FSA

FSA Report on Assessing Sources of Systemic Risk from Hedge Funds

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On August 22, the FSA published a report on assessing the possible sources of systemic risk from hedge funds, setting out the findings of the March 2012 hedge fund survey (HFS) and the April 2012 hedge fund as counterparty survey (HFACS). Report. 

Some of the key findings include:

  • Aggregate assets under management increased in the survey period;
  • Leverage remains largely unchanged and modest for most funds;
  • In aggregate, surveyed hedge funds report that they are able to liquidate their assets in a shorter timeframe than the period after which their liabilities would fall due; and
  • Counterparty exposures of surveyed hedge funds remain fairly concentrated among five banks.

The FSA intends to repeat the HFS in September 2012 and the HFACS in October.

FSA Approach to Implementation of Aspects of the EU Short Selling Regulation

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On August 15, the FSA published a short selling edition of its Market Watch newsletter. Newsletter No. 42, August 2012. 

Although the EU Short Selling Regulation (the ‘Regulation’) will have direct effect in the UK from November 1, certain aspects of it afford discretion to, or impose obligations on, member states to introduce operational procedures to ensure compliance by market participants.

The newsletter, which does not constitute formal FSA guidance, sets out the FSA’s proposed approach to how it will exercise that discretion in six areas of the Regulation including:

  • removing the existing UK rules on short selling by November 1, through amendments to the FSA Handbook;
  • whether it is appropriate to apply the FSA’s existing penalties policy to breaches of the short selling regime;
  • a framework for determining whether or not the FSA will exercise its powers to suspend, prohibit or limit trading in financial instruments following a significant fall in price; and
  • developing web-based solutions for the public disclosure of significant short positions.

The FSA will issue a formal consultation on proposed changes to the FSA Handbook shortly.  

FSA Censures Intermediary Firm for Financial Promotions

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On August 6, the FSA issued a final notice censuring City Gate Money Managers Ltd (City Gate), an intermediary firm, and banning its director and compliance officer, Stewart Domke, for financial promotion and other compliance failings.  Final Notice.

The FSA found that City Gate breached s.20(1)(a) FSMA as it had advised on pension transfer and income drawdown business when it did not have permission to do so. City Gate was also found to have produced a financial promotion which failed to explain in offer letters the risks of investing in the offer being promoted. Mr. Domke failed to ensure that the financial promotion issued by City Gate complied with FSA rules. The FSA withdrew his approval to perform significant influence functions and banned him from performing any significant influence function in relation to any regulated activity.

The final notice states that the FSA would have fined City Gate £180,000 had it not been in liquidation, but issued a public censure instead.

Tracey McDermott Appointed as FSA’s Permanent Director of Enforcement

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The FSA has confirmed that Tracey McDermott, the FSA’s acting head of enforcement, will become the permanent director of enforcement and financial crime.

McDermott joined the FSA as an associate in enforcement 2001, and has been acting as director since April 2011.  During her time as acting head of enforcement, she has secured 10 convictions for insider dealing and imposed the largest FSA fine to date of £59.5 million on Barclays Bank plc for attempting to manipulate the LIBOR rate.

The FSA will divide into the Prudential Regulation Authority and the Financial Conduct Authority in 2013.  McDermott’s role will transfer over to the Financial Conduct Authority.

Q&As Published on FSA’s Transition to the FCA

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On July 31, the FSA published a set of questions and answers on the transition to the new Financial Conduct Authority (“FCA”). Q&As.

The Q&As confirmed that:

  • Firms will not need to reapply for authorisation under the new regime.
  • There were be a six month transition period following confirmation of the new disclosure wording concerning firms’ regulatory status.
  • There will be little change to existing financial crime oversight and the approach to allocating fees.
  • The FCA will retain the FSA’s online notifications and applications and online regulatory reporting systems.
  • The FSA plans to publish an FCA approach document in October.

Six Found Guilty of Insider Dealing

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On July 23, the FSA published a press release announcing that six people have been convicted of offences of disclosure of inside information and dealing whilst in possession of confidential and price sensitive information in respect of six companies’ stocks. A seventh defendant, was acquitted of insider dealing. Press Release.

Between May 2006 and May 2008, the defendants obtained confidential and price-sensitive information from investment banks concerning proposed or forthcoming takeover bids. They then used this information to place spread bets ahead of those announcements knowing that when the information became public knowledge the price would rise. The defendants made a combined profit of £732,044.59. This was the longest and most complex prosecution brought by the FSA to date. On July 27, the six defendants were sentenced to jail for a total of 16 years.

FSA Fines Broker for Improper Disclosure

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On July 9, the FSA issued a final notice, stating that it has imposed a fine of £160,000 (reduced to £30,000 due to his financial circumstances) on Jay Alan Rutland for engaging in the market abuse offence of improper disclosure under section 118(3) of the Financial Services and Markets Act 2000. He had also encouraging others to engage in similar behaviour. Final Notice.

Mr. Rutland was a senior broker at Pacific Continental Securities (UK) Limited. On four occasions, he drafted and supplied sales scripts to brokers to use when selling shares which contained diluted risk warnings and risk factors. He also improperly disclosed inside information to his colleagues. He did not obtain approval from the compliance department and was aware that he should not circulate scripts which had not been approved.

Payment Services Regulations 2012 Published

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On July 11, the Payment Services Regulations 2012 were published. SI 2012/1791. The Regulations address a concern that unfit persons may currently establish or manage a small payment institution. They amend the Money Laundering Regulations 2007 (MLRs) and the Payment Services Regulations 2009 (PSRs).

The Regulations will, among other things:

  • Give the FSA the power to check that the owners and managers of small payment institutions are fit and proper persons, and that the directors and managers of such businesses are of good repute and possess the necessary knowledge and experience.
  • Give HMRC the power to strike a business off the register of money service businesses under the MLRs, if the business is providing, or is purporting to provide, a payment service, when it is not registered or authorised to do so by the FSA.

They come into force on October 1 (with the exception of the regulations relating to the consequential amendments).

Speech by Tracey McDermott on FCA’s Approach to Enforcement

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On July 2, the FSA published a speech by Tracey McDermott, acting director of the FSA’s Enforcement and Financial Crime Division. The speech focused on credible deterrence and the approach that the Financial Conduct Authority (FCA) will take to enforcement. Speech.

Ms. McDermott commented on the FCA that:

  • thematic and firm-specific supervisors will work in a more integrated way;
  • the focus will increasingly be on senior management who fail to recognise and manage risks and fail to control the way products are sold; and
  • it will have a low tolerance for repeat offenders.

The FSA also published a speech by Martin Wheatley, chief executive designate of the FCA. His speech emphasised that the FCA will continue the FSA’s policy of credible deterrence. Speech.

SFO Press Release on Manipulation of LIBOR

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On July 2, the Serious Fraud Office (SFO) published a press release regarding the manipulation of the setting of the London Interbank Offered Rate (LIBOR). Press release.

In the press release, the SFO stated that it had been working closely with the FSA and now that the FSA has concluded its investigation into the regulatory misbehaviour, the SFO is considering whether it is both appropriate and possible to bring criminal prosecutions.

The SFO hopes to come to a conclusion regarding possible criminal prosecutions within a month. It is also working with the relevant authorities that are carrying out equivalent investigations in other jurisdictions.

On July 2, a statement made by George Osborne, Chancellor of the Exchequer on LIBOR and related reforms concerning the banking sector was also published. This included an initiative to establish a joint committee to conduct an inquiry into professional standards in the banking industry. Statement.