Australia: Exchange - International: UK

Financial Services Regulation Newsletter - Issue 21
Last Updated: 5 February 2014
Article by Mathias Hanten MBL, Michael McKee and Jeffrey L. Hare


On 2 January 2014, the PRA updated its webpage on the PRA Handbook and Rulebook to explain that, as previously indicated, the PRA is starting to move away from the "legacy" PRA Handbook to create a PRA Rulebook, containing rules and directions made by the PRA that apply solely to PRA-authorised firms.

Accordingly, the online Handbook website has been updated to include a new webpage containing direct links to those provisions of the PRA Rulebook that have to date been made. Principally, these provisions implement the CRD IV Directive (2013/36/EU), which came into force on 1 January 2014. The PRA Rulebook can also be accessed from the PRA Handbook webpage.

Separately, the readers' guide to using the FCA and PRA Handbooks has been updated to refer to the PRA Rulebook. It explains that the PRA Rulebook will consist of Parts, which are sets of rules that contain short and concise rules relating to one topic.

During the transition to the PRA Rulebook, the online Handbook website will contain both PRA Handbook material and PRA Rulebook material. To understand the full set of applicable requirements, PRA-authorised firms should refer to both the Handbook and Rulebook.

There will be further PRA Rulebook consultations. In 2015, the PRA intends to make changes to the online presentation of the PRA Rulebook to structure its provisions in a logical way and make them easy to navigate. These changes were outlined in a PRA consultation paper (CP8/13) published in October 2013.


On 1 April 2014 the FCA are taking over, from the Office of Fair Trading, the regulation of consumer credit. Therefore, the FCA are using a series of consultation papers to determine their approach to the regulation of consumer credit activities. As part of that series they issued a consultation paper at the end of October 2013 on 'loan-based crowdfunding', also known as peer-to-peer lending platforms as well as investmentbased crowdfunding. In light of the fact that the present rules were not designed with crowdfunding in mind, the consultation paper sets out their revised approach to regulating firms that operate investment-based crowdfunding platforms or market unlisted equity or debt securities.

The FCA define crowdfunding as "a way in which people, organisations and businesses (including business startups) can raise money through online portals (crowdfunding platforms) to finance or re-finance their activities and enterprises". The FCA believe that making an investment via crowdfunding platforms involves higher risks than more traditional investments. In light of this and the ability for loan-based crowdfunding models to develop the FCA are proposing a disclosure based regime. In relation to investment-based crowdfunding, the FCA hope to make the market more accessible to retail clients while at the same time ensuring only investors with the required knowledge and understanding of the risks participate.


The FCA has begun a thematic review into insurance price comparison websites. The review will look at 14 price comparison websites which make up 90 per cent of the market as well as certain insurance providers. The aim is to ensure that consumers are presented with information in such a way that they get the fairest deal. Clive Adamson, the FCA's director of supervision, recognised the convenience of price comparison websites but stated that they "want to get to a place where consumers that use these sites buy with the confidence knowing that they have all the relevant facts". The FCA's objective to protect consumers is driving this review to ensure that the rapid growth in popularity of these websites does not mean transparency and fairness has been lost.

The FCA's press release details what the FCA will do as part of its review, which includes:

  • carrying out an in depth consumer survey to understand exactly what people want from price comparison websites when they are shopping for insurance, how they use them, and how they might be improved;
  • understanding if there is too much of a focus on headline price, and whether consumers may be misled into purchasing products or add-ons which do not meet their needs; and
  • checking for conflicts of interest, such as where a recommended insurer also happens to own the price comparison website.

The review will be focused on the most popular insurance products sold on the price comparison websites such as motor, travel and home insurance. The results will be published in 2014 alongside any actions the FCA might expect the price comparison websites and insurers to take.


On 18 December 2013, the Financial Services (Banking Reform) Bill received Royal Assent in the House of Lords. The Banking Reform Act (the "Act") is central to the government's plan to create a banking system that protects consumers, supports the economy and helps small businesses. Implementing recommendations of the Independent Commission on Banking and the Parliamentary Commission on Banking Standards and the Vickers Report, the Act responds to the criticised culture of banking following revelations of attempts to manipulate LIBOR. The Act is a result of three years' worth of consultations and is the biggest overhaul of the British banking system ever seen. Key sections of the Act are that it:

  • ring-fences the high street bank branches from the City trading floor in order to protect the taxpayer if mistakes are made;
  • introduces a new senior persons regime for banks, building societies and credit unions replacing the old approved persons regime; and
  • introduces a new criminal offence of reckless misconduct in the management of a bank.

In a press statement, Financial Secretary to the Treasury, Sajid Javid, said:

"I am delighted that the Banking Reform Bill has received Royal Assent. This is a major milestone and marks the end of a three year process, led by the government, to make the UK banking system stronger and safer so that it can support the economy, help businesses and serve consumers...From the outset the government has built a consensus on this issue and this legislation will deliver crucial changes to the structure of banks, ensuring that UK taxpayers are not on the hook for future bank failures....The Banking Reform Act will also help to deliver much needed competition in the banking sector and increase the conduct standards amongst bankers."

It is anticipated that banks will have until January 2019 to implement the key provisions, including ring-fencing and depositor preference.


In November 2013 the PRA announced key decisions on capital standards prior to the introduction of the new European capital regime that took place on 1 January 2014. Specifically, the PRA had confirmed the minimum Pillar 1 capital requirements for firms and the dates from which they apply. The PRA requires firms to meet a 4 percent Pillar 1 CET1 requirement in 2014, rising to 4.5 percent from 1 January 2015. Similarly, during the same period the required Pillar 1 Tier 1 capital ratio will be 5.5 percent, rising to 6 percent from 1 January 2015, onwards. The PRA will introduce the final definition of CET1 as quickly as possible. Firms will accordingly be required to make all necessary deductions to bring CET1 in line with the end-point definition from 1 January 2014. The PRA has further decided that firms should meet all Pillar 2A risks, including pension risk, with at least 56 percent CET1 capital from 1 January 2015, onwards. This matches the proportion of CET1 capital required for Pillar 1.


The Capital Requirements Regulations (SI 2013/3115) (the "Regulations") were published on 16 December 2013. The Regulations implement provisions of CRD IV, which is comprised of the CRD IV Directive (2013/36/EU), in part, and the Capital Requirements Regulation (Regulation 575/2013).

Under the Regulations the PRA and the FCA are appointed as the main competent authorities and their obligations of their supervisory roles are outlined. The obligations include co-operation and co-ordination with other UK competent authorities and the European Supervisory Authorities. They also have obligations with regard to disclosure of information and relevant notifications under the CRD. The Regulations make amendments to the Financial Services and Markets Act 2000 ("FSMA"), as well as other primary and secondary legislation, in particular in relation to the passporting rights of non-UK firms into the UK.

The Regulations were published with a helpful explanatory note on the key changes since the 2006 Capital Requirements Regulations. The Regulations came into force on 1 January 2014.



On 25 November 2013 the FCA issued a final notice to SEI Investments (Europe) Limited ("SEI") for failures relating to its handling of client money over a five year period. SEI were fined a total of £900,200 for failing to carry out a number of duties with regards to client money. Failings were found throughout SEI's client money processes for the period from November 2007 to October 2012, indicating that SEI's client money arrangements were inadequate. The FCA found that SEI:

  • failed to perform its internal reconciliations on several occasions;
  • failed on several occasions to ensure that any shortfall or excess identified in its internal reconciliation of client money was paid into or withdrawn from the client bank account by close of business on the day of the internal reconciliation; and
  • failed to train employees with operational oversight and responsibility for client money, leading to an incident which involved an employee incorrectly adjusting SEIfs client money requirement from '14 million, calculated using the internal client money reconciliation, to '932,000.

Although there was no actual loss of client money as a result of these failings, the FCA has emphasised that the CASS measures are preventative and had SEI become insolvent there would have been client money loss. Throughout the relevant period SEI's average daily balance of client money was £84.3 million, representing a huge risk if insolvency had occured.


At the end of October 2013, the FCA announced in a press release that it had fined Rabobank £105 million "for serious, prolonged and widespread misconduct relating to the London Interbank Offered Rate ("LIBOR")." The FCA stated that Rabobank's internal controls were not sufficient and as a result collusion between traders and LIBOR submitters was encouraged, allowing systematic attempts to manipulate the benchmark.

Rabobanks's derivatives and money market traders undermined the overall integrity of LIBOR by influencing LIBOR submissions through colluding with other banks and brokers in a way that benefitted certain trading positions. As a result, a number of LIBOR submissions did not fairly reflect the cost of inter-bank borrowing.

In March 2011, Rabobank assured the FCA that suitable arrangements for their internal controls were in place, however Rabobank in fact failed to properly address failings until August 2012. During their investigation the FCA found over 500 instances of attempted LIBOR manipulation, they found at least one manager who actively facilitated a culture where manipulation appeared to be accepted by the bank. The FCA also found another eight managers and 19 individuals, spread globally across Rabobank, who were involved.

Tracey McDermott, the FCA's director of enforcement and financial crime said that "Rabobank's misconduct is among the most serious we have identified on LIBOR. Traders and submitters treated LIBOR submissions as a potential way to make money, with no regard for the integrity of the market. This is unacceptable...Rabobank's flawed assurances and failure to get a grip on what was going on in its business were extremely disappointing. Firms should be in no doubt that the spotlight will remain on wholesale conduct and we will hold them to account if they fail to meet our standards."


On 6 January 2014 the PRA and FCA confirmed they will be undertaking enforcement investigations into events at the Co-operative Bank (the "Co-op"). In a press release the PRA said that "as part of that investigation [the PRA] will consider the role of former senior managers. No further information will be provided on the investigation until the legal process has concluded and an outcome has been reached." The investigation will look at the decisions and events up to June 2013.

In November 2013, following the exposure of a £1.5 billion hole in the Co-op's balance sheet that summer, the Chancellor of the Exchequer ordered an independent investigation into the events at the Co-op and the circumstances surrounding them, going back as far as 2008. This independent review will commence once it is clear it will not prejudice the actions taken by the FCA and the PRA. The review will take into account any relevant issues that arise from the enforcement investigations and has been jointly agreed with both the FCA and the PRA. The independent investigation will be led by an independent person jointly appointed by the regulators and with the approval of the Treasury.

In addition to the Co-op's financial problems, the former Bank's chairman Paul Flowers was embroiled in scandal last year when he was arrested for alleged drug offences. As a result the Co-op faces increased questions over its corporate governance standards. To combat this, in December 2013 the Co-op appointed former Treasury minister, Lord Myners, as senior independent director to chair a governance review. To combat their financial difficulties, the Co-op's institutional bondholders approved a drastic recapitalisation of the Bank; reducing the Co-op's Group equity stake to 30% while the remaining 70% was largely handed to US hedge funds.


On 11 December 2013 the FCA imposed their largest ever fine for retail conduct failings. The fine of £28,038,844 related to serious failings in Lloyds' controls over sales incentive schemes which affected branches of Lloyds, Bank of Scotland and Halifax. The incentive schemes in place meant that sales staff were put under large amounts of pressure to hit targets to either receive a bonus or avoid being demoted. For example, one advisor sold products to himself and his family to prevent himself from being demoted.

The investigation focused on advised sales of investment and protection products such as share ISAs and critical illness protection respectively. The investigation highlighted that both Lloyds TSB and the Bank of Scotland had high risk features in their incentive schemes which were not being properly controlled. This created a risk that advisors could, by selling products to customers that they did not want or need them, maintain or increase their salaries. Tracey McDermott, the FCA's director of enforcement and financial crime stated "Financial incentive schemes are an important indicator of what management values and a key influence on the culture of the organisation, so they must be designed with the customer at the heart. The review of incentive schemes that we published last year makes it quite clear that this is something to which we expect all firms to adhere."

She went on to say that "Because there have been numerous warnings to the industry about the importance of managing incentives schemes, and because Lloyds TSB had been fined in 2003 for unsuitable sales of bonds, we have increased the fine by ten per cent....Both Lloyds TSB and Bank of Scotland have made substantial changes, and the reviews of sales and the redress now being made should right many of these wrongs."



On 25 November 2013, the FCA published a consultation paper proposing changes to its use of dealing commission rules in the Conduct of Business Sourcebook ("COBS"). The proposals are "intended to clarify the criteria for research under our rules to help firms make better judgements about what can be paid for with dealing commission charged to the fund (the customer)".

The changes proposed relate to COBS 11.6 and include:

  • clarifying what will be considered exempt research and creating a presumption that goods or services are not exempt if the specified criteria is not met; and
  • guidance on the FCAfs expectations where eligible research is bundled with noneligible goods that cannot be paid for with dealing commissions.

The rules relevant to dealing commission apply only to investment managers and therefore the proposals will not directly affect brokers or other sell-side providers of execution, research or other goods and services.

The consultation is open for comments until 25 February 2014.


On 16 December 2013, the FCA published its final rules on mortgage market data collection in a policy statement. The statement is the final publication in a series of Mortgage Market Review policy documents. Collectively, the documents introduce reforms to the mortgage market, the focus of which is sensible lending. The FCA has stated that due to its change in regulation it needed to review and enhance the data it collects. Following a consultation in May 2013 the policy statement sets out the final rules on data collection.

The rules apply to mortgage lenders or other home finance providers as well as home finance administrators who collate or submit regulatory returns. The new data requirements are to highlight any "indicators of irresponsible lending leading to consumer harm" in the mortgage market. The rules will also allow the FCA to ensure that the market functions as they expect it to.

The rules set out in the policy statement come into effect on 1 January 2015.


Having consulted on the proposed changes to the FCA Handbook in light of the transposition of CRD IV the FCA released its finalised Handbook rules and guidance in a policy statement on 13 December 2013. The policy statement also contains feedback to the responses received on three consultations regarding the implementation of CRD IV for investment firms. The appendix to the policy statement contains copies of the relevant Handbook instruments and general guidance on proportionality, capital requirements and reporting.

The new rules came into force on 1 January 2014, with the exception of certain provisions in the Capital Requirements Directive IV (Governance and Remuneration) Instrument 2013 and the CRD IV (Reporting) Instrument 2013. It is expected that these will not come into force before 1 July 2014.

© DLA Piper

This publication is intended as a general overview and discussion of the subjects dealt with. It is not intended to be, and should not used as, a substitute for taking legal advice in any specific situation. DLA Piper Australia will accept no responsibility for any actions taken or not taken on the basis of this publication.

DLA Piper Australia is part of DLA Piper, a global law firm, operating through various separate and distinct legal entities. For further information, please refer to

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