In May of this year, the FCA released a ‘Dear CEO’ letter that addressed the failings of principal firms within the investment management sector. The FCA found that investment management firms (“principals”) failed to appropriately control and oversee their Appointed Representatives (ARs). There is an interesting takeaway from this letter for the payment services market regarding the relationship between The Principles for Businesses and agents.
The implementation of MiFID II in January triggered a significant change in the blanket treatment of FX forwards in the UK and, as a result, non-deliverable forwards (NDFs) became regulated products and overnight were reclassified as contracts for difference (CFDs). Any FX brokers that wished to continue offering NDFs were forced to apply to the FCA to obtain the relevant investment firm regulatory permissions in order to continue providing the same range of FX products they had always offered their clients.
The competence and capability expected of holders of the compliance function has been brought into sharp focus by two final notices issued by the Financial Conduct Authority (FCA) this summer. One holder of the compliance function (the CF10), was fined £75,000 for failing to exercise due skill, care and diligence in performing his compliance oversight role. The other, a would-be compliance officer, had his application for CF10 and the money laundering reporting function (CF11) refused on the grounds of ‘competence and capability’.
Last year, the FCA sent a 'Dear CEO' letter about ICAAP. For those who don't know, the ICAAP is a process a firm follows to assess the risks it’s facing currently and in the foreseeable future and calculate an amount of capital it should hold as a buffer against those risks.
The letter was a warning that the exercise shouldn't be a quick totting up of sums without any real engagement in the process. It went only to IFPRU investment firms, though BIPRU firms also have to do ICAAPs. Payment and e-money institutions don't have to do an ICAAP but as those who are tackling their re-authorisation application know, PSD2 places strong emphasis on understanding and managing risks.
The FCA do not want to regulate specific technologies.
For years, the UK charted a lonely but pragmatic course with its interpretation that deliverable FX forwards are not investment instruments. UK payment and e-money institutions can offer such products without requiring authorisation under the Financial Services and Markets Act 2000 (FSMA) while counterparts elsewhere in the EEA had to be regulated. The implementation of MiFID II in January 2018 will, among other things, confirm the UK’s position but the new definition is a little tighter than what we are used to in the UK and payment and e-money institutions must consider whether they want to remain unregulated.