Dear CEO Letter to firms providing services to retail investors about coronavirus(Covid-19)

  • Source: fca.org.uk

Treliant Takeaway:

Treliant knows how to design, operationalize, and maintain compliance programs. While the pandemic affects the operational elements of financial institutions, with staff working from home in volatile market conditions, Treliant is setup to provide support during this crisis. If your business needs assistance with compliance risk management, Treliant can help.

Article Highlights:

On March 31, 2020, the Financial Conduct Authority (FCA) published their Dear CEO Letter to firms providing services to retail investors about coronavirus (COVID-19). The FCA has already announced a significant package of reprioritisation and deprioritisation of regulatory work designed to allow firms to concentrate their efforts on responding to the crisis and the consumers they serve. The FCA has also received hundreds of requests for adaptations to their regulatory approach from trade associations and firms, in addition to the range of measures taken in close coordination with the Bank of England and HM Treasury.

This latest update centres on firms providing services to retail investors and the FCA wants to support firms operating in this environment. The information below sets out their approach to a number of issues in order to help firms:

Client identify verification needs to continue, but firms have flexibility within the rules

Restrictions on non-essential travel have affected firms’ abilities to use traditional methods to verify a customer’s identity. This is an obligation under the Money Laundering Regulations 2017 (MLRs) and the FCA still expects firms to comply. But firms can be flexible. During this period, the FCA expects firms to continue to comply with their obligations on client identity verification. The MLRs and Joint Money Laundering Steering Group guidance already provide for client identify verification to be carried out remotely and give indications of appropriate safeguards and additional checks which firms can use to assist with verification. For example, firms can:

  • accept scanned documentation sent by e-mail, preferably as a PDF;
  • seek third party verification of identity to corroborate that provided by the client, such as from its lawyer or accountant;
  • ask clients to submit ‘selfies’ or videos;
  • place reliance on due diligence carried out by others, such as the client’s primary bank account provider, where appropriate agreements are in place to provide access to data;
  • use commercial providers who triangulate data sources to verify documentation provided;
  • gather and analyse additional data to triangulate the evidence provided by the client, such as geolocation, IP addresses, verifiable phone numbers;
  • verify phone numbers, e-mails and/or physical addresses by sending codes to the client’s address to validate access to accounts; and
  • seek additional verification once restrictions on movement are lifted for the relevant client group.

Supervisory flexibility over best execution until the end of June

The FCA expects firms to continue to meet their obligations including their obligations on client order handling. The FCA expects firms to take into account current market conditions when determining the relative importance they place on the different execution factors when meeting their obligations, and the venues or brokers they rely upon to achieve best execution.

The FCA would expect firms to consider their use of different types of orders to execute client order and manage risk during market volatility. However, they have no intention of taking enforcement action where a firm:

  • does not publish RTS 27 by 1 April 2020, provided it is published no later than 30 June 2020
  • does not publish RTS 28 and Article 65(6) reports, provided they are published by 30 June 2020

 Supervisory flexibility over 10% depreciation notifications until the end of September

Firms providing portfolio management services or holding retail client accounts that include leveraged investments are currently required to inform investors where the value of their portfolio or leveraged position falls by 10% or more compared with its value in their last periodic statement, and for each subsequent 10% fall in value. Firms have raised concerns about the impact on consumers and the operational burden of this in a highly volatile market.  The FCA has no intention of taking enforcement action where a firm:

  • has issued at least one notification to a retail clients within a current reporting period, indicating their portfolio has decreased in value by at least 10%; and
  • subsequently provides general updates through its website, other public channels (such as social media) and/or generic, non-personalised client communications. These communications should update clients on market conditions, explain how clients can check their portfolio value and invite clients to contact the firm if they wish; or
  • chooses to cease providing 10% depreciation reports for any professional clients

The FCA will adopt this approach for a period of 6 months (to 1 October 2020).

FCA Policy and implementation – pause on implementation of investment pathways and other measures

In response to industry clarification requests on the implementation deadlines for a number of initiatives, the FCA identifies two cases (investment pathways and platform switching provisions) where rules are already made and they are referring these to the Board for further consideration.  The FCA’s ongoing work with firms providing defined benefit transfer advice will continue. The policy statement on pension transfer advice, including on contingent charging, has been delayed to Spring 2020. The FCA has paused their follow up work on assessing the suitability of advice, which was focused on retirement income advice.

 Financial resilience

The FCA has published (26/03) guidance (https://www.fca.org.uk/news/statements/fca-expectations-financial-resilience-fca-solo-regulated-firms) on financial resilience and prudential issues. For firms in this sector, the FCA clarifies:

  • Government schemes to help firms through this period can be used to help firms plan for how they will meet debts as they fall due and help firms remain solvent in the immediate period.
  • Government loans cannot, however, be used to meet capital adequacy requirements as they do not meet the definition of capital.

Author

Ron Ziegler

Ron Ziegler is an Engagement Director with Treliant. He is an experienced global risk management executive with expertise in forensic investigations, Bank Secrecy Act/Anti-Money Laundering (BSA/AML), Office of Foreign Assets Control (OFAC) sanctions, employee conduct risk programs, internal audit, and derivatives/securities trading at global investment and commercial banks.