UK: A Review Of Financial Regulations And Tax Issues For FSA-Regulated Businesses

Last Updated: 14 February 2011
Article by Natasha Lee


By Natasha Lee

We discuss the pertinent results of our 13th annual financial services survey, which collects the opinions and expectations of financial services businesses in the City of London.

In line with overall sentiment within the industry our survey results reflect a cautious mood among respondents, despite stable or improved results on 12 months ago, reflecting the uncertainty surrounding ongoing regulation and the impact of changes in tax legislation.

Generally there is greater confidence in the UK economy, with 81% believing the UK economy to be either stable or improved on 12 months ago, which compares to only 62% last year. The majority of respondents do not consider political factors such as the Coalition Government's Spending Review and subsequent cuts to be a major impact on their business, with 69% expecting their business to be unaffected. Conversely, regulation and changes in tax legislation are expected to have a significant impact, which is a continuation of industry fears a year ago.

Business confidence

Business has notably improved on 12 months ago, with 80% of respondents expecting business prospects to either improve or stabilise over the coming 12 months; this is supported by 87% of respondents expecting turnover to either improve or stabilise in the coming year. This confidence is built on solid financial performance during the last year with 64% of respondents reporting turnover and profit margins to be either stable or improved.

However, caution comes through in various guises. For example, 48% of respondents believe London's reputation as a major financial centre has declined in the last year, although for the previous two years approximately two thirds of respondents held this view. As expected, New York continues to be considered the biggest threat to London, with Frankfurt, Shanghai, Geneva and Zurich the other favourites, respondents no doubt swayed by their more appealing tax and/or regulatory regimes.

Unsurprisingly, despite the solid results reported for the previous 12 months plus the optimistic outlook for next year, 65% of respondents believe regulatory requirements are likely to restrict the development and growth of their business over the next 12 months; a view which is consistent with 63% of respondents expecting expenditure on regulatory compliance to increase over the same period. Though this may not please firms, the FSA is unlikely to be displeased by these expectations given their belief that firms are growing too quickly with under resourced compliance functions.

Overall, headcount is expected to remain stable or increase (93% of respondents), which is not dissimilar to the previous year (86% of respondents reported the same result for the previous 12 months). However, the balance of personnel within firms is expected to alter, with more requirements placed on back office staff.


Despite changes in the remuneration code and tax legislation, 73% of respondents reported that they are not expecting to change the way they incentivise employees. It will be interesting to see if firms are granted their wish.

In addition to regulatory compliance, firms believe tax legislation is also having a negative impact, with 40% of respondents reporting that changes in tax legislation will hinder the development and growth of their business. This sentiment is supported by 40% of respondents believing recent changes in tax legislation will actually decrease their firm's performance.

The survey asked respondents to select factors they believe will most affect business growth over the next 12 months. Of the ten responses available, all bar two received 23% or more of the vote, reflecting diverse views among respondents, which is consistent with the prior year, although the impact of regulatory compliance does dominate this year's response.


By Marco Bragazzi

The revised remuneration code came into effect on 1 January 2011. Marco and Nick consider how this affects those firms in tiers three and four.

In our last newsletter we commented on Consultation Paper 10/19 (CP10/19), issued in July 2010, about revising the remuneration code. On 17 December 2010 a policy statement was issued following the responses to CP10/19. This article comments on the key themes arising from the revised remuneration code and how it applies to 'smaller firms' as defined by the code. The revised remuneration code will apply to more than 2,500 firms that were not previously under the scope of the original remuneration code.

Policy statement

The revised code came into force from 1 January 2011 and will be applied from that date. For firms applying the code for the first time, transitional provisions apply in respect of Principle 12 and firms must comply with this Principle, where applicable, by 1 July 2011.

Approach to proportionality

Given the range of firms now coming into the scope of the code, i.e. all BIPRU investments firms, the FSA recognises the importance of following a proportionate approach to adopting the code. The policy statement introduces four 'proportionality tiers', based around capital resources and, for non-UK BIPRU firms only, total assets thresholds.

In this article, we focus on the relevant tiers for smaller firms and our typical client base: proportionality tiers three and four.

Proportionality tier three firms include:

  • any bank and building society with capital resources of less than £50m
  • any full scope firm with capital resources of less than £100m
  • third-country BIPRU firms with total assets (for the branch) less than £2bn.

Proportionality tier four firms include:

  • all limited licence and limited activity firms, irrespective of size, including third BIPRU firms within equivalent permissions.

The positive news derived from the policy statement is that tier three and four firms may disapply a number of aspects of the code that have been commented on heavily during the consultation phase following the publication of CP10/19, assuming the firm considers it appropriate to do so in the context of the spirit of the code.

Areas that relevant firms may disapply include the principles around the deferral of variable pay, inclusion of retained and other instruments within variable remuneration and the performance adjustments around remuneration that can be found in Principle 12 of the code.

Although disapplied, the FSA has included a caveat that where code staff fall above the de-minimis limits for being applicable to the code, i.e. earning remuneration in excess of £500,000 and including at least 33% of the total as variable remuneration, then even tier four firms should consider whether from a risk perspective they should be applying Principle 12 in full.

Pillar 3 disclosures

By proportionality tier, there are now new disclosure requirements under Pillar 3 for the remuneration policy of BIPRU firms. The rule reference governing these new disclosures can be found in BIPRU 11.5.18 and the extent of disclosure required is again dependent upon what tier the firm is categorised as. The main requirements which are applicable for all tier firms include the following.

  • Information concerning the decisionmaking process used for determining the remuneration policy.
  • Information on the link between pay and performance.
  • Aggregate quantitative information on remuneration, broken down by business area.
  • Aggregate quantitative information on remuneration, broken down by senior management and members of staff whose actions have a material impact on the risk profile of the firm. For most firms this will equate to considering disclosure of directors' emoluments within the Pillar 3 disclosure.

The last two requirements would need to be considered in the context of materiality and confidentiality, which are two approaches to justify not making a disclosure under the Pillar 3 regime.

In addition, firms need to document their remuneration policy and maintain a list of people that fall within the definition of code staff. This can include those who are not employees of the firm but undertake a role which affects the risk of the firm, for example secondees.

Tier three and four firms do not have to have a remuneration committee, although the FSA considers it desirable, particular for large firms, to have one.


By Martin Sharratt

Financial services businesses will still be smarting from the increased cost of irrecoverable VAT, following the increase in the standard rate. Unfortunately, more VAT problems are in the pipeline.

We briefly discuss three VAT 'events' that could affect your business over the coming months: VAT grouping rules, the EU review of VAT in the sector and the Retail Distribution Review (RDR).

VAT grouping

Last year, the European Commission initiated infraction proceedings against the UK (along with several other member states) on the grounds that the UK's application of the VAT grouping rules is overly generous. It has all gone very quiet, but at some point in the next few months this will be debated before the European Court of Justice. The particular point at issue is the ability of UK VAT groups to include companies that are not 'taxable persons' in their own right, e.g. holding companies. However, the European Commission also asserts that a VAT group must be seen as a separate entity from any of its component companies, which (if upheld) could mean inter alia that the reverse charge would be imposed on charges from an overseas head office to a UK branch.

EU review of VAT in the financial services sector

This review has been making slow progress for some years, but it is now approaching the stage where the member states actually think about implementing changes. Some of the ideas on the table, such as a proposal to exempt the management of pension funds, would be welcome. Others, however, include a potential tightening of the rules around outsourcing, possibly going as far as imposing VAT on all outsourced services; the UK is resisting this, but the idea has not gone away. The UK could also be forced to accept a change from zero-rating to exemption for commodity futures, which could prove expensive (the difference being that with zero-rating the business can recover all of the VAT on related costs).

Retail Distribution Review

The RDR is an FSA initiative which, on the face of it, has nothing to do with VAT. The VAT rules will not change – but the RDR is set to change the way in which financial products are sold to retail customers and that in turn will generate significant VAT problems, both for IFAs (and other intermediaries) and for the product providers. Advice has always been subject to VAT, but IFAs typically waive any charge for their advice because they expect to be paid a commission by the product provider. So a large part of the income for a typical IFA currently consists of 'initial' or 'trail' commission on investment and insurance products bought by his/her clients. Many IFAs are not therefore registered for VAT, because their advisory fees fall below the VAT registration threshold (£70,000). Under RDR no such commission can be paid and IFAs will have to charge their clients directly, either for advice (plus VAT) or for arranging specific investments (generally – but not always – exempt.


By Natasha Lee

We briefly consider the FSA's policy statement on capital standards.

17 December 2010 was a busy day for the FSA. In addition to publishing its policy statement 'Revising the Remuneration Code', the FSA also published its policy statement 'Strengthening Capital Standards 3'.

This policy statement deals with feedback and final rules in respect of CP10/17 and CP10/22. In CP10/17, the FSA provides feedback on previous consultation papers relating to CRD 2, as well as consulting on CRD 3 aspects relating to core tier one capital, large exposures and operational risk. CP10/22 included consultation on parts of CRD 3, namely in relation to capital floors for firms using advanced approaches, residential mortgage losses given default (LGD) floors and covered bonds. Unlike the majority of CRD 3 amendments, which require implementation by 31 December 2011, these amendments were required to be implemented by 1 January 2011.


The policy statement provides final rules in respect of core tier one, operational risk and large exposures and is effective from 31 December 2010.

Amendments to core tier one capital

  • Core tier one instruments for joint stock companies are now restricted to ordinary shares.
  • Preferential right to a dividend is not a permitted characteristic of core tier one instruments.
  • Building societies are permitted to include an instrument which has a cap on distribution as long as the purpose of such a cap is to protect the building society's reserves. This exception does not extend to mutuals of jointstock model banking subsidiaries of institutions that adopt a mutual model.

GENPRU 2.2.83 R and 2.2.83A R detail the new definition of permanent share capital permitted as core tier one capital.

Operational risk

CRD 2 implements conditions for the use of insurance and other risk transfer mechanisms (ORTM) by firms using the advanced measurement approach (AMA) in calculating operational risk capital requirements. This will only impact a small number of firms and the guidance is included within BIPRU 6.5.26 R to 6.5.30A G.

Large exposures

BIPRU 10 includes guidance that references the Committee of European Banking Supervisors (CEBS) guidelines in respect of certain large exposures. The new rules refer to four embedded waivers for which firms can apply. Without a relevant waiver, the basic large exposures limit remains at 25% of a firm's capital resources.

All BIPRU limited licence and limited activity firms are exempt from BIPRU 10, and therefore the large exposures regime from 31 December 2010. A firm with a reporting end date of 31 December 2010 will not be required to make a FSA008 submission for that period end.


The policy statement provides final rules in respect of covered bonds and capital floors and they are effective from 1 January 2011.

Capital floors

To avoid discouraging firms from using advanced approaches to calculate part of their capital requirements, capital floors can be calculated on the basis of CRD, as opposed to Basel I, via a waiver, until the FSA implements an asset-based leverage ratio.

Residential mortgage LGD floors

Residential mortgage LGD floors are being extended for a further two years until 31 December 2012.


By Colin Aylott

The new FATCA rules will affect financial services organisations, and doing business with the US.

US legislation has been introduced to further combat perceived tax avoidance in the form of the Foreign Account Tax Compliance Act (FATCA). The rules have significant implications for financial services organisations in particular, including fund managers, as well as imposing a significant compliance burden on doing business with the US.

Withholding taxes

  • A 30% withholding tax would be imposed on 'witholdable payments' made after 31 December 2012 to non- US 'financial institutions' and other entities unless the non-US institution itself enters into an agreement with the IRS to disclose all US account holders and to report annually with detailed relevant information including account ownership, balances and transactions.
  • The definition of a 'financial institution' is broad and includes any entity that is engaged in 'the business of holding financial assets for the account of others, and any entity engaged primarily in the business of investing or trading in securities'. So, subject to exemptions, banks, insurers, private equity companies, hedge funds and asset managers are all likely to be caught by the rules.
  • A non-US entity that is not a financial institution is also subject to 30% withholding tax on witholdable payments unless it identifies its 'substantial United States owners' or certifies to the contrary.
  • Where a shareholder cannot be identified, the 30% withholding tax will be imposed on the portion of the witholdable payment relating to the unknown shareholder. This may be a significant issue for co-investment vehicles investing in the US.
  • The definition of 'witholdable payments' is broad and encompasses not only the ordinary categories of US source investment income, i.e. interest, dividends, annuities and premiums, but also gross proceeds from the sale or disposition of income-generating US property and also payments in respect of derivative contracts that are based on underlying US dividend payments (which will be re-characterised as US source dividends.)
  • The FATCA rules are intended to override reduced treaty rates unless an agreement to disclose to the IRS is entered into.

Other requirements

  • US individuals and entities will be required to report offshore accounts with values of USD 50,000 or more on their tax returns. These requirements are in addition to the current US Report of Foreign Bank and Financial Account Regime (FBAR).
  • The FATCA rules as enacted will represent a significant compliance burden requiring extensive customer due diligence for many UK financial institutions in order to comply, which may not be cost effective for many organisation.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

In association with
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.


Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.


Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.


A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.


This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.


If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.


This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at and we will use commercially reasonable efforts to determine and correct the problem promptly.