UK: Financial Services Europe and International Update - February 2011

Last Updated: 23 February 2011
Article by Martin Day and Richard Frase

Regulatory Developments

This DechertOnPoint summarises regulatory developments in the European Union and the UK in the investment funds and assets management sector during the past four weeks.

EU and International Regulatory Developments

Prospectus Directive: ESMA Call for Evidence on Request for Technical Advice

The European Securities and Markets Authority ("ESMA") issued a request for interested parties to submit views on aspects or areas that it should consider in its advice to the European Commission on possible delegated acts concerning the Prospectus Directive (2003/71/EC) (as amended by Directive 2010/73) towards the end of January 2011. ESMA has been asked to deliver certain parts of the requested advice on 30 September 2011. To enable it to fulfil the request for advice, ESMA has set up a Prospectus Level 2 Task Force. The advice requested by the European Commission included the following matters:

  • the format of final terms to a base prospectus;
  • the format of the summary and content and format requirements of the key information to be included in the summary of a prospectus;
  • the proportionate disclosure regime in relation to certain rights issue prospectuses and prospectuses in relation to issues by SMEs, companies with reduced market capitalisation and certain issues of non-equity securities by credit institutions;
  • the criteria for assessing equivalence of the regulatory framework of third country markets in connection with the extended employee offer exemption from the requirement for a prospectus; and
  • the consent requirements in connection with the use of a prospectus in a retail cascade.

The Commission has also asked ESMA to consider certain amendments to the disclosure requirements in the Prospectus Regulation, including in relation to:

  • the information on taxes on income from securities withheld at source;
  • the requirement for an independent report for a profit forecast or estimate; and
  • the period covered by the audited financial information.

Responses to this initial call for evidence should be received by 25 February 2011 (ESMA intends to publish a consultation paper in July 2011). Thereafter, the advice to the European Commission is expected to be signed off by ESMA in September 2011 and the Commission will then prepare the delegated acts from October to December 2011, with adoption of the delegated acts by the Commission expected in late December 2011. March and June 2012 will be the end of the objection period for the Parliament and Council and the transposition period for the implementing directive will end on 1 July 2012.

Commodity Markets: European Commission Communication

The European Commission presented earlier this month an integrated strategic vision to tackle challenges in commodity markets and on raw materials. The Communication includes measures to improve the transparency of financial and commodity markets. (The report has been delayed after the French President Nicolas Sarkozy criticised an earlier version, which said it had found no evidence of "a correlation between the substantial increase in index fund positions and commodity futures prices." In the final version the section has been removed. Instead, the Commission said that "while it is clear that there is a strong correlation between positions on derivatives markets and spot prices, it is still difficult to assess fully the interactions and the impact of movements in the derivative markets on the volatility of the underlying physical markets.")

In its Communication the Commission presents an overview of developments in financial and physical markets and proposes a series of measures which include improving the integrity, transparency and stability of commodity derivatives markets, inter alia through a review of the Market Abuse Directive and MiFID.

The Commission's Communication also notes that further work is necessary to understand fully the interlink between physical and financial markets, and it intends to continue working on this in the framework of the G20-debate taking place at the global level.

IOSCO Final Report on Point of Sale Disclosure Principles for Collective Investment Schemes

The International Organisation of Securities Commissions ("IOSCO") published its final report on point of sale ("POS") disclosure principles for collective investment schemes ("CISs") on 2 February 2011.

In the report, IOSCO explains that transparency in the market place, particularly the disclosure of information to investors, has always been a high priority and the goal of regulators in seeking to ensure that markets run efficiently and with integrity. The financial crisis highlighted the critical role that accurate, understandable and meaningful disclosure can play.

The report considers issues arising from requiring key information disclosures to be made to retail investors relating to CISs and their distribution prior to the POS, setting out principles for the disclosure of key information relating to CISs prior to the POS. The principles are designed to help markets and regulators when they are considering POS disclosure requirements. Key points made in the report are that:

  • no matter what POS disclosures are required, they will not have the intended effect if the investor does not read or understand the information provided and as a result, regulators should consider steps to improve retail investor education;
  • new POS disclosure requirements should not be imposed without the benefit of consumer testing or assessment, to help to determine the likely effectiveness of any new requirements; and
  • the principles in the report may also be applicable to non-retail investors.

IOSCO is aware that some members of the CIS industry believe that if CIS products are subject to enhanced POS disclosure requirements, this may place them at a competitive disadvantage in relation to other financial products; however, IOSCO has not considered the merits of this argument in great detail in the report, due partly to the difficulty in identifying truly comparable products that are as popular with retail investors.

The report does not consider issues relating to the suitability of CISs. Also, it does not purport to describe or address all intermediary disclosure obligations. Although the report, and the principles, apply to CISs, IOSCO encourages regulators to consider how the principles could be adopted for similar products.

CRD 4: Commission Consultation on Counterparty Credit Risk

As part of its work on developing a wholesale revision of the Capital Requirements Directive ("CRD") to reflect the Basel 3 concordat, the European Commission is currently seeking views on different aspects of the revision. It has already consulted on counter-cyclical buffers and is expected to publish its proposed amendments to CRD in July 2011. Basel 3 also introduces capital requirements for exposures to CCPs, which previously were set at zero if certain conditions were met, and at the same time, in line with the G20, OTC derivatives that are not cleared are to be subject to higher capital charges to reflect the increased perceived risk.

The Commission recently launched a public consultation on counterparty credit risk generated by derivatives, repo and securities financing activities. It addresses two specific questions:

  • capital requirements for exposures to CCPs; and
  • treatment of incurred credit valuation adjustments.

The objective is stated as ensuring higher capital charges to encourage the clearing of OTC derivatives. The CCPs themselves would be divided between "qualifying" CCPs, which meet international standards and the Commission suggests also EU regulations, to which modest capital requirements would apply, and "non-qualifying" ones that would face higher charges.

Responses are required by 9 March 2011. The full formal proposals to amend the CRD are then expected in July 2011. Part of the revision is likely to see some aspects of the CRD transformed into Regulations.

UK Regulatory Developments

FSA Consultation on Product Disclosure

The FSA published a consultation on product disclosure for retail investments (CP11/3) on 2 February 2011.

CP11/3 brings together a number of product disclosure issues and proposals to:

  • amend the key features illustrations ("KFIs") firms are required to provide to clients in respect of advised sales of retail investment products (which includes individual personal pensions) and group personal pensions; this is to reflect the Retail Distribution Review (the "RDR") ban on commission, and product providers will need to amend their KFIs to reflect these requirements by the end of 2012;
  • introduce new KFI disclosure requirements in respect of personal pension schemes marketed as self-invested personal pensions ("SIPPs") by clarifying the nature of a SIPP and improving the quality and usefulness of personal pension scheme disclosure; (however, the FSA is not proposing any disclosure rule changes for other packaged products in view of the European Commission's consultation on packaged retail products (PRIPs) and intention to put forward detailed proposals in the context of its reviews of MiFID (2004/39/EC) (MiFID) and the Insurance Mediation Directive (2002/92/EC); and
  • potentially amend pension KFIs to replace monetary projections with inflation-adjusted projections for personal and stakeholder pensions (both individual and group).

The FSA intends to publish a policy statement, including feedback on its CP 11/3 proposals, in the second half of 2011 and any final rules in relation to the RDR adviser and consultancy charging requirements will come into force on 31 December 2012 and any final rules on pension scheme disclosures will come into force on 6 April 2012.

AIC Guidance for Investment Company Boards on Managing Custody Risk

The Association of Investment Companies (the "AIC") published guidance for boards of investment companies on managing custody risk on 4 February 2011.

Custody risk is described as the risk that an investment company's assets which are held in custody are lost, or access to them is compromised, as a result of the custodian's misuse of assets, fraud, poor administration or inadequate record-keeping. The guidance paper notes that the custody market is dominated by a smaller number of global institutions, including major banks, which hold a wide range of assets, including equities, government and corporate bonds, warrants and derivatives.

The guidance note covers the following areas:

  • the role of an investment company's board;
  • board review of custodial arrangements; and
  • reporting to shareholders.

The potential for counterparty failure has become more apparent in recent years, particularly in view of the collapse of Lehman Brothers in 2008. This has resulted in new regulation and legislation designed to clarify depositaries' responsibilities and set higher standards. In this respect, the guidance note draws attention to the provisions in the AIFM Directive relating to depositary arrangements, which will come into effect in 2013.

The guidance paper also refers to proposed new depositary rules for UCITS funds (under the European Commission review of the UCITS Directive (2009/65/EC)), which may have wider implications for the products and services offered by custody service providers in other sectors of the market. (In Spring 2011, the European Commission intends to present a legislative proposal (known as "UCITS V") which will update the current framework applicable to UCITS depositaries and introduce new provisions on the remuneration of UCITS managers).

Since the nature of custody provision is likely to undergo significant change over the coming years, the AIC is encouraging investment company boards to review their existing custody arrangements and consider, as far as possible, whether current arrangements will be sufficient to meet future regulatory and legislative changes.

FSA Policy Statement on Implementing the 2nd Electronic Money Directive

The FSA published a policy statement on 10 February 2011 on implementing the second Electronic Money Directive (2009/110/EC) ("2EMD") (PS11/2) which reports on the feedback the FSA has received to its October 2010 consultation paper on implementing 2EMD (CP10/25) and its October 2010 consultation paper on regulatory fees and levies (CP10/24).

PS11/2 includes confirmation of the following issues:

  • Perimeter guidance: the FSA will publish amended guidance in the FSA's Perimeter Guidance manual (PERG) about the scope of the Electronic Money Regulations 2011 (SI 2011/99) and intends to publish an e-money approach document by the end of February 2011;
  • Reporting requirements: the FSA intends electronic money institutions ("EMIs") to report on their e-money and payment services business using manual returns, details being contained in chapter 16 of the Supervision Manual (SUP);
  • Dispute resolution: the FSA's proposals are being implemented unchanged from its consultation in CP10/25 (which means that the compulsory jurisdiction of the Financial Ombudsman Service will cover all e-money issuers within the scope of 2EMD for disputes concerning the issuance and redeemability of e-money and related payment services);
  • Enforcement: the FSA will take enforcement action consistent with its stated enforcement policies in the Decision Procedure and Penalties manual (DEPP) and the Enforcement Guide (EG); and
  • Application Fees: the FSA has also confirmed which e-money issuers will be exempt from paying application fees and the level of fees authorised EMIs and small EMIs will need to pay, the fees being finalised in the FSA's consolidated fees policy statement which is due to be published in May 2011.

Changes to the FSA Handbook to implement the new rules and guidance are set out in the Electronic Money and Payment Services Instrument 2011 (FSA 2011/7), included in Appendix 1 to PS11/2. (Different parts of the instrument will come into force on three dates: 10 February 2011, 30 April 2011 and 30 April 2012.)

Bank Levy for 2011

HM Treasury announced on 8 February 2011 that the full bank levy rates (0.075% for short-term liabilities and 0.0375% for long-term equity and liabilities) are to apply for the calendar year 2011. However, because reduced rates were set for January and February 2011 (0.05% for short-term liabilities and 0.025% for long-term equity and liabilities), the rates for March and April 2011 are increased to take account of the shortfall (0.1% for short-term liabilities and 0.05% for long-term equity and liabilities).

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.