Financial services updater- international edition

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

Highlights this week include:

• Banking supervision: towards an EU Single Rulebook
• Delivering Fair Treatment for Consumers of Financial Services - Adamson’s speech

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 supervision: towards an EU Single Rulebook

The European Banking Authority (EBA) has published a speech given by its chairman, Andrea Enria. The speech is entitled Banking supervision: towards an EU Single Rulebook.

In the first part of his speech Enria discusses the proposal the EBA has put forward to deal with the impact of the sovereign debt crisis on EU banking markets. In the second part of his speech Enria focuses on the concept of the EU Single Rulebook.

Enria starts his discussion of the EU Single Rulebook by stating that the idea is quite simple. In that it envisages that key technical rules should be defined at the EU level and adopted through EU Regulations, so that they are directly applicable to all financial institutions operating in the Single Market, without any need for national implementation or possibility for additional layers of local rules. He argues that the need for change stems from the fact that although the bulk of EU financial regulations originate from Directives, much flexibility has been left which has been fully exploited by Member States. Under the umbrella of the same EU legislation a very diverse regulatory environment has flourished.

Enria notes that support for the concept of the EU Single Rulebook seems to be already faltering. More generally, financial regulation is increasingly seen as a tool for protecting national taxpayers, with some arguing that sufficient flexibility should be allowed to adapt to local preferences and specificities. Enria then covers the arguments opposing the EU Single Rulebook but ultimately responds by stating that the financial crisis has shown that financial regulation needs to be overhauled and that effective and long lasting results can only be achieved if efforts are conducted jointly, at a truly European level.

Enria then discusses the origins of the EU Single Rulebook through measures concerning bank capital, liquidity and crisis management and resolution. When considering the CRD IV he notes that the EBA needs to accomplish around 200 tasks. By the end of next year it will have to finalise around 40 implementing and regulatory standards.

Enria states that he believes that the key litmus test for the EU Single Rulebook will be in two areas: the definition of capital and the implementation of the new liquidity standards. A third essential hurdle will be the implementation of the new Directive on crisis management and resolution, which the Commission should issue in the near future.

Enria notes that the definition of capital has been one of the key loopholes in the run up to the financial crisis. He argues that the Basel Committee on Banking Supervision (BCBS) has done a great job in significantly strengthening the definition of capital and that work now needs to be done to make sure that those criteria are implemented in a rigorous fashion throughout the EU. Enria then turns to the EBA’s work in this area mentioning that EBA standards should make sure that consistency is achieved in the calculation of risk weighted assets and in the algorithms needed to compute the relevant ratios. The work on the consistency in the calculation of risk weighted assets has already started under the aegis of the BCBS, but also the EBA will have to invest in this topic. The EBA plans to attribute great priority to this work stream in 2012.

Turning to liquidity requirements Enria acknowledges that the proposals put forward by the BCBS and mirrored in the Commission’s CRD IV proposals have caused concern in the industry. Enria argues that the basic principles of the new standards are sound: banks need to keep buffers of liquid assets readily available to withstand potential stress for a sufficient period of time, without having to resort to support from the central bank; and constraints need to be in place to prevent excessive mismatch between the maturity of assets and liabilities. However, Enria accepts that the technical details of the two ratios - the liquidity coverage ratio (LCR) and the net stable funding ratio (NSFR) - have to be carefully reviewed and calibrated to ensure they achieve the intended results. The EBA will be asked to collect and analyse data from EU banks and report back to EU institutions on the expected impact of the new requirements, with special attention to the financing of the real economy and SMEs. Enria confirms that the EBA has already started its work, in parallel with the steps undertaken by the BCBS. In addition, the EBA will also need to issue technical standards and make sure that the aggregates, the methodologies for calculating the relevant ratios and the reporting standards are effectively the same for all EU banks, with common principles to apply proportionality.

Enria then discusses crisis management, stating that a formal legislative proposal by the European Commission on harmonisation of crisis management and resolution is forthcoming. In relation to the new resolution system Enria argues that it will have to include mechanisms that call for a contribution of uninsured creditors in restoring an ailing bank’s viability - the so called bail-in. The most important point Enria raises on the bail-in is timing. He states that in order to avoid the new rules contributing to existing difficulties on the bank funding markets, it would be appropriate that the entry into force of such rules be made with reference to debt issued after a certain date.

In the final part of his speech Enria discusses a further hurdle, convergence in supervisory practices. He notes that it is a fact that supervisory approaches and traditions are quite diverse in the EU. This means that even in the presence of exactly the same rules, supervisory outcomes could be quite different. Enria argues that the EU should set itself the long term goal of a Single Guidebook for supervisors, a manual that defines common procedures and processes for examiners.

View Banking supervision: towards an EU Single Rulebook, 5 December 2011

Record of the Interim Financial Policy Committee Meeting (23 November 2011)

The Bank of England has published a record of the Interim Financial Policy Committee meeting held on 23 November 2011.

At the meeting the Committee agreed on the following policy recommendations:

• If earnings are insufficient to build capital levels further, banks should limit distributions and give serious consideration to raising external capital in the coming months.
• The FSA should encourage banks to improve the resilience of their balance sheets without exacerbating market fragility or reducing lending to the real economy.
• The FSA should encourage banks to disclose their leverage ratios, as defined in the Basel III agreement, as part of their regular reporting not later than the beginning of 2013.

View Record of the Interim Financial Policy Committee Meeting, 23 November 2011

BCBS consultative document - The internal audit function in banks

The Basel Committee on Banking Supervision (BCBS) has published a consultative document entitled The internal audit function in banks. The consultative document provides proposed guidance for assessing the effectiveness of the internal audit function in banks and replaces the 2001 document entitled Internal audit in banks and the supervisor’s relationship with auditors.

The proposed guidance is built around a set of principles that seek to promote a strong internal audit function within banks. An overview of these principles is contained in the first part of the consultative document. The consultative document also contains:

• Supervisory expectations relevant to the internal audit function.
• The relationship of the supervisory authority with the internal audit function.
• A supervisory assessment of the internal audit function.

The deadline for responses to this consultation is 2 March 2012.

In its accompanying press release, the BCBS states that it is also in the process of developing supervisory guidance on external audit. The BCBS expects to publish a consultative version of its external audit guidance in 2012.

View BCBS consultative document - The internal audit function in banks, 2 December 2011

REMIT published in the Official Journal of the EU

On 8 December 2011, the Regulation on energy market integrity and transparency (REMIT) was published in the Official Journal of the EU. REMIT will enter into force on the 20th day following its publication in the Official Journal.

View REMIT published in the Official Journal of the EU, 8 December 2011

European Parliament announces indicative date for the adoption of EMIR

The European Parliament has announced via its legislative observatory webpage a revised indicative date for its plenary sitting at which it expects to adopt the proposed European Market Infrastructure Regulation. This plenary session is expected to be held on 19 January 2012.

View European Parliament announces indicative date for the adoption of EMIR, 7 December 2011

ECB decision implementing the eligibility criteria for central securities depositories to access TARGET2-Securities services published in the Official Journal

On 2 December 2011, a decision of the European Central Bank (ECB), dated 16 November 2011, was published in the Official Journal of the EU.

The decision established rules and procedures for implementing the eligibility criteria for central securities depositaries (CSD) to access Target2-Securities services. The eligibility criteria is contained in an ECB guideline, which was adopted on 21 April 2010.

The decision includes:

• The application procedure.
• The procedure for obtaining a derogation from CSD access criterion 5.
• Ongoing compliance with the five CSD access criteria.

View ECB decision implementing the eligibility criteria for central securities depositories to access TARGET2-Securities services published in the Official Journal, 2 December 2011

CEER final advice on the regulatory oversight of energy exchanges

The Council of European Energy Regulators (CEER) published its final advice on the regulatory oversight of energy exchanges. This advice follows the work of the European Regulators Group for Electricity and Gas (ERGEG) to examine the supervision of energy exchanges and gas hubs following a request by the European Commission. Due to ERGEG´s abolishment on 1 July 2011, CEER has published this final advice.

The final advice aims to:

• Assess the status quo of regulatory oversight of energy exchanges.
• Describe best practice examples of current regulatory oversight of energy exchanges by national energy regulators.
• Identify the need for improvement of regulatory practices and / or modification of existing provisions of the regulatory oversight of energy exchanges.

View CEER final advice on the regulatory oversight of energy exchanges, 2 December 2011

Proposal for a Regulation on European Venture Capital Funds

At present there are no specific EU level rules that facilitate fund-raising by venture capital fund managers. Venture capital is much more developed in some countries than in others but only nine Member States have put in place dedicated rules for venture capital. The remaining Member States apply general rules on company or corporate law to venture capital funds.

At the European level, rules concerning Undertakings for Collective Investment in Transferable Securities seek to provide safe products for retail investors while the Alternative Investment Fund Managers Directive (AIFMD) targets systemic risk created by complex derivatives-based investment strategies. Under the AIFMD, all alternative investment fund managers, including managers of venture capital funds, whose aggregate assets under management exceed €500 million will, as of July 2013, need to seek authorisation from national supervisors in the area of securities markets. A manager authorised under the AIFMD can market funds across the EU. However, the AIFMD passport is not available to fund managers that operate beneath the threshold of the AIFMD. Although such managers can opt in to the AIFMD full compliance with all of the AIFMD’s requirements is often more than a manager of a small venture capital fund can afford, both in terms of staff and technical resources.

The European Commission has now published a legislative proposal in the form of a draft Regulation which is intended to make life easier for venture capitalists to raise funds across Europe for the benefit of start-ups. The approach adopted by the Commission is simple: once a set of requirements is met, all qualifying fund managers can raise capital under the designation “European Venture Capital Fund” across the EU.

Venture capital funds earn the designation of “European Venture Capital Funds” if they fulfil the following requirements:

• It invests 70% of the capital committed by its sponsors into unlisted SMEs.
• It provides equity or quasi-equity to these SMEs.
• It does not employ leverage (so it does not invest more capital than that committed by investors, so it is not indebted).

In addition to the creation of a uniform single rule book governing the marking of funds the legislative proposal:

• Creates a uniform approach for the categories of investors which are eligible to commit capital to a “European Venture Capital Fund”. Eligible investors will be professional clients as defined in the Markets in Financial Instruments Directive.
• Provides all managers of qualifying venture capital funds with a European marketing passport allowing access to eligible investors across the EU.

View Proposal for a Regulation on European Venture Capital Funds, 7 December 2011

Consultation Paper 11/27: Quarterly consultation paper no. 31

The FSA has published its latest quarterly consultation, Consultation Paper 11/27: Quarterly consultation (No. 31) (CP11/27).

In CP11/27 the FSA invites comments on miscellaneous amendments to the FSA Handbook. It proposes amendments:

• To clarify the liquidity rules by confirming the policy intention of the Prudential sourcebook for Banks, Building Societies and Investment Firms (BIPRU) rules, to change the realisation requirements for non-liquid asset buffer assets to operational testing through the use of the central bank facilities and to provide details of management actions on the occurrence of certain events.
• To implement the Department of Work and Pensions’ changes that will abolish the option to contract out of the state second pension.
• To the form and scope of directors’ certificates and reports by auditors for employer’s liability registers (ELRs) and qualifying tracing office databases, and amendments to the content of ELRs for co-insurance, excess insurance, claims made and employer’s reference numbers.
• To the information disclosure requirements in the Insurance: Conduct of Business sourcebook as a result of the implementation of Solvency II.
• To guidance in the Code of Market Conduct, where the disclosure of inside information by brokers during deals, in which stock owned by persons discharging managerial responsibilities is being sold.
• To improve the clarity of the reporting requirements and to facilitate better data quality.
• To allow a non-UCITS retail scheme that is subject to investment powers and borrowing limits to act as a feeder fund and to incorporate consequential changes to the rules applying to UCITS feeder funds.
• To the qualification standards that advisers have to meet as part of the Retail Distribution Review.

The deadline for comments on CP11/27 is 6 February 2012.

View Consultation Paper 11/27: Quarterly consultation paper no. 31, 6 December 2011

Merlin Executive Remuneration Disclosure consultation

In February the Government announced an accord between itself and the major UK banks under Project Merlin. As part of the Project Merlin announcements, the Government indicated that it would consult on a mandatory requirement, from 2012, for all large UK banks to publish the pay of their eight highest paid senior executive officers. This followed on from a commitment made by the four major UK banks to make detailed remuneration disclosures with respect to the five highest paid non-board executives within their organisations.

The Treasury has now published a consultation paper entitled Bank Executive Remuneration Disclosure - Consultation on Draft Regulations. In this consultation the Government sets out in more detail its proposals for the disclosure requirements.

The Government’s proposals would require more comprehensive disclosure of information relating to the eight most senior executives than is required in relation to staff within the FSA’s Remuneration Code, but the disclosures are less detailed than that required for executive directors of quoted companies in a directors’ remuneration report.

Following the introduction the consultation paper is set out as follows:

• Chapter 2 considers the rationale behind executive remuneration disclosure, including the international context.
• Chapter 3 looks at the definition of ‘relevant banking institutions’ to ensure that appropriate firms are within scope.
• Chapter 4 considers the definition of those executives in respect of whom disclosures should be made.
• Chapter 5 considers what should be disclosed in the content of executive remuneration reports.
• Chapter 6 considers other issues, including the timing of reports, the requirements for publication, board approval, and enforcement.
• Annex A contains draft Regulations.

The deadline for comments on the consultation is 14 February 2012. Following consideration of the consultation responses, the Government will decide on what steps, if any, to take in relation to the draft Regulations, before publishing a summary of responses and, if appropriate, laying final Regulations before Parliament in the 2011/12 Parliamentary session.

View Merlin Executive Remuneration Disclosure consultation, 6 December 2011

ESMA issues a warning to retail investors on trading in foreign exchange (forex) products

The European Securities and Markets Authority (ESMA) has noticed an increase, in some EU countries, in unauthorised firms offering transactions, or platforms to trade, in currency derivatives in the forex market (such as contracts for difference, FX forwards and rolling spot contracts).

In light of this ESMA has issued a warning alerting retail investors to the main risks involved in forex trading. It also warns investors against dealing with unauthorised firms offering forex investments.

View ESMA issues a warning to retail investors on trading in foreign exchange (forex) products, 5 December 2011

State aid: Commission extends crisis rules for banks

The European Commission has published a press release which confirms that it has updated and extended the temporary state aid control rules, which provide support to financial institutions during the crisis.

The Commission recognises that there is increased pressure on banks as a result of tensions in the sovereign debt markets. Therefore, it has decided that the rules will continue to apply as long as required by market conditions. As a result of changes in market conditions, the Commission has also decided to update certain aspects of the rules. This includes a review of the guidance on the fees that banks must pay for guarantees to ensure the aid is limited to the minimum necessary and to reflect the risk for public finances.

The Commission has also published a communication and a speech on the application of the rules.

View State aid: Commission extends crisis rules for banks, 1 December 2011

Non-Executive Directors’ conference: Delivering fair treatment for consumers of financial services - Adamson’s speech

The FSA has published a speech presented by Clive Adamson (Director of Supervision, the FSA Conduct of Business Unit) at the NED conference on 6 December 2011. The speech is entitled Delivering Fair Treatment for Consumers of Financial Services.

At the start of his speech Adamson stresses the critical importance of good corporate governance in relation to retail conduct of business and the vital role non-executive directors (NEDs) play on the boards of regulated firms. He also reassures his audience that the FSA does not expect a NED as one individual on the board to have all the skills and knowledge the board needs as a whole. The FSA sees the board as collectively responsible for delivering fair treatment of customers but wants to engage with the market so that it can share its views about the role NEDs play in ensuring that this happens.

Adamson also discusses how the FSA is developing the supervisory approach or philosophy for the proposed Financial Conduct Authority (FCA). He states that the FSA’s intention to deliver a step-change in the supervision of retail conduct will build on work that has already begun and will be based on five key principles:

• The FCA will be forward looking in making judgements about potential consumer detriment and will look at the underlying causes of potential detriment and not just the symptoms.
• The FCA will be bolder about making earlier interventions when it sees potential consumer detriment.
• The FCA will go beyond the traditional approach of ensuring transparency at point of sale to intervening by stopping products being sold that it judges cannot be sold safely.
• The FCA will seek appropriate redress when things go wrong.
• The FCA will continue with the approach of credible deterrence.

Adamson then turns to the implications of this approach for firms and their boards. The key points include:

• Whilst it is accepted that firms should be able to generate acceptable returns for their owners, this should not be at the expense of either prudential strength and/or fair treatment of customers.
• Firms in general should expect a greater intensity on conduct supervision. This reflects the fact that prudential supervision has gone through a substantial increase in intensity and some re-balancing is needed.
• It appears that the conduct agenda is not being addressed as a strategic issue by senior management and boards but is pushed down the organisation. This is thought to be a mistake not just because the FSA expects boards to be engaged in the conduct agenda but also because widespread failures in this area can lead to very significant financial and reputational consequences.
• It is expected that boards will ensure that the business model of the firm results in the fair treatment of customers. That is not to say that customer strategies are not being considered but that is more from a marketing and profitability perspective as opposed to a fairness perspective.
• Deficiencies in a firm’s culture is a potential root cause of poor outcomes for retail consumers. As a consequence closer attention will be paid to the culture of firms and how the board has oversight over, and challenges management on, how a good culture is being embedded throughout the firm.

View Non-Executive Directors’ conference: delivering fair treatment for consumers of financial services - Adamson’s speech, 6 December 2011

Non-Executive Directors’ conference: Delivering fair treatment for consumers of financial services - Delfas’s speech

The FSA has published a speech by Nausicaa Delfas (Head of Department, Conduct Supervision, FSA) at the Non-Executive Directors' conference on 6 December 2011. Delfas’ speech focuses on the FSA’s current and developing approach to the responsibilities of non-executive directors (NEDs).

Delfas explains that the FSA is now taking a more intensive and intrusive approach to assessing and addressing issues regarding the fair treatment of customers. The approach is shifting to be more pre-emptive, taking a closer look at the governance arrangements within firms, and how effective these are in managing risks to consumers. This approach will also involve looking at how products are developed, launched and sold, and where it is appropriate to do so, taking strong regulatory action, whether against the firm or individuals.

Delfas then considers why delivering a fair customer outcome is important for firms and explains that this affects the reputation and ‘bottom line’ for firms. Although the increasing levels of fines from FSA enforcement cases dominate the press headlines, Delfas highlights that it is the cost of ‘putting the wrongs right’ that have the greatest impact on a firm.

Delfas then sets out the FSA’s key expectations for NEDs, which are to:

• Have a good understanding of the firm, its strategy, its customers and the types of products that it sells.
• Play a part in identifying potential risks to customers, not just those to shareholders.
• Provide robust and insightful challenge to executive management on all aspects of the business, including culture.

In relation to the first expectation Delfas explains that NEDs should have sufficient knowledge to participate actively in the decision-making process of the board and exercise appropriate oversight over the agreed strategy. NEDs should be prepared to answer the FSA’s questions regarding product developments and strategies. Delfas summarises that NEDs should have the right understanding and experience of the business to allow them to scrutinise effectively the performance of management and to deliver an informed challenge.

In relation to the second expectation Delfas explains that a key role for NEDs is to use their experience and expertise to identify, highlight and challenge developments that could pose a risk to the firm’s strategy, profitability or reputation. She states that it is important that this role extends to identifying, highlighting and challenging developments that could pose risks to the firm’s customers. This means that NEDs need to be comfortable with the information the board is receiving and ensure that it is appropriate to support decision making. If they are not comfortable, then they should challenge the executive and the board.

Delfas states that the FSA has worked extensively with firms to introduce customer-focused management information. However, there are still a number of firms with management information that lacks focus on the key risks that the firm could pose to its customers.

In relation to the third expectation she explains that the key is for NEDs to provide robust and insightful challenge to the executive management on all aspects of the business including culture. For challenges to be constructive and effective, action needs to be taken as a result of the challenge, and root causes and wider implications should be identified and drawn out.

Finally, Delfas considers the FSA’s supervisory approach. This involves assessing a firm’s culture, governance and controls. The FSA will interview a wide selection of people from an organisation, in order to understand how the firm’s culture, governance and controls translate to all levels of the business.

View Non-Executive Directors’ conference: Delivering fair treatment for consumers of financial services - Delfas’s speech, 6 December 2011

Non-Executive Directors’ conference: Delivering fair treatment for consumers of financial services - guidance consultation

The FSA has published a guidance consultation which sets out the FSA’s expectations of non-executive directors (NEDs) in delivering the appropriate management of retail conduct risk within firms. By retail conduct risk the FSA means the risk of a firm treating its retail customers unfairly and delivering inappropriate outcomes.

In summary the guidance recommends that NEDs challenge whether:

• Business proposals are aligned with the firm’s conduct risk strategy and are within its stated conduct risk appetite.
• The firm’s culture is such that it delivers good behaviours and outcomes, both prudentially and for customers.
• They have the right information to enable them to make robust decisions and if they feel they do not, then they should ask for it.
• Risks to customers have been identified.
• Appropriate actions are in place to mitigate and monitor such risks.
• The board supports the identification and escalation of issues when they go wrong and ensures appropriate resolution.
• The business learns from identified issues and draws out the wider implications.

Clive Adamson (Director of Supervision, the FSA Conduct of Business Unit) said:

"Non-executive directors have a duty to challenge the management of their firms where they believe the firm could do more to ensure that customers get fair treatment. Our consultation sets out the clear expectations that we have for NEDs and we expect them to play their part by considering this carefully."

View Non-Executive Directors’ conference: Delivering fair treatment for consumers of financial services - guidance consultation, 6 December 2011

View FSA sets out its expectations of non-executive directors in managing risks to retail customers, 6 December 2011

Money Advice Service and the coordination and provision of debt advice

The Treasury has published an informal consultation relating to the co-ordination and provision of debt advice by the Money Advice Service (MAS).

The purpose of the consultation is to clarify the consumer financial education function in the draft Financial Services Bill, by including express provision for the coordination and provision of debt advice. The consumer financial education function allows the MAS to take on and deliver the coordination and provision of debt advice. The Government believes that clarification is necessary in order to reflect the importance of debt advice as part of MAS’ activities.

The deadline for feedback on this consultation is 6 January 2012.

View Money Advice Service and the coordination and provision of debt advice, 2 December 2011

Norton Rose LLP briefing - Financial Transactions Tax - the European Commission’s proposal for “Making the financial sector pay its fair share”

Please click here to view.

FSA enforcement

The FSA has fined HSBC £10.5 million as a result of inappropriate investment advice provided by one of its subsidiaries, NHFA Limited (NHFA), to customers in breach of Principle 9.

NHFA advised customers to invest in asset-backed investment products, typically investment bonds, to fund long-term care costs for elderly customers. The advice and sales were unsuitable because in a number of cases the individual's life expectancy was below the recommended five-year investment period. As a result customers with shorter life expectancies had to make withdrawals from these investments sooner than is recommended. The combination of withdrawals and product charges led to faster reduction of capital than should have been the case if customers had received the right advice. A review by a third party of a sample of customer files found unsuitable sales had been made to 87% of customers involving these types of investments. HSBC is undertaking a past business review to determine if customers of NHFA or their families are entitled to redress and will contact customers directly. HSBC has indicated that it expects the cost of redress to be £29.3 million.

View FSA Final Notice - HSBC Bank Plc, 2 December 2011

France: High frequency trading ranks high on agenda of Securities Regulator

While discussions are mounting at the European level on the merits of high frequency trading (HFT), the French Securities regulator (the Autorité des Marchés Financiers or AMF) has expressed its views on the subject.

The fourth annual colloquium held on 5 October 2011 by the Enforcement Committee of the AMF provided an opportunity to tackle the issue of HFT. The AMF defines HFT as comprising market participants who use software to automatically generate quotes that only last for a number of micro-seconds. Thanks to powerful algorithms, quotes may be placed in the order book in order to detect and take advantage of micro movements in the market. According to the AMF, HFT is by no means a marginal trend, with an estimated 90 per cent of quotes worldwide coming from such trades and about 30 per cent of the transactions originating from them.

The colloquium was also an opportunity to discuss a recent case judged by the Enforcement Committee of the AMF where a financial intermediary was making use of automated trading systems to engage in market manipulation. In this case, a market participant had massively introduced passive quotes into the order book through an automated trading system at such conditions that they may never be traded, which drove the market price of the relevant securities down. The orders were cancelled afterwards, and the market participant allegedly bought securities at the market price which had been driven down as a result of the passive untraded quotes.

Whilst the AMF stressed that HFT does not qualify as market abuse per se, emphasis was further laid on the different risks potentially triggered by such trading:

• Excessive stress on the market infrastructure which may saturate as a result of dealing with millions of orders in the same second.
• Algorithm quotes interacting in unforeseen ways for instance leading to prices falling below zero within a few minutes.
• Driving traditional quotes out of the market as speed of execution will be increasingly regarded as the key criterion.
• Finally, as illustrated by the above-mentioned case, HFT renders market surveillance trickier as regulators need to investigate the strategies prompting it. In this case, orders cancelled for legitimate reasons due to changes in market conditions will need to be sorted out from fraudulent orders.

For further information please contact Roberto Cristofolini or Anselme Mialon

France: Securities Regulator launched public consultation on implementation of the revised Prospectus and Transparency Directives

Whilst an enabling legislation (loi d’habiliation) permitting the implementation of the revised Prospectus and Transparency Directives directly by the Government (by way of a so called ordonnance) is currently under discussion before the Senate, the French Securities regulator (the Autorité des Marchés Financiers or AMF) has launched a consultation on the implementation into its Rulebook of the revised Prospectus and Transparency Directives. Both Directives came into effect on 12 December 2010 and are due to be implemented into national legislation by 1 July 2012. As no draft ordonnance has been made public to date, the consultation only covers provisions that do not require amendments to legislation.

The proposed changes notably cover:

• Offers of financial securities for an amount between EUR 100,000 and EUR 5,000,000 (as opposed to EUR 2,500,000 under the current regime) and representing less than 50 per cent of share capital would not qualify as public offerings.
• Increase of both the minimum threshold denomination and the minimum subscription from EUR 50,000 to EUR 100,000 in order to qualify for prospectus exemption.
• In respect of debt securities, increase of the minimum threshold denomination from EUR 50,000 to EUR 100,000 in order to qualify for a number of prospectus simplifications.
• In relation to retail cascade offers, ability for the financial intermediaries making re-sales of securities to rely on the issuer’s prospectus subject to its written agreement.
• Extension of the prospectus exemption in the event of an offer of securities to directors and employees to both listed and unlisted issuers.
• Other miscellaneous provisions relating to minimum information to be included in prospectuses, start date for validity of the prospectus (approval instead of publication by the relevant authority) and the procedure for passporting the prospectus (certificate of approval).

The deadline for responding to the consultation is 28 December 2011. Following a review of the consultation responses the AMF will shortly implement new provisions in its Rulebook.

For further information please contact Roberto Cristofolini or Anselme Mialon

Netherlands: Disclosure cash settled instruments

On 1 November 2011, the Second Chamber of the Dutch Parliament approved a Bill that introduces a disclosure obligation in relation to cash settled instruments (the Bill). Cash settled instruments are financial instruments of which the economic value depends on an increase in the value of specific shares or dividend rights attached thereto and which will not settle in those shares. The holders of such instruments have an economic long position but no legal claim to the underlying shares. Currently, there is no disclosure obligation for such instruments under Dutch law. The Bill amends the Dutch Act on the Financial Supervision (Wet op het financieel toezicht, AFS) and will enter into force on 1 January 2012.

On 1 December 2011, the Netherlands Authority for the Financial Markets (Autoriteit Financiële Markten, AFM) started a consultation on the disclosure obligation in relation to cash settled instruments. The consultation document includes a calculation method on the number of shares in an issuer to which the relevant financial instruments pertain and the circumstances pursuant to which a basket or an index falls under the disclosure obligation. The consultation period ends on 16 December 2011.

The Bill (in Dutch) can be found here.

The consultation document (in Dutch) can be found here.

For further information please contact Floortje Nagelkerke

Netherlands: Increase of thresholds from EUR 50,000 to EUR 100,000

On 3 November 2011, the Dutch Minister of Finance published the amended Exemption Regulation to the Dutch Act on the Financial Supervision (Vrijstellingsregeling Wft, the Amendment). Together with amendments to the Dutch Act on the Financial Supervision (Wet op het financieel toezicht, AFS), the Amendment increases the exemption threshold for offering investment objects (beleggingsobjecten) and participation rights in investment funds (deelnemingsrechten) from EUR 50,000 to EUR 100,000. The increase of the exemption threshold will enter into force on 1 January 2012.

As of 1 January 2012, the threshold for the exemption from the prohibition to offer securities without publishing a prospectus will also be increased from EUR 50,000 to EUR 100,000. As a result, entities that offer securities to the public in denominations of less than EUR 100,000 after 31 December 2011 must publish a prospectus, unless they rely on another exemption.

Also, as of 1 January 2012, the threshold for qualifying as a professional market party is raised from EUR 50,000 to EUR 100,000.

The Amendment (in Dutch) can be found here

The Decree (in Dutch) can be found here

For further information please contact Floortje Nagelkerke

Netherlands: AFM publishes guideline on providing investment services

The Netherlands Authority for the Financial Markets (Autoriteit Financiële Markten, AFM) has published a guideline that contains recommendations for providing investment advice and portfolio management with due care (the Guideline). In 2011, the AFM reviewed the quality of providing investment advice and portfolio management by thirteen banks and investment firms in the Netherlands. The Guideline follows-up on this review and proposes improvements in relation to gaining an insight into the investment objectives of clients who qualify as non-professional investors.

The Guideline (in Dutch) can be found here

For further information please contact Floortje Nagelkerke

Netherlands: AFM withdraws licence from Homburg Invest Inc

On 23 November 2011, the Netherlands Authority for the Financial Markets (Autoriteit Financiële Markten, AFM) published a news report stating that it had withdrawn the licence of Homburg Invest Inc (Homburg). Homburg was licenced as an investment fund. Homburg either repeatedly ignored information requests from the AFM or failed to respond to them fully. Also, measures introduced by the AFM to improve the soundness of Homburg’s business operations failed.

The news report of the AFM (in Dutch) can be found here

For further information please contact Floortje Nagelkerke

Netherlands: Minister of Finance appoints systemic risk banks

The Dutch Minister of Finance (Minister van Financiën) has appointed the following Dutch banks as systemic risk banks: ABN Amro, ING Bank, Rabobank and SNS Bank. Pursuant to the proposed Capital Requirements Directive IV, these banks will have to comply with increased capital requirements as of 2019 and increase their capital as of 2016.

The appointment (in Dutch) can be found on page 16 here

For further information please contact Floortje Nagelkerke

China: Asset management business in China "in a nutshell"

The Shanghai office has prepared a new client briefing which provides an overview of the key features of major types of asset managers in China and key regulatory issues required to establish an asset management business in China.

View Asset management business in China "in a nutshell"

Research report: Progress towards the professionalism requirements of the Retail Distribution Review

The FSA has published a report produced on its behalf by RS Consulting which sets out the findings of a study which was conducted to estimate the size of the retail investment adviser (RIA) population and measure progress towards the professionalism requirements of the Retail Distribution Review (RDR). The report also looks at how the requirements of the RDR have influenced RIA attitudes and intentions.

The FSA states that the report will be used to inform its communications and supervisory strategy for the RDR. Further surveys in 2012 and 2013 are planned which will help the FSA monitor progress in the final months before the RDR comes into force on 31 December 2012 and to understand how implementation is progressing after this date.

View Research report: Progress towards the professionalism requirements of the Retail Distribution Review, 6 December 2011

Technical report: Progress towards the professionalism requirements of the Retail Distribution Review

The FSA has published a report produced on its behalf by RS Consulting which describes the methodology used for the survey research, Progress towards the professionalism requirements of the Retail Distribution Review.

There were two core objectives of this research which were to estimate the size of the retail investment adviser population and to track the rate of progress within this population towards meeting the professionalism requirements of the Retail Distribution Review.

View Technical report: Progress towards the professionalism requirements of the Retail Distribution Review, 6 December 2011

Proposed update to the distributor-influenced funds fact sheets

In 2008 the FSA published two fact sheets for distributors with their own range of distributor-influenced funds or that were planning to introduce one.

The FSA has now published a guidance consultation which updates the two earlier fact sheets. The FSA expects the Retail Distribution Review (RDR) to have a significant impact on the use of distributor-influenced funds. In particular:

• Firms advising on distributor-influenced funds should no longer receive a share of the annual management charge for their role on a distributor-influenced fund governance committee.
• Adviser charges for recommending a distributor-influenced fund should not vary inappropriately compared with substitutable or competing retail investment products.
• The FSA believes that it will be extremely difficult for firms to recommend distributor-influenced funds and meet the RDR standard for independent advice.

The deadline for responding to the guidance consultation is 30 January 2012.

View Proposed update to the distributor-influenced funds fact sheets, 5 December 2011

Financial services regulatory products: Phoenix and Pegasus

Having difficulty keeping up with the pace of the Government's regulatory reform proposals?

Phoenix is our new financial services product that is an online resource designed to help those who are starting their UK regulatory reform projects. It sets out the latest developments and timing of the Government's reform programme plus the key resource papers from the Treasury, Bank of England, FSA and the ICB. The latest Norton Rose LLP briefing notes, videos and webcasts are also available.

The Phoenix main page can be found here.

Behind the curve on the MiFID review?

We have launched a second online resource product called "Pegasus". Pegasus is a new financial services product that is an online resource designed to assist those starting work on MiFID review projects. 

The Pegasus main page can be found here.

Financial services Fireside Fridays

Please click on the links below:

• Financial services 40 minute briefing entitled ‘European reform: AIFM Directive - the latest on implementing measures’ (7 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 webcasts

Please click on the links below:

• Financial services 40 minute briefing entitled 'European reform: MiFID and MAD: tying the legislative proposals together (November 2011)
• Financial services 40 minute briefing entitled 'European reform: MiFID and MAD: The next pieces in the puzzle' (July 2011)
• Financial services webcast directory