This Week in Regulation


FCA Releases Final MiFID II Policy Statement

The FCA has released its final policy statement on MiFID II implementation. PS17/14 outlines the regulator’s final rules on a range of conduct issues, including client assets, inducements, best execution, research and taping.

The FCA received a lot of feedback on the consultations that this policy statement relates to and, as a result, has made significant changes to its proposals in certain areas, while pursuing the proposed course of action in others.

In a number of areas, the FCA has also gone beyond the legislative requirements in order to ensure the UK has the right regulatory regime and remains an attractive location for international financial services firms. These areas can be grouped into three broad categories; where the regulator:

  • Has extended the minimum standards of MiFID II to a wider range of firms than specified to avoid regulatory arbitrage and maintain consistency;
  • Introduces requirements above the minimum standard to preserve the UK’s existing regulatory standards;
  • Introduces requirements above the minimum standards as a result of new policy decisions.

Key changes firms should be aware of

CASS – CASS changes under MiFID II aren’t extensive, as the directive is broadly aligned to the current UK regime, but they include:

  • Requiring firms to have appropriate measures in place to prevent the unauthorised use of client assets;
  • Extending the safeguarding provisions to third party custodians who further delegate to sub-custodians;
  • Obtaining explicit consent, and undertaking appropriate internal assessment, when placing clients’ money into a qualifying money market fund (QMMF).

The FCA will also continue with its single rulebook approach.

Complaints Handling – The FCA will not extend the MiFID II complaints handling rules to all complaints, or the way complaints data is submitted, but will be updating how it publishes complaints data so it is clear which data relates to eligible MiFID II complaints or not.

Inducements – Industry feedback supported a consistent inducement standard across all advisers and the FCA plans to consult on amendments to the inducements rules to make it clear that advisory firms cannot continue to receive significant hospitality or other inducements from product providers and claim it is not connected to the service they provide to clients.

The FCA is taking forward the changes necessary to implement the MiFID II inducements ban, to include Article 3 firms, in relation to independent advice, and is extending this to the provision of restricted advice and discretionary fund management where it is provided to retail clients in the UK.

Client Categorisation – The FCA’s approach to client categorisation under MiFID II is:

  • To prevent smaller local authorities from being able to opt-up to professional client status, while allowing larger ones to exercise this option;
  • To introduce a common approach to categorisation of local authority clients across MiFID II and non-MiFID II businesses;
  • To exclude local authorities from the list of eligible counterparties in PRIN 1 ANNEX 1.

Taping – The FCA consulted on extending the MiFID II taping regime to all corporate finance businesses, but in light of the feedback received, will not be going forward with this proposal. The regulator also intends to remove the qualified exemption for call recording available for discretionary investment managers.

Article 3 firms may opt to take notes of a call, which will be expected to detail the key features of any order taken and the main substance of the conversation, rather than recording it. Firms that choose to take this approach must apply it consistently across the business, they cannot mix and match. Firms will also need to consider how they will implement appropriate controls so that potential or actual orders are first identified and then recorded in accordance with the requirements.

Best Execution – Existing rules on best execution (COBS 11.2) will be replaced by the new COBS 11.2A, which reflects the MiFID II best execution requirements, as well as retaining some of the existing Handbook guidance, as consulted on last year. The regime will be extended to Article 3 firms, aside from the requirement to produce an annual report on execution quality and order routing activities. It will also be extended to UCITS firms, with some modifications, with the rules contained within COBS 11.2B.

Independence – The FCA will adopt the MiFID II standard around independence and provide additional guidance to help firms demonstrate that they are meeting this new standard consistently. It will be applied across the board to advice on financial instruments, structured deposits and other non-MiFID II retail products.

The regulator’s view has been that the MiFID II definition of independence could allow some independent advisory firms to narrow the scope of their advice and provide more specialist or specific advice, provided this is made clear to customers.

Disclosure – The policy statement outlines new disclosure requirements for undertaking MiFID II business in relation to:

  • Cross-selling/ bundled products or services;
  • More detailed post-sale reporting requirements;
  • The revised requirement to retain records for a minimum of five years.

For non-MiFID II business, the cross-selling/ bundled products rules and record-keeping requirements remain the same. The post-sale reporting obligations are substantially unchanged.

The FCA will not introduce a standardised format for point-of-sale or post-sale disclosure at the current time, but will continue to work with the industry to develop an appropriate, standardised format.


FCA Announces Firm’s Participation in the Advice Unit

The FCA has recently revealed the firms that have participated in its Advice Unit. Formed in 2016, the FCA’s Advice Unit was set up following guidance from the Financial Advice Markets Review (FAMR) with an aim of providing feedback to firms which are developing automated advice and discretionary investment management services. Applications are open to firms of all sizes from new start-ups or large firms, on the condition that they meet the FCA’s criteria.

In the summer of 2016 ten firms participated in the unit, along with seven firms which joined in early 2017.

Advice Unit changes

The Advice Unit will now also be open to firms which are developing automated advice models within the mortgage, general insurance and debt advice sectors. In addition, the Advice Unit will be accepting firms that wish to provide guidance as an alternative to regulated advice and firms that wish to go unauthorised. Other changes also include the acceptance of applications on an ongoing basis than rather than its previous method of intaking participants via a cohort.


FAMR Baseline Report

The FCA has recently published its FAMR Baseline Report outlining three key measures to track market development ; accessibility, affordability and quality of advice. Reviewed on an annual basis and published via the FCA’s website, the findings will be used to assess the result of the FAMR in 2019.

The Post-Implementation Review of the Retail Distribution Review (RDR), expected in 2017, will now be combined with the 2019 FAMR review. This decision will give the market time to react to the regulatory change from FAMR and MIFID II, as well as enabling the FCA to maximise its efficiency and minimise any potential strain of the reporting on firms.

Christopher Woolard, Executive Director of Strategy and Competition at the FCA commented that the changes to its Advice Unit and FAMR Baseline Report provide an opportunity to broaden consumer access and guidance to financial advice across a multiple sectors.


Information Request to With – Profits Firms

The FCA has issued an information request to the majority of firms operating with-profits business to enable them to conduct a sector review.

Its priority lies around ensuring firms treat customers fairly, as outlined in its 2017/18 Business Plan. Some life insurance companies may offer investment types that cover with–profits policies, which work by compiling the money of multiple investors into a company’s with–profits fund, which often includes investment in multiple assets such as shares, fixed interest securities, cash and property.

Firms investing in the stock market or alternative investments can often experience temporary fluctuations. A benefit of with-profits is ‘smoothing’, which aims to balance out any of these temporary ups and downs as well as offering guarantees, which is also an important feature of many types of with-profits funds.

The FCA last conducted a full review into with-profits businesses in 2010. The upcoming review will enable the FCA to further understand the practices used by firms operating this type of business. The request for information is designed to help the regulator identify the most pressing areas for the review, scheduled to begin in Q4 2017 or Q1 2018.

The FCA has said that it does not have any prior views about the unfairness of practices or outcomes, and has not yet come to any conclusion about whether with-profits customers are being fairly, or unfairly, treated.


Announcement of New Chairs of the FCA’s Practitioner Panel and Markets Practitioner Panel

John Griffith-Jones has recently announced the appointment of new Chairs for the FCA’s Independent Practitioner Panel and Markets Practitioner Panel. Representing the interests of the financial services industry, the Practitioner Panels are independent statutory bodies which represent both their sector and the wider industry.

On the 1st August 2017, Anne Richards Chief Executive of M&G will become the Chair of the FCA Practitioner Panel.

John Trundle, also a member of the FCA’s Practitioner Panel and previous Chief Executive Officer of Euroclear UK & Ireland, became Chair of the FCA Markets Practitioner Panel from 1st July.

John Griffith-Jones, FCA Chairman, commented on the recent and upcoming appointments emphasising that both Chairs understand the demand of the roles and necessity of them to ensure that the regulators and the industry continue to communicate in a constructive and challenging manner.


FCA Publishes Proposals on Staff Incentives and Performance Management in Consumer Credit Firms

The FCA has recently published a consultation paper detailing proposals to mitigate risks that may result from the remuneration and incentive schemes of consumer credit firms. Firms are expected to consider the way in which staff are paid and incentivised and manage any risks to consumers that may arise from such schemes.

The FCA undertook a review of the performance management and remuneration policies and procedures of 98 consumer credit firms and found that:

  • A number of firms failed to consider the risks inherent within their performance management and incentive structures or take steps to mitigate them;
  • In a high proportion of firms, high-risk features were present in firms’ performance management structures, but firms did not have the appropriate controls in place to address them;
  • Where consumer credit was not the main activity of the business, the FCA found that firms hadn’t assessed the risks involved in providing consumer credit services, or the impact remuneration schemes may have on these risks.

As a result of its findings, the FCA is proposing to introduce new rules and guidance in the Consumer Credit Sourcebook (CONC), including:

  • Introduce a new rule requiring firms to indentify and take steps to mitigate any risks to customers arising from their performance management or remuneration policies;
  • Guidance around measures and procedures that firms may wish to implement, where appropriate, to mitigate risk;
  • Guidance on the purpose of the new provisions, to ensure firms have a clear understanding of the FCA’s expectations.

The FCA has also published non-Handbook guidance which sets out examples of good and poor practice as an aid to firms.

Jonathan Davidson, Executive Director of Supervision of Retail and Authorisations, commented on the findings, stating that a key indicator of a firm’s culture is the way in which firms pay and manage the performance of their staff. He also stated that this is a priority for the FCA, particularly encouraging firms to consider the wider impact of their staff incentives.


Speech: The Purpose of Free Trade and Open Markets in Financial Services

Andrew Bailey, Chief Executive at the FCA recently delivered a speech outlining the purpose of free trade and open markets in financial services. The speech covers the FCA’s work on Brexit and its impact on financial services and how open markets, the freedom of location and free trade are important to the functioning of the global economy.

The FCA’s job is to play a part in the implementation of the changes made from the country’s decision to leave the EU. A common misconception of the decision is the restrictions on trade, however Mr Bailey’s speech emphasised that open markets within financial services, the freedom of location and free trade are important to the functioning of the economy. Therefore, the FCA is doing its upmost to ensure this continues as well integrated markets are crucial for the functioning of the economy and supporting economic growth and employment.

The FCA’s work on Brexit

The FCA’s objective is to work with the government to create a clear regulatory regime and give clarity to all involved when the UK leaves the EU. It will work with European institutions such as the European Securities and Markets Authority (ESMA) and implement any EU legislation, whilst the UK is still a member of the EU.

It is the FCA’s priority to provide its technical knowledge and advice to the government ahead of the changes of Brexit, as well as working with authorised firms to understand cross-border operations in terms of the transaction of goods in and out of the EU. It is also working with the government on the Repeal legislation, which involves an in-depth analysis of each piece of EU regulation.

Andrew Bailey states that the UK’s decision to leave the EU doesn’t mean abandoning the benefits of free trade and open markets. The FCA states that open markets and free trade bring benefits which will help keep competition healthy which Mr Bailey highlights is a key objective for the regulator. Since the financial crisis, the FCA has aimed to promote a strong framework of global standards to implement financial stability and financial conduct, which has been led by the G20 and Financial Stability Board (FSB).

He emphasises the FCA’s responsibility of representing the public’s interest and maintaining their trust in financial conduct through creating a fair, safe and stable financial system.

The enforcement of the new framework under MIFID II and MIFIR will mean that firms outside the European Economic Area (EEA) can administer cross-border services from outside the EU to firms within the EU without needing the power to make legal decisions, on the condition that the regulatory regime of the other state is equal and that some reciprocity exists.

He concludes his speech with the point that people should not be under the impression that Brexit means the end to open financial markets or that it will restrict free trade. His priority is to drive good financial conduct across the industry which includes the upkeep of the integrity of markets, the fair treatment of customers and ensuring effective competition. Mr Bailey strongly emphasises that these will continue both before and after Brexit.

FCA Publishes Annual Report and Accounts 2016/17

The FCA has published its Annual report and accounts  which takes into consideration of how it has performed against the measures set out in its 2016/17 Business Plan. The regulator’s annual public meeting is to be held on 18th July, where key figures from the FCA will be discussed the report.

Yearly overview

To ensure the markets work well for consumers and provide fair outcomes, the FCA has implemented the following throughout the period of 2016/17:

  • Issued new rules which general insurance must meet at renewal, to encourage consumers to shop around;
  • Published final guidance for life insurance firms to make sure they treat closed book customers fairly;
  • Published a call for input to gather evidence for its work on high cost credit, including a review of the payday loan price gap;
  • Investigated consumer protection issues arising from poor transparency;
  • In terms of capping extra pension charges, the FCA has capped extra charges at 1% for personal pensions that commenced before 31st March 2017. There is a restriction on firms charging extra fees after this date;
  • A key element of the FCA’s 2016/17 business plan, and working towards its objective of making markets work well for consumers, is securing redress when things go wrong. The FCA has also introduced a deadline for PPI complaints to encourage consumers to take action;
  • To ensure the fair treatment of business customers, the FCA commissioned a skilled person report into a leading UK bank in September 2016, to investigate the alleged poor treatment of SMEs.


The UK’s decision to leave the EU has a number of implications for the financial services sector. The FCA has a duty to provide technical advice and government support to implement any withdrawal negotiations and any changes to regulatory legislation.

The FCA has commenced work with the Treasury to help provide financial input on the work around the Great Repeal Bill and to analyse each piece of EU legislation prior to the UK’s exit from the EU.

Key measures under the FCA’s statutory objectives

In its 2016/17 Business Plan the FCA proposed key initiatives around its three statutory objectives:

  • Securing an appropriate degree of consumer protection;
  • Protecting and enhancing the integrity of the UK financial system;
  • Promoting effective competition in the interests of consumers.

Securing an appropriate degree of consumer protection

When asked about satisfaction in the UK financial services sector, 69-90% of adults over the age of 18 claimed they were satisfied with the service they received. However, in terms of complaints only 45% of people were moderately to completely satisfied with how firms handle complaints, hence the FCA will monitoring its complaints handling rule changes over the period of 2017/18.

The survey results also demonstrated that the occurrence of fraud across the market has risen across banking, credit and insurance fraud, something the FCA is currently addressing through its smart scam campaign, designed to educate consumers and help prevent fraud from occurring. It believes its work around this campaign has helped to significantly reduce the amount of fraud in the financial services industry.

When asked about how satisfied consumers were with the effectiveness of the regulator, this score increased from 7.2/10 in 2016 to 7.5/10 this year.

To protect consumers in the mortgage sector, the FCA has developed a remediation framework to help with the calculation of contractual monthly instalments. Within the insurance sector the FCA has also conducted a thematic review of Appointed Representatives (AR’s) to ensure specific issues are identified and addressed around in this market. In April 2017, the FCA  introduced the LISA to help adults under 40 save for a deposit for a first home or towards their retirement. Over the past year the FCA has also introduced changes to pension rules accompanied with the auto-enrolment of workplace pensions and pension’s freedoms. In the advice market, the financial lives survey demonstrated 85% of adults who received advice were moderately or completely satisfied with the advisor that they acquired.

Protecting the integrity of the UK financial system

To protect the integrity of the UK financial system the FCA is reviewing its approach to open ended funds and will be producing a discussion paper on its findings later this year. In addition, research into the wholesale financial markets indicated that 88% of wholesale firms thought the FCA enhanced the representation of the UK financial centre.

The FCA’s introduction of the smart scam website, containing information to make the public more aware of scams and related activities, showed an increase in visits over the period of 2016/17 increasing by 238% with an 89% increase in firms conducting investment checks against the warning list provided by the FCA.

In the annual review of remuneration policies and practices, firms demonstrated they were conducting significant work to implement appropriate culture and conduct practices this year.

To strengthen the UK’s financial system, the FCA and Prudential Regulation Authority (PRA) have prompted banks to ring fence their retail services from the rest of the banking group. In addition to helping firms raise finance in terms of providing equal access to IPO, the FCA published a consultation paper in March 2017 outlining policy measures with the aim of improving the quality and range of information available to investors during the IPO process.

To investigate whether firms treated customers fairly and provided sufficient information on the impact of volatility involving illiquid assets, the FCA published a discussion paper to gather feedback on any problems related to open ended funds.

The FCA has published four consultation papers in the build up to the implementation of MiFID II, in January 2018, to educate the industry and associated firms. It also opened its authorisation process in January 2017 time for firms to apply before the regulation comes into action next year.

Promoting effective competition in the interest of consumers

Over the past year the FCA has conducted a number of market studies around areas such as:

  • Credit cards
  • Investment and corporate banking
  • Asset Management
  • General insurance add ons
  • Mortgage

In light of these studies the FCA has:

  • Published a consultation paper outlining new rules to help with the issue of credit card debt, with the final policy statement expected later this year;
  • Produced a final report around the universal banking model of cross-selling and cross-subsidation from lending and corporate broking services to ensure the market works well;
  • Produced its final report on the asset management sector;
  • Following a market study, the FCA is looking at running a pilot to publish insurance value measures;
  • Conducted an investigation into whether available tools help consumers make decisions regarding their mortgages and whether commercial arrangements lead to conflicts of interest.

The FCA also introduced the regulatory sandbox over the past year to help firms test products and services before they bring them to market and to encourage competition. Of the firms that took part, 73% claimed their experience was either good or excellent and 17 firms from the hub have become fully authorised.

How the FCA regulates

The FCA ensures it has good principles to drive positive regulation around:

  • Efficiency and the economy;
  • Proportionality;
  • Sustainable growth;
  • Responsibility of consumers;
  • Responsibility of senior management, complying with the regulatory framework;
  • Recognising the differences in businesses conducted by different regulated persons;
  • Openness and disclosure;
  • Transparency.

The FCA includes a compatibility statement within all its consultation papers to explain the proposals and the relation to its main principles. To ensure markets work well for consumers, the FCA uses its policy-making powers to deliver and promote frameworks which support its objectives by prioritising its activities in the areas most applicable, devise new rules and guidance relevant to specific problems, review its rules and influence the European and international agendas and schedules.

Supervision of firms

In terms of the supervision of firms and the interest of consumers, the FCA aims to minimise any conduct risks before they become a harm to customers or their markets. To supervise firms the FCA uses a model built upon three pillars:

  • Pillar I – Proactive approach which includes the supervision of firms and groups that are the most important in a sector
  • Pillar II – Reactive supervision centred around dealing with crystallised or crystallising risks
  • Pillar III – A thematic approach where the FCA concentrates on risks and issues across the sector

John-Griffith Jones, Chairman of the FCA commented on the progress of the FCA over the past four years and the work of Andrew Bailey joining the FCA this year has developed its mission, supported its sector views and a vast programme of work. He comments on the difficulty of measuring the effectiveness as a regulator but states with time these themes will become more identifiable as its work as a regulator continuously improves.

Latest Insights

This week in regulation

The FCA releases new data on the sterling flash crash of 2016 and comments on its approach to competition and innovation. This and more in our weekly roundup...

Find out more about our unique RegTech solution at