Regulatory Developments a lawyer s perspective Michael Wainwright

Regulatory Developments – a lawyer’s perspective Michael Wainwright 10 November 2010 Doc 4505874

Introduction • Two initiatives by FSA to change how firms deal with consumers • Overshadowed by reform in the UK and competing EU proposals • What can we expect to happen? • What can we learn about the future course of regulation of financial services?

Treating Customers Fairly (TCF) • Principle 6 - Firms to pay due regard to the interests of their customers and treat them fairly – High level standard- discipline but no compensation • Six outcomes • Continuing process • Inspired by policyholders reasonable expectations (PRE)? – GN 1 and Equitable Life 3

6 Outcomes 1. Consumers can be confident that they are dealing with firms where the fair treatment of customers is central to the corporate culture. 2. Products and services marketed and sold in the retail market are designed to meet the needs of identified consumer groups and are targeted accordingly. 3. Consumers are provided with clear information and are kept appropriately informed before, during and after the point of sale.

6 Outcomes 4. Where consumers receive advice, the advice is suitable and takes account of their circumstances. 5. Consumers are provided with products that perform as firms have led them to expect, and the associated service is both of an acceptable standard and as they have been led to expect. 6. Consumers do not face unreasonable post-sale barriers imposed by firms to change product, switch provider, submit a claim or make a complaint.

Unfair Contract Terms • UK legislation addressed exclusion clauses • Unfair Terms in Consumer Contracts Regulations 1999: – Contract terms to be fair or will not be enforceable – If not in plain intelligible language, then any ambiguity to be resolved in favour of consumer – Regulators can issue guidance on interpretation (though the courts have the last word!)

Proposal for Consumer Rights Directive • Consolidates and amends existing directives – Doorstep Selling Directive – 1985 – Unfair Contract Terms Directive – 1993 – Distance Contracts Directive – 1997 – Sales and Guarantees Directive – 1999 • Maximum harmonisation • Limited application to financial services • Likely to be adopted in 2011 and implemented in 2013?

Consequences for TCF • Directive requirements will be copied out into UK legislation – compare the regulations implementing the Unfair Commercial Practices Directive • Authoritative interpretation by EU regulators and ultimately the European Court • FSA can only impose additional requirements where the Directive specifically permits • Can FSA justify maintaining its focus on process and outcomes?

Retail Distribution Review (RDR) • FSA’s final solution to a debate that has run for 25 years • Four main themes: – Adviser charging – ban on commission, rebates etc – Labelling of advice – independent vs restricted – Professional qualifications – Increased financial resources requirement

Implications of RDR ban on commission • Commission creates a serious conflict for financial advisers • Outright ban on commission is a radical solution • Consequence is that financial advisers can only be paid through fees paid by clients • Ban applies to both product providers and advisers – vertically integrated providers need to operate an equivalent restriction within their business – not yet clear how utilities such as wrap platforms will be treated

Scope of RDR • Applies to UK advised sales of “retail investment products” • Commission still possible if: – not an advised sale eg execution-only – not a “retail client” – sale not conducted in the UK – transitional provisions apply • Commission ban does not apply to related financial services eg mortgages, protection insurance 6

Challenges of RDR • Since the ban is not universal, product providers will have to operate two systems side by side • Confusion for consumers • Commission remuneration is much easier to collect and process than fees • Other RDR changes will increase the cost of trading as a financial adviser • No buy-in from Europe • Implementation at end of 2012

Competing proposal from Europe • Packaged Retail Investment Products (PRIPs) • Task force report by EU regulators – Oct 2010 • Focus on three issues – Scope – concept vs list – Product disclosure – Key Investor Information document from UCITS directive – Sales rules – from Mi. FID directive • Clear evidence of disagreement on many points • Draft rules explicitly permit commission

Will PRIPs happen? • No announced timetable for next steps • PRIPs is seen by the European Commission as having considerable potential – protecting investors – extending the single market – expanding European law

Regulatory changes in Europe • Treaty of Lisbon – qualified majority voting in Council of Ministers – easier to adopt legislation • Level 3 Committees (CEBS, CEIOPS and CESR) to be superseded by European regulators (EBA, EIOPA and ESMA) with limited authority over national regulators – more effective implementation of legislation

Regulatory changes in the UK • Treasury consultation in July 2010 • Legislation in 2011 and implementation at end of 2012 • Abolition of the Financial Services Authority and rise of the Bank of England? • Separation of prudential regulation and conduct of business

Financial Policy Committee (FPC) • Committee of the Court of Directors of the Bank of England – Comparable to the Monetary Policy Committee • Responsible for macro-prudential regulation – the system as a whole – Macro-prudential toolkit • Accountable to Bank of England HM Treasury

Prudential Regulation Authority (PRA) • Responsible for prudential regulation of systemically important firms – Deposit takers, insurers and proprietary traders – Authorisation, capital requirements and day to day supervision • A subsidiary of and accountable to the Bank of England

Consumer Protection and Markets Authority (CPMA) • Authorisation, capital requirements and day to day supervision for firms which are not systemically important • Conduct of business regulation for all firms • Regulation of market conduct • May gain regulation of consumer credit from OFT

Change from FSA to CPMA • Loses prudential regulation of systemically important firms to PRA • Loses regulation of settlement systems and clearing houses to Bank of England • May lose prosecution powers to Economic Crime Agency • May lose powers to regulate companies listed in UK • Gains power to regulate consumer credit

The future of the CPMA • CPMA will be the continuation of FSA without the most prestigious jobs • Its objectives will focus on consumer protection and integrity of financial markets • It will regulate a large number of small firms • TCF and RDR will be at the top of its consumer protection agenda • It will have limited influence in the European arena and will be subject to direction from strong EU regulators

The future of TCF and RDR • The TCF approach will be overtaken by a rules based framework imposed under the Consumer Rights Directive or a financial services supplement to that directive • However, the TCF approach can co-exist with detailed rules and will be allowed to continue • There is a danger that the ban on commission under RDR will eventually be found to be incompatible with emerging EU regulatory principles and will have to be abandoned • If so, the UK market will be seriously weakened by a succession of regulatory upheavals

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