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The Ellis Wilson round-up

Kim Ellis, Ellis Wilson Ltd, Director, London, 8 April 2021


In this edition we look at changes to the UK Financial Conduct Authority's training-and-competence rules, a salutary tale for traders who casually sign compliance statements, no-action statements, regulatory reporting, governance and compliance standards regarding Brexit, operational resilience and the REP CRIM regulatory return.

On 5 March the Financial Conduct Authority published a consultative document in which it proposed to amend its Training and Competence rules (labelled TC in its unified rulebook) to introduce a new rule (TC 2.1.31BR). It wants this rule to require firms to notify the relevant accredited bodies (ABs) when notifying the FCA of certain significant events concerning failures to comply with Statements of Principle and the Code of Practice for Approved Persons (APER) or the Code of Conduct (COCON) on the part of firms’ retail investment advisors. The regulator also proposes to update the "recognised investment management and operations" qualifications. It expects ABs to use this information to ensure that they have all the relevant information that they need when issuing statements of professional standing in respect of retail financial advisors. This seems sensible and is something that ABs are asking for already, but firms with retail investment advisors ought to take note, as might others who apply their own external examination competency standards.

[Editor's note: Once a quarter, the FCA proposes miscellaneous amendments to its rulebook and consults interested parties about them. These tend to be minor changes. This was one such Quarterly Consultation Paper.]

The FCA blows a Horn    

Adrian Horn, a senior market-making trader at Stifel Nicolaus Europe Ltd, has been the subject of an FCA final notice. He had regulatory permission to perform the customer dealing function CF30. The final notice refers to breaches of Europe's Market Abuse Regulation and FIT relating to market abuse at a trading firm as the result of an "abusive trading strategy." Fined £52,500 for knowingly certifying that he was in compliance with Stifel's market abuse 'mandate,' Horn used his trading strategy to ensure that a FTSE All-Share Index company remained on the index. According to the FCA, Horn intentionally placed 'wash' trades in the market to give it false and misleading signals about the supply of and demand for the shares. The FCA found that Horn was not 'fit and proper' to perform an approved function. Members of staff who habitually sign compliance statements should realise that consequences may arise from their lack of caution.
Capital adequacy and regulatory reporting

A 'user guide' came out on this subject in mid-March. It contains an overview of, and explains how to:

  • select a data item for an XBRL upload (the guide covers how to do this on the Reporting Schedule or the Upload Data option);
  • confirm the success of the upload; and
  • submit an XBRL after validation.

For firms that have to do COREP reporting, a user guide providing information for firms that want to upload information using XBRL format is useful. It explains how to make an XBRL submission method in aid of COREP, FINREP and PRA requirements.

FCA no-action statements: playing the percentages

On 19 March the FCA pronounced on reporting for RTS [regulatory technical standard, issued by the EU] 27 and 10% portfolio depreciation. Here, the FCA has stated that it will consult the market about changes relevant to the temporary suspension of the RTS 27 reports and 10% depreciation notifications. The measures are to remain in place until the end of 2021. For services that firm offer to retail investors, the FCA will take no action against a firm as long as it has:

  • issued at least one notification in the current reporting period, indicating to retail clients that their portfolios or positions have decreased in value by at least 10%;
  • informed these clients that they may not receive similar notifications should their portfolio or position values further decrease by 10% in the current reporting period;
  • referred these clients to non-personalised communications, perhaps made available on public channels, that outline general updates on market conditions (these could contextualise potential drops in the values of portfolios or positions to help consumers meet their objectives, rather than making impulsive decisions about their investments); and
  • reminded clients how to check their portfolio values and how to get in touch with the firm.  

For services that firm offer to professional investors, the FCA will not take action for any breach of COBS 16A.4.3 UK as long as the firms in question have allowed professional clients to 'opt in' to receiving notifications. It is interesting to note that the FCA is following the EU line here on the value these reports. Firms still must assess the adequacy of their best-execution arrangements, but the RTS 27 report has done little for the efficacy of that process. It seems likely that 10% depreciation and RTS 27 reporting will, in due consultative course, be consigned to the graveyard of ineffective disclosures. We hope that RTS 28 will join them, but there has been no sign from the FCA that it wants to break free from the European Securities and Markets Authority (ESMA) just yet.

Governance and compliance standards regarding BREXIT

Several useful Brexit-related notes have appeared on the FCA website. The regulator has published three new web-pages regarding the temporary permissions regime (TPR). One called "Supervising firms in the TPR" highlights some things regarding the safeguarding of client money or custody assets, plus notifications. One called "Landing slots for firms in the TPR" tells us that the FCA has started to email formal directions to firms in the TPR confirming their ‘landing slots.’ Such a slot is the period in which a firm can apply: for full FCA authorisation or to vary (change) something if the firm has a "UK top-up permission." The third one, entitled "Cancelling a temporary permission," deals with firms that do not want or need to have their activities authorised by the FCA after all.

ESMA changes short disclosure thresholds
On 15 March a note appeared on the ESMA website; ESMA had decided to change short disclosure thresholds. It decided not to renew its insistence on holders of net short positions in shares traded on a European Union (EU) regulated market to notify the relevant national competent authority if the position reaches, exceeds or falls below 0.1% of the issued share capital. The measure expired on 19 March and was replaced with the previous 0.2% threshold. Firms that short European securities should take note. As at 31 March, the FCA retains the reporting threshold of 0.1% for holders of issued share capital of a company that has shares admitted to trading on a UK trading venue (UK Regulated Market and UK MTF). There has been no indication from the FCA that it plans to change this threshold. The relevant rules are to be found in FINMAR, the part of the rulebook that deals with financial stability and 'market confidence.'

Major shareholding notifications

On 22 March a 'user guide' appeared on the FCA website on the subject of major shareholding notifications. This was prepared to enable this-or-that firm to complete the following activities:

  • register to use the Electronic Submission System (ESS);
  • register to submit a Major Shareholdings Notification in accordance with DTR [disclosure and transparency rule] 5;
  • submit a new Major Shareholdings Notification;
  • upload financial instruments by using a CSV file;
  • send a subsequent Major Shareholdings Notification;
  • correct an existing Major Shareholdings Notification; and
  • delete a Major Shareholdings Notification.    

The FCA has now opened its new Disclosure and Transparency Portal. This user guide taken together with the appearance of the new portal, ought to help everybody use the new system.

Operational resilience

Policy statement 21-3 appeared in March and dealt with operational resilience. In this PS, the FCA published final rules for banks, building societies, designated investment firms, insurers, Recognised Investment Exchanges (RIEs), enhanced-scope senior managers’ and certification regime (SM&CR) firms and entities authorised or registered under the Payment Services Regulations 2017 or the Electronic Money Regulations 2011. This is directly relevant to just the very largest of asset managers. The FCA uses regulation-speak to extend the potential applicability of this PS: "Firms (not subject to these rules) may also want to consider the policy framework set out in this PS." This is a common-sense agenda for most firms to follow or at least be aware of. It is an exercise to set a standard for a firm's operational resilience arrangements and its service continuity priorities and is probably a good thing, provided it is done with a good slice of proportionality and pragmatic application.

Compliance, internal audit and financial crime - the REP CRIM return

The FCA has confirmed that the REP CRIM regulatory return will be extended to all firms. At the moment, the FCA requires a firm to send it a return if there is a maximum revenue threshold (£5 million).

This applies to the majority of firms, particularly those that hold clients' money and assets, but also to those firms that have permission to deal as agents and/or manage investments. Each firm should expect to see this REP-CRIM return on its FCA reporting schedule, but not soon - "Firms being brought into scope are required to submit their first REP-CRIM within 60 business days after their first Accounting Reference Date falling after 30 March 2022." It is good to see that the FCA's financial-crime surveillance capacity at regulated firms is sufficiently robust that the report does not need to be rushed in. Indeed, the extension of the report is itself a compliance exercise by the FCA. Nevertheless, this is another burdensome return that has to be sent off.

* Kim Ellis can be reached on +44 (0)20 3146 1864 or at kim@elliswilson.co.uk

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