The Law Spot highlights a selection of the legal issues which have affected the financial services industry during the past month in the UK. In this edition, Caroline Murray reports on the first action by the FCA against an individual for unlicensed consumer credit lending; the first anniversary of the Senior Managers Regime; and Theresa May triggered Article 50, commencing Britain’s exit from the EU.
Brexit – Article 50
Article 50 was triggered on the 29 March 2017; the important milestone in initiating the process for the UK’s withdrawal from the EU. The Conservative Government has now set out 12 negotiating objectives ahead of the UK leaving the EU. These are the Tory party’s objectives, so potentially are politically biased, but give a useful indication of the priorities it sees going forward.
The objectives are:
- Providing certainty and clarity - providing certainty wherever possible in the approach the negotiations.
- Taking control of our own laws - taking control of the UK statute book and bringing an end to the jurisdiction of the Court of Justice of the European Union in the UK.
- Strengthening the Union - securing a deal that works for the entire UK – for Scotland, Wales, Northern Ireland and all parts of England.
- Protecting our strong and historic ties with Ireland and maintaining the Common Travel Area - working to deliver a practical solution that allows for the maintenance of the Common Travel Area, whilst protecting the integrity of the UK immigration system.
- Controlling immigration - controlling the number of EU nationals coming to the UK.
- Securing rights for EU nationals in the UK, and UK nationals in the EU - securing the status of EU citizens who are already living in the UK, and that of UK nationals in other Member States, as early as possible.
- Protecting workers’ rights - protecting and enhancing existing workers’ rights.
Ensuring free trade with European markets - forging a new strategic partnership with the EU, including a wide reaching, bold and ambitious free trade agreement, and seeking a mutually beneficial new customs agreement with the EU.
Securing new trade agreements with other countries - forging ambitious free trade relationships across the world.
Ensuring the UK remains the best place for science and innovation - remaining at the vanguard of science and innovation and seeking continued close collaboration with European partners.
Cooperating in the fight against crime and terrorism - continuing to work with the EU to preserve European security, to fight terrorism, and to uphold justice across Europe.
Delivering a smooth, orderly exit from the EU - seeking a phased process of implementation, in which both the UK and the EU institutions and the remaining EU Member States prepare for the new arrangements that will exist.
The Senior Managers Regime one year on
The Senior Managers Regime (SMR) became a year old on the 7 March 2017, after implementation for banks, building societies, credit unions and PRA-designated investment firms in March 2016. The same date this year saw the roll out of the Conduct Rules which apply to the wider body of staff working in the firms concerned; and the requirement for firms to have issued certificates to all Certified Employees (for example, financial advisers).
“The Certification Regime puts the onus on firms to identify and annually certify individuals as being fit and proper to carry out certain roles”, whilst the individual Conduct Rules apply to Certified Employees and to almost all other staff within the relevant firms, requiring them to:
- act with integrity.
- act with due skill, care and diligence.
- be open and cooperative with the FCA, the PRA and other regulators.
- pay due regard to the interests of customers and treat them fairly.
- ·observe proper standards of market conduct.
In practice, the Conduct Rules merely formalise the ethical standards to which professional bankers already operate.
The definition of “financial advice”
Following the Financial Advice Market Review’s (FAMR), and a government consultation, the definition of financial advice for regulated firms is being changed with effect from the 3 January 2018. From that date, regulated firms will only be giving financial advice where they provide a personal recommendation. “The effect of this change is that regulated firms will be able to provide more advanced guidance services, which would previously have been caught by the Financial Services and Markets Act 2000 (Regulated Activities) Order 2001 (RAO) definition of advice as “advising on investments”, without having to comply with the higher regulatory requirements associated with regulated advice” (Holman Fenwick Willan, 2017).
The amendment will affect the insurance market when the Insurance Distribution Directive takes effect in February 2018.
Changes to the FCA and PRA enforcement decision-making processes
The Financial Conduct Authority (FCA) and the UK Prudential Regulation Authority (PRA) have confirmed changes to their enforcement decision-making processes. In summary, the changes are:
Effective from 31 January 2017:
- Scoping meetings - The FCA and the PRA will aim to hold scoping meetings once investigators ‘are in a position to share their indicative plans on the direction of the investigation and timetabling of key milestones based on the particular circumstances of the case’.
Effective from 1 March 2017:
- Focused Resolution Agreements - the FCA will adopt a more flexible approach to Focused Resolution Agreements (FRAs).
- Early settlement discounts - if a firm or an individual does not settle an FCA enforcement investigation at the first stage, they will not be eligible for any early settlement discount.
- Fast-track to the Upper Tribunal - subjects of investigations may refer the FCA’s case against them straight to the Upper Tribunal, without having to go through the FCA’s usual settlement process.
- Stage 1 settlement discussions - the FCA has committed to aiming to give subjects of investigations at least 28 days’ notice of the commencement of Stage 1 proceedings.
Unlicensed consumer credit lending
The FCA has taken its first criminal action against an individual which it alleges operated as unlicensed consumer credit lender. The FCA’s case is that Mr Gopee conducted regulated activity without authorisation over a number of years by entering into, and administering regulated credit agreements as a lender, and is believed to have lent in excess of £1 million over the last four years. His customers were frequently those in difficult circumstances, and Mr Gopee regularly registered charges over the homes of borrowers to enable him to take possession of a property if the borrower failed to pay the debt.
A trial date has been fixed for 15 January 2018, with an interim hearing fixed for 6 October 2017.
Failure to pay national minimum wage
A nursery owner from Manchester has been disqualified for 6 years from being a director of a limited company after failing to pay 12 members of staff the national minimum wage.
Robert Clarke, group leader at Insolvent Investigations North, said:
"The Insolvency Service rigorously pursues directors who break employment laws. Not paying staff the national minimum wage is a clear breach of a director's duties.
The public has a right to expect that those who break the law will face the consequences. Running a limited company means you have statutory obligations as well as protections, and this should serve as a warning to other directors who are tempted to underpay staff."
It serves as a useful reminder to corporate bankers of the duties owed by directors to their limited company business, and also as an area for Corporate Relationship Managers to be alert to when reviewing business performance, particularly when credit facilities are sought or renewed.
Caroline Murray is a Senior Lecturer in the full-time banking and finance degree programmes at The London Institute of Banking & Finance.