Investor ProtectionInvestor Protection in the United Kingdom in the United Kingdom

Prepared for China Securities Investor Protection Fund

Nicholas Morris, Managing Director, AsiaJanuary 2008

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DisclaimerDisclaimer

IPA has based the comments in this presentation on review of the legislation, documentation and regulations relating to financial services in the UK. In doing so, it has used its

professional judgement to summarise, paraphrase and interpret the rules. However, IPA cannot be held responsible for any actions taken on the basis of this presentation. It strongly

recommends that reference is made to original materials before any action is taken in these complex areas.

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AgendaAgenda• UK Legal and Institutional Framework• Relationship to European legislation• Regulation and self-regulation• Evolution of investor protection system in UK• Financial Securities Compensation Scheme

• Role and objectives

• Organisational structure

• Funding arrangements

• Coverage and payment processes

• Limits to compensation

• The FSCS 2007 Funding Review

• Financial Ombudsman Service• Role and objectives

• Organisational structure

• Detailed aspects of the system• Co-operation between agencies

• Bankruptcy of securities companies

• Investor Education in UK

UK Legal and Institutional Framework UK Legal and Institutional Framework

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The Modern UK SystemThe Modern UK System

• The Financial Services Authority, the Financial Ombudsman Service and the Financial Services Compensation Scheme are separate organisations

• Each of these organisations is an independent body, set up under the Financial Services and Markets Act 2000.

− The Financial Services Authority (FSA) is the regulator (or “watchdog”) for financial services firms

− The Financial Ombudsman Service (FOS) deals with complaints from consumers against firms that are regulated by the Financial Services Authority and it can require firms to pay compensation

− The Financial Services Compensation Scheme (FSCS) can pay compensation to consumers with claims against firms that are regulated by the Financial Services Authority and financially unable (or likely to be unable) to pay the claim themselves.

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Some UK HistorySome UK History

• 1980s: greater competition, mergers between banks, brokerage firms and dealers.

• 1986 Financial Services Act introduced a two-tier system of regulation.

• The Act created the Securities and Investments Board (SIB) to oversee five self-regulatory organisations (SROs):

• The Securities Association for brokers and merchant bankers;• The Association of Futures Brokers and Dealers (AFBD) for futures and options;• the Financial Intermediaries, Managers and Brokers Regulatory Association (Fimbra) for

high street investment advisers;• The Life and Unit Trust Regulatory Association (Lautro) for life insurance, pensions and

unit trusts; and• The Investment Management Regulatory Organisation (Imro) for fund managers.

• The first two merged to form the Securities and Futures Authority (SFA), and the second two merged in mid 1990’s to form the Personal Investment Authority (PIA).

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Problems in the UK SystemProblems in the UK System• Disasters in the financial services industry precipitated recent reforms

in the UK. • For example:

• Collapse of Barings, the UK’s oldest merchant bank, in February 1995. This resulted in some

£800m of losses incurred on the Singapore exchange via the actions of the so-called rogue

trader Nick Leeson.

• The Bank of England and the Securities and Futures Authority (SFA) shared responsibility for

the regulation of Barings’ banking and securities activities, but clearly failed to detect any

problems.

• An official report by the Banking Board of Supervision was very critical of the lax regulation of

both the SFA and the Bank of England.

• Even after the collapse of Barings, problems continued as the SFA’s attempts to punish

Barings’ managers for not detecting the presence of rogue trading largely failed.

• Other notable difficulties that beset UK financial services in the 1990’s include pension mis-selling, the Maxwell pension scandal, and the BCCI collapse, inter alia

• Government response was to set up the Financial Services Authority (FSA)

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Legislation and Role of the FSALegislation and Role of the FSA

• The UK regulatory regime is now determined by the Financial Services and Markets Act 2000.

• It gives the Financial Services Authority (FSA) four statutory objectives:

− Maintaining market confidence in the financial system

− Promotion of public understanding of the financial system

− Consumer protection

− Reduction in financial crime

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UK Statutory FrameworkUK Statutory Framework

• HM Treasury, Financial Services Authority (FSA) and Bank of England

are all responsible for aspects of financial services regulation

• Inter-relationship is governed by a formal ‘Memorandum of

Understanding’ between them

• Competition Commission, Office of Fair Trading and Stock Exchange

also involved

• Stock Exchange, and its members, are formally permitted to ‘self regulate’

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FSA ResponsibilitiesFSA Responsibilities

• Authorisation and prudential supervision of banks, building societies, investment firms, insurance companies and friendly societies

• Supervision of financial markets and of clearing and settlement systems

• Conduct of operations in response to problem cases affecting firms, markets and clearing, and settlements systems within its responsibilities

• Regulatory policy in these areas

• The FSA will also advise on the regulatory implications for firms, markets and clearing systems of developments in domestic and international markets and of initiatives, both domestic and international, such as EC directives.

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Responsibilities in the UK SystemResponsibilities in the UK System

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Supporting LegislationSupporting Legislation

• The Financial Services and Markets Act 2000 is supported by a large number of orders, regulations and provisions, including:

− Asset Identification Rules− Legal Assistance Regulations− Money Laundering Regulations− Compensation Scheme Regulations− Designated countries and territories− Reconition requirements− Mutual Societies Orders− Disclosure regulations− Bankruptcy and treatment of assets rules− Gaming contracts orders− Rehabilitation of offenders

Relation to European LegislationRelation to European Legislation

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Development of European Financial MarketsDevelopment of European Financial Markets

• In 1999 the ambition of a fully integrated financial market was expressed in the EU's Financial Services Action Plan, which stated an ambitious timetable up to 2005 for the revision of the EU regulatory regime in the financial area, including the directives concerning the securities markets.

• The changes concerning the regulation of securities relate especially to the following directives:

− The Markets in Financial Instruments Directive, MiFID, (previously the

Investment Services Directive)

− The Prospectus Directive

− The Market Abuse Directive

− The Transparency Directive

− The Takeover Directive

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Markets in Financial Instruments Directive Markets in Financial Instruments Directive (MiFID)(MiFID)

• Promotes competition and standardise regulatory requirements across the European Economic Area.

• MiFID applies to a broad range of instruments, including transferable securities, money market

instruments, units in collective investment undertakings and various types of derivative.

• MiFID envisages trading in financial instruments taking place on regulated markets operated by

a market operator (e.g. the Exchange’s Main Market), multilateral trading facilities (such as

AIM), which can be operated by market operators or investment firms, or on an over-the-

counter (“OTC”) basis.

• The MiFID framework is made up of the overarching, high-level directive and a range of additional measures. These include implementing laws (a directive, which it is necessary for individual Member States to transpose into national law, and a regulation, which has direct force) and recommendations developed by regulators on a pan-European basis (the so-called “Level 3” measures).

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European Parliament and Council Directive : European Parliament and Council Directive : 97/9/EC: Investor-Compensation Schemes97/9/EC: Investor-Compensation Schemes

• Enacted on 3 March 1997

• Requires Member States to set up one or more investor compensation schemes.

• All investment firms supplying investment services must belong to such a scheme (credit institutions may be exempted provided that they already belong to a scheme which guarantees protection at least equivalent to that provided under a compensation scheme and that they fulfil certain specific conditions).

• The compensation scheme operates where:• the competent authorities have determined that in their view an investment firm appears, for

the time being, to be unable to meet its obligations arising out of investors' claims and has no early prospect of being able to do so; or

• a judicial authority has made a ruling which has the effect of suspending investors' ability to make claims against an investment firm.

• Cover has to be provided for claims arising out of an investment firm's inability to:

• repay money owed to or belonging to investors and held on their behalf in connection with investment business; or

• return to investors any instruments belonging to them and held, administered or managed on their behalf in connection with investment business.

• The Directive sets a Community minimum level of compensation per investor of Euro 20,000

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Example of European Example of European investor protection NGOinvestor protection NGO

• The European Group for Investor Protection (egip, Europäische Investorenschutzvereinigung e.V.) is an independent, registered NGO seated in Berlin and serving the dialogue between capital markets and politics.

− Egip aims at helping to improve the framework for institutional investors in Germany

and the European Union, and to promote a more professional Corporate Governance.

One basic prerequisite for that is a better public understanding of the developments in

the international capital markets. Egip is engaged in improving that understanding.

− Egip is financed through services for long-term institutional investors (e. g. pension

funds, investment companies, and asset managers), who use us as a think tank and

communication platform. 

Regulation and Self-RegulationRegulation and Self-Regulation

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Stock Exchange Self-RegulationStock Exchange Self-Regulation

• FSA is concerned with investment banks and brokerages treatment of customers

− are they being advised correctly and not defrauded?

• Stock Exchange regulates through their rules and procedures, with self-regulatory status

− Market surveillance by exchanges is a key requirement of their self-regulatory

status

− Concerned with orderly markets, transparency, level playing fields and investor

safety

− Includes audits to ‘assist’ members in self-regulation

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Stock Exchange Rules for MembersStock Exchange Rules for Members

• The Exchange is has recently undertaken a full review all of its secondary market Rules with three key objectives:

− to ensure the Rules effectively govern member firms’ on Exchange business

in a post–MiFID environment;

− to align the Exchange’s Rules more closely with the structure of the various

trading platforms; and

− to simplify the Rules wherever possible and make them more user friendly.

• Member firms were consulted throughout the proposed Rulebook re-write.

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Lloyds (Insurance Market) GovernanceLloyds (Insurance Market) Governance

• An Act of Parliament, the Lloyd's Act 1982, defines the management structure and rules under which Lloyd's operates. Under the Act, the Council of Lloyd's is responsible for the management and supervision of the market.

• The Council normally has six working, six external and six nominated members.

• The appointment of nominated members, including that of the Chief Executive Officer, is

confirmed by the Governor of the Bank of England.

• The working and external members are elected by Lloyd's members.

• The Chairman and Deputy Chairmen are elected annually by the Council from among the

working members of the Council. All members are approved by the FSA.

• The Council can discharge some of its functions directly by making decisions and issuing resolutions, requirements, rules and byelaws. Other decisions are delegated to the Lloyd's Franchise Board and associated committees.

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Lloyds ManagementLloyds Management

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The FSA and LloydsThe FSA and Lloyds

• Lloyd's is regulated by the UK Financial Services Authority (FSA), under the Financial Services and Markets Act

2000.

• The FSA also regulates Lloyd's managing agents, members' agents and Lloyd's brokers. 

• The FSA and Lloyd's have common objectives in ensuring that Lloyd's market is appropriately regulated and, to minimise

duplication, the FSA has agreed arrangements with Lloyd's for the co-operation on supervision and enforcement.

• Lloyds runs a general fund for consumer compensation, and FSCS only intervenes if the General Fund is unable to provide

support

Structure of Lloyds

Insurance Market

Evolution of the Investor Protection System Evolution of the Investor Protection System in UKin UK

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Evolution of UK Investor Protection RulesEvolution of UK Investor Protection Rules

• Initially set out in “A new framework for Investor Protection” White

Paper, DTI, 1985

• Covered regulatory system and the scope of regulation; institutional

structure; `Fit and Proper‘ test; rules for the conduct of business;

competition; unit trusts; marketing of life assurance, unit trusts and

similar investments; pensions; advertising and promotion of

investments; public issues and take-overs; insider dealing; and

enforcement.

• Today this has developed into the FSA handbook system

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The FSA HandbooksThe FSA Handbooks

• FSA has integrated all financial services regulation and now

administers through a system of handbooks

• Developed as an online system

− http://fsahandbook.info/FSA/index.jsp

• Full handbook covers all types of firms

• ‘Tailored’ handbooks cover specific types of firm

− There are tailored handbook for different types of investment firms

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High Level Principles of FSAHigh Level Principles of FSA

• Principles for Businesses− fundamental obligations of firms

• Senior Management Arrangements, Systems and Controls

• Threshold Conditions− minimum standards for becoming and remaining authorised

• Statements of Principle and Code of Practice for Approved Persons

• The Fit and Proper test for Approved Persons

• General Provisions and Fees

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Conduct of Business for Investment FirmsConduct of Business for Investment Firms

Rules which apply to all firms conducting designated investment business

Financial promotionAccepting customersAdvising and sellingProviding basic advice on stakeholder productsProduct disclosure and the customer‘s right to cancel or withdrawDealing and managingReporting to customersClaims handlingClient assetsOperators of collective investment schemesTrustee and depositary activitiesLloyd‘sTransitional Provisions and Schedules

Financial Securities Compensation Financial Securities Compensation SchemeScheme

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Establishment of the Financial Services Establishment of the Financial Services Compensation Scheme (FSCS)Compensation Scheme (FSCS)

• Financial Services and Markets Act 2000 required FSA to make rules for compensating customers when authorised firms are unable to do so

• The Financial Services Compensation Scheme is the sole financial compensatory scheme. It was set up by the Financial Services Authority (FSA) in December 2001, and replaced:

− Building Societies Investor Protection Scheme − Deposit Protection Scheme − Friendly Societies Protection Scheme − Investors Compensation Scheme − PIA Indemnity Scheme − Policyholders Protection Board

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Duties of FSCSDuties of FSCS

• Operate a compensation scheme that is procedurally fair and in accordance with the European Convention on Human Rights

• Pay compensation to eligible claimants when a relevant person is (likely to be) unable to meet claims against it

• FSCS may agree to pay reasonable costs of eligible claimant bringing or continuing insolvency proceedings against a relevant person

• Make levies on participant firms in accordance with scheme funding rules to enable it to pay compensation, secure continuity of insurance or meet the costs of discharging its functions

• Publish information for claimants and potential claimants on the operation of the compensation scheme, including making potential claimants aware as soon as possible after a default

• Make and publish an annual report to the FSA

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Recent FSCS PerformanceRecent FSCS Performance

• FSCS completed over 31,200 claims in 2006/07 and spent just under £27.2m on management expenses.

• 2006/07 was the first year that decisions made on claims exceeded new claims received.

• Whilst endowment claims were the main focus, areas of claims presenting new challenges included splits, credit unions, Pensions Review claims and claims against insurance brokers.

• Recoveries amounted to almost £40m.

• Taken from FSCS Chief Executive’s Report, 2006/7

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FSCS Claims ExperienceFSCS Claims Experience

• For the financial year 2006/07− Total claims completed were 31,260, an increase of 21% on 2005/06.

− Total claims received were 24,540, a decrease of 2% on 2005/06.

− The majority of new claims received related to endowments (21,675).

− 86% of endowment claims were dealt with within six months.

− Insurance payments numbered 16,844.

− Total compensation payments amounted to £ 149.47m.

• From 1 December 2001 – 31 March 2007− Total claims completed were just over 73,700.

− Total claims received were just under 84,200.

− Insurance payments numbered 251,738.

− Total compensation payments amounted to £958.29m, including insurance

payments of £561.35m.

Source: FSCS Annual Report 2006/7

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FSCS Growth in ClaimsFSCS Growth in Claims

Claims received Decisions made

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FSCS EnquiriesFSCS Enquiries

Calls Correspondence

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Number of Claims in 2006/7Number of Claims in 2006/7

Type of claimApplications

receivedClaims

completedClaims in hand

as at

31 March 2007

Investments:

Mortgage endowments 21,675 25,860 7,290

Others, inc. splits 1,115 1,690 950

Total investments 22,790 27,550 8,240

Pensions Review 683 1,825 200

Credit unions 1,025 1,780 60

GI firms2 35 100 30

Mortgage advice 7 5 5

Total claims 24,540 31,260 8,535

Insurance payments3 16,844 16,844 –

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Financial SummaryFinancial Summary

• For the financial year 2006/07− Total compensation payments amounted to £ 149.47m.

− Total levies raised amounted to £73.10m.

− Total recoveries received amounted to £39.98m.

− Total management expenditure amounted to £27.18m.

− Fund balances at 31 March 2007 amounted to £ 139.09m.

• From 1 December 2001 – 31 March 2007− Total compensation payments amounted to £958.29m.

− Total levies raised amounted to £737.58m.

− Total management expenses amounted to £89.56m.

− Total recoveries received amounted to £360.37m.

Source: FSCS Annual Report 2006/7

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FSCS Payments by TypeFSCS Payments by Type

Insurance

Investments

Pensions

Source: FSCS Annual Report 2006/7

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Levies 2006-7Levies 2006-7

Source: FSCS Annual Report 2006/7

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FSCS Investment FSCS Investment Claims ProcessClaims Process

Source: FSCS Annual Report 2006/7

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Source: FSCS Annual Report 2006/7

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FSCS GovernanceFSCS Governance

• Follows the provisions of the Combined Code on Corporate Governance issued in July 2003 (updated in June 2006) - UK listed companies

• Board− Non-executive Chairman− 7 non-executive Directors− Chief Executive and Director of Claims

• Induction, appraisals and training for Directors• Finance and Audit Committees• Claims Decisions Committee• Board Composition and Splits Working Groups• Operation of a Risk Register

• Publishes all defaults in Annual Report

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Financing FSCSFinancing FSCS

• As at 31 March 2007:− FSCS had negotiated facilities for business purposes of £52m, comprising a

364 day revolving credit facility of £50m, repayable over 5 years, at a

floating rate of interest based on LIBOR; and an overdraft facility of £2m at a

fixed margin above base rate.

− FSCS held £2.017 million in short term deposits

− During the year FSCS received £126,000 in interest and paid £72,000 in

finance leases (£36,000 of which was allocated to future periods)

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Rules on CompensationRules on Compensation

• Detailed rules specified in FSA Handbook

− 14 Chapters specifying, for example:

• How the FSCS should operate

• Eligibility for compensation

• Definition of when financial difficulties occur

• Assignment of rights

• Limits to compensation

• Payment and calculations

• Funding

• Paticipation by EEA firms (who can ‘top up’ schemes operated by Home States)

• Specific application to Lloyds (where the Central Fund is expected to pay if it can)

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Some Compensation SpecificsSome Compensation Specifics• To receive compensation, must be eligible, have protected claim, claim

against relevant person in default, normally within 6 years and assign rights to FSCS

• FSA Handbook specifies detailed list of persons not eligible to claim

• In the case of insurance insolvency, FSCS will first try to find continuity of insurance

• Limits apply to different types of claim. In most cases amounts cannot exceed the amount which would have been payable in a claim against FSCS

• FSCS only pays compensation if the firm is unable, or likely to be unable, to meet liabilities

− Otherwise amount paid by agreement or Financial Ombudsman will set repayment level if firm can pay

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Types of ClaimTypes of Claim

• Protected claims

− Deposits (with UK or EEA firm)

− Contracts of Insurance (different rules for early claims)

− Investment business

− Home finance mediation

− Non-investment insurance mediation

• Not covered

− Reinsurance contracts

− Lloyds Members who are covered by the Central Fund

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Payment RequirementsPayment Requirements

• FSCS must pay claim as soon as reasonably possible after:− It is satisfied that conditions have been met− It has calculated the amount− In any case within three months unless the FSA grants an extension− There are specific cases where postponement is permitted

• FSCS may pay interest on compensation if it deems this appropriate

• If claim relates to an Additional Voluntary Contribution policy, must follow FSAVC Review Model Guidance published by FSA in May 2000

• Compensation may be reduced if the FSCS believes there was contributory negligence by the claimant or the amount is greater then claimant might reasonably have expected on similar investments

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Payment LimitsPayment Limits

• Protected deposit

• Protected insurance contract, and

non-investment insurance mediation

• Protected investment business

• Protected home finance mediation

• 100% of claim to maximum of

£35,000

• A) 100%, B) 90% for some

categories, C) 100% of first £2,000,

90% remainder of claim, unlimited

• 100% of first £30,000, 90% of next

£20,000

• 100% of first £30,000, 90% of next

£20,000

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Assignment of RightsAssignment of Rights

• FSCS may make any payment conditional on claimant assigning whole or part of his rights

• After assignment, any amounts payable in respect of rights go to FSCS

• FSCS will pursue only those recoveries which it believes are cost-effective

• If the FSCS recovers amounts for the claimant, it can charge reasonable costs

• FSCS must endeavour to ensure that claimant is not disadvantaged by accepting compensation and assigning rights

• If FSCS decides not to pursue rights, claimant can apply to have rights reassigned

The 2007 FSCS Funding ReviewThe 2007 FSCS Funding Review

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Funding ProcessesFunding Processes

• FSCS is funded on a pay-as-you-go basis by compulsory contributions

(levies) from UK authorised persons

• Level set to permit FSCS to provide adequate assurance for consumers

and maintain UK market confidence

• Above subject to limits put on levies for firms

− Limits refined in funding review 2007

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Funding ReviewFunding Review

• Initial proposals published in 2006 (DP06/1)

• Over 450 responses

• Commissioned two research reports

• Reviewed in 2007 (CP07/5)

• Policy statement in November 2007 (07/19)

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Key ProposalsKey Proposals

• Expand financial capacity of scheme – initially to maximum of

£4.4 billion

• Introduce a ‘widening circle’ model of funding− First tranche borne by specific group, larger claims more widely

• Change some tariff measures from 1 April 2009

• New funding arrangements from 1 April 2008, with some

transitional arrangements

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Current Funding LimitsCurrent Funding Limits

Sub-scheme Current limit % Current limit £*

Deposit 0.3% protected deposits 2.4 billion**

General insurance providers 0.8% net premium income £267 million

General insurance intermediaries 0.8% of annual eligible income £82 million

Life & pensions providers 0.8% of net premium income £544 million

Investment *** N/A £400 million

Mortgage (advice) 0.8% of annual eligible income £14 million * Figures based on figures reported for 2005 ** Cumulative * * * The current investment sub-scheme consists of the contribution groups for financial advisers and brokers (Al2/ 13), fund managers (A7), collective investment scheme operators and depositaries (A9), principal dealers (A10) and corporate finance advisers (A14). The limit of £400 million is shared between them and applies as a total amount that can be raised: but levies cannot be raised in one of the contribution groups to pay a default in another.

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FSCS New Funding ModelFSCS New Funding Model

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New Funding LimitsNew Funding Limits

Class Sub-class Threshold (£)

Provision £690m Life & Pensions

Intermediation £70m

Fund management £340m Investment

Intermediation £90m

Provision £1,045m General Insurance

Intermediation £195m

Banks and building societies £1,839.5m Deposit

Credit unions £0.5m

Provision £70m Home finance

Intermediation £60m

Total £4.4bn

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Setting the ThresholdsSetting the Thresholds

Estimates of the financial sizes of each sub-class based on relevant income (figures are rounded)

Proposed broad class Proposed sub-class Estimated financial size (based on relevant income)

Deposit Banks and building societies Credit unions

£24 billion N/A

General insurance Provision Intermediation

£13.8 billion £5.5 billion

Life and pensions Provision Intermediation

£9 billion £2 billion

Investment Fund management Intermediation

£4.5 billion £2.6 billion

Home finance Intermediation Provision

£1.7 billion N/A

View taken by research that appropriate level is between 5% and 10%

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Current Tariff MeasuresCurrent Tariff Measures

Contribution group Tariff measure

Al Deposit takers Protected deposits

A3/A4 Insurers Relevant net premium income

A7 Fund managers Funds under management

A9 CIS operators* Gross income

A10 Dealing as principal Number of traders

Al2/A13 Advisory brokers (excluding corporate finance adviser) Approved persons

A14 Corporate finance advisory firms Approved persons * Includes managers of authorised unit trusts, authorised corporate directors and depositaries, and operators of personal / stakeholder pension schemes

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New Tariff MeasuresNew Tariff Measures

Class Sub-class Proposed tariff(s) Existing tariff

Provision Relevant net premium income & eligible mathematical reserves

Relevant net premium income (A4) Life &

Pensions Intermediation* Annual eligible income Approved persons (Al2/13)

General insurance

Provision Relevant net premium income & eligible technical liabilities

Relevant net premium income (A3)

Fund management

Annual eligible income Funds under management (A7) Gross income (A9)

Investment

Intermediation Annual eligible income Number of traders (A10) Approved persons (Al2/13/14)

* Under the new model life and pensions providers who also have the activities subject to the intermediation subclass will be subject to liabilities arising in the life and pensions intermediation sub-class, and will have to supply the appropriate tariff data accordingly. This is a change to the current position for A4 life providers as discussed in paragraphs 3.8, 3.22 and 3.25.

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Recent events: Northern RockRecent events: Northern Rock

• Northern Rock was a top-five mortgage lender− Gathered £24 billion in saving− Lent £113 billion− Borrowed difference on short-term markets

• Run on bank’s assets caused loss of confidence• Bank of England injected £16 billion in cash, but still has not

restored confidence• Take-over now imminent, bidders include Virgin and Olivant, but

may be prevented by availability of funds− Jan. 10 (Bloomberg) – “U.K. Chancellor of the Exchequer Alistair

Darling said it might not be possible for companies to finance a rescue of Northern Rock Plc, suggesting the British government may be forced to take ownership of the bank”.

• Crisis has led to concern that FSCS still not funded enough, but FSCS has said that levies would be raised

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If FSCS runs out of funds…..If FSCS runs out of funds…..

• What happens if the capacity of the scheme is exhausted?

• A shock of sufficient magnitude to cause this possibility would trigger

the crisis management arrangements set out in the Tripartite

Memorandum of Understanding.

• Discussions would be held by FSA with HM Treasury and the Bank of

England, through the mechanism of the Tripartite Standing Committee.

Financial Ombudsman ServiceFinancial Ombudsman Service

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The Role of theThe Role of the Financial Ombudsman Service (FOS) Financial Ombudsman Service (FOS)

• FOS was set up under the Financial Services and Markets Act 2000 to help settle individual disputes between businesses providing financial services and their customers – fairly, reasonably, quickly and informally.

• FOS considers complaints about a wide range of financial matters – from insurance and mortgages to investments and bank accounts.

• FOS is intended to be completely independent and impartial • If a business can’t resolve a customer’s complaint, FOS will try to settle the

dispute. But the business must first have the chance to sort things out itself. • FOS service is free to consumers. • Consumers do not have to accept any decisions FOS makes. They are

always free to go to court instead. But if they accept an ombudsman’s decision, it is binding on both them and the business.

• FOS service is confidential• Inter-relation with Office of Fair Trading, FSA and Pensions Ombudsman is

governed by formal memoranda of understanding

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In the Year Ending 31In the Year Ending 31stst March 2007, FOS… March 2007, FOS…

• Handled 627,814 initial enquiries and complaints from consumers – of which 1 in 6 turned into cases requiring the involvement of FOS adjudicators and ombudsmen.

− Half of the total number of cases FOS dealt with related to ten of the UK’s largest financial services groups. 

− Represented a 47% increase in banking-related cases, a 10% increase in insurance-related cases, and a 21% decrease in cases involving investments other than mortgage endowments.

• Received 46,134 new mortgage endowment complaints – around 175 new cases every working day, compared with 250 cases a day in the previous year.

• Resolved 111,673 cases – 94% of which were settled informally, without the need for formal ombudsman decisions.

• Operated on a budget of £59 million and the total number of staff averaged 960.

• Handled 610 parliamentary and ministerial enquiries, over 4,000 media calls and 18,000 specialist enquiries to our technical advice desk.

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FOS Case Handling - Year to 31 March 2007FOS Case Handling - Year to 31 March 2007

• 627,814 initial enquiries and complaints

handled by customer contact division

• 94,392 new cases

referred to adjudicators and ombudsmen for further dispute-resolution

work

• 104,831 cases resolved by adjudicators

by mediation, recommended settlements and adjudications

• 6,842 cases resolved by ombudsmen

making formal decisions at the final "appeal" stage of our dispute-

resolution process

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New Cases in 2006/7New Cases in 2006/7

Source: Financial Ombudsman Service

Annual Review 2006/7

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Types of Firm Complained About 2006-7Types of Firm Complained About 2006-7

Source: Financial Ombudsman Service Annual Review 2006/7

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The Independent AssessorThe Independent Assessor

• Any person or firm directly affected by the statutory functions of the

Financial Ombudsman Service may raise with the independent

assessor any complaint about the standard of service provided by the

FOS provided: − a) the service complaint has first been made to the chief ombudsman or one

of the principal ombudsmen or the service review manager, and they have

had a reasonable opportunity of responding to the service complaint; and

− b) the person or firm making the service complaint remains dissatisfied and

complains to the independent assessor within three months of the Financial

Ombudsman Service confirming that it has completed its own internal

procedures in relation to the service complaint.

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FOS Income and Expenditure 2005-7FOS Income and Expenditure 2005-7

Source: Financial Ombudsman Service Annual Review 2006/7

Co-operation between agenciesCo-operation between agencies

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Memoranda of Understanding (MOU)Memoranda of Understanding (MOU)

• Relative responsibilities of different bodies are defined by detailed MOU’s agreed and updated periodically

• The main MOU’s exist between:

− Bank of England, HM Treasury and FSA (the ‘tripartite agreement’)− FSA and FSCS− FSA and FOS− FOS and Pensions Ombudsman− FOS and Office of Fair Trading (OFT)

• Other organisations which have some role in the system include;− Building Societies Commission− Friendly Societies Commission− Registry of Friendly Societies

• UK has numerous ‘think tanks’ and research groups which also interact with FSA during consultation processes, for example the FSCS funding review

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MoU between FSA and FSCSMoU between FSA and FSCS

• The FSA will ensure that FSCS is at all times capable of exercising its functions by:a) Ensuring that any rules made by the FSA can be administered effectively.

b) Ensuring that the rules do not unreasonably constrain the FSCS’ ability to raise sufficient funds to meet the costs incurred in discharging its responsibilities under the Act and under the rules.

c) Notifying the FSCS of any circumstances which may impact on its ability to meet the objective of administering the rules in a fair and cost effective manner.

d) Appointing appropriate persons to the FSCS’ Board, ensuring that the terms of their appointments are such as to secure their independence from the FSA in the operation of FSCS.

• FSCS is responsible for:a) The effective operation of a single compensation scheme and for overseeing the orderly wind-down

of work to which the Rules of the old schemes apply;

b) Making and implementing procedures to enable FSCS to operate its functions;

c) Making levies for management expenses, compensation costs and establishment costs as are required under the Rules to enable it to carry out its role.

d) The use of its resources in the execution of its objective and functions in an efficient and economic way.

e) Reporting to the FSA on the discharge of its functions.

f) Publishing information on its operation.

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MoU between FSA and FOSMoU between FSA and FOS

• Under FSMA the FSA is responsible, in particular, for:

− appointing and removing the directors of the FOS Ltd (in the case of the chairman, with the approval of the Treasury);− ensuring that the directors' terms of appointment (and particularly those governing removal from office) secure their independence

from the FSA in the operation of the scheme;− ensuring that the FOS Ltd is capable of exercising its statutory functions; and− making rules for the compulsory jurisdiction on: complaint-handling by firms; activities covered; complainants eligible; time-limits; limits

on awards; and levies to cover the establishment and operation of that jurisdiction.

• Under FSMA the FOS Ltd (with the consent/approval of the FSA) is responsible, in particular, for:

− adopting a budget (which must indicate amounts of income arising/expected to arise and distribution of resources deployed) distinguishing between each of the scheme's three jurisdictions;

− making rules (or standard terms) for the consumer credit and voluntary jurisdictions on: complaint-handling by respondents; activities covered; complainants eligible; time-limits; limits on awards; and levies to cover the establishment and operation of those jurisdictions; and

− making rules (or standard terms) for the compulsory, consumer credit and voluntary jurisdictions on: ombudsman procedures; awards of costs and interest; and case fees.

• The FOS Ltd is responsible, in particular, for:

− operating the ombudsman scheme (which is known as the Financial Ombudsman Service);− appointing the ombudsmen (including the chief ombudsman) on terms consistent with their independence; and− making a yearly report to the FSA on the discharge of its functions and publishing that report.

• Additional governance issues

− In appointing the directors of the FOS Ltd, the FSA will take into account the views of the chairman of the FOS Ltd and the need to maintain an appropriate balance in the composition of the board.

− The FSA and the FOS Ltd will cooperate in the smooth running, and periodic review, of their arrangements for:− setting the FOS Ltd's budget and the associated levies and case fees;− collection by the FSA, on behalf of the FOS Ltd, of the levy in relation to the compulsory jurisdiction; and− consulting on and making rules affecting the Financial Ombudsman Service.

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MoU between FOS and Pensions MoU between FOS and Pensions Ombudsman (PO)Ombudsman (PO)

• Regulation 4(1) of The Personal and Occupational Pension Schemes (Pensions. Ombudsman) Regulations 1996 now provides that:

− "The Pensions Ombudsman shall not investigate or determine any complaint or dispute which can be (and is in fact) dealt with under the compulsory jurisdiction of the ombudsman scheme provided for by Part 16 of the Financial Services and Markets Act 2000, other than a complaint or dispute relating to the management of a personal pension scheme."

• It is now considered appropriate that:− FOS should deal with complaints and disputes which predominantly concern the sale

and/or marketing of both personal and occupational pensions and their related investments, and

− the PO should deal with complaints and disputes predominantly concerning the management (after sale or marketing) of both types of pension, and

− where complaints have circumstances which do not enable the complaints to be placed in either of the above two categories, or where either the PO or FOS is unable to deal with the complaint as categorised, the PO and FOS will immediately take steps to agree how each case will be handled subject to the relevant rules of investigation and the complainant's wishes.

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MoU between FOS and OFTMoU between FOS and OFT

• Under the Consumer Credit Act 1974, as amended by the Consumer Credit Act 2006 (the Act), the OFT is responsible, among other matters, for:

− The licensing system established by the Act;− Superintending the enforcement of the Act, in partnership with Local Authority Trading Standards

Services; and− Publishing guidance and other advice on its interpretation of the Act and how it will enforce it.

• The OFT is the lead enforcer of the Unfair Terms in Consumer Contracts Regulations 1999. There are a number of other qualifying bodies, including the FSA, who can exercise powers under these Regulations.

• Under FSMA the FOS Ltd (with the consent/approval of the FSA) is responsible, among other matters, for:

− Making rules (or standard terms) for the consumer credit and voluntary jurisdictions on: complaint-handling by respondents; activities covered; complainants eligible; time-limits; and limits on awards;

− Making rules (or standard terms) for the compulsory, consumer credit and voluntary jurisdictions on: ombudsman procedures; awards of costs and interest; and case fees; and

− Determining the sums to be recovered by the OFT from licensees to establish and operate the consumer credit jurisdiction.

• The MoU agrees that both bodies will exchange information to assist them in carrying out their duties and consult regularly

Bankruptcy of Securities CompaniesBankruptcy of Securities Companies

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FSA’s Bankruptcy PowersFSA’s Bankruptcy Powers

• The FSA has power to petition for a bankruptcy order or a sequestration award in

relation to an individual (section 372 of the Act)

− The FSA recognises that the bankruptcy of an individual or the sequestration of an individual's estate

are significant measures which may have significant personal and professional implications for the

individual involved. In considering whether to present a petition the FSA's principal considerations will

be its regulatory objectives including the protection of consumers.

− If an individual appears to be unable to pay a regulated activity debt, or to have no reasonable

prospect of doing so, then section 372 of the Act permits the FSA to petition for the individual's

bankruptcy, or in Scotland, for the sequestration of the individual's estate. The FSA will petition for

bankruptcy or sequestration only if it believes that the individual is, in fact, insolvent. In determining

this, as a general rule, the FSA will serve a demand requiring the individual to establish, to the FSA's

satisfaction that there is a reasonable prospect that he will be able to pay the regulated activity debt.

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Powers to Make Unauthorised Firms Powers to Make Unauthorised Firms InsolventInsolvent

• The FSA may decide to exercise its power to obtain a compulsory insolvency

order or to apply for the appointment of a receiver rather than to exercise its

powers to obtain restitution.

− The FSA may also consider the cost of seeking compulsory insolvency orders which

will be paid out of the assets of the firm, or of the unauthorised person concerned,

compared to the cost of seeking restitution.

• In the case of unauthorised persons operating in breach of the general

prohibition, a decision to apply for a compulsory insolvency order rather than

restitution will depend on all the circumstances of the case.

− In particular, the FSA may consider the significance of the unauthorised activities

compared to the whole of the business; the nature and conduct of the activities carried

on in breach of the general prohibition; and the number and nature of the claims

against the person or firm concerned.

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Factors to be Considered by FSAFactors to be Considered by FSA1. Whether others have taken steps to deal with the individual's insolvency, including a

proposal by the individual of a voluntary arrangement, a petition by the individual for his own bankruptcy or sequestration, or a petition by a third party for the individual's bankruptcy or the sequestration of the individual's estate;

2. Whether the FSA can adequately deal with the individual using other powers available to it under the Act, without the need to seek a bankruptcy order or sequestration award;

3. The extent of the individual's insolvency or apparent insolvency;

4. The number of consumers affected and the extent of their claims against the individual;

5. Whether the individual has control over assets belonging to consumers;

6. The individual's conduct in his dealings with the FSA, including the extent of his cooperation with the FSA;

7. Whether the individual appears to be, or to have been, involved in financial crime;

8. The adequacy of the individual's accounts and administration records;

9. In the case of an unauthorised individual who is carrying on or who has carried on a regulated activity, the nature, scale and importance of that activity and the individual's conduct in carrying on that activity;

10. Whether there would be an advantage in securing a moratorium in respect of proceedings against the individual; and

11. Whether there are any special personal or professional implications for that individual if a bankruptcy order or sequestration award is made.

Investor EducationInvestor Education

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Investor EducationInvestor Education

• FSA, FSCS and FOS all have press offices and issue detailed press releases

• FSCS issues a regular newsletter

• The FSA handbook system provides all investors with targeted information on regulation, available free on web

• Both FSCS and FOS provide free advisory service for potential claimants and all parties in dispute

• Numerous private organisations and the UK press provide extensive briefing and advice

− For example www.themarketoracle.co.uk

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Other Relevant Programs in UKOther Relevant Programs in UK• FSA National Strategy for Financial Capability

• www.fsa.gov.uk/financial_capacity

• FSA Innovation Fund - to fund research• Department for Work and Pensions• Informed Choice Program• Financial Education Partnership (and Scottish Centre for Financial

Education) provide free workshops to schools and pupils• www.fep.org.uk and

ww.ltscotland.org.uk/wholeschoolissues/crosscurricularissues/financialeducation.asp

• Personal Finance Education Group educational charity for young people• www.pfeg.org

• Various programs for individual investors including:• Institute of Financial Services (ifs) - www.ifslearning.com • Life Academy - www.life-academy.co.uk • Training for Profit - www.trainingforprofit.co.uk

• UK also has numerous special focus organisations such as Citizens Advice and Money Advice Scotland

Questions and DiscussionQuestions and Discussion

Thank You