RDR Crossfire
In late July, the parliamentary Treasury Select Committee called on the U.K. Financial Services Authority to reconsider some of the aspects of its Retail Distribution Review. In particular, the TSC suggested that the implementation of the RDR, currently scheduled to kick in end-2012, is delayed by a year and that grandfathering--a practice by which wealth managers with extensive work experience will be able to bypass the new examination requirements--is not scrapped, as currently planned.
The FSA’s response to these concerns has essentially been one of polite decline. The FSA’s rapid response provoked Andrew Tyrie, chairman of the TSC, to suggest that “no adequate considering had been given to the arguments for the [RDR] delay we recommend.” In response, Hector Sants, chief executive of the FSA, emphasised that the FSA’s allegedly “peremptory rejection” of an RDR delay was an attempt to retain momentum behind the new regulation.
More Clarity on Platforms, Sort of
Shortly following this exchange, the FSA released a policy statement aimed at clarifying how RDR will impact investment platforms. The publication contained more detail on re-registration, use of more than one platform, and transfer of funds. The most controversial issue in the FSA’s consultation, however--cash rebates and provider payments to platforms--was addressed with reservations. The regulator did indicate that its “preferred” option would be to “enhance disclosure” on payments by providers to platforms and “ban” cash rebates to clients, but stopped short of proposing these changes and reserved the right to “carry further work” on the issue.
Commenting on the FSA’s intentions to ban cash rebates, Ian Sayers, Director General of the Association of Investment Companies (AIC) welcomed such a decision and said that “delaying the decision to ban such payments for a long time after RDR’s implementation risks inappropriate practices becoming embedded which will be harder to unwind at a later stage.”
The shortage of concrete detail on the future business model of platforms motivated a number of industry leaders to join MPs in calling for an RDR delay.
Junior ISAs’ Limit Raised
Following the draft publication in March of rules surrounding Junior ISAs, the Government has issued confirmed and clarified a number of questions.
Most notably, the Government raised the maximum amount that can be invested in a Junior ISA each year to £3,600 from the £3,000 cap originally considered. With this change, parents will be able to save up to £3,600 per year for their under-eighteen-year-olds in a tax-efficient ISA.
The HMRC confirmed that Junior ISAs will be available from November 1, 2011 and that all U.K.-resident children who were not eligible for Child Trust Funds--Junior ISAs’ predecessors--would be eligible. With this change, around 6 million children in the U.K. are expected to have access to this vehicle, with a further 800,000 joining each year.
As the Government had stipulated in its draft regulation, Junior ISAs can be used as a wrapper for both cash and shares. In each fiscal year, children will be able to hold one cash and one stock and shares ISA in their name. As the ISA holder turns 18, they will be able to start making withdrawals and their Junior ISAs will convert to standard “adult” ISAs.
Find out more about ISA Investing here.
Implementing Basel III into EU Law
The European Commission took steps towards implementing Basel III capital requirements into European Union law by putting forward a Capital Requirements Directive IV (CRD IV) package proposal. The proposed changes are two-fold; they cover deposit taking activities as well as the conduct of credit institutions and investment firms. In terms of the latter, the European Commission proposes a new capital holding ratio for financial institutions, coupled with a liquidity coverage ratio and supervisor-approved leverage ratio. There is also a push to decrease reliance on external credit rating agencies.
In order to better safeguard bank deposits, the Commission calls for countercyclical capital buffers, enhanced governance and supervision and availability of sanctions.
To a certain degree, the proposed legislation traces the Basel III requirements. However, it goes beyond these on a number of occasions. For example, Basel III rules are designed for “internationally active banks”, while CRD IV will be extended to all EU banks and investment firms. The call for less reliance on external ratings, enhanced governance and supervision, and the broader objective to converge EU-wide capital requirements to a “single rule book” are also points specific to the Commission’s agenda.
The new legislation is expected to kick in January 2013, but full implementation won’t come until 2019.
As the recently-conducted EU-wide bank stress test showed, Europe is not uniformly prepared for the new capital requirements. While a number of banks have a need to strengthen their capital base. In addition, even with the implementation of CRD IV, member states are within their rights to exceed the stipulated capital requirements, in the same way that the U.K. has decided to treat the Basel III rules. If anything, this dynamic is an illustration of the limitations to strengthening the EU’s financial stability via increasing capital holding ratios which, in turn, limit lending capacity. To paraphrase a statement given by Lord Adair Turner, chairman of the FSA, at Cass Business School earlier in the year, in an ideal world capital requirements would be much higher but the EU’s banking system is not prepared to accommodate this change.
Ring-Fencing U.K. Banks
Throughout June and July, a number of public and private sector responses to the interim report on the U.K. banking sector, the so-called Vickers’ report, became available.
The report, published in early April and criticised for not being radical enough, recommended that U.K. banks be forced to ring-fence their high street banking businesses and hold higher capital requirements than stipulated by Basel III. This measures aims to ensure that if a big bank faces bankruptcy, depositors do not incur losses. Ring-fencing was later endorsed as a measure by Chancellor George Osborne during his annual Mansion House Speech in mid-June.
In early July, the Independent Commission on Banking published a summery of responses to its report. One of the contentious issues the Commission indicated was the proposal to ring-fence U.K. retail operations, pointing to the mixed response to this suggestion.
In mid-July, the Treasury Select Committee commented on the interim report as well. In particular, the TSC called on the Commission to consider the effect of their proposed ring-fencing of retail banks on market competitiveness and the cost of credit to business. The TSC also expressed concern that the option to fully split banks has not received sufficient attention.
The final report by the Commission is due on September 12.
Parliament on Credit Rating Agencies
The House of Lords’ EU Select Committee published a report on the role of credit rating agencies in the EU’s sovereign debt crisis. The report makes numerous recommendations and states that EU governments should focus on correcting the flawed market structures that give undue weight to the rating agencies’ opinions.
