This weekly update from Clyde & Co's Financial Services Regulatory Team summarises new developments as reported by the FCA, the PRA, the UKLA, the Upper Tribunal, the Financial Ombudsman Service and the London Stock Exchange over the past week, with links to the full documents where these are available.
We hope that you will find this update useful.
Consultation papers:
No new developments this week.
Discussion papers:
No new developments this week.
Policy statements:
No new developments this week.
Press releases:
21 June: High Court settlement paves the way for FCA to return money to investors in an illegal land bank. The FCA has agreed a settlement of proceedings in the High Court which will enable it to return approximately GBP 380,000 to investors in a land bank. In agreeing to the settlement, St Clair Estates and Elizabeth Fischer (a former director of St Clair) accepted they had run an illegal land bank by operating a collective investment scheme without FCA authorisation. OFG Investments Ltd, Option Land UK Ltd, GIG Properties Ltd, Mehmet Husnu and Ali Seytanpir, who had later sold plots to consumers, agreed to pay the full amount of the FCA's claim and to permanent restraining orders which prevent them from, amongst other things, operating any other collective investment scheme or being involved in a similar business selling land. Had a settlement not been achieved it is likely that the defendants' frozen assets would have been used to meet legal costs, significantly reducing the amount to be returned to investors. The FCA does not regulate the sale of land, but land banking can amount to a collective investment - something that does require FCA authorisation.
20 June: PRA completes capital shortfall exercise with major UK banks and building societies. The PRA has published a press release announcing that it has completed its capital shortfall exercise with major UK banks and building societies. The PRA has also published the methodology used to calculate the capital shortfalls, which outlines three adjustments that were made. These were:
- A special focus on material vulnerable portfolios on firms' balance sheets, for a more prudent valuation of assets
- For conduct costs, an analysis on potential future costs that a firm may incur
- For the prudent calculation of risk weights, the primary focus was on the risk weights applied to corporate and institutional loans and UK mortgages
The PRA has judged that, after these adjustments have been made, each firm should target a risk-weighted capital ratio based on the Basel III definition of at least 7%. At the end of 2012, five of the eight major banks and building societies fell short of this standard. These firms had an aggregate capital shortfall relative to this standard of GPB 27.1 billion, however they have in place plans to take actions that will generate GBP 13.7 billion during 2013. After these actions have taken place, the PRA has assessed that four out of the five firms will have a shortfall. These firms have submitted plans for additional actions which will generate a further GBP 13.4 billion of capital. The PRA believes that these plans can be put into effect and that the vast majority of actions will be completed by the end of 2013. The PRA also announced that after meeting the 7% risk-weighted capital standard, although most firms leverage ratios will be no less than 3%, those for Barclays and Nationwide will be 2.5% and 2% respectively. Therefore, the PRA is requiring a plan to reach 3% CET1 leverage to be submitted by Barclays and Nationwide by the end of June, which it will consider and report publically on in early July.
http://www.bankofengland.co.uk/publications/Pages/news/2013/081.aspx
17 June: PRA statement on the Co-operative Bank. The PRA has published a press release announcing that it has assessed that the Co-operative Bank needs to generate an additional GBP 1.5 billion in Common Equity Tier One capital in order to absorb potential losses over the coming years. In relation to the Co-operative Bank this action will deliver the Financial Policy Committee's recommendation to the PRA in March regarding the capital position of the banking system.
Speeches:
19 June: FCA Speech: Investor relations in an increasingly regulated and international world. The FCA has published a speech by David Lawton, Director of Markets at the FCA, delivered to the Investor Relations Society Annual Conference on 18 June 2013. In the speech Mr Lawton outlined the UK's new regulatory structure and the FCA's objectives and approach, before making some high-level observations on the international landscape, including challenges for regulators and firms. Key topics discussed by Mr Lawton included:
- The FCA's new competition objective and the effect it will have on its supervision of firms, which will be elaborated on in a consultation entitled "Advancing our objectives", due to be published in July
- The change in approach to wholesale conduct facilitated by the broad definition of "consumer" in the Financial Services Act 2012, which will enable the FCA to take a more holistic approach in addressing conduct practices that affect both the wholesale and retail consumer
- How the FCA's financial services integrity objective requires continuing work in maintaining the Listing Regime and keeping it fit for purpose. Mr Lawton noted in particular the complexities regarding rule changes to tighten up the Listing Regime for issuers with controlling shareholders consulted on last year; for which, the FCA hopes to set out final proposals later in the summer
- The need to explore current practices around corporate access through a conversation about how the industry can improve practices so that corporate access supports long-term stewardship
Mr Lawton concluded that the FCA is taking the opportunity presented by new powers and objectives to expand and refine its approach to conduct risk, which will result in more activity in this area than in the past, as is typified by the open debate the FCA wants to have with the industry on the Listing Regime and corporate access.
http://www.fca.org.uk/news/speeches/investor-relations-increasingly-regulated-international-world
18 June: FCA Speech: Enforcement and Credible Deterrence in the FCA. The FCA has published a speech on Enforcement and Credible Deterrence at the FCA by Tracey McDermott, Director of Enforcement and Financial Crime, delivered at the Thompson Reuters Compliance & Risk Summit on 18 June 2013. Ms McDermott described the change in approach to enforcement under the new FCA, noting that the FCA will be spending more time looking at root causes and what is driving problems in the markets, aided by the use of behavioural economics, and that enforcement teams will engage much earlier with issues. She went on to discuss the need for a change of culture in financial services, which she sees as underpinning decisions made and actions taken. Ms McDermott identified some current problems with culture including pursuit of short-term revenue and putting profits to be made over ethics; suggesting that to counter this, firms should embrace the spirit of regulatory rules and embed the FCA's Principles in their approach. While discussing the responsibilities of senior management, Ms McDermott stated that repeated fines for conduct failures demonstrates that fining firms alone is not enough, and that something must be done to hold senior management to account. Citing the recent progress in successful insider dealing investigations, she noted that the FCA will be adopting the same persistent approach in relation to approved persons with increased emphasis on what remedial action is being taken and who is responsible for what. Ms McDermott concluded her speech by highlighting the FCA's enforcement priorities for the next year, which include:
- A continuing focus on LIBOR, market abuse and insider dealing
- Failings in controls over financial crime
- Protection of client money and assets
- Consumer protection, through a focus on mis-selling, culture within firms and remuneration structures
- Looking at what happens when things go wrong and complaints handling procedures
- Dealing with concerns over the sale of low value insurance
- UCIS and pension liberation cases
http://www.fca.org.uk/static/documents/enforcement-credible-deterrence-speech.pdf
Bulletins and newsletters:
No new developments this week.
Final notices:
21 June: Final Notice: Atico Traders Co Limited. The FCA has cancelled the permission of the payment services firm Atico Traders Co Limited (Atico). The FCA found that Atico failed to pay regulatory fees and levies amounting to GBP 460, and in failing to respond to repeated requests for payment, the FCA concluded that Atico had not acted in an open and co-operative manner towards the FCA.
http://www.fca.org.uk/your-fca/documents/final-notices/2013/atico-traders
21 June: Final Notice: Hyde Gardens Limited. The FCA has cancelled the permission of Hyde Gardens Limited (Hyde Gardens). The FCA has concluded that Hyde Gardens appears to have failed to meet the threshold conditions, and therefore the FCA was not satisfied that Hyde Gardens was a fit and proper person. In addition, Hyde Gardens failed to pay regulatory fees of GBP 18,660.52 and the FCA concluded it had not been open and co-operative by not responding to repeated requests to pay those fees.
http://www.fca.org.uk/your-fca/documents/final-notices/2013/hyde-gardens-limited
20 June: Final Notice: Westwind UK Limited. The FCA has published a Final Notice that cancels the registration granted to Westwind UK Limited (Westwind) as a small payment institution under the Payment Services Regulations 2009. The FCA found that Westwind had failed to pay fees and levies totalling GBP 460 owed to the Authority, and it failed to respond adequately to the repeated requests from the Authority that it does so. Accordingly, the FCA concluded that Westwind had failed to demonstrate a readiness and willingness to comply with its ongoing regulatory obligations and to deal with the Authority in an open and co-operative way.
http://www.fca.org.uk/static/fca/documents/final-notices/westwind.pdf
19 June: FCA issues largest ever fine for nearly GBP 1 million on a retail sole trader for deliberately misleading vulnerable customers for personal gain. The FCA has fined sale and rent back (SRB) arranger Gurpreet Singh Chadda GBP 945,277 and banned him from working in the financial services industry for significant failings when conducting SRB agreements. These are agreements where a home owner sells their home and then rents it back from the arranger so as to be able to carry on living in the home. This is the largest ever fine for a sole trader in a retail business. Mr Chadda was based in Birmingham, trading under the names Red2Black Homes and B&L Homes. The FCA investigated his involvement in seven SRB transactions between June 2009 and January 2010 and found serious failings in all of them. Mr Chadda's widespread failings included:
- Misleading his customers by telling them he would be buying their homes when in fact the purchasers were other people
- Failing to notify the sellers that these purchasers were not authorised or regulated by the FCA
- Falsely claiming that the sale of the properties would be based on an independent valuation
- Helping the purchasers to obtain mortgages in the knowledge that they were giving misleading information to mortgage lenders
- Misleading sellers about what their properties were worth
- Charging grossly unfair and excessive hidden fees
The FCA believes that Mr Chadda received GBP 695,277 from the seven transactions as a result of his misconduct, and that these charges were unfair and excessive. The penalty includes disgorgement of the whole of this sum. Mr Chadda seriously aggravated his original misconduct by making false and misleading statements to the FCA, failing to disclose relevant documents and information and creating misleading documents. He also arranged for people to impersonate his customers in order to mislead the FCA.
Press release: http://www.fca.org.uk/news/fca-bans-and-issues-largest-ever-fine-on-a-retail-sole-trader
Final Notice: http://www.fca.org.uk/your-fca/documents/final-notices/2013/fca-final-notice-2013-gurpreet-singh-chadda
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 FCA and PRA publications:
20 June: FCA updates Electronic Money Regulations approach document. The FCA has published an updated version of its approach document explaining its role under the Electronic Money Regulations 2011 (EMRs). The document has been updated to reflect that the transitional period in the EMRs has come to an end. Additionally, the FCA has clarified the information it has provided on:
- Spent convictions (Chapter 3)
- When the FCA may cancel an electronic money institution's (EMIs) authorisation or registration (Chapter 5)
- The passporting process (Chapter 6)
- The application of host state legislation to FCA-authorised EMIs (Chapters 6 and 11)
- The use of the FSA and FCA logos (Chapter 7)
- The application of the conduct of business rules to distributors and the Single Euro Payments Area legislation (Chapter 8)
- The process of submitting reporting returns (Chapter 14)
- The fees applicable to e-money issuers (Chapter 16)
http://www.fca.org.uk/static/documents/emoney-approach.pdf
20 June: FCA updates Payment Services Regulations approach document. The FCA has published an updated version of its approach document setting out its approach to implementing the Payment Services Regulations. The document has been updated to reflect the change of regulatory body from the FSA to the FCA. Other changes include:
- Amendments to Chapter 3 in light of changes made by the Rehabilitation of Offenders Act 1974 (Exceptions) Order 1975 (Amendment) (England and Wales) Order 2013
- Amendments to Chapter 6 where the FCA had defined 'establishment' in a way not intended
- Updating Chapter 7 to reflect the FCA's policy on the use of the FSA and FCA logos, which was subject to consultation (CP12/24) in 2012
http://www.fca.org.uk/static/documents/payment-services-approach.pdf
17 June: Update to information on investments made through Harlequin Management Services (South East) Limited ("Harlequin Property"). Following on from a previous alert issued on 18 January 2013 by the FSA regarding Harlequin Property, the FCA has published an update noting important developments. These include:
- On 5 March 2013 the SFO announced that they, together with Essex Police, were looking into complaints in relation to the Harlequin group, and asked investors who have invested to contact them
- On 23 April 2013 Harlequin Property filed to enter administration and Shipleys LLP were appointed as administrator
- On 13 May 2013 Harlequin Property (SVG) Limited, another company within the Harlequin group, said it was working with investors to facilitate the completion of built properties at Buccament Bay Resort, inviting investors to fund the outstanding balance
The FCA has urged financial advisers to consider recommending that consumers proceed with caution in relation to Harlequin group and ensure that they fully understand the risks.
http://www.fca.org.uk/news/speeches/update-to-information-investments-harlequin-management-services
http://www.fca.org.uk/news/investments-made-through-harlequin-group
17 June: FCA Handbook Release 138. The FCA has published its Handbook Release 138 containing new pages to be inserted into the Handbook.
http://www.fca.org.uk/static/documents/handbook-releases/handbook-release-summary138.pdf
UKLA publications:
No new developments this week.
Upper Tribunal (Tax and Chancery Chamber):
No new developments this week.
Financial Ombudsman Service (FOS):
No new developments this week.
London Stock Exchange (LSE):
No new developments this week.
Financial Services Compensation Scheme (FSCS):
18 June: FSCS appeal dismissed by Court of Appeal in Emptage v FSCS. The Court of Appeal has dismissed an appeal by the Financial Services Compensation Scheme (FSCS) against a decision that Charmaine Emptage was entitled to compensation for the full loss occasioned by bad mortgage advice from a regulated advisor (Berkley Independent Advisers). Ms Emptage had received advice from Berkley Independent Advisers to exchange a GBP 40,000 repayment mortgage for an interest-only mortgage of GBP 112,000 and then invest more than GBP 70,000 in Spanish property. Following the collapse of the Spanish property market, the investment was rendered worthless, leaving Ms Emptage with no means of repaying her mortgage. The FSCS conceded the Ms Emptage had received negligent advice, but decided that it could only pay compensation for losses arising directly from the unsuitable regulated mortgage contract (calculated at GBP 11,520) and not for losses arising from the Spanish property purchase which was unregulated business. The Court of Appeal found that although the FSCS has a broad discretion when considering the payment of compensation, it nonetheless had the power to pay fair compensation in respect losses that flowed from bad advice in relation to a regulated activity. In this case, the FSCS had not actually exercised its discretion to exclude the part of the loss connected with the unregulated business, but had simply decided that it had no power to compensate for that part because it related to an unregulated business and therefore fell outside of the scheme. The court concluded that it was difficult to see how it was possible to assess fair compensation without taking into account the loss caused by the unsuitable advice which had exposed Ms Emptage to the risk of being unable to repay her loan at maturity. Failure to do so in this case had resulted in an award of compensation which bore no relation to the breach of duty or the reason why the mortgage was unsuitable.
http://www.bailii.org/ew/cases/EWCA/Civ/2013/729.html
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