The Voice of Private Client Compliance and Regulation

NEWS

• BNP Paribas: why it was fined in detail• ‘Big Four only’ ban comes to Brazil• The CII guide for whistleblowers• UBS fined €1.1 billion by the French• Lawsky plumps for Bitcoin … and more

ARTICLES

• QROPS explained by a City grandee• How is the wealth industry coping with CRD IV?• MiFID II: counting the likely costs• The Isle of Man’s regulatory evolution• French class actions: the new rules … and more

Copyright © 2014 ClearView Financial Media Ltd. All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, ortransmitted, in any form or by means, electronic, mechanical, photocopying, recording or otherwise, without the prior written permission of the publishers.

VOLUME NO JULY 2014

PUBLISHER: Stephen HarrisEDITOR: Chris HamblinPRODUCTION: Jackie BosmanISSN: 2053-9355

PUBLISHED BY: ClearView Financial Media LtdHeathman’s House, 19 Heathman’s RoadLondon, SW6 4TJ, UK

TEL: +44 (0)20 7148 0188SUBSCRIPTIONS: +44 (0)20 7148 0188EMAIL: info@clearviewpublishing.comWEBSITE: www.comp-matters.com

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INSIDEThe British Wealth Management Association lists its ‘top 5’ problems with MiFID II • We look at why FATCA clashes with the Data Protection Act/Directive • More on why large corporates are vacating large swathes of the world and

abandoning correspondent relationships

Some of the terminology that Barclays uses in its promotional litera-ture is slightly confusing and begs a few questions. Barclays and the Cambridge Judge Business School – a long-established unit – jointly run the Compliance Career Academy, which they describe as a ‘pro-gramme’ and, furthermore, as ‘externally recognised.’ The websites of all concerned do not say how an academy can be a programme or what form the recognition takes and who is bestowing it. According to the business school’s website, the academy has been established under a brand new Centre for Compliance and Trust which also be-longs to the business school. The business school’s website itself pro-claims that the academy “signals a new era for compliance.”

Barclays itself has been going through what can only be described as a period of extreme non-compliance. Last year it admitted in a pro-spectus for a share sale that the Financial Conduct Authority wanted to fine it £50 million for behaving ‘recklessly’ in raising funds dur-ing 2008 to keep itself away from a government bailout. It failed to tell investors all they were entitled to know about two agreements it made with Qatar Holding and is still taking court action to contest this

fine. It also colluded with other banks to rig the London Interbank Of-fered Rate for years with the knowledge of the authorities, as a string of uncovered emails proved. It was the first bank to settle terms over Libor in 2012, paying £290 million in fines.

One criminologist, ex-Fraud Squad officer Rowan Bosworth-Davies, has described the Cambridge initiative thus: “It was probably inevi-table that when Barclays decided that they had better do something to re-engineer the public perception of their criminogenic personal-ity, they chose to engage in the symbolic way that all high rollers do when they need to buy good opinions, by giving away lots of money to charity, albeit in a novel manner.”

The amount of money is unknown, as is the reason why Barclays describes this initiative as ‘a first.’ BPP University runs a postgradu-ate course in financial regulation and compliance, the ICMA Centre at Reading University runs an MSc course in Capital Markets, Regu-lation and Compliance and Westminster Business School’s MSc in finance, banking and insurance has a stand-alone compliance (PTO)

THE ‘PROFESSIONALISATION’ OF COMPLIANCE: NEWS FROM THE FRONT LINEEarlier this month Barclays, the scandal-struck banking giant, opened a School of Compliance at Cambridge University which, it has said, will hire philosophers to lecture students about trust. It is making the bold claim that its initiative will “transform and professionalise compliance.” In this article Compliance Matters explores this claim and also speaks to other organisations that are already established in the compliance training field.

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TRAINING AND COMPETENCE

module, to name but a couple of instances. The Barclays website, how-ever, proclaims: “For the first time the academy offers compliance pro-fessionals technical and behavioural training that places customers and clients at the heart of decision-making and helps the business achieve success in the right way.” Some days ago the chairwoman of the centre, Dame Sandra Dawson, told Compliance Matters that she would ring to answer questions when she had time, but has not yet done so.

Bob Diamond and Marcus Agius resigned as chief executive and chair-man of Barclays over the Libor scandal, with Sir David Walker coming in as chairman. Sir David heralded the founding of the ‘centre for trust’ with the words: “I would like us to be a thought-leader.” Although he is thought of as a safe pair of hands in the City, Sir David has not stopped the steady tidal wave of fines and criminal allegations from engulfing his bank. Only last month, New York Attorney General Eric Schneider-man started suing Barclays for allegedly telling the corporate custom-ers of its ‘dark pool’ – the second largest such trading platform in the US – that it would shield their interests from high-frequency trading firms while actually catering to such businesses.

Meanwhile, on Barclays’ own website, its chief compliance officer states: “At Barclays the compliance function is currently undergoing a wide programme of change to position it as we strive to be the gold standard for the industry,” language that cannot help but recall the involvement of Barclays in manipulating the gold markets, for which the FCA fined it £26 million in May.

Good training is a regulatory requirement. FCA rules state that every firm must employ people with the skills, knowledge and ex-pertise necessary for the discharge of the responsibilities allocated to them (SYSC 5.1.1 R). Its “training and competence sourcebook” contains more stipulations for specified retail activities (SYSC 5.1.3 G). Firms which carry out activities that are not subject to ‘T&C’ may nevertheless wish to take it into account in complying with the competence requirements in SYSC (SYSC 5.1.4A G). Lastly, the rules state that a firm may choose to establish, implement and maintain a T&C scheme (TC2.1.14 G).

THE REAL ‘GOLD STANDARD’

For some real experience in this field, Compliance Matters turned to Steve Jenkins, a director at the Chartered Insurance Institute, whose chartered members number 4,235. The title Chartered Fi-nancial Planner is the most widely accepted “gold standard” qualifi-cation available for professional financial planners/ financial advis-ers in the UK. The qualification fits into the National Qualifications Framework at Level 6, equivalent to a Bachelor’s (first) Degree.

When asked about his members’ qualification, he replied: “These are not level 4 – that’s the ‘licence to practise’. These people ef-fectively represent the pinnacle of the financial advice profession. They are about 15% of the total of financial advisors. It is a degree-level qualification. To be a CFP, you need to do a number of ad-vanced qualifications and be a member of the Personal Finance So-ciety, a subsidiary of the CII. This can only be done through the CII. The ICAEW does the same for chartered accountants.

“We have been doing this since 2001. We are an emerging profes-sion that is still in its relative infancy, although developments such as the RDR have been brining it to public attention more and more.”

A whole range of organisations offer the level 4 diploma for which the Retail Distribution Review calls – these are the ‘accredited bodies’ or Abs (a term invented by the Financial Conduct Author-ity). Level 4 is the minimum that someone needs if they want to

offer financial advice. The CII, on the other hand, is analogous to hospital consultants and general practitioners in medicine, i.e. they are educated to ‘level 6’. Jenkins continued.

AN EDUCATIONAL REQUIREMENT AND NOT A REGULATORY ONE

“For a moment, let us forget the RDR and regulator-speak and think of education. Every formal qualification in the UK is graded in QCF - the Qualifications and Credit Framework which is the national credit transfer system for educational qualifications. It’s regulated by Ofqual, the education regulator, and there’s reference to this on the Ofqual website.

“Any profession or qualification can have its qualifications ‘bench-marked’ in the lattice that QCF provides. That way, the man in the street knows the level to which someone is qualified. That’s where the term ‘level 4’ comes from. All the ABs stretch the financial adviser who wants to qualify for this to the same level.

“Why, I hear you ask, doesn’t every AB offer easier terms than the next, in the hope of attracting more fee-paying IFAs onto its cours-es? If such a thing were allowed to happen, there would be a ‘race to the bottom,’ with the half-dozen ABs clamouring to outdo each other in laxity. Ofqual - not the FCA – oversees us all and periodi-cally sends in a SWAT team to each AB to audit its efforts. I am using the word ‘audit’ in the loosest possible way to mean ‘gauge’ instead of ‘crunch numbers’, although the team does look at accounts as well. It also looks at the syllabus, the questions, the way in which the AB moderates the courses, the quality of the support material it hands out, exam conditions, how the papers are marked – every-thing. All in all, we’re regulated very heavily.”

THE ‘TRAINING AND COMPETENCE’ CONSULTANTS

Julia Kirkland, an eminent T&C consultant, told Compliance Mat-ters: “I don’t think we’re very far away from firms insisting that compliance officers are qualified.”

It is well-known in the UK that private banks and asset-manage-ment firms are so desperate for compliance staff that they are mak-ing extravagant employment offers to staff at the Financial Conduct Authority, the Financial Ombudsman Service and other regulatory bodies and lifting them out of their posts at increasingly immature stages of their careers. At the same time, they are drafting others in from the periphery of the financial regulatory world. In an atmo-sphere like this, CM suggested, there seems to be little prospect of firms insisting on qualifications or anything else that might diminish the supply of candidates. Julia agreed but thought that the industry as a whole might soon take a hand.

“No, no, possibly not, but I think there’ll be more investment by firms to encourage them and pay for them to get qualified. I think that probably includes RDR (retail distribution review) level 4 tech-nical qualifications as well. I’ve encountered more and more people with those going into compliance offices. There’s quite a lot now who do that.

“Suddenly, over recent weeks, there also seem to be people who are ex-financial planners being drafted in. They are qualified by (a) their experience and of course (b) their RDR qualifications. Many are chartered financial planners.”

THE VALUE OF THE BARCLAYS COURSE

The Barclays project, although less unique than it purports to be,

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LITIGATION

The idea of introducing class actions into French law has been around for 40 years. Class actions do not accord with certain basic principles of French law, including the principle according to which no one can argue for someone else. The idea of empowering cer-tain persons to act on behalf of others is very problematic and has been disputed in France since the 1970s.

Capital market activity is not mentioned in the new law but there is no specific exclusion regarding it. The law states that class actions can only be initiated in relation to the sale of goods or the provi-sion of services by a professional to consumers. The class action law sits in the French ‘consumer code’ because it is only meant to apply when there is a consumer/professional relationship (some unsuccessfully argued in favour of a wider scope). Hence, a class action may spring from the terms and conditions applicable to the provision of services in the financial sector. The law is very generic here – for it to apply, some service has to have been performed in a deficient manner and must have caused harm to a group of con-sumers. Breaches of professional contractual duties in relation to the provision of services may be covered.

The law has been passed but is not in operation yet. This will hap-pen when the responsible ministry publishes various decrees.

The legislators were very concerned that this new law would not allow class action litigation to become a national sport, the way it is in America. One of the safeguards against this is the fact that the only persons who can start proceedings will be the associations of consumers who have received government approval. Individual consumers (or lawyers) will not have the legal standing to start class actions on their own. As of today, 16 associations of consumers are qualified to launch class actions.

The association in question will have to present the court with ‘test cases’, from which the court will define the relevant group of consumers to be indemnified (if the claim is successful) by the professional(s). There is no specific timing to initiate a class action,

provided that the action is timely and launched in compliance with the relevant statute of limitations (which sets a time-limit on the taking of legal action for breaches of the relevant law).

“A French claimant cannot come out of court richer than he was before he was wronged”Once the court agrees that the association has produced sufficient evidence that a group of consumers has suffered from the same il-legal behaviour of a given professional, it will set the criteria for the determination of the group and the financial compensation owed to the members of the group. The court will also order its decision to be publicised, so that interested consumers will be in a position to make themselves known for the purpose of receiving compensa-tion (this period can be as short as two months and as long as six, at the discretion of the judge).

There are other safeguards against the excessive use of class ac-tions which stem from the general principles of French law. First, French courts do not award punitive damages and have not been allowed to do so for centuries. The general principle when it comes to awarding damages is that the claimant must be put back in the same situation he was in before he suffered the harm or loss in question. To put it another way, a claimant cannot come out of court richer than he was before he was wronged. Another safeguard is that French law does not allow lawyers to charge contingent fees on a ‘no-win-no-fee’ basis. Associations of consumers who will want to start a class action will have to pay for their legal fees. French law allows success fees to some extent, but it remains to be seen how this will apply in the context of class actions. Generally speaking, success fees are still relatively uncommon in France.

* M Dupoirier can be reached at clement.dupoirier@hsf.com or on +33 1 53 57 70 70.

FRENCH CLASS ACTION LAW CASES: ARE THEY LIKELY TO RESEMBLE AMERICA’S?Earlier this year the French legislature passed the “loi Hamon” to allow class actions for consumers against professionals, including financial advisors. This law could be available to users of financial services. Clément Dupoirier, a partner at Herbert Smith Freehills in Paris, explains in detail.

might point the way forward for the financial services industry. Cash-strapped universities are needful of corporate money and corporations need respectability. When asked whether the basic Barclays idea of using private money to fund a new foundation in collaboration with an academic institution represented the future at least in principle, Julia was unequivocal.

“I think so, without a doubt. It’ll be interesting to see if the award-ing bodies – which include the CII, the ISS and the CISI – take it up and play the role that Cambridge plays in the Barclays model. Or they can ‘buddy up’ with one of the academic business schools, of which there are a few around the country now.”

Julia said that there was no sign of regulators involving themselves in regulatory training plans and qualifications, but thought that this was about to change.

“The regulators haven’t involved themselves in training, but I have a feeling that they are going to get more involved. I’ve heard that they’re thinking of doing it from various people and they could be making an announcement soon. Of course they’d have to dedicate some of their own people to help with that. They might have to recruit more people too.”

In a certain way, it is slightly surprising that the prospect of regu-latory insistence on qualifications has not become widespread al-ready. Even in 1997, with the advent of the Labour government and its decision to merge all financial regulators into one, many compli-ance officers were saying that compulsory qualifications for their positions were only a matter of a few years, but they were wrong.

Perhaps this is merely another instance of the unpredictability of political decision-making.

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Through a series of ‘egregious’ schemes to evade detection and with the knowledge of many senior executives, BNPP con-cealed more than $190 billion in transactions between 2002 and 2012 for clients subject to US sanctions against Sudan, Iran, and Cuba and others. In doing so it contravened various controversial presidential ‘executive orders’ of dubious constitutionality, along with the International Emergency Economic Powers Act 1977, the Trading with the Enemy Act 1917, and the regulations of its US regulators.

BNPP has reached four settlements in all: with the US Department of Justice, with the District Attorney of New York, with the New York State Department of Financial Services and with the US Treasury’s Office of Foreign Assets Control, which maintains the relevant list of ‘specially designated nationals’ and other ‘blocked parties’ that BNPP has admitted to flouting. BNPP has said that as a result of the fine it is going to take an “exceptional charge” of €5.8 billion ($7.9 billion) in the second quarter of this year.

“In its agreement with OFAC, BNPP seems not to agree to any wrongdoing at all”Not every settlement contains a full admission. In its agreement with OFAC, BNPP seems not to agree to wrongdoing at all. In note 28, it states: “Without this agreement constituting an admission or denial by BNPP of any allegation made or implied by OFAC in con-nection with this matter, and solely for the purpose of settling this matter without a final agency finding that a violation has occurred, BNPP agrees to a settlement in the amount of $963,619,900 aris-ing out of the apparent violations by BNPP of IEEPA, TWEA, various controversial presidential ‘executive orders’ of dubious constitu-tionality, and the regulations described in...this agreement.”

THE ADMISSION

BNPP admits that, up to and including 2012, it processed thousands of transactions to or through US financial institutions that involved countries, companies and people subject to US sanctions. It admits that it ‘appeared’ to have engaged in a systematic practice to con-ceal references to sanctioned parties in US dollars in SWIFT payment messages it sent to US financial institutions. It admits that some of its businesses replaced the names of sanctioned parties “pursuant to specific instructions from the sanctioned parties themselves.”

Several BNP Paribas entities developed procedures or used pay-ment practices that contravened the bank’s ‘general procedure’ (proclaimed in 2003) and processed thousands of transactions that they ought not to have. The US sanctions programmes they contravened were against Burma, Cuba, Iran and especially the Su-dan. BNP Paribas Suisse, the senior Swiss company in the group, observed its own group-internal directives for the prevention of

business with Sudanese clients only in part. This meant that people in the system did not record the Sudanese links, nor did they stop the transactions.

In “apparent violation of prohibitions,” BNP Paribas processed 2,663 electronic fund transfers totalling $8.37 billion regarding Su-dan between 2005 and 2009; $1.18 billion between 2005 and 2012 regarding Iran; and $1 million regarding Burma and $689 million regarding Cuba in comparable periods as well.

CORRESPONDENT ACCOUNTS

In 2004 BNP Paribas Suisse decided to shift its US dollar clearing ac-tivity away from BNPP’s New York branch in an ‘apparent’ effort to shield that branch from liability for breaching sanctions. While this happened, the Swiss headquarters maintained US dollar-denomi-nated correspondent accounts for several Sudanese banks, includ-ing four banks on the OFAC list.

“BNP Paribas Suisse made transactions for Sudanese clients using accounts that it enlisted another bank to manage”In the words of its federal regulator, BNP Paribas Suisse made trans-actions for Sudanese clients using accounts that it enlisted another bank to manage. BNPP switched to an external US clearer and in-serted third-party banks between it and the client. It was therefore not evident to the US bank that Sudanese clients were involved in the transactions. For its part, BNP Paribas Suisse believed that US sanction law did not apply to foreign banks, especially where transactions were settled through a US bank. BNP Paribas Suisse did, nonetheless, have grave doubts about the legal implications of this practice. No fewer than 20 legal opinions were sought con-cerning this matter and BNPP’s agreement with the Treasury says: “Though not always consistent, the legal advice that BNP Paribas received described OFAC’s comprehensive sanctions and explained why BNPP should be careful in its business that involved parties subject to OFAC sanctions.”

THE POTENTIAL FOR SECRET DEMANDS

In 2009, the IRS struck a ground-breaking deal with UBS for $780 million in penalties and the names of its American depositors. Much has happened since, but the habit of asking for names to grease the wheels of a settlement – even when it is illegal to do so – must be a hard one for the Americans to kick. One wonders how many people – both from the US and not – whose names and details the Americans have asked BNPP to pass to them surrepti-tiously under the counter. One further wonders whether BNPP held its ground or said yes.

THE BNP PARIBAS FINE: SOME DETAILSIn agreeing to pay $8.97 billion by way of settlement with US authorities, while also pleading guilty on two criminal charges to breaching US sanctions against Iran, Cuba and Sudan, the French lending giant BNP Paribas has set a record in the world of sanctions. Chris Hamblin of Compliance Matters investigates.

ENFORCEMENT

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ENFORCEMENT

Secret demands and secret deals certainly seem to be on the mind of Russian president Vladimir Putin, who claims that the US has been offering to cut the size of the bank’s fine in exchange for the French government scrapping a contract to sell Mistral warships to Russia.

SWISS ENFORCEMENT ACTION AGAINST BNP PARIBAS

Switzerland has recently pledged its all to the cause of pleasing the American government, first by signing up to a ‘model 2’ inter-governmental agreement with the US Internal Revenue Service in line with America’s Foreign Account Tax Compliance Act and sec-ondly by signing a declaration under the auspices of the Organisa-tion for Economic Co-Operation and Development to the effect that it is determined to tackle cross-border tax fraud and tax evasion, after centuries of resistance to the idea of openness between gov-ernments about private bank accounts and holdings. In line with this new spirit of capitulation, the Swiss regulator, FINMA, has de-cided to punish BNPP for daring to do business with countries that the American government does not like, even though it broke no Swiss sanctions. Its penance is to set aside additional capital for op-erational risks and cease to conduct business with companies and persons subject to EU and US sanctions.

As part of the global elite’s drive to push up the number of national regulatory bodies headed up by foreigners, presumably because those foreigners will not suffer much reputational damage in their home countries for their dereliction of duty after the next finan-cial crash, an Englishman called Mark Branson took over FINMA on April Fool’s Day this year.

THE EFFECT OF THE FINE ON THE BANK’S FINANCES: A COMPARISON

The fine beggars all previous ones that the American authorities have levied on European banks for criminal conduct in recent years. If one counts tax evasion as a crime, Credit Suisse previously topped the list with $2.6 billion, with UBS paying $780 million for the same reason. If one does not, the next largest fine to BNP Paribas’ in-volving crime is HSBC’s $1.9 billion, levied at the end of 2012 by multiple agencies for its role in money-laundering. The second and third fines for ‘sanction-busting’ were $674 million for the British bank Standard Chartered and $629 million for the Dutch group ING. Commerzbank, Credit Agricole, Société Générale and the Italian bank Unicredit seem to be next in line, with commentators claiming that US authorities are victimising European banks for some rea-son. The Americans are said to be investigating the four banks for a combination of money laundering and ‘sanction-busting’. There are, however, reports of American banks in the firing line for the same reasons – notably Citigroup’s Banamex unit in Mexico. The progress of these investigations is unknown.

THE HARD ROAD AHEAD

Compliance Matters has long been wondering when the US au-thorities – especially the go-ahead prosecutor Ben Lawsky and his New York Department for Financial Services – were finally going to

remove a European bank’s licence to trade in the US. The combative Lawsky – perhaps in response to his president’s dim view of the French refusal to back down over Russia – has finally felt himself able to move in this direction, although not all the way. His depart-ment has pressurised BNP Paribas to suspend its US dollar clearing operations through its New York Branch and its other US affiliates for one year “at BNPP business lines in which the misconduct cen-tred.” The department is also to extend, for an additional two years, the stay of an ‘independent’ monitor that it has already installed at BNPP’s New York Branch to conduct a review of Bank Secrecy Act/anti-money-laundering and sanctions compliance. The monitor will also review BNPP’s compliance with the clearing suspension. It is to be hoped that this individual or firm is not going to be as lax as the two regulators from the Office of the Comptroller of the Cur-rency who sat in the offices of HSBC New York while that bank was laundering money for Mexican drug cartels and the Iranians.

Reuters recently reported, quoting an anonymous source, that the bank had just decided to move its sanctions compliance operations from Paris to New York. This decision, not part of the bank’s settle-ment with regulators, is likely to involve a profound level of culture-shock for the staff who have to move. It is also likely to be costly.

New York Governor Andrew Cuomo claimed additionally that BNP Paribas planned to sack some senior executives. This has now reportedly happened.

MON ADVERSAIRE, LE FINANCE

The US authorities are not simply targeting European banks as a cynical protectionist ploy. Citigroup of New York has recently agreed to pay $7 billion in fines and consumer relief to quash an allegation that it misled investors over mortgage-backed bonds in the run-up to the financial crisis of 2008. The Department of Justice has also been asking for about $17 billion from Bank of America to settle claims of a similar nature, i.e. “for the suspected mortgage misdeeds of its Countrywide Financial and Merrill Lynch units,” ac-cording to the New York Times. However, there is a lingering feeling among European policy-makers that too many recent target-banks have been European and that this is no accident.

In January 2012, as Socialist presidential candidate, in a speech in Bourget that instantly went viral on a global scale, François Hol-lande said: “I’ll tell you who my opponent is, my true opponent. He has no name, no face, no party. He will never run for office. He will not be elected. And yet he governs. My opponent is the world of finance.”

He then promised the angry public that they would not have long to wait before he brought the bankers to book. He threatened to levy “a real tax” on all their financial transactions and prevent bonuses and share options from forming part of their remuneration. This promise has yet to be honoured, although some of the remunera-tion-related policies being formulated by the European Union have taken on a distinctly draconian character.

A NOTE TO ALL RELATIONSHIP MANAGERS FROM THE EDITORChris Hamblin+44 207 148 0188chris.hamblin@clearviewpublishing.com

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.

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NEW HURDLES FOR CHARITABLE STATUS IN JERSEYThe States of Jersey passed the Charities (Jersey) Law on 18 July 2014. Compli-ance officers who deal with Jersey chari-ties in future might want to check to see whether they are conforming to the four resultant tests. These are:

• a charity test, which the Charity Commissioner has yet to determine, which guarantees that a registered charity can only have charitable purposes and must provide public benefit.• an entitlement for registered charities to receive charitable tax reliefs and to call themselves a charity. • a requirement for the governors of a charity (e.g. trustees, directors or foundation council members) to ensure the charity obeys the law.• the use of the terms ‘charity’ restricted to registered charities only and regulations being drawn up that will restrict the term ‘charitable’.

SUSEP INTRODUCES ‘BIG FOUR ONLY’ BAN FOR ACTUARIAL AUDITSThe Superintendencia de Seguros Priva-dos, Brazil’s insurance regulator, is report-edly pre-empting the European Union’s nascent plans to look beyond the exclu-sive use of ‘Big 4’ accountancy firms to do various work, in this case actuarial audits. The new rules are timed to bite on 1 Jan 2015.

The rules are to be found in resolution 312, which will force insurance firms to set up audit committees if they have more than 500 million reals ($225.7 million) in equity or 700 million reals ($316 mil-lion) in technical provisions (i.e. reserves, which might in this case cover unearned premium, unexpired risks, claims out-standing or equalisation) if they have not done so already.

According to reports, every insurance firm must change its independent actuary and independent auditor every 5 years,

with no reappointments until after a 3-year gap.

SUSEP was created by the Decreto-ley 73/66 and is directly linked to the finance ministry. It is the executive body of the policies designed by the CNSP and is also the insurance commissioner, responsible for the supervision and control of insur-ance, open private pension funds and capital markets of Brazil.

CII LAUNCHES GUIDE TO WHISTLE-BLOWINGThe UK’s Chartered Insurance Institute has launched ‘Speaking Up’ – its guide to help employees ‘go public’ with the un-ethical practices of their employing finan-cial firms – as part of its ‘ethical guidance’ series. The largest ‘Accredited Body’ or AB in the UK has said that this is more to help raise awareness of the phenomenon in advance of new Government guide-lines which are expected in due course and might emanate from Vince Cable’s Department of Business, Innovation and Skills, which is already conducting a study.

This guide, available to the public, pro-vides CII members with information about how to report concerns. It explains the whistle-blowing process and the law and regulations connected with it, as well as what to weigh up when preparing to blow one’s whistle. It tries to reassure people about the importance of upholding ethi-cal standards of behaviour, giving a voice to these concerns and from whom to seek advice. A copy of the CII guide is available at http://bit.ly/1rSHZ3b

ONLY 48% OF FIS THINK THEY HAVE A STRONG CULTURE OF AML COMPLIANCE, SAYS POLLA poll conducted by NICE Actimize, which runs an all-in-one financial risk and com-pliance software platform, has found that only 48% of participants in one of its polls believe that the financial institutions they work for have a strong culture of compli-ance, with 29 percent expecting change in their firms’ approach to anti-money-laun-dering (AML) compliance this year.

Despite such figures, the company’s Anti-Money Laundering “Culture of Compli-ance” Poll recorded that only 22% thought that there was room for improvement in their compliance cultures – an indication that much indoctrination remains to be done, even in compliance departments. The respondents to the poll were 422 compliance people from more than 300 fi-nancial service firms who participated in a recent webinar. Nearly half of them came from large global institutions from among 17 countries, with the United States, the United Kingdom and Canada taking the lion’s share.

Aligned to the issues faced in building a strong compliance culture, approximately 47% of the responding financial institu-tions thought that their most pressing AML concern for the next 6 to 12 months was the imperative to spot gaps in their AML strategies. About 23% of them cited model risk governance and model risk management requirements as another area for continued attention, followed by the desire of about 18% to avoid reg-ulator-imposed sanctions. About 12% of them said that over the coming year they would be apprehensive about being held personally responsible for non-compliant activities.

Seventy-five per cent expected that sig-nificant, or at least some, operational changes would have to be (or were about to be) made to improve the quality of da-ta-gathering and information-gathering at their organisations.

The poll’s hosts thought that the fig-ures provided further proof, if any were needed, that regulators were interested in holding both institutions and compliance officers to account. They intimated – although they did not say outright – that firms were increasingly integrating processes such as customer risk assessment and sanctions-screening efforts with transaction monitoring.

ECB SUPERVISION COMING FOR LARGEST PRIVATE BANKSThe European Union has given Lithuania the green light to become the latest ad-dition to Euroland on 1 January 2015 and, with it, the ‘single supervisory mecha-nism’ or SSM. The governmental club has decided on the conversion rate of 3.45280

Jersey

Brazil

United Kingdom

Global

Lithuania

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Lithuanian litas to €1 and the European Central Bank will take over direct super-vision of the biggest Lithuanian banks in January 2015. Lithuania has been taking part in a comprehensive assessment of bank balance sheets along with the 18 countries of Euroland since January 2014. This affects the three biggest credit insti-tutions in Lithuania in terms of assets: SEB bankas, Swedbank and DNB bankas, at least two of which have significant private banking arms.

IoM FSC PUBLISHES ANNUAL REPORTNew requirements came into force re-garding minimum qualifications for fi-nancial advisers at the beginning of the year. Indeed, the IoM calls them “level 4 qualifications” in line with onshore British terminology. It has also made ‘enhanced’ continuous professional development (CPD) mandatory for everyone who gives financial advice to retail (including high-net-worth) investors. It has also forced institutions to make more and better disclosures to investors.

Another success over the previous year has been the signing of co-operation agreements with EU authorities to ensure that alternative investment funds from the island can be marketed into the EU. This happened last July.

The IoM regulators are evidently worried about the eventual outcome of the UK’s Independent Commission on Banking, which produced the Vickers Report in 2011. It recommended that British banks should ‘ring-fence’ their retail from their investment banking operations to keep the wealth of high-net-worth individuals and lesser customers out of the hands of ‘spivs’. It also suggested the building-up of vast capital stocks and radical reform for competition in retail banking.

A bill to enhance controls in the ‘gatekeeper’ sector (lawyers, accoun-tants, notaries and others) is expected to go before the Tynwald (parliament) in March next year. The isle’s regulators are also planning to beef up civil penal-ties, the better to ensure compliance with their regime. They expect to have done something towards this by September or the autumn.

The Isle of Man Government has de-cided that certain activities relating to virtual currencies such as Bitcoin should be subjected to its money-laundering and terrorist-financing controls, but it wants to defer the introduction of any prudential oversight “until there is more of an international consensus on how it could be framed.” In the meantime, the commissioners suspect that this is a highly risky area for participants, who ought to be aware that there is no Government protection in place for them.

It was early last month that the IoM Gov-ernment’s Department of Economic De-velopment announced that the Manx is-land was open for business to high-quality providers in the crypto-currency sector. In the same month, CoinCorner opened the first Manx digital currency exchange.

UBS ORDERED TO PAY €1.1 BILLION BAIL IN FRENCH MONEY-LAUNDERING PROBE UBS has been ordered to pay €1.1 billion ($1.48 billion) in bail by the French pros-ecutor’s office after being placed under investigation for money laundering in a process the bank has described as “highly politicised”. The affair comes on top of an existing probe into the bank over allega-tions that it helped French clients hide their money in Switzerland.

The bank said in a strongly worded press release that it considered both the legal basis for the bail amount and the method of calculation to be “deeply flawed” and would appeal.

The French unit of UBS has been under investigation by French authorities since June last year for allegedly soliciting French clients to open accounts designed to evade taxes in Switzerland. Under French law, only French-registered finan-cial entities are allowed to recruit clients in France.

Last year, UBS was fined €10 million by France’s Prudential Supervisory Authority for what the regulator called “lax” con-trols in business practices relating to tax evasion.

The Sanctions Committee of the ACP,

which opened disciplinary proceedings in April 2012, also reprimanded the French subsidiary of the Swiss bank. It said its actions did not pre-judge other actions it may take against Switzerland’s biggest bank.

LAWSKY PLUMPS FOR BITCOINNew York has become the first US state to prescribe a regulatory system solely for virtual currencies. Its dynamic super-intendent of financial services, Benjamin Lawsky, whose ultimate ambition seems to be to become Governor or New York like his spiritual predecessor, Elliot Spitzer. The proposals were published on 23 July and there is now a 45-day waiting period.

Each licensee will, if all goes well, be required to comply with all applicable federal and state laws, rules and regula-tions. It will have to designate a qualified individual or individuals responsible for coordinating and monitoring compliance. It will have to maintain and enforce writ-ten compliance policies, including policies with respect to fraud control, money-laundering control, cyber security, pri-vacy and information security, all being reviewed and approved by its board of directors.

The new DFS BitLicenses will be required for firms engaged in the following virtual currency businesses:

• Receiving or transmitting virtual currency on behalf of consumers.• Securing, storing, or maintaining custody or control of such virtual currency on the behalf of customers.• Performing retail conversion services, including the conversion or exchange of fiat currency or other value into virtual currency, the conversion or exchange of virtual currency into fiat currency or other value, or the conversion or exchange of one form of virtual currency into another form of virtual currency.• Buying and selling virtual currency as a ‘customer business’ (as distinct from personal use).• Controlling, administering, or issuing a virtual currency. This does not refer to virtual currency ‘miners’.

NEWS

Isle of Man

France

USA

This conference should be attended by the senior management of business units whose role requires a broad understanding of regulatory issues. It is also of benefit to experienced compliance officers looking for an update on compliance issues, as well as new members of staff within the compliance and regulatory functions who need a solid grasp of the UK’s financial regulatory regime.

An Introduction to UK Financial Services RegulationLondon, Thursday 9th October 2014

Fourth Annual Summit20% discount for Compliance Matters subscribers

Featuring senior speakers from many of the top London law firms, the topics covered will include:

• The ‘twin-peaks’ regulatory architecture 18 months on – a review and lessons learned• The new ‘approved persons’ regime and the responsibilities of individuals working in financial

services• Conduct of business rules and the regulatory handbooks• Prudential regulation of firms by the PRA and the FCA• Supervision of regulated firms• Consumer protection and product regulation• Financial crime and market abuse• Investigations and enforcement

In addition, there will be a panel discussion on likely future regulatory developments.

An impressive panel of speakers from top law firms includes:

• Andrew Clark, Partner, Head of Financial Crime, PricewaterhouseCoopers LLP• Carl Fernandes, Partner, Financial Regulation Group, Linklaters LLP• Jonathan Guest, Partner, Eversheds LLP• Angela Hayes, Partner, King & Spalding• Caroline Stroud, Partner, Freshfields Bruckhaus Deringer LLP

Attendance at this conference will earn the delegate six CPD Points

To find out more and to book please visitwww.cityandfinancial.com/IFR4 or email

Paul Hooper: phooper@cityandfinancial.com or call+44 (0) 1483 479331

If booking online enter discount code IFR4CMat the Submit payment stage

COMPLIANCE MATTERS | JULY 2014 | 9

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QROPS

THE ‘PROFESSIONALISATION’ OF ADVICE

A recent review that the FCA commissioned, which took in nearly 300 cases from bulk pension transfer advice exercises between 2008 and 2012, unearthed “a risk of customers losing out on retire-ment income due to poor advice.” Green, who answered Compli-ance Matters’ questions by email, agreed with it on the grounds that the concept of ‘professionalism’ must continue to gain ground in the sector.

“We champion the revised QROPS guidelines that insist that a cli-ent’s tax position and risk appetite, amongst other factors, are fully assessed; and that schemes that are substantially underfunded will have the right to refuse transfers. The clampdown will, without doubt, strengthen the sector for all its concerned,” he said. His an-swers to our questions are below.

Q1. What’s the angle here for high-net-worth (HNW) clients?

A: HNW clients are, typically, financially ‘savvy’ individuals who are aware of the need for tax efficiency – perhaps largely because their tax burden could be extremely high – and investment flexibility and control in order to achieve their long-term financial goals. There-fore, if they reside overseas, or are planning to move out of Britain, it often makes sense for them to consider QROPS as part of their personal finance strategy. Whether QROPS are an option or not will, ultimately, depend on where they want to retire.

Q2. Who organises QROPS for HNWs?

A: It is highly recommended that an independent financial advisor with cross-border expertise and QROPS experience should organise pension transfers.

Since the recent Treasury announcement, only FCA-licensed advi-sors will be able to give advice about the transfer of British pensions to other jurisdictions. To my mind, this makes perfect sense.

This will clearly result in more compliance procedures for firms such as deVere Group, which offers QROPS and has an FCA licence in the UK, but I believe that it will inevitably drive up the quality of advice, improve standards in the wider financial services industry, protect clients more effectively from sharp practice, make advisors more accountable, and mature the sector further.

Q3. What did George Osborne, the Chancellor of the Exchequer in the UK, do to promote QROPS recently?

A: It is not quite ‘promotion,’ but rather that the FCA, amongst oth-ers, has been working diligently to shore up the industry by making

up tougher rules and regulations and scrutinising more schemes, as well as the firms that promote them. This is something we support as it is of benefit to all stakeholders, including the clients and advis-ers, as it is bound to make the sector grow in the long term.

“The number of QROPS has hit yet another new high with 3,416 on the latest HMRC list”Q4. How many schemes are there? Are any coming off the list and, if so, where and why? Is the list still growing?

A: The number of QROPS has hit yet another new high with 3,416 on the latest HMRC list. The number of pensions tops the previ-ous high of 3,405 QROPS listed on 1st June 2014. There are 42 fi-nancial jurisdictions currently represented. This list seems likely to grow longer as the industry becomes more robust and demand for QROPS continues to soar as more clients become aware of their associated benefits. On the latest list, two schemes were removed – one in South Africa and one in Trinidad and Tobago.

Q5. How old is the concept of QROPS?

A: HMRC established the concept of QROPS in April 2006.

Q6. What hoops does one have to jump through to get HMRC to say ‘yes’ to a QROPS? Is there leeway?

A: Each scheme into which we transfer a pension has to be recog-nised by HMRC. There is a specific, and increasingly stringent, set of criteria for every scheme to adhere to, should it wish to become an HMRC-recognised QROPS.

Q7. 200 schemes migrated from Guernsey to Malta in 2012. What happened there?

A: In 2012, HMRC guidance notes banned jurisdictions, including Guernsey, from changing local laws to allow residents to be taxed differently from non-residents.

Q8. Is there anything else to say about the offshore angle to the phenomenon?

A: It is a phenomenon that is, without doubt, on an upward trend. This is largely because the world is becoming increasingly glo-balised. As a result, people are living, working and retiring abroad more than ever. Because of this, demand for pension transfers will continue to soar.

THE UK’S PENSION TRANSFER MARKET FOR HNW INDIVIDUALS – THE RULES EXPLAINEDThe new, tougher regulations and guidelines that will in due course apply to the United Kingdom’s pension transfer market have come in for much approbation from Nigel Green, the founder of the global pension transfer firm of deVere Group. From now on, only advisors regulated by the Financial Conduct Authority will be able to offer advice on the transfer of defined benefit pension schemes into Qualifying Recognised Overseas Pension Schemes (QROPS).

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JURISDICTION FOCUS – JERSEY

Q1. I hear that Jersey has a sort of ‘AIFMD-lite’ regime. Why is this of benefit?

A: Jersey is the first non-EU-member-state to secure approvals un-der the AIFMD. Alternative fund managers can come to Jersey and distribute their funds into the EU on a private placement basis, us-ing a Jersey-based manager. If you’re a US-based firm and you’re setting up a European fund structure, you can domicile both the fund and the manager in Jersey and draw customers all over the European Economic Area.

If I’m a fund manager and I want to distribute to Europe, Jersey has the necessary AIFMD-compliant regime. If I want to distribute into the Middle East, Jersey has an alternative IOSCO-compliant regime to distribute there – it has a lighter touch. The fund manager there-fore does not have to split its resources across many jurisdictions.

If I’m a US private equity real estate manager and I run investor re-lations from my office in London, I could lift myself out of the scope of the AIFMD by coming to Jersey. I could also market my fund to people in the Far East as long, as I’m not marketing for EU business. Flexibility is the operative word here.

Q2. What is new on the limited liability partnership scene?

A: In January 2013 we adjusted our law to satisfy the growing inter-national consensus about the necessary degree of creditor-protec-tion. This has been very successful and further modernisations are currently in active consideration.

In 2009 Jersey was also the first of the Crown Dependencies to en-act legislation to permit the establishment of foundations (just un-der 300 have been established), a civil law alternative to the com-mon law trust, and a structuring solution which has proved very successful in the civil law jurisdictions and for certain types of busi-ness, such as philanthropic ventures.

Q3. Are there any interesting things to say about the recent revamp of Jersey’s money-laundering regulations?

A: Yes, we’re a fast adopter! The FATF revised their recommenda-tions in February 2012 and we passed the order in August 2013.

“We already collect beneficial ownership information to a higher standard than the UK is proposing”

[Editor’s note – this order clarifies the circumstances in which one should follow “simplified or enhanced know-your-customer or ‘cus-tomer due diligence’ measures.” There was another order in De-cember 2013 to address the International Monetary Fund’s criti-cisms of Jersey’s AML regime. These – now remedied – were that article 34 Proceeds of Crime Law and article 30 Drug Trafficking Of-fences Law were not wide enough to include all acts of “concealing or disguising” and “converting or transferring” with the purpose of avoiding prosecution for a predicate offence; that article 33(2) POCL said that “in proceedings against a person for an offence under this article, it is a defence to prove that the person acquired or used the property or had possession of it for adequate consideration;” that the offences of acquisition, possession and money-laundering itself did not extend to “self-laundering;” and problems with the money laundering provisions in the Terrorism (Jersey) Law 2002.]

Q4. Why is Jersey thinking of reviewing its age-old rule that only the top 500 banks of the world can be registered there?

A: Jersey takes the risk of bank failures very seriously. As a first line of defence, it developed a ‘top 500 policy’. Since that policy was introduced we have had a worldwide economic crisis and jurisdic-tions across the world have been forced to consider the prospects and repercussions of banking failure. This has led to new strategies that range from ‘bail in’ models to the introduction of funded inves-tor compensation schemes. Additionally, the banking industry as a whole has also contracted. These changes in the landscape have prompted our Government to review the ‘top 500’ policy to test the extent to which it is still necessary, relevant and achieving of its original purpose. The outcome of that review, when concluded, will no doubt be publicised in due course.

Q5. David Cameron, the UK’s premier, is bullying you into making your register of beneficial owners public. Are you going to give in?

A: We wouldn’t see it as bullying. We already collect information to a higher standard than the UK is proposing. Through the licens-ing of its company service providers, Jersey already insists on the collection of beneficial ownership information, which has always been available to foreign competent authorities whenever they go through the appropriate channels. It is interesting to see that the US has now promised to set up a very similar model and that the UK is, so far, alone in its policy of creating a central public register. Quite apart from serious issues surrounding the validation of infor-mation that might be placed onto the UK’s registry, its existence also has serious privacy and security repercussions. Unless it be-comes a truly global standard, I cannot see Jersey’s finance indus-try participants pushing to depart from the current model, which works very well.

JERSEY: WHERE ARE WE NOW?Chris Hamblin of Compliance Matters asked Jersey Finance chief Richard Corrigan about his jurisdiction’s recent and coming regulatory struggles. Together they discussed the new money-laundering law, the Alternative Investment Fund Manager’s Directive, under which Jersey operates a ‘dual regime’, compliance with the International Organisation of Securities Commissions (IOSCO) and the IoM Government’s attitude towards bank failures.

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CRD IV

The consultancy’s report shows that, in an effort to remain competi-tive in attracting and keeping talented staff, large numbers of banks are either increasing the base salaries that they are offering or us-ing cash allowances as part of the pay mix. These allowances, how-ever, cannot be performance-linked under the European Banking Authority’s definition of ‘fixed compensation.’

Mercer’s “global financial services executive compensation snap-shot survey” analysed pay-related information amongst 78 financial service organisations, including 44 banks in 18 countries. The report surveyed emerging pay practices related to changes in pay mix, the application of malus conditions and clawbacks, strategies for ad-dressing restrictions to be found in CRD IV and the definition and number of material risk-takers to which regulations applied.

CASH IS KING

High-performing employees expect remuneration that compares well with that of their peers, but CRD IV restricts EU-headquartered banks in what they can pay in relation to performance. They are look-ing at other methods of making up the shortfall to prevent staff walk-ing into the arms of other less-regulated competitors, such as hedge funds. Cash allowances are a form of ‘fixed compensation’ that do not generally require a corresponding increase in benefit costs as base salary increases do. However, both are forms of guaranteed cash with no ‘variable’ link to performance, which the consultancy believes, in the words of its so-called head of talent, is “far from satisfactory.”

Since 2008, banks have made much progress in structuring pay so as to allow – or, at least, half-convince regulators that they allow – for re-alistic risk-adjusted results and good conduct/compliance behaviour over the medium term. Mercer’s report shows that organisations are continuing to try to strengthen the link between performance man-agement and compensation, introducing individual risk-related fac-tors into performance management and strengthening bonus malus/clawback conditions.

“Fifty-five per cent of EU-based banks and 47% of non-EU-based banks are planning to increase cash allowances to compensate for the bonus cap”There is also strong evidence that banks are applying malus condi-tions, i.e., actually reducing or not paying deferred unvested awards when lower performance, non-compliance or misconduct occur. In 2012, 62% of banks applied malus – this practice was far more preva-lent among European banks (82%) than it was among North Ameri-can banks (25%). In 2013, however, the proportion of North Ameri-can banks that applied malus increased to 42%. Almost half of banks said that they were applying malus to individuals due on grounds of

non-compliance or misconduct. Almost one-third said that it applied when performance was poor.

Mercer’s report quoted one of its executives, who said: “The prog-ress the banks have made in improving their pay practices over the last several years since the crisis is now being reversed to some extent with the impact of the CRD IV rules. To remain competitive, banks are shifting a significant portion of compensation into fixed, guaran-teed pay which reduces their ability to pay for performance and also to defer as much compensation subject to malus over a multi-year performance period.”

Mercer has observed that in some cases banks are opting not to pay any up-front annual cash bonus at all in the light of the increases in fixed pay and are shifting all ‘variable’ compensation into multi-year-deferral or long-term-incentive arrangements.

STRATEGIES TO COUNTERACT CRD IV

When asked about their strategies to deal with CRD IV’s remunera-tion rules, 70% of EU-based banks said that they were going to ask approval from shareholders or their parent companies to extend the variable pay cap to 200% of total fixed compensation. In addition, 63% of EU-based banks are increasing or planning to increase base salaries, while only 13% of those based outside the EU are going to do so. Fifty-five per cent of EU-based banks and 47% of non-EU-based banks are planning to increase cash allowances to compen-sate for the bonus cap for “impacted risk-taking staff.” At least 20% of organisations in the EU and the same proportion of organisations outside the EU are, in the somewhat stilted jargon of the consul-tancy, “enhancing their broader employee value proposition beyond pay elements.” The survey also found that some EU participants are increasing the use of long-term deferred compensation (11%) and lengthening vesting periods (11%). Only 5% will be using “Bail-in” convertible bonds as a long-term compensation vehicle.

CONVERSION OF VARIABLE TO FIXED PAY

In shifting variable compensation to fixed compensation, 27% of EU-based banks said that they were planing to discount variable pay, something that no bank based outside the EU intends to do. How-ever, 39% of banks in the EU said that they were planning to adjust ratios on an individual basis, which may or may not include some dis-counting. The survey’s project-manager noted: “If no discounts are applied in the shifting of variable pay at risk for performance to fixed guaranteed pay, then the ‘risk-adjusted value’ of total compensation to the individual has actually increased.”

The remaining question is how this transition from variable to fixed compensation will affect the market dynamics for talent outside the EU between non-EU based banks and those based in the EU. Because banks based in the EU must apply the same cap rules to their ‘risk-takers’ no matter where they are located in the world, fixed compen-sation could rise more broadly across other markets as well, leading to less pay for performance.

CRD IV – THE SURVEYThe European Union’s new – and fourth – Capital Requirements Directive is weakening the efforts of banks to manage performance and risks through pay, according to a survey by Mercers, the risk advisory giant. Partici-pants came from 18 countries, with half in Europe, 39% in North America and 11% in the Asia-Pacific zone.

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MIFID II

The two regulatory experts were understandably worried about the costs that they expect the directive, when completed, to impose on their 250 member-firms, which consist of discretionary fund or portfolio management businesses, wealth management firms and the professional firms that serve them. At this stage, said Cornwall, “there’s not enough detail for us to determine costs”. This did not, however, stop the two experts from pointing out the likely areas of additional expense. Cornwall added: “MiFID II is not as great as Mi-FID I in terms of headlines, but there is a massive series of projects that firms will have to manage.”

WHEN GOOD EUROPEANS ATTEMPT TOO MUCH

On the general subject of how wealth management firms should treat customers, the UK is facing some confusion because three overlapping regimes: “treating customers fairly” or TCF, with its six principles; the Retail Distribution Review which began to bite a cou-ple of years ago; and MiFID with its impending upgrade. Cornwall asked an often-asked question and came up with his own answer: “Will there be an RDR II to clean up the mess? In my own view, we ought to change the RDR to match what’s happening in Europe. We’re all good Europeans now.”

“MiFID II/MiFIR is a response to market fragmentation and information distortions thrown up by MiFID I”The EU has come out with many directives (laws which have to be enshrined in the law of member-countries) and regulations (laws which take immediate effect without such transposition) under Mi-chel Barnier, an EU commissioner who deals with financial super-vision, but as he is to be replaced in November, Barrass regarded him as a ‘lame duck’ and expected no new policy until then. On a critical note, Barrass noted that the EU had plenty of legislation still outstanding, notably the fourth money-laundering directive; some data protection legislation; money-market funds legislation; and a regulation to do with benchmarks, i.e. indices (statistical measure-ments) such as LIBOR, ‘calculated’ (i.e. fabricated) from underlying data, that are used as reference prices for financial instruments or to measure the performance of investment funds. He took all this to mean that “too much is being attempted.”

On the other hand, the WMA’s literature credits the European Par-liament, which most people do not see as a proper parliament, with being the “first ever EP with real legislative power” and says that it has not only voted MiFID II and an accompanying regula-tion (MIFIR) into EU law, but also PRIIPS (packaged retail investment and insurance-based investment products) rules, MAD/MAR (the

second market abuse directive and an accompanying regulation) and CSD/R (the central securities depository regulation), all of which are “key for our sector.”

In the almost impenetrable double-talk of the European Union, the MiFID legislation has now reached ‘level 1’ with the enactment of vague principles and rules that will, after 30 months or so, be bind-ing on all relevant entities. ‘Level 2’, on which the European Securi-ties and Markets Authority (ESMA) has been consulting interested parties, will consist of “non-essential technical details and imple-menting measures.” Once the responses – including the WMA’s – are all in, new regulations will come. The deadline seems to lie in August. Cornwall commented: “we only got the first ‘level 2’ paper-work two months ago. There are bits of what we want to re-write even now. We’ve had to race through this lengthy stuff and it’s very hard to get the firms engaged because they have the day job.”

THE IMPACT OF MIFID II AND MIFIR

On the subject of rules to protect investors from sharp practice, the new law will make things even tighter for firms than its predeces-sor MiFID I, which came into force in 2007. Unlike its predecessor, however, the change it engenders will not be ‘iconoclastic’, in Bar-rass’ words.

“People shouldn’t be frightened. It’s not as dramatic as its prede-cessor, although it’s quite tough in some areas. On the market side, more is new – it covers organised trading facilities [Europe’s rough equivalent of the US swap execution facility], consolidated tape [a speedy electronic system that reports the latest price and volume data on sales of exchange-listed stocks] and the handling of dark pools [electronic alternative trading systems, very similar to stock exchanges but secretive, as allegedly abused by Barclays]. Even here, fundamental changes to create competition between trad-ing venues were in MiFID I. Some of MiFID II/MiFIR is a response to market fragmentation and information distortions thrown up by MiFID I, including the industry’s request for consolidated tape. This is for the larger firms but doesn’t affect us a lot.”

“OUR TOP FIVE PROBLEMS”

Barrass and Cornwall had a list of the top five problems that they had identified in the new legislation. In other words, they had iden-tified the areas in which changes to administrative and IT systems were probably going to be the most expensive. These were, in no particular order:• trading volumes;• transaction-monitoring;• telephone recordings;• disclosures of costs; and• loss thresholds of discretionary managers.

Let us deal with each in turn.

MIFID II: WHY PRIVATE BANKS WILL HAVE TO UPGRADE SO MANY SYSTEMSESMA, the European Union’s overarching markets regulator, recently faced questions from banks and trade bodies about the Markets in Financial Instruments Directive, Mark II, at a meeting in Paris. Among the questioners was Ian Cornwall of the UK’s 14-man Wealth Management Association. He and his colleague John Barrass told Compliance Matters about the WMA’s concerns over this upcoming 720-page directive and its accompanying regulation, MiFIR.

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MIFID II

THE EXECUTION OF ORDERS: WHAT ARE ‘TRADING VOLUMES’?

Under the new directive, investment firms that execute clients’ orders will have to make public (annually, for each class of financial instrument) the top five execution venues in terms of trading vol-umes where they executed clients’ orders in the preceding year and information about the quality of execution obtained. Cornwall was full of doubt about this.

“Our problem here is going to be the sheer cost of producing the data. What is meant by the terms ‘each class of financial instru-ment’, ‘trading volumes’ and ‘quality of execution obtained’? That last is a pretty tricky one. What is the time period to produce the data? There are potentially huge system costs with little benefit for retail clients.”

TRANSACTION REPORTING

This is one of the areas of MiFIR that appears to be set in stone already. Cornwall said: “What’s in the regulation is pretty much what’s going to come in. There’s not much wiggle-room.” Andy Thompson, the WMA’s director of operations, then led Compliance Matters through three main issues.

1. The transmission of an order. An investment firm that transmits orders to another investment firm will still be able to rely on that firm to report the transactions but – and it is a big but – the trans-mitting firm will be obliged to provide much more information to the receiving firm than ever before and there must also be a written agreement between the two regarding the obligations that both parties have over this. Thompson added: “There’s much more own-ership. There has to be a contract between the two about who does what...or the manager can report it himself.”

2. ‘Client identifiers’. This is problematic in a country such as the UK that still lacks some of the trappings of a police state. On the continent of Europe, governments of an authoritarian frame of mind – which was practically all of them – forced their citizens to carry papers during the war and never managed to kick the habit afterwards. The UK gave up national ID cards in 1954 and is still hav-ing trouble trying to force the next generation of them on Britons. Thompson remarked: “For natural persons the obvious substitute for a national ID number is likely to be a national insurance number, but some firms don’t collect these. A passport number might do. For legal persons, there has to be a ‘legal entity identifier’ and the client must apply for an LEI before it can commence or continue trading. This has been in the press over the last year or two, but trusts aren’t defined as ‘legal persons’ – they’re ‘legal relationships’, according to STEP.” STEP is the Society of Trust and Estate Practitioners.

MiFID is not clear on the subject of trusts – in the words of a senior client advisor at Stanhope Capital, “the French don’t ‘get’ trusts. They don’t understand them.” A discussion paper that ESMA pub-lished on 22 May admitted that the organs of the EU must apply further consideration to the question of how to identify joint ac-counts, power of attorney and accounts held on behalf of minors. As Thompson put it: “They themselves [the Europeans] haven’t come up with an idea of how to report these transactions. At the moment there are 23 fields I think in a transaction report. About 90+ will be in a transaction report when this comes in. Some exist-ing fields will change. This is definitely in the ‘top five’ of system changes.”

3. Trader ID. This, said Thompson, is going to be problematic not just for firms in the WMA’s audience, but “right across the

piece.” There are two areas where people or entities have to be allotted IDs.

(i) For execution-only and advisory trades, there has to be identifi-cation for the “trader who pressed the button to initiate the execu-tion.” One example of this is the person who presses the button to submit the order to the order management system.

(ii) For discretionary trades, the person responsible for making deci-sions has to be identified. If a committee makes the decision, there has to be a separate trader ID for each committee.

“For legal persons, there has to be a ‘legal entity identifier’ and the client must apply for one”A recent paper from the accountancy firm of Deloitte’s states: “The discussion paper sets out 93 data attributes which firms may need to populate when submitting a transaction report, an increase from the current 25 attributes. Previous experience from MiFID I imple-mentation demonstrated the difficulties firms can face in reporting accurately. There will be an increased dependency on static data for reporting (e.g. the identification of the trader or the algorithm). Firms should be thinking about the adequacy of their existing data systems now.”

RECORDING OF TELEPHONE CONVERSATIONS OR OTHER ELECTRONIC COMMUNICATIONS

MiFID II sets out a new regime here for communications regard-ing client orders.. On this topic Cornwall began: “It’s not that new for us. We do it already. The main concern is cost. Rather than re-cording 6 months you’re probably going to have to record 7 years. Indexing the data to make it possible to find this-or-that call from 7 years ago – that’s where the money is. You might have to find out if Bill took that call at that particular desk in the building across the road years ago.”

This was an allusion to the MiFID policy that records of telephonic interactions with clients must be recorded for 5 years and not the current 6 months; the regulators can ask firms to retain them for 7 years if it so pleases. Many ‘new’ requirements – written recording policies, staff training, the monitoring of records – are already built into firms’ existing arrangements.

There are to be notes of face-to-face meetings between wealth management firms and clients. ESMA is proposing that clients should be made to sign such notes, which the WMA thinks is prob-ably going to be burdensome for firm and client alike.

Lastly, every client ought to receive relevant records if he asks for them. The WMA suspects that this might not be practical and that there are implications here for complaint-handling and interaction with the Financial Ombudsman Service.

INFORMATION TO CLIENTS ABOUT COSTS AND CHARGES

MiFID calls for the disclosure of all costs and charges in connec-tion with the investment service in question. Each firm will have to disclose its own charges; the costs and charges associated with the client’s investment holdings; and any receipt of any third-party payments, i.e. inducements.

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Disclosures should be ‘before the event’ (‘ex ante’) and ‘after the event’ (‘ex post’). Each should be an “illustration showing the cu-mulative effect of costs on return when providing investor servic-es.” Cornwall commented: “The ESMA advice provides no illustra-tion of what the illustration should contain, so we don’t know about this. It’s difficult from the wording to identify exactly what has to be reported and in what format.

“This is going to be a huge cost to firms. The system costs are likely to equal telephone numbers. And, as I say, it has to be disclosed annually to the client.”

This is actually what point 59 of the ESMA ‘consultation paper’ (ESMA/2014/549) of 22 May states.

“ESMA considers that an investment firm should be obliged to pro-vide its clients both ex-ante and ex-post with an illustration showing the cumulative effect of costs on return when providing investment services, such as portfolio management and investment advice. The illustration should help the client to understand the overall costs and should increase the client’s understanding of the cumulative effect of costs and charges on the investment. The illustration can be a graph, a table or a narrative and should be provided at the point of sale. When providing the illustration the investment firm should ensure that the illustration meets the following high level requirements:

• the illustration shows the effect of the overall costs and charges on the return of the investment;• the illustration shows any anticipated spikes or fluctuations in the costs, such as high costs in the first year of the investment (upfront fees), lower costs in the subsequent years (on-going fees) and higher costs at the end of the investment (exit fees); and• the illustration is accompanied by an explanation of what the illustration shows.”

Cornwall concluded: “One point is that a lot of the investor-protec-tion is not just retail-focused like us. Some of the investor-protec-tion provisions have been widened to take in professional clients. Also, PRIIPS is a document you have to hand to clients. That’ll hap-pen in 18 months’ time.”

REPORTING TO CLIENTS, INCLUDING LOSS THRESHOLDS

Cornwall disclosed: “Most clients already whinge about the volume of papers they get. They can’t opt out of reports. At the moment, if the client wants it annually he has to write to ask for it annually. If he doesn’t, it’s six-monthly. Now it’s going to quarterly.”

This is an allusion to the new rule that reporting must be quarterly as regards valuations and safe custody statements. The focus will have to be on performance and not costs. There is to be no client opt-out this time. The regime, furthermore, is to use loss thresholds for discretionary accounts that are agreed with the client – 10% or 20% or 30% etc. – in multiples of 10%. The way Cornwall put this made it sound as though the client was to have even more control here: “you have to have them in accordance with what the client elects.”

Article 42 of the MiFID Implementing Directive currently requires additional reporting where “investment firms provide portfolio management transactions for retail clients or operate retail client accounts that include an uncovered open position in a contingent

liability transaction”. The application of these requirements has raised some uncertainties over the scope and the effects of this obligation.

In note 20 of its letter, ESMA says that it thinks that this require-ment should be modified in order to “clarify that the agreement of loss thresholds triggering the reporting obligation is an obliga-tion and not an option for firms. Specific predetermined thresholds could also be identified (e.g. 10 % (and multiples of 10%) of the initial investment or the value of the investment at the beginning of each year.”

Cornwall believed that this proposal lacked detail, especially as re-gards cash movements, individual holdings as opposed to whole portfolios, transfers between spouses and transfers to individual savings accounts or ISAs.

TARGET MARKETS

The ESMA ‘consultation paper’ mentions the phrase ‘target market’ 40 times. Firms will have to ensure that each product they manu-facture and/or offer and the distribution strategy they adopt for each are consistent with the identified target market, both from the outset and from time to time thereafter.

One example among many states: “Member states should ensure that the investment firms which manufacture financial instruments ensure that those products are manufactured to meet the needs of an identified target market of end clients within the relevant cat-egory of clients, take reasonable steps to ensure that the financial instruments are distributed to the identified target market and pe-riodically review the identification of the target market of and the performance of the products they offer.”

“The FCA won’t say how it will handle MiFID’s relationship with RDR until the autumn of next year”The WMA’s problem with this crucial phrase, despite its repetition, is that it is ill-defined: “We’re at a loss as to what that term means.”

A LACK OF CLARITY

Plenty of other things in the MiFID II/MiFIR legislative process are ill-defined as well. The WMA’s experts told Compliance Matters that terms such as ‘costs’, ‘switch’ and ‘suitability’ needed further elabo-ration, as did things such as the amount of reliance a firm might place for compliance on other parties such as internal auditors. The UK’s Financial Conduct Authority is not planning to publish any de-termination about how it will handle MiFID’s relationship with RDR until the autumn of next year.

A DISMAL YEAR

Whatever the ESMA papers say at the moment, the eventual out-come of this legislative exercise is going to be a series of expensive systems upgrades. Ian Cornwall predicted: “There will have to be a lot of prep on the part of firms, mainly starting in the last six months of 2015. They’ll have to do some prep then. John Barrass added: “The best we can do is to say the sort of things you’ll have to think about. 2016 is going to be a pretty dismal year for firms.”

MIFID II

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JURISDICTION FOCUS - ISLE OF MAN

Q: Let us begin with the ‘elephant in the room’ – the US Foreign Account Tax Compliance Act and all the unnecessary things they put into FATCA and why they are doing that.

A: Large corporates have a burden of regulation that sits on them already. FATCA is going to introduce a whole new level of complexity based on reporting, particularly for internationally based corpora-tions with footprints in multiple locations. If all FATCA rules, or auto-matic [account information] exchange rules were the same, it would make it marginally easier but unfortunately there are differences be-tween different agreements, whether that be US FATCA, UK FATCA or, indeed, the common reporting standards of the future.

Some people believe that there is not very much leeway at all be-tween agreements, but when one drills down to the technical levels, there are significant differences. If the room for interpretation and mistake leaves that level of doubt, particularly for the large organisa-tions, that’s when ‘good faith’ and ‘bad faith’ starts coming in. Large organisations cannot afford to be accused of bad faith.

Substantially, the agreements are the same but, increasingly, techni-cians are notifying us of specific differences between different types of agreement. One of my colleagues has identified 49 differences be-tween US FATCA and UK FATCA, which are both model 1s. There aren’t many model 2s, and for a very good reason. On our interpretation of a model 2, if you do a bulk reporting of data, then inevitably it begs the question: “this is a smaller or larger number than the one I was expecting – can you give me the rest of the information?” So we saw it as an unnecessary step in the reporting process. Ultimately, the tax authorities of the other country will want to know the detail anyway.

For the model 2, every company has to register on its own with the US Internal Revenue Service (and has to have done it already by 5 May) and you still get the central Treasury collection of data. This breaches the EU’s data-protection rules. We couldn’t reconcile the compliance with European data protection rules with the release of information to a non-competent authority without the enshrinement of a model 1 agreement which protects it from competent authority where the release of information is protected under the Data Protection Act for the EU. After all, we comply with the EU data protection directive even though we aren’t in the EU. We get mutual recognition on the data protection [issue] for our sales in the EU.

Q: Surely, in the UK, s29 Data Protection Act says that personal data processed for the prevention or detection of crime or the assessment or collection of tax is exempt from having to be processed fairly and lawfully in line with the first ‘data protection principle’. Other European countries’ laws have a similar provi-sion in line with the original EU directive. Can’t we take this to mean that they can share people’s tax information with impunity as long as the object is to curb a crime such as tax evasion?

A: Only if a crime has been committed. Proportionality is important. You can’t assume they are all criminals. Usually there is no reason to say “let me arrest you because you may not have done your tax

returns.” You’ve got to have a trigger event. To release personal in-formation to a third party you’ve got to have things like suspicious transaction reporting or something in the terms and conditions that the person signed upon their membership to allow the sharing of that data. In your data protection registration you’ve got to name the counterparties that are going to be sharing the information with you and the basis on which you’ll share that information.

Q: What next for the common reporting standards?

A: This is one of the possible outcomes of the future. Some of the details of the common reporting standards are going to come out in ‘quarter four’ of this year. You’ve seen the pre-notification by over 40 countries, that they’re going to be in the pilot for automatic exchange of information. That number will easily rise to 80 and more in a very short space of time. It’s going to be the US reporting to 80 countries and it’s going to be the Isle of Man reporting to 80 countries and the web of transactions [will be so large that it will massively] increase system complexity. The data that has to be moved is going to be vast. I wouldn’t like to put a size on the number of transactions on which that reporting will be based.

“Surely there is a better way of exchanging information that doesn’t require huge volumes of data to be able to be disclosed”So when you have differences between the reporting systems, wheth-er US FATCA or UK FATCA or CRS, at some point in time, maybe, sense is going to reign. Somebody’s going to look at this and say that surely there is a better way of exchanging information that doesn’t require huge volumes of data to be able to be disclosed, whether that be some sort of central registry, or some sort of application via the tax authorities, where the piece of information that is exchanged is that you have beneficial ownership in an organisation or income zone that sits in that location, rather than all the financial transactions. As it is, there’s going to be a standing file on financial institutions that holds people’s data. The transaction files will be vast! Is the data going to be accurate? Ultimately, I just don’t think so. It’ll be ‘big data.’

One of the interesting things that have happened is that the delay on US FATCA actually means that the dates coincide quite nicely with the proposed dates for common reporting standards. I’m just wondering whether they’ll take the opportunity to look at the European version, the worldwide version and the US version and say right, how about rationalising down the information?

Q: That would be a rare bit of co-ordination, wouldn’t it?

A: It hasn’t happened to date but part of the reason why they’re de-laying it has been that large organisations have been lobbying the US

THE ISLE OF MAN’S PLACE IN THE REGULATORY WORLD: AN OVERVIEWChris Hamblin of Compliance Matters recently spoke to John Spellman, the director of financial services for the Isle of Man government, about the blizzard of regulatory changes that the jurisdiction is facing. The encounter turned into a fascinating exploration of the challenges facing the offshore world as it struggles to survive in the heavily bureaucratising global financial system.

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Government, saying that they can’t cope with the new accounting-based processes and requirements that are going to be coming in. They put the dates back, but if they’re large corporates and they’ve had 18 months to 2 years’ notification, that indicates that Big Busi-ness has got some serious problems – how are they going to comply? For a many-to-many relationship there’s just got to be a better way of doing it than this.

And it’s not to do with places like the Isle of Man; we will follow the rules. We were the first Crown Dependency to sign up and we’re happy with the principles of exchange of data as long as we’ve got tax neutrality.

Q: The consequences of non-compliance are all different, with dif-ferent rates of withholding tax levied by each country, aren’t they?

A: And there are also differences between the definitions of tax-res-idency. A US-based person is worldwide, a UK person is a resident, unless you describe him as a res-non-dom, when it’s permitted in-come only, and you pay your £30,000 or £50,000 or whatever it is, and there are different rules in every single country. If you imagine a big corporate and it’s got a footprint in dozens of countries, what is going to happen is that big corporates are going to blot out large chunks of the world. It’s just not worth interacting with those parts of the world, because the risk of getting it wrong and the risks of compli-ance breaches are just too high.

Q: Which brings us on to the subject of correspondent relationships. Are you seeing an awful lot of those being jettisoned in the Isle of Man?

A: Not jettisoned; investigated for the reasons behind them, their purpose and other information. People are looking at correspondent relationships and saying right, in terms of due diligence costs, is it worth it maintaining our relationship with this country, this individual or this area? We [viz the Isle of Man] want to be ‘above the line.’ We actually use the term ‘above the line and below the line.’ Certain ju-risdictions will not be able to live up to the regulatory standard. We saw early that you’ve got to get up to the regulatory standard or you don’t get to work internationally.

Correspondent banking is payment routing really. Some organisa-tions not familiar with certain parts of the world are using countries as the red flag, irrespective of what [correspondent banks] they’re

signed up with. So we have to do some educational work – I’ve had to do it a number of times over the last 12 months. Just to explain, we’re recognised by the International Monetary Fund and the Financial Ac-tion Task Force, we’re part of MONEYVAL, we signed up with FATCA, we’re classed in the top 8 transparent jurisdictions worldwide in the IMF report, so we have to continually offer an educational-based programme to other parties – large institutions and also sometimes other countries. And it won’t go away. So that’s why we say ‘above the line’; we can answer those questions head-on. Other jurisdictions which have neither committed early enough to FATCA or put regula-tory processes in place on things like identifying beneficial ownership on [the shoulders of] corporate service-providers...those people who can’t generate that information and provide that confidence won’t be part of that future world.

Q: D’you think there’ll be no more entries into the offshore world now? Do you think it’s all consolidation from now on?

A: [Long pause.] Yes. Yes, I do. The tipping-point is the common report-ing standard, because if 80 countries get to it, then 80 countries are going to be the big, developed nations [with] all the natural resources. International trade represents the future of offshore financial centres. They are going to be used to facilitate technical transactions, areas of expertise, cross-border investment, or foreign trade. So if you can’t meet any of those criteria then you won’t be able to enter. Tax has nothing to do with it. Tax neutrality is widely accepted now.

Q: Wacky corporate structures are another way into the offshore world for a jurisdiction...that’s where LLPs started.

A: With fiscal structure, that’s where the test will be for the future. The Isle of Man doesn’t support brass-plating, so what we encourage is physical substance and formal command and control for any organ-isation controlled through the Isle of Man, because the days when you could just set up a company somewhere and put transactions through...those days are numbered.

Suggestions are now coming out through Europe that large corpo-rates should report how much profit they make by country, how many employees they have by country, how much tax they pay to each country, and also, I’ve read somewhere, ‘purpose’ as well. That level of transparency in financial reporting means that you’ve got to have a purpose for the transactions that you’re making, and it’s got to be about fiscal substance.

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