U.K. Regulatory and Legal Developments Update

World Securities Law Report informs you of developments in the regulation of transactions involving securities around the world. It provides expert analysis and practical guidance, with...

By Emma Radmore and Catherine Hogg

The Financial Services and Markets Act 2000 (Market Abuse) Regulations 2016 have been published, among other regulatory and legal developments in the U.K., as outlined below.

Financial Conduct Authority (FCA)
FCA Makes HCSTC Rules

FCA has published its policy statement and final rules in relation to proposals it made in response to CMA's previous recommendations on high-cost-short-term-credit (HCSTC). The rules, which apply to price comparison websites comparing HCSTC products, come into force on 1 December. The rules set out, among other things, the prominence with which products are displayed, the search functionality required, and rules for rankings and lender comparisons.

FCA Evaluates Market-Based Finance

FCA has published an occasional paper, providing an overview of the evolution of and recent innovations in market-based finance. It has been published alongside an insight article which discusses the rise of market-based finance as an alternative to traditional banking. The paper notes the positives as being a diversified type of funding and contributing to the development of new products and services for risk distribution and management. However, the paper also identified risks such as the complexity of the system and its potential instability.

FCA Welcomes Global FX Code

FCA has welcomed the publication of the first part of BIS' global FX code. It is particularly pleased at the recognition that, even where a dealer sets out that it is acting as principal, it still has important responsibilities to its clients when using its discretion on their behalf. It notes firms in the U.K. are already under specific regulatory duties when conducting FX activities, and that it has worked to address several conduct risks that can arise. It says it expects firms and responsible senior managers to ensure their staff satisfy appropriate standards of market practice, and that the code will make an important contribution to such standards. The full code will be published in May 2017. BoE also welcomed the code, and notes that the final version of the code will replace the current Non-Investment Products Code (NIPs Code) in relation to the foreign exchange markets. For non-foreign exchange market products in the U.K. market, there will be a new voluntary code, incorporating revised relevant sections of the NIPs Code, and also a revision and update of the Gilt Repo Code and Securities Borrowing and Lending Code. Publication of the new U.K. Securities Lending, Repo and Money Markets Code is expected in mid-2017. The Bullion element of the NIPs Code is being replaced by a new code which will be established by the London Bullion Markets Association (LBMA).

FCA Creates Website Page on Closed Periods

FCA has created a new page on its website setting out its approach to closed periods and preliminary results under EU MAR. Unless the Commission or ESMA advise otherwise, it will continue to take the view that where an issuer announces preliminary results, the closed period, where dealing is prohibited, is immediately before the preliminary results are announced. The length of the EU MAR closed period will be 30 days. FCA says this applies only where the preliminary announcement contains all inside information expected to be included in the year-end report.

FCA Publishes COBS 14 Modification by Consent

FCA has published a direction making a modification by consent of its Conduct of Business Sourcebook (COBS), rule 14. The modification allows any firm that is required to provide a key investor information document to a client to do so after the transaction has taken place, rather than before, if the client has given instructions by means of distance communication and the firm is not able to provide the document in good time before the transaction is concluded. This modification was previously valid until 30 June 2016, but this has been extended to 31 December 2018, or when the relevant rules are revoked, amended or no longer apply.

FCA Announces Insider Dealing Sentence

FCA has announced that Damian Clarke, a former trader at Schroders Investment Management, has been sentenced to two years' imprisonment for insider dealing. Mr. Clarke used inside information he received in the course of his employment, first as an assistant fund manager and then as an equities broker, to trade on accounts in his own name and those of family members, for which he had passwords. FCA says he made a profit of over £150,000 over nine years. There will also be confiscation proceedings against Mr. Clarke.

FCA Brings Investment Fraud Charges

FCA has charged five individuals with various offences under FSMA and with conspiracy to defraud. The offences relate to promotion and sale of shares through a succession of boiler room companies. One individual has also been charged with money laundering offences and two with perverting the course of justice.

FCA Publishes Data Bulletin

FCA has published its latest data bulletin, highlighting areas of interest for users. This edition covers:

  •  consumer credit authorisations: providing an update as at 31 March on the authorisation process for consumer credit firms. FCA has now processed over 30,000 successful applications for consumer credit permissions, most of which include credit broking. It still had 3,000 firms with interim permission and over 1,000 applications from new to market firms. Nearly 24,000 firms who had interim permission had let it lapse or had cancelled it;
  •  updating on the latest figures for complaints received against FCA: since 1 December 2015, FCA has closed 143 allegations, upholding 52 percent, in whole or in part, of the 94 it investigated. In the same period, it received 232 complaints;
  •  statistics about FCA reviews and actions on certain financial promotions – in its review period it reviewed 1,977 promotions, and saw 69 changed or withdrawn. Almost all related to consumer credit and retail;
  •  how FCA uses attestations to ensure that firms are focused on resolving specific issues. This includes breakdowns by conduct categories and sectors; and
  •  using skilled person reports to conduct independent reviews of regulated firms. FCA has commissioned 14 such reports since 1 October 2015.

Up Next From FCA

The latest edition of FCA’s Policy Development Update provides information and links to publications issued since the last edition, recent Handbook developments and an updated timetable for forthcoming publications. Key publications expected over the coming months include:

  •  a policy statement on regulatory fees and levies in June;
  •  feedback on consultation on the regulatory framework for individuals;
  •  further consultation on implementation of MiFID 2, and a policy statement on increasing transparency and engagement at renewal in general insurance markets, both in “mid-2016,” with a policy statement on the first consultation on MiFID 2 implementation to come at another time;
  •  consultation on FCA's implementation of the BRRD in the light of supervisory experience and EBA standards, during the summer;
  •  feedback to the consultation on implementation of the enforcement review and the Green report; and
  •  FCA's finalised policy on Handbook changes affecting investment funds.

FCA Makes New Rules

FCA has made various changes to its Handbook following its Board meetings in April through to June. It made:

  •  the Consumer Credit (High-Cost Short-Term Credit Price Comparison Website) Instrument 2016, making price comparison websites act in a fair and transparent way, effective 1 December;
  •  Handbook Administration (No 41) Instrument 2016, taking effect on various dates to make minor administrative changes to various modules of FCA's Handbook;
  •  Controllers Instrument 2016, which came into force on 27 May to maintain consistency between FSMA's definition of “controllers” and FCA's Handbook;
  •  Consumer Credit (Amendment No 3) Instrument 2016 which was partially in force from 31 May and was fully in force from 1 July to correct or clarify anomalies or gaps in existing provisions and make deregulatory changes to some financial promotion rules;
  •  the Periodic Fees (2016/2017) and Other Fees Instrument 2016. This took effect on 1 July and amends the Glossary and the Fees Manual (FEES) in relation to periodic fees and fees for funding relevant services. It also enables FCA to recover its pensions guidance costs from designated pensions guidance providers;
  •  the Fees (Payment Systems Regulator) (No 2) Instrument 2016. This takes effect on 8 July and amends the Glossary and FEES in relation to PSR fees;
  •  the Market Abuse Regulation (No 2) Instrument 2016. This took effect on 3 July. It amends several parts of the Handbook, including the Market Conduct Sourcebook, mainly to make consequential amendments as EU MAR takes effect;
  •  the Supervision Manual (Reporting No 2) Instrument 2016. This takes effect on various dates up to 31 October. The changes are intended to improve the clarity of Handbook text and of data, while easing the reporting burden on firms; and
  •  the Enforcement Guide (Warning Notices Publicity) Instrument 2016. This took effect on 24 June and clarified regulatory intent to reduce speculation on the progress of specific cases and reduce the risk of unfairness towards subjects.

Legislation
Market Abuse Regulations 2016 Published

The Financial Services and Markets Act 2000 (Market Abuse) Regulations 2016 have been published together with an explanatory memorandum and impact assessment. They amend the Financial Services and Markets Act 2000 (FSMA), the Financial Services Act 2012 and other legislation to ensure compatibility with the new market abuse regime (EU MAR), and to give effect to those parts of EU MAR which required Member States to put in place implementing legislation. The changes include the deletion of much of the current part 8 of FSMA. The Regulations designate FCA as the U.K.’s competent authority and set out its powers in relation to market abuse issues and the reporting requirements under EU MAR. The Regulations came into force on 3 July along with EU MAR.

HM Treasury (Treasury)
Treasury Publishes AML Supervision Report

Treasury has published its anti-money laundering (AML) and counter terrorist finance (CTF) supervision report for 2014-2015. The report stresses the importance of preparing properly for the U.K.'s FATF assessment in 2017-18 as well as for implementation of the fourth Money Laundering Directive (MLD4). The government says it is clear that money laundering obligations should be carried out in an intelligent way that ensures that businesses can grow and are not weighed down by red tape. It reiterates its commitment to the risk-based approach, and says this means not targeting an entire class of customer in a blanket manner and that this includes proportionately applying anti-money laundering measures when dealing with domestic politically exposed persons. The report concludes:

  •  there are differences between supervisors in levels of sophistication and understanding of the risk-based approach and therefore to how they apply it in their supervision;
  •  there was an increase in both monitoring and enforcement activity across supervisors;
  •  supervisors reported proactively reaching out to their communities to improve understanding on practical application of AML and CTF requirements; and
  •  there has been a greater level of information sharing, which is good as this had been identified as a deficiency.

Treasury Committee Publishes PRA Correspondence on Public Disclosure

The Treasury Committee has published a series of letters between Andrew Tyrie and PRA. In December 2016, Mr. Tyrie asked PRA for an assessment of the average capital ratios for incumbents versus new banking entrants. PRA replied there was normally a difference, because long-standing players would use the internal ratings-based approach while new entrants would tend to use the standardised approach. He then wrote further to address the work PRA had been doing to address certain concerns of the Parliamentary Commission on Banking Standards, including on high-quality public disclosure. He was pleased with progress of U.K. banks against international standards and domestic expectations. The Committee has now asked further questions around PRA's views of its bail-in powers in light of EU experience, on the levels of disclosure and on whether PRA is becoming so intrusive a regulator as to risk being a shadow director.

Competition and Markets Authority (CMA)
CMA Reports on Bank Compliance Audit 2015

CMA has published its audit report on banks’ compliance with the undertakings they made in 2002 that, in principle, they would not require SMEs to have current accounts with them in order to grant them loans. CMA confirmed that all eight banks met these obligations and have complied with the bundling undertakings. CMA reported that, whilst no breaches of the bundling undertaking were found, the banks should continue to review their processes and procedures to ensure compliance.

CMA Responds to Consultation on Competition Regime

CMA has published its response to the government's consultation on proposed options for refining the U.K. competition regime. The proposed reforms are designed to refine the decision-taking system for market and merger cases and make assessments and investigations quicker. There are also proposed changes to CMA's powers to support more effective enforcement. CMA largely welcomes the changes proposed.

British Bankers' Association (BBA)
Industry Reacts to Brexit

In the wake of the referendum vote for the U.K. to leave the EU, regulators and industry associations posted their immediate reactions:

  •  regulators were quick to point out that firms must continue for the moment to abide by all laws stemming from the EU that apply in the U.K., to assure firms that there has been significant contingency planning and to note that the longer-term impacts will depend on the future relationship between the U.K. and the EU;
  •  industry associations called for the government to develop a clear view of the exit process and published FAQs for businesses and consumers. Among key views were those of:
  • ○ BBA, which noted that banking services, including those currently passported, will continue for the foreseeable future and changes will take place over a long period. It welcomed the government's decision not immediately to activate the withdrawal notification process;
  • ○ the Investment Association, which called for a focus on preserving the pre-eminence of the U.K.'s financial services sector including the asset management industry;
  • ○ ICMA, which explained the withdrawal process, noting all the steps that have never yet been tested, outlining the main withdrawal options and noting that there is no clarity yet on which option the U.K. will prefer;
  • ○ AIMA, which singled out five areas as likely to receive significant attention the Alternative Investment Fund Directive (AIFMD) Passport and whether the U.K. would be granted it, the revised Markets in Financial Instruments Directive (MiFID 2) and preparation for it, the European Market Infrastructure Regulation (EMIR) and deciding where to clear, Undertakings for Collective Investment in Transferable Securities (UCITS) and setting up an EU management company, and whether the risk in the Financial Transaction Tax is gone.

City of London Law Society (CLLS)
Law Society and CLLS Raise EU MAR Issues With the Commission

The Law Society and CLLS have jointly written to the Commission raising certain issues concerning the interpretation of EU MAR. The letter requests guidance in relation to:

  •  the scope of the restriction in Article 19(11) regarding managers' transactions;
  •  the interpretation of EU MAR's closed period in Article 19(11) in light of a preliminary announcement of annual results, voluntary quarterly reports and compulsory quarterly reports;
  •  the application of Article 19 of EU MAR to debt issuers and to issuers of global depositary receipts;
  •  the uncertainty as to whether, and to what extent, stakebuilding is permitted under EU MAR;
  •  whether buy-back programmes operating outside the exemption in Article 5 of EU MAR are to be considered abusive;
  •  the approach that may be taken to comply with the requirement in Article 1(b)(i) of the draft implementing technical standards (ITS) that communications clearly identify that the information communicated is inside information; and
  •  whether the requirements to report certain information to the national competent authority after an announcement of inside information has been delayed will apply where the announcement is made after 3 July but the inside information arose before that date.

Prudential Regulation Authority (PRA)
PRA Makes Rules for Contractual Recognition of Bail-In

PRA has published a supervisory statement setting out its expectations for firms subject to the Bank Recovery and Resolution Directive (BRRD) with regard to impracticability in the context of the contractual recognition requirement. It also describes the considerations which BRRD firms could take into account when determining impracticability. These non-exhaustive considerations relate to illegalities, international protocols and membership of non-EU bodies among other things. PRA has also published a policy statement presenting the feedback or its consultation on proposed amendments to PRA rules in relation to the contractual recognition of bail-in. The instrument will come into force on 1 August, and the Rulebook amendments follow a previously published modification by consent.

Emma Radmore is a Managing Associate and Catherine Hogg is an Information Assistant in Denton's UKMEA LLP's Financial Services and Funds Practice in London. Emma Radmore is also a member of the World Securities Law Report Advisory Board. They may be contacted at emma.radmore@dentons.com and catherine.hogg@dentons.com.

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