FCA fines broker £6.5million for compliance failings
Broker ADM Investor Services International Limited (ADMISI) has been slapped with a hefty fine of £6,470,600 by the Financial Conduct Authority (FCA) due to glaring deficiencies in their anti-money laundering (AML) systems and controls. The fine is the regulator’s third largest this year.
The nature of ADMISI’s business operations and its diverse client base heightened the potential risk of money laundering. Factors such as the business model, geographical distribution of customers, involvement with high-risk clients, and dealings with Politically Exposed Persons necessitated stringent AML measures.
Nevertheless, raising initial concerns in 2014 regarding the adequacy of ADMISI’s AML systems, the FCA specifically highlighted the absence of a formal customer risk classification process. Expecting improvements, the FCA revisited ADMISI in 2016 and found significant and persistent shortcomings:
- The firm’s AML customer risk assessment lacked depth, hindering proper financial crime risk evaluation.
- A comprehensive firm-wide money laundering risk assessment was not conducted.
- Inadequate ongoing monitoring was evidenced by the absence of periodic customer reviews.
- Outdated policies referencing obsolete legislation further contributed to the lapses.
- ADMISI’s compliance manual had no reference to PEPs and there were no PEP policies in place.
Following the 2016 evaluation, ADMISI committed to corrective measures, notably abstaining from high-risk customer acquisitions. By October 2016, the company had introduced updated AML policies and procedures to address identified concerns. However, by failing to comply with applicable regulatory and legal AML requirements which require firms to design, implement, and maintain adequate systems and controls to mitigate its money laundering risks, and, by failing to conduct adequate remediation of weaknesses the Authority identified during the 2014 Assessment, ADMISI breached Principle 3 of the Principles for Businesses emphasising the need for responsible and effective organisational affairs management with adequate risk management systems.
Therese Chambers, Joint Executive Director of Enforcement and Market Oversight, emphasised the necessity for all financial firms to have robust anti-money laundering checks in place. She remarked, “ADM Investor Services’ failures put it at risk of being used to facilitate financial crime. These failings continued even after the firm had received clear warnings on the need to improve its systems.”
ADMISI did not contest the FCA’s findings and opted for the partly contested case process, allowing the FCA’s Regulatory Decisions Committee to assess the appropriate penalty. Their acceptance of the findings earned them a 30% settlement discount. If not for this agreement, the FCA would have imposed a financial penalty of £9,243,738.
This case is a reminder to compliance teams of the importance of having effective AML systems and controls in place. Firms that fail to implement adequate AML systems and controls are exposed to the risk of financial crime and may be subject to regulatory fines.
ESMA report sees increase in ESG-related language in fund offerings
The European Securities and Markets Authority (ESMA) has published new research which shows funds increasingly use ESG related language in their names, and that investors consistently prefer funds with ESG words in their name. The report shows that the share of EU UCITS investment funds with ESG words in their name has increased from less than 3% in 2013 to 14% in 2023 and highlights the regulatory concerns over ‘greenwashing’ noting that: “Tackling greenwashing is one of the key priorities in ESMA’s Strategy on Sustainable Finance.”
The report adds that: “we constructed a comprehensive list of ESG words and phrases, against which the ESG-related language used by funds can be measured and compared. In turn, this list – the most complete and up to date, to our knowledge – allows us to apply NLP techniques to several large text and numerical datasets spanning funds across the EU. This work is part of ESMA’s on-going efforts to develop innovative analytical tools for supervisory and regulatory purposes, including with a view to identify and address potential greenwashing in the financial sector.”
CFTC chairman updates on enforcements and priorities
In a speech in Chicago, CFTC chairman Rostin Behnman stressed the key role of the Commodities Exchange Act in every decision the CFTC takes, particularly with regard to enforcement and the need to legislate more for digital assets.
As well as briefly covering the effects on the economy of global weather pattern El Niño, Behnman addressed the ehforcement challenge in a world of innovation noting: “increasing reliance on new structures and technologies does not diminish our commitments to a culture of compliance, rooted in trust and responsible supervision… whether you are relying on technology or outsourcing to third-parties, your duties to comply with the rules and regulations and contribute to the integrity of our markets cannot be abdicated.”
Behnman also outlined some of the key CFTC’s enforcement statistics in its latest fiscal year:
- 45 of the enforcement actions in this period involved digital asset related misconduct, representing more than a third of the 131 similar actions brought by the Commission since 2015.
- The charging of 14 entities who falsely claimed to be CFTC-registered futures commission merchants (FCMs), registered foreign exchange dealers (RFEDs), and NFA members
- The first case involving a romance scam, commonly known as “Pig Butchering”.
More than $6 billion has been obtained in fines during the year and Behnman stressed the enforcement focus was not only on digital assets but retail fraud and FOREX too. Turning to the regulatory agenda, he noted new proposed and final rules for:
- enhancing risk management and resilience across intermediaries, exchanges, and derivatives clearing organisations;
- fostering sound and responsive practices regarding cybersecurity and the use of third-party vendors;
- strengthening customer protections;
- promoting efficiency and innovation;
- improving reporting and data policy; and
- addressing duplicative regulatory requirements and amplifying international comity and domestic coordination with both federal and state regulators.
Behnman added that the following areas will be prioritised before the end of the year:
- Amend swap dealer business conduct standards and documentation requirements to formalise existing staff no-action positions concerning prime broker arrangements and swaps intended for clearing.
- To consider a proposed rule addressing operational resilience programs making them adaptable to the risk profiles of registrants and the constantly changing cyber risk landscape.
- The Market Participants Division will create and share guidance on utilising third-party service providers to fulfill compliance obligations.
- Consideration of codification of routinely provided exemptive letters for account statement reporting deadlines for certain commodity pool operators.
- The intermediary space will also see proposed codification of staff no-action letters addressing swap dealer business conduct standards and documentation requirements.
As Behnman noted in his conclusion: “we still have a few months left of 2023, and I intend to make the most of them.”
PRA publishes September summary
The Prudential Regulatory Authority has published its September Regulatory Digest summarising its activity during the month.
The digest includes the following content:
- Solvency UK: Maintaining the momentum – speech by Gareth Truran
- Competitiveness and growth: continuing the conversation − speech by Victoria Saporta
- Timings of Basel 3.1 implementation in the UK
- CP18/23 – Diversity and inclusion in PRA-regulated firms
- CP19/23 – Review of Solvency II: Reform of the Matching Adjustment
- CP20/23 – Ring-fenced bodies: managing risks from third-country subsidiaries and branches
- Letter from Victoria Saporta ‘Thematic feedback from the 2022/2023 round of written auditor reporting
FCA publishes terminal illness cover recommendations
The Financial Conduct Authority (FCA) has published recommendations for the life insurance industry following its review of the provision of terminal illness benefits.
The regulator concludes that terminal illness cover is a useful addition to life insurance policies but outlines some good practice firms should be mindful of.
- A 12-month prognosis of death period is the most appropriate and is in line with the products and services outcomes expected under the Consumer Duty.
- Declined claims should be independently checked with frequent reinsurer audits, and management information should be in place to show all ‘notifications’ of a terminal illness as well as formal claim logs.
- Firms should act quickly in the event of claims from customers, as delaying claims handling for customers already vulnerable because of their personal loss would have detrimental effects.
- Use of internal medical experts should be communicated clearly and appropriately to customers taking into account the vulnerability of terminally ill customers.
- Firms should be clear and consistent in their policy documents and other communications to customers (either in policy documents or elsewhere) on how the claim decision is to be made and who will make it.
- Insurers should review the suitability of policy terms which prohibit terminal illness claims in the last 12 months of the policy (or similar period). Insurers retaining such terms should have a clear basis for how these are consistent with the delivery of good outcomes under the Consumer Duty.
Australian regulatory bodies unveil measures for joint administration of new regime
The Australian Prudential Regulation Authority (APRA) and the Australian Securities and Investments Commission (ASIC) have released a comprehensive information package to facilitate the implementation of the new Financial Accountability Regime (FAR) in the financial services sector.
The FAR marks a substantial advancement in accountability and responsibility within the banking, insurance, and superannuation sectors, targeting APRA-regulated entities along with their directors and senior executives. The primary objective of FAR is to bolster risk management and governance cultures within these financial institutions.
This initiative responds to recommendations from the financial services Royal Commission, urging the extension of provisions akin to the Banking Executive Accountability Regime (BEAR) to all APRA-regulated entities. In this transition, FAR will effectively replace BEAR, which was enacted on 1 July 2018 and was administered solely by APRA.
While initially targeting authorised deposit-taking institutions (ADIs), FAR will also encompass insurance companies, superannuation trustees, and licensed non-operating holding companies (NOHCs). FAR introduces conduct-focused prescribed responsibilities, marking a pivotal shift in regulatory approach, and will be jointly administered by both APRA and ASIC.
The implementation of FAR is set to commence on 15 March 2024 for the banking industry and on 15 March 2025 for the superannuation and insurance sectors. This strategic rollout allows regulated entities adequate time to align their operations and comply with the new regulatory framework.
EBA publishes 2024 work programme
The European Banking Authority (EBA) has published its work programme for 2024.
For the 2024 period, the plan outlines the following goals:
- Implement Basel framework in the EU and enhance the Single Rulebook.
- Monitor financial stability and sustainability in a context of increased interest rates and uncertainty.
- Provide a data infrastructure at the service of stakeholders.
- Develop an oversight and supervisory capacity for the Digital Operational Resilience Act. (DORA) and the Markets in Crypto Assets Regulation (MiCAR).
- Increase focus on innovation and consumers (including access to financial services) while preparing the transition to the new AML/CFT framework.
The plan further outlines five key medium-term priorities for the 2024 – 2026 period as follows:
- Promote and implement an effective and proportionate Single Rulebook.
- Foster financial stability in a sustainable economy.
- Enable an integrated regulatory reporting system for authorities and market discipline.
- Set up and start DORA oversight and MiCAR supervision.
- Increase focus on innovation and consumers, and ensure a smooth transition to the new AML/CFT framework.
The programme notes that the EBA “will again need to address a very large number of mandates dealing with a wide range of financial sector aspects, both from a policy development and a risk quantification and assessment perspective.”
A selected summary of key developments for regulated financial institutions
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