The Financial Services Authority sent a letter to chief executives late last month voicing the regulator's concern over inadequate disclosures and some lawyers think this could be a precursor to formal guidance. Simon Gleeson, partner at Allen & Overy in London, said, "We will have some FSA rules on this sooner rather than later."
David Cliffe, spokesman at the FSA in London, said the regulator will be visiting the major investment banks to look at how they are managing market, credit, legal and reputational risks. He added it is keen to make sure London does not fall below the standards in the U.S. in terms of disclosure. But, said he was not aware of plans for guidance in the near future.
Gleeson thinks the FSA is likely to follow the U.S. joint-agencies lead, but believes the impact of this will depend on action rather than words. "What matters is not what the law says, but what the policeman does," said Gleeson, adding that unless there are enforcement actions, sellside institutions will likely carry on as before.
In the FSA's letter, Hector Sants, a managing director in wholesale and institutional markets at the regulator, tells chief executives, "You should expect to receive increasing scrutiny and challenge about current and developing practices from our supervisors in the coming months." He added, "We are concerned about the impact of inadequate or imprecise disclosures on the fairness and efficiency in the operation of the markets for debt and related derivatives such as credit default swaps...We would therefore advise you to take care that the disclosure of transactions that may impact market perceptions, across all relevant asset classes, is clear, fair and not misleading."
The regulator will have to tread a fine line in deciding how far to go with legislation, noted lawyers. Gleeson said, "In the most extreme outcome you would end up in a world where regulated firms did the plain-vanilla transactions and the unregulated hedge funds sold structured products." The question is do they want this business inside the tent where they can keep an eye on it, asked Gleeson.
Simon Firth, partner at Linklaters in London, said there may be some follow up guidance along the lines of the letter, but thinks it is unlikely the FSA will require firms to ensure their customers are acting properly. "There is a distinction between due diligence and taking reasonable steps and ensuring they are behaving properly, explained Firth.
The guidance speculation comes hot on the heels of HSH Nordbank's decision to file a lawsuit against Barclays Bank for allegedly misselling and then inaccurately pricing a managed CDO to the German landesbank.
Tim Plews, partner at Clifford Chance, however, thinks the FSA is likely to stop at its letter unless there are further misselling accusations. This is because the background to the U.S. guidance was a series of corporate failings, which had used structured transactions, whereas that has not occurred in Europe.
