Greg Kilminster
Head of Product - Content
CFTC orders two firms to pay a combined $7 Million for firm-wide use of off-channel communication
The Commodity Futures Trading Commission (CFTC) has taken action against U.S. Bank, N.A. (US Bank) and Oppenheimer & Co., Inc. (Oppenheimer) for failing to comply with recordkeeping and supervision failures regarding the firm-wide use of unapproved communication methods. As a result, the CFTC has ordered US Bank to pay $6 million and Oppenheimer to pay $1 million in civil monetary penalties.
In addition, the US Securities and Exchange Commission (SEC) has also filed and settled charges against these firms, along with 14 others, resulting in a total fine of $81 million. Oppenheimer has agreed to pay $12 million, while US Bancorp Investments Inc. (US Bancorp), a US Bank affiliate, has agreed to pay $8 million.
The CFTC’s strict enforcement of regulations regarding the use of unapproved communication methods has resulted in significant civil monetary penalties on 22 financial institutions, totalling $1.124 billion since 2021.
Firms can take note of Gurbir S Grewal, Director of the SEC’s Division of Enforcement, advice: “So here are three takeaways for those firms who haven’t yet done so: self-report, cooperate and remediate. If you adopt that playbook, you’ll have a better outcome than if you wait for us to come calling.”
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FCA review finds retirement income advice market needs improvement
The Financial Conduct Authority (FCA) has released the findings of a thematic review on the retirement income advice market. The review aimed to assess whether consumers are receiving appropriate advice on meeting their income needs in retirement. The FCA also issued Dear CEO letter outlining concerns in this area. Unfortunately, the results were not all positive, with findings including inaccurate records, unsuitable advice, and inconsistent risk profiling. The review also looked at the Consumer Duty (the Duty), and findings suggest that most firms are unlikely to comply.
Background
The review was based on data from the 2022 calendar year and conducted against FCA expectations that firms should provide accessible support, diverse products and services, a realistic approach to risk, useful information for consumers, and appropriate protections where something has gone wrong.
The timing of the review also gave the FCA an opportunity to explore how firms were implementing the Duty.
Areas of improvement
The FCA highlights the following areas for improvement:
- The approach to determining income withdrawals was applied without taking account of individual circumstances or based on methods and assumptions that were not justified or recorded.
- Risk profiling was inconsistent with objectives and customer knowledge and experience or lacked consideration of capacity for loss.
- Failure to get necessary information about customers to demonstrate advice suitability, including expenditure or other financial provision, or not exploring future objectives or circumstances, including income needs or lifestyle changes.
- Periodic review of suitability, where relevant, was not always delivered to customers that had paid for ongoing advice.
- Inaccurate or insufficient records held as the control framework to enable customer outcomes to be assessed and track whether periodic review services were delivered.
Specific concerns regarding the Duty
The review suggests that most firms are unlikely to comply with some of the requirements of the Consumer Duty without taking appropriate action to address concerns. To support firms, the report includes a section on the Duty, including some key considerations to help firms comply.
Next steps
The FCA has asked firms to take steps to address the review’s findings within firms and take appropriate steps to meet requirements on retirement income advice, including the Duty, and document how they have done so. They also encourage firms to refer to
- the questions in the data survey
- good and poor practices in the report
- the Retirement Income Advice Assessment Tool (RIAAT)
- the article on Cashflow modelling (CFM)
As usual, the FCA will take further action if firms do not address the areas of poor practice highlighted by the review. Where appropriate, they will require firms to rectify instances where customers have not received the level of service expected. This includes the provision of potential redress where appropriate.
The FCA will also follow up on the review’s findings more generally with firms involved in the retirement income advice market and carry out further supervisory work in this area to explore the scale of the issues identified and tackle any harms.
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FCA issues business plan for year ahead
The Financial Conduct Authority has published its latest business plan for the 2024/25 period.
The plan is centred around the three main – and one secondary – objectives of the regulator, viz:
- protect consumers
- protect the integrity of the UK financial system
- promote effective competition in the interests of consumers
The secondary objective is facilitating the international competitiveness of the UK economy and its growth in the medium to long term is addresses.
Each of the three core objectives is served by 13 commitments, three of which provide the main focus for the plan. These are:
- reducing and preventing financial crime
- putting consumers’ needs first
- strengthening the UK’s position in global wholesale markets
The plan includes three sections for each of the 13 commitments: outlining the outcomes the regulator hopes to achieve, activities are already under way in the 2024/25 period and activities that will be commenced during the same period. The other commitments include: dealing with problem firms, taking assertive action on market abuse, shaping digital markets, improving the redress framework and improving the oversight of appointed representatives,
The plan also notes the FCA’s funding requirement has increased by nearly 11% but more detail will be forthcoming in the annual fee rates consultation expected in April. The regulator expects to incur the following costs on key commitments:
- Advice Guidance Boundary review: £1.9 million
- Access to cash: £2 million
- Open banking/open finance: £1.2 million
- Smarter regulatory framework: £11.3 million
- InvestSmart: £2.3 million
The plan also notes that more than 5,000 people will be employed by the regulator by the start of the new financial year.
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FINRA amends margin requirements rules to exempt certain short option or warrant positions
The Financial Industry Regulatory Authority (FINRA) has amended FINRA Rule 4210 (Margin Requirements) to establish a specified exception under the margin rules with respect to certain short option or warrant positions on indexes. This exception applies to products that track the same underlying index. The amendment aligns with similar provisions recently adopted by the Chicago Board Options Exchange (Cboe).
The amendments add a new paragraph to FINRA Rule 4210, paragraph (f)(2)(H)(v) f, which provides that when an index call (put) option or warrant is carried “short” (referred to as the “protected option or warrant position”) and there is carried in the same account a “long” (short) position in an underlying stock basket, non-leveraged index mutual fund or non-leveraged ETF (each, referred to as the “protection”) that is based on the same index underlying the index option or warrant, the protected option or warrant position will not be subject to the requirements in paragraphs (f)(2)(E)(i) and (f)(2)(E) (iii) 3 of Rule 4210, provided specific conditions are met.
It is important to note that this exception is not intended for leveraged instruments. The amendments are effective as of 19 March 2024.
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ASIC commissioner on crypto and digital regulation
In a speech at Blockchain APAC’s Policy Week, Australian Securities & Investments Commission (ASIC) Commissioner Alan Kirkland provided some insights into ASIC's approach towards promoting responsible financial innovation while ensuring consumer protection and market integrity. Kirkland's speech primarily focused on ASIC's role in regulating the crypto sector, proposed regulatory reforms, and the importance of trust in the financial system.
ASIC’s approach to innovation
Kirkland outlined ASIC's approach to innovation and highlighted the ‘regulatory trilemma, which posits that financial supervision can achieve two of the following three objectives: consumer protection, market integrity, and encouraging innovation. ASIC’s view is that effective regulation fosters trust, which is crucial for the sustainability of the financial system, including crypto and decentralised finance.
ASIC supports innovation through initiatives like its Innovation Hub, which assists fintech and regtech businesses in navigating regulatory frameworks. Kirkland cited examples of ASIC's involvement in tokenisation projects, demonstrating its proactive stance in monitoring and evaluating emerging technologies in the financial sector.
Tokenisation
Tokenisation, the process of representing real-world assets as digital tokens on a blockchain, has gained traction in the financial industry. ASIC collaborated with the Reserve Bank of Australia (RBA) on a Central Bank Digital Currency (CBDC) trial, assessing token-based products and services. Kirkland highlighted the operational and regulatory considerations surrounding tokenisation, indicating ASIC's increased focus on this area.
Proposed regulatory reforms
The main part of Kirkland’s speech looked at regulatory reforms in the digital space.
The Australian government's proposed framework for regulating digital asset platforms involves incorporating them within the existing financial services framework. This entails introducing a new type of financial product termed a 'digital asset facility'. Under these proposals, platform providers would need to obtain an Australian Financial Services Licence (AFSL) from ASIC to operate their platforms. This move follows Treasury's consultation in 2022 on crypto asset secondary service providers and the 2023 token mapping exercise, indicating a comprehensive approach to regulating the digital asset sector.
The government released a consultation paper in December 2023 on regulating payment services providers, including proposals to regulate payments stablecoins. Kirkland argued this reflects a proactive stance in addressing the evolving landscape of digital payments and stablecoin usage, aiming to mitigate associated risks while fostering innovation in the payments sector.
ASIC's role and view on reforms
Kirkland emphasised ASIC's role in supporting the development and implementation of these proposed regulatory regimes. ASIC's primary objective is to ensure that the regulatory framework maintains market integrity, mitigates risks to consumers and investors, and promotes compliance through effective enforcement mechanisms. He stressed the importance of regulatory outcomes, highlighting the consensus emerging globally, particularly within organisations like the International Organisation of Securities Commissions (IOSCO), on addressing governance, conflicts of interest, abusive behaviours, sales and distribution practices, and custody in crypto and digital asset markets.
Enforcement and Compliance
Kirkland acknowledged that the proposed reforms will necessitate significant operational adjustments for industry participants. Platform providers will be required to comply with general obligations for licensees, including operating efficiently, honestly, and fairly, alongside other obligations within the Corporations Act. Kirkland stressed that while ASIC provides guidance on crypto assets, it is the responsibility of businesses engaged in digital assets to ensure compliance with regulatory obligations. Otherwise: “where we see misconduct, including where we assess you as needing a licence to offer a product or service, we can take action, as we have demonstrated”.
Conclusion
In conclusion, Kirkland reiterated ASIC's commitment to supporting responsible financial innovation while ensuring consumer protection and market integrity. He noted the importance of clear regulatory frameworks backed by effective enforcement mechanisms to enhance trust in the financial system. Kirkland affirmed ASIC's ongoing engagement with industry participants and their advisers to facilitate constructive dialogue and compliance with regulatory requirements.
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SFC Executive Director discusses measures to combat financial misconduct
Christopher Wilson, Executive Director of Enforcement at the Securities and Futures Commission (SFC), recently delivered a speech at the Asian Legal Business (ALB) Pan Asian Regulatory and Anti-Corruption Compliance Summit 2024. He discussed various challenges and measures taken by the SFC to combat financial misconduct, from utilising technology to improve efficiency to collaborating with regulators and law enforcement. He also provided an overview of key SFC initiatives from last year.
Financial misconduct is becoming more advanced and widespread
Wilson stated that the SFC complaint team handled over 400 fraud-related complaints, a 60% increase compared to the previous year. He acknowledged that financial misconduct is becoming more sophisticated and involves multiple parties worldwide, facilitated by social media platforms and private chat groups. Wilson referred to studies conducted by a SFC subsidiary, which revealed that 72% of stock investors recognise the influence of social media, and there is a growing interest in virtual assets, particularly among younger individuals. The research also indicated that most virtual asset investors are motivated by the potential for short-term gains.
Technology as a tool to improve enforcement capabilities
Wilson also shed light on the ways in which the SFC is harnessing technology to enhance its investigative and enforcement powers. This includes consolidating risk data to combat syndicate crimes, adopting AI to monitor social media platforms and automate repetitive tasks and free up staff time.
Prevention is far better than cure
Wilson stressed the importance of prevention and outlined measures the SFC took to strengthen information dissemination and investor education. These initiatives include launching campaigns to alert the public about financial fraudsters and collaborating with Radio Television Hong Kong to produce a TV drama, “SFC in Action,” showcasing investment scams and other market misconduct.
Collaboration is key
Wilson emphasised the importance of collaboration in tackling financial misconduct. The SFC has established strong partnerships with other regulatory authorities and law enforcement agencies. Numerous collaborations were carried out last year, involving organisations such as the Independent Commission Against Corruption, the Accounting and Financial Reporting Council (AFRC), the Stock Exchange of Hong Kong Limited, as well as senior representatives from the China Securities Regulatory Commission, the Economic Crime Investigation Department of the Mainland Ministry of Public Security, and the Commercial Crime Bureau of the Police.
Additionally, he noted that the SFC maintains highly effective enforcement cooperation with regulators in key financial markets worldwide to prevent bad actors from exploiting regulatory and jurisdictional loopholes.
Working toward more judicial and police scrutiny
Finally, Wilson discussed the notable enforcement actions carried out by the SFC in the past year. He mentioned a landmark case led by the SFC against the key members of an advanced “ramp and dump” syndicate. This is the first case of its kind to be heard in the District Court, allowing for more severe penalties to be imposed. Wilson is hopeful that this trend will continue, with similar cases receiving similar judicial scrutiny.
Wilson also mentioned the growing importance of virtual assets in enforcement work. In fact, the SFC has established a dedicated working group with the police to enhance collaboration in monitoring and investigating suspicious platforms. At the SFC’s request, the police will block access to websites of dubious virtual asset trading platforms and remove relevant social media pages.
He ended his speech by encouraging market participants to collaborate, “share intelligence, close regulatory gaps, address potential vulnerabilities and always stay one step ahead of the bad actors.”
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GC24/1: FCA issues consultation on insolvency practitioners guidance
The Financial Conduct Authority (FCA) has released a consultation on proposed changes to the final guidance (FG) 21/4 for insolvency practitioners when dealing with regulated firms. The consultation aims to reflect legal, regulatory, and economic changes that have occurred since its release in 2021.
The proposed changes include:
- Introduction of Consumer Duty expectations.
- Alignment with Compromises Guidance issued in 2022.
- Additional information on the availability of Financial Services Compensation Scheme (FSCS) protection for customers.
- New guidance in anticipation of final rules on Dormant Asset Scheme expansion.
- Clarifications on existing guidance.
The consultation deadline is 30 April 2024.
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CFTC proposes new rules for DCMs and SEFs
The Commodity Futures Trading Commission (CFTC) has issued proposed rules and amendments to its current regulations for designated contract markets (DCMs) and swap execution facilities (SEFs).
The proposed changes include minimum fitness standards, requirements for identifying, managing, and resolving conflicts of interest, and structural governance requirements. These provisions are intended to ensure that SEF and DCM governing bodies incorporate an independent perspective adequately.
The rules also cover composition requirements for boards of directors and disciplinary panels, limitations on the use and disclosure of material non-public information, requirements relating to Chief Regulatory Officers, Chief Compliance Officers, and Regulatory Oversight Committees, and notification of certain changes in the ownership or corporate or organisational structure of a SEF or DCM.
The deadline for comment is 22 April 2024.
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