The claims management industry has grown substantially since the Claims Management Regulation Unit was established within the Ministry of Justice in April 2007 and the composition of the market has also changed, with financial services claims having overtaken personal injury as the greatest source of turnover for claims management companies. It is estimated that CMCs have taken over £3.5 billion in consumer charges since 2011 for payment protection insurance mis-selling claims alone.

The recent Financial Guidance and Claims Act 2018 enables the transfer of regulation of CMCs in England and Wales to the FCA from the existing Claims Management Regulator, and extends regulation to Scotland, where CMCs are currently unregulated.  Northern Ireland will continue to have no equivalent regulatory regime.

The new regime will also include CMCs dealing with claims under section 75 of the Consumer Credit Act 1974, where the credit card company is jointly and severally liable for any breach of contract or misrepresentation by the retailer or trader.

Many of the existing Claims Management Regulation rules will be carried across to the FCA Handbook, with amendment where appropriate. The FCA propose to apply new standards to CMCs in a number of areas, the majority of which will apply from 1 April 2019.

However, some requirements will apply from a later date, including the proposed prudential standards related to:

• the type of business they undertake,
• their total income,
• their expenditure, and
• whether they hold client money.

CMCs that hold client money will need to segregate it from their own money and hold it on trust, whilst maintaining accurate and up-to-date records that identify the client money they hold on behalf of each client. In addition, their capital resources requirement will be increased by £20,000 and they will be required to appoint a person to be accountable for client money oversight.

The FCA’s proposals require CMCs to provide a potential customer with a short summary document containing important information such as an illustration of fees charged and an overview of the services the CMC will provide. This document will need to be provided before any contract is agreed.

CMCs will also need to highlight any free alternatives to using the CMC, such as ombudsmen schemes, in marketing material and pre-contract disclosures.

CMCs that buy so-called ‘lead lists’ from third parties will be required to carry out due diligence to ensure that the leads have been obtained legally and to keep records of this. The FCA is also proposing that CMCs will have to record and keep all calls with customers for at least 12 months.

The FCA has also set out its approach to authorising both existing and new CMCs. Firms will need to notify their intention to register for Temporary Permission and pay the relevant fee to the FCA before 1 April 2019. Firms will then need to go through the FCA’s authorisation process. New firms will need to decide whether to begin their authorisation process with the Claims Management Regulator or wait and submit an application to the FCA after April 2019.

The FCA will publish, in autumn 2018,  a separate consultation paper that will set out how it plans to apply the Senior Managers & Certification Regime to CMCs.

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The Data Protection Act 2018 replaces the Data Protection Act 1998 and provides a comprehensive legal framework for data protection in the UK, supplemented by the General Data Protection Regulation (“GDPR”) until the UK leaves the European Union (“EU”).

The four main matters provided for in the Bill are:

• general data processing,
• law enforcement data processing,
• data processing for national security purposes including processing by the intelligence services, and
• regulatory oversight and enforcement.

While the UK remains a member of the EU, all the rights and obligations of EU membership remain in force. When the UK leaves the EU, GDPR will be incorporated into the UK’s domestic law under powers in the European Union (Withdrawal) Bill, currently before Parliament.

Don’t forget: Whilst GDPR removes the requirement for data controllers to register with the Information Commissioner’s Office (“ICO”), new UK regulations require all data controllers to provide certain information and pay an annual fee to the ICO to ensure its continued funding.

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The Financial Conduct Authority (“FCA”) has set out its key priorities for the coming year in its Business Plan for 2018/19, along with its annual Sector Views. Inevitably, the priority for its discretionary activity is preparing for and implementing the changes resulting from European Union withdrawal (“Brexit”).

Additionally, seven priorities cut across different financial sectors and the other priorities listed relate to the seven specific financial sectors the FCA regulates.

This year’s Business Plan reflects the high level of resource the FCA needs to dedicate to Brexit to carry out the following priorities:

• Working with the Government.
• Ensuring an appropriate transition for EEA firms.
• Working with regulated firms and monitoring the risks to FCA objectives.
• Working towards operational readiness.
• Cooperating with international partners.

In addition, the FCA intends to advance some aspects of work to introduce a new duty of care provision for firms, beginning with the launch of an initial Discussion Paper, Feedback Statement and final version of its ‘Our Approach to Consumers’ paper in summer 2018.

Cross-Sector Priority Areas

• Firms’ culture and governance which should drive behaviours and produce outcomes likely to benefit consumers and markets.
• High-cost credit, building on the significant impact already made in the market.
• Tackling financial crime, including fraud, scams and anti-money laundering to make the UK financial services sector a hostile place for criminals and a safe place for consumers.
• Data security, resilience and outsourcing since technology plays a pivotal role in delivering financial products and services.
• Innovation, big data, technology and competition which are driving change in markets.
• The treatment of existing customers to ensure that they do not get less attention or receive poorer outcomes than new customers.
• Long-term savings, pensions and intergenerational differences which reflects the changing UK population and their financial needs.

Sector Priority Focus

1. Wholesale Financial Markets

• Clarifying FCA approach to market integrity
• Reviewing money laundering in capital markets
• Monitoring firms’ compliance with new conflicts of interest requirements
• Addressing operational resilience
• Monitoring firms’ compliance with FCA rules on Initial Public Offerings
• Publishing final rules and FCA approach to industry codes of conduct for unregulated markets

2. Investment Management

• Finalising rule changes following the Asset Management Market Study
• Working with European Supervisory Authorities in the implementation and review of the Packaged Retail and Insurance-Based Investments Products Regulation (“PRIIPs”)
• Consulting on new rules and guidance on liquidity management
• Considering the extension of governance remedies to with-profits and unit-linked funds
• Assisting the Treasury in the development of a new prudential regime for investment firms authorised under the Markets in Financial Instruments Directive (“MiFID II”)
• Publishing research that explores the rise of passive investment

3. Retail Lending

• Assessing creditworthiness in consumer credit
• Launching a Market Study on Credit Information
• Publishing the interim report on FCA Mortgage Market Study
• Reviewing the commission between credit brokers and other firms
• Ensuring the debt management sector works well for consumers
• Reviewing the motor finance market
• Reviewing the retained Consumer Credit Act provisions

4. Pensions and Retirement Income

• Developing a joint pensions strategy with The Pensions Regulator
• Potentially extending the remit of Independent Governance Committees for workplace pension schemes
• Helping consumers avoid scams

5. Retail Investments

• Assessing the impact of the Financial Advice Market Review (“FAMR”) and the Retail Distribution Review (“RDR”)
• Reviewing high-risk and complex investments
• Evaluating FCA interventions on Contracts for Difference
• Publishing report on the Investment Platforms Market Study
• Raising awareness of fraud and scams

6. Retail Banking

• Continuing to help firms prepare for ring fencing
• Developing a payments sector strategy
• Delivering the revised Payment Services Directive (“PSD2”)
• Continuing FCA awareness campaign on the Payment Protection Insurance redress deadline

7. General Insurance and Protection

• Implementing the Insurance Distribution Directive (“IDD”)
• Publishing interim report from the Wholesale Insurance Brokers Market Study
• Concluding initial diagnostic work on general insurance distribution chains
• Publishing the findings from FCA Call for Input on access to travel insurance
• Evaluating the effectiveness of 2015 FCA rules on Guaranteed Asset Protection insurance

Sector Views 2018

The annual Sector Views issued by the FCA cover all the markets it regulates and give an overall view of how each sector is performing, based on the data held by the FCA and its view as at mid-2017.

The FCA describes the sector, the need the sector seeks to fulfil, the issues and developments the FCA are seeing and the impact of change, and are developed in three stages:

1. Understanding the sector.
2. Assessing how the sector is performing and what is driving change in the sector.
3. Identifying the key themes for consumers, firms and the sector more widely.

Data Protection and GDPR related issues

The FCA intends to review the use of data by financial services firms, including:

• machine learning analysis of big data pools;
• algorithmic trading; and
• the wider use of artificial intelligence.

It believes this will help them better assess both potential opportunities and harm and where they may need to intervene.

The FCA will also further develop its relationship with the Information Commissioner’s Office in anticipation of the General Data Protection Regulation (“GDPR”) coming into force in May 2018, with the intention of publishing an updated Memorandum of Understanding (first issued in 2014) setting out how the two organisations will work together in future.

While the ICO will regulate GDPR, complying with GDPR requirements is something the FCA will consider under, for example, the requirements in the Senior Management Arrangements, Systems and Controls (“SYSC”) sourcebook. Under SYSC, firms should establish, maintain and improve appropriate technology and cyber resilience systems and controls.

The post FCA publishes its Business Plan for 2018/19 first appeared on Complyport - Your Trusted Partner in Governance, Risk, Compliance & Technology .

It is to be made clear to all authorised firms and their staff that the FCA expects good conduct in all financial markets and activities, not just those covered by regulatory rules and principles.

The proposals in CP17/37 follow several high-profile cases of serious misconduct in unregulated wholesale financial markets by individuals working at authorised firms, and the development of a number of new codes of conduct to cover some of those activities and raise standards.

The CP17/37 proposals will also be relevant to a wider group of firms as the FCA is currently consulting on extending its Senior Managers and Certification Regime (SMCR) to all authorised firms when HM Treasury sets the implementation date (likely to be in the second half of 2018). The SMCR does not apply to firms which are not authorised under the Financial Services and Markets Act 2000.

Limited Scope Firms will typically have fewer Senior Management Functions than firms in the core SMCR, maintaining the exemption for firms which already have exemptions under the current Approved Persons Regime.

The FCA are concerned that failure of authorised firms and their staff to meet appropriate standards of conduct in unregulated markets may harm broader confidence in the operation of regulated financial markets.

All authorised firms are therefore invited to comment on the FCA proposal to extend the application of FCA Principle 5 – A firm must observe proper standards of market conduct – to unregulated activities.

The FCA have advised they may take enforcement action in cases of serious and egregious misconduct leading to harm or potential harm, particularly where they consider the firm or individual has not adhered to the SMCR rules and/or FCA-recognised industry codes of conduct that, in their view, set out proper standards of market conduct for unregulated markets and activities.

The post FCA CP17/37 Industry Codes of Conduct and Discussion on Principle 5 Market Conduct first appeared on Complyport - Your Trusted Partner in Governance, Risk, Compliance & Technology .

Under DTR 5, a person is required to notify the issuer (and, under DTR 5.9, the FCA where the shares in question are admitted to trading on a regulated market) when the percentage of voting rights held reaches, exceeds or falls below a particular threshold – please refer to DTR 5.1.2 & 5.1.5 for details of the relevant thresholds at which such notification obligations arise.

The FCA’s Primary Market Bulletin No. 17 informs us that form TR-1 used for such notifications is being revised and will come into force on 30 June 2017. The new TR-1 incorporates notes on the completion of the form, as opposed to current practice of having separate stand-alone completion notes.

Completed forms need to be sent to majorshareholdings@fca.org.uk. The FCA requests that the TR-1 forms are sent in Microsoft Word format, as opposed to readable PDF.

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Of Relevance to:
Managers of private equity and venture capital funds; managers of unauthorised collective investment schemes

A reminder that ‘The Legislative Reform (Private Fund Limited Partnerships) Order 2017’ (2015/514) came into force on 6 April 2017.

As advised in Regulatory Roundup 66, the Order will only apply to those UK LPs that are collective investment schemes that are not authorised (i.e. not an authorised contractual scheme) by the FCA. The intention of the Order is to ensure that the UK limited partnership remains the market standard structure for private funds.

Points of note include (references in brackets refer to the relevant part of the Order):

• Limited partners will not be under any obligation to contribute any capital or property to the PFLP unless otherwise agreed between the partners. (Article 2, paragraph (3))
• Under certain circumstances a limited partner can wind up a dissolved PFLP. (Article 2, paragraph (4))
• Limited partners will be permitted to undertake certain activities without being regarded as taking part “in the management of the partnership business” – which would ordinarily make that partner liable for all the debts and obligations of the LP incurred whilst taking part in the management of the business. (Article 2, paragraph (5))
• The ability for an existing limited partnership to be designated as a PFLP. (Article 2, paragraph (9))

The post Private Fund Limited Partnerships first appeared on Complyport - Your Trusted Partner in Governance, Risk, Compliance & Technology .

Complyport & Alexander Lloyd hosted a breakfast seminar on MiFID II and the Senior Managers Regime with a Governance Risk and Compliance (GRC) perspective.

Click here to see slides

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Given the concerns that the FCA has previously expressed on the distribution of contracts for difference (“CFD”) – see Regulatory Roundup 73 – it probably comes as no surprise that it has issued Consultation Paper CP16/40 “Enhancing conduct of business rules for firms providing contract for difference products to retail clients”.

Work undertaken by the FCA reveals that over 80% of clients lost money on CFDs (the term also captures spread bets and rolling spot FX) over a year, with the average result per client being a loss of £2,200.

The unease that the FCA has about CFDs and retail clients is not unique to the UK. Aside from the recent ESMA update of its Q&As on ‘the provision of CFDs and other speculative products to retail investors under MiFID’ (see Regulatory Roundup 81), the paper advises us that several EU member states, including Belgium, France and the Netherlands, have already introduced (or announced an intention to introduce) a ban on the financial promotion of CFD products.

The FCA’s proposed changes include (note that any references below to Handbook rules are to those contained in Appendix 1 to CP16/40 and should assist firms in their understanding of the detailed requirements):

• The need to categorise all retail clients as either an ‘experienced retail client’ or ‘inexperienced retail client’. This categorisation impacts on how other elements of the proposal apply. It is recommended that firms look to the Glossary in Annex A of Appendix 1 to familiarise themselves with the definitions of ‘active trading experience’ (being either the execution of at least ten relevant trades in a calendar quarter or at least forty such trades in a continuous period of twelve months with at least two trades carried out per calendar quarter) and the definition of ‘experienced retail client’ (a retail client with ‘active trading experience’ of at least a continuous period of twelve months or four calendar quarters within the twelve calendar quarters prior to the current trade). Any client not meeting the definition will by default fall into the ‘inexperienced retail client’ category. Note the need for evidential records (i.e. no ‘self-certification’) to be received by the firm and that the use of demonstration or training accounts is to be ignored for the purposes of determining ‘active trading experience’ (COBS 22.4.17 – 22.4.20).
• A requirement for a prominent standardised risk warning which will include details of profits/losses made by the firm’s retail clients over the last quarter and four quarters respectively. Where a firm’s website or mobile application is used then this warning must remain fixed on the screen even when the (retail) client scrolls up or down (COBS 22.4.3 – 22.4.4).
• The provision of standardised point of sale risk warning. The firm must require the retail client to acknowledge receipt (using prescribed wording) of this standardised point of sale risk warning – which must be separate to any acknowledgement of terms and conditions – before a trading account can be opened (COBS 22.4.5 – 22.4.9).
• Initial margin requirements are determined by the client’s categorisation as either ‘experienced retail client’ or ‘inexperienced retail client’ and ranges from 2% to 20% (COBS 22.4.10 – 22.4.13).
• Margin close out requirements oblige a firm to ensure that the retail client’s net equity (as defined in the rules) does not fall below 50% of the initial margin requirement, otherwise the client’s open positions must be closed ‘as soon as market conditions allow’. Note that the retail client must be informed as to how their margin close out level is calculated and triggered. Firms are also reminded of their ‘best execution’ obligations when e.g. closing a retail client’s position (COBS 22.4.14 – 22.4.16).
• Restrictions on financial promotions likely to be received by a retail client will prohibit offering a monetary or non-monetary incentive or a bonus offer contingent on opening a trading account (COBS 22.4.21 – 22.4.23).

Firms should note (chapter 5) that during the consultation period the FCA expects all CFD providers to ensure that they are complying with the existing rules and in particular draws attention to appropriateness assessments, AML controls and client categorisation – reference to February’s ‘Dear CEO’ letter will assist here – and risk warnings. We are also informed that the FCA is conducting further supervisory work and are applying increased scrutiny during the authorisation process to applicants seeking to offer retail CFDs.

The Consultation Paper also briefly touches on what it refers to as binary bets (which is the term that will be used in the Handbook Glossary although they are more commonly referred to as binary options). These are currently regarded as gambling products, although HM Treasury has consulted on bringing them within the scope of FCA regulation in the light of the European Commission opinion that they should be considered as MiFID financial instruments. It is stated that any formal proposals and draft Handbook rules in relation to these products would be consulted on in Spring 2017.

The consultation period ends 7 March 2017.

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In December 2015 a joint ESMA/EBA report was published on the suitability, or otherwise, of the prudential regime for investment firms.

The paper recommended a new categorisation of investment firm which distinguishes between systemic and ‘bank-like’ investment firms (to which the full CRD IV framework would apply) and those which are non-systemic for which there would be a more limited set of prudential requirements – see Regulatory Roundup 72 and “EBA: Report on Investment Firms and Prudential Requirements”.

The EBA backed-up this recommendation by declaring that it “stands ready to complete” the necessary data collection in order to calibrate this new regime.

One ‘Call for Advice’ later, the EBA has published a Discussion Paper (EBA/DP/2016/02) on the design of a new prudential regime for investment firms. Although the paper is aimed at MiFID investment firms it will also be relevant to UCITS management companies and AIFMs that conduct permissible MiFID activities.

Aside from the handful of investment firms that fall within the EBA’s earlier Opinion, and so would be subject to the full CRD (see below), the Discussion Paper proposes a prudential regime focussing on the risks to customers and markets and risks to the firm itself (what is referred to as the K-factor approach).

These K-factors can be attributed to ‘risk to customers’ (“RtC”) and ‘risk to market access, liquidity or integrity’ (“RtM”) which would need to be accompanied by appropriate scalars – with acknowledgement of the extent such risks are amplified by the risk to the firm itself (“RtF”).

Possible RtC and RtM K-factors identified so far include, but are not limited to, Assets under Management, Client Money held and (number of) Customer orders Handled. As an alternative to creating specific K-factors for RtF the use of an ‘uplift’ is considered i.e. a firm’s capital requirement would be the sum of the RtC and RtM K-factors as above multiplied by an appropriate ‘uplift factor’.

The Discussion Paper also gives consideration to a different prudential regime, based mainly upon the fixed overheads requirement for “very small and non-interconnected” firms (referred to as “Class 3” investment firms).

Whilst the paper effectively proposes designing a tailored regime for investment firms – and so reflects the EBA’s preferred approach – it also acknowledges that there is also the alternative option of applying the current prudential regime to such firms, but in a more proportionate and targeted manner.

The Discussion Paper follows on from a short (four page) EBA Opinion paper published in October which concentrated on the identification of those investment firms for which CRD IV is appropriate and which rules should apply. In brief, the recommendation was that the full CRD and CRR should apply to those investment firms that meet the identification standards and guidelines applicable to Global Systemically Important Institutions (“G-SIIs”) and Other Systemically Important Institutions (“O-SIIs”) – although the Opinion advises that there are only eight such firms in the EU.

Comments on the Discussion Paper are invited by 2 February 2017 with a view to the EBA submitting an Opinion to the European Commission by 30 June 2017.

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In October 2015 the FCA launched a joint Consultation Paper (CP15/31) with the PRA on “Strengthening accountability in banking and insurance: regulatory references” – see Regulatory Roundup 69.

The consultation proposed introducing a new chapter in SYSC on ‘Regulatory References’ which would be referenced in the Approved Persons chapter of SUP (SUP 10C for ‘relevant authorised persons’) and SUP 10A (for firms that are not ‘relevant authorised persons’).

In its simplest form a ‘relevant authorised person’ is either:

• A firm with permission to accept deposits; or
• An investment firm that has permission for dealing in investments as principal and when carried on by it that activity is a PRA-regulated activity.

For further information on the relevant authorised person regulatory framework please see the article on the Senior Managers Regime which is also in Regulatory Roundup 69.

The FCA has now released Policy Statement PS16/22 which contains the final rules on regulatory references (which will appear in SYSC 22).

Although the need for ‘regulatory references’ is specific to firms that are ‘relevant authorised persons’ (the new rules refer to a ‘full scope regulatory reference firm’ which also captures a Solvency II firm and a large non-directive insurer) it is important to appreciate that the amendments to SUP 10A means that all firms are impacted by the proposals to a greater or lesser extent.

SYSC 22 will apply to both PRA and to FCA firms in that the latter will be required to provide references to the former in line with SYSC 22 i.e. in the scenario where an employee/ex-employee is moving into a PRA-regime firm.

We would draw firms’ attention to the need to:

• Ensure that the HR functions are aware of the obligations arising in SYSC 22;
• Obtain/supply references for possibly up to six years (SYSC 22.2.1(1)(d) and SYSC 22.2.2(3)); and
• Refer to the template (SYSC 22 Annex 1R) to be used by the provider of the regulatory reference.

The table on page 26 of PS16/22 may be useful in that it reminds both relevant authorised persons and FCA only authorised firms of which aspects of the new framework applies to them.

The final rules in SYSC 22 can be found in Appendix 1 of PS16/22.

The rules, subject to the transitional provisions in TP 5, come into force on 7 March next year.

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