UK: Risk and Regulation Monthly - October 2012

Last Updated: 12 December 2012
Article by Deloitte LLP

A number of important documents were issued in October, including on Basel III implementation progress internationally, on banking structural reform in the EU and the UK, on how the Prudential Regulation Authority (PRA) and the Financial Conduct Authority (FCA) will approach supervision, and the final instalment of the Mortgage Market Review.

As usual this note is produced for information only, on a best efforts basis, and does not constitute advice of any kind.

Capital (including stress testing)

The Basel Committee on Banking Supervision (BCBS) published a progress report on Basel III implementation: only eight of the 27 member countries of the BCBS have issued final Basel III related regulations. The report also noted that the EU's Capital Requirements Regulation (CRR) and the revised Capital Requirements Directive (CRD4) are "materially non-compliant" against the Basel III framework in two areas: definition of capital; and the internal ratings based (IRB) approach to credit risk. Preliminary findings also suggested key differences between jurisdictions and individual banks on the calculation of risk weighted assets (RWA) for both banking and trading book exposures. The BCBS is expected to publish a report containing detailed findings in early 2013.

The European Banking Authority (EBA) issued its final report on the European bank recapitalisation exercise following its 2011 recommendation on the creation of temporary capital buffers to restore market confidence. The report revealed that 27 initially undercapitalised banks have increased their overall capital position by ,¬116 billion and 24 of them now have a core tier one ratio (CT1) above 9%. The EBA indicated its intention to adopt new recommendations on capital conservation once the CRR and CRD4 texts are finalised.

Wayne Byres, Secretary General of the BCBS, defended the Basel 2.5 and III risk-based approach to calculating capital requirements; adding risk sensitivity to the regulatory regime has increased complexity, but this is necessary to reflect the increasing complexity of the banking system itself, and to ensure bank incentives are firmly aligned with prudent risk management. The Basel requirements avoid unnecessary complexity; some aspects of the Basel requirements have been made simpler such as the composition of capital and the introduction of the leverage ratio as a "backstop for the risk-based framework".

EIOPA, the European Insurance and Occupational Pensions Authority, published the first part of its updated technical specification for the Solvency II valuation and Solvency Capital Requirements calculations.

The Financial Services Authority (FSA) updated its website on the Solvency II internal model approval process (IMAP) to include interim findings from its assessment of the quality of data inputs firms used in internal models.

Amidst speculation that Solvency II would not be implemented until 2016, Gabriel Bernardino (Chair of EIOPA) wrote to Michel Barnier (European Commissioner) regarding his concern with the delay to OMNIBUS II negotiations, and the uncertainty it was causing for the Solvency II timetable. He called for a "sound and realistic timetable" to be drawn up "as soon as possible"; the lack of certainty was "undermining the EU credibility in international discussions".

Liquidity

No new developments.

Governance and risk management (including remuneration)

The FSA fined Sun Life Assurance Company of Canada (UK) Limited £600,000 for failings in the governance of its with-profits business, which it concluded had led to a high risk that policyholders' interests would not be protected properly.

Conduct of Business (including MiFID)

The FSA published a Policy Statement on the Mortgage Market Review (MMR) confirming that it is taking forward the majority of its proposals, which include: the removal of the non-advised sales process; strengthened arrears charging rules; responsible lending reforms, in particular, that lenders must undertake an "affordability assessment"; and enhanced prudential requirements for non-banks. In response to consultation, the FSA has relaxed some of its initial proposals through introducing exceptions relating to: the removal of the non-advised sales process, in particular, related to non-interactive sales or where there is a variation in a contract with no increase in balance; the affordability assessment to prevent some customers becoming "trapped" with an existing lender; and the responsible lending and interactive sales process for high net worth customers.

The UK Government accepted in full the recommendations of the Wheatley Review of LIBOR. For those recommendations that require primary legislation, such as bringing LIBOR activities within the scope of statutory legislation, the Government will amend the Financial Services Bill, which is currently before Parliament. Baroness Hogg will chair a panel of independent experts tasked with identifying a successor to the British Bankers' Association (BBA) as operational LIBOR administrator.

The FSA issued a 'Dear CEO' letter to life insurers and networks/IFA firms expressing concern that some firms may be looking for ways to circumvent existing inducements rules and the prospective Retail Distribution Review (RDR) adviser charging rules through soliciting or providing payments that may have the same effect as traditional commission. The FSA is concerned that such activity may not be in the best interests of the client and may give some distributors an unfair competitive advantage over others.

Steven Maijoor, Chair of the European Securities and Markets Authority (ESMA), spoke at the BBA Annual Conference. He focused on: investor protection and how inducements and incentive schemes for sales staff may not lead to outcomes that are in the client's best interests; the development of the single rule book for securities markets; ESMA's work on interest rate benchmarks; and supervision of Credit Rating Agencies (CRAs).

The Office of Fair Trading (OFT) consulted on the use of its new power to suspend consumer credit licences with immediate effect or from a date specified in the notice, if necessary for the protection of consumers. The new power is provided by way of an amendment to the Financial Services Bill.

The FSA consulted on guidance concerning Self- Invested Personal Pensions (SIPP) operators following a thematic review which found that SIPP operators have the potential to lead to significant consumer detriment through failing to control their businesses adequately. The FSA expects SIPP operators to demonstrate, in particular: the effectiveness of senior management oversight and their understanding of regulatory requirements; and the application of the FSA's Client Money and Assets rules (CASS) to the firm's business model and, where applicable, the effectiveness of systems and controls to comply with the rules.

The FSA fined Bank of Scotland (BOS) £4.2 million for failures in its mortgage records system. BOS had relied upon inaccurate mortgage records for 250,000 of its customers for considerable periods of time between 2004 and 2011.

The FSA fined and banned an individual at Topps Rogers Financial Management for mis-selling Unregulated Collective Investment Schemes (UCIS).

Crisis management (including special resolution, systemically important firms, and business continuity)

The High-level Expert Group (HLEG) published its recommendations for reforming the structure of the EU banking sector (the Liikanen report). Proprietary trading and market-making activities should be assigned to a separate legal entity from the deposit-taking side of the business (if such activities amount to a significant share of a bank's business). Resolution authorities should have the power to request further separation as part of their assessment of a firm's resolvability. Banks should build up a suitable amount of bail-in debt (or an equivalent amount of equity) which should be held outside the banking system. The EC launched a consultation on the recommendations.

HMT published the draft Banking Reform Bill, enabling it to take forward the Independent Commission on Banking's recommendations on structural and non structural reforms to the banking sector. The draft Bill gives the PRA and the FCA a new objective to protect the uninterrupted provision of vital banking services. It introduces the concepts of "core activities" and "excluded activities" and puts provisions in place to ensure deposits eligible for protection under the Financial Services Compensation Scheme (FSCS) are "preferential debts".

The European Commission published a consultation paper on a possible recovery and resolution framework for non-bank financial institutions. The paper investigated how and under what circumstances the failure of non-banks could threaten financial stability and the suitability of applying a resolution regime to non-banks. Containing over 50 open questions, it is a "working document" and does not set out concrete proposals for any sector. However, the paper focused on insurers and central counterparties (CCPs). The circumstances under which insurers could cause systemic risk were discussed - significant non-traditional or non-insurance activity and a dominant market position in compulsory or trade credit insurance were identified as relevant. Possible policy measures include: run off; portfolio transfer; bridge institution; restructuring liabilities; and compulsory winding up. Possible resolution tools for CCPs include: hair-cuts to initial and variation margin; bridge institution; and liquidity calls.

Her Majesty's Treasury (HMT) issued responses to its consultation on broadening the UK's Special Resolution Regime. HMT outlined its intention to pursue a full resolution regime for CCPs, deposit-taking institutions and investment firms and parent undertakings of investment firms. The case for a full resolution regime for non-CCP financial market infrastructure and insurers was considered to be less clear-cut, requiring additional consideration.

BCBS published a framework for identifying domestic systemically important banks (D-SIBs), and applying higher loss absorbency (HLA) requirements to them. National authorities should take into consideration: size; interconnectedness; substitutability; and complexity when deciding a bank's D-SIB status. HLA requirements are expected to be set on the basis of an individual bank's systemic importance relative to other banks operating in that country. Host supervisory authorities will be able to set HLA at both the subsidiary and branch level (subject to their legal and regulatory framework). In the case where a D-SIB has also been identified as a global systemically important bank (G-SIB), authorities will be required to impose the higher of the two HLA requirements.

The International Association of Insurance Supervisors (IAIS) launched a consultation on policy measures to address global systemically important insurers (G-SIIs) including enhanced supervision, HLA requirements and recovery and resolution regimes.

Paul Tucker, Deputy Governor for Financial Stability at the Bank of England talked about the importance of deposit insurance in international efforts to build a stronger, more resilient financial system. Deposit insurance was discussed as vital for boosting market confidence and for supporting the smooth implementation of recovery and resolution requirements, e.g. the bridge institution tool. For deposit insurance to be effective it is important for the general public to understand it and feel able to rely on rapid payout in the event of a bank's failure.

Regulatory perimeter

The Financial Stability Board (FSB) published its fourth six-monthly progress report on the implementation of over-the-counter (OTC) derivatives market reforms, pointing to regulatory uncertainty as the most significant impediment to further progress. To this end, the FSB reiterated its end-2012 deadline for jurisdictions to identify inconsistencies, conflicts and gaps in national, as well as cross-border, regulation.

The International Organization of Securities Commissions (IOSCO) published its final 15 Policy Recommendations for Money Market Funds (MMFs). In contrast to the 2010 reforms, these recommendations focused on risks on the liability side of MMFs, such as run risk, as well as valuation, recommending that regulators require a conversion to variable net asset value (NAV) or safeguard against the risks of using a constant NAV. IOSCO did acknowledge that the recommendations may be applied with varied rigour in different jurisdictions and their implementation may have to be phased in.

IOSCO published the outcomes of a survey on the implementation of its 2011 Commodity Derivatives Markets Principles. While most respondents indicated that they were broadly compliant, shortcomings were noted in the following areas: supply and stock information collection; reporting on large positions in on-exchange commodity derivative contracts; detection of market manipulation across markets; and the publication of aggregate positions of different classes by large traders. IOSCO will target these shortcomings in any future work.

Ahead of the 1 November implementation deadline for the EU Short Selling Regulation, ESMA issued a number of documents, including net short position notification thresholds for sovereign issuers, a list of exempted shares, an updated Q&A and links to national websites where the net short positions in shares are disclosed.

The European Commission recognised the legal and supervisory framework for CRAs in the United States, Canada and Australia as equivalent to the EU, allowing for ratings issued by CRAs in these jurisdictions to be used for regulatory purposes in the EU. It also adopted rules enabling ESMA to fine CRAs.

Rethinking the domestic and international architecture for regulation

The FSA and the Bank of England jointly published two documents outlining the future PRA's intended approach towards banking and insurance supervision respectively. For the most part, the documents consolidated previously published material and re-emphasised some of the core PRA messages. Of note, risk appetite is expected to be integral to firms' strategies and risk management, and insurers, as well as banks, will need to provide all the information needed by the PRA to perform a resolvability assessment. The FSA also published a document outlining the FCA's intended approach. The document addressed, in particular, the FCA's use of its product banning power and how it will interpret its competition mandate.

The European Supervisory Authorities (ESAs), namely EBA, ESMA and EIOPA, published their 2013 working programmes. Similarly to 2012, the ESAs have committed to an ambitious work plan. A large number of technical standards are scheduled for completion in 2013, with the EBA focusing on developing the new CRD4/CRR framework, EIOPA maintaining focus on Solvency II and ESMA prioritising work on market infrastructure and asset management-related initiatives. The ESAs will also increase their focus on supervision and supervisory convergence, beginning to move away from their current policy-making role on a number of regulatory initiatives. The EBA and EIOPA will conduct EU-wide stress tests for banks and insurance firms, respectively.

Mario Draghi, chair of the European Systemic Risk Board (ESRB), made a statement before the European Parliament. He pointed to a number of upcoming ESRB initiatives, including identifying sources of systemic risks associated with complex funding instruments, e.g. synthetic ETFs, and ways to mitigate them. In light of the new Single Supervisory Mechanism (SSM) proposals, the ESRB will also develop a framework for the coordination of macro-prudential policies in the EU. The ESRB mission and organisation is also to be revised next year.

HMT consulted on draft secondary legislation that will underpin the Financial Services Bill, in particular relating to provisions covering: the allocation of regulatory responsibility between the PRA and the FCA; threshold conditions for dual-regulated firms; transferring regulation of mutual societies to the PRA and the FCA; criteria for designating super-complainants to the FCA; the allocation of responsibility for rule-making with regard to the FSCS between the FCA and the PRA; and the regulators' power of direction and information gathering rules over parent undertakings of authorised persons.

The FSA, in consultation with the Bank of England, consulted on proposed changes to existing regulatory rules and guidance related to approved persons in order to align the new PRA and FCA rulebooks with their objectives and functions.

The FSA announced that its Authorisations department is implementing an internal twin-peaks structure designed to mirror the future authorisation procedures in the PRA and FCA.

Disclosure, valuation and accounting

The EBA published its follow-up to a review of banks' transparency in their 2010 Pillar 3 reports. While the EBA generally commended the industry on its disclosure efforts, a number of areas for further improvement were identified, including the provision of CRD specific data as well as disclosure harmonisation.

The FSB's Enhanced Disclosure Task Force (EDTF) published a report identifying seven principles for enhancing the risk disclosure of banks. A need for more transparency was identified in a number of areas, including: banks' business models; liquidity positions; RWA calculations; and the relationship between market and other risk measures and the bank's balance sheet. The EDTF intends for the majority of its recommendations to be adopted in 2012-2013.

Information security and data privacy

The Article 29 Data Protection Working Party, an EU advisory body, said that cookie identifiers and IP addresses that can be used to single out and treat individuals differently should be classed as 'personal data'; it called for broad changes to the types of information the term 'personal data' should apply to within the European Commission's proposed General Data Protection Regulation.

The Federal Bureau of Investigation (FBI) found that a gap within Citibank's electronic transaction systems had permitted fourteen individuals to steal more than $1 million (£628,000). The security flaw appears to have enabled the alleged conspirators to collectively withdraw "several times the amount of money" they had deposited into Citibank accounts by making multiple withdrawals from advance cash kiosks located within casinos across the US, all within one minute.

Financial crime

The FSA charged four men with conspiracy to commit insider dealing between 2006 and 2010. The charges arise out of Operation Tabernula, the FSA's largest and most complex insider dealing investigation to date. A number of individuals remain under investigation.

The FSA banned and imposed a fine of £100,000 on the Managing Director at Welcome Financial Services, a subsidiary of Cattles Plc, for engaging in market abuse. The individual was found to have provided misleading statements about the quality of the subprime lender's loan book.

The Serious Fraud Office (SFO) reviewed its policies on facilitation payments, business expenditure (e.g hospitality) and corporate self-reporting in order to restate its primary role as an investigator and prosecutor of serious crime and ensure consistency with other prosecuting bodies. The review was undertaken following the appointment of David Green as Director of the SFO and takes forward recommendations made by the OECD Working Group on Bribery.

The Financial Action Task Force (FATF) agreed a set of actions at its October plenary meeting, including a decision to suspend Turkey's membership in mid-February if it does not enact adequate counter terrorism financing legislation.

Other items

The BBA appointed Sir Nigel Wicks as its new Chair.

A new international insurance trade body, the Global Federation of Insurance Associations (GFIA), was formed. Comprising 31 national or regional insurance associations, its mandate is to respond to key areas of concern to the global insurance industry.

The FSA consulted on changes to the policy for fees and levies for the FSA, the Financial Ombudsman Service, the Money Advice Service and the FSCS for 2013-14. In particular, the FSA proposed to introduce separate PRA fee-blocks as well as a FCA prudential fee-block to enable it to recover costs related to prudential regulation of 'solo-regulated' firms. It also proposed to revise the fees discount for European Economic Area firms that passport into the UK through undertaking branch activities to reflect the fact that the home state is primarily responsible for prudential regulation and the host state is primarily responsible for conduct regulation.

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.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
Similar Articles
Relevancy Powered by MondaqAI
 
In association with
Related Topics
 
Similar Articles
Relevancy Powered by MondaqAI
Related Articles
 
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions