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1 November 2006

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FSA publishes consultation paper on Reforming Conduct of Business Regulation

The FSA has published a major consultation paper which sets out proposals for reforming its conduct of business rules. Wide-ranging changes to the current FSA rules are necessitated by the Markets in Financial Instruments Directive (MiFID) and the FSA has taken the opportunity to rewrite its rules taking into account its wish to move towards more principles-based regulation. Its proposals will result in a new conduct of business rule book (NEWCOB) which will be substantially shorter. The consultation paper also discusses implementation of the Unfair Commercial Practices Directive for financial services and consults on a number of MiFID-related changes to parts of its Handbook other than conduct of business rules.

NEWCOB covers broadly the same areas as the existing COB rules, although MIFID has introduced new detailed requirements in some areas (such as the "appropriateness" obligation for some non-advised sales) and some of the existing material has been moved to other locations within the Handbook. The FSA only has limited scope to include further national measures in areas covered by MiFID. Therefore the FSA is only proposing to retain existing super-equivalent requirements in a small number of areas, the main ones being: the Initial Disclosure Document and the "Menu" (at least for the moment); the rules governing the use of the term "independent" by advisers; the rules governing "Keyfacts" documents, Simplified Prospectuses and certain other information requirements for retail customers; the rules restricting the use of dealing commissions to payment for execution and research.

Some of the more important issues discussed in the paper, beyond questions of super-equivalence, are as follows: the FSA's approach to MiFID client categorisation requirements (reflecting feedback on the FSA' s informal paper on this); the FSA's proposals for amending the "suitability" obligation for investment advice; the new MiFID requirements in relation to "appropriateness" for some non-advised sales; the requirement for firms to provide best execution; the results of the FSA's review of its product disclosure regime.

The scope of application of the new rules is discussed only in part in this paper. MiFID itself requires only that MiFID conduct of business rules be applied to firms and business within the scope of MiFID. In some respects the existing FSA COB rules have wider application, and the FSA has therefore had to consider to what extent its new rules should apply to non-MiFID firms and business. This paper considers these scope issues only in relation to the retail product and advice markets; the FSA will be carrying out a separate review of the COB standards for the remaining non-MiFID firms and business and will consult on the proposals in the second quarter of 2007.

The paper also discusses implementation of MiFID requirements in relation to a number of issues other than conduct of business, including complaints handling, record-keeping, outsourcing of retail portfolio management, training and competence and non-scope transaction reporting. It also sets out the FSA's proposals for implementation of the Unfair Commercial Practices Directive.

MiFID has to be transposed into the UK regulatory regime by 31 January 2007 (ready to come into force on 1 November 2007). There is therefore a very short consultation period in respect of those aspects of the proposals which implement MiFID - comments on these are requested by 28 November 2006. A policy statement on implementation of MiFID conduct of business requirements and a formal MiFID transposition instrument will be published at the end of January 2007. Comments on other aspects of the proposals are invited by 23 February 2007.

The FSA is planning to make the NEWCOB rules in the second quarter of 2007 to come into force on 1 November 2007 and replace the MiFID transposition instrument made in January.

Copies of the consultation paper, newsletter and press release are available at [http://www.fsa.gov.uk/Pages/Library/Policy/CP/2006/06_19.shtml].


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FSA consults on changes to the financial promotion regime

The FSA has published an important consultation paper which sets out its proposals for a more principles-based approach to financial promotions and other communications by firms and which sets out the rules and guidance to implement the Markets in Financial Instruments Directive (MiFID) conduct of business obligations which relate to 'all information' and 'marketing communications'.

Overall the FSA is proposing a substantial reduction in the number of detailed financial promotion rules and will instead be focusing on principles and high-level standards. The proposed new rules will be contained in chapters 4 and 5 of the new conduct of business sourcebook (NEWCOB).

Chapter 4 of NEWCOB will outline the standards relevant to all firms when communicating with professional and retail clients. The key rule will remain the requirement that all communications must be "fair, clear and not misleading". The FSA has copied out the MiFID text into this chapter, which applies to 'all information', i.e. any communication, including marketing communications, between a firm and its client or potential client. Additional guidance has been included in some cases. Some of these provisions will apply to both MiFID scope and non- MiFID scope business.

Chapter 5 of NEWCOB will expand on the fair, clear and not misleading rule contained in Chapter 4 of NEWCOB. It will also contain revised, simplified and largely high-level requirements for the approval and communication of financial promotions aimed at retail clients.

Consultation on the MiFID provisions will close on 28 November 2006 with feedback and made text being published in January 2007. Consultation on non-MiFID provisions will end on 23 February 2007 and feedback on these proposals will be published in the second quarter of 2007 with the new rules taking effect on 1 November 2006. The FSA will consult on consequential amendments to other parts of the Handbook in the second quarter of 2007.

Copies of the consultation paper, newsletter and press release are available at [http://www.fsa.gov.uk/Pages/Library/Policy/CP/2006/06_20.shtml].


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FSA publishes Handbook Development newsletter

The FSA has published a new Handbook development newsletter, which includes a timetable of forthcoming publications including:

  • a supplementary consultation paper on "Systems and Controls", due to be published Q4 2006;
  • a policy statement to CP06/9 and made text on "Systems and Controls", due to be published Q4 2006;
  • a discussion paper on "Private Equity", due to be published October 2006;
  • a policy statement to CP06/16 and made text on "Prudential changes for Insurers", due to be published Q4 2006;
  • a feedback statement on "Point of sale investment product disclosure (including feedback on CP05/12 and CP170)", due to be published November 2006;
  • a policy statement to CP06/15 and made text on "Review of the Approved Persons Regimes", due to be published January 2007 for MiFID and CP05/10 changes and February 2007 for merging of customer functions;
  • a policy statement to CP05/8 and made text on "Suitability standards for personal pensions", due to be published Q1 2007;
  • a policy statement to CP06/14 and made text on "Implementing MiFID for firms and markets", due to be published Q1 2007;
  • a consultation paper on "Funds of unregulated schemes for retail investors/permitted links rules", due to be published Q1 2007;
  • a consultation paper on "Review of the Training and Competence Sourcebook", due to be published Q1 2007;
  • a feedback statement to CP06/4 on "Provider/Distributor Responsibilities", due to be published March 2007;
  • a policy statement to CP06/11 and made text on "Integrated Regulatory Reporting: credit institutions and investment firms", due to be published October 2006 for data requirements relating to deposit takers and those investment firms subject to the Capital Requirements Directive (CRD) for reporting covering 2007, December 2006 for data requirements as above but covering 2008 onwards, and January 2007 for non-financial data requirements for all firms carrying on investment activities (excluding retail investment activities) and financial data requirements for non-CRD firms;
  • a consultation paper on "Review of Enforcement and Decision making manuals", due to be published December 2006;
  • a consultation paper, including feedback statement to DP06/2 on "Financial Ombudsman Service compulsory jurisdiction: funding review", due to be published March 2007;
  • a policy statement to part of CP06/4 and made text on "Implementation of the Investment entities Listing review material", due to be published Q4 2006;
  • a policy statement to CP06/17 and made text on "Amendments to the Prospectus and Listing Rules", due to be published Q2 2007;
  • a discussion paper on "Working with the Industry to set Standards", due to be published November 2006;
  • a Quarterly consultation paper, due to be published January 2007;
  • a policy statement (in Handbook Notice) to Quarterly CP06/18, due to be published February 2007;
  • a consultation paper on "Regulatory fees and levies 2007/2008", due to be published February 2007.

A copy of the Handbook development newsletter is available at [http://www.fsa.gov.uk/pubs/handbook/hb80.pdf].


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