Financial services update - October 2020

FCA launches consultation on the regulation of international firms operating in the UK

On 23 September 2020, the FCA launched a consultation on its approach to the authorisation and supervision of international firms operating in the UK. The FCA stated that there may be an increase in the number of international firms seeking authorisation at the end of the Brexit transition period. The deadline for consultation responses is 27 November 2020.

FCA to embrace a new model for financial regulation

On 21 September 2020, Christopher Woolard, interim chief executive at the FCA, delivered a speech on the evolution of a new model for financial regulation in the UK. Mr Woolard stated that:

• the COVID-19 pandemic is bringing the future forward
• the FCA shall work closely with other agencies and regulators as product boundaries become blurred
• the FCA’s own requirements should be more straightforward, especially for smaller firms
• the FCA shall make sure that the rulebook is not analogue in a digital age
• as negotiations on the UK’s future trading relationship with the EU continue, firms should continue to prepare for a range of scenarios.

FCA reminds firms to get ready for LIBOR transition

On 17 September 2020, the FCA published a webpage setting out information and actions that all firms need to consider to be ready for LIBOR transition. The webpage states that a key consideration is balance sheet exposure and how affected firms can move their stock of LIBOR-linked contracts to alternative risk-free rates while also states that even if the firms thought that they have no balance sheet exposure, the firms may still be exposed to other risks from LIBOR transition. The FCA therefore expects the boards and senior managers to put necessary arrangements in place to identify their firms’ exposures to LIBOR and to ensure their transition away from LIBOR does not harm their clients and the operation of the markets. The FCA also expects firms to conduct an end-to-end inventory of LIBOR exposure.

The webpage also provides information for specific firms based on the activities they undertake, some of which are outlined in this newsletter (see below for information on asset management, principal trading and wholesale brokerage).

BoE's webinar assisting firms to get ready for LIBOR transition

To raise awareness and to assist businesses with the transition to SONIA, the BoE hosted a webinar titled "Is your business prepared for LIBOR?" on 18 September 2020. The speakers included senior regulators and representatives from the banking and corporate sectors. The webinar focused on loan market developments and conversion, international developments and practical considerations.

FCA publishes Annual Report and Accounts 2019/20

After a 3-month delay, the FCA published its Annual Report and Accounts 2019/20 on 10 September 2020. The Report highlights that the FCA has been:

• taking action against firms – it imposed 15 financial penalties totalling over £224m.
• keeping markets clean and resilient – it determined 4,133 cases for new firm authorisation in the last financial year and opened 415 preliminary reviews into market abuse.
• protecting consumers - it published 715 consumer warnings about unauthorised firms.

The Report also summarised the FCA's response to the COVID-19 pandemic and the impact of COVID-19 on the FCA's workstreams.

PSR reports on whether the supply of card‑acquiring services is benefiting merchants

In 2019, there are around 163 million cards in issue in the UK and consumers made 14.8 billion debit card payments. The Payment Systems Regulator ("PSR") had concerns that card-acquiring services may not offer value for money for merchants, ultimately impacting the consumers. The PSR therefore conducted a market review.

On 15 September 2020, the PSR published the interim report on the market review. The report states that the supply of card-acquiring services is working well for the large merchants (whose annual card turnover is above £50 million). However, the supply is not working well for many small and medium merchants as they neither shop around nor negotiate with their current provider, thus losing opportunities to make savings. The report therefore proposes several potential remedies:

• Requiring all contracts for card-acquiring services to have an end date, providing a prompt for merchants to shop around.
• Requiring changes to point-of-sale ("POS") terminal contracts to limit their length, ending contracts that auto-renew for successive fixed terms and making it easier to exit POS terminal contracts without incurring exit fees.
• Making it easier for merchants to research and compare options available to them.

FCA urges firms to consider vulnerable customers when closing branches and ATMs

On 14 September 2020, the FCA published the finalised guidance on the closures or conversions of branches and ATMs. The guidance sets out the FCA's expectation that firms should:

• consider how the planned closure or conversion may impact customers
• inform customers and consider their feedback
• inform the FCA.

In particular, the FCA expects firms to pay attention to vulnerable consumers and vulnerable SMEs or micro-enterprises. The guidance provides that a vulnerable customer is "somebody who, due to their personal circumstances, is especially susceptible to harm, particularly when a firm is not acting with appropriate levels of care". The guidance further provides that drivers of vulnerability include health, resilience, capability and life events; each will affect the different needs of vulnerable customers, and so may affect alternative solutions that firms consider in place of an existing service.

The guidance applies from 21 September 2020.

Principles for payments regulation in the face of innovation

On 9 September 2020, Elisabeth Stheeman, an external member of the Financial Policy Committee ("FPC"), delivered a speech examining some of the possible risks resulting from innovation in payments. The FPC is committed to ensuring that systemically important payment firms support financial stability, while allowing competition and innovation in payments to thrive. The FPC has therefore developed three principles for payments regulation, namely:

• Regulation should reflect the financial stability risk, rather than the legal form, of payments activities.
• Payments regulation should ensure end-to-end operational and financial resilience across payment chains that are critical for the smooth functioning of the economy.
• Sufficient information should be available to monitor payments activities so that emerging risks to financial stability can be identified and addressed appropriately.

Christopher Woolard to chair FCA's review of the future regulation of the unsecured credit market

On 16 September 2020, the FCA published a press release announcing that Christopher Woolard will chair a review of the future regulation of the unsecured credit market. The review will be focusing on how regulation can better support a healthy unsecured lending market. The review will consider:

• the impact of the coronavirus on employment security and credit scores
• changes in business models and new developments in unsecured lending including the growth of unregulated products in retail and the workplace.

Sterling Working Group stresses the importance of the transition of existing sterling LIBOR-linked cash products by the end of 2021

On 10 September 2020, the Working Group on Sterling Risk-Free Reference Rates stated in a press release that market volatility during the COVID-19 period has clearly illustrated LIBOR’s longstanding weaknesses and stressed the importance of transition by the end of 2021. The Working Group had published the following to support firms in the transition:

• Paper on active transition of sterling LIBOR-referencing loans: this paper seeks to familiarise firms with the fundamentals of active transition of legacy loan products.
• Paper on active transition of sterling LIBOR-referencing bonds: this paper covers how issuers might consider converting existing bonds and securitisations.
• Formal recommendation on the appropriate credit adjustment spread to be used in fallbacks for cash products referencing sterling LIBOR.

NGFS reviews and promotes environmental risk analysis by financial institutions

On 10 September 2020, the Network for Greening the Financial System ("NGFS") published an overview of environmental risk analysis ("ERA") by financial institutions. The overview provides an extensive list of examples on how environmental risks are transmitted to financial risks. This overview also identifies lack of awareness of environmental risks and limited application to environment-related risks and emerging market economies as two of the major barriers to wider adoptions of ERA by financial institutions. The NGFS concluded that collective efforts are needed from regulators, financial institutions, international organisations, third party vendors, and academic institutions to promote the wider adoptions of ERA. Among other efforts, the NGFS suggested that central banks and supervisors can encourage disclosures of financial institutions’ exposures to environmental risks and their ERA results in line with the recommendations by Task Force on Climate-related Financial Disclosures.

Alongside the overview, the NGFS also published an occasional paper containing case studies of ERA methodologies conducted by over 30 organisations. The paper aims to inform financial institutions of ERA methodologies and to encourage those interested to further develop the methodologies.

Lloyds breached undertakings as a result of ‘bundling’ business accounts with loans

On 8 September 2020, the Competition and Markets Authority (CMA) published a letter that it has sent to Lloyds Banking Group (Lloyds) and a press release announcing that Lloyds has breached certain behavioural undertakings and affected around 30,000 customers. Lloyds breached the undertakings because Lloyds required SME customers holding a personal current account to open a business current account in order to progress their application for a loan under the Bounce Back Loan Scheme. Lloyds gave undertakings in 2002 to not bundle the business current account in this way.

The CMA also published an action plan that sets out information on Lloyds’ actions to address the breach.

FCA's 'Dear CEO' letter for personal and commercial lines insurance intermediaries

On 4 September 2020, the FCA published a 'Dear CEO' letter addresses to personal and commercial insurance intermediaries. The FCA re-emphasised the key messages in a statement updated on 17 April 2020, namely that firms should have sound management of their financial resources and should plan ahead including maintaining up-to-date wind-down plans. As many of the key harms that the FCA has seen in this sector are directly linked to poor governance and controls, the FCA will prioritise supervisory work against:

• ineffective governance
• incentive arrangements that do not support a positive conduct culture
• business models which provide poor control over sales and renewals and conflicts of interest including through appointed representatives.

The FCA also reminded firms that they need to consider how the end of the transition period will affect them and their customers and what action they may need to take before 1 January 2021.

Culture, purpose and governance in the asset management sector

On 17 September 2020, Marc Teasdale, the Director of Wholesale Supervision at Supervision Investment, Wholesale & Specialists Division (SIWS), gave a speech on culture, purpose and governance in the asset management sector. The FCA identified four factors that are particularly important in defining a firm's culture, namely, leadership, people policies, governance and purpose. The speech focuses on purpose and states that the asset management sector plays a more critical role than ever in overseeing the savings and investments of millions of individuals within the UK and beyond. The success of the sector in protecting and growing the capital and income of the customers over the long term will be central to the ability of the public to provide for retirement, long-term health and care needs. Therefore, the FCA's regulatory interventions in the asset management sector as well as continuing work on governance and conflicts of interest, are intended to more closely align the sector with its essential purpose of protecting and growing the capital and income of its customers over the long term.

The speech also highlights that strong governance is particularly relevant to the asset management sector because strong governance is needed to appropriately address conflicts of interest. The speech further emphasises that a meaningful focus on diversity and inclusion is essential to ensure that the firms can deliver on their purpose for all sections of society.

Asset management firms shall get ready for LIBOR transition

In the new FCA's webpage dedicated to assisting firms with LIBOR transition (see above), there is a paragraph specifically on asset management. The FCA directed firms to a 'Dear CEO' letter addresses to all UK regulated asset management firms that it published on 27 February 2020. The FCA reiterated its expectation that firms shall take all reasonable steps to ensure the end of LIBOR does not lead to market disruption or negatively affect consumers. The FCA also asked firms to continue supporting industry initiatives to ensure a smooth transition.

FCA's data shows decline in fees and profitability of the asset management sector

On 10 September 2020, the FCA published the investment management data which assesses the impact of the FCA's actions since the Asset Management Market Study in 2016. The data shows a modest decline in profitability in the asset-management sector, driven by a very significant downward trend in fees in most asset classes over the past 4 years, especially since 2018. The data suggests that the FCA's remedies may be enhancing competition in the sector.

LIBOR transition: principal trading and wholesale brokerage

In the new FCA's webpage dedicated to assisting firms with LIBOR transition (see above), there are specific paragraphs on principal trading and wholesale brokerage. The FCA encourages firms who transact in financial instruments as principal to engage with the upcoming ISDA Protocol and market infrastructure providers to keep informed of transition timing and fallback arrangements for the LIBOR-referencing financial instruments they transact in. For firms caring out wholesale broking activity, when LIBOR exposure arises (i) directly from the products intermediated; or (ii) indirectly through LIBOR references in contracts, the FCA requires firms to communicate to clients the plans to transition these exposures and references to alternative rates before the end of 2021.

FCA seeks views on how to improve the consumer investment market

On 15 September 2020, the FCA launched a Call for Input to help shape its work on improving the consumer investment market. The key questions that the FCA is seeking views on are:

• What more can the FCA do to help the market in offering a range of products that meet straightforward investment needs?
• How can the FCA better ensure that those who have the financial resources to accept the risks of higher risk investments can do so if they wish, but in a way that ensures they understand the risk they are taking?
• How can the FCA use the regulation of financial promotions to make it easier for people to understand the level of regulatory protections afforded to them when they invest?
• What more can the FCA do to ensure that when people lost money because of an act or omission of a regulated firm, they are appropriately compensated and that such act or omission is paid for fairly by those who caused the loss?
• How can people be better protected from scams?
• How can the FCA help the market to be competitive?

Permission for judicial review of FSCS decision to reject majority of LC&F claims granted

On 17 September 2020, the Financial Services Compensation Scheme ("FSCS") updated its dedicated London Capital & Finance plc ("LC&F") webpage to provide notice to LC&F bondholders as interested parties in a judicial review action concerning the decision of FSCS that the issuance of bonds on or after 3 January 2018 was not a regulated activity. In particular, the update confirms that permission for judicial review of part of the FSCS's approach to LC&F bondholders' claims has been granted.

FCA decision notice relating to market manipulation under MAR

On 16 September 2020, the FCA published the decision notice (dated 22 July 2020) issued to Mr Abbattista, a partner and the Chief Investment Officer at Fenician Capital Management LLP, for market abuse. In particular, the FCA considered that in 2017, Mr Abbattista repeatedly placed in the market large misleading orders for Contract for Differences, referenced to equities, which he did not intend to execute. The FCA is imposing a penalty of £100,000 and prohibiting Mr Abbattista from performing any functions in relation to regulated activity.

Public censure in lieu of penalty for false or misleading impression

On 9 September 2020, the FCA published a final notice issued to the former CEO of Worldspreads, Mr Foley. Mr Foley was involved in drafting admission documentation ahead of WSG’s flotation on the Alternative Investment Market of the London Stock Exchange in August 2007. The documents contained misleading information and omitted key information that investors would have needed to make an informed decision about the company. In the decision notice published on 3 July 2020, the FCA initially imposed a financial penalty of £658,900 on Mr Foley but as Mr Foley has subsequently provided evidence of his serious financial hardship, the FCA has imposed a public censure in lieu of the financial penalty.

FATF flags indicators of money laundering and terrorist financing associated with virtual assets

On 14 September 2020, the Financial Action Task Force published a report on the red flag indicators of money laundering and terrorist financing associated with virtual assets. The report aims to help various stakeholders to detect whether virtual assets are being used for criminal activities and to report suspicious transactions. The key indicators identified in the report include:

• value and frequency of the transactions lack logical business explanations
• irregular, unusual or uncommon transaction patterns, such as transactions concerning new users
• technological features that increase anonymity
• unusual behaviour of either the sender or the recipient of the illicit transactions, such as incomplete or insufficient KYC information
• transactions that appear to be taking advantage of the varying stages of implementation on measures regarding virtual assets in different jurisdictions
• source of funds or wealth that can relate to criminal activity, such as funds which are sourced directly from third-party mixing services or wallet tumblers or transactions originating from or destined to online gambling services.

EBA responds to European Commission's call for advice on future EU AML and CTF framework

On 10 September 2020, the EBA published an opinion and a report in response to the European Commission's March 2020 call for advice on the future EU anti-money laundering ("AML") and counter-terrorist financing ("CTF") framework. The EBA recommends that the Commission:

• Harmonise aspects of the EU’s legal framework where evidence suggests that the divergence of national rules and practices has had a significant adverse impact on the prevention of the use of the EU’s financial system for money laundering or terrorist financing purposes.
• Strengthen aspects of the EU’s legal framework where current provisions are insufficiently robust and create vulnerabilities in the EU’s defences.
• Review the scope of the EU’s AML/CFT legislation to ensure that the list of obliged entities is sufficiently comprehensive and well‐defined, and in line with international AML/CFT standards.
• Clarify provisions in sectoral financial services legislation to ensure that they are compatible with the EU’s AML/CFT objectives.

What is the name of the regime which will allow EEA passporting firms that do not enter the Temporary Permissions Regime to continue to service UK contracts entered into prior to the end of the transition period?

• the contractual run-off scheme
• the wind down programme
• the financial services contracts regime
• the post-Brexit legacy contracts regime

The answer to last month's question is the K-factor.