Tag: FSA

Financial Services Act 2012: A New UK Financial Regulatory Framework

The following post comes to us from Jeffery Roberts, senior partner in the London office of Gibson, Dunn and Crutcher, and is based on a Gibson Dunn memorandum by Mr. Roberts and Edward A. Tran.

The Financial Services Act 2012 (the “Act”), which comes into force on 1 April 2013, contains the UK government’s reforms of the UK financial services regulatory structure and will create a new regulatory framework for the supervision and management of the UK’s banking and financial services industry. The Act gives the Bank of England macro-prudential responsibility for oversight of the financial system and day-to-day prudential supervision of financial services firms managing significant balance-sheet risk. Three new bodies will be formed under the Act: the Financial Policy Committee (“FPC”), the Prudential Regulatory Authority (“PRA”) and the Financial Conduct Authority (“FCA”). While the Act mainly contains the core provisions for the UK government’s structural reforms and will therefore make extensive changes to Financial Services and Markets Act 2000 (“FSMA”), as well as to the Bank of England Act 1998 and the Banking Act 2009, it also includes freestanding provisions in Part 3 (“mutual societies”), Part 4 (“collaboration between Treasury and Bank of England, FCA or PRA”), Part 5 (“inquiries and investigations”), Part 6 (“investigation of complaints against regulators”) and Part 7 (“offences relating to financial services”). With respect to the last of these, it should be noted that:


The “Hindsight” Principle and Clients of Insolvent UK Brokers

Barnabas Reynolds is head of the global Financial Institutions Advisory & Financial Regulatory Group at Shearman & Sterling LLP. This post is based on a Shearman & Sterling client publication.

The High Court in London has held that clients of insolvent UK brokers are entitled to a claim based on the value of their open positions as at the date of entry into administration or liquidation, rather than based on the value actually realised when those positions are closed. The “hindsight” principle – that where assets are later actually valued, actual values should be used – is not applicable.


Under the client money and client asset rules contained in the CASS 7 and 7A sourcebooks of the UK Financial Services Authority (the “FSA”) Handbook (the “client money rules”), brokers are required to segregate money received from or held for their clients and will hold such funds pursuant to a statutory trust. In the event of the broker entering administration or liquidation, client money is segregated from the broker’s property and is distributed to clients on a pari passu basis (meaning “pro rata”).

The client money rules have been the subject of protracted litigation and judicial criticism in various cases due to their lack of clarity and even drafting errors. A number of issues regarding the client money rules were resolved by the UK Supreme Court in February 2012 in the litigation arising out of the Lehman insolvency, and have been discussed in a previous client publication. [1] The client money rules have also been amended in various ways and are currently subject to a consultation process for more wholesale amendment. [2]

On 31 October 2011, investment broker MF Global UK Limited became the first investment company to enter the special administration regime under the Investment Bank Special Administration Regulations 2011. It held client money as well as many open derivative positions for clients.


FSA Calendar Year-End Update 2012

The following post comes to us from Paul Hinton, Vice President at NERA Economic Consulting, and is based on a NERA publication by Mr. Hinton, Robert Patton, and Zachary Slabotsky; the full document, including footnotes, is available here.

Fines imposed by the Financial Services Authority (FSA) since 1 January 2012 (through 20 December) have totalled £310 million, more than four times the total for 2011 (see Figure 1 below). This increase is due to a handful of very large fines, including the £160 million fine against UBS for LIBOR manipulation announced 19 December, which is the largest-ever FSA fine by a substantial margin.

The number of fines assessed against firms, 25, was in line with last year. In contrast, the number of fines against individuals fell to its lowest level since 2009, and the aggregate fine amount imposed on individuals fell slightly compared to 2011.

The dramatic increase in aggregate fines is the result of a few headline-grabbing penalties against banks, notably those against UBS and Barclays for manipulation of LIBOR and EURIBOR, and against UBS for failing to prevent unauthorised trading by a rogue trader, Kweku Adoboli. Those three fines alone totalled nearly £250 million. The size of fines against banks, of which there were nine in 2012 as compared to seven in 2011, largely explains the £244 million jump in the annual totals.


EU AIFMD: UK Implementation Update

The following post comes to us from Jeffery Roberts, senior partner in the London office of Gibson, Dunn and Crutcher, and is based on a Gibson Dunn memorandum by Lauren Dunford and Selina S. Sagayam.

The UK Financial Services Authority Publishes Consultation Paper on Implementation of AIFMD

On November 14, 2012, the UK Financial Services Authority (“FSA“) published the first part of its long-awaited consultation paper “CP 12/32 Implementation of the Alternative Investment Fund Managers Directive (“AIFMD“) Part 1” (“CP 32“). [1]

This post summarises key points from CP 32 and includes a brief reminder of other key issues arising under AIFMD [2] (which we have written about in the past [3] and we assume that you are familiar with these issues). Please note that not all the requirements discussed below apply to all AIFMs and/or AIFs.


Shadow Banking and Financial Instability

Editor’s Note: Lord Adair Turner is chairman of the United Kingdom Financial Services Authority. This post is based on a speech delivered by Lord Turner at the Cass Business School; the speech and accompanying slides are available here.

In autumn 2008 the developed world’s banking system suffered a severe crisis. In response the world’s regulators and central banks have focused on building a more stable banking system for the future: less leveraged, more liquid, better supervised and with even the largest banks able to be resolved without taxpayer’s support. The implementation of that bank-focused regulatory agenda is still unfinished, but much progress has been made.

Looking back to the year 2007/08, however, it’s striking that the crisis did not at first look like a traditional banking crisis, but rather one related to a new phenomenon: shadow banking. Initially the problems seemed concentrated in the US, where the development of non-bank credit intermediation was most advanced, and many of the events which marked the developing crisis related to non-bank institutions and markets.


Differences Between US and UK Market Abuse Regimes

The following post comes to us from John H. Sturc, co-chair of the Securities Enforcement Practice Group at Gibson, Dunn & Crutcher LLP, and is based on a Gibson Dunn alert by Mr. Sturc, Jeffery Roberts, Selina Sagayam, James Barabas, and Edward Tran.

The UK Financial Services Authority (“FSA”) imposed fines of £3.651 million ($5.77 million) on Greenlight Capital Inc., a US hedge fund manager (“Greenlight”), £3.638 million ($5.74 million) on David Einhorn, Greenlight’s owner, and £350,000 ($553,000) on Andrew Osborne, a former Bank of America Merrill Lynch banker. These fines were levied in connection with Greenlight’s trading in the shares of Punch Taverns Plc (“Punch”), a UK pubs business, ahead of a planned equity offering. The FSA imposed the fines on the grounds that Greenlight traded on inside information conveyed to David Einhorn during a conference call with Punch’s CEO and Andrew Osborne, its broker. Greenlight specifically declined to be made an insider for the purposes of the call and David Einhorn requested that he would not be “wall crossed.” Notwithstanding this, the FSA determined that the information conveyed amounted to inside information, that trading on this information was prohibited by the UK’s market abuse regime and that Greenlight, David Einhorn and Andrew Osborne should have been aware of this. It is unlikely that Greenlight’s trading would have triggered an enforcement action by the US Securities and Exchange Commission (“SEC”) if it had occurred in the context of a US exchange. However, US financial institutions and other market participants active in UK financial markets should take note of the FSA’s actions as this case illustrates key differences between the regulation of insider trading and market abuse in the US and the UK, and the FSA’s more aggressive policing of UK markets.


The Enforcement Regime of the UK Financial Services Authority

The following post comes to us from Jeffery Roberts, senior partner at Gibson, Dunn and Crutcher LLP, and is based on a Gibson Dunn alert by Mr. Roberts, Selina Sagayam, and James Barabas.


It’s not just a numbers game… Since overhauling its financial penalty framework in March 2010, the UK Financial Services Authority (FSA) has gone a long way to dispel views that it has a lacklustre approach towards levying market abuse fines. However, harsher fines are just one feature of its tougher enforcement regime. Recent cases show that the FSA has generally stepped up its enforcement activity, improving the range of resources and evidence available to successfully investigate market abuse. This will particularly be the case due to the introduction of the Zen monitoring system and requirement for firms to tap employee mobile phones.

Ready to take on the “tricky” cases: The regulator has also shown increased willingness to expunge novel/unusual forms of market abuse involving both non-equity securities, and instruments that do not in themselves fall squarely within the ambit of the Financial Services and Markets Act 2000 (the “Act”). The FSA has also levied fines in respect of individuals that live abroad, yet engage in abusive transactions in UK markets. Although in general, the harshest hitting penalties have been issued to high profile individuals, or those involved in very serious cases of market abuse, recent enforcement action has signaled that the FSA has the potential also to come down on firms that do not take appropriate steps to supervise and manage market abusers. It remains to be seen whether this tougher enforcement regime will transfer to the FSA successor agencies once the regulator is abolished.

This alert looks at a few examples of FSA enforcement action in 2011 in the market abuse area and considers how this heralds a more robust enforcement regime.


UK Special Administration Regime

The following post comes to us from Lawrence V. Gelber, partner at Schulte Roth & Zabel LLP, and is based on a Schulte Roth & Zabel client alert by Mr. Gelber and Ron Feldman.

The UK Financial Services Authority (“FSA”) confirmed on 31 Oct. 2011 that MF Global UK Limited (“MF Global UK”) will be subject to the new Special Administration Regime (“SAR”). [1] This is the first time that the new regime, set out in The Investment Bank Special Administration Regulations 2011 (“SAR Regulations”) [2] has been invoked.


The SAR Regulations were made under the powers set out in Sections 233 and 234 of the Banking Act 2009. They came into effect on Feb. 8, 2011 and are supplemented by The Investment Bank Special Administration (England and Wales) Rules 2011 [3] (“SAR Rules”) which came into force on 30 June 2011.

The purpose of the new SAR is to address perceived deficiencies in the UK insolvency regime in the case of the collapse of an investment bank and highlighted by the collapse of Lehman Brothers in 2008 such as: [4]

  • Ascertaining which assets are client assets and which firm assets;
  • Interpreting the effect of, and the interrelationship between, various contracts and master agreements such as prime brokerage agreements, futures agreements, stock lending agreements and ISDA master agreements;
  • Establishing the extent of any right of use; and
  • Determining and allocating any shortfalls in client omnibus accounts.


The Proposed Restructuring of the UK Financial Regulatory Framework

Barnabas Reynolds is head of the global Financial Institutions Advisory & Financial Regulatory Group at Shearman & Sterling LLP. This post on a Shearman & Sterling client publication by Mr. Reynolds, William R. Murdie, Azad Ali, Thomas A. Donegan, John Adams, and Aatif Ahmad.

The UK Government has published a white paper and draft bill setting out further details of its proposals for a new structure of financial regulation. The FSA, currently the sole regulator of the financial sector, will be replaced with two bodies: (i) a prudential regulator, to be known as the Prudential Regulation Authority and (ii) a conduct of business regulator, to be known as the Financial Conduct Authority. In addition, macro-prudential or systemic risk regulation will fall to a new Financial Policy Committee of the Bank of England. The financial services industry is likely to face more intrusive and judgment-based regulation once the new structure is adopted.


The UK Government will be pushing ahead with its plans to reform the financial regulatory system in the United Kingdom in line with its initial proposals. [1] In addition to the white paper, the regulatory approaches to be adopted by the Prudential Regulation Authority (the “PRA”) and Financial Conduct Authority (the “FCA”) have been further detailed in two subsequent papers. [2]


UK Financial Services Authority Issues the Final-Form Remuneration Code

This post comes to us from John J. Cannon, a partner in the Executive Compensation and Employee Benefits Group at Shearman & Sterling LLP, and is based on a Shearman & Sterling Client Memorandum by Barnabas W. B. Reynolds, Linda E. Rappaport and Sam Whitaker. The complete memo, including the Appendix, can be found here.

On 17 December 2010, the UK’s Financial Services Authority (“FSA”) issued the final form of the revised Remuneration Code (the “Code”). [1] The Code introduces significant restrictions on the way in which remuneration policies and structures are operated within financial institutions in the UK and beyond. The Code builds upon international standards set by the Financial Stability Board at a European level and goes beyond those standards in a number of key respects.

In this briefing, we have set out an overview of the background to the Code, a summary of the key provisions of the final form of the Code, as well as our commentary on some relevant provisions of the final-form guidance issued by the Committee of European Bank Supervisors (“CEBS”) on 10 December 2010. Finally, at the end of this briefing, we have focused in depth on some specific issues which may be of particular interest to our clients.