FCA Update September Presented by: Ian Fletcher FCA

Transcription

1 FCA Update September 2015 Presented by: Ian Fletcher FCA

2 Training disclaimer The current requirements with which an authorised person, and an approved person, must comply are set out in the Financial Services and Market Acts 2000, the regulations made under that Act and the rules in the FCA Handbook. Under that Act, FCA are given the power to give guidance and they do so extensively in the Handbook. FCA call this general guidance. FCA also give guidance to particular firms in their particular circumstances. They call this individual guidance. The information which we will give to you on this webinar is for training purposes only. It is not guidance in either of these two senses. I hope you will appreciate that I am not in a position to give you, or your firms, individual guidance. The purpose of this session is to give you a better understanding of FCA provisions and to enable you to apply them to your circumstances. The slides and notes for this webinar should be read in conjunction with the detailed legislation or regulations. No responsibility for loss occasioned by any person acting or refraining from action as a result of the material contained in this programme can be accepted by the authors or 2020 Innovation Training Limited.

3 Forthcoming FCA Webinars Please contact the office on for booking and prices or see for further information

4 Objectives To provide an overview of regulation and legislation To review common problem areas To provide guidance on the audit and accounting work of an FCA authorised entity New CASS rules and guidance

5 Content New CPs and PSs CASS Audit programme and guidance

6 FCA Website Review NEW LAYOUT! Reminder of key areas Register CP and PS in YOUR FCA Dear CEO letters News sections

7 FCA Website Review

8 Consultation Paper Update

9 Recent CPs CP15/20: Investing in authorised funds through nominees CP15/21: Reform of the legacy Credit Unions Sourcebook CP15/22 Strengthening accountability in banking: Final rules CP15/23: Ring-fencing: Disclosures to consumers by non-ring-fenced bodies CP15/24: Cash savings remedies CP15/25: Changes to the Approved Persons Regime for insurers not subject to Solvency II CP15/26: PSR regulatory fees 2015/16 CP15/27: UCITS V implementation and other changes to the Handbook affecting investment funds

10 Recent CPs CP15/28: Quarterly Consultation Paper No. 10

11 CP15/20:Investing in authorised funds through nominees FCA propose to revoke rules and guidance in the COBS that are currently scheduled to come into force at the end of this year. They apply to certain firms (defined as intermediate unitholders ) that hold units in authorised Investment funds on behalf of consumers who are the beneficial owners of the units. The rules require certain disclosures and interactions between the firm and the beneficial owners, in respect of their holdings. the FCA is considering the effectiveness of disclosures required under the rules due to come into force and that they will be conducting a market study in this area, FCA propose to revoke the rules and guidance in COBS R to R (inclusive) that relate to notifications to beneficial owners about short reports, unitholder voting rights and other fund information. FCA intend to reconsider the substance of these rules and guidance in 2016 in the light of feedback from the discussion paper, their subsequent consultation on removing some specific disclosures, and any issues emerging from the market study.

12 CP15/21: Reform of the legacy Credit Unions Sourcebook At this stage, the FCA is not proposing to make significant changes to its version of CREDS. Its changes are mainly consequential on those being made by the PRA. Details of the changes proposed by the PRA are set out in section 2 and those proposed by the FCA in Section 3.

13 CP15/22 Strengthening accountability in banking: Final rules (including feedback on CP14/31 and CP15/5) and consultation on extending the Certification Regime to wholesale market activities Final rules for a new accountability framework for individuals working in banks, building societies and credit unions Senior managers can be held accountable for any misconduct that falls within their area of responsibility, the regime aims to hold individuals working at all levels in banks and other relevant firms to appropriate standards of conduct New certification routine

14 CP15/23: Ring-fencing: Disclosures to consumers by nonring-fenced bodies FCA required to establish a ring-fencing regime from the Government s intended start date of 1 January This is likely to be applicable to a number of the largest UK banking groups. The legislation aims to isolate retail banking activities from investment banking activities. The core objective is to reduce the likelihood of disruption of key retail services by insulating ring-fenced bodies (RFBs) from risks arising elsewhere in their own groups or in the wider financial system.

15 CP15/24: Cash savings remedies FCA are working with industry to deliver seven day switching for the vast majority of cash-isa transfers (except for those involving the very smallest providers), from January FCA will take forward the convenience remedy through implementation of the Second Payment Services Directive (PSD2) from They expect firms to move towards implementing PSD2 requirements in time for the 2017 implementation date. FCA intend to trial publishing information on the lowest interest rates firms pay on open and closed easy access and easy access cash-isa savings accounts. They will trial publishing this information for 18 months during which time they will evaluate the remedy s effectiveness.

16 CP15/25: Changes to the Approved Persons Regime for insurers not subject to Solvency II: reforms for larger Non- Directive Firms, feedback on CP 15/15, forms, consequential and transitional aspects This document sets out amendments to the arrangements for small NDFs they proposed in CP15/15 taking into account feedback they received; Consults on a reformed regime for larger NDFs; and Consults on changes to forms necessary for the implementation of the reformed regime for all NDFs, as well as transitional arrangements for implementing the reforms. Chapter 7 sets out changes to the Handbook that are consequential to these reforms.

17 CP15/26: PSR regulatory fees 2015/16 This document sets out FCA decision to allocate PSR fees between payment systems based on equal allocation across regulated pan-uk payment systems (with the two regional cheque systems, C&C and NICC, counted as a single system for fee allocation purposes). This document also includes the consultation on calculating and collecting fees from participants in each regulated payment system.

18 CP15/27: UCITS V implementation and other changes to the Handbook affecting investment funds In Part I FCA consult on rules and guidance to give effect to a new set of changes to the Undertakings for Collective Investment in Transferable Securities (UCITS) Directive. These changes are informally referred to as UCITS V; they require amendments to both primary and secondary legislation, as well as the FCA Handbook. HM Treasury (Treasury) and the FCA are working together as part of the implementation process. This paper covers those UCITS V provisions that fall to the FCA to transpose. The Treasury will consult separately on changes to primary and secondary legislation.

19 CP15/27: UCITS V implementation and other changes to the Handbook affecting investment funds (Cont.) In Part II of this paper FCA consult on changes to the Handbook to ensure the EU Regulation introducing European long-term investment funds (ELTIFs) will operate effectively. As with the implementation of UCITS V, changes to primary and secondary legislation are required and FCA are working with the Treasury to set a framework for ELTIFs to be authorised in the UK. In Part III FCA take the opportunity to consult on a number of changes to the Handbook to keep the rules and guidance for authorised investment funds up to date.

20 CP15/28: Quarterly Consultation Paper No. 10 Here FCA include a number of Handbook changes. Please see notes for details.

21 POLICY STATEMENT UPDATE

22 Recent Policy Statements PS15/13: Guaranteed Asset Protection insurance: competition remedy PS15/14: Restrictions on the retail distribution of regulatory capital instruments PS15/15: FCA regulated fees and levies 2015/16 PS15/16: Strengthening the alignment of risk and reward: new remuneration rules PS15/17: Pension Wise recommendation policy PS15/18: FCA Competition Concurrency Guidance and Handbook amendments: Feedback on CP15/01, finalised guidance and rules PS15/19: Improving complaints handling

23 Recent Policy Statements PS15/20: Implementation of the Mortgage Credit Directive: Consequential Changes to the Consumer Credit Sourcebook (CONC) PS15/21: Changes to the Approved Persons Regime for Solvency II firms: Final rules

24 PS15/13: Guaranteed Asset Protection insurance: competition remedy Firms distributing GAP insurance in connection with the sale of a motor vehicle (add-on GAP) will be required to: provide customers with prescribed information to help them shop around and be more engaged when making decisions about purchasing the product introduce a deferral period, which means GAP insurance cannot be introduced and sold on the same day FCA expect to see better customer outcomes from more informed purchasing decisions and improved competition between add-on and standalone distribution channels as a result of these measures.

25 PS15/14: Restrictions on the retail distribution of regulatory capital instruments In this paper FCA set out the rules they are implementing following their consultation on restrictions on the retail distribution of regulatory capital instruments (contingent convertible securities (CoCos) and mutual society shares). Novel types of regulatory capital instruments are being issued in large amounts as institutions transition their capital position to meet the new prudential requirements under the Capital Requirements Directive IV (CRD IV) and Capital Requirements Regulation (CRR) package of measures. The rules FCA have introduced will limit the scope for distribution that exploits information asymmetries and other consumer behavioural weaknesses, which are a particular concern where complex, risky instruments are offered to nonsophisticated retail investors of ordinary means. In doing so, the new rules should limit the scope for consumer harm from inappropriate retail investment

26 PS15/15: FCA regulated fees and levies 2015/16 FCA are publishing the 2015/16 periodic regulatory fees and levies rules for the: Financial Conduct Authority (FCA) Pensions guidance levies Financial Ombudsman Service (ombudsman service) general levy, and Money Advice Service

27 PS15/16: Strengthening the alignment of risk and reward: new remuneration rules This policy statement includes feedback, final rules, and guidance in relation to proposals under CP 15/14 Strengthening the alignment of risk and reward: new remuneration rules (1) published jointly by the Prudential Regulatory Authority (PRA) and the Financial Conduct Authority (FCA). The consultation proposed changes to existing remuneration requirements and considered options to implement the remuneration recommendations of the Parliamentary Commission on Banking Standards (PCBS) report Changing banking for good.

28 PS15/17: Pension Wise recommendation policy In the 2014 Budget the Government announced reforms to retirement options. This included a proposal that all consumers with Defined Contribution (DC) pensions should be entitled to access free impartial guidance at retirement about their options when accessing their pension savings. This was launched by Treasury under the brand Pension Wise and became operational from 6 April In November, the FCA published standards for the Treasury s designated guidance providers to meet in delivering Pension Wise. FCA are required to monitor the designated guidance providers compliance with the standards and, where providers have breached them, they may make recommendations to the designated guidance providers and the Treasury, where appropriate. FCA consulted on their recommendation policy in CP-15/12 Pension Wise recommendation policy with the consultation period ending on 8 May. This Policy Statement summarises the feedback received and publishes the final policy.

29 PS15/18: FCA Competition Concurrency Guidance and Handbook amendments: Feedback on CP15/01, finalised guidance and rules FCA are publishing three documents: final guidance on their functions and procedures under Competition Act 1998 (CA98) issued under section 52 CA98 final guidance on their market studies and market investigation reference functions and procedures under Enterprise Act 2002 (EA02) and the Financial Services and Markets Act 2000 (FSMA) issued under section 139A FSMA final legislative instrument to introduce minor amendments to the FCA Handbook as adopted by the FCA Board In this Policy Statement, FCA set out their views on the responses to the consultation, and publish comparison versions in the annexes which show the changes to the versions of the guidance and legislative instrument on which they consulted.

30 PS15/19: Improving complaints handling, feedback on CP14/30 and final rules In this policy statement, FCA confirm the following new requirements for firms: a) extending the next business day rule, where firms are permitted to handle complaints less formally, without sending a final response letter, to the close of three business days after the date of receipt b) reporting all complaints, including those handled by the close of three business days after the firm receives them c) raising consumer awareness of the ombudsman service, by sending a summary resolution communication following the resolution of complaints handled by the close of the third business day after receipt d) revised rules limiting the cost of calls consumers make to firms to a maximum basic rate, including all post-contractual calls and all complaints calls e) The new complaints return which requires firms to send FCA data twice a year on the number of complaints they receive.

31 PS15/20: Implementation of the Mortgage Credit Directive: Consequential Changes to the Consumer Credit Sourcebook (CONC) In February 2015 FCA published CP 15/61, which set out proposed amendments to their Consumer Credit sourcebook (CONC) to implement the Mortgage Credit Directive (MCD). In this Policy Statement they summarise the feedback they received on the MCD elements of the consultation and their response. In general, respondents agreed with their proposed amendments and FCA are publishing final rules, the majority of which come into effect on 21 March FCA response to the non-mcd changes to CONC we consulted on in CP15/6 will be published later this year.

32 PS15/21: Changes to the Approved Persons Regime for Solvency II firms: Final rules (including feedback on CP14/25, CP15/5 and CP15/16), and consequentials relating to CP22/15 on strengthening accountability in banking The paper covers: Changes to the scope of the FCA s approved persons regime. These will ensure more robust oversight and continued enforcement powers over key individuals who can significantly impact FCA objectives, whilst maintaining a proportionate approach. Changes to fitness and propriety assessments of candidates for FCA regulated Significant Influence Function (SIF) roles to reflect the Solvency II framework and European Insurance and Occupational Pensions Authority (EIOPA) guidelines. These will support the implementation of the fitness and propriety requirements of Solvency II in a way that minimises the burden on firms, by avoiding them having to make further submissions to the PRA as the lead regulator for the transposition of these requirements. New Conduct Rules for approved persons in Solvency II firms to encourage appropriate behaviour by staff, in particular through an enhanced focus on treating customers fairly and responsible delegation by senior staff. Changes to governance arrangements, particularly to support enhanced accountability of senior staff in firms.

33 The New CASS Rules This policy statement makes changes to the rules in Client Assets Sourcebook (CASS).

34 The New CASS Rules The changes affect around 1,500 FCA-regulated firms that carry out investment business, from the largest investment banks to the smallest investment adviser, who collectively hold over 100 billion of client money and 10 trillion of custody assets.

35 Brief Reminder of Old Rules CASS 7

36 Old Rules CASS 7 MiFID rules apply to all DIF firms Principle based S & C Segregation and Identification Separate account Bank account rules Prompt and accurate payments into and out of account

37 Old Rules CASS 7 Regular reconciliations Supervision and review of reconciliations Accounting records Auditors report Gabriel reporting

38 Summary of changes in CASS 7 rules These changes are designed to clarify and enhance the regime to ensure the best protection of client money held in relation to investment business. RULE CHANGES 1 June 2015

39 1 July July 2014 certain rules and guidance came into force providing clarifications to existing requirements, introducing optional arrangements with which firms may choose to comply and limiting the placement of client money in new unbreakable term deposits. These include clarifications of application provisions and the introduction of the option to operate multiple client money pools

40 1 December December 2014 certain rules and guidance came into force relating to the provision of information to or obtaining the agreement of new clients and the documenting of agreements and arrangements with any new counterparties with whom firms deposit or otherwise place custody assets or client money, these include requirements to notify the client of certain matters if operating the banking exemption and mandating the use of template acknowledgment letters with new client bank accounts and client transaction accounts.

41 Acknowledgement Letters CASS 7.8 (now 7.18) requires firms to exchange usual letters with banks on Trust status, set off etc. FCA notes variety of methodologies in applying rule New rules Standard template letters to be used Removal of 20 days grace period and applies to UK and foreign accounts opened Firms required to perform due diligence on authorisations etc. ALL EXISTING letters to be re done in template form

42 Templates

43 1 June 2015 June 2015 all of the remaining rules and guidance came into force and firms need to ensure they fully comply with all of the new rules See Handbook for changes

44 Overview of todays webinar training new rules and suggested audit tests (CASS 7) Application and exemptions NOW Segregation NOW Receipt 7.2 NOW 7.11 Withdrawal 7.2 NOW 7.11 CM Calculations and Regular reconciliations 7.6 NOW 7.15 NEW 7.16 The standard methods of internal client money reconciliation 7.18 Acknowledgement letters

45 7.10 Application and purpose

46 Application and purpose Overview work Review the organisational arrangements that the firm has in place to minimise the risk of the loss or diminution of client money and reach a conclusion as to whether those arrangements appear adequate given the size and nature of its business. Note whether the firm intends to opt-in all other relevant client money to the MiFID rules and if not, whether it uses any Opt-outs for professional clients or non-imd business. For Credit institutions or approved bank, firms that hold coins, solicitors, long term insurers and friendly societies, holds client money in relation contracts of insurance or in respect of life assurance business or is a Trustee firm confirm whether the client elects to comply with the client rules. If so follow this programme. Check whether the firm holds or receives money from an affiliated company in respect of MiFID business, if so follow this programme

47 Application and exemptions Overview work Check whether the firm holds or receives money from an affiliated company in respect of MiFID business, if so follow this programme. Confirm the client is MiFID regulated. Non MiFID firms are not subject to CASS 7 rules ( MGI firms are subject to CASS 5 rules). Enquire whether the firm intends to exempt client money under title transfer collateral arrangements. Note exceptions for retail clients and obligations under contracts for differences or rolling forex contracts, whether or not arranged by the firm. Ascertain whether firm is using delivery versus payment transaction exemption arrangements. If so, review systems to ensure that the settlement system complies with the exemption requirements and that the firm retains written consent for these arrangements from the client where needed

48

49 Segregation of Client Money 7.13

50 Segregation of Client Money OVERVIEW Enhancements to rules to ensure all client money held in appropriate manner with a suitable institution Requirement to consider diversification and do enhanced due diligence on the banks with which they deposit client money Introduction of an explicit requirement for firms to make a record of each periodic review of a bank and to keep that record from the date it conducts the periodic review until five years after the firm ceases to use that bank to hold client money

51

52 Segregation Audit tests Where money is deposited in a credit institution, bank or money market fund (CBAs) ensure the firm has documented its selection criteria for any legal requirements, expertise and market reputation and performs periodic reviews to confirm the selection criteria. Confirm the documentation of the selection criteria covers: Diversification of risks; The capital of the credit institution or bank; The amount of client money placed as a proportion of the total capital and deposits; The credit rating; and The level of risk in the activities undertaken by the credit institution or bank

53 Segregation Audit tests Ensure that if the firm deposits or holds funds with a group entity the funds do not at any point exceed 20 per cent of the balance on: All client accounts in aggregate; Each of its designated client accounts; and Each of its designated client fund accounts. Obtain an up to date list of all CBAs and ensure they in accounts identified as separate from accounts used to hold money belonging to the firm. Confirm that the firm has agreed terms on all CBAs that allow it to make withdrawals of client money promptly and, in any event, within one business day of a request for withdrawal. Note any use of transitional provisions for notice periods of a maximum of 30 days notice

54 Physical Receipt and Allocation of Client Money All client money MUST be received directly into a client account All client money to be banked no later than one business day following receipt Cannot use client money until cleared Unidentified receipts to be segregated until identified

55 Client Money held by third parties Necessary by nature of some transactions, rules say firm keeps fiduciary responsibility to client unless TP has direct relationship with client Rules Clarification, money remains client money and therefore include these amounts in client money calculations

56 Unbreakable Client Money Deposits Restriction on the use of term deposits and Notice accounts (30 days max.) New rules enhance prompt withdrawals of client money rules

57 Physical receipt audit tests Document and assess the adequacy of the firm s internal controls to segregate client money from the firms money on receipt (including use of suitably trained and experienced staff, and a clear procedures manual). Confirm these procedures are adequate to identify and protect clients money Establish whether the firm adopts the normal approach or the alternative approach to paying in client money (N.B. Alternative approach outside todays webinar) Confirm that all client money is paid into a CBA no later than one business day after receipt. Ensure money is segregated into the correct sub-pool where relevant.

58 Physical receipt / payment audit tests Establish, review, test and conclude on the procedures the firm has for dealing with: mixed remittances; and automated transfers. Review lodgements to non-client money accounts and ensure these do not include client money. Ensure any client entitlements are paid into a client account or in accordance with the client s instruction. Where a firm is liable to pay money to a client ensure that it is paid, within one business day after it is due into a CBS or to the client. Where money was transferred to a third party confirm that retail clients have been notified and that the firm has agreements in place to ensure that the third party holds client money only for the purpose of transactions for a client and meets a clients obligation to provide collateral for a transaction. Confirm the firm has recorded such transactions in the CBA of the client

59 Physical receipt / payment audit tests Review contractual arrangements between the firm and its clients particularly when money due and payable to the firm is taken. Review any commission rebate arrangements to ensure that it was not treated as client money until the rebate became due and payable to the client per the contract between the parties. Conclude!

60 Client Money Reconciliations and Recordkeeping 7.15 Firms must carry out internals daily, externals regularly (per MiFID) FCA some firms fail to do this, wide variety in methodology and MiFID interpretation of regularly New rules Internals daily, externals no less than monthly. Firms to justify timing of externals. Guidance on how reconciliations should be done -AP Technical proposals to improve clarity and address inconsistencies (a number of provisions made into rules) AP s Non standard methodologies to be agreed in advance - AP More detailed record keeping requirements - overarching requirement firm can determine how much money it holds for each client - AP Notification concept of materiality introduced, breach and MUST notify FCA - AP

61 Client Money Reconciliations and Recordkeeping 7.15

62 Client Money Reconciliations Review the systems for carrying out internal reconciliations and ascertain whether the client uses a standard or an alternative method to perform its internal reconciliations. IMPORTANT: A firm wishing to adopt a non-standard approach needs, from 1 December 2014, an assurance report from the firm s auditor.

63 Regular internal and external reconciliations Confirm the firm conducted daily internal reconciliations between its internal accounts and records and those of any third parties by whom the client money is held. Examine and consider whether the frequency of external reconciliations performed by the firm is adequate and whether the firm considered the risks which the business is exposed, such as the nature, volume and complexity of the business and where and with whom the client money is held.

64 Reconciliations Obtain a bank certificate from each bank at which CBAs are held made to the reporting date. Check (on a sample basis to include this date) the reconciliations carried out by the firm in respect of: reconciling the total of the client bank account balances with the client s account balances; reconciling the clients bank account balances with the balances recorded on the bank statement; and tracing outstanding items to client s accounting records and bank statements.

65 Reconciliations Ensure that there is evidence of independent review of these reconciliations and that any differences on reconciliations are corrected as soon as possible. Verify that none of the bank accounts (per statement or cash book) have been overdrawn in the year and that no debit balance on an individual client balance is netted against other client balances when calculating the money that should be held on the client account. Review any internal or external compliance reports for evidence of material non compliance with the rules of CASS 7.6.1,7.6.2,7.6.9 and if having carried out a reconciliation it has not complied materially with CASS to CASS Where material non compliance arose, confirm the firm informed the FCA without delay.

66 Alternative Approach Money paid in and out of firm s own account rather than client accounts Relevant for multi currency and multi product companies FCA research in 2012 indicated some firms using approach inappropriately New rules - Clarify when alternative approach relevant - AP New rules - Notify FCA no less than 3 months before adopting - AP New rules - Risk justification to be made on why alternative approach necessary, adequate systems and controls, buffer requirement, AUDITOR REPORT to FCA BEFORE adoption -AP

67 POLICY STATEMENT - RULES Both those firms currently using the alternative approach and those wishing to use it for a business line in the future will be required to obtain a report from their auditor before operating the alternative approach to client money segregation. For those firms already using the alternative approach the reasons for this stem from the fact that the amended rules impose new requirements on these firms - AP RAR report following FRC guidelines - AP

68 SUMMARY CASS rules changed Auditors need to be fully ready for new reporting and programme obtain copy of PS and discuss changes with client IN ADVANCE of commencing audit

69 FRC Consultation Providing Assurance on Client Assets to the FCA

70 FRC CONSULTATION May 2015, closed July Standard applies to all reports commencing on or after 1 Jan Early adoption permitted. Work/Publications/Audit-and-Assurance- Team/Consultation-Providing-Assurance-on- Client-Assets.aspx

71 Scope of the FRC Standard RAR, LAR, Hybrid and CASS 5 audit reports

72 Requirements applicable to all Client Asset Engagements Obtain understanding of the firm s business model and the permissions it has received from the FCA Ethical requirements Engagement acceptance Engagement letter

73 Requirements applicable to all Client Asset Engagements Use SUP 3 Annexe 1R template. Appendices 2 to 8 give illustrative reports for variations Follow QC guidelines Professional scepticism, judgement and requisite mind-sets Documentation

74 Requirements applicable to all Client Asset Engagements Written representations Planning and performing the audit Duty to report to the FCA material significance Right to report

75 Requirements applicable to CASS RARs Focus on assurance engagement risk Do an overview of the process to form an opinion Assess risk Determine nature and extent of risk assessment procedures Respond to the risk assessment

76 Requirements applicable to CASS RARs Obtain evidence During period did they comply with CASS rules? At year end? Content of report defined including breaches schedule Engagement quality control review

77 Requirements applicable to CASS LARs Outlines circumstances para 146 et seq. Written representation Forming the LAR opinion Content of opinion

78 Hybrid opinions and special reports Guidance given in these areas

79 CASS 5 REPORTS Para 176 et seq.

80 OVERVIEW Appendix 1

81 Illustrative reports appendix 2

82 OTHER CASS RULE CHANGES Safe Custody assets CASS 6 Collateral and mandates CASS 3 & 8 TPA programme Sundry areas

83 FCA Update September 2015 Presented by: Ian Fletcher FCA