Financial services updater - international edition

21 June 2011

London office building

Contacts

Introduction

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

Highlights this week include:

  • A new approach to financial regulation: the blueprint for reform
  • Feedback Statement 11/3: Product Intervention: Feedback on DP 11/1

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

Basel III implementation monitoring

The Basel Committee on Banking Supervision (the Committee) is monitoring the impact of its two main framework documents on a sample of banks. The two documents are:

  • Basel III: A global regulatory framework for more resilient banks and banking systems.
  • Basel III: International framework for liquidity risk measurement, standards and monitoring.

The Committee has now published a new web page in relation to this monitoring exercise, which announces that the exercise will be repeated semi-annually with end-December and end-June reporting dates. The web page also contains links to the:

  • Basel III implementation monitoring workbook.  
  • Instructions for Basel III implementation monitoring.
  • Frequently asked questions on Basel III implementation monitoring.

View Basel III implementation monitoring, 9 June 2011

Frequently asked questions on Basel III implementation monitoring

The Basel Committee on Banking Supervision (the Committee) has updated its frequently asked questions on Basel III implementation monitoring.

The FAQs provide answers to technical and interpretative questions raised by supervisors and banks during the Committee’s Basel III implementation monitoring. Questions which have been added since the previous version of the FAQs are shaded in yellow and revised questions are shaded in red.

View Frequently asked questions on Basel III implementation monitoring, 14 June 2011

European Commission Q&As on the PSD

The European Commission has updated its questions and answers web page on the Payment Services Directive (PSD), to include a question on irrevocability. The new question confirms that Article 66(2) of the PSD should be interpreted that the payer may not revoke the payment order in any or all of the following situations:

  • After the payment order is transmitted to the payer's payment service provider or after the payer gives his consent to execute the payment transaction to the payee.
  • After the payer has transmitted the payment order to the payee or gives his consent to execute the payment transaction to the payee.
  • After the payer has given his consent to the payee to execute the transaction, if the transaction is initiated through the payee (i.e. by card).

View European Commission Q&As on the Payment Services Directive, 9 June 2011

Independent Commission on Banking: meeting on 13 June

The Independent Commission on Banking (ICB) has issued a press release following its meeting on 13 June 2011.

At its meeting the ICB noted the evidence provided to the Treasury Select Committee in relation to its Interim Report. The ICB reviewed and discussed further analysis of reform options including a UK retail ring-fence, measures to increase loss absorbency and measures to promote competition in the UK retail banking sector.

The ICB also stated that it will publish its final report on Monday 12 September 2011.

View Independent Commission on Banking: meeting on 13 June, 14 June 2011

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Clearing and settlement

Legislative observatory web page for EMIR

The European Parliament has updated its legislative observatory web page on the proposed European Market Infrastructure Regulation (EMIR). The indicative date for the European Parliament’s plenary sitting on EMIR has been brought forward from 7 to 4 July 2011.

View Legislative observatory web page for the European Market Infrastructure Regulation, 9 June 2011

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Collective investment schemes

Draft Statutory Instruments - Financial Services and Markets: The Undertakings for Collective Investment in Transferable Securities Regulations 2011

HM Treasury has published a draft of The Undertakings for Collective Investment in Transferable Securities Regulations 2011. The Regulations implement the UCITS IV Directive into UK legislation and regulation. If approved by Parliament the Regulations will come into force on 1 July 2011.

The Treasury has also published a draft Explanatory Memorandum accompanying the draft Regulations. The Treasury expects the corresponding changes to the FSA rules to be published in the near future.

View Draft Statutory Instruments - Financial Services and Markets: The Undertakings for Collective Investment in Transferable Securities Regulations 2011, 13 June 2011

View HM Treasury - Undertakings for Collective Investment in Transferable Securities, 13 June 2011

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Consumer credit

A new approach to financial regulation: consultation on reforming the consumer credit regime

On 21 December 2010, the Treasury published a joint consultation document with the Department for Business, Innovation and Skills which considered the merits of transferring responsibility for consumer credit regulation from the Office of Fair Trading to the new conduct of business regulator, the Financial Conduct Authority. The deadline for responding to the consultation document was 22 March 2011.

The Treasury has now updated its web page concerning the consultation on consumer credit reform. The Treasury states that a summary of consultation responses will be published before the summer and this will be followed by the Government’s response later in the year.

View A new approach to financial regulation: consultation on reforming the consumer credit regime, 13 June 2011

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FSA Handbook

Consultation Paper 11/11: Quarterly consultation paper No.29 – Corrected version

The FSA has published a corrected version of Consultation Paper 11/11: Quarterly consultation paper No.29 (CP11/11), along with an erratum. The erratum states that page 11 of Annex 4 to CP11/11 has been corrected to include a proposed amendment to SUP16 Annex 25G.

View Consultation Paper 11/11: Quarterly consultation paper No.29 – Corrected version, 10 June 2011

View Consultation Paper 11/11: Quarterly consultation paper No.29 – Erratum, 10 June 2011

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Insurance

Omnibus II Directive - Presidency compromise

The Hungarian Presidency of the Council of the European Union has published a further compromise proposal relating to the proposed Omnibus II Directive.

View Proposal for an Omnibus II Directive - Presidency compromise, 14 June 2011

FSA Insurance newsletters 

The FSA has published the latest issues of its:

  • Life Insurance newsletter – which contains links to all the information from the FSA’s Solvency II conference, an update on the recent Gender Directive judgment and the FSA’s with-profits consultation paper.
  • General Insurance newsletter – which contains links to all the information from the FSA’s Solvency II conference, an update on the recent Gender Directive judgment and an update on Solicitors’ Professional Indemnity Insurance.

View Life Insurance newsletter - Issue 5, 9 June 2011

View General Insurance newsletter - Issue 5, 9 June 2011

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Market abuse

FSA enforcement

A self-employed trader has been prohibited, fined £700,000 and ordered to pay £322, 818 in restitution to firms which have suffered loss as a result of his market abuse.  A temporary injunction preventing the trader from committing market abuse that was granted by the High Court in May 2010 has been made permanent; this is the second permanent injunction the FSA has obtained against an individual for market abuse.

Between 1 January 2009 and 25 May 2010, the trader dealt in shares, contracts for differences (CfDs) and spread bets from his home address.  He devised a trading strategy designed to influence, in his favour, the prices of CfDs and spread bets offered by retail providers of those products. Specifically, he would enter orders for shares above the current best bid price, or below the current best offer price on the London Stock Exchange, observe the change in the prices of CfDs and spread bets as a result and then trade those products profitably both through accounts in his name and in the names of third parties to disguise his behaviour.

Given his deliberate and repeated actions, the attempts to conceal the misconduct and the substantial economic benefit, the FSA regarded this to be a serious case of market abuse.  In mitigation, the FSA took account of the fact that the trader was not working in the financial services industry at the time and that he has admitted his market abuse.

View Final Notice - Barnett Michael Alexander, 14 June 2011

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Regulation and compliance

A new European regime for venture capital

The European Commission Directorate General Internal Market and Services has published a consultation paper on a new European regime for venture capital. The consultation aims to address the two problems that venture capital funds that intend to raise funds and invest on a cross-border basis in the EU are confronted with:

  • The fact that they do not benefit from a real internal market.
  • The fact that they may face problems of double taxation.

The consultation focuses on the creation of an internal market for venture capital. It aims to do this through one of two legislative alternatives:

  • Re-examining the suitability of the Alternative Investment Fund Managers Directive (AIFMD) in relation to certain venture capital funds.
  • Creating a system tailor made for the needs of venture capital as a stand alone initiative.

View A new European regime for venture capital, 15 June 2011

Commodities and raw materials: challenges and policy responses

Commissioner Michel Barnier has given a speech entitled Commodities and raw materials: challenges and policy responses. Selected extracts from the speech, published by the European Commission, reveal that Barnier states that the level of transparency in both the derivatives and physical markets must be improved; and this means that regulators must have access to more information.

Barnier then turns to the area of position limits, and states that position limits will not be applied systematically to all markets, but that the European Securities and Markets Authority (ESMA) will coordinate the use of position limits by national authorities if it is necessary to preserve the integrity and stability of the derivatives and physical markets.

Staying with the topic of ESMA’s work, Barnier states that ESMA will:

  • Work towards the adoption of common rules to supervise the derivatives and physical markets.
  • Ensure a uniform and coordinated application of these rules.
  • Strengthen collaboration at the European level with regulators of the underlying physical markets.

Barnier then states that the revision of the Market Abuse Directive will clearly define what constitutes market abuse in the case of commodity derivatives and will ensure that all contracts and transactions where abuse may occur are adequately covered by EU rules.

Barnier finishes by stating that all companies working in the extractive industry will in the future be obliged to report on their activities, per country and per project. To this end, the European Commission is proposing:

  • Changes to the Transparency Directive, with regard to companies listed in the EU.
  • Changes in the accounting Directives, with regard to non-listed companies.

These changes are expected in autumn 2011.

View Commodities and raw materials: challenges and policy responses, 14 June 2011

A new approach to financial regulation: the blueprint for reform

The Government has published its latest consultation document on regulatory reform, which includes a draft of the Financial Services Bill and explanatory notes. The consultation document is called A new approach to financial regulation: the blueprint for reform.

The consultation document builds on the Government's initial thinking set out last July and a further consultation document which followed in February 2011. It contains a number of new policy proposals which have been developed in light of the feedback received including:

  • A specific statutory objective governing the Prudential Regulatory Authority's responsibilities for the insurance sector.
  • The Financial Policy Committee to take economic growth into account in pursuing financial stability, recognising that stability will generally be an important enabler of growth.
  • An updated and enhanced competition regime under the Financial Conduct Authority (FCA). The FCA will have a specific new competition power to require the Office of Fair Trading to consider whether structural barriers or other features of the market are creating competitive inefficiencies in specific markets.
  • Steps to strengthen the handling of cases of widespread consumer detriment, including misselling. To aid this, the Government proposes to provide a range of organisations, including the Financial Ombudsman Service and consumer groups, with the ability to raise to the FCA's attention issues causing significant detriment, and to require the FCA to consider taking appropriate action, such as requiring firms to put in place a consumer redress scheme using recently expanded powers under section 404 of the Financial Services and Markets Act 2000 (FSMA).

The draft Financial Services Bill contains the core provisions needed to give effect to the Government's reform proposals. Parliament now has the opportunity to consider the draft legislation. According to the Government the pre-legislative scrutiny (PLS) is expected to take twelve sitting weeks in Parliament. The exact start date is subject to Parliament's establishment of a scrutiny committee, and consequential timing issues. The Government expects PLS to start shortly and to be well underway before the summer recess. In order to further support the scrutiny of the draft Bill during the PLS, the Government will publish a 'consolidated' version of FSMA, which will show the changes and additions that the draft Bill will make if enacted as published.

Alongside Parliamentary scrutiny of the draft Bill, the Government is carrying out its own consultation on a number of issues which are set out in Schedule A of the consultation document. The deadline for responding to these issues is 8 September 2011.

View A new approach to financial regulation: the blueprint for reform, 16 June 2011

Chancellor's Mansion House speech

In his Mansion House speech the Chancellor of the Exchequer, George Osborne MP, stated that the British economy was slowly recovering but that the financial crisis presented a very simple dilemma which he dubbed "the British Dilemma".

In summary, the Government acknowledges that as a global financial centre that generates hundreds of thousands of jobs, a successful banking and financial services industry is clearly in the UK's national economic interests. However, Osborne argued that whilst the UK should strive for global success in financial services, such success should not come at an unacceptably high price.

A year on since taking office, Osborne believes that we are now closer to a consensus on how the British Dilemma can be solved with the UK achieving both a successful, competitive financial services industry and a healthy, balanced economy. The consensus concerns two key issues:

  • What the right culture of regulation is.
  • How international rules apply and where successful banks fit in.

In relation to culture Osborne attacks the current tripartite system stating that the decision to divide responsibility for assessing systemic financial risks from the responsibility for applying that assessment to particular financial institutions created a regime in which no one was in charge. At the same time the system required endless box ticking and costly processes. The Government is therefore proposing a completely new culture of regulation. The proposed new institutions (the Financial Policy Committee (FPC), the Prudential Regulation Authority (PRA) and the Financial Conduct Authority (FCA)) are designed to create clear lines of accountability and provide space for regulators to exercise judgement.

Osborne also acknowledges that getting supervision right in the UK is not enough and as the world's leading financial centre the UK is particularly exposed to financial instability elsewhere in the world. Given this, Osborne argues that global standards are strongly in the UK's national interest and that in particular the Government wants to see the full implementation of the Basel III standards around the world. He also states that pay in the financial services sector should be regulated internationally to avoid a race to excess. However, he also argues that the European rules implementing Basel III should give national regulators the discretion to add to the requirements where national circumstances require it and that more generally the UK will always fight against badly thought-through European legislation.

In the final part of his speech Osborne briefly discusses the work of the Independent Commission on Banking (ICB) and states that the Government endorses in principle two key proposals set out in the Interim Report: a retail ring fence around better capitalised high street banks and bail-in instead of bail out so that private investors, not taxpayers, bear losses if things go wrong.

Whilst not pre-empting the ICB's final report Osborne states that the Government will judge the final proposals against the following conditions:

  • All banks should be allowed to fail safely without affecting vital banking services.
  • Without imposing costs on the taxpayer
  • In a manner applicable across the UK's diverse financial services sector.
  • Consistent with EU and international law.

Osborne also makes the point that in line with the ICB's Interim Report, there needs to be further capital requirements for systemically important banks but that outside the ring fence this is best done internationally.

View Speech at the Lord Mayor's dinner for bankers and merchants of the City of London by the Chancellor of the Exchequer, Mansion House, London, 15 June 2011

Governor of the Bank of England's Mansion House speech

The Bank of England has published Sir Mervyn King's Mansion House speech. In his speech King commented on three themes:

  • Monetary policy.
  • Macro-prudential policy and work of the new Financial Policy Committee (FPC) at the Bank of England.
  • The new approach to banking regulation that will follow the creation of the Prudential Regulation Authority (PRA).

King advises that the FPC will publish its first report on 24 June and concedes that in devising new macro-prudential policy instruments there has inevitably been a degree of learning by doing. In addition, the draft Financial Services Bill makes it clear that the aim of banking regulation will be to minimise the adverse impact of a failure of a firm on the stability of the financial system as a whole. As such, resolution will be at the heart of the new regulatory regime and supervisors will act in the knowledge that resolution powers can and will be deployed in the event of firm failure.

However, King also makes clear that adequate resolution procedures are not an alternative to ensuring that banks have sufficient loss-absorbing capital; in fact adequate resolution procedures and sufficient loss-absorbing capital should be seen as complimentary to each other. King also argues that all institutions, especially systemically important financial institutions, should have much higher levels of loss-absorbing capital than they did before the financial crisis and that should be in the form of common equity.

King also states that the style of regulation will change with the PRA arguing that prudential supervision can be operated at lower cost than hitherto by reducing the burden of routine data collection and focussing on the major risks to the system. King refers to "targeted and focussed regulation" which allows senior supervisors to exercise their judgement. For example the PRA will reduce the number of people subject to the intensive regulatory interview process before appointment by limiting such interviews to the most senior people.

View Speech by Sir Mervyn King at the Lord Mayor’s Banquet for Bankers and Merchants of the City of London at the Mansion House on 15 June 2011, 15 June 2011

The Bribery Act 2010 (Commencement) Order 2011

The Bribery Act 2010 (Commencement) Order 2011 has been made. It brings into force on 1 July 2011 those provisions of the Bribery Act 2010 which were not brought into force on Royal Assent by section 19(2) of that Act.

The Bribery Act 2010 (Consequential Amendments) Order 2011 has also been made. It makes amendments to subordinate legislation in consequence of the Bribery Act 2010, and it comes into force on 1 July 2011.

View The Bribery Act 2010 (Commencement) Order 2011, 7 June 2011

View The Bribery Act 2010 (Consequential Amendments) Order 2011, 7 June 2011

View The Bribery Act 2010 (Consequential Amendments) Order 2011: explanatory memorandum, 7 June 2011

The Credit Rating Agencies (Amendment) Regulations 2011

The Credit Rating Agencies (Amendment) Regulations 2011 (the CRA Regulations) have been published, with an accompanying explanatory memorandum. The explanatory memorandum explains that the second European Credit Rating Agency Regulation (CRA2) amends the first European Credit Rating Agency Regulation (CRA1) such that responsibility for regulating credit rating agencies is transferred from national authorities to the European Securities and Markets Authority (ESMA).

The CRA Regulations ensure that the CRA2 is properly implemented in the UK, by amending the UK Credit Rating Agencies Regulations 2010. The CRA Regulations:

  • Revoke provisions of the Credit Rating Agencies Regulations 2010 which are inconsistent with the CRA2 or are no longer required.
  • Enable ESMA to enforce in the UK any sanctions and periodic penalties it might impose under the CRA2.
  • Require ESMA to obtain authorisation from the High Court before requesting records of telephone or data traffic, or carrying out an on-site inspection.

View The Credit Rating Agencies (Amendment) Regulations 2011, 9 June 2011

View Explanatory memorandum to the Credit Rating Agencies (Amendment) Regulations 2011, 9 June 2011

A brief guide to the European Union and its legislative processes

The FSA has published a revised version of its brief guide to the European Union and its legislative process. The guide briefly discusses the key EU institutions, the EU supervisory architecture and the EU legislative process. At the end of the guide there is also a discussion concerning the key UK national institutions: the Treasury, the FSA, the Bank of England, the Cabinet Office (or the Ministerial Committee on European Policy) and the Department for Business, Innovation and Skills.

View A brief guide to the European Union and its legislative processes, 15 June 2011

Feedback Statement 11/3: Product Intervention: Feedback on DP11/1

On 25 January 2011, the FSA published Discussion Paper 11/1: Product Intervention (DP11/1). DP11/1 was designed to open the public debate about how the FSA could reduce consumer detriment by scrutinising the whole of the product lifecycle from start to finish rather than just focusing on the point-of-sale. DP11/1 set out a range of interventions that could be introduced in areas where the potential for customer harm was thought to be greatest. Such interventions included banning products or prohibiting the sale of certain products to specific groups of customers.

The FSA has now published Feedback Statement 11/3: Product Intervention: Feedback on DP11/1 (FS11/3). In FS11/3, the FSA:

  • Summarises the feedback it received to the questions posed in DP11/1 and sets out its responses to this feedback.
  • Considers the place of product intervention in relation to other relevant projects (such as the Treasury’s work on simple products, development of the Financial Conduct Authority (FCA) and work underway at EU level on product governance responsibilities).
  • Discusses its next steps and expectations for the future.

In its general comments, the FSA makes a number of points concerning product intervention, market failure analysis, initiatives in other EU member states and supervision.

In relation to product intervention the FSA states that consumer organisations were generally supportive of the idea that it should regulate all stages of the product life cycle. The reaction from industry was, however, more diverse with some respondents arguing that as point-of-sale is where consumer detriment originates, product intervention was unnecessary. In response the FSA reiterates that it sees product intervention as an essential means of achieving an appropriate level of consumer protection. It states that it will be looking primarily at:

  • The product governance processes employed by firms.
  • Whether competition is working effectively for consumers.
  • Whether firms are exploiting consumer behaviour.

In relation to market failure analysis the FSA remains of the view that products can be designed to take advantage of consumer behavioural traits in ways that are contrary to their interests, and that consumers are not always able to exert competitive pressure on firms to support their interests.

Many of the respondents to DP11/1 raised concerns about the competitive position of UK based firms if UK regulation takes a more interventionist, product-based approach than the regulation found in other EU member states. The FSA states that it is aware of this issue, and will take it into account as it develops its approach to product intervention.

The FSA’s emerging supervisory approach, as outlined in DP11/1, received widespread support. Some respondents asked for more clarity about the FSA’s expectations and areas of concern, and some asked the FSA to publish additional guidance. In FS11/3, the FSA states that its supervisory approach is still in development and it will take account of responses as it continues to refine it.

The FSA states that its next steps are to:

  • Develop a single set of rules and guidance on product governance.
  • Seek any necessary changes to be made to relevant EU Directives.
  • Engage with the Treasury on the development of the FCA’s powers with regard to product intervention.
  • Adopt a timetable for the introduction of new rules and additional interventions that reflects the outcome of the legislative process within the UK Government and at EU level.

View Feedback Statement 11/3: Product Intervention: Feedback on DP11/1, 14 June 2011

Dear CEO letter - Wealth management review

The FSA has recently reviewed the suitability of client portfolios in a sample of firms in the wealth management industry. The key focus of the review was to assess suitability of client portfolios against documented client information, which includes, but not limited to, the client’s knowledge and experience, financial situation and investment objectives.

The FSA found significant failings in that:

  • 14 out of 16 firms were judged to pose a high or medium-high risk of detriment to their customers, based on the number of client files which had a high risk of unsuitability or where the suitability could not be determined.
  • Overall, 79% of files reviewed had a high risk of unsuitability or the suitability could not be determined.
  • 67% of the files reviewed were not consistent with one or more of the following: the firm’s house models; the client’s documented attitude to risk; and the client’s investment objectives.

The FSA has now published a Dear CEO letter which explains the issues it has identified in the wealth management review and asks firms to consider whether they meet and can demonstrate that they meet the suitability requirements.

In the Dear CEO letter the FSA states that a key area of concern is the inability of firms to demonstrate that client portfolios and/or portfolio holdings were suitable. For example the FSA found an inability to demonstrate suitability because of an absence of basic know your customer (KYC) information or a failure to obtain sufficient (or any) information on client knowledge, experience and objectives. The FSA found risks of unsuitability due, in summary to inconsistencies between portfolios and the client’s attitude to risk and inconsistencies between portfolios and the client’s investment objective, investment horizon and/or agreed mandate.

The FSA asks firms to respond to the Dear CEO letter by 9 August 2011 acknowledging that they have read and understood its content and considered its implications.

View Dear CEO letter - Wealth management review, 14 June 2011

Chartered Institute for Securities & Investment annual conference 2011: A regulatory update

Sheila Nicoll, Director Conduct Policy, the FSA, has given a speech at the Chartered Institute for Securities & Investment annual conference entitled ‘2011: A regulatory update’.

In the first part of her speech Nicoll discusses the recent Dear CEO letter regarding the FSA's wealth management review. Nicoll states that the FSA's findings were a matter of concern on the basis that for every five files reviewed, four were assessed to have a high risk of unsuitability or suitability could not be determined. In addition two thirds of the files the FSA reviewed were not consistent with either the firm's house models, the client's documented attitude to risk, or the client's investment objectives. Nicoll warned that the FSA intends to do a follow up review of firms later this year. Nicoll's overall messages for wealth managers were:

  • Look carefully at whether you are complying with the FSA's suitability requirements.
  • Maintain good records.
  • Make sure the right controls and risk management systems are in place to satisfy yourself that you are complying with the FSA rules.

Nicoll then turns to the Retail Distribution Review (RDR), and acknowledges that the FSA has work to do on its rules on platforms, legacy assets and the need for firms to be able to offer simplified advice. Nicoll confirms that the FSA will be publishing a further paper in the summer on simplified advice.

Turning to European developments, Nicoll expresses the concern the FSA has over the European Commission’s plans to deliver its regime for Packaged Retail Investment Products (PRIPS) through changes, on the one hand to MiFID, and on the other to the Insurance Mediation Directive, depending on the type of product or service that is being offered. The FSA fears that this would result in divergence, allowing different selling standards to develop across different markets.

Nicoll expresses further concern over the Commission’s plans, outlined in its consultation on the MiFID review, to place inducement restrictions on only ‘independent’ advisers and/or portfolio managers. The FSA would like the Directive to go further and ensure that investment advice should be provided without any potential for bias. Nicoll does point out, however, that the FSA supports the Commission's suggestion that standards should be met for advice to be labelled ‘independent’. She also calls on the Commission to make sure that firms which do not provide independent advice make this clear.

Nicoll then mentions the FSA’s Feedback Statement on Product Intervention (Feedback Statement 11/3: Product Intervention: Feedback on DP11/1 (FS113)). She explains that FS11/3 re-affirms the FSA’s commitment to acting in all parts of the product life cycle. In particular, the FSA considers that product design and decisions about how and to whom products will be distributed play a significant role in determining consumer outcomes.

Nicoll then highlights the concerns that the FSA has with regard to exchange traded products:

  • Whether marketing and promotional material actually adequately explains the differences between different fund structures and strategies.
  • The risks involved with those that rely on swap counterparties.

Nicoll then explains that, as the FSA is committed to intervening early, before risks have crystallised, where it identifies potential risks, it is aiming to adopt this approach with exchange traded products.

Nicoll then turns to the issue of funding the Financial Services Compensation Scheme (FSCS). She explains that as the Government's proposals for regulatory reform will require a review of the structure of the FSCS, and some important aspects of the deposit and investment compensation regimes are being discussed at EU level, the FSA will delay its own formal consultation into the funding of the FSCS until it has more certainty as to where things stand.

Nicoll finishes her speech by touching on the Government's proposals for regulatory reform. She announces that on 28 June 2011 the FSA will be holding a conference which will focus on the supervisory approach of the Financial Conduct Authority (FCA). The FSA will also publish a document which sets out its latest thinking on the overall supervisory philosophy of the FCA. The FSA remains open to comments on key questions such as:

  • What should success look like for the FCA?
  • What should interaction with the FCA feel like?
  • How can it deliver appropriate consumer protection?

Nicoll concludes by stating that “in thinking about regulation, past, present or future, in the UK, in the EU, or internationally our guiding principle should be doing the right thing for the customer. We think that is a good guiding principle for your business, too.”

View Chartered Institute for Securities & Investment annual conference 2011: A regulatory update, 14 June 2011

FSA Annual Report 2010/11

The FSA has published its Annual Report for the year 2010/11, in which it outlines its performance against the priorities set out in its 2010/11 Business Plan and its statutory objectives.

The Annual Report highlights four main areas in which the FSA has made progress:

  • Executing a credible deterrence and enforcement approach throughout 2010/11.
  • The launch of a radically new approach to the protection of retail customers, with a willingness to intervene earlier, as highlighted by:
    • Securing greater redress for consumers, for example in the recent legal proceedings surrounding the complaints handling by institutions of payment protection insurance.
    • The publication of the FSA’s first Retail Conduct Risk Outlook, which illustrates how the FSA will seek to identify emerging market developments that could pose risks to consumers.
    • Continuing to progress major policy initiatives such as the Retail Distribution and Mortgage Market Reviews.
  • The continued development of a more intensive approach to prudential supervision as demonstrated by:
    • Strengthening the FSA’s capital regime by establishing a comprehensive stress-testing framework.
    • Working closely with firms to require them to embed reverse stress testing into their business models.
    • Implementing new European rules on remuneration.
  • Continued progress in developing new global standards of prudential banking regulation.

In the Chairman’s statement, Lord Turner states that, in addition to the four areas of progress outlined above, the FSA has continued to work to ensure clean and efficient wholesale markets, as well as to prepare for the structural changes outlined in the Government's consultation document A new approach to financial regulation: building a stronger system.

View FSA Annual Report 2010/11, 13 June 2011

FSA Enforcement Annual Performance Account 2010/11

The FSA has published its Enforcement Annual Performance Account 2010/11 (the Account), outlining the fairness and effectiveness of the FSA’s enforcement policies.

The Account concludes that the FSA will not be deterred from its credible deterrence strategy by the trend for the cases which it takes on lasting longer, and being more strongly contested. As such, the FSA will continue to make full and robust use of the powers available to it, including its new powers, to help bring about a change in behaviour in the financial services industry.

View FSA Enforcement Annual Performance Account 2010/11, 13 June 2011

FSA secures its first criminal conviction for boiler room fraud

A broker has been sentenced to two years imprisonment and disqualified from being a director for six years after pleading guilty to 13 counts of carrying out a regulated activity without authorisation, one count of making false/misleading statements, promises or forecasts and three counts of money-laundering. David Mason ran cold-calling schemes offering shares in Edu Vest Plc (Edu Vest) resulting in 32 people investing a total of £270,000 in the belief that Edu Vest would soon be listing However, share certificates were never issued and Mr Mason laundered the proceeds of the boiler room operation. It is the first time the FSA has secured a criminal conviction for boiler room fraud.

In a related action, an FSA approved person, David Sinclair of Axiom Capital Limited, has been fined £68,000 and prohibited from holding any significant influence function in the future. Mr Sinclair was approached by Mr Mason in 2008 and his assistance sought in the setting up of the investment vehicle, Edu Vest. The FSA considered that Mr Sinclair failed to carry out adequate due diligence as to the legitimacy of Edu Vest, failed to take reasonable action to prevent the unauthorised activities carried on by Edu Vest and failed to adequately respond to customer complaints and recognise the warning signs that unauthorised overseas entities were involved in the sale of Edu Vest shares. Mr Sinclair effectively allowed Mr Mason to use a bank account under his control to transfer investors’ money to Mr Mason and to other specified accounts. It was acknowledged that Mr Sinclair’s misconduct was not deliberate. However, the FSA concluded that his involvement in/failure to prevent Mr Mason’s activities represented a serious failure to meet the minimum standards expected and therefore the financial penalty imposed was proportionate.

View Press release - FSA secures its first criminal conviction for boiler room fraud, 14 June 2011

View Final Notice - David Grant Sinclair, 20 December 2010

Dubai: Procedure for de-listing a Dubai Financial Market listed company for the purpose of a takeover

When it comes to a de-listing and takeover of a public joint stock company (PJSC) listed in the Dubai Financial Market (DFM), there are various restrictions, disclosure and reporting requirements prescribed by the Securities and Commodities Agency (SCA), which need to be followed. The takeover would, in essence, require the target company to be de-listed and converted from a PJSC to a private company in order for all its shares to be transferred to the acquiring company and the acquiring company’s local partner.

The Federal Law stipulates various restrictions on ownership of UAE companies. In the event of a foreign (non GCC) shareholder investing in a UAE company, the aggregate shareholding of the GCC and the foreign shareholder cannot exceed 49%, while a minimum of 51% of the shares must be owned by one or more UAE nationals or a company wholly owned by UAE nationals. If the company is not operating in a restricted sector, then GCC shareholders are permitted to own 100% of the shares, however, they are not permitted to act as a UAE local partner.

For the conversion and de-listing of the PJSC to take place, an EGM of the target needs to be held, approving the de-listing and conversion. The target will require at least 75% of the shareholdings represented at the EGM (subject to a higher threshold required under the target’s memorandum and articles of association) to vote in favour of the de-listing and conversion. Secondly, the SCA will need to approve the request by the target, taking into consideration whether de-listing would contravene with the relevant laws or would be detrimental to the shareholders’ rights). After SCA approval is granted, the target will be required to adhere to the UAE Companies Law in respect of conversion to a private company (i.e. minimum of two shareholders, minimum UAE shareholding of 51% etc.).

For further information please contact Jane Clayton

Hong Kong: Consultation paper on Securities and Futures (Short Position Reporting) Rules in Hong Kong

On 25 May 2011, the Securities and Futures Commission (SFC) issued a consultation paper on Securities and Futures (Short Position Reporting) Rules (the Consultation). These will give effect to the short position reporting regime announced earlier in the SFC’s March 2010 Consultation Conclusions on Increasing Short Position Transparency.

Under the regime, a short position that hits the threshold of 0.02% of the issued share capital of a listed company, or has a market value of HK$30 million, whichever is lower, has to be reported to the SFC on a weekly basis. Aggregated short positions of each stock will be published, on an anonymous basis, a week after the receipt of the reports.

In general, the party who beneficially owns the short position will be responsible for the reporting. The reporting requirement will apply to the constituent stocks of the Hang Seng Index, the Hang Seng China Enterprises Index and other financial stocks specified by the SFC. Reporting will exclude derivatives, although the SFC will permit voluntary reporting of stock short positions which are either on or off exchange. New aspects contained in the Consultation include the introduction of a power for the SFC to require daily reporting in contingency situations and to impose criminal penalties on failure to comply with the reporting requirements.

The SFC will provide an electronic reporting facility and a template for reporting.

The consultation period ends on 30 June 2011.

View www.sfc.hk

For further information please contact Charlotte Robins

Hong Kong: SFC and HKMA jointly introduce mystery shopping programme to monitor selling practices

The Securities and Futures Commission (SFC) and the Hong Kong Monetary Authority (HKMA) jointly engaged an external service provider, the Hong Kong Productivity Council, to carry out mystery shopping exercises between July and November 2010 to look into the selling practices of intermediaries involving unlisted securities and futures investment products to retail investors (and in respect of the banking sector, the scope of the exercise was expanded to include structured deposits). The mystery shopping exercise primarily focused on three key areas, namely the “know-your-client” (KYC) procedures, explanation of product features and disclosure of risks, and suitability assessment.

The SFC and the HKMA issued separate findings on licensed corporations and on authorised institutions respectively. The SFC report identified certain deficiencies in the selling practices of the selected licensed corporations (including insufficient explanation of product feature, inadequate risk disclosure and failure to take into account investors’ personal circumstances) and 16% of the cases were found to be unsatisfactory. The HKMA report identified that the banks in general had a high level of compliance with the KYC requirement, but there were areas such as risk disclosure and suitability assessments that required further enhancement by the banks.

Where major deficiencies were noted, both regulators have asked the firms in question to take remedial action and will continue to monitor these firms to ensure that appropriate measures are put in place. In addition, both regulators will continue to use mystery shopping exercises as one of its regulatory tools to assess the industry’s compliance with requirements in terms of selling practices and both regulators have stated that they will not hesitate to take regulatory actions for repeated material breaches.

View SFC’s press release and findings

View the HKMA findings

For further information please contact Charlotte Robins

Hong Kong: Investor characterization requirements extended for 3 months to come into force on 4 September 2011

The implementation of the new paragraph 5.1A of the Code of Conduct for Persons Licensed by or Registered with the Securities and Futures Commission (Code) has been delayed until 4 September 2011, whilst revisions to paragraph 8.3 (pre-sale disclosure of monetary and non-monetary benefits), paragraph 8.3A (disclosure of sales related information), and paragraphs 15.3 to 15.3B (professional investors) came into force on 4 June 2011, as originally planned.

Paragraph 5.1A was added to the Code as part of the consultation conclusions of the Proposals to Enhance Protection for the Investment Public on 28 May 2010. The aim was to codify the practice of characterizing investors as part of the know your client procedures and to assess the clients derivatives knowledge, and set out the conduct required of an intermediary in certain circumstances.

The SFC issued a circular on 28 May 2010 and on 20 May 2011 which provided further guidance (see Circular 28/5/2010:

View the Circular - 28 May 2010

View the Circular - 20 May 2011;

For further information please contact Charlotte Robins

Hong Kong: HKSI offers new training program for the wealth management industry

The Hong Kong Securities Institute (HKSI) has introduced a new education program for the wealth management industry. The Certified International Wealth Manager (CIWM) is a qualification which is awarded by the Association of International Wealth Management (AIWM), an international professional organization for wealth managers, portfolio managers, investment advisors, asset managers and trust and estate practitioners worldwide.

The CIWM is aimed at financial, legal and other professionals working in the Private Wealth Management (PWM) industry. The CIWM examination consists of a foundation exam and a final exam. Part of the final exam consists of the existing Paper 1 of the SFC Licensing Exam (i.e. Fundamentals of Securities and Futures Regulations also set by the HKSI).

View the CIWM Brochure

For further information please contact Charlotte Robins

Hong Kong: SFC releases papers to enhance transparency of regulatory and supervisory framework

To enhance transparency and communication with external stakeholders, the Securities and Futures Commission (SFC) has published two papers explaining its existing regulatory and supervisory framework for intermediaries:

  • The first paper, “Regulatory Framework for Intermediaries” outlines the broad role and approach taken by, as well as the underlying philosophy that guides, the SFC in regulating intermediaries.
  • The second paper, “Approach to Supervision of Intermediaries” focuses on the detailed processes underpinning the SFC’s approach to supervision of intermediaries.

For further information please contact Charlotte Robins

Netherlands: Financial Markets Amendment Act 2010

The First Chamber of the Dutch Parliament has approved the Financial Markets Amendment Act 2010 (Wijzigingswet financiële markten 2010, the Act). The Act contains both substantive and technical non-substantive amendments to the Dutch Act on the Financial Supervision (Wet op het financieel toezicht, AFS). The substantive amendments relate to:

  • The introduction of a mandatory exemption notice to the clients of offerors of securities that are exempt from the prospectus obligation pursuant to section 5:2 AFS.
  • The introduction of a voluntary supervisory regime for investment funds (beleggingsinstellingen).
  • Broadening the dispensation for offerors of investments to all licence requirements (including their ongoing obligations).
  • Raising the threshold for exemption from the licence requirements for investment objects (beleggingsobjecten) and participation rights in investment funds from EUR 50,000 to EUR 100,000.

The Act will come into force on a date decided by Royal Decree (Koninklijk Besluit, the Decree). The Decree may decide on separate dates of entering into force for separate sections of the Act.

View the Act (in Dutch)

For further information please contact Gijs van Leeuwen or Floortje Nagelkerke

Netherlands: Implementation of Consumer Credit Directive

The EU Directive on credit agreements for consumers (2008/48/EC) (the Directive) has been implemented in the Netherlands. The implementation act (the Act) entered into force on 25 May 2011.

The Act supplements the Dutch Civil Code (Burgerlijk Wetboek) with a new Title 7.2A on consumer credit agreements in Book 7. In this new Title, the civil law rules of the Directive are laid down, such as the rules regarding the information that needs to be included in a consumer credit agreement. The Act also contains changes to the Act on the Financial Supervision (Wet op het financieel toezicht, AFS) as the AFS already contained rules on pre-contractual information and advertising. The regulations pursuant to the AFS in which such rules are more detailed, also needed to be changed. Therefore, on 2 June 2011, an amendment decree (the Decree) entered into force that amends, amongst others, the Decree on Conduct of Business Supervision on Financial Undertakings FSA (Besluit Gedragstoezicht financiële ondernemingen Wft). The Decree mainly implements provisions on standard information that needs to be provided to consumers before concluding an agreement and when publishing advertisement statements.

View the Decree (in Dutch)

For further information please contact Gijs van Leeuwen or Floortje Nagelkerke

Netherlands: Dutch Minister of Finance proposes Act on strengthening the governance of the Dutch supervisors

The Dutch Minister of Finance (Minister van Financiën, the Minister) has proposed to strengthen the governance of the Dutch Central Bank (De Nederlandsche Bank, DNB) and the Netherlands Authority for the Financial Markets (Autoriteit Financiële Markten, AFM) (the Proposal).

The Proposal contains a number of measures aimed to tighten the supervision of the financial regulators in the Netherlands (the AFM and DNB) including:

  • The introduction of the power to the Minister to adopt policy guidelines (beleidsregels) on the manner in which the regulators should perform their tasks.
  • The introduction of a chairman responsible for the supervision tasks within the management board (bestuur) of DNB.
  • Broadening the legal task of the supervisory board (raad van commissarissen) of DNB and the supervisory council (raad van toezicht) of the AFM.
  • Restricting re-appointments within the management boards of DNB and the AFM to one re-appointment to the same position.
  • The introduction of an integrity and suitability test for members of the managing and supervisory boards of DNB and the AFM.

The Proposal will amend the Banking Act 1998 (Bankwet 1998) and the Dutch Act on the Financial Supervision (Wet op het financieel toezicht, AFS).

View the Proposal (in Dutch)

For further information please contact Gijs van Leeuwen or Floortje Nagelkerke

Netherlands: Regulation on Accepted Market Practices

On 13 May 2011, the regulation on accepted market practices (Regeling gebruikelijke marktpratkijken Wft, the Regulation) entered into force. The Regulation introduces a new exemption to the Dutch market manipulation rules: the liquidity agreement.

Section 5:58 of the Dutch Act on the Financial Supervision (Wet op het financieel toezicht, AFS) prohibits, amongst others, the performance of transactions in financial instruments that send or may send an incorrect or misleading signal with regard to the supply, demand or price of the financial instruments and the performance of transactions in financial instruments in order to maintain the price of those financial instruments at an artificial level. Pursuant to the Regulation these prohibitions do not apply to transactions that are performed in the context of a liquidity agreement.

A liquidity agreement under the Regulation enables issuers to trade in own shares or participation rights via an investment firm in order to enhance regular trading in those financial instruments with the purpose of preventing price fluctuations that occur pursuant to a lack of regular trading in those financial instruments. In order for transactions to be exempt from the above mentioned prohibitions of the AFS they should be performed in the context of such a liquidity agreement. Transactions performed under the liquidity agreement must be for the risk and at the expense of the issuer. The liquidity agreement must also specify a maximum amount of securities (expressed in absolute numbers or in currency) which may be bought or sold by the investment firm. The Regulation does not apply to transactions conducted in participation rights in the capital of open-end investment funds.

View the Regulation (in Dutch)

For further information please contact Gijs van Leeuwen or Floortje Nagelkerke

Netherlands: AFM imposes administrative fine for market abuse

The Netherlands Authority for the Financial Markets (Autoriteit Financiële Markten, AFM) has imposed an administrative fine of EUR 200,000 on Mr. Heidman (Heidman) for violation of the tipping prohibition of section 5:57 of the Dutch Act on the Financial Supervision (Wet op het financieel toezicht, AFS).

Under section 5:57 AFS it is prohibited for primary insiders to disclose inside information to a third party, other than as part of their normal duties, profession or position or to recommend or induce a third party to conduct or effect transactions in the relevant financial instruments. Amongst others, primary insiders are persons that have access to inside information by virtue of their duties, profession or position.

On 18 September 2009, a Dutch newspaper published an article that reported that Jumbo (a Dutch grocery chain) had made an offer for the shares of Super de Boer (another Dutch grocery chain). Heidman gave a presentation at a meeting for C1000 (yet another Dutch grocery chain) entrepreneurs five days later. In his presentation, Heidman referred to the news article and made several statements that referred to Jumbo's offer for the Super de Boer shares and C1000’s role in this connection. Heidman stated, amongst others: "we did not miss the boat" and "the race is not over yet". Based on these statements, trading took place in shares of Super de Boer.

According to the AFM, Heidman, a primary insider pursuant to his profession and position, had inside information pursuant to his involvement in various meetings on a possible takeover of Super de Boer. He was also present when a non-disclosure agreement was signed. According to the AFM, by making the abovementioned statements at the internal meeting, Heidman violated the prohibition of section 5:57 AFS.

View the decision of the AFM (in Dutch)

For further information please contact Gijs van Leeuwen or Floortje Nagelkerke

Netherlands: AFM and DNB publish a joint statement explaining their enforcement policy

The Netherlands Authority for the Financial Markets (Autoriteit Financiële Markten, AFM) and the Dutch Central Bank (De Nederlandsche Bank, DNB) have published a joint statement explaining their enforcement policy (handhavingsbeleid, the Statement). The Statement is the result of requests from market participants to the AFM and DNB for more transparency on their considerations for enforcement. According to the AFM, not all violations are followed by formal enforcement. Many violations are settled by having a dialogue or by sending a warning letter. The level of compliance within an entity can be the decisive factor when considering enforcement proceedings.

View the Statement (in Dutch)

For further information please contact Gijs van Leeuwen or Floortje Nagelkerke

Singapore: Revamp of Singapore’s Corporate Governance Code

Singapore’s Corporate Governance Council has proposed significant changes to the Corporate Governance Code. The key changes relate to:

  • Strengthening the independence of directors with amongst others, a stricter definition of independence (to include independence from substantial shareholders).
  • Greater disclosure of board and executive remuneration.
  • Risk management - effective risk management systems and internal controls should be in place and the CEO or CFO to give assurances that financial records are properly kept and true.
  • Shareholders’ rights and responsibilities (a new principle to the Code) so as to guide companies in their engagement with shareholders.

The consultation paper and the proposed changes are available on the website of the Monetary Authority of Singapore. Interested parties have until 31 July 2011 to submit their views on the proposals.

For further information please contact Daniel Yong or Wilson Ang

Singapore: SGX offers trading of Singapore government bonds

From 8 July 2011, Singapore government bonds (SGS bonds) will be available for trading on SGX. This is expected to improve liquidity and price transparency of the SGS bonds. Currently, investors can only trade in SGS bonds through dealer banks but with this initiative, investors will be able to access the bond prices on the SGX website or through their brokers.

An aggregate of 19 SGS bond issues with maturities of at least two years totalling S$74 billion will be available for trading. Like all securities traded on SGX, SGS bonds must be held through the CDP before they can be traded on SGX.

For further information please contact Daniel Yong or Wilson Ang

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Retail

FSA grants temporary extension for some PPI complaints

The FSA has issued a press release stating that it has agreed temporary arrangements for Barclays, Lloyds Banking Group, HSBC and RBS to handle payment protection insurance (PPI) complaints.

The arrangement extends the timeframe for these banks to deal with the claims that have been put on hold and also agrees additional time for them to deal with PPI complaints received since the end of their involvement in the judicial review:

  • PPI complaints still with the bank but put on hold during the judicial review will receive a decision by the end of August.
  • PPI complaints received after the conclusion of judicial review but on or before the 31 August will be responded to within 16 weeks.
  • PPI complaints received on or after 1 September and before 31 December 2011 will be responded to within 12 weeks.

The FSA reports that strict conditions have been imposed on the temporary time extensions. The banks with the temporary time extension will have to:

  • Keep PPI complainants and their customers fully informed.
  • Provide the FSA will regular reports on compliance.

The FSA states that it expects all PPI complaints handling to return to the normal eight week standard by 1 January 2012 at the latest.

The temporary arrangements only apply to the three banks, all other PPI complaints are unaffected.

View FSA grants temporary extension for some PPI complaints, 13 June 2011

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Securities

Prospectuses: common positions agreed by ESMA members (updated version)

The European Securities and Markets Authority (ESMA) has published an updated version of its FAQs on prospectuses: common positions agreed by ESMA members.  Two questions have been updated in this version of the document.

Question 15 concerning the interaction between item 20.1 of Annex I Regulation and IAS 8 has been updated so that the question applies to changes in accounting policies other than the initial application of a new standard.  

Question 76 concerning references to credit ratings in prospectuses has been introduced as a new question. The question covers:

  • Does Article 4 (1) refer to any credit rating mentioned in a prospectus?
  • How issuers and offerors find out whether a credit rating agency (CRA) is registered under the EU Regulation on CRAs?
  • Do prospectuses registered before 7 December 2010 need to be supplemented?
  • What happens if the application for registration by a CRA has not been decided upon yet? Do issuers have to disclose that an existing credit rating has applied for registration?

View Frequently Asked Questions - Prospectuses: common positions agreed by ESMA members - 13th updated version - June 2011, 9 June 2011

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Seminars

Invitations

40 minute briefing series - May to July 2011

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.

http://www.nortonrose.com/invitations/2011/your-guide-to-the-key-regulatory-challenges-in-2011-50366.aspx

Asset Management Regulation workshop - 22 June 2011

The Norton Rose LLP financial services team will be holding an asset management regulation workshop on 22 June 2011. We are pleased to announce that the FSA will participate in this workshop.

To access your invitation, please click here.

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  • Publications

    Blog: Basel III

    On 12 September 2010, the Group of Governors and Heads of Supervision of the Basel Committee on Banking Supervision announced that they had reached agreement on...

    October 2011

    Blog: AIFM Directive - 2011

    Please be advised that this blog is no longer in use and has been replaced by our online technical resource “AIFMD expert”.

    2011

    Blog: MiFID review

    The Markets in Financial Instruments Directive (MiFID) entered into force in November 2007.

    March 2011