Compliance News - 8 & 15 July
INDUSTRY NEWS FLASH WEEKS ENDED 8 AND 15 JULY 2011
The FSA’s Remuneration Code limits the circumstances in which a firm may offer a guaranteed award of remuneration. Firms are generally clear on how this applies to ‘sign on’ awards (i.e. fixed awards to incentivise an individual to join the firm). But firms have sought more clarity on when they may offer ‘buy out’ awards (i.e. awards to compensate a new hire for the outstanding deferred remuneration that he/she has forfeited by joining the firm). This guidance aims to provide clarity on when such ‘buy out’ awards may normally be made without contravening the requirements of the Code.
The FSA does not encourage the use of buy out awards. However, in the FSA’s view, such awards may normally be made without contravening the Code in situations where:
- the firm has taken reasonable steps to ensure that the buy out is not more generous in amount or terms than the award from the previous employer; and
- the buy out is subject to appropriate performance adjustment conditions (e.g. clawback).
This guidance is likely to be of most relevance to all FSA authorised banks, building societies and CAD investment firms subject to MiFID. Consultation closes on 4 August 2011.
Source: Financial Services Authority
The FSA from time to time publishes industry updates on issues or trends that they identify through routine monitoring of financial promotions compliance. The aim of these publications is to capture emerging concerns and, where necessary, to clarify FSA’s expectations of firms. The updates are meant to help regulated firms understand the rules better, however FSA are at pains to emphasise that they are no substitute for referring to the rules themselves and that firms should always ensure that the promotions they produce comply with all the relevant rules and guidance.
The recent theme is on prominence which can be interpreted in many different ways, often leading to inconsistent standards. The FSA has attempted to clarify some of the inconsistencies they have found during monitoring.
FSA have stated
“There are many promotional features that must be considered in relation to prominence, such as: interest rates, fees, charges, relevant risk statements and other key product information. This list is by no means exhaustive and firms must ensure that they have checked all relevant areas of the Conduct of Business sourcebooks to ensure that our expectations on prominence are addressed for all different product types and services.”
“Prominence can be subjective, as something that may appear clear to one person may not be to another. In deciding whether a particular statement meets the rules on prominence, consideration should be given to the target audience, the nature of the product or business and the likely information needs of the average recipient. Targeted consumer testing is an avenue that could be explored to assist with your assessments in this area.”
“We will look at prominence in the context of the promotion as a whole. You should consider the positioning of text, background, colour and type size to ensure that prescribed information meets our requirements.”
In short, all about as clear as mud – so get in quickly with any comments which must be received by 5 August 2011.
Source: Financial Services Authority
The paper follows on the ‘Enhancing frameworks in the standardised approach to operational risk’ guidance note published early 2011 and the new guidance focuses attention on the importance of appropriate operational risk policies and documentation and their management as part of TSA frameworks.
The key issues are as follows:
- Documentation forms an integral part of managing operational risk and is an important prerequisite to the effective operation of controls.
- Consistent with BIPRU 6.4 (TSA requirements for operational risk) referring to sections of the Handbook outside of the operational risk domain (e.g. SYSC), the paper recommends that operational risk functions in firms not only manage documentation they are directly responsible for, but also promote good documentation practices in other functions and business units.
- The paper recommends that firms meet the requirement of a ‘use test’ for documentation, i.e. ensure it works thanks to its quality, the fact it is regularly reviewed, communicated, well-understood and actually used by relevant staff.
- It also needs to evolve with the firm’s business and reflect any changes in the firm’s environment.
Overall, FSA are not prescriptive in their recommended approach to documentation, however, to help satisfy TSA operational risk requirements, it is suggested that firms demonstrate:
- they have all their important processes documented to appropriate levels of detail in policies and other documents;
- their documentation is well-managed through the application of the principles of well-defined ownership, documentation hierarchy and lifecycle; and
- they have relevant documentation management controls.
Closing date for comments is 10 August 2011.
Source: Financial Services Authority
The paper focuses on the Fundamental Review of the trading book regime which the Basel Committee on Banking Supervision (BCBS) is developing. This review focuses on the prudential requirements for banks and investment firms that engage in trading activities, thus it is these firms that will be most directly affected.
However, many elements of the review could be applied more broadly and will be of general interest in the financial services industry, including policymakers and supervisors in other countries. The review has implications for the global regulatory framework and global banking system, which will have implications for consumers.
Source: Financial Services Authority
The purpose of this consultation paper is to seek views on the process and scope of review the FSA undertakes when assessing the adequacy of the counterparty credit risk management framework within a central counterparty. The FSA assesses both applications and existing services against the UK standards for central counterparties in Part 18 of the Financial Services and Markets Act and the Recognition Requirements.
The background to this piece of work is that the financial crisis has led to a re-evaluation of supervisory approaches and standards, not only in the UK, but also by other major market regulators and by international regulatory bodies. These include the Committee on Payment and Settlement Systems and Technical Committee of the International Organization of Securities Commissions (CPSS-IOSCO), and the legislative proposal by the European Commission on derivative transactions and central counterparties (EMIR).
To this end the Financial Services Authority (FSA) has previously outlined a more intrusive approach to the supervision of entities it regulates, including Recognised Clearing Houses (RCHs) and Recognised Overseas Clearing Houses (ROCHs).
At the same time, the clearing market is undergoing a period of substantial change. Both market participants and regulators have indicated a desire to increase the scale and scope of financial instruments cleared through central counterparties. Further, increased industry competition and consolidation continues to play a fundamental role in defining the shape of the clearing industry.
The FSA continues to receive a substantial number of applications for new clearing services, and notifications of extensions to existing services. In addition, the FSA is undertaking a rolling programme for review of existing central counterparty services. This paper is in response to industry requests for more detail on this process.
While not formally required to consult on this material, the FSA is of the view that, given the technical nature of the document, there is benefit in seeking views from stakeholders. The FSA is interested in ensuring that both the current process is clearly articulated and that the industry has appropriate opportunity to comment. Closing date for those keen to comment is 11 August 2011.
Source: Financial Services Authority
Margaret Cole, Managing Director of the FSA, has written to the Commission setting out the FSA’s view on the role of financial services products – and the Regulator – in relation to the funding of care and support for the elderly. She stated:
“I believe that there is a role for the financial services industry here and the FSA has a close interest in the development of private sector financial services solutions to care funding. We are keen to continue working with the government, the financial services industry and third parties to help ensure the development of products that are in the best interests of consumers.
We will be active in supervising the development of new products, especially in light of previous problems with pre-funded long-term care insurance. Indeed, under our consumer protection strategy, we intend to increase our focus on product design and governance more generally, to try to avoid customer detriment.
We are also happy to be involved in working groups to consider improvements to the standards of advice for products that meet care fees funding needs. Such products can be complex and consumers may need additional protection.”
Source: Financial Services Authority
The insurance industry’s determination to protect honest customers from insurance fraud moved up a gear recently with the announcement of a national Insurance Fraud Register. It is estimated that insurance fraud costs £2billion a year, adding, on average, an extra £44 a year to the insurance bill for every UK policyholder.
Funded by ABI members, the register will be an industry-owned database enabling insurers to share information on known cheats. The database will enable insurers to identify anyone who fails to declare a previous fraudulent insurance claim and follows a six month pilot exercise. It should be fully operational by early 2012.
Nick Starling, ABI’s Director of General Insurance and Health, said:
Funded by ABI members, the register will be an industry-owned database enabling insurers to share information on known cheats. The database will enable insurers to identify anyone who fails to declare a previous fraudulent insurance claim and follows a six month pilot exercise. It should be fully operational by early 2012.
Nick Starling, ABI’s Director of General Insurance and Health, said:
“This initiative demonstrates how seriously insurers take reducing insurance fraud, and their determination to protect honest customers. The database will build on existing industry databases that help insurers check previous claims history to ensure that there is no hiding place for anyone caught making a bogus or exaggerated insurance claim.”
David Neave, Chairman of the Insurance Fraud Bureau, (IFB) said:
“This important initiative is the next key strategic step in strengthening insurers’ tough approach to this problem. The IFB is at the forefront of a concerted drive to tackle organised insurance fraud. The work of the IFB with insurers and police forces throughout the UK has led to the prosecution of many organised insurance fraud gangs, so helping save money for insurers and honest customers alike.”
Source: Association of British Insurers
The BBA have stated that the banking industry shares the Independent Commission on Banking’s aims of reducing the probability of bank failure in future, and of protecting customers, businesses and taxpayers if a bank gets into difficulty.
They went on to explain that if a bank is at risk of risk failing, it is essential that customers are protected, the supply for credit into the economy is retained and the bank can be unwound without involving the taxpayer in their response to the ICB’s proposals for the future of the industry.
They went on to explain that if a bank is at risk of risk failing, it is essential that customers are protected, the supply for credit into the economy is retained and the bank can be unwound without involving the taxpayer in their response to the ICB’s proposals for the future of the industry.
However they have warned that there is widespread concern in both banking and business circles that the costs and possible consequences of the Independent Commission on Banking proposals have not been worked through.
The BBA’s submission reports that key aspects of the ICB’s eventual recommendations are likely to overlap or be contrary to the international regulatory reform programme. Therefore when final decisions are taken it will be necessary to:
- take that international programme into account;
- consider the economic and other considerations;
- think through timing and implementation issues carefully, not least as the Commission and the international programme are not running to the same timetable;
- determine the further coordinating work to be undertaken by the Treasury, in consultation with the Bank of England and the Financial Services Authority; and
- assess the additional stability proposals in light of international changes to macro-prudential regulation and the requirements of the new Financial Policy Committee.
Source: British Bankers Association
The FOS has published a new technical note containing new assumptions and is effective from 1 July 2011.
Source: Financial Ombudsman Service
The FOS has published a new section of their web-site which sets out their approach where a consumer complains to them about how an insurer has handled the repair of something insured under a household insurance policy.
With their usual consumer-friendly clarity – which frequently is as helpful to complaints managers as consumers - they have explained that this could involve something insured under a contents policy or a buildings policy and comment that complaints generally focused on the quality or the timeliness of repairs carried out.
Source: Financial Ombudsman Service
