This posting was written by Jacqui Hatfield.
2013 was a significant year for the UK regulatory landscape. National and international regulators continued to address the issues identified by the financial crisis in addition to responding to the LIBOR scandal with record-breaking penalties. In April 2013 a new regulatory regime was introduced in the UK which divided the Financial Services Authority into two new departments, the Financial Conduct Authority (FCA) and Prudential Regulatory Authority (PRA).
Keeping abreast of regulatory issues has never been more important for financial firms who are likely to face further scrutiny and change in 2014 as the FCA and PRA settle into their new roles.
Set out below are some of the key areas to watch in 2014.
2014 will see preparation for the first criminal trials for the manipulation of benchmarks. In 2013 the Serious Fraud Office (SFO) brought criminal charges against three individuals. The SFO is expected to bring further charges in early 2014, with the first trials scheduled for January 2015.
Tougher FCA enforcement and fines
In 2013 the FCA fined firms a record £472.3 million, up 52% from 2012. Whilst this figure was significantly affected by the substantial LIBOR fines levied against banks last year, it clearly demonstrates that the new FCA is a regulator willing to use its teeth.
In addition, approved persons within regulated entities are vulnerable to fines. The FCA and PRA acknowledge that fining firms alone does not result in a sufficient change in approach, and the targeting of individuals (senior managers) has become the norm when enforcement action is taken against a firm. Approved persons at regulated entities need to keep abreast of the increasingly prescriptive expectations and skill set requirements, including in respect of boards, relevant to their position. They should also keep abreast of the potential risks related to their positions. Even a fine can make it difficult for an approved person to work again in a similar role at a different firm.
The best protection for regulated entities and approved persons is management information in an understandable, transparent form, clearly related to the risk.
Culture was a recurring theme in FCA speeches throughout 2013 and is likely to remain an important issue in the year to come. FCA Chief Executive Martin Wheatley listed culture as one of his two key priorities for 2014.
Although culture is an elusive concept, being client focused is frequently cited as an integral part of a good culture. FCA speeches have provided some guidance on how the FCA intends to explore the area including investigating customer experience, incentive structures, regulatory responses, governance and decision making.
Regulated firms should generally review the speeches of the FCA and the PRA (if relevant). They are an important educational tool providing important information regarding their expectations and areas of focus.
Restrictions on the promotion of structured products
The FCA’s ban on the promotion of unregulated collective investment schemes and equivalent pooled vehicles to retail investors came into effect on 1 January 2014. Over the next year the FCA will consult on the introduction of new marketing restrictions in relation to non-pooled investments whilst continuing to monitor the effectiveness of the existing restrictions.
Temporary product intervention powers
In 2014 the FCA will continue to scrutinise financial products to determine whether they are causing consumer detriment. On making such a determination the FCA is entitled to temporarily intervene or ban a financial product without consultation. Short selling and certain aspects of credit default swaps were banned for 12 months in July 2013.
On 1 April 2014 the FCA will take over responsibility from the OFT for all consumer credit regulation. The FCA revealed at the end of 2013 that it plans to introduce new rules for reporting, consumer complaints, financial promotions, approved persons and prudential resources. The FCA’s new regulations will replace the Consumer Credit Act 1974, although many existing provisions will be transferred to the FCA Handbook.
When the FCA was created last year, Parliament conferred on it a new competition mandate. The FCA conducted its first competition-related market studies in 2013 in areas such as annuities and the cash savings market. In 2014 the FCA is expected to make statements on the appropriate next steps whilst considering whether competition market studies are required in other areas, including asset management for major institutional clients.
Martin Wheatley’s second key priority for 2014 concerns international technical regulatory reform. The publication of MiFID II, the Markets in Financial Instruments Directive aimed at increasing market efficiency and transparency, is expected shortly. This year will also see the implementation of some of EMIR’s more onerous requirements. Clarifying new EU legislation and ensuring a smooth transition will be crucial for the FCA in 2014.
Financial Services (Banking Reform) Act 2013
The Financial Services (Banking Reform) Act 2013 (the “Banking Reform Act”) received royal assent on 18 December 2013. The Banking Reform Act introduces reforms on a wide range of issues, some of which are outlined below.
Banks which accept deposits as a core activity (“RFBs”) will no longer be permitted to carry out certain activities. Secondary legislation to clarify which activities will be caught is to be developed throughout 2014. It is anticipated that such activities will include dealing in investments as principal and certain commodities trading activities.
RFBs will be prohibited from other conduct, including having non-EEA branches or subsidiaries carrying on regulated activities.
Changes to approved persons and accountability
The Banking Reform Act introduced a new senior persons framework which includes:
- Reverse (civil) burdens of proof for senior persons accused of misconduct
- Extended time limits for disciplinary action against senior persons
- Pre-approval of all senior persons by regulators
- A new criminal offence for senior persons guilty of reckless misconduct in the management of a bank
During 2014 the FCA will consult on the implementation of the new regime.
Payment Systems Regulator
The Banking Reform Act provided for a Payments Systems Regulator (PSR) to be established by the FCA. The PSR will be a competition-focused regulator with power to investigate and impose sanctions, including fines. Amongst other things, the new regulator will have the power to amend agreements relating to payment systems and require banks to enter into agreement with smaller institutions to process transactions on their behalf.
The PSR’s powers will come into force in late 2014.
Primary loss-absorbing capacity requirements
Requirements for systemically important banks to hold loss-absorbing capacity to satisfy their capital requirements were implemented by the Banking Reform Act. 2014 will see secondary legislation developed in this area.
Jacqui Hatfield is a partner in the Financial Services Regulatory Group at Reed Smith LLP, resident in the London office. Jacqui heads up the Financial Services Advisory Group which sits within the Financial Industry Group. She has a wealth of experience across the broad spectrum of the FSA regulated community. Her clients range from asset managers, brokers, banks, fund managers, fund platforms, exchanges, insurance companies, brokers, energy traders and corporate finance boutiques.