In this month’s update:
- FCA’s new Consumer Duty.
- Financial Services and Markets Bill 2022/23.
- Regulators’ joint discussion paper on critical third parties to the UK financial sector.
- Treasury Committee inquiry on cryptoassets.
- FSB’s progress report on roadmap for addressing climate-related financial risks.
- FCA’s SME collections and recoveries review.
General FS regulation
FCA: new financial promotion rules for high-risk investments
On 1 August 2022, the FCA published policy statement 22/10 which sets out its final policy and handbook rules for high-risk investments subject to its financial promotion rules and for firms communicating and approving financial promotions. The policy statement responds to the proposals contained in the FCA’s consultation paper 22/2 (see our February 2022 update), which built on the feedback to its discussion paper DP21/2 (see our article “High-risk investment promotions under scrutiny“) and evidence from behavioural science research. The FCA has made a number of targeted amendments to its proposals to mitigate negative unintended consequences identified in the consultation responses and to ensure firms have enough time to implement the rules.
The new regime is a key component of the FCA’s Consumer Investment Strategy, which it published in September 2021. As part of this strategy, the FCA has set itself a target of a 50% reduction by 2025 in the number of consumers investing in high-risk investments who indicate a low risk tolerance or demonstrate vulnerability.
In summary, the new regime:
- Rationalises the financial promotion marketing restrictions in COBS 4 under the categories “restricted mass market investments” and “non-mass market investments”.
- Reinforces the consumer journey into high-risk investments by strengthening risk warnings for a number of types of high-risk investment, prohibiting certain incentives to invest such as “refer a friend bonuses”, introducing positive frictions, enhancing client categorisation and requiring stronger appropriateness tests.
- Requires firms that approve and issue financial promotions to have the necessary competence and expertise regarding the investment product promoted.
The rules relating to risk warnings for financial promotions of high-risk investments come into force on 1 December 2022; all other rules will take effect from 1 February 2023.
Cryptoassets are not covered by the policy statement. The FCA will address its consultation proposals for cryptoassets once the relevant legislation to bring qualifying cryptoassets within the financial promotion regime has been made. At this stage, the FCA expects its approach to cryptoassets will be consistent with how it has approached other high-risk investments.
FCA: new Consumer Duty
The new Consumer Duty aims to set higher and clearer standards of consumer protection and requires firms to put customers’ needs first. It is made up of:
- A new Consumer Principle that requires firms to act to deliver good outcomes for retail customers.
- Cross-cutting rules which clarify the FCA’s expectations for behaviour through three overarching requirements and help firms to deliver the four outcomes under the Duty.
- The four outcomes which relate to the governance of products and services, price and value, consumer understanding, and consumer support.
The FCA has adjusted the application dates of the new rules. The rules come into force on 31 July 2023 for new and existing products or services that are open to sale or renewal and on 31 July 2024 for closed products or services. The FCA expects firms to have agreed their implementation plans by the end of October 2022 and be able to demonstrate that they have ensured their plans are deliverable and robust.
HM Treasury: first annual report on the state of the UK financial services sector
On 21 July 2022, HM Treasury published its first annual report on the state of the UK financial services sector. The report has been produced in collaboration with the City of London Corporation and assesses the attractiveness and international competitiveness of the UK financial services sector. The key findings are:
- Whilst the sector is successful, there are several opportunities identified where more can be done to secure future success. These include the opportunity to build a coherent, agile, and internationally respected financial regulatory framework following the UK’s exit from the EU, the implications of the wide-ranging Financial Services and Markets Bill which will aim to make the UK a more attractive place for business and innovative technologies, and the recent implementation of the Capital Markets Industry Taskforce.
- Collaboration and constructive challenge between industry, government and regulators is required to deliver on the ambitions for the sector.
HM Treasury: response to the second consultation on the financial services future regulatory framework review
On 20 July 2022, HM Treasury published its response to the second consultation paper on the financial services future regulatory framework review (FRF), which relates to Phase II of the review.
The response summarises the feedback to the consultation and sets out the final policy position. Among other things, the review notes that:
- A significant majority of respondents support the intention to add new growth and international competitiveness secondary objectives for the FCA and the PRA.
- Many respondents support proposals that existing regulatory principles for sustainable growth should be updated to reference climate change and a net zero economy.
- Respondents generally welcome proposals for HM Treasury to require regulators to review their rules when it is in the public interest.
The FRF reforms are being legislated through the Financial Services and Markets Bill 2022/23 (see below).
Financial Services and Markets Bill 2022/23
On 19 July 2022, Nadhim Zahawi, the Chancellor of the Exchequer, gave his first Mansion House speech, in which he highlighted the key aspects of the Financial Services and Markets Bill 2022/23. He described it as a “landmark piece of legislation.” The Bill was introduced in Parliament on 20 July 2022. Please see our insight article for further information on the Bill.
FCA: perimeter report 2022
On 19 July 2022, the FCA published its perimeter report. The perimeter report webpage will be updated quarterly.
The report sets out the FCA’s general approach to the perimeter, and harm linked to the perimeter. The report then works through the following sections, and includes examples of its work in each area:
- The FCA’s general approach to the Perimeter: For example, the FCA analyses data and intelligence, and brings action against firms or individuals who illegally carry out regulated activities.
- Challenges: The FCA’s ability to monitor harm related to unregulated activities is a challenge due to their limited ability to collect intelligence and data on unregulated activities. The FCA is investing in its people, technology, and capabilities so that they can find and stop harm quicker.
- Firms business models: The FCA recognises that firms are only required to be authorised where they undertake regulated activities. However, these firms can also undertake unregulated activities and the FCA believes bringing unregulated activities under its remit would assist in preventing harm and producing better outcomes. The FCA lists various business models, for example, outsourcing/third party service providers, and refers to its work in relation to the joint discussion paper on critical third parties to the UK financial sector.
- Lending: As part of the work in relation to deferred credit payments (Buy-NowPay-Later), the FCA is working closely with the Treasury to shape the new regulatory regime.
- Consumer investments: The FCA is taking action, and successfully prosecuting, firms promoting and selling unregulated collective investment schemes.
- Technological changes: The FCA has continued engagement with the largest online platforms, including Meta, and Twitter, to put in place similar policies and expect commitments to implement a solution this year, similar to that which Google has implemented, which only allows financial promotions made by, or with the approval of, FCA authorised firms.
- Wholesale markets: The FCA believes extending the Senior Managers and Certification Regime to recognised investment exchanges and credit rating agencies would deliver greater accountability and robust oversight of functions that promote market integrity.
FCA: annual report and accounts
On 19 July 2022, the FCA published its annual report and accounts for 2021/22, providing an update on what it has achieved in the past year. Some of the key highlights include:
- Securing £34.8 million in consumer redress for unauthorised investment businesses.
- Calling for the government to include paid-for advertising in the Online Safety Bill and pressing for changes to the regulation of cryptoassets.
- Since launching the ‘always open’ regulatory sandbox in August 2021, the FCA has received 60 applications with an increase in those focusing on Open Banking and AI technologies.
For information on investigations and enforcements in the annual report and accounts, please see our item under the section: FCA Enforcement action.
Fintech and cryptoassets
BoE, PRA, FCA: joint discussion paper on critical third parties to the UK financial sector
On 21 July 2022, the Bank of England (BoE), PRA, and FCA (together, the supervisory authorities) published their discussion paper on “Operational resilience: critical third parties to the UK financial sector.” The Financial Services and Markets Bill 2022/2023 sets out a framework for managing systemic risks posed by third parties designated as critical third parties (CTPs) by HM Treasury, which has been welcomed by the supervisory authorities.
The discussion paper sets out how the supervisory authorities could use their proposed powers in powers in the Bill to assess and strengthen operational resilience of services supplied by CTPs. The paper focuses on three main building blocks:
- A framework of the supervisory authorities to identify and recommend potential CTPs for designation.
- Minimum resilience standards for CTPs in respect of material services provided to firms and FMIs.
- A range of tools for testing the resilience of CTPs material services
The discussion paper is open to responses until 23 December 2022. Subject to the outcome of the Bill, a consultation is anticipated in 2023.
Treasury Committee: cryptoassets inquiry
On 13 July 2022, the House of Commons Treasury Committee published a press release announcing the launch of its inquiry into cryptoassets, and a related call for evidence which confirms that the inquiry will cover:
- The role of cryptoassets in the UK, including the opportunities and risks they pose to consumers, businesses, and government.
- The potential impact of distributed ledger technologies on financial institutions and financial infrastructure.
- The government, FCA, and BoE’s regulatory response to cryptoassets, considering how regulation could be balanced to protect consumers and avoid stifling innovation.
The call for evidence also provides a list of topics that submissions are invited on, including:
- To what extent digital currencies are likely to replace traditional currencies.
- What impact cryptoassets may have on social inclusion.
- Whether the government and regulators are suitably equipped to grasp the opportunities of cryptoassets, whilst mitigating the risks.
Written submissions will be accepted until 17.00 on 12 September 2022.
FCA: innovation open day
On 13 July 2022, the FCA held its 2022 innovation open day, in which he FCA laid out its roadmap for the future and shared its plans to support industry growth. The plenary sessions are available on the FCA’s innovation open day webinars webpage.
- How the FCA intends to use its innovation agenda to support the future of financial services.
- An upcoming diversity and inclusion innovation challenge.
- Plans to set up an innovation industry advisory panel.
- Plans to pilot a new policy sandbox.
The FCA are also set to host the authorised push payment fraud TechSprint on 27 – 29 September 2022.
BoE: lessons from recent cryptoassets instability
On 12 July 2022, Sir Jon Cunliffe, Deputy Governor of the Bank of England, gave a speech on the lessons from the “Crypto Winter”, which saw a widespread collapse in the valuation of cryptoassets (Bitcoin has dropped 70% since November), and included the collapse of several high-profile crypto firms. The lessons include:
- Technology does not change the underlying risks in economics and finance.
- Regulators should accelerate and continue any work to implement effective regulation of crypto technologies in finance.
- Crypto regulation should be constructed on the “same risk, same regulatory outcome” principle.
- Crypto technologies provide the opportunity of substantive innovation and improvement in finance. However, a suitable framework is required to ensure risks are managed and innovation is therefore successful and sustainable.
IOSCO: FinTech taskforce
On 7 July 2022, the International Organization of Securities Commissions (IOSCO), published its cryptoassets roadmap for 2022/23. The Fintech taskforce (FTF) is tasked with developing, overseeing, delivering, and implementing IOSCO’s regulatory agenda on Fintech and cryptoassets. The FTF will also be responsible for coordinating engagement with the FSB and other standards bodies on Fintech and cryptoassets related matters.
FTF’s work will be split across two workstreams, covering crypto and digital assets (CDA), and decentralised finance (DeFi). Both worksteams will focus primarily on analysing and responding to market integrity and investor protection concerns with regards to cryptoassets. The roadmap provides the FTFs overarching workplan and deliverables for each of the workstreams.
Public reports on each workstream are due in 2023. The FTF will also consider whether there are suitable junctures in 2023 for interim reports on the ongoing work.
FSB: progress report on roadmap for addressing climate-related financial risks
On 14 July 2022, the Financial Stability Board (FSB) published the first annual progress report on the roadmap for addressing climate-related financial risks. The report aims to: take stock of progress made since publication of the roadmap, identify and address areas that require further attention, strengthen coordination across various international initiatives, and provide updates, where required, to the roadmap actions.
The FSB consider that progress across the four blocks of the roadmap has been encouraging. The four blocks are firm level disclosures, data, vulnerabilities analysis, and regulatory and supervisory practices and tools.
As the understanding of the implications of other sustainability topics deepen, the FSB will consider whether to include a broader range of sustainability topics in future financial stability agendas.
The FSB is also expected to publish:
- Its joint work with the Network for Greening the Financial System (NGFS) on climate scenarios in November 2022.
- The final version of its report on supervisory and regulatory approaches to climate-related risks in October 2022.
BoE: climate change risks on UK banks and insurers
On 11 July 2022, Anil Kashyap, a member of the Financial Policy Committee, gave a speech on the climate change risks that UK banks and insurers face. Mr Kashyap provides an overview of the structure of the Climate Biennial Exploratory Scenario (CBES) to help illustrate his arguments by describing some of the findings.
In the closing remarks, Mr Kashyap poses some queries that he considers should be asked by senior management at firms, these include:
- How much data extrapolation is required due to missing data, and how will these gaps be filled? Obtaining high quality data is essential for risk management.
- Are firms aware of which third parties they are reliant on, and what are their key features and assumptions of their models? It is likely the highly rated consultants’ models require high quality data to take advantage of the model. Are firms aware of the data that their staff require to efficiently utilise third party consultants.
- What is the firm best and worst at modelling, how can this be improved? The BoE is meeting with the CBES participants to share best practices and will share these wider with broader financial firms.
Network for Greening the Financial System: final report on bridging data gaps
On 6 July 2022, the NGFS published its final report on bridging data gaps. The report provides policy recommendations for improving the availability, quality, and comparability of climate-related data, and provides an update on the NGFS’ work since the May 2021 progress report.
Task Force on Nature-related Financial Disclosures: second draft disclosure framework
On 28 June 2022, the Task Force on Nature-related Financial Disclosures (TFND) published its second beta draft of the disclose framework for consultation, and an accompanying press release. The framework aims to achieve nature-positive outcomes by providing guidance for organisations to report and act on evolving nature-related risks.
There are a number of additional items in the second draft including:
- The approach to metrics and targets distinguishes between assessment and disclosure metrics and takes a cross-sector approach. The TNFD will develop additional sector-specific metrics in due course.
- Additional practical guidance for market participants interested in pilot testing the beta framework from 1 July 2022 and 1 June 2023.
- Enhancements to the LEAP (Locate Evaluate Assess Prepare) approach from financial institutions.
Updated beta versions are anticipated in November 2022 and February 2023. The final framework is due in September 2023.
Payment services and systems
HM Treasury: payments regulation and the systemic perimeter
On 21 July 2022, HM Treasury published its consultation and call for evidence on payments regulation and the systemic perimeter.
The consultation and call for evidence is split into six chapters. One of these focuses on extending the Senior Managers and Certification regime (SMCR). It is proposed that if the systemic regulatory perimeter is expanded, SMCR should be expanded accordingly to apply to systemic payment systems and specified service providers.
As part of the review, the government would also welcome any views on the potential applicability of SMCR to the payment services and e-money sector more widely, including in relation to the FCA’s regulatory ambit.
The consultation closes on 11 October 2022.
PSR: digital payments initiative report
On 21 July 2022, the Payment Systems Regulator (PSR) published its response to the digital payments initiative report, please see our previous update for more information on initial report. In the response the PSR welcomes the recommendations set out in the report, and responses include:
- Setting out four priority issues that need to be addressed to promote open banking account-to-account transactions.
- The PSR will coordinate with the FCA in exploring with payment system operators what could be done to facilitate the availability and use of digital payment services that meet the needs of consumers with limited digital and financial access or skills.
PSR: annual report and accounts for 2021/22
On 19 July 2022, the PSR published its annual report and accounts for 2021/22. The report highlights the work completed by the PSR across the various workstreams, such as authorised push payment (APP) scams, access to cash, cryptoassets and stablecoins.
PSR: provisional decision on remedies for the card-acquiring market review
On 29 June 2022, the PSR published a consultation paper on its provisional decision on remedies for the card-acquiring market review. Following a November 2021 market review which found that the market does not operate well for merchants with annual card turnover lower than £50m, the PSR consulted in January 2022 on the initial four remedies.
The PSR is now consulting on the proposals regarding the following three remedies:
- Greater transparency.
- Greater engagement.
- Ability to change providers easily.
It has decided not to progress with the proposal to encourage digital comparison tools for merchants.
These remedies are intended for implementation through specific directions given to the most significant providers of card-acquiring services to the merchants the PSR seeks to protect.
FCA: SME collections and recoveries
On 12 July 2022, the FCA published its findings following a multi-firm review into retail banks’ treatment of SME customers in collections or recoveries. Ensuring that retail banks regulated by the FCA treat SME customers fairly is a key priority for the FCA.
The review looked at 11 retail banks who provide SME lending services (including bounce back loans, where relevant), and considered the firms’ systems, controls and processes for collecting and recovering SME debt under Principles 2, 3 and 6, SYSC 9 and 13, and CONC 7.
In general, the findings identified repeated instances of poor customer outcomes and failure to treat customers fairly. The FCA highlights the themes that drive poor outcomes.
The FCA has provided the 11 retail banks with individual feedback and has published the findings and expectations in a Dear Chair letter.
European Parliament: agreement on proposed Directive on consumer credits
On 12 July 2022, the European Parliament published a press release confirming that it has agreed its position on the European Commission’s legislative proposal for a Directive on consumer credits to revise and replace the Consumer Credit Directive. The Internal Market and Consumer Protection Committee voted to adopt a text reflecting compromise amendments to the draft report prepared in February 2022.
Banking and insurance
PRA: challenges and risks for investment banks
On 20 July 2022, Nathanaël Benjamin, PRA Executive Director, gave a speech on the challenges and risks for investment banks. Among other things, Mr Benjamin noted:
- Investment banks must ensure that they understand and can manage the associated risks of new technologies or emerging digital asset markets, rather than adopt them due to commercial pressure. There is particular emphasis on operational resilience expectations.
- Risk concentration should not be considered only on a clint-by-client basis. Importantly this should be considered across all clients, and client’s market-wide portfolio.
FOS: 33% decline in insurance pricing complaints
On 20 July 2022, the Financial Ombudsman Service (FOS) published its press release on insurance pricing complaints, reporting that the number of new cases received has fallen to 1,004 from 1,507 the previous year.
FOS notes that whilst the number of new cases has declined, it is important that consumer confidence is upheld in the price of their insurance, especially with the ongoing cost of living crisis.
Despite the number of upheld complaints decreasing, the FOS has found that the insurer has acted fairly in most cases. It did, however, see cases where customers felt that they had not understood the reason for the price quoted.
PRA: capital and liquidity buffers
On 14 July 2022, Victoria Saporta, PRA Executive Director, gave a speech on capital and liquidity buffers. Ms Saporta covers the following topics as part of her speech:
- Impediments to capital buffer usability and policy implications – there are possible supporting measures which are under consideration, in the UK but also internationally via the Basel Committee on Banking Supervision and Financial Stability Board.
- Liquidity framework, factors affecting high quality liquid assets (HQLA) usability and policy implications – there is evidence to suggest that the way the prudential framework is working may inhibit banks in appropriately using liquidity when stress testing. To better understand this, the BoE and PRA published a joint discussion paper on supporting HQLA in the context of the prudential liquidity framework. For further information on this please see our previous update.
Securities, investments, and markets
HM Treasury: future regulatory framework for CCPs and CSDs
On 20 July 2022, HM Treasury published its response to the consultation on future regulatory framework for central counterparties (CCPs) and central securities depositories (CSDs).
The response summarises the feedback from respondents and how HM Treasury intends to take forward its proposals. The response notes, among other things, that:
- There is support for the proposal to provide general rule-making powers to the BoE, which will allow the BoE to set direct requirements on CCPs and CSDs.
- The government intends to introduce a power for the BoE to impose direct requirements on individual CCPs and CSDs, allowing the bank to advance its objective to protect and enhance UK financial stability.
- The BoE may subject “systemically important third country CCPs” to direct UK regulation and oversight. It may apply its rulebook, in full or in part, to these firms.
- The government intends to introduce a secondary objective on innovation.
- It is proposed that the BoE will use the same cost-benefit analysis panel as the PRA.
- A requirement for the BoE to report annually on its efforts to engage with stakeholders who are outside of direct regulation and provide a summary of the engagement. These reforms (including the final policy) are set out in the Financial Services and Markets Bill 2022/23.
European Commission: Crowdfunding Regulation
On 13 July 2022, the European Commission adopted the following Delegated and Implementing Regulations, under the Regulation on European crowdfunding service providers for business (ECSPR):
- Delegated Regulation supplementing the ECSPR with regard to regulatory technical standards specifying conflicts of interest requirements for crowdfunding service providers.
- Delegated Regulation supplementing the ECSPR with regard to regulatory technical standards specifying the methodology for calculating default rates of loans offered on a crowdfunding platform.
- Delegated Regulation supplementing the ECSPR with regard to regulatory technical standards specifying the measures and procedures for crowdfunding service providers’ business continuity plan.
- Implementing Regulation laying down implementing technical standards for the application of the ECSPR with regard to data standards and formats, templates and procedures for reporting information on projects funded through crowdfunding platforms.
- Implementing Regulation laying down implementing technical standards for the application of the ECSPR with regard to standard forms, templates and procedures for the cooperation and exchange of information between competent authorities concerning European crowdfunding service providers for business.
- Delegated Regulation supplementing the ECSPR with regard to regulatory technical standards for the key investment information sheet.
- Delegated Regulation supplementing the ECSPR with regard to regulatory technical standards specifying the requirements, standard formats and procedures for complaint handling.
- Delegated Regulation supplementing the ECSPR with regard to regulatory technical standards specifying the entry knowledge test and the simulation of the ability to bear loss for prospective non-sophisticated investors in crowdfunding projects.
- Implementing Regulation laying down implementing technical standards for the application of the ECSPR with regard to the standard forms, templates and procedures for the notifications of national marketing requirements applicable to crowdfunding service providers by competent authorities to ESMA.
- Implementing Regulation laying down implementing technical standards for the application of the ECSPR with regard to standard forms, templates and procedures for the cooperation and exchange of information between competent authorities and ESMA in relation to European crowdfunding service providers for business.
- Delegated Regulation supplementing the ECSPR with regard to regulatory technical standards for the exchange of information between competent authorities in relation to investigation, supervision and enforcement activities in relation to European crowdfunding service providers for business.
- Delegated Regulation supplementing the ECSPR with regard to regulatory technical standards on individual portfolio management of loans by crowdfunding service providers, specifying the elements of the method to assess credit risk, the information on each individual portfolio to be disclosed to investors, and the policies and procedures required in relation to contingency funds.
- Delegated Regulation supplementing the ECSPR with regard to regulatory technical standards specifying requirements and arrangements for the application for authorisation as a crowdfunding service provider.
On 12 July 2022, the European Commission adopted a Delegated Regulation extending the transitional period for continuing to provide crowdfunding services according to national law as referred to in the ECSPR.
The Council of the EU and the European Parliament will now scrutinise the Delegated Regulations.
FCA: improving equity secondary markets
On 5 July 2022, the FCA published its consultation paper on proposals to improve how the equity secondary market operates. These proposals apply to trading venues, investment firms, and UK branches of overseas firms undertaking investment services and activities. As part of these proposals, the FCA wants to make the following changes:
- Improve the content of post-trade transparency.
- Simplify over the counter transaction reporting.
- Improve choice and competition by enabling UK trading venues to use reference prices from overseas venues.
- Improve the quality of execution.
- Enhance market resilience.
Following consideration of the responses to the consultation, the FCA intends to submit the relevant updated technical standards for approval.
The consultation closes on 16 September 2022.
Funds and asset management
ESMA: application of Alternative Investment Fund Managers Directive
On 20 July 2022, ESMA published its updated Q&A on the application the of Alternative Investment Fund Managers Directive (AIFMD). The update includes two new questions on reconciliations (Section VI, Q&A 15 and 16), and one new question on responsibility for compliance with requirements for marketing communications (Section VIII, Q&A 4).
ESMA: application of the Undertakings for Collective Investment in Transferable Securities Directive
On 20 July 2022, ESMA published its updated Q&A on the application of the Undertakings for Collective Investment in Transferable Securities Directive (UCITS). The update includes new questions on reconciliation frequency for funds trading on a daily basis (Section X, Q&A 7), reconciliation with tri-party collateral managers (Section X, Q&A 8), and responsibility to ensure compliance with the rules governing marketing communications (Section XIII, Q&A 1).
FCA: firms in the TPR and fund operators in the TMPR
On 14 July 2022, the FCA updated its webpage on rules that apply to firms in the temporary permissions regime (TPR) and fund operators in the temporary marketing permissions regime (TMPR). The update sees the addition of a new section on disclosure requirements for EEA UCITS. The new section provides that:
- In the UK the exemption for EEA UCITS of the requirement to produce a PRIIPs KID lasts until 31 December 2026. When marketing to retail investors in the UK, EEA UCITS recognised under either s272 FSMA or the TMPR must produce a UCITS KIID.
- The TMPR is due to end on 31 December 2025. The FCA are engaging with HM Treasury on the disclosure requirements that will apply in the event of an equivalence decision under the Overseas Funds Regime.
FCA: investigation and enforcement aspects of the annual report and accounts 2021/21
On 19 July 2022, the FCA published its annual report and accounts for 2021/22. Investigation and enforcement aspects in the report include:
- The FCA’s data on market cleanliness highlights improvements against each of the three metrics, although this data does not provide a complete picture and should be read with caution: market cleanliness measure (7.7%), abnormal trading volume measure (7.1%) and the potentially anomalous trading ratio (6.1%).
- Referrals for insider dealing and market manipulation from the enforcement teams have increased.
- Under S166 FSMA, the FCA has the power to obtain an independent view of aspects of a firm’s activities that cause concern or require further analysis. The FCA used this power on 38 cases, in six of these cases a skilled person firm was appointed by the FCA. In total 13 skilled person firms were appointed to undertake these reviews.
- The aggregate costs incurred by regulated firms for s166 work (including ongoing reviews from the previous year) was £37.7 million.
- The investment management sector required the most skilled person reviews.
- The Regulation Decisions Committee (RDC) made 132 decisions on cases. A number of these cases involve cancellation actions against firms for failing to pay regulatory fees or submit regulatory returns. These are no longer in the remit for the RDC.
- Cases to the RDC have decreased by 64% (with 84 cases referred, and 86 completed). This is largely due to the change in remit.
For general information relating to the annual report and accounts, please see our item under the section: General FS regulation.
FCA: FCA fine TJM Partnership Ltd for cum-ex trading AML systems and control failings
On 15 July 2022, the FCA published its final notice that it issued to TJM Partnership Ltd (in liquidation) for having ineffective systems and controls to identify and reduce the risk of financial crime and money laundering in its business.
TJM has been fined £2,038,700 (of which £1,198,277 is a disgorgement) for breach of Principle 2 and Principle 3.
The fine was subject to a 30% stage 1 discount from £2,399,000, pursuant to the FCA’s executive settlement procedures.
European Central Bank: AI to fight financial crime
On 13 July 2022, Elizabeth McCaul, European Central Bank (ECB) Supervisory Board Member, gave a speech on the use of AI to fight financial crime. As part of her speech, Ms McCaul notes the interaction between digitalisation and anti-money laundering (AML) and counter-terrorist financing (CTF) and highlights:
- Some companies are not fully captured by the regulatory framework and fall outside the scope of the AML Directive, in particular digital platforms, or mixed activity groups.
- Some new entrants, such as FinTechs, do not have a sufficient understanding of AML and CTF obligations.
- There may be AML/CTF challenges inherent to business models of some new entrants. For example, one challenge mentioned by Ms McCaul is that the deployment of new payment processing methods that are developing do not use traditional identification information.
Ms McCaul explains that AI’s potential in banking exceeds AML and CTF. AI is already being utilised for credit scoring, algorithmic trading, robo-advice or chatbots. AI is deeply entrenched in the financial system, and is subject to strong governance, risk management and first line internal controls with strong quality assurance components. Innovative digitalisation needs to be supported by a strong regulatory framework and sufficient oversight.
The most important challenges for AI are transparency and explainability, essentially, the ability for humans to understand and trust the results and output created by AI.
Properly harnessing the potential of technology means using it in a manner that reduces risk, including paying attention to the programming of AI, its governance and quality assurance or backtesting which is relevant for machine learning. There may be further changes where AI tools are outsourced to third-party service providers.
FCA: financial sanctions responsibilities and approach to assessing firms’ sanctions systems and controls
On 12 July 2022, the House of Commons Treasury Committee published the 4 July 2022 letter it received from the FCA responding to queries regarding the financial sanctions responsibilities in the context of the Ukraine conflict. The takeaways include:
- In the FCA’s initial response to Russian sanctions, thee FCA communicated with firms and their trade bodies about expectations and engaged with partners. The FCA were not made aware of material deficiencies in firms’ sanctions systems and controls. Generally, boards and executive teams of affected firms have sought to be proactive when ensuring sanctions compliance.
- The Russian sanctions are “unparalleled in volume”, implemented in a short time frame, and wide in scope. As firms have had a reasonable period to respond to sanctions, the FCA has increased assessment work to proactively test firms’ compliance. Where issues are identified, the FCA will liaise with OFSI and other government partners.
- Firms are taking different approaches to sanctions screening, particularly with regard to operating manual or automated sanctions screening systems. The FCA sent tailored communications to firms operating manual screening processes to ensure that the approach is appropriate in the context of the rapidly evolving Russian sanctions regime.
- The FCA and OFSI have a memorandum of understanding. This sets out their agreement for cooperation and exchange of relevant information.
- The FCA has an established crisis management framework, which enabled a coordinated cross-FCA response to the Ukraine conflict. This allows the FCA to respond at pace.
The Upper Tribunal: Vladimir Consulting Ltd v Financial Conduct Authority  UKUT 168 (TCC)
On 28 June 2022, the Upper Tribunal handed down its Judgment in Vladimir Consulting Ltd v Financial Conduct Authority  UKUT 168 (TCC) where they analysed whether a cryptocurrency traders approach to business was compliant with the AML regime set out in the Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017 (MLRs). The FCA had initially refused the application by Vladimir Consulting (VC), which was then referred to the tribunal for appeal, VC requesting the decision notice be suspended.
The Upper Tribunal has rejected the VC’s request for the decision notice to be suspended. For an application of this kind to be upheld, there must be detailed evidence made available as to how the business would carry on in a broadly compliant manner in the timeframe prior to the appeal hearing.
In this instance the Tribunal had not been satisfied that VC would carry on business in a broadly compliant manner were the suspension to be granted.
- VC’s interpretation of “business relationship” under the MLRs is incorrect. VC had argued that the MLRs require the relevant person to assess whether there is an element of duration only once, at the time of first contact with a customer.
- This misunderstanding of “business relationship” means that VC had not been compliant with due diligence requirements. VC’s owner (and sole employee) was not a fit and proper person to carry on the business.
- VC had not understood the role of “gatekeeper” to the AML regime. VC had relied upon due diligence checks by its customers’ banks and bitcoin exchanges.
According to the FCA’s recent annual report and accounts, what is the total value of penalties collected on behalf of the Treasury for the year?
- £189.9 million
- £128.7 million
- £354.7 million
- £247.3 million
The answer to last month’s trivia: according to the FCA’s recent update on its data strategy, 564 financial adverts were amended or withdrawn in 2021.