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CFPB-Autos, Ranking Assets, Structured Notes: Compliance

The U.S. Consumer Financial Protection Bureau has told at least four banks that it may sue them over vehicle loans and interest-rate markups by auto dealers that appear discriminatory, according to three people briefed on the matter.

The banks received letters from the CFPB last week giving them 15 days to provide an explanation of the practice, said the people, who asked not to be identified because the plans aren’t public. The letters indicate the bureau believes the banks may have violated the Equal Credit Opportunity Act, a 1974 law that bars discrimination in lending.

The letters, sent as vehicle loan originations are on the rise, demonstrate that the CFPB may be willing to sanction banks over mark-ups by auto dealers, which were excluded from the bureau’s supervision in the 2010 Dodd-Frank Law. As the economy has improved, auto loans climbed to $85.8 billion in the third quarter of 2012, according to the Federal Reserve.

CFPB Director Richard Cordray said in a conference call with credit unions on Feb. 5, that auto lending “is within our jurisdiction,” without referencing any enforcement plans.

Moira Vahey, a CFPB spokeswoman, declined to confirm the existence of the letters or comment on possible enforcement matters.

The regulation of auto lending was one of the hardest- fought provisions of Dodd-Frank. Dealers often provide financing by giving buyers loans backed by banks and other lenders, a process known as indirect lending. CFPB has the authority to supervise banks with more than $10 billion in assets.

The agency also has the authority to issue a regulation that would allow it to supervise the larger players in the field of auto lending that aren’t traditional banks.

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Compliance Policy

Big Four Auditing Dominance Hurts Quality, U.K. Regulator Says

The Big Four accounting firms’ dominance over corporate audits in Britain will probably lead to higher prices, lower quality and a failure of customers to innovate and meet shareholders’ demands, a regulator said.

The lack of competition also makes it difficult to compare prices and switch providers, resulting in 31 percent of the U.K.’s 100 biggest publicly traded companies using the same accounting firm for the past two decades, the Competition Commission said today in provisional findings following a 16- month probe of the industry.

The probe focused on KPMG LLP, Deloitte LLP, Ernst & Young LLP and PricewaterhouseCoopers LLP, the same companies at the center of a similar European Union effort to increase competition in the industry. A U.K. government committee investigating the global financial crisis had called for a probe of the four accounting firms, which earned 99 percent of audit fees paid by the FTSE 100 companies in 2010.

The U.K. Competition Commission said it’s considering possible remedies including mandatory bidding and rotations processes.

The Competition Commission said it will issue a final report by Oct. 20.

Structured Note Value Disclosure Examined by Europe Regulators

Regulators in Europe are discussing whether issuers of structured notes should be forced to disclose to investors the value of the securities, which package debt with derivatives.

The European Securities and Markets Authority, set up in 2011 to harmonize regulations for financial markets across the 27-nation European Union, could introduce new rules by 2015, according to Paris-based spokesman David Cliffe.

Structured notes offer customized bets to investors and are under scrutiny from regulators in the U.S. and Europe because of their complexity and lack of transparency. The value of securities is lower than the issue price to account for costs including underwriting fees, hedging costs and expenses to create and market the notes.

Any new European regulations would be included in an update of Europe’s Markets in Financial Instruments Directive, which is being reviewed by EU Financial Services Commissioner Michel Barnier as part of a wider overhaul of the securities industry. Mifid II is expected to come into force in 2015, Cliffe said.

In the U.S., the Securities and Exchange Commission plans to require banks to disclose the estimated initial value of notes, including how they arrived at prices for the bond and derivatives components, according to a report from securities law firm Morrison & Foerster LLP.

Goldman Sachs Group Inc. (GS), Bank of America Corp. and Royal Bank of Canada (RY) started publishing their estimates in prospectuses in anticipation of new rules.

In Europe, any new guidelines for structured notes will be agreed upon between ESMA and the 27 national financial regulators in the EU, and would apply equally across the continent, Cliffe said.

EU Bank Watchdog to Rank Assets by Liquidity for Basel Rules

Europe’s top banking regulator will start ranking financial assets in order of liquidity as it implements international rules to protect banks from a sudden loss of short-term funding.

The European Banking Authority will create a “scorecard” of asset liquidity, the agency said in an e-mailed statement, as part of requirements that banks hold a buffer of assets, known as the Liquidity Coverage Ratio, they can quickly sell to survive a 30-day credit squeeze.

Central bankers from around the world, who make up the Basel Committee on Banking Supervision, agreed on Jan. 6 to give banks more time and the right to use more types of securities to meet the liquidity ratio. The LCR is part of an overhaul of global financial rules, known as Basel III, intended to prevent a repeat of the financial crisis that followed the 2008 collapse of Lehman Brothers Holdings Inc.

Ireland, which holds the rotating presidency of the EU, is pressing for an agreement to have the liquidity rule take full effect on Jan. 1, 2018, a year ahead of a deadline set last month by the global central bank chiefs. Global regulators had previously planned to implement the requirement fully as early as 2015.

The EBA will seek to come up with a definition of liquidity, “recognize that some asset classes are more liquid than others, and define which assets should be subject to a cap on their usage in the buffer,” the agency said in a consultation document on its website.

Compliance Action

Swiss Franc Rates Added to EU’s Interbank Collusion Probes

European Union antitrust regulators are investigating collusion among banks and brokers to manipulate benchmark lending rates denominated in Swiss francs, building on earlier probes linked to the yen and the euro, EU Competition Commissioner Joaquin Almunia said today.

Deutsche Bank AG, Barclays Plc (RBS), HSBC Holdings Plc (HSBA) and Royal Bank of Scotland Group Plc have all said they were questioned by the EU over benchmark interest rates. Almunia has said that he’s investigating possible rate-fixing for Libor, Euribor and the Tokyo index Tibor that may have affected derivatives. He said today that the Euribor probe is linked to the euro and declined to comment further on currencies linked to the other rates.

The Libor probes are an “absolute priority” for the EU, Almunia said today. Any fines from EU regulators will cover all the companies involved at once, he said. That differs from other financial regulators that have settled with banks separately. Barclays (BARC), UBS (UBSN) AG and RBS have been fined more than $2.5 billion by U.S. and U.K. financial regulators for manipulating the London interbank offered rate and more than a dozen more firms are being investigated.

UBS has received conditional immunity from U.S. and Swiss antitrust regulators for cooperating with investigations. The bank said it sought immunity for probes on yen Libor, Euroyen Tibor and Swiss franc Libor.

The EU can levy fines of as much of 10 percent of a company’s yearly global revenue for each cartel in which they participate.

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SNS Reaal Wins Temporary Approval From EU for Dutch Rescue

SNS Reaal NV (SR) won temporary approval from European Union regulators for recapitalizations and a bridge loan from the Dutch government, which took control of the country’s fourth- largest lender on Feb. 1.

A restructuring plan for SNS Reaal must be sent to the European Commission within six months before the Brussels-based authority gives final approval for the aid, the EU said in an e- mailed statement today. The EU will examine a 300 million-euro ($396 million) recapitalization and a 1.1 billion-euro bridge loan for SNS Reaal and a 1.9 billion-euro recapitalization for its SNS Bank unit.

Mexico Agency Rejects Telecom Accord From Phone Regulator

Mexico’s phone regulator must study whether to force phone companies to lease the parts of their network that connect directly to the homes and businesses of customers, a concept known as “local-loop unbundling,” the nation’s regulatory review agency said.

The Federal Regulatory Improvement Commission rejected a proposal from the Federal Telecommunications Commission to regulate the way phone companies connect to each other, a document known as the Interconnection Framework Accord. The phone regulator must provide an analysis of costs and benefits of local-loop unbundling to win approval for the regulation, the regulatory review agency said in a letter on its website.

The phone regulator said last month it aimed to publish the regulation in early February, assuming it got approval from the regulatory improvement commission. The government has said America Movil SAB (AMX) must sign the document to win approval for its Telmex unit to offer pay-TV service in Mexico.

EU to Prioritize Collective Redress, Close Antitrust Probe

European Union Competition Commissioner Joaquin Almunia said regulators may draft rules on collective redress to allow group lawsuits ahead of legislating on private damages actions for victims of cartels to seek compensation.

Separately, Almunia said regulators will close an antitrust probe into banks’ online payment program after the group abandoned work on e-payments standards.

Courts

NCAA Sues Pennsylvania Over $60 Million Sandusky Abuse Fine

The National Collegiate Athletic Association filed a lawsuit accusing Pennsylvania of trying to confiscate a $60 million sanction imposed against Pennsylvania State University in the Jerry Sandusky child-abuse case.

A new law that lets the state control the use of the funds violates the U.S. Constitution and can’t be enforced, the NCAA said in a complaint filed Feb. 20 in federal court in Harrisburg, Pennsylvania. The bill, passed this month and enacted yesterday, applies to all large fines levied against state-supported institutions.

Pennsylvania Governor Tom Corbett’s office is reviewing the complaint, spokeswoman Janet Kelley said in an e-mail.

Corbett supported and signed the law “because he believes it is important to keep this money in Pennsylvania,” Kelley said in the e-mail. “He believes it makes sense and is the right thing to do.”

Corbett sued the Indianapolis-based NCAA in January, challenging the fine levied against the school for its failure to prevent sexual abuse by Sandusky, a former Penn State assistant football coach who was convicted of molesting 10 boys. The governor accused the NCAA of using the Sandusky offenses as a “pretext” to impose unprecedented sanctions in violation of antitrust laws.

The NCAA countered in papers filed this month that Corbett has no standing to bring the case and is seeking to undo an agreement “freely entered into” by Penn State.

The Pennsylvania Institution of Higher Education Consent Decree Endowment Act attempts to “negate a valid contract” between the NCAA and Penn State, the sports association said in court papers. The act, which says that fines levied from a school become property of the state, “amounts to a taking of private property without just compensation,” the NCAA said.

The governing body is asking a judge to declare the law unconstitutional and bar its enforcement.

The case is NCAA v. Corbett, 13-00457, U.S. District Court, Middle District of Pennsylvania (Harrisburg).

Interviews/Speeches

EU and U.K. Plans to Split Banks ‘Problematical,’ Goodhart Says

European and U.K. proposals to separate lenders’ investment banking and retail divisions are “problematical,” said Charles Goodhart, a former member of the Bank of England’s Monetary Policy Committee.

“The degree to which the Liikanen proposals are being watered down is simply a trend in that direction,” Goodhart said in a speech in London. If the U.K. implements its own plan to split banks, “we will largely be doing it on our own,” Goodhart said.

LME Stands to Gain as EU Seeks OTC Derivative Transparency

The London Metal Exchange, the world’s biggest industrial- metals marketplace, stands to gain as the European Union seeks greater transparency for over-the-counter derivatives, its deputy chief executive officer said.

Diarmuid O’Hegarty made the remarks yesterday at a press conference. The LME held a separate briefing on the EU’s European Market Infrastructure Regulation for its members, which include JPMorgan Chase & Co. (JPM) and Deutsche Bank AG. (DBK)

EMIR mandates clearing of OTC derivatives, as well as reporting of all derivative contracts to a so-called trade repository. Clearinghouses operate as central counterparties for all trades made by their members to reduce risk from an individual default. The LME is starting its own clearing business with a goal of going into operation next year.

Regulators around the world are seeking to push more trading onto clearinghouses in reaction to the 2008 financial crisis. Investors bought and sold contracts worth $14.5 trillion last year on the LME, where copper, aluminum, nickel, tin, zinc and lead are traded.

Rules including EMIR will increase the costs of running metals businesses, according to O’Hegarty. He said the new regulations will amount to “a benefit” in case of an event similar to the 2011 collapse of futures brokerage MF Global Inc. (MFGLQ), which reported a $1.6 billion shortfall in customer funds.

Increased rulemaking was not aimed specifically at the metals market, and regulators have yet to provide definitions for OTC derivative contracts, O’Hegarty said.

To contact the reporter on this story: Carla Main in New York at cmain2@bloomberg.net

To contact the editor responsible for this story: Michael Hytha at mhytha@bloomberg.net

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