As summer begins to draw to a close we are fast approaching a particularly busy time for compliance professionals of financial services firms. In this article we provide an overview of some of the key financial services initiatives that are set to make in-trays even deeper when compliance staff return from their summer break.

Senior managers’ regime: the countdown to March 2016

Since last summer the PRA and FCA have been consulting on a new individual accountability framework for banks. The framework itself has three limbs: the Senior Managers’ Regime (SMR), the certification regime and new conduct rules. Both regulators will be introducing rules and guidance on each of these limbs and these are generally due to come into force on 7 March 2016. Already we have seen a number of papers containing the final rules and guidance for each limb and electronic grandfathering forms transitioning approved persons into the SMR are expected to become available for submission during the autumn.

Compliance teams will be tasked with interpreting the new requirements and ensuring that their bank meets them. Of particular importance will be the drafting and maintenance of statements of responsibilities for senior managers and preparation of the responsibilities maps. Under the new regime the burden of proof for individual misconduct is reversed so that if a regulatory contravention occurs in an area of the business for which a particular senior manager is responsible, he or she will be guilty of misconduct unless he /she can show that he / she took such steps as a person in his / her position could reasonably be expected to take to avoid the contravention occurring. In light of this great care is needed when drafting these documents.

MiFID II and MiFIR: technical standards

There will be further activity on MiFID II and MiFIR. For instance, earlier this summer correspondence between the European Commission and the European Securities and Markets Authority (ESMA) was published noting that formal submission of most of the technical standards would be delayed until the end of September 2015 (the original deadline was 2 July 2015). The delay in submission was to allow the Commission services to conduct an “early legal review” before their formal submission.

Financial services firms have also found that, in some cases, preparing for the new MiFID II regime is proving difficult. In FCA MiFID II implementation roundtable minutes of 17 July 2015 (published 10 August 2015) a number of concerns were noted that had been raised by different trade associations. The concerns were summarised into four main categories – policy concerns, technical challenges, uncertainty over key processes and interpretation. The latter two categories are particularly noteworthy with firms finding it difficult to plan when they do not know when and how equivalence determinations will be made, how the process for applying for exemptions from position limits will work and there being a lack of certainty about what the legislation requires in areas including the quoting obligations under the non-equity systematic internaliser regime and the concept of ‘target market’ in product governance. Perhaps further guidance may be provided at the FCA’s next MiFID II conference which will take place on 19 October 2015.

MAR: FCA consultation

Whilst perhaps MiFID II and MiFIR have taken some of the spotlight in EU regulatory terms, the new Market Abuse Regulation (MAR) should not be forgotten particularly as it makes important changes to the market abuse regime. For example the use of inside information to amend or cancel an order will expressly be considered to be insider dealing, the manipulation offence is extended to capture attempted manipulation, issuers and emission allowance market participants will be obliged to draw-up and maintain insider lists and the existing obligation to report suspicious transaction reports will include suspicious orders too.

In the same Commission / ESMA correspondence referred to above it was also mentioned that all the technical standards under MAR would be delayed until the end of September 2015. However, it is worth noting that timing is more critical as MAR will come into force much earlier than MiFID II and MiFIR (the latter being 3 January 2017 as opposed to the former which is 3 July 2016). In Q4 2015 the FCA is expected to publish consultation papers on MAD and MiFID II / MiFIR. The August 2015 FCA Policy development update (issue 25) noted that a consultation paper on MAR is expected in October 2015 and two consultation papers on MiFID II (covering conduct and markets) are expected in December 2015.

Benchmarks: oversight and controls

The Fair and Effective Markets Review – which is a joint project between the FCA, the Bank of England and HM Treasury – increased the number of benchmarks that come under the FCA’s regulatory scope.

Firms would be wise to pay attention to the warning signals raised by the FCA in July when it published the findings of its thematic review of firms’ oversight and controls around benchmarks. The FCA found that firms were failing to identify a wide enough scope of benchmark activities by interpreting the IOSCO definition of benchmark too narrowly and that some firms had not made sufficient effort to properly identify the conflicts of interest that could arise from their business and benchmark activities.

The FCA said that firms needed to:

  • fully identify their benchmark activities across all business areas;
  • continue to strengthen governance and oversight of benchmark activity;
  • continue to identify and manage conflicts of interest;
  • establish oversight and controls for any in-house benchmarks where they had not done so; and
  • implement appropriate training programmes.

The FCA also had a warning for firms’ senior management, stating that it was essential that they pay heed to the findings and messages of the thematic review and take the steps necessary to identify and resolve any outstanding issues.

Consumer credit: rule changes on the horizon

The FCA has been very active in its regulation of consumer credit since taking over from the OFT and it has already issued a number of substantial financial penalties against financial services firms that have not met the requirements of its new regime. For firms active in the consumer credit space it is important to note that compliance with existing FCA requirements is critical but also that there are further changes to the regime on the horizon. Earlier this year the FCA published a consultation paper proposing certain changes to its rules and guidance. In particular the FCA set out proposals for guarantor lending whereby firms would be required to provide adequate pre-contract explanations to guarantors and to assess the guarantor’s creditworthiness. Also, on high-cost-short-term credit, the FCA proposed to remove the exemption from the requirement to include a risk warning in financial promotions. The latest FCA Policy development update (mentioned above) stated that the expected publication date of the policy statement and final rules is “TBC” but it may be assumed that we will see them before the end of the year.

At the time of writing the FCA announced two new thematic reviews covering staff remuneration and incentives and early arrears management in unsecured lending. Both are consumer credit related with the former intended to give the FCA a better understanding of the nature of staff incentives, remuneration and performance management arrangements in the consumer credit market and how firms can control and mitigate the risks that can arise. The FCA visits are due to occur between Q4 2015 to Q1 2016 and firms need to ensure that they are ready for these.

Mortgages: 21 March 2016

The Mortgage Credit Directive comes into force on 21 March 2016 and the Directive applies equally to first and second charge mortgages. The UK Government decided that second charge mortgage business should move from its consumer credit regime into its mortgage regime meaning that to carry on second charge mortgage business after 21 March 2016 lenders, administrators and brokers have to be authorised and hold the correct mortgage permissions. The FCA is now open to accept applications from second charge firms applying for regulated mortgage permissions. Also, the FCA’s Mortgage Conference takes place on 7 September 2015.

Wholesale conduct risk

Wholesale conduct risk is becoming an important regulatory topic with the FCA’s Tracey McDermott delivering a speech on the same at the BBA’s wholesale markets conference. The key message in her speech was that firms needed to take proactive steps to improve conduct and that without a solid foundation in identifying the conduct risks inherent in their business firms would find it hard to manage conduct, let alone show the regulator that it is being managed. In her speech five conduct questions were mentioned that firms should be considering:

  1. how does the firm identify the conduct risks inherent in its business? According to the FCA the root causes of much that goes wrong in wholesale markets are constant – risks exist in managing information flows, conflicts of interest and trader controls. However, the FCA often finds that firms fail to identify where these might crystallise and manage them appropriately
  2. who is responsible for managing the conduct in the firm’s business? The FCA expects firms to be asking themselves how they are encouraging their employees to be and feel responsible for actually managing the conduct of their business
  3. what support mechanisms does the firm have to enable people to improve the conduct of their business or function? Whilst there is no “golden metric” for many firms it will be a combination of practices that create the environment the FCA wants to see. For example, are new product and new business approval committees robust and appropriately represented by the control functions? Do training and induction programmes lay out a firm’s expectation of its staff? Do firms provide management information for supervisors that is useful, timely and genuinely helps them supervise their staff?
  4. how does the firm’s board and executive committees gain oversight of the conduct of the organisation? At a basic level, this is about what information the board and executive see, and how they take it into account in their decision making
  5. whether the firm has any perverse incentives or other activities that may undermine any strategies put in place to answer the first four questions. As an example, most employees of a firm may never or rarely see the CEO. Their role models will instead be the top trader, the desk head. If they see a colleague rewarded and promoted, even if their behaviour is not consistent with the values of the firm, this does not send a clear message that such behaviour is not tolerated.


Last year the FCA levied fines on firms and individuals amounting to £1,471,431,800. This figure seems set to rise in 2015 with the FCA already levying £818,712,756. In July the FCA updated the criteria and outlined the process it uses when deciding whether to refer a firm or individual to its enforcement division for a formal investigation. The update followed a HM Treasury review last December which looked at the enforcement decision making process at the FCA and PRA. As a result of that review, the FCA committed to publish the updated criteria and set out more clearly the process by which decisions to refer cases to enforcement are taken. The FCA is due to publish a further consultation paper later this year setting out how it plans to implement other recommendations made in the HM Treasury review.