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Financial Services Regulation monthly update - August 2016

Welcome to TLT’s update of the Financial Services Regulation sector for the past four weeks. 


Policy and rule changes

  •  Final findings of credit card study published
  •  Oversight of appointed representatives: failings in the general insurance sector
  •  FCA commitment to firms during credit authorisation process
  •  Crowdfunding rules: have your say
  •  Guidance for firms outsourcing to the cloud 
  •  PRA supervisory statement sets out expectations of ring-fenced bodies
  •  FCA publishes Annual Report and Accounts 2015/16
  •  Quarterly Consultation Paper on ICOBS amendments

FCA speeches and communications

  • Future challenges outlined by new  FCA Chief Executive 
  • Innovation in RegTech 
  • Getting culture and conduct right


  • Enforcement fine for client money failings by an insurer
  • Cancellation of payday lender’s interim permission and prohibition of director from role in regulated financial services
  • Five charged in alleged investment fraud

Policy and rule changes

Findings of credit card market study published

Following on from its interim report in November 2015 the FCA has confirmed that whilst competition in the credit card market works fairly well for most consumers, there is concern about the scale of potentially problematic debt.
The FCA has produced a number of proposed remedies. This will be brought in by a combination of FCA rules, supervisory work, industry voluntary agreements and the work of third parties.

The remedies include:

  • timely prompts before promotional periods end; 
  • timely information to prompt consumers to take into account how much they are borrowing and avoid charges for exceeding limits;
  • giving consumers the ability to choose the payment due date;
  • requiring consumers to opt into a credit limit increase; and
  • increasing the minimum monthly repayment.

This is far from  the end of the FCA's work in this sector, especially as few of the remedies have been clearly defined.  Arguably though, many firms - either of their own initiative or via their association with the UK Cards Association - will already be ahead of the curve on a number of the proposals. They have done this by making changes to internal processes and customer-facing documentation, which will ultimately lessen the impact of these remedies.  There will of course always be exceptions to the rule for which these rules will potentially have far-reaching consequences. 

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Oversight of appointed representatives: failings in the general insurance sector

In its thematic review of the general insurance sector the FCA has found significant shortcomings regarding the arrangements between appointed representatives and their principal firms.

The FCA found that:

  • over half could not consistently demonstrate effective risk management and control frameworks;
  • almost half could not demonstrate that they had understood the nature, scale and complexity of the risks arising from their appointed representatives’ activities -  in particular the risks to customers; and
  • there were examples of potential mis-selling and customer detriment as a result of appointed representatives’ actions at a third of the principal firms reviewed. Most of these issues were not previously identified by the principals. The outcomes included customers buying products they may not need, products they may not be eligible to claim under and customers not being provided with enough information to make an informed decision.

Jonathan Davidson, Director of Supervision at the FCA said: “we found widespread examples of poor practices across the sector. In many cases firms were simply failing to understand and manage the risks arising from their appointed representatives’ activities."

This is a clear reminder to those authorised firms who act as principals to ensure that they establish and implement clear policies. These are vital to oversee the activities of their appointed representatives, to a standard comparable with the FCA's expectations. 

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FCA commitment to firms during credit authorisation process

Between 1 April 2014 and 31 March 2016, the FCA received nearly 37,000 applications for authorisation from consumer credit firms. 87% of these applications have been closed; 99.6% of which were within the statutory deadline.

A number of cases breached the deadline during this period. There are also around 200 open applications, which have not been determined within 12 months

Following feedback from some firms and industry bodies on the process, the FCA has made the following commitments:

  • the applicant will be informed when their application has been assigned to a case officer;
  • all communications from the applicant will be acknowledged within two working days;
  • a substantive response will be given, where possible, within ten working days;
  • the applicant will be given clear deadlines when asked to submit additional information; and
  • the applicant will receive an update from the designated case handler on the current status of their case at least once a month.

The commitments should provide applicant firms with greater certainty as to when and how their application will be handled by the regulator.  This will be key to any future planning and strategy arrangements the firm may wish to consider.

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FCA launches call for input on crowdfunding rules

Rules for the regulation of crowdfunding were introduced by the FCA in March 2014.  Since then the industry has grown rapidly; an estimated £2.7 billion was invested in 2015.  As a result, the FCA has committed itself to review the appropriateness of the current rules.

In its call for input the FCA is seeking views on a number of issues related to loan-based crowdfunding including:

  • considering whether financial promotions, due diligence and prudential standards are still appropriate for the way the market has developed;
  • whether to mandate in greater detail the disclosure firms are expected to give consumers and the time that the disclosures must be provided; and
  • whether platforms should be required to assess investor knowledge or experience of the risks involved in this type of investment.

Responses are due by 8 September 2016

With the rapid growth in the sector, crowdfunding firms could find themselves subject to additional requirements and an increased regulatory burden.  Care needs to be taken that the effect of these requirements is to improve customer confidence in the industry as opposed to stymying its growth.

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Guidance for firms outsourcing to the cloud 

The FCA has sought to clarify the requirements on firms when outsourcing to cloud-based or third-party IT services.

The areas of interest that a firm should consider include:

  • legal and regulatory considerations – does the firm have a clear and documented business case or rationale in support of the decision to outsource;
  • risk management – has the firm carried out a risk assessment to identify relevant risks and identify steps to mitigate them; and
  • effective access to data – for example, that notification requirements on accessing data are reasonable and not overly restrictive.

Whilst not entirely dissimilar to the provisions of SYSC 8 this guidance should provide greater clarity for firms involved in such outsourcing.

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PRA supervisory statement sets out expectations of ring-fenced bodies

The PRA has published a supervisory statement setting out its expectations of ring-fenced bodies (RFB) in respect of its core activities and services.

The statement contains positions on various areas, including:

  • legal structure and holdings of capital;
  • establishment of an RFB sub-group and application of requirements on a sub-consolidated basis;
  • application of capital and liquidity standards to an RFB sub-group; and
  • intragroup concessions. 

The wide-ranging statement gives banks further guidance ahead of the 2019 deadline to comply with the ring-fencing requirements. Most if not all banks will have already established projects to meet this deadline and will need to ensure that this, and all subsequent, statements are taken into account.  

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FCA publishes Annual Report and Accounts 2015/16

The report sets out the FCA's view on how it has performed against its key objectives in the previous 12 months.

In her final Annual Report statement as Acting Chief Executive, Tracey McDermott states that the FCA has delivered against an ambitious and demanding programme of legislative and regulatory reform. She cites the introduction of the Senior Managers and Certification Regime and the progress made against MiFID II and MAR as examples of this.

Reference is also made to the FCA's recent enforcement work in the form of penalties, jail sentences and redress programmes featuring prominently.

McDermott also makes reference to a willingness by the regulator to change its approach where necessary, saying:  “we have demonstrated a willingness to listen to, and work with, stakeholders who identify areas where our approach might need to change."

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Quarterly Consultation Paper on ICOBS amendments

Amongst other changes to the FCA Handbook proposed in the Consultation Paper are those relating to ICOBS in response to the Insurance Act 2015 requirements on claims handling rules.

They include where the FCA would view rejections of claims as unreasonable unless an insurer can also rely on relevant legislative provisions. Those cases include rejections for breach of warranty or term, or for fraud, for which provision has been made in the Insurance Act 2015.

The rule changes are expected to come into force on 1 November 2016. Impacted firms should ensure that internal processes are updated to ensure rejections do not occur on unreasonable grounds.  

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FCA speeches and communications 

Innovation in RegTech speech

Christopher Woolard, Director of Strategy and Competition at the FCA, delivered a speech at London FinTech Week 2016. He made the following points:

  • the FCA’s work on innovation is integral to its duty to promote competition in the interests of consumers;
  • since the launch of Project Innovate in October 2014, the FCA has provided support to nearly 300 firms who presented innovative ideas that were in the interests of consumers; and
  • the FCA has a particular interest in working with those involved in developing technologies to improve regulatory reporting and data sharing - so called 'RegTech'.

With Project Innovate the FCA is demonstrating a desire to keep on top of, and facilitate the expansion of, the rapidly evolving ‘fin tech’ sector; the Regulatory Sandbox being one way the FCA is aiming to achieve this.

Firms have expressed certain concerns about the development of RegTech which the FCA will have to address before real efficiencies and savings can be achieved. Amongst the risks are the complexity, scale and diversity of legacy infrastructure and existing systems in firms and a natural risk aversion which sees firms preferring to retain proven technologies. 

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Getting culture and conduct right 

Jonathan Davidson, Director of Supervision for Retail & Authorisations, made the following points on 'getting culture and conduct right' at the recent City and Financial Culture and Conduct Forum:

  • the FCA's ambition is for the conduct element of culture - that mindsets and incentives will shift to make doing the right thing for consumers and the markets the objective that is always considered.
  • the role of all leaders is to encourage a culture of personal responsibility and good culture to the health of the firm and the financial services industry more widely; and
  • more firms are forming the view that a strong conduct culture which builds consumer trust in a firm as well as inspires employees is in the economic self-interest of the firms and their shareholders.

This speech reinforces the FCA's message on the importance of getting a firm's culture right.  Davidson was clear that "the culture of our regulated firms is and always has been vital in our regulation of their conduct".  The regulator does acknowledge that changing culture can be very difficult and take time, saying; "CEOs, boards, programmes, systems and controls come and go regularly. Mindsets are developed and reinforced over years and even decades and are passed down from one generation to the next".  However, a firm should not feel this gives them an excuse not to prioritise the issue. The regulator will not hesitate to take action against a regulated firm if it has concerns as to the culture that pervades the firm.

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Enforcement fine for client and insurer money failings

Towergate Underwriting Group Limited has been fined £2.632 million for failings relating to its protection of client and insurer money. 

Towergate holds both client and insurer money and accumulated a shortfall of £12.6 million in its client and insurer money bank accounts which, due to systems and controls weaknesses, went undetected for a number of years.

The FCA found that Towergate had failed to comply with CASS Rules and Principles 3 and 10.

The FCA has issued repeated warnings to the industry on the importance of complying with client money rules, which are designed to ensure that client money is adequately protected in the event of a firm failing.  The FCA will readily pursue both firms and senior management if there are perceived failings in this area.

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Cancellation of payday lender's interim permission and prohibition of director from role in regulated financial services

The FCA has published Decision Notices in relation to Wage Payment and Payday Loans Limited (WPPL) and its director Andrew Hart.

The FCA has found that Mr Hart is not a fit and proper person because he lacks integrity.  In the FCA's view, he took a reckless approach to managing the lender and to complying with regulatory requirements.  

The FCA has also decided to cancel the payday lender's interim permission because it is failing to satisfy the threshold conditions regarding appropriate resources and suitability, for reasons including its connection with Mr Hart.

Mr Hart and WPPL dispute the FCA’s decisions and have referred their cases to the Upper Tribunal (the Tribunal). Accordingly, the findings in the Decision Notices are provisional pending the Tribunal’s determination.

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Five charged in alleged investment fraud

The offences relate to the promotion and sale of shares in Atlantic Equity LLC through a succession of boiler room companies.

The FCA alleges that the defendants were involved in the promotion of investment schemes. These schemes offered investors interest in purported commercial developments in Madeira, which may have lost 175 investors approximately £275 million.

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This publication is intended for general guidance and represents our understanding of the relevant law and practice as at August 2016. Specific advice should be sought for specific cases. For more information see our terms & conditions.

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