UK: Weekly Financial Services Regulatory Update - Week To 17 October 2014

17 October 2014: PRA speech considers Solvency II models, bonus caps and governance for banks and insurers. The Bank of England (BoE) published a speech given by Andrew Bailey, Deputy Governor for Prudential Regulation and CEO of the Prudential Regulation Authority, at the City Banquet.

Issues considered by Mr Bailey in the speech included the following:

  • Solvency II models. Mr Bailey noted that, as a consequence of the implementation of the Solvency II Directive (2009/138/EC), insurers will be using models to assess safety and soundness and policyholder protection. He emphasised that the PRA will be using these models in "an appropriately diagnostic fashion". The PRA will seek to challenge models robustly and will not hesitate to withhold approval of inadequate or opaque models
  • Bonus caps. Mr Bailey criticised the bonus cap for bankers introduced by the CRD IV Directive (2013/36/ EU), describing it as a "bad policy". He also criticised the use of role-based allowances by banks, which the European Banking Authority (EBA) considers may have been used to circumvent the bonus cap. Mr Bailey called for a system where senior people responsible for the performance of their firms understand that for a reasonable period of time a meaningful proportion of their remuneration is at risk of being taken away
  • Governance. In its implementation of Solvency II, the PRA will aim to align the fit and proper requirements of Solvency II with the new senior managers regime. The PRA also intends to set out the meaning of the statutory requirement of senior management responsibility: senior managers will need to show that they have taken the steps that a person in their position could reasonably be expected to take to prevent breaches of our requirements

16 October 2014: Memorandum of understanding between FCA and LSB: October 2014. The FCA published a memorandum of understanding (MoU) it has entered into with the Lending Standards Board (LSB).

The MoU sets out the framework for co-operation and communication between the FCA and LSB in carrying out their respective functions under the FCA's banking conduct and consumer credit regimes and the Lending Code, which is monitored and enforced by the LSB and does not have FCA confirmed industry guidance status.

The MoU identifies the key areas in which the FCA and LSB have a mutual regulatory interest as:

  • Payment services
  • Providing appropriate information and treating customers fairly
  • Unfair contract terms
  • Financial difficulties

In addition, the MoU outlines how the FCA and LSB will exercise their respective responsibilities in relation to investigation and enforcement and co-operation, co-ordination and exchange of information.

At least annually, the FCA and LSB will consider the content and application of the MoU and determine whether any rules or procedures need to be reviewed for possible change.

The MoU replaces the previous version of the MoU between the FCA and LSB, which was dated March 2013

16 October 2014: FCA Chief Executive responds to points raised during September 2014 Treasury Committee hearing. The House of Commons Treasury Committee published a letter (dated 30 September 2014) from Martin Wheatley, FCA Chief Executive, to Andrew Tyrie, Treasury Committee Chairman.

In his letter, Mr Wheatley clarifies and responds to the following points raised during his appearance before the committee at a hearing on 9 September 2014:

  • FCA enforcement action against individuals for benchmark fixing. The FCA has published warning notices against 11 individuals involved in the attempted manipulation of interest rate benchmarks. Many of its cases against individuals have been stayed at the request of the Serious Fraud Office (SFO) to avoid jeopardising their investigations and prosecutions. The SFO's first LIBOR-related criminal trial is due to start in January 2015 and the SFO secured its first criminal conviction arising from its LIBOR investigation in October 2014
  • Regulated firms taking on secondees from their advisers and accountancy firms. Under FCA rules, firms are required to manage conflicts of interest effectively. However, the FCA is aware of customer concerns regarding specific cases. It is discussing the issue with a number of firms to assess the situation across the industry before deciding what, if any, action may be taken
  • Cyber security. The FCA employs two dedicated resilience specialists that focus on cyber security issues. The FCA does not employ former hackers. In addition to the specialists, it has cyber security capability across its IT, Resilience, Legal and Policy teams, and this knowledge is filtered through to supervisors. The FCA also has an internal resilience working group that meets quarterly to discuss intelligence and acts as a virtual team for issues as they arise. It attends groups within the Bank of England (BoE) and government to ensure skills, knowledge and emerging threats are understood
  • High-frequency trading (HFT). The FCA estimates that HFT makes up around one third of the UK equity market, although the exact figure will depend on how HFT is defined. Mr Wheatley has previously written to Mr Tyrie on the regulation of HFT and dark pools
  • Market monitoring. The FCA's market surveillance system monitors constantly throughout the day and at the close, and its computer takes in a very large amount of market data, transaction by transaction. However, the FCA does not investigate the data in real time, but instead looks for spikes and movement patterns, which it then investigates. It also works closely with, and supervises, trading venues which carry out real time monitoring of the trading on their platforms, and are obliged to alert the FCA to any instances of concern
  • Other. The committee raised a number of questions in respect of the possibility of requiring banks to calculate the impact of conduct fines on different sources of potential funding, including bonuses; the costs and benefits of increased competition in platforms as a result of MiFID II; and further discussion with other regulators on the costs and benefits of anti-money laundering (AML) regulations. The FCA will report back to the committee on all of these issues in due course

15 October 2014: Draft Finance Bill 2015 clauses will be published on 10 December 2014. Draft clauses for the Finance Bill 2015 will be published on Wednesday 10 December 2014, together with responses to policy consultations, explanatory notes and tax information and impact notes. The consultation on the draft legislation will be open until 4 February 2015.

These dates mirror those for the draft clauses for the Finance Bill 2014. The Finance Bill 2014 was published on 27 March 2014 but, given that Parliament will dissolve on 30 March 2015, the Finance Bill 2015 will need to be published well before that date. This suggests that it will be a short Bill in advance of the general election, with further measures likely to be included in a second Bill. Bill-2015

15 October 2014: FSB guidance on resolution of non-bank financial institutions. The Financial Stability Board (FSB) published an updated version of its key attributes of effective resolution regimes for financial institutions (Key Attributes). The Key Attributes are the international standard for resolution regimes for financial institutions. The FSB originally published the Key Attributes in November 2011 following endorsement by the G20.

The Key Attributes now includes new guidance on the resolution of non-bank financial institutions. Four new annexes set out guidance covering:

  • Resolution of financial market infrastructure (FMIs), including central counterparties (CCPs), and resolution of systemically important FMI participants
  • Resolution of insurers. This guidance provides further detail on the resolution framework for systemically important insurers (SIIs). It should help authorities and firms in implementing the resolution planning requirements set out in the policy measures for global SIIs (G-SIIs) published by the International Association of Insurance Supervisors (IAIS) in July 2013
  • Client asset protection in resolution. This guidance builds on the International Organization of Securities Commissions' (IOSCO) January 2014 report on recommendations regarding the protection of client assets
  • Information sharing for resolution purposes. This guidance sets out principles for the design of national legal gateways and confidentiality regimes to allow the exchange with domestic and foreign authorities of non-public information that is necessary for planning and carrying out resolution. It also includes provisions on information sharing and confidentiality that should be included in the institution-specific cross-border co-operation agreements (COAGs) that the Key Attributes require for all global systemically important financial institutions (G-SIFIs)

The annexes have been developed by the FSB in conjunction with the Committee on Payment and Market Infrastructure (CPMI), the IAIS and IOSCO. They were issued for consultation in August 2013 and have been revised in the light of comments.

14 October 2014: Revised version of Lending Code (October 2014). The Lending Standards Board published a revised version (dated 7 October 2014) of the Lending Code. The LSB states that the Lending Code has been revised to:

  • Remove references to the FSA and OFT
  • Reflect the FCA's role as the regulator of the consumer credit market and the application of the Consumer Credit sourcebook (CONC)
  • Include references to debt collection agencies and debt purchase firms who can now subscribe to the Lending Code in their own right
  • Amend the wording of some provisions contained within section 4 (Credit assessment)
  • Amend the current provisions on unauthorised credit card transactions
  • Clarify the LSB's role in monitoring compliance with UK Cards best practice guidelines, where these are applicable to the Lending Code

14 October 2014: SRA proposes law firms carrying on consumer credit activities seek FCA authorisation. The Solicitors Regulation Authority (SRA) published a consultation paper on withdrawing from the FCA's designated professional bodies (DPB) regime under Part 20 of the Financial Services and Markets Act 2000 (FSMA) for the purposes of consumer credit activities.

Under the OFT consumer credit regime, solicitors carrying on consumer credit business were regulated under a group licence issued to the Law Society and managed by the SRA. The FCA consumer credit regime, which came into force on 1 April 2014, did not continue the group licence system however firms may carry out consumer credit activities under transitional arrangements that continue until 1 April 2015.

After this date, firms could continue consumer credit work under an exemption that allows them to carry on regulated financial activities, provided they are overseen by a DPB (in this case, the SRA). However, for the SRA to fulfil regulatory requirements, it would need to adopt either all, or substantial parts of, the FCA's Consumer Credit sourcebook (CONC).

Among other things, the following points are made in the consultation paper:

  • The rules in CONC do not fit in with the SRA's regime
  • The rules would add an extra regulatory burden to firms
  • The SRA does not have the resources or expertise in place to supervise firms in accordance with the FCA's requirements

In the light of the above, the SRA proposes that the Part 20 regime should not be available to firms in relation to consumer credit activities. This would mean that firms wishing to carry on regulated consumer credit activities would need to be authorised by the FCA if they wished to continue to do so after the transitional arrangements end.

In the consultation paper, the SRA advises firms that are concerned about the possibility of any gap between 1 April 2015 and the date on which they are able to obtain FCA authorisation, to apply to the FCA as soon as possible rather than waiting for the outcome of the consultation. The deadline for responses to the consultation is 15 December 2014.

Press release:


14 October 2014: FCA feedback statement on Solvency II COBS rule changes. The FCA published a feedback statement (FS14/1) to its consultation paper on Solvency II (2009/138/EC) transposition (CP12/13). As the feedback is primarily about the Conduct of Business sourcebook (COBS 20 (with-profits business) and COBS 21 (unit-linked business)) and related consequential amendments, the feedback statement is of interest to insurance firms writing savings business, where the FCA intends to largely maintain its current protections for policyholders in the Solvency II environment. The FCA states that firms were broadly supportive of the proposals outlined in chapters 7 and 8 of CP12/13 on changes to the rules in COBS 20 and 21, although in some areas the FCA has amended its proposals in reaction to feedback received. More generally, the FCA has sought to simplify and clarify the consulted-on rules.

The FCA plans to make or amend affected FCA rules in early 2015 to allow for Solvency II implementation by 1 January 2016. The PRA has simultaneously published a consultation paper setting out its approach to the prudential regulation of with-profits insurance business (CP22/14).

FCA Statement:

PRA Press release:

PRA Paper:

14 October 2014: FSB framework for haircuts on non-centrally cleared securities financing transactions. The Financial Stability Board published a regulatory framework for haircuts on non-centrally cleared securities financing transactions. The framework aims to limit the build-up of excessive leverage outside the banking system and to help reduce the pro-cyclicality of that leverage. The framework consists of:

  • Qualitative standards to be incorporated into existing or new regulatory standards for methodologies used by market participants that provide securities financing to calculate haircuts on the collateral received (including additional guidance for methodologies used by market participants to calculate margins on a portfolio basis)
  • A framework of numerical haircut floors that will apply to non-centrally cleared securities financing transactions where financing against collateral other than government securities is provided to non-banks. Centrally-cleared securities financing transactions and financing provided to banks and broker-dealers subject to adequate capital and liquidity regulation on a consolidated basis are excluded

Annex 4 to the framework contains a consultative proposal relating to the application of numerical haircut floors regarding non-bank to non-bank transactions. This is to ensure shadow banking activities are fully covered and to reduce the risk of regulatory arbitrage. The consultation period ends on 15 December 2015. FSB member authorities should implement the framework, including the numerical haircut floors, by the end of 2017.

14 October 2014: HM Treasury consults on designation of payment systems for regulation by the Payment Systems Regulator. HM Treasury has published a consultation document on the designation of payment systems for regulation by the Payment Systems Regulator (PSR). HM Treasury has invited responses on proposals for the designation of payment systems for regulation in the UK.

Consultation Paper:

Press release:

13 October 2014: US and UK officials discuss key components for resolution of G-SIBs. The PRA issued a press release following a meeting between US and UK officials to discuss key components for the resolution of a global systemically important bank (G-SIB).

The high-level discussion was intended to further understanding among the principals regarding:

  • G-SIB resolution strategies under US and UK resolution regimes
  • Aspects of those strategies requiring co-ordination between UK and US authorities
  • Key challenges to the successful resolution of US and UK G-SIBs

The exercise builds on previous bilateral work between US and UK authorities that, since late 2012, has included the publication of a joint paper on G-SIB resolution, participation in detailed simulation exercises for G-SIB resolution and participation in other join G-SIB resolution planning efforts.

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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