The latest compliance news: regulatory developments, punishments, guidance, permissions and new product and service offerings.

FINMA, Banca Credinvest
The Swiss Financial Market Supervisory Authority, FINMA, is punishing Lugano-based Banca Credinvest for violating anti-money laundering rules in how it handled Venezuelan clients, the regulator said yesterday.

The bank must end all Venezuela links, and is banned from accepting any new high-risk clients – aka politically-exposed persons (PEPs) - for three years.

The watchdog started enforcement actions in November 2018 against the boutique bank, linked to alleged corruption involving Venezuelan oil firm PDVSA. 

“FINMA found that the bank’s money-laundering processes and its risk management were inadequate. In particular, the bank breached its duty of due diligence in relation to anti-money laundering regulations between 2013 and 2017,” the regulator said in a statement.

“Specifically, the bank failed to adequately identify its clients or beneficial owners, failed to sufficiently monitor these clients’ transactions, documented the processes incompletely and reported suspicious activity to MROS too late."

FINMA said the bank must monitor all private banking clients to spot increased money-laundering risks and adequately mitigate these. The bank, as it has decided, must “rapidly withdraw” from all client relationships with a connection to Venezuela and may not accept any new high-risk clients (e.g. politically exposed persons) for three years or until all measures have been implemented and reviewed at a later stage. 

In recent years the Swiss financial services industry has been caught up in several global corruption cases (Petrobras, Odebrecht, 1MDB, Panama Papers, FIFA and PDVSA). 

“FINMA continues to designate money laundering as a major risk to the Swiss financial services industry. Correspondingly, the issue remains a core part of its supervisory activities,” it added.

Financial Conduct Authority
The Financial Conduct Authority, the UK regulator, is banning firms from selling, marketing and distributing derivatives and exchange traded notes linked to crypto-assets to retail investors. The FCA reckons that such a ban will save investors £53 million ($68.6 million).

“The FCA considers these products to be ill-suited for retail consumers due to the harm they pose,” it said in a statement yesterday. 

The ban takes effect from 6 January 2021.

The FCA said such products cannot be reliably valued by retail consumers because the underlying assets have no reliable way of being valued; there is “prevalence” of market abuse and financial crime in the secondary market for crypto-assets, such as theft by hackers; retail investors don’t fully understand these assets, and price movements are extremely volatile. There is also not a legitimate investment need for retail consumers to hold such products, the FCA continued. 

The move is an example of how regulators continue to clamp down on what they see as unsuitable investments for the mass market. While the crypto-asset sector, most notably Bitcoin, has been around for several years now, it remains controversial, and the price movement has been choppy.  

“This ban reflects how seriously we view the potential harm to retail consumers in these products. Consumer protection is paramount here. Significant price volatility, combined with the inherent difficulties of valuing crypto-assets reliably, places retail consumers at a high risk of suffering losses from trading crypto-derivatives. We have evidence of this happening on a significant scale. The ban provides an appropriate level of protection,” Sheldon Mills, interim executive director of strategy and competition at the FCA, said. 

WealthBriefing asked the FCA how it arrived at the £53 million figure. The FCA said this sum “represents the net aggregate losses from retail clients trading crypto-derivatives and ETNs referencing crypto-assets”.

The regulator said that consumers should stay alert for crypto-derivative investment scams. As the sale of derivatives and ETNs that reference certain types of crypto-assets to retail consumers is now banned, any firm offering these services to retail consumers is likely to be a scam.

One commentator said the FCA's move may not solve all the problems of crypo-asset scams. 

"While it’s no misfire, the FCA’s shot is all but certain to miss its mark," Richard Berry, founder of goodmoneyguide.com, said. “To be clear, it has not banned cryptocurrencies themselves, but a set of complex and poorly understood derivatives that track unregulated crypto assets."

“While such highly leveraged investments can deliver big returns, they can also – and frequently do – deliver crippling losses far in excess of the original amount invested. The FCA has taken the view that retail investors need protecting from such high-risk investments, based on the not unreasonable assumption that most won’t grasp just how volatile they are," he said.

Berry continued: “But the real danger is not the investments themselves, but the network of scammers and get-rich-quick merchants who peddle them online and through high-pressure cold calls. The FCA would have done better to go after the snake oil salesmen who reel in the unsuspecting via Instagram feeds packed with pictures of flash cars, jewel-encrusted watches and wads of cash. Sadly the FCA’s ban will barely touch most such scammers, who will remain free to flog the same unregulated investments as long as they are traded on a non-UK exchange. Given the scammers aren’t big on small print anyway, this change won’t cramp their style. People will continue to be conned out of their money until the FCA acts to hold the social media platforms used by the scammers accountable for the fraud they enable,” he added. 

Other industry figures said they were unhappy about the FCA's action.

“I am surprised by today’s announcement from the FCA. The regulator says part of its decision was influenced by a lack of consumer understanding around these products, but I am not convinced they are really any different to other similar alternative asset products that have not been banned for sale to the UK’s many sophisticated retail investors. Also, the industry has appropriateness and suitability tests to assess whether they are right for individual retail investors interested in using them," Lawrence Wintermeyer, executive co-chair of Global Digital Finance, said.

“I also disagree with the regulator’s view that there is no legitimate investment purpose for crypto-asset derivatives. In the same way that you may hedge against a position in fiat currency, one may wish to hedge against exposure to crypto-assets. This ban kills off what could have been a new investment opportunity for sophisticated retail investors. It also sends a negative signal regarding the UK’s stance on crypto-assets.”