‘Ratchet Up’ Penalties, Debt Collectors: Compliance

U.S. regulators will ratchet up enforcement penalties if banks continue making the mistakes that have already cost them more than $100 billion in legal bills in recent years, said Comptroller of the Currency Thomas Curry.

As the six biggest banks, led by JPMorgan Chase & Co. and Bank of America Corp., have topped $103 billion in legal costs since the 2008 credit crisis, Curry said his agency has turned its focus to “operational risk” -- failures by people, systems and controls inside the banks.

“Some of the settlements and the size of those settlements and regulatory penalties are a reflection of that breakdown,” Curry said yesterday on Bloomberg Television’s “Market Makers” with Erik Schatzker, discussing JPMorgan’s so-called London Whale missteps and money-laundering violations at HSBC Holding Plc. “These are significant penalties. They are also subject to additional ratcheting up if there’s continued non-compliance.”

Curry said his agency’s failure to detect the London Whale trading in which JPMorgan, the biggest U.S. bank by assets, lost more than $6.2 billion has caused him to make “major changes with respect to our supervision of the model procedures the banks use for determining capital.” In its investigation of the Whale trades, the Senate’s Permanent Subcommittee on Investigations said the OCC downgraded JPMorgan’s management rating in July 2012 for “lax governance and oversight.”

Ralph Sharpe, a partner at Venable LLP who was a former enforcement chief at the OCC, said Curry has made it clear that banks experiencing a wide range of legal troubles could face lower management ratings.

Curry said the question of growing bank scale and complexity also figures into his agency’s supervision. He said it’s important to have a range of bank sizes in the industry even as the biggest ones can be more difficult to manage and oversee.

For the video, click here.

Compliance Policy

ECB Said Wrangling With EU Lawmakers on Oversight Minutes

A European Central Bank agreement with the European Parliament on the institutional setup of a banking union hinges on how much access lawmakers get to the minutes of the ECB’s bank-oversight board, according to two people familiar with the matter.

EU lawmakers aim to vote next week on the euro area’s Single Supervisory Mechanism, the last stage in approving a deal hashed out between nations and lawmakers in April. Negotiators appear to be closing in on a deal, according to an EU Parliament official, who asked not to be named because the talks aren’t public.

ECB President Mario Draghi said yesterday that the talks were moving forward and he expected to have “some positive news” in the coming days, he told reporters in Frankfurt.

At issue is an inter-institutional agreement that sets out the working relationship between the ECB and parliament on bank-supervision issues. Negotiators for the legislature and the ECB hope to complete the pact before Sept. 10, allowing for a parliamentary vote on the oversight law to go ahead as scheduled, the people said.

If lawmakers and the ECB fail to reach a deal, the skirmish could delay the ECB’s assumption of its new supervisory duties by pushing back a final vote in parliament or adding another layer of paperwork to the set-up process.

Supervisory board minutes are the centerpiece of talks on how much access to information the ECB will provide. The ECB is concerned that promises to provide this information could open the door to calls for it to share monetary policy minutes as well, according to one of the people.

Euro-area leaders asked the ECB in June 2012 to take up bank supervisory duties in a bid to help quell the 17-nation currency zone’s sovereign debt crisis by separating the financial woes of banks and nations.

NYSE Arca Seeks to Make Penny Pricing for U.S. Options Permanent

NYSE Arca asked regulators to end a six-year test of quoting U.S. options in 1-cent increments by making the system permanent while limiting the program to the 150 most-active securities.

The trial, which began in January 2007 amid attempts by the U.S. Securities and Exchange Commission to cut investors’ trading costs, now includes 363 options classes. NYSE Arca, the fifth-biggest U.S. options exchange by volume last month, said this should be reduced by more than half, according to an SEC filing dated Sept. 4.

Before the test of 1-cent increments, U.S. options were commonly traded in 5- and 10-cent increments.

Debt Collectors Face More Enforcement From U.S. Consumer Bureau

The debt-collection business faces greater U.S. oversight as the Consumer Financial Protection Bureau begins writing the first regulations under a federal law governing the industry and probes for violations.

The 2010 Dodd-Frank Act that created the bureau also authorized it to write regulations under the Fair Debt Collection Practices Act of 1977. It can oversee debt collection from when credit is extended -- such as via credit cards issued by JPMorgan Chase & Co. (JPM) or Capital One Financial Corp. (COF) --through the purchase of charged-off debt by companies including Portfolio Recovery Associates Inc. (PRAA) and Encore Capital Group Inc. (ECPG)

Mark Schiffman, a spokesman for ACA International, a collectors’ trade group, said the industry supports efforts to have “less gray and more black and white” in how to comply with the debt-collection law.

The debt-collection business has become part of the lives of the roughly 1 in 10 Americans being pursued by debt collectors, Richard Cordray, the CFPB’s director, said in an interview Sept. 3.

Cordray said a goal of the agency is to clarify the rules regarding the use of social media in debt collection and break a trend in which debt-collection practices are controlled by the outcomes of lawsuits.

Earlier this year, the agency commenced the first direct federal supervision of debt-collection companies, assigning examiners to scrutinize every aspect of the business.

On July 18, CFPB announced it would open its consumer response system to complaints about debt collection, and is allowing submissions to be directed at both collectors and the original lender. The same day, it announced that banks, exempt from the requirements of the 1977 law, would also have to take steps to avoid mistreating consumers in debt collection.

The bureau Sept. 3 directed companies that furnish information to credit bureaus such as Experian Plc (EXPN), TransUnion Corp. and Equifax Inc. (EFX), to respond to consumer inquiries disputing the data. Debt collectors sometimes provide information to the credit bureaus on whether consumers pay debts.

Compliance Action

ICAP Said to Be Negotiating Libor Settlement With U.S., U.K.

ICAP Plc (IAP), the world’s largest broker of transactions between banks, is negotiating a fine with U.S. and U.K. regulators for allegedly helping traders manipulate the London interbank offered rate, or Libor, a person familiar with the matter said.

A settlement with the U.S. Justice Department, Commodity Futures Trading Commission and U.K. Financial Conduct Authority may be announced as early as this month, said the person, who requested anonymity because the talks are private. The amount of the fine will probably be less than the 290 million pound ($452.1 million) penalty levied against Barclays Plc (BARC) in June last year, the person said.

Barclays, UBS AG and Royal Bank of Scotland Group Plc have paid a total of about $2.5 billion in fines for colluding to rig benchmark interest rates for profit or to mask their true cost of borrowing.

A fine for London-based ICAP will be the first against an interdealer broker in the investigation, which the CFTC opened in 2008. Interdealer brokers act as a go-between for banks that trade bonds, stocks, currencies, energy and derivatives.

ICAP has said it is cooperating with authorities in the probes. The firm suspended an employee and put three others on leave pending an outcome of an internal inquiry, a person familiar with the procedures said earlier this year.

Brigitte Trafford, a spokeswoman for ICAP, declined to comment.

The talks were reported earlier by the Wall Street Journal. Peter Carr, a spokesman for the Justice Department, declined to comment.

For more, click here.

Iceland Banks Face $3.3 Billion Loss in Debt Relief Lawsuits

Iceland’s banks are facing $3.3 billion in additional writedowns as the nation’s biggest homeowner protection group throws its weight behind borrowers suing their lenders for indexing mortgages to inflation.

Banks, which lost a similar case in 2010 for linking loans to foreign exchange rates, have already forgiven $2.1 billion in debt since Iceland’s 2008 crisis wiped out its financial industry. In two separate lawsuits, banks are now being sued for selling inflation-linked loans that allegedly clash with European Economic Area laws banning unfair terms in consumer contracts.

Vilhjalmur Bjarnason, chairman of the Homes Association in Reykjavik, which represents 10 percent of Iceland’s homeowners, is urging the courts to “correct the injustice” to borrowers he says followed a 2008 krona slump that sent inflation soaring as high as 19 percent. The scale of writedowns to date makes Iceland a world-leader in debt relief, according to Danske Bank A/S. (DANSKE)

The Homes Association is covering the legal costs of one of its members suing Iceland’s state-backed Housing Financing Fund, which the regulator has warned lacks sufficient capital to be deemed solvent. The HFF has lost money as Icelanders turned to competitors offering non-indexed mortgages.

The HFF’s loans follow Icelandic law, though the fund will review its lending practices if the law changes, said Karl F. Johannsson, a lawyer representing the lender.

Icelandic households owe the country’s banks 1.43 trillion kronur in loans indexed to inflation, according to a statement published by parliament in March.

For more, click here.

EU Insurers Spent $6.5 Billion on Regulation, Deloitte Says

Europe’s 40 largest insurers spent as much as 4.9 billion euros ($6.5 billion) last year complying with new regulations, according to estimates by Deloitte LLP.

The cost is equivalent to a one percentage point reduction in return on equity, a measure of profitability, the accounting firm said in a statement yesterday. Insurers expect the expense to continue at current levels until at least 2015, Deloitte said.

Insurers are grappling with income regulations such as the Solvency II directive that are aimed at making the industry safer. Solvency II, intended to harmonize the way insurers allocate capital against the risks they take across the European Union, was originally scheduled to come into force in 2013. It may not now be implemented before 2016.

Deloitte, the U.K. member firm of Deloitte Touche Tohmatsu Ltd., estimated that the total cost of compliance from 2010 to 2012 may be as much as 9 billion euros, with the average cost for each insurer exceeding 200 million euros.

Courts

TCash Ran Unlicensed Money Transmitting Business, U.S. Alleges

TCash Ads Inc. ran an unlicensed money transmitting business that moved millions of dollars around the world through an illegal virtual currency service, U.S. Attorney Paul Fishman claimed in a civil lawsuit.

The case, filed in federal court in Newark, New Jersey, seeks forfeiture of $230,433 seized by the U.S. Secret Service from accounts held by Atlanta-based TCash and a related firm, Trustcash Holdings Inc. (TCHH) Funds were transferred by TCash to merchants, people and other money transmitters in Canada, Cyprus, the Philippines, China, Nepal and Australia, according to the complaint.

TCash lets people anonymously buy goods and virtual currency credits from entities registered with the service, according to a statement by Fishman. A TCash account can be used to pay any TCash-registered entity, including virtual currency exchanges and offshore accounts, Fishman said.

The company moved millions of dollars from 2008 to 2012, according to the complaint.

Douglas Jensen, an attorney for TCash and one of its operators, Kent Carasquero, declined to comment on the case.

Rebekah Carmichael, a spokeswoman for Fishman, said the investigation is continuing.

The case is U.S. v. $230,433 in United States Currency, U.S. District Court, District of New Jersey (Newark).

CKI, Power Assets Ordered to Pay $711 Million in Back Taxes

Cheung Kong Infrastructure Holdings Ltd. (1) and Power Assets Holdings Ltd. (6), controlled by Asia’s richest man Li Ka-shing, must pay A$776 million ($711 million) in back taxes in Australia, a judge ruled.

Australia Federal Court Justice Michelle Gordon on Aug. 30 in Melbourne issued two orders without holding a trial at the request of Australia’s deputy commissioner of taxation after Cheung Kong Infrastructure and Power Assets failed to provide addresses where they could be served with the tax office’s lawsuit.

The two companies owe taxes from 2000 to 2009, according to complaints filed June 14. Cheung Kong Infrastructure and Power Assets are the primary electricity network owners in Victoria, holding a 51 percent stake in two distribution networks, according to the Australian power regulator. They also have a 200-year lease on South Australia’s distribution network.

Power Assets will continue to defend the case, said Mimi Yeung, a spokeswoman at the energy company.

“The overall dispute with the ATO is yet to be resolved,” Wendy Tong Barnes, a Cheung Kong Infrastructure spokeswoman, said in an e-mail, referring to the Australian Taxation Office. She said the company plans to challenge the tax office’s position.

Gordon ordered Cheung Kong Infrastructure to pay A$380 million in back taxes and Power Assets to pay A$396 million.

The cases are DCOT v Cheung Kong Infrastructure Holdings Ltd. VID515/2013 and DCOT v Power Assets Holdings Ltd. VID516/2013. Federal Court of Australia (Melbourne).

Interviews/Hearings

Weber Says Banks Need Simpler Business Model as Regulations Loom

UBS AG (UBSN) Chairman Axel Weber said banks need to reassess their business models in response to tougher regulation of the financial industry.

Banks need to be “simpler and less capital-intensive,” Weber said yesterday at the Policy Exchange, a London-based research group. UBS, the biggest Swiss bank, has overhauled its businesses to be more “risk-averse,” he said.

The European Union is set to phase in its version of the Basel III regulations starting in January, and they will fully apply as of 2019. The rules, from the Basel Committee on Banking Supervision, require banks to hold capital equal to at least 7 percent of their risk-weighted assets, while also meeting indebtedness limits and liquidity requirements.

Weber, 56, was president of Germany’s Bundesbank before joining Zurich-based UBS in 2012.

Dijsselbloem Says ECB Bank Supervision to Start in October 2014

The European Central Bank is on track to take up its full bank-supervision duties in October 2014, Dutch Finance Minister Jeroen Dijsselbloem said in his role as chief of the group of euro-area finance ministers.

“The interests of the euro zone are of course massive in this project,” Dijsselbloem told a European Parliament committee in Brussels yesterday.

Finance ministers will ask ECB President Mario Draghi for an update “quite soon” on how the Frankfurt-based central bank will handle its reviews of banks’ balance sheets during a transitional period, Dijsselbloem said. He said clarity on that process will be “crucial” for the new supervisor to explain its strategy to nations and the general public.

“We need to be able to trust that it’s a good process, that it will be done in an independent and high-quality manner,” Dijsselbloem said. He also said it is “inevitable” that private companies will play a role in the assessments.

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

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

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