FCA Compliance News - April 2019
Here are the top news stories from financial services compliance over the past month, selected to highlight FCA action, the people dimension of compliance, and the things you can do in your organisation to avoid the missteps of others.
- FCA fines Standard Chartered Bank £102.2 million for poor AML controls
- FCA highlights areas of potential customer harm In General Insurance market
- FCA permanently bans the sale of Binary Options to Retail Consumers
- HM Treasury directs FCA to undertake review of events at London Capital and Finance
- FCA acts to help free Mortgage Prisoners
FCA fines Standard Chartered Bank £102.2 million for poor AML controls
The Financial Conduct Authority (FCA) has fined Standard Chartered Bank (Standard Chartered) £102,163,200 for Anti-Money Laundering (AML) breaches. This is the second largest financial penalty for AML controls failings ever imposed by the FCA.
The FCA found serious and sustained shortcomings in Standard Chartered’s AML controls relating to customer due diligence and ongoing monitoring. Standard Chartered failed to establish and maintain risk-sensitive policies and procedures, and failed to ensure its United Arab Emirates (UAE) branches applied UK equivalent AML and counter-terrorist financing controls.
The failings identified exposed Standard Chartered to the risk of breaching sanctions and increased the risk of Standard Chartered receiving and/or laundering the proceeds of crime. Examples of Standard Chartered AML failings, which are detailed in the FCA Decision Notice, include:
- opening an account with 3 million UAE Dirham in cash in a suitcase (just over £500,000) with little evidence that the origin of the funds had been investigated;
- failing to collect sufficient information on a customer exporting a commercial product which could, potentially, have a military application. This product was exported to over 75 countries, including two jurisdictions where armed conflict was taking place or was likely to be taking place; and
- not reviewing due diligence on a customer despite repeated red flags such as a blocked transaction from another bank indicating a link to a sanctioned entity.
The FCA also found significant shortcomings in Standard Chartered’s internal assessments of the adequacy of its AML controls, its approach towards identifying and mitigating material money laundering risks and its escalation of money laundering risks.
US authorities have also acted against the Standard Chartered group for significant violations of US sanctions laws and regulations. Since the US authorities launched investigations of the bank in 2012, Standard Chartered has paid fines to US authorities totalling more than $1.1 billion.
Mark Steward, Director of Enforcement and Market Oversight at the FCA, said: “Standard Chartered’s oversight of its financial crime controls was narrow, slow and reactive. These breaches are especially serious because they occurred against a backdrop of heightened awareness within the broader, global community, as well as within the bank, and after receiving specific attention from the FCA, US agencies and other global bodies about these risks.”
FCA highlights areas of potential Customer Harm in General Insurance market
The Financial Conduct Authority (FCA) has warned General Insurance (GI) firms about manufacturing, sales and distribution approaches that can lead to customers purchasing inappropriate products, paying excessive prices or receiving poor service.
The FCA has written to the CEOs of General Insurance (GI) firms calling on firms to act immediately to identify and mitigate any shortcomings. The Dear CEO letter explains that these harms include: “customers purchasing products that are not appropriate for them or customers paying increased prices due to remuneration paid to firms in the distribution chain who incur little cost or deliver little benefit.”
Firms have also been warned that GI customers were not receiving the services they needed and were experiencing poor outcomes, e.g. when making claims or complaints.
The FCA has identified two primary causes for these potential harms:
- firms having a purpose and culture with insufficient focus on customers, particularly in relation to value and customer outcomes; and
- poor governance and oversight of product design, manufacture and distribution processes and practices, both over firms’ own business activities and where these were undertaken by other parties in the distribution chain.
The warning follows two FCA reviews of the GI market; a thematic review of the Value in the GI Distribution Chain and a multi-firm review of Delegated Authority Arrangements (this review followed the FCA’s 2015 thematic review of Delegated Authority Arrangements). Completion of these reviews has resulted in the FCA consulting on non-Handbook Guidance to clarify the FCA’s expectations of firms as manufacturers and distributors of GI products.
Jonathan Davidson, executive director of Supervision – Retail and Authorisations, at the FCA comments: “Through our recent work we have continued to see poor manufacturing, sales and distribution approaches leading to sales of low value and inappropriate products, unfair treatment of claims and service issues.
“The widespread extent of these issues demonstrates a culture which pays insufficient regard to customer outcomes in some parts of the general insurance sector. We are going to carry out further supervisory work to make sure that firms meet their obligations and will not hesitate to use the full range of our regulatory powers.”
The recently implemented Insurance Distribution Directive requires that all firms in the GI distribution chain act in accordance with the best interests of the customer. The Senior Manager and Certification Regime (SMCR) which was implemented for insurers in December 2018 is designed to make Senior Managers accountable for the actions of their firms.
The FCA has warned General Insurers that it will not hesitate to intervene with both firms and their senior managers on these bases where it sees a failure to have appropriate regard to the value their ultimate customers receive.
FCA permanently bans the sale of Binary Options to Retail Consumers
Following a consultation, the FCA has confirmed that binary options products can no longer be sold, marketed or distributed to retail customers.
Policy Statement PS19/11, which was published by the FCA on 29 March 2019, confirmed that firms should ensure they continue to comply with European Securities and Markets Authority’s EU-wide temporary restrictions on binary options. However, the FCA’s new rules also cover other types of binary option including securitised binary options that are not covered by the ESMA temporary restriction.
The FCA has found that retail consumers purchasing binary options have suffered large and unexpected trading losses. It also found evidence of poor conduct of the firms selling the products.
The permanent ban of such products to retail customers came into force on 2 April 2019. The new rules could, according to FCA estimates, save retail consumers £17m a year and may also reduce the likelihood of fraud from unauthorised firms operating in the market.
In the UK, binary options were historically treated as gambling products and, as such, were licensed by the UK Gambling Commission and until January 2018 they were not subject to FCA regulation.
HM Treasury directs FCA to undertake review of events at London Capital and Finance
The HM Treasury has directed the FCA to undertake an independent review to investigate the regulatory failings exposed by the collapse of London Capital & Finance.
London Capital & Finance (LCF), which is now in administration, collapsed owing £236 million to approximately 14,000 investors. LCF issued mini-bonds which it stated it used to make loans to corporate borrowers to provide capital for further investment. However, it has been revealed that the LCF sold many of the mini-bonds to first-time investors, inheritance recipients, small business owners or the newly retired.
Issuing mini-bonds is not a regulated activity so LCF was not authorised by the FCA. However, when an authorised firm approves a promotion for mini-bonds, they must ensure that it is in line with FCA rules that the financial promotion is fair, clear and not misleading. On 10 December 2018 the FCA directed LCF to immediately withdraw its promotional material on the basis that the way in which it was marketing it bonds was misleading, not fair and unclear. The FCA’s concerns included the fact that LCF bonds were being marketed as ISA eligible when they were not.
The FCA immediately commenced an investigation into the firm’s promotions. The Serious Fraud Office (SFO), working in conjunction with the FCA, has also opened an investigation into individuals associated with LCF. On 18 March 2019, the SFO advised that four individuals had been arrested in the Kent and Sussex areas but added that they had been released pending further investigation. The FCA’s investigation into these matters will proceed jointly with the SFO’s.
Rt Hon. Nicky Morgan MP, Chair of the Treasury Committee, wrote to the FCA Board last month to request that it consider whether the tests around the need for a statutory investigation into possible regulatory failure surrounding LCF have been met. Mrs Morgan also wrote to John Glen MP, Economic Secretary, to urge the Treasury to use this power if the FCA declined to investigate.
The FCA’s review will be led by an independent person appointed by the FCA, with the approval of the Treasury. The investigation is expected to cover:
- whether the existing regulatory system adequately protects retail purchasers of mini-bonds from unacceptable levels of harm; and
- the FCA’s supervision of LCF
The investigation’s report will be laid before Parliament. The Economic Secretary to the Treasury, John Glen, said: “I want to make sure we have the strongest and safest financial system possible. By ordering this investigation, we will better understand the circumstances around the collapse and make sure we are properly protecting those who invest their money in the future.”
FCA acts to help free Mortgage Prisoners
Mortgage customers who have previously been unable to switch mortgages despite being up-to-date with their payments, could soon be able to find a cheaper deal as the FCA has proposed changes to how lenders assess whether or not a customer can afford the loan.
Publishing the final report of its Mortgages Market Study on 26 March 2019, the FCA confirmed that a consultation on new lending rules forms part of a package of remedies designed to help the market work better.
The remedies package includes:
- seeking to speed up more widespread participation by lenders in innovative tools to help customers more easily identify what mortgages they qualify for
- a proposal for the Single Financial Guidance Body (SFGB) to extend its existing retirement adviser directory to include mortgage intermediaries to help customers make a more informed choice of broker
- consulting on proposals to change mortgage advice rules and guidance to help remove potential barriers to innovation
- further, in-depth analysis to understand more about those customers that do not switch mortgage to inform any necessary intervention
Christopher Woolard, Executive Director of Strategy and Competition at the FCA said: “We are particularly concerned about consumers – who are commonly referred to as mortgage prisoners - who are currently unable to switch. That is why we are acting now to help remove potential barriers in our rules. These changes should make it easier for consumers to get a more affordable mortgage.”
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