Regulatory Monitor Winter 2001/2002

Profession:Jones Day Gouldens

Conduct of Business transitional arrangements

Following the hectic build-up to the passing of N2 at midnight on 30 November 2001, with firms endeavouring to achieve systems and controls which comply with the new Conduct of Business Rules (COB), authorised firms may now enjoy a grace period in a number of circumstances.

There is a general 7 month transitional period to 30 June 2002, for firms previously authorised under the Financial Services Act 1986, whether by an SRO or the FSA itself. During this period, authorised firms may comply with current SRO rules, COB or a combination of SRO rules in certain areas and COB in others. The transitional period does not apply to banks whose only regulated activity is deposit-taking, or general insurance companies.

There is a 12 month period to 30 November 2002 for firms previously regulated by a Recognised Professional Body.

The transitional provisions include:

Arrangements for the "mapping across" of client classifications so that firms will not need to re-document all of their clients after N2.

A general permission for firms to continue to rely on pre-N2 terms of business (including for post-N2 customers), subject to specified safeguards.

A defence against allegations of a breach of COB where a firm has complied with the equivalent rules of its pre-N2 regulator, during the relevant transitional period.

Certain "extra time" provisions apply, to some extent, to COB relating to financial promotion, client classification, client assets, client money and information about the firm.

Certain technical timing provisions apply such as in relation to half-yearly reports by SFA member firms to customers in respect of their portfolios. SFA rules may be applied for periods which end less than 6 months after N2.

Firms may continue to use or rely upon pre-N2 compliant documentation or compliance work indefinitely, such as terms of business agreed by a customer before the end of any extra time transitional period. For example, an ex-SFA member firm may issue FSA compliant terms of business after N2 and before 30 June 2002, without breaching the new COB.

Customer classification

The customer classification rules within the Conduct of Business Source Book, merge the requirements of the former SROs. Customers are now to be categorised into one of three groups: market counter-parties, intermediate customers and private customers, with increasing levels of protection respectively.

The adequacy of a firm's records to support customer classification is very likely to be reviewed by the FSA post-N2. This will include reviewing documentation evidencing a firm's reasoning behind particular client classifications. It is therefore essential that all conversations and written communications relied upon for the purposes of classifying customers are recorded in writing and retained.

All relevant records must be retained for a minimum of three years from the date a firm ceases to carry on business for a particular client. The ability of firms to "map across" pre-N2 classifications directly to their appropriate new classifications and the ability to continue to rely upon terms of business and client agreements which have not changed, enable a smoother transition to the new classification regime.

Changes to Listing Rules

On 1 December 2001, new rules and a new guidance manual in relation to changes to the Listing Rules came into force. In summary, the conclusions reached by the FSA following detailed consultation during the Summer, include:

Clarification of the guidance on the dissemination of price sensitive information (the "PSI Guide");

To replace the Quotations Committee with the Listing Authority Review Committee, for non-disciplinary cases;

To withhold the introduction of a requirement for a company to make an announcement to the market if a director or relevant employee has breached the company's code of dealing;

To withhold the proposed new rules requiring issuers and sponsors to notify the UKLA when becoming aware that they have breached a Listing Rule;

To emphasise that the PSI Guide is now guidance within the terms of the Act and not simply best practice.

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