Kinetic Partners Focus 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 email@example.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 Information/articles Deadlines Pillar 3 disclosure ICAAP updates Priorities and issues for 2009 8 Details of all FSA publications can be found at: http://www.fsa.gov.uk/Pages/Library/Publications_by_date/index.shtml Kinetic Partners Focus 2 R E G U L A T O R Y 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 Kinetic Partners Focus 3 R E G U L A T O R Y 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. abuse 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 DP08/1 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- modifications. cluded, “FSA to increase the rigour of its Kinetic Partners Focus 4 R E G U L A T O R Y 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. Kinetic Partners Focus 5 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. Speeches 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 cation/Speeches/2008/1202_jp.shtml Kinetic Partners Focus 6 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 Focus 7 R E G U L A T O R Y Deadlines 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 http://fsahandbook.info/FSA/html/handbook/BIPRU/11 Corresponding guidance can be found within the FSA website page on Pillar 3 information and guidance http://www.fsa.gov.uk/Pages/About/What/International/basel/info/pill3/index.shtml 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: firstname.lastname@example.org David Marshall t: +44 20 7862 0884 e: email@example.com Kinetic Partners Focus 8 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 http://www.fsa.gov.uk/pages/About/What/International/pdf/pil2_observations_inv.pdf 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’ http://www.fsa.gov.uk/pages/Library/Policy/CP/2008/08_24.shtml 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’ http://www.fsa.gov.uk/pages/Library/Policy/CP/2008/08_22.shtml Should you require any further information on ICAAP, please contact: Philip Martin t: +44 20 7862 0817 e: firstname.lastname@example.org David Marshall t: +44 20 7862 0884 e: email@example.com Kinetic Partners Focus 9 R E G U L A T O R Y Contacts: Audit and assurance Regulatory consulting and compliance London firstname.lastname@example.org email@example.com One London Wall, Floor 10 firstname.lastname@example.org email@example.com London, EC2Y 5HB, United Kingdom firstname.lastname@example.org t: +44 20 7862 0700 Corporate recovery and liquidation email@example.com Dublin firstname.lastname@example.org email@example.com Iveagh Court, Floor 5 Block D firstname.lastname@example.org email@example.com Harcourt Road, Dublin 2, Ireland firstname.lastname@example.org Financial crime t: +353 1 475 0520 email@example.com firstname.lastname@example.org Grand Cayman email@example.com Risk and operations The Harbour Centre, Floor 1 firstname.lastname@example.org Forensic and dispute resolution PO Box 10387, 42 North Church Street email@example.com firstname.lastname@example.org Grand Cayman, Cayman Islands, KY1-1004 email@example.com firstname.lastname@example.org t: +1 345 623 9900 email@example.com Tax advisory New York firstname.lastname@example.org Corporate finance 675 Third Avenue, Floor 10 email@example.com firstname.lastname@example.org New York, NY 10017, United States email@example.com firstname.lastname@example.org t: +1 212 661 2200 email@example.com firstname.lastname@example.org Geneva Technology 6, Place de Chevelu email@example.com 1201 Genève, Switzerland firstname.lastname@example.org t: +41 22 715 2840 www.kinetic-partners.com If you wish to be added to or removed from the circulation list, or have any comments or suggestions, please contact email@example.com 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.