RegZone. The demise of FSA - the impact on firms Preparing for the new regulatory regime

Transcription

1 RegZone The demise of FSA - the impact on firms Preparing for the new regulatory regime 30 September / 8 October 2010 (London) 22 October 2010 (Edinburgh)

2 CMS Cameron McKenna CMS Cameron McKenna is an international commercial law firm advising businesses, financial institutions, governments and public sector bodies. We are a founding member of CMS - the alliance of independent European law firms. CMS law firms provide clients with access to integrated pan-european legal services, managed by a single point of contact and with common high calibre service standards. The organisation has over 58 offices and associated offices worldwide. In Europe, CMS Cameron McKenna is a top-ten law firm in its own right with over 130 partners and c 700 legal and tax advisers (including partners). We have the resources and experience to advise clients on a wide range of transactions and projects both in the UK and internationally. We have offices and associated offices in various key business centres worldwide including the UK, Central Europe, Russia, Asia and North America. Our lawyers have strong specialist expertise in areas such as finance and financial services; competition and European law; corporate; consumer products; tax; utilities and natural resources; real estate, hotels and environment; insurance and reinsurance; cross-border investment; technology, lifesciences and intellectual property; infrastructure and projects; human resources and pensions; arbitration and litigation. We have a strong track record in the financial services sector across Europe and are therefore very familiar with the key issues affecting clients at the moment. We are committed to providing the highest quality professional advice and building enduring relationships with our clients. We place great emphasis on the training and development of our partners and staff in both current legal and business issues. Our investment in know-how and information systems allows us to share our knowledge and experience throughout the firm, helping to ensure that all our lawyers add value to the services they provide. We work with our clients to identify their business needs and provide them with comprehensive, cost-effective commercial guidance, we offer a clear business lead - not just legal opinion. CMS Cameron McKenna is a member of Scottish Financial Enterprise.

3 Speakers Simon Morris Partner, Financial Services T +44 (0) E simon.morris@cms-cmck.com Simon joined Cameron McKenna in 1980, qualified as a solicitor in 1982 and has been a partner since He is a member of the firm s financial services group and specialises in advising financial services institutions on commercial and regulatory matters. Simon has acted on a number of acquisitions and product launches, and has represented over 250 firms in regulatory and disciplinary proceedings. Simon is author of Financial Services: Regulating Investment Business, and is a member of the City of London Law Society Financial Services Sub- Committee. He was also one of the advisors to HM Opposition on the Financial Services and Markets Act. Simon was named as the Best Regulatory Lawyer of 2008 at Complinet s Fourth Annual Compliance Awards in January Paul Edmondson Partner, Financial Services T +44 (0) E paul.edmondson@cms-cmck.com Paul Edmondson joined CMS Cameron McKenna in 1992, qualifying as a solicitor in 1994 and becoming a partner in He now heads the firm s Financial Services team. He advises financial institutions on a range of regulatory and related commercial issues. Clients include banks, insurers (life and non-life), fund managers, broker-dealers, insurance intermediaries and trade associations. Paul is the author of the insurance regulation chapter in the Oxford University Press publication, Financial Services Law.

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5 The demise of FSA the impact on firms Preparing for the new regulatory regime Simon Morris and Paul Edmondson Partners - CMS Cameron McKenna LLP 30 th September 2010 Mitre House, London 8 th October 2010 Mitre House, London 22 nd October 2010 Balmoral Hotel, Edinburgh

6 The new regulatory structure - the future gets clearer Simon Morris Partner CMS Cameron McKenna LLP

7 Looking at... What we ve lost What we haven t What we might get And so what?

8 Where we were What we ll miss Unitary regulator Comprehensive functionality Moving from principles-based to rules-driven One-stop shop What we won t A bit full of itself Staff of variable quality Occasionally erratic and sometimes aggressive And firms were...

9 Now where were we remember Turner? Focus on banks Liquidity a key issue Countercyclical capital Trading book Constrain commercial banks Macro-prudential analysis Work closer with Bank & Treasury Focus large banks Models not process Individual skills & remuneration

10 And also Give FSA more powers Financial stability objective Enhanced rule making & information gathering Internalise risk through increased capital More international co-operation

11 And where we have got to Failure of UK regulatory framework The same causes But Tripartite failed to spot, mitigate or deal Excessive concern for competitiveness light touch orthodoxy Inherent contradictions FSA is monolithic covering Lehman Northern Rock IFAs Bank had power without responsibility (or levers) Treasury no responsibility for crisis management So a clear case for reform

12 So what we have in mind is... Macro-prudential policy Financial Policy Committee Old Lady knows best Governor chairs Extends to overseeing PRU & CON Full toolbox: capital, risk weights, leverage Macro-prudential regulation Prudential regulator Consumer protection & markets C&M regulator A few inherent contradictions...

13 Will it actually happen? Yes policy imperative But Overestimation of benefits Underestimation of difficulty Thoroughly unwelcome Coming at a bad time Frankly irrelevant A potential deterrent for new entrants

14 And some obvious policy drivers Better crisis planning & reaction Instilling an ethos of urgency and capability PRU more judgement-focussed approach CON consumer champion

15 Prudential regulation Credible and intrusive approach Authorise, regulate & supervise (an FSA) for banks & insurers 2000 firms also subject to CON Policy largely EU but ability to call for increases via FPC Closer connection with analysis of economic drivers regulatory change Change Solvency II/Basel Style PRU Supervision & enforcement PRU

16 Consumer regulation Regulates all firms retail dealings Sole regulator for most of FSA s 20,000 firms And market conduct Pre-emptive and interventionist style consumer champion Scope for manoeuvre within EU policies

17 So what will be the impact 1. Upheaval & uncertainty a. Cost b. Future planning c. Re-documentation d. Rule familiarisation e. Process change 2. Nothing will change a) Same fundamental principles b) And policies c) And Directives d) And people

18 But quite a lot can change 1. Attitude a) Consumerist b) Intolerant c) Enforcement led 2. Economic connectivity a) Supplying the levers 3. Dysfunctionality a) Duplication b) Costs c) Personnel

19 Current UK regulatory framework

20 Proposed UK regulatory framework

21 The new EU regime Paul Edmondson Partner - CMS Cameron McKenna LLP

22 Outline The new EU regime Policy debate Current versus new The agencies and their roles What we do not yet know Timeline for reform Current EU work programme levels 1 and 2 Defending the City Sovereignty Impact on firms

23 Policy debate Shortcomings in the wake of the financial crisis Vulnerability of financial system to inter-connected systemic risks National level supervision is uneven and uncoordinated Larosière s vision Convergence between Member States on technical rules Mechanism for ensuring coordination of national supervisors across borders Allocation of emergency powers

24 Current position of the EU regulatory regime

25 Proposed changes to EU regulatory regime

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27 The agencies and their roles European Systemic Risk Board (ESRB) Macro-prudential supervision Early warning of system-wide risks Issuing recommendations Forum of coordination and discussion (without formal powers)

28 The agencies and their roles European System of Financial Supervision (ESFS) Supervising the supervisor Comprises a network of three new European Supervisory Authorities (ESAs) Staffing up At the moment, it s one man and his dog But staffing at the three ESAs will rise to 150 people in 2011 and to 300 in 2015 Detailed harmonisation through technical standards in Level 3 guidance

29 The agencies and their roles When will the ESAs start to cause ripples domestically? Tie-breaker powers Mediating and settling disputes between national supervisors (e.g. home and host supervisor of a bank) Power to revise standards of national supervision Temporary restriction of high-risk financial activities based on sectoral legislation e.g. the proposal on short-selling Enhanced ESA powers for emergencies and crisis management Ability of ESA to issue instructions to FSA and/or to individual institutions to comply with ESA rulings

30 What we do not yet know What will the ESRB and ESFS require from the UK at the national level? What are the practical implications of their intrusive new roles? Fallout from increased Level 3 guidance Work programme? Scope? Difficult to predict how vigorously ESA powers will actually be enforced

31 Timeline for reform On 22 nd September, the EU Parliament voted through the new supervisory framework Effective from 1 st January 2011 Final appointment of Chairpersons of the Authorities Expected in early spring of 2011 June 2010 Commission Communication, Regulating financial services for growth Package of reforms to be adopted by end of 2011 and enter into force by end of 2012

32 Current EU work programme Levels 1 and 2 Content of Barnier s work programme A new Financial Services Action Plan MiFID/MAD reviews Post-crisis measures Long list! Other EU legislation (e.g. Single Market Act) Less national discretion on local rules Legislation by regulation Maximum harmonization Less gold plating Framework with greater detailed harmonization at levels 2 and 3 (by ESAs)

33 Defending the City Sovereignty conundrum The new ESAs can overrule UK regulators Subject to interpretation of established EU rules and inter-regulatory disputes Potential ambiguities Could ESA emergency powers be destabilising? Has the UK government been outmanoeuvred? Fiscal over-ride

34 Impact on firms Shadowing has already commenced CESR has already changed its structure as it morphs into ESMA Closer coordination of policy and rule-making Assist firms in dealing with cross-border issues (e.g. approval of a single internal model for use at group and subsidiary levels) Moving towards standardisation of supervision Less scope for national discretion More level playing field Industry needs to be more vigilant (at an earlier stage) of the work programme Hugely complicated

35 Current UK regulatory framework

36 Proposed UK regulatory framework

37 Current position of the EU regulatory regime

38 Proposed changes to EU regulatory regime

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40 EU Commission s Financial Services Proposals Initiatives for Commission Adoption and Agreement Initiatives and Key Dates for Commission Adoption and Commission Proposals for Endorsement by the Council and European Parliament The table below represents the forthcoming proposals on financial services regulatory reform from the Commission, which were released as part of its Commission s Work Programme in June The table contains the key dates for the adoption of proposals and proposed dates for the endorsement by the Council and European Parliament. A report which includes links to the relevant Regzone commentary will soon be available on the Regzone. Initiatives Commission adoption Political agreement Measures proposed, adopted to date Solvency II Directive (capital requirements for insurance undertakings) July 2007 Adopted December 2009 Amendment of the Settlement Finality Directive and the financial collateral directive (securities) April 2008 Adopted May 2009 Recast of the UCITS Directive July 2008 Adopted July nd revision of the Capital requirements Directive for banks amendments to securitisation rules, large exposure limits, supervisory October 2008 Adopted May 2009 colleges, liquidity risk management and quality of capital. Deposit Guarantee Schemes Directive amendment October 2008 Adopted March 2009 Credit Rating Agencies Regulation October 2008 Adopted March 2009 Communication on remuneration principles April 2009 See Annex 2 for next steps Launched April 2010 Financial literacy Dolceta on-line education programme, new n/a modules Communication on Packaged Retail Investment Products (PRIPS) April 2009 Legislative proposals forthcoming Alternative Investment Fund Managers Directive April 2009 Co-decision underway 3 rd revision of the Capital Requirements Directive for banks capital requirements for the trading book and re-securitisations, disclosure of securitisation exposures, and remuneration policies July 2009 Co-decision underway Supervision package (European Systemic Risk Board and European Supervisory Authorities) September 2009 Co-decision underway Prospectus Directive amendments (securities) September 2009 Co-decision underway Prospectus Directive amendments (securities) September 2009 Co-decision underway Communication on Crisis management in the Banking Sector October 2009 Further Communication in autumn 2010 and legislative proposal in Spring 2011 Communication on Derivatives July & October Legislative proposal forthcoming Measures proposed, under negotiation: Alternative Investment Fund Managers Directive April 2009 Summer rd Revision of the Capital Requirements Directive (CRD3) July 2009 Summer 2010 Supervision package (European Systemic Risk Board and European Supervisory Authorities) September 2009 Summer 2010

41 Communication on options for bank resolution funds May 2010 n/a Forthcoming proposals: UCITS implementing measures June 2010 June 2010 Revision of Credit Ratings Agencies Regulation (EU-level supervision June 2010 By end 2011 of CRAs) Green Paper on Corporate Governance in Financial Institutions June 2010 By end 2011 Creation of a Financial Services Users Group Summer 2010 n/a Revision of the Deposit Guarantee Schemes Directive July 2010 By end 2011 White Paper on Insurance Guarantee Schemes July 2010 n/a Revision of the Investor Compensation Schemes Directive July 2010 By end 2011 Derivatives legislation on market infrastructure Summer 2010 By end 2011 Revision of the Financial Conglomerate Directive Summer 2010 By end 2011 Second Omnibus Directive of changes to sectoral legislation to align Summer 2010 By end 2010 it with the proposals on supervision Directive on legal certainty of securities holding & transactions September 2010 By end 2011 Regulation on SEPA (Single European Payments Area), setting a September 2010 By end 2011 deadline for transition to SEPA Communication on a framework for crisis management October 2010 n/a Measures on short selling/credit default swaps October 2010 By end 2011 Initiative on access to minimum basic banking services October/November 2010 By end 2011 Communication on sanctions in the financial services sector December 2010 n/a Revision of the Capital Requirements Directive (CRD4) December 2010 By end 2011 Revision of the Market Abuse Directive (securities) December 2010 By end 2011 Review of the Markets in Financial Instruments Directive Spring 2011 By end 2011 UCITS depositories function Spring 2011 By end 2011 Implementing measures for Solvency II Directive on capital Spring 2011 By end 2011 requirements for insurance undertakings Packaged Retail Investment Products legislative proposals Spring 2011 By end 2011 Crisis management legislative proposal (including bank resolution Spring 2011 By end 2011 funds) Insurance mediation Directive revision Spring 2011 By end 2011 Further amendments to the Credit Rating Agencies Regulation Spring 2011 By end 2011 Legislation on corporate governance Spring 2011 By end 2011 Regzone materials are intended for clients and professional contacts of CMS Cameron McKenna LLP. They are intended to simplify and summarise the issues covered and must not be relied upon as giving definitive advice. Further information, including a list of our offices, can be found at CMS Cameron McKenna LLP All rights reserved. 2

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