In this edition we look at the perils of WhatsApp, the need for firms to review their recording policies, the levies of the Financial Services Compensation Scheme, the case of Fabiana Abdel-Malek and Walid Choucair, the use of Variations of Permission, the Financial Services Bill and the UK's general regulatory agenda.

Keep calm and carry on recording!

Apparently not deeming it worthy of a separate publication, the Financial Conduct Authority has published its latest Market Watch on its newsletter webpage. This page draws attention to the risks of misconduct that may be heightened or increased by home/remote working arrangements. This includes the potential for people using unmonitored and/or encrypted communication applications such as WhatsApp more and more to share potentially sensitive information connected with work. The use of such applications can present problems and compliance risks because firms will be less able to effectively monitor communications using these channels. Firms that allow such applications to be used for relevant activities on business devices will have to ensure that they are recorded and auditable. This covers a broad range of activities including the arranging of deals and dealing (whether principal or agent) in investments, managing investments and managing a UCITS and/or an AIF.

It is important for firms to review their recording policies and procedures in a proactive way every time that the context and environment in which they operate changes. Policies should be signed off under appropriate governance arrangements and each firm should approve all new media of communication before use. Every firm should also have a rigorous monitoring regime, commensurate to the rising risks, to look at activities being conducted outside its controlled office environment. Senior managers are expected to establish and embed the right culture and governance to improve the standard of conduct at all levels continuously. No matter what the technology or application used for communication purposes, firms in all cases must comply with the FCA's recording obligations when conducting regulated activities and have effective policies, controls and oversight to ensure that these are met. Firms should know that the FCA has previously acted against individuals and firms for misusing social media platforms such as WhatsApp to arrange deals and provide investment advice to clients, as well as transmitting ‘trading signals.'
 
CP 21/02 and the FSCS fee MELLtdown

The MELL is the maximum amount that the Financial Services Compensation Scheme may levy in a year for its operating costs without further consultation and is relevant to all firms authorised by the FCA. The proposed MELL for 2021/22 is £105.5 million and consists of the FSCS management expenses budget of £90.5 million and an unlevied reserve of £15 million. The proposed management expenses budget for 2021/22 is £90.5 million and covers the FSCS’s continuing operating costs and includes the FSCS’s IT, staff, legal and outsourced and internal claims’ handling costs. The proposals represent an increase of 16% (£12.4 million) over the 2020/21 management expenses budget of £78.2 million. 88% of the increase is due to a forecast rise in the volume and complexity of claims expected by the FSCS.

The FSCS hopes to make the MELL apply from 1 April onwards, at the start of its financial year, and continue on to 31 March 2022. In response to the COVID-19 pandemic, the proposed FSCS MELL is based on a greater level of uncertainty than is normal due to the difficulties that the organisation has in forecasting the rate at which firms are going to fail and the number of potential claims against it. The FCA is proposing an unlevied reserve of £15 million (an increase of £10 million over the £5 million reserve in 2020/21) to give the FSCS flexibility in handling higher-than-budgeted level of claims should they materialise. The unlevied reserve can be levied without further formal consultation by the FCA. The FSCS’s compensation costs levy, which covers compensation paid to consumers, is determined separately by the FSCS and does not form part of this consultation. That should provide another opportunity for firms that are affected by these fee charges to complain about the inequality of the process.

An insider dealing confiscation order for £3.9 million

In a case brought by the FCA, Her Honour Judge Korner, CMG, QC, made a consent confiscation order totalling £3,893,964.82 to be paid by Choucair. Readers might recall that in June 2019 Walid Choucair was sentenced to three years’ imprisonment in respect of five offences of insider dealing alongside Fabiana Abdel-Malek which took place in 2013/4. Both individuals tried to conceal their activities by using mobile phones and this resulted in Walid Choucair, an experienced trader, illegally profiting by approximately £1.4 million. The amount of the confiscation order takes into account that estimate of profit from the five insider dealing charges together with profits arising from other trading carried out by him which (the court is permitted to assume) also represents proceeds of crime. Mr Choucair is required to pay the confiscation order by 1 March. If he fails to do so, he will have to serve five years in default of payment. This is an insightful post-script to the case from June 2019 of Fabiana Abdel-Malek and Walid Choucair, both sentenced to three years’ imprisonment each, having sustained convictions relating to five insider-dealing offences. If you have attended market abuse training in the last 18 months, you will recall that Fabiana Abdel-Malek was a senior compliance officer at UBS AG in London who used her position to obtain inside information which she passed to Choucair. The details of the case no doubt will pop up in firms' market-abuse training for some time to come.

Regular reviews of regulatory permission

The FCA is reminding firms of their obligation to review regulatory permissions regularly to ensure that they are up-to-date and removed where they are not needed. The FCA has the power to cancel a firm’s Part 4A permission if it has not carried on a regulated activity for at least 12 months. What action does the FCA want firms to take? If a firm has a Part 4A permission, but has not carried on any regulated activities for 12 months or more and has no current plans to do so, it should apply for cancellation using FCA Connect. If a firm has a Part 4A permission and has not used (or no longer needs) some of its permissions, then it should apply to remove the unnecessary permissions by completing and submitting a Variation of Permission application using Connect.

As reported previously, the Financial Services Bill, which is making its way through Parliament, will empower the FCA to act more quickly when it considers that firms are no longer carrying out regulated activities. It will be able to serve notice on this-or-that firm, asking for a written response within 14 days. If the firm does not respond, the FCA will be able to publish a second, public notice, explaining that it appears that the firm is not carrying on a regulated activity. The FCA can then vary or cancel the firm’s permission(s) after 1 month. Linking the requirement to Conduct Risks, the FCA expects firms to review existing permissions and make any necessary changes to ensure that they present a clear picture of what they do and help the FCA prevent scams and block misleading information. We consider it sensible for firms to review their permissions on a regular basis and ensure that they understand how they are being used in the business, or that there is a realistic intention to use the relevant permission. This may be particularly relevant for a firm that has collected permission over time in response to EU directives, some of whose Part 4A permissions that it used to use previously have become redundant.

The regulatory agenda - what to expect

• [Implementation expected within 12 months.] FCA consultation about the Investment Firms Prudential Regime. The FCA is conducting an extensive reform of the prudential rules that apply to investment firms, including investment managers. This is due to be implemented on 1 January 2022. The FCA began to consult interested parties in December and consultation will continue throughout the year.
• [Implementation expected within 1-2 years.] FCA pre-consultation about TCFD-related obligations for UK asset managers, life insurers and pension providers. The FCA is introducing rules to require premium listed companies to make better disclosures about how climate change affects their business, consistent with the recommendations of the Taskforce on Climate-related Financial Disclosures (TCFD). The FCA will consult interested parties in the first half of 2021.
• [Implementation expected within 1-2 years.] FCA pre-consultation about a duty of care. The FCA has published options to change the rules following receipt of the Duty of Care Feedback Statement. It is now aiming to consult people this year.
• [Implementation expected within 1-2 years.] HM Treasury pre-consultation about an amendment to the PRIIPS Regulation.
• [Implementation expected  within 1-2 years.] HM Treasury consultation about the Future Regulatory Framework Review (FRF). HM Government is consulting the market about a post-Brexit regulatory set-up. Having seen the British regulatory scene develop under detailed EU regulatory standards to 2015 and beyond, HM Government now wants to delegate responsibility for policy to its financial regulators, as was the case back in 2000. It wants a more flexible, responsive and accountable regulatory set-up with one coherent source of regulatory requirements for firms – the regulators’ rulebook. Comment period closes on 19 February.
• [No confirmed date for implementation.] Longer-term Review of the British funds regime. The government is seeking comments and information about issues to do with both tax and regulation as part of its review of the funds regime. The overarching objective of the review is to spot options which will make the UK a more attractive location in which to set up, manage and administer funds and which will support a wider range of more efficient investments that are better suited to investors’ needs. The funds regime can do this by improving the routes through which people can 'commit' capital into long-term assets.

* Jonathan Wilson can be reached on +44 (0)20 3146 1869 or at jon@elliswilson.co.uk