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MiFID obligations in a hard Brexit: This week in regulation

17/03/19

The speed read

  • Statement on the position of various MiFID obligations in the event of a hard Brexit
  • Reporting derivatives under the UK EMIR regime in the event of a no-deal Brexit
  • Driving competition improvements in the platforms market  
  • FCA announces final rules on the public Directory
  • FCA increases FOS award limit
  • Is it a wonderful life in retail banking?
  • Is time up for mandated disclosure?  
  • The role of the Office for Professional Body Anti-Money Laundering Supervision (OPBAS)
  • Retailer fined £29 million for insurance mis-selling

Statement on the position of various MiFID obligations in the event of a hard Brexit

In response to ESMA’s statement on the operation of various aspects of the MiFID regime in the event of a no-deal (‘hard’) Brexit, the FCA has set out its position on the following areas:

  • Post-trade transparency and position limits: UK trading venues will operate to the same standards on day one of leaving the EU.
  • Post-trade transparency for OTC transactions between UK firms and EU counterparties: UK investment firms that weren’t obliged to report on transactions will not be required to do so post-Brexit. Those EU27 firms with a UK branch within the UK temporary permissions regime can continue to fulfil their reporting obligations through EU APA.
  • Trading obligations for derivatives: The onshored MiFID and binding technical standards (BTS) mean that the trading of certain derivatives can only take place on regulated markets, multi-lateral trading facilities or organised trading facilities.
  • Benchmarks: The FCA will be setting up a UK public register for benchmarks and administrators authorised in the UK.

 

Reporting derivatives under the UK EMIR regime in the event of a no-deal Brexit

In the event of a no-deal Brexit, UK counterparties will be required to report their derivative trades to FCA-recognised trade repositories (TRs), which TRs must then make available to UK authorities from exit day. The Bank of England will be responsible for supervising the UK EMIR reporting requirements for UK central counterparties (CCP), while the FCA holds responsibility for supervising all other counterparties.

All firms that enter into a derivative contract will be in scope of the UK EMIR regime once the UK leaves the EU. However, the following information will not be reported:

  • Transactions by EU27 counterparties traded on a UK trading venue
  • Transactions by EU27 counterparties conducted in GBP
  • Transactions by EU27 counterparties where the reference entity is located in the UK or the reference obligation is UK sovereign debt.

The UK regime will not require TRs to undertake inter-TR reconciliation, or report on inter-TR reconciliation statistics.

 

Driving competition improvements in the platforms market  

The FCA has published its proposals to improve competition and help consumers find and switch investment platforms to one that meets their needs more easily. The regulator’s recent market study sought to understand how investment platforms compete to win new business and retain existing customers. It found that competition was generally working well, but some consumers and advisers can find it difficult to switch due to the time, complexity and costs involved.

To make transfers simpler, the FCA is proposing to:

  • Make platforms offer ‘in-specie’ transfers for units common to both platforms and request a conversion of unit class where this is necessary for such a transfer to take place
  • Offer consumers who are transferring out of the platform the option to convert to discounted units, where available.

The consultation paper also includes a discussion on the scope of potential remedies to address concerns around exit fees after concluding that a ban on platform exit fees is likely to be appropriate to reduce consumer harm. The FCA believes that any exit fee remedy should apply to both platforms and firms that offer similar retail distribution services and is inviting comments from a wider scope of firms to ensure any measures are appropriate.

The regulator is seeking industry feedback in three areas:

  • How an exit fee should be defined
  • The scope of the interventions
  • Whether it would be most appropriate to ban exit fees or implement a charge cap.

 

FCA announces final rules on the public Directory

The FCA has announced the final rules on establishing its upcoming public register, known as the Directory. The Directory will contain information on certain individuals that work in financial services and will be publicly available, with a new, easy-to-use interface. The Financial Services Register will continue to be maintained and will contain details of those approved by the FCA under the SM&CR.

The Directory will contain information on:

  • All certified staff
  • Non-executive and executive directors who are not perform a Senior Manager Function
  • Sole traders and appointed representatives (ARs) who are client-facing and require a qualification to perform their role.

The Directory will enable consumers to verify the identity and professional standing of those they are looking to engage with, help firms cross-check references and make it harder for unsuitable individuals to operate within the UK financial services markets. It will also help the FCA and other authorities to monitor the market and build intelligence.

Banks and insurers can begin submitting information to the Directory from September 2019, with access for other firms following in December 2019. The Directory is due to go live in March next year.

 

FCA increases FOS award limit

The FCA will soon increase the amount financial services firms could be required to compensate consumers by, via the Financial Ombudsman Service (FOS). From the 1st April 2019 the limit will rise from £150,000 to £350,000 for complaints made about firms from that date. For complaints made before 1st April, the limit will rise slightly to £160,000.

The limit will be adjusted each year in line with inflation. This comes into force at the same time as the extension of FOS access to larger SMEs with a turnover of £6.5 million or less, which amounts to 210,000 businesses.

 

Is it a wonderful life in retail banking?

Charles Randell, Chair of the FCA, recently gave a speech about the future of cash within the retail banking sector.

He opened his speech by recounting his recent trip to Burslem, the first town of its size to have no bank branches or free-to-use ATMs within its limits. It’s a town with its own economic challenges and a large cash ecosystem, despite the limited availability of cash, but this situation is pushing the cost of using cash up for those who are least able to afford it.

Although figures show that the use of cash is declining, consumers are interacting with their money more than ever. However, this risks leaving the most vulnerable behind.

There is no universal service obligation for cash or banking, but the voluntary Access to Banking code does outline the recommended process for community consultation around branch closures. There are also strong guidelines to protect ATM access.

In light of these issues, Natalie Ceeney’s Access to Cash review is welcome. Her analysis estimates that it costs £2 billion a year to maintain the cash network. Even if greater efficiencies can be introduced, the network will face significant pressure as the instances of cash usage declines and cost per transaction rises.

The declining use of cash is not a stand-alone issue, it is part of a broader debate into financial inclusion and the future of commodities in a digital age. The discussion needs to be around not only who should pay for the cash system but how governments and regulators can support people as they adapt to a world without cash. The time to have these conversations is now as we don’t know how quickly cash usage will continue to decline.

Mr Randell’s speech coincides with the publication of FCA analysis on the realities and impact of bank branch closures.

 

Is time up for mandated disclosure?  

Professor Lauren Willis argues that mandated disclosure should be scrapped as there are better ways to keep consumers informed, in the latest from FCA Insights.

There is currently widespread customer confusion about the nature of the complex financial transactions they are engaging in and for all the disclosure testing that goes on, the increase in disclosure is not resulting in improved understanding.

Professor Willis argues that instead of more disclosure, there needs to be a policy tool that combines the interests of firms and the goals of the regulator. Firms should be required to demonstrate, via independent assessment, that a good proportion of their customers understand the key costs, benefits and risks of the products and services provided. This should be assessed against ‘customer confusion caps’, the maximum limit for a lack of customer understanding.

There are already examples of customer confusion caps in force in the US, including to prove false advertising and trademark infringement and in cases of deceptive or abusive practices.

Well-functioning markets depend on consumers understanding the products and services available in order to determine the most appropriate one for their needs. Without this, competition often takes over, which can result in firms confusing customers into making a purchase.

 

The role of the Office for Professional Body Anti-Money Laundering Supervision (OPBAS)

Alison Barker, the FCA’s Director of Specialist Supervision, recently gave a speech outlining the findings of the OPBAS’ first-year review of the 22 professional bodies it supervises.

The report shows variable finds, with two key issues across the bodies it supervises: poor standards of supervision and a lack of intelligence sharing.

Many of the professional bodies could not demonstrate a clear understanding of their obligations as an anti-money laundering supervisor and the review highlighted that 90% did not have a fully developed risk-based approach or collect the necessary data to facilitate this. There was also evidence of inadequate enforcement, with only 50% of professional bodies issuing fines for AML failings in 2018. The OPBAS finds this hard to believe, given the high-risk activities undertaken by the professions those bodies oversee. Feedback highlighted that professional bodies believed their members would leave if enforcement standards were tightened.

Because of the reluctance to enforce these requirements, there has been limited information sharing. According to data collected in February 2018, only 40% of professional body supervisors were members of the main intelligence sharing networks. This has gradually increased but is still not high enough and doesn’t necessarily mean that information is actually being shared.

In all but two of the professional bodies, whistleblowing procedures were inadequate, with 56% having no whistleblowing policy in place.

To ensure professional bodies maintain a consistently high standard of supervision, the OPBAS wants to see:

  • Risk-based supervision of the professions
  • Properly resourced supervisory activity
  • Leadership from the top
  • Robust enforcement activity
  • Greater recognition of the risk that member firms could be vulnerable to facilitating money laundering.

 

Retailer fined £29 million for insurance mis-selling

The FCA has fined a mobile phone retailer £29 million for mis-selling a mobile phone insurance and technical support product.

The issues came to light following whistleblowing reports, which highlighted that advisers were trained to persuade consumers to purchase the product by highlighting its features and benefits, rather than assess whether the product was suitable. This led to a high cancellation rate, which is a clear risk indicator for mis-selling. In January 2014, 35% of policies were cancelled within the first three months.

Customer complaints weren’t properly investigated or fairly upheld, leading to valid complaints being dismissed despite the product being mis-sold.

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