Welcome to the latest edition of our financial services updater.
Highlights this week include:
- FSA Annual Public Meeting: Chairman’s speech
- Commission publishes legislative proposals on PRIPS
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.
Back to top
Basel Committee consultation on a framework for dealing with domestic systemically important banks
The Basel Committee on Banking Supervision (BCBS) has published a consultative document which sets out framework principles covering the assessment methodology and the higher loss absorbency requirement for domestic systemically important banks (D-SIBs). The framework for D-SIBs takes a complementary perspective of the global systemically important (G-SIB) framework published by the BCBS in November 2011.
The consultative document requires those banks that have been identified as D-SIBs by their national authorities, to comply with the principles beginning in January 2016. This is consistent with the phase-in arrangements for the G-SIB framework.
The deadline for comments on the consultative document is 1 August 2012.
View A framework for dealing with domestic systemically important banks - consultative document, 29 June 2012
Basel Committee guidance on the internal audit function in banks
The Basel Committee on Banking Supervision (BCBS) has issued a paper entitled The internal audit function in banks. This paper replaces the 2001 BCBS paper entitled Internal audit in banks and the supervisor’s relationship with auditors.
The paper sets out revised supervisory guidance for assessing the effectiveness of the internal audit function in banks, which forms part of the BCBS’s ongoing efforts to address bank supervisory issues and enhance supervision through guidance that encourages sound practices within banks. The guidance applies to all banks, including those within a banking group, and to holding companies subject to prudential supervision whose subsidiaries are predominantly banks.
View The internal audit function in banks, 28 June 2012
Euro area summit statement
On 29 June 2012, the heads of state of the Member States in the eurozone issued a summit statement following the European Council meetings on 28 and 29 June 2012.
The summit statement includes the following:
“We affirm that it is imperative to break the vicious circle between banks and sovereigns. The Commission will present proposals on the basis of Article 127(6) [of the Treaty on the Functioning of the European Union] for a single supervisory mechanism shortly. We ask the Council to consider these proposals as a matter of urgency by the end of 2012. When an effective single supervisory mechanism is established, involving the ECB, for banks in the euro area the ESM [European Stability Mechanism] could, following a regular decision, have the possibility to recapitalise banks directly.”
View Euro area summit statement, 29 June 2012
Commission feedback on Green Paper concerning an integrated European market for card, internet and mobile payments
In January 2012, the European Commission published a Green Paper entitled Towards an integrated European market for card, internet and mobile payments (the Green Paper). The purpose of the Green Paper was to collect the opinions of the market participants on a number of payment issues and to identify their requirements and expectations verses the Single Market in payments.
The Commission has now published a Feedback Statement which summarises the responses to the Green Paper. The purpose of the Feedback Statement is to present an impartial overview of the opinions expressed and arguments presented by stakeholders in their individual contributions. The views expressed in the Feedback Statement do not necessarily represent the views of the Commission.
View Feedback statement on European Commission Green Paper “Towards an integrated European market for card, internet and mobile payments”, 28 June 2012
Financial Stability Report (issue 31)
The Bank of England has published its latest Financial Stability Report (issue 31). The report notes that the interim Financial Policy Committee (FPC) met on 22 June and agreed certain policy recommendations including that:
- The FSA works with banks to ensure they build a sufficient cushion of loss-absorbing capital in order to help to protect against the current heightened risk of losses. That the cushion may temporarily be above that implied by the official transition path to the Basel III standards and would support additional lending to the real economy.
- The FSA encourage banks to improve the resilience of their balance sheets, including through prudent valuations, without exacerbating market fragility or reducing lending to the real economy.
- The banks’ work to assess, manage and mitigate specific risks to their balance sheets stemming from current and future potential stress in the euro area.
- The FSA makes clearer to banks that they are free to use their regulatory liquid asset buffers in the event of a liquidity stress.
- The UK banks work with the FSA and the British Bankers’ Association to ensure greater consistency and comparability of their Pillar 3 disclosures.
View Financial Stability Report (issue 31), 29 June 2012
Banks’ defences against investment fraud
The FSA has published a report entitled Banks’ defences against investment fraud - Detecting perpetrators and protecting victims. At the same time the FSA has published a Guidance Consultation entitled Examples of good and poor practice in banks’ defences against investment fraud (GC12/7).
The FSA’s report considers a review which examined banks’ efforts to counter fraud where their customer is the fraudster or their customer is the victim of fraud. The FSA has a regulatory remit to tackle investment fraud. Firms authorised by the FSA have a regulatory duty to counter the risk that they might be used to further financial crime.
During its review the FSA states that it was not clear that the banks visited had fulfilled this aspect of their regulatory obligation to counter the risk that they might be used to further financial crime. In particular the FSA states that it is disappointed with banks’ ability to detect where their customers may be complicit in investment fraud. However, more positively the FSA saw a range of transaction monitoring technologies, and some banks had used these successfully to prevent customers falling victim to investment fraud.
The report contains examples of good and poor practice found during the FSA’s review. As the examples will constitute guidance from the FSA, it is consulting on them. The deadline for responding to the examples in the report and G12/7 is 23 August 2012. After consultation, the material will be added to the FSA’s publication entitled Financial crime: a guide for firms.
Whilst the FSA’s review concentrated on investment fraud, it has wider relevance to how firms handle other types of fraud and criminal conduct affecting their customers.
View Banks’ defences against investment fraud, 28 June 2012
View Guidance Consultation 12/7: Examples of good and poor practice in banks’ defences against investment fraud, 28 June 2012
Back to top
Basel Committee consultation on monitoring indicators for intraday liquidity management
The Basel Committee on Banking Supervision (BCBS) has published a consultative document concerning monitoring indicators for intraday liquidity management.
The consultative document seeks comments on the design of the proposed monitoring indicators for intraday liquidity management and on the supporting regulatory reporting regime. Whilst the proposed indicators apply specifically to internationally active banks, they have been designed equally to apply to all banks, including those that access payment and settlement systems indirectly via the services of a correspondent bank.
The consultative document sets out proposals for:
- The definition of intraday liquidity and the elements that constitute a bank’s intraday liquidity sources and needs.
- The detailed design of the proposed monitoring indicators of a bank’s intraday liquidity risk in normal times.
- Proposed stress scenarios.
- Key application issues.
- The proposed reporting regime.
The deadline for comments on the consultative document is 14 September 2012.
View Consultative document - Monitoring indicators for intraday liquidity management, 2 July 2012
FSA to adjust bank liquidity guidance in light of improved Bank of England facilities
The FSA has issued a press release which states that it will adjust its guidance to certain banks on appropriate levels of liquid asset buffers. For banks that hold pre-positioned collateral at the Bank of England, the FSA will take some account of their potential access to central bank liquidity when formulating its guidance on appropriate liquidity buffers. Details will be discussed with banks on an individual basis.
View FSA to adjust bank liquidity guidance in light of improved Bank of England facilities, 29 June 2012
Back to top
Clearing and settlement
Second mini-consultation on adaptation to cross-CSD settlement in T2S
On 1 March 2012, the European Central Bank (ECB) issued a mini-consultation on the adaptation to cross-CSD settlement in T2S. The mini-consultation focused on the following topics: registration processing, tax processing, central security depository (CSD) ancillary services, portfolio transfers, bond stripping and reconstitution and account segregation by currency. The mini-consultation closed on 30 April 2012.
The ECB has now issued a second mini-consultation on the adaptation to cross-CSD settlement in T2S. This mini-consultation focuses on the following: CCP instructions, issuance practices, message fields and non-standardised securities. The deadline for responding to this mini-consultation is 14 September 2012.
View Second mini-consultation on adaptation to cross-CSD settlement in T2S, 28 June 2012
15 more CSDs sign the T2S framework agreement
The European Central Bank has issued a press release stating that a further fifteen central securities depositories have announced that they will participate in the T2S project.
View Fifteen additional central securities depositories sign the T2S framework agreement, 3 July 2012
Council adopts rules on derivatives
The Council of the European Union (the Council) has adopted the European Market Infrastructure Regulation (EMIR). Adoption of EMIR follows an agreement reached with the European Parliament. The Council accepted all amendments voted by the European Parliament at first reading on 3 July 2012.
EMIR will apply from the end of 2012 and is intended to implement commitments made by G20 leaders in September 2009 in response to the global economic crisis:
“[to have] all standardised OTC derivatives traded on exchanges or electronic trading platforms, where appropriate, and cleared through central counterparties by the end of 2012 at the latest. OTC derivative contracts should be reported to trade repositories...”
View Council adopts rules on derivatives, 4 July 2012
View OTC Oracle, 5 July 2012
Back to top
Collective investment schemes
Proposal for UCITS V
The European Commission has published a legislative proposal that amends the current UCITS Directive. The Commission's proposed amendments to the UCITS Directive (known as UCITS V) focus on three areas:
- Clarification of the UCITS depositary's functions and improvements to provisions governing their liability, should assets be lost in custody.
- The introduction of rules on remuneration policies that must be applied to key members of the UCITS managerial staff.
- Harmonisation of the minimum administrative sanctions that are available to supervisors in case of key violations of the UCITS rules, including common standards on the level of administrative fines.
The draft legislation will now go to the European Parliament and the Council of the European Union for their consideration under the co-decision procedure. Once they reach agreement, Member States usually have two years to transpose the provisions into their national laws and regulations, meaning that the new rules could apply by the end of 2014.
View Proposal for a Directive amending Directive 2009/65/EC, 3 July 2012
FSCS statement on reporting of annual eligible income from CIS
The Financial Services Compensation Scheme (FSCS) has published a statement which explains how it has been advising firms to report income from collective investment schemes under the current rules. This is so that firms know how to report in the future and to explain the consequences of this for the 2010/2011 levy review process. The FSCS has also published a set of frequently asked questions alongside the statement.
In the statement the FSCS states that if a firm did not apply to revise its 2010/11 tariff data by 31 March 2012 and now wishes to apply to have a request to revise its tariff data considered it should write to the FSCS by 31 August 2012.
View FSCS interim levy - Tariff issues: FSCS statement on reporting of annual eligible income from collective investment schemes, 29 June 2012
View FSCS interim levy - Tariff issues: FSCS statement on reporting of annual eligible income from collective investment schemes Q&As, 29 June 2012
Back to top
European Commission publishes new Directive to regulate sales of insurance products
The European Commission has published a draft of the Directive which will replace the Insurance Mediation Directive (2002/92/EC) or IMD. The revised Directive on mediation or “IMD2” as it is known, makes a number of significant changes to the regulation of sales of insurance products in the EU.
The draft IMD2 tackles the issues of scope of regulation (who should be regulated and who not), conflict of interests and remuneration transparency (what are customers paying for and who are they paying), quality of advice and information for customers in addition to recognition of professional standards. Headline changes made to regulation in IMD2 include the following:
- The inclusion of direct writers (i.e. insurers and reinsurers selling without the use of intermediaries) and the inclusion of sales through aggregator websites.
- Claims managers, loss adjusters and expert claims appraisers being brought within scope of the regulation (although with limitations on the application of certain requirements of IMD2).
- The introduction of mandatory disclosure of remuneration for life insurance products and a five year on-request disclosure regime for non-life products. After the five year transitional period disclosure of the ‘amount’ or ‘basis’ of remuneration paid to intermediaries will become mandatory for all sales.
- A new definition of insurance mediation namely advising on, proposing or carrying out other work preparatory to the conclusion of contracts of insurance, concluding or assisting in the conclusion of such contracts or assisting in the administration and performance of such contracts, in particular in the event of a claim. Professional management of claims and loss adjusting are now included within the definition of mediation. Notably, introducing is no longer within this definition so that the provision of information on an incidental basis to potential policyholders is not in scope.
- The creation of a distinction between insurance investment products and other products for the application of certain requirements, for example a requirement to identify, prevent, manage and disclose conflicts of interest when selling insurance investment products.
- IMD2 recognises the practice and risks of bundling products and requires certain information disclosure on sale of bundles. Tying is outlawed.
- The recognition of a lower risk posed by those offering insurance products on an ancillary basis to their main activity.
IMD2 will follow a Lamfalussy structure and will therefore contain certain Level 2 measures including detailed professional requirements for intermediaries, criteria for determining conflicts of interest and standards of customer information in investment products. Much of the detail will be contained in the Level 2 measures, therefore, only when these are published will firms be able to assess the true impact of the requirements.
The Directive will have to be approved by the European Parliament and the Council before adoption into law during 2013, with entry into force most likely in 2015.
View Draft Insurance Mediation Directive, 3 July 2012
Feedback Statement 12/2: Solvency II and linked long-term insurance business
In Consultation Paper 11/23: Solvency II and linked long-term insurance business (CP11/23) the FSA set out proposals for changes to its rules and guidance on the operation of unit-linked and index-linked insurance policies, to ensure they comply with the requirements of the Solvency II Directive. These rules and guidance are found in chapter 21 of the Conduct of Business sourcebook.
The FSA has now published Feedback Statement 12/2: Solvency II and linked long-term insurance business (FS12/2). In FS12/2 the FSA summarises the comments received on CP11/23 and sets out its response to them.
The final amended Handbook text will be included in a further Policy Statement on Solvency II, which will include all the Handbook changes consulted on as part of implementing the Solvency II Directive. The FSA states that it expects to publish this in the near future.
View Feedback Statement 12/2: Solvency II and linked long-term insurance business, 29 June 2012
Back to top
FG12/16: Assessing suitability: Replacement business and centralised investment propositions
The FSA has published Finalised Guidance 12/16: Assessing suitability: Replacement business and centralised investment propositions (FG12/16).
In preparation of the Retail Distribution Review (RDR) many firms are changing their business model and choosing to offer a centralised investment proposition (CIP). This includes portfolio advice services, discretionary investment management and distributor-influenced funds.
In FG12/16 the FSA outlines its findings of a thematic review which assessed how firms' changing their business model has affected consumers. The FSA also identified suitability failings of wider relevance relating to replacement business. FG12/16 considers:
- The factors firms must consider when deciding whether a recommendation to switch a client’s investment is in the client’s best interests.
- The steps firms should take when designing or adopting a CIP.
- The FSA’s expectations of firms to ensure that individual recommendations to invest into a CIP are suitable.
View FG12/16: Assessing suitability: Replacement business and centralised investment propositions, 5 July 2012
Handbook Notice 121
The FSA has published Handbook Notice 121 which introduces the FSA Handbook and other material made by the FSA Board under its legislative powers on 20 and 28 June 2012.
On 20 June 2012, the FSA Board made changes to the Prospectus Rules, Listing Rules and Disclosure and Transparency Rules, in order to implement the changes to the Prospectus Directive which were introduced by an Amending Directive.
On 28 June 2012, the FSA Board made changes to the Handbook in four instruments which:
- Make minor administrative corrections to the Handbook, none of which represents any change in FSA policy.
- Update the appropriate qualifications list in the Training and Competence sourcebook.
- Amend the liquidity rules in the Prudential sourcebook for Banks, Building Societies and Investment Firms and the Supervision manual.
- Implement changes to the Prospectus Rule sourcebook due to the Prospectus Regulation being amended by the European Commission.
There were no changes to material outside the Handbook in June.
View Handbook Notice 121, 29 June 2012
Policy development update (no.148)
The FSA has published its latest Policy development update (no. 148). The update contains:
- A brief summary of FSA publications issued since the last edition.
- Information about recent other FSA publications including guidance consultations and finalised guidance.
- An updated timetable for forthcoming FSA publications. The FSA intends to publish in Q3 2012 a number of papers including a Consultation Paper on CRD IV and a Policy Statement to Consultation Paper 11/31: Mortgage Market Review - Proposed package of reforms.
View Policy development update no.148, 29 June 2012
Back to top
Council Presidency paper on outstanding issues on MAD review
The Presidency of the Council of the European Union has published a paper which describes the outstanding issues concerning the proposal for a Directive of the European Parliament and of the Council on criminal sanctions for insider dealing and market manipulation (the proposed Directive).
The paper describes certain specific issues relating to:
- Description of the offences, in particular the need to clarify the description of the administrative offences in the proposed Regulation on insider dealing and market manipulation (MAR) and the criminal offences in the proposed Directive.
- The principle of ne bis in idem, in terms of criminal and administrative proceedings being brought for the same act.
- Privilege against self incrimination. This issue concerns, in particular, the exercise of investigative powers by the national authorities competent to ascertain the administrative offences covered by MAR, when these concern directly the person (or persons) suspected of the infraction.
- Approximation of penalties. The Presidency states that on the basis of informal contacts with the European Parliament, the approximation of penalties will, with all probability, form part of a specific proposal for amendment of the proposed Directive.
View Council Presidency paper Proposal for a Directive of the European Parliament and of the Council on criminal sanctions for insider dealing and market manipulation - outstanding issues, 4 July 2012
Back to top
FATF report to G20 leaders
The Financial Action Task Force (FATF) is an independent inter-governmental body that develops and promotes policies to protect the global financial system against money laundering, terrorist financing and the financing of proliferation of weapons of mass destruction. The FATF Recommendations are recognised as the global anti-money laundering and counter-terrorist financing standard.
The FATF has now published a report which it presented to G20 leaders for their summit at Los Cabos, Mexico.
In the report the FATF states that it is seeking from G20 leaders a commitment to the full, effective and consistent implementation of the new FATF Recommendations which were published in February 2012.
The report provides a summary of what the new standards mean and an update on other ongoing work of the FATF which is of particular relevance to the G20 agenda in the areas of high-risk jurisdictions, corruption, tax and financial inclusion.
View Report to G20 leaders by the FATF - Los Cabos summit, 28 June 2012
FATF report - Specific risk factors in laundering the proceeds of corruption
The Financial Action Task Force (FATF) has published a report which is intended to assist reporting institutions - financial and non financial - that have a legal obligation to file suspicious transaction reports, or otherwise engage in anti-money laundering / counter terrorist financing due diligence.
The report seeks to help these financial institutions to better analyse and better understand specific risk factors that may assist them in identifying situations posing a heightened risk of corruption-related money laundering risk. In particular the report seeks to answer the following question: Are there specific types of business relationships, customers or products which should lead a reporting institution to pay particular attention to the risk of corruption-related money laundering?
View FATF report - Specific Risk Factors in Laundering the Proceeds of Corruption, 2 July 2012
Back to top
Regulation and compliance
European Commission adopts technical standards on Regulation on short selling and certain aspects of credit default swaps
The European Commission has adopted the regulatory and implementing technical standards on the Regulation on short selling and certain aspects of credit default swaps.
An implementing Regulation sets out technical standards concerning the means for public disclosure of net positions in shares and the format of the information to be provided to the European Securities and Markets Authority (ESMA).
The Implementing Regulation will enter into force on the day following its publication in the Official Journal of the European Union (the Official Journal) and shall apply from 1 November 2012 except for the provisions on principal trading venue, which apply from the date of entry into force.
The Delegated Regulation on regulatory technical standards sets out the details of the information on short positions that must be notified to competent authorities and disclosed to the public. It also specifies what information competent authorities must report on a quarterly basis to ESMA, and the method of calculation of turn over for ESMA to determine the principal trading venue of shares.
The Delegated Regulation is subject to a one-month objection period by the European Parliament and the Council of the European Union, which can be extended by one-month. It will only enter into force provided that neither co-legislator objects, at the end of this period and the day following publication in the Official Journal.
View Short selling: Commission adopts technical standards, 29 June 2012
View Short selling: technical standards - Frequently asked questions, 29 June 2012
View Text of Implementing Regulation (provisional version), 29 June 2012
View Text of Delegated Regulation (provisional version), 29 June 2012
Commission adopts Delegated Act and technical standard on Regulation on short selling and certain aspects of CDS
The European Commission has adopted a Delegated Regulation which sets out important technical rules that are needed to ensure the uniform application and enforcement of the Regulation on short selling and certain aspects of credit default swaps (the Regulation).
Key issues addressed in the Delegated Regulation include:
- Certain key terms in the Regulation, such as what it means to “own” or “hold” a share for the purposes of the Regulation.
- Technical details of how to calculate significant short positions in shares or sovereign debt, which are to be notified to the regulator or disclosed to the public.
- How net short positions are to be calculated and reported by funds managing several funds and by different entities within a group company, in order to avoid circumvention of the transparency rules in the Regulation.
- The details of the cases in which a sovereign credit default swap (CDS) is considered to be legitimate hedging and therefore deemed “covered” for the purposes of the ban on uncovered sovereign CDS.
- The thresholds at which significant short positions in the sovereign debt of Member States and other sovereign and EU issuers have to be notified to regulators.
- The threshold for the significant decline in the liquidity of a sovereign debt market which allows a regulator to temporarily suspend restrictions on short selling of sovereign debt.
- The thresholds for significant price falls for financial instruments other than liquid shares that can trigger a short term suspension of short selling by national regulators.
- The meaning of adverse events, and developments that can trigger temporary restrictions on short selling by national regulators and, in exceptional cross-border situations, by the European Securities and Markets Authority.
The Commission has also endorsed a Delegated Regulation on regulatory technical standards for the Regulation. This sets out the technical details of how to calculate the significant fall in value which can trigger a short term suspension of short selling in certain financial instruments.
View Short selling: Commission adopts Delegated Act detailing rules on the ban on uncovered sovereign credit default swaps and short sales of shares and sovereign debt, 5 July 2012
View Commission Delegated Regulation on short selling and credit default swaps - Frequently asked questions, 5 July 2012
Sanctions for the directors of failed banks
HM Treasury has published a Consultation Paper concerning sanctions for the directors of failed banks.
An important part of the Government’s overall approach to reforming banks is to ensure that bank directors and senior management take full account of the downside risks for their institutions. The Consultation Paper sets out possible measures to strengthen the accountability of bank directors.
- The Government proposes to introduce a “rebuttable presumption” that the director of a failed bank is not suitable to be approved by the regulator to hold a position as a senior executive in a bank. The necessary legislation would be included in the Financial Services Bill.
- The Government is also considering the introduction of criminal sanctions for serious misconduct in the management of a bank. If this proposal were adopted the Government would include the necessary legislation in a separate Bill during the present Parliament.
The deadline for responding to the Consultation Paper is 30 September 2012.
View Sanctions for the directors of failed banks, 3 July 2012
FSA agrees settlement with four banks over interest rate hedging products
Interest rate hedging products range in complexity from comparatively simple ‘caps’ that fix an upper limit to the interest rate on a loan, through to the more complex derivatives such as ‘structured collars’ which fix interest rates within a band but introduce a degree of interest rate speculation.
Interest rate hedging products can protect bank customers against the risk of interest rate movements and can be an appropriate product when properly sold in the right circumstances.
Over the past two months the FSA has conducted a review of interest rate hedging product sales at the UK’s four major retail banks. The review has found serious failings in the sale of interest rate hedging products to small and medium sized businesses. Failings included:
- Poor disclosure of exit costs.
- Failure to ascertain the customers’ understanding of risk.
- Non-adviced sales straying into advice.
In order to provide a swift resolution to customers the FSA has reached agreement with the banks involved with the review to provide appropriate redress where mis-selling has occurred. The agreement reached involves the banks to:
- Provide fair and reasonable redress to non-sophisticated customers who were sold structured collars on or after 1 December 2001.
- Review sales of other interest rate hedging products (except caps or structured collars) for non-sophisticated customers on or after 1 December 2001.
- Review the sale of caps if a complaint is made by a non-sophisticated customer during the review. Complaints from sophisticated customers will not be subject to the past business review but will be dealt with in accordance with the bank’s usual complaints handling procedures.
The CEO’s of the banks involved have personally confirmed that they will have responsibility for oversight of this exercise within their bank and will ensure that complainants are treated fairly. Furthermore the banks involved in the review have agreed to cease marketing structured collars to retail clients.
The FSA will be contacting other banks who have sold interest rate hedging products with a view to determining whether similar practices have occurred and, if so, agreeing a similar course of action.
View FSA agrees settlement with four banks over interest rate hedging products, 29 June 2012
View FSA update - Interest rate hedging products, 29 June 2012
FSA Annual Public Meeting: Chairman’s speech
The FSA has published a speech by Lord Turner (FSA Chairman) given at the FSA Annual Public Meeting.
At the start of his speech Lord Turner states that the financial crisis made it clear that the pre-crisis system of prudential regulation had been severely deficient in three important respects:
- Woefully deficit rules on bank capital and liquidity.
- A deficient and under-resourced approach to prudential supervision.
- A dangerous vacuum, an “underlap” between the Bank of England and the FSA, an absence of systemic analysis and macro-prudential policy tools.
Lord Turner then states that at the core of good prudential supervision should be a focus on: capital, liquidity and asset quality. Such focus was previously lacking, and the resource dedicated to the supervision of the major banks was insufficient. In light of this since the beginning of 2008, the FSA has implemented a radical change in its approach to prudential supervision. This has led to a fundamental change both in the regulation and in the supervision of individual banks.
Lord Turner then discusses regulation on the conduct side and states that one crucial determinant of whether the financial services industry meets customer needs, selling appropriate products to appropriate customer segments, is the structure of incentives. He notes that the FSA has paid increasing attention to the structure of incentives. For example the Retail Distribution Review has been designed to remove commission bias in the financial adviser space. In addition the FSA is consulting on policy in relation to the payments to platform service providers by fund managers.
According to Lord Turner better regulated incentive structures and a more efficient approach to early intervention will always need to be supported by the credible deterrence of potential enforcement action. Given this over the last five years the FSA has significantly increased the effectiveness and the robustness of its enforcement activities. Lord Turner then discusses the recent LIBOR scandal stating that it is a huge blow to the reputation of the banking industry.
Lord Turner then refers to supervision in the wholesale space stating that in the past the FSA has tended to adopt a somewhat caveat emptor approach to wholesale conduct issues. However, the issue for the proposed Financial Conduct Authority (FCA) to consider is how far the caveat emptor approach is sufficient. Lord Turner states: “We will therefore need to think carefully how far we should shift our past approach to the supervision of wholesale conduct, and what resources and skills we need to be more effective in this area. This is an issue currently under discussion between the executive and the Board, and one on which we will comment in the FCA approach document which we will publish in Autumn.”
In the final part of his speech Lord Turner discusses the timing of the transition from the FSA to twin peaks regulation. He states that the current estimate is that “legal cut over” will occur in April 2013. However, whether this is the date depends on the Parliamentary timetable up to Royal Assent and the time needed thereafter for secondary legislation and regulations.
View FSA Annual Public Meeting: Chairman’s speech, 3 July 2012
Credible deterrence: here to stay
The FSA has published a speech by Tracey McDermott (Acting Director of the FSA Enforcement and Financial Crime Division) entitled Credible deterrence: here to stay. In this speech McDermott discusses what the FSA Enforcement Division has been up to in the past two years, and then briefly discusses what firms can expect from enforcement in the future.
At the start of her speech McDermott makes the general comment that the job of enforcement is to help the FSA change behaviour by making it clear that there are real and meaningful consequences for those firms or individuals who do not play by the rules.
She then discusses enforcement action over the past two years noting that:
- The FSA has levied in excess of £94 million in fines in cases relating to the retail sector, £5 million of those on individuals. The FSA has also prohibited 96 individuals in relation to misconduct relating to retail customers.
- Formal disciplinary action is only part of the story. A key aspect of the FSA’s work is securing appropriate redress for consumers who have been harmed by misconduct. The FSA estimates that over the past two years redress paid by authorised firms solely in connection with enforcement related matters is in the region of £290 million.
When discussing consumer protection McDermott also discusses the future stating that:
- Effective enforcement is only part of the answer but that it needs to get further up the chain of command. It needs to look increasingly at those in senior management who fail to recognise and manage the risks their firm is running, who fail to control the way their products are sold, and who fail to ensure that the interests of consumers are at the forefront of the minds of those designing, and working out profit projections and sales channels for new products.
- The FSA needs to be quicker to respond to emerging issues and to intervene earlier to minimise consumer detriment.
- The FSA needs to have a low tolerance for firms that constantly bump along the bottom. It will be much more prepared to intervene and limit business where each time it raises an issue or takes action against a firm when it sees the firm simply fixing the immediate problem but failing to think about the underlying causes.
McDermott also mentions that whilst consumer protection is a key part of the FSA’s responsibilities, it is not its only objective. The FSA and then the Financial Conduct Authority (FCA) will continue policing the wholesale as well as the retail markets and will take action where misconduct in those markets threatens confidence in them or undermines their integrity.
In particular the FSA has continued to publish a steady stream of market abuse cases in the last two years and McDermott draws out three themes from those cases:
- The role of professionals in stamping out misconduct in markets. In the Greenlight case, the FSA not only took action against David Einhorn, who directed the trading, but also against Alexander Ten Holter, the compliance officer who failed to recognise the risk that inside information had been disclosed.
- Some of the cases concern people who are not setting out to break the rules and in some cases were attempting, albeit ineptly, to stay within the letter rather than the spirit of the law. An example of this is the Kyprios case.
- Several cases have applied the new penalties policy, which the FSA introduced in March 2010. The changes to the penalties framework gave the FSA a minimum starting point of £100,000 for individuals who commit serious market abuse.
McDermott also discusses financial crime and in the last two years the FSA has imposed large penalties on firms that have failed to meet the requirements. McDermott warns that the imposition of large fines will be a continuing trend for the FCA where enforcement will work closely with supervision to ensure that where industry wide issues are identified swift action can be taken.
View Credible deterrence: here to stay, 2 July 2012
The FCA - our vision for enforcement
The FSA has published a speech by Martin Wheatley (CEO designate of the Financial Conduct Authority (FCA)). The speech is entitled The FCA - our vision for enforcement.
At the start of his speech Wheatley discusses the transition from the FSA to twin peaks supervision and briefly covers the FCA’s product intervention powers. In relation to these powers Wheatley makes the point that they will not always be the first thing the FCA reaches for. However, he also warns that the powers are not window dressing and will be used when needed.
Wheatley then discusses putting consumers at the heart of what the FSA does. In particular he mentions that the FSA will be focussing on how firms develop their products, their culture, how they incentivise their staff, and how decisions are made at the highest level.
In relation to the FSA’s approach to enforcement Wheatley emphasises that credible deterrence is here to stay. He also highlights two important points:
- The FSA will continue to use the full range of its existing enforcement tools, which include pursuing criminal prosecutions where appropriate.
- There will be some changes to the way enforcement is delivered by the FCA. The FCA will be more prepared to use formal tools including enforcement action to support its emphasis on intervening earlier to stop problems occurring.
At the end of his speech Wheatley gives his audience three main messages:
- The FCA’s core purpose is to make sure markets work well so consumers get a fair deal - to do that it needs to have not only new powers, but a new supervisory approach and a new culture.
- Key to the success of this approach is ensuring that good consumer outcomes are built into the business models of regulated firms.
- While much of what the FSA is doing is changing, its enforcement approach and credible deterrence agenda is here to stay.
View The FCA - our vision for enforcement, 2 July 2012
Credit Union newsletter (issue 15)
The FSA has published the latest edition of its Credit Union newsletter. This is the first newsletter that the FSA has published since taking over the regulation of over 170 credit unions in Northern Ireland. The newsletter contains articles covering a number of issues including:
- Regulatory reform and the splitting of the FSA.
- The Legislative Reform Order - starting a specified activity, notifications and reporting.
- Getting things right - lending limits and subordinated loans.
- Single customer view reporting requirements.
- Recent credit union supervision team activities.
View Credit Union newsletter (issue 15), 29 June 2012
Report on the progress of the Equitable Life Payment Scheme - July 2012
The Equitable Life Payment Scheme (the Scheme) has published a progress report.
The Scheme states that it has continued to make significant progress and as of 30 June 2012, it had made payments to 288,823 individual policyholders totalling £277,727,668. This is nearly two thirds of all individuals due a payment from the Scheme.
The report adds that over the next 6 months the Scheme will focus on:
- Making payments to the remaining eligible individual policyholders who are due a payment.
- Making the second annual payment to with-profits annuitants via BACS.
- Continuing to contact the trustees and administrators of group schemes to facilitate the processing of payments to these policyholders.
- Continuing the process of contacting the estates of deceased policyholders, and making payments to those estates where possible.
The Scheme will make a further progress report in early 2013.
View Report on the progress of the Equitable Life Payment Scheme - July 2012, 3 July 2012
Back to top
Commission publishes legislative proposals on PRIPS
The European Commission has published a legislative proposal, in the form of a draft Regulation, concerning packaged retail investment products (PRIPS). The proposal is intended to improve the quality of information that is provided to consumers when considering investments.
The Commission's proposal aims to inform consumers in a format easy to understand by introducing a new standard for product information, one that is short and plain-speaking, and consumer-friendly. This document is called the 'Key Information Document' (KID). The proposal foresees that every manufacturer of investment products (e.g. investment fund managers, insurers, banks) will have to produce such a document for each investment product.
Each KID will provide information on the product's main features, as well as the risks and costs associated with the investment in that product. Information on risks will be as straight-forward and comparable as possible, without over-simplifying often complex products. The KID will make clear to every consumer whether or not they could lose money with a certain product and how complex the product is.
The KIDs will follow a common standard as regards structure, content, and presentation. In this way, consumers will be able to use the document to compare different investment products and ultimately choose the product that best suits their needs.
The products for which a KID will be required include all types of investment funds, insurance-based investments and retail structured products, in addition to private pensions.
The Commission's proposal will now go to the European Parliament and the Council of the European Union for their consideration under the co-decision procedure. Once they reach agreement, detailed work will be done by the Commission with the input of experts, consumers and stakeholders on the implementing measures. The full proposal could be expected to be in place by the end of 2014.
View Proposal for a Regulation on key information documents for investment products, 3 July 2012
View Impact Assessment on a proposal for a Regulation on key information documents for investment products, 3 July 2012
View FAQs for Key Information Documents for packaged retail investment products, 3 July 2012
RDR newsletter (issue 6)
The FSA has published the latest issue of its RDR newsletter (issue 6).
In this newsletter the FSA focuses on:
- The recent Consultation Paper on platforms (Consultation Paper 12/12: Payments to platform service providers and cash rebates from providers to consumers).
- Information about gap-fill.
- The FSA’s position on post RDR fund switches within pensions.
- Information on independent and restricted advice requirements.
View RDR newsletter (issue 6), 28 June 2012
Ombudsman news (issue 103)
The Financial Ombudsman Service (FOS) has published the latest edition of its newsletter, Ombudsman news (issue 103). In this edition of Ombudsman news the FOS covers:
- Complaints involving whole-of-life policies.
- A snap shot of complaint figures for the first quarter of the 2012/2013 financial year.
- Mortgages - arrears and hardship.
View Ombudsman news (issue 103), 4 July 2012
Back to top
ESMA questions and answers on prospectuses (15th updated version)
The European Securities and Markets Authority (ESMA) has published a further updated version of its paper containing questions and answers on prospectuses.
In this version ESMA provides a new question (question 80) dealing with the format of the prospectus summary (Annex XXII of the Commission Delegated Regulation (EU) No 486/2012 of 30 March 2012).
View ESMA questions and answers on prospectuses (15th updated version), 2 July 2012
Back to top
Invitation to buy-side regulatory workshop
The coming months will see the buy-side readying itself for a number of key regulatory developments, both in the UK and in Europe.
To help asset managers, custodians, administrators and other buy-side players prepare for the new regulatory requirements to be introduced by the Alternative Investment Fund Managers Directive (AIFMD), the review of the Markets in Financial Instruments Directive (the MiFID Review), the Regulation on OTC Derivatives, Central Counterparties and Trade Repositories (EMIR) and other initiatives, Norton Rose LLP’s financial services group is running its 2012 workshop on managing regulatory change.
This workshop will take place on Thursday 12 July 2012 at 2.30pm. It is designed to look at the practical issues for the industry, identifying the key regulatory changes and how you can plan for and implement them.
If you can not access this link, please copy and paste the address below into your web browser.
40 minute briefing series - May to September 2012
We are pleased to announce that the invitation for the next series of 40 minute briefings is now available.
If you can not access this link, please copy and paste the address below into your web browser.
Financial services regulatory products: Phoenix, Pegasus, OTC Oracle and AIFMD expert
Having difficulty keeping up with the pace of the Government's regulatory reform proposals?
Phoenix is our new financial services product that is an online resource designed to help those who are starting their UK regulatory reform projects. It sets out the latest developments and timing of the Government's reform programme plus the key resource papers from the Treasury, Bank of England, FSA and the ICB. The latest Norton Rose LLP briefing notes, videos and webcasts are also available.
The Phoenix main page can be found here.
Behind the curve on the MiFID review?
We have launched a second online resource product called "Pegasus". Pegasus is a new financial services product that is an online resource designed to assist those starting work on MiFID review projects.
The Pegasus main page can be found here.
G20 commitment on clearing
Our third online resource product is OTC Oracle. OTC Oracle is designed to assist clients track the implementation of the G20 commitment to have all standardised OTC derivatives traded on exchanges or electronic trading platforms, where appropriate, and cleared through CCPs by the end of 2012. OTC Oracle sets out the latest developments and timing plus the key resource papers from each of the EU, Canada, Hong Kong and Singapore.
The OTC Oracle main page can be found here.
Our fourth online resource product is AIFMD expert. AIFMD expert is designed to assist clients and contacts of Norton Rose LLP when conducting their projects on the Alternative Investment Fund Managers Directive. It sets out the latest developments and timing of the AIFMD plus the key resource papers from the Commission, ESMA and the FSA. Clients and contacts are also given access to the latest Norton Rose LLP briefing notes, slides and webcasts.
The AIFMD expert main page can be found here.
Financial services Fireside Fridays
Please click on the links below:
Financial services & markets webinars
We are currently experiencing significant changes in the European financial services regime that could have a particular impact on both financial firms and non-financial firms that trade energy, commodities and emissions. To assist our clients we have produced a series of short webinars which will look at the forthcoming regulatory changes and their impact on the financial regulation of trading.
Financial services webcasts
Please click on the links below:
Back to top