Compliance News - 27 January 2012
CC:ME WEEK ENDED 27 JANUARY 2012
Martin Wheatley, managing director of the Financial Services Authority (FSA), has outlined a new orthodoxy and regulatory approach for the future of conduct regulation – getting a fair deal for consumers. With just over a year to go before the successor bodies to the FSA take over, Martin who is also CEO designate of the Financial Conduct Authority (FCA), told a British Bankers’ Association audience that it was time for a new approach to get the right outcomes for consumers.
Martin Wheatley said: “We need to develop a new orthodoxy and a new regulatory approach…I want the culture in your firms, from your product governance to your sales, to be aligned with the best interests of your customers. I don’t want to see any of the failings the FSA has had to deal with in the last few years.”
He continued: “But I want to emphasise this is not all about regulated firms. Consumers of course have a role to play, and we need a cultural change at the regulator as well. The FCA will need to ask tougher questions, and they need to be the right ones, if we are really going to discover what lies at the heart of your firms’ successes and failures. The FCA then needs to make better, bolder, faster decisions.”
He told the audience that “we all have to walk in the footsteps of your customers” to understand their perspective and to be able to deliver the new approach.
The FCA, Martin Wheatley said, will build on the experience of the FSA but will aim to strike a balance recognising that firms, the regulator and the consumer all have a responsibility. “If a consumer makes a fully informed decision that subsequently goes wrong, then that is down to them. But we have to be realistic. And what this is about is balance. “We have to realise that consumers aren’t always in a position to take responsibility, because of their lack of financial knowledge and because we have to take a reasonable approach to what a normal person can understand about complicated products and risks.
“And so I believe that balance comes from all parties – consumers, providers, intermediaries – taking responsibility for their part in each transaction. So our approach will reflect that and be flexible and proportionate. But what the FCA won’t be doing is lying back then letting the market get on with it and expecting clear disclosure and a mandated sales process to do its job.”
Source: Financial Services Authority
The Financial Services Authority has fined a trader and former compliance officer £130,000 for failing to question and make reasonable enquiries before selling a shareholding in a firm (“the target company”) ahead of an anticipated significant equity fundraising by the firm in June 2009, and prohibited him from performing Compliance Oversight and Money Laundering reporting functions.
The FSA has also fined a trading desk director at another firm £65,000 for failing to identify and act on a suspicious order to sell the firm’s shares that allowed the firm to be used to facilitate insider dealing or market abuse. As a result of his failings the trading desk director’s emplotyer failed to identify the trade as suspicious and report it to the FSA.
The Compliance Officer
On 9 June 2009, the Compliance Officer received an order to sell his firm’s entire shareholding in the target company despite being made aware that his firm had spoken to the target company’s management a matter of minutes before its decision to sell. The analyst who gave the sell-order told the Compliance Officer that the target firm’s management would have told them “secret bad things” had they signed a confidentiality agreement and the analyst thought that their firm had potentially a window of a week before the stock “plummets”. This should have alerted the Compliance Officer to the risk that his firm may have been in receipt of inside information.
The Compliance Officer took no steps to satisfy himself that the order was not based on inside information, despite the clear risk that it was. In fact, his firm had received inside information in the course of the call with the target firm’s management and had based its decision to sell on that inside information. The Compliance Officer simply executed the order via the trading desk director, of another firm, instructing them to sell on his firm’s behalf.
On 15 June 2009, the target firm announced a fundraising of £375 million. Following the announcement, the price of the target firm shares fell by 29.9%. The Compliance Officer’s firm’s trading had avoided losses of approximately £5.8 million for the funds under their management. This should have again prompted the Compliance Officer to question and make enquires regarding the order to sell. Instead, he took no action to satisfy himself that his firm’s trading had not been based on inside information in relation to the fundraising.
The Compliance Officer failed to act with due skill, care and diligence despite his knowledge of the suspicious circumstances surrounding his firm’s sale of shares. In addition to imposing a fine of £130,000, the FSA has concluded that he is not fit and proper to act as a compliance officer. The FSA expects compliance officers to be vigilant for signs that transactions may be improper, to investigate and, if not satisfied as to the propriety of the transaction, to prevent the trade.
The Trading Desk Director
His misconduct related to his dealings with the Compliance Officer’s firm between 9-12 June 2009 when he was instructed to sell 11.4 million shares of the target company, which constituted over 4% of its issued share capital. This represented approximately 68% of all trading in the target company’s shares over that period.
He failed to act with due skill, care and diligence especially because he became aware of the possibility that there had been a pre-marketing of the target company’s shareholders prior to the unscheduled announcement, and that major shareholders were likely to have obtained inside information through pre-marketing. Shareholders contacted during such a pre-marketing exercise are not allowed to trade on receipt of that inside information.
The trader failed to identify and alert his employer to the possibility that the trade was being conducted on the basis of inside information and as a result no Suspicious Transaction Report (STR) was submitted to the FSA. The Compliance Officer thought that the selling firm was simply fortunate in the timing of its transactions.
Tracey McDermott, acting director of enforcement and financial crime, said:
“The Compliance Officer’s approach to compliance oversight was wholly inadequate. Serious compliance failures of this nature can have a dramatic effect on the orderliness and integrity of the markets. The trader was an experienced trader, so should have been suspicious of this transaction and aware of his responsibilities to report it. Tackling market abuse and insider dealing is not just an issue for the regulator. Compliance professionals and staff on sales and trading desks play a key role in assisting the FSA in detecting and preventing market abuse. Approved persons should be in no doubt as to their responsibilities in this area and the FSA will not hesitate to take tough action where they fall down on these.”
Source: Financial Services Authority
FSA have published Discussion Paper – Implementation of the Alternative Investment Fund Managers Directive – and asked for views about the potential impact of the AIFM Directive, which will be implemented in 2013. Implementation will significantly alter the regulatory framework under which (potential) Alternative Investment Fund Managers (AIFMs) operate, manage and/or market AIFs in the UK and across the EU. It will change how AIFMs operate their businesses and how
they interact with third party service providers, including under delegation (outsourcing) arrangements. It also means a new set of requirements for listed internally managed AIFs currently subject to the listing rules of the UK Listing Authority. Implementing the Directive will affect firms’ relations with investors, shareholders of corporate AIFs and national and EU regulatory authorities.
The Discussion Paper (DP) will be most relevant to those entities that will be defined as managers of Alternative Investment Funds (AIFMs and AIFs) under the Alternative Investment Fund Managers Directive (the Directive).
The Directive will directly regulate:
- UK-based fund managers that deem at least part of their regular business as managing AIFs (including UCITS management companies if they manage AIFs as well);
- some discretionary investment managers;
- operators of unregulated collective investment schemes;
- investment companies that do not employ an external fund manager; and
- depositaries and custodians holding the assets of AIFs.
The Directive will also affect those firms who provide AIFMs with services such as:
- prime brokerage facilities;
- external valuation;
- client administration; and
- marketing and distribution (including AIFMs established elsewhere in the EU who market their AIFs in the UK).
If your firm is on this list, then it may be affected by implementation of this Directive and should read the full paper. Retail consumerswill, to a lesser extent, also be affected by these changes. This is because the Directive will change the way AIFs for retail consumers are managed and marketed.
The DP process will run for a two-month period from 23 January to 23 March 2012. Responses are requested to this DP by 23 March at the latest. After the launch of this DP, FSA intend to undertake a preliminary firm categorisation exercise to get more information about the likely population of UK AIFMs coming within the scope of the Directive. It will be similar to the exercise they undertook in preparation for the Markets in Financial Instruments Directive (MiFID) in 2005. FSA expect to publish proposed policy positions and rules in a Consultation Paper later in 2012 and will again invite stakeholders to comment.
Preparation for the Directive implementation will intensify over the next 18 months. Senior management of stakeholders, particularly potential AIFMs, should engage with the issues in the DP. They should anticipate and consider their response to the upcoming operational challenges towards a state of ‘AIFMD-readiness’. They should also begin earmarking sufficient and appropriately qualified resources to identify likely impacts of the Directive on their business models.
Source: Financial Services Authority
Firms with FSA transaction reporting obligations have been required to report transactions executed in financial instruments admitted to trading on Alternative Instrument Identifier (Aii) exchanges to the FSA since November 2011. The FSA has received enquiries from firms who were unsure how to transaction report strategy trades entered into on Aii exchanges. It is important that the FSA receives full details of these transactions in order to be able to monitor effectively for market abuse in support of its statutory objectives of maintaining confidence in financial markets and reducing financial crime. FSA proposed guidance in this area is the subject of this consultation.
Certain exchanges offer strategy trades whereby two or more contracts that are dependent on each other are executed simultaneously. FSA expect firms with reporting obligations to report these transactions individually. This consultation presents FSA proposed guidance on how to report such transactions, with particular focus on correctly reporting the venue identification field.
Source: Financial Services Authority
The Financial Services Authority (FSA) has proposed a number of changes to the Listing Rules that set out the requirements for companies listed in the UK. The changes are updates to the rules to take account of market developments. The Listing Rules are the responsibility of the United Kingdom Listing Authority (UKLA), operating under the FSA. The Consultation Paper (CP) also sets out some wider issues in relation to the premium listing standard on which comment is sought.
The Listing Rules have been reviewed on a regular basis since their introduction in 2000. The last review in 2008-10 introduced the premium and standard segments in order to provide greater clarity for investors. The proposals, the majority of which are technical in nature, fall under a number of different headings:
Reverse Takeovers
The proposed changes will ensure that reverse takeovers cannot be used as a ‘back-door’ route to listing for companies that would otherwise be ineligible. There are currently exemptions that remove some acquisitions from the reverse takeover requirements. These proposed changes will narrow these exemptions.
Sponsor Regime
Sponsors play an important role in the regime for premium listed companies by ensuring that such companies understand the regulatory framework and by providing assurance to the UKLA that companies are meeting the requirements. Today’s proposals are intended to clarify UKLA’s expectations of sponsors – for example by adding a rule that that the FSA can require a sponsor to confirm to the FSA that its client is complying with the Listing Rules.
Externally Managed Companies
The UKLA has observed the development of a new corporate structure – which involves the outsourcing of significant management functions to an offshore advisory firm that the UKLA has termed ‘externally managed companies’. This structure places the offshore advisory company beyond many of the key controls within the listing regime and lessens the ability of shareholders to hold the real management of the company to account. The CP proposes to make the management of the advisory company responsible for any prospectus issued by the listed company and subject to existing rules about dealing in the shares of the listed company. In addition, externally managed companies would not be eligible for a premium listing, but they would still be eligible for a standard listing.
Premium Listings
There has in recent months been debate about some of the requirements for the premium listing standard. There has also been a separate debate about the criteria used to define inclusion in the main stock market index which was recently the subject of consultation by the FTSE. On the listing rule side, some questions have been raised about the Listing Rule free float requirements, but there is also a broader discussion about whether the premium listing standard more generally needs to be enhanced. The CP invites comment on whether any changes may need to be made to the Listing Rules to provide additional protection to investors.
David Lawton, the FSA’s acting director of markets, said: “It is important that the Listing Rules continue to keep pace with market developments and the needs of investors. We believe that this consultation, which proposes specific changes, but also invites debate about the corporate governance standards that should underpin the premium listing standard, will serve that purpose and welcome responses to help us maintain an appropriate regime for the UK.”
Source: Financial Services Authority
An LE of a firm is its total exposure to a counterparty, connected counterparties or groups of connected clients, which in aggregate equals or exceeds 10% of the firm’s capital resources. A firm must ensure that the total amount of its exposures to a counterparty, or a group of connected clients or its connected counterparties does not exceed 25% of its capital resources.
In January 2007, in addition to implementing the concept of group of connected clients in the Handbook, the Directive definition of a ‘group of connected clients’ was implemented in a wider sense in BIPRU 10.3.8R (Connected Counterparties) to include counterparties connected to the firm. The definition goes beyond a narrow interpretation of the Directive definition and has the unintended consequence of connecting entities without a single risk between them being established. Furthermore, the aggregation applied to these connected counterparties is stricter than is required under the Directive. FSA propose to address this super-equivalence in this paper.
The current LE regime applies a non-risk-sensitive regulatory backstop to a firm’s exposures to counterparties, a group of connected clients and its connected counterparties. This guidance builds on the Committee of European Banking Supervisors (CEBS) guidelines on the implementation of the revised LE regime published in December 2009. FSA aim to provide additional clarity on how exposures to structured finance vehicles, such as asset backed commercial paper conduits, master trusts, covered bonds, standalone securitisation vehicles and collateralised loan obligations, should be aggregated under the LE regime.
This consultation will close on 26 April 2012. FSA will then finalise any changes to the Handbook in light of responses to this CP. After this, FSA intend to publish a Policy Statement providing feedback and setting out the finalised rules and guidance.
Once the Policy Statement has been published, FSA expect the final rule changes to come into immediate effect without any transitional arrangements. If, however, firms have problems complying with the new rules, they will need to ensure early engagement with their supervisory relationship managers.
This Consultation Paper has three aims:
- To propose rule changes for:
o the FSA Handbook definition of Connected Counterparties; and
o the basis for aggregating exposures to Connected
o Counterparties when applying large exposure (LE) limits.
- To propose new guidance on the treatment of large exposures (LE) to structured finance vehicles.
- To propose a change to the Handbook guidance in BIPRU 10.6.33G on the institutional exemption.
Closing date 26 April 2012.
Source: Financial Services Authority
