Written by Ben Mason, CEO, My Compliance Centre
28 September 2022 Newsletter
We like to keep an eye on our primary regulators and what they are up to and, of course, My Compliance Centre’s automated data feed and Regulatory Change Management (RCM) module make this easy to do.
In summary, regulator activity, if measured purely by the volume of documents released, has increased slightly from the last quarter, which in turn was 10% higher than Q1 2022. This is across the eight regulators we track and for the documents in our scope.
The FCA remains the highest producer and with a significant increment from last quarter (up to 95 documents compared to 74 in the previous quarter), with ESMA 2nd and the EBA, EIOPA, HMT and PRA all between 20 and 30 documents, all of which is typical.
Of additional note was a raft of ‘Dear CEO’ letters, setting out the FCA’s approach to the management of a number of different verticals for which they are responsible. If you have not checked out the FCA’s stated approach to regulating your sector, now might be a suitable time to do so.
For those that like the melodrama of fines and enforcement, it was a quiet quarter, with the primary enforcement actions taken, all being market abuse related. The fact that most of them related to the fallout of the Carillion scandal highlights the range of activities that can fall foul of market abuse regulations, although City Group’s own impressive £12.5m market abuse fine leads the way in terms of the scale of the action. Look out for an uptick in enforcement activity from the FCA post summer break.
Having said that, while not UK specific, the DoJ’s action against Neil Philips for manipulation of the Rand exchange rate will certainly raise eyebrows. As always, these investigations take years to conclude and in this case has resulted in an extradition from Spain to the US.
In the UK, what was most notable in the enforcement category last quarter was the enforcement NOT taken by the PRA and FCA into HBOS managers in relation to HBOS’s collapse in the credit crunch. The investigation was concluded at, I would assume, huge expense with… no action being taken.
On a personal level, I am trying to work out which emotion is stronger; that of anger that a systemically important financial institution could do so much damage to the entire national and global economy, with no individual having action taken against them OR the relief, on a personal level for those involved, who have had this investigation hanging over them for 14 years. Take your pick. Either way, something feels completely wrong.
Enforcement is Fascinating in Europe!
My favourite reads of the quarter have to be the two ESMA reports which summarise the fines imposed under the AIFMD and UCITS directives. AIFMD covers the regulation of hedge funds and private equity funds (amongst others) and UCITS covers retail funds. All fines were reported to the nearest cent!
The headlines are that under AIFMD 78 individual fines raised €42M and under the UCITS directive, 61 separate fines raised nearly €39M of revenue. In aggregate, that is roughly 140 fines for a total of roughly €80m in fines revenue. However, that does not tell the full story.
Of the total of roughly €80M fines raised, $75M were from just 2 fines in France. The remaining €5M is not evenly spread out. Far, from it; while Germany imposed zero fines, Bulgaria imposed 30 under UCITS alone – at an average of €3000 each. Ireland, Malta and Cyprus, all off-shore financial centres, imposed 1 fine in total between them – whereas Luxembourg, also a financial centre, imposed 14 fines, raising approx. €1M.
What to conclude?
I hardly know where to start. As a minimum, it seems like a very uneven playing field across Europe from a regulatory enforcement perspective that is already heavily impacted by local culture and politics. I can’t help but wonder what EU and ESMA policy makers think of such diverse actions by National Competent Authorities (the local regulators) to the same set of rules?
Ongoing Regulatory Themes
Starting with the FCA, the theme that continues to stand out for me is the transition from Consultation to Guidance. Last quarter, I noted how over a period of years the FCA was consulting significantly less on rule changes and simply giving guidance on its existing rules, generally strengthening its interpretation of them. This continues, and the consultations that have been issued are generally of relatively minor importance. Why consult when you already know what you think? This aligns with the theme we have been noting since Nikhil Rathi’s appointment of a more assertive regulator and its' ongoing consumer protection ambitions.
Personally, I would find it quite easy to construct arguments that ESG should not be directly a regulatory issue. However, that is not the FCA’s view, not least because it is charged with supporting the governments net zero by 2050 strategy.
Since 2019, the FCA has taken a proactive stance to ESG, appointing an ESG Director and publishing a strategy (in 2021). It also has a ‘golden thread’ approach, arguing that ESG should be integrated into all its activities. This quarter it released a strategy for enhancing ESG in capital markets, which mainly focusses on issues of ESG ‘compliance’ for bond issuers.
The challenge I perceive, is that there now seems to be as much criticism of ESG as there is praise for it. It may be the flavour of the month and align with everything ‘green’ that we all now support, but the practical implications are very challenging. All sorts of analyses show ESG funds underperforming, the companies they invest in do worse on ESG issues and compliance than those that don’t claim ESG compliance. Specifically, challenges around the effectiveness of a system which includes many different methodologies for measuring three such challenging and unmeasurable issues as the environment, social impact and governance.
However, as far as ESG goes, the regulator is here to stay and this will not go away. Interestingly, I note none of the three main EU regulators mention ESG specifically this quarter, although 'Sustainability' reporting is front and centre – more to follow on this.
I like to monitor what is happening in the crypto space, as this acts as a good indicator of wider regulatory sentiments around innovation and competition. This is said at a time when the FCA still nominally continues to promote innovation but is unwilling to authorise business models which it considers risky, such as those involving crypto assets.
This has been another quiet quarter for crypto in terms of regulatory developments, something I still struggle to work out given the general noise, consumer risk and significant risk of all forms of financial crime which crypto assets create. Having said that, the FCA’s defence against these risks appears to be to keep firms out altogether. There are still only 37 crypto firms approved under the Money Laundering Regulations and just one in the last quarter. This is a tiny number – it is nearly three years since the relevant regulations came into force. The conflict between the FCA’s theoretical promotion of innovation and the natural suspicion the FCA’s authorisation team has of all innovative businesses continues to be difficult.
MiCA (forthcoming European Crypto Regulatory) framework, of course, continues apace in Europe with the EBA encouraging firms to embrace it early. I remain unconvinced that the UK is doing the right thing by refusing to develop its own equivalent.