MONTHLY REGULATORY UPDATE

MONTHLY REGULATORY UPDATE

October 2016

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Monthly regulatory update | 1

The following is a summary of the pronouncements issued since our last regulatory update for the financial services sector issued on 30 September 2016. This update will be provided on a monthly basis, normally on the last Friday of the month and for ease of transition we have retained our former layout however this may change going forward.

Financial Conduct Authority (FCA)

Discussion paper

DP16/4

Overall responsibility and the legal function

Overview:

The purpose of this discussion paper is to clarify how and why the legal function is currently captured under the

Senior Manager Regime (SMR), and to consider whether the legal function should continue to be part of the SMR

going forwards.

Applicable to:

UK banks, building societies, credit unions and PRA‑designated investment firms (collectively referred to in this

paper as relevant firms).

Next steps:

Questions on chapter four of the discussion paper welcomed until 9 January 2017.

News

Complaints data: January to June 2016: latest data published regarding complaints received by banks insurers, lenders and other firms. Overall the level of complaints had decreased by 2.6 per cent.

Speech

Chris Woolard, Director of Strategy and Competition at the FCA. The role of consumer decision-making in ensuring good market dynamics in the mortgage sector.

A review earlier in the year found no evidence of poor practices in relation to responsible lending.

Since the Mortgage Market Review (MMR) launch in 2009, world of regulation has changed in three important ways; first, the macroeconomic environment, second the FCA has taken a more sophisticated approach to understanding consumers, and third, (unlike the FSA) the FCA has a competition mandate.

o FCA developing a deeper understanding of ageing population and the part that property plays in retirement wealth, plus the decline in home ownership in younger generations.

o Consumer capability in general has increased. o Competition research revealed that consumers are less likely to shop around when purchasing a

home, as their motivation is the property and not the mortgage finance required to purchase the property, the question the FCA wants to answer is are there tools available to help consumers make decisions that effectively meet their needs.

WEEK ENDED 7 OCTOBER 2016

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o Mortgage intermediary business has risen to 67 per cent from around 50 per cent since MMR and the FCA are exploring why and what differences in outcomes between those consumers who obtain their mortgage through a broker versus those who go direct to the lender.

o A review of the commercial relationships within the mortgage buying process including brokers, lenders , panels, price comparison websites and even estate agents and builders, with a view to understanding the competition dynamics and subsequent outcomes.

Building Societies Association (BSA)

Policy Briefs

Common Reporting Standards: HMRC issues guidance for client notification regulations, which came into force 30 September 2016. The regulations affect financial institutions that offer accounts outside the UK, or refer their own account holders who wish to open an overseas financial account, to another institution.

Information Commissioner’s Office (ICO)

Transparency, innovation and building a culture of data confidence and trust. o Organisations need to do more to explain to consumers what they are doing with their information and

why it is important to remember that reputation can be easily lost when people discover you haven’t been completely honest about how you are using their information.

o A clear and effective privacy notice is one way to do it. That doesn’t necessarily mean a single document to inform individuals about what the organisation does with personal data.

o It is not enough to put a privacy notice on your website and forget all about it. The privacy information organisations provide needs to be regularly reviewed and updated to reflect any changes.

Payment Systems Regulator

Payment Systems Regulator (PSR) receives super-complaint from Which? PSR has received a super-complaint from Which? relating to concerns it has around consumer safeguards in the market for push payments. Which? is concerned that when consumers are tricked into transferring money to a fraudster via a push payment (such as when the consumer instructs their bank to send money) there is not an appropriate level of protection compared to other types of payment.

HMRC

Personal Savings Allowance: update to give additional guidance in relation to certain savings income that does not contribute towards individual personal savings allowance. These include Interest from Individual Savings Accounts (ISAs) and interest from National Savings and Investments (NS&I).

Sources1

1 Nothing new issued by Prudential Regulation Authority, Financial Ombudsman, Council of Mortgage Lenders, Association of Financial Mutuals,

National Crime Agency or Joint Money Laundering Steering Group.

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Feedback Statement:

FS16/10 Smarter consumer communications

Overview:

This feedback statement reports on themes arising from the responses to the discussion paper on Smarter Consumer Communications. The following issues are examined:

presentation of terms and conditions (T&Cs);

complexity of information provided to consumers at retirement;

common terminology in the general insurance sector;

cover offered by the Financial Services Compensation Scheme (FSCS) for specific products or services;

raising consumer awareness of the Financial Ombudsman Service;

transparency around the scope and cost of an investment advice service;

cost transparency, and

communication in asset management. Next steps form the FCA:

Host a Smarter Consumer Communications event to further engage with stakeholders on key issues, including Terms and Conditions.

Consider the issues raised around our Social Media Guidance through consumer testing to seek to identify innovative approaches that may address concerns especially around risk warnings.

Consult on good disclosure guides, including digital disclosure.

Consult to change disclosure rules, or accompanying guidance where they have been identified as barriers to Smarter Communications or Innovations.

Consider the use and definition of durable medium in the Handbook and consult on possible updates.

Investigate instances where firms provide unhelpful disclosure or risk warnings to consumers that reduce the overall effectiveness of communication. We will reduce or remove unhelpful and unnecessary provisions of information when possible.

Respond to the issues raised in the financial advice market through FAMR. We will work with the APFA, the Personal Finance Society and the Financial Ombudsman Service to help the industry develop guidelines for preparation of suitability reports to make them more accessible for consumers and reduce the time firms spend preparing them.

Applicable to:

All FCA regulated firms.


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Policy Statement:

PS16/23

Removing ineffective disclosure requirements in the Handbook

Overview:

In October 2015, as part of the Smarter Consumer Communications initiative, the FCA consulted on proposals to

remove ineffective disclosure requirements from our Handbook. This formed part of our commitment to create a

sustainable regulatory framework and drive improvements in the effectiveness of consumer communications.

The proposals affected the following disclosures:

the Consumer-Friendly Principles and Practices of Financial Management (CFPPFM) (pre-sale document);

short report (post-sale document);

the Initial Disclosure (IDD)/Combined Initial Disclosure Document (CIDD); and

combined Initial Disclosure Document (CIDD)/ Services and Costs Document (SCDD).

The IDD, CIDD and SCDD for insurance, home finance and investment firms

The significant majority of respondents to the consultation supported the proposal to remove the IDD, CIDD and

SCDD templates from our Handbook. A number of respondents welcomed the scope this gave them to design their

communications around the needs of their customers. In light of this feedback, the FCA has decided to proceed with

this proposal.

Applicable to:

The changes to the IDD and CIDD will be of interest to home finance and investment firms as well as general

insurance firms. Deleting the template for the SCDD will be of interest to all firms that offer advice to retail clients or

arrange transactions for them in relation to packaged products.

Next steps:

The changes to the Handbook set out in this Policy Statement will take effect from 1 February 2017.

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Final Notice

Notice served

upon:

Sanction:

Reason:

Sonali Bank

(UK)

The Financial Conduct

Authority (FCA) has fined

Sonali Bank (UK) Limited

(SBUK) £3,250,600 and has

imposed a restriction,

preventing it from accepting

deposits from new customers

for 168 days. It has also fined

the bank’s former money

laundering reporting officer

(MLRO) £17,900 and

prohibited him from

performing the MLRO or

compliance oversight

functions at regulated firms.

The FCA found serious and systemic weaknesses affected

almost all levels of its AML control and governance structure,

including its senior management team, its money laundering

reporting function, the oversight of its branches and its AML

policies and procedures. This meant that the firm failed to

comply with its operational obligations in respect of customer

due diligence, the identification and treatment of politically

exposed persons, transaction and customer monitoring and

making suspicious activity reports.

The firm’s MLRO was responsible for overseeing the day-to-day

operation of, and ensuring the effectiveness of, SBUK’s AML

systems and controls. Despite repeated warnings from SBUK’s

internal auditors, the MLRO:

failed to put in place appropriate AML monitoring arrangements;

failed to identify serious weaknesses in operational controls and a lack of appropriate knowledge among staff members;

reassured SBUK’s board and senior management that controls were working well when they were not;

failed to report appropriately SBUK’s internal auditors’ concerns and the results of internal testing; and

failed to impress upon senior management the need for more resources in the MLRO function and failed to take adequate steps to recruit more staff in a timely fashion.

Speech:

Getting Regulation Right: delivered by Christopher Woolard, Director of Strategy and Competition at the FCA, delivered at the LendIt Conference 2016. The highlights included that crowdfunding markets are continuing to develop rapidly. The authorisation process acts as a gateway to protect consumers. It is expected that the FCA will complete the major authorisations work in this sector soon. The FCA is currently considering responses to our call-for-input on the post implementation review of crowdfunding rules. We expect to publish a feedback statement by the end of the year.

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Prudential Regulation Authority (PRA)

Occasional Consultation Paper

CP36/16

Occasional Consultation Paper

Overview:

This Occasional Consultation Paper (OCP) sets out proposed changes to the following parts of the Prudential

Regulation Authority (PRA) Rulebook, existing and new supervisory statements (SS):

• Regulatory Reporting Part and draft SS Supervising international banks: the Prudential Regulation Authority’s approach to branch supervision – liquidity reporting;

• Own Funds, Group Supervision, and Insurance Company – Capital Resources Parts;

• SS13/13 ‘Market Risk’;

• Ring-fenced Bodies and Notifications Parts, and the Rulebook Glossary;

• Credit Unions Part and SS2/16 ‘The prudential regulation of credit unions’; and

• External Audit Part.

This OCP also consults on an administration instrument.

The policy contained in this OCP has been designed in the context of the current UK and EU regulatory framework.

The PRA will keep the policy under review to assess whether any changes would be required due to changes in the

UK regulatory framework, including changes arising once any new arrangements with the European Union take

effect.

Applicable to:

All PRA regulated firms.

Next steps:

The consultation will close on:

• Tuesday 25 October 2016 for the administration instrument (Appendix 12);

• Monday 12 December 2016 for Chapter five; and

• Wednesday 11 January 2017 for Chapters two, three, four, six and seven.


Policy Briefs

Improving services to attorneys and deputies: The Office of the Public Guardian (OPG) has launched an e-learning package covers the basics of supporting attorneys and deputies who have authority to manage another person's account to assist with employee training on services to attorneys and deputies. The OPG’s e-learning package is now available for building societies and banks to downloaded and incorporate into their employee training on third party mandates.

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Strengthening Accountability in Banking: BSA practical resource: The BSA has published the third in its series of guides on the new conduct rules; the latest intended for trainers in relation to the conduct rules as they will apply to junior staff. Timing - the conduct rules will apply to relevant 'junior' staff from 7 March 2017.

HMRC

Treasury Committee’s review of the reports into the failure of HBOS: government response (Policy Paper): the government has set out its response to the Treasury Committee’s report. The regulators are responding separately. Since the HBOS review was initiated, a new framework for investigations and inquiries into possible serious regulatory failure has been created. This includes a requirement for the regulators to investigate a serious regulatory failure and send a report to the Treasury, who will then lay the report before Parliament.

Sources2

2 Nothing new issued by Financial Ombudsman Service, Information Commissioners Office, Council of Mortgage Lenders, Payment Systems

Regulator, Association of Financial Mutuals, National Crime Agency or Joint Money Laundering Steering Group

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Guidance consultation:

GC16/6

The fair treatment of mortgage customers in payment shortfall: impact of automatic

capitalisations

Overview:

The FCA has found that some mortgage firms (lenders and administrators) have automatically included customers’

payment shortfall balances within their contractual monthly instalments (CMI) which are recalculated from time to

time, for example when an interest rate changes.

The FCA considers this practice to be automatic capitalisation of payment shortfalls and a likely breach of MCOB

rules. Effectively, because firms have not extinguished (reduced to zero) the payment shortfall, they are collecting

the payment shortfall over the remaining term through a higher monthly payment and also continuing to pursue

these balances through their collection processes, treating them as immediately payable.

The FCA has developed the remediation framework with input from an industry working group. Use of the

framework is not mandatory, but it expects firms to determine a remediation approach to achieve fair outcomes for

affected customers. The priority is to ensure a proportionate, practical and fair remediation approach, delivered in a

timely manner.

Applicable to:

This guidance consultation is primarily aimed at residential mortgage lenders and administrators of regulated

mortgage contracts.

Next Steps:

Responses required by 18 January 2017.


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Thematic Review:

TR16/8

Packaged Bank Accounts

Overview:

The findings of the thematic review suggest that the new rules around packaged bank accounts have raised standards in the market, but that firms have more work to do on sales and complaints handling.

The review found that eligibility checks for travel insurance had improved, but firms had more work to do to check and record eligibility for other insurances, such as gadget insurance and motor breakdown cover.

The review also assessed how firms were dealing with complaints initiated in late 2014 about packaged accounts,

when complaints volumes were rising. The review suggested that too many customers who complained about being

mis-sold packaged bank accounts during this period did not get the right outcome; a finding supported by the

number of complaints the Financial Ombudsman Service (the Ombudsman) upheld in that period.

Applicable to:

All regulated firms that provide, have provided or are considering providing packaged bank accounts.

Speech:

Peter Andrews, Chief Economist, FCA, Culture in Banking – regulatory priorities, looking at how regulators might improve conduct in banking.

o The FCA believes that poor culture played a significant part in the financial crisis and that it is a root cause of many failings at firms. Thus culture is both a major driver and potential mitigant of risk. The FCA’s ambition is that firms’ senior management lead and foster a culture that has the fair treatment of customers and market integrity at its core.

o The main aim of the FCA’s major initiative, the Senior Managers and Certification Regime or ‘SMCR’, is to drive cultural change. It does this by making senior managers accountable and by applying baseline standards to all financial services staff.

o A firm with a good culture is likely to allocate capital well; that is, on the merits of the business cases. A firm with a good culture is likely to monitor the use of the capital it has allocated, so as to check that its clients get the stewardship and, subject to shocks, the outcomes they expect. A firm with a good culture is likely to innovate to the advantage of its clients and to lower transaction costs. All of which tends to lead to growth.

o It is of critical importance that the FCA’s overall objective is to make markets work well. It is also important that the FCA has an operating objective to promote competition, and a competition duty which requires it, other things being equal, to reach first for competition tools when it needs to act. Together, these obligations can drive a programme of regulation that will enable markets to allocate capital better and generally work efficiently, providing appropriate access to demand and supply sides.

o The FCA’s own upcoming occasional paper in this area is called ‘Behaviour and Compliance in Organisations’. This focuses on what the regulators can learn about improving compliance by combining insights from behavioural economics, sociology and psychology with more traditional economic thinking on credible deterrence. It also considers what firms themselves can learn from these sources about encouraging compliance. We take it for granted, of course, that this activity by firms is in the context of business models that sustainably provide an acceptable rate of return to the providers of capital.

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News:

FCA to consult on mortgage payment shortfall remediation guidance: The Financial Conduct Authority (FCA) has today announced that it will consult on new guidance on the treatment of customers with mortgage payment shortfalls (commonly referred to as arrears). This guidance covers remediation for mortgage customers who may have been affected by the way firms calculate these customers’ monthly mortgage payments.

Regulatory round up October 2016:

o Topics covered include:

treatment of customers with mortgage payment shortfalls;

new measures to maintain firms’ focus on culture;

Senior Managers & Certification Regime publications - Conduct Rule Breaches - Data Submission Update;

statement: super-complaint from Which?;

penalties against Sonali Bank; and

speech: A more effective approach to combatting financial crime.


Criminal Finances Bill 2016: the Government published the Criminal Finances Bill on 13 October 2016. The new Bill is intended to assist in tackling corruption, money laundering and tax evasion and forms part of a wider package of measures alongside Government’s response to the AML Action Plan: Consultation for legislative proposals. The Government’s intention is that police will recoup more criminal assets by reforming the law on proceeds of crime, including provisions to strengthen enforcement powers and protect the public. It will also implement a more effective regime to support reporting of suspicious financial activity, make it easier to compel individuals to disclose evidence and improve coordination between the public and private sectors to tackle criminal financial behaviour.

FOS Consultation on Complaints Data publication: FOS has been asked to consider publishing more

complaints data more frequently but proposes to continue publishing complaints data as they do now:

Annually - sector level complaints data in their Annual Review; six monthly – complaints data on individual

firms who have had at least 30 new cases and 30 resolved cases in the last six months; Quarterly –

complaints data by product type. FOS now proposes to publish sector level data every six months alongside

the publication of complaints data on individual firms.

Private rental sector and buy-to- let: The Department for Communities and Local Government (DCLG)

consultation launched today on expanding scope of HMO licensing as part of the Government's commitment

to raise standards in HMOs. Key changes include the removal of three storey rule so that all HMOs are in

scope, extend mandatory licensing to flats above and below business premises and set a minimum room size

of 6.52sq-m.

Mortgage Debt Consolidation: update including slides and summary of FCA workshop on mortgage debt

consolidation. The FCA explained that the original June Regulatory Update had prompted by a review of debt

consolidation policies, procedures and customer files at nine networks and six directly authorised firms. It also

reviewed adjudications made by the Financial Ombudsman Service. Of the files reviewed none contained

evidence that the adviser had considered:

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• the costs associated with increasing the period over which a debt is to be repaid;

• clear reasons why the product was appropriate for the customer's needs and circumstances; and

• some files instead contained disclaimers and declarations suggesting an intention to limit the firm's

responsibility for the recommendation.

Payment Systems Regulator (PSR)

• The Payment Systems Regulator (PSR) has today announced the membership of a Payment System Operator (PSO) Delivery Group. The group has been established by the PSR and the Bank of England (the Bank) to consider key issues relating to the potential consolidation of the governance of three payment system operators, Bacs, Cheque and Credit Clearing Company (C&CCC) and the Faster Payments Service (FPS).

HMRC

Help to Save: response to consultation on implementation: the response to the consultation on Help to Save summarises the comments received and sets out the government’s decisions on how to proceed with implementation and detailed policy design of the scheme.

Sources3

3 Nothing new issued by Prudential Regulation Authority, Council of Mortgage Lenders (CML), Information Commissioners Office (ICO), Association

of Financial Mutuals, Financial Ombudsman Service, National Crime Agency or Joint Money Laundering Steering Group.

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Guidance Consultation

GC16/7

Revised proposed guidance on guarantor loans

Overview:

In February 2016 the FCA published a guidance consultation (GC16/2) which sets out how it will interpret provisions

of the Consumer Credit Act 1974 (CCA) regarding the enforcement of security in the context of guarantor loans and

whether this requires a default notice under the CCA. They are now publishing a further guidance consultation in the

light of responses to GC16/2.

Applicable to:

This guidance is relevant to firms which offer guarantor loans. Whilst this guidance will not be binding on firms, we

will take it into account in deciding whether a firm has followed the law and whether any supervisory or enforcement

action is warranted.

Next steps:

Comments required by 25 November 2016.

News:

FCA announces ‘The Mission’. The Mission is a flagship programme of work driven by the Chief Executive, Andrew

Bailey. It explains the choices required and how the final mission is critical to the FCA’s continued success and to

financial services as a whole. The FCA wants to provide guidelines to explain how they interpret their objectives and

choose our Business Plan priorities. The Mission will set out a framework to help the FCA prioritise their work,

ensuring they focus their resources in the right places. The future Mission document explains the approach and asks

the key questions that the FCA needs to answer as a conduct regulator. These include questions relating to consumer

responsibility and vulnerability, their role in encouraging change and innovation in the industries they regulate, how

they identify harm and then decide what action to take to address it, and the interaction between regulation and public

policy. It also focuses on the tools the FCA uses to deliver its competition policy, firm supervision and enforcement

work.


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Prudential Regulation Authority

Policy Statement

PS29/16

MiFID II: Response to CP9/16

Overview:

This Prudential Regulation Authority (PRA) policy statement (PS) provides feedback to responses to Consultation

Paper (CP) 9/16 ‘Implementation of MiFID II: Part 1’.

It sets out final rules to transpose the Markets in Financial Instruments Directive (MiFID II) legislative package for:

• the extension of scope and harmonisation of the MiFID passporting regime in the Passporting Part of the PRA Rulebook; and

• systems and controls for firms who undertake algorithmic trading and provide direct electronic access to trade venues in the new Algorithmic Trading Part of the PRA Rulebook.

Applicable to:

This PS is relevant to banks, building societies, PRA-designated investment firms and their qualifying parent

undertakings, which for this purpose comprise financial holding companies and mixed financial holding companies,

as well as credit institutions, investment firms and financial institutions that are subsidiaries of these firms.

Next Steps:

None, the policy contained in this PS has been designed in the context of the current UK and EU regulatory

framework. The PRA will keep the policy under review to assess whether any changes would be required due to

changes in the UK regulatory framework, including those arising once any new arrangements with the European

Union (EU) take effect.


Strengthening Accountability in Banking: BSA practical resource: the BSA has published a supplement to its guide on directors' duties, taking into account the latest regulatory proposals concerning the new duty of responsibility (and 'reasonable steps') and the application of the conduct rules to 'standard'/'notified' NEDs.

Flexible ISA’s: October 2016's ISA bulletin lists new codes for reporting flexible and non-flexible ISAs. They are as previously advised. The bulletin also has a reminder about Additional Permitted Subscriptions (APS) reporting.

Pillar 1 Credit Risk: Sam Woods, CE of the PRA and deputy governor of the BoE, has given a broad indication of the direction in which Basel might be travelling. He signalled a significant lowering of the standardised risk weight for low LTV mortgages. Woods expressed concern at the resultant unlevel playing field which led to the economic incentive for standardised firms to concentrate on higher LTV lending. The PRA is also to bring forward proposals under Pillar 2 which should also reduce the risk that the PRA's capital standards are overly prudent for smaller firms using the standardised approach to credit risk to calculate their requirements – essentially by looking at capital requirements in the round rather than assuming that a simple sum of the parts

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approach will deliver the right answer. He also reiterated the PRA commitment to easing the transition process to IRB.

Making Tax Digital: HMRC has published six consultation papers on its plans to change how tax is collected. They will have a significant impact on building societies and their customers. While all six are of interest, the paper, Making Tax Digital: Transforming the tax system through the better use of information, which concentrates on third party information provision, should be read as a matter of priority. HMRC wants to implement changes from 2018 onwards as part of its plans to abolish tax returns by 2020.

Information Commissioner’s Office (ICO)

How the ICO will be supporting the implementation of the GDPR: the ICO is committed to assisting businesses and public bodies to prepare to meet the requirements of the GDPR ahead of May 2018 and beyond. Within the next month, the ICO will publish a revised timeline setting out what areas of guidance they will be prioritising over the next six months. Everything will be published on the ICO website, and they will flag updates on twitter and through our e-newsletter. Firms should start by reading start by the overview to GDPR, which sets out the key themes of the regulation to help organisations understand the similarities with the existing UK Data Protection Act, and some of the new requirements.

HMRC

Draft legislation: Lifetime ISA: this draft legislation amending the Individual Savings Account (ISA) Regulations to establish Lifetime ISA, includes rules in relation to the government bonus payable on Lifetime ISA savings and withdrawals from accounts.

Annual Return spreadsheet template for ISA Managers: annual return spreadsheet template for ISA managers has been updated.

Sources4

4 Nothing new issued by, Council of Mortgage Lenders, HMRC, Payment Systems Regulator, Association of Financial Mutuals, Financial

Ombudsman Service, or Joint Money Laundering Steering Group.

https://ico.org.uk/for-organisations/data-protection-reform/overview-of-the-gdpr/

rsmuk.com

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communication may not be comprehensive and recipients should not act upon it without seeking professional advice.

© 2016 RSM UK Group LLP, all rights reserved

This Regulatory Update includes pronouncements up to 10.30 am on 28

October 2016. Any relevant pronouncements issued after this time will be

included in our next regulatory update. This list is not exhaustive and should

not be seen as a substitute for reviewing all such documentation. For further

information, please contact:

Jonathan Pepper

RSM

[email protected]

This communication is intended to provide general guidance on matters of interest and you should not act or refrain from acting upon any information contained on it without seeking appropriate professional advice on the particular facts and circumstances at issue.

FOR FURTHER INFORMATION CONTACT

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