Examples for market interventions for our benefit

Rent-to-Own (RTO) market

highly vulnerable group of consumers were paying too much for household goods. Therefore the FCA would:

  • set a total credit cap of 100%, meaning consumers do not pay credit costs that are higher than the price of the product
  • introduce a requirement on firms to benchmark base prices (including delivery and installation) against the price charged by 3 mainstream retailers
  • prevent firms increasing their prices for associated products such as extended warranties to recoup lost revenue from the price cap

Cash savings market

consumers who stay with the same provider for a long time, receive lower interest rates.

The FCA may decide to suggest a basic savings rate (BSR). It is an interest rate that providers would set themselves but would be required to apply to all easy access cash saving accounts and easy access cash Individual Savings Account after they have been open for a set period, such as a year.

Motor finance

The way commission arrangements are operating may be leading to consumer harm on a potentially significant scale.

The widespread use of commission models which link the broker commission to the customer interest rate, and allow brokers wide discretion to set the interest rate, can lead to conflicts of interest. These conflicts are not being controlled adequately by lenders. This can lead to customers paying significantly more for their motor finance.

The FCA also found that where pre-contract disclosures were not always complete, clear or easy to understand. As a result, consumers may not be given sufficient information and explanation to enable informed decisions.

The FCA is assessing the options for intervening in the motor finance market.

Contracts for Difference (CFD) market

The FCA have seen an increase in the number of UK firms offering CFDs to retail consumers. Firms have increasingly offered CFD products to consumers who may not understand the risks of these products or be capable of bearing potential trading losses. For example, firms have offered ‘bonus’ promotions as well as lower margin requirements to attract less experienced retail consumers.

The new rules are intend to restrict how CFDs and CFD-like options are marketed, distributed and sold to retail consumers. This included requiring firms to stop offering inducements to encourage retail consumers to trade and applying minimum margin requirements (leverage limits).

Distributing or selling contracts for differences (CFDs) to retail clients

According to ESMA statement it has serious concerns about firms’ marketing, distribution or sale of CFDs to retail clients and considers it necessary to remind CFD providers about some of the requirements connected with the offering of CFDs. 

ESMA has identified undesirable practices related to:

  • Professional clients on request; and
  • Marketing, distribution or sale by third-country CFD-Providers.

Ensuring investors are protected necessitates that all CFD providers respect all applicable requirements and do not circumvent them using professional client status or third country entities.”

Professional clients on request

ESMA is aware that some CFD providers are advertising to retail clients the possibility to become professional client on request. Investment firms should strictly refrain from implementing any form of practice that incentivises, induces or pressures an investor to request to be treated as a professional client. In this respect, any form of promotional language in relation to the status of professional client shall be seen as incentivising a retail client to request a professional client status. This includes providing a comparison between leverage limits available to different types of clients and the provision of any form of rewards for becoming a professional client.

In order to mask wrongdoing, in some cases, CFD providers will change the client categorization status according to their needs (first from retail to professional, and then from professional to retail once you lost your invested capital), with no compliance justifications.

ESMA is also aware that some third-country firms are marketing CFDs that do not comply with ESMA’s measures to retail clients.

ESMA notes that firms should not incentivise retail clients to start trading with an intra-group firm established in a non-EU jurisdiction.

You can control your faith, don’t be tempted to change your categorization status from retail to professional, and/or open an account with non-EU firms.

EU rules are here to protect you, and reduce your risk. Please rest assured that the regulator does not like it when you lose your invested capital. Protecting you is part of the regulator missions.

 

Insider trading is not worth your time

If you will try, they will sure find you.

Few examples

SEC Charges Accountant and Friend in $6.2 Million Insider Trading Scheme

The Securities and Exchange Commission today filed insider trading charges against an accountant and her friend, whom she illegally tipped with confidential information in advance of her company’s quarterly performance announcements in exchange for all-expense paid travel and other expensive gifts.  The alleged insider trading scheme generated profits of more than $6.2 million and was uncovered by the SEC through analysis and technology that it uses to detect suspicious trading activity.

The SEC’s complaint seeks permanent injunctions, disgorgement with prejudgment interest, and penalties. Meaning the defendants will lose the profit (6.2 million) and they will pay interest and penalties.

FCA secures confiscation orders totalling £1.69 million against convicted insider dealers

The conspiracy operated between 1 November 2006 and 23 March 2010. During that time, the defendant held senior positions at Morgan Stanley, Lehman Brothers and Deutsche Bank. He used those positions to source inside information, which he passed on to his close friend, who in turn caused trades to be placed for the benefit of both defendants.

The Defendants employed elaborate strategies designed to prevent the authorities from uncovering their activities. These included using unregistered mobile telephones, safety deposit boxes, and encoded and encrypted records. They also used multifarious methods to distribute the benefit they obtained from their criminal enterprise.

Whilst the Defendants went to great lengths in an effort to ensure that their pursuits went undetected, their meticulous record keeping ultimately proved to be their downfall in the confiscation proceedings. Those records detailed trading in a variety of stocks and the amounts that each was to benefit as a result. This made it far easier for the FCA to demonstrate the full extent of each defendant’s benefit from their criminal conduct.

The Defendant was sentenced to 4 and a half years’ imprisonment and his friend to 3 and a half years’ imprisonment. Moreover, Crown Court made confiscation orders in the sum of £1,074,236 against the Defendant and £624,521 against his friend.

The Custody challenges of digital asset securities

According to the U.S. SEC market participants wishing to custody digital asset securities may find it challenging to comply with the broker-dealer financial responsibility rules without putting in place significant technological enhancements and solutions unique to digital asset securities. 

A broker-dealer seeking to custody digital asset securities must comply with the Customer Protection Rule. If the broker-dealer fails, customer securities and cash should be readily available to be returned to customers.

There are many significant differences in the mechanics and risks associated with custodying traditional securities and digital asset securities. For instance, the manner in which digital asset securities are issued, held, and transferred may create greater risk that a broker-dealer maintaining custody of them could be victimized by fraud or theft, could lose a “private key” necessary to transfer a client’s digital asset securities, or could transfer a client’s digital asset securities to an unknown or unintended address without meaningful recourse to invalidate fraudulent transactions, recover or replace lost property, or correct errors. Consequently, a broker-dealer must consider how it can, in conformance with the law, hold in possession or control digital asset securities.

If, for example, the broker-dealer holds a private key, it may be able to transfer such securities reflected on the blockchain or distributed ledger. However, the fact that a broker-dealer (or its third party custodian) maintains the private key may not be sufficient evidence by itself that the broker-dealer has exclusive control of the digital asset security (e.g., it may not be able to demonstrate that no other party has a copy of the private key and could transfer the digital asset security without the broker-dealer’s consent). The above mentioned risks could cause securities customers to suffer losses, with corresponding liabilities for the broker-dealer, imperiling the firm, its customers, and other creditors.

It should be noted that the broker-dealer’s difficulties in evidencing the existence of these digital asset securities may in turn create challenges for the broker-dealer’s independent auditor seeking to obtain sufficient appropriate audit evidence.

The Crypto asset market (digital asset) or the law may need to continue devolving and/or amending in order to achieve an understanding.

 

Broker-dealers or investment advisers, which one should I choose?

A retail customer that intends to buy and hold a long-term investment may find that paying a one-time commission to a broker-dealer is more cost effective than paying an ongoing advisory fee to an investment adviser to hold the same investment. That same investor might want to use a brokerage account to hold those long-term investments, and an advisory account for other investments.

Nonetheless, whether a you chooses a broker-dealer or an investment adviser (or both), the recommendation or advice is required to be for your best interest. Moreover, broker-dealer or an investment adviser cannot place their own interests before yours.

Neither investment advisers nor broker-dealers are required to recommend the single “best” product. Many different options may in fact be in your best interest, and what is the “best” product is likely only to be known in hindsight.

In the U.S. The broker-dealer must comply with the below component obligations:

  • The Disclosure Obligation, which requires full and fair disclosure of all material facts about the scope and terms of its relationship with the customer, including material facts relating to conflicts of interest associated with its recommendations.
  • The Care Obligation, which requires brokers to exercise reasonable diligence, care, and skill, to understand the potential risks, rewards, and costs associated with the recommendation, and to consider those risks, rewards, and costs in light of the customer’s investment profile in order to make a recommendation that is in the best interest of the retail customer and does not place the broker-dealer’s interests ahead of the retail customer’s interest.
  • The Conflict of Interest Obligation, which requires firms to implement policies and procedures to mitigate (and in some cases, eliminate) certain identified conflicts of interest that create incentives to make recommendations that are not in the retail customer’s best interest.
  • The Compliance Obligation, which requires firms to implement policies and procedures.

Similarly, an investment adviser has an obligation to act in the best interest of its client—which is an overarching principle that encompasses both the adviser’s duty of care and duty of loyalty.

Conclusion: it is clear why we can be confused about the differences between brokers and investment advisers. Nonetheless, choose at least one, and make sure it is register.

Therefore, you can use the SEC website at https://www.investor.gov/ in order to find what you need and consult.

The UK Information Commissioner’s Office report into Adverting Technology practices

The Information Commissioner’s Office (ICO) is the UK’s regulator responsible for data protection.

When you visit a website, some of the ads you see have been specifically selected for you. As the site was loading, the website publisher auctioned a space on the page you are viewing, and an advertiser bought it because it specifically wants to reach people like you. The process can involve many companies, and happens in milliseconds. Billions of online ads are placed on webpages and apps in this way every day.

The process – known as real time bidding – relies on the potential advertiser seeing information about you. That information can be as basic as the device you’re using to view the webpage, or where in the country you are. But it can have a more detailed picture, including the websites you’ve visited, what your perceived interests are, even what health condition you’ve been searching for information about.

Real-Time Bidding (RTB) is a set of technologies and practices used in programmatic advertising. It has evolved and grown rapidly in recent years and is underpinned by advertising technology (adtech), allowing advertisers to compete for available digital advertising space in milliseconds, placing billions of online adverts on webpages and apps in the UK every day by automated means.

According to the ICO report, While many RTB market participants place some controls on their processing and sharing of personal data, it’s become apparent that there are substantially different levels of engagement and understanding of how data protection law applies, and the issues that arise.

The report described number of concerns with the data protection practices within RTB, for instance:

  • identifying a lawful basis for the processing of personal data in RTB remains challenging, as the scenarios where legitimate interests could apply are limited, and methods of obtaining consent are often insufficient in respect of data protection law requirements
  • the privacy notices provided to individuals lack clarity and do not give them full visibility of what happens to their data
  • the scale of the creation and sharing of personal data profiles in RTB appears disproportionate, intrusive and unfair, particularly when in many cases data subjects are unaware that this processing is taking place

It seems that more work needs to be done, in order to make sure our personal data is protected as expected.

Buying a franchise? Know the risks

If you’re thinking about buying a franchise, it’s important that you understand whether it’s right for you before making a final decision or signing a franchise agreement.

Just like any business, there are risks when running a franchise. If you buy a franchise business and it goes badly, you could lose all your money and any assets, such as your house, that you have borrowed against.

Franchising is a model for doing business. When you enter into a franchise agreement, the franchisor controls the name, brand and business system you are going to use. The franchisor gives you the right to operate a business in line with its system, usually for a set period of time. It’s important to understand that there will be some things you can and can’t do in a franchise compared to another type of business.

A franchise business can fail, just like any other business, therefore, please consider the following:

Supplier restrictions

Some franchise systems require their franchisees to buy certain products from them or their specified supplier, known as supply restrictions. You might have no choice about where to buy some products.

Price vs. costs

The upfront price of a franchise may seem like a good deal, but there are also costs that you may have to pay to set up and run a franchise. It’s important to understand the total costs you may have to pay.

In Australia, there are laws that must be followed when franchising in Australia, like the Franchise Code of Conduct (the Code) and the Australian Consumer Law. But these laws cannot ensure the success of the business or that your money is always protected.

In the UK there is no authority responsible for enforcing franchising laws and requirements, given that there are no franchise-specific laws.

In the U.S franchising is a heavily regulated industry. On a federal level The Franchise Rule gives prospective purchasers of franchises the material information they need in order to weigh the risks and benefits of such an investment. The Rule requires franchisors to provide all potential franchisees with a disclosure document containing 23 specific items of information about the offered franchise, its officers, and other franchisees.

Should you transfer your defined benefit pension? Should you invest your pension?

Should you take more risk with your pension funds?

There are no easy answers to those questions. Moreover, the answers can be very risky. You may ,therefore, consider the following:

The FCA is concerned that firms are recommending that large numbers of consumers transfer out of their defined benefit pension schemes despite the FCA’s stance that transfers are likely to be unsuitable for most clients.

Megan Butler, Executive Director of Supervision, Wholesale and Specialists at the FCA said:

‘We have said repeatedly that, when advising on DB transfers, advisers should start from the position that a transfer is not suitable. It is deeply concerning and disappointing to see that transfers are still being recommended at the levels we have seen.

The FCA surveyed 3,015 firms and found that between April 2015 and September 2018:

  • 2,426 firms had provided advice on transferring their DB pension.
  • 234,951 scheme members had received advice on transferring.
  • Of those 162,047 members had been recommended to transfer out and 72,904 had been recommended not to transfer.
  • The total value of DB pensions where transfer advice had been provided was £82.8bn with an average value of £352,303.
  • 1,454 firms had recommended 75% of more of their clients to transfer. One reason a firm may be recommending a large number of clients to transfer is if the firm has a robust initial guidance service triaging clients. 1,346 firms reported data on the total number of clients who had not proceed past the firm’s initial guidance. The total number of clients reported as not proceeding to advice was 59,086. When these triaged clients are factored in 55% of clients were recommended to transfer.

Any customer who has concerns about the advice they received when transferring out of DB scheme should first off contact the firm which gave them the advice.

You should take action if you are among those people who transfer their defined benefit pension based on an advice received from an adviser.

Regulators are here to prompt innovation

FCA, for instance, is placing a limit on investments in P2P (peer-to-peer) agreements for retail customers new to the sector of 10 per cent of invest-able assets. This is an important means of ensuring that retail customers do not over-expose themselves to risk. The investment restriction will not apply to new retail customers who have received regulated financial advice.

In addition, P2P platforms should have the following:

  • More explicit requirements to clarify what governance arrangements, systems and controls platforms need to have in place to support the outcomes they advertise, with a particular focus on credit risk assessment, risk management and fair valuation practices.
  • Strengthening rules on plans for the wind-down of P2P platforms if they fail.
  • Introducing a requirement that platforms assess investors’ knowledge and experience of P2P investments where no advice has been given to them.
  • Setting out the minimum information that P2P platforms need to provide to investors.
  • Applying the Mortgage and Home Finance Conduct of Business sourcebook and other Handbook requirements to P2P platforms that offer home finance products, where at least one of the investors is not an authorised home finance provider.

On the other side of the ocean, the SEC’s Strategic Hub for Innovation and Financial Technology, plays an important role in facilitating the SEC’s active engagement with innovators, developers, and entrepreneurs.

As part of a continuing effort to assist those seeking to comply with the U.S. federal securities laws, FinHub published a framework for analyzing whether a digital asset is a security. The framework is not intended to be an exhaustive overview of the law; rather, it is a tool to help market participants assess whether the federal securities laws apply to the offer, sale, or resale of a particular digital asset. Additionally, the Division of Corporation Finance issued no-action response to a market participant in connection with the proposed offer and sale of a digital asset.

In case your intentions are good, regulators are open for business. Moreover, a productive government is a great deal.

The SEC’S “CryptoMom” and exchange-traded fund (“ETF”)

According to the SEC’S Commissioner Hester M. Peirce some people call her “CryptoMom”, and they may be right.

The below is just few highlights from her full speech.

Despite interest from sponsors and investors, the Commission has yet to entertain an exemptive application for an ETF or approve an exchange rule allowing for the operation of crypto ETFs or other ETPs. The Commission has expressed a number of concerns from market manipulation to custody to retail investor protection. We need to do a better job of fostering open dialogue about the first two topics. On the third issue—retail investor protection—the reality is that retail investors will get access to these products, even if we do not allow them to do so through SEC regulated products and venues. Again, it is not the Commission’s role to be the arbiter of what constitutes an appropriate investment or to act as an investment adviser.

In disapproving a proposed rule change to list and trade shares of the Winklevoss Bitcoin Trust, the Commission focused on the underlying characteristics of bitcoin and the spot markets in which it trades. Instead of focusing on the merits of bitcoin as an investment, the Commission should have considered how the exchange-traded wrapper would work and how increased participation by institutional investors in the bitcoin market could have led to bolstered defenses against theft, greater investment in custody solutions, and lower likelihood of market manipulation.

All that said, it is important to remember that, if the SEC were to permit a Cryptocurrency ETP to trade in our markets, it would not be a seal of approval. In other words, investors would still have to do their own homework, study the product disclosures, assess their own appetites for risk, determine how much of a loss they could stomach, and—if those losses materialize—learn from them and refrain from coming to the SEC asking to be made whole.

Well, the above may or clearly justified the nickname “CryptoMom”.

Only time will tell if Cryptocurrencies is a bubble or not, until then we may need to give it the benefits other assets are enjoying.