August 11, 2022
The 24/7 news cycle kept churning this week, but hopefully not lost in the shuffle was the Federal Reserve Board's announcement on the individual capital requirements for all large banks, following the June announcement of Dodd-Frank Act Stress Test results. Let's not forget: this supervision is there for a very good reason − namely, to ensure that banks are sufficiently capitalized to absorb losses during times of stress. We look at the FRB announcement, and other key announcements from U.S. and UK agencies, this week.
As always, we welcome your thoughts. Just write to us here.
Daniel Meade and Michael Sholem
Co-Editors, Cabinet News and Views
Last week, the Federal Reserve Board (“FRB”) announced the individual capital requirements for all large banks, effective on October 1. This announcement follows the June announcement on the results of the supervisory stress test (also known as the Dodd-Frank Act Stress Test or DFAST, as these tests are required by Section 165 of the Dodd-Frank Act), which assesses whether banks are sufficiently capitalized to absorb losses during a severe recession.
The FRB’s announcement noted that “[u]nder the Federal Reserve Board’s capital framework for bank holding companies, covered savings and loan holding companies, and U.S. intermediate holding companies with $100 billion or more in total consolidated assets, capital requirements are in part determined by the supervisory stress test results.” The FRB’s announcement includes a table showing the total common equity tier 1 (“CET1”) capital ratio requirement for each of the 34 large banks, including the CET1’s three components: (1) the minimum CET1 capital ratio requirement of 4.5% for all the 34 banks; (2) the stress capital buffer (“SCB”) requirement, which is determined from the supervisory stress test results and is at least 2.5%; and (3) the global systemically important bank (“G-SIB”) surcharge for the eight U.S. G-SIBs.
As we noted in June, some of the largest banking organizations saw an increase to their stress SCB this year. The minimum CET1 capital requirements for the 34 large banking organizations range from 7.0%-13.5%.
An appointed representative (“AR”) is a firm or person who carries on a regulated activity, or activities, under the responsibility of an authorized financial services firm. An authorized firm that appoints representatives in this way is referred to as a “principal.” In appointing an AR, the principal assumes responsibility for the regulated activities carried on by the AR that have been agreed with the AR in writing. The appointed representatives regime dates back to 1986, but as the perimeter of UK financial regulation has extended, the market significance of ARs has grown. At present, some principals have responsibility for a large number of ARs, especially in the fintech and asset management markets.
On August 3, the UK’s Financial Conduct Authority (“FCA”) published a policy statement on improvements to the AR regime. The statement gives detail on responses submitted to a consultation on the regime which took place in December 2021, together with the final rules. The majority of the 107 responses were supportive of the FCA’s proposed changes. The FCA has made some amendments that take account of feedback received to add flexibility, make it easier for firms to implement relevant proposals, and to reduce duplication and regulatory burdens. The details of the changes, together with minor clarifications and updates, and the FCA’s response to the feedback received, are set out in chapters 2 and 3 of the policy statement. The final rules, guidance and forms are in the Appointed Representatives Instrument 2022 (FCA 2022/32) and will come into force on December 8, 2022. Principals should expect to receive a request for data about their ARs later in 2022.
Under the new rules, principal firms will be required to:
- Apply enhanced oversight of their ARs, including ensuring they have adequate systems, controls and resources.
- Assess and monitor the risk that their ARs pose to consumers and markets, providing similar oversight as they would to their own business.
- Review information on their AR’s activities, business and senior management annually and be clear on the circumstances when they should terminate an AR relationship.
- Notify the FCA of future AR appointments 30 calendar days before they take effect.
- Provide complaints and revenue information for each AR to the FCA on an annual basis.
The FCA has clarified that the annual review requirements can be met by principals integrating them into existing internal reporting processes, so long as they meet the standards set out in the rules. The annual reviews can be conducted by individuals with a suitable degree of knowledge and authority below the governing body’s level. Significant issues identified at specific ARs should then be escalated to the governing body.
Following the Consumer Financial Protection Bureau’s supervisory observations that the auto finance industry seemed to be struggling with providing adequate consumer protections to servicemembers, the CFPB has joined with the Department of Justice to reach out directly to auto finance companies, emphasizing the importance of compliance with the Servicemembers Civil Relief Act ("SCRA"). While the DOJ is responsible for enforcing the SCRA, the CFPB provides support in terms of educating consumers and industry on how to comply with it, and may use its unfair, deceptive or abusive act or practice authority under the Consumer Financial Protection Act to itself address the failure to comply with the SCRA.
In the letter that was sent to a variety of auto finance and leasing companies, including banks, the industry was reminded that the protections of the SCRA extend not just to servicemembers but also to their dependents. Specifically, when companies undertake to repossess a vehicle, they have the burden of identifying whether a borrower is protected under the SCRA. In addition, the SCRA allows protected borrowers to terminate leases early, without penalty, as well as to reduce interest rates to 6% while the servicemember is in active duty.
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Christopher Gent, a former CEO of Vodafone Group plc and non-executive Chairman of GlaxoSmithKline plc, was appointed as the non-executive Chairman of ConvaTec Group Plc (“ConvaTec”), a company admitted to trading on the London Stock Exchange (“LSE”), in October 2016 and held this position until retirement in May 2019. In his role, Mr. Gent was responsible for governance over, and closely involved in the preparation of, ConvaTec’s issuance of key company news (“RNS”) announcements to the LSE. In October 2018, Mr. Gent previewed the release of an expected RNS announcement relating to the downward revision of ConvaTec’s financial guidance and the retirement of ConvaTec’s CEO before such information had been announced to the market. The disclosures were made to two individuals in senior positions at two of ConvaTec’s major shareholders under the belief that it was in the best interests of ConvaTec that these investors received the information ahead of the public announcement (which was made five days after the private communications). The UK Financial Conduct Authority (“FCA”) determined that Mr. Gent’s actions amounted to an unlawful disclosure of inside information and that he therefore committed market abuse in breach of the UK Market Abuse Regulation (“MAR”). He was fined £80,000.
The factors relevant to the FCA’s assessment over the conduct at issue were that Mr. Gent was an experienced industry professional and held a senior position within his organization. In concluding that the market abuse was committed negligently, the FCA maintained that “[h]aving received relevant training on MAR from ConvaTec’s external legal advisers […], and based on his own considerable experience and position, Sir Christopher should have realised that the information he disclosed amounted, or may have amounted, to inside information and that it was not in the normal exercise of his employment, profession or duties selectively to disclose it. Sir Christopher failed properly to apply his mind to the specific question of what information, if any, he might properly disclose, as well as when, in what manner and to whom, and he failed to obtain clear, formal advice regarding this question, before making the disclosures.” The FCA acknowledged and accepted Mr. Gent’s explanation that he believed that he was acting in the best interests of ConvaTec in his role as its Chairman by making the disclosures, yet this could not excuse his actions because the FCA resolved that his conduct undermined investor confidence in the integrity of financial markets.
The FCA final notice (issued on August 5, 2022) is available here.
Cadwalader’s financial services team completed its four-part webinar series on capital relief trades last week.
Webinar replays are available here:
We're excited to announce that our annual "Cadwalader Finance Forum" is coming back as an in-person event in Charlotte once again on Thursday, October 27.
Previous Finance Forums, with their mix of networking opportunities and panel discussions, have attracted more than 500 participants. This year's Finance Forum will once again focus on critical market and regulatory issues and trends impacting multiple sectors, including commercial real estate finance, middle market lending, fund finance and securitization.
A detailed schedule, featuring our panel line-up and speakers, will follow.
Click here to register for the event.
We look forward to seeing you in Charlotte on October 27.