Financial services updater - international edition

7 November 2011

London office building

Contacts

Introduction

Welcome to the latest international edition of our financial services updater.

Highlights this week include:

  • Update on EU Fund Management Regulatory Developments
  • FSA increases customer protection in packaged account market

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

BCBS Consultative Document: Capitalisation of bank exposures to central counterparties

The Basel Committee on Banking Supervision (BCBS) has published a second consultative paper on the capitalisation of bank exposures to central counterparties (CCPs).  The BCBS carried out an initial consultation on this topic in December 2010. This second consultation takes into account the responses to its December 2010 consultation and the results of a number of impact assessments.

The consultation builds on the BCBS’s proposals for rules that will require banks to more appropriately capitalise their exposures to over the counter derivatives, while creating incentives for them to increase their use of CCPs. This includes efforts to ensure that banks’ exposures to CCPs are adequately capitalised.

The BCBS welcomes comments on its consultation by 25 November 2011, as it aims to finalise the rules by the end of 2011. It is expected that the rules will be implemented in Member States by January 2013.  

View BCBS Consultative Document: Capitalisation of bank exposures to central counterparties, 2 November 2011

The EBA details the EU measures to restore confidence in the banking sector

The European Banking Authority (EBA) has issued a press statement which summarises its contribution to the package that has been agreed at the EU level to restore confidence in the banking sector. The EBA’s contribution focuses on the capital and term funding needs in the EU banking sector against the backdrop of the increasing concerns regarding sovereign debt.

The EBA has been asked to work with the European Commission, the European Central Bank and the European Investment Bank to explore how an EU coordinated approach can be put in place for the public guarantee schemes that should be set in place to support banks’ access to term funding at reasonable conditions.

Given the sovereign debt crisis the EBA has designed a capital package which, while recognising the steps already taken to strengthen capital positions in the EU, aims to provide a further capital buffer for the EU banking system. Banks are required to strengthen their capital positions by building up a temporary capital buffer against sovereign debt exposures to reflect current market prices. In addition, banks are required to establish a buffer such that the Core Tier 1 capital ratio reaches 9%. Banks will be expected to build these buffers by the end of June 2012.

View The EBA details the EU measures to restore confidence in the banking sector, 26 October 2011

View EBA Questions & Answers, 26 October 2011

View Capital buffers for addressing market concerns over sovereign exposures - methodological note, 26 October 2011

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Capital adequacy

How will Basel III be implemented - CRD IV

The FSA has recently published a new web page entitled How will Basel III be implemented - CRD IV.

In relation to CRD IV there are two proposals in the EU package: the Capital Requirements Regulation (CRR), and the Capital Requirements Directive (CRD). The CRR contains the Pillar 1 and Pillar 3 requirements and the CRD contains the requirements for Pillar 2, supervisory review and the buffers framework. The CRR will be directly applicable and the FSA states that in light of this it will not be transposed via the FSA Handbook. In relation to the CRD the FSA states that it will still need to be transposed via a mixture of Treasury regulations and FSA Handbook.

The FSA also states that the current expectation of the European Commission is that the legislative negotiation process will have concluded by summer 2012 and the proposed date for the CRR and CRD legislation to become binding on banks, building societies and credit institutions is 1 January 2013. The FSA has not yet set a timetable for UK consultation.

View How will Basel III be implemented - CRD IV, 28 October 2011

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Collective investment schemes

Update on EU Fund Management Regulatory Developments

The FSA has published a speech by Sheila Nicoll (Director of Conduct Policy, the FSA) at the Terrapin Hedge 2011 Conference on 1 November 2011.  The speech is entitled Update on EU Fund Management Regulatory Developments and provides the FSA’s perspective on the ramifications of ongoing regulatory change in the fund management sector.

In her speech Nicoll focuses on the most important legislative developments for the fund management industry, including the Alternative Investment Fund Managers Directive (AIFMD) and the review of the Markets in Financial Instruments Directive (MiFID review).

In relation the AIFMD Nicoll explains that there are still a number of important details yet to be finalised, in particular the implementing measures, which the European Securities and Markets Authority (ESMA) has been working on.  The FSA has been working with ESMA to review the responses to its consultation regarding the possible implementing measures of the AIFMD. Nicoll discusses three main themes that have arisen:

  • Depositaries.  In particular the liability of depositaries in the event of the loss of certain assets.  Nicoll explains that ESMA needs to develop a balanced set of technical advice that respects the principles agreed during the debate on the Level 1 Directive, while taking into account the interests of stakeholders.  Many respondents to ESMA’s consultation were concerned to identify events that would result in loss but for which the depositary could not have reasonably prevented. Nicoll confirms that in response to this ESMA has worked on defining what it refers to as ‘acts or omissions’ by the depositary, in order to provide the European Commission with further advice on this issue.
  • Leverage.  Nicoll explains that in the fund management area the concepts of leverage ratios and backstops have not been subject to definition or regulation.  Therefore, ESMA must develop an approach which allows regulators to monitor the systemic importance or relevance of alternative investment funds and allow investors to have a clear understanding of the leverage of the funds in which they are investing.  ESMA also needs to consider the responses to its consultation in designating the final framework that it proposes to the Commission.
  • Third countries.  Nicoll discusses the treatment of funds and fund managers that are based in third countries and explains that this has been an area of great contention.  In particular many respondents are concerned about the scope of the equivalence assessment that should be performed for the delegation of functions and the appointment of depositaries outside the EU.  Nicoll states that ESMA must work within the principles of the Level 1 Directive and also make sure a clear framework is set out. She also explains that it is important to ensure consistency with international standards.  

Nicoll then turns to the MiFID review and summarises some of the key impacts. She also explains that the MiFID review is not only relevant to markets but also to conduct of business.  In relation to conduct of business, Nicoll notes the similarities between the MiFID review and the UK’s Retail Distribution Review.  In relation to the MiFID review, Nicoll focuses on three key areas:

  • Market evolution. Nicoll explains that the current scope of MiFID will be extended to capture a wider range of instruments and types of trading systems, such as automated trading. She supports the proposals for robust risk controls to be put in place by firms involved in algorithmic trading or those who provide sponsored access to automated traders.
  • Trading venues. Nicoll comments on the proposals to broaden and re-categorise trading venues within a new definition; organised trading facilities. She is concerned about the broad scope of this new definition and states that there is a significant risk that the proposals will capture forms of trading that are not truly organised.
  • Transparency. Nicoll explains that one of the main objectives of the MiFID review is to overhaul transparency for both equity-like and non-equity instruments. She explains that although the MiFID review proposals are unlikely to come into effect until 2016, regulators need to be constructively involved in the debate from the start.

In the final part of her speech, Nicoll turns to regulatory reform.  She is confident that the overall effect of the reforms will be positive and she explains that the creation of the new Financial Conduct Authority (FCA) will provide an opportunity to develop a new approach to regulation. Nicoll explains that this will be particularly important for the fund management industry, as the biggest constituency of firms for which the FCA will have responsibility for both prudential and conduct regulation.  

View Update on EU Fund Management Regulatory Developments, 2 November 2011

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Consumer credit

FSB consultation on Consumer Finance Protection with particular focus on credit

The Financial Stability Board (FSB), in collaboration with the Organisation for Economic Co-operation and Development (OECD), has published a report on consumer finance protection in relation to mortgages, credit cards and secured and unsecured loans.  The OECD has also published G-20 high-level financial consumer protection principles.

The accompanying FSB press release confirms that the report has been endorsed by G-20 Finance Ministers and Central Bank governors at their meeting on 14 and 15 October 2011.

View FSB consultation on Consumer Finance Protection with particular focus on credit, 26 October 2011

View OECD: G-20 high-level financial consumer protection principles, 26 October 2011

View FSB Press Release: FSB publishes report on consumer finance protection with particular focus on credit, 26 October 2011

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FSA Handbook

FMLC paper on legal uncertainty in the FSA’s Client Assets sourcebook and arising from judicial decisions relating to the administration of Lehman Brothers International (Europe)

The Financial Markets Law Committee (FMLC) has published a paper which provides an analysis of legal uncertainty in the FSA’s Client Assets sourcebook (CASS).

The paper starts with the FMLC explaining that the financial crisis has exposed various uncertainties regarding the holding of client monies by investment firms. In particular, the High Court’s decision in Lehman Brothers International (Europe) v CRC Credit Fund Limited and others [2009] and the decision of the Court of Appeal in CRC Credit Fund Limited v GLG Investments Sub-Fund (the Lehman Case) have highlighted issues surrounding the nature and effect of the statutory trust created under CASS where an FSA authorised firm fails to segregate properly the monies that it receives from a client.

The FMLC has prepared this paper for the FSA in its consideration of CASS. In particular, the paper seeks to deal with:

  • The uncertainties highlighted in the High Court’s decision in Lehman Brothers International (Europe) v CRC Credit Fund Limited and the decision of the Court of Appeal in the Lehman Case surrounding the point at which the statutory trust is created pursuant to CASS.
  • The uncertainties regarding the nature of the assets and claims forming part of the statutory trust and the remedies available to the holders of the beneficial interests under the statutory trust where a firm has failed to segregate monies in the client account.
  • Some policy solutions for addressing the uncertainties mentioned above, including the power to transfer unsegregated monies from the “house” account to the “client” account and the power to treat a claim for client monies as an expense of a firm’s administration in cases where the statutory trust and/or proprietary remedies fail.

View FMLC paper on legal uncertainty in the FSA’s Client Assets sourcebook and arising from judicial decisions relating to the administration of Lehman Brothers International (Europe), 1 November 2011

Modification by consent - BIPRU 12.6

The FSA has published a web page which explains the Simplified ILAS waiver and how firms should apply for it.

The background to the waiver is that the FSA recognises that some firms operating on a less complex business model will have more straightforward liquidity risks, arising from fewer drivers than would be relevant to a more complex firm. Such firms are allowed to use a standardised buffer ratio for the purposes of determining the liquidity buffer which they must hold (BIPRU 12.6.9R to 12.6.18R), instead of adhering to the full Individual Liquidity Adequacy Standards (ILAS) requirements of BIPRU 12.5. BIPRU 12.6.2R permits a firm to operate under the simplified ILAS approach if it has satisfied ILAS conditions and been granted a simplified ILAS waiver. This would designate it a simplified ILAS BIPRU firm and exempt it from the provisions of BIPRU 12.5.

View Modification by consent - BIPRU 12.6, 1 November 2011

Policy development update (no. 140)

The FSA has published its latest Policy development update no. 140. The update briefly discusses:

  • FSA publications issued since the last update. This covers Consultation Paper 11/20: Packaged bank accounts and Consultation Paper 11/19: Financial resources requirements for Recognised Bodies.
  • Information about recent Handbook-related and other developments. The FSA has launched a new online catalogue for the FSA Handbook. The FSA will also be launching shortly a new search facility for the FSA Handbook.
  • Other publications - consumer publications, guidance consultations and finalised guidance.
  • An updated timetable for forthcoming FSA publications. In Q4 2011 the FSA is expecting to publish a number of publications including Policy Statements to: Consultation Paper 11/14: Auctioning of greenhouse gas emission allowances, Consultation Paper 11/3: Product Disclosure - changes for RDR and SIPPs and Consultation Paper 11/8: Mortgage Market Review: Proposed Reforms (including niche markets).

View Policy development update (no. 140), 28 October 2011

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Money laundering

Outcomes of the plenary meeting of the FATF, Paris, 27-28 October 2011

The Financial Action Task Force (FATF) has published an update following its plenary meeting in Paris on 27-28 October 2011.

In the update the FATF states that it has produced two public documents as part of its ongoing work to identify jurisdictions that may pose a risk to the international financial system:

  • FATF public statement on jurisdictions with strategic anti-money laundering and combating the financing of terrorism (AML/CFT) deficiencies.
  • Improving Global AML/CFT Compliance: ongoing process - jurisdictions with strategic AML/CFT deficiencies for which they have developed an action plan with the FATF.

The FATF also provides a brief update on the progress made on the review of the FATF Standards. The FATF states that there is broad agreement on the principles and proposed revisions.  The FATF will hold a further consultation with private sector and other stakeholders through the FATF consultative forum in December 2011. The FATF will thereafter hold a special plenary meeting in January 2012 to finalise the text of the revised FATF Recommendations with a view to formally adopt them in February 2012.

View Outcomes of the plenary meeting of the FATF, Paris, 27-28 October 2011, 27 October 2011

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Insurance

Smaller Wholesale Insurance Intermediaries newsletter (issue 7)

The FSA has published issue 7 of its Smaller Wholesale Insurance Intermediaries newsletter.

The newsletter contains the following articles:

  • A brief introduction by Simon Green who became the Head of the FSA’s Wholesale and General Insurance Department in July. In his introduction Green gives a brief update on the FSA’s work on the Government’s proposals for regulatory reform. In particular Green states that the FSA will publish further proposals on the proposed Financial Conduct Authority’s operating model in the coming period.
  • Recent ARROW observations. This provides a summary of recent observations from ARROW risk assessments that will be relevant to certain firms. This covers business continuity planning, data security, business transformation programmes and persons of good repute.
  • Fiduciary balances, client money and bad debts. The article sets out a number of questions that firms have asked themselves when looking at their fiduciary ledgers and their compliance with the client money rules, including how these balances are reflected in the client money calculation.
  • Consumer complaint handling - who to appoint. The article refers to the July edition of the newsletter which highlighted the FSA’s new complaints handling rules. A requirement of the new rules, effective since 1 September 2011, is for firms to identify a senior individual responsible for complaints handling.
  • A reminder to insurance intermediaries. This article covers providing clear and comparable information to commercial insurance customers.
  • GABRIEL and non-paper based reports. This article briefing covers the non-GABRIEL reports that will soon be listed on GABRIEL.
  • Guidance on price comparison websites. The FSA reminds firms that it has finalised guidance for price comparison websites.
  • Referral fees and the Office of Fair Trading (OFT). The article mentions that the OFT has made a Call for Evidence from UK Private Motor market participants to establish the factors behind reported premium increases of up to 40% for private motors.

View Smaller Wholesale Insurance Intermediaries newsletter (issue 7), 28 October 2011

FSA increases customer protection in packaged account market

The FSA has published Consultation Paper 11/20: Packaged bank accounts: New ICOBS rules for the sale of non-investment insurance contracts (CP11/20).

A packaged bank account is often a current account bundled with a range of insurance policies, access to preferential terms for other financial services (for example an overdraft or mortgage) and sometimes non-financial products and services, for which the customer usually pays a monthly fee.

When implementing the Banking Conduct Regime in November 2009 the FSA stated that it intended to carry out a review of packaged bank accounts to get a better understanding of the product and the market. The FSA has now concluded that there is a place in the market for these accounts but that the bundling can make it difficult for customers to focus on the important information when it comes to making informed decisions. The complexity may also further limit already low switching rates between accounts and providers of packaged bank accounts. The FSA’s priority is to address the information needs of consumers at the point of sale and annually thereafter.

In CP11/20 the FSA proposes that a firm selling insurance policies as part of a packaged bank account must do the following:

  • Take reasonable steps to establish whether a customer is eligible to claim the benefits under each policy. CP11/20 then provides further detail on what these steps should be.
  • Throughout the term of each policy, provide customers with an annual eligibility statement, which sets out any qualifying requirements to claim the benefits under the policy and recommend that the customer reviews their circumstances and whether they meet the eligibility requirements.
  • When selling on an advised basis, consider the suitability of each insurance policy.

In addition the FSA believes that price transparency is important to help customers compare and shop around/switch. Where packaged bank accounts are involved the total price includes many elements and the FSA feels that just providing a breakdown of the individual insurance premiums is not the right answer for consumers. The FSA would like to see better price transparency of the overall package and welcomes suggestions as to how to achieve this in a way that helps consumers know what they are buying and choose between different packaged or non-packaged bank accounts.

The FSA is also proposing to collect a range of data, beginning in early 2012, from firms providing packaged bank accounts. This will enable the FSA to monitor how the market evolves. It will also help the FSA to understand whether it is necessary to intervene further in the future to improve consumer outcomes.

The deadline for comments on CP11/20 is 27 January 2012.

View FSA increases customer protection in packaged account market, 27 October 2011

View Consultation Paper 11/20: Packaged bank accounts: New ICOBS rules for the sale of non-investment insurance contracts, 27 October 2011

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Regulation and compliance

Macroprudential Policy Tools and Frameworks - Progress report to G-20

The Financial Stability Board (FSB) has published a progress report to the G-20 concerning macroprudential policy tools and frameworks. The report follows an earlier update given to the G-20 in February 2011 and traces the progress in implementing macroprudential policy frameworks along three broad lines: (i) advances in the identification and monitoring of systemic financial risk; (ii) the designation and calibration of instruments for macroprudential purposes; and (iii) building institutional and governance arrangements in the domestic and regional context.

The main message of the report is that effective macroprudential frameworks require institutional arrangements and governance structures, tailored to national circumstances, that can ensure an open and frank dialogue among policymakers on the policy choices that impact on systemic risk, resolve conflicts among policy objectives and instruments and mobilise the right tools to limit systemic risk.

The report also discusses the scope for further progress. First, the identification of systemic risk is a nascent field and that no common paradigms as yet exist. Further research is needed, not least to better inform the collection and analysis of data already underway. Second, new tools will need to be tried out in different circumstances and their performance evaluated against expectations. Finally, many jurisdictions still lack specific institutional arrangements for the conduct of macroprudential policy and those that have recently introduced them will need to gather experience on their performance.

View Macroprudential Policy Tools and Frameworks - Progress report to G-20, 27 October 2011

FSB publishes recommendations to strengthen oversight and regulation of shadow banking

The Financial Stability Board (FSB) has published a report entitled Shadow Banking: Strengthening Oversight and Regulation (the Report). The Report sets out the FSB’s recommendations on a number of issues concerning shadow banking that were requested by the G-20 leaders at the November 2010 Seoul Summit.

The Report’s recommendations set out high level principles for regulators and a stylised monitoring process. This process calls on regulators to first assess the broad scale and trends of non-bank credit intermediation in the financial system, drawing on information sources and complemented with other information such as supervisory data. Using this assessment the FSB believes that regulators should narrow down their regulatory focus to those types of non-bank credit intermediation that have the potential to pose systemic risks, by focusing in particular on those involving the following key risk factors: (i) maturity transformation; (ii) liquidity transformation; (iii) imperfect credit risk transfer; and/or (iv) leverage. The FSB then calls on regulators to assess in detail the potential impact that the severe distress or failure of certain shadow banking entities/activities would pose to the overall financial system through looking at other factors, such as the inter-connectedness between the shadow banking system and the regular banking system.

The Report also describes work plans for the five work streams, announced earlier this year, that are designed to assess in more detail the case for further regulatory action:

  • Banks' interactions with shadow banking entities (indirect regulation).
  • Money market funds.
  • Other shadow banking entities.
  • Securitisation.
  • Securities lending and repos.

All five work streams will report their proposed policy recommendations to the FSB, which will continue to review the work streams so as to provide consistency to the overall project.

View FSB publishes recommendations to strengthen oversight and regulation of shadow banking, 27 October 2011

View Shadow Banking: Strengthening Oversight and Regulation - Recommendations of the Financial Stability Board, 27 October 2011

Finalised guidance on thematic feedback on the FSA’s reviews of the Regulated Covered Bonds programmes

The FSA has published finalised guidance, which provides thematic feedback on its reviews of the Regulated Covered Bond (RCB) programmes.  Following the annual review of the RCB programme last year, the FSA has provided feedback to a number of issuers on the scope and depth of engagement that the compliance function has with the programme.  

FG 11/20 sets out the FSA’s expectations regarding the level of involvement that the compliance function should have with regulated programmes for the benefit of issuers.  As a minimum, the FSA expects the second line of oversight of all regulated issuers to include:

  • A clearly defined and documented mandate and terms of reference related to the programme, as well as regular and formalised interaction with the programme.
  • Ongoing monitoring of the programme.
  • A clear understanding of the requirements and the role of the compliance function in relation to the programme.
  • Adequate and skilled resource, with appropriate depth of expertise in covered bonds and evidence of the ability to challenge management.
  • A clearly defined escalation process from the first line to compliance and from compliance to independent risk oversight committees.  

FG 11/20 also provides examples of good practice by issuers of RCBs.  

View Finalised guidance on thematic feedback on the FSA’s reviews of the Regulated Covered Bonds programmes, 1 November 2011

FSA publishes latest results

The FSA has published on its website the latest performance results relating to service standards and customer satisfaction.  These results relate to the period between 1 April 2011 to 30 September 2011, and also 1 January 2011 to 30 June 2011.  

During this period, a total of 48 service standards were in place and for two of these standards no transactions were recorded.  For the 46 standards where transactions were recorded, 30 of the standards were met and 16 were not.  The FSA explains that eight of the missed standards had challenging 100% targets and that the other transactions, which did not meet the service standards, were due to the complexity of the queries and the FSA’s more intrusive approach to regulation.  

This information is accompanied by a graph that shows the FSA’s performance against its standards for the last three years.  The graph shows an improvement in performance as compared with the previous period.  

In relation to customer satisfaction, the FSA explains that the research is conducted by an independent research company.  The FSA’s overall satisfaction score for the Customer Contact Centre, in relation to consumers, is 77. This is below the target score of 80.  The FSA explains that it was challenged by the high volume of emails during this period which was caused by increased customer awareness of scams, boiler rooms and land banking.  The FSA’s overall satisfaction score for the Customer Contact Centre, in relation to firms, is 79.

View FSA publishes latest results, 31 October 2011

View FSA Service Standards graph, 31 October 2011

Credit Ratings Agencies - Registration Decisions

The FSA has announced that it has been designated as the competent authority of the UK for the purposes of the Credit Ratings Agency Regulation.

The FSA has issued a press release stating that it has registered the following credit rating agencies: Standard & Poor’s Credit Market Services Europe Ltd; Fitch Ratings Limited; Fitch Ratings CIS Limited; Moody’s Investors Service Ltd; and DBRS Ratings Limited.

View Credit Ratings Agencies - Registration Decisions, 31 October 2011

Guidance consultation - Remuneration - Proportionality Guidance - Proposal to change the boundary between Tiers 2 & 3 for banks and building societies

The FSA has issued a guidance consultation which proposes a change to the boundary between Tiers 2 and 3 of the Remuneration Code for banks and building societies. The proposed guidance recommends that this boundary is raised from £50 million capital resources to £100 million for banks and building societies, aligning it with the corresponding boundary for BIPRU 730k firms (i.e. full scope BIPRU investment firms). The deadline for comments on the guidance consultation is 28 November 2011.

View Guidance consultation - Remuneration - Proportionality Guidance - Proposal to change the boundary between Tiers 2 & 3 for banks and building societies, 28 October 2011

Consultation Paper 11/21: Regulatory fees and levies: Policy proposals for 2012/13

The FSA has published Consultation Paper 11/21: Regulatory fees and levies: Policy proposals for 2012/13 (CP11/21).

CP11/21 is the FSA’s annual consultation on proposed changes to the underlying policy for the FSA, the Financial Services Compensation Scheme (FSCS), the Financial Ombudsman Service (FOS) and the Money Advice Service (MAS) on fees and levies. In the following January the FSA will consult on:

  • The Annual Funding Requirement and its allocation between fee-blocks.
  • FSA fee rates for the forthcoming financial year.
  • FSCS management expenses levy limit for the forthcoming financial year.
  • FOS general levy for the forthcoming financial year.
  • MAS levies for the forthcoming financial year.

To help firms identify the chapters in CP11/21 that are most relevant to them the FSA has set out a table at the end of chapter 1 which summarises the fee payers likely to be affected by the proposed changes.

The deadline for comments on CP11/21 is 6 January 2012 with the exception of the proposals in chapter 2 where the deadline is 6 February 2012. The FSA expects to publish the final rules and appropriate feedback statements in its annual consolidated Policy Statement in May 2012. This will reflect the finalised policy and rules from this consultation and the subsequent consultation in the New Year on fees and levies rates.

View Consultation Paper 11/21: Regulatory fees and levies: Policy proposals for 2012/13, 28 October 2011

Consultation on version 3 of the Transaction Reporting User Pack

The FSA has published a guidance consultation on a proposed version 3 of the Transaction Reporting User Pack (TRUP).

The TRUP provides guidance to firms on understanding the transaction reporting obligations that come from the Markets in Financial Instruments Directive, implemented through chapter 17 of the Supervision manual (SUP 17).

The FSA is consulting on an updated version of TRUP in order to:

  • Update the document to remove historical information that is no longer relevant.
  • Update references and incorporate guidelines published by the Committee of European Securities Regulators.
  • Incorporate guidance published elsewhere and guidance issued since the publication of version 2 of the TRUP.
  • Provide clarification on areas raised by firms and trade bodies and where it is helpful in assisting the FSA to conduct its market abuse monitoring.

The deadline for comments on the guidance consultation is 24 November 2011.

View Consultation on version 3 of the Transaction Reporting User Pack, 27 October 2011

Letter from Chairman of the Treasury Committee to the Chairman of the draft Financial Services Bill Committee

The House of Commons’ Treasury Committee has published a letter that its chairman, Andrew Tyrie MP, has sent to Peter Lilley MP, chairman of the draft Financial Services Bill Committee.

In his letter Mr Tyrie makes the point that the Government’s determination to legislate its regulatory reform proposals early next year leaves limited time available for pre-legislative scrutiny. In light of this it is important that both Committees examine as much of the draft Financial Services Bill as possible.

Mr Tyrie then sets out a number of issues that his Committee feels should be reviewed. This includes:

  • The relationship between, and the responsibilities of, the Treasury and the Bank of England and its subsidiaries and committees, both in normal times and particularly in times of financial turbulence.
  • The accountability and governance at the Bank of England.
  • The examination of the process for agreeing and legislating for new macro-prudential tools.
  • Further clarity concerning the boundary between the proposed Prudential Regulation Authority (PRA) and the Financial Conduct Authority (FCA), consistency between regulatory approach at the margins and mechanisms to allow a firm to move from being lead supervised by one to the other.
  • The proposed product intervention powers of the FCA.
  • The regulatory objectives and role of the PRA.
  • The extent that EU regulatory initiatives impinge on the UK’s room to manoeuvre with regard to domestic regulation.
  • How the recommendations of the Independent Commission on Banking will be incorporated into the draft legislation or other legislative vechicles.

View Letter from Chairman of the Treasury Committee to the Chairman of the draft Financial Services Bill Committee, 25 October 2011

FSA enforcement

The Tribunal has upheld the FSA’s decision to prohibit Mr Bedford, a former director of an insurance broker, and decided to impose a penalty of £10,000 (reduced from a starting point of £200,000).  Mr Bedford continued to place surety bonds and related business with a counterparty, despite accepting that he should have realised the risk posed by this counterparty from July 2006 onwards and, from July 2007 onwards, knowing that the counterparty was committing fraud.  Mr Bedford subsequently forged documents and issued cover without an insurer’s authority in an attempt to conceal the fraud.     

Mr Bedford admitted the conduct alleged but contested the severity of the sanctions proposed by the FSA before the Tribunal.  Notwithstanding Mr Bedford’s contrition, admissions and the serious consequences of a prohibition, the Tribunal considered that this was necessary to protect the public.  The Tribunal concluded that the fact that Mr Bedford had received a police caution for similar conduct did not preclude the FSA from imposing a penalty.  The Tribunal expressed surprise that Mr Bedford had not been prosecuted and described his misconduct as serious, in the context of which a penalty of £200,000 could be perceived as lenient.  However, on the basis of evidence submitted by Mr Bedford concerning financial hardship, it decided to depart from recent precedent, stating that Mr Bedford had no realistic prospect of paying a higher amount.  The Tribunal concluded that “the need to deter others does not justify the imposition of a penalty of that magnitude in the particular circumstances of this case.” 

View David John Bedford, 31 October 2011

Dubai: DFSA Listing Rules - Consultation Paper

The Dubai Financial Services Authority (the DFSA), the independent regulator of all financial and ancillary services conducted in and from the Dubai International Financial Centre (the DIFC), published consultation paper no. 78 "Proposed DFSA Listing Rules" on 6 October 2011 (the Consultation Paper).

The Consultation Paper seeks feedback on the proposed new listing rules (the Listing Rules) which the DFSA will have to adopt in due course as a result of the transfer of the responsibility for maintaining the Official List of Securities (the List) from NASDAQ Dubai to the DFSA on 1 October 2011.   

To deal with any listings during the interim period between the transfer to the DFSA of the responsibility for maintaining the List and the coming into force of the new Listing Rules in due course, the OSR (Interim Listing And Transitional Rules) Rule-Making Instrument (No. 80) came into force on 1 October 2011 which repealed and replaced the previous Offered Securities Rules (OSR) module of the DFSA Rulebook with an updated version (the Updated OSRs).  The Updated OSRs includes a new chapter 13 (Listing Rules (Interim)) which incorporates NASDAQ Dubai’s previous listing rules into Appendix 6 of the Updated OSRs, amended as required to reflect the fact that the DFSA now has responsibility for maintaining the List and deleting certain superfluous provisions.  

The DFSA has clarified that its key aims in drafting the new Listing Rules are to improve proportionality, efficiency and competition.  The DFSA is keen to ensure that the new Listing Rules are not overly burdensome whilst at the same time are reflective of international standards.  In this regard, the DFSA has benchmarked the new Listing Rules against the equivalent UK and Hong Kong regulations.

The new Listing Rules, when adopted (which is expected to be in the first quarter of 2012), will be included as a chapter in the new markets rules module which is proposed to be included in the DFSA’s Rulebook in due course (see consultation paper no. 75 “Proposed changes to the Markets Law Regime”).  The chapter will incorporate other rules, such as rules on the requirement to prepare a prospectus, market disclosures and corporate governance, by reference to other chapters of the markets rules module.

The DFSA has highlighted the following four key points of interest in the Consultation Paper:

  • The proposal to introduce listing principles with the aim of ensuring that listed entities understand and pay due regard to the fundamental role they play in maintaining market confidence and ensuring a fair and orderly market.  The listing principles will be in addition to and complement the DFSA’s Corporate Governance Principles.
  • Including a free float requirement set at a threshold of 25% (reflecting the EU model). The test of those entities which will not be construed to be “public” for the purposes of the free float requirement has been taken from the United Kingdom Listing Authority listing rules (see LR 6.1.19).  The free float requirement is both an eligibility and ongoing requirement but the DFSA proposes to retain discretion to accept less than 25% free float if it is felt that liquidity will not be affected.
  • Including an eligibility requirement that the issuer must have sufficient working capital available for 12 months post the listing.  The sponsor declaration will also give comfort around this statement as the issuer’s  sponsor will be required to confirm that such statement has been given after due and careful enquiry by the directors of the issuer.
  • The inclusion of provisions related to controlling shareholders and conflicts of interest with the aim of ensuring that the issuer can operate independently.

For further information or questions on the above, please contact Emma Chee (Senior Associate).

Obtaining a Dubai Financial Services Authority licence

The financial services team in Dubai has produced a new online client briefing which summarises the process for obtaining a Dubai Financial Services Authority licence.

View Obtaining a Dubai Financial Services Authority licence, October 2011

France: Provisions relating to recommendations over CO2 emissions

French rules governing CO2 emissions trading markets are gradually taking shape. As previously reported, the spot market status of French platform Bluenext has been upgraded from a multilateral trading facility to a regulated market in order to satisfy the European requirement that only regulated markets may organise the EU auction of CO2 emission allowances. In addition the jurisdiction of the French Securities regulator (the Autorité des Marchés Financiers or AMF) has been extended to cover the emissions market with the creation of a new section in the AMF Rulebook entitled “Regulated markets for emissions trading” (Book VII). This new section contains rules relating to market operators, market membership, money and deposits, market abuse and the production and dissemination of investment recommendations.

A government decree was nonetheless necessary in order to give full effect to the new requirements concerning investment recommendations. As a result of this intervention, the production and dissemination of information aimed at distribution channels or the public and recommending or suggesting an investment strategy with regard to emission allowances now trigger a whole set of rules.

The new rules concerning investment recommendations also include general requirements in terms of honesty, fairness and impartiality or disclosure of potential conflicts of interest, notably in the event that the person involved in preparing the recommendation has a significant financial interest associated with the emission allowance.

For further information please contact Roberto Cristofolini or Anselme Mialon

France: Changes to the rules of European CCP LCH.Clearnet SA

LCH.Clearnet SA acts as a central clearing counterparty (CCP) for Belgian, French, Dutch and Portuguese markets. The French securities regulator (the Autorité des Marchés Financiers or AMF), which has legal authority for approving changes to rules governing relevant CCPs, has approved amendments made to close-out netting provisions applicable to LCH.Clearnet SA. Thus far, such rules have only considered the occurrence of insolvency proceedings against or of an event of default by clearing members, but not LCH.Clearnet SA. Such rules are now reciprocal. As a result, new provisions have been written into LCH.Clearnet SA rules to consider how clearing members would be entitled to close outstanding trades, value such terminated trades and set off reciprocal debts to reach an aggregate single termination payment in the event of insolvency proceedings against or of an event of default by LCH.Clearnet SA.

For further information please contact Roberto Cristofolini or Anselme Mialon

France: Implementation of UCITS IV takes one more step

Implementation of UCITS IV is nearing completion in France. As previously reported, whilst legislative provisions together with government decrees had been adopted over the summer, the French regulator (the Autorité des Marchés Financiers or AMF) had not incorporated the necessary changes into its Rulebook. However, the position has now been rectified with two books having been overhauled - Book III dealing with service providers (i.e. in the area of asset management asset managers and custodians) and Book IV dealing with collective investment schemes (including UCITS).

The new provisions inserted into Book III cover new capital requirements for asset managers; risk management systems for asset managers; and new requirements in terms of manager/custodian contractual relationship. The new provisions inserted into Book IV cover the new streamlined regulated-to-regulator passport procedure for marketing of UCITS; merger of UCIS and “master-feeder” arrangements; and the implementation of the “key investor information” (KIID).

A number of the provisions of the revised AMF Rulebook (notably relating to the cross-border marketing authorisation) however refer to an AMF Instruction that had been taken prior to UCITS IV. This Instruction still remains to be revised.

For further information please contact Roberto Cristofolini or Anselme Mialon

Netherlands: AFM publishes guideline on active and passive investments

The Netherlands Authority for the Financial Markets (Autoriteit Financiële Markten, AFM) has published a guideline for financial undertakings on active and passive investments (the Guideline). The AFM encourages financial undertakings to take their clients’ interests into account by objectively informing them on the merits of active and passive investments, by making careful decisions between active and passive investments when providing investment advice or asset management and by critically reviewing active funds that closely follow an index and charge high costs. The Guideline is based on independent research (the Research). The AFM defines active investments as composing a portfolio that intentionally deviates from indices in an attempt to gain extra returns and passive investments as investments that follow an index. According to the Research, financial undertakings must be aware that it is very difficult to select active funds that, after deduction of costs, have a higher return than an index. Therefore, financial undertakings should not automatically select active investments for their clients but first carefully consider the merits of both active and passive investments.

The Guideline (in Dutch) can be found at:

http://www.afm.nl/layouts/afm/default.aspx~/media/files/wetten-regels/leidraad/leidraad-actief-passief-beleggen.ashx

The Research (in Dutch) can be found at:

http://www.afm.nl/layouts/afm/default.aspx~/media/files/wetten-regels/leidraad/leidraad-actief-passief-beleggen/literatuurstudie-actief-passief-beleggen.ashx

For further information please contact Floortje Nagelkerke

Netherlands: Bill on implementation of the Prospectus Directive

The Dutch Minister of Finance (Minister van Financiën) has sent the Bill on the implementation of the Prospectus Directive (wetsvoorstel ter implementatie van de Prospectusrichtlijn, the Bill) to the Second Chamber of the Parliament. The Bill contains a number of amendments to the Act on the Financial Supervision (Wet op het financieel toezicht) pursuant to the implementation of the Prospectus Directive into Dutch law. Amongst others, the Bill includes further requirements to the summary of a prospectus and contains the obligation for financial institutions to publish a document each year that summarizes any published information in relation to securities.

The amendment to the threshold amount of the exemption to the obligation to publish a prospectus as included in the Prospectus Directive from EUR 50,000 to EUR 100,000 was already implemented in the Financial Markets Amendment Act 2010 (Wijzigingswet Financiële Markten 2010) and will enter into force on 1 January 2012. Pursuant to this increase, offerors of securities of EUR 100,000 or more are exempted from the obligation to publish a prospectus.

The Netherlands does not implement the increase of the EUR 2,500,000-exemption to the obligation to publish a prospectus to EUR 5,000,000. This means that if there is an offer of securities of EUR 2,500,000 or more that the offeror must publish a prospectus.

The Bill (in Dutch) can be found at:

http://www.rijksoverheid.nl/ministeries/fin/documenten-en-publicaties/kamerstukken/2011/10/05/wetsvoorstel-herziene-richtlijn-prospectus.html

For further information please contact Floortje Nagelkerke

Netherlands: Bill on limiting the liability of supervisors

The Dutch Minister of Finance (Minister van Financiën, the Minister) has sent a Bill on limiting the liability of financial supervisors to the Second Chamber of the Parliament (the Bill). The Bill amends the Act on the Financial Supervision (Wet op het financieel toezicht). It is proposed that the Dutch Central Bank (De Nederlandsche Bank, DNB) and the Netherlands Authority for the Financial Markets (Autoriteit Financiële Markten, AFM) will only be liable in cases of gross negligence (grove schuld) or wilful misconduct (opzet). By including this standard for liability, the Minister intends to align the Dutch standard of liability with those of other European countries.

The Bill (in Dutch) can be found at:

http://www.rijksoverheid.nl/ministeries/fin/documenten-en-publicaties/kamerstukken/2011/10/26/wetsvoorstel-aansprakelijkheidsbeperking-toezichthouders.html

For further information please contact Floortje Nagelkerke

Netherlands: Minister of Finance publishes financial services action plan

On 20 October 2011, the Dutch Minister of Finance (Minister van Financiën, the Minister) published his action plan on new legislation for the financial sector and a progress report on the first six months of implementing the 27 recommendations of the so-called Committee De Wit (the Plan). The Committee De Wit was established by the government after the credit crisis in order to investigate the financial system in the Netherlands. The Minister describes his proposals for new financial services legislation pursuant to three key themes:

  • A solid financial sector. This includes transparency, capital and solvability requirements for banks and insurers, ensuring that currently unregulated entities such as hedgefunds and credit rating agencies are supervised and strengthen crisis management by financial institutions.
  • Strengthening the position of consumers and a conduct of business- and cultural change within the financial sector. This includes the prohibition on inducements, the interest of clients in relation to product development and strengthening of the independence of the institute for complaints in relation to the financial sector (KiFID).
  • Strengthening the institutional framework. This includes implementing  the new, more strict European rules and regulation on supervision into Dutch law and transparency when executing such supervision.

The Minister also elaborates on the compliance of financial institutions with the bonus policy in relation to reports of the Monitoring Committee Code Banks (Monitoring Commissie Code Banken) and the Dutch Central Bank (De Nederlandsche Bank).

The Plan (in Dutch) can be found at:

http://www.rijksoverheid.nl/ministeries/fin/documenten-en-publicaties/kamerstukken/2011/10/20/kamerbrief-beleids-en-wetgevingsbrief-financiele-markten.html

For further information please contact Floortje Nagelkerke

Singapore: SGX clears first Asian FX Forwards

On 24 October 2011, SGX launched its clearing service for OTC traded Asian FX Forwards, which covers non‑deliverable Asian currencies (namely Chinese Yuan, Indian Rupee, Korean Won, Indonesian Rupiah, Malaysian Ringgit, Philippine Peso and Taiwanese Dollar). This initiative is aligned with international developments in favour of central counterparty clearing of OTC derivatives and follows the November 2010 clearing service for Interest Rate Swaps denominated in Singapore and US dollars.

For more information please contact Daniel Yong

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Retail

FSA publishes review of firms’ structured product design processes and proposes new guidance on retail product development

The FSA has published a guidance consultation which sets out proposed guidance that firms should consider when designing structured products and dealing with the after sales process. Much of the guidance is also relevant to other retail products.

The proposed guidance sets out that firms should:

  • Identify the target audience and then design products that meet that audience’s needs.
  • Stress test new products to ensure they are capable of delivering fair outcomes for the target audience.
  • Ensure a robust product approval process for new products.
  • Monitor the progress of a product throughout its life cycle.

The deadline for comments on the guidance consultation is 11 January 2012.

View FSA publishes review of firms’ structured product design processes and proposes new guidance on retail product development, 2 November 2011

View Guidance consultation - Retail Product Development and Governance - Structured Products Review, 2 November 2011

FSA and OFT publish draft guidance on payment protection products

The FSA and the Office of Fair Trading (OFT) have issued a joint guidance consultation on payment protection products. The proposed guidance sets out the risks that may arise in the design of payment protection products. In particular the FSA sets out risks around:

  • Identifying the target market for the protection.
  • Ensuring that the cover offered meets the needs of that target market.
  • Ensuring that the product does not create barriers to comparing, exiting or switching cover.

The OFT’s proposed guidance sets out how the Consumer Credit Act (CCA) applies to payment protection products such as debt freeze or debt waivers linked to a regulated credit agreement, and what firms can do to ensure compliance with the CCA. The OFT makes the point that firms should ensure that consumers are absolutely clear about the nature, price and implications of payment protection products. The guidance also sets out examples of business practices in relation to payment protection products which the OFT is likely to regard as unfair or improper and so may cast doubt on fitness to hold a consumer credit licence.

The deadline for comments on the guidance consultation is 13 January 2012.

View FSA and OFT publish draft guidance on payment protection products, 1 November 2011

View Guidance consultation - Payment protection products,1 November 2011

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Seminars

Invitations

40 minute briefing series - September 2011 to December 2011

We are pleased to announce that the invitation for the next series of 40-minute briefings is now available.

If you cannot access this link, please copy and paste the address below into your web browser.

http://www.nortonrose.com/invitations/2011/your-guide-to-the-key-regulatory-challenges-in-2011-sept-dec-54810.aspx

Financial services regulatory products: Phoenix and Pegasus

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.

Financial services Fireside Fridays

Please click on the links below:

  • The MiFID Review (21 October 2011)
  • The regulatory regime for energy and commodity companies (7 October 2011)
  • The final report of the Independent Commission on Banking (23 September 2011)
  • Financial services Fireside Fridays directory

Financial services webcasts

Please click on the links below:

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  • Publications

    Blog: Basel III

    On 12 September 2010, the Group of Governors and Heads of Supervision of the Basel Committee on Banking Supervision announced that they had reached agreement on...

    October 2011

    Blog: AIFM Directive - 2011

    Please be advised that this blog is no longer in use and has been replaced by our online technical resource “AIFMD expert”.

    2011

    Blog: MiFID review

    The Markets in Financial Instruments Directive (MiFID) entered into force in November 2007.

    March 2011