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Financial services regulation newsletter - July 2017

This month in summary

Financial services regulation

FCA outlines proposals to extend the Senior Managers and Certification Regime to all financial services firms

On 26 July 2017, the FCA published a Consultation Paper outlining their proposals to extend the Senior Managers and Certification Regime (SM&CR) to almost all regulated firms. The new regime will essentially replace the Approved Persons Regime.

The FCA's Consultation Paper outlines the expansion of the SM&CR as well as some minor proposals relating to the existing banking regime. The FCA proposes three main pillars:

  • Five Conduct Rules that will apply to all financial services staff at FCA authorised firms. This simple set of rules requires individuals who fall within the scope to act with integrity, act with due care, skill and diligence, be open and cooperative with regulators, pay due regard to customer interests and treat them fairly, and observe proper standards of market conduct.
  • The responsibilities of Senior Managers must be clearly set out and, should something in their area of responsibility go wrong, they can be personally held to account. The Senior Managers will be approved by the FCA and appear on the FCA Register.
  • Under the Certification Regime, firms will certify individuals' fitness, skill and propriety at least once a year, if they are not covered by the Senior Managers Regime but their jobs significantly impact customers or firms.

The proposals in this consultation relate to all firms regulated by the FCA. As well as the firms themselves, the proposals will affect everyone performing financial services roles at those institutions. The proposals in the consultation do not extend to individuals at Appointed Representatives of affected firms.

The implementation date is yet to be set by HM Treasury but it is expected to come into effect in 2018. These changes will have a large impact on almost all financial services firms, as the FCA ultimately wants to bring about cultural change to improve individual accountability and reinforce the governance structure within firms. Firms will need to be much clearer on where responsibility for certain actions rests and have appropriate oversight in place.

For more information see the FCA's website.

FCA publishes second Consultation Paper on the implementation of the Insurance Distribution Directive

On 24 July 2017, the FCA published its second Consultation Paper setting out its proposals for the implementation of the Insurance Distribution Directive (IDD). The IDD, which the UK is required to comply with by 23 February 2018, concerns the distribution of insurance and reinsurance, and also covers assisting in the administration and performance of an insurance contract post-sale.

The IDD aims to enhance consumer protection when buying insurance (including general insurance, life insurance and insurance-based investment products) and to support competition between insurance distributors by creating a level playing field.

The consultation paper covers the FCA’s proposals for the application of the Directive, which include the following areas:

  • general business and conduct requirements;
  • information disclosure;
  • required suitability assessments;
  • product oversight and governance; and
  • the Insurance Product Information Document.

The consultation will close on 20 October 2017 and the FCA plans to issue its final guidance in a Policy Statement in December 2017. This doesn’t leave a great deal of time to implement the necessary changes before the deadline and firms should already be looking at how to implement the requirements of the IDD on the basis of currently available information.

For more information, see the FCA’s website.

FCA sets out scope of Investment Platforms Market Study

On 17 July 2017, the FCA published the Terms of Reference for the Investment Platforms Market Study, which sets out the scope and topics that will be covered. Investment platforms are increasingly used by consumers and financial advisers to access retail investment products and to manage investments, with the market reaching £592 billion in 2016.

This Market Study follows on from the Asset Management Market final report published in June 2017, which highlighted a number of potential competition issues in the platforms sector.

As part of the study, the FCA will explore whether the information and tools many platforms provide help investors make good investment decisions and whether their investment solutions offer investors value for money.

The FCA also will look at how platforms compete in practice and whether they use their bargaining power to get investors a good deal. It will also consider whether the way in which platforms interact with other platforms, advisers, asset managers and fund ratings providers work in the interests of investors.

This study will be of interest to all firms operating in this market or offering ancillary services, as it has the potential to lead to wide ranging regulatory changes in the area if the FCA identifies potentially harmful or risky practices. The FCA is asking for feedback on the topics that will be explored until 8 September 2017 and plans on publishing an interim report by summer 2018.

For more information, see the FCA's website.

Speeches and communications

Why free trade and open markets in financial services matter

In a speech delivered on 6 July 2017, Andrew Bailey, the FCA's Chief Executive, gave a speech highlighting the importance of open markets in financial services, freedom of location and free trade.

Mr Bailey gave an insight into the FCA's work on the implementation of Brexit. Beyond assisting with repealing and amending legislation, the FCA is positioning itself to provide technical advice to the Government as it carries out negotiations with the EU. It is also working with authorised firms to gain an understanding of their plans for cross-border operations with the EU post-Brexit. The aim is to have a clear and functioning regulatory regime in place for when the UK leaves the EU.

The speech also discussed the impact that Brexit may have on financial services and looked to ease concerns that businesses will need to re-locate in order to maintain access to EU financial markets. Mr Bailey stated that “Brexit should not be conflated with whether or not to have open global financial markets and trade in financial services. The economic and financial cost of losing open markets is too great to be justified and is not a necessary response to the choice of Brexit”.

Instead, he argued, the UK should seek out cross-border regulatory co-operation and continue to participate in the framework of global standards that were implemented following the global financial crisis in 2008. In Mr Bailey’s view, the UK and EU markets have developed together on the basis of the same rules and to break from this would be a departure from the sound regulatory approach of ‘same risk, same requirements’. He added that “In a world of increasingly strong global standards of regulation, it is not the right approach.”

The FCA has identified four key areas for future co-ordination with the EU:

  1. comparability of rules, but not exact mirroring;
  2. supervisory co-ordination;
  3. exchange of information; and
  4. a mechanism to deal with differences.

Equivalency of cross-border regulatory standards in financial services can be achieved. Mr Bailey concluded that “My view is that if there is a commitment on all sides that the UK and the EU maintain substantially equivalent regulatory arrangements in future… I see no reason why we should sacrifice open financial markets and free trade, as an inevitable response to Brexit.”

For more information, see the FCA’s website.

Fines and enforcements

FCA secures £350,000 confiscation order against convicted insider dealer

On the 24 July 2017, a confiscation order was made in the sum of £350,000 against Damian Clarke, a convicted insider dealer. The order must be paid within 3 months or Mr Clarke will face a further 3 years in prison.

Mr Clarke pleaded guilty to nine counts of insider dealing, contrary to section 52 of the Criminal Justice Act 1993 and was sentenced to a total of 2 years’ imprisonment on 13 June 2016.

Between August 2000 and January 2013, Mr Clarke was employed by Schroders Investment Management. In various roles, Mr Clarke received inside information about significant corporate events, mainly anticipated public announcements of mergers and acquisitions. He used this information to place trades using accounts in his own name and those of close family members, in respect of which he had been provided with the account numbers and passwords. The offences were committed over a nine-year period between October 2003 and November 2012.

In total, the Defendant derived a benefit of £719,658.69 from his criminal conduct. It was agreed that the value of Mr Clarke’s interest in various assets amounted to £350,000 and therefore, a confiscation order was made in that sum.

Mark Steward, the FCA’s Executive Director of Enforcement and Market Oversight said:

Mr Clarke engaged in a systematic and long-running criminal enterprise in order to make significant illegal gains for himself and his family. As a result, he has lost his liberty, his livelihood and his reputation and must now pay a substantial confiscation order. The message should now be clear that insider dealers are increasingly likely to be caught and will be made to fully account for their misconduct."

For more information, see the FCA’s website.

FCA fines compliance oversight officer for pension transfer failings

On 14 Jul 2017, the FCA fined David Watters £75,000 for failing to exercise due skill, care and diligence in his role as compliance oversight officer, firstly at FGS McClure Watters (FGS) and then Lanyon Astor Buller Ltd (LAB).

Following an investigation, the FCA found that Mr Watters failed to take reasonable steps to ensure that the process in place at the above firms was adequate and met regulatory standards. This led to a serious risk of unsuitable advice being given to customers of FGS and LAB about the merits of transferring their pension, from a defined benefit (DB) to a defined contribution (DC) scheme, as part of an ETV pension transfer.

Approximately 500 customers that received advice from FGS or LAB transferred their pensions from a DB scheme to a DC scheme, with a combined value of approximately £12.7 million.  In many cases, it may have been unnecessary for customers to leave their DB schemes, thereby losing their guaranteed benefits.

Mr Watters failed to put in place numerous measures to satisfy regulatory requirements. It is vital the customers considering giving up their guaranteed benefits are given suitable advice on the real benefits and consequences so that they can properly decide whether a transfer is in their best interests.

This is a current area of focus for the FCA. For many, a pension is the largest investment they will own and there is a clear risk to consumers if inadequate advice is being provided and demonstrates the FCA’s commitment to ensuring regulatory compliance in this area. On 21 June 2017, the FCA issued a Consultation Paper on advising on pensions transfers as it seeks to clarify the regulatory obligations it places on advisers in this area.

For more information, see the FCA’s website.

This publication is intended for general guidance and represents our understanding of the relevant law and practice as at August 2017. Specific advice should be sought for specific cases. For more information see our terms & conditions.

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