Introduction
Welcome to the latest edition of our financial services updater.
Highlights this week include:
- The PRA's approach to banking supervision
- Sound banking: Delivering reform
To view know-how corner our video summary concerning this week's highlights please click here.
ARROW visit coming up? It is important that firms properly prepare themselves for an ARROW visit. There are many ways in which we can assist in this preparation to ensure that the process runs smoothly. For further information please contact either Jonathan Herbst or Peter Snowdon.
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Banking
Towards a genuine economic and monetary union
The Council of the European Union has published an interim report entitled Towards a genuine economic and monetary union. The purpose of the interim report is to highlight points of EU convergence and to outline areas that require further work ahead of a final report which is due this December.
The interim report contains four sections:
- Integrated financial framework. The interim report discusses the single supervisory mechanism (SSM), resolution and deposit guarantee mechanisms. In relation to the SSM the interim report states that its adoption is a matter of priority and that there are three important elements: first, a clear separation between European Central Bank monetary policy and supervisory functions; second, a balance between rights and obligations for all Member States participating in the new supervisory arrangements; third, appropriate accountability of the new single supervisor, including the European Parliament.
- Integrated budgetary framework. The interim report covers stronger economic governance, fiscal capacity and a safe and liquid financial asset for the euro area. When discussing stronger economic governance the interim report states that the priority is to complete and implement the new steps for stronger economic governance. However, it also states that strengthening discipline alone is not enough. In the longer term, there is a need to explore the option to go beyond the current steps to strengthen economic governance by gradually developing a fiscal capacity for the European Monetary Union. Such a fiscal capacity could take several forms and various options would need to be explored in more detail.
- Integrated economic policy framework. The interim report discusses the reforms of the EU surveillance framework, promoting structural reforms through arrangements of a contractual nature and strengthening macro-prudential policy. In particular it states that a careful balance needs to be struck between the need to maintain policy autonomy and adjustment capacity of Member States and the enforceability of measures aiming to prevent the build up of imbalances and to facilitate price and cost adjustments.
- Democratic legitimacy and accountability. The interim report states that as a general principle, democratic control and accountability should occur at the level at which the decisions are taken. This implies relying on the European Parliament as regards accountability for decisions at the European level but also maintaining and securing the pivotal role of national Parliaments, as appropriate.
View Towards a genuine economic and monetary union, 12 October 2012
Draft ECON reports on single supervisory mechanism
The European Parliament (the Parliament) has published draft reports from the Committee on Economic and Monetary Affairs (ECON) concerning the single supervisory mechanism. The draft reports cover:
- The proposed Regulation conferring specific tasks on the European Central Bank (ECB) concerning policies relating to the prudential supervision of credit institutions (Rapporteur: Marianne Thyssen). In the report the Rapporteur considers that the decision as to what level of supervision is appropriate to which type of credit institution cannot be left entirely to the discretion of the ECB but should be taken by the legislature. The Rapporteur has proposed an amendment establishing the role and remit of national supervisory authorities and the ECB. The amendment allows the ECB, under exceptional circumstances, to assume direct responsibility for the supervision of any credit institution in any Member State. The ECB would directly supervise credit institutions which had received or applied for financial support, and systemic credit institutions.
- The proposed Regulation amending the Regulation establishing the European Banking Authority (Rapporteur: Sven Giegold).
Both draft reports contain a draft Parliament legislative resolution on the relevant legislative proposal. The draft legislative resolutions are also accompanied by an explanatory statement.
View Draft Report on the proposed Regulation conferring specific tasks on the European Central Bank concerning policies relating to the prudential supervision of credit institutions, 8 October 2012
View Draft Report on the proposed Regulation amending the regulation establishing the European Banking Authority, 9 October 2012
ECON draft report on RRD legislative proposal
The European Parliament's Committee on Economic and Monetary Affairs (ECON) has published a draft report on the European Commission’s legislative proposal for a Directive establishing a recovery and resolution framework for credit institutions and investment firms. The draft report contains:
- A draft European Parliament legislative resolution on the Commission’s legislative proposal, setting out proposed amendments.
- An explanatory statement by the Rapporteur, Gunnar Hökmark, which explains the proposed amendments to the Commission's proposals. In particular the Rapporteur welcomes the bail-in tool on the basis that it will instil discipline on banks' creditors. However, the Rapporteur argues whether the current outline of detail for recovery and resolution plans is practically feasible. He suggests scaling down the scope for general scenario-based planning and instead focus on issues specific to each institution.
The Commission has indicated that it intends to finalise the draft Recovery and Resolution Directive by the end of this year.
View ECON draft report on the RRD legislative proposal, 16 October 2012
ECON votes on report on Economic and Monetary Union
The European Parliament (the Parliament) has published a press release on a vote taken by its Economic and Monetary Affairs Committee (ECON) on a report containing a proposed resolution on European Economic and Monetary Union (EMU).
With regards to European banking union and the single supervisory mechanism, the press release states that the proposed resolution calls for the Parliament to be empowered to approve the bank supervisor chairperson (which is likely to be the European Central Bank) and require them to report to the Parliament. The proposed resolution also calls for the Parliament to be empowered to investigate any perceived failings of the bank supervisor chairperson.
On the issue of increased involvement of Member States, the press release states that the proposed resolution specifically calls on national Parliaments to take part in shaping the fiscal and reform plans that their governments then submit to the EU.
The procedure file for this initiative states that the Parliament is scheduled to consider the proposed resolution at its plenary session to be held between 19 - 22 November 2012.
View Tomorrow's EMU needs all-round accountability, 15 October 2012
View European Parliament procedure file: Towards a genuine Economic Monetary Union (2012/2151), 15 October 2012
Sound banking: Delivering reform
HM Treasury has published a Consultation Document entitled Sound banking: Delivering reform.
The Consultation Document provides an overview of responses to the Government's earlier consultation on banking reform and sets out the draft Financial Services (Banking Reform) Bill (the Bill) and explanatory notes. The draft Bill will be subject of pre-legislative scrutiny by the Parliamentary Commission on Banking Standards. The Parliamentary Commission will produce a report on the draft Bill by 18 December 2012. The draft Bill will then be introduced into Parliament early next year.
The draft Bill is designed to provide the Government with the necessary powers to implement the recommendations of the Independent Commission on Banking. It is primarily an enabling Bill which provides HM Treasury with the requisite powers to implement the policy underlying the Bill through secondary legislation. With a few important exceptions, the majority of the detail of the policy will be set out in secondary legislation and regulatory rules. For example, the draft Bill introduces the concepts of 'core activities' and 'excluded activities' but currently only provides for one instance of each type of activity. However, the Treasury is given powers to make secondary legislation creating additional core and excluded activities, and providing exceptions to them. The draft Bill also provides for HM Treasury to set out in secondary legislation the scope of ring-fencing policy.
While the draft Bill is primarily focused on banking reform, the Government is also introducing other broader changes that are intended to help ensure the integrity and robustness of the UK financial system. These include reform of the Payments Council and changes to the governance structure of the Financial Services Compensation Scheme (FSCS), which will be included in the Bill when it is formally introduced into Parliament.
In chapter 2 of the Consultation Document the Government outlines each of the key policy areas. These are:
- Ring-fencing vital banking services.
- Depositor preference.
- The framework for implementing primary loss absorbency capacity (PLAC) requirements.
- Financial Services and Markets Act 2000 fees amendment.
- Financial Services Compensation Scheme governance reform.
- Payments Council reform.
View Sound banking: Delivering reform, 12 October 2012
The PRA's approach to banking supervision
The Bank of England and the FSA have jointly published a paper concerning the Prudential Regulation Authority's (PRA) approach to the supervision of banks and those investment firms that could present significant risks to the stability of the UK financial system.
For deposit taking and significant investment firms the PRA will have one objective, to promote the safety and soundness of regulated firms. The PRA will meet this objective primarily by seeking to minimise any adverse effects that a firm failure may have on the UK financial system and by ensuring that firms carry on their business in a way that avoids adverse effects on the system. However, it will not be the PRA's role to ensure that no PRA authorised firm fails. Firm failures will happen, but the PRA will seek to ensure that they do not result in significant disruption to the supply of financial services.
The PRA's approach to regulation will consist of policy making to guard against a range of positive outcomes and the application of that policy through effective supervision. All firms will be subject to a baseline level of supervisory oversight designed to ensure that if a firm does fail, it does so in an orderly way.
The PRA's style of supervision will be judgement-based. This includes:
- The nature and intensity of the PRA's supervisory approach will be commensurate with the level or risk a firm poses to the stability of the system.
- PRA supervisors will focus on the ‘big picture’ and on understanding where the main risks to the stability of the UK financial system lie.
- The PRA will be forward looking, seeking to assess whether, on balance of risks, there are vulnerabilities in firms' business models, capital and liquidity positions, governance, risk management and controls that cast into doubt their future financial soundness.
- Where potential threats to the safety and soundness of an institution are identified, the PRA will take supervisory action at an early stage to reduce the probability of disorderly failure.
View The PRA's approach to banking supervision, 16 October 2012
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Capital adequacy
EBA publishes follow-up review of banks' transparency in their 2011 Pillar 3 reports
The European Banking Authority (EBA) has published a follow-up review of banks' transparency in their 2011 Pillar 3 reports.
Overall, the EBA welcomes efforts made by banks to improve their disclosure practices and to comply with the requirements introduced by the CRD III. However, the report notes that there is still room for improvement in banks' Pillar 3 disclosures and the EBA intends to press for such improvements.
Key findings in the review include:
- The EBA notes that banks have generally published their Pillar 3 information nearer to the reporting date of their annual accounts and publication of their annual reports. The EBA would prefer the Pillar 3 information to be published at the same time and expects the situation to improve as a result of compliance with the proposed Capital Requirements Regulation.
- In relation to remuneration disclosures, if these are not included in the Pillar 3 reports or annual reports, the EBA would prefer them to be published at the same time and provide cross references between the reports.
- Disclosures on own funds were generally assessed as comprehensive. Cases of non-compliance were mostly related to disclosures on the grandfathering of instruments, qualitative details about the capital instruments or breakdowns of capital items.
- The analysis of information on credit risk revealed certain weaknesses as well as the need for improvements and more explanation on the rationale for, and the expected content of, disclosure requirements.
- The analysis of market risk identified certain areas where significant improvements were needed. These included disclosures on back-testing of internal models, stress testing, valuation models, adequate breakdown of market risk capital requirements and stressed value at risk measure.
View EBA publishes follow-up review of banks' transparency in their 2011 Pillar 3 reports, 12 October 2012
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Clearing & settlement
Euroclear UK & Ireland operational bulletin
Euroclear UK & Ireland has published its latest operational bulletin.
In particular the operational bulletin notes that an updated version of the blue book entitled A Guide to MiFID transaction reporting for the FSA via the CREST ARM has been made available.
The operational bulletin also reminds readers that the new Euroclear UK & Ireland tariff commenced on 1 October 2012. Customers can expect to receive the first invoice incorporating the new Asset Maintenance Charges in the middle of November.
View Euroclear UK & Ireland operational bulletin, 15 October 2012
View A Guide to MiFID transaction reporting for the FSA via the CREST ARM, 15 October 2012
ECSDA launches members online database
The European Central Securities Depositories Association (ECSDA) has launched a members online database with a view to increasing the transparency and awareness of the role played by central securities depositories (CSDs) in financial markets.
The database includes basic information about each CSD (such as country of incorporation) and its services including the main types of financial instruments accepted for settlement.
View ECSDA launches members online database, 15 October 2012
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Collective investment schemes
Details of £54m package for CF Arch cru investors
The FSA has published an update on CF Arch cru funds stating that investors should have received letters from Capita Financial Managers Limited which included an offer under the £54m payment scheme. Investors have until 31 December 2012 to accept the offer. In accepting the offer, investors will give up certain rights to make claims against the three firms contributing to the payment scheme.
To help investors the FSA has also published FAQs which sets out the background to CF Arch cru funds, the payment scheme and the legal challenges to the payment scheme.
View Details of £54m package for CF Arch cru investors, 15 October 2012
View Latest news and FAQs for Arch cru investors, 15 October 2012
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Insurance
European Parliament plenary session to consider Omnibus II now scheduled for 11 to14 March 2013
The European Parliament has updated its procedure file for the proposed Omnibus II Directive. The procedure file now shows that the European Parliament will consider the proposed Directive in its plenary session from 11 to 14 March 2012.
View European Parliament legislative observatory - Omnibus II Directive, 12 October 2012
The PRA’s approach to insurance supervision
The Bank of England and the FSA have jointly published a paper concerning the Prudential Regulation Authority's (the PRA) approach to insurance supervision.
The PRA's supervisory approach to insurance firms will be anchored in its statutory objectives. For insurers, the PRA will have two complementary objectives. It will promote their safety and soundness, as with all firms it supervises, thereby reducing the threat they can pose to the stability of the UK financial system and thus to the continuity of provision of critical financial services. It will also contribute to the securing of an appropriate degree of protection for those who are or may become policyholders.
Policyholders will be protected by both the PRA as prudential regulator and by the Financial Conduct Authority (FCA) as conduct regulator. The FCA will seek to ensure that consumers are treated fairly in their dealings with insurers, whereas the PRA’s focus will be to ensure that policyholders have an appropriate degree of continuity of cover for the risks they are insured against.
However, it is not the PRA's role to ensure that no insurer fails. Insurer failures will happen but the PRA will seek to ensure that they do not result in significant disruption to the supply of critical financial services, including by promoting an acceptable degree of continuity for policyholders' cover against insured risks (whether delivered through continuity of cover or the return of premiums paid).
Given the particular nature of insurance contracts and insurers' business models, the PRA's supervision of insurers will be framed in a different way to its supervision of banks. The PRA's statutory threshold conditions for insurers are designed to promote safety and soundness both to ensure insurers' ongoing ability to meet their obligations to policyholders and to support the stability of the financial system. The PRA will expect insurers not only to meet and continue to meet the letter of the threshold conditions, but also to consider the overriding principles of safety and soundness and the protection of policyholders.
In its approach to supervision the PRA will rely significantly on judgement. It will supervise firms to judge whether they are safe and sound, and whether they meet, and are likely to continue to meet, the threshold conditions. The PRA’s supervisory judgements will be based on evidence and analysis. The PRA's approach will also be forward looking in that it will assess firms not just against current risks, but also against those that plausibly arise in the future.
View The PRA’s approach to insurance supervision, 15 October 2012
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Money laundering
FATF publishes a summary of an experts’ meeting on corruption
The Financial Action Task Force (FATF) has published a summary of an experts' meeting on corruption held on 13 October 2012.
The meeting was convened in collaboration with the G20 Anti-Corruption Working Group and included representatives from FATF, the International Association of Insurance Supervisors and the International Monetary Fund (IMF).
The objectives of the meeting included identifying challenges and solutions for facilitating international co-operation by exploiting synergies between anti-corruption (AC) measures and anti-money laundering (AML) and counter-terrorist financing (CTF) measures. The meeting considered the following issues:
- Asset tracing and financial investigations.
- Freezing and seizing.
- Confiscation.
- Asset recovery and international co-operation.
The outcome of the meeting is that the FATF continues to emphasise the anti-corruption agenda, while avoiding duplication of the role of mandated anti-corruption bodies. Part of that work is focused on bringing together AML/CFT experts and AC experts for the purpose of discussing issues of mutual interest.
The meeting concluded that, while AC and AML/CFT measures are mutually reinforcing, they have not always been brought together effectively. It recommended that the development of tools, such as best practices, that take into account the needs of AC experts would improve co-operation and the effectiveness of AC and AML/CTF measures.
The FATF states that the information gathered at the meeting will be reported to the FATF's membership at its plenary to be held between 17 and 19 October 2012. The information should also provide useful input into the FATF's work to develop a new assessment methodology, new mutual evaluation procedures and new guidance to assist countries in implementing the new FATF standards.
View FATF summary of an experts' meeting on corruption, 15 October 2012.
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Regulation and compliance
Commission decision implementing CRA Regulation equivalence of Canada published in the Official Journal
There has been published in the Official Journal of the European Union the text of the Commission implementing decision on the recognition of the legal and supervisory framework of Canada as equivalent to the Regulation on credit rating agencies.
View Commission Implementing Decision of 5 October 2012 on the recognition of the legal and supervisory framework of Canada as equivalent to the requirements of Regulation (EC) No 1060/2009 of the European parliament and of the Council on credit rating agencies, 12 October 2012
A new approach to financial regulation: Draft secondary legislation
HM Treasury has published a Consultation Paper on secondary legislation and guidance required by the Financial Services Bill (the Bill).
The consultation, entitled A new approach to financial regulation: Draft secondary legislation, invites comments on secondary legislation relating to the following aspects of the new regulatory structure introduced by the Bill:
- The scope of regulation by the Prudential Regulation Authority (PRA).
- Threshold conditions.
- Regulation of mutual societies.
- Powers of direction over unregulated parent undertakings.
- Rule-making responsibility for the Financial Services Compensation Scheme (FSCS).
The Consultation Paper also covers draft criteria and guidance for bodies seeking designation as super-complainants to the Financial Conduct Authority (FCA).
The deadline for comments on the Consultation Paper is 24 December 2012. The Government currently expects the Bill to receive Royal Assent in late 2012 or early 2013 and the new regulatory structure to be fully established on 1 April 2013.
View A new approach to financial regulation: Draft secondary legislation, 15 October 2012
FSA publishes paper entitled Journey to the FCA
The FSA has published a paper entitled Journey to the FCA (the Paper). The Paper sets out the FSA's current thinking on the transition to the Financial Conduct Authority (FCA) and how the FCA will operate once it is established.
The issues considered in the Paper include introducing the FCA's approach to:
- Its new powers and responsibilities, including powers relating to product intervention, financial promotions, markets regulation and super-complaints.
- Its competition objective and duty, including the steps it will take to promote competition and to embed competition in its regulatory approach.
- Regulatory processes, including authorisations and threshold conditions, approved persons, changes in control, waivers and passporting.
- Supervising firms, including details of the FCA's proposed supervision categories (C1, C2, C3 and C4) and the three pillars of its supervision model (the firm systematic framework (FSF), event-driven work and issues and products).
The Paper also highlights the purpose of the FCA’s approach which is to ensure that consumers are a central consideration in decisions taken by firms and that markets work well so that consumers are treated fairly.
The FSA is also using the Paper to consult on specific questions relating to the FCA's new competition role and its approach to gathering and receiving information.
The deadline for comments on the Paper is 14 December 2012. The FSA intends to publish feedback in early 2013.
The Paper also contains details of the papers relating to the FCA and its powers that the FSA intends to publish before legal cutover to the FCA in 2013.
View Journey to the FCA, 16 October 2012
FSA implements internal twin peaks model for authorisations
The FSA has published a statement announcing that both the Prudential Business Unit (PBU) and the Conduct Business Unit (CBU) will undertake authorisation assessments of firms that will be dual regulated under the new regulatory structure.
This change will mirror the future authorisation procedures under the new regulatory structure scheduled to take effect in April 2013, when the FSA splits into the Financial Conduct Authority and the Prudential Regulation Authority.
The FSA states that the application process itself will not change, but how an application is processed is altered. The internal processing of an application will be conducted by the CBU and PBU in tandem. The FSA also states that a CBU case officer and a PBU supervisor will be responsible for each application and they will co-ordinate in order to minimise duplication and the impact of the change on applicant firms and individuals. Ultimately, the final decision will need to be agreed by both the PBU and CBU to ensure a single FSA decision during transition to the new regulatory structure.
View FSA statement: Changes to authorisations, 15 October 2012
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Securities
ESMA publishes the notification thresholds for sovereign issuers
The European Securities and Markets Authority (ESMA) has, in accordance with article 7(2) of the Regulation on short selling and certain aspects of credit default swaps, published a list of the thresholds applicable to sovereign issuers for the purpose of the notification to competent authorities of significant net short positions in sovereign debt.
The table contains the name of the sovereign issuer, the amount of outstanding debt duration adjusted, the initial threshold amount and the relevant percentage, the incremental threshold amount and the relevant percentage.
View ESMA publishes the notification thresholds for sovereign issuers, 11 October 2012
Delegated Regulation on fines for CRAs published in the Official Journal
The European Commission (the Commission) has published a delegated Regulation in the Official Journal on the powers of the European Securities and Markets Authority (ESMA) to impose fines on credit rating agencies (CRAs) when they breach EU legislation.
The delegated Regulation includes a full list of infringements including:
- Obstacles to supervisory activities
- Conflicts of interest
- Non-disclosure of certain information
The Commission adopted the text of the delegated Regulation on 12 July 2012. The delegated Regulation will come into force on the third day following publication in the Official Journal.
View Delegated Regulation 946/2012 , 16 October 2012
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Seminars
40 minute briefing series - October 2012 to January 2013
We are pleased to announce that the invitation for the next series of 40 minute briefings is now available.
If you can not access this link, please copy and paste the address below into your web browser.
http://www.nortonrose.com/invitations/2012/your-guide-to-the-key-regulatory-challenges-in-201213-70230.aspx
Financial services regulatory products: Phoenix, Pegasus, OTC Oracle and AIFMD expert
Having difficulty keeping up with the pace of the Government's regulatory reform proposals?
Phoenix is our new financial services product that is an online resource designed to help those who are starting their UK regulatory reform projects. It sets out the latest developments and timing of the Government's reform programme plus the key resource papers from the Treasury, Bank of England, FSA and the ICB. The latest Norton Rose LLP briefing notes, videos and webcasts are also available.
The Phoenix main page can be found here.
Behind the curve on the MiFID review?
We have launched a second online resource product called "Pegasus". Pegasus is a new financial services product that is an online resource designed to assist those starting work on MiFID review projects.
The Pegasus main page can be found here.
G20 commitment on clearing
Our third online resource product is OTC Oracle. OTC Oracle is designed to assist clients track the implementation of the G20 commitment to have all standardised OTC derivatives traded on exchanges or electronic trading platforms, where appropriate, and cleared through CCPs by the end of 2012. OTC Oracle sets out the latest developments and timing plus the key resource papers from each of the EU, Canada, Hong Kong and Singapore.
The OTC Oracle main page can be found here.
AIFMD expert
Our fourth online resource product is AIFMD expert. AIFMD expert is designed to assist clients and contacts of Norton Rose LLP when conducting their projects on the Alternative Investment Fund Managers Directive. It sets out the latest developments and timing of the AIFMD plus the key resource papers from the Commission, ESMA and the FSA. Clients and contacts are also given access to the latest Norton Rose LLP briefing notes, slides and webcasts.
The AIFMD expert main page can be found here.
Financial services Fireside Fridays
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Financial services & markets webinars
We are currently experiencing significant changes in the European financial services regime that could have a particular impact on both financial firms and non-financial firms that trade energy, commodities and emissions. To assist our clients we have produced a series of short webinars which will look at the forthcoming regulatory changes and their impact on the financial regulation of trading.
Financial services webcasts
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