Updates from the FCA During December 2020

  • Ian Manson IanManson
  • Jane Stoakes JaneStoakes
  • Peter Ray PeterRay
  • Andrew Lowin is a director at Duff & Phelps.
    Andrew Lowin AndrewLowin
  • Warren Radloff WarrenRadloff
  • Darragh Finn is a director at Duff & Phelps.
    Darragh Finn DarraghFinn
  • Alex Lander AlexLander
  • Matteo Basso Matteo Basso
  • Mark Ford Mark Ford
  • Tom Bevan Tom Bevan
  • Lauren Foulstone Lauren Foulstone
  • Giles McClelland Giles McClelland
  • Peter Timson Peter Timson
  • Amelie Snape Amelie Snape
  • Kristian Sotiriou Kristian Sotiriou
  • Laura Febbrari Laura Febbrari
  • Nadia Ghodrati Nadia Ghodrati

Updates from the FCA during December 2020

Position Limited for Certain Commodity Derivative Contracts

The FCA has published updated position limits for certain commodity derivative contracts traded on ICE Futures Europe to reflect changing market conditions. The limits have been established under the Markets in Financial Instruments Regulations 2017.

The limits are being revised in accordance with Regulatory Technical Standard 21, which states that position limits should be reviewed when there is a significant change in Open Interest, deliverable supply, or any other significant change in the market.

The affected contracts are Dutch TTF Gas 1st Line Financial Futures, UK NBP Gas 1st Line Financial Futures and WIM LNG (Platts) Future.

For further information please read the full article here.

Appointments

Sheldon Mills has been hired by the FCA as its new Executive Director, Consumers and Competition, a new post created last month after the FCA’s existing two Supervision divisions were merged with the policy and competition functions. This created a new single division led by two Executive Directors: one will be focused on the FCA’s consumer protection and competition objectives; the other on the objective to protect financial markets.

Sheldon’s prior experience was as Executive Director, Strategy and Competition, helping to ensure industry support for consumers during the pandemic. Prior to the FCA, he led on delivery of merger control across the UK economy as a Senior Director at the Competition and Markets Authority (“CMA”).

Siobhán Sheridan joins in March 2021 as Chief People Officer, having previously led a HR team of 200 people at the Ministry of Defense where she was responsible for Diversity and Inclusion Strategy at Group level. Prior to this, she had roles at Capital One, DEFRA, DWP and the NSPCC.

Find the full press release here.

Guidance for Proving the Presence of Coronavirus

The FCA consultation on draft guidance (the guidance) to help business interruption insurance policyholders, insurers and insurance intermediaries prove the presence of Coronavirus (Covid-19) closed on January 18, 2021.

The guidance proposes explanations for the types of evidence and measures available to business interruption insurance policyholders for proving the presence of Coronavirus in specific areas of their premises. The aim of the guidance is to clarify and simplify the process used for considering these claims and to facilitate claims payments being made as early as possible. Whether or not claims are paid will depend on whether the Supreme Court upholds a previous High Court decision over whether relevant policies provide cover in response to the pandemic.

This guidance is especially relevant for policyholders, insurers and insurance intermediaries.

The FCA’s statement on this can be found here.

IFPR – Data Collections Obligation

The FCA’s first IFPR Consultation Paper (CP20/24) proposes transitional provisions to facilitate the use of short data sets. This will no doubt be due to the fact that firms are not formally required to meet the IFPR data collection provisions until MIFIDPRU first applies (expected to be January 1, 2022) and is intended to cover the opening period of MIFIDPRU, i.e. until the point the full data sets should be available. Further detail is set out in Chapter 6.4 and 6.37-63 of the CP and MIFIDPRU TP4 (the proposed Transitional Provisions) can be found on page 160 and beyond. The key points to note are as follows:

  • It recognizes that firms won’t have complete sets of relevant data, as at relevant dates, within the first few months that MIFIDPRU is applicable.
  • It describes how each factor, e.g. for both the K-Factor and SNI/Non-SNI thresholds, should be calculated over periods where insufficient time has elapsed in order collect a complete set of required data.
  • Each relevant transitional provision falls away from the point a firm should have collected the full data sets.

In the absence of clarification otherwise, many firms are working on the basis that they would be required to have a full set of data by January 1, 2022, when MIFIDPRU will likely start applying.

The FCA will provide further clarification via their Consultation Papers and Policy Statement on the meaning of relevant terms in these Transitional Provisions to permit firms to be ready to confidently collect correct data and meet their obligations.

Hedge Fund CIO Banned for Market Abuse

A former Chief Investment Officer at an investment management firm has been fined £100,000 for market abuse and has prohibited him from performing functions related to any regulated activity. 

The FCA’s internal surveillance systems identified that the individual had abused the market by making a false and misleading impression as to the supply and demand for equities between January and May 2017. The individual placed large misleading orders for Contracts for Difference (CFDs), referenced to equities, which he did not intend to execute. At the same time, he placed small orders that were intended to be completed. As a result of these actions, the individual created a false representation of his buy/sell intentions to the market.

The FCA has increased its capability to detect any harmful behaviour within the market by using specifically designed algorithms to review data from UK trading venues. It hopes that the action taken against the individual shows the serious nature of the breach and that robust measures are in place to deter and prevent such incidents happening in the future. 
The individual had referred this matter to the Upper Tribunal, but the reference was withdrawn in November 2020.

To read the full article click here

Temporary Registration Regime for Cryptoasset Businesses

The FCA has established a Temporary Registration Regime (TRR) for cryptoasset businesses which applied for registration before December 16, 2020, and whose applications are still being assessed. Cryptoasset firms which did not submit an application by December 15, 2020 will not be eligible for the TRR. They will need to return cryptoassets to customers and stop trading by January 10, 2021. Firms that do not stop trading by that date are at risk of being subject to the FCA’s criminal and civil enforcement powers. The full FCA announcement can be read here.

First Consultation Paper on IFPR

The (FCA has published the first of three Investment Firms Prudential Regulation (IFPR) Consultation Papers (CP20/24). Two further Consultation Papers will follow in 2021, each addressing different elements of the proposed regime as the FCA implements its new MiFIDPRU Sourcebook. Further details and timings of these planned consultations can be found here (p.5). The UK intends to implement what is now, MIFIDPRU, and the necessary associated changes to its whole Handbook from January 1, 2022, the UK’s target implementation date.

In CP20/24, the FCA is consulting on the following:

  • Categorisation of Investment Firms, SNI or non-SNI;
  • Prudential Consolidation and the Group Capital Test;
  • Own Funds;
  • Own Funds Requirements (the next Consultation Paper due in Q2 will attend to other elements of the K-factors not covered here)
  • Concentration Risk Monitoring and related Own Funds Requirement K-CON. It should be noted that the FCA confirms SNI Firms’ obligation to monitor certain concentration risks, that only non-SNI Firms will need to report Concentration Risk and calculate a K-CON in the event they have a Trading Book; and
  • Supervisory Reporting Requirements.

CP20/24 contains proposed UK transitionals, in addition to those in the EU's IFR, which firms may welcome (e.g. for non-Local Firm Exempt CAD Firms’ Own Funds Requirement and to those firms intending to apply for the Group Capital Test).

The FCA also proposes to adopt IFR’s Initial Capital Requirement and Permanent Minimum Requirement straight as GBP equivalents;

  • £75k rather than €75k;
  • £150k rather than €150k; and
  • £750k rather than €750k.

The deadline for comments on CP20/24 is February 5, 2021.

LCF and Connaught Reviews

On December 17, 2020, the FCA responded to the independent reviews of its regulation of London Capital & Finance plc (LCF) and Connaught Income Fund Series 1 and connected companies (Connaught).

The LCF Review

The LCF Review has assessed the FCA’s actions, policies and approach when regulating LCF between April 2014 and January 2019.

All nine recommendations for the FCA in the LCF Report have been accepted. The FCA’s full response is available here.

The Connaught Review

The Connaught Review has assessed the Financial Services Authority’s and the FCA’s approach and response to intelligence, and the FCA’s approach to and involvement in the mediated negotiations before the launch of enforcement investigations in March 2015.

The FCA has accepted all five lessons learned, identified in the Connaught Report. The FCA’s full response is available here.

To read the full article click here.

Authorized Firm Censured

The FCA has ordered the Operator of the Connaught Income Fund Series 1 (‘the Fund’) to pay £203,007 restitution to investors who lost money investing in the Fund.

The FCA found that the Operator had breached Principle 2 by failing to conduct adequate due diligence before it took over as operator of the Fund in September 2009, failing to investigate potentially serious issues and failing to establish that the Fund was operating as expected. The Operator was also found to have breached Principle 7 by way of its failure to communicate with investors in a fair, clear and not misleading manner.

The Operator did not contest the FCA’s findings.

The FCA’s press release can be found here.

SM&CR and COVID-19 Expectations for Solo-Regulated Firms

In the FCA’s previous coronavirus statement on their expectations for solo-regulated firms and SM&CR, they clarified that they would not expect a firm to submit updated Statements of Responsibilities (SoRs) regarding temporary arrangements so long as certain conditions were met. This provision ended on 7 January 2021.

The FCA has since concluded that most firms have now adapted to the new ways of working, and as such now expect firms to adhere to the notification requirements and submit a Form J when significant changes are made to its SoRs.

The regulator does not expect firms to submit updated Statements of Responsibilities relating to changes made before 7 January 2021. They do, however, continue to expect that temporary arrangements carried out under the previous version of this statement to be clearly documented internally. This should be available if the FCA were to request it, both now and in the future.

The FCA previously issued a Modification by Consent to the 12-week rule to support firms using temporary arrangements during the crisis. If temporary arrangements made as a result of the pandemic lasted longer than 12 weeks, firms could notify the regulator that they consented to an extension of the 12-week rule.

While the modification by consent is still available, a firm cannot consent to the modification after April 30, 2021 and all modifications consented to before then will come to an end on that date.

To read the update in full, click here.

Rule to Enhance Climate-related Disclosures

The FCA has published a Policy Statement around climate-related financial disclosures for UK premium listed commercial companies. These companies will be required to include a disclosure statement in their annual financial report for accounting periods beginning on or after January 1, 2021, so the first disclosure statements will be published in spring 2022. The FCA press release and Policy Statement can be read here.

Firm Fined for Safeguarding and Compliance Failures

The FCA issued a fine of £8.96 million to a financial services firm for:

  • Failing to adequately protect client assets;
  • Carrying out a regulated activity without permission; and
  • Making a false statement to the FCA.

The failings affected retail customers who are supposed to be awarded the highest level of protection. The breaches arose between August 2017 and April 2019 after client money subject to UK rules was moved to a US firm and mixed with assets belonging to both UK and non-UK clients.

The firm concerned did not have FCA permission to safeguard and administer custody assets and, when it later applied for this permission, it did not notify the FCA of the breaches that had occurred. In addition, the firm falsely confirmed to the FCA that its auditors had established that it had adequate systems and controls in place to protect client assets.

To read the Final Notice in full, please click here.

Final Brexit Instruments and TTP Directions Published

To prepare for the end of the Brexit transition period, the FCA has made further EU exit-related changes to its Handbook and Binding Technical Standards to ensure a functioning regulatory and legal framework after the Brexit transition period.

The FCA also published its Temporary Transitional Power (TTP) directions. The TTP applies transitional provisions to financial services legislation for a temporary period. The TTP will be applied on a broad basis from the end of the transition period until March 31, 2022, but there are some areas where the TTP will not apply for example transaction reporting, EMIR reporting and SFTR reporting. Where the TTP applies, firms and other regulated persons can continue to comply with their pre-existing requirements for a limited period.

Firms can see which changes will apply to them by reviewing the FCA’s Handbook alongside the updated TTP information.

Please find a link to the full article here.

Paul Feeney Appointed Chair of Practitioner Panel

The Financial Conduct Authority (FCA) has appointed Paul Feeney as Chairman of its independent Practitioner Panel, with effect from January 1, 2021. The Panel is a component of the FCA arrangements for consulting practitioners on policies and practices. Paul Feeney has been Chief Executive Officer of Quilter plc (previously Old Mutual Wealth) since August 2012. The full press release can be read here.

Use of Temporary Transitional Power to Modify Derivatives Trading Obligation

The UK has onshored the Markets in Financial Instruments Regulation (MiFIR) derivatives trading obligation (DTO) under the EU Withdrawal Act. The UK DTO applies to the same classes of derivatives as the EU DTO. The Financial Conduct Authority (“FCA”) is, however, using the Temporary Transitional Power (TTP) to modify the application of the UK DTO.

This modification only applies to UK firms, branches of overseas firms in the UK and EU firms using the UK’s temporary permission regime. Those transactions which are concluded by an EEA UCITS fund or an EEA AIF are currently not in scope of the UK DTO.

Firms which are in scope of the UK DTO will be able to transact or execute trades on EU venues when trading with or on behalf of EU clients that are subject to the EU DTO provided that:

  • firms take reasonable steps to be satisfied that the client does not have arrangements in place to execute the trade on a trading venue to which both the UK and EU have granted equivalence; and
  • the EU venue has the necessary regulatory status to do business in the UK.

By March 31, 2021, the FCA will consider whether market or regulatory developments warrant a review of the use of the TTP. However, the FCA expects firms to be able to demonstrate that they are taking all reasonable steps during Q1 2021 to ensure compliance with the UK DTO. 

To read the full article please click here.

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