FSA Consults on FCA Publication of Warning Notices

On March 18, the FSA published a consultation paper (CP13/8) setting out proposals on how the Financial Conduct Authority (FCA) will use its new power under section 391(1)(c) of the Financial Services and Markets Act 2000 (FSMA) to publish information about the matter to which a warning notice relates.

The consultation paper stated that the FCA will consider each case on its merits but will generally publish a statement where it has issued a warning notice to which the power under section 391(1)(c) applies. When considering whether a publication would be unfair to the person against whom the action is proposed to be taken, the FCA will consider whether the person is an individual or a firm and to what extent they have been made aware of the case against them.  Information about the warning notice will be published in a statement by the FCA.  The statement will not normally contain details of any proposed sanctions, and if the FCA does intend to publish a warning notice statement, the person to whom the notice is given or copied will be consulted.

OFT Annual Plan for 2013/14: Financial Services Implications

On March 21, the OFT published its annual plan setting out its priorities for 2013/14.  The OFT stated that it does not intend to make any fundamental changes to the themes for 2013/14 but that the following financial services-related issues were of importance:

  • Consumer credit enforcement.  The OFT intends to scrutinize applications from businesses wishing to operate in high risk areas.  It also intends to implement its consumer credit enforcement tools where there is an urgent need to protect the interests of consumers.
  • Payday lending sector.  The OFT has noted the widespread failure of the payday lending sector to comply with the law and OFT guidance and intends to implement a number of actions in response.
  • Supporting transition to the Financial Conduct Authority (FCA).  The OFT has also announced that the transfer of the OFT’s consumer credit responsibility to the FCA is expected to take effect from April 2014, and that it will be working with the FCA to ensure an effective transition.  The OFT will also assist with establishing the FCA’s interim permissions regime and ensure that any OFT-initiated enforcement action can be carried on and concluded by the FCA. The OFT is also developing a memorandum of understanding which will clearly set out the roles of the OFT and FCA.

Implications of the UK 2013 Budget for Investment Funds

The 2013 budget, delivered by the U.K.’s Chancellor of the Exchequer, George Osborne on March 20, incorporated a number of provisions affecting investment funds, which are included in a UK investment management strategy.

The U.K. government announced a package of measures in areas of taxation, regulation and marketing, designed to make the UK one of the most competitive places in the world for investment funds.

Regarding taxation, stamp duty reserve tax is to be abolished by 2014/15, and withholding rules for bond fund interest distributions are to be altered to make these funds more attractive to foreign investors.  Changes will also be made to tax provisions on the residency status of offshore UCITS, the investment manager’s exemption and tax transparent funds.

For regulation, the strategy paper states that the FSA has agreed to actively engage with the fund management industry to streamline and improve the efficiency of the fund authorization process.

Finally, on marketing strategy, the U.K. government has stated that it will introduce a one-stop shop service for fund managers wishing to set up in the UK, through collaboration with TheCityUK and the Investment Management Association.

European Agreement on Creation of a Single Supervisory Mechanism

An agreement has been reached on the way the European Central Bank (ECB) will be responsible for the supervision of banks within the framework of the single supervisory mechanism.

The agreement, made between the Council of the EU, the European Commission and the European Parliament (EP), was announced in a press release.  Billed as being the first step towards a European banking union, the press release summarizes areas where the EP pushed through changes to improve democratic accountability, including a stronger role for national parliaments, a strict division of the ECB between monetary policy and supervision and stronger accountability of the supervisor by the EP.

The next step in the process towards the single supervisory mechanism will be the formal ratification of the agreement by the EP.

Prudential Sues Bank of America Over $2 Billion in RMBS

On March 14, several Prudential entities filed suit in the United States District Court for the District of New Jersey against several Bank of America and Merrill Lynch entities in connection with Prudential’s investments in more than $2 billion in RMBS sold by the Defendants.  The Complaint alleges that the Defendants made knowingly false statements of material fact and omissions regarding compliance with underwriting guidelines, omissions regarding due diligence results and misrepresentations as to owner-occupancy rates, appraisals, loan-to-value ratios, assignments of the loans underlying the securities to the trusts and the credit ratings of the securities.  Prudential asserts causes of action for common-law fraud and fraudulent inducement, aiding and abetting fraud and fraudulent inducement, equitable fraud, negligent misrepresentation, violations of New Jersey’s civil RICO statute and violations of sections 11 and 12(a)(2) of the Securities Act of 1933.  Complaint.

Court Grants in Part Motions to Dismiss Allstate RMBS Lawsuits

On March 15, Judge Eileen Bransten of the Supreme Court of the State of New York granted in part and denied in part motions to dismiss brought by Merrill Lynch, Deutsche Bank and Morgan Stanley entities (together Defendants) in respective lawsuits brought against them by certain Allstate entities related to Allstate’s purchases of RMBS.  The court dismissed Allstate’s negligent misrepresentation claim against all Defendants, concluding that Allstate had not alleged either that Defendants had the required specialized knowledge or that Defendants had a special or privity-like relationship with Allstate.  The court also dismissed all claims as to two of the Deutsche Bank certificates and federal securities claims against Merrill Lynch as untimely, but rejected Defendants’ arguments that other claims were untimely.  The court denied Defendants’ motions to dismiss as to Allstate’s fraud claims.  The court also concluded that Defendants can face liability for distributing statements they allegedly knew to be false, even if the statements were originally made by third parties, such as originators or rating agencies.  Deutsche Bank Order; Merrill Order; Morgan Stanley Order.

SEC Charges Private Equity Firm, Former Executive, and Consultant for Improperly Soliciting Investments

On March 11, the SEC announced charges against a private equity firm, a former senior executive of the firm and an individual based solely on the allegation that the individual acted as an unregistered broker-dealer in violation of the Securities Exchange Act of 1934.  The parties agreed to settle the charges.  The significance of this action is that the SEC did not allege that the parties defrauded clients, but rather only that the individual, who purported to be a “finder” (and not a broker-dealer), engaged in activities that went far beyond merely making initial introductions and, therefore, should have been registered.  In turn, the SEC’s order found that the private equity firm “caused” the violation and that the former executive who oversaw the marketing efforts “aided and abetted and caused” the individual’s violation of the registration requirements of the Exchange Act.  SEC Press Release.

On March 20, Moody’s released its methodology for U.S. State revolving fund debt.  Moody’s Report. 

On March 18, Moody’s released implementation guidance for the temporary use of cash in structured finance transactions.  Moody’s Report. 

On March 18, Moody’s released its approach to rating railcar leasing ABS.  Moody’s Report. 

On March 18, Fitch published criteria for assigning issue level ratings to debt and/or preferred securities issued by closed-end funds outside the U.S.  Fitch Report. 

On March 15, S&P released methodology for forecasting operating assumptions for the U.S. merchant power sector.  S&P Report. 

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CFPB Proposed Rule for Nonbank Student Loan Servicers

On March 14, the CFPB proposed a rule that would allow it to federally supervise certain nonbank student loan servicers.  The CFPB currently oversees student loan servicing at larger banks.  The rule would define certain nonbank student loan servicers as “larger participants” and would allow the Bureau to oversee their activity for compliance with federal consumer financial laws.  CFPB Release.