exchange – international newsletter - dla piper
TRANSCRIPT
INTRODUCTION
WELCOME
DLA Piper’s Financial Services International Regulatory team welcomes you to the seventeenth 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, SWEDEN, the UK and the United States.
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 launch of Australia’s Significant Investor Visa.
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 [email protected]
Europe
Dr. Mathias HantenFrankfurt T +49 69 271 33 381 [email protected]
Michael McKeeLondon T +44 20 7153 7468 [email protected]
Us
Jeffrey L. HareWashington D.C. T +1 202 799 4375 [email protected]
Jim KaplanChicago T +1 312 368 7027 [email protected]
Exchange – International NewsletterIssue 17 – February 2013
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 [email protected] with their contact details. For recent publications, legal updates and an overview of our Litigation & Regulatory capabilities please see our global website.
Next Page >
CONTENTs
EUROPE | aUsTRIa | sWEDEN | UK | UNITED sTaTEsIN FOCUsCONTaCTs
02 | Exchange – International Newsletter
BCBs PUBLIsHEs a FRaMEWORK FOR DEaLING WITH DOMEsTIC sYsTEMICaLLY IMPORTaNT BaNKs
BCBS, 11 October 2012
On 11 October 2012, the Basel Committee on Banking Supervision (“BCBS”) published its framework for dealing with domestic systemically important banks (“D-SIBs”). The BCBS has developed a set of principles broadly categorised into two groups: assessment methodology for D-SIBs; and higher loss absorbency requirements for D-SIBs. The BCBS’s view is that banks should be assessed by national authorities for their systemic importance to that specific jurisdiction and that the framework should be added to the scope of the Basel III regulatory consistency assessment programme.
FsB CONsULTaTION: sTRENGTHENING OVERsIGHT aND REGULaTION OF sHaDOW BaNKING – aN INTEGRaTED OVERVIEW OF POLICY RECOMMENDaTIONs
FSB, 18 November 2012
On 18 November 2012, the Financial Stability Board (“FSB”) published a consultation document seeking comments on its parallel reports on Strengthening Oversight and Regulation of Shadow Banking. The FSB is focussing on five specific areas in which policies are needed to mitigate the potential systemic risks associated with shadow banking:
■ mitigating the spill-over effect between the regular banking system and the shadow banking system;
■ reducing the susceptibility of money market funds to “runs”;
■ assessing and mitigating systemic risks posed by other shadow banking entities;
■ assessing and aligning the incentives associated with securitisation; and
■ dampening risks and pro-cyclical incentives associated with secured financing contracts such as repos and securities lending that may exacerbate funding strains in times of “runs”.
Comments on the consultative documents closed on 14 January 2013.
EUROPEaN PaRLIaMENT aDOPTs REsOLUTION ON sHaDOW BaNKING
European Parliament, 20 November 2012
On 20 November 2012, the European Parliament voted to adopt a resolution on shadow banking and published the adopted text. The resolution:
■ calls for better prudential oversight to reduce shadow banking’s systemic risks without stifling its benefits to the economy;
■ suggests ways to reduce identified systemic risks; and
■ calls on the European Commission to adopt a consistent approach to collecting data centrally.
BCBs UPDaTE ON BasEL III COUNTERPaRTY CREDIT RIsK FaQ’s
BCBS, 21 November 2012
On 21 November 2012, as part of its periodic review to ensure consistent global implementation of Basel III, the BCBS published its third update to the set of frequently asked questions relating to the counterparty credit risk sections of the Basel III rules.
EUROPE
Home | < Previous Page | Next Page >
03 | Exchange – International Newsletter
EsMa aPPROVEs CO-OPERaTION aRRaNGEMENTs WITH FINMa ON CROss BORDER sUPERVIsION OF aIFM
ESMA, 3 December 2012
The European Securities and Markets Authority (“ESMA”), on behalf of all 27 EU national competent authorities for securities markets regulation, has approved a co-operation agreement with FINMA for the supervision of alternative investment funds. The agreement includes the exchange of information, cross-border on-site visits and mutual assistance in the enforcement of respective supervisory laws. The agreement takes the form of a Memorandum of Understanding.
EUROPEaN PaRLIaMENT REsOLUTION: CORPORaTE GOVERNaNCE IN FINaNCIaL INsTITUTIONs
European Parliament, 7 December 2012
The European Parliament has published its resolution on corporate governance in financial institutions. The resolution is in response to the European Commission’s green paper on corporate governance published in June 2010. The resolution addresses a number of points and calls for the implementation of a raft of measures including improved and robust management, regulatory and legislative systems.
aGREEMENT REaCHED ON ssM LEGIsLaTIVE PROPOsaLs
Council of the EU, 13 December 2012
On 13 December 2012, the Council of the EU announced that a general approach on proposals for establishing a single supervisory mechanism to oversee credit institutions had been agreed. The proposals cover two regulations: conferring supervisory tasks
on the European Central bank; and modifying regulation 11093/2010 establishing the European Banking Authority. The proposals are to be considered by the European Parliament in February 2013.
EUROPEaN sECURITIEs aND MaRKETs aUTHORITY PUBLIsH CONsULTaTION PaPER ON sCOPE OF CRa REGULaTION
ESMA, 21 December 2012
On 21 December 2012 the European Securities and Markets Authority (“ESMA”) published its consultation paper on the guidelines and recommendations on the scope of the CRA regulation. Responses are requested by 20 February 2013.
EUROPEaN COMMIssION sUMMaRY OF REsPONsEs TO GREEN PaPER ON sHaDOW BaNKING
European Commission, 21 December 2012
On 21 December 2012, the European Commission published a summary of the responses given to its March 2012 green paper on shadow banking. Analysis of the responses by the European Commission indicates that there is support for regulatory measures in the EU subject to key principles such as that they should improve financial stability; they are proportionate and improve transparency. The European Commission is planning to release a further communication in the first quarter of 2013 providing further details of the areas for which legal proposals might be developed.
Home | < Previous Page | Next Page >
04 | Exchange – International Newsletter
MaD II UPDaTE
November – December 2012
The existing Market Abuse Directive is to be replaced by a new Directive on criminal sanctions for insider dealing and market manipulation (“CSMAD”) and a new Regulation on insider dealing and market manipulation (“MAR”) (together “MAD II”). On 12 November 2012 the European Parliament’s Economic and Monetary Affairs Committee (“ECON”) published its reports on the CSMAD MAR. Both reports had been adopted on 9 October 2012 and they follow on from compromise proposals on both the Regulation and the Directive dated 4 October 2012 and 5 October 2012 respectively.
A general approach to CSMAD and MAR was agreed and published by the Council of the EU on 3 and 5 December 2012 respectively. The agreed approaches will create the platform on which negotiations with the European Parliament will take place to agree the final text of the Directive.
BCBs REPORTs ON THE PROGREss OF BasEL III IMPLEMENTaTION
BCBS, October – December 2012
The BCBS has published a series of progress reports on the implementation of Basel III.
On 1 October 2012, the BCBS published its report on progress in the EU, US and Japan. This report notes that the implementation task is more complex for the EU than other jurisdictions but it does highlight some key gaps in compliance in the EU measures adopted for the definition of capital and internal ratings based approach to risk and the US measures on securitisations. The BCBS will conduct follow-up reports on the EU and US measures once the rule making process for both jurisdictions is complete.
On 29 October 2012 the BCBS reported to the G20 Finance Ministers. The report noted that specific areas required attention if timely and consistent implementation of the measures was to be achieved. The transitional phase for implementation commenced on 1 January 2013 by which time the 27 member jurisdictions should have had the necessary regulations in place. On 14 December 2012 the BCBS stated that “it is expected that the remaining jurisdictions finalise their domestic regulations during 2013… by the end of 2013, almost all Basel Committee jurisdictions will be implementing Basel III in accordance with the agreed timetable.”
LIIKaNEN FINaL REPORT ON BaNKING sECTOR sTRUCTURE REFORM
European Commission, October – December 2012
On 2 October 2012, the European Commission published its final report from the High-level Expert Group (“Group”) into its recommendations for structural reform of the European banking sector. The report concludes that no particular business model fared particularly well or particularly poorly in the financial crisis and that a number of reforms are required:
■ mandatory separation of proprietary and significant other trading activities (e.g. proprietary trading of securities and derivatives);
■ possible additional separation of other activities conditional on the recovery and resolution plan;
■ possible amendments to the use of bail-in instruments as a resolution tool;
■ review of capital requirements on trading assets and real estate related loans; and
■ strengthening the governance and control of banks.
Home | < Previous Page | Next Page >
05 | Exchange – International Newsletter
The European Commission comments that the report will inform its policy on regulating the financial sector and feed their reflections on the need for further action.
The European Commission published a summary of those responses received to the report on 21 December 2012. The Financial Markets Law Committee has raised concerns over potential issues of legal uncertainty with regard to the Group’s proposals on bail-in and ring-fencing. The European Banking Federation states that the Group does not make a compelling case for mandatory separation of activities and as such it does not support such a proposal.
MIFID II: UPDaTE
Council of the EU
Progress on the agreement of the text of MIFID II has stalled after promising movement at institutional level following the proposals passing a vote of the European Parliament’s Committee on Economic and Monetary Affairs on 3 September 2012. The European Council MIFID working group was unable to pass the text to the Council’s Economic and Financial Affairs meeting for discussion in November with the suite of proposals instead being passed to the Irish presidency of the EU which begins in January.
The European Council has been divided on MIFID II with the Cypriot presidency introducing radical amendments to the texts in the course of November in an attempt to progress negotiations.
The most contentious issue was treatment of trading and transparency in the over-the-counter markets. Two options were introduced to deal with this issue:
■ Option 1: The reference price waiver would be removed for pre-trade transparency requirements for the equity markets while the waivers for large-in-scale transactions, negotiated transactions and order management would be retained. The non-equity pre-trade transparency requirements would be retained in the same form as in previous compromise proposals.
■ Option 2: All four equity pre-trade transparency waivers would be retained. However, the reference price waiver would have a lower threshold than the large-in-scale waiver threshold and would not be able to use volume weighted average price ratio as a benchmark. For non-equity pre-trade transparency, bonds, structured finance products and emissions allowances would be treated differently from derivatives making the non-derivative regime much lighter than in earlier drafts.
It should be noted that for both options, the European Council’s evolving definition of “over-the-counter” was removed and replaced with a more traditional definition, following concerns from the Commission and member states.
The European Council published a progress report on 13 December 2012 giving an overview of the situation regarding the “more important” MIFID II issues including those that may require further discussion at political level.
Commentators are suggesting that European Council agreement on the MIFID II suite of proposals could now be as far off as May 2013. In any case, it remains to be seen whether the Irish presidency will approach the proposals in the same way as the Cypriot presidency and what further changes might be necessary move the legislation forward.
CRa III UPDaTE
European Commission
Equivalence Regime
On 5 October 2012, the European Commission announced that it had adopted implementing decisions on the recognition of the legal and supervisory frameworks of the US, Canada and Australia as equivalent to the Credit Rating Agency (“CRA”) Regulation (1060/2009). This follows the technical advice provided by ESMA on the equivalence of the regulatory regimes for CRAs in these countries. On 9 October 2012,
Home | < Previous Page | Next Page >
06 | Exchange – International Newsletter
the text of the EC’s decision on the recognition of the legal and supervisory frameworks of the US (2012/628/EU) and Australia (2012/627/EU) as equivalent to the CRA Regulation (Regulation 1060/2009) was published in the Official Journal of European Union (“OJ”). The decisions come into effect 20 days following publication.
Delegated Regulation
On 16 October 2012, the full text of the European Commission’s delegated Regulation (Regulation 946/2012) on the power of ESMA to impose fines on credit rating agencies was published in the OJ. It includes a full list of infringements that if committed by a CRA will trigger fines. Such infringements include conflicts of interest, obstacles to supervisory activities or non-disclosure of certain information. The delegated Regulation comes into effect on the third day following the publication of the text in the OJ.
On 28 October 2012, the European Parliament’s Economic and Monetary Affairs Committee (“ECON”) published the following:
■ A report dated 23 August 2012 on the proposed CRA III Regulation; and
■ A report dated 28 June 2012 on the proposed Directive amending the UCITS IV Directive (2006/65/EC) and the Alternative Investment Fund Managers Directive (2011/61/EU) (“AIFM Directive”) to reduce the reliance of external ratings by fund managers.
ECON adopted these reports in June 2012. The reports contained draft legislative resolutions for the European Parliament with proposed amendments to the CRA III Regulation and the amending Directive.
Political Progress
On 27 November 2012, the European Commission issued a press release announcing broad political agreement had been reached between the European Parliament and the European Council on CRA III. In particular agreement had been reached in relation to: sovereign ratings, over-reliance on ratings, the independence of credit rating agencies and civil liability. All references to “external ratings” in EU law will be checked to see whether they trigger automatic reactions to ratings. If so these references should be deleted by 2020, subject to appropriate alternatives to credit risk assessment being identified and implemented.
On 4 December 2012, the European Council published:
■ its “general approach” on CRA III;
■ CRA III Regulation (dated 3 December 2012); and
■ Amending Directive (dated 3 December 2012).
The agreed compromise texts for CRA III reform were published by the European Council on 4 December 2012. These texts will be submitted for approval and adoption to the European Council and European Parliament in the first quarter of 2013 for approval and adoption.
Home | < Previous Page | Next Page >
07 | Exchange – International Newsletter
aUsTRIa
Home | < Previous Page | Next Page >
aUsTRIaN PaYMENTs sERVICEs aCT CLass aCTION sUIT
In a class action suit, the Association for Consumer Information (Verein für Konsumenteninformation) has objected to some of the clauses contained in the general terms and provisions of a bank due to an asserted violation of the Austrian implementation of the Payment Services Directive (Zahlungsdienstegesetz), moral principles and transparency requirements.
These transparency requirements imply that terms of contracts which are offered to a consumer in writing must always be drafted in plain, intelligible language. Additionally, the Association for Consumer Information has demanded that the bank waives these clauses in the future. In its decision of August 1, 2012 the Austrian Supreme Court regarded most of the objected clauses as invalid. In the following, the most important results shall be described:
One of the main results of this decision is, that a bank cannot oblige a customer, in a Business to Customer (B2C) context, to verify the correctness and completeness of his account statements. Only in the case that an accounting error attracts the attention of a payment service user, must the customer inform the bank immediately. The customer has, however, in any case a claim for correction.
Another outcome is that a bank is entitled to only use the Bank Identification Code (BIC) and the International Bank Account Number (IBAN) for a consistency review of a bank transfer. Therefore, the bank is not obliged to examine the concordance between the beneficiary’s name and the IBAN account number, except if the bank uses pre-printed payment forms which require the name of the recipient.
Moreover, a bank has to clearly state the cut-off time, beyond which any payment order received shall be deemed to have been received on the following business day, in its general terms and provisions. Payment orders received by a payment service provider after the cut-off time become irrevocable only on the following business day.
Due to the Austrian Payments Services Act, a payment service provider is entitled to only charge for three distinct ancillary services (revocation of payment orders, notification of the refusal of payment orders and recovery of funds involved in a defective execution of a payment transaction), if expressly agreed, whereby a simple disclosure of a list of applicable fees is regarded as insufficient. All other services named in this act have to be provided without any additional charges, except for voluntary contractual ancillary services for which charges are admissible.
In addition, a payment service provider is prohibited to adjust its fees on a unilateral basis, especially in the case of an automatic index-linked adaptation.
In Austria most general terms and provisions of banks are based on the Model General Terms and Conditions for Banking Transactions (ABB 2009). Therefore, this decision may also have consequences for other financial institutions which provide payment services. All institutions which offer payment services in Austria should therefore review their general terms and provisions to ensure that they are in compliance with the most recent case-law.
Please contact [email protected] for further information.
08 | Exchange – International Newsletter
sWEDEN
Home | < Previous Page | Next Page >
REGULaTORY GaP REVEaLED FOLLOWING THE BaNKRUPTCY OF THE sWEDIsH CasH MaNaGEMENT COMPaNY PaNaxIa.
In September 2012, the Panaxia group entered into bankruptcy. Panaxia provided cash handling services to Swedish retail and store chains, gas stations etc., which included collecting, transportation and counting of cash, and supplying ATM’s with cash. Panaxia held approximately 25 per cent of the Swedish market for cash handling services and served approximately 20 per cent of the Swedish ATM’s.
The administrators in Panaxia’s bankruptcy discovered serious deficiencies in the way the business had been carried out. The administrators found that there was a major shortage in Panaxia in respect of the cash that had been collected and the amounts that had been deposited on Panaxia’s customers’ bank accounts. The shortage was assessed to SEK 646,000,000 (approximately EUR 75,050,000) and this raised suspicions that fraud and embezzlement had been committed, which presently are under investigation.
The Panaxia bankruptcy also revealed a regulatory gap in Sweden. The cash service activities of Panaxia are regulated under the same regulatory framework that applies to security and surveillance companies and these regulations virtually lack any regulations on corporate governance, risk management, internal control and compliance. The regulatory framework is instead focused on external risks and threats. Following the Panaxia bankruptcy, the Swedish Central Bank (Sw. Riksbanken) has addressed the Swedish
parliament, requiring that a commission of inquiry is immediately appointed to review the regulatory framework for companies involved in cash management services in Sweden. The Swedish Central Bank has in particular highlighted the following:
■ Cash management/distribution is currently to a large extent handled by cash management service companies operating under the same rules and regulations as security and surveillance companies, i.e. regulations that to a large extent focuses on what could be considered traditional security activities (such as providing security guards, surveillance etc.).
■ There is no control of the directors and officers economic situation when the County Administrative Board, which is the body which supervises security companies, approves the members of the board of directors and the officers of the companies, nor does the County Administrative Board exercise any financial and economic supervision over the companies as such.
■ Cash counting services as such do not require any licensing or permits at all and there is accordingly no supervision in respect of such services.
■ There are no specific regulations in respect of the handling of large amounts of cash and the financial risks related to such activities.
■ There are no express legal requirement to the effect that the companies must hold the customers’ cash and funds separated from the companies’ own cash and funds.
09 | Exchange – International Newsletter
■ There are no regulation that takes into consideration the critical role and position of the companies in the cash handling system, such as requirements in respect of capital strength or similar rules aiming to strengthen the companies’ financial resistance to bankruptcy.
The bankruptcy of a major player in the cash handling system may lead to serious consequences, such as shortage of cash, liquidity problems for smaller companies and consequential bankruptcies of other companies. The process for Panaxia’s customers to change supplier of cash related services has also proven to be time consuming and complicated, during which time the daily cash is not being counted and deposited on bank accounts. The current situation is thus dissatisfying and the fact that the activities
of the cash service companies have been so poorly regulated has taken many by surprise. More detailed and comprehensive regulations in respect of cash service companies could hence be expected to be implemented in the future.
DLA Nordic in Sweden assists several of Panaxia customers that have suffered major losses from Panaxia’s poor and perhaps even criminal handling of their cash and the following bankruptcy of Panaxia. DLA Nordic is closely following the regulatory development in this area.
Please contact [email protected] for further information.
Home | < Previous Page | Next Page >
10 | Exchange – International Newsletter
FINaNCIaL sERVICEs BILL UPDaTE
Parliament, October – December 2012
The Financial Services Act 2012 (“Financial Services Act”) received Royal Assent on 19 December 2012 and will come into force 1 April 2013. Secondary legislation that will, among other things, bring LIBOR into regulation will be brought forward in early 2013. The Financial Services Act largely amends existing legislation, and will make extensive changes to the Financial Services and Markets Act 2000 (“FSMA”), as well as to other legislation including the Bank of England Act 1998 and the Banking Act 2009.
The Financial Services Bill completed its committee stage in the House of Lords on 24 October 2012. The revised version contained a number of amendments made at the committee stage including: establishing a new oversight committee for the Bank of England; expanding the objectives of the Financial Policy Committee; giving the Bank of England powers of direction over UK clearing houses; and allowing the OFT the power to suspend consumer credit licences with immediate effect.
The report stage in the House of Lords was concluded on 28 November 2012 and contained further amendments which, amongst other things, include: power to transfer consumer credit regulation to the Financial Conduct Authority (“FCA”); the implementation of the Wheatley LIBOR Review; and the inclusion of provisions relating to regulated activities connected with setting benchmarks.
Fsa OUTLINEs ITs INTENDED IMPLEMENTaTION OF CRD IV TRaNsITIONaL PROVIsIONs ON CaPITaL REsOURCEs
FSA, October 2012
Draft European legislation updating the capital requirements framework (“CRD IV”) contains a raft of transitional provisions which will impact on firm’s capital planning strategies. There are three areas where the FSA intends to exceed the minimum transitional provisions in order to prevent weakening against the Handbook. Given the importance of the provisions to capital planning the FSA has given notice of its intentions early and intends to consult on the proposals once the CRD IV legislation has been adopted.
Fsa PUBLIsHEs CP12/26 – REGULaTORY REFORM: THE PRa aND FCa REGIMEs FOR aPPROVED PERsONs
FSA, 3 October 2012
On 3 October 2012 the Financial Services Authority (“FSA”) published a consultation paper, CP12/26, on the proposed changes to the existing regulatory rules and guidance relating to approved persons.
Home | < Previous Page | Next Page >
UK
11 | Exchange – International Newsletter
HM TREasURY PUBLIsHEs BaNKING REFORM PaPER
HM Treasury, 12 October 2012
On 12 October 2012, HM Treasury published a paper outlining its proposals for banking reform and the promotion of stability and competition within the financial system. The paper follows on from the final report issued by the Independent Commission on Banking in September 2011 and contains a draft of the Financial Services (Banking Reform) Bill. The paper also provides an overview of the responses to the white paper consultation issued by the Government in June 2012.
TWIN PEaKs MODEL FOR aUTHORIsaTIONs aDOPTED BY Fsa
FSA, 15 October 2012
The FSA published a statement on 15 October 2012 that they have now implemented the Twin Peaks model for the authorisation assessments of firms that are to be dual regulated under the new regulatory regime (due to be implemented in 2013). This mirrors the structure adopted in April 2012 for assessments carried out by FSA Supervision. This internal structure means that firms which will fall to be dual regulated under the new regime will be assessed by the Prudential Business Unit (“PBU”) and the Conduct Business Unit (“CBU”). The new structure reflects changes to the internal procedures followed by the FSA and the application process, as undertaken by the firms, will not be changed.
CONsULTaTION PaPER IssUED BY HM TREasURY
HM Treasury, 15 October 2012
On 15 October 2012, HM Treasury published a consultation paper on secondary legislation and guidance required under the new statutory framework constructed by the version of the Financial Services Bill at that time. The consultation invites comments on a number of aspects of the new regulatory structure:
■ scope of the PRA and FCA regulatory powers and the ability for them to be altered;
■ threshold conditions for both the PRA and FCA that authorised persons must meet;
■ transfer of regulation of mutual societies to the PRA and FCA;
■ information gathering rules over parent undertakings of authorised persons;
■ allocation of responsibility for rule-making with regard to the FSCS between the FCA and PRA; and
■ the power to designate bodies that can make super-complaints.
The consultation closed on 24 December 2012 and the secondary legislation will be laid before Parliament in early 2013.
Home | < Previous Page | Next Page >
12 | Exchange – International Newsletter
BaNK OF ENGLaND aND FINaNCIaL sERVICEs aUTHORITY UPDaTE ON PRUDENTIaL REGULaTION aUTHORITY aPPROaCH TO BaNKING sUPERVIsION
FSA, PRA, BoE, 15 October 2012
On 15 October 2012, the Bank of England (“BoE”) and the FSA published a paper (supplementing a paper dated 19 May 2011) which set out the approach that the PRA will take in order to fulfil its statutory objective of promoting the safety and soundness of regulated firms in relation to deposit takers and investment firms.
The PRA will aim to establish and maintain published policy material consistent with its objectives. EU regulations that apply to UK firms will not be reproduced in the PRA’s rules but will form part of the PRA requirements. Relevant EU directives will be implemented through legally binding PRA rules. Initially the PRA will adopt parts of the FSA handbook but will seek to produce a separate rulebook containing only the PRA’s rules.
Fsa PaPER – JOURNEY TO THE FCa PUBLIsHED
FSA, 16 October 2012
The FSA published on 16 October 2012 a paper setting out its views on the way in which the FCA will operate. The paper covers a number of topics and includes an overview of the objectives of the FCA; new powers of the FCA; how the new regime will impact on firms regulated by the FSA; and how the new regime will benefit and protect consumers.
In the paper Martin Wheatley (FCA Chief Executive designate) states that the creation of the FCA is an opportunity to ‘reset conduct standards for the financial services industry’ and for the new regulatory body to be more transparent in its dealings with firms (as well as firms being more transparent with their customers) in doing so the FCA has three desired outcomes of:
■ consumers getting financial services and products that meet their needs, from firms they can trust;
■ markets and financial systems that are sound, stable and resilient with transparent pricing information; and
■ firms that compete effectively, with the interests of their customers and the integrity of the market at the heart of how they run their business.
The paper also focuses on a number of key areas of the FCA’s creation and role including:
■ the creation of the FCA and the new statutory powers which the it will be able to draw on, including greater product governance and intervention powers;
■ how it will fulfil its competition objectives and duties; and
■ the changes to regulatory processes such as authorisations and on-going supervision.
The paper is also being used as a vehicle to set out a number of high-level questions by way of consultation on its competition and information gathering processes. The deadline for responses was 14 December 2012 and a summary of comments will be published in early 2013.
Home | < Previous Page | Next Page >
13 | Exchange – International Newsletter
Fsa PUBLIsH sIPP THEMaTIC REVIEW FINDINGs
FSA, 23 October 2012
On 23 October 2012 the FSA published their report on the findings of its thematic review on self-invested personal pension schemes (“SIPP”). This review is the second such thematic review conducted by the FSA on SIPP since April 2007. The current review:
■ investigated concerns regarding poor firm conduct and the potential for significant consumer detriment;
■ investigated the extent to which SIPP operators had adapted their processes and procedures; and
■ investigated the level of compliance among SIPP operators with the Client Money and Asset rules (“CASS”).
The review highlighted that SIPP operators have the potential to lead to significant consumer detriment as a result of:
■ poor firm compliance with regulatory requirements;
■ poor knowledge of how CASS applies to SIPP operators resulting in failures to protect client assets adequately; and
■ some SIPPs having inadequate internal controls over investments
The FSA require that all SIPP operators review their business in light of the outcome of the review. The FSA propose to run a series of workshops to highlight those areas that they expect SIPP operators to improve upon.
BaNK OF ENGLaND aND FINaNCIaL sERVICEs aUTHORITY PUBLIsH CONsULTaTION ON DRaFT sTaTEMENT OF POLICY: DEsIGNaTION OF INVEsTMENT FIRMs
FSA, BoE, 26 October 2012
The Financial Services Act introduces a power enabling the PRA to designate certain systemically important investment firms for prudential supervision by the PRA rather than the FCA.
On 26 October 2012, the BoE and the FSA published a consultation paper containing a statement of policy by the PRA and sets out the proposed factors to which the PRA will have regard when deciding whether to designate an investment firm as systemically important as well as the procedural arrangements for doing so.
Fsa PUBLIsHEs CONsULTaTION PaPER CP12/30: COMPLaINTs aGaINsT THE REGULaTORs
FSA, 6 November 2012
On 6 November 2012, the FSA published a joint consultation paper with the FCA, the BoE and the PRA on their proposals for the complaints mechanisms required by the version before Parliament of the Financial Services Bill at that time.
Home | < Previous Page | Next Page >
14 | Exchange – International Newsletter
Fsa REQUIREs assET MaNaGEMENT CEOs TO aTTEsT TO THEIR FIRM’s COMPLIaNCE WITH CONFLICTs OF INTEREsT RULEs
FSA, 9 November 2012
On 9 November 2012, the FSA published a paper setting out its expectations in relation to managing conflicts of interest, for the wider asset management sector, in light of a series of thematic reviews conducted between June 2011 and February 2012. The FSA is concerned that many firms do not have robust procedures in place for identifying and understanding the risks involved. The FSA expect the board of each asset management firm to discuss the paper and each firm’s CEO to attest that their firm complies with the FSA conflicts of interest rules by 28 February 2013.
MaRTIN WHEaTLEY MaRKET REGULaTION sPEECH TO MaRKETs aND CLIENT assETs CONFERENCE
FSA, 20 November 2012
On 20 November 2012, Martin Wheatley (FCA Chief Executive designate) gave a speech to the Markets and Client Assets Conference in which he set out the FCA’s intended approach to dealing with markets regulation and protection of client assets.
Mr Wheatley states that the FCA will have a number of foci, a principal one of which will be maintaining the integrity of the financial system. Mr Wheatley goes on to highlight that the FCA will seek to protect ‘consumers’. The broad definition will not result in all consumers being treated the same and that the FCA will broadly categorise them as either being a retail consumer of financial services; professionals; or sophisticated financial services firms. He states that the FCA will be “a robust regulator of securities markets”.
In his speech Mr Wheatley also addresses the FCA’s intended approach to the regulation of conduct in the wholesale markets.
The FCA will have three early priorities in the area of monitoring wholesale conduct, they are:
■ focussing on issues in the wholesale market where poor behaviour may have a knock-on impact for retail markets and retail consumers;
■ to identify relationships between wholesale participants of different expertise or sophistication where it may be that one participant warrants greater protection than the other; and
■ intervention where, even when participants are evenly matched, the FCA believes that poor conduct between the parties has the potential to adversely impact on the integrity of the markets or the reputation of the UK as a place to do business.
LETTER FROM Fsa TO PaRLIaMENTaRY COMMIssION ON BaNKING sTaNDaRDs
FSA, 21 November 2012
On 21 November 2012, Parliament published a letter from Andrew Bailey (Managing Director Prudential Business Unit) to Andrew Tyrie (Chairman Parliamentary Commission on Banking Standards) elaborating on two points that the FSA feel would be useful to include in the draft Financial Services (Banking Reform) Bill.
The FSA believe that the Prudential Regulatory Authority’s new statutory objective regarding continuity of core banking services should be defined more clearly in regard to the interaction between that objective and the objectives of promoting safety and soundness. In particular the FSA believes that the continuity objective should be a sub-set of the safety and soundness objective.
Home | < Previous Page | Next Page >
15 | Exchange – International Newsletter
The second point addressed is that the draft Bill should specify that Ring -Fenced Bank (“RFB”) directors (and potentially directors of other entities in the group that have influence over the RFB) should have a legal obligation to ensure the integrity of the ring-fence.
GOVERNMENT PUBLIsHEs CONsULTaTION ON REGULaTION OF LIBOR
HM Treasury, 28 November 2012
On 28 November 2012 the Government launched its public consultation on the regulation of LIBOR. The Government states that it is committed to restoring the confidence of this crucial international benchmark and intends to do so as quickly as possible. The consultation sought comments on two proposed pieces of secondary legislation which it intends to implement by amending the Financial Services Bill which was before Parliament at that time. They are:
■ bringing LIBOR within the scope of regulation; and
■ making the manipulation of a LIBOR a criminal offence.
This consultation followed on from the Government statement dated 17 October 2012 that they would accept all the recommendations in the Wheatley Review on LIBOR in full.
The consultation closed on 24 December 2012.
Fsa CONsULTaTION PaPER CP12/35: THE FCa’s UsE OF TEMPORaRY PRODUCT INTERVENTION RULEs
FSA, 3 December 2012
On 3 December 2012, the FSA published a consultation paper setting out the FCA’s draft Statement of Policy on making temporary product intervention rules and giving examples of when and how the FCA may make such rules. The Financial Services Act which received Royal Assent on 19 December 2012 explicitly gives the FCA power to make general rules under which the power to make temporary product intervention rules is included. The Financial Services Act requires that such rules do not last more than 12 months and may not be renewed. The FCA states that they will consider the use of such interventions in the discharge of its functions. The consultation closed on 4 February 2013 with a final statement to be made by the FSA before legal cutover on 1 April 2013.
Fsa CONsULTaTION PaPER CP12/36: THE REGULaTION aND sUPERVIsION OF BENCHMaRKs
FSA, 5 December 2012
Secondary legislation to bring certain benchmarks within regulation will be brought forward in early 2013. On 5 December 2012, the FSA published a consultation paper setting out the FCA’s intended approach to the enacting the proposed legislation focussing specifically on LIBOR. The consultation paper sets out that the FSA’s approach will revolve around clear and unambiguous rules and guidance laid out in the Market Conduct section of the Handbook. The consultation closed on 16 January 2013 and the Policy Statement and finalised Handbook text is anticipated to be published in March 2013.
Home | < Previous Page | Next Page >
16 | Exchange – International Newsletter
FsMa 2000 (DIsCLOsURE OF CONFIDENTIaL INFORMaTION) (aMENDMENT) REGULaTIONs 2012 – aMENDMENT
HM Treasury, 5 December 2012
HM Treasury has published an explanatory memorandum detailing the amendments to FSMA 2000 (Disclosure of Confidential Information) Regulations 2012. The purpose of the amendment is to restore the Gas and Electricity Markets Authority (“GEMA”) to the list of bodies to which confidential information (as defined in FSMA 2000) that is not subject to restrictions on disclosure under EU Legislation may be provided. GEMA had previously erroneously been removed from the list by Regulation 3(15) of the Financial Services (Omnibus 1 Directive) Regulations 2012 (S.I. 2012/916).
Fsa “DEaR CEO” LETTER TO assET MaNaGERs
FSA, 11 December 2012
On 11 December 2012, the FSA published a “Dear CEO” letter expressing its concerns about risks to its objectives arising from asset manager’s outsourcing arrangements. The area of particular concern is that the asset management industry outsources a number of activities to a small number of providers who are usually part of a complex international banking group and as such should the provider face financial distress or severe operational disruption the asset managers would not be able to perform critical and important regulated activities and thus potentially cause detriment to their customers. The letter sets out that the FSA expects firms to have robust contingency plans in place and that these contingency plans are to be reviewed to ensure compliance with SYSC 8.
HM TREasURY CONsULTaTION ON FPC MaCRO-PRUDENTIaL TOOLs ENDs
HM Treasury, 11 December 2012
On 18 September 2012, HM Treasury published a consultation paper on the macro-prudential rules available to the Financial Policy Committee (“FPC”) to help it ensure financial stability. The consultation period closed on 11 December 2012. HM Treasury received responses from a number of key bodies including the British Banker’s Association (“BBA”). The BBA welcomed the development of a macro-prudential regime and they believe that the Government has identified the correct range of powers to be made available to the FPC. They do not advocate the implementation of all the tools envisaged by HM Treasury at this time but rather the toolkit should be built in a measured and thoughtful way as experience is gained.
HOUsE OF LORDs EU COMMITTEE REPORT
House of Lords, 13 December 2012
On 12 December 2012, the House of Lords EU Committee published its report on the European Commission’s proposals for a European banking union. The report highlights the need for a European banking union to restore credibility and stability to the euro area banking system. Whilst it states that the UK will not participate in such a union it does recognise that the UK may become marginalised as any banking union participants move towards closer integration. It also highlights that a move towards greater integration could result in a breakdown of the single market as the authority of EU-27 bodies such as the European Banking Authority and the European Systemic Risk Board comes under threat. It also states that measures to protect London’s status as the pre-eminent financial market and to retain the integrity of the single market should be taken.
Home | < Previous Page | Next Page >
17 | Exchange – International Newsletter
HM TREasURY saR REVIEW TERMs OF REFERENCE PUBLIsHED
HM Treasury, 14 December 2012
HM Treasury has published its terms of reference for the review of the special administration regime for investment banks (“SAR”). The review will consist of two phases. The first phase, ending January 2013, addresses the central issues to the review and an investigation as to how the Investment Bank Special Administration Regulations 2011 are meeting their objectives. The second phase, due to complete in June 2013, will address whether any further changes to the law or practice are needed to further enable the SAR to meet its objectives.
Fsa PUBLIsHEs FINaLIsED GUIDaNCE ON THE REGULaTED COVERED BOND REGIME: THE ROLE OF assET POOL MONITOR
FSA, 14 December 2012
The FSA has responded to requests by market participants to clarify the role of the Asset Pool Monitor (“APM”) established in the amended Regulated Covered Bond Regulations and Sourcebook in November and December 2011 respectively. In its finalised guidance the FSA sets out further guidance on the scope of the inspection and report of the APM.
BBa sTaTEMENT ON PROPOsaL TO IMPLEMENT WHEaTLEY REVIEW OF LIBOR RECOMMENDaTION: DIsCONTINUaTION OF LIBOR FOR CERTaIN CURRENCIEs aND TENORs
BBA, 14 December 2012
The BBA published, on 14 December 2012, its feedback on their consultation paper entitled ‘Strengthening LIBOR – proposal to implement recommendation number 6 of The Wheatley Review of LIBOR’. Of general concern to some respondents was that the proposed timescales for the recommended changes were too fast. In light of this the BBA have proposed a revised timetable and scope for the proposed changes. This has been done in order to enable a greater period of market adjustment. The changes are as follows:
■ 11, 10, 9 8, 7, 5 and 4 month and 2 week tenors will cease to be compiled for all currencies in the LIBOR framework at the end of May 2013 (previously January 2013);
■ publication of the Australian and Canadian Dollar fixings will be discontinued at the end of May 2013 (previously the end of February and March 2013 respectively and
■ for those currencies which remain in the LIBOR framework after May 2013, the two-month tenor will be retained.
■ all other changes will remain to be implemented as proposed in the 8 November 2012 consultation paper.
Home | < Previous Page | Next Page >
18 | Exchange – International Newsletter
Fsa PUBLIsHEs POLICY sTaTEMENT ON PaCKaGED BaNK aCCOUNTs
FSA, 14 December 2012
On 14 December 2012, the FSA published policy statement PS12/22 – Packaged Bank Accounts: New ICOBS rules for the sale of non-investment insurance contracts. PS12/22 provides feedback to the responses given to consultation paper CP12/17 including the final rules.
Fsa PUBLIsHEs POLICY sTaTEMENT ON CONsUMER REDREss sCHEME RELaTING TO aRCH CRU FUNDs
FSA, 17 December 2012
On 17 December 2012, the FSA published policy statement PS12/24: Consumer redress scheme in respect of unsuitable advice to invest in Arch cru funds. The consumer redress scheme begins on 1 April 2013 and firms have until 29 April 2013 to identify all consumers for whom the firm advised, arranged or managed investments in an Arch cru fund and identify all cases that fall within the scope of the redress scheme. Firms must then write to all consumers within and outside the scope of the scheme before 29 April 2013. Those consumers that do not respond to the letter sent by the firms will receive up to two reminder letters following the initial letter and will have until 22 July 2013 to opt in to the scheme.
Fsa aND BaNK OF ENGLaND PUBLIsH JOINT CONsULTaTION PaPER ON THE PRa’s aPPROaCH TO ENFORCEMENT
FSA and Bank of England, 17 December 2012
On 17 December 2012, the FSA published, in conjunction with the Bank of England, consultation paper CP12/39. This paper consults on the proposed statutory statements of policy and procedure in relation to the approach to enforcement of the PRA.
BaNK OF ENGLaND PUBLIsHEs aPPROaCH DOCUMENT ON sUPERVIsION OF FINaNCIaL MaRKET INFRasTRUCTUREs
Bank of England, 18 December 2012
On 18 December 2012, the Bank of England published its approach to the supervision of financial market infrastructures following the transfer of these responsibilities from the FSA to the Bank of England as a result of the enactment of the Financial Services Act. The transfer of responsibility is due to take effect on 1 April 2013.
Fsa PUBLIsHEs CONsULTaTION PaPER ON FCa MaRKETs aND ENFORCEMENT POWERs
FSA, 18 December 2012
On 18 December 2012, the FCA published consultation paper CP12/37: The Financial Services Bill: Implementing market powers, decision making procedures and penalties policies. CP12/37 sets out the proposed changes to the regulatory requirements needed to create the new rulebooks and policies for the FCA in light of the changes brought about by the Financial Services Act.
Home | < Previous Page | Next Page >
19 | Exchange – International Newsletter
Fsa sTaTEMENT ON sTUDY INTO aDD-ON GENERaL INsURaNCE PRODUCTs
FSA, 19 December 2012
On 19 December 2012 the FSA issued a statement that it intends to commence a study into general insurance products sold as add-ons. One of the objectives of the study is to determine if there are common features of add-on markets that weaken competition and drive poor consumer outcomes. The study will cover all the relevant markets and will take into account firms’ and consumers’ behaviour and how they interact to shape prices and the quality and consumption of the product. The FSA aim to complete the assessment in the 3rd quarter of 2013 and the results are to be published shortly after.
Fsa LETTER TO FIRMs THaT WILL HaVE THE PRa as THEIR LEaD sUPERVIsOR
FSA, 20 December 2012
On 20 December 2012, the FSA published a letter (dated 17 December 2012) addressed to firms that will have the PRA as their lead supervisor. The letter sets out what firms need to do in order to be ready for legal cutover on 1 April 2013.
BaNK OF ENGLaND aND Fsa JOINT CONsULTaTION ON DRaFT sTaTEMENT OF POLICY ON PRa POWERs OVER QUaLIFYING PaRENT UNDERTaKINGs
Bank of England and FSA, 21 December 2012
On 21 December 2012, the Bank of England and the FSA published a joint consultation paper on the implementation of power of direction over qualifying parent undertakings given to the PRA by virtue of the Financial Services Act. The Financial Services Act confers certain powers on the PRA over qualifying parent undertakings and section 192H of FSMA requires the FSA to publish a statement of policy on the use of these powers. The consultation paper sets out a draft version of this policy and contains their views on the PRA’s use of these powers.
ENFORCEMENT DECIsIONs
Fsa PUBLIsHEs FURTHER NEWs aND FaQ’s FOR CF aRCH CRU INVEsTORs
On 15 October, the FSA published an update for CF Arch cru investors. A £54 million package (“Payment Scheme”) has been made available to eligible investors and the terms of which must be followed by the FOS when assessing any complaints about the three firms which contribute to the scheme. The original deadline for accepting the terms of the Payment Scheme of 31 December 2012 has been extended to December 31 2013 with agreement from all parties.
Home | < Previous Page | Next Page >
20 | Exchange – International Newsletter
BaNK OF sCOTLaND FINED £4.2 MILLION FOR FaILUREs IN KEEPING aCCURaTE MORTGaGE RECORDs
On 19 October 2012, the FSA issued its final notice to Bank of Scotland (“BOS”). BOS were issued a fine of £4.2 million for their breach of Principle Three of the FSA’s Principles for Business which requires firms to organise and control its affairs responsibly and effectively with adequate risk management systems.
BOS were found to have inaccurate mortgage records for 250,000 customers arising from failings in aligning separate computerised information systems and ensuring manual updates being carried out in a timely fashion. These failings resulted in 33,700 BOS customers being incorrectly contacted and having goodwill payments made to them in error.
The FSA viewed these failings as particularly serious as the inaccuracies built up over a period of seven years and there was no structure in place to identify errors as they occurred. This was further compounded by the fact that there was no checking procedure later in the process.
The fine was discounted from £6 million for early settlement of the investigation.
FOs PROVIsIONaLLY UPHOLDs TWO COMPLaINTs IN INTEREsT RaTE HEDGING sWaP CasEs
The Financial Ombudsmen Service (“FOS”) has released two provisional decisions (22 October 2012 and 23 October 2012) upholding complaints in relation to mis-selling of interest rate hedging products. The two complaints relate to the selling of an interest rate swap product and an interest rate collar product to “non-sophisticated customers”. In both cases neither the bank nor the customer has been named.
The FOS outlines that it will apply the Principles and Conduct of Business rules as appropriate when dealing with complaints of this nature.
The FOS provisionally concluded that both banks failed to meet the information needs of their customers and that both banks gave insufficient attention to the needs of their customers in the advice that was given and therefore acted unfairly in their dealings with their respective customers.
In both instances the parties have been recommended to engage in further dialogue to determine the level of redress. The FOS is in a position only to enforce a payment of £100,000 but recognises that this may not reflect the true level of cost to the customers. In this event the FOS has recommended that the banks settle any additional amount (above the £100,000) in full. The parties were requested to respond with comments and proposals for settlement by 3 December 2012 following which the FOS will release a final decision in due course.
FINaL NOTICE: CaPITa FINaNCIaL MaNaGERs LIMITED
On 13 November 2012, the FSA issued its final notice against Capita Financial Managers Limited (“CFM”). The FSA has publicly censured (on 26 November 2012) CFM for a number of failures in relation to the CF Arch cru funds. Ordinarily the FSA would have fined CFM £4.025 million (after 30% early settlement discount) however the FSA concluded that since CFM agreed to settle at an early stage of their investigation and that CFM have agreed voluntarily to contribute £32 million to the £54 million payment scheme for investors in the CF Arch cru funds, it is not appropriate to impose a financial penalty on CFM.
CaRD PROTECTION PLaN LIMITED FINED £10.5 MILLION FOR MIs-sELLING INsURaNCE PRODUCTs
On 14 November 2012, the FSA issued its final notice setting out the reasons it fined Card Protection Plan Limited (“CPP”) £10.5 million (discounted from £15 million for early settlement) for widespread mis-selling of its two main insurance products.
Home | < Previous Page | Next Page >
21 | Exchange – International Newsletter
UPPER TRIBUNaL RECOMMENDs NO aCTION TO BE TaKEN aGaINsT DaVID HOBBs FOR MaRKET aBUsE
The FSA originally issued a decision notice against Mr. Hobbs on 23 July 2010 imposing a fine of £175,000 and issuing a prohibition order for conduct amounting to market abuse contrary to s118 FSMA. The FSA deemed that Mr Hobbs’ actions in instructing Andrew Kerr (a broker at Sucden) to buy 600 lots of coffee futures shortly before the market closed, resulting in a significant increase in the September 2007 coffee futures price, constituted a “manipulating transaction”. The Tribunal, on 22 November 2012, determined that his actions were legitimate and conformed to accepted market practices on the coffee futures market. For these reasons the Tribunal allowed the referral and directed the FSA to take no further action against him. The FSA had previously issued their final notice against Andrew Kerr, in relation to his part in the transaction. Mr Kerr has been fined £100,000 and given a prohibition order preventing him from performing any function in relation to any regulated activity carried on by any authorised person or exempt professional firm on the grounds that he is not a fit and proper person.
Fsa/FINMa ENFORCEMENT PROCEEDINGs aGaINsT UBs COMPLETE
On 25 November 2012, the FSA issued a final notice setting out the reasons for which they fined UBS AG (“UBS”) £29.7 million (discounted from £42.4 million for early settlement) for systems and controls failings which resulted in a UBS employee (Kweku Adoboli) amassing losses of USD2.3 billion for UBS.
Adoboli conducted a number of unauthorised trades on the Exchange Traded Funds Desk in the Global Synthetic Equities trading division of UBS. These unauthorised trades were disguised by using late bookings of real trades, booking fictitious trades and the use of fictitious deferred settlement trades. The control functions at UBS did not detect the unauthorised trades during this period resulting in significant losses for the bank. Adoboli was found guilty of 2 counts of fraud by abuse of position and sentenced to 7 years imprisonment.
In determining the level of the fine the FSA took into account the fact that in November 2008 UBS were fined in relation to failings of systems and controls around their international wealth management business. UBS were expected by the FSA to assess whether the issues which gave rise to the 2008 fine were applicable to other areas of the business. UBS failed to do so and failed to take remedial action to address the issues which led to the current enforcement action.
UBS have engaged an independent firm to undertake a substantive investigation into the unauthorised trading by Adoboli and UBS senior management have implemented an extensive programme of remediation. These remedial measures will be overseen by an independent investigator appointed by FINMA and once implemented FINMA will engage an audit firm to assess whether the measures are effective.
The FSA investigation was conducted in parallel with FINMA who have imposed a number of additional measures on UBS.
Home | < Previous Page | Next Page >
22 | Exchange – International Newsletter
Fsa PUBLIsHEs FINaL NOTICE TO UBs aG IN RELaTION TO LIBOR aND EURIBOR FaILINGs
On 19 December 2012, the FSA issued a final notice setting out the reasons for which they fined UBS AG (“UBS”) £160 million (discounted from £200 million for early settlement) in accordance with s206 of the Financial Services and Markets Act (“Act”). The FSA found that UBS breached Principles 3 and 5 through their misconduct in relation to the calculation of LIBOR and EURIBOR. The FSA found that UBS has
manipulated its own LIBOR and EURIBOR submissions and manipulated submissions of other banks in collusion with other brokers and panel banks. UBS also made corrupt payments, over a period of at least 18 months, of £15,000 per quarter to brokers to reward them for their assistance. The FSA also found that UBS had significant systems and controls failings during the relevant period.
Please contact [email protected] or [email protected] for further information.
Home | < Previous Page | Next Page >
23 | Exchange – International Newsletter
UNITED sTaTEs
Home | < Previous Page | Next Page >
FsOC PROPOsEs MONEY MaRKET MUTUaL FUND REFORM
On 13 November 2012, the Financial Stability Oversight Council (“FSOC”), announced proposed recommendations for reforming money market mutual funds (“MMFs”). MMFs are a type of mutual fund that invests in various money market instruments, including commercial paper, short-term state and local government debt, Treasury bills, and repurchase agreements.
FSOC was created under the Dodd-Frank Act to provide comprehensive monitoring of the overall stability of the U.S. financial system. It is comprised of the Secretary of the Treasury, the Chairman of the Board of Governors of the Federal Reserve, the Comptroller of the Currency, and the heads of several other financial regulatory agencies. FSOC has the authority to recommend more stringent regulatory standards to a primary banking regulator where the conduct, scope, nature, size, scale, concentration or interconnectedness of financial activity could create or increase threats to financial stability. FSOC, at the outset, determined that MMFs could pose a risk of “significant liquidity, credit, and other problems” among bank holdings companies, nonbank financial companies and U.S. financial markets.
MMFs play an important intermediary role between investors looking for low-risk liquid investments and banks and companies with short-term borrowing needs. Crucial to MMF attractiveness over insured deposit accounts is the implicit promise that the value of shares, typically $1.00 each in the U.S., will never lose value. MMFs are able to maintain this stable value in part because, unlike typical mutual funds, they are permitted to use “amortized cost” accounting rather than market value when valuing their assets and pricing shares. When the value of shares in an MMF drops more than half a percent per share, the share price falls below $1.00 in what is referred to as “breaking the buck.”
Prior to the 2008 financial crisis, breaking the buck was a rare occurrence because fund sponsors typically step in with their own capital in order to prop up the share value.
During the crisis, however, the Reserve Primary Fund, a $62 billion fund, broke the buck and set off a run on all MMFs. On the day of the Lehman Brothers bankruptcy, the Reserve Primary Fund held $785 million in Lehman debt, causing losses its sponsor could not absorb. During the week of September 15, 2008, investors withdrew over $300 billion from prime market funds. Before the end of the month, the Treasury Department was forced to step in and temporarily guarantee the $1.00 share price in order to stem runs on MMFs.
Against this background, FSOC determined that several MMF practices, their size and scale and their interconnectedness pose risks to U.S. financial stability. FSOC pointed out that MMFs employ a potentially risky combination of reliance on rounding to maintain a stable share price, offering on-demand share redemption, and attracting a highly risk-averse investor base, while simultaneously investing in assets with interest-rate and credit risk without explicit loss-absorbing capital. The MMF industry represents $2.9 trillion in assets and is highly interconnected with the rest of the financial system through its funding of short-term debt.
In order to reduce associated risks, FSOC proposed three alternatives for reforming MMFs. First, FSOC proposed requiring MMFs to have a floating net asset value (“NAV”) per share, as opposed to the fixed value of $1.00. If MMFs allow their NAVs to fluctuate, FSOC believes investors may become accustomed to changes in value be less likely to panic at the first signs that NAV dips below $1.00. As part of the proposal, MMFs would be required to re-price their shares to $100 per share to make them more responsive to price fluctuations.
The second proposal is a dual solution requiring an NAV buffer and a minimum shareholder balance at risk. Under this proposal, an MMF would be required to maintain assets of up to 1% in excess of those needed to maintain the $1.00 share price and absorb daily fluctuations in value. The proposal includes a new mechanism called minimum balance at risk (MBR) which prohibits investors from redeeming the total value of their accounts on demand. FSOC proposes that 3% of a shareholder’s highest account value in
24 | Exchange – International Newsletter
excess of $100,000 during the previous 30 days (the MBR) be available for redemption only after a 30-day delay. If the MMF suffers losses exceeding the NAV buffer, those losses would first be applied to MBRs of shareholders who have recently redeemed. By applying losses to the MBRs of redeeming shareholders first, this proposal would reduce the first-mover advantage held by early redeemers and reduce runs on MMFs. The MBR requirement would not apply to investors with accounts below $100,000, and neither the buffer nor MBR requirements would apply to MMFs invested primarily in U.S. Treasury obligations and repos collateralized with U.S. Treasury securities.
The third proposal requires a larger NAV buffer of 3%, combined with other measures to reduce risks such as greater diversification, increased minimum liquidity or increased disclosure. FSOC was not explicit as to what other measures would be required, but sought comment on a mix of appropriate prudential measures.
POTENTIaL IMPaCT OF Us ELECTION REsULTs ON FINaNCIaL REGULaTION
The November elections left the US legislative and executive branches largely unchanged – the Democratic Party controls the White House and holds a slight majority in the Senate, while the Republican Party holds a majority in the House of Representatives. Although the political landscape is split in much the same way as before the election, it seems likely that financial reform will once again be on the legislative agenda. Some Senate leaders such as Sen. Mark Warner (D-VA) have deviated from earlier refusals to reopen the legislation and acknowledge that changes to the Dodd-Frank Act are appropriate. Many of these so-called “corrections bills” have had bipartisan support but, likely due to Democratic fears that Republicans would cease on corrective bills to effect more dramatic reform, remained frozen in the Senate.
Housing reform remains a hot-button topic, primarily as it relates to the status of Fannie Mae and Freddie Mac and their continued roles in the US housing market. Both parties acknowledge that housing reform is necessary, but suggestions range from more aggressive mortgage modifications on portfolio loans or principal forgiveness to the wholesale elimination of Fannie Mae and Freddie Mac.
For the financial services industry, the election of Elizabeth Warren (D-MA) to the Senate is likely to be one of the more meaningful outcomes of the elections. Ms Warren was instrumental in design and creation of the Bureau of Consumer Financial Protection. The Bureau was a particularly objectionable element of the Dodd-Frank Act for Republicans and the industry. Ms Warren acted as special advisor to President Obama and played a de facto role as the head of the Bureau during its formative days. Ms Warren is expected to join the Senate Banking Committee when it is reformulated in 2013, given the retirement of two existing members of the Committee. She would likely oppose any reduction to the Bureau’s authority or changes to its composition or structure requested by Republicans who refused to confirm Richard Cordray as Director of the Bureau absent consideration of such changes. Sen. Richard Shelby (R-AL) is the Republican Ranking Member of the Committee and is term-limited under the Republican rules. He will likely be replaced by Sen. Mike Crapo (R-ID). On the House side, the Republicans have shifted leadership of the House Financial Services Committee to Jeb Hensarling (R-TX).
With respect to the agencies, the Senate confirmed Martin Gruenberg as Chairman of the FDIC and Thomas Hoenig as vice chairman. Both were confirmed to serve as members of the FDIC’s board of directors in April, but approval of their leadership roles was held up due to partisan politics. Republicans refused to approve the positions in the event that Mitt Romney, the Republican candidate for President, won the election and could appoint his own FDIC leadership.
Please contact [email protected] or [email protected] for further information.
Home | < Previous Page | Next Page >
25 | Exchange – International Newsletter
IN FOCUs
Home | < Previous Page | Next Page >
LaUNCH OF aUsTRaLIa’s sIGNIFICaNT INVEsTOR VIsa: a WORLD OF OPPORTUNITY FOR MaNaGED FUNDs
INTRODUCTION
In May 2012, the Federal Government announced that it would introduce a new stream of visa referred to as the ‘Significant Investor Visa’, which would provide high net worth individuals with the ability to apply for an Australian visa and ultimately permanent residence on the basis of a minimum investment in Australia of $5 million. Applicants would not be required to satisfy the innovation points test, which would otherwise apply under a business investment/skilled migration application. There would also be no upper age limit for applying, providing a golden opportunity for high net worth individuals wishing to migrate to and invest in Australia.
In August this year, the Department of Immigration and Citizenship announced more detail about how the Significant Investor Visa would operate and, in particular, the conditions that would apply to a ‘complying investment’. The new stream of visa officially commenced on 24 November 2012 with the enactment of the Migration Amendment Regulation 2012 (No.7) (Regulations). The issue of the Regulations has finally allowed fund managers to have detailed information about the type of managed fund into which investments can be directed in order to qualify for the new visa.
The Significant Investor Visa is a new stream within the Business Innovation and Investment (Provisional) (Subclass 188) visa and the Business Innovation and Investment (Permanent) (Subclass 888) visa. Considerable interest in the new visa is reported to have been shown by high net worth individuals across Asia (and in particular China). It is expected that, with the release of the Regulations, there will be significant opportunities for operators of managed funds investing in complying assets to take advantage of this interest by tailoring both existing and new products to receive the investments that will
follow. With a reported expectation of up to 700 applicants annually, this represents a significant pool of investment funds that will need to be managed appropriately and within the conditions provided under the Regulations.
aDDITIONaL FLExIBILITY FOR MaNaGED FUNDs
Of particular interest to local fund managers will be a clarification and broadening of the conditions originally announced in August 2012, so that a complying investment can be made into a managed fund where one or more of the following apply:
■ The fund is an unregistered managed investment scheme, provided the trustee of the fund holds an Australian Financial Services Licence (“AFSL”);
■ The investment in the fund is made indirectly through an ‘investor directed portfolio service’; or
■ The fund is offered only to a limited number of high net worth investors and is not ‘open to the general public’.
When the conditions were announced in August, they included a requirement for the managed fund to be ‘regulated by the Australian Securities and Investments Commission (“ASIC”) and to be ‘open to the general public’. This implied the need for a managed fund to be a registered managed investment scheme and offered to retail investors alongside high net worth investors. The conditions also appeared to require that the investment into the fund be made directly or through a family company or a controlled family trust of the high net worth investor.
The Regulations now make it clear that, in order to be a complying investment, a managed fund simply needs to be a ‘managed investment scheme’ as defined under the Corporations Act 2001 (Cth) (“Corporations Act”), where the operator that issues
26 | Exchange – International Newsletter
the interests in the fund to investors, does so under an AFSL and that this is considered to satisfy the requirement for the fund to be regulated by ASIC. There is no requirement in the Regulations for the fund to be offered to the general public and indirect investments in the fund through an investor directed portfolio service are specifically allowed.
HOW CaN THE sIGNIFICaNT INVEsTOR VIsa BE OBTaINED?
In order to apply for the Significant Investor Visa, applicants must:
■ submit an expression of interest in SkillSelect (an online service that enables skilled workers and business people interested in migrating to Australia to record their details to be considered for a skilled visa);
■ be nominated by a state or territory government; and
■ make investments of at least $5 million into ‘complying investments’ for a minimum of four years.
The NSW Government has announced that in order to be nominated by the NSW Government, visa applicants will be required to invest a minimum of 30% (or $1.5 million at the base level of investment) in NSW Waratah Bonds. Announcements by the other state and territory governments in relation to their requirements for nomination are expected to be made shortly.
WHaT aRE ‘COMPLYING INVEsTMENTs’?
A ‘complying investment’ consists of one or more of the following:
■ an investment in a government bond (however described) of the Commonwealth, a state or territory;
■ an investment in a managed fund (directly or through an investor directed portfolio service) (summarised below); or
■ a direct investment by taking an ownership interest in an Australian proprietary company that is not listed on the Australian Securities Exchange and that operates a ‘qualifying business’ in Australia (i.e. passive speculative or investment business is excluded), subject to certain conditions.
Applicants may hold investments in each of the above complying investments and may also switch between the investment options, provided that they meet certain reinvestment conditions. It is likely that the category of managed fund investment will provide the most scope for ready and flexible investment by applicants under the Significant Investor Visa.
INVEsTMENTs IN a MaNaGED FUND
In order to be classed as a ‘complying investment’, an investment in a managed fund must satisfy the following conditions:
■ The investment is a ‘managed investment scheme’ (within the meaning of the Corporations Act);
■ The interests are not able to be traded on a financial market;
■ No representation has been made to any member of the managed investment scheme that the interests will be able to be traded on a financial market; and
■ The issue of the interest is covered by an AFSL.
In addition, the managed fund must be limited to categories of investment specified by the Minister in an instrument in writing. These categories include the following:
■ Infrastructure projects in Australia;
■ Cash held by Australian deposit-taking institutions;
Home | < Previous Page | Next Page >
27 | Exchange – International Newsletter
■ Bonds issued by the Federal Government or a state or territory government;
■ Bonds, equity, hybrids or other corporate debt in companies and trusts listed on an Australian stock exchange;
■ Bonds or term deposits issued by Australian financial institutions;
■ Real estate in Australia;
■ Australian agribusiness.
Importantly, the managed fund is not required to be registered with ASIC. This will reduce the levels of compliance required by the fund, make establishing funds for the Significant Investor Visa potentially more straightforward and enable the funds to be managed at a lower cost. As noted above, this appears to represent a relaxation and broadening of the requirements for a managed fund to qualify as a complying investment, from the conditions originally announced by the Department of Immigration and Citizenship in August 2012.
WHaT Is THE TERM OF THE sIGNIFICaNT INVEsTOR VIsa?
The Significant Investor Visa operates for an initial term of four years. However, holders can extend their visa term if they satisfy certain requirements (including if they have held complying investments for at least four years and continue to meet the relevant conditions). They will be allowed to extend their provisional visa by an additional two years, with a maximum of two extensions permitted, bringing the maximum total period on a provisional Significant Investor Visa to eight years.
WHaT aRE THE aDVaNTaGEs TO THE sIGNIFICaNT INVEsTOR VIsa?
For migrants, the Significant Investor Visa has a number of advantages over other types of visas. Successful applicants will be granted the following concessions:
■ No upper age limit;
■ No requirement to meet a points test; and
■ A reduced residency requirement of 160 days over four years in order to qualify for a permanent visa.
From the Federal Government’s point of view, this new visa will encourage investment into Australia and boost growth in key areas including real estate, infrastructure projects, financial planning and funds management and administration. It will provide fund managers, in particular, with the opportunity to create new locally managed funds to market to wealthy individuals throughout Asia and other parts of the world. This could well provide a ‘world of opportunity’ for Australian fund managers, in particular those investing in infrastructure, real estate and agribusiness.
Please contact [email protected] for further information.
Home | < Previous Page | Next Page >
28 | Exchange – International Newsletter
asIa
CHINa – HONG KONG
Christopher ClarkePartner T +852 2103 0688 [email protected]
adrian ElmsSenior Associate T +852 2103 0755 [email protected]
aUsTRaLIa
Warwick Painter Partner T +61 2 9286 8252 [email protected]
Marianne RobinsonConsultant T +61 2 9286 8017 [email protected]
EUROPE
aUsTRIa
Jasna Zwitter-Tehovnik Partner T +43 1 531 78 [email protected]
BELGIUM
Koen Vanderheyden PartnerT +32 02 500 6552 [email protected]
Patrick Van EeckePartner T +32 2 500 1630 [email protected]
Emma Greenow Account DirectorT +32 2 500 1623 [email protected]
CZECH REPUBLIC
Pavel MarcPartner T +420 222 817 402 [email protected]
FRaNCE
Fabrice armandPartner T +33 1 40 15 24 43 [email protected]
anne MaréchalPartner T +33 1 40 15 24 40 [email protected]
CONTaCT Us
For further information, please contact:
Home | < Previous Page | Next Page >
29 | Exchange – International Newsletter
GERMaNY
Eyke GrüningPartner T +49 69 271 33 290 [email protected]
Dr. Mathias HantenPartner T +49 69 271 33 381 [email protected]
Dr. Gunne W. BährPartner T +49 221 277 277 283 [email protected]
HUNGaRY
andrás NemescsóiPartner T +36 1 510 1180 [email protected]
ITaLY
alessandro CornoPartner T +39 02 80 618 508 [email protected]
Luigi RizziPartner T +39 06 68 880 503 [email protected]
Marco ZechiniPartner T +39 06 68 880 509 [email protected]
NETHERLaNDs
Hans HofmeesterLegal Consultant T +31 20 541 9355 [email protected]
Paul HopmanAdvocaat T +31 20 541 9952 [email protected]
Rik MellenberghAdvocaat Professional Support Lawyer T +31 20 541 9850 [email protected]
NORWaY
Karl-Fredrik LindblomOf Counsel T +47 24 13 16 46 [email protected]
Camilla WollanPartner T +47 24 13 16 59 [email protected]
ROMaNIa
sabin Volciuc-IonescuCounsel T +40 372 155 820 [email protected]
sLOVaKIa
Eva skottkeSenior Associate T +421 2 592 021 11 [email protected]
Radoslava RojkovaSenior Associate T +421 2 592 021 14 [email protected]
Home | < Previous Page | Next Page >
30 | Exchange – International Newsletter
sWEDEN
Lina WilliamssonSenior Associate T +46 8769 7910 [email protected]
UK
Elisabeth BremnerPartner T +44 (0)20 7796 6230 [email protected]
Michael McKeePartner T +44 (0)20 7153 7468 [email protected]
UNITED sTaTEs
Us – CHICaGO
Jim KaplanPartner T +1 312 368 7027 [email protected]
Wesley NissenPartner T +1 312 368 3411 [email protected]
Us – LOs aNGELEs
Nicolas MorganPartner T +1 310 595 3146 [email protected]
Us – NEW YORK
Matthew YoonPartner T +1 212 335 4505 [email protected]
Us – WasHINGTON D.C.
Luis MejiaPartner T +1 202 799 4572 [email protected]
Jeffrey HarePartner T +1 202 799 4375 [email protected]
Home | < Previous Page | Next Page >
Home | < Previous Page
If you have finished with this document, please pass it on to other interested parties or recycle it, Thank you.
DLA Piper is a global law firm operating through various separate and distinct legal entities. Further details of these entities can be found at www.dlapiper.com
Copyright © 2013 DLA Piper. All rights reserved. | FEB13 | 2507746
www.dlapiper.com
FINaNCIaL sERVICEs TEaM
DLA Piper’s dedicated Financial Services team offers specialist legal expertise and practical advice on a wide range of contentious and advisory issues. The team can assist clients on contentious legal matters including: internal and regulatory investigations, enforcement actions and court proceedings in the financial services sector. There is also an experienced advisory practice which gives practical advice
on all aspects of financial regulation, including the need for authorisation, regulatory capital, preparation for supervision and thematic visits, conduct of business issues and financial promotions.
DLa PIPER REGULaTORY & GOVERNMENT aFFaIRs GROUP
Find out more about DLA Piper’s global Regulatory & Government Affairs group.
IMPORTANT NOTE TO RECIPIENTS: We may supply your personal data to other members of the DLA Piper international legal practice (which may be situated outside the European Economic Area (“EEA”)) so that we or they may contact you with information about legal services and events offered by us or them subject to your consent.
It is our policy not to pass any of your personal data outside of the DLA Piper international legal practice or use your personal data for any purposes other than those indicated above.
If you no longer wish to receive information from DLA Piper uk llp and/or any of the DLA Piper members, please contact [email protected]
The email is from DLA Piper uk llp and DLA Piper scotland llp.
This publication is intended as a general overview and discussion of the subjects dealt with. It is not intended to be, and should not be used as, a substitute for taking legal advice in any specific situation. DLA Piper uk llp and DLA Piper scotland llp will accept no responsibility for any actions taken or not taken on the basis of this publication.
Please note that neither DLA Piper uk llp or DLA Piper scotland llp nor the sender accepts any responsibility for viruses and it is your responsibility to scan or otherwise check this email and any attachments.
DLA Piper uk llp is a limited liability partnership registered in England and Wales (registered number OC307848) which provides services from offices in England, Belgium, Germany, France, and the People’s Republic of China. A list of members is open for inspection at it’s registered office and principal place of business, 3 Noble Street, London EC2V 7EE. DLA Piper Scotland is a limited liability partnership registered in Scotland (registered number SO300365) which provides services from offices in Scotland. A list of members is open for inspection at its registered office and principal place of business, Rutland Square, Edinburgh, EH1 2AA.
Partner denotes member of a limited liability partnership.
DLA Piper uk llp is a law firm regulated by the Solicitors Regulation Authority. DLA Piper scotland llp is a law firm regulated by the Law Society of Scotland. Both are part of DLA Piper, an international legal practice, the members of which are separate and distinct legal entities.