Mon, Nov 8, 2021

FCA Updates - July - August 2021

FCA Statement on Supervision of Commodity Position Limits

Tom Bevan and Matteo Basso

The FCA released a statement outlining its approach to the operation of the Markets in Financial Instruments Directive (MiFID) markets regime after the end of the EU withdrawal transition period. This statement follows the regulator’s supervisory statement of December 2020 (here).

The December 2020 statement included a changed approach to commodity derivative position limits in light of evidence of potential constraints on market functioning during the COVID-19 pandemic, because of inflexibilities in the commodity derivatives position limits regime.

The regulator confirmed that they did not intend to take supervisory/enforcement action for positions that exceed limits where the position is held by a liquidity provider to fulfil its obligations on a trading venue. The FCA’s recent statement confirms that this remains their position.

HM Treasury recently published a consultation on its wholesale markets review that included specific proposals on reforming the MiFID commodity derivatives position limits regime. It proposes changes that would limit the scope of position limits to agricultural contracts and physically settled contracts. The FCA has confirmed it supports these proposals.

As such, the regulator has decided that while change to the scope of the regime is being considered, they will not take supervisory/enforcement action in relation to commodity derivative positions that exceed position limits on cash-settled commodity derivative contracts, unless the underlying is an agricultural commodity. The FCA will keep this position under review, and reconsider if there are indications of market abuse.

For further information, please click here.

Joint Bank of England and FCA Review of Open-Ended Investment Funds

Kristian Sotiriou and Matteo Basso

The FCA and the Bank of England carried out a review of open-ended investment funds due to the risks posed by their liquidity mismatch.

As a result of their review, the regulators published a report on 13th July 2021 and have put forward recommendations for establishing a liquidity classification framework for funds and proposed enhancement to the calculation and use of swing pricing.

Click here for the full article.

FCA Publishes Annual Report and Accounts 2020/21

Peter Timson and Alex Lander

The Annual Report and Accounts, published on 15 July 2021, looks back on key pieces of work throughout the period. Firstly, in responding to the economic impacts of the pandemic and, secondly, working with the UK government on a range of issues during the EU withdrawal to ensure continuity for firms operating in the UK while maintaining UK market integrity.

Charles Randell, Chair of the FCA, observed how much of a challenging year it has been for everyone and that the FCA “helped thousands of businesses, large and small, through the COVID-19 pandemic” while continuing to “transform the FCA to better support consumers and markets in a fast-changing digital age.” Charles ended by stating that despite challenges the FCA will “realise our ambition to be a more agile, preventative and data-driven regulator and reinforce our commitment to demonstrating the public value we create.”

Please find the Annual Report and Accounts 2020/21 here.

Regulatory Hosted Solution Update

Sascha Cordonnier, Mark Ford, Darragh Finn and Ian Manson

The recent Greensill scandal, involving the collapse of a large firm that was not directly FCA regulated, but an Appointed Representative (AR) of another authorised firm, has attracted both public scrutiny and increased focus by the FCA on firms offering Regulatory Hosting Solution (RHS) AR services. Below we set out a case for well-run RHS AR services as a steppingstone and complement to full FCA authorization.

Kroll first began offering a Regulatory Hosting Solution (RHS) AR service in 2015 and since that time has successfully hosted well over 100 ARs on its platform.  In our experience the RHS offers firms, particularly new market entrants, the opportunity to establish their business quickly and with full regulatory support. It also allows them to familiarise themselves with UK regulation and the opportunity to test their business model prior to seeking full FCA authorisation.

Kroll’s RHS allows firms to use Duff & Phelps Securities Limited’s (DPSL) FCA permissions, which include: investment advice, arranging transactions and receipt and transmission of orders with professional clients. DPSL acts as Principal to its ARs and remains fully responsible for their conduct.  Consequently, Kroll performs detailed due diligence on its ARs and provides a full compliance infrastructure, undertakes regular compliance monitoring, provides regulatory advice and guidance and is responsible for approving the ARs’ financial promotions. Similarly, it is in the ARs’ interest to ensure they are dealing with a reputable, well managed principal with sufficient human, systems, technical and regulatory capital resources to support their business.

It usually takes between two and four months to onboard clients onto the RHS, although we expect this to improve due to FCA changes described below. In contrast the FCA’s assessment of a direct authorisation application will typically take between six to 12 months, so, there are clear benefits to becoming an AR if timing is important.

Kroll provides full support during the registration process (for both the AR and associated approved persons), as well as ad-hoc support to answer any questions its ARs may have.  Importantly, the FCA recently announced that it will no longer be possible to submit an ‘add Appointed Representative’ notification via Connect, without simultaneously submitting at least one approved person submission (Form A).  We expect this procedural change to speed-up the onboarding process by allowing the FCA to integrate its assessment of the ARs suitability with that of the fitness and propriety of any associated approved persons.

Finally, Duff & Phelps announced in February 2021 it was changing its name to Kroll.  As part of the continuing brand transition, DPSL will change its name to Kroll Securities Limited (KSL) effective as of 4 January 2022.

If you are interested in our Regulatory Hosting Solution, please visit this webpage, or contact Ian Manson, Alex Lander or Mark Ford.

Transforming to a Forward-Looking, Proactive Regulator

Tom Bevan and Darragh Finn

Nikhil Rathi, CEO of the FCA, delivered a speech regarding the regulator’s changing approach and its business plan on 15 July 2021.

The speech focused on the FCA’s transformation into a more innovative, assertive and adaptive regulator. Rathi emphasised the crucial role of data and technology in the transformation, as illustrated by his decision to commit more resources into data and technological capabilities: a planned £120 million investment over the next three years.

Rathi also stated that the regulator will be taking a more robust approach to authorisations, stating “The UK is open for business, but not to firms who do not meet, or wish to meet, regulatory expectations. There will be a greater focus on scrutinising applicants’ financials and business models.” Crypto firms applying for anti-money laundering registration were specified as being particularly high risk.

Additionally, the regulator will remain cognisant of the need to adjust its approach as consumer choices, markets, services and products evolve. The FCA will work more closely with national organisations such as the Financial Ombudsman Service and the Financial Services Compensation Scheme through a consumer investments coordination group to become the regulator consumers and companies need. The FCA has also proposed extending the climate-related financial disclosure requirements for listed companies to asset managers, life insurers and FCA-regulated pension providers.

The speech can be read in full here

Information for Firms Using Exemptions from the Financial Promotions Order

Lauren Foulstone and Darragh Finn

Following Brexit, the exemptions under Articles 37, 41, 67, 68 and 69 of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005 inadvertently no longer cover financial promotions in relation to relevant UK markets or investments traded on such markets following onshoring changes made to the Order. These exemptions will, however, be restored by government statutory instrument in due course. The FCA has advised that it does not propose enforcement action against those for breach of the financial promotion restriction, if such a breach only materialises due to the relevant exemption no longer applying.

The FCA will, however, pursue enforcement action in the event of misconduct by an affected person that extends beyond a failure to meet the criteria for exemption. 

FCA Secures Conditional Resolution of Proceedings Against an Investment Scheme

Laura Febbrari and Peter Ray

The FCA secured a conditional agreement with the defendants in proceedings seeking compensation for approximately 4,500 investors in a failed investment scheme. The conditional agreement should result in a further £25 million compensation for investors, in addition to the £33 million already secured.

The FCA brought proceedings against the chief executive, a director and a number of companies connected to the investment scheme. Other companies involved in the investment scheme entered administration in July 2019 and November 2020.

The agreement is conditional on investors approving Company Voluntary Arrangements (CVAs) in respect of these companies, which will give them a say about whether these arrangements and the conditional agreement are acceptable.

The chief executive will need to realise most of his assets to pay the sum of £25 million, which will be paid in instalments on the sale of the assets. If any instalment is unpaid, the chief executive has agreed not to contest the debt for the purpose of any bankruptcy proceedings brought by the FCA.

If the arrangements are approved, the defendants will consent to orders that they breached section 19 of the Financial Services & Markets Act, 2000 by operating a collective investment scheme without being authorised by the FCA. If the investors do not approve the arrangements, the FCA’s proceedings against the defendants will continue. The trial is fixed for hearing in February 2022.

To read the full article click here.

FCA Enforcement: Individual Charged with One Offence of Money Laundering

Peter Timson and Alex Lander

The FCA announced that an individual has been charged with one offence of money laundering. This follows a joint investigation by the FCA and the City of London Police. The individual was due to appear in Westminster Magistrates Court on 10 August 2021 and the offence relates to activity between 11 October 2017 and 10 July 2018.

The FCA will not be making further comment until the individual appears in court.

To find out more, click here.

Four Year Sentencing for Fraudulent Trading and Providing Financial Services Without FCA Authorisation

Kristian Sotiriou and Matteo Basso

The FCA announced on 26th July 2021 that a man has been sentenced to four years imprisonment for one count of fraudulent trading. He has also been given an additional 14 months to reflect a breach of s19 the Financial Services and Markets Act 2000 (FSMA).

Although the man was not authorised by the FCA to carry out any financial service, he illegally provided investment advice on investment products such as pensions and regulated mortgages between 2008 and 2019.

He had advised many people to invest their money using his company with the promise of investing the sums in a diverse number of financial vehicles. In total, around £2m was deposited with his business, but the money was used to re-pay existing clients, to make payments to other individuals and to fund himself.

Confiscation proceedings are in progress and any sums that may be recovered will be returned to the victims.

Click here for the full article

FCA Publishes Final Rules to Strengthen Investor Protections in Special Acquisition Companies (SPACs)

Giles McClelland and Alex Lander

The FCA published final rules and guidance for certain SPACs, which took effect 10 August 2021.The FCA removed the general presumption that it will suspend the listing of a SPAC when it identifies a potential acquisition target. A suspension of a listing will not be required if the SPAC contains certain features and disclosures designed to provide additional investor safeguards. These include:

  • A size threshold of GBP 100 million, (reduced from GBP 200 million proposed in the initial FCA consultation).
  • A ‘redemption’ option allowing investors to exit a SPAC prior to any acquisition being completed
  • Ensuring money raised from public shareholders is ring-fenced
  • Requiring shareholder approval for any proposed acquisition
  • A time limit on a SPAC’s operating period if no acquisition is completed

SPAC issuers who do not meet these conditions will continue to be subject to a presumption of suspension.

The FCA press release can be read in full here.

FCA Consults on Proposals to Boost Disclosure of Diversity on Listed Company Boards and Executive Committees

Tom Bevan and Warren Radloff

The FCA launched a consultation on proposals to improve transparency pertaining to diversity of listed companies’ boards, as well as their executive management teams on 28th July 2021. 
The regulator is consulting on changes, which would require listed companies to publish annually:

  • A ‘comply or explain statement’ on whether they have achieved certain proposed targets for gender and ethnic minority representation on their boards, and as part of the same annual disclosure obligation,
  • Data on the make-up of their board and most senior level of executive management in terms of gender and ethnicity.

The FCA is also proposing changes to its disclosure and transparency rules to require companies to ensure that any existing disclosure on diversity policies addresses key board committees, as well as considering broader aspects of diversity. This could include considerations of ethnicity, sexual orientation, disability, lower socio-economic background and other diversity factors.

The listing rule diversity targets are not mandatory for companies, and as such the FCA is not setting ‘quotas.’ Rather, the regulator is providing a positive benchmark for issuers to report against. The proposals would apply to UK and overseas companies with equity shares in either the premium or standard listing segments of the FCA’s official list, while the disclosure and transparency changes apply to companies with securities traded on UK regulated markets, including the Main Market of the London Stock Exchange.

The consultation closed on 22 October 2021.

For more information, please click here

Enforcement: Court of Appeal Upholds Findings of Breaches Against Firm

Peter Timson and Peter Ray

The FCA announced on 4th August 2021 that its findings of breaches by a firm and two individuals had been upheld by the Court of Appeal. It was found that the appellants arranged and promoted investments without FCA authorisation and made false and misleading statements to investors which induced them to transfer their pensions into self-invested personal pensions (SIPPs) and subsequently into alternative investments (office space to rent, tree plantations and Brazilian property developments).

Over 2,000 customers were found to have transferred around £91.8m from their pensions into these SIPPs, with around £68m of that invested in products the firm and individuals promoted, along with a further £905,000 invested in a fixed-rate Brazilian property development bond. They earned £10.8m in commissions from these investments with many of these investments failing or in liquidation.

They were ordered to pay £10,715,000 in restitution to customers and this decision will allow the FCA to take further steps to recover monies from the defendants to return to the investors.
The FCA has appealed to anyone who believes they have lost money as a result of this and who have not been contacted to come forward.

Further information can be found here.

FCA stops firms from offering contracts for differences (CFDs) to UK customers

Giles McClelland and Matteo Basso

The FCA announced on 5th August 2021 that it stopped a Cypriot-based firm from conducting any regulated or marketing activities in the UK. It has also ordered the firm to close all trading positions and return the money to customers. The firm used three trading names and offered (CFDs) to UK investors. Although one of its firms was regulated in the UK, 99% of UK consumers traded through overseas entities, which had no authorisation to provide regulated services in the UK. These firms also did not comply with the FCA’s restrictions on the marketing and sale of CFDs to retail consumers. The FCA press release is available here.

Third Consultation on New Prudential Regime for UK Investment Firms

Laura Febbrari and Peter Ray

The FCA’s third consultation paper, issued on 6th August 2021, covers the following areas:

  • Disclosure
  • Own funds – excess drawings by partners and members
  • Technical standards
  • Depositaries
  • Changes to the Handbook to reflect changes to the UK resolution regime
  • Other consequential changes to the Handbook
  • Our use of new powers introduced under Part 9C of FSMA
  • See more on the proposed new rules here

Investment Firms Prudential Regime (IFPR) rules should simplify prudential requirements for solo-regulated UK firms that are authorised under the Markets in Financial Instruments Directive (MiFID) and will introduce a single regime reflecting the size and business of FCA regulated MiFID investment firms.

The first consultation focused on the categorisation of investment firms, prudential consolidation, own funds and aspects of own funds requirements, and reporting.

The second consultation focused on the remaining aspects of own funds requirements, liquidity, risk management, governance, remuneration, applications and notifications.

The FCA published the policy statements and near-final rules for the first and second consultations in June 2021 and July 2021 respectively.

Following this consultation, the FCA will publish a policy statement and final rules for the whole regime in autumn 2021.

This consultation closed on 17 September 2021.

The full details are available here.

Unlawful CFD Forex Trading Promotion Results in Bankruptcy Order

Kristian Sotiriou and Peter Ray

In March 2021, the FCA obtained a summary judgement against an individual engaging in an unlawful forex trading business. The money was to be used to compensate the victims that had been harmed.

Since the court order, the man has made no attempt to pay the compensation. Following this, on 30 June 2021, the Court of Appeal refused his application of appeal and the FCA filed a bankruptcy petition.

The High Court made a bankruptcy order against him and the bankruptcy trustee will now have to assess all of his financial affairs with the objective to pay any creditors with the recovered funds.

Click here for the full article.

Firms Reminded About Potential Financial Crime Risks Linked to Afghanistan

Sascha Cordonnier and Warren Radloff

The FCA reminded firms on 31st August 2021 of the need for robust systems and controls to meet their legal and regulatory requirements to counter the risk of their firms being used to further financial crime such as money laundering or terrorist financing. This includes risk assessments, customer due diligence, enhanced due diligence and transaction monitoring, as well as complying with their reporting obligation of suspicious activities.

The situation in Afghanistan has highlighted the changing risks that can occur. While Afghanistan is not currently considered a high-risk jurisdiction, firms are required to use a risk sensitive approach (including country risk) and to consider the impact that the latest developments can have on particular customers and flows of funds.

The FCA also notes that there are sanctions in place on Afghanistan and that firms should continue screening against the UK sanctions list.

Read the full FCA reminder here.

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