February 20, 2024 by Clare Curtis

Critical Third Parties (CTPs)

UK regulators are enhancing their stance on safeguarding the UK financial services sector against harm that could be potentially caused by CTPs.

In a recent consultation paper, the Financial Conduct Authority (“FCA”) have outlined their plans to designate certain 3rd parties as critical, such as cloud storage providers, IT outsourcing etc, and therefore ensuring that they are subject to regulatory oversights and standards.

These actions are mainly due to several high-profile incidents where 3rd party failings have directly impacted financial sector. A singular good example of this would be the data breach of First American Corp in 2019, where over 885million individuals had their names, phone numbers, emails exposed. The threat of damage to the financial system pertaining to these potential issues is seen as enormous and hence the FCAs consultation paper to tighten regulations around these third parties.

The proposed new framework would give regulators the capacity to step in and impose resilience standards upon CTPs, including but not exclusively, contingency planning, testing and risk management. Even with this scenario in place it still does not in turn vindicate the firms utilising CTPs or release them for their own accountability.

Financial Services Compensation Scheme (FSCS)

In co-operation with the Prudential Regulation Authority (“PRA”), the FCA are consulting on the Management Expenses Levy Limit (MELL), within the FSCS.

Setting a limit that the FSCS can impose upon financial services firms regarding the total management expenses is a necessary action required of the FCA/PRA. This levy is set for total management expenses the FSCS can impose on financial services firms for its operating costs of the compensation scheme service.

The paper is relevant to all FCA/PRA authorised firms who fund the FSCS through levies.

The proposed MELL for 2024/25 is £108.1m, a reduction of £1.7m from 2023/24.

FCA Market Watch: Flying and Printing

The FCAs publication of Market Watch #76 entailed observations and comments regarding ‘Flying and Printing’ was released on 30/01/2024

Flying is the activity of firms informing their clients, and/or any additional market participants, via any form of communication that it possesses bids or offers that have no underlying truth, i.e. not supported by, or derived from, a valid and genuine instruction to the firm’s trader/s.

Printing is much the same as above except for in this instance, the firm profess that they have in fact executed a trade where in truth this is not the case.

Both scenarios serve to mislead clients and markets alike, creating false impressions which in turn can cause other market participants to act in a way, via investment decisions etc, that they would not have done if they had no knowledge of the invalid and erroneous pricing or trading information.

This can all quite comfortably lead to harming those participants while also compromising the integrity of the UK markets. In addition, it could quite simply impair the confidence built up over many years in the UK Financial Sector.

This behaviour is in breach of various provisions of law under the UK Market Abuse Regulations, and therefore can lead to regulatory action against a firm and relevant individuals.

The regulator has addressed this situation previously, but it would there are many firms that did not take heed, especially in fixed income, commodities, and currencies in instruments such as bonds, swaps, and options.

It has also been noted by the FCA that certain boards of management (SMFs, directors and board members) have either not recognised the practice within the firm or have indeed ‘turned a blind eye’ or they have disregarded the importance of implementing surveillance of such activities and have also omitted to submit suspicious transactions and orders.

The regulator concluded they needed to re-iterate what actions firms must apply to eradicate this damaging behaviour. Firms must ensure compliance manuals highlight the prohibition of Flying and Printing.

This condemnation of the practice must also be included in staff training, as well as the management ensuring there is sufficient monitoring and surveillance procedures in place to identify this type of trading activities.

The FCA have stipulated that it ‘Will not hesitate to intervene’ if and when they suspect any behaviour that could be detrimental to the integrity, fairness, and confidence of the UK markets.

FCA Regulatory Updates

The FCA has published a number of announcements regarding proposed regulatory changes spanning various sectors.

The regulator indicates that these amendments are aimed to target enhancements of market integrity, consumer protection, industry resilience and financial stability within the financial sector.

Included in the amendments is Updating the Regime for Money Market Funds (MMFs).

The FCAs proposals for MMFs look to address and eradicate vulnerabilities they discovered during recent market stress situations, by enhancing resilience within the sector.

The regulator also wishes firms to partake in implementing practices to underpin continued growth in the UK MMF sector.

As well as the above, the FCA also commented on improving the Commodity Derivatives Regulatory Framework, proposing reforms to help shore up oversight and resilience in UK Commodity Markets.

Another point the FCA aired was concerns over firms’ retention of interest earned on customers cash balances. Any interest gained must appear on the customer’s cash balance. The regulator has informed firms that they must review these practices and make any necessary alterations to their framework in order to eradicate activity and fall into line with what is expected by the Consumer Duty.

Consumer Technology

In a recent speech delivered by the FCAs CEO, Nikil Rathi, at the Imperial College London Business School, he focused on how the exponential growth of technology interacts with the financial markets on an increasing basis, and how the regulator needs to adapt its existing regulatory tools in order to protect customers but at the same time embracing innovation.

He very much underlined how technology, when utilised correctly, is and can continue to be a benefit to the financial sector and the customers within it.  Mr Rathi noted one of several things to beware of is the security of data, be it of firms or individual customers alike.

Regarding competition within the financial sector Mr. Rathi said that while the FCA still welcome competition and innovation flourishing, they do not want to see market entry barriers being created by monopolistic suppliers of the latest ‘must have’ technology.

The full speech can be found on the FCA website.