Bank Tax Secrecy, Behavioral Economics, CEZ: Compliance

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Luxembourg will begin the automatic exchange of tax data in 2015, easing its bank-secrecy rules as part of efforts to fight the financial crisis.

Luxembourg will change its rules to coordinate with policy in the U.S. and 25 of the EU’s 27 member nations, Prime Minister Jean-Claude Juncker told his nation’s parliament yesterday. Luxembourg and Austria have been holdouts in the EU’s efforts to coordinate savings taxes and hold talks with non-EU countries.

The tax-data decision took on a “certain acuteness” after Cypriot bailout talks roiled financial markets, the Luxembourg Finance Ministry said in a statement. Luxembourg had been preparing changes to its regulations for several months prior to yesterday’s announcement, the ministry said.

Luxembourg and Austria last year vetoed negotiations over the extension of a savings-tax agreement because of concerns that they would be forced to give up banking-secrecy measures that attract foreign depositors. The two countries blocked the European Union from starting talks on updating the seven-year-old tax accord with Switzerland, Liechtenstein, Monaco, Andorra and San Marino.

The Austrian government said yesterday that it may revise its laws shielding information about foreign account holders. EU finance ministers will discuss the savings-tax accord when they meet in Dublin later this week.

Under a 2005 accord, Austria and Luxembourg withhold tax on interest income paid to depositors from other EU states while protecting their identities. Other EU states transfer the income data to the depositor’s home tax authority.

Compliance Policy

Investor Missteps Studied by FCA in Quest for Better Rules

Britain’s Financial Conduct Authority will tap into behavioral economics to bolster regulation of markets through better knowledge of common blunders by financial consumers, such as overconfidence in their ability to pick winning stocks.

The FCA, which replaced the Financial Services Authority on April 1, released two reports yesterday signaling its intention to apply the discipline to its work, including the results of its first field study. The new regulator said that blaming consumers for poor decisions has limits.

Regulators on both sides of the Atlantic have applied behavioral economics to improve their understanding of people’s financial choices. Behaviorists reject the assumptions in conventional economics that people always choose the best option for themselves, and study what motivates good and bad decisions.

The FCA’s research team includes former Yale and Harvard behaviorist Stefan Hunt, while the U.S. Consumer Financial Protection Bureau has put the field to work when writing rules for mortgages, credit cards and payday loans. Hunt was one of the authors of the two FCA papers released yesterday.

The first FCA paper, “Applying Behavioral Economics at the Financial Conduct Authority,” outlined trends that regulators can spot. Those include projection bias or the difficulty consumers have in working out their future ability to repay loans; and overconfidence, an “excessive belief in one’s ability to pick winning stocks,” researchers wrote.

Recognizing such biases can help the FCA ban products that are exploitative, or force firms to provide information that allows consumers to make an informed choice.

Bank Regulation Shifts Risk Instead of Reducing It, Nordea Says

Efforts to regulate financial markets will transfer risk to investors from banks instead of reducing it, Nordea Bank AB said.

“The credit risk on counterparties becomes liquidity risk through central counterparties and collateral demands,” Nordea’s Helsinki-based Head of Research Aki Kangasharju and Analyst Suvi Kosonen said in a report yesterday. “Central counterparties may become too big to fail.”

Europe’s bank regulation is being tightened in the aftermath of the global credit crunch to shatter the link between banks and sovereigns that worsened the euro-area debt crisis. Banks will have to amass more capital and match lending with the funds raised on the market to ensure they can sustain losses. Liquidity will decline, augmenting volatility and risk, the lender said.

France to Require Companies to Disclose Overseas Units

A French legal requirement that already applies to banks to divulge financial information for every overseas subsidiary will be extended to all companies, President Francois Hollande said after a cabinet meeting yesterday in Paris.

Hollande said he wants the new law, which will be presented to the cabinet on April 24, to be extended to all European Union countries.

Compliance Action

CEZ Settles Antitrust Probe With Pledge to Sell Power Assets

CEZ AS, the Czech Republic’s largest power producer, settled a European Union antitrust probe after offering to sell power assets to allay concerns that it shut out potential rivals from the country’s power market.

The Brussels-based European Commission opened a probe into CEZ because of concerns it may have prevented competitors from entering the market by hoarding capacity in the transmission network.

The deal announced yesterday means that CEZ will divest about 800 megawatts to 1,000 megawatts of generation capacity, the commission said. Under the settlement, CEZ may choose between three divestment scenarios. These are the sale of its Pocerady or Chvaletice plants, or Melnik III together with Tisova, the commission said.

“We took all the necessary steps to fulfill the commission’s demands, so we are happy that the settlement was finally confirmed,” said Barbora Pulpanova, a spokeswoman for CEZ.

CEZ “will carry out the sale under the supervision of a monitoring trustee, who will verify in particular that the transaction would not raise new competition concerns,” the EU authority said. “The buyer will have to be approved by the commission.”

EU Said to Push to Fine Banks Over Yen Libor and Euribor Rates

European Union regulators are pushing to fine banks before the end of the year for attempting to fix benchmark interest rates tied to the euro and yen currencies, two people familiar with the investigation said.

Several banks want to resolve the antitrust probe and may negotiate with the EU for a settlement as early as October, said the people, who asked not to be named because the talks are in private.

The EU is also investigating the possible rigging of Swiss franc Libor, the EU’s antitrust chief, Joaquin Almunia, has said. That case is less advanced than the EU’s probes into the yen Libor, the cost of borrowing in the Japanese currency, and Euribor rates and unlikely to be completed this year, according to the two people.

Any settlement would include fines and an admission that the companies violated competition rules, one of the people said.

Barclays Plc, Deutsche Bank AG, UBS AG and Royal Bank of Scotland Group Plc are among banks and brokerages that have been quizzed by the EU about manipulation of lending rates that may have helped them and others generate profits from derivatives trades. Even minor tweaks to the rate by one bank would benefit trading positions to net millions of euros in profit, one of the people said.

Antoine Colombani, a spokesman for the Brussels-based authority, said the EU’s cases are ongoing.

JPMorgan’s Dimon Says Bank Faces More Regulatory Sanctions

JPMorgan Chase & Co., which is under regulatory orders to tighten internal controls following a record trading loss last year, will face more sanctions in the coming months, Chief Executive Officer Jamie Dimon said.

The bet on credit derivatives that lost more than $6.2 billion was “extremely embarrassing, opened us up to severe criticism, damaged our reputation and resulted in litigation and investigations that are still ongoing,” Dimon said yesterday in a letter to shareholders. “We received regulatory orders requiring improved performance in multiple areas, including mortgage foreclosures, anti-money laundering procedures and others. Unfortunately, we expect we will have more of these.”

Dimon again accepted blame on the New York-based bank’s behalf for the mistakes and said he felt “terrible that we let our regulators down.” The loss was “the stupidest and most embarrassing situation I have ever been a part of.”

The comments mark a shift in tone from Dimon’s letter a year ago, when he criticized regulators in the U.S. and abroad for producing rules that he said threatened to impair economic growth. JPMorgan released last year’s letter April 4, one day before Bloomberg News first reported on market-distorting derivatives bets by the bank’s chief investment office that erased as much as $51 billion in shareholder value and prompted multiple regulatory probes.

Banking regulators censured JPMorgan in January over risk-control and anti-money laundering lapses. Last month, Senate investigators said the firm and its leaders dodged regulators and then misled investors as the losses escalated.

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KPMG Audits Before HBOS Collapse May Be Reviewed by U.K. FRC

The U.K.’s accounting regulator will consider whether to review KPMG LLP’s audits of HBOS Plc following reports on the bank’s collapse from the U.K. Parliament and financial watchdog.

KPMG was the auditor for HBOS before it was taken over by London-based Lloyds Banking Group Plc in a government-backed deal in 2008.

British lawmakers said earlier this month that three former top executives at HBOS should be barred from working in the finance industry. The Parliamentary Commission on Banking Standards said former Chairman Dennis Stevenson, and ex-Chief Executive Officers James Crosby and Andy Hornby embarked on an aggressive expansion strategy, issued loans incompetently and failed to understand or manage risk.

“We stand by the quality of our work at HBOS,” said Mark Hamilton, a spokesman for KPMG in London.

The Financial Conduct Authority will publish a report into the bank’s failure later this year.


Google Sued by Streetmap for Anti-Competitive Behavior

Google Inc., operator of the world’s largest search engine, was sued in London by a U.K. Internet company for promoting its own maps over those of competitors.

Streetmap, a provider of Internet maps, filed a complaint in London March 15, according to court records. Google’s actions have made its products “harder to find,” the U.K.-based company said yesterday in a statement.

Streetmap said its complaint mirrors an antitrust probe by the European Union into whether Google favors its own services over competitors in search results. The European Commission has asked Mountain View, California-based Google to submit proposals that could lead to a settlement.

A spokesman for Google declined to comment on the suit.

The case is Ltd. v. Google Inc., case no 13-1013, High Court of Justice, Chancery Division.

Madoff Investors Can’t Sue SEC, U.S. Appeals Court Rules

Bernard Madoff’s investors can’t sue the U.S. Securities and Exchange Commission for failing to uncover his massive Ponzi scheme, a federal appeals court ruled.

The regulator’s “regrettable inaction” is shielded by law, the New York-based appeals panel said yesterday, upholding a lower-court decision to dismiss suits in which investors accused the SEC of negligence.

The three-judge panel ruled that the “discretionary function” exception to a law permitting people to sue the U.S. government applies in cases filed by Madoff victims.

Madoff, 74, pleaded guilty to orchestrating the biggest Ponzi scheme in history. He is serving a 150-year sentence in federal prison in North Carolina.

Howard Elisofon, a lawyer for investor Phyllis Molchatsky, a plaintiff in the suit, had no immediate comment on yesterday’s decision.

The case is Molchatsky v. U.S., 11-02510, U.S. Court of Appeals for the Second Circuit.


Lockhart Says ‘Too-Big-to-Fail’ Bailouts Still a Risk

Federal Reserve Bank of Atlanta President Dennis Lockhart spoke about financial regulation and the continued risk that regulators would need to provide a taxpayer bailout when winding down a failing financial institution.

Lockhart spoke at the conclusion of an Atlanta Fed conference in Stone Mountain, Georgia.

For the audio, click here.

Rurelec Says Bolivia Nationalizations Put Off Investors

Peter Earl, chief executive officer of Rurelec Plc, discussed the Bolivian government’s nationalization of its local assets.

He spoke with Francine Lacqua and Guy Johnson on Bloomberg Television’s “The Pulse.”

For the video, click here.

Barnier Says U.S. Financial Regulations Could Be ‘Damaging’

European Union Internal Market and Services Commissioner Michel Barnier said it would be “particularly damaging” if the U.S. pursued financial regulation in isolation.

He made the comments in an article prepared for a conference in Dublin yesterday.

“It would be a great concern if duplicative rules were imposed in isolation as it would start a process of costly replication worldwide, leading to capital and regulatory fragmentation.”

Barnier is pushing back against proposals from the U.S. Federal Reserve that foreign lenders organize their U.S. units as subsidiaries and hold capital independently from their parent firms to make it easier for U.S. regulators to seize local assets in a crisis. The Fed is seeking views on the measures, which Barnier has warned could drive up costs for EU banks.

He also said “intense discussions are taking place on derivatives.” Final regulations need to match standards agreed internationally.

Comings and Goings

RBS Said to Dismiss Derivatives Trader Weeks After Libor Fine

Royal Bank of Scotland Group Plc dismissed a London-based interest-rates trader, weeks after settling with regulators over its part in the Libor scandal, two people with knowledge of the move said.

Simon Green, who traded derivatives tied to short-term moves in interest rates in dollars and euros, was fired last month, said the people, who asked not to be identified because the matter hasn’t been made public. He is the seventh individual to be dismissed from the bank for Libor-related misconduct, one of the people said. Officials at the Edinburgh-based lender declined to comment.

Green, who joined RBS as a trainee in 2002, has been listed as inactive since Feb. 26 on the U.K. regulator’s register of approved individuals. He couldn’t be located through directory searches and a message left with a LinkedIn account with the same name wasn’t immediately returned.

RBS was fined $612 million by U.K. and U.S regulators on Feb. 6 for making hundreds of attempts to rig rates including yen, Swiss franc and U.S. dollar Libor between 2006 and 2010.

RBS said in February it had dismissed six individuals, including two managers, following an internal probe. Eight more left before disciplinary action could be taken, while a further six had been “severely disciplined” or were “going through a disciplinary process,” the bank said. Green is one of the latter six, one of the people said. In all, 21 employees have left, been disciplined or are facing disciplinary action over rate-rigging.

Separately, the bank’s Japan brokerage unit head is preparing to resign as the company faces penalties for attempts to manipulate benchmark interest rates, said two people with knowledge of the situation.

RBS Securities Japan Ltd. Chief Executive Officer Ryusuke Otani will leave the firm as soon as this week, one of the people said, asking not to be named as the information is private. The Financial Services Agency will announce penalties including a business improvement order as early as tomorrow, the people said.

The agency oversees the Securities and Exchange Surveillance Commission, which on April 5 recommended action against RBS. The unit in February pleaded guilty to wire fraud as part of a $612 million settlement with U.K. and U.S. authorities for rigging the London interbank offered rate, the benchmark for at least $300 trillion of securities worldwide.

Atsuko Yoshitsugu, a Tokyo-based spokeswoman for RBS, said Otani wasn’t available to comment as he is on “compliance leave.” Hiroshi Okada, an FSA spokesman, declined to comment.

From around mid-2006 to early 2010, an unidentified RBS trader and his colleagues asked employees responsible for making yen Libor submissions to change them to favor their derivatives portfolio, the SESC said in a statement last week. The conduct was “seriously unjust and malicious,” it said.

The Edinburgh-based lender apologized to customers following the SESC recommendation, saying in a statement that it will take “appropriate steps” to address the issues raised by the regulator.

ISDA Taps Oliver Wyman to Review Swap Pricing Probed by CFTC

The International Swaps & Derivatives Association hired consulting firm Oliver Wyman to make recommendations on how to modify an interest-rate swap pricing process that is under investigation by a U.S. regulator.

The hiring comes as Bloomberg News reported April 8 that the U.S. Commodity Futures Trading Commission subpoenaed ICAP Plc and as many as 15 dealers related to potential manipulation of benchmark rate-swap measures, including the so-called ISDAfix rates. The CFTC is investigating whether ICAP brokers colluded with dealers who stand to profit from inaccurate quotes, including failing to update published prices after trades occur, one of the people familiar with the probe said. ICAP said in a statement April 9 it maintains policies prohibiting the alleged behavior and is cooperating with the CFTC’s wider inquiry.

Oliver Wyman, which is a unit of New York-based insurance broker Marsh & McLennan Cos., advised the British Bankers’ Association in its review of how the London interbank offered rate was being set amid a probe into allegations that the benchmark was being manipulated.

A representative for Oliver Wyman didn’t return telephone calls seeking comment. Marsh & McLennan is the largest insurance broker by market value.

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