UK: Financial Regulatory Developments (FReD) - 17 April 2015

Last Updated: 18 April 2015
Article by Emma Radmore, Michael Wainwright, Luca Salerno and Rosali Pretorius

HEADLINES

  • FCA fines £126 million for custody failings
  • FCA fines Clydesdale over PPI
  • LSB reviews Lending Code

EUROPEAN UNION AND INTERNATIONAL

Financial Stability Board (FSB)

FSB starts second resolution regime review: FSB has started its second peer review of resolution regimes in the banking sector. It has sent a questionnaire to regulators in its member countries but also invites comments from industry and other stakeholders. It suggests respondents might give views on the adequacy of regimes, guidance from regulators, factors that influence the use of powers, and challenges and experiences in dealing with recovery and resolution planning. It asks for comments by 8 May and will publish the review in early 2016. (Source: FSB Starts Second Resolution Review)

Contact: Michael Wainwright or Rosali Pretorius

Global Meeting of Foreign Exchange Committees (GMFEC)

GMFEC publishes meeting summary: The GMFEC took place in Tokyo in late March and was attended by representatives from eight major financial centres, including the Eurozone, the UK and the US. The attendees:

  • unanimously approved the new global preamble to the Codes of Best Market Practice and Shared Global Principles;
  • considered the implementation status of FSB's foreign exchange benchmarks report;
  • discussed changes to local laws to take account of the preamble and FSB paper;
  • discussed liquidity in the foreign exchange market;
  • heard updates from national committees, including an update from the UK on the Fair and Effective Markets review; and
  • considered developments in retail foreign exchange markets.

(Source: GMFEC Publishes Meeting Summary)

Contact: Rosali Pretorius or Luca Salerno

European Banking Authority (EBA)

EBA publishes supervisory review report: EBA has published its first annual report on the convergence of supervisory review practices in the EU banking sector. It covers the findings of a three-year study and focuses on the Supervisory Review and Evaluation Process and assessment of risks (SREP), supervisory stress testing, ongoing review of internal models and supervisory measures and powers. The report identifies that supervisory authorities across the EU have made significant progress towards converging their supervisory practices since 2011. However, some differences remain in methodologies, practices and supervisory measures. The recently published EBA Guidelines on the SREP and with various related technical standards are designed to reduce divergences in practice. Nonetheless, implementation of these products in a consistent way will be important. To that end EBA will provide training and use monitoring tools to assess implementation in its next report on supervisory convergence in 2016. (Source: Ongoing Progress on Supervisory Convergence is Vital for the Single Market)

Contact: Rosali Pretorius or Michael Wainwright

EBA amends 2015 work programme: EBA has published a revised version of its 2015 work programme, first released in September 2014. The revisions reflect a nominal decrease of 15% in the actual EBA budget from that previously drafted and a reduction of 20 to the numbers of staff sought. EBA has also received several new mandates mainly coming out of the new Multilateral Interchange Fee Regulation and Technical Standards updates on Liquidity Coverage Ratio reporting and on disclosure templates for leverage ratio. This has led EBA to have to reprioritise its workload for 2015. (Source: EBA Publishes Revised Version of its 2015 Work Programme)

Contact: Rosali Pretorius or Michael Wainwright

EBA updates single rulebook Q&As: EBA has updated its single rulebook Q&As with addition of four new items. (Source: Single Rulebook Q&As)

Contact: Rosali Pretorius or Michael Wainwright

European Insurance and Occupational Pensions Authority (EIOPA)

EIOPA issues Internal Model opinion: EIOPA has issued an opinion directed at National Competent Authorities (NCAs) on the preparation for Internal Model (IM) applications. The opinion advises NCAs:

  • that they should require that IMs take into account the risks related to Sovereign Exposures;
  • accept and assess the IM application on a "best endeavours basis" if risk-free rates were not available sufficiently in advance of the date on which undertakings make an application to use an IM;
  • it is considered good practice that NCAs compare different IMs better to understand them.

(Source: EIOPA Opinion on the Preparation for Internal Model Applications)

Contact: Michael Wainwright or Juan Jose Manchado

European Securities and Markets Authority (ESMA)

ESMA publishes UCITS responses: ESMA has published the responses to its discussion paper on the share classes of UCITS. (Source: Discussion Paper: Share Classes of UCITS)

Contact: Rosali Pretorius or Juan Jose Manchado

European Parliament (EP)

EP reports on securities financing Regulation: EP has released a report on the proposal for a Regulation on reporting and transparency of securities financing transactions. The report sets out EP's suggested amendments to the original Council proposal following its first reading. (Source: Proposal for a Regulation on Reporting and Transparency of Securities Financing Transactions)

Contact: Rosali Pretorius or Tom Harkus

UK GOVERNMENT AND PARLIAMENT

HM Revenue and Customs (HMRC)

HMRC updates FATCA requirements: HMRC has published two updates that affect the reporting requirements under the Foreign Account Tax Compliance Act (FATCA). These updates mean that:

  • UK financial institutions are no longer required to file nil returns; and
  • holding companies and treasury companies do not need to report under FATCA.

HMRC also reminds firms that if they need to submit a FATCA return they must register and report by 31 May. (Source: Updates to FATCA Reporting Requirements)

Contact: Jeremy Cape or Suhail Qureshi

HM Treasury (Treasury)

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

Contact: Emma Radmore or Tom Harkus

UK FINANCIAL SERVICES AND MARKETS REGULATORS

Financial Conduct Authority (FCA)

FCA fines £126 million for custody failings: FCA has fined Bank of New York Mellon London branch and Bank of New York Mellon International £126 million for failure to comply with the custody rules in the Client Assets Sourcebook (CASS). The level of the fine reflected:

  • the amount of assets the firms hold in custody;
  • the systemic importance of the firms to the UK financial markets, as they are the third and eighth largest custodians in the UK and therefore whose insolvency would have had a significant effect on the UK financial markets;
  • signs the failings were firm-wide and not allied to any particular business line, showing serious weakness in compliance with custody requirements;
  • the stresses the markets were under during the relevant period, which meant firms should have had heightened awareness of custody requirements; and
  • the fact the firms' own monitoring did not pick up the breaches, which were detected by FCA staff during regular monitoring.

FCA found breaches of CASS for a period of almost six years from implementation of the Markets in Financial Instruments Directive (MiFID) in the UK. The firms used global platforms to manage clients' safe custody assets, which did not record with which BNY Mellon Group entity clients had contracted. CASS required entity-specific records. Among other things, failure to keep them meant the firms could not conduct entity-specific external reconciliations and, later, after the relevant requirements took effect, could not have an adequate CASS resolution pack or submit accurate Client Money and Asset Returns (CMAR). It also found other breaches, such as:

  • failure to conduct reconciliations between the firms' records and those of both affiliate and non-affiliate sub-custodians;
  • failure to take the necessary steps to prevent commingling safe custody assets with firm assets from 13 proprietary accounts;
  • using safe custody assets held in omnibus accounts to settle other clients' transactions without the express prior consent of all relevant clients; and
  • failure to put in place adequate CASS-specific governance arrangements or to identify and remedy failings.

The firms agreed early settlement and so benefited from a 30% discount on the proposed fine of £180 million. (Source: FCA Fines £126 million for Custody Failings)

Contact: Rosali Pretorius or Michael Wainright

FCA publishes board meeting minutes: FCA has published the minutes from the meeting of its board which took place on 26 and 27 February. Among other things the board:

  • discussed the key trends, concerns and the regulatory response so far on the capital markets sector;
  • approved the Payment Systems Regulator (PSR) plan and budget for 2015/16 of £15.9 million;
  • heard an update on the work of the Financial Inclusion Commission;
  • agreed the Oversight Committee should review the detail of the Money Advice Service's (MAS) revised budget and provide a recommendation to the Board in March;
  • discussed the draft outline of the 2014/15 Annual Report;
  • noted the final draft of the 2015/16 business plan which had been developed from earlier drafts by grouping particular items and providing an explanation of how it is prioritising issues;
  • heard an update on the work of the PRA, especially on Solvency 2 and the Senior Managers Regime (SMR);
  • noted the feedback on the FCA consultation on proposals about the scope of application of the conduct rules and the requirements that should be placed on firms to report individual breaches;
  • discussed and noted the proposals which sought to keep the spirit and goal of the SMR rules in UK branches of overseas banks;
  • discussed and noted the proposals to publish changes to the Decision Procedure and Penalties manual on the presumption of responsibility for the SMR; and
  • approved the proposed allocation of the 2015/16 annual funding requirement across fee-blocks.

(Source: Minutes of FCA Board Meeting 25 & 26 February 2015)

Contact: Emma Radmore or Josie Day

FCA fines Clydesdale over PPI: FCA has fined Clydesdale Bank Plc a record £20,678,300 for serious failings in its Payment Protection Insurance (PPI) complaint handling processes between May 2011 and July 2013. FCA's reasons for imposing its largest PPI-related fine included that Clydesdale:

  • had inappropriate policies in mid-2011 which led its PPI complaints handlers to fail to take account of all relevant documents when deciding how to handle PPI complaints;
  • provided false information to FOS over the course of a year in response to requests for evidence of the records Clydesdale held on PPI policies sold to individual customers. A team within Clydesdale's PPI complaint handling operation altered certain system print-outs to make it look as if Clydesdale held no relevant documents and deleted all PPI information from a separate print-out listing the products sold to the customer. Clydesdale's PPI leadership team or more senior management did not know about or authorise the alterations; and
  • failed to identify cases where the PPI policy sold was unsuitable to the customer, and had deficiencies in the training and monitoring of complaint handlers.

Because of Clydesdale's conduct, of the 126,600 PPI complaints decided between May 2011 and July 2013, up to 42,200 may have been rejected unfairly and up to 50,900 upheld complaints may have resulted in inadequate redress for customers. Clydesdale will review all PPI complaints handled before August 2014 and offer redress to any customers impacted by these failings. Clydesdale agreed to settle at an early stage of FCA's investigation and therefore qualified for a 30% stage 1 discount. Were it not for this FCA would have imposed a financial penalty of £29,540,500. (Source: Clydesdale Bank Fined £20,678,300 for Serious Failings in PPI Complaint Handling)

Contact: Emma Radmore or Josie Day

FCA finalises MTF good practice guidance: FCA has published its finalised guidance on good practices for Multilateral Trading Facility (MTF) rulebooks, alongside a "dear CEO" letter to MTFs attaching it. Respondents to its consultation were supportive of the guidance, but FCA has made some changes to address points respondents raised. (Source: FCA Finalises MTF Good Practice Guidance)

Contact: Rosali Pretorius or Luca Salerno

FCA adds MCD FAQs: A new page on FCA's website contains a set of frequently asked questions on FCA's implementation of the Mortgage Credit Directive (MCD). (Source: FCA Adds MCD FAQs)

Contact: Emma Radmore or Josie Day

Prudential Regulation Authority (PRA)

PRA consults on Solvency 2 and accounting principles: PRA is consulting on compatibility of Solvency 2 with generally accepted accounting principles (GAAP). The consultation includes a draft supervisory statement for firms that are considering using the derogation in the Commission Delegated Regulation on Solvency 2 to value some assets and liabilities using local GAAP if they fulfil some specific criteria. The statement maps the derogation to UK GAAP and explains when firms will be able to use it. PRA asks for comments by 10 July. (Source: PRA Consults on Solvency 2 and Accounting Principles)

Contact: Michael Wainright or Juan Jose Manchado

Financial Ombudsman Service (FOS)

FOS consults on voluntary jurisdiction: FOS has published a consultation paper on its proposed amendments to the scope of its voluntary jurisdiction, as set out in the Dispute Resolution: Complaints sourcebook (DISP) of the FCA Handbook. The proposals have been prompted by the reforms to defined benefit pension schemes, effective from 6 April, which brought complaints about advice on these schemes within the remit of FOS. The consultation closes on 16 April. (Source: Amendments to Our Voluntary Jurisdiction; A Consultation Paper)

Contact: Emma Radmore or Josie Day

Lloyd's

Lloyd's and ABI publish cyber risk guide: Lloyd's, in association with the Association of British Insurers (ABI), has published a guide to cyber risk. The guide looks at managing cyber risk, legislative initiatives to address the risks, and what insurance is available. (Source: Lloyd's and ABI Publish Cyber Risk Guide)

Contact: Emma Radmore or Tom Harkus

OTHER REGULATORS/AUTHORITIES/INDUSTRY ASSOCIATIONS

Financial Markets Law Committee (FMLC)

FMLC writes to FSB on benchmark reform: FMLC has written to the Financial Standards Board (FSB) on regulation of commodity benchmarks. In the letter FMLC outlined the current state of benchmark regulation in the UK, EU and internationally. The letter also looks to future developments in benchmark regulation and cautions against unilateral national or regional action as this can lead to inconsistencies, gaps, overlaps, duplicative requirements and other legal uncertainties. FMLC suggests that FSB start an overarching international enquiry to identify appropriate objectives for reform initiatives to promote inter-jurisdictional cohesion and legal certainty. The letter suggests that FSB might adopt the same approach that it took to its previous study on "IBOR" benchmarks. (Source: FMLC Letter to FSB on the Regulation of Commodity Benchmarks)

Contact: Rosali Pretorius or Michael Wainright

FMLC writes to Treasury on FCARs: FMLC has written to Treasury on the meaning of "possession", "control" and "excess financial collateral" under the Financial Collateral Arrangements (No. 2) Regulations 2003 (FCARs). The letter attaches evidence FMLC has gathered to show the impact that uncertainty over the definitions is having in the UK financial markets. The letter follows an FMLC paper in 2012 and subsequent discussions with Treasury. FMLC says the evidence in the letter shows the cumulative effect of the uncertainty on the different parts of the UK financial markets. It also says imminent changes driven by EU law will add to the concerns, as they will result in an increased use of security financial collateral arrangements (SFCA), thereby exacerbating the issues of legal uncertainty. FMLC urges Treasury to address these issues of legal uncertainty as set out in its original 2012 paper on the topic. (Source: Letter From FMLC to Treasury on the Meaning of "Possession", "Control" and "Excess Financial Collateral" Under the Financial Collateral Arrangements (No. 2) Regulations 2003)

Contact: Rosali Pretorius or Michael Wainright

Lending Standards Board (LSB)

LSB reviews Lending Code: LSB has published the findings from its Lending Code (Code) governance and control framework review. Within the nine firms surveyed as part of the review LSB found:

  • that those firms where senior management understood the Code and emphasised its importance to other employees performed best in the review;
  • some firms' senior management and compliance staff had poor knowledge of the Code and so there was a lack of clarity in overall governance;
  • that there was a direct correlation between the experience and seniority of the Code Compliance Officer (CCO) and his ability to influence the firms' level of compliance;
  • most firms operated a "three lines of defence" approach to their assurance framework and this varied in effectiveness across the sampled firms; and
  • all firms appeared to have an adequate outsourcing framework in place.

On this basis the LSB recommended that:

  • the existing section 11 of the Code could be updated to provide guidance for CCOs on their role and for firms in terms of the authority that the CCO should have;
  • the Code should be strengthened with regard to responsibilities for outsourced activities, other than debt sale and debt collection (which the Code already covers);
  • that all subscribers reflect on their own internal assurance framework and how this ensures there is effective oversight of compliance with the Code.

LSB also assessed the firms' approaches to change management, ongoing compliance with the Code and breach management. Based on its findings in these areas it recommended that small sections on change management and breach management be inserted into the Code and that firms must be able to evidence their compliance with the Code. (Source: Lending Code Governance and Control Framework Review)

Contact: Rosali Pretorius or Michael Wainright

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