UK regulator 'considering further banking crackdown'

“Banks in the UK may need to significantly increase the amount of capital they hold in the near future, it has emerged.

Sources in the financial industry have today (25 February) told Reuters that the Financial Services Authority (FSA) is currently overseeing an investigation into how lenders go about calculating the riskiness of their lending arrangements.”

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FSA publishes its plans for 2011/12

The Financial Services Authority (FSA) has published its business plan setting out its priorities for 2011/12. In it   the FSAoutlines its priorities and specific initiatives for the year ahead, which reflect the continuing challenges facing the financial services industry.

This year’s business plan has been created against a backdrop of considerable change, with the UK government last year announcing plans for changes to the structure of financial services regulation in the UK. The FSA will restructure into the Prudential Regulation Authority (PRA) and the existing FSA legal entity will become the Financial Conduct Authority (FCA). This change will occur at the end of 2012 or early 2013. Until then the FSA will continue to deliver on its statutory objectives and implement the major initiatives that are already underway. The key areas will include:

• Maintaining ongoing supervision in a period of continued fragility in markets
• Continuing to influence the international and European policy forums, delivering, in particular, the new prudential regulatory agenda
• Implementing the current EU major policy initiatives, including Solvency II
• Delivering on the principal national sector initiatives to improve consumer protection - the Retail Distribution Review (RDR) and Mortgage Market Review (MMR)
• Continuing to improve the FSA’s operating systems and the quality of its staff
• Implementing the government’s regulatory reform agenda.

Reflecting the extensive resources needed for the regulatory reform program and the need to recognize the difficult economic circumstances for many firms, the FSA is not planning any new discretionary initiatives and is capping headcount at the current level.

The majority of the FSA’s resources are utilized providing ongoing supervision. The two biggest policy initiatives are Solvency II and influencing the substantial international prudential reform agenda, especially in respect of Basel III.

More ethical behaviour needed to regain public trust

Financial firms need to adopt the appropriate culture and ethics if a future credit crisis is to be averted and the trust of the public regained, Hector Sants, the Financial Services Authority (FSA) chief has warned. He made the comments during a keynote address at Mansion House.

He stated that both firms and regulators need to collaborate on instilling the right “behaviours and judgements” among financial firms in order for trust to be won back.

Mr Sants said: “Remuneration practices - bonuses - have been a symbol; a lightening rod of society’s lack of trust in bankers and to address the trust issue this state of affairs has to be recognized and resolved.

“I believe that unless bankers demonstrate sensitivity and exercise restraint in this area, trust will not be restored."

He added that firms should change their remuneration structure to ensure a sense of long-term 'ownership' is generated and that employers are viewed as “custodians” of the firm.

Meanwhile, the FSA recently set out changes to its rules surrounding complaint handling as part of an ongoing strategy to boost standards within the financial services industry.

FSA sets out best practice recommendations regarding contact with the media

The UK’s Financial Services Authority) (FSA) in the September edition of “Market Watch” has raised concerns regarding leaks.

They state that over the past three years they conducted two examinations concerning leaks:

1. During 2008 to 2010 they carried out a number of intensive enquiries into potential disclosures of inside information to the media ahead of certain announcements. These leak enquiries were conducted with the aim of identifying suspicious contact between insiders to a corporate transaction, and the media. This work also included discussions with regulated firms about their policies governing such contact. 
2. They continued their thematic work assessing regulated firms’ systems and controls on handling leaks.

In the “Market Watch” article they set out the background and present the key findings on both work streams. They also give a list of best practice recommendations regarding contact with the media, as they believe improvement is necessary. They appreciate that several recommendations that they have made could result in significant changes to current media handling practices at regulated firms. However, it is their belief that these changes, particularly those concerning restricting/recording contact between non-media-relations personnel and the media, could substantially benefit most firms. As an example, they indicate that these controls could help exonerate the firm and their staff early on in any leak enquiries conducted by their clients, regulators or the firm itself.

Leaks ahead of announcements threaten market integrity. Strategic leaks – designed to be advantageous to a party to a transaction – are particularly damaging to market confidence and do not serve shareholders’ or investors’ wider interests. It is therefore in all interests to ensure that senior management of all organizations who handle inside information establish (and are seen to establish) a much stricter culture that firmly and actively discourages leaks.

The FSA indicate that they will continue to actively monitor for leaks of inside information and conduct enquiries into these with the aim of identifying contact between the media and individuals at regulated/unregulated firms or issuers, and to take appropriate action. If no improvement is noticed in the levels of leaking in UK markets, they may consider rule changes. They will also take action where they deem unacceptable practices have occurred or the relevant existing systems and controls requirements applying to regulated firms and issuers have been breached.

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FSA poised to set tougher capital rules

Big British banks are likely to be forced to hold more capital than required under rules announced this month by the Basel Committee on Banking Supervision, the head of the City regulator told the Financial Times.

“We want to preserve the freedom to go beyond the absolute minimums, in particular in relation to our approach to systemically important banks,” Lord Turner, chairman of the Financial Services Authority, said. He also said that he would push forward with plans for UK liquidity requirements.

In a speech at the Mansion House, the Chairman of the Financial Services Authority, Lord Turner, said that to design an effective regulatory response to the financial crisis, we need to move beyond the demonization of over-paid financial traders and recognize the fundamental mistakes made by policy makers.

"In finance and economics", he said, "ill-designed policy is a more powerful force for harm than individual greed and error".

He argued that the crisis had many causes, including "absurd bonuses for excessive risk taking" and "an explosion of exotic socially useless product development", but that underlying these problems were prudential rules and an entire philosophy of market regulation which failed to identify and address the dangers of excessive leverage, and which too confidently relied on supposedly efficient and rational markets always to produce good results.

Addressing that failure requires the implementation of three major sets of reform: significant increases in bank capital and liquidity requirements; clear strategies to ensure that banks will not be bailed out by tax-payers; and macro-prudential tools which can slow down excessive credit growth. But applying these tools will sometimes have unpopular consequences for the supply of credit which society needs to be willing to accept.

Given these priorities, Lord Turner welcomed the decisions reached on the Basel III package of capital and liquidity reforms. Responding to suggestions that the package was weaker than ideal, he pointed out that the total impact derives from changes to the definition of capital and the definition of risk weights, as well as to the ratio itself, with the combined effect being considerably larger than the headline increase from 2% to 7% suggests.

He accepted that if philosopher kings were designing a banking system entirely anew for a greenfield economy, they would choose still higher ratios, but argue that starting where the world economy is today, the Basel III reforms will significantly improve the resilience of the global banking system without harming prospects for economic recovery.

But while Basel III is vital, Lord Turner stressed that it is not the end of global regulatory reform. In future, he said, tax-payers should not have to bail out those systemically important financial institutions which in the past have been judged ‘Too Big to Fail’. Options to achieve this while ensuring that systemic shocks to confidence and lending capacity are minimized, include capital surcharges for systemically important banks, or debt instruments smoothly convertible to equity as firms approach failure.

No set of permanent rules can, however, guard against all financial risks, which evolve in form and change through the cycle. For this reason, Lord Turner said the he regards the creation of the new Financial Policy Committee as the most important element in the Government’s reform package. The FPC will fill the “macro-prudential underlap” which existed between the FSA and the Bank of England, and move beyond a rule driven approach to financial policy to recognize the importance of judgment and discretionary powers to constrain excessive credit growth. Doing that, however, will not always be popular. To be effective, the FPC will therefore require robust independence, and to be supported by public recognition that constraints on easy credit are sometimes in everybody’s interest.

Société Générale fined £1.575 million for failures in transaction reporting

The Financial Services Authority (FSA) has fined the London branch of Société Générale (SocGen) £1,575,000 for failing to provide accurate transaction reports to the FSA. The fine reflects the seriousness of SocGen’s failure to submit accurate reports for approximately 80% of its reportable transactions, across all of its asset classes, for a period of over two years.

Firms are required to ensure they submit data for reportable transactions by close of business the day after a trade is executed. The FSA uses this data to detect and investigate suspected market abuse including insider trading and market manipulation.

SocGen also breached FSA rules by failing to retain and have available all relevant transaction reporting data. Firms must keep all data related to financial transactions and make it available to the FSA for at least five years.

Between November 2007 and February 2010, SocGen either failed to report, or inaccurately reported, 18.8 million of its 23.5 million reportable transactions. These breaches occurred despite the FSA sending repeated reminders to firms of their obligations to provide accurate data and of the importance of compliance with the FSA rules on transaction reporting.

Margaret Cole, director of enforcement and financial crime at the FSA, said:

"This is the sixth case in the last year where we have taken action against a firm for failures to make accurate transaction reports. We will continue to monitor the quality of firm reporting and we are committed to taking action where necessary to ensure firms comply with their reporting obligations.

"SocGen failed to accurately report a very high proportion of its transactions for a significant length of time. This failure is a serious breach of our rules as it can have a damaging impact on our ability to detect and investigate suspected market abuse.

"Firms and their management must ensure they submit quality transaction reporting data and we encourage all firms to review the integrity of this data on a regular basis."

The firm has taken a number of steps to address the concerns raised including commissioning a formal review of its transaction reporting process and committing resources to improve its processes and resolve the errors.

Zurich Insurance fined £2.275 million by FSA over loss of policy holders' personal details

The Financial Services Authority (FSA) has fined the UK branch of Zurich Insurance Plc (Zurich UK) £2,275,000 for failing to have adequate systems and controls in place to prevent the loss of customers’ confidential information. The fine is the highest levied to date on a single firm for data security failings.

The failings came to light following the loss of 46,000 customers’ personal details, including identity details, and in some cases bank account and credit card information, details about insured assets and security arrangements. The loss could have led to serious financial detriment for customers and even exposed them to the risk of burglary. Zurich’s failings were in breach of Principle of Business 3 (management and control) and the FSA’s System and Controls rules.

Zurich UK has seen no evidence to suggest that the personal data was compromised or misused.

Zurich UK outsourced the processing of some of its general insurance customer data to Zurich Insurance Company South Africa Limited (Zurich SA). In August 2008, Zurich SA lost an unencrypted back-up tape during a routine transfer to a data storage centre. As there were no proper reporting lines in place Zurich UK did not learn of the incident until a year later.

Zurich UK failed to take reasonable care to ensure it had effective systems and controls to manage the risks relating to the security of customer data resulting from the outsourcing arrangement.

The firm also failed to ensure that it had effective systems and controls to prevent the lost data being used for financial crime.

Margaret Cole, the FSA’s director of enforcement and financial crime, commented:

"Zurich UK let its customers down badly. It failed to oversee the outsourcing arrangement effectively and did not have full control over the data being processed by Zurich SA. To make matters worse, Zurich UK was oblivious to the data loss incident until a year later.

"Firms across the financial sector would do well to look at the details of this case and learn from the mistakes that Zurich UK made."

The FSA has previously fined HSBC, Nationwide and Norwich Union for data loss.

Royal Bank of Scotland Group fined £5.6m by the Financial Services Authority fines UK sanctions controls failings

The Financial Services Authority (FSA) has fined members of the Royal Bank of Scotland Group (RBSG) £5.6m for failing to have adequate systems and controls in place to prevent breaches of UK financial sanctions.

UK firms are prohibited from providing financial services to persons on the HM Treasury sanctions list. The Money Laundering Regulations 2007 require that firms maintain appropriate policies and procedures in order to prevent funds or financial services being made available to those on the sanctions list. These regulations require firms to establish and maintain appropriate policies and procedures in order to prevent funds or financial services being made available to designated persons on the list of financial sanctions targets maintained by HM Treasury. The Terrorism (United Nations Measures) Order 2006 and The Al-Qaida and Taliban (United Nations Measures) Order 2006 make it an offence to make funds or, in the case of the Terrorism Order, financial services available, directly or indirectly, to a designated person on the HM Treasury sanctions list unless a license is first obtained from HM Treasury.

According to the FSA during 2007, RBSG processed the largest volume of foreign payments of any UK financial institution. However, between 15 December 2007 and 31 December 2008, RBS Plc, NatWest, Ulster Bank and Coutts and Co, which are all members of RBSG, failed to adequately screen both their customers, and the payments they made and received, against the sanctions list. This resulted in an unacceptable risk that RBSG could have facilitated transactions involving sanctions targets, including terrorist financing.

The FSA considers that RBSG’s failings in relation to its screening procedures were particularly serious because of the risk they posed to the integrity of the UK financial services sector. This is the biggest fine imposed by the FSA to date in pursuit of its financial crime objective. It is also the first fine imposed by the FSA under the Regulations.

Margaret Cole, FSA director of enforcement and financial crime, said:

"The involvement of UK financial institutions in providing funds, economic resources or financial services to designated persons on the sanctions list undermines the integrity of the UK’s financial services sector. By failing to screen relevant customers and payments against the HM Treasury sanctions list, RBSG left itself open to the risk that it was facilitating terrorist financing.

"The scale of the fine shows how seriously the FSA takes this issue and should act as a warning to other firms to ensure that they have adequate screening procedures."

As RBSG agreed to settle at an early stage of the FSA investigation, it qualified for a 30% reduction in penalty. The FSA would have otherwise imposed a financial penalty of £8m.

Bank of England to take on a greater regulatory role

The Bank of England (BoE) may control a new regulatory committee as part of a number of proposals to change the way in which the financial services industry is supervised. A consultation document from the UK’s Coalition government outlines a strategy to set up a new Financial Policy Committee (FPC) in the autumn of 2010.

The creation of the FPC would provide the BoE with powers of macro prudential regulation. It will be headed up by the BoE’s new deputy governor with Hector Sant, the current chief executive of the Financial Services Authority (FSA), to be the first to take up the position.

Mark Hoban, financial secretary to the Treasury, said: “The Coalition government is delivering on its commitment to reform the financial system, to avoid repeating the mistakes of the recent financial crisis and to ensure that taxpayers are protected. “

He added that the launch of the consultation is a “crucial milestone” in its attempts to reform the industry.

The document also includes plans to create a Consumer Protection and Markets Authority, which would police conduct within the financial markets.

British 'Ponzi scheme' defendants fined £115m

Three men accused of running the UK's largest-ever Ponzi scheme have been ordered to pay £115 million to the Financial Services Authority (FSA).

It is claimed that John Anderson, Kautilya Nandan Pruthi and Kenneth Peacock – who ran Business Consulting International – took up to £84 million from clients including celebrities and sports stars, using new investors' cash to pay returns out to older ones. hey were offering investors returns of up to 20 per cent a month, reports BBC News.

While the police investigation into their activities continues, a High Court hearing has ruled that they were unlawfully accepting deposits without FSA authorization.

As a result, Pruthi has been ordered to pay £89.7 million, Anderson £13.1 million and Peacock £11.6 million. The FSA said that despite the ruling, it would be unlikely investors will be repaid for their losses "in part or at all".

Margaret Cole, director of enforcement and financial crime at the FSA, said: "This case emphasizes the importance of taking care to ensure that any firm or individual consumers deal with are authorized or approved by the FSA."

FSA chairman welcomes chancellor’s plans for regulatory reform

The Chairman of the Financial Services Authority (FSA), Lord Turner, has welcomed the changes to financial regulation outlined by the Chancellor of the Exchequer in his Mansion House speech and Hector Sants’ agreement to remain as Chief Executive of the FSA, leading the transition and the creation of a new prudential authority.

Lord Turner said: "The FSA now has the clarity of direction and timescale as well as the leadership that we need to meet the challenges ahead.

"In particular I am delighted that Hector, who has done so much to transform the FSA during the past few years, has agreed to lead the transition to the new structure in 2012, and to become the first Chief Executive of the Prudential Authority and a Deputy Governor of the Bank of England."

"The crisis demonstrated the need for new regulatory approaches and more intense supervision, and the FSA has already implemented major change. But it also demonstrated the need to bridge the gap between macro-prudential policy and the supervision of individual firms. The Chancellor's proposals for prudential regulation will enable us to do that, while building on the major changes we have made over the last few years. The timescale will enable us to manage the transition in a smooth and orderly way.

"On retail customer protection, the FSA has recognized the need for a shift in our past approach, moving to the more interventionist approach which we set out in our recently published Retail Conduct Strategy. The new Consumer Protection and Markets Authority will have a strong focus on this challenge, while also maintaining strong focus on conduct issues in wholesale products.

"There are important issues still to be resolved – in particular the arrangements for our Enforcement activities and for those Markets activities which relate to exchanges, clearing infrastructure and prudential issues – and we look forward to working closely with the government in considering the relative merits of different possible arrangements for these. But the overall future shape of financial regulation is now much clearer and we are in a strong position to create a future regulatory system which builds on the FSA's achievements over the last few years of major change."