fca annual report 2014 15

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Annual Report and

Accounts 2014/15(for the year ended 31 March 2015)


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Financial Conduct AuthorityAnnual Report and Accounts 2014/15(for the year ended 31 March 2015)

Presented to Parliament pursuant to paragraphs 11(4) and 15(3) of

Schedule 1ZA of the Financial Services and Markets Act 2000 asamended by the Financial Services Act 2012and the Financial Services (Banking Reform) Act 2013

Ordered by the House of Commons to be printed on 2 July 2015

HC 94


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© Financial Conduct Authority copyright 2015The text of this document (this excludes, where present, the Royal Arms andall departmental or agency logos) may be reproduced free of charge in anyformat or medium provided that it is reproduced accurately and not in amisleading context.

The material must be acknowledged as Financial Conduct Authority copyrightand the document title specified. Where third party material has beenidentified, permission from the respective copyright holder must be sought.

Any enquiries related to this publication should be sent to us at:

Financial Conduct Authority25 North Colonnade

LondonE14 5HS

This publication is available at https://www.gov.uk/government/publications

Print ISBN 9781474121514Web ISBN 9781474121521

ID 09061509 06/15

Printed in the UK by the Williams Lea Group on behalf of the Controller ofHer Majesty’s Stationery Office


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X

Annual Report and

Accounts 2014/15(for the year ended 31 March 2015)


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5

Overviewof the year

p10

Chief Executive’s

statement

p8

Chairman’s

statement

p6

1

Protecting

consumers

p18

4Our performance:

how we regulate

p48

2

Enhancing

integrity

p28

5 Working with

our international

partners

p64

3

Promoting

competition

p40

6How we

operate

p68

7

Payment Systems

Regulator

p79

8 Strategic report P80

9 Directors’ report P88

10 Financial statements P102

Appendices

Appendix 1 Skilled Person Report P130Appendix 2 Enforcement activity P132

Appendix 3 Diversity P136

Contents


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6 Financial Conduct Authority

Financial Conduct Authority Annual Report 2014/15

Our Annual Report brings together those achievements.We have played a central role in improving the conductof the UK’s financial industry, thereby contributing toits long-term objectives. Fundamentally we remaincommitted to ensuring that we meet our overridingobjective to ensure financial markets work well.

When we came into being our approach was designedto advance our three operational objectives: to protectconsumers, enhance market integrity and promotecompetition, with around 26,000 firms within our

scope. In a short time, that scope has nearly trebled.Now at the start of our third year, we have seen thenumber of firms we regulate increase to over 73,000,largely due to us taking over the regulation of theconsumer credit industry. As a Board, we are acutelyaware of the fact a number of these firms are newto us and our rules, so it has been vital that as anorganisation we have engaged and communicatedeffectively with them, ensuring that we provide clarityin what their obligations are and what they can expectof us as a regulator.

Engaging and effective communication continuesto be an important focus for us in establishing ourvisibility and credibility as a regulator. Our secondyear of annual research with external stakeholdershas shown that most have shifted from a position ofuncertainty about the FCA as a new and ‘untested’regulator, to feeling more confident about us and ourobjectives this year, particularly in the area of consumerprotection. The research also gave us useful insightinto how we can improve engagement with all ourstakeholders, which alongside our regular dialoguewith the Consumer, Practitioner, Markets Practitionerand Smaller Business Practitioner Panels, ensures thatwe receive the challenge and advice essential for us toregulate in a balanced and effective manner.

It has been another busy year for

the FCA, one in which we have

faced some tough challenges but

also grown a great deal in bothscope and experience. As we

reflect on the last 12 months, I

believe we can look to the future

with confidence that we have learnt

important lessons, but that we have

also delivered a number of notable

achievements.

Chairman’sstatement


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Financial Conduct Authority 7

Chairman’s statement

Both inside and outside the financial sector, peopleunderstand it is vital that we hold firms and individualsaccountable for their conduct, while recognisingthe need to be proportionate and predictable. Wetake appropriate steps where we find risks or issuesthat threaten our objectives, but we aim to workwith the industry and communicate transparentlyto ensure not only that our expectations are clear,but that firms and individuals are reasonably able tomeet them. Ultimately, maintaining relationships oftrust and mutual respect with regulated entities to

ensure that UK markets are fair and effective bothbenefits consumers and makes the UK an attractivemarketplace for international business.

Measurement of regulatory outcomes is not an exactscience, but there are some indicators of a positivedirection of travel highlighted in this report. Creditfor this lies with the firms that we regulate, who haveembraced the conduct agenda.

Of course, we have been reminded of our own influenceand accountability, and the need to take stock when

mistakes are made. Last year my Board commissionedan independent inquiry by Simon Davis into the eventssurrounding the publication of last year’s BusinessPlan. We published the resulting report in December,which raised a number of points for us to consider,and put forward recommendations for the future. Wehave fully accepted all of these recommendations andhave already made important changes to our internalprocesses and operating model since to sharpen ourfocus. Highly regrettable as the incident was, boththe Board and I believe that we have learned manyimportant lessons that will improve how we go aboutour day-to-day business.

My Board has seen some notable changes this year.It was with deep sadness that we acknowledged thepassing of David Harker in March. He was a remarkableman who made a considerable contribution to theorganisation in his short time on the Board; we misshim a great deal. Lesley Titcomb left us to take up theposition of Chief Executive at The Pensions Regulatorafter 20 years at the FCA and its predecessor bodies,and Clive Adamson also moved on after nearly 18years of service. I am grateful to both of them for theircommitment; we wish them all the best in their new

endeavours. In August we were pleased to welcomeCatherine Bradley, who joined us with a wealth ofexperience in European and international financialservices.

Our priorities this year have significantly contributedto achieving our long-term ambitions. The next 12months will see further change in the financial sectorand we look forward to continuing to work with boththe firms we regulate and the consumers we protectas we move forward as an organisation with growingstrength and vigour.

John Griffith-JonesChairman


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The last 12 months have seen our remit expand to includethe radical new pension changes, new competitionpowers and the responsibility for consumer credit,which we assumed in April last year. As well as evolvingto meet the challenges of our expanding conduct remit,we have also continued to embed our approach to theprudential supervision of around 23,000 wholesale andretail firms.

That in itself is a considerable body of work, but it is ameasure of the importance of the objectives set out forus that it is a fraction of what we undertook last year,which also included the growth of our innovation hub,

a review into competition in the wholesale sector, workon the cash savings market and the retirement incomesmarket as well as our enforcement activity on LIBORand the Forex markets.

The regulatory landscape is always changing as itresponds to the challenges and expectations of thefinancial sector, and we have adapted accordingly.

But as we know, effective financial regulation is notdone simply within our own borders. Finance is globaland so too must be regulation. We have worked hard to

ensure that we have a strong voice at the internationaltable working with ESMA for example, on dealingcommissions to promote competition between brokersand providers of independent research.

And this year we host the 40th annual IOSCO conferencein London – a clear example of the key role we play inthe new regulatory world. But there is always more wecan do and more improvements we can make.

Our expanded remit now means that every importantfinancial decision an individual makes or that a firmis involved in must have a clear emphasis on goodconduct. And I welcome that every CEO and ChairmanI meet sees conduct as a central pillar of how their

As a regulator we accept that,

in an industry as dynamic as

the UK’s financial sector, change

is a constant. Whether it beresponding to the latest innovation

in the market or new Government

initiative, we have to demonstrate

that we can respond to whatever

challenge is presented.

ChiefExecutive’s

statement


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Chief Executive statement

business must operate and, by extension, how theycan regain the trust of the British people. This isunquestionably a good thing for consumers but also forfirms and I look forward to working with them in theyear ahead to implement the recommendations fromthe Parliamentary Commission on Banking Standardsthat will ingrain this still further.

Work is well underway to implement theserecommendations, especially around the SeniorManagers and Certification Regime, that will seeindividual accountability take centre stage. This is longoverdue. For trust to return to the sector, it is vital thatindividuals are held responsible for the decisions theymake and the behaviour they demonstrate.

The UK’s economy needs the financial sector to beworking effectively and we have worked with thewholesale sector across a variety of issues that I believecan improve conduct and protect the market’s integrity.We launched our first competition market study intothe wholesale sector and will continue to play ourpart in the implementation of the Fair and EffectiveMarkets Review. It is vital that we restore confidence inour wholesale markets given the impact they have on

almost every aspect of the global economy. The reviewwill seek to ensure that there is clear accountability forthe decisions taken by those who operate in them, bothhere at home and internationally, and that we have thecorrect market structure in place.

One of the most significant changes that I have beenparticularly proud of has been the increased activityof our Project Innovate initiative. Regulation can beportrayed as a barrier to the entrepreneurial spirit ofindividuals and start-ups with rules, checks and balancesthat prevent burgeoning ideas from flourishing. I don’t

think it needs to be that way.

I believe that to ensure that financial markets remainvibrant and offer consumers the best outcome isthrough newcomers entering the market, challengingthe established order and keeping costs low.

Project Innovate allows us to work with them and helpnavigate a path, hopefully to market. I look forward toseeing how this grows in the year ahead.

This sits with the new competition powers we havebeen given. Breaking down those barriers that haveprevented firms coming into sectors, like banking, is anessential part of our role.

Working with the PRA, we are giving firms who wantto enter the market more tailored support as well aslowering the capital and liquidity requirements andgranting authorisation where they have a developedbusiness plan and key senior managers in place. It bringscertainty for these firms and as a result 14 new bankshave been authorised in the UK since 2013. Another 20are in the pre-application stage.

This is just a selection of the key pieces of work weundertook and it demonstrated to us a need to lookat how we were structured to meet these considerablechallenges.

In December we announced that we would restructurekey parts of the organisation, enabling us to have asharper focus on the firms we regulate and deliveringthe right outcome for consumers and the markets weregulate. Key to this will be to take a more marketsbased approach and conducting fewer but morefocused pieces of work.

We will continue to invest in our staff, as having thebest people with the right skills is crucial to us meetingour objectives. Last year saw the launch of our master’s

degree in financial regulation in association with theHenley Business School and the Chartered Institutefor Securities and Investment. This is a very excitinginitiative and underlines our commitment to the FCAbeing a place that can develop our own people whilstbeing an attractive destination for talent outside ofregulation.

Change is a given in the financial sector and we mustchange with it, and at times with considerable speed.We have learned from our experiences, including wherewe have made mistakes, and evolved to better meet

the challenges ahead and the expectations placed uponus. The year ahead promises to be as demanding as thetwo that have preceded it and we are now well placedto meet those challenges and expectations.

Martin WheatleyChief Executive Officer


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11

Overview of the year

Our Annual Report sets out how we haveprogressed over the financial year and deliveredagainst our objectives and priorities from our2014/15 Business Plan. It shows a significant rangeof activity that lays the foundations for a positivefuture for UK financial services and their customers.

Regulation has a crucial role to play in the financial services sector. It is a key driverof reform, and a critical means of establishing confidence in financial markets,allowing consumers to have confidence and firms to prosper and supporteconomic growth. We are judgement-based, forward-looking, proportionateand pre-emptive in assessing potential or emerging risks, responding promptlyand effectively to wrongdoing that threatens our objectives.

To secure an appropriate degree of protection

for consumers

To protect and enhance the integrity of the UK

financial system

To promote effective competition in the

interests of consumers

Over the last year we have taken on several new, high profile responsibilities,which will have a significant long-term impact on the future shape anddirection of the UK’s financial services sector. Those include the regulationof consumer credit firms, as well as working towards the implementationof recommendations from the Parliamentary Commission on BankingStandards (PCBS), and preparation for the operational launch of thePayment Systems Regulator and competition concurrency.


Our strategic objective is to ensure that the relevant markets

function well. To support this, we deliver our work through

three operational objectives:


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Some key events from the last year



July

October

May

August

November

June

September

December

We becomeresponsible for

regulatingconsumer credit

New listing rulesimplemented

2014

Final rules to improvethe protection of client

money and assets

April

Dealingcommission

review

PaymentProtection Insurance

(PPI) update

Mortgage CreditDirective consultation

ProjectInnovate launched

Five banks fined£1.1bn for FX

failures

Credit brokingrules published

Cash savingscompetition study

final findings

Vulnerable consumersresearch published

MIFIDdiscussion paper

January February March

2015

£

Some key events from the last year


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As part of the PCBS recommendations, we have takensignificant steps towards implementing the new SeniorManager and Certification Regime for deposit-takersand PRA-designated investment firms. The new regimewill increase accountability of senior leaders in firms,raise overall standards of governance, and help improve

confidence in the UK financial markets.

As we regulate a diverse range of firms, sectors andmarkets, we take a risk-based approach to identifywhere we should take action, intervene or continue tomonitor. As part of this, we have published 25 in-depththematic reviews to assess what is, and what couldbe, causing poor outcomes for consumers and marketparticipants, drawing on data analysis, information fromour financial crime and enforcement investigations,market intelligence and input from our supervisorywork. Our annual Risk Outlook (published this year aspart of our Buisness Plan) sets out the forward-lookingareas of risk that we see in the markets.

Protecting consumers

We have carried out work to understand the behaviourof consumers, to tackle the firms and individualswho had abused consumer trust, and to prioritiseimprovements in key markets such as consumer credit,insurance and savings. In recognition of this we wereawarded the Which? Positive Change award for 2014,

for shifting the regulatory culture of financial servicesand for committing to put consumers first.

For example, since taking over the regulation ofconsumer credit we have sought to raise standards,particularly in high-cost short-term credit, credit brokingand debt management. Our new rules restrict the useof continuous payment authorities and limit rollovers,as well as putting a cap on the total cost of credit forpayday loans.

In the 2014 Budget the Government announced

extensive changes to the pensions system. We havedeveloped standards to ensure that consumers receiveappropriate guidance on their choices at retirement,and conducted reviews of the pension market.

In February 2015, we published the results of aninvestigation into how vulnerable customers are treatedby financial services firms; working alongside banks toaddress several key issues related to areas like power ofattorney and service flexibility. We have also publishedour consumer segmentation model and launchedour ScamSmart campaign to help consumers avoidinvestment fraud.

Enhancing market integrity

We carried out a number of in-depth reviews over the lastyear that provided clear findings and recommendationsfor change to address cultural and behavioural issues in

markets. These examined risks in the wholesale marketsaround conflicts of interest, information flows, electronictrading platforms, trading culture, effectiveness of frontoffice supervision, front office controls, automation oftrade execution and financial crime. We also analysedchanges in market structure and firms’ business models.

The Fair and Effective Markets Review – which is a jointproject between the FCA, the Bank of England and theTreasury – increased the number of benchmarks thatcome under our regulatory scope, and our EU policywork has implemented a series of European Directivesthat aim to enhance and build a European-wide modelof regulation.

In enforcement, we continued our credible deterrenceapproach by attributing responsibility not just to firms,but also to individuals. We demonstrated that, wherefirms and individuals do not play by the rules, we willtake action. For example, we have concluded somesignificant enforcement cases, such as LIBOR andFOREX, together with levying substantial fines, whichhave sent a clear message to the market about expectedstandards of conduct.

In enforcement, we continued our

credible deterrence approach by

attributing responsibility not just to

firms, but also to individuals


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Promoting competition

We acquired concurrent competition law powerson 1 April 2015 and have continued to embed andpromote competition through an extensive range of

activities. These are supported by a team of around 50competition specialists who:

• improve our ability to identify competitionconcerns and markets where weak competition iscontributing to poor consumer outcomes

• help ensure that the measures we take to promotemarket integrity and consumer protection arethe most pro-competitive solutions available (ourcompetition duty)

• respond to competition concerns raised bycomplainants and through our supervisory activities

Our market studies are our main tool for identifyingcompetition concerns. Over the last year we completedmarket studies into general insurance add-on services,cash savings and retirement income, which set outremedies on how to make competition work betterfor consumers. We launched a study into credit cards.We have also published a review on the operationaleffectiveness of the current account switch serviceafter its first year in operation and worked with theCompetition and Markets Authority on a range of

retail banking issues. As a result, we are improvingthe information given to consumers with savings andmaking it easier to switch.

We completed a competition review of the wholesalesector, off the back of which we launched a marketstudy into investment banking. Later this year we willlaunch a market study into asset management. Wehave also worked with the PRA to implement changesdesigned to reduce barriers to entry in the bankingsector.

As part of our Project Innovate, we have recognisedthe critical contribution that innovation can haveon competition by establishing an Innovation Hub,dedicated to supporting innovation among new marketentrants and existing market participants.

Working with our national andinternational partners

We have helped to shape EU policy-making positivelyfor both consumers and firms, such as in the

implementation of MiFID II, which has an impact onretail and wholesale investment markets. At a globallevel we have played a significant role, particularly in theInternational Organization of Securities Commissions(IOSCO) and the Financial Stability Board (FSB).

The number of international enforcement requestsfor assistance has continued to grow. In 2014/15, wereceived 1,047 formal requests for assistance from ouroverseas counterparts. We have conducted interviewson behalf of overseas investigators, compelledinformation and provided assistance to multipleoverseas enforcement investigations. We also receiveassistance from our overseas counterparts.

Strengthening the organisation

We are committed to improving the skills and expertiseof our staff. In 2014/15 we launched the FCA Academyand embarked on a series of strategic partnerships withSaid Business School at Oxford University, CranfieldSchool of Management and Henley Business School,with whom we have developed and launched an MSc

in Financial Regulation.

We are in the third year of a five year £150m investmentprogramme to improve our infrastructure, refresh coresystem components and build IS capability. This willcontribute to significantly improving the way we collectand analyse data from firms.

As part of our Project Innovate,we have recognised the critical

contribution that innovation can

have on competition by establishing

an Innovation Hub, dedicated

to supporting innovation among

new market entrants and existing

market participants


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The Davis review

In December 2014, Simon Davis of Clifford Chancedelivered a report following events surrounding a mediastory about our planned life assurance review. We

fully accepted Mr Davis’ analysis and have introduceda number of changes to our structure, processes andoperating model. Good progress has been made in anumber of areas, which were identified by Mr Davis asparticularly important.

For example, we have introduced substantialimprovement in the procedures relating to theidentification, control and release of price sensitiveinformation. We have informed staff of the revisedpolicies, procedures and guidance. Central trainingabout these revised procedures has been provided to allmanagers and further training and awareness initiativeshave been rolled out to all staff.

In March 2015 the Treasury Committee published itsreport: Press briefing of the FCA’s Business Plan for2014/15 . We will respond in due course.

Looking ahead

In December 2014 we announced our new strategy,which is an evolution of our regulatory approach, in

light of new developments in financial services and thecontinued expansion of our remit.

The last two years have seen significant changes in thescope of our regulatory responsibilities, but resourcinghas remained largely fixed, so we are now sharpeningour use of data analysis, regulatory intelligence andresource to focus on key priorities, while remainingflexible enough to respond to emerging issues.More details about our new strategy and our workprogramme for this financial year can be found in ourBusiness Plan 2015/16.

HBOS review

The PRA and FCA are preparing a report into thefailure of HBOS plc. We and the PRA are committed topublishing the report as soon as possible but the legal

process of Maxwellisation and consent can be lengthy.

Maxwellisation is the process, required by law,whereby anyone subject to potential criticism is givenan opportunity to see those references, comment inresponse and have those comments considered by theperson preparing the report. Following this, we will needto obtain consent from various parties to publish in thereport any information deemed confidential by law.

Our regulatory approach

When exercising our general functionswe have regard to the following regulatory

principles for good regulation:

Efficiency and economy

Proportionality

Sustainable growth

Responsibility of consumers

Openness and disclosure

Recognising the differences in businessescarried on by different regulated persons

Responsibility of senior management tocomply with the regulatory framework

Transparency


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Our performance: outcomes

We have an outcomes-based performance framework,which measures different aspects of our performance.Part of this focuses on our performance against ourstatutory objectives.

To assess whether we are advancing our objectives webreak down our statutory objectives into outcomes that

we would like to see in the industry, indicators of theseoutcomes and performance measures. These outcomes areaspirational and achieving them will take time; however,they tell us if we are heading in the right direction.

Examples of some important indicators we use to helpus measure our performance against these outcomesare included in this report.

This analysis should not be seen as an absolute measureof performance, and our success should not and cannotbe measured by it on its own. The measures cover

some dimensions of the market outcomes that the FCAand our stakeholders care about. They are not directmeasures of the FCA’s performance, but rather bringtogether measures that serve as proxies for whether ornot markets are moving in the right direction. As such,the analysis will not and cannot capture the complexityof the markets we regulate, or encompass all the risks,activities and outcomes we seek.

Considering the diversity of financial services andconsumer needs, and the scope of a typical FCA actionor industry initiative, it is clear that these outcomescan only be achieved through the cumulative effectsof our and others’ actions. We analyse our operationalperformance and monitor value for money, servicestandards and enforcement activity.

Outcome indicators

Improved consumer experience

We look at consumer complaints to the FinancialOmbudsman Service, particularly complaints upheld, asa proxy for problems consumers face and the advice

and services they receive from firms. We consider trendsin complaints made about advice provided by firms forpurchasing financial products and of charges applied bythese firms over the life of the product. Between 2014and 2015 the number of new complaints fell by over35%, due to a significant decrease in complaints tothe Financial Ombudsman Service relating to paymentprotection insurance.

Clean, regulated markets

The market cleanliness statistic for takeoverannouncements is a simple indicator of the proportionof potential insider trading cases, measured on the basisof abnormal price movements observed before takeoverannouncements of publicly traded companies, relative tothe sum of all takeovers in a given period.

The statistic does not provide a perfect measure of thelevel of insider trading, but the observed significantdecline in the incidence of potential insider trading casessuggests that insider trading has become rarer.

Figure 1: Measuring performance against the statutory objectives

Statutoryobjectives

Ensuring that financial services markets function well

Securing an appropriatedegree of protection forconsumers

Promoting effectivecompetition in the interests ofconsumers

Protecting and enhancing theintegrity of the UK financialsystem

Outcomes

Consumers haveaccess to fair

products andservices, whichdeliver what

they promise

Consumers canbe confident

that firms treatthem fairly andfix problems

promptly

Competitioncontributes

to improvedconsumeroutcomes

Firms competeon clear costsand consumers

have theinformationthey need

Consumers cantrust firms to befit and proper

and for financialmarkets to beclean

A respectedregulatorysystem that

lets good firmsknow wherethey stand

Outcomesindicators

Fair productsand services

Buildingtrust and

engagement

Value formoney

products andservices

Competitivemarkets

Clean regulatedmarkets

Attractivenessof market

Improved

consumer

experience

Effective

remedies

Getting better

service

Clear and useful

information

Low financial

crime

Respected,

joined-up

regulation


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Getting better service

Net Promoter Score (NPS) measures willingness ofcustomers to recommend products or services. It isused as a proxy for gauging overall satisfaction withfirms’ products or services.

Our measure shows the proportion of customers who are‘promoters’ (those who say they would recommend thefirm) minus the proportion of those who are ‘detractors’.

There continues to be improvement, which showsthat customers are becoming more satisfied with theservices they receive from financial services firms.

Respected, joined-up regulation

Research undertaken by BritainThinks demonstratesgrowing confidence in our consumer protectionwork among opinion formers including trade bodies,consumer organisations, parliamentarians and themedia that we are delivering against our objectives.

The financial services Practitioner Panel survey 2015asked firms to score their thoughts on the perceived‘effectiveness of the regulator’ and ‘satisfaction withthe regulatory relationship’.


79,763 24%

14,723

30,080

204,943

4%

9%

63%

65,077

15,938

31,213

399,939

13%

3%

6%

78%

77,176

19,834

33,172

378,699

15%

4%

7%

74%

Banking and creditInvestments and pensions

Insurance (excluding PPI)

Payment protection insurance (PPI)

New cases in total

2 0 1 5

2 0 1 4

2 0 1 3

508,881

512,167

329,509

Figure 2: What the complaints were about

Source: Financial Ombudsman Service complaints (dataexcludes PPI) as of April 2015

Figure 4: Net promoter scores

Source: 2014 GfK’s Financial Research Survey

* please also see pages 32 and 33

--15%

-10%

-5%

0%

2011 2012 2013 2014

NPS

Scores rating satisfaction with relationship with the FCA

2015

2014

2013

7.1695 26

646 30

4516 38

6.9

5.9

Meanscore

1 to 3 4 to 6 7 to 10

Figure 5: Practitioner ratings on FCA as effectiveregulator

Figure 5.1: Practitioner satisfaction with FCArelationship

Source: Q2 – Overall, from your firm’s perspective, how effective has theFCA been in regulating the financial services industry in the last year(since April 2014)? Base: All firms – 2015 (4,055); 2014 (3,146)

Source: Q1 - Taking into account all of your firms dealings with the FinancialConduct Authority, how satisfied are you with the relationship?Base: All firms– 2015 (4,055); 2014 (3,146); 2013 (1,470); 2010 (4,187); 2008 (4,407)

1 to 3

Scores rating how effective the FCA has been regulatingthe financial services industry in the last year

2014

2015

4 to 6 7 to 10

7

7 30

38 55 6.5

6.7

Meanscore

58

Figure 3: Market cleanliness statistics*

0%

5%

10%

15%

20%

25%

30%

35%

40%

2 0 0 6

2 0 0 6

2 0 0 7

2 0 0 7

2 0 0 8

2 0 0 8

2 0 0 9

2 0 0 9

2 0 1 0

2 0 1 0

2 0 1 1 Q 1

2 0 1 1 Q 3

2 0 1 2

2 0 1 2

2 0 1 3

2 0 1 3

2 0 1 4

2 0 1 4


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19


Protecting

consumers1One of our central responsibilities is to protectconsumers from the firms and individuals in thefinancial industry that may cause them harm. Weexpect firms to have their customers at the heart

of how they do business and provide them withappropriate products and services.

In 2014/15 we said that to protect consumers we would:

• build our understanding of financial consumers, testing the waythey make financial decisions and designing behaviourally informedinterventions

• communicate via consumer bodies and third parties or directly withfirms and consumers

• identify and understand current and emerging risks

• take action to address issues identified through firm supervision,thematic reviews and market studies

• secure redress

To ensure consumers are protected and treated fairly, we monitor whichfirms and individuals are able to enter the financial markets, making surethat they meet our standards before we authorise them. We then supervisehow they work and stop those that are not meeting our standards fromcarrying out regulated activities.

Where we find that firms are not following our rules, or unauthorised firmsare doing business in the UK, we intervene where appropriate. This cantake many forms, such as stepping in to impose penalties, stopping themfrom carrying out certain types of business, requiring improvements incontrols or management, or securing redress. We discuss our enforcementwork in more detail in Chapter 4 and Appendix 2.


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Building our understanding offinancial consumers

We use consumer and market insights to improveoutcomes for consumers. We achieved this through our

own research, data and analysis, behavioural economicsand through working with consumer organisations andpartners.

Working with others

We work with a number of consumer organisationsacross the UK. This network provides us with aninvaluable source of intelligence and information thathelps to embed the consumer perspective into ourwork.

Our consumer network includes:

• Age UK• Citizens Advice• Money Advice Scotland• Money Advice Service• Money Advice Trust• MoneySavingExpert• Scope• Shelter• StepChange• Which?

Through this network we are able to gather a widerange of consumer perspectives and a host of interestingand vital intelligence. We want to identify the earlyindicators that may alert us to issues or trends thatcould harm consumers. For example, our collaborationwith Citizens Advice highlighted the consumer harmthat was being created by credit brokers.

The Financial Services Consumer Panel monitors howfar we fulfil our statutory objectives in relation toconsumers. It is independent and free to publish its

views on our work and to commission research onconsumers’ views, which this year included research on:

• cross-subsidisation in the market for personalcurrent accounts

• how information about enforcement action againstregulated firms and individuals, and other publicinformation about firms’ behaviour, can empowerconsumers to make more informed decisions

ScamSmart

communications campaign

Case study:Consumer Spotlight and ScamSmart

We launched a microsite for our consumer segmentation

model, Consumer Spotlight, in January 2015. It demonstrateshow people in the UK deal with money and financialservices, with a unique focus on the capabilities and potentialvulnerabilities of different groups.

This will help the industry to understand the behavioursthat certain consumer groups exhibit, so they can designproducts that are fair and appropriate. The model is a keytool in helping us to assess the effect particular issues mayhave on different types of consumer and it helps ensure thatwe choose our interventions accordingly

Consumer Spotlight played an integral role in the development

and execution of our first consumer-facing communicationscampaign, ScamSmart. Using our research, we identifiedthat the ‘retired with resources’ segment was three timesmore likely to become a victim of investment fraud. Ourresearch enabled us to target our campaign effectively sowe could reach the most vulnerable consumers. We alsotested campaign messages and materials in consumer focusgroups to inform our creative approach.

Consumer Spotlightwww.fca-consumer-spotlight.org.uk

http://www.fs-cp.org.uk/http://www.fs-cp.org.uk/


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The Financial Policy Committee (FPC) recommendedthat the Treasury, the Bank of England, the FCA, UKgovernment agencies and the industry work togetherto enhance firm resilience to cyber-attacks and improveinformation sharing across sectors. We monitortechnological trends and associated risks so that when

reviewing firms’ practices we ensure that consumers donot lose out as a result of cybercrime, that firms protectthe integrity and confidentiality of the data they relyon, and that firms have adequate controls and provideredress where required.

The Money Advice Service

We oversee the work of the Money Advice Service,which is responsible for providing free, impartial moneyadvice across the UK, and for funding and coordinatingthe provision of free debt advice.

During 2014/15, Money Advice Service received morethan 20 million customer contacts online, by phone andface to face, and helped customers take more than 11million actions to manage their money more effectively.Through its partners across the UK, it has funded thedelivery of more than 200,000 free face-to-face debtadvice sessions.

The Farnish review of the Money Advice Service waspublished in March 2015. The review recognised theimportant role the Money Advice Service plays in

helping those who face problem debt and in helpingconsumers understand financial services and makeinformed decisions.

The review proposed a number of recommendationsthat have called for major changes to the scope of theMoney Advice Service’s money advice work. We willwork with the Money Advice Service to carry out adetailed assessment of practicalities of implementingthe suggested changes. The Money Advice Servicehas also convened an independent panel of seniorstakeholders to advise it in addressing these changes.

We welcome the recommendations on debt advice, inparticular that the Money Advice Service adopts moreof a coordinating role to ensure a collaborative, joinedup approach. The Money Advice Service is setting up aSteering Group to oversee this work.

We have agreed to submit our proposed action planson the Farnish review to the Treasury in the autumn2015.


Case study:Vulnerable consumers

In February 2015, we published the results of aninvestigation into how vulnerable consumers aretreated by financial services firms. We called onfirms to improve their approach as a ‘key test ofconscience for the City’.

We highlighted a number of key problem areas,including a frequent failure of firms to adapt to theneeds of consumers in vulnerable circumstances.We also published a practitioners pack, whichincludes a number of helpful tips and ideas forfirms to use.

Communicating directly withconsumers

We launched a national ScamSmart campaign to warnpeople about investment fraud and how to spot apotential scam. Investment scams generally involve

high-pressured selling, using boiler room tactics, forproducts that often do not exist, including land-bankingschemes, carbon credits and rare earth metals.

The average investor who suffers fraud loses around£20,000 and we receive around 5,000 calls a yearabout suspected investment fraud. Investment scamsare difficult to spot and are designed to look likegenuine investments. We have seen examples offraudulent websites that mimic those of legitimate firmsand investment brochures that could convince even anexperienced investor that the product was genuine.Those most at risk are people in retirement who areactively seeking an investment opportunity.

Since launching in October 2014, 100,000 people havevisited the dedicated ScamSmart website, with 20% ofvisitors checking an investment through the warninglist. Evaluation shows our targeted approach is working,with a 67% increase in visits from the retired withresources segment to our scams digital content sincethe campaign started.


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Identifying risks and taking action

Retail banking

We have focused on ensuring the culture in firms continues to change. We looked in-depth at a numberof areas, such as performance incentives in retailbanking, mortgage sales culture, digitisation in firms,including the governance of digitisation programmes,the launch of new online products, and the use ofoutsourcing in firms, ranging from product governanceto mortgage intermediation. Where necessary we haveused enforcement sanctions.

Modern banking depends on effective, reliable andresilient IT systems. We carried out a Dear ChairmanExercise II1, as well as firm-specific reviews. We havebacked this up with enforcement action when bankshave failed to put resilient systems in place.

We have also worked on issues related to everydaybanking. This has included ensuring that unauthorisedpayments are appropriately refunded to customers.We have reviewed firms’ judgements on unauthorisedtransactions and will publish our findings in 2015.

Long-term savings andpensions markets

We have worked closely with the Treasury, theDepartment for Work and Pensions and The PensionsRegulator following the Government’s reforms. Inparticular we have worked with the Government todefine our role in relation to the Pension Wise service.

Under FSMA (as amended through the Pension SchemesAct 2015) we are required to make standards for theprovision of pensions guidance through the PensionWise guidance service, which is a free Government

advice service on defined contribution pensions, andto monitor compliance with these standards. Weconsulted on this in 2014 and the standards came intoforce on 6 April 2015.

If we consider that a designated guidance provider hasfailed to comply with our standards then we may makerecommendations to that designated guidance providerand to the Treasury. We are required to have a policy inplace regarding the making of these recommendationsand we consulted on our draft recommendations policy

1 ‘Dear chairman’ or ‘dear CEO’ letters are often the result ofin-depth work in a particular sector when we want to highlightsomething to a number of firms that we think is serious enoughto point out, but where we’re not necessarily taking specificaction against individual firms.

Case study:

Consumer pilot, ScotlandConsumers’ experience can be affected by wherethey live, so we conducted a pilot in Scotland to helpus understand experiences and issues facing Scottishconsumers.

We focused on how young consumers interact withcredit, working closely with key intermediaries suchas Young Scot, Citizens Advice Scotland and MoneyAdvice Scotland. We also worked with Scottish localauthorities, student money advisers and front line debtadvisers, building on our existing network and giving us

access to new sources of intelligence.The pilot gave us a more granular view of the issuesaffecting consumers in Scotland. We intend to runsimilar studies in different areas of the UK, ultimatelyhelping us to build a UK network, dedicated tounderstanding consumers across the country.

Case study:Advice when switchingpension schemes

We continued our review of firms that advisecustomers to switch their personal pensions oroccupational pension schemes to self-investedpersonal pensions (SIPPs) to invest wholly or primarilyin high-risk, highly illiquid, unregulated investments,such as overseas property developments, forestryand storage units. We looked at whether consumerswere being adequately advised and found that adviser

firms either did not give advice on the unregulatedinvestment or gave generally poor advice.

Due to the poor standard of sales identified duringthese reviews, we issued an alert on 28 April2014 reminding advisers of their obligations whenadvising in this area, together with an alert aimed atconsumers warning them of the risks of dealing withunregulated introducers, or of being cold-called andoffered a ‘free pension review’.


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in March 2015. In addition, as required under FSMA,we have during this period consulted on and maderules in terms of raising fees for Pension Wise on behalfof the Treasury.

We have conducted reviews of pension advice,

focusing on making our expectations clear for dealingwith clients. We have also identified and taken actionagainst several producers and marketers of promotionalmaterial that may be related to scams.

We have worked with other agencies to tackle risks toconsumers through enforcement actions and awarenesscampaigns. We are targeting unauthorised pensionintroducers, who appear to play an integral role inpension transfers to high-risk unregulated assets. Wehave assisted with criminal investigations conducted bypartner agencies and continue to identify opportunitiesfor joint operations targeting pension fraudsters. Thesecond phase of our ScamSmart campaign is alsofocused on warning consumers about pension scams.

We consulted on strengthening the requirementson giving advice on pension transfers to support theGovernment’s introduction of a legislative requirementfor advice to be taken on transfers involving safeguardedbenefits.

We have increased our communications withadvisory representatives, for example throughconferences and seminars. We consider this a particularly

effective way of engaging with them and we havereceived positive feedback from participants. Overthe last year we have been involved in many externalengagements, for example compliance workshops, riskawareness workshops and various conferences, whichhas seen us present to around 13,000 firms, helping tomake our expectations of them clear.

In December 2012, we introduced new rules arisingfrom the Retail Distribution Review (RDR) to makethe retail investment market work better for consumers.These raised the minimum level of adviser qualification,

removed commission payments to advisers andplatforms from product providers and aimed to improvethe transparency of charges and services.

We completed the first phase of a post-implementationreview of the RDR in 2014, which assessed the extent towhich the RDR was on course to deliver its original aims.This was an in-depth review, led by an independenteconomic consultancy and informed by research withboth firms and consumers and modelling work.

They concluded that while in many respects the longer-term effects of the RDR were yet to become clear,the evidence showed a positive picture overall, withencouraging signs that the RDR is on track to deliver itsobjectives in many areas.

In particular, the review found that the removalof commission paid by providers to advisers andplatforms has reduced product bias from adviserrecommendations. This is reflected in a decline in thesale of products that paid higher commissions pre-RDR.It has also made it easier for consumers and advisers tocompare platforms, increasing competitive pressure andleading to a significant reduction in direct-to-consumerplatform charges. Product prices have also fallen by atleast the amounts paid in commission pre-RDR, andthere is evidence some product prices may have falleneven further.

The review found that the vast majority of advisers arenow qualified to the new minimum standards and therehas been an increase in the number of advisers goingbeyond these minimum standards.

In other areas it found the market is adjusting andmore time will be needed for the full effects of RDR tobecome apparent. We will undertake a more completeanalysis of the medium-term impacts of the RDR andaim to publish the next phase of the review in 2017.

In January 2015, we published guidance to clarify the

different types of retail investment sales models,the boundaries between them and the associatedregulatory requirements. It provides a clear frameworkfor firms that wish to develop new models and services.


We have conducted reviews

of pension advice, focusing on

making our expectations clear fordealing with clients. We have also

identified and taken action against

several producers and marketers of

promotional material that may be

related to scams.


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Mortgages and consumer credit

We identified a number of key priorities in the consumercredit market, including in the high-risk subsectors,where there was evidence or risk of significant consumerharm. We have carried out a programme of visits and

analysed a number of key sub-sectors.

We have investigated issues and concerns identifiedthrough intelligence and where we have found rulebreaches and unfair practices, we have intervenedearly and swiftly to ensure that failings are addressedand that firms have improved their practices. Theoverwhelming majority of these outcomes have beenachieved through voluntary agreements with firms.

We have secured 45 formal voluntary commitmentsfrom firms to put matters right and/or to compensatecustomers. In 17 cases we required firms to engage anexpert third party at their own expense to oversee andverify such measures.

We undertook extensive research and analysis toexplore how introducing a price cap for payday lenderswould affect firms and their lending decisions, whateffect there would be on consumers who no longer

have access to high-cost short-term credit, and whetheras a result consumers would be better or worse off. Wefound that excessive charges for high-cost short-termcredit were harming significant numbers of consumers.

We put in place a price cap for payday lenders that

means no borrower will ever pay back more than twicewhat they borrowed.

We designed our rules so that they complied with ourcompetition duty to secure an appropriate degree ofprotection for borrowers against excessive charges,while also promoting effective competition in theinterests of consumers. We recognised that price capsare not generally a pro-competitive regulatory tool, sowe considered a number of options and chose the mostpro-competitive in each case and as a whole.

We plan to review the price cap in 2017. In the meantimewe are monitoring whether there are any unintendedconsequences emerging for firms or consumers,including the impact on people who are no longerable to get this type of credit. We worked with firmswhose affordability assessments were not adequatelyassessing customers’ ability to make repayments in asustainable manner. This included ensuring that, where

FCA price cap for HCSTC loans

Borrowers must never have

to pay more in fees and

interest than 100% of what

they borrowed.

0.8%per day 100%

TOTAL

COST CAP

of amount

borrowedapplying to all interest,

fees and charges

default fees

£15If borrowers default,

fees must not exceed

£15. Firms can continue

to charge interest after

default but not above

the initial rate.

When loans are taken out

or rolled over, the interest

and fees charged must

not exceed 0.8% per day

of the amount borrowed.


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appropriate, customers will receive redress for any harmcaused.

Over 40% of the consumer credit complaints we receivedrelated to credit brokers and 80% of these related tofirms that charge upfront fees. We responded rapidly

to this issue, which led to the voluntary imposition ofrequirements on 19 firms to review and improve theirbusiness practices. In a majority of cases firms haveagreed to take down their websites or not to take onany new customers until they have made improvements.Early analysis based on our own information, and thatprovided by consumer bodies, suggests that there hasbeen a significant drop in complaints volumes andissues across the sector following our interventions.

We published new rules on credit broking on 1December 2014. We did so without consultation,under section 138L of FSMA, on the grounds that thedelay involved in consulting would be prejudicial tothe interests of consumers. The rules came into forceon 2 January 2015. The rules banned credit brokersfrom charging fees to customers, and from requestingcustomers’ payment details for that purpose unlessthey meet FCA requirements. These include:

• credit brokers must make sure customers are givenclear information about who they are dealing with,what fee will be payable, and when and how thefee will be payable

• fee-charging brokers need to notify the FCA,quarterly, of the websites they operate

• all brokers need to include their legal name (as itappears in the FCA Register) in all advertising andall correspondence with customers

• advertising must clearly state that the firm is acredit broker and not a lender; if the firm is both acredit broker and a lender, the advertising needs tomake clear that they are advertising their brokingservices, not their lending

• there were additional rules on cancellation rightsfor distance contracts (for example, online creditbroking), including rights to a refund

Financial promotions

In 2014 we reviewed over

1,500financial promotions for consumercredit products to ensure they were

clear, fair and not misleading.

As a result we opened over 200 cases about non-compliant promotions

for products such as payday loans,debt management services and

credit brokers.

of these cases relate toadvertisements for high-cost

short-term credit, with many notprominently displaying a risk warning

or representative APR.

Around

relate to digital media, such aswebsites, emails and text messages.

Firms have been quickto make changes

25%

80%


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In the debt management sector we found thata number of firms were operating unfair chargingpractices and were also falling well short of our high-level standards and Principles for Businesses. In 16 casesfirms agreed to close to new business and work withus to address our concerns while others have decided

to leave the industry. We have also taken steps toprotect client money where this was at risk, includingfreezing the bank accounts of seven debt managementfirms. We are looking into the quality of advice in debtmanagement firms and will publish results in summer2015.

The Mortgage Market Review (MMR) wasimplemented on 26 April 2014. We are continuing ourassessment of how firms are implementing our post-MMR rules this year, including completing our adviceand distribution review in the summer, and reviewingresponsible lending from April 2015. We also continuedto monitor the interest-only maturity risk to ensure thatfirms work with customers to help them understandthe need to have adequate repayment strategies inplace to repay the mortgage at the end of the term.

In March 2015 we published our final rules for theimplementation of the Mortgage Credit Directive(MCD), which introduces an EU-wide framework ofconduct rules for mortgage firms. Our approach isintended to cause the least possible disruption to themarket, while ensuring consumers are appropriately

protected.

The Government decided that second charge mortgagesshould be brought out of our consumer credit regimeand into mortgage regulation when the MCD wasimplemented. The changes largely take effect on 21March 2016. We published the rules a year early to givefirms time to prepare.

The Government has chosen to use an exemption in theMCD that means Member States do not have to apply theDirective’s requirements to buy-to-let mortgage activity,provided there is an appropriate regulatory framework inplace, which the UK has established. We do not have thepower to modify the standards that firms must follow,but we have been given powers to register, superviseand take action against firms. We consulted in Februaryon our approach to implementing the framework.

General insurance and protection

We want consumers to feel confident in getting accessto insurance products and services they can trust, andinsurance markets that are sound, stable, resilient and

competitive. Where we have found poor practice inthese markets we have intervened, taking enforcementaction where necessary. For example:

• We agreed a compensation package for consumerssold card security products through reaching anagreement with Affinion International and 11 highstreet banks and credit card issuers.

• We analysed a firm’s product offering, whichthey agreed to review due to duplicated productbenefits. As a result two add-on products were

removed from sale, 670,000 customers werecontacted to notify them of the duplication, and aredress programme was secured.

• We identified and corrected a £17m client moneydeficit in a medium-sized motor insurance broker.

• Working collaboratively with the Federal FinancialSupervisory Authority (BaFin), we intervened andprevented 1,300 small law firms renewing theirProfessional Indemnity Insurance cover, worth over£20m with a small insurer. Investigations highlightedthat the firm had become insolvent and ceasedpaying for claims. Our failure to act could have leftthe laws firms without effective insurance cover andunable, under SRA rules, to continue to practice.

We analysed a firm’s productoffering, which they agreed to

review due to duplicatedproduct benefits.

As a result

two add-on products

were removed from sale,

670,000 customers were contacted to

notify them of the duplication,and a redress programme

was secured.


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• An insurance provider identified a historic overcharging of premiums to a number of customers,SMEs and corporates. Following engagement withthe supervisory team we agreed that the firmcould establish a redress programme, which had toinclude third party oversight to oversee the process

and controls. The programme saw £27m repaidto affected consumers. The firm also agreed to awider product governance review to minimise therisk of repetition and to look at its systems andcontrols that are in place.

Cross-sector/other

We introduced temporary product intervention rulesrestricting the distribution of contingent convertiblesecurities (CoCos) to retail consumers, which cameinto force on 1 October 2014 and will remain in forceuntil 1 October 2015. We set permanent rules imposingrestrictions on the retail distribution of CoCos andplaced certain requirements on the sale of mutualsociety shares to ordinary retail investors.

Mutual societies are able to issue new types of shareinstruments to strengthen their capital base. Wewere concerned that these shares may be offered toconsumers without experience in direct investment inshares, which generally carries a high level of risk. Suchconsumers are at particular risk of misunderstandingwhat is on offer. We proposed that firms selling these

investments will need to ensure the investor has readspecified risk warnings and committed not to investmore than 5% of their net assets. These requirementsonly apply to sales to retail investors who have not beencertified as sophisticated or high net worth.

In accordance with Section 339B of the Financial Servicesand Markets Act 2000, we are required to meet, atleast once a year, the auditor of any firm designatedby the PRA to be important to the stability of the UKfinancial system. The PRA may determine that a firmmeets that criteria at any point. By the end of the year

up to 31 March 2015, 37 firms fell within this category,and we had held 38 meetings with the auditors of 36of those firms. For two of those firms, two meetingswere held during that period. For one firm, no meetingwas held during that period. It was not designated bythe PRA until October 2014 and we intend to meet withthat firm’s auditor before October 2015.

Securing redress

Securing appropriate redress for consumers whenthey have been treated unfairly is a key aim for us andso we are striving to be more transparent about our

processes.

We continue to progress three major redress schemesinto PPI, Interest Rate Hedging Products (IRHP) andCard Protection. We have now secured over £20billion since starting the first of these schemes, PPI in2011. This scheme has now secured £19.2 billion intotal for consumers, with £5.6 billion being securedin 2014/15.

In 2012, we identified failings in the way that somebanks sold structured collars, swaps, simple collarsand cap products, which we collectively refer to asIRHPs. The banks involved agreed to review theirsales of IRHPs made to unsophisticated customerssince 2001. The full review started in May 2013 isnearing completion, having so far secured £1.9 billionin redress, of which £1.3 billion was paid in 2014/15.

In August 2013, we reached an agreement with CardProtection Plan Limited (CPP) and 13 high street banksand credit card issuers that paved the way for redressto be paid to customers who were mis-sold CPP’scard protection and identity protection policies. Thescheme has secured a further £451m of redress for

2.37 million consumers.

Securing appropriate redress for

consumers when they have been

treated unfairly is a key aim for us

and so we are striving to be more

transparent about our processes



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29

Enhancing integrity

We aim to support and empower a healthy and successfulfinancial system, where financial markets are efficientand transparent, firms can thrive and consumers ofall types can place their trust in transparent and openmarkets. This means that the markets need to be

supported by resilient infrastructure, with appropriateaccess and transparency to satisfy the needs of theconsumers, corporates and other wholesale clientsthat use them.

In 2014/15 we said we would enhance market integrity by:

• improving wholesale conduct through our proactive supervisory workand market level intervention

• engaging in international and European policy debates

• protecting markets against abuse through monitoring markets andappropriate interventions

• delivering our responsibilities as the UK’s listing authority (UKLA)

• extending our anti-money laundering (AML) assessments

• enhancing our whistleblowing activity

We have carried out a programme of work to deliver this, including thefollowing key elements.

We want senior managers in regulated firms to take responsibility forensuring that strong risk management is in place, accountability is clear andrests with individuals, conflicts of interest are managed and the institutionsare not used for financial crime. So firms need to have a culture that focuseson customers and integrity.

Where we find that firms are not following our rules, we respondappropriately and proportionately. We have concluded some significantenforcement cases, such as LIBOR and FOREX, and we discuss ourenforcement work in detail in Chapter 4 and Appendix 2.

Enhancing integrity2


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We have taken significant steps towards implementingthe new Senior Manager and Certification Regime fordeposit-takers and PRA-designated investment firms.This will increase the accountability of senior leadersin firms, raise overall standards of governance, andhelp improve confidence in the UK financial markets.The Treasury announced in March 2015 that the newregime would also apply to UK branches of foreign

banks as well as UK domestic firms, and we are currentlyconsulting on how we propose to apply the regime tothese firms.

In July 2014, we and the PRA jointly consulted onthe policy and rules for the new regime (CP14/13).In November 2014, we consulted on the transitionalarrangements, including how firms will transfer existingapproved persons to the new senior managementfunctions. We also consulted on new forms establishedby the new regime as well as changes to existing forms.In March 2015 we consulted on the presumption

of responsibility and published a roadmap toimplementation, with details of key milestones betweennow and the start of the new regime in 2016.

As was evident during the financial crisis, the integrityof the UK financial markets is heavily reliant on thesecurity and activity of the wider European andinternational financial system. Influencing and shapinginternational policy is therefore critical and much ofour markets and wholesale regulation is shaped byEuropean policy developments. We have continued towork on defining the regulatory rules that will underpinEU legislation and preparing for their implementation,as well as continuing our ongoing work on improvingwholesale markets.

Improving wholesale conduct

Wholesale conduct refers to how market participantsinteract with each other and conduct their business inwholesale markets, and the behaviour of regulated firms

when dealing with ‘non-retail’ clients. This year, weincreased the intensity of our supervision in this area.

Over 2014/15 we looked at risks around conflictsof interest, information flows, electronic tradingplatforms, trading culture, effectiveness of front officesupervision, front office controls, automation of tradeexecution and financial crime. We also identified risksby analysing changes in market structure and firms’business models and we continued to increase ourexternal engagements with key industry associationsand other regulators.

Annual remuneration round

We are coming to the end of our second annual reviewof the 20 largest deposit takers and investment firmsthat we undertake jointly with the PRA. Our focus hasbeen to make sure that pay practices at firms do notencourage inappropriate behaviours or excessive risktaking and that variable remuneration is only paid orallowed to vest where justified by performance.

We found that firms were adopting increasingly

sophisticated approaches to measuring performanceand adjusting awards. Specific action taken by firmsin cases of misconduct included reducing group bonuspools, making targeted reductions for groups of staffand reducing or cancelling awards for an increasinglywide range of individuals.

Wholesale banking

As evidenced by the scale of fines levied against thewholesale banking sector in recent years, the range of

conduct risks that exist within the sector are varied andconsiderable.

We identify the key risks and ensure that firms play anactive and full role in managing and mitigating theirconduct risks themselves. There are four risk themesand expected behaviours, which are central to oursupervisory strategy.

• Managing conflicts of interest associatedwith business models and activities. Across allbusiness lines and activities, firms must identify andmanage conflicts of interest effectively, particularlythose that arise from complex or changing businessmodels. This covers situations where the firm is

We have continued to work on

defining the regulatory rules thatwill underpin EU legislation and

preparing for their implementation,

as well as continuing our ongoing

work on improving wholesale

markets


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acting as agent, as well as those where it acts asprincipal. It includes the appropriate managementof information flows (covering both marketsensitive and client confidential information) aswell as appropriate risk mitigation strategies

around lack of transparency, inappropriate costsand poor valuations. It encompasses activities suchas investment banking advisory services, custody,asset management and product governance.

• Controls/behaviours. Firms’ senior managementare expected to set the tone from the top and areresponsible for robust controls over their bankingand securities activities in support of good conductof business and market conduct outcomes,including market abuse, market manipulation andtheir financial crime responsibilities (such as moneylaundering, terrorist funding, sanctions evasion ortax evasion). Employees on the frontline shouldtake on accountability and act as the first line ofdefence against misconduct.

• Infrastructure resilience. Key marketinfrastructures and principal market participantsmust uphold market integrity by putting in placerobust IS systems and business continuity planning.

• Protection of client assets. Firms should embedappropriate systems and controls when dealingwith client assets.

We apply three primary strategies for addressing theserisks and improving the ability of firms to manage themresponsibly.

• We assess firms’ business models, key personnel,control environment, and increasingly culture andits impact on conduct. We engage with firms andcarry out ‘deep dive’ assessments to judge thenature of the primary risks we have identified.We put in place risk-mitigation programmesand we ask firms to participate in thematic

reviews to understand the risks. Where thoseare characteristic to the firm, we seek to addressthese with the firm themselves; where issues areindustry-wide, we seek to engage more widely tosecure appropriate solutions.

• We supervise the programmes that firmsthemselves have put in place to manage the riskof poor conduct – many of which are known asWholesale Conduct Risk Frameworks. We compareprogress consistently across the industry and sharebest practice as firms identify the most effectiveways of improving the conduct of their staff.

• We carry out in-depth thematic reviews where weproactively engage with firms on wider topics orpotential risk issues often with teams that includea broad range of regulatory expertise and industryexperience.

We are currently following up with firms to ensurethey make timely changes to strengthen controls andoversight. Our review of ‘dark pools’ reflects our focuson current and future risks in the structure of equitymarkets, the transparency of trading processes, not justprices, and the management of conflicts of interest bydark venue operators.

Clarity of fund charges

It is important for investors to be able to understandand compare charges because of their impact on overallfund returns and investors’ ability to exert competitive

pressure on the firms.

This year we worked with a number of firms, whichmanage about 29% of funds sold in the UK retailmarket, to ensure that they are providing a consistentand combined charge. We found that using annualmanagement charges (AMC) in some instancesand ongoing charges (OCF) in others may confuseinvestors, so we encouraged firms to use the OCF in allmarketing material for UCITS2 funds. The forthcomingimplementation of regulations concerning PackagedRetail and Insurance-based Products (PRIPs) and of

MiFID II should also ensure better clarity.

In November 2014 the Financial Services ConsumerPanel made some technical proposals to improve costtransparency. In particular, the recommendationsaround the disclosure of costs and charges are auseful contribution to our current joint work withthe Department for Work and Pensions on deliveringtransparency of transaction costs in the work placepensions market. We are also planning to launch amarket study on asset management in 2015/16.

2 Undertakings For The Collective Investment Of Transferable Securities

– UCITS. A public limited company that coordinates the distribution

and management of unit trusts amongst countries within the European

Union.

Enhancing integrity

Firms’ senior management are expected

to set the tone from the top


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Focusing on fair use of client dealingcommission by investment managers

We finalised rule changes to clarify that investmentmanagers should only use client dealing commission3 to pay for substantive research or execution costs, and

that they cannot be used to pay brokers for arrangingmeetings with corporate issuers (corporate access). Wealso provided new guidance for investment managers tohelp ensure that they only pass on costs for substantiveresearch that is in their customers’ best interests.

We have published findings from a wider review of ourdealing commission regime where we found that toofew firms properly assess the value and cost of researchpaid for using client dealing commission. The reviewalso found that if brokers bundle execution and researchservices together it prevents effective price formationfor research, reducing the ability of independentproviders to compete in the market and for investmentmanagers to assess the value of research.

Based on these findings, we announced our support forpotential European reforms under MiFID II that couldrequire a further separation of the supply of researchfrom order execution services, to encourage greatercompetition and transparency over the price of research,and to make investment managers more accountableto customers for research costs. The final EU MiFID IIreforms will apply to firms from January 2017.

Benchmarks, trading firms andtrading infrastructures

We supervise trading firms, market infrastructure firmsand benchmark administrators and submitters. As ofApril 2015 we supervise the benchmark administratorsand benchmark data submitters for eight benchmarks:LIBOR, SONIA, RONIA, IsdaFix, WM Reuters London4pm Fix, ICE Brent Index and the Gold and Silver fixes.

Market infrastructure firms (including Recognised

Investment Exchanges (RIEs), Recognised OverseasInvestment Exchanges (ROIEs) and Multilateral TradingFacilities (MTFs)) and trading firms (including high-frequency trading firms, agency brokers and commodityfirms among others) are critical to the integrity andfunctioning of UK financial markets. So we carry out riskassessments for the higher-impact firms and regulatedinfrastructure firms every 12 to 18 months, focusing ongovernance, culture, business strategy and systems.

3 Dealing commissions are the charges paid by consumers when an

investment manager executes trades and acquires external research, and

amounts to £3bn a year in the UK.

In 2014 we completed ‘deep dive’ assessments thatfocused on:

• Pre and post-trade controls on direct electronicaccess, market abuse and risk management.Findings varied by firm and ranged from effective

well-set controls that were monitored and reviewedappropriately to ineffective controls that were setat inappropriate levels and rarely reviewed.

• Anti-money laundering (AML) and financial crimecontrols. Again results varied by firm and we founda lack of sanctions and Politically Exposed Person(PEP) checks in some areas as well as effectivecontrols elsewhere.

• Compliance controls and culture, where we foundrobust controls and an improved cultural messagebeing distributed across a global group.

We are currently carrying out a thematic reviewassessing the robustness of front office traders andbroker controls.

We also track trends in financial markets. A key focusfor us this last year has been investors’ search foryield, liquidity in the corporate bond market and theincreasing popularity of connected products. To informand influence in this area we sit on the EuropeanSystemic Risk Board’s expert group on market liquidity.

Overseeing primary and secondarymarket activity

Protecting markets against abuse

Our supervisory and educational activities remindmarket participants of their obligations under themarket abuse regime, with the ultimate intention of

reducing market abuse.

We also track trends in financial

markets. A key focus for us this last

year has been investors’ search for

yield, liquidity in the corporate bond

market and the increasing popularity

of connected products.


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This year we have:

• educated firms through forums, speeches, thematicstudies and publications such as Market Watch

• visited firms to assess market abuse systems andcontrols

• continued with our enhanced suspicioustransaction reporting (STR) supervision program,including assessments of firms’ surveillancecapabilities and following up on incidences of pooror insufficient STR reporting

• contributed to the development of Europeansurveillance best practice through ESMA andbilateral relationships with other competentauthorities

Technology is a key tool in monitoring for market abuse.We have continued to grow our surveillance capabilitiesto increase detection and enhance our investigationsinto abusive behaviour.

For the four years prior to 2009, the market cleanliness

statistic for takeover announcements remained close to30%. From 2010 onwards, we saw a significant declineto an average of 13.88% across 2014 (15.1% in 2013).This provides a simple indicator of the proportion ofpotential insider trading cases, measured on the basis ofabnormal price movements observed before takeoverannouncements of publicly traded companies, relativeto the sum of all takeovers in a given period.

The statistic does not provide a perfect measure ofthe level of insider trading as many factors otherthan insider trading could cause an abnormal pricemovement ahead of a takeover announcement. Forexample, financial analysts or the media correctlyassessing which companies are likely takeover targets,or significant non-abusive trades that just happen tofall before an announcement.

It is not always possible to determine which of thesefactors is behind each abnormal price movement andwhether any insider trading might have taken place.Still, the observed significant decline in the incidence

of potential insider trading cases suggests that insidertrading has become rarer.

Transaction reporting

Since November 2007, MiFID has required firms toprovide us with transaction reports for all executedtrades in all financial instruments admitted to tradingon a regulated market or prescribed market. Accurateand complete transaction reporting by firms is anessential tool. We use these reports in a number

of ways – including identifying and investigatingsuspected market abuse, such as insider trading andmarket manipulation.

We have seen increasing numbers of transactionreports submitted to us over the years, and we arecurrently averaging 13 million transaction reports a day.

Figure 6: Market cleanliness statistics*

0%

5%

10%

15%

20%

25%

30%

35%

40%

2 0 0 6

2 0 0 6

2 0 0 7

2 0 0 7

2 0 0 8

2 0 0 8

2 0 0 9

2 0 0 9

2 0 1 0

2 0 1 0

2 0 1 1 Q 1

2 0 1 1 Q 3

2 0 1 2

2 0 1 2

2 0 1 3

2 0 1 3

2 0 1 4

2 0 1 4

Enhancing integrity

2 2 / 5 / 1 2

1 9 / 6 / 1 2

1 3 / 7 / 1 2

8 / 8 / 1 2

4 / 9 / 1 2

2 8 / 9 / 1 2

2 4 / 1 0 / 1 2

1 9 / 1 1 / 1 2

2 4 / 1 0 / 1 1

1 5 / 1 1 / 1 1

9 / 1 2 / 1 1

1 0 / 1 / 1 2

3 / 2 / 1 2

1 / 3 / 1 2

2 8 / 3 / 1 2

2 5 / 4 / 1 2

6 / 8 / 1 1

2 / 9 / 1 1

2 8 / 9 / 1 1

1 3 / 1 2 / 1 2

1 5 / 1 / 1 3

6 / 3 / 1 3

3 / 4 / 1 3

2 9 / 4 / 1 3

2 4 / 5 / 1 3

2 0 / 6 / 1 3

1 6 / 7 / 1 3

8 / 9 / 1 3

1 / 1 0 / 1 3

2 5 / 1 0 / 1 3

2 0 / 1 1 / 1 3

1 6 / 1 2 / 1 3

1 6 / 1 2 / 1 3

1 6 / 1 / 1 4

1 1 / 2 / 1 4

2 / 4 / 1 4

3 0 / 4 / 1 4

2 8 / 5 / 1 4

2 3 / 6 / 1 4

1 2 / 8 / 1 4

2 1 / 1 1 / 1 4

1 5 / 1 / 1 5

2 / 1 0 / 1 5

30m

25m

20m

15m

10m

5m

0m

T r a n s a c t i o n s

r e

c e i v e d ,

t r e n d

Processed date

Transactions recievedTrend

Figure 7: Transactions recieved trend

* please also see pages 16 and 17


36/143



In February 2015, we started offering transactionreporting workshops for investment firms, to helpeducate their staff on the importance of accurate andcomplete transaction reports. We have also contributedsignificantly to the development of regulatory technicalstandards for MiFIR.

In August 2014 we fined Deutsche Bank £4.7m for failingto properly report 29,411,494 Equity Swap CFD (contractsfor difference) transactions between November 2007and April 2013. The failure, which affected all Deutsche’sEquity Swap CFD transaction reports in this period,

breached our rules on transaction reporting.

Suspicious transaction reporting

The Market Abuse Directive (MAD) was

fca annual report 2014 15

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