Monday 25th May 2015
NEWS TICKER: FRIDAY, MAY 22ND: The California Public Employees' Retirement System (CalPERS) has named Beliz Chappuie as CalPERS' Chief Auditor, effective July 31, 2015 - Saudi Arabia's oil minister has said the country will switch its energy focus to solar power as the nation envisages an end to fossil fuels, possibly around 2040-2050, Reuters reports. "In Saudi Arabia, we recognise that eventually, one of these days, we are not going to need fossil fuels, I don't know when, in 2040, 2050... we have embarked on a program to develop solar energy," Ali Al-Naimi told a business and climate conference in Paris, the news service reports. "Hopefully, one of these days, instead of exporting fossil fuels, we will be exporting gigawatts, electric ones. Does that sound good?" The minster is also reported to say he still expects the world's energy mix to be dominated by fossil fuels in the near future - Barclays has appointed Steve Rickards as head of offshore funds. He will lead the creation and implementation of the bank’s offshore funds strategy and report directly to Paul Savery, managing director of personal and corporate banking in the Channel Islands. For the last four years Mr Rickards has been heading up the Guernsey Funds team providing debt solutions for private equity and working with locally based fund administrators. Savery says: “Barclays’ funds segment has seen some terrific cross functional success over the past year or so. Specifically, the offshore business has worked hand in hand with the funds team in London to bring the very best of Barclays to our clients, and Steve has been a real catalyst to driving this relationship from a Guernsey perspective.” - Moody's has downgraded Uzbekistan based Qishloq Qurilish Bank's (QQB’s) local-currency deposit rating to B2, and downgraded BCA to b3 and assigned a Counterparty Risk Assessment of B1(cr)/Not prime(cr) to the bank. The agency says the impact on QQB of the publication of Moody's revised bank methodology and QQB's weak asset quality and moderate loss-absorption capacity are the reasons for the downgrades. Concurrently, Moody's has confirmed QQB's long-term B2 foreign-currency deposit rating and assigned stable outlooks to all of the affected long-term ratings. The short-term deposit ratings of Not-prime were unaffected - Delinquencies of the Dutch residential mortgage-backed securities (RMBS) market fell during the three-month period ended March 2015, according to Moody's. The 60+ day delinquencies of Dutch RMBS, including Dutch mortgage loans benefitting from a Nationale Hypotheek Garantie, decreased to 0.85% in March 2015 from 0.92% in December 2014. The 90+ day delinquencies also decreased to 0.66% in March 2015 from 0.71% in December 2014.Nevertheless, cumulative defaults increased to 0.65% of the original balance, plus additions (in the case of master issuers) and replenishments, in March 2015 from 0.56% in December 2014. Cumulative losses increased slightly to 0.13% in March 2015 from 0.11% in December 2014 – Asset manager Jupiter has recruited fund manager Jason Pidcock to build Asian Income strategy at the firm. Pidcock J has built a strong reputation at Newton Investment Management for the management of income-orientated assets in Asian markets and, in particular the £4.4bn Newton Asian Income Fund, which he has managed since its launch in 2005. The fund has delivered a return of 64.0% over the past five years compared with 35.9% for the IA Asia Pacific Ex Japan sector average, placing it 4th in the sector. Since launch it has returned 191.4 against 154.1% for the sector average. Before joining Newton in 2004, Jason was responsible for stock selection and asset allocation in the Asia ex-Japan region for the BP Pension Fund.

Twin peaks: the fire walk of UK market regulation?

Monday, 05 March 2012
Twin peaks: the fire walk of UK market regulation? Those who were keen followers of the 1990s cult television series Twin Peaks and its prequel film, Twin Peaks: Fire Walk With Me may have experienced some concern at hearing recently in a speech by the Financial Services Authority's (FSA’s) chief executive officer, Hector Sants, that the regulator would very shortly start adopting a ‘Twin Peaks’ model of regulation.  However, rather than a drama concerning the murder of a teenage girl, which explored the gulf between the veneer of small-town respectability and the seedier layers of life lurking beneath it, this is the continuing drama of the progress of the UK’s regulatory reform programme, though it is also laced with some underlying seediness, mystery and double-think, all thrown in for good measure. Charlotte Hill, partner and head of the financial services and regulation practice at law firm Stephenson Harwood, gives a sprightly, sometimes humorous run through the implications of change, positing that it might all be too complicated for it’s own good. http://www.ftseglobalmarkets.com/media/k2/items/cache/3fc2270e36abb53621f286382276e85e_XL.jpg

Those who were keen followers of the 1990s cult television series Twin Peaks and its prequel film, Twin Peaks: Fire Walk With Me may have experienced some concern at hearing recently in a speech by the Financial Services Authority's (FSA’s) chief executive officer, Hector Sants, that the regulator would very shortly start adopting a ‘Twin Peaks’ model of regulation.  However, rather than a drama concerning the murder of a teenage girl, which explored the gulf between the veneer of small-town respectability and the seedier layers of life lurking beneath it, this is the continuing drama of the progress of the UK’s regulatory reform programme, though it is also laced with some underlying seediness, mystery and double-think, all thrown in for good measure. Charlotte Hill, partner and head of the financial services and regulation practice at law firm Stephenson Harwood, gives a sprightly, sometimes humorous run through the implications of change, positing that it might all be too complicated for it’s own good.

The financial crisis and recession caused the FSA, the United King-dom’s financial markets reg-ulator, to be criticised for being too costly and ineffective in its approach to regulation, resulting in a complete reform of the UK's regulatory structure.

Right now the UK financial markets are governed by a tripartite system of regulation, with regulatory responsibility being shared between the Bank of England (BoE), the FSA and HM Treasury. However it looks as if this system has now had its day and change is afoot. There is much optimism that this time around, all will be well and the shortcomings of the previous system will be addressed and a new dawn is breaking.



The old structures will be replaced with an all-new, all-improved, shiny new system, where responsibility for regulation will be shared between, em ... three new regulatory bodies! These are the Financial Policy Committee (FPC), which will sit in the BoE and take responsibility for the macro-prudential regulation of the UK financial system; the Prudential Regulation Authority (PRA), which will sit as an independent subsidiary of the BoE and take responsibility for the micro-prudential regulation of financial institutions of systemic importance, such as banks and building societies; and the Financial Conduct Authority (FCA), which will inherit the majority of the FSA’s current regulatory functions and be responsible for the conduct of business regulation of all firms currently regulated by the FSA. This will include those firms that will be dual-regulated, authorised and subject to prudential regulation by the PRA.  

In two speeches on February 6th and 7th this year, Hector Sants announced what he termed a "major milestone" in the progress of the regulatory reform programme, namely, the introduction of a "Twin Peaks" model of regulation, which would be operating within the FSA from April 2nd 2012. From this date, two regulatory models (the Twin Peaks) will operate within the FSA in preparation for those models becoming separate regulatory entities early in 2013. One peak is earmarked for prudential regulation and the other for conduct regulation. So, banks, building societies, insurers and major investment firms will have two separate groups of supervisors: one focussing on prudential issues and the other on conduct.

Whilst the FSA could not completely replicate the new approach envisaged by the Financial Services Bill at this stage, the Twin Peaks model will ensure that the transition to the new regulatory structure early in 2013 (termed, in true superb FSA-speak, the "cutover") would be "seamless".  

Not only are there the two independent groups of supervisors for banks, insurers and major investment firm but also, all other firms (that is, those which are not dual-regulated) will be supervised entirely by the conduct supervisors. These separate groups of supervisors will make their own separate judgements, and against different objectives. This is an important distinction, as we are told that they will be "pursing different goals". Up to now, there has been little clarity on what all this means, but the approach is summarised in another piece of fluent FSA-speak: "independent but coordinated decision making"––an approach that will be "stressed to staff". The thrust of this appears to be a policy of sometimes working together, but sometimes not, whilst somehow managing to share all data collected from companies.  Although no detail is given, "greater clarity" apparently has been given to the objectives of the two supervisory groups. No information is given on what this "clarity" entails.

Those still reeling from the spectre of two separate sets of supervisors will exit screaming at the intelligence that the existing ARROW risk mitigation programme will be split between the Twin Peaks. The Financial Services Authority (FSA) is a risk-based regulator and ARROW is the framework it uses to make risk-based regulation operational. ARROW stands for the Advanced, Risk-Responsive Operating Framework and covers firm specific (vertical supervision), thematic (those involving several firms or relating to the market as a whole; the FSA terms this ‘horizontal’ work) and internal risks (these are operational risks that might impact the FSA).

ARROW will be split between those actions which are relevant to the conduct supervisory group's objectives and those that relate to the objectives of the prudential group. What is worse is that this is only just around the corner. From April 2nd 2012 onwards, the two separate supervisory units will run their own risk mitigation programmes and firms will have "two separate sets of mitigating actions to address".  

The two supervisory teams will assess risk separately, against their own separate objectives (and of course, firms do not as yet know what these are). Any firm currently preparing for an ARROW visit, or anticipating one later in the year will not be delighted by the knowledge that each group may well ask apparently similar questions, but that the purpose will be different.  

Conclusions drawn from the ARROW process will be coordinated with "a single pack of documentation" being presented to the firm's board––but this will have "two separate sections". However, there will not be a consolidated list of required actions arising from the ARROW visit.

Doubling up on visits
The meaning seems to be that you will still have an ARROW visit (at least, for the lifetime of the current FSA), but this will in fact be two visits. When the visit is over, the FSA will provide one, consolidated pack of documentation summarising the conclusions of the assessment. However this will be divided into two, with two separate sets of actions, to each of which firms are required to give "equal focus". So, you are indeed seeing double––your one ARROW visit has suddenly become two. Anyone who has been through the current ARROW process well knows the enormous amount of preparatory work that is necessary and the stress of the increasingly demanding interviews, so it is hardly welcome news that the amount of work involved is about to be doubled.

Firms will be required to make "behavioural changes", so that the new approach works "to the benefit of society" as a whole. In line with this, firms must comply with supervisory judgements "willingly" and "proactively"; in other words, not challenge FSA judgements, but take it like lambs. Firms must align their goals with those of their supervisors and (again) "with society as a whole". So, now companies have "the best interests of society" to contend with, along with everything else.

Unsurprisingly, no steer is given as to what these might be, or which society the regulator may have in mind. Rather puzzlingly, a further feature of this new world is that firms must "recognise that there are times when both firms and the regulator will make judgements which in hindsight are found to be wrong".  Sounds sinister!  What does this mean exactly?  

Perhaps the killer punch comes in an apparently throwaway line that is not elaborated further that firms must "recognise that this new approach will require greater resources and expertise and thus costs more than the old reactive model". Double the trouble, it seems, means double the cost. More fees and a greater cost of regulation at a time when companies are feeling the pinch of uncertain markets and falling revenues and buckling under the weight of around thirty-five (at last count) separate new legislative measures from Europe.

There is much still to be done and in his speeches, Sants provided a shopping list of the issues still to be addressed within the next twelve months, any one of which would be enough to keep an army of regulators busy for a good deal longer than this. They include amendments to the threshold conditions; the designing of a new "operating platform" for the FCA and the PRA; designing a new supervisory framework to replace ARROW; finalising the new Memorandum of Understanding detailing how the FCA and the PRA will coordinate their activities; splitting the Rulebook between the PRA and the FCA; and training (and presumably, recruiting) staff.

The next twelve months are likely to be extremely lively, as the FSA wrestles with operating within the Twin Peaks framework and labours with the complexity and volume of the issues still to be addressed.  Firms once again will be obliged to wrestle with major operational changes due to regulatory upheaval. Twin Peaks looks like being only the beginning of the fire walk.

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