Financial services updater - international edition

Publication | 1 August 2011


Welcome to the latest international edition of our financial services newsletter, our newsletter service that details the latest UK and international financial services regulatory developments. In this edition we are pleased to include articles from our colleagues in Canada, France, Hong Kong, Singapore, the Netherlands and Dubai.

Highlights this week include:

  • ESMA seeks preliminary views on the potential shape of future regulation of exchange-traded funds and structured UCITS
  • Consultation Paper 11/14: Auctioning of greenhouse gas emission allowances

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.


Publication of the Commission Recommendation of 18 July 2011 on access to a basic payment account

On 18 July 2011, the Commission Regulation of 18 July 2011 on access to a basic payment account was published in the Official Journal of the European Union.

View Publication of the Commission Recommendation of 18 July 2011 on access to a basic payment account, 21 July 2011

UK owned banks’ exposures to EEA sovereigns and financials

On 15 July 2011, the four UK banks that participated in the European Banking Authority (EBA) stress tests (Barclays, HSBC, Lloyds Banking Group and Royal Bank of Scotland) published details of their exposures to the EEA 30 countries (plus the US and Japan and the rest of the world by region) as part of their stress test disclosures. In addition, the Cooperative Bank, the Nationwide Building Society and the Standard Chartered Bank also published details of their exposures to EEA sovereigns and financial institutions.

On 16 July 2011, the interim Financial Policy Committee (iFPC) recommended that the FSA compile data on the current sovereign and banking exposures of UK banks not subject to the EBA stress tests. The iFPC recommended that the FSA publish these exposures in aggregate.

The FSA has now published the aggregated exposures of 47 UK owned building societies and the remaining 30 UK owned banks to non-UK sovereigns and financial institutions as of 31 December 2010. The FSA notes that in aggregate, the UK financial system has limited direct exposures to all EEA 29 sovereigns, including to the higher risk peripheral countries. Exposures to EEA 29 financial institutions are larger but exposures to peripheral countries’ banking systems are not significant.

View UK owned banks’ exposures to EEA sovereigns and financials, 25 July 2011

Industry Best Practice - The UK Payment Schemes in the context of the PSRs conduct of business requirements

The Payments Council has published industry best practice guidance on some of the relevant features of UK payment schemes in the context of the conduct of business requirements under the Payment Services Regulations 2009.

The best practice guidance has the following chapters:

  • Definition of “D”.
  • CHAPS.
  • The faster payments service.
  • Bacs direct credits.
  • Direct debits.

The guidance is written from the scheme perspective and therefore largely focuses on direct members rather than getting into the detail of the implications for agency payment service providers or indirect members.

View Payments Services Regulations - Industry Best Practice - The UK Payment Schemes in the context of the PSRs conduct of business requirements, 25 July 2011

The banking landscape since the general election

The Department for Business Innovation and Skills (BIS) has published a speech given by Vince Cable (the Secretary of State for Business). Mr Cable’s speech is entitled The banking landscape since the general election.

In his speech Mr Cable discusses the interim report produced by the Independent Commission on Banking (ICB). Mr Cable explains that he supports full separation of retail and investment banking functions and notes that the Treasury Select Committee has expressed surprise that the ICB did not explain why it was not pursuing this approach.

Mr Cable then states that the Government will be seeking reassurance from the ICB’s final report to demonstrate that the retail ring fence can be as effective as full separation at lower cost. According to Mr Cable the key tests will be:

  • Would it stop banks using deposits underwritten by the tax payer to cross subsidise their “casino” banking operations?
  • Will the ring fence be high enough and the ‘Chinese walls’ strong enough to eliminate regulatory arbitrage by the banks?
  • Will the division between what is inside and outside the ring fence ensure that nothing resembling a universal bank remains?

According to Mr Cable, the Government will await the ICB’s final report before coming to a firm conclusion. However, he adds that once a way forward has been agreed it will be essential to put the new arrangements in place as quickly as possible.

In the final part of his speech Mr Cable discusses competition in the banking sector. He argues that until a genuinely competitive market does emerge there will need to be effective consumer protection to deal with penalty charging and other abuses. He also states that pressure for more competition needs to be increased if the banks are to respond positively. He calls on the proposed Financial Conduct Authority to have an explicit mandate to protect the interests of consumers and businesses and that this should be done through promoting competition, in parallel with the competition powers of the Office of Fair Trading.

Mr Cable also states that he believes that diversity is another key antidote and that the gradual decline in relationship banking needs to be reversed. In particular he notes that part of the answer may lie in the new challenger banks like Handelsbanken but another key element may be more community lending through Community Development Finance Institutions and credit unions.

View The banking landscape since the general election, 27 July 2011

Clearing and settlement

ECB’s Governing Council sets deadline for finalisation of the T2S framework agreement with CSDs

The European Central Bank (ECB) has issued a press release stating that it has decided to make a final offer on a framework agreement with central securities depositories (CSDs) interested in the TARGET2 Securities (T2S) project by the end of October 2011.

The framework agreement will be the contract clarifying the rights and obligations of the CSDs and the Eurosystem in relation to T2S, providing a legal basis for CSDs to adapt to T2S and safeguarding the Eurosystems’ investment in T2S.

CSDs will be expected to decide whether to sign the framework agreement before the end of 2011. The ECB calls on CSDs’ decision-making bodies to examine the remaining open issues so that as far as possible a mutual understanding can be reached ahead of the final offer being made.

View ECB’s Governing Council sets deadline for finalisation of the T2S framework agreement with CSDs, 22 July 2011

Collective investment schemes

ESMA seeks preliminary views on the potential shape of future regulation of exchange-traded funds and structured UCITS

The European Securities and Markets Authority (ESMA) has published a Discussion Paper setting out policy orientations on guidelines for UCITS exchange-traded funds (ETFs) and structured UCITS.

For ETFs, ESMA has identified the following topics for which guidelines should be developed:

  • Use of an identifier. ESMA believes that UCITS ETFs should use an identifier, in their name and in their fund rules, prospectus and marketing material, which identifies them as an ETF.
  • Index-tracking issues. ESMA believes that the prospectus of index-tracking ETFs should contain a clear and comprehensive description of the index to be tracked and the mechanism used to gain exposure to the index.
  • Synthetic ETFs. ESMA proposes certain types of information that should, as a minimum, be provided to investors in the prospectus of synthetic ETFs.
  • Securities lending activities. ESMA suggests that the collateral received should comply with the criteria for over-the-counter transactions set out in CESR’s Guidelines on Risk Measurement and Calculation of Global Exposure and Counterparty Risk for UCITS. ESMA also believes that investors should be informed about the policy in relation to collateral.
  • Disclosure of main risks of actively managed ETFs. ESMA states that investors should be clearly informed of the fact that the fund is actively managed and of the main sources of risks arising from the investment strategy.
  • Disclosure of the leverage policy when used by ETFs. ESMA calls on the prospectus of leveraged ETFs to disclose the leverage policy and the risks associated with it, as well as a description of how the daily calculation of leverage impacts on investors’ returns over the medium to long term.
  • Secondary market investors. ESMA is considering the possibility to require UCITS ETFs to give all investors, including those who acquire units on the secondary market, the right to redeem their units directly from the UCITS.

For structured UCITS ESMA believes that guidelines should be developed with regards to total return swaps and strategy indices. In addition where a structured UCITS is gaining exposure to complicated investment strategies both the structured UCITS’ investment portfolio, which is swapped, and the underlying to the swap to which the UCITS obtains exposure, should comply with the relevant UCITS diversification rules.

The deadline for comments on the Discussion Paper is 22 September 2011.

View ESMA seeks preliminary views on the potential shape of future regulation of exchange-traded funds and structured UCITS, 22 July 2011

View Discussion Paper on ESMA’s policy orientations on guidelines for UCITS exchange-traded funds and structured UCITS, 22 July 2011

The Alternative Investment Fund Managers Directive - ESMA’s draft technical advice to the European Commission

The FSA has published a speech by Shelia Nicoll, Director of Conduct Policy, on the Alternative Investment Fund Managers Directive (AIFMD) and the recent consultation paper published by the European Securities and Markets Authority (ESMA) concerning its technical advice on the Level 2 implementing measures. In her speech, Nicoll discusses the important aspects of ESMA’s advice:

  • Depositories. In particular, the liability of a depositary to restitute the alternative investment fund (AIF) for lost assets. ESMA is seeking the input of stakeholders to achieve a balanced outcome that provides an appropriate level of investor protection without creating systemic risk. In some cases, depositaries must take additional ‘appropriate actions’. Nicoll comments that it would be useful for ESMA to explain what this means. ESMA’s consultation also considers other aspects of the depositary’s role and the relationship between the depositary and prime broker, which is important in the hedge fund area.
  • Leverage. Nicoll uses two key phrases when explaining the ESMA consultation: ‘proportional application’ and ‘robust methodology’. The former relates to how the fund and its investors view leverage by providing for an ‘advanced method’. This allows for tailoring by the manager. In regard to the latter, ESMA’s consultation limits the extent to which leverage can be hidden behind layers of derivatives or via complicated hedging and netting relationships. However, Nicoll comments that practitioners may require further clarity on matters such as how borrowings within a portfolio company and fund of fund structures should be treated.
  • Transparency. A main objective of the AIFMD is to increase transparency. Requirements include: the annual report of the AIF, disclosure to investors and reporting requirements. Remuneration disclosure is still a contentious issue but ESMA’s consultation provides a proportional response and ensures flexibility. ESMA proposes that, AIFMs should be required to report to the competent authorities on a quarterly basis. Nicoll states that it is important for stakeholders to explain their existing practices.
  • Risk management. This area draws heavily on existing UCITS requirements. There is debate around the provision of a non-exhaustive list of specific safeguards that AIFM should apply against conflicts of interests. In particular, whether all or only certain safeguards should be mandatory.
  • Scope. ESMA’s consultation clarifies the AIFMD in this regard. Nicoll explains that the AIFMD allows managers to delegate functions to third parties but not to the extent that the AIFM becomes a ‘letter box entity’.
  • Valuation. The AIFMD requires an independent performance of the valuation function. ESMA clarifies that this relates to the valuation of individual assets, not the calculation of net asset value and also that there can be more than one external valuer. In Nicoll’s view this provides a workable framework.
  • Capital. The AIFMD’s requirements are broadly consistent with that for UCITS management companies but there are additional requirements in relation to professional negligence. ESMA’s proposals in relation to capital requirements are unlikely to result in significant changes for many fund managers.
  • Third-country aspects. Whilst ESMA’s consultation has not covered the aspects of AIFMD that govern the regulation of non-European AIFs and their managers it is committed to further consultation in this area. Nicoll quotes ESMA’s chairman, Steven Maijoor who has acknowledged the importance of ensuring that “an effective and efficient regulatory framework is in place in Europe for the recognition of third country service providers”.

View The Alternative Investment Fund Managers Directive - ESMA’s draft technical advice to the European Commission, 21 July 2011

UK asset managers call for supportive regulatory and competitive environment to benefit investors

The Investment Management Association (IMA) has published its ninth annual asset management survey. The survey reflects in-depth interviews with 30 senior figures, primarily CEOs, CIOs and Chairmen, from 23 asset management firms. The survey found that 70 per cent of interviewees said that the volume and appropriateness of new regulation hitting the asset management industry was a key concern.

View UK asset managers call for supportive regulatory and competitive environment to benefit investors, 25 July 2011

Assessing the possible sources of systemic risk from hedge funds

The FSA has published a paper entitled Assessing the possible sources of systemic risk from hedge funds. The paper sets out the results of the FSA’s latest Hedge Fund Survey (HFS) conducted in March 2011 and the Hedge Fund as Counterparty Survey (HFACS) conducted in April 2011.

Both surveys are conducted every six months and form an important part of the FSA’s work on assessing risks to financial stability from outside the boundary of prudential regulation. Therefore this forms a key component of the FSA’s efforts to protect and enhance the stability of the UK financial system, which is one of its statutory objectives.

The key findings from the surveys were:

  • Nearly all surveyed hedge funds had positive returns for the survey period.
  • The footprint of surveyed hedge funds within markets is generally small when measured by the value of their holdings, suggesting that, in aggregate, the hedge funds surveyed do not have a major presence in most markets.
  • Leverage has not changed significantly in aggregate relative to previous surveys.
  • Hedge funds appear to have extended the term of their financing recently. Nevertheless, the risk of a sudden withdrawal of liabilities during stressed markets is likely to remain, with an associated risk of fire sales of assets.
  • Counterparty credit exposures to hedge funds remain concentrated amongst a small number of banks.

The FSA intends to repeat the HFS in September 2011 and the HFACS in October 2011.

View Assessing the possible sources of systemic risk from hedge funds, 27 July 2011

FSA Handbook

Handbook Release 115

The FSA has published Handbook Release 115. This Release contains pages to be inserted into paper versions of the Handbook in order to bring it up to date and incorporate the changes that came into force between 7 June 2011 to 6 July 2011.

View Handbook Release 115, 21 July 2011

Proposed guidance on liquidity swaps

The FSA has issued a guidance consultation on liquidity swaps.

The proposed guidance is not intended to be an exhaustive description of the prudential treatment that counterparties to these transactions can expect, as the FSA will have to perform a case-by-case Pillar 2 assessment in the absence of specific Pillar 1 rules. Rather the purpose of the guidance is to:

  • Alert firms to the FSA’s prudential concerns about liquidity swaps and tell firms engaging in these transactions that they should inform the FSA before execution under Principle 11 of the Principles for Businesses.
  • Inform firms of the basis for the FSA’s Pillar 2 assessment. This should then assist firms in adequately addressing the FSA’s prudential concerns.

In terms of the consultation, from the FSA’s perspective the principal issues are:

  • Wrong-way risk - use of own-issued or own originated securities.
  • Limit structures - interdependencies between micro-prudential and macro-prudential risks.
  • Intra-group transactions - conflicts of interest.

The deadline for comments on the guidance consultation is 21 September 2011.

View Proposed guidance on liquidity swaps, 21 July 2011


FSA Solvency II webpage

The FSA has updated its Solvency II webpage. The FSA now provides an update for firms on the pre-application phase of the internal model approval process (IMAP). In particular the FSA discusses the development of quantitative techniques and tools and the use of external review.

View FSA Solvency II webpage, 26 July 2011

Smaller Wholesale Insurance Intermediaries newsletter - Issue 6

The FSA has published its latest newsletter for smaller wholesale insurance intermediaries. In this newsletter the FSA briefly discusses:

  • The recent FSA paper on the regulatory approach of the Financial Conduct Authority.
  • Client money compliance.
  • Responsibilities concerning the taking on of Appointed Representatives.
  • Action taken by firms since the publication of the FSA’s report into Anti-Bribery and Corruption in Commercial Insurance Broking.
  • An update on the European Commission’s proposed changes to the Insurance Mediation Directive.
  • New rules on consumer complaint handling.

The FSA also reminds firms to keep their contact details up-to-date. This is particularly important as the FSA is sending firms more communications electronically.

View Smaller Wholesale Insurance Intermediaries newsletter - Issue 6, 27 July 2011

Money laundering

Common understanding between Member States on third country equivalence under the Anti-Money Laundering Directive (Directive 2005/60/EC)

The European Commission has published a list of third countries that are currently considered as having equivalent anti-money laundering (AML) and counter-terrorist financing (CFT) systems to the EU. The list has been compiled in accordance with Article 11 of the Anti-Money Laundering Directive 2005/60/EC (the Directive), which contains an obligation for Member States to inform each other, the European Supervisory Authorities (ESAs) and the Commission of cases where they consider that a third country meets EU AML or CFT equivalence standards. The list is necessary in order to apply certain provisions of the Directive such as simplified due diligence.

The list was prepared in accordance with the Common Understanding on the Procedure and Criteria for the Recognition of Third Countries' Equivalence agreed by Member States. It is important to note that the list will be reviewed regularly, and that it does not override the need to continue to operate a risk-based approach. Similarly, the list does not override the obligation under Article 13 of the Directive to apply enhanced customer due diligence measures in all situations which by their nature present a higher risk of money laundering or terrorist financing. The Commission also stresses that the assessment of third country equivalence remains an obligation of the Member States.

View Common understanding between Member States on third country equivalence under the Anti-Money Laundering Directive (Directive 2005/60/EC), 26 July 2011

Treasury statement on money laundering controls in overseas jurisdictions

The Treasury has published a financial sector supervisory notice concerning money laundering controls in overseas jurisdictions.

The notice constitutes advice issued by the Treasury about risks posed by unsatisfactory money laundering controls in a number of jurisdictions. The advice is set out in three parts:

  • Part A. Jurisdictions with ongoing and substantial money laundering and terrorist financing risks.
  • Part B. Jurisdictions with strategic deficiencies in their anti-money laundering / counter terrorist financing (AML/CTF) regime which have developed an action plan with the Financial Action Task Force (FATF).
  • Part C. Mutual evaluation of Argentina by the FATF.

The Treasury states that the advice is particularly relevant if firms conduct any business with individuals or entities based in any of the jurisdictions referred to in Parts A, B or C. The advice also supersedes previous advice issued by the Treasury in connection with deficiencies in AML/CTF in these jurisdictions particularly the Treasury advice issued on 15 April 2011.

View Treasury statement on money laundering controls in overseas jurisdictions, 26 July 2011

Regulation and compliance

The EU Financial Supervisory Framework: An update

The House of Lords EU Sub-Committee responsible for Economic and Financial Affairs and International Trade has published an update report on the EU financial supervisory framework.

The Committee strongly supports the principle that the day-to-day supervision of financial institutions should take place at a national level. However, the Committee also recognises that in exceptional circumstances it may be necessary for the European Supervisory Authorities (ESAs) to exercise emergency powers and temporarily overrule national supervisors. The Committee believes that as a general rule, these powers should only be available to the ESAs if the Council of Ministers declares an emergency. The Committee also notes, however, that the proposed European Regulation on short selling and certain aspects of credit default swaps should be seen as an exception to this general rule. The Government is called on to review its objections to provisions giving the European Securities and Markets Authority enhanced intervention powers.

The Committee also argues that it is vital that the UK exert significant influence in the ESAs given London’s status as a finance centre. The Committee is concerned that the Government’s proposed changes to the FSA may compromise the leadership role the UK has been able to take up until now. The Government is asked to set out in detail the structures and mechanisms they intend to put in place to guarantee that the proposed new UK supervisory bodies present a cohesive and unified face within the ESAs.

View The EU Financial Supervisory Framework: An update, 21 July 2011

Sovereign credit ratings: Shooting the messenger?

The House of Lords EU Sub-Committee responsible for Economic and Financial Affairs and International Trade has published a report in relation to its inquiry into credit rating agencies’ influence on the EU’s sovereign debt crisis.

The report sets out four key recommendations which are:

  • Market investors must take responsibility for their own decisions.
  • EU Governments should focus on correcting the flawed market structures which give undue weight to the rating agencies’ opinions.
  • Credit rating agencies must learn from their failure to identify mounting risks in some euro area Member States.
  • The European Commission should not press forward with proposals to establish a publicly funded European credit rating agency.

Committee Chairman, Lord Harrison, said:

"The ratings agencies have attracted a huge amount of attention and criticism as they have downgraded the ratings of Greece, Ireland and Portugal over the past year. They failed to spot risks which had been building within these states long before the crisis hit. Although they were not alone in this failure it does not absolve them of responsibility.

The criticism they have faced, however, has largely been unjustified. The rating agencies did not precipitate the crisis, nor do we believe it is possible to say with any certainty that they exacerbated it. Valid concerns over their role in the 2008 financial crisis should not be allowed to colour an objective assessment of their decisions relating to the creditworthiness of some Member States' sovereign debt. Their recent downgrades merely reflect the seriousness of the problems facing countries such as Ireland, Portugal and Greece.

Ratings are ultimately subjective predictions. Instead of criticising these downgrades, Member States should be working to amend the flawed financial rules which lend these judgements excessive weight. Investors, meanwhile, should view ratings as opinions that need to be balanced and confirmed by other market indicators. The final responsibility for investment decisions lies with investors."

View Sovereign credit ratings: Shooting the messenger?, 21 July 2011

Will the new Financial Services Bill protect against crisis?

A new joint committee has been appointed by both Houses of Parliament to conduct pre-legislative scrutiny of the draft Financial Services Bill. The joint committee comprises 6 MPs and 6 peers.

The joint committee has issued a call for evidence as part of its inquiry into the draft Bill. The call for evidence sets out 22 detailed questions on the draft Bill and the Government’s proposals for regulatory reform. In addition to the detailed questions the joint committee is interested in whether the draft Bill will or could better prevent another financial crisis. The joint committee is also interested in whether the proposals in the draft Bill will increase or decrease the risk of regulatory arbitrage of financial businesses.

The deadline for written submissions to the joint committee is 2 September 2011.

View Will the new Financial Services Bill protect against crisis?, 21 July 2011

Consultation Paper 11/14: Auctioning of greenhouse gas emission allowances

The FSA has published Consultation Paper 11/14: Auctioning of greenhouse gas emission allowances (CP11/14).

In CP11/14 the FSA is proposing to make certain amendments to the Recognised Investment Exchanges and Recognised Clearing Houses sourcebook (REC), the Fees manual (FEES) and related definitions in the Glossary of definitions. The FSA is proposing these changes to complement the Treasury implementation of a new regulatory regime applicable to platforms that will conduct auctions in emission allowances.

In chapter 2 the FSA describes the background of the proposed amendments. The proposed amendments to REC are set out in chapter 3 and the proposed amendments to the FEES manual are contained in chapter 4. A costs benefit analysis and a statement of the proposals’ compatibility with the FSA’s regulatory objectives and the Principles of Good Regulation are provided as annexes. Appendix 1 of CP11/14 sets out the text of the proposed amendments.

The deadline for comments on CP11/14 is 18 September 2011.

View Consultation Paper 11/14: Auctioning of greenhouse gas emission allowances, 25 July 2011

FOS update on Arch cru

On 21 June 2011, the FSA, Capita Financial Managers Limited (CFM), BNY Mellon Trust & Depositary (UK) Limited and HSBC Bank plc confirmed the voluntary establishment of a £54 million package for CF Arch cru investors who invested in the CF Arch cru Investment Fund and the CF Arch cru Diversified Fund.

The FSA considers the package to be a fair and reasonable outcome, which is in the best interests of investors. Investors have a choice whether to accept the offer of payment out of the payment scheme which has been established by the firms. If they accept, it will be in full and final settlement of any claims or any remedies they may consider they would otherwise have against the firms.

Since the FSA’s announcement the Financial Ombudsman Service (FOS) has received a number of enquiries about the complaints it has received relating to Arch cru investments. The FOS states that it is waiting for the FSA to confirm the details of the scheme before it can consider complaints further.

The FSA is currently working out the details of the payment scheme. The administrator of the payment scheme, Capita, has said that it will be writing to update investors with further information before 31 August 2011.

View FOS update on Arch cru, 26 July 2011

Canada: Canadian Task Force on payments system issues discussion paper

The Task Force for the Payments System Review has recently published its discussion paper The Way We Pay: Transforming the Canadian Payments System. The discussion paper presents the research of the Task Force to date and elaborates on the goal of Canada to become a world leader in payments. The Task Force for the Payments System Review was established in June 2010. Its mandate is to provide the Canadian Minister of Finance with recommendations about the safety, soundness and efficiency of the payments system, to identify public policy objectives for the operation and regulation of the system and to identify a regulatory and institutional structure to achieve these objectives.

The payments system is undergoing a dramatic shift as the information revolution continues. The discussion paper outlines the challenges which must be addressed and sets out the elements of a proposed governance framework for the system. The following are identified by the Task Force as the fundamental challenges facing the Canadian payments system:

  • Increasing fairness in the credit and debt card networks.
  • Updating the fragmented regulatory and governance structure for payments.
  • Improving on-line authentication, security and privacy for on-line payments.
  • Transitioning to a digital economy.

The components of the proposed governance framework are:

  • Payments legislation.
  • An industry self-governing organization.
  • A basic payments infrastructure.
  • A payments oversight body.

The discussion paper is a must read for organizations and individuals involved in the payments landscape and public response to the discussion paper is encouraged. The Task Force intends to submit its final recommendations to the Minister of Finance at the end of 2011.

View The way we can pay - Transforming the Canadian Payments System, July 2011

For further information please contact Andrew Fleming

Hong Kong and Singapore: Establishing an asset management presence in Hong Kong and Singapore

Asia is viewed as a key area for the future growth of the asset management industry, with many financial institutions showing a keen interest in expanding in the region. Hong Kong and Singapore with developed financial markets providing access to mainland China and India, as well as other countries in the region, are key jurisdictions for asset management companies to grow their business.

Our Asia Financial Services team has prepared a briefing that provides an overview of the key regulatory and licensing issues required to establish an asset management business in Hong Kong and Singapore.

View Establishing an asset management presence in Hong Kong and Singapore, 26 July 2011

For further information please contact Daniel Yong or Charlotte Robins

Hong Kong: SFC to appeal Court’s dismissal of Tiger Asia proceedings

On 14 July 2011, the Court of First Instance (the Court) ordered that the Securities and Futures Commission’s (SFC’s) proceedings against Tiger Asia Management LLC (Tiger Asia) and three of its officers (collectively the Tiger Asia Parties) be struck out. This follows an earlier decision on 21 June 2011 that the Court did not have jurisdiction under section 213 of the Securities and Futures Ordinance (SFO) to find contraventions of the insider dealing and market manipulation laws.

The SFC argued that the order on the trading ban did not require the Court to find a contravention and that this part of the SFC’s case should not be struck out. The Court considered that the SFC had not argued this in the earlier hearing and held that the Court did not have jurisdiction to make the final orders that determine the Tiger Asia Parties substantive legal rights on the basis without proof of an actual contravention, i.e. prima facie evidence of a contravention does not justify a final order. The Court reiterated its earlier decision that the Court does not have power to make final orders sought by the SFC under section 213 of the SFO without a prior finding of a breach of the SFO by the market misconduct tribunal or a criminal court.

The whole of the SFC’s proceedings against the Tiger Asia Parties were therefore struck out.

The SFC has announced that it challenges the Court’s decision and intends to appeal.

For further information please contact Charlotte Robins

Hong Kong: New statutory obligation to disclose price-sensitive information

The Securities and Futures (Amendment) Bill 2011 (the Amendment Bill) has been introduced to the Legislative Council (Legco). If passed into law in its current form, it will create a new statutory obligation on listed companies and their officers to publicly disclose any “inside information” that comes to their knowledge. “Inside information” will mean the same as “relevant information”, meaning “price-sensitive information not in the public domain”, a term used in respect of insider dealing under the Securities and Futures Ordinance.

The SFC has also published a revised draft of the Guidelines on Disclosure of Inside Information (the Guidelines). The Guidelines are designed to assist listed corporations in complying with the proposed statutory obligations and provide guidance on the interpretation and application of provisions in the Amendment Bill.

The Guidelines:

  • Provide a wide range of examples of what may be inside information, when and how to disclose.
  • Explain the circumstances under which a listed company can delay the disclosure of inside information.
  • Explain the circumstances under which a listed company will fall within safe harbours that allow non-disclosure.

The Guidelines may be further revised once the Amendment Bill has passed through the Legco. The final version of the Guidelines will be published in the Gazette and will take effect on the same day as the Amendment Bill.

View A mark-up copy of the Guidelines

For further information please contact Charlotte Robins

Hong Kong: Codification of AML requirements

The Anti-Money Laundering and Counter-Terrorist Financing (Financial Institutions) Ordinance (AMLO) was gazetted on 8 July 2011 and will come into force on 1 April 2012. This follows public consultations by the Financial Services and the Treasury Bureau (FSTB).

In response to FATF Recommendations, the AMLO seeks to improve Hong Kong’s anti-money laundering regime for the financial sector to better align it with prevailing international standards, and help strengthen Hong Kong’s status as an international financial centre. There are codified statutory customer due diligence (CDD) and record-keeping requirements.

The most significant aspect of the AMLO is the introduction of criminal penalties for failure to conduct appropriate CDD.

Regulatory bodies in Hong Kong, including the Securities and Futures Commission (SFC), Hong Kong Monetary Authority (HKMA), Office of the Commissioner of Insurance and Custom and Exercise Department, are working closely with the FSTB to prepare industry focused guidelines to assist financial institutions operating in Hong Kong in creating and adhering to suitable policies, systems and controls to meet the requirements of the AMLO.

For further information please contact Charlotte Robins

Singapore: MAS’s capital adequacy rules to subject Singapore banks to more stringent rules than Basel III

In late June, the Monetary Authority of Singapore (MAS) announced their new capital adequacy rules (the Rules). The Rules, created to ensure the future stability of banks in Singapore, are set to exceed the rules and regulations imposed by Basel III. The Rules differ from Basel III in two main ways:

  • Basel III standards require banks to have a total capital adequacy ratio (CAR) of 8 per cent and a Tier 1 CAR of 6 percent. The MAS requires Singapore‑incorporated banks to have a total CAR of 10 percent and a minimum Tier 1 CAR of 8 per cent by 2015.
  • Basel III standards require banks to have a minimum common equity Tier 1 (CET) CAR of 4.5 per cent by 2015. The MAS requires Singapore‑incorporated banks to have a CET CAR of 4.5 per cent by 2013 initially, increasing to 6.5 per cent by 2015.

For further information please contact Daniel Yong

France: Proposed changes to credit broker status

Under French law, credit brokers have traditionally been qualified as “Intermediaries in Banking Transactions” (intermédiaires en opérations de banque) if, on an “habitual” basis, they brought together natural persons or legal entities interested in entering into a banking transaction (e.g. a credit transaction). This status remained remarkably impervious to European legislation until recently, when two changes occurred in rapid succession.

The first recent change was the modification of the status of intermediary to encompass the provision of payment services as a result of the French implementation of the Payment Services Directive.

The second recent change resulted from the uncertainty of the scope of the term “bringing natural persons or legal entities together”. Such concept was replaced by a new definition modelled on the EU notion of insurance brokers. It now encompasses the activities of “introducing, proposing or assisting with the carrying out of a banking transaction or a payment service by requesting or collecting the consent of a potential client on the practicalities of a banking transaction or a payment service”.

So far, the requirements placed on Intermediaries in Banking Transactions have been limited in that they only had to be appointed by, and enter into, an agreement with a properly licensed credit payment services institution. Furthermore there are currently no disclosure or remuneration requirements placed on them.

However, this may change.

Legislation has been recently introduced that requires Intermediaries in Banking Transactions to register on a master list now encompassing all sorts of intermediaries (financial advisors, insurance brokers and tied agents). A draft décret has also been published for consultation which contemplates imposing additional requirements on Intermediaries in Banking Transactions. Such requirements cover a wide range of issues including financial guarantee, professional competence, liability insurance, conduct of business rules inspired by the MiFID (such as collecting information on the client’s experience and “predictable evolutions” of clients’ needs in terms of banking transactions) and remuneration related transparency (for example intermediaries having to disclose credit institutions that account for over a third of their turnover upon client request).

The consultation has met with scepticism on the part of the industry on the grounds that rules promulgated in the realm of investment services could not be replicated to banking activity and that this reform was untimely in light of the creation of a new status for intermediaries on credit agreements relating to residential property as part of an upcoming EU Directive.

For further information please contact Roberto Cristofolini or Anselme Mialon

Netherlands: AFM publishes warning texts

On 1 July 2011, the majority of provisions in the Financial Markets Amendment Act 2010 (Wijzigingswet financiële markten 2010, the Act) entered into force. The Act contains a number of amendments to the Dutch Act on the Financial Supervision (Wet op het financieel toezicht, AFS), such as the voluntarily supervision regime for exempted managers of investment funds, raising the threshold of the exemption from the licence requirements for offering investment objects, participations in investment funds and securities from EUR 50,000 to EUR 100,000, as well as the introduction of the so-called “wild west sign”.

As of 1 January 2012, offerors of investment objects, participations in investment funds and securities which are exempted from the licence and/or prospectus obligation are obliged to include the ‘wild west sign’ in their advertisements and other information documents. This means they need to state that they do not have a licence and that their offer is not supervised by the Netherlands Authority for the Financial Markets (Autoriteit Financiële Markten, AFM). The AFM recently published the texts of the ‘wild west sign’. The mandatory notice reads: “Watch out! You are investing outside AFM-supervision. There is no licence obligation for this activity”, or: “Watch out! You are investing outside AFM-supervision. There is no prospectus obligation for this activity”. These sentences should be accompanied by a symbol representing a thinking person with a question mark. Offerors which only offer investment objects, participations in investment funds and securities to qualified investors are exempted from the obligation to include these warnings in their advertisements and other information documents.

As of 1 July 2012, all collective investment schemes will be obliged to provide the so-called "Essential Investor Information". In advertisements, the new warning sentence will read: “Do not run unnecessary risks. Read the Essential Investor Information”. The Essential Investor Information replaces the financial leaflet (financiële bijsluiter) (this is a simplified prospectus) for investment schemes. The Essential Investor Information is the same document as the Key Investor Information Document under UCITS IV. For more complex financial products, the financial leaflet will persist. The AFM has also published new risk indicators which indicate return and risk on a scale of 1 to 7. There are standard indicators for the use of various media.

View Text of the AFM for the wild west sign (in Dutch)

View The Amendment Regulation (in Dutch)

View The new warning texts of the AFM (in English) for collective investment schemes

View The new risk indicators (in Dutch)

For further information please contact Floortje Nagelkerke

Netherlands: UCITS IV enters into force

On 22 July 2011, UCITS IV was implemented into the Dutch Act on the Financial Supervision (Wet op het financieel toezicht, AFS) and underlying decrees. A European passport for managers (beheerders) has been introduced, which allows the management of an undertaking for collective investments in transferable securities (instelling voor collective belegging in effecten, UCITS) in another member state without the need to obtain a separate licence. The implementation also provides the possibility for a UCITS to invest in another UCITS (master-feeder-structure). Furthermore, the protection of investors is improved by the implementation of the European harmonised rules on investor information. Pursuant to these rules, it is now possible for investors to compare UCITS from different member states.

View the implementation (in Dutch)

For further information please contact Floortje Nagelkerke

Netherlands: Consultation on Dutch AML/CFT Act

On 19 July 2011, the Netherlands Ministry of Finance (Ministerie van Financiën) published a consultation on amendments to the Dutch anti-money laundering and anti-terrorist financing Act (Wet ter voorkoming van witwassen en financiering van terrorisme, Wwft) (the Consultation).

The Consultation follows the third evaluation by the Financial Action Task Force (FATF) on the Netherlands application of the European anti-money laundering and anti-terrorist financing rules. The FATF made some recommendations to the Netherlands after observing a few shortcomings in the Wwft. The Consultation aims to include the recommendations of the FATF and sees, amongst others, to the mandatory know-your-customer investigation under the Wwft. The Consultation closes on 11 September 2011.

View The Consultation (in Dutch)

For further information please contact Floortje Nagelkerke

Netherlands: Fees and costs for AFM supervision 2011 published

On 5 July 2011, the Dutch Ministry of Finance (Ministerie van Financiën) published the fees and costs for the ongoing supervision of the Netherlands Authority for the Financial Markets (Autoriteit Financiële Markten) for the year 2011.

View Regulations on the fees (in Dutch)

For further information please contact Floortje Nagelkerke

Netherlands: EU-wide stress test 2011: Results for the Netherlands

On 15 July 2011, the Dutch Ministry of Finance (Ministerie van Financiën) and the Dutch Central Bank (De Nederlandsche Bank) published the results of how the Dutch banks performed in the European Banking Authority’s 2011 EU-wide stress test. The purpose of the stress test was to assess the resilience of the EU banking system to severe shocks under a plausible but unlikely scenario. All participating Dutch banks (ING Bank N.V., Rabobank Nederland, ABN AMRO Bank N.V. and SNS Bank N.V.) were found to be adequately capitalised, with CT1 ratios significantly above the 5% benchmark under the stress scenario.

View Report on the results of the stress test (in English)

For further information please contact Floortje Nagelkerke

Dubai: DFSA consultation on proposed changes to the Markets Law regime

The Dubai Financial Services Authority (DFSA) published consultation paper No. 75 (the Consultation Paper) earlier this year to propose changes to the “Markets Law regime” in the Dubai International Financial Centre (DIFC). The “Markets Law regime” is currently contained in the Markets Law, DIFC Law No.12 of 2004, as amended (the Markets Law) and the Offered Securities Rules module contained in the DFSA Rulebook (the OSRs).

The Consultation Paper proposes significant changes to the current legislative and regulatory framework applicable to securities and capital markets in the DIFC. The primary intention of the Consultation Paper is to bring such framework into closer alignment with the EU Prospectus Directive (as amended) (PD) and the EU’s Market Abuse Directive (MAD). However, due to the needs and circumstances that are particular to the region the DFSA has also recognised the need to retain certain features of the current regime and a degree of flexibility.

The Consultation Paper’s key areas of focus include:

  • The requirement for a prospectus to be produced (and approved by the DFSA) where there is an offer of securities to the public in or from the DIFC or securities are admitted to trading on an Authorised Market Institution (an AMI).
  • Governance of reporting entities.
  • Market disclosure of information.
  • Requirements applicable to funds listed on an AMI in the DIFC.

In order to deal with the significant changes being proposed, the DFSA is proposing to repeal and replace the Markets Law and the OSRs with the Markets Law 2011 and the Markets Rules Module (which will be included in the DFSA Rulebook) respectively. Consequential amendments are also proposed to be made to other modules of the DFSA Rulebook such as the Authorised Market Institutions module and the Glossary module.

For further information please contact Jane Clayton or Emma Chee.


Hector Sants letter to Andrew Tyrie re RDR

On 16 July 2011, the House of Commons’ Treasury Committee (the Committee) published a report on its inquiry into the Retail Distribution Review (RDR). In the report the Committee called on the FSA to delay the implementation of the RDR for 12 months.

On 20 July 2011, the Committee published a letter which referred to the FSA circulating an embargoed response to the report which rejected “in a peremptory manner” the recommendation of delaying the implementation of the RDR. According to the Committee’s letter this rejection was issued within hours of the embargoed copies of the report being distributed. The Committee’s letter further stated that it deprecates the FSA’s action and that it was precipitate, giving the impression that no adequate consideration was given to the arguments advocating the delay.

The FSA has published a letter from Hector Sants (Chief Executive, FSA) in response to the Committee’s letter. In his letter Sants assures the Committee that the FSA is carefully considering the recommendations in the report and will follow its usual practice of submitting a full response. This will take some weeks but the FSA intends to submit it by the end of September. Sants also states that prior to responding to the report the FSA will continue to consider whether further mitigating actions are necessary to address concerns that firms or individuals will be unable to meet the RDR deadline. Sants mentions that, for example, the FSA will be publishing guidelines on eligibility for waivers from the qualifications requirements. Sants also makes it clear that it was not the intention of the FSA’s earlier statement to be seen as a peremptory rejection of any element of the Committee's report. Rather, it was intended simply to ensure that the momentum behind the preparations for the RDR is not lost.

View Hector Sants letter to Andrew Tyrie re RDR, 21 July 2011

View Treasury Committee letter to Hector Sants on RDR, 21 July 2011

Savings accounts: Complaints that the interest rate is too low

The Financial Ombudsman Service (FOS) has published an online technical note entitled savings accounts: complaints that the interest rate is too low.  

This technical note deals with cases where a consumer complains to the FOS that the interest rate on a savings or deposit account is too low. The FOS explains that when dealing with these complaints it will take into account:

  • The advice given by the financial institution, and whether this advice was reasonable.
  • The terms and conditions of the account.
  • Whether the consumer was given sufficient and clear information by the financial business.
  • Industry codes, regulations and guidance.
  • Whether the consumer was treated unfairly.
  • The steps taken by the consumer.

View Savings accounts: Complaints that the interest rate is too low, 21 July 2011