FCA wins case against unauthorised forex firm
On 14 May the High Court declared that Xcore Capital Limited (“Xcore”) and Jonathan Chitty had carried on an unauthorised investment scheme. The scheme took in at least £1 million from investors but only a small amount of the investors’ money was ever used for trading.
Consumers transferred money to Xcore in return for a 6% annual return, believing that it would be trading their money on forex and equity markets. However, the majority of this money was instead used to fund an office in Mayfair, brokers’ wages and Mr Chitty’s lifestyle. Mr Chitty’s personal spending included £102,000 on cryptocurrencies, £58,000 on luxury goods, £24,000 on a Rolex watch and £20,000 towards his wedding.
The order of the High Court declares that Xcore ran a deposit taking scheme without the necessary authorisation by the FCA, and that Jonathan Chitty was knowingly concerned in the scheme. It further requires Xcore and Mr Chitty to pay the FCA £917,231 which is the full value of all outstanding sums owed to consumers. The FCA will distribute to consumers any funds it is able to recover from Xcore and Mr Chitty.
On 20 November 2018, following an application by the FCA, a Judge in the High Court had previously imposed a freezing order on Xcore and Jonathan Chitty’s assets, and ordered to stop selling investments regulated by the FCA. This order remains in place until further order of the Court.
Review of principals and appointed representatives in investment management sector
The FCA has set out its findings from its review of how principal firms in the investment management sector understood and complied with their regulatory responsibilities in respect of their appointed representatives (“ARs”).
The review found that most principal firms reviewed had weak or under-developed governance arrangements in place, including a lack of effective risk frameworks, internal controls and resources. Though principals are responsible for the activities of their ARs, most principals were not assessing the risks these activities posed to their firms. Consequently, some principals may not be holding adequate financial resources for both liquidity and capital. Many principals did not identify conflicts of interest inherent in this business model or make attempts to manage them. The FCA concluded that there is a significant risk of harm to consumers and to the market arising from the activities of ARs operating in this sector.
The FCA has written a “Dear CEO” letter to the chief executive officers of principal firms with appointed representatives in the sector setting out its expectations. For more information, follow this link: https://www.fca.org.uk/publications/multi-firm-reviews/review-principal-firms-investment-management-sector
ISDA® consults on benchmark fallbacks
ISDA® has published two consultations on benchmark fallbacks for derivatives contracts that reference certain interbank offered rates (IBORs).
The first consultation relates to spread and term adjustments that would apply to risk-free rates for derivatives (RFRs, or fallback rates) in the event certain IBORs are permanently discontinued. Such rates include US dollar LIBOR, Canada’s CDOR and Hong Kong’s HIBOR. ISDA has also requested comments on a proposed fallback for Singapore’s SOR (following a permanent cessation of US dollar LIBOR).
Adjustments are necessary because these IBORs operate differently to their respective fallback rates. IBORs are currently available in multiple tenors (such as 1, 3, 6 and 12 months) whereas the RFRs identified as fallbacks are overnight rates. The IBORs also incorporate a bank credit risk premium and a variety of other factors (such as liquidity and fluctuations in supply and demand), while RFRs do not.
This consultation follows (and is supplemental to) the one carried out in July 2018 that covered sterling LIBOR, Swiss franc LIBOR, yen LIBOR, yen TIBOR, euroyen TIBOR and the Australian Bank Bill Swap Rate (see Legal update, Updated: ISDA® Releases Consultation on Technical Issues Related to Benchmark Fallbacks).
ISDA expects to use the results of the two consultations to implement fallbacks for the relevant IBORs by the end of 2019.
The second consultation addresses pre-cessation issues, and seeks comment on how derivatives contracts should address a regulatory announcement that LIBOR or certain other IBORs categorised as critical benchmarks under the EU Benchmarks Regulation are no longer representative of an underlying market.
The consultations, which were both published on 17 May 2019, are open until 12 July 2019.
FCA decision finding that three asset management firms exchanged confidential information in breach of competition law
On 22 May 2019, the FCA published the full text of its February 2019 decision finding that three asset management firms had exchanged confidential information in breach of the Chapter I prohibition of the Competition Act 1998 and/or Article 101 of the TFEU.
The decision sets out the market background, the factual evidence relied on and the legal analysis applied by the FCA in finding that Hargreave Hale Ltd, Newton Investment Management Limited and River and Mercantile Asset Management LLP had engaged in concerted practices that had the object of restricting, preventing or distorting competition. In particular, the three firms shared strategic information by disclosing the price they intended to pay or volume of shares they intended to bid for, in relation to one Initial Public Offering and one share placings. This information was exchanged shortly before the share prices were set.
The decision also sets out the FCA’s calculation of the fines imposed on Hargreave Hale (£306,300) and River and Mercantile (£108,000). Newton received full immunity from fines under the FCA’s leniency policy.
The FCA had initially investigated an information exchange by Artemis Investment Management LLP but it found that the information disclosed was not strategic and, therefore, concluded that it had no grounds for further action.
ESMA establishes new co-ordination network on sustainability
On 23 May 2019, ESMA published a press release announcing it has established a new co-ordination network on sustainability (CNS).
The CNS will:
- Develop the co-ordination of national competent authorities’ (NCAs) work on sustainability.
- Be responsible for the development of policy in this area, with a strategic view on issues related to integrating sustainability considerations into financial regulation.
In the press release, ESMA notes that the EU envisages a shift towards a more sustainable financial system in the medium and long term. ESMA and EU securities regulators must therefore make sustainable finance an integral part of their supervisory and enforcement activities. In this context, ESMA’s work on sustainable finance supports the European Commission’s sustainability action plan in the areas of investment services and investment funds.
ESMA has appointed Ana María Martínez-Pina Garcia, Vice-Chair of the Comisión Nacional del Mercado de Valores (CNMV, Spain) to chair the CNS for two years with immediate effect. In addition to her role at the CNMV, Ms Martinez-Pina Garcia leads one of two main workstreams on sustainable finance at the International Organization of Securities Commissions (IOSCO).