UK: Financial Services UK And International Update

Last Updated: 1 December 2009

FSA and SEC discuss approaches to global regulatory requirements

The Financial Services Authority (FSA) and the Securities and Exchange Commission (SEC) have issued a joint press release in which they set out their plans to explore common approaches to reporting and other regulatory requirements for key market participants such as hedge funds and their advisers. In particular, the regulators have agreed to identify a common set of data to collect from hedge fund advisers and managers to help them identify risks to their regulatory objectives and mandates.

Hector Sants, Chief Executive of the FSA, said, "The global crisis has underlined how intertwined financial markets and institutions are and regulators around the world have to work together to ensure appropriate oversight. We are all working alongside the Financial Stability Board and other international regulatory committees to drive forward global financial reforms. The strategic dialogue with the SEC is a valuable component of the discussions around these reforms, particularly in areas of joint interest and in identifying potential regulatory gaps".

G20 publishes statement and report following Pittsburgh summit

The G20 has published a leaders' statement (Statement) and progress report on the actions to promote financial regulatory reform following the G20 summit held in Pittsburgh on 24 and 25 September 2009.

The Statement sets out the progress which has been made on the strengthening of the international financial regulatory system, especially in the areas of strengthening prudential oversight, improving risk management, strengthening transparency, promoting market integrity, establishing supervisory colleges and reinforcing international cooperation. The scope of regulation in relation to OTC derivatives, securitisation markets, credit rating agencies and hedge funds has been enhanced and expanded.

However, the Statement states that more needs to be done to protect consumers, depositors and investors, promote high quality standards and ensure the world does not face another crisis. The G20 leaders have called for agreement to be reached in the following areas:

  • building high quality capital and mitigating pro-cyclicality;
  • reforming compensation practices to support financial stability;
  • improving OTC derivatives markets; and
  • addressing cross-border resolutions and systemically important financial institutions by end 2010.

The next summit will be held in Canada in June 2010, with a summit in Korea in November 2010.

European Commission publishes proposal for a Directive to amend the Prospectus Directive

The European Commission has published a proposal for a Directive to amend the Prospectus Directive. This follows a consultation in January which examined proposals to improve and simplify the application of the Prospectus Directive. The Prospectus Directive sets out the rules which govern the prospectus which has to be made available to the public where there is a public offer or an admission to trading of transferable securities in a regulated market in the EU.

The main proposals are in the following areas:

  • the definition of "qualified investor" will be aligned to the MiFID "professional clients" definition;
  • certain types of securities issues will have simplified disclosures requirements (small companies, small lenders, rights issues and government guarantee schemes);
  • issuers of all non-equity securities will be able to determine their home Member State;
  • the prospectus summary's format and content have been revised;
  • duplicate disclosure requirements with the Transparency Directive will be repealed; and
  • exemptions in relation to retail cascades and employee share schemes.

CESR responds to the European Commission's consultation on the UCITS depositary function

The Committee of European Securities Regulators (CESR) has provided a response to the European Commission's consultation on the UCITS depositary function. The impact of Madoff showed that some Member States had implemented and interpreted the UCITS Directive's provisions relating to the depositary's status, role and liability as the minimum provided for by the Directive whilst other Member States added supplementary obligations resulting in inconsistencies in EU investor protection.

CESR sees UCITS depositaries as a core element of European investment fund regulation and supports the European Commission's view that legal certainty, greater clarity and harmonisation are required in this area. CESR examines a number of areas including:

  • the definition of safe keeping—currently there is no definition—CESR suggests that it should include two principles: overall control of all assets and the segregation of the assets from the depositary's own assets so they can be identified as belonging to the UCITS in the event of depositary default; and
  • clarification of the conditions of delegation to a sub-custodian—including that the sub-custodian:
  • is subject to supervision by a public authority in its own jurisdiction;
  • is audited by independent auditors on a regulator basis to ensure the presence of the assets;
  • segregates the assets it keeps from its own assets and is prohibited from re-hypothecating on its own initiative and/or without the consent of the UCITS;
  • has adequate and proportionate organisational structure and expertise; and
  • keeps adequate records of custody delegation.

CESR also has concerns about any proposed extension of the draft depositary provisions of the Alternative Investment Fund Managers (AIFM) Directive to encompass UCITS funds.

IOSCO publishes regulatory standards for funds of hedge funds

The Technical Committee of the International Organisation of Securities Commissions (IOSCO) has published its final report on "Elements of International Regulatory Standards on Funds of Hedge Funds Related Issues Based on Best Market Practices". IOSCO has identified two additional investor protection regulatory issues in addition to those it published in June 2008. These issues are:

  • the methods by which funds of hedge funds' managers deal with liquidity risk; and
  • the nature and conditions of the due diligence process used by funds of hedge funds' managers prior to and during investment.

FSA and HMT response to EU Consultation Document on OTC derivatives market

The Financial Services Authority and HM Treasury (HMT), (together, the UK Authorities) have published a joint response to the EU Consultation: Possible initiatives to enhance the resilience of OTC derivatives markets. The UK Authorities believe that the principle objectives of regulatory reform should be designed to reduce systemic risk and to improve overall transparency. In order to achieve these objectives, the UK Authorities believe that the following issues need to be addressed:

  • further standardisation of contract and economic terms;
  • greater use of central counterparty (CCP) clearing for "clearing-eligible" products;
  • strengthened risk management for non-CCP cleared products; and
  • increased transparency to the market and to regulators.

The UK Authorities believe that the key tools to enable regulators to achieve the objectives are:

  • the application of capital charges that are proportionate to the risks assumed;
  • market-led initiatives which are closely overseen and monitored by regulators; and
  • further legislative/regulatory action.

European Commission publishes draft legislative proposals to strengthen EU financial supervision

The European Commission has published a number of draft legislative proposals designed to significantly strengthen the supervision of the financial sector in Europe. The proposals address the weaknesses highlighted by the financial crisis in the EU's supervisory framework at both the macro and micro prudential levels by creating a European Systemic Risk Board to monitor and assess the risks to the stability of the financial system as a whole and a European System of Financial Supervisors for the supervision of individual financial institutions.

The draft legislative proposals are:

  • a Regulation on Community macro prudential oversight of the financial system and establishing a European Systemic Risk Board;
  • a Council Decision entrusting the European Central Bank with specific tasks concerning the functioning of the European Systemic Risk Board;
  • a Regulation establishing a European Banking Authority;
  • a Regulation establishing a European Insurance and Occupational Pensions Authority; and
  • a Regulation establishing a European Securities and Markets Authority.

Charlie McCreevy, European Commissioner for Internal Market and Services, said, "This package represents rapid and robust action by the Commission to remedy shortcomings in European financial supervision and will help prevent future financial crises".

Open Europe publishes survey results on AIFM Directive

Open Europe, an independent think tank, has published the results of two surveys in a paper entitled "The EU's AIFM Directive: Likely impact and best way forward". One of the surveys was aimed at members of the Alternative Investment Management Association (AIMA) and the other at members of the British Private Equity and Venture Capital Association. The report sets out both problems with the draft Directive and recommendations for improving it.

AIMA publishes position paper on AIFM Directive

The Alternative Investment Management Association, (AIMA) has published its position paper on the AIFM Directive. AIMA's key points to note are:

  • AIMA supports the authorisation of all AIFMs without any threshold;
  • AIMA supports enhancing the safety of European markets by the provision to national regulators of the data necessary to monitor financial stability within their capital markets;
  • AIMA calls for an increased limit of €1 billion for disclosure of systemically relevant data; and
  • AIMA concludes that, without significant revision, the Directive will lead to less choice and greater costs for investors within the EU—without achieving the stated objectives of the Directive.

MFA publishes white paper on AIFM Directive

The Managed Funds Association (MFA) has published a white paper on the AIFM Directive. The paper discusses the terms of the proposal and areas in which the MFA believes that the AIFM Directive will provide serious issues to the ability of AIFM to provide vital services to investors. MFA also believes that the AIFM Directive has the potential to limit the available choices and potential benefits to EU investors who seek to invest in alternative investment funds.

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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