A number of the reforms that were designed to deal with the 2008 financial crisis have been finalised, although there are some notable exceptions.
In June the FCA published its Policy Statement concerning the implementation of the Alternative Investment Fund Managers Directive. The following month, on 22 July, the transitional period for the directive began. This phase will end on 22 July 2014, by which time UK AIFMs will need to have obtained the necessary variation of permission, authorisation or registration from the FCA. The exact timing of full-scope applications has been the subject of a number of queries from firms, prompting the FCA to issue a short statement on its website. The gist of this statement is that firms have a legal right to have their complete full-scope AIFM application determined by the FCA within three months (or exceptionally six months).
More than two years ago the European Commission issued its legislative proposal amending its Markets in Financial Instruments Directive. However, it seems that negotiations between the European Parliament and the Council have been quite tortuous as agreement has so far not been reached. It appears that one of the key stumbling blocks relates to the treatment of third country firms.
Notwithstanding the aforementioned plans, perhaps the key European Union regulatory initiative this year has been banking union. This initiative has not been universally welcomed by all member states, with the UK indicating that it does not intend to participate. Under this initiative the European Central Bank will be given supervisory tasks in respect of banks and certain other deposit takers under a single supervisory mechanism (known as the SSM).
Closer to home the UK regulatory horizon changed on 1 April with the FSA being replaced by the FCA (and the Prudential Regulation Authority). Thematic reviews, self-attestation, market studies and the increased use of judgment are regulatory features that are here to stay.
The FCA has been given a new competition remit, which is perhaps the most significant change to its regulatory objectives. It is tasked with spending more time and effort looking at markets as a whole and whether they function well for consumers. This also means the FCA cannot wait for problems to emerge before it tries to promote competition.
Firms are also subject to a new FCA supervisory model that has at its core an approach that is focused not just on compliance but seeks to encourage firms to do the right thing in respect of their customers and the markets they operate in. This is a significant philosophical change.
There are a number of issues on the FCA’s horizon that are too numerous to mention here. Perhaps a couple of the more interesting ones are: wholesale market regulation, client assets, the use of dealing commission, consumer credit regulation and crowdfunding.
The UK government is also moving forward with significant regulatory change in the banking sector through the Banking Reform Bill. This legislation is designed to implement a number of recommendations made in the final report of the Independent Commission on Banking that was published in September 2011. It will also take into account the recommendations of the Parliamentary Commission on Banking Standards whose final report was published in June.
As most of us are aware, the headline in the bill is the ring-fencing proposal, whereby the deposit-taking business is placed into a separate legal entity. However, this requirement was modified this year by the government, it having accepted the PCBS recommendation that the ring-fence should be ‘electrified’, whereby the regulator would have the power to enforce full separation between retail and wholesale banking in a group structure. The bill was scheduled for its third reading this week at the House of Lords and it appears to be on course to receive Royal Assent by February next year.
It is also worth mentioning that cyber security is appearing more and more on the regulatory agenda. In March 2014 the European Parliament is expected to vote on the proposed Cyber-Security Directive. Also, sometime in the first quarter of 2014, there should be a report concerning the lessons learned from the exercise to test the resilience of the financial services industry from cyber attacks (named Operation Waking Shark 2).
Simon Lovegrove is a lawyer with the financial services team at City law firm Norton Rose Fulbright
Key points
■ The past year has been one of the busiest for the financial services industry with regard to regulatory reform.
■ In June the FCA published its Policy Statement concerning the implementation of the Alternative Investment Fund Managers Directive.
■ The UK regulatory horizon changed on 1 April with the FSA being replaced by the FCA (and the Prudential Regulation Authority).
