1. FCA to apply ‘conduct’ rules to NEDs of banks and insurers

 

The FCA have published PS 17/8 in May 2017 to extend their conduct rules in the ‘code of conduct sourcebook’ (COCON) to standard non-executive directors (NEDs) in banks, building societies, credit unions and dual-regulated investment firms and insurance firms. According to FCA, application of COCON to NEDs will help raise standards of conduct and reduce the risk of future mis-selling in firms.

FCA have proposed:

  • That standard NEDs would be subject to the five FCA Individual Conduct rules set out in COCON 2.1 and to the Senior Conduct rule 4 requiring individuals to ‘disclose appropriately any information of which the FCA or PRA would reasonably expect notice’
  • To introduce additional guidance to Individual Conduct rule 2 (ie the requirement to act with due skill, care and diligence) to clarify that this rule applies to a director (whether executive or non-executive) when acting as a member of the Board or other governing body or of its committees
  • To extend to insurance firms the scope of the guidance to COCON 1 on the role and responsibilities of NEDs
  • To amend the form firms use to report breaches to us, to allow us to recognise which of these breaches relate to standard NEDs in banks

 

These rules come into force on 3 July 2017. If a firm is affected by these changes, it will need to:

 

  • Ensure that standard NEDs receive appropriate training on COCON and how it applies to them.

 

  • Report to the FCA any breaches of COCON by standard NEDs resulting in disciplinary action. For the first reporting period, the notification must cover breaches occurring between 3 July 2017 and the last day of August 2017. This must be submitted to the FCA within two months of the end of the reporting period.

 

2. JMLSG revises Parts II and III of its risk-based Guidance

The Joint Money Laundering Steering Group (JMLSG) published on 9 May 2017 its proposed revisions to Parts II and III of its guidance on the prevention of money laundering and the financing of terrorism for the UK financial services industry. The proposed revisions reflect the provisions of the new draft Money Laundering Regulations 2017 published by HM Treasury on 15 March 2017.

The revisions are designed to be consistent with the draft Risk Factor Guidelines issued by the European Supervisory Authorities (ESAs). The final text of these Guidelines has not been published, but the JMLSG text reflects what was proposed in the ESA’s consultations published in October 2015. The Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017 are set to come into effect on 26 June 2017.

 

3. EBA’s Guidelines on credit risk management practices and accounting for expected credit losses

 

The European Banking Authority (EBA) has welcomed the move from an incurred loss model to an expected credit loss (ECL) model under IFRS 9. A significant number of credit institutions apply the International Financial Reporting Standards (IFRS Standards) as these are incorporated into the EU legal framework through EU regulations. IFRS 9 Financial Instruments (IFRS 9), which will replace IAS 39 Financial Instruments: Recognition and Measurement (IAS 39), for the accounting periods beginning on or after 1 January 20182, requires the measurement of impairment loss allowances to be based ECL accounting model rather than on an incurred loss basis.

In December 2015, the Basel Committee on Banking Supervision (BCBS) issued supervisory guidance on credit risk and accounting for expected credit losses, which sets out supervisory expectations for credit institutions related to sound credit risk practices associated with implementing and applying an ECL accounting model.

Building on the BCBS guidance, these guidelines aim at ensuring sound credit risk management practices for credit institutions, associated with the implementation and ongoing application of ECL accounting models. The existence of supervisory guidance emphasises the importance of high-quality and consistent application of IFRS 9 and could help to promote consistent interpretations and practices. The objective of the EBA guidelines is to be in line with the BCBS guidance. The EBA guidelines would not prevent credit institutions from meeting the impairment requirements in IFRS 9.

The guidelines include four main sections as follows:

 

  • Section 4.1 includes some general considerations on the application of the principles of proportionality and materiality, and the use of information by credit institutions.
  • Section 4.2 includes eight principles, also addressed to credit institutions, which relate to the provisions for the main elements of credit risk management and accounting for ECL, and provide detailed guidance for the application of each principle.
  • Section 4.3 includes guidance specific to credit institutions reporting under IFRS and is limited to providing guidance on certain aspects of the ECL requirements in the impairment section of IFRS 9 that may not be common to other ECL accounting frameworks.
  • Section 4.4 includes three principles, specifically addressed to competent authorities, on the supervisory evaluation of credit risk management practices, accounting for ECL and the overall capital adequacy.

 

 

4. EU Parliament rejects ‘narrow’ blacklist of countries at risk of money laundering

The European Parliament has rejected proposed change to the list of countries at risk of money laundering proposed by the European Commission.

The list of third-countries judged by the Commission to have strategic deficiencies in their anti-money laundering and countering the financing of terrorism regimes are:

Afghanistan, Bosnia and Herzegovina, Guyana, Iraq, Lao PDR, Syria, Uganda, Vanuatu, Yemen, Iran and Democratic People’s Republic of Korea (DPRK)

The Commission proposes to amend the list by adding Ethiopia and removing Guyana from the list. However, a resolution passed by the EU Parliament has rejected both the lists saying that “the EU should have an independent, autonomous process for judging whether countries pose a threat of financial criminality, rather than relying on the judgement of an external body”. Currently, the Commission relies heavily on an international body, the Financial Action Task Force (FATF) in drawing up its list.

The EU Parliament felt that the Commission’s process “was not sufficiently autonomous” and that the criteria for its list excluded offences giving rise to money laundering such as tax crimes. The MEPs would like the blacklist to be more expansive and wide-ranging rather than limiting itself to the narrower list published by FATF.

 

  1. FCA’s Review of ‘Suitability Reports’ by Advisers

The FCA initiated the Assessing Suitability Review (‘the review’) in April 2016 in recognition of the important role the regulator has to play to support the sector in delivering suitable advice. The purpose of the review is to assess a statistically robust sample of advice files that allows FCA to draw conclusions on the suitability of advice and quality of disclosure in the sector as a whole.

The suitability of advice is important for the financial advisory sector and advice was highlighted as one of the seven priorities in the FCA’s Business Plan 2016/17.

The FCA’s assessment of disclosure considers three distinct elements: the firm’s initial disclosure, the product disclosure and the disclosure in the suitability report. According to the FCA, the results point to the main area where there is a high level of unacceptable disclosure, and that relates to the firms’ initial disclosure, which includes firms’ costs and services. The issues the FCA found included a) firms disclosing charging structures with wide ranges, and b) firms using hourly charging rates failing to provide an indication of the number of hours for the provision
of each service, rather than firms failing to provide any cost information.

The FCA’s findings demonstrate that there is further work required in this area. Whilst they did not observe any material non-compliance in firms’ disclosure of product charges and the disclosure in suitability reports, however, they found that some suitability reports were too long and/or complex.

FCA’s report points out that some important changes are coming to the advice and disclosure requirements through the Markets in Financial Instruments Directive II (MiFID II), the Packaged Retail and Insurance-based Investment Products regulation (PRIIPs) and the Insurance Distribution Directive (IDD). As a result of the new rules, in a number of areas, there will be increased requirements for financial advisers and FCA have advised firms to ensure that they take note of the new requirements and make any changes necessary.

 

  1. Review of FCA’s Appropriate Qualification Standards

The FCA released the policy statement PS 17/11 in May 2017 setting out the final, updated appropriate exam standards (AES) for appropriate qualifications listed in the FCA’s Training and Competence (TC) sourcebook. TC sourcebook includes:

 

  • A high-level ‘competent employees’ rule that applies to all firms carrying on any regulated activities in the UK, and

 

  • More-detailed requirements in addition to this for certain retail activities, including the need to achieve an appropriate qualification.

 

Following industry consultation, the FCA have decided to reduce the number of ‘regulation and ethics’ AES from three to two to help avoid duplication in standards and make them more relevant to both individuals and firms.

 

They have introduced further Handbook guidance that would help in navigating the qualification tables in TC Appendix 4.1. The FCA have acknowledged that more should be done to improve the format and presentation of the tables to make them more interactive, user friendly and easier to understand.

 

Due to the mixed feedback on whether there was a market need for a standalone or

top-up equity release qualification, the FCA agreed that an alternative to the current approach was unlikely to lead to a significant increase in the number of people

appropriately qualified. Accordingly, they have decided not to change the appropriate

qualification for equity release at this time.

 

  1. Brexit – ESMA Guidance on Relocation of firms from the UK

In a paper published in May 2017, the European Securities and Markets Authority’s (ESMA) has advised that, in the course of the UK withdrawing from the EU, UK-based market participants may seek to relocate entities, activities or functions to the EU27 in order to maintain access to EU financial markets. In this context, ESMA says that “these market participants may seek to minimise the transfer of the effective performance of those activities or functions in the EU27, i.e. by relying on the outsourcing or delegation of certain activities or functions to UK-based entities, including affiliates. It is therefore necessary to ensure that the conditions for authorisation as well as for outsourcing and delegation do not generate supervisory arbitrage risks”.

 

New authorisations must be granted in full compliance with Union law and in a coherent manner across the EU27. Any outsourcing or delegation arrangement from entities authorised in the EU27 to third country entities should be strictly framed and consistently super-vised. Outsourcing or delegation arrangements, under which entities confer either a substantial degree of activities or critical functions to other entities, should not result in those entities becoming letter-box entities.

 

EU’s national competent authorities (NCAs) are preparing for an increase in activities related to authorisation and supervision. ESMA will also be looking at the need for NCAs to ensure that they have the ability to adequately handle authorisation requests and carry out effective supervision in line with the EU law, as well as have the capacity to respond to relevant market developments.