UK: financial regulation reform - consultation paper

HM Treasury today published a consultation paper - titled A new approach to financial regulation: judgement, focus and stability - setting out in more detail its proposals for reform of the UK financial regulatory structure and explaining the proposed transitional arrangements: see here (pdf).

UK: the bank levy - HM Treasury consultation published

HM Treasury today published a consultation paper on the design and implementation of the proposed bank levy: see here (pdf).

UK: proposed reforms to Part 7 of the Companies Act (1989)

HM Treasury has published a consultation paper titled "Modernising the insolvency protections for the operation of financial markets – proposals to reform Part 7 of the 1989 Companies Act". In the executive summary it is stated:

Part 7 of the Companies Act 1989 modifies general insolvency law to provide systemic protection for certain financial markets in the event that one of their participants defaults. Due to the rapidly evolving nature of financial markets, the Act allows for these provisions to be updated by regulations and this consultation concerns proposals for such an update. Central counterparty clearing, which is the main focus of Part 7, is increasingly recognised as a vital element of market infrastructure, helping to guarantee transactions and produce efficiencies of risk management. In November 2004 the IOSCO (International Organization of Securities Commissions) and the Group of Ten central banks produced recommendations for the operation of central counterparties. The amendments proposed here are in accord with those recommendations, and with the recent proposal by the EU Commission to update the Settlement Finality Directive in line with latest market and regulatory developments, including the increased interoperability of systems".

UK: credit union and industrial and provident societies - Legislative Reform Order published

HM Treasury has published its proposals for a Legislative Reform Order (LRO) for Credit Unions and Industrial & Provident Societies in Great Britain. The LRO will make changes to the Credit Unions Act (1979), Industrial & Provident Societies Act (1965) and Friendly and Industrial & Provident Societies Act (1968). For further information, click here.  

Note: The Financial Services Authority has welcomed the publication of the LRO and, in a press release issued today, states that it will publish a consultation paper in the autumn concerning changes to its rules arising from the changes proposed in the LRO.

UK: financial regulation reform - Parliamentary statement

The Financial Secretary to the Treasury delivered a statement to the House of Commons yesterday on the Government's proposals for financial regulation reform: see here. The statement provides further information on the new institutional structure and the responsibilities of the Bank of England, Financial Policy Committee, Prudential Regulation Authority and Consumer Protection and Markets Authority.

UK: issuer liability - Government response to the Davies review

Section 1270 of the Companies Act (2006) inserted Section 90A of the Financial Services and Markets Act (2000) and established a statutory civil liability regime for issuer misstatements to the market. A review of this regime was conducted by Professor Paul Davies FBA QC - the Davies review - and recommendations published in June 2007.  The Government has published its response in "Extension of the statutory regime for issuer liability", in which it outlines its proposals which include the following:

• There is to be no change to the current basis of liability (which is based on fraud).
  
• The liability regime should apply to [a] issuers of all securities admitted to trading on a UK regulated market or multilateral trading facility and [b] issuers of securities admitted to trading on an EEA regulated market or multilateral trading facility, where the UK is the home state for the issuer under the Transparency Directive (2004/109/EC) or the issuer has its registered office in the UK.
  
• The regime should apply to "transferable securities" as defined in Section 102A(3) of the Financial Services and Markets Act (2000).
  

A draft statutory instrument - The Financial Services and Markets Act 2000 (Liability of Issuers) Regulations 2008 - has been included in the Government's response document.

For further information see:

HM Treasury: Davies review page

UK: financial regulation reform - reactions

Lord Adair Turner, the chairman of the Financial Services Authority, was interviewed this morning on Radio 4's Today programme about the changes announced yesterday: listen here. The Chancellor was also interviewed: listen here. The Governor of the Bank of England, Mervyn King, welcomed the new responsibilities being given to the Bank of England in his speech last night at the Mansion House: see here.

UK: the abolition of the FSA and the new financial regulation framework

Last night the Chancellor of the Exchequer, the Rt Hon George Osborne, delivered his first Mansion House speech - see here - and outlined, in general terms, significant changes to the structure of financial regulation in the UK. The Financial Services Authority will be abolished in its current form and a new prudential regulator, a subsidiary of the Bank of England, will be created.

Other changes are outlined in the following extract from the Chancellor's speech (further information will be provided in Parliament later today by the Financial Secretary to the Treasury, Mark Hoban MP):

... the Government will abolish the tripartite regime, and the Financial Services Authority will cease to exist in its current form. We will create a new prudential regulator, which will operate as a subsidiary of the Bank of England. It will carry out the prudential regulation of financial firms, including banks, investment banks, building societies and insurance companies.

We will create an independent Financial Policy Committee at the Bank, which will have the tools and the responsibility to look across the economy at the macro issues that may threaten economic and financial stability and take effective action in response. We will also establish a powerful new Consumer Protection and Markets Authority. It will regulate the conduct of every authorised financial firm providing services to consumers. It will also be responsible for ensuring the good conduct of business in the UK’s retail and wholesale financial services, in order to preserve our reputation for transparency and efficiency as well as our position as one of the world’s leading global financial centres.

I can also confirm that we will fulfil the commitment in the coalition agreement to create a single agency to take on the work of tackling serious economic crime that is currently dispersed across a number of Government departments and agencies. We take white collar crime as seriously as other crime and we are determined to simplify the confusing and overlapping responsibilities in this area in order to improve detection and enforcement.

I have thought longer and harder and spoken to more people about all these issues than almost any other issue to have crossed my desk. We do not undertake these reforms lightly, and we do so only because we believe they are absolutely necessary. We will handle the transition carefully, consult widely and get this right. The process will be completed in 2012".

UK: Conservatives propose Chapter 11 style insolvency regime

In a wide-ranging speech delivered today, the leader of the Conservative Party suggests that it may be appropriate to adopt elements of the American Chapter 11 regime. The Rt Hon David Cameron MP stated:

Just as we took action for banks - so too should we take the appropriate action to help all businesses in these difficult times. We want to make sure sound companies don't go into liquidation unnecessarily. Because we all know what liquidation normally means - closure. This isn't good for the companies, many of which are actually fundamentally sound. This isn't good for the banks, who lend these companies money. And it's not good for employees - who face being laid off. So what can we do? I can announce today that we will consult on taking the best aspects of the American Chapter 11 system and give good companies breathing space to allow them to rescue or restructure the business in the face of the credit crunch. This change will ensure that fewer good companies end up in liquidation - and fewer people lose their jobs through no fault of their own. But of course, we cannot - and should not save all companies that fail".

The Liberal Democrats' Treasury Spokesman, Vince Cable MP, has already offered criticism; in his view (published here):

Chapter 11 allows people who have mismanaged their companies to continue to run them free from their debt and pensions obligations. Chapter 11 not only rewards failure, but as the debacle of the US airline industry showed, it distorts the market and can be used as a cynical ploy for executives to weasel their way out of paying the pensions owed to their employees"

These comments do, of course, assume a great deal about the eventual form of any proposals developed by the Conservatives. The Financial Times newspaper reports that the Conservative Party's advisors

...have focused on three areas: an "automatic stay of enforcement" of debt by creditors, granted for a renewable period of a few months, while management stays and tries to negotiate a restructuring; priority funding for distressed companies, to whom lenders could give money in exchange for "super priority" over other unsecured creditors; and binding measures agreed by court and a majority of creditors to stop "unscrupulous" creditors from vetoing desirable restructurings".

UK: Government reviews - raising equity and rights issues

The Government has today announced the formation of a working party to review the efficiency of the UK's capital raising process. The party will be chaired by the FSA chief executive Hector Sants and Economic Secretary to HM Treasury Kitty Ussher and will be considering whether changes are need to UK company law, market practices or regulatory requirements in order to make the raising of equity capital more efficient and orderly. The relationship between this new working party and the recently formed Rights Issue Review Group is not entirely clear, although both groups are chaired by Sants and Ussher. 

We have been here before (albeit under different market conditions). In 2005, Paul Myners CBE produced a report for the Government in which he considered the impact of pre-emption rights on companies' ability to raise new capital and proposed changes to the current regime.  It is not clear whether Myners' proposals were seriously considered by the Government.  Mr. Myners has, however, commented on the current debate in a recent article in the UK's Daily Telegraph newspaper - see here - which begins: 

The principle of pre-emption has been a cornerstone of capital raising under UK company law for nearly 200 years. Shareholders need to know that they are protected from any unwelcome dilution in value or control of their investments. But public companies also need to be able to raise new equity cheaply and efficiently when it is required. Are the two now in conflict?

The UK's concept of pre-emption is one of the things which differentiates the UK equity market from many other jurisdictions, including the US. It is a source of strength, not weakness. But the outdated, complex, and lengthy processes of rights issues are seeing this approach to capital raising placed under attack, particularly from US investment banks".

For further information see:

HM Treasury press release | Paul Myners' article | Paul Myners' 2005 report |

UK: the FSA's annual report 2009/10

The Financial Services Authority has published its 2009/10 annual report: see here (pdf). Whether this will be the last report from the FSA as it is currently organised should become clear (or clearer) this month. The emergency budget on June 22 provides a good opportunity for plans to be published but the Financial Times newspaper suggests (here) that proposals may be published next week.

Meanwhile, the report provides an overview of the FSA's actions in the past year. There is a section titled "Corporate governance and Significant Influence Functions" which states:

As part of our supervisory enhancement programme,we now place much greater emphasis on the role of senior management at firms ... in 2009/10 we completed 377 cases involving a significant influence function (SIF) interview where 27 were withdrawn by the firms concerned ...

On governance more widely, in November 2009 Sir David Walker completed his Treasury-commissioned review of corporate governance in banks and other financial industry entities; our proposals in the January [Consultation Paper] cover the FSA-specific recommendations in the review. Sir David’s recommendations address many current governance concerns and, as we have said publicly, we intend to play our part in supporting their delivery alongside the Financial Reporting Council (FRC) and work in relation to the Corporate Governance Code (formerly the Combined Code)".

UK: Tripartite authorities publish "financial stability and depositor protection" consultation paper

The Tripartite authorities - the Bank of England, Financial Services Authority and HM Treasury - have today published a consultation paper titled "Financial Stability and Depositor Protection". This consultation paper builds on the Authorities' earlier consultation and the responses thereto. It also outlines the Government's proposals, including:

Providing the Bank of England with a statutory responsibility for contributing to the maintenance of financial stability.

Improving the policy instruments available to the Bank of England in support of financial stability.

Legislating for the creation of a Financial Stability Committee to support the Governor and Bank of England, drawing upon external expertise.

Giving the Court of the Bank of England a formal role in overseeing the Bank of England’s performance on financial stability.

Legislating to facilitate the FSA obtaining and sharing information that the Bank of England and the Treasury require for purposes related to financial stability.

Providing the Bank of England with statutory immunity from liabilities in damages arising from acts or omissions in carrying out its responsibilities in relation to financial stability and other central bank functions.

Legislating to formalise the Bank of England’s role in the oversight of payment systems to ensure the robustness of payment systems which, if a disruption in the operation of the system were to occur, would be likely to lead to systemic and system-wide consequences.

Legislating to introduce a 'special resolution regime', comprising a set of new, and existing, tools to permit the Authorities to take control when a bank is judged to be failing, and all other options have been deemed insufficient.

UK: cooperative and credit union reform

In June 2007 the Government published  a consultation paper titled "Review of the GB cooperative and credit union legislation". A summary of the responses and the Government's proposals were published in December 2007. On June 5 of this year, the Government indicated in a parliamentary written answer that its proposals would be implemented "subject to parliamentary time". A further update has been provided today by Kitty Ussher - the Economic Secretary to HM Treasury - in a speech at the launch of the All Party Parliamentary Group on Credit Unions. The Government plans to introduce a Legislative Reform Order in order to make the following changes (quoting directly from the relevant press release):

Credit Unions:

• liberalising membership criteria and radically changing the "common bond", so that credit unions can provide their services to a wider range of people
  
• making it possible for groups, rather than just individuals, to become members
  
• allowing credit unions to pay interest on members' deposits.
  
• removing the statutory limit on non-qualifying members.
  
• allowing credit unions to charge the market rate for services such as chequebooks and money transfers.

Cooperatives:

• Removing the £20,000 limit on risk share capital which is transferable, but not withdrawable

Cooperatives and Credit Unions:

• Giving societies the flexibility to choose their own accounting year-ends
  
• Abolishing the requirement to have interim accounts audited.
  
• Lowering the minimum age for being an officer of a society to 16
  
• Bringing the fee for a copy of the society's rules up to date
  
• Making it easier for members to dissolve a society, subject to safeguards.

For further information see:

HM Treasury press release | HM Treasury consultation | Ussher's speech | Co-operatives UK | Association of British Credit Unions | 

UK: the Bank of England and banking regulation

The Chancellor, Alistair Darling, has written to the Treasury Select Committee explaining his proposals for banking regulation reform and the governance of the Bank of England. In his letter, the Chancellor explains that financial stability will become a statutory objective of the Bank of England. The Bank's role in this regard will be overseen by a new Committee of the Bank's Court of Directors. Changes to the Court are also proposed: its size will be limited to a maximum of 12 members, the majority of whom will be non-executive.

UK: the super equivalence of the market abuse rules

In February this year, HM Treasury launched a consultation concerning the definition of market abuse within the Financial Services and Markets Act (2000). The FSMA definition is wider than that found in the European Market Abuse Directive (2003/6/EC) (it includes, for example, behaviour based on a wider set of information than the Directive).  For this reason HM Treasury sought views on the desirability of this position of "super equivalence".  HM Treasury's response to the consultation has now been published; to quote directly from the response document (para. 1.2):

Having an effective set of tools to tackle market abuse is crucial. This is a shared objective at the EU level and we are therefore keen that the EU review of the Market Abuse Directive should ultimately deliver an outcome that we consider fully satisfactory for combating market abuse. Pending this work we have decided to retain the areas in which we are superequivalent to the EU’s Market Abuse Directive until December 2009 to enable a wider consideration of their benefits for addressing identified issues with the EU regime and to minimise transition costs for industry".

For further information about the European Market Abuse Directive, see here and for discussion see Siems, M."The EU Market Abuse Directive: A Case-Based Analysis", 2007, available on SSRN here.

Postscript (11 June 2008): The Financial Services and Markets Act 2000 (Market Abuse) Regulations 2008, which will extend the super equivalent provisions until 31 December 2009, have been published and come into force on 30 June 2008. 

UK: FSA report to HM Treasury on the implementation of the recommendations of the Rights Issue Review Group

The Financial Services Authority has published its report to HM Treasury on the implementation of the recommendations of the Rights Issue Review Group: see here (pdf). The report notes:

The RIRG report’s two key recommendations were to shorten the minimum rights issue subscription period from three to roughly two weeks and to increase the allotment ceiling from one-third to two-thirds. The implementation of these recommendations has created a significantly better environment for rights issues from that when the RIRG report was published.

The RIRG report made a number of other recommendations relating to the duration of rights issues and to underwriting and short selling. These are also addressed in this paper as are the three RIRG recommendations concerning conditional rights issues, compensatory open offers and accelerated pre-emptive issues. The latter three topics have been the subject of a series of meetings with market participants in 2009. We originally thought they would have been the basis of a consultative paper, either a discussion paper or a consultation paper, depending on our findings. However, we have now concluded that a consultative paper is not needed ..."

UK: building society capital and related issues - consultation paper

HM Treasury yesterday published a consultation paper seeking responses to some very broad questions concerning capital raising by building societies and related governance issues: see here (pdf).

The paper contains many suggestions including providing Core Tier 1 capital instrument holders with the right to nominate a board member, with the society's members retaining the right to remove such board members at the annual general meeting.

UK: the Financial Services Bill

In today's Queen's Speech - containing the Government's legislative programme for the months that remain before a general election must be called - was mention of the Government's heavily trailed proposals for the financial sector. A Financial Services Bill is proposed, the main elements of which include (to quote from a short overview of the Bill prepared by the Government):

• Establishing a new statutory Council for Financial Stability (‘the Council’), to replace the Standing Committee, chaired by the Chancellor and comprising the Treasury, Bank of England and the Financial Services Authority.
• Strengthening the Financial Services Authority, including through providing explicit objectives, formalising its international work, and expanding the remit of the Financial Services Compensation Scheme.
• Taking action, nationally and internationally, on remuneration.
• Tougher requirements on systemically important financial firms to set up recovery and resolution plans (ie ‘living wills’), that will make banks safer and easier to wind down in the event of a future crisis.
• Enabling the roll-out of a national money guidance service, to be delivered by a new Consumer Financial Education Body.
• The creation of better routes for consumer redress, including enabling a representative to bring an action through the courts on behalf of a group of consumers, and streamlining the FSA’s powers to order a review of past business and secure compensation if there have been legal or regulatory breaches.
• Banning unsolicited credit card cheques, to prevent financial institutions from encouraging customers to borrow more than they can afford.
  

The devil will, of course, be in the detail and for this we will have to wait. The Guardian newspaper reports that the Bill will be published in full tomorrow. This raises the question how the Government will implement the Walker Review final recommendations, which will be published next week. In a speech delivered earlier this month, the Chancellor said that the Government would "legislate to make further reforms [to the financial regulation framework], including the implementation of Sir David Walker’s report on corporate governance in the financial sector".

UK: Myners Principles - Further review

In March 2000, Paul Myners was commissioned by HM Treasury to conduct a review of institutional investment in the UK. Myners' report "Institutional Investment in the United Kingdom: A Review" was published in 2001 and it contained several principles for institutional investment decision making. These were last reviewed in 2004. HM Treasury has begun a further consultation and its consultation paper states:

"This consultation provides an opportunity to update the Myners principles and develop a comprehensive suite of authoritative best practice tools giving further assistance for pension fund trustees to improve investment decision-making and governance".

Update (16 November 2008): the Government's response to the consultation has been published here. 

UK: corporation tax, small companies' rate - proposed reform to the associated companies' test

HM Treasury and HMRC have published a consultation paper setting out a proposed new test for determining whether companies are associated for the purposes of the small companies' rate of corporation tax. Where a company is deemed to be associated with other companies the corporation tax thresholds are reduced. The purpose of reform (to quote from the consultation paper (at para. 3.3):

... is to provide a test that retains those aspects of the current test that work well within a new test that attributes rights held between linked persons only in circumstances where actual links between the companies make it appropriate to do so. Put broadly, the new test seeks to ensure that companies cannot be associated by an attribution of rights by mere ‘accident of circumstance’".