The Financial Services Bill has received Royal Assent and the Act will come into force on 1 April 2013: HMT notes that the Government will bring forward secondary legislation in the New Year. Final text of the Act has not yet been published.

FSA sets out proposals relating to with-profits mutuals, emphasising that it does not intend any changes to have an effect on proprietary with-profits firms. FSA notes that the current situation is one in which with-profits mutuals have to deal with the consequences of their current with-profits business maturing more quickly than new policies are being sold. Under current rules firms in this position have to make arrangements to deliver the value of any expected surplus in the fund to its existing with-profits policyholders. Firms which are not writing a material volume of new with-profits business are required to consider closing to new business in order to go into an orderly run-off that is fair to with-profits policyholders. However in a with-profits mutual the with-profits policyholders do not represent the sole relevant consumer interest. In such a firm the ‘with-profits fund’ is not necessarily distinct from the firm as a whole and there is no provision within FSA’s rules that recognises the interests of the membership (as opposed to with-profits) interests. When a proprietary with-profits fund goes into run-off, it does not mean that the firm as a whole has to close down as a consequence. FSA proposes giving mutuals the opportunity to achieve a similar outcome using methods that will be considered on a case-by-case basis. FSA proposes a new approach through changes to guidance in COBS 20 which will allow mutuals the opportunity to present proposals to identify within their existing fund the element that relates specifically to the with-profits policyholders (as opposed to what might be called ‘mutual capital’ or the ‘mutual members’ fund’). COBS 20 should explicitly recognise the potential for with-profits mutuals with a single common fund to undertake an exercise to separate out the relevant interests into a mutual members’ fund and a with-profits fund. Where the existing rights or interests in the mutual’s common fund are unclear and undetermined, the effect of such an exercise would be to seek to determine fairly to what part of that common fund FSA’s conduct regime for the regulation of with-profits business should apply. It would not be a reattribution. This will not be dependent on any particular legal view of the respective rights and interests of with-profits policyholders and members. Firms may, but will not necessarily be required to, use available legal processes, for example court sanctioned schemes of arrangement to effect a fair separation. However, where such options are not available or viable in the circumstances of a particular firm, firms will still be able to put forward proposals for effecting a separation which gives a fair outcome for all relevant categories of policyholders, taking all relevant circumstances into account. These proposals will vary from firm to firm and so each proposal will need to be assessed on its merits. This separation would principally be given regulatory effect in COBS 20 by an indication that firms may apply for a modification of the relevant regulator’s rules, under the new s138A FSMA (as proposed in the current Financial Services Bill) and subject to meeting the statutory tests. This will affect the definition of a with-profits fund in COBS 20, to narrow its focus to the with-profits element of the firm only, to fit the particular circumstances of that firm. Where a modification is granted, COBS 20 rules on with-profits business will still apply to the with-profits fund as identified but will not apply to the mutual members’ fund. However, fair treatment of policyholders may still affect the mutual members’ fund in other ways, for example, when considering the role of any mutual members’ funds as support for the with-profits fund. FSA proposes that certain elements of the existing COBS 20 rules and guidance which might otherwise be seen as prescribing a particular process or standard of evidence be removed or amended. FSA proposes to remove the existing guidance for mutuals in COBS 20.2.60G, which says with-profits policyholders should be asked to agree alternative arrangements for carrying on non-profit business after with-profits run-off, noting that this is a change in approach from a September 2010 “Dear CEO” letter. . FSA’s r proposed new approach potentially enables mutuals to demonstrate retrospectively that they have mutual members’ funds without needing to show that the practice of keeping and not distributing this capital has been clearly communicated to policyholders. FSA further proposes that the new application process should be supported by firms obtaining the report of an independent expert, the identity of whom and terms of reference of which are agreed with FCA (including appropriate consultation with PRA, as relevant) in advance and if appropriate include effective pre-consultation with policyholders and other members. This may be effected under s166 FSMA Responses to the consultation are required by 19 March 2013 and draft guidance will be finalised in light of the responses to this CP with the intention of publishing a PS giving feedback next yea. FSA notes that it is likely to be published by FCA, in consultation where appropriate with PRA.

These Regulations are made pursuant to the UK’s obligations under Regulation (EC) No. 924/2009 of the European Parliament and of the Council (OJ No L266, 9.10.2009, p11) (“the 2009 European Regulation”) and Regulation (EU) No 260/2012 of the European Parliament and Council (OJ No L94, 30.3.2012, p22) (“the 2012 European Regulation”). The 2009 European Regulation lays down rules on cross-border payments in euro; the 2012 European Regulation sets business and technical standards for payments in euro wherever they take place. Regulations 3 to 17 confer functions on FSA in relation to the supervision and enforcement of the 2009 and 2012 European Regulations. These include the requirement to maintain arrangements for determining whether compliance is being breached, powers to gather information, impose penalties or disciplinary measures, apply to court for an injunction and require restitution. FSA is also required to maintain arrangements for dealing with complaints and has power to issue guidance and exchange information with other competent authorities in the EU in order to resolve disputes. Provision is made for FSA’s supervisory costs and its exemption from liability in damages. Regulation 18 makes provision for civil proceedings to be brought in cases where a person has suffered a loss due to an institution breaching certain articles of the European Regulations. Regulation 19 provides for a derogation under Article 16(3) and (4) of the 2012 European Regulation to apply so that the requirements of Articles 8(2) and (3) of that Regulation do not apply until 1 February 2016. (The derogations under Article 16(2) and (8), applying to Member States which do not have the euro as their currency, mean that the requirements of Articles 3, 4 and 5 of the 2012 European Regulation do not apply until 31 October 2016). Regulation 20 makes provision for the application of these Regulations to UK branches of Gibraltar-based firms. Regulation 21 and the Schedule apply certain provisions of FSMA and secondary legislation (with modifications) in respect of FSA’s functions. Regulation 22 revokes, with savings, the Cross-Border Payments in Euro Regulations 2010/89. (Date in force: 15/1/2013)

This general approach document provides the text as agreed by ECOFIN at its meeting of 12 December 2012.

BIS has published this consultation. It is considering two possible hierarchies that would be significantly different from hierarchies currently employed in the securitisation framework. These two hierarchies differ in aspects such as the specific approach to be applied for certain types of exposures, the order and scope of application of approaches, as well as the flexibility that is given to either jurisdictions or to banks to opt for one approach or the other. BIS is proposing enhancements to the current ratings-based approaches and the supervisory formula approach included in the Basel II securitisation framework. The proposal contains a revised ratings-based approach and a modified supervisory formula approach, both of which are intended to create a more risk-sensitive and prudent calibration. The proposed revisions to the securitisation framework include the introduction of new approaches, such as a simplified supervisory formula approach and different applications of the concentration ratio based approach that was included in the Basel 2.5 enhancements. BIS intends to conduct a quantitative impact study on the proposals. Responses are required by 15 March 2013.

On the morning of 16 December 2012, FSA published Decision Notices in respect of the firm and its former CEO and former senior partner/compliance officer at the firm, saying that the inpiduals referred the matters to the Upper Tribunal. The Decision Notices set out that FSA has decided to prohibit Robin Farrell and Robert Addison from performing any role in regulated financial services, to fine them £650,000 and £200,000 respectively and issue a public censure against the firm – it is noted that FSA would have fined the firm £9m for its misconduct, were it not for the firm’s financial position. The firm was the investment manager of the CF Arch cru Funds and FSA alleges that it was reckless as to the risk that conflicts of interest would not be managed fairly, noting that in one transaction the firm received a fee of £3m from Guernsey cells it set up which the firm did not disclose to the independent directors of the cells or record in any contemporaneous transaction documentation. In addition, FSA alleges that the firm pursued an investment strategy which resulted in significant liquidity risks for the funds. Further, FSA believes that the firm and Robin Farrell failed to ensure that the funds aimed to provide a prudent spread of risk by adopting an investment strategy of allocating a majority of the funds’ assets in the Guernsey cells for which there was a limited secondary market; the liquidity risks increased when the firm increased the funds’ investments in the Guernsey cells’ shares at a time of market turbulence and illiquidity, rather than retaining cash in the funds. In the circumstances, investors were exposed to the risk that the funds would not be able to liquidate their investments to meet redemption requests from investors. The funds were ultimately suspended in March 2009 as a result of liquidity concerns. FSA says that the firm and Robert Addison adopted an informal, ad hoc approach to compliance monitoring with insufficient recording of the monitoring that was undertaken. The press release notes that the inpiduals applied unsuccessfully to the Tribunal for an order preventing FSA from publishing the Decision Notices. In the afternoon, the Upper Tribunal published its Decision (final link below) in respect of the publication of the Decision Notices. It concludes “I should however, express my concern that it is important that adequate steps are taken when publicising the Decision Notices to ensure that it is clear that the decisions are provisional in the light of the fact that they are being challenged in the Upper Tribunal. I am concerned that some of the benefits expressed by the FSA to flow from the fact of publication, such as the need to establish a deterrent effect could be said to be predicated on the basis that the findings are a fait accompli. Mr Hunter [FSA’s QC] referred to the fact that when a decision notice is published which is being challenged in the Upper Tribunal a legend to that effect is added to the notice. In my view the publicity material should go further than that. In particular any press release issued by the FSA should state prominently at its beginning that the Applicants have referred the matter to the Upper Tribunal where each will present their case and the Tribunal will then determine the appropriate action to take, which may be to uphold, vary or cancel the FSA’s decision. … Likewise in referring to the findings made, rather than give any suggestion of finality they should be prefaced with a statement to the effect that they reflect the FSA’s belief as to what occurred and how the behaviour concerned is to be characterised. The dismissal of the Applications is therefore conditional upon compliance with these principles and both parties have liberty to apply for further directions if, which I hope not to be the case, there is any doubt on what is expected”.

Consolidated text as agreed by ECOFIN at its meeting of 12 December 2012 follows.

FSA has published this consultation Chapter 2 explains our proposed amendments to LR arising from the new statutory powers that FCA will acquire to supervise and discipline sponsors. proposed amendments to LR regarding the notification requirements regarding suspensions or cancellations of an issuer’s securities at the request of an issuer; amendments to DTR regarding the approval of primary information providers, amendments to REC to reflect relevant changes in FCA’s role and powers; amendments to DEPP which will fulfil the requirements that FCA issue policy statements setting out: its decision-making procedures for giving statutory notices (i.e. warning notices, decision notices and supervisory notices); FCA’s decision-making procedures for refusing consent to PRA granting applications for authorisation or approval; FCA’s decision-making procedures for publishing information about warning notices; FCA’s policy regarding the imposition and amount of penalties under FSMA; and FCA’s policy regarding the imposition of suspensions or restrictions, and the period for which those suspension or restrictions are to have effect, under FSMA. Responses are required by 1 February 2012.

HMT has published a consultation on raising the maximum interest rate cap for credit union loans. This consultation seeks views on the proposal to increase the maximum interest rate that credit unions can charge, from 2% per month to 3% per month. The rationale for this proposal was explained in detail in a DWP feasibility study published in May 2012 which found that credit unions are currently unable to break even on small, short-term loans. HMT emphasises that this increase in the interest rate would be permissive; it does not require credit unions to increase the interest rate they charge but simply permits them to do so if they judge that the benefits outweigh the costs. As such, the measure eases an existing regulatory burden on credit unions. Responses are required by 18 March 2013.

A marked-up Presidency compromise text of the above dated 11 December 2012 has been published.