Category: Regulatory Intelligence Page 1 of 10

Coronavirus Gives SM&CR its First Real Test - Waymark Tech Blog

Coronavirus Gives SM&CR its First Real Test

COVID-19 is proving to be the first real test of financial regulations introduced since 2008 with the Senior Managers and Certification Regime in the front line.

Speaking to the Financial Times, the FCA’s interim Chief Executive, Christopher Woolard has suggested that the Senior Managers Regime could give the regulator more weapons in ensuring corporations continue to behave ethically throughout the crisis.

Although he admitted that the FCA had little power to take action against those lenders who did not treat customers fairly, he suggested the regime did give the regulator an option to ensure fair treatment of lenders.

These rules allow regulators to take action against senior managers based on their conduct, including fair treatment of customers. With all commercial lending being unregulated, this will be the only weapon the regulator has to put pressure on banks.

However, since its introduction, the FCA has been criticised for taking relatively little action. After three years, it was only in August 2019 that it secured its first conviction when Barclays Chief Executive Jes Staley was jointly fined £642,000 by the FCA and PRA for his response to an anonymous whistleblower letter.

Since then, the regime has been extended from the banking sector and across all authorised firms, but its impact is still one which exists in the fears and imaginations of senior managers rather than in actuality. However, this crisis could be an opportunity for SM&CR to play a significant role.

Since the outbreak of COVID-19, there have been a number of complaints about how banks have been treating their customers, especially in the way the Government-backed loan scheme has been rolled out. The Federation of Small Businesses has been among those raising concerns about how the loan scheme is being implemented.

Although pace has picked up, approval rates are lower than with commercial lending despite the number of companies facing difficulties. The FSB has called for reassurances from the regulator that the banks are not putting profits before people.

The FCA has written to the banks reminding them of their responsibility to treat borrowers fairly at this stressful time, but beyond that it has relatively few direct powers. SM&CR could offer an alternative approach, and Woolard admitted this period would prove to be a test of the scheme.

Nonetheless, the difficulty they’ve experienced in securing convictions so far suggests they might face an uphill battle. The problem for the regulation is that it can be difficult to attribute the action of a company to a single individual. The burden of proof lies with the FCA and, in many cases, this is proving too high a hurdle to clear.

So far, then, SM&CR has been used as an abstract threat – a tool to place more pressure on individual managers to take greater responsibility for good conduct. Whether this will be enough remains to be seen.

COVID-19 is the first period of great stress for the financial sector. It is at these moments that corporate responsibility and regulation comes under pressure. It’s also at moments like these that the cracks show and problems in the existing system are there for all too see. This in itself could serve as a warning to any corporates who do not heed the FCA’s letter and treat customers fairly.

Even though the regulator’s powers may be limited at present, if they are not satisfied by the actions of lenders during this time, they will be more likely to step up their oversight.

This could come in the form of enhanced regulation and stricter rules in the future.

Financial Conduct Authority Updates Action on Coronavirus - Waymark Tech Blog

Financial Conduct Authority Updates Action on Coronavirus

As the UK goes into lockdown the FCA continues to update its guidance and work out how it can support the financial sector and those who rely on it through what is now undeniably, an unprecedented crisis. With questions about trading practices, vulnerable customers and reporting, the FCA has issued a series of statements over the past few weeks outlining its expectations.

Short selling

The FCA has not followed the examples of other countries such as Italy and Spain in banning short selling. Both countries have banned the practice in order to counter market volatility as the virus spreads across the world. Experts in the US have also argued strongly against short selling. However, the FCA claimed there was no evidence that it was behind the recent turmoil in the market. Indeed, they said short selling remains a useful tool in investment strategy, allowing companies to manage risks by taking long and short positions.

Vulnerable clients

Its work on vulnerable clients has been shelved as it postpones all non-essential work in the face of the pandemic. Publication of its guidance on vulnerable customers will be placed on the back burner for the time being.

However, the FCA has stepped up pressure to prevent repossessions in the fallout of the crisis. The regulator’s guidance says lenders should offer a three-month payment holiday in the face of the spreading pandemic. It should be granted where homeowners are experiencing payment difficulties because of COVID-19. This can apply where a customer first asks for leniency or if a lender feels they qualify for a break. The Government has said there is no expectation under its guidance for a lender to fully investigate the circumstances surrounding a request for a payment holiday.

“We are making it clear that no responsible lender should be considering repossession as an appropriate measure at this time.”

Christopher woolard, interim chief executive of the fca

Delayed disclosure

The FCA has urged companies to delay publication of their preliminary results for at least two weeks.

“The unprecedented events of the last couple of weeks mean that the basis on which companies are reporting and planning is changing rapidly.”

Financial conduct authority

Companies, it said, should give due consideration to the impact of the virus and that the events of the last couple of weeks meant that time tables set before the virus would mean there would be little time to achieve this.

It says it is in talks with the audit regulator, the Financial Reporting Council (FRC) and the Bank of England’s Prudential Regulation Authority (PRA) about a package of measures to ensure companies take time to prepare appropriate disclosures. The FRC, for its part, has also asked companies to delay disclosing financial reports rather than produce substandard audits.

This is uncharted territory for the entire sector. The FCA’s role in this is to reduce turmoil as much as possible and put pressure on companies to maintain sustainable and responsible policies which do not cause additional stress and anxiety to their customers.

How should firms adapt for AMLD5 - Waymark Tech Blog

How Should Firms Adapt for AMLD5?

New anti money laundering legislation has arrived and firms will have to move very quickly in order to comply if they have not already. Those that do not, will be unable to plead ignorance. Even so, many are lagging.

On 10th January, the Government introduced its Fifth EU Anti-Money Laundering Directive (AMLD5). It’s an update of existing legislation so it doesn’t involve a massive overhaul but firms still need to take immediate action to ensure they are compliant.

What’s new?

The new regulation will enhance the powers of the EU financial intelligence units and increase transparency around company trust and ownership using beneficial benefit ownership registers. It will also prevent risks associated with the use of virtual currencies for financing terrorism and enhance access to information for financial intelligence units.

Specific and complete identification of real holders of passbooks, bank accounts or e-wallets must be provided. Until now, they could be anonymous. The required subjects list has been expanded, particularly taking us into the realm of digital currencies. The registration processes of holders and trusts will also be expanded.

Electronic sources

With the new regulation coming so quickly after Christmas there isn’t much time to get ready and it’s easy to see how some companies might get caught out. Of all the changes, it’s the requirement for electronic documentation, where possible, which might cause the most problems.

The legislation states:
“(19) Information may be regarded as obtained from a reliable source which is independent of the person whose identity is being verified where […]
(a) it is obtained by means of an electronic identification process, including by using electronic identification means or by using a trust service (within the meanings of those terms in Regulation (EU) No 910/2014 of the European Parliament and of the Council of 23rd July 2014 on electronic identification and trust services for electronic transactions in the internal market(11)); and…
If you do not have a reliable way of obtaining documentation which meets these standards, you’ll have to develop it quickly. “

Due diligence

When deciding on due diligence, firms will have to consider a number of risk factors, such as transactions from high-risk countries, if the customer is the beneficiary of a life insurance policy, a national of a third country seeking residence rights or if businesses relationships are not face to face. If a transaction is related to oil, arms, precious metals or tobacco products they will also have to take more care.

To cope with these new demands, firms will have to enhance their due diligence checks and install AML training for all staff. You’ll also have to use electronic verification wherever possible, although paper-based checks may still be available in some circumstances such as if they have been provided by the client from electronic sources. While the changes to AML5 are far from exhaustive, they do require a significant adjustment, some which are all too easy to overlook.

Five Lessons - Waymark Tech Blog

Five Lessons From SMCR

The Senior Managers and Certification Regime (SMCR) is finally upon us. After years of preparation, the FCA has finally rolled it out to virtually all regulated firms in the UK. Anyone performing a role designated by the FCA as a senior manager position will now be given designated responsibilities for which they are personally responsible.

With the rules now fully implemented, what can we learn from the FCA’s statements and investigations so far?

Convictions are difficult

Despite a number of investigations using SMCR powers, there has only been one high profile conviction when Jes Staley was fined more than £642,000 for failing to act with due skill, care and diligence in his response to a whistleblower in 2016. In a large firm, it is proving difficult to conclusively prove that one person should be held accountable for wrongdoing. The burden of proof is on the FCA which makes it difficult to secure a conviction but…

… Convictions may be higher for smaller businesses

With SMCR now extended to solo-regulated firms, that conviction rate could climb. While it can be impossible to prove personal responsibility in a large corporation it will be much easier in a smaller firm.

Firms should be proactive against non-financial misconduct

Non-financial misconduct will form part of the FCA’s assessment about who is a fit and proper person. In a Dear CEO letter Johnathan Davidson, Executive Director of Supervision, retail and authorisation wrote: “Following recent, publicised incidents of non-financial misconduct in the wholesale general insurance sector, I am writing to set out our clear expectation that you should be proactive in tackling such issues.” The FCA says it expects firms to identify what drives bad misconduct and, ‘modify those drivers’ to improve conduct.

Governance, governance, governance

As another Dear CEO letter highlights, this time from Marc Teasdale, the FCA is disappointed about standards of governance:

“Overall standards of governance, particularly at the level of the regulated entity, generally fall below our expectations. Funds offered to retail investors in the UK do not consistently deliver good value, frequently due to failure to identify and manage conflicts of interest,” he wrote.

A key issue, according to Teasdale, is liquidity management in open-ended funds. Liquidity, he said, should remain the responsibility of the asset manager even if outsourced to a third-party provider. While it is possible to delegate control, it is not possible to delegate responsibility.

SMCR is an opportunity

Much depends on how companies choose to perceive SMCR. Some will see it as simply being a compliance project, another box to be ticked in order to satisfy the regulators. However, it helps businesses get their governance in order. It includes all the things that companies should be doing in any case and helps companies highlight risk. Those who see this as a positive element of strategy are likely to see real benefits.

Smaller businesses are still getting to grips with SMCR. There may be bumps along the way, but every investigation, enforcement action and statement from the FCA contains lessons for the wider sector.

FCA Issues First Fine Against Claims Management Firm - Waymark Tech Blog

FCA Issues First Fine Against Claims Management Firm

The FCA has issued its first fine against a claims management company since it took over regulation of the sector eight months ago. It’s a finding which should signal the need for financial institutions to maintain the highest standards of transparency when communicating to customers.

Essex-based Professional Personal Claims (PPC) was fined £70,000 by the regulator for misleading branding and for submitting inaccurate or misleading claims to banks.

The FCA also believed that the firm was attempting to give customers the impression that they were making claims direct to those banks, when this of course, was not the case. PPC operated websites with the logos of five banks which contained their domains. The FCA said that this muddied the water of what customers might expect.

Customers could easily have been confused that the claims were being submitted directly to the banks rather than through a claims management firm in return for a fee.

“PPC’s misleading website and marketing material suggested PPC was associated with the five banks when this was not the case,” said Mark Steward, Executive Director of Enforcement. “Claims management firms must ensure their advertising is accurate. Not only in terms of what they say about themselves and their services but also in terms of what is represented.”

A lack of detail

The second charge is arguably just as damaging. People use claims management firms because they either don’t want the hassle of making the claim themselves or they aren’t confident they will fill out the forms correctly.

However, according to the FCA, PPC submitted claim forms to the banks which were either misleading or contained the wrong information.

The claims had already been made by the former regulator before the FCA took over, which had received 14 complaints about the company. PPC had originally challenged the finding in court, before withdrawing their claim in September leaving the FCA to adjudicate the penalty.

What can we learn?

This fine comes at a difficult time for claims management firms. The end of the PPI deadline leaves many people wondering what the future will bring for them. The FCA has only around 350 firms registering with them, compared to 700 during the height of the claims process.

The reputation of the sector is also extremely shaky. It has been blamed for misleading customers and also creating a compensation culture which has cost the banks billions.

If claims management firms are to go forward, the FCA, has served notice that it expects it to adhere to the highest standards of accountability and transparency. Advertising must be scrupulously accurate, communication must be clear and they will need to ensure all documentation is accurate, complete and correct. That might be something of an adjustment to a sector which has often thrived on ambiguity.

Before the deadline, the FCA had launched a high-profile marketing campaign to inform people about their rights and ensure they understood that they could make the claim themselves without using a claims firm.

Going forward they will have to ensure they are whiter than white, being clear about what they offer, how much they charge and that they are not affiliated with any bank or financial institution.

Check your Conduct Before the FCA Does - Waymark Tech Blog

Check your Conduct Before the FCA Does

Over the past year, the FCA has increased its focus on conduct which is why it’s a good idea to investigate your own firm’s behaviour – before the FCA does it for you.

2019 began with the collapse of London Capital & Finance together with all the grizzly details that came with it. As the FCA’s investigations progressed, a picture emerged of a company in which misconduct was commonplace and went unchecked.

In response, the FCA said it planned to intervene more swiftly to protect the interests of investors and it has been true to its word. 2019 was a bumper year for fines, the biggest for four years hinting at a regulator which is becoming more confident and aggressive.

In particular, though, they have started to focus on the conduct and culture of a business because this, the FCA believes, is a prime indicator for which firms are more likely to experience compliance issues.

Monitoring conduct

In a recent letter to the insurance sector, the FCA warned that firms would be at risk of failing SMCR if they failed to address financial misconduct. Jonathan Davidson, Executive Director of Supervision, Retail and Authorisations at the FCA, said the letter had come as a result of “recent, publicised incidents of non-financial misconduct in the wholesale general insurance sector”.

The same message was again hammered home in a recent speech at the Personal Finance Society by Debbie Gupta, the FCA’s Director of Life Insurance and Financial Advice.

“We expect you to adhere to your regulatory and professional duty, to give suitable advice to clients by identifying those conflicts of interest and managing it.”

Although many of the misconduct fines issued in the past year relate to historic abuses, the FCA still believes there is a culture of putting a firm’s financial interests above those of its clients. Firms are failing in their oversight and allowing a culture to develop where non-compliance becomes highly likely.

Take steps now

The FCA, then, will be grilling firms over their conduct, so it makes sense to beat them to the punch.

Ultimately, the FCA will be asking five questions of firms and you will need good answers for all of them. They are:

  • 1. What proactive steps do you take as a firm to identify risks?
  • 2. How do you encourage individuals who work in the front, middle and back-office to be responsible for managing the conduct of their business?
  • 3. What support does the firm have to enable people to improve conduct within their area of the business?
  • 4. How does the Board maintain oversight and consider the implications of each strategic decision?
  • 5. Has the firm assessed whether any of their other activities could undermine their attempts to improve conduct?

Firms can start by identifying risks within their business. Those firms with higher degrees of permissions will require more extensive governance and oversight. Are people within the firm sufficiently competent to carry out their roles and are they given enough support?

Firms will need to maintain oversight and implement adequate controls to monitor conduct within their business. They will need to look at the strategic decisions senior managers will be making and what expectations are being placed on their employees.

Those who are too heavily incentivised for financial performance, rather than representing the interests of the customers, will be more likely to act against their best interests.

In other words, you should put yourself in the shoes of the FCA and start asking the questions they will. So, when they do come calling, you will have all the answers in place.

FCA Plans to Share More Data - Waymark Tech Blog

FCA Plans to Share More Data

The FCA has admitted it could share more of its information to help the financial sector understand what bad conduct looks like.

Debbie Gupta, director of Life Insurance and Financial Advice at the FCA told the personal finance Society’s annual conference that the FCA sat in a unique position of being able to see, first hand, what bad conduct looked like.

“From our point of view, yes we are doing lots of work on rooting out bad practice, but I also think one of the things the regulator is privileged to see, in a slightly roundabout way, is what bad practice looks like.”

The FCA has chosen to take action on an advice market which it says is, too often, letting customers down. The area concerning the regulator most is defined benefits.

According to a survey from the regulator, advice in this sector is all too often ‘still not of an acceptable standard.’

The regulatory started out by asking advice firms with defined benefit transfer permissions to return data about their activities before following up with site visits. It quickly raised concerns when it found that 60% of firms providing transfer advice have recommended 75% or more of its clients to transfer.

It recently sent out letters to 1,600 companies about their advice surrounding transfers, more than half of the 2,500 advice firms working in the sector. The companies contacted have been given two months to make changes and get their houses in order.

Gupta says the regulator is seeing evidence every day where firms are failing to provide significant advice to clients. This data, can prove useful in creating a picture of what bad culture looks like.

The move feeds into their ongoing aim to reduce non compliance by improving general culture. As we’ve covered in the past it is already focusing on a company’s conduct as an indicator of potential non-compliance and it now appears to believe that this data can offer learnings to the wider sector about what bad culture looks like and how it can be avoided.

It’s a similar principle to the Enforcd Regulatory Database. By compiling details of enforcement actions taken across the financial sector it is possible to build a picture of where companies are going wrong and what they could have done to avoid problems in the first place. (If you would like more information on access to the Enforcd Regulatory Database please get in touch here.)

A look at the cases on the database shows common problems cropping up in terms of incentives, data management and governance. The FCA does indeed have a privileged position which can help to shine a light on the key warning signs of non-compliance.

However, it can also share details of good culture, giving firms a positive template on which to work. By doing so, it can give firms a guide including plenty of DOs, as well as the DON’Ts.

Why You Should See Diversity as a Regulatory Issue - Waymark Tech

Why You Should See Diversity as a Regulatory Issue

Fresh data released by the FCA shows suggests the world of finance is still looking pretty male dominated. However, this is more than just an issue of equality, it could also be one of regulation.

The report in general makes for sober reading. Despite a lot of positive noise, senior jobs in finance are as male now as they were 15 years ago. The proportion of women in approved persons roles in the financial sector is 17% which is more or less the same as in 2005.

The picture is far from uniform. Smaller firms, it found, were less likely to have women in top roles than larger organisations. Major firms have seen a significant rise in the number of women in top jobs. Back in 2005 these firms were markedly less gender diverse than the industry average, but in 2019 they appear slightly above the industry average.

The conversation around gender diversity is also changing. Slowly but surely firms are beginning to realise that greater diversity is a benefit to the business rather than an ethical consideration.

Even so, this rise comes from a pretty low base and suggests that all the rhetoric surrounding diversity has not had the impact many might have expected.

A regulatory issue

Diversity is a regulatory issue for firms. Back in 2018 Christopher Woolard, Chief Executive of the FCA, pointed out that a firm’s approach to diversity and inclusion reveals a lot about their culture. Further more, he said, “the way firms handle non-financial misconduct, including allegations of sexual misconduct, is potentially relevant to our assessment of that firm, in the same way that their handling of insider dealing, market manipulation or any other misconduct is.”

In other words, the FCA believes a lack of gender diversity could be an indicator towards poor corporate behaviour.

Investors share this attitude with a move towards gender lens investment which examines a firm’s potential exposure to gender risk. A less diverse firm, one might assume, would be more likely to suffer from poor culture and may be open to a number of regulatory and PR issues which could impact financial return.

How firms should act

The lesson is the diversity is easy to talk about, but not quite as simple to achieve. However, some firms have managed it better than others. For those who have not, the message is clear: they should see this as a regulatory issue rather than just one of morality. Regulators see gender diversity as an important part of establishing the kind of positive culture they have been looking for.

So what can firms do?

The first is to be transparent about how you are performing on diversity. It should be a part of reports as much as other financial data.

The second is to make a clear commitment such as by joining the Treasuries Women in Finance initiative. The FCA’s report demonstrated that those firms which had done so were above the curve in terms of how many women make it into their top teams.

Thirdly it’s a case of education. The world of finance still suffers from a male dominated reputation, headlines such as the President’s Club still give the perception of an environment which is hostile to women. Changing this environment will encourage more women to choose finance and make their way up hierarchies.

There has already been plenty of reports showing the business case for diversity, but what’s becoming clear is that it’s also an issue of compliance. Having more women in top teams is not just about fairness, or about business performance; it’s also about reducing regulatory risk.

FCA Tackles Liquidity Mismatch - Waymark Tech Blog

FCA Tackles Liquidity Mismatch

The FCA has set out new rules to protect investors in open ended funds in hard-to-sell assets, but already they have run into some criticism.

The policy review had been started in response to property fund suspensions after the EU referendum.

The suspensions demonstrated the risk of liquidity mismatch between the time it takes to sell assets and fund holds, and the daily redemptions being offered to investors. Each time the fund managers were unable to fulfill requests for withdrawals because of their exposure to hard-to-sell illiquid assets.

The new rules started in September and only apply to property funds. A new category has been created: ‘funds investing in inherently illiquid assets’, which will be subject to enhanced oversight and disclosure rules. They will also be required to provide liquidity risk contingency plans and will be required to halt trading if there is uncertainty about the value of 20% or more of their portfolios.

The consultation closed in January and it had been due to announce its policy in June, but that was delayed by the Woodford suspension. As well as these new rules, the regulator is considering various remedies to avert a repetition of the Woodford crisis, such as the practice of daily dealing.

The policy statement says the FCA will look into notice periods for investors wishing to redeem their cash or reducing frequency for funds exposed to iliquid assets.

Another key area, according to the FCA, is disclosures. The Woodford crisis they say, illustrated the importance of investors being informed about the possibility of a liquidity mismatch. They further said, investors in the Woodford fund did not seem to be aware of – nor understand – the liquidity risks to which they were exposed.

Not going far enough?

The plans have not received the warmest of receptions. SCM Direct founder, Gina Miller, described them as ‘more tick-box regulation’, warning that investors would not be protected by mere risk warnings and contingency plans.

Other criticisms focused on the decision to limit the scope of the consultation to property funds while ignoring the wider UCITS Universe.

As the FCA acknowledged, the Woodford crisis showed that liquidity mismatches were not solely confined to property funds.

“Liquidity issues can extend to other open-ended funds, including UCITS, where they have holdings of less liquid assets, even including investments in listed equities if there is not a liquid market in those equities. Similarly, some bonds may be listed without there being a liquid market for those securities.”

Financial conduct authority

UCITS fell outside the scope of the original consultation, but when the FCA delayed its policy by three months after the Woodford crisis to see if there were relevant lessons it could draw, there were expectations that the scope might be widened.

The issue is urgent. The major liquidity crises of the past year have involved daily dealing or UCITS funds, so while this policy statement is one part of the solution, more will need to follow. The FCA confirmed that both they and the Bank of England are continuing to investigate solutions which could be applied to the wider market, so there will be more updates to come.

Waymark blog FCA takes aim at overdrafts

FCA Takes Aim at Overdrafts

It has been billed as the biggest shake up of bank overdrafts in a generation as the FCA takes aim at what it calls a ‘dysfunctional overdraft market’. So how will these changes affect banks and customers?

Read More

Page 1 of 10

Powered by WordPress & Theme by Anders Norén