fca update december 2015 - 2020 innovation€¦ · 8 recent cps cp15/29: amendments to various...

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Presented by:

Ian Fletcher FCA

www.the2020group.com

FCA Update – December 2015

© 2020 Innovation Training Limited - 2015

To provide an overview of regulation and legislation

To review common problem areas

To provide guidance on the audit and accounting work of an FCA authorised entity

New CASS rules and guidance


Objectives

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News and website update

New CPs and PSs

CASS and FRC standard – Audit programme and guidance


Content

Please contact the office on 0121 314 2020 for booking and prices or see www.the2020group.com for further information


Forthcoming FCA Webinars

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The current requirements with which an authorised person, and an approved person, must comply are set out

in the Financial Services and Market Acts 2000, the regulations made under that Act and the rules in the FCA

Handbook. Under that Act, FCA are given the power to give guidance – and they do so extensively in the

Handbook. FCA call this ‘general guidance’. FCA also give guidance to particular firms in their particular

circumstances. They call this ‘individual guidance’.

The information which we will give to you on this webinar is for training purposes only. It is not guidance in

either of these two senses. I hope you will appreciate that I am not in a position to give you, or your firms,

individual guidance. The purpose of this session is to give you a better understanding of FCA provisions and to

enable you to apply them to your circumstances.

The slides and notes for this webinar should be read in conjunction with the detailed legislation or regulations.

No responsibility for loss occasioned by any person acting or refraining from action as a result of the material

contained in this programme can be accepted by the authors or 2020 Innovation Training Limited.


Training disclaimer

GABRIEL

New log in:

https://gabriel.fca.org.uk/portal_authentication_service/appmanager/merportal/desktop


NEWS






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BIG DATA

FCA review of GI data

Look before you audit!


REGULATION ROUND UP

http://www.google.co.uk/url?sa=i&rct=j&q=&esrc=s&source=images&cd=&cad=rja&uact=8&ved=0ahUKEwjlxp7WlanJAhUBlxQKHXkmDIYQjRwIBw&url=http://www.connexica.com/big-data-buzz-or-big-data-fuzz-2/&psig=AFQjCNHmA58_KzW09S5wzsog4qEY8HnNxw&ust=1448458256762975

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CONNECT: REPLACED ONA TO MAKE APPLICATIONS AND GIVE FCA NOTIFICATIONS

Connect is an online system that you can submit applications and notifications for:

approved persons

appointed representatives

variation of permission

standing data

passporting

part 4A permission (dual regulated firms still have to use the paper forms)

payment institutions: authorise, register or cancel

PSD agents: add, amend or remove


CONNECT

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FRC Standard on CASS audits

• Register

• Handbook

• CP and PS in “YOUR FCA”

• Firms


FCA Website

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FCA Website Review

Consultation Paper Update


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Recent CPs

CP15/29: Amendments to Various Forms

CP15/30: Pension reforms – proposed changes to our rules and guidance

CP15/31: Strengthening accountability in banking and insurance: regulatory references

CP15/32: Smarter Consumer Communications: Removing ineffective disclosure requirements in our Handbook

CP15/33: Consumer credit: proposals in response to the CMA's recommendations on high-cost short-term credit

CP15/34: Regulatory fees and levies: policy proposals for 2016/17

CP15/35: Policy proposals and Handbook changes related to the implementation of the Market Abuse Regulation (2014/596/EU)


CP15/36: Future regulatory treatment of CCA regulated first charge mortgages

CP15/37: Consequential amendments to the Senior Insurance Managers Regime (SIMR)

CP15/38: Provisions to delay disclosure of inside information within the FCA's Disclosure and Transparency Rules


Recent CPs

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Amendments to four forms used by firms and individuals relating to regulatory approval for certain roles. The forms changed are forms D,F (FCA), D (PRA) and M.

D relates to changes in circumstances for approved persons, F for overseas firms, M (PRA only) for Non – Execs and Key function holders.


CP15/29: Amendments to various forms

FCA set out expectations as to how existing rules and guidance operate in the new pensions environment, consult on a number of changes aimed at ensuring their rules are fit for purpose.


CP15/30: Pension reforms – proposed changes to our rules and guidance

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In this consultation the FCA and the PRA set out proposals for regulatory references for candidates applying for:

Senior management functions (SMFs) under the Senior Managers Regime (SMR).

Significant harm functions under the Certification Regime (CR).

PRA senior insurance management functions (SIMF) under the Senior Insurance Managers Regime (SIMR).

FCA insurance controlled functions.

Notified non-executive director (notified NED1) roles within a Relevant Authorised Person (RAP2) or Solvency II firm.

Non-executive director roles in credit unions.

Key function holders (KFH3) and notified NED roles within an insurer.


CP15/31: Strengthening accountability in banking and insurance: regulatory references

FCA are consulting to remove a number of disclosure requirements which they identified as not being effective in terms of informing consumers about a product or service and to reduce the regulatory burden on firms. This reflects their commitment to create a sustainable regulatory framework.


CP15/32: Smarter Consumer Communications: Removing ineffective disclosure requirements in our Handbook

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additional standards for price comparison websites (PCWs) which compare high-cost short-term credit (HCSTC) products


CP15/33: Consumer credit: proposals in response to the CMA's recommendations on high-cost short-term credit


CP15/34: Regulatory fees and levies: policy proposals for 2016/17

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Proposals set out for the necessary changes to the Handbook required to implement the new Market Abuse Regulations (EU MAR).

The Treasury is preparing secondary legislation to repeal or modify existing domestic law, where it conflicts with EU MAR, to meet the UK’s amended obligations under the new regime. This secondary legislation will also cover new EU MAR obligations which are not covered by the existing market abuse regime, such as the requirement for employers to have internal procedures for employees to report infringements of EU MAR.

In this consultation document, FCA set out proposals for the necessary changes to the Handbook required in implementing this new regime.


CP15/35: Policy proposals and Handbook changes related to the implementation of the Market Abuse Regulation (2014/596/EU)

Prior to 31 October 2004, first charge mortgages were regulated under the Consumer Credit Act 1974 (CCA) if they fell below the relevant financial threshold. In November 2015 the Government made legislation1 which will make the administration of these mortgages a regulated mortgage activity from 21 March 2016 and the CCA will then no longer generally apply.


CP15/36: Future regulatory treatment of CCA regulated first charge mortgages

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This CP proposes changes to the Society of Lloyds rulebook and consolidates Actuaries, Auditors and FSCS Part and the Lloyd’s Part in the PRA Rulebook into a single Part. It also proposes amendments to S133/13 on market risk, SS12/13 on counterparty credit risk, Consequential amendments to the Senior Managers Regime (SMR) and the Senior Insurance Managers Regime (SIMR) and amendments to definitions related to credit unions.


CP15/37: Consequential amendments to the Senior Insurance Managers Regime (SIMR)

FCA address recent developments around the disclosure of inside information by issuers with securities admitted to trading on a regulated market.


CP15/38: Provisions to delay disclosure of inside information within the FCA's Disclosure and Transparency Rules

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POLICY STATEMENT UPDATE

PS15/22: General Insurance Add-Ons Market Study – Remedies: banning opt-out selling across financial services and supporting informed decision-making for add-on buyers

PS15/23: Consumer credit – feedback on CP15/6 and final rules and guidance

PS15/24: Whistleblowing in deposit-takers, PRA-designated investment firms and insurers

PS15/25: PSR regulatory fees 2015/16

PS15/26: Implementation of the Transparency Directive Amending Directive (2013/50/EU) and other Disclosure Rule and Transparency Rule Changes


Recent Policy Statements

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This policy statement sets out an overview of the consultation feedback and FCA response on:

The rules banning opt-out selling; and

The Handbook guidance.

The final rules and guidance do not differ significantly from those consulted on. The rules banning opt-out selling come into force on 1 April 2016. The Handbook guidance will come into force at the same time. The non-Handbook guidance will be effective immediately. FCA recognise that firms will need time to implement any necessary changes, but expect that firms should already be working towards delivering appropriate and timely information for add-on sales. FCA expect firms to have made the necessary changes to their sales journey by 30 September 2016.


PS15/22: General Insurance Add-Ons Market Study – Remedies: banning opt-out selling across financial services and supporting informed decision-making for add-on buyers

In this policy statement FCA set out responses to the feedback they received to the consultation Consumer credit – proposed changes to our rules and guidance (CP15/6), published in February 2015. This response deals with the issues relating to credit broking, lending, financial promotions and debt. FCA response on issues relating to the Mortgage Credit Directive was published in PS15/20 in July 2015. As noted in CP15/6, FCA consumer credit regime is relatively new.

FCA are still learning more about how the market operates, and the risks to consumers. They are therefore finding it necessary to propose more changes to the requirements than they would usually do for a sector that they have been regulating for longer. FCA will continue to monitor developments in the market, and outcomes of their work in authorising and supervising firms, and may need to propose further changes.


PS15/23: Consumer credit – feedback on CP15/6 and final rules and guidance

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The rules in this policy statement complement FCA recent initiatives to reform senior management arrangements and remuneration in the financial services industry.

The new rules affect:

UK deposit-takers with assets of £250m or greater, including:

banks

Building societies

credit unions

PRA-designated investment firms, and insurance and

reinsurance firms within the scope of Solvency II

the Society of Lloyd’s and managing agents.


PS15/24: Whistleblowing in deposit-takers, PRA-designated investment firms and insurers


PS15/25: PSR regulatory fees 2015/16

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FCA propose other miscellaneous changes to the DTRs in CP15/11 which were not directly related to TDAD implementation but were required to clarify or improve the current regime. In this Policy Statement, FCA set out the feedback to those proposals and the FCA’s response to it. The new DTRs will come into force on 26 November 2015.


PS15/26: Implementation of the Transparency Directive Amending Directive (2013/50/EU) and other Disclosure Rule and Transparency Rule Changes

CASS

FRC STANDARD


REVIEW OF THE YEAR

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This policy statement makes changes to the rules in Client Assets Sourcebook (CASS).


The New CASS Rules

The changes affect around 1,500 FCA-regulated firms that carry out investment business, from the largest investment banks to the smallest investment adviser, who collectively hold over £100 billion of client money and £10 trillion of custody assets.


The New CASS Rules

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Brief Reminder of Old Rules

CASS 7


Old Rules – CASS 7

MiFID rules apply to all DIF firms

Principle based

S & C – Segregation and Identification

Separate account

Bank account rules

Prompt and accurate payments into and out of account


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Old Rules – CASS 7

Regular reconciliations

Supervision and review of reconciliations

Accounting records

Auditors report

Gabriel reporting


Summary of changes in CASS 7 rules

These changes are designed to clarify and enhance the regime to ensure the best protection of client money held in relation to investment business.

RULE CHANGES – 1 June 2015


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1 July 2014 – certain rules and guidance came into force providing clarifications to existing requirements, introducing optional arrangements with which firms may choose to comply and limiting the placement of client money in new unbreakable term deposits. These include clarifications of application provisions and the introduction of the option to operate multiple client money pools


1 July 2014

1 December 2014 – certain rules and guidance came into force relating to the provision of information to or obtaining the agreement of new clients and the documenting of agreements and arrangements with any new counterparties with whom firms deposit or otherwise place custody assets or client money, these include requirements to notify the client of certain matters if operating the banking exemption and mandating the use of template acknowledgment letters with new client bank accounts and client transaction accounts.


1 December 2014

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Acknowledgement Letters

CASS 7.8 (now 7.18) requires firms to exchange usual letters with banks on Trust status, set off etc.

FCA notes variety of methodologies in applying rule

New rules – Standard template letters to be used Removal of 20 days grace period and applies to UK and foreign accounts opened Firms required to perform due diligence on authorisations etc.

ALL EXISTING letters to be re done in template form



Templates

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June 2015 – all of the remaining rules and guidance came into force and firms need to ensure they fully comply with all of the new rules –See Handbook for changes


1 June 2015

Application and exemptions 7.1 - 7.3 NOW 7.10 -7.11

Segregation 7.3 - 7.4 NOW 7.12 – 7.13

Receipt 7.2 NOW 7.11

Withdrawal 7.2 NOW 7.11

CM Calculations and Regular reconciliations 7.6 NOW 7.15

NEW 7.16 – The standard methods of internal client money reconciliation

7.18 – Acknowledgement letters

Note : EXTRACTS only of Mercia programme


Overview of todays webinar training – new rules and suggested audit tests (CASS 7)

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7.10 Application and purpose

Review the organisational arrangements that the firm has in place to minimise the risk of the loss or diminution of client money and reach a conclusion as to whether those arrangements appear adequate given the size and nature of its business.

Note whether the firm intends to opt-in all other relevant client money to the MiFID rules and if not, whether it uses any “Opt-outs” for professional clients or non-IMD business.

For Credit institutions or approved bank, firms that hold coins, solicitors, long term insurers and friendly societies, holds client money in relation contracts of insurance or in respect of life assurance business or is a Trustee firm confirm whether the client elects to comply with the client rules. If so follow this programme.

Check whether the firm holds or receives money from an affiliated company in respect of MiFID business, if so follow this programme


Application and purpose – Overview work

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Check whether the firm holds or receives money from an affiliated

company in respect of MiFID business, if so follow this programme.

Confirm the client is MiFID regulated. Non MiFID firms are not subject to CASS 7 rules ( MGI firms are subject to CASS 5 rules).

Enquire whether the firm intends to exempt client money under title transfer collateral arrangements. Note exceptions for retail clients and obligations under contracts for differences or rolling forex contracts, whether or not arranged by the firm.

Ascertain whether firm is using delivery versus payment transaction exemption arrangements. If so, review systems to ensure that the settlement system complies with the exemption requirements and that the firm retains written consent for these arrangements from the client where needed


Application and exemptions – Overview work


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Segregation of Client Money 7.13

Segregation of Client Money 7.13 - OVERVIEW

Enhancements to rules to ensure all client money held in appropriate manner with a suitable institution

Requirement to consider diversification and do enhanced due diligence on the banks with which they deposit client money

Introduction of an explicit requirement for firms to make a record of each periodic review of a bank and to keep that record from the date it conducts the periodic review until five years after the firm ceases to use that bank to hold client money


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Where money is deposited in a credit institution, bank or money market fund (CBAs) ensure the firm has documented its selection criteria for any legal requirements, expertise and market reputation and performs periodic reviews to confirm the selection criteria.

Confirm the documentation of the selection criteria covers:

Diversification of risks;

The capital of the credit institution or bank;

The amount of client money placed as a proportion of the total capital and deposits;

The credit rating; and

The level of risk in the activities undertaken by the credit institution or bank


Segregation – Audit tests

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Ensure that if the firm deposits or holds funds with a group entity the funds do not at any point exceed 20 per cent of the balance on:

All client accounts in aggregate;

Each of its designated client accounts; and

Each of its designated client fund accounts.

Obtain an up to date list of all CBAs and ensure they in accounts identified as separate from accounts used to hold money belonging to the firm.

Confirm that the firm has agreed terms on all CBAs that allow it to make withdrawals of client money promptly and, in any event, within one business day of a request for withdrawal. Note any use of transitional provisions for notice periods of a maximum of 30 days notice


Segregation – Audit tests

Physical Receipt and Allocation of Client Money

All client money MUST be received directly into a client account All client money to be banked no later than one business day following receipt

Cannot use client money until cleared

Unidentified receipts to be segregated until identified


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Client Money held by third parties

Necessary by nature of some transactions, rules say firm keeps fiduciary responsibility to client unless TP has direct relationship with client

Rules – Clarification, money remains client money and therefore include these amounts in client money calculations


Unbreakable Client Money Deposits

Restriction on the use of term deposits and “Notice” accounts (30 days max.)

New rules enhance prompt withdrawals of client money rules


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Document and assess the adequacy of the firm’s internal controls to segregate client money from the firms’ money on receipt (including use of suitably trained and experienced staff, and a clear procedures manual). Confirm these procedures are adequate to identify and protect clients’ money

Establish whether the firm adopts the ‘normal’ approach or the ‘alternative’ approach to paying in client money (N.B. Alternative approach outside todays webinar)

Confirm that all client money is paid into a CBA no later than one business day after receipt. Ensure money is segregated into the correct sub-pool where relevant.


Physical receipt – audit tests

Establish, review, test and conclude on the procedures the firm has for dealing with:

mixed remittances; and

automated transfers.

Review lodgements to non-client money accounts and ensure these do not include client money.

Ensure any client entitlements are paid into a client account or in accordance with the client’s instruction.

Where a firm is liable to pay money to a client ensure that it is paid, within one business day after it is due into a CBS or to the client.

Where money was transferred to a third party confirm that retail clients have been notified and that the firm has agreements in place to ensure that the third party holds client money only for the purpose of transactions for a client and meets a clients obligation to provide collateral for a transaction. Confirm the firm has recorded such transactions in the CBA of the client


Physical receipt / payment – audit tests

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• Review contractual arrangements between the firm and its clients particularly when money due and payable to the firm is taken.

• Review any commission rebate arrangements to ensure that it was not treated as client money until the rebate became due and payable to the client per the contract between the parties.

• Conclude!


Physical receipt / payment – audit tests

Client Money Reconciliations and Recordkeeping – 7.15

Firms must carry out internals daily, externals regularly (per MiFID)

FCA – some firms fail to do this, wide variety in methodology and MiFID interpretation of regularly

New rules – Internals daily, externals no less than monthly. Firms to justify timing of externals. Guidance on how reconciliations should be done -AP

Technical proposals to improve clarity and address inconsistencies (a number of provisions made into rules) –AP’s

Non standard methodologies to be agreed in advance - AP

More detailed record keeping requirements - overarching requirement firm can determine how much money it holds for each client - AP

Notification – concept of materiality introduced, breach and MUST notify FCA - AP


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Client Money Reconciliations and Recordkeeping – 7.15

Review the systems for carrying out internal reconciliations and ascertain whether the client uses a standard or an alternative method to perform its internal reconciliations. IMPORTANT: A firm wishing to adopt a non-standard approach needs, from 1 December 2014, an assurance report from the firm’s auditor.


Client Money Reconciliations

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Confirm the firm conducted daily internal reconciliations between its internal accounts and records and those of any third parties by whom the client money is held.

Examine and consider whether the frequency of external reconciliations performed by the firm is adequate and whether the firm considered the risks which the business is exposed, such as the nature, volume and complexity of the business and where and with whom the client money is held.


Regular internal and external reconciliations

Obtain a bank certificate from each bank at which CBAs are held made to the reporting date. Check (on a sample basis to include this date) the reconciliations carried out by the firm in respect of:

reconciling the total of the client bank account balances with the client’s account balances;

reconciling the clients’ bank account balances with the balances recorded on the bank statement; and

tracing outstanding items to client’s accounting records and bank statements.


Reconciliations

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Ensure that there is evidence of independent review of these reconciliations and that any differences on reconciliations are corrected as soon as possible.

Verify that none of the bank accounts (per statement or cash book) have been overdrawn in the year and that no debit balance on an individual client balance is netted against other client balances when calculating the money that should be held on the client account.

Review any internal or external compliance reports for evidence of material non compliance with the rules of CASS 7.6.1,7.6.2,7.6.9 and if having carried out a reconciliation it has not complied materially with CASS 7.6.13 to CASS 7.6.15. Where material non compliance arose, confirm the firm informed the FCA without delay.


Reconciliations

Alternative Approach

Money paid in and out of firm’s own account rather than client accounts

Relevant for multi currency and multi product companies

FCA research in 2012 indicated some firms using approach inappropriately

New rules - Clarify when alternative approach relevant - AP

New rules - Notify FCA no less than 3 months before adopting - AP

New rules - Risk justification to be made on why alternative approach necessary, adequate systems and controls, buffer requirement, AUDITOR REPORT to FCA BEFORE adoption -AP


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Both those firms currently using the alternative approach and those wishing to use it for a business line in the future will be required to obtain a report from their auditor before operating the alternative approach to client money segregation. For those firms already using the alternative approach the reasons for this stem from the fact that the amended rules impose new requirements on these firms - AP

RAR report following FRC guidelines - AP


POLICY STATEMENT - RULES

SUMMARY

CASS rules changed

Auditors need to be fully ready for new reporting and programme – obtain copy of PS and discuss changes with client IN ADVANCE of commencing audit


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FRC – Providing Assurance on Client Assets to the FCA

Standard applies to all reports commencing on or after 1 Jan 2016.

Early adoption permitted.

https://www.frc.org.uk/Our-Work/Publications/Audit-and-Assurance-Team/Consultation-Providing-Assurance-on-Client-Assets.aspx


FRC CONSULTATION





















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RAR, LAR, Hybrid and CASS 5 audit reports


Scope of the FRC Standard

Obtain understanding of the firm’s business model and the permissions it has received from the FCA

Ethical requirements

Engagement acceptance

Engagement letter


Requirements applicable to all Client Asset Engagements

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Use SUP 3 Annexe 1R template.

Appendices 2 to 8 give illustrative reports for variations

Follow QC guidelines

Professional scepticism, judgement and requisite mind-sets

Documentation



Written representations

Planning and performing the audit

Duty to report to the FCA – material significance

Right to report



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Focus on assurance engagement risk

Do an overview of the process to form an opinion

Assess risk

Determine nature and extent of risk assessment procedures

Respond to the risk assessment


Requirements applicable to CASS RARs

Obtain evidence

During period did they comply with CASS rules?

At year end?

Content of report defined including breaches schedule

Engagement quality control review


Requirements applicable to CASS RARs

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Outlines circumstances – para 146 et seq.

Written representation

Forming the LAR opinion

Content of opinion


Requirements applicable to CASS LARs

Guidance given in these areas


Hybrid opinions and special reports

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Para 176 et seq.


CASS 5 REPORTS

OVERVIEW – Appendix 1


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Illustrative reports – appendix 2

Safe Custody assets – CASS 6

Collateral and mandates – CASS 3 & 8

TPA – programme

Sundry areas


OTHER CASS RULE CHANGES

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And finally…….


FCA Update – December 2015

Presented by:

Ian Fletcher FCA

www.the2020group.com

fca update december 2015 - 2020 innovation€¦ · 8 recent cps cp15/29: amendments to various...

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