Transcript Norton Rose presentation

40 Minute Briefing
Domestic reform:
The first 100 days of the new regime
Jonathan Herbst - Partner
Katie Stephen - Consultant
Sonya Zywko - Senior Associate
Norton Rose Fulbright LLP
3 July 2013
Today’s agenda
• What happened to the Handbook?
• The new philosophy: How the FCA is using the new threshold
conditions and objectives
• The end of certainty?
– Themed visits
– Events driven work
• The world of enforcement
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Domestic reform: The first 100 days of the new regime
Nuts and bolts: What happened to the Handbook?
• Minimalist approach: Made sense given the timescales
• Approach taken by the FSA prior to cut-over:
– Designate provisions to be carried forward in the new regime
– Make changes to certain provisions that did not involve policy changes
– Make more substantive changes to align the new Handbooks with the
provisions of the Financial Services Act 2012
• FSA statutory obligation under section 155 FSMA to consult on
changes: Several consultation papers published in particular
CP12/26 concerning changes to approved persons regime
• Final changes to the Handbook set out in PS13/5
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Domestic reform: The first 100 days of the new regime
Nuts and bolts: What happened to the Handbook?
• At cut-over FSA Handbook split into FCA and PRA Handbooks:
Note a combined view can be found on FCA website
• Interpretation of both Handbooks:
– Purposive interpretation of the rules
– If Handbook provision goes beyond the FCA’s or PRA’s powers or
responsibilities, it is to be interpreted as applied by that regulator to the extent
of that regulator’s powers and regulatory responsibilities only
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Domestic reform: The first 100 days of the new regime
The evolution of the new Handbooks
• FCA and PRA can amend their Handbooks subject to public
consultation: Sections 138I and 138J FSMA
• PRA will conduct a review of its Handbook and intends to replace
it with a rulebook:
– Unclear at the moment how much the rulebook will differ from the Handbook
– But guidance material in the rulebook will be strictly limited and other types of
material (e.g. procedure manuals and information on how the PRA will act) will
be published separately
– Important to bear in mind the PRA Approach document: Firms expected not to
merely meet the letter of the rules nor game them but maintain sight of the
overriding principle of their safety and soundness and act accordingly
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Domestic reform: The first 100 days of the new regime
The evolution of the new Handbooks
• FCA will be reviewing the way it presents rules and guidance:
– Journey to FCA confirms that FCA is reviewing the way that non-Handbook
guidance (e.g. letters to firms) can be used as an effective tool for firms: A
major issue over the last few years
• Financial Services Act 2012 provides for the FCA and PRA to
make threshold condition codes:
– Not published so far but FCA has COND and PRA has set out information in its
Approach documents
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Domestic reform: The first 100 days of the new regime
The new philosophy: The twin pillars
• Regulatory objectives:
– A lot of work within FCA on competition objective: Competition within financial
services in interests of consumers in regulated financial services and markets
– Must insofar as possible advance consumer protection and integrity objective to
promote effective competition
– Unclear yet how policy will be shaped in this area but questions already much
more focussed for firms on competition issues
– Note also the distinction between this and competitiveness of the UK: Now
there is just a sustainable growth have regard to
– Innovation is a discretionary have regard to as part of the competition objective
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Domestic reform: The first 100 days of the new regime
The new philosophy: The twin pillars
• Threshold conditions:
– FCA threshold conditions for FCA authorised firms: Effective supervision,
appropriate resources and business model threshold conditions being used to
the full
– FCA threshold conditions for PRA authorised firms: Effective supervision and
appropriate non-financial resources and business model
– Key point is the breakdown of the compliance versus commercial distinction in
the new world
– Ties closely into forward looking regulatory intervention and product regulation
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Domestic reform: The first 100 days of the new regime
A further word on effective supervision
• FCA effective supervision threshold condition:
– New threshold condition encompassing previous FSA close links condition
– Covers all circumstances including the nature and complexity of the firm’s
regulated activities, the complexity of its products and the way in which the
business is organised
• Appropriate non-financial resources:
– PRA solely responsible for assessing dual regulated firm’s financial resources
under its prudent conduct threshold conditions
– Appropriate interpreted as meaning sufficient in terms of quantity, quality and
availability
– Includes any systems, controls, plans or policies that the firm maintains, any
information that the person holds and the human resources that the firm has
available
– Assess whether firm able to comply with SYSC and other applicable systems
and controls requirements
– FCA may consider the impact of other members of the firm’s group on the
adequacy of its resources
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Domestic reform: The first 100 days of the new regime
Business model analysis
FCA
PRA
• FCA will look at a firm’s business model to ensure
it meets the needs of consumers when it considers
authorising it
• PRA’s supervisory approach will include business
model analysis of firms it regulates
• Firms applying for authorisation or to vary their
permissions will be assessed against FCA
threshold conditions, one of which is the Business
Model Threshold Condition (BMTC)
• BMTC will demonstrate the importance that the
FCA will place on a firm’s ability to put forward an
appropriate, viable and sustainable business
model, given the nature and scale of business that
they intend to carry out
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FCA will expect firms to:
– Demonstrate adequate contingency planning in their
business model
– Make clear how their business model meets the needs of
the client
– Provide clear information, with evidence of how they will
meet BMTC
• FCA will recommend refusal at an early stage
where it is not satisfied that a firm meets, or will
continue to meet, BMTC
• FCA is consulting on how it will apply BMTC
• The analysis will include an assessment of where
and how a firm makes money, the risks it takes in
so doing, and how it funds itself. Firms will be
assessed at the level of the firm or the sector as
appropriate
• PRA will aim to understand a business model’s
sustainability and vulnerabilities. Vulnerabilities
might include:
– Unsustainable expectations of growth
– Heavy reliance on an inflexible structure of net interest
income, with consequent exposure to a low interest rate
environment
– Concentrated funding sources which may dry up in
stressed circumstances
– Significant consequences following a change in credit
rating
• For those firms posing greater risk to the stability
of the financial system, the analysis will be more
detailed. It will include a review of the drivers of
profitability, risk appetite, performance targets and
underlying assumptions, and a firm’s own forecasts
and their plausibility
• If the PRA believes that mitigating measures alone
cannot adequately reduce material risks to the
safety and soundness of the firm, it will require the
firm to change its business model
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The end of certainty? - Themed visits

The key message:
– Certainty on the cycle of visits and communications has gone: FCA will be preemptive and tough and firms can expect much more challenge
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Reminder of FCA firm categorisation:
– C1 and C2 to be fixed portfolio firms with a nominated supervisor
– C3 and C4 to be flexible portfolio supervised by a team of sector specialists and
no nominated supervisor: A lot of firms have or are losing their supervisor
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The FCA three pillar supervisory approach:
– Firm Systematic Framework (FSF), event-driven work and issues and products
– FSF assesses the firm’s conduct risk and aims to answer the question: Are the
interests of customers and market integrity at the heart of how the firm is run?
– Fewer supervisors allocated to specific firms means more flexibility to assign
resources to pillars 2 and 3
– Issues and products: Sector risk assessment which provides an assessment of
the conduct risks across a sector
– The reality of sector risk assessment is that firms without supervisors never
know when the theme arc light may shine on them
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Practical reality of themed visits
• Regulator will identify an area about which it has concerns or
wishes to find out more: Areas may be identified by supervisors,
policy work, or by looking at trends in complaints
• Objectives of a themed visit: Identify good practice, address
identified risks or determine the scale of risks identified from
intelligence or surveillance
• In reality, tight timing for documentation requests and visit shortly
after that: Appears designed to stop “creation” of documentation
• Message is to do proper trend analysis and have documentation
and people ready at any time: Dawn raid prep is a good
comparator
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Practical reality of themed visits
• Key issue for firms is to avoid 166 or disciplinary action:
– Much more commercial focus with linkage to the new business model threshold
condition: Firms need to be clear how their business model meets the needs of
clients and customers
– The focus on approved persons
– Already seen results in investment managers ABC/AML, conflicts and transition
management visits
• A new NRF product: The Complete Themed Visit Response
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The twist in the tail: Lessons from event driven work
• The official position:
– SUP 1A.3.4 definition: Dealing with problems that are emerging or have
crystallised, and securing customer redress or other remedial work (e.g. to
secure the integrity of the market) where necessary
– Covers everything from deals where there has been a problem to
whistleblowing allegations to spikes in reported complaints at a firm
• FCA Business Plan 2013/14:
– Delivering consumer protection FCA moving from a reactive approach to a
more proactive one
– Complex Event-Driven Crystallisation Team aims to resolve issues quickly and
decisively
• The reality:
– Vital for firms to consider Principle 11 and breach notifications carefully as they
may trigger referral to crystallisation team
– A firm without a supervisor may suddenly find itself the subject of a lot of
attention
– Even for firms with supervisors the old world in which the supervisor was in
control is largely gone: Other forces at work within FCA which have key input on
outcomes
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Enforcement: 100 Days
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Priorities
Penalties
Process
Publication
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So what is new? The place?
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So what is new? The people?
FSA Director of Enforcement
Tracey McDermott
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FCA Director of Enforcement
Tracey McDermott
So what is new? The public face?
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FCA Priorities 2013/14
Themes
Hot topics
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Focus on consumers
Culture
Principles
Credible deterrence
Senior management
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LIBOR
Market abuse
Unauthorised business
Financial crime controls
Mis-selling
Client money and assets
Complaints handling
FCA Priorities 2013/14
Thematic reviews feed into enforcement
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Banks’ control of financial crime risks in trade finance
Mobile phone insurance
Motor legal expenses insurance
Claims handling
Product governance
Mortgage arrears handling procedures
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Senior management
• Credible deterrence:
– 55 individuals (over £5m fines, 43 prohibitions and 13 criminal convictions)
– 38 firms (£418m fines)
• Knowingly concerned (Cummings, Thiam)
• No comfort in a crowd (Thiam)
• If in doubt, disclose:
– to the regulator (Thiam, Final Notice, Censure)
– to the board (Burns, Decision Notice, £154,800)
– to shareholders (Willford, Decision Notice £100,000)
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Mis-selling
• Drivers of behaviour
• Product focus
• Actual or potential:
– Sesame £6,031,200, Principles 3 and 9
– JP Morgan £3,076,200, Principle 3
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Client Assets and Complaints Handling
Client Assets
Complaints Handling
• XCap: £120,000, Principles
3 and 10 and CASS
• Horn Express: Censure
(£136,687), Payment
Services Regulations
• UBS: £9.45m, mis-selling
and complaints handling
• Lloyds: £4.315m, PPI
complaints handling
• Co-op: £113,300, PPI
complaints handling
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Penalties
March 2010 – new penalty regime
• When the new regime applies:
– “Gravamen of misconduct”
– Majority of misconduct
• Revenue not always indicative of harm:
– Client asset cases: daily average of balances
– Listing rules cases: average market capitalisation
– Forecasts
• Lead time
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Process
• Decision Notice reasons
• Challenging the regulator
• PRA
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Publication of Decision Notices
Arch Cru: September 2012
• Grounds:
– Serious reputational harm
– Risk to families from disgruntled investors
– Adverse effect on civil proceedings
• But…
– Lack of evidence
– Press comment
– Court papers publicly available
• No “cogent evidence of disproportionate damage”
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Publication of Decision Notices
Burns: May 2013
• “Possibility” of severe damage vs “significant likelihood”
• Burden not discharged due to:
– Uncertainty of future business
– Prospects of revival
– Financial impact “not such to leave her insolvent or destitute”
• Cogent evidence needed to outweigh strong presumption that
publication should be permitted
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Publication of Decision Notices
Christopher Willford: June 2013
• Judicial Review
• Private at first instance
• Not at Court of Appeal
• Public interest in open justice
• Judicial review brings matter into public forum
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Publication of Warning Notices
Background
• “Greater and earlier
transparency”
• RDC to decide if publish:
CP12/37
• How power will be used:
CP13/8
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What will be published?
• s.391(1)(c) “appropriate”
• Statement
• Caveats
• Not sanction
Publication of Warning Notices
Process
• 14 days
• RDC decision
Unfairness
• “Clear and convincing
evidence…suffer a
disproportionate level of
damage” e.g.
– materially affect physical or
mental health
– disproportionate loss of income
or livelihood
– prejudice criminal proceedings
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Enforcement Summary
• Different face, different focus?
• “Tough and meaningful action”
• Earlier public exposure
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Contact details
Jonathan Herbst
Peter Snowdon
Partner
Norton Rose Fulbright LLP
Solicitor, qualified in England & Wales
+44 20 7444 3166
[email protected]
Partner
Norton Rose Fulbright LLP
Solicitor, qualified in England & Wales
+44 20 7444 3912
[email protected]
Katie Stephen
Sonya Zywko
Consultant
Norton Rose Fulbright LLP
Solicitor, qualified in England & Wales
+44 20 7444 2431
[email protected]
Senior Associate
Norton Rose Fulbright LLP
Solicitor Advocate, qualified in England & Wales
+44 20 7444 2160
[email protected]
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Phoenix
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