Financial services update - November 2019

Among the items covered in this month's update are the latest EBA opinion on strong customer authentication, the FCA's webpage on its new role as the AML/CTF supervisor of cryptoasset businesses, updates to ESMA's Q&As on investor protection and intermediaries under MiFID II, and a speech by Mark Carney on strengthening the foundations of sustainable finance.

Payment services and systems

General financial services regulation

Banking and insurance

Wealth management and investment funds

Financial crime

Enforcement and investigations

FS Trivia

Payment Services and Systems

PSR publishes review of specific direction relating to LINK ATM system

On 11 October 2019, the Payment Systems Regulator (PSR) announced that it is conducting a review of Specific Direction 8 (SD8) that it gave to LINK Scheme Holdings Ltd in October 2018.

SD8 is designed to make sure LINK does all it can to fulfil the public commitments it made in relation to the ongoing availability of access to free-to-use ATMs for UK customers.

The review will provide the PSR with an opportunity to reassess LINK's commitment and its related procedures, processes, policies and measures under SD8. To ensure that SD8 is working well, the PSR invites stakeholders to submit views to the review. The PSR provides some issues stakeholders may wish to consider providing feedback on, including the impact of the Low Volume Premium in relation to ATMs that LINK committed to protect, as well as the processes to replace closed Protected ATMs. Responses must be submitted by 5pm on 1 November 2019.

EBA opinion on deadline for migration to SCA for e-commerce card-based payment transactions

On 16 October 2019, the European Banking Authority (EBA) published an opinion (EBA-Op-2019-11) on the deadline and process for the migration to strong customer authentication (SCA) under the revised Payment Services Directive (PSD2) for e-commerce card-based payment transactions.

Earlier this year, the EBA published an opinion on elements of SCA and acknowledged that some firms not directly subject to the PSD2 (such as e-merchants) may not be ready to implement SCA by the 14 September 2019 deadline. The EBA therefore allowed Member States to provide limited additional time for payment service providers (PSPs) that carry out e-commerce card-based payment transactions to migrate SCA compliant authentication processes.

The latest opinion gives a deadline of 31 December 2020 by which the supervisory flexibility period will end. This is shorter than the FCA's adjustment period which ends on 14 March 2019. At the time of writing, the FCA is yet to comment on whether it will shorten the adjustment period to bring it into line with the EBA opinion. For more information on the FCA's delayed implementation period for SCA, see our September newsletter.

The EBA also sets out the expected actions that national competent authorities (NCAs) should take during the migration period and a timeline for doing so. The opinion recommends that NCAs communicate to PSPs that the supervisory flexibility period that has been exercised does not constitute a delay in the application date of SCA requirements, but instead means that NCAs will not take enforcement action during this time.

General financial services regulation

Mark Carney gives speech to TCFD summit on sustainable finance

On 8 October 2019, Mark Carney, Governor of the Bank of England, gave a speech at the Task Force on Climate-related Financial Disclosures (TCFD) summit in Tokyo on strengthening the foundations of sustainable finance.

In his speech, Carney highlighted the progress that has been made so far since the final TCFD recommendations were published in 2017, and the path ahead for better reporting and risk management, noting that companies, their banks, insurers and investors must:

• increase the quantity and quality of disclosures by sharing best practice
• refine disclosure metrics to determine which ones are most decision-useful
• spread knowledge on how to assess strategic resilience
• consider how to disclose the extent to which portfolios are ready for the transition to net zero.

The UK government launched the Green Finance Strategy in July 2019 and announced that it would set out its expectations for all listed companies and large asset owners to disclose in line with the TCFD recommendations by 2022.

New FCA webpage on submitting change in control notifications

On 14 October 2019, the FCA published a new webpage that explains how to submit a notification for a change in control. The FCA notes that the guidance on the webpage is not an exhaustive list and there may be additional factors that need to be considered on a case-by-case basis.

The FCA points out that firms may wish to complete a business plan when making a change in control notification, although some notifications take longer when a business plan is not detailed enough. To assist firms, the FCA has set out a list of sections to be included in a business plan to help with the notification:

• business to be undertaken
• governance
• staff, controllers and close links
• outsourcing
• systems and controls/risk management.

The FCA has also published a webpage on change in control notification forms which will assist firms in finding the appropriate forms to complete when submitting a notification.

Joint Committee of ESAs consult on amendments to PRIIPs Delegated Regulation

On 16 October 2019, the Joint Committee of the European Supervisory Authorities (ESAs) published a consultation paper setting out proposed amendments to existing rules that underpin the key information document (KID) for packaged retail and insurance-based investment products (PRIIPs).

The consultation paper proposes amendments relating to:

• illustrations of what the retail investor might receive in return from their investment (performance scenarios)
• information on what the costs of the investment are
• specific issues for different types of investment funds
• specific issues for PRIIPs offering a range of options for investments (so-called "Multi-Option Products").

Stakeholders can comment on the proposals up to 13 January 2020, and the European Commission is carrying out consumer testing to assess the effectiveness of different performance scenario presentations. The testing results are expected to be published in the first quarter of 2020.

FCA considers whether current regulatory model is the right one

On 21 October 2019, the FCA published a speech by Christopher Woolard, Executive Director of Strategy and Competition, on the future of regulation in a changing world.

The key takeaways from the speech include:

• The first wave of post-crisis regulation is done, and firms are better capitalised and the personal responsibility of their leaders is more embedded.
• There is a change in consumer need and attitude, where consumers are getting older, have less saved and inherit assets later in life.
• Innovation is gathering pace, where digital transformation is reflected in the new products finding their way direct to consumers over the internet.

The FCA will be issuing an open invitation for thoughts and ideas, as well as setting out some of its own. The FCA will also publish detailed papers, including an analysis of future market dynamics, a Discussion Paper about its Principles, and a Consultation Paper on the Duty of Care.

Woolard identified some key factors towards assessing future regulation, which include working with other agencies to think about appropriate outcomes, and to use technology to help deliver solutions that better meet customer needs.

New FCA webpage on role as AML and CTF supervisor for cryptoasset businesses

On 25 October 2019, the FCA published a new webpage on its new role from 10 January 2020 as the anti-money laundering and counter terrorist financing (AML/CTF) supervisor of UK cryptoasset businesses under the Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017 (SI 2017/692) (MLRs).

This follows the publication on 15 October 2019 of the FCA's consultation paper (CP19/29) on its fee proposals for the recovery of costs of supervising cryptoasset businesses.

The webpage outlines the background to the FCA's new role and the steps that have been taken so far to address AML/CTF risks. The webpage also sets out the scope of cryptoasset business as currently proposed by the Treasury (which will be updated once the Treasury publishes its Policy Statement), the registration requirements for businesses carrying out such activities, and the FCA's approach to supervision and enforcement, and a timetable of the key dates for the registration of cryptoasset businesses.

For more information on the consultation paper and the webpage, please see our special FSR update.

Wealth management and investment funds

ESMA updates MiFID II Q&As on investor protection and intermediaries topics

On 3 October 2019, the European and Securities Markets Authority (ESMA) published an updated version of its Q&As on investor protection and intermediaries under MiFID II (2014/65/EU) and the Markets in Financial Instruments Regulation (600/2014) (MiFIR).

The updated Q&As:

• modify the answers to Question 8 on best execution relating to the disclosure of RTS 27 and RTS 28 reports to the public
• amend the response to Question 1 which includes a drafting change on understanding the term "ongoing relationship" in the context of MiFID II
• add a new Q&A on investment advice on an independent basis.

The MiFID II and MiFIR investor protection Q&As aim to promote common supervisory approaches and practices in the application of MiFID II and MiFIR. ESMA will continue to update the Q&A document in relation to topics already covered as well as introducing new sections for other MiFID II investor protection areas not yet addressed.

IFR and IFD adopted by Council of EU at first reading

On 23 October 2019, the Council of the EU published the texts it has adopted at first reading for the:

• Investment Firms Regulation (IFR) (PE-CONS 80/19) (on the prudential requirements of investment firms and amending the Capital Requirements Regulation (575/2013) (CRR), the Markets in Financial Instruments Regulation (600/2014) (MiFIR) and the EBA Regulation (1093/2010) (2017/0359(COD)).
• Investment Firms Directive (IFD) (PE-CONS 79/19) (on the prudential supervision of investment firms and amending the CRD IV Directive (2013/36/EU) and the MiFID II Directive (2014/65/EU) (2017/0358(COD)).

Both the IFR and IFD will be published in the Official Journal of the EU (OJ) and will enter into force 20 days later. Most of the provisions of the IFR will not apply until 18 months after it enters into force.

Financial crime

FCA speech on using technology to tackle financial crime

On 23 October 2019, the FCA published a speech by Megan Butler (Executive Director of Supervision – Investment, Wholesale and Specialists) on how technology can be used in the financial services space to combat financial crime for both the industry and the regulator.

The key points in the speech include:

• New technologies give unprecedented access to innovative products and services, and flexibility in how we use them. However, this also gives criminals the ability to get around the financial system for their own advantage.
• The FCA is currently experimenting with new analytical techniques, including predictive analytics and web-scraping, to help discover key trends and potential outliers more quickly.
• The threat requires a 'collaborative response', and the FCA has set up the "regulatory sandbox" which allows firms to test innovative propositions in a controlled environment and provides access to regulatory expertise.
• When used to the right ends, technology can be a "gamechanger" in the fight against financial crime.

FCA publishes letter on application of SAR and STOR regimes

On 18 October 2019, the FCA published a letter from Julia Hoggett (FCA Director of Market Oversight) to UK Finance that gives guidance on the application of the Suspicious Activity Reports (SAR) and Suspicious Transaction and Order Reports (STOR) regimes.

In the letter, the FCA acknowledges that there is a "significant overlap" between the Market Abuse Regulation (596/2014) (MAR) definition of market abuse and certain financial crimes such as insider dealing set out in the Criminal Justice Act 1993. It is common therefore for firms to become aware of, or suspect, both the civil offence of market abuse and financial crime through a single suspicious order or transaction. The letter also explains that:

• The National Crime Agency (NCA) is responsible for receiving SARs and firms must submit an SAR when the firms knows or suspects that a criminal offence has occurred.
• STORs must be submitted to the FCA when "any person professionally arranging or executing transactions … has a reasonable suspicion that an order or transaction could constitute insider dealing, market manipulation" or an attempt to do either.
• Filing a STOR with the FCA in accordance with MAR will not discharge a person's obligations under the Proceeds of Crime Act 2002 or the Terrorism Act 2000 to submit a SAR to the NCA and vice versa. Firms will have to consider, on a case by case basis, whether to submit a STOR, SAR or both.
• The obligation to detect and identify market abuse under Article 16(2) of MAR also applies to buy side firms (such as investment management firms) as well as firms professionally engaged in trading on own account (proprietary traders). Article 16(2) can also apply to non-financial firms that trade on own account in financial instruments as part of their business activities (such as industrial companies for hedging purposes).

The letter also provides a link to the FCA's Financial Crime Guide, which includes specific guidance on insider dealing and market manipulation.

Enforcement and investigations

FCA fines Tullett Prebon £15.4 million for broker conduct failures

On 11 October 2019, the FCA published a press release and final notice in relation to a £15.4 million fine for Tullet Prebon (Europe) Limited for breaching Principles 2, 3 and 11 of the FCA's Principles for Businesses. The firm failed to conduct its business with due skill, care and diligence, failed to have adequate risk management systems, and failed to be open and co-operative with the FCA.

Tullett Prebon (now part of TP ICAP), is an electronic and voice inter-dealer broker that acts for institutional clients transacting in the wholesale financial markets. "Name passing" broking comprised a significant part of Tullett Prebon's Rates Division business, and between 2008 to 2010 the FCA found that Tullett Prebon's Rates Division had ineffective controls around broker conduct. This, coupled with lavish entertainment, allowed improper trading to take place, including "wash" trades (where there is no change in beneficial ownership and has no legitimate commercial purpose) which generated unusually high amounts of brokerage for the firm.

Mark Steward, Executive Director of Enforcement and Market Oversight at the FCA said that "senior management and compliance were cocooned from seeing the misconduct, and systems and controls failed to probe broker conduct, even when warning signs were visible." The firm's failure to be open with the FCA about the existence of key evidence also reflected a high degree of culpable incompetence. The FCA had requested broker audio tapes which the firm did not produce in a timely fashion and initially provided an incorrect account about how the audio was discovered.

SFO closes its seven-year probe into LIBOR manipulation

On 18 October 2019, the Serious Fraud Office (SFO) released a statement announcing the closure of its investigation into London Interbank Offered Rate (LIBOR) manipulation. The decision was taken in line with the Code for Crown Prosecutors, and means no further charges will be brought in this case.

The SFO's investigation into LIBOR manipulation has resulted in 13 individuals being charged with conspiracy to defraud. The result of the LIBOR rigging scandal led to billions of pounds in fines for major banks and jail sentences for traders involved.

In 2014, an individual pleaded guilty to manipulating the US dollar LIBOR, this being the first criminal conviction for a LIBOR offence in the UK. Three individuals were later convicted in 2016 for the same charges. In 2015, Tom Hayes was convicted on eight counts of conspiracy to defraud for manipulating the Japanese Yen LIBOR. However, eight people charged with LIBOR manipulation were acquitted between January 2016 and April 2017.

While all strands of the SFO's investigation into LIBOR manipulation are now closed, its investigation into the manipulation of the Euro Interbank Offered Rate (EURIBOR) remains open.

Banking and insurance

PRA policy statement on changes to settlement of enforcement action policy

On 4 October 2019, the Prudential Regulation Authority (PRA) published a policy statement (PS23/19) which provides the final statement of policy (SoP) on its approach to enforcement.

PS23/19 follows a consultation carried out in April 2019 to which the PRA received no responses. The PRA has therefore decided to make the changes as consulted, which include:

• Simplifying the PRA's settlement discount scheme (by keeping a 30% penalty discount for early settlement and removing the 20% and 10% discounts available for settlement in later stages of an enforcement action).
• Clarifying and make more transparent the PRA's procedures for settlement.

The SoP took effect from 4 October 2019, except for cases where the PRA has already concluded 'Stage 1' settlement discussions with the subject, without reaching a settlement, prior to 4 October 2019.

FCA publishes interim report of market study on general insurance pricing practices

On 4 October 2019, the FCA published an interim report on its market study into general insurance pricing practices (MS18/1.2). The market study was launched in October 2018 under the FCA's powers under the Financial and Services Market Act 2000, and is intended to better understand whether pricing practices in home and motor insurance support effective competition.

Overall the FCA found that competition is not working well for all consumers in these markets. Other key findings of the interim report include:

• Around 6 million policyholders pay high prices and are not getting a good deal on their insurance.
• One in three people that pay higher prices are potentially vulnerable.
• When setting a price, firms include expectations of whether a customer will switch product.
• Firms earn profits primarily from activities other than underwriting, such as add-ons, premium finance or investment income.
• People who pay high premiums are less likely to understand insurance or the impact that renewing has on their premium.

To address the problems identified, the FCA is considering a range of activities and remedies to tackle high premiums for consumers, stop practices that discourage switching, and make firms be clear and transparent in their dealings with consumers. The FCA also intends to use technological developments and innovation in the longer-term so that general insurance markets can benefit positively.

The FCA invites comments on its interim findings and potential remedies by 15 November 2019.

FS trivia

Which of the following is not a distinct certification function within the Certification Regime under SMCR?

• Systems and controls
• Significant management
• Managers of certification employees
• Algorithmic trading

The answer to last month's question is Gabriel (GAthering Better Regulatory Information ELectronically). The FCA is planning to move to a new platform for its data collection systems, which will replace Gabriel.