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The Ellis Wilson round-up: recent regulatory issues from the UK

Jonathan Wilson, Ellis Wilson Ltd, Director, London, 25 November 2020


In this episode we look at some deadlines that the FCA has extended because of the pandemic, the lessons to draw from some fines for bad money-laundering controls and two websites that the FCA has set up for the collection of tip-offs. We also scan a case of market abuse, a review of early reporting and, as ever, more data about Brexit.

Fenician Capital Management

On 16 September an enforcement case came to light in which the Financial Conduct Authority fined a partner and portfolio manager at Fenicial Capital Management £100,000 and banned him from performing a regulated activity.

Mr Corrado Abbattista, the chief investment officer at the firm, placed a number of opposing trades in the market relating to equity-linked contracts for differences during January and May 2017. He placed large orders wholly visible to the market but had no intention of executing those orders, while placing smaller genuine orders as "iceberg orders." An iceberg order is a permitted market facility available to traders by which one portion of the order is visible to the market and the remainder is hidden.

These iceberg orders were for volumes of shares far greater than the typical market size and the FCA argues that they would probably have had a noticeable effect on other market participants and created a false and misleading impression regarding the true supply of, and demand for, the shares in question.

The FCA contends that Mr Abbattista was aware that his actions might constitute market abuse, but "recklessly went ahead with those actions anyway." Separately, the FCA criticised the firm for failing to keep any meaningful records of its investment committee meeting pertaining to either its investment decisions in individual companies or its investment strategy more generally. The outcome is not yet final as the decision notice has been referred to the Upper Tribunal for consideration.

Have you ever wondered what the FCA did with all those transaction reports? This decision notice is a demonstration of how the FCA ingests order-book trading data and then runs surveillance algorithms on it that it has calibrated to spot potential market abuse. It was from this surveillance activity that the FCA spotted the alleged manipulative activities of Mr Abbattista.

Firms and people ought to realise that the provision of appropriate training in market abuse, the monitoring of investment and trading activities and the appropriate investment records are all vital. Although there is no specific rule that obliges firms to keep minutes of investment committee meetings, they ought to keep orderly records of everything, including trading decisions, rationale and strategies.

Capital adequacy and regulatory reporting – a new web page

The FCA's RegData resources page now includes a series of explanatory videos and user guides designed to help firms find their way around the new system. It helps them with logging in, changing passwords and adding users. Plans are underway to inculcate some 52,000 firms. Every firm ought to expect a communication from the FCA over the coming months specific to its own 'migration.' It would be a good idea to bookmark the web page.

General organisation of arrangements

On 23 September there emerged an FCA consultative paper (CP 20/20) on the right regulatory approach to authorising international firms that want to provide financial services in the UK after the end of the transitional period.

It outlines the FCA's general expectations relevant to international firms operating from branches in the UK, though they may also be relevant for British subsidiaries with overseas parents. The FCA will authorise a firm only if it satisfies it that it meets, and will continue to meet, standards that cover:

  • the nature of its operations in the UK;
  • personnel and decision-making, including compliance with the SM&CR (senior managers and certification regime);
  • systems and controls, especially if a foreign firm's operations depend on services provided from its other locations, paying attention to whether these arrangements could impaire the FCA's ability to regulate the firm properly; and
  • the quality of the home state supervisor and the degree to which it normally co-operates with the FCA.

The FCA intends to publish a finalised document.

This applies to firms from the European Economic Area which intend to apply for authorisation, including those that have opted into the Temporary Permissions Regime (TPR) and non-EEA firms that have applied or intend to apply for authorisation or are already authorised. The comment period closes this Friday on 27th November.

This contrasts with the detailed draft technical standards published in late September by the European Securities and Markets Authority on the provision of investment services and activities in the European Union by non-EU firms. These proposals include new annual reporting requirements for non-EU-country firms to ESMA, the possibility that ESMA might ask non-EU firms to provide data relating to all their orders and transactions in the EU and the power to conduct on-site inspections. New annual reporting requirements from branches of non-EU firms to national regulators are also proposed.

A call for 'input'

On 15 September the FCA asked for comments and data about "client relations." It is seeking views (by 15 December) to help it decide how it should stop firms from causing the harm it sees in the consumer investments market without going beyond its existing resources and powers. It has reform of the HNW and self-certified sophisticated investor exemptions for financial promotions in mind. It wants to gather firms' thoughts about how it can 'clarify' the job of the Financial Services Compensation Scheme and fund it more fairly.

Any firm with 'exposure' to any private individual ought to be interested in this. It should also be of interest to firms that offer non-mainstream services or products to anyone who is not an institutional investor.

There is a risk that the FCA conflates the risks of scallywags operating around the perimeter of its regulation with legitimate, sometimes government-supported, investment in risky investments. The scope of eligibility for compensation from the FSCS is drafted more widely than a lot of people think. Perhaps this should be simplified.

A 'dear CEO' letter about clients' assets

On 30th September the FCA sent out a 'dear CEO' letter on the subject of client money and customers' assets. It exhorts all firms with permission to safeguard clients' assets to keep a close eye on their internal arrangements for protecting them in the light of Covid-19. The letter specifically sets out the expectations of the FCA regarding:

  • how to govern and oversee things;
  • how to oversee third parties;
  • adequate records and reconciliations;
  • acknowledgment letters for all client money accounts (for firms that are holding client money); and
  • accurate and up-to-date CASS resolution packs.

The contents of the letter should be no surprise to anyone familiar with the CASS rules. Firms should at least:

  • quantify and take action to address any risks that many arise after the end of the Brexit transition period (31 December) to client assets if these are held by other EEA institutions; and
  • ask their compliance departments (or auditors or third parties) to monitor and test things to assure themselves that their internal arrangements are sound.

The drop-letter rule

In March the FCA exempted firms temporarily from having to send 10% depreciation notifications to retail investors. It has, as we have seen, extended this concession for a further six months until 30 March 2021 with minor amendments.

The EU proposes to dispense with 10% reporting for professional clients. Perhaps in the long term the FCA will dispense with the rule for retail clients also, if it so chooses.

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