FReD: 30 July 2010

Headlines

CEBS publishes stress test results

Treasury publishes plans for new regulatory structure

Treasury updates on Iran

FSA responds on capital standards

FSA confirms new powers

FSA reports on unregulated schemes findings

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European Union and International

 

Financial Stability Board (FSB)

FSB welcomes stress tests: The FSB chairman has welcomed CEBS’s release of its stress testing results (see CEBS below).  He said the exercise is an important contribution to bolstering confidence in the European banking system.  (Source: Press Release)

Contact: Brett Hillis or Madeleine de Remusat.

FSB reviews risk disclosures: FSB has started a peer review on implementation of its recommendations on risk disclosures by market participants from a 2008 report.  It has sent a template to national authorities showing the information it needs and will finish its review in January 2011.  (Source: Press Release)

Contact: Robert Finney or Chris Borg.

 

European Council

Council publishes regulatory architecture compromises: The Council has published Presidency compromises of the Regulations establishing the European System of Financial Supervisors and the European Banking Authority.  (Source: 12457/10 and 11962/3/10 REV 3)

Contact: Robert Finney or Rosali Pretorius.

Council welcomes EEA stability agreement: The Council has welcomed the extension of an MoU between the EU financial supervisory authorities, central banks and finance ministers, and their counterparts in the non-EU European Economic Area countries to address management and resolution of cross-border financial crises.  (Source: Press Release)

Contact: Robert Finney or Rosali Pretorius.

 

Committee of European Banking Supervisors (CEBS)

CEBS publishes stress test results: CEBS has published the results of its EU-wide stress testing exercise.  The objective was to provide policy information for assessing the resilience of the EU banking system to possible adverse economic developments, including sovereign risks.  The exercise covered 91 banks, which comprise 65% of the European market in terms of total assets. Under the test, the aggregate Tier 1 ratio would decrease from 10.3% to 9.2% over a two-year period.  The aggregate results depend partly on the continued reliance on government support for 38 institutions in the exercise.  As a result of the adverse scenario, seven banks would see their Tier 1 capital ratios fall below 6% (the benchmark set for the purpose of the stress test).  CEBS has published details of the exercise and the results from the banks that took part and also a set of FAQs.  (Source: Press Release, Aggregate outcome of the 2010 EU wide stress test exercise coordinated by CEBS in cooperation with the ECB, joint CEBS/ECB/European Commission Press Release and Questions and Answers: 2010 EU-wide stress testing exercise)

Contact: Brett Hillis or Madeleine de Remusat.

CEBS publishes guidelines on large exposures exemptions: The Capital Requirements Directive (CRD) now provides exemptions from large exposures rules for specific short-term exposures arising from the provision of money transmission, correspondent banking, clearing and settlement and custody activities (Article 106(2) (c) and (d) of the CRD).  CEBS has published guidelines (as required by the CRD) which provide further clarification of the eligibility criteria to be met to qualify exposures for exemption from the large exposure regime under the provisions of Article 106(2) (c) and (d) of the CRD.  (Source: Press Release and CEBS Guidelines on Article 106(2) (c) and (d) of Directive 2006/48/EC recast)

Contact: Brett Hillis or Madeleine de Remusat.

 

Committee of European Securities Regulators (CESR)

CESR publishes information on CRA repository: CESR has asked Credit Rating Agencies wanting information on the central repository to apply for information packages on connectivity testing and the CRA reporting instructions.  (Source: Press Release)

Contact: Robert Finney or Brett Hillis.

 

Committee of European Insurance and Occupational Pensions Supervisors (CEIOPS)

CEIOPS publishes QIS 5 FAQs: CEIOPS has published a set of FAQs on issues raised by participants and supervisors on the QIS 5 exercise.  (Source: CEIOPS-DOC-88/10)

Contact: Robert Finney or Emma Radmore.

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UK Government and Parliament

 

HM Treasury (Treasury)

Treasury publishes plans for new regulatory structure: Treasury is consulting on plans for its new approach to financial regulation.  Mark Hoban, launching the consultation, discussed what the new Government has already done.  He looked at the failure of the tripartite system and why the new supervisory approach learns from the past and is designed for the future.  He explained, and the consultation focuses on, the following key proposals:

• the responsibilities of the new Financial Policy Committee (FPC) within BoE.  The FPC will meet at least four times a year and will look across the economy at macroeconomic and financial issues.  It will publish the results of its deliberations and decisions.  It can also tell the new Prudential Regulation Authority (PRA) to take action against specific institutions for macroprudential reasons;
• PRA as a subsidiary of BoE.  It will have prudential regulatory responsibility for all deposit-taking institutions, insurers (including friendly societies) and investment banks/broker-dealers;
• the Consumer Protection and Markets Authority (CPMA – a working title according to the consultation).  The Government feels FSA’s wide remit means consumers often did not get enough regulatory protection and the new CPMA will have better focus.  It will regulate the conduct of business of all authorised firms, involving all products, with twin objectives of consumer protection and financial stability.  It will also prudentially regulate all firms required to be authorised under FSMA and not regulated by PRA.  CPMA will use FSA’s enforcement approach and will work together with, but at arm’s length from, the FOS and FSCS.  The Government will re-open the debate on consumer credit regulatory responsibility now CPMA has a strong “consumer” voice and will consult on this in the autumn.  Finally, CPMA will have a strong markets division to lead on market conduct regulation (including regulation of exchanges and trading platform providers) and represent the UK on the European Securities and Markets Authority;
• addressing the overlap between PRA and CPMA: there will be cross-membership of boards and statutory MoUs.  Treasury says that “assuming FSMA is to be the model for the PRA’s legal framework”, it will set out in legislation PRA and CPMA’s powers.  When new regulated activities take effect, legislation will specify which entity is responsible for which activities.  Each entity will have powers to grant or vary permissions and approve applicants for significant influence functions within firms, and rule-making, supervision and enforcement powers.  CPMA will also have power to approve individuals for conduct-related functions within PRA-regulated firms;  
• the Consumer Financial Education Body as another body to operate at arm’s length from CPMA;
• the possibility of merging the UKLA function with the Financial Reporting Council;
• giving BoE responsibility for oversight of central counterparty clearing houses and settlement systems; and
• crisis management tools and framework.

Mark Hoban said the new authorities would build on changes FSA has put in place and supervisors would have more discretion to interrogate firms’ business models. The paper does not cover the new proposed Economic Crime Agency, on which there will be separate consultation. The Government recognises the need for a smooth transition and wants new primary legislation in place within two years.  It wants comments on its proposals by 18 October.  The House of Commons has announced an inquiry into the proposals and asks for evidence by 22 September. (Source: Press Release, Speech, A new approach to financial regulation: judgement, focus and stability and House of Commons Press Release)

Contact: Robert Finney or Brett Hillis.

Treasury updates on Iran: Treasury has updated its sanctions lists and told institutions to take note of an EU Council decision on key Iranian entities.  From 27 July, Bank Mellat, Islamic Republic of Iran Shipping Lines (IRISL) and all their branches are subject to EU asset freeze restrictions.  Treasury had already imposed financial restrictions under the Counter-Terrorism Act 2008.  The Council decision requires UK financial and credit institutions to cease transactions and business relationships with Bank Mellat, IRISL and all their branches.  Treasury has published a note explaining the interaction between the EU asset freeze and CTA regimes and what firms should do, whether or not they have existing CTA licences or have reported relationships to Treasury.  It has made some changes to licences to take account of the Council decision.  (Source: EU asset freeze and Counter-Terrorism Act 2008 restrictions: Bank Mellat and IRISL and Treasury website)

Contact: Brett Hillis or Emma Radmore.

Treasury updates on Equitable Life: Treasury greeted the publication of the final Chadwick report on Equitable Life with the Equitable Life (Payments) Bill, now introduced in Parliament.  It has also set up an independent commission on Equitable Life payments.  (Source: Press Releases, Sir John’s advice and Equitable Life – important next steps)

Contact: Robert Finney or Emma Radmore.

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UK Financial Services and Markets Regulator

 

Financial Services Authority (FSA)

FSA comments on CEBS stress test results: FSA said the EU-wide stress test exercise carried out by CEBS shows that the UK banks are well placed to handle further periods of economic stress.  It also published the CEBS stress test results for the four UK groups involved.  (Source: FSA/PN/124/2010 and website)

Contact: Brett Hillis or Madeleine de Remusat.

FSA responds on capital standards: FSA has published feedback to its consultation on Strengthening Capital Standards 3 in which it proposed changes to its rules to implement most of CRD2 and CRD3.  The new rules take effect on 31 December 2010.  FSA is also now consulting further on additional CRD2-related material and implementing the CEBS guidance on core tier one capital, large exposures and operational risk.  The deadline for comments on the credit risk amendments is 23 August 2010 and the deadline for comments on the CEBS guidance is 23 October 2010.  The response deadlines reflect implementation deadlines.  FSA will also consult later on changes to its CRD3 proposals now CRD3 is in final form.  (Source: Consultation Paper 10/17***: Strengthening Capital Standards 3 – feedback to CP09/29, final rules for CRD2, and further consultation and FSA 2010/29)

Contact: Brett Hillis or Melissa Peters.

FSA confirms new powers: FSA has made final rules implementing some of the new powers it gets under the Financial Services Act 2010 and has extended the consultation period on one planned change.  New rules cover:

• amendments to DEPP, EG and the Glossary in respect of FSA’s powers to:
  • impose financial penalties or public censure on those who breach short-selling  rules;
  • suspend firms or individuals by stopping them undertaking some or all of the activities which they are permitted to carry on for a period of time; and
  • impose financial penalties on individuals who have carried out controlled functions without the necessary approval from FSA;
• the new Financial Stability and Market Confidence Sourcebook (FINMAR) and changes to COND and MAR in respect of disclosure of significant net short positions and to introduce FSA's policy on the use of the power to gather information in relation to financial stability from specified categories of both authorised and unauthorised persons to help identify potential threats to the UK financial market;
• changes to FEES in relation to the FSCS contribution to the costs associated with resolutions under the Banking Act 2009; and
• changes to miscellaneous parts of the Handbook mainly to take into account FSA’s new powers in respect of financial stability.

FSA made few changes to the consultation draft of the various rules.  The new rules will come into force on 6 August 2010.  FSA has extended the consultation period to 23 August in respect of its proposed changes to FEES in respect of FSCS management expenses.  It hopes to make its rules on this in September.  (Source: FSA/PN/123/2010, Consultation Paper 10/18**: Implementing aspects of the Financial Services Act 2010: Feedback on CP10/11, final rules and further consultation and FSA 2010/25 - 28)

Contact: Robert Finney or Chris Borg.

FSA bans and fines Northern Rock director: FSA has fined David Jones, former finance director of Northern Rock, £320,000 and banned him from performing any function related to a regulated activity.  It found he allowed false mortgage arrears figures to appear in explanatory text published with the 2006 annual accounts and was responsible for the continued misreporting of arrears and possessions figures to Northern Rock's assets and liabilities committee and to the Council of Mortgage Lenders for nearly one year.  FSA has already disciplined two other individuals formerly of Northern Rock.  Margaret Cole said "…as a senior director…and as an FSA authorised person, Jones had a duty to reveal the true position to the public and to important internal committees."  (Source: FSA/PN/126/2010 and Final Notice)

Contact: Rosali Pretorius or Madeleine de Remusat.

FSA feeds back on credit unions: FSA has published its near final rules to strengthen the financial resilience of the credit union sector and reduce the number of credit union failures.  On average, six credit unions fail each year.  FSA’s new rules, in a new Credit Union sourcebook (CREDS), will replace the existing sourcebook CRED.  The main changes are:

• new credit unions must have adequate initial capital based on the nature, scale and complexity of their business.  Smaller credit unions will usually need initial capital of at least £10,000 and larger credit unions at least £50,000;
• smaller credit unions must have a capital-to-assets ratio of at least 3%; and
• all credit unions must hold liquid assets of at least 5% of total relevant liabilities but not below 10% in two consecutive quarters.  This is the current requirement for smaller credit unions but a slight increase for larger credit unions.

The capital-to-assets and liquidity requirements will be phased in, coming into full effect on 30 September 2013.  (Source: FSA/PN/124/2010 and Policy Statement 10/11: A review of the Credit Union Sourcebook (CRED): Feedback on CP09/27 and near final rules)

Contact: Rosali Pretorius or Emma Radmore.

FSA makes more new rules: At FSA’s Board meeting on 22 July it made changes to the Handbook in addition to the CRD and FS Act changes mentioned above which amend:

• BIPRU in respect of  the conditions a firm is to comply with if it is to operate the simplified ILAS approach;
• COBS to clarify the rules around approving promotions for an overseas firm to ensure that the firm takes reasonable steps and deals with UK retail clients in an honest and reliable way;
• CASS to amend an incorrect cross-reference;
• SUP to provide clarification on the time necessary for FSA to assess approved person applications, to improve the transparency of reporting requirements for payment services and to clarify the guidance on data item FSA015;
• LR and DTR to clarify aspects of application; and
• various parts of the Handbook but mainly LR in respect of references in FSA's rules to the Combined Code are consistent with the most recent Financial Reporting Council standards.

Most of the changes take effect from 6 August except those in respect of payment services reporting, which took effect immediately.  (Source: Handbook Notice 102 and FSA 2010/30-35 and 37-39)

Contact: Emma Radmore or Madeleine de Remusat.

FSA reports on unregulated schemes findings: FSA has published the findings of its project which assessed firms' financial promotions and advice processes for the sale of Unregulated Collective Investment Schemes (UCIS).  FSA found firms were unaware of the statutory restrictions on the promotion of UCIS to the general public.  It says firms do not adequately consider:

• customers' eligibility for the promotion of UCIS;
• suitability of UCIS when giving advice; or
• risk management and oversight (particularly in relation to financial promotions and customer risk profiles).

FSA has produced a good and poor practice report to help firms improve compliance.  (Source: Unregulated Collective Investment Schemes – Project Findings)

Contact: Rosali Pretorius or Emma Radmore.

FSA publishes insurance newsletters: The July issue of FSA's Life and General Insurance Newsletter includes articles on the Solvency II regime, FSA's changing approach to reviewing firms’ scheduled Individual Capital Assessments and FSA’s review of financial crime controls in small firms.  (Source: Insurance Newsletter: Issue 2)

Contact: Emma Radmore or Melissa Peters.

Up next from FSA: The latest issue of Handbook Development promises during August:

• a discussion paper on the prudential regime for trading activities; and
• feedback on FSA’s discussion paper on financial reporting by credit institutions.

Papers due in September include feedback on capital planning buffers and on the Walker Review consultation.  (Source: Handbook Development No. 125)

Contact: Emma Radmore or Melissa Peters.

 

Financial Services Compensation Scheme (FSCS)

FSCS pays £204 million in compensation: FSCS reports in its Annual Report and Accounts 2009/10 that it has paid more than £204 million in compensation to over 21,000 claimants.  Two thirds of the compensation paid during the year was for Payment Protection Insurance and investment claims. (Source: Press Release and Financial Services Compensation Scheme: Annual Report and Accounts 2009/10)

Contact: Rosali Pretorius or Dominic Gilmore.

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Other Authorities/Regulators/Trade Associations

 

Bank for International Settlements/Basel Committee on Banking Supervision (Basel)

Basel agrees reform plans: The oversight body of the Basel Committee met on 26 July to review and agree the substance of the capital and liquidity reform package.  An annex to the press release describes the main heads of agreement under capital, counterparty credit risk, leverage ratio and global liquidity standard.  The regulatory buffers will be finalised before the end of the year.  (Source:  Press Release and Annex)

Contact: Brett Hillis or Madeleine de Remusat.

Basel looks at counter-cyclical buffers: Basel has published a working paper looking at possible designs for counter-cyclical capital buffers.  It looks at the differences between a system-wide or a bank-specific approach and thinks a system-wide one is better.  The paper supports the Basel consultation on the subject (see FReD This Week 23 July).  (Source: Counter-cyclical capital buffers: exploring options)

Contact: Brett Hillis or Madeleine de Remusat.

 

British Bankers’ Association (BBA)

BBA responds on recovery plans: BBA has responded to:

• Treasury’s paper on improving regulation: it stresses the importance of a smooth transition to the new structure and comments how far ahead of many countries UK regulatory reform already is.  It calls for a “substantial and authoritative” regulator; and
• BIS’s paper on financing a private sector recovery: it says banks are willing to lend, but only to businesses with robust business models and that it helps nobody if banks lend to borrowers that will struggle to repay loans.  It says the best way to help lending to SMEs is to restart the securitisation and wholesale markets so there will be a steady stream of new funds that banks can convert into loans. 

(Source: Press Releases)

Contact: Robert Finney or Brett Hillis.

BBA pleased with stress testing: In response to CEBS’s announcement on bank stress tests, BBA said UK banks have already worked hard to rebuild their businesses and put money aside to cover future risks.  It supports stress testing, but says the long-standing bilateral approach between individual institutions and their regulator is the appropriate management tool.  (Source:  Press Release)

Contact: Brett Hillis or Melissa Peters.

Industry responds on cross-border supervision: BBA and the Association for Financial Markets in Europe have responded to CEBS’s consultation on guidance for supervisors on the joint assessment of elements of supervisory review and capital adequacy of cross-border groups.  They support global colleges of regulators but say colleges must be adaptable and comply with Basel and other relevant standards.  The response also looks at the role of the new planned EBA and how colleges will work.  It stresses the need to recognise that firms do not necessarily organise their business within jurisdictions or legal entities, but often on business lines.  However, the associations do not support CEBS’s plan to repeat guidance on stress tests because firms are worried they could face three levels of mandatory stress test, which is too much.  (Source: Draft guidelines for the joint assessment of the elements covered by the supervisory review and evaluation process and the joint decision regarding the capital adequacy of cross-border groups (CEBS CP 39): A response by BBA and AFME)

Contact: Brett Hillis or Rosali Pretorius.

BBA responds on operational risk: BBA has also responded to the CEBS consultation on management of operational risk in market-related activities. BBA recognises CEBS has tried to take into account many of the comments BBA made in its response to the original paper but has asked for a meeting with CEBS to look at some points the response has not addressed.  (Source: CEBS CP 35 (revised) on the management of operational risk in market-related activities)

Contact: Brett Hillis or Madeleine de Remusat.

 

European Fund and Asset Management Association (EFAMA)

EFAMA responds on EMIR: EFAMA has responded to the European Commission's consultation on Derivatives and Market Infrastructures.  EFAMA believes that, unless the margining and collateral arrangements established within the CCPs are correctly set to take account of all the risks in the system, the cost of central clearing will be borne disproportionately by the very people the legislation seeks to protect – the man in the street, through pensions, insurance endowment policies and savings in UCITS funds.  (Source: EFAMA website) 

Contact: Chris Borg or Robert Finney.

 

Finance and Leasing Association (FLA)

FLA says CC transfer huge task: Commenting on Treasury’s consultation paper, FLA said the Government is right to recognise it would be a huge task to transfer regulation of consumer credit to a new body.  (Source: Press Release)

Contact: Ian Roberts or Dominic Gilmore.

 

International Association of Insurance Supervisors (IAIS)

IAIS review core principles: IAIS is reviewing its core principles for insurance.  It has published a document setting out how it plans to consult and make changes.  (Source: Revision of the Insurance Core Principles: Process for Review and Consultation)

Contact: Robert Finney or Emma Radmore.

 

Investment Management Association (IMA)

IMA comments on new UK regulatory structure: IMA welcomes the recognition of the agency role of investment managers which, under the new UK regulatory structure, will be supervised by the Consumer Protection and Markets Authority.  IMA does, however, have some concerns and warns that it is essential that regulators balance sell-side and buy-side interests.  Investment managers, as users of the market on the "buy-side", act on behalf of their clients (pension funds, charities and ordinary investors).  IMA urges BoE, in its new role as regulator of all exchanges, clearing and settlement systems, to take full heed of buy-side views.  (Source: IMA Press Release) 

Contact: Robert Finney or Brett Hillis.

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Recent publications and forthcoming events

Complying with sanctions laws: JMLSG takes action: Emma Radmore wrote an article for Complinet on the draft JMLSG guidance on the financial sanctions regime.

Robert Finney appeared on CNBC commmenting on European and UK development in light of the financial sector's success in pushing back on proposed reforms.  Robert suggested that the watering down of the original proposals was a result of a normal legislative process of compromise, from extreme to workable proposals - some nonsensical ideas were likely to remain in the final legislation, but most of the worst excesses of the extreme reaction to the financial crisis would probably be avoided.

The MiFID Review: Emma Radmore has written an article for Compliance Monitor on the progress of the MiFID Review to the end of May 2010.

Insurance broker bribery and corruption controls: FSA wants action: Emma Radmore has written an article for Complinet on FSA's latest report.

Compliance Register MLRO conferences: The Compliance Register is running a series of MLRO conferences.  The first is on 9 June and Emma Radmore will be speaking at the second event on 13 October.

Financial Markets and Regulation partners' opinions in the media: You can see the Financial Markets and Regulation group's national media appearances on the BBC, in the Financial Times, City AM and other national press and on CNBC.  Most recently, Robert Finney was quoted in City AM and appeared on CNBC discussing the future of FSA after the Conservative-Liberal Democrat Coalition scrapped the orginal Conservative plans to disband it.

FSA Business Plan 2010-2011: We wrote an article for Complinet on FSA’s Business Plan for 2010-2011.  For further information, contact Rosali Pretorius or Ming Da Wang.

FSA Financial Risk Outlook 2010: We wrote an opinion for Complinet and an article for Compliance Monitor on FSA’s Financial Risk Outlook 2010.  For further information, contact Rosali Pretorius, Emma Radmore or Ming Da Wang.

Developments in Anti-Money Laundering: We wrote an article for Compliance Monitor on recent developments in Anti-Money Laundering laws and practices.  For further information, contact Emma Radmore.

Bank notes on new regulatory treatment of sukuk: The latest edition of our Bank notes publication includes an article by Robert Finney and Matthew Sapte on the new regulatory treatment of sukuk.

PLC/DWS practice note on Consumer Credit Directive:  We have collaborated with PLC Financial Services on a practice note looking at key issues in implementation of the Consumer Credit Directive into UK law.  For more information, please contact Ian Roberts, Brett Hillis or Matthew Hodgson.

Single Customer View: Time to get your customer data in shape: John Worthy, a partner in Denton Wilde Sapte's Technology group, has written an article for Complinet in which he reviews what FSA's new rules on the SCV mean, what issues they raise and whether there is good news for financial institutions.

Bedding Down to BCOBS: We have written an article for Compliance Monitor on FSA's new Banking Conduct of Business Rules.  For more information, please contact Brett Hillis or Emma Radmore.

Turner Review feedback: a victory for FSA?: We have written an article for Complinet on FSA's response to the Turner Review feedback.  For more information, contact Robert Finney or Emma Radmore.

Perfect har-money?: The new e-money directive: We have written an article on the new e-money directive and its interaction with other legislation.  For further information, contact Brett Hillis or Melissa Peters.

Structure of UK financial regulation: fix it or rip it up and start again?: We have written an article on key reports analysing flaws in regulation and changes needed.  For further information, contact Robert Finney or Emma Radmore.

Financial sanctions and financial institutions: We have written an article on UK financial sanctions and FSA's expectations of the regulated community for Financial Regulation International.  For further information, please contact Robert Finney or Emma Radmore.

Social usefulness: The purpose of regulation?: We have written an article for Complinet on Lord Turner's recent speech in New York.  For further information, please contact Rosali Pretorius or Emma Radmore.

Can you prove your TCF?  We have published an article looking at how a firm can prove it has met FSA's TCF outcomes.  For further information, please contact Brett Hillis, Emma Radmore or Dominic Gilmore.

Know your contacts: We have written an article on the lessons from the Aon fine.  For further information, please contact Rosali Pretorius or Emma Radmore.

New choices for credit card issuers: We have written an article on how the Payment Services Directive may affect credit card issuers.  For further information, please contact Ian Roberts, Brett Hillis or Dominic Gilmore.