In this edition of Regulatory Focus, Kroll’s compliance experts round up key news on Russian sanctions and implications on financial services industry and publications from the FCA during February and March 2022.

Hot Topics

  • Russian Sanctions and Implications on Financial Services Industry

FCA Updates

  • FCA Strategy 2022 To 2025
  • FCA Appoints New Head of Leeds Office as It Recruits 200 Roles as Part of Transformation
  • FCA Fines
  • FCA Looks for Members to Help Shape Secondary Markets Work
  • Former CFO Sentenced to Five-and-a-Half Years Imprisonment
  • FCA Speech on UK Market Structure
  • Update on the Market Share Test Under the Ancillary Activities’ Exemption for Commodity Derivatives
  • Court of Appeal Upholds Appeal in Illegal Financial Promotion Case
  • PRIIPs—Final Scope Rules and Amendments to Regulatory Technical Standards
Hot Topic

Russian Sanctions and Implications on Financial Services Industry

FCA issues financial sanctions against Russia

As mentioned in our last edition, the UK announced a tranche of sanctions on Russia in February 2022. Further information can be found here as the situation evolves, and we encourage firms to monitor this site for further developments, as it is regularly updated.

The FCA expects firms to have established systems and controls to comply with financial sanctions regulations, as laid out in FCG 7 of the FCA’s Financial Crime Guide. If failings are identified, restrictions and enforcement action may be taken. Firms are encouraged to screen against the UK Sanctions List and the Office of Financial Sanctions Implementation (OFSI) list of asset freeze targets for sanctions obligations to ensure compliance.

Firms are also legally obliged to report to OFSI if a breach is known or suspected to have occurred and should also separately notify the FCA. Where transactions appear suspicious concerning sanctions evasion, firms should also report this to the UK Financial Intelligence Unit at the National Crime Agency.

Read the full statement here.

Russian sanctions and crypto assets

The FCA is working closely with the government and law enforcement agencies across the UK and around the world to ensure that financial services firms, including the crypto asset sector, are contributing to making sure that economic sanctions on Russia and Belarus in response to Russia’s invasion of Ukraine are complied with.

Financial sanctions regulations do not differentiate between crypto assets and other forms of assets. For this reason, the FCA has reached out to all registered crypto asset firms to make it clear that the use of crypto assets to avoid sanctions is a criminal offence under the Money Laundering Regulations 2017 and regulations made under the Sanctions and Anti-Money Laundering Act 2018.

The FCA urges authorized financial institutions to check the FCA register, or the relevant overseas register, to ensure that any crypto asset firms they do business with are appropriately registered. 

Click here to see the FCA’s list of recommended steps to tackle the risk of sanction evasions via crypto assets. 

Impact on financial markets

Following the wide sanctions placed on Russian businesses and individuals after the invasion of Ukraine, the FCA reminded firms of their disclosure obligations under the UK Market Abuse Regulation (MAR). 

The regulator stressed that companies in scope of MAR must fulfil their obligations to disclose inside information. It also reminded firms they should consider what information constitutes inside information, recognizing that responses by different governments to the invasion across multiple jurisdictions may alter the nature of information that is material to a business’s assets, operations and prospects. 

The FCA also mentioned that companies should ensure the market is fully informed of any information or changes required to be disclosed under MAR and that disclosure obligations continue to apply even when trading of securities has been suspended.

The full statement can be viewed here.

FCA’s response to Chancellor’s call to stop investing in Russia

The FCA has issued a response to the Chancellor’s call to stop investing in Russia, confirming that regulated firms have already taken steps to avoid new investment in the Russian economy.

Whilst many asset managers and pension providers have already written down any Russian assets held by their respective funds or schemes to zero, some have announced that they intend to divest themselves of such assets when it is practical to do so. Major index providers have also taken steps to remove Russian securities from their equity and bond indices.

The FCA has noted that there are currently significant practical challenges in disposing of Russian assets but has also advised firms that when it is possible to sell such investments, they ensure that they meet requirements on entities subject to sanctions or connected to sanctioned entities. 

Wholesale broker enters special administration

Directors of an FCA regulated wholesale broker have decided to place it into special administration due to its links and business dependence on Russia. 

The special administrators will carry out an assessment of the client money and assets held by the Firm and will work to return client money and custody assets to customers.

The Financial Services Compensation Scheme (FSCS) will be working with the special administrators to determine where it will be able to assist the firm in covering any custody assets and client money shortfalls up to £85,000.

The firm will remain authorized by the FCA but subject to supervisory oversight and FCA rules because it may need to conduct regulated activities during its wind down. 

Click here for the full article.

FCA Updates

FCA Strategy 2022 to 2025

Laura Febbrari and Darragh Finn

The FCA has announced its three-year strategy, which sets out its expectations for all regulated firms. The focus of the strategy is to reduce and prevent serious harm, set and test higher standards, and promote competition and positive change. The FCA published its 2022/23 Business Plan as part of this strategy. This Business Plan builds on consumer-facing work by expressing commitments to put consumer needs first, shape digital markets and enable consumers to help themselves. 

The FCA notes that the external environment is changing rapidly, with low levels of financial resilience and rising costs, meaning that many people are at risk of serious financial problems. 

In terms of asset management, the FCA wants firms to offer products that provide fair value and meet their customer investment needs. The FCA plans to increase its supervisory focus on the presentation of environmental, social and governance (ESG) properties of products in a way that is fair, clear and not misleading. The FCA also plans to work with the Treasury and industry to identify opportunities for change under the Future Regulatory Framework and will work with its global counterparts on topics such as fund liquidity to achieve common standards.

The FCA’s Business Plan can be found here and its strategy statement here.

FCA Appoints New Head of Leeds Office as It Recruits 200 Roles as Part of Transformation

Roma Patel and Darragh Finn

The FCA is recruiting around 200 new roles as part of its transformation program. As part of the FCA’s commitment to expand its footprint across the UK, it has increased its headcount in Edinburgh to around 200 and set up a new office in Leeds. 

William Hague, the FCA’s former Chief People Officer, will lead on setting up the new office in Leeds alongside Stephen Braviner Roman, the FCA’s General Counsel. 

The roles in both Edinburgh and Leeds will be new roles and will not involve a restructuring of positions out of London.

Nikhil Rathi, Chief Executive of the FCA, said: ‘I’m delighted that an experienced leader like William will head up our office in Leeds, as we broaden our talent base and national footprint. This is an important step in our transformation, which will ensure we are a regulator that better represents the people we serve.’

Read the full article here.

FCA Fines

Vishan Singh and Alex Lander

The FCA publishes fines it charges during calendar years. In 2021, the FCA fined a total of £567,765,219.95. This includes fines for reasons such as: 

  • Breaches of Money Laundering Regulations
  • Breaches of FCA Principles 
  • Breaches of Statements of Principle for Approved Persons 1 and 7
  • Breaches of APER and FIT
  • Breaches of MAR

At the time of writing, there had been one fine of £783,000 for PRIN and financial crime breaches. The link to the fines can be found here.

We note that as the FCA becomes a more ‘innovative, assertive and adaptive regulator’, firms are likely to face increased scrutiny. Kroll can assist in various matters such as annual and independent regulatory and compliance-related reviews, independent assurance, health checks and mock regulator examinations. 

FCA Looks for Members to Help Shape Secondary Markets Work

Sam Smith and Thomas Bevan

The FCA is establishing a new advisory committee on secondary markets, whose purpose will be to support the FCA’s wholesale secondary markets work in equities, derivatives, fixed income and commodity derivatives. The committee’s task will be to:

  • Help develop reforms that improve market competition, increase consumer protection and enhance the integrity of markets.
  • Identify market changes that may affect the proper functioning of secondary markets.
  • Provide data and analysis to support policy reforms.

The committee, which will be made up of 20 members (excluding FCA representatives), will be composed of senior individuals in firms active in financial markets, who are experts in how secondary markets function and how they are regulated. The FCA is seeking to ensure that there is balanced representation of the types of firms active in wholesale markets, as well as ensuring the diversity of the members of the committee in line with its commitment to promote diverse and inclusive financial services.

The FCA will chair the committee and provide secretariat support. The committee will meet regularly—typically quarterly—but can meet more frequently, if necessary, to carry out its functions.

Former CFO Sentenced to Five-and-a-half Years Imprisonment

Sascha Cordonnier and Warren Radloff

A former CFO of an AIM-listed company was found guilty of two offences of making false and misleading statements to the market and three offences of false accounting. He was sentenced to five-and-a-half years imprisonment and disqualified from being a director for ten years.

The company in question had issued false and misleading unaudited interim results in November 2015 and false and misleading audited final year results in June 2016. Both inflated its cash position by £13.1m and £12.2m, respectively and misrepresented its net debt position. 

These false figures were presented to the board and the investors of the Firm who purchased shares for a higher price than they were worth, causing losses to investors when the true position was revealed.

The Judge remarked: ‘A CFO of a public company—of any company—is expected to demonstrate the highest standards of integrity. It is the bedrock upon which a company, its directors and its shareholders are entirely dependent. When people such as you are found to have failed seriously, they must expect severe punishment.’

A former finance director of the firm was also sentenced to three years imprisonment for her participation in this scheme.

Read the full press release here.

FCA Speech on UK Market Structure

Peter Timson and Tom Bevan

Edwin Schooling Latter (Director of Markets and Wholesale Policy and Wholesale Supervision at the FCA) delivered a speech to the Rosenblatt’s European Market Structure Conference.

Mr. Latter outlined the H1 2022 consultation on changes to UK equity market functioning and other areas of potential change. The speech covered the following key points:

  • Lord Hill’s UK Listing Review Report has helped identify refinements to the UK markets, such as confirming changes to Listing Rules for Special Purpose Acquisition Companies (SPACs). 
  • The FCA and HMT are working to make capital-raising disclosures more proportionate.
  • The government intends to repeal the double volume cap and share trading obligation, recalibrate the transparency regime for derivatives and bonds, and reduce the scope of the commodity derivatives position limits regime.
  • The FCA’s 2021/22 Business Plan outlines its consultation on the UK’s MiFID regime as it relates to the Wholesale Markets Review. 
  • The UK is removing ‘dark trading caps’, while the EU is tightening the trading restrictions. 
  • The FCA will seek market views on allowing firms to elect to be trade reporters regardless of whether they are a systematic internaliser in a particular instrument. 
  • The complexity of calculating thresholds for block trades in bonds and derivatives introduced under MiFID could be reduced by returning responsibility to the trading venues for setting large in scale (LIS) thresholds for Exchange Traded Derivatives.
  • The FCA will consult on allowing UK trading venues to source reference prices from any overseas trading venue, including the US and Switzerland, providing those prices are robust, transparent and consistent with best execution. 

Please find the full speech here.

Update on the Market Share Test Under the Ancillary Activities Exemption for Commodity Derivatives

Sascha Cordonnier and Amelie Snape

The FCA has consulted on clarifications to its perimeter guidance sourcebook (PERG) and UK MiFID RTS 20 to clarify that the ‘market share test’ is no longer a prerequisite for firms to benefit from the MiFID Article 2(1)(j) ancillary activities exemption. This exemption allows firms that trade in commodity derivatives, emission allowances and emission allowance derivatives to be exempt from authorization as a MiFID investment firm if they fulfil certain criteria.

Before February 2022, firms were required to perform both the ‘market share test’ and the ‘main business test’ to evidence meeting the exemption criteria. The ‘market share test’ is a calculation of the aggregate notional value of all trades in commodity derivatives, emission allowances and emission allowance derivatives traded on, or outside, trading venues across the European Union (which included the UK at the time of adoption).

The consultation closed on 11 April 2022.

Find the full update here.

Court of Appeal Upholds Appeal in Illegal Financial Promotion Case

Sam Smith and Mark Ford

The Court of Appeal has upheld an individual’s appeal against a High Court order, on 6 May 2020, requiring them (together with three other individuals) to pay restitution for consumers who suffered losses relating to an illegal financial promotion issued by a start-up company (‘the Company’). The Court of Appeal’s decision can be found here.

The Company failed to secure investments from high-net-worth or sophisticated investors via an FCA-authorized firm and then sought to raise funds from retail investors through two share offerings—however, these were promoted by unauthorized marketing agents. 

The individual appealed the ruling because they believed the financial promotion had been approved by a firm of chartered accountants. The Court of Appeal agreed that this meant the individual did not have the knowledge required to have been involved in the Company’s breach (i.e. not having the financial promotion approved by an FCA-authorized person). 

As a result of the judgement, the individual no longer must pay restitution in this matter. The findings against the remaining three individuals are not affected by this ruling. 
The FCA’s press release can be found here

PRIIPS—final Scope Rules and Amendments to Regulatory Technical Standards

Vishan Singh and Alex Lander

The FCA published PS22/2, which makes changes to Packaged Retail and Insurance-based Investment Products (PRIIPs) Regulation. The handbook rules came into force on 25 March 2022. However, there is a transitional period ending 31 December 2022, by which date firms must apply the new requirements. 

The PRIIPs changes will: 

  • Introduce rules to clarify the scope of the PRIIPs Regulation for corporate bonds, making it clearer that certain common features of these instruments do not make them into a PRIIP.
  • Provide clarity on the regulator’s view on some products falling in scope of the PRIIP’s regime, such as FX Forwards, Exchange Traded Derivatives and US ETFs.
  • Introduce guidance surrounding conditions for a PRIIP to be regarded as not ‘made available’ to retail investors. This includes a minimum denomination for considering a security not to be made to retail investors of £100k. 
  • Introduce a requirement for narrative information on performance.
  • Address the potential of some PRIIPs inappropriately assigning a low summary risk indicator in the KID. For example, under the new rules, PRIIPs issued by venture capital trusts must have a minimum summary risk indicator score of 6.
  • Address concerns about certain applications of the ‘slippage’ methodology when calculating transaction costs. For example, index-tracking funds will now use a spread model to calculate costs.

The policy statement can be found here.

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