Shorts: key regulatory developments from Q2, 2023

Shorts: key regulatory developments from Q2, 2023

In this article we provide a round up of key Financial Conduct Authority (“FCA”) related regulatory developments that are particularly relevant to investment firms.  

FCA publishes new guidance on the regulatory perimeter for trading venues (5th July 2023)

On 5th July the FCA released Policy Statement PS23/11 to issue new guidance on the regulatory perimeter for trading venues. In brief, PS23/11:

  • aims to increase certainty about what permissions firms need to conduct their business; 
  • casts aside guidance (Q&As on MiFID II and MiFIR market structures topics with the exception of Section 5) issued by the European Securities and Markets Authority (“ESMA”) in the aftermath of Brexit; 
  • updates the definition of a service company, i.e. firms that are involved in arranging deals in investments through the provision of technology that is designed to support trading, e.g. certain order routing and post-trade processing services;
  • provides more detail on when a technological system would likely constitute a trading system or facility; 
  • clarifies that executing client orders over the telephone would not constitute a “multilateral system” unless the characteristics of a system or facility are present; 
  • bulletin board would not be in the perimeter unless buying and selling interests are able to interact within the system; 
  • clarifies that systems designed to facilitate the arrangement of block trades outside trading venues, and then report them to those venues for execution under their rules, are not “multilateral systems”;
  • includes a section discussing potential areas for future change with the objective of making obligations more proportionate. Respondents in this section asserted that:
    • technology firms often do not have adequate systems and controls to comply with requirements, especially pre-and post-trade transparency, transaction reporting and trade surveillance; 
    • the costs and burdens of regulation constitute a significant barrier to entry which deter technology firms from operating trading venues; and
    • despite this, the existing requirements help improve the integrity of the market and ensure investor protection.

The FCA expects firms to review their business models in light of the revised guidance. If, as a result of this exercise, a firm assesses that it needs to: (a) revise its permissions; or (b) wind down certain activities, the FCA expects firms to engage with it “at an early stage” to ensure an “orderly transition”. The FCA stresses that although some firms may not need trading venue related permissions, they may still require other forms of authorisation, e.g. as service companies. 

The revised guidance enters into force on 9th October 2023 and is available here

FCA publishes 10 key questions for firms to consider in assessing their final preparations for the entry into force of the Consumer Duty on 31st July (28th June 2023)

Firms serving retail clients should be well advanced in their preparations for the entry into force of the Consumer Duty now. Nevertheless, the FCA has stated that some firms still have “more to do to meet the deadline”. To aid boards and senior management bodies in assessing any potential gaps or weaknesses in their arrangements, the FCA has published 10 key questions for firms to consider on 28th June 2023. To access the questions, please click here

FCA stresses the need for wholesale brokerage firms to stop the repeat recruitment of “bad apples” (26th June 2023)

In a speech delivered by Emily Shepperd, Chief Operating Officer and Executive Director of Authorisations, on 26th June 2023, the FCA expressed disappointment that wholesale brokerage firms continue to recruit “bad apples”:

“Wholesale brokers have told us it is all too easy for individuals who have been involved in misconduct to move from one firm to another, with few questions asked at the new firm. These individuals can become “rolling bad apples”, with their misconduct continuing.”

Consequently, Shepperd stated that the FCA:

  • wants firms to take regulatory referencing “far more seriously”; 
  • has found that many firms were not giving proper consideration to adverse information that had been revealed in regulatory references obtained for staff set to perform certified roles; and
  • in particular, the FCA had identified instances where firms had “turned a blind eye” to evidence that individuals had been dismissed for market abuse, expense fraud and sexual harassment. 

Shepperd said that good practice involved firms: (i) proactively contacting previous employers to seek more information where potential issues had been identified; and (ii) conducting their own investigations where necessary. 

Shepperd’s speech also contains insights which are relevant to firm culture more generally, including a decline in the practice of “readily” signing off “expenses submitted after taking clients to a lap dancing bar”.  To read more, click here

Substantial claim against spread betting firm dismissed by the High Court (7th June 2023)

For an extended summary of the case and its implications for firms serving retail clients, please see our note which is available here

FCA fines wholesale brokerage firm £17,219,300 for breaches of Principles 2 and 3 (5th June 2023)

On 5th June 2023 the FCA announced that it had fined ED&F Man Capital Markets Ltd for a range of breaches related to the firm’s dividend arbitrage business between February 2012 – March 2015. In short, the reasons for the enforcement action were stated as follows:

  • the payment of circa £20.46 million in illegitimate withholding tax claims based on uncovered short selling that was conducted by an unregulated affiliate based in Dubai; 
  • tax reclaims should only have been made where stock had actually been purchased, borrowed or sold; 
  • relying heavily on tax and legal opinions to support the dividend arbitrage without performing meaningful monitoring to ensure this business was being conducted in accordance with the advice therein; and
  • a lack of understanding of the dividend arbitrage business on the part of the Compliance function and relevant member of the board who were charged with overseeing it. 

To read more, please see here

Consumer Duty: Assessing fair value (10th May 2023)

The FCA published a summary of its observations relating to firms’ Consumer Duty preparations as they relate to fair value. A self-assessment questionnaire can be found here

FCA publishes final validation rules and amended schemas for the revised EMIR trade reporting regime (27th April 2023)

Please click here for our summary. 

Market Watch Newsletter 73: Market abuse peer review (26th April 2023)

In Market Watch Newsletter 73 the FCA published a summary of its findings from a peer review of firms offering contracts for difference (“CFDs”) and spread betting services. We published a summary which is available here

FCA publishes its Business Plan for 2023/24 (5th April 2023)

For an extended summary of the Plan customised to firms active in the investment firm and payments sectors, please see here

Need help?

Please contact us if your firm requires assistance with any of the matters raised in this update. 

References

  1. PS23/11: Guidance on the trading venue perimeter. Financial Conduct Authority, available at: https://www.fca.org.uk/publications/policy-statements/ps23-11-guidance-trading-venue-perimeter#:~:text=We%20are%20issuing%20new%20guidance,authorisation%20as%20a%20trading%20venue. (last accessed 17th July 2023). 
  2. One month to go for the Consumer Duty. Financial Conduct Authority, available at: https://www.fca.org.uk/news/news-stories/one-month-go-consumer-duty (last accessed 17th July 2023). 
  3. Cultural evolution: how culture must change to meet expectations. Financial Conduct Authority, available at: https://www.fca.org.uk/news/speeches/cultural-evolution-how-culture-must-change-meet-expectations#:~:text=The%20higher%20standard%20of%20the,outcomes%20for%20consumers%20is%20central (last accessed 17th July 2023). 

2023. FCA fines ED&F Man Capital Markets Ltd £17.2m for serious failings which enabled millions in illegitimate tax reclaims. Available at: https://www.fca.org.uk/news/press-releases/fca-fines-edf-man-capital-markets-ltd-17m-serious-failings-enabled-millions-illegitimate-reclaims (last accessed 17th July 2023).

Alexander Culley

Alexander Culley

Alexander Culley