Greg Kilminster
Head of Product - Content
FCA publishes review of firms' adherence to 'back-end' cryptoasset FP rules
The Financial Conduct Authority (FCA) has released the results of a review evaluating firms’ adherence to 'back-end' cryptoasset financial promotion regulations. The findings contain instances of both strong and weak practices against the new requirements for promoting qualifying cryptoassets to retail clients outlined in policy statement (PS) 23/6.
Some context
In June 2023, the FCA established new requirements, the 'back-end' rules, for promoting qualifying cryptoassets to retail clients. These rules include a 24-hour cooling-off period, personalised risk warnings, client categorisation, and appropriateness assessments. The FCA provided extensive support to the industry to ensure compliance, allowing firms the option to postpone implementation of the 'back-end' rules from October 2023 to January 2024.
For the review, the FCA selected a sample of firms that offer qualifying cryptoassets and are either registered with the FCA under the Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017 (MLRs) or authorised firms able to approve promotions for unregistered/unauthorised firms. The FCA specifically requested information on their onboarding process and conducted on-site visits to review their approach to the following requirements: cooling-off period, personalised risk warning, client categorisation, appropriateness, record-keeping, and due diligence.
Key findings
The FCA identified both instances of firms demonstrating good practices and multiple instances where firms failed to meet the required standards.
It also noted that some firms relied on industry comparisons to benchmark what is acceptable, but considering the prevalence of poor practices in the market, the FCA stated that firms should not be doing so. Instead, the FCA expects firms to directly engage with them to elevate standards across the sector. The
FCA also expect firms engaged in communicating or approving financial promotions to have robust compliance systems and controls in place.
Next Steps
The FCA expects firms offering qualifying cryptoassets to retail clients and firms approving financial promotions under s21 FSMA to consider these examples and make any necessary changes to their practices to meet expectations and enhance consumer outcomes. The FCA also encourages all firms to review the good and poor practices, as well as its previously published guidance GC23/1.
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MAS highlights good practices in financial advisory industry
The Monetary Authority of Singapore (MAS) has updated an information paper identifying good practices observed among financial advisers (FAs) in their efforts to comply with the Financial Advisers Act (FAA). The paper, first issued on 17 November 2004 and recently revised on 31 July 2024, aims to help FAs enhance their advisory and sales processes, improve the competency of their representatives, and strengthen complaints handling and compliance functions.
The MAS noted that while most FAs have implemented controls and procedures to meet business conduct requirements, the standard of compliance varies significantly across the industry. The information paper specifically addresses the practices of FAs dealing primarily with retail clients, excluding those working with high net worth individuals, corporations, and other sophisticated investors.
The good practices outlined in the paper are intended to guide FAs in developing their internal compliance systems and controls, without replacing existing legislative requirements. MAS has included references to relevant statutory provisions of the FAA to provide context for the practices discussed.
FAs are encouraged to review these good practices to ensure their compliance measures are appropriate for their specific business models and risk profiles. The MAS also reminded FAs and their representatives to adhere to any relevant industry standards applicable to their operations.
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UK regulators reinforce collaboration in financial supervision
The Bank of England (the Bank) and the Financial Conduct Authority (FCA) have reaffirmed their commitment to effective cooperation in the supervision of financial market infrastructure (FMI). This cooperation is formalised through a Memorandum of Understanding (MoU), which facilitates the exchange of information between the Authorities and ensures regulatory efficiency by minimising duplication in their oversight of FMIs.
As part of the MoU, both regulators are required to conduct an annual review to assess its effectiveness. This process includes soliciting feedback from the supervised FMIs.
Feedback from these entities has confirmed that the current arrangements under the MoU are working well. Respondents emphasised the importance of the ongoing coordination between the Bank and the FCA, noting improvements in communication, particularly in areas such as operational resilience. Some participants also acknowledged that suggestions made in the previous year had been addressed.
The MoU will be updated to incorporate changes brought about by the Financial Services Markets Act (2023) and to cover new areas requiring coordination, such as regulatory sandboxes designed to test innovative solutions safely, and related policy initiatives.
Additionally, the Bank and the FCA are finalising a separate MoU to outline their collaborative approach to the operation and supervision of the forthcoming Digital Securities Sandbox (DSS). This DSS MoU will be made public prior to the commencement of supervision in the DSS.
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H2O AM to pay €250 million to investors following FCA investigation
The Financial Conduct Authority (FCA) has announced that asset manager H2O AM LLP (H2O) will pay €250 million to investors unable to access their funds since 2020, following an investigation by the FCA.
In the notice, the FCA notes that it would have imposed a substantial fine on H2O, but has agreed that the firm will make €250 million available to all those whose investments remain trapped. H2O has waived its rights to fees and investments totaling €320 million, and will apply to cancel its UK authorisation by the end of the year.
Some context
The FCA has found that:
- Between April 2015 and November 2019, H2O failed to carry out proper due diligence on high-risk and hard-to-sell investments.
- H2O did not have adequate policies or procedures or exercise due skill and care in managing potential conflicts of interest.
- H2O also provided false and misleading statements and documentation to the regulator, such as fabricated records and minutes of meetings.
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FRC fines EY UK for breach of Ethical Standard
Ernst & Young LLP (EY UK) has been fined £251,305 by the Financial Reporting Council (FRC) for breaching the FRC’s Revised Ethical Standard 2019.
The breach occurred due to EY UK exceeding the 70% fee-cap on non-audit services while conducting the statutory audit of the financial statements of Evraz plc, a multi-national mining group, headquartered in Moscow but incorporated in London, for the year ended 31 December 2021.
In addition to the financial penalty, EY UK has been reprimanded publicly, and they are required to prepare and present a root-cause analysis report to the FRC. EY UK has also paid the costs of the Executive Counsel’s investigation.
Some context
EY UK had been the Statutory Audit Firm of Evraz since it listed in the UK in 2011 until its resignation in November 2022 following the imposition of new UK Government sanctions against the Russian Federation. The breach specifically relates to non-audit work carried out by EY UK in connection with a proposed disposal of the Evraz Group’s coal-related interests, known as Project Gemini
The FRC’s Ethical Standard imposes restrictions on non-audit services provided to public interest entities such as Evraz. This includes a cap on non-audit work of 70% of the average fees paid to the audit firm over the previous three consecutive years. EY UK conducted the fee ratio test at the Network level but not at the Firm level, resulting in the acceptance and execution of non-audit work that breached the 70% fee cap.
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FCA publishes FP interventions data for Q2 2024
The Financial Conduct Authority (FCA) has released its quarterly financial promotion data covering the period from 1 April 2024 to 30 June 2024. The data highlights actions taken against firms violating financial promotion rules and investigations into unregulated activity.
Areas of intervention
Key areas of intervention for this quarter include:
- Concerns about firms not being fit and proper.
- Claims management firms with non-compliant financial promotions.
- Deferred payment credit (Buy Now, Pay Later) promotions.
- High-risk investment firm promotions lacking mandatory risk warnings.
- Misuse of trading names.
Specific considerations regarding cryptoassets
The FCA has also highlighted issues related to crypto-related financial promotions. It particularly referenced:
- Findings from its review of firms' compliance with the ‘back end’ Direct Offer Financial Promotion (DOFP) rules introduced by policy statement (PS)23/6, which came into force on 8 January 2024.
- A letter to firms on 23 September 2023 setting out expectations regarding registered cryptoasset firms that operate a ‘widget’ model. It states that from 8 October 2023, unregistered cryptoasset firms must cease making illegal financial promotions to UK consumers.
The notice also includes cases related to the advertising of later-life mortgages.
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