Update

UK Business Conduct Regulation

	Look out for…

The latest edition of the FSA's Handbook Development newsletter (No 91), indicates, inter alia , that the following consultation papers, discussion papers and feedback statements, which are likely to be of interest to FOA members, are due to be published over the coming months:

* As explained in Handbook Development newsletter No 47, 3 star CPs are “high-profile consultations, and major policy changes affecting a large number of consumers or financial sectors,” 2 star CPs contain “other important policy changes” and 1 star CPs contain “minor changes.”

	New Handbook forms, including approved persons and appointed representatives

The FSA has published the MiFID-compliant approved persons and appointed representative forms. These forms come into effect on 1st November, however: “In order to give firms time to incorporate the new forms into their systems, the FSA will accept old forms until the end of December 2007. However after year end, old forms will be returned with a request that a new form be submitted.” The FSA is also asking firms not to amend existing forms but download the new forms from the website.

Future Handbook forms, including are available from here:

After 1st November, members using the Firms Online system should note that the approved persons forms A, D2 and E and the waivers and variations of Permission forms will no longer be available and will have to be submitted manually. The FSA has indicated that a new forms submission system is due to be rolled out in 2008.

	MiFID Permissions and Notification Guide – Update (including consultation on measures applicable to incoming firms from late-implementing EEA states)

The FSA has published a " MiFID Permissions and Notifications Guide - Update ", which includes, in Part I, a consultation on measures applicable to incoming firms from late-implementing EEA states. A copy is available from: www.fsa.gov.uk/pubs/international/mifid_update.pdf

The FSA proposed making: "a temporary rule the effect of which would be to require all incoming firms from late-implementing EEA states to comply with certain MiFID standards after 1 November 2007. It would apply only to the extent that the firm's home state had not implemented the relevant MiFID provisions, or did not already impose measures of comparable effect. The rule would take effect on 1 November 2007, and would run until 31 October 2008."

Two policy issues were discussed in the consultation: (1) what business the rule should apply to? and (2) what MiFID requirements it should impose on inward passporting firms from late-implementing states?

In respect of the first issue, the FSA proposed that the rule should apply to "all business that could fall within the scope of MiFID and current domestic regulation, including that done by EEA firms in the UK under top-up permissions."

The FSA noted that: "A small number of EEA firms currently have top-up permissions for - mostly - commodity derivatives business (the vast majority of these firms are EEA credit institutions that carry on this business through their UK branches). Most of this business is likely to fall within the scope of MiFID. Where a firm's home state has implemented MiFID, this business can be brought within firms' MiFID passports from 1 November. Where a firm's home state has not implemented MiFID, we will regard its top-up permission as valid after 1 November (where a firm continues to act in accordance with its permission). All UK branches of passported EEA firms will be subject to MiFID conduct of business requirements (through the FSA's implementing rules) in relation to their passported business conducted within the UK, so applying these requirements also to MiFID business conducted under top-up permissions should not amount to a significant extra burden."

In respect of the second issue, the FSA proposed that the rule be limited to: "‘MiFID minimum' Level 1 and Level 2 requirements to ‘fill the gap' created by non-implementation of those requirements by a firm's home state, principally to enable us to meet our consumer protection and market confidence objectives. This encompasses requirements in MiFID Articles 12-14, 18 to 22, 24, and 26 to 30, and the associated provisions of the Implementing Directive."

The FOA participated in a Joint Associations' response to this consultation: a copy of the response is available from the FOA website. The FSA confirmed their proposal and gave feedback on responses in PS07/18.

	Have you read…?

	Best Execution Guidance

Following the decision of MiFID Connect to abandon the production of best execution guidance for the understandable reasons that it did not wish to add to the considerable amount of paper already in the public domain on this issue, a number of firms expressed a wish that the FOA would nevertheless produce guidelines on this topic. Since the Association of Foreign Banks (AFB) had encountered similar requests from its members, we combined resources to produce a first draft set of guidelines. These are now posted on the FOA website ([website ref]). For emphasis, they are still in draft form, but such is the pressures of the MiFID implementation timetable that we felt that they should be posted forthwith on our website. That said, we do not anticipate any major changes to the text, but members need to bear in mind that some changes will be introduced. We will, therefore, post on the website a tracked version of guidelines, highlighting the changes.

If you do have any observations or suggestions for amendment to the guidelines, please let Anthony Belchambers know as soon as possible.

	FSA questions and answers on the appropriateness assessment

The FSA has published a number of helpful questions and answers on appropriateness. Click here to view.

The FSA has also published "two case studies to illustrate some of the questions and answers. They are intended to reflect real-life scenarios and provide material, including questions, which firms may find useful when considering the issues raised. Inevitably, these issues are not exhaustive. We have in places also included examples of good and poor practice. Generally, these are to help firms and their management reach decisions on how to achieve the desired outcomes." Please click here to view the case studies. Please contact Jane Green if you wish to discuss.

	FSA: challenges and supervisory priorities

The FSA has published a statement of its supervisory priorities arising from the November changes to the Handbook. A copy is available here

The FSA will be carrying out post-implementation work from Q1 2008, which will include “sampling across a range of firms to obtain examples of documentation firms are giving customers (particularly retail clients) where firms are given greater flexibility under COBS on form and content…” Such review are “ likely to focus on 'new' documentation such as that used to disclose IDD and Menu information; the form of risk warnings being used for riskier products; suitability reports; and possibly best execution policies.” From Q2 2008, there will be a “more formal review of implementation of the relevant priority changes…”

In the statement the FSA also sets out its priorities in three areas: COBS supervisory priorities for predominantly retail business, COB supervisory priorities for predominantly wholesale business and SYC supervisory priorities. Specific priorities include:

• for retail business, the new rules on inducements and their disclosure, suitability and appropriateness, financial promotions and communications;

• for predominantly wholesale business, firms' responses to the revised best execution regime, amended client categorizations and new requirements for investment research; and

• The FSA SYSC priorities include firms' changes in requirements for managing and disclosing conflicts of interest and outsourcing.

FOA members should ensure that their own internal monitoring programmes reflect the FSA's priorities and focus. Please contact Jane Green to discuss.

David Kenmir, Managing Director of Regulatory Services at the FSA gave a speech to the Compliance Institute Summit on the challenges facing the FSA and the regulated community over the next few years. As well as discussing the impacts of the move to more principles-based regulation (including the challenges for compliance departments) the speech also discusses the FSA's retail and wholesale strategies. A copy of the speech is available here

The FOA is planning to hold a Compliance forum on the move to more-principles-based regulation in December