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Conduct of Business (including MiFID)

Conduct of Business continues to be at the forefront of regulatory reform with an increasing focus on transparency and investor protection, both in retail and wholesale markets, and on the need for more proactive and robust intervention earlier in the process – intended to lead to products being withdrawn before they can cause widespread customer detriment.

International and European Union regulatory developments

The Financial Stability Board (FSB) published a report on consumer finance protection in October 2011, which focuses on consumer credit including credit cards, mortgages and secured/ unsecured loans. The report provides an overview of global progress made in strengthening consumer protection and suggests areas which may require further work including strengthening supervisory tools and the development of best practices guides. The FSB report also includes, as an annex, ten high-level principles for financial consumer protection published by the Organisation for Economic Co-operation and Development (OECD). The high-level principles are intended to guide regulators in G20 countries and include a regulatory framework and the role of oversight bodies as well as principles regarding complaints handling and competition. Both the FSB report and the OECD principles were endorsed by the G20 Finance Ministers and Central Bank Governors in October 2011. Additionally, the FSB published a consultation paper on principles for residential mortgage underwriting practices in October 2011, following a thematic review of mortgage market underwriting earlier in the year in which it called for more consistent, stringent supervision and improved measures to assess the borrower’s ability to pay. The seven principles include effective verification of income and other financial information and guidance on appropriate loan-to-value ratios.

In Europe, the European Commission (EC) is expected to publish a proposal on Packaged Retail Investment Products (PRIPs) in Q1 2012. The proposal is likely to introduce new pre-contractual disclosure requirements and improved rules for selling practices and investor protection Additionally, in October 2011 the EC published its proposals for revisions to the Markets in Financial Instruments Directive (MiFID II). MiFID II was published in the form of a Directive and a Regulation and has increased the scope of the original Directive to include the commodity derivatives market, trading facilities and OTC financial instruments, as well as additional measures to improve transparency and investor protection. In addition the Chairman of EIOPA, Gabriel Bernardino outlined his intention to take a lead role in consumer protection in his opening speech in November 2011. EIOPA are currently consulting on a draft report on best practices and a proposal for guidelines on complaints-handling by insurance undertakings, as well as good practices for disclosure and selling of variable annuities.

UK regulatory developments

At a national level, the focus is on protecting the retail consumer. In the UK, the Independent Commission on Banking (ICB) published its final recommendations in September 2011. The recommendations were divided into two sections; financial stability and competition. The premise of the competition recommendations is to increase consumer choice. The Government is supportive of the proposed measures, including holding the industry to account to establish a current account redirection service by September 2013. In addition, the Government believes further action is needed to enhance the regulation of payments networks in the UK and is currently consulting on changes to the operation of the Payments Council, with a view of including any resulting changes in the Banking Reform Bill in 2013. The Financial Services Authority (FSA) is considering increasing its supervisory scope to encompass all aspects of the product life cycle including product design. In June 2011 the FSA published a feedback statement re-affirming its commitment for product intervention following a discussion paper earlier in the year. The FSA is currently consulting on packaged bank accounts, proposed guidance for structured retail product development and governance as well as proposed guidance for payment protection products, with the aim of preventing a repeat of the mass customer detriment caused by the mis-sale of Payment Protection Insurance (PPI). The FSA is also focussing on the role of non-executive directors (NEDs) in ensuring firms are identifying, monitoring and mitigating risks to their retail customers. Guidance is currently being developed for NEDs, which includes the expected skills level of the board and the kind of information they should expect to be provided regarding retail conduct risk.  Additionally the FSA is continuing its review of the mortgage market, and is currently consulting on the proposed package of reforms which includes detailed rules around income verification for all mortgage applications. A policy statement outlining the final rules is expected to be published in summer 2012.

The FSA is also continuing work on the Retail Distribution Review, where it is currently focusing on guidance for simplified advice. The FSA has also recently published a policy statement outlining its final rules on changes to product disclosure arising from RDR adviser and consultancy charging. Additionally, in May 2011 the FSA published final policy, rules and guidance on complaints handling rules, and is further consulting on a proposed change to the definition of ‘eligible complainant’. The FSA also announced an increase to the Financial Ombudsman award limit. The changes will be phased in between September 2011 and July 2012.

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