Welcome
This month we are delighted to have Robert Guest as our featured author.
Robert is financial services partner in the top 25 UK law firm Beachcroft. He is a specialist in legal and regulatory matters relating to the financial services industry including fund managers, banks, brokers, and corporate finance houses. As a former in-house lawyer, compliance officer and MLRO he has a practical approach to compliance and regulatory issues.
Robert was one of the founders of SG Asset Management, and was its General Counsel and Compliance Director. He has extensive experience in all areas of compliance, holding executive-level responsibilities for legal, compliance and risk management. In this role, he managed the relationship with regulators, including with the FSA and SEC. His experience includes establishing and registering funds in a variety of locations, managing litigation, acting as Money Laundering Reporting Officer and as Company Secretary.
Robert has a degree in law from Balliol College, Oxford, and is a Member of the Securities and Investment Institute and a Member of Law Society.
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Upcoming Conferences and Events
Securities and Investment Institute's new traning schedule is now available
The Securities & Investment Institute as a well-respected professional body is able to call on a wealth of industry experts and practitioners to write timely programmes and deliver exceptional training. To view the professional development programme for July - December 2006, click on the link below:
SII Professional Development Programme
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Articles of Interest
FSA publishes Annual Report 2005/2006
The importance of senior management responsibility and the transition to a risk-based approach
FSA fines Rainbow Homeloans Limited £35,000 for systems and controls failures
Police vetting loophole lets foreign criminals join force
Recruitment: The lying game
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Did you know that there are proposed new FSA rules dealing with employees and agents?
by Robert Guest, partner Beachcroft LLP
The FSA has published draft rules in CP06/9 to be introduced on 1 January for CRD firms and 1 November 2007 for MiFID firms. The FSA is faced with a dilemma because there are overlapping provisions in the CRD and MiFID concerning organisational requirements for firms. The directives share a common approach and are broadly compatible even if they are formulated differently. The FSA thinks that the right approach to implementation is to create a unified set of reasonably high level risk management and systems and controls requirements, a so-called “common platform”.
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CRD = Capital Requirements Directive. It amends the Banking Consolidation Directive and the Capital Adequacy Directive for the prudential regulation of credit institutions and investment firms across the EU. It introduces a modern prudential framework relating to capital levels more closely to risks.
MiFID = Markets in Financial Instruments Directive. It is a framework directive. The intention is to create a common regulatory framework for Europe’s securities markets. It is claimed that MiFID will remove obstacles to the use by firms of the EU-wide investment “passport”, foster competition, create a level playing field between so-called trading venues and ensure a high level of investor protection.
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CRD firm = Majority of firms performing investment activities and credit institutions
MiFID firm = Retail banks, investment banks, venture capital firms, stockbrokers, investment managers, proprietary trading firms, corporate finance firms, wholesale market brokers and providers of custody services
In respect of employees and agents, what do the new SYSC rules cover?
• awareness of procedures
• segregation of duties
• employees’ competence, skills, knowledge and expertise
• ongoing monitoring
There are also tough new rules on managing conflicts of interest and inducements. Every firm must have a conflicts policy identifying them and detailing how they will be managed. It appears from the FSA’s “Dear CEO letters” on the management of conflicts that the Board should appoint one of its number to conduct a review of all of the activities of the firm to identify the circumstances giving rise to actual or potential conflicts. The regulatory focus is on conflicts between the interests of the firm and customers and ensuring fairness in the way the firm deals with the interests of different clients. The MiFID provisions on conflicts protects the interests of ALL clients with no exceptions. A list of actual or potential conflicts of this nature should be produced and then they should be graded in terms of the likelihood of a conflict arising and the seriousness of the consequences. The policy should specify measures to manage conflicts and the executive in charge of the review should consider the appropriateness and effectiveness of the firm’s measures to avoid or manage conflicts, notably:
• procedures to ensure suitability of advice and fairness to clients
• staff rules and codes of ethics
• staff remuneration policies (avoid over-emphasis on quantity rather than quality of sales)
• effective procedures for the giving or receiving of gifts or corporate hospitality (eg permission should be sought for the making or receiving of gifts or corporate hospitality over certain materiality levels)
• segregation of duties and information barriers where individuals might be subject to difficult conflicts (e.g. separation of proprietary traders from advisors of clients or those advising companies issuing shares and those managing clients’ investments)
• staff to seek permission of senior managers in sensitive cases
• key performance indicators and key risk indicators to provide meaningful and timely management information (eg unusual placement volumes and patterns)
• monitoring by compliance/internal audit functions (appropriate monitoring plans to be approved by senior management)
• disclosure of conflicts to clients (regarded as a last resort after other measures to manage conflicts and likely to be treated as more acceptable when dealing with professional clients) together with post transaction checking to ensure effective communication of the relevant disclosures was made
• The Board should approve the conflicts policy and KPIs and KRIs and conduct periodic reviews on the effectiveness of the firm’s arrangements
Members of staff should be made aware of the policy and appropriate measures should be adopted to manage conflicts. For example:
• annual undertaking to comply with internal rules on giving and receipt of gifts and corporate hospitality
• staff training (awareness of the issues and how to deal with them)
• segregation of duties
• reinforcement of the issues in staff appraisals
• promotion of a culture of client service (including adoption of appropriate remuneration structures)
The appropriateness of measures is an issue of judgement taking into account the nature, scale and complexity of a firm’s business. The FSA is not suggesting a “one size fits all” approach.
For employees who perform multiple functions that may lead to conflicts of interest, please note that the test is whether clients’ interests might be prejudiced and whether the relevant employees’ judgement may be affected in terms of soundness, honesty and professionalism. This rather “wooley”, but then the reason for such a broad test is that regulators feel that financial services industry has not been good at identifying and addressing conflicts.
The proposed new chapter 5 of the SYSC rules is similar to existing requirements in many respects. Some measures are common sense from an anti-fraud perspective. For instance, a firm should ensure that no single individual has unrestricted authority to do all of the following:
1. initiate a transaction;
2. bind the firm;
3. make payments; and
4. account for it
Did I accidentally use the words “common sense” in relation to an EU Directive? Amazing.
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