Every year, the Financial Services Authority (FSA) publishes its business plan which outlines its key priorities for the coming year. When the FSA published the Business Plan 2011/12 this April, unlike other years there was also the additional challenge of managing the regulatory reform agenda of dividing the FSA’s responsibilities between the new regulatory authorities of the Prudential Regulatory Authority (PRA) and the Financial Conduct Authority (FCA).
This article summarises a number of the issues raised by the FSA in its latest Business Plan, and the subsequent steps that the FSA has taken in relation to these issues, which relate to certain key developments in compliance systems and obligations that will be placed on firms.
DELIVERING THE NEW REGULATORY REFORM AGENDA IN THE UK
Since the announcement in June 2010 of the division of the FSA’s powers between two new authorities, the FSA has been working to implement the introduction of the PRA and the FCA. The FSA acknowledged in the Business Plan that the process will be progressive in nature and that the FSA will work with the Bank of England to ensure an efficient and effective transition.
Clearly, dividing the current FSA responsibilities between the new institutions will be a complex and resource intensive task, in addition to the FSA’s “usual” regulatory responsibilities. Since the Business Plan was published, the FSA has moved towards working under the new structure and has shifted its internal organisation into the business units that will, in time, move across to the PRA and the FCA respectively. The FSA has also produced and contributed to a number of publications and given many speeches relating to the new regulatory regime, including the FCA Approach to Regulation in June 2011.1 The steps taken to date suggest that the regulatory reform agenda is on target to be implemented in early 2013 as planned.
In relation to the cost of regulatory reform, the FSA estimates that creating the FCA will cost up to £25 million and the PRA an estimated £75 million to £150 million. The FSA has, however, stated in the Business Plan that it will “take care to minimise the impact of the cost of regulatory reform on firms.”
In December 2010 the FSA published a revised version of the Remuneration Code2 (Code), which, from 1 January 2011 applied to a wider range of firms than was previously the case (e.g., broker dealers and asset managers).3The FSA stated in the Business Plan that “we will ensure that it is rigorously applied and that the full benefits are realised in firms.” In this respect, the FSA has this year produced a number of documents designed to assist firms to comply with the Code, including guidance on particular issues and a pro forma document that firms may complete to evidence that they have complied with the Code. Moreover, the FSA has created a page on its website dedicated to its approach to the Code.4
In September 2010, the FSA published a policy statement outlining its plans to create a number of new controlled functions and associated changes to the FSA Handbook,5 which were due to take place on 1 May 2011. The FSA then postponed these changes “until further notice” and, at the time of writing, the FSA has not yet announced a new date for implementing these measures. However, the Business Plan referred to the FSA being “committed to improving standards of governance across the financial services industry” and, in this respect, it is possible the FSA will move forward with implementing these new rules in the near future.
The FSA stated in the Business Plan that it would work to provide more sophisticated and specialist in-depth risk analysis by producing a key supervisory tool for risk management. The more intensive supervision is designed to enhance “outcomes-based” supervision. In this respect, stress-testing remains a key tool for FSA supervisors, requiring firms to test their own ability to cope if the economic environment were to be significantly worse than predicted.
The Business Plan also refers to the introduction of Analytics and Risk Technology (ART) to strengthen the FSA’s risk analysis toolkit. The FSA has taken this forward with a pilot project for credit and capital stress testing, which is designed to ensure that ART is an appropriate tool for the PRA to use going forward.
The Business Plan stated that the FSA will continue with its intensive supervisory approach to client assets. Since then, as well as publishing a variety of policy related documents, the FSA has conducted a number of investigations into the manner in which firms supervise client assets. Following these investigations and the March 2010 consultation6 relating to the effective supervision of issues relating to the Client Assets Sourcebook (CASS), the FSA has created a new controlled function, CF10a, which will require an individual to take responsibility for compliance with CASS (which only applies to CASS “large” and CASS “medium” firms, with smaller firms required to have an individual with responsibility for CASS but not to have them approved for CF10a).
Another area on which the FSA is currently consulting is the use of title transfer collateral arrangements (TTCAs). The FSA has confirmed in Handbook Notice 113 that the use of TTCAs in relation to rolling spot forex contracts is prohibited from 1 October 2011. This ongoing process of consultation and reform of CASS shows that the FSA considers it a regulatory priority for 2011/12.
In an attempt to increase consumer confidence and improve consumer protection the FSA changed its approach to consumer protection in 2010. Under its new approach, the FSA intends to anticipate consumer detriment before it happens so it can be prevented. To implement discussion of this strategy, the FSA has published a discussion paper relating to product intervention,7 which outlines the proposals for this new approach. This is expected to be an entirely new supervisory model, which will require the FSA to have additional and more intrusive supervisory powers to allow them to implement the proposals.
The FSA stated in the Business Plan that it intends to deter criminal activity in the financial services industry by ensuring that firms improve their systems and controls, as well as taking enforcement action. Also, intensive, continuing supervision of FSA-authorised firms is expected to help protect against financial crime.
Since publishing the Business Plan, the FSA has taken active steps to enforce the market abuse regime. For example, in August 2011 the FSA announced that it had imposed a penalty of £8 million on Swift Trade for “layering,” a form of market manipulation.8 Swift Trade has appealed the decision to the Upper Tribunal. In addition, the FSA has banned and fined the CEO and CFO of Mercurius International (a hedge fund) for a range of offences amounting to market abuse.9
The FSA has also published a guide for firms on financial crime,10 which provides high-level guidance on implementing good practices to prevent financial crime.
The FSA stated in the Business Plan that it expects to consult on an ongoing basis with all relevant stakeholders, the European Securities and Markets Authority, relevant UK institutions (e.g., HM Treasury) and EU and UK industry associations on the formulation of a number of pieces of European legislation. In this respect, the FSA has indeed taken an active role in assisting with the implementation of European legislation relating to, amongst other things, the over-the-counter (OTC) derivatives market, the review of the Markets in Financial Instruments Directive,11 the implementation of the Alternative Investment Fund Managers Directive,12and the regulation of the commodity derivatives market.
Clearly, the reform and implementation of the regulatory structure in the UK will require considerable human resources. Hector Sants has labelled 2011/12 as “difficult” and the combination of considerable EU legislation on financial regulation coupled with implementing structural reform will be very demanding on the FSA.
However, the FSA’s view is that the reforms outlined in the Business Plan should make for a more resilient financial system that is better suited to dealing with systemic crises in the future. The reforms at EU level, once implemented, should help to re-build market confidence generally but particularly in OTC transactions and in the commodity markets. Ongoing regulation and the increasing willingness of the FSA to prosecute for market abuse and market manipulation is expected to give greater protection from financial crime. It seems the FSA believes that if these objectives can be achieved in time for the introduction of the PRA and the FCA then the FSA’s “difficult” year will be worth it.
Adrian Brown is a partner and head of the financial services regulatory practice at Nabarro LLP. He advises investment banks, broker dealers, fund managers and corporate finance houses on all aspects of financial services regulation. Telephone: +44 (0) 20 7524 6400; E-mail: email@example.com.
Sam Robinson is a senior associate in the financial services regulatory practice at Nabarro LLP. Sam has advised a number of clients including banks, stockbrokers, fund managers and investment advisers on all aspects of financial services regulation. Prior to working in private practice Sam worked for seven years at the FSA, the majority of that time in the FSA’s General Counsel’s Division. Telephone: +44 (0) 20 7524 6836; E-mail: firstname.lastname@example.org.
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