Malaysia's New Corporate Governance Code Puts Strong Emphasis on Board Effectiveness

The Securities Commission Malaysia (SC) released the Malaysian Code on Corporate Governance (CG) 2012 (MCCG 2012) as the first major deliverable of the Corporate Governance Blueprint 2011 (Blueprint) launched in July last year.

Aimed at enhancing board effectiveness of listed companies through strengthening board composition, reinforcing the independence of directors and fostering commitment of directors, the new code will supercede the Malaysian Code on Corporate Governance 2007.

"In essence, the Malaysian Code on Corporate Governance 2012 and the Blueprint seek to embed a culture of good corporate governance, addressing the key components of the corporate governance ecosystem to strengthen self and market discipline. Boards and shareholders must embrace the fact that good business is not just about achieving the desired financial bottom line by being competitive. It is equally about creating shareholder value, which can only be sustained by well-informed strategic direction and engaged oversight, which stretch beyond short-term financial performance," said Tan Sri Zarinah Anwar, Chairman of the SC.

The new CG code sets out eight broad principles and specifies the best practices of good corporate governance at a higher level than that expected by regulations. Each principle is followed by a series of recommendations, which include the formalisation of a board charter, capping of the tenure of independent directors to nine years and the separation of chairman and CEO roles. It also elaborates on the need for boards to recognise and manage risks and for companies to encourage shareholder participation.

To support and enhance the capacity of directors to fulfil the demands of their role, the new code puts greater emphasis on the role of the Nominating Committee, chaired by a senior independent director, in relation to the recruitment, assessment, and training needs of directors.

"Good corporate governance cannot be achieved merely on the strength of regulations. Directors have a duty not just in setting strategic direction and overseeing the conduct of business in compliance with laws, they should also be effective stewards and guardians of the company in respect of ethical values, and ensuring an effective governance structure for the appropriate management of risks and level of internal controls," added Tan Sri Zarinah.

The MCCG 2012 will be effective on 31 December 2012 although listed companies are encouraged to make an early transition to the principles and recommendations elaborated in this new code.

The new CG code, as well as a set of FAQs, is available at the SC website at www.sc.com.my

FSA Review into Anti-Bribery and Corruption Systems and Controls in Investment Banks and Proposed New Guidance for All Firms

The Financial Services Authority, UK (FSA) publishes the findings of its thematic review into anti-bribery and corruption (ABC) systems and controls in investment banks. 

In response to those findings, the FSA will consult on proposed amendments to the FSA’s regulatory guidance, ‘Financial crime: a guide for firms’. This proposed new guidance applies to all firms within scope of our financial crime rules, not just investment banks.

From August 2011, the FSA visited 15 firms, including eight major global investment banks and a number of smaller operations, to examine how firms mitigate bribery and corruption risk.  Bribery and corruption risk is the risk of the firm, or anyone acting on the firm’s behalf, engaging in bribery and corruption.

The FSA found that, despite a long-standing regulatory requirement to mitigate financial crime risk, the majority of firms in our sample had more work to do to implement effective anti-bribery and corruption systems and controls. In particular, FSA found the following common weaknesses:

• most firms had not properly taken account of our rules covering bribery and corruption, either before the implementation of the Bribery Act 2010 or after;
• nearly half the firms in our sample did not have an adequate ABC risk assessment;
• management information on ABC was poor, making it difficult for us to see how firms’ senior management could provide effective oversight;
• only two firms had either started or carried out specific ABC internal audits;
• there were significant issues in firms’ dealings with third parties used to win or retain business;
• though many firms had recently tightened up their gifts, hospitality and expenses policies, few had processes to ensure gifts and expenses in relation to particular clients/projects were reasonable on a cumulative basis.

Although firms in our sample had been slow and reactive in managing bribery and corruption risk, our visits and the introduction of the Bribery Act had acted as a trigger for firms to focus on ABC issues.

The FSA is considering whether further regulatory action is required in relation to certain firms in its review.

Tracey McDermott, acting director of enforcement and financial crime, said:

“It is imperative that firms have adequate arrangements to control the risks of financial crime. We have seen examples of good practice and some examples of poor practice. Overall, despite the high profile of the issue, the investment banking sector has been too slow and too reactive in managing bribery and corruption risks.

“Firms across all sectors must have appropriate controls to manage their financial crime risks, whether related to bribery and corruption or otherwise. The FSA and, from next year, the Financial Conduct Authority will continue to focus on financial crime risks in this sector and beyond to ensure firms are meeting their legal and regulatory obligations.”

SEBI laid Down Broad Guidelines on Algorithmic Trading

New Circular of Securities and Exchange Board of India (SEBI) laid down Guidelines on Algorithmic Trading.

SEBI has been observed that adoption of technology for the purpose of trading in financial instruments has been on a rise over the past few years. Stock brokers as well as their clients are now making increased usage of trading algorithm (hereinafter referred to as “algo”).

Based on recommendations of Technical Advisory Committee (TAC) and Secondary Market Advisory Committee (SMAC), SEBI decided to put in place the following broad guidelines for algorithmic trading in the securities market.

According to Circular, Algorithmic Trading means any order that is generated using automated execution logic shall be known as algorithmic trading.

Guidelines to the stock exchanges and the stock brokers

Stock exchanges shall ensure the following while permitting algorithmic trading:

(i) The stock exchange shall have arrangements, procedures and system capability to manage the load on their systems in such a manner so as to achieve consistent response time to all stock brokers. The stock exchange shall continuously study the performance of its systems and, if necessary, undertake system upgradation, including periodic upgradation of its surveillance system, in order to keep pace with the speed of trade and volume of data that may arise through algorithmic trading.

(ii) In order to ensure maintenance of orderly trading in the market, stock exchange shall put in place effective economic disincentives with regard to high daily order-to-trade ratio of algo orders of the stock broker. Further, the stock exchange shall put in place monitoring systems to identify and initiate measures to impede any possible instances of order flooding by algos.

(iii) The stock exchange shall ensure that all algorithmic orders are necessarily routed through broker servers located in India and the stock exchange has appropriate risk controls mechanism to address the risk emanating from algorithmic orders and trades. The minimum order-level risk controls shall
include the following:

a. Price check - The price quoted by the order shall not violate the price bands defined by the exchange for the security. For securities that do not have price bands, dummy filters shall be brought into effective use to serve as an early warning system to detect sudden surge in prices.

b. Quantity Limit check - The quantity quoted in the order shall not violate the maximum permissible quantity per order as defined by the exchange for the security.

(iv) In the interest of orderly trading and market integrity, the stock exchange shall put in place a system to identify dysfunctional algos (i.e. algos leading to loop or runaway situation) and take suitable measures, including advising the member, to shut down such algos and remove any outstanding orders in the system that have emanated from such dysfunctional algos. Further, in exigency, the stock exchange should be in a position to shut down the broker’s terminal.

(v) Terminals of the stock broker that are disabled upon exhaustion of collaterals shall be enabled manually by the stock exchange in accordance with its risk management procedures.

(vi) The stock exchange may seek details of trading strategies used by the algo for such purposes viz. inquiry, surveillance, investigation, etc.

(vii) The stock exchange shall include a report on algorithmic trading on the stock exchange in the Monthly Development Report (MDR) submitted to SEBI inter-alia incorporating turnover details of algorithmic trading, algorithmic trading as percentage of total trading, number of stock brokers / clients using algorithmic trading, action taken in respect of dysfunctional algos, status of grievances, if any, received and processed, etc.

(viii) The stock exchange shall synchronize its system clock with the atomic clock before the start of market such that its clock has precision of atleast one microsecond and accuracy of atleast +/- one millisecond.

Stock exchange shall ensure that the stock broker shall provide the facility of algorithmic trading only upon the prior permission of the stock exchange. Stock exchange shall subject the systems of the stock broker to initial conformance tests to ensure that the checks mentioned below are in place and that the stock broker’s system facilitate orderly trading and integrity of the securities market.
Further, the stock exchange shall suitably schedule such conformance tests and thereafter, convey the outcome of the test to the stock broker. For stock brokers already providing algo trading, the stock exchange shall ensure that the risk controls specified in this circular are implemented by the stock broker.

Additionally, the annual system audit report for a stock broker, as submitted to the stock exchange, shall include a specific report ensuring that the checks are in place. Such system audit shall be conducted by Certified Information System Auditors (CISA) empanelled by stock exchanges. Further, the stock exchange shall subject the stock broker systems to more frequent system audits, if required.

The stock broker, desirous of placing orders generated using algos, shall satisfy the stock exchange with regard to the implementation of the following minimum levels of risk controls at its end -

(i) Price check – Algo orders shall not be released in breach of the price bands defined by the exchange for the security.

(ii) Quantity check – Algo orders shall not be released in breach of the quantity limit as defined by the exchange for the security.

(iii) Order Value check - Algo orders shall not be released in breach of the ‘value per order’ as defined by the stock exchanges.

(iv) Cumulative Open Order Value check – The individual client level cumulative open order value check, may be prescribed by the broker for the clients. Cumulative Open Order Value for a client is the total value of its unexecuted orders released from the stock broker system.

(v) Automated Execution check – An algo shall account for all executed, unexecuted and unconfirmed orders, placed by it before releasing further order(s). Further, the algo system shall have pre-defined parameters for an automatic stoppage in the event of algo execution leading to a loop or a
runaway situation.

(vi) All algorithmic orders are tagged with a unique identifier provided by the stock exchange in order to establish audit trail.

The other risk management checks already put in place by the exchange shall continue and the exchange may re-evaluate such checks if deemed necessary in view of algo trading.

The stock broker, desirous of placing orders generated using algos, shall submit to the respective stock exchange an undertaking that -

(i) The stock broker has proper procedures, systems and technical capability to carry out trading through the use of algorithms.

(ii) The stock broker has procedures and arrangements to safeguard algorithms from misuse or unauthorized access.

(iii) The stock broker has real-time monitoring systems to identify algorithms that may not behave as expected. Stock broker shall keep stock exchange informed of such incidents immediately.

(iv) The stock broker shall maintain logs of all trading activities to facilitate audit trail. The stock broker shall maintain record of control parameters, orders, trades and data points emanating from trades executed through algorithm trading.

(v) The stock broker shall inform the stock exchange on any modification or change to the approved algos or systems used for algos.

The stock exchange, if required, shall seek conformance of such modified algo or systems to the requirements specified in the circular.

Stock exchanges are directed to:

(i) take necessary steps and put in place necessary systems for implementation of the above within a period of one month from the date of this circular.

(ii) make necessary amendments to the relevant bye-laws, rules and regulations for the implementation of the above decision.

(iii) bring the provisions of this circular to the notice of the stock brokers of the stock exchange and also to disseminate the same on the website.

(iv) For stock brokers that are currently executing orders through algos, a period of three months is provided to the stock exchanges within which the approval process shall be completed and minimum risk controls shall be established, if not already done.

(v) communicate to SEBI, the status of implementation of the provisions of this circular in the Monthly Development Report.

SEBI Tightens Reporting Norms for Investment Bankers

Securities and Exchange Board of India (SEBI) under new circular has tighten Regulatory Compliance and Periodic Reporting Bankers to an Issue (BTIs).

Bankers to an Issue (BTIs) are required to furnish periodical reports on quarterly and annual basis in electronic form in the prescribed format in terms of SEBI Circulars No. RBT(G I Series) Circular No. 1(95-96)) dated April 21, 1995, BTI Circular No. 3(1999-2000) dated July 09, 1999, and Cir No. MIRSD/DPS-2/BTI/Cir- 15/2008 dated May 06, 2008.

In order to strengthen the compliance mechanism and role of the Boards of BTIs, it has been decided to review the norms and format for periodic reporting. The revised format as given in the circular includes the status of regulatory compliance and investor grievances redressal. The Board of directors of BTI shall, henceforth, review the report and record its observations on (i) the deficiencies and non-compliances,

RBI Amended Overseas Direct Investments Route by Resident Individuals

Reserve Bank of India (RBI), amended the Notification No. FEMA 120/RB-2004 dated July 7, 2004 [Foreign Exchange Management (Transfer or Issue of any Foreign Security) (Amendment) Regulations, 2004, under circular and circular.

RBI proposed following following changes in ODI Investment Route:

Creation of charge on immovable / movable property and other financial assets

The existing regulations of the Notification do not envisage creation of charge on the immovable movable property and other financial assets (except shares of JV / WOS) of the Indian Party. It has been decided that proposals from the Indian party for creation of charge in the form of pledge / mortgage / hypothecation on the immovable / movable property and other financial assets of the Indian Party and their group companies may be considered by the Reserve Bank under the approval route within the overall limit fixed (presently 400%) for financial commitment subject to submission of a ‘No Objection’ by the Indian Party and their Group companies from their Indian lenders.

Appropriate reporting mechanism for capturing the financial commitment on account of creation of charge on such property / assets shall be introduced shortly.

Reckoning bank guarantee issued on behalf of JV / WOS for computation of Financial Commitment

Presently, the bank guarantee issued on behalf of JV / WOS is not reckoned for the purpose of computing the financial commitment of the Indian Party to its JV / WOS overseas.

It has been decided that the bank guarantee issued by a resident bank on behalf of an overseas JV / WOS of the Indian party, which is backed by a counter guarantee / collateral by the Indian party, shall be reckoned for computation of the financial commitment of the Indian Party and reported accordingly.

Appropriate reporting mechanism for capturing the financial commitment on account of issuance of bank guarantee shall be introduced shortly.

Issuance of personal guarantee by the direct / indirect individual promoters of the Indian Party

It has been decided that issuance of personal guarantee by the promoters of the Indian Party as presently allowed under the General Permission shall also be extended to the indirect resident individual promoters of the Indian Party with same stipulations as in the case of personal guarantee by the direct promoters.

Financial Commitment without equity contribution to JV / WOS

Presently, Regulation 6(4) of the Notification ibid prescribes that an Indian Party may extend a loan or a guarantee to or on behalf of the Joint Venture / Wholly Owned Subsidiary abroad, within the permissible financial commitment, provided that the Indian party has made investment by way of contribution to the equity capital of the Joint Venture.

Keeping in view the business requirement of the Indian party, particularly the legal requirement of the host country, it has now been decided that the proposals from the Indian party for undertaking financial commitment without equity contribution in JV / WOS may be considered by the Reserve Bank under the approval route. AD banks may forward the proposals from their constituents after ensuring that the laws of the host country permit incorporation of a company without equity participation by the Indian party.

Submission of Annual Performance Report

Presently, Regulation 15(iii) of the Notification prescribes that Indian party needs to submit to the Reserve Bank through the designated Authorised Dealer bank every year an Annual Performance Report in Form ODI Part III in respect of each Joint Venture or Wholly Owned Subsidiary outside India, set up or acquired by the Indian party, after the finalization of the audited accounts of the Joint Venture / Wholly Owned Subsidiary outside India.

Where the law of the host country does not mandatorily require auditing of the books of accounts of JV / WOS, the Annual Performance Report (APR) may be submitted by the Indian party based on the un-audited annual accounts of the JV / WOS provided:

1. The Statutory Auditors of the Indian party certifies that ‘The un-audited annual accounts of the JV / WOS reflect the true and fair picture of the affairs of the JV / WOS’ and
   
2. That the un-audited annual accounts of the JV / WOS has been adopted and ratified by the Board of the Indian party.
   

Compulsorily Convertible Preference Shares (CCPS)

The extant provisions of Overseas Direct Investments envisage setting up / acquiring JV / WOS abroad by subscribing / contributing to the equity capital of the JV / WOS. Therefore, contribution to the preference share capital (whether convertible or non-convertible) of the JV / WOS abroad by the Indian party is treated as loan to them.

Keeping in view the nature of the Compulsorily Convertible Preference Shares (CCPS), it has been decided that Compulsorily Convertible Preference Shares shall be treated at par with equity shares and the Indian party is allowed to undertake financial commitment based on the exposure to JV by way of CCPS.

Acquiring qualification shares of an overseas company for holding the post of a Director 

 

In terms of Regulation 24(1)(a) of the Notification ibid, a person resident in India being an individual may acquire foreign securities as qualification shares issued by a company incorporated outside India for holding the post of a Director in the company provided that:

1. the number of shares so acquired shall be the minimum required to be held for holding the post of director and in any case shall not exceed 1 (one) per cent of the paid-up capital of the company, and
   
2. the consideration for acquisition of such shares does not exceed the ceiling as stipulated by RBI from time to time.
   

Since the necessity of having certain qualification shares by an individual to be appointed as a Director of the company is governed by the law of the host country, it has been decided to remove the existing cap of 1 (one) per cent on the ceiling for resident individuals to acquire qualification shares for holding the post of a Director in the overseas company. Accordingly, henceforth, remittance shall be allowed from resident individuals for acquiring the qualification shares for holding the post of a Director in the overseas company to the extent prescribed as per the law of the host country where the company is located. The limit of remittance for acquiring such qualification shares shall be within the overall ceiling prescribed for the resident individuals under the Liberalized Remittance Scheme (LRS) in force at the time of acquisition.

Acquiring shares of a foreign company towards professional services rendered or in lieu of Director’s remuneration

 

Presently, Regulation 20 of the Notification ibid prescribes that a Resident individual may apply to the Reserve Bank for permission to acquire shares in a foreign entity offered as consideration for professional services rendered to the foreign entity and the Reserve Bank may, after taking into account certain factors, grant permission subject to such terms and conditions as are considered necessary.

It has been decided to grant General Permission to the resident individuals to acquire shares of a foreign entity in part / full consideration of professional services rendered to the foreign company or in lieu of Director’s remuneration. The limit of acquiring such shares in terms of value shall be within the overall ceiling prescribed for the resident individuals under the Liberalized Remittance Scheme (LRS) in force at the time of acquisition.

Acquiring shares in a foreign company through ESOP Scheme

 

As per the extant Regulation 22(2) of the Notification ibid, General permission has been granted to a resident individual to purchase equity shares offered by a foreign company under its ESOP Schemes, if he is an employee, or, a Director of an Indian office or branch of a foreign company, or, of a subsidiary in India of a foreign company, or, an Indian company in which foreign equity holding, either direct or through a holding company/Special Purpose Vehicle (SPV), is not less than 51 per cent.

Accordingly, AD Category – I banks are permitted to allow remittances for purchase of shares by eligible persons under this provision irrespective of the method of operationalisation of the scheme i.e. where the shares under the scheme are offered directly by the issuing company or indirectly through a trust / a Special Purpose Vehicle (SPV) / step down subsidiary, provided:

1. the company issuing the shares effectively, directly or indirectly, holds in the Indian company, whose employees / directors are being offered shares, not less than 51 per cent of its equity,
   
2. the shares under the ESOP Scheme are offered by the issuing company globally on a uniform basis, and
   
3. an Annual Return is submitted by the Indian company to the Reserve Bank through the AD Category – I bank giving details of remittances / beneficiaries, etc.
   

It has now been decided that resident employees or Directors may be permitted to accept shares offered under an ESOP Scheme globally, on uniform basis, in a foreign company irrespective of the percentage of the direct or indirect equity stake in the Indian company subject to:

1. the shares under the ESOP Scheme are offered by the issuing company globally on a uniform basis, and
   
2. an Annual Return is submitted by the Indian company to the Reserve Bank through the AD Category – I bank giving details of remittances / beneficiaries, etc.

ASIC Introduces New disclosure Policy of Unlisted Property Scheme Risks

The Australian Securities and Investments Commission (ASIC) introduced a new disclosure principle and six new disclosure benchmarks for unlisted property schemes to improve investors’ awareness of the risks of investing in these products. 

Regulatory Guide 46 Unlisted property schemes: Improving disclosure for retail investors (RG 46) has been revised as ASIC was concerned there was insufficient consistency or comparability in the form of disclosure applied by responsible entities and as a result, important information was not being adequately disclosed to investors. ASIC consulted with the industry and has updated the existing disclosure principles and introduced disclosure benchmarks based on industry feedback. 

ASIC Commissioner Greg Tanzer said: ‘ASIC’s first priority is to ensure consumers and financial investors are fully informed and can make confident decisions. This is especially important when investing in financial products such as unlisted property schemes as they have particular risks such as gearing, valuations, liquidity, distributions and the diversification of the schemes’ portfolio. 

‘Many Australians like to invest in real estate, reflecting a preference for owning bricks and mortar over less tangible assets. Unlisted property schemes have become popular investment vehicles for such people, but they do carry risks as well as opportunities. It’s necessary to ensure investors have the information they need to make informed investment decisions as inadequate disclosure can contribute to investors not understanding the risks.’ 

Unlisted property schemes must disclose whether they meet the benchmarks and if not, why not. This means they must explain how they will deal with the business factor or the issue underlying the benchmark. 

RG 46 is the next in the series of the ‘if not, why not’ benchmark model of disclosure for sectors that pose particular risk to investors and financial consumers. It follows the issue of disclosure benchmarks for the infrastructure and over-the-counter contracts for difference sectors in Regulatory Guide 231 Infrastructure entities: Improving disclosure for retail investors (RG 231), Regulatory Guide 227 Over-the-counter contracts for difference: Improving disclosure for retail investors (RG 227) and Regulatory Guide 232 Agribusiness managed investment schemes: Improving disclosure for retail investors (RG 232) 

RG 46 also outlines the standards ASIC expects responsible entities to meet when advertising unlisted property schemes to retail investors as to clear, concise and effective disclosure of benchmark and disclosure principle information. Responsible entities of existing unlisted property schemes should disclose the benchmark and updated disclosure principle information to investors by 1 November 2012. For new product disclosure statements prominent and clear disclosure of the benchmark and disclosure principle information should be included in those issued on or after 1 November 2012.

Australian Regulator Releases Full Report on Retirement Advice Shadow Shopping Research

Australian Securities and Investments Commissions (ASIC) released the full findings of ‘shadow shopping’ research which examined financial advice given to people to help them plan for retirement. 

The purpose of Report 279 Shadow shopping study of financial advice (REP 279) was to investigate the quality of retirement advice provided and people’s experience of obtaining financial advice. 

ASIC’s research found that:

• over a third of the advice examples were poor (39%)
• there were only two examples of good quality advice (3%)
• the majority of advice examples reviewed (58%) were adequate. 

 ASIC Commissioner Peter Kell said, ‘The results of ASIC’s shadow shopping research demonstrate that there is scope for significant improvement in the provision of good quality retirement advice in Australia. Our research found there are several areas where the financial advice industry needs to lift its game. 

‘Advisers are important gatekeepers who have a key role to play in helping consumers plan and manage their finances. This underlines the importance for the industry to remove conflicts of interest and improve overall professional standards to ensure that their client’s trust is not misplaced,’ he said.

Mr Kell said, ‘Financial advisers need to provide realistic and client focused communication about people’s retirement prospects including how long their money will last, even if this can on occasion be a challenging conversation.’

‘Too much poor advice provided to our shadow shoppers was overly product focused and not strategic enough to help clients develop a realistic and achievable plan for their retirement and make the most of their financial resources taking into account their circumstances and attitudes to risk,’ he said.

ASIC’s research also found that people have difficulty in assessing the quality of the financial advice they have received. Participants in the study rated their advisers and the advice they received highly, even when they received poor advice.

Mr Kell said, ‘Consumers’ difficulties in assessing advice quality are not surprising. People who thoroughly understand personal finance are less likely to need a financial planner.’ 

ASIC’s report points to a range of actions that are being taken to help improve the quality of advice. The recent Future of Financial Advice Reforms will play a key role in lifting standards in the industry and putting greater focus on the client. Major industry efforts to improve standards, such as through codes of conduct, can also make an important contribution to addressing some of the industry weaknesses identified by this research. In addition to this ASIC will also:

• work with the financial planning industry associations and individual firms to provide more information on the findings in the report to help them focus on areas that will improve advice quality.
• review the Getting Advice booklet and further refine MoneySmart website content to ensure that consumers are well equipped to find the right financial adviser.

The following problems were common in the advice we graded as poor or adequate:

• Inaccurate or incomplete investigation of the client’s personal circumstances
• Recommended strategies did not address the client’s needs or objectives - this included the failure of advisers to address areas that didn’t directly involve the sale of investment products.
• We saw examples of conflicted remuneration structures, such as product commissions and percentage asset-based fees, impacting on the advice and recommendations, and on the quality of advice.
• Poor scoping of advice – some advisers excluded crucial topics, such as clients’ debts, from the scope of the advice, or failed to clearly explain the limitations of the advice.
• Failing to provide appropriate justification for switching recommendations – sometimes the features that the client would lose as a result of changing products were not disclosed. In other instances the ‘benefits’ of the new product were not actually advantageous or useful for the client.
• Poor communication in the Statement of Advice.
• While in some cases there were valid reasons, approximately one third of advice did not provide cash flow projections to show how the recommended strategy would meet the client's income and expenditure objectives. And approximately 44% of the advice statements did not consider how long the client's money would last in retirement.

Advice rated as adequate also had good elements, but fell short due to significant weaknesses in the recommended strategy or products. Poor quality financial advice failed to meet the requirements of the Corporations Act that the adviser must have a reasonable basis for their advice. The report includes real examples of both good and poor advice, providing useful guidance to industry.

UK Regulator Amended Financial Services Compensation Scheme

The Financial Services Authority, UK (FSA's) Consultation Paper CP12/7 is entitled 'Financial Services Compensation Scheme: changes to the Compensation sourcebook'.

The Financial Services Compensation Scheme (FSCS) is the UK’s statutory compensation scheme of last resort for customers of authorised financial institutions. It may pay compensation to eligible customers of a financial services firm if that firm is unable, or likely to be unable, to pay claims against it. The FSCS is funded by levies on authorised firms.

This Consultation Paper (CP) proposes changes to some of the rules in our Compensation sourcebook (COMP) that govern the operation of the FSCS. This follows the commitment in our Business Plan 2010/11 to review COMP, as part of our work to ensure the appropriate degree of protection for consumers.

New Zealand Regulator to Issue Revised Draft Guidance Note on Effective Disclosure in Offer Documents

The Financial Markets Authority (FMA), capital market regulator of New Zealand will publish a revised draft of its guidance note by 2 April 2012 and invites further submissions from the market.

The first round of market consultation, completed 9 March, consisted of 30 stakeholder meetings. FMA also received over 60 written submissions and is now reviewing and carefully considering all feedback.

FMA CEO Sean Hughes said "We are impressed with the quality and depth of submissions received and considered to date. I think it's important to acknowledge the considerable care and time commitment undertaken by market participants and consumer groups involved in the consultation process.

"The revised guidance note will benefit from the feedback we've received and will be markedly different to the first draft.

"We are looking for further market engagement as we release this next draft of the disclosure guidelines, which will build on many of the constructive suggestions we received. We would encourage the market to help identify the remaining 'big picture' issues.

"FMA's aim is to work with the market to achieve positive changes in disclosure practices. To that end, the guidance note needs to be based on a strong understanding of market fundamentals and commercial realities."

As a compliance tool, the guidance note seeks to assist issuers by signalling FMA's expectations and what it will look at as part of a review of disclosure documents.

"We are not out to hang people who are trying in good faith to get it right and exercise appropriate diligence" Mr Hughes said.

FMA will continue to work with the market after release of the final guidance note, to improve the standard of disclosure and to explain the disclosure practices that work well and those that don't.

Consistent with the timeline signalled from early 2011, FMA will no longer be pre vetting all disclosure documents. However, it will be inviting issuers of large, novel, or potentially complex offers to engage with FMA from an early stage in the preparations.

Timeline:

Revised draft published week commencing 2 April.
Submissions invited on the revised draft with a close date of Tuesday 1 May.
Final guidance note published end of May.

The compliance date for new and existing offer documents is to be confirmed after consideration of all submissions.


Further Background

Further background can be found in FMA's January 26 release.

Original consultation and guidance note here.

ESMA Issues a Report on its First Examinations of Credit Rating Agencies

European Securities and Markets Authority (ESMA) publishes a report (ESMA/2012/207) on the supervision of Credit Rating Agencies (CRAs) registered in the European Union (EU). The report provides an overview of ESMA’s supervisory activity and summarises the results of the first examinations ESMA conducted in December 2011 of three groups of CRAs, namely Fitch Ratings (Fitch), Moody’s Investor Services (Moody’s) and Standard and Poor’s Rating Services (S&P).

These examinations are the first step in an on-going supervisory process conducted by ESMA. ESMA identified several shortcomings and areas for improvement that apply to a varying extent to all CRAs relating to the following topics:

· Transparency of rating methodologies, disclosure and presentation of ratings;
· Adequacy of controls over IT systems;
· Recording of core internal processes and decisions; and
· Adequacy of resources devoted to internal control functions and analytical business lines.
 

In light of its regulatory objective to protect investors and financial stability, ESMA decided to focus its first on-site-inspections on the larger CRAs. ESMA’s examination aimed at monitoring compliance by CRAs with the EU Regulation, and focused in particular on three specific credit rating classes (sovereign ratings, bank ratings and covered bond ratings) which it considered to be significant, given the current market trends, the degree of credit linkage and the interdependence of these products.

ESMA has not determined whether any of the observations in the report constitute a breach of the CRA Regulation. ESMA will follow-up on the observations through risk mitigation plans for each individual CRA in the first half of 2012.

Reserve Bank of India Issued Guidelines on Fair Practices Code for NBFCs

The Reserve Bank of India (RBI) vide its circular dated September 28, 2006, issued guidelines on Fair Practices Code (FPC) for all NBFCs to be adopted by them while doing lending business. The guidelines inter alia, covered general principles on adequate disclosures on the terms and conditions of a loan and also adopting a non-coercive recovery method.

A review of the guidelines is made in view of the creation of a new category of NBFCs viz; NBFC-MFIs and also rapid growth in NBFCs’ lending against gold jewellery. The revised guidelines issued under Section 45 L of the Reserve Bank of India Act, 1934 (Act 2 of 1934) and of all the powers enabling it in this behalf, in supercession of the CC dated September 28, 2006, is enclosed in the annex. 

The Guidelines have also incorporated the instructions issued vide CC No. 95 dated May 24, 2007 on ‘Complaints about excessive interest charged by NBFCs’ and CC No. 139 dated April 24, 2009 on ‘Clarification regarding re-possession of vehicles financed by NBFCs’ for reference.

The NBFCs is required to make suitable amendments in their existing FPC. The FPC so modified should be put in place by all NBFCs with the approval of their Boards within one month from the date of issue of this circular and should be published and disseminated on the web-site of the company, if any, for the information of the public.

SEC Establishes New Supervisory Cooperation Arrangements With Foreign Counterparts

The Securities and Exchange Commission (SEC) announced that it has established comprehensive arrangements with the Cayman Islands Monetary Authority (CIMA) and the European Securities and Markets Authority (ESMA) as part of long-term strategy to improve the oversight of regulated entities that operate across national borders. 

The two memoranda of understanding (MOUs) reached this month follow on a similar supervisory arrangement that the SEC concluded with the Quebec Autorité des marchés financiers and the Ontario Securities Commission in 2010 and expanded to include the Alberta Securities Commission and the British Columbia Securities Commission last September. 

The SEC’s latest supervisory cooperation arrangements will enhance SEC staff ability to share information about such regulated entities as investment advisers, investment fund managers, broker-dealers, and credit rating agencies. The Cayman Islands is a major offshore financial center and home to large numbers of hedge funds, investment advisers and investment managers that frequently access the U.S. market. ESMA is a pan-European Union agency that regulates credit rating agencies and fosters regulatory convergence among European Union securities regulators.

“Supervisory cooperation arrangements help the SEC build closer relationships with its counterparts to cooperate and consult on each other’s oversight activities in ways that may help prevent fraud in the long term or lessen the chances of future financial crises,” said Ethiopis Tafara, Director of the SEC’s Office of International Affairs.

The SEC’s approach to supervisory cooperation with its overseas counterparts follows on more than two decades of experience with cross-border cooperation, starting in the late 1980s with MOUs facilitating the sharing of information between the SEC and other securities regulators in securities enforcement matters. The SEC’s enforcement cooperation arrangements – which now encompass partnerships with approximately 80 separate jurisdictions via bilateral MOUs and a Multilateral MOU under the auspices of the International Organization of Securities Commissions (IOSCO) – detail procedures and mechanisms by which the SEC and its counterparts can collect and share investigatory information where there are suspicions of a violation of either jurisdiction’s securities laws, and after a potential problem has arisen.

In contrast, the SEC’s supervisory cooperation arrangements generally establish mechanisms for continuous and ongoing consultation, cooperation and the exchange of supervisory information related to the oversight of globally active firms and markets. Such information may include routine supervisory information as well as the types of information regulators need to monitor risk concentrations, identify emerging systemic risks, and better understand a globally-active regulated entity’s compliance culture. These MOUs also facilitate the ability of the SEC and its counterparts to conduct on-site examinations of registered entities located abroad. 

Although they are designed to achieve different things, enforcement and supervisory cooperation arrangements are complimentary tools. Supervisory cooperation involves ongoing sharing of information regarding day-to-day oversight of regulated entities. Enforcement cooperation MOUs, by contrast, help the Commission collect information abroad that is necessary to help ensure that the SEC’s enforcement program deters violations of the federal securities laws, while also helping to compensate victims of securities fraud when possible.

The SEC entered into its first supervisory cooperation MOU in March 2006 with the United Kingdom’s Financial Services Authority. Following the recent financial crisis, the Commission has expanded its emphasis on this form of continuous supervisory cooperation in an effort to better identify emerging risks to U.S. capital markets and the international financial system. As part of this effort, SEC commissioners and staff co-chaired an international task force in 2010 to develop principles for cross-border supervisory cooperation. These principles have since proven to be a useful guideline for structuring MOUs around the type of information to be shared, the mechanisms which regulators can use to share information, and the degree of confidentiality this information should be accorded. 

Additional information about SEC cooperation arrangements with foreign regulators can be found at: http://www.sec.gov/about/offices/oia/oia_cooparrangements.shtml. (Press Rel. 2012-49)

European Commission Published a Consultation Paper on Shadow Banking

The European Commission (EC)  Published a Consultation Paper on Shadow Banking that is the first step in its plan for regulating this part of business of Banking sector. The Paper marks the start of a long awaited process targeted at an Industry worth an estimated 46 trillion Euro.

In Introduction of this Paper, EC expressed that the 2008 crisis was global and financial services were at its heart, revealing inadequacies including regulatory gaps, ineffective supervision, opaque markets and overly-complex products. The response has been international and coordinated through the G20 and the Financial Stability Board (FSB).

The European Union has shown global leadership in implementing its G20 commitments. In line with EU's Roadmap for Financial Reform, the Union is very advanced in implementing the reforms linked to the G20 commitments. Most of the reforms are now going through the legislative process. In particular, a major achievement has been the recent adoption by the Council and the Parliament of landmark legislation on over-the-counter derivatives.

Negotiations are also well developed on measures to revamp capital requirements for the banking sector. Overall, the reforms will equip the EU with the tools designed to ensure that the financial system, its institutions and markets are properly supervised. More stable and responsible financial markets are a pre-condition for growth and for the creation of a business environment that allows companies to thrive, innovate and expand their activities. This in turn enhances the confidence and trust of citizens.

However, there is an increasing area of non-bank credit activity, or shadow banking, which has not been the prime focus of prudential regulation and supervision. Shadow banking performs important functions in the financial system. For example, it creates additional sources of funding and offers investors alternatives to bank deposits. But it can also pose potential threats to long-term financial stability.

In response to the invitations by G20 in Seoul in 2010 and in Cannes in 2011, the FSB is therefore in the process of developing recommendations on the oversight and regulation of this activity.

The FSB's work has highlighted that the disorderly failure of shadow bank entities can carry systemic risk, both directly and through their interconnectedness with the regular banking system. The FSB has also suggested that as long as such activities and entities remain subject to a lower level of regulation and supervision than the rest of the financial sector, reinforced banking regulation could drive a substantial part of banking activities beyond the boundaries of traditional banking and towards shadow banking.

Against this background, the Commission considers it a priority to examine in detail the issues posed by shadow banking activities and entities. The objective is actively to respond and further contribute to the global debate; continue to increase the resilience of the Union’s financial system; and, ensure all financial activities are contributing to the economic growth.

The purpose of this Green Paper is therefore to take stock of current development, and to present on-going reflections on the subject to allow for a wide-ranging consultation of stakeholders.

Bermuda Monetary Authority Reduced License Fees for Special Purpose Insurers

The Bermuda Monetary Authority (‘the Authority’ or ‘BMA’) announced that the registration fees for Special Purpose Insurers (SPI’s) has been nearly halved. Effective 1st April 2012, all new SPI’s licensed in Bermuda will pay $6,000 for annual registration. This is a significant reduction from the current registration fee of $11,600.

Accordance to Press Release Shelby Weldon, the Authority’s Director, Insurance, Licensing & Authorisations said, “The ability to establish SPI’s here within our insurance classification system is another option for the market to use Bermuda's extensive alternative risk transfer expertise.”

An SPI assumes insurance or reinsurance risks and typically fully funds its exposure to such risks through debt issuance or some other financing. The repayment rights of the debt or other financing mechanisms are subordinated to the insurance or reinsurance obligations of that vehicle.

Mr. Weldon continued, “Since SPI’s are fully funded, the Authority also applies a proportionate level of supervision to such entities, which appropriately is different from what we would apply to say, a large Class 4 commercial insurer. Therefore, this fee adjustment also recognises that distinction, since our fees are directly related to the cost of supervision, further reinforcing Bermuda’s competitive position to support SPI’s.”

Bermuda has recorded significant growth in SPI formations in the last two years. A total of 23 new SPI’s were licensed in 2011, up from eight in 2010 and one in 2009 when the Authority established the regulatory framework to accommodate SPI’s. During January and February 2012, three SPI’s had already licenced in Bermuda.

The move to reduce the fees has been well received by industry, including Bermuda-based law firm,
Appleby.  Accordance to Press Release Brad Adderley, Partner, Corporate & Commercial at Appleby said, “The fee reduction epitomises the proactive approach of the Authority, which was reinforced by the very senior Bermuda contingent that attended the recent Insurance- & Risk-Linked Securities Conference held annually by the Securities Industry and Financial Markets Association (SIFMA). The BMA's attendance at the conference reaffirms to the market place that Bermuda wants to be the preeminent player in this space.”

Accordance to Press Release Greg Wojciechowski, President and CEO of the Bermuda Stock Exchange said, “Since the coming into force of the new licensing regime for Special Purpose Insurers, the BSX has seen a significant increase in interest from the market for the creation of Bermuda based SPI’s which are used for the issuance of Insurance Linked Securities (ILS). This development has led to a record number of listed ILS issues on the BSX.”

SPI’s are often used to issue catastrophe bonds. The BSX has reported that $3.4 billion worth of
catastrophe bonds, or ILS was listed on the exchange by the end of 2011. To date, 25 ILS structures have been listed on the BSX.

Mr. Adderley continued, “Bermuda has made significant inroads into the cat bond market – the reduction of fees will help the island continue to grow this business which will have a positive impact on the Bermuda economy.”

Mr. Wojciechowski added, “The announcement by the BMA to reduce registration fees for SPI structures is a significant development and underscores Bermuda's firm commitment to provide regulatory and commercially sensible support to the global reinsurance industry. Bermuda has been a partner to the global reinsurance industry for over three decades, a healthy partnership which has resulted in the jurisdiction exhibiting a "silicon valley" effect for specialty insurance. Bermuda is a global leader in the reinsurance industry and developments such as this reduction of fees highlight Bermuda stakeholders’ resolve in providing the environment for that partnership to continue for decades to come.”

Accordance to Press Release Arthur Wightman, Partner, Assurance and Business Advisory Services, Insurance/Reinsurance at PricewaterhouseCoopers said, “Bermuda's established funds and reinsurance marketplaces make it the optimal jurisdiction for structuring Insurance Linked Securities and other convergence structures. This move by Bermuda's forward-looking regulator is just one example of how seriously Bermuda is committed to further developing these markets and represents another proactive move by the BMA to commercially practicable regulation. It also reinforces a commitment by the regulator to facilitate speed to market.”

SFC Hong Kong Introduces Changes in Takeover Code

The Securities and Futures Commission (SFC), Hong Kong capital market regulator announced that the following amendments (Note 1) to the Codes on Takeovers and Mergers and Share Repurchases (Codes) will take immediate effect:

• Property valuation requirements now only apply to offers when the offeror is an interested party (Note 2).
• Regarding confirmations of independence of placees in placing and top-up transactions, it is the responsibility of the financial adviser, placing agent and acquirer of the voting rights to confirm the independence of placees.
• The prescribed period for payment of acceptance of an offer is no longer 10 days but seven business days.

The SFC launched a public consultation on the proposed amendments in August 2011 (Note 3) and 18 written submissions were received during the consultation period. The conclusions paper was released on 23rd March.

RBI Proposed Changes in Investment in Indian Venture Capital Undertakings and /or domestic Venture Capital Funds by SEBI registered Foreign Venture Capital Investors

As per new Circular of Reserve Bank of India (RBI), the Foreign Exchange Management (Transfer or Issue of Security by a Person Resident outside India) Regulations, 2000 notified vide Notification No. FEMA 20 / 2000 -RB dated May 3, 2000 as amended from time to time, in terms of which, a SEBI registered Foreign Venture Capital Investor (FVCI) may invest in equity, equity linked instruments, debt, debt instruments, debentures of an Indian Venture capital Undertaking (IVCU) or of a Venture Capital Funds (VCF) through Initial Public Offer or Private Placement or in units of schemes / funds set up by a VCF, subject to such terms and conditions mentioned therein.

RBI has now been decided, to allow FVCIs to invest in the eligible securities (equity, equity linked instruments, debt, debt instruments, debentures of an IVCU or VCF, units of schemes / funds set up by a VCF) by way of private arrangement / purchase from a third party also, subject to terms and conditions as stipulated in Schedule 6 of Notification No. FEMA 20 / 2000 -RB dated May 3, 2000 as amended from time to time. It is also being clarified that SEBI registered FVCIs would also be allowed to invest in securities on a recognized stock exchange subject to the provisions of the SEBI (FVCI) Regulations, 2000, as amended from time to time, as well as the terms and conditions stipulated therein.

Mr. Marc Hein Appointed as Chairman of the FSC, Mauritius

As per Press release, Mr. Marc Hein has been appointed as the Chairman of the Financial Services Commission (‘FSC’) on 19 March 2012. Prior to joining the FSC, Mr. Hein served as Chairperson of the National Economic and Social Council since March 2011.

Mr. Hein has a wide expertise as barrister. He holds a Bachelor’s degree in Law from the University of Wales, Licence-en-Droit from l’Université d’Aix en Provence and a degree of Utter Barrister of Gray's Inn, UK. He started practising law in Mauritius in 1979 at the Chambers of Sir Raymond Hein Q.C. In 1991, he founded the Juristconsult Chambers, one of the largest law firms in Mauritius. He was a member of the Mauritius Parliament from 1983 to 1987 and served on various parliamentary and select committees. Member of the Bar Council, he was elected as Chairman in 1993. Mr. Hein was representative of the International Bar Association in Mauritius from 1992 to 2004. He is also member of international professional bodies namely the International Fiscal Association, the Offshore Institute and a fellow member of the Mauritius Institute of Directors.

Mr. Hein has developed substantial expertise and experience in all laws linked to business, including corporate, commercial, insolvency, labour and industrial relations, and has represented clients since 1980 before all courts of Mauritius, the Privy Council and the Seychelles. He has an in-depth experience in the global business sector and has long been associated with the financial services sector, having held the post of director of investment funds, listed and unlisted companies and legal adviser to local and international firms.

Following his appointment as Chairman of the FSC (“the Commission”), Mr. Hein has started all the necessary procedures to ensure that there is no risk of conflict of interest between his role as Chairman and the Commission’s licensees. The Commission is pleased to welcome Mr. Marc Hein. His vast experience in the financial services sector will bring a new dimension for the FSC and his expertise in the sector will provide more guidance in face of the challenges ahead for the sector.

FSA Publishes Business Plan for 2012/13

The Financial Services Authority (FSA) has published its business plan setting out its priorities for 2012/13, and the implications for the FSA’s budget. The document outlines the FSA’s specific initiatives for the year ahead, which reflect the continuing challenges facing the financial services industry. This is likely to be the FSA’s final business plan before it splits into the Prudential Regulation Authority (PRA) and the Financial Conduct Authority (FCA) in 2013.

This year's business plan has been set against a very difficult macro-economic environment. Against this challenging backdrop, the FSA has been focused on delivering its statutory objectives and implementing the regulatory reform programme as set out by the government. For the coming year the main focus is on five areas:

• delivering the regulatory reform programme;
• continuing to influence the international and European policy agenda;
• delivering financial stability by maintaining ongoing supervision of firms in a period of continued fragility in markets including business model analysis, capital/liquidity assessments, recovery and resolution planning and the Significant Influence Function regime;
• delivering market confidence and credible deterrence; and
• delivering on the principal FSA initiatives to improve consumer protection: early product  intervention, the Retail Distribution Review (RDR) and Mortgage Market Review (MMR);

Ahead of the split to the PRA and FCA, the FSA, will from 2 April 2012, move to a twin peaks model internally that will begin to reflect the shape of the new authorities. The new model will mean that banks, building societies, insurers and major investment firms will, from this date, have two groups of supervisors, one focusing on prudential matters and one focusing on conduct.  All other firms (i.e. those not dual regulated) will be solely supervised by the conduct supervisors.

The FSA will maintain its policy of intensive supervision which includes business model analysis, capital and liquidity assessments and recovery and resolution planning. The key areas of the substantial international regulatory reform agenda will continue to be implemented particularly in respect of the banking agenda set by the Basel Committee and the wider policy agenda primarily mandated by the European Union. The key ongoing prudential policy initiatives will be the Capital Requirements Directive IV, Solvency II and the recommendations of the Independent Commission on Banking.

The FSA will continue to maintain market confidence ensuring markets are resilient and fair and continue to enforce its credible deterrence agenda. The FSA will also conduct a review into whether further changes to the client assets regime are required following the lessons learnt from ongoing insolvencies, and the recent judgement of the Lehman Brothers International (Europe) client money Supreme Court Appeal. However, it is important to recognise that insolvency law and the Special Administration Regime is determined by primary legislation and not the FSA rules.

The consumer protection strategy, which seeks to actively anticipate consumer detriment and stop it before it occurs, will remain a priority with the FSA showing a greater willingness to make reality its commitment to earlier intervention where it sees potential risks to consumer detriment crystallising. The FSA will intervene where it sees unsuitable products with a high probability of being mis-sold, as well as where its sees firms with poor standards of product design or sales processes.

In addition the FSA will continue with its two principal initiatives within the consumer protection strategy which are the structural reform of the investment market through the Retail Distribution Review project (RDR) and the Mortgage Market Review (MMR).

Hector Sants, FSA chief executive, said:

"The year to April 2013 will be the last year for the FSA before it splits into the PRA and FCA. We will nevertheless ensure we continue to deliver effective supervision and to support the development of the key European policy initiatives.  From 2 April 2012 we will have moved to a twin peaks model within the FSA so an additional key element must be to ensure that we thoughtfully refine this model prior to the legal launch of the new regulatory structure and ensure that the benefits of the reforms we have made since the financial crisis are carried over to the new authorities.

"We have previously said that the budget for this year totals £578.4m, an increase of 15.6% in overall funding on the previous year.  The FSA recognises that given the economic circumstances the industry faces, it is not realistic that the cost of regulation continues to rise at this rate in the long term, and therefore the new authorities will be very focused on controlling costs.

"However it should be noted that over the last 4 years these increased costs have fallen on the larger firms, rather than smaller ones.  The percentage of the FSA's budget funded by the top ten firms has risen from 17% in 2009 to 31% this year, and for the top 1000 firms has risen from 70% to 84%. As a percentage of revenues, not only have those firms outside the top 1000 seen their costs fall from 31% to 16%, they have also seen a fall as a percentage of their income on average."

FSA Policy Statement: Distribution of Retail Investments: RDR Adviser Charging and Solvency II Disclosures

Financial Services Commission (FSA), capital market regulator in UK publishes Policy Statement – Distribution of retail investments – RDR Adviser Charging and Solvency II disclosures, based on feedback to Consultation Paper 11/25 and final Adviser Charging rules – here FSA outlines the proposals.

This Policy statement will be of interest to firms advising on retail investment products and to product providers offering these products. The Solvency II changes to the COBS product disclosure rules will be of interest primarily to insurers.

The new rules will come into effect as follows:
• rules on the facilitation of payment of adviser and consultancy charges – on 31 December 2012, at the same time as the main RDR Adviser Charging rules; and
• the rule on reporting investment amounts where payment of adviser charges or consultancy charges is being facilitated – this will apply to firms’ first full reporting period after 31 December 2012.

The Solvency II disclosure rules are ‘near final’, as they include new Glossary definitions to be made with the main Solvency II rules.
They will be made at the same time as the main Solvency II rules, which we expect to be at the end of this year; we currently expect them to come into effect on 1 January 2014.
 

In November 2011 FSA published Consultation Paper (CP) 11/251, which covered:
• issues on facilitating the payment of adviser and consultancy charges under the Retail Distribution Review (RDR) rules;
• whether product providers should, when reporting data under our data requirements such as Product Sales Data (PSD), report investment amounts on a basis net or gross of any adviser or consultancy charges being facilitated; and
• minor changes to the disclosure requirements in Chapters 13 to 16 of the Conduct of Business sourcebook (COBS) to implement Solvency II2 Directive (Solvency II) requirements.

Regulating Bidding for Emissions Allowances under Phase Three of the EU Emissions Trading Scheme (ETS)

The Financial Services Authority (FSA's) Consultation Paper CP12/6 is entitled 'Regulating bidding for Emissions Allowances under Phase Three of the EU Emissions Trading Scheme (ETS)' issued in line of of implementation of reduction of carbon emission process initiated by European Union.

The European Union (EU) is committed to a 20% reduction in carbon emissions from 1990 levels by 2020. One of the European Commission’s key policies for achieving this is a market-based requirement for the industry to account for their emissions by surrendering a matching number of allowances throughout each trading period. These allowances are issued under a ‘cap and trade’ system, whereby the available number will diminish over time. This system is known as the EU Emissions Trading Scheme (ETS).

A right to emit one tonne of carbon (or the equivalent in another greenhouse gas) is known as an EU Allowance (EUA). Member States can currently auction up to 10% of allowances, with the balance being issued at no cost but from 2013 this proportion will greatly increase.

To accommodate this auctioning, there will be a common European auction platform through which allowances are auctioned, but the UK has exercised a right to host a national platform instead. To achieve this, the Treasury’s Recognised Auction Platforms Regulations 2011 created a new type of body which the FSA may recognise and supervise – a Recognised Auction Platform (RAP) – applying a regime similar to that applicable to Recognised Investment Exchanges. 

FSA consulted on approach to recognising RAPs last summer (CP11/14). The Treasury is now consulting on amendments to legislation that would make bidding on such auction platforms a regulated activity, in certain circumstances. This means that FSA will be required to specifically authorise certain firms intending to bid; namely investment firms, credit institutions and a category of firms that are exempt from the Markets in Financial Instruments Directive (MiFID).

Present Consultation Paper was published in March 2012. Comments should reach FSA by 19 April 2012.

Vodafone Tax case: Official Copy of Reveiw Petition

In reference to follow blog on Vodafone Tax Case, where supreme court of India has rejected review petition of Union of India against last judgement, which was held in favour of the company. Please find official copy of the order of apex court.

Last blog on Vodafone Tax case.

Services of Mutual Fund Agents Exempt from Service Tax Net in India

After proposal by Finance Minister of India in its Annual Budget 2012-13, subject related to widening service tax exemption list in light of public interest, Department of Revenue, Ministry of Finance issued notification dated 17th March, 2012 has fully exempted " the “services rendered by a mutual fund agent or distributor to mutual fund or asset management company for distribution or marketing of mutual fund", from service tax net.

Present changes are in line of various series of reform undertake by the Regulator and Government in last one year. “The government, being satisfied it is necessary in public interest so to do, exempts the following taxable services from the whole of the service tax leviable thereon under section 66 B of the Finance Act,”

Vodafone Tax Case: Supreme Court of India Dismisses Government Review Petition

The Supreme Court on Tuesday 20th march, dismissed government's review plea in the Vodafone-Hutch tax case. The apex court had ruled in favour of Vodafone in Rs 11,000 crore tax case in January.

A bench of Chief Justice S.H. Kapadia, Justice K.S. Radhakrishnan and Justice Swatanter Kumar dismissed the government's plea after considering it in their chamber.

Vodafone won a five-year legal battle against the Indian tax authorities in January as the apex court dismissed a $2.2 billion tax demand raised over the British mobile phone giant's acquisition of Indian mobile assets in 2007.

The tax office last month filed a petition seeking a review of that judgment.

The tax demand was over Vodafone's $11 billion deal to buy Hutchison Whampoa Ltd's Indian mobile business.

Vodafone, the world's largest mobile operator by revenue and the biggest overseas corporate investor in India, had argued that the Indian authorities had no right to tax the transaction between two foreign entities.

Even if tax was due, the company had argued, it should be paid by the seller and not the buyer.

The union budget presented last week amended the income tax act retrospectively from 1962, giving the taxman powers to scrutinise offshore merger and acquisition deals. Finance Minister Pranab Mukherjee later assured investors that deals more than six years old will not be reopoened. This still leaves the sword hanging over the Vodafone case.

The government in its review petition had said that the apex court ruling had error in its findings that the offshore transaction which gave Vodafone holding company a 67% stake in Hutch-Essar was bona fide structured FDI in India.

The Centre said there was no investment or inflow of the funds into the country through such transactions. It said that the amount was admittedly paid outside India by VIH, a British Virgin Island company, to Hutchison Telecommunications International (Cayman) Holdings Ltd, a Cayman Island company, and was, therefore, not a case of FDI into India at all.

"We hold, that the Offshore Transaction herein is a bona fide structured FDI investment into India which fell outside India's territorial tax jurisdiction, hence not taxable. The said Offshore Transaction evidences participative investment and not a sham or tax avoidant preordained transaction," Chief Justice SH Kapadia had said writing the lead judgement in the case.

The government further said that the SC ruling has the effect of legitimising transactions through the tax havens and preventing the income-tax department from looking at the substance of such transactions.

By creating an interposed holding or operating company, the foreign investors would be able to avoid lengthy approval or registration process which would have far reaching consequences, the Centre said seeking recall of the order.

The apex court had on January 20 ruled that the income-tax authorities have no jurisdiction to tax Vodafone's $2.2-billion purchase of a majority stake in the Indian mobile unit of Hong Kong-based Hutchison Whampoa. 

Official copy of the decision is still awaited.

Indian Insurance Regulator Proposed Exposure Draft on Servicing of Orphan Policies

Insurance Regulatory and Development Authority (IRDA), insurance market watchdog has issued draft regulations for Orphan Policies.

Introduction: Insurance agents are the most important channel of intermediation in the insurance business in India. Recognizing the importance of the agents in the procurement and servicing of insurance policies, the Insurance Act has two specific provisions, namely Section 40(2A) and Section 44 which protect the long term interests of agents. In brief, under provisions of Section 40(2A), lapsed policies which require medical examination prior to revival can be assigned to another agent after giving due notice to the existing agent to revive such policies. In such cases, new agent is entitled to commission of only 50% of what the procuring agent would have been entitled had the policy continued to be in force. Under Section 44, except on grounds of fraud, an agent who has served an insurance company for a period of 5 years shall be entitled, subject to certain conditions, to renewal commission on such policies if he discontinues his agency. However, agents who have completed 10 years of service with a given insurance company and stops for any reason his/her agency business but does not join another company are entitled to renewal commission on all such policies which they had placed. The commission on policies covered under Section 44 is inheritable and entitled to be passed on to the legal heirs of that agent.

2.     In the evolving Indian insurance context, it is noticed that a large number of agents discontinue services with a given insurance company before completing the minimum service prescribed. During the period of their service with a company they would have placed some policies and on the discontinuance of an agent such policies are left “orphan” and the policyholder suffers from lack of proper assistance in the servicing of the policy. The insurance company also suffers because of the drop of persistency which might occur in such cases. Given this pattern, IRDA believes it is important and in the interest of such policy holders to provide for a system where they are not denied the benefit of having an agent to look after their policy service issues in the best interest of policyholders.

3.     In order to address this gap created by exit of insurance agents well before attaining qualifying criterion as stipulated in Section 44, the Authority proposes to issue the following guidelines:

Guidelines on Servicing of Orphan Policies

1.       ‘Orphan life insurance policies’ for the purpose of these Guidelines, means the policies initially effected by an insurance agent whose services were subsequently terminated or removed from the rolls of the insurer excluding those policies to which the effecting agent is entitled to renewal commission under provisions of Section 44 of the Insurance Act. The policies that are considered eligible under proviso to section 40(2A) of Insurance Act also do not fall under the purview of this definition.

2.        “Allottee Agent” for the purpose of these guidelines is an individual insurance agent who is on the rolls of the life insurance company to whom the orphan, lapsed life insurance policies are allotted for the purpose of conservation and rendering the policy services. 

3.       ‘A lapsed life insurance policy’ for the purpose of these guidelines is a policy on which premium that is due and remained unpaid even after six months from the date of first unpaid premium.

4.       Insurance companies are allowed to allot any of the lapsed and orphan life insurance policies to individual insurance agents whose license is in force for the purpose of conservation and rendering effective policy service to the policyholders. Only a life insurance policy that is in lapsed condition on the date of allotment is eligible for allotment.

5.       Single Premium Life Insurance policies or life insurance policies on which no further premiums are due for payment (Limited Premium Payment Policies after the expiry of Premium Paying Term) are not eligible for allotment under these guidelines. Life Insurance Products designed with specific marketing features, inter alia, say direct / online marketing where no commission outgo is projected under respective File and Use are also not eligible for allotment. 

6.       The Life Insurers shall notify the particulars of ‘Allottee agent’to the concerned policy holders.

7.       The ‘Allottee agents’ shall be provided a list of such allotted life insurance policies along with the addresses for policy servicing. While submitting the list, it shall be stipulated that the purpose of submitting the said list is for rendering required policy services and any details thereof shall neither be parted with to any third party / entity nor be used for any other business purposes. However there is no bar in an ‘Allottee agent’canvassing new policies to the policyholder after reviving the lapsed allotted policies.

8.       It shall be specified to the ‘Allottee agent’ that the objective of the allotment is the conservation/revival and further servicing of the policies. 

9.       Regulation 8 of IRDA (Licensing of Individual Agents) Regulations, 2000 (Code of Conduct) applies to the ‘Allottee agent’ in respect of all the allotted policies. It shall be disclosed upfront to the Allottee agent.

10.   While allotting the policies for servicing, the life insurers shall direct the Allottee agents that all policy services shall be rendered similar to how an insurance agent would render to those policies that were otherwise effected by him / her. 

11.   The insurers are allowed to pay the following remuneration to the Allottee agent towards policy service in respect of the policies allotted to him/her

a.       Equivalent to the commission rates mentioned in the respective File & Use.

b.      The remuneration referred in 11 (a) above is payable only on revival of a lapsed orphan policy on account of arrears premiums received on or after the date of allotment and also on subsequent renewal premiums paid under the policy.

c.       No upfront / advance payments are allowed on account of the policy allotments referred herein.

d.      The payment of remuneration shall cease with the exit of an Allottee agent by any means and such Allottee agent will not be eligible for the benefits accorded by 44 of the Insurance Act.

12.   The policies that are allotted for servicing shall not be counted for persistency of the Policy allotted agent.

13.   The allotment of lapsed policies shall be done judiciously by the life insurers keeping in view the ability / feasibility of the insurance agents to service the policies allotted.

14.   Insurers shall also take in to account the track record of the agent and complaints registered against an agent etc. while allotting the orphan policies.

15.   The Life Insurers shall take an undertaking from the agents regarding their willingness for the proposed allotment and their consent for rendering the required policy services.

16.   Where a lapsed policy allotted is not revived / reinstated within 3 months from the date of such allotment, life insurers shall have the discretion to undo the allotment by issuing a formal notice to the Allottee agent and re-allot to any other agent as per the norms prescribed herein.

17.   An allotted policy which was revived or reinstated but lapsed subsequently may also be allotted in accordance to the provisions of the within referred stipulations. 

18.   Allotting the lapsed policies by a life insurance company is only an option.

19.   The Insurers shall put in place procedures for capturing the details of the Policy allotted agents who are servicing the allotted policies, in order to ensure that the objectives of allotment are met.

Comments if any on the above exposure draft may be forwarded to the following before 31^st March, 2012.