Financial services updater

25 February 2008

Introduction

Welcome to our Financial services updater

Highlights this week include:

• CESR takes steps to improve retail investor information for UCITS products
• The Regulated Covered Bonds Regulations 2008 No. 346

ARROW visit coming up? It is important that firms properly prepare themselves for an ARROW visit. There are many ways in which we can assist in this preparation to ensure that the process runs smoothly. For further information please contact either Jonathan Herbst or Peter Snowdon.

Banking

Chancellor's statement on Northern Rock

The FSA has published on its website a statement by the Chancellor regarding Northern Rock. In the statement the Chancellor confirms that the Government is to bring forward legislation to take Northern Rock into a period of temporary public ownership. He also confirms that savers’ and depositors’ money remains safe and secure. The remainder of the statement sets out the background to the Government’s decision.

View Chancellor's statement on Northern Rock, 17 February 2008

Collective investment schemes

CESR takes steps to improve retail investor information for UCITS products

The Committee of European Securities Regulators (CESR) has published its advice to the European Commission on the content and form of Key Information Document disclosures for UCITS, known as the KID. The new disclosure document is intended to simplify and highlight the crucial elements that a retail investor should consider when buying a UCITS. It is intended that the KID will eventually replace the simplified prospectus.

CESR’s recommendations on the KID include:

• That it should contain only the essential elements for making and carrying out investment decisions, which excludes information serving only legal or regulatory requirements.
• That it should be a single document covering a maximum of two sides of A4. There should be a standardised list of permitted contents in fixed order and hierarchy.
• That it may require certain modifications when provided for a fund of funds, an umbrella fund, or a fund with multiple share classes. For instance, for a fund of funds, the charges of the underlying funds need to be taken into account.
• That it should be revised as soon as any significant change to the fund (for example, a new charging structure) affects its accuracy.
• It should be reviewed regularly, at least every 12 months, and revised to ensure that it remains up to date.

View CESR takes steps to improve retail investor information for UCITS products , 15 February 2008

Insurance

ABI industry report 2007/08: Customer impact survey

The Association of British Insurers (ABI) has published a report entitled ABI industry report 2007/8: Customer impact survey (the Report). The Report sets out the findings from the ABI’s consumer impact survey for 2007/08, in which 32 companies participated and a total of 19,425 customers were surveyed. The key findings of the survey were:

• Reputation of the insurance industry - 53 per cent of customers ‘strongly agreed’ or ‘agreed’ that the industry has an excellent reputation, compared with 48% in 2006/07.
• Key image statements - 86 per cent of customers ‘strongly agreed’ or ‘agreed’ that their company was ‘easy to do business with’, while 77 per cent felt that their provider ‘really cares about its customers’. These scores have increased by 1 per cent and 2 per cent respectively on 2006/07. The same proportion of customers as last year, 85 per cent, felt that their provider ‘treats customers fairly’.
• Customer advocacy - 53 per cent of customers said that they would be ‘extremely’ or ‘very likely’ to recommend their company, down 2 per cent on last year.
• Sales - 53 per cent of customers rated the sales process as ‘excellent’ or ‘very good’ this year compared with 57 per cent last year. Of the different aspects of a sale, customers rated payment handling highest. Clarity of information at point of sale scored lowest, as in 2006/07.
• Claims - 50 per cent of customers rated the claims and payments process as ‘excellent’ or ‘very good’, down from 53 per cent last year. Customers rated the speed of payment most favourably, while the way companies keep customers updated on the progress of their claim was viewed most negatively.
  
• Complaints - 3 per cent of customers surveyed had made a complaint to their provider in the past 12 months compared with 4 per cent last year. 10 per cent said that the way the company handled their complaint was ‘excellent’ or ‘very good’ compared with 14 per cent in 2006/07. 57 per cent of customers felt that their complaint had been handled poorly, an increase of 7 per cent on last year.

View ABI industry report 2007/08: Customer impact survey, (PDF 503KB), 19 February 2008

Main conclusions of the CEIOPS members’ meeting on 18 February 2008

The Committee of European Insurance and Occupational Pensions Supervisors (CEIOPS) has published its main conclusions that were adopted at its members’ meeting on 18 February 2008.
CEIOPS is to publish for comment its draft Advice on proportionality which addresses how to gear the risk-based regime of Solvency II to the nature, scale and complexity of an insurer’s or reinsurer’s risks. CEIOPS will also publish for comment its draft Advice on the framework Directive proposal relating to insurance groups which focuses on measures to facilitate their effective supervision.

View Main conclusions of the CEIOPS members’ meeting on 18 February 2008, (PDF 85.2KB), 18 February 2008

Regulation and compliance

Consultation Paper 08/3 - Simplifying Disclosure: Information about services and costs

The FSA has published Consultation Paper 08/3 - Simplifying Disclosure: Information about services and costs (CP08/3). In CP08/3, the FSA seeks views on a new disclosure document that investment firms can use to explain their services and costs to consumers. The proposal is to introduce the new disclosure document into guidance in the new Conduct of Business Sourcebook (COBS). This will replace the existing Initial Disclosure Document and menu. The new disclosure document is described in further detail in chapter 4 of CP08/3. The FSA is also proposing to update the Combined Initial Disclosure Document (CIDD) to have consistency between its proposed services and costs disclosures document and the investments sections of the CIDD. In addition, the FSA will update its templates and ‘build your own’ tools which are accessible through the FSA website to help firms who want to use this guidance. The deadline for comments on CP08/3 is 19 March 2008. The FSA will publish feedback on the responses in a Policy Statement in July 2008 together with the final Handbook text.

View Consultation Paper 08/3 - Simplifying Disclosure: Information about services and costs, 19 February 2008

Financial Advisers newsletter - issue 12

The FSA has published issue 12 of its Financial Advisers newsletter. The newsletter briefly covers:

• More help for small firms on Treating Customers Fairly (TCF).
• The TCF management information deadline in March 2008.
• The FSA’s recent consultation on simplifying disclosure.
• Appointed Representatives and TCF.
• The Money Laundering Regulations 2007.

View Financial Advisers newsletter - issue 12, (PDF 45.5KB), 20 February 2008

FSA speech - Regulation in different industries

The FSA has published a speech by Callum McCarthy (Chairman, FSA) entitled Regulation in different industries. In his speech Callum McCarthy starts by recognising that there are a wide and diverse range of organisations which fall within the general category of “regulators”. He then refers to the 2005 Hampton Review of national regulators, which identified 62 national regulators which it regarded as falling within its scope, a further 16 which fell out of its scope and four new national regulators which had been created or proposed while the review was in process.

Callum McCarthy then discusses some of the particular characteristics of regulation, the relationship between regulatory organisation and government, the difference between structural and behavioural regulation and the threat to the regulatory relationship arising from price controls.

On the issue of the relationship between regulatory organisation and government Callum McCarthy mentions that difficult decisions on authorisations, capital adequacy, the appropriate stress tests for banks are the responsibility of the FSA rather than HM Treasury.

Callum McCarthy then states that legitimacy is a central question for any regulatory organisation and discusses the following four issues:

• Any regulatory organisation must cleave to the statute which established it as this is the bedrock of the organisation’s legitimacy.
• In giving powers to a regulatory organisation Parliament should not delegate essentially political or value judgments, as distinct from those which are essentially subject to technical or economic analysis.
• Those responsible for taking regulatory decisions should be particularly aware of the need for continuity, predictability and due process.
• A critical element of legitimacy covers the general question of how to ensure compliance with the principles and rules promulgated by a regulatory organisation, and how, within a general framework, to enforce those principles and rules.

View Directive amending Directive 2004/39/EC on markets in financial instruments, as regards the implementing powers conferred on the Commission, 13 February 2008

Directive amending Directive 2004/39/EC on markets in financial instruments, as regards the implementing powers conferred on the Commission

The European Parliament and the Council of the European Union have adopted a Directive which amends the Markets in Financial Instruments Directive (MiFID) in respect of the implementing powers conferred on the European Commission. The Directive has not yet been published in the Official Journal. The amendments made to MiFID by the Directive do not require transposition by Member States as they are technical in nature and concern EU legislative procedures only.

View Directive amending Directive 2004/39/EC on markets in financial instruments, as regards the implementing powers conferred on the Commission, (PDF 102KB), 12 February 2008

The European Parliament and the Council of the European Union adopting Directives which amend Financial Services Action Plan Directives in respect of implementing powers conferred on the European Commission

The European Parliament and the Council of the European Union adopted the following Directives which amend key Level 1 Financial Services Action Plan Directives in respect of the implementing powers conferred on the European Commission:

• Directive amending the Banking Directive (2006/48/EEC), (PDF 91.9KB), 13 February 2008
• Directive amending the Re-cast Capital Adequacy Directive (2006/49/EC), (PDF 89.8KB), 13 February 2008
• Directive amending the Financial Conglomerates Directive (2002/87/EC), (PDF 95.4KB),13 February 2008
• Directive amending the Financial Conglomerates Directive (2002/87/EC), (PDF 98.3KB), 13 February 2008
• Directive amending the Prospectus Directive (2003/71/EC), (PDF 91KB), 13 February 2008

The Directives have not yet been published in the Official Journal.

Directive amending Directive 2002/83/EC concerning life assurance, as regards the implementing powers conferred on the Commission

The European Parliament and the Council of the European Union have adopted a Directive which amends Directive 2002/83/EC concerning life assurance, in respect of the implementing powers conferred on the European Commission. The Directive has not yet been published in the Official Journal.

View Directive amending Directive 2002/83/EC concerning life assurance, as regards the implementing powers conferred on the Commission, (PDF 84.5KB), 18 February 2008

CESR launches a consultation on the role of credit rating agencies in structured finance

The Committee of European Securities Regulators (CESR) has published a Consultation Paper entitled The role of credit rating agencies in structured finance. The Consultation Paper follows on from the European Commission’s additional request for CESR to review several aspects of the rating process regarding structured finance instruments. The Consultation Paper covers the following areas in relation to structured finance:

• Transparency of rating processes and methodologies.
• Monitoring of rating performance.
• CRA staff resourcing.
• Conflicts of interest.
• Regulatory options.
  

On 26 March 2008 CESR will hold an open hearing at its premises (CRAs excluded). The deadline for responses to the Consultation Paper is 31 March 2008. CESR expects to submit its final report to the European Commission by May 2008.

View CESR launches a consultation on the role of credit rating agencies in structured finance, 13 February 2008

Protocol on the operation of CESR MiFID database

The Committee of European Securities Regulators (CESR) has published a protocol on the operation of the CESR MiFID database. The protocol concerns the practical co-operation arrangements between CESR members and the CESR Secretariat in order to manage the calculation and publication of MiFID market transparency calculations.

View Protocol on the operation of CESR MiFID database, 18 February 2008

The Regulated Covered Bonds Regulations 2008 No. 346

On the Office of Public Sector Information website there has been published The Regulated Covered Bonds Regulations 2008 No. 346 (the Regulations). The Regulations implement Article 22(4) of the UCITS Directive, Article 22(4) of the Third Non-Life Directive and Article 24(4) of the Consolidated Life Directive. The relevant requirements of the UCITS Directive, the Third Non-Life Directive and the Consolidated Life Directive are in the same terms. The Regulations also implement paragraph 68 of Annex 6 to the Banking Consolidation Directive.

A covered bond is a class of corporate bond, issued by credit institutions and backed by certain assets, normally mortgages or public sector loans. Interest and repayments of principal is payable out of ring-fenced assets (an asset pool) backing the bond. Covered bonds that comply with the UCITS Directive (and equivalent requirements in the other Directives referred to above) benefit from higher prudential investment limits under the UCITS Directive and lower risk weights under the Banking Consolidation Directive.

The Regulations provide a new legislative framework for covered bonds in the UK. The Regulations establish a new regime supervised by the FSA and take account of UK practice in relation to covered bonds. Part 1 of the Regulations sets out definitions. Part 2 sets out the functions of the FSA and provides for it to have regard to certain considerations, including the need to preserve investor confidence in regulated covered bonds in the UK. Part 3 requires the FSA to maintain a register of issuers and a register of regulated covered bonds and sets out the registration process. Part 4 imposes requirements on issuers and Part 5 imposes requirements on owners. In particular, the issuer and the owner must make arrangements for the maintenance and administration of the asset pool so that the claims of bond holders and other specified parties may be met. Part 6 establishes that regulated covered bond holders and other specified persons must be paid in priority to all other creditors, after the payment of expenses of the receivership or winding up etc. Part 6 also provides for certain expenses incurred by a receiver or liquidator etc. to rank above the payment of all other expenses. Part 7 sets out the enforcement powers of the FSA and the Courts. Part 8 confers functions on the Financial Services and Markets Act Tribunal and Part 9 (and Schedule 1) contains provision for notification to the European Commission, guidance to be issued by the FSA and various modifications of primary and secondary legislation.

View The Regulated Covered Bonds Regulations 2008 No. 346, 19 February 2008

View Explanatory Memorandum - The Regulated Covered Bonds Regulations 2008 No. 346, (PDF 169KB), 19 February 2008

Proposals for a UK regulated covered bonds legislative framework: Summary of responses and final impact assessment

HM Treasury and the FSA have jointly published a document entitled Proposals for a UK regulated covered bonds legislative framework: Summary of responses and final impact assessment. This document summarises the responses to HM Treasury’s consultation on the proposed legislative framework for UK regulated covered bonds. The consultation was launched on 23 July 2007 and closed on 15 October 2007 and ran alongside the FSA’s consultation on its proposed implementation of the regime.

View Proposals for a UK regulated covered bonds legislative framework: Summary of responses and final impact assessment, (PDF 555KB), 18 February 2008

CESR/ERGEG Call for Evidence on record keeping, transparency, supply contracts and derivatives for electricity and gas

In December 2007 the European Commission issued a Call for Technical Advice to the Committee of European Securities Regulators (CESR) and the European Regulators Group for Electricity and Gas (ERGEG) in relation to Articles 22f and 24f and Recitals 20 and 22 respectively in the two proposals for Directives amending Directive 2003/54/EC and Directive 2003/55/EC (the Third Energy Package).

CESR and ERGEG are being asked to jointly give advice on issues concerning record keeping and transparency of transactions in electricity and gas supply contracts and derivatives. The aim of the Call for Technical Advice is to find out if additional measures are necessary with respect to transparency in energy trading and to provide the Commission with technical background information to allow it to adopt guidelines on record keeping under the Third Energy Package.

CESR and ERGEG are requested to deliver their technical advice to the Commission in two parts, by the end of May 2008 and by the end of December 2008.

CESR/ERGEG have now jointly published a Call for Evidence on record keeping, transparency, supply contracts and derivatives for electricity and gas. The deadline for responses to the Call for Evidence is 18 March 2008.

View CESR/ERGEG Call for Evidence on record keeping, transparency, supply contracts and derivatives for electricity and gas, (PDF 940KB), 19 February 2008

FSA Final Notice - Wessex Finance Limited

The FSA has published a Final Notice concerning Wessex Finance Limited cancelling its permission to carry on regulated activities.

View FSA Final Notice - Wessex Finance Limited, (PDF 19.5KB), 15 February 2008

FSA Final Notice - Russell Terry (trading as Harlequin Motor Company)

The FSA has published a Final Notice concerning Russell Terry (trading as Harlequin Motor Company) cancelling his permission to carry on regulated activities.

View FSA Final Notice - Russell Terry (trading as Harlequin Motor Company), (PDF 21KB), 15 February 2008

FSA Final Notice - Mr Amjad Ali Malik

The FSA has published a Final Notice prohibiting Mr Amjad Ali Malik, from performing any function in relation to any regulated activity carried on by any authorised person, exempt person or exempt professional firm.

View FSA Final Notice - Mr Amjad Ali Malik, (PDF 86.1KB), 20 February 2008

FSA Final Notice - Mr Tahir Mahmood

The FSA has published a Final Notice prohibiting Mr Tahir Mahmood, from performing any function in relation to any regulated activity carried on by any authorised person, exempt person or exempt professional firm.

View FSA Final Notice - Mr Tahir Mahmood, (PDF 91.1KB), 20 February 2008

Retail Products

FSA Consumer Research - Depolarisation Disclosure

The FSA has published Consumer Research Paper 64 entitled Depolarisation Disclosure. The FSA commissioned GfK NOP to conduct a quantitative study to assess whether the Initial Disclosure Document (IDD) and the menu had been effective in helping consumers understand the status of their adviser, that there is a cost for advice, and that it is possible to negotiate and shop around. The research was conducted in two stages. The first stage was conducted in December 2005 among consumers who had taken out an investment product during the period prior to the introduction of the IDD and the menu. The second stage was conducted in February/March 2007 among consumers who had purchased an investment product in the previous year, after the introduction of the IDD and menu. The findings of the research was that the introduction of the IDD and menu have not improved consumer understanding of the cost of advice, commission, status of the adviser, or the option to negotiate, and have not led to more shopping around.

View FSA Consumer Research - Depolarisation Disclosure, (PDF 541KB), 19 February 2008

FSA Consumer Research Paper 65a

The FSA has published Consumer Research Paper 65a entitled Services and costs disclosure - Stage 1: Qualitative research with potential and recent purchasers of financial products.
The FSA commissioned BMRB Social Research to undertake a research programme to assess whether there is a justification, in terms of consumer understanding and decision-making behaviour, for imposing additional disclosure requirements on firms beyond what the Markets in Financial Instruments Directive (MiFID) requires. The research programme had three stages:

• Qualitative research with potential and recent purchasers of financial products.
• Qualitative research with potential and recent purchasers of financial products (large scale survey).
• Qualitative research – mock sales testing.

This report covers the first stage of research, comprising a qualitative study with consumers who were either in the market for a financial product, or who had recently purchased a financial product to identify the content, format and context for delivering information to consumers that is likely to be effective in promoting understanding of key messages.

The research found that consumers had a general interest in personal finance and obtained the information they needed from financially related television programmes and reading the financial sections of newspapers. Consumers did not generally consider themselves to be confident or experienced in gaining financial advice (with the exception of those who were financially sophisticated) and their experience was usually limited to a one-off purchase.

View FSA Consumer Research Paper 65a, (PDF 1.47MB), 19 February 2008

FSA Consumer Research Paper 65b

The FSA has published Consumer Research Paper 65b entitled Services and costs disclosure - Stage 2: Qualitative research with potential and recent purchasers of financial products. This report covers the second stage of the research which involved a large scale survey among recent purchasers of financial products to test how the different options performed in terms of increasing understanding. The report sets out the findings from the survey and how it was structured.

View FSA Consumer Research Paper 65b, (PDF 1.02MB), 19 February 2008

FSA Consumer Research Paper 65c

The FSA has published Consumer Research Paper 65c entitled Services and costs disclosure - Stage 3: Qualitative research – mock sales testing. This report covers the final stage of the research which involved a mock sales exercise which used real advisers to test how the Initial Disclosure Document (IDD) performed when compared with the MiFID baseline documents. The research found that consumers who had received the IDD generally understood the scope of advice available whereas consumers who had received the MiFID baseline documents only recalled the types of products and services offered. Part ownership was generally highlighted as a key message by consumers who had received the IDD but not the MiFID baseline documents. Information about the firm giving advice, including background to the firm, contact information, the role of advisers and entitlement to a free health check, was taken as a key message from the MiFID baseline documents. The key messages in the terms and conditions of business were felt to be easy to identify due to the headings used.

View FSA Consumer Research Paper 65c, (PDF 630KB), 19 February 2008

Securities

CESR announces the changes which will be made to the database of shares admitted to trading on regulated markets

The Committee of European Securities Regulators (CESR) has issued a press release stating that, as from 5 March 2008, there will be changes to the database of shares admitted to trading on regulated markets. The changes will include:

• The addition of new columns.
• Improvements to the display and export functions.
• The addition of new search functions covering liquid shares, date of update and date of applicability.

CESR is also publishing on its website a list of national contacts, to which questions pertaining to the content of specific entries should be sent. CESR is also implementing a first version of the EU network of storage mechanisms. The network will provide market participants with access to the website of the relevant Officially Appointed Mechanism (OAM) for all shares admitted to trading on regulated markets. Access will be provided through a link on the name of the shares, sending the user either to the national OAM, if only one exists, or to an intermediary page with a list of all the OAMs in the country of the relevant authority for Transparency Directive purposes.

View CESR announces the changes which will be made to the database of shares admitted to trading on regulated markets, 18 February 2008

General

Consumer Research 63 - Parent's guide to money

The FSA has published a research report prepared by IFF Research Ltd to the FSA entitled Parent’s guide to money. The research paper is to help prospective parents review and organise their finances.

View, Consumer Research 63 - Parent's guide to money (PDF 581KB), 15 February 2008

Seminars

40 Minute Briefing - 5 March 2008

The changing market landscape: the buy/sell side legal architecture

The next 40 Minute Briefing is taking place on Wednesday 5 March 2008 at our offices located at 3 More London Riverside, London SE1 2AQ. The Briefing starts at 8.45am and registration is available from 8.30am. For further details or to book a place, please contact Justine Phillips.

40 Minute Briefing programme February 2008 to June 2008

Invitation