Financial services matters - September 2024

FCA annual report 2023/2024

On 5 September 2024, the FCA published its annual report and accounts for 2023/2024.  Please see our October update for further details.

Regulators report on whistleblowing disclosures in 2023/24

The FCA, Bank of England (BoE) and the PRA have published their annual reports on whistleblowing disclosures in 2023/2024 in accordance with the Prescribed Persons (Reports on Disclosures of Information) Regulations 2017. As prescribed persons, they are required to report annually. The reports disclose the whistleblowing disclosures received during the period 1 April 2023 to 31 March 2024.

The BoE and the PRA's report was published on 30 July 2024. 240 disclosures were received, 228 of which were considered to be protected disclosures within section 43B of the Employment Rights Act 1996 and subject to the BoE’s and PRA’s role as Prescribed Persons. 

The BoE highly values the role whistleblowers can play to help it achieve its objectives and ensure that financial services are regulated effectively, since it states that whistleblowing can provide vital information to further supervisory assessments. All protected disclosures were the subject of supervisory consultation, 14 disclosures contributed to significant regulatory or supervisory activity, and 55 disclosures provided intelligence, which were of prudential value.

The FCA's report, which was published on 5 September 2024, notes that it received and assessed 1,124 new whistleblower reports.  This is a slight increase on previous years' figures (2022/23: 1, 086, 2021/22: 1,041, 2020/21: 1,046). The reports resulted in 3,094 separate allegations, which covered a broad range of topics. The top 10 subjects were:

• compliance

• fitness and propriety

• culture of organisation

• consumer detriment

• systems and controls

• fraud

• Consumer Duty

• treating customers fairly

• unauthorised business

• anti-money laundering.

The FCA's report provides anonymised examples demonstrating the value of whistleblower disclosures to its day-to-day role as a supervisor.

Financial and narrative reporting: FRC discussion paper on opportunities for future UK digital reporting

On 13 August 2024, the Financial Reporting Council (FRC) published a discussion paper on opportunities for future UK digital reporting. The paper was published by the FRC as part of a cross-regulatory group comprising the FCA, Companies House, HMRC and the Charity Commission for England and Wales (the Regulators).

The discussion paper notes that each of the Regulators is considering significant and substantial changes to their digital filing requirements, in particular in light of the post-Brexit legislative landscape and requirements of the Economic Crime and Corporate Transparency Act 2023 (ECCTA 2023). The purpose of the discussion paper is to seek feedback on how these changes in policy might be implemented. 

The regulators are seeking feedback on wide range of topics, including:

• scope and extent of digital reporting requirements

• sssurance of digital reports

• developments in XBRL taxonomies

• guidance needed by users.

The FRC requests responses by 1 November 2024.

FCA announces further expansion of Leeds office

On 7 August 2024, the FCA announced, via a webpage, is set to base a further 100 of its workforce in Leeds as it expands its footprint in the city.

FCA financial promotions Q2 2024 data and examples of intervention

On 7 August 2024, the FCA published a webpage containing its financial promotions quarterly data for Q2 2024.

The webpage summarises data generated between 1 April 2024 and 30 June 2024 from the FCA's actions against firms breaching financial promotion rules, and referrals and investigations into unregulated activity. 

Examples of FCA intervention with both authorised and non-authorised firms include:

• A firm offering buy now pay later (BNPL) had unbalanced financial promotions on their website and social media, which the FCA considered was a breach of CONC 3.3.1R which states that financial promotions must be clear, fair and not misleading. The FCA invited the firm to apply for the imposition of voluntary requirements (VREQ), where the firm were restricted from issuing financial promotions. The firm subsequently amended or withdrew its financial promotions to comply with the relevant Handbook rules and enhanced their policies and procedures for their financial promotion activity.

• A large non-UK cryptoasset non-custodial wallet firm was illegally promoting cryptoasset investment activities, including the buying and selling of cryptoassets, to UK consumers through its website, apps and social media accounts, breaching section 21 FSMA. Following FCA engagement, the firm implemented interim measures to reduce the harm from its breach of FSMA, and the firm is now complying with the financial promotions regime by engaging with an authorised firm to have its financial promotions approved. 

FCA statement of policy on approach to cost benefit analysis

On 29 July 2024, the FCA published a statement of policy on its approach to cost benefit analysis, which it is required to do under FSMA. 
The statement of policy provides information about:

• The methodology used in preparing CBAs.

• Matters to which we have regard in determining whether certain legislative requirements apply or not.

• How we make sure we consider timely representations made in connection with CBAs. 

• Instances where the requirement to consult the FCA Cost Benefit Analysis Panel (the CBA Panel) in relation to the preparation of a CBA does not apply. 

• The FCA's arrangements to make sure the CBA Panel may review performance against relevant legislative requirements and provide recommendations.

The statement of policy aims to provide stakeholders with assurance that the FCA take steps to understand the effects of its policy proposals, and that its CBAs are undertaken in a consistent manner and are accurate and proportionate.

House of Lords Financial Services Regulation Committee re-opens inquiries into FCA enforcement proposals and regulators' secondary growth and competitiveness objective

On 5 August 2024, the House of Lords Financial Services Regulation Committee published a press release announcing that it has reopened the following inquiries:

• The FCA's proposals to publicise enforcement investigations, as set out in a consultation paper (CP24/2) published in February 2024 (as mentioned in our March 2024 update). The deadline for submissions is 11 October 2024, and the updated webpage states that the Committee will invite the FCA to provide oral evidence to it at a later date.

• The FCA's and PRA's secondary competitiveness and growth objective. The deadline for submissions is 29 November 2024.

FCA outlines good and poor practices in cryptoasset financial promotion

On 7 August 2024, the FCA published a document outlining the findings of its assessment of cryptoasset firms' compliance with requirements for promoting cryptoassets and identifying examples of good and poor practices.

Following the implementation of the new requirements for promoting qualifying cryptoassets to retail clients in PS23/6, the FCA reviewed a sample of crypto firms' compliance. The FCA reviewed firms' onboarding process and their approach to the following requirements: 

• cooling-off period

• personalised risk warnings

• client categorisation

• appropriateness

• record keeping

• due diligence.

The FCA recognised that firms were still adjusting to the new requirements, and the examples of good and poor practice aim to help firms to get it right for consumers and the market. The FCA noted instances where firms were not meeting the required standards and expected level of consumer protection, so it has worked extensively with them to remedy their compliance failures. Some firms still needed to make significant improvements to reach the levels of compliance seen in other sectors. 

The document also identifies good and poor practice for the wider financial services sector to consider and make any necessary changes to their own practices.

ESMA opinion on risks presented by global crypto firms seeking limited authorisation under MiCA

On 31 July 2024, ESMA published an opinion (ESMA75-453128700-1048) addressing the risks presented by global crypto firms seeking authorisation under the Regulation on markets in cryptoassets ((EU) 2023/1114) (MiCA).

In a previous statement published in October 2023, ESMA had anticipated that MCIs (referred to as global crypto firms in the ESMA statement) might seek operating under the MiCA framework “using group structures that tend to be complex and opaque”, thereby highlighting the specific ability of these entities to engage in regulatory arbitrage. ESMA noted the risk of conflicts of interest, diminished investor protection and the unlevel playing field with EU trading platforms that MCI’s business strategies could create.

Since the concerns have not been alleviated, ESMA is providing clarification on the application of certain MiCA obligations, particularly in relation to MCIs that might attempt to structure their business in a way to maintain access to EU clients while minimising the impact of the MiCA regulatory framework on their activities.

The opinion is addressed primarily to national competent authorities, and aims to share relevant criteria to promote supervisory convergence and support (i) NCAs’ assessment of the business model and activities that the applicant MCIs intend to carry out, as well as (ii) the ongoing assessment of how such activities are carried out.

Digital assets as personal property: Law Commission publishes supplemental report and draft Bill

On 29 July 2024, the Law Commission published a supplemental report and revised draft Bill on digital assets as personal property. The Bill is titled Property (Digital Assets etc) Bill.

If implemented, the Bill would confirm the existence of a third category of personal property. The Law Commission published its report on digital assets in June 2023, concluding that crypto-tokens and potentially other kinds of digital assets can be the object of property rights and recommending legislation to confirm that a thing can be property even if it does not fit easily into the traditional categories of personal property.

The supplemental report explains that recommendation and appends the draft legislation intended to implement the recommendation. The aim of the draft Bill is to confirm that digital assets such as crypto-tokens, and potentially other assets such as voluntary carbon credits, are capable of being recognised by the law as property. The courts have already recognised a "third" category of things to which personal property rights can relate, but a statutory confirmation should offer greater legal certainty.

Official translations of ESMA guidelines on funds' names using ESG or sustainability-related terms

On 21 August 2024, ESMA published on its website the official translations of its guidelines on funds' names using ESG or sustainability-related terms (ESMA34-1592494965-657).

The guidelines aim to ensure that investors are protected against unsubstantiated or exaggerated sustainability claims in fund names. They also provide asset managers with clear and measurable criteria to assess their ability to use ESG or sustainability-related terms in fund names.

The guidelines apply from 21 November 2024.

FCA updates SDR webpage with downloadable labels

On 19 August 2024, the FCA updated its webpage on its sustainability disclosure requirements (SDR) and investment labelling regime to include a section on downloadable labels.

The webpage provides distributors, which are subject to ESG 4.1.16R to 4.1.19R, with access to the investment labels list below, and has information on their terms of use. The relevant labels are:

• sustainability mixed goals

• sustainability improvers

• sustainability impact

• sustainability focus.

HM Treasury to introduce legislation on regulation of ESG rating providers in 2025

On 8 August 2024, an article was published announcing that the government intends to bring forward legislation on a regulatory regime for ESG rating providers in 2025.

Currently, ESG ratings providers are asked to comply with a voluntary code of conduct. The proposed legislation will reflect HM Treasury's proposals for the regime that were set out in a consultation paper published in March 2023, where HM Treasury proposed that the regulatory perimeter under FSMA should be extended to bring ESG rating providers within the scope of FCA authorisation and regulation. The finance ministry said Rachel Reeves, the Finance Minister, has asked the treasury to respond quickly to an industry consultation on a new regulatory regime for ESG rating providers, and to bring legislation forward next year.

The new approach aims to boost growth, help deliver a cleaner economy and ensure that companies in critical sectors like defence are not penalised by opaque ratings.

European Commission draft notice containing FAQs on sustainability reporting provisions introduced by Corporate Sustainability Reporting Directive

On 7 August 2024, the European Commission published a draft Commission Notice on the interpretation of certain legal provisions in:

• the Accounting Directive (2013/34/EU)

• Audit Directive (2006/43/EC)

• Audit Regulation (537/2014)

• Transparency Directive (2004/109/EC)

• Commission Delegated Regulation ((EU) 2023/2772) (containing the first set of European Sustainability Reporting Standards (ESRS)) 

• the Sustainable Finance Disclosures Regulation ((EU) 2019/2088) (SFDR) as regards sustainability reporting.

The notice contains a set of FAQs and responses which aim to clarify the interpretation of certain provisions on sustainability reporting introduced by the Corporate Sustainability Reporting Directive (CSRD) (Directive (EU) 2022/2464). It also includes a limited number of clarifications concerning the interpretation of certain provisions of the first set of European Sustainability Reporting Standards (ESRS) (Commission Delegated Regulation (EU) 2023/2772), where legal interpretation from the Commission has been deemed to be necessary.

PSR publishes annual report 2023/24

On 5 September 2024, the PSR published its annual report and accounts for 2023/2024. We are preparing a special briefing on this, which will be published shortly.

PSR consultation on change to APP fraud reimbursement limit

On 4 September 2024, the PSR published a consultation paper (CP24/11) proposing a reduction in the maximum level of reimbursement for its Faster Payments authorised push payment (APP) scams reimbursement regime from £415,000 to £85,000.

The reduced amount, which is aligned with the Financial Services Compensation Scheme (FSCS) reimbursement level of £85,000 and is therefore a figure that consumers are familiar with, has been put forward in response to stakeholder feedback on the risks and impacts of its original proposed limit, particularly prudential concerns for some smaller firms in the market. The PSR said it would formally review the effectiveness and impact of adopting the FSCS limit after the policy has been in place for a year.

Responses to the consultation paper must be made by 13:00 on 18 September 2024. Given the short window for providing comments, the PSR has said it is open to considering requests to discuss the proposal instead of submitting a written response.

For further details on the PSR's APP fraud reimbursement regime, which begins on 7 October 2024, see our special briefing.

PSR response to consultation on expanding variable recurring payments 

On 15 August 2024, the Payment Systems Regulator (PSR) published a response to its consultation paper (CP23/12) on expanding variable recurring payments (VRP, published in December 2023.

Variable recurring payments (VRPs) enable customers to safely connect authorised payment providers to their payment account using open banking so that they can initiate recurring payments. The response document sets out the industry’s feedback on the PSR's key proposals and how it intends to progress in light of those views, with a view to publishing updated proposals in autumn 2024.

The updated proposals will cover issues which include the following:

• Co-ordinating expansion through a multilateral agreement.

• Mandated participation.

• The pricing principles and a possible price intervention. 

EBA and ECB report on payment fraud

On 1 August 2024, the European Banking Authority (EBA) and the European Central Bank (ECB) published a joint report on payment fraud data.

The report assesses the latest payment data reported to the EBA and ECB under Article 96(6) of Directive EU 2015/2366 (the revised Payment Services Directive, PSD2), covering semi-annual data reported over three reference periods. The report focuses on the credit transfers, direct debits, card payments (from an EU/EEA issuing perspective), cash withdrawals and e-money transactions, and provides more detailed analyses on specific topics such as the main fraud types and the application of strong customer authentication (SCA), as well as some geographical and country-level analyses.

Among other things, the report confirms the beneficial impact of strong customer authentication (SCA) on fraud levels, and fraud shares for card payments, both in terms of values and volumes, were ten times higher when the counterpart is located outside the EEA, where the application of SCA is not legally required and may therefore not have been requested.

The report is the most comprehensive publication so far on payment fraud in the EU. Both the EBA and the ECB will continue to monitor fraud data and publish the aggregate data on an annual basis.

BoE discussion paper on approach to innovation in money and payments

On 30 July 2024, the Bank of England (BoE) published a discussion paper setting out its approach to innovation in money and payments.

The paper sets out current innovations in the payments and settlement landscape, how the BoE has responded to those innovations so far, and how its response will evolve going forward. The BoE has identified principles to guide its approach to innovation. Its approach is driven by economic analysis and policy outcomes that are consistent with its monetary and financial stability objectives, and it is geared towards ensuring it is agile and responsive to developments in an inherently uncertain landscape.

The BoE seeks views on both its proposed overall approach and on a number of specific areas, including:

• Areas in which programmable platforms might bring significant benefits and risks in payments and settlement.

• Likelihood of programmable platforms being taken up at scale by wholesale financial markets.

• Views on the pace of innovation in private money (particularly commercial bank money) used in retail payments.

• Risks and benefits from the use of tokenised deposits and stablecoins for wholesale transactions.

• Views on potential functionalities and design of a wholesale central bank digital currency (wCBDC).

Responses to the proposals can be submitted until 31 October 2024.

Credit reporting: Interim Working Group

On 14 August 2024, the FCA updated its webpage on its Credit Information Market Study (MS19/1) with a joint statement with the Interim Working Group (IWG) on timings of its work.

The FCA's final report covering its market study into the credit information market was published in December 2023, as reported in our January 2024 edition. The FCA proposed the introduction of a new governing body for the credit reference information market, the Credit Reporting Governing Body (CRGB), to replace the current industry governance arrangements, the Steering Committee on Reciprocity (SCOR), which were found to be ineffective.

By mutual agreement, the FCA and IWG have decided to extend the timeline for report three (how the CRGB should operate) and four (when the CRGB should be established) to November 2024 and February 2025 respectively to allow for more comprehensive pre-issuance industry engagement and the development of an in-depth transition plan from the SCOR to the CRGB.

EBA report on creditworthiness assessment practices of non-bank lenders

On 7 August 2024, the EBA published a report on a fact-finding exercise on creditworthiness assessment practices of non-bank lenders (NBLs) (EBA-Rep-2024-17).

In 2023 and 2024, the EBA carried out an analysis into the creditworthiness assessment (CWA) practices of non-bank lenders (NBLs), with a view to assessing whether these might be inadequate and a possible contributing factor in the trend of persistent increase in over-indebtedness and arrears of borrowers across the European Union (EU) to the detriment of consumers. This trend was identified in the EBA's latest edition of its Consumer Trends Report (CTR).

125 NBLs were sampled through a fact-finding exercise with national competent authorities across the EU. The report summarises the EBA’s key findings from the exercise, with a view to bringing about more insight into the CWA practices of NBLs, on which potential legislative, regulatory and/or supervisory action can also be drawn in the future. Key findings include:

• A significant number of NBLs appear to apply inadequate practices for information gathering and verification during their CWAs.

• The lack of a harmonised definition of "non-bank lenders" and of a regulatory framework for authorisation at EU level may result in different types of NBLs being supervised in different ways across member states and consequently different rules might apply in member states to entities of a similar kind.

• The growth in the number and significance of NBLs creates a need for an increase in specialised resources at NCAs dedicated to monitoring NBLs and their CWA practices.

The EBA will continue monitoring the activities of NBLs through its biennial consumer trends report and may consider initiating ad hoc action if necessary.

FCA findings from thematic review into product oversight and governance arrangements in insurance manufacturers and distributors

On 21 August 2024, the FCA published a report setting out the findings from its product oversight and governance (POG) thematic review relating to general insurance and pure protection products (TR24/2).

The report considers whether firms are meeting their product governance obligations for general insurance and pure protection products under the rules in the Product Governance Sourcebook, which were strengthened in 2021. The FCA assessed insurance manufacturers and distributors’ product oversight and governance arrangements against what is required under PROD 4, in particular, it looked at whether firms have assessed and can demonstrate that their products and services offer fair value, and whether they have taken effective action where products may not be providing the intended value.

The report sets out the FCA's findings, which included the following:

• Most manufacturers have materially strengthened their POG arrangement. However, many are not adequately assessing and evidencing that their products deliver fair value and good outcomes. This means they are not identifying where their products are not delivering fair value for customers, which allows products to cause harm.

• Some distributors have strengthened their POG arrangements. However, others have made much more limited progress. Many do not get sufficient information from the manufacturers to fully understand the distribution strategies in place. Also, most distributors do not appear to have fully understood their responsibilities to consider their remuneration, its interaction with the services and benefits they provide, and its impact on a product's value.

EBA 2024 resolution on convergence report and 2025 priorities

On 13 August 2024, the EBA published its 2024 resolution convergence report and 2025 priorities (EBA-Rep-2024-18).

The second report on resolution convergence aims to foster greater convergence of resolution practices. The report sets out key topics that all resolution authorities are requested to incorporate into their priorities for next year monitors how the key topics identified in the EBA’s 2023 European Resolution Examination Programme (EREP) were embedded in resolution authorities’ work for 2023.

The EREP priorities for 2025 mainly confirmed the areas of focus set for 2024, given their relevance and the fact that work on these complex topics will extend over multiple years. The 2025 priorities also reflect policy developments, progress and expertise gained by RAs and draw on more recent market developments. The 2024 EREP priorities (operationalisation of the resolution strategy, management information systems for valuation and operationalisation of the liquidity strategy in resolution) will continue for 2025 with updated objective elements.

BoE resolvability assessment of major UK banks: August 2024

On 6 August 2024, the Bank of England (BoE) published a paper setting out the findings from its second assessment of the resolvability of the major UK banks as part of the Resolvability Assessment Framework (RAF).

This is the second assessment by the Bank of England (the Bank), as resolution authority, of the eight major UK banks’ preparations for resolution under the RAF. The findings of this second assessment show that the major UK banks have continued to make significant progress in improving their preparations for resolution, including embedding resolution preparations into their everyday business.

The Bank will use future RAF assessments to undertake further detailed analysis of resolvability capabilities. The next RAF assessment for the major UK banks will focus on the Continuity and Restructuring outcome, including an assessment of the readiness of banks to plan quickly for and execute restructuring options to address the causes of failure and restore viability.

IEO evaluation of PRA's approach to competitiveness and growth objective

On 31 July 2024, the Bank of England (BoE) published a report from the Independent Evaluation Office (IE), evaluating the PRA's approach to its secondary competitiveness and growth objective (SCGO).

The SCGO came into force in August 2023 and requires the PRA to facilitate the international competitiveness of the UK economy and its medium to long-term growth (subject to aligning with international standards). In December 2023 BoE Court of Directors commissioned its Independent Evaluation Office to conduct an evaluation of the PRA's approach to its new objective.

The IEO’s report found numerous positive aspects to the PRA’s approach to its new objective. The PRA has invested in its approach to the SCGO, key aspects of it were well understood by policy staff, and the PRA's framework supported the consistent treatment of competitiveness and growth issues in different types of policy initiative.

Areas the PRA could consider further include further articulation of the PRA's vision and supporting culture to help clarify internally and externally the extent of change that should come from the new objective, and that the PRA could embed the SCGO more firmly into relevant processes to help maintain a consistent and proactive approach to the objective throughout the organisation.

The IEO provides nine recommendations, grouped into four themes:

• Clarifying the PRA’s vision and desired culture for supporting competitiveness and growth across all its activity.

• Ensuring staff across the PRA have a consistent understanding of the new objective, and what they have to do to support it.

• Harnessing intelligence from inside and outside BoE to help inform policy making and prioritisation.

• Refining transparency and oversight mechanisms to build trust in the PRA’s approach.

PRA consults on international banks' supervision and reporting requirements

On 30 July 2024, the PRA published a consultation paper (CP11/24) on revisions to its supervisory statement on the supervision of international banks (SS5/21) and branch reporting requirements for international banks.

CP11/24 proposes targeted updates to reflect developments since the publication of SS5/21 and to provide detail or clarification on certain aspects of the PRA’s approach. The proposed updates to the PRA’s approach to international banks were:

• The introduction of some additional indicative criteria that the PRA would consider when determining whether it would be appropriate for an international bank to operate in the UK as a branch rather than a subsidiary.

• Clarifications to the expectations of firms’ booking arrangements and extending their formal application to a subset of UK banks.

• Amendments to the PRA branch return designed to improve the collection of whole-firm liquidity data.

• Minor amendments to SS5/21 to clarify some of the PRA’s existing expectations and processes.

The consultation closes on 30 October 2024.

FCA discussion paper on regulating commercial and bespoke insurance business

On 29 July 2024, the FCA published a discussion paper (DP24/1) on the regulation of commercial and bespoke insurance business.

The aim of the discussion paper is to gather feedback on whether the FCA rules strike an appropriate balance between safeguarding customers who require regulatory protections and competitiveness in the commercial non-investment general insurance market, since the FCA believes there may be changes which can be made to better align this practice.

The discussion paper covers:

• The application of rules to the commercial insurance market. 

• The rules which should apply to situations where multiple firms are responsible for manufacturing insurance products.

• The rules which apply to tailor-made (bespoke) contracts.

The discussion paper is open for comments until 16 September 2024.

New FCA webpages on consolidated tape for bonds and equities 

On 13 August 2024, the FCA published two new webpages providing an update on its work to establish a consolidated tape (CT) for bonds and a CT for equities (shares and exchange traded funds (ETFs)).

Both webpages explain that a CT collates market data, such as prices and volumes associated with trades in a financial market and aims to provide a comprehensive picture of transactions in a specific asset class. The webpages also explain that the market for bond data is distinct from that for equities and the two need distinct assessments of the potential role of a CT provider (CTP), its characteristics, the appropriate economic model for the CT and its benefits in the relevant trade data market.

The bond CT webpage explains the FCA is working with DotEcon Ltd to finalise the tender design to appoint a bond CTP, and will share updates on the progress of the work on this webpage. The FCA expects to commence the tender before the end of 2024 and it asks anyone potentially interested in taking part in the process to contact it by 13 September 2024.

The equities CT webpage explains that the FCA has appointed consultants from Europe Economics to undertake the analysis on an independent basis. The FCA intends to provide a further update before the end of 2024.

DTR: FCA consultation on enhancing the National Storage Mechanism

On 9 August 2024, the FCA published a consultation paper (CP24/17) on the requirements for submitting regulated information to the National Storage Mechanism (NSM).

The FCA is consulting on proposals to change the NSM’s data requirements for ‘regulated information’, which is information disclosed by regulated market issuers in accordance with the Disclosure Guidance and Transparency Rules (DTRs), Listing Rules, and parts of the Market Abuse Regulation (MAR). The FCA are also proposing to standardise the way Primary Information Providers (PIPs) submit information to the NSM. The proposed changes, which form part of a broader initiative to improve the NSM’s functionality, aim to enable the FCA to implement improved data quality controls and make it easier for NSM users to find regulated information.

The consultation is open for comments until 27 September 2024. 

BoE statement on review of BoE-FCA MoU on FMI supervision: August 2024

On 7 August 2024, the Bank of England (BoE) published a statement on the annual review of its memorandum of understanding (MoU) with the FCA on the supervision of markets and financial market infrastructure (FMI).

The BoE and the FCA have agreed, following consultation with central counterparties (CCPs), recognised investment exchanges (RIEs) and recognised central securities depositories (RCSDs), that the MoU is proving to be effective and emphasised the importance of close and effective co-ordination between the authorities. They acknowledged the efforts made on coordination and agree that the Bank and FCA remain committed to effective co-operation.

The BoE and FCA agree that the arrangements of the MoU regarding co-operation continue to be effective with appropriate co-ordination and no material duplication between them. They will seek to address any specific areas identified by firms, including the need for collaboration in relation to new rulemaking powers.

The MoU will be updated in 2024 to reflect changes related to the Financial Services Markets Act (2023).

Overseas Funds Regime – updates to FCA webpage

The FCA has updated its webpage for the new Overseas Funds Regime (OFR), which is expected to come into effect later in 2024. The OFR will allow certain overseas investment funds to become recognised schemes in the UK and promoted in the UK, including to retail investors.

The updates comprise a guide on how to complete the registration and enrolment form and a glossary of key terms. The FCA has also confirmed that it will open the gateway to new schemes (ie, those schemes that are not in the temporary permissions regime) on 30 September 2024. From that date, such schemes will be able to apply without a landing slot.

FCA publishes new webpage on becoming a UK UCITS management company

On 31 July 2024, the FCA published a new webpage outlining the key requirements and authorisation process for firms wanting to become a UK UCITS management company of a UK UCITS. To be eligible to apply for the permission of managing a UK UCITS, a firm must be managing a UK authorised fund. This means the fund must be constituted as one of the following:

• an investment company with variable capital

• an authorised unit trust

• an authorised contractual scheme. 

A firm that is applying to become a UK UCITS management company must apply for a pre-application meeting first of all using the FCA's pre-application support service.

The website notes that firms intending to manage a non-UK UCITS should refer to the FCA's AIFMD or investment management related pages depending on the business model adopted.

FCA enforcement data for 2023/2024

On 5 September 2024, the FCA published a detailed breakdown of the enforcement action it took in 2023/24. The data forms part of its annual report (see our General Financial Services Regulation section above).

FCA fines audit firm for not alerting FCA of suspected fraudulent activity at London Capital & Finance plc

On 16 August 2024, the FCA announced that it had issued a final notice to PricewaterhouseCoopers LLP (PwC) fining it £15 million for not reporting to the regulator its belief that London Capital & Finance plc (LCF) might be involved in fraudulent activity.

PwC was LCF's statutory auditor from 8 September 2016 until 17 October 2017. LCF went into administration in January 2019 after the FCA had required it to withdraw materials promoting the sale of mini-bonds because the way the firm was marketing the mini-bonds was unfair, unclear and misleading. Following its administration, it became clear that companies to which LCF had lent bondholder funds were not able to repay their loans and that LCF's business had been conducted in a highly suspicious manner.

While the FCA recognised that PwC was not involved in LCF's misconduct and was not responsible for seeking out or fully investigating suspected fraud, it did should nonetheless have reported to the FCA a number of red flags that led it to suspect fraud. By not doing so, the FCA was deprived of potentially essential information to enable it to discharge its objectives, particularly as regards consumer harm and financial crime

It is the first time that the FCA has used its powers under section 345 FSMA to impose a financial penalty on an audit firm.

The FCA's investigation was run in parallel with investigations into the audits of LCF by the Financial Reporting Council, which culminated in sanctions being issued against three audit firms in May 2024.

FCA censures auditor for failings in client asset reports

On 15 August 2024, the FCA published the final notice (dated 6 August 2024) it has issued to chartered accountants MacIntyre Hudson LLP (MHA), publicly censuring it for failings in client asset reports it prepared in respect of firms it had audited.

The notice states that MHA contravened SUP 3.10.4A R (1) by failing to prepare four Client Asset Reports in accordance with the terms of a Reasonable Assurance Engagement between 1 July 2015 and 28 May 2019. The FCA states that MHA failed to report to the Authority a total of 25 breaches (by the relevant client) of rules contained in the Authority’s Client Assets sourcebook (CASS).

FCA censures fund manager for failures relating to high-risk and highly illiquid securities

On 7 August 2024, the FCA published a final notice issued to H2O AM LLP (H2O) (dated 2 August 2024), in which it imposed a public censure on H2O under section 205 FSMA.

H2O had acted as a fund manager for several funds including seven French UCITS. Between 2015 and 2019, it had made a number of investments into companies and entities controlled by the Tennor Group, as well as investments introduced to it by the ultimate beneficial owner of the Tennor Group. The investments valued in August 2020 at €1.6 billion.

The investments were mainly private placement debt instruments and equity shares in early stage or turnaround businesses and were therefore both high-risk and highly illiquid, contrasting with the vast majority of its investments, which were open-ended, daily dealing funds.

The FCA found that the firm had breached COLL 6.6A.4R (which imposes due diligence requirements on authorised fund managers of UCITS schemes) and three of the FCA's Principles for Businesses:

• Principle 2 (due skill, care and diligence)

• Principle 3 (management and control)

• Principle 11 (relations with regulators).

The FCA criticised the firm for its failure to undertake proper due diligence of the investments, lack of adequate policies or procedures and failure to exercise due skill and care in managing potential conflicts of interest. It had found that there had been multiple instances of hospitality being received by H2O staff that was not properly declared, including use of a private jet and superyacht.

The FCA also found that H2O had provided false and misleading documents and information to the regulator including records that had been prepared retrospectively and misleading minutes.

The FCA decided not to fine H20 as the firm had agreed to make available €250 million to be held for the sole purpose of making payments to affected investors and had agreed to voluntarily cancel its regulatory permissions. The FCA took into account the fact that the AMF, the French financial services regulatory, had fined H2O (currently subject to an appeal).

Publication of SARs reporter booklet 

On 7 August 2024, the National Crime Agency (NCA) and the UK Financial Intelligence Unit published the August 2024 edition of its Suspicious Activity Reports (SARs) reporter booklet. The booklet contains feedback from law enforcement agencies (LEAs) on their use of SARs and is designed to encourage best practice among reporters. It also includes a review of case studies provided by LEAs regarding fraud and money laundering.

New UK Sanctions List search function launched 

On 1 August 2024, the Foreign, Commonwealth & Development Office launched a new search function to the UK Sanctions List, enabling users to search for designated persons without needing to download the whole list.

NCA launches initiative to identify organised crime

On 26 July 2024, the NCA announced that together with seven UK banks it was launching a public private partnership to identify criminality using banking data. The model, whereby banks share relevant data with the NCA, was shown to be effective in a pilot undertaken by the NCA and two banks between October 2021 and February 2022.

The answer to last month's question: The minister responsible for financial services policy and regulation is the Economic Secretary to the Treasury, Tulip Siddiq MP.

This month's question: According to the EBA and ECB's 2024 report on payment fraud, what was the total value of fraudulent credit transfers sent from PSPs in the EU/EEA and received worldwide in the first half of 2023:

• €4.3 billion

• €2.0 billion

• €1.1 billion

• €0.6 billion.