UK: Weekly Financial Services Regulatory Update - Week To 26.10.12

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.

Consultation papers:

No new developments this week.

Discussion papers:

No new developments this week.

Policy statements:

25 October: Mortgage Market Review – Feedback on CP11/31 and final rules. The FSA has published its feedback on CP11/31 and the final rules following its Mortgage Market Review. In light of feedback received during the consultation period, changes have been made in the following key areas:

  • Transitional rules - enabling lenders to make exceptions for customers who need to remortgage, providing there is no increase in the outstanding amount to be repaid
  • Advised sales - clarifying that while most sales will have to be advised, advice will not be needed for simple contract variations - providing there is no increase in the amount to be repaid
  • High net worth borrowers, and business customers borrowing against their home – these types of customers require a tailored approach and will be subject to a less stringent affordability check.

A summary of the key proposals consulted on can be found on page 11 of the Policy Statement.

Press releases:

25 October: FSA confirms new rules that will hardwire common sense into the mortgage market. The FSA has published new rules following the outcome of its Mortgage Market Review which, for the most part, will come into force on 26 April 2014. The majority of the proposals previously published in December 2011 are unchanged. For all mortgages, lenders will need to consider a borrower's net income and basic essential expenditure. Interest-only mortgages can be offered to anybody who shows they have a credible repayment strategy - but relying on increases in house prices will not be sufficient. All mortgage lenders will also have to take into account the impact that future interest rate rises may have on mortgage repayment costs. The FSA is also carrying out an analysis of existing interest-only borrowers to see how many will be unable to repay the capital and see what steps may be taken. The FSA expects to publish these results in the first quarter of 2013.

22 October: Andrew Bailey set out details of the PRA's approach to regulation. Andrew Bailey, head of the prudential business unit at the FSA held an event with banks, insurers, building societies, credit unions and investment firms to discuss the details of two PRA approach documents published last week. The documents set out the PRA's intended approach to supervision; one established the PRA's attitude towards regulating deposit-takers and investment firms; the other focused on insurers. Speaking at the event, Mr Bailey said: "The PRA will come into existence during a period of profound change in the policies governing financial regulation around the world. Our goal will be to focus on the things that matter most to achieving our objectives and our responsibility to the public, given to us by Parliament.... This will not be a zero failure regime, but one where firms can fail in an orderly way without major detriment to the wider system. We will be here to ensure the safety and soundness of firms and the stability of the financial system. We want, and need, to ensure that the public can put their trust in a safe and sound financial system for the future."


25 October: What the FCA means for the London insurance market (carriers and intermediaries) (dated 9 October and published on 25 October). The FSA has published a speech by Clive Adamson, Director of Supervision, FSA, at The Insurance Institute of London. Mr Adamson's speech was directed mainly at firms operating within the Lloyd's market. He noted the challenging operating environment for insurance firms which is causing many firms to respond by finding new ways to generate profits and control costs. He also noted the possibility for a rise in the level of risk in these firms, such as entering new lines of business without detailed understanding, or outsourcing activities offshore without appropriate controls. Mr Adamson said that the high level supervisory approach over the next six to 12 months is to focus on ensuring that the executive and boards of firms have appropriate information and oversight to ensure that controls are in place to meet their conduct and financial crime obligations.

He highlighted two main risks for the Lloyd's market: first, controls for underwriters over delegated authorities can fall below the FSA's standards and should be more robust, with further consideration given to how they deliver good outcomes and fulfil their obligations as product providers. Second, due to the global nature of the London insurance market, the FSA believed that firms are susceptible to a higher risk of financial crime, and should ensure they continue to adapt through a combination of more robust controls and more effective assessments when trading in higher risk areas. Issues he highlighted as affecting the insurance intermediary sector were: deficient systems and controls leading to poor consumer outcomes; poor design and mis-selling of low value products; and claims management and outsourcing.

22 October: Our approach to insurance regulation – in practice. The FSA has published a speech by Julian Adams, Director of Insurance, FSA, at the PRA Insurance Conference. Mr Adams comments on how the PRA will adapt to the ongoing uncertainty relating to the Solvency II Directive. He described the current Solvency II timetable as "completely unrealistic" and sympathised with industry frustration at uncertainty in implementation. He called for a clear and credible timeline for Solvency II and that it needed to be produced urgently. Other points of interest discussed were: early use of firms' preparations for Solvency II models as a way to meet current individual capital adequacy standards regime requirements; the possible impact of the delay of Solvency II implementation on UK reporting requirements; and the final draft memorandum of understanding between the PRA and the FCA relating to supervision of with-profits business which will be published in the next few weeks.

Bulletins and newsletters:

No new developments this week.

Final notices:

25 October: MPC Mortgage Services Limited. The FSA has issued a Final Notice to MPC Mortgage Services Limited ('MPC') cancelling MPC's Part IV permission under FSMA (the 'Act'). MPC failed to pay regulatory fees and failed to satisfy the Threshold Conditions set out in Schedule 6 of the Act.

24 October: Recent FSA action against unauthorised business: Gary Hexley and John Cooper. The FSA has charged Gary Hexley with six offences for giving investment advice while unauthorised. He has been charged with carrying on a regulated activity without being authorised or exempt, contrary to sections 19 and 23 of FSMA. He has also been charged with five counts of dishonestly concealing a material fact, contrary to section 397 of FSMA. John Cooper, Mr Hexley's business partner, has been charged with three counts of dishonestly concealing a material fact, contrary to section 397 of FSMA. Both have been bailed to attend Birmingham Magistrates' Court on 26 October 2012.

24 October FSA fines two firms for transaction reporting failures. The FSA has published two Final Notices issued to James Sharp and Company (20 August) and Pluss500UK Ltd (17 October) fining the firms £49,000 and £205,128 respectively for failures relating to transaction reporting. Between November 2007 and February 2011, James Sharp failed to report approximately 71,000 reportable transactions and Pluss500 failed to report 189,000 reportable transactions between June 2010 and November 2011 and failed to accurately report another 1,143,000 during the same period. The FSA considered the failures particularly serious and has issued a press release relating to the fines. Pluss500 is the first regulated firm to be fined for transaction reporting failures under the new FSA penalties policy that came into force in March 2010.

Press release:

James Sharp:


22 October: Quick2PK International Limited. The FSA has issued a Final Notice against Quick2PK International Limited cancelling its registration as a small payment institution under the Payment Services Regulations 2009 ('PSR'). Quick2PK International Limited has not referred the case to the Upper Tribunal. Quick2PK International Limited failed to submit a Payment Services Directive Transactions return and failed to adequately respond to the FSA's repeated requests that it do so. These actions led the FSA to conclude that Quick2PK International Limited had failed to demonstrate a readiness and willingness to comply with its ongoing regulatory obligations and to deal with the FSA in an open and co-operative way.

22 October: Anthony Gott. The FSA has issued a Final Notice against Anthony Gott prohibiting him from performing any function in relation to any regulated activity carried on by any authorised person, exempt person or exempt professional firm. On 28 September 2011, Anthony Gott was convicted of three counts of obtaining a money transfer by deception, for which he was sentenced on 10 February 2012 to 24 months' imprisonment, suspended for 24 months with a curfew requirement.

22 October: Kenneth James McKenzie trading as Mortgage & Finance Solutions. The FSA has issued a Final Notice against Kenneth James McKenzie trading as Mortgage & Finance Solutions ('Kenneth McKenzie') cancelling permissions granted to him under Part IV of FSMA. Kenneth McKenzie has not referred the matter to the Upper Tribunal. The decision was taken because Kenneth McKenzie failed to notify the FSA of adequate, current contact details and has failed to respond adequately to communications from the FSA thereby failing to satisfy the Threshold Conditions under Schedule 6 of FSMA.

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:

26 October: FSA and BoE consult on statement of policy on PRA designation of investment firms. The Bank of England has published a joint consultation with the FSA on a draft policy statement relating to how the PRA will exercise its powers to designate certain investment firms. Under the Financial Services Bill, the PRA will be given powers to designate certain investment firms for prudential supervision by the PRA, rather than by the FCA. Earlier in October, the Treasury published a draft version of the statutory instrument, the Financial Services and Markets Act 2000 (PRA-Regulated Activities) Order 201*, setting out the criteria that the PRA should apply when considering whether to designate an investment firm. The Order requires the PRA to issue a statement of policy on designation.

This consultation sets out a draft statement of policy and the current views of the BoE and the FSA on the PRA's approach to designation, including:

  • The factors which the PRA will consider when deciding to designate an investment firm, or to withdraw a designation
  • Procedural arrangements for the PRA when making designations
  • Periodic reviews by the PRA of firms subject to designation

The deadline for comments is 4 January 2013.

26 October: FSA Policy Development update no 152. The FSA has published Policy Development update no 152. This legal update summarises the publications that the FSA proposes to publish, as set out in PDU no 152. The update also indicates the changes to the FSA's publishing schedule, as set out in PDU no 151, published on 1 October 2012.

24 October: FSA letter to Treasury Committee on report into HBOS failure. The House of Commons Treasury Committee has published a letter, dated 28 September 2012, from FSA Chief Executive, Lord Turner to Andrew Tyrie, Committee Chairman concerning the FSA's report into the failure of HBOS plc. In the letter, Lord Turner advises that the next step in the FSA's work on the report is to agree the terms of reference and governance arrangements. The FSA has established a sub-committee to overview development of the report.

23 October: FSA SIPP thematic review findings and consultation on guidance. The FSA has published a report on the findings of its thematic review on self-invested personal pensions (SIPP) operators and is also consulting on the related guidance concerning a guide for SIPP operators and a further guide for SIPP operators on client money and custody assets. This follows the FSA's review in April 2011 in which it asked 72 SIPP operators to complete a questionnaire, some followed up with telephone calls and site visits. The deadline for comments is 20 November 2012.



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):

24 October: Interest Rate Hedging. The FOS has published two provisional decisions relating to interest rate hedging products, setting out the issues involved in disputes over "swaps" and "collars" between banks and smaller businesses aimed at explaining the ombudsman's general approach to the complaints.

23 October: FOS issues provisional decision upholding complaint about interest rate hedging products. The FOS has published a provisional decision upholding a complaint against a bank about an interest rate hedging product. Bank S failed to meet the information needs of Business H. Specifically, it failed to adequately highlight or explain the potential cancellation charges associated with the product concerned. The FOS said that an award is appropriate (based around a re-working of the loan and hedging arrangement), on the basis that, if properly advised and informed, Business H would not have taken the product on the same terms.

22 October: FOS issues provisional decision upholding complaint in interest rate hedging swap rate. FOS has published a provisional decision upholding a complaint against a bank about an interest rate hedging swap product. The bank (Bank E) sold the swap to a medium sized family run hotel business which was not classed as a 'sophisticated customer' for the purposes of the FSA. The FOS provisionally concluded that the bank had recommended a swap unsuitable to the customer and provided very little in the way of benefits for the customer, and had put the swap in place primarily for its own commercial convenience. The FOS has said that an award is appropriate but has invited the parties to discuss redress further before finalising its determinations.

London Stock Exchange (LSE):

25 October: Private investors optimistic for economic recovery. The LSE has published a press release stating that 63 percent of UK private investors feel optimistic about the UK economy over the next 12 months (up from 47 percent one year ago) according to a survey of over 1,000 investors by the LSE and research firm, ONVA. The "Investor Confidence Barometer", a measure of economic confidence developed as part of the survey, demonstrated heightened optimism. Investors said they were most interested in investing in the natural resources, technology, healthcare and pharmaceutical sectors.

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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