A View from the Shard: A compliance round-up from the team at Protiviti​

A view from The Shard - A compliance round-up from Protiviti
A View from the Shard: A compliance round-up from the team at Protiviti​

Welcome to the first Protiviti UK regulatory and compliance news roundup of 2020. We start the new year with a list of priorities: LIBOR transition, Brexit and its consequential changes to regulation, sustainable finance (ESG – Environment, Social, Governance) and the financial services sector’s response, operational resilience and the increasing use of technology, and digital innovation to name a few.

However, as in 2019, some themes continue to dominate the UK regulators’ agenda. There is continued focus on protecting consumers - with changes relating to cash savings - and improvements in internal working practices - focussing specifically on Lloyd’s of London’s whistleblowing systems and controls. We also predict that cultural changes in the insurance industry will be monitored more closely. The “Dear CEO” letter to wholesale firms to tackle non-financial misconduct marks the start of driving improvements in this sector. Digital innovation also continues to be priority, as the Financial Conduct Authority calls for input on the opportunities presented by open finance, which, like open banking, could allow consumers to have greater choices for other finance products such as insurance and mortgages. This coming year will see

  • Firm taking closer looks at the opportunities and the risks presented by the digital revolution.

  • Increasing focus on supervision of payment institutions

  • Continuing regulatory focus on consumer credit firms

Towards the end of 2019, there was a flurry of regulatory activity as the UK regulators issued a series of consultation papers around operational resilience. These documents explore how financial institutions can commence strategies to answer systemic risk challenges and provide an insight into the direction of travel the regulators will require when firms develop their tailored operational resilience frameworks. The Protiviti team has highlighted essential key themes and learnings from the papers.

Similarly, there has been much regulatory activity around LIBOR transition and the perceived need for firms to do more to address the transition in order to be ready for the significant changes ahead. The UK regulators have been busy with a statement on Conduct Risk during LIBOR transition issued in November 2019 followed by two further publications in January setting out next steps for LIBOR transition. Learn more about how replacing the LIBOR rate will affect your business and other ways to mitigate related exposures and risks in LIBOR and Conduct Risk.

As always, the team at Protiviti are on hand to talk through any of these areas.

Bernadine Reese, Managing Director, Risk & Compliance


What we are reading

Conduct and Governance


Anti-money Laundering

Operations and Technology

Conduct and Governance

EU regulatory framework for crypto-assets

The European Commission has launched two public consultations to form regulations on digitalisation in the financial sector. Through them, the Commission plans to promote digital finance in Europe.

The first consultation invites opinions on the suitability of the existing regulatory framework for crypto-assets, and the second asks for ways to improve the existing legislative framework to ensure that the financial sector can deal with cyber-attacks and other risks that are associated with the digital transformation.

This public consultation and the parallel consultation are the primary steps to prepare potential initiatives planned by the Commission. This effort is an extension of the EU's earlier efforts to regulate the handling of data and payment processes.

Source: European Commission

Evaluation of the retail distribution review and the financial advice market review

The Retail Distribution Review (RDR) and the Financial Advice Market Review (FAMR) aimed to improve consumer outcomes from financial advice and guidance. The FCA are reviewing their impact on the market to date, and assessing how the market may develop, to ensure it meets consumer needs now and in the future.

The FCA agreed to keep firms updated in its progress. In August the FCA surveyed approximately 400 firms and received 300 responses from firms that were surveyed to provide information on their advice services, including business models and strategies, target customers, charging structures, future plans, use of technology and any recent innovations.

This data is now being analysed and will be used with other data collated by the FCA to inform a view of how services are developing to serve consumers now and how it will continue with its consumer research and the analysis of firm data so as to:

  • Understand the impact technology has had on the market
  • Know organisations' plans to use technology in making efficiencies, in offering innovative services, and what challenges and barriers they are facing in doing so
  • Explore the potential for new services to emerge in the market

Source: FCA

Financial Services Duty of Care Bill 2019-20 reintroduced to Parliament

On 9 January 2020, the Financial Services Duty of Care Bill 2019-20 was formally reintroduced to the House of Lords. The Bill requires the FCA to make rules for authorised persons to owe a duty of care to consumers in their regulated activities. A date for the second reading of the Bill is yet to be scheduled. The FCA is due to publish a policy paper on the possibility of introducing a new duty of care for financial services firms in early 2020, which will seek detailed views on specific options for change.

Source: www.parliament.uk

FCA acts to help customers get better rates for cash savings

The FCA is concerned that competition is not working well for many of the 40 million consumers who hold either an easy access savings account or easy access cash ISA. The FCA considers that many longstanding customers currently receive poor outcomes and the regulator wants firms to focus more on these savers, hence proposing to reform the easy access cash savings market. Under new rules all firms will have to set a single easy access rate (SEAR) across all easy access accounts. Firms will have flexibility to offer multiple introductory rates for up to 12 months. Thereafter, they will need to choose one SEAR for their easy access cash savings accounts, and one for their easy access cash savings ISAs.

The FCA’s proposals aim to improve competition in the market, encouraging firms to increase the interest rates they offer as well as protecting those consumers that currently receive the lowest interest rates.

Source: FCA

FCA asks for proposals on how open finance could transform financial services

FCA has launched a Call for Input (CfI) on the opportunities presented by open finance. The CfI will launch a discussion on the opportunities and risks arising from open finance.

Open finance builds on the principles of open banking, the sharing of data which provides new ways for customers and businesses to make the most of their money. Open finance would extend those principles to a wider range of products. By making it easier for consumers and businesses to compare price and product features and switch product or provider, open finance could be beneficial in the general insurance, cash savings and mortgage markets. It could help widen access to advice and support, boost efficiencies for businesses and access to credit, and spur innovation.

The FCA is seeking feedback to the CfI by 17 March 2020 and will publish a feedback statement in summer 2020.

Source: FCA

PRA announces special requirements regarding whistleblowing systems and controls at the Society of Lloyd’s

The PRA published a written notice it issued to the Society of Lloyd's, in which it has imposed a number of additional requirements on the firm relating to its whistleblowing systems and controls. The PRA identified certain areas that required improvement, including the firm's compliance with some of the PRA's rules and expectations relating to whistleblowing in 2019 post the disclosure that Lloyd's anonymous whistleblowing telephone service for UK and overseas staff had not been operational. The requirements for Lloyds are:

  • Must submit to the PRA an annual report on whistleblowing for each of the calendar years 2020, 2021 and 2022.
  • Must provide an attestation in 2021, 2022 and 2023 regarding compliance with reporting requirements, accuracy of material, compliance with PRA's whistleblowing rules and that senior management and directors have completed the firm's whistleblowing training.

Source: BOE

FCA and Bank of England statement on joint review of open-ended funds

The Bank of England plans to work with the FCA to address risks to the financial system from the vulnerabilities in the make-up of open-ended funds. The Bank's financial policy committee warns that there remains a mismatch between redemption terms and the liquidity of funds’ assets. The Bank and the FCA are looking at ways the two can be better aligned to minimise financial risks without compromising the supply of productive finance. The Bank of England has launched a review into open- ended funds.

Source: FCA

FCA Dear CEO letter sets out expectations for wholesale GI firms to tackle non-financial misconduct

A Dear CEO letter was published by the FCA regarding non-financial misconduct in the wholesale general insurance (GI) sector as a result of recent publicised incidents. The letter was sent to the CEOs of wholesale GI firms. FCA states that:

  • While work has been undertaken in the market to tackle the issue of non-financial misconduct, such behaviour continues to be prevalent and will be a key focus for its supervision of firms and senior managers.
  • Both lack of diversity and inclusion, and non-financial misconduct as obstacles to creating an environment.
  • To support firms in delivering cultural change, it will host a webinar during 2020 focused on firms' assessment of culture and will hold a conference in March 2020 to share the insights from its work and discuss the way forward.
  • It will continue to work closely with the PRA to assess instances where inappropriate culture and behaviour within firms may impact compliance.
  • It will carry out further supervisory work to assess the extent to which firms are meeting its expectations.

Source: FCA


Next steps for LIBOR transition in 2020

The Bank of England, The FCA and the Working Group on Sterling Risk-Free Reference Rates (RFRWG) have published a set of documents, outlining priorities and milestones for 2020 on LIBOR transition. Apart from generic actions that firms should take along with transitioning to alternative rates, key highlights suggested include:

  • Ceasing issuance of cash products linked to sterling LIBOR by end-Q3 2020
  • Taking steps that demonstrate that compounded SONIA is easily accessible and usable, throughout 2020
  • Taking steps to enable a further shift of volumes from LIBOR to SONIA in derivative markets
  • Establishing a framework for the transition of legacy LIBOR products, in order to significantly reduce the stock of LIBOR referencing contracts by Q1 2021
  • Considering how best to address issues “tough legacy” contracts.

Furthermore, The FCA and the Bank of England published a statement encouraging market makers to change the market convention for sterling interest rate swaps from LIBOR to SONIA (the Sterling Overnight Index Average) in Q1 2020. This change is intended to move the greater part of new sterling swaps trading to SONIA and reduce the risks from creating new LIBOR exposures.

Source: BOE, FCA

Anti-money Laundering

FCA becomes AML and CTF supervisor of UK cryptoasset activities

Any UK business conducting specific cryptoasset activities now falls within scope of the FCA regulations and will need to comply with their requirements. The FCA is now the anti-money laundering and counter terrorist financing (AML/CTF) supervisor for businesses carrying out certain cryptoasset activities under the amended Money Laundering, Terrorist Financing and Transfer of Funds Regulations 2017 (MLRs). New businesses carrying out cryptoasset activity in scope of the MLRs must be registered with the FCA before conducting businesses. Existing businesses already conducting cryptoasset activity before 10 January 2020 may continue their business but will need to ensure their compliance with the MLRs with immediate effect.

Given the risk of money laundering activities in the cryptoasset activities, such firms will be proactively supervised for compliance with the new regulations.

Source: FCA

Money Laundering and Terrorist Financing (Amendment) Regulations 2019 (5MLD)

New regulations came into force on 10th January 2020 to amend the UK’s existing anti-money laundering and counter-terrorist financing (AML/CTF) legislation, namely the Money Laundering, Terrorist Financing and Transfer of Funds Regulations 2017 (MLR 2017), to implement changes made by the Fifth Money Laundering Directive into the UK. The following key changes being made:

  • Expand the scope of regulated sectors to add new categories of ‘relevant person’.
  • New provisions addressing policies, controls and procedures for regulated businesses, as well as ensuring that relevant persons undertake risk assessments prior to the launch or use of new products, business practices and technologies.
  • FCA to maintain a register of providers, including providers of cryptoasset exchanges and custodian wallets. Also, FCA to confer new powers in relation to providers of cryptoasset exchanges and custodian wallets.

Source: www.gov.uk

Speech by FATF's Simon Lovegrove

Simon Lovegrove, FATF Executive Secretary, delivered a speech at the 7th International Anti-Money Laundering and Compliance Conference. Key highlights of his speech included:

  • Evaluation and follow-up processes will be the core of what FATF does. It will be identifying and building on activity that promotes both effective and efficient anti-money laundering measures under its Strategic Review
  • FATF will develop and publish best practices for the financial investigation of illegal wildlife trafficking and how to prevent and detect this through the financial system
  • Final guidance on the use of digital ID is expected to be published in the coming months
  • FATF will be updating G20 Finance Ministers and Central Bank Governors on the FATF policy recommendations for dealing with stablecoins and the risks and opportunities from financial innovation more generally

Source: FATF

Operations and Technology

Asset management portfolio tools

FCA published a new report setting out its findings on how asset management firms select and use risk modelling and other portfolio management tools. This was to identify and manage relevant risks in the industry and assess how asset management firms utilised the tools and models at their disposal to respond to system failures or service interruptions.

The firms sampled had different approaches in their use of portfolio tools. Some relied largely on a single provider offering an integrated package. Others used a suite of tools from different providers. The remainder built their technology in-house.

The FCA will continue to review the operational resilience arrangements in place at firms, including those which were not included in the review.

Source: FCA

Transforming data collection from the UK financial sector

The Bank of England has published a Discussion Paper (DP), Transforming data collection from the UK financial sector, to improve the timeliness and effectiveness of data collection from firms across the financial system. The DP sets out the issues facing the current data collection system and identifies and explores a series of potential solutions, to prompt feedback from and further discussion with industry.

Source: BOE

European Banking Authority report on big data and advanced analytics

EBA published a report on Big Data and Advanced Analytics (BD&AA) to share knowledge on the current use of BD&AA by providing a background on this area, alongside key observations and outlining the key pillars and elements of trust that could be used to establish a framework for their use. Key highlights of the report are:

  • It is part of the EBA’s fintech roadmap project
  • Identifies four key pillars for the development, implementation and adoption of BD&AA: data management, technological infrastructure, organisation and governance, and analytics methodology. These pillars require review by institutions to ensure they can support the roll- out of advanced analytics
  • Discusses the overarching elements of trust to be respected throughout the development, implementation and adoption of BD&AA. These include ethics, explainability, interpretability, traceability and auditability

Source: EBA identifies key challenges in big data and advanced analytics

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Bernadine Reese
Bernadine Reese
Managing Director
Matt Taylor
Matt Taylor
Managing Director