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Q4 2012 Investment Management Regulatory Update

Developments this quarter

Welcome to the fifth edition of our Investment Management Regulatory Update which summarises the regulatory developments affecting the UK investment management sector.

In this edition we cover key international, European and UK regulatory developments including:

Financial Services Act 2012 

In December, following Royal Assent, the Financial Services Act 2012 was published and will now come into force on 1 April 2013. The Act:

  • abolishes the Financial Services Authority (FSA) and creates a new regulatory architecture consisting of the Financial Policy Committee, the Prudential Regulation Authority (PRA) and the Financial Conduct Authority (FCA);
  • gives the Bank of England responsibility for protecting and strengthening financial stability, bringing together macro and micro prudential regulation; and
  • empowers authorities to look beyond ‘tick-box’ compliance while fostering a regulatory culture of judgement, expertise and proactive supervision.

The Government will bring forward secondary legislation in 2013 in advance of the launch of the new regulatory authorities.

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FSA’s 'Dear CEO' letters to asset management firms 

FSA 'Dear CEO' letter: Conflicts of interest between asset managers and their customers
On 9 November, the FSA published a 'Dear CEO' letter setting out the findings of its thematic review carried out between June 2011 and February 2012 on asset management firms’ arrangements for managing conflicts of interest. The review highlighted the better practices observed in identifying and managing conflicts of interest, along with the key issues of concern which were observed.

A summary of key findings stated that a firm’s culture is central in identifying potential conflicts of interest, with better practices including:

  • the consideration of whether new activities are likely to create new conflicts, whilst carrying out periodic reviews of operations to look for existing unidentified conflicts;
  • better designed control frameworks for managing conflicts of interest which are the result of a synergy of efforts between both business line management and second line teams such as Legal or Compliance; and
  • the monitoring and management of conflicts, which involves both the Business and Compliance, with boards receiving adequate management information and UK boards having committees dedicated to conflicts of interest.

The thematic review also identified a number of issues in relation to:

  • The purchase of research and trade execution services on behalf of customers - only a few firms exercised the same control over payments for research and trade execution services on behalf of customers, as they would if the payment were being made from the firm’s own resources. Further, firms did not regularly review whether services were eligible to be paid for using customers’ commission.
  • Managing gifts and entertainment - many firms set their gift and entertainment policies in line with market practices without any further considerations, and not taking the necessary steps to consider whether the value and frequency of gifts and entertainment were likely to give rise to conflicts.
  • Ensuring that customers have equal access to all suitable investment opportunities - one firm delayed the allocation of trades for several hours, allowing fund managers to favour some customers over others. It was also demonstrated that not all cross trading was in the interest of both customers involved, with failure to document reasons for cross trading in some instances.
  • Personal account dealing - it concluded most firms had satisfactory arrangements for managing conflicts of interest arising from employees’ personal account dealing but the application to staff was inconsistent. Most firms also had clear arrangements for handling errors, but some were too reliant on contractual limitation to avoid reporting the cost of errors to customers.

A number of section 166 skilled person reviews have been commissioned following the thematic review and enforcement action is being considered where more serious issues have been identified. Where an asset management firm has been directly contacted by the FSA, the board must consider the review and each firm’s CEO must complete and return the required ‘attestation’ by 28 February 2013. All asset management firms must conduct an assessment of their conflicts management framework and may be required to submit an attestation to the FSA at a later stage. The FSA communicated that a second round of thematic visits on conflicts is being planned. The FSA has said that the attestations received will influence their selection of firms for the second round of visits.

FSA 'Dear CEO' letter: Review of outsourcing arrangements
On 11 December 2012, the FSA wrote a ‘Dear CEO’ letter to the CEOs of asset management firms regarding its review of outsourcing arrangements within the asset management sector.

Noting that the asset management industry outsources a growing number of activities to providers that are often part of complex international banking groups, the FSA expressed concern that UK asset managers would not be able to perform critical or important regulated activities in the event that an outsource provider faced financial difficulties or severe operational disruption. The FSA was concerned that those asset managers would not be able to function effectively and that this could lead to customer detriment. In particular, the FSA noted that some firms appear to rely on their outsource service providers being part of a large financial institution which would be rescued using public funds; this is inconsistent with the FSA’s policy in relation to allowing organisations to fail and is not sufficiently prudent.

The FSA noted that it was “not confident that across the industry, effective recovery and resolution plans are in place for the asset management sector as a whole”, stating that it was the responsibility of firms’ Boards to ensure appropriate contingency plans were in place that would enable the firm to carry out regulated activity if a service provider fails.

The FSA asked that asset management firms review their current contingency plans, taking into account the observations in the letter. There is a general concern in the industry and from the regulator that there are not any credible plans to mitigate failure of administrators and there is a lack of clarity as to how best to approach this issue. The FSA has invited feedback on how it can achieve its aim of ensuring effective recovery and resolution plans are in place in the asset management industry and intends to host an industry event in early 2013 in order to facilitate an exchange of views.  

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FSA consultation papers and speeches 

FSA CP12/26: Regulatory reform - the PRA and FCA regimes for Approved Persons
On 3 October, the FSA published a consultation paper (CP12/26) prepared in consultation with the Bank of England seeking views and comments on the proposed amendments to the existing regulatory rules and guidance relating to approved persons following the introduction of the Financial Service Bill. The consultation also looks at the wider objective in creating two new rulebooks which will come in to effect when the FCA and the PRA acquire their legal powers.

The FSA has communicated that all investment management firms will be single-regulated by the FCA. Where a firm is single-regulated, the FCA will be responsible for all existing CFs which are currently specified by the FSA (excluding the actuarial controlled functions, CF12-12B which will apply only to dual regulated firms). However, where a firm is dual regulated it is proposed that the current list of controlled functions be split between the FCA and PRA, in order to avoid unnecessary duplication and to reduce any burden on firms. The proposed split for each function is as follows:

  • Governing Functions - the FCA would be responsible for CF1 (Director), CF2 (FCA Non-Executive Director), CF4 (Partner), CF5 (Director of an unincorporated association) and CF6 (Small friendly society). The PRA for CF2 (PRA Non-Executive Director) and CF3 (Chief executive).
  • Required Functions - the FCA would be responsible for CF8 (Apportionment and oversight), CF10 (Compliance oversight), CF10a (Client Assets) and CF11 (Money Laundering reporting). The PRA for CF12 (Actuarial), CF12A (With-profits actuary), CF12B (Lloyd’s actuary) and CF28 (Systems and Controls).
  • Significant management function and Customer function - the FCA would take responsibility for regulating all CF29 and CF30 approved persons.

The existing FSA controlled functions will be allocated in their entirety between the FCA and PRA, with the exception of the CF2 Non-Executive Director function. This will be split into two new functions, the FCA Non-Executive Director and PRA Non-Executive Director which will need to be separately approved. The proposed split of controlled functions between the FCA and PRA does not make reference to any changes to the SIF regime as proposed under PS10/15, Effective Corporate Governance and the Walker Review. The other key change proposed by CP12/26 includes an extension of the Statements of Principles in APER to a wider set of activities, and their application to approved persons of both dual and single-regulated firms.

The consultation period for this paper closed on the 7 December 2012. Final rule instruments and policy statements will be issued once the FCA and PRA acquire their legal powers.

FSA CP12/34 - Regulatory reform of the FSA Handbook
On 29 November, the FSA published a consultation paper (CP12/34) as part of a series outlining proposed changes to the regulatory requirement needed to create the new rulebooks for the FCA. This consultation paper focuses on changes to the Supervision Manual, Threshold Conditions and proposals for implementing the FCA’s powers over qualifying parent undertakings. The key changes to the Handbook are as follows:

  • SUP 1: The FCA approach to supervision - amended to reflect the FCA’s statutory objectives, including reference to the FCA’s new competition objective which requires the FCA to identify and address competition problems and adopt a more pro-competition approach to regulation. Additional sections have been added to reflect the FCA’s supervisory approach and the new approach to the FCA’s relationship with firms.
  • SUP 7: Individual requirements - updated to reflect the extension of the FCA’s powers to dual-regulated firms and to remind firms when the FCA may need to consult the PRA before exercising its powers. A proposed new definition of ‘own-initiative variation powers’ is introduced to describe the relevant new FCA powers to vary or cancel a firm’s part 4A permission.
  • Threshold Conditions (TC) - the ‘suitability’ TC sets out additional circumstances, which the FCA may consider when assessing whether a firm is ‘fit and proper’. There is a new business model TC which allows the FCA to assess whether a firm’s strategy is suitable for its regulated activities.
  • Powers over qualifying parent undertakings - consists of three sets of powers that can be applied directly to a parent undertaking: a power of direction; a rule-making power for information gathering; and a supporting enforcement power to impose fines or censure. The FSA considers this to be a necessary step in preventing an unregulated parent undertaking from adversely affecting the FSA’s operational objectives. In practice, the FCA is likely to act against regulated firms first and it will aim to exercise this power in a proportionate fashion, however there are concerns that parent companies may be forced to incur financial penalties in the form of making its own funds and liquid assets available to regulated subsidiaries and the potential for dividend restrictions to be enforced aimed at retaining capital in the group.

The full text of the proposed changes can be seen in the appendices to the consultation paper, and will be in place in time for the legal cutover to the FCA and PRA, which is planned for 1 April 2013.

FSA CP12/35: Consultation on the FCA’s use of temporary product intervention rules
On 3 December, the FSA published a consultation paper (CP12/35) on when and how the FCA will use its power to make temporary product intervention rules, as provided for in the Financial Services Act.

Any such rules will be published on the FCA’s website and cannot last more than 12 months and will not be renewed. During this time, the FCA will either consult on a permanent remedy or aim to resolve the problem in a different way. The FCA will consider using a temporary product intervention rule where it identifies “a risk of consumer detriment arising from a particular product, type of product, or practices associated with a particular product or type of product”, and where it considers it necessary or expedient for the purpose of advancing its consumer protection or competition objective, or (if an order from the Treasury is provided) its integrity objective. Before making such rules, it anticipates the FCA examining alternative methods of mitigating consumer detriment. The FCA does not expect to use temporary product intervention rules often.

The consultation will remain open until 4 February 2013 and the FSA intends to have the final Statement of Policy in place in time for the legal cutover to the FCA and PRA, which is planned for 1 April 2013.

Challenging the culture of market behaviour – speech by Jamie Symington, FSA
On 4 December, Jamie Symington, Head of Wholesale enforcement at the FSA, gave a speech at the City and Financial Market Abuse Conference in London examining how cultural change is key to changing market behaviour and combating market abuse. Mr Symington highlighted a number of ways that the FSA is working to change culture.

  • Tough action against perpetrators - increasing success in civil and criminal prosecutions has led to the FSA creating a credible deterrent and as a result expects to see its annual metric for market cleanliness continuing to improve.
  • The wider regulatory regime - Mr Symington highlighted the Greenlight Capital enforcement case as an example of how the FSA expects it to be second nature for market professionals to suspect and report potential misconduct.
  • Educational and thematic work - the FSA’s focus on high-frequency trading, transaction reporting and developing training initiatives has continued to make market participants aware of their obligations and ensure they take steps to mitigate the risk of market abuse.

In conclusion, Mr Symington reiterated that the FCA’s approach to market abuse will follow on from the work of the FSA and that the FCA recognises that retail and wholesale markets are connected and as a result will turn its focus more towards wholesale conduct than regulators in the past previously have.

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IOSCO final report - policy recommendations for Money Market Funds 

On 9 October, the International Organization of Securities Commissions (IOSCO) published its final report on ‘Policy recommendations for Money Market Funds’. IOSCO stated that although money market funds (MMF) did not cause the 2008 financial crisis, their performance during the turmoil highlighted their potential to spread or amplify a crisis. This has raised concerns over the stability of the money market fund industry and the risks that it may pose to the broader financial system. The final report consists of 15 recommendations and proposes that these form the basis for common standards for the regulation and management of MMFs across jurisdictions. The recommendations are summarised below.

  • MMFs should be explicitly defined in Collective Investment Schemes (CIS) regulation to ensure that all CIS that present the characteristics of a MMF are captured by appropriate regulation even when they are not marketed to investors as a money market fund.
  • Specific limitations should apply to the types of assets in which MMFs may invest and the risks they may take.
  • Regulators should closely monitor the development and use of other vehicles similar to MMFs, e.g. CIS or other types of securities.
  • Funds must comply with the general principles of fair value accounting when valuing the securities held in their portfolios.
  • Valuation policies should be reviewed by a third party as part of the fund’s periodic review of its accounts.
  • Limitations on the use of repos.
  • Funds should establish sound policies and procedures to know their investors.
  • Funds should be required to hold a minimum amount of liquid assets to strengthen their ability to face redemptions and prevent fire sales. Each jurisdiction should define a minimum level of liquid assets that the fund should hold depending on their respective markets.
  • Funds should periodically conduct appropriate stress testing on their portfolios and where they reveal specific vulnerabilities, responsible entities should undertake actions to reinforce their robustness.
  • Funds should have tools in place to deal with exceptional market conditions and substantial redemption pressures.
  • Funds that offer a 'stable' net asset value should be subjected to additional regulatory requirements.
  • Funds should be required to strengthen internal credit risk assessment practices and avoid too much reliance on external ratings.
  • Supervisors should ensure that the credit rating agencies that they are supervising make their current rating methodologies for MMFs more explicit.
  • Disclosure to investors of the absence of a capital guarantee and the possibility of principal loss.
  • Disclosure to investors of the fund’s practices relating to valuation and the applicable procedures in times of stress.

IOSCO is proposing to review the implementation of these recommendations within two years.

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Financial Stability Board consultation on ‘Strengthening Oversight and Regulation of Shadow Banking’ 

On 18 November, the Financial Stability Board (FSB) published a set of consultative documents seeking comments on proposals on Strengthening Oversight and Regulation of Shadow Banking. The FSB is of the view that the authorities’ approach to shadow banking has to be a targeted one. Their objective is to ensure that shadow banking is subject to appropriate oversight and regulation to address bank-like risks to financial stability emerging outside the regular banking system while not inhibiting sustainable non-bank financing models that do not pose such risks. The consultative documents comprised:

The FSB has focused on five specific areas in which it believes policies are needed to mitigate the potential systemic risks associated with shadow banking:

  • to mitigate the spill-over effect between the regular banking system and the shadow banking system;
  • to reduce the susceptibility of MMFs to 'runs';
  • to assess and mitigate systemic risks posed by other shadow banking entities;
  • to assess and align the incentives associated with securitisation; and
  • to dampen risks and pro-cyclical incentives associated with secured financing contracts such as repos, and securities lending that may exacerbate funding strains in times of 'runs'.

The closing date for responses to these consultations was 14 January 2013.  The FSB expects to publish final recommendations in September 2013.

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AIFMD update 

There have been a number of key developments in the last quarter in relation to the implementation of the Alternative Investment Fund Managers Directive (AIFMD). To keep advised of further developments and for further detail and analysis of the AIFMD Level 2 implementing measures in early 2013, visit our AIFM publications page here.

European Commission adopts delegated regulation supplementing the AIFMD
On 19 December the European Commission published its long-awaited Regulation that will provide the basis for implementing AIFMD across the EU by 22 July 2013. The Directive, or Level 1 text, entered into force in July 2011 and the Commission’s Level 2 Regulation now provides the detailed measures for compliance. The Regulation draws on the European Securities and Markets Authority (ESMA) technical advice from November 2011 with some changes. Key areas of impact include:

  • Delegation - Investment management functions cannot be delegated "to an extent that exceeds by a substantial margin the investment management functions performed by the AIFM itself". Certain qualitative criteria are provided to assess the extent of delegation.
  • Collateral - Collateral both received and pledged by the fund will now fall under the Directive’s strict depositary liability regime, requiring the depositary to return assets held in custody without 'undue delay' in the event of loss.
  • Leverage - Leverage must be calculated according to the 'gross' and 'commitment' methods which may result in the disclosure of higher leverage figures than those derived from other methods. The Commission will consider permitting an optional 'advanced' approach, only by July 2015. The Regulation has also tightened the definition of when an AIF becomes substantially leveraged (3 times Net Asset Value under the commitment approach), which will trigger additional leverage reporting.

The European Parliament and Council of Ministers now have a three month period in which to object to the Commission’s Regulation. It is anticipated that the Commission will clarify in early 2013 certain aspects of the transitional arrangements for compliance. AIFMD must be implemented nationally by 22 July 2013 while pre-existing AIFMs are required to submit an application for authorisation by 22 July 2014.

ESMA consults on draft regulatory technical standards and guidelines
On 19 December, ESMA published two consultation papers which provide detailed feedback on the earlier key concepts of the AIFMD discussion paper issued in February 2012:

Guidelines on key concepts of the AIFMD - this paper provides draft guidelines on key concepts of the AIFMD, focussing specifically on the definition of an AIF that will come within scope. Certain criteria are outlined, such as raising capital from investors and a defined investment policy. A collective investment undertaking with only one investor can meet this definition.

Draft regulatory technical standards on types of AIFMs - this paper provides draft regulatory technical standards (RTS) on the types of AIFMs. The RTS focus on distinguishing whether an AIFM is managing an Alternative Investment Fund (AIF) of the open-ended or closed-ended type in order to ensure that the rules on liquidity management, the valuation procedures and the transitional provisions of the AIFMD are applied to AIFMs in a uniform manner.  ESMA expects to submit the finalised draft RTS to the European Commission in the first half of 2013 for endorsement.

The deadline for comments in respect of both consultations is 1 February 2013.

FSA CP12/32: Implementation of the Alternative Investment Fund Managers Directive
On 14 November, the FSA published a consultation paper (CP12/32) setting out how it will transpose the requirements of the AIFMD into UK law by the deadline of 22 July 2013. The consultation paper is the first of two papers with the second expected to be published in February 2013.

The paper follows on from the FSA’s discussion paper (DP12/1) which was published in January 2012 and provides feedback on some of issues raised then. The FSA makes clear that it has little scope for discretion in implementing AIFMD as it is mostly a maximum-harmonising Directive. However, there are still some areas where the Member States have options available. The FSA’s paper therefore covers those areas where there is sufficient certainty at European level. Some notable points from the paper include:

  • proposal to create a new section of the FSA Handbook, entitled FUND, containing requirements for AIFs and UCITS funds, and the companies that manage them;
  • acceptance of AIFM authorisation applications or Variations of Permission is planned to take place from 22 July 2013;
  • clarification that investment managers structured as limited partnerships will not be able to become AIFMs as they do not have separate legal personality;
  • the Regulated Activities Order will be realigned by introducing four more regulated activities: (i) managing an AIF; (ii) managing a UCITS; (iii) acting as a depositary of an AIF; and (iv) acting as a depositary of a UCITS;
  • the FSA intends not to give firms the option of using contractual guarantees in lieu of regulatory capital although Article 9(6) of the Directive allows a Member State to let an AIFM provide up to 50% of the additional own funds required under Article 9(3) with a guarantee from a credit institution or insurance undertaking;
  • the FSA will consult on how the transparency provisions (annual report, disclosure to investors) of the AIFM interact with current requirements for Non-UCITS Retail Schemes and Qualified Investor Schemes in the second part of the consultation process; and
  • the FSA intends not to increase the private placement obligations above those within the Directive.

The closing date for responses to this first part of the consultation is 1 February 2013.

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EMIR update 

European Commission adopts technical standards for EMIR
On 19 December, the European Commission adopted nine regulatory and implementing technical standards to complement the obligations defined under the European Markets Infrastructure Regulation (EMIR) which entered into force on 16 August 2012. The standards were developed by ESMA and the European Banking Authority (EBA) and were endorsed by the European Commission without modification. The adoption of these technical standards provides firms with much greater certainty on the detailed requirements for EMIR and the timetable for implementation. The standards cover the following important areas:

  • the data set to be reported to trade repositories for OTC and exchange-traded derivatives;
  • the supervisory framework for central counterparties (CCPs) including stringent capital requirements;
  • what constitutes eligible collateral for margin payments;
  • the client money segregation requirements for firms who offer client clearing;
  • the details of how and when firms should perform risk mitigation techniques such as trade confirmation and portfolio reconciliation; and
  • the thresholds for determining which non-financial firms will need to clear and exchange margins for derivative trades.

The bulk of the standards must still be endorsed by the European Parliament and the Council of Finance Ministries. The Parliament has received a one month extension to the minimum one month deadline to allow for the Christmas period. In practical terms this means that if the Parliament and Council endorse these standards without amendment the likely implementation start date will be the end of March/early April 2013. But a demand for change would see the timelines push out considerably as the standards would need to go back to ESMA and/or the EBA.

The Deloitte EMEA Centre for Regulatory Strategy has further analysis of the hot topics for firms in relation to EMIR here.

FSA Policy Statement: Client Asset Regime - changes following EMIR
On 14 December, the FSA published a policy statement (PS12/23) which includes the final rule changes to CASS as required under EMIR and summarises the feedback submitted in relation to Part I of the consultation paper CP12/22.

  • The concept of ‘porting’ has been introduced. ‘Porting’ occurs when the positions and margins held in a client account at a CCP by a clearing member firm that is determined to be in default, are transferred to another client account held by a back-up clearing member.
  • In the event of a clearing member default, CCP must return the balance of any collateral from the failed clearing member’s client accounts at the CCP directly to the clients or back to the failed clearing member.
  • It has been proposed that should a ‘primary pooling event’ occur as the result of the failure of a firm, any client money held by a clearing member firm in a client transaction account at a CCP is excluded from the pooling and distribution triggered by this event.

The changes put forward by this policy statement came in to effect from the 1 January 2013.

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MiFID update 

European Parliament vote on Compromise Text
On 26 October, there was a European Parliament plenary vote on MiFID II. This led to the both the MiFID and MiFIR amendments being adopted, subject to small changes. The voting numbers were:

  • MiFID amendments: 495 in favour; 15 against proposals; and 19 abstentions.
  • MiFIR amendments: 497 in favour; 20 against proposals; and 17 abstentions.

These texts will now form the basis of the European Parliament’s position for the trialogue negotiations, which will start once the Council has finalised its position in order to agree a Level 1 text for MiFID and MiFIR.

Council working group update
A number of Council working group sessions took place in Q4 2012. There was support in some areas of the text, however there are still a number of concerns and compromise has not been reached in all areas. This has resulted in delays to the trialogue process, which was initially expected to commence in Q1 2013.

ESMA supervisory briefings on MiFID
ESMA published two supervisory briefings on MiFID, covering Suitability and Appropriateness and Execution Only. The purpose of the supervisory briefings is to provide supervisors with guidance on potential areas of supervisory focus.

The briefing on ‘Suitability’ includes a number of key questions under the following headings:

  • Determining situations where the suitability assessment is required.
  • Obtaining information from clients.
  • Duty to ensure suitability when providing investment advice or portfolio management.

The briefing on ‘Appropriateness and Execution Only’ includes a number of key questions relating to the following:

  • General implementation (e.g. assessing appropriateness and training).
  • Appropriateness test (e.g. questions asked, timing of test and format of test).
  • Warning clients.

Although the questions are meant for supervisors, firms should review the questions against their current arrangements in order to identify any gaps.

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RDR update 

The implementation date of RDR has now passed and all impacted firms are now required to comply with all RDR rules and guidance.

As the deadline approached, the FSA published its final RDR Newsletter and, possibly of more relevance and importance, consulted on amendments to RDR adviser charging and remuneration rules regarding a referral to discretionary investment managers (DIM) in a bid to ensure that the RDR was implemented as the FSA intended.

Payments for referrals to DIMs
The intention is to make it clear that adviser firms must not accept or solicit commission, remuneration or benefit of any kind from a DIM for recommending its services to a retail client. Adviser firms can receive additional remuneration for any role they play in the relationship between a client and a DIM, but this can only be through charges that they have set out upfront and agreed with their clients. Financial advisers should generally not be paid by DIMs for referring their clients' business to those investment managers, Under the FSA's proposed new rules, advisers would generally be banned from being paid for 'managing a relationship' with DIMs by acting as an 'agent' for clients dealing with DIMs or by passing "material to the DIM on the client's financial situation and/or investment preferences" where this was a new relationship with a client is created post RDR. At this stage, pre RDR relationships are not impacted.

RDR Newsletter # 8
This final RDR Newsletter covered a number of operational considerations, updates and reminders on key points. It is also signposted to another chapter within an earlier Quarterly Consultation. This chapter dealt with share conversions where the client moves from pre-RDR share classes to clean share classes. The clarification is designed to ensure that these transfers between capital and income accounts can be made without adversely affecting the rights of unit holders to income their units have already earned.

The remaining contents of the RDR Newsletter covered;

  • Distinction between product costs and the cost of advice update - confirmation that following on from identifying this risk in a previous RDR Newsletter, the FSA has now carried out a review on a number of firms’ approaches and is picking up issues with these firms directly.
  • Qualifications - Q&A on common queries including Statement of Professional Standing, 30 month rule and CPD.
  • Waivers - highlighting circumstances where advisers may be able to apply for a waiver to meeting the professionalism standards – examples of exceptional circumstances.
  • Facilitation of adviser charging - clarification on when existing charging approaches can be relied up to satisfy RDR.
  • Communicating with consumers - signpost to obtain copies of the FSA’s RDR Consumer Guide.
  • Policy update - notification of proposed change to definition of Holloway policies to ensure that wording fully reflects policy intention to exempt these policies from RDR.

For further information, visit www.deloitte.co.uk/RDR.

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Q4 2012 enforcement cases 

There have been 33 final notices published on the FSA website in the last quarter. The following enforcement cases may be of particular interest to those in the investment management sector:

  • The failure of an Authorised Corporate Director in matters of oversight of the funds for which it was responsible. This included inadequacies in the management of conflicts of interest, monitoring of valuation processes and liquidity risk.
  • Suitability failings of a wealth management firm in its provision of portfolio management services. This included inadequate record-keeping and maintenance of client information for the purposes of evidencing suitability of investments given the client’s personal and financial circumstances.
  • The failure of a high profile bank to prevent an employee from undertaking unauthorised trading activities that led to substantial losses for the firm. Although, not strictly related to the investment management sector, this case highlighted the FSA’s focus on systems and controls, particularly in relation to firms’ oversight and risk management systems.
  • An individual being fined and banned from undertaking controlled functions due to his lack of integrity and failure to act with due skill, care and diligence in relation to advice and promotion of unregulated collective investment schemes to retail customers. Amongst other things, the individual did not take adequate steps to ascertain if there were suitable exemptions which would enable him to promote such schemes to customers and there was insufficient information recorded on customer files to determine their eligibility to receive such promotions.

The FSA is increasingly using enforcement as a method for communicating its position on issues within the industry. Firms should pay particular notice to the issues raised as the FSA will expect consideration to be given to the outcomes of these cases. A full overview of the FSA’s enforcement notices is available here.

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