UK: Weekly Financial Services Regulatory Update - Week To 29.06.12

This weekly update from Clyde & Co's Financial Services Regulatory Team summarises new developments as reported by the FSA, the UKLA, the Upper Tribunal, the Financial Ombudsman Service and the London Stock Exchange over the past week, with links to the full documents where these are available.

We hope that you will find this update useful.

Consultation papers:

27 June: Payments to platform service providers and cash rebates from providers to consumers. The FSA has published Consultation Paper 12/12 which outlines proposals in relation to payments to platforms and cash rebates from providers to consumers. It proposes to prevent platforms from being funded by platform providers, the charge being transparent and being paid directly by the consumer. It further proposes banning cash rebates from product providers to consumers using platforms on a non-advised basis. The consultation paper contains both the proposals and draft Handbook rules. The deadline for responses is 27 September 2012 and a form is provided online for this purpose.

Discussion papers:

No new developments this week.

Policy statements:

No new developments this week.

Press releases:

29 June: FSA to adjust bank liquidity guidance in light of improved Bank of England facilities. The FSA has announced that, in light of the improved level of liquidity insurance to be provided by the Bank of England, it will be adjusting its guidance to banks on the appropriate levels of liquid asset buffers. This change at the Bank of England reflects the increased degree of contingent liquidity insurance that it is able to provide following the activation of the ECTR (Extended Collateral Term Repo) facility.

29 June: FSA agrees settlement with four banks over interest rate hedging products. The FSA has found serious failings in the selling of interest rate hedging products to small and medium sized businesses. Agreements have been reached with Barclays, Lloyds, RBS and HSBC that they will provide redress to those who have been worst affected following findings of poor sales practices.

27 June: Barclays fined £59.5 million for significant failings in relation to LIBOR and EURIBOR. The FSA has imposed its largest ever fine of £59.5 million on Barclays for misconduct in relation to its LIBOR and EURIBOR submissions. Barclays made submissions that took into account requests made by its interest rate derivatives traders who sought to enhance Barclays' trading position. It also sought to influence the rate setting process and reduced its submissions during the financial crisis in order to avoid negative media comment. The BBA is now reviewing the LIBOR setting process as a result and the FSA is supporting market-led reviews of existing arrangements. The FSA also thanks the US Commodity Futures Trading Commission ("CFTC"), the US Department of Justice ("DOJ") and the Securities and Exchange Commission ("SEC") for their cooperation with the cross-border investigation. The CFTC has also imposed a fine of $200 million on Barclays and the DOJ has agreed with the firm that it will pay a further penalty of $160 million.

27 June: FSA consults on changes to platforms market. The FSA has issued a consultation paper on proposals that would ensure that investors are able to make informed decisions about consolidating their investments on a platform. Changes will involve making the hidden costs of investing in platform products more transparent so that investors can determine whether it represents good value for money. The FSA is proposing to ban all payments from product providers to platforms and is also seeking views on whether this ban should be extended across the retail investment market.

26 June: FSA statement on Kaupthing Singer and Friedlander Limited. The FSA has published a press statement in relation to its regulation of Kaupthing Singer and Friedlander Limited ("KSFL"), the UK-based subsidiary of the Icelandic banking group Kaupthing Bank Hf. It describes the process that it went through leading up to, during, and after the collapse of KSFL's Icelandic parent company. It issued a final notice against KSFL for breach of the FSA's Principles, in that it had wrongly assumed that it could rely upon a special arrangement that it had with its parent company (i.e. the ability to draw down £1 billion at short notice) without testing or monitoring this arrangement. KSFL's failure was not held to lead to its ultimate insolvency but was nonetheless held to be serious as it occurred at a time when financial markets were in a critical situation. The FSA states that its investigation into this matter is now closed, notwithstanding other investigations surrounding the Icelandic parent company being carried out by other agencies.


26 June: Derivatives reform – Regulatory update. The FSA has published a speech given by David Lawton on derivatives reform. His speech is in keeping with that of Alexander Justham's last year in that it updates on the progress being made in complying with the G20 commitments to improve counterparty risk management and transparency in over-the-counter (OTC) derivative markets. Lawton outlines the continuing importance of these commitments, including developments with the European Markets Infrastructure Regulation (EMIR), before going into more detail. To date, a common approach on trade repositories is in the process of being provided and market participants have moved towards increasing their central clearing and trade reporting. Lawton identifies that a number of steps are still to be taken including the bilateral collateralisation of uncleared trades, the creation of tools to assist the recovery or resolution of CCPs, continued engagement with regulators worldwide to ensure that changes are effective internationally, and to ensure that firms are ready for implementation.

Bulletins and newsletters:

28 June: Retail Distribution Review Newsletter. The FSA has published issue six of the Retail Distribution Review Newsletter which covers the FSA's consultation paper on platforms, information about gap-fill, the FSA's post-RDR stance on switches within pensions and independent and restrictive advice requirements.

Final notices:

27 June: Barclays Bank Plc. The FSA has issued a final notice, dated 27 June 2012, fining Barclays Bank Plc £59.5 million by attempting to manipulate the LIBOR and EURIBOR rates in order to enhance its trading position. Specifically, Barclays made LIBOR submissions which, between 2005 and 2008, took into account requests made by its interest rate derivatives traders, and between 2007 and 2009 took into account the negative media perception of Barclays in relation to its LIBOR submissions. Barclays failed to have adequate risk management systems or effective controls in place in relation to its LIBOR and EURIBOR submissions processes and failed to conduct its business with due skill, care and diligence when considering issues raised internally in relation to its LIBOR submissions. Barclays cooperated throughout the FSA's investigation and was therefore entitled to a 30% discount on what would otherwise have been a fine of £85 million.

27 June: Laila Karan. The FSA has issued a final notice, dated 27 June 2012, fining Laila Karan £75,000 and making an order prohibiting her from performing any function in relation to any regulated activity. This final notice follows the Upper Tribunal's decision, released on 15 May 2012, that this level of fine was appropriate and that a prohibition order should also be made.

27 June: Sachin Surendra Karpe. The FSA has issued a final notice, dated 27 June 2012, fining Sachin Surendra Karpe £1,250,000 and making an order prohibiting him from performing any function in relation to any regulated activity. This final notice follows the Upper Tribunal's decision, released on 15 May 2012, that this level of fine was appropriate and that a prohibition order should be made.

Application refusals:

No new developments this week.

Approved person refusals:

No new developments this week.

Research publications:

No new developments this week.

Consumer research:

27 June: The platforms market: consumer interaction – Qualitative research to investigate consumer use and knowledge of platforms. The FSA has published a piece of consumer research on consumer use and knowledge of platforms prepared for the FSA by NMG Consulting. Prior to publishing its consultation paper on payments to platform service providers, the FSA commissioned this research on the potential unintended consequences of banning the funding of platforms by platform providers and cash rebates. The findings of this research included:

  • Not all consumers are aware of what platforms do
  • Interaction with platforms is predominantly paper-based, rather than online
  • The relationship between the fund manager, platform provider and adviser is not widely understood
  • Few customers are aware of current platform charges
  • The proposed changes are likely to increase transparency
  • Overall the changes are unlikely to have negative unintended consequences for consumers as it is anticipated that by improving transparency, consumers will be able to make a more informed decision.

Other FSA publications:

29 June: Solvency II and linked long-term insurance business. The FSA has issued a feedback statement setting out the responses it received on its consultation paper relating to Solvency II and linked long-term insurance business. The final amended text of the rules consulted on, having amended them in consideration of the feedback received, will appear in the final Policy Statement on Solvency II.

29 June: Interest rate hedging products. The FSA has published an update on interest rate hedging products, providing information about the FSA's work and findings in this area. The FSA has found that as these products can be very complex, they are also susceptible to mis-selling. The FSA undertook a review into this process and uncovered sufficient evidence of poor-practice to justify FSA involvement. The FSA's findings included:

  • That although these products can protect customers, those that are complex require a great deal of understanding on the part of the customer in order for them to make an informed decision
  • Sales practices have included poor disclosure of exit costs, a failure to ascertain a customer's understanding of the level of risk, non-advised sales becoming advisory, 'over-hedging' and the use of rewards and incentives becoming a driving force for these practices

This review also outlines what the next steps will be for banks and what outcomes these will provide for customers.

29 June: Handbook Notice 121. The FSA has published a handbook notice on 29 June 2012 introducing amendments decided on at the relevant Board meetings on 20 and 28 June. Changes include minor administrative corrections, an update of the appropriate qualifications in the Training and Competence Sourcebook, an amendment to the liquidity rules, and an amendment to the Prospectus Rule sourcebook in response to the European Commission's amended Prospectus Regulation.

28 June: Banks' defences against investment fraud: detecting perpetrators and protecting victims. The FSA has published a report considering what banks can and should be doing to counter fraud where their customer is a fraudster or where their customer is a victim of fraud. The report suggests that although there are systems in place to tackle financial crime, very little is directed towards investment fraud. Further, only limited and generally haphazard resources are directed towards this area, there rarely appears to be a system in place to determine whether measures taken are effective, and there is also very little reporting on instances of fraud by or against customers. Overall there was found to be very little governance of investment fraud and banks were, in general found to be failing in their obligation to counter the risk of investment fraud.

28 June: Examples of good and poor practice in 'Banks' defences against investment fraud'. Following on from the FSA's review of banks' performance in relation to preventing and countering investment fraud, the FSA is proposing to include a new Chapter 14 in Part 2 of 'Financial crime: a guide for firms'. The chapter will include guidance on good and poor practice in relation to investment fraud in the areas of governance, risk assessment, detecting perpetrators, automated monitoring, protecting victims, management reporting and escalation of suspicions, staff awareness, and use of industry intelligence.

26 June: Christopher John Riches trading as Fairway Mortgages. The FSA has issued a first supervisory notice, dated 26 June 2012, varying the Part IV permission that had previously been granted to Christopher John Riches (trading as Fairway Mortgages) by removing all of his regulated activities with immediate effect. Further, within 14 days, Mr Riches must inform all of his clients in writing of the fact that he is not longer permitted to carry out regulated activities and provide the FSA with confirmation of this. The FSA has decided to impose this supervisory notice because it no longer considers Mr Riches to be a fit and proper person to conduct regulated activities on the basis that that he has not confined his regulated activities to those that he has permission for and has failed to be open and cooperative in his dealings with the FSA.

26 June: Draft Memorandum of Understanding (MoU) between the Prudential Regulation Authority and the Financial Services Compensation Scheme. The FSA has published a draft MoU in relation to the roles of the Prudential Regulation Authority ("PRA") and Financial Conduct Authority ("FCA") in assisting the Financial Services Compensation Scheme ("FSCS") to discharge its functions. It has been provisionally agreed that both the PRA and the FCA will be able to set some of the rules relating to the scheme but that, although the FSCS will be accountable to both the FCA and the PRA, it will also be independent.

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):

28 June: Bank technical problems and the ombudsman. The FOS has published information regarding how to initiate a complaint by first going to the business that the consumer is unhappy with prior to asking the FOS to intervene. It provides a link on this page to the FOS complaint form which is available in several different languages and formats.

London Stock Exchange (LSE):

27 June: London Stock Exchange welcomes 1,000th exchange-traded product. The LSE now lists more than 1,000 exchange-traded products on its Main Market as UBS adds an additional 64 ETFs.

26 June: London Stock Exchange welcomes Egypt's Orascom Telecom Media & Technology to Main Market. Orascom Telecom Media & Technology has entered the LSE, listing Global Depository Receipts (GDRs). This firm was the first to use LSE's Admitted-To-Trading Only facility and has now graduated to a full listing of GDRs. The Chief Executive Officer of the firm marked the occasion by opening trading at the LSE on the morning of the 26 June.

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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