The following posts provide a snapshot of the principal U.S., European and global financial regulatory developments of interest to banks, investment firms, broker-dealers, market infrastructures, asset managers and corporates.
UK Competition and Markets Authority Publishes Working Paper on its Investment Consultancy Investigation
As part of its market investigation into the supply and acquisition of investment consultancy services and fiduciary management services, the U.K. Competition and Markets Authority has published the first in a series of working papers on specific aspects of the investigation, as envisaged by the progress report it published in February 2018. The working paper sets out the CMA’s analysis and emerging findings to date in respect of the information available to pension trustees on the fees and quality of investment consultants and fiduciary managers. It should be read together with the issues statement for the investigation, which was published in September 2017. The working paper also provides an update on the CMA’s developing thinking on potential remedies that might be applied in the event that the CMA was to find an adverse effect on competition. Remedies being considered by the CMA include guidance and off-the-shelf materials for running better tenders, standardised information for prospective clients in response to tenders, better fee information, standardised performance metrics and stronger service quality metrics.
UK Competition Authority Updates Stakeholders on the Investment Consultants Market Investigation
Following a market investigation reference from the Financial Conduct Authority in September 2017, the Competition and Markets Authority has published a progress report on the Investment Consultants Market Investigation that it is carrying out into the supply of investment consultancy services and fiduciary management services to, or the acquisition of such services by, institutional investors and employers. The institutional investors who use investment consultancy services are mainly pension schemes but also include charities, insurance companies and endowment funds.
The progress report sets out the steps that the CMA has taken to date, such as the publication of the Issues Statement in October 2017, the hearings it has held and the visits it has made to the three largest investment consultants. The report also provides a list of working papers that the CMA intends to publish in the next few months, which will provide the CMA's emerging thinking on specific areas of the Investigation, such as information on fees and quality of service that investment consultants and fiduciary managers provide to current and prospective clients, the performance of investment consultants' recommended asset managers, conflicts of interest and market concentration. The CMA also confirms, as proposed in the Issues Statement, that the Investigation will focus on pension schemes as clients of investment consultants and fiduciary managers.
The CMA will publish a Provisional Decision report in July 2018, to which interested stakeholders can provide feedback in advance of the publication of the final report in March 2019.
View the progress report.
View the Issues Statement.
UK Financial Conduct Authority Moots Global Sandbox
The Financial Conduct Authority has issued a questionnaire on whether a global regulatory sandbox for fintech and other innovative businesses would be beneficial and how it would operate. The FCA set up the United Kingdom's Regulatory Sandbox in 2016 to provide a controlled environment for firms looking to develop and launch innovative businesses models. Similar sandboxes have been introduced in other countries as diverse as the United States, Australia, Bahrain, the Abu Dhabi Global Market, the Netherlands, Hong Kong, Malaysia, Thailand, Canada and Singapore. Other countries have officially announced the establishment of a sandbox or are in the process of setting up their sandbox.
The FCA considers that a global sandbox could allow firms to conduct tests in different jurisdictions at the same time. It could also bring regulators together to identify and work on solutions to common cross-border regulatory issues. Recognizing that establishing a global sandbox would be an enormous task, the FCA also suggests, as an interim measure, the establishment of an international college of regulators with innovation or sandbox models, so that firms could access multiple regulators simultaneously. This approach would also allow the regulators to share and learn from each other about new innovative business models.
The FCA requests feedback on the ideas by March 2, 2018. The FCA expects to provide an update on the global sandbox proposition later in March 2018.
View the FCA webpage.
View the questionnaire.
UK Financial Conduct Authority Elaborates on its Mission and Consults on Approaches to Competition and Authorization
The UK Financial Conduct Authority has published two consultations, seeking feedback on draft documents setting out its regulatory approach to authorization and competition. The two documents, once finalized, will form part of a series of formal approach documents explaining the FCA's approach to regulation in more depth. They should be read alongside the FCA's Mission document, which was first published in October 2016 and most recently updated in November 2017.
In the consultation on its approach to authorization, the FCA explains the public value and purpose of requiring authorization to conduct regulated financial services activities and the FCA's current approach to authorizing firms and individuals. The FCA seeks feedback on four questions: (i) understanding of the Threshold Conditions that firms and individuals must meet for authorization, and any areas where the FCA might be more specific; (ii) how the FCA might improve its approach to supporting firms and individuals to meet the minimum standards and how the FCA might better promote competition; (iii) whether the FCA has suggested the correct commitments to firms making authorization applications and what other commitments could be made; and (iv) whether the FCA has prioritized the right strategic goals, and, if not, what additional goals could add the most public value to the FCA's work.
UK Competition & Markets Authority Consults on Upcoming Focus Areas
The UK Competition & Markets Authority has launched a consultation on its proposed focus areas for 2018/2019. The consultation paper sets out the CMA's draft plans and priorities and a number of key commitments and initiatives across the areas of: markets and mergers, CMA development and resources, enforcement and preparing for the UK's exit from the EU. The CMA proposes, among other things, to deal with a higher volume of enforcement cases, advance consumer protection, support business compliance, consider specific markets or practices, enhance its processes around assessing mergers, improve the effects of remedies by conducting evaluations of previous projects, enhance its operational effectiveness by establishing a new digital team and to continue its preparation for Brexit. The CMA has secured additional funding for the 2017/2018 financial year to enable it to prepare for the anticipated increase in cases that will fall within the CMA's remit post-Brexit. The CMA notes that the additional £2.8 million funding per year from 2018/19, allocated in the Autumn budget, will enable it to initiate more enforcement cases against companies allegedly acting unfairly.
The consultation closes on January 14, 2018. The CMA intends to publish its final Annual Plan in March 2018.
View the consultation paper.
UK Financial Conduct Authority Alleges Breach of Competition Law By Four Asset Management Firms
The Financial Conduct Authority has published a Statement of Objections issued to four asset management firms under the Competition Act 1998. Using its competition enforcement powers for the first time, the FCA alleges that Artemis Investment Management LLP, Hargreave Hale Ltd, Newton Investment Management Limited and River & Mercantile Asset Management LLP shared information by exchanging information concerning the price they intended to pay in relation to initial public offerings and a placing, shortly before the prices were set. The FCA's provisional view is that they have infringed competition law. The firms have the opportunity to respond to the allegations. Individuals that could materially assist in the FCA's assessment of the case may request a non-confidential version of the statement of objections from FCA by no later than January 12, 2018.
View the FCA's Statement of Objections.
UK Competition and Markets Authority Highlights Potential Issues in Investment Consultancy and Fiduciary Management
Following a market investigation reference from the Financial Conduct Authority, the Competition and Markets Authority has published the issues statement for the market investigation it is carrying out into the supply of investment consultancy services and fiduciary management services to, or the acquisition of such services by, institutional investors and employers.
The CMA's issues statement sets out its general approach to the market investigation and outlines potential issues and possible remedies that might be put in place if competition issues are found. In particular, the CMA focuses on: (i) whether difficulties in customers' ability to assess, compare and switch investment consultants means that investment consultants have little incentive to compete for customers; (ii) whether conflicts of interest on the part of investment consultants reduce the quality and/or value for money of services provided to customers; and (iii) whether barriers to entry and expansion mean there are fewer challengers to put pressure on the established investment consultants to be competitive , which could lead to worse outcomes for customers.
The CMA is requesting feedback on the issues statement by October 12, 2017.
View the Statement of Issues.
View the CMA Case Page.
View the CMA Press Release.
UK Financial Conduct Authority Makes Market Investigation Reference for Investment Consultancy and Fiduciary Management Services09/14/2017
The Financial Conduct Authority has made a market investigation reference to the Competition and Markets Authority in relation to investment consultancy and fiduciary management services. The institutional investors who use investment consultancy services are mainly pension schemes but also include charities, insurance companies and endowment funds.
Financial Conduct Authority Sets Out Terms of Reference for Investment Platform Market Study
Following on from the final report of its Asset Management Market Study in June 2017, which highlighted potential competition issues in the investment platforms sector, the Financial Conduct Authority has published the terms of reference for its investment platform market study. The market study will involve a number of different areas in order that the FCA can ascertain whether competition between platforms is working in the interests of consumers. The FCA intends to look into competition in the sector by exploring the following areas: barriers to entry and expansion; business models; platform profitability; the impact of financial advisers; and consumer preferences and behaviour. Noting the increasing vertical integration in the sector, the FCA will also consider commercial relationships between platforms, asset managers, discretionary investment managers and financial advisers given the potential of these relationships to distort competition. The market study will include all firms offering retail investment products through online portals. It will also include product and wrapper providers that use platforms to distribute their products, fund rating and data providers and the technology providers to whom platforms outsource services.
Comments on the terms of reference are invited by September 8, 2017. The FCA expects to publish an interim report in Summer 2018.
View the Terms of Reference.
UK Regulator Consults on Persistent Debt and Earlier Intervention Remedies as Part of Credit Card Market Study
The Financial Conduct Authority has published a consultation paper on persistent credit card debt and earlier intervention remedies. The remedies and interventions outlined in the consultation paper form part of the overall package of remedies announced by the FCA in July 2016 in its credit card market study final findings report. The FCA then concluded that competition was working fairly well for the 30 million consumers who hold a credit card. However, the FCA expressed significant concerns regarding the scale, extent and the nature of persistent credit card debt and the limited incentives provided by firms to reduce this.
UK Payment Systems Regulator Consults Further Remedies for Competition Issues Relating to Bank Ownership of Payment Infrastructure
The Payment Systems Regulator published proposals for remedying the lack of competition in the provision of UK payments central infrastructure for Bacs, FPS and LINK which means that the incumbent provider, VocaLink, faces limited competitive pressure and minimal incentives to provide more efficient and innovative services.
The PSR published its final report on its market review into the ownership and payment infrastructure competitiveness in the UK on July 28, 2016. The final report identified the competition issues and outlined potential remedies, including undertaking competitive procurement exercises, such as issuing guidance and requiring operators of payment service providers to follow a prescribed set of processes and implementing enhanced interoperability, including a common international messaging standard, for Bacs and FPS, and divestment by the four largest shareholders in VocaLink. Following feedback to those initial proposals, the PSR is now consulting on mandating competitive procurement exercises for Bacs, FPS and LINK when the operators of these systems purchase central infrastructure services and introducing the ISO 20022 messaging standard in future procurements for Bacs and FPS.
Steps Taken to Implement the Remedies Emerging from the UK's Retail Banking Market Investigation
The UK's Competition & Markets Authority published proposals for the implementation of certain remedies to counter the adverse effects on competition which were identified in the CMA's final report on the retail banking market investigation. The CMA published its final report into the supply of retail banking services to personal current account customers and small and banking services to small and medium-sized enterprises (SMEs) in the UK in August 2016. In that report, the CMA made several recommendations, including the introduction of Open Banking, a single digital application that allows customers to manage their accounts with multiple providers. In response to that recommendation, the nine providers identified in the CMA's report have made proposals for the structure, membership, governance and funding arrangements of the Implementation Entity. It is proposed, amongst other things, that the Implementation Entity's Steering Group would comprise the nine providers as well as representatives of FinTechs, smaller "challenger" banks and payment service providers. Andrew Pinder has already been appointed as Implementation Trustee and will oversee the work of the Implementation Entity. Comments on the Implementation Entity proposals should be provided to the CMA by October 21, 2016.
UK Competition and Markets Authority Final Report on Retail Banking Market Investigation
The UK Competition and Markets Authority published its final report on its market investigation into the supply of retail banking services to personal current account customers and small and medium-sized enterprises (SMEs) in the UK. The report outlines its findings and a proposed package of remedies. The CMA aims to implement all elements of the package by the end of September 2018.
UK Regulator Reports on Credit Card Market
The Financial Conduct Authority published its final report outlining findings from its credit card market study. The FCA credit card market study was launched in November 2014. The purpose of the study was to analyze the credit card market and determine whether it is working in the interest of consumers and to develop remedies to improve the situation if needed. Interim findings were published in November 2015 with potential remedies mooted for certain issues such as the frequent withdrawal of firms’ promotional offers and the fees associated with a single month’s missed payment. The final report summarizes feedback received on the interim report and outlines the FCA’s package of remedies.
UK Competition and Markets Authority Consults on Proposals to Reform Retail Banking
The Competition and Markets Authority published a provisional decision on market issues regarding personal current accounts and retail banking services for small-and medium-sized enterprises. The decision is part of the CMA’s retail banking investigation which commenced on June 19, 2013. The decision outlines proposals to combat issues hindering competition in personal current accounts and in banking services for SMEs. The CMA considers that competitive pressures in retail banking are weak and that diversification of the banking sector is not the most efficient and accurate way to increase competition. Instead, the CMA is proposing a package of remedies, focused on innovation and the provision of information to customers, coupled with technological development.
Interim Report on Investment and Corporate Banking Market Study Published by Financial Conduct Authority
The Financial Conduct Authority published its interim report on the investment and corporate banking market study, which includes proposed remedies to the deficiencies identified. The FCA proposals include removing the practice of banks using contractual clauses to restrict client choice, reducing barriers to entry for non-universal banks without undermining the efficiency benefits of cross-selling and improving the credibility of league tables for investment and corporate banking. The FCA also intends to investigate further whether individual banks whether there are any issues in conflicts management in the allocation of Initial Public Offerings.
UK Government Consults on Draft Innovation Plan for Financial Services
The UK Government launched a consultation on a draft innovation plan for financial services. The innovation plan covers the work of each of the financial services regulators – the Financial Conduct Authority, the Payment Systems Regulator, the Prudential Regulation Authority and the Bank of England – setting out the steps that each regulator has taken or intends to take to adapt to new technologies and disruptive business models to encourage competition and growth and to better utilize technologies to reduce burdens on business and create efficiency savings. The consultation seeks feedback on the UK's regulatory environment for financial services supporting innovation, whether the regulators understand innovation and where new technologies might emerge, if there are any gaps that the regulators should focus on and if there are ways that the regulators could better utilize technologies. Responses are requested by May 6, 2016.
UK Payment Systems Regulator Publishes Interim Outcome of Review into the Supply of Indirect Access to Payment Systems
03/10/2016The UK Payment Systems Regulator published its interim report relating to its market review into the supply of indirect access to payment systems. The PSR considers that competition in the supply of indirect access is going in the right direction for indirect payment services providers. However, the regulator has concerns about choice, service quality and the ability of indirect payment services providers to switch providers. Responses to financial crime regulation is limiting the provision of indirect access. The PSR does not intend to take regulatory action at this stage but will monitor developments in the industry to assess whether its concerns are addressed. The PSR is seeking feedback on its interim findings and its approach and comments are due by May 5, 2016.
View the PSR's interim report.
UK Regulators Will Not Apply Bonus Cap Requirements to Smaller Firms
The Prudential Regulation Authority and Financial Conduct Authority jointly announced that they will comply with all aspects of the European Banking Authority's Guidelines on Sound Remuneration Policies published in December 2015, save for the approach related to the Bonus Cap. The Bonus Cap approach relates to provisions that establish that the limit on awarding variable remuneration to 100% of fixed remuneration, or 200% with shareholder approval must be applied to all firms subject to the Capital Requirements Directive. The PRA and FCA favor a risk-based approach in the application of the Bonus Cap, which under CRD principles allows for firms to comply in a way that is proportionate and appropriate to the firm's size, internal organisation, nature, scope and complexity of business. As the EBA Guidelines represent an interpretation of the CRD with which the PRA and FCA do not agree, the PRA and FCA will continue to use the current approach which requires smaller firms to determine an appropriate ratio between fixed and variable remuneration. The Guidelines are applicable to banks and investment firms and cover all staff, with particular aspects focusing on staff whose professional activities have a material impact on a firm's risk profile. The Guidelines set out detailed requirements for remuneration policies and related governance arrangements for implementing remuneration policies and apply from January 1, 2017.
View the EBA's Guidelines on Sound Remuneration Policies.
View the PRA and FCA's joint statement.
UK Competition and Markets Authority Extends Timetable for Investigation into Retail Banking Market
The Competition and Markets Authority announced that it is likely to extend the timetable for its investigation into the retail banking market. A decision on the extension is expected to be taken in March 2016, when a timetable for publication of the final report will also be published. The report was originally scheduled for publication in February 2016. A provisional report, published in October 2015, identified several competition issues in the Personal Current Accounts and Small and Medium-sized Enterprises banking market, including: (i) small numbers of customers switching to different bank accounts, due to banks not being under sufficient competitive pressure to attract customers; (ii) new banks and new products not attracting new customers; and (iii) high numbers of SMEs holding their business accounts in the same banks as their PCAs, with low levels of switching. The CMA states that, further to its provisional findings, a number of new suggestions have been made for achieving better outcomes for current account customers and that it wishes to ensure that there is enough time to hear from interested parties so that all of the proposals can be considered properly.
View the press release.
View the CMA's provisional report.
UK Parliament Treasury Committee's Letter to Bank of England on Challenger Banks
A letter addressing possible competition issues between established and challenger banks dated October 7, 2015 sent from the Chairman of the Treasury Committee, Mr. Andrew Tyrie, addressed to the Deputy Governor for Prudential Regulation at the Bank of England, Mr. Andrew Bailey, was published. The letter refers to the potential difficulties challenger banks may face in satisfying the conditions required to use the Internal Ratings-Based approach for calculating credit risk. Mr. Tyrie is concerned that newer banks may be at a competitive disadvantage to more established banks, given that the IRB approach leads to lower capital requirements compared to the Standardized Approach which newer smaller banks would be able to use more easily. The letter asks whether: (i) the new corporation tax regime for banks encourages competition between new and established banks; (ii) adaptations made by the Prudential Regulation Authority's to capital requirements for new banks will be effective in overcoming the competitive disadvantage that new banks may face; (iii) the PRA has plans to make further adjustments to capital or other requirements for new banks; (iv) the PRA is restricted, and if so, to what extent, from making further adjustments to newer banks' capital requirements under the Capital Requirements Directive IV or other EU legislation; and (v) there has been a reduction in requests for pre-application discussions with the PRA and Financial Conduct Authority since the new tax regime was announced in July 2015.
View the letter.
UK Regulator Launches Asset Management Market Study
The Financial Conduct Authority launched its market study into asset management by publishing the Terms of Reference for the study. The FCA announced its intention to conduct the study in its 2015/2016 business plan following feedback it received during the wholesale sector competition review. The Terms of Reference state that the FCA will investigate three core areas: (i) how asset managers compete to deliver value; (ii) are asset managers willing and able to control costs and quality along the value chain; and (iii) how investment consultants affect competition for institutional asset management. The FCA will also be looking at whether there are any barriers to innovation that prevent investors from obtaining better results. The Terms of Reference are not being formally consulted on but the FCA will accept comments received by December 18, 2015 on them and the issues raised. An interim report is expected to be published in summer 2016 setting out preliminary conclusions and possibly remedies to address any identified issues. The final report is expected in early 2017.
View the Terms of Reference.
UK Competition and Markets Authority Proposes Remedies for Retail Banking Competition Issues
The Competition and Markets Authority published a provisional report related to its investigation into the supply of Personal Current Accounts and of banking services to Small and Medium-sized Enterprises. The report identifies several competition issues in the PCA and SME banking market, including: (i) small numbers of customers switching to different bank accounts, due to banks not being under sufficient competitive pressure to attract customers; (ii) new banks and new products not attracting new customers; and (iii) high numbers of SMEs holding their business accounts in the same banks as their PCAs, with low levels of switching. The report also states that customers that are holders of more expensive accounts are not switching to better value and better quality cheaper accounts, which would be expected in a well-functioning market. The CMA is proposing remedies which include: (i) requiring banks to prompt customers to review the service they receive by receiving individual messages at certain "trigger points"; (ii) encouraging consumers and businesses to compare bank products by using Midata, an industry online tool, that allows consumers to easily access their banking data and compare it with other services; and (iii) creating a price comparison service for SMEs. Responses to the report are invited by November 20, 2015. The CMA also announced that it intends to review the undertakings put in place after the 2002 Competition Commission review into PCA banking in Northern Ireland and into SME banking generally.
View the CMA's report.
UK Payment Systems Regulator Publishes Guidance on its Concurrent Competition Powers
The UK Payment Systems Regulator published final guidance on its concurrent competition powers and on its approach to market reviews. The PSR has concurrent competition powers with the Competition and Markets Authority. The final guidance on the PSR’s powers and procedures under the Competition Act 1998, known as the CA98 Guidance, explains how the PSR will use its concurrent competition powers for participation in payment systems within the UK, in particular the enforcement processes it will follow and how they relate to its other powers and duties. The final guidance on the PSR’s powers and procedures for market reviews, market studies and market investigation, known as its Markets Guidance, explains the PSR’s powers to carry out market reviews, how the PSR will choose which powers to use, how the PSR will carry out market reviews and studies, including its approach to disclosure and use of information and how the PSR will make market investigation references.
View the CA98 Guidance.
View the Markets Guidance.
UK Financial Conduct Authority Publishes Final Guidance and Amended Rules on its Concurrent Competition Powers
The FCA published final guidance and amended rules on its new competition law powers. The FCA obtained concurrent competition powers for the provision of financial services on April 1, 2015 which allow it to: (i) conduct investigations under the Competition Act 1998 and the Treaty on the Functioning of the European Union; and (ii) carry out market studies and make market investigation references to the Competition and Markets Authority under the Enterprise Act 2002. The finalized guidance clarifies how the FCA intends to use its new competition powers. The final rules, which come into effect from August 1, 2015, impose an obligation on authorized firms to report to the FCA any significant infringement of any applicable competition law.
View the Shearman & Sterling client publication on the FCA’s Concurrent Competition Powers.
View the FCA Policy Statement, including final rules.
View the final guidance on the FCA’s powers and procedures under the Competition Act 1998.
View the final guidance on the FCA’s market.
UK Financial Conduct Authority Launches Market Study into Competition in Investment and Corporate Banking
05/22/2015The Financial Conduct Authority published the terms of reference for its upcoming market study into competition in investment and corporate banking. The need for the market study emerged during the FCA’s review of competition into the wholesale sector. The aim of the market study is to assess whether competition for investment banking and corporate banking services is functioning well, focusing on primary market and related activities provided in the UK. The market study will concentrate on: (i) choice of banks and advisers, including the competitive landscape, clients’ purchasing behavior and entry and expansion within the sector; (ii) limited transparency, including the adequacy of information available to clients, transparency of the allocation process and the impact of established practices, processes or regulation on transparency in the IPO process; and (iii) bundling and cross-subsidization of investment and corporate and banking services, including whether there are any resulting adverse effects on competition and clients. The outcome of the market study may lead the FCA to adopt measures to promote effective competition. However, the FCA will be taking into account related initiatives such as the Fair and Effective Markets Review, the implementation of MiFID II and the Capital Markets Union, and may decide that no further action is required if any concerns arising from the market study are likely to be satisfied by upcoming legislative measures or otherwise. The FCA will be accepting comments on the terms of reference until June 22, 2015, although the regulator is not formally consulting on the terms. The FCA intends to publish an interim report, including any proposed remedies that may be necessary, by the end of the year and a final report in spring 2016.
View the terms of reference.