Legal Shorts 12.07.19 including Senior Managers and Certification Regime: Finalising FCA rules

Senior Managers and Certification Regime: Finalising FCA rules

On 10 July 2019, the FCA announced that it had been working closely with HM Treasury on the preparation of the Commencement Order needed to enable the FCA to publish final rules on the extension of the Senior Managers and Certification Regime (SMCR). The aim of the SMCR is to reduce harm to consumers and strengthen market integrity by creating a system that enables firms and regulators to hold individuals to account.

The SMCR is due to be extended to FCA solo-regulated firms including claims management companies (CMCs) from 9 December 2019. Given the importance of consulting on sector-specific considerations, the FCA has requested and agreed with HM Treasury a later commencement date for benchmark administrators. This will allow the FCA to carry out a dedicated consultation for benchmark administrators before making final rules for the sector. As set out in the FCA’s near-final rules, CMCs will also not come into scope until they have been authorised by the FCA. This does not affect the timing of commencement for any other firm.

The Commencement Order will be made by HM Treasury, following which the FCA will publish a Policy Statement setting out its final rules. In July 2018, the FCA published near-final rules in PS18/14 on extending the Senior Managers & Certification Regime to FCA firms. It then consulted on further changes in CP19/4 to optimise the SMCR ahead of commencement.

In March 2019, the FCA published near-final rules to extend the SMCR to CMCs in PS19/9 and near-final rules to introduce the Directory of financial services workers in PS19/7. Following publication of the Commencement Order, the FCA’s Policy Statement will finalise its rules.

More on the SMCR: FCA extends deadline for submitting form for notification of changes to firm classification for FCA solo-regulated firms

On 5 July 2019, the FCA updated its webpage on SMCR for FCA solo-regulated firms to provide an update on timings for submitting Form O (notification of change to firm classification under the SM&CR).

Firms can opt-up from the core to the enhanced regime, or limited scope firms can opt-up to the core or the enhanced regime, by submitting a Form O. In its July 2018 policy statement on extending the SMCR to FCA firms (PS18/14), the FCA published the near final version of Form O and stated that the pre-commencement version of Form O could be submitted up to six months before the extension takes effect, being 9 June 2019.

The FCA has updated the webpage to change the deadline for submitting Form O from 9 September 2019 to 24 November 2019. It has stated that if firms decide to opt up to the enhanced regime, they must ensure they are ready to meet all the relevant requirements, including submitting a Form K (conversion notification), statement of responsibilities and a management responsibilities map by 24 November 2019.

Unauthorised firm and directors to pay restitution to consumers

The High Court has consented to an order by which Samuel Golding, Shantelle Golding, Digital Wealth Limited and Outsourcing Express Limited will pay funds held by them to FCA for distribution to investors. The funds were raised by the defendants in unauthorised investment schemes operated by them.

The schemes purported to involve the online purchase of wholesale goods from China for onward sale and promised unrealistically high returns, in some cases up to 100% of the amount invested. In fact, the schemes were an unauthorised collective investment scheme and illegal deposit-taking, in contravention of the Financial Services & Markets Act 2000. No significant trading was conducted and the schemes relied on a continuous flow of new investors to fund existing investors’ returns. Samuel and Shantelle Golding admitted to the Court they were personally involved in these contraventions.

The schemes raised just over £15m from over 1,000 individual accounts. The FCA took urgent enforcement action to stop it and prevent the disposal of the remaining funds. Of the £15m that was raised, £9.25m was paid out to investors as returns and the defendants spent about £2.7m, including significant sums on travel, hotels and retail goods.

The Court order confirms that Mr and Mrs Golding will pay all funds held by them to the FCA for distribution to investors. As a result of this action, the FCA will take control of approximately £3.4m which will be distributed to affected consumers, leaving them with a loss totalling at least £2.7m.

Mark Steward, Executive Director of Enforcement and Market Oversight at the FCA, said:

‘The FCA took action as soon as it became aware of this illegal scheme, preventing further losses to future investors who would be unable to exit the scheme before it inevitably collapsed. ‘The FCA again reminds consumers not to invest in schemes being offered by firms that are not authorised by the FCA and that look too good to be true, like these ones. In this case, we managed to save some money for investors: too often it is too late.’

The FCA will write to all investors about what steps need to be taken in the distribution process.

HM Treasury AML and CTF supervision report 2017 to 2018

On 8 July 2019, HM Treasury published its anti-money laundering and counter-terrorist financing: supervision report 2017 to 2018. It reports the findings of the Financial Action Task Force’s mutual evaluation report into the UK in December 2018 and confirming the intention to transpose the Fifth Money Laundering Directive (5MLD) into UK law by January 2020, the report contains the following important findings and recommendations:

  • the quality of anti-money laundering and counter-terrorist financing (AML/CTF) supervision in the UK is of a variable standard with the statutory supervisors (FCA, HMRC and the Gambling Commission) being the best performing with a better understanding of money laundering and terrorist financing risks than the other 22 professional body supervisors. These deficiencies need to be addressed and the UK should monitor the impact of the Office for Professional Body Anti-Money Laundering Supervision (OPBAS) in addressing these failings;
  • there are significant weaknesses in the risk based approach to supervision amongst all supervisors with the exception of the Gambling Commission.
  • systemic AML/CTF failings have been identified in some large multinational UK firms and these have been met with the levying of penalties for serious failings. For the legal and accountancy sectors the weaknesses in supervision must be addressed in their own right because of the impact the failings have on the application of preventative measures and on the necessary gathering of financial intelligence;
  • statutory supervisors should consider how to ensure the appropriate intensity of supervision according to their assessment of risk presented by those under their supervision;
  • all supervisors should ensure that penalties imposed for failings are proportionate, dissuasive and effective. They should also collect statistics on their supervisory actions to enable them to better target their activities and to demonstrate the impact of their supervision; and
  • the FCA should, in line with the other statutory supervisors, consider the wider use of criminal background checks as part of its processes to identify and prevent criminals and their associates from owning or controlling financial institutions.

ESAs’ recommendations on supervision of cross-border retail financial services

On 9 July 2019, the Joint Committee of the European Supervisory Authorities (ESAs) (EBA, EIOPA and ESMA) published a report (JC/2019-22) on cross-border supervision of retail financial services.

The ESAs identified the main issues that national competent authorities (NCAs) face when supervising financial institutions that provide cross-border retail financial services within the EU and make recommendations to NCAs, the European Commission, the Council of the EU and the European Parliament on how to address them.

The report provides an overview of the main rules that apply in the EU in respect of consumer protection, conduct of business and co-operation between NCAs, and assesses the extent to which these rules address the supervisory issues faced by NCAs. It also makes recommendations for NCAs aimed at enhancing co-operation between them, such as following a number of high-level principles on co-operation (set out in the report) in the absence of any detailed requirements on co-operation in the applicable legislation, or liaising with the ESAs so that registers of contact points for notifications and exchange of information are kept up to date.

The ESAs call for more clarity on when activities carried out by digital means fall under the passporting rules, and for consideration of the high-level principles on co-operation as the basis for any new legislation.

ESMA updates its Q&As regarding the Benchmark Regulation

On 11 July 2019, the European Securities and Markets Authority (ESMA) issued an update of its Question and Answers (Q&As) on the European Benchmarks Regulation (Regulation (EU) 2016/1011 of the European Parliament and of the Council of 8 June 2016) (BMR). The BMR relates to indices used as benchmarks in financial instruments and financial contracts or to measure the performance of investment funds.

The new Q&As provide clarification on the following issues:

  • the commodity benchmark definition; and
  • the contribution to the euro short-term rate (€STR).

The purpose of the Q&As is to promote common supervisory approaches and practices in the application of the BMR. ESMA updates the Q&As regularly and they provide responses to questions posed by the public, market participants and competent authorities in relation to the practical application of the BMR. The content of this document is aimed at competent authorities under the BMR to ensure that in their supervisory activities their actions are converging along the lines of the responses adopted by ESMA. It also provides guidance to market participants by providing clarity on the BMR requirements.

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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