FSA – PUBLISHES FEEDBACK STATEMENT ON REMUNERATION

The Financial Services Authority has published the summarised feedback it received on whether to extend its code on remuneration policies to other FSA-authorised firms.

The FSA’s remuneration code comes into force for large banks, building societies and broker dealers on 1 January 2010. It will apply to any remuneration awards made by these firms for the 2009 performance year.

Chapter 6 of the March consultation paper invited general discussion on whether the code should be extended to other FSA-authorised firms. At this stage the FSA has decided not to introduce any new rules and will not extend the rules to other sectors. The FSA’s supervisory focus is on ensuring that the firms which are within the initial scope of the remuneration code are fully compliant from 1 January 2010.

The FSA has already committed to a review of the effectiveness of the remuneration code in mid 2010. At that stage, as well as taking into account the lessons learned from this year’s exercise, the FSA will take into account the following:

• The wider European work that touches on remuneration: a number of directives containing remuneration provisions are currently at different stages of European negotiation;

• The elements of the Walker Review that focused on remuneration; and

• The progress of the Financial Services Bill which may give new powers to the FSA in respect of remuneration.

The FSA does not think it beneficial to make further changes now as adjustments will be required to the existing code given the large body of European directives that contain remuneration provisions. In the meantime, the FSA expects firms to continue to focus on remuneration risk management.

The FSA will continue to address this issue in the course of its usual supervisory action.

All the firms covered by the remuneration code provided the FSA with remuneration policy statements (RPS) at the beginning of November. The FSA is currently reviewing these RPS and follow-up meetings have been arranged or held with firms.

The FSA has made it clear that it intends to assess firms’ 2009 reviews to ensure they are compliant with the code before they are finalised.


Source: Financial Services Authority

FSA Website

FSA – CONSULTS ON STRENGTHENING FIRMS’ CAPITAL STANDARDS

The Financial Services Authority (FSA) has issued proposals aimed at ensuring the financial soundness of firms by strengthening the prudential regime.

The consultation paper sets out the FSA’s proposals for implementing changes that are required following amendments to the EU Capital Requirements Directive.

The wide range of changes address some of the lessons learned from the financial crisis and follows up on aspects of the Turner Review.

The proposals include:

• Improving the quality of firms’ capital by establishing clear EU-wide criteria for assessing the eligibility of hybrid capital to be counted as part of a firm’s overall capital. The proposals specify the features that hybrid capital must have regarding permanence, flexibility of payments and loss absorbency to be eligible as tier one capital;

• Strengthening the capital requirements for the trading book to ensure that a firm’s assessment of the risks connected with its trading book better reflects the potential losses from adverse market movements in stressed conditions;

• Enhancing the management of large exposures by restricting a firm’s lending beyond a certain limit to any one party;

• Improving the risk management of securitisation, including a requirement to ensure that a firm does not invest in a securitisation unless the originator retains an economic interest; so called ‘skin in the game;

• Imposing higher capital requirements for re-securitisations to make sure that firms take proper account of the risks of investing in such complex financial products; and

• Upgrading disclosure standards to increase market confidence.

The consultation period closes on 10 March 2010. The FSA plans to issue feedback to this consultation together with a policy statement confirming the final rules later on in 2010.

The rules must come into effect on 1 January 2011.


Source: Financial Services Authority

FSA Website

FSA – STRENGTHENS STRESS TESTING REGIME

The Financial Services Authority has strengthened its stress testing regime by requiring firms to improve their stress testing capability, enhance their capital planning stress testing and by introducing a reverse stress testing requirement for firms.

The FSA’s integrated approach to stress testing consists of three main elements:

• Firms' own stress testing – The FSA expects firms to develop, implement and action a robust and effective stress testing programme which assesses their ability to meet capital and liquidity requirements in stressed conditions, as a key component of effective risk management.

• FSA stress testing of specific firms – As part of its more intrusive supervisory approach the FSA runs its own stress tests on a periodic basis for a number of firms. This is carried out regularly for specific high impact firms and for other firms as the need arises, to assess their ability to meet minimum specified capital levels throughout a stress period.

• Simultaneous system-wide stress testing – This is undertaken by firms using a common scenario for the purposes of specific system-wide analysis for financial stability purposes.

The FSA is taking steps now to strengthen all elements of its stress testing approach although the changes mentioned in the policy statement refer to firms’ own stress testing. The FSA will be recommending scenarios to help firms improve capital planning in 2010.

Reverse stress testing will sit alongside the current range of stress tests that firms are required to carry out to ensure that firms identify and assess scenarios most likely to cause their current business models to become unviable. Firms subject to the new reverse stress testing requirement will have 12 months to incorporate reverse stress testing into their current suite of stress tests and risk management tools.

Alongside the policy statement, the FSA published a short consultation paper clarifying its approach to capital planning buffers (CPB). The CPB is the amount of capital that a firm should hold now so that it is available to absorb losses and meet higher capital requirements in adverse external circumstances such as an economic downturn.

The FSA is consulting on simplifying its approach and has provided further clarity about expectations on the use of the CPB and the mechanism by which firms can draw down the buffer. This is an initial step in improving firm’s capital ahead of international discussions which will take place in 2010.

The consultation period closes on 31 March 2010.


Source: Financial Services Authority

FSA Website

FSA – PRODUCES MORTGAGE LENDERS ROUND-UP

This included comments on the Mortgage Market Review speech by Jon Pain on going “back to basics” on responsible lending, cultural change needed for reform, macro-prudential tools vital to future financial stability, how to deal with “too big to fail” and some enforcement news such as the GMAC fine on the grounds of not treating customers fairly.


Source: Financial Services Authority

FSA Website

FSA – ANALYSIS OF ACTIVITY IN THE ENERGY MARKETS 2009

For the eighth successive year, the FSA has written to energy market brokers to ask for information about trading volumes and values in the gas, power, coal and emissions markets.

They aim to gather information on market size, favoured routes to market, the size of the market and to help assess firms’ potential market impacts. This information also helps to focus efforts in identifying risks to the market through FSA’s market surveillance programmes.

The findings are set out in the report.


Source: Financial Services Authority

FSA Website

FSA AND OFT – DELIVERING BETTER REGULATORY OUTCOMES

The Financial Services Authority and Office of Fair Trading have published a joint action plan on delivering better regulatory outcomes and a Memorandum of Understanding on the same subject.


Source: Financial Services Authority

FSA Website

ABI – NEW STANDARDS FOR PRE-RETIREMENT WAKE-UP PACKS

The ABI has published updated guidance to help pension providers deliver further improvements to the ‘wake-up’ packs sent to pension customers as they approach their retirement date.

‘Wake-up’ packs contain vital information for people with defined contribution pension policies, aimed at helping them decide how to take their benefits. This includes key messages such as the right to shop around using the Open Market Option (OMO), and sets out in simple language the different types of annuity available.

The new guidance builds on the success of a 2008 ABI guide, and incorporates feedback from extensive customer testing of ‘wake-up’ packs and their impact on consumers’ understanding of the OMO and key retirement options.

The enhancements include:

• Clear prompts for customers about the importance of reading the wake-up pack.

• Greater emphasis on the importance and benefits of shopping around.

• Clarity on the timeline for taking benefits, whether through the OMO or not.

• Prominent promotion of the Pension Advisory Service’s online financial planner.

• Encouragement for providers to consider earlier customer communications, at an earlier stage than the usual four or six month wake-up pack.

• New standards to improve OMO transfer processes


Source: Association of British Insurers

ABI Website

ABI – TREASURY SHOULD RECOGNISE THE DIFFERENCES IN THE FINANCIAL SECTOR

Responding to HM Treasury’s discussion document report, Risk, reward and responsibility: the financial sector and society, Peter Vipond, the ABI’s Director of Financial Regulation and Tax, said:

“Yet again, the Government is suggesting sweeping reforms of the financial sector with no recognition of the differences between banking and other financial organisations. Insurers and banks have very different business models and should not be treated in the same way. Insurers did not cause the financial crisis and have emerged from it with their business intact and with no disruption to its customers.

“It is particularly worrying that a proposed ‘systemic risk scheme’ would look for contributions from non-banking financial organisations to pay for future bank rescues. This is despite no UK-based insurers having received Government money in this crisis. We dispute this idea is workable or to the benefit of insurance industry customers or shareholders.

“The Treasury is right to stress that a Tobin tax can only work if adopted internationally. Without global agreement, this could harm the UK economy.”


Source: Association of British Insurers

ABI Website

CML – LOANS FOR HOUSE PURCHASES AT THEIR HIGHEST FOR TWO YEARS

The number of loans for house purchase in the UK reached 55,000 in October, its highest level since December 2007, according to new data released by the Council of Mortgage Lenders.

The amount of buyers has risen from a trough in January 2009 when only 23,000 loans were advanced. It is now up 140% from that low point.

However, this pattern of increase is not repeated with loans for remortgaging which have stayed static for two months at 33,000. Apart from a total of 30,000 in August 2009, remortgaging is at its lowest level since this run of data began in 2002.

Borrowers are turning to trackers mainly because they now have greater expectation that interest rates will stay at, or near, their current low for a while to come. That, coupled with lenders pricing their trackers at lower rates than their fixes, makes trackers very appealing to those able to meet the criteria necessary to take advantage of them.

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

“We are still in a two-speed mortgage market. It appears that low interest rates for those with substantial deposits, coupled with this year’s sustained increases in house prices, are encouraging more people to buy or move home. But the same low interest rates that are driving house purchase activity provide little incentive for borrowers to refinance their loans. This, coupled with ongoing tightness in lending criteria, continues to hold back the remortgage market."


Source: Council of Mortgage Lenders

CML Website