Address to the British Bankers’ Association Annual International Banking Conference 2009
The FSA has published the speech that Adair Turner, Chairman, FSA, gave at the British Bankers’ Association (BBA) Annual International Banking Conference.
Turner’s speech was set out under the following headings:
- A new supervisory approach. The FSA will continue to increase the intensity and intrusiveness of its supervisory approach. The FSA is now involved to a much greater extent on the granular analysis of balance sheets, accounting practices and valuation approaches.
- Better supervision necessary but not sufficient: radical change in regulation required. Turner’s core message is that excellent supervision is a necessary but not sufficient condition for financial stability. The FSA will do better supervision in the future, but future financial crises will not be avoided unless the rules are quite radically changed. A feedback document on the proposals in the Turner Review will be published this autumn.
- Clearly essential reforms. A clear need is to get better at identifying emerging systemic risks and creating the tools which can act against these risks at the macro level. Also change is needed to create a financial system with more shock absorbers and for banks this means capital and liquidity. Turner argues that in the future the banking system needs to be run with higher capital ratios, higher quality capital and more loss absorbing equity. Capital also needs to be made in some degree countercyclical and that approach needs to be reflected in some form in published accounts, with provision or reserve movements which reflect future possible losses.
- Fundamental issue: more capital, but how much more? Turner argues that immediate improvements to the capital adequacy regime need to be made but the fundamentals also need to be reviewed in order to design the best possible long term system. He adds that a similar balance between immediate action and long-term thinking is required in relation to the capital held against trading books. Turner calls this area “clearly and dramatically inadequate”. Changes to the capital regime must also be matched by major changes to the approach to liquidity. Turner states that in the future larger buffers of undoubtedly liquid assets, primarily government bonds, is needed. He also calls on tighter controls of overall maturity mismatches.
Turner then discusses the interconnected issues of ‘too big to fail’, ‘too big and too cross-border to save’ and ‘too involved in proprietary trading to be a safe home for retail deposits’.
On the issue of ‘too big to fail’ Turner discusses three policy options and these are:
- Resolution arrangements are defined in advance making it possible to impose haircuts on at least some of the non-insured creditors of a large bank in failure.
- Make banks smaller, to break them up.
- Simply demand that larger banks have higher capital requirements. This is Turner’s preferred option.
On ‘too big and too cross-border to save’ Turner states that global supervisory cooperation should be intensified through the development of effective colleges of supervisors. However, intelligent cooperation can only achieve so much and Turner believes that the more important response lies in capital and liquidity requirements. In this case it is necessary not just to look at the group level but at the capital and liquidity residing in national entity balance sheets.
Narrow banking and investment banking: the Glass Steagall debate. Turner states that the real issue is not what the existing very narrow institutions should be allowed to do but rather what should be the freedoms for those large commercial banks which are involved in the provision of services not only to residential customers and SME s, but also to large complex corporates operating in a global economy and involved in the management of complex foreign exchange, interest and credit risk. The tentative conclusion in the Turner Review is that a binary legal distinction - banks can do this but not that - is not feasible and that the focus should be on the scale of position taking and the capital held against position taking. However, Turner believes that there may be a role for defining more clearly the separate legal entities in which core retail banking functions and investment banking type functions are performed.
In the final part of his speech Turner covers the macro-prudential analysis and tools. Turner accepts that there is still much work needed to be done to define precisely how macro-prudential regulation will operate. There are important questions in respect to objectives, to tools, and to the choice between hardwired and discretionary approaches.
View Address to the British Bankers’ Association Annual International Banking Conference 2009, 30 June 2009
Tackling Challenges - Facing the future - Embracing change
The British Bankers’ Association (BBA) has published a speech given by its Chief Executive, Angela Knight (AK). AK’s speech was given at the BBA’s Annual International Banking Conference and was entitled Tackling Challenges - Facing the future - Embracing change.
AK begins her speech by saying that it has been a difficult year for the banking industry and as a consequence there are changes ahead.
She states that the Banking Act has opened up a debate regarding the roles and responsibilities of the tripartite authorities. She believes that there are merits on all sides of the argument but that conclusions now need to be made quickly and with the agreement of all parties.
She points out that banks are already holding more capital than before the financial crisis and twice that of the international Basel standards. She notes that further revisions to the current capital regime are planned and these include moves by the FSA to substantially increase the amount and quality of capital to be held, particularly in trading book, to require more liquidity, a core funding ratio and a leverage ratio. She states that such measures will have an impact on the banking sector to support the broader economy. She also argues that “insufficient attention to date has been paid to understand either the impact of these measures or the way in which they interrelate.” She adds that the danger “is that an over-layering of multiple capital measures could result in an undue constraint being placed on the ability of banks to support households and firms through continuing to lend as the UK emerges from the recession.” She states that it is “now the time for an analysis to be undertaken in order that there is a clear understanding reached on the order of priority of the measures and on their proposed timing.”
AK argues that there has to be a right balance in the application of new standards. There needs to be an understanding of the impact that they will have on the customer base of the banking industry and on the wider economy. In addition as the UK is a large international centre changes need to be made in conjunction with other countries on an equivalent basis and on an equivalent timetable.
AK also calls for:
- The retention of principles based supervision, together with the promotion of effective and workable colleges of regulators. This does not mean light touch regulation.
- The UK providing experienced individuals to work on the revision of the EU supervisory structure.
- A detailed examination of what the new European supervisory authorities can and cannot do.
- Continuity in the Minister representation on financial matters in Europe.
In relation to the discussions that are now taking place on bank size and structure, AK states that big economies require big banks to finance them. Large companies need large banks which are capable of servicing their requirements in the jurisdictions where they do business and international business requires international broad based universal banks. She argues that changes that overreact to the early phase risk fixing the wrong problem. She adds that large banks and universal banks “are both required to provide economies of scale, the specialised teams that are needed for either an industry or a section of the market, to deal with global customers to provide the variety of services and products needed, and to underpin others in the financial sector in the UK.” She also stresses that splitting banks up does not change customer requirements. Instead it just makes it more difficult and expensive to meet them and would force customers to seek the services of a bank outside the UK.
At the end of her speech AK states that it is now the time “to construct the future together using as our template the model of those who have managed well throughout the crisis. That is the majority of banks. Now is the time to stop the blame game. We have stepped up to the table for change and let us collectively move on.”
View Tackling Challenges - Facing the future - Embracing change, 30 June 2009 (130 KB pdf)
BBA Annual International Banking Conference
The British Bankers’ Association (BBA) has published the remainder of the speeches made at its Annual International Banking Conference. The other speeches at the conference were:
- Restoring governance and trust - Stephen Green (Group Chairman, HSBC Holdings; Chairman, BBA).
- Financial Stability in the UK - Paul Tucker (Deputy Governor, Financial Stability, Bank of England).
- The role of trade policy in fostering economic growth - Baroness Ashton of Upholland (European Commissioner for Trade).
- Financial services regulation and supervision - the picture in the UK and in Europe - Paul Myners (Financial Services Secretary to the Treasury).
- The role of accounts in the financial crisis - Bill Michael (Partner, KPMG).
- Is it implementing Basel II or do we need Basel III? - José María Roldán (Chairman, Standards Implementation Group).
- Taxpayers, banks, regulators and governments: the rebalancing of power - Mark Hobman MP (Shadow Financial Secretary to the Treasury).
- Have intervention packages helped solve the financial crisis? - Neelie Kroes (European Commissioner for Competition).
- When will it get better? - Roger Bootle (Managing Director, Capital Economics).
View BBA Annual International Banking Conference, 30 June 2009
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Regulation and compliance
Some aspects of economic and financial crisis
The European Commission has published a speech that Charlie McCreevy (European Commissioner for Internal Market and Services) gave at the financial services breakfast seminar held by the Institute of Chartered Accountants in Ireland. The speech is entitled Some aspects of economic and financial crisis.
In his speech Commissioner McCreevy briefly discusses some of the measures that the Commission plans to put in place to deal with:
- European supervisory architecture. Commissioner McCreevy states that legislative proposals will be brought forward in September 2009.
- Prudential requirements for banks. In particular later this year there will be further measures to help constrain the build-up of leverage in the banking sector, supplementing the present risk-based capital requirements.
- Credit rating agencies and alternative investment fund managers. On the draft Directive on alternative investment fund managers Commissioner McCreevy states that it is now being examined by the Council of Ministers and the European Parliament. He hopes that in the debate ahead people on all sides will bear in mind that Europe is going to need all the investment it can get to move out of the crisis. Europe must not end up an unattractive place for investors.
- OTC derivatives markets. The Commission is closely monitoring the commitment of the OTC derivatives markets’ industry to clear credit default swaps on one or more European central counterparties by 31 July 2009. If the industry cannot deliver on its commitment then the Commission will consider other ways to incentivise the use of CCP clearing for credit default swaps. Commissioner McCreevy also states that in the coming days the Commission will be publishing its findings on the functioning of the OTC derivatives market.
- Single Euro Payments Area (SEPA). The Commission plans to publish a SEPA Roadmap next month which will identify the steps needed to move forward.
View Some aspects of economic and financial crisis, 26 June 2009
Commission calls on Member States to implement new guidelines for improving Single Market
The European Commission has released a press statement announcing the publication of a non-binding Recommendation on ‘Measures to improve the functioning of the Single Market’. The measures contained in the Recommendation are designed to enable all citizens and businesses to make use of their Single Market rights. Measures in the Recommendation aim to:
- Ensure and strengthen a Single Market coordination function, to promote efficient coordination amongst authorities responsible for Single Market issues at national, regional and local level.
- Encourage close cooperation between Member States, and with the Commission, to facilitate communication and build mutual trust.
- Improve the transposition of Directives affecting the Single Market.
- Better monitor markets and sectors to identify potential problems.
- Ensure that civil servants dealing with Single Market issues are properly trained and have access to advice on Single Market rules.
- Strengthen the enforcement of Single Market rules, for example by providing sufficient training for judges and by promoting problem-solving mechanisms.
- Promote regular assessment of national legislation.
- Improve provision of information to citizens and businesses about their Single Market rights and cross-border opportunities.
The Recommendation has been produced in response to the Single Market Review, published last December, which called for closer partnerships amongst Member States, and with the Commission, to make the Single Market work in practice.
Two Commission staff working documents accompany the Recommendation. These provide information on: (i) the activities undertaken by the Commission to support Member States and (ii) the main existing networks established by the Commission for administrative cooperation in the area of the Single Market.
Internal Market and Services Commissioner Charlie McCreevy said:
“The Single Market is crucial to the recovery of the European economy. But for the Single Market to work effectively, its rules need to be correctly transposed, applied and enforced at national level, and national authorities need to cooperate more closely with each other. The Recommendation we have adopted today sets out concrete steps on how to ensure this. I am grateful for Member States’ close cooperation in preparing this Recommendation and I urge them to actively implement the recommendations at national level. The Commission will do its utmost to support Member States in this work.”
View Commission calls on Member States to implement new guidelines for improving Single Market, 29 June 2009
Work programme of the Swedish Presidency of the Council of the European Union
There has been published the work programme of the Swedish Presidency of the Council of the European Union for the period 1 July to 31 December 2009.
In the work programme it is stated that one of the Presidency’s objectives is to reach an agreement on the form of a new supervisory structure, which includes the establishment of a European body to supervise stability in the financial system as a whole. The new structure also contains a proposal for a European system for financial supervision at micro level that will ensure more efficient supervision of cross-border banks and reinforced cooperation among national supervisory authorities.
View Work programme of the Swedish Presidency of the Council of the European Union, 23 June 2009 (415 KB pdf)
Request for CESR technical advice on the equivalence between certain third country legal and supervisory frameworks and the EU regulatory regime for credit rating agencies
The European Commission has published a request dated 12 June 2009 for the Committee of European Securities Regulators (CESR) to provide advice on the equivalence between the legal and supervisory frameworks of third countries and the regulatory framework for credit rating agencies (CRAs) introduced by the CRA Regulation.
The request consists of two parts:
- To provide technical assistance for the assessment of the regulatory frameworks of the USA , Canada and Japan.
- To conduct a fact finding exercise to establish whether other additional jurisdictions should be assessed.
The Commission states that as the formal adoption of the CRA Regulation is foreseen by the end of September it would anticipate receiving CESR’s technical advice by 15 February 2010 in order to allow the formal comitology procedures to be in place at the due time before October 2010 (the expected date for the mandatory use of credit ratings issued by registered or certified CRAs).
View Request for CESR technical advice on the equivalence between certain third country legal and supervisory frameworks and the EU regulatory regime for credit rating agencies, 12 June 2009 (607 KB pdf)
Measures adopted by CESR members on short selling - updated
The Committee of European Securities Regulators has updated the list of measures taken by its members on short selling. The list contains an update from:
- Austria’s Financial Market Authority (AFM).
- UK ’s Financial Services Authority.
- France’s Autorité des Marchés Financiers (AMF).
View Measures adopted by CESR Members on short selling - updated, 1 July 2009 (114 KB pdf)
Waivers from Pre-trade Transparency Obligations under the Markets in Financial Instruments Directive (MiFID) - Updated
The Committee of European Securities Regulators (CESR) has published an update of its assessment of waivers from pre-trade transparency obligations under the Markets in Financial Instruments Directive (MiFID).
The table now includes information on a new assessment made by CESR regarding an application for a waiver to be granted on the basis of Article 18(1)(a) of the MiFID implementing Regulation.
View Waivers from Pre-trade Transparency Obligations under the Markets in Financial Instruments Directive (MiFID) - Updated, 29 June 2009 (161 KB pdf)
CESR report on the mapping of supervisory powers, administrative and criminal sanctioning regimes of Member States in relation to the Transparency Directive
The Committee of European Securities Regulators (CESR) has published the results of a comparative survey of the supervisory powers of its members, and the criminal and administrative sanctions available to them, in relation to the Transparency Directive (TD).
The headline findings are that:
- There is a large degree of convergence in terms of CESR members being the designated central competent authorities responsible for all aspects of the TD. A few CESR members have either appointed other competent authorities or delegated the relevant powers to other national authorities.
- The majority of CESR members follow the same supervisory regime as regards general obligations, ongoing information and powers of the competent authorities and co-operation within the EU .
- There are significant differences between CESR members in regard to the powers they bring to bear on the timing of the publication of half-yearly financial reports which issuers of securities admitted to trading on a regulated market are obliged to do under the TD. There are also differences between CESR members in regard to cooperation agreements concerning third countries.
- Administrative measures and fines are generally more common than criminal sanctions although in a small number of countries the manner of implementation of the TD has resulted in a much reduced scope for these actions. Where similar measures can be imposed as a result of infringements of the TD, they vary in severity across CESR members.
Carlos Tavares, Vice-Chair of CESR and Chairman of the CESR Review Panel stated:
“Today’s publication represents a significant contribution by CESR’s Review Panel towards creating an extensive factual overview of the state of play throughout the CESR membership of the implementation of supervisory powers and sanctioning regimes of all the Directives. The work undertaken here concerning the TD, completes this picture. Clarifying the level of coherence, equivalence and variance of powers and sanctioning regimes is a key step in the process to ensure greater convergence and in a very practical way, it enables CESR to identify those areas where it is within our Member’s power to bring about further harmonisation and therefore where we might focus future efforts more effectively.
The equivalent powers of supervisors when enforcing against those who infringe EU legislation is considered by CESR as a precondition to a convergent EU supervisory system that maintains sound financial markets. At the same time, such equivalence in enforcement and sanctioning powers protects European financial markets from regulatory arbitrage ensuring greater investor protection.”
View CESR report on the mapping of supervisory powers, administrative and criminal sanctioning regimes of Member States in relation to the Transparency Directive, 1 July 2009 (1.68 MB pdf)
Policy Statement 09/10: Extension of the short selling disclosure obligation
The FSA has published Policy Statement 09/10: Extension of the short selling disclosure obligation (PS09/10). In PS09/10 the FSA confirms that it has extended, without time limit, the current disclosure regime for significant net short positions in the stocks of UK financial sector companies which was due to expire on 30 June 2009.
The FSA expects to issue a Feedback Statement summarising the responses to its earlier Discussion Paper in Q3 2009 including alternative methods of increasing transparency.
View Policy Statement 09/10: Extension of the short selling disclosure obligation, 26 June 2009
View FSA press release UK short selling disclosure regime extended, 26 June 2009
Interim Permitted Regulated Sale and Rent Back Activities Instrument 2009
The FSA’s interim regime for the regulation of sale and rent back schemes came into effect on 1 July 2009.
The FSA has published the Interim Permitted Regulated Sale and Rent Back Activities Instrument 2009 which introduces new provisions relating to sale and rent back activities into the FSA Handbook. The instrument came into force on 1 July 2009.
Firms that intend to carry on sale and rent back (SRB) activities from 1 July 2009 must apply for interim permission. Firms must not undertake SRB activities without permission. The FSA will be closely monitoring the market and will take action against firms opertaing without permission.
View Interim Permitted Regulated Sale and Rent Back Activities Instrument 2009, 1 July 2009 (289 KB pdf)
The Financial Services and Markets Act 2000 (Regulated Activities) (Amendment) Order 2009
The Financial Services and Markets Act 2000 (Regulated Activities) (Amendment) Order 2009 has come into force.
This Order amends the Financial Services and Markets Act 2000 (Regulated Activities) Order 2001 to introduce new regulated activities relating to sale and rent back agreements. These activities broadly mirror those relating to regulated mortgage contracts, home purchase plans and home reversion plans.
View The Financial Services and Markets Act 2000 (Regulated Activities) (Amendment) Order 2009, 1 July 2009 (100 KB pdf)
Update on Keydata Investment Services Limited
The FSA has published an update on Keydata Investment Services Limited (Keydata).
On 8 June 2009 the FSA applied to have Keydata placed into administration on the grounds that it was insolvent. On 30 June 2009 PricewaterhouseCoopers announced that as a result of concerns around some Keydata products it had suspended certain interest payments and certain redemption rights.
View Update on Keydata Investment Services Limited, 30 June 2009
The FSA has withdrawn the permissions of a director of a mortgage broker and banned him from holding any significant influence function in the future for failing to adequately supervise the operations of his firm. The FSA found that he lacked competence and capability due to his failure to ensure that the firm provided suitable advice or ensure that the firm was controlled effectively, as a result of which the firm was used by third parties to obtain mortgages on a fraudulent basis. During the course of the investigation, the director applied to cancel the firm’s Part IV permission and placed it into administration (Simon William Robins 5 June 2009 (120 KB pdf)).
A director of a mortgage broker has been prohibited for making false and misleading statements to the FSA regarding his employment history and a police investigation, which concluded with a caution for attempting to obtain property by deception, in repeated applications to become an approved person (Simon Robert Gray 25 June 2009 (48 KB pdf)).
The FSA has issued a Final Notice to Mr Richard Anthony Holmes, a director of AIF Limited, in relation to a fine of £20,020 for control failings in relation to an appointed representative firm (AR).
Jonathan Phelan, head of FSA retail enforcement, said:
“Senior management at firms are responsible for the standards and conduct of the businesses they run – this applies to all firms both large and small. In particular, senior managers should ensure that their appointed representatives are appropriately overseen.
As a director of the firm, Richard Holmes failed to carry out sufficient initial checks and then failed to monitor adequately the activities of the AR over a period of almost a year despite identifying a number of concerns early on during the AR agreement – this falls below the standards that FSA expects of firms. Directors who fail to discharge their personal responsibilities, including monitoring ARs properly, give rise to a risk of consumer loss and we will take action against them.” (Richard Anthony Holmes 1 July 2009 (104 KB pdf)).
BBA response to draft code of practice on remuneration policies and CP09/10
The British Bankers’ Association (BBA) has published its response to the FSA’s draft code of practice on remuneration policies and Consultation Paper 09/10.
The BBA supports the principles based approach and the objective of aligning remuneration policy with risk management, as well as the linking of remuneration practice to capital planning. However, the BBA has a number of concerns including that the draft code goes further than the principles set out by the Financial Stability Forum (Principles for Sound Compensation Practices).
The BBA concludes that firms should have the freedom to decide on the most appropriate form of remuneration provided it supports sound risk management. Remuneration policy and practice should be consistent with risk management and the avoidance of excessive risk. The level and form of remuneration are a matter for firms’ governing bodies and investors. Regulatory principles on remuneration should remain at a high level and focus on outcomes. This will avoid prescription on structures and other issues where firms can reasonably adopt different approaches.
The BBA also argues that the failure to align practices between the UK, EU and the rest of the world may lead to arbitrage and the loss of business as firms locate operations outside the UK, and to less regulated and/or more tax advantageous jurisdictions.
The BBA also notes that without a coordinated international approach, reform will be difficult to implement consistently and have only partial effect.
View BBA response to draft code of practice on remuneration policies and CP09/10, 1 July 2009 (397 KB pdf)
German Federal Civil Court continues its jurisdiction on retrocession fees
With its verdict dated 12 May 2009, the German Federal Civil Court ( Bundesgerichtshof - BGH) continues its series of verdicts on payments of retrocession fees to agents of financial products.
In December 2006, the BGH held that banks and financial services firms are obliged to disclose that they receive retrocession fees from third parties (in most cases the product providers) when selling financial products. In its most recent verdict, the BGH held that - if such disclosure duty is not complied with - the banks have to prove that they have not acted with intent.
This has significant consequences, in particular on limitation periods and defence strategies against civil law suits. The limitation period may - under specific circumstances - be extended from three years to ten years.
New legal requirement for investment advice: written minutes of meeting and advice
An amendment to the German Securities Trading Act ( Wertpapierhandelsgesetz - WpHG) - which will come into effect later this year - provides that banks and financial services firms that provide investment advice have to draft and sign minutes of the meeting and the advice.
The intention of the new law is to help investors to claim for damages in case of unlawful advice. The draft Act is subject to criticism of the financial industry (in particular because of the high implementation costs), but is expected to pass parliament soon.
Report on the Dutch deposit guarantee scheme
A team of experts from the Ministry of Finance, the Dutch Central Bank (DNB) and the Netherlands Bankers’ Association have produced a report on the Dutch deposit guarantee scheme (DGS). The DGS protects private individuals and small enterprises having cash deposits with a Dutch bank.
The report sets out an analysis of the DGS and aims to reconsider and possibly revise the DGS. The report also considers a European DGS, which could be an attractive alternative in the long run.
The report concludes that the current DGS should be improved on several points including:
- It does not give the right incentives to deposit holders and banks.
- The apportionment of the costs for the banks comes at the wrong time (pro-cyclical).
- The execution of the DGS is complicated and the law is unclear on multiple points. Furthermore, the report considers a European DGS, which could be an attractive alternative in the long run.
- If investigation by the provider would prove that the customer could not reasonably be expected to meet their payment obligations, the provider should bear part of the interest and principle repayment as well.
View The report (which is only available in Dutch)
View Further information on the DGS (in English)
Damage of securities leasing partially compensated
On 5 June 2009, the Dutch Supreme Court ruled on three securities leasing cases involving Dexia, Aegon and Levob. The rulings have answered many important legal questions and have cleared the path for the settlement of many pending claims.
The key point of the rulings is that the provider has a duty of due care to emphasise the financial risks, especially the risk of residual debt to the customer. Furthermore, the provider should investigate the financial situation of the customer.
The Supreme Court ruled that Dexia, Aegon and Levob had each failed in their duty of care. These providers are required to pay damages, which will generally consist of the residual and the already paid interest and repayment.
The Supreme Court also ruled that:
- The customers would have to bear part of the loss as well, because they knew or should have known that the securities were bought with borrowed money, for which interest should be paid and the principle amount should be repaid, regardless of the value of the securities at the time of repayment of the loan.
- The provider should always bear a part of the residual debt.
- If investigation by the provider could prove that the customer could not reasonably be expected to meet their payment obligations, the provider should bear part of the interest and principle repayment as well.
View The rulings of the Dutch Supreme Court (which are only available in Dutch)
Italy - Duty of intermediaries in distributing illiquid products
On 2 March 2009 the Italian Financial Services Authority (Consob - Commissione Nazionale per le Società e la Borsa) issued communication no. 9019104 (CONSOB Communication), providing new guidelines on intermediaries’ duties in relation to the distribution of illiquid financial products to retail investors.
The Communication represents Level 3 implementing measures in the framework of MiFID and is aimed to enhance the disclosure available to retail investors when investing in illiquid products as well as to increase the level of protection for such investors in dealing with financial intermediaries and issuers of illiquid products.
Definition of “illiquid products”
Under the CONSOB Communication, “illiquid products” are defined as financial instruments that cause obstacles or limitations in selling such products within an adequately short timeframe, at critical price conditions.
In assessing whether the conditions are critical (i.e. potentially detrimental to investors), the following criteria should be taken into account:
- bid and offer spreads;
- width and depth of the trading book;
- frequency, number and size of the transactions regarding the relevant financial product; and
- availability of information on the terms of the transactions involving the specific product.
The CONSOB Communication gives examples of those products which normally tend to be “illiquid”; these include bank bonds, insurance-financial policies and over the counter (OTC) derivatives.
The CONSOB Communication also clarifies that financial products may be classified as “liquid” when such products are: (i) listed on a regulated market, or (ii) admitted to trading on a multilateral trading facility (MTF), or when intermediaries are committed to buy back such products on pre-determined and agreed conditions, consistent with those which have driven the pricing of the products on the primary market level. These conditions are referred to as “liquidity conditions”.
The mere fact that a financial product is expected to be listed on a regulated market or admitted to trading on an MTF is not in itself a guarantee that the relevant product is liquid. The actual liquidity of the regulated market or MTF in question must be assessed and re-assessed from time to time on a case-by-case basis.
When a financial product qualifies as “illiquid” and is therefore considered not transparent, retail investors necessarily rely on the information provided by the intermediary, which often acts as the issuer of such product. In order to ensure that intermediaries comply with their duties of fairness and transparency, the CONSOB Communication advises the intermediaries to adopt the following:
- transparency procedures, to be used especially when the intermediaries are also issuers of the relevant illiquid product;
- procedures for fair pricing; and
- procedures for assessing the suitability/appropriateness of the investment in illiquid products.
Transparency of the cost and value of “liquid” products is provided by the existence of a reference market; by contrast, information of this kind regarding “illiquid” products can only be obtained upon application of disclosure measures.
For this reason, intermediaries should adopt systems aimed at disclosing the price components of such products. In particular, the components of an illiquid product should be “unbundled” and the fair value of such product (with a separate indication of its derivative component, if any) should be described, together with the costs – implicit or explicit, immediate or deferred – which will be charged to the investor.
Furthermore, in order to avoid that investors only become aware of the costs related to the product’s illiquidity upon liquidation of the product itself, the following is recommended:
- disclosure of the price at which the instrument could be sold in the moment immediately following the transaction (valore di smobilizzo) assuming that the market conditions are the same as those existing at the time of the subscription; and
- disclosure of the investor’s expected ability to disinvest its position, by expressly mentioning possible difficulties of liquidating the product and the consequence in terms of cost and time of execution.
In addition, comparison with more traditional and low-risk financial products in terms of risk/return should be made available to investors, together with examples simulating the returns generated from the illiquid product in various market conditions.
Finally, intermediaries should send retail investors a periodic statement of the current fair value and potential liquidation value of the illiquid product.
Pursuant to the CONSOB Communication, intermediaries which simultaneously issue and offer products or act as direct counterpart vis-à-vis the investors in purchasing illiquid products, shall apply price conditions consistent with the fair value of the specific product. The fair value should be determined by means of accepted models for pricing financial instruments, which reflect the complexity of the relevant product.
In case of buy-back by the issuer itself, the relevant pricing criteria should be consistent with those used to determine the subscription price on the primary market.
Suitability and appropriateness
The CONSOB Communication recommends the adoption of more stringent measures and internal procedures by which intermediaries conduct the assessment regarding the suitability and appropriateness of investments in illiquid products. Particular attention is to be given to the specific situation of the solicited investor.
The CONSOB Communication consists of guidelines and recommendations with no actual legal binding nature. However the spirit of the Communication should be carefully considered given the recent turmoil in the financial markets and the unique position of the Italian market, where illiquid products, and in particular OTC derivatives and unit-linked policies, have been widely distributed to retail investors.
It is widely accepted that given their importance and impact, CONSOB’s recommendations require prompt review and implementation which will lead to an updating of procedures followed by intermediaries.
The text of the Communication and the consultation results paper are available only in Italian, on the website of CONSOB (www.consob.it).
For further information please contact: Nicolò Juvara
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Financial Services Authority announces final stage of operational reforms with new integrated operating structure
The FSA has announced a new operational structure with the basic objective of better aligning its internal operating model to its core activities of identifying and mitigating risk, supervision and enforcement.
The changes will take effect from 1 October 2009 and will conclude the organisation’s internal reforms of the last two years that were carried out in response to the banking crisis, the Northern Rock internal review and the priorities outlined in the Turner Review.
In a statement, Hector Sants, FSA chief executive listed six specific benefits expected to flow from these organisational changes:
- Integration of retail and wholesale firm supervision into one Supervision business unit under managing director, Jon Pain, which will ensure long term consistency and flexibility to the implementation of the FSA’s supervisory philosophy.
- Integration of risk identification, risk management and policy formulation into one Risk business unit under managing director, Sally Dewar. Grouping all the FSA’s technical specialists in one group will ensure, at all times, the required focus on conduct and prudential risk.
- Expansion of the existing Financial Stability team to become a new, enhanced division under director David Strachan, focusing on macro-prudential issues and providing the central link for the FSA with the wider macro-prudential framework.
- Creation of a new International division, under director Verena Ross, which will enable the FSA to significantly increase its engagement with international fora.
- Integration of Enforcement and Financial Crime to form one division under director Margaret Cole, which will enable the FSA to better extract the synergies in this important area, to enhance delivery of its credible deterrence strategy.
- Financial Capability division will move from the existing Retail business unit to become a standalone division, under director Chris Pond and will report directly to Hector Sants. This will put the FSA in a better position to take forward the national roll-out of the Money Guidance service, as announced in the 2009 Budget.
“These changes will provide greater clarity, both internally and externally, as to the way we work and, in particular, reinforce our role as micro-prudential supervisor based on a model of integrated risk analysis and integrated supervision. I believe the actions we have taken since the crisis began have shown the effectiveness of this model. This reorganisation will ensure our changing working practices and the way we make our judgements are successfully institutionalised.”
View Financial Services Authority announces final stage of operational reforms with new integrated operating structure, 2 July 2007
UK Government welcomes Isle of Man Tax Reforms
HM Treasury has issued a press statement welcoming the announcement by the Isle of Man to improve the transparency of their tax regulations.
Plans have been announced for the automatic exchange of information on savings interest with the UK and other EU Member States.
The withholding tax option available to customers with accounts in Isle of Man financial institutions by virtue of the transitional arrangements under the European Union Savings Directive framework (EUSD) will be withdrawn by July 2011.
The announcement was made by Isle of Man Treasury Minister, Allan Bell, MHK, in his speech “Promoting market integrity” at the annual Organisation for Economic Co-operation and Development (OECD) Forum in Paris.
Stephen Timms, Financial Secretary to the Treasury, said:
“I warmly welcome this move by the Isle of Man, which reflects the aim of the Savings Directive to promote exchange of information for tax purposes. This will enhance transparency and help ensure that tax is paid where it is due. We encourage all jurisdictions that apply the transitional withholding tax to move to exchange of information as soon as possible.”
View UK Government welcomes Isle of Man Tax Reforms, 24 June 2009
RE: CESR’s comments regarding IFRIC tentative agenda decision on IAS 39 “significant or prolonged”
The Committee of European Securities Regulators (CESR) has responded to the tentative agenda decision of the International Financial Reporting Interpretations Committee (IFRIC) in relation to IAS 39, published in IFRIC ’s Update of May 2009.
View RE: CESR’s comments regarding IFRIC tentative agenda decision on IAS 39 “significant or prolonged”, 23 June 2009 (176 KB pdf)
Lord Turner appointed chair of FSB’s Standing Committee for Supervisory and Regulatory Co-operation
The FSA has announced that its chairman, Adair Turner, has been appointed chairman of the Financial Stability Board’s Standing Committee for Supervisory and Regulatory Co-operation.
The Financial Stability Board (FSB) was re-established in April 2009 as the successor to the Financial Stability Forum (FSF). It comprises national authorities responsible for financial stability in significant international financial centres, institutions, sector-specific groupings of regulators and supervisors, and committees of central bank experts.
Lord Turner said:
“The global nature of the financial crisis and the fact that so many banking groups operate across national borders make international co-operation a vital part of reforming regulation. We will work hard on this committee to define the regulations and supervisory approaches needed to address these global risks and identify priorities for regulatory policy needed to tackle them.”
View Lord Turner appointed chair of FSB’s Standing Committee for Supervisory and Regulatory Co-operation, 29 June 2009
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