FCA Update December 2015 - 2020 Innovation€¦ · 8 Recent CPs CP15/29: Amendments to Various Forms CP15/30: Pension reforms – proposed changes to our rules and guidance CP15/31:
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Amendments to four forms used by firms and individuals relating to regulatory approval for certain roles. The forms changed are forms D,F (FCA), D (PRA) and M.
D relates to changes in circumstances for approved persons, F for overseas firms, M (PRA only) for Non – Execs and Key function holders.
FCA set out expectations as to how existing rules and guidance operate in the new pensions environment, consult on a number of changes aimed at ensuring their rules are fit for purpose.
CP15/31: Strengthening accountability in banking and insurance: regulatory references
FCA are consulting to remove a number of disclosure requirements which they identified as not being effective in terms of informing consumers about a product or service and to reduce the regulatory burden on firms. This reflects their commitment to create a sustainable regulatory framework.
CP15/34: Regulatory fees and levies: policy proposals for 2016/17
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Proposals set out for the necessary changes to the Handbook required to implement the new Market Abuse Regulations (EU MAR).
The Treasury is preparing secondary legislation to repeal or modify existing domestic law, where it conflicts with EU MAR, to meet the UK’s amended obligations under the new regime. This secondary legislation will also cover new EU MAR obligations which are not covered by the existing market abuse regime, such as the requirement for employers to have internal procedures for employees to report infringements of EU MAR.
In this consultation document, FCA set out proposals for the necessary changes to the Handbook required in implementing this new regime.
CP15/35: Policy proposals and Handbook changes related to the implementation of the Market Abuse Regulation (2014/596/EU)
Prior to 31 October 2004, first charge mortgages were regulated under the Consumer Credit Act 1974 (CCA) if they fell below the relevant financial threshold. In November 2015 the Government made legislation1 which will make the administration of these mortgages a regulated mortgage activity from 21 March 2016 and the CCA will then no longer generally apply.
CP15/36: Future regulatory treatment of CCA regulated first charge mortgages
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This CP proposes changes to the Society of Lloyds rulebook and consolidates Actuaries, Auditors and FSCS Part and the Lloyd’s Part in the PRA Rulebook into a single Part. It also proposes amendments to S133/13 on market risk, SS12/13 on counterparty credit risk, Consequential amendments to the Senior Managers Regime (SMR) and the Senior Insurance Managers Regime (SIMR) and amendments to definitions related to credit unions.
PS15/22: General Insurance Add-Ons Market Study – Remedies: banning opt-out selling across financial services and supporting informed decision-making for add-on buyers
PS15/23: Consumer credit – feedback on CP15/6 and final rules and guidance
PS15/24: Whistleblowing in deposit-takers, PRA-designated investment firms and insurers
PS15/25: PSR regulatory fees 2015/16
PS15/26: Implementation of the Transparency Directive Amending Directive (2013/50/EU) and other Disclosure Rule and Transparency Rule Changes
This policy statement sets out an overview of the consultation feedback and FCA response on:
The rules banning opt-out selling; and
The Handbook guidance.
The final rules and guidance do not differ significantly from those consulted on. The rules banning opt-out selling come into force on 1 April 2016. The Handbook guidance will come into force at the same time. The non-Handbook guidance will be effective immediately. FCA recognise that firms will need time to implement any necessary changes, but expect that firms should already be working towards delivering appropriate and timely information for add-on sales. FCA expect firms to have made the necessary changes to their sales journey by 30 September 2016.
PS15/22: General Insurance Add-Ons Market Study – Remedies: banning opt-out selling across financial services and supporting informed decision-making for add-on buyers
In this policy statement FCA set out responses to the feedback they received to the consultation Consumer credit – proposed changes to our rules and guidance (CP15/6), published in February 2015. This response deals with the issues relating to credit broking, lending, financial promotions and debt. FCA response on issues relating to the Mortgage Credit Directive was published in PS15/20 in July 2015. As noted in CP15/6, FCA consumer credit regime is relatively new.
FCA are still learning more about how the market operates, and the risks to consumers. They are therefore finding it necessary to propose more changes to the requirements than they would usually do for a sector that they have been regulating for longer. FCA will continue to monitor developments in the market, and outcomes of their work in authorising and supervising firms, and may need to propose further changes.
PS15/23: Consumer credit – feedback on CP15/6 and final rules and guidance
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The rules in this policy statement complement FCA recent initiatives to reform senior management arrangements and remuneration in the financial services industry.
The new rules affect:
UK deposit-takers with assets of £250m or greater, including:
banks
Building societies
credit unions
PRA-designated investment firms, and insurance and
FCA propose other miscellaneous changes to the DTRs in CP15/11 which were not directly related to TDAD implementation but were required to clarify or improve the current regime. In this Policy Statement, FCA set out the feedback to those proposals and the FCA’s response to it. The new DTRs will come into force on 26 November 2015.
The changes affect around 1,500 FCA-regulated firms that carry out investment business, from the largest investment banks to the smallest investment adviser, who collectively hold over £100 billion of client money and £10 trillion of custody assets.
1 July 2014 – certain rules and guidance came into force providing clarifications to existing requirements, introducing optional arrangements with which firms may choose to comply and limiting the placement of client money in new unbreakable term deposits. These include clarifications of application provisions and the introduction of the option to operate multiple client money pools
1 December 2014 – certain rules and guidance came into force relating to the provision of information to or obtaining the agreement of new clients and the documenting of agreements and arrangements with any new counterparties with whom firms deposit or otherwise place custody assets or client money, these include requirements to notify the client of certain matters if operating the banking exemption and mandating the use of template acknowledgment letters with new client bank accounts and client transaction accounts.
CASS 7.8 (now 7.18) requires firms to exchange usual letters with banks on Trust status, set off etc.
FCA notes variety of methodologies in applying rule
New rules – Standard template letters to be used Removal of 20 days grace period and applies to UK and foreign accounts opened Firms required to perform due diligence on authorisations etc.
ALL EXISTING letters to be re done in template form
June 2015 – all of the remaining rules and guidance came into force and firms need to ensure they fully comply with all of the new rules –See Handbook for changes
Review the organisational arrangements that the firm has in place to minimise the risk of the loss or diminution of client money and reach a conclusion as to whether those arrangements appear adequate given the size and nature of its business.
Note whether the firm intends to opt-in all other relevant client money to the MiFID rules and if not, whether it uses any “Opt-outs” for professional clients or non-IMD business.
For Credit institutions or approved bank, firms that hold coins, solicitors, long term insurers and friendly societies, holds client money in relation contracts of insurance or in respect of life assurance business or is a Trustee firm confirm whether the client elects to comply with the client rules. If so follow this programme.
Check whether the firm holds or receives money from an affiliated company in respect of MiFID business, if so follow this programme
Check whether the firm holds or receives money from an affiliated
company in respect of MiFID business, if so follow this programme.
Confirm the client is MiFID regulated. Non MiFID firms are not subject to CASS 7 rules ( MGI firms are subject to CASS 5 rules).
Enquire whether the firm intends to exempt client money under title transfer collateral arrangements. Note exceptions for retail clients and obligations under contracts for differences or rolling forex contracts, whether or not arranged by the firm.
Ascertain whether firm is using delivery versus payment transaction exemption arrangements. If so, review systems to ensure that the settlement system complies with the exemption requirements and that the firm retains written consent for these arrangements from the client where needed
Enhancements to rules to ensure all client money held in appropriate manner with a suitable institution
Requirement to consider diversification and do enhanced due diligence on the banks with which they deposit client money
Introduction of an explicit requirement for firms to make a record of each periodic review of a bank and to keep that record from the date it conducts the periodic review until five years after the firm ceases to use that bank to hold client money
Where money is deposited in a credit institution, bank or money market fund (CBAs) ensure the firm has documented its selection criteria for any legal requirements, expertise and market reputation and performs periodic reviews to confirm the selection criteria.
Confirm the documentation of the selection criteria covers:
Diversification of risks;
The capital of the credit institution or bank;
The amount of client money placed as a proportion of the total capital and deposits;
The credit rating; and
The level of risk in the activities undertaken by the credit institution or bank
Ensure that if the firm deposits or holds funds with a group entity the funds do not at any point exceed 20 per cent of the balance on:
All client accounts in aggregate;
Each of its designated client accounts; and
Each of its designated client fund accounts.
Obtain an up to date list of all CBAs and ensure they in accounts identified as separate from accounts used to hold money belonging to the firm.
Confirm that the firm has agreed terms on all CBAs that allow it to make withdrawals of client money promptly and, in any event, within one business day of a request for withdrawal. Note any use of transitional provisions for notice periods of a maximum of 30 days notice
Document and assess the adequacy of the firm’s internal controls to segregate client money from the firms’ money on receipt (including use of suitably trained and experienced staff, and a clear procedures manual). Confirm these procedures are adequate to identify and protect clients’ money
Establish whether the firm adopts the ‘normal’ approach or the ‘alternative’ approach to paying in client money (N.B. Alternative approach outside todays webinar)
Confirm that all client money is paid into a CBA no later than one business day after receipt. Ensure money is segregated into the correct sub-pool where relevant.
Establish, review, test and conclude on the procedures the firm has for dealing with:
mixed remittances; and
automated transfers.
Review lodgements to non-client money accounts and ensure these do not include client money.
Ensure any client entitlements are paid into a client account or in accordance with the client’s instruction.
Where a firm is liable to pay money to a client ensure that it is paid, within one business day after it is due into a CBS or to the client.
Where money was transferred to a third party confirm that retail clients have been notified and that the firm has agreements in place to ensure that the third party holds client money only for the purpose of transactions for a client and meets a clients obligation to provide collateral for a transaction. Confirm the firm has recorded such transactions in the CBA of the client
• Review contractual arrangements between the firm and its clients particularly when money due and payable to the firm is taken.
• Review any commission rebate arrangements to ensure that it was not treated as client money until the rebate became due and payable to the client per the contract between the parties.
Client Money Reconciliations and Recordkeeping – 7.15
Review the systems for carrying out internal reconciliations and ascertain whether the client uses a standard or an alternative method to perform its internal reconciliations. IMPORTANT: A firm wishing to adopt a non-standard approach needs, from 1 December 2014, an assurance report from the firm’s auditor.
Confirm the firm conducted daily internal reconciliations between its internal accounts and records and those of any third parties by whom the client money is held.
Examine and consider whether the frequency of external reconciliations performed by the firm is adequate and whether the firm considered the risks which the business is exposed, such as the nature, volume and complexity of the business and where and with whom the client money is held.
Obtain a bank certificate from each bank at which CBAs are held made to the reporting date. Check (on a sample basis to include this date) the reconciliations carried out by the firm in respect of:
reconciling the total of the client bank account balances with the client’s account balances;
reconciling the clients’ bank account balances with the balances recorded on the bank statement; and
tracing outstanding items to client’s accounting records and bank statements.
Ensure that there is evidence of independent review of these reconciliations and that any differences on reconciliations are corrected as soon as possible.
Verify that none of the bank accounts (per statement or cash book) have been overdrawn in the year and that no debit balance on an individual client balance is netted against other client balances when calculating the money that should be held on the client account.
Review any internal or external compliance reports for evidence of material non compliance with the rules of CASS 7.6.1,7.6.2,7.6.9 and if having carried out a reconciliation it has not complied materially with CASS 7.6.13 to CASS 7.6.15. Where material non compliance arose, confirm the firm informed the FCA without delay.
Money paid in and out of firm’s own account rather than client accounts
Relevant for multi currency and multi product companies
FCA research in 2012 indicated some firms using approach inappropriately
New rules - Clarify when alternative approach relevant - AP
New rules - Notify FCA no less than 3 months before adopting - AP
New rules - Risk justification to be made on why alternative approach necessary, adequate systems and controls, buffer requirement, AUDITOR REPORT to FCA BEFORE adoption -AP
Both those firms currently using the alternative approach and those wishing to use it for a business line in the future will be required to obtain a report from their auditor before operating the alternative approach to client money segregation. For those firms already using the alternative approach the reasons for this stem from the fact that the amended rules impose new requirements on these firms - AP