Financial services updater

Publication | 6 February 2012


Welcome to the latest edition of our financial services updater.

Highlights this week include:

  • Finalised guidance - FSA reviews of counterparty credit risk management by central counterparties
  • Bill documents - Financial Services Bill 2010-11

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.


Your questions on the PSD - Implementation in Poland

The European Commission has published a new answer on its questions and answers web page concerning the Payment Services Directive (PSD). The answer concerns the implementation of the PSD in Poland. The Polish Parliament adopted a law transposing the PSD on 19 August 2011. The law entered into force on 30 October 2011.

View Your questions on the PSD - ID1059, 31 January 2011

Capital adequacy

ECB opinion on CRD IV proposals

The European Central Bank (ECB) has published its opinion concerning the European Commission’s legislative proposals for the CRD IV.

The opinion starts with general observations covering the objectives of the proposals, reform of EU banking legislation, the single EU rulebook in the financial sector and the ECB’s advisory role regarding draft delegated and implementing acts.

The ECB states that it welcomes the innovative approach taken by the Commission, in particular with regard to the proposed Regulation, which incorporates most of the technical Annexes to Directives 2006/48/EC and 2006/49/EC and limits Member State options and discretion. However, the ECB also states that as regards future reviews of the proposed Regulation, it recommends ensuring that only framework principles reflecting basic political choices and substantive matters remain subject to the ordinary legislative procedure. Technical rules, including those in the proposed Regulation, should be adopted as delegated or implementing acts in accordance with Articles 290 and 291 of the Treaty on the Functioning of the European Union.

The opinion then sets out ECB specific observations on a number of issues including those relating to:

  • Macro-prudential supervision and scope for stricter rules.
  • Own funds.
  • Capital buffers.
  • Liquidity.
  • Leverage.
  • Supervisory reporting.
  • Enhancement of information sharing arrangements.

The ECB then sets out in the Annex to the opinion specific drafting amendments together with explanatory notes.

View ECB opinion on CRD IV proposals, 25 January 2012

Consumer credit

Implementation of the Consumer Credit Directive

The European Parliament's Committee on the Internal Market and Consumer Protection is responsible for legislative oversight and scrutiny for EU rules on the free movement of goods and services, free movement of professionals, customs policy, standardisation, and the economic interests of consumers.

The Committee has recently published a research study concerning the implementation of the Consumer Credit Directive. The study is divided into three parts using three different analytical approaches: one part on the “formal” aspects of implementation, one on the substantial aspects of implementation and one part on credit agreements going beyond the Directive’s scope of application.

The study focuses on:

  • The state of implementation in Member States and the difficulties during the implementation process.
  • Specific aspects of the Directive, particularly the fully harmonised provisions.
  • Whether the scope of implementation has been extended and how credit agreements falling outside the scope of the Directive are regulated in national legislation.

View Implementation of the Consumer Credit Directive, 30 January 2012

Clearing & settlement

Council compromise proposal on EMIR

The Council of the European Union has published a compromise proposal for the proposed European Market Infrastructure Regulation (EMIR).

However, the proposal only covers the compromise text for Article 13(2) and Article 15(3) as well as the related recitals, on which agreement was reached by the Economic and Financial Affairs Council (ECOFIN) at its 24 January meeting.

View Council compromise proposal on EMIR, 26 January 2012 

Finalised guidance - FSA reviews of counterparty credit risk management by central counterparties

The FSA has published finalised guidance concerning reviews of counterparty credit risk management by central counterparties.

The finalised guidance looks at specific aspects of counterparty credit risk management, namely risk models and associated governance, processes and procedures. 

The finalised guidance provides further information as to how the FSA assesses compliance with the Financial Services and Markets Act 2000 and the Recognition Requirements set out in chapter 2 of the Recognised Investment Exchanges and Recognised Clearing Houses sourcebook (REC). However, the FSA states that while it has outlined the typical approach it takes, it is important to note that any review will necessarily be customised to the specifics of the proposed clearing service.

The finalised guidance is designed to be consistent with the CPSS-IOSCO Principles for Financial Market Infrastructures and may be revised when these principles are finalised. It will also be revised in due course to ensure that it is consistent with the Technical Standards for CCP Requirements to be defined by the relevant European Supervisory Authorities when the proposed European Market Infrastructure Regulation is finalised.

View Finalised guidance - FSA reviews of counterparty credit risk management by central counterparties, 31 January 2012

Collective investment schemes

ESMA outlines future regulatory framework for ETFs and other UCITS issues

The European Securities and Markets Authority (ESMA) has published a Consultation Paper setting out future guidelines on UCITS Exchange-Traded Funds (UCITS ETFs) and other UCITS-related issues.

The proposals in the Consultation Paper cover both synthetic and physical UCITS ETFs and detail the obligations to come for UCITS ETFs, index-tracking UCITS, efficient portfolio management techniques, total return swaps and strategy indices for UCITS.

The Consultation Paper is the next stage in the development of ESMA guidelines in this area and follows a Discussion Paper that was published in July last year on policy orientations on guidelines for UCITS ETFs and structured UCITS.

The deadline for comments on the Consultation Paper is 30 March 2012.

Steven Maijoor, ESMA chairman, states:

“In outlining the draft future rules for investment funds today, ESMA is proposing to reinforce the legal framework applicable to ETFs and other types of UCITS. The aim of these guidelines is to enhance investor protection and limit the risk of certain practices by strengthening, in particular, the standards applicable to collateral received in the context of activities such as securities lending. Moreover, the proposed guidelines improve the quality of the information provided to investors to allow them to make informed investment decisions. Furthermore, the draft guidelines help address concerns arising from the increase in the number of complex products sold to retail investors and will contribute to the convergence of the regulatory framework for these products.”

View ESMA outlines future regulatory framework for ETFs and other UCITS issues, 30 January 2012

FSA Handbook

Policy Development Update No. 143

The FSA has published its latest Policy Development Update (no. 143).  In this Update the FSA briefly discusses recent publications covering:

  • Consultation Paper 12/1: Large exposures connected counterparties.
  • Consultation Paper 11/31: Mortgage Market Review: proposed package of reforms.
  • Consultation Paper 11/30: Proposed regulatory prudent valuation return.
  • Consultation Paper 11/29: Deposit protection: raising consumer awareness.
  • Discussion Paper 12/01: Alternative Investment Fund Managers Directive.
  • Policy Statement 12/02: Client assets: custody liens.
  • Policy Statement 12/01: Auctioning of greenhouse gas emission allowances: Feedback to CP11/14.

The FSA also sets out information about recent Handbook-related and other developments. In particular the FSA lists guidance that it has recently finalised.

At the end of the Update the FSA sets out a table describing forthcoming publications for 2012. In particular the FSA states that in Q1 2012 it will publish:

  • Policy Statement to Consultation Paper 11/16: Recovery and Resolution Plans.
  • Policy Statement to Consultation Paper 11/25: Distribution of retail investments RDR Adviser Charging and Solvency II disclosures.
  • Policy Statement to Consultation Paper 11/26: Distribution to retail investments - RDR Adviser Charging - treatment of legacy assets.

View Policy Development Update No. 143, 27 January 2012

Market abuse

CLLS Regulatory Law Committee comments on proposed MAR and MAD

The Regulatory Law Committee of the City of London Law Society has produced a comment paper on the European Commission’s legislative proposal for a new Market Abuse Regulation (MAR) and a new Market Abuse Directive (new MAD) to replace the existing Market Abuse Directive (MAD).

Overall the Committee is very concerned that the Commission’s proposals represent a major extension to the current market abuse regime. In particular, the proposals may have a considerable impact on transactions in instruments that are not publicly traded in any way.

Key points in the paper include:

  • The proposals should specifically address the uncertainties raised by European case law as to the scope of the prohibition on insider dealing. In particular, they should reinstate some of the key recitals from MAD and the recently adopted Regulation on Market Integrity and Transparency as these are important in defining the scope of the insider dealing offence.
  • The scope of MAR should not be extended to all instruments traded on every multilateral trading facility or organised trading facility.
  • MAR should not extend the definition of inside information to cover information simply because investors may regard that information as “relevant”.
  • MAR should limit the definition of inside information in relation to commodity and other similar derivatives to information that is disclosable and price sensitive.
  • The scope of new MAD should only extend to trading in financial instruments admitted to trading on defined trading venues.
  • The new MAD should address the mental element required for a criminal offence in more detail.
  • MAR should address the civil liability consequences of a violation of its prohibitions in a way that provides legal certainty.
  • MAR should include provisions reducing the extent of overlap and duplication between the enforcement processes for the administrative and criminal sanctioning regimes.

View CLLS Regulatory Law Committee comments on proposed Market Abuse Regulation and Market Abuse Directive, 25 January 2012

Regulation & compliance

Bill documents - Financial Services Bill 2010-11

On 26 January 2012, the Financial Services Bill (the Bill) had its first reading in the House of Commons. The following day the text of the Bill together with explanatory notes were published on Parliament's website.

To accompany the Bill’s introduction into Parliament the Government published a further document entitled A new approach to financial regulation: securing stability, protecting consumers. This document is structured into a series of substantive chapters, detailing the main changes the Government is making to the Bill. The annexes to the document contain:

  • The Government’s formal responses to the Joint Committee’s report on the draft Bill.
  • The Treasury Select Committee’s report on Bank of England governance and accountability.
  • A summary of consultation responses received to the earlier White Paper and draft Bill.
  • Drafts of the memorandums of understanding on crisis management and international organisations which Parliament and stakeholders have asked to see during the course of the Bill’s passage.

The Bill will now make its way through Parliament, and the Government states that it is firmly committed to securing the passage of the Bill by the end of 2012, so that the changes can be implemented early in 2013.

View Bill documents - Financial Services Bill 2010-11, 27 January 2012

View Parliamentary business - 26 January 2012, 27 January 2012

View A new approach to financial regulation: securing stability, protecting consumers, 27 January 2012

MiFID II: A Regulator’s viewpoint

The FSA has published a speech by David Lawton (Acting Director, FSA) entitled MiFID II: A Regulator’s viewpoint.

At the start of his speech Lawton states that generally the Markets in Financial Instruments Directive (MiFID) has been a success for the trading environment, increasing competition and reducing trading costs and therefore there is no need for a radical re-think. However, some important changes are needed to address certain areas so that the framework continues to foster market integrity, enhance market transparency while promoting market liquidity and deliver market stability.

In relation to fostering market integrity Lawton makes the following points:

  • Regulators need to have appropriate powers to properly supervise markets and their participants, and take action where necessary.
  • Regulators need access to information that is comprehensive, accurate, focused on important risks, provided on a timely basis and in a format that can be easily used for analysis.
  • Regulators need to be given the appropriate authority to consider the interaction between financial markets and any underlying physical markets.
  • That the extension of the transaction reporting obligations to over-the-counter derivatives is long overdue.
  • Improvements to the content of transaction reports sent to regulators are also necessary to facilitate surveillance.

In relation to transparency Lawton states that currently there are shortcomings in the quality, standardisation and consolidation of equity post-trade data. Whilst acknowledging that some important details still need to be fleshed out the FSA believes that the Commission’s approach in this area is heading in the right direction and it welcomes the involvement of the European Securities and Markets Authority in the calibration of the regime.

Lawton states that the big question is whether the transparency regime for equities should be applied to other asset classes and that here pre- and post-trade requirements need to be considered separately. Lawton further states that the FSA believes that there is a case for greater post-trade transparency but that it will need to be carefully calibrated.

When discussing investor protection one point that Lawton picks up on is the retail distribution review (RDR). He states that the FSA believes that the RDR rules are compatible with the MiFID review proposals. While the proposals explicitly provide for a ban on commission when firms describe their advice as “independent”, it does not prohibit national regulators from going further.

In the final part of his speech Lawton touches on third countries. He states that the FSA welcomes the granting of passporting rights to branches of third country firms under a single branch authorisation procedure. However, it fears that the current scope of access restrictions will curtail investor choice and competition.

View MiFID II: A Regulator’s viewpoint, 30 January 2012

FCA supervision

The FSA has published a speech by Clive Adamson (Director of Supervision, Conduct Business Unit, FSA) entitled FCA supervision.

In his speech Adamson gives an insight into how the Financial Conduct Authority (FCA) will supervise firms.

He begins by discussing conduct strategy and mentions that one of the building blocks is the FSA’s revised conduct strategy which was launched in 2010. This, in essence, set out the key change in approach which was to move from a primarily reactive to a pre-emptive style of retail conduct supervision. The FCA’s approach will build on this and will emphasise five main elements to:

  • Be more forward looking in its assessment of potential problems.
  • Intervene earlier when it sees problems including earlier intervention in the development or marketing of retail products.
  • Attack the underlying causes of problems it sees, not just the symptoms, on the basis that this will be more effective and efficient in the longer term for consumers and firms.
  • Secure redress for consumers if failures occur.
  • Take meaningful action against firms that fail to meet standards through fines that will have a deterrent effect.

Adamson then turns to the supervision model that is being developed to deliver more intensive conduct supervision. The key components of this model are:

  • A clearer sector-based approach.
  • Greater use of forward looking analysis to understand what is happening in particular sectors and to help in determining risks.
  • More focus on intelligence and data.
  • Greater use of thematic reviews.
  • Continued, but more focused, programme of firm level assessments.
  • More responsive and flexible use of resources with fewer firms having a fixed team facing off against them.

Adamson also touches on the firm assessment aspect of the supervision model. At the moment this is conducted through the ARROW process for large firms and through the Revised Approach to Small Firm Supervision for smaller firms. According to Adamson the intention is to keep a firm assessment framework across the firm population but to replace the ARROW framework with a new process that is easier to communicate to the senior executives and boards of firms so that they can align good business practice with good regulatory practice.

According to Adamson the new framework will focus much more on the main drivers of conduct risk at the firm level, but the overall assessment, which will continue to be in the form of a letter to the board, will be based on all the work that has happened on the firm, including thematic work. At the most intensive end of the spectrum the firm’s business model and strategy will be reviewed to see whether these deliver good outcomes for consumers.

The key message is that the FCA will be a conduct focussed regulator to ensure that firms do not trade consumer treatment off against financial performance or prudential strength. The FCA will look at product design and delve into sales to see whether firms have appropriate systems and controls in place to ensure the delivery of fair outcomes to consumers. The FCA will also look to firms’ boards and other governing bodies to set, put in place and maintain a culture that will bring about good outcomes for their customers.

Adamson also discusses wholesale conduct and the FCA’s focus here will be to ensure the integrity and resilience of wholesale markets rather than to seek to introduce concepts of detriment and redress that it will use in the retail markets. However, the FCA will place more emphasis on three areas where:

  • Wholesale products filter down or are distributed to retail consumers.
  • Certain behaviours in wholesale markets can cause damage to market integrity.
  • Market structures can result in participants being disadvantaged or the market being inefficient.

In the final part of his speech Adamson discusses the transition from the FSA to the FCA. A key milestone for the FSA occurred last April with the creation of the Conduct (CBU) and Prudential business units within the FSA. At that time the FSA moved all firms that will be solo regulated in the future into the Supervision Division within the CBU. The next milestone is the splitting of conduct and prudential supervision of firms that will be dual regulated in the future and the move of these into CBU Supervision for conduct purposes.

View FCA supervision, 25 January 2012

FESE position on the MiFID II proposal

The Federation of European Securities Exchanges (FESE) has published a position paper concerning the European Commission’s legislative proposals revising the Markets in Financial Instruments Directive (MiFID).

FESE reports that its members generally welcome the Commission’s proposals and in particular supports:

  • Recognition that Europe’s main legislation on trading should ensure that all the market participants active in trading ultimately serve the real economy.
  • The Commission’s overall approach to ensure that qualifying over-the-counter (OTC) derivatives are traded in a well regulated environment.
  • Proposals to extend transparency requirements to bonds and derivatives.
  • Measures to ensure the transparency and supervisory oversight of commodity markets.
  • That the proposals accepts technological advances in trading speed as fact, and includes mostly sensible solutions to reduce systemic risks, counter potential of market abuse and ensure fair treatment of clients.

However, FESE also proposes certain changes to the proposals including that:

  • There should be a clear definition of OTC.
  • The MiFID review should maintain the existing protections designed for all types of trading platforms. In particular, multilateral trading of equities, bonds and standardised derivatives should only happen on platforms that provide identical transparency, non-discretionary execution, non-discretionary access, and full market surveillance capabilities.
  • Systematic Internalisers should remain classified as “regulated” trading venues and not move into the OTC classification.
  • Conflicts of interest arising from the combination of roles of investment firms should be better managed.

View FESE position on the MiFID II proposal, 31 January 2012

Unfair contract terms: improving standards in consumer contracts

The FSA has published finalised guidance comprising of a statement which provides commentary on the types of contract term that it commonly finds to be of concern under the Unfair Terms in Consumer Contracts Regulations 1999 (the Regulations). These are terms giving the firm:

  • The right to unilaterally vary the contract.
  • The right to terminate the contract.
  • Discretion to exercise contractual powers.
  • The right to transfer its obligations under the contract.
  • Terms that are not in plain and intelligible language.

The FSA reminds firms that the statement is not a full legal explanation of the Regulations and does not set out an exhaustive list of all the terms that are likely to be unfair or unclear within a contract.  

The FSA also reminds firms that it has published a large amount of information about the fairness of contract terms, including: undertakings from individual firms, statements on specific types of unfair terms, outcomes from sector-wide projects, and guidance on how it applies its powers under the Regulations in the Unfair Contract Terms Regulatory Guide. Firms can also refer to guidance and undertakings published by the Office of Fair Trading and determinations by the Financial Ombudsman Service.

View Unfair contract terms: improving standards in consumer contracts, 30 January 2012 

FSA enforcement

The former CEO of a private equity group has been prohibited from performing any function in relation to any regulated activity on the grounds that he is not a fit and proper person. The individual concerned (Mr Sinha) has also been fined £2.867 million, on the grounds that he has failed to act with integrity. Mr Sinha was CEO of JC Flowers & Co UK Limited ("JCFUK") and as such, he acted as an investment adviser to certain private equity funds (the "JCF Funds"). Between 17 February and 26 October 2009, Mr Sinha fraudulently obtained €1,548,396.67 for himself from a company in which the JCF Funds had invested ("Company A"). Mr Sinha did this by issuing invoices to Company A for fees, payable to himself, to which Mr Sinha knew that he was not entitled. Mr Sinha deliberately misled the CEO of Company A by claiming that the payments had been authorised and approved by JCFUK when they had not. Mr Sinha also dishonestly concealed from JCFUK the fact that he had received the payments from Company A. The FSA considered that Mr Sinha failed to act with honesty and integrity, contrary to Statement of Principle 1.

View FSA Final Notice - Ravi Shankar Sinha, 31 January 2012

A compliance officer of a hedge fund has been fined £130,000 and has been prohibited from performing the compliance oversight and money laundering reporting significant influence functions in relation to any regulated activity on the grounds that he is not a fit and proper person to perform those functions. The compliance officer (Mr Ten-Holter) failed to question and to make reasonable enquiries prior to effecting an order from Greenlight Capital Inc ("Greenlight") to sell its shares in Punch Taverns Plc ("Punch") despite an unscheduled announcement by Punch. The FSA found Mr Ten-Holter's behaviour to be in breach of Statement of Principle 6 of APER.

View FSA Final Notice - Alexander Edward Ten-Holter, 26 January 2012

A JP Morgan Cazenove trader has been fined £65,000 for failing to exercise due skill, care and diligence in breach of Statement of Principle 2. The FSA considered that he carried out transactions without recognising that there were reasonable grounds to suspect insider dealing or market abuse and failed to alert Compliance. Following an unscheduled announcement by an issuer, the trader should have realised that his client was likely to have obtained inside information through pre-marketing in advance of that announcement. The FSA accepted that he made an honest misjudgement, but decided the penalty imposed must be sufficient to deter others.  

View FSA Final Notice - Caspar Jonathan William Agnew, 3 October 2011 


FSA announces a new investment banking senior advisor

The FSA has issued a press release stating that it has appointed Will Samuel to the role of investment banking senior advisor. Samuel will take up his role on 30 January 2012.

View FSA announces a new investment banking senior advisor, 30 January 2012


40 minute briefing series - January 2012 to April 2012

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

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

Fifth annual Markets Infrastructure Group seminar - 7 February 2012

At 15.00 on Tuesday 7 February 2012 the Norton Rose LLP financial services team will be holding its fifth annual Markets Infrastructure Group seminar. 

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

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:

  • AIFMD Update (3 February 2012)
  • The regulatory year ahead (20 January 2012)
  • The regulatory year in review (16 December 2011)
  • MiFID review and third country issues (25 November 2011)
  • The MiFID Review (21 October 2011)
  • The regulatory regime for energy and commodity companies (7 October 2011)
  • The final report of the Independent Commission on Banking (23 September 2011)

Financial services webcasts

Please click on the links below: