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Regulation: What will the next 12 months have in store

2011 promises to be the year that European regulators get more rigorous as well as heralding the beginning of a new era in UK regulation.

In the UK, the RDR will continue to take central stage and the Independent Banking Commission’s probe into structural reform is due.

At European level, the Committee of European Banking Supervisors is to be replaced by the more aggressive European Banking Authority and updates to the markets in financial instruments directive and European Commission proposals on distribution of packaged retail investment products will all be taking place.

Cicero Consulting director and chief corporate counsel Iain Anderson thinks “the big show in town” will be the creation of the PRA and CPMA in the first half of the year.

He says: “The key question will be how these bodies interact with the Bank of England and with firms. There will be lots of potential for Parliamentary amendment, so this year is critical.”

The new UK regulatory structure is unlikely to lead to a let-up in what many IFAs see as heavy-handed regulation of the sector. Foot Anstey Solicitors associate Alan Hughes says the consumer arm of the regulator will be “more intrusive”.

Wolters Klower managing director Dean Curtis says: “The policing of financial crime as a whole will increase this year. Smaller organisations will definitely be under more scrutiny and the effects of sanctions on small firms can be pretty frightening.”

The first quarter of next year will see the release of the FSA’s policy statement on aligning platform services with the RDR.

Key proposals include the restriction of cash rebates and rules that require platforms to tell customers how much they will receive in fees. With over three-quarters of IFAs intending to increase their use of platforms usage, according to research by Skandia Investment Group, this could have far-reaching effects.

The House of Commons’ debate on the RDR last November raised questions that will need answering in 2011. MP Harriett Baldwin has challenged Chancellor George Osborne to produce more substantial evidence to support the case for the RDR. She called for “irrefutable evidence that qual-ifications prevent misselling”.

Anderson says: “I think we will know by Easter if there is sufficient political pressure to affect the Treasury select committee’s decision on the RDR.”

Increasing concern about the cliff-edge deadline and age discrimination legislation hampering prospects of automatic grandfathering means other concessions may need to be found. The concept of regulatory dividends could be back on the table and a sunset clause allowing IFAs to leave the business in a gradual timeframe has also been proposed.

But Hughes says: “We will see no shift in the RDR. The FSA is so entrenched in its position that significant concessions would seem like a sign of weakness.”

However, he believes Aifa director general Stephen Gay’s call for flexibility on the RDR deadline is a possibility and says: “We are more likely to see success in tweaking around the edges.”

September will see the outcome of the IBC’s investigation into the UK banking structure, which is looking at ways to reduce consumer risk and increase competition. KPMG regulatory services partner Giles Williams has said it could bring about the biggest regulatory changes for a decade.

Treasury select committee chairman Andrew Tyrie’s opinion that consumers are suffering from a lack of choice is shared by the IBC and has led to speculation that market domination by the big four of HSBC, Barclays, RBS and Lloyds may come to an end.

“I think we will know by Easter if there is sufficient political pressure to affect the Treasury select committee’s decision on the RDR”

The commission’s radical proposal of reducing consumer risk by separating the retail and investment arms of “casino banks” has provoked indignation from the bigger banks, as has the suggestion of cutting bonuses to meet requirements of bolstering capital to cushion against risk.

But Hughes does not believe these measures will come into force. He says: “The big banks will do everything they can dig their heels in and avoid splitting. Even if it is proposed, it will take so long and probably end up being watered down.”

Former City minister Lord Myners has suggested undoing the Lloyds-RBS merger to increase competition and Metro Bank co-founder Vernon Hill recently said that breaking up the big banks is not enough as the UK needs new players and the Government needs to make switching to these new players easier.

On the European side, updates to Mifid are expected in May. EC head of securities markets Maria Velentza initially promised a slightly tweaked Mifid II but the focus on transparency may hit investment services.

It will keep the EU trading passport introduced by the investment services directive and continue to aim for a single market but Mifid’s new target is greater home supervision as well as a more competitive EU market.

Further regulation on consumer transparency will come with the Prips proposals in the first quarter. The plans have been designed to reduce the risk of regulatory arbitrage caused by the inconsistency of existing directives and to increase clarity of investor information. This will mainly be done through the new key investor information documents, which will detail pre-contractual product information and sales processes.

The Prips plans will have a considerable effect on the investment market. Essentially applying existing regulation more widely, they will place structured products under the Ucits regime.

Once the EC’s work on Prips is finalised, it may lead to alterations in the RDR. Anderson says: “The debate on aligning Prips with the RDR has got more traction now than ever. The impact of Prips will be felt firmly throughout 2011 and the EC will continue to take an interest in the FSA’s stance.”


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There are 5 comments at the moment, we would love to hear your opinion too.

  1. Paul U Thompson 5th January 2011 at 6:01 pm

    Since when did Lloyds & RBS merge?

  2. Wolters Klower managing director Dean Curtis says: “The policing of financial crime as a whole will increase this year.” Nothing wrong with that, except I’d always thought that the policing of financial crime is supposed to be the province of the police. Why now the FSA? Because the police force is a publicly funded body, whilst the FSA is a privately funded quango. It looks as though Adair Turner’s calls for more power, more staff, more resources and, above all else, MORE MONEY (ours, of course) are being granted.

    “Smaller organisations will definitely be under more scrutiny and the effects of sanctions on small firms can be pretty frightening.” Bit of an understatement there. But are smaller organisations the cause of greatest consumer detriment? All the data suggests not. The question that arises therefore is why the FSA intends to step up its focus on (persecution of) smaller firms when everybody knows that those that routinely give the worst advice leading to the highest levels of not just customer complaints but customer complaints which are subsequently referred to the FOS are………….THE BANKS!

    It all stinks, doesn’t it?

  3. Regulation is without doubt THE growth industry. And its almost foolproof. Humanity is fundamentally flawed. After 10,000 years will still need policemen on the streets to keep us on the right path, and I doubt that fact will ever change.
    But having policemen does not imply that the whole of society is rotten. It’s generally accepted that they are there to keep the 2 to 3% of incorrigible deviants in check, and to encourage the 2 to 3% of floating deviants to stay on the straight and narrow. The police are under the watchful eye of Police Complaint Boards; their budget is under the control of Parliament and local authorities. The law they police is subject to debate, and does change from time to time as societal views change. It is also subject to review on a daily basis by the judiciary. In other words there are checks and balances.
    There are no such checks and balances with the financial regulator. There is total power without responsibility; there is remarkable revenue raising freedom; there is no debate on content or effectiveness of the regulation. Whatever the Treasury select committee believe on RDR is absolutely irrelevant for it has no powers under the FSMA 2000 to do anything – other than makes funny noises. Should any such body be allowed to exist in a democratic society?
    There is no respect between advisers and regulator; there is no dialogue; there are rules that make no sense at all; there are business models arising that are based on keeping the regulator happy, not to benefit the consumer; their is a fundamental beleif at Canary Wharf that all advisers are rotten – even when proven otherwise. There are documents flooding out of Canary Wharf that have the sole purpose of providing employment for people – the assumptions upon which they are based do not stand up to scrutiny. Most of the assumptions upon which the FSA bases it regulatory role are unsubstantiated cliches.
    All of which is a great shame because I suspect that 99% of the advisory sector want a competent regulator; they want an increase in standards; they would willingly go along with high qualification standards; they would love to make some of the FSAs ideal’s work, but in a practical and cost effective manner that benefits the client. But for that you need dialogue and respect. When you have a regulator that acts like the cliched sulky teenager that treats everything with disrespect there is not much room for manoeuvre.
    And we need a media that will constructively criticise both sides. Currently it is happy to create large headlines when an adviser/institution does wrong, but were is the great debate that should have followed on from a succession of FSA failures? I would suggest that the most important element in that debate is what any Regulator can actually achieve in real life, as opposed to the anticipated perfection of a one dimensional world.
    So I suppose the advice to young people wanting to join the finance industry is “Go East, young man – Canary Wharf”.

  4. There are large, medium and small accountants; there are large, medium and small solicitors; there are large, medium and small retailers.
    Can anyone explain why a small adviser firm is considered to be the Devil incarnate?

  5. Excellent Glen, agree 100%.

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