Financial services regulatory update - June 2021

FCA: all reporting firms are now on RegData

On 19 May 2021, the FCA reported that the transfer of all reporting firms from the legacy data collection platform Gabriel to the new data collection platform RegData has been completed.  The new RegData platform boasts a better user experience with faster navigation than Gabriel and is designed such that the user interface can be repaired and improved rapidly on an ongoing basis.

Firms can find a RegData briefing video on the FCA website. 

The Queen's Speech 2021

HM The Queen delivered her speech to Parliament on 11 May 2021.  The speech sets out the government's priorities for the next parliamentary session.  There are two points of note for the financial services industry:

• Online Safety Bill - The FCA had called for financial harms to be included in the Online Safety Bill, however these have not been mentioned explicitly in the UK government briefing that accompanied the speech.
• Dormant Assets Bill - This proposal will make three changes to the Dormant Assets Scheme:
  • The scheme will be extended to include insurance and pensions, investment and wealth management, and securities sectors.
  • The English portion of funds through the scheme can be attributed to promote social and environmental agendas via secondary legislation, so that the focus of funds can be changed over time – which is in line with the devolved administrations.
  • The scheme's administrator (Reclaim Fund Ltd) will be renamed as the scheme's authorised reclaim fund and will only be able to accept transfers from participants who have made appropriate efforts to trace, verify and reunite assets with their rightful owners.

Financial Services Regulatory Initiatives Forum publishes updated Regulatory Initiatives Grid

On 7 May 2021, the FCA announced that the third edition of the Regulatory Initiatives Grid has been published, and that the Forum plans to publish an updated Grid twice annually.  The regulator reports that the Financial Reporting Council has now joined the forum, to be included alongside the current members: the Bank of England and the PRA; the FCA; the Payment Services Regulator; the Competition and Markets Authority; The Pensions Regulator; the Information Commissioner's Office; and observer member HM Treasury.

Upcoming work includes eight ESG initiatives, the Bank of England's and FCA's data collection transformation programme, The Pension Regulator's single code of practice programme and the Treasury's Future Regulatory Framework Review.  The Grid can be found on the FCA website.

FCA: speech on UK regulatory landscape post-Brexit and beyond

On 6 May 2021, Nikhil Rathi, CEO of the FCA, delivered a speech at the Association of Foreign Banks CEO Programme 2021.  In summary:

• The FCA will continue to support open and competitive markets with responsible innovation.
• FCA regulation of overseas firms is aimed at achieving a level playing field with UK domestic firms.
• International regulatory cooperation remains vital to avoid duplication of regulatory requirements by working towards the same objectives
• The FCA will use the post-Brexit flexibility of the UK financial markets for the benefit of markets and consumers
• Environmental, Social and Governance (ESG) and sustainability, and financial crime are included in other focus areas of international regulation.

FCA: focusing on the best consumer outcomes is the right thing to do

On 6 May 2021, Charles Randell, Chair of the FCA and PSR, gave a speech to the Building Societies Association about outcomes-focused regulation.  Citing successes in publishing annual market cleanliness statistics and increasing competition for the benefit of consumers, Randell's core message was that:

• focusing on consumer outcomes is the right approach, but this is not yet fully part of the actions of both the FCA and financial services firms
• correctly identifying the right outcomes and measuring the right metrics will allow the FCA to target its intervention activity more effectively
• the regulator's transparency increases its drive to act and its accountability against its declared objectives.

Payment Services Regulator: call for views on Confirmation of Payee (CoP)

On 21 May 2021, the Payment Services Regulator released Consultation Paper CP21/6, calling for views on the implementation of Phase 2 of the CoP service.  CoP is intended to reduce the likelihood of consumers falling victim to Authorised Push Payment scams and prevent accidentally misdirected payments which are unable to be recovered under the current CHAPS system, by revealing the identity of the transferee to the transferor before the transaction is completed.  Phase 2 of the CoP programme is envisioned to be the inclusion of payment service providers (PSPs) into CoP by allowing them to take a dedicated CoP-only role in the Open Banking Directory system and by allowing PSPs to use secondary reference data to identify customers where they do not use sort codes and account numbers.

Interested parties are requested to provide comments to the regulator by 5pm on 30 June 2021.

FCA: extension of deadline for implementing Strong Customer Authentication (SCA)

On 20 May 2021, the FCA announced that firms will have a further six months to implement SCA measures of e-commerce transactions.  This allows firms until 14 March 2022 to implement the measures, which were imposed under the Payment Services Regulations 2017.  Firms are still expected to take "robust action" on reducing the risks of online fraud, but the regulator has granted the extension in response to concerns being raised about readiness to implement the measures within the payments industry.

FCA: Dear CEO letter to e-money firms on protection of customers' money

On 18 May 2021, the FCA published an open letter to the chief executives of e-money firms, in which it expressed its concerns that many e-money firms do not make it clear to consumers that their protections are different to those of traditional banking.  In particular, e-money firms are not covered under the Financial Services Compensation Scheme (FSCS).  The letter requests that chief executives of such firms bring the letter to the attention of their firms' board and that customers are reminded within six weeks of the date of the letter of how their money is protected through safeguarding but that the FSCS does not apply.

FCA: credit broking survey

On 20 May 2021, the FCA distributed a survey to 300 of the registered credit broking firms under regulation.  The regulator has stated that it intends to release the survey to the remaining regulated credit broking firms in July 2021.  Surveys are expected to be completed within 30 minutes or less and are expected to be returned within 15 working days of receipt.

The FCA plans to use the survey to update its knowledge on firms that hold credit broking permissions so that it is better informed to identify emerging risks to consumers, the market, and competition, and to move forward with its operational objectives.  An FAQ is available for more information on the survey.

FCA: consultation paper on proposed new Consumer Duty

On 14 May 2021, the FCA published Consultation Paper CP21/13 on its proposals to introduce a new Consumer Duty.  The FCA wants to set a higher level of consumer protection in retail financial markets by imposing a duty that firms will be bound to follow.  The FCA proposes that the Consumer Duty would comprise:

• a Consumer Principle, which will likely be worded as either "a firm must act to deliver good outcomes for retail clients" or "a firm must act in the best interests of retail clients"

• new rules and guidance in relation to customer outcomes on communications, products and services, customer service, and price and value.  The FCA proposes that these rules would require three key behaviours from firms: taking all reasonable steps to avoid foreseeable harm to retail customers; taking all reasonable steps to enable retail customers to pursue their financial objectives; and acting in good faith.

Interested parties can supply comments on the proposals to the FCA by 31 July 2021.

PRA: Business Plan 2021/22 released

On 24 May 2021, the PRA published its Business Plan 2021/22. As part of the plan, the PRA has outlined its eight strategic goals for 2021/22:

• have in place robust prudential standards, and hold regulated firms, and those who run them, accountable for meeting these standards (‘robust prudential standards and supervision’)
• continue to adapt to changes in the markets in which we are involved and pre-empt and mitigate risks to our objectives (‘adapt to market changes and horizon scanning’)
• ensure that firms are adequately capitalised, and have sufficient liquidity, for the risks they are running or planning to take (‘financial resilience’)
• develop our supervision of operational resilience in order to mitigate the risk of disruption to the provision of important business services (‘operational resilience’)
• ensure that banks and insurers have credible plans in place to enable them to recover from stress events, and that firms work to remove barriers to their resolvability to support the management of failure – proportionate to the firm’s size and systemic importance – in an orderly manner (‘recovery and resolution’)
• facilitate effective competition by actively considering the proportionality of our approach as it contributes to the safety and soundness of the UK financial system (‘competition’)
• continue to deliver a sustainable and resilient UK financial regulatory framework following the end of the transition period arising from the UK’s exit from the European Union (‘EU withdrawal’)
• operate efficiently and effectively by ensuring that resources are allocated to work that best advances our strategy and reduces the greatest risks to the delivery of our statutory objectives, and by providing an inclusive working environment in which all staff can perform to their potential (‘efficiency and effectiveness’).

The annual report on last year's plan will be published in June 2021.

Bank of England: financial services firms can act as stewards in a move towards 'net zero'

On 18 May 2021, the Bank of England published a speech by Sarah Breeden – executive director of UK deposit takers supervision – where she outlined steps that financial institutions can take in the move towards a 'net zero' carbon economy.  Ms Breeden expects that firms will include climate change planning as part of their day-to-day risk management and decision-making and to consider the climate change scenarios outlines by the Network for Greening the Financial System.  To assist with this, the Bank plans to formally launch a climate biennial exploratory scenario exercise in June 2021.

Bank of England: move away from LIBOR will help create a more resilient financial system

On 11 May 2021, the Bank of England published a speech by its governor, Andrew Bailey, which stated that the move away from LIBOR and towards overnight risk-free rates will create a more resilient and more transparent financial system.  While there are alternatives to risk-free reference rates such as SONIA, these alternatives must address the weaknesses of LIBOR to be effective and Mr Bailey states that it is not clear that alternative credit sensitive benchmarks have addressed the weaknesses of LIBOR.  He concluded that the consensus in the UK is that use of credit sensitive reference rates is unwelcome as part of the sterling transition from LIBOR.

FCA: expectations for regulated firms providing insurance for leasehold apartments

On 30 April 2021, the FCA published a website post setting out its expectations for regulated firms that arrange and provide fair value buildings insurance for leaseholds apartment buildings.  Chief among these expectations is that regulated insurance intermediaries will consider that such insurance policies as may be taken by property management agents will largely be interlinked with a manager's duty towards leaseholders, therefore the regulated firm should consider the needs of the leaseholders too.  This falls under the 'customers best interests' rule in ICOBS 2.5.-1R.

FCA: how the regulator proposes to use powers over use of critical benchmarks

On 20 May 2021, the FCA released Consultation Paper CP21/5 to consult on how it will use its powers under the Benchmarks Regulation (as granted by the Financial Services Act 2021).  The powers concerned are: the 'legacy use power', whereby the regulator could declare a benchmark that has become obsolete as usable in some or all cases as a 'legacy' benchmark; and the 'new use' restriction, where the regulator could prevent any new use of a benchmark where its administrator has notified the FCA that it will cease to be provided. 

Comments on the CP must be submitted by 17 June 2021.

Bank of England: proposal to modify the scope of contracts which are subject to the derivatives clearing obligation

On 20 May 2021, the Bank of England published a consultation paper on changes to Commission Delegated Regulation (EU) 2015/2205 of 6 August 2015 supplementing Regulation (EU) No 648/2012 of the European Parliament and of the Council on OTC derivatives, central counterparties and trade repositories with regard to regulatory technical standards on the clearing obligation (hereafter Binding Technical Standards (BTS) 2015/2205).  The intended outcome is to remove contracts which use reference benchmarks that are or will be obsolete and replace them with Overnight Index Swaps that refer to the appropriate risk-free rates for each currency.  This will mean that contracts which are based on EONIA, GBP LIBOR and JPY LIBOR will be replaced with €STR and SONIA, where applicable.

Interested parties are invited to respond to the Bank by 14 July 2021.

ESMA: appointment of Executive Director, Natasha Cazenave

On 20 May 2021, the Board of Supervisors at the European Securities and Markets Authority (ESMA) confirmed the appointment of Natasha Cazenave as Executive Director from 1 June 2021, succeeding Vanessa Ross. 

FCA and Bank of England: sterling exchange traded derivatives encouraged to switch to SONIA from 17 June

On 13 May 2021, the FCA and Bank of England published a joint statement on the FCA website to encourage market users and liquidity providers in sterling exchange traded derivatives to switch from LIBOR to SONIA from 17 June 2021.  This follows an FCA survey which was showed overwhelming support for the measure from 26 participants.  The FCA and the Bank will work with market participants in the period leading up to 17 June to determine whether market conditions will allow for a smooth transfer.

HM Treasury: consultation on supporting the wind-down of critical benchmarks

On 7 May 2021, the Treasury published the 'detail of outcome' following its consultation on supporting the wind-down of critical benchmarks.  Following the consultation, the government intends to bring forward further legislation to reduce the risk of contractual uncertainty as part of the transition away from LIBOR, where the FCA has exercised its powers under the Financial Services Act 2021.  However, it remains the Treasury's intention that all parties continue to transition away from LIBOR by the end of 2021.

FCA: feedback to consultation on liquidity mismatch in authorised open-ended property funds

On 7 May 2021, the FCA published Feedback Statement FS21/8, following its consultation on liquidity mismatch in open-ended property funds and the potential harm that this might cause to consumers.  The concern was that units in such funds can be traded significantly faster than the underlying investments – the property – can be bought or sold, which means that such funds are required to carry a significant amount of cash in the fund to protect against liquidity mismatches.  To combat this, the FCA suggested implementing 90-day or 180-day notice periods for selling units in these trusts.

The consultation concluded with a small number of funds agreeing with the proposals as written, but a small majority of respondents supported the notice periods in principle, provided that platforms and advisers' systems can support the notice periods and that adding notice periods would not prevent these funds being ISA-eligible assets.

FCA: consultation on long-term asset investments

On 7 May 2021, the FCA published Consultation Paper CP21/12 to seek feedback on a proposed new authorised fund regime for investing in long term assets.  The regulator proposes to create a new type of open-ended fund called a Long-Term Asset Fund (LTAF).  The types of asset in scope for an LTAF include venture capital, private equity, private debt, real estate and infrastructure, and the proposal is that LTAFs are designated as Alternative Investment Funds, to be initially restricted to professional investors and sophisticated retail investors.

Interested partied are invited to comment by 25 June 2021.

Bank of England: statement of progress made by the Working Group on Productive Finance

On 7 May 2021, the Bank of England published a statement on the progress of the Working Group on Productive Finance.  The Working Group includes HM Treasury, the FCA and the Bank, with 24 industry member bodies and two independent trustees of pension schemes.

The first "concrete step" from the Working Group is the FCA consultation on LTAFs (above).  The next phase will be to develop other "concrete steps" that will result in the removal of barriers to finance supporting investment in less liquid assets, with the intention that business and infrastructure projects will gain greater access to long-term capital.

European Commission: fines for European Government Bonds cartel

On 20 May 2021, the European Commission announced €371 million in fines for breach of the antitrust rules in Article 101(1) of the Treaty on the Functioning of the European Union.  The banks involved were Bank of America, Natixis, Nomura, RBS (now NatWest), UBS, UniCredit and WestLB (now Portigon).  Between 2007 and 2011, workers at the banks exchanged commercially sensitive information about bidding for Euro denominated government bonds and secondary market trading parameters via Bloomberg terminal multilateral chatrooms, which the Commission found to be a closed circle of trust.

NatWest (formerly RBS) escaped fines for revealing the cartel.  Bank of America and Natixis escaped fines due to limitation of time and Portigon, the legal successor of WestBL, paid no fines due to the fine cap being 10% of net turnover in a year where it had not generated any turnover.

FCA: criminal proceedings for alleged fraudulent trading and carrying on business without authorisation

On 20 May 2021, the FCA published a press release to announce the commencement of criminal proceedings against Mr Ian James Hudson for alleged fraudulent trading and carrying on regulated activities without authorisation.  The regulator alleges that between 1 January 2008 and 31 July 2019 Mr Hudson advised on investments and invested money which clients had deposited with him on their behalf, without being authorised by the FCA to do so.  He will appear at Southwark Crown Court for a plea and trial preparation hearing on 17 June 2021.

Treasury Committee: responses to Greensill Capital inquiry

On 11 May 2021, the Treasury Committee published responses in relation to its inquiry into Greensill Capital.  Of particular interest is the fact that the FCA was only responsible for Greensill's supervision under money-laundering and terrorist financing rules, as Greensill Capital UK was designated as an Annex 1 firm under the Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017 (SI 2017/692). 

In the FCA's written response, the regulator admitted that the Greensill Capital affair has drawn further attention to the regulatory or perimeter issues that had already been under consideration, such as:

• the appointed representatives regime
• investigation and penalty powers in the even of a firm becoming de-registered or failing
• the fitness and propriety criteria under the Money Laundering Regulations
• firms gaining access to UK investors by listing securities on overseas markets that are neither Recognised Overseas Investment Exchanges (ROIEs) or regulated markets
• employer salary advance schemes.

FCA: fine for cum/ex trading financial crime control failings

On 6 May 2021, the FCA published its final notice to Sapien Capital Limited, including a financial penalty of £178,000.  The punitive measure comes after a decision by the regulator that Sapien Capital, between 10 February 2015 and 10 November 2015:

• had inadequate systems and controls to identify and mitigate the risk of being used as part of fraudulent trading and money laundering in relation to clients introduced by a third party
• did not exercise due skill, care and diligence in applying its anti-money laundering procedures, and in failing to assess, monitor and mitigate the risk of financial crime in relation to these clients.

The penalty comes as the result of a scheme involving two clients, which were introduced by a third party, that used Sapien Capital as the broker for a series of circular over-the-counter equity trades in European equities on or around the cum dividends date, such that the parties were able to claim a tax rebate on dividend withholding tax in certain jurisdictions without entitlement. The FCA found that the arrangement, its scale and volume was highly suggestive of financial crime and has censured Sapien Capital accordingly.

FCA: rise in scams and their threat to legitimate financial services

On 18 May 2021, Mark Steward, Executive Director of Enforcement and Market Oversight at the FCA, delivered a speech to the City & Financial Global – FCA Investigations and Enforcement Summit on the rise in scams.  Mr Steward reiterated the FCA's role in preventing harm to consumers through unauthorised activities, its powers to enforce false or misleading statements and its work with online platforms to prevent consumer harms.  Mr Steward pointed out that the regulator is limited where actions are outside of its regulatory perimeter and it expects firms to do more to combat harm to consumers.

European Commission: Anti-Money Laundering (AML) and Counter-Terrorist Financing (CTF) action plan reform

On 17 May 2021, Mairead McGuinness – European Commissioner for Financial Services, Financial Stability, and Capital Markets Union – delivered a speech at the AML Intelligence Boardroom Series on how the Commission intends to implement the AML and CTF action plan. Although Ms McGuinness pointed out that these were subject to confirmation, the following are on the Commission's list of proposed reforms and measures:

• A single AML and CTF rulebook, with EU Regulation for private sector rules and the addition of virtual assets to the Wire Transfer Regulation ((EU) 2015/847)
• Increased detail on existing regulations such as customer due diligence and beneficial ownership
• An EU-wide upper limit of €10,000 for cash purchases
• The stand-up of a new AML authority in 2024, to start direct supervision in 2026
• Consultation on exchange of information between partners in public-private partnerships
• Studies on how AML is implemented in each Member State
• Full establishment of beneficial ownership registers and cross-border interconnection of national beneficial ownership registers, which should start later this year.

HM Government: Economic Crime Plan

On 5 May 2021, the Government published Economic Crime Plan: Statement of Progress July 2019 - February 2021.  This follows the February 2021 decision to develop an ambitious vision to deliver a comprehensive economic crime response.  The statement confirms that the government, private sector and law enforcement agencies will develop a fraud action plan, which will be published in the 2021 spending review.

What did the Banking Standards Board relaunch as at the end of April:

• the Banking Accountability Forum
• the Financial Services Culture Board
• the Sustainability in Financial Institutions Network
• the Good Conduct in Financial Services Board?

The answer to last month's trivia: the threshold for cumulative contactless transactions is £300.