FINANCIAL SERVICES: An Introduction

Financial Services Overview 

Following several years of high profile Libor and Forex enforcement cases, fines levied by the Financial Conduct Authority (FCA) in 2016 were the lowest since 2007. This brief impasse appears to be the result of a refocusing by the regulator on other areas of misconduct in the market, with energies being directed towards tackling financial crime in particular. By the first half of 2017, fines imposed by the FCA had already increased seven-fold on the previous year. Deutsche Bank was a notable example, receiving a £163 million fine for failing to maintain adequate anti-money laundering controls. The FCA will also now have better access to information about trends and developments in this area via the new annual Financial Crime Return that came into effect at the end of 2016, replacing ad-hoc data collection of financial crime risks with targeted supervision. As a result, 2018 is likely to be another year of significant fines.

The FCA’s appointment of Vincent Coughlin QC as its chief criminal counsel signals a declaration of intent by the regulator to conduct more criminal investigations and prosecutions. This comes at an important time, when the future of the Serious Fraud Office remains uncertain. A significant upsurge in insider dealing cases in 2016 shows no signs of abating in 2017, as methods for detecting market abuse become more sophisticated. This will, in turn, filter through to a greater number of headline grabbing criminal prosecutions brought by the regulator in this area over the coming years.

Whilst big banks and trading floors have been the popular target for several years, firms and activities which have a more obvious impact on the general public are also entering the FCA’s sights again. The spotlight is being turned back on smaller firms, independents, insurers and anyone handling client money. Consumer credit firms are likely to remain to be a particular focus for the regulator during 2018.

In addition to strong enforcement action in the wholesale and retail markets, the FCA and Prudential Regulation Authority (PRA) have remained active in significant regulatory change and supervisory projects, with the forthcoming extension of the Senior Managers Regime to all FSMA (Financial Services and Markets Act) authorised firms in 2018, implementation of MiFID II and the continuing success of the regulatory sandbox to guide and supervise FinTech and innovative businesses.

Any discussion on the future of financial services in the UK would not be complete without an honourable mention for Brexit. The decision by the UK to vote to leave the European Union continues to create uncertainty in the markets and at this stage the full impact of this change on financial services is unknown. The key concern for the regulator has been to ensure an appropriate transitional period for firms that will be affected.

The following overview sets out some of the key issues that are likely to be facing clients and professional advisors for 2017/2018.

Senior Managers and Certified Persons Regimes 

The FCA and PRA continue to prioritise individual accountability for those in positions of responsibility. Significantly, in 2018 the combined Senior Managers & Certification Regimes (SMCR) will be rolled out to all FSMA authorised firms. A vast range and type of businesses will be affected, from one person IFAs to asset managers with billions under management. The scope and approach to the roll out has been consulted on but “proportionality” is the message being used by the FCA.

This extension of the regime will require firms to implement significant changes to their compliance and employment practices and planning ahead will be essential to successful implementation of the extended regime.

Focus on consumer credit firms 

The FCA’s stated commitment towards the highest standards of conduct towards consumers was evident in the increased intervention by the FCA on the consumer credit sector last year. IFAs, wealth management firms, insurance firms and brokers, and investment firms were also targeted. This is likely to continue as the FCA prioritises the financial interests of the man in the street. In this vein, the FCA took its first criminal action against an individual acting as an unlicensed consumer credit lender in 2017.

MiFID II, MAD II and MAR 

Though it was due to be implemented in January of 2017, the MiFID II Directive and Markets in Financial Instruments Regulation (MiFIR) is now due to be implemented on 3 January 2018. MiFID II and MiFIR will strengthen transparency and functioning of the internal market for financial instruments. The new regime is a comprehensive set of reforms that will reshape the secondary trading of financial instruments, particularly derivatives, and seeks to ensure the best interests of clients are central to firms’ businesses. The MiFID II Directive and MiFIR will also form the legal framework governing the requirements applicable to investment firms, trading venues, data reporting service providers and third-country firms providing investment services or activities in the EU.

On 3 July 2016 MAD II entered into force, incorporating the Market Abuse Regulation (MAR) and replacing the previous Market Abuse Directive. As well as prescribing market abuse offences, MAR addresses the management and disclosure of inside information and the maintenance of insider lists and the PDMR (Persons Discharging Managerial Responsibilities) notification regime. MAR extends the market abuse regime to commodity derivatives markets and the manipulation of benchmarks. It also contains provisions on High-Frequency Trading whilst regulators have been granted greater investigative powers. Firms will need to ensure they continue to be compliant with the new rules, providing staff training and reviewing and updating their policies and procedures.

The Focus for 2018 

The FCA and the PRA look likely to continue their reformation and enforcement of the UK’s regulatory framework. Emphasis is set to remain on the culture and governance of firms, with continued importance placed on the values and norms set by boards and senior managers in an effort to embed the right culture in firms.

Financial Services firms will need to prepare for the implementation of the SMRC, MiFID II and MiFIR in 2018. These reforms aim to ensure that the best interests of clients are central to the affected business, in a concerted effort to improve the UK’s reputation as a financial centre and support the FCA’s objective of increasing market integrity.

Whilst the effect of Brexit on the financial services sector remains uncertain at this stage, evidently the PRA and FCA remain enthusiastic about their proactive approach to market supervision. Regulated firms should expect this outlook to continue through 2018 and prepare accordingly.