SMCR+ View - May 2023

Last week we went to the Bank of England for a meeting with HM Treasury, the PRA and the FCA regarding the ongoing SMCR review. It was an interesting conversation and they are clearly keen to hear from industry, please contact us if you would like to hear more.

In the non-Edinburgh Reforms world, this month’s SMCR+ View covers another set of Conduct Rule breach Decision Notices (!), SMCR form changes, amongst much more.

1. FCA - Decision Notice for Banque Havilland and associated staff / Senior Managers

Like London buses, you're waiting for one and then three arrive at once - the FCA has published three linked Decision Notices fining Edmund Rowland (SMF 21 and former London branch CEO) £352,000, David Weller (SMF 21 and former London branch Senior Manager) £54,000 and Vladimir Bolelyy (former London branch employee) £14,200 and banning all three individuals from working in financial services. All individuals were found to be in breach of Individual Conduct Rule 1 (you must act with integrity) and to lack fitness and propriety. All of these decisions have been referred to the Upper Tribunal. Note, the firm Banque Havilland SA was also fined £10 million for a breach of Principle 1 (a firm is required to conduct its business with integrity) and is also referring the decision to the Upper Tribunal. So these FCA findings are subject to change once the Tribunal hears the references.

Speed read - the FCA's case is that in 2017, a presentation was drafted and disseminated which contained manipulative trading strategies aimed at creating a false or misleading impression in the price of Qatari bonds. Although the strategy was never implemented, the proposals contained could have been a criminal offence if they had taken place in the UK. It all came to light via the press - an article entitled "Leaked Documents Expose Stunning Plan To Wage Financial War On Qatar (...)". Mr Rowland had tasked Mr Bolelyy to draft the document, Mr Weller significantly contributed to the content and both Mr Rowland and Mr Bolelyy then disseminated the document.

A couple of interesting points to note:

• The FCA reiterated a number of times that if the strategy had been executed it could have been a criminal offence if it had taken place in the UK. Even though the strategy was never implemented and there was no criminal offence, the prospect that there could have been was deemed enough (combined with the fact the presentation was produced in the first place) to amount to a lack of integrity.
• Again, there was no duty of responsibility case brought against the Senior Managers.

Please contact Penny Miller (Partner), Amy Sumaria (Supervising Associate), Emma Sutcliffe (Partner) or Richard Sims (Partner) if you have any questions.

2. FCA Decision Notice for Markos Markou

The FCA is usually measured in its response to Upper Tribunal decisions that disagree with it, but they described this one as "incorrect and irrational" which is quite strong! This relates to the Decision Notice for Markos Markou, imposing a fine of £25k, withdrawing his approval as an SMF 1 and SMF 3 and prohibiting his performance of any function in relation to any regulated activity. Mr Markou was the sole director at a small mortgage and insurance intermediary, with responsibility for establishing and maintaining the systems, controls and oversight of the mortgage business. The FCA found that Mr Markou recklessly failed to have appropriate oversight over the mortgage business, and even after multiple communications from the FCA, failed to implement satisfactory systems and controls. The FCA therefore determined that Mr Markou had breached Statement of Principle 1 under the Code of Practice for Approved Persons (acting with integrity) (note the relevant period was pre-SMCR) and was not a fit and proper person to perform the SMF roles allocated to him.

Mr Markou referred the decision to the Upper Tribunal, which concluded that it was not satisfied that Mr Markou had failed to establish, maintain and enforce effective financial crime systems and controls and made no findings of misconduct. The Upper Tribunal therefore concluded that the FCA's decision was unreasonable and directed the FCA not to impose a disciplinary sanction on Mr Markou. The FCA has confirmed it will seek permission to appeal this decision. Watch this space...

Please contact Richard Sims (Partner) if you have any questions.

3. PRA - Policy Statement on changes to SMR forms

An administrative update for dual-regulated firms now, and as anticipated in CP 2/23, the PRA has published PS 4/23 which moves Forms A, B, E, I, J and the Statement of Responsibilities from the PRA Rulebook to the Connect system (downloadable blank templates of the forms remain available on the PRA's website). The PRA also confirmed that they will increase the visibility of any future changes to the forms that are not consulted on by including a message in the monthly Regulatory Digest (they said they will try to publish this before the changes take effect, which feels only reasonable!).

The PRA have also increased the length of employment history required by the long Form A from five to ten years, and have confirmed that this amendment will not have an impact on the six year regulatory reference requirement. They have said that they are very open to feedback on any authorisation form so if firms have any you can let them know at PRA-ApprovedPersons@bankofengland.co.uk.

We note that the Senior Manager approval forms are one thing we are covering in our response to the PRA/FCA Discussion Paper on the SMCR. Notably, we are proposing to suggest a number of things - a summary of which we've outlined below. Let us know if you have other comments to add or any that you would like to discuss - we are aware that firms have differing views and we are aiming to present a consensus view where we can or otherwise propose options for consideration!

• Reducing duplication within the forms - e.g. requiring a CV, employment history and competency assessment.
• Reducing additional forms: MiFID investment firms have to submit an Article 4 SMR form and Annex III form when there is a change in the management body along with the relevant Form A/Form E. We have suggested doing away with these because they are legacy EU driven forms where most firms cross refer to the contents of the Form A.
• Equivalence: Where an individual is approved or assessed as fit and proper under another regime that the PRA/FCA deem to be broadly equivalent (e.g. Managers in Charge regime in Hong Kong), allowing firms to submit a notification informing the regulators the individual will be performing a SMF role in the UK, or at least providing an abridged process for their approval.
• Notifications rather than applications:
  • Potentially only requiring a notification to the FCA rather than a Form E / approval process to be conducted where individuals who are already approved are taking up new SMF roles. We note that there may be a proportionality point here whereby there are certain roles where the regulators may still want the ability to scrutinise the particular individuals (e.g. SMF 1), but there are other roles (e.g. SMF 18) where this may not be necessary.
  • Allowing firms to notify the FCA of individuals taking on certain Senior Manager roles (likely by submitting a Statement of Responsibilities) provided the firm has done its own assessment and there was not anything of particular note (e.g. an adverse regulatory reference). Of course, the regulators may ask questions, but it would avoid the rigmarole of a full application. For example, for SMF 18s and SMF 6s where they tend to be business heads, it is arguably disproportionate that the PRA/FCA would need to approve them if the firm has done its own assessment.

Please contact Penny Miller (Partner) or Amy Sumaria (Supervising Associate), if you have any questions.

4. WhatsApp monitoring failures - SEC and what's happening across the pond

$1.8 billion of fines were previously issued by the SEC in relation to the use of private messaging services when conducting firm business. And it hasn't stopped there, with more fines being issued by the SEC last week, totalling £18 million. In both cases from last week the SEC found that the firms had failed to maintain and preserve electronic communications relating to business dealings. Both firms had self-reported and self-remediated the violations meaning the fines were reduced. Interestingly, the SEC noted that the purpose of the fines is twofold: reminding firms and employees of all levels of seniority of the importance of following the regulatory record keeping requirements, whilst also encouraging firms to disclose any violations if and when they occur. Of course, this is happening in the US for now but this is clearly on the FCA's radar since COVID-19 and the rise of individuals working from home and so we'd encourage firms to consider these enforcements by the SEC in the context of their UK business given the broadly applicable lessons that can be learned.

We recently did a client webinar on this topic, viewed from a UK regulatory perspective, which you can access here. Please contact Richard Sims (Partner) if you have any questions.

5. FCA publishes steps to improve whistleblower confidence

Following the Government's announcement of its review of the whistleblowing framework, the FCA has now published a list of actions to improve confidence of whistleblowers following a survey of individuals who had provided them with information. These actions include providing whistleblowers with information on how the information they provide is used, as well as improving how the information is used across the FCA. The FCA also confirmed that it will enhance its webform, which is the most used method of whistleblowers contacting them. The FCA will also engage with the Government in their review of the legislative framework for whistleblowers. This will be of interest to firms Whistleblowing Champions and for broader policies and procedures on this topic, and is one to keep an eye one (we certainly will!).

To discuss this further, please contact Andrea Finn (Partner) or Peter Lockwood (Managing Associate).

6. FCA - Market Abuse in Contract for Difference (CFD) providers

In its Market Watch 73, the FCA published its observations from its market abuse peer review into firms offering CFDs. From a governance perspective, the FCA found that all firms had policies and procedures which set out the roles and responsibilities for market abuse surveillance, with responsibility resting either solely with the front office, or a mix of the front or middle office with a Compliance function independently reviewing any alerts. The FCA confirmed that for smaller firms, it may be proportionate for responsibility to rest with teams or individuals who are outside of Compliance. The FCA also found that Compliance were reluctant to provide feedback to front office staff on surveillance matters due to concern about tipping off. The FCA reiterated that Compliance should be challenging and educating front office staff to ensure they understand their obligations under the market abuse regime. Although this Market Watch is specifically in relation to CFD providers, these broad findings will be of interest to a wider scope of firms.

Please do reach out to Richard Sims (Partner) with any questions you have.

7. FCA publishes complaints data

The FCA has published a webpage which provides an overview of firm-specific complaints data and aggregate market-level complaints data for the second half of 2022. The FCA found that the number of complaints received in the second half of 2022 was down by 6% from the first half, with financial services firms receiving 1.79 million complaints. The FCA flagged notable increases in complaints in certain product groups, including the home finance product group (up 14%) and savings (including ISAs) (up 35%), with the majority of complaints being closed within 8 weeks. This is useful data for firms to compare their performance with other peers in the market and particularly within the context of the Consumer Duty and its implementation by relevant firms' implementation. Some firms will have responsibility for complaints sitting with a particular Senior Manager - if this is the case, this may be of interest to them.

8. PRA - Consultation Paper on proposed changes to enforcement approach

The PRA have published CP 9/23 which sets out proposals to amalgamate the Bank of England's enforcement policies and procedures which includes the PRA's Approach to Enforcement. As part of those amendments, the PRA has proposed an innovative new 'Early Account Scheme' under which the subject of the investigation would be compelled to undertake the 'fact-find' phase of the review itself and to report to the PRA. The current proposal is that this report would need to be supported by an attestation from a Senior Manager who is "independent" of the subject matter of the investigation that "there are no other related matters, relevant information or potential breaches of which the firm is aware and which should be notified to the PRA". This would potentially be a significant undertaking for the Senior Manager in question. The Bank of England is asking for responses by 4 August 2023.

We recently hosted a webinar discussing CP 9/23, including the potential for a senior manager attestation under the proposed Early Account Scheme, which you can access here. If you have any questions, please reach out to Tom Makin (Managing Associate).