CUBE RegNews: 6th September

Greg Kilminster

Greg Kilminster

Head of Product - Content

FCA alerts firms to better sanctions practices

Following the Russian invasion of Ukraine, the Financial Conduct Authority surveyed around 90 firms to ensure that their financial sanctions systems and controls were:  

  • adequate and effective at addressing sanctions risk; and
  • appropriate to respond swiftly to changes in UK sanctions regimes.

The results of the survey have now been published. Good practice was observed in the following areas: 

  • Proactive approach by firms to identify sanctions exposure to Russia. 
  • Firms’ sanctions screening systems. 
  • Tool calibration. 

But there were areas where the regulator noted the need for improvement. 

Governance and oversight

  • Some multinational firms exhibited limited understanding and oversight of systems used to manage sanctions risks in the UK.
  • Inadequate sanctions management information (MI) was noted, leading to a lack of quantitative and qualitative metrics for risk assessment.
  • Senior management and Senior Management Functions (SMFs) need proper MI to fulfill their responsibilities effectively and comprehend applicable sanctions risks. 

Global sanctions policies

  • In some global firms, policies did not align with the UK sanctions regime, focusing more on other jurisdictions.
  • Poor communication was noted between global and regional sanctions teams, potentially leading to non-compliance with evolving UK legislation.

Over-reliance on third-party tools

  • Several firms lacked understanding of how their sanctions screening tools were calibrated and when lists were updated.
  • This led to screening against incorrect lists, missing names, and an excess of false positives, risking sanctions breaches.

Contingency planning

  • Firms that conducted risk assessments and developed contingency plans in anticipation of escalating tensions with Russia were better prepared to introduce risk-reducing measures.
  • Lessons learned from increased sanctions levels enabled better contingency planning for future events.

Skills and resources

  • Many firms had backlogs in assessing, escalating, and reporting alerts from name and payment screenings due to a lack of appropriate resources.
  • Resource constraints affected prioritization of alerts, increasing the risk of errors.
  • Backlogs in due diligence reviews were identified in some firms, with insufficient internal expertise.

Screening capabilities

  • While some firms demonstrated effective control mechanisms for screening tool efficiency, calibration issues were observed.
  • Calibration problems resulted in either too many false positives or a failure to detect sanctioned individuals.
  • Some systems were unable to generate alerts for certain names on sanctions lists.

Customer Due Diligence (CDD) and Know Your Customer (KYC)

  • Backlogs in CDD and KYC assessments, coupled with low-quality assessments, increased the risk of failing to identify sanctioned individuals.
  • Incomplete articulation of ownership structures in CDD posed screening challenges.

Breach reporting to regulatory authorities

  • Some firms exhibited inconsistencies in reporting breaches, with delays of weeks or months.
  • Others failed to report breaches altogether, undermining regulatory oversight and remediation efforts.

The report notes: “Firms should continue to evaluate their approach to identifying and assessing the sanctions risks they are exposed to. They should actively strengthen their measures to prevent sanctions breaches and evasion, adapting to the evolving sanctions landscape and changing risk exposures.”

Click here to read the full RegInsight on CUBE’s RegPlatform

FCA launches review of treatment of domestic PEPs in anti-money laundering compliance

The Financial Conduct Authority (FCA) has initiated a comprehensive review of how regulated firms handle domestic Politically Exposed Persons (PEPs) in accordance with anti-money laundering (AML) legislation and FCA guidance. The review aims to assess whether firms are effectively implementing the requisite measures to combat money laundering risks associated with PEPs, ensuring a proportionate and risk-based approach.

The summary terms of reference (terms) of the review emphasises the international AML standards set by the Financial Action Task Force (FATF) and the United Kingdom’s commitment to implementing these standards through legislative measures passed in Parliament.

Motivation for the Review

The terms outline the FCA’s decision to conduct this review, rooted in concerns that some firms may not be treating domestic PEPs in compliance with the legislation and FCA guidance. This non-compliance could have significant consequences, potentially excluding individuals from financial products or services unfairly and damaging the reputation of the UK’s financial services sector.

Review scope and approach

The terms state the review will encompass input from UK PEPs, their family members, and known close associates. It will also assess firms’ practices, with a focus on those flagged for concerns related to their dealings with PEPs. Any significant issues identified during the review will trigger immediate action, and findings relevant to the statutory framework will be shared with HM Treasury.

The FCA plans to publish its findings by 29th June 2024, and, if necessary, initiate a consultation on revised guidance.

The review will delve into various aspects, including:

  • Definition of PEPs: Ensuring that firms correctly identify individuals with prominent public functions.
  • Proportionate risk assessments: Assessing the proportionality of risk assessments for UK PEPs, including considering other risk factors.
  • Enhanced Due Diligence (EDD): Evaluating how firms carry out risk-based and proportionate EDD for individual customers.
  • Account rejections and closures: Verifying those decisions regarding PEPs, their family members, and close associates align with applicable legislation, guidance, and consumer duty.
  • Effective communication: Examining how firms communicate with PEP customers during account opening, information collection, and account closures.
  • Review of controls: Ensuring that PEP controls are periodically reviewed for appropriateness.

Findings and actions

The FCA will prioritise firms where concerns are indicated and promptly address significant issues. Upon completion of the review, findings will be made publicly available on the FCA website, and if necessary, guidance amendments will be subject to consultation.


Click here to read the full RegInsight on CUBE’s RegPlatform

SEC charges five investment advisers with client asset safeguard failures and disclosure violations

The Securities and Exchange Commission (SEC) has announced charges against five prominent investment advisory firms for their failure to comply with requirements related to the safeguarding of client assets. Among the allegations, three of these firms are also charged with untimely updates to SEC disclosures concerning audits of their private fund clients’ financial statements.

The firms in question are Lloyd George Management (HK) Limited, Bluestone Capital Management LLC, The Eideard Group, LLC, Disruptive Technology Advisers LLC, and Apex Financial Advisors Inc. Each has collectively agreed to settle the SEC’s charges. The resolution includes payment of combined penalties exceeding $500,000.

According to the SEC’s orders, the firms fell short in one or more of the following areas:

  • failing to conduct required audits,
  • not delivering audited financials to investors in a timely manner,
  • and inadequately ensuring that a qualified custodian properly maintained client assets.

Additionally, two of the firms have been found to have delayed filing amended Forms ADV to reflect their receipt of audited financial statements. Furthermore, one firm inaccurately described the status of its financial statement audits for multiple years when submitting its Form ADV.

Click here to read the full RegInsight on CUBE’s RegPlatform

ASIC targets OTC retail product issuers

During 2022–2023, ASIC reviewed compliance with the design and distribution obligations by issuers of retail over-the-counter (OTC) derivatives. 

ASIC has now published a report summarising the key findings from that research. The report’s key findings are as follows:

  • Underutilisation of data: Some issuers fail to make effective use of available data, including client data and external sources, when designing derivative products or assessing their suitability for consumers. Best practices involve using client data to filter out inappropriate consumers and incorporating profit and loss data into product reviews. 
  • Lack of granularity: While most Target Market Determinations (TMDs) acknowledge the high-risk nature of OTC derivatives, some lack the necessary granularity in describing the target market. They should provide more specific and detailed parameters. 
  • Over-reliance on questionnaires: Many issuers heavily rely on client questionnaires, some of which have flaws, as the primary method to determine if consumers fit within the target market. This approach may not always be sufficient. 
  • Over-reliance on existing controls: Some issuers depend on controls developed for meeting disclosure benchmarks, which do not fully address the newer design and distribution obligations. A risk management approach is needed beyond mere disclosure. 
  • Marketing practices: Some issuers engage in mass marketing to a broad audience, which may not align with their narrow target market. Better marketing practices involve targeted campaigns through specific distribution channels based on existing client data. 
  • Poorly defined review triggers: Some TMDs have unrealistic or poorly defined review triggers, making it difficult for issuers to assess the appropriateness of their TMD over time. 
  • Leadership engagement: There is a need for increased engagement from the board and senior leadership of retail OTC derivative issuers in ensuring compliance with design and distribution obligations.

The accompanying media release to the report’s publication stresses that ASIC will not shy from taking strong regulatory action against issuers who do not take heed of the report findings and improve any short-comings.

Click here to read the full RegInsight on CUBE’s RegPlatform

FINRA Regulatory Notice

FINRA has published Regulatory Notice 23-15 which covers the SEC’s recent amendments to shorten the settlement cycle for broker-dealer transactions to one business day in the majority of cases.

The notice advises that FINRA is updating the Regulatory Extension (REX) system to enable firms to file extension of time requests under the shortened settlement cycle, allowing firms to file extension requests up to 28th May 2024 based on a Trade date +4 payment period, and from 31st May 2024 with a Trade date +1 payment period.


Click here to read the full RegInsight on CUBE’s RegPlatform