FSA liquidity rules... - Kinetic Partners by sdsdfqw21


									                                                                 Kinetic Partners

                                                                            R E G U L A T O R Y

Financial Services Authority developments, news and publications issued in DECEMBER 2008                                    Issue 8

Welcome to Kinetic Partners’ latest Regulatory Focus, our regulatory newsletter for the asset management community. It
provides a synopsis of the Financial Services Authority’s (FSA) latest news and publications on a monthly basis. Highlights this
month include the FSA’s consultation on liquidity rules for banks, building societies and investment firms along with news that an
Oxfordshire businessman has been fined £35,000 for lying about being authorised by the FSA.

As your views are important to us, we would value your comments and suggestions.

Please send these to info@kinetic-partners.com

Contents                                                         Highlights
Press releases                                   2
Consultation paper                               3               FSA consults on liquidity rules
Policy statement                                 4               for banks, building societies and investment firms             2
Discussion paper                                 4
Feedback statements                              4               Oxfordshire businessman fined £35,000
Statements                                       4               for lying about FSA authorisation                              2
Handbook publications                            4
Consumer research                                4               Consultation paper 08/24:
Letters                                          5               Stress and scenario testing                                    3
EU document                                      5
Speeches                                         5               Consultation paper 08/25:
Miscellaneous                                    5               The approved persons regime
Final supervisory notice                         6               significant influence function review                          3
Final notices                                    6

Pillar 3 disclosure
ICAAP updates
Priorities and issues for 2009                   8

                                          Details of all FSA publications can be found at:
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Press releases
Clearer segments will help improve                    switch into personal pensions or self-invested        over the last two years, and this is significantly
listing regime                                        personal pension (SIPP), following a review           higher where they have had recent contact with
FSA/PN/143/2008           1 December 2008             which found variables standards across a sample       the regulator. Hector Sants, FSA chief execu-
A feedback statement has been published by the        of 30 firms. The FSA is determined to ensure          tive, said: “The Practitioner Panel survey is an
Financial Services Authority (FSA) following its      that all firms meet their required standards of       important tool for the FSA to understand how
review of the structure of the Listing Regime.        advice. It will be writing to over 4,500 firms that   regulated firms perceive and experience us, and
The proposed changes will provide further clar-       advise on pension transfers, setting out its find-    I am particularly encouraged to see the findings
ity to the Listing Regime and help maintain the       ings, the standards it expects of firms and the       show that firms are more satisfied when they
integrity of the UK markets, enabling issuers         action firms should take to ensure customers          have more contact with the FSA.”
and investors to make informed decisions. In          receive suitable advice. Further assessments
particular, the paper sets out proposals on how       will be undertaken by the FSA in the third            Oxfordshire businessman fined £35,000
the UK listing regime can be clearly marked           quarter of 2009.                                      for lying about FSA authorisation
out into ‘Premium’ and ‘Standard’ so market                                                                 FSA/PN/151/2008 11 December 2008
participants understand the differences in the        Letter to 11,000 shareholders: Your                   Mr Mayson Shanti of Marcham, Abingdon,
obligations issuers have to meet.                     personal details might be on a database               an Oxfordshire businessman, has been fined
                                                      shared by fraudsters                                  £35,000 by Didcot Magistrate’s Court for falsely
FSA consults on liquidity rules for banks,            FSA/PN/148/2008          8 December 2008              claiming that his company, Chase Capital
building societies and investment firms               11,000 UK shareholders have been warned               Finance Limited (Chase Capital), was author-
FSA/PN/144/2008          4 December 2008              by the FSA that their personal details are on a       ised by the FSA. This is the first time the FSA
A consultation paper which proposes a                 database shared by fraudsters which can be            has prosecuted an individual for falsely claiming
far-reaching overhaul of the liquidity require-       used to target people and illegally sell them         to be authorised. Advertisements were placed
ments for banks, building societies and invest-       shares. Share fraudsters, also known as boiler        in the BT Telephone Directory and Yellow
ment firms has been published by the FSA. The         rooms fraudsters, are often based overseas and        Pages, which falsely stated that Chase Capital
rules that have been proposed are based on            use high pressure sales techniques to target          was FSA authorised and was regulated to carry
recently agreed international liquidity standards,    investors offering them non-tradable, over-           out financial services; the company is no longer
in particular the Basel Committee on Banking          priced or even non-existent shares. The FSA           trading and was also fined £1,000.
Supervision’s (BCBS) Principles for Sound             wrote to shareholders warning them of the
Liquidity Risk Management and Supervision.            fraud and suggested ways to avoid becoming a          FSA confirms Catholic Building Society
The rules also take into account difficulties         victim to this.                                       merger with the Chelsea Building Society
faced in the market over the past 18 months.                                                                FSA/PN/152/2008 16 December 2008
The proposed measures in the consultation             Egg fined £721,000 and will compensate                The FSA has announced that it confirmed the
paper are designed to enhance firms’ liquidity        PPI customers                                         proposed transfer of the engagements of the
risk management practices significantly and will,     FSA/PN/149/2008 10 December 2008                      Catholic Building Society to the Chelsea Build-
in some cases, reshape their business models          Egg Banking plc (Egg) has been fined £721,000         ing Society. The FSA’s written decision can be
over the coming years.                                for serious failings in its’ sales of credit card     found on: http://www.fsa.gov.uk/pages/Library/
                                                      payment protection insurance (PPI). The FSA           Communication/PR/2008/152.shtml
FSA confirms Cheshire Building Society                found failings in approximately 40% of
merger with the Nationwide Building Society           telephone sales of credit card PPI made by Egg        FSA consults on changes to the rules for
FSA/PN/145/2008          5 December 2008              between January 2005 and December 2007.               approved persons
It has been announced by the FSA that it              “Objective handling” techniques were used to          FSA/PN/153/2008 19 December 2008
confirms the proposed transfer of the engage-         persuade the customer to take the insurance.          A consultation paper has been published that
ments of the Cheshire Building Society. The           These techniques included over emphasising            clarifies the FSA’s expectations of those who
documents set out the reasons for the FSA’s           the positive features of the PPI or telling the       will be performing “significant influence”
decision. Fifty two written representations and       customers they could take up the PPI for a free       positions within firms. The consultation paper
one notice of intention to make oral represen-        period and cancel it at a later date. In some         proposes amendments to the FSA handbook
tations were received by the FSA.                     cases, even when customers did not consent,           to extend the approved persons regime and
                                                      PPI was applied to their credit card anyway. Egg      sets out how the FSA will enhance its scrutiny
Barnsley & Yorkshire Building Societies:              will write to customers asking them to call a         of senior management competence. The FSA
merger confirmation hearing                           dedicated number if they have any concerns            is seeking to ensure that all directors and
FSA/PN/146/2008           5 December 2008             about the policy or the way it was sold to            senior managers understand their regulatory
The arrangements for the hearing of the               them and offer compensation where appropriate.        obligations, have relevant experience and carry
proposed transfer of the engagements of               Egg is expected to pay £1.67 million for every        out their roles with integrity. As part of this
Barnsley Building Society to Yorkshire Building       10 percent of customers who receive a refund.         process, the FSA has already started to inter-
Society, has been announced by the FSA. The           Further details are available in the Final Notice     view more applicants for “significant influence”
purpose of such hearing is to give interested         section of this Bulletin.                             posts at high impact firms. Where individuals
parties an opportunity to make oral represen-                                                               fail to meet the required standards whilst
tations and to enable the FSA to make such            FSA response to Practitioner Panel survey             carrying out their process, the FSA will
inquiry as it considers necessary, both of the        FSA/PN/150/2008 11 December 2008                      consider enforcement action.
societies and of those making oral representations.   The FSA has responded to the latest survey of
                                                      regulated firms by the independent Financial          FSA to explore more widely the issue of
FSA takes action to address pension                   Services Practitioner Panel. The survey showed        consumer responsibility
transfer advice failings                              that firms are more satisfied where they have         FSA/PN/154/2008 19 December 2008
FSA/PN/147/2008        5 December 2008                had recent contact or enjoy a close relation-         A discussion paper has been published by the
The FSA is taking action to improve the               ship with the FSA. One in five firms considers        FSA on consumer responsibility to explore
quality of advice given to customers to               their relationship with the FSA has improved          what steps the regulator or others could take
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Press releases cont.                                                                                      Consultation papers cont.
to help consumers understand and protect their      FSA re-appoints Tim Herrington as                     CP08/23: Financial stability and deposi-
own best interests more effectively. The FSA is     Regulatory Decisions Committee chairman               tor protection: FSA responsibilities
required by law to consider the general principle   FSA/PN/158/2008 30 December 2008                      This Consultation Paper (CP) outlines the FSA’s
that consumers should take responsibility for       Tim Herrington has been re-appointed as               policy position in relation to some aspects of
their decisions when setting its’ consumer          chairman of its’ Regulatory Decision Commit-          the FSA’s responsibilities under the banking
protection agenda. Dan Waters, FSA director         tee (RDC) by the FSA. Tim Herrington said:            reform work and supports the Banking Bill,
of retail policy and conduct risk, said: “Respon-   “I am pleased to have had the opportunity to          which is currently going through Parliament.
sible and well managed firms that treat their       undertake this role at the FSA and to be able         This paper also intends to compliment the
customers fairly are crucial…All firms have         to carry on the very valuable work that the           recently published CP08/22 on liquidity by
been warned that they face stronger and more        RDC does. FSA regulatory processes must be            adding more explanation on the contractual
intrusive regulation to ensure they are aware of    fair, proportionate and subject to an effective       barriers issues, which has been covered in the
their responsibilities to treat customers fairly.   challenge process to maintain the industry’s          liquidity framework. The structure of the CP is
However, we also believe that markets will          confidence and I, as well as the other RDC            split into two chapters; the first chapter covers
work more effectively if consumers are more         committee members, aim to continue ensuring           the FSA’s policy on reducing the likelihood of
involved, more capable and empowered.               that this happens during my second term.”             failure and the second chapter explains some
                                                                                                          of the FSA’s work on reducing the impact of
FSA fines two individuals for market                                                                      failure.
FSA/PN/155/2008 19 December 2008                    Consultation papers                                   CP08/24: Stress and scenario testing
Two individuals, Mr Stewart McKegg and Mr                                                                 This paper concerns the way firms approach
                                                    CP08/21: Consultation on amendments
Brian Valentine Taylor have been fined for                                                                their ICAAP stress and scenario testing. The
                                                    to the Listing Rules and feedback on
market abuse. Mr McKegg was fined £14,411.25                                                              FSA has proposed two main changes, firstly
and Mr Taylor was fined £4,642.50. In both                                                                to introduce rules that apply to the “reverse-
                                                    This consultation paper provides feedback
cases this was the disgorgement of profits                                                                stress test requirement” and secondly rules
                                                    following the FSA’s Discussion Paper - a review
made on transactions where they had inside                                                                relating to “risk based capital stress testing”.
                                                    of the structure of the Listing Regime (DP08/1)
information. Mr McKegg and Mr Taylor were
                                                    - where the key objective of carrying out the
private investors in Amerisur Resources Plc.                                                              The reverse-stress test requirement will
                                                    review was to explore how the structure of the
They were both individually contacted by                                                                  require firms to consider the scenarios most
                                                    Listing Regime can best contribute to striking
Amerisur’s brokers to inform them of a placing                                                            likely to cause their current business model
                                                    an appropriate balance between the FSA’s
of Amerisur shares which was to be announced                                                              to become unviable, whereas the risk-based
                                                    objectives of investor protection and ensuring
the following day. This placing was to be at a                                                            capital requirements relate to some drafting
                                                    that the UK Listing Regime remains competitive
substantial discount to the market price. Both                                                            change to the FSA’s existing Pillar 2 capital
                                                    in a continuously evolving global market envi-
committed market abuse as they each sold                                                                  stress and scenario testing or where firms use
                                                    ronment. This paper also details rule changes
some or all of their existing shareholding prior                                                          internal models to assess their Pillar 1 capital
                                                    which reflect the proposed policies. The FSA
to the public announcement of the placement.                                                              requirements.
                                                    is not intending to make any major structural
They both then rebuilt their position in Amerisur
                                                    changes to the Listing Regime; the changes are
stock by subscribing for discounted shares in                                                             The FSA are proposing to introduce a complete
                                                    mainly mechanistic changes which reflect the
the placing.                                                                                              new chapter in Senior Management Arrange-
                                                    new labels the FSA has introduced to replace
                                                                                                          ments, Systems and Controls (SYSC), SYSC
                                                    ‘Primary’ and ‘Secondary’ Listings.
Two mortgage brokers banned for                                                                           19 and also make substantial Rule and Guid-
misleading the FSA                                                                                        ance changes to GENPRU and BIPRU. These
                                                    CP08/22: Strengthening liquidity standards
FSA/PN/156/2008 23 December 2008                                                                          changes will have an impact on all firms that are
                                                    This paper has set out the FSA’s views on the
Two sole trader mortgage brokers, Andrew                                                                  subject to Pillar 2; however there is reference
                                                    future of liquidity regulation within the UK.
David Bowden, trading as Scott Jarrett Bowden                                                             that this may also impact on lower risk firms
                                                    The FSA’s proposals implemented recently
and Partners and Shaun Lawrence have been                                                                 such as Limited License Firms.
                                                    agreed international standards for liquidity and
banned by the FSA for failing to comply with
                                                    incorporate feedback received to last Decem-
FSA rules. Both mortgage brokers had misled                                                               Consultation on the legislative frame-
                                                    ber’s Discussion Paper (DP) 07/7 Review of the
the regulator and subsequently shown a lack of                                                            work for the regulation of alternative
                                                    liquidity requirements for banks and building
honesty and integrity. The regulator found that                                                           finance investment bonds (sukuk)
                                                    societies. The consultation paper covers:
Mr Bowden had submitted false and unverified                                                              This document sets out the proposed legisla-
                                                    ▪ The key features of the new liquidity
information on the firm’s regulatory reports to                                                           tive framework for the regulatory treatment
                                                         regime, its scope and the policy considera-
the FSA, while Mr Lawrence removed docu-                                                                  of “Alternative Finance Investment Bonds”
                                                         -tions which underpin it.
ments from files before sending them on to the                                                            (AFIBs). AFIBs refer to a type of financial
                                                    ▪ Details of one of the main pillars of the
regulator.                                                                                                instrument commonly known as sukuk or
                                                         regime - the new systems and controls
                                                                                                          Islamic bond, but can also refer to any financial
                                                         requirements, which will apply to BIPRU firms.
FSA confirms Barnsley Building Society                                                                    instrument with similar characteristics. Further
                                                    ▪ An explanation to the Individual Liquidity
merger with Yorkshire Building Society                                                                    information can be found on: http://www.fsa.
                                                         Adequacy Standards (ILAS) component of
FSA/PN/157/2008 24 December 2008                                                                          gov.uk/pubs/cp/sukuk.pdf
                                                         the regime.
The FSA has announced that it confirms the
                                                    ▪ The FSA’s proposals on quantitative
proposed transfer of the engagements of the                                                               CP08/25: The approved persons regime -
                                                         standards for simpler firms that fall within
Barnsley Building Society to Yorkshire Building                                                           significant influence function review
                                                         ILAS’s component of the regime.
Society. The FSA’s written decision can be seen                                                           One of the recommendations made from the
                                                    ▪ The FSA’s approach to group-wide manage-
on: http://www.fsa.gov.uk/pages/Library/Com-                                                              internal audit review of lessons learned from
                                                         -ment of liquidity, including waivers and
munication/PR/2008/157.shtml                                                                              the FSA’s supervision of Northern Rock in-
                                                                                                          cluded, “FSA to increase the rigour of its
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Consultation papers cont.                              Discussion paper                                        Handbook publications
day-to-day supervision.” This led to a re-             DP08/5: Consumer responsibility                         Handbook Release 835 December 2008
view of the approach taken by the FSA to the           This paper focuses on consumer responsibility;          This Handbook Release contains changes made
significant influence controlled functions to          the structure of this document covers:                  by the FSA to the Handbook on 26 November
discover where improvements can be made                ▪ the FSA’s reasons for undertaking this piece          2008:
and to examine whether the regime reflected                of work and what they hope to achieve               ▪ to enable a building society which merges
corporate governance structures within the                 with it;                                                with another to keep its separate compen-
industry. This paper contains proposals to:            ▪ the legal and regulatory landscape;                       sation limit.
▪ extend the definition of the existing CF1            ▪ consumers in the retail market;                       On 4 December 2008, the FSA had also made
    (director) and CF2 (non-executive director)        ▪ consumer responsibility and the FSA; and              changes to the Handbook in eight instruments
    controlled functions to include those              ▪ a ‘better’ world and actions for the FSA,             which:
    individuals who exercise significant                   firms and consumers.                                ▪ clarify the FSA’s policy to ensure that all
    influence on a regulated firm from a                                                                           firms that undertake designated investment
    parent undertaking or holding company                                                                          business are categorised correctly;
    within its group which is unregulated by                                                                   ▪ improve the day-to-day application of the
    the FSA or any other European Union                Feedback statement                                          insurance prudential sourcebooks including
    financial services regulator;                      FS08/7: Transparency, disclosure and                        the reporting of derivatives and assets
▪ clarify the role of non-executive directors          conflicts of interest in the commercial                     backing index-linked liabilities;
    within the Code of Practice for Approved           insurance market                                        ▪ clarify the disclosure requirements relating
    Persons (contained in APER in the FSA              This paper sets out the FSA’s continued                     to income withdrawals from existing
    Handbook);                                         interest in wholesale commission disclosure,                personal pensions schemes;
▪ extend the definition of the CF29 controlled         the management of conflicts of interest and             ▪ make revisions to the enforcement
    function to include appropriate proprietary        transparency more generally in the commercial               provisions, and associated guide, following a
    traders with the expectation that this will        general insurance market. The structure of this             review undertaken earlier this year;
    capture all proprietary traders;                   paper includes:                                         ▪ remove the current limit of 28 days
▪ amend the application of the approved                ▪ the background to the FSA’s most recent                   imposed on collective investment schemes
    persons regime to UK branches of third                 programme of work and summarises                        which have suspended dealings in units;
    country firms so that all the controlled               associated developments the FSA have                ▪ clarify and update the Listing Rules relating
    functions may apply; and                               taken into consideration;                               to the sponsor regime;
▪ extend the rule obliging firms to provide            ▪ the outcomes for commercial customers                 ▪ provide for a delay in disclosure that should
    references for applicants of the CF30                  that the FSA believe are appropriate and                improve the effectiveness of any liquidity
    (customer function) to all controlled functions.       proportionate and how the industry                      support provided, and reduce the likelihood
                                                           guidance that is being developed will assist            of disclosure undermining confidence in
                                                           the market to achieve them; and                         the issuer; and
                                                       ▪ the findings of the three work streams that           ▪ change Regulated Covered Bonds (RCB)
Policy statements                                          comprise the FSA’s most recent                          forms so that the RCB application and
                                                           programme of work and set out how the                   ongoing monitoring processes are made more
PS08/12: Sponsor Regime: A targeted review                                                                         efficient.
In March 2008 the FSA published a Consultation             findings give rise to the outcomes for customers.
Paper, CP08/5: Sponsor regime - a targeted
review. In July 2008, the FSA published the Quar-
terly Consultation Paper 08/12, this proposed
two additional amendments to the sponsor               Statements                                              Consumer research
regime, relating to sponsor independence. This         London Scottish Bank Plc 1 Dec. 2008                    Asset ownership, portfolios and retire-
Policy Statement (PS) summarises on the feed-          It was determined by the FSA that London                ment saving arrangements: past trends
back received in answer to the questions raised        Scottish Bank Plc should be prevented from              and prospects for the future
in CP08/5 and chapter 12 of Consultation               accepting further deposits as it no longer met          This report explores evidence on current
Paper 08/12; this PS also gives the FSA’s              the FSA’s threshold conditions for authorisation.       asset holding amongst older individuals, how
responses to the feedback received.                    It was placed into administration by the Court          this varies with age and how it has changed
                                                       on the application of its directors. As a result        over the last decade. This evidence provides a
PS08/13: Decision Procedure & Penalties                of the administration, the Financial Services           good basis to consider:
manual & Enforcement Guide Review 2008                 Compensation Scheme will be triggered to                ▪ what types of products future retirees are
This Policy Statement (PS) responds to com-            safeguard retail deposits. The bank has approx-             likely to want or need and how this might
ments the FSA received in relation to Consulta-        imately 10,000 depositors.                                  differ from demand amongst current
tion Paper 08/10 (CP08/10): Decision Procedure
                                                                                                                   retirees; and
and Penalties manual and Enforcement Guide             FSA Statement to accompany Feedback                     ▪ whether the types of individuals looking to
Review 2008 and published amendments to the            Statement 08/7                                              buy these products in future will be any
text of the Decision Procedure and Penalties           The FSA has made a statement accompanying                   different from those who currently buy
manual (DEPP), the Regulated Covered Bonds             the release of Feedback Statement 08/7, Trans-              them (in terms of their wealth).
sourcebook (RCB) and the Enforcement Guide             parency, disclosure and conflicts of interest in
(EG) and associated consequential changes.             the commercial insurance market. This state-
This PS also provides a summary of responses           ment can be found at: http://www.fsa.gov.uk/pag-
and feedback on the proposals in Discussion            es/Library/Communication/Statements/2008/
Paper 08/3 (DP08/3): Transparency as a Regula-         feedback.shtml
tory Tool relating to our own-initiative variation
of permission (OIVoP) power.
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      R E G U L A T O R Y

Letters                                               Speeches cont.                                     Miscellaneous cont.
Letter to shareholders                                                                                   ment sets out the FSA’s high level interim
Jonathan Phelan, Head of Retail Enforcement at        Model myopia                                       findings about how firms have responded to
the FSA, has written to shareholders warning          Speech by Thomas Huertas 8 Dec 2008                the rule changes, to the extent that they have
them that their names had been found on a list        Thomas Huertas, Director of the Banking            been identifiable since November last year.
used by fraudsters. He warned that the fraud-         Sector at the FSA, delivered a speech at the
sters cold call people trying to persuade them        Risk Minds Conference in Geneva which              DECISION BY THE FINANCIAL
to buy often worthless shares. One example            focused on the risk culture within banks. He       SERVICES AUTHORITY ON THE
of this is an activity which is commonly called       questioned risk cultures in place at banks. The    APPLICATIONS OF CHESHIRE BUILD-
“boiler rooms”, which involves high pressure          assumption underlying the Basel Capital            ING SOCIETY AND NATIONWIDE
sales tactics to try and persuade individuals to      Accord was that regulators around the world        BUILDING SOCIETY FOR CONFIRMA-
buy worthless shares or offer to sell existing        could rely on firms’ own risk models as the        TION OF A TRANSFER OF ENGAGE-
shares for a fee and disappear with the money.        basis for capital requirements. This has turned    MENTS UNDER SECTION 95 OF THE
Further details are available in the Press            out to be incorrect. Mr Huertas stated “Banks      BUILDING SOCIETIES ACT 1986
Release section of this Bulletin.                     and, to some extent, their supervisors, suffer     The Decision on the applications of Cheshire
                                                      from what may be called model myopia – a           Building Society and Nationwide Building
Pension switching advice - important                  belief that their models fully capture the risks   Society for Confirmation of a Transfer of
information from the FSA                              to which the bank is exposed”. He went on to       Engagements under section 95 of the Building
The FSA wrote a letter to all firms that have         say that risk models should not be disposed of     Societies Acts 1986 has been published on the
provided “pension-switching advice” to:               and started again, but that models have to be      FSA web-site.
▪ report key findings from the FSA’s thematic         put into perspective.                              DECISION BY THE FINANCIAL
    project on the suitability of advice given                                                           SERVICES AUTHORITY ON THE
    since April 2006;                                                                                    APPLICATIONS OF CATHOLIC BUILD-
▪ explain the action the firms should take;           Miscellaneous                                      ING SOCIETY & CHELSEA BUILDING
    and                                                                                                  SOCIETY FOR CONFIRMATION OF A
▪ set out the follow-up work the FSA will do          Quality of advice on pension switching:            TRANSFER          OF      ENGAGEMENTS
    to ensure firms have taken appropriate action.    A report on the findings of a thematic             UNDER SECTION 95 OF THE BUILD-
Further information can be found at: http://          review                                             ING SOCIETIES ACT 1986
www.fsa.gov.uk/pubs/other/letter_pension-             This report summarises the findings from the       The Decision on the applications of Catholic
switching.pdf                                         FSA’s thematic review of pension-switching         Building Society and Chelsea Building Society
                                                      advice. It also provides examples of good,         for Confirmation of a Transfer of Engagements
                                                      compliant and poor practices found by the FSA.     under section 95 of the Building Societies Acts
                                                      This report has been published on the FSA          1986 has been published on the FSA web-site.
EU Document                                           web-site and is accessible from:
                                                      http://www.fsa.gov.uk/pubs/other/pensions_         DECISION BY THE FINANCIAL
FSA UK country report: The fourth                     switch.pdf                                         SERVICES AUTHORITY ON THE
Quantitative Impact Study (QIS4) for                                                                     APPLICATIONS            OF       BARNSLEY
Solvency II                                           Conduct of Business Sourcebook (COBS)              BUILDING SOCIETY & YORKSHIRE
QIS4 is a field-testing exercise requested by         post-implementation review:                        BUILDING SOCIETY FOR CONFIRMA-
the Commission to assess the practicability,          2008 statement on interim findings                 TION OF A TRANSFER OF ENGAGE-
implications and possible impact of different         Significant changes were made to the FSA           MENTS UNDER SECTION 95 OF THE
alternatives considered. QIS4 was to study the        Handbook in November 2007 which intro-             BUILDING SOCIETIES ACT 1986
effect on the own-funds of insurance undertakings     duced a more principle based Conduct of            The Decision on the applications of Barnsley
and groups. The key purpose of this report            Business Sourcebook (COBS) for investment          Building Society and Yorkshire Building Society
is to summarise the findings from the UK              business. COBS replaced the old COB                for Confirmation of a Transfer of Engagements
element of the QIS4 study. This report aims           sourcebook. The FSA has conducted a post-          under section 95 of the Building Societies Acts
to be factual, reporting the feedback received        implementation review of COBS; this state-         1986 has been published on the FSA web-site.
from UK firms and groups that participated in QIS4.

Current issues in the mortgage market
Speech by Jon Pain              2 Dec 2008
Jon Pain spoke at the Council of Mortgage
Lenders annual conference regarding the
current position within the mortgage market
and discussed current and future problems
faced by the industry. However, Jon Pain
emphasised the importance of treating customers
fairly when they go into arrears in such a chal-
lenging operating environment. Further infor-
                                                                           Details of all FSA publications can be found at:
mation can be found at:
http://www.fsa.gov.uk/pages/Library/Communi-                    http://www.fsa.gov.uk/Pages/Library/Publications_by_date/index.shtml
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      R E G U L A T O R Y

First supervisory notice
During December, the FSA issued an assets requirement to Noel Victor Heaney (Mr Heaney) trading as Heaney Finance pursuant to Section 43, 45
and 48 of the Financial Services and Markets Act 2000 (FSMA), whereby all assets held by Mr Heaney may not, so long as the requirement is in force,
be dealt with or disposed of. This was issued as a result of unsuitable mortgage contracts being recommended to customers.

Final notices
                                                      systems (Principle 3); and to pay due regard to     with the regulatory requirement to submit their
During December the FSA issued the                    the interests of its customers and treat them       RMAR. They have also failed to be open and
following Final Notices:                              fairly (Principle 6). Egg agreed to settle at an    co-operate in all their dealings with the FSA,
                                                      early stage of the FSA’s investigation. It there-   in that they have failed to respond to the FSA’s
The FSA refused an application made by                fore qualified for a 30% reduction in penalty.      repeated requests to submit their RMAR.
Cartel (Midlands) Ltd (CML) under section
60 of the Financial Services and Markets Act          The FSA cancelled One 2 One International           The FSA has prohibited Mr Shaun Lawrence
2000 (FSMA) for the approval of Mr Peter              Limited’s (One 2 One) Part IV permission            (Mr Lawrence) trading as Shaun Lawrence,
Applewhite (Mr Applewhite) to perform the             pursuant to section 45 of FSMA. This cancel-        from performing any function in relation to any
controlled functions of CF1 (Director) and CF8        lation was issued by the FSA as a result of the     regulated activity carried on by any authorised
(Apportionment and Oversight). The FSA was            Firm failing to comply with the regulatory          person. In addition, the Regulator has also
not satisfied that Mr Applewhite was a fit and        requirement to submit their Retail Mediation        cancelled the permission granted to Mr
proper person to perform the controlled func-         Activities Return (RMAR). It was considered         Lawrence as a sole trader, trading as a Firm,
tions applied, because Mr Applewhite failed to        by the FSA that One 2 One had not been open         pursuant to Part IV of FSMA. It was discovered
demonstrate to the FSA that he was ready, willing     and co-operative in all their dealings with the     by the FSA that Mr Lawrence in his capacity as
and able to comply with the requirements              FSA as they had failed to respond to repeated       sole trader and mortgage advisor failed to take
under the regulatory system and he had not            requests made by the FSA to submit the              reasonable care to organise and control the
responded to FSA’s requests for information           RMAR. As a result of this failure, One 2 One        Firm’s affairs responsibly and effectively with
and for him to attend a competency interview.         breached Principle 11 of the FSA’s Principles       adequate risk management systems. Mr Lawrence
Mr Applewhite had also failed to demonstrate          for Businesses. The FSA concluded that One 2        had also provided information to lenders that
to the FSA that he had the necessary com-             One was not conducting their business soundly       may have been deliberately misleading in order
petence and capability to perform significant         and prudently and in compliance with proper         to facilitate customers obtaining mortgages. It
influence functions.                                  standards.                                          was concluded by the FSA that Mr Lawrence
                                                                                                          failed to meet minimum regulatory standards
The FSA also refused an application made by           The FSA cancelled Misba Properties Limited’s        in terms of competence and capability, honesty
Cartel (Midlands) Ltd (CML) in pursuant to            (Misba) Part IV permission pursuant to section      and integrity and is not fit and proper to
section 40 of FSMA for Part IV Permission to          45 of FSMA. Misba failed to comply with the         perform any regulated activities.
carry on regulated activities. The reasons for        regulatory requirement to submit their RMAR.
the refusal of authorisation can be seen above        As a result Misba had not been open and             Pursuant to section 56 of FSMA, the FSA
in relation to Mr Applewhite. It was also felt by     co-operative in all their dealings with the FSA,    has issued a prohibition order against Mr
the FSA that CML had failed to demonstrate            in that they had failed to respond to the FSA’s     Andrew David Bowden (Mr Bowden) t/a
that it was ready, willing and organised to com-      repeated requests to submit the RMAR and            Scott Jarrett Bowden & Partners (SJB).
ply with the requirements and standards under         have thereby failed to comply with Principle        Mr Bowden had failed to take reasonable care
the regulatory system. CML had also failed to         11 of the FSA’s Principles for Businesses. They     to organise and control SJB’s affairs responsibly
make representations in response to the FSA’s         also failed to satisfy the FSA that they were       and effectively, with adequate risk management
Warning Notice proposing to refuse the                ready, willing and organised to comply with the     systems. In particular, Mr Bowden failed to
application.                                          requirements and standards under the                record how or why SJB concluded that
                                                      regulatory system.                                  recommended mortgages were suitable for
The FSA issued Egg Banking plc (Egg) a                                                                    customers, and failed to ensure that personal
financial penalty of £721,000 in pursuant to          The FSA has cancelled Meridian Financial            and confidential customer information was
section 206 of FSMA. This penalty was in              Services (Meridian) regulatory permissions          stored securely and appropriately. These failings
respect of Principles 3 and 6 of the FSA’s Prin-      pursuant to section 45 of FSMA. Meridian had        were considered serious as it had exposed
ciples for Businesses in relation to non-advised      failed to demonstrate that they were fit and        customers to unsuitable mortgages, and the
telephone sales of credit card payment protection     proper and had subsequently failed to satisfy       risk that customers’ personal and confidential
insurance (PPI). Egg failed to take reasonable care   the threshold conditions set out in Schedule        information was accessible to persons outside
to organise and control its affairs responsibly       6 to the Act. The reasoning behind the cancel-      SJB and could be disclosed inappropriately.
and effectively, with adequate risk management        lation was because Meridian failed to comply
Kinetic Partners

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      R E G U L A T O R Y

As the final year-end deadline for ICAAP (Internal Capital Adequacy Assessment Process) Pillar 3 disclosure was 31 December 2008, below is some
advice and guidance in relation to BIPRU Firms, with particular regard to:
1. Pillar 3 disclosure - navigating through the Pillar 3 disclosure process;
2. ICAAP updates, issues and reminder - ensuring your ICAAP itself is appropriately up-to-date; and
3. Priorities and issues for 2009 - giving consideration to ICAAP-related issues and priorities for the year ahead.

1. Pillar 3 disclosure
What is Pillar 3?
Pillar 3 is the third pillar of the Capital Adequacy Directive, under the Basel Accord. Its aim is to encourage market discipline, by setting out disclosure
requirements for firms to publish certain details of their capital, risk exposures and risk assessment processes. Pillar 3 complements the minimum
capital requirements (Pillar 1) and the supervisory review process (Pillar 2).
How should Pillar 3 disclosure requirements be implemented?
A firm’s Pillar 3 disclosures may be made via the firm’s website and/or the audited annual report and accounts. To date, these are the only two
recognised media. Critically in this context, the FSA expects authorised firms to make their disclosures readily accessible, without any form of prior
application or prompting on the part of prospective recipients. A statement to the effect - ‘Our Pillar 3 disclosure is available in hard copy format on
request’, is not likely to be viewed by the FSA as a satisfactory alternative means of compliance.
When and how often will firms have to make the disclosure?
The FSA requires Pillar 3 disclosures to be made annually. As the new regime came into existence on 1 January 2008 the first disclosures should
have been made by 31 December 2008.
What were the minimum Pillar 3 disclosure requirements applicable as at 31 December 2008?
The FSA has stated that qualitative disclosures (i.e. summarising firms’ ICAAP-related risk identification, assessment, management, governance, and
review processes) need to be made during the calendar year 2008. Quantitative disclosures are also required in relation to firms’ capital resources.
If firms did not have accounting data available to support the necessary quantitative disclosures by 31 December 2008 (for example because their
financial year end coincides with that date) they must ensure that this information is disclosed in 2009.
What if the information to be disclosed is confidential or potentially damaging to the interests of a firm or its’ clients?
The FSA does not insist on disclosures in these circumstances, and if, for example the information was considered to be price-sensitive, the firm(s)
concerned should not disclose it. However, this ‘opt-out’ should be used with care: it is not intended as a means to avoid what the industry or Regula-
tor would legitimately consider as disclosable.
If some or all of the Pillar 3 information has already been disclosed elsewhere, need it be repeated within or as part of the Pillar 3 disclosure?
If a firm has been required to disclose Pillar 3-related information under accounting, listing or other mandatory requirements, then it may assume
that in doing so it has met the corresponding Pillar 3 obligations. However, the regulator expects that, as far as practicable, all the relevant information
required to complete the Pillar 3 disclosure process should be published in one location.
Is there a definition of ‘materiality’ in relation to Pillar 3 disclosure data?
Yes. Specifically, a firm must consider information as material if its omission or misstatement could influence the assessment or decision of a user
relying on that information for the purpose of making economic decisions.
Where has the FSA set out detailed regulatory requirements and accompanying guidance on Pillar 3 disclosure requirements?
The FSA rules on what should be disclosed can be found in the FSA Handbook under BIPRU 11
Corresponding guidance can be found within the FSA website page on Pillar 3 information and guidance
Does Kinetic Partners provide specific assistance on Pillar 3 disclosure?
Kinetic Partners offer a detailed template model spreadsheet and guidance that can be used as a step-by-step tool for completing your Pillar 3 disclo-
sure. This is available on a stand-alone basis for £1,500, but may be purchased on a discounted package basis by firms that have purchased (or wish to
purchase) the ICAAP toolkit. For further information please contact:
Philip Martin
t: +44 20 7862 0817
e: philip.martin@kinetic-partners.com
David Marshall
t: +44 20 7862 0884
e: david.marshall@kinetic-partners.com
Kinetic Partners

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      R E G U L A T O R Y

Deadlines cont.
2. ICAAP updates, issues and reminders
Most firms - with perhaps some exceptions in the case of those very recently FSA Authorised - will have completed their ICAAP last year. This was
required in compliance with the Pillar 2 regime, which came into effect for all BIPRU Firms from 1 January 2008. As up to 12 months may therefore
have elapsed since firms undertook their initial ICAAP, firms are reminded that this needs to be reviewed, updated and signed off by the Governing
Body of the firm in each case, on at least an annual basis. For others, the end of the current calendar year may nevertheless provide a useful juncture
to reconsider the firm’s approach to the Pillar 2 risk assessment process. Given recent market events, combined with increasing regulatory standards
and expectations in the context of the ICAAP generally, this should now be a priority for all firms.

According to FSA feedback from early in 2008, many investment firms appear to have lost sight of the underlying rationale behind the ICAAP, which
is effectively to ensure that they hold sufficient capital to offset or at least mitigate the risks of their continuing in business. Where a firm allocates
capital to particular Pillar 2 risks, the FSA expects an explanation as to how it derived the numbers, what assumptions it made, and how it manages
the individual risks. If the underlying risk assessment methodology or rationale is unclear, the final outcome is likely to be considered valueless.

The FSA’s observations on small investment firms

Equally essential is evidence that the ICAAP has been reviewed, challenged where necessary, and signed off by the firm’s Governing Body, without
which, it will have little or no validity as a barometer of risk (or risk management) within the firm. The Board or the Partners or Members (if the
firm is an LLP) tend to be viewed by the FSA as the final arbiters of the firm’s risk appetite. As such Senior Management’s role and involvement in the
ICAAP needs to be clear and consistent.

3. Priorities and issues for 2009
The FSA has responded to recent events with the expectation that firms adopt more robust stress testing of their business models this year. This is
likely to result in amendments to both Pillar 1 and Pillar 2 stress testing policies. In particular, BIPRU 50k firms with funds under management exceeding
£1 billion or equivalent should expect to be subject to a new ‘reverse-stress test’ requirement. In this context, a firm’s business plan should be
assumed to become unviable to the point where it suffers from a loss of collective market confidence. The test scenario should have the objective of
establishing whether the firm can then continue to survive long enough to wind up, downsize, transfer or reconstitute its business (at a later date) in
an orderly manner and without posing additional risk to market confidence.

The FSA’s Consultation paper 08/24 is entitled ‘Stress and scenario testing’

For all BIPRU firms, the FSA has stressed that senior management involvement is critical to the effectiveness of any stress-testing programme.
Accordingly, the generally-increased expectations regarding the scope and severity of stress testing for firms are expected to be the subject of
additional SYSC (Senior Management Arrangements, Systems and Controls) requirements. These proposals are likely to be introduced following the
end of the consultation period on 31 March 2009.

Further FSA consultation is currently under way, with the expectation of new rules and guidance requiring firms to maintain appropriate systems and
controls to manage their liquidity risks, and these will have additional implications for data collection and FSA reporting, albeit most extensively in
relation to banks, building societies and full scope BIPRU firms. We will comment further on this in the later this year.

The FSA’s Consultation paper 08/22 is entitled ‘Strengthening liquidity standards’

Should you require any further information on ICAAP, please contact:

Philip Martin
t: +44 20 7862 0817
e: philip.martin@kinetic-partners.com

David Marshall
t: +44 20 7862 0884
e: david.marshall@kinetic-partners.com
Kinetic Partners

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      R E G U L A T O R Y

Audit and assurance                                        Regulatory consulting and compliance                       London
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Corporate recovery and liquidation                         andrew.shrimpton@kinetic-partners.com
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Forensic and dispute resolution                                                                                       PO Box 10387, 42 North Church Street
julian.korek@kinetic-partners.com                                                                                     Grand Cayman, Cayman Islands, KY1-1004
nick.matthews@kinetic-partners.com                                                                                    t: +1 345 623 9900
raymond.oneill@kinetic-partners.com                        Tax advisory
                                                                                                                      New York
Corporate finance                                                                                                     675 Third Avenue, Floor 10
killian.buckley@kinetic-partners.com                                                                                  New York, NY 10017, United States
john.hamrock@kinetic-partners.com                                                                                     t: +1 212 661 2200
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                                                                                                                      t: +41 22 715 2840


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The opinions expressed herein are those of the authors and other contributors and do not necessarily reflect the views of the firm. This is not intended as specific legal
advice for any purpose. Kinetic Partners, established in March 2005, is a global professional services firm providing a range of audit & assurance, tax, consulting, forensic,
corporate recovery and corporate finance services solely to the asset management industry.
Kinetic Partners LLP is registered in England and Wales, company number OC311318. Kinetic Financial Services (Ireland) Limited is registered in the Republic of
Ireland, company number 400790. Kinetic Partners US LLP is registered in Delaware. Kinetic Partners Cayman LLP is registered in England and Wales, company number
OC31498. Kinetic Partners Audit LLP is registered in England and Wales, company number OC3127282. Kinetic Partners (Switzerland) SA is a société anonyme
registered with the Registre du commerce, Genève, Suisse.

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