The UK’s Financial Services Authority has for the first time in a letter to the country’s Regulated Covered Bond issuers provided “thematic feedback” based on annual reviews, with the compliance function within regulated programmes in focus.

The letter, representing “finalised guidance”, was published yesterday (Tuesday) and sets out the FSA’s expectations of minimum standards that compliance functions – referred to also as “second line oversight” – should meet within regulated programmes as well as examples of good practice by RCB issuers.

“Following the FSA’s annual review of Regulated Covered Bond programmes conducted last year, specific feedback was provided to a number of issuers on the scope and depth of engagement that the Compliance function has with the programme,” said the FSA. “In addition to this, in June 2011 the RCB team sought the views from all registered issuers on the nature of the interaction between Compliance and their regulated covered bond programmes.”

John Wu, senior associate, capital markets team at the FSA, told The Covered Bond Report that the FSA’s RCB team felt it would be valuable to communicate to RCB issuers some of the findings of its annual reviews, with compliance functions a “theme of interest”.

“We thought it would be a good idea to communicate what good points issuers were doing and let other firms know what is indeed best practice,” he said. “It doesn’t reflect changes in our expectations, as we have always looked at compliance as an integral part of a programme’s operation.”

The letter is the first time the FSA’s RCB team has sent such guidance to RCB issuers, and it may publish further letters “as and when” this is deemed worthwhile, said Wu.

The letter is addressed to the signatory of the “RCB 1D Annual Attestation of Compliance” as the official responsible for ensuring that arrangements relating to the management of a programme, including governance and oversight, meet the expectations of the FSA.

“We recognise that the specific role carried out by the compliance function may vary between issuers, with certain aspects of oversight shared between other second line functions,” said the FSA. “Below, we set out our expectations and provide examples of areas of good practice that we have observed.

“You should consider whether you should enhance the second line oversight of your programme in light of the examples below.”

The FSA’s expectations for second line oversight at RCB issuers, in its own words, include:

• Ongoing monitoring of the programme (e.g. checks accuracy of regulatory and investor reporting, aware of and monitoring breaches);
• Clear understanding of RCB requirements and the role of the compliance function in relation to the programme. Appraised of relevant regulatory developments, and able to provide advice internally as appropriate; and
• Adequate and skilled resource, with appropriate depth of expertise in covered bonds, evidence of ability to challenge management.

Examples of good practice observed by the FSA at RCB issuers include, again in the FSA’s words:

• Compliance is represented as voting member on covered bond management committees and relevant steering groups with full access to relevant minutes and MI;
• Compliance undertakes regular reviews of the programme, with clear channels of escalation between i) first line and compliance function, ii) independent upwards escalation of issues from the compliance function and senior committees; and
• Compliance undertakes active “horizon scanning” and provides advice on changes in regulatory environment and is engaged in providing responses to regulatory changes.