SMCR+ View – June 2024

After questioning whether we could credibly call this a summer edition of SMCR+ View with the recent weather, it looks like summer may now be truly upon us, and with this, we bring you June’s edition of SMCR+ View.

The headline is that the long awaited SMCR consultation papers from the FCA/PRA which we were hoping for last week (and which follow last year’s discussion papers and HM Treasury’s Call for Evidence) have been delayed until after the election on 4 July 2024 (see the FCA’s statement here that no major consultation papers or significant final rules will be published during the election period and whilst Parliament is dissolved). We have heard on the grapevine that matters likely to be included in the consultation papers include the 12-week rule, the SMF 7 role and the proportionality of the SMCR processes, but let’s wait and see in July. We will be engaging with clients on the consultation papers and if you’d like to be included in any peer roundtables or our webinar summarising the consultation papers then do let us know.

Aside from this main update, this version includes an update on the new Form A as well as a number of Final Notices relating to failures in systems and controls and the treatment of customers (with an interesting Consumer Duty angle). We’ve also got some updates on the FCA’s enforcement transparency proposals, and some observations and insights from the FCA on operational resilience.

As always, please reach out if you have any feedback or questions.

1. New Form A

The new Form A is finally available in the FCA Handbook. You will notice that there are a number of small differences between this and the old Form A, so a heads up before you start preparing the information for any new Senior Managers!

We do a lot of work assisting firms with their Senior Manager applications and preparing Senior Managers for interview with the PRA/FCA – do reach out to Penny Miller (Partner) or [Amy Sumaria](amy.sumaria@simmons-simmons.com (Managing Associate) if you’d like our assistance – we have a very good track record!

2. Enforcement transparency

In May’s SMCR+ View, we highlighted pushback from multiple parties in relation to the FCA’s proposals around enforcement transparency. Since then, the House of Lords Regulation Committee has published a letter summarising its concerns. It includes points made at an oral evidence session held on 8 May, and aligns with its inquiry into the proposals launched in May this year.

Whilst the letter does note some positive feedback received (e.g. consumer protection, deterring poor conduct, and increasing trust in enforcement), it has a clear focus on the Committee’s concerns, which include the FCA taking a different approach to other regulators (e.g. in the US, France and Switzerland), loss of investor confidence in the UK if there is a low bar for assessing public interest for publicising investigations, and a clear need for the FCA to reduce the time taken to conclude investigations so that allegations aren’t hanging over firms for prolonged periods of time. There’s a bit of a dig at the FCA for focussing on publicising enforcement investigations over other work to increase international competitiveness and reference to the FCA already having powers in exceptional circumstances to publicise enforcement investigations.

The Committee’s inquiry into the proposals closed on 4 June, and we expect to see a summary of the responses received shortly. To discuss any of the above, please reach out to Emma Sutcliffe (Partner), Thomas Makin (Managing Associate) or Amy Sumaria (Managing Associate).

3. FCA and PRA Final Notices

• The FCA and PRA have published Final Notices fining Citigroup Global Markets Limited (“CGML”) £27,766,200, and £33,880,000 respectively, for a breach of FCA Principle 2 (Due skill, care and diligence), FCA Principle 3 (Organise and control its affairs responsibly and effectively), PRA Fundamental Rule 2 (Conduct its business with due skill, care and diligence), Fundamental Rule 5 (Effective risk strategies and risk management systems) and Fundamental Rule 6 (Organise and control its affairs reasonably and effectively) in relation to failures in CGML’s trading systems and controls. This relates to an incident where a trader made an inputting error whilst loading a basket of equities into an order management system, which caused a material short-term drop in several European indices for a few minutes. Certain controls were found to be absent or deficient, including the ability of the trader to override numerous warning messages and failures by the trade monitoring team to escalate information alerts.

  The FCA and PRA found material and continuing deficiencies in the trading systems, including there being no implementation of hard blocks or limits that would have prevented the error, the trader being able to override pop-up alerts quickly and easily, and real-time monitoring being inadequate to fully identify risks and remediate all issues arising from the suspension and alerts. The PRA also found that adequate governance structures had not been imposed to ensure that all trading activity was identified and adhered to CGML’s trading policy, and operational procedures and processes actioned by first line defence functions were not timely and did not enable effective risk management.

  We would suggest flagging the FCA and PRA’s findings to both the first line and second line defence functions.

If you have any questions, please reach out to Alex Ainley (Partner).

• In this Final Notice involving various HSBC entities, the FCA imposed a £6.28 million fine for failures in relation to the treatment of customers in arrears or experiencing financial difficulty (this occurred prior to the Consumer Duty implementation). The FCA found a breach of Principle 3 (Management and control) and Principle 6 (Treating customers fairly). This followed a s. 166 Skilled Persons Report covering arrears handling, collections, and recoveries operation which revealed a number of things and the Final Notice includes topics such as weaknesses in training, vulnerable customers, assurance frameworks etc, but of particular relevance to SMCR+ View are the following points:

  • SMF responsibilities: The Skilled Person found that the responsibilities/accountabilities set for management between the Global operational risk management framework and the collections and recoveries function/activities were not fully aligned.
  • Governance and Management Information: The governance and oversight model for collections and recoveries was found to be inconsistent and unclear across various risk and control frameworks. MI metrics also did not have a customer outcome-centred focus (they were operationally and financially focussed) and there are some interesting points here around MI to consider in light of the Consumer Duty. The s. 166 also highlighted a lack of debate and challenge in relation to such MI packs.

You can easily see how, if this had happened post-Consumer Duty implementation, Principle 12 and associated Consumer Duty rules would be applicable. We are doing a lot of work with firms on their Consumer Duty MI and advising in relation to the different surveys the FCA have sent to firms on vulnerable customers and customer support. You can find more details on the Consumer Duty learnings from this in Consumer Duty View.

If you have any questions on this or the Consumer Duty more generally, please reach out to Penny Miller (Partner), Caroline Hunter-Yeates (Partner), or Louise Tudor-Edwards (Partner).

4. FCA – Observations and Insights on operational resilience

The FCA has updated its webpage on operational resilience to assist banks, building societies, PRA-designed investment firms, insurers, Enhanced Scope SMCR firms and entities authorised and registered under the Payment Services Regulations 2017 or the Electronic Money Regulations 2011 with complying with its operational resilience rules by 31 May 2025. This stems from the FCA’s Final Rules on Building Operational Resilience published on 31 March 2022, which requires firms to have performed mapping and testing so they are able to remain within impact tolerances for each important business service by 31 March 2025.

The updated webpage includes a number of observations and insights, including around governance and self-assessment. For example, one requirement outlined is the need for the self-assessment to provide sufficient information and justification on the decisions and plans made for resilience, as this will be provided to the governing body to approve and they should be able to understand the firm’s position and roadmap to resilience. Examples of the contents of this self-assessment include an overview of vulnerabilities found, the scenarios tested together with the relevant outcomes, remediation plans, and the firm’s strategy to ensure they can remain within impact tolerances.

We would recommend the SMF 24 or the Senior Manager with the responsibility for operational resilience reviews this webpage and the good practices identified. If you have any questions, please reach out to Alex Ainley (Partner) and Amy Sumaria (Managing Associate).

5. FCA Final and Decision Notices – pension funds mistreatment

The FCA has imposed a ban and fines on three individuals who were involved in operating SVS Securities Plc’s (“SVS”) discretionary fund management business. Two of the individuals have referred the decision to the Upper Tribunal.

The FCA found that SVS invested customer funds into high-risk illiquid bonds, including instruments issued by companies operated by some of SVS’ directors. This resulted in systematic conflicts of interest and, the FCA alleges, undisclosed commissions of up to 12% of the customers’ investments. The bonds have since defaulted, leaving customers with only a fraction of their original investment.

The FCA found that the individuals breached Statement of Principle 6 (Due skill care and diligence) and Statement of Principle 1 (Act with integrity), as a result of their reckless decision to mark down customers' valuations when they disinvested from fixed income assets. Of particular interest is the FCA’s findings in relation to SVS’s former finance director then CEO, who the FCA found had closed his mind to the risk that customers would lose out financially, and SVS’s Head of Compliance, who the FCA concluded had actively dismissed concerns from others regarding the potentially negative impact on customers.

The Notices are a reminder to firms and Senior Managers to ensure that decision-making is well documented and that any concerns regarding potential customer harm are considered, taken on board and that the way in which any concerns or potential customer detriment have been rectified is reflected in contemporaneous documentation.

If you have any questions, please reach out to Caroline Hunter-Yeats (Partner), Emma Sutcliffe (Partner) and Thomas Makin (Managing Associate).

6. FCA speech – International regulatory developments affecting investment management

One for those in the asset management sector - Nikhil Rathi, the FCA Chief Executive gave a speech in relation to developments and regulatory priorities in the sector, with a focus on encouraging innovation and making regulation more efficient. Rathi highlights the importance for firms’ governance in respect to the adoption of new technologies, encouraging firms to think about the skills and capabilities needed in an organisation. Rathi confirms that the FCA’s role in relation to AI stems from its objective to ensure market integrity and that the use of AI doesn’t lead to market manipulation. Rathi also reiterates the FCA’s view on governance which we have seen a couple of times now in relation to AI - for now, the FCA believes it can rely on existing governance regimes such as the SMCR and Consumer Duty without the need to create any AI-specific framework.

If you have any questions on AI more generally, please reach out to Minesh Tanna (Partner), Sophie Sheldon (Partner) or Amy Sumaria (Managing Associate).

7. PRA – Policy Statement on Insurance Branch Authorisation and Supervision

A helpful clarification from the PRA in its Final Rules on its supervision of insurance branches, indicating that the PRA expects third country branch undertakings to establish at least the four minimum key functions in respect of the branch’s operations: risk management, compliance, internal audit and actuarial. The rules in relation to fitness and propriety will apply to those individuals and will need to be notified to the PRA for a fit and proper assessment if they will not be holding a PRA SMF or FCA controlled function.

If you have any questions, please reach out to Jonathan Thorpe (Partner) or Amy Sumaria (Managing Associate).

8. FCA Decision Notice – Pension activities

We’ve also had yet more FCA Decision Notices against individuals for misconduct in relation to pension activities, with the FCA publishing Decision Notices against Mr Stephen Burdett and Mr James Goodchild (an SMF 27) fining them £311,762 and £47,600 respectively and banning both individuals. Both of these decisions have been referred to the Upper Tribunal.

The FCA alleges that personal pension funds worth over £10 million were switched to high-risk portfolios which were obviously unsuitable for most customers. Both individuals were found to have acted without integrity by creating misleading client information which led customers to believe they were getting low or medium risk portfolios. Mr Burdett also acted as a director despite knowing he wasn’t approved and failed to co-operate with the FCA’s investigation.

If you have any questions, please reach out to Thomas Makin (Managing Associate) or Amy Sumaria (Managing Associate).

9. FCA – Updates to Forms

A couple of quick flags to end on:

• The new Form A is now available in the FCA Handbook – please see above for more details.
• The FCA has updated the Financial Analysis Template for Wholesale firms to be used when preparing a firm’s financial information to be submitted in an application to be authorised or registered by the FCA.
• For listed companies subject to the FCA’s diversity and inclusion requirements around reporting information and disclosing targets on the representation of women and ethnic minorities on their boards and executive management, the FCA, in their Primary Market Bulletin 49, is proposing to update the “Other Ethnic group” reporting category to align with updates made by the ONS. The FCA encourage companies in scope of the diversity and inclusion requirements to give flexibility to allow individuals to use the Other Ethnic Group category.