FCA Updates – March 2021

FCA Restricts from Undertaking Regulated Activities

The FCA has placed restrictions on a wealth management firm that provides services to retail and professional clients, after a number of concerns were identified with the firm’s business practices.

In particular, the FCA identified serious concerns with tier 1 investor’s business activities and financial crime controls. The FCA had been trying to address these concerns with the firm but, following a Skilled Persons Review, concluded that the firm should stop carrying out regulated activities in the interests of protecting the integrity of the UK financial system. The FCA also stated that the firm should cease reducing the value of its assets or any of the client money or custody assets it holds without the consent of the FCA.

Clients will not be able to trade, withdraw, add to, transfer or use custody assets or monies held by the firm while these restrictions remain in place. While custody assets or client money that is held by a third-party custodian are not affected by these restrictions, clients will need to contact custodians directly, as the firm is forbidden from providing instructions under the restrictions.

This demonstrates the consequences of an FCA authorized firm failing to meet the threshold conditions. There is no time limit on the duration of these restrictions, as it is entirely dependent on the firm demonstrating that the FCA’s concerns have been addressed.

Further information can be found here.

A Forward Look at Regulation of the UK’s Wholesale Financial Markets 

Edwin Schooling Latter, Director of Markets and Wholesale Policy at the FCA, delivered a speech on regulation of the UK’s wholesale financial markets at the International Securities Lending Association Post Trade Conference on 16 March.

The main points from the speech were as follows:

• The FCA encouraged and supported HM Treasury’s decision not to bring non-financial companies into scope of UK Securities Financing Transaction Regulation (SFTR) reporting. With regards to further divergence from the current SFTR reporting regime, the FCA believes that it is prudent to allow the regime to mature before considering further refinements.
• HM Treasury decided not to implement the EU Central Securities Depositories Regulation settlement discipline regime in the UK.
• The FCA, together with the Bank of England and HM Treasury, will remain open to ideas on whether the UK’s settlement arrangements could be refreshed to support both market liquidity and settlement efficiency.
• The FCA is considering Lord Hill’s recommendations for changes to the listing rules.
• The FCA believes that the granular machinery of the MiFID II transparency regime can be difficult to follow. The FCA has opportunities to refine the framework for securities and derivatives trading in a way that helps those doing business in the UK.
• In addition, the FCA believes that another part of MiFID II (in which the FCA has expressed doubts from the outset is the commodity derivatives regime. Mr. Schooling Latter believes there is scope to simplify this regime.

The speech can be read in full here.

FCA Starts Criminal Proceedings Against a Retail and Commercial Bank

On 16 March 2021, the FCA announced criminal proceedings against a bank, (no individuals are being charged), around the failure of the bank to comply with Money Laundering Regulations 2007 (MLR 2007). No individuals are being charged. It is alleged that a UK company deposited around £365 million, of which about £264 million was in cash, and that the bank failed to adequately monitor and scrutinize this activity. This is the first criminal prosecution under the MLR 2007 by the FCA against a bank.

The FCA press release can be read here.

Why Are Diversity and Inclusion Regulatory Issues? 

On 17 March 2021, Nikhil Rathi, the FCA’s CEO, spoke about the FCA’s desire to lead by example when it comes to diversity and inclusion. Mr. Rathi noted the FCA’s ambitious target of having a senior leadership team with 50% women by 2025. He also noted that diversity was a broad topic covering a range of protected characteristics, including social background.

Research suggests that increased gender diversity improves risk management culture. Moreover, a lack of diversity on the boards of financial services firms questions how well firms can understand the different needs of the communities they serve.

Mr. Rathi would like to add a question to the FCA’s five conduct questions: Are firms’ management teams diverse enough, and do firms create the right environment for all staff to speak up? If improvements in diversity are not seen in the years ahead, the FCA will consider how best to use its powers, which may include assessing the diversity of a firm’s management team when considering senior management applications.

It is clear that diversity and inclusion within authorized firms will be an area of focus for the FCA over the coming years. The agency is expecting firms to be proactive in considering how diverse their management teams are, as well as how they foster an inclusive environment within the workplace.

This speech was delivered at the launch of the HM Treasury Women in Finance Charter Annual Review.

The full text of the speech can be found here.

Update on Trial Dates in Criminal Cases

The FCA has published a statement relating to two insider dealing and fraud prosecutions. Both trials will commence in April 2022.

Insider Dealing Prosecution
In a preparation hearing on 11 March this year, two individuals appeared in relation to a prosecution brought by the FCA for insider dealing. One is also being charged with improperly disclosing inside information, or encouraging another, whilst being an insider, to engage in dealing. Neither defendant was called to account. The next hearing in the case will be for case management on 10 September 2021.

Insider Dealing and Fraud
In another preparation hearing on 16 March, two individuals appeared in relation to a prosecution brought by the FCA for six offences of insider dealing and three offences of fraud by false representation. Both will be called to account at a further hearing on 28 June 2021. Both individuals were granted unconditional bail.

The FCA states that it cannot provide further comment about either case at this time.

To read the full article, click here.

FCA Releases a Statement on Its Approach to the UK’s Derivatives Trading Obligation

In December 2020, the FCA published a statement on its use of the Temporary Transitional Power (TTP) to modify the application of the derivatives trading obligation (DTO).

The FCA reviewed its approach during Q1 2021 and concluded that there have not been market or regulatory developments that would justify changes to it. Hence, the FCA will continue to use the TTP to modify the application of the DTO as previously set out.

The FCA will continue to monitor developments and review the approach, if necessary. If there is a requirement for change, then the FCA will provide sufficient notice to market participants so that any changes can be implemented smoothly. 

The full statement can be found here.

Liquidity Management in UK Open-Ended Funds

The Bank of England and FCA have published their findings of a survey on the approach of open-ended funds to liquidity management. Many open-ended funds offer daily redemptions while holding assets that can take longer to sell in an orderly way and are vulnerable to liquidity mismatch as a result.

The survey covered the period from Q4 2019 to Q2 2020, incorporating the extreme market conditions in March 2020 in the wake of COVID-19. Fund managers responded on behalf of 272 UK authorized funds investing in less liquid assets.

Key findings of the survey were:

• Funds have a wide range of liquidity tools available to them, but predominantly use swing pricing.
• Funds intensified and adapted their use of swing pricing during the stress period, although there were large variations in how swing pricing was applied.
• In addition to the use of liquidity management tools, funds managed their liquidity by holding liquidity buffers in the form of cash and non-cash liquid assets.
• Some funds adapted their liquidity management approaches and governance measures temporarily or permanently in response to the COVID-19 stress.
• An indicative liquidity classification suggests that managers of corporate bond funds may be overestimating the liquidity of their holdings.

Please find a link to the full report here.

FCA Publishes a Decision Notice for Non-Financial Misconduct

The FCA has published a Decision Notice against an independent financial adviser.

The regulator believed that the adviser is not a fit and proper person and as such has withdrawn his approval to perform senior management functions. The regulator also made an order prohibiting the adviser from performing any functions in relation to regulated activity.

In March 2017 the adviser was convicted of attempting to meet a child following sexual grooming. He committed this offence whilst he was an approved person. He was sentenced to 22 months’ imprisonment, suspended for 18 months. The FCA considers that the adviser is not a fit and proper person to perform any function in relation to any regulated activity because he lacks the necessary integrity and reputation. The adviser has referred the Decision Notice to the Upper Tribunal, where he and the FCA will present their cases.

For further information, please click here.