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.
FICC Markets Standards Board Consults on Statement of Good Practice on Algorithmic Trading
The FICC Markets Standards Board has launched a consultation on a transparency draft of a Statement of Good Practice on algorithmic trading in the wholesale fixed income, commodity and currency markets. The draft SGP forms part of the FMSB's work to build up a body of Standards and Statements of Good Practice to improve conduct and raise standards in the wholesale FICC markets. The FMSB Standards and SGPs do not impose legal or regulatory obligations on FMSB members, nor do they take the place of regulation. Instead, an SGP is intended to be considered to the extent it is possible to follow it in compliance with applicable laws.
For the purposes of the consultation paper, "algorithmic trading" is defined as trading in instruments where a computer algorithm, with limited or no human intervention, automatically determines individual parameters of orders, such as whether to initiate the order, the timing, price or quantity of the order or how to manage the order after its submission.
UK Regulators Finalize Rule Changes For Extending Individual Accountability Regime to Insurers
The U.K. Financial Conduct Authority and Prudential Regulation Authority have published Policy Statements confirming the near-final and final rule changes they will apply to extend the application of the Senior Managers & Certification Regimes to insurers. The Policy Statements do not make an changes to the prudential rules implementing Solvency II or to the wider U.K. regulatory framework for insurers.
The extended SM&CR will apply from December 10, 2018, subject to commencement regulations being made by HM Treasury. The SM&CR will apply to all insurers and reinsurers regulated by the FCA and the PRA. The Policy Statements will be of specific interest to Solvency II firms (that is, all firms within the scope of the U.K. rules implementing the Solvency II Directive), insurance special purpose vehicles (undertakings with permission to carry on the regulated activity of insurance risk transformation), insurers outside the scope of the Solvency II Directive (so-called Non-Directive Firms) and small run-off firms (all insurers with less than £25 million technical provisions that no longer have permission to write or acquire new business).
UK Conduct Regulator Issues Near-Final Rules on Extension of Individual Accountability Regime to All Financial Services Firms
The U.K. Financial Authority has published Policy Statements confirming the rule changes it will apply to extend the application of the Senior Managers & Certification Regimes to all FCA solo-regulated firms (that is, firms for which the FCA is both conduct and prudential regulator). At this stage, the rules are near-final as they are subject to commencement regulations that will be made by HM Treasury and they may also be amended by subsequent changes related to, for example, Brexit or SM&CR optimizations. The FCA also plans to consult separately on rules for benchmark-related activities.
The extended SM&CR will apply to all firms authorized under the Financial Services and Markets Act 2000 and regulated by the FCA, as well as EEA and third country (non-EEA) branches. SM&CR will be extended to FCA solo-regulated firms from December 9, 2019.
While insurance intermediaries, which are solo-regulated by the FCA, will fall within the FCA's new rules, the FCA and the Prudential Regulation Authority have separately published policy statements on the extension of the SM&CR to insurers.
New UK Standard on Risk Management Transactions for New Issuances for the Fixed Income Markets
The U.K. Fixed Income, Currency and Commodities Markets Standards Board has published a new Standard on Risk Management Transactions for New Issuances for the Fixed Income markets.
The FMSB has created several Standards to improve conduct in the FICC markets since its establishment in 2015 in response to the Fair and Effective Markets Review conducted by HM Treasury, the Bank of England and the Financial Conduct Authority. FMSB members commit to applying the FMSB Standards but the Standards do not impose legal or regulatory obligations.
The new Standard describes expected behaviors to improve the practice and awareness regarding risk management activities conducted in and around the new issuance of bonds and includes 12 Core Principles. Following its consultation at the end of 2017 on the proposed Standard on Risk Management Transactions for New Issuances, the FMSB has made some minor changes, including providing more detail on the nature of the conduct risks and amending the Principle on dissemination of information (Core Principle 9).
UK Regulator Provides Update on its Retail Banking Business Model Review
The U.K. Financial Conduct Authority has published a Progress Report on its Strategic Review of Retail Banking Business Models. The FCA launched the Review in April 2017 and published a purpose and scope document in October 2017. The FCA is conducting the Review to gain a picture of how profits are generated by the sector, of the relative competitive advantages and disadvantages of different business models and of barriers to entry and expansion. The Review covers retail banking services to personal and small business customers. It focuses on the products and services that are used on a regular basis by large numbers of consumers and small businesses. This includes current accounts, savings products, mortgages, personal loans, credit cards, and business finance.
The FCA explains that its early analysis indicates that a key component of the competitive advantage enjoyed by retail banks to date has been the combination of personal current accounts and large branch networks. This combination has brought a number of benefits including a funding cost advantage (from personal current accounts paying zero interest or lower interest than other providers), significant additional income from fees and charges on personal current accounts (including overdrafts), the opportunity to cross-sell lending products to personal current account holders and the ability to cross-sell business accounts and associated business savings balances.
Federal Reserve Bank of New York President John C. Williams Discusses Banking Culture Reform
The Federal Reserve Bank of New York’s new President, John C. Williams, discussed banking cultural reform at the FRBNY’s annual Governance and Culture Reform Conference. His speech kicked off a full day of panels discussing various aspects of bank culture reform. President Williams noted that while the economy and regulation of the financial system have improved markedly since the financial crisis, more work needs to be done with respect to promoting good bank culture. President Williams highlighted that bank culture is often overlooked, especially in prosperous times when hard numbers, such as profits, losses, capital and liquidity, often look very positive. With respect to reform, President Williams suggested that effectuating change in bank culture is a multi-year process, and that maintaining good bank culture is an ongoing exercise that requires clearly defined expectations and values, a board and management who are committed to maintaining and promoting high standards of conduct and culture and an environment that empowers employees to speak up when they have concerns.
View full text of President Williams’s remarks.
Proposed UK Good Practice on Information Confidentiality for the FICC Markets
The U.K. Fixed Income, Currency and Commodities Markets Standards Board has published for consultation a Transparency Draft of a new Statement of Good Practice on Information and Confidentiality for fixed income and commodities markets. The proposed Statement of Good Practice will apply in the European Fixed Income and Commodities markets. It is not intended to apply to the FX markets to which the FX Global Code applies, or to the precious metals markets, which are covered by the Precious Metals Code. The aim of the proposal is to clarify data sharing in the relevant markets and dealing with confidential information within a firm, including what information should not be shared with parties outside of a firm and what can be revealed when discussing "market color." The proposed Statement of Good Practice consists of nine Statements of Good Practice and an explanation of the rationale for each statement.
The consultation closes on August 31, 2018. The FMSB intends to publish the final Statement of Good Practice shortly thereafter. The Statements of Good Practice are not part of the FMSB Standards and are not binding on FMSB members, but reflect the FMSB's view of what constitutes good or best practice in the areas covered.
View the consultation paper.
UK Authorities Publish Progress Report on the Fair and Effective Markets Review
The Bank of England, the Financial Conduct Authority and HM Treasury have published a progress report on the Fair and Effective Markets Review, outlining the progress made in responding to the FEMR recommendations that were originally published in June 2015 and followed by an implementation report in June 2016.
The three authorities commend the significant progress that has been made by firms, both collectively and individually, in driving up standards in the Fixed Income, Currency and Commodities Markets since the implementation report. The progress report sets out the assessment of the three authorities of the impact of the FEMR's recommendations.
Financial Stability Board Consults on Reporting on the Use of Compensation Tools to Address Misconduct Risk
The Financial Stability Board has published proposed Recommendations for consistent national reporting of data concerning the use of compensation tools to address misconduct risk in significant financial institutions. The FSB is proposing a supervisory framework for the collection and reporting of data, which can be used by supervisors for monitoring and analyzing the effectiveness of compensation frameworks in addressing misconduct risk. The information so collected is intended to assist supervisors to understand and review: (i) the importance of individual conduct within the firm's incentive compensation framework and the role of compensation policy in establishing a sound risk and conduct culture; and (ii) the use of compensation tools in practice and their role in ensuring accountability when misconduct occurs.
Financial Stability Board Publishes Toolkit to Abate Misconduct Risk
The Financial Stability Board has published a report, "Strengthening Governance Frameworks to Mitigate Misconduct Risk: A Toolkit for Firms and Supervisors." The report is part of the FSB's work on measures to reduce misconduct in the financial sector and follows the FSB's stocktake of endeavors by international bodies, national authorities, industry associations and firms.
The Toolkit is designed to provide firms and authorities with a set of tools that can be used, taking into account the applicable legislative, judicial and regulatory frameworks. Rather than creating an international standard or adopting a prescriptive approach, the FSB's Toolkit allows firms and supervisors to decide whether and how to use the Toolkit to address misconduct risk. The FSB also states that firms and their supervisors can use individual tools separately or in combination.
The Toolkit comprises 19 tools, divided into three categories and assigned between firms and national authorities.
UK Financial Conduct Authority Publishes its 2018/19 Business Plan
The Financial Conduct Authority has published its Business Plan for 2018/19 which sets out its key priorities for the coming year. The FCA confirms that it will continue to focus on issues relating to the U.K.'s withdrawal from the EU by working with the Government, ensuring appropriate transition measures for EEA firms, working towards operational readiness and cooperating at international level.
The FCA divides the remainder of its priorities into cross-sector priorities and sector priorities. There are seven cross-sector priorities: firms' culture and governance; financial crime and anti-money laundering; data security, resilience and outsourcing; innovation, big data, technology and competition; treatment of existing customers; long-term savings, pensions and intergenerational differences; and high-cost credit. There are seven sector priority areas: wholesale financial markets; investment management; retail lending; pensions and retirement income; retail investments; retail banking; and general insurance and protection. The FCA also published Sector Views for each of these sectors which provide an FCA view of how each sector was performing as of mid-2017.
European Supervisory Authorities Issue Final Report on Financial Institutions' Use of Big Data
The Joint Committee of the European Supervisory Authorities has published a final report on the use of Big Data by financial institutions. The Final Report has been prepared following feedback to a discussion paper published in December 2016 by the Joint Committee’s sub-Committee on Consumer Protection and Financial Innovation. “Big Data” is the term used to refer to situations where high volumes of different types of data, produced with high velocity from a wide variety of data sets and sources, is processed (often in real time) by IT tools, such as powerful processors, software and algorithms. Big Data tools have been in use for several years in some sectors, but less so in others. Nevertheless most respondents to the ESAs’ discussion paper agreed that Big Data may have an impact on almost all financial institutions and on their products and services. The use of Big Data techniques can help financial institutions to improve their understanding of customers’ preferences and their interactions with customers and clients. This can enable them to tailor products to their target markets and support effective product governance. However, the use of Big Data also entails risk.
UK Banking Standards Board Publishes Annual Review for 2017-2018
The U.K. Banking Standards Board has published its Annual Review for the year 2017-2018. The BSB is a non-statutory organization established in April 2015 to help raise standards of behaviour and competence across the U.K. banking sector. Voluntary membership of the BSB is open to all banks and building societies operating in the U.K. The Annual Review sets out the key findings of the second annual assessment exercise conducted at member firms.
The BSB uses quantitative and qualitative data to assess firms against an Assessment Framework to establish how far each of nine characteristics is demonstrated within each firm. These characteristics are: honesty; competence; reliability; responsiveness; personal/organizational resilience; accountability; openness; respect; and shared purpose. The quantitative aspect of the assessment consists of an employee survey asking 37 core questions that allow comparison across and between firms and over time. The qualitative aspect incorporates views and perspectives from all levels and parts of the firm, obtained by various means, including written submissions, interviews and focus groups.
UK Banking Standards Board Publishes Principles for Strengthening Professionalism
The Banking Standards Board has published the "BSB Statement of Principles for Strengthening Professionalism - The role of the firm", which is a guiding statement of principles intended to assist banks and building societies to strengthen professionalism in the banking sector. The BSB has defined professionalism in UK banking as "attitudes, judgement and high standards of behaviour, knowledge and skill expected of individuals working in banking". The Statement consists of six principles, each of which is supported by action points on how the principle can be achieved.
The Statement does not impose any legal or regulatory obligations on firms or replace any regulation. It is intended to assist firms in structuring their own practices and to build on regulatory initiatives, such as the Senior Managers and Certification Regimes.
View the BSB Statement.
Financial Stability Board Issues Supplementary Guidance to its Principles and Standards on Sound Compensation Practices
The Financial Stability Board has published the finalized version of its Supplementary Guidance on its Principles and Standards on Sound Compensation Practices, following feedback to a consultation it launched in June 2017. The Supplementary Guidance relates to the use of compensation tools to address misconduct risk. Misconduct, for the purposes of the Supplementary Guidance, should generally be understood as conduct that falls short of expected standards, including legal, professional, internal conduct and ethical standards.
The Supplementary Guidance is consistent with the FSB’s existing Principles and Standards on Sound Compensation Practices and provides guidance on better practice for addressing misconduct risk without adding any new or additional principles or standards. It is broken down into sections covering: (i) governance of compensation and misconduct risk; (ii) effective alignment of compensation with misconduct risk; and (iii) supervision of compensation and misconduct risk. FSB members are asked to apply the Supplementary Guidance to significant institutions and in a way consistent with the law and regulation of their jurisdictions.
UK Regulator to Consult on Expanded Financial Services Register under the Senior Managers & Certification Regimes
The Financial Conduct Authority has announced that it will be putting forward proposals for aligning the Financial Services Register with the expanded Senior Managers & Certification Regimes. The SM&CR has been in place for banks, building societies, credit unions and PRA-designated investment firms since March 2016, whilst certain insurers have been subject to the separate Senior Insurance Managers Regime. The remainder of authorized firms have continued to be subject to the Approved Persons Regime. The FCA recently consulted on expanding the existing SM&CR to all other authorized firms.
Under the SM&CR, the FCA only approves Senior Managers and it is only these individuals that appear in the FS Register. The Certification Regime requires firms to certify that all individuals in roles which pose a risk of significant harm are "fit and proper".
Feedback on the proposals to extend the SM&CR indicated that there would be public value in including details of certification of employees and other important individuals at firms in the FS Register. The FCA intends to consult in the Summer on implementing that feedback. If these proposals are implemented, non-executive directors, financial advisers, traders and portfolio managers would appear in the revised FS Register.
View the FCA's statement.
View the proposals to extend the SM&CR.
International Standards Body Seeks to Tackle Conflicts of Interest and Conduct Risks in Equity Capital Raisings
The International Organization of Securities Commissions has published a consultation report in which it seeks feedback on proposed Guidance to address the significant potential conflicts of interest arising from the role of intermediaries during key stages of an equity raising.
IOSCO has identified a number of key risks. In the early, pre-offering, phase of an equity raising, conflicts of interest can arise where analysts employed by firms managing the securities offering may be under pressure to present a positive view of the issuer. During the investor education and price-formation phase these "connected" analysts may produce conflicted research and conflicts can also be present during the allocation of securities. There can be both conflicts of interest and risks of misconduct where staff employed within firms that are managing an equity raising enter into personal transactions. These issues can damage investor confidence and the effectiveness of the capital markets as route for issuers to raise finance.
UK Banking Standards Board Publishes Further Guidance on the Certification Regime
The U.K. Banking Standards Board has published further Supporting Guidance to its Statement of Good Practice on the Certification Regime: Fitness and Propriety Assessment Principles (known as Statement of Good Practice 1). The new Supporting Guidance, "Establishing Pass/Fail Criteria and Evidencing the F&P Assessment" (known as Supporting Guidance 2), aims to assist firms and other persons assessing fitness and propriety in making certification decisions, particularly in borderline cases. The Certification Regime is part of the regulatory reforms introduced in the U.K. to strengthen individual accountability (namely, the Senior Managers Regime, the Certification Regime and the Conduct Rules). It requires firms to certify that all individuals in roles which pose a risk of significant harm are "fit and proper." The U.K. regulators are proposing to extend the Certification Regime to all other regulated firms. The BSB was launched in April 2015 as an industry initiative to help raise standards of behavior and competence in the banking sector.
Federal Reserve Bank of New York President Dudley Participates in Banking Culture Panel Discussion
William Dudley, President of the Federal Reserve Bank of New York, participated in a panel discussion entitled “Banking Culture - Still Room for Improvement?” Mr. Dudley commented that there has been significant progress and improvement in bank culture, but noted that there is room for making even further progress. The discussion also highlighted that regulation and compliance are complements, not substitutes, for good institutional culture. Mr. Dudley also noted that while many often think that supervision by regulators and firm profitability are in conflict, in reality these two forces are aligned. The panel discussed that good culture can provide a competitive advantage with respect to recruiting, given changing priorities among the growing millennial workforce, the importance that bank culture plays in the health and maintenance of a financial institution’s reputation, and how a good culture also promotes bottom-line success. The panel did note, however, that changing culture in large and complex financial institutions can be a very difficult task, and stressed that good firm culture needs to be promoted from the top down.
View full transcript of the panel discussion.
European Securities and Markets Authority Issues Final Guidelines on CCP Conflicts Management
The European Securities and Markets Authority has published a Final Report setting out Guidelines for compliance, by central counterparties authorized under the European Market Infrastructure Regulation, with their obligations to manage conflicts of interest under EMIR and related Regulatory Technical Standards. ESMA was not directly mandated by provisions in EMIR to prepare the Guidelines. Instead, ESMA has prepared the Guidelines pursuant to the wider mandate in its founding regulation to ensure common, uniform and consistent application of the relevant provisions of EMIR and the RTS.
The Final Report summarises the feedback ESMA received to its consultation on draft Guidelines, which ran between June 1, 2017 and August 24, 2017, and sets out the final form of the Guidelines. After clarifying the concept of conflicts of interest in the context of a CCP's commercial relationships, the Guidelines summarize the organisational arrangements CCPs should have in place, along with additional measures that apply in a group context. Finally the Guidelines specify a procedure for conflicts of interest management.
The Guidelines apply to all EU national regulators that supervise CCPs, and will take effect on April 7, 2018. This date is also the deadline for national regulators to inform ESMA whether they comply or intend to comply with the Guidelines, with reasons for non-compliance. All CCPs must report to their national regulator on their compliance with the Guidelines.
Bank of England Confirms its Commitment to Wholesale Market Conduct Codes
The Bank of England has published statements of commitment to the FX Global Code, the UK Money Markets Code and the Global Precious Metal Code. By issuing the statements, the BoE is demonstrating that it will abide by the principles of the three market codes, both when acting as a market participant and also when its activities include acting as agent for HM Treasury in managing the UK's official reserves in the Exchange Equalisation Account. HM Treasury has separately confirmed that it is content with the BoE's ability to adhere to the codes. Six other central banks in the European System of Central Banks have also simultaneously issued their own statements of commitment to the Global FX Code and it is expected all ESCB banks will have done so by May 2018.
UK Regulators Consult Further on Extension of Individual Accountability Regime to All Financial Services Firms12/13/2017
The UK Financial Conduct Authority and Prudential Regulation Authority have issued further consultations on aspects of the extension of the Senior Managers and Certification Regime to all firms authorized under the Financial Services and Markets Act 2000.
The FCA has published three separate consultations, which build on its previous consultation in July 2017 and set out further proportionate proposals to account for the wide differences in the sizes and nature of firms that will be brought within the regime. In the July 2017 consultation, the FCA proposed an extended SM&CR consisting of a standard set of requirements for firms within the "core" regime, and further "enhanced" or simplified "limited scope" requirements for other firms as appropriate. The PRA has published a further consultation supplementing its July 2017 consultation on the PRA's substantive proposals for extension of the SM&CR to insurers.
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.
US Federal Reserve Bank of New York Executive Vice President Discusses the Role of Bank Supervisors in the Culture Reform Dialogue
US FRB of NY Executive VP Kevin Stiroh spoke at a culture roundtable session regarding misconduct, risk, culture, and supervision. The remarks were based on a white paper that was published the same day. Mr. Stiroh’s remarks focused primarily on employee misconduct risk in the financial services industry, noting that since 2008 financial institutions have paid over $320 billion in related fines. Mr. Stiroh also highlighted the damaging effect that employee misconduct has not only on the employer and financial institutions, but also on the financial system as a whole. Mr. Stiroh contended that misconduct is the result of low cultural capital—a confluence of processes and procedures, stated values, and senior management and employees who are empowered to reinforce and conduct their day-to-day activities that promotes a culture of compliance. Mr. Stiroh also suggested that lack of cultural capital may be the result of market failures brought about by factors such as externalities, principal-agent problems and adverse selection, arguing that one possible means to remedy these issues is through internal supervision; with supervisors willing to support a culture of compliance, close gaps in rules, and advance value of safe and sound practices. To this end, Mr. Stiroh highlighted to attendees the important role that supervisors play in maintaining high levels of cultural capital at financial institutions.
View Mr. Stiroh's speech.
UK Financial Conduct Authority Publishes Note on the Compliance Function within Wholesale Banks
The Financial Conduct Authority has published a note on the compliance function in wholesale banks. The note sets out the key themes and issues arising from responses to an FCA questionnaire which was sent to 22 firms as well as the FCA's own observations. The questionnaire was sent to large global banks operating across several business lines, medium-sized firms focusing on specific areas or geographies and smaller UK firms, in order that the FCA could gain insight into how the function has changed over the past few years. The key themes are that compliance functions need to evolve in response to changes impacting the industry and that more strategic thinking is needed. The FCA has not asked individual firms to take any steps in response to the note. However, the FCA indicates that all firms and heads of compliance should use the note to develop their compliance function.
View the FCA's note.
UK Financial Conduct Authority Consults on Measures to Reduce Misconduct in Unregulated Markets and Activities
The Financial Conduct Authority has published a consultation paper on proposals to clarify its expectations on authorized firms and their staff when operating in markets or undertaking activities that are not covered by regulatory rules and principles. The FCA cites, as a particular example of the need to clarify its expectations, the spate of enforcement action in response to serious misconduct such as benchmark manipulation by employees of regulated firms in the fixed-income, currency and commodities (FICC) markets, which fall outside the FCA's regulatory perimeter.
A number of solutions to help reduce this type of misconduct in the FICC markets were suggested following the recommendations of the Fair and Effective Markets Review (FEMR) that was conducted in 2014-15. In these unregulated wholesale markets, activities undertaken by authorized firms were often only governed by industry-written codes of conduct, such as the UK's Non-Investment Products (NIPs) Code, rather than FCA rules. One recommendation of the FICC market standards board, which was established as a result of the FEMR, was that proper market conduct should be managed in FICC markets through regulators and firms monitoring compliance with all standards - formal and voluntary - under the Senior Managers and Certification Regimes.
UK Banking Standards Board Consults on What Good Banking Outcomes Look Like for Consumers
The UK Banking Standards Board, which was established in 2015 to help raise standards of behaviour and competence across UK banks and building societies, has launched a consultation seeking views, in particular from consumer and civil society organisations, about what the outcomes of a good banking culture look like to consumers. The BSB uses the term "consumers" to refer to retail banking customers (personal customers and micro businesses) and building society members, both potential and actual.
The views of consultation respondents will assist the BSB in developing a "Consumer Framework", that consumer and civil society organisations can readily relate to and that can potentially align, if wished, with some of their own work. An outline of the Consumer Framework is provided for consultation. The starting point for the Consumer Framework is a set of consumer principles (access, choice, clarity and transparency, safety and security, redress and being listened to, value for money, fairness). The BSB seeks feedback on the adequacy of these principles. It also seeks views on its proposals to adopt outcomes-focused approach and on high level questions such as how consumer outcomes could be measured, on the helpfulness of "real life" examples of what the outcomes might mean to consumers and on whether the Consumer Framework would be helpful in setting a benchmark for good practice standards.
Comments on the proposals are invited by January 26, 2018, following which the BSB will publish a further and fuller version of the Consumer Framework.
View BSB News release.
View Consultation Paper: What do good banking outcomes look like for consumers.
UK Regulator Outlines Scope of Retail Banking Business Model Review
The U.K. Financial Conduct Authority has published a paper outlining the purpose and scope of its strategic review of retail banking business models. The FCA launched the strategic review in April 2017 in order to deepen its understanding of retail banking business models generally. The FCA also wants to gain an understanding of how changes such as increased use of digital services and reduced use of branches have impacted on banks’ business models and whether this might have implications for the FCA's consumer protection and competition objectives. The strategic review will also help the FCA to understand how free-if-in-credit banking is paid for and whether this gives rise to concerns about the distribution of profits from different types of consumers or different products.
The paper outlines how the FCA uses business model analysis in conduct and competition regulation before discussing how the face of retail banking is changing. A new environment has emerged due to the rise of challenger banks in response to macroeconomic, technological and regulatory changes, the profound effect of technology on costs and customer behaviour, the effect of recent regulatory changes on competition and the expected significant increase in competition that will be brought about by the Competition and Markets Authority's Open Banking initiative and the implementation revised Payment Services Directive.
Financial Stability Board Meeting to Discuss Ongoing 2017-2018 Workplan
The Financial Stability Board has published a press release summarizing the outcome of its plenary meeting in Berlin on October 6, 2017, at which it considered potential vulnerabilities in the financial system and discussed a number of areas from its workplan.
Financial Conduct Authority Consults on Extending Senior Managers & Certification Regime to All FCA Regulated Firms and Both UK Regulators Consult on its Extension to Insurers
The Financial Conduct Authority has published a consultation paper on its proposed rule changes to implement the extension of the Senior Managers& Certification Regime (SM&CR) to all firms that are authorized under the Financial Services and Markets Act 2000 and solo-regulated by the FCA. The SM&CR has been in place for banks, building societies, credit unions and PRA-designated investment firms since March 2016, whilst certain insurers have been subject to the separate Senior Insurance Managers Regime. The remainder of authorized firms have continued to be subject to the Approved Persons Regime, which will be replaced when the extended application of SM&CR takes effect.
Given that the extension of SM&CR will capture a very wide range of firms, the FCA has tailored the principles and tools used for the banking regime to fit the different risks, impact and complexity of the firms that will be affected by the extended SM&CR. The rules proposed by the FCA comprise (i) a "core regime" consisting of a standard set of requirements that will apply to all FCA solo-regulated firms; (ii) an "enhanced regime" which will apply extra requirements to the very small number of solo-regulated firms whose size, complexity and potential impact on consumers warrant more attention; and (iii) a reduced set of requirements which will apply to firms the FCA has categorized as "limited scope" firms.
Prudential Regulation Authority Publishes Policy Statement on Strengthening Individual Accountability in Banking
The Prudential Regulation Authority has published a Policy Statement on strengthening individual accountability in banking. The Policy Statement provides the PRA's final policy on a number of issues. Among other things, the PRA has made modifications to the final rules, such as simplifying the draft definition of the new Chief Operations Senior Management Function and narrowing the new Prescribed Responsibility accompanying the Chief Operations SMF to focus on responsibility for the firm's performance of its obligations relating to outsourcing.
Financial Conduct Authority Publishes Policy Statement on Application of its Conduct Rules to Non-Executive Directors
The Financial Conduct Authority has published a Policy Statement on applying conduct rules in the Code of Conduct sourcebook to non-executive directors in the banking and insurance sectors. In-scope NEDs are those who do not hold Senior Management Functions and therefore are not subject to regulatory pre-approval under the Senior Managers & Certification Regime, the Prudential Regulation Authority's Senior Insurance Managers Regime, or the FCA's revised Approved Persons Regime.
The Policy Statement follows a Consultation in September 2016, which proposed that NEDs would be subject to the five FCA Individual Conduct rules on acting with integrity, acting with due skill, care and diligence, cooperating with the FCA and other regulators, having regard for customer interests and observing proper standards of market conduct. In addition, NEDs would be subject to the Senior Conduct rule requiring individuals to disclose any information of which the FCA or PRA would reasonably expect notice. The remaining Senior Conduct rules will not apply to a NED unless they are also a senior conduct rules staff member. The new rules will come into force on July 3, 2017.
View the Policy Statement.
Financial Conduct Authority Publishes Policy Statement on Whistleblowing in UK Branches of Foreign Banks
The Financial Conduct Authority has published a Policy Statement introducing final rules on whistleblowing requirements for UK branches of overseas (EEA and third country) banks. The Policy Statement follows a consultation in September 2016 on a proposed approach for extending aspects of the Prudential Regulation Authority and FCA regime to require banks and insurers to introduce whistleblowing procedures internally. The proposals are broadly being implemented as consulted upon, with one minor change being the introduction of guidance reminding branches they may continue to have concurrent reporting obligations to their home state regulators. The rules will come into force on September 7, 2017.
View the Policy Statement.
Financial Conduct Authority Publishes Policy Statement and Final Guidance on the Duty of Responsibility
The Financial Conduct Authority has published a Policy Statement and final Guidance on how it will enforce the "duty of responsibility". The "duty of responsibility" came into force to replace the much-criticised so-called "presumption of guilt" for UK senior managers on May 10, 2016. The new duty applies to persons performing senior management functions at UK banks, building societies, credit unions, investment firms designated by the Prudential Regulation Authority and incoming branches of overseas firms. Under this duty, the FCA and the PRA can take enforcement action against Senior Managers if they are responsible for the management of any activities in their firm in relation to which their firm contravenes a regulatory requirement and they do not take such steps as a person in their position could reasonably be expected to take to avoid the contravention occurring or continuing. The burden of proof lies with the regulators to prove a contravention. The Guidance applied from May 3, 2017.
View the Policy Statement.
US Federal Reserve Bank of New York General Counsel Discusses Lawyers’ Role in Financial Services Culture Reform
US Federal Reserve Bank of New York General Counsel and Executive Vice President Michael Held provided remarks on the role that lawyers should play in reforming culture and conduct in the financial services industry. Held noted that reform of culture has long been a priority issue for the FRBNY. His primary recommendation was that lawyers can play an important role in advising, not just on whether an action is legal or illegal, but on matters dealing with culture as well. He argued that lawyers can identify and help combat troublesome silos of behavior and should support clients with healthy skepticism, providing “effective challenge” of assumptions that are conveyed by the institution in the course of representation. Held also supported the creation of a database of bankers with records of misconduct, thus preventing them from moving from firm to firm and spreading bad practices. He suggested that the database, originally proposed by FRBNY President Bill Dudley, would be complemented by a law requiring two duties: a duty to report misconduct and a duty to check the database before an employee begins work.
View the full text of the speech.
UK Banking Standards Board Publishes Fitness and Propriety Assessment Principles
The Banking Standards Board has published the Statement of Good Practice 1 on the Certification Regime: fitness and propriety assessment principles and Supporting Guidance for the Statement of Good Practice. The BSB was launched in April 2015 to help raise standards of behavior and competence in the banking sector. The Certification Regime, part of the regulatory reforms introduced in the UK to strengthen individual accountability, requires firms to certify that all individuals in roles which pose a risk of significant harm are "fit and proper". The first certification process was due to be completed by March 7, 2017 and thereafter firms must conduct assessments on an ongoing basis.
US Senior Deputy Comptroller Grovetta Gardineer Speaks to the CRA and Fair Lending Colloquium
Grovetta Gardineer, Senior Deputy Comptroller for Compliance and Community Affairs, spoke to the CRA and Fair Lending Colloquium about the role a “healthy culture” plays at regulated financial institutions. She called the Dodd-Frank reforms the process of establishing a “new normal,” warning institutions they cannot return to pre-crisis modes of operation. She highlighted compliance culture as a key element to a healthy institutional culture, noting OCC efforts to improve compliance supervision. She also noted a focus on existing and emerging risks in the fair lending and CRA spaces for the OCC.
View Senior Deputy Comptroller Gardineer’s remarks.
UK Legislation Implements Financial Services and Markets Act 2000 Updates to Secondary Legislation
The Financial Services (Banking Reform) Act 2013 (Consequential Amendments) (No. 2) Order 2016 was made. The Order amends secondary legislation as a result of updates to the Financial Services and Markets Act 2000 relating to disciplinary powers for the Financial Conduct Authority and Prudential Regulation Authority applying to the misconduct of individuals and the senior manager’s regime. The Order also amends FSMA secondary legislation which specifies a "qualifying EU provision" applied for the purposes of determining whether a person has been knowingly concerned in a contravention of a relevant requirement by an authorized person under the new section of FSMA relating to FCA and PRA powers. The Order will enter into force on November 21, 2016.
View the Order.
Federal Reserve Bank of New York President Delivers Opening Remarks at Conference on Culture within the Financial Services Industry
William Dudley, President of the Federal Reserve Bank of New York, delivered opening remarks at the New York Fed’s third conference on culture in the financial industry. Dudley opened by citing “pervasive” evidence that the financial services industry faces deep-seated cultural and ethical problems and an erosion of trustworthiness that impedes the ability of the industry to do its job. Dudley argued that a trustworthy financial industry would also be a more productive industry, avoiding spending time on reputational or legal problems and better attracting top talent.
Dudley also argued that incentive structures and accountability will do more to improve the culture of the industry than “statements of virtues,” citing the need for real consequences rather than aspirational ideals. He argued that firms need to assess their incentive regimes to be consistent with good conduct, and supervisors should monitor compensation to see if incentive structures must be changed. Dudley also noted the role of the public sector and new rules in overcoming collective action and first-mover problems. Dudley concluded by arguing that an effort to air previously silent issues and discuss what had not been discussed before could be an effective tool in reforming the culture of the financial industry.
View President Dudley’s remarks.
UK Regulators Move to Amend UK's Senior Manager & Certification Regime
The Prudential Regulation Authority and the Financial Conduct Authority launched a consultation proposing amendments to the Senior Manager & Certification Regime. Most of the changes result from the legislative changes made in the Bank of England and Financial Services Act 2016. However, the regulators are also proposing some other changes which they consider appropriate having had the opportunity to assess the SM&CR in practice.
UK Regulators Propose Extending Some of Their Whistleblowing Requirements to UK Branches of Overseas Banks
The Prudential Regulation Authority and the Financial Conduct Authority launched separate consultations on proposals to extend some of their whistleblowing requirements to UK branches of non-EEA banks. The proposals do not apply to UK branches of EEA banks. The regulators are proposing that non-EEA banks should be required to inform their employees about the regulators' whistleblowing services. Moreover, any non-EEA banking group that has both a UK subsidiary and a UK branch should inform branch staff about the subsidiary's whistleblowing arrangements. The PRA is also proposing that all insurers should inform employees about whistleblowing procedures. Since September 7, 2016, UK banks, building societies and credit unions with assets of £250 million or greater, PRA-designated investment firms, insurance and reinsurance firms within the scope of Solvency II or regulated by the Society of Lloyd's, as well as Lloyd's managing agents, have been required to implement internal whistleblowing procedures.They must also inform employees of the internal procedures and the whistleblowing services provided by the PRA and FCA and to ensure that employment contracts and settlement agreements do not deter employees from whistleblowing. Responses to the consultation are requested by January 9, 2017. The final rules are expected to apply from September 2017.
View the PRA's consultation paper.
View the FCA's consultation paper.
UK Regulators Revise Rules on Regulatory References
The Prudential Regulation Authority and the Financial Conduct Authority published revised rules on regulatory references for banking and insurance firms subject to the Senior Manager and Certification Regime and the Senior Insurance Manager Regime, respectively. Regulatory references are employment references passed between firms when an individual moves roles.
UK Financial Conduct Authority Discusses the Application of the Senior Managers Regime to a Firm's Legal Function
The Financial Conduct Authority published a discussion paper about how and why the legal function currently falls within the Senior Manager & Certification Regimes and whether it should continue to do so. In the lead up to implementation of the SM&CR in March 2016, the FCA became aware of significant uncertainty amongst firms as to whether an individual responsible for the management of a firm's legal function would require approval as a Senior Manager. Where heads of legal are responsible for compliance, there is a clear need to register, but the position is less clear for heads of legal who do not hold this additional function.
Financial Stability Board Reports on Progress on its Workplan to Reduce Misconduct Risk
The Financial Stability Board published a second progress report on its workplan to reduce misconduct risk. The workplan was first agreed in May 2015 and the FSB published its first progress report in November 2015. The workplan involves: (i) reviewing the effectiveness of reforms to compensation tools in reducing the risk of misconduct; (ii) examining whether the global standards of conduct in the fixed income, commodities and currency (FICC) markets need to be improved; and (iii) reforming the major financial benchmarks. The FSB's second progress report sets out the progress made to date as well as the expected dates for finalization of some of the work. By the end of 2016, the International Organization of Securities Commissions will publish final guidance for benchmark administrators on the content of the statements of compliance that administrators will be conducting a follow-up review of WM/Reuters 4 pm London Closing Spot Rate. The report also noted current reforms to the key IBOR benchmarks with a final report to be released in the course of 2017. Other items that are in the pipeline include publishing recommendations on the application of regulatory compensation tools to reduce misconduct risk by the end of 2017 and a wide-ranging FX Global Code for the wholesale foreign exchange market is expected to be finalized by May 2017.
View the progress report.
UK Legislation Implements Provisions of The Bank of England and Financial Services Act 2016
The Bank of England and Financial Services Act 2016 (Commencement No. 3) Regulations 2016 were made. The Regulations bring a majority of the provisions in The Bank of England and Financial Services Act 2016 into force. Such provisions cover topics such as financial stability strategy, Financial Policy Committee: status and membership, Monetary Policy Committee: membership and procedure, audit, activities indemnified by Treasury, appointment of Financial Conduct Authority chief executive, Treasury recommendations to the Financial Conduct Authority, administration of senior managers regime, rules of conduct, decisions causing a financial institution to fail: meaning of insolvency, enforceability of agreements relating to credit, illegal money lending and banks authorized to issue banknotes in Scotland and Northern Ireland.
The provisions will enter into force on July 6, 2016.
View the Regulations.
UK Senior Manager Misconduct Provisions Come Into Force
Two pieces of secondary legislation brought the revised provisions published on May 5th in the Bank of England and Financial Services Act 2016 on senior manager misconduct into force. The revised provisions replace the presumption of responsibility for a senior manager when a breach of regulatory provisions occurs in the area that he is responsible for (originally brought in by the Financial Services (Banking Reform) Act 2013), with a duty of responsibility. For a senior manager to be found guilty of misconduct by one of the UK regulators, the Prudential Regulation Authority and/or Financial Conduct Authority will need to prove that a senior manager did not take reasonable steps to prevent the contravention by his firm from occurring or continuing.
View the Order.
View the Regulations.
UK Senior Manager and Certification Regime Amendments and Extension Final
The Bank of England and Financial Services Act 2016 was passed by the UK Parliament. The Act includes amendments to the Senior Manager and Certification Regime and extends the SM&CR to all UK authorized firms. The amendments include removing the presumption of responsibility for a senior manager when a breach of regulatory provisions occurs in the area that he is responsible for, replacing it with a duty of responsibility. In addition, the UK regulators are granted specific powers to take enforcement action against all non-executive directors of firms for their misconduct. The extension of the SM&CR follows from the recommendations of the Fair and Effective Markets Review, published in June 2015, that the regime should be extended to wholesale participants in the fixed income, currency and commodity markets.
Certain provisions of the Act came into effect immediately. The provisions on senior management will come into effect once HM Treasury adopts regulations providing for the effective date. It is not yet known when the extension to all UK authorized firms will occur but the UK regulators have mentioned 2018 in the past.
View the Act.
View HM Treasury’s press release.
View the Bank of England’s press release.
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UK Banking Standards Board Publishes First Annual Review Report
The Banking Standards Board published its first annual review report. The BSB was launched in April 2015 to help raise standards of behavior and competence in the banking sector. The report discusses the assessment exercise that the BSB ran during 2015 with 10 banks on how each firm was performing against its objectives on behavior, competence and culture. The BSB aims to gather information collected from the assessment and create an evidence based picture of concerns and developments at industry and individual firm level. It is intended that the 2016 exercise will be more comprehensive and will be scaled up to include a wider number of member firms.The 2016 assessment will also include quantitative factors to help firms benchmark themselves against their peer firms.
View the report.
UK Regulators Remove Certain Rules under Senior Manager and Certification Regimes
The Prudential Regulation Authority and the Financial Conduct Authority published final rules removing certain requirements under the Senior Manager and Certification Regimes. The regulators consulted earlier this year on the proposed amendments which are necessary as a result of the proposed changes to the regime that have been proposed by the UK Government, including extending the regime to all financial services firms, removing the obligation on a firm to notify the PRA or FCA when it knows or suspects that a senior manager or certified person has failed to comply with the conduct rules and replacing the presumption of responsibility with a duty of responsibility. It remains to be seen whether Parliament will approve the equivalent changes that have been proposed by the Government to legislation. An amending Order, published in December 2015, stops the above-mentioned notification requirement and the presumption of responsibility from coming into force on March 7, 2016 – the date when the remainder of the new Regime will come into effect. The regulators' rules and forms have been amended to reflect this position. The PRA has also made changes to the definition of 'significant risk taker' which sets the parameters of its Certification Regime. The amendment aims to align the definition of SRT with a 'material risk taker' under the Remuneration rules.
View the FCA Policy Statement and final rules.
View the PRA Policy Statement and final rules.
UK Regulators Joint Policy Statement on Regulatory References, Implementation of Senior Manager and Certification Regimes and Senior Insurance Managers Regime
The Prudential Regulation Authority and Financial Conduct Authority jointly published a Policy Statement on the implementation of the Senior Manager and Certification Regimes, Senior Insurance Managers Regime and the requirements of the PRA on regulatory references. The Policy Statement, amongst other things, sets out a first set of PRA rules on the provision of regulatory references by firms under the SM&CR and SIMR, i.e., employment references passed between firms when an individual moves roles. These PRA rules are set out in Appendix 1 of the Policy Statement and will apply from March 7, 2016. The rules are largely a continuation of the existing requirements under the Approved Persons Regime and should be read and applied together with the FCA's equivalent requirements. The FCA's Policy Statement was published on February 4, 2016 and sets out the feedback received on the PRA and FCA's joint consultation on regulatory references. A second set of rules are expected to be published at a later date and will cover the areas on which feedback received by the PRA is still under consideration.
View the PRA and FCA's Policy Statement.
View the FCA's Policy Statement.