EFFECTA CONCISE MONTHLY BULLETIN, July 2024

August 19, 2024 by Clare Curtis

Financial Conduct Authority Endeavours to Reduce Burdens on Firms

In a streamlining plan, the Financial Conduct Authority (“FCA”), is seeking input from firms operating in the Financial Services Sector to identify avenues where possible burdensome and laborious rules and regulations can cause considerable time and money expenditure for firms.

Post the introduction of the Consumer Duty (“The Duty”), where businesses are required to deliver good outcomes for customers, the regulator aims to identify and simplify, or even remove, rules which overlap with The Duty. This should ease time and financial pressures on firms, which in turn may lower costs, stimulate innovation, and assist in supporting risk appetite to bolster growth. The FCA’s objective is to amplify International Competitiveness and enhance the UK economy in the medium to long term.

Included in the invitation of views, are Insurance firms to ascertain as to whether changing customer categories could lead to a significant reduction in time, labour and cost required to onboard new customers, or even extend contracts, and to allow tailor products to suit individual clients.

Financial Regulation under the Labour Government

While there was an expected shortage of news, regulatory updates, and changes from the FCA leading up to the UK Parliamentary elections, there still appears to be a dearth information during the new Labour government’s settling in period, but what might we expect going forward?

It is likely that the immediate effects are thought to be negligible at most, but as the Labour Party settles into office, we may see a few directional switches.

Along with the recent civil unrest in the UK, which has become a focus point of great proportions for the Government, the new Chancellor, Rachel Reeves, was allegedly shocked by the black hole in the country’s finances bestowed upon her by the previous administration. This will clearly have a negative impact on what she and the Labour Party were targeting prior to winning the election.

These unexpected dilemmas will most likely lead to a delay on much focus from Financial Regulation and the FCA, however there are a couple of items that could be addressed short-term:

  1. Streamlining: While the regulatory framework is likely to proceed as it was with the Labour Party underlining the need for continuity, one particular element may well be addressed, this being the potential streamlining of the FCA rulebook, which the FCA are consulting on and seeking to introduce in the near term.
  2. Regulatory Authority Empowerment: Where the previous chancellor, Jeremy Hunt, was openly opposed to the FCA being ‘further empowered,’ albeit in Consumer interest, it would seem Labour’s intentions will be quite the opposite. This further empowerment for the Regulator would see them acquiring greater enforcement powers, which could trigger real and present obstacles and impairments for firms falling foul of rules and regulations, and it would appear Ms. Reeves is very much willing to allow this consultation and introduction to continue.

Overseas Funds Regime

The FCA have published their concluding rules and guidance regarding the Overseas Funds Regime (OFR).

These new rules are expected to promote constructive competition that will be beneficial to consumers, by handing investors in the United Kingdom the opportunity to invest in a much wider range of investment funds.

Having announced earlier in 2024 that the FCA now finds EEA countries, plus Iceland, Liechtenstein, and Norway equivalent under the OFR, the regime will allow overseas schemes, such as EEA UCITS, a smooth and efficient route to the FCA for recognition, in turn permitting schemes to be marketed to UK retail investors with relative ease[1].

This gateway will apply to new schemes in September and for funds currently in the temporary marketing permissions regime (TMPR), in October.

Primarily interested parties will include:

  • Fund and Asset management trade associations
  • EEA UCITS and the management companies of like funds that presently market to UK investors
  • Distributors of the above
  • Investment Advisers
  • Firms that provide facilities to UK investors in EEA UCITS and firms approving financial promotions of such
  • Professional services firms providing legal and support services to operators of EEA UCITS
  • EEA and EU national competent bodies

Treatment Of Politically Exposed Persons (PEPs)

The FCA reviewed and has now published their findings about the efficacy of the treatment firms subject PEPs to in terms of anti-money laundering purposes.

The regulators’ guidance declares that firms should apply a proportionate, risk-based approach to PEPs when considering risks concerning money laundering with them.

The FCA discovered, that in general, many firms did implement the guidance, however, there were a handful of discrepancies that the regulator wants to see corrected, these include:

  • Staff training. This has been a regular issue the FCA have noted in many different areas within their rules and regulation. Even though it was stipulated within the Consumer Duty, staff training needed to be thorough and with the outcome that all staff should display a level of competency that will alleviate any fears of poor work.
  • In some cases, definitions being utilised for PEPs and their Relatives and Close Associates, (“RCAs”), were wider than those in the regulation and the regulator’s guidance.
  • Clarity and detail of communication with PEP and RCA clients were vague and need improvement.
  • Some firms were required to update their policies to consider recent legislative changes, which state that local PEPs and RCAs may be treated as having lesser risk than that of a foreign PEP, unless of course they possess other risk factors.
  • Consideration of a customer’s actual risk assessment and appropriate risk rating were lacking.
  • Several firms did not have proper systems and controls regarding on-going due diligence by having arrangements to check whether a PEP designation upon a customer was still appropriate post the individual leaving public office.

After publishing its observations, the FCA expects all firms to investigate and ensure that their Financial Crimes policies, procedures, and controls regarding PEPs and RCAs are in check with their Guidance. If your firm requires any support in meeting these requirements or would benefit from face to face training on AML in general please do reach out to Effecta Compliance, we are already assisting several firms with their AML and onboarding requirements and are well resourced to support firms in this regard.

[1] Note, this does not include money-market funds.