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Financial services regulation round-up - September 2018

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Regulation round-up

FCA and PRA publish 'Dear CEO' letters on firms’ preparations for transition from LIBOR to risk-free rates

On 19 September the Financial Conduct Authority (FCA) and Prudential Regulation Authority (PRA) wrote to CEOs of major banks and insurers supervised in the UK asking for the preparations and actions they are taking to manage transition from the London Interbank Offered Rate (LIBOR) to alternative interest rate benchmarks. The purpose of the letters is to seek assurance that firms’ senior managers and boards understand the risks associated with this transition and are taking appropriate action now so that firms can transition to alternative rates ahead of the end of 2021.

Firms are required to provide a response to the letters by 14 December 2018 detailing:

  • a board-approved summary of firms’ assessment of key risks relating to LIBOR discontinuation and details of actions that firms plan to take to mitigate those risks. Assessments and plans should consider an appropriately wide range of scenarios and impacts and include a quantification of LIBOR exposures; and
  • the Senior Manager(s) within the firm who will oversee the provision of the firm's response to the letter and the implementation of its transition plans.

View the letter to insurers 

View the letter to banking firms

The FCA's press release  

The PRA's press release  

Consultation Paper CP18/26: proposals for applying the Senior Managers and Certification Regime to claims management companies

On 20 September 2018 the FCA published Consultation Paper (CP18/26) setting out the draft rules and guidance for applying the Senior Managers and Certification Regime (SMCR) to claims management companies (CMCs). The proposed rules would apply to CMCs serving customers in, or constituted under the laws of, England and Wales or Scotland.

The FCA will become the regulator for CMCs on 1 April 2019 and SMCR will apply to authorised CMCs from December 2019.

View CP18/26

Visit the FCA's holding page 


HM Treasury: draft Electronic Money, Payment Services and Payment Systems (Amendment and Transitional Provisions) (EU Exit) Regulations 2018

On 5 September 2018, HM Treasury updated its programme of secondary financial services legislation under the EU (Withdrawal) Act 2018 with the publication of two draft statutory instruments (SIs) together with a single explanatory memorandum. The two SIs published are:

  • the draft Electronic Money, Payment Services and Payment Systems (Amendment and Transitional Provisions) (EU Exit) Regulations 2018 (the Regulations); and
  • the draft Credit Transfers and Direct Debits in Euro (Amendment) (EU Exit) Regulations 2018.

The purpose of the SIs is to make amendments to retained EU law relating to payment services in order maximise the prospect of the UK maintaining access to the Single Euro Payments Area (SEPA); and to create a temporary permissions regime for payment firms. Further, the government seeks to ensure access to segregated safeguarding accounts for UK institutions that hold safeguarding accounts in the EU, and to ensure UK Payment Service Providers (PSPs) are not disadvantaged on pricing of Euro transactions.

The Single Euro Payments Area (SEPA)

SEPA enables efficient, low cost euro payments to be made across EEA Member States and with third-countries who meet the governing body’s third-country access criteria.  This will entail:

  • retaining the SEPA Regulation, while fixing a number of deficiencies which result from accessing SEPA as a third-country rather than an EU Member State; and
  • amending the Payment Services Regulations (PSRs) such that transactions in Euros with another member of the SEPA area (“the qualifying area”) are treated as ‘two-legs in.’ This means that Part 7 of the PSRs will continue to apply in full to transactions in Euro within SEPA, including intra-UK Euro transactions.

If the UK is unable to continue to participate within SEPA, and PSPs are therefore unable to fulfil the above regulatory obligations, the government also proposes a power to enable it to remove the SEPA Regulation from the statute book and to reduce transactions in Euro to a SEPA member to a ‘one-leg’ transaction (where Part 7 of the PSRs only applies to the part of the transaction carried out in the UK).

Temporary Permissions Regime

The Temporary Permissions Regime (TPR) to be created for payment firms will differ from that contained within the EEA Passport Rights (Amendment, etc., and Transitional Provisions) (EU Exit) Regulations 2018 in two respects:

  • the Financial Services Compensation Scheme will not apply to payments or e-money firms in the TPR; and
  • the EEA entity's temporary permission will not fall away automatically upon the authorisation of a subsidiary as the UK subsidiary may take some time to become fully operational post-authorisation. Instead, the EEA entity will continue to be able to provide services using its’ temporary permission while the UK subsidiary becomes operational, for up to 3 years from exit day, subject to the TPR conditions.

The draft SIs will not come into force on 29 March 2019 if the EU and UK government enter into a withdrawal agreement and an implementation period is put into place. If the SIs do come into force, the FCA will be updating its Handbook and relevant Binding Technical Standards to reflect the changes introduced. The FCA has confirmed its intention to consult on these changes in the autumn.

View the full text of the draft statutory instruments and HM Treasury's explanatory information 

FCA direction on its approach to applications from overseas market operators to become a recognised overseas investment exchange (ROIE)

The FCA has published a direction clarifying how an EEA market operator may make an application to become a recognised overseas investment exchange (ROIE).

Currently EEA market operators, i.e. entities who operate a regulated market, a multilateral trading facility (MTF) or an organised trading facility (OTF), rely on MiFID II passport rights to enable members based in the UK access to their markets. Once the UK has left the EU, passport rights will no longer apply to MiFID II EEA market operators. Further, HM Treasury is not planning to put in place a temporary recognition regime for EEA market operators in the event the UK leaves the EU without a deal and without entering an implementation period.

EEA market operators who currently make use of passport rights may therefore wish to apply to be recognised as a ROIE. Such entities are encouraged to contact the FCA as soon as possible if they wish to make an application.

The FCA's press release and a link to the direction

Brexit Committee report on the progress of negotiations with the European Union

The House of Commons Exiting the European Union Committee (the Committee) has published a report on the progress of Brexit negotiations between the UK and the European Union.

The report states that the UK government's urgent priority must be to secure a withdrawal agreement, which would provide much needed certainty, including the transition period up to the end of December 2020. The Committee notes that there has been some progress on the draft withdrawal agreement however since its last report in May 2018, the Committee has "not seen any progress between the two sides on agreeing how disputes over the provisions in the Withdrawal Agreement should be settled."

The report also warns that agreement between the European Union and UK remains unlikely until consensus is reached on the terms of a 'backstop' to prevent a hard border in Ireland.

View the full report

General insurance

Second PRA consultation on SMCR extension to insurers

The PRA has launched consultation paper (CP20/18) setting out its proposed rules for some consequential changes and minor administrative amendments, related to the extension of the Senior Managers and Certification Regime (SMCR) to insurers.

The consultation paper should be read in conjunction with the PRA's policy statement and consultation paper published in July 2018 (PS15/18 and CP18/18 respectively) and the FCA's policy statement PS18/15.

CP 20/18 is relevant to Solvency II insurers (i.e. UK Solvency II firms, the Society of Lloyd’s and Lloyd’s managing agents, and third country (re)insurance branches), insurance special purpose vehicles (ISPVs), large non-Directive firms (NDFs), small NDFs and Swiss general insurers.

Feedback is sought by 17 October 2018.

View CP18/20

Payment services

Consultation Paper CP18/25: Approach to final Regulatory Technical Standards and European Banking Authority guidelines under the revised Payment Services Directive

The FCA is consulting on new rules and guidance to implement the revised Payment Services Directive (PSD2), particularly in relation to the security of customers’ payments and how firms interact for the purposes of ‘open banking’.

The proposals reflect final regulatory technical standards on security and new fraud reporting requirements published by the European Banking Authority. The FCA is also consulting on new complaints reporting rules about authorised push payment (APP) fraud.

The consultation closes on 12 October 2018 and will be of interest to all payment service providers as well as  Credit Unions, consumer bodies and relevant trade bodies, retailers, consumers, micro-enterprises and those involved in open banking initiatives.

View CP18/25 

Visit the FCA's holding page 

Financial crime

House of Commons Library report on the future of the UK sanctions regime following Brexit

The Sanctions and Anti-Money Laundering Act 2018 (the Sanctions Act) received Royal Assent on 23 May 2018 and is a significant piece of legislation required to plug a gap which had previously been filled by EU law.

As an EU member, UK sanctions were imposed using the powers in the European Communities Act 1972. The Sanctions Act provides for creating sanctions regimes independently of the European Union. Although the sanctions-related provisions of the Act are not yet in force, they will give the government wider powers to implement sanctions - including financial sanctions, trade sanctions and immigration sanctions.

The House of Commons Library has produced a report on the efficacy of this legislation and the future of UK anti-money laundering (AML) sanctions. The report warns that there is a danger sanctions could become entangled with increasingly competitive and nationalist trade policies and, being less co-ordinated, could lose legitimacy.

In particular, the report highlights that:

  • The new Sanctions Act sets up appeal or review processes for sanctions targets unless those targets were chosen by the United Nations. However, only one of the of the United Nations’ sanctions regimes has an appeal process available, meaning that there will be no appeals procedure for the majority of internationally-binding sanctions designations.
  • Although the UK has had an outsize influence on shaping EU sanctions policy, after Brexit there is a strong possibility that the EU will become less enthusiastic about sanctions in general.

Read the full report 

Fines and enforcement

FCA issues final notices in respect of One Call and CEO for client money failings

The Financial Conduct Authority (FCA) has issued final notices and imposed sanctions on One Call Insurance Services Limited (One Call) and its chief executive and majority shareholder, John Lawrence Radford, after finding that they had breached client money rules.

One Call had failed to arrange adequate protection for its client money, breaching Principle 10 of the FCA's Principles for Businesses, and the Client Money Rules. Further, despite receiving warnings from its external auditors One Call failed to appreciate it was holding client money and withdrew client money to finance its own working capital requirements, make payments to directors and, indirectly, to capitalise a connected company, One Insurance Limited (“OIL”).

During the majority of the relevant period, Mr Radford was responsible for client money at One Call. The FCA found that Mr Radford lacked adequate understanding of the FCA's requirements in relation to client money. This meant that Mr Radford failed to ensure that One Call complied with the rules and requirements of the Client Money Rules.

The FCA imposed a financial penalty of £684,000 on One Call as well as a restriction for a period of 90 days preventing One Call from charging renewal fees to its customers, which is anticipated to cost the firm approximately £4,703,000. This restriction takes effect from 1 October 2018.

Mr Radford was fined £468,600 and prohibited from having any responsibility for client money and/or insurer money in relation to any regulated activity carried on by any authorised person, exempt person or exempt professional firm.

Final notice to One Call Insurance Services Limited 

Final notice to John Lawrence Radford 

Six sentenced in FCA prosecution of £2.8m investment fraud

In a case brought by FCA, six individuals were sentenced on to a total of 18.5 years’ imprisonment for their roles in a share fraud carried out through a series of boiler room companies which led to the loss of more than £2.8m of investors’ money.

Charanjit Sandhu was sentenced, along with four other defendants on 4 September 2018, to 5.5 years’ imprisonment. He was a senior broker, often using bullying sales tactics and false names. Hugh Edwards recruited and trained brokers, drafted and sent misleading brochures to potential investors, and personally pitched the product as a senior broker using false names. He was sentenced to 3 years and 9 months’ imprisonment. Stuart Rea, who fronted one of the companies, and recruited and managed the sales brokers, was sentenced to 3 years and 9 months’ imprisonment. Jeannine Lewis assisted in laundering the proceeds of the fraud through various bank accounts including her own. She was sentenced to 2.5 years’ imprisonment. Ryan Parker, was sentenced to 2 years’ imprisonment to be suspended for 18 months. The instigator and main beneficiary of the fraud, Michael Nascimento, was sentenced separately on 17 September 2018 to 11 years’ imprisonment.

The six defendants were charged by the FCA with offences of conspiracy to defraud, fraud, money laundering and perverting the course of justice, as well as breaches of FSMA, and either pleaded guilty or were convicted by the jury. Sandhu, Edwards and Rea were also made subject to Serious Crime Prevention Orders, and are prohibited from involvement in financial services or the sale of any form of investment for a period of 5 years after release from prison. Sandhu, Rea, Edwards and Parker are also banned from being company directors for periods of between 7 and 14 years.

Commenting on the case, Mark Steward, Executive Director of Enforcement and Market Oversight at the FCA, said:

These fraudsters callously targeted investors who were often elderly and vulnerable, lying to them to get them to part with significant sums of money. Despite efforts to conceal and destroy evidence, the FCA, in one of its largest ever investigations, was able to ensure that these criminals faced justice and ended up behind bars.

Applications under Proceeds of Crime legislation remain on foot and the FCA is determined to recover as much money from these defendants as possible for the benefit of investors.”

The FCA's press release of 4 September 2018 

The FCA's press release of 17 September 2018 in relation to the sentencing of Michael Nascimento 

FCA bans former Deutsche Bank trader, Christian Bittar

On 14 September 2018, the FCA published a final notice with respect to Christian Bittar, and banned him from performing any function in relation to any regulated financial activity.

Mr Bittar formerly worked as a derivatives trader at Deutsche Bank where he traded interest rate derivative products referenced to benchmarks including the European Interbank Offered Rate (EURIBOR). Mr Bittar made requests to EURIBOR submitters to make high or low EURIBOR submissions, both internally to Deutsche Bank submitters and externally to traders at other EURIBOR panel banks. He did so to benefit the profitability of the trading positions for which he was responsible and, on occasion, the profitability of the trading positions of other traders.

Mark Steward, director of enforcement and market oversight at the FCA said:

The FCA’s Decision Notice against Mr Bittar, which was issued in April 2017, can now be published. It is a detailed account of how Mr Bittar sought to manipulate EURIBOR. It is a tale of gross misconduct and betrayal of the public interest in financial benchmarks. If he had not been convicted and imprisoned for the same matters, the FCA would have sought a financial penalty of £6.5 million. As it is, we have prohibited him from performing any regulated function, reinforcing the message of the criminal court.”

The final notice 

The FCA's press release


A case for balancing autonomy and co-operation in the interests of financial markets

In a speech at the Eurofi Financial Forum, Andrew Bailey, Chief Executive of the FCA, discusses the importance of multilaterialism and global coordination in financial markets.

Mr Bailey begins by commenting that "competition and innovation in financial markets, supported by robust regulatory and supervisory standards" creates better outcomes for users, particularly in wholesale markets. He notes that an essential component of these outcomes is open financial markets which support trade in goods and services.

Mr Bailey accepts that "one jurisdiction cannot constrain the autonomy of another’s domestic regulation" in the drive for open financial markets. He goes on to state, however, that the goal of open financial markets which support free trade can be achieved with a common commitment to international standards which promote equivalent outcomes whilst respecting the freedom for jurisdictions to set their own standards domestically. Mr Bailey givres two examples,  the work being carried out on benchmark interest-rate reform and financial innovation and regulatory ‘sandboxes’, to highlight the ways global authorities are balancing these considerations.

Mr Bailey then discusses the current challenges facing multilaterialism and global coordination, particularly in the context of Brexit. He discusses the debate between the desire to keep access to the Single Market open to third countries, including the UK, and the view that EU financial activity must take place in the EU.

The speech concludes with a statement that emphasis on outcomes-based equivalence is fundamentally important to support the balance between autonomy and co-operation.

Read the full speech 

Charles Randell speech at the Annual Public Meeting 2018

Charles Randell, Chair of the FCA delivered a speech at the annual public meeting on 11 September 2018, in which he discusses the impact of Brexit and technological developments on the FCA’s functions, as well as their approach to financial crime.

Mr Randell began by reflecting on his first five months in office. He highlighted the FCA’s commitment to delivering public value, and notes that although the broad shape of new regulations is reasonably clear, the financial sector itself is constantly evolving and changing. Despite these challenges, the FCA remains adaptable and reacts to developments outside of its control, particularly international affairs and the development of emerging technologies.

Mr Randell also discusses the impact of technology on the financial sector, and the FCA's technology-neutral approach to the regulation of individual technologies on their merits. He also mentions the increasing complexity of financial crime as the financial services industry itself has become globalised.

Read the full speech 

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

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