UK: Weekly Financial Services Regulatory Update - Week To 23.11.12

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:

22 November: A new capital regime for Self-Invested Personal Pension (SIPP) operators. The FSA has published a Consultation Paper on the prudential requirements for Self Invested Personal Pension (SIPP) operators. This consultation paper aims to bring the capital requirements for operators broadly in line with those for investment managers and operators of collective investment schemes. Operators are required to hold an amount of capital, which is the higher of £5,000, six weeks of expenditure, or 13 weeks of expenditure if they hold client money. The deadline for comments is 22 February 2013 and a Policy Statement including final rules is expected to be published in the second half of 2013. There will be a one-year transitional period to allow firms to raise the necessary capital to comply with the new rules.

Discussion papers:

No new developments this week.

Policy statements:

No new developments this week.

Press releases:

22 November: FSA publishes proposals to strengthen capital standards for SIPP operators. The FSA has published a press release regarding its Consultation Paper outlining how much capital Self Invested Personal Pension (SIPP) operators must hold in future. The minimum capital a SIPP will have to hold will increase from £5,000 to £20,000 to help protect consumers should the operator have to be wound down. In addition to the minimum capital requirement, the FSA is proposing that an operator's total capital requirement should consist of two further elements:

  • The amount of assets under administration (AUA)
  • An additional capital surcharge for operators that hold non-standard asset types (i.e. assets that will take longer to deal with during a wind down)

Therefore, the more assets an operator holds, the more capital it will need and an additional surcharge will apply if the operator is holding non-standard assets. The FSA is also proposing that core capital must be held in a form which is releasable within a year, while capital relating to the surcharge must be releasable within a 30 day period. The FSA recognises that the proposals will require some operators to raise significant new capital, and in light of this there will be a transitional period of one year between the publication of final rules and implementation. The deadline for responses is 22 February 2012.


22 November: EMIR: The bigger picture and looking forward. The FSA has published a speech by David Lawton, FSA Director of Markets, delivered at the Tradetech Conference. Mr Lawton provides a summary of the reasons for OTC derivatives regulation and the key features of the European Market Infrastructure Regulation (EMIR) legislation. These include: reporting obligations; mandatory clearing obligations; and, risk mitigation requirements for all uncleared OTC derivative trades. Mr Lawton acknowledges the challenges associated with implementing new regulation and the initial uncertainties that are associated with regime change. Mr Lawton directs firms to the FAQs published by ESMA in relation to EMIR as a useful starting point and speculates that the timetable for implementation would be as follows:

  • Entry into force of level 2: late Q1 2013
  • First clearing obligations: Q4 2013
  • Reporting requirements: July 2013 for credit and interest rate derivatives; January 2014 for all other classes. 90 days for backloading.
  • Collateralisation of non-cleared trades: consultation likely in H1 2013.

The final part of Mr Lawton's speech focuses on practical advice for firms and what steps they can be taking now to ensure they are ready for EMIR next year. Important preparatory steps include:

  • Establishing central counterparty clearing arrangements
  • Preparing for the non-margin aspects of the regulation, such as operational risk management tools, and the rules on dispute resolution, portfolio reconciliation, and portfolio compression. (Mr Lawson warns that this could prove challenging for areas of the market still relying on paper-based processes.)
  • Checking if you are a firm which will fall under the non-financial firms exemption from the clearing and bilateral collateralisation obligations.

The FSA hopes to have an automated process established by next year to help firms calculate group-wide non-hedging transactions, and intragroup derivatives transactions in terms of the relevant exemptions. The FSA hopes the new regime will bring about more transparency and a clearer picture of risk. The OTC derivatives market will become perhaps smaller and more expensive, but in return should become more stable. Mr Lawson believes this is an acceptable trade-off given the impact this market can have on general financial stability.

20 November: Improving trust: Client assets and markets regulation in the FCA, Martin Wheatley. The FSA has published a speech by Martin Wheatley, FSA MD, delivered at the Markets and Client Assets Conference. Mr Wheatley discussed markets regulation and client assets, and the FCA's future approach to conduct in wholesale assets. Mr Wheatley set out the FCA's early priorities for wholesale conduct which will cover the following:

  • The FCA seeks to focus on issues in the wholesale market where any poor behaviour has the potential to lead to knock-on consequences in retail markets for everyday retail customers
  • The FCA will seek to identify relationships between wholesale participants where it feels one warrants more protection than the other, for instance relationships where one party has more power or expertise than the other
  • Even if the FCA feels that wholesale participants are evenly matched in power and expertise, the FCA will still intervene if it feels that poor conduct between such parties has the power to have an adverse impact on the integrity of the markets or on the reputation of the UK as a place to do business

20 November: The Client Assets Unit: why we were formed, what we do and how? The FSA has published a speech by Richard Sutcliffe, Head of Client Assets Unit, FSA delivered at the CASS and Markets Conference. Mr Sutcliffe stresses the need for a robust approach to the protection of assets, both for clients and the industry at large. He briefly covers the Lehman collapse as a "watershed" moment in client assets which led to the formation of the FSA's Client Assets Unit. Mr Sutcliffe identifies the FSA's "single most important structural change" to date as the implementation of the dedicated control function, the CF10a and goes on to discuss why and what changes within firms this has brought about. Mr Sutcliffe has a broadly positive outlook on the success of measures put in place to date, but concludes that there is still work to be done, improvements to be made and attitude shifts yet to happen before protecting clients' assets is properly embedded in business practices. Mr Sutcliffe also briefly outlines the Unit's plans going forward which include: a review of the CASS rules, including a revisiting of CASS 6 and 7; the open consultation on CASS 5; and, continuing with the intensive supervisory approach to firms.

Bulletins and newsletters:

No new developments this week.

Final notices:

No new developments this week.

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:

23 November: Dear CEO Letter: Conflicts of interest between asset managers and their customers. The FSA has published a short letter highlighting what firms need to do in response to its recent Dear CEO Letter 'Conflicts of interest between asset managers and their customers: Identifying and mitigating the risks'. If firms received a hard copy of the letter from the FSA, they must provide an attestation by 28 February 2013, using the wording set out in Appendix 1 of the letter. All other firms are not required to attest at this stage but must still consider the letter, review their operations and ensure compliance with the rules.

21 November: FSA response to Law Commissions' consultation on unfair terms. The FSA has published a response to the Law Commissions' consultation in July on unfair terms and the definition of terms which, under the Unfair Terms in Consumer Contracts Regulations 1999 (UTCCRs), cannot be reviewed for fairness. The response covers these issues:

  • UTCCRs may not be the most appropriate tool for dealing with unfair charges in respect of FSA regulated activities. However, it queries whether it would be beneficial to amend the UTCCRs to cover unfair charges
  • The FSA disagrees with the presumption that transparency and prominence in price terms are in themselves sufficient to ensure fair consumer outcomes
  • The FSA does not favour checklist guidance as to transparency as there is a risk that this would lead to a tick-box approach used by firms
  • The fairness test should retain the concepts of a "significant imbalance" and "consumer detriment"

21 November: FSA makes further recommendations on draft Banking Reform Bill. Parliament has published a letter from Andrew Bailey, MD of the FSA's Prudential Business Unit, to the Parliamentary Commission on Banking Standards. The letter is in response to the evidence session Mr Bailey attended on 19 November. The letter elaborates on two points, namely that:

  • The FSA agrees with the PRA having a statutory objective regarding the continuity of core banking services, but it believes it would be useful to have a better narrative regarding how the PRA's safety and soundness and continuity objectives interact
  • The FSA also considers that directors of a ring-fenced bank (RFB ) (and possibly other appropriate entities) should have a legal obligation to ensure the integrity of the ring-fence which would require them to protect the RFB from contagion from the wider financial system

An appendix to the letter sets out the main points made by Mr Bailey in the evidence session on 19 November.

19 November: Handbook Release 131. The FSA has issued the latest Handbook Release containing pages to be inserted into paper versions of the FSA Handbook in order to bring it up to date.

UKLA publications:

No new developments this week.

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

22 November: Decision Notice - David John Hobbs. The FSA had previously issued a Decision Notice to Mr David John Hobbs on 23 July 2010. Mr Hobbs referred the matter to the Upper Tribunal in August 2010. The Tribunal has now determined that Mr Hobbs, a former proprietary trader at Mizuho International plc, had not committed market abuse in instructing a broker at Sucden, Mr Kerr to purchase coffee futures in 2007. The Tribunal has directed the FSA to take no further action against him and the FSA confirms that it is discontinuing its action against Mr Hobbs in this matter. Mr Kerr previously made a settlement with the FSA on the basis that his role in the relevant trading amounted to market abuse.

Decision Notice Hobbs:

Final Notice Kerr:

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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