FSA – CONSULTS ON ENHANCED ASSET CLIENT PROTECTION

The Financial Services Authority (FSA) has published a consultation on changes to its client asset rules. The aim of the consultation is to ensure that clients have confidence their money and assets are safe and will be returned within a reasonable timeframe in the event that a firm becomes insolvent.

The failure of Lehman Brothers International (Europe) (LBIE) highlighted a number of areas where the client assets sourcebook (CASS) could be strengthened. Keen to learn lessons, the FSA has been reviewing this area on a number of fronts including engagement with a number of working groups and extensive pre-consultation with firms. The FSA also input into the Treasury’s consultations which considered effective resolution arrangements for investment banks.

The consultation focuses on the following:

• Re-hypothecation of client assets
Creating a requirement that all prime brokerage agreements will contain a disclosure annex which will highlight relevant definitions and the contractual limit on re-hypothecation. These are provisions in the contract which apply when a firm can ‘use’ its clients assets in specified circumstances;

• Increased reporting to clients
The FSA will require daily reporting on client money and assets holdings to all prime brokerage clients. This will mean that clients will know exactly what is happening to their assets, what transactions have been completed and, if relevant, which and how many of their assets have been re-hypothecated;

• Holding client money with group banks
Restricting the placement of client money deposits held in client bank accounts within a group to 20%. This will limit the amount by which a client is exposed to group credit risk;

• Prohibiting the use of general liens in custodial agreements
The FSA considers it unacceptable that a client’s assets held with a custodian were subject to a lien exercised because of the debt of a completely unrelated group entity to the relevant custodian This emerged as part of the Lehman insolvency and contributed to significant delays in the insolvency practitioners’ ability to recover assets from deposits not under their direct control;

• Creating a new controlled function with specific responsibility for client money and assets
A senior individual within the firm should be responsible for oversight and protection of client assets and money. Proportionate to the size of the firm, this should be one named individual who may be interviewed for the post and who will hold an FSA significant influence controlled function; and

• Introducing client money and assets return (CMAR)
This return will be reviewed and authorised on a monthly basis for medium-large firms and twice a year for small firms. This will provide the FSA with an overview of firm-specific CASS positions and an overview of UK firms’ CASS holdings and will enable the FSA to make regulated interventions on a firm-specific or thematic basis.

Source: Financial Services Authority

FSA Website

FSA – TAKING THE CORPORATE GOVERNANCE AGENDA FORWARD

Sally Dewar, Manging Director, Risk, FSA addressed the City Corporate Governance and Remuneration Summit on 30 March and stated:

“In our Business Plan earlier this month, our chief executive said we have been through a revolution in the intensity of our supervisory approach. Our approach to governance and risk in firms is a part of that. Because it is clear to us that the financial crisis exposed significant shortcomings in the governance and risk management across numerous firms."

"And although poor governance was only one of many factors that contributed to the financial crisis, it was an important one. “

Ms Dewar then went on to say:

“It is now incumbent on the FSA to take action on these issues. So, just as we are taking action on a range of fronts in our response to the crisis – from capital and liquidity, right through to asking questions about the very nature of our financial system – we are also going to have to address issues around governance and the culture within firms.

There are four stages to go through:

• The firm’s application
• Assessment of the application
• The Interview
• Ongoing review

In conclusion she stated:

“All of this work aims to respond to the lessons we have learned from the financial crisis and to make our regulation more effective to reduce the risk of the same problems happening again. It goes alongside our other prudential work – on capital, liquidity and stress testing, and it is part of our more intensive approach.
We will supervise individuals and firms more intensively, and our renewed focus on governance is a clear sign of our intention to strengthen industry practice and ensure that markets and consumers are protected.”


Source: Financial Services Authority

FSA Website

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CML – COMMENTS ON BANK OF ENGLAND MORTGAGE DATA

Commenting on this week’s mortgage data published by the Bank of England, the Council of Mortgage Lenders notes that interest rates on new mortgages continue to fall, while the average rate on the outstanding stock is stable.

CML senior economist Paul Samter observed:

• The average rate on mortgages advanced in February fell to 3.83%, from 3.90% in January, and has declined each month from 4.34% last August. The largest falls have been on shorter-term fixed rates. The average rate on all outstanding loans was unchanged at 3.67% in the month. This is slightly higher than the low of 3.56% in October, but still extremely low on any historic comparison and is likely to help keep arrears rates relatively low.

• Approvals for house purchase fell a little to 47,100, down 2% on the month, but up 20% on a year earlier. This is very much in line with the CML forecast for activity to remain subdued early in the year in light of the rush to beat the end of the stamp duty holiday late last year, and uncertainty over the economic and political outlook. The new stamp duty exemption for first-time buyers on properties up to £250,000 is likely to boost activity in the coming months, although it is extremely difficult to assess how many potential buyers will qualify and what the impact will be.

• Remortgage activity picked up a little, with 27,300 loans approved in the month, a 12% rise from January but down 21% on a year earlier. The CML continues to expect refinancing activity to remain subdued throughout most of this year with official interest rates (and therefore most variable mortgage rates) unlikely to rise for some time yet.

• Gross lending came in very close to the CML's £9.2 billion estimate at £9.3 billion (nsa) while net lending, on an unadjusted basis, was in modestly negative territory in the month – however, the seasonally adjusted figure was £1.6 billion, a similar level to that seen in recent months.


Source: Council of Mortgage Lenders

CML Website

LLOYD’S – A VIEW FROM LIME STREET

Though the global economy remains fragile, Lloyd’s is already planning for the future with a strategy for international growth aimed at grabbing the chances that will come when the upturn gathers strength, says Jose Ribeiro, Lloyd’s Director of International Markets and Business Development.

“There are still plenty of opportunities out there and we need to be prepared to reap the benefits of those,” Ribeiro says in an interview with lloyds.com.

Cultivating more business from Europe is a key target contained in the market’s latest three-year plan and Lloyd’s has identified coverholders as the best distribution channel to achieve that growth, rather than going head to head with the continent’s major insurers in their own backyards.

Developing the market’s business in China is also a top priority for Ribeiro.

“China is a huge challenge; it is a key market for us, to which we will continue to commit resources and time. We want to continue to develop our reinsurance business in China, as well as explore some opportunities to write direct business there.”

Good progress in Brazil

He is pleased with the progress Lloyd’s has made in Brazil, where just a few years after being granted a licence as an admitted reinsurer following the dismantling of the state monopoly on reinsurance business it is now the second-largest player in the fledgling market after the mighty IRB.

“Since we opened an office in Brazil we’ve seen our business there grow considerably. We see huge potential in that market. The challenge is to ensure we write profitable business as competition increases and the IRB reacts to its leadership position being threatened.”

In contrast to the bright prospects in both China and Brazil, progress in India remains disappointingly elusive.

“India is a very different story. We’ve been trying for years to get a licence to operate there. We have worked hard with the regulator, but we haven’t got to where we would like to be. It is an important market for us: we get more than $400 million in premium income as an offshore reinsurer. But there isn’t much more we can do for the time being, without a licence. That has been a big frustration to us. But I’m an optimist – I believe that eventually India will open up, as China and Brazil have done.”

Bright prospects in Russia, Mexico

Russia, the last of the BRIC quartet of fast-developing economies, is another market on which Ribeiro and his team have lavished much attention. The benefits are already starting to be seen: Lloyd’s increased its reinsurance income from there in 2009, despite the fact the Russian reinsurance market as a whole shrank, as Lloyd’s benefited from a flight to quality when the financial crisis bit hard into the finances of local players.

In May, Lloyd’s is organising a market trip to Russia, with a list of appointments to meet the key reinsurance buyers and brokers. The fact-finding mission will allow Lloyd’s players to get a valuable insight into the Russian market as well as giving local cedants the opportunity to find out more about doing business with the 350 year-old market.

The trip is an acknowledgement that Russia will soon be one of the most powerful players on the world’s economic and political stages. But it will also allow Lloyd’s insurers to learn more about how Russia plans to diversify its economy away from a dependence on its huge mineral wealth, says Ribeiro.

Another market Lloyd’s is targeting is Mexico, which although it is in the depths of its worst recession in living memory shows immense promise.

“Mexico has been hit hard, mainly as a result of its dependence on the US. As the US economy picks up then so will Mexico’s.”

Ribeiro is to organise a market visit to Mexico in the near future, which will help to decide whether Lloyd’s should establish a representative office there to help raise the market’s profile in the country.

“The fact that most of the leading Mexican insurers are local companies is quite interesting to us, because they have more independence to make their own decisions about reinsurance than the local subsidiary of a major international insurer,” he says.


Source: Lloyd's of London

Lloyd's Website

LLOYD’S – EMERGING FROM THE RECESSION

Despite the challenging macroeconomic environment of the past two years, London and Lloyd’s market insurers have proved their resilience to the crisis. Strong results for 2009 and an expectation that earnings will stabilise further in 2010 prompted Fitch Ratings to revise its outlook on the UK non-life insurance sector to stable from negative on 22 March.

“The UK non-life sector’s market and product diversity, aided by the international business underwritten by the London Market, has helped the sector’s resilience to the crisis,” said Fitch.

Long winter over

Recovery of the global equity markets helped insurers grow their investments in 2009, while a lack of major catastrophes also had a favourable effect on balance sheets.

“The absence of a major loss event and the more recent recovery observed in investment markets have helped most insurers maintain capital at strong levels through the financial crisis, and the preservation of the sector’s capital strength is viewed as a key factor in returning the sector outlook to stable at this time,” said Fitch.

On 24 March, Lloyd’s revealed record profits of £3.9bn and a combined ratio of 86.1% (compared to profits of £1.9bn in 2008 and a combined ratio of 91.3%). The investment return grew to £1.77bn, up from £957m in 2008. The top five London market players – Amlin, Brit, Catlin, Hiscox and RSA – collectively posted a combined ratio of 87.5% for 2009 (2008: 88.2%).

In his chairman’s statement Robert Hiscox revealed record gross profits of £320.6m for Hiscox Insurance. He praised the industry’s overall performance and said he hoped regulators and government would appreciate its conservatism and value.

“As I have said, there is more discipline in our industry than at any time in my long career. It is of course not perfect, but the general insurance industry and Lloyd’s in particular have performed excellently through the financial chaos of the last few years,” said Hiscox.

Not an insurance crisis

The financial crisis, which peaked in 2008, was primarily a banking crisis. While the resulting downturn affected investment returns, the majority of insurers came through the crisis with their capital intact. Because insurance companies take risk on the underwriting side of their balance sheet they are generally very conservative investors.

“It’s pretty clear that the leverage involved in the insurance industry is far different from that involved in the banking sector and that explains why the ramifications were so different for the two sectors,” explains Geoffrey Bromley, vice chairman, international at Aon Benfield.

The UK economy, which emerged from recession in the fourth quarter of 2009, is expected to stabilise further during 2010. Insurers are expected to benefit from reduced volatility in the investment market and a drop in recession-related claims. However, the first three months of 2010 have had their fair share of global catastrophes, including major earthquakes and winter storms.

“Although the London Market is likely to incur greater exposure than the UK Company Market to losses arising from the Chilean earthquake and European Windstorm Xynthia, initial loss estimates published by individual insurers and other market commentators suggest that these events will affect earnings rather than capital,” said Fitch.


Source: Lloyd's of London

Lloyd's Website

LLOYD’S – CHOCOLATE LOVE AFFAIR RAISES RISKS

It will be difficult enough choosing from the huge range of tempting chocolate eggs, rabbits and chickens this Easter, but increasingly consumers are also making their chocolate purchasing decisions on ethical, environmental and health grounds. However, ethical claims bring reputational risks for producers.

Once an expensive luxury, the UK now consumes some £3.5bn worth of chocolate ever year, more than any other European country. This Easter alone, the country’s chocoholics are expected to consume some 100 million chocolate eggs.

As well as an insatiable desire for chocolate, UK consumers are increasingly asking for healthier, higher quality, and ethically produced foods. More and more of us are concerned with what we eat, or whether farmers in developing countries receive a fair price, and the carbon footprint of our groceries.

This trend has helped niche Fair Trade and organic chocolate brands like Divine, Green & Black’s, and Malagasy find their way onto supermarket shelves. Large food producers too, are now responding to such concerns – with chocolate giant Cadbury switching to Fair Trade and acquiring organic producer Green & Black’s.


Source: Lloyd's of London

Lloyd's Website

BIS – NEW CONSUMER CREDIT RULES LAID IN PARLIAMENT

The Government laid new rules in Parliament to protect borrowers. These rules implement the European Consumer Credit Directive and will come into effect from 1st February 2011. They will work in conjunction with the Office of Fair Trading’s irresponsible lending guidance for lenders which will be published shortly.

The new rules for unsecured credit agreements include:

• A 14-day window for consumers to cancel credit agreements without penalty;

• Lenders will have to assess consumers creditworthiness before providing a loan;

• Lenders will have to clearly explain their products to help consumers make the right choices;

• A right for consumers to make partial early repayment (this is in addition to the existing right to repay early in full); and

• A standardised information form setting out important information details for consumers before they sign a credit agreement.

Consumer Minister Kevin Brennan said:

“These new rules will further strengthen a culture of responsible lending and borrowing whilst helping put consumers back in the driving seat with their finances. The balance of power needs to shift back to consumers and these new rules will help them make better informed decisions before committing to any credit agreement.”


Source: Department for Business, Innovation and Skills

BIS Website