Insurers will not be bankrupts, if you were worried , don’t be

According to the FCA press release:

The Court found in favour of the arguments advanced for policyholders by the FCA on the majority of the key issues. 

Many policyholders whose businesses were affected by the Covid-19 pandemic suffered significant losses, resulting in large numbers of claims under business interruption (BI) policies.

Most policies are focused on property damage and only have basic cover for BI as a consequence of property damage. But some policies also cover for BI from other causes, in particular infectious or notifiable diseases (‘disease clauses’) and non-damage denial of access and public authority closures or restrictions (‘denial of access clauses’). In some cases, insurers have accepted liability under these policies. In other cases, insurers have disputed liability while policyholders considered that it existed, leading to widespread concern about the lack of clarity and certainty. 

The judgment says that most, but not all, of the disease clauses in the sample provide cover.  It also says that certain denial of access clauses in the sample provide cover, but this depends on the detailed wording of the clause and how the business was affected by the Government response to the pandemic, including for example whether the business was subject to a mandatory closure order and whether the business was ordered to close completely.

The test case has removed the need for policyholders to resolve a number of the key issues individually with their insurers. It enabled them to benefit from the expert legal team assembled by the FCA, providing a comparatively quick and cost-effective solution to the legal uncertainty in the business interruption insurance market.

Good job done by the FCA team, while good job done by the insurers.

Why insurers made a good job? they will claim to the government that those policies were not designed to bring them into bankruptcy, and they will request and get compensation, where needed. Therefore, if you were worried, don’t be, most probably, we will pay for it, it will still come from your pocket. When the system is smarter than us, it may be…

Who do you favour insurers or insured?

According to the FCA, most SME (small medium entities) insurance policies are focused on property damage (and only have basic cover for business interruption (BI) as a consequence of property damage) so, at least in the majority of cases, insurers are unlikely to be obliged to pay out in relation to the coronavirus pandemic.

Some customers’ policies also cover for BI from other causes (for example in relation to infectious/notifiable diseases, non-damage denial of access and public authority closures/restrictions) and may in some cases provide cover. Whether there is cover for the business interruption related to the pandemic crisis will depend on a number of factors including the policy’s wording. The range of wordings and types of coverage are sufficiently broad in the BI market that it is difficult to determine at a general level the degree to which any one individual customer may be able to claim.

There are BI policies where firms have determined an obligation to pay out on a policy. For these policies, it is important that claims are assessed and settled quickly. Firms still need to do more work to agree, process and pay these claims as promptly as possible in all cases, including using interim payments where appropriate.

However, in relation to other policies, firms may consider there is no doubt about wording and decline to pay a claim, but customers may still consider there is genuine uncertainty about whether their policy provides cover.

The issues around BI policies are complex and there are significant differences in policy wording between policies and across firms. These complexities have the potential to create ongoing uncertainty for a lengthy period.

It is clear that decisive action is appropriate given the severity of the potential consequences for customers in the current coronavirus emergency.

In this context, FCA will work actively and promptly to seek to resolve issues causing uncertainty over BI coverage, to provide greater clarity for parties and help ensure there is not undue delay to payments where there are valid claims.

The FCA intend to do this by seeking to bring relevant cases to court as soon as possible for an authoritative declaratory judgment regarding the meaning and effect of some BI insurance policy wordings where there remains unresolved uncertainty. The FCA is  working to identify a sample of cases representative of all the most frequently used policy wordings that are giving rise to uncertainty, where it would be appropriate for them to bring such proceedings.

Who will side insurers (except their fully paid lawyers)? should they be protected? did they sell unreasonable policies? who will side SME? time will tell.

Understanding the money laundering needs via informal/formal stakeholders public speeches

It was interesting to read the following speech of Therese Chambers, Director of Retail and Regulatory Investigations.

Crypto businesses may want to consider the following when proving services via a UK entity:

Under the MLRs, any firm undertaking one of the specified cryptoasset activities is required to satisfy the FCA when they arrive at our authorisations team that they have:

Risk assessment: to identify where the risks of money laundering lies in their business and establish policies and procedures to tackle them.

Customer Due Diligence (CDD): as there is a zero threshold for all activity in this sector, all transactions, whether occasional or part of an ongoing business relationship, will need to be subject to CDD. This means identifying the customer and verifying their identity on the basis of reliable and independent documentation or information. As cryptoasset activities are online, then they will need to establish the veracity of the information provided to ensure the person on the other side of the screen is who they claim to be. We expect that many will apply similar approaches to e-money and challenger banks who often deploy new technologies such as video/photo identification via mobile.

Transaction monitoring: cryptoasset firms will need to monitor the transactions that they execute on behalf of their customers to identify any potential suspicious or unusual transactions that indicate a risk of money laundering. While we know of several services that offer blockchain analytics software which can help with this task, we will still require that firms have the right processes in place to evaluate transactions. This is because all FCA regulation is underpinned by the notion that you can outsource work but not responsibility.

Record keeping: the MLRs require all firms to retain documents and information used as part of CDD and transaction monitoring for a period of 5 years after the end of a business relationship, but they do not need to be kept for longer than 10 years since the start of that relationship.

Suspicious Activity Report (SAR) reporting: where a firm identifies suspicious activity that they have reasonable ground to suspect is the proceeds of crime then they need to make a SAR and send it to the National Crime Agency (NCA).

When a firm arrives at the FCA’s gateway looking to apply for registration, we believe that a ‘good’ application will clearly demonstrate to our authorisations team that they have robust systems and controls to cover each of these areas. But fundamentally, we are looking for more than just whether the firm has the right policies and procedures, we need to be satisfied that the firm take seriously their responsibilities to prevent their business being used to launder the proceeds of crime.

The FCA’s crypotasset AML regime is still in its infancy, as it only came into effect on the 10 January 2020. We are expecting several key challenges. First, this is largely a market that is new to regulation, and since the premise of the technology comes from a libertarian strand of ideology which eschews identity checks and advocates digital privacy, so we are expecting compliance with AML regulation will be met with resistance. But we are keen to work with the industry to ensure our AML standards are met in this market, particularly since this sector is closely integrated with traditional financial services.

 

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.

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.

Referencing to a Regulator in Marketing Material

Entities that operate in the financial services and credit industries will often reference the Regulator or use the Regulator’s logo in marketing material in an attempt to legitimize their business. However, use of the Regulator’s logo is not permitted and references to a Regulator can often overstate Regulator’s extent of oversight.

References to a Regulator and the use of the Regulator’s logo in marketing material is especially popular when targeting overseas clients. As a result, entities seek to promote themselves as regulated. When referencing a Regulator in marketing material, entities should ensure they do not promote themselves as being supervised or approved by a Regulator, or stating that the Regulator has oversight of the entity.

If an entity promotes itself as being supervised or approved by a Regulator, or stating that the Regulator has oversight of the entity, you should not do business with such entity.

Snack Company Investment Scam

The Securities and Exchange Commission charged three individuals who defrauded investors in a company that falsely claimed to be developing a caffeinated chocolate snack and nearing an acquisition by Monster Energy or Coca-Cola Co.

The defendants falsely promised investors that after being acquired, Starship Snack Corp. investors would get a one-to-one exchange of Starship shares for Monster or Coca-Cola shares. Moreover, the defendants falsely claimed that investors had “no down-side risk” and that investors could get their investment back with 5 percent interest if the shares failed to appreciate over a year.

According to the SEC’s complaint, Starship had no agreement with Monster Energy or Coca-Cola , and the defendants used investor funds as their own personal piggy bank, spending them to rent and decorate a New York City apartment, and on travel, meals, and other personal expenses.

Please find attached a link for the full story Snack Company Investment Scam