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The Ellis Wilson round-up: recent Anglo-European regulatory issues

Jonathan Wilson, Ellis Wilson Ltd, Director, London, 31 August 2020

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In this edition we look at recently-released figures that predict the amounts that the Financial Conduct Authority will levy on the financial services industry, more standards for responsibility and accountability, implementation deadlines for the Certification Regime and Conduct Rules and other matters.

FCA levies 2020/21

As mentioned previously in consultative documents, the UK's Financial Conduct Authority wants to protect smaller firms so there will be no increase in the minimum fees that they have to pay.

Small-to-medium-sized firms will have their period for payment extended by 2 months to 90 days and larger firms will be expected to pay in the same way as usual. Most firms will have until the end of 2020 to pay. The FCA has also published details of the calculation of the FSCS levy.

Medium and smaller firms are those firms who pay total fees and levies in 2020/21 of less than £10,000. The FCA has also confirmed that it is proposing to review all application fees this year.

The SM&CR: responsibility and accountability

On 13 July the FCA launched its “enhanced” Financial Services Register with a new look and “improvements” made in response to feedback from users and testing by consumers. Firms ought to update any links that they have to pages on the current Financial Services Register, other than those to the homepage.

The FCA claims that the purpose of the redesign is to help consumers protect themselves from harm and will help consumers avoid scams and enable firms to cross-check references and make their key staff known to customers.

Key “enhancements” include clearer navigation and design, simpler language, more information on the register’s purpose, how to use it and how to avoid scams. Important information (including past actions against individuals and firms) is given more prominence. Jonathan Davidson, the executive director of supervision, retail and authorisations, said: 'These changes will make it easier for users to navigate and understand the Register.'

The new design concentrates on consumer use and consumer protection to the point of alarmism. The layout highlights firms' "Restrictions / suspensions" but includes here regular restrictions on permission such as the standard "BIPRU firm MiFID activity restriction" for the "placing of financial instruments without a firm commitment basis." The register draws blanket attention that FOS and the FSCS may be able to consider disputes and claims even for firms that are unlikely to have jurisdiction. Fair to the firm, clear and not misleading to the consumer? Hardly! A filter on firms that can deal with retail customer types (surely the FCA's "target market") would have been helpful.

An important omission is data on people who perform certification functions - those people (no longer approved by the regulator, remember) who interact with consumers and actually provide advice or make decisions about investments. As we say below, the FCA plans to extend the previous deadline of 9 December 2020 for solo-regulated firms (i.e. firms that only it - and not the PRA - regulates) to submit information about these "directory persons" to the register to 31 March 2021, because of Covid-19.   

As impenetrable as ever, the FCA has not done very well here in our opinion.

CP20/10

On 17 July, due to Covid-19, the FCA published CP20/10 on the subject of extending implementation deadlines for the Certification Regime and Conduct Rules. (Consultation closed on 14 August.) It wants to extend the deadlines for each of the following from 9 December 2020 to 31 March 2021:

  • the date by which firms ought to have assessed the fitness and propriety of their certified staff;
  • the date the Conduct Rules come into force for staff who are not senior managers or certified persons;
  • the date by which relevant employees must have received training in the Conduct Rules; and
  • the deadline for the submission of information about directory persons.

The date by which firms need to complete Conduct Rule breach reporting will not change. Firms are required to make their first annual notifications about Conduct Rule breaches in October 2021. However, the FCA wants the reporting period to change, as firms only have to report relevant breaches following commencement, so firms would only need to report relevant breaches that occurred from 31 March 2021 onwards.

The proposed transitional provisions, if enacted, will dictate that Certification Certificates that are issued during this period will be valid for 12 months from their dates of issue.  Concurrently, because a firm becomes obliged to obtain a regulatory reference when a certificate is issued, that means that the regulatory referencing obligations for certification staff apply on the date of certification.  

The paper states that it is HM Treasury that has agreed to delay the deadline. Since the FCA still encourages firms to keep to the original deadline of 9 December 2020, one wonders whether the Treasury agreed to the change without being asked.

Firms behaving badly - the Treasury's proposals to simplify the FCA's cancellation process

On or just before 20 July, HM Treasury published a policy statement entitled "Changes to the FCA’s cancellation of authorisation process."

The policy statement proposes to simplify the FCA's ability to cancel a firm’s authorisation when it suspects that it may no longer be carrying out any regulated activities. The new process could be used, although not exclusively, for situations in which:

  • a firm fails to pay its fees, file its returns or keep its core information requirements up-to-date;
  • there is a repeated failure to respond to FCA correspondence; or
  • such correspondence is returned undelivered.  

The FCA would, if this became policy, first serve a notice letter and, in the event that the firm does not respond within 28 days (including after a second notice is sent), would then publish a notice on its website and in the Financial Services Register, stating that it has sprung into action to remove the firm’s authorisation. If, after one month, the firm has not been able to satisfy the FCA that it should not cancel its permission to do various jobs, the FCA will cancel the firm’s authorisations.  

If these plans go ahead, a restoration of the firm's authorisation will be possible and conditional on the firm having a reasonable excuse for its failure to respond, its subsequent compliance with the requirement that was the ground for the cancellation, the fact that it was carrying out a regulated activity immediately before the cancellation and its attestation that it still meets the "threshold conditions." It will have one year to try to restore its former authorisation.

The process that the FCA must follow to cancel a firm's authorisation is set down in law. It has caused the FCA to commit significant time to gather the evidence that it needs eded to make the case for a cancellation. These proposals should not affect most firms. They should, though, help firms realise that if they do not play by the rules, the FCA can kick them out of the financial services industry more easily.  

Treasury policy consultation: a step change in the approval of financial promotions of unauthorised persons

On the subject of firms communicating with clients, HM Treasury in July proposed to change the process by which authorised persons approve financial promotions from unauthorised firms. Recent experience indicates to the Government that the existing regime is not operating effectively because firms are not performing sufficient 'due diligence' on the financial promotions or perhaps because firms lack expertise in the product or service being promoted.

To rectify these weaknesses and to give the FCA a clear view of who the approving firms are, the Government is proposing to introduce a regulatory “gateway” through which firms must pass, with the FCA's consent, before they are able to approve the financial promotions of unauthorised firms. The new gateway need not apply to unauthorised persons in the same group or to firms approving their own financial promotions for use by unauthorised persons.

The Government is considering two policy options, both of which would require an amendment of s21(2)(b) Financial Services and Markets Act. One option is for the FCA to ban all firms from approving the financial promotions of unauthorised persons. Any firm that wishes to do this would need then have to apply to the FCA to have this ban varied, cancelled or not placed on its permission if the firm is being authorised. The other option is to make the approval of financial promotions of unauthorised persons a regulated activity in its own right.

These new ideas spring from the collapse of London Capital and Finance (LCF) in January 2019 and sit alongside other changes designed to protect consumers to a higher degree, such as the temporary (and now, perhaps, permanent) ban on the promotion of highly risky speculative illiquid securities to retail clients.

Clearly, a principles-led and conduct-led approach is proving ineffective and legislation is required. Consumers who invest in unregulated products sold by unauthorised firms will remain unprotected from recourse to the Financial Services Compensation Scheme in the event of the failure of an issuer, so caveat emptor prevails!

Indeed, the paper skirts around the issue of FSCS responsibility. The clues are in the Government's comment that to make the approval a regulated activity would be "disproportionate" and "the FSCS exists to provide compensation in respect of claims made in connection with regulated activities carried on by authorised firms or their appointed representatives," so an unauthorised firm's failure would still not be covered by the FSCS.

The consultative exercise, however, is a reminder that any firm that issues financial promotions would be sensible to consider both the presentation and substance of its promotions with the detailed requirements in COBS 4 in mind.  Responses are invited by 12pm on 25 October 2020.  

EU tries to reduce damage caused by MiFID II

Recent pronouncements from the European Union show that it plans to make significant concessions to ease the administrative burden of MiFID II and support an economic recovery after the pandemic recedes. The European Commission proposes relief measures “to remove formal burdens where they are not strictly necessary” which were introduced by MiFID II.

The changes include proposals relating to:

  • the possible re-introduction of research payment bundling for smaller and mid-cap stocks and fixed income instruments;
  • the removal of ex-post reporting for professional client and eligible counterparties including the end-of-day 10% loss reporting;
  • the cessation and possible removal of the requirement to produce RTS 27 Best Execution reports; and
  • clearer rules for the calculation of the arrival price that firm use to measure execution "slippage" in PRIIPS and ex-ante cost disclosures.

Meanwhile, HM Treasury has published proposals to 'onshore' the EU's PRIIPs Regulation (in the form of regulatory technical standards or RTS). After the end of the transition period, the FCA will have the power to change the RTS and intends to explore ways to iron out some problems with them. In the longer term, HM Treasury intends to conduct a wholesale review of the disclosure regime for British retail investors and explore, for example, how to make the PRIIPs regime more compatible with the EU second Markets in Financial Instruments Directive (MiFID II).

These are certainly ones to watch. Whether certain policy requirements were necessary in the first place is a debate for another day, but the proposals for change represent a significant shift in approach by the EU and are likely to be welcomed.

The EU appears to acknowledge that MiFID II contained “unnecessary” and  “overly burdensome” requirements for firms when they provided services to professional clients. However, there is little joy here for the managers of retail clients.

These proposals aspire to reduce regulation, so it is likely that the FCA will reciprocate with some alleviations of its own. Retail managers could claim that their clients and businesses would benefit from the relaxation of similar obligations applied to them. Although HM Treasury's consultative exercise shows that there are plans for longer-term thinking about retail disclosures, investment managers may want the FCA to go further and protect them from a second wave of these and other regulations in the near-term, bearing in mind that they were summarily but temporarily suspended by the FCA when Covid-19 struck.

GC20/03 on firms' relations with (and communication with) vulnerable customers

Although the FCA believes that consumers should take responsibility for their financial decisions, it is keen to see improvements in the treatment of, and outcomes of, vulnerable customers (the FCA’s 2020/21 Business Plan refers to them). A vulnerable customer is someone who, due to personal circumstances, is especially susceptible to harm, particularly if his financier is not acting with appropriate care and might be exhibiting behavioural biases.  

The FCA's "guidance consultation" (GC) focuses on the following.

  • Skills and capability. How do front-line staff recognise and respond to vulnerable customers through training and practical and emotional support?
  • Customer service and communication. This allows vulnerable customers to talk about their needs and clearly understand information about products and services.
  • Product and service design that considers the needs of vulnerable customers, the positive and negative impacts of products and services by making a firm understand its customer base and assess its target market.
  • Evaluation. The firm must ask itself whether it has to make improvements by producing and using relevant management information.

GC20/03 provides very detailed guidance in each of the above areas, including case studies that contain examples of good and poor practice.

The FCA’s recent Financial Lives survey showed that just under half of British adults aged 18 and over (24.1 million people) display one or more characteristics of weakness. In this time of pandemic, many more may appear. GC20/03 is principally aimed at financial firms with retail customers. Fund managers ought to understand the needs of and characteristics of their target markets and customer bases, particularly by monitoring management information that they obtain from distributors and by reviewing this regularly.

COCON addresses the conduct standards at firms and the Senior Manager responsible should ensure there is a robust process in place to help the firm understand a client’s personal circumstances and potential weaknesses, putting appropriate safeguards in place to protect him from harm.  

The FCA intends to monitor firms' response through supervisory work, assessing how firms’ cultures, policies and processes ensure that they treat all consumers, including those who are vulnerable, fairly. The deadline for responses is 30 September 2020.

* Jonathan Wilson can be reached on +44 (0)20 3146 1869 or at jon@elliswilson.co.uk

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