Successfully reported this slideshow.

Wholesale Small Firms Briefing- Investment Managers


Published on

  • Be the first to comment

  • Be the first to like this

Wholesale Small Firms Briefing- Investment Managers

  1. 1. Wholesale Small Firms’ Briefing- Investment Managers 11 September 2009
  2. 2. Introduction John King Wholesale Small Firms
  3. 3. Programme • Introduction – John King • Regulatory Reporting – Sharon Campbell • Markets – Anita Coughlin • Financial Crime / Enforcement – Hannah Lynes • Hedge Fund Survey – Henry Knapman • EU Directive – Giles Swan • Visit Feedback – Stephane Blais • Operational Risk – Christine Bretani
  4. 4. Introduction • More intrusive supervision • Increased resources • 300 visits • Thematic Work – Transaction Monitoring, Client Money, Taping, Controlled Functions • Liquidity • Groups • Significant Influence Functions
  5. 5. Wholesale Small Firms’ Strategy To improve the compliance of and increase the engagement with wholesale small firms
  6. 6. Regulatory Reporting Sharon Campbell Central Analysis & Reporting Department (CARD)
  7. 7. Agenda • Gabriel (Gathering Better Regulatory Information Electronically) – reporting and alerting process • Gabriel resubmission process • Gabriel overriding of reporting schedules • Late Reporting • Non electronic reporting
  8. 8. Gabriel reporting and alerting • RMAR (Retail Mediation Activities Returns) & FSA000 Returns • Alerts (rule breaches / crystallised risks) and risk indicators (early warnings)
  9. 9. Gabriel resubmission process • Resubmission requests are made by the firms due to incorrect completion or by CARD • Firms can make the request through Gabriel to unlock the return to enable resubmission • The firm is advised by e-mail if their request is granted or declined
  10. 10. Gabriel overriding of reporting schedules • Reporting schedules in Gabriel are driven by the firms permissions which are set up and advised to firms at authorisation and which may require amendment following firms varying their permissions • Requests to make changes to firms reporting schedules may require removal or the addition of data items
  11. 11. Late Reporting • 3 scheduled automated reminder e-mails are sent from Gabriel – 1st reminder – 1 day after the reporting period has ended – 2nd reminder – 10 days before the submission due date – 3rd reminder – 1 day before the submission due date • An administrative fee of £250 is levied where firms report late
  12. 12. Late Reporting cont • Fee notification e-mail issued 10 working days after the submission due date • Invoice issued requesting payment of the £250 administrative fee • Firms who fail to submit their return are referred to supervision and may ultimately be referred to Enforcement who will take action to cancel the firms permission
  13. 13. Non electronic reporting • Annual Accounts (SUP 16.12) • Client Asset Reports (SUP 3.10) • Annual Controllers Notifications (SUP15) • Annual Close Links Notifications (SUP 15) • Submission method (SUP 16.3)
  14. 14. Questions?
  15. 15. Markets Update Anita Coughlin Market Conduct
  16. 16. Short Selling Measures • The temporary ban and disclosure obligations • The current disclosure obligations • Going forward; national and international efforts
  17. 17. Control of Inside Information • Principles of good practice, one year on • Significant progress by firms • The need for continuing improvement • Leak Enquiries
  18. 18. Pre-Soundings • Sounding out in bond and equities market and the issues of inconsistency in practice. • Recognised by the industry as a problem.
  19. 19. Tackling market abuse and credible deterrence • More criminal cases – TTP Communication case • Increased fines – Winterfloods case
  20. 20. Further Information • Market Abuse Helpline – Tel: 020 7066 4900; – Email:
  21. 21. Financial Crime Risks Hannah Lynes Financial Crime & Intelligence Division 11 September 2009
  22. 22. Why fight financial crime? • Social impact: We can help to combat – Corruption – The drugs trade – People trafficking – Terrorism • Economic impact: How much does fraud cost the UK each year? £14bn
  23. 23. Latest risk assessments • 2009 Financial Risk Outlook • 2009 Financial Crime Conference • Risks in the downturn – Fraud detection increasing – Greater risk of insider fraud – Resources diverted from operational to prudential risk
  24. 24. Key risks • AML – Review of firms’ implementation of a risk-based approach to anti-money laundering (March 2008) – Sindicatum Holdings Ltd fined £49,000 (Oct 2008) • Data Security – Data Security in Financial Services (Thematic review April 2008)
  25. 25. Key Risks • Sanctions – Financial services firms’ approach to UK financial sanctions (thematic review April 2009) • Small firms need to improve • Corruption – Anti bribery & corruption systems & controls in commercial insurance brokers (ongoing thematic review – interim results available soon) – Bribery Bill in Parliament
  26. 26. Enforcement Credible deterrence: – Use of criminal prosecutions – Larger fines – More prohibitions – More cancellation of permissions – Complemented by supervision
  27. 27. Key messages • Diverting resources from financial crime controls could be costly • Review your financial crime risk in light of economic conditions • Use our thematic reviews and Financial Risk Outlook to inform your approach
  28. 28. Further information Web: Email:
  29. 29. The FSA’s planned Hedge Fund Survey in October 2009 Henry Knapman Wholesale Banks and Investment Firms – Alternative Investments
  30. 30. Alternative Investment Fund Managers Directive (AIFMD) Giles Swan Asset Management Sector Team
  31. 31. What is the AIFMD? • Proposal published by the EU Commission on 30 April under a very tight timetable so not subject to industry consultation • Seeks to harmonise the regulation of the asset investment management industry in the EU • The Commission’s stated objectives are to – protect investors and – permit better identification and mitigation of systemic risk • Focuses on regulating the management and administration of “alternative investment funds” not the funds themselves • Subject to Co-decision procedure: – EU Council Working Groups commenced in May – First EU Parliament ECON Committee discussion on 2 Sept – Jean-Paul Gauzes (French MEP) appointed as Rapporteur
  32. 32. What does the AIFMD cover? • The “management and administration” of alternative investment funds (including the marketing of the funds by the fund manager) • It includes requirements for: – Authorisation of the fund manager – Conduct of business – Capital – Valuation and safekeeping of investments – Delegation of certain activities – Disclosure to investors, regulators and the market – Marketing
  33. 33. What are alternative investment funds (AIF)? The definition of an AIF covers most non-UCITS funds including : – Hedge Funds – Private Equity Funds – Commodity Funds – Real Estate Funds Retail Investors Professional Investors (i.e. the general public) (e.g. companies and high-net worth individuals) UCITS Non-UCITS Retail Professional Funds Schemes (e.g. Hedge Funds) Subject to UCITS IV Within the scope of the AIFMD Marketing and some operational aspects currently subject to national law
  34. 34. Scope • Very broad scope covering the management and administration of most funds not authorised under UCITS • Regulation of the fund manager and not the fund as the manager takes key day-to-day decisions • Certain exemptions including for: – Those funds with assets of less than €100mn (or €500mn if investors can’t take their money out in the first five years) – Those EU fund managers who do not manage EU domiciled funds or sell investment funds in the EU – Occupational pension funds and life insurance funds – already subject to community law • Despite the broad scope, some key competitors of AIF are not caught - e.g. family offices and sovereign wealth funds, which risks creating an unjustified unlevel playing field
  35. 35. Authorisation and Operating Requirements • A requirements that only fund managers authorised under the AIFMD or national law can manage and market AIF • Operating requirements cover four areas: – Conduct of Business including managing conflicts of interest and managing risk (duplicating to a large degree existing MiFID requirements) – Capital Requirements (as a % of the funds managed - broad alignment to UCITS) – Organisational Requirements including valuation and “depositary” (e.g. safekeeping assets) – Delegation of functions to other companies by the fund manager • Although many requirements are comprehensive it is not easy to understand how some will operate in practice.
  36. 36. Depositary Requirements • The “depositary” of an AIF performs a number of important roles including safekeeping or custody • The proposals in the AIFMD make two important changes to the current model adopted under other parts of community law – The AIFMD imposes greater liability on the depositary in the event investors suffer a loss – Only permit EU Credit Institutions (i.e. banks) to be depositaries • These requirements “de facto” prevent AIF from investing outside the EU which has significant consequences • Although these requirements are intended to strengthen the protection provided to investors they would appear in practice to weaken this including by concentrating “depositary” risk in a handful of credit institutions.
  37. 37. Transparency and Disclosure • Requirements for certain disclosure to (i) investors, (ii) supervisors and (iii) “de facto” to the market • Significant increase in disclosure for some types of AIF over current practice, particularly for smaller funds • Additional requirements where funds are “leveraged” • New requirements where AIF (particularly Private Equity funds) acquire a 30% or greater stake in a public company but non- AIF acquiring stakes in these companies are not covered • These new requirements include disclosure to shareholders and trade unions in respect of areas including: – Policies for managing conflicts of interest – Development Plans for the company. • There will be a significant increase in disclosure requirements although it is not clear in all cases how these support the Commission’s objectives for the Directive.
  38. 38. Marketing Unlike other Directives “marketing” includes the promotion of AIF by fund managers and investment at the investor’s initiative (i.e. reverse enquiries) New “passport” introduced for the marketing of all types of AIF • Currently fund managers have to comply with specific requirements in each Member State to market (if permitted under private placement) • The passport will create one harmonised regime Marketing rules draw a distinction between whether the fund is domiciled in the EU or outside (i.e. where it is registered) In order for a fund to be marketed: • For non-EU domiciled funds an “OECD tax information accord” is required between the fund’s domicile and the Member State(s) • Where a non-EU fund is managed outside the EU, the fund manager’s jurisdiction must meet certain “equivalency” standards set by the Commission
  39. 39. Systemic Risk Concerns Certain requirements are intended to better permit regulators to identify, analyse and mitigate systemic risks which may arise from AIF These requirements include: • The collection and sharing of systemically important information • The ability for the Commission to impose hard caps on alternative investment fund leverage • The ability for supervisors to impose temporary leverage caps It is not clear however whether: • These requirements are sufficiently focused on those AIF which pose systemic concerns; and • Their action in some cases would exacerbate systemic issues
  40. 40. UK View on the AIFMD • As the largest domicile for fund managers of AIF, we welcome proportionate, effective regulation of the AIF sector at EU level • We also see benefit in: – the harmonisation of the marketing of funds; and – the collection and sharing of systemic information between regulators. • We feel however that more focused regulation which better addresses the different types of risk posed by AIF would more comprehensively meet the Commission’s objectives, namely: – To provide greater investor protection; and – To provide more effective oversight of systemic risk • We are concerned that the Directive as currently proposed would be detrimental to the EU, whereas a sensible, focused framework would actually be beneficial
  41. 41. Legislative Process AIFMD is subject to the codecision procedure which requires agreement to be reached between the EU Council and EU Parliament European Council Commission Directive European Proposal (Target Codecision Procedure transposition Commission (AIFMD Proposal date is 2011) published 30/04) European Parliament
  42. 42. Influencing negotiations • HMT is lead UK negotiator with FSA providing technical advice and supporting industry consultation (“town hall” meetings and expert groups) • Significant involvement with: – EU Council Working Groups which started in May; and – Parliamentary negotiations (initially in the Economic and Monetary Affairs Committee) which started on 2 September • Practitioners and investors have an important role in influencing negotiations so you should make your voice heard through trade bodies or directly through MEPs if you have contacts • The Directive is not just about larger investment managers and in the absence of proportionality the impact could be significant for smaller firms
  43. 43. Hedge Fund Managers Stéphane R. Blais Wholesale Banks and Investment Firms 11 September 2009
  44. 44. Key risks on the radar • Fraud and mis-valuations • Market standards and insider dealing • Proactive disclosure and Principle 11
  45. 45. Fraud and misvaluations • Driver was ‘low tide’: the Madoff fraud and our own fraud cases • Looked at some of key features, developed our own ‘red flags’ • Conducted data analysis and market intelligence • Chose a sample of firms and feeding back to senior management • Results: – Firms appear to have recognised the importance of timely on valuations and independent fund boards – Lack of independence is a sign-post of possible conflicts of interest within the wider business structure • Concerns: – in a few cases TPAs had close ties with the principals of the firm – TPAs have missed related counterparty transactions - worse cases fraudulent and at best misleading – fund boards independence
  46. 46. Fraud and misvaluations • Risk for regulator = we end up fighting the last crisis • Risk to firm = caught up in a misvaluation or fraud • Developing more sophisticated behavioural analysis with SFO and SOCA • Getting closer to the firms we supervise and encouraging more STR
  47. 47. Market standards and insider dealing • Firms have expanded their fund range – often trading across public and private markets to take advantage of recent dislocation • Risk: – potentially breaching rules on the use of inside information – being caught up in an investigation
  48. 48. Proactive disclosure and Principle 11 • Most firms disclosed the nature of their Madoff exposures • A few did not • Firms need to proactively disclose significant exposures and breaches • Suspicious Transaction Reports (STRs) – some of our best intelligence come from buyside firms
  49. 49. Stéphane R. Blais 020 7066 1526
  50. 50. Risk Management and ICAAPs – Investment Management Firms Christine Brentani Prudential Cross-Sectoral Policy Department
  51. 51. Agenda • High Level Review of Rules Relating to Risk Management – SYSC – BIPRU • ICAAP – Overview and Expectations – Pillar 1 and Pillar 2 • Operational Risk Requirements - Good Practice • Professional Indemnity Insurance
  52. 52. High Level Rules Review
  53. 53. SYSC • SYSC 4 states that a firm must have robust governance arrangements: – which include a clear organisational structure, – well-defined, transparent and consistent lines of responsibility, – effective processes to identify, manage, monitor and report the risks it is or might be exposed to, – and internal control mechanisms • including sound administrative and accounting procedures and, • effective control and safeguard arrangements for information processing systems.
  54. 54. SYSC (con’t) • SYSC 7 states that a firm must establish, implement and maintain adequate risk management policies and procedures, including effective procedures for risk assessment, which identify the risks relating to the firm's activities, processes and systems, and where appropriate, set the level of risk tolerated by the firm.
  55. 55. ICAAP Preparation - BIPRU • For firm’s whose activities are simple, BIPRU 2.2.24 – 2.2.27 provides the following guidance: – Indentify and consider the firm’s largest losses over the last 3 to 5 years and whether those losses are likely to recur; – Prepare a short list of the most significant risks to which the firm is exposed; – Consider how the firm would act, and the amount of capital that would be absorbed, in the event that each of the risks identified were to materialise.
  56. 56. ICAAP Overview and Expectations – Pillar 1 and Pillar 2
  57. 57. ICAAP – High Level Goals • Individual Capital Adequacy Assessment Process (ICAAP): – Our ultimate objective is to better align regulatory capital to underlying risk; – Pillar 2 provides incentives for firms to enhance risk management capabilities; – Quantification key but from a supervisory perspective the qualitative aspects of risk management is equally important.
  58. 58. ICAAP - Procedures • Firms to produce ICAAP annually • Investment Managers to submit GABRIEL FSA019 form • FSA may request firm’s ICAAP • Firms submit ICAAP to FSA when requested • FSA will issue Individual Capital Guidance (ICG) and potential Risk Mitigation Programme (RMP)
  59. 59. Pillar 1 – Capital Resource Requirement (CRR) • Many Investment Managers will be Limited License Investment Firms (LLIFs): – Not authorised to deal on their own account – Not authorised to underwrite or place certain financial instruments specified under MiFID • For LLIFs, the Pillar 1 Capital Resource Requirement (CRR) will be: – The higher of: (a) Base capital Requirement (€50,000 or €125,000) or (b) Credit Risk + Market Risk or (c) The Fixed Overheads Requirement (FOR) • We will also compare the firm’s true wind down costs to the FOR
  60. 60. Pillar 1 – Fixed Overhead Requirement (FOR) • FOR – calculated using data from the most recent audited financial statement – Equals to one quarter of the firm’s relevant fixed expenditure – FOR should be a proxy for wind-down costs
  61. 61. Pillar 1 – Wind-Down Costs • Wind-down costs should include: – Extra closure costs, such as termination penalties, redundancy costs, and lease costs; – Residual fee income as fund management contracts run off; – The costs associated with any risks which, if crystallised, would eat into the capital set aside for a wind-down costs.
  62. 62. ICAAP - Risk Appetite • ICAAP should have clearly defined, statements of risk appetite linked to risk limits and policies and procedures. • Firm should identify the level of risks that can be: • Accepted • Managed • Transferred • Avoided.
  63. 63. Pillar 2 - Operational Risk • For Investment Management firms, operational risk (OR) is likely to be a key area of focus under Pillar 2. • All operational risks must be considered so that the firm can identify which are the material risks. • We expect a firm’s operational risk management framework to be proportionate to the nature, scale and complexity of the firm’s activities.
  64. 64. Operational Risk – Good Practice
  65. 65. Operational Risk - Good practices to expect of firms • Methodology used to assess operational risk; • Analysis of the types of risk exposure on a gross and net basis (e.g. the legal risks arising from failing to comply with the terms of contracts) including where relevant a summary of mitigating controls; and • Analysis of the likely losses incurred by the firm in the event of the crystallisation of risk and the resulting impact on capital requirements. • Consideration of the severe, but plausible operational risks which could occur at their firm.
  66. 66. Operational Risk - Good practices to expect of firms (con’t) • Overall framework that promotes a strong, risk-aware operational risk culture. • Clearly articulated risk appetite statements (including limits if deemed appropriate). • Comprehensive Management Information packs identifying relevant KRIs and KPIs for the appropriate level of management. • IT systems which enable exposures to be sufficiently recorded and to enable performance to be tracked across different areas of the firm.
  67. 67. PII Insurance
  68. 68. PII Cover – General Expectations • Some firms use insurance to mitigate operational risk. Where this happens our expectations are that firms will have: – Identified operational risk exposures – Measured / quantified those exposures – A suitable control environment – Gap analysed the policy(s) – Assessed credit quality of potential underwriter – Mitigated any ‘residual exposure.’
  69. 69. PII – Potential Limitations of Policy • Focus on the limitations of the PII policy: – Gap analysis – Exemptions – Excesses – Credit Quality of the provider – Potential concentration of risks associated with the provider – Potential delays between a claim being submitted and the insurer paying up.
  70. 70. Concluding Comments • Firms to submit ICAAP information via FSA019. • Firms to assess the true costs of an orderly wind down and ensure they hold enough capital. • Firms to ensure they have appropriate risk management frameworks. • Firms to assess their PII cover.
  71. 71. Thank you
  72. 72. Coffee