Regulatory Focus – April 2021

In this edition of Regulatory Focus, Duff & Phelps’ compliance experts round up the news and publications from the Financial Conduct Authority during February and March 2021.

Cayman Islands has been added to the FATF Grey List

On February 25, 2021 the Financial Action Task Force (“FATF”) updated its list of jurisdictions under increased monitoring.  The FATF added four countries to the “grey list”: Burkina Faso, Morocco, Senegal and the Cayman Islands. The addition of the latter will be of interest to investment managers of Cayman funds who are required to treat such funds as their customers.

What Does FATF Increased Monitoring Mean?

When the FATF places a jurisdiction under increased monitoring, it means that the country in question has given the FATF a commitment to resolve the strategic deficiencies identified by the FATF within an agreed  timeframe and is consequently subject to increased monitoring by the FATF. Countries on the FATF “grey list” must be distinguished from countries on the FATF “blacklist”, which identifies countries who have not formally committed to working with the FATF to address their anti-money laundering or counter terrorist financing deficiencies.

What Are the Implications for UK Investment Managers With Cayman Funds?

The UK Money Laundering Regulations require firms to apply enhanced customer due diligence in relation to high-risk countries. Regulation 33 requires firms to apply enhanced customer due diligence measures and enhanced ongoing monitoring in any business relationship with a company incorporated in, having its principal place of business in, or having its principal regulatory authority in a high-risk third country. 

A high-risk third country means a country which has been identified by the European Commission in delegated acts adopted under Article 9.2 of the Fourth Money Laundering Directive. Under the provisions of the EU (Withdrawal) Act 2018, at the end of the transition period any amendments made by the European Union to their list of high-risk third countries do not have effect in the UK. The UK will shortly be introducing legislation which will define high risk third countries with a specific list of countries that replicates the FATF grey and black lists. 

HM Treasury issued an advisory notice on March 25, 2021 for UK firms to take appropriate actions to minimise the associated risk of doing business with customers in jurisdictions on the latest FATF grey list which “may include enhanced due diligence”. We would recommend that investment managers with Cayman funds consider whether they are should be applying enhanced due diligence to these customers. 

Please get in touch with your representative at Duff and Phelps should you require further guidance. 

The Financial Conduct Authority (FCA)

Authorization and Supervision of International Firms: FCA Publishes its Approach

Following responses to a consultation published last year (CP20/20), the FCA has published a feedback statement along with an approach document outlining how the FCA will assess international firms seeking authorisation in the UK market.

The FCA expects international firms seeking authorisation in the UK to set up a place of business within the UK, as either a branch or a subsidiary, to allow the FCA to effectively supervise its UK activities. Due to the different risks of harm to UK customers that international firms can potentially present, compared to UK firms, particularly when operating as a branch, the approach document sets out the FCA’s expectations and how these risks can  be mitigated.

Please find a link to the FCA’s press release here.

FCA Secures Interim Restitution Order Against Illegal Deposit Takers

The FCA announced that it has obtained an interim restitution order in the region of £676,000 against five individuals accused of unauthorized deposit taking. The Court ordered that the defendants were jointly and severally liable for repaying money to members of the public who had provided them funds which were used for projects including forex trading and crypto assets. 

Proceedings continue against two other defendants, with a date for the trial yet to be confirmed. In the meantime, injunctions are in place freezing the defendants’ assets up to £1.3 million.

Please find a link to the FCA’s press release here. 

FCA Report Outlines Practices Firms Can Consider to Reduce Consumer Harm Caused by Failed Technology Changes

In February the FCA published the results of their multi-firm review on how firms implement technology change and the challenges they may face. The review analyzed over 1 million production changes implemented during 2019, by a sample of financial services firms, using existing FCA data, questionnaires and workshops. The review highlights practices considered to contribute to both change success and change failure, together with recommended steps firms could take to protect consumers from harm and prevent disruption in the market. The review noted that failed technology changes accounted for a quarter of all high severity incidents that caused harm to consumers and the market, during the period under review.

This review is relevant to all financial services firms and will contribute to the ongoing discussion of how firms can ensure that they reduce the risk of technology change causing operational disruption.

Please find a link to the FCA’s review here. 

Changes to Regulatory Reporting During Coronavirus

Due to the coronavirus pandemic, the FCA has been introducing temporary flexible measures for the submission of regulatory returns since April 22, 2020. On February 5, 2021, the FCA issued its latest update.

The regulator announced that due to the difficulties faced by firms and their auditors in preparing audited financial statements, it will provide flexibility for the submission of FIN-A (annual report and accounts). There will be a 2-month extension to the deadline for submissions due up to and including July 31, 2021.

The FCA noted that this measure is only to be used by firms where it has not been possible to finalise audited financial statements because of the pandemic. Where a firm is able to submit the FIN-A on time, then it should endeavour to do so. Please find a link to the FCA’s update here.

FCA Commences Criminal Proceedings Against Two for Insider Dealing

On February 11, 2021, the FCA announced that it has commenced a criminal prosecution against two individuals for insider dealing. One of the individuals has also been charged with improperly disclosing inside information, or encouraging another, whilst being an insider, to engage in dealing. The alleged offending took place between May 2, 2016 and June 10, 2016 and involved trading in shares in a company ahead of an announcement on its acquisition.

The total profit from the insider dealing was approximately £138,700. The individuals appeared at Westminster Magistrates’ Court on February 11, 2021. Insider dealing is punishable by a fine and/or up to 7 years’ imprisonment. Please find a link to the FCA’s announcement here.

FCA Commences Criminal Proceedings Against Brothers for Insider Dealing and Fraud

The FCA commenced criminal proceedings against two brothers relating to 6 offences of insider dealings and 3 offences of fraud by false representation. One of the brothers was an analyst at Goldman Sachs International and the other brother was a solicitor at Clifford Chance. Both were based in London.

The suspected insider dealing offences took place between July 15, 2016 and December 4, 2017 and are alleged to have earned the pair a profit of around £142,000. These dealings were funded by 3 separate personal loans originally stated to be for home improvements, totaling £95,000, which has led to the additional fraud charges.

The brothers appeared at Court in February 2021 and the case has now been passed on for a Plea and Trial Preparation Hearing in March 2021.

Fraud is punishable by a fine and/or up to 10 years’ imprisonment. Please find a link to the FCA’s announcement here.

FCA News and Publications Now Available in a Daily Email Alert

The FCA news and publications email alert can now be sent to subscribers on a daily and/or weekly basis. It includes press releases, speeches and statements, as well as new publications, consultations, guidance, notices and decisions. Click here to subscribe.

The FCA Makes Senior Appointments to Drive Its Transformation

Nikhil Rathi, Chief Executive of the FCA, has made four further appointments to the FCA’s executive team as part of the FCA’s transformation program to build a data-led regulator, which is able to make fast and effective decisions.  All four individuals will sit on the FCA’s Executive Committee, its most senior executive decision-making body. 

Emily Shepperd joined the FCA in March 2021 to take up the newly created role of Executive Director to oversee the authorization process.  

Stephanie Cohen will join the FCA in June 2021 as the FCA’s Chief Operating Officer and will be responsible for the FCA’s operations and business performance, systems and infrastructure, and finances.  Jessica Rusu will join the FCA in June 2021 as its first Chief Data, Information and Intelligence Officer.  Stephanie and Jessica will work closely together with their teams to deliver operational excellence and build the FCA’s data and intelligence analytics capabilities, and the technology and infrastructure that underpin them. 

Sarah Pritchard will also join the FCA in June 2021 as Executive Director, Markets.  Sarah will be responsible for the delivery of the FCA’s statutory market integrity objective in the combined Supervision, Policy and Competition division.

The FCA has also appointed Clare Cole as Director of Market Oversight and as part of that role she will lead the FCA’s response to Lord Hill’s forthcoming Listings Review.

Please find a link to the FCA’s announcement here.

Lord Hill Publishes Recommendations From the UK Listings Review

The FCA has welcomed the publishing of Lord Hill’s UK Listings Review, which sets out how UK markets and regulation can continue to meet high standards and ensure the efficacy of the UK’s capital markets to issuers and investors.

Lord Hill’s recommendations will be carefully considered by the FCA in line with its objectives on free float, dual share structures and special purpose acquisition companies. The FCA aims to publish a consultation paper in late summer 2021 with a view to make relevant rules by late 2021.

Please find a link to the FCA’s statement here.

FCA Fines and Prohibits Trader for Market Abuse

The FCA has fined a former market making trader at an investment bank £52,500 for market abuse and banned him from performing any functions in relation to regulated activity.

Between July 2018 and May 2019, the trader executed 129 wash trades by deliberately placing simultaneous buy and sell orders for shares in a commercial property investment company. 

The company was a constituent of the FTSE All Share Index and a client of the investment bank. The defendant used an abusive trading strategy with the false objective of keeping the client in the index. This artificially inflated trading volumes and gave false and misleading signals to the market.

Mark Steward, Executive Director of Enforcement and Market Oversight, commented that the “manipulative trading was serious” and said that the case demonstrated that the FCA “will take robust action against such abuse”.

In light of his cooperation to resolve the matter, the FCA reduced the original financial penalty of £75,000. Please find a link to the FCA’s announcement here.

FCA Update on the Double Volume Cap

The FCA has published a revised Statement of Policy regarding the use of a temporary power under the UK Markets in Financial Instruments Regulation (MiFIR). 

Dark trading in equities is when the participant’s trading terms in equity instruments are not made publicly available before the trade is executed. The Double Volume Cap (DVC) limits the level of dark trading in an equity.  

The MiFIR temporary power allows the FCA to apply the DVC if it considers it is necessary to prevent dark trading from harming the ability of market participants to make well-informed decisions.  

In December 2020, the FCA announced that it would not automatically apply the DVC to UK equities. The FCA is now extending this policy to all equities.

The revised Statement of Policy states that the FCA will amend its approach to the DVC if another jurisdiction makes an equivalence decision in respect of the UK.

Please find a link to the FCA’s announcement here. 

Announcements on the End of LIBOR

The FCA made a statement confirming that all LIBOR settings will either cease to be provided by any administrator or no longer be representative:

• immediately after December 31, 2021, in the case of all sterling, euro, Swiss franc and Japanese yen settings, and the 1-week and 2-month US dollar settings; and
• immediately after June 30, 2023, in the case of the remaining US dollar settings.

Publication of most of the LIBOR settings will cease immediately after these dates. ISDA confirmed separately that the ‘spread adjustments’ to be used in its IBOR fallbacks will be fixed as of March 5, 2021 as a result of the FCA’s announcement. 

The Bank of England and the FCA have recognized that there are some existing LIBOR contracts which are particularly difficult to amend ahead of the LIBOR panels ceasing, often known as the ‘tough legacy’. The FCA is taking steps to help reduce disruption in these cases. There are likely to be synthetic rates for sterling, Japanese yen and even US dollar after June 2023 for these ‘tough legacy’ contracts.

This FCA announcement is significant as it sets in motion the final chain of events to end LIBOR. Firms must act now if they have not already done so to prepare for LIBOR to largely disappear by the end of the year. Please find a link to the FCA’s announcement here.

Locking Down Market Abuse

The FCA’s Executive Director of Enforcement and Market Oversight, Mark Steward, gave a speech about Market Abuse at the Expert Forum. Key aspects of his speech related to:

• The amount of surveillance and investigation work conducted meant there was reduced trading by certain “actors” whose trading prompted high numbers of suspicious transaction and order reports.
• The increase in the FCA’s proactive market monitoring and the introduction of some new initiatives, specifically a new approach to short selling reporting.
• The introduction of a market cleanliness measure called the “Potentially Anomalous Trading Ratio.”
• Enforcement being taken in key market abuse cases against individuals and firms.

Mr. Steward made it clear that, despite the Covid-19 pandemic and Brexit, there has been an overall increase of 34% in transactions and transaction reports in 2020. This was believed to be due to the heavier trading in the first lockdown period.

Mr. Steward also mentioned that, since the first lockdown, volumes of Suspicious Transaction and Order Reports have returned to levels that the FCA expected to see, given the unprecedented trading conditions.  

Please find a link to the speech here.

Technical Negotiations Concluded on UK – EU Memorandum of Understanding

The UK and European Union (EU) have confirmed that they have agreed a Memorandum of Understanding (MoU) to continue talks and co-operation on financial services.

A government announcement said the MoU, once signed, would create “the framework for voluntary regulatory cooperation in financial services between the UK and the EU”.

The MoU will create the framework for voluntary regulatory cooperation in financial services between the UK and the EU. The MoU will establish the Joint UK-EU Financial Regulatory Forum, which will serve as a platform to facilitate dialogue on financial services issues.

The Forum’s activities are intended to reduce uncertainty and identify potential cross-border implementation issues in financial services.

The Forum will facilitate bi-annual meetings of the UK chancellor and the EU commissioner for financial services.

The MoU is not expected to automatically lead to market access for UK firms. Please find a link to the UK Government announcement here.

ESMA Launches a Common Supervisory Action on MiFID II Product Governance Rules

The European Securities and Markets Authority, the EU’s securities markets regulator, announced that it is launching a common supervisory action with national competent authorities on the application of MiFID II product governance rules across the European Union. 

Please find a link to the announcement here.