FSA – CHAIRMAN WELCOMES CHANGES TO REGULATION

The Chairman of the Financial Services Authority, Lord Turner, has welcomed the changes to financial regulation outlined by the Chancellor of the Exchequer in his Mansion House speech lasty week, and Hector Sants’ agreement to remain as Chief Executive of the FSA, leading the transition and the creation of a new prudential authority.

Lord Turner said:

"The FSA now has the clarity of direction and timescale as well as the leadership that we need to meet the challenges ahead. In particular I am delighted that Hector, who has done so much to transform the FSA during the past few years, has agreed to lead the transition to the new structure in 2012, and to become the first Chief Executive of the Prudential Authority and a Deputy Governor of the Bank of England."

"The crisis demonstrated the need for new regulatory approaches and more intense supervision, and the FSA has already implemented major change. But it also demonstrated the need to bridge the gap between macro-prudential policy and the supervision of individual firms. The Chancellor's proposals for prudential regulation will enable us to do that, while building on the major changes we have made over the last few years. The timescale will enable us to manage the transition in a smooth and orderly way."

"On retail customer protection, the FSA has recognised the need for a shift in our past approach, moving to the more interventionist approach which we set out in our recently published Retail Conduct Strategy. The new Consumer Protection and Markets Authority will have a strong focus on this challenge, while also maintaining strong focus on conduct issues in wholesale products."

"There are important issues still to be resolved – in particular the arrangements for our Enforcement activities and for those Markets activities which relate to exchanges, clearing infrastructure and prudential issues – and we look forward to working closely with the government in considering the relative merits of different possible arrangements for these. But the overall future shape of financial regulation is now much clearer and we are in a strong position to create a future regulatory system which builds on the FSA's achievements over the last few years of major change."


Source: Financial Services Authority

FSA Website

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FSA – SHOULD REGULATORS JUDGE CULTURE?

Unacceptable culture within firms was a major contributor to the financial crisis and so regulators should play a greater role in judging how culture drives firms’ behaviour and impacts on society as a whole, according to the chief executive of the FSA.

In a speech at the Chartered Institute for Securities & Investment (CISI) conference in London entitled, ‘Do regulators have a role to play in judging culture and ethics?’, Hector Sants discussed his personal view that many of the causes of the financial crisis were deeply rooted in behavioural issues.

He commented that ‘even after all the supposed lessons learned exercises, we are still seeing some decisions by management in major firms that we would judge not to be prudent’ and, as a result, greater intervention is needed from regulators to ensure decisions made by firms deliver the outcomes society expects.

Hector Sants, said:

“Historically regulators have avoided judging culture and behaviour as it has been seen as too judgemental a role to play. However, given the issues we continue to see over time, I believe this one-dimensional approach has to be questioned. Every other aspect of the regulatory framework is under scrutiny and we should not shy away from debating the culture question.”

The FSA chief executive commented that the focus for regulators should not be to define one ‘acceptable culture’, because there are many different forms a positive culture can take. Rather, regulators should focus on what an unacceptable culture looks like and what outcomes that drives.

Hector Sants continued:

“I would strongly advocate intervention in the UK through changing the Companies Act framework for directors, for example. The current requirement for directors is to promote the success of the company. This is often interpreted in terms of shareholder value. Whilst this does include the need, for example, to ‘have regard to’ the impact on the community, I do not believe that is sufficient. There must be a stronger and more explicit obligation to wider society. There must be clear recognition of the need for institutions to contribute to the common good.”

In conclusion, Sants said:

“Determining an ethical framework is for society as a whole, not an unelected regulatory agency. However, it is, I believe, our role to police behaviour and expect firms to have the right culture which facilitates the delivery of the outcomes we expect.”


Source: Financial Services Authority

FSA Website

FSA – APPOINTS SENIOR ADVISER

The FSA today announced the appointment of Tom Boardman to the role of life insurance senior advisor. Tom has more than 35 years experience in the financial services sector, most recently as director of retirement strategy and innovation at Prudential.

Hector Sants, the FSA’s chief executive officer, said:

"I am delighted to announce Tom’s appointment today as a senior advisor to the FSA. He has considerable experience to bring to bear on the regulatory changes and issues that we face in the insurance sector.”

Senior advisors are a core part of the FSA’s delivery of intensive supervision. The team provides experience on regulatory, market and consumer matters. Tom held a number of senior management and actuarial roles at Prudential, established the bancassurance operation at Nationwide Building Society, and provided consultancy to a number of financial services businesses.


Source: Financial Services Authority

FSA Website

FSA – OUTLINES PLANS FOR MORTGAGE MARKET

Lesley Titcomb, Director of Small Firms and Contact Centre, FSA, addressed the Council of Mortgage Lenders at their conference on 17 June 2010.

The speech covered mortgage arrears, prudential reform and non-banks, conduct of business, interest only mortgages and income verification and affordability and extending FSA’s scope.


Source: Financial Services Authority

FSA Website

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OSBORNE’S PLAN MUST NOT STIFLE INSURANCE COMPANIES

The Government's decision to take financial services regulation out of the hands of the FSA may make sense for banks, but the case is less clear for the insurance industry. Insurance regulation has been shunted from pillar to post and there was nowhere left for it to go to but the Bank of England (BoE). Firstly it was regulated by the Board of Trade, then the Department of Trade, then the DTI and then HM Treasury, so now it appears that it is the BoE's turn.

Scrapping the FSA for banks is the right thing to do, but the case has not yet been made for insurers. Regulators always say no one size fits all; but the BoE's new Prudential Regulator would appear to be just that – and there is a danger that this one-stop-shop regulator will focus too much on banking. In many respects, these changes for insurers are cosmetic as the European Union Solvency II Directive will set out the required system of prudential regulation for UK and EU insurers. The new UK Prudential Regulator will have to implement Solvency II just as the FSA has been doing.

The timing of the changes could create problems for businesses. If the CPMA changes the rules on the conduct of business again then insurers will have to budget for redesigning products and systems. For the life industry having to cope with Solvency II and the Retail Distribution Review coming into effect at the same time as the BoE change, regulation becomes a huge burden over the next few years.

Insurers have, in the main, survived the financial crisis largely intact. Insurers have anti-contagion rules and less inter-dependencies that became so prevalent in the banking industry. From 2013, the Solvency II Directive, which was drafted to benefit from the lessons learned from previous financial crises to strengthen insurers' capital base, will mandate the capital requirements for UK insurers. But insurers have been concerned since the recent general election that they will be lumped together with the banks and that the BoE will be unable, possibly through a lack of understanding about insurance or by being too fixated on the banks in future, to ensure that a system of prudential regulation will be appropriately applied to the insurers.

Changing the regulatory structure does not automatically bring better regulation and insurers must make good use of the consultation on these changes to strongly argue their case, clearly outlining how regulation by the BoE and the new CPMA should work.


Source: Out-Law.com

Out-Law.com

FSA – MUST KEEP TABS ON SOCIAL NETWORK AND OTHER iPHONE APPS

Financial services firms should keep tabs on their social networking, other internet communications and iPhone apps to make sure that they stay up to date and compliant, according to the FSA. Firms must apply all the strict advertising rules their formal communications are subject to, even if the communication is in a more informal medium such as a Twitter post or a message board comment.

The FSA has studied the way that financial services companies communicate to the public and has found that some of communication through new media channels lacks compliance with its safeguards. Companies published Twitter updates or commented on discussion threads without the usual disclaimers and risk warnings, it found, and engaged in behaviour that acted as promotional activity without complying with all the FSA's rules.
The FSA studied 30 Twitter and Facebook pages and examined companies' behaviour on financial forums.

"Throughout the review we identified good and poor practice among firms who had adopted the use of new media to communicate financial promotions," said an FSA statement on its study.

"Some promotions lacked risk warnings. Other promotions, while not very specific about products or services, nevertheless went beyond the definition of ‘image advertising’".

The FSA said that firms must be aware that all their communications could come under scrutiny.

"Firms may not have considered these factors to meet the definition of a financial promotion and therefore have not applied the relevant communication rule," said the FSA about the new media promotions.

"Our rules cover all communications by regulated firms to clients, not just promotional ones. The rules for non-promotional communications are fairly high-level – the main rule is that communications must be fair, clear and not misleading."

The FSA said that where financial services firms do make use of new media as a platform for advertising, they must make sure that the information stays accurate and relevant.

"New media may date more quickly than traditional media channels, so regular reviews to ensure that information is up-to-date may be required".


Source: Out-Law.com

Out-Law.com

FSA – TRACING EMPLOYERS’ LIABILITY INSURERS

In February 2010, the Department for Work and Pensions published proposals to help people track down Employers’ Liability (EL) insurance policies by creating an Employers’ Liability Tracing Office. Also in February, the Ministry of Justice announced several measures to help those people exposed to asbestos. It also stated that creating the Employers’ Liability Tracing Office would help them trace the relevant insurers and obtain compensation.

This paper will be of interest to past and present UK employees who may need to trace details of EL insurance, as well as insurers and Lloyd’s members. This paper is particularly relevant to insurers and Lloyd’s managing agents in relation to members who are potentially liable in respect of UK EL cover, whether or not they are based inside the UK.

By law, most employers must have Employers’ Liability Compulsory Insurance. Many employees may not confirm whether their employer has insurance or find out who the insurer is. If an employee is diagnosed with an employment-related disease – sometimes many years later – the company may no longer exist and insurer information may not be available.

Although many claimants find an employer or insurers to claim against, the number of claimants who cannot do so – 3,210 in 2008 – cannot be ignored. The Department for Work and Pensions proposed creating the Employers’ Liability Tracing Office. This would manage an electronic database to help people track down Employers’ Liability insurance policies and run a current tracing service.

Although FSA cannot force insurers to comply with the Employers’ Liability Tracing Office requirements, FSA can introduce rules to improve consumer protection (a statutory objective) until legislation is passed.

• FSA propose to require all general insurers to notify them whether they carry out (i.e. are potentially liable for) UK commercial lines EL insurance contracts.

• FSA propose to require all insurers carrying out UK commercial lines EL insurance to make certain policy and other information they generally have available for tracing purposes in a specified easily accessible form. This could be available on the insurer’s website or through a tracing office if the tracing office used by the insurer meets certain conditions.

Responses close on 14 September 2010.


Source: Financial Services Authority

FSA Website

CML – COMMENT ON MORTGAGE CAP SPECULATION

Responding to speculation that the Chancellor is set to announce that the Bank of England will gain new powers to impose limits on the type of mortgage lending that lenders will be able to undertake in the future, the Council of Mortgage Lenders says it is vital that there should be a logical discussion of what objectives such a measure would be designed to achieve. The characteristics of today’s market are not likely to stoke risky mortgage lending, and the international and domestic measures already under way will further dampen down the appetite for risk.

CML director general Michael Coogan comments:

“We need to remember that in the UK it was not risky lending that caused the banking problems, it was banks’ inability to refinance their borrowings due to the shutdown of global financial markets. We also need to remember that what is currently bothering most people about the mortgage market isn’t high-risk lending, but the fact that lending is so constrained into low-risk borrowers that it may be making it more difficult for the economy to grow as individuals and businesses find it more difficult than they would wish to borrow.

“It may make sense – depending on the detail – for the Bank to have tools such as this at its disposal. But, it is surprising to see such attempts to target specific sectors such as the mortgage market when the new and onerous capital regime – which will be the most effective tool in influencing lending decisions going forward - will dampen risk appetite and manage risk in lending across the board. Policymakers need to be very careful to avoid trying to solve the wrong problems – the much bigger problem for the mortgage market for the foreseeable future will be in raising enough money to lend, not the risk of stoking asset bubbles through over-generous lending.”

The CML estimates that around 2.5 million mortgages outstanding - around a quarter of all mortgages - are for more than 75% of the value of the property.


Source: Council of Mortgage Lenders

CML Website

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Source: Financial Services Skills Council

FSSC Website

BIS – ACTION PLAN ANNOUNCED TO END EXCESSIVE REGULATION

Business Secretary Vince Cable has announced an action plan to bring an end to the excessive regulation that is stifling business growth.

He detailed the first phase of the Coalition Government’s action plan to reduce regulation following the Prime Minister’s commitment last week to “re-open Britain for business”.

The action plan:

• Creates a new Cabinet “Star Chamber” that will lead the Government’s drive to reduce regulation which is stifling growth, especially of small businesses. This Reducing Regulation Committee will be chaired by the Business Secretary and will enforce a new approach to new laws and regulations, ensuring that their costs are being properly addressed across the entire British economy.

• Announces an immediate review of all regulation in the pipeline for implementation which has been inherited from the last Government. The cost of implementing this amounts to £5bn annually before April 2011 and £19.1bn per annum thereafter. This will be the first action for the new Cabinet committee.

• Establishes a new “challenge group” to come up with innovative approaches to achieving social and environmental goals in a non-regulatory way. This team would work with experts including Richard Thaler, the US behavioural economist.

• Introduces a new approach that will control and reduce the burden of regulation. A “one-in, one-out” approach, designed to change the culture of government, would make sure that new regulatory burdens on business are only brought in when reductions can be made to existing regulation.

Business Secretary Vince Cable said:

“The deluge of new regulations has been choking off enterprise for too long. We must move away from the view that the only way to solve problems is to regulate. The Government has wide-ranging social and ecological goals including protecting consumers and protecting the environment. This requires increased social responsibility on the part of businesses and individuals.

“This is a real challenge and it will not be easy. We need to reduce regulation and at the same time meet our social and environmental ambitions. This demands a radical change in culture away from the tick box approach to regulation only as a last resort. It’s a big task but one worth striving for.”


Source: Department for Business Innovation and Skills

BIS Website