This update summarises current regulatory developments in the European Union and certain member states including the UK, focussing on the investment funds and asset management and related sectors, during the past month. We also include in this update a longer summary in the UK section of the Independent Commission on Banking's Final Report on 12 September 2011 and the Coalition Government's initial reaction to it.


The AIFM Directive

Readers will remember that this Directive was the subject of a record several thousand amendments during the legislative process in Brussels before it was finally published in the Official Journal on 1 July 2011. During the process on 9 November 2009, the UK's Treasury Minister Lord Myners stated:

"This is a very dodgy Directive that's been poorly constructed. It was produced in a hurry. It's a process that makes those who support the European Union embarrassed"

and Patrice Berge-Vincent of the French financial regulator, the AMF, stated on 9 October 2009:

"Almost all of the Directive's provisions need to be redrafted to make them appropriate, proportionate and adequate".

Against this background, on 23 August 2011, ESMA published a further consultation on possible level 2 implementing measures under the AIFM Directive relating to future rules for alternative investment fund managers ("AIF managers") and the treatment of third-country entities. ESMA's proposals set out in this consultation paper include:

  • Supervisory co-operation and exchange of information. ESMA's draft advice to the European Commission focuses on the relationships between the EU and third-country competent authorities. ESMA envisages that the arrangements between competent authorities should take the form of written agreements allowing for exchange of information for the purposes of supervision, enforcement and systemic risk oversight. ESMA considers that the agreements should also impose a duty on the third-countries competent authorities to assist the relevant EU competent authorities, to enforce either EU or national legislation. It proposes that the agreements take the form of a multilateral memorandum of understanding (a "MMoU") centrally negotiated by ESMA itself.
  • Delegation of portfolio or risk management functions to third-country entities. ESMA's draft advice sets out the additional requirements to be applied when AIF managers delegate portfolio or risk management functions to an undertaking in a third country. The draft advice focuses on the content of the written agreement to be put in place between the competent authorities of the home member state and the third country concerned. ESMA considers that the detailed content of these agreements should be based on existing international standards.
  • Assessment of equivalence of third-country depositary frameworks. ESMA sets out its proposals on the elements to be taken into account when assessing whether the prudential regulation and supervision applicable to a depositary established in a third country has the same effect as the AIFM Directive.

This consultation paper is in effect ESMA's draft advice on Part IV of the Commission's December 2010 request for advice on the AIFM Directive implementing measures. It also summarises feedback received to the former Committee of European Securities Regulators' December 2010 call for evidence on the AIFM Directive implementing measures.

European Commission Consultation on a New EU Regime for Venture Capital

The Investment Management Association (the "IMA") has published its response dated 10 August 2011 to the European Commission's June 2011 consultation on a new European regime for venture capital. The IMA strongly supports a wide-ranging review of the AIFM Directive, rather than a stand-alone initiative relating to venture capital funds. It is of the view that the Commission should assess the proportionality of the AIFM Directive's requirements for all professional and non-systemically important funds (in addition to focusing on venture capital funds).

The IMA also calls on the Commission to align its venture capital work with the Markets in Financial Instruments Directive (2004/39/EC) ("MiFID"). This is because MiFID will govern trading in publicly listed securities of small and medium sized enterprises ("SMEs") at a later stage of their growth.

The City of London Law Society (the "CLLS") also published its response on 10 August 2011 to the European Commission's June 2011 consultation and included the following comments on the Commission's proposals:

  • the Commission should clarify that the passport regime will only apply to the ability to raise funds and will not require venture capital funds, or any other investors, to obtain a licence to invest in European companies;
  • firms that are outside the scope of the AIFM Directive should continue to be able to make use of national private placement regimes, and the proposed passport regime should be an additional option for firms, rather than a requirement;
  • the CLLS is concerned that the proposal refers to "professional investors as defined by MiFID" as it believes the MiFID definition is not appropriate to either private equity or venture capital investment, and suggests that the UK concept of "business angel" investors (as reflected in the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005 (S1 2005/1529)) would be a better model; and
  • the Commission should review and clarify the definition of a small and medium enterprise (a "SME") and the CLLS prefers the approach taken in the AIFM Directive, which applied a more limited definition of SME.

(A separate DechertOnPoint on the European Commission's consultation is currently in preparation).

A Common Definition of EU Money Market Funds

The European Securities and Markets Authority ("ESMA") published a Q&A paper on a common definition of EU money market funds ("MMFs") on 26 August 2011.

The Q&A paper relates to the guidelines on a commons definition of EU MMFs published by the former Committee of European Securities Regulators ("CESR") in May 2010. The guidelines apply only to collective investment undertakings authorised under the UCITS Directive (2009/65/EC) ("UCITS IV") and collective investment undertakings regulated under the national law of a member state which are subject to supervision, comply with risk-spreading rules and label or market themselves as MMFs.

The Q&A paper provides answers to questions on the guidelines that ESMA has received from both the competent authorities and the public. The aim of the Q&A paper is to promote common supervisory approaches and practices among competent authorities in the application of the guidelines. However, it is also intended to help management companies by providing clarity on the guidelines. The Q&A paper is not designed to create an extra layer of requirements in this area, although it may be converted into formal ESMA guidelines and recommendations in due course.

The MiFID Review

Revision of the Markets in Financial Instruments Directive ("MiFID") (which is now four years old), is a part of the European Commission's attempt to strengthen the rules governing financial markets in light of the financial crisis and to introduce additional rules relating to practices that were not widespread at the time of the original Directive. In December 2010 the Commission published a consultation paper on the review of MiFID. The consultation paper stated that technological advances, the complexity and changing make-up of financial markets, and the lessons of the financial crisis call for an extensive review targeted at addressing the areas where shortcomings have been revealed or improvements are needed. The paper argued that significant changes to MiFID are required as regards the organisation, transparency and oversight of various markets segments, especially in those instruments traded mostly over-the-counter ("OTC").

A widely-leaked draft copy of the MiFID Review due to be released next month now reveals that the European Commission will publish the MiFID reform in two parts—the first will be a regulation covering market infrastructure while the second part focuses on transparency issues and will be introduced as a directive. The draft regulation will mandate open access to clearing and expand current equities transparency regulation competition in the derivatives industry by allowing derivatives trading platforms access to existing derivatives clearing pools. The rules will also force widely traded derivatives out of the over-the-counter market and onto trading platforms. The Commission would also like to bring down the fees exchanges and trading platforms charge for data on share trades. Exchanges and other trading platforms would have to make all data free within fifteen minutes of a trade, with live data sold on what the Commission defines as a "reasonable commercial basis". Platforms would also have to store order data for at least five years to improve market abuse monitoring by supervisors.

The draft directive which accompanies the regulation contains proposals central to High Frequency Trading. ESMA has launched a preliminary consultation into high frequency trading, and the European Commission will now aim to bring all entities engaged in High Frequency Trading under MiFID. Tougher scrutiny of computerised trading programs is planned. The Commission will also start to regulate broadly defined Organised Trading Facilities ("OTFs"), (a trading system operated by an investment firm that is not already a regulated market or a multilateral trading facility). The Commission wishes to ensure that proprietary capital is not used on these OTFs.

The second half of the MiFID reform also contains strict consumer protection measures, such as allowing ESMA to co-ordinate permanent bans on products or to temporarily suspend a product.

Corporate governance reforms have also been added on to MiFID II. These propose that board members at financial services firms cannot combine more than on executive directorship with two nonexecutive roles (so as to ensure that they commit sufficient time to perform their functions). MiFID II will extend its scope to Commodity Markets. It is proposed that all trading venues on which commodity derivative contracts are traded adopt appropriate limits or alternative arrangements to ensure the orderly functioning of the market and settlement conditions for physically delivered commodities. Supervisers should also have powers to impose position limits on markets and trading venues will have to provide granular data on positions held in their markets.

In its MiFID review consultation in December 2010, the Commission wanted to make access to the EU for third-country firms and market operators subject to a strict equivalence regime. The current draft now includes a harmonised regime for granting non-EU firms EU-wide passports. This would replace existing national third-country market access regimes. The Commission is aiming to overcome the current fragmentation of third-country rules to "ensure a level playing field for all financial services actors in the EU".

Under the new regime, a non-EU firm would be authorised and passported to operate throughout the EU if it is "properly authorised" in its home jurisdiction to provide the services it wants to provide in the EU and is supervised in its home country. Such a firm would also have to comply with its jurisdiction's legal requirements on the fitness, propriety and competence of its management, and the suitability of its shareholders to ensure the sound and prudent management of the firm. Moreover, it must belong to an investor-compensation scheme, have sufficient initial capital, and comply with adequate organisational and internal control requirements. The non-EU firm will also have to comply with many of the MiFID conduct of business rules applicable to EU-based firms, including conflicts management, inducements and best execution requirements. The Commission also proposes giving ESMA a role in reviewing national regulators' decisions to authorise non-EU firms, as well as a veto over the awarding of a passport.

The draft is still subject to amendments and will be subject to more debate and then approval by all member states before it comes into force. The final legislative proposal is expected to be formally published in October 2011, although there are now rumours that it might be delayed until November 2011. By pushing much of the new rules into the regulation, the final decision on key aspects of the rules could take longer to emerge.

A Financial Transaction Tax

In its proposal for the Multiannual Financial Framework, the European Commission proposed the introduction of a financial transaction tax ("FTT") as a new own resource for the EU Budget. The idea of introducing a global FTT has been discussed at the G20 and France and Germany support the introduction of an EU-wide FTT if no global agreement can be reached. The Commission announced that it would publish proposals for an EU-wide FTT in advance of the G20 summit to be held in Cannes in November 2011.

The Commission has now decided to press ahead with a proposal for an FTT. Its DG Tax is finalising a draft directive that will target a specified group of transactions that are seen as difficult to move offshore. Sovereign debt and market makers are expected to be exempt. One issue that appears still undecided is whether the directive should set a fixed rate for the FTT or instead a minimum level that Member States would be allowed to go above.

The Commission is aware that such a tax would be difficult to apply without international cooperation and will therefore work on gaining support at the G20. (The Commission assessment is that if the EU sets an example other jurisdiction are more likely to follow.)

The Commission is expected to adopt the draft directive towards the end of October 2011, although this could slip. The directive would have to be adopted by unanimity in the Council (i.e., a single Member State may veto it and it is expected that the UK will).

The Commission's proposal is understood to set out plans for financial transaction tax on shares and bonds at 0.1 per cent and on OTC derivatives at 0.01 per cent with the possibility for Member States to increase the rate nationally. While it is not thought the proposed FTT will cover foreign exchange spot transactions on the basis that this could inhibit the free movement of capital, it is thought that it will cover foreign exchange derivatives transactions. It is also understood that the proposed FTT will cover all financial institutions (except central banks), including branches and subsidiaries. This raises concerns about extraterritoriality and could mean that, even if the UK opts out of the FTT, some transactions carried out in London could still be captured by an FTT introduced in the Eurozone or under enhanced cooperation.

Commodity Derivatives Markets Supervisory Principles

The International Organisation of Securities Commissions ("IOSCO") published a final report on principles for the regulation and supervision of the commodity derivatives markets on 15 September 2011.

The report contains a set of principles, supported by explanatory background information on how regulators can apply them. The principles are designed to assist regulators in constructing an appropriate regulatory and supervisory approach to preventing manipulative and abusive trading and to responding to disorderly market conditions. The report concludes that regulators should review their policies and seek to ensure that the principles are put into effect.

The principles address:

  • Contract design. These principles focus on establishing design concepts for futures contracts. There are principles on accountability, economic utility, correlation with physical market, promotion of price convergence through reliable settlement, responsiveness and transparency.
  • Surveillance of commodity derivatives markets. These principles include the basic framework for surveillance, powers needed to access information for exchange, over-the-counter ("OTC") and cash market transactions. The importance of monitoring large positions is emphasised.
  • Disorderly markets. These principles set out the powers needed by regulators to intervene in the markets to address disorderly conditions.
  • Enforcement and information sharing. These principles focus on enforcement rules, compliance programmes, a framework for addressing market abuse, powers and capacity to respond to market abuse, disciplinary sanctions and information sharing.
  • Pricing discovery and transparency. These principles set out when regulators should publish the aggregate exposures of different classes of large traders and promotes the reporting of OTC derivatives contracts to trade repositories.

(The principles in the IOSCO's report build on and expand the 1997 Tokyo Communiqué on the supervision of commodity futures markets and have been prepared in response to the G20's November 2010 request for further work on regulation and supervision of physical commodity derivatives markets.)

EFAMA Publishes a Blueprint for a European Consolidated Tape

The European Fund and Asset Management Association ("EFAMA") published a proposal for the establishment and operation of a European consolidated tape ("ECT"), together with recommended enabling measures, on 16 September 2011. This is intended to give investors greater certainty about prices, best execution, valuation and performance measurement, and lead to further reductions in their direct and indirect trading costs. The main purpose of the ECT is to serve as the official record for all trading business done in the EU market. Its key service is the provision of a real time consolidated feed of post-trade data.

EFAMA is publishing the proposal for an ECT against the background of the European Commission's proposals to amend the Markets in Financial Instruments Directive (2004/39/EC) and its implementing legislation (MiFID), following the Commission's MiFID review. The Commission is expected to adopt a legislative proposal to amend MiFID (now referred to as MiFID II) in October 2011. One of the aims of MiFID II is to improve the regulation of data quality and aggregation following the identification of weaknesses in this area due to the proliferation of trading venues under MiFID.

EFAMA hopes its proposal will contribute to the public debate on this issue and provide buyside input to the Commission for forthcoming legislative measures. It is proposing a single official ECT rather than a competitive commercial solution. Whilst it accepts that commercial solutions may address many of the issues that have been identified ahead of any imposed ECT, it expects that standards will still need to be set and supervised by the European Securities and Markets Authority.


FSA Policy Statement on Transposing UCITS IV

The FSA published a policy statement on transposing the UCITS Directive (2009/65/EC) ("UCITS IV") (PS11/10) on 2 September 2011.

PS11/10 outlines the main issues arising from the joint FSA and HM Treasury consultation paper on transposing UCITS IV, which was published in December 2010. It summarises the feedback received on the matters that are the FSA's responsibility and sets out the FSA's response, including where FSA Handbook changes differ significantly from the version consulted on. PS11/10 also sets out the final FSA rules implementing UCITS IV.

It will be recalled that UCITS IV had to be implemented by 1 July 2011 (The Handbook instrument implementing the new UCITS IV FSA rules and guidance (i.e., the UCITS IV Directive Instrument 2011 (FSA 2011/39)) came into effect on 1 July 2011, although firms have until 30th June 2012 to introduce the key investor information document ("KID") for their UCITS funds.)

The FSA has also published transposition tables indicating how HM Treasury and the FSA have transposed the UCITS IV requirements.

BIS Working Paper on High-Frequency Trading

The Department for Business, Innovation and Skills ("BIS") published a paper on the future of computer trading in financial markets as part of a project on high-frequency trading ("HFT") on 9 September 2011.

The working paper (which does not represent the position of the UK's Coalition Government) consists of the following three somewhat fanciful papers which review evidence directly commissioned by this project:

  • Financial stability and computer based trading. This paper considers the effect of computer trading on financial stability, reviews evidence of its past effect, and considers possible future risks. A key type of mechanism leading to instability is self-reinforcing feedback loops (whereby the effect of a small change loops back on itself and triggers a bigger change). A cause of instability is identified as a process called "normalisation of deviance", where unexpected and risky events come to be seen as normal.
  • The impact of computer based trading on liquidity, price efficiency/discovery and transaction costs. This paper considers the benefits that computer trading has had on liquidity, price efficiency and transaction costs, and suggests that liquidity has improved, transaction costs are now lower and market efficiency has not been harmed by computerised trading during regular market conditions.
  • The impact of technology developments. This paper explains that advances in HFT and reductions in the cost of technology are set to continue for the foreseeable future and suggests that fewer human traders will be needed because future, "trading robots" being able to adapt to the demands of markets.

New Tax Regulations on Pooling Investments by AIFs

The Authorised Investment Funds (Tax) (Amendment No 2) Regulations 2011 (SI 2011/2192) were made on 5 September 2011 and:

  • amend the genuine diversity of ownership condition in the authorised investment fund ("AIF") rules that it may be satisfied by an AIF (not just a property AIF, as currently) pooling the investments of unit trust schemes, offshore funds or other AIFs and allow the investors in those investing funds to be taken into account in applying the genuine diversity of ownership test to the AIF; and
  • reduce the compliance burdens on AIFs' tracking certain market indices by removing the need to check the status of some of the holdings of such funds and prevent a tax charge arising on a disposal of an interest in a non-reporting fund if that interest has been held as part of an investment strategy that requires tracking a recognised index of listed securities.

Comment: Similar changes have already been made in relation to offshore funds under the Offshore Funds (Tax) (Amendment) Regulations 2011 (SI 2011/1211). The new regulations are intended to put AIFs on an equal footing with offshore funds in this respect.

UK Government Legal Action against the ECB Over Rules on Clearing

The media reported on 15 September 2011 that the UK Government has commenced legal proceedings against the European Central Bank (the "ECB") concerning proposed rules on clearing in the European Court of Justice.

The new rules are expected to force the City of London's largest clearing house, LCH Clearnet, to relocate into the eurozone and highlights a growing impatience amongst UK politicians, who believe that the European Union's institutions are now using new regulations as a smokescreen to undermine London's pre-eminence as a global financial centre.

The ECB published a policy paper in July 2011 which set out its plan to require central counterparties that handle more than five per cent of a euro-denominated product to be based in the eurozone. It is this policy that could lead to London-based clearing houses having to move their operations into the eurozone.

HM Treasury has taken the view that the ECB's decision contravenes European law and fundamental single market principles by preventing the clearing of some financial products outside the eurozone and this is now to be tested in the ECJ.

Post-Legislative Assessment of the Financial Services (Land Transactions) Act 2005

HM Treasury released an information memorandum on the post-legislative assessment of the Financial Services (Land Transactions) Act 2005 ("the 2005 Act") on 15 September 2011.

The 2005 Act received Royal Assent on 19 December 2005 and came into effect two months later. Its purpose is to enable activities relating to financial arrangements involving the acquisition or disposal of land to be specified as regulated activities under section 22 of the Financial Services and Markets Act 2000 ("FSMA"). In practical terms, the Act brought home reversion plans and home purchase plans within the scope of FSA regulation.

HM Treasury has concluded that the benefits of FSA regulation of home reversion plans and home purchase plans are difficult to quantify. Both investments are viewed as long term which means that complaints and evidence of consumer detriment may be slow to emerge. However, to date no serious issues have come to light and the Government therefore considers that the reforms made by the Act have been effective without imposing significant costs.

The memorandum states that the FSA will carry out a post-implementation review of the regulation of home reversion plans and home purchase plans in due course, once any changes made as a result of its mortgage market review have been in force long enough to inform such a study.

FSA Consultation on Land Investment Schemes

The City of London Law Society (the "CLLS") has published its response to the FSA's June 2011 29th quarterly consultation, which included guidance relating to land investment schemes.

The response focuses on the proposed guidance in chapter 11 of the FSA's Perimeter Guidance Manual ("PERG") on land investment schemes and includes the following points of interest.

The CLLS is of the view that the proposed guidance should expressly refer to Sky Land Consultants plc, Re 120107 EWHC 399 (Ch) (13 March 2010), a case in which the High Court held that Sky Land should be wound up (under a petition by the Secretary of State) as it operated a collective investment scheme without being authorised or exempt under the Financial Services and Markets Act 2000.

Suggested amendments to PERG 11 are proposed by the CLLS in order to clarify that the substance of an arrangement is not the same as, and cannot be derived conclusively from, the intentions of an operator or of the investors in a scheme.

Pre-Legislative Scrutiny of the Financial Services Bill 2011

The House of Commons agreed on 14 September 2011 to instruct the Committee for pre-legislative scrutiny of the draft Financial Services Bill (the "Bill") to report on the Bill by 16 December 2011. (The Joint Committee had been due to report on the Bill by 1 December 2011.)

On 12 September 2011, the City of London Law Society (the "CLLS") published a response dated 9 August 2011 to HM Treasury's June 2011 White Paper on proposals for reform of the UK financial services regulatory structure, which included a draft of the Bill.

In its response, the CLLS advises that the draft Bill provides a scant framework for a fundamental reform that will replace a tripartite model of financial regulation with one that has four bodies. It considers that the efficient and effective interaction and co-ordination between the regulators will be critical to ensure a safe system of regulation. It will also be essential to reassure firms that they will not be paying for an inefficient duplicative system or be at risk of being caught in a cross-fire of disagreement or perimeter disputes between the new regulators. Amongst other things, the CLLS:

  • highlights a number of areas that require more detail in the draft Bill, including the interaction between the new regulators, the regulatory scope of the Prudential Regulation Authority and the rather strange proposal to split the regulation of exchanges from the regulation of clearing and settlement systems;
  • is concerned about the risk of the proposed structure decreasing the effectiveness of the UK in the EU at a time when there is a considerable shift of power to the EU regulatory bodies and calls for more clarity on how the new regulators will provide an effective and coherent voice in the EU; and
  • is concerned that the proposals include substantial extensions of enforcement processes, including the publication of decisions with little or no protection for regulated persons.

The response also sets out the CLLS's detailed comments on HM Treasury's proposals. Many of the comments repeat comments the CLLS has made previously which appear to have been ignored by HM Treasury. The CLLS has therefore now repeated its comments on the issues that it believes are of considerable importance where they either:

  • raise fundamental issues of natural justice and fair procedure; or
  • have negative implications for the UK's position as a financial centre compared with the other major EU centres.

FSA Guidance Consultation on Simplified Advice

The FSA published for comment a guidance consultation on simplified advice (GC11/22) on 15 September 2011. GC11/22 sets out proposed guidance on:

  • suitability;
  • adviser charging;
  • service disclosure;
  • professional standards;
  • designing and delivering a simplified advice process; and
  • choosing an appropriate product suite.

The proposed guidance is designed to help firms that want to offer simplified advice services by reducing any regulatory uncertainties that may be discouraging them from offering these services. It outlines how the regulatory regime applies to the simplified advice process, and the FSA's expectations of simplified advice services. The guidance focuses on simplified advice on retail investment products. The FSA advises that firms that choose to recommend other products through simplified advice processes must ensure they comply with the relevant rules for selling these products. It also points out that the guidance only mentions a sub-set of the rules that are applicable for simplified advice. For all of the relevant rules, firms need to refer to the FSA's Handbook.

The FSA has produced this additional guidance after hearing about the issues some firms have faced while designing and piloting simplified advice processes as part of their implementation of the Retail Distribution Review.

(Comments can be made on the proposed guidance until 15 November 2011).

The ICB's Final Report and Recommendations on the UK Banking Sector

On 12 September 2011, the Independent Commission on Banking (the "ICB") published its final report and recommendations on reforms to improve stability and competition in UK banking.

The report expands on the ICB's April 2011 interim report and also contains a summary of the responses received to the earlier consultation.

The ICB sets out recommended reforms for promoting stability and competition in UK banking. The recommendations on financial stability call for both structural reform, including a retail ring-fence and enhanced loss-absorbing capacity for UK banks. The recommendations on competition set out reforms for structural change in UK banking markets, for improving switching and consumer choice, and for pro-competitive regulation of financial services.

The ICB calls on the Government to respond to its recommendations by enacting reform measures. soon It is of the view that banks should be strongly encouraged to implement any operational changes as soon as possible.

However, because certain proposals will require additional capital, an extended implementation period is considered appropriate. This means implementation should be completed by the start of 2019 at the latest, which corresponds with the timetable for implementing Basel III.

The Report's recommendations are outlined in more detail below.

A Retail Ring-Fence

The ICB recommends the implementation of a retail ring-fence around retail banking activities in the UK. The purpose of the retail ring-fence is to isolate those banking activities where continuous provision of service is vital to the economy and to a bank's customers to ensure that the provision of services is not threatened as a result of incidental activities and can be maintained in the event of a bank's failure without Government solvency support.

The ICB sets out five principles that summarise how it foresees a ring-fence being introduced:

  • Mandated services. Only ring-fenced banks (which includes banks and building societies) should be granted permission by the UK regulator to provide mandated services. Mandated services comprise the taking of deposits from, and the provision of overdrafts to, individuals and small and medium-sized enterprises ("SMEs").
  • Prohibited services. Ring-fenced banks should be prohibited from providing certain services. Prohibited services should include:
    • any service that is not provided to customers within the EEA;
    • any service that results in an exposure to a non-ring-fenced bank or a non-bank financial organisation, except those associated with the provision of payments services where the regulator has deemed this appropriate;
    • any service that would result in a trading-book asset;
    • any service that would result in a requirement to hold regulatory capital against market risk;
    • the purchase or origination of derivatives or other contracts that would result in a requirement to hold regulatory capital against counterparty credit risk; and
    • services relating to secondary markets activity including the purchase of loans or securities.
  • Ancillary activities. The provision of ancillary services by ring-fenced banks should only be permitted to the extent they are necessary for the efficient provision of non-prohibited services, for example, they are likely to include employing staff, owning or procuring operational infrastructure, and limited financial activities.
  • Legal and operational links. Where a ring-fenced bank is part of a group, authorities should have confidence that they can isolate it from the rest of the group in a matter of days and continue the provision of its services without providing solvency support.
  • Economic links. Where a ring-fenced bank is part of a group, its relationships with entities in that group should be conducted on a third-party basis. It should not be dependent on the group for its solvency or liquidity. This should be ensured through regulation and sufficiently independent governance.

Loss Absorbency

The ICB makes the following recommendations on loss absorbency:

  • Equity. Ring-fenced banks should have equity capital of at least ten per cent of risk-weighted assets ("RWAs").
  • Leverage ratio. All UK-headquartered banks and all ring-fenced banks should maintain a Tier 1 leverage ratio of at least three per cent. (This is increased to 4.06 per cent for ring-fenced banks required to have an equity ratio of at least ten per cent.)
  • Bail-in. Resolution authorities should have a primary bail-in power allowing them to impose losses on long-term unsecured debt in resolution before imposing losses on other non-capital, non-subordinated liabilities. Resolution authorities should also have a secondary bail-in power to enable them to impose losses on all other unsecured liabilities in resolution, if necessary.
  • Depositor preference. In insolvency and resolution, all insured depositors (i.e., those who deposits are covered by the Financial Services Compensation Scheme) should rank ahead of other creditors to the extent that those creditors are either unsecured or only secured by a floating charge.
  • Primary loss-absorbing capacity. UK headquartered global systemically important banks ("G-SIBs") should be required to have capital and bail-in bonds (that is, primary loss-absorbing capacity) of at least seventeen per cent.
  • Resolution buffer: the supervisor of any G-SIB headquartered in the UK or ring-fenced bank with a ratio of RWAs to UK GDP of one per cent or more should be able to require the bank to have additional primary loss-absorbing capacity of up to three per cent of its RWAs.


The ICB makes the following recommendation on competition:

  • Market structure. The ICB confirms its view that the prospects for competition in UK retail banking would be improved by the creation of a new entity resulting from the Lloyds Bank divestiture.
  • Barriers to entry. The Prudential Regulation Authority (the "PRA") should work with the OFT to review the application of prudential standards to ensure that prudential requirements for capital and liquidity do not unnecessarily limit the ability of new entrants to enter the market safely and to grow.
  • Switching. A current account redirection service should be established, to streamline the process of switching current accounts for individuals and small businesses. (However, there is little else in the ICB's Final Report likely to meet the criticism of consumer account holders concerning the poor customer service offered by most of the retail banks in the UK – including the long queues, unhelpful bank counter staff, delays in implementing even the simplest of transactions and the apparent inability of most banks to acknowledge or respond to written communications from such customers).
  • Transparency. The OFT and the Financial Conduct Authority (the "FCA") should work with banks to improve transparency across all retail banking products (in particular for personal current accounts and business current accounts).
  • The Financial Conduct Authority. In the Authority's draft objectives, the efficiency and choice operational objective should be replaced with an objective to promote effective competition in markets for financial services. The ICB also suggests that the Government should reconsider the Authority's strategic objective to provide greater clarity on the fundamental issue of making markets work well.

Implementation and Timetable

The ICB suggests that its structural reform measures would best be implemented through primary legislation, providing authorities with appropriate powers to implement and enforce the ring-fencing of retail banks in accordance with the proposed principles. The ICB also suggests that its loss-absorbency measures would best be implemented through primary legislation.

As mentioned above, the ICB calls on the Government to respond to its recommendations by enacting reform measures soon. It is of the view that banks should be strongly encouraged to implement any operational changes as soon as possible. For example, the report indicates that the ICB would like foregone interest to appear on bank statements as soon as possible, and in any event no later than January 2013, and that the redirection service should be fully operational by September 2013.

However, because certain proposals will require additional capital, an extended implementation period is considered appropriate. This means implementation should be completed by the start of 2019 at the latest, to correspond with the timetable for implementing Basel Ill.

The Chancellor of the Exchequer, on 12 September 2011, stated that the report is welcomed and that the Coalition Government will: provide a response to the report by the end of 2011;

  • consult on the costs and benefits of the most appropriate way to implement the proposed changes;
  • legislate in the current Parliament to put the needed changes into law. The Government will consider which changes can be put in the draft Financial Services Bill, the primary legislation that will bring UK financial services regulatory reforms into effect; and that will need a new Bill; and
  • discuss proposed changes with international partners to ensure consistency with international agreements and EU law.

Financial Services and Markets Act 2000 (Carrying on Regulated Activities by Way of Business) (Amendment) Order 2011 Published

On 20 September 2011, the Financial Services and Markets Act 2000 (Carrying on Regulated Activities by Way of Business) (Amendment) Order 2011 (SI 2011/2304) ("the 2011 Business Order") was published and revises the circumstances in which a person entering into a sale and rent back ("SRB") agreement will be doing so by way of business.

The full regime for FSA regulation of SRB schemes came into full effect on 30 June 2010. However, since then, the FSA has found that unauthorised persons have entered into SRB transactions on the basis that they did not believe that they were carrying on the activity "by way of business".

The FSA requested the government to amend the Financial Services and Markets Act 2000 (Carrying on Regulated Activities by Way of Business) Order 2001 (SI 2001/1177) ("the 2001 Business Order") to make it clear that FSA regulation applies to all commercial SRB activities.

The 2011 Business Order:

  • inserts a new article 5 into the 2001 Business Order to state that any person carrying on the activity of entering into a regulated SRB agreement will be regarded as doing so by way of business, unless the parties to the agreement are family members; and
  • commits HM Treasury to carrying out a review of this amendment before the end of 2012. (Unless another order is made to keep the amendment in force, article 5 of the 2001 Business Order will cease to have effect on 1 January 2015.)

The 2011 Business Order came into force on 16 September 2011.



Implementation of the UCITS IV under French Laws

The UCITS IV directive was implemented in France via the edict n°2011-915 dated 1 August 2011 and published in the Journal official (JORF n°0177 dated 2 August 2011). The French Monetary and Financial Code has now been amended in accordance with the UCITS IV directive and the General Regulation of the AMF, as well as the AMF's instruction 2005-01 on the authorisation and periodic reporting requirements for French funds and foreign funds marketed in France, should now be amended shortly. The implementation of the UCITS IV directive has been the occasion to reorganise the French legal framework on UCITS and non-UCITS funds, to enhance the previous regulations and to sharpen the role and duties of the custodian in order to anticipate the AIFM directive.

AFG Response to ESMA Consultation

Further to the ESMA consultation paper on possible implementing measures of the AIFM Directive issued on 13 July 2011 the AFG (i.e., the French association for investment management industry) published on 13 September 2011 its response to the ESMA consultation, which is available on the following link:

Among the main comments of the AFG are a recommendation that delegation of portfolio management should only be allowed to entities authorised for collective investment management, the necessity that protection of funds' assets should be guaranteed at the same level throughout the EU and concerns on the calculation of the leverage of funds of hedge funds.

Tax Reforms Applicable to the Asset Management Industry

A certain number of tax reforms in France are now expected to impact French investment vehicles, in this respect including the following:

  • Amendment to the French wealth tax (impôt solidarité sur la fortune) which will impact French private equity funds allowing investors to reduce wealth tax (i.e., specific vehicle which permit investors to benefit from a favorable tax regime applicable to their investments). In substance the reform will simplify the current tax rate structure, the various thresholds and the notification process;
  • Increase of the social charges (CSG/CRDS) from 12.3 to 13.5 per cent. This results in an increase of the overall taxation rate on capital gains (including from investment vehicles) (which is coupled with such social charges); and
  • Increasing the tax rate related to long term capital gains resulting from sales of equity investments within the parent company regime and for distributions to the parent company. In France sales of an equity investment and distributions made to the parent company are usually not subject to corporate tax (subject to various requirements), except a quota for the various charges and expenses. Such quota, subject to corporate tax of 33.33 per cent, has risen from 5 per cent to 10 per cent, which means that the tax rate applicable to sales of equity investments within the parent company regime and distributions made to parent company have now risen from 1.67 per cent (i.e., 33.33 per cent x 5 per cent) to 3.33 per cent (i.e., 33.33 per cent x 10 per cent).


According to the current legislation in Germany insurance companies which invest in investment funds need to be provided with certain ongoing information on the portfolio of the respective fund which they can then pass on to the regulator BaFin in a report. This report is used by BaFin to monitor the indirect investments made by German insurance companies through investment funds. BaFin, BVI (German Asset Management Association) and GDV (German Association of Insurance Companies) have updated the reporting standard for German insurance companies regarding the investments in investment funds on 23 September 2011. The new fund reporting standard will be effective as of 31 December 2011.

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