FSA – NEW FRAMEWORK FOR FINANCIAL PENALTY-SETTING

The Financial Services Authority (FSA) has published its new penalties policy, which establishes a consistent and more transparent framework for the calculation of financial penalties, and which could see enforcement fines treble in size. Under the new framework, fines will be linked more closely to income and be based on:

• Up to 20% of a firm’s revenue from the product or business area linked to the breach over the relevant period;

• Up to 40% of an individual’s salary and benefits (including bonuses) from their job relating to the breach in non-market abuse cases; and

• A minimum starting point of £100,000 for individuals in serious market abuse cases.

The new policy supports the FSA’s ongoing commitment to the principle of credible deterrence and the improvement of standards within firms in relation to market misconduct and their dealings with customers. The imposition of harder hitting financial penalties which better reflect the scale of a firm’s wrongdoing will become a feature of enforcement activity in the future.

The FSA’s Policy Statement, ‘Enforcement Financial Penalties’, creates a new and structured five-step penalty-setting framework. This has been established following a period of consultation with the industry subsequent to the publication of a Consultation Paper in July 2009. The new framework is based on the three principles of disgorgement, discipline and deterrence and consists of the following steps:

1. Removing any profits made from the misconduct;

2. Setting a figure to reflect the seriousness of the breach;

3. Considering any aggravating and mitigating factors;

4. Achieving the appropriate deterrent effect; and

5. Applying any settlement discount.

The Policy Statement also:

• Sets out a new policy in relation to the circumstances when the FSA may reduce a fine because of its financial impact; and

• Clarifies the situations in which the FSA may publicise enforcement action in criminal cases bringing the FSA’s approach in line with other agencies.

Margaret Cole, FSA director of enforcement and financial crime, said:

"Despite industry opposition we have decided to implement these proposals as we believe enforcement penalties are a powerful tool to help change behaviour in the industry. We imposed record fines in 2009, but this new approach further amplifies the deterrent effect of our penalties and sends a powerful message to firms which makes it clear that non-compliant behaviour will not be tolerated. We are committed to our enforcement philosophy of credible deterrence and will continue to focus on those cases that can make a real difference, both to consumers and markets."

"We have repeatedly seen breaches in particular areas where insufficient account has been taken of previous enforcement action. As well as delivering increased levels of fines, we believe that our new framework offers substantially more clarity and transparency around the penalty-setting process and will reap rewards in terms of an increase in compliant behaviour."

The new penalty regime will come into force on 6 March 2010 and will apply to any breaches which occur on or after this date.


Source: Financial Services Authority

FSA Website

FSA – RSM TENON FINED £700,000 FOR FAILINGS RELATING TO LEHMAN-BACKED STRUCTURED PRODUCT SALES

The Financial Services Authority (FSA) has fined RSM Tenon Financial Services Limited (Tenon) £700,000 for significant failings in its advice and sales processes relating to Lehman-backed structured products, and for having poor systems and controls to prevent unsuitable advice in its structured product and pension switching business.

This is the first enforcement action resulting from the FSA’s review of the marketing and distribution of structured products, particularly those backed by Lehman Brothers, concluded in October 2009. The FSA found that, in relation to its sales of Lehman-backed structured products between November 2007 and August 2008, Tenon failed to treat some of its customers fairly. It breached Principle 3 of the FSA’s Principles for Businesses by failing to take reasonable care to organise and control its affairs responsibly and effectively, and Principle 9 by failing to take reasonable care to ensure the suitability of its advice to its customers.

Specifically, the FSA found that Tenon;

• Failed to fully assess the risks of structured products and ensure advisers considered those risks when providing advice to customers;

• Failed to provide suitable advice to its customers and/or failed to demonstrate the suitability of its advice by recording insufficient personal and financial information on customers’ files; and

• Failed to implement and maintain appropriate compliance monitoring to control the use of non-compliant direct offer financial promotions.

In addition, in relation to Tenon’s structured products and pension switching business more generally, the FSA found that the firm failed to have effective risk management systems in place to manage and control its affairs – and ultimately failed to prevent or minimise the risk of unsuitable sales.

Margaret Cole, FSA director of enforcement and financial crime, said:

"Firms giving investment advice must ensure they fully assess clients’ needs and make suitable recommendations – they must also have the necessary systems and controls in place to demonstrate this. We take failure in this area very seriously and the fine and other actions announced today demonstrate our commitment to credible deterrence."

"This is the first action we have taken for advice failings relating to Lehman-backed structured products following our recent review, and we acted swiftly and decisively in order to return money to investors as quickly as possible. We will continue to take tough action where we find evidence that firms are giving unsuitable advice to investors."

Tenon co-operated fully with the FSA and agreed to settle at an early stage of the FSA's investigation, therefore qualifying for a 30% reduction in penalty. Were it not for this discount, the FSA would have imposed a financial penalty of £1m.

Are you worried if your systems and controls are adequate and indeed appropriate to your business activities?

To find out how Risk Frameworker can enable you to undertake a holistic assessment of your systems and controls and thus identify areas where compliance risks could crystallise please call 020 7645 8808 and ask for a demonstration.


Source: Financial Services Authority

FSA Website

FSA – ASSESSING POSSIBLE SOURCES OF SYSTEMIC RISK FROM HEDGE FUNDS - A REPORT ON THE FINDINGS OF THE HEDGE FUND AS COUNTERPARTY SURVEY AND HEDGE FUND SURVEY

FSA have acknowledged that they have an important role to play in assessing and mitigating systemic risk as they carry out their supervisory and regulatory functions. It has been suggested that hedge funds could pose a source of systemic risk to the financial system and this paper describes some of the survey work FSA have carried out to address the issue.

FSA believe that, in the case of hedge funds, systemic risk could arise through two main channels:

1. The credit channel

If hedge funds suffer losses on their investments, then once investors’ capital has been eroded, losses would be borne by creditors. Where the failing fund is large, or there are a number of funds involved, then this could destabilise creditors, who might be systemically important in their own right.

2. The market channel

In a number of asset classes, hedge funds may be significant investors and/or providers of liquidity. As a result, it is possible for their collective impact to be one of the drivers of unsustainable asset price upswings in certain markets. And, in particular, in moments of financial crisis, forced selling by hedge funds may cause downward price adjustments to overshoot.


Source: Financial Services Authority

FSA Website

FSA – TRADED LIFE POLICY INVESTMENTS

Speech by Peter Smith, Head of Investments Policy, Conduct Policy Division, FSA to the European Life Settlement Association, London.

Topics covered included:

• The FSA’s approach to regulation
• Risks and issues
• Longevity risk
• Volatility of returns
• Liquidity risk
• Counterparty risk
• Potential for loss
• Treating customers fairly
• Misleading financial promotions
• Unsuitable sales by intermediaries
• Conclusions and expectations


Source: Financial Services Authority

FSA Website

FSA – REGULATORY CHALLENGES AND DEVELOPMENTS IN THE BOND MARKET

Speech by Sally Dewar, Managing Director, Risk, FSA
Euromoney Bond Investors Congress, The Brewery, London.

Topics covered included:

• Bond market conditions review
• Addressing transparency – corporate bonds
• Retail bond market access
• European Prospectus Directive
• Non-traditional funding
• Enhancing the quality of credit ratings
• 2010 and beyond


Source: Financial Services Authority

FSA Website

FSA – EVALUATING THE PROSPECTS FOR THE UK AND EUROPEAN MARKET UNDER THE AIM MANAGERS DIRECTIVE

Speech by Dan Waters, Director, Conduct Risk, and Asset Management Sector Leader, Euromoney AIFM Directive conference.

Topics covered included:

• The FSA’s views on the Directive
• EU Council negotiations
• EU Parliamentary negotiations
• Adoption of the Directive
• Hedge funds and systemic risk


Source: Financial Services Authority

FSA Website

FSA – LISTING REGIME FEEDBACK

This Policy Statement provides a summary of the feedback, FSA policy decisions and the final rules concerning two Consultation Papers: CP09/24, Listing Regime review: Policy Statement for CP08/21 and further minor consultation; and CP09/28, Listing Regime review: Consultation on changes to the listing categories consequent to CP09/24.

CP09/24 is the FSA Policy Statement that set out the amendments to the Listing Rules to implement the main changes to the Listing Regime, as set out in CP08/21.

These included:

• Restructuring the regime into two listing segments – Premium and Standard. Premium denotes the more stringent super-equivalent requirements and Standard is based on EU-minimum standards;

• Further sub-dividing these segments into listing categories under which each listed security will be admitted to listing;

• Strengthening corporate governance standards for overseas companies; and

• Opening the Standard Listing segment to UK companies to provide a level playing field.


Source: Financial Services Authority

FSA Website

FSA – FUNDS OF ALTERNATIVE INVESTMENT FUNDS

In 2005 FSA published a Discussion Paper (DP05/3) where they examined the rapidly changing world of retail investments and risks, and whether their existing regime gave the appropriate degree of consumer protection as envisaged in the Financial Services and Markets Act 2000 (FSMA).

Feedback from this DP was published in 2006 (Feedback Statement 06/3) and this was followed up in March 2007 (Consultation Paper 07/6). This concerned the introduction of retail Funds of Alternative Investment Funds (FAIFs).


Source: Financial Services Authority

FSA Website

ABI – FOS COMPLAINTS

Responding to the publication by the Financial Ombudsman Service (FOS) of company-specific complaints data, Maggie Craig, the ABI’s Director of Consumer Strategy, said:

“It is important for consumers to have clear and meaningful information about the performance of companies who manage their insurances and investments, including how they handle complaints.

“The ABI’s own data puts complaints into clearer perspective. For example, the actual number of motor insurance complaints referred to the FOS equated to one complaint per 4,100 motor policies; one complaint per 12,700 travel insurance policies, and one complaint for every 14,700 annuity contracts. Going forward, it is important for the FOS to adopt a similar approach when publishing its complaints data. This approach will help customers to make informed choices about an individual company’s performance, and provide the right incentive for individual firms to improve their performance as necessary.”


Source: Association of British Insurers

ABI Website

FOS – LATEST COMPLAINTS DATA ON INDIVIDUAL BUSINESSES

The Financial Ombudsman Service has released its second six-monthly set of complaints data relating to individual financial businesses – including banks, insurance companies and investment firms.

The data published on the ombudsman's website covers consumer complaints handled by the ombudsman service between 1 July and 31 December 2009. The data includes both the number of complaints received about individual businesses and the percentage of complaints upheld by the ombudsman service in favour of consumers.

During this six-month period, the ombudsman service received a total of 82,136 new complaints – an increase of 18% on the 69,841 cases received in the first half of 2009. Of these new cases, 88% related to 155 financial businesses (out of more than 100,000 businesses covered by the ombudsman).

The number of new complaints about each of these individual businesses ranged from 31 to 9,952. Five financial services groups each continued to have more than 3,000 complaints each, which together accounted for 46,979 cases – over half of all the new complaints received by the ombudsman during this six-month period.

The number of new complaints against each business is likely to be affected by the business size. However, experts consulted by the ombudsman were unable to agree how size (or market share) should be taken into account, when comparing complaints statistics across the financial services sector.

The data published shows that in the second half of 2009 the ombudsman service upheld an average of 53% of complaints in favour of consumers, compared to 59% in the first half of the year. Across the 155 individual businesses included in the complaints data, this uphold rate varied substantially between 10% and 100% upheld in favour of consumers.

David Thomas – interim chief ombudsman – said:

“While the number of cases referred by consumers to the ombudsman has continued to increase substantially, it’s encouraging to see that some businesses are committed to handling complaints better.

However, there is evidently still room for significant improvement in the way other financial businesses handle complaints – judged by the proportion of cases where we overturn the decision that the businesses have themselves come to in their own earlier investigation of their customer complaints.

The data we have released today clearly shows that some businesses still need to do more to ensure that they deal with their customers’ complaints effectively and fairly – so that consumers do not then need to escalate their dissatisfaction to the ombudsman. We hope that businesses will continue to use this data to focus their attention on addressing these key complaints-handling issues over the coming months and years.”


Source: Financial Ombudsman Service

FOS Website