This Week in Regulation


The Speed Read:

  • FCA issues feedback statement on Distributed Ledger Technology (DLT)
  • FCA statement on ESMA’s consideration of interventions in retail CFD products
  • EBA guidelines on handling operational and security risks under PSD2
  • FCA takes action to stop unlawful Forex investment scheme
  • FCA responds to ESMA statement on LEIs
  • FCA statement on EU negotiations
  • Three sentenced in relation to £1.4million investment scheme
  • European Commission announces plans to delay IDD implementation

FCA Issues Feedback on Development of Distributed Ledger Technology (DLT)

The FCA has published a feedback statement on its consultation paper on the potential future use of DLT within FCA-regulated financial markets and the regulatory approach required to support it.

Although DLT was initially used to underpin the development of Bitcoin, the FCA’s focus within the consultation paper was more broadly on how DLT could develop within financial services and the regulatory implications this may have.

The FCA’s ‘technology-neutral’ approach received support from consultation paper respondents and the feedback didn’t highlight the need for any changes to existing rules, suggesting that the current regime is flexible enough to accommodate developments within the DLT arena. Respondents also suggested that DLT solutions could help firms and regulators meet obligations more effectively.

The feedback statement also highlighted a number of concerns, including whether permissionless networks are compatible with the regulatory regime. The FCA has said it’s open to all forms of DLT deployment and it will work collaboratively with relevant bodies to ensure a co-ordinated approach.

The FCA also committed to conduct a deeper examination of the Initial Coin Offering (ICO) market to determine whether further intervention is needed, beyond the consumer warning issued in September 2017.


FCA Statement on ESMA’s Consideration of Interventions in Retail CFD Products

The European Securities and Markets Authority (ESMA) has recently outlined its work around the provision of contracts for difference (CFD) to retail clients. The European regulator is considering intervening in this market to address risks to consumer protection, including using its powers to:

  • Prohibit the marketing, distribution or sale of binary options to retail investors;
  • Prohibit the marketing, distribution or sale of CFDs, including rolling spot forex, to retail investors.

A public consultation on this issue will follow in January 2018. The FCA supports ESMA’s proposals, with its own product intervention work in this area still ongoing.


EBA Guidelines on Handling Operational and Security Risks under PSD2

The European Banking Authority (EBA) has published final guidelines to ensure Payment Service Providers (PSPs) have appropriate security measures in place to mitigate operational and security risks under the revised Payment Services Directive (PSD2).

PSPs are expected to comply with these guidelines from 13th January 2018 and the FCA will consult on its approach to incorporating the guidelines into its regulatory regime, including its expectations around PSPs future reporting requirements, in 2018.


FCA Takes Action to Stop Unlawful Forex Investment Scheme

The High Court has make orders against a number of individuals involved in an unauthorised foreign exchange (Forex) investment scheme following an application by the FCA. The scheme in question took at least £1.2 million from 65 investors but none of this money was invested or used in foreign exchange trading.

The individuals involved were found to have unlawfully promoted and operated a managed foreign exchange trading facility between December 2014 and November 2015. The court issued injunctions to prevent further unauthorised activity and continued a freezing injunction against the defendants. A restitution order, for the sum of £1,203,298.41, has also been made to cover the losses suffered by investors, however there is likely to be a shortfall in the amount investors can recover.


FCA Responds to ESMA Statement on LEIs

ESMA has outlined a temporary process for Legal Entity Identifiers (LEIs) for clients that are legal persons and LEIs for issuers. This process will be in place for six months, from the 3rd January 2018 and will require the FCA to temporarily amend a validation rule within its Market Data Processor (MDP).

The FCA has announced that this change will be made as soon as possible, but it will not be in place in time for MiFID II implementation, on the 3rd January. The regulator will continue to communicate with affected firms and Approved Reporting Mechanisms (ARMs) and, until then, firms shouldn’t submit reports that wouldn’t normally pass the existing validation.

On the subject of LEIs for issuers, the ESMA statement allows venues to use their own LEI in place of any missing non-EEU issuer LEI for the first six months. However, the FCA reiterated its expectations that venues continue their efforts to populate missing LEI data.


FCA Statement on EU Negotiations

In mid-December, the European Council announced that enough progress had been made in negotiations for the UK’s withdrawal from Europe to move to the second stage, relating to the transition and framework for the future relationship between the UK and EU.

While the final details are still some way off, it is anticipated that firms will be able to passport between the UK and EEA during the implementation period, which the regulator welcomes. HM Treasury has also announced that the Government will legislate for a temporary permissions regime, if necessary, to enable relevant organisations to fulfil their contractual obligations and undertake new business within the scope of their permissions.

UK firms, solely regulated by the FCA, will need to inform the regulator if they wish to benefit from the regime, but won’t be required to submit an application for authorisation.


Three Sentenced in Relation to £1.4million Investment Scheme  

Three individuals have been sentenced for their roles in an investment scheme which led to investors losing more than £1.4 million.

Two individuals, who are already serving custodial sentences for their roles in a separate investment scheme, were sentenced to 15 months’ imprisonment and 9 months’ imprisonment and both have been disqualified from holding directorships for 10 years. The third individual was sentenced to 15 months’ imprisonment and disqualified as a director for eight years.

The final defendant, described by the judge as ‘the prime mover’ in the scheme, had their sentencing adjourned. This will now take place in late January 2018.


European Commission Announces Plans to Delay IDD Implementation

The European Commission (EC) has published proposals to push back the implementation of the Insurance Distribution Directive to 1st October 2018 at the request of European Parliament and Member States.

Under these plans, Member States will still be obliged to transpose the directive into national law by the original date (23rd February 2018), however, firms will have until the 1st October to comply with the requirements. In order for these proposals to go ahead, the European Parliament and Council will need to confirm the new application date under an accelerated legislative process.


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