UK: Weekly Financial Services Regulatory Update - Week To 19.10.12

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. If you have any queries about any of the information in this update or financial services regulatory matters generally, please contact one of the individuals listed in the 'Contacts' section of this publication.

If you have any comments on the content or format of the update or if you no longer wish to receive it, or have a colleague who would like to receive it, please email

Consultation papers:

No new developments this week.

Discussion papers:

No new developments this week.

Policy statements:

No new developments this week.

Press releases:

19 October: Bank of Scotland fined £4.2 million for failing to keep accurate mortgage records. The FSA has issued a press release to accompany the Final Notice issued to the Bank of Scotland for failing to keep accurate mortgage records. Tracey McDermott FSA director of enforcement and financial crime stated that: "These mistakes stemmed from the fact that Bank of Scotland had an inadequate mortgage records system meaning they could not identify which of those 250,000 customers were subject to a cap on their standard variable rate. This breach is particularly serious because the inaccuracies built up over a period of seven years. There was no structure in place to identify errors as they occurred and no checking procedures thereafter. In a complicated organisation where several legacy systems exist, firms have to make sure they are synchronised, otherwise it is their customers who suffer."

18 October: FSA fines Sun Life Assurance Company of Canada (UK) Limited £600,000 for with-profits governance failings. The FSA has published a press release relating to its Final Notice issued to the firm for failures to properly review and approve transactions leading to unacceptable risk that proper independent judgment would not be applied to those transactions. Tracey McDermott, Director of Enforcement at the FSA, said: "The firm fell below the standard required. Its with-profits committee and board, who had primary responsibility for the fair treatment of policyholders, were not adequately consulted on two significant transactions. This was an unacceptable approach to protecting policyholders."

16 October: Martin Wheatley sets out the 'Journey to the FCA'. The FSA has published a press release about the publication of a paper by Martin Wheatley that sets out how the new financial conduct regulator will operate. At the Thomson Reuters Newsmaker event to mark the launch of the paper, Mr Wheatley highlights the opportunity presented to the industry and to firms and regulators to start afresh and "reset how we deal with conduct in financial services". He discusses the changes in the approach of the FCA and the focus on learning from previous issues such as PPI mis-selling and taking earlier, more decisive action which will be possible due to the FCA's new powers to ban products and promotions where necessary. The FSA is asking for comments about the plans for the FCA and the consultation period runs until 14 December 2012.

Press release:

Journey to the FCA publication:


17 October: The FCA: the future of conduct regulation, Martin Wheatley. The FSA has published a speech by Martin Wheatley, MD of the FSA delivered at the BBA Annual Banking Conference. He focuses particularly on how the banks together with the FSA should meet their objectives to restore market integrity and public trust. He highlights three principle objectives for the FSA: Consumer protection, competition and market integrity. He takes each objective in turn and briefly summarises any work to be done in that area (including mentioning the work carried out recently in relation to LIBOR), and closes by discussing how the FCA will operate and the impact of European legislation on regulation in the UK.

17 October: The future of banking regulation in the UK.

The FSA has published a speech by Andrew Bailey delivered at the BBA Annual Banking Conference. The speech highlights some of the details set out in the recently published PRA approach document on how the PRA will supervise banks from April 2013, alongside which a separate publication on the supervision of insurers was also released. He looks at certain issues around bank regulation and macroeconomic policy, and the Financial Policy Committee's macroprudential role, and also highlights key aspects of the Government and the Bank of England's Funding for Lending Scheme.

16 October: Martin Wheatley: Launch of the Journey to the FCA. The FSA has published a speech by Martin Wheatley, MD of the FSA and CEO Designate of the FCA, at the 'Launch of the Journey to the FCA' event. Mr Wheatley emphasises the opportunities presented by an overhaul of regulation and that it is the role of a regulator not only to ensure that markets work well, but to ensure that firms put their customers at the heart of how they do business. He sets out 'what the FCA is going to be about', outlining three outcomes:

1 Consumers get financial services and products that meet their needs from firms they can trust.

2 Firms compete effectively with the interests of their customers and the integrity of the market at the heart of how they run their business.

3 Markets and financial systems are sound, stable and resilient with transparent pricing information.

He concludes by reminding the industry that good intentions are not enough and that "there are challenges and opportunities for both us the regulator, and you the industry. It is a journey we have to walk together, as we put consumers back at the heart of what we do."

13 October: Adair Turner: Regulatory reform and deleveraging risks. The FSA has published a speech by Adair Turner, Chairman of the FSA, at the Bretton Woods Committee 2012 International Council Meeting, Tokyo. He sets out where we've got to in developing a reformed regulatory framework – what is already achieved, what the remaining priorities are, and what risks and realities we need to be aware of as we progress.

Bulletins and newsletters:

No new developments this week.

Final notices:

19 October: FSA fines Bank of Scotland £4.2 million for mortgage records failings. The FSA has published a Final Notice issued to the Bank of Scotland (BOS) fining it £4.2 million for mortgage record failings. BOS settled at an early stage of the investigation and received a 30% discount on the original fine of £6million. The decision is based on BOS relying on incorrect records held on its mortgage systems for considerable periods of time between 2004 and 2011. These records resulted in customers in the Halifax part of the business not receiving important information about the changes to the terms and conditions of their mortgages. The issue came to light when goodwill payments to customers were mistakenly made to some who were not entitled and not made to others who were. This was due to mortgage information being held on two separate unaligned systems and manual updates not always being carried out.

19 October: FSA final notice to Mortgage & Finance Professionals. The FSA has published a Final Notice to Mortgage & Finance Professionals and cancelled their Part IV permission under FSMA. Mortgage & Finance Professionals failed to complete the Retail Mediation Activities Return (RMAR) and has failed to respond to FSA requests that it do so.

19 October: FSA final notice objects to controller of Think The FSA has issued a Final Notice (dated 9 October) to Ewa Karczewska objecting to her acquisition of at least 70% of the issued share capital of Think Finance. com in September 2010 without seeking prior approval from the FSA. The Final Notice closely mirror's the FSA's Decision Notice to object to the acquisition, the main reasons for which were:

  • Lack of honesty and integrity
  • Lack of reputation and experience
  • Failure to give the FSA the required notice before acquiring control
  • Repeated failure to comply with FSA requirements

19 October: FSA fines director of SIPP for failing to monitor and correctly calculate regulatory capital requirements. The FSA has published a Final Notice issued to Graeham Sampson, a director of a self-invested personal pension operator, and imposed a fine of £17,850 for failing to monitor and correctly calculate regulatory capital requirements. Mr Sampson agreed to settle at an early stage of the investigation and therefore received a 30% discount on the original fine of £25,500. The Final Notice was issued as Mr Sampson failed to act with due care skill and diligence when operating his business and failed to understand the capital requirements applicable to his business and as a result exposed the business to a risk that it would be unable to fulfil its financial requirements. The FSA deemed this a serious breach and the penalty reflects the need to send out a strong message of deterrence to other individuals who exercise significant influence functions.

18 October: FSA fines Sun Life Assurance £600,000 for with-profits governance failings. The FSA has published a Final Notice issued to Sun Life Assurance Company of Canada (UK) Ltd (Sun Life), fining the firm for failures relating to the governance of its with-profits business. The FSA found that between November 2008 and August 2009, Sun Life had breached Principle 3 of the FSA's Principles for Businesses. Its governance arrangements for with-profits business were unclear and inadequate, both in their design and in their practical operation; as a result, the risk to policyholders was that their interests were not protected properly. The FSA further concluded that Sun Life had breached rules in the Prudential Sourcebook for Insurers (INSPRU) and in the Supervision Manual (SUP) as it failed to maintain a positive value for the inherited estate of its with-profits fund in breach of INSPRU 1.1.28R. It also failed to report the negative value of the inherited estate to the FSA in a timely manner in breach of SUP 15.3.11R.

The FSA considered the failings particularly serious as they occurred at a time when there was a high-level of awareness within the with-profits sector of the regulatory standards concerning the governance arrangements for with-profits funds. In particular, a "Dear CEO" letter was sent to insurers in September 2007 that set out the FSA's expectations in terms of governance standards for with-profits business. Sun Life agreed to settle at an early stage of the investigation and therefore qualified for a 20% reduction on the original penalty which would have been £750,000.

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-related publications:

19 October: Treasury Committee report on FSA report into the failure of RBS. On 19 October 2012, the House of Commons Treasury Committee published a report on the FSA's December 2011 report into the failure of RBS. The focus of the report was to identify areas which would benefit from further legislative or regulatory change. The report is critical of the senior management in place at the FSA at the time and sets out some specific recommendations and conclusions, including those on:

  • Future bank acquisitions and mergers
  • The significant influence functions (SIF) screening process
  • The effectiveness of the enforcement regime
  • The need for transparency and accountability

18 October: Complaints commissioner finds serious administrative error by FSA and recommends improvement to procedures in de-authorising firms. The Office of the Complaints Commissioner published a decision finding that the FSA committed a serious administrative error and recommending that it improves its procedures when de-authorising firms, although it did not uphold the complaint. A complainant agreed a settlement with Firm A's administrators. The complainant subsequently became aware that Firm A had applied to cancel its permission under Part IV of FSMA and to transfer its remaining assets to Firm B. The FSA proceeded with the cancellation of permission, although the complainant's solicitors had previously sent an e-mail to the FSA about the claim, which the FSA had misplaced. The complainant alleged that as result of the FSA's maladministration in losing the e-mail, he was unable to recover the settlement monies.

The Complaints Commissioner did not uphold the complaint as losses incurred did not flow directly as a result of the FSA's actions, however he found that the FSA's loss of the email was a serious administrative error and recommended the FSA make an ex gratia payment of £1,500 to the complainant to reflect the distress and inconvenience caused. He also recommended that the FSA put in place safeguards when de-authorising firms on request to ensure that no relevant information in possession of the FSA is overlooked in future.

17 October: HM Treasury accepts all recommendations in Wheatley LIBOR report. HM Treasury has published a written statement from Greg Clark, Financial Secretary to the Treasury announcing that the government accepts all the recommendations in the final report of LIBOR. The Treasury has also released a press release stating that the Government will amend the Financial Services Bill to:

  • Bring LIBOR activities within the scope of statutory regulation, including the submission and administration of LIBOR
  • Create a new criminal offence for misleading statements in relation to benchmarks such as LIBOR, as well as amending the language of existing offences
  • Provide the new Financial Conduct Authority (FCA) with a specific power to make rules requiring banks to submit to LIBOR, with reference to a Code of Practice produced by the rate administrator

Other recommendations will also be implemented, including the BBA giving up its operational role in LIBOR setting and a new LIBOR administrator to be placed in a governance role.


Press Release:

15 October: FSA and Bank of England publish updated PRA approach documents. The FSA, together with the Bank of England, has published papers on the proposed approach of the Prudential Regulation Authority (PRA) to banking and insurance supervision. These documents follow earlier versions published in May and June 2011 and are intended to provide information to dual-regulated firms on the PRA's expectations and the supervisory approach they can expect from the PRA while the Financial Services Bill is being debated in Parliament. Final versions will be approved for publication by the PRA Board before it takes on its statutory responsibilities in 2013. Each document will be intended to be a "standing reference" that will be revised and reissued in response to significant legislative changes or other such changes that require amendment to the PRA's approach.

15 October: FSA update on £54m package for CF Arch cru Investors and FAQs. The FSA has published new web pages containing details of the £54m package for CF Arch cru investors and a set of FAQs for similar investors. Most investors eligible under this package, known as the 'Payment Scheme' have until 31 December 2012 to accept the offer made to them by the authorised corporate director of the CF Arch cru funds, Capita Financial Managers Ltd (Capita). If they accept the offer, investors will give up certain rights to make claims against the three firms contributing to the Payment Scheme.

15 October: Changes to authorisations. The FSA has published a statement detailing how its Authorisations function is implementing a similar structure to the twin peaks model adopted by the Supervision team. Assessments are being carried out by both the Prudential Business Unit (PBU) and the Conduct Business Unit (CBU). These changes will only affect those that will be dual-regulated firms. The FSA states that it will not change the application submission process but that there will be a PBU and a CBU case officer for each application who will coordinate to minimise duplication and impact on applicant firms and individuals.

15 October: HM Treasury consults on Financial Services Bill draft secondary legislation and guidance. The Treasury has published a consultation on secondary legislation and guidance required by the Financial Services Bill 2012-13 (FS Bill). The consultation invites comments on legislation relating to the regulatory structure introduced by the FS Bill, including:

  • The scope of regulation between the PRA and the FCA
  • Threshold conditions for both regulators
  • The allocation of responsibility for rule-making with regard to the FSCS between the FCA and PRA
  • The power to designate bodies that can make super-complaints

Comments on the consultation are requested by 24 December 2012. The Government envisages the secondary legislation will go before Parliament "as early as possible" in 2013. It currently expects the FS Bill to receive Royal Assent in late 2012 or early 2013 and the new regulatory structure to be fully established on 1 April 2013. draft_secondary_leg.pdf

UKLA publications:

No new developments this week.

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

19 October: Upper Tribunal upholds FSA decision to ban individual in mortgage case and FSA publishes final notice. The Upper Tribunal has published its decision in the case of Raymond Wagner v FSA along with a Final Notice of the same date. The basis of the decision was that Mr Wagner had:

  • Knowingly inflated his income in order to obtain a residential mortgage
  • Deliberately allowed false and inflated income figures to be submitted on his behalf in order to obtain four buy-to-let mortgages between May 2006 and June 2007
  • Failed to have in place proper systems and controls and as a result, two employees of Ambergate Business Services Limited had been able to submit mortgage applications containing false information

The FSA's Decision Notice had imposed a financial penalty of £100,000 on Mr Wagner but the tribunal concluded that a prohibition order should be imposed with no financial penalty as his actions were the result of recklessness rather than being deliberately misleading.

Tribunal Decision:

Final Notice:

Financial Ombudsman Service (FOS):

No new developments this week.

London Stock Exchange (LSE):

No new developments this week.

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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