This month's update brings news of two key appointments at the FCA and FSCS, alongside a number of important communications about regulatory activity in the pensions market and interest-only mortgages. The FCA’s enforcement department has also had a busy month.

The FCA has published a consultative paper that contains plans to widen access to the Financial Ombudsman Service (FOS) for small businesses. This follows a review of the protection available to SMEs and includes an overview of the feedback received in response to an FCA paper called "DP15/7: Our Approach to SMEs as Users of Financial Services."

As things stand at the moment, only micro-enterprises (businesses with €2 million or less on the balance sheet, which employ 10 people or fewer) have access to FOS, which limits the avenues down which SMEs can travel if they want to resolve complaints and obtain redress from financial firms. To change this, the FCA proposes the following:

• The introduction of a ‘small businesses’ category to the list of eligible complainants.
• The redefiniton of a 'small business' for this purpose as one with an annual turnover of less than £6.5 million, an annual balance sheet of less than £5 million and fewer than 50 employees.
• The creation of a new category of eligible complainant for guarantors.

 
The FCA proposes to bring these changes into effect on 1st December.

PRIIPS client communication

The FCA has responded to practitioners' concerns to do with Packaged Retail and Insurance-Based Investment Products (PRIIPs). EU law on the subject has been in force since 1st January. Every PRIIPs manufacturer must publish a stand-alone Key Information Document (KID), which must go to each investor in good time before the conclusion of a transaction. The KID must outline the risks, performance scenarios, costs and other pre-contract information in a standardised format. Concerns have been raised that, for a minority of PRIIPs, performance scenarios may appear too optimistic and therefore perhaps misleading for investors. The FCA has said that explanatory material can be added if a PRIIPs manufacturer or distributor feels that the scenarios being presented are too optimistic.

FCA fines and penalties

The FCA has fined an online brokerage £1,049,412 for failing to control market abuse and report suspicious transactions.

The firm delegated its post-trade monitoring to a team at an affiliated firm in the US. It failed to design or test its controls to make sure that it was detecting potential instances of market abuse and flagging them up for further review. The firm also failed to oversee the team’s conduct effectively, train team members adequately or undertake any quality assurance on the reviews. These failings made it more likely that the firm might fail to identify suspicious transactions and submit suspicious transaction reports to the authorities. During the relevant period (February 2014 – February 2015) the regulator identified three instances where such reports should have been made but were not.

The FCA has published provisional decision notices against an insurance intermediary and its chief executive for mishandling clients' money. A company connected to the intermediary has made references to the Upper Tribunal (which handles appeals against the FCA's decisions) about certain aspects of the decision notice. Until this case has been heard, the decision notices will remain provisional.

The FCA has also fined the firm £684,000 and restricted its ability to charge renewal fees with a 121-day limit. The firm inadvertently spent clients' money, leading to a deficit of £17.3 million. Its chief executive, who was responsible for overseeing clients' money, was fined £468,000 and banned from any future responsibility for client/insurer money in connection with regulated financial activities.

A corporate advisor has been sentenced to three-and-a-half years imprisonment for exploiting hundreds of vulnerable investors. He showed no remorse for the "entirely self-centred and devious" way in which he targeted elderly investors with worthless shares in a healthcare solution. His firm used high-pressure tactics, including cold-calling and exaggerated promotional materials. The scheme resulted in 300 investors losing £1.4 million.

Three other people who acted as brokers have also been sentenced and confiscation proceeding are underway.

Someone who described himself as a "lender of last resort" has been found guilty of lending money illegally. Over a four-year period, he made 147 illegal credit agreements, lending more than £1 million to new customers and collecting on pre-existing agreements without the necessary regulatory permission. The agreements induced his customers, many of whom were vulnerable, to sell their homes for the value of the loans without a understanding or knowing the implications clearly.

Greater cyber resilience

Robin Jones, the head of technology, resilience and cyber at the FCA, recently informed an audience about his organisation's expectations of firms in terms of cyber resilience and ways in which it is helping them.

In a rapidly changing technological environment, cyber security and resilience have never been so important. In order to respond effectively and recover quickly when things go wrong, firms ought to be 'cyber-hygienic' with a culture that promotes active cyber security and robust governance. He thought that firms ought to be taking the following steps.

• Understand their 'critical assets' so as to protect them in the event of an attack.
• Make up for weaknesses in old systems.
• Train employees to detect breaches and make sure that people are observing basic cyber security measures.
• Manage suppliers' and authorised third parties' access to systems.
• Put contingency plans in place to prevent and mitigate the spread of attacks.
• Draw up and follow 'communication plans' that help them manage customers, suppliers, the regulator and media, with business continuity plans in place to manage the process.
• Establish strong governance with visible leadership.

The FCA works particularly closely with larger firms, which it believes pose the greatest risk to consumers and to the markets; it is less likely to help smaller firms. Over the coming year it will make more pronouncements on this topic.

TR18/1 on fair dealings with interest-only mortgage customers

The number of interest-only mortgages that reach maturity will increase over the next 10-14 years. The FCA has recently published the findings of a thematic review in which it tried to ascertain whether lenders were treating customers fairly by helping them to avoid non-repayment at maturity.

The regulator found that firms had made good progress on this subject, evolving strategies that helped them stay in contact with customers, analyse repayment plans and introduce suitable software. These processes are often time-consuming. It reached the following conclusions.

• Lenders had a clear understanding of the value, volume and maturity profile of their interest-only mortgage customers.
• They were issuing regular communications throughout the mortgage terms.
• Most lenders offered a range of options and were flexible when they realised that full repayments were not possible.
• Customers were able to talk to knowledgeable and experienced teams about their options.
• In cases where less experienced staff were deployed to 'triage' cases, there may have been confusion about the adequacy of repayment plans.
• The earlier consumers engaged with lenders, the more affordable the repayment options offered were.
• Many lenders did not speak to customers much.

The FCA has commissioned research into the reasons behind the last point. It has also published a leaflet in which it has urged all customers to contact their lenders and promoting the importance of early intervention.

FCA appoints executive director of its international business

Nausicca Delfas, the FCA’s acting chief operating officer and a member of its executive committee, has been appointed to the newly-created post of "executive director of international." She will nurture the FCA's relationships with regulators and governments abroad with responsibility for shaping the regulator's international policy. She will also play a crucial part in the FCA’s 'Brexit' activity.

A new chairman for the FSCS

The FCA and PRA have announced the appointment of Marshall Bailey to the job of chairman of the Financial Services Compensation Scheme, effective on 1st April. Bailey will succeed Lawrence Churchill, who has served for two terms.

Marshall Bailey has more than two decades’ experience in financial services and has worked on such things as financial reform and 'conduct' as part of the board of UKFI. He is also a non-executive director at Chubb European Group and CIBC World Markets.

The FCA's and the ICO's GDPR update

With the General Data Protection Regulation's implementation date looming (25th May), the FCA and the Information Commissioner's Office have published a joint update in which they look at one of the greatest challenges for firms - how to comply with both the regulation and the FCA's rules. This states that the GDPR does not contain any rules that are incompatible with the FCA rulebook and that common themes exist between the two sets of rules, notably an insistence on clear communication and the fair treatment of customers. The regulator has also considered the need for GDPR compliance in its rules, including the need to maintain robust systems and controls (SYSC).

The FCA recognises that some details of GDPR are still in the process of being ironed out and is working closely with the ICO to ensure implementation is consistent with the wider regulatory regime.

Competition in the personal pensions market

Now that it has intervened in the workplace pensions market, the FCA has turned its attention to the personal pension market and is seeking industry input on whether competition is working well for customers.

The regulator has published a discussion paper outlining its concerns and is particularly focused on:

• performance and the complexity of products;
• factors that influence consumers' motivation;
• barriers to identifying and switching;
• fund choice and defaults;
• charges and the impact of competition.

Interested parties are invited to provide feedback by 27th April.

The future of the City after Brexit

In a recent speech, FCA chief executive Andrew Bailey discussed the future of the City. One of the key factors that makes trade free is the mutual recognition of regulatory standards which are designed to protect public interests. Brexit has the potential to disrupt this by closing market access.

In his speech, Bailey outlined a number of ways in which markets could become less stable if the Government does not manage Brexit effectively. These included the following.

• Financial contracts between British and EU firms may cease to be serviceable, potentially affecting up to £26 trillion of derivative contracts and countless businesses and individuals.
• EU and British central counterparties (CCPs) may be in breach of regulations if they provide clearing services in each others' jurisdictions. This might trigger off a rapid and abrupt close-out of positions.
• The holding and sharing of data between the UK and EU may also be illegal and this might compromise data flows between businesses, regulators and consumers.

In order to offset these risks and provide certainty to businesses, the FCA is working closely with Government to ensure the same rules will continue to apply throughout the transitional period. Bailey also outlined the need for mutually agreed and enacted solutions to be in place by the end of March, along with a defined transitional period. This will ensure the FCA has enough time to assist firms in the build-up to, and throughout Brexit. The FCA has a contingency plan in place to enable firms to obtain interim permissions in the event that they may suddenly be left without authorisation.

Beyond Brexit?

When Britain finally leaves the EU, it and other countries must keep 'recognising' each others' regulatory standards and its markets must continue to be open. It is Bailey’s view that it is a simple task to do these things. He expects the process to resemble the FCA’s approach to authorising branches of banks based outside of the EEA – an alignment of desired results, supervisory co-operation, the sharing of information between regulators and clear arrangements for the resolution of disputes.

Algorithmic trading compliance

The FCA has published a report about its supervisory approach to algorithmic trading in the wholesale markets. This contains examples of good and bad practice from previous reviews.

Automated information technology has helped the supply chain, increasing the speed of execution and reducing costs, but it has also made some things riskier. The regulator is focusing on the proactive supervision of this market and has the following objectives, which are as follows.

• To ensure that appropriate processes are in place to identify and manage algorithmic trading and ‘material changes’ and to maintain a comprehensive inventory of trading throughout the business.
• To ensure that all algorithms go through rigorous testing before being deployed.
• To ensure that pre- and post-trade controls are in place to minimise trading risk.
• To ensure that firms 'govern' and oversee algorithmic trading activities appropriately.
• To ensure that firms take the potential effect of their trading activity on market integrity into account and take steps to mitigate potential conduct issues and instances of market abuse.