Roger McCormick On Sustainable Banking

Workshop on the Financial Sustainability of Banks, Speaker: Professor Roger McCormick (London School of Economics) Chair: Professor Emilios Avgouleas (University of Edinburgh) held at UCL Faculty of Laws, Bentham House, Endsleigh Gardens, WC1H 0EG on Feb 6, 2013. 

A league table of Bad Banks might lead to improvements in the ethics of Banking, argued LSE’s Professor Roger McCormick at a UCL’s Centre for Ethics and Law event on Sustainable Banking. He drew on evidence to the Banking Standards Committee criticising the idea that what Banks needed were more lawyers and compliance staff. Doubting the efficacy of Codes of Conduct, he advocated a focus on steps that might genuinely influence banking conduct. If it is the case that codes and process measures can simply be worked round and recognising that basic values may be important it was necessary to find other techniques. Structures played a role: Professor McCormick pointed to the de-federalisation of Barclay as a positive sign that the Bank might be taking control of the compliance and ethics problems it faced, with reporting lines direct into the CEO.

But there was a profound need to realign the interests of boards who had often not been informed of illegalities and other problems in their Companies.

Commission On Banking Standards Publishes Proprietary Trading Report

In its First Report (which said that the ring-fence needed electrification) of 21 December 2012 – see volume 1, volume 2 (written evidence) and post here – the Parliamentary Commission on Banking Standards embarked on considering fully the consequences and practicalities of supplementing the proposed UK ring-fence with something similar to the Volcker Rule (see First Report at para 94, see Chairman of the Federal Reserve Paul Volcker’s evidence to the Commission here). To this end the Commission published its Third Report – entitled “Proprietary Trading” – on 15 March 2013; the report contains its conclusions and recommendations; see also volume 2 (written evidence). The Commission has explained that it will produce a further report in May 2013 which will make wider recommendations in connection to banking reform.

Proprietary Trading

The term “proprietary trading” when applied to a bank could in theory refer to any trading activity which results in a proprietary position for that bank – in other words, where price movements in the relevant market affect the bank’s bottom line.

At paragraph 10, the report explained that:

There is no commonly-accepted definition of proprietary trading. Most activity undertaken by banks results in some form of proprietary position.

Is the door to England still that wide open for CIS disputes?

Guest Post by AstapovLawyers International Law Group

6 February 2013 has marked lawyers’ calendars with an important message from the UK Supreme Court: English courts will not accept the jurisdiction over a dispute which has the “centre of gravity” in another country. In particular, the Supreme Court found that in a tort claim, where the key issues in the litigation would on the face of it be factual not legal, law governing the tort was of very little, if any, potency for the purposes of defining the appropriate forum. The Supreme Court also refused to invoke non-exclusive jurisdiction clauses in favour of English courts noting that the connection with another country was of such strength and importance that England could not be said to be clearly or distinctly the appropriate forum.

For the reasons explained below, Lord Neuberger PSC and Lord Mance, Lord Clarke, Lord Wilson and Lord Reed JJSC upheld the lower courts’ judgments dismissing the jurisdiction of English courts and claims on piercing the corporate veil in the widely reported case of VTB Capital plc (Appellant) v Nutritek International Corp and others (Respondents) [2013] UKSC 5. (On appeal from [2012] EWCA Civ 808 and [2011] EWHC 3107 (Ch) respectively.) See case preview on this blog here.

FSA: LIBOR Internal Audit Report

Punishing banks – Barclays, UBS and RBS – by imposing fines against them for manipulated LIBOR submissions has been a vexing issue for the Financial Services Authority (FSA). After receiving its final notice, Barclays told the Treasury Committee (see Fixing LIBOR: some preliminary findings) that – in order to avoid negative media comment (lowballing) – the issue that firms were making inappropriate LIBOR submissions was raised with the FSA on 13 occasions. Noting media and academic concern, the Treasury Committee highlighted that:

44. Barclays’ continuing manipulation of its own LIBOR setting took place against a background of media concern about the LIBOR setting process during the [financial] crisis. On 25 September 2007, an article by Gillian Tett in the Financial Times entitled “LIBOR’s value called into question” noted the complaint of the Treasurer of one of the largest City banks that “The LIBOR rates are a bit of a fiction. The number on the screen doesn’t always match what we see now.”

45. On 16 April 2008, the Wall Street Journal published an article called “Bankers cast doubt on Key Rate amid crisis” by Carrick Mollenkamp. This noted that: “The concern: Some banks don’t want to report the high rates they’re paying for short-term loans because they don’t want to tip off the market that they’re desperate for cash. The LIBOR system depends on banks to tell the truth about their borrowing rates.

Public Law Duty and Cross-Undertaking for Losses to Third Parties

The Financial Services Authority (a company limited by guarantee) (Respondent) v Sinaloa Gold plc and others (Respondents) and Barclays Bank plc (Appellant) [2013] UKSC 11

Affirming the Court of Appeal’s decision reported at [2011] EWCA Civ 1158, see Patten LJ at [55], the Supreme Court has unanimously dismissed the appeal in this case. The court held that there is no general rule that an authority such as the Financial Services Authority (FSA), acting pursuant to a public law duty, should be required to give a cross-undertaking in respect of losses incurred by third parties. Equally, on the facts of this case, no particular circumstances existed whereby the FSA should be required to give such a cross-undertaking. For the full details of this case in the Court of Appeal and High Court (which held that the FSA was required to give a cross-undertaking in respect of losses incurred by third parties), the preview to this case is available here.

Just to recap briefly, cross-undertakings are a critical feature of a freezing (formerly Mareva) injunctions. Usually, applicants must give a cross-undertaking in damages to the court. This is to compensate respondents and any affected third parties in the event  the court decides that the applicant was not entitled to injunctive relief (a discretionary remedy). Where no cross-undertaking is given, the courts will refuse to grant an injunction. However, in situations where freezing injunctions are procured by public bodies (such as the FSA) pursuing law enforcement functions, the courts usually do not require such bodies to provide a cross-undertaking in damages to safeguard the respondent’s position. Lord Mance of Frognal gave the leading judgment and Lord Neuberger PSC, Lady Hale, Lord Clarke and Lord Sumption JJSC concurred with his Lordship.

UK Supreme Court: Case Preview: Securitisation and the Balance Sheet Test

BNY Corporate Trustee Services Limited and others (Respondents) v Neuberger Berman Europe Ltd (on behalf of Sealink Funding Ltd) and others (Appellants) UKSC 2011/0086 and BNY Corporate Trustee Services Limited and others (Respondents) v Eurosail-UK 2007-3BL PLC (Appellant) UKSC 2011/0199 shall be heard by the UK Supreme Court on 25 and 26 February 2013. Lord Hope of Craighead DPSC and Lord Walker of Gestingthorpe, Lord Mance of Frognal, Lord Sumption and Lord Carnwath of Notting Hill JJSC will hear these appeals. This hearing can be viewed online during Court hours here.

Facts

Interest-bearing Notes were issued by a special purpose vehicle, Eurosail-UK 2007-3BL PLC (“the Issuer”), formed to hold income-producing assets, namely mortgage loans. Due to the insolvency of Lehman Brothers (see the earlier case decided by the UK Supreme Court involving Lehman Brothers here), with whom the Issuer had entered into swap agreements, the Issuer suffered a significant deficiency in its net asset position. The terms governing the issue of the notes provided that on specified Events of Default an enforcement notice could be served, the effects of which included altering the respective priorities of the Noteholders for repayment of capital and interest. One such Event of Default involved the issuer being unable to pay its debts within the meaning of section 123(2) – definition of inability to pay debts; “a company is also deemed unable to pay its debts if it is proved to the satisfaction of the court that the value of the company’s assets is less than the amount of its liabilities, taking into account its contingent and prospective liabilities” – of the Insolvency Act 1986. The trustee of the Noteholders’ rights, BNY Corporate Trustee Services Ltd, commenced the current proceedings seeking a determination of whether that event of default had occurred.

FSA’s Response to Fixing LIBOR

The Financial Services Authority’s Response to the Treasury Committee’s Second Report of Session 2012–13, Fixing LIBOR: some preliminary findings was published by the Committee on 21 February 2013. It is worth recalling that the Treasury Committee is appointed by the House of Commons to examine the expenditure, administration and policy of HM Treasury, HM Revenue & Customs, and associated public bodies, including the Bank of England and the Financial Services Authority (FSA). And, of course, the FSA’s response makes rather interesting reading (see below).

But prior to setting out the FSA’s responses, it is apposite to note the Committee’s Chairman Mr Andrew Tyrie MP (Conservative, Chichester) comments who said that:

• Our inquiry uncovered appalling behaviour and serious failings at many levels in Barclays; on the trading floors, on compliance desks and amongst senior management.

• It is now clear that these failures were not limited to a single institution. The systemic rigging of important rates appears to have been pervasive in the banking industry over a long period of time.

• Serious regulatory shortcomings also came to light. It is only right that the FSA has had to shoulder its share of the blame for this scandal.