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This Week in Regulation

31/07/17

FCA Publishes 2nd Consultation Paper on Insurance Distribution Directive Implementation

The FCA has recently published further proposals on its approach to the implementation of the Insurance Distribution Directive (IDD). The IDD aims to enhance consumer protection and competition in the insurance market.

Proposals cover:

  • Application of the requirements of the IDD, including the conduct of business and information provision, for life insurance firms;
  • Proposed changes to COBS to extend IDD requirements regarding information disclosures to insurance-based investment products (IBIPs);
  • Implementation of the IDD requirements for life and non-investment insurance business, including product oversight and governance, and the management of conflicts of interest;
  • Implementation of organisational requirements relating to the protection of customers’ money, and professional requirements relating to the good repute of employees of insurance distributors.

The FCA is inviting feedback on the proposals, with the consultation closing on 20th October 2017. The FCA hopes to publish a Policy Statement in December 2017.

FCA Launches Consultation on the Office for Professional Body AML Supervision

The Office for Professional Body AML Supervision (OPBAS) will be a new function within the FCA, with the regulator responsible for reviewing the quality of AML supervision carried out by professional body supervisors. The FCA is now consulting on proposed text for a specialist sourcebook for professional body supervisors, which will set out expectations around anti-money laundering (AML) supervision.

OPBAS is due to be operational by early 2018 and will adopt a risk-based approach, working to develop a sound understanding of the different bodies and sectors it supervises, and working closely with other overseeing bodies to avoid supervisory conflicts.

Convicted Insider Dealer Faces Confiscation Order Totalling £350,000

The FCA has secured a confiscation order for the sum of £350,000 against a former equities trader who was sentenced to two years imprisonment in 2016 after pleading guilty to nine counts of insider trading.

The offences were committed over a nine year period during which the individual received inside information about anticipated public announcements of mergers and acquisitions, and used this information to place trades in the benefit of himself and his close family.

The order must be paid within three months or the individual will face a further three years in prison. The FCA believes the confiscation order sends a clear message that insider dealers are increasingly likely to be caught and will be held fully accountable.

FCA Proposals for Current Account Providers to Publish Service Information

The FCA has launched a consultation around new rules for current account providers, designed to help customers compare the service levels available for both personal and business current accounts.

The proposals are part of a wider effort to encourage consumers to consider their banking arrangements and stimulate effective competition in the market, following recommendations made by the Competition and Markets Authority (CMA)

The new rules will require firms to publish meaningful and comparable service metrics, including:

  • Timescales involved in opening an account, with all additional features up and running;
  • Time taken to replace a lost or stolen debit card and to organise third party access;
  • Availability of services, including whether 24-hour help is available for certain matters;
  • The number and type of major operational incidents.

The consultation closes on 25th September 2017.

MiFID II: Late Applications

The FCA has urged any firms who have not yet submitted complete applications for authorisations or variations of permissions to do so as soon as possible.

MiFID II is due to be take effect from 3rd January 2018, and firms will only be able to carry on activities that require authorisation under MiFID II if they have the required permissions to do so. In order to ensure the necessary permissions are in place before that time, firms needed to have submitted a complete application to the FCA by 3rd July 2017. Going forwards, any complete application received will be determined within six months. However, it cannot be guaranteed that it will be determined before MiFID II implementation, and such firms need to have contingency plans in place.

Banking Group to Establish Redress Scheme for Mortgage Arrears Customers

An agreement has been reached between the FCA and a large UK banking group to set up a redress scheme for mortgage customers who incurred fees after they fell behind with their mortgage payments, after it was found that the bank in question had failed to fully consider the customer’s circumstances when determining the affordability of their payment plans.

The scheme intends to:

  • Refund all fees charged to customers for arrears management and broken payment arrangements;
  • Offer compensation for potential distress, inconvenience and consequential loss;
  • Refund the accrued interest on all feeds up to the remediation date or the date when the fees were paid;
  • Pay an additional 8% interest for customers deprived of funds.

Speech: the Future of LIBOR

Andrew Bailey, Chief Executive of the FCA, recently delivered a speech covering the future of LIBOR and recent developments in this area, including the early stages of planning the transition to alternative reference rates that are based firmly on transactions.

With so many contracts relying on reference to LIBOR rates to determine payments, the sudden collapse of LIBOR would cause significant market disruption. Over recent years, there have been improvements made to LIBOR to strengthen its robustness, such as:

  • Establishment of an oversight committee to provide challenge on how the benchmark is operated;
  • Significant investment from firms in their controls around submissions;
  • Launch of a consultation into how the FCA could use its powers, if necessary, to support the LIBOR market once LIBOR is designated as a critical benchmark under the European Benchmark Regulation;
  • Attempts to anchor submission and rates to the greatest extent possible to actual transactions;

However, attempts to tie submissions and rates to actual market conditions has been difficult, primarily due to the absence of an active underlying market for unsecured wholesale term lending to banks, which LIBOR benchmarks are based upon, and the reluctance of panel banks to supply judgements as a result of this.

There are certainly many questions around whether LIBOR remains an appropriate and useful benchmark, not least due to the greater vulnerability to manipulation inherent in any scenario where market participants rely on reference rates that do not have active underlying markets, and the overall drop in banks funding themselves through term wholesale unsecured money markets.

What are the alternatives?

The transition away from LIBOR would take time, potentially several years, due to the risks involved for market participants that heavily depend on LIBOR and the difficulties in amending contractual terms across all legacy contract holders. However, there has already been some discussion around preferred alternative reference rates:

  • The Risk Free Rate Working Group in the UK proposed SONIA;
  • The Alternative Reference Rates Committed in the UK selected a broad Treasuries repo rate as an alternative;
  • The euro’s EONIA, Swiss SARON and Japan’s TONAR all benefit from being anchored in overnight markets.

Panel banks have agreed voluntarily to sustain LIBOR until 2021, which gives enough time for market participants to develop transition plans. Post-2021, the continuation of LIBOR would not be guaranteed by the FCA and would rely on the willingness of the benchmark’s administrator and the panel banks. The fate of legacy contracts still referencing LIBOR by the end of 2021 depends on the actions of panel banks and the contingency plans put in place by users should LIBOR cease publication. The FCA believes markets cannot rely on LIBOR indefinitely, and is keen for work to begin in earnest on planning transition to alternative reference rates to ensure smooth execution.

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