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Global Witness and leading anti-corruption MP Margaret Hodge have recently called on the UK’s Financial Conduct Authority to take action over the role of RBS and Standard Chartered in handling more than US$2 billion of embezzled funds in a major international corruption scandal. The call comes as Global Witness publishes a new analysis of the role of the bankers, auditors and lawyers in enabling Malaysia’s 1MDB corruption scandal that is likely to have robbed the Malaysian people of an estimated US$4.5 billion.

According to the US Department of Justice the billions embezzled from 1Malaysia Development Berhad (1MDB), a government owned-company, by a variety of people were spent on luxury properties, high-end art and lavish lifestyles, as well as payments to the Malaysian Prime Minister Najib Razak. Most famously, money taken from 1MDB allegedly funded the Leonardo DiCaprio film the Wolf of Wall Street.

Global Witness and Margaret Hodge have written to the Financial Conduct Authority (FCA) calling for it to investigate the role of two UK-based banks, RBS and Standard Chartered, for their oversight of their Swiss and Singapore branches’ money laundering controls. Regulators in Singapore and Switzerland have fined the two banks’ foreign branches a total of $12 million for breaches of anti-money laundering regulations in relation to the scandal. Those investigations were completed over a year ago, with Swiss regulators passing their findings to the FCA at that time. However, there has been no sign of any action from the UK authorities.

In response to Global Witness’ findings, prominent Labour MP Margaret Hodge said: “It is time for the FCA to take firm action to hold banks that handle dirty money to account. The FCA must also explain its apparent inaction over this case, when other countries completed their investigations over a year ago.”

The role of the two banks feature in Global Witness’ new analysis of how a range of banks, lawyers and auditors either turned a blind eye, signed off on suspicious transactions or were simply not obliged by the rules to question origin of funding.

“Our analysis shows that the international anti-money laundering system is not working,” said Global Witness Senior Campaigner Murray Worthy. “The 1MDB scandal would simply not have been possible if the system worked; the financial professionals involved would have spotted this dirty cash and prevented the money from being ever being taken.”

The report concludes that for the banks involved in the 1MDB scandal, this was not a problem of inadequate regulations but a failure of bankers to follow those rules. The banks were either simply not conducting the checks that they were required to do, or they were willing to ignore the risks they saw.

Murray Worthy continued: “The UK should not allow banks based here to handle the proceeds of crime or corruption, wherever they operate in the world. The people of Malaysia are now facing a bill greater than the country’s annual healthcare budget as a result of this scandal – and these banks enabled this scandal to happen.”

(Source: Global Witness)

The FCA has finally released its long-awaited consultation paper[1] (CP) on its planned extension to the Senior Managers and Certification Regime (SM&CR) to the vast majority of those firms regulated by it.

The FCA intends introducing this new extended regime on a proportionate basis and having regard to the plethora of activities undertaken by regulated firms, and the size and scale of individual firms. Here Douglas Cherry, Partner at Reed Smith, discusses with Finance Monthly.

The SM&CR consists of three principal elements which are the “core”, “enhanced” and “limited-scope” regimes.

The core regime applies to all affected firms and is the focus of this short discussion.

The enhanced regime will apply only to the very largest firms regulated by the FCA and is expected by the FCA to capture only around 350 firms in total. It requires additional detail, above the core regime and places additional individual responsibility in particular on risk, prudential and audit responsibilities.

The limited scope regime is effectively a ‘light’ version of the core regime for particular classes of FCA-regulated firms including: limited scope consumer credit, oil market participant and sole trader firms. These firms will not be required to implement the SMFs and are exempt from other requirements in the regimes too.

The core regime essentially sees those holding significant influence control functions under the existing regime mapping across to the newly defined Senior Management Functions “SMFs”. It also introduces the notion of the certification regime to firms.

Whilst the new SMFs are re-defined, there is little magic about those definitions, and those of you currently holding a Chief-Executive, Executive Director, Partner, Compliance Officer, MLRO and so on, will likely fall within these new SMF definitions. SMFs will be required to apply for the relevant designations and receive prior approval from the FCA before carrying out any duties at a regulated firm which fall within the definition of the relevant SMF.

The extended regime mandates adherence to a Statement of Responsibilities (SOR) by SMFs. The firm must articulate those duties for which the SMF holder is responsible and ensure that each impacted SMF-holder subscribes to that SOR. This is similar to the approved-persons regime, but in contrast to that regime, it creates a burden on the SMF holder to demonstrate to the FCA that they proactively discharge their prescribed responsibilities, and in the case of regulatory criticism; show that they took “reasonable steps” to meet their obligations.

Some staff will fall outside of the SMF definitions, and instead fall within the certification regime. These staff will not require pre-approval from the FCA. Rather, they must be assessed (on an ongoing basis) by the firm, as fit and proper to do their job. Certification staff will likely include those concerned with client assets and money (CASS oversight function), those heading up business units and those persons who have the ability to cause ‘significant harm’ to a regulated firm (including proprietary and algorithmic traders, and investment advisors amongst others.

The FCA expects to focus very precisely on how roles and defined and described and how the firm organises itself. From an employee perspective, firms may well start seeing senior staff being reluctant to be seen as SMF staff, where a role may be defined in manner that pushes it into the certification regime instead.

Whilst for may practical purposes, the regime changes do not fundamentally change the day to day approach at regulated firms, the very fact of the certification regime places a positive burden on firms (and the SMF individual with responsibility for this area of systems and controls as well) to actively certify at the outset an monitor on an ongoing basis, compliance with the fit and proper test.

The largest burden is likely to be the defining of roles and management time and effort spent in implementing these changes. The consultation runs through to 3rd November, and the new rules, in very similar form to the CP, to be in force from Q3 2018.

[1] Individual Accountability: Extending the Senior Managers & Certification Regime to all FCA firms CP17/25 July 2017

The Financial Conduct Authority (FCA) has published new proposals on advice relating to pension transfers where consumers have safeguarded benefits, primarily for transfers from Defined Benefit to Defined Contribution pension schemes.

The FCA proposals aim to reflect the current environment and the increased demand for pension transfer advice. Since the introduction of the pension freedoms in April 2015, consumers have more options available to access their pension savings. This has combined with more recent changes to the financial environment leading to historically high levels of transfer values.

The new rules outline the FCA’s expectations of advisers and pension transfer specialists to ensure that consumers receive advice which considers all relevant factors. They build on an FCA alert on advising on pension transfers published in January.

The proposed changes include requiring transfer advice to be provided as a personal recommendation, and replacing the current transfer value analysis with a comparison to show the value of the benefits being given up. Taken together as a package, the proposals will ensure that advice fully takes account of an individual’s circumstances so that consumers make the right decision for them.

Christopher Woolard, Executive Director of Strategy and Competition at the FCA said: “Defined Benefit pensions, and other safeguarded benefits such as guarantees, are valuable so most consumers will be best advised to keep them. However, we recognise that the environment has changed significantly, so we want to ensure that financial advice considers the customer’s circumstances in full and recognises the various options now available to them.

“Our new approach should better equip advisers to give the right advice so that consumers make well informed decisions.”

The proposals include:

(Source: FCA)

The UK’s financial sector is the biggest and most respected in the world, with the City of London acting as a magnet for investment and industry talent. Here Craig James, CEO of Neopay, discusses with Finance Monthly the potential impact the FCA could have through its engagement in fintech beyond the City.

Most recently the capital has been a hotbed of innovation in the financial technology – fintech – sector, with a number of start-up accelerators and new companies coming onto the scene to challenge the established industry.

But with the confusion over Brexit now firmly in people’s mind, many are concerned that London’s position as a leading financial centre and the focal point of the EU’s fintech industry may be under threat.

Other EU countries are beginning to respond to this and attempting to entice fintech businesses away from London and the UK.

As a result, the British government and its financial regulator appear to be doing more than ever to boost the UK’s share of the fintech market.

This is definitely a good time for fintech businesses, as governments across the world compete for their business, and this is even more apparent in Europe and the UK as a result of Brexit.

In one of its latest initiatives, the British government are looking specifically beyond the borders of London to help boost fintech hubs in the rest of the UK and encourage greater development of fintech across the country.

Expanding access to regulation beyond the capital

Britain’s financial watchdog, the Financial Conduct Authority (FCA), has recently announced that it is to expand its regulatory support across the UK in efforts to aid emerging financial technology hubs based outside of London.

Specifically, the regulator is looking to areas with both a strong financial centre and technology presence.

Historically, fintech business have predominantly come from London due to its proximity to tech funding and major financial institutions as well as government and regulatory bodies.

Looking around the rest of the world, these four factors have been key in the success of fintech companies.

But devolution of government, the rise of non-London tech hubs and the increasing willingness of banks to have a presence in other major cities around the UK, means there is greater potential for fintech businesses to spread far beyond London, just at the time the country needs to solidify and expand its position in the world’s financial and technology markets.

Speaking to the Leeds Digital Festival earlier this year Christopher Woolard, executive director of strategy and competition at the FCA, identified emerging hubs in the Edinburgh-Glasgow corridor and the Leeds-Manchester area as significant areas for potential growth.

The developing “FiNexus Lab” in Leeds – a collaboration between local government, industry, and central government – is laying solid foundations for fintech firms to flourish in the city, while in Manchester, Barclays’ “Rise” hub and “The Vault”, a 20,000 sq ft co-working space for fintech firms in Spinningfield’s business quarter, is improving the conditions for innovative firms to collaborate and grow.

The FCA has also been seeking to assist up and coming fintech businesses through its “sandbox” scheme, which helps firms to experiment with innovative products, services and business models.

About two thirds of the scheme’s first cohort was London based, but a rash of regional interest has seen nearly half of applications for its latest round come from outside the capital, highlighting the growth of fintech across the UK.

Non-London fintech companies are also seeing an increased interest in investment with Durham based Atom Bank recently securing £83m of funding from investors including Spanish bank BBVA, fund manager Neil Woodford and Toscafund Asset Management.

Not an entirely new trend

While encouraging new fintech companies outside of London has just recently become a focus of the FCA, it is not an entirely new concept and as far back as 2014 politicians, as well as financial and technology bosses, were calling for an expansion of the UK’s fintech sector beyond the boundaries of London to fully recognise its potential – long before the possibility of Brexit became a reality.

For instance, Eric van der Kleij, head of Canary Wharf based start-up accelerator Level39, has been one of the leading fintech figures suggesting that a business’ location isn’t a factor in whether it will be a success, pointing particularly to Manchester as a place where fintech companies were performing strongly.

One of the major hurdles, and a major barrier the FCA is now seeking to breach with its latest commitment, is that much of the regulatory framework emanated from London, with businesses based outside of this area – particularly those further towards the north and Scotland – struggling to get access to the kind of help they needed.

Speaking at the Leeds Festival, Christopher Woolard said the FCA now wanted to make it “as easy as possible” for firms to engage with the regulator and get access to the advice and help they needed to get into the market.

While many businesses have been able to set up outside of London and travel, sometimes great distances, to access this regulatory assistance, actively moving this help closer to businesses could be a significant benefit to new businesses, and a boost to British fintech at a time when it most needs it.

Increasing Brexit Britain’s competitiveness

The global fintech market is one of the fastest growing sectors in the world and, according to European Union figures, the value of investment into the sector reached $22.3bn by the end of 2015, a 75% increase on the year before.

Since 2010, large corporates, venture capitalists and private equity firms have invested in excess of $50bn into nearly 2,500 global start-ups since the start of the decade.

In the UK, the fintech sector – enveloping everything from online lending to applying blockchain to capital markets – is worth about £7bn to the economy, while more than 60,000 people are employed in the sector.

Looking at the UK’s global positioning, the country is second only to the United States in prominence on the top 100 fintech list, compiled by KPMG.

But while many of the UK companies on the list are London based, the highest based company, and the only UK business to breach the top 10, is based outside London.

The fact that a non-London business is the country’s highest valued fintech business is significant if we are to continue to convince new businesses to set up in the UK.

This is particularly important as other EU countries are attempting to take advantage of the confusion surrounding Brexit and boost their share of the fintech market.

A new public-private partnership, “House of Fintech” was recently set up in Luxembourg to attract companies to set up in the country, while French lobbyists have been making efforts to entice fintech businesses to relocate from the UK to Paris.

Even outside of the EU, steps are being taken to replicate the innovation and success being seen in the UK and The Monetary Authority of Singapore has moved to copy the FCA’s “sandbox” scheme to improve the prospects of its own fintech market.

With the UK’s future position in the single market still not fully known, and not likely to be defined for another year at least, the UK government knows it needs to maintain its popularity for fintech businesses.  These businesses need to be given an even greater chance to succeed if the UK is to maintain its strong position during the Brexit negotiations and fend off the competition.

We can expect to see further new initiatives from the UK aimed at making that a reality and more positive developments for fintech as European countries compete for their business.

Complaints data released by the FCA estimates that the total number of complaints decreased in the second half of last year by 14%, although changes in the way FCA measures complaints means that the number has gone up. A key new metric reveals firms’ ability to close complaints within three days, highlighting the increased pressure on firms to respond in real-time and to fast-track communication. The FCA report highlighted that 43% of complaints were closed in this time period, rising to 63% when PPI claims are excluded.[1]

According to today’s FCA complaints data report, which helps assess how well financial services treat their customers over time, the largest number of complaints were related to general administration and customer service. 40% of complaints are related to this topic, up from 27% in the first six months of last year.[2]

Bhupender Singh, CEO of Intelenet Global Services, comments: “Poor customer experience costs banking and financial services £5.81 billion.[3] Changing customer expectations put pressure on financial services firms to offer a round the clock service and many firms have adopted new technology solutions in response.

“The emergence of voice assistants and chatbots offer a new way of communicating with customers but firms mustn’t ignore the continued need to provide the possibility of speaking to a well-trained customer service professional. The technologies that will help firms to reduce friction in customer service are those which boost the efficiency of back-end administration so that agents can respond more quickly to customers. A harmonious blend of human interaction with digital tools should be the aim. Financial services companies should focus on modernising their IT infrastructure through automation so staff can redirect their focus to the customer, by taking away the headache of the more mundane repetitive tasks.

“Although we are seeing a trend in the total number of complaints reducing, financial services firms need to be constantly on top of the customer experience they offer. Automation matches speed with quality service and gifts banks with the agility their Fintech competitors have to ensure customer retention. Banks have an established customer base compared to new entrants, but in order to gain brand value they need to ensure they can service customers as efficiently and effectively as possible.”

Bhupender continues: “Customer Service inefficiencies are mirrored with high costs. Front line staff who are not equipped with the right skills and knowledge will result in longer queues and high abandonment rates. Many banks are turning to banking bots and voice assistants, as customers do want more choice in how they bank. But whilst the option of self-service is highly desirable for customers, firms must not forget to blend this an element of human interaction to enhance the customer’s experience.”

(Source: Intelenet)

[1] https://www.fca.org.uk/firms/complaints-data/aggregate#context
[2] https://www.fca.org.uk/publication/data/aggregate-complaints-data-charts-2016-h1.pdf
[3] http://www.mycustomer.com/experience/voice-of-the-customer/poor-service-costing-the-uk-ps37bn-as-customer-complaints-soar

Are younger individuals completely aware of the ramifications of indulging in financial services? CEO at Everyday Loans, Dany Malone talks to Finance Monthly about raising the right awareness among younger demographics.

It’s no secret that short term or ‘payday’ loan services have come under fire in recent years. Google announced a ban on search ads in the first half of 2016 and the media spotlight increased its scrutiny. We understand, there are of course, those businesses within the industry that do not undertake rigorous affordability checks to check whether a borrower can afford a financial product. At Everyday Loans, we have welcomed the stringent regulations implemented by the FCA that have ensued as a result of the poor practices that were being followed.

We as lenders have an obligation to ensure that we are not allowing or enabling individuals to enter financial circumstances that will be of detriment to themselves, their families and their financial future. The loan-cap that was introduced in 2015 was designed to protect borrowers from poor practice, but what essentially happened was that it stunted the supply of these loans.

Many of the businesses that existed in the industry saw revenue plunge and regulatory fines coming their way. As a result the industry as whole now markets their products to a higher demographic. The struggle that is now being recognised as a consequence of the stricter regulations and lack of supply to feed the demand for short-term loans is that consumers are now left struggling to obtain short-term credit, feeding the rise of the unregulated “loan sharks”.

While payday lenders have been subject to criticism due to the high APR involved with short-term lending, the major high street banks are still charging customers more when they enter both authorised and unauthorised overdrafts. Banks such as RBS, HSBC and Santander charge around £30 for an authorised overdraft and £90 for an unauthorised overdraft.

It appears that the regulations introduced for short-term lending companies haven’t had much of an impact on overall debt within the UK. At the end of January 2017, a total of £1.52 trillion was owed; outstanding consumer credit lending was at £194 billion, and per household this equates to £2,470 which would take more than 25 years to repay should the minimum payment be met each month. Of course, for those failing to make this payment, both the cost and length of time will increase.

It can be argued that as well as forcing the banking and financial services industries to act in a way that is responsible, more must be done to educate individuals about personal finances, and the impact and consequences that their decisions can have on their immediate and long-term financial future.

For example, one trend that we have noticed, is the increase in students that are using these short-term loan services to supplement their student finances. One-third of university students have admitted to relying on payday loans and credit cards to help fund their education, and 70% have admitted that their Government funded loans do not cover the costs associated. There are concerns about students being forced to use alternative means of finance while studying, but what’s even more concerning in their lack of financial understanding.

Research by Future Finance has suggested that there is a distinct gap in the financial knowledge of young adults and their lack of understanding when it comes to what they view as ‘debt’. For instance, 25% of students do not to consider payday loans and credit cards to be a form of debt, and while 63% of students reporting that they have a good understanding of personal finance – 40% admitted to not knowing what APR stands for.

If this basic element of borrowing isn’t understood, we can say with a degree of confidence that the true impact of borrowing and the detrimental effect that it can have on an individual’s future if not handled responsibly, is completely disregarded.

This is an issue that must be addressed with immediate effect; student housing and living costs have increased by 23% since 2010 and university costs are higher than ever; it is the responsibilities of the financial industry, the education system and parents alike to ensure that financial awareness is nurtured in young adults to prepare them for responsible borrowing.

In truth, there are more than 10 million people who utilise payday and short term loans effectively when needed, who use sporadically when required and pay on time. We hope that by championing the need for compulsory financial awareness, this becomes ‘the norm’ when it comes to using payday loans.

Word on the horizon is that credit card interest ‘could be waived’ for those with longstanding debt on their shoulders. The Financial Conduct Authority (FCA) recently published papers proposing that in order to tackle long term amassing debt, credit card companies could cancel interest or charges in extreme cases.

The FCA defines such credit card debt as when a person has paid more in interest and charges than they have repaid of their actual borrowing over a period of 18 months, and according to the BBC says that "customers in persistent debt are profitable for credit card firms, who do not routinely intervene to help them."

We reached out to Finance Monthly readers this week and heard Your Thoughts on the potential waiver and how it might or might not help tackle consumer debt.

Angela Clements, CEO, Fair for You:

It has been 2 years since the Financial Conduct Authority (FCA) gained additional powers to address competition issues in the consumer credit industry. There has been progress but the agile operators in the high cost credit sector mutate around regulatory change - from doorstep credit and rent-to-own stores to sub-prime credit cards. The FCA refers to such unintended consequences as the ‘waterbed effect’. However, the burning question is why do we continue to see so few real alternatives to counter the growth of high cost credit?

Fair for You is a new Community Interest Company wholly owned by a charity, which is the first national, mainstream challenge to the high cost credit sector. We provide lower cost credit to ‘just about managing’ households to enable them to buy essential items like washing machines from our online store. This typically saves each customer over £500 per item compared to major rent-to-own stores.

The credit search data we examine for all loan applications reveals worrying levels of so-called ‘zombie debt’ from credit cards which are being sold on the basis that the customer need barely service the interest and without adequate affordability checks. After trading for 15 months it’s really clear that this is about more than just the price of the credit. Credit for lower income households needs to be better designed to meet their needs.

Alleviating debt is not just a financial issue. Independent research by the Centre for Responsible Credit shows that half of our customers say they are less stressed, depressed or anxious as a direct result of using our service, with a third saying their children’s health and wellbeing has improved. The report’s author calculates the benefits to poorer households and wider UK of scaling up alternative credit could be as high as £18bn.

Surprisingly, personal credit remains one of few sectors that does not attract social investment tax relief. Fair for You has been fortunate to have had the backing of some of the largest family trusts in the UK. That hardly matches the funding and marketing budgets of big brands like Provident, BrightHouse and The Money Shop. The creation of challengers needs more than supportive regulators fulfilling their competition remit. That’s why Fair for You is in active dialogue with the Government, local authorities, debt management advisors and the social investment community to work around this problem quickly.

Mike Smith, Director, Jameson Smith & Co Limited:

The FCA’s proposals are a great idea and I support them fully. Anything that tackles Consumer debt can only be a good thing. As someone who deals with banks and financial institutions daily it’s important to understand bad debts can be profitable for these institutions. The point is there is no incentive for the banks or the financial institutions to break what can be a vicious cycle of debt for some.

UK Consumer debt has risen by 9.3% taking it to pre-crisis levels of 2005 and a recent BBC article reported that every UK household owes just under £13,000 that’s a staggering £1.52 trillion.

So how did this Consumer debt get so large?

There are lots of obvious reasons, car sales were at an all-time high at 536,337 in March and the bulk of these would be on personal finance. With an average new sale price of around £27,000 that adds another £14.5billion. According to Barclays Card services we are also spending more on entertainment for ourselves.

From my perspective, personal debts are not always about funding a lavish lifestyle or being irresponsible. In the last quarter of 2016 the governments’ own statistics show a staggering 146,987 new companies were registered. Bear in mind this does not take into account sole traders or partnerships.

The down side to these figures of course is that around 40% will fail in the first year. Many will have supported their businesses and dreams with personal loans and credit cards not business overdrafts. Why? The answer is simple Banks will not lend to a start-up company without personal security and or assets.

It follows that a portion of this Consumer debt will have been created by well-intentioned individuals who simply wanted a better life. These statistics are not easily identified but common sense dictates that a portion of these Consumer debts started life as business funding. It’s estimated that around 46% of businesses use their own personal cash when starting up.

The FCA rules will apply pressure in the right area that is, reassessing adding interest to bad debts after 18 months. However well-intentioned my experience tells me if there is an incentive for something to happen it most assuredly will.

My concern is that some banks and financial institutions may try to play ‘hard ball’ early on in the debt life cycle to get as much as they can prior to the 18-month proposed deadline, or any deadline. My suggestion is there should be some counter measure, some safeguard to protect Consumers too, no matter how that debt arose.

Jane Asscher, CEO and Founding Partner, 23red:

The FCA’s proposals and the 2015 credit card report underpinning them are a stark reminder of the challenging situation faced by those with unmanageable debt.

But we should view it as symptomatic of a situation where 1 in 3 UK adults is described as having low financial capability.

Debt charities have questioned if the proposals go far enough. Still, the move would undoubtedly be a step in the right direction in helping people out of long-term debt. It would force the hand of all credit card providers to help the 3.3 million currently stuck in a spiral of debt. Customers would have to acknowledge their situation and be supported to take the necessary actions to start to manage it.

The OBR forecasts, as a nation, we’ll be spending more than we earn well into the 2020’s. Against this backdrop, where borrowing will continue to fund purchases (be it essentials or relative luxuries) the finance industry must consider the preventative measures it can implement to start to address the reasons why some people fail to manage their finances.

Last week Lloyds Banking Group released its latest Consumer Index, which tracks the digital and financial capability of the British public. The report identifies that over 16 million people lack the necessary levels of financial awareness to best manage their money. It becomes clear that by building money management skills, people can make better financial decisions for their circumstances including spending, borrowing and repayment levels.

What role can the proposals play here? It can only be a positive thing if the regulator can change market conditions to where it’s no longer preferable (i.e. as profitable) for credit card companies to have large numbers of customers in persistent debt. It may start paving the way for customer financial wellbeing to be prioritised.

We would also love to hear more of Your Thoughts on this, so feel free to comment below and tell us what you think!

Competition compliance programmes must take account of the FCA’s rules for mandatory self-reporting of existing or potential competition law infringements. Here Finance Monthly benefits from exclusive insight, written by James Marshall and Marieke Datema of Berwin Leighton Paisner (BLP), who take a look at the powerful toolkit at the FCA’s disposal and explain what it means for firms in the year ahead.

A heavy use of market studies

Since acquiring a competition mandate in April 2013, the FCA has conducted several market studies. These allow the regulator to ‘peer behind the curtain’ in any given market to identify structural competition, consumer or market integrity concerns. In just over three years, the FCA reviewed insurance add-ons, cash savings, credit cards, retirement income, investment and corporate banking, asset management and residential mortgages.

The FCA has a uniquely powerful toolkit; it can use either sectoral (Financial Services and Markets Act 2000 (FSMA)) or competition (Enterprise Act 2002) powers to conduct market reviews.

To date, all FCA market studies, including those launched after the FCA acquired concurrent competition law enforcement powers in April 2015, have been carried out using FSMA powers, rather than pure competition powers under the Enterprise Act. The FCA chooses the most appropriate power on a case-by-case basis. In practice, the FCA enjoys the ‘best of both worlds’, in that it can pursue competition-focused investigations using extensive data-gathering powers under FSMA without being bound by tight timetables under the Enterprise Act.

If, following a market study, the FCA concludes that a market is not functioning well, it may seek regulatory changes to fix the issues identified. Potential remedies include structural reforms (e.g. rule-making, guidance and/or proposing enhanced self-regulation), or firm-specific changes (e.g. varying regulatory permissions, public censure and/or financial penalties). The FCA can also “name and shame” firms by publishing data – one of the remedies imposed in the cash savings market study, for example, was the publication of interest rates made available by over 30 banks and building societies on certain types of savings accounts and ISAs. The FCA furthermore has the power to refer a market to the Competition and Markets Authority (CMA) for a detailed “phase 2” market investigation, the outcome of which could include forced divestments or other major interventions.

A market study offers the opportunity for quite considerable change. We would therefore encourage firms affected by market studies to consider what features of the market they may wish to change or defend and then consider how to engage with the FCA on those fronts.

Zeroing-in on individual firms – ‘hard’ and ‘soft’ enforcement measures

Investigations of individual firms are common outcomes of market studies in other sectors. Early in 2016, the FCA launched its first antitrust investigation. Details of the behaviour and the firms under investigation remain confidential. The FCA Director of Competition stated that she hoped the investigation “sends a signal that we take competition law seriously alongside other regulatory enforcement” and noted that the FCA is “well placed” to detect and take action in relation to breaches of competition law. It is certainly true that the FCA is ‘well placed’ – it has a team of around 100 competition specialists, a number of whom used to work for the CMA.

We anticipate an uptick in antitrust investigations in 2017. The CMA publishes an annual report assessing the operation of the concurrent powers by the FCA and other sector regulators. In its April 2016 report the CMA stated that it hoped to see a greater number of cases opened by the concurrent sector regulators (including the FCA) in the year ahead. The FCA, like its peer concurrent regulators, has been given its competition law powers on a ‘use it or lose it’ basis. This may be a real spur for greater enforcement action in future. The competition between sector regulators and the FCA’s desire to be regarded as ‘first among equals’ may also motivate further competition enforcement. Finally, following Brexit, cases involving possible anti-competitive conduct in the financial sector that previously may have been investigated by the European Commission are likely fall to the FCA or CMA.

Despite little ‘hard’ antitrust enforcement, the FCA has been astute in its use of ‘soft’ enforcement methods and we expect this trend to continue in 2017.  The FCA has made use of “on notice” letters which notify a firm that the FCA has information about a suspected breach of competition law. The firm must conduct an internal review and report back to the FCA on the scale of any competition breach identified, and what measures the firm will take to address the problem. “On notice” letters transfer the burden of investigating and remedying competition problems to individual firms. This can free-up FCA resource for higher priority matters, whilst also solving potential competition concerns - a regulatory ‘win-win’.

To date, the FCA has publicly confirmed the use of several “on notice” letters prompted by information gathered during the retirement income market study. The FCA met with the relevant firms to better understand their proposed solutions and the firms have since undertaken a number of initiatives to strengthen their compliance.

The FCA has also sent three advisory letters – intended to raise competition law awareness and promote compliance amongst targeted firms.

Self-reporting competition issues – a significant question

Both market studies and “on-notice” letters can place considerable burdens on individual firms to provide evidence in response to an FCA information request. Responding to such requests can also cause firms to ‘flush out’ potential issues which may require self-notification under the FCA’s handbook. SUP 15.3.32R (1) requires firms to notify the FCA of any significant infringement (or potential infringement) of any applicable competition law. The reference to “any applicable competition law” means that the notification obligation extends to infringements of competition law outside the UK. Despite the extensive scope of the notification obligation, only limited guidance has been provided by the FCA, in particular in relation to how firms can determine whether an infringement is “significant”.

The position adopted by the FCA is in stark contrast with the standard application of competition law. Leniency programmes generally provide that companies can choose whether or not to self-report competition infringements and there are, in many cases, incentives for companies to do so. If the relevant conduct identified by a firm is sufficiently serious, the FCA’s mandatory self-reporting obligation can effectively force a firm to apply for leniency. Moreover, the same conduct could prove problematic under both the FCA’s conduct rules and competition law. It is therefore more important than ever that regulated firms bring their competition compliance programmes in line with the self-reporting obligation and think through the wider implications of any notifications to the FCA.

The UK’s Financial Conduct Authority (FCA) and the Hong Kong Monetary Authority (HKMA) have entered into a Co-operation Agreement (Agreement) to foster collaboration between the two regulatory authorities in promoting financial innovation.

According to the Agreement, the FCA and the HKMA will closely collaborate on a number of initiatives such as referrals of innovative firms, joint innovation projects, information exchange and experience sharing, to facilitate financial innovation in the United Kingdom and Hong Kong.

For the UK this represents the fifth co-operation agreement that the FCA has signed with international authorities after Australia, Singapore, South Korea, and China. The FCA has an overarching statutory objective as a regulator to make financial services markets work well and promoting competition through innovation forms a significant part of this. The Co-operation Agreement with the HKMA will reduce the barriers for authorised firms looking to grow to scale overseas and assist non-UK innovators interested in entering the market the FCA oversees.

For Hong Kong, the Agreement is a key initiative of the Fintech Facilitation Office (FFO) of the HKMA. It presents significant opportunities for financial and fintech companies to enhance their services and extend their global footprint. The Agreement also shows the HKMA’s commitment to build a vibrant fintech ecosystem.

Christopher Woolard, Executive Director of Strategy and Competition at the FCA, said: “Alongside promoting innovation in UK businesses, we also want to see the best firms from around the world coming to the UK. Both consumers and the wider UK economy benefit from this transfer of ideas and innovation. The Agreement signed today with the HKMA is a good example of this type of international co-operation and we look forward to working to promote innovation and reduce barriers to entry for firms both here in the UK and in Hong Kong."

Mr Shu-Pui Li, Executive Director (Financial Infrastructure) of the HKMA, said: “We are delighted to sign the Agreement with the FCA. Both Hong Kong and the UK are well positioned as global financial centres and premier locations for financial innovation. Many fintech firms and financial institutions in the two markets have already gained a solid local footing. Collaboration between the HKMA and the FCA will create significant synergy for the two markets by enabling fintech firms and financial institutions to extend their global reach and learn from their foreign counterparts. It will also help to enhance services delivered by financial institutions.”

The Agreement was signed today at the London-Hong Kong Financial Services Forum in London, an annual forum facilitating discussion on financial cooperation and development between the UK and Hong Kong.

(Source: FCA)

The Financial Conduct Authority (FCA) has imposed a financial penalty of £284,432,000 (€400 million) on Barclays Bank Plc (Barclays) for failing to control business practices in its foreign exchange (FX) business in London. This is the largest financial penalty ever imposed by the FCA, or its predecessor the Financial Services Authority (FSA).

Barclays’ failure to adequately control its FX business is particularly serious in light of its potential impact on the systemically important spot FX market. The failings occurred throughout Barclays’ London voice trading FX business, extending beyond G10 spot FX trading into EM spot FX trading, options and sales, undermining confidence in the UK financial system and putting its integrity at risk.

Georgina Philippou, the FCA’s acting director of enforcement and market oversight said: “This is another example of a firm allowing unacceptable practices to flourish on the trading floor. Instead of addressing the obvious risks associated with its business Barclays allowed a culture to develop which put the firm’s interests ahead of those of its clients and which undermined the reputation and integrity of the UK financial system.  Firms should scrutinise their own systems and cultures to ensure that they make good on their promises to deliver change.”

Between 1 January 2008 and 15 October 2013, Barclays’ systems and controls over its FX business were inadequate. These behaviours included inappropriately sharing information about clients’ activities and attempting to manipulate spot FX currency rates, including in collusion with traders at other firms, in a way that could disadvantage those clients and the market.

Barclays and other firms are already participating in an industry-wide remediation programme to ensure that they address the root causes of the failings in their FX businesses and that they drive up standards.

Trading Floor - Deutsche BankThe Financial Conduct Authority (FCA) has handed Deutsche Bank AG a £227 million (€315 million) fine, its largest ever for LIBOR and EURIBOR-related (collectively known as IBOR) misconduct. The fine is so large because Deutsche Bank also misled the regulator, which could have hampered its investigation.

Georgina Philippou, acting Director of Enforcement and Market Oversight, said: “This case stands out for the seriousness and duration of the breaches by Deutsche Bank – something reflected in the size of today’s fine. One division at Deutsche Bank had a culture of generating profits without proper regard to the integrity of the market. This wasn’t limited to a few individuals but, on certain desks, it appeared deeply ingrained.

“Deutsche Bank’s failings were compounded by them repeatedly misleading us. The bank took far too long to produce vital documents and it moved far too slowly to fix relevant systems and controls.

“This case shows how seriously we view a failure to cooperate with our investigations and our determination to take action against firms where we see wrongdoing.”

Between January 2005 and December 2010, trading desks at Deutsche Bank manipulated its IBOR submissions across all major currencies. This misconduct involved at least 29 Deutsche Bank individuals including managers, traders and submitters, primarily based in London but also in Frankfurt, Tokyo and New York.

FCAThe Financial Conduct Authority (FCA) has fined The Bank of New York Mellon London Branch and The Bank of New York Mellon International Limited £126 million (€175 million) for failing to comply with the FCA Client Assets Sourcebook (Custody Rules, or CASS), which applies to safe custody assets and to client money.

Georgina Philippou, acting director of enforcement and market oversight at the FCA said: “Our Custody Rules are in place to ensure that clients are protected in the event of insolvency. The Firms’ failure to comply with our rules including their failure to adequately record, reconcile and protect safe custody assets was particularly serious given the systemically important nature of the Firms and the fact that safeguarding assets is core to their business. Had the Firms become insolvent, the total value of safe custody assets at risk would have been significant. This is compounded by the fact that the breaches took place at a time when there was considerable stress in the market.”

The failings occurred between 1 November 2007 and 12 August 2013

The Bank of New York Mellon Group is the world’s largest global custody bank by safe custody assets. The Bank of New York Mellon London Branch and The Bank of New York Mellon International Limited are the third and eighth largest custody banks in the UK respectively and provide custody services jointly to 6,089 UK-based clients. During the period of their breaches, the safe custody asset balances they held peaked at approximately £1.3 trillion (€1.8 trillion) and £236 billion (€328 billion) respectively.

The FCA also found a number of other failings by the firms including:

 

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