UK: Weekly Financial Services Regulatory Update - Week to 6 April 2013


This weekly update from Clyde & Co's Financial Services Regulatory Team summarises new developments as reported by the FSA, the Financial Conduct Authority (FCA), the Prudential Regulatory Authority (PRA), the UKLA, the Upper Tribunal, the Financial Ombudsman Service and the London Stock Exchange over the past two weeks, with links to the full documents where these are available. As this update covers the legal cutover period for the FSA to the PRA and the FCA, references are made to all three of these bodies.

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:

25 March: FSCS Funding model review - feedback on CP13/1. On 25 March the FSA published a policy statement that summarises the feedback to CP13/1: FSCS Funding Model Review - feedback on CP12/16 and further consultation, which re-consulted on the funding arrangements for the FCA retail pool. The statement confirms that the FSA will proceed as outlined in CP13/1, and sets out the final rules, which contain a few drafting amendments. The rules on the FCA retail pool apply to firms that are FCA-regulated and are therefore set out in the FCA Handbook only.

Discussion papers:

No new developments this week.

Policy statements:

1 April: PRA power of direction over qualifying parent undertakings. The PRA has published a policy statement on its use of the power to direct a qualifying parent undertaking, which includes:

  • A non-exhaustive list of possible scenarios in which the PRA may consider exercising the power of direction
  • A non-exhaustive list of possible directions which the PRA may consider taking

1 April: PRA's approach to enforcement: The PRA has published a policy statement on its approach to enforcement. It includes:

  • Procedures regarding decisions that create an obligation to give a statutory notice
  • Policy on the imposition and amount of penalties.
  • Policy on the imposition and period of suspensions and restrictions
  • Policy on the settlement of cases involving enforcement action
  • Policy on the publication of disciplinary and other enforcement actions
  • Policy regarding the conduct of certain interviews at the request of overseas regulators

28 March: Policy development update (issue 157). On 28 March, the FSA published issue 157 of its Policy development update, setting out all of the publications issued since the last edition. The policy update also includes an updated timetable for forthcoming publications.

27 March: Methodology note on calculating capital pressures. On 27 March, the FSA published a statement on the methodology it used to carry out analysis to calculate capital pressures in UK banks and building societies. The following methodologies were used:

  • Proper valuation of assets: valuation assessments were carried out across a number of the largest and riskiest loan portfolios on firms' balance sheets
  • Realistic assessment of future conduct costs: the FSA examined the potential future costs that firms might incur over a three year period as a result of fines related to the settling of LIBOR and redress payments linked to the misselling of PPI and interest rate swaps
  • Prudent calculation of risk weights: risk weights applied to corporate and institutional loans, and UK mortgages were examined, as these represent the majority (approximately 70%) of assets for which firms use models to determine risk weights in the banking book

Applying the judgements made under the three areas above to firms' current capital positions would reduce aggregate capital levels by around £50bn. Some firms, even after the adjustments described above, have capital ratios in excess of the Financial Policy Committee's recommended 7% of risk-weighted assets using Basel III definitions; for those that do not, the aggregate capital shortfall at the end of 2012 was approximately £25bn.

25 March: FSA finalises proposals for the regulation and supervision of benchmarks. Following a consultation (CP 12/36), on 25 March 2013 the FSA finalised proposals for the regulation and supervision of specified benchmarks, such as LIBOR, implementing a key recommendation of the Wheatley Review. The key proposals include:

  • Benchmark administrators will be required to corroborate submissions and monitor for any suspicious activity
  • Those submitting data to benchmarks will be required to have in place a clear conflicts of interest policy and appropriate systems and controls
  • Two new significant controlled functions have been created under the FSA's Approved Persons Regime for the administrator and submitting firms

The new rules came into force on 2 April 2013, immediately after the cutover to the UK's new regulatory structure. LIBOR is the first benchmark to be brought under the new regimes and there will be a thematic review of the LIBOR-submitting firms' compliance with these regulations within the first year of them coming into force.

Press Release: communication/pr/2013/029.shtml

Policy Statement: ps13-06.pdf

25 March: The new FCA Handbook. On 25 March, the FSA published a policy statement setting out the new FCA Handbook, which is now in force following legal cutover. As far as possible, existing FSA rules and other provisions have been transitioned to the FCA Handbook, with changes only made where necessary to implement the 2012 Act and support the creation of the new regulatory structure. In addition to this, the FSA has conducted a review of 250 pieces of non-Handbook guidance and decided not to re-publish around 45% of it on the FCA website.

25 March: FSA confirms approach to using temporary product intervention rules that will be used by the FCA. On 25 March, the FSA confirmed its approach to temporary product intervention. This sets out the process for the FCA when it makes emergency rules to protect consumers. Temporary product intervention rules are rules made before consultation, where the FCA indentifies a significant risk to consumers which requires prompt action. Rules made before consultation will last for no longer than 12 months and cannot be renewed. During this time, the FCA will either consult on a permanent remedy or will work to resolve the problem another way. The Financial Services Act 2012 introduced this rule-making power as part of the FCA's regulatory toolkit.

Press Release: communication/pr/2013/028.shtml

Policy Statement: ps13-03.pdf

Press releases:

28 March: Financial Conduct Authority Board members confirmed. On 28 February, HM Treasury named the members of the Financial Conduct Authority (FCA) Board comprising 12 members, including FCA chairman John Griffith-Jones. The Board also includes four executive members: Martin Wheatley, chief executive of the FCA; Tracey McDermott, FCA director of enforcement and financial crime; Clive Adamson, FCA director of supervision; and Lesley Titcomb, FCA chief operating officer. shtml

25 March: FCA business plan and risk outlook published. On 25 March, the FSA published the business plan and risk outlook for the FCA for 2013/14. The risk outlook sets out the challenging economic backdrop as well as outlining how the FCA will assess market conditions and identify future risks. The business plan sets out how risks will be managed and how the FCA will use its resources to effectively meet its objectives. Key areas of focus for the coming year include:

  • A renewed focus on consumers, which will include helping to ensure that firms' strategies are aligned with producing appropriate outcomes for consumers
  • Continuing to tackle market abuse, by taking strong enforcement action to deter future misconduct
  • Ensuring a competitive financial services industry. This will involve building a new Competition Department to embed competition analysis across the organisation
  • Continuing to address ongoing misconduct, such as LIBOR, Payment Protection Insurance and interest rate swaps
  • Carrying forward major policy initiatives such as the Mortgage Market Review, the changes to retail investment advice and extensive engagement with Europe on important Directives under consideration

The main risks indentified for the coming year are:

  • Firms not designing products and services that respond to real consumer needs
  • Distribution channels not promoting transparency for consumers on financial products and services.
  • Over-reliance on, and inadequate oversight of, payment and product technologies
  • Shift towards more innovative, complex or risky funding strategies or structures that lack oversight, posing risks to market integrity and consumer protection
  • Poor understanding of risk and return, combined with the search for yield or income which can lead to consumers taking on more risk than is appropriate

Press release: communication/pr/2013/027.shtml

Business plan: bp2013-14.pdf

Financial Risk Outlook: other/fcarco.pdf


No new developments this week.

Bulletins and newsletters:

No new developments this week.

Final notices:

27 March: FSA fines Prudential £30 million and censures CEO for failing to inform regulator of 2010 acquisition plans. On 27 March, the FSA fined companies in the Prudential Group (Prudential) a total of £30 million for breaching FSA Principles and UKLA Listing Principles. The fines relate to the Prudential's failure to inform the FSA at the appropriate time that it was seeking to acquire AIA, the Asian subsidiary of AIG, in early 2010. The proposed transaction involved a planned rights issue of £14.5bn, which would have been the biggest ever in the UK, and had the potential to impact upon the stability and confidence of the financial system. The FSA found that Prudential wrongly allowed its judgement to be overly influenced by its concern about the risk of leaks, which meant that it failed to give due weight to the importance of complying with its regulatory obligations. The FSA has also censured Mr Tidjane Thiam, Prudential's Group Chief Executive, as he played a significant role in the decision not to contact the FSA and was therefore knowingly concerned in this breach. The FSA noted that Prudential did consider their obligations in forming their assessment in respect of informing the regulator. Therefore, although the FSA considered that the circumstances of these breaches were serious, the FSA did not consider that their actions were reckless or intentional.

Press Release: communication/pr/2013/031.shtml

Final Notice: Mr Thiam:

Final Notice: Prudential plc: pubs/final/pru-plc.pdf

Final Notice: The Prudential Assurance Company Limited:

27 March: Final Notice: Care Asset Management Limited. On 27 March, the FSA published a Final Notice fining Care Asset Management Limited (Care) £56,000 pursuant to section 206 of FSMA and in respect of breaches of Principle 9 (Customers: relationships of trust) and certain rules set out in COBS. The fine is for failings by Care in relation to its sale of products provided by Keydata. Amongst other things, the FSA found that Care failed to take reasonable care to provide suitable advice in relation to sales of Keydata Products having incorrectly rated the risks of Keydata products. Care also failed to communicate clearly to customers and failed to have adequate systems in place to ensure it understood the risks its customers were willing to take. The FSA regarded these failings as particularly serious because it identified systemic weaknesses in other products. Care agreed to settle at an early stage of the FSA's investigation and therefore qualified for a 30% discount under the FSA's executive settlement procedures. Were it not for this discount, the FSA would have imposed a fine of £80,000.

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, FCA and PRA publications:

1 April: FCA banking application guidelines. The FCA has published guidelines setting out its approach to assessing banking applications, which apply to new applicants seeking to gain Part IV Permission to carry on banking business in the UK, and to existing FCA-authorised firms seeking a Part V Variation of Permission to do the same. The guidelines focus on the FCA, but refer to the PRA where there is a joint approach and direct prospective applicants to the PRA where a particular aspect of the assessment is predominantly a prudential one.

1 April: PRA updates approach documents on banking and insurance supervision. The PRA has issued two documents detailing its approach to banking and insurance supervision, which set out how it will carry out its role in respect of deposit-takers, designated investment firms and insurance companies. Areas addressed in these approach documents include:

  • The PRA's risk framework, including the five "potential impact" categories into which all PRA-authorised firms will be divided
  • The PRA's expectations of how firms should mitigate their risks
  • The PRA's proactive intervention framework

PRA's banking approach:

PRA's insurance approach: praapproach/insuranceappr1304.pdf

26 March: FSA and Bank of England relax the barriers to entry for new bank entrants. On 26 March, the FSA and the Bank of England published the results of their review (the Review) into the barriers to new entrants to the banking sector. The Review sets out significant changes to the regulatory requirements and authorisation processes which, taken together, will reduce some of the regulatory hurdles and, as a result, enable an increased competitive challenge to existing banks.

The main features of the changes to the prudential regime are:

  • No longer applying the additional requirements (known as "add-ons and scalars") which have previously been applied to reflect the uncertainties inherent in start-ups, and often resulted in capital requirements being higher for start-ups than for existing banks
  • Implementing the Basel III regime by applying only the 4.5% minimum Core Tier 1 capital requirement at start-up, compared to the 7% to 9.5% requirement which will apply to major existing banks
  • Reduced liquidity requirements for all new banks and no automatic new bank liquidity requirement

The main features of changes to the authorisation process are:

  • Improvements to the existing authorisation process, so that where an applicant firm is able to deliver a complete application form with all supporting materials, the PRA and FCA will work together to complete their assessment within six months. To support firms to provide a complete application, the PRA and FCA will introduce a significant level of up-front support to the firm during the pre-application stage
  • An alternative authorisation process for firms unable to meet the 6-month timetable, with a 3-stage route to authorisation. This will provide the same pre-application support, but require a shorter application that focuses on essential elements, which will be determined in six months. Granting authorisation on those essential elements will enable the firm to mobilise the remaining requirements such as capital
  • Streamlining the information requirements, which means the PRA and FCA expect to be able to significantly reduce the time taken for authorisation shtml

26 March: Handbook Notice 128. On 26 March, the FSA published its Handbook Notice 128, which includes all of the changes to the Handbook which were necessary for legal cutover. The notice also includes changes outside the Handbook. shtml

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):

No new developments this week.

London Stock Exchange (LSE):

No new developments this week.

Legislative updates:

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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