Introduction
Welcome to the latest edition of our financial services updater.
Highlights this week include:
- Consultation Paper 12/22: Client assets regime: EMIR, multiple pools and the wider review
- FSA launches initiative to outlaw flawed sales bonuses that encourage mis-selling
To view know-how corner our video summary concerning this week's highlights please click here.
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.
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Banking
Towards a genuine economic and monetary union
The European Commission has published a speech given by Olli Rehn (Vice-President of the European Commission) entitled, Towards a genuine economic and monetary union.
In his speech Mr Rehn states that the further development of EU banking union should be seen as a top priority and that the Commission wants to move without delay in two stages.
The first stage, in line with the Euro Summit statement of 29 June 2012, is that the Commission has been working on a legislative proposal for establishing a Single Supervisory Mechanism (SSM) for euro area banks as a matter of urgency. According to Mr Rehn this will be presented in less than two weeks, in order to be finalised by the end of the year. When presenting the legislative proposals for setting up a SSM, the Commission will also adopt a Communication which sketches out the roadmap towards a fully fledged banking union.
At the second stage the Commission intends to make progress to build a Common Deposit Guarantee Scheme for the protection of depositors, as well as for a single European recovery and resolution framework.
View Towards a genuine economic and monetary union, 3 September 2012
Commission staff working document providing a follow-up to the Recommendation on access to a basic payment account
Earlier this year the European Commission published a Recommendation on access to a basic payment account.
The purpose of the Recommendation was to ensure that consumers can open and use a basic payment account with a set of essential payment services, free of charge or at a reasonable charge, regardless of their place of residence in the EU or financial situation. Member States were invited to take the necessary measures to ensure the application of the Recommendation at the latest six months after its publication.
The Commission has now published a staff working document which provides a factual overview of the measures currently in place in Member States, and assesses the extent to which Member States are complying with the Recommendation, in particular with regard to:
- The right to open and use an account.
- The features of such an account.
- The associated charges.
View Commission staff working document: National measures and practices as regards access to basic payment accounts - Follow-up to the Recommendation on access to a basic payment account, 22 August 2012
Treasury Committee report: Access to cash machines for basic account holders
The House of Commons’ Treasury Select Committee has published a report on access to cash machines for basic bank account holders.
Basic bank accounts are available to consumers who may not otherwise meet the minimum requirements to open a bank account because they have no credit history or a poor credit history. Basic bank accounts do not offer as many features as conventional personal current accounts (for example, basic bank accounts typically do not offer overdrafts and may not offer a debit card). However, basic bank account holders can receive payments directly into their account (including wages, State pensions and tax credits) and set up direct debits or standing orders to pay bills or make other payments.
At present, some UK banks currently limit access to cash machines for their basic bank account holders. The report notes that the main purpose behind the development of the basic bank account initiative was to improve financial inclusion and recommends to the banks that such restrictions be removed.
View Treasury Committee report: Access to cash machines for basic account holders, 31 August 2012
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Capital adequacy
Frequently asked questions on Basel III monitoring
The Basel Committee on Banking Supervision has published a revised version of its frequently asked questions on Basel III monitoring.
Questions which have been added since the previous version of the FAQs are shaded in yellow and questions which have been revised are shaded in red. There are answers to two new questions which both relate to the “General Info” worksheet.
View Frequently asked questions on Basel III monitoring, 3 September 2012
ESAs consult on the application of the capital calculation methods for financial conglomerates
The Joint Committee of the European Supervisory Authorities (the European Banking Authority, the European Insurance and Occupational Pensions Authority and the European Securities and Markets Authority) has issued a Consultation Paper which contains a draft Regulatory Technical Standard (RTS) which are intended to ensure that institutions that are part of a financial conglomerate apply the appropriate calculation methods for the determination of required capital at the level of the conglomerate.
The calculation methods are based in particular on the following elements:
- Elimination of multiple gearing.
- Elimination of intra-group creation of own funds.
- Transferability and availability of own funds.
- Coverage of deficit at financial conglomerate level having regard to definition of cross-sector capital.
The Consultation Paper covers three technical calculation methods being the:
- Accounting consolidation method.
- Deduction and aggregation method.
- Combination of the above two methods.
The deadline for responding to the Consultation Paper is 5 October 2012.
The Consultation Paper is based on the draft Capital Requirements Regulation and draft Capital Requirements Directive (recast) as proposed by the European Commission (together the CRD IV) on 20 July 2011. The proposals may be subject to further changes, following the consultation and also the final adoption of the CRD IV. The RTS shall be submitted to the European Commission by 1 January 2013.
View ESAs consult on the application of the capital calculation methods for financial conglomerates, 31 August 2012
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Clearing & settlement
Consultation Paper 12/22: Client assets regime: EMIR, multiple pools and the wider review
The FSA has published Consultation Paper 12/22: Client assets regime: EMIR, multiple pools and the wider review (CP12/22).
CP12/22 is a combined Consultation Paper and Discussion Paper which consults on the FSA’s client assets regime to adhere to the European Market Infrastructure Regulation (EMIR), proposes to introduce a change in the client money rules applicable to investment firms and opens a discussion on the wider regime.
CP12/22 has three parts:
- Part I discusses segregation and porting measures in articles 39 and 48 of EMIR and consequential changes to the FSA‘s Client Assets sourcebook (CASS). Pursuant to EMIR, when a clearing member firm becomes insolvent, the client positions it holds in client accounts at a central counterparty (CCP) and the margin supporting those positions, may be referred to another client account held by a back-up clearing member. This process is known as porting. Under the current CASS rules the insolvency of a firm triggers a primary pooling event. On such an event, all client money is pooled for distribution. To comply with EMIR the FSA is proposing to amend CASS to exclude client money that is held by a clearing member firm in a client transaction account at a CCP from the pooling that occurs if that firm becomes insolvent.
- Part II sets out proposals for introducing multiple pooling, The FSA states that the proposals could result in the most significant changes it has made to the client assets regime in over 20 years. EMIR and the changes proposed in Part I will only allow a CCP to port the margin the clearing member could be holding. To make porting net client transaction accounts a viable option the FSA proposes to introduce ‘client money sub-pools’ into the client assets regime. The proposals will allow firms to operate legally and operationally separate client money sub-pools. This will allow a clearing member firm to operate discrete sub-pools of client money comprising, for example, the margin held in a particular net client transaction account at a CCP and the client money the clearing member holds in relation to that transaction account. Given the advantages that multiple pooling and the potential client demand for such arrangements the FSA is also proposing to make multiple sub-pools available to other types of business. The FSA consults on allowing firms the discretion to create specific sub-pools based, for example, on a class of clients or business lines. The FSA also discusses whether in addition to, or in place of, the discretion to create sub-pools it should require firms to have separate client money sub-pools for example, for retail and non-retail clients or for margined and non-margined business.
- Part III discusses the wider client assets review currently underway, which is focused on getting a better result in the context of client assets in a firm’s insolvency. The objectives of the review are to: (i) improve the speed of return of client assets following the insolvency of an investment firm; (ii) reduce the market impact of an insolvency of an investment firm that holds client assets; and (iii) achieve a greater return of client assets to clients following the insolvency of an investment firm.
The deadline for comments on:
- Part I of CP12/22 is 16 October 2012. The FSA expects to publish a Feedback Statement and final rules in December 2012.
- Parts II and III of CP12/22 is 30 November 2012. In relation to the proposals in Part II the FSA expects to publish feedback and final rules in the first half of 2013. In relation to Part III the FSA expects to publish feedback and consult on proposed rule changes in the first half of 2013.
View Consultation Paper 12/22: Client assets regime: EMIR, multiple pools and the wider review, 6 September 2012
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FSA Handbook
Policy development update no.150
The FSA has published its latest Policy development update (no. 150).
In this update the FSA briefly discusses its publications issued since the last update. This includes Consultation Paper 12/19: Restrictions on the retail distribution of unregulated collective investment schemes and close substitutes and Policy Statement 12/13: Financial resources requirements for Recognised Bodies.
The FSA then describes other recent policy publications including guidance consultations and finalised guidance. Since the last policy development update the FSA has produced one piece of finalised guidance, Finalised Guidance 12/18: Sale and Rent Back Review 2011.
The final part of the update sets out an updated timetable for forthcoming FSA publications. FSA publications in Q3 2012 include:
- Mortgage Market Review: Proposed package of reforms - Policy Statement to CP11/31.
- Consultation Paper on restrictions on the retail distribution of unregulated collective investment schemes and close substitutes.
- Consultation Paper on CASS, EMIR and porting.
- Consultation Paper on the implementation of the Alternative Investment Fund Managers Directive (AIFMD).
- Consultation Paper on proposed amendments to the Listing Rules in relation to the AIFMD, Mineral Companies Eligibility and Minority Shareholders Protections and feedback to CP12/2.
View Policy development update no. 150, 31 August 2012
BBA letter to FSA on client asset sourcebook recovery and resolution
The British Bankers' Association (BBA) has published a letter which it has sent to the FSA concerning the specific interpretation of certain aspects of chapter 10 of the Client Assets sourcebook (CASS 10) including:
- CASS 10.3.1(11) and clarification of whether it is acceptable for firms to include in the CASS resolution pack (CASS RP) either just those agreements for clients where money or assets are actually held or alternatively all agreements for all investment business clients which will include those clients from whom money or assets are held.
- CASS 10.1.16R. The FSA is asked to confirm if it has some concept of materiality in mind in relation to this requirement.
- CASS 10.9.E.(2). The BBA asks for clarification on the circumstances under which a firm can rely on the Special Administration Regulations 2011 to obtain legal certainty that systems provided by third parties will remain operational and accessible after insolvency.
- CASS 10.1.11 R(2). The FSA is asked to clarify whether it is really interested in prompt updating of the CASS RP in response to changes or is actually referring to mistakes.
- CASS 10.2.1R(3). The FSA is asked to clarify the meaning of other agents.'
View BBA letter to FSA on client asset sourcebook recovery and resolution, 3 September 2012
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Insurance
ECON report on Omnibus II Directive
The European Parliament’s Economic and Monetary Affairs Committee (ECON) has published a report that was adopted on the proposed Omnibus II Directive. The report contains a draft European Parliament legislative resolution on the Omnibus II Directive. The text of the resolution sets out amendments to both the Recitals and the Articles. The report also contains an opinion of the European Parliament’s Committee on Legal Affairs which calls on ECON to incorporate two amendments to Article 2 of the Directive.
View ECON report on Omnibus II Directive, 31 August 2012
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Market abuse
Council compromise proposal on MAR
The Presidency of the Council of the European Union has published a new compromise proposal in respect of the draft Regulation on insider dealing and market manipulation.
The cover note to the compromise proposal states that it has been prepared for a working party meeting on 10 September 2012. Additions and changes to the previous Presidency compromise proposal are denoted by bold underlining and the deletions by strikethroughs.
View Proposal for a Regulation of the European Parliament and of the Council on insider dealing and market manipulation (market abuse) - Presidency compromise, 3 September 2012
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Regulation & compliance
Commission services consultation on the regulation of indices
The Commission services has published a Consultation Document which is intended to identify the key issues and shortcomings in the production and use of benchmarks in order to assess the need for any necessary changes to the legal framework to ensure the future integrity of benchmarks.
The Commission services identify a number of areas on which it would welcome stakeholder input:
- Indices and benchmarks: What they are, who produces them and for which purposes?
- Calculation of benchmarks: Governance and transparency.
- The purpose and use of benchmarks.
- Provision of benchmarks by private or public bodies.
- Impact of potential regulation: Transition, continuity and international issues.
The deadline for comments on the Consultation Document is 15 November 2012.
View Consultation Document on the regulation of indices - A possible framework for the regulation of the production and use of indices serving as benchmarks in financial and other contracts, 5 September 2012
Council publishes latest compromise proposals on MIFID review
The Presidency of the Council of the European Union has published compromise proposals on both the proposed Markets in Financial Instruments Directive (recast) and the proposed Regulation on Markets in Financial Instruments (MiFIR).
The compromise proposals have been produced following discussions in meetings of the working party on financial services in July 2012. Latest additions and changes are denoted by bold underlining and deletions by strikethroughs.
View Proposal for a Directive of the European Parliament and of the Council on markets in financial instruments repealing Directive 2004/39/EC of the European Parliament and of the Council - Presidency compromise, 31 August 2012
View Proposal for a Regulation of the European Parliament and of the Council on markets in financial instruments and amending Regulation [EMIR] on OTC derivatives, central counterparties and trade repositories - Presidency compromise, 31 August 2012
European Parliament to consider MiFID review
The European Parliament procedure files for both the draft Markets in Financial Instruments Directive (recast) and the draft Markets in Financial Instruments Regulation indicate that both will be considered in plenary session from 22 to 23 October 2012.
View European Parliament procedure file MiFID (recast), 30 August 2012
View European Parliament procedure file MiFIR, 30 August 2012
The FSA’s role under the Payment Services Regulations 2009: Our approach (October 2012)
In April 2012, the FSA consulted on proposed changes to its approach document on its role under the Payment Services Regulations 2009. The consultation was primarily prompted by the Payment Services Regulations which come into effect on 1 October 2012 and amend the Payment Services Regulations 2009 (the PSRs).
The FSA has now published a blackline version of its amended approach document. The new text in the draft updated approach document includes:
- Paragraphs 3.59 and 3.100 - updates the information on disclosure of spent convictions in the UK.
- Paragraphs 3.77 and 3.102 - clarification that, for the purposes of the PSRs, a virtual office in the UK does not satisfy the condition that the head office and registered office should be in the UK.
- Chapters 3, 4 and 5 - updated to reflect the additional information required of applicants for registration as small payment institutions, those with applications pending and existing small payment institutions.
The FSA invites comments on the draft approach by document by 17 September 2012. It intends to publish the final version in October 2012.
View The FSA’s role under the Payment Services Regulations 2009: Our approach (October 2012), 4 September 2012
View Key publications - The Payment Services Regulations, 4 September 2012
Credit Union newsletter (issue 16)
The FSA has published the latest issue of its Credit Union newsletter (issue 16). In this newsletter the FSA briefly discusses the transition to the Prudential Regulation Authority and Financial Conduct Authority and how it will affect credit unions.
View Credit Union newsletter (issue 16), 3 September 2012
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Retail
FSA launches initiative to outlaw flawed sales bonuses that encourage mis-selling
The FSA has published a speech given by Martin Wheatley, managing director of the FSA and chief executive officer designate of the Financial Conduct Authority (FCA), entitled The incentivisation of sales staff - are consumers getting a fair deal?
The main points in Mr Wheatley’s speech are that:
- The FSA has found that most incentive schemes that it has looked at are likely to drive mis-selling, and this risk is not being properly managed.
- While the FSA will be looking at its rules and also the way it supervises, it expects firms to act now to clean up their act in regard to the FSA’s findings.
- This work will be taken forward by the Financial Conduct Authority (FCA) and it will be taking a closer look at how firms incentivise their staff.
In relation to this last point Mr Wheatley adds:
“From boardroom to point of sale, the behaviour and attitude of financial firms needs to be examined and assessed - especially in terms of what experience and outcomes it offers customers.
This will include pre-emptive regulation that takes a broad and deep look at firms’ businesses individually and across the board. We will look for the bigger issues, find them earlier and deal with them quickly once we spot them.
We will look at how firms make their money, how they pay their staff and whether they are designing, and selling products with customers in mind.
This is a change from the traditional regulatory model, which involved setting standards and then looking back at what firms have done.”
At the same time the FSA has published a guidance consultation which is intended to help firms identify and manage the risks from incentive schemes. The draft guidance sets out ways that firms can comply with the relevant requirements of the FSA Handbook. The FSA expects firms to:
- Properly consider if their incentive schemes increase the risk of mis-selling and, if so, how?
- Review whether their governance and controls are adequate.
- Take action to address any inadequacies - this might involve changing their governance and/or controls, and/or changing their schemes.
- Where risks cannot be mitigated take action to change their schemes.
- Where a recurring problem is identified, investigate, take action and pay redress where consumers have suffered detriment.
The deadline for responding to the guidance consultation is 31 October 2012.
View FSA launches initiative to outflow flawed sales bonuses that encourage mis-selling, 5 September 2012
View Risks to customers from financial incentives, 5 September 2012
View The incentivisation of sales staff - are consumers getting a fair deal?, 5 September 2012
Mortgages Product Sales Data - Trend Report 2005 - 2012
Since 1 April 2005, product providers have been required to provide the FSA with transaction-level data on all sales of regulated mortgage contracts, retail investment products and certain pure protection products to retail and private customers.
In December 2005 the FSA made a commitment to the industry to publish aggregate product sales data. The FSA first published data in June 2007 covering the period April 2005 to March 2007. The last annual trends report was published in August 2011.
The FSA has now published its latest product sales data trend report for mortgages which covers seven years of data (from Q2 2005 until Q1 2012). The FSA’s analysis in the report focuses on those developments it deems most insightful when interpreting the main trends in the mortgage market.
View Mortgages Product Sales Data - Trend Report 2005 - 2012, 31 August 2012
Pure protection contracts product sales data - Trend report 2005 -2012
The FSA has now published its latest product sales data trend report for pure protection contracts which covers seven years of data (from Q2 2005 until Q1 2012). The FSA’s analysis in the report focuses on those developments it deems most insightful when interpreting the main trends in the pure protection contracts market.
View Pure protection contracts product sales data - Trend report 2005 -2012, 31 August 2012
Retail investments product sales data - Trend report 2005 -2012
The FSA has now published its latest product sales data trend report for retail investment sales which covers seven years of data (from Q2 2005 until Q1 2012). The FSA’s analysis in the report focuses on those developments it deems most insightful when interpreting the main trends in the retail investment market.
View Retail investments product sales data - Trend report 2005 -2012, 31 August 2012
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Securities
Short Selling Regulation - An update on market maker and authorised primary dealer exemptions notification procedures
The EU Regulation on short selling and certain aspects of credit default swaps is directly applicable in the UK from 1 November 2012. Under this Regulation firms are able to notify their intention to employ the market maker exemption and the authorised primary dealer exemption in relation to specific financial instruments at least 60 days before the Regulation comes into effect.
This means that firms will be able to notify the FSA from 3 September 2012 of their intention to use these exemptions. However, the FSA notes that the European Securities and Markets Authority (ESMA) is due to publish a Consultation Paper setting out guidelines on the process in mid-September. The FSA intends to publish the UK procedure for making such notifications, including the forms that will need to be completed, at that time.
The FSA has stated that it wants to wait for the consultation draft of the ESMA guidelines before it starts to receive and process notifications. It therefore has asked firms not to submit their notifications to it before it has published its procedures.
View Short Selling Regulation - An update on Market Maker and Authorised Primary Dealer Exemptions notification procedures, 31 August 2012
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Seminars
OTC derivatives international roundtables
Norton Rose Group will be hosting a series of international roundtables on the European Market Infrastructure Regulation (EMIR).
In August / September there will be two roundtables in London, one for buy-side clients and another for energy clients.
Further roundtables will take place in our offices in Amsterdam, Hong Kong and Singapore.
The roundtables in Hong Kong and Singapore will give participants the chance to get an insight into EMIR and draw comparisons with local regulatory developments.
The invitation to the international roundtables can be found here.
If you can not access this link, please copy and paste the address below into your web browser.
http://www.nortonrose.com/invitations/2012/otc-oracle-an-international-overview-of-the-new-clearing-and-collateralisation-requirements-for-otc-derivatives-67515.aspx
40 minute briefing series - October 2012 to January 2013
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.
http://www.nortonrose.com/invitations/2012/your-guide-to-the-key-regulatory-challenges-in-201213-70230.aspx
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.
AIFMD expert
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:
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