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Financial Services Regulation monthly update September 2016

This month in summary:

Financial Services Regulation

Speeches and Communications


Financial services regulation

FCA provide feedback on the Implementation of the Senior Managers and Certification Regime 

The FCA marked six months since the implementation of the Senior Managers and Certification Regime (SMCR) by providing feedback on the impact of the SMCR to date and how to further strengthen the regime.

Whilst the FCA recognised that many firms have made a substantial effort to embrace the importance of responsibility and accountability within the SMCR, in other cases, the FCA has seen evidence of overlapping responsibilities and issuing responsibilities to more junior staff, which goes against its intentions when implementing the SMCR. The FCA has also called for clearer responsibilities maps and Statements of Responsibilities to ensure that all business functions have been allocated to the regime correctly. 

In light of the FCA's findings, firms should:

  • review their Statements of Responsibilities and management responsibilities maps to ensure that the  roles within them are clear and cover each area of the business;
  • review which individuals hold Senior Management Functions or particular responsibilities to ensure that they are senior enough to be genuinely responsible for that area of the business; and
  • note that the FCA intends for the SMCR to be extended to all regulated financial services firms from 2018 and as such, those not currently covered by the SMCR should be focusing on how they will work towards this deadline.

The FCA has also issued a discussion paper on the much anticipated impact of the Senior Managers Regime (SMR) on the legal function and the role of a General Counsel. 

The discussion paper confirms that the SMR does not require the role of the General Counsel to be designated a Senior Manager within the SMR. However, the rules do require that a Senior Manager must have overall responsibility for every activity in a relevant firm, including the legal function. As such, an individual who has overall responsibility for the management of a legal function will need to be captured as an SMF18 if they are not already an individual holding Senior Management Functions.

This discussion paper seeks an open debate on whether the head of a legal function should be included as an individual holding Senior Management Functions and recognises the concerns expressed by many in doing so, including the potential impact it could have on the concept of legal privilege. 

Firms should therefore note that the FCA has asked for responses to the Discussion Paper to be submitted by 9 January 2017.

For more information and links to the feedback paper and discussion paper discussed above, visit the FCA’s site.

Implementation of the revised Markets in Financial Instruments Directive (MiFID II)

The FCA has published its third consultation paper on the implementation of the revised MiFID II in an effort to focus on a wide range of conduct of business issues which will increase protections for retail investors.

MiFID II comes into effect on 3 January 2018. It aims to improve the rules governing the way capital markets function, contribute to the reform of derivatives markets and strengthen transparency of trading. These changes reflect the FCA's efforts over recent years to promote competition and market integrity within both retail and wholesale markets.

Key proposals from the consultation paper include:

  • strengthening inducement and research rules to drive competition and ensure that research adds value to investment decisions;
  • implementing requirements of full disclosure of costs and charges;
  • guidance on the responsibilities of providers for the fair treatment of customers; and
  • extending the requirement of telephone taping to financial advisers with the aim of resolving disputes in a timely and cost effective manner.

This consultation is open until 4 January 2017, with the exception for comments on Chapter 16 – Supervision manual, authorisation and approved persons, which should be provided by 31 October 2016. The FCA also notes that a fourth consultation paper is likely to be published towards the end of this year.

Whilst issuing the above update, the FCA reminds firms that they must continue to abide by their obligations under UK law, including those derived from EU law, as the MiFID II is an example of the implementation plans for legislation that is still to come into effect.

For more information and a link to the consultation paper discussed above, visit the FCA’s site

Speeches and Communications

The FCA's approach to cyber security in financial services firms

On 21 September 2016, the FCA's Director of Specialist Supervision, Nausicaa Delfas, delivered a speech on the FCA's approach to cyber security and the risks in today's digital world.

The key points from the speech are:

  • cyber security risk is an evolving threat which impacts each of the FCA's objectives;
  • the FCA regulate 56,000 financial services firms and, whatever their size, these firms could pose a significant risk to the FCA's objectives if the sensitive data they hold is compromised;
  • cyber security is a shared interest and responsibility that the FCA will continue to work on with the Government and other regulators, both nationally and internationally, to ensure that the threat is mitigated; and
  • the FCA will be looking for a security culture in firms of all sizes to ensure good governance, identification and protection for all affected. 

Within this speech, the FCA also highlights the key emerging risk areas that it will be focusing on going forward. The first of which is the ransomware (software that can block the users' access) threat to firms and customers and the likely increase of risk in this respect over the next few years. The second risk highlighted by the FCA relates to data storage and outsourcing key services to cloud vendors along with firms' failures to understand the potential threats acquired by their cloud provider's profile. The final risk emphasised by the FCA is the current skills gap in the cyber market and the struggle to recruit skilled staff to respond to any threats posed. 

In light of the above, firms should:

  • review the security methods they have in place to ensure that sensitive information is held in an appropriate manner; 
  • begin considering how they can better achieve a security culture within their internal structure, particularly in relation to the key emerging risk areas highlighted above; and
  • be prepared for the FCA to focus on preventing cybercrime in more detail and introduce further regulation around how firms can protect their sensitive information.  

For more information and a link to the speech discussed above, visit the FCA's site.

Financially vulnerable customers' thematic review

The FCA's thematic review follows its report on Mortgage Lenders' Arrears Management and Forbearance issued in February 2014. In this report, the FCA asked firms to:

  • consider which borrowers are most likely to be affected by potential rate rises;
  • deal sensitively with borrowers who may have particular vulnerabilities;
  • take action to identify customers susceptible to falling into arrears; and
  • have appropriate strategies to treat these customers fairly. 

Since this report, the FCA set out to understand what strategies mortgage lenders have in place to mitigate the impact of an interest rate rise on financially vulnerable customers. This review was initiated in early 2016, when an interest rate rise was expected. Interest rates have now been cut and the FCA recognises that this matter may not be a high priority for firms in the current market. 

In publishing its findings, the FCA has noted that firms are currently at different stages in developing strategies to mitigate the impact of an interest rate rise on financially vulnerable customers and much work is still required before they will be ready for implementation. 

Despite the current market and low levels of interest rates, this review should prompt firms to:

  • take proactive steps to review their internal procedures while they can in order to be better prepared for a rise in the future; and
  • attempt to reduce the risk of customers entering arrears or worsening their current position as a result of this. 

For more information, visit the FCA's site.

Ageing population update: are firms meeting the needs of older customers? 

In February 2016, the FCA published its discussion paper on the ageing population, which looked at the way in which the financial services industry meets the needs of older consumers. 

After gathering views from the market, the FCA has decided to undertake focused work in six key areas to supplement work already on-going across the FCA. The areas that the FCA believes will contribute most towards positive change for older consumers are: 

  • pensions;
  • advice and guidance;
  • mortgages;
  • vulnerability;
  • access; and
  • scams/fraud.

The FCA is proposing to launch its findings and its Ageing Population Strategy in Summer 2017 and will continue to seek the views of stakeholders in the meantime through a combination of bilateral meetings and roundtables on key issues. 

Whilst awaiting further guidance from the FCA as to how it proposes to move forward, firms should:

  • attempt to stay up to date with the FCA's views leading up to the launch; and 
  • initiate internal discussions about how they can better support older consumers within their particular business structure. 

For more information, visit the FCA's site.


Investment Portfolio Manager charged with insider dealing

The FCA has instituted criminal proceedings against Mark Alexander Lyttleton, a former Investment Portfolio Manager at Blackrock Investment Management (UK) Ltd. Mr Lyttleton has been charged with three counts of insider dealing which relate to trading in equities and a call option between 2 October  - 16 December 2011.

Insider dealing is a criminal offence that is punishable by a fine or up to seven years imprisonment. 

For more information, visit the FCA's site

Breach by Andrew Tinney, former Barclays Wealth Senior Director

The FCA's published Decision Notice against Andrew Tinney alleges that he breached Statement of Principle 1 by concealing a document prepared by a consultancy reporting on the 'tone from the top' at Barclays Wealth Americas following regulatory breaches identified by the US SEC. The FCA proposes a public censure and lifetime prohibition of Mr Tinney.  Mr Tinney has referred to FCA's decision to the Upper Tribunal. 

For more information, visit the FCA’s site

Elizabeth Anne Parry, Sole Trader, fined

On 1 September 2016, Elizabeth Anne Parry was fined £109,400 and was prohibited for fabricating two “statements of professional standing” to give the impression to the FCA that she had the appropriate qualification from a professional body to provide investment advice to retail customers. Ms Parry continued to maintain that she was appropriately qualified on another six occasions where she was communicating to the FCA which ultimately led to the FCA's conclusion that she lacked honesty and integrity in contravention of Statement of Principle 1 for Approved Persons. 

It is unclear whether Ms Parry had the relevant competence to advise retail customers and attain the appropriate qualification but her failure to be honest with the FCA led to her ultimately receiving a lifetime ban and a significant financial penalty. 

For more information, visit the FCA’s site.

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

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