June has, so far, been another busy month in the world of regulation, with the regulator releasing a number of significant publications including one on the transfer of safeguarded pension benefits, the appropriateness of current anti-money laundering regulations and the FCA’s use of its LIBOR-related compulsive powers.

Advice about the transfer of safeguarded benefits

In the light of an increase in demand for pension transfers as a result of the UK's "pension freedoms" and the Financial Conduct Authority’s well-publicised concerns about levels of suitability (ensuring that a personal recommendation or a decision to trade, is suitable for this-or-that customer) and positive results for consumers, the regulator has published new proposals for the giving of advice about the transfer of pensions with safeguarded benefits.

In the FCA’s view, any advice on the transfer or conversion of safeguarded benefits should include a personal recommendation which takes the client’s personal circumstances into account. The idea is to provide consumers with the appropriate level of protection from sharp practice and/or their own inexperience and enable them to make informed decisions. As a result, the regulator is proposing to require all advice in this area to be given alongside a personal recommendation, especially when the safeguarded benefit is a guaranteed annuity rate. The consultative paper, number CP17/16, entitled "Advising on Pension Transfers," also restates the regulator’s expectations that financial advisors should "challenge" consumers’ objectives if they seem unsuitable or unrealistic.  

To make transfers as suited to consumers' requirements (or as 'suitable') as possible, the FCA intends to cease to rely solely on the transfer value analysis (TVA) requirement, replacing it with an overarching requirement to undertake an appropriate analysis of the client’s options, referred to as the Appropriate Pension Transfer Analysis (APTA). The regulator wants the APTA to contain a Transfer Value Comparator (TVC), presented in a prescribed format. It does not, however, intend to be prescriptive about anything else that appears in it.

The FCA is seeking responses to the questions it raises in this paper, with a policy statement expected to be released in early 2018. The regulator also wants to consult interested parties about additional guidance to do with transactions on behalf of insistent customers, as it realises that this would also benefit the industry.

A fresh look at AML guidance

The FCA is asking the regulated community whether its money-laundering guidance, policies and procedures are up-to-date, effective and fair in the light of the UK's new Money Laundering Regulations, which came into force yesterday.

The European Union’s anti-money laundering framework has been updated by the Fourth Money Laundering Directive (4MLD) and the Fund Transfer Regulation (FTR) in order to meet the new international standards issued by the Financial Action Taskforce.

The Money Laundering Regulations 2007 and the Transfer of Funds (Information on the Payer Regulations 2007) have been replaced by the Money Laundering, Terrorist Financing and Transfer Funds (Information on the Prayer) Regulations 2017. These new regulations require firms to create policies and procedures that evaluate the risks posed by money laundering and terrorist financing, and call on firms to ensure that the measures they put in place, such as "customer due diligence" ("know your customer" controls) and "ongoing monitoring," correspond to these risks.

The changes will increase the FCA’s powers to supervise the degree to which firms comply with their obligations and enable it to determine the way in which banks and various payment institutions adhere to the UK's fund transfer regulations.

The regulations have also handed the FCA new ways of enforcing AML/terrorist finance rules. As a consequence, the FCA is consulting the industry about changes to the procedures it follows when making decisions about punishing firms, and on changes to its penalties manual and enforcement guide.

The FX Global Code, relevant to private banks

The Global Foreign Exchange Committee has published the FX Global Code, which contains a set of guidelines to ensure that the wholesale foreign exchange market is sufficiently robust, fair, liquid and transparent.

The code does not impose legal or regulatory obligations on market participants, but rather it is intended to identify good global practices and processes to help competition can work effectively in the market. The FCA is welcoming the code as it is largely in line with its Senior Managers and Certification Regime (SMCR). It also believes that such clear standards of market conduct might be useful for the industry should it ever become interested in policing itself.

Powers relating to LIBOR contributions

The FCA has published a consultative paper about its approach to using its powers to influence the London Interbank Offered Rate (LIBOR). Under its so-called "compulsion powers," if the FCA feels it is necessary to protect the "representativeness" of LIBOR, and thus the integrity of a market, it can compel banks to contribute to LIBOR data.

The FCA’s "compulsion powers" will change once the European Commission (the nearest thing that the European Union has to an executive branch) decides that LIBOR is "critical under the EU Benchmarks Regulation (BMR)" and will become subject to specific requirements. The FCA’s consultative document sets out:

• proportional methods by which it wants to require banks to contribute to LIBOR;
• the methods by which it intends to identify the banks to be included in the "compulsion population";
• types of transaction and relevant data; and
• a draft rule that it might use if it wanted to compel banks to submit data.

The FCA wants to receive comments by 12 August, with a view to publishing a policy statement and a summary of responses in September.

ESMA's final report on MiFID II product governance

With a raft of forthcoming legislation including MiFID II, GDPR and PRIIPS coming into force over the coming year, firms are once again facing a difficult and rapidly evolving period of market regulation.
 
The European Securities and Markets Authority (ESMA), for example, recently published its final guidelines regarding product governance under MiFID II. It has split these rules into manufacturers’ duties, distributors’ duties and those that apply to both.

Manufacturers are expected to assess the appropriate target markets for all products manufactured in the EU and take reasonable steps to ensure they are only distributed to the target markets they have identified.

It is the distributor’s duty to ensure that products are offered or recommended when they are in the best interests of the client. Distributors are not required to report sales outside a so-called positive target market for purposes involving portfolio diversification or hedging, but they should report all sales to a so-called negative target market. Both manufacturers and distributors are responsible for reviewing products regularly to ensure that they still suit the needs and characteristics of the target market, and to ensure that investment strategies remain appropriate.

The FCA has also urged firms to consider the impact MiFID II might have on them and to submit a complete application for authorisation or a "variation of permission" as soon as possible, if required.

The FCA is saying that it cannot consider applications in time for 3rd January 2018 (the MiFID II implementation date) unless it receives all completed applications by 3rd July 2017. This may or may not be the case, but many applications are not complete when they are submitted and firms ought to make efforts to avoid this problem on this occasion.

Firms urged not to ignore GDPR
 
Designed to protect data that relates to citizens of the European Union more effectively than ever and to replace various national rules on the subject with a single, EU-wide law, the upcoming General Data Protection Directive will require firms to develop effective technical and operational measures to obey it.

It may be tempting to assume that the 'Brexit' vote is going to absolve British banks, asset managers, trust firms etc. from obeying the regulation, but the Information Commissioner’s Office (ICO) has stated publicly that the UK will need clear and effective data protection laws in order for businesses to continue transferring data between the UK and EU member states. The reforms are therefore likely to be applied, in some form, all over the UK.

In a world where fines for non-compliance are growing ever-heftier, financial service firms cannot afford to neglect GDPR compliance and should be taking steps to prepare for it now.