After a relatively quiet year for fines in 2018, the Financial Conduct Authority (“FCA“) has already published two Final Notices this week confirming the first fines of 2019 that total over £79 million.
FCA warns firms about misleading financial promotions for unregulated products
Last week, the Financial Conduct Authority (“FCA”) published a letter addressed to the CEOs of all regulated firms concerning financial promotions. In particular, the FCA highlighted its concerns over financial promotions that falsely implied that all of a firm’s activities were regulated by the FCA or the Prudential Regulation Authority (“PRA”), when in fact they were not.
New Disclosure Pilot Scheme – Now In Force
Think of a fairly common situation; you receive an email from a third party with three colleagues in copy, you forward this email to your colleagues with comments, one responds and you then reply to the third party. Later, a dispute between your company and the third party arises.
When you consider that this short exchange alone created more than 15 documents between you and your colleagues it begins to explain how the disclosure exercise in an electronic age is so time consuming and costly; even utilising the increasing numbers of electronic tools available to reduce and streamline the process.
The mandatory Disclosure Pilot Scheme (the “Pilot”), which came into force on 1 January 2019, aims to make the disclosure process more efficient, flexible and therefore more cost effective. It provides a new mindset for the disclosure process and will require both litigants and practitioners to revise their approach to documents when a dispute arises.
FCA – “Unacceptable” Low Levels of Suitable Pension Transfer Advice
The FCA’s latest update on its review of pension transfer advice does not make for happy reading.
The stats
As part of its ongoing review of the pensions transfer industry, the FCA reviewed advice on 154 transfers made by 18 firms (out of a total of 48,248 potential transfers advised on by these firms in the period under review). Just over 50% of the total transfers advised on resulted in actual pension transfers, though the FCA has made clear that it “expect[s] advisers to start from the position that a pension transfer is not suitable”.
Of the advice analysed, the FCA found that:
- 48.1% were suitable (74);
- 29.2% were unsuitable (45); and
- 22.7% were unclear (35).
The FCA acknowledged that a part of these figures came from four firms who have subsequently ceased providing pension transfer advice or varied their business models, and that the review is not representative of the whole market, being targeted at particular firms. Leaving those four firms out improves the statistics somewhat (60% of advice being found to be suitable), though it still leaves considerable room for improvement.
It remains to be seen from the next phase of the FCA’s review work whether these statistics are borne out across the industry as a whole.
What does the FCA say is going wrong?
The FCA says it observed the following key issues:
- Firms failing to identify and mitigate risks associated with pensions transfer business.
- Senior management lacking understanding of the business or failing to adequately oversee advisers’ activities.
- Insufficient understanding and management of conflicts of interest caused by charging structures.
- Risk management and resources lagging behind increased volumes of work.
- Firms adopting commoditised processes and so taking inadequate account of individual customer needs.
Where the proportion of suitable advice was low, the FCA identified this was driven by the following:
- Failing to obtain sufficient information about clients’ needs and circumstances.
- Failing to consider clients’ needs and objectives alongside one another, and using generic objectives which were not sufficiently specified to the client.
- Making inadequate assessments of the risks clients were willing to take.
The FCA’s update also gives a number of more specific examples of how the advice it reviewed fell short.
The FCA also highlights failings in disclosures to and communications with clients. This comes partly from firms adopting inadequate standard documentation, notably in the way fees are communicated. It also stems from using unclear, emotive, or, in some cases, misleading language.
However, where firms had recognised the higher risks of defined benefit pension transfer business and put in place additional controls, the FCA saw a higher rate of suitable advice.
What next?
Pension transfer advice is set to remain an FCA focus for some time to come.
The FCA has published a significant amount of guidance over the past year or so on its expectations for firms operating in this area and detailing how some firms are currently failing to meet expectations. This provides a roadmap to avoiding non-compliance.
Data has already been requested by the FCA from all firms with permissions to advise on defined benefit pension transfers. The FCA has indicated that it “will not hesitate” to use its investigatory powers where there are findings of serious misconduct and that “serious consequences” can be expected where the FCA’s concerns are not taken on board.
To avoid attracting negative attention from the FCA, firms should be taking steps now to review existing systems and controls in the light of the FCA’s latest findings and guidance. We are continuing to advise a number of firms in this area.
FCA reminds senior managers to take an active role in AML procedures
Last week the FCA published a Decision Notice which imposed a fine of £76,400 on the former CEO of Sonali Bank (UK) Ltd (“SBUK“), Mohammed Ataur Rahman Prodhan (“Mr Prodhan“), for “acting without due skill, care and diligence and for being knowingly concerned in a breach by SBUK of its obligations to maintain effective anti-money laundering (AML) systems”.
The FCA’s decision is a sobering warning to all senior management figures at FCA regulated businesses that they must take an active role in anti-money laundering (“AML“) policies and procedures.
This follows on from the £3.25 million fine that the FCA imposed on SBUK in December 2016 for serious AML systems failings and the £17,500 fine imposed at the same time on its former MLRO.
Lenders’ discretion and the limitation of the Braganza duty
Where a lender has the absolute discretion to do something under a loan, their position will be protected according to the recent High Court decision in UBS AG v Rose Capital Ventures Limited, Dr Vijay Mallya, Mrs Lalitha Mallya, Mr Sidartha Vijay Mallya [2018] EWHC 3137 (Ch). The Court provided some comfort to secured (and possibly, by extension, unsecured) lenders by confirming that the “Braganza duty” will not generally apply where a lender is entitled to perform a unilateral act at their own discretion.
Courts prepared to scrutinise and limit Norwich Pharmacal Orders
A Norwich Pharmacal Order (“NPO“) forces a third party to disclose documents or information to an applicant. These Court orders are typically used to identify a proper defendant to a claim or to get information to enable someone to set out their case in Court documents. The respondent to an NPO application is generally not the defendant to the potential proceedings but they must be somehow mixed up in the wrongdoing (innocently or otherwise).
Cryptoassets Taskforce: Report Indicates Path Forward for UK’s Cryptoasset and DLT Approach
In light of rapid developments in the market, the substantial potential of applications of distributed ledger technology (DLT), and growing evidence of the risks associated with cryptoassets; the Chancellor of the Exchequer launched the Cryptoassets Taskforce, comprising HM Treasury (HMT), the Financial Conduct Authority (FCA) and the Bank of England (BoE), in March 2018 as part of the government’s Fintech Sector Strategy.
Their report, now published, sets out proposals for the UK’s policy and regulatory approach to cryptoassets and DLT in financial services. This follows the recently published report on cryptoassets by the House of Commons Treasury Committee. You can read our blog post on that report here.
The report
The Taskforce has concluded that whilst there are examples of cryptoassets that are delivering beneficial innovation in financial services – for example, firms in the Sandbox have demonstrated that cryptoassets can be used to make existing processes cheaper and easier at small scale – we have yet to see if these tests can be scaled up. This conclusion has been echoed by Christopher Woolard (Executive Director of Strategy and Competition at the FCA) in his speech at The Regulation of Cryptocurrencies on 20 November 2018.
As such, the Taskforce considers that “in many cases, the risks posed by the current generation of cryptoassets outweigh any potential benefits”; and are of the view that “the most immediate priorities for the authorities are to mitigate the risks to consumers and market integrity, and prevent the use of cryptoasset for illicit activity.”
Although interest is growing, the UK is still a relatively minor exchange market for cryptoasset trading.
The Taskforce highlighted four inherent risks associated with the use of cryptoassets, mirrored in the earlier Treasury Committee report. These are:
- Risks of financial crime, where cryptoassets are used for illicit activity, such as money laundering and fraud, and cyber threats;
- Potential threats to financial stability, which is not currently perceived as a major risk but may arise if the market grows and cryptoassets become more widely used;
- Risks to consumers, who may buy unsuitable products, face large losses, be exposed to fraudulent activity, struggle to access market services, and be exposed to the failings of service providers, such as exchanges; and
- Potential harm to market integrity, owing to manipulation, opaque practices, and other market abuse strategies, which may lead to consumer losses or damage confidence in the market.
Next steps
The Taskforce’s immediate priority is to mitigate these risks. However the report does look further forward, considering that DLT, with further development, will have the potential to deliver benefits in both the financial services and other sectors.
The Taskforce has committed to a number of actions that will be taken by HM Treasury, the FCA and/or the Bank of England (in accordance with their remits) to further develop and implement the UK’s policy and regulatory approach to cryptoassets and DLT. The actions to be taken by the authorities are as follows:
By the end of 2018:
- Consult on guidance for those cryptoasset activities currently falling within the regulatory perimeter (FCA);
- Consult on a potential prohibition of the sale to retail consumers of derivative products referencing certain cryptoassets (FCA); and
- Update on timing for the renewed ‘Real Time Gross Settlement’ service to be able to interface with innovative payment platforms, including those based on DLT (BoE).
By early 2019:
- Consult on changing the current regulatory perimeter to include cryptoassets with comparable features and explore how exchange tokens might be regulated (HMT);
- Implement the Fifth AML Directive with the potential to broaden the scope of the AML regime as it applies in the cryptoasset sector (HMT); and
- Issue revised guidance on the tax treatment of cryptoassets (HMRC).
Ongoing:
- Assess the adequacy of the prudential regulatory framework, including with international counterparts (PRA);
- Continue monitoring market developments and the risks to financial stability, as well as the UK’s approach to these changes (HMT, FCA & BoE);
- Continue international engagement programmes (HMT, FCA, & BoE);
- Further develop experience with DLT applications and support to firms through the Regulatory Sandbox and Innovate initiative (FCA); and
- Explore the use of DLT to enable more accurate, efficient and consistent regulatory reporting (FCA), to support new financial services infrastructure (HMT) and for public sector use (various government departments), including through Field Labs.
The Taskforce will also convene every six months to consider developments and review the UK’s approach.
Conclusions
Although the Taskforce’s current outlook for existing cryptoasset benefits appears limited, the proposals for future development show a more positive horizon. The report and its ongoing and future proposals demonstrate the commitment of the authorities to promoting innovation in the crypto-space and aim to pave the way for the UK to simultaneously ensure adequate protection for consumers and support the development of the UK as a hub for cryptoassets and DLT.
One thing is clear, we can expect to see focus on the UK’s approach to cryptoasset and DLT for the foreseeable future.
Former Keydata boss stuck with £76 million FCA fine
The Upper Tribunal, the independent Court that hears appeals from FCA decisions, last week upheld the regulator’s decision to fine Stewart Ford, the former CEO of Keydata Investment Services Limited, a huge £76million (the largest FCA fine on an individual) and ban him from working in the financial services industry.
The Tribunal decided that the FCA had been correct to ban and fine Mr Ford for a lack of integrity, and for failing to deal with the regulator in an open way after he made false statements during compelled interviews with the regulator.
The record fine results from allegations of active concealment and lack of integrity.
Suspicious Activity to Report? Careful how you draft as you might have to disclose what you say in confidence.
The recent High Court decision in Lonsdale v. National Westminster Bank plc [2018] EWHC 1842 (QB) serves to highlight that the content of a suspicious activity report (“SAR”) could be discloseable to an opponent in Court proceedings. Not only that – it could also form the basis of a claim in defamation.
