FSA Publishes New Rules to Ensure Pension Transfers

The Financial Services Authority (FSA), UK has published new rules and guidance, following consultation, to strengthen the protection for members of defined benefit pension schemes who are considering moving their money into personal pensions.

The changes are designed to deal with the FSA’s concern that in most cases a pension transfer is not in the best interest of pension scheme members.

The FSA is raising the standards on the assumptions used when a pension transfer value analysis (TVA) is made. This will make it less likely that an adviser will be able to recommend a transfer from a defined benefit pension scheme to a personal pension.

Respondents to the consultation welcomed the changes and there was broad support for updating and clarifying the assumptions.

Sheila Nicoll, director of conduct policy at the FSA, said:

“In the vast majority of cases someone in a defined benefit pension scheme will not be better off transferring to a personal pension. The new assumptions will make it tougher for advisers to make the case for a transfer. As a result of these new rules, we would expect the number of pension transfers to decrease, leaving pension scheme members better off.”

German Regulator Notified Procedure for Net Short Positions

Federal Financial Supervisory Authority (BanFin), German Capital Market regulator notified

"Net short positions" that exist on 26 March 2012 and have not yet been notified under the General Decree or that arise on 26 March 2012 are to be notified and/or published for the first time. Net short positions are to be notified by the end of 27 March 2012, (12 midnight) and, where they are also subject to the publication requirement, to be published within the above period.

Section 30i of the WpHG replaces the General Decree on transparency requirements of BaFin for the shares of ten selected companies of 4 March 2010. As of 26 March 2012, the notification and publication requirements for net short positions will pertain to all shares admitted to trading on the regulated market of a German stock exchange. 

The Regulation on Net Short Positions introduces details on calculating net short positions as well as an electronic notification and publication procedure. For the notifications, BaFin will make available an electronic notification procedure through its Reporting and Publishing Portal (Melde- und Veröffentlichungsportal – MVP). No later than when the first notification is submitted, a successful registration on the Reporting and Publishing Portal of BaFin and a registration for the specialised procedure for net short positions are necessary to be able to notify BaFin of net short positions electronically.

Notifications may be submitted by the person or entity subject to the notification requirements either itself, through its contact person or through an external third party. For notifications to be clearly attributed to the person or entity subject to the notification requirement, each person or entity subject to the notification requirement as well as their contact persons or external third parties must identify themselves to BaFin once, at the latest when the first notification is submitted. For this purpose, the application for the specialised procedure is to be printed out after being transmitted electronically, signed and then sent without undue delay to BaFin by fax or post with further documents required for identification. Once the written documentation has been received, BaFin compares the data provided electronically with the documentation submitted. In the event of successful verification, BaFin activates the notifying party’s account for the specialised procedure. From that point in time, the notifications are no longer deemed to be preliminary. BaFin informs both the reporting party and the person or entity subject to the notification requirement of such account activation.

For the notifying party’s account to be activated by BaFin as soon as possible (so that the notifications are no longer deemed preliminary), users can now register in advance without submitting a notification. Since a great number of persons or entities subject to the notification requirement and users can be expected, BaFin recommends using the opportunity of advance registration.

Canadian Regulator Provides Guidance To Improve Compliance of Disclosure Requirements Related to Prospectus Exemption

The Canadian Securities Administrators (CSA) published two notices aimed at improving market participant compliance with exemptions to prospectus requirements. Staff Notice 45-308 Guidance for Preparing and Filing Reports of Exempt Distribution and Multilateral Staff Notice 45-309 Guidance for Preparing and Filing an Offering Memoranda, offer guidance related to disclosure rules found under National Instrument (NI) 45-106 Prospectus and Registration Exemptions. 

“The CSA is committed to ensuring that market participants understand what is expected of them when relying on prospectus exemptions to sell securities,” said Bill Rice, Chair of the CSA and Chair and CEO of the Alberta Securities Commission. “These Notices not only provide clear guidance to assist issuers in preparing and filing certain exempt market documents, but also serve as a reminder to market participants who rely on prospectus exemptions that their filings or disclosure may come under staff review and that non-compliance may result in appropriate action by a CSA regulator.” 

The Notices primarily focus on Form 45-106F1 Report of Exempt Distribution and Form 45-106F2 Offering Memorandum for Non-Qualifying Issuers, and provide guidance on such topics as filing deadlines, correct and consistent reporting, financial statement requirements and adequate disclosure of certain information. 

Issuers should be aware that the primary responsibility for compliance with NI 45-106 rests with them and that the exempt market is not free from regulation and oversight.

Reserve Bank of India Opened External Commercial Borrowing Route for Civil Aviation Sector

Reserve Bank of India (RBI) has issued Circular on "External Commercial Borrowings (ECB) for Civil Aviation Sector". 

As per the extant guidelines, availing of ECB for working capital is not a permissible end-use. On a review of the policy related to ECB and keeping in view the announcement made in the Union Budget for the Year 2012-13, RBI has decided to allow ECB for working capital as a permissible end-use for the civil aviation sector, under the approval route, subject to the following conditions:

1. Airline companies registered under the Companies Act, 1956 and possessing scheduled operator permit license from DGCA for passenger transportation are eligible to avail of ECB for working capital;
   
2. ECB will be allowed to the airline companies based on the cash flow, foreign exchange earnings and its capability to service the debt;
   
3. The ECB for working capital should be raised within 12 months from the date of issue of the circular;
   
4. The ECB can be raised with a minimum average maturity period of three years; and
   
5. The overall ECB ceiling for the entire civil aviation sector would be USD one billion and the maximum permissible ECB that can be availed by an individual airline company will be USD 300 million. This limit can be utilized for working capital as well as refinancing of the outstanding working capital Rupee loan(s) availed of from the domestic banking system. Airline companies desirous of availing of such ECBs for refinancing their working capital Rupee loans may submit the necessary certification from the domestic lender/s regarding the outstanding Rupee loan/s.
   

ECB availed for working capital/refinancing of working capital as above will not be allowed to be rolled over.

The application for such ECB should be accompanied by a certificate from a chartered accountant confirming the requirement of the working capital loan and the projected foreign exchange cash flows/earnings which would be used for servicing the loan. Authorised Dealer should ensure that the foreign exchange for repayment of ECB is not accessed from Indian markets and the liability is extinguished only out of the foreign exchange earnings of the borrowing company.

The modifications to the ECB policy will come into force from the date of this circular. All other aspects of the ECB policy shall remain unchanged.

Japanese Regulator Extends Temporary Measures Regarding Restrictions on Short Selling and Purchase of Own Stocks by Listed Companies

Financial Services Agency (FSA), Japan laid down regulatory measures related to Regarding Restrictions on Short Selling and Purchase of Own Stocks by Listed Companies.

The following regulatory measures on short selling are currently in place, with regard to all listed stocks in Japan:

1) An "uptick rule requirement" which prohibits, in principle, short selling at the same as or prices lower than the latest market price

2) Requirements for traders to verify and flag whether or not the transactions in question are short selling; and

3) Request the exchanges to make daily announcements on their aggregate price of short selling regarding all securities and aggregate price of short selling by sector (The announcements have been made sequentially since October 14, 2008). (See the FSA press release on October 14, 2008.) 

In addition, the Financial Services Agency (FSA) has put in force the following measures, as temporary measures effective until April 30,2012 (See the FSA press release on October 24, 2011.):

1) Naked short selling (short selling in which stocks are not borrowed at the time of selling) is prohibited (effective since October 30, 2008); and

2) Holders of a short position of a certain level or more (in principle, 0.25 percent or more of outstanding issued stocks) are required to report to exchanges through securities firms. Exchanges are required to publicly disclose such information (effective since November 7, 2008). 

Regarding the purchase of own stocks by listed companies, taking into consideration the of situation Japan's capital markets, the following restrictions have been temporarily relaxed over the period from October 14, 2008, to April 30,2012. (See the FSA press release on October 24, 2011.)

1) Upper limit on the daily purchase volume: The limit will be raised from the current 25% to 100% of average daily trading volume during the four weeks immediately preceding the repurchase.

2) Timing of purchase: Companies are currently required to repurchase their own stocks during hours other than the 30 minutes immediately before the close of trading. This restriction will be lifted.

The FSA decided to further extend these temporary measures until October 31, 2012. To this end, the Cabinet Office Ordinances and FSA Regulatory Notices necessary for these extensions will be promulgated before expiry of these measures by the end of April, 2012.

CPSS IOSCO Report on Principles for Financial Market Infrastructures

The Committee on Payment and Settlement Systems (CPSS) and the Technical Committee of the
International Organization of Securities Commissions (IOSCO) issued final version of their new Principles for financial market infrastructures (PFMI report).

The PFMI report replaces the CPSS and IOSCO’s previous standards for systemically important payment systems, central securities depositories, securities settlement systems (SSSs), central counterparties (CCPs) and trade repositories (TRs) (collectively FMIs), namely:

- Core principles for systemically important payment systems (CPSIPS), issued in 2001;
- Recommendations for securities settlement systems (RSSS), also issued in 2001; and
- Recommendations for central counterparties (RCCP), issued in 2004.

In March 2011, CPSS and IOSCO published a draft version of the new principles in a consultative document. CPSS and IOSCO received 120 comment letters on the consultative document. The comments were detailed and constructive and were generally supportive of the principles. However some noted various areas for potential improvement, including greater clarity in some areas and more specificity on the application of the principles to certain types of FMI.

The PFMI report harmonises and, where appropriate, strengthens the previous international standards. It also incorporates additional detailed guidance for over-the-counter (OTC) derivatives CCPs and TRs. In general, these new standards are expressed as broad principles in recognition of FMIs’ differing organisations, functions and designs and the range of ways potentially available in relation to some issues to achieve a particular result.

In some cases, however, the PFMI report does incorporate a specific quantitative minimum requirement (such as in the credit, liquidity and general business risk principles) to ensure a common base level of risk management across FMIs and countries.

In addition to the new principles themselves, the PFMI report also outlines the general responsibilities of relevant authorities for FMIs in implementing these standards. CPSS and IOSCO members will strive to adopt the new principles by the end of 2012 and put them into effect as soon as possible. FMIs are expected to observe the principles as soon as possible.

Thai Regulator Proposed Regulations of Offer for Sale of ASEAN Collective Investment Scheme

The Securities and Exchange Commission, Thailand allows offer for sale of ASEAN Collective Investment Scheme (“ASEAN CIS”) to non-retail investor in Thailand within first half of 2012. This is under the Implementation Plan for ASEAN Capital Markets Integration in 2015 aiming at facilitating cross-border securities offerings in the region, strengthening potential of ASEAN capital markets and providing more alternatives to non-retail investor in Thailand. In addition, offer for sale of ASEAN CIS to retail investor will be allowed by the end of this year. 

Criteria for CIS to be offered will include (1) offer must be made only to institutional investor and high net worth investor with specified investment experience, financial status or income, (2) CIS operator must be subject to supervision of ASEAN capital market regulator which is a member of International Organization of Securities Commissions (IOSCO) and Signatory A of IOSCO MMOU concerning Consultation and Cooperation and the Exchange of Information, (3) CIS operator must appoint licensed securities broker as selling agent and (4) selling agent must comply with specified criteria including distribution of offering circular (fact sheet) prepared in Thai.  

The draft regulation includes qualifications of CIS to be offered to non-retail investor in Thailand, conditions relating to offer of CIS, duty of selling agent as well as procedure for filing of application for inspection on qualifications of CIS and allocation of quota for offshore securities investment. Stakeholders and the interested public are welcome to submit comments through the website until April 24, 2012.

Malaysia Issued Regulation of Shape and Structure of Financial Statements Announcement of Insurance and Reinsurance Company

The Capital Market Supervisory Agency in Malaysia and the Institute Finance issued regulations related  to insurance business, namely Chairman of Bapepam-LK Regulation of Shape  and Structure of Financial Statements Announcement Insurance and Reinsurance Company.

The background of the drafting of the Chairman of Bapepam-LK Regulation are:

The need for transparency (disclosure of information) a better idea of the condition an financial  performance of insurance companies and reinsurance companies.

Chairman of the enactment of the Capital Market Supervisory Agency and Financial Institution  PER-06/BL/2011 number of Form and Structure Reports and Announcements Report Business  Insurance and Reinsurance business with Sharia resulting need fo adjustments to the Directorate  General of Financial Institutions Decree No. Kep 4033/LK/2004 about the shape and composition as well as the Insurance Business Reports and Form Announcement of Financial Structure of Insurance and Reinsurance Compan and the Director General of Financial Institutions  Kep-390/LK/2005 Number Guidelines for calculation of Financial Soundness and Structure  Reports and Form Finance For Non PT Insurance Company, as amended by regulatio Chairman of  the Board of Supervisors Mo dal Market and Financial Institutions No. Per-09/BL/200 on the  amendment to the Director General of Financial Institutions No. Kep 390/LK/2005 Guidelines for  Calculation and Forms of Financial Soundness an Structure of the Financial Statements for  Non-Insurance Company PT.

The implementation of Statement of Financial Accounting Standards (SFAS) No. 1 of the  Presentation Financial statements result in the need for adjustments to the shape and arrangement financial statements of insurance companies and reinsurance companies.

The shape and arrangement of the announcement of annual financial statements of insurance companies and reinsurance companies set out in appendix Chairman of Bapepam-LK Regulation.

These include the shape and arrangement of the announcement to:
a. Insurance companies and reinsurance companies with conventional principles;
b. Insurance companies and reinsurance companies with the conventional principles who has a business unit of insurance with Islamic principles;
c. Life Insurance Company with conventional principles;
d. Life Insurance Company with the conventional principle that has a business unit of insurance with Islamic principles;
e. Life Insurance Company with the conventional principle that market insurance products That Associated with an Investme

SEBI Amended Equity Listing Agreement

Ministry of Corporate Affairs vide Notification dated February 28, 2011 has revised the format for disclosure of Balance Sheet under Schedule VI of the Companies Act, 1956.

Pursuant to the same, it has been decided to carry out consequential amendments to Clause 41 of the Listing Agreement regarding interim disclosure of financial results by listed entities to the stock exchanges, which has been drawn from the format under Schedule VI of the Companies Act, 1956. Accordingly, the format for the said disclosure has been given in the circular.

The above shall be applicable for financial year ended on March 31, 2012 for all filings made after the date of this circular.

SEBI Issued Guidelines for Business Continuity Plan (BCP) and Disaster Recovery (DR)

Securities and Exchange Board of India (SEBI) issued Guidelines for Business Continuity Plan (BCP) and Disaster Recovery (DR). 

SEBI stated that in the event of disaster, the disruption in trading system of stock exchanges / depository system may not only affect the market integrity but also the confidence of investors. In order to address this issue, the current BCP - DR setups of some of the stock exchanges having nation-wide terminals and depositories were examined by the Technical Advisory Committee of SEBI (TAC). Based on the recommendations of TAC, the broad guidelines for BCP - DR are given below:

i. The stock exchanges and depositories should have in place Business Continuity Plan (BCP) and Disaster Recovery Site (DRS) so as to maintain data and transaction integrity.

ii. Apart from DRS, stock exchanges should also have a Near Site (NS) to ensure zero data loss.

iii. The DRS should be set up sufficiently away, i.e. in a different seismic zone, from Primary Data Centre (PDC) to ensure that both DRS and PDC are not affected by the same disasters.

iv. The manpower deployed at DRS / NS should have similar expertise as available at PDC in terms of knowledge / awareness of various technological and procedural systems and processes relating to all operations such that DRS / NS can function at short notice, independently.

v. Configuration of DRS / NS with PDC:

a) Hardware, system software, application environment, network and security devices and associated application environments of DRS / NS and PDC should have one to one correspondence between them.
b) Exchanges / Depositories should have Recovery Time Objective (RTO) and Recovery Point Objective (RPO) not more than 30 minutes and 4 hours, respectively.
c) Solution architecture of PDC and DRS / NS should ensure high availability, fault tolerance, no single point of failure, zero data loss, and data and transaction integrity.
d) Any updates made at the PDC should be reflected at DRS / NS immediately (before end of day) with head room flexibility without compromising any of the performance metrics.
e) Replication architecture, bandwidth and load consideration between the DRS / NS and PDC should be within stipulated RTO and ensure high availability, right sizing, and no single point of failure.
f) Replication between PDC and NS should be synchronous to ensure zero data loss. Whereas the one between PDC and DR and between NS and DR may be asynchronous.
g) Adequate resources (with appropriate training and experience) should be available at all times to handle operations on a regular basis as well as during disasters.

vi. DR Drills / Testing

a) DR drills should be conducted on quarterly basis. In case of exchanges, these drills should be closer to real life scenario (trading days) with minimal notice to DR staff involved.
b) During the drills, the staff based at PDC should not be involved in supporting operations in any manner. To begin with, initial three DR drills from the date of this circular may be conducted with the support of staff based at PDC.
c) The drill should include running all operations from DRS for at least 1 full trading day.
d) Before DR drills, the timing diagrams clearly identifying resources at both ends (DRS as well as PDC) should be in place.
e) The results and observations of these drills should be documented and placed before the Governing Board of Stock Exchange / Depositories. Subsequently, the same along with the comments of the Governing Board should be forwarded to SEBI within a month of the DR drill.
f) The system auditor while covering the BCP – DR as a part of mandated annual system audit should also comment on documented results and observations of DR drills.

vii. BCP – DR Policy Document

a) The BCP – DR policy of stock exchanges and depositories should be well documented covering all areas as mentioned above including disaster escalation hierarchy.
b) The stock exchanges should specifically address their preparedness in terms of proper system and infrastructure in case disaster strikes during business hours.
c) Depositories should also demonstrate their preparedness to handle any issue which may arise due to trading halts in stock exchanges.
d) The policy document and subsequent changes / additions / deletions should be approved by Governing Board of the Stock Exchange / Depositories and thereafter communicated to SEBI.

The Alternative to Shareholder Class Actions: The SEC Blocks Arbitration without any Explanation

Present Blog is the gist of an Article published April 1, 2012 on Wall Street Journal Hal Scott And Leslie N. Silverman.

Last month, the Securities and Exchange Commission rejected attempts by the Carlyle Group, and proposals by stockholders of Pfizer and Gannett, to mandate arbitration rather than litigation in disputes between investors and management. The SEC gave no explanation for its action on Carlyle (related to an upcoming public offering), and it said opaquely the Pfizer and Gannett proposals might violate the securities laws.

Arbitration has opponents inside the agency, of course, and among plaintiffs lawyers. They claim stockholders will receive less for management wrongdoing, and that this will lead to less deterrence of such wrongdoing. But this argument ignores some important facts. And it does not address the problem identified by the Committee on Capital Markets Regulation—that securities class-action litigation may be the most burdensome feature of U.S. capital markets.

From 2000 through 2011, the total value of all U.S. securities class-action settlements was approximately $64.4 billion, according to NERA Economic Consulting. These settlements do little to accomplish the class action's traditional goals of compensation and deterrence. Unlike mass tort litigation, securities class actions involve stockholders who are often both plaintiffs and investors in the defendant corporation. The suits are invariably settled before trial, generally for pennies on the dollar. Small investors recover so little they often do not bother to file for their money: 40%-60% of settlement funds generally go unclaimed, according to research prepared for the Committee on Capital Markets. Regardless, plaintiffs attorneys take up to 35% of the total settlement.

The lawsuits do little to deter wrongdoing. The stockholders funding a settlement generally have no knowledge of management misdeeds—they simply held the wrong stock at the wrong time. Managements—the actual wrongdoers and proper objects of deterrence—rarely pay a dime, as the corporation's directors' and officers' insurance picks up the settlement cost. 

Real deterrence comes from whistleblowers and the media, whose reports of fraud send share prices plunging. Deterrence also comes from the strongest public-enforcement system in the world—administered by the Department of Justice, the SEC and the state officials.

Securities class actions undercut the competitiveness of the U.S. capital markets. Plaintiffs attorneys have demonstrated a clear tendency to target the largest public companies, and because insurance firms will not provide settlement coverage over a few hundred million dollars, public companies face substantial risk. Further, foreign corporations are reluctant to list and trade here, while private U.S. corporations have grown wary of going public.

In 2011, 7% of U.S. companies that did go public did so abroad. They were no doubt motivated in part by the litigiousness they can avoid under the Supreme Court's decision in Morrison v. National Australia Bank (2010), which does not permit securities claims by private plaintiffs for shares purchased or sold on a foreign exchange. Historically, it was almost unheard of for American companies to go public outside the U.S.

It does not have to be this way. Companies and their stockholders have recently begun exploring mechanisms by which disputes must be settled in individual, private arbitration, taking advantage of the lower costs and quicker results such arbitration affords. They are following the national policy in favor of arbitration embodied in the Federal Arbitration Act of 1925 and confirmed by the Supreme Court in AT&T Mobility v. Concepcion (2011), which struck down a California anti-arbitration law. Other important Supreme Court cases include Rodriguez de Quijas v. Shearson American Express (1989), which held that arbitration does not violate federal securities laws that prohibit waivers of substantive rights guaranteed by law, such as anti-fraud provisions.

Despite arbitration's endorsement by Congress and the Supreme Court, the SEC has rebuffed efforts to substitute arbitration for securities class actions. So in the recent cases cited above, investors—prospective, in the case of Carlyle, and existing, in the case of Pfizer and Gannett— were deprived of the opportunity to decide upon the dispute-resolution procedure they preferred.

The SEC prides itself on ensuring that U.S. markets are transparent, but in ruling out arbitration it has said no without any explanation. The matter deserves a fair hearing.

CSA and IIROC Implement a Dark Liquidity Framework in Canada

The Canadian Securities Administrators (CSA) and the Investment Industry Regulatory Organization of Canada (IIROC) are implementing a new regulatory framework for the use of orders entered without pre-trade transparency (dark orders). 

The CSA, the council of the securities regulatory authorities of Canada’s provinces and territories, co-ordinates and harmonizes regulation for the Canadian capital markets. 

IIROC is the national self-regulatory organization which oversees all investment dealers and trading activity on debt and equity marketplaces in Canada.

To implement the framework, amendments have been made to National Instrument 21-101 Marketplace Operation and to the Universal Market Integrity Rules (UMIR), approved by the CSA on March 30, 2012. The framework is comprised of the following key elements: 

• Visible order priority –Visible orders will have execution priority over dark orders on the same marketplace at the same price; 
• Meaningful price improvement – In order to trade with a dark order, smaller orders must receive a minimum level of price improvement, which is defined as one trading increment or half a trading increment for securities with a bid-ask spread of one trading increment; and 
• Minimum size – IIROC has the ability to designate a minimum size for dark orders. It is not doing so at this time, but the CSA and IIROC will monitor market developments closely to consider whether and when IIROC should implement a minimum size. 

Effective October 10, 2012, the UMIR provisions will introduce a comprehensive and proactive regulatory approach to safeguard the price discovery process in Canadian equity markets. 

“The Canadian capital markets are developing rapidly and it’s incumbent on regulators to set high standards to ensure these changes are in the best interests of investors and the markets,” said Bill Rice, Chair of the CSA and Chair and CEO of the Alberta Securities Commission. “This new regulatory framework strikes an appropriate balance that will allow for continued innovation while maintaining fair and efficient capital markets.” 

“The new rule framework recognizes the increasing use of dark liquidity and balances displayed and dark liquidity for healthy price discovery,” added Susan Wolburgh Jenah, IIROC President and Chief Executive Officer. “These proposals are intended to ensure Canadian equity markets continue to evolve in a fair and competitive manner that strengthens market integrity and investor protection.” 

The initiative follows extensive consultations with industry and stakeholders that began in 2009. The rules are designed to enable institutional traders to continue to execute large orders with minimal market impact, while ensuring that investors with smaller orders receive meaningful price improvement when they trade with dark orders. 

A copy of IIROC’s Notice of Approval “Provisions Respecting Dark Liquidity” is available here at IIROC.

Canadian Regulator Seeks Comment on Proposed Over the Counter Derivatives Exemptions

The Canadian Securities Administrators (CSA) published for comment CSA Consultation Paper 91-405 - Derivatives: End-User Exemption. The Consultation Paper, which is part of a series of proposals designed to improve the regulatory oversight of over-the-counter (OTC) derivatives in Canada, sets out the CSA Derivatives Committee’s recommendations for an exemption from specific requirements being developed to regulate over-the-counter (OTC) derivatives. This end-user exemption would be available to qualifying businesses that use OTC derivatives as a risk management tool. 

The paper sets out the Committee’s position on the application of the proposed end-user exemption such as what criteria would be required to qualify, what criteria were considered but excluded, and what a qualifying end-user would need to do to rely on the proposed exemption. 

“The CSA’s commitment to establish a comprehensive framework for OTC derivatives regulation must balance the need to meet international commitments with the needs of individual market participants in Canada,” said Bill Rice, Chair of the CSA and Chair and CEO of the Alberta Securities Commission. “The proposed end-user exemption would permit a business that uses OTC derivatives to manage its own business risks to continue to use these products in a cost effective manner, without increasing risk to the overall market.”

French Regulator Complies with the ESMA Guidelines on Automated Trading

The Autorité des marchés financiers (AMF) has included the ESMA guidelines1 on automated trading in its position the provisions of which will apply from 7 May 2012.

These guidelines, issued on the basis of the Market in Financial Instruments (MiFID) and Market Abuse directives, set out the methods for implementation of certain provisions of these directives and their implementing directive in the particular field of automated trading systems, most notably high frequency trading.

They mainly concern the following activities:

- The operation of an electronic trading system by a regulated market or a multilateral trading facility (MTF);
- The use of an electronic trading system, including algorithmic trading, by an investment firm when dealing on own account or for the execution of orders on behalf of clients;
- The provision of direct access to the market or of sponsored access by an investment firm as part of the service of the execution of orders on behalf of clients.

Swiss Consultation Paper on Adapting FINMA Circular "Capital Buffer and Capital Planning – Banks"

The Swiss Financial Market Supervisory Authority (FINMA) is opening a consultation on adapting FINMA Circular 11/2 "Capital buffer and capital planning – banks". The Circular, which has been in force since 1 July 2011, is based on provisions prescribed in the current Capital Adequacy Ordinance (CAO) pertaining to the requirements for the quality of capital needed for the capital buffer. To date, the quality of capital defined in the CAO has been in accordance with Basel II. Since the CAO is currently being fully revised and adjusted to incorporate the modified definition of the term 'equity capital' as specified in the Basel III reform package, it is also deemed necessary to change the Circular appropriately. Comments on the proposed adjustments to the Circular may be submitted up to 30 April 2012.

Thailand Regulator Issues Draft Regulations on Overseas Investment through Derivatives Broker

The Bank of Thailand (BOT) has approved the proposal to allow retail investors to invest in derivatives traded on foreign derivatives exchange without limiting investment objective only to risk management. The proposed draft regulations aim to provide investors with more variety of investment alternatives and promote new income channels for securities companies as well as increase experiences in overseas investment.

Under the proposed regulations, derivatives brokers must have infrastructure in place to render service to retail investors to trade derivatives on foreign derivatives exchange. While the investment objective in relation to derivatives trading will no longer be limited, derivative brokers, in providing the service, will be required to comply with rules and practices prescribed by the Association of Securities Companies with the SEC approval. 

Chinese Regulator (CSRC) Enhance Regulation Over Mutual Funds Information Disclosure

The China Securities Regulatory Commission (CSRC) held a press briefing to release a circular, which required fund management companies to use the XBRL model when they publicly disclose the net value of fund assets, as of May 1. The CSRC will release the net asset value data presented by fund management companies on the website: fund.csrc.gov.cn.

An official with the CSRC said forced information disclosure is a part of the system advantages of China’s funds industry, and it enables fund management companies to win the trust of investors. In a bid to strengthen funds information disclosure, the CSRC in 2008 strengthened efforts to improve digital information disclosure of funds. It applied the XBRL (extensible business reporting language) technology to facilitate electronic automatic exchange and intellectual recognition & analysis of funds information, which solved the problem of distribution and utilization of funds information. In the recent three years, the CSRC has released four funds information XBRL models, and completed digital distribution and display of all funds’ regular reports, net asset value disclosure and some provisional announcements. So far, there have been around 510,000 digital documents on the website: fund.csrc.gov.cn, and investors could inquire about more than 950 funds on the website.

As required by the country’s relevant rules, the circular set the format and contents of net asset value disclosure—“table plus mark of words”. That method allies to disclosures of net asset value (except money market funds), yields of money market funds and net asset value of structured funds. As early as in 2009, the CSRC had tried the XBRL model of funds net asset value disclosure. So the latest model is based on the experiences of the past three years. In addition to the regular disclosure of net asset value, the circular also required fund management companies to disclose information of dividend distribution & ex-dividend, so investors can better understand the volatility of the funds net asset value.

The CSRC official said the commission will continue improving digital information disclosure of funds, promoting digital distribution of fund contracts, pushing forward market reform of the fund products approval, and promoting the digital distribution of the second batch of provisional announcements. At the same time, efforts will be stepped up to enhance regulation over information disclosure, prompt fund management companies to improve information disclosure quality, and foster credibility and compliance in the funds industry.

Chinese Regulator Releases Guidance Document on Uncovered Losses of Listed Companies

The China Securities Regulatory Commission (CSRC), Chinese capital market watchdog held a press briefing to issue a guidance document(CSRC Announcement [2012] No.6), detailing regulation requirements as regard to uncovered losses of listed companies after major asset reorganization.

A CSRC official said the guidance document clarified regulation requirements for listed companies, which had uncovered losses after major asset reorganization. After share issue, asset acquisition or major asset reorganization, a new listed company inherits uncovered losses of the original listed company. According to the Company Law and the Administrative Measures for the Issuance of Securities by Listed Companies, the new company would not be able to distribute cash dividends or refinance through public securities issue for a long time because of the uncovered losses. First, the guidance document ordered that the listed companies must not use its capital reserve to cover the losses according to the Company Law. Second, the listed company must not cover the losses by transferring the capital reserve to increase share capital and shrinking stock circulation to circumvent relevant regulations. Third, the listed company should alarm risks about the uncovered losses in provisional announcements and annual reports. Fourth, when it makes a major asset reorganization, the listed company should alarm risks about inherited losses in the reorganization report.

The official said the CSRC will study and closely follow new problems and new situations in regulation of listed companies, and inform the public of those cases, so as to make its regulation more transparent and easier to understand, and form a unified yardstick for regulations of the CSRC and stock exchanges.

Guernsey's New Sanction Measures against Iran

The States of Guernsey has adopted new sanction measures against Iran.  The new sanctions carry forward the existing sanctions, introduce additional categories or persons as being subject to asset freezing provisions, and extend certain restrictions to the provision of insurance or reinsurance.
Financial services businesses and prescribed businesses will need to familiarise themselves with the new sanctions and check their records to ensure compliance.

Further information on the sanctions and any notifications which need to be made are contained on the States of Guernsey website which can be accessed through the following link: www.gov.gg/sanctionsiran.

Please note that it is proposed that similar legislation will be put in place for Alderney and Sark.

Malaysian Regulator has Updated Equity Guidelines

Securities Commission (SC), Malaysia has updated Guidelines on the Offering of Equity and Equity-linked Securities in Malaysia.

The Equity Guidelines, which supersedes the Guidelines on the Offering of Equity and Equity-linked Securities issued on 1 February 2008 by the SC, is issued under section 377 of the Capital Markets and Services Act 2007 (CMSA) and applied by the SC in considering the following proposals under section 212 of the CMSA:

(a) Issues and offerings of equity securities;
(b) Listings of corporations and quotations of securities on the main market of Bursa Malaysia Securities Bhd (Bursa Securities) (Main Market); and
(c) Proposals which result in a significant change in the business direction or policy of corporations listed on the Main Market.

More specifically these guidelines are generally applicable to body corporates whether they are incorporated in Malaysia or outside Malaysia. However, these guidelines, do not apply to proposals undertaken by corporations seeking listing or listed on the alternative market of Bursa Securities (ACE Market) (except for a proposed transfer of listing from the ACE Market to the Main Market).

General principles

These guidelines are formulated to ensure a fair and consistent application of policies. The requirements set out in these guidelines represent the minimum standards that have to be met by applicants embarking on proposals. Accordingly, applicants must observe the spirit and the wording of these guidelines.

The principles on which these guidelines are based embrace the interests of listed corporations, the provision of investor protection and maintenance of investor confidence, as well as the need to protect the reputation and integrity of the capital market. The principles include the following:

(a) Issuers must be suitable for listing and have minimum standards of quality, size, operations, and management experience and expertise;
(b) Issuers and their advisers must make timely disclosure of material information and ensure the accuracy and completeness of such information to enable investors to make an informed assessment of the issuer, the proposals and the securities being offered;
(c) Issuers and their directors, officers and advisers must maintain the highest standards of corporate governance, integrity, accountability and responsibility;
(d) Directors of an issuer must act in the interests of shareholders as a whole, particularly where a related party has material interest in a transaction entered into by the issuer;
(e) All holders of securities must be treated fairly and equitably and must be consulted on matters of significance; and
(f) Proposals undertaken by issuers must not undermine public interests.

In circumstances not explicitly covered, in making its decision, the SC will have regard to the general principles outlined in the Guidelines where applicable for specific proposals submitted for the SC’s consideration.

New Zealand Regulator Calls for Submissions on Exemption Reviews

The Financial Markets Authority (FMA), New Zealand Capital Market Regulator is seeking submissions from market participants, investors, representatives and advisers on review of 44 class exemption notices due to expire later this year.

FMA is able to grant exemptions from provisions of various securities laws. Exemptions remove rigidities in the law and ensure standards set for market participants are reasonable and cost-effective. They provide relief where the costs of compliance are not matched by improved outcomes for investors or market participants.

Background

FMA may grant exemptions from various provisions of the Securities Act 1978, Financial Reporting Act 1993, Securities Markets Act 1988, Financial Advisers Act 2008 and regulations made under those Acts.

Forty-four class exemption notices expire between June and November 2012, with the bulk expiring on 30 September 2012. Forty-two provide exemptions from the provisions of the Securities Act 1978 and two provide exemptions for overseas issuers from the Financial Reporting Act.

Purpose of exemptions

Exemption notices recognise that organisations and entities with widely differing aims and circumstances are affected by securities law. Full compliance with all the requirements of securities law will not always provide the best outcomes for investors, and can also result in unnecessary compliance costs. Examples of exemptions on which submissions are being called for are: 

Real Property Developments

This notice recognises that memberships and shares offered as ancillary features to real estate transactions can allow residents in a property development to use and enjoy communal facilities. They are not investments in the usual sense. The notice exempts the developer and the society or company from the standard offer document disclosure requirements, among other things.

Charitable and Religious Purposes

This notice recognises that the investors in debt securities offered by charitable and religious organisations are motivated by a desire to support the charitable goals of the organisation in question, as well as possibly making an investment. The notice exempts charitable and religious organisations from the trustee and trust deed, and standard offer document disclosure requirements, among other things.

FMA will review each of the 44 notices before they expire. As part of the review process FMA is calling for submissions from all interested parties on their experience with the notices, and proposals on whether, and if so how, the exemptions should be renewed consistently with FMA's regulatory objectives.

The final date for submissions is 7 May 2012. The consultation paper and request for feedback can be found here.

European Advisory Authorities Publish Report on Money Laundering

The Joint Committee of the three European Supervisory Authorities (EBA, ESMA and EIOPA) has today published two reports on the implementation of the third Money Laundering Directive [2005/60/EC] (3MLD).

The “Report on the legal, regulatory and supervisory implementation across EU Member States in relation to the Beneficial Owners Customer Due Diligence requirements” analyses EU Member States’ current legal, regulatory and supervisory implementation of the anti-money laundering/counter terrorist financing (AML/CTF) frameworks related to the application by different credit and financial institutions of Customer Due Diligence (CDD) measures on their customers’ beneficial owners. The report sought to identify differences in the implementation of the Directive and to determine whether such differences create a gap in the EU AML/CTF regime that could be exploited by criminals for money laundering and terrorist financing purposes.

The “Report on the legal and regulatory provisions and supervisory expectations across EU Member States of Simplified Due Diligence requirements where the customers are credit and financial institutions” provides an overview of EU Member States’ legal and regulatory provisions and supervisory expectations in relation to the application of Simplified Due Diligence (SDD) requirements of the 3MLD. The report focuses exclusively on one particular situation of low risk where SDD is applicable, namely where the customer is a credit or financial institution situated in a EU/EEA state or in a country that imposes equivalent AML/CFT requirements.

Both reports come to the conclusion that there are significant differences in the implementation across the EU Member States, and that some of these differences could create undesirable effects on the common European Anti Money Laundering Regime. The reports find that some of these differences are not due to the Directive’s minimum harmonisation approach, but instead appear to stem from different national interpretations of the Directive’s requirements. Both reports also call on the European Union to consider addressing these problems.

The Joint Committee

The Joint Committee is a forum for cooperation that was established on 1st January 2011, with the goal of strengthening cooperation between the European Banking Authority (EBA), European Securities and Markets Authority (ESMA) and European Insurance and Occupational Pensions Authority (EIOPA), collectively known as the three European Supervisory Authorities (ESAs).

Through the Joint Committee, the three ESAs cooperate regularly and closely and ensure consistency in their practices. In particular, the Joint Committee works in the areas of supervision of financial conglomerates, accounting and auditing, micro-prudential analyses of cross-sectoral developments, risks and vulnerabilities for financial stability, retail investment products and measures combating money laundering. In addition to being a forum for cooperation, the Joint Committee also plays an important role in the exchange of information with the European Systemic Risk Board (ESRB) and in developing the relationship between the ESRB and the ESAs.

Unfair Contract Terms – Ensuring a Fair Deal for Consumers

This blog is gist of speech by Clive Gordon at the FSA’s Unfair Contract Term’s Seminar on Wednesday 21 March 2012

  

Introduction

The contracts you have with your customers are among the most important that a business can have. Certainty about your obligations to your customers and theirs to you, are the lifeblood of your businesses. It is very important, therefore, that you get your consumer contracts right.

We want to use the time we have today to help you understand our view of what terms are unfair, what we consider is good practice and what we consider is poor practice. But, in the end, it is you and your senior management who are responsible for ensuring that your contract terms are fair.

It’s hard to argue with the principle that fair contract terms should be the basis on which all of you conduct your business, but it’s also important to remember that unfair terms can create serious problems and costs.

We could take action against you and you could end up in court and have unfair terms struck out. In these cases you would have to spend management time and energy dealing with putting things right, including perhaps paying significant compensation. You could lose business because consumers don’t trust you to deal fairly with them. 

Examples of poor practice

Despite the importance of consumer contracts, we remain disappointed in the lack of attention that many firms give to them. For example:

• by not reacting to legal and/or regulatory developments at the FSA or the OFT;
• by not reviewing contracts routinely; and
• the lack of good staff training or setting an example from the top down (if senior management are not aware of how a firm’s systems and controls operate, or what the contract approval processes are, it is unlikely that good practice will filter down through the rest of the firm).

Our concern about the inadequate attention that some firms give to their consumer contracts is mirrored by the experience of consumers themselves.

For this year’s Retail Conduct Risk Outlook, we commissioned consumer-focused research and found that some consumers had concerns about unilateral changes in their contract terms and the way that they were being treated by firms. Consumers were experiencing frustration with their dealings with firms.

To give you just one pet insurance example, one respondent’s dog had an ongoing complaint with its back leg. The dog was then, unfortunately, diagnosed with diabetes. When the respondent submitted the insurance claim for treatment she was informed, over the phone, by her insurance company, that they had, in fact, cancelled her policy because her dog had died. During the phone call, the insurance firm were insisting that the dog was dead even though the dog in question was barking away in the background.

After she complained to a head of department she was sent a new policy but was disappointed to find that the nature of the cover for her dog had changed, so it no longer covered the diabetes the dog had been diagnosed with.

I’d like to share with you the sense of frustration that this particular consumer had. She said: ‘they changed like, half of it and it didn't cover the diabetes side of it and they won’t start me on what the old policy was .... who else is going to insure[my dog] now?’. ‘They had me over a barrel. I can’t get to anybody. I can’t get to the right person. Nobody’ll give me a name who I can write to, to complain. I’ve spoke to the head of department, I’ve spoke to this one, I’ve spoke to that one, I’ve complained’.

This consumer’s experience shows that a number of issues are often inter-related: contract terms, complaints-handling, a firm’s practices and its systems and controls.

The research we carried out also showed that consumers:

• thought that their contracts were too complicated and needed to be simpler, clearer and in plain English;
• they were unhappy about firms changing their terms and conditions before the end of the contract term; and
• they wanted their contract terms to reflect the natural meaning of words – for example, consumers had been misled by seeing an everyday word, such as ‘redundancy’ in their contract, only to find that this word was a defined term in the contract and given a different meaning by the firm.

Where there is confusion about which contract term prevails, or what an unintelligible contract term means in practice, consumers cannot fully appreciate what service they should be receiving from you. This means consumers may not be receiving a fair deal. It is surely not good business practice for you to be using contracts which are difficult to understand or confusing – why would you want to do this? 

Systems and controls

I am often surprised by the number of times a firm will respond to concerns we raise about a particular contract term by saying ‘ah well, yes, actually, we don’t ever enforce that particular term’. Well, if this is really true, then what is it doing in the contract in the first place? What does it say about a firm’s systems and controls if its contracts contain terms which it has no intention of applying? How is a consumer supposed to know that?

Our concern about systems and controls has led us to conduct an increasing amount of work in this area. We want to identify the root causes of why some firms continue to have unfair terms in their contracts.

We think that the wording of contracts should be something that you should consider at the product design stage, to ensure that the contracts are clear and fair and accurately reflect the features of the product as designed. Our interest in this is in line with our objective of adopting a more intensive and intrusive supervisory approach. We want to tackle the underlying cause of problems and not just the symptoms. 

Examples of good practice

However, I should say that it is not all doom and gloom. We have come across some very good practices, which I would like to share with you:

• First, we have met some of you and you have told us how you review our published notices of undertakings against your own contract terms. Notices of undertakings provide you with an indication of what type of terms we consider are likely to be unfair.
• Second, we have seen some of you considering your contract terms at the product design stage, ensuring that you have appropriate contract approval processes and the systems and controls in place to ensure that someone with the requisite skills and knowledge is providing sign-off. In addition, some of you are regularly reviewing your contracts.
• Third, I think staff training is key. If your front-line staff are aware of how contract terms are worded and operate in practice, this can influence how they are perceived by consumers, because it is these staff that they meet and talk to.
• Finally, and perhaps most importantly, to achieve all of the above, you need to have support from your senior management. We have seen examples of this in practice. In one instance, we were in discussions with a firm’s compliance officer about the firm’s contract terms and were experiencing some resistance in relation to amending these terms. However, when the CEO became aware of the issue, it was resolved very quickly and the CEO’s attitude filtered down through the firm.

We have seen some great examples of where some of you have been determined to make sure that your contracts are in line with the Regulations. Some of you have even gone beyond what is indicated by the Regulations, where you thought this was in the best interests of your consumers.

We have also noticed that some of you take pains to ensure that your contracts are easy to read and understand. You group together similar terms and adopt a clear layout. Some of you also highlight important or onerous terms, which we think encourages fair treatment of your customers. 

How we are helping you

So how can we help you? We want you to give your customers a fair deal. But we still see too many problems caused by unfair contract terms. Although getting contract terms right is your responsibility, we try to help you understand how to get this right.

In publishing our notices of undertakings we aim to help you by being open and explaining our reasoning as to why we think a particular contract term is likely to be unfair. Historically, our undertaking notices have been relatively short but, in recent years, we have set out the rationale for considering that a particular term is likely to be unfair. We have done this to help you understand our approach and what is expected of you. We also think that including a greater level of detail, helps you to read across the principles from one financial sector to another.

We will continue to publish undertakings where we consider that firms have included terms in their contracts that are likely to be unfair. This helps consumers and firms by making them aware of:

• the changes that a particular firm is making to a contract; and
• what types of term are likely to be unfair in general.

In future we may publicise undertakings more to ensure that the message reaches consumers and firms. 

Conclusion

In conclusion, by publishing our most recent guidance on unfair contract terms, and running this seminar, we are making our expectations clear. It means that there can be no more excuses from you that you have misunderstood how the Regulations work.

I encourage you to engage with today’s sessions as fully as possible. Our work and your work, however, will not stop at the end of today’s seminar. We hope that you will be able to take what you have learnt today and be proactive about reviewing your contracts and making any necessary changes.

The key messages that I would like you to take away today are:

• First, it is your responsibility to ensure that your contracts are compliant and treat your customers fairly so that they get a fair deal.
• Second, we expect to see improvements in your contract terms to ensure that consumers receive a fair deal. If you are not prepared to engage with the Regulations, then we are prepared to go to court to seek an injunction to prevent you from relying on an unfair term.

It would be a very positive development indeed for you and for me if, in the future, we both had to spend less time and resource on unfair contract terms.

As Martin Wheatley, the FCA’s CEO designate, has recently said, we are expecting more from firms as we move into the new world of the FCA. We believe not only will this lead to a fairer deal and better outcomes for consumers, but a healthier and more efficient market.

Singapore Introduces Panel for the Financial Advisory Industry Review (FAIR)

The Monetary Authority of Singapore (MAS), capital market watchdog has announced the composition of the Review Panel for the Financial Advisory Industry Review (FAIR).

The Review Panel will be chaired by MAS’ Assistant Managing Director for Capital Markets, Mr Lee Chuan Teck, and comprise representatives from industry associations, consumer bodies, the investment community, academia, media, and other stakeholders.  The panel composition is in Annex A. 

The Review Panel will review and propose recommendations on the five key thrusts of FAIR, as outlined by MAS Managing Director, Mr Ravi Menon on 26 March 2012:

(i) raise the competence of financial advisory (FA) representatives;
(ii) raise the quality of FA firms;
(iii) make FA a dedicated service;
(iv) lower distribution costs; and
(v) promote a culture of fair dealing.

FAIR will build on the foundations laid by the industry-led Committee on Efficient Distribution of Life Insurance (CEDLI) which, in 2000, made far-reaching recommendations for the insurance industry on areas such as needs-based advisory process, disclosure practices, and training and competency requirements.  FAIR will cover all firms engaged in the financial advisory business – including banks, insurers, stockbrokers, financial advisory firms – and their representatives, and all investment products regulated by MAS under the Financial Advisers Act (CAP. 110).

Said Mr Lee Chuan Teck, Assistant Managing Director for Capital Markets, MAS “Our vision is for financial institutions to put customers first, and for customers to have access to affordable life insurance and investments to meet their financial planning and retirement needs.  We are not there yet.  Preliminary findings in a recent Mystery Shopping exercise that we commissioned show that up to one-third of recommendations by FA representatives were “clearly unsuitable” and representatives were not upfront in disclosing fees and charges.  FAIR is an opportunity for financial institutions and consumers to build mutual trust, towards sustainable growth in the FA industry, and a more secure financial future for Singaporeans.”

MAS invites consumers and industry practitioners to work with us to achieve our objectives of financial institutions that consistently deliver fair dealing outcomes and competent representatives who provide quality advice. Please refer to Annex B for the questionnaire and feedback channels. The completed questionnaire should reach MAS by 1 May 2012.

ANNEX A

Panel for the Financial Advisory Industry Review (FAIR)

Chairman
• Mr Lee Chuan Teck, Assistant Managing Director, Monetary Authority of Singapore

Members
• Mr Esmond Choo, President, Securities Association of Singapore
• Ms Genevieve Cua, Wealth Editor, The Business Times
• Mr David Gerald, President, Securities Investors Association (Singapore)
• Mr Lester Gray, Chairman, Investment Management Association of Singapore
• Mr Piyush Gupta, Chairman, The Association of Banks in Singapore
• Ms Aurill Kam, Partner, Rajah & Tann LLP
• Professor Francis Koh, Deputy Dean, Lee Kong Chian School of Business, Singapore Management University
• Mr Kuo How Nam, President, Credit Counselling Singapore
• Mr Augustine Lee, President, Association of Financial Advisers
• Mr Ong Ye Kung, Deputy Secretary-General, National Trades Union Congress
• Mr Seah Seng Choon, Executive Director, Consumers Association of Singapore
• Mr Tan Hak Leh, President, Life Insurance Association Singapore
• Mr Yee Ping Yi, Chief Executive Officer, Central Provident Fund Board

ANNEX B

Financial Advisory Industry Review (FAIR) – Questionnaire

The Monetary Authority of Singapore invites suggestions from the public on how the financial advisory (FA) industry in Singapore may be improved. 

The Financial Advisory Industry Review (FAIR) aims to: (i) raise the competence of FA representatives; (ii) raise the quality of FA firms; (iii) make FA a dedicated service; (iv) lower distribution costs; and (v) promote a culture of fair dealing.

Based on the key thrusts of FAIR outlined above, what changes would you like to see in the FA industry?

1. Raise the competence of FA representatives

A basic level of education is required to understand the increasing diversity and complexity of financial products.

Questions:

a. Currently, any person who possesses 4 GCE “O” Level credit passes can become an FA representative.  Is this sufficient? If not, what do you think is an appropriate educational requirement for representatives, and should exceptions be made for existing and/ or older representatives?

b. How else can we improve the quality and professional standards of FA representatives?

2. Raise the quality of FA firms

FA firms (institutions other than banks and insurers which offer FA services) vary in size.  Some are large, with up to several hundred representatives, while others have only two representatives.  The CEOs and Executive Directors of FA firms are currently required to have a minimum of 5 years of relevant working experience and 3 years of managerial experience. The minimum paid-up capital requirement for most FA firms is S$150,000 and all FA firms are required to maintain a professional indemnity insurance of S$500,000 to buffer against possible claims from customers for wrongful advice or misrepresentation.

Questions:

a. What is your experience in dealing with or purchasing insurance and investment products from banks and insurers versus FA firms?  Do you have a preference as to which type of financial institution you deal with?

b. Should FA firms be of a certain minimum size, say, in terms of the number of representatives or financial resources?

3. Make FA a dedicated service

FA representatives being involved in non-FA work

Giving proper financial advice is an important job.  MAS is of the view that money lending, promoting junkets for casinos, selling real estate and marketing investment products which are not regulated by MAS, are in clear conflict with financial advisory. 

Questions:

a. What other activities, if any, should FA representatives not be permitted to engage in?

b. Should FA representatives pursue other paid activities that may not be in conflict with their FA role, but which may distract them from their professional focus?  Should these activities be subject to guidelines in terms of earned income, or absolute or percentage time spent?

Use of introducers

Introducers are typically paid a fee to refer customers to financial institutions, or they may receive a cut of the sales commissions generated.  Introducers may be individuals whose fit and proper credentials have not been vouched for by any financial institution. Customers may face undue pressure and inducement from introducers to buy products when introducers go beyond merely introducing.  This could result in customers not receiving proper advice, or purchasing unsuitable products.

Questions:

a. Should financial institutions be allowed to use “introducers” to reach out to customers?  Would you hold the introducer accountable if your relationship with the financial institution or representative turns sour?

b. Do you have views on or experience in being “introduced” to financial institutions and their products and services, by individuals who are paid a commission for the referral?  Please share your experience.

FA activities in insurance brokers

Insurance brokers help customers source for and purchase general insurance (eg. motor, property insurance).  Some insurance brokers provide FA services to their customers, including marketing life insurance policies and unit trusts.

Questions:

a. Do you have any views on insurance brokers providing financial advisory service?

b. Do you look to your insurance broker for financial advice or to purchase life insurance or other investment products?  Why or why not?

4. Lower distribution costs

The commission-based remuneration and distribution structure

The FA industry today is largely commission-based.  A multi-tier distribution structure is common in insurance companies and large FA firms.  Representatives in the upper tiers share in the commissions earned by lower-tier representatives who provide insurance and financial advice to the customers.

Questions:

a. Do you think FA representatives should be paid solely or largely in commissions? Should Singapore move towards a fee-based model for remunerating FA representatives? 

b. Would you be prepared to pay an upfront fee for financial planning and advisory service (even if this does not result in purchase of life policy or investment products), instead of commissions based on sales concluded?

c. What do you think is a reasonable amount to pay for financial advice?

d. Do you think having different commissions for different products affects an FA representative's ability to recommend suitable products to the customer?

The transparency of distribution and other related costs

Presently, benefit illustrations in insurance policies show the total distribution costs but do not show the direct payout to an FA representative.  Benefit illustrations also do not include a detailed breakdown of the proportions of premiums that are channelled towards protection and investment on bundled insurance products.

Questions:

a. Do you find the current benefit illustrations easy to understand?  Are you aware of, and does it matter to you, how much your premiums go to direct commissions?

b. Are you aware of how much your premiums for life or investment-linked policies are allocated between protection and investment/savings? 

5. Promote a culture of fair dealing

Dealing fairly with customers should be embedded in financial institutions’ ethos and values.

Questions:

a. What do you look for in the financial institutions or representatives you deal with, that will demonstrate most convincingly they are dealing fairly with customers?

b. How do you think we can promote a culture of fair dealing in the industry?

Australian Regulator Provides Direction on Market Structure Reforms

Australian Securities and Investments Commission (ASIC), capital market regulator in Australia announced it has refined its proposals for market structure reform and issued a timetable for implementing the regulatory framework. 

Based on feedback on the key issues impacting market structure outlined in Consultation Paper 168 Australian equity market structure: Further proposals (CP 168), ASIC has revised its proposals, to:

• On automated trading – make no new rule on algorithm testing, make a new rule for kill switch capabilities, amend existing rules to require annual review of systems; and publish guidance clarifying our expectations on trading system controls, testing of systems and additional minimum standards for direct market access.
• On extreme price movements – amend existing anomalous order threshold and extreme cancellation range rules, and extend those amended rules (as adopted) to the ASX SPI 200 index futures contract.
• On enhanced data for surveillance – make a new rule requiring identification of some information (but not all of the information mentioned in CP 168 recognising cost to industry); make no change to current clock synchronisation rules; publish guidance on format of information provided to ASIC.
• On best execution – make no change to current obligations.
• On pre-trade transparency – make the new rule on price improvement and alter the block sizes as proposed and make no new rule on a minimum size threshold for dark orders. However, we plan to consult further with industry on these plans and potential triggers for future application of a minimum size threshold for dark orders.

ASIC Deputy Chairman Belinda Gibson said, ‘One of ASIC’s objectives is to ensure financial markets are fair and efficient. Therefore we have sought feedback from industry on our original proposals to reform market structure and reviewed our position in light of that feedback. We plan to make changes where necessary so market prices can be transparent and our market will be robust through inevitable periods of volatility. 

 

‘The improved framework should lead to a more internationally competitive market with confident and informed investors and efficient capital formation. ASIC is concerned to ensure that we have the flexibility to maintain this competitive market regulatory model. 

 

‘Along with industry feedback, we have considered recent market developments here and overseas including the increasingly automated nature of trading and the trend towards more frequent, smaller trades, away from public markets,’ she said.
The timetable for implementing the regulatory framework is:

Continue industry consultation and prepare draft market integrity rules and guidance	April / May 2012
Release revised draft market integrity rules and guidance for four week consultation with an analysis of potential impacts Publish feedback report to CP 168	June 2012
Make final market integrity rules and release final  guidance and regulation impact statement (subject to Ministerial consent)	September / October 2012
Final rules take effect	Staggered implementation to end Q1 2014