Legal Shorts 26.07.29 including FCA announces extension to its use of the temporary transitional power

FCA announces extension to its use of the temporary transitional power

On 25 July 2019, the FCA confirmed it intends to extend the proposed duration of the directions issued under the temporary transitional power to 31 December 2020. This is to reflect the extension of Article 50. Other than the additional time the FCA’s approach remains unchanged. The temporary transitional power is intended to minimise disruption for firms and other regulated entities if the UK leaves the EU without a withdrawal agreement. Under the power firms do not generally need to prepare now to meet the changes to their UK regulatory obligations that are connected to Brexit. 

As the FCA announced in February 2019, there are specific areas where it will not be granting transitional relief and, in these areas, it continues to expect firms and other regulated entities to take reasonable steps to comply with the changes to their regulatory obligations by exit day.

The following firms or persons should continue their preparations to comply with the changes:

  • firms subject to the MiFID II transaction reporting regime, and connected persons (for example approved reporting mechanisms).

  • firms subject to reporting obligations under the European Market Infrastructure Regulation (EMIR).

  • EEA Issuers that have securities traded or admitted to trading on UK markets.

  • investment firms subject to the Bank Recovery and Resolution Directive (BRRD) and that have liabilities governed by the law of an EEA State.

  • EEA firms intending to use the market-making exemption under the Short Selling Regulation.

  • firms intending to use credit ratings issued or endorsed by FCA-registered credit ratings agencies after exit day.

  • UK originators, sponsors, or securitisation special purpose entities (SSPEs) of securitisations they wish to be considered simple, transparent, and standardised (STS) under the Securitisation Regulation.

The FCA expects firms to use the additional time between now and the end of October to prepare to meet these obligations. The FCA will publish further information before exit day on how firms should comply with post-exit rules. The extension is aligned with the end date intended by the Bank of England and the Prudential Regulation Authority (PRA).

FCA consultation on proposed guidance for firms on the fair treatment of vulnerable customers

On 23 July 2019, the FCA launched a consultation on proposed guidance for firms on the fair treatment of vulnerable customers. The guidance sets out the FCA’s view of what the FCA Principles require of firms to ensure that vulnerable consumers are consistently treated fairly across financial services sectors. 

The FCA wants to see firms doing the right thing for vulnerable consumers deeply embedded in firms’ culture. Firms will need to think about what the guidance means for their business and customers, and how they are understanding and addressing the needs of vulnerable customers. As part of the FCA’s priority to protect vulnerable consumers, it has been working extensively with stakeholders on this issue. Whilst many firms have made significant progress in how they treat vulnerable consumers, the FCA believes that there needs to be more consistency across financial services sectors. In some cases, firms are clearly failing to consider the needs of vulnerable consumers, leading to harm.

Christopher Woolard, Executive Director of Strategy and Competition said:

‘Protecting vulnerable consumers is a key priority for the FCA and we want to see firms explicitly embedding the fair treatment of vulnerable consumers into their culture. Where we find that firms are not doing enough to ensure that consumers are treated fairly, we will take action.

‘Firms need to take particular care to ensure that vulnerable consumers are treated fairly as they may be more likely to experience harm. The guidance should drive improvements across the industry, improving outcomes for millions of vulnerable consumers’.

The guidance will be consulted on in 2 stages and the FCA is asking for comments on this first stage of the consultation by 4 October 2019.

FCA Dear CEO letter on wealth management and stockbroking strategy

On 23 July 2019, the FCA published a Dear CEO letter (dated 13 June 2019) on its wealth management and stockbroking supervision strategy. The FCA’s strategy covers a two-year period, which began in April 2019, and is focused on the following key risks of harm that wealth management and stockbroking firms pose to their customers or the markets in which they operate. The letter listed the FCA’s view on the key ways in which customers may be harmed in this sector, which are as follows, in summary:

  • by having  reduced levels of savings and investments due to fraud, investment scams and inadequate client money, or assets controls. This remains a priority area for the FCA – client portfolios must be aligned and managed to the client’s risk profile. The FCA expects firms to ensure suitability and not include high-risk investments inappropriately.

  • by losing  confidence in the industry’s ability to deliver their financial objectives  due to mismanagement of conflicts of interest and market abuse 

  • through reduced levels of savings and investments due to order handling procedures and execution processes that do not deliver best outcomes – the FCA expects firms to have effective day-to-day execution processes, contingent arrangements for periods of market distress, and clear, comprehensive and effective oversight and monitoring arrangements. Firms must consider their best execution arrangements and make improvements where necessary

  • by being unable to understand the costs of services provided by firms, due to insufficient or inaccurate disclosure of costs and charges, fraud, investment scams and market abuse – the FCA expects firms to review their costs and charges disclosures to ensure they are satisfying all relevant requirements

The FCA’s letter also referred to (i) the SM&CR and stated that it may undertake a number of assessments of firms’ submissions after implementation; and (ii) the potential impact of   Brexit. It stated that where Brexit may impact customer relationships (for example, for EEA-based customers) the FCA expects firms to act in their customers’ best interests and maintain clear communications throughout.

Decision on European Commission’s refusal to grant public access to documents under MLD4

This case concerned a request for public access to documents drawn up by the European Commission (EC) assessing the risk of money laundering and terrorist financing in 54 third countries. The request was made by a member of the European Parliament (MEP). The EC refused, arguing that disclosure would undermine international relations, public security and the EU’s financial, monetary or economic policy. In March 2019, the MEP asked the EC to review its decision. However, the EC did not reply within the deadline for responding and the MEP turned to the European Ombudsman. Before the European Ombudsman, the EC argued amongst other things,  (i) that the documents contained sensitive information that had not been shared with the third countries concerned; (ii) publication may have a negative diplomatic impact; (iii) some of the information originated from third countries and international organisations, so disclosure would undermine the relationship of trust, and lead to an unwillingness to share further information; and (iv) that disclosure would undermine its decision-making processes.

One of the MEP’s arguments for disclosure was that it is in the public interest that entities such as financial institutions have as much information as possible to help them to comply with their obligations to identify, manage and mitigate money laundering and terrorist financing risks. 

The European Ombudsman inspected the documents and found that the EC was justified in refusing to grant access to them. She closed the inquiry finding no maladministration.

Updated memorandum of understanding (MoU) between the FCA and the Bank of England 

On 18 July 2019, HM Treasury published an MoU between the Bank of England (exercising its prudential functions) and the FCA. 

The MoU was first agreed in 2013 and sets out the high-level framework the PRA and FCA use to co-ordinate and co-operate when carrying out their respective responsibilities various pieces of UK legislation including (i) the Financial Services and Markets Act 2000 (FSMA).  

The mandates of the FCA and the Bank of England are very different. At the highest level, the FCA is responsible for maintaining the integrity of the provision of financial services to users. The Bank of England is responsible for monetary policy and financial stability, primarily through its Monetary Policy Committee, Financial Policy Committee and Prudential Regulation Committee. It has primary operational responsibility for financial crisis management and is responsible for oversight/supervision of payment systems, settlement systems and central counterparties. It is the UK’s resolution authority and, when acting in its capacity as the Prudential Regulation Authority (PRA), it is responsible for promoting the safety and soundness of PRA-authorised persons, that is, deposit-takers, designated investment firms and insurance firms, and in the specific context of insurance, contributing to an appropriate degree of protection for those who are or may become policyholders.

The PRA and the FCA have separate and independent mandates, which are set out in statute, reflecting the UK’s ‘Twin Peaks’ micro-regulatory system. While it is important that this is respected, it is also essential that the regulators co-ordinate in some areas, and co-operate in others.

The MoU published on 18 July 2019 has been substantially updated to reflect the expansion of the FCA’s and PRA’s remit and organisational changes. 

FCA fines Standard Life Assurance Limited £30 million for non-advised pension sales failures

On 23 July 2019 the FCA fined Standard Life Assurance Limited (SLAL) £30,792,500 for failures related to non-advised sales of annuities.  An annuity is a retirement income product that can be bought with some, or all of a customer’s pension pot. It pays a regular income either for life or for a set time period. A customer requires accurate information when choosing an annuity, because it is a complex financial product. This is especially so for non-advised sales, where the customer selects the annuity based on factual information and does not receive financial advice. 

The FCA found that:

  • SLAL failed to put in place adequate controls to monitor the quality of the calls between its call handlers and non-advised customers. At the same time, SLAL offered its front-line staff large financial incentives to sell annuities, which encouraged them to place their own financial interests ahead of their customers. This gave rise to a significant risk that SLAL’s call handlers would fail to provide customers with the information they needed to choose an annuity appropriate to their circumstances. 

  • As part of the sales process for non-advised annuities, firms are required to explain to customers that they may get a better rate if they shop around on the open market.  Where customers have health or lifestyle factors which may shorten their life expectancy, they may be eligible for an enhanced annuity. Firms need to provide clear, fair and not misleading information about enhanced annuities to help the customer make an informed decision about what product to buy.  SLAL used high level call guidelines which gave call handlers significant discretion about how they communicated with customers. This meant that the firm failed to provide some customers with appropriate information about enhanced annuities, including the option to shop around for a better deal.

  • SLAL’s call handlers had the opportunity to receive significant bonuses and rewards if they met or exceeded sales targets. During the period of misconduct, nearly 22% of call handlers received more than 100% of their basic salary in bonus payments. This created the risk that call handlers would place their own financial interests ahead of fair customer outcomes.

  • SLAL failed to put in place robust systems and controls to mitigate the risks created by high level call guidelines and large bonuses. It failed to adequately monitor calls between call handlers and customers and provide sufficient management information to enable senior management to identify failings in relation to the quality and volume of call monitoring.

On 31 January 2017, SLAL voluntarily agreed to conduct a past business review to identify and pay redress to those customers who were likely to have suffered, or did suffer, loss as a result of its failures. As at 31 May 2019, SLAL had paid approximately £25.3 million to 15,302 customers.

SLAL did not dispute the FCA’s findings. The firm’s agreement to accept the FCA’s findings meant it qualified for a 30% discount. Otherwise, the FCA would have imposed a financial penalty of £43,989,300