Legal Shorts 10.05.19 including FCA launches the Financial Services Regulatory Partners Phoenixing Group

FCA launches the Financial Services Regulatory Partners Phoenixing Group

The FCA has held a round table event with its regulatory partners to build on existing collaboration and launch a working group to tackle the ongoing issue of phoenixing in financial services. Representatives of the Financial Services Compensation Scheme (FSCS), the Financial Ombudsman Service, the Insolvency Service and Scotland’s Accountant in Bankruptcy joined the FCA to discuss approaches to tackling phoenixing and how they can work together more closely in the future by more effectively sharing data and intelligence on individuals and firms.

Phoenixing in this context involves firms and individuals deliberately seeking to avoid their liabilities to consumers or poor conduct history by closing down firms – or resigning senior positions – only to re-emerge in a different legal entity. The practice can have a devastating impact on the individual consumers concerned and a knock-on effect on the wider economy. Whilst the partners have shared information and discussed phoenixing in the past, this is the first time that they have come together as a group and in a formal way to discuss and agree to work together to tackle the issue. Sharing data on issues such as FSCS claims, complaints, unpaid Financial Ombudsman Service awards and director disqualifications is proving highly effective in preventing and detecting instances of phoenixing and in helping the FCA build cases to refuse applications for authorisation. Expanding on the types of data and information shared through the working group can only improve on this.

FCA evaluates Innovate progress and outlines next steps in promoting innovation in financial services

On 29 April 2019, the FCA published a speech by Christopher Woolard, FCA Executive Director for Strategy and Competition, assessing and evaluating the progress to date of the FCA’s Innovate services and setting out the next steps in promoting innovation in financial services.

Alongside the speech, the FCA has published the following related materials:

  • an evaluation report assessing the impact and effectiveness of its Innovate services;
  • a new webpage setting out the next steps for the Global Financial Innovation Network (GFIN) cross-border testing pilot, including the firms with which the FCA will work to develop tests (see Legal update, FCA update on functions, membership and governance of Global Financial Innovation Network (GFIN));
  • an updated webpage announcing the first cohort of firms taking part in the FCA’s Green FinTech Challenge;
  • a new webpage announcing the fifth cohort of firms taking part in the FCA’s regulatory sandbox.

In his speech, Mr Woolard stated that, in July 2019, the FCA will be holding a follow-up to its 2018 TechSprint on financial crime.

FCA statement on delay to publication of final rules for CFDs products and CFD-like options

On 26 April the FCA issued a statement on its consultation on permanent product intervention measures to restrict the sale, marketing and distribution of contract for differences (CFDs) and CFD-like options sold to retail clients. The FCA published a Consultation Paper on 7 December 2018, which proposed making ESMA temporary product intervention measures for CFDs permanent in the UK. The FCA’s proposed interventions are the same in substance as ESMA’s, although it is also proposing to apply our rules to closely substitutable CFD-like products. The consultation closed on 7 February 2019.

The FCA published a statement on ‘onshoring ESMA’s temporary intervention measures on retail CFD and binary options products’ on 22 February 2019. It indicated that it planned to publish a Policy Statement and any final Handbook rules in April 2019 for CFDs and CFD-like options.

The FCA is still considering the consultation feedback and ESMA’s temporary restrictions continue to apply to FCA-authorised firms, and as a consequence plans to publish a Policy Statement and any final Handbook rules in Summer 2019. Final rules for CFDs would apply from the date that ESMA’s restrictions expire, if not earlier. Firms that sell, market, or distribute CFD-like options would be given at least two months to comply with new rules.

Firms must continue to comply with ESMA’s decision notice that imposes temporary restrictions on the marketing, distribution or sale of CFDs to retail clients. Should EU law cease to apply in the UK before ESMA’s decision notice expires, ESMA’s decision notices will continue to apply as part of UK law. The FCA confirmed that supervision of firms in this sector will remain focused on compliance with ESMA’s measures.

Complaints Commissioner holds FCA partially responsible for loss caused by defective Financial Services Register

On 7 May 2019, the Office of the Complaints Commissioner published the final report (FCA00503) (dated 8 April 2019) of the Financial Regulators Complaints Commissioner.

In 2018, the complainant contacted the FCA with a view to confirming that a firm (which was part of Firm X (Austria)) was a regulated entity. An FCA call centre associate confirmed that the firm was legitimate based on its registration number and was eligible to operate in the UK under EU passporting laws. The associate also recommended that the complainant contact the Austrian regulator before investing. The complainant did so but did not await a response before investing. In reliance on the FCA’s assurances, the complainant invested £13,000, which it lost as the firm was in fact a clone. The complainant held the FCA responsible for the loss and sought compensation. The FCA did not uphold the complaint. The complainant alleged that the FCA’s decision was wrong as the FCA should have informed them that Firm X was not listed for savings products and that the FCA had failed to act on alerts about fraudulent activity connected with the company.

The Commissioner’s investigation found that the register’s entry for the firm was seriously inaccurate (the firm had been deregistered in 2006). Had the firm not been erroneously shown on the register it could not have been cloned in the way it was. The FCA’s complaints team also failed to uncover the extent of the regulatory failing.

The Commissioner acknowledged that the FCA should be protected from general liability for consumer losses and accepted that there should not be a general warranty for the accuracy of the register. However, he found the FCA’s failings with respect of the register to be unusually serious and significant. He recommended that the FCA consider making an ex gratia payment to cover 50% of the complainant’s losses; the complainant was liable for half the losses as it failed to await the advice of the Austrian regulator.

Finally, the Commissioner found that the registration of passported firms was defective and recommended that the FCA review its procedures. The FCA accepted the recommendation, has undertaken the review and removed a number of records from the register. The Commissioner welcomes the FCA’s plans to further improve the intelligibility and accuracy of the records.

House of Commons European Scrutiny Committee clears proposed ESFS reforms from scrutiny

On 7 May 2019, the House of Commons European Scrutiny Committee published its sixty-fourth report of the 2017-19 parliamentary session. Among other things, it considers the proposed legislative reforms to the European System of Financial Supervision (ESFS) and clears the reforms from scrutiny.

The report summarises developments to the ESFS proposals since February 2019, which is when they were previously considered by the Committee. It was subsequently provided with an update in April 2019.

In the report, the Committee explains that the changes to the powers of the European Supervisory Authorities (ESAs) (that is, the EBA, EIOPA and ESMA) under the ESFS reforms are directly relevant to the UK financial services industry, both before and after the UK leaves the EU. Clearing the legislative files from scrutiny, the Committee gives the following reasons for this:

  • the government has accepted that any preferential access for UK financial services firms to the EU market will be based on the “equivalence” mechanism. Therefore, as the ESFS review will give the ESAs a greater role in monitoring to what extent a non-EU country has maintained adequate regulation of specific financial sectors after equivalence has been granted, both HM Treasury and the industry have an interest in how the ESAs will fulfil those new responsibilities.
  • from January 2022, ESMA is gaining direct new supervisory responsibilities for several market-related activities carried out within the EU by non-EU firms. Its powers will therefore extend to the EU activities of the relevant UK sectors after the reforms take effect and the UK has left the EU.
  • the legislative reform of the ESAs is included within scope of the government’s Financial Services (Implementation of Legislation) Bill, which is currently awaiting its third reading in the House of Commons.

Also relating to the Bill, the Committee urges the House to monitor closely how HM Treasury may use its powers under the Bill to implement the ESFS reforms. This includes, once the UK is outside the single market, the extent to which they could be used to keep UK legislation aligned with EU financial services law by means of regulations to obtain equivalence with the EU.

IFSB consults on Shari’ah compliant lender of last resort facilities draft guidance note

On 7 May 2019, the Islamic Financial Services Board (IFSB) published for consultation an exposure draft of guidance note 7 on Shari’ah compliant lender of last resort (SLOLR) facilities (ED GN-7).

The aim of ED GN-7 is to complement existing IFSB guidance on SLOLR and to offer international benchmark guidelines to regulatory and supervisory authorities for developing and offering SLOLR facilities as part of the financial safety net arrangement for institutions offering Islamic financial services (IIFS) in their jurisdictions. ED GN-7 is primarily intended to serve as a benchmark for central banks in establishing and operationalising an SLOLR framework that applies to full-fledged islamic commercial banks and islamic commercial banks that are subsidiaries of conventional banks. ED GN-7 covers several essential features of an SLOLR arrangement, including the preconditions for developing and implementing an SLOLR mechanism, eligibility criteria to access SLOLR, a non-exhaustive selection of Shari’ah-compliant structures and mechanisms that central banks could utilise for SLOLR purposes, the applicability of penalty rates to these mechanisms, Shari’ah-compliant eligible collateral, and central bank disclosures.

A public hearing to consider ED GN-7 will be held on 18 June 2019. A webinar will also be held on 19 June 2019, details of which will be announced in due course. The deadline for responses to the consultation is 5 July 2019.

Claire Cummings

Claire practises financial services law with a focus on regulatory issues, cryptocurrencies and tokens, trading and brokerage documentation and advising both existing and start-up funds and fund managers.

If you would like to discuss any of the points we raise, please contact me or one of our other lawyers.

Phone: 0207 585 1406
Email: claire.cummings@cummingsfisher.com

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