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IntroductIon
WELcoME
DLA Piper’s Financial Services International Regulatory team welcomes you to the fifteenth edition of ‘Exchange – International’ – an international newsletter designed to keep you informed of regulatory developments in the financial services sector.
This issue includes updates from EUROPE, HONG KONG, the UK and the USA.
Please click on the links below to access updates for the relevant jurisdictions.
Our aim is to assist you in providing an overview of developments outside your own jurisdiction which may be of interest to you. In each issue we will also focus on a topic of wider international interest. In this edition, “In Focus” looks at the proposal for a directive to establish a framework for the recovery and resolution of credit institutions and investment firms.
Please click on the links below to access updates for the relevant jurisdictions.
Your feedback is important to us. If you have any comments or suggestions for future issues, we would be very glad to hear from you.
contEntS
EuroPE | HonG KonG | uK | unItEd StAtESIn FocuScontActS
contActS
Editor
Elisabeth BremnerLondon t +44 20 7796 6230 [email protected]
Europe
dr. Mathias HantenFrankfurt t +49 69 271 33 381 [email protected]
Michael McKeeLondon t +44 20 7153 7468 [email protected]
uS
Jeffrey L. HareWashington D.C. t +1 202 799 4375 [email protected]
Jim KaplanChicago t +1 312 368 7027 [email protected]
Exchange – International newsletterIssue 15 – August 2012
FInAncIAL SErvIcES rEGuLAtIon
uSEFuL InForMAtIon
If your colleagues would like to be added to our mailing list to receive future client alerts or newsletters, please email [email protected] with their contact details. For recent publications, legal updates and an overview of our Litigation & Regulatory capabilities please see our global website.
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EuroPEAn SEcurItIES And MArKEtS AutHorItY (“ESMA”) 2011 AnnuAL rEPort
ESMA, 2012
On 25 June 2012, ESMA published its annual report for 2011. This is ESMA’s first annual report following its creation on 1 January 2011 as European regulator for securities markets. It reports on the first year of ESMA’s operations.
The report covers ESMA’s six objectives, which relate to:
Supervision – ESMA is focused on credit rating agencies for which it has been the ■
responsible body regarding registration and supervision since 1 July 2011. Future direct supervisory powers have been added to ESMA’s remit regarding trade repositories;
Single rulebook – ESMA contributes to the establishment of a single EU rulebook by ■
establishing harmonised regulatory technical standards in different areas of securities regulation.
Convergence – ESMA conducts peer reviews of existing EU legislation in the field of ■
securities regulation and has a number of powers at its disposal including the power to issue opinions;
Investor protection – ESMA collects and analyses consumer trends along with the ■
promotion of education initiatives and monitoring of new and existing financial activities. ESMA has the power to issue warnings in respect of any products posing a serious threat to investors;
Financial stability – ESMA continuously analyses trends and identifies potential risks ■
across borders and sectors; and
Organisational set-up – ESMA is committed to being a transparent and accountable ■
organisation and uses its annual report to demonstrate its accountability to the EU institutions and public.
The report also deals with (i) the economic environment in 2011; (ii) ESMA’s tasks and achievements; and (iii) ESMA’s work programme for 2012.
EuroPEAn BAnKInG AutHorItY (“EBA”) AnnuAL rEPort 2011
EBA, June 2012
On 28 June 2012, the EBA published its annual report for 2011 giving an account of activities and achievements over the last year and setting out its priorities for 2012. According to the annual report, these are:
Regulation – the EBA will play a central role in the creation of a Single Rulebook for ■
the EU banking system;
Oversight – the EBA will deliver independent and high quality analysis of EU banks ■
and the EU banking sector and promote supervisory convergence;
Consumer protection – the EBA will focus on analysis of consumer trends, financial ■
literacy initiatives and the development of training standards and common disclosure rules; and
Operations – the EBA’s overall objective will be the completion of the internal control ■
environment.
EuroPE
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tHE orGAnISAtIon For EconoMIc co-oPErAtIon And dEvELoPMEnt (“oEcd”) HAS PuBLISHEd tWo rEPortS AS PArt oF ItS WorK to IMProvE IntEr-AGEncY co-oPErAtIon In tHE FIGHt AGAInSt FInAncIAL crIME
OECD, June 2012
The first of the two reports published by the OECD is the Effective Inter-Agency Co-operation in Fighting Tax Crimes and Other Financial Crimes which is the first substantial study of domestic inter-agency co-operation.
Different government agencies may be involved in the prevention and detection of financial crime which is becoming more sophisticated. The report explains the current position with regards to domestic inter-agency co-operation in 32 countries in the fight against financial crime. It goes on to discuss the roles of different agencies, the current options available to those agencies to allow them to share information and models for enhanced cooperation.
The report suggests that the OECD’s future work may cover more countries.
The second report entitled International Co-operation against Tax Crimes and Other Financial Crimes: A Catalogue of the Main Instruments. It gives an overview of the international instruments available to authorities and agencies involved in fighting financial crime. It also details international agreements in place for the exchange of information and international cooperation. The report then summarises the initiatives to improve domestic inter-agency co-operation and international co-operation between counterpart agencies.
The body of the report catalogues the features of the main instruments for international co-operation in combating financial crimes, namely:
Tax related instruments; ■
Anti-money laundering related instruments; ■
Anti-corruption related instruments; ■
Regulation and supervision related instruments; and ■
Other mutual legal assistance instruments. ■
EuroPEAn SEcurItIES And MArKEtS AutHorItY (“ESMA”) conSuLtS on EuroPEAn MArKEt InFrAStructurE rEGuLAtIon drAFt tEcHnIcAL StAndArdS
ESMA, June 2012
ESMA published a consultation paper on its draft technical standards for the Regulation of over-the-counter (“OTC”) derivatives, central counterparties (“CCP”) and trade repositories. In the consultation paper, ESMA seeks views on ESMA’s Regulatory Technical Standards and Implementing Technical Standards.
The consultation paper covers OTC derivatives, CCP requirements and Trade repositories.
The deadline for comments is 5 August 2012 and ESMA is required to submit the draft technical standards to the European Commission by 30 September 2012.
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EuroPEAn PArLIAMEnt to conSIdEr MArKEt ABuSE dIrEctIvE (“MAd”) II And MArKEtS In FInAncIAL InStruMEntS dIrEctIvE (“MIFId”) II In novEMBEr 2012
European Parliament, July 2012
The European Parliament’s plenary session to be held from 19 to 22 November 2012 is the indicative dates given for the first reading of the following legislative proposals:
Proposed Regulation on insider dealing and market manipulatio ■ n;
Proposed Directive on criminal sanctions for insider dealing and market ■
manipulation;
Proposed MiFID II Directiv ■ e; and
Proposed MiFID II Regulatio ■ n.
councIL oF Eu PrESIdEncY ProGrESS rEPort on ProPoSEd rEGuLAtIon on InSIdEr dEALInG And MArKEt MAnIPuLAtIon (“MAr”)
Council of the EU, June 2012
On 22 June 2012, the Council of the EU published a Presidency progress report on the MAR.
The report noted that the MAR proposal has been well received and there is a general consensus that a stronger and more uniform approach is required.
The Presidency progress report provides a summary of the outstanding key issues as follows:
Inside information and publication – discussions among Member States have shown ■
there is no common understanding of the kind of information insiders cannot trade on, when inside information arises nor when information must be disclosed;
Insider dealing and defences – there is a general consensus on the need to have ■
defences defined in an article but there is no agreement on the wording of these;
Accepted market practices ( ■ “AMP”) – most Member States agree that AMPs could be kept but should only apply in one Member State and not be transposed to other Member States’ markets.
Power of competent authorities – there is agreement that there is a need for sufficient ■
investigatory powers to each Member States’ competent authority as well as a deterrent sanctioning regime;
Administrative sanctions – for some Member States the proposed pecuniary sanctions ■
are considered to be very high, whilst for others, they are low and lack deterrent effect. A compromise has been proposed to give more flexibility to Member States when implementing the administrative sanctions, while at the same time leaving open the possibility to impose higher sanctions; and
Publication – as the publication of sanctions is controversial in some Member States, ■
it has been proposed that publication will be for information purposes rather than be a sanction in itself.
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It has been proposed that the incoming Cyprus Presidency should continue to work on the basis of the latest proposal to enable agreement to be reached on a general approach in the near future.
councIL oF Eu PrESIdEncY rEPort on MArKEtS In FInAncIAL InStruMEntS dIrEctIvE (“MIFId”) II
Council of the EU, June 2012
On 22 June 2012, the Council of the EU published a Presidency progress report which discussed the MiFID II legislative proposals. Amongst other things, according to the report the proposals aim to further the integration, competition and efficiency of the EU financial markets. Some of the key outstanding issues are as follows:
Scope – the discussions have mostly centred on the scope of the exemptions; ■
Organised Trading Facility ( ■ “OTF”) – the introduction of a new trading venue category has a division between those Member States in favour but who would like to make the OTF rules less strict and those Member States that would like to make the OTF rules more strict;
Systematic Internalisation ( ■ “SI”) and post-trade transparency rules for investment firms – whilst Member States are supportive of the definition of SI, they are divided on the question of the size of the quotes up to which the SI rules should apply;
Transparency for trading venues – whilst Member States are in favour of this ■
proposal, they are divided over the application of general waivers;
Corporate governance – there is agreement amongst the Member States to strengthen ■
the effectiveness of governance in investment firms, market operators and other regulated entities under MiFID;
Inducements and independent investment advice – Member States seem to largely ■
favour the stricter disclosure requirements on firms receiving inducements with a smaller number wanting to see a general ban on inducements;
Undertakings for collective investment in transferable securities (“ ■ UCITS”) – there is overall agreement that certain UCITS are too complex for retail investors to trade in as ‘execution only’ but the disagreement lies in the best way to deal with this issue;
Position management, position lists and product intervention – discussions have ■
focussed on which types of contracts should be covered; and
The third country regime – discussions have surrounded the proposal to introduce a ■
third country regime for the provision of investment services in the EU.
As is the case with the Proposed Regulation on Insider Dealing and Market Manipulation (see above), it has been proposed that the incoming Cyprus Presidency should be invited to continue to work on the proposals to reach agreement on a general approach on MiFID in the near future.
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coMMISSIon ProPoSES LEGISLAtIon to IMProvE conSuMEr ProtEctIon In FInAncIAL SErvIcES
European Commission, July 2012
On 3 July 2012, the European Commission proposed a package of three legislative proposals to improve consumer protection in financial services. These are:
A proposal for a regulation on key information documents for packaged retail ■
investment products;
A revision of the Insurance Mediation Directive; and ■
A proposal to boost protection for those who buy investment funds. ■
EuroPEAn coMMISSIon ProPoSES Eu-WIdE ActIon to FIGHt rAtE-FIxInG
European Commission, 25 July 2012
Following the manipulation of the submissions of banks’ estimated interbank lending rates, the European Commission has adopted amendments to the proposals for a Regulation and a Directive on insider dealing and market manipulation. These amendments will clearly prohibit the manipulation of benchmarks, including LIBOR and EURIBOR, and make such manipulation a criminal offence. Each Member State will be required to incorporate criminal sanctions into domestic law to cover the manipulation of benchmarks.
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court oF APPEAL rEcoGnISES PArtIAL WAIvEr oF PrIvILEGE
The recent Court of Appeal (“CA”) judgment in Citic Pacific Limited v Secretary of Justice [2012] 2 HKLRD 701 (CACV 60/2011) is an important clarification of the law on legal professional privilege in Hong Kong.
Factual Background
During the financial crisis in 2008, Citic Pacific Limited (“Citic”) sustained huge losses from its exposure to foreign exchange markets. Citic was accused of being aware of the losses on 7 September 2008 but did not promptly make the profit warning announcement as required under Rule 13.09 of the Listing Rules until about six weeks later, on 20 October 2008. The Securities and Futures Commission (“SFC”) commenced an investigation into Citic’s delay in making the announcement. As a result, Citic was required to hand over all records relevant to the investigation, including six documents which contained legal advice or a record of oral legal advice given at board meetings. These six documents were voluntarily handed over to the SFC, and then passed by the SFC to the Department of Justice (“DoJ”) for the purpose of seeking legal advice. Citic found out that the police intended to obtain these documents for investigation, so Citic commenced legal proceedings against the DoJ seeking orders and protection from disclosure of these documents.
Partial Waiver of Privilege
The CA, overturning the Court of First Instance’s decision on lost privilege, declared that privilege is a constitutionally guaranteed right in Hong Kong and recognised partial waiver of privilege in Hong Kong.
Although the CA was troubled by the fact that Citic’s legal advisors had not specified in writing any limitations to the waiver of privilege when Citic was surrendering the documents to the SFC, it held that the inherent uncertainties forbade a finding of an absolute waiver of privilege. In establishing the partial waiver of privilege doctrine,
the CA states that “in both civil and criminal matters, privilege is not lost unless there is evidence that it has been intentionally waived by the holder of that privilege.” Therefore, the CA held that Citic had only waived privilege in favour of the SFC for the purpose of its investigation and for no other purpose.
Fraud Exception to Legal Advice Privilege
On the fraud exception to legal advice privilege, the CA stated that the integrity of the privilege does not depend on the person receiving the legal advice then following it. The confidentiality relationship is created when advice is sought and given in good faith. Thereafter, if the person who has received the advice seeks not to heed it but to follow some independent dishonest course of conduct, this will not act retrospectively to strip away the earlier privileged relationship.
In order for the fraud exception to legal advice privilege to apply, there must be a direct causal relationship between the advice received and the fraudulent conduct. In other words, there must be evidence of a fraudulent purpose behind the seeking and obtaining of the advice.
Conclusion
In light of this CA decision, and for regulatory purposes, careful steps should be taken to prevent any unintentional waiver of privilege in case the relevant documents are sought by third parties for other purposes, such as criminal investigations. It is therefore very important to remember that at the time of handing over any materials to any authorities in regulatory investigations it must be clearly stated in exact written terms that any waiver of privilege is limited to the purposes of the investigation only. There is still the possibility, however, that the CA decision will be appealed and the partial waiver of privilege doctrine will be re-considered by the Court of Final Appeal.
Please contact [email protected] or [email protected] for further information.
HonG KonG
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MArKEt ABuSE dIrEctIvE – coMMonS LIBrArY StAndArd notE
House of Commons, June 2012
On 15 June 2012, the House of Commons published a Library Standard Note on the Market Abuse Directive (“MAD”). The note outlines the purpose of MAD which is aimed at preventing insider dealing and the misuse of financially sensitive market information.
Although the UK Government broadly supports both the new Market Abuse Regulation and the MAD, there is procedural uncertainty with regards to implementation. This has led to the UK Government’s decision that the UK should not yet ‘opt-in’ to the Directive.
This Library Standard note was written as background for a debate in the House of Commons which took place on 19 June 2012. At the debate, it was decided that the House supports the Government’s decision not to opt-in until it is clear that related provisions within the MAD are further progressed to enable the Government to evaluate the implications for the UK.
FSA And HMrc PuBLISH MEMorAnduM oF undErStAndInG (“Mou”)
FSA, June 2012
On 1 June 2012, the FSA published, together with HMRC, a MoU for the exchange of information and conducting of joint visits under the Money Laundering Regulations 2007 (“MLR”) and Payment Services Regulations 2009 (“PSR”) (collectively, “the Regulations”). Both bodies should co-operate and communicate in order to carry out their functions as required by the Regulations.
The MoU replaces the original “Practical arrangements for disclosing information relating to payment services providers” which was agreed on 11 June 2009 and last updated in August 2011.
Under the MLR, HMRC is responsible for both registration and supervision of persons acting as Money Services Businesses, including money transmitters.
Under the PSR, the FSA is responsible for the authorisation, registration and supervision of people providing payment services including money remitters.
The MoU provides a framework for (i) co-operation; (ii) disclosure of confidential information; (iii) information security and use of information; and (iv) joint visits. As a statement of intent, however, the MoU does not create any enforceable rights.
The MoU will be reviewed annually by the FSA and HMRC.
FSA PuBLISHES AnnuAL rEPort For 2011/12
FSA, 19 June 2012
On 19 June 2012, the FSA published its Annual Report for 2011/12. The report outlines the FSA’s performance against the priorities as set out in its 2011/12 Business Plan and its statutory objectives under the Financial Services and Markets Act 2000.
As outlined in the FSA’s communication, the Annual Report reviews the FSA’s performance against its five key objectives:
Executing the Government’s regulatory reform programme – the FSA, together with ■
the Bank of England has completed the high level of design work for the Prudential Regulatory Authority (“PRA”) and the Financial Conduct Authority (“FCA”), it established internal twin peaks within the FSA and remains on track for the creation of the PRA and the FCA;
uK
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Executing a credible deterrence and enforcement approach throughout 2011; ■
Delivering the FSA’s financial stability objective which involves supporting the ■
Interim Financial Policy Committee, ensuring that the major financial institutions have adequate capital and continuing to influence the International and European policy agenda;
Delivering efficient, clean, orderly and fair markets that remain attractive and ■
sustainable – the FSA is continuing to reform over-the-counter derivatives along with implementing the existing European regulatory regime for credit rating agencies; and
Continued progress in developing a new consumer protection strategy – the FSA is ■
progressing its work on the Retail Distribution Review, the Mortgage Market Review and other policy initiatives. The FSA also aims to secure greater redress for consumers in various areas including the protection of client money.
FSA conSuLtS WItH tHE FInAncIAL rEPortInG councIL on LoWErInG ProJEctIon rAtES
FSA, 31 May 2012
The FSA jointly with the Financial Reporting Council are consulting on rules to ensure investors taking out a retail investment product receive a realistic indication of potential future returns and charges. Projection rates apply to products such as personal pensions or life policies.
Although projection rates do not provide investors with a guarantee of future returns on investments, firms are required to use them to show potential future investment returns.
The FSA has stated that, according to the FSA’s current rules, firms must project on three different rates of return, revising these rates downwards where a product is
unlikely to achieve returns in line with these rates. Often, however, firms do not comply with this requirement so the FSA wants to improve the rules in this area.
The current rates for tax-advantaged products such as personal pensions are 5%, 7% and 9% and the proposed rates are 2%, 5% and 8%. The current rates for tax-disadvantaged products such as endowment policies are 4%, 6% and 8% with the proposed rates being 1.5%, 4.5% and 7.5%.
Other areas subject to the FSA consultation are:
Revised mortality rates for use by insurers in Key Features Illustrations; and ■
Explicit Consumer Price Index assumption to enable advisers to assess if it would ■
make better financial sense for a member of a defined benefit pension scheme to move their money into a personal pension.
HIGH court ALLoWS JudIcIAL rEvIEW AGAInSt FSA
The High Court, in the case of R (C) v Financial Services Authority [2012] EWHC 1417 (Admin) has allowed a judicial review against the FSA despite the availability of the right of reference to the Upper Tribunal.
The FSA’s Regulatory Decisions Committee (“RDC”) was held to have breached its statutory duty to give adequate reasons for its decision imposing a fine on the claimant for alleged breaches of the FSA’s Statements of Principles for Approved Persons (“APER”).
The claimant, an Approved Person, was alleged to have breached Principle 6, APER for failing to ensure adequate risk management within the bank in which he worked.
Following the warning notice, the claimant submitted detailed written and oral representations to the RDC, however, the Decision Notice failed to explain why these were rejected.
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The FSA argued that reasons for its decision were only required where an enforcement decision was taken and that the claimant had an adequate alternative remedy through the Upper Tribunal.
The High Court found in the claimant’s favour and held that he had been disadvantaged by not being provided with reasons for the FSA’s decision which would have enabled him to make an informed decision as to whether to pursue the matter in the Upper Tribunal. The Decision Notice was quashed and remitted back to the RDC.
rEGuLAtInG In A nEW ErA oF ProFESSIonALISM
FSA, 14 June 2012
On 14 June 2012, Clive Adamson, Director of Supervision for the FSA’s Conduct of Business Unit, gave a speech to the Marketforce and the Institute of Economic Affairs’ 15th Annual Conference covering (i) the FSA’s focus on the stability of the banking system, (ii) the appropriateness of prudential regulation following the collapse of Northern Rock, and (iii) the FSA’s recent steps of separating prudential and conduct regulation in preparation for the creation of the two new regulatory bodies, the Financial Conduct Authority (“FCA”) and the Prudential Regulatory Authority (“PRA”).
The new supervisory approach will comprise of the following five elements:
Forward-looking assessment of potential problems; ■
Early intervention; ■
Addressing underlying causes of problems, not just the symptoms; ■
Redress for consumers where failures occur; and ■
Taking meaningful action. ■
It was stated that consumers should have clarity in the service they receive, as well as transparency and a fair charging system for the advice received from professional advisors.
BArcLAYS FInEd For FAILInGS In rELAtIon to LIBor And EurIBor
FSA, 27 June 2012
On 27 June 2012, the FSA imposed its largest ever fine on Barclays Bank plc totalling £59.5 million for misconduct relating to the London Interbank Offered Rate (“LIBOR”) and the Euro Interbank Offered Rate (“EURIBOR”). Barclays co-operated fully during the FSA’s investigation and agreed to settle at an early stage. This resulted in the bank qualifying for a 30% discount without which the fine would have been £85 million.
Barclays’ misconduct, involving a number of employees and covering a number of years as noted by the FSA, included:
making submissions which formed part of the LIBOR and EURIBOR setting process. ■
These submissions took into account requests from the Bank’s interest rate derivatives traders who were motivated by profit and sought to benefit from Barclays’ trading positions;
seeking to influence the EURIBOR submissions of other banks contributing to the ■
rate setting process; and
reducing its LIBOR submissions due to senior management’s concerns regarding ■
negative publicity during the financial crisis.
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Barclays also failed to have adequate systems and controls in place relating to its LIBOR and EURIBOR submissions processes until June 2010 and failed to review its systems and controls at a number of appropriate points. In addition, the Bank failed to deal with issues relating to its LIBOR submissions when these were escalated to Barclays’ Investment Banking compliance function in 2007 and 2008.
This was a significant cross-border investigation and the U.S. Commodity Futures Trading Commission (“CFTC”) brought attempted manipulation and false reporting charges against Barclays for similar failings, which the bank agreed to settle. The CFTC imposed a penalty of US $200 million. In addition, as part of an agreement with the U.S. Department of Justice, Barclays admitted to its misconduct and agreed to pay a penalty of US $160 million.
The British Bankers Association is currently undertaking a review of the way LIBOR is set and will publish its findings shortly. Martin Wheatley undertook a review into the structure and governance of LIBOR and the corresponding criminal sanctions regime. The review will aim to publish its conclusions by the end of September.
The UK Serious Fraud Office has confirmed that it has formally launched an investigation into the rigging of inter-bank lending rates.
WHItE PAPEr – BAnKInG rEForM: dELIvErInG StABILItY And SuPPortInG A SuStAInABLE EconoMY
HM Treasury
On 14 June 2012, the UK Government published a White Paper setting out proposals to significantly reform the structure of UK banking including details of how the key recommendations made by the Independent Commission on Banking (“ICB”) in 2011
will be implemented. In outline, the paper details the Government’s plans to (i) separate retail and investment banking through a ring-fence; (ii) increase competition; and (iii) make banks more resilient and simpler to resolve in the event of failure.
The consultation closes on 6 September 2012. The Government plans to publish a draft version of the Bill in the autumn with the aim that legislation will be in place in 2015. Banks will be expected to comply by 2019.
tHE FSA AGrEES SEttLEMEnt ovEr MIS-SELLInG oF IntErESt rAtE HEdGInG ProductS
FSA, 29 June 2012
On 29 June 2012, the FSA agreed a settlement with four banks, namely HSBC Bank plc, Barclays Bank plc, Lloyds Banking Group and Royal Bank of Scotland plc over the misselling of interest rate hedging products to a large number of small and medium-sized businesses. The FSA issued an update on 23 July 2012 announcing that Allied Irish Bank (UK), Bank of Ireland, Clydesdale and Yorkshire banks (part of the National Australia Group (Europe)), Co-operative Bank, Northern Bank and Santander UK will all be reviewing their sales of interest rate hedging products sold to small and medium sized businesses.
Following a thematic review into the sales of these products by the four banks, the FSA had concerns, including inappropriate sales of more complex varieties of interest rate hedging products along with poor sales practices as follows:
Poor disclosure of exit costs; ■
Failure to ascertain the customers’ understanding of risk; ■
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Non-advised sales deviating into advice; ■
“Over-hedging” (where the amounts and/or durations did not match the underlying ■
loans); and
Rewards and incentive schemes being a driver of these practices. ■
The FSA stated that it has been agreed that the four Banks will:
provide fair and reasonable redress to non-sophisticated customers who were sold ■
structured collars;
review sales of other interest rate hedging products (except caps or structured collars) ■
for non-sophisticated customers; and
review the sale of caps if a complaint is made by a non-sophisticated customer during ■
the review.
The FSA has also confirmed that it intends to contact other banks who have sold these products to ascertain whether similar practices have occurred and with a view to agreeing a similar course of action if required.
conSuLtAtIon PAPErS ISSuEd BY tHE codE coMMIttEE oF tHE tAKEovEr PAnEL
The Takeover Panel, July 2012
On 5 July 2012, the Code Committee of the Takeover Panel published three consultation papers as follows:
PCP 2012/1 – Profit forecasts, quantified benefits statements, material changes in ■
information and other amendments to the Takeover Code;
PCP 2012/2 – Pension scheme trustee issues; and ■
PCP 2012/3 – Companies subject to the Takeover Code. ■
The consultation papers set out a number of proposals aimed at increasing protection for shareholders and company pension funds. The proposals include:
Amending the rule on profit forecasts which aims to apply more proportionate ■
requirements, adopting a more logical framework for the regulation, and achieving a greater consistency with other legislation;
Renaming merger benefits statements as “quantified financial benefits statements” ■
along with extending the application of the provisions and adopting more detailed requirements;
Requiring an offeror and offeree company to disclose material changes promptly after ■
their occurrence;
Increasing disclosure to ensure that the offeror has to publicly state what it will do ■
with the company’s pension fund scheme in the event that it is successful in its bid; and
Removing the “residency test” which would result in about 180 companies, mostly ■
listed on AIM of Plus markets being caught by the Takeover Code.
The consultation closes on 28 September 2012.
FSA And tHE rESErvE BAnK oF IndIA (“rBI”) PuBLISH MEMorAnduM oF undErStAndInG (“Mou”)
FSA, 17 July 2012
On 17 July 2012, the FSA published, together with the RBI, a MoU to provide a formal basis for co-operation in banking supervision including for the exchange of supervisory information. The MoU states that the RBI and FSA intend to work towards the following outcomes:
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to ensure that the operations of the cross-border representative offices and subsidiaries ■
of Banking organisations (“Cross-border establishments”) under their respective jurisdictions are prudently conducted;
the head offices and parent banking organisations of the Cross-border establishments ■
exercise adequate and effective control over the operations of their cross-border branches and subsidiaries; and
their respective on-going supervision of Banking organisations effectively covers ■
Cross-border establishments on a consolidated basis and assists each other in performing such function.
The MoU as a statement of intent does not create any enforceable rights.
EnForcEMEnt dEcISIonS
trIo SEntEncEd For InSIdEr dEALInG
FSA, 20 June 2012
On 20 June 2012, three people were sentenced for insider dealing. They were James Sanders and James Swallow, co-directors of Blue Index, along with James Sanders’ wife, Miranda Sanders.
Inside information was leaked by Arnold McClellan, Miranda Sanders’ brother in law, or Miranda Sanders’ sister, Annabel McClellan. Arnold McClellan was a senior partner in a US accounting firm and an ‘insider’ to a number of mergers and acquisitions in
US securities listed on the NYSE and NASDAQ. Information was passed to James and Miranda Sanders who then traded, as insiders, on those securities between October 2006 and February 2008.
Blue Index was an FSA authorised company which specialised in Contract for Difference (“CFD”) brokerage. James Sanders who was Head of Compliance for Blue Index had an obligation to ensure that there was no insider dealing. James Sanders passed the information on to James Swallow who used it to commit insider dealing and to encourage the clients of Blue Index to trade in CFDs. Clients of Blue Index were unwittingly trading on the basis of inside information as well as helping to boost the value of Blue Index which James Sanders was planning to sell.
The profits generated by the defendants between October 2006 and February 2008 totalled £1.9 million and the profits generated by the clients of Blue Index was roughly £10.2 million. The case involved parallel investigations by the US Securities and Exchange Commission (“SEC”), the US Department of Justice (“DoJ”) and the Federal Bureau of Investigation. Information was shared by the FSA using statutory “gateways” as provided by the Financial Services and Markets Act 2000 (Disclosure of Information) Regulations 2001.
Following action by the SEC, Annabel McClellan reached a settlement of $1 million. She also pleaded guilty to a charge brought by the DoJ and is currently serving an 11 month prison sentence.
For his involvement, James Sanders was sentenced to four years in custody and disqualified as a director for five years. Miranda Sanders and James Swallow were both sentenced to 10 months in custody.
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cHrIStIAn ArtHur LIttLEWood And AnGIE LIttLEWood (A.K.A SIEW-Yoon LEW And AnGIE YEW)
FSA, 31 May 2012
On 31 May 2012, the FSA published a Final Notice prohibiting Christian Arthur Littlewood from performing any function in relation to any regulated activity carried out by an authorised person or exempt professional firm on the grounds he is not a fit and proper person. Mr Littlewood was involved in serious criminal offences spanning the period 2000 to 2008 when he was employed in corporate finance roles involving mergers and acquisitions at two companies.
Mr Littlewood was an Approved Person holding various Controlled Functions and had legitimate access to inside information which he disclosed on a number of occasions to his wife, Angie Littlewood, who then passed this information on to her friend, Mr Helmy Omar Sa’aid, a Singaporean national. Mrs Littlewood used the inside information to place trades in eight separate stocks by her or Mr Sa’aid, making profits of around £590,000. In 2005, Angie Littlewood received a letter from the FSA inquiring into her trading and in order to avoid detection, all future trades were carried out by Mr Sa’aid.
On 8 October 2010, Mr Littlewood pleaded guilty to eight counts of insider dealing contrary to Part V of the Criminal Justice Act 1993 and on 2 February 2011, Mr Littlewood was sentenced to 3 years and 4 months.
Mr Littlewood, who provided a false statement to the FSA, was arrested on 31 March 2009 after nine years’ of involvement in insider dealing.
The FSA made the Prohibition Order against Angie Littlewood which took effect from 7 June 2012.
On 8 October 2010, Angie Littlewood pleaded guilty to eight counts of insider dealing and on 2 February 2011, she was sentenced to a custodial sentence of 12 months suspended for two years.
Please contact [email protected] or [email protected] for further information.
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BurEAu oF conSuMEr FInAncIAL ProtEctIon uPdAtE
The Bureau of Consumer Financial Protection (the “Bureau”) continues to expand the scope and nature of its regulatory activities with respect to consumer financial products and services. Most recently, the Bureau announced inquiries into financial abuse of the elderly, issued a report on consumer confusion regarding reverse mortgages and issued guidance on mortgage servicer practices that impact members of the U.S. armed forces. In each case, the Bureau has largely focused on demographic segments that have historically been seen as targets of aggressive or abusive behaviour as it relates to consumer credit products.
One of the most unique actions taken by the Bureau was the release of the beta version of its Consumer Complaint Database (the “Database”) and related Notice of Final Policy Statement (the “Notice”) regarding its use. In a first for federal regulators, the Database will provide a public chronology of all consumer complaints received by the Bureau, and will publicly name the company that is the subject of the complaint as well as other pertinent facts about the complaint. This level of public transparency, which previously could only be accomplished by making burdensome formal requests under the Freedom of Information Act, was implemented despite objections from many in the financial services industry who argued that the Database does not adequately filter complaints or assess their veracity before publicly disseminating the information.
The Database, which provides micro-level information on a complaint-by-complaint basis, will disclose data on consumer complaints that the Bureau receives, including: (i) the company’s name, (ii) the issue, (iii) the date of the complaint, (iv) the consumer’s zip code, and (v) the company’s response. Upon receipt of a complaint, the Bureau’s Consumer Response Group (the “CRG”) screens the complaint, considers whether it falls within the Bureau’s enforcement authority, whether it is complete, and whether it is a duplicate submission, then sends the complaint to the appropriate company. The Bureau then requires the recipient to review the information, communicate with the consumer as necessary, and report the company’s findings both to the consumer and to the CRG. The company must provide a substantive response to the consumer complaint within
15 days, and resolve and close all but the most complex issues within 60 days. Upon resolution, the Database will reveal that the complaint was “closed with explanation,” “closed with monetary relief,” “closed with non-monetary relief,” or simply, “closed.”
One area of dispute between the financial services industry and consumer groups was the proposed inclusion of consumer narratives with each complaint. Consumer and civil rights groups strongly supported narrative disclosures, and industry and trade groups opposed them. The Notice confirms that the Bureau will not be publishing narrative data at this time, but has not ruled out using narrative disclosures in the future.
It is expected that the Database will be used by journalists, academics, lawyers, and other federal and state regulators, and will likely increase the already immense regulatory scrutiny of the financial services industry, along with litigation and reputational risks for firms. Although the beta version of the Database only displays consumer complaint data on credit cards, the Bureau plans to extend coverage of the Database to other consumer financial products and services. It is largely anticipated that the Database will ultimately include complaints dealing with mortgages, private student loans, checking and saving accounts, and other banking and financial products before year-end.
The Bureau also released a report on the activities of its CRG entitled Consumer Response: A Snapshot of Complaints Received (the “Report”). The CRG is comprised of the Bureau’s personnel who address consumer complaints. The Report summarises consumer complaints that have been received between 21 July 2011 and 1 June 2012, before the creation of the Database. The Report contained data on 45,630 complaints – approximately 19,250 mortgage complaints, 16,480 credit card complaints, 6,490 bank products and services complaints, and 1,270 private student loan complaints. Of these, 81% were sent to companies for a response, 9% were referred to other regulatory agencies, 4% were found incomplete, and 6% are pending.
Please contact [email protected], [email protected] or [email protected] for further information.
unItEd StAtES
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AGEncIES ISSuE ProPoSEd ruLES on IntEGrAtEd rEGuLAtorY cAPItAL FrAMEWorK
On 7 June 2012, the Federal Reserve Board, Office of the Comptroller of the Currency (“OCC”) and the Federal Deposit Insurance Corporation announced the issuance of three proposed rules “intended to help ensure banks maintain strong capital positions, enabling them to continue lending to creditworthy households and businesses even after unforeseen losses and during severe economic downturns.” The proposals establish an integrated capital framework designed to address deficiencies in the regulatory capital system made apparent during the recent financial crisis. Additionally, the proposals implement U.S. requirements for Basel III regulatory capital compliance as well as changes required by the Dodd-Frank Act.
The public announcement of the proposals noted that agencies divided the content into three proposed rules in order “to minimize burden on smaller and mid-sized banking organizations and to allow firms to focus on the aspects of the proposed revisions that are most relevant to them.” However, all three proposals taken together are integral to meeting the objectives identified above.
Regulatory Capital Rules: Regulatory Capital, Implementation of Basel III, Minimum Regulatory Capital Ratios, Capital Adequacy, and Transition Provisions. The first proposed rulemaking applies to all depository institutions, bank holding companies with total consolidated assets of $500 million or more, and savings and loan holding companies. Consistent with the international Basel framework set forth in Basel III: A Global Regulatory Framework for More Resilient Banks and Banking Systems (“Basel III”), the proposal:
Increases the quantity and quality of capital required. In part, the proposal sets a new ■
minimum common equity tier 1 ratio of 4.5% of risk-weighted assets, a common equity tier 1 capital conservation buffer of 2.5% of risk-weighted assets, and elevated minimum tier 1 capital ratio from 4% to 6% of risk-weighted assets;
Revises the definition of capital to improve the ability of regulatory capital ■
instruments to absorb losses by adopting more conservative standards for including an instrument in regulatory capital;
Establishes limitations on capital distributions and certain discretionary bonus ■
payments if additional specified amounts, or buffers, of common equity tier 1 capital are not met; and
Introduces a supplementary leverage ratio for internationally active banking ■
organisations.
The proposal also sets up the process for phasing-out non-qualifying capital instruments under Section 171 of the Dodd-Frank Act, the so-called “Collins Amendment”. Depository institution holding companies with total consolidated assets of $15 billion or more as of 31 December 2009 must phase-out any non-qualifying capital instruments, including trust preferred securities, from tier 1 capital 25% per calendar year for each of the next four years. For those depository institutions and holding companies with total consolidated assets of less than $15 billion, the phase-out would be over a 10-year period with 10 % decreases per calendar year.
Regulatory Capital Rules: Standardized Approach for Risk-weighted Assets; Market Discipline and Disclosure Requirements. The second notice would also apply to all depository institutions, bank holding companies with total consolidated assets of $500 million or more, and savings and loan holding companies. This proposal is intended to “revise and harmonize” the agencies’ rules for calculating risk-weighted assets “to enhance risk sensitivity and address weaknesses identified over recent years, including by incorporating certain international capital standards” set forth by the Basel Committee on Banking Supervision in the International Convergence of Capital Measurement and Capital Standards: A Revised Framework (Basel II).
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Regulatory Capital Rules: Advanced Approaches Risk-based Capital Rule; Market Risk Capital Rule. The third proposal applies to banking organisations that are subject to the agencies’ advanced approaches rule or to their market risk rule. This group generally consists of those entities with consolidated total assets of at least $250 billion or consolidated total on-balance sheet foreign exposures of at least $10 billion. Market risk banking organisations are generally those with aggregate trading assets and trading liabilities equal to at least 10% of quarter-end total assets or $1 billion.
This proposal is designed “to enhance the risk sensitivity of the current rule for internationally active firms to better address counterparty credit risk and interconnectedness among financial institutions.” It also applies the advanced approaches rule and market risk capital rule to savings and loan holding companies meeting the same thresholds described above and incorporates the final market risk rule into the integrated framework set forth by all three proposed rules.
Please contact [email protected] or [email protected] for further information.
tHE coMModItY FuturES trAdInG coMMISSIon (“cFtc”) ISSuES tWo ProPoSALS AFFEctInG tHoSE EnGAGInG In SWAPS ActIvItIES
The CFTC has unanimously voted by seriatim (without a meeting) to issue two proposals which will affect “U.S. persons” who engage in swaps activities. The proposals address the hotly debated application of Dodd-Frank outside US soil, commonly referred to as “extraterritoriality” or “ET” by the derivatives industry but termed “cross border” by the CFTC.
It is believed that the CFTC issued the proposals as “interpretive guidance” and an “exemptive order” rather than a rulemaking in order to avoid the need to present a cost-benefit analysis required in a rulemaking.
The proposals, issued on 29 June 2012, are:
(1) Proposed Interpretive Guidance regarding the cross-border application of the swaps provisions of the Commodity Exchange Act (CEA); and
(2) a Proposed Exemptive Order allowing delayed implementation for certain provisions of the CEA (and corresponding CFTC regulations).
Please contact [email protected] or [email protected] for further information.
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ProPoSAL For A dIrEctIvE oF tHE EuroPEAn PArLIAMEnt And oF tHE councIL EStABLISHInG A FrAMEWorK For tHE rEcovErY And rESoLutIon oF crEdIt InStItutIonS And InvEStMEnt FIrMS – tHE “rEcovErY dIrEctIvE”
The proposal for the Recovery Directive (the “Proposal”) has been disclosed by the Commission on 6 June 2012. This article aims to give a short introduction to the Proposal, as the soon to be implemented Recovery Directive will be of tremendous influence on the entire banking sector. The legal basis of the proposal is Article 114 of The Treaty Of The Functioning Of The European Union (“TFEU”). This legal basis authorises the EU legislative bodies to adopt measures for the adjustment of national provisions which shall lead to the functioning of the internal market.
In contrast to the US approach under the Dodd-Frank Act which provides in essence for taking failing institutions into receivership by the Federal Deposit Insurance Corporation, the approach of the European Union is broader as the Commission also proposes giving authorities the power to write down some of the liabilities of a financial institution (bail-in) and allow the financial institution to remain in business.
Purposes and objectives of the Recovery Directive
“Too big to fail” has become a well-known term in connection with financial institutions during the events of the financial crisis. Barely a month passes without news about a credit institution being in severe financial difficulty, the most recent coming from the Spanish banking sector. The lack of sufficient measures to deal with such a crisis especially when it comes to failing credit institutions has become apparent, as EU Member States have been “forced” to bail out credit institutions.
There is a general agreement that the existing national measures are not sufficient to deal with a crisis of that enormity. It is also widely recognised that solutions and measures are needed on a European level.
Accordingly, the aim of the published Proposal is to enhance financial stability, reduce moral hazard, save public money and protect the internal market for financial institutions. Credit institutions shall be allowed to fail in an orderly matter and go into insolvency like any other company, regardless of their size and systemic relevance.
Scope of the Recovery Directive and cross-border groups
The proposed Recovery Directive covers credit institutions and investment firms, identical to those currently covered by the Capital Requirements Directive (“CRD”).
As most of the financial institutions operate on a cross-border basis, it was of specific importance that the Proposal takes into account this reality and recognises the character of such cross-border groups in the European Union as one of the most important factors to the integration of the Union’s financial markets.
In this respect the first aim is to provide the national supervisors with a set of harmonised tools and to establish a robust framework for information sharing, consultation and cooperation between them. In order to provide for a harmonised approach by the authorities, the group resolution authority (the authority in which the consolidating supervisor under EU banking rules is situated) shall assume the leading role in approving a recovery plan and designing a resolution plan for the whole group. A mediatory and coordinating role would be in this respect assumed by the European Banking Authority. A similar approach is intended with respect to third countries in which banking groups operate through the conclusion of co-operation agreements with foreign resolution authorities.
In FocuS
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Recovery and Resolution Mechanisms – the 3 key elements
According to the Proposal, the primary objective of bank resolution is to maintain financial stability and minimise losses for society. The Proposal is based on the following three key elements:
The first element can be summarised under the terms “ ■ prevention and preparation”. The preparation of recovery and resolution plans (“living wills”) is among the preventive measures the entities covered by the Recovery Directive, at both a group level and for the individual institutions within the group as well as the resolution authorities, will need to draft and implement.
Measures under the second element will aim at ■ early intervention, such as dismissing management and appointing a special manager when a financial institution is in breach of, or is about to breach, regulatory capital requirements.
As a last scenario, the Proposal aims to provide for ■ credible resolution tools when a financial institution is about to fail, such as the sale or merger of a business, the set-up of a temporary bridge bank, the separation of bad assets into a “bad bank” and similar.
Financing of Resolution
One of the key purposes of the Recovery Directive is the reduction of the use of public money in safeguarding financial institutions. Accordingly, it explicitly derives from the Proposal that the costs of resolution should be covered by the banking sector. The contribution would be based on the proportion of the financial institution’s liabilities
in relation to the total size of the national financial sector. Such financing should be preventive – accordingly contributions will need to be raised from financial institutions at least annually in order to reach a target funding level of at least 1% of covered deposits over a 10 year transitional period. In case of insufficiency of ex-ante funds, further contributions may need to be raised ex post.
Bail-In
One of the proposed resolution tools is the “bail-in” mechanism. Its aim is to stabilise a failing institution so that it can continue to provide essential services, without the need for “bail-out” by public funds. The respective measures would be the write-down of liabilities and/or the conversion thereof into equity in order to allow the financial institution to continue as a going-concern.
It is intended that bail-in would potentially apply to any liabilities not backed by assets or collateral, and not to deposits protected by a deposit guarantee scheme. In this respect, even though for the time being not set as legal requirement, the indication is that 10% of total liabilities should be the minimum threshold subject to write-down. As this tool has not been in place yet, the Proposal foresees a transition period – the tool should become fully functional after 1 January 2018.
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Supervision and resolution on the EU level
The aforesaid measures will be combined with an enhanced level of supervision. In order to strengthen supervision a high degree of cooperation and consistency as regards the preventive measures and resolution actions foreseen in relation to cross border banks and other systemically relevant institutions shall be achieved. The Proposal does not yet, however, foresee a single body for the resolution of cross-border entities.
Relationship to the Commission’s announcement of 30 May 2012 on moving towards a banking union
The Commission considers the Proposal to be a necessary first step towards improving efficiency and cohesion by ensuring that failing banks in the EU single market can be dealt with in a way which preserves financial stability and minimises costs for taxpayers. The idea of a more integrated banking union signalled by the Commission would therefore be a logic next step.
In addition, the Proposal is intended to complement the CRD IV proposal which aims at strengthening the prudential requirements and supervision related to banks and investment firms.
Outlook
The Proposal can be considered to be very ambitious. It is expected that prior to its enactment it will face strong negotiations from the various actors involved. Nonetheless, a specific framework aimed at the recovery and resolution of the on-going issues faced by banks and financial institutions seems inevitable.
Please contact [email protected] for further information.
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