FSA

FSA Update on Derivatives Reform

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On June 26, the FSA published a speech by David Lawton, FSA Acting Director of Markets, on recent progress made on derivatives reform. Speech.

Mr. Lawton reports that much has been achieved over the past year as regards meeting the G20 commitments to improve counterparty risk management and transparency in the over-the-counter (OTC) derivatives markets. In particular, the international standard setting bodies continue to facilitate the advancement of reforms across jurisdictions and industry has made good progress to increase standardisation of contracts and use of central clearing.

However, four outstanding areas remain:

  • rules for bilateral collateralisation of uncleared trades.
  • ensuring Regulators have a full range of tools to deal with recovery and resolution of central counterparty clearing houses (CCPs). EU legislation in this area is expected sometime this year.
  • getting agreement on how requirements will apply cross-border. The FSA believes that it is desirable to achieve a global system of regulation of OTC derivatives based upon mutual recognition and substituted compliance where possible.
  • ensuring the readiness of firms, both financial and non-financial, not currently clearing OTC derivative trades. Firms will need to be ready to comply with EMIR from January 2013.

FSA Issues Final Notice to Former UBS Advisers Following Upper Tribunal Decision

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On June 28, the FSA published final notices (dated 27 June 2012) it has issued to Laila Karan and Sachin Surendra Karpe, former UBS client advisers, relating to breaches concerning an unauthorised trading scheme. Final Notice for Laila Karan. Final Notice for Sachin Surendra Karpe.

The final notices impose a financial penalty of £1,250,000 on Mr. Karpe, and £75,000 on Mrs. Karan. Both individuals have been banned from carrying on any function relating to regulated activities carried on by any authorised or exempt persons, or exempt professional firm.

FSA Censures Kaupthing for Liquidity Monitoring Failures

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On June 26, the FSA reported that it had issued a Final Notice (dated 18 June 2012) against Kaupthing Singer and Friedlander Limited (KSFL), the UK based subsidiary of the Icelandic banking group Kaupthing Bank Hf (KBHf). Final Notice.

The FSA found that KSFL breached Principle 2 of the FSA’s Principles because it failed to consider promptly and properly whether liquidity stresses in KBHf would have a detrimental effect on its own liquidity position. KSFL did not give proper consideration to, or properly monitor, a special financing arrangement with its parent company in Iceland. In addition, when it started to have concerns about this liquidity arrangement, it failed to discuss these concerns with the FSA in a timely manner.

The FSA has published this notice to ensure that other regulated firms understand the importance of complying with the FSA’s liquidity guidelines and that where compliance is dependent on liquidity arrangements with a parent company, the ability to exercise these arrangements is rigorously tested rather than assumed.

Memoranda of Understanding Between FSCS, PRA and FCA Published

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On June 26, the FSA published a draft memorandum of understanding (“MoU”) between the Financial Services Compensation Scheme (“FSCS”) and the new Prudential Regulation Authority (“PRA”) and a second MoU between the FSCS and the new Financial Conduct Authority (“FCA”). MoU between FSCS and PRA. MoU between FSCS and FCA.

In particular the MoUs cover:

  • The roles of the FSCS, PRA and FCA;
  • Information sharing between the FSCS and the new regulators and confidentiality issues;
  • Policy making;
  • Funding the FSCS;
  • Co-ordination between the PRA and FCA on the oversight of the FSCS; and
  • Reporting obligations on the FSCS to the new regulators.

FSA Fines Barclays £59.5 Million for Manipulation of LIBOR

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On 27 June 2012, the FSA published the final notice issued to Barclays Bank plc, detailing a £59.5 million fine for misconduct relating to its submission of rates that formed part of the London Interbank Offered Rate (“LIBOR”) and the Euro Interbank Offered Rate (“EURIBOR”). This is the largest ever fine that the FSA has imposed. Final Notice.

In particular, Barclays breached the following Principles:

  • Principle 5 (market conduct) – Barclays was found to have breach Principle 5 by making US dollar LIBOR and EURIBOR submissions that took into account requests made by interest rate derivatives traders.
  • Principle 3 (management and control) – Barclays did not have adequate risk management systems or effective controls in place relating to its LIBOR and EURIBOR submission process.
  • Principle 2 (skill, care and diligence) – Barclays failed to conduct its business with due skill, care and diligence when considering issues raised internally relating to its LIBOR submissions.

In addition to the fine by the FSA, the U.S. Commodity Futures Trading Commission fined Barclays $200 million, and Barclays agreed to pay a penalty of $160 million as part of an agreement with the U.S. Department of Justice.

The Barclays settlement is the first settlement announced in connection with the LIBOR probe, with regulators investigating more than 20 banks.

FSA Letter on Monitoring Ongoing Appropriateness of Solvency II Internal Models

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On 18 June 2012 the FSA published a letter (dated 13 June 2012) from Julian Adams, FSA Director of Insurance, to firms involved in the FSA’s internal model approval process (IMAP) in preparation for the implementation of the Solvency II Directive. Letter.

The letter sets out the FSA’s thinking on how it will monitor the ongoing appropriateness of internal models after approval. Highlights include:

• The FSA expects firms to have systems and controls in place to ensure that the internal model operates properly on a continuous basis at all times, including stressed market conditions.

• The FSA is developing a number of early warning indicators (which may take the form of ratios or ranges) to help it and firms ensure that, after approval, internal models and the solvency capital requirement (SCR) calculation remain appropriate.

FSA Annual Report for 2011/12 Published

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On 19 June 2012, the FSA published its Annual Report for 2011/12. The report is a key component of the FSA’s accountability framework. The report deals the performance of the FSA during 2011/12 and compares this against the priorities listed in its business plan. FSA Annual Report.

This will be the FSA’s last annual report before the Prudential Regulation Authority and the Financial Conduct Authority take over as ‘twin peak’ regulators in early 2013.

The FSA measures market cleanliness by looking at the level of abnormal price movements prior to company announcements. This declined from 21.2% in 2010 to 19.8% in 2011. The 2011 level is the lowest since 2003.

Speech by FSA’s Clive Adamson on ‘Regulating in a New Era of Professionalism’

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On 14 June 2012, Clive Adamson, Director of Supervision of the Conduct Business Unit at the FSA gave a speech to Marketforce and the Institute of Economic Affairs entitled ‘Regulating in a new era of professionalism’ which gave a high level view of the changes taking place in UK regulation, how the FSA expects professionalism to play a part in this, and what it means for regulated firms. Speech.

The main points were as follows:

• It is the FSA’s intention that the Financial Conduct Authority (FCA) will look and feel different from the FSA. The aim is to move away from a primarily reactive style to a judgment based, confident and pre-emptive regulator that acts to ensure consumers get a better deal and markets are fair and orderly.

• The new supervisory approach will comprise of five main elements:

• More forward-looking in assessment of potential problems.

• Intervene earlier when the FCA sees problems.

• Address the underlying causes of problems that the FCA sees, not just the symptoms.

• Secure redress for consumers if failures do occur – for example, as with payment protection insurance.

• Take meaningful action against firms that fail to meet the FCA’s standards, through levels of fines that have a credible deterrent effect.

• A key component of the FCA’s approach is to continue implementing the work that the FSA has already started around professionalism and provision of advice.

• The Retail Distribution Review (RDR), which comes into effect on 31 December 2012, is an example of action being taken to fulfil one of the FCA’s operational objectives – consumer protection.

• The Retail Conduct Risk Outlook (RCRO), published in March 2012, also sets out the regulator’s views on how professionalism needs to be at the core of advice for long-term savings, including pensions and retirement planning.

• From an industry perspective, firms should look at their customers as unique individuals, consider their personal situations and fully understand their objectives and potential financial needs. Advice should be just that, advice – not a sales/product driven process.

FSA Issues Final Notices to an Investment Banker and His Wife for Insider Dealing

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On 31 May 2012, the FSA issued Christian Littlewood and his wife, Angie, with final notices prohibiting them from performing any function in relation to any regulated activity. Between 1998 and 2008, Mr. Littlewood was employed by the investment bank Dresdner Kleinwort Wasserstein Ltd. As a result of his employment he had access to inside information relating to securities. Mr. and Mrs. Littlewood used the inside information obtained through his employment to facilitate the placing of trades in eight separate stocks just prior to announcements to the market. As a result of these trades, Mr. and Mrs. Littlewood, together with a third party friend of Mrs. Littlewood (Mr. Sa’aid), made profits of around £590,000.

The FSA’s action follows the conviction of Mr. and Mrs. Littlewood for criminal offences of insider dealing in February 2011. Final Notice for Christian Littlewood. Final Notice for Angie Littlewood.

FSA Publishes Consolidated Policy Statement Setting Out the Regulatory Fees and Levies for 2012/13

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On 29 May 2012, the FSA published its consolidated policy statement, which provides an overview of the FSA’s fee-raising arrangements and sets out the regulatory fees and levies for 2012/13. Consolidated Policy Statement: PS12/11.

Highlights include:

– The FSA’s annual funding requirement (AFR) of £559.8 million is 3.2% lower than the estimate consulted on in CP12/3.

– The final Solvency II special project fee (SPF) rates recovery for 2012/13 is £15 million, compared with the £25.9 million estimated in CP12/3.

– The minimum fee for authorised firms will remain at £1,000 for the third year running.