COMPLIANCEMATTERS | SEPTEMBER 2013 | 2
CM: What led to the setting-up of a separate department to
supervise wealth management?
CA: The wealth manager’s always been within our remit. What we
haven’t done historically is essentially separate them out from oth-
er broad IFA companies at one end or the banks at the other end.
The idea is to have a new department to cover the broad wealth
management private banking industry, partly because...there was a
desire to be recognised in essence as a sector in their own right and
partly, from our point of view, so we can better focus on that sector.
I think the key point from our point of view was that we recognised
that wealth management private banking is a large sector. It’s im-
portant in its own right. It does contribute quite significantly to the
UK economy. We want to properly reflect that in how we supervise.
CM: Was that your idea from start to finish?
CA: Essentially, yes. I think a key point to make is that it’s quite a dis-
parate sector [and they] find it quite difficult to define themselves.
So we’ve been quite careful to say that it’s a broad sector [and] we
don’t define it precisely.
CM: What would you say is the biggest issue in front of wealth
management in the UK at the moment and why?
CA: The biggest is still adjusting to RDR because it does represent
a very significant change to the whole advisory market of which
wealth management is part. We think it’s time for firms to rethink
their business models and we’re certainly in the early stages of that.
CM: What’s your general sense so far about how well the industry
is coping with RDR?
CA: Generally, we think, well. I think from the viewpoint of looking
at the key aims of RDR in one particular issue, professionalism, we
are pleased that a very high percentage of advisers were ready in
terms of...the must-haves. We’ve been actually pretty pleased with
how firms have coped with it so far.
CA: Well, there’s a series of areas we’ll continue to look at. Part of
it is actually how firms are adjusting their business models, which
we’ll keep looking at. We will be looking at bit more [at] the growth
of non-advice propositions and particularly the extent to which it
is actually clear to buyers of these services that it is not advice. So
we think over time there will be various new forms of distribution
coming to the market. As a regulator we’re open to that – we like
innovation. We’re still looking broadly at the issue of growth for
inducements and the extent to which both the spirit and the letter
is being observed in relation to...the RDR.
CM: Is it tough enforcing the spirit, as opposed to the letter?
CA: Errm, the message I’m trying to get across to firms generally –
not just in this sector – is...that...the way we want to regulate and
supervise in the future is not just about adherence to certain rules.
It’s about doing the right thing for customers. So where we see
practices which we think are at the margins of acceptability...we’ve
really been asking firms, “are you really doing the right thing?” And
that’s not just a question of enforcing it, it’s a question of the right
level of engagement.
CM: Like social pressure? Like the ‘raised eyebrow,’ as it used to
CA: Um...essentially. I wouldn’t quite use that phrase. But cer-
tainly we find that if you look at how the FCA wants to regulate,
we want to use the soft power of supervision as much as the hard
power of enforcement. A key point is that we’re about persuading,
encouraging people to do the right thing.
CM: How do you anticipate the knock-on effects of legislation
that might not be desirable?
CA: Our approach to that – whether it’s RDR or anything else – is
that we spend a lot of time thinking through the direct and indi-
rect consequences. We are bound to do what we call cost-benefit
analysis and consider everything. It’s hard for the regulator to
predict everything that might happen. So, for example, we keep
hearing from the market that there is now less advice being given
post-RDR than there was before. That’s possibly true because the
major banks have essentially largely withdrawn from mass-market
Our view about that is that that is a decision that they make on the
basis of their own economic models but it’s not...necessarily a bad
thing. From our point of view, what’s important is that high-quality
good advice is given rather than poor advice. We will be doing what
Recently CM interviewed Clive Adamson, the genial head of the British FCA’s supervision department and
the creator of its new department for monitoring wealth management firms. He told us how well firms were
responding to the retail distribution review (RDR), explained his reasons for forming the new department, and
ranged over a wealth of compliance topics from technology and record-keeping to the eternal conflict (which
he largely dismissed as non-existent) between the relationship manager’s compliance role and his
naked need to make a profit. His fascinating take on the revelations of the Parliamentary Banking
Standards Commission – he implied that the old Financial Services Authority mishandled the 2008 banking
crisis because it lacked the right legislation to discipline CEOs – are to be found at the end.
“Wealth management private
banking sector is a large sector.
It’s important in its own right”
COMPLIANCEMATTERS | SEPTEMBER 2013 | 3
we call a post-implementation review next year, just to more for-
mally assess what’s happening with the RDR, what changes have
occurred as a result of that.
CM: Early next year, do you think?
CA: I forget the dates.
CM: Besides RDR, what would you say the other things are?
CA: For the wealth management industry...by just setting up a new
department focusing on that area, they’ll get more attention from
us. That will be done through both what we call individual firm-lev-
el assessments, where we will be looking at firms by themselves...
managing their risks but also we’ll also be doing more thematic
cross-firm work. But some of the areas we think are highest priority
for us [are] suitability [and] the quality of record-keeping. Beyond
that, we are still interested in the quantity of client asset controls,
to the extent that firms hold client assets, and as you go up the
size spectrum of the customer, we’re increasingly interested in
money-laundering controls and sources of wealth.
CM: As you go up the size of the asset-management firm as well?
CM: How do you make sure that the people who are running
these products [i.e. the wealth managers] are competent at what
CA: We do look pretty hard. Certainly [we focus on] the wealth
managers and the quality of their oversight over their own
business. That’s very important.
CM: It’s a great conflict isn’t it? The conflict between relationship
managers being at the front line in compliance, having to gather
all the detail and even having to do some low-level assessment
themselves [when they are also] the very people who have to
CA: I don’t see that as a conflict really. The well-managed firms
ensure their front-line people, whether private bankers or wealth
managers, operate to the highest standard of integrity. So I don’t
think we would see that as a conflict. It’s sometimes hard to make
that happen at a firm, but I’m not sure we would see that as a
CM: One issue that has really affected wealth management is
technology – mobile devices, cloud computing, etc. That can
sometimes have an impact on regulation too. Do you have any
thoughts on that?
CA: It’s a really good question. It’s something we [look at] broadly,
not just for wealth management but retail banking as well. [We
look at] the impact of new forms of technology on distribution and
about how customers interact with firms. We’re not saying a huge
amount yet because we’ve still got a lot of thinking work to do on
it but it’s been an increasing topic for us. And you can start to see
it in terms of the new entrants into the payments business in re-
tail banking, who come more from a technology background rather
than a traditional banking background. We can see that evolving
over time into both markets. There are new forms of distribution,
particularly around knowledge-based solutions – those [are] things
we’re quite interested in looking at.
CM: What global trend, would you say, is the most significant in
terms of wealth management and regulation?
CA: I think [in] the major jurisdictions of the wealth market - the
US, London, Switzerland and Singapore, there’s one obvious trend
which is that it’s a growing market, a growing business.
CM: And the people with the wealth at the top are getting wealthi-
er and wealthier disproportionately to everybody else as well.
CA: Yes. I think there’s a growing sophistication, particularly as we
go up the wealth curve. There is a greater use of different sorts of
products, particularly some products that were traditionally sold to
institutions by some investment banks that are now going into the
wealth market. [There is also] much greater focus globally on AML.
CM: Have you ever thought about cancelling [ultra-high-net-
worth individuals] out of the conduct-of-business rulebooks alto-
gether, and saying “when you get past such a level, when you’re
super-rich, we cancel you out”?
CA: It’s a good question. That’s been raised with us, as a philosophi-
cal point. Why are we concerned about wealthier people? And our
answer is that we think that there are basic standards that should
be applied to everybody.
CM: On the subject of whistle-blowers, do you look at how a
person who has a worry can express it without finding himself
out on the street? There are issues about client confidentiality
and good governance, so it’s not a straightforward subject, is it?
CA: Currently not terribly, I’d say. But we do want to encourage
whistle-blowing. At the parliamentary banking commission there
was reference to the need to protect whistle-blowers more.
CM: The FSA has gone after the IFA sector for the Arch cru
problems and it’s driven some IFAs out of business but at the
same time it’s not had a Pensions Review-type exercise to clear
up the vastly more important PPI problem. How [does] the FCA
justify the disparity between those two things?
CA: I don’t think we see it as a disparity. I think in Arch cru we got a
pot of money out of people we felt could contribute on a voluntary
basis. It contributed £54 million. That is different from the action
that we took in respect of the advisers and distributors [and we
allowed investors to get redress from them in] the Arch cru sec-
tion 404 scheme. Through a combination of that and the Arch cru
payment scheme, we felt that that was the most effective way to
CM: The Parliamentary Commission for Banking Standards criticised
the FSA for (a) allowing bank senior managers to hide behind an
‘accountability firewall’ by giving responsibility for major jobs to
people without ‘approved person’ status and for (b) accepting the
‘Murder on the Orient Express’ defence (‘everybody was doing it’) as
grounds for not taking enforcement action against senior
management. What is the FCA going to do to avoid that charge?
CA: It’s for the Treasury to replace [or] make any changes in the legis-
lation that come from the parliamentary commission, so we’re in the
process of responding to the Treasury and we’ll see what the Treasury
wants to do in terms of legislation. We are very keen to emphasise
the importance of senior management responsibility. It’s complex
how one does that, so we’re working out the practical bits of that.
COMPLIANCEMATTERS | SEPTEMBER 2013 | 4
As the industry adapts to the end of trail commission and the RDR
puts a further squeeze on profit margins, the prospects for wealth
managers in the sector look uncertain. Since the launch of the RDR in
December 2012, a firm must disclose its charging structure in writing
and, where possible, in cash terms.
The whole exercise has driven up both compliance and non-com-
pliance costs. It has also forced customers to re-evaluate the uses
of seeking advice because this is the first time that they have fully
appreciated the costs they are paying, according to Peter Moores,
chief executive of Raymond James Investment Services. His firm
seems to be one of the beneficiaries of the RDR, having prepared
for the changes in advance. He told WealthBriefing, the sister pub-
lication of Compliance Matters: “Every year our market share is in-
creasing and that is in part due to the way we price our services. As
we rebated trail from fund groups we never developed a depen-
dency on it, which meant it did not impact our business as we al-
ways agreed with our customers how and when we charged them.”
Assets also increased for Architas, AXA Wealth’s specialist multi-
manager business, rising 17 per cent from £10.8 billion to £12.6
billion in the six months to June. AXA said that Architas introduced
clean share classes in preparation for the RDR, with 78 per cent of
new business now going into these funds. Additionally, the popular-
ity of the risk-rated funds has led to them being added to a num-
ber of leading wrap platforms. This growth helped increase AXA
Wealth’s overall assets by 21 per cent from £20.0 billion to £24.3
billion over the same period.
HIGHER COSTS BUT PROFITS ELSEWHERE
Some wealth management firms are doing well despite the RDR.
London-listed wealth and investment management firm Brooks
Macdonald reported 45 per cent growth in its funds under manage-
ment for the year to June. It said that ahead of the RDR it had fixed
its managed portfolio service fees at the same level across new and
existing funds. As a result of the RDR, it reported that compliance
and regulatory costs had “increased significantly”, yet this was far
from ruinous for the group as a whole.
MORE INVESTORS TO COME?
There may be other good news. In July AXA Wealth’s study, con-
ducted by YouGov, interviewed 2,070 consumers and revealed that
19 per cent of them had never sought financial advice but intended
to do so for the first time to ensure that they had enough of an in-
come for their retirement. It found that 40 per cent of British adults
were not confident about their ability to manage their own finances
for that purpose. It also revealed that 16 per cent of consumers had
already sought professional advice in the past and planned to do so
again, with 19 per cent who had never sought financial advice say-
ing they would do so in future.
a wave of consolidation amongst firms. A report released by Fidelity
in June found that almost two-thirds of British advisers thought that
the RDR had led to an increase in outsourcing their investment port-
folio management, with the majority expecting to increase their use
of managed fund solutions and model portfolios as a result. Accord-
ing to figures from the Association of Professional Financial Advisers,
ahead of the RDR the number of financial advisers fell from 26,339 in
December 2012 to 20,453 as of 1 January 2013.
Research conducted by RS Consulting, meanwhile, has found that
six months after the introduction of the new rules, 97 per cent of
advisers have the right level of qualification, with the final three per
cent studying within the time-scales permitted by the rules. This
contrasts with 2010, when less than half of all advisers were quali-
fied to today’s standard.
The field is full of conflicting information, however. The RDR has
been widely criticised for creating an “advice gap”. This gap is said
to consist of people who will cease to use advisers because they are
unable or unwilling to pay the higher fees for regulated advice. A re-
port published in January by Cass Consulting and Fidelity Worldwide
Investment suggests that as many as 43 million Britons, who have an
investible wealth of £440 billion, could fall into this gap. Research by
Deloitte in December 2012 estimated that 5½ million people could
stop using financial advisers as a result of the advice gap. Deloitte
the mass market (2.4 million), mass affluent (2½ million) and afflu-
many consumers out of receiving independent financial advice,
turning them into “orphan” clients.
Along with this phenomenon comes an “advisor gap.” Eddy Reynolds
of Standard Life told WealthBriefing: “We believe there is also an ad-
viser gap to service higher-net-worths, particularly those among the
baby-boomer generation approaching retirement. In other words,
more people than ever before will be in need of financial advice but
there will not be enough advisers available to help them.” Set against
this, the FCA has just brought out figures that suggest that the num-
ber of advisers in the industry has actually gone up by five per cent
since December. Strange days indeed.
The Retail Distribution Review was brought in to give customers greater protection and confidence in the
advice they receive, following scandals such as the mis-selling of payment protection insurance. In the
words of Nick Elphick, the managing director of specialist products at AXA Wealth, “One of the key
drivers behind the RDR was to establish financial advice as a profession akin to solicitors or doctors and
as a credible financial support network.”
COMPLIANCEMATTERS | SEPTEMBER 2013 | 5
The JMLSG starts by enumerating the money-laundering risks in
the sector. All relationship managers ought to be aware of them,
even though their compliance departments typically have the job
of codifying them in company policy. They are as follows:
• The combination of wealth and power in the same people.
Those two things go hand-in-hand in many countries, which is
why the Financial Action Task Force reckons “politically exposed
persons” to be risky customers at all times. If they have recently
wielded political power, they may have used it to accumulate
the wealth that the RM is “onboarding.”
• Many accounts with other wealth management firms. If the
customer does not tell the RM about these, it may be difficult
for the financial firm to build up an accurate picture of his
worldwide dealings, as required by the Money Laundering
Regulations 2007. Regulation 5(c) obliges the firm (in the shape
of the RM, usually) to obtain information on the purpose and
intended nature of the business relationship. Regulation 8(2)
(a) calls for “ongoing monitoring of a business relationship.”
This entails scrutiny of transactions undertaken throughout
the course of the individual’s relationship with the bank
(including, where necessary, his source of funds which the
bank must in any case establish at the beginning of its dealings
with him) to ensure that the transactions are consistent with the
RM’s knowledge of the customer, his business and risk profile.
• The tendency of customers to want their services to be conducted
discreetly and in confidence. This seems to be a slight misunder-
standing of the word “confidentiality,” which in general global
governmental parlance merely refers to information about an
individual being shielded from the gaze of other individuals and
not from the government, whose informant the RM is on this
subject. Only the words “privacy” or “secrecy” denote account
information being shielded from the gaze of the government as
well as from that of fellow-citizens.
• The existence of the offshore world. The word that the JMLSG
uses here is “concealment.” To it, there is no difference
between the concealment of something and “the misuse
of services such as offshore trusts and...shell companies.”
• Next to this the group lists countries with statutory banking
secrecy that also have wealth management markets. No
examples are offered but the FATF’s list of “high-risk and
non-co-operative jurisdictions” has a few states on it that
RMs might want to consider. These fall into three camps.
Among the “jurisdictions with strategic deficiencies that have
not made sufficient progress in addressing the deficiencies”
are: Ecuador; Indonesia; Turkey; Vietnam; and Yemen. In the
second camp, that of “improving,” lie Argentina and Kyrgyzstan.
In the third class, that of sanctions, Iran is in a class of its own.
• Countries with statutory banking secrecy.
• Countries where corruption is known, or perceived, to be a
common source of wealth.
• The frequent insistence of HNWs on transmission of funds in
high values rapidly between accounts all over the world.
• The use, by persons unspecified in the notes but presumably
private banks on their own initiative, of concentration
accounts – multi-client pooled/omnibus-type accounts.
• Private banks’ tendency to extend credit to clients while using
potentially “dodgy” assets as collateral without researching
• HNWs’ tendency to conduct commercial activity through
personal accounts to deceive the bank or the RM himself.
• The common use in wealth management of collateralised loans
without disclosure of the identity of the guarantor, if there is one.
An appreciation of these risks will be of massive help to a private
bank’s compliance officer – or even an RM – in the formation of
legitimate suspicions that might lead to a suspicious transaction
report being sent off to the Serious Organised Crime Agency.
The RM faces a quandary: what is a suspicious transaction? In most
European Union countries for most of the time they have been
obeying EU anti-money-laundering statutes, it was synonymous
with an unusual transaction. The JMLSG still makes the odd pro-
nouncement in which it conflates the two, although it should not
because banks have long been required to take a risk-based ap-
proach to money-laundering problems. The MLRO always has the
last say about the sending of a report, but the JMLSG expects RMs
to be often the first source of suspicion because they operate on
the front line of money-laundering control.
This is evident in point 5.4, which says that “the role of the rela-
tionship manager is particularly important to the firm in manag-
ing and controlling the money-laundering or terrorist-financing
risk it faces.” In 5.5 it states that he or she must “at all times” be
aware of the dangers of “becoming too close to the client.” He or
she should guard against a “false sense of security,” presumably the
firm’s security from the threat of regulatory fines or worse. He/she
should also guard against “undue influence by others” (this is not
explained) and “conflicts of interest” (also unspecified but presum-
ably this refers to the bank’s impetus to make a profit by treating
the HNW as a customer when it should be thinking instead of treat-
ing him as a suspect).
The RM should also be worried about his/her personal safety (para
5.6). This is not an idle warning; criminal networks have been
known to gain favours from high-street banking staff by threaten-
ing them with beatings. Some years ago a French private bank re-
ported its findings about a gypsy network to the police. The head
MLRO told a conference that “the gypsies” in France could use their
contacts in the police to find out the whereabouts of anyone who
had moved to escape intimidation and as a result, the MLRO was
sent to New Caledonia in the Pacific to keep him from harm. Para
5.6, some might think rather naively, states that firms should have
suitable internal procedures to require staff including RMs to report
In the first of a regular series we explore the compliance side of the relationship manager’s job. RMs in certain
countries are being held to greater account than before for their compliance duties. Here CM dissects a list of
them as laid out in the wealth management chapter of the Joint Money Laundering Steering Group’s Guidelines.
“Confidentiality is information
about an individual being shielded
from the gaze of other individuals
and not from the government”
COMPLIANCEMATTERS | SEPTEMBER 2013 | 6
the fact that they have been menaced and a policy for reporting
such incidents to the police. RMs, it adds without giving a reason,
should never handle cash.
Although it is the RM’s job to sell services to the client, he/she is
also compelled to gather information on him/her. This, accord-
ing to point 5.9, means asking him at every turn for his reasons
for using financial institutions, businesses or addresses in differ-
ent jurisdictions. If the HNW uses these facilities across the private
bank’s group, it should consider the appointment of someone to
act as a leading RM. Wealth Matters would like to hear from any
readers who know this to be the way their businesses do things. If
such a structure exists, the leading RM’s job is to compile enough
information to know and understand the HNW’s business structure.
Private banks, as the JMLSG often points out, should gather infor-
mation at a far more granular level that normal retail banks would
for their customers as the risk is greater. RMs, according to point
5.13, should obtain information on the following:
• the origins of the client’s wealth;
• documents relating to the economic activity that gave rise to
the wealth “where possible and appropriate”;
• the nature and type of transactions;
• the client’s business and legitimate business structures;
• for corporate and trust structures, the chain of title, authority
or control, leading to the ultimate beneficial owner, settlor and
beneficiaries, “if relevant and known”;
• the reasons why the client is using complex structures,
if he/she is;
• the use the client makes of products and services; and
• the nature and level of business to be expected over the
This last is likely to be tricky as, as one MLRO once put it, “there are
no usual transactions with high-net-worth customers.”
Point 5.15 calls on relationship managers to do more detective
work: “in wealth management, relationship managers should
generally visit their clients at their place of business in order to
substantiate [its] type and volume.” They should keep a record of:
• the date and time of the visit;
• the address or addresses visited;
• a summary of both the discussions and assessments;
• any commitments or agreements;
• any changes in the customer’s profile;
• his/her expectations for product usage, volumes and turnover;
• any international dimension to the client’s activities and the risk
status of the jurisdictions involved; and
• updating the client profile “where appropriate.”
There is one job that the RM does not have to do: all new wealth
management customers should be subject to “independent review
and appropriate management approval and sign-off” (point 5.16).
The regulations leave it up to the private bank to decide who does
the necessary reputational searches to determine the level of risk
to be assigned to new customers. The RM, however, has the job of
obtaining information about anyone the MLRO asks to provide a
written reference about the customer. References should only be
trusted if they are addressed only to the firm and come from the
referee directly (5.17).
This higher level of information-gathering occurs when the HNW
in question is a “politically exposed person” (in which case, senior
management sign-off is always needed) or poses a high money-
laundering risk in some other way. The JMLSG leaves the details up
to the firm. Transaction-monitoring also has to take place, as the
only true way of “knowing one’s customer” is through his transac-
tions. This, however, is not earmarked as a job for the relationship
manager and is generally done centrally with the aid of software.
Although the JMLSG notes expect RMs to gather plenty of informa-
tion and sit on the “front line” of their firms’ anti-money-laundering ef-
forts, their compliance tasks are essentially menial ones. If something
is amiss they might be expected to be the first to form suspicions, but
the suspicious transaction reporting process is generally supervised
centrally by the compliance department. The JMLSG certainly does not
expect the RM to “mastermind” the compliance effort.
The British Columbia Securities Com-
mission in western Canada has issued a
so-called “temporary order and notice
of hearing” in which it alleges that Bank
Gutenberg, a Swiss private bank, traded
and advised in securities on behalf of at
least two local high-net-worth customers
without a licence. The regulator strongly
suspects that there are other residents
of the province who trade through Bank
Gutenberg. It alleges, however, that the
bank has refused to answer direct enqui-
ries, claiming that Swiss secrecy laws do
not permit it to provide the information
directly. Indeed, it also claims that the
Swiss regulator – presumably FINMA al-
though it does not name it – said the same
when asked. It also alleges that the bank
argued that Swiss criminal laws prohibited
it from complying with orders or requests
from foreign authorities. The regulator is
after the names, account information and
account statements of all British Colum-
bia residents who have beneficially held
accounts at the bank.
The oddly-named document is a product
of s161(1) of the province’s Securities Act
1996, which gives the commission sweep-
ing powers to end someone’s financial
career, stop a firm from trading, force it
to disseminate information to the public,
force it to make recompense for breaking
regulations and issue reprimands, as long
as it has held a hearing and has decided
that it is in the public interest.
The “notice of hearing” stems from s161(2)
of the Act, which states that if the com-
mission considers that the length of time
required to hold such a hearing could be
“prejudicial to the public interest” it can is-
sue a temporary order, without giving the
miscreant an opportunity to be heard, to
COMPLIANCEMATTERS | SEPTEMBER 2013 | 7
take effect for a 15-day period. Every en-
forcement order must be accompanied by
a notice of hearing (s161(5)).
After that, however, there must be a for-
mal hearing at which the target firm can
make its own representations. Section 162
states that the commission can impose a
maximum fine of $1 million for each con-
travention of the Act or of its rules. In rela-
tion to the hearing itself, every cost imag-
inable may be awarded to the recalcitrant
firm under s174.
The allegations, which are not yet proven,
go on to say that Bank Gutenberg offered
its services through its website without
posting a prominent disclaimer that ex-
pressly identified the foreign jurisdictions
in which it was allowed to deal shares.
Bank Gutenberg, formerly CAT Brokerage
AG, has never been registered in any ca-
pacity under the Act. It provides offshore
securities brokerage services on its web-
site. The commission believes that it is
facilitating “suspicious trading” in British
Columbia because it employs two locals
with regulatory enforcement histories on
its night desk to trade on the TSX Venture
Exchange, which has its headquarters in
Calgary but which also has an office in
The “onshore-offshore” jurisdiction of
New Zealand’s Anti-Money-Laundering
and Countering the Financing of Terrorism
Act 2009 (which the Ministry of Justice ad-
ministers) has recently started to apply to
trust and company service providers.
The Companies Office (a service of the
Ministry of Business, Innovation and Em-
ployment) has formed a specialist corpo-
rate risk-profiling team to monitor all new
company formations with an eye on finan-
cial abuse. The Companies and Limited
Partnerships Amendment Bill is intended
to bring in limited changes to the registra-
tion requirements of companies and give
the Registrar of Companies new pow-
ers. It was reported back from the New
Zealand Parliament’s Commerce Select
Committee on 11 December 2012 and is
currently awaiting its second reading.
Section 22 calls for “enhanced customer
due diligence” when a reporting entity
(such as a private bank) takes on a customer
that is “a trust or another vehicle for holding
personal assets” or receives a request for an
occasional transaction from such a custom-
er. In relation to a customer or his/its proxy
or beneficial owner, s23 says that the bank
must find out the source of the customer’s
wealth or [interestingly, not “and”, as in
other jurisdictions such as the UK] the funds
that he/it presents to the bank.
Standard “due diligence” information con-
sists, among other things, of name, date of
birth, address, company registration num-
ber, and relationship to the customer if not
the customer him/her/itself. Section 24(c)
is more lax than its British counterpart: it
calls for the verification of identity “as soon
as is practicable once the business relation-
ship has been established.”
In the UK, the latest the bank can leave
verification is “during” the establishment
of the relationship and then only under
exceptional circumstances. This conceiv-
ably might allow transactions to take place
before verification, in which case a one-
transaction laundry might be possible.
New Zealand’s judiciary, however, might
close up this apparent loophole as soon as
it applies its mind to the section.
In July last year, New Zealand’s Ministry
of Business, Innovation and Employment
wrote that “heightened perceptions of
weaknesses in New Zealand’s regulatory
regime” were having “negative conse-
quences for New Zealand’s economy and
society, including difficulties for New Zea-
land companies doing business overseas
(in the form of increased costs or missed
business opportunities) if New Zealand is
down-graded internationally.” New Zea-
land’s removal from the European Union
“white list” is an example of this issue.
This is the infamous list that the European
Commission persuaded HM Treasury in the
UK and other national finance ministries in
the EU to issue in 2008 with instructions to
financial institutions to conduct “simplified
due diligence” on businesses located in the
The stated reason was that such countries
controlled the threat of financial crime in
a way that was “equivalent” to that of the
EU. These included the less-than-spotless
jurisdictions of Russia, Aruba, Curaçao
and Mexico. New Zealand’s removal from
the list is a mystery as, unlike the others,
it is hardly a major hotbed of money-
laundering. The United Nations Office on
Drugs and Crime estimates that $2 trillion
(NZ$2.56 trillion) is laundered annually,
whereas the July paper’s estimate for New
Zealand was NZ$1.5 billion.
The government also feared that without
more stringent rules in place, New Zealand
would attract more dirty money through its
cheap and speedy incorporation regime.
This regime was a cut above others, accord-
ing to the ministry’s 2012 paper, because it
had for some years occupied first place on
the World Bank’s “starting a business” rank-
ing and up until August last year it did not
impose a continuing annual licensing fee.
The Act, which was prompted by a sting-
ing report from the Financial Action
Task Force after a visit in 2008, has intro-
duced a “risk-based approach” to money-
laundering regulation for the first time.
There will be a follow-up visit from the
inspectors in October.
US authorities have started a bribery in-
vestigation into whether JP Morgan hired
the children of powerful Chinese officials
to help the bank win business in the Asian
nation, the New York Times has reported,
citing a confidential US government docu-
ment. In one instance, the bank allegedly
hired the son of a former Chinese bank-
ing regulator who is now the chairman
of the China Everbright Group, a state-
controlled financial conglomerate. After
the chairman’s son came on board, the US
banking giant secured several coveted as-
signments from the Chinese conglomer-
ate, including an advisory job for one of
The director and deputy director of the
Vatican bank have both resigned in the
wake of a Vatican accountant’s arrest on
suspicion of corruption and fraud. Paolo
Cipriani and Massimo Tulli left after the
arrest of Msgr Nunzio Scarano in connec-
tion with a plot to smuggle €20 million
(£17.1 million) into Italy from Switzer-
land. Ernst von Freyberg, the president of
COMPLIANCEMATTERS | SEPTEMBER 2013 | 8
the bank, is now acting director. Antonio
Montaresi has been appointed as acting
compliance and special projects.
A damaging 28-page magisterial docu-
ment which fell into the hands of the
press suggests that Scarano provided il-
legal and clandestine private banking ser-
vices for wealthy cronies and raises the
question of who else might be doing this.
There are separate money-laundering
charges against him as well.
The Financial Action Task Force’s “mutual
evaluation” of the Holy See last year, al-
though substantially a whitewash, has
forced the financial intelligence unit of
Vatican City, the world’s smallest nation,
to sign memoranda of understanding
with the FIUs of Belgium, Spain, Slove-
nia and the United States. A particularly
important one with Italy is now signed.
In 2011 the FIU received one suspicious
transaction report; in 2012 it received
six, a development that its Financial In-
formation Authority hailed as a glorious
Regulatory risk is the top priority for risk
managers at the major asset manage-
ment firms of Western Europe, who now
expect financial quangos to give them a
harder time than ever over the next three
years, according to an annual survey by
Ernst & Young. The firm of accountants in-
terviewed 54 heads of risk at a represen-
tative spread of investment management
firms in the UK, Ireland, France, Germany,
Holland, Switzerland and Italy. It found
that 76 per cent of respondents cited
regulatory risk as the top issue “keeping
them awake at night”, up from 67 per cent
in 2012. EY said that managers have seen
regulators pay more and more attention
to front-office “governance controls and
frameworks” as well as the protection of
investors from sharp practice and risks re-
lated to outsourcing. The survey showed
that 56 per cent of respondents were
concerned about managing the ex-
pectations of regulators in respect of
Looking ahead, managers expected the
burden of regulation to grow over the
next three years: 82 per cent expected in-
ter-jurisdictional complexities to increase;
and 80 per cent felt that regulatory scru-
tiny was about to become more intense;
and 76 per cent expected more overlap
from new regulatory directives.
Citigroup has been ordered to pay $10.75
million to a high-net-worth former cus-
tomer over his losses from investments
in Royal Bank of Scotland Group, the UK-
listed bank which has been partly owned
by the UK taxpayer since the 2008 financial
crash, media reports said. RBS reported a
profit for the second quarter of 2013.
The US Financial Industry Regulatory Au-
thority (FINRA) arbitration panel also or-
dered Edward Mulcahy, a former Citigroup
Leopoldo Fiorilla, according to a July 30 rul-
ing. Citigroup’s publicity machine told Re-
which was not supported by the facts.”
Fiorilla originally went to court in 2010,
seeking $19.5 million in damages, ac-
cording to the ruling. Citigroup, he al-
leged, was grossly negligent and failed to
supervise its broker.
Brown Advisory has rolled out a new in-
vestment management and tax reporting
service aimed at US ex-patriates living in
the UK, as the industry grapples with reg-
ulatory changes and the impending onset
of the Foreign Account Tax Compliance
Act. Around 126,000 Americans currently
live in the UK, according to the Office of
National Statistics, but many firms are
turning clients with connections to the US
away. A recent survey by the UK’s deVere
Group found that millions of US Ameri-
cans living in the UK had given up their
passports because of a “financial advice
black hole” stemming from FATCA.
Meanwhile, London & Capital, the wealth
management firm which goes out of its
way to cater for ex-patriate Americans,
has created a service for US-resident non-
domiciled persons and Green Card hold-
ers to obtain a US domestic bank account
without them having to hold a US pri-
mary address. Until the new service came
along, London & Capital said that onerous
reporting requirements made it impos-
sible for such persons to obtain a domes-
tic US bank account. The new facility has
been created with Royal Bank of Canada –
the latter being a bank registered with the
US Securities and Exchange Commission.
“Recent US legislation has been designed
to catch out US citizens who may not have
declared their investments overseas, and
with penalties sometimes in the region of
50 per cent of the balance of an investor’s
account, plus interest, penalties for non-
reporting occasionally exceed the under-
lying value of the account”, said the head
of L&C’s US office.
A Guernsey court has denied US regula-
tors who were pursuing money allegedly
linked to Ponzi fraudster Bernard Madoff
the right to interfere with moves to dis-
tribute surplus assets from hedge funds
incorporated in the British Virgin Islands
The Royal Court of Guernsey yesterday
confirmed that “non-parties” seeking to
be joined to current litigation had to sat-
isfy certain tests before being allowed to
join proceedings, according to a state-
ment issued by Carey Olsen, which acted
for the liquidators. The liquidators wanted
to repatriate assets held in accounts in
Guernsey to the BVI and Anguilla so that
the liquidation could go ahead.
“The ultimate aim is to distribute the
surplus assets of those entities forced
into liquidation to their respective credi-
tors and investors. The US Securities and
Exchange Commission and the US Com-
modity Futures Trading Commission were
seeking to cut across the hedge funds’
liquidations and have those same assets
repatriated to the US in an effort to pay
back creditors and investors in differ-
ent entities also involved in an allegedly
fraudulent scheme,” the law firm said.
COMPLIANCEMATTERS | SEPTEMBER 2013 | 9
As with the Financial Services Authority’s (now the Financial Conduct
Authority’s or FCA’s) guidance which governs financial incentives for
people who sell financial services to retail customers, ESMA puts the
protection of investors from sharp practice at the forefront of the
guidelines it has issued to firms on the subject of remunerating staff
who can affect the sales process. Unlike the FCA guidance, the ESMA
guidelines relate to both retail and professional clients.
Firms to which the ESMA MiFID guidelines relate are likely to be
required to take steps to comply fairly shortly. Assuming that
the FCA complies (which is likely), firms based in the United King-
dom will have to take their first steps towards compliance at some
time around November 2013, depending on whether the official
translations of the guidelines have been published by then.
THE EUROPEAN CONTEXT
The MiFID remuneration guidelines represent only one strand of
legislation from the European Union that deals with remuneration
issues and affects investment firms.
• The Capital Requirements Directive 3 (CRD 3), now enshrined in the
UK Remuneration Code, sets out specific rules for remuneration in
the context of prudential regulation. The later version of this
directive (known as CRD 4), finalised in June 2013, contains the
next generation of rules for remuneration, including the much-
discussed “bonus cap” (albeit that CRD 4 in principle covers a
smaller subset of investment firms than CRD 3 and the FCA has
indicated that although it intends such firms to remain subject to
remuneration regulation, the bonus cap will not apply).
• The Alternative Investment Fund Managers Directive (the AIFMD)
includes a similar set of provisions that address remuneration for
EU Alternative Investment Fund Managers, this time with specific
reference to the interests of investors.
• The fifth EU directive to govern undertakings for collective
investment in transferable securities or UCITS 5 has yet to
become EU law but is expected to contain detailed provisions
regarding the remuneration of UCITS managers.
The MiFID regime (perhaps showing its age as it pre-dates the fi-
nancial crisis and the general focus on remuneration issues in the
financial sector) contains no provisions that relate specifically to re-
muneration. ESMA’s MiFID guidelines for remuneration are therefore
issued under ESMA’s general powers, by reference to the conflicts-of-
interest and conduct-of-business rules of MiFID.
Given that context, it is not entirely surprising that the content of the
EMSA MiFID guidelines is different from guidelines issued under the
other legislation. It is worth mentioning that ESMA notes in its final re-
in line with the principle in CRD 4, ESMA should introduce an effective
“bonus cap” (a limit on the ratio between fixed and variable remunera-
tion) in its guidelines. ESMA wisely decided not to take this advice.
THE UK CONTEXT
Following complaints in some quarters about the role that incentives
played in the so-called payment protection insurance “mis-selling”
saga, the FSA issued guidance in January 2013 specifically for firms
that were selling financial products to retail customers. Although this
did not focus on exactly the same services as the ESMA MiFID guide-
lines, it is likely to influence the way in which the FCA enforces the
ESMA MiFID guidelines.
In its guidance of 2013, the FSA defined mis-selling as “failure to de-
liver fair outcomes”. This is consistent with ESMA’s MiFID guidelines
which suggest that firms should assess performance according to
results for clients. The existing FCA guidance applies only to retail
financial services and staff who deal directly with transactions for re-
tail customers (but they also apply to a wider range of products than
MiFID investment services).
The FSA required firms to review their incentive schemes and im-
prove the “governance” that surrounded their financial incentives if
necessary. Anecdotally, it appears that a number of major organisa-
tions did make changes to their retail incentive schemes, although
some commentators doubt their efficacy. The FSA identified some
incentive arrangements which, in its words, “increase the risk of
mis-selling”. For example:
• retrospective accelerators (i.e. a higher rate of remuneration for all
sales people after the company’s sales have passed a certain point);
• disproportionate awards (e.g. a £10,000 bonus competition); and
• different incentive awards for different products.
THE ESMA MIFID GUIDELINES: IN GENERAL
The ESMA MiFID guidelines apply only in relation to the provision
of MiFID investment services and ancillary services – e.g. investment
advice, portfolio management, investment research and financial
analysis. They apply to the following.
• Investment firms, plus banks that provide investment services
and UCITS/AIFMs that provide investment services that pertain
to individual portfolio management or “non-core services” (not
“investment services and activities,” in other words) as described
• Services provided to both retail and professional clients
• Remuneration to “relevant persons”. This term is defined in the
ESMA MiFID guidelines and does not restrict itself to individuals
who deal with customers directly. It covers everyone who can
have a “material impact on services provided.” These are:
client-facing front-office staff; sales force staff; line managers;
financial analysts; persons involved in complaints/claims handling;
and tied agents. ESMA includes line managers because it fears
that they might be paid incentives to coerce their sales forces.
Another strand of regulation designed to affect pay in the European Union’s wealth management
sector is on its way. On 11 June, the European Securities and Markets Authority (ESMA) issued its final
guidelines for remuneration under the Markets in Financial Instruments Directive (MiFID). Andrea Finn
of the global law firm of Simmons & Simmons explores them and their relationship with the
requirements that MiFID places on conflicts of interest and the “conduct of business”.
COMPLIANCEMATTERS | SEPTEMBER 2013 | 10
• Tied agents (as defined in MiFID). These are covered expressly.
ESMA, in its final report, says that firms must ensure that tied
agents and outsourced entities have remuneration policies and
practices that follow a consistent approach. It also calls on them
not to use outsourcing to circumvent these guidelines.
Competent authorities (such as the FCA in the UK) are required to
consider appropriate action for any breach of MiFID in connection
with the guidelines and review the ways in which firms try to act in
the best interests of their clients.
CONSISTENCY WITH OTHER REMUNERATION REGULATION AND GUIDANCE
Unsurprisingly, respondents to the consultative exercise urged ESMA
to consider the relationship between different EU laws and guide-
lines. ESMA’s response was to state its view that consistency was not
relevant. ESMA considers that the context for its MiFID guidelines is
different from that for other EU laws and that the guidelines serve
different objectives as well.
In relation to firms which are covered both by MiFID and by CRD 3
or AIFMD, ESMA notes that the most significant rules (for example
the requirement to defer a significant proportion of remuneration
or issue remuneration in instruments other than cash) apply only to
“Identified Staff” (i.e. staff who could pose a prudential risk to the
firm in the case of CRD 3 or those whose professional activities have
a material impact on the risk profile of the AIFMs or of the AIFs they
manage in accordance with the AIFMD). By contrast, ESMA considers
that the MiFID guidelines are focused on conduct and have a differ-
ent population in mind. It notes that some senior managers could
be covered by both sets of rules but does not believe that this gives
rise to a contradiction. In other words, senior individuals who are
“code staff” under the existing Remuneration Code (to be found in
SYSC 19A, the “systems and controls” part of the FCA handbook, re-
main subject to the general principles and provisions for payment
under the Remuneration Code but the determination of the amount
of variable remuneration must take into account the requirements
It is clearly unsatisfactory that competing sets of guidelines govern
the ways in which firms remunerate their staff. In that regard, it
is helpful that the EU Parliament’s latest draft of UCITS 5 says that
ESMA’s guidelines under UCITS 5 should deal with the relationship
between the different rules.
REMUNERATING STAFF WHOSE ACTIVITIES AFFECT SERVICE
In the absence of detailed provisions in MiFID, the guidelines that
ESMA has issued under it are less prescriptive than the guidelines it
has issued under other EU laws. A few points about the guidelines
are worth emphasising.
• Variable remuneration does not inherently give rise to
conduct-related issues but variable remuneration which is based
only on sales volumes does.
• The compulsory deferral of remuneration as “good practice.”
• The ratio between fixed and variable remuneration should be
“appropriate” and firms should reserve the right to pay no
variable remuneration at all.
• Performance assessments should take account of qualitative
criteria to encourage staff to act in the best interests of clients –
e.g. regulatory requirements, internal procedures, fair treatment
and “client satisfaction.”
• Individuals should be informed of the criteria they are to use
and their instructions should be accessible, understandable and
recorded. It is good practice for remuneration to:
(a) “reflect desired conduct”
(b) “in the case of an open-ended investment, be deferred until
the encashment of the product” or
(c) be paid in relation to the “effective return for the client”.
MiFID obliges investment firms to seek out and neutralise conflicts of
interest. In this context, ESMA suggests that it is “good practice” for
such a firm to assess “return on investment” from the clients’ per-
spective and use that as a factor in determining remuneration rather
than sales targets. In view of the organisational structure of a typical
investment firm, that could be a difficult undertaking.
REMUNERATION ARRANGEMENTS TO BE AVOIDED
ESMA states that “firms would have difficulties demonstrating
compliance with the MiFID requirements” if they were to offer:
• incentives based on individual product sales with different
incentives depending on the product;
• incentives increased to coincide with promotional/marketing
• minimum thresholds for incentives in each “bucket”;
• additional payment for “add-on” features subject to a set
penetration rate before the payment of an incentive;
• salaries that vary according to sales targets; and
• disproportionate returns for marginal sales (accelerators).
GOVERNANCE AND RESPONSIBILITY
ESMA expects compliance departments and senior managers to be
involved in the design, monitoring and implementation of remunera-
tion arrangements. Contrary to the pleas from many who responded
to the consultative process, ESMA specifically obliges firms to check
that their outsourced providers follow a consistent approach to
remuneration in line with their guidelines.
TIMING IS CRUCIAL
The FCA has two months from the publication of the translations of
the guidelines to tell ESMA that it will comply (or to explain why it will
not do so). Sixty days after that deadline, if it chooses to conform,
the guidelines will come into force. Firms based in the UK to which
the guidelines refer are therefore likely to have to start complying in
Once the FCA has made its position clear, every firm should ask itself
the following questions.
• Do our incentive schemes and bonus arrangements (including
commission schemes and metrics for discretionary bonus
arrangements) need to change?
• Do we need to adjust our internal controls and processes?
• Do we need to take any steps with regard to any outsourced
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+44 20 7825 3915
COMPLIANCEMATTERS | SEPTEMBER 2013 | 11
High-net-worth individuals (HNWs) are going to be a favourite
target for the Internal Revenue Service as, it believes, they are
more likely to cheat the taxman than anyone else. This is be-
cause a great deal of their income is self-certified and a great
many of them are entrepreneurial “chancers”. The IRS estimates
that Americans underpay their taxes by about $345 billion every
year, according to Barron’s, the popular financial news website
and magazine. The IRS collected about $65 billion of enforcement
revenue in the fiscal year of 2011 – nearly 13 per cent up on the
previous year’s figure of $57.6 billion, which itself was 18 per cent
up on the $48.9 billion of 2009. This process required the employ-
ment of thousands of revenue officers, agents and special agents.
The IRS says that its staff in “key enforcement occupations” rose in
number from 20,203 to 22,184 between 2001 and 2011.
Nine countries have so far signed intergovernmental agreements
in respect of FATCA with the US. These are the United Kingdom
(which signed first on 12 September 2012); Denmark and Mexico
(November); Ireland (January); Switzerland (February); Norway
(April); Germany and Spain (May); and France (July) with Sin-
gapore to follow soon and another 80 governments being pres-
surised to do the same. All existing agreements follow the text
of a pre-existing US model agreement almost word-for-word. The
carve-outs or exemptions that the US has allowed in each case are
sparse to say the most.
Spain’s carve-outs are to be found in Annex II of the document.
The exempt beneficial owners are the big governmental entities
such as the Banco de Espana and the regulators and retirement
funds. These, which HNWs often use along with the less affluent,
comprise any fund regulated under the amended text of the Law
on Pension Funds and Pension Schemes of 2002; and any entity
defined under Article 64 of the Amended Text of the Law on the
Regulation and Monitoring of Private Insurance of 2004. This sec-
ond exemption applies to mutual funds as well but only if all the
participants are employees, if the promoters and sponsoring part-
ners are their employing firms and benefits are exclusively derived
from the social welfare agreements (a Spanish phenomenon)
between both parties. This will tend to exclude HNWs.
There are, at least potentially, some carve-outs for private banks as
well. Small banks can be classified as “deemed-compliant financial
institutions” but only if they pass a battery of stringent tests.
These are as follows:
• the bank must be regulated in Spain;
• it must have no fixed place of business abroad;
• it must not solicit account-holders outside Spain;
• the tax laws of Spain must require it to report information or
withhold tax on its accounts;
• at least 98 per cent of its accounts must belong to citizens of
the European Union;
• it does not provide accounts to (I) any specified US person who
is not resident in Spain, (ii) a non-participating financial
institution, or (iii) any “passive NFFE” (a type of non-US entity
defined in US Treasury regulations) with controlling persons
who are US citizens or residents;
• it has systems in place on or before 1 January (now 1 July)
to make sure of this and to close any accounts that do not
• it reviews the existing accounts of people who do not live in
Spain for compliance with FATCA;
• it ensures that all its related entities are incorporated in Spain
and are themselves compliant with FATCA; and
• it must not discriminate in its business policies against opening
accounts for American residents in Spain.
This last, and some might say rather sneaky, requirement seems to
be designed to keep such an entity in constant fear of transgression
against FATCA. It does not say whether the IRS would interpret a poli-
cy of keeping a bank’s foreign customer base lower than two per cent
– and therefore turning away all Americans whose enrolment would
tip the balance over that figure – as “discrimination”. Any Spanish
institution that answers to this detailed description – if such an insti-
tution exists at all – is likely to suffer from constant insecurity as far as
The world recently took another step towards a unified personal tax-collection regime when France
signed an agreement to co-operate with the US Foreign Account Tax Compliance Act. Under such
agreements, which were to come into effect in January 2014 but have been delayed for six months
beyond it, each non-exempt financial institution in the co-operating country and the United States will tell
its home tax authority about the financial accounts of customers who are citizens of the other. The home
tax authority will then share the information with its overseas counterpart in a standardized way.
Chris Hamblin of Compliance Matters investigates.
“HNWs are going to be a favourite
target for the Internal Revenue Service
as, it believes, they are more likely to
cheat the taxman than anyone else”
COMPLIANCEMATTERS | SEPTEMBER 2013 | 12
FATCA is concerned. This is probably the first time in the modern era
when one sovereign state has treated others in this way.
The Hire Act of 2010, of which FATCA is a part, allows the US Trea-
sury, acting in tandem with the IRS, to waive certain requirements
and this discretion forms the basis for intergovernmental agree-
ments. The US authorities prosper from these agreements by re-
ceiving the active co-operation of foreign governments in their
tax-collecting drive; the partner-countries benefit by obtaining
a few meagre exemptions. In the case of non-signatory nations,
however, foreign financial institutions are expected to co-operate
directly with the IRS. If they have a presence or any resources in
the US, dire consequences will follow if they fail in this regard.
Withholding taxes are common in the tax world. One example of
them is the money that an employer automatically takes out of an
employee’s monthly wage and gives to the tax authority without
any permission from – or involvement by – the employee in the
process. Under the new regime, if a non-compliant foreign bank
has an American customer who wishes to make a transfer from
the US to it, the sending bank in the US will deduct the 30 per cent
and the IRS will keep it for itself.
Things do not necessarily improve if the foreign bank dismisses
all its American customers. If it receives a payment from a firm in
its own country that is owned by Americans, or has a substantial
American ownership, any holdings it may have in the US will be
subject to the 30% withholding tax. FATCA is designed to make it
unprofitable for such a bank to hold any assets in the US.
If the non-participating foreign financial institution or private bank
has an American affiliate or subsidiary, the tax will have an even
more drastic effect. In all cases, 30 per cent of monies coming into
its coffers from American or other participating institutions will be
deducted before it reaches it. If the institution’s turnover is of any
size, it will lose its assets quickly. If it tries to repatriate all its as-
sets home, it will lose 30 per cent of everything it sells even before
it can do so because the assets’ buyers will pay through accounts
at their own banks, which will deduct automatically. No bank or
other business can prosper under such circumstances.
Lastly, withholding taxes traditionally attempt to capture money
for underlying taxes. The Hire Act does not do this; the 30 per
cent, with a few possible exceptions, is totally punitive in this
case. The IRS might be about to replace the Office of Foreign As-
sets Control as the US regulator that banks around the world fear
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For this refresher we take the UK conduct-of-business (COBS)
rules as a template because they are the same throughout Eu-
rope through the MiFID connection and because Hong Kong and
many other financial centres emulate them. MiFID is the Markets
in Financial Instruments Directive. In fact there are two directives
in operation here: the second is the confusingly named MIFID
When making a recommendation (COBS 9.2.1R) or managing in-
vestments, the relationship manager should ascertain the custom-
er’s knowledge of and experience in the investment field in respect
of the investment or service in question; his financial situation; and
his investment objectives. This applies, of course, to investments of
all types including those contained in life assurance policies.
The idea is that the private bank or asset manager must have
enough information about the customer as is reasonably necessary
to help him meet his investment objectives; ensure that he is able
financially to bear any related investment risks in a way that is con-
sistent with those objectives; and ensure that he knows enough to
understand those risks.
The information the relationship manager or RM should draw from
him (COBS 9.2.2R) must include, where relevant:
• the length of time for which he wishes to hold the investment;
• his preferences when it comes to taking risks;
• his actual risk profile;
• the purposes of the investment;
• the source and extent of his regular income;
• his assets, including liquid assets, investments and real property;
• his regular financial commitments.
On the subject of the customer’s knowledge of and experience in
the investment field (COBS 9.2.3R) the RM must find out:
• the types of service, transaction and investment with which the
customer is familiar;
• the nature, volume and frequency of the customer’s previous
transactions in the investments covered by the rules and the
period over which they have been carried out; and
• the customer’s level of education, his profession or his former
profession, where relevant.
COBS 9.2.4 bans the firm from encouraging the customer not to
provide information. Having said that, COBS 9.2.5 allows the firm
to rely on the information he provides as long as that information is
not manifestly (Oxford English Dictionary: clear and obvious to eye
or mind) out of date and/or wrong. If the information passes this
test but still turns out to be wrong, the firm is officially held to be
innocent but regulators play a dirty game in this area and the best
advice, in the words of Ronald Reagan, is to “trust and verify.”
This brings us onto the subject of what happens when the RM can-
not gather sufficient information. COBS 9.2.6R applies: “If a firm
does not obtain the necessary information to assess suitability, it
must not make a personal recommendation to the client or take a
decision to trade for him.” In other words, the RM is not allowed
to say “we took the decision without the information because the
customer wouldn’t give it to me.” The private bank is not entitled to
a free pass just because the customer is being difficult.
When recommending a small friendly society life policy (with a pre-
mium of £50 per annum or less or £1 a week or less if it is paid
weekly) the only assessment of suitability the RM need do is to
obtain details of the customer’s (and his dependants’) net income
and expenditure. This, though, will not provide a defence against a
claim for negligence. The exception is therefore quite useless.
COBS 9.3.2 makes the obvious point that transactions that look
suitable in isolation may not be so when taken together. It also en-
courages private banks to “have regard to the client’s agreed in-
vestment strategy.” COBS 9.3.3G deals with the things a firm should
consider when making a personal recommendation to a retail cus-
tomer about income withdrawals from a pension fund. These are:
• his investment objectives;
• his current and future income requirements, existing pension
assets and the relative importance of the plan to him; and
• his appetite for risk.
Every firm must take reasonable steps to ensure that a personal recommendation, or a decision to trade,
that it makes is suitable for its client. So say the laws and rulebooks of all the major investment centres. The
rules for Europe in this area come from the MiFID directives. Those for the Asia-Pacific region, like the Hong
Kong Securities and Futures Commission (SFC) Code for Intermediaries, stem from the work of the Interna-
tional Organization of Securities Commissions or IOSCO, the world’s standard-setter for securities markets.
Chris Hamblin of Compliance Matters provides a checklist for firms.
“If a firm does not obtain the necessary
information to assess suitability, it must
not make a personal recommendation”
COMPLIANCEMATTERS | SEPTEMBER 2013 | 14
Suitability reports explain, among other things, why this-or-that pri-
vate bank has concluded that a recommended transaction is suitable
for the customer. Fund management firms need not compile these
but any private bank that is giving advice (i.e. a “personal recommen-
dation”) to the customer ought to take heed of COBS 9.4.1R, which
calls on such a firm to give him a suitability report if he:
• buys or sells a holding in a regulated collective investment
• buys or sells a holding in an investment trust where the relevant
shares have been or are to be acquired in a regulated collective
investment scheme; or
• buys or sells a holding in an investment trust where the relevant
shares are to be held within an ISA which has been promoted as
the means for investing in one or more specific investment
• buys, sells, surrenders, converts or cancels rights under, or
suspends contributions to, a personal pension scheme or a
stakeholder pension scheme; or
• elects to make income withdrawals or purchase a short-term
• signs a pension transfer or pension opt-out.
If the private bank is making a personal recommendation (i.e. giving
advice) about a life policy, it must automatically give the customer a
suitability report (COBS 9.4.2R).
No report is needed at all if the bank is managing a client’s funds
and its advice relates to a regulated collective investment scheme.
There are other peripheral exemptions from this requirement in
COBS 9.4.3R. In most cases the bank must hand the report over to
the customer when – or as soon as possible after – the transaction
is done (COBS 9.4.4R). In respect of a life policy, the report must be
presented in a durable medium, such as paper, immediately after
the contract is concluded (COBS 9.4.5R and 9.4.6R).
Professional clients receive much less protection from the regulators
in this area. Firms do not have to provide them with suitability re-
ports. Having said that, a “professional” can always sue the private
bank for negligence with much the same results for the institution.
RMs always have to remember their obligation under the FCA “prin-
ciples for business” and APER “principles for approved persons” to
“use due care and diligence” in this area. They cannot be too careful
in ensuring that professional investors are correctly classified as such.
Only a commodity dealer or commodity derivatives dealer, or a “lo-
cal” (a dealer on an exchange such as LIFFE, trading on his own ac-
count) can automatically qualify as “professional.” Otherwise, the
customer can only qualify if the firm subjects him to a battery of
stringent tests (COBS 3.5.2R). It must undertake a “reasonable” as-
sessment of his expertise to ensure that he is capable of making his
own investment decisions and understanding the risks involved. It
must certify that at least two of the following three criteria are true:
• the client has €500,000 in his portfolio;
• he has carried out transactions of “significant size” on a market
at an average frequency of 10 per quarter over the previous four
• he works or has worked in the financial sector for at least one
year in a professional position, which requires knowledge of the
transactions or services envisaged.
There is a third hurdle, once again with a threefold procedure:
• the customer must state in writing to the firm that he wishes
to be treated as a professional client, perhaps only in relation
to one particular service or transaction or type of transaction or
product, perhaps in relation to them all;
• the firm must give him a clear written warning of the rights he
might lose; and
• the customer must state in writing, in a separate document
from the contract, that he is aware of the consequences of
losing such protection.
When a firm is advising a customer about income withdrawals or
the purchase of shot-term annuities, the report should contain such
warnings as the following.
• The capital value of the fund may be eroded.
• The investment returns may be less than those shown in the
• Annuity or pension scheme rates may deteriorate.
• If the maximum short-term annuity is to be bought, the
resultant high levels of income might not last.
The private bank (COBS 9.5.2R) must retain its records relating to
suitability for a minimum of the following periods:
• if they relate to a pension transfer, pension opt-out or FSAVC
(free-standing additional voluntary contribution) scheme,
• if they relate to a life policy, personal pension scheme or stake
holder pension scheme, five years;
• if they relate to MIFID business, five years; and
• in any other case, three years.
The bank need not keep its records that related to suitability if
the customer does not proceed with its recommendation or if the
records do not relate to MIFID business (COBS 9.5.3R).
Despite these apparent safeguards, when private banks throw away
records on this subject they expose themselves to the risk of litiga-
tion and to the referral of complaints by eligible parties (individu-
als, micro-enterprises and reasonably small trusts) to the Financial
Ombudsman Service and this is not only true in the UK. Hong Kong
now has a dispute resolution service to deal with such complaints.
New Zealand and Australia have ombudsman schemes on the
British model. Elsewhere, similar arrangements (sometimes not
binding) are springing up.
“RMs cannot be too careful in
ensuring that professional investors
are correctly classified as such”
COMPLIANCEMATTERS | SEPTEMBER 2013 | 15
Rather than contain many draconian suggestions for new predicate
offences, reporting obligations or regulatory powers, it suggests
instead that all EU-based multinationals should impose EU-style
controls wherever they have branches in the world and should also
keep records of all the substantial beneficial owners of their corpo-
rate and other collectively-held customer-firms and counterparties.
These provisions, if they come into force, will be onerous.
There is one new predicate offence whose proceeds are to be out-
lawed everywhere in the EU: tax fraud. Countries such as the UK
have long criminalised the proceeds of tax evasion (and even, since
about 1999, the proceeds of foreign tax evasion) but the EU now
wishes to make this universal and many countries will be experi-
encing this for the first time if this version of the draft becomes
EU law. Article 3(4)(a) contains a proposal to expand the existing
operative phrase, “criminal activity,” to include “all offences, includ-
ing tax crimes related to direct taxes and indirect taxes, which are
punishable by deprivation of liberty or a detention order for a maxi-
mum of more than one year or, as regards those states which have
a minimum threshold for offences in their legal system, all offences
punishable by deprivation of liberty or a detention order for a mini-
mum of more than six months”.
Article 12 seeks to oblige banks to verify the identity of every cus-
tomer and of every beneficial owner who owns 25 per cent or more
of the entity in question before the business relationship begins. No
transaction is to take place before this happens.
There is also a drive to introduce new requirements for domes-
tic “politically exposed persons” and PEPs who work in interna-
tional organisations, subject for the first time to the dictates of a
vague and unspecified form of risk management. At present, Ital-
ian private banks need not conduct “enhanced due diligence” on
the accounts of Silvio Berlusconi, at least on the pretext that he
is a PEP. Under the proposals, this should change. EDD is to ap-
ply for at least 18 months (rather than the current 12) after every
office-holding PEP (the definition of PEP also includes nuclear
family members – which bizarrely rules out uncles and nephews –
and an undefined collection of “close associates”) vacates his office.
There are some record-keeping suggestions in Article 39 that are
unlikely to be new to most countries. The EU wants the new law to
compel financial firms to spend five years storing the “know your
customer” data they collect to prove that each new applicant for
business is who he/she/it claims to be. It wants the same for docu-
ments that prove the veracity of the business relationships that un-
derpin customers’ wealth. The idea is to keep the information ready
for official scrutiny at any time; this is already happening in most of
the old (pre-2004) member-states, and should already be happen-
ing in the rest according to national laws. Five years has long been
the almost-universal compliance record-keeping period throughout
the civilised world.
The European Banking Federation is a typical EU construct which
purports to represent the interests of all EU states’ banking sec-
tors. It has had privileged access to the inner workings of the EU
legislative process on this subject. Its response to the proposal is
full of objections. To begin with, it fears the costs associated with
the identification of beneficial owners – an expensive undertaking
if applied to a private bank’s entire business. It also decries the fact
that the proposal stops short of calling for EU-wide standards for
publicly registered information regarding shareholdings and benefi-
cial ownership in general as regards unlisted companies.
Its concern here is ostensibly “legal certainty,” although cost must
surely be a larger worry. If such registers did exist, ordinary taxpay-
ers would be footing the bill and not banks. There is, however, an
EU plan to promote a “European business register” which merely
copies information from national registers such as the one at Com-
panies House in London, but the EU’s planners did not deign to link
this up to the money-laundering proposal.
On the same theme, the EBF thinks that national governments
should provide its members with ready-made lists of PEPs. The EU’s
legislators, however, are famously shy of agreeing to expenditures
of governmental effort and money on this scale.
The EBF is on firmer ground in asking for a clear definition of such
terms as “international organisation.” Article 19 calls on compliance
officers and money-laundering reporting officers to treat “persons
who are or who have been entrusted with a prominent function by
an international organisation” as PEPs who require EDD. However,
neither the proposal nor its lengthy preamble define the term “in-
ternational organisation”. The EBF also wants watertight definitions
for “supervisory bodies” and “state-owned enterprises”.
The cross-over between a bank’s duty to protect customers’ data
and to “inform” on its clients is as blurred as ever and forms
the subject for another sore point. This time the bankers are
complaining that the new rule in Article 39 states that “the maxi-
mum retention period following either the carrying-out of the
transactions or the end of the business relationship, whichever
period ends first, shall not exceed ten years.” In this scenario the
private bank is being asked to destroy the data after ten years. The
The European Union’s proposal for a fourth directive to govern money laundering controls is unlike any
of its predecessors and promises to be nothing like the directive which, according to its text, will
supersede it in a few years. It is expected to become EU law very late in the year or early in the next.
Compliance Matters dissects this peculiar document.
“There is one new predicate offence
whose proceeds are to be outlawed
everywhere in the EU: tax fraud”
COMPLIANCEMATTERS | SEPTEMBER 2013 | 16
EBF argues that this cannot be in the interests of the customer or
his heirs, who may need information on the account in question in
inheritance proceedings which might drag on for years. The same
goes for insolvency proceedings. In going on to argue that the data
might be needed in criminal investigations, however, the EBF gives
off the distinct impression that customer service is not the real rea-
son for its objections to Article 39.
“Reliance,” to give it its UK term, is a major issue in the money-
laundering world. It refers, of course, to the extent to which a bank
can rely on other banks outside its jurisdiction or the reach of its
regulators for the identification and verification of an applicant for
business’s identity and other things. Article 25(1) limits extra-EU
“third parties” who are allowed to provide this information to en-
tities from countries where “due diligence” is “equivalent” to the
EU’s. Article 25(2) places the burden of deciding which jurisdiction
is “equivalent” squarely on the shoulders of each national govern-
ment, ringed around tightly with the need to obtain permission
from a battery of EU institutions.
This heralds the end of the EU’s scandalous experiment with anti-
money-laundering “white-lists.” In 2008, to gasps of astonishment,
national regulators in many if not all EU countries announced that
they were going to tolerate “simplified due diligence” (a lower stan-
dard of background-checking) for entities that belonged to about a
dozen selected countries. This list included Aruba, Curaçao, Mexico,
Russia and other territories that have long been famous for their
opacity (and, especially in the case of Mexico, general lawlessness)
rather than for good regulation and due diligence. This embarrass-
ment is likely to be over in the next year or two. In the preamble to
the proposal, the EU states: “Equivalence of third country regimes:
remove the “white list” process.” This terse reference is the only
mention it makes of the débâcle. In a sense, the EU need do nothing
to close the loophole; it originated from pressure that the EU exerted
on member-states behind the scenes and not from any EU law.
One of the stars of the new proposal is the European Banking Au-
thority, which the EU believes is destined to take the reigns of pri-
vate bank regulation out of the hands of national regulators one
day. The document contains a slew of deadlines by which the EBA
must approve this-and-that. Article 6 calls on it to club together
with other centralised EU regulators (the European Insurance and
Occupational Pensions Authority or EIOPA and the European Secu-
rities and Markets Authority or ESMA) to float an “opinion” about
money-laundering and terrorist-financing risks within two years of
the fourth directive coming into force.
Article 15 calls on that body to evolve guidelines within the same
time-frame for the risk factors that should govern decisions about
when and where “simplified due diligence” should apply. Article 16
asks it to issue other guidelines in the same time-frame, this time
for EDD. Article 42 contains another crop of deadlines (which fall
on the same date) for EU standardisation in which the EBA is to
participate. The EU’s drive to centralise financial regulation is only
too obvious in this draft.
The EBA, however, is nowhere near a state of readiness for such lofty
pre-eminence. The UK’s Financial Conduct Authority, according to its
latest business plan, is going to spend around £445 million ($674 mil-
lion) in 2013-14, with fees payable of £391 million. Its total headcount
will be 2,848. The EBA’s budget for this year is €30 million or £25.7
million, of which €15 million has been pilfered from the “fees” that
national regulators charge their flock, and its headcount by Christmas
is expected to be 93. It will therefore be some time before the EBA
is able to do much more than broadcast patronising messages to the
national regulators that it hopes one day to supplant.
+44 207 148 0188
How is compliance affecting your work?
This publication would like to know. RMs often have to deal with
many conflicting business imperatives and these are likely to
become more challenging still in the next year. My question,
therefore, is this: what are your most important regulatory con-
cerns and fears? I would like to hear from you in total confidence,
with anonymity secured.
UK business secretary Vince Cable has announced a massive series
of reforms that promise to make life very different in future for com-
pany directors. He plans to set up a central registry of companies’
beneficial owners, a term he defines by reference to regulation 6.1 of
the UK’s Money Laundering Regulations. In the case of a body corpo-
rate this means any individual who:
• as respects any body other than a company listed on a regulated
market, ultimately owns or controls (whether through direct or
indirect ownership or control, perhaps through bearer share
holdings) more than 25 per cent of the shares or voting rights in
the body; or
• as respects any body corporate, otherwise exercises control over
the management of the body.
Cable’s document says that beneficial ownership should be interpret-
ed “in the widest sense.” Fortunately for the tax-dodging and money-
laundering fraternity that the proposal is designed to frustrate, he is
only weakly in favour of making such a register available to the public
and proposes no such register for the beneficial owners of trusts. The
police and taxmen are, of course, to use it come what may. There
are varying shades of strength in Cable’s proposals to keep an eye on
Cable also proposes to quash all bearer shares and turn them into
ordinary registered shares. The document does not say whether the
UK intends to force all its overseas territories to do the same, but this
seems logical. The government is unambiguous in its desire to ban
COMPLIANCEMATTERS | SEPTEMBER 2013 | 17
The legislation, according to The Economist on 11 July 2011, was
“conceived by the previous Labour government in response to the
scandal of BAE bribes in Saudi Arabia”. Section 6, which deals with
bribing foreign officials, was a direct response to it. Despite this,
the smart money is on the Serious Fraud Office, the UK’s principal
anti-corruption prosecutor, bringing a case under sections 1 and 2,
which contain the offences of bribing and being bribed regardless
of whether a foreign official is involved. The SFO might also invoke
section 7, which prohibits a UK commercial organisation from al-
lowing bribery to happen on its behalf and requires it to do its
best to stop “associated persons” who act on its behalf (section 8)
from committing it. Why?
HARDLY ANY NEED FOR A GUILTY MENTALITY
The first clue lies in the mental element that underpins the “busi-
ness-to-business” crime under sections 1 and 2. The prosecutor
need only prove that the defendant intended some (not neces-
sarily monetary) advantage to accrue to someone. He/she/it need
also only intend to cause the improper performance of a “relevant
function”. Section 3(2)(d) says that a relevant function for this pur-
pose is any activity performed by or on behalf of a body of persons
whether corporate or not – a very wide definition. Anything to do
with business or the person’s employment is obviously included.
The only other condition for “relevance” is that the person in
question must be “trusted” or expected to perform it “in good
faith” or “impartially”. In using the passive voice without identi-
fying the person doing the trusting, section 3 ensures that a re-
cipient of bribes can be held to misbehave even if his employer
does not expect him to live up to these standards, just as long as
The only mental element to the crime of bribing in section 1 is
that the briber must think that the person to whom he gives the
advantage would be “improperly performing” by accepting it; as
we have seen, the bar for this is inconsequential. Section 2 has
more to say, this time about a bribed party being charged: in most
instances, it does not even matter whether he thinks that the
required activity is improper.
Section 7, a corporate offence which also applies to business-to-
business crime, goes further because it requires no mental ele-
ment at all. The company whose officers perform the bribery can
be completely oblivious to it and still be liable. Its only defence is
the upkeep of good anti-bribery systems in line with the some-
what controversial “guidance” that the Ministry of Justice issued
in 2011, under section 9.
All individuals and companies anywhere in the world can be
found guilty of breaking sections 1, 2 and 7 as long as they or their
misdeeds are sufficient well-connected with the UK. The mental
element that the SFO needs to prove guilt for these offences is
scant and, at times, non-existent. This is not true, however, of
section 6, the purely foreign officials section.
A HIGHER MENTAL TEST
By stating that the commercial organisation that tries to bribe
a foreign public official has to want a business advantage to ac-
crue, section 6(2) asks more of a jury than sections 1 and 2 (subs
2 and 5) do, as these merely call for an intent to promote some
improper activity which may not have any effect at all.
THE “LOCAL LAW” RULE
There is another area in which section 6 is weaker than its coun-
terparts. Anti-bribery statutes in various parts of the world have
a “local law” defence as regards official corruption. Under the US
Foreign Corrupt Practices Act 1977, for example, if it is legal for
the third-world harbourmaster to demand money from the im-
porting US company with menaces, that company has no choice
but to pay him or ship its wares home again with no recourse to a
US court. Section 6 has the same stipulation. The US federal courts
are gradually whittling this right away and the English courts may
do the same, but this is at present unknowable.
The “local law” defence is not, however, available for the busi-
ness-to-business offences. Here, the bribed party must be breach-
ing a “relevant expectation” which he ought to be fulfilling impar-
tially or in good faith (sections 3-4). Section 5 states than when a
jury evaluates the validity of such an expectation it must look at
“what a reasonable person in the United Kingdom would expect in
relation to the performance of the type of function or activity con-
cerned”. This tendency to apply UK standards all over the world is
present in other criminal statutes such as the Money Laundering
Regulations and is increasing with time. It is no wonder that com-
mentators are expecting a “B2B” test case to emerge before one
that involves the corruption of public officials.
The FCA’s report on bribery and corruption in the asset management
sector is due to be published sometime this quarter.
With the Financial Conduct Authority reportedly reviewing at least 22 asset management firms for signs
of bribery and corruption in their business practices, the time has come for a long look at the Act which
underpins its efforts. Although Section 6 of the UK’s Bribery Act 2010 outlaws the bribing of a foreign
public official, it is the offence of normal bribery between private businesses – such as private banks and
fund firms – that is the most far-reaching and hardest to defend against. Chris Hamblin explains.
“The smart money is on the
SFO bringing a case under
Sections 1 and 2”