Legislation PRA Close Consultation on RingFencing Comments have closed for the PRA consultation paper on the implementation of bank ring-fencing due to come into effect on 1 January 2019. The PRA is required by the Financial Services and Markets Act 2000 (FSMA), as amended by the Financial Services (Banking Reform) Act 2013, to ensure that banks with deposits of over £25 billion insulate their retail banking operations from the perceived ‘more risky’ corporate and investment banking operations, in order to enhance customer protection and financial stability. The requirements include a provision to ensure that the board of directors of each entity remain separate, with no more than a third of directors allowed to sit on both boards. Banks were asked to submit their preliminary legal and regulatory structures before 6 January 2015. It has been reported that TSB, Santander, Virgin Money, RBS, Barclays, Lloyds and HSBC have confirmed submission of their ring-fencing plans to the PRA. The Financial Times (FT), citing people familiar with the situation, have reported that Lloyds Banking Group plc have asked for an exemption to proposals requiring a different board for the ring-fenced and non-ring-fenced entity, because over 90 per cent of their new banking operation is to be ring-fenced. It is also understood that Barclays plc and HSBC Holdings plc are planning to put as little as possible into the ringfenced entity, in order to boost the size of the remaining entity and therefore lower their costs of funding. For example, Barclays are believed to have proposed keeping Barclaycard credit card and most corporate finance divisions outside the ring-fenced entity. RBS and Lloyds, both banks based on strong lending platforms, have instead sought to operate using as a large a ringfenced entity as possible. In their response to the consultation, the British Bankers’ Association (BBA), the industry body representing banks, stated that they foresee the deadline of January 2019 laid out in the consultation as “extremely challenging” unless operational and functional capacity can be put in place by the regulators. The BBA stated that the PRA will need to “accelerate decision-making on key aspects of the regulatory regime and ensure that they have sufficient capacity to provide requisite regulatory engagement, and where necessary, approval at each relevant stage in a timely and efficient manner”. Executive Director of the BBA, Paul Chisnall, stated that “we’d like the regulators to try to put in place the new regime as quickly as possible to allow banks to make final decisions about how to structure their businesses”. Standard and Poor’s (S&P), the ratings agency, has stated that as a result of the ring-fencing legislation, some of the investment banks could be assigned credit ratings as low as BB, also known as “junk” status. Osman Sattar of S&P stated that “although we believe non-ring-fenced entities could remain viable, we think their risk appetite may need to be lowered further and their business models revised. They could also require very high levels of capitalisation and liquidity. This may make them a less attractive investment proposition than they’ve been over much of the past two decades.” “Banking groups whose systemically-important retail banking units have ratings around the ‘A’ category could under our criteria have non-ring-fenced entities with ratings around the ‘BB’ category – or at best the ‘BBB’ category.” The policy for ring-fencing was originally laid out in the Vickers Report in December 2013. The PRA expect to consult further on the policies in 2015, before publishing their final rules in 2016. New FCA Policies to Improve Behaviour in Credit Broking In response to concerns over the credit broking market, the Financial Conduct Authority (FCA) has published a policy statement issuing new rules focussed on tackling bad fee charging practices in the industry. The new rules, targeted towards addressing concerns in certain subprime 20 | Exchange – International Newsletter markets including the high-cost short-term credit (known in the UK as payday lending) market, came into force on 2 January 2015. The rules focus on regulating those brokers who charge a fee to the customer. Firms will now be banned from charging fees and requesting details from customers for the purpose of charging fees unless certain information about the firm and the fees are provided to the customer in a durable medium. The credit broker must also ensure that the customer has acknowledged receipt of this information and confirmed awareness of the contents of the notice in a durable medium. The rules are designed to ensure transparency for the customer about the finance party being dealt with and any fees that may result from the relationship. The FCA has also stated its intention is to cut down the process of firms sharing payment details to other firms which take a fee, as each fee-charging firm will be required to send its own information notice and receive an acknowledgement letter. There are certain additional transparency requirements for brokers, including having to notify the customer of their legal name and the fact they are a broker (as opposed to a lender) in all financial promotions and other communications. All fee charging brokers will be required to inform the FCA of their web domain names every quarter. Furthermore, the FCA is requiring that if a customer cancels a credit broking agreement within the 14 days prescribed in the Distance Marketing Directive, the credit broker will be required to repay any sums received from the customer within 30 calendar days. In producing the policy guidelines, the FCA did not issue a consultation period, as the regulator felt that “the delay involved in consulting would be prejudicial to the interests of consumers”. The FCA has made relevant updates to the Consumer Credit sourcebook (CONC) and the Supervision manual (SUP) to take account of these policy changes. Market Abuse Definition Extended Until 2016 In November, the Government announced the extension of the existing market abuse regime until July 2016. The existing definition of market abuse, under section 118(8) FSMA, had been set to expire on 31 December 2014. In an explanatory memorandum, HM Treasury noted that the definition of market abuse in the UK is wider than the one prescribed by the EU Market Abuse Directive, and therefore the government had kept the need for this broader definition under review. This extension is the fourth time the expiry date has been extended, having previously been retained in 2008, 2009 and 2011. The newly published Financial Services and Markets Act 2000 (Market Abuse) Regulations 2014 will retain the existing legislative provisions under section 118(8) FSMA until the EU Market Abuse Regulation (MAR) comes into force in 2016. The MAR provides for a similarly broad interpretation of market abuse, functionally equivalent to the UK legislation. Enforcement FCA Hands Out £1.1 Billion in Fines for Banks Rigging Foreign Exchange Market In the largest fines ever imposed by a UK financial regulator, the FCA has fined five banks over £1.1 billion over the manipulation of foreign exchange (FX) benchmarks. The five banks, Citibank N.A., HSBC Bank plc, JPMorgan Chase Bank N.A., The Royal Bank of Scotland plc and UBS AG, were each fined between £210 million and £235 million for their role in the misconduct. The FCA announced that its investigation into Barclays Bank plc was ongoing. The FX market has an average daily turnover of US$5.3 trillion, of which 40% is traded through London. The spot FX markets rely on a number of benchmarks “fixes”, which are supposed to reflect the relative market price between two currencies at particular times during the day. In its investigation, the FCA focussed, in particular, on the WM/Reuters 4pm London Fix and the 1.15pm European Central Bank Fix. The investigation revealed that between January 2008 and October 2013, groups of traders in the five banks had communicated with one another to try to manipulate the market in a way that ensured that the participating traders would benefit. Traders would typically take one of three roles: ‘building’ their position, in which the trader would take a large position in the currency and use this financial muscle to push the market in the desired direction; ‘giving www.dlapiper.com | 21 the ammo’, in which traders at other banks would pass on some of their position to the trader seeking to build; or ‘netting off’ their position in which the traders at the other banks would ensure they reduced their position in off-market transactions, if they were positioned in the opposite direction to that desired. The majority of the evidence in the case came through a number of instant chat messages sent between traders. The FCA revealed that groups of traders in these firms formed “tight knit groups” who referred to themselves by names such as ‘the players’, ‘the 3 musketeers’ and ‘the A-team’. In some of the more revealing messages, traders would celebrate with one another after having successfully manipulated a rate, posting messages such as: “cnt teach that”, “sml rumour we haven’t lost it”, “we… do… dollar” and “we fooking killed it right”. The FCA has announced that it will be implementing an industry wide remediation programme in order to ensure that the root causes of the problems have been addressed going forward. The review will focus on ensuring that the systems and controls in relation to spot FX in order to ensure they are adequate to manage the risk within the banks. In announcing the fines, chief executive of the FCA, Martin Wheatley stated “today’s record fines mark the gravity of the failings we found and firms need to take responsibility for putting it right. They must make sure their traders do not game the system to boost profits or leave the ethics of their conduct to compliance to worry about. Senior management commitments to change need to become a reality in every area of their business.” “But this is not just about enforcement action. It is about a combination of actions aimed at driving up market standards across the industry. All firms need to work with us to deliver real and lasting change to the culture of the trading floor.” The FCA’s fines were published in conjunction with further fines issued by the Commodity Futures Trading Commission (CFTC) and Office of the Comptroller of the Currency in the US, totalling US$2.4 billion, and a further £100 million fine by FINMA in Switzerland. IT Failures cost RBS Group £56 Million in First Joint FCA and PRA Enforcement Action In the first joint enforcement action taken together by the FCA and PRA, Royal Bank of Scotland Group banks were fined £56 million in relation to an IT failure in June 2012. The fine, which was issued to Royal Bank of Scotland plc (RBS), National Westminster Bank plc (NatWest) and Ulster Bank Ltd (Ulster Bank) (together the Banks), related to a software compatibility problem which left over six and a half million customers facing difficulties accessing their money. In its final notice, the FCA stated that the problem had meant customers of the Banks were unable to access their online banking facilities or obtain accurate account balances from ATM machines, as well as facing difficulties paying some external credit providers. Following the incident, the Financial Services Authority (the predecessor of the FCA) ordered a skilled persons report into the incident. The PRA and FCA then undertook a joint investigation into the issues. In the meanwhile, the Banks paid out paid a total of over £70 million in redress to customers, including £460,000 to individuals and firms who were not customers of the Banks. As a result of the investigation, the FCA deemed the IT failings to be a breach of Principle 3 in failing to ensure that the firms had adequate systems and controls measures to identify and manage IT risks. The Banks had failed to take “reasonable care to organise and control its affairs responsibly and effectively with adequate risk management systems”. In the FCA’s press release, the director of enforcement at the FCA, Tracey McDermott, stated that “the problems arose due to failures at many levels within the RBS Group to identify and manage the risks which can flow from disruptive IT incidents and the result was that RBS customers were left exposed to these risks. We expect all firms to focus on how they ensure that they can meet the requirements of their customers when looking at their IT strategies and policies.”22 | Exchange – International Newsletter The PRA also identified in its final notice that the banks had failed to ensure that the IT change had been managed in a carefully planned way. In outlining its final penalty, the PRA stated “properly functioning IT risk management systems and controls are an integral part of a firm’s safety and soundness and of particular importance to the stability of the UK financial system”. The Banks would have had a combined penalty of £80 million, but were entitled to a 30% discount for early settlement. SUCCESSFUL FIRST PROSECUTION FOR SFO UNDER THE BRIBERY ACT In December 2014, the Serious Fraud Office (SFO) announced its first successful convictions under the Bribery Act 2010, following the sentencing of three individuals in relation to alleged fraud of over £23 million. These are the first convictions under the Bribery Act since it came into force in July 2011. Gary West and James Whale, former directors of the companies in the Sustainable Growth Group (SGG), and Stuart Stone, a sales agent of an investment firm, were convicted of a number of offences, including conspiracy to commit fraud, conspiracy to furnish false information, fraudulent trading and a number of Bribery Act 2010 offences. They were sentenced to 13, 9 and 6 years in jail respectively at Southwark Crown Court. The convictions were part of the SFO’s investigation into the SGG, which was discovered to have numerous accounting irregularities, relating to false sales invoices and disguised money transfers. Director of the SFO, David Green CB QC, stated “These three individuals preyed on investors, many of whom were duped into investing life savings and pension funds. As a result, many lost life-changing amounts of money. This successful conclusion of the SFO’s investigation clearly demonstrates the harm that this type of investment fraud has on victims and the SFO’s ability and determination to bring criminals to justice.” These convictions come less than a month after Stuart Alford QC, Joint Head of Fraud at the SFO had to reiterate that the SFO was taking the Bribery Act seriously after a lack of prosecutions. In a speech to the Anti-Corruption Oil and Gas Conference 2014, he stated “I believe that the record in respect of the Bribery Act is not nearly as troubling as some people make out. This is a piece of legislation which is taken very seriously, and you will start to see an increase in the number of prosecutions: both from the SFO and other agencies.” UK Trading Platform COLLAPSES Trading platform Alpari has been forced into insolvency as a result of the Swiss National Bank’s decision to end the Swiss franc cap against the Euro. On 15 January 2015, the Swiss National Bank abandoned its attempts to fix the price of the Swiss franc against the Euro. The surprise decision, believed to have been in response to early rumours of the Eurozone’s quantitative easing plan, resulted in the franc rising by 30%. This was described by some commentators as “probably the largest one-day movement by a major currency since the First World War”. This caught some market participants off-guard, including trading platform Alpari, a UK based trading platform. Alpari, originally established in Russia, allowed their clients to be exposed in certain markets, relying on an ability to match their clients’ positions with liquidity in the market. When liquidity in the market dried up, Alpari found themselves unable to cover their cash demands. The firm, which had been planning an IPO in 2015, released a press statement on its website stating that it had been put into insolvency. Explaining the outcome, the firm stated that the rate move had resulted in the “majority of clients had sustaining losses which has exceeded their account equity. Where a client cannot cover this loss, it is passed on to us”. The firm has moved to reassure customers about their procedures for client money protection. “Retail client funds continue to be segregated in accordance with FCA rules”.www.dlapiper.com | 23 Bank Excludes Duty to Provide Advice When Making Recommendations The High Court has ruled that in certain cases, banks can exclude a duty to provide advice when making recommendations of certain products. It was held, in the case of Crestsign Ltd v RBS and Natwest  EWHC 3043 (Ch), that although the bank did provide negligent advice, they had successfully excluded the duty to provide advice by providing the relevant terms of business before the transaction. Included in the terms were statements including that the borrower would be acting on its own account and would not be placing reliance on the bank for advice or recommendations provided. The case centred around Crestsign, a small, family-owned business, who entered into an agreement with NatWest to refinance an existing loan. As a condition of the loan, the finance would only be provided if Crestsign agreed to enter into an interest rate swap arrangement. When interest rates fell in the years subsequent to the finance agreement being signed, Crestsign continued to pay a significantly higher interest rate as a result of the swap. Crestsign claimed damages for negligent advice and negligent misstatement. In providing his judgement, Mr Tim Kerr QC, stated that “in the present case, I find myself unable to resist the conclusion that the banks successfully disclaimed responsibility for any advice that Mr Gillard [an RBS representative] might give and (as I have found) did give. The Risk Management Paper and the two sets of terms of business were unequivocal; they defined the relationship as one in which advice was not being given.” “They were clearly drawn to Mr Parker’s [a director from Crestsign] attention before the swap contract was concluded. He rightly understood (and hence sought comment from Mr Bransby-Zachary [another Crestsign director] on the terms of business) that they were not empty words but were intended to have legal effect as part of any contract.” This case comes in the context of a number of past-sale regulatory reviews conducted by banks at the insistence of the FCA, which have paid out large amounts of redress for missold swaps and derivatives products. This case may demonstrate that the regulatory requirements imposed on banks by the FCA are, in some cases, more stringent on banks than strict legal tests applied by the court. Trader Pleads Guilty to LIBOR Manipulation In October, the SFO announced its first conviction in connection with manipulating the LIBOR benchmark. The individual, described as “a senior banker for a leading British bank”, but who has not been named for legal reasons, pleaded guilty at Southwark Crown Court for conspiracy to defraud. LIBOR is an interest rate benchmark which calculates the average rate at which contributor banks can borrow in the inter-bank market. The benchmark, which is used for pricing billions of pounds worth of financial contracts annually, has been the subject of a number of high profile manipulation scandals, in which traders from major banks sought to profit from altering the rate. Later in the same month (October), the SFO also announced it had commenced criminal proceedings against Noel Cryan, formerly of Tullett Prebon Group Ltd, bringing the number of persons facing charges for LIBOR related offences up to thirteen. Reports FCA Publishes Davis Review Into Mishandled Media Briefing In December 2014, the FCA released the Davis Review (Review), an independent report into the FCA’s mishandled announcement of a thematic review into historic life insurance products. The Review was commissioned in response to a front page article in The Telegraph newspaper on 27 March 2014, announcing an FCA investigation into legacy life insurance products. The story was based on information provided to a journalist by the FCA, ahead of the thematic review’s formal announcement in the FCA’s 2014/15 Business Plan at the end of the month. 24 | Exchange – International Newsletter At the time, the article had a significant effect on the share price of a number of insurance companies, resulting in accusations that the FCA had irresponsibly released price sensitive information and created a false market in shares. The Review, which cost £3.15 million pounds to compile, found that the FCA has used the media “...as a tool of regulation to communicate effectively to firms and consumers about the steps which the FCA was taking to achieve its operational objectives”. However, in this case, although the article was “well intentioned”, its execution was poorly supervised and executed, which reflected failings in the FCA’s media handling procedures. The Review made a number of recommendations to the FCA, including: ■ improving media handling procedures; ■ acting under the presumption that the contents of its Business Plans are price sensitive; ■ emphasising the impartiality of the prospective investigation in its announcement; ■ not pre-briefing thematic reviews; and ■ implementing greater controls of the Communications Division. In its response, the FCA accepted all of the recommendations of the Review, and stated that it has begun the process of implementing changes. The FCA also announced that Clive Adamson, FCA Director of Supervision and the individual to whom a number of quotes in the article were attributed, and Zitah McMillan, Director of Communications and International, have decided to leave the regulator as a result of their role in the scandal and, along with CEO Martin Wheatley and Director of Markets David Lawton, they would not receive their 2013/14 bonuses. James Palmer, Chairman of the Listing Authority Advisory Panel, commented that “the FCA came close to the line. If the FCA had been a listed or regulated firm, there would have been a potentially serious breach of systems and controls”. Regulatory Approach PSR Outlines Vision for Future Regulation of Payments Systems In November 2014, the new Payment Systems Regulator (PSR) released a consultation paper on its vision for the new regulatory framework for payment systems in the UK. The PSR is the new regulator of payment systems which will become fully operational in April 2015, as an independent subsidiary of the FCA. Amongst the proposals in the consultation paper is the creation of a Payments Strategy Forum (PSF), which the PSR plans to launch soon after the PSR’s inception. The PSF will be composed of a broad spectrum of industry representatives and service users, to discuss outcomes for, propose developments to, and monitor implementation of, future industry evolution. In December 2014, the PSR published a draft terms of reference for the Working Group, which will help to develop and steer the PSF. To coincide with the launch of the PSF, the PSR intends to conduct a wide ranging market review, commencing in April 2015, into the ownership and competitiveness of infrastructure provision. Other proposals include opening up governance to additional players including service users; a renewed focus on the access requirements for payment systems; and a new set of principles for industry behaviour standards. The consultation paper closed on 12 January 2015. The PSR expects to publish its final policies and recommendations no later than the end of March 2015. FCA FOCUS ON COMPLAINTS HANDLING In December 2014, the FCA produced a consultation paper on proposals for improving complaints handling across all financial services sectors. It follows on from its November 2014 thematic review into the complaints handling processes of retail financial services firms, to identify and mitigate any obstacles preventing effective complaints handling in the future. www.dlapiper.com | 25 The paper consults on a number of policy and procedural improvements firms will be required to make. These include: ■ Extending the informal complaint period time limit from one to three days; ■ Requiring written communication to consumers whose complaints are resolved informally that they have the right to refer to the ombudsman if unsatisfied; ■ Ensuring all complaints data is reported to the FCA; ■ Improving the FCA’s complaints return form that firms are required to fill out; and ■ Limiting the cost of calling financial services firms to, at most, a “basic rate” number. The thematic review, on which this consultation builds, found that broadly speaking, the retail financial services firms had made improvements in their complaints handling procedures, however there was still room for improvement to ensure that processes were handled in the best interests of consumers, through providing a clear, consistent and fair means of dealing with issues. The review covered new ground from previous thematic review work on complaints through its forward-looking focus. The review was conducted working alongside fifteen major retail financial firms, including seven banks, two building societies and six insurers, who were asked to conduct self-assessment reviews on their own complaint handling procedures, to provide an insight into the customer journey within their firms and to identify any areas for improvement. It was the first time a selfassessment methodology had been adopted by the FCA for looking at complaints handling. It remains to be seen whether the FCA intends to use this methodology going forward in this area. Responses to the consultation paper should be submitted before 13 March 2015. The FCA will consider the responses before publishing its new rules.