FSA

FSA Guidance on Proportionality in Relation to its Remuneration Code

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On September 25 the FSA published Finalised Guidance 12/19: General guidance on Proportionality: The Remuneration Code (SYSC 19A) & Pillar 3 disclosures on remuneration (BIPRU 11) (FG12/19).

The Remuneration Code (the “Code”) regulates the way in which financial services firms remunerate their staff. Firms are required to apply the Code in a way that is proportionate to their size, internal organisation and the nature, scope and complexity of their activities. The FSA provides guidance which sets out a framework of what it considers to be a proportionate application of the Code to different sized firms. Prior to the publication of FG 12/19, the FSA’s guidance placed each firm into one of four proportionality tiers, determined by its capital resources.  

FG 12/19 replaces the old four-tiered proportionality structure with a new framework. In the new framework each firm will be placed into one of three proportionality levels, determined by its total assets.

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

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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.

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

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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.

Consultation on Non-EEA National Depositor Preference Regimes

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The FSA has published a consultation paper looking at the implications of non-EEA national depositor preference regimes which prioritise the claims of home-country depositors over those of depositors outside the home country if a firm becomes insolvent.

The proposed new FSA rules would prohibit firms from non-EEA  countries that operate such regimes from accepting deposits through a UK branch, unless measures are introduced to eliminate the disadvantage to UK depositors caused by the subordination of their claims in favour of home country depositors.

It is intended that the new rules will be in place by January 2013, with a compliance deadline of January 2015.

FSA Consults on Proposals to Change Client Money and Custody Assets Regime

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On 6 September 2012, the FSA published a consultation and discussion paper proposing changes to the client money and custody assets regime for firms undertaking investment business.  The paper is split into three parts:

   I.        A consultation on changes to the FSA’s client assets regime to bring them into line with EMIR’s segregation and portability requirements. 

II.        The introduction of proposals to permit investment firms to operate multiple client money pools that will be legally and operationally separate. 

III.        An overview of the FSA’s review of its client assets regime, focusing on ways to improve the regime in the event that an investment firm becomes insolvent.

The proposed introduction of client money sub-pools is considered by the FSA to potentially be the most radical change in the client assets regime in over two decades.

The deadline for comments on Part I is 16 October 2012, with comments on Parts II and III required by 30 November 2012.  The FSA anticipates the publication of a feedback statement on Part I during December 2012, with feedback on Parts II and III to be provided in the first half of 2013.

FSA Publishes a Guidance Consultation on the Risks to Customers from Financial Incentives

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On 5 September 2012, the FSA published a guidance consultation on the risks to customers from financial incentives (GC 12/11). 

GC 12/11 includes proposed guidance for firms on:

  •  incentive scheme features that increase the risk of mis-selling; and
  • managing the risks and governance of incentive schemes.

The publication of GC 12/11 marks the launch of what the FSA is calling its initiative to outlaw flawed sales bonuses that encourage mis-selling and was accompanied by the publication of a speech by Martin Wheatley (Managing Director, FSA and chief executive officer designate, FCA) entitled ‘The incentivisation of sales staff – are consumers getting a fair deal?’.  In his speech Mr. Wheatley explained that the FSA’s initiative – in which he would be taking a lead role – was aimed at ensuring that financial institutions view their customers as people to be served, as opposed to people “to sell to”.

 The FSA invites firms to respond to GC 12/11 by 31 October 2012.

FSA to Commence Further Thematic Work on Wealth Management

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 On August 29, the FSA published a statement saying that it has launched further thematic work into the wealth management sector. Statement. 

Following a review of a sample of wealth management firms, in June 2011, the FSA wrote “Dear CEO” letters to all Chief Executive Officers of firms that offer wealth management services to retail clients highlighting that the FSA’s work had identified “significant, widespread failings” in the industry.

The FSA will interview key individuals from firms that formed part of its previous work to review the approach firms have taken to remediate problems identified in client portfolios and to assess whether they have taken sufficient steps in identifying and dealing with past detriment that consumers may have suffered.

Following these interviews the FSA will consider whether to take any regulatory action. The FSA will publish its report in 2013.

FSA Consultation Paper on the EU Short Selling Regulation

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On August 30, the FSA published a consultation paper on the proposed amendments to the FSA Handbook relating to the EU Short Selling Regulation (SSR), which will apply from November 1. CP12/21. 

The consultation paper proposes the repeal of the UK’s current short selling regime contained in FINMAR 2 and sets out how the UK will implement the SSR in the UK.  Responses should be submitted by September 20.

FSA Consultation Paper on Restricting the Retail Distribution of UCIS

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On August 22, the FSA published a consultation paper on restrictions on the retail distribution of unregulated collective investment schemes (UCIS) and close substitutes. CP12/19. 

In CP 12/19, the FSA outlines proposals to ban the promotion of UCIS and close substitutes to most ordinary UK retail investors. As providing financial advice generally includes making a financial promotion, by limiting the promotion of UCIS the FSA aims to limit the number of retail clients being wrongly advised to invest in UCIS.

Highlights include:

  • changing the financial promotion rules to limit the type of customer to whom firms may promote financial promotions for UCIS and closely substitutable investments;
  • Handbook guidance on the effect of the financial promotion rules on advised sales to clarify that personal recommendations generally amount to a financial promotion and, as a result of the marketing restrictions, advice on a non-mainstream pooled investment may result in an unlawful promotion if no valid exemption is available; and
  • updating the retail investment product definition to clarify the position on advice on UCIS and substitutable products in relation to Retail Distribution Review independence requirements.

Comments can be made on the proposals until November 14.

In keeping with its regulatory objective of protecting consumers, on August 17, the FSA published final notices issued to Richard Rhys and Anthony Adams, both former directors of MNFA Ltd (in liquidation), for their involvement in mis-selling a UCIS. Final Notice for Mr. Rhys.  Final Notice for Mr. Adams.    

Confiscation Orders Made Against Investment Banker and Wife Convicted of Insider Dealing

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On August 20, Confiscation Orders (the Orders) totalling £1,534,000 were made against Christian Littlewood, a former Dresdner Kleinwort Wasserstein investment banker, and his wife Angie Littlewood. Press Release. 

The couple used inside information obtained through his employment to facilitate the placing of trades in eight separate stocks just prior to announcements to the market and were convicted and sentenced for insider dealing in February 2011.

The confiscation regime under the Proceeds of Crime Act 2002 (POCA) allows the court to assume that the proceeds of other trading that took place within the same period as the insider dealing represents the proceeds of crime. Both Mr and Mrs Littlewood have been ordered to pay £767,000, representing the benefit each obtained from insider dealing.

This is an example of the FSA’s increasingly tougher sanctions towards insider dealing. Tracey McDermott, director of enforcement and financial crime said “The Orders made today, coupled with the sentences previously imposed, should make it clear that insider dealing does not pay.”