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CHASE COOPER
The new UK regulatory framework —
the mists are clearing
Nick Gibson, Chase Cooper's Director of Compliance Solutions,
US’s PCAOB to inspect summarises the recent clarification received from the UK Treasury
overseas auditors Department and comments on its impact on regulated firms.
In the UK we are in the midst of a low‐key but far‐reaching regulatory revolution, driven by the
The PCAOB, created by the Sarbanes–Oxley
Act (Sarbox) to oversee auditors of Sarbox‐ coalition government, in response to the perceived past failings of the participants in the
effected companies, has said that in 2011 it existing system (and in particular the Financial Services Authority ‐ FSA).
will inspect audit firms in 31 countries,
On 17th February HM Treasury issued its 138 page blueprint for
including the UK, despite initial
reluctance from many overseas the revised UK regulatory system. This follows the first HMT
auditors citing sovereignty and legal consultation document, issued in July (for which comments closed
concerns.
in October) and contains a number of significant changes. Further
In 2010 the EU declared the PCAOB an
comments are invited on the new paper by the closing date in mid‐
“equivalent regulator” and the Dodd‐
Frank Act allowed the PCAOB to share April.
information with overseas bodies. The
Professional Oversight Board, the UK’s Whilst the most noticeable headline change is the change of name
“super‐regulator” of accountancy and from the Consumer Protection &
IN THIS ISSUE OF metric
audit supervisory bodies, has agreed to Nick Gibson, Chase Cooper
Markets Authority (CPMA) to the more G20 sets targets
share information.
digestible Financial Conduct Authority ‐ about which more below ‐ London trader jailed
Dame Barbara Mills, Chair of the POB said
there are a number of more fundamental changes or clarifications New EBA Head appointed
“The agreement will improve our respective
access to information, for example relating from the original, some of which are, to our eyes, potentially quite Managing Liquidity Risk
to US audit firms registered in the UK, and disturbing.
UK firms registered in the US”.
Structure
All foreign companies with any share listing
in the USA need to comply with Sarbox The structure remains almost entirely as originally planned, with a Financial Policy Committee
requirements and their audit firms must be (FPC) within the Bank of England running macro‐prudential supervision, to identify and reduce
registered with the PCAOB in order to carry
systemic risks arising within the financial system. The FPC will not be an institutional supervisor,
out compliant audits. Over 900 audit firms
from over 85 countries have registered with and will have no powers over individual firms.
the PCAOB and are subject to inspections in
the same manner as US firms. The two new supervisory bodies will be the Prudential Regulation Authority (PRA) and the
Financial Conduct Authority (FCA), whilst the Bank of
This is the new format for our newsletter, Chase Cooper metric. We will be
publishing this monthly towards the end of the month and distributing it by email. England will have direct responsibility for
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In view of the recent announcements on the UK’s regulatory changes we have made supervising systemically‐important
this a 6 page issue with a major article summarising and commenting on these infrastructure, such as payment systems,
changes. We would enjoy receiving any comments on our new format at
settlement systems under the
editor@chasecooper.com.
continued on page 2

2. Uncertificated Securities Regulations 2001, and recognised clearing setting balance sheet leverage ratios,
houses under FSMA. requiring the publication of specific information by classes of firms
The PRA has a single strategic objective: "contributing to the promotion during times of stress,
of the stability of the UK financial system". The PRA mandate makes it setting higher collateral requirements where lending growth in
solely responsible for the prudential regulation of all banks, building specific classes of lending appears unsustainable.
societies, credit unions and insurers. The PRA may also designate
The FPC will also be able to direct the PRA and FCA to gather and
investment firms that deal as principal, to bring them under its
provide information
supervision, where PRA believes specific firms may pose systemic risks to
Whilst PRA and the FCA are
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from authorised
the UK's financial stability, or to other de facto PRA‐regulated firms
“equal in status”, there are
firms needed by the
within the firm's group.
significant issues where it
Bank of England in
In addition to insurance providers, the role in relation to insurance also order to meet its
appears that the PRA has
makes it the prudential regulator for Lloyds of London; comfort is given, financial stability
primacy.
in relation to insurance business generally, that a prudential lighter touch objective at any time,
may be appropriate by comparison with banks. but particularly during times of stress.
The Bank of England, FPC and PRA Both the PRA and FCA will in any event be under statutory duties to
will be collectively responsible under provide or share detailed information with the FPC on a routine basis to
the same roof for designing the UK inform its own decision making. In return, the FPC will provide advice and
response to the next emergent expertise to both regulators on systemic financial stability and current
financial crisis, and executing the and developing risks thereto. The PRA and the FCA are clearly described
special resolution regime where as "equal in status". This is, in some respects, true. There are, however,
necessary. significant operational issues where it appears that PRA has primacy over
the FCA.
The second supervisory body, the
HECTOR SANTS, current Chief Financial Conduct Authority, will The PRA's relevant powers include:
Executive of the FSA and Chief
Executive designate of the PRA regulate the conduct of all
Where FCA wishes to take action against an authorised firm by
authorised financial services firms, and will be prudential regulator for all
imposing requirements or cancelling its permissions, it is the PRA that
firms not regulated by the PRA. The FCA will be by far the larger of the
has the expertise to judge whether this might cause the firm to fail in
two bodies, but will have a clearly subsidiary role.
a disorderly way and/or cause financial instability within the system.
Leaving reporting lines to one side, a natural hierarchy of influence has When consultation between the two regulators about the proposed
emerged in the government's deliberations. The FPC, as the macro‐ action takes place, the government expects that the FCA will
prudential regulator, sits at the top of the influence tree, and is being
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take the PRA's advice in relation to the risk of disorderly failure.
given powers in respect of both supervisors.
In the event that the PRA and FCA are unable to agree on a
The FPC's powers in respect of the PRA and FCA include: course of action, the legislation will grant PRA the power of veto over
the FCA's proposed course where the PRA considers that it would risk
The ability to make "recommendations" to the PRA and FCA, under
financial instability or the disorderly failure of the firm concerned.
the 'comply or explain' principle, where either body, if not adopting
the recommendation, will be required to explain publicly why it chose The PRA power of veto also extends to the making of rules by FCA,
not to, and and even FCA's granting of individual firm modifications or waivers,
where PRA believes there may be a negative impact on financial
The ability to direct the PRA and FCA to adopt and apply specific stability or the prospect of a disorderly failure.
macro‐economic tools in specific ways, which could include (amongst
Lead responsibility for approving particular Controlled Functions for
others):
jointly‐regulated firms will be split between the two regulators.
setting levels for counter‐cyclical capital buffers/dynamic
Subject to consultation between them, the PRA will have the final say
provisioning,
in approving Significant Influence Functions which impact on
setting variable risk weights focused on specific sectors or asset prudential soundness, such as that of the Chief Executive Officer: the
classes, FCA will have similar powers in respect of functions which impact
continued on page 3

3. more on its own statutory responsibilities, such as client assets or This is clearly a very direct response to the government's fury over FSA
anti‐money laundering. being unable to publish its report into RBS due to its interpretation of the
current confidentiality provisions in FSMA.
Financial Policy Committee
The Financial Policy Committee remains broadly as envisioned in the first In a material change from earlier proposals, significant regulatory
document, with the statutory objective of "..the identification of, decisions in respect of particular firms will no longer be taken solely by a
monitoring of, and PRA Executive Committee, or one with a majority of executive staff. The
government has fortunately recognised the obvious incongruity that this
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PRA reports will contain taking of action to
would contradict the principles of good corporate governance that PRA
confidential information remove or reduce,
itself should be enforcing on firms. It now proposes to give the PRA
where publication is in the systemic risks with a
flexibility to create its own decision‐making structures, involving non‐
national interest. view to protecting and
enhancing the resilience executives "as appropriate" in this context.
of the UK financial system…" . Operationally, the PRA will be obliged to take a judgment‐led supervisory
The particular systemic risks within that objective are: approach to the firms it regulates, and will take a more principles‐based
approach in creating regulation, requiring PRA‐supervised firms to
systemic risks attributable to structural features of financial markets comply with the spirit, as well as the letter, of its prudential rules.
or to the distribution of risk within the financial sector, and
On the back of this approach, PRA
unsustainable levels of leverage, debt or credit growth will have its own enforcement
powers. The obvious challenges
In response to concerns raised during consultation, the objective has
of effective enforcement in
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been extended to reflect that the FPC should not take actions under this
response to breaches in a
objective that would be, in their own view "…likely to have a significant
judgment‐led, principles‐based
adverse effect on the capacity of the financial sector to contribute to the
regime are recognised.
growth of the UK economy in the medium or long term…".
A particularly interesting
The 12 members of the interim FPC have also been announced, notably
statement in the document is
including a former Vice Chairman of the US Federal Reserve and a former
that, "The Government is
Director General of the Confederation for British Industry. This interim Sir Richard Lambert, new member
considering whether appeals of the FPC and until recently,
FPC started to operate experimentally in February and is waiting for the Director General of the CBI
from judgement‐based
(Photo courtesy of the CBI)
legislation to catch up before it takes full powers.
supervisory decisions should be
Prudential Regulation Authority heard by the Upper Tribunal on limited grounds (those which could be
raised on a judicial review) rather than the 'full merits review'
The PRA will be "operationally independent" from the Bank of England,
with its own Board, but accountable to the Court of Directors of the Bank
currently provided for in relation to FSA supervisory decisions
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which engage the statutory notice procedure."
of England for administrative matters, which include budget,
remuneration, and performance against objectives. This constitutes an Simply put, if implemented, this appears to mean that PRA's decisions
interesting definition of independence, particularly as the Chairman of would only be able to be challenged if it could be demonstrated that in
the PRA will be the Governor of the Bank of England. reaching a judgment‐led decision, PRA had acted illegally, acted
irrationally or unreasonably, or created a procedural impropriety. Clearly
However, operational independence will apparently be preserved by the
this would make PRA decisions even more difficult, and even more
PRA Board having a majority of non‐executive directors. It will also be
expensive, to overturn than under the existing FSA regime.
subject to audit by the National Audit Office, and accountable to
Parliament and Ministers, with a new measure that where there is a The PRA will also have powers, transferred from FSA, to require
significant regulatory failure, the PRA must then make a formal report to information for financial stability purposes from unregulated persons as
HM Treasury containing an analysis of the causes of the failure, and well as from those it directly supervises.
lessons to be learned. HM Treasury will in turn lay the report before
Financial Conduct Authority
Parliament, and it will be made public.
Whereas there was a lot of the political rhetoric on the role of the ex‐
This provision is unambiguous in stating that such reports will contain CPMA as a consumer champion fighting for the downtrodden, there is
confidential information where its publication is in the national interest. significant back‐tracking on this both in Parliament and in the current
continued on page 4

4. proposals ‐ part of which is reflected in the change of name. To a large action is subsequently dropped, a large part of the reputational
extent this is designed to answer questions about a future lack of damage to the firm or person will already have been done.
impartiality in its dealings with firms.
In an apparent turnaround, the FCA will be retaining its powers of
The proposal therefore includes a very early and clear statement in the prosecution for market abuse offences, rather than transferring them
description of the FCA's role as "...protecting and enhancing the to the proposed new Economic Crime Agency.
confidence of all consumers of financial services ‐ from retail customers
choosing a current account to a hedge fund engaging in multi‐million The UK Listing Authority will also remain within the FCA, rather than
pound derivatives trades." as was previously being considered, transferred to the Financial
Reporting Council.
The FCA has ‐ like the PRA ‐ been given a single strategic objective, to
protect and enhance confidence in the UK financial system. Its operating It is proposed that
The FCA will be able to
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model will be, as envisaged, materially different from FSA's current the FCA will also have
approach, with a much greater focus on financial products, and rather a significant role in publish Warning Notices
less focus on firms themselves: applying general signalling the start of formal
competition law in enforcement proceedings
There is recognition that detriment in retail financial services is more
financial services, but
likely to arise from a sector or product than from the conduct of an the details are subject to subsequent publication.
individual firm. Because of this, much of FCA's focus will be on issues‐
based, rather than firm‐based supervision ‐ a continuance and Current measures
strengthening of theme‐based supervision, where the FCA will be As noted above, the "interim FPC" was appointed in February and will
expected to publish more observations of good and bad business start to meet with an initial focus on identifying the right macro‐
practice. prudential tools to be used when it assumes full powers.
The "vast majority" of FCA firms will interact with the regulator FSA itself is constructing a 'shadow organisation' to mirror and trial the
through a contact centre, and only a small number of firms will have a operations of the proposed PRA and FCA. In practical terms this means
dedicated FCA supervisor. that FSA staff are being allocated to one or other organisation, as
described in Hector Sants' "Dear CEO letter" of 7th February (which still
All firms will, however, be subject to periodic review of their referred to CPMA rather than FCA). The new FSA internal organisation,
governance, culture and controls ‐ so ARROW will remain in some split between the Prudential Business Unit and the Consumer & Markets
form. Business Unit will start operating on 4th April.
The FCA will be granted powers to ban products in development, or In a spin‐off bonus for firms, the focus on the new organisation will mean
those already in the market, where there is a significant prospect of a reduction in routine supervisory activity; on which affected firms
are to be informed.
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consumer detriment, and where setting conditions on the product or
the sales process has proven ineffective. Sants himself has been confirmed as the first head of the PRA, and
Martin Wheatley, current Chief Executive of the Hong Kong
There is, happily, no intention to involve the FCA in the pre‐approval
Securities & Futures Commission and former Deputy Chief Executive of
of financial products.
the London Stock Exchange, is CEO‐designate for the FCA. He will join
There is a proposed power to enable the FCA to direct a firm to FSA to run the new CMBU in September this year.
withdraw a financial promotion, and to make public the fact that it
Next steps
has done so to warn consumers.
The draft bill creating the new structure and both dealing with the new
As an enhancement to the current FSA credible deterrence policy, the powers and transferring the existing ones is intended to be published by the
government is proposing that the FCA will be able to publish Warning early summer, and enacted within 12 months. The government is determined
Notices, which signal the start of formal enforcement proceedings that the new regulatory structure will be up and running by the end of 2012.
(rather than their end). This is a sweeping change. Effectively the
The closing date for responses to the current paper is 14th April 2011, and
charges against a firm or individual, and the summary supporting
consultation responses will feed into both the government's White Paper on
evidence, will be published without the accused having had the
reform and the draft Parliamentary Bill. We will continue to update you as
opportunity for its defence to be heard. Whilst there is then an
things develop further. m
obligation to publish a Notice of Discontinuance if the enforcement

5. G20 sets targets European Parliament confirms EBA head
At this month’s Paris meeting, the G20 Finance Ministers and Earlier this month the European
Central Bank Governors have agreed the next steps to combat the Parliament confirmed Andrea Enria
current crisis. They will agree, by April, on quantitative indicators as the first Chairperson of the
that will be used to assess public debt and deficits, private savings European Banking Authority (EBA),
rate and debts, and trade balances and investment flows. By the new regulatory body
October they want the IMF to established at the start of this year
have developed a plan for and which takes over all existing
strengthening the IMS and for and ongoing tasks and
them to report on progress in responsibilities from the previous
April. Committee of European Banking
Andrea Enria, first Chairperson of
Supervisors (CEBS). the European Banking Authority
Commodity price volatility was
also a target and the IMF and This confirmation followed a meeting of the Economic and
the International Energy Monetary Affairs Committee (ECON).
Forum are being asked to In his opening statement, Enria emphasised the need for the EBA to
coordinate strategies on oil, move towards a more integrated regulatory and supervisory
Christine Lagarde gas and coal price volatility.
France’s Finance and Economics Minister framework in the Union and to work as a “hub and spoke”
(Photo courtesy World Economic Forum) October is also scheduled as European system of supervision heavily backed by national
the date by which the G20 expect to propose and agree the supervisors. When describing the way forward, he said “the first
handling of globally systemically important financial institutions (G‐ priority should be the success of the European stress test exercise.
SIFIs) and a framework is expected to ensure stability through European banks are still operating in a fragile market environment
capital surcharges, contingent capital, bail‐in instruments and and we need to make sure that they are able to withstand a further
systemic levies. This framework is expected to be on top of the severe shock and that those that aren’t strong enough are subject
requirements of Basel III. The G20 also expect proposals by the to appropriate supervisory actions.”
middle of this year on regulation and oversight of the shadow
Enria starts his role of Chairperson on March 1st. Previously, he
banking system with an emphasis on the risks of arbitrage as well
was Head of the Supervisory Regulations and Policies Department
as those associated with new technological trading platforms. m
at the Banca d’Italia. m
London trader jailed for £14M fraud
A case brought by the City of London Police's Economic Crime Chase Cooper
Directorate has resulted in a City trader being jailed for eight years. Strategic Compliance
Terry Freeman of GFX Capital assured 350 investors of high returns Breakfast Briefing
by investing in foreign exchange markets. Investors were also Held on 16th February, Chase Cooper’s fourth Strategic 5
assured that stop loss checks had been put on their accounts. They Compliance Breakfast Briefing was held as a complimentary
were also given false trading statements which showed that their service to current and new clients.
accounts were healthy when, in fact, Freeman was using their
funds to pay off other investors. It also turned out that Freeman Nick Gibson, Director of Compliance Solutions at Chase Cooper,
had falsely stated he had previously worked at Morgan Stanley covered a wide‐ranging agenda, looking in some detail at the
when the truth was that he had a string of convictions going back troublesome practical implications for UK businesses of the new
to 1979 but that he had changed his name in 2000 to avoid being European regulatory system and of the ongoing MiFID2 review, set
identified as such. against the backdrop of the current political and economic
situation in the UK and worldwide, and the existing focus of FSA
Freeman pleaded guilty in Southwark Crown Court to six charges and proposed changes within UK regulation. The event was
including fraudulent trading and trading whilst bankrupt. Although attended by 15 senior delegates from brokers, corporate banks,
the deception was uncovered when Freeman could not hide the private banks and the insurance sector.
losses made following the Lehman collapse, much of the investors’
funds had been spent on holiday homes, entertaining in executive The next Breakfast Briefing, which is open to senior compliance,
boxes and on gifts for his family. The court heard that threats from business and risk staff working in FSA authorised firms, will be held
overseas investors had resulted in Freeman handing himself into at Chase Cooper’s offices on 16th March 2011 with registration
the police. m from 8.30 a.m. You can register your interest online here. m

6. Regulatory ASYMmetricAL
NEWS The back page, sometimes critical view from the Editor
FSA HANDBOOK RULE CHANGES Who will manage liquidity risk? Who has overall responsibility for this?
The rule changes to the FSA Handbook
Liquidity risk, its management, measurement and standards, are now firmly part of the new
resulting from the Consultative Paper 10/3 and
Basel III requirements. A standard, part of the many documents that currently make up Basel
Policy Statement 10/15 on Effective Corporate
III, "International Framework for Liquidity Risk Measurement, Standards and Monitoring", was
Governance come into
released last December. The objectives are to manage both the short‐term
effect on the 1st of May.
resilience of a bank's liquidity risk profile and to pressure the banks to look
These new rules, based
for more stable sources of longer‐term funding.
on the 2009 Walker
Review, are to improve To achieve these, two measurements have been introduced: the Liquidity
corporate governance in Coverage Ratio (LCR) for the short‐term objective, and the Net Stable
financial firms. Included Funding Ratio (NSFR) with a time horizon of one year to provide a
in the requirements is "sustainable maturity structure of assets and liabilities". The timetables
the setting‐up of a Board for both of these are relatively benign: January 1st 2015 for the LCR, and
level risk committee three years later for the NSFR. However that does not mean that risk
predominantly made up managers can sit back and wait as these are dates for achieving
of non‐executive compliance with the required ratios and it will take time to implement
directors and with direct contact with the new funding disciplines. Liquidity management will require daily checking on the ratios and
regulators. assurance that stocks held are not encumbered or otherwise compromised in ways not
MiFID REGULATION reflected in the risk management calculations.
Consultation has just ended on the The question then arises as to where the responsibility for the management of stocks and the
categorisation and regulation used in EU's associated liquidity risk should sit in an organisation. What is the level of involvement of the
MiFID (Markets in Financial Instruments bank's existing risk management framework and where does overall responsibility lie?
Directive) for trading venues. There is
On page 7 of the abovementioned standard, the BIS comes down marginally in favour of the
particular market concern on the impact the
bank's treasurer. It says "The stock should be under the control of the specific function or
proposed changes could have on broker
functions charged with managing the liquidity risk of the bank (typically the treasurer)" and
crossing networks (BCNs) with their having to
suggests that, as part of its ongoing stock management, the bank should periodically test the
identify all their trades in post‐trade data
submissions and to provide public end of day liquidity of stocks via repos or outright sales of portions of the assets. But this means that
information on daily activity. This would there are two separate operations managing the liquidity risk within an organisation, one run
effectively transform them into MTFs by the treasurer and one run by the chief risk officer.
(Multilateral Trading Facilities) with open Liquidity is only one of the risks associated with a bank's assets. There is also the price and
memberships and price disclosure. return on the assets (market risk) and their probability of default (credit risk). And there is the
operational risk embedded in the process of testing, and eventually liquidating, the
AUDITORS/SUPERVISORS CONSULTATION
The FSA and the Bank of England have
positions. All these facets need to be managed and reported together and banks need
to avoid creating any silos, or even conflicts, in their control of risk.
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published, for consultation, a code of practice
on how external auditors and supervisors will At a Basel III conference, late last year, attended mainly by delegates from the risk
work together. This is particularly targeted at management community, an informal show of hands on the question "who manages risk
high impact firms and obliges their auditors to management" came down firmly in favour of the treasury department. There was no question
work closely with the regulatory supervisors. that these risk managers did not want this extra responsibility ‐ or maybe there were a lot of
Responses to the consultation should be in by treasurers in the audience?
March 25th.
But whilst there is never any single measurement of risk in an organisation, there should be a
SOLVENCY II UNLIKELY FOR IORPs single point of reporting the risks ‐ from the chief risk officer supported by the risk committee,
According to the European Federation for to the Board risk committee and via them to the Board. Having parallel reporting lines will be
Retirement Provision it is unlikely that the EU counter‐productive.
will apply Solvency II to institutions for
Would it be possible that the liquidity risk manager, sitting within treasury, then also reports to
occupational retirement provision (IORPs). An
the chief risk officer, along with the heads of operational, credit and market risk? There is a
internal EC report said that changes to
possible precedence for this in the ALM. But, like ALM, treasury is a well established part of a
pensions would result in substantial costs to
bank's operations and it is unlikely that the department will appreciate the imposition of
member states, raise government debt levels
branched reporting lines. It would be interesting to
and increase budget deficits. The report did, metric is published by
understand how banks are planning to handle liquidity risk Chase Cooper.
however, call for enhanced control regulations
management processes and responsibilities. m web: www.chasecooper.com
on pensions. email: metric@chasecooper.com