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Financial services regulation round-up - June 2018

This month in summary:

Financial services regulation

FCA publishes Consultation Paper on regulating Claims Management Companies

On 1 April 2019 the FCA will become the regulator of claims management companies (CMCs) established or serving customers, in England, Wales and Scotland. At the same time the Financial Ombudsman Service will become responsible for resolving disputes about CMCs.

The FCA published a Consultation Paper on 5 June 2018 outlining how it proposes to regulate claims management companies when the responsibility for regulating this sector transfers to the FCA. This Consultation Paper (CP 18/15) sets out the proposed rules and guidance in relation to claims management and asks a series of questions about the proposals. The FCA also sets out the process for CMCs to become authorised by the FCA and proposed changes to the compulsory and voluntary jurisdictions of the Financial Ombudsman Service.

The responses received will establish whether the FCA’s proposals are fit for purpose, or whether changes should be made before the final rules are published. The consultation closes on 3 August 2018.

These proposals will be of interest to: 

  • CMCs established or serving customers, in England, Scotland and Wales, including those who deal with section 75 claims;
  • ·organisations (that are not CMCs) affected by CMCs, such as those that use CMCs to generate leads;
  • trade bodies representing CMCs, or trade bodies representing firms that receive claims about their products/services from CMCs;
  • bodies representing customers' interests;
  • ·other bodies currently involved in regulating businesses that provide claims management services, for example, the Information Commissioner’s Office (ICO); and
  • customers who use, or are considering using, firms that provide claims management services.

For more information, and a link to the consultation paper CP 18/15, click here.

Digital regulatory reporting

In November 2017, the FCA and the Bank of England held a two-week TechSprint to examine how technology can make the current system of regulatory reporting more accurate, efficient and consistent. 

At the TechSprint, participants successfully developed a ‘Proof of Concept’ which could make regulatory reporting requirements machine-readable and executable.  This means that firms could map the reporting requirements directly to the data that they hold, creating the potential for automated, straight-through processing of regulatory returns.

The FCA is now working with the Bank of England on 6-month pilots to build upon the Proof of Concept. The pilots will evaluate the feasibility of scaling the work from the TechSprint considering two use cases. One will focus on retail reporting and the other on wholesale reporting. All findings from the pilots will be published and the intended output will be open source.

The FCA will provide opportunities for firms to provide feedback on the direction of the pilots as they progress. For further information, including on how to participate in the pilots, please email regtech@fca.org.uk.

This pilot will be of interest to:

  • Regulated firms
  • RegTech (technology that helps meet regulatory requirements) firms
  • FinTech (technology that helps deliver financial services) firms
  • Technology and software providers
  • Professional services providers
  • Academics with interests in technology and financial regulation
  • Financial services regulators

For more information, and a link to the FCA's website, please click here. 

Money Market Funds Regulations 2018 published

On 11 June 2018, the Money Market Funds Regulations 2018 (SI 2018/698) (MMF Regulations) were published on legislation.gov.uk, together with an explanatory memorandum. The MMF Regulations give effect to the EU Money Market Funds Regulation; and allows funds to apply to the FCA to become authorised money market funds (MMFs). The MMF Regulations also enable the FCA to exercise its regulatory powers in respect of MMFs. Unless otherwise stated, the Regulations come into force on 21 July 2018. The MMF Regulations amend the:

  • Financial Services and Markets Act 2000 (FSMA) to provide powers of authorisation and intervention for the FCA in respect of unit trust funds and contractual schemes, both of which may be types of MMF.
  • Open-Ended Investment Companies Regulations 2001 (SI 2001/1228) to allow funds that are open-ended investment companies (OEICs) to apply to become MMFs, or for funds that apply to be authorised as an OEIC to be authorised as an MMF at the same time.
  • Alternative Investment Fund Managers Regulations 2013 (SI 2013/1773) to make provision for the FCA to direct the manner in which an application may be made for an alternative investment fund to be authorised as an MMF, and the process for intervention by the FCA in respect of such a fund.
  • Financial Services and Markets Act 2000 (Qualifying European Union Provisions) Order 2013 (SI 2013/419) by inserting the MMF Regulation to enable the FCA to investigate and bring enforcement action against funds directly for breach of the MMF Regulation.

The MMF Regulations also include a review provision requiring HM Treasury to carry out a review of the regulations from time to time, and publish a report setting out the conclusions of the review by 21 July 2023.

The FCA consulted on changes to the FCA Handbook to reflect the application of the MMF Regulation in January 2018 (CP18/4). It is due to publish the policy statement to CP18/4 in the second quarter of 2018.

For more information, and a link to the FCA's consultation paper CP 18/4, please click here.

FCA "Dear CEO" letter to banks on crypto-assets and financial crime

On 11 June 2018, the FCA published a letter to the CEOs of UK banks suggesting good practice for handling the financial crime risks posed by crypto-assets. In the letter, the FCA defines crypto-assets as any publicly available electronic medium of exchange featuring a distributed ledger and a decentralised system for exchanging value (for example, Bitcoin or Ether).

Although the FCA acknowledged that many users of cryptocurrencies did so with respect for existing laws, the ease with which funds could cross borders and the anonymity afforded by certain digital assets meant an increased risk of illegal use.

The FCA advises banks offering services to current or prospective clients who derive significant business activities or revenues from crypto-related activities that it may be necessary to enhance their scrutiny of these clients and their activities. Appropriate steps include:

  • Developing staff knowledge and expertise on crypto-assets to help them identify the clients or activities that pose a high risk of financial crime.
  • Ensuring that existing financial crime frameworks adequately reflect the crypto-related activities that the firm is involved in, and that they are capable of keeping pace with fast-moving developments.
  • In relation to clients offering forms of crypto-exchange services, assessing the adequacy of those clients' own due diligence arrangements.

The letter concludes by noting that retail customers contributing large sums to initial coin offerings (ICOs) may be at a heightened risk of falling victim to investment fraud.

Please click here to view the letter.

Speeches and communications

Bank of England speech on resilience and continuity in an interconnected and changing world

On 13 June 2018, the Bank of England (BoE) published a speech by Deputy CEO and Executive Director, Lyndon Nelson, on resilience and continuity in an interconnected and changing world.

In his speech, Lyndon Nelson discusses the changes and advancements that have occurred in financial services during his three decades in the City of London - mentioning the rapid development of both Internet and mobile telecommunications, the growth of telephone, mobile and internet banking, and the rise in outsourcing arrangements and use of third parties.

He also highlights that the financial system’s increasing reliance on technology and data has led to an increase in the risks posed by cyber threats and other operational incidents. Mr Nelson states that as a result of these risks, operational resilience will soon be seen to be on a par with financial resilience and will be a key part of a firm's risk profile. The cyber threat, in particular, brings operational resilience into greater focus and requires organisations to understand themselves and their most critical assets and functions.

Mr Nelson considers that regulators need to set out clear expectations of firms as regards their operational resilience. He refers to the work carried out by the Financial Policy Committee (FPC) on its tolerance for disruption to key economic functions that the finance sector performs. As part of this work, it is likely that the FPC will set a minimum expected level of service provision for the delivery of key economic functions in the event of a severe but plausible operational disruption.

Mr Nelson states that the BoE intends to publish a joint discussion paper with the FCA, which will set out the regulators' expectations in this area.

For the full speech please click here.

Speech on FCA’s approach to competition and innovation

The FCA’s executive director of strategy and competition, Christopher Woolard, delivered a speech at a conference on the relationship between antitrust, innovation and investment.

Mr Woolard states that the FCA’s approach to competition is driven by its operational objective to promote effective competition in the interests of consumers and improve the process of rivalry between firms, rather than improving the competitiveness of any one firm in particular.

Mr Woolard then discusses the link between innovation and competition, stating that innovation "sees firms serve new niches, streamlines processes and shakes up the status quo". The FCA's support of innovation can be seen in initiatives like FCA Innovate and the FCA's regulatory sandboxes. Mr Woodard states that this approach to innovation has allowed the regulator to better understand the real-world implications of new technologies.

Finally, Mr Woolard discusses the future potential of technology and the issues that may arise from technological advancements in financial services. For example, Mr Woolard discusses the potential for Open Banking to solve some of the big issues in competition by increasing consumer engagement. However, he was also mindful of the challenges presented by new technologies, for example the massive collection of customer data which Mr Woolard states is "this century’s most precious commodity". Mr Woolard queries how smaller or new market players who can’t gather data on the scale of larger rivals will fare in this new environment. He concludes by stating that the question for regulators will be how to extract the best from markets, whilst avoiding these pitfalls.

For the full speech, and link to the FCA's website, please click here.

Fines and enforcements

FCA fines and imposes a restriction on Canara Bank for anti-money laundering systems failings

On 6 June 2018, the FCA published a Final Notice regarding anti-money laundering (AML) breaches at the Indian state-controlled lender Canara Bank (Canara). As well as imposing a financial penalty of £896,100, the regulator also banned Canara from accepting new customers in respect of its regulated activities for 147 days.

Background

Canara is the UK branch of the Indian state owned bank of the same name, headquartered in Bangalore, India. It has two branches in the UK in London and Leicester. In order to fill senior management positions in the UK, Canara seconds staff from its Head Office in India.

In November 2012 and March 2013, Canara was visited by the FCA as part of the Trade Finance Thematic Project. Detailed written feedback was provided to Canara on 25 April 2013 by the FCA in relation to failings in the trade finance business’ systems and controls. The FCA found that:

  1. there was limited evidence to suggest that money laundering risks were being taken into account when processing trade finance transactions;
  2. there was no evidence that risk assessments or sanctions checks had been carried out for trade finance customers; and
  3. there was limited evidence that trade based money laundering risks were being considered and/or documented.

After the visit, Canara confirmed to the FCA that it had taken remedial action in relation to all of the above points. During a second visit to Canara in April 2015, however, it became apparent that remedial action taken by Canara to rectify the issues originally identified in 2012 and 2013 was insufficient, and Canara had failed to test the implementation and effectiveness of the steps taken.

As a result, a Skilled Person was appointed by the PRA on 30 September 2015, to carry out an assessment which was to include an “FCA element” covering the adequacy and effectiveness of Canara’s AML and financial sanctions systems and controls and other matters.

Findings

The Skilled Person’s final report, dated 29 January 2016, highlighted a number of significant deficiencies with respect to Canara’s AML systems and controls, the oversight and monitoring of those controls and the general governance of Canara’s risk control framework. These failings were accepted by the bank and included the following:

  • Canara had an ineffective three lines of defence model.
  • Canara’s documented risk assessment was not appropriately designed or effective.
  • Canara’s 2015 AML Manual was not fit for purpose in respect of ongoing transaction monitoring.
  • There was a lack of detailed understanding of the AML requirements which had an impact on Canara's ability to manage its AML risk at all levels.

The FCA was particularly scathing of senior management who were unable to articulate the level of understanding expected of requirements in relation to AML. Canara’s senior management did not review or test the remediation action taken following the initial visit in order to ensure that the required steps had been taken or to ensure that the remediation was effective.

Comment

A common approach of overseas banks is to second senior management from the home country to the UK for limited periods of time. For a global bank there are advantages in senior staff obtaining experience of different areas of the bank and ensuring consistency across the group. Canara's Final Notice highlights the importance for UK branches of overseas banks and their senior management to (a) have sufficient understanding of their regulatory responsibilities and (b) ensure that obligations are met with appropriate resources.

In Canara's case, senior management positions in the UK were filled with staff from its Head Office in India. This practice, although not prohibited, contributed to Canara's failings. The FCA found that, as a result of this practice, some of the individuals in question lacked the necessary understanding of applicable UK legal and regulatory AML requirements.

To avoid sanctions such these, overseas banks should take AML compliance in the UK seriously.  The Final Notice focused heavily on Canara's failure to embed a culture of regulatory compliance within the firm. Reliance on a ‘tick box’ approach to compliance monitoring will not be sufficient for the regulator. Banks must ensure that all staff members understand the importance of AML compliance and senior staff should be rigorous in their approach to compliance monitoring.

For more information, and a link to the Final Notice, please click here

FCA secures increased confiscation order against Benjamin Wilson

On 11 June 2018, the FCA secured an increase in the value of a confiscation order made against Benjamin Wilson, a convicted fraudster, representing monies currently held in a Santander bank account in Mr Wilson’s name. The bulk of the balance in the account is a result of a payment of made by the John Lewis Partnership upon the death of Mr Wilson’s mother, who worked for the Waitrose supermarket chain. He received the sum as one of three beneficiaries named by her.

Mr Wilson was sentenced to seven years at Southwark Crown Court 14 February 2014 for defrauding investors of over £21m, following previous guilty pleas for fraud, forgery and operating a collective investment scheme without authorisation.

Wilson pleaded guilty in December 2013 after it was found that the unauthorised investment firm he ran, SureInvestment, was a sham, costing investors millions which were used to fund Wilson’s extravagant lifestyle.

In total, over 300 investors trusted Wilson with £21.8m. When the scam was closed down by the FCA, £17.54m was owed to investors and it is estimated that £5.39m in total will be recovered.

For more information, and a link to the FCA’s website, please click here.

This publication is intended for general guidance and represents our understanding of the relevant law and practice as at June 2018. Specific advice should be sought for specific cases. For more information see our terms & conditions.


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