Compliance News - 9 December 2011
CC:ME WEEK ENDED 9 DECEMBER 2011
The FSA has published its Board’s Report into ‘The failure of the Royal Bank of Scotland’ (RBS). The Report concludes that RBS’s failure amid the systemic crisis ultimately resulted from poor decisions made by the RBS management and Board. But deficiencies in the global capital regime and liquidity regulations made the crisis much more likely. In addition, flaws in the FSA’s supervisory approach provided insufficient challenge to RBS.
Specifically, the Report concludes that the failure of RBS can be explained by a combination of six factors:
1. significant weaknesses in RBS’s capital position, as a result of management decisions and permitted by an inadequate global regulatory capital framework;
2. over-reliance on risky short-term wholesale funding, which was permitted by an inadequate approach to the regulation of liquidity;
3. concerns and uncertainties about RBS’s underlying asset quality, which in turn was subject to little fundamental analysis by the FSA;
4. substantial losses in credit trading activities, which eroded market confidence. Both RBS’s strategy and the FSA’s supervisory approach underestimated how bad losses associated with structured credit might be;
5. the ABN AMRO acquisition, on which RBS proceeded without appropriate heed to the risks involved and with inadequate due diligence; and
6. an overall systemic crisis in which the banks in worse relative positions were extremely vulnerable to failure. RBS was one such bank.
The multiple poor decisions that RBS made suggest, moreover, that there are likely to have been underlying deficiencies in RBS management, governance and culture which made it prone to make poor decisions. The Report, therefore concludes that these underlying deficiencies should be considered as a seventh key factor in explaining RBS’s failure.
Many of the reforms required in response to the lessons highlighted in this Report have already been implemented. But in addition, Adair Turner proposed two key policy areas where further significant change should be considered. Firstly, he recommends that major bank acquisitions should in future, require explicit regulatory approval. And secondly, he calls for a public debate about changes to rules, laws or remuneration policies which would ensure that bank executives and directors face personal consequences as a result of bank failure.
Source: Financial Services Authority
In Consultation Paper 11/12 (Financial crime: a guide for firms) FSA consulted on their proposal to publish the guide. FSA’s aims were to:
- improve transparency and clarity by sharing more of their knowledge and increasing understanding about their financial crime expectations and focus;
- capture existing published information to make it more accessible; and
- reinforce FSA’s commitment to tackling financial crime.
FSA received 50 responses to their consultation on the Guide, over three quarters of which supported the Guide. But there were also some common concerns raised, including:
- the risk that the Guide would be used (by firms and FSA supervisors) as a checklist of things firms should and should not be doing;
- confusion over the status of our guidance; and
- the application of our guidance. Many respondents asked us to be clearer about which provisions of guidance applied to which firms.
FSA have confirmed that the guidance should be applied in a risk-based, proportionate, outcomes-focused way, taking into account such things as the nature and size of a firm’s business, and that examples of good practice provide ways, but not the only ways, of meeting FSA’s requirements. FSA have clarified application provisions, but not to the level of detail that they believe could encourage ‘box-ticking’ compliance. FSA have improved cross-references and indexing to show the sources of guidance and make the guide easier to navigate. The policy statement explains more about how FSA have addressed respondents’ concerns and the changes made to the guide in response to feedback.
The guide comes into immediate effect.
Source: Financial Services Authority
The Financial Services Authority (FSA) has issued a consultation on guidance for non-executive directors (NEDs). Its aim is to assist NEDs understand their role in ensuring customers are treated fairly within their firms.
The FSA expects NEDs to play a pivotal part within the firm’s governance by ensuring that the firm is meeting its responsibilities to retail customers. The guidance proposes that amongst the issues that NEDs should consider are:
- taking a strategic view to treatment of their customers;
- being confident that the firm is identifying, monitoring and mitigating risk to its customers;
- having the right mix of skills on the Board and the right information to be able to constructively challenge the executive; and
- supporting a culture within the firm that takes into account fair treatment of customers
Clive Adamson, FSA director of supervision, conduct business unit said:
"Non-executive directors have a duty to challenge the management of their firms where they believe the firm could do more to ensure that customers get fair treatment. Our consultation sets out the clear expectations that we have for NEDs and we expect them to play their part by considering this carefully."
Together with the guidance for NEDs, the FSA has also set out for firms an outline of how it will assess how firms are managing these risks. The guidance is to help NEDs understand better how to deliver against their regulatory responsibilities under the FSA Rules and Principles, from a retail conduct risk perspective, and what this looks like in practice. In summary it recommends NEDs challenge whether:
- business proposals are aligned with the firm’s conduct risk strategy and is within its stated conduct risk appetite;
- the firm’s culture is such that it delivers good behaviours and outcomes, both prudentially and for customers;
- they have the right information to enable them to make robust decisions and if they feel they do not, then they should ask for it;
- risks to customers have been identified;
- appropriate actions are in place to mitigate and monitor such risks;
- the Board supports the identification and escalation of issues when they go wrong and ensures appropriate resolution; and
- the business learns from identified issues and draws out the wider implications.
Source: Financial Services Authority
The FSA has published changes to its regulatory framework for UK regulated covered bonds. Changes to the RCB Regulations were published on 29 November 2011 by HM Treasury.
The changes to the regime are designed to increase transparency for investors and make features of the UK regime readily comparable to those from other countries. They reflect feedback from the industry that we received on the joint consultation published earlier this year. These changes will come into force on 1 January 2013.
The policy statement sets out the following changes to the FSA’s RCB Sourcebook:
- Introduction of consistent standards of investor reporting: this will increase transparency for investors and highlight the quality of underlying assets, while the use of common standards will make it easier for investors to compare different programmes. This includes requiring issuers to provide loan level information on assets in the cover pool.
- Clarification of the role of ‘Asset Pool Monitor’: this codifies the existing UK practice of independent, external scrutiny of an issuer’s regulated covered bond programme. Issuers will be required to provide these reports to the FSA.
- Refining of regulatory reporting: this updates and consolidates the regulatory reporting that the FSA requires when issuers apply to register with the FSA and on an ongoing basis. This information is used to assess issuers’ applications and as part of the regular stress-testing the FSA conducts on regulated covered bond programmes.
The policy statement also provides an update on other areas of policy which relate to covered bonds.
Source: Financial Services Authority
The Financial Services Authority (FSA) and HM Treasury (HMT) have jointly announced that Northern Ireland’s credit union customers will have their deposits protected to the value of £85,000. The change will come into effect on 31 March 2012 when regulation of all 177 credit unions passes from the Northern Ireland Department of Enterprise and Investment to the FSA. As well as bringing customers within the scope of the Financial Services Compensation Scheme, this move will also give them access to the Financial Ombudsman Service.
Martin Stewart, head of building societies and credit unions at the FSA said: ''The changes mean that credit union customers will have the same protection as those using banks. In January the FSA will be hosting a further round of road shows in Belfast, Londonderry and Newry amongst others to assist credit unions prepare for the transfer process.''
Source: Financial Services Authority
The FSA have published a new Policy Statement which will be of interest to:
- members of the professions who carry out financial services activities on an authorised basis, and to their trade associations and designated professional bodies;
- clients of these firms and consumer bodies;
- the wider firm population which is subject to and funds the Financial Services Compensation Scheme (FSCS) and Financial Ombudsman Service (FOS).
As a result of the Legal Services Act 2007, the Solicitors Regulation Authority (SRA) is going to stop regulating the financial services activities of some law firms. This would cause a regulatory gap, which would significantly undermine consumer protection. Thus FSA are changing their rules in this area.
In July of this year FSA published Consultation Paper (CP) 11/13, setting out measures to address the future regulatory gap arising indirectly from the Legal Services Act 2007. The Act establishes ‘alternative business structures’ (ABSs), which allow non-law firms to provide legal services and introduces increased flexibility in the management and financing of law firms.
The licensing authorities for these new structures will include some designated professional bodies, whose members carry out financial services as professional firms. If those members are authorised professional firms, they are subject to the rules of both their designated professional body and the FSA for their financial services activities.
A gap will arise because the SRA will not regulate the financial services activities of proposed future ABSs that are authorised professional firms. This gap will not exist until the SRA permits the creation of ABSs – expected in the second half of February.
The measures we proposed in CP11/13 close the gap by removing the special treatment in the FSA rules for professional firms (including ABSs) which are authorised professional firms, but only where the designated professional body does not apply rules covering the firm’s FSA-regulated activities. The measures provide tangible consumer protection – for example, in the case of ABSs under the SRA, compensation if the firm fails.
The consultation period closed on 12 August 2011, and FSA received 17 responses which were overall in favour of our proposal to close the future gap. However, the responses made FSA aware that five of the designated professional bodies did not currently apply their rules to the non-mainstream regulated activities of their authorised professional firms, as FSA had assumed.
As a result, FSA had not considered the impact of this in their cost benefit analysis, and the affected firms would not have enough time to prepare for the changes proposed. FSA have therefore amended their proposals so the new rules do not immediately apply to the non-mainstream regulated activities of members of the five affected designated professional bodies.
Source: Financial Services Authority
