Financial services updater

16 January 2012

London office building

Contacts

Key industry sectors

Introduction

Welcome to the latest edition of our financial services newsletter.

Highlights this week include:

  • GHOS meeting on Basel implementation and the LCR
  • EBA publishes guidelines on AMA extensions and changes

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

GHOS meeting on Basel implementation and the LCR

The Bank for International Settlements has issued a press release stating that the oversight body of the Basel Committee on Banking Supervision (the Group of Governors and Heads of Supervision (GHOS)) met on 8 January 2012 to discuss proposals concerning the liquidity coverage ratio (LCR) and the strategy for assessing implementation of the Basel regulatory framework more generally.

The press release states that each Basel Committee member country has committed to undergo a detailed peer review of its implementation of all components of the Basel regulatory framework. The Committee will also assess implementation of Basel II and Basel II.5 (i.e. the July 2009 enhancements on market risk and resecuritisations). The GHOS has also endorsed the Committee’s agreement to publish the results of the assessments.

In relation to the LCR the press release states that at the GHOS meeting the central principle was reiterated that a bank is expected to have a stable funding structure and a stock of high quality liquid assets that should be available to meet its liquidity needs in times of stress. Once the LCR has been implemented, its 100% threshold will be a minimum requirement in normal times. However, during periods of stress, banks would be expected to use their pool of liquid assets, thereby temporarily falling below the minimum requirement. According to the press release the Basel Committee has been asked to provide further elaboration on this principle by clarifying the LCR rules text to state explicitly that liquid assets accumulated in normal times are intended to be used in times of stress. It will also provide additional guidance on the circumstances that would justify the use of the pool. The Basel Committee will also review how central banks interact with banks during periods of stress, with a view to ensuring that the workings of the LCR do not hinder or conflict with central bank policies.

View Basel III liquidity standard and strategy for assessing implementation of standards endorsed by Group of Governors and Heads of Supervision, 8 January 2012

EBA Work Programme 2012

The European Banking Authority (EBA) has published its work programme for 2012. This sets out the main objectives and deliverables of the EBA during 2012.

The EBA explains that it has only been in operation for two years and strong emphasis needs to be placed on the development and strengthening of its institutional capabilities. The EBA also states that there are significant new legislative proposals on the agenda for European banking regulation, which will have a major impact on the priorities of the EBA in 2012 and thereafter.

The EBA’s main areas of activity are:

  • Regulation. The EBA aims to play a leading role in the creation of a single rule book for the EU banking system. The EBA will also work on the drafting of binding technical standards under the new Capital Requirements Directive (CRD IV). In addition, it will work on crisis prevention and crisis resolution arrangements.
  • Oversight. The EBA aims to deliver an independent and high quality analysis of EU banks and the EU banking sector. This will include a follow up to its recommendations post the 2011 EU-wide stress test. The EBA will also work to promote supervisory convergence by assisting national supervisory authorities.
  • Consumer protection. In line with the EBA’s responsibility for promoting transparency, simplicity and fairness in the market for consumer financial products, the EBA has recently set up an independent organisational unit for consumer protection. This unit is expected to set out its strategy and priorities shortly.

The EBA’s work programme also contains an annex which sets out a detailed work list with its tasks ranked in order of priority.

View EBA Work Programme 2012, 4 January 2012

View Annex to the Work Programme EBA’s tasks and priorities, 4 January 2012

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Capital adequacy

Presidency compromise proposals on CRD IV

The Council of the European Union has published presidency compromise proposals on the proposed CRD IV Directive and the proposed Capital Requirements Regulation. Both compromise proposals state that they have been prepared following discussions at working party meetings in 2011. The proposals highlight changes to the original text produced by the European Commission.

View Presidency compromise proposal - Proposal for a Regulation of the European Parliament and of the Council on prudential requirements for credit institutions and investment firms, 9 January 2012 

View Presidency compromise proposal - Proposal for a Directive of the European Parliament and of the Council on the access to the activity of credit institutions and the prudential supervision of credit institutions and investment firms and amending Directive 2002/87/EC of the European Parliament and of the Council on the supplementary supervision of credit institutions, insurance undertakings and investment firms in a financial conglomerate, 9 January 2012

EBA publishes guidelines on AMA extensions and changes

Paragraph 1 of Article 105 of Directive 2006/48/EC and paragraph 1 of Article 20 of Directive 2006/49/EC allow institutions and investment firms (hereafter institutions) to use, within the Advanced Measurement Approach (AMA), their internal risk models to determine the regulatory capital charge for operational risk, provided these internal models are expressly approved by EU competent authorities.

Extensions and changes to an AMA can have a considerable impact on its quality and reliability and the institution’s capital requirements at group and solo level and it may be necessary to involve an EU competent authority prior to their implementation.

An AMA extension is the introduction of new relevant AMA components or the implementation of the AMA framework in parts of the group. Changes to an AMA comprise modifications that are essential for meeting the regulatory requirements in the area of operational risk management and measurement systems and modifications with respect to internal governance structure and procedures.

The European Banking Authority (EBA) has now published guidelines that provide institutions with guidance on how to communicate AMA extensions and changes to EU competent authorities and on how to define internal policies for AMA changes in line with supervisory expectations. The EBA states that the guidelines rely on the established administrative procedures and technical channels for communication between EU competent authorities and institutions. The means of communication are left to be defined by EU competent authorities.

The EBA expects that EU competent authorities will perform all tasks necessary to implement the guidelines by 6 March 2012. After that date, EU competent authorities should ensure that institutions comply with them effectively.

View EBA publishes guidelines on AMA extensions and changes, 6 January 2012

View EBA guidelines on Advanced Measurement Approach - Extensions and Changes, 6 January 2012

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Clearing & settlement

European Parliament Legislative Observatory - EMIR

The European Parliament procedure file for the proposed European Market Infrastructure Regulation (EMIR) indicates that the plenary session at which the draft legislation will be considered will take place on 14 February 2012.

View European Parliament Legislative Observatory - EMIR, 9 January 2012

EACH paper on best practices for CCP stress testing

In 1991 European central counterparty clearing houses (CCPs) formed the European Association of CCP Clearing Houses (EACH).

EACH has now published a paper which is intended to make a distinction between stress testing performed by CCPs and those by banking institutions. The paper also sets out best practices of stress testing within the community of CCPs and discusses some of the boundaries on the possibilities and feasibility of CCP stress testing.

EACH explains that the relevance, appropriateness and feasibility of all elements in this paper may differ per CCP and cleared market. Therefore the paper should not be considered as a set of minimum requirements for CCPs for regulations or principles. Furthermore it should not be seen as a defined process for stress-testing.

View EACH paper on best practices for CCP stress testing, 10 January 2012

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Collective investment schemes

Consultation on contractual schemes for collective investment

The Treasury has published a consultation document on contractual schemes for collective investment. The consultation document follows the announcement made by the Government in the 2011 Budget that it would introduce a new, regulated, tax-transparent fund vehicle (referred to as the contractual scheme) primarily to facilitate the setting up of pooled “Master Funds” under the UCITS IV Directive.

The consultation document sets out the background to the Government’s proposals, the structure of the vehicles, the required regulatory and tax legislation and the expected benefits of introducing such schemes.

The deadline for comments on the consultation is 19 March 2012. The FSA will carry out a separate consultation on proposed rule changes to the FSA Handbook in spring 2012.

View Consultation on contractual schemes for collective investment, 10 January 2012

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Market abuse

ESMA Q&A on the common operation of the Market Abuse Directive

The European Securities and Markets Authority (ESMA) has published a short Q&A on the definition of inside information of the Market Abuse Directive, with regards to information relating to dividends by an issuer of financial instruments that would be likely to have a significant effect on the prices of related derivative financial instruments.

View ESMA Q&A on the common operation of the Market Abuse Directive, 9 January 2012

Richard Joseph charged with insider dealing

The FSA has issued a press release stating that it has charged Richard Anthony Joseph with eight counts of insider dealing and two counts of money laundering. Joseph is on conditional bail and will next appear at Southwark Crown Court on 6 March 2012.

View Richard Joseph charged with insider dealing, 11 January 2012

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Regulation & compliance

EBF position on the review of MiFID

The European Banking Federation (EBF) has published a position paper on the review of the Markets in Financial Instruments Directive (MiFID).

Overall, the EBF is pleased with the proposed changes to the MiFID framework. However, the EBF states that there are significant areas of concern, which need to be addressed to ensure the legislation is well adapted to the needs of investors and issuers who use the markets.

Areas of specific concern for the EBF include:

  • The Commission’s proposal for a new category of Organised Trading Facilities (OTFs). The EBF states that OTFs should be regulated in way that permits OTFs and existing venues to compete fairly for business.
  • The Commission’s proposal to extend the Systematic Internaliser regime to non-equities.
  • The imposition of market-making obligations on algorithmic traders.
  • The Commission’s proposed extension of transparency obligations to depositary receipts, exchange traded funds and certificates issued by companies.
  • The extension of transaction reporting. The EBF states that the transaction reporting regime should not include transactions in all commodity derivatives as position reports may be more appropriate.
  • The conduct of business rules. In particular, the EBF is concerned about the proposed labelling of different kinds of advice (i.e. independent versus non independent).
  • The application of equivalence requirements to third-country legislation.

View EBF position on the review of MiFID, 4 January 2012

Meeting of the Financial Stability Board in Basel on 10 January

The Financial Stability Board (FSB) has issued a press release following its recent meeting in Basel at which it discussed vulnerabilities currently affecting the global financial system and its work plan for 2012 to strengthen global financial regulation.

In relation to the financial regulatory reform programme the press release states that:

  • The FSB discussed the work ahead to further develop and implement the framework for systemically important financial institutions (SIFIs) including extending it to domestic systemically important banks, and global systemically important insurance companies and other types of financial institution. The FSB also approved work plans to implement the core elements set out in the Key Attributes of Effective Resolution Regimes for Financial Institutions, including the preparation of resolvability assessments, recovery and resolution plans, and cross-border cooperation agreements between home and host authorities for each global SIFI by end 2012.
  • The FSB reviewed the status of the work streams that are designed to strengthen the regulation and oversight of shadow banking. In March 2012 the FSB will review in more detail the progress made by each work stream.
  • The FSB has set up an OTC Derivatives Coordination Group to ensure coordination with different international work streams. An initial focus of the group will be on establishing adequate safeguards for a global framework for central counterparties (CCPs) so that, by June 2012, authorities can make informed decisions on the appropriate form of CCPs to meet the G20 commitment that all over-the-counter derivatives be centrally cleared by end 2012.
  • The FSB is supporting the development of a legal entity identifier (LEI) - a unique global identifier for parties to financial transactions. The FSB has set up an expert group to deliver proposals by April 2012 on the implementation of a global LEI system.
  • The FSB has agreed to study how to improve the role that external audits play in providing early warnings to prudential supervisors and regulators of financial institutions and to encourage improvements to the regulation of external audits.

The press release also briefly covers the FSB’s work on implementation monitoring including peer reviews and compensation practices. In relation to the latter the FSB states that a bilateral complaint handling process will be established by which national supervisors will address specific level playing field concerns regarding the implementation of the FSB Principles and Standards for Sound Compensation Practices.

View Meeting of the Financial Stability Board in Basel on 10 January, 10 January 2012

Finalised guidance - Statement on using Switching Terms in mortgage contracts under the Unfair Terms in Consumer Contracts Regulations 1999

The FSA has published finalised guidance which comprises of a statement that considers terms in interest-only mortgage contracts that allow firms to switch consumers from an interest-only mortgage to a repayment mortgage (so called Switching Terms). The statement briefly sets out why the FSA believes that some Switching Terms in standard consumer contracts may pose a risk of being considered unfair, or of not being expressed in plain and intelligible language, under the Unfair Terms in Consumer Contracts Regulations 1999 (the Regulations).

The FSA notes that the scope of the statement is limited to a consideration of the Regulations and firms should be aware that there may be other Handbook rules that may be applicable. In addition, in relation to the Regulations, the FSA states that the risks identified in the statement are not intended to be exhaustive and instead represent what the FSA regards as the most likely risks.

View Finalised guidance - Statement on using Switching Terms in mortgage contracts under the Unfair Terms in Consumer Contracts Regulations 1999, 12 January 2012

FSA letter on the Legislative Reform Order and CREDS

The FSA has published a number of documents concerning the changes introduced on 8 January 2012 by the Legislative Reform (Industrial and Provident Societies and Credit Unions) Order 2010 (LRO) and the new Credit Union New sourcebook (CREDS).

The FSA has published a letter to the boards of every credit union setting out the key points of the LRO and what credit unions need to do. In particular the letter states that all credit unions should be aware of the following points:

  • The LRO clarifies the position on the attachment of shares and this is something which all credit unions should be aware of, regardless of whether they are choosing to take up options under the LRO.
  • All credit unions will need to be aware of the strengthened prudential rules (and the associated transitional provisions that apply) and must consider any steps they may need to take to meet the strengthened requirements.
  • The LRO gives the FSA the power to automatically vary all credit unions’ permissions so that they can admit the full range of corporate members, if they wish. Even if a credit union does not want to take on corporate members immediately, varying its permission now will mean that it will have the appropriate permission to accept corporate members in the future.

The FSA has also published four fact sheets which cover:

  • Changes affecting credit unions under the LRO.
  • Changes to prudential rules for credit unions.
  • Amending the registered rules of a credit union.
  • Regulatory reporting for credit unions.

View FSA letter on the Legislative Reform Order and CREDS, 6 January 2012

View Fact sheet - Regulatory reporting for credit unions, 6 January 2012

View Fact sheet - Changes to prudential rules for credit unions, 6 January 2012

View Fact sheet - Changes affecting your credit union under the Legislative Reform Order, 6 January 2012

View Fact sheet - Amending the registered rules of a credit union, 6 January 2012

Complaint against the FSA

On 5 January 2012, the Office of the Complaints Commissioner published a decision relating to a complaint against the FSA regarding material on its website about cheque clearing times.

The complainant argued that information on the FSA's website was incorrect because it implied that banks must adhere to cheque clearance timescales set by the FSA. This is not the case as the timescales set out on the FSA's website were simply recommendations.

The decision states that the FSA did amend material on some of its web pages following an initial enquiry by the Complaints Commissioner. However, at the time of the decision, the FSA had not amended one particular publication entitled Bank accounts - Know your rights.

Therefore, the Complaints Commissioner recommended that the FSA amend the publication, apologise to the complainant and make an ex gratia payment of £50 to the claimant.

View Complaint against the FSA, 5 January 2012

FSA publishes new web pages on change of control

The FSA has published new web pages relating to the change of control requirements under the Financial Services and Markets Act 2000 (FSMA).

The first new web page is entitled FSA's section 178 notice requirements. This web page includes links to the FSA’s updated notification forms.

The second new web page is entitled Quick Reference Guide: Acquisitions and the Change in Control regime. This web page sets out the key requirements under FSMA and also provides a structure chart to help firms identify controllers.

View FSA publishes new web pages on change of control, , 4 January 2012

View Quick Reference Guide: Acquisitions and the Change in Control regime, 4 January 2012

FSA enforcement

The FSA has published a Final Notice concerning Karamat Ali cancelling his registration as a small payment institution under the Payment Services Regulations 2009 (the PSRs).

The FSA has concluded that Mr Ali has changed the address of his head office without notifying the FSA thereby preventing it from regulating Mr Ali’s business effectively. The FSA has cancelled Mr Ali’s registration as a small payment institution in order to protect the interests of consumers, in accordance with Regulation 10(1)(h) of the PSRs.

View Final Notice - Karamat Ali, 5 January 2012

The FSA has published Final Notices concerning Kumarans Silk Limited (KSL), Sohail Anjum, Sardar Agha and Akhtar Mahmood trading as AM & Sons Money Exchange cancelling their registration as a small payment institution under the Payment Services Regulations 2009 (the PSRs).

Each Final Notice reports that the FSA has taken this action on the basis for failure to submit a Payment Services Directive Transactions return for the period ended 31 December 2010 and to respond adequately to repeated FSA requests to do so. The FSA has cancelled their registration as a small payment institution in order to protect the interests of consumers, in accordance with Regulation 10(1)(h) of the PSRs.

View Final Notice - Kumarans Silk Limited, 5 January 2012

View Final Notice - Sohail Anjum, 5 January 2012

View Final Notice - Sardar Agha, 5 January 2012

View Final Notice - Akhtar Mahmood trading as AM & Sons Money Exchange, 5 January 2012

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Retail

Financial Ombudsman consults on plans for dealing with record complaints workload

The Financial Ombudsman Service (FOS) has published for consultation its proposed plans and budget for the 2012/2013 financial year together with an update on the numbers and workload for the 2011/2012 financial year.

In addition the FOS is consulting on new arrangements for charging financial businesses for its work which would mean a new case fee structure from April 2013. The FOS states that this would mean that:

  • The number of free cases for low users would be increased from three to 25, so that only 1% of financial businesses pay any case fees at all.
  • For the ten financial services groups that account for over 70% of the complaints workload of the FOS a new group account arrangement would be developed that is intended to accurately reflect the total costs to the FOS of the work generated by each group.

View Financial Ombudsman consults on plans for dealing with record complaints workload, 6 January 2012

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Securities

Responses to ESMA Consultation Paper on technical advice on possible delegated acts concerning the Prospectus Directive as amended by Directive 2010/73/EU

On 13 December 2011, the European Securities and Markets Authority (ESMA) published a consultation paper concerning technical advice on possible delegated acts concerning the Prospectus Directive as amended by Directive 2010/73/EU. The consultation closed on 6 January 2012. ESMA has now published the responses to the consultation and will seek to deliver its advice to the Commission by 29 February 2012.

View Responses to ESMA Consultation Paper on technical advice on possible delegated acts concerning the Prospectus Directive as amended by Directive 2010/73/EU, 10 January 2012

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General

FSA appoints new Board Chairman for Financial Services Compensation Scheme

The FSA has issued a press release announcing the appointment of Lawrence Churchill as the new Chairman of the Board of the Financial Services Compensation Scheme for three years. He will start this role on 1 April 2012.

View FSA appoints new Board Chairman for Financial Services Compensation Scheme, 9 January 2012

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Seminars

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.

http://www.nortonrose.com/invitations/2011/your-guide-to-the-key-regulatory-challenges-in-2012-60409.aspx

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.

http://www.nortonrose.com/invitations/2011/fifth-annual-markets-infrastructure-group-seminar-60990.aspx

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:

  • 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:

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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