FSA Fines IFA Network Firm in Relation to Misselling of High Risk Products

The FSA has published a final notice (dated September 18) issued to Pi Financial Limited, an IFA network firm.  The notice imposed a fine of £58,300 for failures in relation to systemic weaknesses in Pi’s systems and controls, and the suitability of advice given to clients.  Had Pi not settled at an early stage, the fine would have been £83,363.

Pi was found to have breached Principles 3 (management and control) and 9 (customer’s relationships of trust) of the FSA’s Principles for Business.  In respect of Principle 3, Pi had failed to take reasonable steps to organise and control its affairs in a responsible and effective manner.  Specific areas of failure included sales monitoring, training and supervision of advisers, and compliance and file checking arrangements.  In respect of Principle 9, Pi was found to have lacked reasonable care in advising its clients. In particular, none of its recommendations to invest in unregulated collective investment schemes (UCIS) or structured products was considered suitable for the clients concerned.

Pi’s failures were considered to be aggravated, due to previous concerns having been raised by the FSA regarding systems and controls, and the availability of extensive guidance on ensuring product suitability in relation to the products Pi had advised on.  However, the FSA also commented that Pi’s failings were partially mitigated, as it had attempted to address the FSA’s concerns and had voluntarily varied its permission such that it can now no longer arrange or promote UCIS.

HM Treasury Consultation Paper on the Macroprudential Directive Tools of the FPC

HM Treasury has published a consultation paper on the tools available to the Financial Policy Committee (FPC) to address systemic risks to the stability of the financial system entitled ‘The Financial Services Bill: the Financial Policy Committee’s macro-prudential tools’ (the “Consultation Paper”).

The Financial Service Bill provides the FPC with two primary powers.  The first of these is the power to make recommendations (which can be made on a comply-or-explain basis) to the Prudential Regulation Authority (PRA), the Financial Conduct Authority (FCA), the Treasury and the Bank of England.  The second is the power to direct the PRA and FCA to take action, and the tools that the PRA should have under this power (the “directive tools”) are the subject of the Consultation Paper.

In December 2011, the Bank of England published a discussion paper entitled ‘Instruments of Macroprudential Policy’.  The Consultation Paper builds on the responses to the discussion paper and proposes directive tools that the FPC should have, including:

  • o    control over the level of the UK’s counter-cyclical capital buffer;
  • o    a direction-making power to impose sectoral capital requirements; and
  • o    once international standards are in place, the power to set, and vary over time, a leverage ratio cap.

HM Treasury invites responses to its Consultation Paper by December 11.

ESMA Consultation Paper on Draft Guidelines for the Exemption of Market Making Activities under the Short Selling Regulation

ESMA has published a consultation paper on its draft guidelines in relation to the exemption for market making activities and primary dealer operations under the Regulation on short selling and certain aspects of Credit Default Swaps (the “Regulation”).  Certain market making activities (as defined under Article 2.1 of the Regulation) enjoy exemptions (under Article 17 of the Regulation) from net short position transparency requirements and the restrictions on uncovered short sales.  ESMA is consulting on the scope and definition of market making activities and how the exemption of such activities should be applied in practice.

ESMA’s consultation includes questions on:

  • the definition and scope of the exemption for market making activities;
  • determination of the competent authority that should be notified;
  • the general principles applicable to persons intending to make use of the exemption; and
  • the qualifying criteria of eligibility for the exemption.

ESMA invites responses to its consultation paper by October 5.

ESMA Consultation on Guidelines on Remuneration Policies and Practices under MiFID

On September 17, the European Securities and Markets Association (ESMA) published a consultation paper on proposed guidelines on remuneration policies and practices under MiFID.

The proposed guidelines are intended to enhance the implementation of MiFID’s existing conduct of business and conflicts of interests rules in relation to remuneration, with a view to improving investor protection.

The guidelines focus on:

  • the governance and structure of remuneration policies and practices in the context of existing MiFID requirements; and
  • the control of risks created by remuneration policies and practices.

The deadline for comments is December 7, with a final report and guidelines expected to be published by Q2 of 2013.

When a “Public Offering” Is Not a “Public Offering”: The SEC Rule Proposal Eliminating the Ban on General Solicitation and Advertising in Securities Offerings

On April 5, 2012, the Jumpstart Our Business Startups Act (the “JOBS Act”) was enacted.  The stated objective for the JOBS Act is to improve access to the public capital markets for startup and emerging companies and thus increase job creation and economic growth in the United States.  Click here to read more.

OCC Guidance on 1- to 4-Family Residential Real Estate

On September 17, the OCC issued guidance to national banks and federal savings associations on risk management practices for investor-owned, one- to four-family residential real estate lending where the primary repayment source for the loan is rental income.  The guidance includes: (i) credit risk management expectations; (ii) loan underwriting standards; (iii) loan identification and portfolio monitoring expectations; (iv) allowance for loan and lease losses considerations; (v) internal risk assessment and rating systems; and (vi) regulatory reporting, HOLA, and risk-based capital treatment.  OCC Release.

FHFA Request for Comment on State-Level Guarantee Fee Pricing

On September 20, the FHFA released a notice presenting an approach to adjust the guarantee fees that Fannie Mae and Freddie Mac charge on single-family mortgages in states where costs related to foreclosure practices are statistically higher than the national average.  FHFA expects to direct Fannie and Freddie to implement pricing adjustments in 2013.  Comments must be submitted within 60 days after publication in the Federal Register.  FHFA Release.  Federal Register Notice.

Global Financial Markets Association Letter Outlining Principles for Financial Benchmarks

On September 7,  the Global Financial Markets Association (GFMA) published a letter setting out principles that it proposes to assist in the setting of global financial benchmarks such as LIBOR. The principles outline a set of best practice standards for conducting benchmark price assessments. The principles state that the overall responsibility for the benchmark process lies with the entity or group that develops and issues the benchmark (the “sponsor”). The Principles are grounded in three fundamental sponsor obligations, which GFMA believe should be applied in a manner commensurate with the significance of the benchmark:

  • Governance: A sponsor should ensure that there is an appropriate governance structure for oversight of the benchmark;
  • Benchmark Methodology and Quality: A sponsor should employ sound design standards in devising the benchmark and ongoing processes related to its operations; and

Controls: A sponsor should ensure that there is an appropriate system of controls promoting the efficient and sound operation of the benchmark process and should implement such a system of controls.

Consultation on the Authorisation and Supervision Regimes Proposed under the UK’s New Supervisory Structure

On September 12, the FSA published a consultation paper entitled ‘Regulatory Reform: PRA and FCA regimes relating to aspects of authorisation and supervision’ (CP12/24). CP12/24 relates to the creation of the PRA and the FCA that will, along with the FPC, replace the FSA. The PRA and FCA will each adopt provisions from the FSA Handbook to create two new rulebooks that will come into effect when the new regulators acquire their legal powers; these new rulebooks will replace the current FSA Handbook.

In CP12/24 the FSA is consulting on substantive changes to the FSA Handbook that it proposes to make in order to ensure that sections adopted by the PRA and FCA are in line with their future objectives and functions.

The FSA’s consultation is fairly wide-ranging, but it suggests that firms may wish to focus their comments on the following proposals:

  • the updated wording of prescribed status disclosures under GEN 4;
  • the use of the regulators’ logos under GEN 5;
  • the use of Skilled Persons (SUP 5);
  • the channel for submitting waiver applications (SUP 8);
  • certain updates to the guidance on transfers of insurance business to reflect other recent changes to legislation and current practices (SUP 18); and
  • the chapter on other amendments.

The FSA is inviting firms to comment by December 12.