FINMAR

FINMAR will be the abbreviation given to a new Handbook module: the Financial Stability and Market Confidence Sourcebook. It is referenced in the latest consultation paper from the FSA – CP10/11 “Implementing aspects of the Financial Services Act 2010”. The CP has been released following the Financial Services Bill 2010 receiving Royal Assent on 8 April 2010 (see Regulatory Roundup issue number 12), although it should be noted that many of the Act’s provisions do not come into force until two months from this date.

The paper reminds us that the FSA’s powers have been increased and have been given a new regulatory objective of financial stability (the regulator’s public awareness objective is likely to be removed following the establishment of a new consumer financial education body).

Highlights include removing the short selling rules in MAR and remaking them in FINMAR, so removing the current need for the FSA to link shorting rules with market abuse. The proposals would also tighten the rule in respect of rights issues so that it will apply only to UK incorporated companies (or non-UK companies if a UK prescribed market is the sole/main trading venue).

The FSA acknowledge the CESR shorting proposals which contain different disclosure thresholds. Disclosure obligations will apply to the client (for non-discretionary management) and to both the client and the investment manager for discretionary managed portfolios (although it will be acceptable for the manager to make disclosures on behalf of a client).

Enforcement powers will be beefed up and will include the imposition of penalties on persons who breach short selling prohibition/disclosure requirements. The power of suspension can be applied to both firms (up to 12 months) and to approved persons (up to 2 years). The FSA’s penalty reach also extends to persons performing controlled functions without approval.

It’s interesting to read from section 3.63 of CP10/11 that the FSA will need to train up relevant persons within its organisation, so that they are familiar with the new enforcement powers, which will cost an estimated £30 per head.

Information gathering powers now fall to the FSA and applies equally to authorised and non-authorised firms. Tucked away on page 33 is a comment that the power would also allow the FSA to gather information which could lead to expanding the regulator’s regulatory scope. Firms subject to the information gathering powers could include regulated/unregulated collectives and “…vehicles often referred to as ‘hedge funds’ and their managers…”. Additionally the power will extend to proprietary traders and service providers to authorised firms.

The Act also places a duty on the FSA to make rules in relation to remuneration. As you’ll know, SYSC 19 (“Remuneration Code” – introduced at the beginning of the year) does, of course, already apply to certain types of firms; however the Act refers to “… requiring each authorised person … to have, and act in accordance with, a remuneration policy.”The current CP does not cover remuneration issues and we’ll have to wait until the end of Q2, when a further CP will be issued, to learn more. Another aspect of the Act which is aimed at all firms (“each authorised person”) is the need for the FSA to make rules regarding ‘living wills’, or ‘recovery and resolution plans’ as described in the Act. The CP barely references this.

The consultation period ends 25 June.

As is always, the draft new rules and changes to existing rules are contained within various Appendices to the paper.