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Financial Services Update - January 2020

In this quarter’s update we cover what’s next with Brexit, changes to the Senior Manager and Certification Regime (SM&CR) and the FCA’s policy statement on Cryptoassets

9 January 2020

Brexit

The end is finally in sight! Although not finalised yet, the government has indicated its commitment to leaving the EU with a Withdrawal agreement on 31 January 2020.

If this happens we will enter an implementation period due to last until 31 December 2020, in which the UK will negotiate its future with the EU. During this period, EU law continues to apply in the UK and passporting continues. Any new EU legislation passed in the period also applies to the UK. Essentially this means business as usual until 31 December 2020, by which time there should be more clarity on the UK’s position.

More information is available on the FCA website here: https://www.fca.org.uk/firms/preparing-for-brexit

 

Senior Manager and Certification Regime (SM&CR)

From 9 December 2019 the SM&CR was extended to cover small (solo regulated) firms which brought a further 49,000 firms into scope.

In practical terms the controlled functions have been replaced with SM&CR functions but there are a number of new obligations on firms.

Controlled functions have been split between Senior Management Functions (SMFs) (e.g. Compliance Oversight) and Certification Functions (CFs) (e.g. Customer Dealing). The SMF’s are shown on the FCA register while the CFs are not.

There are three classifications of firm and firms will have to decide which applies to them. Firms can be Limited, Core or Enhanced. The majority of our clients will fall into the Core category. Once firms establish which category they are in. they need to apply the rules. In summary Core firms are required to do the following:

  • Each Senior Manager needs a Statement of Responsibilities, covering the functions they are responsible for. There are also ‘Prescribed functions’ which are a list of specific responsibilities. These need to be assigned to a Senior Manager, and need to be recorded on the Statement of Responsibilities.
  • Each person carrying out a CF (for example client dealing) needs to be issued with a certificate to show what they are certified to do. The firm needs to check they are fit and proper to undertake these functions. This also applies to Senior Managers carrying out CFs.
  • Any new Senior Managers need a criminal background check, and the FCA no longer review and add people to the register (as they previously did with controlled functions). It is down to the firm to assess new Senior Managers are up to standard, and to tell the FCA where new appointments have been made.
  • Senior Managers are required to train the people in the Certification Regime on FCA Conduct Rules. Any breaches in the conduct rules need reporting to the FCA and it requires an annual declaration regardless of any breaches in the REP008 form on GABRIEL.

There is a transition period to 31 December 2020 for some of the above to be prepared, and more detail can be found in the FCA’s guidance here: https://www.fca.org.uk/publication/policy/guide-for-fca-solo-regulated-firms.pdf.

 

Cryptoassets

Cryptoassets have generally been outside the scope of the FCA’s remit historically, as there was no clear guidance on them. Given their unique characteristics, firms had to decide whether a cryptoasset was considered a security for FCA purposes or not, which typically meant obtaining a legal opinion.

The FCA have released a Policy Statement (PS19/22) on cryptoassets and their treatment, which now gives some clarity on what falls within the FCA’s remit.

The guidance is detailed but essentially recognises three classes of crypto asset:

Exchange tokens – these are a decentralised tool for buying and selling goods and services (i.e. Bitcoin) and these are usually outside the scope of the FCA.

Utility tokens – these grant the holder access to a product or service. Although they do not meet the classification of an investment, they may meet the definition of e-money, in which case a firm dealing with these would require e-money permissions.

Security tokens – these have the specific characteristics of providing rights and obligations akin to an investment like a share or debt instrument. These are within FCA scope.

This is a sector we have significant experience in, so please get in touch if you require assistance with the above.

 

Specific advice should be obtained before taking action, or refraining from taking action, in relation to this summary, if you would like advice or further information, please speak to your usual Shipleys contact.

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