A new year and another year of regulatory change in prospect. Ian Ashleigh is a freelance risk and compliance consultant, here are some themes he expects will come under the regulatory microscope in 2020.
There is no doubt that the FCA will continue to focus on conduct behaviours that may prevent good customer outcomes, how will these themes translate into regulatory activity in 2020?
On 9th December 2019, the Senior Managers and Certification Regime (SM&CR) came into force for all solo FCA regulated firms. Senior Managers and Certification staff should have been trained regarding their roles and responsibilities by that date, including the implications of the Code of Conduct rules in the COCON sourcebook.
But that is the beginning of the work that needs to be done.
Having identified the employees who are to be Certified and then trained them on the conduct rules, the firm is required to certificate staff by 20th December 2020 and annually thereafter. Firms will need to record their processes and procedures for certificating staff are fit and proper and be able to demonstrate the basis for issuing certificates should the FCA request. Depending on the number of certification staff, the firm may want to phase the process across the year. This may entail a review of your KPIs and appraisal system
All other staff will need training on the Conduct Rules by 9th December 2020 with some form of evidence that this has been delivered.
The FCA will continue to focus on transfers from defined benefit and other safeguarded pension schemes with the debate over contingent charging continuing to rumble on. Further regulatory change will come from The Pensions Bill is likely to be introduced to the new Parliament early in 2020. It is likely to be similar to the 2019 Bill which included a framework for collective defined contribution pension schemes, the foundations for the pensions dashboard and new powers for The Pensions Regulator. There will also be changes in relation to transfer rights.
In July 2019 the FCA published a Guidance Consultation Paper on the fair treatment of vulnerable customers, comments were invited by 4th October 2019. The themes were familiar and are likely to be an ongoing focus for the regulator through 2020.
Question for firms include:
- How do firms define vulnerability?
- What strategies will firms use to ensure fair treatment and good financial outcomes for vulnerable clients?
- What training will be provided to ensure staff have the right understanding of vulnerability?
- How will this understanding be translated into the skills and capabilities to identify a vulnerable client?
From 10th January 2020, the FCA is the AML/CTF supervisor for cryptoasset businesses. Its responsibility under the AML/CTF regime will limited to registration and supervision.
At this stage it is not envisaged that the FCA will extend its scope to regulate the conduct of cryptoasset businesses, however, it is worth keeping in mind this possibility. There is an international appetite to regulate cryptoassets and bring them closer to the mainstream – something included in the Fifth Money Laundering Directive (see below). The Basel Committee on Banking Supervision has published a discussion paper on the prudential regulatory treatment of cryptoassets with a request for feedback by 13th March 2020.
With more technology companies entering financial services to challenge traditions providers of banking and insurance, the FCA created the Regulatory Sandbox that allows all firms to test innovative propositions in the market with consumers. Close on 68 firms have been accepted in 5 cohorts to test innovative products, services, business models and delivery mechanisms.
2020 will see the development of the fintech markets with more new players entering and further challenges for the FCA. Which leads nicely to the Regulatory Perimeter.
There has been much discussion about extending the regulatory perimeter and smoothing out some of the complexity where similar activities may or may not be regulated. Indeed, in his speech to the Lord Mayor’s City Banquet in October 2019, Andrew Bailey (Chief Executive of the FCA) has articulated his vision of how the perimeter could be extended.
In June 2019 the FCA published its first annual report on the perimeter, this highlighted the impact on consumers of firms that operate outside the perimeter, particularly technology companies that operate on the edge of financial services. These organisations may find their activities are brought into regulation with all that entails.
AML and Fifth Money Laundering Directive
The Fifth Money Laundering Directive (or 5MLD) becomes law in the UK on 10th January 2020, the changes include:
- regulation of virtual currencies and pre-paid cards to prevent terrorist financing;
- improving safeguards for financial transactions to and from high-risk jurisdictions;
- ensuring centralised national bank and payment account registers or central data retrieval systems are accessible in all EU member states.
Under 5MLD, virtual currencies such as Bitcoin will have a legal definition. Virtual currency platforms and wallet providers will also become regulated entities under the scope of the directive. While many already conduct due diligence and report suspicious transactions, 5MLD will make it a legal requirement.
5MLD will also introduce the requirement for firms to record the ultimate beneficial ownership of corporate clients (from January 2020) and of Trusts (from March 2020). From September 2020, centralised automated mechanisms must be implemented to allow identification of those who hold or control payment accounts and bank accounts.
GDPR has been with us for close on two years and we are all familiar with the concept of consent and the lawful control and processing of personal data.
On 4th December 2019, the Information Commissioner’s Office has issued a consultation regarding the draft of the right of access guidance which explains in greater detail the rights that individuals have in order to access their personal data and the obligations on controllers. The draft guidance also explores the special rules involving certain categories of personal data, how to deal with requests involving the personal data of others, and the exemptions that are most likely to apply in practice when handling a request. This consultation closes on 12th February 2020.
When and how we leave the European Union remains unclear at the time of writing Brexit but it seems likely that the UK will leave the EU with a deal in place.
The FCA has been steadily absorbing the provisions of MiFID II, the Insurance Mediation Directive and other EU generated regulation into the Handbook as UK Regulation. It has been steadily publishing guidance to assist regulated firms prepare for Brexit as has the Government itself. The big issues for a number of firms will be the ability to passport financial services between the UK and the EU. This will be an evolving situation as more detail becomes apparent.
FCA Business Plan 2020/21
The FCA publishes its business plan in April every year in which it identifies its priorities for the forthcoming 12 months. This highlights the cross-sector priorities as well as the areas of risk within the seven specific sectors it regulates. Recurrent topics are;
- firms’ governance and culture (this will be linked to embedding SM&CR);
- operational resilience (particularly when a firm has outsourced critical functions);
- financial crime prevention
- fair treatment of new, existing and vulnerable customers; and
- innovation, data and data ethics in relation to open banking and fintech.
The new year will bring another round of regulatory challenges but we must not lose sight that first and foremost there are human beings called clients whose financial goals and objectives require our support and diligence to ensure the solutions we provide produce good customer outcomes from fair treatment and conduct that puts the customer at the heart of all we do.
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