This month in summary

Financial services regulation

FCA to conduct strategic review of banking business models

On 11 May 2017, the FCA announced that it will be conducting a review of the business models used in the retail banking sector to get a sense of how recent changes in this area have impacted on competition and conduct.

Phase 1 of the review will focus on understanding the existing retail banking business models and the markets they serve, from a supply side perspective. Specific areas of focus include:

  • profitability across different areas of retail banking;
  • understanding profit distribution around the various participants in the market;
  • considering how revenues and costs may be linked across business areas;
  • how emergency business models differ from traditional business models; and
  • an in-depth look at personal current account profitability to understand:

(i) The roll of free-if-in-credit banking in the broader business model; and

(ii) how different types of consumers may generate different contributions to profits from their personal current account usage, and consider whether this creates distributional concerns.

In Phase 2, the FCA will investigate the impact of economic, technological, social and regulatory changes. The effects of these changes are expected to continue in the coming years, with 'lower for longer' interest rates, Open Banking, increased use of digital channels by consumers, regulatory interventions such as ring-fencing, and the remedies introduced by the Competition and Markets Authority (CMA).

In conducting this review, the FCA is seeking to understand the impact of changes in retail banking business models, with a view to identifying any risks to its competition and conduct objectives, and how its regulatory approach can remain fit for purpose in this changing landscape.

The FCA plans to engage with retail banks, building societies, credit unions, and relevant consumer bodies during May and June 2017, before issuing an information request to firms. A project update, setting out preliminary analysis and conclusions from Phase 1, is expected in Q2 2018.

This review is still in its early stages, but the FCA is clearly mindful of the numerous developments in this area and possible changes on the horizon. Firms should be prepared to engage with the FCA, sharing information and consulting on the impact of changes, so any future regulatory updates are properly informed and work well for all parties. Innovations in the retail banking space have the potential to greatly impact this area and regulatory change is likely to result from this review.

For more information, and a link to the FCA's website, please click here.

EBA consults on draft recommendation on outsourcing to cloud service providers

On 18 May 2017, the European Banking Authority (EBA) published a consultation paper setting out its proposed guidance on the use of cloud service providers by financial institutions.

The EBA recommendations apply to credit institutions, investment firms and competent authorities and it is intended to clarify the EU-wide supervisory expectations if institutions adopt cloud computing.

These recommendations were developed by the EBA on its own initiative as a response to the growing importance of cloud services as a driver of innovation and the increased interest in the use of cloud outsourcing solutions within the banking industry.

It is hoped this will allow firms to utilise the benefits of cloud services, while ensuring that any related risks are adequately identified and managed. In particular, the Recommendations address five key areas:

  • the security of data and systems;
  • the location of data and data processing;
  • access and audit rights;
  •  chain outsourcing; and
  • contingency plans and exit strategies.

The consultation will run until 18 August 2017. The use of outsourcing to cloud service providers is on the rise and firms potentially affected by this guidance should look to engage with the EBA's consultation to help ensure that the guidance issued is appropriate and well-informed.

For more information, and a link to the EBA's website, please click here.

FCA's stance on national cyber attack and cyber resilience

On 13 May 2017, the FCA published a statement in response to the recent wave of ransomware attacks that have affected a number of computer systems throughout the UK, most notably several NHS trusts. The FCA has advised firms to review the guidance on randomware issued by the National Cyber Security Centre and take appropriate action. It also asks firms that have been subject to an attack to contact Action Fraud and to notify their regulator.

On 18 May 2017, the FCA also published a new webpage on cyber resilience with the aim of helping firms to become more resilient to cyber attacks, while ensuring consumer protection and market integrity.

The FCA wants firms of all sizes to develop a 'security culture' throughout the organisation which identifies and prioritises key information assets – hardware, software and people. Firms should protect these assets, detect breaches, respond to and recover from incidents, and constantly evolve to meet new threats.

It should be noted that, under Principle 11 of the FCA's Principles for Businesses, firms must report material cyber incidents. A firm may consider an incident material if:

  • it results in significant loss of data, or affects the availability or control of its IT systems;
  • it impacts a large number of victims; or
  • it results in unauthorised access to, or malicious software present on, its information and communication systems.

Where a firm considers an incident to be material, it should report this to the FCA and other relevant authorities.

These recent attacks illustrate the need for firms to establish robust cyber security defences and procedures to respond to an attack. Existing measures should be reviewed to make sure they are up to the task as this appears to be a growing area of concern with the potential to cause serious harm to organisations.

For more information, and a link to the FCA's website, please click here.

Bank of England launches new FX Global Code of Conduct

On 25 May 2017, the Bank of England (BoE) launched its Global Code of Conduct for FX markets. This comprises a common set of guidelines aimed at promoting the integrity and effective functioning of the institutional FX market. The Code does not impose legal or regulatory obligations but it is likely it will be adopted by most local regulators as the definitive standard for FX markets and firms will be expected to incorporate the Code into their own internal FC policies and processes.

Following the scandals involving alleged rigging of Forex benchmarks, the FX Global Code represents the culmination of a globally coordinated effort between regulators and international banks to define a new set of standards to which participants and markets will now be expected to adhere.

The Global Code is a single Code for the entire FX industry.  To ensure adherence with the Code, market participants will need to take practical steps such as training their staff and putting in place appropriate policies and procedures.

In the UK, the Code will be augmented by the UK Money Market Code covering Securities Lending, Repo and Money Markets, as well as complemented by the Precious Metals Code being prepared by the LBMA.  Together these three codes will replace the Non-Investment Products (NIPs) Code which had been drawn up by participants in the UK foreign exchange, money and bullion markets in conjunction with the Bank of England and FCA.

TLT has recently published an article giving more detail on the subject. For more information, and a link to TLT's website, please click here.

To see the full code, and for a link to the BoE's website, please click here.

Speeches and Communications

Competition and innovation in financial services: the regulator's perspective

In a speech published on 11 May 2017, Christopher Woolard, The FCA's Executive Director of Strategy and Competition, outlined the regulator's views on competition and innovation in financial services.

Mr Woolard highlighted the complexity associated with improving competition and innovation through regulation. The challenge for the FCA is to lower barriers without increasing risk.

In the words of Mr Woolard, the FCA wants "a race to improve products and services. We want firms to compete to win more customers, and to do this by improving service, quality and price."

The FCA is almost unique amongst financial regulators in having competition powers, but since these powers are relatively new, firms report this is the area of the FCA's work they understand least. More details of how the FCA sees its powers in this area working in conjunction with the rest of its work can be found in its Mission Statement for 2017.

Mr Woolard cited Project Innovate and the Innovation Hub as further examples of the support the FCA is providing to innovative businesses with the potential to benefit customers. He stated that the FCA must be mindful of the risks of supporting an innovative business; it must be convinced that the business's proposition is truly innovative, has a consumer benefit and, crucially, that it will not cause consumer detriment.

As part of Project Innovate, the FCA has also established the regulatory sandbox. Mr Woolard states that "We have also pioneered the regulatory sandbox – a space where firms can pilot the very most innovative products and services. Today the UK sandbox is the largest of its kind in the world and attracts a range of international businesses."

Overall, the FCA's approach appears to be centred on striking a balance between competition and consumer protection. The success of innovation relies on trust and it is regulation that can give consumers to confidence to participate. The FCA's approach going forward is always to put consumer protection front and centre, but it certainly recognises the importance of healthy competition and innovation in the market and plans to continue to use the tools outlined above to achieve this aim.

For more information, and a link to the FCA's website, please click here.

FCA and SFC sign Fintech co-operation agreement

On 12 May 2017, The FCA and Securities and Futures Commission (SFC) in Hong Kong announced a new co-operation agreement to support Fintech development. Under the agreement, the two regulators will co-operate on information sharing and referrals of innovative firms seeking to enter one another's markets.

A similar agreement was reached with the Hong Kong Monetary Authority in December 2016, and the FCA now has agreements with a number of key regulators in Hong Kong.

This marks the latest in a series of similar international agreements the FCA has entered into with its counterparts overseas. Improving international engagement is one of the key aims of Project Innovate and the Innovation Hub, the FCA's initiative to improve innovation in financial markets, which it hopes will promote the UK as a centre for innovation in financial services.

Christopher Woolard, the FCA's Executive Director of Strategy and Competition, said: "Co-operation agreements are absolutely vital in fostering an environment of Fintech innovation on a global scale. In the last few months alone we've signed agreements with colleagues in China, Japan, Canada and the Hong Kong Monetary Authority. Working with other regulators internationally, we want to build a common understanding of the principles of good innovation and we look forward to working closely with the SFC."

This further demonstrates the progress the FCA is making in establishing international regulatory cooperation. The exchange provides further opportunities for UK businesses and will assist innovative Hong Kong firms interested in entering an FCA supervised market, potentially bringing benefits to customer and established businesses.

For more information, and a link to the FCA's website, please click here.

Fines and enforcements

FCA secures eight confiscation orders totalling just under £2.2 million

On 24 May 2017, an FCA investigation into an unauthorised collective investment scheme resulted in eight confiscation orders which totalled £2,195,495. The investigation, known as Operation Cotton, has led to convictions for all eight defendants: Scott Crawley, Brendan Daley, Daniel Forsyth, Adam Hawkins, Ricky Mitchie, Ross Peters, Aaron Petrou and Dale Walker.

His Honour Judge Leonard QC has directed that all sums confiscated from the Defendants be paid by way of compensation to the victims of their crimes. Those who have suffered a quantifiable loss should expect to receive just over 40% of the capital amount owed to them.

Between July 2008 and November 2011, an unauthorised collective investment scheme was operated through three companies: Plott Investments Ltd (which later changed its name to Plott UK Ltd), European Property Investments (UK) Ltd and Stirling Alexander Ltd. The scheme involved cold-calling potential investors to sell them agricultural land that the companies had bought for minimal amounts, as well as land the companies did not own at all, at vastly inflated prices. Over £5 million was extracted from investors on the false promise of a substantial profit, which never materialised.

Scott Crawley and the salesmen who worked with him were assisted by Dale Walker, a conveyancing solicitor who received hundreds of thousands of pounds into his accounts. He was convicted of possessing criminal property contrary to section 329 of the Proceeds of Crime Act 2002, as well as aiding and abetting the carrying out of a regulated activity.

These orders highlight the FCA's strict approach to tackling financial wrongdoing. This should also serve as a warning to investors and remind them vigilance is always necessary, particularly where there is cold-calling or the returns promised seem too good to be true.

For more information, and a link to the FCA's website, please click here.

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