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The end of year has proved to be very busy in financial sector compliance, with numerous publications concerning Brexit being issued on top of the ongoing regulatory communications to the financial services sector.

This blog is dedicated to bringing you the news that touches the people dimension of regulatory compliance. It's not only about regulations, policies, procedures and systems. It's also about people, and about understanding what leads them to make errors of judgement, and in some cases, to act in brazen disregard of the rules.

Here's our selection of news stories from mid-November to mid-December 2018.

FCA fines and bans NED over conflicts of interest failings

The Financial Conduct authority (FCA) has banned Angela Burns, an investment professional, from acting as a non-executive director (NED) and fined her £20,000 for failing to act with integrity at two mutual societies.

From 2009 until May 2011, Ms Burns was a NED at Marine and General Life Assurance Society and the Teachers Provident Society. She also served as the chair of their investment committees. Ms Burns talked to both societies about using the services of Vanguard Asset Management Limited (Vanguard), but did not disclose that at that time she was actively soliciting a NED position and consulting work from Vanguard.

Mark Steward, Executive Director of Enforcement and Market Oversight of the FCA, said: “Ms Burns placed herself in a position where her duty as a non-executive director may have conflicted with concurrent opportunities she was pursuing …This was inappropriate and inconsistent with the standards of integrity expected from senior managers”.

Ms Burns appealed against the FCA’s enforcement action, she referred the FCA’s Decision Notice to the Upper Tribunal in 2012 and subsequently appealed to the Court of Appeal. The Supreme Court denied her application for permission to appeal. The FCA’s final notice can be viewed here.

Regulators take retrospective action against Senior Managers

Interestingly, both the FCA and PRA have both announced retrospective regulatory enforcement actions against Senior Managers over a year after taking enforcement actions against the regulated firms.

The FCA published a decision notice confirming that it had fined Mohammad Prodhan, the former Chief Executive Officer of Sonali Bank (SBUK), £76,400 for a breach by the bank of its obligations to maintain effective anti-money laundering systems. The FCA took enforcement action against the bank and its former Money Laundering Reporting Officer (MLRO) in 2016, and has announced the fine against the CEO more than two years later.

The FCA took action against SBUK in October 2016, when the bank was fined £3.3m and banned from accepting deposits from new customers for five months. At the same time Steven Smith, the former MLRO was fined £17,900 and banned from taking on future compliance oversight roles.

Mr Prodhan was the senior manager at SBUK with responsibility for the establishment and maintenance of effective AML systems and controls. The FCA found that Mr Prodhan failed to take reasonable steps to assess and mitigate the AML risks arising from a culture of non-compliance among SBUK’s staff. This led to systemic failures in SBUK’s AML systems and controls throughout the business. Mr Prodhan has referred the FCA’s Decision Notice to the Upper Tribunal.

Meanwhile, the PRA has announced that it has fined the former chair and non-executive director (NED) of The Bank of Tokyo-Mitsubishi (BTMU) for breaching PRA’s Statement of Principle 4 by failing to disclose information to the regulator.

The requirement to disclose appropriately any information of which the regulator would reasonably expect notice is set out in Senior Manager Conduct Rule 4. The PRA’s decision notice acts a reminder to Senior Managers that the duty imposed by that rule includes the requirement to make disclosures in the absence of any request or enquiry from the PRA (or FCA).

The action against the former board members is taken some time after the enforcement action against the respective regulated firms. The PRA fined The Bank of Tokyo-Mitsubishi (BTMU) £17.85m and MUFG Securities EMEA plc £8.925m on 9 February 2017. The PRA commented at that time that where senior managers have roles and responsibilities in more than one entity within a group they must ensure that they consider the regulatory responsibilities of each firm, as well as their own responsibilities to the UK regulators.

The PRA has now confirmed that Mr Kamiya, former Chair of Mitsubishi UFJ Securities International plc has been fined £22,700 and Mr Takami Onodera, former NED has been fined £14,945. Both individuals failed to disclose to the PRA the possibility Mr Kamiya would be restricted from conducting US banking activities because of action by the New York Department of Financial Services against the Bank.

FCA to overhaul overdraft charges to fix dysfunctional market

The FCA has set out proposals to overhaul overdraft charges. The FCA reports that in some cases unarranged overdraft fees can be more than ten times as high as fees for payday loans and that people living in deprived areas are more likely to be impacted by these. In 2017, firms made over £2.4bn from overdrafts alone, with around 30% from unarranged overdrafts.

The plans have been announced in a package of measures introduced by the FCA’s high-cost credit review. The FCA proposes the following changes to the overdraft market:

  • Ensuring the price for each overdraft will be a simple, single interest rate – no fixed daily or monthly charges.
  • Stopping firms from charging higher prices when customers use an unarranged overdraft.
  • Banning fixed fees for borrowing through an overdraft.
  • Overdraft prices must be advertised in a standard way, including an APR to help customers compare them against other products.

Banks will have to do more to identify overdraft customers who are showing signs of financial strain or are in financial difficulty, and to help them to reduce their overdraft use.

The FCA is also making changes, proposed in May 2018, to tackle harm to consumers in the home-collected credit, catalogue credit and store card sectors. In CP18/43, the FCA publishes final rules and guidance on home-collected credit, catalogue credit and storecards, and finalised guidance for registered social landlords (RSLs).

The FCA also proposes additional protections on buy now pay later offers, including stopping backdated interest for repayments made during the offer period, that will save consumers around £40-60 million. The FCA proposes to extend two measures, that already apply to catalogue credit and store cards to point of sale retail finance providers.

Both consultations are open until 18 March 2019. The FCA will consider feedback before publishing policy statements on overdrafts and buy now pay later offers in June 2019.

FCA finds mortgage lenders are treating mortgage arrear customers fairly

On a positive note, the FCA’s thematic review of how mortgage lenders treat customers who have long-term mortgage arrears, found that firms generally treated such customers appropriately.

However, the FCA commented that it was disappointed to find some inconsistencies in firms’ arrears management practices that may result in a poor customer experience and have the potential to cause harm. The review highlighted the following examples of poor practice:

• Incomplete record keeping

• Inconsistent handling of vulnerable customers

• Inadequate reviewing of arrangements

• Inaccurate communications

• Lack of consideration of other options:

• Narrow quality assurance processes

• Barriers to effective engagement

Firms that offer or administer mortgages should review their mortgage lending practices against the review findings and FCA rules, guidance and examples of good and poor practice.

Spotlight on IT failures in the financial services sector

Senior Managers with responsibility for cyber security should read the FCA’s findings from a survey of 296 firms to assess their technology and cyber capabilities. Survey headlines include the finding that nearly half of firms do not upgrade or retire old IT systems in time and that only 56% of firms are able to measure the effectiveness of their information asset controls. The survey also highlights a lack of Board understanding of cyber risks.

It is interesting to note that those firms which are subject to the Senior Managers Regime often reported a clearer structuring of roles and responsibilities and ownership of a cyber security strategy. The FCA reminds firms that effective governance at senior levels is essential for effective resilience throughout an organisation, whatever its size.

Commenting on the findings, Megan Butler, Executive Director of Supervision – Investment, Wholesale and Specialists at the FCA said: “we see no immediate end in sight to the escalation in tech and cyber incidents that are affecting UK financial services”.

The FCA’s publication and Megan Butler’s speech on this topic were issued just a few days after the announcement that the Treasury Committee is undertaking an inquiry into IT failures in the financial services sector. The Committee will examine the ability of financial services institutions to guard against service disruptions and to put things right should disruptions do occur.

Launching the inquiry, Rt Hon. Nicky Morgan MP, Chair of the Treasury Committee, said: “The number of IT failures at banks and other financial institutions in recent years is astonishing. Since becoming Chair of the Committee 16 months ago, there have been problems at Equifax, TSB, Visa, Barclays, Cashplus and RBS, to name a few.

“Millions of customers have been affected by the uncertainty and disruption caused by failures of banking IT systems. Measly apologies and hollow words from financial services institutions will not suffice when consumers aren’t able to access their own money and face delays in paying bills.”

FCA acts to address harm to retail consumers from the sale of CFDs

The FCA has proposed rules to address harm to retail consumers from the sale of certain complex derivative products, including CFDs and binary options, with the publication of two consultation papers.

A binary option is a financial product that involve an investor ‘betting’ on whether an event will happen or not. For example, whether the price of a share, currency, commodity, or an index will go up or down within a certain timeframe. An investor will usually lose their initial stake if their prediction is incorrect, or receiving a fixed pay-out if they are correct. Binary options are treated as a subset of contracts for difference

Contracts for difference CFDs are complex, leveraged derivatives. They are typically offered to retail consumers through online trading platforms. CFDs include contracts for differences, spread bets, and rolling spot forex products. CFDs are used to speculate on the rise and fall in price of a wide range of assets.

Widespread concerns about the inherent risks of these products, and the poor conduct of the firms selling them, has led to harm to UK and international consumers through large and unexpected trading losses.

Consultation Paper 18/37 proposes a permanent ban on binary options. The FCA claims this could save retail consumers up to £17m per year, and may reduce the risk of fraud by unauthorised entities claiming to offer these products.

Consultation Paper 18/38 proposes restrictions on how Contracts for difference (CFDs) and CFD-like options are marketed, distributed, and sold to retail consumers.

The FCA’s proposed interventions are the same in substance as the European Securities and Markets Authority’s (ESMA) existing, EU-wide temporary restrictions on these products, although the FCA is also proposing to apply its rules to closely substitutable products.

Firms marketing, distributing or selling binary options, CFDs and CFD-like products in or from the UK to retail clients must carefully consider the detail of the FCA’s proposals. Affected firms should identify the necessary changes, including to the design, marketing and distribution of products, to comply with the proposed rules.

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