In this article, the experts at TCC examine news of further changes in the wake of the British conduct regulator’s asset management market study and a consultative exercise that asks whether it ought to clarify its position on crypt-oassets with some new guidelines, commenting also on the Senior Managers & Certification Regime and MiFID II.

SM&CR: What can we learn from the banking sector?

We also look at the extension of the Senior Managers & Certification Regime (SM&CR) to firms beyond the realm of banking represents the next significant regulatory change on the horizon for solo-regulated firms, i.e. for firms whose sole regulator is the Financial Conduct Authority. The implementation date is creeping closer and many firms are looking at the regime’s previous incarnation in the banking sector for ways to streamline their own ‘implementation roadmaps.’ What, then, can they learn from the banks?

Senior manager buy-in. In view of the regime’s strong emphasis on personal accountability, particularly at the top of an organisation, it is important for the compliance officer at a firm to obtain the approval of senior managers for the project at its very inception. This helps smooth the transition from one regime to another and to prove to the FCA that the firm is dedicated to a customer-centric culture and the maintenance of robust governance. Firms that can demonstrate this also benefit from a stronger relationship with the regulator and, potentially, less regulatory scrutiny.

Early preparation. It is not a quick or straightforward process to identify the employees who come under the various aspects of the regime, or to gauge the extent to which they do. The compliance officer ought to give himself enough time to plan and prepare effectively. This will increase the likelihood of success and buy enough time for him to review and refine his approach.

The documents, such as Statements of Responsibilities, that the regime requires also take time to prepare. The compliance officer ought to talk to people to whom the regime is going to apply at an early stage. He will then hopefully have enough time to address any problems that may arise.

Effective governance. As a central pillar of the regime, governance is an area on which firms ought to concentrate when preparing for the upcoming regime.

The most effective approaches to implementation are those in which the firm has reviewed and amended its governance in light of the new requirements, having also considered the processes surrounding regulatory reporting to ensure that the regulator can gauge their efficacy.

Training and awareness. Employees are the compliance officer’s vital allies as he tries to change things throughout his organisation. Successful firms are the ones that consult and empower their staff, avoiding confusion by giving them every opportunity to have their concerns heard.

Business as usual? Rather than reinventing the wheel, the compliance director ought to use existing policies and procedures, where appropriate, as the foundation of the SM&CR. He should only develop new systems and controls if he has to. This ought to reduce the burdens he has to bear while implementing the regime and it ought to help employees learn about it more easily.

MiFID II: one year on

The European Union’s second Markets in Financial Instruments Directive is now more than a year old. To celebrate, we examine the effect it has had on the wealth management industry and the ways in which firms have adapted to its new requirements.

On the surface, MiFID II should not have had a significant effect on the relationships between firms and their clients. It was designed to force British firms to be cautious about the suitability reviews that they now had to undertake, and which many of them were already conducting.

There is a high level of MiFID II compliance throughout the industry. There are still parts of MiFID II which are hard for firms to implement efficiently, e.g. best execution reporting, distributor reporting and 10% portfolio reporting, which many firms have opted to handle manually. They have been interpreting and implementing the new regulations in different way because their systems and operating models differ from one another.

Firms are now beginning to review their approach to compliance and are trying to stop MiFID II from harming their relationships with customers. Generally speaking, they are providing clients with more upfront disclosures about the effect of MiFID II. The 10% portfolio change rule, for example, has forced each firms to communicate more comprehensively with each client at the beginning of its relationship with him, the better to minimise the risk of him selling out too soon as a result of temporary market fluctuations.

MiFID II is likely to have increased both implementation and operational costs, but not to a great extent. Throughout the industry, firms are trying harder than before to make their operations more efficient in an attempt to offset these cost increases. Our firm expects to see them making more use of technology and automation in the advising process, while continuing to refine their propositions.

Firms, then, have been making good headway with MiFID II, but as with all new regulations, they can interpret the rules slightly differently. They will take time to resolve some of the more difficult aspects of the regime.

The asset management market study spawns a second set of rules

Because it has uncovered evidence of weak price competition and lower returns for savers during its asset management market study, the FCA has published further rules and guidelines to make fund managers act in the best interests of investors.

The new rules and guidelines do the following.

• Dictate the ways in which fund managers should describe fund objectives and investment policies.
• Require fund managers to explain how and why their funds use particular benchmarks and, if they use none, how investors should assess the performance of the funds.
• Require benchmarks to be referred to consistently in all fund documents.
• State in no uncertain terms that each fund manager ought to calculate each performance fee according to the performance of each scheme once it has deducted all fees.

General standards and communication rules for the payment services and e-money sectors

The FCA has published a policy statement outlining a number of changes to its rulebook to introduce general standards and communication rules for the payment services and e-money sectors.

The changes include:

• and extension of the application of the FCA’s Principles for Businesses to certain types of payment service providers (PSPs) and e-money issuers;
• the extension of a number of the communication rules and guidelines in the Banking Conduct of Business Sourcebook, Chapter 2 (BCOBS 2) to communications made to customers of e-money and payment services; and
• new rules and guidelines to govern the communication and promotion of currency transfer services, applicable to payment services and the issue of e-money involving the conversion of currencies.

The FCA also has new powers to extend the rules under the Financial Services and Markets Act 2000 to activities regulated under the Payment Services Regulations (PSRs 2017) and the Electronic Money Regulations (EMRs 2011). The new rules and guidelines will come into force on 1st August.

Further changes to SM&CR proposed

While it was consulting interested parties about extending the Senior Managers and Certification Regime (SM&CR) to insurers and solo-regulated firms, the regulator spotted some necessary changes that it felt it had to make in order to make the new regime easier to understand and help firms adjust to it. These changes include:

• excluding the legal function from the overall responsibility requirement;
• bringing intermediaries with regulated revenue of more than £35 million, but which do not complete form RMA-B, to do with a firm’s profit and loss account, into the ambit of the regime.
• excluding purely administrative jobs from the certification regime by changing the scope of the Client Dealing Function;
• ensuring that all people who do jobs previously labelled as Systems and Controls functions under the Approved Persons Regime, but are no longer approved by the FCA under the SM&CR, are covered by the certification regime; and
• applying the Senior Manager Conduct Rule Four (which says that “you must disclose appropriately any information of which the FCA or PRA would reasonably expect notice”) to non-approved executive directors at limited-scope firms and non-executive directors at all firms subject to equivalent requirements.

The FCA is also proposing to make minor changes to its rulebook and regulatory forms to ensure consistency with the above changes.

Guidelines for crypto-assets

To help improve firms’ understanding of whether their crypto-assets activity falls under the FCA’s regulation, the regulator is consulting interested parties about new guidelines to point out the points at which different types of crypto-asset sit inside the regulatory perimeter.

The FCA has divided crypto-assets into three types of token.

• Exchange token: designed as a means of exchange, not issued or backed by a central authority.
• Security token: with specific characteristics that meet the definition of a Specified Investment, e.g. a share or a debt instrument.
• Utility token: provides holders with access to a current (or prospective) product or service, but does not provide them with the same rights as those offered by Specified Investments.

The guidelines are designed to say where each of these categories sits in relation to the regulatory perimeter and outlines a step-by-step process by which a firm can work out whether its activity ought to be subject to FCA regulation.

The Government intends to ask interested parties whether it should expand the regulatory perimeter to include a greater proportion of crypto-asset activities. Later in the year the FCA also plans to consult the public about its proposals to ban the sale of derivatives linked to certain crypto-assets to retail investors.

Further measures to improve retirement

The FCA is always trying to ensure that consumers receive appropriate retirement results. It is now proposing to take a number of steps, including default investment pathways, to help consumers make better decisions in this area.

The FCA’s Retirement Outcomes Review (ROR) found that consumers were frequently disengaged in the investment decisions associated with moving into drawdown and certain providers were defaulting those consumers into cash, or cash-like products. The regulator believes that a new range of default investment pathways would help consumers select options that meet their objectives, in the main at least. The proposals are for pension providers to offer investment pathways whenever a customer moves into drawdown or transfers funds already in drawdown without advice.

The FCA has outlined four objectives for which providers ought to develop investment pathways.

• Option one: the customer has no plans to touch his money in the next five years.
• Option two: the customer plans to use his money to set up a guaranteed income (annuity) within the next five years.
• Option three: the customer plans to start taking his money as long-term income in the next five years.
• Option four: the customer plans to withdraw all his money within the next five years.

The regulator is thinking of requiring all drawdown providers serving non-advised consumers to offer investment pathways, with the exception of those with less than 500 non-advised consumers entering drawdown each year. It also wants to require them to provide pathways for at least two of the four objectives and refer consumers to other providers whenever they do not offer pathways for the chosen investments.

From the date when the finalised rules and guidance are published, providers will have 12 months to design and offer these investment pathways and the changes in governance that these proposals are likely to require.

The FCA has also published its rules and guidelines to do with ‘wake-up’ packs and retirement risk warnings, first outlined in CP18/17, in their final form. The feedback it received was broadly supportive of these proposals, so the original proposals went largely unchanged.

General insurance value measures data reporting requirements

Having completed an initial pilot scheme, the FCA is proposing to introduce “quarterly value measures reporting” throughout the general insurance industry to help consumers assess value for money. The pilot has had a positive effect on the market by making consumers more aware of the value that general insurance products offer. It has also given firms a benchmark against which to compare their products with those of others.

Now, the FCA is proposing to:

• roll out value measures reporting requirements to all general insurance products, except no-claimsbonus protection, packaged bank accounts and commercial products;
• make insurers responsible for reporting their value metrics, even for products not included within the Regulated Activities Order (RAO);
• include reporting on claims frequency, acceptance rate, complaints made as part of the claims process and the average value of a claims payout; and
• introduce new product governance rules to make providers take value metrics into account when assessing whether their products give consumers value for money.

The reported date will be published on the FCA website.

The LIBOR phaseout and contractual fallbacks

The FCA’s Director of Markets and Wholesale Policy, Edwin Schooling Latter, recently gave a speech about the final transition away from the notorious London Interbank Offered Rate or LIBOR. There is an agreement in place between 20 panel banks to continue submitting rates to LIBOR until the end of 2021, but an audience poll at a previous gathering showed that more than 50% of attendees believed that it would be the end of 2022 before it stopped. This has implications for how the ‘fallback’ language in outstanding contracts should be applied.

The end of the rate publication is one reason for firms to use effective fallback provisions, but firms may also wish to consider a fallback that provides an alternative rate if LIBOR no longer provides an accurate representation of the market. In the past year, the market has made good progress towards calculating a fallback rate to replace LIBOR in outstanding contracts. The consensus is that the term elements of LIBOR should be replicated through the compounding of the observed overnight rates, which will act as substitutes for sterling, yen and Swiss franc LIBOR (SONIA, TONA and SARON).

The regulator believes that, for a smooth and orderly transition, contracts that refer to LIBOR should be replaced or amended before fallback provisions are necessary. That said, robust fallback measures do offer firms an important safety net.