FCA letter to wealth management and stockbrokers
The Financial Conduct Authority has written to CEOs of wealth management and stockbroker firms, who typically manage portfolios or provide retail focused stockbroking services or operate as a private bank or provide outsourced services to wealth managers, to outline their obligations to meet Consumer Duty requirements and prevent financial crime.
From a financial crime perspective, the letter explains firms should:
- not engage in fraudulent activities or money laundering;
- understand their clients and their transaction patterns;
- not outsource financial crime compliance to third parties or apply a tick-box mentality;
- implement robust systems and controls to counter financial crime;
- ensure SMF 16/17 holders are qualified and independent;
- report wrongdoing to regulators or law enforcement agencies immediately; and
- read and implement the Financial Crime Guide and Financial Crime Thematic Reviews.
The Consumer Duty obligations are to:
- understand the needs and objectives of the firm’s target market;
- align products and services with consumers’ needs and risk profiles;
- reassess the vulnerability status of consumers regularly;
- ensure consumers fully understand their investment products and services;
- not to exploit limited understanding of your consumers;
- not to uprate consumers from retail to professional unless justified;
- fully justify any complex and/or unregulated investments; and
- ensure consumers understand the limitations of the Financial Ombudsman/FSCS consumer protection status.
The letter adds that CEOs “should have familiarised yourself with all aspects of the Consumer Duty, including for consumer support. Embedding the Consumer Duty into the day-to-day culture and running of your firm must remain a key focus”.
Mark Uyeda speech on SEC enforcement
In a speech at the Fifth Annual Scott Friestad Memorial Lecture SEC commissioner Mark T Uyeda addressed three issues: the scope of the definition of a dealer under the Securities Exchange Act of 1934; cryptocurrencies; and off-channel communications by broker-dealers.
Firstly, however, Uyeda addressed challenges associated with the SEC’s enforcement actions, highlighting the potential for abuse due to the low threshold for launching investigations. The need for objective and articulable standards in exercising enforcement power was stressed, particularly to ensure fair treatment of similarly situated individuals.
He went on to advocate for a cautious approach to using enforcement actions as a means to set regulatory policy. The SEC, he said, should be providing clarity to market participants through rules, interpretations, guidance, and no-action letters before resorting to enforcement actions. The potential drawbacks of creating novel interpretations that broaden the SEC’s jurisdiction are discussed.
Uyeda drew a comparison is drawn between the notice and comment process in rulemaking and the lack of such a process in enforcement actions, highlighting the importance of public input in shaping regulatory policy, and raising concerns about the limited scope and context of enforcement orders.
He then delved into three specific areas where insufficient clarity may result in a lack of understanding and fair notice of novel interpretations by the SEC. These areas include the scope of the definition of a “Dealer” under the Securities Exchange Act, cryptocurrencies, and off-channel communications by broker-dealers.
Definition of a “Dealer” Under the Securities Exchange Act
Uyeda made the following points:
- A dealer is defined as any person who buys and sells securities for their own account as part of a regular business.
- Traders are specifically excluded from the dealer definition.
- The SEC has brought enforcement actions against individuals and firms for unregistered dealer activity.
- Some market participants have questioned whether the SEC’s interpretation of the dealer definition is fair and whether there are better ways to communicate the SEC’s views.
- The Crown Bridge case (where two brothers were sued for unregistered dealing) was cited as one where the regulator might have communicated more effectively the requirement to register.
Uyeda noted the following:
- There is a lack of regulatory guidance in the cryptocurrency space, which has led to concerns among market participants.
- Enforcement actions are not well-suited for providing guidance because they are reactive rather than proactive.
- The SEC should consider proposing rules or issuing interpretive guidance with respect to cryptocurrencies and digital assets.
- The SEC has not taken a proactive approach to regulating cryptocurrencies and digital assets, instead pursuing a case-by-case approach through enforcement actions.
- This case-by-case approach will take years to reach any type of legally-binding precedent.
- The SEC has a responsibility to provide clear expectations on permitted and prohibited conduct in advance.
- The SEC should consider the jurisdictional status of cryptocurrencies and digital assets.
- The SEC should proactively contribute to the creation of a body of law regarding cryptocurrencies and digital assets.
Finally, Uyeda addressed the topical issue of off-channel communications. He made the following points,
- The SEC has brought a number of enforcement actions against broker-dealers for violating recordkeeping requirements related to off-channel communications.
- These enforcement actions have been criticised for a lack of clarity about what constitutes a “business communication” that must be preserved or retained.
- The SEC has not issued additional guidance on this issue, even though the technological landscape has changed significantly since the rules were first adopted.
- The civil penalties associated with these enforcement actions have been high, even in cases where no investor harm has been identified.
- The SEC should provide more transparency about how it calculates penalty amounts.
- The SEC’s recordkeeping rules need to be updated to reflect the current technological environment.
- Market participants need clearer guidance on what constitutes a “business communication” that must be preserved.
- The SEC should be more transparent about how it calculates penalty amounts for recordkeeping violations.
Uyeda concluded by reiterating the responsibility that comes with the SEC’s enforcement power and advocating for transparency in interpreting and applying rules. The call for equal justice under the law, akin to the principles of the Magna Carta, serves as a powerful reminder of the need for fairness, clarity, and public input in the SEC’s regulatory efforts.
ESMA Spotlights on Markets newsletter published
The European Securities and Markets Authority (ESMA) has published its latest edition of the Spotlight on Markets Newsletter. It contains the following articles:
- Preparations for a smooth transition to MiCA — what is expected from entities providing cryptos and from national authorities
- EBA and ESMA consult on two sets of joint guidelines under MiCA
- ESG names and claims in the EU fund industry — has ESG-related language increased?
- The European sustainable debt market — do issuers benefit from an ESG pricing effect?
- Decentralised Finance — market developments and 12 the smart contracts system
- Natural gas futures markets in August 2022 — what happened?
- Analysis on the evolution of EEA share market structure since the application of MiFID II
As well as coverage of forthcoming speeches and consultations.
Trader charged with fraud
Jeyakumar Nadarajah, a former director and head of the US Treasuries trading desk at a major Wall Street bank, has been charged with engaging in a scheme to manipulate the US Treasuries market.
According to the indictment, Nadarajah allegedly engaged in a spoofing and layering scheme between approximately April 2018 and May 2019. Spoofing is a practice of placing orders to buy or sell securities that the trader does not intend to execute. Layering is a practice of placing multiple orders at different prices to create the false impression of supply or demand.
Nadarajah allegedly used these manipulative trading practices to mislead other market participants and artificially inflate or depress the prices of US Treasuries. As a result of Nadarajah’s alleged scheme, other market participants were induced to trade at prices that they otherwise would not have traded.
Nadarajah is charged with two counts of wire fraud, seven counts of securities fraud, and seven counts of securities manipulation. If convicted, he faces a maximum penalty of 20 years in prison for each count of wire fraud, securities fraud, and securities manipulation.
ASIC sees nearly $18 million retail investor compensation of OTC derivatives
The Australian Securities and Investments Commission (ASIC) has confirmed it has overseen compensation payments totalling more than $17.4 million to 2,000 retail clients affected by breaches of Over-the-Counter (OTC) derivatives regulation
The compensation breakdown includes a combined $4.3 million for 1,500 retail clients of seven different issuers of Contracts for Difference (CFDs). This payment arose from the issuance of CFDs that exceeded the leverage ratio limits stipulated by the ASIC Corporations (Product Intervention Order – Contracts for Difference) Instrument 2020/986 (PIO).
Additionally, approximately $13.1 million has been allocated to 523 derivatives clients of Oztures Trading Pty Ltd, trading as Binance Australia Derivatives, between May and September 2023. This compensation stems from the incorrect classification of retail clients as wholesale clients, leading to various breaches of financial services laws. Notably, Binance’s Australian financial services licence was voluntarily cancelled in April,
The affected clients faced losses on more than 150,000 CFD trades across 100 different instruments, surpassing the maximum leverage permitted by the PIO. The seven CFD issuers involved in the compensation included Capital Com Australia Pty Ltd, CMC Markets Asia Pacific Pty Ltd, Eightcap Pty Ltd, IG Australia (IG Markets Limited and IG Australia Pty Ltd), Pepperstone Group Limited, Saxo Capital Markets (Australia) Limited, and StoneX Financial Pty Ltd trading as City Index. All seven issuers self-reported the breaches and initiated remediation programs.
ASIC’s review of the compensation programs identified that three CFD issuers used behavioural assumptions to estimate retail client losses, resulting in lower compensation amounts. Additionally, these three issuers, along with one other, had not compensated clients for fees or charges incurred on CFDs issued in breach of the PIO or interest on these amounts. Consequently, ASIC secured additional compensation totalling more than $2.8 million for affected retail clients.
The misclassification of retail clients as wholesale clients by Binance led to compensation payments totalling over $13 million to affected clients. Binance rectified its error by compensating clients for net trading losses and fees incurred during the misclassification period.
A selected summary of key developments for regulated financial institutions
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