Legal Shorts 17.05.19 including ESMA speech on its current priorities

BEIS publishes consultation on corporate transparency and reform of the companies register

BEIS has published a consultation on proposals to enhance the role of Companies House and increase the transparency of UK corporate entities. The proposed reforms aim to improve the accuracy of information on the companies register and to strengthen the UK’s ability to combat economic crime.

The government is consulting on a wide range of measures which, if implemented, would require significant legislative and operational changes. The proposals fall into five parts: Part A: Knowing who is setting up, managing and controlling corporate entities; Part B: Improving the accuracy and usability of data on the companies register; Part C: Protecting personal information; Part D: Ensuring compliance, sharing intelligence, other measures to deter abuse of corporate entities; and Part E: Implementation.

The proposed changes will take some years to deliver and the government will set out its next steps when it formally responds to the consultation. Companies House fees are likely to increase, but to remain low by international standards. The closing date for responses to the consultation is 5 August 2019.

ESMA speech on its current priorities

On 13 May 2019, ESMA published a speech on its current priorities. Points of interest include the following:

  • The European Supervisory Authorities (ESAs) (EBA, EIOPA and ESMA) are starting to work on the mandated technical standards on disclosure following the political agreement reached between the European Parliament and the Council of the EU on the European Commission’s proposed Regulation on disclosures relating to sustainable investments and sustainability risks. The timeline is tight as most of the standards must be delivered within 12 months of the Regulation’s entry into force, which is expected during or just after the summer.
  • ESMA has found out that national practices on performance fees are not always consistent. This creates the risk of different levels of protection for the retail investor depending on where the fund is domiciled. It is currently working on some common principles that could help harmonise the way EU regulators approach performance fees and the way they allow asset managers to structure them while creating funds.

ESMA has begun work on a broad review of the PRIIPs Delegated Regulation. The review will include proposals to review the performance scenarios section of the PRIIPs key information document (KID), which proved to show over-optimistic results in certain cases. It will also cover cost-related issues, such as the presentation and calculation of costs. It will be complemented by a consumer testing exercise undertaken by the Commission on the different possible amendments to be made to the presentation of performance scenarios. The results of this exercise will be known by the end of 2019.

FCA board considers government’s proposed approach to cryptoasset regulation and supervision

On 9 May 2019, the FCA published the minutes of its board meeting of 28 March 2019.

Among other things, the minutes report that HM Treasury is consulting on domestic legislation to implement an anti-money laundering (AML) regime for certain cryptoasset activities by January 2020. HM Treasury is also proposing additional elements that would require the UK to meet the relevant Financial Action Task Force (FATF) standards and has asked the FCA to take on supervision of the new regime.

The FCA board noted that the new regime would introduce AML supervision for businesses that enable cryptoasset exchanges and act as custodians for “wallets” storing cryptoassets for clients. Subject to the outcome of the consultation, it may also include businesses enabling exchange of one cryptoasset for another and cryptoasset ATMs and, potentially, businesses facilitating peer-to-peer exchange of cryptoassets or providing wallets without providing custody of the wallet.

The FCA board also discussed the resourcing implications, and the risks and issues, associated with taking on these new supervisory responsibilities. In relation to risks not covered by the regime, such as technology and resilience requirements, financial promotions and consumer protections, the FCA board considered whether communication alone was sufficient for managing risks and whether additional rules were required. It agreed that further discussion in relation to this would be necessary.

The minutes indicate that the FCA board expressed support and agreed:

  • In principle, subject to detailed design of the regime and the development of the supervisory model and associated funding, that the FCA is prepared to act as AML supervisor for specified cryptoasset businesses located in the UK, assuming this remains HM Treasury’s preferred approach following the consultation (which closes to responses on 10 June 2019).
  • Continued engagement with industry pending the consultation outcome to inform the design and enable timely implementation of the regime.

Member states are required to implement the Fifth Money Laundering Directive ((EU) 2018/843) (MLD5 or 5MLD) by 10 January 2020.

Government response to Treasury Committee report on economic crime

On 7 May 2019, the House of Commons Treasury Committee published the government’s response to its report on economic crime. The government has taken up many of the committee’s recommendations, including launching a consultation into the reform of Companies House, introducing new powers and resources, and ensuring that the UK’s commitment to combatting economic crime will not diminish once the UK has exited the EU. It has also committed HM Treasury to send a report on HMRC’s role as an anti-money laundering (AML) supervisor and its relationship with the Office for Professional Body Anti-Money Laundering Supervision (OPBAS) by September 2019.

There are some areas where the government are still to provide their final response, including:

  • The corporate criminal liability framework, where the Ministry of Justice’s call for evidence from 2017 will be responded to shortly.
  • The Economic Crime Plan.
  • The power to block a stock market listing on national security grounds.
  • Suspicious activity reports (SARs) reform, where the government is currently awaiting the publication of the Law Commission’s review into limited aspects of the Proceeds of Crime Act 2002.

There are a few surprises in the response, perhaps the most significant being that proposals to introduce a failure to prevent economic crime offence are likely to be resurrected. The Law Commission’s review of the SARs regime will also be of considerable interest.

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 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.

Treasury Committee report on consumers’ access to financial services

On 10 May 2019, the House of Commons Treasury Committee published its twenty-ninth report of session 2017-19 on consumers’ access to financial services.
The report includes recommendations, including a number that are directed at the FCA, the Payments Systems Regulator (PSR) and the government, to ensure that financial inclusion is a priority for financial services providers, so that large parts of society (especially those with particular needs or characteristics) are not left behind. The key findings and recommendations for the government and regulators are outlined in the report under the following headings:

• Increasing financial inclusion.
• Do vulnerable consumers pay more?
• Bank branch closures.
• The Equality Act and the provision of reasonable adjustments.
• Defining vulnerability.
• Access to lower-cost credit.

The report also links to the written evidence and transcripts of oral evidence submitted to its consumers’ access to financial services inquiry.