This Week in Regulation


MiFID II: Authorisation and Variation of Permissions

The FCA recently provided an update on the progress of applications received from firms which require new authorisation or a Variation of Permission (VoP) after MiFID II takes effect on 3rd January 2018.

As MiFID II will widen the scope of the existing MiFID legislation to include firms that were not previously captured, there are some firms which will need to seek new authorisations or a VoP. Good progress has been made on applications received before 3rd July 2017, primarily from firms seeking to operate a trade venue or becomes a Data Reporting Services Provider (DRSP).

The FCA has urged firms that have not yet applied, or have been notified that their submitted application is incomplete, to take action as soon as possible to submit a complete application. This includes unregulated proprietary traders who use a form of direct electronic access provided by a regulated firm to access trading venues. Firms who are unsure whether they need new permissions should take legal guidance, consult with compliance professionals or consult the FCA’s application and notification user guide.

Firms also need to establish contingency plans in the event that new permissions are not in place by 3rd January 2018.


FCA Finalises Revised Payment Services Directive (PSD2) Requirements

The FCA recently published its finalised approach to implementing the revised Payment Services Directive (PSD2), which takes effect from 13th January 2018.

PSD2 sets out requirements for firms that provide payment services and aims to improve consumer protection, increase safety and security and decrease the costs of payment services. It also introduces new requirements around complaints handling procedures and the data that firms must report to the FCA.

Services brought into the FCA’s scope by PSD2 include:

  • Account aggregation services, which consolidate the bank account data of customers to help with the management of their personal finances;
  • Online payment services that allow customers to make payments without the use of a debit or credit card.

It also requires existing payment and e-money institutions to be re-authorised or re-registered, for which applications will open on 13th October 2017.


FCA Publishes Findings from Ageing Population Project

The FCA has published the findings from its Ageing Population Project, which explored how older people use financial services and products, and how an ageing population could impact the Financial Services Industry. Finding include:

  • There is a risk of exclusion, poor customer outcomes and potential harm to older people;
  • Policies and controls are not always designed around consumer needs, which consequently impacts on product and service design;
  • Older consumers are more likely than any other group to experience vulnerability;

The Discussion Paper outlines the FCA’s strategy to:

  • Help firms better identify and understand the needs and preferences of older consumers;
  • Help create an environment that delivers good outcomes for older consumers;
  • Challenge financial exclusion;
  • Encourage firms to consider the potential issues posed by demographic change and ensure they are able to recognise the potential vulnerabilities older consumers may experience.


FCA and Hong Kong Insurance Authority Sign Co-operation Agreement

The FCA and the Hong Kong Insurance Authority (IA) have entered into a co-operation agreement to support Fintech innovation.

The FCA already has similar agreements with the Hong Kong Monetary Authority and the Securities and Futures Commissions, with the aim of sharing information on innovative firms and supporting firms seeking to enter the counterpart’s market.


CMA Publishes ToR for Insurance Consultancy Services Market Investigation

The FCA recently referred the insurance consultancy market to the Competition and Market’s Authority (CMA) for investigation. The CMA has now published the terms of reference for investigation.

Demand side and information issues

The FCA’s market study found that switching rates appeared to be low, and that customers find it difficult to assess the quality of consultants’ advice, which could be having a detrimental effect on competition. The CMA will seek to understand:

  • Customer characteristics, in particular the types of trustees, the schemes they oversee and their use of investment consultants;
  • Trustee/ employer engagement and how they engage with investment consultants when shopping around, tendering and monitoring their advice or services (including fees) on an ongoing basis;
  • Clarity and comparability of information on fees and performance;
  • Barriers to switching, such as high switching costs;
  • Trustee/ employer capabilities and incentives;
  • The complexity of the investment strategies that consultants recommend to clients, and whether they are necessary and appropriate;
  • Impact of demand-side issues on outcomes.

Conflicts of interest

The FCA expressed concerns about potential conflicts of interest and how they are effectively managed by investment consultants. The CMA will investigate:

  • Instances of investment consultants moving clients into in-house products even if there are better products elsewhere, and whether trustees can effectively scrutinise these recommendations;
  • Outside business relationships, in particular with the asset management industry;
  • Gifts and hospitality.

Barriers to entry and expansion

Entry and expansion can disrupt the market dominated by incumbents, and promote efficiency and innovation. Although the FCA did not find barriers to entry to be unnecessarily high, expansion in the industry was found to be difficult for smaller firms. The CMA will consider:

  • Potential demand-side issues;
  • The number, size and characteristics of existing suppliers in the market;
  • The initial set-up costs, expansion costs, regulatory barriers and brand/recognition factors;
  • Whether larger firms have any particular advantages over smaller firms in terms of their offering.

The CMA is seeking views on a number of remedies, which will need to be received before June 2018, before the Provisional Decision Report.


Speech: Trends in the FCA’s Enforcement

Mark Steward, Director of Enforcement and Market Oversight at the FCA, recently delivered a speech on recent trends in FCA enforcement in the wholesale markets and how MiFID II is impacting the logistics of enforcement.

There has been approximately a 75% increase in the number of FCA investigations in the past year. This is primarily due to changes under the Market Abuse Regime (MAR) that have significantly extended the scope of the reporting regime, therefore increasing the number of suspicious transactions reported and providing a richer and more varied market picture following action taken against poor disclosure practices.

Inevitably, MiFID II will lead to a further increase as even more data will be captured through the introduction of legal entity identifiers. This enables the FCA to have a broad view of the market, increase the speed and efficiency with which they make assessments, and better understand the markets they oversee.

The starting point of investigations is also a contributing factor to the increase in the number of investigations. There is a very low threshold for starting an investigation, giving the FCA the power to act when there are concerns of serious misconduct but a lack of hard evidence. However, the FCA aims to work reasonably and proportionately. Historically, investigations may not have been started if the ‘prospects of success’ were low, i.e. that the investigation would not lead to successful enforcement action, however this approach has since been reconsidered. The FCA’s approach is now to act as quickly as possible when serious misconduct is suspected.

In terms of the enforcement of MiFID II, the FCA have urged firms that need new authorisations or variations of permissions to act as soon as possible. As always, the regulator intends to act proportionately, so enforcement action will not be taking against firms for not meeting all the requirements immediately, as long as they can evidence that they have taken sufficient steps in an attempt to meet the new obligations by the 3rd January 2018.


Speech: Culture and Conduct – Extending the Accountability Regime

Jonathan Davidson, Director of Supervision – Retail and Authorisations at the FCA, recently delivered a speech on the FCA’s expectations around culture, why an ethical culture is key to both business and industry success, and the different factors involved in maintaining good culture.

The financial crisis was as much a conduct crisis as it was a prudential one. Therefore, in an effort to be forward looking, the FCA has identified the root causes of the crisis that continually need to be addressed: the strategy and business model of firms, and their internal culture.

In terms of strategies and business models, the FCA’s work centres on understanding how business models are evolving to anticipate emerging risks of harm. This is closely linked to the FCA’s focus on culture in that business models can create commercial incentives for behaviours that lead to poor customer outcomes.

The FCA assesses how effectively a firm is managing their culture through four key levers:

  • Clear communication of ‘why’ certain policies and processes are in place, so that all employees understand the impact of their behaviours;
  • The ‘tone’ from senior management;
  • Formal governance processes and structure, policies and systems that encourage specific behaviours;
  • Remuneration and incentives practices that reward good conduct.

It has been shown that personal accountability in work can affect outcomes positively, therefore these key drivers of culture are all reinforced by the accountability regime. The accountability regime consistent of three major components:

  • The basic conduct rules of the regime applies to all employees and includes the requirement for firms to train all employees in how it applies to their role;
  • The Senior Managers Regime goes further to ensure the statement of responsibility for senior managers covers ultimate responsibility for the areas for which they are accountable. This reflects the crucial role senior managers play in decision-making and the implementation of cultural levers;
  • The certification rules are in place to ensure that people in positions that significantly affect conduct outcomes are fit and proper.

This does not necessarily mean that just because something goes wrong in your area of responsibility, you are automatically liable. The regulator will take into account whether you took reasonable steps to prevent a breach of conduct rules. This is part of a push to remove the fear of the regulator as a source of motivation for good conduct, as a truly ethical culture is ultimately more powerful than one based solely on superficial incentives, such as commercial pressures.

In addition, the benefits of an ethical culture extend beyond regulatory compliance to include greater employee engagement, better teamwork and more innovation. Ultimately, the extension of the regime is good for businesses.

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