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From August 2019, certain existing FCA rules and guidance will extend to payment service providers and e-money issuers in a signal that the FCA wants a consistent approach to consumer protection.

By Rob Moulton, Brett Carr, and Frida Montenius

The FCA has published a Policy Statement extending certain rules and guidance to the payment services and e-money sectors, following a Consultation Paper published in August 2018. The extensions concern the FCA’s Principles for Businesses (Principles) and the Banking Conduct of Business Sourcebook (BCOBS), along with new guidance concerning the communication and marketing of currency transfer services. The FCA has made these changes, aimed at payment institutions (PIs), electronic money institutions (EMIs), and registered account information service providers (RAISPs), with a hope to protect consumers by providing a clear and consistent set of rules that firms must abide by.

Background

The motivation behind the extensions is to standardise the current regulatory approach in order to better align customer expectations of firm behaviour and customer treatment, with the aim of protecting the interests of consumers. The FCA has noted that some firms have been guilty of bad practices, and the extension of rules is a step to foster an environment that prevents consumer harm. With consistent standards that apply equally to all firms — notably including a fast-evolving, ever-changing payments landscape — the new extensions are intended to enhance competition by allowing consumers to make more informed choices while ensuring that consumers are adequately protected by clamping down on misleading communications and other harmful practices.

By Nicola Higgs, Fiona MacLean, Brett Carr, and Catherine Campbell

Technology outsourcing by financial institutions (FIs) has increased in recent years as FIs look to the latest innovations to improve their day-to-day business processes and to reduce costs. FIs outsource key functions to a host of regulated and unregulated third-party service providers, and the sector is poised for continued growth. According to research conducted by business outsourcing provider Arvato and analyst firm NelsonHall, outsourcing agreements worth £6.74 billion were agreed in the UK last year across all industries (a 9% increase on the prior year), and financial services firms signed £3.26 billion of them. With this continued growth, the outsourcing sector is increasingly likely to be a hotbed of PE deal activity; and, as regulators place a greater focus on outsource providers, deal teams should monitor regulatory engagement and policy developments.

Outsourcing Companies Evolve

IT and business process outsourcing are converging, meaning outsourcing deals are now different to the traditional, bespoke, dedicated service arrangements firms have entered into in the past. Modern-day outsource providers who have grown exclusively as tech companies are looking to meet the demand for processing and administration solutions for financial products and services in a heavily regulated environment. Notably, the Financial Conduct Authority’s (FCA’s) recent Investment Platforms Market Study identified that most investment platforms purchase their technology from third-party providers, and more than half of the platforms the study considered are in the process of re-platforming to a new provider. Less than a third of firms in the study rely on proprietary technology. Areas such as cybersecurity and data analytics have also become increasingly important for the sector, driving demand for specialist third-party providers with robust processes.

FATF has published its highly anticipated report on the effectiveness of the UK’s anti-money laundering and counter-terrorist financing measures.

By Jon Holland, Rob Moulton, and Jonathan Ritson-Candler

On 7 December 2018, the Financial Action Task Force (FATF) published its highly anticipated mutual evaluation report of the UK. The report sets out the UK’s global standing in combatting money laundering and terrorist financing. The report is generally positive, ranking the UK as either highly or substantially effective in its fight against money laundering and terrorist financing in the majority of areas. The report does, however, highlight some concerns about the UK’s approach, particularly in relation to the Suspicious Activity Reporting (SAR) regime, the utilisation of financial intelligence, and the FCA’s role in the supervision of firms’ compliance with anti-money laundering (AML) and counter-terrorist financing (CTF) rules.

The UK’s last FATF evaluation took place in 2007 and in light of recently heightened sensitivities around money laundering, the government was motivated to ensure that the UK maintained its status as a global financial centre with robust tools to combat financial crime. The report summarises the FATF’s analysis, based on its on-site visit in March 2018, of the UK’s compliance with the FATF 40 Recommendations and the effectiveness of the UK’s AML and CTF regimes. It also provides recommendations as to how those systems can be strengthened.

Key Findings

The report is largely positive and states that the UK:

  • Has a robust understanding of the money laundering and terrorist financing risks to which it is subject.
  • Proactively investigates, prosecutes, and convicts a range of money laundering and terrorist financing activity, securing approximately 1,400 convictions a year for money laundering offences.
  • Has improved its legal framework since the 2007 evaluation by implementing the People with Significant Control (PSC) Register to aid enforcement agencies, regulators and businesses in identifying the ultimate beneficial owners of UK-incorporated companies.
  • Ensures that all entities within the FATF definition of “financial institution” (e.g., banks and regulated investment firms) and “Designated Non-Financial Business Professionals” (e.g., lawyers and accountants) are subject to appropriate AML and CTF rules and are supervised for compliance with those rules.

The rules will echo ESMA’s temporary measures, however the FCA will extend the CFD restriction to capture closely substitutable products (such as turbo certificates). 

By Rob Moulton, David Berman, Charlotte Collins, and Gabriel Lakeman

The FCA has launched two consultations on:

  • Banning the sale, marketing, and distribution of binary options to retail consumers (CP18/37)
  • Restricting the sale, marketing, and distribution of contracts for difference (CFDs) and similar products to retail customers (CP18/38 and Annex)

These measures are largely the same as ESMA’s temporary product intervention measures in relation to CFDs and binary options, which were first announced in March 2018 (see Latham’s related blog post for more detail). The ESMA measures, which apply for a maximum of three months at a time, but can be extended by ESMA, have already been renewed twice. At the time ESMA’s measures were first announced, the FCA stated that it expected to consult on whether to apply them in the UK on a permanent basis.

Given that the ESMA measures will fall away due to Brexit (although the timing will depend on whether or not a transitional period is agreed), it makes sense for the FCA to act now to ensure that the measures will continue to apply if the UK leaves the EU without a deal.