The aim of this outlook is to provide busy senior managers and compliance professionals with an overview of key developments in Q1, 2022. Key takeaways, with selected excerpts from relevant materials, are provided in the table below.
- High levels of activity relating to supervision of activities involving crypto assets, anti-financial crime and sanctions.
- Wholesale Markets Review concluded, regulatory focus now on effectively implementing reforms.
- Regulator set out expectations of applicants seeking to hold compliance oversight and money laundering reporting functions.
|Economic Crime (Transparency and Enforcement) Act 2022||17/03/22||Relevance: senior management, anti-financial crime and client facing staff.
Increases transparency by introducing a register of foreign ownership.
Make Unexplained Wealth Orders more workable.
Strengthens UK Government’s ability to prosecute persons involved in sanctions evasion.
|The Act and related papers can be found here.|
|Wholesale Markets Review: Consultation Response||1/03/22||Relevance: compliance staff at a range of wholesale financial institutions.
Most reform proposals consulted on in 2021 accepted.
Implementation of accepted reforms now subject to Parliamentary and/or FCA timetables.
|A detailed summary of outcomes can be found here.|
|Strengthened UK Russian sanction legislation enters into force||10/02/22||Relevance: senior management, anti-financial crime staff.
Most extensive package of financial sanctions ever announced by UK Governments.
List of sanctions targets expanding extremely regularly, with additional targets in Belarus.
Information dissemination, escalation and daily screening processes in financial services organisations need to be at optimal levels to accommodate constant change.
|A short guide of operational matters to consider can be found here.
Link to the FCA’s dedicated page re: Russia related financial sanctions can be found here.
Link to OFSI’s dedicated page here.
|Notice to all FCA regulated firms with exposure to cryptoassets||24/03/22||Relevance: senior management, compliance, risk and operational staff at firms interacting with or exposed to cryptoassets.
Regulated firms should assess the risks (asset, financial crime, prudential) posed by unregulated cryptoassets in a similar way to how they would assess regulated business.
|Link to notice here.|
|Dear CEO letter: custody and fund services supervision strategy||23/03/22||Relevance: senior management, CASS oversight and operational staff at custody and fund services firms.
FCA perceives four principal areas of harm:
(1) disruption to consumers due to weak cyber controls;
(2) sub-standard oversight of client money and assets;
(3) inadequate depositary oversight of fund managers; and
(4) inadequate oversight of high- risk business, e.g. illiquid or speculative assets sold to retail investors.
Expect questions about:
(1) reliance on legacy IT systems;
(2) oversight of third party or intra-group service providers;
(3) cyber and operational resilience, through the FCA’s threat-led penetration testing scheme (“CBEST”); and
(4) the oversight of depositories.
|Link to letter here.|
|SFTR update||15/03/22||Relevance: regulatory reporting teams, compliance staff.
SFTR specific Temporary Transitional Power (“TTP”) effective since the end of the Brexit transition period set to expire on 31/03/22.
From 1/04/22 UK counterparties subject to UK SFTR will have to report securities financing transactions with members of the European System of Central Banks (“ESCB”) under UK SFTR. This applies to both new and outstanding transactions.
From 1/04/22, SFTs will no longer be reportable under UK MiFIR. This is to eliminate duplicative reporting.
|Link to news item here.|
|Update on the market share test under the ancillary activities exemption||14/03/22||Relevance: UK non-financial counterparties (“NFCs”) that are active in trading commodity derivatives.
FCA will not publish data to enable the performance of the market share calculations for the purposes of the ancillary exemption per Article 2 UK MiFID RTS 20.
|Link to statement here.|
|Russian invasion of Ukraine: operational and cyber resilience||08/03/22||Relevance: senior management, IT, operational staff.
Reminds firms that any incidents must be reported to the FCA in a timely manner.
Directs firms to consider guidance issued by the National Cyber Security Centre (“NCSC”).
Firms should consider potential impact on third party providers, e.g. as a part of outsourcing arrangements.
Asks firms to ensure business continuity and incident management processes are up to date and ready.
|Link to statement here.|
|Speech: where next for UK Market Structure||03/03/22||Relevance: general.
Provides an overview regarding the FCA’s medium term priorities.
Provides FCA’s views on the outcomes of the Wholesale Markets Review and how to take some of the initiatives forward.
FCA planning to consult on some proposals for change during Q2.
FCA is keen to avoid unnecessary change and costs post Brexit.
Initiatives to reform the Prospectus Regime a return to “previous UK practice” “to some degree”.
UK is removing “dark trading caps”, whereas EU is looking to tighten existing restrictions.
No major uptick in “dark trading” since the Double Volume Cap suspended.
|Link to speech here.|
|Barclays Bank Plc fined £783,000 for oversight failings in relationship with collapsed payments firm Premier FX||28/02/22||Relevance: senior management and staff involved in conducting anti-financial crime supervision of customers and agents.
Barclays found to have breached Principle 2 for failings in its oversight of Premier FX.
Premier FX was an authorised payment institution.
Premier FX was liquidated after serious shortfalls in client balances were identified.
Premier FX may have been involved in deposit taking and dealing in investments without authorisation.
167 customers of Premier FX lost circa £10m.
Barclays provided Premier FX with banking and FX services.
Barclays assessed money service businesses (“MSB”) to be high risk for money laundering purposes.
Oversight of Premier FX by Barclays, particularly from an anti-financial crime perspective, found to be deficient in several respects.
|Link to Final Notice here.|
|Number of STORs received 2021||24/02/22||Relevance: trade surveillance personnel.
FCA received 4233 STORs for insider dealing vs 638 for market manipulation.
Reporting rates for commodity and FX products continue to be very low.
|Link to table here.|
|Speech: enhancing the UK’s capital markets – the FCA’s role and priorities||08/02/22||Relevance: senior management, compliance staff.
Regulatory Sandbox to be made permanent.
FCA continues to take “a tough approach” to cryptoassets firms seeking registration under the UK Money Laundering regime. Many firms are failing in their attempts to become registered.
FCA operating a ‘Use it or lose it’ pilot to remove permissions from firms who do not use them.
FCA proposing to introduce new rules to embed diversity and inclusion.
FCA welcomes moves to transfer large portions of legislation onshored because of Brexit into the FCA’s Handbook.
FCA continues to work on strengthening environmental, social and governance (“ESG”) initiatives.
FCA has recruited a significant number of staff into its authorisations team.
|Link to speech here.|
|Financial promotions data 2021||03/02/22||Relevance: senior management, compliance departments.
Authorised firms: FCA reviewed 1,686 promotions in 2021. Most reviews were triggered by reports from consumers.
300 amendments / withdrawals of financial promotions in 2021, mostly in the retail investment and lending sectors.
The use of social media influencers by retail investment firms is cited as a major area of concern for the FCA.
Unauthorised firms: Increase in illegal financial promotions issued by unauthorised persons, particularly using mediums such as Google. The FCA received 34,244 reports about the promotion of potential unauthorised business.
|Link to data here.|
|Head of compliance and MLRO applicant competence and capability||28/01/22||Relevance: senior management, HR departments, aspiring compliance or money laundering reporting officers.
FCA is unlikely to approve senior manager function SMF 16 (compliance oversight) or SMF 17 (money laundering reporting) applications unless the candidate already has relevant experience and high quality, relevant, training that is up to date.
Candidates who only possess experience in a front office role without training or other experience are unlikely to be approved.
The FCA may allow the owner or CEO of a smaller firm to hold the SMF 16 or SMF 17 roles, provided they have relevant training and experience.
External support, e.g. from consultants or law firms, is not a substitute for a candidate’s own knowledge and experience.
Part time candidates may be approved if the applicant firm can demonstrate that this would be sufficient.
Candidates who are demonstrably independent from front line business units are more likely to be successful.
If a candidate already performs an SMF role at another firm, the FCA will seek assurances that this does not pose a conflict of interest that cannot be managed.
The FCA generally expects that a candidate for an SMF 16 or SMF 17 role will be based in the UK.
To be successful, an applicant must be a senior leader within the firm they are seeking to represent.
The FCA may invite some candidates to an interview to test their understanding.
|Link to statement here.|
|CP22/2: Strengthening our financial promotion rules for high risk investments, including cryptoassets, supported by several research papers.||19/01/22||Relevance: senior management, compliance and marketing staff at firms targeting retail clients.
CP22/2 has four key objectives:
(1) clarify the classification of high-risk investments to make it clearer when certain restrictions apply;
(2) strengthening risk warnings, banning inducements to invest, strengthening client categorisation and appropriateness tests;
(3) limit the ability of unauthorised issuers to promote to consumers, increase approval standards; and
(4) extend financial promotion rules to qualifying cryptoassets.
The consultation closed on 23/03/22, with the FCA to provide feedback in summer 2022.
|Link to CP22/2 here.|
|MiFIDPRU Remuneration Code||17/01/22||Relevance: senior management, members of Remuneration Committees, HR departments, Compliance departments, internal auditors.
The FCA published the Remuneration Code applicable to investment firms.
Firms will be particularly interested in the self-assessment templates and tables: Remuneration Policy Statement and table of Material Risk Takers (“MRT”).
|Link to dedicated FCA page here.|
Advertising Standards Authority (“ASA”)
|Enforcement notice: advertising of cryptoassets||24/03/22||Relevance: senior management and compliance staff at entities advertising cryptocurrencies.
Crypto adverts must expressly and prominently state:
o Cryptocurrencies are unregulated in the UK
o Crypto profits may be subject to Capital Gains Tax
o Value of crypto can go down as well as up
The abovementioned qualifications must be clearly presented in the medium, e.g. they cannot just be posted at the bottom of a webpage.
It must be possible to display qualifications clearly in a medium, otherwise the medium should not be used.
Qualifications cannot be downplayed or contradicted by the overall impression conveyed by an advert.
Claims for rates of return must be supported by documentary evidence, clarify how the rate is calculated and stipulate any time commitment.
Adverts must not imply:
o Crypto products or services are regulated
o Past performance is an indicator of future results
o Investments are safe, ‘low risk’ or guarantee returns
o An urgency to buy or create a fear of missing out
o Investment decisions are trivial, simple, easy or suitable for anyone
o Crypto products are suitable for purchase on credit
Requirements apply to: (1) paid for or non-paid for crypto adverts; (2) traditional and digital media; and (3) the use of influencers.
Relevant entities have until 02/05/22 to ensure their adverts are compliant with the requirement of the ASA’s notice.
After this date, entities publishing non-compliant advert risk ASA sanctions. Furthermore, they will be reported to the FCA, Trading Standards and any relevant professional bodies.
|Link to the enforcement notice here.|
|ASA ruling on Ziglu Ltd||09/03/22||Relevance: senior management and compliance staff at entities advertising cryptocurrencies.
Respondent published an advert in Scotland stating “Scotland, your capital is at risk” next to an internet search tool and a link to a webpage promoting cryptocurrency services.
Ruling: Advert banned. Advert found to have caused distress by suggesting all Scottish consumers’ capital was at risk and encouraging investment in cryptocurrency as a way of mitigating that risk. Furthermore, the advert did not make it clear that capital gains tax (“CGT”) could be charged on cryptocurrency profits.
|The full ruling can be found here.|
|ASA ruling on Floki Inu||02/03/22||Relevance: senior management and compliance staff at entities advertising cryptocurrencies.
Respondent published an advert on London Underground in November 2021. The advert stated “MISSED DOGE.GET FLOKI” and featured an image of a cartoon dog wearing a Viking helmet.
Ruling: Advert banned. Advert found to have exploited consumer’s fear of missing out and trivialised investment in cryptocurrency. Furthermore, the advert did not make it clear that CGT could be charged on cryptocurrency profits.
|The full ruling can be found here.|
A.C.Culley & Co. has substantial experience of implementing compliance programmes at investment and payment firms. Please contact us today on email@example.com if you would like any assistance with your compliance programme.