EFFECTA CONCISE MONTHLY BULLETIN, August 2024

September 13, 2024 by Clare Curtis

Equities Consolidated Tape

The Financial Conduct Authority (FCA) are working on establishing an Equities Consolidated Tape (ECT) and an equivalent for Bonds.  The purpose behind this initiative is to provide a comprehensive portrayal of transactions executed both on trading platforms and over the counter (OTC), in specific asset classes, and to strengthen UK markets by increasing transparency, which the FCA anticipates will generate more liquidity.

However, consultation conducted by the regulator showed that there were several differing views from interested parties on whether pre-trade data (information regarding bids and offers), should be included, and if so, how much. The FCA have taken steps to appoint an independent company to conduct analysis of the possible impact of the inclusion of pre-trade data, being either beneficial or detrimental, upon the stability and resilience of UK Equity Markets and how differing types of users may be affected.

It is anticipated that the independent consultant, Europe Economics, will be contacting a broad range of market participants with the desire to conduct interviews with them and analyse their comments and/or suggestions. The results of the analysis will assist the FCA in making a final decision in relation to ECT.

The regulator expects to deliver a further update before the end of 2024.

 

Whistleblowing: FCA Fines Price Waterhouse Coopers

The FCA have imposed a £15m fine upon PricewaterhouseCoopers LLP (PWC), for failure to report to the regulator regarding concerns that their client, London Capital and Finance PLC (LCF), was involved in fraudulent activities. This is the first time the FCA has fined an audit firm.

In 2016 PWC noted that the audit they conducted on LCF was overly complex and took a considerably longer time than was normal for this type and size of audit. The reason given for this was that LCF allegedly supplied PWC with ‘inaccurate and misleading information’.

This led PWC to suspect that LCF may be involved in fraudulent activities, however no such concern was raised with the FCA at the time. Even after they had eventually completed what they believed to be a satisfactory audit, they did not disclose their initial concerns to the regulator.  In addition, it was noted that the auditors encountered aggressive behavior when conducting the audit from one of the senior managers at LCF, all of which should have raised “red flags” which PWC should have acted on immediately, according to FCA.  In not doing so PWC potentially deprived FCA of vital information

In 2019 LCF went into administration after the FCA ordered the firm to withdraw misleading promotional material for the sale of mini-bonds. Thousands of investors were misled because they were not given the full picture about the risks of the product and the Serious Fraud Office opened a criminal investigation into these potentially fraudulent failures.

This action lead the FCA to review the audit undertaken by PWC in 2016 where, according to the FCAs Enforcement and Market Oversight executive director, PWC had failed to take appropriate action in relation to their suspicions and therefore failed to report its findings and concerns to the FCA.  This failure has lead the FCA to impose this significant fine and also raise the importance of the role of the auditor in identifying potential fraud and their obligations in relation to this.

 

New EU Anti-Money Laundering Regime

Although not affecting UK investment firms directly, new EU Anti-Money Laundering (AML) regulations will have a secondary impact upon firms with, or planning to have, EU operations. Going forward UK firms with EU operations will need to comply with both the UK AML requirements as well as these new regulatory obligations.

Of course, this can be onerous and complex, but firms must be aware of the importance of rigid compliance within both of these regulatory regimes.

The EU is putting in place a new regulatory structure for Anti-Money Laundering and Counter the Financing of Terrorism using the acronym AMLA, which will be in place in the summer of 2025 (specific date to be confirmed). Firms are also expected to keep themselves updated with any new guidance issued by AMLA including the regulatory technical standards due to be published in 2026.

There have been a number of new and strengthened regulatory requirements within the AML regulation, some of which are deserved of particular attention, these being:

  1. Customer Due Diligence and Enhanced Due Diligence are both equally fortified by specifying additional information for individuals and financial entities, as well as a widening of the definition for Politically Exposed Persons (PEPs)
  2. New regulation has cast the net wider to include more Obliged Entities, probably the most noteworthy one being Crypto-Asset service providers.
  3. It is requisite that all staff involved in the AML compliance process within firms must possess not just the necessary skills, knowledge, and experience to execute their roles, but must also be of good reputation. Furthermore, it is a necessity for firms to have a whistleblowing service in place that protects employees and senior management alike who report any suspicions of breaches of regulations.
  4. Prohibition of anonymous products including, crypto-asset wallets and prepaid cards issued in third party countries.
  5. There are new limitations on outsourcing of AML obligations.

In conclusion, it is imperative that firms functioning in both the UK and EU keep up to date on both regulation regimes, amending and updating their internal framework procedures accordingly. Furthermore, firms must ensure that staff members involved are fully aware of any changes.