Compliance Matters: week ending 8th November 2024

Welcome to this week’s Compliance Matters. Here is a digest of regulatory issues that have come into my inbox this week.

FCA’s expectations for SIPP Operators
All aboard: strong infrastructure for smooth journeys
Failure to prevent fraud offence takes effect from September 2025
House of Lords Committee publishes enforcement proposal views

FCA’s expectations for Self-Invested Personal Pension (SIPP) Operators

In a Dear CEO Letter to SIPP operators, the FCA has set out its regulatory priorities and expectations for the sector.

The FCA recently completed a 2024 SIPP data request. Its supervisory teams will use this information to engage with firms over the next year.

The letter highlights issues that came out of the data request followed by the FCA’s expectations of firms. The FCA devotes the longest section of the letter to the Consumer Duty in which the FCA expressed five concerns:

As set out in the May 2023 portfolio letter, SIPP operators are manufacturers and distributors under the Consumer Duty. Whilst all firms understood their role as manufacturer, many remained unclear about their obligations as distributors under the Consumer Duty. SIPP operators are distributors under the Consumer Duty because they sell a product when they grant rights under a personal pension scheme to a member.
Some firms have not specified the target market for their products at a sufficiently granular level. This is significant because of long-term fair value concerns for groups of consumers who do not need the flexibility of a full SIPP or who do not have a significant pension pot and are therefore unlikely to fall within the target market for this product.
On fair value, some firms assessed the value of their product primarily through market comparisons. In our recent publication on good and poor practice under the price and value outcome, we explained that firms may consider the costs to manufacture and distribute a product in their value assessments (see PRIN 2A.4.9G(1)). Incorporating cost and margin analysis with supporting evidence in a fair value assessment can provide necessary context to effectively consider pricing decisions.
Some firms were too reliant on third parties (such as advisers) to ensure their communications were understood by retail clients.
Some firms had not adequately implemented the Consumer Duty for closed products and services, despite the 31 July 2024 deadline now having passed.

Whilst specifically addressed to SIPP Operators, all firms would benefit from reading the letter and following the embedded hotlinks. If you require any assistance with reviewing your systems and controls or the way you have implemented Consumer Duty please contact Compliance Matters UK Limited, click here.

All aboard: strong infrastructure for smooth journeys

Emily Shepperd, FCA chief operating officer, delivered a speech at the UK Sustainable Investment and Finance Association (UKSIF) Leadership Summit, IET London. The highlights included:

The FCA’s objectives underpin the growth of the economy and encourage investment required for UK and financial services to achieve net zero by 2050.
It will continue to engage with industry, balancing proportionate regulations more broadly while recognising and avoiding unnecessary regulatory pressures and costs on businesses.
The FCA’s expansion to Leeds and Edinburgh enables it to attract new talent and better reflects the demographic of firms nationwide.

The key themes were sustainable finance and encouraging sustainable investment. It is estimated that in the UK we need £60 billion of additional annual funding per year by 2030 to achieve net zero by 2050. Globally, the figure stands at US$4.5 trillion.

The Global Green Finance Index ranks London as the leading green financial centre – a position it has held since 2021. UK asset managers are responsible for £11 trillion in assets under management, making us the world’s second-largest investment manager. Our bond market is US$4.3 trillion.

The speech goes on to discuss the Sustainability Disclosure Requirements and the FCA’s anti greenwashing initiatives.

It will come as no surprise that the speech concluded with a reference to the Consumer Duty and to building attractive cultures.

The FCA said it is "mindful" of firms' desire for more clarity on sustainability regulations. Please contact Compliance Matters UK Limited, (click here) if you require assistance with any of the issues raised in the speech.

Failure to prevent fraud offence takes effect from September 2025

On the day when the FCA announced that it secured convictions against two individuals for £1.5m fraud related to fake investments into cryptocurrency, the Home Office published guidance for large organisations on the offence of failure to prevent fraud that was created by the Economic Crime and Corporate Transparency Act 2023 (ECCTA).

The provisions of the ECCTA relating to the new offence of failure to prevent fraud that will apply to large companies will take effect from 1 September 2025.

The following was published by the law firm Womble Bond Dickinson The guidance stresses that it is advisory, and both that compliance with it will not of itself necessarily amount to an organisation having in place relevant procedures while departure from it will not mean that it does not. The onus of relying on the defence that the organisation had in place reasonable procedures to prevent it from committing the offence will be on the organisation and the standard of proof is one of the balance of probabilities. It notes that in some limited circumstances it may be deemed reasonable not to introduce measures in respect of a particular risk but says it will rarely be reasonable not even to have carried out a risk assessment.

The guidance also notes that while various sector-specific guidance may be developed, the ECCTA has no mechanism for any statutory guidance to be issued by any industry association or other body, so, in order to be effective, any sectoral guidance must align with the Home Office guidance and the law itself.

The guidance:

explains who the offence applies to (and how some of the factors that determine what is a “large organisation” should be applied);
sets out the types of fraud covered by the offence;
explains who an “associated person” of the organisation will be and what “intending to benefit” means;
sets out the key considerations for organisations developing their fraud prevention procedures with a view to having “reasonable procedures” in place – based on the now familiar six principles of top-level commitment, risk assessment, proportionate risk-based prevention procedures, due diligence, communication (including training) and monitoring and review;
gives some examples of what would constitute the base offences; and
discusses the overlap with other offences, particularly the offence of failure to prevent facilitation of tax evasion.

This applies to the largest firms in the UK, but all firms may wish to review their fraud prevention provisions to ensure they remain robust. Please contact Compliance Matters UK Limited, (click here) if you require assistance with the review of your fraud prevention systems and controls.

House of Lords Committee publishes enforcement proposal views

Also from Womble Bond Dickinson. The House of Lords Financial Services Regulation Committee, which took over from its predecessor in gathering evidence on the FCA’s controversial enforcement proposals has published several pieces of written evidence received, and has also confirmed it is to take oral evidence from Ashley Alder and Nikhil Rathi on 13th November.

Among the evidence lodged is a submission from the City of London Law Society Regulatory Law Committee which pulls no punches. It describes the policy as presented as ill-conceived, lacking justification and likely to risk undermining confidence in both regulated firms and the FCA as an institution.

The FCA’s enforcement proposals will impact all of us: watch this space.

How can we help?

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