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.”

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.

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.”

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.

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.

Shadow Banking and Financial Instability

In a speech to the CASS Business School the Chairman of the Financial Services Authority (FSA), Lord Adair Turner, set out how the ‘shadow banking’ sector contributed to the financial crisis, the risks it still poses to financial stability and the importance of a sufficiently comprehensive and radical policy response.

Present speech has comprehensively covered various dimensions of Shadow Banking and contribution towards global financial instability, gist of present speech as follows:

In autumn 2008 the developed world’s banking system suffered a severe crisis. In response the world’s regulators and central banks have focused on building a more stable banking system for the future: less leveraged, more liquid, better supervised and with even the largest banks able to be resolved without taxpayer’s support. The implementation of that bank-focused regulatory agenda is still unfinished, but much progress has been made and Shadow Banking one of the strong reform components for Regulator.

While determining Shadow Banking, Lord Turner described there are three main conclusions:

• First, that we need to understand shadow banking not as something parallel to and separate from the core banking system, but deeply intertwined with it.
• Second, that the way in which shadow banking contributed to financial instability reflected fundamental developments in our financial system which are as relevant to banks as to shadow banks, which remain important today, and which could produce new problems in the future.
• Third, that as a result we should not take the decline in some specific indicators of shadow activity which has occurred since 2008 as suggesting that the risks have gone away.

The Financial Stability Board (FSB) has defined shadow banking as entailing ‘credit intermediation which occurs outside or partially outside the banking system, but which involves leverage and maturity transformation’.

The financial system intermediates flows of finance between non-financial providers of funds (typically households and corporates) and users of funds (typically households, corporates and governments). These flows can be in debt form (loans, bonds or other credit securities) or in equity form, or in various hybrids of the two.

‘Shadow banking’ occurs when we have credit flows outside or partially outside the banking system which do involve these distinctive features. This is the case when, for instance, a money market mutual fund lends money to an asset backed commercial paper SIV, which buys the tranched debt issued by a special purpose vehicle – a chain of intermediation which is functionally equivalent to banking, and which introduces both leverage and maturity transformation, but in multiple steps, rather than within one bank balance sheet.

Why did these developments occur? Lord Turner stated that in US Shadow banking is result of residential mortgage market which combined a commitment to provide 30-year fixed rate but repayable mortgages and the peculiar part-public/ part-private role of the government sponsored enterprises – Fannie Mae and Freddie Mac, existence until the mid-1980s of Reg Q limitations on bank deposit interest rates and the development of US financial regulation, which combined a dismantling of the Glass-Steagall separation between commercial and investment banking with a continued light touch regulation of the investment bank broker-dealers, a combination which enabled them to grow leverage far faster than the commercial banks.

However, in Europe seeds of Shadow banking is still different from US market. In Europe shadow banking is result of limited growth of residential mortgage securitisation – most European mortgages continuing even at the pre-crisis peak to be held on balance sheet, limited and somewhat different role for money market mutual funds and a much greater role of bank balance sheets in European credit intermediation.

And it is indeed important to be clear that much of the financial crisis in Europe did not involve shadow banking activities such as securitised lending, but plain old-fashioned on-balance sheet lending. Unlike in the US, losses on securitised mortgage lending in Europe have been relatively minor, with a bigger hit to bank balance sheets arising from commercial real estate loans – in particular in the UK, Ireland and Spain – primarily lent in the traditional fashion by traditional banks.

what we label ‘shadow banking’ suggests five interrelated factors which make the modern financial system inherently unstable:

• The interaction of secured lending practices and mark-to-market accounting, which exacerbates the risk of procyclicality and the volatility of credit creation.
• The creation of long, complex intermediation chains, which can increase the dangers of funding runs, and which make it difficult for authorities to see the development of excessive maturity transformation.
• The important links between funding liquidity and market liquidity, which can increase contagion risk across apparently separate markets.
• Increasing demands for ‘liquidity’ in asset holdings, and thus for cross-system maturity transformation, arising in part from practices and incentives within the asset management industry.
• And the danger that increasingly self-referential approaches to credit pricing, combined with inherently myopic and unstable assessment of tail risks can further increase procyclicality and instability.

In conclusion, Some of the specific measures required have already been introduced as part of the Basel 2.5 and Basel III reforms of banking regulation – higher trading book capital requirements, higher capital and liquidity standards overall. Some appropriate separation of market based activity and bank balance sheet activity will also be achieved by either Volcker or Vickers style reform.

One of the odder sounding recommendations to appear recently in an official report on shadow banking, is that made in the July 2010 report from the Federal Reserve Bank of New York, where the authors state clearly ‘We recommend putting the accompanying map of the shadow banking system on a 36 inch by 48 inch poster’. But it’s a necessary recommendation given the sheer complexity of the system they have mapped. Any system this complex will defy complete understanding and any belief that we can precisely calibrate our response to it will therefore be a delusion. Given the enormous cost which instability can produce, and given the uncertain benefits which this complexity has delivered, our regulatory response should therefore entail a bias to prudence – a bias against complex interconnectivity, against procyclical market contracts, and against allowing maturity transformation or high leverage to develop in unregulated institutions or markets.

Delivering a Twin Peaks Regulatory Model within the FSA

Financial Services Authority (FSA) vide press release FSA/PN/012/2012 published speech of Hector Sants, chief executive of the FSA in the British Bankers’ Association, , gave an update on the progress of the regulatory reform programme. He announced a major milestone in the regulatory reform programme, namely the introduction of a ‘twin peaks’ model operating within the FSA from 2 April 2012.

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 and one focusing on conduct. All other firms (i.e. those not ‘dual regulated’) will be solely supervised by the conduct supervisors.

He explained that the FSA could not completely replicate the approach proposed by the Government in the Financial Services Bill published on 26 January, but he emphasised that the changes would go as far as possible to ensure that the cutover to the new regulatory structure in early 2013 will be seamless.

The key characteristics of the model include:

• Two independent groups of supervisors for banks, building societies, insurers and major investment firms, covering prudential and conduct;
• Supervisors making their own, separate, set of regulatory judgements against different objectives;
• ‘Independent but coordinated regulation’ designed to allow internal coordination between both conduct and prudential supervisors to maximise the exchange of information relevant to their individual objectives, but with supervisors still acting separately when engaging with firms; and
• Retaining the principle of seeking to ensure that regulatory data is only collected once.

He emphasised that the change will embed the forward-looking, judgement-based approach and accelerate the move away from the old reactive style of regulation. He stressed that the changes must not just be structural but must involve behavioural shifts from both supervisors and firms.

Hector Sants said:

“The move to twin peaks is an opportunity to drive home and further embed the move to forward-looking, proactive, judgement-based supervision.  It is an opportunity that must not be missed.  We must crystallise the change from the old style reactive approach to the new style proactive approach.

“The most important change that will occur at twin peaks, in my judgement, is not the introduction of a new operational framework, but the opportunity to accelerate the process of behavioural change that the FSA embarked on when we began the reform of the supervisory process in the spring of 2008.”

He argued that if this new approach is to work effectively, firms would need to change the way they thought about regulation. Firms will be expected to:

• recognise the importance of aligning their goals with those of the supervisors and society as a whole;
• show a greater willingness to proactively comply with supervisory judgements.  “We are not asking firms to forgo their right to challenge their supervisor if their decisions have not been properly made.  But we are suggesting that dragging their feet in complying with requests when it is obvious to all that the outcome is in the best interest of society as a whole is not a behaviour which should survive in the new world”; and
• Recognise that this new approach will require greater resources and expertise and thus costs more than the old reactive model which existed prior to the crisis.

Hector Sants concluded:

“It is really important that we must use this opportunity to accelerate the behavioural and cultural change needed in both regulators and firms. The new world of judgement-based regulation needs to be embraced by us all.”

FSA Consultation Paper on Amendments to the Listing Rules, Prospectus Rules, Disclosure Rules and Transparency Rules

Financial Services Authority, UK has tabled consultation paper on Amendments to the Listing Rules,

Prospectus Rules, Disclosure Rules and Transparency Rules.

This consultation paper sets out proposals for changes to the Listing Rules to ensure that they reflect properly recent changes in market practices and so allow the UK Listing Authority (UKLA) to meet its objectives of:
• providing an appropriate degree of protection for investors in listed securities;
• facilitating access to listed markets for a broad range of enterprises; and
• seeking to maintain the integrity and competitiveness of UK markets for listed securities.

Present consultation paper focusing on the changes that are required as a matter of priority to ensure that the operational effectiveness of the Listing Regime is maintained. The principal areas in which we are proposing changes are:
• reverse takeovers;
• sponsors;
• transactions;
• financial information; and
• externally managed companies.

The Financial Services Authority invites comments on this Consultation Paper. Comments should reach us by 26 April 2012.

FSA has issued Discussion Paper on "Implementation of the Alternative Investment Fund Managers Directive"

Financial Services Authority (FSA), capital market regulator in United Kingdom published first discussion paper on "Implementation of the Alternative Investment Fund Managers Directive" in process to initiate coherent between EU directives and regulation of Alternative Investment Fund (AIF) industry in the country.

This Discussion paper (DP) to set out some provisional thinking in approach to implementing the European Union Alternative Investment Fund Managers Directive (the Directive or AIFMD) in the UK.

Objectives of the DP

This DP has two folds objective:

i) Development of well-informed, proportionate and effective regulatory policy on alternative investment fund managers (AIFMs); and

ii) Assisting stakeholders towards ‘AIFMD-readiness’,and establish regulatory changes in UK in line of the EU directive.

EU Directive on AIFM's

The European Union Directive on Alternative Investment Manager was published in the Official Journal of the European Union on 1 July 2011. EU Member States, such as the UK, are required to transpose the Directive by 22 July 2013.
The Directive is one of several pieces of EU and domestic regulation that firms, especially fund managers, will need to consider over the next 18 months. The EU Directive forms part of a legislative programme put forward by the Commission to ‘extend appropriate regulation and oversight to all actors and activities that embed significant risks’.

The goals for the Directive were to:
• establish a secure, harmonised EU framework for monitoring and supervising the risks that AIFMs pose to their investors, counterparties and other financial market participants and to financial stability; and
• permit, subject to compliance with strict requirements, AIFMs to provide services and market their funds across the internal market.

Meaning of Alternative Investment Fund (AIF)

There is no simple definition of an Alternative Investment Fund. In summary, Alternative Investment Funds are defined by their characteristics, including: a nontraditional strategy, a focus on risk rather than reward: reduced correlation to traditional markets and some form of performance based fee structure.

The EU Directive contains a fairly broad legal definition of an AIF which seeks to capture any investment fund which does not require authorisation under the UCITS Directive. The Directive also specifies a number of additional elements in the definition, including (i) the raising of capital from (ii) a number of investors (iii) with a view to investing that capital in accordance with a defined investment policy (iv) for the benefit of those investors.

Potential AIFs in UK

Present DP expects the AIF population to be diverse, which in turn would mean that there will be a diverse population of AIFMs. As an illustrative starting point, we expect that some, or all, of the following, may be considered UK AIFs:

• hedge funds, hedge funds of funds;
• private equity and venture capital funds;
• property funds;
• investment trusts;
• Real Estate Investment Trusts (REITs);
• FSA-authorised non-UCITS funds including Non-UCITS Retail Schemes (NURS), Funds of Alternative Investment Funds (FAIFs) and Qualified Investor Schemes (QIS);
• charity funds (these are distinct from social funds which are currently the subject of a Commission proposal for regulation);
• commodity funds; and
• infrastructure funds.

The Financial Services Authority invites comments on this Discussion Paper. Comments should reach us by 23 March 2012.
Comments may be sent by electronic submission using the form on the FSA’s website at: www.fsa.gov.uk/Pages/Library/Policy/DP/2012/dp12_01_response.shtml.