The following posts provide a snapshot of the principal U.S., European and global financial regulatory developments of interest to banks, investment firms, broker-dealers, market infrastructures, asset managers and corporates.
UK Financial Conduct Authority Publishes Its Final Approach to Authorization
The Financial Conduct Authority has published its final document, entitled "FCA Mission: Approach to Authorisation," explaining the purpose of authorization and the FCA's approach to it. The paper sets out details of the FCA's approach to: (i) evaluating whether firms meet the requisite Threshold Conditions and assessing whether individuals are "fit and proper"; (ii) how the FCA uses authorization to promote competition; and (iii) revoking authorization.
UK Conduct Authority Consults on Permanent Product Intervention Measures
The U.K. Financial Conduct Authority has launched two consultations proposing to prohibit the sale, marketing and distribution of binary options to retail consumers and to restrict the sale, marketing and distribution of contracts for difference and similar products to retail customers. Both CFDs and binary options are considered to have given rise to significant investor protection concerns, due to their complexity, the lack of transparent information at the point of sale, the risk of significant loss for investors and the deployment of aggressive marketing techniques by providers and distributors of the products. The FCA's product intervention powers under the Markets in Financial Instrument Regulation and, where the FCA has gone beyond those powers, the Financial Services and Markets Act 2000, allow it to impose prohibitions or restrictions on certain financial instruments, financial activities or practices to address a significant investor protection concern. The proposed rules would be permanent and would replace the temporary measures introduced, and subsequently renewed, by the European Securities and Markets Authority earlier this year.
UK Parliamentary Committee Launches Inquiry Into Operational Resilience in the Financial Services Sector
The U.K. Treasury Committee has announced the launch of a new Inquiry into IT failures in the financial services sector. The Inquiry has been launched in response to recent IT failures at a number of financial institutions that have led to consumers being unable to access their bank accounts or becoming subject to fraud.
The Committee will assess the causes and consequences of these recent IT failures. Among other things, the Committee will consider the extent to which such incidents are becoming more frequent, sources of concentration risk in the financial sector, the impact of legacy IT systems, the effect of outsourcing on operational resilience, best practices in responding to operational incidents and whether the U.K. regulators are able to regulate firms' capabilities for responding to such incidents.
Written submissions can be made to the Committee by January 18, 2019. The Committee will also appoint a special advisor to provide policy advice to the Committee on the issues. Individuals interested in the role should respond to the call for Expressions of Interest.
View the announcement.
EU Supervisory Authority Will Extend Binary Options Ban Into 2019
The European Securities and Markets Authority has announced that it proposes to renew the prohibition on the marketing, distribution or sale of binary options to retail clients for a further three months from January 2, 2019. ESMA's product intervention powers under the Markets in Financial Instruments Regulation allow it to impose temporary prohibitions or restrictions on certain financial instruments, financial activities or practices to address a significant investor protection concern in the EU. ESMA is renewing the prohibition on binary options because it considers that a significant investor protection concern remains. The measure will be renewed on the same terms as the previous renewal decision that has applied from October 2, 2018 and that will expire on January 1, 2019.
ESMA's Board of Supervisors agreed on the renewal of intervention measures on November 7, 2018. ESMA will publish an official notice on its website in the coming weeks. The new Decision will then be published in the Official Journal of the European Union and will start to apply from January 2, 2019 for a period of three months.
View ESMA's announcement.
View details of the prohibition expiring on January 1, 2019.
EU Proposals Aim to Avoid Duplicative Information Requirements on Investment Managers
The Joint Committee of the European Supervisory Authorities have launched a consultation on amendments to the Key Information Document for Packaged Retail and Insurance-based Investment Products.
Since January 1, 2018, the EU PRIIPs Regulation has required manufacturers of PRIIPs to prepare and publish a stand-alone, standardized Key Information Document for each of their PRIIPs. Those advising retail investors on PRIIPs, or selling PRIIPs to retail investors, must provide retail investors with a KID in good time before the transaction is concluded. The PRIIPs Regulation exempts until December 31, 2019 management and investment companies and persons advising on or selling Undertakings for Collective Investment in Transferable Securities from the obligation to produce and provide a PRIIPs KID. The UCITS Directive requires these entities to provide investors with a Key Investor Information Document. As a result, if there were no changes made to the EU legislation, UCITS would be subject to duplicative information requirements from January 1, 2020. To address this situation, the ESAs are proposing to amend the Regulatory Technical Standards under the PRIIPs Regulation by moving the UCITS KIID requirements to the PRIIPs RTS.
EU Contracts for Differences Product Intervention Measures Extended
The European Securities and Markets Authority Decision renewing and amending the temporary restriction on the marketing, distribution or sale of contracts for differences to retail clients has been published in the Official Journal of the European Union. ESMA announced on September 28, 2018 that the existing restriction would be extended and would include an additional reduced character risk warning because CFD providers have experienced technical difficulties in using the risk warnings due to the character limitations imposed by third-party marketing providers. The CFD Decision applies directly across the EU from November 1, 2018 for three months.
ESMA extended the temporary product intervention prohibiting the marketing, distribution and sale of binary options to retail investors for a further three months from October 2, 2018, although certain types of binary options were excluded from the scope of the prohibition because ESMA considers that those binary options are less likely to present a significant investor protection concern. Both of ESMA's product intervention measures are made using powers under the Markets in Financial Instruments Regulation.
View the Decision.
View details of the extension of the ban relating to binary options.
UK Regulator Considers Potential Regulatory Refinements for Climate Change
The U.K. Financial Conduct Authority has published a Discussion Paper on climate change and green finance in which it calls for comment on potential changes to its regulatory approach in these areas. The Discussion Paper sets out specific action that the FCA intends to take in the short term in four focus areas - capital markets disclosures, public reporting requirements, green finance and pensions.
First, the FCA is considering whether the regulatory approach to disclosures by issuers in the capital markets should be amended. In particular, the FCA is asking for comments on: (i) the difficulties that issuers may have in determining materiality of climate-related issues such that a specific disclosure would be warranted; (ii) whether investors would benefit from greater comparability of disclosures; (iii) whether further prescribed requirements on climate-related disclosures should be introduced to facilitate more consistent disclosures by issuers. This final point includes whether the introduction of a "comply or explain" approach to the Task Force on Climate-related Disclosures would facilitate more effective markets.
European Supervisors Announce 2019 Work Priorities
The Joint Committee of the European Supervisory Authorities (that is, the European Banking Authority, the European Securities and Markets Authority and the European Insurance and Occupational Pensions Authority) has published its 2019 Work Programme. EIOPA will Chair the Joint Committee in 2019. The Work Programme provides details of the Joint Committee's key workstreams for 2019.
European Parliament Adopts Resolution on Distributed Ledger Technologies
The European Parliament has adopted a non-legislative resolution entitled "distributed ledger technologies and blockchains: building trust with disintermediation." Of particular relevance to the financial services sector, the European Parliament is requesting that the European Commission and other EU authorities take various steps to maximize the potential of this technology in the EU.
EU Ban Relating to Binary Options Extended
Following its announcement in August 2018, the European Securities and Markets Authority has published notice of the extension of the prohibition on the marketing, distribution and sale of binary options to retail investors for a further three-month period from October 2, 2018. ESMA is extending the ban because the threat to investor protection has not been addressed yet through a change in EU legislation and national regulators have either taken no action or have taken insufficient action to address the potential harm.
EU Contracts for Difference Product Intervention Measures to be Extended
The European Securities and Markets Authority has announced that its various restrictions on the sale, distribution and marketing of Contracts for Difference to retail investors will be extended from November 1, 2018 for a further three months.
ESMA adopted two temporary product intervention Decisions under the Markets in Financial Instruments Regulation in June this year, one relating to binary options and another to CFDs. ESMA has powers under MiFIR to impose prohibitions or restrictions on certain financial instruments, financial activities or practices to address a significant investor protection concern in the Union. Product intervention measures imposed by ESMA under MiFIR must be reviewed at appropriate intervals and at least every three months. If a measure is not renewed after three months, it will expire and it would then fall to member states to impose similar restrictions at a national level, if they so wish. The U.K. Financial Conduct Authority is expected to consult before the end of the year on whether to make permanent the EU's temporary prohibition on marketing, distribution and sale of binary options to retail investors. The International Organization of Securities Commissions recently published a report on retail OTC leveraged products, alongside a statement warning retail investors of the risks of investing in illegal or fraudulent binary options.
International Standards Body Encourages Regulatory Clampdown on OTC Leveraged Products
The International Organization of Securities Commissions has published a report on retail OTC leveraged products, alongside a statement warning retail investors of the risks of investing in illegal or fraudulent binary options. This step at international level follows the temporary prohibition of the marketing, distribution or sale of binary options and the restrictions on the marketing, distribution or sale of CFDs to retail clients introduced in the EU earlier this year, which the U.K. Financial Conduct Authority fully supported.
The report covers rolling spot forex contracts, CFDs and binary options offered and sold on a domestic and cross-border basis by intermediaries to retail investors. The report includes three toolkits providing guidance to IOSCO member jurisdictions on methods for mitigating the harm to retail investors investing in these products.
European Securities and Markets Authority Intends to Extend Product Intervention Measures for Binary Options for a Further Three Months
The European Securities and Markets Authority has announced its intention to adopt a Decision to extend the prohibition on the marketing, distribution and sale of binary options to retail investors for a further three-month period from October 2, 2018. ESMA has previously adopted intervention measures for binary options, with the current Decision set to expire on October 1, 2018.
ESMA has power under the Markets in Financial Instruments Regulation to impose prohibitions or restrictions on certain financial instruments, financial activities or practices. This may be done when, among other conditions, the exercise of ESMA's power addresses a significant investor protection concern in the Union. Product intervention measures imposed by ESMA under MiFIR must be reviewed at appropriate intervals and at least every three months. If a measure is not renewed after three months, it will expire. In reviewing the current Decision, ESMA has agreed to exclude from the scope of product intervention certain types of binary option that are less likely to lead to a significant investor protection concern.
UK Conduct Regulator Reminds Firms of Obligations on Selling High-Risk Products to Retail Clients
The U.K. Financial Conduct Authority has issued a statement on selling high-risk speculative investments to retail clients following the European Securities and Markets Authority's product intervention on contracts for difference products.
ESMA issued decisions in March and June 2018 to temporarily prohibit the marketing, distribution or sale of binary options and to impose restrictions on the marketing, distribution or sale of CFDs to retail clients. In the CFD decision, ESMA had clarified that turbo certificates were outside the scope of the CFD restrictions. However, in its recently updated Q&A on its product intervention, ESMA acknowledges that turbo certificates have comparable features to CFDs, such as leverage.
UK Financial Conduct Authority Proposes Changes to Rules Governing Peer-to-Peer Lending Platforms
The Financial Conduct Authority has launched a consultation on new rules for loan-based crowdfunding platforms, also known as peer-to-peer lending platforms. The FCA implemented rules regulating FCA-authorized firms operating investment-based and loan-based crowdfunding platforms on April 1, 2014. Investment-based crowdfunding is governed by the Markets in Financial Instruments package and the Alternative Investment Fund Managers Directive, as transposed into U.K. law. The regime for P2P lending is a national one and is less detailed and prescriptive.
The FCA began a post-implementation review of the crowdfunding sector and the applicable regimes in 2016. In the post-implementation review, the FCA identified that harm may be caused to investors as a result of poor business practices and due to the business models that some platforms have adopted. The consultation paper summarizes the FCA's findings from that review and sets out the FCA's proposals to change certain rules and guidance.
UK Regulator Seeks Input on EU Packaged Retail and Insurance-based Investment Products Regulation
The Financial Conduct Authority has issued a call for input on the Packaged Retail and Insurance-based Investment Products Regulation. Since January 1, 2018, the EU PRIIPs Regulation has required manufacturers of PRIIPs to prepare and publish a stand-alone, standardized Key Information Document for each of their PRIIPs. Those advising retail investors on PRIIPs, or selling PRIIPs to retail investors, must provide retail investors with a KID in good time before the transaction is concluded.
The FCA is seeking input about the initial experience of: (i) those producing, advising on, or distributing PRIIPs and preparing and providing KIDs; and (ii) consumers using KIDs to decide whether to invest in these investment products. In addition, the FCA is asking for feedback on the scope of the PRIIPs Regulation, in particular, which instruments fall in or out of the scope of the requirements, and on practical aspects of certain cost and risk disclosure requirements.
Feedback to the call for input should be provided by September 28, 2018. The FCA intends to publish a feedback statement in Q1 2019.
View the call for input.
US Federal Reserve Board Launches New Consumer Protection Bulletin
The U.S. Board of Governors of the Federal Reserve System launched the Consumer Compliance Supervision Bulletin. The bulletin will be published by the Federal Reserve Board’s Division of Consumer and Community Affairs, and will provide high-level summaries of supervisory issues, highlight violations that have been identified, include practical guidance with respect to the management of consumer compliance risks and enhance transparency with respect to the Federal Reserve Board’s consumer compliance supervisory program. The current issue of the bulletin includes content with respect to fair lending, unfair or deceptive acts or practices and regulatory and policy developments.
View full text of the bulletin.
UK Conduct Authority Contemplates Introducing a New Duty of Care
The Financial Conduct Authority has published its Approach to Consumers alongside a discussion paper on the potential introduction of a new duty of care and possible alternative approaches. The Approach to Consumers forms part of a series of formal approach documents explaining the FCA's approach to regulation in more depth. It should be read alongside the FCA's Mission document, which was first published in October 2016 and most recently updated in November 2017.
The Approach to Consumers sets out the FCA's approach to regulating for retail customers. The document sets out the FCA's vision for well-functioning markets that work for consumers, the relevant regulatory and legal framework, when and how the regulator will act to protect consumers, the FCA's policy position on key issues and its strategy for ensuring that its consumer protection objective is advanced with the greatest impact.
UK Conduct Regulator Chair Supports New Standards for Data Ethics
Charles Randell, Chair of the Financial Conduct Authority and Payment Systems Regulator,delivered a speech on big data, regulation and data protection entitled, "How can we ensure that big data does not make us prisoners of technology?"
Discussing the risks associated with big data and artificial intelligence, Mr. Randell highlighted that in order to innovate ethically, thought needs to be given to the questions posed by big data, AI and behavioural science. In particular, the FCA Chair is concerned that technical innovation could increase social exclusion and reduce access to financial services if it was used, for example, to identify the most profitable or most risky customers.
European Banking Authority Issues Annual Report for 2017
The European Banking Authority has published its Annual Report for 2017.
The Annual Report summarizes the progress made in a number of workstreams undertaken by the EBA in 2017, including the EBA's work on: (i) developing and maintaining an EU Single Rulebook for banking; (ii) promoting supervisory convergence; (iii) developing resolution policies and promoting common approaches for the resolution of failing financial institutions; (iv) determining and monitoring key risks in the banking sector across Europe; (v) strengthening the EBA's role as EU data hub for the collection, use and dissemination of banking data; (vi) protecting consumers, monitoring financial innovation and contributing to easy retail payments in the EU; (vii) Brexit preparations; (viii) international engagement; and (ix) cross-sectoral work by the European Supervisory Authorities under the Joint Committee.
European Securities and Markets Authority Adopts First Product Intervention Measures for Contracts for Difference and Binary Options
The European Securities and Markets Authority has adopted two Decisions on the provision of Contracts for Difference and binary options to retail investors. The effect of the Decisions is to prohibit the marketing, distribution and sale of binary options to retail investors and to impose a number of restrictions on the marketing, distribution and sale of Contracts for Difference to retail investors. Both CFDs and binary options are considered to have given rise to significant investor protection concerns, due to their complexity, the lack of transparent information at the point of sale, the risk of significant loss for investors and the deployment of aggressive marketing techniques by providers and distributors of the products.
EU Authorities Highlight Importance of Bail-In Risk Disclosures for Retail Investors in Bank Debt Liabilities
The European Banking Authority and the European Securities and Markets Authority have published a joint statement on the treatment of retail holdings of debt financial instruments under the EU Bank Recovery and Resolution Directive and the revised Markets in Financial Instruments Directive. The EBA and ESMA highlight that care is needed when bail-in is implemented in relation to debt liabilities held by retail customers. There have been a number of mis-selling cases as a result of firms not complying with the investor protection requirements at the point of sale of banks' debt liabilities to retail investors.
The EBA and ESMA emphasize that to ensure that debt instruments are distributed to clients for whom they are suitable, firms must properly implement the MiFID II investor protection requirements. Those requirements oblige firms to, among other things, act honestly, fairly, professionally and in the best interests of clients, disclose certain information to potential and existing clients and conduct suitability assessments. In addition, the product governance framework requires manufacturers and distributors of financial products to act in the client's best interests at all stages of the life-cycle of products or services. In particular, firms must identify the target market for complex products to a greater level of detail than other products. Instruments subject to bail-in must be classified as complex products.
US Department of Labor Issues Guidance on Fiduciary Rule Compliance
The U.S. Department of Labor issued a Field Assistance Bulletin regarding an anticipated mandate by the United States Court of Appeals for the Fifth Circuit effectuating its opinion that vacates the Fiduciary Rule and related exemptions and amendments in their entirety. The DOL guidance notes that fiduciaries may continue to rely on its previously issued temporary enforcement policy, which notes that the DOL will not pursue prohibited transaction claims against fiduciaries who are working in good faith to comply with certain prohibited transaction exemptions issued in connection with the Fiduciary Rule or treat those fiduciaries as violating the applicable prohibited transaction rules. In addition, the temporary enforcement policy notes that investment advice fiduciaries may also choose to rely upon other available exemptions to the extent applicable after the Fifth Circuit’s decision.
View full text of the DOL bulletin.
UK Financial Conduct Authority Finalizes Rules Enhancing Governance of Authorized Fund Managers
The Financial Conduct Authority has published a Policy Statement and final rules relating to strengthening the governance arrangements of U.K. authorized fund managers. The need to enhance these arrangements was identified by the FCA in the Asset Management Market Study launched in 2015. The final AMMS report was published in June 2017 and set out remedies the FCA intended to implement to address identified issues. At the same time, the FCA published a consultation paper on the first set of proposals.
The Policy Statement sets out the FCA's response to the feedback on its proposals and the final rules and guidance. The new rules and guidance applies to U.K. AFMs in relation to their management of authorized funds (that is, authorized open-ended collective investment schemes). The rules will apply either on April 1, 2019 or on September 30, 2019, depending on the lead time that the FCA considers the industry needs to implement the required changes.
Read more for a summary of the FCA's decision on the various consultation points.
UK Financial Conduct Authority Consults on Proposals to Improve Disclosure to Fund Investors by Authorized Fund Managers
The Financial Conduct Authority has published a second consultation paper on remedies arising out of the Asset Management Market Study. This consultation concerns improving disclosure by authorized fund managers to their investors and should be read with the Policy Statement, final rules and revised guidance on enhanced governance arrangements for U.K. AFMs, which were published alongside the consultation paper. The FCA is proposing:
- new guidance on how AFMs should make fund objectives and investment policies clear and more useful for investors;
- new rules requiring managers to be clear about why (or why not) a benchmark has been used and how investors should assess the performance of the fund;
- new rules requiring AFMs that use benchmarks to use and reference them consistently across marketing materials;
- new rules requiring that where managers present past performance they must do so in an appropriate and consistent manner; and
- amending the performance fee rules to require that performance fees be calculated on performance net of other fees.
View the second consultation on remedies arising from the AMMS.
View details of the Policy Statement and final rules.
View the AMMS final report and the first consultation paper.
US Consumer Financial Protection Bureau Releases Semi-Annual Report
The U.S. Consumer Financial Protection Bureau published its semi-annual report. The report, which is mandated by the Dodd-Frank Act, highlights and summarizes various topics the CFPB is working on, including a list of rules, orders and initiatives to be undertaken in the upcoming period. The report notes upcoming proposed and final rules, including reconsideration of certain aspects of Regulation C (Home Mortgage Disclosure), finalization of amendments to Regulation P (Annual Privacy Notice Requirements Under the Gramm-Leach-Bliley Act), and finalizing an amendment to Regulation Z (Federal Mortgage Disclosure Requirements under the Truth in Lending Act). In his introductory letter to the report, CFPB Acting Director Mick Mulvaney was critical of past actions by the CFPB, contending that the CFPB was too powerful and subject to very little oversight. Acting Director Mulvaney noted that the CFPB “will continue to execute the law, but will no longer go beyond its statutory mandate.” In addition, Acting Director Mulvaney requested Congress enact four changes in order to promote and establish CFPB accountability: funding the CFPB through the congressional appropriations process; requiring congressional approval of major CFPB rules; ensuring that the CFPB Director is accountable to the President in the exercise of executive authority; and creating an independent Inspector General for the CFPB.
View the CFPB report.
European Banking Authority Proposes Extending the Scope of the Complaints-Handling Guidelines
The European Banking Authority has published proposals to extend the Joint Committee Guidelines on complaints-handling for the securities and banking sectors to the new institutions established under the revised Payment Service Directive and the Mortgage Credit Directive. The Joint Committee's Guidelines on complaints-handing for the securities and banking sectors, published in June 2014, apply to national regulators responsible for supervising complaints-handling by credit institutions, investment firms, certain fund managers, payment institutions and electronic money institutions where complaints are made by natural or legal persons about the regulated activities carried out by these entities.
The MCD, which has applied since March 2016, covers non-bank creditors. Similarly, PSD2, in application since January 2018, introduced two new providers of payment services - payment initiation service providers and account information service providers. Complaints-handling by these entities do not currently fall within the scope of the Guidelines.
The EBA is proposing to extend the scope of the existing Guidelines to these entities to ensure that consumers receive the same level of protection when they interact with these new entities as when they interact with in-scope regulated entities. The extended Guidelines would only apply to security-related complaints for account information services provided by account information service providers under PSD2. The EBA proposes that national regulators should apply the extended Guidelines on a proportionate basis, taking into account the nature, scale and complexity of the business of each entity as well as the nature and range of services they offer.
The consultation closes on May 27, 2018.
View the consultation paper.
View the existing Guidelines.
European Securities and Markets Authority Confirms Product Intervention for Contracts for Difference and Binary Options
The European Securities and Markets Authority has confirmed that it will use its product intervention powers under the Markets in Financial Instruments Regulation to prohibit the marketing, distribution and sale of binary options to retail investors. It will also impose a number of restrictions on the marketing, distribution and sale of Contracts for Difference to retail investors. Both CFDs and binary options have given rise to significant investor protection concerns, due to their complexity, the lack of transparent information at the point of sale, the risk of significant loss for investors and the deployment of aggressive marketing techniques by providers and distributors of the products.
UK Payment Systems Regulator To Proceed With Plans To Reimburse Payment Scam Victims
The U.K. Payment Systems Regulator has published the outcome of the consultation it launched in November 2017 on a contingent reimbursement model for the victims of so-called “authorized push payment” scams. That consultation, which closed on January 12, 2018, outlined high level principles for the CRM and requested input from stakeholders on how the model should be further developed, implemented and administered.
Taking into account responses to the consultation, the PSR proposes to proceed with the CRM model and will establish a dedicated steering group to develop it, in the form of an industry code for reimbursement of APP scam victims. The steering group will be comprised of representatives from key stakeholder groups, particularly consumer representatives and PSPs, with oversight and support from the PSR. Other relevant regulatory and governmental bodies will also be involved as observers.
European Securities and Markets Authority Outlines 2018 Plans for EU Supervisory Convergence
In addition to the key priorities, the 2018 programme also sets out ESMA key objectives and main planned outputs in relation to a number of thematic and cross-cutting issues, including: investor protection and intermediaries; secondary markets; investment management; market integrity (including market abuse and benchmarks); post-trading (including CCPs, securities financing and settlement); corporate finance (in particular the new prospectus regime); corporate reporting; market data; financial innovation; IT infrastructure; and peer reviews.
The European Securities and Markets Authority has published its Supervisory Convergence Work Programme for 2018. It highlights a total of five key priorities for its work on supervisory convergence in 2018, comprised of three ongoing priorities (application of the revised Markets in Financial Instruments framework, data quality and investor protection) and two new priorities (Brexit and financial innovation).
UK Financial Conduct Authority Provides Reassurance for Manufacturers of Packaged Retail and Insurance-based Investment Products
The UK Financial Conduct Authority has issued a public statement on the Packaged Retail and Insurance-based Investment Products Regulation, which took effect on January 1, 2018.
The PRIIPs Regulation requires manufacturers of PRIIPs to prepare and publish a stand-alone, standardized Key Information Document for each of their PRIIPs. Those advising retail investors on PRIIPs, or selling PRIIPs to retail investors, must provide the retail investors with a KID in good time before the transaction is concluded.
European Securities and Markets Authority Considers Product Intervention for Contracts for Difference and Binary Options
The European Securities and Markets Authority has issued a call for evidence on the possible use of its product intervention powers under the Markets in Financial Instruments Regulation to impose restrictions and/or prohibitions on the marketing, distribution and sale of contracts for difference and binary options to retail investors.
UK Financial Conduct Authority Highlights Firms' Failings in Providing and Distributing Contracts for Difference
The Financial Conduct Authority has published a "Dear CEO" letter that was sent to firms that offer contracts for difference products to retail customers on either an advisory or discretionary portfolio management basis (including pursuant to limited power of attorney). The "Dear CEO" letter follows a review conducted by the FCA which assessed internal processes, policies, controls and oversight arrangements at a sample of 19 providers and 15 distributors of CFD products to retail customers. The "Dear CEO" letter identifies a number of areas of concern: target market identification and alignment of the target market to the characteristics of the product; communication, oversight and challenge; the process for taking on new distributors; management of conflicts of interest; the use of management information and key performance indicators; client categorisation; and remuneration arrangements.
The FCA considers that there is a high risk that firms across the sector are not meeting its rules and expectations when providing and distributing CFDs and that consumers are likely to experience poor outcomes unless these poor practices are addressed. The letter highlights the need for firms overall to improve a number of oversight and control arrangements to reach the standard required by FCA rules and guidance. The FCA will conduct further work on CFDs and firms may be asked to take part in a follow-up review to assess how they have responded to the feedback in the Dear CEO letter. The FCA will also be assessing firms' compliance with the new Product Intervention and Product Governance sourcebook, which came into effect on January 3, 2018, implementing as rules the product governance requirements of the revised Markets in Financial Instruments Directive.
View the "Dear CEO" letter.
New York State Department of Financial Services Proposes Fiduciary Standard for Insurance Brokers
The New York Department of Financial Services published a proposed amendment which would require insurance brokers to offer products that align with a customer’s “best interest,” instead of products that offer the most economic benefit to the broker. The proposed amendment sets forth what constitutes acting in the best interest of a customer, which includes an evaluation of the suitability information of the customer and a determination that a product is suitable for the particular customer. In an accompanying press release New York Governor Andrew Cuomo drew comparisons between the proposed amendment and the US Department of Labor’s Fiduciary Rule, of which the implementation of certain provisions of the latter has been delayed. As proposed, the NYDFS amendment is more expansive than the DOL’s Fiduciary Rule with respect to the products that it covers. The proposed amendment is open for public comment until February 25, 2018, and is scheduled to take effect March 27, 2018.
View proposed amendment.
UK Financial Conduct Authority Elaborates on its Mission and Consults on Approaches to Competition and Authorization
The UK Financial Conduct Authority has published two consultations, seeking feedback on draft documents setting out its regulatory approach to authorization and competition. The two documents, once finalized, will form part of a series of formal approach documents explaining the FCA's approach to regulation in more depth. They should be read alongside the FCA's Mission document, which was first published in October 2016 and most recently updated in November 2017.
In the consultation on its approach to authorization, the FCA explains the public value and purpose of requiring authorization to conduct regulated financial services activities and the FCA's current approach to authorizing firms and individuals. The FCA seeks feedback on four questions: (i) understanding of the Threshold Conditions that firms and individuals must meet for authorization, and any areas where the FCA might be more specific; (ii) how the FCA might improve its approach to supporting firms and individuals to meet the minimum standards and how the FCA might better promote competition; (iii) whether the FCA has suggested the correct commitments to firms making authorization applications and what other commitments could be made; and (iv) whether the FCA has prioritized the right strategic goals, and, if not, what additional goals could add the most public value to the FCA's work.
UK Regulations on Packaged Retail and Insurance-based Investment Products Published
The Packaged Retail and Insurance-based Investment Products Regulations 2017 have been published and will enter into force on January 1, 2018.
The Regulations implement in part the EU Regulation on key information documents for packaged retail and insurance-based investment products (PRIIPs Regulation). From January 1, 2018, the PRIIPs Regulation will introduce requirements on manufacturers of PRIIPs to produce a standardized Key Information Document in an official language of all EU countries into which offerings are made. It also requires those advising on or selling PRIIPs to provide retail investors with KIDs in good time before the investor enters into the investment.
This legislation has major implications for many parts of the financial sector, since PRIIPs as defined are likely to include most financial instruments (other than shares). For example, for bonds and exchange traded derivatives, new selling restrictions or disclosures are needed for many financial products.
The Regulations designate the Financial Conduct Authority as the competent authority for the purposes of the PRIIPs Regulation and confer enforcement powers on the FCA. The FCA will be empowered to make orders prohibiting persons from marketing PRIIPs or requiring them to suspend marketing. The FCA will also have the power to issue statements on contraventions of the PRIIPs Regulation and/or to impose penalties.
View the Regulations (S.I. 2017 No 1127).
View Correction Slip published on December 11, 2017.
View the Explanatory Memorandum.
UK Regulator Warns of Risks of Investing in Cryptocurrency CFDs and Binary Options
The UK Financial Conduct Authority has issued two consumer warnings on the risks of investing in contracts for differences relating to cryptocurrencies (that is, digital assets such as Bitcoin or Ethereum) and the risks of trading binary options.
UK Payment Systems Regulator Consults on Reimbursement of Victims of Payment Scams
The UK Payment Systems Regulator has published a report on the initiatives it has engaged in with banks, the payment systems industry and the Financial Conduct Authority to prevent or mitigate harm to consumers from scams which involve tricking people into sending money to fraudsters. This type of scam is known as an authorized push payment, or APP, scam and is the second biggest type of payment fraud reported in the UK behind card fraud. The PSR has previously investigated APP scams following a Which? super-complaint in 2016 and concluded in its response to the super-complaint that more needed to be done to address them.
UK Financial Conduct Authority Publishes Final Asset Management Market Study Report
The Financial Conduct Authority has published the final report of the Asset Management Market Study it launched in November 2015. The object of the AMMS was to investigate three core areas: (i) how asset managers compete to deliver value; (ii) whether asset managers are willing and able to control costs and quality along the value chain; and (iii) how investment consultants affect competition for institutional asset management. Furthermore, the FCA wanted to look at whether there are any barriers to innovation that prevent investors from obtaining better results. The FCA published an interim AMMS report in November 2016 which set out the FCA's provisional assessment of the way competition works for asset management services, the consequences for investors and the FCA's proposed remedies to tackle the issues.
The final AMMS report confirms the FCA's interim findings and proposes a package of remedies. The FCA has divided the remedies into three buckets: (i) remedies on which it has published a consultation alongside the final report; (ii) final remedies; and (iii) remedies on which it intends to consult later.
UK Regulator Consults on Persistent Debt and Earlier Intervention Remedies as Part of Credit Card Market Study
The Financial Conduct Authority has published a consultation paper on persistent credit card debt and earlier intervention remedies. The remedies and interventions outlined in the consultation paper form part of the overall package of remedies announced by the FCA in July 2016 in its credit card market study final findings report. The FCA then concluded that competition was working fairly well for the 30 million consumers who hold a credit card. However, the FCA expressed significant concerns regarding the scale, extent and the nature of persistent credit card debt and the limited incentives provided by firms to reduce this.
US Consumer Financial Protection Bureau Seeks Public Comment on Consumer Remittance Rule
The US Consumer Financial Protection Bureau announced that it is seeking feedback from the public regarding the effectiveness of the remittance rule. The remittance rule, which took effect on October 28, 2013, requires, among other things, that companies give accurate disclosures to consumers prior to a remittance transfer. In addition, the rule also requires remittance transfer providers to investigate disputes and remedy certain areas. Pursuant to the Dodd-Frank Wall Street Reform and Consumer Protection Act which authorized the CFPB to issue rules governing remittance transfers, the CFPB is also required to conduct an assessment of the rule within 5 years from the date of effectiveness of the rule. Under this requirement, the CFPB will be required to issue a report of the assessment in the fall of 2018.
View the CFPB press release requesting comment.
US Consumer Financial Protection Bureau Delays Prepaid Account Rule
The CFPB proposed to delay the effective date of the “prepaid account rule” by six months, from October 1, 2017 to April 1, 2018. The rule generally extends Regulation E (Electronic Funds Transfers) and Regulation Z (Truth in Lending) to “prepaid accounts,” such as prepaid cards and mobile wallets that can store and transfer funds. The proposed delay was open for public comment until April 5, 2017. While the proposed delay would not make any changes to the prepaid account rule, the CFPB noted the delay would allow the CFPB to consider possible further amendments to the rule to address other concerns raised by industry participants.
View the CFPB’s proposal.
US Consumer Financial Protection Bureau Issues Compliance Guide on Prepaid Rule and Remittance Transfers
The CFPB provided summary and highlights information regarding the implementation of the Prepaid Rule, which creates tailored provisions for prepaid accounts governing disclosures, limited liability and error resolutions, and periodic statements. The CFPB concurrently issued a compliance guide on remittance transfers.
View the CFPB compliance guide on the Prepaid Rule.
View the CFPB compliance guide on remittance transfers.
HSBC to Provide Voluntary Redress for Historical Debt Collection Practices
The Financial Conduct Authority announced that HSBC Bank Plc has voluntarily agreed to set up a redress scheme of approximately £4m for customers who suffered detriment by paying unreasonable debt collection charges imposed by HFC Bank Ltd and John Lewis Financial Services Ltd. HSBC now owns both HFC and JLFS. Customers of HFC and JLFS who, between 2003 and 2009, fell into arrears were referred to the firms’ nominated solicitors. The solicitors added a “debt collection charge” of 16.4% of the customer’s balance to each customer’s account. The charge was identified by the Office of Fair Trading in 2010 as unreasonable as it did not reflect the actual costs of collecting the debt and the OFT in November 2010 formally ordered HFC to stop adding the collection charge until it varied or introduced new terms into its agreements with customers to reflect the charge. JLFS was not within the scope of the OFT’s review. In practice, JLFS and OFT had stopped adding a debt collection charge in November 2009, and in 2010 reversed the charge from all live accounts.
UK Prudential Regulator Confirms Increase in Deposit Protection Limit
The Prudential Regulation Authority published a Policy Statement and final rules on raising the deposit protection limit. The Policy Statement follows the consultation paper published by the PRA in November 2016. It is proposed that the DPL will be raised to £85,000 from January 30, 2017. The Policy Statement provides feedback to the responses received to the consultation paper. The PRA received 24 responses, with most respondents supportive of the proposals to reset the DPL at £85,000. The purpose of the revised DPL is to provide depositors with PRA-authorized firms commensurate protection to that of depositors with firms authorized by regulators in other EU Member States. The Deposit Guarantee Schemes Directive requires non-Euro Member States to adjust their deposit protection limits every five years to ensure they are equivalent to the euro limit of EUR100,000 (£85,000 was added as a figure following recent currency fluctuations).
The DPL is effective from January 30, 2017. Firms will need to make changes to customer-facing materials required to implement the new deposit limit as soon as practicable from January 30, 2017, and at the latest, by June 30, 2017. The PRA expected firms to train their customer-facing staff to answer questions from customers about the change in the deposit limit, regardless of whether a firm's written materials are amended by January 30, 2017.
View the Policy Statement.
View the final rules.
UK Regulators Consult on the Management Expenses Levy Limit for 2017/18
The Prudential Regulation Authority and the Financial Conduct Authority published a joint consultation paper on the management expenses levy limit for the Financial Services Compensation Scheme in 2017/2018. The MELL proposed for 2017/18 is £74.54 million. The FSCS is a last resort compensation fund for consumers of failed authorized financial services firms that fall under the regulatory remit of the FCA and PRA. The MELL is the maximum amount which the FSCS may levy in a year without further consultation. The proposed MELL of £74.54 million consists of £69.24 million for FSCS management of expenses and £5.3 million as an unlevied contingency reserve. The consultation also contains the proposed rules for the PRA and FCA to set the MELL in 2017/18. Responses to the MELL for 2017/18 as outlined in the consultation are due by February 13, 2017. The PRA and FCA aim to finalize and publish the rules in a policy statement to be published in March 2017 and final rules are expected to take effect from April 1, 2017 with invoices to be sent out to firms from July 2017.
View the consultation paper.
UK Financial Conduct Authority Proposes Changes to Financial Services Compensation Scheme Levies and Rules
The Financial Conduct Authority launched a consultation on the future funding of the Financial Services Compensation Scheme as well as changes to the FSCS rules. The FSCS is the compensation scheme for customers of UK authorized financial services firms. It covers the business conducted by firms authorized by the Financial Conduct Authority and the Prudential Regulation Authority and protects, subject to certain limits, deposits, investment business, home finance, insurance policies and insurance broking. The FSCS is funded by contributions from firms across the financial services sector. The FCA's consultation follows the Financial Advice Market Review, conducted by HM Treasury and the Financial Conduct Authority, which concluded that the scale and impact of FSCS levies has increased sharply for certain firms recently, particularly those required to contribute towards claims for self-invested personal pensions. This causes concerns relating to the unpredictability of levies and, in some sectors, a relatively small number of firms being responsible for a large proportion of compensation claims.
UK Regulator Proposals to Amend the Conduct of Business Rules for Retail CfDs
The Financial Conduct Authority published a consultation paper setting out its proposals to enhance the conduct of business rules for firms providing contract for difference products to retail clients and to limit the risks of CfDs for retail clients. The FCA is proposing to change its current rules because of increasing evidence of poor conduct by relevant firms and risks posed to retail customers. Amongst other things, the FCA is proposing to require all CfD firms to provide a standardized risk warning and mandatory profit-loss disclosures, to impose lower leverage limits for inexperienced retail clients (i.e. those with less than 12 months of active trading experience) and higher leverage limits for experienced retail clients, and to prohibit bonus and account opening promotions for their retail CfD products and platforms.
The FCA also sets out its policy proposals for the regulation of binary bets. Binary bets are expected to be brought within the UK regulatory perimeter as part of the UK implementation of the revised Markets in Financial Instruments Directive. The FCA is considering its policy approach for the protection of retail clients in relation to binary bets and is seeking feedback on its approach before it consults on formal proposals.
The consultation closes on March 7, 2017. The FCA expects to publish a Policy Statement and final rules in Q2 2017, with the expectation that the rules will come into force shortly afterwards.
View the consultation paper.
UK Regulator Launches Call for Input on Review of High-Cost Credit
The Financial Conduct Authority launched a call for input into its review of high-cost credit, including the high-cost of short-term credit (HCSTC) price caps. The FCA took over regulation of consumer credit in April 2014. High-cost credit includes payday loans, home-collected credit, catalogue credit, some rent-to-own, pawn-broking, guarantor and logbook loans. As part of its policy to address the risk of consumer harm from such products, the FCA has introduced a HCSTC cap and new regulation for HCSTC lenders. The FCA has committed to reviewing the HCSTC price cap while also reviewing high-cost products as a whole to determine whether further policy intervention is required and if so, whether a more consistent approach is necessary. The FCA identifies overdrafts as a priority area for consumer protection and regulation. The FCA is seeking responses on issues with regard to the competition and provision of substitute or alternative high-cost credit products to overdrafts. The HCSTC price cap came into force on January 2, 2015. The FCA is seeking to assess whether there is evidence to suggest that it should consider changing the price cap.
US Consumer Financial Protection Bureau Issues Bulletin on Detecting and Preventing Consumer Harm from Production Incentives
The US Consumer Financial Protection Bureau issued a bulletin warning banks that creating incentives for employees and service providers to meet sales and other business goals can lead to illegal sales practices such as unauthorized account openings, deceptive sales tactics and steering consumers into less favorable products, all practices which may cause consumer harm. In addition, the bulletin outlines the CFPB’s expectation that institutions that choose to utilize incentives should institute effective controls for the risks that these incentives may present. Most importantly, the CFPB emphasizes the need for a robust compliance management system, which includes board of director and management oversight, training, monitoring and independent audits.
View CFPB bulletin.