Regulation and compliance
Macroprudential Policy Tools and Frameworks - Progress report to G-20
The Financial Stability Board (FSB) has published a progress report to the G-20 concerning macroprudential policy tools and frameworks. The report follows an earlier update given to the G-20 in February 2011 and traces the progress in implementing macroprudential policy frameworks along three broad lines: (i) advances in the identification and monitoring of systemic financial risk; (ii) the designation and calibration of instruments for macroprudential purposes; and (iii) building institutional and governance arrangements in the domestic and regional context.
The main message of the report is that effective macroprudential frameworks require institutional arrangements and governance structures, tailored to national circumstances, that can ensure an open and frank dialogue among policymakers on the policy choices that impact on systemic risk, resolve conflicts among policy objectives and instruments and mobilise the right tools to limit systemic risk.
The report also discusses the scope for further progress. First, the identification of systemic risk is a nascent field and that no common paradigms as yet exist. Further research is needed, not least to better inform the collection and analysis of data already underway. Second, new tools will need to be tried out in different circumstances and their performance evaluated against expectations. Finally, many jurisdictions still lack specific institutional arrangements for the conduct of macroprudential policy and those that have recently introduced them will need to gather experience on their performance.
View Macroprudential Policy Tools and Frameworks - Progress report to G-20, 27 October 2011
FSB publishes recommendations to strengthen oversight and regulation of shadow banking
The Financial Stability Board (FSB) has published a report entitled Shadow Banking: Strengthening Oversight and Regulation (the Report). The Report sets out the FSB’s recommendations on a number of issues concerning shadow banking that were requested by the G-20 leaders at the November 2010 Seoul Summit.
The Report’s recommendations set out high level principles for regulators and a stylised monitoring process. This process calls on regulators to first assess the broad scale and trends of non-bank credit intermediation in the financial system, drawing on information sources and complemented with other information such as supervisory data. Using this assessment the FSB believes that regulators should narrow down their regulatory focus to those types of non-bank credit intermediation that have the potential to pose systemic risks, by focusing in particular on those involving the following key risk factors: (i) maturity transformation; (ii) liquidity transformation; (iii) imperfect credit risk transfer; and/or (iv) leverage. The FSB then calls on regulators to assess in detail the potential impact that the severe distress or failure of certain shadow banking entities/activities would pose to the overall financial system through looking at other factors, such as the inter-connectedness between the shadow banking system and the regular banking system.
The Report also describes work plans for the five work streams, announced earlier this year, that are designed to assess in more detail the case for further regulatory action:
- Banks' interactions with shadow banking entities (indirect regulation).
- Money market funds.
- Other shadow banking entities.
- Securitisation.
- Securities lending and repos.
All five work streams will report their proposed policy recommendations to the FSB, which will continue to review the work streams so as to provide consistency to the overall project.
View FSB publishes recommendations to strengthen oversight and regulation of shadow banking, 27 October 2011
View Shadow Banking: Strengthening Oversight and Regulation - Recommendations of the Financial Stability Board, 27 October 2011
Finalised guidance on thematic feedback on the FSA’s reviews of the Regulated Covered Bonds programmes
The FSA has published finalised guidance, which provides thematic feedback on its reviews of the Regulated Covered Bond (RCB) programmes. Following the annual review of the RCB programme last year, the FSA has provided feedback to a number of issuers on the scope and depth of engagement that the compliance function has with the programme.
FG 11/20 sets out the FSA’s expectations regarding the level of involvement that the compliance function should have with regulated programmes for the benefit of issuers. As a minimum, the FSA expects the second line of oversight of all regulated issuers to include:
- A clearly defined and documented mandate and terms of reference related to the programme, as well as regular and formalised interaction with the programme.
- Ongoing monitoring of the programme.
- A clear understanding of the requirements and the role of the compliance function in relation to the programme.
- Adequate and skilled resource, with appropriate depth of expertise in covered bonds and evidence of the ability to challenge management.
- A clearly defined escalation process from the first line to compliance and from compliance to independent risk oversight committees.
FG 11/20 also provides examples of good practice by issuers of RCBs.
View Finalised guidance on thematic feedback on the FSA’s reviews of the Regulated Covered Bonds programmes, 1 November 2011
FSA publishes latest results
The FSA has published on its website the latest performance results relating to service standards and customer satisfaction. These results relate to the period between 1 April 2011 to 30 September 2011, and also 1 January 2011 to 30 June 2011.
During this period, a total of 48 service standards were in place and for two of these standards no transactions were recorded. For the 46 standards where transactions were recorded, 30 of the standards were met and 16 were not. The FSA explains that eight of the missed standards had challenging 100% targets and that the other transactions, which did not meet the service standards, were due to the complexity of the queries and the FSA’s more intrusive approach to regulation.
This information is accompanied by a graph that shows the FSA’s performance against its standards for the last three years. The graph shows an improvement in performance as compared with the previous period.
In relation to customer satisfaction, the FSA explains that the research is conducted by an independent research company. The FSA’s overall satisfaction score for the Customer Contact Centre, in relation to consumers, is 77. This is below the target score of 80. The FSA explains that it was challenged by the high volume of emails during this period which was caused by increased customer awareness of scams, boiler rooms and land banking. The FSA’s overall satisfaction score for the Customer Contact Centre, in relation to firms, is 79.
View FSA publishes latest results, 31 October 2011
View FSA Service Standards graph, 31 October 2011
Credit Ratings Agencies - Registration Decisions
The FSA has announced that it has been designated as the competent authority of the UK for the purposes of the Credit Ratings Agency Regulation.
The FSA has issued a press release stating that it has registered the following credit rating agencies: Standard & Poor’s Credit Market Services Europe Ltd; Fitch Ratings Limited; Fitch Ratings CIS Limited; Moody’s Investors Service Ltd; and DBRS Ratings Limited.
View Credit Ratings Agencies - Registration Decisions, 31 October 2011
Guidance consultation - Remuneration - Proportionality Guidance - Proposal to change the boundary between Tiers 2 & 3 for banks and building societies
The FSA has issued a guidance consultation which proposes a change to the boundary between Tiers 2 and 3 of the Remuneration Code for banks and building societies. The proposed guidance recommends that this boundary is raised from £50 million capital resources to £100 million for banks and building societies, aligning it with the corresponding boundary for BIPRU 730k firms (i.e. full scope BIPRU investment firms). The deadline for comments on the guidance consultation is 28 November 2011.
View Guidance consultation - Remuneration - Proportionality Guidance - Proposal to change the boundary between Tiers 2 & 3 for banks and building societies, 28 October 2011
Consultation Paper 11/21: Regulatory fees and levies: Policy proposals for 2012/13
The FSA has published Consultation Paper 11/21: Regulatory fees and levies: Policy proposals for 2012/13 (CP11/21).
CP11/21 is the FSA’s annual consultation on proposed changes to the underlying policy for the FSA, the Financial Services Compensation Scheme (FSCS), the Financial Ombudsman Service (FOS) and the Money Advice Service (MAS) on fees and levies. In the following January the FSA will consult on:
- The Annual Funding Requirement and its allocation between fee-blocks.
- FSA fee rates for the forthcoming financial year.
- FSCS management expenses levy limit for the forthcoming financial year.
- FOS general levy for the forthcoming financial year.
- MAS levies for the forthcoming financial year.
To help firms identify the chapters in CP11/21 that are most relevant to them the FSA has set out a table at the end of chapter 1 which summarises the fee payers likely to be affected by the proposed changes.
The deadline for comments on CP11/21 is 6 January 2012 with the exception of the proposals in chapter 2 where the deadline is 6 February 2012. The FSA expects to publish the final rules and appropriate feedback statements in its annual consolidated Policy Statement in May 2012. This will reflect the finalised policy and rules from this consultation and the subsequent consultation in the New Year on fees and levies rates.
View Consultation Paper 11/21: Regulatory fees and levies: Policy proposals for 2012/13, 28 October 2011
Consultation on version 3 of the Transaction Reporting User Pack
The FSA has published a guidance consultation on a proposed version 3 of the Transaction Reporting User Pack (TRUP).
The TRUP provides guidance to firms on understanding the transaction reporting obligations that come from the Markets in Financial Instruments Directive, implemented through chapter 17 of the Supervision manual (SUP 17).
The FSA is consulting on an updated version of TRUP in order to:
- Update the document to remove historical information that is no longer relevant.
- Update references and incorporate guidelines published by the Committee of European Securities Regulators.
- Incorporate guidance published elsewhere and guidance issued since the publication of version 2 of the TRUP.
- Provide clarification on areas raised by firms and trade bodies and where it is helpful in assisting the FSA to conduct its market abuse monitoring.
The deadline for comments on the guidance consultation is 24 November 2011.
View Consultation on version 3 of the Transaction Reporting User Pack, 27 October 2011
Letter from Chairman of the Treasury Committee to the Chairman of the draft Financial Services Bill Committee
The House of Commons’ Treasury Committee has published a letter that its chairman, Andrew Tyrie MP, has sent to Peter Lilley MP, chairman of the draft Financial Services Bill Committee.
In his letter Mr Tyrie makes the point that the Government’s determination to legislate its regulatory reform proposals early next year leaves limited time available for pre-legislative scrutiny. In light of this it is important that both Committees examine as much of the draft Financial Services Bill as possible.
Mr Tyrie then sets out a number of issues that his Committee feels should be reviewed. This includes:
- The relationship between, and the responsibilities of, the Treasury and the Bank of England and its subsidiaries and committees, both in normal times and particularly in times of financial turbulence.
- The accountability and governance at the Bank of England.
- The examination of the process for agreeing and legislating for new macro-prudential tools.
- Further clarity concerning the boundary between the proposed Prudential Regulation Authority (PRA) and the Financial Conduct Authority (FCA), consistency between regulatory approach at the margins and mechanisms to allow a firm to move from being lead supervised by one to the other.
- The proposed product intervention powers of the FCA.
- The regulatory objectives and role of the PRA.
- The extent that EU regulatory initiatives impinge on the UK’s room to manoeuvre with regard to domestic regulation.
- How the recommendations of the Independent Commission on Banking will be incorporated into the draft legislation or other legislative vechicles.
View Letter from Chairman of the Treasury Committee to the Chairman of the draft Financial Services Bill Committee, 25 October 2011
FSA enforcement
The Tribunal has upheld the FSA’s decision to prohibit Mr Bedford, a former director of an insurance broker, and decided to impose a penalty of £10,000 (reduced from a starting point of £200,000). Mr Bedford continued to place surety bonds and related business with a counterparty, despite accepting that he should have realised the risk posed by this counterparty from July 2006 onwards and, from July 2007 onwards, knowing that the counterparty was committing fraud. Mr Bedford subsequently forged documents and issued cover without an insurer’s authority in an attempt to conceal the fraud.
Mr Bedford admitted the conduct alleged but contested the severity of the sanctions proposed by the FSA before the Tribunal. Notwithstanding Mr Bedford’s contrition, admissions and the serious consequences of a prohibition, the Tribunal considered that this was necessary to protect the public. The Tribunal concluded that the fact that Mr Bedford had received a police caution for similar conduct did not preclude the FSA from imposing a penalty. The Tribunal expressed surprise that Mr Bedford had not been prosecuted and described his misconduct as serious, in the context of which a penalty of £200,000 could be perceived as lenient. However, on the basis of evidence submitted by Mr Bedford concerning financial hardship, it decided to depart from recent precedent, stating that Mr Bedford had no realistic prospect of paying a higher amount. The Tribunal concluded that “the need to deter others does not justify the imposition of a penalty of that magnitude in the particular circumstances of this case.”
View David John Bedford, 31 October 2011
Dubai: DFSA Listing Rules - Consultation Paper
The Dubai Financial Services Authority (the DFSA), the independent regulator of all financial and ancillary services conducted in and from the Dubai International Financial Centre (the DIFC), published consultation paper no. 78 "Proposed DFSA Listing Rules" on 6 October 2011 (the Consultation Paper).
The Consultation Paper seeks feedback on the proposed new listing rules (the Listing Rules) which the DFSA will have to adopt in due course as a result of the transfer of the responsibility for maintaining the Official List of Securities (the List) from NASDAQ Dubai to the DFSA on 1 October 2011.
To deal with any listings during the interim period between the transfer to the DFSA of the responsibility for maintaining the List and the coming into force of the new Listing Rules in due course, the OSR (Interim Listing And Transitional Rules) Rule-Making Instrument (No. 80) came into force on 1 October 2011 which repealed and replaced the previous Offered Securities Rules (OSR) module of the DFSA Rulebook with an updated version (the Updated OSRs). The Updated OSRs includes a new chapter 13 (Listing Rules (Interim)) which incorporates NASDAQ Dubai’s previous listing rules into Appendix 6 of the Updated OSRs, amended as required to reflect the fact that the DFSA now has responsibility for maintaining the List and deleting certain superfluous provisions.
The DFSA has clarified that its key aims in drafting the new Listing Rules are to improve proportionality, efficiency and competition. The DFSA is keen to ensure that the new Listing Rules are not overly burdensome whilst at the same time are reflective of international standards. In this regard, the DFSA has benchmarked the new Listing Rules against the equivalent UK and Hong Kong regulations.
The new Listing Rules, when adopted (which is expected to be in the first quarter of 2012), will be included as a chapter in the new markets rules module which is proposed to be included in the DFSA’s Rulebook in due course (see consultation paper no. 75 “Proposed changes to the Markets Law Regime”). The chapter will incorporate other rules, such as rules on the requirement to prepare a prospectus, market disclosures and corporate governance, by reference to other chapters of the markets rules module.
The DFSA has highlighted the following four key points of interest in the Consultation Paper:
- The proposal to introduce listing principles with the aim of ensuring that listed entities understand and pay due regard to the fundamental role they play in maintaining market confidence and ensuring a fair and orderly market. The listing principles will be in addition to and complement the DFSA’s Corporate Governance Principles.
- Including a free float requirement set at a threshold of 25% (reflecting the EU model). The test of those entities which will not be construed to be “public” for the purposes of the free float requirement has been taken from the United Kingdom Listing Authority listing rules (see LR 6.1.19). The free float requirement is both an eligibility and ongoing requirement but the DFSA proposes to retain discretion to accept less than 25% free float if it is felt that liquidity will not be affected.
- Including an eligibility requirement that the issuer must have sufficient working capital available for 12 months post the listing. The sponsor declaration will also give comfort around this statement as the issuer’s sponsor will be required to confirm that such statement has been given after due and careful enquiry by the directors of the issuer.
- The inclusion of provisions related to controlling shareholders and conflicts of interest with the aim of ensuring that the issuer can operate independently.
For further information or questions on the above, please contact Emma Chee (Senior Associate).
Obtaining a Dubai Financial Services Authority licence
The financial services team in Dubai has produced a new online client briefing which summarises the process for obtaining a Dubai Financial Services Authority licence.
View Obtaining a Dubai Financial Services Authority licence, October 2011
France: Provisions relating to recommendations over CO2 emissions
French rules governing CO2 emissions trading markets are gradually taking shape. As previously reported, the spot market status of French platform Bluenext has been upgraded from a multilateral trading facility to a regulated market in order to satisfy the European requirement that only regulated markets may organise the EU auction of CO2 emission allowances. In addition the jurisdiction of the French Securities regulator (the Autorité des Marchés Financiers or AMF) has been extended to cover the emissions market with the creation of a new section in the AMF Rulebook entitled “Regulated markets for emissions trading” (Book VII). This new section contains rules relating to market operators, market membership, money and deposits, market abuse and the production and dissemination of investment recommendations.
A government decree was nonetheless necessary in order to give full effect to the new requirements concerning investment recommendations. As a result of this intervention, the production and dissemination of information aimed at distribution channels or the public and recommending or suggesting an investment strategy with regard to emission allowances now trigger a whole set of rules.
The new rules concerning investment recommendations also include general requirements in terms of honesty, fairness and impartiality or disclosure of potential conflicts of interest, notably in the event that the person involved in preparing the recommendation has a significant financial interest associated with the emission allowance.
For further information please contact Roberto Cristofolini or Anselme Mialon
France: Changes to the rules of European CCP LCH.Clearnet SA
LCH.Clearnet SA acts as a central clearing counterparty (CCP) for Belgian, French, Dutch and Portuguese markets. The French securities regulator (the Autorité des Marchés Financiers or AMF), which has legal authority for approving changes to rules governing relevant CCPs, has approved amendments made to close-out netting provisions applicable to LCH.Clearnet SA. Thus far, such rules have only considered the occurrence of insolvency proceedings against or of an event of default by clearing members, but not LCH.Clearnet SA. Such rules are now reciprocal. As a result, new provisions have been written into LCH.Clearnet SA rules to consider how clearing members would be entitled to close outstanding trades, value such terminated trades and set off reciprocal debts to reach an aggregate single termination payment in the event of insolvency proceedings against or of an event of default by LCH.Clearnet SA.
For further information please contact Roberto Cristofolini or Anselme Mialon
France: Implementation of UCITS IV takes one more step
Implementation of UCITS IV is nearing completion in France. As previously reported, whilst legislative provisions together with government decrees had been adopted over the summer, the French regulator (the Autorité des Marchés Financiers or AMF) had not incorporated the necessary changes into its Rulebook. However, the position has now been rectified with two books having been overhauled - Book III dealing with service providers (i.e. in the area of asset management asset managers and custodians) and Book IV dealing with collective investment schemes (including UCITS).
The new provisions inserted into Book III cover new capital requirements for asset managers; risk management systems for asset managers; and new requirements in terms of manager/custodian contractual relationship. The new provisions inserted into Book IV cover the new streamlined regulated-to-regulator passport procedure for marketing of UCITS; merger of UCIS and “master-feeder” arrangements; and the implementation of the “key investor information” (KIID).
A number of the provisions of the revised AMF Rulebook (notably relating to the cross-border marketing authorisation) however refer to an AMF Instruction that had been taken prior to UCITS IV. This Instruction still remains to be revised.
For further information please contact Roberto Cristofolini or Anselme Mialon
Netherlands: AFM publishes guideline on active and passive investments
The Netherlands Authority for the Financial Markets (Autoriteit Financiële Markten, AFM) has published a guideline for financial undertakings on active and passive investments (the Guideline). The AFM encourages financial undertakings to take their clients’ interests into account by objectively informing them on the merits of active and passive investments, by making careful decisions between active and passive investments when providing investment advice or asset management and by critically reviewing active funds that closely follow an index and charge high costs. The Guideline is based on independent research (the Research). The AFM defines active investments as composing a portfolio that intentionally deviates from indices in an attempt to gain extra returns and passive investments as investments that follow an index. According to the Research, financial undertakings must be aware that it is very difficult to select active funds that, after deduction of costs, have a higher return than an index. Therefore, financial undertakings should not automatically select active investments for their clients but first carefully consider the merits of both active and passive investments.
The Guideline (in Dutch) can be found at:
http://www.afm.nl/layouts/afm/default.aspx~/media/files/wetten-regels/leidraad/leidraad-actief-passief-beleggen.ashx
The Research (in Dutch) can be found at:
http://www.afm.nl/layouts/afm/default.aspx~/media/files/wetten-regels/leidraad/leidraad-actief-passief-beleggen/literatuurstudie-actief-passief-beleggen.ashx
For further information please contact Floortje Nagelkerke
Netherlands: Bill on implementation of the Prospectus Directive
The Dutch Minister of Finance (Minister van Financiën) has sent the Bill on the implementation of the Prospectus Directive (wetsvoorstel ter implementatie van de Prospectusrichtlijn, the Bill) to the Second Chamber of the Parliament. The Bill contains a number of amendments to the Act on the Financial Supervision (Wet op het financieel toezicht) pursuant to the implementation of the Prospectus Directive into Dutch law. Amongst others, the Bill includes further requirements to the summary of a prospectus and contains the obligation for financial institutions to publish a document each year that summarizes any published information in relation to securities.
The amendment to the threshold amount of the exemption to the obligation to publish a prospectus as included in the Prospectus Directive from EUR 50,000 to EUR 100,000 was already implemented in the Financial Markets Amendment Act 2010 (Wijzigingswet Financiële Markten 2010) and will enter into force on 1 January 2012. Pursuant to this increase, offerors of securities of EUR 100,000 or more are exempted from the obligation to publish a prospectus.
The Netherlands does not implement the increase of the EUR 2,500,000-exemption to the obligation to publish a prospectus to EUR 5,000,000. This means that if there is an offer of securities of EUR 2,500,000 or more that the offeror must publish a prospectus.
The Bill (in Dutch) can be found at:
http://www.rijksoverheid.nl/ministeries/fin/documenten-en-publicaties/kamerstukken/2011/10/05/wetsvoorstel-herziene-richtlijn-prospectus.html
For further information please contact Floortje Nagelkerke
Netherlands: Bill on limiting the liability of supervisors
The Dutch Minister of Finance (Minister van Financiën, the Minister) has sent a Bill on limiting the liability of financial supervisors to the Second Chamber of the Parliament (the Bill). The Bill amends the Act on the Financial Supervision (Wet op het financieel toezicht). It is proposed that the Dutch Central Bank (De Nederlandsche Bank, DNB) and the Netherlands Authority for the Financial Markets (Autoriteit Financiële Markten, AFM) will only be liable in cases of gross negligence (grove schuld) or wilful misconduct (opzet). By including this standard for liability, the Minister intends to align the Dutch standard of liability with those of other European countries.
The Bill (in Dutch) can be found at:
http://www.rijksoverheid.nl/ministeries/fin/documenten-en-publicaties/kamerstukken/2011/10/26/wetsvoorstel-aansprakelijkheidsbeperking-toezichthouders.html
For further information please contact Floortje Nagelkerke
Netherlands: Minister of Finance publishes financial services action plan
On 20 October 2011, the Dutch Minister of Finance (Minister van Financiën, the Minister) published his action plan on new legislation for the financial sector and a progress report on the first six months of implementing the 27 recommendations of the so-called Committee De Wit (the Plan). The Committee De Wit was established by the government after the credit crisis in order to investigate the financial system in the Netherlands. The Minister describes his proposals for new financial services legislation pursuant to three key themes:
- A solid financial sector. This includes transparency, capital and solvability requirements for banks and insurers, ensuring that currently unregulated entities such as hedgefunds and credit rating agencies are supervised and strengthen crisis management by financial institutions.
- Strengthening the position of consumers and a conduct of business- and cultural change within the financial sector. This includes the prohibition on inducements, the interest of clients in relation to product development and strengthening of the independence of the institute for complaints in relation to the financial sector (KiFID).
- Strengthening the institutional framework. This includes implementing the new, more strict European rules and regulation on supervision into Dutch law and transparency when executing such supervision.
The Minister also elaborates on the compliance of financial institutions with the bonus policy in relation to reports of the Monitoring Committee Code Banks (Monitoring Commissie Code Banken) and the Dutch Central Bank (De Nederlandsche Bank).
The Plan (in Dutch) can be found at:
http://www.rijksoverheid.nl/ministeries/fin/documenten-en-publicaties/kamerstukken/2011/10/20/kamerbrief-beleids-en-wetgevingsbrief-financiele-markten.html
For further information please contact Floortje Nagelkerke
Singapore: SGX clears first Asian FX Forwards
On 24 October 2011, SGX launched its clearing service for OTC traded Asian FX Forwards, which covers non‑deliverable Asian currencies (namely Chinese Yuan, Indian Rupee, Korean Won, Indonesian Rupiah, Malaysian Ringgit, Philippine Peso and Taiwanese Dollar). This initiative is aligned with international developments in favour of central counterparty clearing of OTC derivatives and follows the November 2010 clearing service for Interest Rate Swaps denominated in Singapore and US dollars.
For more information please contact Daniel Yong
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