This week in regulation


The speed read

  • Raising conduct standards for claims management firms
  • FCA requests details of firms’ preparations for life after LIBOR
  • Speech: The regulator’s view on pensions
  • Individual sentenced to 11 years’ imprisonment for investment fraud
  • FCA bans former trader
  • FCA outlines approach to final Regulatory Technical Standards under PSD2

Raising conduct standards for claims management companies

The FCA has announced that from December 2019, claims management companies (CMCs) will be subject to the Senior Managers & Certification Regime (SM&CR).

In consultation paper CP18/26, the regulator outlined its approach to applying SM&CR to CMCs in order to reduce consumer harm and address evidence of poor governance arrangements within firms.

The Senior Managers Regime

A small number of senior roles within CMCs will be designated Senior Management Functions (SMF) and will be subject to FCA approval and the Duty of Responsibility. Firms will also be required to maintain an up to date Statement of Responsibility for each SMF.

Certification Regime

Those not classed as SMFs, but whose actions could have a significant impact on customers and the firm will be subject to the certification regime. Firms will be required to identify employees who fall under this definition and assess whether they are fit and proper to perform their role.

The FCA is also proposing to include CMCs in the Directory of all Certification staff, SMFs and directors who aren’t Senior Managers.

Fit and Proper Rules

At least annually, CMCs will be required to assess whether individuals performing SMFs and certified functions are fit and proper to perform their roles and will be required to document this process.

Conduct rules

The conduct rules will apply to nearly every employee within a CMC and are designed to improve conduct standards and behaviour across the industry.


FCA and PRA request details of firms’ preparations for life after LIBOR

The FCA and PRA have issued a joint ‘Dear CEO’ letter to CEOs of major banks and insurers requesting details of their preparations and plans to manage the transition from LIBOR to alternative rate benchmarks.

Both regulators are seeking assurance that firms’ senior management fully understand the risks associated with the transition to alternative rate benchmarks and have appropriate plans in place to mitigate them.

The first wave of letters have been sent to the largest UK banks and insurers, requesting a Board-approved assessment of the risks of LIBOR discontinuation, the plans in place to mitigate these risks and the Senior Manager responsible for oversight and implementation of the transition. The FCA and PRA have also encouraged firms which rely on LIBOR, but have not received communication from the Supervision team, to reflect on this issue.


The regulator’s view on pensions

The FCA’s Andrew Bailey recently delivered a speech at Gleneagles which provided attendees with greater insight into the regulator’s views of the pensions market. We bring you the highlights.

Mr Bailey began his speech by discussing the lifetime saving model and how, despite recent changes, it remains the most appropriate model for considering the challenges facing the pension industry.

The FCA’s Financial Lives survey shows that indebtedness among the younger age brackets has increased, while pension contributions have decreased. An estimated 15 million adults in the UK are not currently paying into any form of pension.

One issue linked to the changing market is whether the options offered by the pension freedoms are still appropriate. Andrew Bailey believes they are, supported by the expansion of the scope and scale of auto-enrolment. However, the regulator and industry must also be alert to the consequences of shifting responsibility for this complex financial decision onto individuals, so the right levels of support need to be available.

The pension reforms provided the FCA with the opportunity to review the entire retirement income market, first through the Retirement Income Market Study, then through its Retirement Outcomes Review. Both reviews took place against a backdrop of changing consumer behaviour, but some patterns emerged:

  • Overall, there is a strong growth in the purchase of drawdown products and reduced annuity sales;
  • Research suggests that a third of individuals have no knowledge of how their pension is invested;
  • Research has concluded that consumers have generally welcomed the ability to take their pensions flexibly;
  • There is limited evidence to suggest that consumers are accessing their pension benefits at an unsustainable rate; and
  • The FCA expects levels of engagement to increase as pot size grows.

The FCA is concerned that some providers are defaulting consumers into cash, or cash-like assets as research shows that just over 30% of non-advised drawdown consumers are only holding cash deposits. As a result, consumers may be losing out on greater levels of income throughout their retirement. This is partly being driven by a lack of engagement, understanding and trust in the pensions industry.

Recent research conducted by the regulator suggests that offering a more structured set of options can improve outcomes for consumers. The market is still in the process of adjusting to the arrival of the pension freedoms and, although there has been limited innovation so far, the incentives to innovate are expected to increase as the average pot size grows. The FCA intends to allow the market to develop further before considering any action to promote innovation.

As a result of the FCA’s investigation into the market, a number of remedies have been proposed. The regulator isn’t yet in a position to consult on these measures as further investigation is required, but Andrew Bailey outlined three potential solutions:

  • The creation of three pathways for consumers with straightforward needs, who may become lost in the complexity of the landscape. This would need to be balanced with the danger of these pathways becoming a ‘three sizes fits all’ solution;
  • Measures to stop firms from defaulting drawdown customers into cash and increasing the transparency around drawdown features. On the annuity side, the FCA is also considering extending existing information prompts to cover enhanced annuities; and
  • Whether there is a need for a charge cap. Currently, Andrew Bailey isn’t convinced this is necessary, but the option will never be completely ruled out. The regulator intends to review charges as they evolve and if issues are uncovered, a cap may be considered as an appropriate response.

On a final note, Mr Bailey highlighted that the FCA and TPR are committed to publishing a joint pensions strategy which will outline the regulators’ priorities over the next five to ten years and a joint view on the risks facing consumers.


Individual sentenced to 11 years’ imprisonment for investment fraud  

The main instigator and benefactor of a large scale investment fraud involving multiple boiler room companies has been sentenced to 11 years’ imprisonment following the FCA’s most complex fraud investigations to date.

The defendant also received an additional sentence of two years relating to a separate prosecution brought against him by the Crown Prosecution Service and the City of London Police, taking his total sentence to 13 years.

Five other individuals were sentenced earlier this month as part of the same investigation, taking the total imprisonment for all individuals to 28.5 years.


FCA bans former trader  

The FCA has banned a former trader from performing any function in relation to a regulated financial activity after he was found to lack the integrity, fitness and propriety to perform such a role.

The individual in question manipulated EURIBOR to benefit the trading positions he was responsible for and the profitability of the trading positions of other traders. He was sentenced to five years and four months imprisonment earlier this year and ordered to pay £2.5 million by way of a confiscation order.


FCA outlines approach to final Regulatory Technical Standards under PSD2

In consultation paper CP18/25, the FCA has outlined its proposed rules and guidance to implement the revised Payment Services Directive (PSD2) and reflect the new final Regulatory Technical Standards on security and the European Banking Authority’s new fraud reporting requirements.

While most of the PSD2 requirements came into force on 13th January 2018, additional rules will come into effect on 14th September 2019. These include rules to increase the security of payments, customer authentication and common and secure communication (SCA-RTS).

The proposed changes will enable the FCA to:

  • Exempt Account Servicing Payment Service Providers (ASPSPs) from being required to build a contingency mechanism;
  • Receive information from Payment Services Providers (PSPs) in a standard, consistent format;
  • Ensure the Approach Document is aligned with EBA exemption guidelines and the latest PSD2 guidance; and
  • Ensure complaints reporting rules are extended to cover authorised push payment fraud.

In response to feedback from stakeholders, the FCA is consulting over a four-week period with the final response expected to be published in early 2019.

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