The Financial Services Authority (FSA) has announced steps to improve the quality and consistency of auditors’ reports on client assets. As part of its more intensive approach to supervision and enhanced focus on client assets, the FSA has reviewed the quality and consistency of auditors’ reports submitted in this regard.

A number of serious failings were identified – these were not localised to one or a limited number of auditors, but indicate a general deficiency by auditors in applying the FSA requirements on client assets, and a need to take steps to improve the quality of auditors’ reports.

The review identified the following material failings and weaknesses in a number of reports:

• Auditors providing ‘clean’ reports, despite the firm having committed significant breaches of the client asset rules;

• Auditors’ reports covering the wrong chapters of the Client Assets Sourcebook (CASS);

• Failure to provide the report on client assets because the auditor was not aware of, or did not understand, the reporting requirements;

• Auditors failing to provide adequate detail on the issues and exceptions identified in their report;

• Auditors submitting their reports several months late (in some instances, they were submitted years after the period they relate to); and

• Some auditors’ reports had ‘simple errors’, such as the auditor not signing or dating the report, quoting the wrong FSA firm reference number, or referring to another firm within the body of the report.

The consultation paper (CP) sets out ten proposals that aim to drive improvements in the quality and consistency of auditors’ reports on client assets. The proposals will be applicable to firms and their external auditors. In summary, these proposals aim to:

• Confirm and clarify the standards required for the auditors’ reports on client assets in order to provide clear focus of accountability;

• Make consistent and increase the information provided in the report so that the FSA can better utilise it to undertake both firm and thematic reviews; and

• Improve firms’ governance oversight of both their auditors and their compliance with the client assets rules.

Richard Sutcliffe, FSA’s client assets sector leader, said:

"We have repeatedly emphasised the importance of firms segregating client money and assets effectively. We have also made clear our disappointment in the quality of auditors’ reports that we have reviewed. It is ultimately a firm’s responsibility to ensure that they have adequate systems in place, but they, as we, rely on their auditors to provide the necessary assurance in this regard. Auditors charge a fee for this professional service – it is important that we and firms can rely on the reports they are signing off."

"The actions we have taken recently along with the changes we are consulting on will significantly strengthen the requirements in this regard and also mean that should we fail to see improvements we will be able to take action more easily."

The consultation period closes on 31 December 2010. The FSA intends to publish a policy statement during the first quarter of 2011.

Source: Financial Services Authority

FSA Website

The Financial Services Authority (FSA) has proposed changes to its complaints handling rules as part of a package of measures to drive up standards of complaints handling within the industry.

Consultation Paper 10/21 is key to the FSA’s consumer protection agenda and is aimed at ensuring that more firms resolve complaints promptly and fairly.

Proposals include:

• Requiring firms to identify a senior individual responsible for complaints handling;

• Abolition of the ‘two-stage’ complaints handling rule to incentivise firms to resolve complaints fairly the first time;

• Underlining the requirement for firms to carry out root cause analysis, by identifying and remedying any recurrent or systemic problems with complaints, and to take action where appropriate; and

• Additional guidance in relation to taking account of ombudsman decisions and previous customer complaints and learning from the outcome.

The FSA has also published firm-specific complaints data, enabling customers, for the first time, to compare and contrast the way different firms deal with their complaints. The FSA is committed to greater transparency where it will benefit consumers. Publishing this data brings complaints to the attention of firms and consumers alike, and gives firms a benchmark and an incentive to improve how they treat their customers and handle complaints.

The FSA also published its latest set of aggregate complaints statistics for the first half of 2010, which they began publishing in 2009, to enable customers to see the volume of complaints being received by firms. The FSA also proposes to increase the limit on awards made by the Financial Ombudsman Service from £100, 000 to £150,000 to provide fairer and more effective redress for customers.

Consultation closes on 31 December 2010.

Source: Financial Services Authority

FSA Website

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Source: The Consulting Consortium

TCC Website

Jon Pain, Managing Director, Supervision, wrote reminding firms of the contents of his October 2009 letter which explained the conclusions that FSA had reached on several questions put to them by mutual firms and by what is now called the Association of Financial Mutuals.

Firms were asked to consider the implications of that letter for them and to communicate their conclusions to FSA by the end of December 2009. Since then, FSA has been carefully considering firms’ responses and, in some cases, has been in touch with firms to request further information and to clarify some of the issues they raised.

After discussing the various responses and legal opinions gained in relation to that letter, Mr Pain went on to say:

“On 29 June 2010, we announced our intention to conduct further policy work around aspects of our existing regime for with-profits business to see whether it could be further strengthened to provide better protection for with-profits policyholders. As part of this, we will consider whether our rules should develop our current approach, set out in this letter, to the treatment of with-profits funds of mutuals in order to provide greater clarity and consistency for mutuals and their with-profits policyholders."

"We will do this with the aim of including any proposals in the Consultation Paper planned for the end of this year. In the meantime, the FSA Relationship Manager for your firm or, for SF&CD firms, the Smaller Insurers Team, will continue to follow-up with you, as necessary, on your response to the October 2009 Dear CEO in a manner consistent with the points made in this letter."

Source: Financial Services Authority

FSA Website

Adair Turner, Chairman of FSA, addressed the Eurofi conference in Brussels.

Comparing and contrasting European and UK regulation he stated:

“In the UK, when in 2008 we had to deal with the collapse of the Icelandic bank Landsbanki, we were forced to recognise the reality that a European single market in retail banking, with banks free to operate across borders in branch form, is dangerous if not combined with pan-European mechanisms to ensure strong bank regulation and supervision in all countries of the European Economic Area, each of which can be the home to a bank with branches in others."

"That is why, in my own Review, I said we either needed “more Europe, or less Europe” – either more effective European mechanisms to ensure well enforced regulation and supervision, or acceptance that a single market in retail banking is unsustainable. In fact, I always recognised, and the FSA always recognised, that the choice would have to be more Europe, and that is why we have the European Supervisory Authorities (ESA)."

"The crucial need now is for the ESAs to concentrate its efforts on addressing the key deficiencies that led to the crisis – defining appropriate implementation of Europe’s prudential rule book, and ensuring, through peer review, that national supervisors are effectually enforcing it. To ensure that, it needs high technical competence and clear independence from political pressure. My key message is that among all the reasonably important issues discussed, we keep returning to those which are most important."

"It is important to regulate bankers’ remuneration and hedge funds, but if the legislation on these which we are now introducing, had been in place ten years ago, but with the global bank capital and liquidity regime as it was, the crisis would have occurred much as it did. Conversely, if we had imposed more effective rules on trading book capital, on total capital and liquidity, and had in place appropriate macro-prudential analysis and policy tools, the crisis could have been avoided even if many bankers got paid too much for unnecessary activity."

"This crisis has been so harmful to the lives of ordinary people across Europe, through lost income, lost employment and public debt burdens for the future – that we owe it to them to ensure our policy responses focus on the key changes which will prevent it happening again."

Source: Financial Services Authority

FSA Website

Andrew Bulley, Head of Wholesale Insurance Department has produced his first newsletter since taking over as Head of the Wholesale Insurance Department in July, stating that he had been out and about meeting firms and getting up to speed on the issues facing the Wholesale Insurance sector.

He reminded readers:

“The Chancellor outlined proposals on financial regulation in his June Mansion House speech. We will be split into two bodies from 2012, but it is important to emphasise that we will continue as the UK’s financial regulator until then. Although our organisational structure will change from 2012, our successor bodies will continue our post-crisis philosophy of proactive, outcomes-based financial regulation. This is why we are continuing to implement the policy initiatives and reforms we have developed across all areas of regulation, such as our stronger prudential requirements."

"It is important that your firm is aware that you still have the same responsibilities to the FSA and you should carry on dealing with your current contacts until informed otherwise. We will inform you what the changes to the regulatory framework are likely to mean for you as details become available. As always, we are interested to hear your views on this newsletter – please see the feedback box on page 3 for details of how to get in touch.”

The contents of the newsletter cover the following topics:

• Completing the RMAR

• Adequacy of Resources

• Undertaking controlled functions without our approval

• Controls over Appointed Representatives

• Client Assets and Money Enforcement Cases

• Online Notifications and Applications (ONA)

• Principle 11 – Relations with regulators

• How are we helping you?

Source: Financial Services Authority

FSA Website

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Source: The Consulting Consortium

TCC Website

Responding to the consultation by the Financial Services Authority on interest-only mortgages, the CML welcomed the regulator's approach to having a discussion on how these products should be regulated before publishing draft rules. But it warned that if the FSA implements the proposals as drafted in its consultation paper, it is probable that interest-only mortgages will effectively vanish, restricting choice for consumers.

The CML believes that the compliance costs for lenders of annually checking the existence of borrowers' repayment methods, and the regulatory risk of the lender making a judgement on the adequacy of the repayment method, would prove prohibitive. In its submission, the CML acknowledges concerns about borrowers having a shortfall at the end of their term, and lenders being exposed to a prudential risk by having a number of borrowers with unknown repayment methods.

However, the number of borrowers with a shortfall at the end of their term is extremely low, and where this occurs the lender is normally able to arrange an acceptable repayment plan with the borrower. Lenders do not see significant losses from interest-only mortgages, meaning that the majority of borrowers' repayment methods work.

Commenting on the submission, CML director general Michael Coogan said:

"Interest-only mortgages are an appropriate choice for a range of different types of consumers, including borrowers who rationally choose them as an alternative to renting, financially capable customers who make acceptable arrangements to repay the capital over the long term, and buy-to-let investors. We do not want to see measures that would effectively regulate them out of the market, and we believe it is possible to address the FSA's concerns, without imposing costs and requirements on lenders and borrowers that are likely to prove to be unacceptable."

Source: Council of Mortgage Lenders

CML Website

With a 40% cut in the rate at which borrowers receive income support to cover their mortgage payments (ISMI) due to come into effect on 1 October, the CML is urging the government to resist further cuts to this benefit in its forthcoming comprehensive spending review and, in particular, to maintain the 13-week qualifying period for payments.

The CML understands the pressures on government funding and accepts there is a case for reducing the rate from 6.08% to 3.63%, as the government has done today. However, the decision means that fewer borrowers will receive payments covering their mortgage interest in full, and all households receiving the benefit will come under greater financial pressure.

The CML can nonetheless re-assure borrowers that lenders will continue treat them sympathetically if they experience payment problems. We urge any borrower anticipating payment difficulty - either as a result of the benefit change or for any other reason - to contact their lender as soon as possible. Lenders will treat borrowers fairly, and will seek to work out a plan for dealing with the borrower's problems that is tailored to their individual circumstances.

Commenting on the recent reduction in the rate at which ISMI is paid from 6.08% to the Bank of England's average mortgage rate (3.63%), CML director general Michael Coogan said:

"A combination of low interest rates and the concerted efforts of borrowers, lenders and the government have brought about a reduction in arrears and possessions, despite the economic slowdown. Paying benefit at a lower rate will put extra pressure on household finances, and any borrower anticipating payment problems should talk as soon as possible to their lender, who will treat them sympathetically and try to work out a solution with them."

"Lender forbearance has played a crucial role in keeping arrears and possessions in check, and this is reinforced by the certainty for lenders and borrowers of benefit payments, albeit at a reduced rate, within 13 weeks. But any move to lengthen the qualifying period - and in particular to return to a 39-week waiting time - will seriously undermine the efforts of lenders and borrowers to work together to try to ensure that going into arrears does not result in the home being repossessed. Continuing government support, including the funding of debt advice, is vital in helping keep people in their homes."

Source: Council of Mortgage Lenders

CML Website

At Lloyd’s City Dinner, Lord Levene warned that the current focus on regulation should not get in the way of strategies for future growth. Following dinner for two hundred of London’s leading businessmen and women, along with senior government figures and members of diplomatic community at Plasterers’ Hall in London, Lord Levene suggested that “a failure of common sense” is seeing healthy sectors like insurance “still fighting a rear guard action, trying to convince regulators not to impose harsh conditions”.

Lord Levene believes that the central focus should instead fall on growth.

“I believe what Europe needs at this critical point, is not so much a safety net, but more a launch pad for the growth that will create the enterprise, and crucially the jobs which the continent so badly needs”.