Greg Kilminster
Head of Product - Content
Insurance firms agree to halt GAP insurance sales amid FCA concerns
The Financial Conduct Authority (FCA) has announced a halt in the sales of Guaranteed Asset Protection (GAP) insurance by various insurance firms, which collectively make up 80% of the GAP market.
This move was prompted by concerns raised by the FCA in September that customers were not receiving fair value from the product. The FCA had requested these firms to take immediate action to ensure that customers were getting a fair deal, but the responses received by the FCA were deemed unsatisfactory. Consequently, these firms have agreed to a pause in sales in order to make changes to their GAP products in accordance with FCA regulations.
Under the Consumer Duty, firms are obligated to provide their customers with fair value, products and services tailored to their needs, and good customer service. The FCA will engage with the remaining GAP market in a second tranche of engagement with the objective of improving the value of the product across the board. During this time, the firms involved have agreed not to use new distributors of GAP insurance.
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SEC cracks down on firms failing to monitor employees’ off-channel communications
The Securities and Exchange Commission (SEC) has charged 16 firms (five broker-dealers, seven dually registered broker-dealers and investment advisers, and four affiliated investment advisers) for violating recordkeeping provisions of the federal securities laws by failing to maintain and preserve electronic communications. Employees at different levels, including supervisors and senior managers, used unapproved communication channels, such as personal text messages, for recommendations and advice related to business, which should have been recorded.
The firms have admitted to their misconduct, agreed to pay more than $81 million in civil penalties and have begun implementing improved compliance policies and procedures. One firm received a lower penalty due to voluntary self-reporting and cooperation with the SEC.
In addition to the financial penalties, the firms have been ordered to cease and desist from future violations and have been censured. They have also agreed to retain independent compliance consultants to conduct comprehensive reviews of their policies and procedures relating to the retention of electronic communications found on personal devices and their respective frameworks for addressing non-compliance by their employees with those policies and procedures.
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US annual fraud hits $10 billion for first time
The Federal Trade Commission (FTC) has issued new data which shows that US citizens fell victim to more than $10 billion of fraud during 2023, the highest total ever recorded.
The data reveals that:
- $4.6 billion was lost to investment fraud – a 21% increase on the previous year.
- $2.7 billion was lost to imposter fraud.
- 2.6 million consumers filed fraud reports.
- Email replaced text messages as the most common medium for fraud.
The FTC notes a number of initiatives in 2023 to try to control the growth in fraud. These include:
- A major initiative against illegal telemarketing.
- Proposing a ban on impersonator fraud.
- Cracking down on investment schemes.
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Australian Federal Court rules on crypto-backed products in landmark decision
The Australian Federal Court has made a landmark decision on the application of financial services law to crypto-backed products. Block Earner, a fintech company, has been found to have violated financial services laws by offering its crypto-backed product, Earner, without a license. The court ruled that the product qualified as a financial product due to its definition as a managed investment scheme and a facility for making a financial investment.
It is worth noting that the Australian Securities and Investments Commission (ASIC) was unable to prove that Block Earner’s variable yield crypto-asset-based offering was a financial product. The product was marketed as providing access to decentralised finance (DeFi) lending protocols. Although ASIC argued that it had the characteristics of a managed investment scheme, investment facility, or derivative, the court rejected this characterisation.
According to ASIC deputy chair Sarah Court, the ruling provides clarity on when crypto-backed products should be considered financial products. The decision suggests that firms offering products with crypto-assets must thoroughly evaluate whether their offerings qualify as financial products under the law and ensure proper licensing and authorisation before distributing them.
Other ongoing ASIC enforcement actions relating to crypto-asset offerings include:
- On 25 October 2022, ASIC commenced civil penalty proceedings against BPS Financial Pty Ltd over alleged unlicensed conduct and misleading statements in relation to its offering tied to the crypto-asset.
- On 15 December 2022, ASIC commenced civil penalty proceedings against Finder Wallet Pty Ltd for allegedly providing unlicensed financial services, breaching product disclosure requirements and failing to comply with design and distribution obligations in relation to its crypto-asset-related product.
- On 21 September 2023, ASIC sued Bit Trade Pty Ltd, provider of the Kraken crypto exchange to Australian consumers, for allegedly failing to comply with the design and distribution obligations for the margin trading product it offers on the Kraken exchange.
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Hong Kong government proposes licensing regime for virtual assets OTC trading services
The Hong Kong Government has issued a public consultation on legislative proposals to establish a licensing regime for over the counter (OTC) trading services of virtual assets (VA). The proposed regulations would cover all VA OTC services, regardless of whether they are provided through physical outlets or other platforms. The proposals include:
- Requirement for any person conducting a business in providing services of spot trade of any VA for money in Hong Kong to be licensed by the Commissioner of Customs and Excise (CCE).
- Empowering the CCE to supervise licensees’ anti-money laundering and counter-terrorist financing conduct and enforce the new regime’s statutory and regulatory requirements.
- Transitional arrangement to facilitate the effective implementation of the regulatory regime.
The deadline for response is 12 April 2024.
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