Chartered Accountants and Professional Business Advisers

FCA and Financial Services

Events since the start of the recession in 2008 have seen financial services come under increasing scrutiny and calls have been made for the government to improve regulation of the sector. The response to this has been an overhaul of the existing system and a split of the FSA into two new organisations: The Prudential Regulatory Authority (PRA) and the Financial Conduct Authority (FCA). The 'legal cutover' to the new 'twin peaks' model was effected on 1 April 2013. The aim is to give the treasury more control over large financial institutions, and it is for this reason that the PRA is a subsidiary of the Bank of England.

Most regulated entities will fall under FCA regulation, with a smaller number of large institutions subject to regulation by the PRA. The aim is that larger institutions will be under more regulation and scrutiny than smaller financial service firms. Given the size, and subsequent regulation of our clients, this newsletter will focus on the FCA rather than the PRA.

The changes

The FSA's remit and objectives have changed, and the FCA now has the general objective of "ensuring financial markets work well so customers get a fair deal".

This is to be achieved by following three statutory objectives:

  • Protect customers;
  • Enhance the integrity of the UK financial system; and
  • Help maintain competitive markets and promote effective competition in the interest of consumers.

The FSA handbook has been replaced with the FCA Handbook and the PRA Handbook. There is little difference between the old FSA handbook and the new FCA handbook as the focus has been on moving to the new model. Changes are expected to both handbooks going forward as they become more tailored to their respective supervisory structures.

The first change expected is to replace the collective investment scheme sourcebook (COLL) with a new FUND sourcebook, however this has been put back from its original implementation date in July 2013, to an unknown point.

GABRIEL reporting and ONA submission system have not changed and reports and requests are submitted in the same way. The FCA has changed some of the contact email addresses for email submission, which can be found on the website.

The Financial Ombudsman Service will remain unaffected by the change in regulator.

Annual funding requirement

A press release from the FCA was issued on 9th April 2013 detailing its annual funding requirement for 2013/14. Overall the requirement for the FCA is £432.1m and the combined requirement for the FCA and PRA is £646.3m. This represents a 15% increase over the 2012/13 requirement and the FCA have stated the main reasons for the increase are an increase in staff numbers and IT systems.

The increase is to be borne predominantly by large organisations, however you may see your levies increase slightly, and the recent form from the FSA requesting information on turnover was for the purpose of determining the 2013/14 levy.

You won't have escaped details in the press of the large fines levied to firms in 2012/13, the largest three being to UBS, RBS and Barclays with an aggregate amount of £307m. While these fines previously were returned to the industry by way of a discount on the following year's FSA fees, this is no longer the case under the new model, with money going straight to the exchequer, so fines aren't expected to reduce firms' FCA fees in the coming year.

European Market Infrastructure Regulation (EMIR)

The new regulation requires entities that enter into any form of derivative contract, including interest rate, foreign exchange, equity, credit and commodity derivatives to report each contract to a trade repository. They are also required to implement new risk management standards for transactions not cleared by a Central Counterparty (CCP). They must also clear, via a CCP, those OTC Derivatives subject to a mandatory clearing obligation.

This regulation applies to all EU firms and indirectly to non-EU firms trading with EU firms.

Controller and Close - Link reporting

The FCA has now issued templates to be used when undertaking reporting of controllers and close links. In addition, any change in close links should be reported on an 'event driven' basis rather than just once a year on the annual report. This is likely to affect a firm which is altering its group structure.

Please note that in the case where control changes, the firm is already required to submit a change in controller notification to the FCA in advance of the change.

Financial Services Act 2012

While this is unlikely to have a significant effect on the day-to-day running of the firm, it's been included for understanding. Any references to the current FSMA Act on the firm's website for example may require amendment to bring it up to date.

The Act amends the Financial Services and Markets Act 2000 and is the legal underpinning for the new regulatory framework. The Bill makes the Bank of England responsible for ensuring and protecting the stability of financial systems in the UK and provides for an independent conduct of business regulator.

A further change is the establishment of the Financial Policy Committee (FPC) which has responsibility for regulating the stability of the financial system as a whole.

Practical changes required

In the case of an FCA inspection it is considered unlikely that they will respond too harshly to compliance manuals and systems notes referring to the FSA during this transitional year. However it is advised to get these up to date as soon as possible. While this will principally involve changing the name from 'FSA' to 'FCA' compliance manuals often refer to statutory objectives and the FSMA, and these references will require updating.

According to the consultation paper prior to the changeover there will be a 6 month window from the point of cutover to update business stationary with the new regulatory requirements. The FSA logo was permitted to be used in certain circumstances (on websites for example). The consultation paper also proposes that after 6 months from cutover the FSA logo is no longer permitted to be used, and firms will not be allowed to use the new FCA logo either.

Alternative Investment Fund Manager's Directive (AIFMD)

This is currently under consultation with the aim of establishing a harmonised regime across the EU for regulating various forms of investment management, including hedge funds and private equity. This consistent approach is intended to increase transparency and competition.

The directive considers all investment funds which aren't UCITS to be Alternative Investment Funds (AIFs). The proposed rules which come into effect from July 2013 essentially follow current UCITS rules for investment funds with the focus on transparency and investor protection.

All AIFs will require a separate depository to hold investments and monitor cash flows. The depository also has greater exposure to recourse, which is expected to increase fees based on the risk weighting of each fund. This has lead to some criticism of the new regime.

The legislation comes into force on 22 July 2013 and Alternative Investment Fund Managers have a year from this date to transition their funds under management to the new scheme. Firms will be required to register with the FCA to be an AIFM, however the FCA aren't accepting applications until 22 July 2013.

It's currently not clear what happens to fund managers who have applied for regulation before 22 July 2013, whether their application will be 'upgraded' to include the AIFMD or whether a separate application will be required. This is predicted to cause problems as the FCA's target response time for applications is 3 months, and new fund managers must be registered under AIFMD before they are authorised to carry out regulated activities


This is currently under consultation, and proposes many of the features seen in the AIFMD. UCITS fund managers are currently not covered by the AIFMD and this is believed to be an attempt to bring the two in line.

The main proposed changes in UCITS V are an increase in the responsibilities and liabilities of depositories. The exact timeline for implementation is as yet unknown however it is currently suggested that it will apply from the end of 2014.

European Union Financial Transaction Tax

The EU Financial Transaction Tax (FTT) is a proposal to introduce a tax on transactions between financial institutions on the exchange of shares, bonds, and derivatives. It is supported by the majority of EU countries but opposed by the UK, and the legality of the tax is currently in dispute.

Its aim is to raise funds from banks which can be used to help reduce fiscal deficits, and to curb market volatility. However opponents argue that there is little evidence for a possible reduction in volatility and that the FTT will have a negative effect on share prices, especially on securities which are commonly traded.

Italy and France already have a similar tax in place. The tax is collected and paid on by the broker who executes the purchase order.

Specific advice should be obtained before taking action, or refraining from taking action, on any of the subjects covered above. If you would like advice or further information, please speak to your usual Shipleys contact.

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