2020 – Into the Murk?

As 2020 opens and we gaze into the crystal ball for the year ahead, the picture has never been more hazy.

Two factors are clouding the picture. Firstly, the appointment of FCA Chief Executive Andrew Bailey as next Governor of the Bank of England from March 2020 means that a new FCA CEO needs to be appointed. FCA has yet to announce his successor, and the usual list of internal and external candidates has been canvassed. A new appointment will not be announced for some months.

As a consequence, FCA policy making in the interim period will go one of two ways – or both simultaneously. Either policy development will dry up, awaiting the new hand on the tiller, or there will be a plethora of speeches and initiatives from the internal candidates as they seek to enhance their credibility. Watch these for clues as to any new direction the FCA may take.

The other confusing factor is Boris Johnson’s re-election with a large majority. It had always been a working assumption for Brexit planning that the UK would pursue an approach which had the EU declare that the UK regulatory regime was “equivalent” to the EU, leading to greatest market access. Recent press comment would indicate that this remains the government’s first option. However, the concept of equivalence is fast becoming a contested term.

Speaking in the House in the EU (Withdrawal Agreement) Bill debate on 20 December, Johnson said “this [Agreement] will be with no alignment on EU rules, but instead with control of our own laws, and close and friendly relations.” In the same debate, Liam Fox, a former trade minister, described a concept of equivalence “where we know what standards we need to meet, but we want to find our own ways, our own rules and our own efficiencies in achieving them.”

Fox went on to say that “there are those in the forthcoming negotiations who will say that, to have access to the single market, Britain must accept dynamic alignment – in other words, we must automatically change our rules in line with the EU. The Prime Minister will have 100% support from the Conservative Party if he rules out any concept of dynamic alignment, which would leave Britain in a worse place in terms of taking back control than we are in as a member of the European Union.”

So there you are. Equivalence, along with government’s desire to achieve it and how it is maintained long term, is now very much less certain. At this stage we can only speculate on what that will mean for the detailed application of rules in our sector.

New Prudential Regime – or not?

All of the forgoing does cast some doubt over the new prudential regime which was due to be implemented in 2021.

These regulations had their origin in EU legislation, and it was widely assumed that they would be implemented in the UK, irrespective of Brexit, in order to ensure a smooth transition with equivalent rules and as much access as possible.

FCA was due to release a consultation paper on this towards the end of 2019 – we await this now with added interest. It would be a shame it these new EU rules were not applied – for smaller firms not holding client assets or carrying out principal trading, they had some merit. It would be an equal shame if they were replaced with FCA’s proposed rules on “Adequate Financial Resources” – see our comments in our October Newsletter. But again, the Policy Statement on these proposals, due in late 2019, has similarly been delayed.

5th Anti-money Laundering Directive

No such doubt surrounds the implementation of 5AMLD, which came into force on 10 January. But for most firms already within the scope of these directives, there is not much to change.

The 5th Directive gives a new list of high-risk factors to be taken into account when assessing the need for enhanced due diligence and document retention, most of which will already be covered by firms’ procedures.

There is a new requirement to report to Companies House discrepancies between the information the firm holds compared with the information held in the Companies House Register. Fulcrum Compliance will be working with retained clients to ensure that these new procedures are part of standard operating procedures.

Client money – are you talking to your auditors?

All firms – irrespective of whether they do or don’t hold client money or assets – will have already received from FCA their annual reminder to disclose to them the value of client assets and money held over the past year and predicted to be held in the coming year.

For firms who do not hold client money or assets, it’s tempting to assume that a nil return is an end to this matter. However for firms subject to a Companies Act audit requirement, that’s far from the case. As the FCA’s web site here makes clear, “If you claim not to have held client money or custody assets (or are not authorised to hold client money or custody assets) the auditor should provide a limited assurance report.”

But there are exemptions from this audit requirement, set out in SUP 3.1 of the FCA Handbook. As mentioned, a large number of firms will be exempt if “they do not hold client money or client assets and do not appoint an auditor”. Exempt CAD firms are also exempt. However MiFID Investment firms are not exempt.

Don’t rely on your auditor to know this – as the FCA site says, “it is your responsibility to appoint an appropriately qualified auditor and to ensure that they provide the report to us in line with our requirements.”

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