Transcript www.thepfs.org

Regulation & compliance in 2012
Simon Morris
Partner, CMS Cameron McKenna LLP
Looking at …
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What is changing with the FS Bill & FCA?
Standards for advising & selling
Individual responsibility
The future – Europe & G20
1. A change of tone (but not of
substance)
FS Bill – the big picture
Lord Sassoon
• We asked too much of the FSA
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Process was valued over judgement
Judgement of expert supervisors is put at the heart of the system
FCA good news for consumers
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Will seek competition-led solutions for better outcomes
Preparation points:
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Understand the FCA’s policy and the cultural requirement
Understand how this will impact your firm
Understand how the FCA’s consumer agenda will impact your firm
Consider your competitive position
The view from the Treasury Select
Committee
View on the FCA …
• Objectives are unfocussed
• Weak accountability
• Overhang of current FSA culture
Preparation point - This may sharpen the approach
The restructuring is underway
2011:
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Announcement that FCA to take over Consumer Credit from OFT
Start of FSA’s ‘twin peaks’– internal split into PBU (PRA) and CBU (FCA)
2012
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FSB: further sittings at Committee stage. Back to HoC after HoL’s third reading.
Expected to receive Royal Assent end of 2012
Draft legislation on further banking reform due (Autumn)
FCA approach document to be published
2013
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Draft handbooks for FCA and PRA to be published (early 2013)
Legal cutover from FSA to PRA, FCA and FPC expected (April). Designate heads:
Andrew Bailey (PRA); Martin Wheatley (FCA). FSA wants handover ASAP after 1st
March. Depends on FSB
2014
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Expected transfer of consumer credit (incl. 2nd charge lending) from OFT
to FCA under FSB
And already
FSA effectively divided
Preparation point - what you are seeing is what you will get
Changes in Bill are focused on delivery not substance
• MiFID is pervasive
• But the style can change – AUTH, SUP & ENF
• And G is important
• As is COND, PRIN and APER
Preparation point – the key focus is changes in style
The rulebooks
Work starting on the rulebooks – very little change yet
• A change of tune?
“Making only the changes required to implement the Bill and support
creation of the new regulatory structure” CP12/24
• PRA & FCA will designate existing FSA rules – but expect divergence
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As regulators develop them “in line with their objectives and functions”
In Guidance
Plus new COND, PRIN & APER
Plus new CASS, FEES & COMP
Substantive changes needed for objectives & functions – GEN & SUP
Preparation point – study and respond to the consultation
Tripartite max – the new reality
a) The FPC
We must ...
Understand and guard against the big risks
Ensure shareholders’ money is at risk if a bank fails
Take away the punchbowl – when this will work
Mervyn King
b) The PRA
We are seeking to occupy the middle ground between fixed rules
and unpredictable discretion
Julian Adams
c) The FCA
I am interested in how to intervene to make things better
Martin Wheatley
The FCA
The new philosophy
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Looking at consumer behaviour and what drives decisions
People make easy mistakes
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How can they assess risk?
How can they compare complicated products?
Transparency is not enough ... does your business model deliver
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Product and approval processes that produce the right product?
Point of sale processes that produce suitable outcomes?
Martin Wheatley May 2012
Preparation point – look through your customers’ eyes & think TCF
The FCA philosophy in action
1. Forward looking – act before goes wrong
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Authorisation, VoP, CiC, thematic supervision
2. Earlier intervention in development & marketing
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UCIS
3. Attack underlying causes
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Business model drivers
Governance & senior management engagement
Flows of MI and systems & controls
4. Securing redress and taking enforcement action
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Intensive, interventionist & judgemental
Preparation point – anticipate the challenge
FCA agenda by sector – a measure of
continuity
Retail banking
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Responsible lending
Bundled accounts
Uprisking
BCOBS
Asset managers
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SYSC
CASS
Platform transparency
IFAs
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Suitability – CIP, DIF &c
Pressure of RDR
Wholesale
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Market integrity
Systems and controls
Place in the product chain
Generally
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Cost cutting
Remuneration
Cross selling
Outsourcing controls
Complexity in product
design
Preparation point: grasp the
agenda
A change in supervisory philosophy
The supervisory stance
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Sector based & firm/product focus
Thematic
Less relationship management
2/4 year review replaces ARROW
C1 – C4
• Firm Systematic Framework –
are customer interests &
market integrity central to the
firm?
• Emerging issues – firm event
driven
• Issues & products – sector
analysis
With focus on conduct risk
We will communicate understandably
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Less jargon & regulatory speak
Consult face-to-face
Fewer briefer consultations
How will regulatory processes feel?
A change of approach
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Viability of business
Management focus
The Daily Mail test
Preparation point: grasp the agenda
The FCA agenda – draft product
intervention policy
To address potential or actual consumer detriment
Looking at breadth, depth and context
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How many? How much? How vulnerable?
Outside FCA’s view of proper market
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Obnoxious features
Market cannot address – barriers to entry or exit
For example
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Single premium PPI
SCARPs
Preparation point – review and build into your design
process
The FCA agenda – competition plans
Promoting effective competition in the interests of consumers
Product intervention to tackle competition problems such as
products and services with the following characteristics
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One-off high value transactions
Long term investments where problems only appear many years on
Asymmetries of information
Inherent complexities
Linked-in sales practices such as tying and bundling
Barriers to switching
Barriers to entry.
Preparation points
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Review your products through a competition filter
Consider also comparative prices, value for money and clarity of
pricing.
The FCA agenda – incentivisation
We are concerned that reward culture is contributing to
mis-selling …
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we have found that most incentive schemes that we looked at are
likely to drive mis-selling, and this risk is not being properly managed;
we expect firms to act now to clean up their act in regards to our
findings;
this work will be taken forward by the FCA and we will be taking a
closer look at how firms incentivise their staff.
If you do have an incentive scheme, it has to be structured
and managed in a way that treats the people it will affect
fairly.
Martin Wheatley 5 September 2012
What’s the agenda?
We will be making a judgement on what the businesses we
regulate are doing now, and what they plan to do in the
future ...
We will look at how firms make their money,
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and whether they are ‘good profits’
how they pay their staff
whether they are designing, and selling products with customers in
mind
In short, whether they are carrying out their business in a way
that is treating their customers fairly …
Martin Wheatley 5 September 2012
And the call for action
1. First, look at your incentive schemes to see if they
increase the risk of mis-selling, and if so how.
2. Second, review whether your governance and controls
are adequate.
3. … Recurring problems need to be investigated, action
taken and redress paid to consumers who have lost out.
Martin Wheatley 5 September 2012
What are the exceptionable schemes?
In principle, any incentivisation unless limited & strict
governance
Especially ones with
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Significant amounts
Disproportionate rewards
Inappropriate triggers
Product bias
Mix bias
What should a firm look to do?
Remove high risk features
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Think through bias generation
Manager incentives
Reducing the value of incentive schemes
Capping maximum payments
Remedies
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Act on quality
Claw back
Capping
2. Standards of advising & selling
What are the sources?
COBS
TCF
Campaigns
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Replacement business
CIPs
ETVs
Structured retail product governance
And to come
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Product intervention
Competition
Common features – manufacturing
1. The lovable product
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Prove it!
2. Carefully crafted
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Describe it!
3. With quality distribution
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No inducements!
Oversee it!
4. And monitored throughout the journey
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Do it!
Common features – advising
1. Target the customer
2. Ascertain the customer needs
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Realistically assess horizon, needs & ATR
3. Measure their present assets v their needs
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What is a proper priority?
Can you adjust the present assets?
What would it cost them to enhance with your offering?
4. Give the suitable advice
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Avoid bias
5. Keeping a very careful record
3. Enforcement & individual
responsibility
The future holds
Credible deterrence has been at the centre of our enforcement strategy
for a number of years. Simply put, credible deterrence is about taking
tough, targeted, effective, public action against firms’ and individuals’
mis-conduct as a way of changing behaviours ...
Martin Wheatley July 2012
... enforcement needs to get further up the chain of command – to look
increasingly at those in senior management who fail to recognise and
manage the risks their firm is running
… we need to have a low tolerance for firms that constantly bump along
the bottom.
Tracey McDermott July 2012
Individual approval – judging senior
management
APER 5 – 7 and in due course the PRA/FCA versions
Proper control – have you mapped the business & identified
the risks?
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How did you manage them?
How did you manage subordinates?
Skilful Management – do you fully grasp it?
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What MI do you get?
What do you do with it?
Business is compliant – how is it monitored?
Up to 2007/08 …
Predominantly directors of small retail firms, for example
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APER 5 – director of retail stockbroker failed to ensure systems
and controls for suitability (Weston July 2008)
APER 6 – director of insurance intermediary failed to monitor
Compliance staff (Hales October 2008)
APER 7 – director failed to ensure quality of advice or complaints
reviewed at IFA (Nagaty September 2005)
The common features
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Evident wrongdoing
Resultant detriment
Clear personal responsibility
UK / 73064985.1
Not forgetting … incompetent
compliance officers
Failure to ensure firm took reasonable steps to comply
with CASS; delegated responsibility & not supervise APER 5 & 7 (Thornberry March 2012)
Failed to ensure Compliance contractor performed –
APER 7 (Ruff July 2011)
Did not understand business and delegated to others –
APER 7 (Royden September 2010)
MLRO failed to assess risks, oversee function or ensure
checks made – APER 7 (Chatto May 2010)
What should they have done?
UK / 73064985.1
The new world – senior management
competency
Chief executive major IFA (over 300 advisers) breached APER 7
Knew from board packs that suitability retail advice only c 60%
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Failure to ensure systems in place for suitable advice
Failed to implement proper controls over record keeping
Failed to understand why systems not working
Aware of problems but failed to take reasonable action
Remedial action cost c £7m.
Withdrew approval, fine, 5 year undertaking not apply SIF position
What should he have done?
Peter Sprung (Royal Liver) FN Feb 2010
UK / 73064985.1
The new world – competency (what is
reasonable)
There were serious flaws in governance & risk management
Six major issues current on his appointment as CEO
On appointment interviewed, discussed, met & challenged
Also commissioned reviews, appointed new heads
FSA argued not wide enough but Tribunal said …
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Reasonable initial assessment & not prompted to dig deeper
CEO oversees controls but may rely on delegates
Only limited authority in large international group
Investigated every control failure and oversaw remedies
Thus took reasonable steps despite ongoing serious flaws
John Pottage (UBS) Tribunal April 2012
What are the “defences”?
1. Unfair to pick me out
2. My conduct was not beyond the range of plausible
judgement
3. The FSA never criticised us
4. The strategy was agreed by the Board
5. I didn’t design the controls
6. It was the deteriorating economy that caused it
7. I did take some steps to improve things
Every one of these arguments was rejected in
Cummins – the focus is on personal responsibility and
personal reasonableness
4. There is more (much more) to
come
Insurance
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Solvency II: 2014
IMD II: 2015
IGS
Banking
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Funds
CRD IV: 20132019
RRD: 2014 – 2015
Banking Union in
Eurozone: 20132014
Liikanen Review
DGS
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AIFMD: 2013
UCITS IV: 2011
UCITS V: 2014
Key
No proposal
Trialogue in process
Adopted but implementation still to come
In force
Securities, Derivatives and
Investments
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MiFID: 2015
Short selling: 2012
MAD II: 2015
REMIT: 2013
EMIR: 2012/13
PRIPs: 2014
CRA
CSD
Listing and Prospectus
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Amending Prospectus
Directive and delegated
Regulations: 2012
Transparency Requirements
Key
No proposal
Trialogue in process
Adopted but implementation still to come
In force