Financial services updater - international edition

30 April 2012

London office building

Contacts

Introduction

Welcome to the latest edition of our financial services updater.

Highlights this week include:

  • FSB letter to G20 finance ministers and central bank governors regarding progress of financial regulatory reforms
  • Final report - ESMA’s technical advice on possible delegated acts concerning the Regulation on short selling and certain aspects of credit default swaps

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

Commission acts to ensure implementation of EU rules in the area of electronic money activities

The European Commission has issued a press release stating that it has asked Belgium, Spain, France, Cyprus, Poland and Portugal to notify it within the next two months of the measures they are taking to update their national legislation in conformity with the latest Directive on e-money.

The deadline for implementing the measures was 30 April 2011. The Commission’s request takes the form of a reasoned opinion. If the national authorities do not notify the necessary implementing measures within two months, the Commission may refer the Member States to the Court of Justice of the EU and may request the Court to impose financial penalties.

View Commission acts to ensure implementation of EU rules in the area of electronic money activities, 26 April 2012

EPC response to the European Commission Green Paper ‘Towards an integrated European market for card, internet and mobile payments’

The European Payments Council (EPC) has published its response to the European Commission Green Paper, Towards an integrated European market for card, internet and mobile payments.

The EPC does not support a number of related assumptions and suggestions that have been put forward in the Green Paper. In particular it states that a thorough factual analysis of the EU payment landscape is a prerequisite for any conclusion that further regulatory action may be required.

View EPC response to the European Commission Green Paper ‘Towards an integrated European market for card, internet and mobile payments’, 26 April 2012

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Capital adequacy

Policy Statement 12/7: Regulatory Prudent Valuation Return

The FSA has found that firms’ accounting approaches to fair valuing assets vary substantially. The fair values in firms’ annual reports do not provide substantial information on the degree of uncertainty in the valuations of financial instruments, such as derivatives.

GENPRU 1.3 sets out requirements for firms to use prudent valuation principles when valuing trading books (and other assets and liabilities held at fair value) and to disclose the difference between that prudent valuation and the fair valuation used in their financial statements.

From December 2010‚ relevant firms were asked by the FSA to produce quarterly reports that show these differences. These were produced in a free format. However, to aid comparability between firms and over time, the FSA sought to introduce a consistent format for the return.

In December 2011 the FSA published Consultation Paper 11/30: Proposed Regulatory Prudent Valuation Return (CP11/30) in which it consulted on the proposed format for the return. The major properties of the proposed return are to show the net and gross balance sheets for a defined list of asset classes, together with the potential downside and upside that could exist through the inherent uncertainty in the valuation process.

The FSA has now published Policy Statement 12/7: Regulatory Prudent Valuation Return (PS12/7). In PS12/7 the FSA sets out feedback to CP11/30 and the subsequent changes to the FSA’s rules. The requirement to produce the new regulatory return comes into force on 30 June 2012 and the return will be required for reporting periods ending on or after that date.

View Policy Statement 12/7: Regulatory Prudent Valuation Return, 27 April 2012

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Collective Investment Schemes

IOSCO consultation - Principles of liquidity risk management for collective investment schemes

The Technical Committee of the International Organization of Securities Commissions has published a Consultation Report that sets out principles against which both the industry and regulators can assess the quality of regulation and industry practices concerning liquidity risk management for collective investment vehicles.

The principles are structured according to the time frame of a collective investment scheme’s life. They start with principles which should be considered in the design (pre-launch) phase of a collective investment scheme. They then outline the principles that should form part of the day-to-day liquidity risk management process.

The deadline for comments on the Consultation Report is 2 August 2012.

View Consultation Report - Principles of Liquidity Risk Management for Collective Investment Schemes, 26 April 2012

ESMA begins AIFMD co-operation discussions with non-EU supervisors

The European Securities and Markets Authority (ESMA) has announced that it will begin discussions with non-EU supervisors of entities subject to the requirements of the Alternative Investment Fund Managers Directive (AIFMD) about supervisory co-operation issues.

The announcement follows agreement by ESMA’s Board of Supervisors to follow a common policy in relation to the co-operation arrangements under the AIFMD, which should be in place between EU and non-EU securities supervisors by July 2013.

ESMA will lead on the negotiation of co-operation arrangements with non-EU authorities on behalf of EU supervisors. While ESMA will negotiate on behalf of the EU competent authorities, the final signature of individual Memorandum’s of Understanding will be the responsibility of each EU competent authority.

View ESMA begins AIFMD co-operation discussions with non-EU supervisors, 26 April 2012

EFAMA report on EFC categories

The European Fund Categorisation Forum (EFCF) was formed by a group of fund management companies and data vendors for the specific purpose of defining the parameters for a pan-European classification system of investment funds.

By agreeing to work together, these firms recognised that they had a common goal - increasing transparency in fund comparison within a classification system that could be endorsed by a core group of cross-border firms and data vendors. By pooling their expertise, the EFCF members could reach mutual understanding of the difficulties involved in fund categorisation and accelerate the convergence towards a common European standard.

This goal prompted the EFCF to join forces with the European Fund and Asset Management Association (EFAMA) to facilitate broad acceptance of the European Fund Classification (EFC) across Europe.

The EFAMA has now published a report detailing the categories to facilitate the use of the EFC by all industry stakeholders. Under the categorisation system detailed in the report funds are split into six types:

  • Equity, bond, multi-asset and money market funds. These funds typically aim to achieve returns higher than a benchmark index, within a universe that is segmented according to eight criteria: country/region, sector, market capitalisation, currency, credit quality, interest rate, emerging market exposure and asset allocation.
  • Absolute Return Innovative Strategies (ARIS) funds. These funds are managed with the objective of generating a positive return over a cash benchmark, irrespective of market movements. In general, these funds make extensive use of derivatives to short-long securities or the market as a whole.
  • Other funds. These funds fall outside the main EFC categories because they use specialist investment strategies such as capital protected, real estate and convertibles.

The report is accompanied by a spreadsheet showing in which EFC categories 3,296 cross border funds (13,048 share classes) belong to. These funds are promoted by 125 fund managers, including many belonging to the largest fund management groups.

View EFAMA report on EFC categories, 23 April 2012

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FSA Handbook

Handbook Notice 119

The FSA has published Handbook Notice 119. This Handbook Notice introduces the FSA Handbook and other material made by the FSA Board under its legislative powers on 23 February 2012, 21 March 2012 and 26 April 2012. In this period the FSA published instruments which:

  • Improves rules for with-profits businesses and enhances governance by mandating an increased role for the with-profits committee (FSAS 2012/10).
  • Covered the maintenance of information relating to clients’ safe custody assets and client money (FSA 2012/20).
  • Approved the making, by the Board of the Financial Ombudsman Service (FOS) of case fees for the FOS and voluntary jurisdiction levy rates (FOS 2012/1).
  • Set minimum qualification standards that advisers have to meet under the Retail Distribution Review (FSA 2012/21).
  • Update the technical assumptions and guidance on pension transfer value analysis (FSA 2012/22).
  • Amend data items and guidance for clarification of reporting requirements in the Supervision manual (FSA 2012/23).
  • Improve firms reporting around the prudent valuations of financial instruments (FSA 2012/24).
  • Apply a master-feeder regime for non-UCITS retail schemes (FSA 2012/25).

There were no changes outside the FSA Handbook this month.

View Handbook Notice 119, 27 April 2012

FSA confirms traded life policy investments should not generally be promoted to UK investors

Traded Life Policy Investments (TLPIs) - also known as Traded Life Settlements or Senior Life Settlements - are complex products with a number of risks. They are pooled investments into US life assurance policies. They can be sold either directly or indirectly through other investments such as funds of funds.

The FSA has published finalised guidance in which it strongly recommends that TLPIs should not reach the vast majority of retail clients. The FSA has found significant problems with the way in which many TLPIs are designed, marketed and sold to UK retail clients. Many TLPIs take the form of unregulated collective investment schemes, which cannot lawfully be promoted to retail investors in most cases, but have often been marketed inappropriately to retail customers.

The finalised guidance is an interim measure. The FSA will shortly be consulting on new rules which will impose significant restrictions on the promotion of non-mainstream investments, including TLPIs, to retail investors.

View FSA confirms traded life policy investments should not generally be promoted to UK investors, 25 April 2012

View Finalised Guidance 12/2: Traded Life Policy Investments, 25 April 2012

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Insurance

Smaller wholesale insurance intermediaries newsletter (issue 8)

The FSA has published a new issue of its Smaller wholesale insurance intermediaries newsletter (issue 8). In this newsletter the FSA briefly covers:

  • EU Gender Directive update.
  • Regulatory fees and levies.
  • Gender diversity.
  • Retail Conduct Risk Outlook 2012.
  • Tracing Employers’ Liability Insurance.
  • Improving standards in consumer contracts.
  • SUP 15 obligations.
  • Regulatory reporting.

View Smaller wholesale insurance intermediaries newsletter (issue 8), 27 April 2012

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Market abuse

EESC opinion on the MAD revision legislative proposals

The European Economic and Social Committee (EESC) has published an opinion concerning the European Commission’s legislative proposals which revise the Market Abuse Directive (MAD).

The EESC agrees in principle with the Commission’s proposals but has a number of concerns in relation to the specific structure of the proposals being in the form of a Regulation and a Directive. In particular the EESC believes that the vague wording of many offences in the proposal for a recast Directive on market abuse, and the delegation of further detail to the European Securities and Markets Authority and/or the Commission at Level 2 are likely to cause significant legal uncertainty.

In its opinion the EESC sets out a number of specific remarks on the legislative proposals. In particular it welcomes the extension of the scope to include over-the-counter financial instruments. However, the EESC states that it is unclear as to how these are to be covered by the proposals. The EESC also broadly welcomes the inclusion of highly sophisticated technology for implementing trading strategies within the scope of the rules on market abuse. However, the EESC states that it should be remembered that algorithm-based trading is not per se a bad thing, but is also used by credit institutions to process day-to-day orders from private clients. The EESC states that those applying the law therefore need further clarification as to what is legally permissible.

View Opinion of the European Economic and Social Committee on the Proposal for a Regulation of the European Parliament and of the Council on insider dealing and market manipulation and the Proposal for a Directive of the European Parliament and of the Council on criminal sanctions for insider dealing and market manipulation, 28 March 2012

ESMA report - Actual use of sanctioning powers under MAD

The European Securities and Markets Authority (ESMA) has published a report on the use of administrative and criminal sanctions by EU national regulators under the Market Abuse Directive. The report provides a comparison of the use of administrative sanctioning powers across 29 EEA Member States for 2008-2010. The report compares Member States’ market abuse regimes across a number of categories, which are:

  • The type of sanctioning powers available to competent authorities (CAs) and against whom and for which offences they were applicable.
  • The resources allocated by CAs to this issue.
  • The actual use of sanctioning powers available - settlement, administrative and criminal sanctions and publication.

The results of the report will provide input to the legislative process on the new market abuse regime.

View ESMA report - Actual use of sanctioning powers under MAD, 26 April 2012

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Money Laundering

JMLSG revised guidance on electronic money

The Joint Money Laundering Steering Group (JMLSG) has published an updated version of chapter 3 of its guidance which concerns electronic money.

The purpose of the guidance is to provide clarification to electronic money issuers on customer due diligence and related measures required by law. The guidance may be used by all electronic money issuers (as defined in Regulation 2(1) of the Electronic Money Regulations 2011), including authorised electronic money institutions, registered small electronic money institutions, and credit institutions with a Part IV permission under the Financial Services and Markets Act 2000 to issue electronic money. It may also be relevant for EEA authorised electronic money issuers who distribute their products in the UK.

The revised guidance must be read in conjunction with the JMLSG main guidance set out in Part I and the specialist guidance set out in Part II.

View JMLSG electronic money guidance, 18 April 2012

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Regulation & compliance

Final communiqué - Meeting of G20 finance ministers and central bank governors

The G20 finance ministers and central bank governors have issued a final communiqué following their meeting in Washington DC.

The communiqué looks ahead to the G20 leaders’ summit which will be held in Los Cabos, Mexico on 18 and 19 June 2012 and the work scheduled to be finalised for that summit.

In the communiqué G20 finance ministers and central bank governors:

  • Reaffirmed their commitment to common global standards by pursuing the financial regulatory reform agenda.
  • Noted the work carried out to date by the Financial Stability Board (FSB) and the Basel Committee on Banking Supervision on the modalities for extending the systemically important financial institutions framework to domestic systemically important banks.
  • Welcomed the FSB progress report on strengthening the oversight and regulation of the shadow banking system.
  • Supported the work coordinated by the FSB to provide safeguards supportive of a global framework for central counterparties (CCPs) as an important element in achieving the agreed over-the-counter (OTC) derivatives reforms, so that authorities can make informed decisions on the standards and requirements of CCPs to meet by end 2012 their commitment that all standardised OTC derivatives be centrally cleared in CCPs with the appropriate safeguards.
  • Supported the work of the FSB on the global governance framework for the legal identifier and looks forward to its recommendations in June on establishing a global LEI system.
  • Supported work on developing for consultation, internationally consistent standards on margining for non-centrally cleared OTC derivatives by June 2012.

View Final communiqué - Meeting of G20 finance ministers and central bank governors, 19 April 2012

FSB letter to G20 finance ministers and central bank governors regarding progress of financial regulatory reforms

The Financial Stability Board (FSB) has published a letter to G20 finance ministers and central bank governors concerning the progress of the financial regulatory reforms agreed by G20 leaders at Cannes. The areas covered in the letter include:

  • Building resilient financial institutions. The FSB notes that financial institutions are making progress strengthening their balance sheets. It also notes that a recent assessment by the Basel Committee on Banking Supervision (BCBS) shows that banks largely meet the new minimum Basel III requirements of 4.5 per cent for common equity Tier 1 capital, net of the adjustments for the quality of capital that will be phased in beginning next January.
  • Ending “too-big-to-fail”. The FSB and the BCBS are leaning towards a set of principles as a minimum framework for domestic systemically important banks, covering both the methodology for assessing the systemic importance of domestic institutions, and the policy tools that national authorities could apply to contain the systemic risks they pose.
  • Strengthening the oversight and regulation of shadow banking activities. The FSB has put on track a number of initiatives including developing, with other standard setting bodies, regulatory recommendations: (i) to mitigate the spill-over effect between the regular banking system and the shadow banking system; (ii) to reduce the susceptibility of money market funds to “runs”; (iii) to assess and mitigate systemic risks posed by other shadow banking entities than money market funds; (iv) to assess and align the incentives associated with securitisation to prevent a repeat of the creation of excessive leverage; and (v) to dampen risks and pro-cyclical incentives associated with securities lending and repos that may exacerbate funding strains at times of shocks to confidence. A full set of recommendations will be issued by the end of 2012.
  • Creating continuous markets - OTC derivatives reforms. The FSB notes that work is well advanced to establish a safe environment for clearing over-the-counter (OTC) derivatives through a global framework of central counterparties. The FSB is also on course to meet the mandate from the G20 leaders’ summit in Cannes to provide recommendations on the governance framework for a global legal entity identifier to the G20 summit in Los Cabos, as well as providing proposals for the implementation of the system.
  • Convergence of IASB-FASB accounting standards and strengthening of IASB governance. Important improvements to the IASB and FASB standards on financial instruments, fair value and off-balance sheet entities were finalised in 2011. The IASB and FASB will conduct further consultations in the second half of 2012, and the FSB expects them to issue final converged standards in a number of key areas by mid-2013.
  • Timely and consistent implementation of reforms. The FSB will report to the G20 summit in Los Cabos on progress across the range of reforms. The reporting will include separate progress reports on the three priority areas where the reforms are furthest advanced (Basel III, OTC derivatives and compensation practices), together with an overall overview progress report.

View FSB letter to G20 finance ministers and central bank governors regarding progress of financial regulatory reforms, 16 April 2012

FSB report on extending the G-SIFI framework to domestic systemically important banks

The Financial Stability Board (FSB) has published a progress report to G20 finance ministers and central bank governors concerning extending the global systemically important financial institutions (G-SIFIs) framework to domestic systemically important banks (D-SIBs).

The framework which is being considered for D-SIBs is complementary to that for G-SIFIs, namely that of assessing the impact of the failure associated with the local presence of a bank in a given jurisdiction, whether a national or an internationally active bank.

The Basel Committee on Banking Supervision (BCBS) and the FSB are considering a minimum framework for D-SIBs, based on a set of principles, covering both the methodology for assessing the systemic importance of domestic institutions, and the policy tools that national authorities could apply to contain the systemic risks they pose.

The principles being considered for D-SIBs seek to establish a minimum framework that is intended to ensure compatibility with the framework for global significantly important banks (G-SIBs), address cross border externalities that the failure of a D-SIB may pose, and preserve a level playing field within and across jurisdictions. The principles would include guidelines for national authorities to assess the systemic importance of banks in a domestic context, as well as an agreed appropriate unit of analysis, i.e. the entity that is being assessed for systemic importance at the domestic level.

The BCBS and the FSB intend to finalise the principles in the autumn. The principles would then be submitted to the meeting of G20 finance ministers and central bank governors in November.

View FSB report on extending the G-SIFI framework to domestic systemically important banks, 16 April 2012

FSB report on strengthening the oversight and regulation of shadow banking

The Financial Stability Board (FSB) has published a progress report to G20 finance ministers and central bank governors concerning strengthening the oversight and regulation of shadow banking.

The FSB published initial recommendations concerning shadow banking in its October 2011 report Shadow Banking: Strengthening Oversight and Regulation. Following the initial recommendations five work streams have been launched to advance the work to develop proposed policy recommendations in the following areas:

  • Banks’ interactions with shadow banking entities.
  • Money market funds.
  • Other shadow banking entities.
  • Securitisation.
  • Securities lending and repos.

The first, second and fourth of the above work streams will prepare their recommendations by July 2012. The recommendations from the other work streams are expected by September 2012, while the securities lending/repo work stream is to prepare recommendations by the end of 2012.

View FSB report on strengthening the oversight and regulation of shadow banking, 16 April 2012

Final report - ESMA’s technical advice on possible delegated acts concerning the Regulation on short selling and certain aspects of credit default swaps

The Regulation on short selling and certain aspects of credit default swaps (the Regulation) was published in the Official Journal of the EU on 24 March 2012 and comes into effect from 1 November 2012.

ESMA has now published a final report setting out technical advice on a number of delegated acts concerning the Regulation. The final advice is set out as follows:

  • Section 1 covers the definition of when a natural or legal person is considered to own a financial instrument for the purposes of the definition of short sale (Article 2(2) of the Regulation).
  • Section 2 relates to the net short position in shares or sovereign debt covering the concept of holding a position, the case when a person has a net short position and the method of calculation of such a position including when different entities in a group have long or short positions or for fund management activities related to separate funds (Article 3(7) of the Regulation).
  • Section 3 sets out advice in instances where a credit default swap (CDS) transaction is considered to be hedging against a default risk or the risk of a decline of the value of the sovereign debt and the method of calculation of an uncovered position in a CDS (Article 4(2) of the Regulation).
  • Section 4 defines the initial and incremental levels of the notification thresholds to apply for the reporting of net short positions in sovereign debt (Article 7(3) of the Regulation).
  • Section 5 specifies the parameters and methods for calculating the threshold of liquidity on sovereign debt for suspending restrictions on short sales of sovereign debt (Article 13(4) of the Regulation).
  • Section 6 contains ESMA’s proposal of advice on what constitutes a significant fall in value for various financial instruments and also specifies, in the form of a draft regulatory technical standard, the method of calculation of such falls (Article 23(7) and (8) of the Regulation).
  • Section 7 sets out criteria and factors to be taken into account by competent authorities and ESMA in determining when adverse events or developments arise (Article 30 of the Regulation).

View Final report - ESMA’s technical advice on possible delegated acts concerning the Regulation on short selling and certain aspects of credit default swaps, 19 April 2012

European Financial integration and stability report

The European Commission has published this year’s integration and stability report. The report:

  • Presents a comprehensive account of the main market trends and developments in 2011 that had a direct impact on financial stability and integration.
  • Sets out the major policy steps taken in 2011 to redress the crisis situation and provide the foundations for more stable and sustained growth.
  • Provides an overview of broad trends in the evolution of the structure of the EU banking sector.
  • Gives an assessment of the impact of the crisis and regulation on the insurance sector.
  • Considers how household sector financial wealth and household borrowing evolved in the crisis.

View Post-crisis policy measures in the financial sector give way to longer-term growth goals Commission report finds, 26 April 2012

Financial Services Bill - First day of the report stage

The Financial Services Bill (the Bill) was introduced into the House of Commons on 26 January 2012 and received its second reading on 6 February 2012. The Bill was considered in a Public Bill Committee between 21 February to 22 March 2012. On 23 April 2012, the House of Commons held the first day of the report stage for the Bill.

A motion passed in the House of Commons allocates only one further day for the report stage and third reading of the Bill. These stages will occur in the 2012-13 Parliamentary session.

View Financial Services Bill - First day of the report stage, 23 April 2012

View Financial Services Bill (Programme) (No.3), 23 April 2012

Liquidity and the regulation of markets

The FSA has published a speech by David Lawton (Acting Director, Markets, FSA) entitled Liquidity and the regulation of markets.

At the start of his speech Lawton sets out why liquidity matters to regulators and how they think about it. Lawton reminds his audience that regulators often state that their objective is to ensure fair, resilient and efficient markets and encompassed within that is the notion of liquid markets. Insufficient liquidity in financial instruments can lead to:

  • Issuers, including governments, not being assured of raising sufficient funds.
  • Investors being exposed to very wide spreads or, at worst, being locked into their investments.
  • Corporate hedgers being exposed to increased costs.
  • Market-makers being exposed to increased risks.

Lawton then discusses some of the trade-offs that policymakers are confronted with when considering how to strengthen confidence in the trading environment. For example policymakers need to get the balance right between enhancing transparency and not damaging liquidity. Policymakers are also concerned about the impact on orderly trading and market resilience that may arise if market participants rapidly withdraw from providing liquidity.

Lawton then rounds off his speech by touching on some of the specific regulations currently on the table that will potentially have an impact on the trading and liquidity of financial instruments. For example:

  • The proposed Markets in Financial Instruments Regulation (MiFIR) proposes a new type of trading venue, the organised trading facility (or OTF). The FSA believes the introduction of this new type of venue category is a necessary part of the revised regulatory structure, and supports extending the scope of regulation - such as organisational requirements and access obligations - to some of the trading that currently takes place outside organised trading venues. However, the FSA feels that as a regulator it needs to ask itself whether it is in the best interests of end users - such as investors and corporations - to go further and prohibit certain structures without considering explicitly the impact on liquidity.
  • Another important issue in relation to MiFIR is that further reflection is needed on whether firms deploying algorithmic trading should be subject to continuous market-making obligations. In particular consideration needs to be given on the potential impact such market making obligations might have on trading participants if the law prohibits them from stopping trading when they experience losses.
  • The European Securities and Markets Authority is currently working on technical standards which will be used to determine which over-the-counter products will be subject to the mandatory clearing obligation under the European Market Infrastructure Regulation. Two consultation papers have so far been published, with final standards required by September and national implementation from January 2013.
  • The proposals in MiFIR only allow firms from outside the EU to solicit business in the EU where their home jurisdiction is deemed to have equivalent regulation and offers reciprocal access rights to all EU firms. The proposals also require third country firms that wish to provide investment services to professional clients to do so through the establishment of a physical branch presence in the EU. In light of the global nature of activity carried out in the EU’s international financial centres, the FSA feels that this restriction is potentially very harmful to market end users that rely on non-EU firms on a daily basis for their funding and investment needs.
  • The FSA and other international regulators have concerns about aspects of the draft US Volker rule which prohibits banks and their affiliates from engaging in bond trading for their own account. The rule is extraterritorial in its application in that it also imposes itself on non-US banks with a US presence.

At the end of his speech Lawton mentions that negotiations among Member States and the EU institutions are well underway in the Council of the EU and the European Parliament on the proposed MiFIR text. The European Parliament has produced a draft report and amendments from MEPs are to be tabled by 10 May. The Council of the EU is also working to produce a compromise text in May. However, the FSA expects that negotiations will continue into the Cypriot Presidency.

View Liquidity and the regulation of markets, 26 April 2012

Delivering effective corporate governance: the financial regulators role

The FSA has published a speech given by Hector Sants (CEO, FSA) entitled Delivering effective corporate governance: the financial regulators role.

At the start of his speech Sants explains that the financial crisis exposed significant shortcomings in the governance and risk management of firms and the culture and ethics which underpin them. This is not principally a structural issue but in fact a failure in behaviour, attitude and in some cases, competence. While the issue of good governance is primarily for firms and shareholders to address the financial crisis has demonstrated that regulators should play a role.

In relation to the regulator’s role in delivering effective corporate governance Sants then addresses three questions:

  • What do we mean when we say we want firms to have ‘effective boards’?
  • What does this mean for the regulator’s Significant Influence Function (SIF) process?
  • To what extent can the regulator incentivise the right behaviour and culture in firms?

In relation to the first question Sants explains that when you analyse those firms that failed during the financial crisis, one or more of five key indicators were evident: a dysfunctional board, a domineering CEO, key posts held by individuals without the required technical competence, inadequate ‘four-eyes’ oversight of risk and an inadequate understanding of the aggregation of risk. He then discusses effective governance, highlighting three key components:

  • There needs to be an effective board that ‘sets the right tone’ from the top. An effective board is one which crucially, understands the circumstances under which their firm would fail and constantly asks the ‘what if’ questions.
  • It is the chair’s role to construct and manage a board that has the appropriate and relevant skills and experience to enable it to function effectively. In relation to technical skills the FSA is assessing whether the board collectively understands and can address the breadth of the business. It does not expect all non-executive directors to be technical experts in financial services and it does not expect every member of the board to have the same degree of technical knowledge.
  • The importance of the board’s role in signing off the strategic plan and ensuring that the executive team execute that plan. In order to do this effectively, the board needs to see and demand management information that relates to that plan directly.

In relation to the question concerning the SIF process Sants states that in his view the financial crisis exposed the fact that there were many senior executives and non-executives in key board positions who lacked the technical skills to manage the risks of their firms. He argues that the current concerns around whether the SIF interview process has become too intrusive and cumbersome should not obscure this fact.

He explains that in the process firms need to help themselves and do more to explain, at an early stage, where and how an individual adds to the collective skill of the board. According to Sants too frequently the FSA still sees applicants who:

  • Do not understand what the job entails and have no job description.
  • Have done no due diligence into the firm they are proposing to join.
  • Are unable to discuss the risks/issues facing the sector in a proportionate way to the role they are applying for.
  • Often significantly underestimate the commitment required to perform the role effectively.

When discussing the extent to which a regulator can incentivise the right behaviour and culture in firms Sants refers to the current European banking Directive, the CRD III, which is designed to incentivise effective risk management. However, he argues that there is more that can be done to incentivise the right long-term behaviour and culture and that too often reward structures encourage short term gain and excessive risk taking.

On this topic Sants also adds that it is for boards, not the FSA, to determine individual levels of remuneration. The FSA’s remuneration framework is designed to promote sound and effective risk management and greater symmetry between the economic incentives of individuals and shareholders.

At the end of his speech Sants makes two observations on the governance of individual accountability for decision making:

  • That it would be preferable if there is a presumption that if you are on the board of a bank that fails then you should not be allowed to carry out that role in the future. The onus should be on the individual to demonstrate otherwise.
  • It is important that regulators operate a credible enforcement regime for individual wrongdoing, particularly in the conduct area. In this area much progress has been made but Sants believes it is vital that penalties are raised above the current level so that the momentum in this area is maintained.

View Delivering effective corporate governance: the financial regulators role, 24 April 2012

Consultation Paper 12/8: Changes to the Training and Competence Sourcebook

The FSA has published Consultation Paper 12/8: Changes to the Training and Competence Sourcebook (CP12/8).

In CP12/8 the FSA proposes to:

  • Add three qualifications to the ‘appropriate qualification tables’ in the Training and Competence (TC) sourcebook.
  • Amend the details for three qualifications on the ‘appropriate qualification list’ in the TC.

The proposed changes are of interest to firms and individuals who are subject to the TC requirements, including where the FSA’s professionalism requirements under the Retail Distribution Review apply.

The deadline for comments on CP12/8 is 31 May 2012.

View Consultation Paper 12/8: Changes to the Training and Competence Sourcebook, 24 April 2012

FSA enforcement

The FSA has published a Final Notice concerning Equifund Limited (Equifund) cancelling its permission to carry on regulated activities.

The FSA believes that Equifund is not conducting its business soundly and prudently and in compliance with proper standards and that it is not a fit and proper person. In addition it appears to the FSA that Equifund is failing to satisfy the threshold conditions set out in Schedule 6 to the Financial Services and Markets Act 2000.

This is because despite repeated requests by the FSA Equifund has failed to:

  • Pay fees and levies totalling £1,891.22 owed to the FSA.
  • Submit the Retail Mediation Activities Returns for the periods ended 31 October 2010, 30 April 2011 and 31 October 2011.

View Final Notice - Equifund Limited, 23 April 2012

An oil company (Exillon Energy plc (Exillon)) has been fined £292,950 for failing to identify approximately £930,000 of payments for private expenses to its former Chairman and beneficiary of the major shareholder (Mr. Arip) as related party transactions, and failing to disclose them to the FSA in a timely manner.

In the year following its listing, Exillon made a series of payments to Mr. Arip pursuant to an informal arrangement which had been in place before Exillon listed, whereby Exillon paid Mr. Arip's private expenses and set off those payments against his unpaid salary. Mr. Arip would then pay or receive the net balance.

The aggregate amount of these payments exceeded 0.25% of the aggregate market value of all Exillon's ordinary shares and triggered the requirements for related party transactions under the Listing Rules. Exillon breached Listing Principle 2 by failing to take reasonable steps to establish and maintain adequate procedures, systems and controls to enable it to comply with its obligations. The FSA did not find that Mr. Arip acted improperly in relation to the payments made to him.

View Exillon Energy plc, 26 April 2012

Bahrain: Collective Investment Undertakings Module of the Central Bank of Bahrain Consultation Paper

The Central Bank of Bahrain (CBB) issued a consultation paper on 5 January 2012 with respect to proposed revisions and new regulations in respect of the Collective Investment Undertakings (CIU) Module of the Central Bank of Bahrain Rulebook Volume 6. The purpose behind the intended changes is to introduce a new framework for the rules under this Module, new requirements for Bahrain funds in line with international standards and launch two new types of funds. The CBB has stated that these new rules will be incorporated into Volume 6 of the Rulebook in the near future.

The key changes under consultation include:

  • The introduction of new corporate governance requirements such as specific director’s duties for fund companies.
  • The CBB have introduced revised reporting requirements for new CIUs and made revisions to the reporting requirements of existing CIUs.
  • Clarifying the requirements of the three existing categories of CIU:
    • A retail CIU needs authorisation by the CBB prior to offering to all types of investors. There are no financial qualifications on who may apply for such a fund and there is no minimum investment. This CIU type is subject to detailed requirements, in particular, restrictions on asset classes into which the CIU may invest.
    • An expert CIU needs to be authorised by the CBB prior to offering to expert investors. Expert investors must have financial assets of US$100,000 and the minimum initial investment is US$10,000. This type of CIU is designed to attract moderately sophisticated investors and offers greater investment flexibility by having fewer restrictions on asset classes in which the CIU may invest compared to a retail CIU.
    • An exempt CIU needs registration (not authorisation) by the CBB prior to offering to accredited investors. Accredited investors must have minimum assets of US$1,000,000 and the minimum initial investment is US$100,000. This type of CIU has no restriction on the asset classes in which the CIU may invest but has more onerous reporting and disclosure requirements.
  • The introduction of rules and regulations to govern a new type of fund being Bahrain real estate investment trusts (B-REIT) specifically introduced to directly or indirectly acquire, hold administer, manage and sell local and foreign income generating property.
  • The introduction of rules and regulations to govern a new type of fund called a private investment undertaking (PIU) which needs registration by the CBB prior to offering high net worth investors. Such investors must have financial assets of US$25,000,000 and the minimum initial investment is US$3,000,000. There are no restrictions on the asset classes in which this fund may invest.

For further information please contact Jane Clayton or Rayhana Kapadia Sheikh

Hong Kong: Detailed proposals for trust law reform released

On 22 March 2012, the Financial Services and the Treasury Bureau of the Hong Kong Government released a consultation paper seeking comments on the detailed legislative proposals for the reform of Hong Kong trusts law. The proposals encompass amendments to the Trustee Ordinance to bring Hong Kong’s regulatory regime in line with other comparable common law jurisdictions (such as the UK and Singapore) and to cater for the needs of modern-day trusts.

If implemented, the proposals will provide clarification of trustees’ duties and powers, including imposing a statutory duty of care on trustees and improving the law relating to delegation of trustee duties. The proposals also provide for better protection of beneficiaries’ interests (including a mechanism under which beneficiaries may remove trustees) and make various modernisation suggestions, including one to abolish the rule against perpetuities.

The deadline for comments on the proposals is 21 May 2012.

View Detailed Legislative Proposals on Trust Law Reform - Consultation Paper, 22 March 2012

For further information please contact Charlotte Robins.

Hong Kong: New short position reporting regime to become effective June 2012

Hong Kong’s new Securities & Futures (Short Position Reporting) Rules and the related Securities & Futures (Offences and Penalties) (Amendment) Regulation 2012 were gazetted on 23 March 2012 and will be brought into effect on 18 June 2012.

The new legislation requires a person who has a net short position in specified shares which equals or exceeds a certain threshold, to report that position to the SFC. Failure to report is a criminal offence.

View Securities & Futures (Short Position Reporting) Rules, 23 March 2012

For further information please contact Charlotte Robins.

Singapore: Proposed changes to registration of negotiated large trades

The Singapore Exchange (SGX) is consulting the public on the following proposed changes for negotiated large trades (NLTs) in the derivatives market:

  • New functionality to enable registration of NLTs through the QUEST Application Programming Interface (API) - providing an alternative to the existing eNLT system and offering more convenience to market participants whose order management system is already connected to the SGX trading engine via API.
  • Extension of registration hours on the eNLT system to 8.00 p.m. for all SGX-DT contracts - allowing market participants greater flexibility to execute their options strategy and futures hedges and bringing SGX-DT in line with the current NLT registration practice on SGX AsiaClear.

The changes are intended to be implemented in the third quarter of 2012.

For further information please contact Daniel Yong.

Singapore: SGX introduces dual currency trading

The Singapore Exchange (SGX) has introduced dual currency trading which allows listed securities to be traded in two different currencies. This aims to give greater cost efficiency to investors through allowing them to trade securities in another currency regardless of the currency in which such securities were first traded.

For further information please contact Daniel Yong.

The Netherlands: Report Committee De Wit

On 11 April 2012, the Parliamentary Committee De Wit (Commissie De Wit) published the outcome of its assessment of the measures taken by the Dutch government during the financial crisis which were designed to stabilise the financial system and restore trust in the financial sector. The report criticizes the previous Dutch government for paying too much to rescue the bank ABN Amro and its then-owner, Fortis, in 2008. It also criticizes the oversight undertaken by the Dutch Central Bank (De Nederlandsche Bank) in relation to measures taken with respect to ING. According to the report the risks the Dutch state took upon itself were large and not transparent. The report includes a list of recommendations.

The report of Committee de Wit (in Dutch) can be found here.

For further information please contact Floortje Nagelkerke.

Netherlands: AFM on investments in bullion

On 19 April 2012, the Netherlands Authority for the Financial Markets (Autoriteit Financiële Markten, AFM) published a warning on its website in relation to investments in bullion, mostly gold and silver. The AFM notes that the offer of these commodities has increased enormously. If the commodity will be saved by the seller or a third party after the sale, it can qualify as an investment object (beleggingsobject). In principle an offeror of investment objects requires a licence from the AFM. The AFM advises that before accepting an offer persons should check whether the offeror has a licence or would need a licence. In addition they should investigate the economic risks connected to the investment in these commodities.

The publication (in Dutch) can be found here.

For further information please contact Floortje Nagelkerke.

Netherlands: AFM on compliance with ‘best execution’ obligation

On 23 April 2012, the Netherlands Authority for the Financial Markets (Autoriteit Financiële Markten, AFM) published the outcome of its review of whether Dutch banks and investment managers comply with the best execution obligation. The AFM has generally concluded that these entities do in fact comply with the obligation.

The publication of the AFM (in Dutch) can be found here.

For further information please contact Floortje Nagelkerke.

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Retail

FSA fact sheet for investment advisers - Exchange Traded Products

The FSA has published a fact sheet for investment advisers concerning Exchange Traded Products (ETPs). Most ETPs structured as funds comply with the UCITS Directive and are called Exchange Traded Funds (ETFs).

The fact sheet explains:

  • The key features of ETPs and the differences between them.
  • The investment strategies ETPs use to generate a return, and the risks these strategies pose to investors.
  • The transactions which the fund enters into with third parties to improve the investment return, including where this involves collateral.
  • The mechanisms by which ETPs are traded and the risks that investors face when trading.
  • The potential for conflicts of interest in ETP structures.

In January 2012‚ the European Securities and Markets Authority (ESMA) published a Consultation Paper concerning draft guidelines for ETFs and other UCITS issues. The deadline for comments on the Consultation Paper was 30 March 2012. The FSA states that certain aspects of the fact sheet may change following ESMA’s consultation.

View FSA fact sheet for investment advisers - Exchange Traded Products, 23 April 2012

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Seminars

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.

www.nortonrose.com/invitations/2012/your-guide-to-the-key-regulatory-challenges-in-2012-65614.aspx

Financial services regulatory products: Phoenix, Pegasus and OTC Oracle

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.

Financial services Fireside Fridays

Please click on the links below:

  • FSA Business Plan - 2012/13 (27 April 2012)
  • EMIR Part II (5 April 2012)
  • Twin Peaks - The FSA operational changes (16 March 2012)
  • AIFMD Update (2 March 2012)
  • EMIR (17 February 2012)
  • AIFMD Update (3 February 2012)
  • The regulatory year ahead (20 January 2012)
  • The regulatory year in review (16 December 2011)
  • MiFID review and third country issues (25 November 2011)
  • 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 & 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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  • 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