Financial Regulatory Developments (FReD) - 8 November 2013

UK Government and Parliament

Parliament

Parliament announces next Banking Reform Bill stages: Parliament has announced two dates on which the Report stage in the House of Lords will consider the Financial Services (Banking Reform) Bill (Banking Reform Bill). These are 18 and 26 November. (Source: Parliament Announces Next Banking Reform Bill Stages)

UK Government

Government responds to Select Committee on Kay Review: The Government has responded to the report on the inquiry of the Business, Innovation and Skills Commons Select Committee into the Kay Review of UK Equity Markets and Long-term Decision Making. Although a progress report is due in summer 2014, Annex A of the Government's response contains a summary of the key areas of action, progress to date and next steps, including:

• Development of industry good practice to improve transparency in the investment chain: the response highlights the Investment Management Association's (IMA) Statement of Recommended Practice for disclosure of fund performance and charges. Similar initiatives in other industries should ensure transparency to investors irrespective of investment vehicle. The Government is also prepared to consider regulation if insufficient progress is made.
• Aligning regulation with the Kay review: among other regulators, FCA will consider whether existing regulatory requirements hinder the adoption of the Good Practice Statements in the Kay Review, or the application of minimum standards of behaviour on all investment intermediaries. FCA should feed the objectives of the Kay Review into its current reviews of asset managers' charges and conflicts of interest.
• Metrics and models for long-term investment: research is ongoing to enable the identification of where regulation may be favouring the use of short-term metrics and models.

(Source: Government Response to the Committee's Third Report of Session 2013-14)

Department for Business, Innovation and Skills (DBIS)

DBIS announces company ownership transparency: DBIS has announced its plans to implement a central register of company beneficial ownership which will be publicly accessible. The register will give details of persons with an interest in over 25% of a company's shares or voting rights, or who otherwise control the company. The proposals form part of the Government's overall "transparency and trust" initiative. The Government plans to feed back on its proposals in early 2014. (Source: DBIS Announces Company Ownership Transparency)

HM Treasury (Treasury)

Treasury updates on AML: Treasury has published an updated advisory notice on jurisdictions with inadequate anti-money laundering (AML) controls, following the latest Financial Action Task Force plenary meeting. The advisory notice also highlights those jurisdictions subject also to sanctions. (Source: Treasury Updates on AML)

Treasury updates sanctions: Treasury has updated the sanctions lists in respect of Al-Qaida. (Source: Treasury Updates Sanctions)

Bank of England (BoE)

BoE speaks on payments: Chris Salmon, Executive Director for Banking Services and Chief Cashier at the BoE, has spoken on the UK payments system. He highlighted the following future priorities:

• Cyber risk: following the Financial Policy Committee's recommendation in June, BoE has set each payment scheme a specific priority regarding cyber risk.
• Operating hours of the real time gross settlement system (RTGS): BoE will consider extending the operating hours for the RTGS infrastructure in the UK, to support the move of retail payment systems to a cash pre-funded model.
• New Payments System Regulator: Chris Salmon welcomed BoE's veto power over anything the Payment Systems Regulator may do that would impact financial stability. Nonetheless, he expects that stability and competition and innovation objectives will normally be aligned.

(Source: The UK Payments Landscape)

Central banks' currency swap arrangements to remain in place: BoE and the central banks for Canada, Japan, the Eurozone, the US and Switzerland have announced that the current temporary bilateral liquidity swap arrangements are being converted to standing arrangements. (Source: Central Banks Announce Standing Swap Arrangements)

Financial Reporting Council (FRC)

FRC issues guidance on financial reporting: FRC has issued guidance to banks' directors on financial reporting of solvency and liquidity risks, and the definition of going concern, in the context of post-crisis reforms and central bank and government support. (Source: Guidance for Directors of Banks)

Office of Fair Trading (OFT)

OFT writes to banks on post-contract information: OFT has written to banks asking them to confirm they provide fully compliant post-contract information to their customers, or, if they cannot give the confirmation, to explain what they are doing to achieve compliance. It wants responses by 18 November. (Source: OFT Writes to Banks on Post-Contract Information)

UK Financial Services and Markets Regulators

Financial Conduct Authority (FCA)

FCA publishes asset management financial crime review: FCA has published its thematic review on AML and anti-bribery and corruption (ABC) systems and controls in 22 firms in the asset management and platform sector. The report notes the specific AML and ABC risks in the sector, including:

• non face-to-face business;
• customers from, or with links to, high-risk jurisdictions;
• wealthy or powerful clients;
• use of offshore structures;
• large or unexpected transactions; and
• unexplained payments to third parties.

FCA was disappointed with the results of the review. It found some good practices but said it expected the industry to have done more to put in place suitable systems and controls. It was particularly concerned about inadequacies in firms that were part of larger financial groups, some of which had previously attracted regulatory attention. Among the key concerns were:

• inability to show effective senior management oversight and challenge;
• firms tended to deal with AML and ABC risks as a compliance matter rather than as proactive risk management;
• some firms lacked proper controls to record the risks posed by new customers, which meant that enhanced due diligence (EDD) did not always take place when it should;
• firms often could not measure and did not monitor risks they identified;
• a tendency to regard a long-standing relationship as a substitute for keeping due diligence up to date;
• failure properly to check source of funds;
• failure to show adequate systems and controls for assessing bribery and corruption risks in third party relationships; and
• lack of properly tailored training programmes.

FCA expects all firms to consider these findings and take action to improve their AML and ABC systems and controls where necessary. It will follow up with some firms. (Source: FCA Publishes Asset Management Financial Crime Review)

FCA announces cash savings market study: FCA is conducting a study into cash savings. It wants to look at competition in the market, and obstacles to customers wishing to switch accounts. It will look at consumer behaviour and supplier conduct in relation to cash savings and related products, regardless of whether they are FCA-regulated. FCA plans to publish its preliminary findings in spring 2014 and its final report in autumn 2014. It has published its terms of reference for the study and information, explaining how it carries out market studies, and asks for views by 6 December. (Source: FCA Announces Cash Savings Market Study)

FCA consults on fees: FCA is consulting on regulatory fees and levies for 2014/15. The paper covers FCA's proposals for various fee-paying categories and includes proposals for:

• consumer credit application fees, fees for dealing with validation orders and periodic fees. The proposals also explain the basis on which it will calculate fees and give indicative periodic fee rates. Broadly, there will be separate classes for limited permission firms and full permission firms. For application fees, FCA makes clear that firms that are already authorised will merely pay a fee for varying permission;
• a change in the way FCA groups firms, which will enable it better to recover costs from firms that hold client money or assets. FCA had proposed a similar model in 2010 but decided not to proceed with it until it had in place data collection arrangements;
• introducing a common fee rate for all investment intermediaries, which will correct an anomaly that could mean some smaller firms that do not hold client money or assets could end up paying more in fees than they would if their permission included client money and asset holding;
• simplifying how FCA defines "income" as it uses the term for its calculations;
• setting an annual fee for approved reporting mechanisms;
• allowing electronic payment of application fees;
• how FCA calculates the first year's fees for newly authorised firms; and
• a new method for allocating the costs of the Money Advice Service.

It asks for comments by 6 January 2014. (Source: FCA Consults on Fees)

FCA updates AIFM passporting and reporting pages: FCA has updated its website with new questions and answers for alternative investment fund managers (AIFMs) wishing to passport elsewhere in the EU. It has also updated its information pages to explain to firms how they can report under AIFMD, following ESMA's recent advice. (Source: FCA Updates AIFMD Passporting Pages and FCA Gives AIFMD Reporting Guidance)

FCA publishes skilled persons figures: FCA has published details of the number of skilled persons reports it commissioned in the second quarter of 2013. It commissioned 12, of which half related to banks, and three quarters related to systems and controls or conduct of business. (Source: FCA Publishes Skilled Persons Figures)

Up next from FCA: Before the end of 2013, FCA plans policy statements on its consultations on CRD 4 for investment firms, data reporting and the Mortgage Market Review (MMR) and coverage of the Financial Services Compensation Scheme (FSCS). Further papers are planned for early 2014, including feedback on FCA's consultation on crowdfunding and its detailed proposals for the consumer credit regime, but further papers on Solvency 2 are not due until later in the year. (Source: Up Next from FCA)

FCA publishes asset manager outsourcing review: FCA has published the findings of its thematic review on outsourcing in the asset management sector. The review focused on how asset managers dealt with the risk of the service provider failing (resilience risk) and how the managers monitored the performance of providers (oversight risk). FCA had been particularly concerned about these risks. Following its "Dear CEO" letter on resilience risk, it is pleased with the progress and changes the industry has made. It was also pleased at the level of engagement of managers in supervising their providers, although it sometimes found they lacked the internal expertise properly to monitor. It now wants asset managers to review their own outsourcing arrangements and where appropriate:

• enhance their contingency plans for the failure of a service provider providing critical activities; and
• assess the effectiveness of their oversight arrangements to oversee outsourced "critical activities" to ensure they have the required expertise to supervise the providers.

(Source: Thematic Review on Asset Management and Outsourcing)

FCA decides to ban director and firm: FCA has published its decision notices to fine John Rosier £10,000, ban him from significant influence functions and remove his status as approved person of Bayliss & Co (Financial Services) Limited. It found Mr Rosier had, among other things:

• failed to record enough information about customers and to show that recommendations were suitable;
• failed to ensure the firm treated customers fairly when they complained;
• not told FCA the firm could not complete its review of geared traded endowment policies;
• failed to ensure it promoted unregulated collective investment schemes compliantly; and
• failed to ensure the firm took account of regulatory developments.

(Source: FCA Decides to Ban Director)

FCA speaks on MMR: Linda Woodall spoke on building a "common language" in the context of the MMR. She explained that by this she meant FCA's stated supervisory stance of making better judgements and being forward-looking and outcomes-focused. She discussed what FCA means by each of these terms. She went on to discuss conduct risk and FCA's supervisory attitude and priorities for that. (Source: FCA Speaks on MMR)

Prudential Regulation Authority (PRA)

PRA consults on fees: PRA is consulting on its fees and levies policy for 2014/15. The paper looks at:

• the PRA minimum fee, which it proposes to raise in line with its annual funding requirement;
• the fees PRA will set for insurers subject to Solvency 2;
• application fees, which PRA needs to raise so they reflect the cost of processing applications;
• special project fees for restructuring;
• apportionment of periodic fees to firms authorised in the course of the year; and
• the timetable for levying and invoicing firms.

It asks for comments by 30 December. PRA has also issued a policy statement on the factors that it may consider when deciding whether to introduce a new special project fee, which so far only exist in respect of a firm's restructuring and Solvency 2-related work. (Source: PRA Consults on Fees and Policy Statement on Special Project Fees)

Other Regulators/Authorities/Industry Associations

Bank for International Settlements/Basel Committee on Banking Supervision (Basel Committee)

Basel Committee consults on trading book review: The Basel Committee has published its second consultation on reviewing the framework for market risk in banks' trading books. It is still considering introducing the standardised approach as a floor to the models-based approach, but has already decided that banks should be mandated to disclose risk weights according to the standardised approach and on a desk-by-desk basis. Other key changes covered in the paper include:

• Revised internal models-based approach: supervisors will approve the use of internal models on a desk-by-desk basis. The approval process will include an assessment of how well a desk captures risk factors and backtesting for reconciling forecasted losses with actual losses. The Basel Committee also suggests a non-internal assessment of individual desks' trading in illiquid or complex products, as well as a more robust process for assessing whether data quality is enough for modelling certain risks. The document also provides more specific methodology and guidance to reduce the variability in the risk weights that banks apply to similar assets.
• Revised standardised approach: the Basel Committee has opted for a more risk-sensitive approach, risk weights having been calibrated according to observed market price fluctuations in periods of stress. Hedging and diversification will get more recognition, although also subject to correlation parameters.
• Boundary between the trading book and the banking book: the Basel Committee proposes to introduce a list of instrument types which it will be presumed must be included in the trading book. It is also consulting on documentation that banks would need to report to supervisors for all trading book positions. To reduce incentives to arbitrage, measures will reduce the benefit derived from switching risk between books. For example, and especially for securitisations, capital charges against default risk in the trading book will be aligned to those in the banking book. Additionally, capital for securitisations will have to be calculated using the revised standardised approach.
• Risk measurement: the Basel Committee has decided to push forward with the replacement of VaR with an Expected Shortfall (ES) measure, which measures the likelihood of losses above a confidence level set at 97.5%.

(Source: Trading Book Review)

British Bankers' Association (BBA)

BBA opposes early introduction of countercyclical buffer: BBA has responded to a letter in which HM Treasury suggested the early implementation of the countercyclical buffer. It argues that the UK should not deviate from the internationally agreed phase-in periods in the Basel 3 standards, and that, given the state of the UK economy, it is not likely that the Financial Policy Committee would consider deploying the buffer before 2016, which is the implementation date envisaged in Basel 3. BBA also notes that EBA has not yet issued final technical standards on geographical allocation of exposures. (Source: Implementation of the Countercyclical Buffer)

Legal Entity Identifier Regulatory Oversight Committee (LEIROC)

LEIROC writes to national business registries: LEIROC has written to national business registries seeking their confirmation that there will be no impediments to entities providing their business registration numbers to local operating units (LOUs) and to LOUs publishing those numbers and making them free to use. (Source: LEIROC Update 3 November)

Contact: Rosali Pretorius or Luca Salerno

International Swaps and Derivatives Association (ISDA)

ISDA responds on assessment of resolution regimes: ISDA has responded to FSB's consultation on a methodology for assessing the implementation of the Key Attributes of Effective Resolution Regimes. It is surprised that the consultation raises again the question of the length of the stay on close-out netting, and reaffirms its position that this stay should not exceed two days. Furthermore, authorities should not have the power to extend the temporary stay. Otherwise, the degree of legal uncertainty would be such that firms would not be able to obtain recognition of close-out netting and collateral arrangements for risk mitigation purposes under regulatory capital requirements. Separately, ISDA has issued a statement confirming that it is considering amending ISDA derivatives documentation to include a standard provision in which counterparties agree to a short-term suspension of early termination rights following the commencement of an insolvency or resolution situation. (Source: Response on Resolution Regimes Assessment and ISDA Statement on Letter from Major Resolution Authorities)

Forthcoming events

FReD Live Consumer Credit: FReD readers should have received their invitations to our breakfast briefing on 3 December.

IMLPO Section 166 Workshop: Sam Coulthard, Felicity Ewing and Emma Radmore will be speaking at this workshop, which Dentons is hosting on 19 November.

A Practical Guide to PRA Regulation for Regulated Firms: Emma Radmore will be speaking at this City & Financial conference on 3 December.

AIFM Directive Implementation conference: Rosali Pretorius will be speaking at this Infoline conference in London in December. Dentons clients and contacts can get a 20% discount by quoting VIP code FKM62678EMSPK when registering. Bookings by 11 October can benefit from a further early registration discount of up to £900.

The 2013 COBS Conference: Dentons will host the 2013 COBS Conference organised by the Compliance Register on 15 November, and members of our London Financial Services and Funds team will present at it.

Recent Publications

Financial Crime 

The Bribery Act – Has It Made A Difference?: We have updated our previous overview of the Bribery Act to take into account the Serious Fraud Office's latest guidance. (updated October 2012)

UK authorities move forward on tougher financial crime prevention: Emma Radmore wrote an article for Financial Regulation International on current consultations on sentencing and deferred prosecution agreements. (August 2013)

Sanctions restrictions do not prevent payment of debts: Richard Caird and Tom Rocher comment on the judgement in DVB Bank SE and others v. Shere Shipping Company Limited and others. (August 2013)

Deferred Prosecution Agreements: Emma Radmore has written an article for Financial Regulation International on the introduction of Deferred Prosecution Agreements in the UK. (June 2013)

Anti-Bribery and Corruption Laws in Key Jurisdictions: Lawyers from Dentons offices in six jurisdictions prepared a table comparing key provisions of anti-corruption laws for Thomson Reuters Compliance Complete. (May 2013)

Preventing Financial Crime: Emma Radmore has written an article for Financial Regulation International on recent developments in financial crime prevention. (April 2013)

The Evolving Financial Sanctions Landscape – UK and US Perspectives: Emma Radmore, Thomas Laryea, Michael Zolandz and Peter Feldman have written an article for Financial Regulation International on financial sanctions under the UK and US regimes. (November 2012)

Dealing with Anti-Corruption Laws – the Bribery Act and FCPA in Context: This article summarises the effects of the Bribery Act and US Foreign Corrupt Practices Act. For further information, please contact Emma Radmore or Dominic Sedghi (London), or Michelle Shapiro (New York). (May 2012)

Investment Services and Markets Reform

Consumer Credit Regulation: Are you ready for the seismic shift?: Please contact Andrew Barber, Emma Radmore or Howard Cohen if you have any questions about what you need to do to prepare for the transfer of consumer credit regulation to FCA.

Are you clear on EMIR: Rosali Pretorius and Emma Radmore have written an article for Compliance Monitor on EMIR's application and recent developments. (October 2013)

Mobile Banking - FCA sets out the risks: Candice Chapman, Andrew Barber and Winston Green comment on FCA's thematic review of mobile banking. (See also FReD 30 August.) (August 2013)

Mobile Network Operator Billing: Andrew Barber and Alex Haffner have written an alert on the effects of the Payment Services Directive on the development of direct-to-phone-bill purchases by mobile network operators. (August 2013)

US Government announces six-month delay in FATCA rules: John Harrington, Jeffrey Koppele, Marc Teitelbaum and Jerome Walker have written an update on the delay in implementing certain elements of FATCA. (July 2013)

Take aim for AIFMD implementation: Emma Radmore and Kam Dhillon have written an article for Compliance Monitor on the final steps towards implementation of the AIFMD. (July 2013)

Taking the Credit - the Transfer of Consumer Credit Regulation: Andrew Barber, Emma Radmore and Juan Jose Manchado have written an article for Compliance Monitor on the transfer of consumer credit regulation to FCA. (April 2013)

Last Lap to Legal Cut-Over: Emma Radmore has written an article for Compliance Monitor on FSA's first two consultations on preparing for the new regulatory regime. (January 2013)

A New Handbook for a New Era?: Emma Radmore has written an article for Thomson Reuters Compliance Complete on FSA's proposals to update the General Provisions Sourcebook for legal cut-over. (October 2012)

Treasury Publishes Banking Reform Bill: Read our summary of the Bill implementing the Vickers reforms into FSMA. (October 2012)

RDR: How Long Can it Last?: Emma Radmore and Andrew Barber have written an article for Compliance Monitor on the future of the Retail Distribution Review. (October 2012)

What's next for LIBOR? Summary of the Wheatley Review Recommendations: We have written a summary of the Wheatley 10-point plan for the reform of the LIBOR process. (September 2012)

Rate Setting and Regulation: In Everyone's Interests?: Rosali Pretorius and Katharine Harle wrote an article for Financial Regulation International on the background to LIBOR setting and potential regulatory action. (August 2012)

Money through your mobile – regulation of m-payments: Andrew Barber and Emma Radmore have written an article for Compliance Monitor on the regulatory aspects of mobile payments. (May 2012)

MiFID 2 – Prescription and Change: Emma Radmore wrote an article for Compliance Monitor on the breadth of the proposals to amend the Markets in Financial Instruments Directive (MiFID 2). (January 2012)

Prudential Regulation

UK Treasury Publishes Banking Structure Reform Plans: This article summarises the June 2012 White Paper on implementation of structural change to UK banking (as covered in FReD 15 June). For more information, please contact Rosali Pretorius, Emma Radmore or Andrew Barber. (June 2012)

EU Living Wills Plans – the Key Proposals: This article is the latest in our suite of articles about Living Wills and Recovery and Resolution Plans looks at the European Commission's proposals. For further information, please contact Rosali Pretorius or Andrew Barber. (June 2012)

Living Wills update: We have produced an update on FSA's current plans for Recovery and Resolution Plans. For further information, please contact Rosali Pretorius or Andrew Barber. (May 2012)

Asset management

The Alternative Investment Fund Managers Directive – Theory Becomes Reality: Rosali Pretorius and Emma Radmore wrote an article on implementation of the AIFMD for the Global Asset Management & Servicing Review 2013/14 published by Euromoney Yearbooks.

Product Regulation

More Protection for Retail Markets – the EU's PRIPs Package: We have written a detailed summary of the PRIPS, IMD2 and UCITS V proposals. (July 2012)

Another Stable Door?: Emma Radmore and Katharine Harle wrote an article for Thomson Reuters Complinet on IOSCO's proposals for complex product distribution. (April 2012)

Enforcement and Litigation

Court of Appeal dismisses interest rate swap appeal: Richard Caird and Kattalin Truman have written a briefing on the Court of Appeal judgment in the appeal by Mr Green and Mr Rowley against the decision that RBS had not missold an interest rate swap. (October 2013)

Appeal dismissed in first interest swap case: Richard Caird and Kattalin Truman have written an article on the Court of Appeal's decision in the first interest rate swap case in the English courts. (August 2013)

It's all in the detail: a cautionary tale for handling complaints: Richard Caird and Felicity Ewing have written an article on the FCA's fine on Policy Administration Services.

Having Your Cake and Eating It: FOS Award is no Bar to Issuing Proceedings: Katharine Harle has written an article for Compliance Monitor on the High Court award in Clark and another v. In Focus Asset Management & Tax Solutions Ltd. (January 2013)

The Not So Remote Risks of Recommendations: Richard Caird, Sam Coulthard and Kattalin Truman have written an article on the case of Rubenstein v. HSBC Bank plc. (September 2012)

The Long Arm of FSA: Overseas Firms and Senior Management Beware: Emma Radmore and Katharine Harle have written an article for Compliance Monitor on the lessons from recent FSA enforcement cases involving overseas firms and their approved persons. (August 2012)

More Confusion on Client Money: Rosali Pretorius and Josie Day have written an article on the Supreme Court decision in the Lehman client money case. (March 2012)

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.