FSA Consultation on the Implementation of the Alternative Investment Fund Managers Directive

On November 14, the FSA published its first consultation paper regarding the transposition of the Alternative Investment Fund Managers Directive (AIFMD) into UK law.

The consultation paper sets out proposals on the following areas:

  • the prudential regime applicable to all types of alternative investment fund managers (AIFMs);
  • FSA Handbook amendments to reflect the main Level 1 requirements of the AIFMD, such as operating requirements for AIFMs, duties of AIFMs when managing funds, and transparency obligations towards both the Financial Conduct Authority and investors themselves; and
  • the regime applying to firms which act as depositaries of alternative investment funds, such as eligibility requirements, capital requirements and an independence requirement.

The deadline for consultation responses is February 1, 2013. It is anticipated that a second consultation paper will be published in February 2013.

Short Selling Regulation and Updates to FSA Handbook

On November 1, the Short Selling Regulation (SSR) came into force across the European Union. The SSR applies to the short selling of shares, sovereign debt, sovereign credit default swaps and related instruments that are admitted to trading or traded on an European Economic Area trading venue (unless they are primarily traded on a third country venue). The SSR:

  • requires holders of these net short positions to make notifications once certain thresholds have been breached;  
  • outlines restrictions on investors entering into uncovered short positions; and
  • gives powers to regulating authorities to suspend short selling or limit transactions when the price of various instruments fall by set percentage amounts from the previous day’s closing price.

In line with the coming into force of the SSR, the FSA has published policy statement 12/19 which sets out the resulting changes to the FSA’s Handbook.  These changes also came into force on November 1.

The SSR does allow for limited exemptions for certain market making activities in respect of transparency requirements and the restrictions on uncovered short sales. ESMA has consulted on its proposed guidelines in respect of these limited exemptions, and plans to publish its final guidelines by the end of November.

Approach to Implementing CRD IV Transitional Provisions – FSA Announcement

On October 30, the FSA announced its approach to implementing the transitional provisions in the proposed Capital Requirements Directive IV framework (CRD IV). The announcement, published on an FSA webpage, was made in advance of political agreement having been reached on the final CRD IV legislation, highlighting the FSA’s recognition of the importance of these measures to firms’ capital planning.

The FSA confirmed that it expects to exceed the minimum transitional standards relating to the following deductions from Common Equity Tier 1 capital:

  • deductions of interim losses in respect of firms regulated by the new Prudential Regulation Authority;
  • investment in own shares not previously removed to meet accounting standards; and
  • deferred tax assets not arising from timing differences.

A formal consultation on the proposals will be undertaken by the FSA once the final CRD IV legislation has been adopted.

FSA Rules on Data Collection on Remuneration Policies

On November 1, the FSA published policy statement 12/18 ‘Data collection on remuneration policies’ (PS12/18). PS12/18 sets out the FSA’s rules in line with the requirements in the capital requirements directive CRD3 and the EBA’s guidelines on a Benchmarking Information Report and the High Earners Report to be submitted by firms annually, and follows the FSA’s consultation CP12/18.  

The Benchmarking Information Report requires firms to provide certain information in respect of Remuneration Code Staff in their group, including the number of Code Staff in each business division and total remuneration for Code Staff in each business division broken down by fixed and variable remuneration in cash and shares.

The High Earner Report requires firms to submit data on all employees in their group (excluding subsidiaries and branches established outside the EEA) with total annual remuneration of EUR 1 million or more, and the total number of High Earners split between Code Staff and non-Code Staff in each business division.

Both reports apply to banks, building societies and investment firms, but not to BIPRU limited licence and BIPRU limited activity firms (unless these firms are part of a group that does fall in scope). Firms should file two versions of each report by December 31 – one for each of the last two complete financial years. Thereafter firms required to submit a report annually, within four months of their accounting year end.

FSA Issues Fines Totalling £250,000 for Transaction Reporting Failures

The FSA has fined two firms a total of £250,000 for failing to provide accurate and timely transaction reports to the FSA in respect of reportable transactions carried out.  The final notices in respect of Plus500UK Limited and James Sharp and Company were published on October 24 and show that between November 2007 and November 2011 the two firms failed to report a total of 1,403,000 trades accurately and failed to report 160,000 of these trades at all.  These failures were caused by the firms having inadequate systems and controls for the reporting of trades.

The FSA has stated that it views accurate transaction reports as a key tool in its efforts to tackle market abuse, and will take action to ensure firms comply with their reporting obligations.

Indication of Regulatory Expectations for Banks Currently Making LIBOR Submissions

On October 17, the FSA published a speech by Martin Wheatley (the FSA Managing Director and Chief-Executive Designate of the Financial Conduct Authority), which indicated the regulatory expectations for banks making LIBOR submissions until the new LIBOR regime is put into place.  Mr Wheatley was clear that, in the long term, there will be high-level rules and a code of conduct to govern LIBOR submissions.

LIBOR submitters should have regard to the submission guidelines set out in the Wheatley Report, and use a combination of their judgment and transaction data.

The UK government announced in a written ministerial statement that it has accepted all the recommendations made in the Wheatley Report.

The PRA’s Approach to Banking Supervision

On October 15, the Bank of England and the FSA published a joint paper on how the UK’s new prudential regulator for deposit takers and investment firms, the Prudential Regulation Authority (the PRA), will operate, entitled “The PRA’s approach to banking supervision.”  The paper is designed to provide an overall description of the PRA and the approach it will take in relation to:

  •  its objective to promote the safety and soundness of firms primarily by seeking to avoid adverse effects on financial stability (the PRA acknowledges that, while firm failures will happen, it will seek to ensure that they are orderly);
  •  the new statutory threshold requirements for firms to be permitted to carry on regulated activities;
  • judgement based and forward looking supervision; and
  • working closely with both the FCA and the Financial Policy Committee, which will be able to make recommendations and give directions to the PRA.

The paper was accompanied by a speech by Andrew Bailey, Managing Director, Prudential Business Unit of the FSA, entitled “The future of banking regulation in the UK.”

FSA Bans and Fines Former Managing Director of Welcome Financial Services Ltd for Market Abuse

The FSA published its final notice dated October 8 in relation to John Blake, the former managing director of Welcome Financial Services Ltd (Welcome).  In its final notice the FSA states that Mr. Blake engaged in market abuse, and has fined him £100,000 and banned him from performing any function relating to a regulated activity. 

Mr. Blake, together with other directors on the board of Welcome, approved Welcome’s 2007 annual report, which contained false and misleading statements.  As Welcome was at the time a subsidiary of the (as was) publically listed Cattles plc (which has since been de-listed), the false and misleading statements in the Welcome report were included in Cattles’ 2007 annual report and rights issue prospectus.  The FSA considered that Mr. Blake had been “knowingly concerned” in the failure of Welcome to take reasonable care to organise and control its affairs responsibly and effectively. 

The FSA viewed Mr. Blake’s conduct as particularly serious as it took place over a sustained period (approximately 18 months) and had a very serious impact both on Cattles’ shareholders (who lost all or virtually all of their investment) and on market confidence.

FSA Consultation on the PRA and FCA Regimes for Approved Persons

On October 3, the FSA published consultation paper 12/26 ‘Regulatory reform: the PRA and FCA regimes for Approved Persons’ (CP12/26). As part of the reform of the supervisory structure of financial services in the UK, the role and functions of the FSA will be passed over to the Prudential Regulation Authority (PRA) and Financial Conduct Authority (FCA).  The PRA and FCA will each adopt sections of the FSA Handbook to create new PRA and FCA rulebooks. Most of the FSA Handbook will be adopted in its current form. Some substantive amendments to the FSA Handbook will be made to align the new rulebooks with the future objectives and functions of the PRA and FCA.   

CP12/26 consults on these substantive amendments, most of which relate to the ‘controlled functions’ which can only be carried out by persons approved by the FSA (‘approved persons’), who must comply with the Statements of Principle and Code of Practice for Approved Persons (APER) in the FSA Handbook.  The main substantive changes consulted on by CP12/26 are:

  • o    a split of the current list of controlled functions for firms regulated by both the PRA and FCA (dual-regulated firms), seeking to minimise unnecessary duplication for dual-regulated firms; and
  • o    an extension of the Statements of Principle in APER to a wider set of activities, and their application to people approved by either regulator – meaning that both regulators will have the ability to discipline certain categories of approved person.

 The FSA invites comments by December 7.

Tribunal Upholds FSA Decision to Ban and Fine Swiss Fund Manager and Two Former Cantor Fitzgerald Traders for Market Abuse

The Upper Tribunal (Tax and Chancery Chamber) (the “Tribunal”) has directed the FSA to fine Stefan Chaligné, a Swiss-based hedge fund manager £900,000, (plus disgorgement of the financial benefit he obtained of €362,950) and Patrick Sejean, a former senior salesman on Cantor Fitzgerald Europe’s (CFE) London-based French desk £650,000. Chaligné, Sejean and a third trader, Tidiane Diallo, have in addition been banned by the FSA from performing any role in regulated financial services, at the direction of the Tribunal.

Chaligné recruited the assistance of Sejean and Diallo in manipulating the share price of securities in the hedge fund he was managing, thus increasing the value of the hedge fund on portfolio evaluation dates. This practice, known as “window dressing the close”, was achieved by Chaligné placing orders through CFE, effected and executed by Sejean and Diallo, which were designed to increase the closing price of nine securities traded on European and North American exchanges. The practical effect of his market abuse was to increase the performance and management fees paid to him by the beneficiaries of the hedge fund.

The Tribunal described this as “as serious a case of market abuse of its kind as one might conceive”.