Brexit – FCA Discloses No-Deal plans

The FCA has stepped up its preparations for a no-deal Brexit by outlining detailed plans for the oversight of EU financial services firms with operations in Britain. The FCA published a blueprint for how it would issue temporary authorisations for EU firms doing business in the UK.

The regulator also revealed that 1,300 EU firms that have activities in Britain would be willing to sign up to its proposal that they have time-limited permits lasting three years.

This figure represents fewer than 20 per cent of the 8,000 EU entities that hold authorisations from the bloc, called passports, to do business in the UK.

However, the FCA does not know how many of these entities have multiple passports.

The FCA will roll out its three-year temporary authorisations regime for EU firms in the event of a no-deal Brexit to try to smooth the end of passporting arrangements.

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Lehman – The last ten years could & should have been so different

In 2008, the collapse of Lehman Brothers triggered a global financial crisis. A decade later, commentators are debating whether federal officials could have prevented the crisis by supporting Lehman as it did other banks soon afterwards.

Commentary from Lehman’s chief administrative officer on the day it closed its doors forever. ‘Speaking as someone who was on the inside looking out, the answer is clear: Lehman could have and should have been saved’

Realising that may sound self-serving he points to the the facts. ‘Lehman was refused assistance, it was explained weeks afterwards, because it lacked the collateral to secure a loan from the US Federal Reserve and the Fed was therefore barred from providing assistance. Many of us first heard that explanation from the then-Fed chairman Ben Bernanke at the Economic Club of New York in October 2008′

He continues, ”by way of context, Lehman had delivered record net revenues and earnings in 2007, giving it the second-best revenue and earnings growth in the industry over the previous five-year period. That year, net leverage was in line with that of our peer and by 2008, we had meaningfully reduced that leverage, increased our equity and expanded our liquidity pool”

“Were those numbers real, or were we cooking the books? Well, the three investigations over the past decade, including one by the Securities and Exchange Commission, have all concluded that our balance sheet valuations were legal. In other words, there was adequate collateral to secure a loan from the Fed after all”

It’s not as though Lehman sprang its need for support from federal decision makers at the last minute, leaving too little time to make a thoughtful decision. Quite the opposite. “In June, being on a call with Dick Fuld and several other top Lehman executives when then the president of the Federal Reserve Bank of New York, was ask to allow Lehman to become a bank holding company:

“Tragically, they said no, saying it would send the wrong message. Ironically, the Fed turned Goldman Sachs and Morgan Stanley into bank holding companies one week after Lehman filed for bankruptcy, sending the right message and giving them exactly what we had been denied”.

The decision to rescue Goldman and Morgan Stanley was instrumental in preventing the collapse of the entire financial system. Lehman could have been saved in exactly the same way at any point that summer which would have prevented the carnage the world experienced.

A bad decision was made because of suffocating political pressure. As we prepare for the next time a crisis happens and there will be a next time, even if it doesn’t look exactly like 2008  policymakers need to remember this lesson, learn from it and avoid an unnecessary repeat.

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Asset Management – No fee Passive Fund launch sets challenge to the market

Shares in US fund firms took a beating as Fidelity Investment took the price war to a new level by launching two no-fee funds.

The Boston-based manager announced plans to launch a pair of stock index funds that will carry an expense ratio of zero. It also unveiled plans to cut fees on a host of other index funds and scrap investment minimums on all of its mutual funds and minimum account balances on its brokerage platforms.

Shares of other asset managers plunged on the news. BlackRock, the world’s biggest asset manager, fell 4.6%, while Franklin Resources and Invesco dipped by 5.5% and 4.3% respectively. AllianceBernstein and T Rowe Price slipped by 1.8% and 1.5% respectively.

The zero-expense ratio index funds, the Fidelity Zero Total Market Index fund and the Fidelity Zero International Index fund, will go live on the firm’s brokerage platform on Friday, the firm said.

Access to the zero-expense ratio funds will be restricted to retail investors on Fidelity’s brokerage platform, Fidelity said in a prospectus filed with the Securities and Exchange Commission.

The firm said it would cut expenses across its existing index funds by an average of 35%, which Fidelity said would save investors $47 million annually. Fidelity said all of its stock and bond index funds would have lower expense ratios than Vanguard’s comparable funds and nine out of 10 of Charles Schwab’s comparable index funds.

Charles Schwab said the move was a good one for investors.

‘Anytime costs go down, investors win,’ a Charles Schwab spokeswoman said. ‘We remain laser focused on delivering straightforward, transparent and low-cost products.’

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Brexit – Another bank chooses Frankfurt

Credit Suisse has picked Frankfurt as a key post-Brexit centre for its investment banking and capital markets business and has already moved several hundred million dollars of assets to support the new hub.

The Swiss group, one of the last big international banks to reveal its post-Brexit plans, is also moving a number of traders to Madrid, as reported earlier this week and recently confirmed it had been granted a new brokerage licence in Paris.

In Frankfurt, Credit Suisse is re-purposing an existing entity so that it can become part of the group’s Investment Banking & Capital Markets unit.

A person familiar with the plans said the change in structure was “certainly part of the Brexit strategy” and would facilitate Credit Suisse doing investment banking and capital markets business out of Germany.

Credit Suisse will move some bankers to other EU corporate centres, as well as its Paris brokerage, bringing the total moves from London to about 250 from the Swiss bank’s 5,500 headcount there.

Frankfurt and Paris, the favoured post-Brexit choices of large US banks, had long been mooted as potential homes for Credit Suisse’s EU businesses after Brexit, along with Amsterdam.

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BoE probe KPMG

The Bank of England has probed the strength of KPMG’s business after a string of high-profile corporate scandals damaged the reputation of the Big Four accounting firm.

The BoE’s Prudential Regulation Authority, has raised questions with financial institutions and other regulators to see whether there were risks to KPMG’s viability. People involved in the discussions said the PRA had sought assurance on whether KPMG’s existing clients were planning to cut ties with the firm or whether it was struggling to win new business following heavy criticism of its work in South Africa and for British outsourcer Carillion.

The regulator was also keen to understand whether KPMG’s problems in South Africa where it has haemorrhaged clients and cut hundreds of staff over the past 12 months is due to its role in a sprawling government corruption scandal could jeopardise the rest of its international network.

Bill Michael, chairman of KPMG UK, said: “KPMG is in robust financial health. KPMG is seeing outstanding growth right across our audit, tax and advisory arms, we have a strong balance sheet and are well funded with a growing pipeline. The Bank of England has a legitimate duty to scrutinise the market. But they have not approached KPMG formally or informally. If they were to, we would be happy to reassure them of our robust financial health.”

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Brexit – FCA gets punchy as it plans for no-deal

The UK and the European Union’s financial regulations may “evolve” after Brexit but that should not impede access to one another’s markets, a senior UK regulator has said.

In a pointed rebuttal of criticism from EU regulators, Nausicaa Delfas, executive director for international at the Financial Conduct Authority, said that UK regulators were planning for a scenario in which the UK crashes out of the EU in March with no deal, but were pinning their hopes on the transition deal through late 2020 that has been agreed but not ratified. She upbraided her European counterparts for not introducing temporary permissions to operate, as the UK is doing for EU firms.

Ms Delfas warned that financial firms expanding their EU operations because of Brexit must still have sufficient top brass in the UK who can be answerable to British watchdogs, and that whatever their new structure it must not impede direct oversight of firms’ UK businesses by UK regulators. EU regulators have been just as demanding in saying senior managers must be located in the EU, and they are also insisting on direct oversight.

Her comments come a week after the UK government published its white paper detailing its Brexit negotiating position, including for the first time detailed proposals about how to approach financial services. The UK jettisoned a previous idea for “mutual recognition” of standards between the EU and the UK and instead proposed building on the existing legal mechanism of so-called equivalence, which allows access to financial firms beyond the EU in some areas. But it is currently patchy and can be withdrawn with just 30 days’ notice.

“Common outcomes should be the criteria by which we judge one another’s regulatory position, and thus the access that we are prepared to grant to one another’s markets. What matters more is not what road we take, but what that final destination is — and as long as the UK and the EU maintain a commitment to protecting consumers and to strong, open markets, there is no reason this cannot work in practice,” Ms Delfas said in a speech in London on Thursday, according to prepared remarks.

EU firms that are still planning to access the City of London will be given temporary permission to operate in order to smooth the effects of having to seek full new regulatory authorisation in a short time period, the government has already confirmed. The FCA is giving firms a “landing slot” to then apply for full authorisation, with the first expected in late 2019, Ms Delfas said on Thursday.

EU regulators are yet to present a parallel backstop for UK firms seeking to retain access to the bloc, however.

The challenges this presents, in terms of lack of commercial certainty, and business disruption, is clear from my speaking to senior leaders in regulated firms,” said Ms Delfas. “Needless to say, we think this is necessary to provide certainty and smooth the transition, and it is something we stand ready to discuss with our EU counterparts.

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CEO out as part of TP ICAP Shake Up

John Phizackerley, boss of the world’s largest interdealer broker TP ICAP, appears to have had his exit arranged for him, after the company found itself saving far less money and spending far too much on the integratation of its ICAP purchase.

TP ICAP said it was reducing its annualised cost savings target for 2019 from around £100m to £75m as finance and investment costs will be much higher than expected. Spending on Mifid II regulations, Brexit-related changes and legal and IT costs will rise by around £10m to £25m – and finance costs will increase to around £40m in 2019.

As a result, chairman Rupert Robson announced that Mr Phizackerley would be leaving his post as chief executive and board member with immediate effect, being replaced by Nicolas Breteau, the current chief commercial officer and head of TP ICAP’s global broking business.

Mr Robson tried to suggest it was ”part of our established succession plan” – after it “became clear that a change of leadership is required to execute our medium-term growth strategy and deliver the detail of the integration process”.

However, like most political departures, the protagonist was able to tell a different story: Mr Phizackerley told the Financial Times that he had been told of the decision only yesterday. And he pointedly pointed out that the decision was not the position of the board at its last meeting, in New York, on June 20, when the half-year numbers were discussed.

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Brexit – EBA stressed over ‘banks pace of preparations’

Whilst the BoE appears more ‘relaxed’ the EBA have said banks have failed to make enough progress in their Brexit preparations and should not expect “miracle” public intervention to help them.

Banks’ preparations for the potential departure of Britain from the EU without a ratified withdrawal agreement are “inadequate”, the European Banking Authority (EBA) said in a statement on Brexit.

“This should be a wake up call. Time is running out, in some cases it has run out, and don’t assume there will be a transition period,” said Piers Haben, EBA director of banking markets, innovation and consumers.

Banks in Britain are submitting applications for licences to set up or expand operations in the EU to ensure continuity of service after March. UK branches of banks from the EU need permission to continue serving customers in the United Kingdom.

“Big banks can’t assume they can put off the full application process,” Haben said.

The EBA said banks must have enough staff at new operations to manage risks from the first day after Britain’s withdrawal on March 29, 2019, and financial stability must not be put at risk because lenders want to avoid costs.

The EBA – itself relocating from London to Paris by March due to Brexit – said preparations by banks must advance more rapidly in a number of areas without further delay.

Separately, the European Central Bank (ECB) said banks must submit “complete and high quality” licence applications for euro zone hubs by the end of this month to ensure there is no disruption in business with EU customers after Brexit Day.

“For banks that fail to meet the Q2 2018 target date, or fail to submit high-quality applications, the ECB cannot guarantee that the authorisation process will be completed by the end of March 2019,” the ECB said in an update on its Brexit policy on Monday.

The Bank of England (BoE), which has said banks can rely on the transition deal being in place by March to avoid hasty relocation decisions, had no comment on the EBA’s statement.

It has said branches of EU banks in London can assume they will not need new UK authorisation until the transition period ends.

The BoE has said UK and EU legislation is needed to ensure continuity in contracts that span many years in some cases. The EU has shown no willingness to legislate, and the EBA said no public solution may be proposed or even agreed in time.

The ECB and BoE are in talks on how to keep markets orderly around Brexit Day next March, raising expectations that some public action will take place.

TheCityUK, which promotes Britain as a financial centre, said the single most helpful thing EU authorities could do right now was to engage urgently on the issue of contract continuity.

EU-based banks will also have to explain if any bonds they have issued under UK law remain valid after Brexit for plugging capital shortfalls in a crisis.

Continental banks must also show how they could meet potentially higher capital charges for exposures to UK assets no longer deemed to be covered under EU law.

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Brexit – Hammond to lay out plan for ‘global financial partnerships’

Philip Hammond will today set out a strategy for securing new “global financial partnerships” with other countries after Britain leaves the EU. In an annual address at Mansion House, the chancellor will pitch the plan as a way to make Britain the “undisputed gateway to global markets”.

New partnerships will be targeted at fast-growing markets such as China, India, South Korea and Australia, and build on existing agreements, such as “financial dialogues” with other countries.

Many in the financial services industry have repeatedly raised concerns about the potential impact of Brexit, particularly if Britain fails to finalise a deal with Brussels. While the most extreme predictions of job losses have yet to be borne out, the Treasury and Bank of England are at loggerheads over how the Square Mile will be regulated in future.

The loose model for the new “global financial partnerships” would be the “economic and financial dialogues” that already exist between Britain and China, India and Brazil, allowing finance ministers to hold high-level talks every year. However, the new arrangements would be more focused on financial services and could, in theory, be extended to scores of countries around the world.

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MiFID II – FCA to launch asset management probe

The FCA is to begin a review of the EU rules that changed how asset managers pay for the research they use to make investment decisions. The FCA is concerned about inconsistencies in the interpretation and application of the Mifid II regulations, which came into force in January.

Mifid II requires asset managers to separate the cost of research from transaction charges and trading commissions, the process known as unbundling. The move was intended to improve investor protection by ensuring that asset managers’ decisions could not be influenced by receiving research free.

The FCA announced the review at its asset management conference last week. It said it would start to contact fund managers, investment banks and brokers within weeks. The system that existed previously, in which trading orders could be directed to the bank or broker supplying the information, was opaque. Now, however, at least one aspect of the change brought about by Mifid II is in question. “The costs of research packages offered by some of the big banks are totally out of whack with pricing elsewhere in the market,” said Joshua Maxey, managing director of Third Bridge, an independent research company, who welcomed the FCA probe. “There are questions over whether some of the pricing packages for research could be viewed as an inducement and contrary to the Mifid rules.”

The FCA wants to evaluate the effect of the rules on the use of research. Within weeks it will write to asset managers, investment banks, specialist brokers and independent providers to ask for details about research pricing models. It also plans to ask about governance and decision making related to research provision and to examine any outlier models of pricing methodologies.

The Mifid rules also require banks and brokers to charge fund managers separately for “corporate access” such as face-to-face meetings with company management. The pricing of corporate access will be part of the FCA review, which is expected to take six months to complete. Mifid II has led to dramatic falls in prices for research.

Price quotes from some big banks for the entirety of their published research output have fallen to between $10,000 and $30,000 annually, from six-figure costs that were first mooted a year ago.

Mhairi Jackson, a manager with the FCA’s wholesale conduct policy team, said the regulator recognised that the market was still working out the most appropriate price for research but she cautioned that investment banks could not offer “unduly favourable terms” for it.

The existence of carve-outs in the Mifid rules have created legal uncertainties. Content that is not deemed “substantive”, such as a short market commentary, can qualify as a “minor nonmonetary benefit” and would therefore not need to be paid for. However, exactly what is classified as “substantive” is unclear.

Terence Sinclair, global franchise director at Citi, the US investment bank, said Mifid II had led to clear changes in how research was being used in Europe. “Our analysts are being invited to fewer meetings by asset managers but their research is being read more,” he said. “The number of requests for bespoke research has also gone up.” Mr Sinclair added:

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