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IMS Asset Management and Securities Regulatory Update, July 2011
In the business section of good bookshops these days, amongst the get rich quick guides and biographies of celebrity millionaires, there are a large number of paperbacks on the “history” of the financial crisis, an event barely three years in the rear view mirror and in some respects still continuing. These books tell fascinating stories of the small number of people who were on the short (i.e. profitable) side of the credit bubble. Others focus on the near death of both high street and investment banking “as we know it”. Some consider the actual death of particular financial institutions previously considered to be immortal on account of their size and thus importance. The common ground amongst all these after-the-fact analyses of the financial crisis is the general failure of both monetary policy and financial services regulation - anywhere, not just in the UK - to effectively check the explosion of lending, the related and simultaneous innovation in the world of derivatives and the effect that both of these phenomenona had on the balance sheets of a large number of major financial institutions.
No book has yet been written on the failure of the UK’s tripartite system for economic and financial services regulation, perhaps because of the difficulty in coming up with a sufficiently snappy title. How the new/post FSA structure (or indeed the pre-FSA structure) would have coped with the events leading up to 2008 would make for an interesting debate amongst regulatory aficionados at a time when we begin another transition of responsibility. Interestingly, the FSA’s first Chief Executive (and Chairman) Howard Davies recently described the structural changes that are currently taking place as rearranging the deck chairs on The Titanic, primarily due to their proximity to so many other major regulatory developments globally. Firms shouldn’t need to be reminded what these other developments are. However, if you do, IMS’ series of newsletters should prove extremely helpful. And so onto this edition!
This newsletter discusses HMT’s White Paper on the proposed new regulatory structure for the UK and also the FSA’s public consultation on the role and remit of the new Financial Conduct Authority. What makes this consultation so interesting is the frank admission that the recent history of financial services regulation in the UK has a legacy of £15b worth of mis sold financial products. Furthermore, the FSA in its consultation takes the remarkable approach of asking stakeholders precisely what sort of regulator they want its successor to be.
We report back from the FSA’s penultimate annual FSA conference. An international perspective is added by the news that investment adviser registration in the US – Dodd Frank being another noteworthy response to the financial crisis - has been partially delayed until next year. We also discuss the European Union’s ongoing efforts to create a harmonised short selling regime, the need for which was highlighted by the unilateral actions of the Italian regulator in suddenly introducing short selling measures in July 2011 and we welcome the coming into effect of the UK Bribery Act.
FSA “Business as Usual” is in the form of a revisit to the area of transaction reporting which stems from the FSA’s continued focus on market abuse prevention, detection and deterrence. We also highlight the FSA’s recent articulation of its growing concerns relating to suitable portfolios in the area of wealth management. Finally, we discuss a number of developments in the world of financial crime, including the FSA’s recent conference and publications on the subject, before concluding with our usual enforcement round-up.
If you have any questions regarding any of the articles below, please contact Peter Moore, Stephen Burke or Alan Leale-Green. Alternatively telephone 020 7408 2448 to speak to your usual IMS contact.
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This is the UK Bribery Act 2010. The most powerful anti-corruption legislation in the world: do you feel lucky?
The Bribery Act 2010 (“the Act”) received Royal Assent on 8 April 2010 and after much ado finally came into force on 1 July 2011, three months after the Ministry of Justice published its literally if not succinctly entitled “Guidance about procedures which relevant commercial organisations can put into place to prevent persons associated with them from bribing” (the "Guidance").
SEC Registration of Private Fund Managers under Dodd Frank formally deferred to 30th March 2012.
Non-US private fund managers and advisers hoping for favourable amendments to the SEC’s Dodd Frank implementation proposals will be feeling slightly disappointed. On the 22nd of June the SEC commissioners voted 3-2 in favour of implementing the Private Fund advisor rules largely as set out in their consultation proposals published November 2010 with very little reasoning or discussion of the potential cross jurisdictional impact of the rules.
UK financial regulation reform: Draft bill and white paper published
The most significant modification in a decade to the UK’s financial regulatory architecture began to take shape on 16 June 2011 with the publication of the Government’s financial regulation White Paper. This provides some further detail on the Government’s proposed reforms to the UK financial regulatory regime and also contains a draft Bill to amend the existing banking and financial services legislation.
“Tougher, bolder and more engaged”: the approach of the Financial Conduct Authority
On 27th June 2011, the Financial Services Authority (“FSA”) released an “approach” document outlining how its successor body for conduct and markets regulation, the Financial Conduct Authority (“FCA”), would be tougher and bolder than even the FSA itself when it commences its operations in late 2012 or early 2013.
The FCA document adds (a little but not a lot) to previous publications on change to the infrastructure for the authorisation and supervision of UK financial services firms. No major structural changes were announced in the FCA document but the key message is to expect a material change to the regulatory and supervisory approach in certain sectors of the market.
The FSA’s penultimate annual report and public meeting: The countdown to twin peaks
The key messages from the FSA’s Annual Public Meeting held on 23 June 2011 were broadly those already laid out in the FSA’s business plan (on which we have previously commented) and also the Treasury’s more recently published white paper on financial reform.The FSA’s Annual Report published ten days before the meeting summarises the steps taken by the FSA during the year to further and fulfil its statutory objectives of financial stability (2010), market confidence, consumer protection, and reduction in financial crime, while also summarising its substantial inroads into delivery of the financial reform and delivering the FSA’s operational platform.
High pitched harmony: European short selling regime due in July 2012
European proposals on short selling continue to move towards their target implementation date of July 2012. This follows publication on 15 September 2010 of the European Commission’s “Proposal for a Regulation on Short Selling and certain aspects of Credit Default Swaps”. The harmonised regime will generally increase the need to disclose short positions and will also partially restrict uncovered short sales by (although this is still be resolved) possibly requiring some degree of prior arrangement to buy the instruments prior to settlement of the sale.
Transaction reporting and market surveillance: recent developments at July 2011.
The FSA continues to heighten the importance of the transaction reporting regime for authorised firms with the launch of its new reporting and surveillance system. ‘Zen’ will replace Sabre II on 8th August 2011, with a transition period running until 13th November, as outlined in the FSA’s Market Watch Newsletter Issue No. 39.
Caveat Venditor ‘Let the Seller Beware’: FSA publishes findings of ‘suitability’ review of wealth management firms
With a cry of “Caveat Venditor”, the lesser known counterpart to “Caveat Emptor” or Buyer Beware – the FSA have issued a stark warning that it means business in the retail investment sector. With the regulator’s Retail Distribution Review building momentum towards the December 2012 deadline, tough talk about intensive supervision and early product intervention in the Retail Conduct Risk outlook, the FSA looks set to keep its promise to “take decisive action to protect consumers”.
Financial Crime Conference: the FSA’s boiling point…
Amidst a highly congested regulatory conference season, the FSA held its Financial Crime Conference on 22 June at which attendees enjoyed presentations by senior FSA staff, a Member of Parliament, the Police, Ministry of Justice, and the Serious Fraud Office. The conference indulgently focussed on the “good work” of the FSA’s enforcement division in the recent past and also the anticipated improvements going forward.
Enforcement round-up – the rise and rise of the injunction
Having discussed in our last newsletter the introduction of the FSA’s new enforcement tool, “the power of early publicity”, the FSA continues to provide further opportunities to discuss firsts in the course of our enforcement round-up.
