If you have any comments or questions, please contact Elizabeth Prentice. Slaughter and May also produces a periodical Insurance Newsletter. If you would like to go on the distribution list, please contact Beth Dobson.

Selected Headlines

General

Brexit

Banking and Finance

Securities and Markets

Asset Management

Insurance

Financial Crime

Enforcement

Financial Regulation

Weekly Bulletin 25 January 2018 / Issue 946

Major UK and European regulatory developments of interest to banks, insurers and reinsurers, asset managers and other market participants

Selected Headlines Brexit

Brexit: Key cliff edge risks in wholesale financial services – AFME publishes report

5.1

Banking and Finance

CRR – European Commission adopts regulatory technical standards on excluding transaction with third country non-financial counterparties from own funds requirement for credit valuation adjustment risk

6.1

CRR - European Commission consults on draft delegated regulation amending the Commission Delegated Regulation on the Liquidity Coverage Ratio

6.2

Securities and Markets

Proposed Regulation on recovery and resolution of CCPs – European Parliament agrees negotiating position

10.1

MiFID II/MiFIR - ESMA publishes additional transitional transparency calculations and updates FAQs

11.1

MiFID II – FCA publishes further commodity derivative contract position limits

12.1

FCA Policy Statement PS18/2: Client money and unbreakable deposits

12.2

PRIIPs – FCA publishes statement on performance scenarios in the KID 12.3

Asset Management

FCA Consultation Paper CP18/4: The European Money Market Funds Regulation

13.1

Insurance

Application of group supervision under Solvency II Directive – EIOPA publishes report

14.1

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Financial Regulation / 25 January 2018 / Issue 946 2

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FCA Policy Statement PS18/1: Insurance Distribution Directive implementation - Feedback and near-final rules to CP17/33 and other IDD consultations

15.1

Financial Crime

AML/CTF compliance – ESAs publish Opinion on the use of innovative solutions by credit and financial institutions in the customer due diligence process

18.1

Enforcement

Poor market abuse controls and failure to report suspicious client transactions – FCA fines online broker £1 million

22.1

General 1. Council of the European Union

1.1 Progress on EU financial services legislative proposals – Council of the EU publishes

information from the Presidency – 16 January 2018 – The Council of the EU has published

information from the Presidency on the state of play of legislative proposals within the financial

services sector.

The document is here.

2. Financial Conduct Authority

2.1 FCA Consultation Paper CP18/3: Consultation on SME access to the Financial Ombudsman

Service and Feedback to DP15/7: SMEs as Users of Financial Services – 22 January 2018 – The

Financial Conduct Authority (FCA) has published a Consultation Paper (CP18/3) on proposed new

rules to allow more small and medium sized enterprises (SMEs) to refer disputes to the Financial

Ombudsman Service (FOS).

CP18/3 discusses the wider context (chapter 2). The FCA proposes that SMEs with fewer than 50

employees, annual turnover below £6.5 million, and an annual balance sheet below £5 million

would be able to access the FOS. The proposed changes do not cover disputes where the redress

sought would be significantly higher than the FOS’s binding award limit of £150,000 (chapter 3).

The FCA is also seeking feedback on whether there is anything else that might be done for

businesses and disputes not addressed by CP18/3. The FCA suggests that this could include greater

scope for voluntary codes (chapter 4). A summary of feedback to “Discussion Paper DP15/7: Our

approach to SMEs as users of financial services” (November 2015) is contained in Annex 4.

The consultation closes on 22 April 2018.

The FCA intends to publish a Policy Statement in summer 2018.

CP18/3 is here.

The consultation webpage is here.

The press release is here.

Financial Regulation / 25 January 2018 / Issue 946 3

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2.2 FCA Handbook Notice No.51 – conduct of business changes to projections – January 2018 – The

FCA has published Handbook Notice No.51, which announces changes to the Handbook made by

the FCA Board between 7 December 2017 and 18 January 2018. Among the items of interest is The

Conduct of Business Sourcebook (Projections) (Amendment No. 2) Instrument 2018 (FCA 2018/2) —

consulted on in CP17/32 “Quarterly Consultation Paper No. 18” (September 2017) — which makes

changes to COBS 13 and 19 from 6 April 2019 to ensure that consumers continue to receive

information which reflects the current economic outlook.

The FCA Handbook Notice No.51 is here.

Handbook instruments can be found here.

3. Financial Services Compensation Scheme

3.1 FSCS Plan and Budget 2018/19 - published by FSCS with details of initial levy indications – 19

January 2017 - The Financial Services Compensation Scheme (FSCS) has published its Plan and

Budget for 2018/19, which outlines its expected management costs and initial levy forecasts for

next year.

The Plan and Budget 2018/19 is available here.

The press release is here.

Brexit 4. UK Parliament

4.1 European Union (Withdrawal) Bill – second reading in House of Lords scheduled for 30 January

2018 – January 2018 – The second reading in the House of Lords for the EU (Withdrawal) Bill has

been scheduled for 30 January 2018. The Bill and explanatory notes have been reprinted to reflect

the Bill as introduced into the House of Lords on 18 January. Versions of the Bill showing changes

made at report stage in the House of Commons, and changes made in committee and at report

stage, are available. A new Delegated Powers Memorandum is available.

The Bill file is here.

4.2 Data Protection Bill – has first reading in the House of Commons – 18 January 2018 – The Data

Protection Bill has completed its House of Lords stages, and had its first reading in the House of

Commons on 18 January 2018. The Bill and explanatory notes have been reprinted as brought from

the House of Lords, and a version showing changes made in committee in the House of Lords is

available.

The Bill file is here.

4.3 The Sanctions and Anti-Money Laundering Bill – completes House of Lords stages – 24 January

2018 – The Sanctions and Anti-Money Laundering Bill completed its third reading in the House of

Lords on 24 January 2018. The Bill now goes to the House of Commons for consideration.

The Bill file is here.

4.4 Trading in financial services after Brexit – House of Lords question and answer on government

position paper – 23 January 2018 – Baroness Goldie has answered a question from Baroness

Financial Regulation / 25 January 2018 / Issue 946 4

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Falkner of Margravine in the House of Lords about whether the government still intends to publish

a position paper setting out its priorities and preferred trading relationship for the financial

services sector after the United Kingdom’s withdrawal from the EU, and if so when. Baroness

Goldie referred to a reply in the House of Commons in November, in which Robin Walker stated

that, at that point, there was no position paper. She indicated that there was a delicate balance

about when and how to set things out in public, and that the government would keep under

review the best way of doing this.

The relevant section of Hansard is here.

5. Association of Financial Markets in Europe

5.1 Brexit: Key cliff edge risks in wholesale financial services – AFME publishes report – 22 January

2018 - The Association for Financial Markets in Europe (AFME) has published a short paper on some

of the key cliff edge risks in wholesale financial services that Brexit could create for market

efficiency and financial stability. AFME defines a cliff edge risk as an issue that is expected to

create market disruption or material impediments to business activities on the day of Brexit if no

legislative or regulatory intervention is undertaken (i.e., is not easily resolved by banks’ own plans

or industry solutions). Cliff edge risks could arise (unless mitigated) at the point of UK exit, and at

the end of a transition period. AFME considers that the Withdrawal Agreement is the most

appropriate mechanism to resolve the cliff edge risks highlighted in this paper, although the

principles of the Withdrawal Agreement may need to be supported by legislation in the UK, the EU

and the EU27 Member States.

AFME highlights the following cliff edge risks:

cross-border personal data transfers;

continuity of contracts;

choice of jurisdiction; recognition and enforcement of judgments;

access to market infrastructure: recognition of CCPs; and

recognition of resolution actions.

AFME welcomes feedback on the paper.

The report is here.

The holding page is here.

See also the Securities and Markets section below for an item on the European Parliament publishing a

briefing paper on equivalence decisions under MiFID II/MiFIR.

Banking and Finance 6. European Commission

6.1 CRR – European Commission adopts regulatory technical standards on excluding transactions

with third country non-financial counterparties from own funds requirement for credit

Financial Regulation / 25 January 2018 / Issue 946 5

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valuation adjustment risk – 24 January 2018 – The European Commission has adopted a Delegated

Regulation (C(2018) 256) on regulatory technical standards (RTS) in relation to the procedures for

excluding transactions with non-financial counterparties established in a third country from the

own funds requirement for credit valuation adjustment risk under Article 382(5) of the Capital

Requirements Regulation (575/2013/EU) (CRR).

Unless objected to by the Council of the EU and the European Parliament, the Delegated

Regulation will enter into force 20 days after its publication in the Official Journal of the EU.

The Delegated Regulation is here.

6.2 CRR - European Commission consults on draft delegated regulation amending the Commission

Delegated Regulation on the Liquidity Coverage Ratio - 24 January 2018 – The European

Commission has published a draft Delegated Regulation for consultation amending Delegated

Regulation (EU) 2015/61 of 10 October 2014 with regard to liquidity coverage requirements for

credit institutions for the purposes of the Credit Requirements Regulation (575/2013/EU) (CRR).

The Commission states that the most important amendment is that the calculation of the

expected liquidity outflows and inflows on repos, reverse repos and collateral swaps transactions

be fully aligned with the international liquidity standard developed by the Basel Committee on

Banking Supervision.

The Commission welcomes feedback by 21 February 2018.

It proposes to adopt the draft Delegated Regulation in March 2018.

The draft Delegated Regulation is here.

The consultation holding page is here.

6.3 Second Electronic Money Directive – European Commission publishes report – 25 January 2018 –

The European Commission has published a report addressed to the European Parliament and the

Council on the implementation and impact of the second Electronic Money Directive

(2009/110/EC), particularly on the application of prudential requirements for electronic money

institutions. The overall assessment is positive, but the report does suggest improvements,

including guidance on: the classification of products as e-money; the application of the limited

network provision; and the distinction between the concept of an agent and a distributor in the

context of e-money.

The report is here.

The annex to the report is here.

7. Recent cases

7.1 London Executive Aviation Ltd v The Royal Bank of Scotland plc [2018] EWHC 74 (Ch) - 22

January 2018

Alleged mis-selling of interest rate hedging products

The High Court (Mrs Justice Rose) has dismissed on the facts a case of alleged mis-selling (in

February 2008) by a bank of interest rate hedging products, in this case to a private aircraft

Financial Regulation / 25 January 2018 / Issue 946 6

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charter business. An important feature of the case was that the loan being hedged had a variable

interest, but fixed monthly payments, with a balloon payment at the end. In addition,

negotiations with the client had been conducted by an employee of the defendant bank, but the

counterparty to the final contract was a different entity within the banking group (although the

Judge did not need to make a finding on the legal effect of this).

The Judge reviewed the cases on the court’s approach to negligent mis-selling claims, and derived

five principles (paragraph 159 onwards):

in all of the cases, the courts have carefully examined the emails, phone call transcripts, slide

presentations and contractual documents (generated during the often lengthy dealings

between the parties) to ascertain whether the bank not only sold the products to the customer,

but also advised the customer to buy its products to an extent that engages a legal

responsibility on the part of the defendant bank to ensure that such advice was not negligent;

in many of the cases (as here), the claimant faces the hurdle that the binding contractual

terms explicitly state that the relationship between them is not an advisory one; the customer

acknowledges that the bank is not advising him and that he has not relied on any advice or

recommendation given by the bank;

the courts have taken a pragmatic and commercially sensible approach to analysing the

dealings between a bank's representative and the customer;

an analysis of the judgments in J. P Morgan Chase Bank v Springwell Navigation Corp [2008]

EWHC 1186 (Comm) and Thornbridge Ltd v Barclays Bank plc [2015] EWHC 3430 (QB) shows that

although the factual question of whether advice was given and the legal question of whether

the bank assumed responsibility for that advice if it was negligent are conceptually separate,

they are closely linked; and

the courts are cautious about importing concepts from the regulatory rules and guidance into

the discussion of the scope of the common law duty of care or the circumstances in which it

arises.

The Judge found that:

the negligence claim failed because the salesman did not give advice (and even if he had,

there was no advisory relationship). She did not need to find whether the bank could rely on

the contractual terms;

there was no breach of the so-called mezzanine duty (the proposition that a bank which

undertakes to explain the nature and effect of a transaction, even if what is said falls short of

a recommendation or advice on the merits of entering into it, owes a duty to take reasonable

care to do so as fully and properly as the circumstances demand); and

the deceit and misrepresentation claims failed.

The Judge declined to make a finding on whether the employee was to be treated as giving advice

or making any misstatements or misrepresentations on behalf of his employer (acting on its own

behalf) or on behalf of the counterparty (and hence whether the right defendant had been sued).

The judgment is here.

Financial Regulation / 25 January 2018 / Issue 946 7

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8. Complaints Commissioner

8.1 IRHP Compensation Scheme - Complaints Commissioner recommends the FCA reconsiders a

complaint - 16 January 2018 - The Complaints Commissioner (in a final report dated 2 January

2018) has recommended that the FCA reconsider a complaint about its oversight of the interest

rate hedging products (IRHP) redress scheme in September 2015 (relating to a bank’s application

of the 40 day time limit for notifying consequential loss claims, referred to in the bank’s offer

letters to claimants), makes inquiries of the bank, and then informs the complainant and the

Commissioner about its conclusions. Among other things, the Commissioner is concerned to find

out what steps the FCA has taken to establish whether other claimants under the redress scheme

may have been disadvantaged.

The FCA has published an interim response, indicating that it is considering the Complaints

Commissioner’s recommendations, but repeating the bank’s confirmation that no claimants have

been placed at a disadvantage.

The Complaints Commissioner’s final report is here.

The FCA’s response is here.

See also the General section above for an item on “FCA Consultation Paper CP18/3: Consultation on SME

access to the Financial Ombudsman Service” and “Feedback to DP15/7: SMEs as Users of Financial

Services”.

See the Asset Management section below for an item on “FCA Consultation Paper CP18/4: The European

Money Market Funds Regulation” (January 2018), which includes a statement that the FCA is not proposing

to align the BIPRU definition for ‘designated money market fund’ to that of the MMF Regulation definition

for a ‘money market fund’ (in order not to affect liquidity requirements).

Securities and Markets 9. International Organization of Securities Commissions

9.1 Concerns related to ICOs - IOSCO Board publishes communication - 18 January 2018 - The

International Organization of Securities Commissions (IOSCO) Board has published a

communication expressing its concerns about the risks (including fraud) associated with initial coin

offerings (ICOs). ICOs (also known as token sales or coin sales), typically involve the creation of

digital tokens — using distributed ledger technology — and their sale to investors by auction or

through subscription, in return for a crypto-currency such as Bitcoin or Ether (or more rarely, for

government-backed currency).

The communication is here.

IOSCO has also collated a sample of other ICO-related communications from other regulators here.

10. European Parliament

10.1 Proposed Regulation on recovery and resolution of CCPs – European Parliament agrees

negotiating position – 24 January 2018 - The European Parliament’s Committee on Economic and

Monetary Affairs (ECON) has agreed its negotiating position on the proposed Regulation of the

European Parliament and of the Council on a framework for the recovery and resolution of central

counterparties (CCPs), amending Regulations (EU) No 1095/2010, (EU) No 648/2012 (EMIR), and

Financial Regulation / 25 January 2018 / Issue 946 8

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(EU) 2015/2365. Negotiations between the European Parliament, the Council of the EU and the

European Commission will follow after member states have agreed their common stance.

The procedure file is here.

The announcement is here.

10.2 Equivalence decisions under MiFID II/MiFIR – European Parliament publishes briefing paper – 25

January 2018 – The European Parliament’s Committee on Economic and Monetary Affairs has

published a briefing paper on equivalence decisions under the Markets in Financial Instruments

Directive (2014/65/EU) (MiFID II) and Regulation (600/2014/EU) (MiFIR). The paper describes the

MiFID II/MiFIR third country framework, Commission equivalence assessments generally, and those

adopted to date under Articles 23 and 28(4) of MiFIR, and under Article 25(4) of MiFID II, together

with transitional provisions.

The paper also briefly discusses the regulatory technical standards on strong customer

authentication and secure communication as adopted by the Commission on 27 November 2017

under Article 98 of the revised Payment Services Directive ((EU) 2015/2366) (PSD2).

The briefing paper is here.

11. European Securities and Markets Authority

11.1 MiFID II/MiFIR - ESMA publishes additional transitional transparency calculations and updates

FAQs - 19 January 2018 - The European Securities and Markets Authority (ESMA) has

added transitional transparency calculations (TTCs) under the Markets in Financial Instruments

Directive (2014/65/EU) (MiFID II) and the Markets in Financial Instruments Regulation

(600/2014/EU) (MiFIR) for:

equity instruments traded for the first time on a trading venue between 13 September 2017

and 2 January 2018 (included); and

bond instruments (except ETCs and ETNs) traded for the first time on a trading venue between

01 November 2017 and 2 January 2018 (included).

ESMA has also updated its FAQs.

The full list of TTCs can be found here.

The FAQs are here.

The press release is here.

12. Financial Conduct Authority

12.1 MiFID II – FCA publishes further commodity derivative contract position limits – 25 January 2018

– The FCA has published position limits for the Swiss Baseload Power contract. The limits will apply

from 31 March 2018. They have been established under regulation 16 of the Financial Services and

Markets Act 2000 (Markets in Financial Instruments) Regulations 2017 (SI 2017/701), in accordance

with the Markets in Financial Instruments Directive (2014/65/EU) (MiFID II), and the methodology

set out in article 57 and Commission Delegated Regulation (EU) 2017/591 (RTS 21). The position

Financial Regulation / 25 January 2018 / Issue 946 9

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limits have been published in advance of, and may change in the light of, the publication of the

European Securities and Markets Authority’s opinion.

The FCA webpage on position limits for commodity derivative contracts is here.

12.2 FCA Policy Statement PS18/2: Client money and unbreakable deposits – January 2018 - The

Financial Conduct Authority (FCA) has published a Policy Statement (PS18/2) on depositing client

money in unbreakable deposits. PS18/2 contains feedback to CP17/29 (August 2017) and final

rules. Changes to the FCA Client Assets Sourcebook (CASS 7) will enable investment firms to hold a

proportion of client money in an unbreakable deposit longer than 30 days, subject to certain

conditions.

The Client Assets (Term Deposits) Instrument 2018 (FCA 2018/2) came into force on 22 January

2018.

PS18/2 is here.

The webpage is here.

12.3 PRIIPs – FCA publishes statement on performance scenarios in the KID – 24 January 2018 – The

FCA has published a statement regarding the performance scenarios in the Key Information

Document (KID) under the Regulation on Packaged Retail and Insurance-based Investment Products

(1286/2014/EU) (PRIIPs Regulation). The FCA understands that some firms are concerned that, for

some PRIIPs, the ‘performance scenario’ information required in the KID could appear too

optimistic and may mislead consumers. The FCA states that it will allow any PRIIP manufacturer

with these concerns to provide explanatory materials which contextualise the calculation, and to

outline these concerns for customers to consider. Where firms selling or advising on PRIIPs have

concerns that the performance scenarios in a particular KID may mislead their clients, they should

consider how to address this, for example by providing additional explanation as part of their

communications with clients.

The statement is here.

See also the General section above for an item on FCA Handbook Notice No.51 announcing changes to

projections.

Asset Management 13. Financial Conduct Authority

13.1 FCA Consultation Paper CP18/4: The European Money Market Funds Regulation – 24 January

2018 – The FCA has published a Consultation Paper (CP18/4) which sets out proposed Handbook

changes in relation to the European Money Market Funds (MMF) Regulation ((EU) 2017/1131).

Although the Regulation is directly applicable, the FCA and the Treasury have identified certain

changes necessary in order that the Regulation can work properly in the UK. The Treasury intends

to give certain powers to the FCA to ensure that it can supervise firms’ adherence to the

requirements of the MMF Regulation. In addition, the FCA proposes to make changes to its

Glossary of definitions, its Collective Investment Schemes sourcebook (COLL), and its Fees manual.

However, the FCA is not proposing to align the BIPRU definition of ‘designated money market

fund’ to that of the MMF Regulation definition for a ‘money market fund’, as there would be a

Financial Regulation / 25 January 2018 / Issue 946 10

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corresponding impact on the liquidity requirements for firms which the FCA does not think

desirable or necessary.

The consultation period closes on 23 March 2018.

The FCA intends to publish the final rules in a Handbook Notice as soon as possible after the end

of the consultation period (spring 2018).

It also intends to make application forms for authorisation of new MMFs available on its website

from early May 2018.

The MMF Regulation came into force on 21 July 2017, and applies to new MMFs from 21 July 2018,

and to existing MMFs from 21 January 2019.

CP18/4 is here.

The consultation webpage is here.

See also the General section above for an item on FCA Handbook Notice No.51 announcing changes to

projections.

See also the Securities and Markets section above for an item on the FCA publishing a statement on

performance scenarios in the KID for PRIIPs.

Insurance 14. European Insurance and Occupational Pensions Authority

14.1 Application of group supervision under Solvency II Directive – EIOPA publishes report – 25

January 2018 – EIOPA has published a report (dated 22 December 2017) to the European

Commission on the application of group supervision under the Solvency II Directive (2009/138/EC).

The report was prepared in the context of Article 242(1) of Solvency II, which requires the

Commission to make an assessment of the application of Title III, in particular as regards the

cooperation of supervisory authorities within, and functionality of, the college of supervisors and

the supervisory practices concerning setting the capital add-ons. The Commission asked EIOPA to

pay particular attention to 29 issues (listed in the Annex), but not to formulate proposals for the

amendment of Solvency II.

The report is here.

14.2 IDD – EIOPA publishes official translations of Guidelines on complex insurance-based

investment products – 19 January 2018 - The European Insurance and Occupational Pensions

Authority (EIOPA) has published official translations of its Guidelines on insurance-based

investment products (IBIPs) that incorporate a structure which makes it difficult for the customer

to understand the risks involved. The Guidelines were developed under articles 30(7) and (8) of

the Insurance Distribution Directive (EU) 2016/97.

The Guidelines apply from 19 January 2018 and competent authorities have two months to

‘comply or explain’.

The English language version of the Guidelines is here.

Financial Regulation / 25 January 2018 / Issue 946 11

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The webpage is here.

The press release is here.

15. Financial Conduct Authority

15.1 FCA Policy Statement PS18/1: Insurance Distribution Directive implementation - Feedback and

near-final rules to CP17/33 and other IDD consultations - January 2018 - The Financial Conduct

Authority (FCA) has published Policy Statement (PS18/1) which sets out (in Appendix 1) near-final

rules for the implementation of the Insurance Distribution Directive (EU) 2016/97 (IDD). PS18/1

includes feedback to CP17/33 (the FCA’s third IDD CP), certain matters deferred from CP17/23

(the second CP), and feedback to the IDD-related aspects of two Quarterly Consultation Papers

(CP17/32 and CP17/39).

PS18/1 summarises:

the FCA's approach to the IDD delegated acts (chapter 2);

changes to the FCA's requirements related to the distribution of insurance-based investment

products (IBIPs) and wider life insurance business, specifically:

o inducements (chapter 3);

o suitability and appropriateness (chapter 4); and

o information and product disclosure (chapter 5);

changes to the FCA’s rules affecting all investment insurance business, including:

o conflicts of interest (chapter 6);

o product oversight and governance (chapter 7);

o Perimeter Guidance (chapter 8); and

o regulatory processes (chapter 9);

additional changes to the Handbook (chapter 10); and

feedback to the IDD-related aspects of the quarterly consultations CP17/32 and CP17/39

(chapter 11).

The FCA intends to publish the final rules once the legislation transposing the IDD is in force.

On 20 December 2017, the European Commission published proposals to delay the application date

of the IDD and two associated Delegated Regulations, (EU) 2017/2358 and (EU) 2017/2359, from 23

February to 1 October 2018. HM Treasury has indicated that it will amend the UK legislation in this

event. With this in mind, the FCA has included a formal transition period in its near-final rules

(GEN TP4) to clarify that firms may adopt some or all of the new IDD requirements early if they so

choose. If the delay is not agreed at the European level, it intends to remove this from its final

rules.

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PS18/1 is here.

The FCA webpage is here.

The HM Treasury webpage is here.

15.2 Pension transfer advice and scams – FCA responds to criticism from the House of Commons

Work and Pensions Committee relating to financial advice given to members of the British

Steel Pension Scheme – 18 January 2018 – The FCA has published a letter from its Chief

Executive, Andrew Bailey, responding to criticism of the House of Commons Work and Pensions

Committee, concerning the FCA’s actions in relation to the financial advice received by members

of the British Steel Pension Scheme, and defending the work of the FCA generally (and that of

other regulators) concerning pension transfer advice and scams. Among other things, it mentions

the referral of 14 cases to enforcement for investigation in relation to the provision of pension

transfer advice.

The letter is here.

The Committee’s webpage is here.

See also the Securities and Markets section above for an item on the FCA publishing a statement on

performance scenarios in the KID for PRIIPs.

Financial Crime 16. Financial Action Task Force

16.1 Financing of recruitment for terrorist purposes – FATF publishes report – January 2018 - The

Financial Action Task Force (FATF) has published a report on the financing of recruitment for

terrorist purposes. The FATF hopes this will enhance understanding of the role of counter-

terrorism financing measures in disrupting terrorist recruitment activity, and also assist in the

early detection, investigation and prosecution of recruiters, or the adoption of targeted financial

sanctions, both at a domestic and international level.

The report can be found here.

17. Council of the European Union

17.1 EU list of non-cooperative jurisdictions for tax purposes – Council of the EU removes eight

jurisdictions – 23 January 2018 – The Council of the EU has removed Barbados, Grenada, the

Republic of Korea, Macao SAR, Mongolia, Panama, Tunisia and the United Arab Emirates from the

EU list of non-cooperative jurisdictions for the purposes of taxation. These countries have been

moved to a separate category of jurisdictions subject to close monitoring. There are nine

remaining jurisdictions on the list.

The Council’s January 2018 note on the subject is here.

The original list is here.

The press release is here.

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18. Joint Committee of the European Supervisory Authorities

18.1 AML/CTF compliance – ESAs publish opinion on the use of innovative solutions by credit and

financial institutions in the customer due diligence process – 23 January 2018 - The Joint

Committee of the European Supervisory Authorities (ESAs) has published an opinion on how credit

and financial institutions use innovative solutions to comply with their customer due diligence

(CDD) obligations, as part of their anti-money laundering and counter terrorist financing controls.

The opinion is addressed to competent authorities, and includes content on:

the legal framework;

types of innovative solutions currently used in the CDD process;

factors that competent authorities should consider (including oversight and control

mechanisms, the quality and adequacy of CDD measures, the reliability of CDD measures,

delivery channel risks, and geographical risks); and

achieving a common approach across member states.

The opinion is here.

The press release is here.

19. UK government

19.1 Register revealing ultimate ownership of property bought by overseas companies - to go live in

2021 – 18 January 2018 – The Department for Business, Energy and Industrial Strategy has

announced that the government expects to publish a draft Bill on a public register requiring

overseas companies that own or buy property in the UK to provide details of their ultimate owners

this summer. The register will go live in 2021. The government intends to use the register to

prevent criminals from using the UK property market to launder money.

The press release is here.

20. Financial Conduct Authority

20.1 FCA Finalised Guidance FG18/1: Sourcebook for professional body supervisors on anti-money

laundering supervision – January 2018 – The Office for Professional Body Anti-Money Laundering

Supervision (OPBAS) is a new regulator within the FCA which oversees the adequacy of the anti-

money laundering (AML) supervisory arrangements of the accountancy and legal professional

bodies. The OPBAS Regulations 2018 (SI 2017/1301) came into effect on 18 January 2018.

The FCA has published FG18/1: Sourcebook for professional body anti-money laundering

supervisors (January 2018), the OPBAS Sourcebook, and a summary of feedback to GC17/7 (July

2017).

The OPBAS Sourcebook sets out OPBAS’s expectations in relation to the Money Laundering,

Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017 (SI

2017/692). It takes effect on 1 February 2018 (but OPBAS does not expect professional body

supervisors to be aligned with all the material in this guidance by 1 February 2018).

Financial Regulation / 25 January 2018 / Issue 946 14

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FG18/1 is here.

The OPBAS Sourcebook is here.

The summary of feedback is here.

The webpage is here.

21. New legislation

21.1 The Andrey Lugovoy and Dmitri Kovtun Freezing Order 2018 (SI 2018/60) was made on 19

January 2018 and came into force at 12 noon on 22 January 2018. The Order replaces a 2016

Order, and has been made under the Anti-terrorism, Crime and Security Act 2001. It prohibits

persons from making funds available to or for the benefit of two named individuals who are

foreign residents, on the basis of reasonable belief that they took action constituting a threat to

the life of Alexander Litvinenko, a UK national and resident. The Treasury believe that this Order

will be an effective deterrent to prevent similar activities being undertaken again.

The Order is here.

The explanatory memorandum is here.

See also the Brexit section above for an item on the Sanctions and Anti-Money Laundering Bill completing

its House of Lords stages.

See also the Securities and Markets section above for an item on the IOSCO Board publishing a

communication on concerns related to ICOs.

See also the Insurance section above for an item on pension transfer advice and scams, and the FCA

responding to criticism from the House of Commons Work and Pensions Committee.

See also the Enforcement section below for an item on the FCA fining an online broker £1 million for poor

market abuse controls, and failure to report suspicious client transactions.

Enforcement 22. Financial Conduct Authority

22.1 Poor market abuse controls and failure to report suspicious client transactions – FCA fines

online broker £1 million – 25 January 2018 - The FCA has fined Interactive Brokers (UK) Limited

£1,049,412. The FCA found it breached Principle 3 of the FCA’s Principles for Businesses by failing

to take reasonable care to organise and control its affairs responsibly and effectively, with

adequate risk management systems, in relation to the detection and reporting of potential

instances of market abuse from 6 February 2014 to 28 February 2015. Prior to being notified of the

FCA’s concerns, the firm failed to submit any suspicious transaction reports (STRs) in relation to

insider dealing, and the FCA identified three occasions on which the firm breached SUP 15.10.2R

by failing to report suspicious trading by its clients in advance of three separate RNS

announcements.

The firm is an online broker which arranges and executes transactions in certain instruments

directly for its UK clients, including CFDs, index futures and index options. It also executes

Financial Regulation / 25 January 2018 / Issue 946 15

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transactions in other products, including UK stocks, stock options, bonds and warrants, on behalf

of other entities in the group.

The FCA states that the firm relied entirely on post-trade surveillance systems which were

designed for the whole group and which operated on a global basis, across multiple jurisdictions,

for all group entities. Although it was entitled to use the group systems, the firm failed to take

adequate steps to satisfy itself that potential market abuse by its clients was effectively captured

by the Post-Trade Surveillance Reports, which were not tailored in any way to its specific

business. Specific findings made by the FCA included failing to provide adequate input into the

design and calibration of post-trade surveillance systems, and to test the operation of those

systems.

In addition, the firm delegated the conduct of its initial post-trade surveillance to a team from a

US-based affiliate company. The FCA found that its oversight of that team’s conduct of the

reviews of the Post-Trade Surveillance Reports was inadequate. The firm also failed to provide

adequate guidance or training to those carrying out that review.

The final notice is here.

The press release is here.

See also the Banking section above for an item on London Executive Aviation Ltd v The Royal Bank of

Scotland plc, the latest case to fail to prove mis-selling of interest rate hedging products.

See also the Banking section above for an item on the Complaints Commissioner recommending that the

FCA reconsiders a complaint concerning its oversight of the IRHP Compensation Scheme.

See also the Insurance section above for an item on pension transfer advice and scams, and the FCA

response to criticism from the House of Commons Work and Pensions Committee, in which the FCA

mentions the referral of 14 cases to enforcement for investigation in relation to the provision of pension

transfer advice.

Financial Regulation / 25 January 2018 / Issue 946 16

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Document No

This Bulletin is prepared by the Financial Regulation Group of Slaughter and May in London.

The Group comprises a team of lawyers with expertise and experience across all sectors in which

financial institutions operate.

We advise on regulatory issues affecting firms across the financial services sector, including

banks, investment firms, insurers and reinsurers, brokers, asset managers and funds, non-bank

lenders, payment service providers, e-money issuers, exchanges and clearing systems. We also

advise non-regulated businesses involved in financial regulatory matters. In addition, our leading

financial regulatory investigations practice is regularly instructed by financial institutions

requiring specialist knowledge of financial services regulation together with experience in high

profile and complex investigations and contentious regulatory matters.

Most of the projects that we advise on have an extensive international or cross-border element.

We work in seamless integrated teams with leading independent law firms which offer many of

the most highly regarded financial institutions lawyers in Europe, the US and Asia, as well as

strong and constructive relationships with local regulators.

Our Financial Regulation Group also produces occasional briefing papers and other client

publications. The five most recent issues of this Bulletin and our most recent briefing papers

and client publications appear on the Slaughter and May website here.

The Group’s recent work includes advising:

A number of banking groups in relation to banking structural reform, including the

ring-fencing regime;

Standard Life plc on the recommended all-share merger with Aberdeen Asset Management;

RSA Insurance Group on its disposal of £834 million of UK Legacy liabilities to the Enstar Group;

UK Asset Resolution and Bradford & Bingley plc in relation to the disposal of legacy buy-to-let

mortgage assets to Prudential plc and funds managed by Blackstone for a total consideration of

£11.8bn;

A range of financial services clients responding to the legal and structural implications of the

UK’s exit from the EU, including co-authoring a report ‘Navigating the legislative landscape

outside the single market’ with the BBA (now UK Finance);

Major financial institutions and non-financial corporates on the impact of the MiFID II regime

and related measures;

On the legal implications of developments across a broad fintech waterfront for clients such as

Euroclear, Bupa, and Stripe, as well as other established businesses through to challengers and

start-ups;

A number of multi-national clients in relation to the UK, EU, and US economic and trade

sanctions regimes.

If you would like to find out more about our Financial Regulation Group or require advice on a

financial regulation matter, please contact one of the following or your usual Slaughter and May

contact:

Jan Putnis jan.putnis@slaughterandmay.com

Ben Kingsley ben.kingsley@slaughterandmay.com

Nick Bonsall nick.bonsall@slaughterandmay.com

© Slaughter and May 2017

This material is for general information only and is not intended to provide legal advice.

For further information, please speak to your usual Slaughter and May contact.