INTRODUCTION

WELCOME

DLA Piper’s Financial Services International Regulatory team welcomes you to the sixteenth edition of ‘Exchange – International’ – an international newsletter designed to keep you informed of regulatory developments in the financial services sector.

This issue includes updates from EUROPE, AUSTRIA, HONG KONG, the UK and the USA.

Please click on the links below to access updates for the relevant jurisdictions.

Our aim is to assist you in providing an overview of developments outside your own jurisdiction which may be of interest to you. In each issue we will also focus on a topic of wider international interest. In this edition, “In Focus” looks at the progress being made on the single supervisory mechanism of the planned European banking union.

Please click on the links below to access updates for the relevant jurisdictions.

Your feedback is important to us. If you have any comments or suggestions for future issues, we would be very glad to hear from you.

CONTaCTs

Editor

Elisabeth BremnerLondon T +44 20 7796 6230 elisabeth.bremner@dlapiper.com

Europe

Dr. Mathias HantenFrankfurt T +49 69 271 33 381 mathias.hanten@dlapiper.com

Michael McKeeLondon T +44 20 7153 7468 michael.mckee@dlapiper.com

Us

Jeffrey L. HareWashington D.C. T +1 202 799 4375 jeffrey.hare@dlapiper.com

Jim KaplanChicago T +1 312 368 7027 jim.kaplan@dlapiper.com

Exchange – International NewsletterIssue 16 – October 2012

FINaNCIaL sERVICEs REGULaTION

UsEFUL INFORMaTION

If your colleagues would like to be added to our mailing list to receive future client alerts or newsletters, please email amanda.alldrick@dlapiper.com with their contact details. For recent publications, legal updates and an overview of our Litigation & Regulatory capabilities please see our global website.

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CONTENTs

EUROPE | aUsTRIa | HONG KONG | UK | UNITED sTaTEsIN FOCUsCONTaCTs

02 | Exchange – International Newsletter

EUROPEaN PaRLIaMENT’s COMMITTEE ON ECONOMIC aND MONETaRY aFFaIRs (THE “COMMITTEE”) VOTEs ON MaRKETs IN FINaNCIaL INsTRUMENTs DIRECTIVE (“MIFID”) II

Council of the EU, August 2012

On 3 September 2012, the Council of the European Union published a compromise proposal on the text of MIFID II following on from its report on the same directive in June 2012. The proposal passed its first major legislative milestone on 26 September 2012 when the European Parliament’s Committee on Economic and Monetary Affairs amended the proposal and voted unanimously to update the law.

The main thrust of the proposals is to catch up regulation with advances in trading technology and also apply lessons learned from the financial crisis. The proposal was amended further by the Committee and looks to introduce sweeping changes to the securities markets by the following means:

■ Investor protection; the proposal was amended to require firms to design investment products that meet their clients’ needs while also selling to the correct classes of client using staff possessing an appropriate level of knowledge;

■ Commission; investment advisors will have to pass commission/inducement fees onto their customers except where they have been declared;

■ Conflicts of interest; remuneration or assessment of staff by institutions should not conflict with the interests of their clients;

■ Uniform trading rules; fair and orderly trading is to be achieved by clear rules and procedures being used by market players and trading venue operators to include:

– objective criteria for executing orders efficiently;

– transparent criteria for determining which instruments may be traded on their trading systems; and

– proper preparations in the event of system disruption;

■ Organised trading facilities (“OTFs”); the MEPs amended the proposal to create OTFs as a new breed of off-market trading facility, envisaged as being mainly for derivatives and bonds which will be forced onto electronic trading platforms and brought under MIFID II with a view to increasing transparency;

■ High frequency trading; trading by means of computers that can handle millions of trades a second with minimal human intervention is to be curtailed with a requirement that trades are held for at least 500 milliseconds to avoid share price volatility; and

■ Commodities; trade in commodities and derivatives will be regulated by limiting the maximum net positions persons can hold over a period of time. This will address the issue of activity on the commodities markets, akin to speculation, pushing up oil and food prices. This mirrors the position in the United States.

MIFID II is still being discussed by the EU institutions with implementation by the member states expected in 2015 at the earliest so further changes to the proposal are expected. Markus Ferber, the lead MEP in this matter, has advised that he hopes to put the amendments made by the Committee to a vote in the October plenary session of the European Parliament.

EUROPE

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03 | Exchange – International Newsletter

EUROPEaN PaRLIaMENT TO CONsIDER MaRKET aBUsE DIRECTIVE (“MaD II”) IN JaNUaRY 2012

European Parliament, August 2012

The European Parliament will consider the text of MAD II, which will replace the Market Abuse Directive 2003/6/EC, at its plenary session from 14 to 17 January 2013. The Parliament has previously advised it would consider the text in November 2012.

EUROPEaN COMMIssION PUBLIsHEs ITs FINaL VERsION OF ITs LEGIsLaTIVE PROPOsaL FOR THE UNDERTaKINGs FOR COLLECTIVE INVEsTMENT IN TRaNsFERaBLE sECURITIEs DIRECTIVE (“UCITs ”) V

European Commission, July 2012

On 9 July 2012, the European Commission published its final legislative proposal for UCITS V which relates to three main areas for UCITS:

■ UCITS depositary function; the proposed directive will impact on the duties, liabilities and eligibility of UCITS to perform the depositary function with an exhaustive list of entities, being broadly credit institutions and investment firms, being able to perform this function;

■ Remuneration; managers are expected to be remunerated in a way that is consistent with sound management of the fund and report on the same in the fund’s annual report; and

■ Sanctions; the Commission is seeking to harmonise sanctions by putting in place a minimum list of administrative sanctions, measures and criteria with the home member state authorities.

The European Parliament will consider UCITS V at its plenary session between 11 and 14 March 2013.

EUROPEaN PaRLIaMENT TO CONsIDER THE CaPITaL REQUIREMENTs DIRECTIVE IV (“CRD IV”) IN NOVEMBER 2012 aND EUROPEaN BaNKING aUTHORITY (“EBa”) REVIsEs DRaFT sUPERVIsORY DOCUMENTaTION

European Parliament, August 2012

The European Parliament will consider the text of CRD IV, which will replace the Capital Requirements Directives 2006/48/EC and 2006/29/EC, at its plenary session from 19 to 22 November 2012. The Parliament had initially indicated it would consider the Directive in September.

Concerns have already been raised in the European banking industry, for instance by the European Banking Industry Committee in their statement of 2 August 2012, that the current timetable and implementation date for CRD IV of 1 January 2013 are not realistic.

On 29 August 2012, the EBA published draft versions of its templates relating to the implementing technical standards for CRD IV and its data point model documentation. The documentation covers:

■ common reporting;

■ financial reporting;

■ immoveable property;

■ losses; and

■ large exposures.

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04 | Exchange – International Newsletter

TEXT OF EUROPEaN MaRKET INFRasTRUCTURE REGULaTION (“EMIR”) aDOPTED BY COUNCIL aND FINaL DRaFT REGULaTORY TECHNICaL sTaNDaRDs FOR CCP CaPITaL REQUIREMENTs PUBLIsHED BY EUROPEaN BaNKING aUTHORITY (“EBa”)

Council of the EU, July 2012/EBA, September 2012

The text of EMIR was adopted by the Council of the EU on 4 July 2012, following adoption by the European Parliament on 29 March 2012. The Council has confirmed that EMIR should apply from the end of 2012.

The EBA published its final draft regulatory technical standards (“RTSs”) for the capital requirements of central counterparties (“CCPs”) under EMIR on 26 September 2012. This follows the European Securities and Markets Authority consultation papers on the same from June 2012. The final draft RTSs will now go to the European Commission which will have three months to consider them and endorse them or otherwise.

The final draft RTSs require that CCPs hold capital, including retained capital and reserves, equal to their:

■ gross operational expenses during a winding down or restructuring;

■ operational and legal risks;

■ credit, counterparty credit and other market risks; and

■ risk in the business, the level of which to be determined on an individual basis by national regulators.

EUROPEaN COMIssION PUBLIsHEs CONsULTaTION DOCUMENT ON THE REGULaTION OF INDICEs

European Commission, September 2012

On 5 September 2012, the European Commission (the “Commission”) published a consultation document on the regulation of indices serving as benchmarks in financial and other contracts. This makes reference to and accords with the initial discussion paper published by the HM Treasury in the UK in relation to the use of LIBOR as a contractual benchmark.

The Commission is concerned with the accuracy and integrity of indices and the possible creation of an unlevel playing field in the single market if an inconsistent and patchwork approach to regulation is taken.

The Commission notes issues with the governance and transparency of indices including;

■ inadequate conflict management from participants;

■ insufficient independence of those submitting underlying data;

■ staff dealing with indices submissions not being adequately trained or skilled; and

■ lack of appropriate regulation, document retention and audit.

The Commission also suggests that making contributions to indices should be a regulated activity within the control of regulatory authorities and that appropriate sanctions should be created. The Commission has already suggested making the provision of false or misleading information in a context such as LIBOR market abuse for the purposes of the proposed Market Abuse Directive.

It further notes, as did HM Treasury in the UK, that any transition to new benchmarks is likely to be costly and complicated.

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05 | Exchange – International Newsletter

The International Organization of Securities Commissions has also created an international working group to develop recommendations on benchmarks. This is to be led by Martin Wheatley of the FSA and Gary Gensler of the US Commodity Futures Trading Commission. It is expected to report towards the end of the first quarter of 2013.

The Commission’s consultation closes on 15 November 2012.

EU COMMITTEE ON INTERNaL MaRKET aND CONsUMER PROTECTION IssUEs OPINION ON PaYMENTs MaRKET

European Parliament Committee on the Internal Market and Consumer Affairs, September 2012.

On 14 September 2012, the European Parliament’s Committee on The Internal Market and Consumer Protection (the “Committee”) issued its opinion on the single European payment market proposing a number of recommendations for the forthcoming Committee on Economic and Monetary Affairs resolution.

The Committee believes that in order to create a genuine single digital market for payments and increase consumer confidence it is essential to:

■ Establish a neutral, safe and integrated European single market for card, internet and mobile payments with the Single European Payments Area (“SEPA”) as the principal body to create such a market;

■ Standardise card payments to improve the fragmentation of the current market for card, internet and mobile payments across and inside national borders. Specifically, the Committee suggested that measures be introduced to ensure a more uniform and transparent electronic payments market such as mandatory co-badging for payment cards;

■ Safeguard consumer rights by collective redress and alternative dispute resolution systems instituted to protect consumers against unauthorised payments and undelivered/unsatisfactory goods or services;

■ Establish security standards for each form of electronic payment (which includes non-banking service providers) and regulate all players within the payment services sector (including intermediaries);

■ Create rules which prescribe the circumstances and procedures when a card payment is refused; and

■ Reduce and harmonise multilateral interchange fees in SEPA so that consumers are not overcharged and to encourage market openness and transparency.

CREDIT RaTING aGENCY REFORM PROPOsED

European Parliament, June 2012

The regulatory landscape for credit rating agencies has changed significantly in the years since the 2008 financial collapse where major failings were identified within the sector. Since then, both the US and the EU have introduced regulations to address these problems. The EU has passed Credit Rating Agency Regulation I (“CRA I”) and Credit Rating Agency Regulation II (“CRA II”), with Credit Rating Agency Regulation III (“CRA III”) being the subject of a vote by the European Parliament’s Committee on Economic and Monetary Affairs on 19 June 2012.

CRA I came into force on 7 December 2009 and outlined a raft of measures to increase independence and transparency, and widen the rating criteria used by credit rating agencies operating within Europe. In force from 1 June 2011, CRA II transferred the registration and supervisory responsibility over rating agencies from national supervisors to the European Securities and Markets Authority (“ESMA”). ESMA were

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06 | Exchange – International Newsletter

given enforcement powers for the rules contained within CRA I as well as the power to request information from and inspect rating agency premises.

Draft legislative proposals for CRA III go further in their programme of change for credit rating agencies. They suggest:

■ The quality, timing and frequency of sovereign debt ratings ought to be more regulated with ratings taking into account the specific circumstances of the country in question. Credit ratings should not recommend policy changes. A specific timetable for the publication of credit ratings for sovereign debt should be prepared;

■ An internal EU level public rating capacity ought to be developed by existing EU institutions. This will provide a creditworthiness assessment along with all relevant publicly disclosed data and ratings concerning sovereign debt and macroeconomic indicators;

■ EU law shall not be permitted to refer to credit ratings for regulatory purposes;

■ All regulated financial institutions including banks, insurance companies and investment managers should create their own internal rating functions to prepare risk assessments. Regulated financial institutions will not be permitted to sell assets after an unfavourable credit rating or “downgrade”;

■ Rating agencies must provide impartial and high quality ratings. If a rating agency makes methodological mistakes or infringes regulations it can be sued by investors whose interests are harmed by their reliance on such ratings; and

■ Rating agencies will be prohibited from issuing ratings of bodies that own more than 2% of the rating agency’s capital or voting rights. Entities which hold more than 5% of a rating agency’s capital or voting rights cannot hold shares in another rating agency without disclosure.

EUROPEaN BaNKING aUTHORITY (“EBa”) REPORT ON THE RIsKs aND VULNERaBILITIEs OF THE EUROPEaN BaNKING sYsTEM

EBA, July 2012

On 11 July 2012, the EBA published its report into the risks and vulnerabilities of the European banking system. The report examines the current and possible future macroeconomic and systemic stresses in the short to medium term. It also provides an insight into current policy and trends and looks beyond 2012 at what shape successful recovery might take for the banks and consumers.

The report identifies the following as main risks facing the EU banking sector:

■ Sovereigns being stressed by deficit, lack of market confidence and links to the banks;

■ Funding and liquidity issues caused by volatile market sentiment, credit downgrades and national compartmentalisation;

■ Deteriorating assets caused by the macroeconomic conditions and uncertainty on problem loans;

■ Business model changes due to capital level and deleverage requirements driven by the market or by regulators;

■ Asset encumbrance at inappropriate levels due to the freezing of the unsecured funding markets;

■ Fragmentation of the single market by national regulatory initiatives and the sovereign/bank link; and

■ Shadow banking coming to the fore because it is less regulated and there are expected heightened prudential requirements on traditional banks.

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07 | Exchange – International Newsletter

The report notes the main policy actions taken in 2011 as (i) the European Central Bank (“ECB”) Long Term Refinancing Operations (“LTRO”) and (ii) the EBA EU-wide stress test and recapitalisation exercise.

The LTRO is noted as helping Eurozone banks bridge their refinancing gap in the latter half of 2011 and into 2012 with most banks seeking to shore up their liquidity position in order to regain market confidence.

The EBA’s stress test used a common definition of core tier 1 capital and looked ahead two years to assess the possible impact of credit losses, funding costs and sovereign weaknesses on Eurozone banks. This resulted in pre-emptive capital raising by the banks assessed. The EBA notes however that during and immediately following the test the sovereign debt crisis worsened which led to its carrying out of a further capital exercise with 71 banks. The EBA recommended that the banks put a temporary capital buffer in place, to reach a 9% core tier 1 ratio and indicates that further steps will be taken in this respect.

The EBA’s short term assessment of European banks notes that deteriorating conditions in the macroeconomic environment are affecting asset quality but that the solvency and capital positions of the banks improved between 2009 and 2012. In the medium term, the EBA notes that the LTRO is not a solution to recovery for European banking but a “bridge” to it with uncertainties, particularly surrounding sovereign debt, persisting. There is also analysis of loan forbearance as an indicator for credit risk and asset quality on which there should be increased supervisory attention as it can be used by banks to hide losses on their balance sheets. The EBA indicates that this indicator is difficult to define and measure, advising that their results in this respect need further analysis.

The EBA describes market recovery as the re-emergence of a cross border interbank market working on a non-collateralised basis. Key to this will be a gradual convergence of supervisory practices across the Eurozone with a single “rule book”. The EBA

recommends cross-border collegiate supervision in order to achieve this. The EBA also believes that its capitalisation recommendations will drive an orderly de-risking of banks’ balance sheets which nonetheless may fragment the single market where banks deleverage outside of the EU. The EBA also notes the trend that banks are moving back towards their “core” retail businesses with more predictable asset-liability mixes.

The EBA believes that increased focus on retail funding will bring consumer issues and trust to the fore post recovery. The EBA considers the following issues are important for consumer protection and therefore trust in the market;

■ Better examination of borrower solvency and indebtedness;

■ Controls over mis-selling of products (such as PPI);

■ Free of charge access to basic payment accounts;

■ Transparency of bank account fees;

■ Easier switching of retail accounts;

■ More financial education for consumers;

■ Professional indemnity for credit intermediaries;

■ Product oversight and control from regulators;

■ Shielding of retail investors from structured products that are not appropriate for them; and

■ Transparency of portfolio composition for Exchange Traded Funds.

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08 | Exchange – International Newsletter

EUROPEaN sECURITY aND MaRKETs aUTHORITY (“EsMa”) PUBLIsHEs REsPONsE TO EUROPEaN COMMIssION’s GREEN PaPER ON sHaDOW BaNKING

ESMA August 2012

On 21 August 2012, the European Securities and Markets Authority published its response to the European Commission’s Green Paper on shadow banking. Shadow banking is a collection of financial bodies, infrastructure and practices which support financial institutions but which themselves are unregulated or less regulated than the “regular” banking system. This can include hedge funds, money market funds and structured investment vehicles.

ESMA considers that an “orderly and appropriately regulated market” for shadow banking is possible and desirable. In response to the Commission’s Green Paper, ESMA also notes:

■ An activity based approach to the definition of shadow banking; ESMA broadly agrees with the definition proposed by the Commission but recommended that the definition ought to be focussed on activities performed rather than the entity performing the activity to ensure consistency. ESMA also notes that many components of the shadow banking system are regulated (or soon will be by regulations such as the Alternative Investment Fund Managers Directives);

■ Stricter monitoring and transparency of the shadow banking system; ESMA agreed with the Commission’s recommendation for tighter monitoring of shadow banking. This can be achieved through more transparent and efficient information exchange between competent authorities. ESMA also recommends a “flexible and evolving” framework that will allow the monitoring of financial innovations and special purpose vehicles;

■ International harmonisation of regulation; ESMA believes that focus on international co operation for regulation will be important for channelling the benefits of shadow banking back to the real economy while avoiding global regulatory arbitrage, eg, by applying this principle to exchange traded products other than UCITS compliant exchange traded funds; and

■ Developing a reporting regime on lending, repo transactions and positions; ESMA recommended developing a reporting regime to address the lack of data available on securities trading in terms of stock available for lending at a certain point in time. This regime could allow the analysis of the current market structure of securities lending and repo.

COUNCIL OF THE EU RECOMMENDaTION ON UK MORTGaGEs aND BaNKING MaRKETs

Council of the EU, July 2012

On 8 July 2012, the Council of the EU published a recommendation on the UK’s National Reform Programme for 2012 and its updated Convergence Programme for 2012–2017. The Council examined these programmes and recommends that the UK government should:

■ Improve access to bank and non-bank lending to the private sector and SMEs including easier entry to venture and risk capital;

■ Reform the housing market to avoid high and unstable house prices and high household debt. The EU suggests that this can be achieved by implementing reforms to the mortgage and rental markets, property taxation and financial regulation; and

■ Support competition within the banking sector by implementing the recommendations proposed by the Independent Commission on Banking. This involves reducing barriers to entry, increasing transparency and facilitating switching between banks.

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09 | Exchange – International Newsletter

aUsTRIaN PaYMENT sERVICEs aCT

Regulation (EU) No 260/2012 or the SEPA Regulation of the European Parliament and of the Council of 14 March 2012, establishing technical and business requirements for credit transfers and direct debits in euro denomination and amending Regulation (EC) No 924/2009, was adopted in February 2012. Its main objective is to create a single european payments area. Eurozone countries have to comply with the core provisions of the SEPA Regulation by 1 February 2014 at the latest. However, outside the Eurozone, the deadline ends on 31 October 2016. Effectively, this means that as of these dates, existing national euro credit transfer and direct debit schemes will be replaced by the SEPA Credit Transfer (“SCT”) and SEPA Direct Debit (“SDD”) Schemes.

In order to comply with the SEPA Regulation a draft bill (the “Bill”), concerning amendments to the Austrian Payment Services Act (Zahlungsdienstegesetz; “ZaDiG”), has been put forward.

The Bill proposes the Austrian Financial Market Authority (Finanzmarktaufsicht; “FMA”) as the competent authority ensuring the correct application of the SEPA Regulation. Furthermore, payment institutions which are setting up a branch in another EU Member State would have to inform the FMA about amendments concerning their business plan, measures on the prevention of money laundering and terrorist financing, the name and the address of the payment institute and/or a change in name of the managing director before such changes became effective.

Moreover, the arbitration board of the Austrian Credit Industry (“Österreichische Kreditwirtschaft”) will act as an out-of-court compliance office and legal remedy department. The Bill also proposes to create a new article which would lay down the rules on penalties applicable for infringements of the provisions of the SEPA Regulation. However, it is not clear what kind of sanctions should be imposed.

In addition, according to the Bill, Austria should allow the FMA to waive all or some of the requirements referred to in Article 6 (1) and (2) of SEPA Regulation for those credit transfer or direct debit transactions with a cumulative market share of less than 10 % until 1 February 2016. The FMA is also authorised to waive all or some of the requirements referred to in Article 6 (1) and (2) of the SEPA Regulation for those payment transactions generated using a payment card at the point of sale which result in direct debits to and from a payment accounts identified as BBAN or IBAN until 1 February 2016.

If adopted, these amendments shall enter into force on 1 February 2013.

Please contact jasna.zwitter-tehovnik@dlapiper.com for further information.

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aUsTRIa

10 | Exchange – International Newsletter

HONG KONG MONETaRY aUTHORITY (“HKMa”) sEEKs TO sTRENGTHEN CORPORaTE GOVERNaNCE

HKMA, August 2012

On 3 August 2012, HKMA issued a revised version of its Supervisory Policy Manual on “Corporate Governance of Locally Incorporated Authorised Institutions” (the “SPM”). This is a statutory guideline in respect of section 7(3) of the Banking Ordinance, which seeks to strengthen supervisory guidance and requirements for sound corporate governance within authorised institutions by incorporating new international standards, developed in response to the lessons of the global financial crisis, including the Basel Committee’s Guidance for Enhancing Corporate Governance.

The main changes introduced are:

■ Board members must approve and oversee the overall risk strategy and firm wide risk management. The risk tolerance of the authorised institution must be commensurate with its operations and strategic goals;

■ Board members are responsible for appointing and supervising senior management, this involves providing them with a formal document setting out their responsibilities, accountabilities and their reporting requirements. The board must also monitor the performance of senior management;

■ Board members must set corporate values, standards and ethical behavior at an institutional and staff level. Effective policies for addressing conflicts of interest must also be created;

■ The board must be sufficiently independent and possess collective expertise for decision making;

■ The board must form nomination and risk management committees;

■ The decision to elect a chair person should be taken on a sound, well informed basis and the decision must be in the best interests of the authorised institution;

■ The role of the chairperson is to lead board members and ensure board decisions are taken on a sound and well informed basis;

■ Board members must actively contribute and be committed to the work of the board or board committees to which they are appointed;

■ A tailored orientation and ongoing training programme must be provided to board members which sets out their roles and responsibilities and the strategy, operations, governance and internal control framework for the authorised institution;

■ Regular assessments to determine the effectiveness of the board must be undertaken along with the contribution of each director. The board’s practices and procedures with regards to governance must also be assessed this way;

■ HKMA may hold personal meetings with candidates applying for a CEO position or to be appointed to the board of an authorised institution. This will enable HKMA to assess first hand whether the candidate is fit and proper to perform the role for which they are being considered. As the fit and proper requirement is ongoing, HKMA may request meetings with directors/CEOs as and when it feels appropriate;

■ Board members and senior management must be familiar with structure of their authorised institution, regardless of the complexity of the institution;

■ Adequate controls must be put in place on structures established by an authorised institution on behalf of its customers (eg special vehicles); and

■ Certain information concerning key areas of corporate governance and risk must be disclosed.

Authorised institutions have 12 months to bring their practices into line with the SPM, with HKMA monitoring ongoing compliance with these guidelines.

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HONG KONG

11 | Exchange – International Newsletter

sTOCK EXCHaNGE OF HONG KONG LIMITED (“HKEX”) CONsULTs ON RULE CHaNGEs TO COMPLEMENT THE INTRODUCTION OF a sTaTUTORY OBLIGaTION TO DIsCLOsE INsIDE INFORMaTION

HKEx, August 2012

On 3 August 2012, HKEx published a consultation paper seeking views on changes to the listing rules to minimize duplication and overlap with the new Securities and Futures (Amendment) Ordinance 2012 (the “Ordinance”). The statutory disclosure regime under the Ordinance will take effect on 1 January 2013.

The main change proposed involves the imposition of a statutory obligation on listed corporations to disclose price sensitive information (“inside information” under Part XIVA of the Ordinance) (“SDO”). This states that a listed corporation must, as soon as reasonably practicable after any inside information has come to its attention, disclose this information to the public. The Hong Kong Securities and Futures Commission (the “SFC”) is authorised to enforce this.

The main amendment will be to the Rules Governing the Listing of Securities on the Stock Exchange of Hong Kong Limited (the “MB Rules”) and the Rules Governing the Listing of Securities on the Growth Enterprise Market of the Stock Exchange of Hong Kong Limited (the “GEM Rules”). MB Rule 13.09(1) and the GEM Rule 17.10 will be deleted as the requirement to disclose the following information will be in the Ordinance:

■ Information which is necessary to enable the HKEx, members of the issuer and other holders of its listed securities and the public to appraise the position of the group; and

■ Information which might reasonably be expected to materially affect market activity in and the price of its securities.

Other proposed changes that will impact on both the MB Rules and the GEM Rules include:

■ Jurisdiction for enforcing the SDO will vest with the SFC;

■ HKEx will still maintain an orderly, informed and fair market;

■ Certain notes to the provisions of MB Rule 13.09(1) and GEM Rule 17.01 will be made into rules;

■ Directors of listed corporations will require to make due enquiries before announcing that there is no undisclosed inside information in relation to the corporation and the announcement must confirm this;

■ Additional language to be added to the MB Rules and GEM Rules to clarify the obligation to correct a false market as well as to avoid the creation of a false market;

■ A rule to be created to require a listed corporation to apply for a trading halt where it has information that should be disclosed but the announcement cannot be made promptly or confidentiality has been lost in respect of inside information which is subject to an application for exemption or is exempted automatically from the SDO; and

■ Preserving the confidentiality of inside information to be a condition of relying on exemptions from the SDO.

HKEx will consider all responses to the consultation and formulate their final amendments to the MB and GEM Rules with the SFC.

Please contact christopher.clarke@dlapiper.com or adrian.elms@dlapiper.com for further information.

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12 | Exchange – International Newsletter

WHEaTLEY REVIEW OF LIBOR: FINaL REPORT

HM Treasury, September 2012

On 27 September 2012, HM Treasury published the final report of the Wheatley Review of the London Inter-Bank Offered Rate (“LIBOR”) (“Review”). This followed a short consultation period starting with the publication of the discussion paper on 10 August 2012 which indicates the urgency with which the LIBOR issue is being treated by the FSA and its incoming successor the Financial Conduct Authority.

Key conclusions

■ The Review favours comprehensively reforming LIBOR rather than replacing it;

■ Transaction data should be explicitly used to support LIBOR submissions;

■ Market participants should continue to play a significant role in the production and oversight of LIBOR;

■ The British Banking Association (“BBA”) should no longer run LIBOR and there should be a tendering process for a new administrator;

■ There will be guidelines developed to govern LIBOR submissions and a code of conduct to be developed and run by the administrator;

■ In the meantime banks, when submitting their rates, should take into consideration the sort of transactions set out in the Review;

■ The submission of rates to LIBOR and the administration of LIBOR will become regulated and subject to FSA enforcement and criminal prosecution; and

■ There will be further work internationally with European, US and other authorities to develop a global approach to the regulation of LIBOR and other global benchmarks.

Key recommendations

Regulation of LIBOR

■ The Review recommends making submissions to and the administration and calculation of LIBOR to become regulated activities by amending:

– S.22 of Financial Services Markets Act 2000 (“FSMA”) which sets out the nature of activity which can be regulated;

– Schedule 2 of FSMA which lists the activities that can be bought under the scope of FSMA regulation; and

– The Regulated Activities Order 2001 to include as regulated activities contributing to and administering a benchmark, with LIBOR specified as a relevant benchmark;

■ Submitting and administering LIBOR to become a controlled function under the FSMA approved persons regime;

■ The submission of false or misleading information in connection with a benchmark, such as LIBOR, is a form of market abuse and should come under the scope of the market abuse regime. Proposals to that end have been put forward by the European Commission.

Institutional Reform

■ The BBA should transfer responsibility for LIBOR to a new administrator;

■ The new administrator should fulfil specific obligations as part of its governance and oversight of the rate, paying due regard to fairness, transparency and non-discriminatory access to the benchmark. The administrator will be responsible for:

– surveillance and scrutiny of submissions;

– publishing a statistical digest of rate submissions; and

– periodic reviews to assess whether LIBOR meets market needs effectively and credibly.

UK

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13 | Exchange – International Newsletter

The rules governing LIBOR

■ A code of conduct should be drawn up by the administrator and include:

– guidelines for the explicit use of transaction data to determine submissions;

– policies for training the LIBOR submitters including what inputs to take account of when determining submissions and how to use expert judgement within the framework of the submission guidelines;

■ Systems and controls for submitting companies, which will include:

– an outline of personal responsibilities within each firm including internal reporting lines and accountability;

– internal procedures to sign off rate submissions, exception reporting and the provision of management intelligence;

– implementing disciplinary or whistle-blowing procedures;

– installation of effective conflicts of interest management procedures and communication controls both within and between banks and banks and other third parties. This will avoid any inappropriate external influence over those responsible for submitting rates;

■ Submitting banks to have responsibility for transaction record keeping, which will involve:

– keeping accurate and accessible records of transactions in inter-bank deposits;

– records being readily available to the new rate administrator and any relevant governance committees as well as the FSA;

■ A requirement for regular external auditing for submitting firms;

■ Preferential use of transaction data, where available, for LIBOR submissions until the code of conduct is drawn up, due to the urgency of the situation;

Improvements to LIBOR mechanism

■ The BBA should stop the compilation and publication of LIBOR;

■ The BBA should for now publish LIBOR submissions after three months to reduce the interpretation of submissions as a sign of creditworthiness;

■ Banks, including those not currently submitting to LIBOR, should be encouraged to participate as widely as possible to compile the LIBOR rate; and

■ Market participants using LIBOR should be encouraged to consider and evaluate their use of LIBOR as the most appropriate benchmark for their particular needs;

Institutional co-ordination

■ The FSA and FCA should work closely with the European and international community and participate in the debate concerning the long term future of LIBOR and other global benchmarks.

Next steps

Martin Wheatley clearly concluded that LIBOR was too widely and deeply embedded as a benchmark in international markets to be abolished. The Review clearly signals that all the relevant banks need to therefore undertake a serious reform of their structures, procedures and policies in respect of their involvement with benchmarks. These steps will be necessary to avoid falling foul of the likely new regulatory requirements, when adopted.

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Fsa PUBLIsHEs INFORMaTION ON PREPaRaTION aND TRaNsITIONaL aRRaNGEMENTs FOR THE PRUDENTIaL REGULaTION aUTHORITY (“PRa”)

FSA, September 2012

On 12 September 2012, the FSA published a letter, incorporating a set of frequently asked questions (the “FAQs”), and advising firms of the preparations and transitional arrangements for the PRA. Two further documents will be published in October outlining the PRA’s supervision approach, elaborating further on the two launch documents published by the FSA and Bank of England in 2011. One of the documents will be of use to deposit-takers and investment firms and the other to insurers.

HM Treasury intends to make the draft threshold conditions, referred to in a link in the FAQs, more specific. Firms regulated by both the PRA and the FCA will be subject to threshold conditions from both bodies with the PRA applying specific threshold conditions to insurers, as distinct from all the other firms it will regulate.

Fsa CONsULTs ON CHaNGEs TO CLIENT MONEY aND CUsTODY assETs REGIME

On 6 September 2012, the FSA published a Consultation and Discussion Paper recommending a number of modifications to the client assets management system for investment firms. The aim of these Papers is to ensure that the requirements of the European Markets Infrastructure Regulation (“EMIR”) are fully applied to UK firms and to propose new changes which will transform how firms protect client assets. The FSA is requesting comment as part of their re-examination of the client assets regime with a view towards achieving better results when a firm becomes insolvent.

Part I: Changes instituted by EMIR

EMIR will require central counterparties (“CCPs”) or clearing houses to try and port (transfer) positions or associated margins in the event of a default of a clearing member to a backup clearing member or to return the balance. This will enable clients to carry on trading or have their positions closed and money reimbursed.

Part II: Establishment of client money pools

The FSA proposes to extend the new EMIR rules concerning CCPs into all firms which hold client money in relation to investment business. The existing rules state that in the event of an insolvency of an investment firm all client money will form a single pool. The changes on the other hand provide that firms can, with the permission of their clients, activate legal and operationally distinct client money sub pools. So, for example, a firm may now separate client money into distinct groups based on each type of service it provides. A client may also request that a firm keeps its money in a client money sub pool separate from the firm’s other clients.

The advantages of these proposals are that if there are any shortfalls in client money, then they will be restricted to their particular sub pool. This will make the most of client money return as it will ensure not all of the clients of the firm share losses. It will also allow a quicker distribution of some client money if no contentious issues have arisen in relation to that sub pool.

Part III: Review of the client assets regime

This part of the Discussion Paper summarises the FSA’s review of the client money and custody assets regime. The intention of the review is to improve the client asset regime in the event of the insolvency of a firm (although the insolvency rules are governed by primary legislation).

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The purpose of the review is intended to improve the speed of return of client assets and achieve a greater return of client assets after an investment firm is declared insolvent. The review is also intended to minimise the market impact of the insolvency of an investment firm that holds client assets.

Fsa INsTITUTEs NEW RULEs ON PaCKaGED aCCOUNTs

On 27 July 2012, the FSA printed a series of rules which will set out how banks and building societies are to sell insurance cover on packaged bank accounts. These changes are intended to restore consumer protection and confidence concerning packaged accounts and insurance cover. Packaged accounts consist of current accounts which offer bundles of products such as insurance policies, overdraft facilities and other attractive features such as music downloads. The new rules come into force on 31 March 2013.

The new rules state that banks and building societies must examine whether the customer is suitable for each policy and inform them of the outcome of this assessment. Representatives or sales advisors from these organisations must also go through the customer’s suitability for policies prior to making a recommendation. Customers will need to be alerted if a product is inappropriate for them. Customers must also be provided with an eligibility statement which establishes the requirements for claiming the benefits of the insurance policy. Representatives must also check whether the circumstances of their customers have changed and whether these policies are still suitable for them.

The new rules are part of an ongoing review by the FSA into the promotion of packaged accounts.

Fsa CONsULTs ON NEW FUNDING MODEL REVIEW FOR FsCs

On 25 July 2012, the FSA recommended an overhaul of the funding arrangements of the Financial Services Compensation Scheme (“FSCS”). The purpose of the FSCS is to compensate customers if a regulated firm is unable to payback a claim against it or is declared insolvent. It is currently financed by subsidies from regulated firms. The level of their contribution depends on their funding class (the type of business they perform).

The proposed changes are intended to minimise the likelihood of interim payments for firms and offer them more certainty in the level of fees they will need to provide whilst still delivering some level of consumer reassurance.

The funding scheme arrangements were last overhauled in April 2008. Between April 2008 and June 2012, significant levies have been imposed on certain funding classes due to large payouts that have needed to be made to the public. In the context of the changes in the regulatory regime, these proposals will incorporate these developments and the new agencies being created.

The consultation paper suggests a new approach to financing the FSCS which will balance affordability with sufficiency of funds. Four main changes are being proposed:

1. Revised annual thresholds based on means testing;

2. Future planning so that FSCS can anticipate possible compensation costs that may arise in the next 36 months after the subsidy fee is paid, rather than the current range of twelve months;

3. Two different methods for funding the FSCS’ costs based on the Financial Conduct Authority’s funding rules and those of the Prudential Regulation Authority; and

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4. When one or more FCA classes reach their annual threshold (ie, their FSCS contribution for that funding class for the year) a retail pool will be triggered. The retail pool will be made up of all classes subject to the FCA’s funding rules.

The FSA commented that over the past four years the compensation scheme has been vital in securing consumer confidence.

ENFORCEMENT DECIsIONs

Fsa JaILs INsIDER TRaDING RING aFTER 18 MONTH OPERaTION

On 27 July 2012 the FSA successfully prosecuted Ali Mustafa, Pardip Saini, Bijal Shah, Trupesh Patel, Bijal Shah and Neten Shah for dealing in and disclosing insider information. Each were given sentences ranging from 18 months to 3 and a half years. For the FSA, it was the successful conclusion of one of the most lengthy and sophisticated investigations brought by the regulator to date.

The prosecution was based upon the activities of the above individuals who obtained price sensitive information from investment firms on forthcoming company acquisitions. This information was then used to place several spread bets through hundreds of trading accounts held by the group. When news of the takeovers became public the price of their newly acquired shares rose dramatically. Between 1 May 2006 and 31 May 2008, the group made a combined profit of £732,044.59 through their insider activities. The affected companies included Reuters, Biffa, Premier Oil, Enodis, Thus and Vega.

The FSA commented that the case was a “significant milestone in their fight against insider dealing”, with the investigation involving the detailed examination of hundreds of different trading accounts across their enforcement, markets and intelligence teams. The conviction also signals the FSA’s confidence in bringing a relatively complex insider trading case before a jury.

TURKIsH BaNK FINED £294,000 FOR MONEY LaUNDERING FaILINGs

On 2nd August 2012, the FSA fined Turkish Bank UK (“TBUK”) £294,000 for breaching Money Laundering Regulations in relation to deficiencies in its correspondent banking arrangements.

Correspondent banking arrangements occur when a bank provide services to an overseas respondent bank to enable the overseas bank to provide domestic customers with cross border products and services such as payment and clearing. Between 15 December 2007 and 3 July 2010, TBUK performed the role of correspondent bank for nine respondent banks in Turkey and 6 respondent banks in Northern Cyprus.

According to the current Money Laundering Regulations, providing correspondent banking functions to banks outside of the EEA is recognised as creating a high risk of money laundering which requires enhanced due diligence and constant supervision. In July 2010, the FSA reviewed TBUK’s money laundering procedures and identified three major failings: the failure to create risk sensitive AML policies and procedures for its correspondent banking relationships; the failure to carry out adequate due diligence on and the lack of supervision of the respondent banks they were dealing with and the failure to maintain adequate records of such policies and due diligence. These failings were considered all the more serious due to a previous warning issued by the FSA concerning TBUK’s lack of AML controls over correspondent banking.

The FSA identified that TBUK’s behaviour as a correspondent bank fell far short of the standards placed upon firms to manage their money laundering risks effectively, exposing UK financial services to the risk that money could be laundered. TBUK’s early admission of these failings and cooperation during the investigation led to a reduced fine from the original penalty totalling £420,000.

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Fsa FINEs INsURaNCE BROKER FOR EMBEZZLING INsURaNCE PREMIUMs

On 24 July 2012, Stephen Goodwin, a former commercial insurance broker from Lancashire was banned and fined £471,846 for misappropriating client monies resulting in one of the largest fines levied against an individual for insurance fraud.

From 2008 to 2010, Goodwin was a partner in commercial insurance broking firm Goodwin Best based in Bury, Lancashire. Goodwin and his now deceased partner in the firm accepted insurance premiums from clients on the understanding that this money would be passed onto their insurer or the relevant intermediary for the policy itself. Instead, Goodwin and his partner passed some of this money into their business account culminating in the misappropriation of £303,846 worth of client funds. As a result of Goodwin’s actions, three of his clients suffered financial loss; two clients had to repay premiums and one tried to make a claim to find out he was uninsured.

In April 2011, Goodwin filed for bankruptcy in regards to the debts incurred by his firm. This was later discharged in April 2012. The FSA considered the broker’s actions as extremely serious, posing a risk to consumers and the financial system more widely. Goodwin was fined £303,846 in relation to the benefit obtained from the misconduct and a further £168,000 for the punitive element. This signifies one of the largest fines ever levied by the FSA for commercial insurance fraud. Goodwin obtained a 30% discount by agreeing to settle with the FSA at an early stage of the FSA’s investigation.

Fsa TaKEs aCTION aGaINsT HEDGE FUND MaNaGER FOR £3M

On 29 May 2012, the FSA decided to fine and ban Alberto Micalizzi, CEO of Dynamic Decisions Capital Management (“DDCM”), a hedge fund company based in London. Micalizzi was fined £3million which is the largest fine issued by the FSA against an individual for a non market abuse case.

Between 1 October 2008 and 31 December 2008, under Micalizzi’s management, DDCM’s master fund (the “Fund”) suffered substantial losses of £250 million. This constituted approximately 85% of the value of the fund. The FSA alleges that Micalizzi then tried to hide these losses by entering the Fund into a number of contracts for the purchase and sale of bonds. According to the FSA, Micalizzi entered into these bond contracts knowing they were not genuine financial instruments so that he could create artificial gains for the Fund. Over the period in question, £4.6 million of investors’ funds were used to purchase the bond contracts. Ostensibly DDCM purchased the bonds at a deep discount to their face value and then priced them at their face value for the purposes of deceiving investors. In late 2008, this process was used by Micalizzi to report profits from the bond contracts of over £250 million. This enabled him to report a small profit each month.

Micalizzi continued to court new investors including one who invested £26.1 million on the 1st of December 2008. The FSA’s submission is that he was able to do this by providing false and misleading information concerning the true value of the Fund.

In May 2009 the Fund went into liquidation, its assets valued at a mere £6.2 million. To date, no payments have been made to investors by the liquidator.

In August 2010, the FSA began an investigation into the Fund and the conduct of Micalizzi. The investigation was significantly hindered by the evidence provided by Micalizzi himself, whom the FSA noted as having provided “false and misleading information”. The findings of the investigation culminated in the publication of the decision notice which fined Micalizzi £3million and banned him from performing any role in regulated financial services. His firm was also prohibited from carrying out any regulated activities by falling far short of the threshold criteria for this type of activity. Micalizzi and DDCM have referred the decision notice to the Upper Tribunal to try and appeal the decision notice.

The FSA stated that Micalizzi’s behaviour fell woefully short of the standards that investors should expect and has no place in the financial services industry.

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Fsa FINEs aND BaNs IFa PaTRICK FRaNCIs O’DONNELL OVER THE saLE OF NON-MaINsTREaM INVEsTMENTs

On 30 May 2012, the FSA found against Patrick Francis O’Donnell of P3 Wealth Management Limited (“P3”) for providing advice to his clients concerning unsuitable financial products. P3 Wealth Management was a modest independent financial services company based in Queensferry, south of Edinburgh.

The FSA order banned O’Donnell and his firm from carrying out any regulated financial activities and personally fined him £60,000 for providing bad advice. The advice related to the promotion of Unregulated Collective Investment Schemes (“UCIS”) and a separate failure to understand the regulatory restrictions on the promotion of UCIS.

UCIS are subject to FSA rules concerning their promotion and sale. Only FSA authorised firms performing regulated activities may promote them, for example by providing a personal recommendation to invest in them. UCIS may not be promoted to the general public and their promotion is only available to a certain category of investors such as high net worth individuals and other sophisticated investors.

In this context, O’Donnell and P3 failed to adequately identify whether these non-mainstream investments were suitable for his clients. O’Donnell failed in the first instance by essentially promoting UCIS which were complex, risky and illiquid. O’Donnell’s clients were not appropriate for this kind of advice either, eg, being in one case a single mother who invested 93% of her pension into a UCIS and in another a forklift truck driver who invested 90% of his savings into a separate UCIS. Approximately two thirds of P3’s clients invested 75% of their savings into a UCIS and other non-mainstream investments. After the FSA’s investigation and being aware of their concerns, O’Donnell continued to inappropriately sell these products.

O’Donnell was banned from carrying out any regulated activity in the financial services industry and fined £60,000 for making inappropriate recommendations. P3 were also declared ineligible from performing any regulated activity.

Fsa FREEZEs assETs OF sUsPECTED LaND BaNKING FIRM

On 13 July 2012, the FSA obtained asset freezing orders against Asset L.I. Inc. (also known as Asset Land Worldwide), Equity Services (London) Ltd and Asset Land Investment PLC, three suspected land banking firms. The court orders extend to prohibiting these firms and certain individuals within them from selling plots of land across sites in Stansted, Harrogate, Lutterworth, Newbury, Liphook and South Godstone. This action represented a synchronised effort from the FSA, West Berkshire Trading Standards and the Metropolitan and Essex police forces. The operation involved the arrest of an individual in Essex.

The FSA does not in itself regulate the sale or purchase of land, however, it does regulate the operation of collective investment schemes. Land banking operations therefore fall under its scrutiny. Collective investment schemes are a regulated activity and require FSA authorisation. In this case, none of the firms had obtained authorisation from the FSA prior to offering the land for sale.

The FSA recommends that anybody investing in land should always have it independently valued and checked to verify its true value. Only FSA authorised firms are sanctioned to sell land for investment purposes providing it is being managed as part of a wider site. In reality, such firms are rare due to the very hard line approach the FSA takes to land banking operations.

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Fsa RETURNs FUNDs TO VICTIMs OF BOILER ROOM sCaM

On 19 July 2012, the FSA obtained a court order against Sinaloa Gold PLC (“Sinaloa”) and its director Glen Lawrence Hoover for their involvement in a suspected boiler room scheme.

From August to December 2010, twelve different boiler room schemes offered UK retail investors shares in Sinaloa on the premise that the company needed to raise funds to develop a gold mine in the Sinaloa region of Mexico. The shares were offered to members of the public through several different vehicles including First Geneva Capital Wealth Management, Tudor Asset Management, PH Capital Invest and Steiner Haus Capital. Sinaloa did achieve a brief listing on the Frankfurt stock exchange’s First Quotation Board, but these were delisted in 2011.

The order identified that the sale of these shares were suspicious on several counts. Firstly, the shares were offered for investment without a prospectus, a pre-requisite required for the sale of shares in the UK market. Secondly, the FSA found that Sinaloa held no interest in the gold mine in Mexico. Finally, that approximately 90% of the funds raised through the sale of Sinaloa shares had gone directly to the boiler room companies offering them up for sale or persons associated with Hoover.

In December 2010, when the FSA was notified of the operation, they obtained an injunction and freezing order against both Hoover and Sinaloa securing £127,000. This was a fraction of the total amount defrauded from investors, which approximated £1,097,092.11. The sums recovered thus far only represent a tenth of the total value of the investment.

The FSA restated its view that dealing with unauthorised businesses carries a great deal of risk.

Fsa IssUEs CUsTODIaL sENTENCE aND FINEs FORMER INVEsTMENT BaNKER aND HIs WIFE FOR £1,534,000

On 20 August 2012, Southwark Crown Court issued confiscation orders against insider traders Christian and Angie Littlewood totalling a joint sum of £1,534,000. The confiscation order regime enables the court to assume that the proceeds of other trading that took place within the same period represent the proceeds of crime. This followed a custodial sentence issued against the pair sentencing Mr Littlewood to three years and four months and Mrs Littlewood to twelve months in custody, suspended for two years. The case follows the successful conviction of their family friend Helmy Omar Sa’aid on 10 January 2011 who was sentenced to two years in custody and a further fine of £640,000.

Between 2000 and 2008, Christian Littlewood tipped off his wife to invest hundreds of thousands of pounds in companies when he learned their share price was set to increase. Angie Littlewood who traded under her Chinese name Siew Yoon Lew, would then purchase a number of different London Stock Exchange and AIM listed shares on the basis of this information. Sensitive share price information was also passed to their family friend Helmy Omar Sai’id.

The Littlewoods were deemed not fit or proper persons under section 56 of the Financial Services and Markets Act 2000. They have been banned from carrying out any function associated with a regulated activity carried out by an authorised or exempt person. The order will be paid out of funds and assets which were restrained by the court on the FSA’s application at the time of the Littlewoods’ arrest. If the sums are not paid within six months, the Littlewoods must serve an extra three years in jail.

The order represents one of the largest confiscation orders made in an insider trading case.

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BLaCKROCK INVEsTMENT MaNaGEMENT (UK) LIMITED FINED £9.5M FOR CLIENT MONEY FaILINGs BY THE Fsa

On 11 September 2012, the FSA fined Blackrock Investment Management (UK) Limited (“BIM”) £9,533,100 for failing to protect client money held by third parties.

Between 2006 and 2010, BIM’s procedures for protecting client money did not adequately protect client assets because of the firm’s failure to secure trust letters on behalf of clients who held deposits with third parties. The FSA also found that BIM failed in its duty of care to organise and behave responsibly in relation to client assets.

Blackrock Group, who owns BIM, is one of the world’s largest asset management companies. These failures arose as a result of their acquisition of Merrill Lynch Investment Managers Limited. As part of the synchronization process between the two firms, system changes were implemented which did not incorporate the correct risk control procedures. The system of adding banks to the list of approved banks broke down along with key personnel departures meaning that BIM had to use banks which it did not have previous dealings with. BIM did not have trust letters in place with these new banks and they were not cleared by their compliance department prior to BIM’s dealings with them.

BIM failed to protect a daily average of £1.36bn of client money held by third parties. If the firm had become insolvent during this period then clients may have suffered a significant delay in recovering their funds or may not have had them returned at all.

The FSA considered that the firm self-reported the issue, that the breaches were not deliberate and had subsequently implemented more robust client money procedures since discovering the problem. BIM cooperated with the FSA investigation and agreed to settle at the initial stages. These actions secured BIM a discount of 30% of the total penalty which would have been £13,618,800.

Fsa DIsCIPLINEs FORMER HBOs EXECUTIVE PETER CUMMINGs BaNNING HIM FOR aNY sENIOR POsITION WITHIN a FINaNCIaL INsTITUTION aND FINING HIM £500,000

On 12 September 2012, the FSA issued a decision notice against Peter Cummings, a former HBOS executive director and chief executive of its corporate division. The decision notice contained an outright ban placed upon Cummings from holding any senior position within a UK bank, building society, investment or insurance firm. The notice also contained a fine for £500,000, one of the largest fines placed by the FSA for an individual indicted for management failings.

The decision notice concerned Cummings’ weaknesses as head of HBOS’ corporate division between January 2006 and December 2008. The FSA found a number of shortfalls in his leadership, namely:

■ Failures with the division’s control framework. These included/failures in management information leading to a culture which de-prioritised risk management and staff being rewarded for the acquisition of revenue at the expense of risk;

■ Leading an aggressive growth strategy while concerns materialised over the credit crunch and the market sectors HBOS’ corporate division were operating in. Specifically, Cummings instructed staff to increase market share while other financial institutions were withdrawing from deals; and

■ Failing to spot and take the appropriate action when confronted with information concerning bad debts. Under Cummings’ directorship, the corporate division did not adequately monitor the degeneration of high value transactions. Risk control procedures, which may have mitigated future losses suffered, were followed slowly or not at all. This resulted in delayed loan default assessments and suitable steps in respect of stressed transactions not being followed. This went against the advice of the Corporate Risk division and HBOS’ internal auditors.

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The FSA found that Cummings had breached Principle 6 of the FSA’s Code of Practice for Approved Persons by failing to exercise due skill, care and diligence through his leadership of the Corporate Division’s aggressive growth plan in an environment of deteriorating control measures. The FSA also highlighted that between April and December 2008, Cummings did not take reasonable care to manage the Corporate Division’s high value transactions which displayed signs of possible default.

The FSA did concede that Cummings was not responsible for all of the problems associated with HBOS’ Corporate Division, that decisions were made collectively, some improvements had been made and some of the issues stemmed from pre-existing problems. However, Tracey McDermott, director of enforcement and financial crime at the FSA, stated that his actions were born out of a ‘dangerous folly’ which promoted revenue over risk.

CHaRGEs LaID BEFORE sUREINVEsTMENT LLC aND OWNER BEN WILsON FOR OPERaTING UNaUTHORIsED INVEsTMENT sCHEME

On 24 September 2012, the FSA charged Benjamin Edward Wilson of seven offences relating to his management of an unauthorised collective investment scheme in Bournemouth, Dorset.

In 2004 it came to the FSA’s attention that Wilson and his company SureInvestment LLC (“SureInvestment”) were running an investment fund without authorisation. Accordingly the FSA responded by sending Wilson a series of letters highlighting that they were operating outside of the regulatory framework and would be liable to cease trading and pay a series of fines. Wilson and SureInvestment responded by reassuring the regulator that it has ceased trading and was returning money to it its investors. The FSA “accepted its assurances” all funds were repaid and “decided it was not in the public interest to take further action”.

However seven years on, the FSA has made a claim alleging that Mr Wilson continued to take money from investors, using it to buy a £4m mansion and fund “lifestyle payments”. Mr Wilson vigorously denies these claims. However, outgoing payments were made to William Hill, iTunes, LoveFilm DVD rental, watch retailers, supermarkets, restaurants and a computer game shop from an account pooling investor money.

The company marketed itself on the basis that it specialised in high yield returns with a focus on varying financial instruments including stocks, bonds, futures, and currencies. Wilson hailed SureInvestment as a ‘market leader’ producing annual returns of between 50-90% year on year from 2004-2008. However, the FSA found a number of discrepancies in its investigation. Firstly, SureInvestment’s accounts did not appear to be regularly used directly for substantial trading on the financial markets. Secondly, a large proportion of client money was held in cash rather than being tied up in financial instruments suggesting that money was not being invested as indicated. Thirdly, SureInvesment was investing in assets classes which fell outside those listed in the brochure.

The investigation took two years with a series of searches conducted at Mr. Wilson’s offices in Poole. He was charged with a number of offences including making false/misleading/deceptive statements, forgery, using a false instrument, fraud and operating a collective investment scheme without authorisation or exemption.

Please contact michael.mckee@dlapiper.com or elisabeth.bremner@dlapiper.com for further information.

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CHaNGEs IN REGULaTION E – REMITTaNCE TRaNsFER RULEs

The Bureau of Consumer Financial Protection (“Bureau”) has issued new rules governing remittance transfers sent from the US. A remittance transfer is an electronic transfer of funds from a consumer in one country to a recipient in another country. In the US, these transfers are generally conducted by migrants sending funds to family and friends in their country of origin but the definition applies to any consumer transferring money to a recipient in another country. Several studies indicate that the amount of money sent abroad in remittance transfers by US consumers is in the tens of billions of dollars annually. For example, the US Bureau of Economic Analysis estimates that in 2010, $37.1 billion in cash and in-kind transfers was sent from the US to foreign households by foreign-born individuals alone.

The most common method of remittance transfer is through non-depository institutions called “money transmitters” such as Western Union and MoneyGram. These companies generally operate through closed networks, sending and receiving money through their own business locations in the US and abroad, or through the use of agents, such as grocery stores convenience stores, and foreign depositories. Money transmitters focus on smaller dollar transactions, as compared to transactions processed via banks, and some even cap the amount that an individual may transfer in one transaction. Money transmitters receive money from the consumer in the form of cash, credit or debit cards, bank account debits, or online payments and provide the consumer with a confirmation number which is, in turn, transmitted to the recipient. The recipient presents this number at the money transmitter’s (or its agent’s) location in the foreign country and is paid cash, or in some cases, with a direct deposit into his or her bank account.

In contrast to non-bank money transmitters, depository institutions and credit unions offer remittance through wire transfers on an open network that can reach almost any bank worldwide through correspondent and intermediary bank relationships. These transfers tend to be larger than those made by money transmitters and occur between a sender and recipient with account relationships at the respective financial institutions.

Aside from any government taxes charged at either end, a consumer’s cost of transmitting money abroad is typically comprised of fees and any exchange rate between currencies established by the transferring entities. Both money transmitters and wire transfer providers tend to charge up-front fees paid for separately or deducted from the amount transferred. Wire transfers may also involve fees by intermediary institutions or fees for depositing the money in the recipient’s account.

Despite the considerable amount of money transferred each year, remittance transfers fell outside the scope of federal consumer protection laws prior to enactment of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (the “Dodd-Frank Act”). Congress passed the Electronic Funds Transfer Act in 1978, but that Act deals only with transfers linked to accounts at financial institutions. With the overwhelming majority of remittance transfers occurring through non-bank money transmitters, remittance transfers were largely outside the scope of federal consumer protection laws and regulations and subject to inconsistent application of such laws and regulations at the state level before the Dodd-Frank Act.

Consumer protection concerns arise in the context of remittance transfers because of the potential lack of disclosure or the language barriers of consumers. This makes it difficult for consumers to follow the complex interplay between fees and exchange rates in order to calculate what amount of money is actually received by the recipient in a foreign country and which service provider offers the best rates. The provisions of the Dodd-Frank Act attempt to solve these problems by (i) requiring pre-payment disclosure of fees, exchange rates, and the amount to be received; (ii) creating federal rights to cancel a remittance transfer or receive a refund; (iii) requiring remittance providers to investigate disputes and resolve errors; and (iv) establishing provider liability for the acts of their agents.

The final rule, published in the Federal Register on 7 February 2012, covers both depository institutions and money transmitters that provide remittance transfers in the “normal course of business,” a term that will be explained more fully below.

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UNITED sTaTEs

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All remittance transfer providers must give written pre-payment disclosures containing information about the specific transfer, including exchange rates, fees and taxes, the amount to be received, the date the money will be available in the foreign country, and information regarding the sender’s error resolution and cancellation rights. The final rule also requires that the written disclosures be offered in English and in every foreign language that the provider uses to advertise its services at a particular location.

Under the final rule, remittance transfer providers are required to set up error resolution procedures, including recordkeeping standards similar to those already applied under Regulation E to electronic fund transfers. The Bureau imposed a standard of liability under which remittance transfer providers are liable for violations by their agents and in doing so, rejected a more lenient standard sought by industry groups that would have removed liability where the provider established policies for agent compliance. The final rule was changed to reflect commentator concerns, however, by reducing, from one business day to thirty minutes, the consumer’s time to cancel the transaction and receive a full refund.

The final rule also includes two exceptions from the strict disclosure requirement to provide the exact amount that would be available to the recipient in the foreign country. First, the Bureau created a permanent exception for situations where the provider cannot determine the amount to be received because of either (i) the laws of the recipient country; or (ii) the method by which transactions are made in the recipient

country. The Bureau is expected to issue a safe harbor list of countries to which this exception will apply. Second, the Bureau allowed a temporary exception for providers offering services over open networks. Industry commentators argued that, because providers in an open network do not control the transaction from start to finish, it would be difficult to accurately disclose the fees that could be charged by intermediaries and the exact amount available to the recipient. Responding to these concerns, the final rule allows a temporary exception from disclosure where providers cannot determine certain amounts for reasons beyond their control. This temporary exception expires on 21 July 2015. Under both exceptions, the provider is still required to disclose estimates of the relevant amounts.

On the day it released the final rule, the Bureau also released a proposed rule to provide additional clarity on the meaning of offering remittance transfer services “in the normal course of business.” The proposed rule provides that a person or company that provided 100 or fewer remittance transfers in the previous calendar year, and provides 100 or fewer remittance transfers in the current calendar year, does not provide remittance transfers in the normal course of business, and is therefore not subject to the amended Regulation E requirements.

Both the final rule amending Regulation E, and the subsequent rule amending the final rule, become effective as of 7 February 2013.

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UPDaTE ON FsOC DEsIGNaTIONs OF sYsTEMICaLLY IMPORTaNT FINaNCIaL INsTITUTIONs

Title I of the Dodd-Frank Act, created the Financial Stability Oversight Council (“FSOC”), a new regulatory body comprised of senior leaders from several US federal agencies with responsibility for economic and financial affairs. As part of its duties, FSOC is tasked with identifying those institutions that are critical to the stability of the US financial system. Companies that are “systemically important financial institutions” (“SIFIs”), face higher capital requirements and increased oversight.

Under the Dodd-Frank Act, any bank holding company with total consolidated assets of $50 billion or more is automatically designated a SIFI. In addition, FSOC has authority to designate both non-bank financial institutions and financial market utilities (“FMUs”) as SIFIs. In April 2012, FSOC issued a final rule describing the asset thresholds and other factors that would be used to determine which non-bank financial institutions posed systemic risks. Any firm notified of a pending designation is given the opportunity to present evidence on why it should not be considered vital to financial stability.

A FMU is a person or company that manages or operates a multilateral system for the purpose of transferring, clearing, or settling payments, securities, or other financial transactions among financial institutions or between financial institutions and the person or company. Essentially, a FMU is a clearing house. A clearing house reduces risk in securities and derivatives transactions by (i) requiring both sides to post collateral; (ii) monitoring each party’s credit; and (iii) providing guarantee funds to cover losses greater than the value of posted collateral.

On 27 July 2011, FSOC announced final rules for determining whether an FMU is systemically important. The first stage of the inquiry is largely quantitative, and focuses on four factors:

1. The aggregate monetary value of transactions processed by the FMU;

2. The aggregate exposure of the FMU to its counterparties;

3. The relationships and interdependencies of the FMU with other FMUs; and

4. The effect that failure or disruption of the FMU would have on markets, financial institutions, or the broader financial system.

For those FMUs that pass the first stage, the second stage focuses on the relationship between the previous four factors, and poses two main questions – whether the failure of or a disruption to the functioning of the FMU now or in the future could create, or increase, the risk of significant liquidity or credit problems spreading among financial institutions or markets, and whether the spread of such liquidity or credit problems among financial institutions or markets could threaten the stability of the financial system of the US.

FSOC produced a list of bank holding companies that passed the $50 billion SIFI threshold as far back as November 2011, but observers have been watching closely for FSOC’s first non-bank SIFI designation. On 18 July 2012, FSOC voted unanimously to designate eight FMUs as systemically important. Those firms are the Clearing House Payments Company, L.L.C., CLS Bank International, Chicago Mercantile Exchange, Inc., The Depository Trust Company (“DTC”), Fixed Income Clearing Corporation (“FICC”), ICE Clear Credit LLC, National Securities Clearing Corporation (“NSCC”),

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25 | Exchange – International Newsletter

and The Options Clearing Corporation. The FMU designation process includes an opportunity to request a hearing if the identified firms disagree with FSOC’s decision, but none of the FMUs disputed the designation.

The FMUs are to be only the first wave in non-bank SIFI designations. Furthermore, the decision to designate the FMUs was not particularly controversial; FSOC voted unanimously, none of the FMU’s protested the designation, and, as the Depository Trust & Clearing Corporation, owner of DTC, FICC, and NSCC, stated, they were “neither surprised at nor [in disagreement] with the designation.” Future designations may not go as smoothly if other non-bank financial institutions choose to dispute designations and differing regulatory priorities make unanimous voting a challenge.

FSOC is likely to identify additional non-bank candidates in September, with final designations by the end of the year. Two probable candidates include American International Group Inc. (“AIG”) and GE Capital, both of whom satisfy FSOC’s quantitative thresholds, according to publicly available information. Mike Neal, GE Capital’s Chief Executive Officer, stated in May that, “We have not been designated a SIFI as yet, but it’s likely.”

As noted above, bank holding companies with total consolidated assets of $50 billion or more are statutorily considered SIFIs without designation by FSOC. As such, these institutions are already in the process of taking the necessary steps to comply with the heightened regulatory and reporting requirements associated with being a SIFI. Bank

holding companies with more than $250 billion in non-bank assets were required to submit their resolution plans (or living wills) to the FDIC and the Federal Reserve by 2 July 2012. The nine bank holding companies meeting these criteria and submitting plans were Bank of America, Barclays plc, Citigroup Inc., Credit Suisse Group AG, Deutsche Bank AG, Goldman Sachs Group, Inc., JPMorgan Chase and Co., Morgan Stanley and UBS Finanzholding AG.

These resolution plans explain each company’s financial position and how it could be dissolved in a rapid and orderly manner in the event of material financial distress or failure. The resolution plans are divided into public and confidential sections, and on 3 July 2012, the FDIC and the Federal Reserve released the public portions of each company’s plan “to allow the public to understand the business of the covered company”. The public portions include information on each company’s core business lines, assets, liabilities, capital, and major funding sources. The FDIC and the Federal Reserve are currently conducting their preliminary review and have sixty days from 2 July 2012 to inspect the plans for “informational completeness and credibility.”

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PROGREss ON EUROPEaN BaNKING UNION; EUROPEaN COMMIssION PUBLIsHEs PROPOsaL FOR sINGLE sUPERVIsORY MECHaNIsM (“ssM”)

European Commission, September 2012

The European Commission published a proposal on 12 September 2012 for a regulation to set up a SSM for banking regulation across all Eurozone countries, built around the ECB. The Commission is working towards these proposals being in force as soon as early 2013 as part of its plans for the banking union. The proposals are a huge shift toward supranational jurisdiction with effects both within and outside of the Eurozone.

The proposals form part of the Commission’s wider vision to create a banking union which will break the link between member states and the banks, stopping the negative feedback loops between the sovereign debt and bank bail-outs. These proposals are also being made with a view to market integration across the Eurozone, restoring confidence and forming a closer economic and monetary union.

Why the ECB?

The Commission justifies the decision to build the SSM around the ECB on the asymmetry between the single monetary policy and the fragmented regulation of banking in the Eurozone. In order to address this the Commission, on the basis of Article 127 (6) of the Treaty on the Functioning of the European Union, is seeking to confer the powers necessary for the SSM on the ECB to create a central supervisor, free from the temptation to protect national interests. It further indicates in its explanatory memorandum to the proposal that the ECB will add a further layer of focus on financial stability.

The proposals

Tasks of the ECB

The ECB will have exclusive competence over:

■ Supervisory tasks essential to banks’ viability including prudential supervision and requirements and imposing capital buffers;

■ Carrying out supervisory stress testing at a national level in addition to the stress testing carried out by the European Banking Authority which covers the Single Market as a whole;

■ Assessing acquisition and disposal of banks and relevant approvals;

■ Licensing and authorising credit institutions;

■ Ensuring compliance with minimum capital requirements;

■ Ensuring compliance with leverage and liquidity requirements;

■ Early intervention measures, with resolution authorities, for breach of capital, leverage or liquidity requirements; and

■ Applying requirements for robust governance arrangements and internal risk management and capital adequacy assessments.

The national supervisors will retain competence for tasks not conferred on the ECB including money laundering, third country banks opening branches and cross border services within the member states. The national supervisors will also have a role delivering implementation within the SSM. The Commission gives the examples of;

■ approving/withdrawing authorisations of banks;

■ monitoring on behalf of and reporting to the ECB; and

■ sharing sanctioning powers.

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IN FOCUs

27 | Exchange – International Newsletter

Powers of the ECB

Supervisory and investigatory

The supervisory and investigatory powers of the ECB will mirror those of the national authorities so that it can carry out the above tasks. The ECB will also be able to impose pecuniary sanctions and periodic penalty payments.

The ECB’s investigatory powers will allow it to collect all relevant information from the entities it supervises and the persons involved in and related to their activities and carrying out activities on their behalf. This will include requiring submission of documents, examining books and records, written or oral explanations from staff and management and interviews of the same natural persons or interviews of legal persons. The ECB will also have the power to investigate premises without announcement if it is necessary for the conduct of the investigation.

Authorisation

Applications for authorisation to carry on business as a credit institution will be taken to the national supervisors first who will then consider if the requirements of national law are met. The national supervisors will then take the application onto the ECB who will assess the application for compliance with Union requirements. The ECB will have the power to withdraw authorisation on its own initiative or following a notification from the national supervisor.

Cross border branches

Where an institution is exercising its right to open a branch in another member state’s territory, the ECB becomes both the host and home supervisor for the tasks conferred on it. The attribution of competences between host and home supervisors currently in use in Union law will no longer be in place.

Cross border banking groups

For banking groups established cross border, but only in Eurozone member states, the college of supervisors system currently in place will no longer apply and the ECB will take over all relevant supervisory tasks.

Relationship with non-Eurozone countries

The proposal allows for competent national authorities of non-Eurozone member states to opt into a “close co-operation” relationship the ECB by means of a notification of the same to the ECB, member states, commission and European Banking Authority. The notification must contain:

■ an undertaking from the member state to abide by ECB guidelines; and

■ an undertaking to provide all such information to the ECB as is necessary for the assessment of the banks of that member state.

The member state must also enact national legislation that will oblige its competent supervisory authorities to adopt measures requested by the ECB.

Accountability and governance

The ECB will be accountable to the European Parliament and the Council of Europe and most likely on a practical level to the finance ministers of the Eurozone. The Parliament will be able to use its competent committees to call on the ECB at any time to be heard.

The monetary function of the ECB will be completely distinct from its supervisory and prudential regulatory functions, to avoid any conflicts of interest between the two.

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Further steps and outlook

The Commission is stressing the urgency of setting up an effective SSM with a phased in approach, projected to begin 1 January 2012, being advised. The ECB will initially supervise banks at its discretion when the proposals first come into force, particularly those banks which have sought assistance. All systemically important banks will come under the supervision of the ECB first with all banks in the Eurozone being under supervision at the latest by 1 January 2014. The proposals could be adopted by the EU leaders by 13 to 14 December 2012 at their formal summit meeting.

Two main issues may cause debate at the European Parliament and between the EU member states as the proposal moves through the legislative process;

1. Scope within Eurozone; the German finance minister Wolfgang Schauble points out the unrealistic timescale for bringing the ECB to the stage where it can monitor 6000 banks when a better solution might be for 200 systemically important banks to be the only institutions coming under the supervision. Berlin is also keen to retain an exception for its state-owned Landesdbanks;

2. Scope outside Eurozone; the ten EU member states that are outside the Eurozone are likely to have concerns about how much power the ECB may have to investigate institutions within their jurisdictions or even being de facto compelled to enter in a co-operation agreements with the ECB for practical reasons.

Commentators have also raised concerns that the proposals do not touch on the arrangements for enforcement and appeal of ECB decisions. Every national regime of supervision will have such mechanisms however it is not clear if the European Court of Justice will take on this role in the SSM.

Conclusion

The proposal for the SSM is ambitious both in its scope and its stated timescales for implementation. It remains to be seen how much debate at member state and EU institutional level over the former will influence the latter. What is clear however is the urgency expressed by the Commission who see the SSM as a way out of the financial mire in which the Eurozone is currently wallowing. The SSM, and the European banking union with it, seem therefore likely to take form in the near future.

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