Financial services updater

Publication | 13 February 2012


Welcome to the latest edition of our financial services updater.

Highlights this week include:

  • Update on the regulatory reform agenda
  • Delivering twin peaks within the FSA

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.

FSA Handbook

Sale and Rent Back Review 2011

The FSA has published a guidance consultation concerning its rules for sale and rent back, which is primarily set out in the Mortgages and Home Finance Conduct of Business sourcebook (MCOB).

In March 2011, the FSA undertook a thematic review of the sale and rent back (SRB) market and the proposed guidance explains the findings from that review.

The FSA reports that the most common failings it identified in the review were:

  • Appropriateness and affordability were not assessed correctly.
  • Disclosure did not follow the correct order, was insufficient and was not given at the right time.
  • Record keeping was inadequate to confirm that the FSA’s requirements had been met.
  • SRB agreements contained incorrect information and did not meet its requirements for tenancy agreements.
  • Financial promotions were not compliant with the FSA’s rules.
  • Sales processes did not follow the structure set out in the FSA's rules, or allow firms to gather enough information from the customer to assess appropriateness. Customers were not given enough time to consider the SRB.
  • Training and competence and compliance monitoring were inadequate.

The deadline for comments on the guidance consultation is 29 March 2012.

View Sale and Rent Back Review 2011, 3 February 2012

View FSA review into sale and rent back finds widespread poor practice and sees market temporarily closed, 3 February 2012


FSA publishes latest insurance newsletters

The FSA has published the latest editions of its insurance newsletters:

  • General Insurance Newsletter.
  • Life Insurance Newsletter.

These newsletters provide an update on Solvency II and other relevant initiatives, such as: the EU Gender Directive and the Retail Distribution Review.  

View General Insurance Newsletter (Issue 7), 8 February 2012

View Life Insurance Newsletter (Issue 7), 8 February 2012

Regulation & compliance

Financial Services Bill - House of Commons Second Reading

On 6 February 2012, the Financial Services Bill (the Bill) was debated at its second reading in the House of Commons.  

In his opening remarks, Mr George Osborne stated that:

“The genesis of the Bill is obvious - the biggest failure of economic management and banking regulation in our country’s history. Its purpose is clear as well - to dismantle the disastrous tripartite system created 14 years ago and replace it with a structure of financial oversight that supports successful, competitive financial services while protecting the British taxpayer from the risk that those services run.

Of course, the Bill is not the complete answer to what went so spectacularly wrong. It should be seen alongside the Basel reforms to capital and liquidity, the living wills and resolution regimes that have been developed and the reforms to the structure of banking proposed by the Vickers’ commission. It is not by itself a sufficient response to the mistakes of the past, but it is absolutely necessary.”

At the second reading, the following motions were passed:

  • Programme motion. This provides that the Bill shall be committed to a Public Bill Committee (the Committee) that will scrutinise the bill line by line.  Proceedings in the Committee will be concluded by 20 March 2012.
  • Carry over motion.  This provides that if proceedings on the Bill are not completed in the 2010-12 Parliamentary session, they will continue in the next Parliamentary session.

View Financial Services Bill - House of Commons Second Reading, 6 February 2012

Financial Services Bill - House of Commons Committee Stage

The UK Parliament has announced on its website that the Financial Services Bill has been sent to the Public Bill Committee (the Committee).  The first sitting of the Committee is scheduled for 21 February 2012.

View Financial Services Bill - House of Commons Committee Stage, 8 February 2012

ESMA makes available data on past performance of CRAs

The European Securities and Markets Authority (ESMA) has launched a Central Rating Repository (CEREP) providing information on credit ratings issued by the credit rating agencies (CRAs) that are either registered or certified in the EU.

The purpose of the CEREP is to allow investors to assess on a single platform the performance and reliability of credit ratings on different types of ratings, asset classes and geographical regions over the time period of choice.

The data base is free of charge and without prior subscription. It can be customised in terms of the time periods, rating types and geographical region of choice.

View ESMA makes available data on past performance of CRAs, 2 February 2012

View CEREP database, 2 February 2012

Consultation Paper 12/3: Regulated fees and levies: Rates proposals 2012/13

The FSA has published Consultation Paper 12/3: Regulated fees and levies: rates proposals 2012/13 (CP12/3). In CP12/3 the FSA announces its proposed annual funding requirement (AFR) for 2012/13.

Overall the AFR for 2012/13 is £578.4m, up from £500.5m in 2011/12, a gross increase of 15.6%. The increase in fees will be borne mainly by larger firms, reflecting the resources applied to intensive supervision of high impact firms. Medium sized firms will see a proportionate increase reflecting the type of business they conduct. Currently 42% of the FSA’s authorised firms need only pay the FSA minimum fee and for the third year running the gross minimum fee for firms will remain unchanged at £1,000.

In addition to funding its core programme a significant part of the increase in this year’s AFR reflects the costs of implementing the Government’s reform of the UK regulatory framework.

Some of the proposals in CP12/3 require comments by 29 February 2012 and others by 2 April 2012. The FSA indicates in the paper which deadlines apply to which proposals.

View Consultation Paper 12/3: Regulated fees and levies: Rates proposals 2012/13, 2 February 2012

View FSA announces annual funding requirement for 2012/13, 2 February 2012


Delivering twin peaks within the FSA

The FSA has published a speech given by Hector Sants (Chief Executive, FSA) entitled Delivering twin peaks within the FSA.

At the start of his speech Sants states that implementing a twin peaks model is the next stage in the FSA’s reform process and that such model will be introduced from 2 April 2012.

The FSA intends to move as close as possible, subject to the framework imposed on it by the Financial Services and Markets Act 2000, to the new style of regulation outlined by the Government. Namely, that firm-specific supervision for banks, insurers and major investment firms will be carried out by two separate entities, one for prudential and one for conduct regulation.

Sants then discusses some of the general principles of the new model noting that its high level operating characteristics will be:

  • There will be two independent groups of supervisors for banks, insurers and major investment firms covering prudential and conduct supervision. All other firms (i.e. those not dual regulated) will be solely supervised by the conduct supervisors.
  • The supervisors will make their own, separate, set of regulatory judgements against different objectives.
  • They will coordinate internally to maximise the exchange of information which is relevant to their individual objectives, but to be clear, they will act separately when engaging with firms. The FSA has termed this “independent but coordinated regulation”.
  • The FSA will retain the principle of seeking to ensure that regulatory data is only collected once. It will retain its common, current data infrastructure.

Sants also mentions that the move to twin peaks is an opportunity to drive home and further embed the move to forward-looking, proactive, judgement-based supervision.

Sants then discusses some of the operational changes. From a firm’s perspective the key operational change will be that the existing ARROW risk mitigation programme will be split between those actions which are relevant to the conduct supervisory group’s objectives and those that relate to the prudential supervisory group. From 2 April 2012 onwards, the two supervisory units will run their own risk mitigation programmes and firms will have two separate sets of mitigating actions to address. Sants also states that in the remaining lifetime of the FSA, it will retain the current ARROW cycle so that if a firm is due to complete an ARROW assessment before spring 2013 it will still be subject to a supervisory review.

However, there will be two particular consequences of the new approach. First, each supervisory group may ask similar questions, but it needs to be understood that the purpose will be different. Second, in the twin peaks world there will not be a consolidated list of the required actions arising from the two supervisory groups. Firms will be expected to address each set of actions arising from the prudential and conduct reviews with equal focus.

In addition, the supervisory models of each group will diverge in a number of ways particularly in terms of allocation of supervisory resource and in the mechanism that each supervisor will use to reach judgements. In relation to the latter prudential supervisors will introduce the concept of a set of questions, which will be focused on ensuring the institution is minimising the risk of disorderly failure. In the conduct area, ARROW will be replaced by a more focussed assessment of conduct risk.  In addition in the conduct space there will be more focus on thematic work.

Sants then discusses behavioural changes stating that it is not just supervisors but also firms that need to adopt a new approach. If the new approach is to work Sants argues that firms should also:

  • Recognise the importance of aligning their goals with those of the supervisors and with society as a whole. Firms are encouraged to avoid gratuitous regulatory arbitrage.
  • Show greater willingness to proactively comply with supervisory judgements.
  • Recognise that there are times when both firms and the regulator will make judgements which in hindsight are wrong.
  • Recognise that this new approach will require greater resources and expertise than the previous reactive model.

Sants also reminds firms that one of the key messages relates to the importance of boards managing their institutions responsibly.

In the final part of his speech Sants mentions that the FSA and the Bank of England will publish, later this year, two further documents setting out in more detail the functionality of the supervisory regimes of the Prudential Regulation Authority (PRA) and Financial Conduct Authority (FCA).  He also mentions the principal areas of focus for further work over the next 12 months:

  • Threshold conditions need to be recast to align them with the twin peaks model.
  • Both the FCA and the PRA need to commence work on designing a new operating platform to support their new approaches to supervision.
  • Both need to complete the detailed design work on their supervisory risk framework which will replace ARROW. For the PRA this includes documenting the detail of the new “proactive intervention framework” and for the FCA the “firm systematic framework”.
  • The draft memorandum of understanding laying out how the FCA and PRA will coordinate has been published but the detailed procedures need to be agreed.
  • The rulebook will need to be split between the responsibilities of the PRA and the FCA.
  • Work needs to be undertaken to ensure that staff are effectively equipped to deliver the new model.

The FSA has also published a press release concerning the speech.

View Delivering twin peaks within the FSA, 6 February 2012

View Delivering a twin peaks regulatory model within the FSA, 6 February 2012

Update on the transition to the new regulatory structure: Implementing ‘twin peaks’ within the FSA

The FSA has published a Dear CEO letter which provides an update on the transition to the new regulatory structure and the implementation of ‘twin peaks’ within the FSA.

The Dear CEO letter repeats many of the comments that Hector Sants (Chief Executive, FSA) made in an earlier speech entitled Delivering twin peaks within the FSA. In particular, Sants makes the same points concerning the supervisory changes firms will see.

The Dear CEO letter also reminds firms that in the twin peaks world there will not be a consolidated list of the required actions arising from the two supervisory groups. Central to the concept of genuine twin peaks is that both sets of regulatory objectives are different and determined by Parliament to be of equal importance. Firms will be expected to address each set of actions arising from the prudential and conduct reviews with equal focus.

View Update on the transition to the new regulatory structure: Implementing ‘twin peaks’ within the FSA, 6 February 2012

Update on the regulatory reform agenda

The FSA has published a speech by Hector Sants (Chief Executive, FSA) entitled Update on the regulatory reform agenda.

In the first part of his speech Sants discusses the UK’s reform programme and the move to twin peaks supervision. Much of the discussion repeats the comments Sants made in an earlier speech entitled Delivering twin peaks within the FSA.

In the second part of his speech Sants discusses the challenge of Europe. He starts by stating that engaging with the European regulatory process is central to delivering financial regulation in the UK. He also states that it needs to be recognised that, in respect of prudential regulation, and increasingly over the longer-term in respect of conduct regulation, the rules will be made by Europe and the role of the Prudential Regulation Authority and the Financial Conduct Authority will primarily be one of supervision and enforcement. Essentially, the UK is moving to become a ‘supervisory arm’ of Europe.

Sants then turns to the European Supervisory Authorities (ESAs) and discusses how they will operate and how this will impact on the FSA. He starts by stating that the FSA supports the concept behind the ESAs and the necessity of them being strong and independent organisations. He adds that the ESAs will also bring profound changes for both the policy function and firm supervision.

In terms of policy function Sants refers to the shift in the FSA’s rule making authority to European bodies and that this trend has increased with the Commission opting to use regulations as opposed to directives and the further increase of detail through ESAs issuing binding technical standards.

In relation to firm supervision Sants makes two points. Firstly, that there is pressure to harmonise the way that supervision is carried out. Secondly, the by-product of seeking to have common standards, which underpins the concept of the single financial market, runs the risk of removing supervisory discretion in terms of the measures supervisors can take to address firm-specific risk.

Sants acknowledges that there is momentum to have a common supervisory procedure manual and supports the importance of the ESAs having a role in maintaining standards and in doing so they need to be able to participate in peer reviews and have a full understanding of the way a supervisor assesses risk. However, he argues that supervision needs to be delivered locally and be tailored to a particular set of circumstances. Good supervision needs to be based on forward-looking judgements and a deep understanding of firm-specific circumstances. He warns that care needs to be taken to ensure that the philosophy of harmonisation does not undermine this principle. Sants does, however, make clear his strong support for colleges and data sharing. In particular, he states that cooperation is crucial to establishing effective recovery and resolution regimes.

View Update on the regulatory reform agenda, 7 February 2012


FOS online technical resource - GAP insurance

The Financial Ombudsman Service (FOS) has published a new online technical resource covering guaranteed asset protection (GAP) insurance. In the resource the FOS discusses the cases it commonly sees where consumers often say:

  • The policy was mis-sold or the cover was not correctly described.
  • The amount the insurer paid out was not enough to pay off all the outstanding finance.
  • The insurer wrongly rejected the claim.
  • The insurer delayed paying out.
  • They cancelled their policy but the insurer has not refunded any of the premiums.

View FOS online technical resource - Insurance to cover the shortfall between a vehicle’s market value and its financing or purchase cost (GAP insurance), 6 February 2012

Consumer awareness of the FSA and financial regulation

The FSA has published its latest consumer research paper entitled Consumer awareness of the FSA and financial regulation. The paper contains the results from the 2011 FSA consumer awareness survey. The FSA carries out this survey once a year so that it may identify risks and take appropriate action to mitigate risk and improve performance.

The main findings in the report include:

  • Awareness of the FSA remained static among a third of survey respondents over the lifespan of the survey. Awareness of the FSA is higher among those groups with greater exposure to financial products, and is higher still among those with exposure to products with a greater risk such as shares and equity ISAs.
  • One in three people, overall, believe that the main responsibility of a financial watchdog should be to ensure that firms treat their customers fairly.
  • Of those surveyed, 60% are confident that the FSA effectively regulates the financial services industry, but only 5% are very confident that it does so.
  • Over one in three people surveyed believe that financial services firms are not allowed to go bankrupt because the government or regulator will always bail them out.
  • Fifty five percent of people surveyed are confident that financial firms treat their customers fairly but only 4% are very confident, and by contrast 13% are unconfident.
  • More than one in nine people (11%) surveyed report having a problem with a financial services firm in the previous 12 months.
  • Three out of five people receiving advice from an IFA were very confident that the advice was appropriate to their circumstances - compared with 33% of those going to banks or building societies.

View Consumer awareness of the FSA and financial regulation, 2 February 2012


MoU between FSA and the Institute and Faculty of Actuaries

The FSA has published a memorandum of understanding (MoU) between itself and the Institute and Faculty of Actuaries. The MoU concerns exempt professional firms and authorised professional firms.

View MoU between FSA and the Institute and Faculty of Actuaries, 6 February 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.

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: