UK: Weekly Financial Services Regulatory Update - 30.03.12

Consultation papers:

27 March: Consultation Paper on the Financial Services Compensation Scheme – changes to the Compensation Sourcebook (CP12/7). The FSA has published a consultation paper which sets out proposed amendments to the Financial Services Compensation Scheme's (FSCS) Compensation Sourcebook. The changes aim to help the FSCS handle claims in a more streamlined way and involve providing the FSCS with additional flexibility when the value of a claimant's investment is uncertain. Additionally, the FSCS will be able to pay full compensation in certain circumstances, and in others it will have the ability to pay compensation without a full investigation, if the costs would become disproportionate to the benefits. Other changes include removing the requirement for an application form.

The general deadline for responses is 26 June 2012, however, in relation to the proposal to remove the FSCS's telephone number from the information deposit-takers must give to depositors, the deadline for responses is 26 April 2012.

Discussion papers:

No new developments this week.

Policy statements:

26 March: FSA Publishes CASS Resolution Pack Policy Statement. The FSA has published its CASS Resolution Pack Policy Statement which sets out the final rules that firms need to comply with that require them to maintain and be able to retrieve a CASS Resolution Pack ("CASS RP"). A CASS RP contains documents and records that would help an insolvency practitioner return client assets more quickly on the collapse of an investment firm. 25 responses to the proposals were received and this document summarises these, as well as providing feedback to them and outlining the final guidance.

Firms will have until 1 October 2012 to comply with the CASS RP rules.

Press releases:

29 March: FSA review into anti-bribery and corruption systems and controls in investment banks and proposed new guidance for all firms. The FSA has published the findings of its review into anti-bribery and corruption (ABC) systems and controls in investment banks. 15 firms were included in the study, eight of which were global investment banks and the findings included the following:

  1. Most firms had not given proper regard to ABC rules either before or after the enactment of the Bribery Act 2010
  2. Nearly half of the firms did not have an adequate ABC risk assessment process in place
  3. Management information on ABC was poor, making it difficult to determine how senior managers could provide effective oversight
  4. Only two out of the 15 had started or carried out specific ABC internal audits
  5. Firms' dealings with third parties in relation to their efforts to win or retain business caused concern
  6. Though many firms had taken steps to strengthen their gifts, hospitality and expenses policies, few had processes in place to ensure that gifts and expenses in relation to specific clients or projects were proportionate

The FSA will use the results from the review to determine whether further regulatory action is required to deal with individual firms which were involved.

For related proposed guidance changes, please see the Other FSA publications section of this update.

28 March: FSA bans and fines directors a total of £600,000 for publishing misleading information about Cattles Plc. The FSA has fined and banned two former directors and Welcome Financial Services Limited ("Welcome" – a subsidiary of Cattles plc ("Cattles")) for publishing misleading information to investors about the credit quality of Welcome's loan book and failing to act with the integrity expected from their position. James Corr, the Group Finance Director of Cattles, has been fined £400,000 and Peter Miller, the Finance Director of Welcome, has been fined £200,000. John Blake, the Managing Director of Welcome, has also been fined £100,000 but Mr Blake has decided to refer his case to the Upper Tribunal.

Cattles was a sub-prime lender and most of its business was conducted through Welcome, its subsidiary. Cattles' 2007 annual report contained inaccurate and misleading arrears, impairment and profit figures and the same false figures were also included in a rights issue prospectus which was released to investors in April 2008.

When the reality of Cattles' financial situation became known in 2009, trading in Cattles' shares was suspended and a scheme of arrangement followed in March 2011 by which shareholders would only receive 1p for each share. Cattles failed to act with integrity towards its shareholders and potential investors and both firms engaged in market abuse by publishing and distributing misleading information, as did Corr and Miller.

For the related final notices, please see the relevant section of this update.

26 March: FSA publically censures two Glasgow credit unions. The FSA has publically censured two Glasgow-based credit unions on the basis that Pollock Credit Union jeopardised its own solvency by making large loans to a non-member, and Shettleston and Tollcross Credit Union made loans to its directors on terms better than available to its wider membership. Tom Spender, head of Retail Enforcement at the FSA, emphasised that whilst in these circumstances, public censure was imposed, credit unions are not exempt from having financial penalties imposed upon them by the FSA.

26 March: Coutts fined £8.75 million for anti-money laundering control failings. The FSA has fined Coutts & Company ("Coutts") £8.75 million for failing to maintain adequate anti-money laundering controls in relation to high-risk customers, including Politically Exposed Persons ("PEPs"). The high financial penalty in this case reflects the FSA's finding that the failings were severe, systemic and allowed to persist for almost three years. Coutts has already taken some remedial action in response to the FSA's findings and was entitled to a 30% discount on the fine originally envisaged due to its agreement to settle at an early stage.


No new developments this week.

Bulletins and newsletters:

No new developments this week.

Final notices:

28 March: Welcome Financial Services Ltd. The FSA has issued a final notice, dated 28 March 2012, censuring Welcome Financial Services Ltd ("Welcome") for market abuse. The FSA has stated that, had Welcome been a going concern with surplus assets, it would have imposed a substantial financial penalty. Between August 2007-2009, Welcome was the primary subsidiary of Cattles Limited, a subprime lender. During the relevant period, Welcome published false and misleading statements about the credit quality of its loan book and also published misleading arrears and profit figures, giving the impression that far more customers were repaying their loans on time than was actually the case. The FSA considered the conduct to be particularly serious as it took place over a sustained period of 18 months, during which it had numerous opportunities to disclose the information and obtain advice. Further, the impact upon Cattle's shareholders was substantial as they lost almost all of their investment.

For the related press release, please see the relevant section of this update.

28 March: Peter Douglas Miller. The FSA has issued a final notice, dated 28 March 2012, fining Peter Douglas Miller, the Financial Director of Welcome Financial Services Ltd ("Welcome"), £200,000 for engaging in market abuse and being knowingly concerned in the failure of Welcome to take reasonable care to organise and control its affairs. The FSA has also imposed a prohibition order prohibiting Mr Miller from performing any regulated function on the grounds that he is not a fit and proper person. The FSA has also noted that, due to the severity of the conduct involved, the financial penalty would have been £400,000 had it not been considered that to impose this would have caused financial hardship. The information published by Welcome that included false and misleading statements was authorised by Mr Miller as one of the board members which was done in breach of his duty to exercise care, skill and diligence in the performance of his duties.

For the related press release, please see the relevant section of this update.

28 March: James Joseph Corr. The FSA has issued a final notice, dated 28 March 2012, fining Mr James Joseph Corr, the Finance Director of Cattles Limited ("Cattles"), £400,000 for engaging in market abuse and being knowingly concerned in breaches of a relevant Listing Rule and Listing Principle. Mr Corr has also been prohibited from performing any regulated function on the grounds that he is not a fit and proper person. The FSA also noted that the financial penalty would have been £750,000 had it not been considered that to impose this would have caused financial hardship. The information provided by Welcome, which contained false and misleading statements, was further published in several of Cattles' public documents including Cattles' 2007 Annual Report which was done by Mr Corr in breach of his duty to exercise care, skill and diligence in the performance of his duties.

For the related press release, please see the relevant section of this update.

28 March: Cattles Limited. The FSA has issued a final notice, dated 28 March 2012, censuring Cattles Limited ("Cattles") for engaging in market abuse, publishing misleading information, lacking integrity and creating a false market. The FSA has noted that, if Cattles were a going concern with significant surplus assets, a substantial financial penalty would have been appropriate. False and misleading information regarding the finances of Cattles' subsidiary Welcome Financial Services Limited ("Welcome") was published in both Cattles' Annual Report 2007 and a rights issue prospectus which was disseminated to the public. The FSA considered the conduct to be particularly serious as it took place over a sustained period of 18 months, during which Cattles had numerous opportunities to disclose the information and obtain advice.

For the related press release, please see the relevant section of this update.

27 March: Gareth Flanagan and GMF Marketing Services Limited. The FSA has issued a final notice, dated 27 March 2012, imposing a financial penalty of £95,200 upon Mr Gareth Flanagan, withdrawing the approval given to Mr Flanagan to perform controlled functions at GMF Marketing Services Limited ("GMF") and prohibiting Mr Flanagan from performing any function in relation to any regulated activities carried on by any authorised or exempt persons, or exempt professional firm. Mr Flanagan has been found to have acted without integrity whilst carrying out his controlled functions by knowingly submitting mortgage applications in his own name which contained false information. Specifically, Mr Flanagan failed to:

  1. take reasonable steps to ensure that GMF (of which Mr Flanagan was the sole owner and director) did not submit false and misleading information to mortgage lenders about customers' incomes
  2. establish and maintain adequate systems and controls such that GMF took reasonable steps to ensure it made suitable personal recommendations to its customers, and
  3. ensure that the competence and performance of GMF's advisers were adequately monitored

Application refusals:

No new developments this week.

Approved person refusals:

No new developments this week.

Research publications:

No new developments this week.

Consumer research:

No new developments this week.

Other FSA publications:

30 March: FG12/11: Financial Promotions, Fund Performance and Image Advertising/ Advertising ISAs & Adverts for Investment Professionals. Last year, the FSA consulted on proposals relating to the promotion of financial products and services and has now collated its results and published its finalised guidance alongside the feedback received. The guidance includes information about what firms should avoid doing in relation to image advertising and where further information can be found. Guidance is also provided on the advertising of ISAs and advertising for investment professionals.

30 March: Policy Development Update No.145. The FSA has published a policy development update which summarises the consultation papers and policy statements that have been released since the last edition, published in February 2012. It also contains an updated timetable of the forthcoming publications for the year.

29 March: FG12/10: Simplified Advice. In response to the investment industry's desire to design and provide simplified advice processes, the FSA has assisted by publishing additional guidance on certain aspects of the regulatory regime and how simplified advice processes can be developed, particularly in the context of making retail investment product recommendations. The guidance outlines the background and the FSA's regulatory approach, covers aspects of the regulatory regime for providing investment advice and the specific rules relating to the provision of simplified advice, and highlights some of the standards and guidance which firms should have regard to when designing and delivering simplified advice. The FSA also considers the implications of the relevant standards and guidance upon the type of advice that can be given and in what way it should be delivered.

29 March: Anti-bribery and corruption systems and controls: Proposed guidance and amendments to 'Financial crime: a guide for firms'. The FSA has published a guidance consultation paper in order to collect firms' views on proposals to make changes to the 'Financial crime: a guide for firms' in response to the findings of the 'Anti-bribery and corruption systems and controls in investment banks' review. Despite long-standing rules and regulatory requirements relating to anti-bribery and corruption systems, firms have in general failed to comply with these to an adequate level. Changes proposed will therefore involve including examples of good and bad practices that have been drawn from the findings of the review.

The deadline for responses is 29 April 2012.

For the findings of the 'Anti-bribery and corruption systems and controls in investment banks' review', please see the press release section of this update.

28 March: FSA complaints data for second half of 2011. The FSA has published its aggregated complaints data for the second half of 2011. In this period, the total number of complaints was seen to rise by 21 per cent (mostly due to the increased number of complaints relating to payment protection insurance). Whilst complaints within banking about current accounts decreased by 6 per cent, the number of complaints about credit cards and unregulated loans increased.

26 March: Supervisory Notice issued against HD Administrators LLP.

The FSA has issued a supervisory notice, dated 22 March and having immediate effect, varying HD Administrators LLP's ("HDA") Part IV permission by imposing a requirement that HDA may not carry on any of the regulated activities in HDA's Part IV permission, imposing a requirement prohibiting HDA from releasing, disposing of or dealing with any of its assets so long as the requirement is in force, and imposing a requirement that HDA shall procure assets held in the accounts of HDA's wholly owned subsidiary, HD Trustees Limited. The FSA is concerned that HDA lacks competent and prudential management as its two approved persons appear not to be fit and proper in that they have, in respect of the first, been arrested on suspicion of fraud by false representation and money laundering, and in respect of the second, been found to be unaware that they were approved to perform a controlled function at HDA, and acted purely in an administrative capacity.

UKLA publications:

No new developments this week.

Upper Tribunal (Tax and Chancery Chamber) (formerly Financial Services and Markets Tribunal (FSMT)):

No new developments this week.

Financial Ombudsman Service (FOS):

29 March: ombudsman news issue 101. This issue of ombudsman news outlines the effect that economically difficult times have had upon the complaints received and explains the kinds of complaints it has encountered in relation to cash ISAs and investments, as well as including an interview with Sir Nicholas Montagu, the new chairman of the FOS.

27 March: Financial Ombudsman Service issues provisional decision about Halifax Insurance Services Ltd. The Financial Ombudsman Service (FOS) has published a provisional decision in relation to a consumer complaint made against Halifax Insurance Services Ltd. The complaint was about Halifax's decision to withdraw Halifax pet insurance from the market as the complainant's pet had developed health problems requiring regular treatment that were covered by the policy (as they developed after the policy had been taken out) but which would now be excluded from any other insurance policy as pre-existing conditions. The ombudsman held that, due to the way the policy had been advertised and the withdrawal had been handled, Halifax was under an obligation to top-up any cover subsequently obtained by the complainant to cover any conditions excluded under the new policy over a period of three years.

27 March: FOS Budget for 2012/13 finalised and approved. The FOS's budget of £191.1 million has been finalised and approved by the FSA following its consultation in January 2012. Though case fees and the total levy have been frozen, the FOS has introduced a £350 supplementary fee for firms that have more than 25 PPI mis-selling cases brought against them in a year. The FOS has also published a document which outlines its plans for the year.

London Stock Exchange (LSE):

30 March: London Stock Exchange Group plc pre-close period update for the eleven months ended 29 February 2012. The London Stock Exchange Group ("LSEG") has published an update on the 11 months prior to 29 February 2012. Results include continued good operational performance, a total of £34.6 billion equity capital raised and a decrease of two percent in the average daily UK equity value traded.

29 March: Charitable Trading Day at London Stock Exchange Group on 2 April. For the first time ever, the LSEG will, on 2 April, donate a full day's worth of equity trading fees to charity. The amount is expected to be in the region of £500,000 and will be donated to the LSEG Foundation which funds charitable projects in the UK, Italy and Sri Lanka.

28 March: London Stock Exchange Group and Bucharest Stock Exchange sign collaboration agreement. The LSEG and the Bucharest Stock Exchange have signed a "Letter of Intent" to collaborate across key business areas including primary markets, seminars and training, Proquote market data and trading solutions, the FTSE and post-trade services.

28 March: London Stock Exchange Group statement re NYSE Euronext's European clearing strategy and long term continuation of cash equity clearing with LCH. Clearnet. The LSEG has welcomed NYSE Euronext's announcement of its intentions in respect of its European clearing strategy and of LCH.Clearnet. The LSEG is looking forward to working with NYSE Euronext as a valued customer of LCH.Clearnet on completion of the proposed transaction whereby the LSEG will become the majority owner of LCH.Clearnet.

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.

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