Say Goodbye to the Cuddly Regulator, says Lee Werrell. It’s All About Enforcement Now.



PS14/1: Distribution of Retail Investments: Referrals to Discretionary Investment Managers and Adviser Complaints Reporting



The FCA published PS14/1 ( on 31st January, to present the final rules on the first two of the proposals that it had consulted on in CP13/4 in July 2013.

The first two proposals were:

•                    Banning new referral payments by a discretionary investment manager (DIM) to an adviser when the adviser recommends that a client places additional money with the same DIM from whom they receive payments following a pre-RDR referral.


•                    Banning referral payments where an adviser firm does not provide personal recommendations to particular clients, but provides other services to them.

Additionally , there is a minor amendment to the rules requiring complaints against individual advisers to be reported to the regulator, so as to match the policy intention that complaints concerning activities when acting as a retail investment adviser – such as advice on shares and derivatives as well as retail investment products – should also be included.

The regulator has not yet published final rules on the third proposal discussed in CP13/4, since these will changes need to coincide with an update to text in Gabriel, which is currently scheduled at appear in June 2014.


Some decisions included in the final rules were;

•                    That referral payment for pre-RDR referrals to discretionary investment managers should continue, with new payments on top-ups being banned? This was generally supported with some stating that the measures should have gone further.

•                    Request for comments on the FCA analysis of the costs and benefits in relation to their proposals on payments for referrals to discretionary investment managers? Seen as "simply clarifying existing rules", the change to ban all referral payments may lead to significant costs for systems changes. A partial ban may actually have greater costs associated with it as complex contingent programming would be required.


The upshot of all this is that COBS 6.1A now applies to firms that provide personal recommendations generally, even if personal recommendations to a specific client are not provided.

So the rule amendment referring to ‘other services’ does not apply to firms offering only non-advised services or to pure introductions, where the introducer has no further contact with the client. Referral payments in these circumstances can continue.

Regarding the minor change to the complaints wording, all the respondents agreed with the proposals, with one respondent confirming that there was no significant impact to firms as a result and that it would create a level playing field.


Impact: This clarity around the pre and post RDR payments helps many firms understand what is expected of them. Although there may be some software coding changes, for most firms their vendors should already have options in place to implement the correct processing. Check out with your providers and administration system users.


FCA Warning Notice Disclosures – The Regulator Gets Tougher



On 3rd February the FCA released two statements containing details of warning notices issued to two individuals connected with alleged involvement in the attempted manipulation of the London Interbank Offered Rate ("LIBOR"). Although not naming the individuals, the statements disclose that warning notices that were issued to those individuals on 28th November 2013. The institutions employing the individuals were also not named.

The FCA Principles for Business were cited in both documents. One alleging that the particular individual was knowingly concerned in breaches by an institution of Principle 5 (market conduct), whilst the other alleges that the individual to which it relates was knowingly concerned in breaches of Principles 3 (management and control) and 5. Both set out brief particulars of the alleged conduct.

Although brief and generic, and consisting of less than a page each, the statements are significant. This is the first occasion that the FCA has released details of warning notices since the Financial Services Act 2012 amended section 391 of the Financial Services and Markets Act 2000 to enable it to publish such details.


Now, About Those Warning Notices

Until 2010, the regulator, the then Financial Services Authority (the FSA) could only publish details about enforcement action against a firm or an individual once a final notice had been published at the conclusion of a case. In 2010, the point at which the FSA could publish information about its enforcement cases was brought forward to the stage at which the FSA’s Regulatory Decisions Committee (the RDC) issued a decision notice (i.e. after the firm or individual had made representations to the RDC in response to a warning notice but before the Upper Tribunal had made a decision).

Things changed again on 15 October 2013, when the FCA published a policy statement (PS13/9) that confirmed the regulator’s policy for publishing information about enforcement warning notices. The approach to publishing such information includes some significant changes from the FCA’s original proposals which were set out in the Consultation Paper in March 2013.

Warning notices record the allegations against firms or individuals, and they differ significantly from decision notices, which set out determinations made (either as the result of settlement discussions or following a contested process before the Regulatory Decisions Committee), as to whether infringements have occurred and the level of penalties to be imposed.


The opportunity now exists for the individuals concerned to make representations to the RDC. Representations will assist the RDC in determining whether or not a breach occurred, and if so, the extent of any breach – and, if appropriate, the level of any penalties to be imposed.

Now, in theory, the individuals concerned could reach a settlement with the FCA, although in practice such settlements after the issue of warning notices are rare. Until either of those processes are complete, the allegations made against the individuals will remain unproven. If it is determined that breaches have occurred, further details (including the names of the individuals) are likely to be released at that stage in decision notices.

Naming And Shaming – The Regulator Backs Off

There have been expressions of concern from various institutions, employees, and their advisers in relation to the potential for unfairness resulting from the use of the FCA's power to publish details of warning notices has been heard.

The FCA responded to those concerns in its policy statement (PS 13/9), setting out a number of safeguards and gave details of the circumstances in which it proposed to publish the identity of individuals concerned.

So, when issuing its most recent statements, the FCA has put some of those safeguards into practice – deciding not to name the individuals to whom the warning notices relate. It should also be noted that the regulator has been relatively guarded in the way in which it has released the statements, placing them on the website without issuing any accompanying press release.

It remains to be seen whether this is an approach which will be replicated in future cases where it chooses to put the public on notice of action being taken against firms or individuals, particularly those involving allegations of failures to treat customers fairly or conduct risk.

Impact: Being an authorised person is a heavy responsibility and should be taken seriously. Compliance with the rules from any handbook is a requirement, and your personal reputation as well as that of your firm’s depends on you fully understanding your responsibilities.


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