“Land Banks” and Collective Investment Schemes: Supreme Court on s.235, FSMA

6 05 2016

news-release-120514Asset Land Investment Plc & Anor v The Financial Conduct Authority [2016] UKSC 17 (20 April 2016)

The Financial Conduct Authority is in the news a lot these days. Andrew Bailey has been handpicked to head the agency but the chancellor George Osborne has come under fire for making the appointment without conducting a formal interview, thereby sidestepping the two candidates (Tracey McDermott and Greg Medcraft from Down Under) formally on the shortlist. However, the beleaguered FCA chairman John Griffith-Jones agreed with outgoing chief executive McDermott and both of them were “happy” with the chancellor’s appointment of Bailey – a beefy looking BoE insider who impressively holds a doctorate in economic history. As seen in the last post, Panama has been in the news a lot. The FCA had originally given 20 banks until 15 April 2016 to report on the extent, if any, of their involvement and links with Mossack Fonseca or firms serviced by them. But now it warns that prosecutions over the Panama Papers are not clear-cut. According to Mark Steward, head of enforcement, the media frenzy is “quite different from prosecutions – the two don’t necessarily go together”. This case involved a Panamanian corporation called Asset LI Inc trading as Asset Land Investment plc against which the FCA brought proceedings for carrying on “regulated activities” without authorisation contrary to the general prohibition in section 19 of the Financial Services and Markets Act 2000. Schemes for investing in land with development potential are commonly known as “land banks” and the operation of such initiatives first came into the regulatory perimeter under section 11 of the PERG Manual of the FCA Handbook.  

In Financial Services Authority v Fradley [2005] EWCA Civ 1183, the Court of Appeal had described the drafting of section 235 (collective investment schemes) of FSMA as “open-textured” by virtue of which words such as “arrangements” and “property of any description” are to be given “a wide meaning”. Arden LJ found in Fradley that section 235 must not be construed so as to include matters which are not fairly within it because contravening section 19 may result in the commission of criminal offences, subject to section 23(3) of FSMA. Lord Carnwath of Notting Hill found her Ladyship’s approach to be “helpful guidance”. On the other hand, he remained cautious of drawing analogies from comparative Commonwealth legislation presented to the court – such as the Australian Corporations Act 2001 – on the ground that differences in drafting warranted keeping the discussion strictly within the boundaries of UK statutes and authorities. Like the first instance judge, the Supreme Court referred to the English and the Panamanian company indiscriminately as “Asset Land”. Read the rest of this entry »





Case Preview: FCA v Macris: FSMA and Third Party Rights

17 12 2015

On 3 November 2015, a panel of Supreme Court justices consisting of Lord Neuberger (President), Lord Clarke, Lord Hodge granted permission to appeal in the case of Financial Conduct Authority (Appellant) v Macris (Respondent) Case No: UKSC 2015/0143. In proceedings reported as [2015] EWCA Civ 490, the Court of Appeal unanimously dismissed the FCA’s appeal against the decision of the Upper Tribunal, reported as [2014] UKUT B7 (TCC). Longmore, Patten and Gloster LJJ held that Mr Achilles Macris, a Greek and US citizen, was identified and should have been given the right to make representations on certain matters set out in the final notice. The issue thrown up by the case is whether the FCA’s notices identified Macris for the purposes of section 393 of the Financial Services and Markets Act 2000 (FSMA) in which case the watchdog ought to have given him third party rights. The third party procedure secures the fair treatment of the reputation of third parties so that they are not presumed guilty in the enforcement process. Developments in these proceedings are keenly monitored by those who contend that they have not been given a right of reply despite being identified in FCA notices.

As regards identification, on 18 September 2013 the FCA gave a Warning Notice, a Decision Notice, and a Final Notice to JPMorgan Chase Bank, N.A. (the firm). All the notices were in identical terms and on 19 September 2013 the Final Notice (the notice) was published. It informed the firm about the imposition of a financial penalty, or conduct costs, of £137.61 million which was settled under the FCA’s executive settlement procedures. The firm was penalised as a result of losses incurred in the “synthetic credit portfolio” (the portfolio) it managed for its owner JP Morgan Chase & Co (the group), a corporate entity branded – by Michael Lewis’ controversial bestseller Flashboys – as mostly “passive-aggressive” but occasionally “simply aggressive”. The portfolio’s trading related to credit instruments, especially credit default swap indices. The firm is a wholly owned subsidiary of the group. Read the rest of this entry »





The LIBOR Trial: Episode Two

6 10 2015

The SFO lost this case: see here, original post continues. Only recently former rogue UBS trader Tom Hayes, who accused the Swiss lender of distributing a manual on rigging LIBOR, became the first person ever to be convicted of benchmark rigging. He got 14 years’ imprisonment for eight counts of fraud and is appealing his conviction and sentence. However, episode two of the LIBOR trial is underway in London this week and a number of brokers thought to be acting in cahoots with Hayes are facing a jury in Southwark crown court for manipulating the interbank rate. These proceedings constitute a continuation of the long promised clean up (being overseen by the Serious Fraud Office) of rampant cheating in the banking and financial services industry that erupted in the aftermath of the global financial crisis. The sequel proceedings involve a batch of allegedly crooked individuals, namely Darrell Read (50), Colin Goodman (53), Danny Wilkinson (48) of ICAP (“a leading markets operator and provider of post trade risk mitigation and information services”); Terry Farr (44) and James Gilmour (50), formerly of RP Martin; and Noel Cryan (49, of Tullet Prebon). Their criminal trial began today and is expected to last 12 to 14 weeks and is likely to end early in the new year. All six men deny the charges and have elected to plead not guilty.

The new/emergent point in these cases is the part played by brokers, and not traders and submitters, in LIBOR manipulation. The half a dozen individuals identified above stand accused of conspiring with Hayes to rig LIBOR by suggesting numbers which were falsified and misleading. Darrell Read and Colin Goodman are said to have conspired with Brent Davies (also of ICAP) and Hayes. Terry Farr and James Gilmour are said to have conspired with Luke Madden of HSBC and Paul Robson of Rabobank to rig LIBOR. Farr also faces charges for conspiring with Hayes during his time at Citibank (which ultimately reported him over his cheating ways). Noel Cryan is accused of conspiring with UBS traders. Mr Justice Hamblen, a highly accomplished and respected judicial figure, will hear the case and it is being prosecuted by Mukul Chawla QC who saw to it that no loose boards were left dangling from Hayes’s coffin when he went down. Opening the case for the prosecution, Mukul Chawla QC argued that all six defendants conspired with Hayes and others and that Read the rest of this entry »





The Senior Managers Regime

12 09 2015

Tom Hayes did not bring down a bank but he paid a heavy price for being a part of the wider dirty casino culture built into the world of finance. During his trial, important questions were thrown up about the degree to which his seniors were culpable in his actions. In applauding the Senior Managers Regime (SMR), which aims to fill the lacuna in the regulatory regime, it has already been argued that Sir Jeremy Cooke was right to say that those supervising Hayes were irrelevant to his crimes: they would, after all, raise the stale decades old “we didn’t know” defence. But this historical rebuttal has been stretched to its outer limits: too overworked and overloaded, it has crowded itself out. As Roger McCormick explained in a recent interview referring to the famous Swaps Case from the 1980s: “Patience has run out and it’s no longer acceptable for them to just say, ‘It’s not our fault, we didn’t know.’ Laws of this kind reflect that impatience. We’ve had enough of this. We can’t have big, unruly banks that are out of control with no one at the top really accepting responsibility for what’s going on.” We must not lose sight of the fact that a divergence of views exists in this field. Senior lawyers and academics do not necessarily see eye to eye on everything that the regulators say.

Some unknown authors in the media argue that: “The LIBOR conviction is welcome. Now directors must be held accountable too.” It is said that the trial “was a landmark moment in the cleanup of the City after the financial crisis.” Mark Carney pledged that the SMR will in principle apply to him and the Bank of England but the bank is uneasy about opening up to official auditors for fear that such proposals may reduce its autonomy. George Osborne has been, as of July, consulting in relation to a Bank of England Bill targeting accountability and transparency at Threadneedle Street. The bank is “uneasy” and “surprised” by thoughts of being swept within the audit powers of the National Audit Office outside whose scrutiny it has historically been. As regards future prospects of independence, the bank is not satisfied with the limited comfort offered by the retention of its policy making functions and potentially keeping them outside the scope of the National Audit Office’s oversight. Read the rest of this entry »





Hunter into Prey: City Watchdog Exposes its Achilles’ Heel – Part 2

6 07 2015

HeelThe issues in the last post must be examined in light of the scandal which erupted in late 2014 when the FCA came under heavy fire from the Davis Report because of the highly irresponsible way in which it had leaked sensitive data to the media earlier in March that year. Simon Davis, a partner in the Magic Circle firm Clifford Chance, stressed that there had been nothing less than systemic failure. Davis was adamant that the FCA failed to address the issue of whether the information given out might be price sensitive. The conclusion was unsurprising because the leak culminated in an article in the Telegraph headlined Savers locked into ‘rip-off’ pensions and investments may be free to exit, regulators will say which claimed that the regulator was planning an investigation of 30 million pension policies, some sold as far back as the 1970s. Consequently, big insurance companies had billions wiped off their share prices. The misapprehension that selected annuity products would be picked out meant that major UK insurers saw their share prices plummet. The insurers called for Wheatley’s resignation. Even the Chancellor George Osborne bemoaned he was “profoundly concerned” by the episode. In his inquiry, Davis unearthed multiple failures symbolic of a dysfunctional organisation, and he emphasised that the regulator was “high-risk, poorly supervised and inadequately controlled.”

Davis – who was unsparing in his criticism – held the FCA’s Board responsible for the flaws in the regulator’s controls on the identification, control and release of price sensitive information. The buck ultimately stopped with the board because it “failed in its oversight of the FCA’s executive and … failed to identify the risks inherent in the FCA’s communications strategy.” The episode required urgent action and an external organisation needed to review the board’s practices and effectiveness. So serious were the mechanical failures of corporate governance of the City watchdog. To scotch the confusion, in light of public hearings that ensued, on 17 March 2015 the House of Commons Treasury Select Committee (the Treasury Committee) published Thirteenth Report (2014-2015): Press briefing of information in the Financial Conduct Authority’s 2014/15 Business Plan (HC881). Read the rest of this entry »





CP15/11: Implementing the TDAD and Transparency Rule Changes

21 03 2015

Directive 2004/109/EC or the Transparency Directive (TD) operates principally to harmonise the requirements on companies regarding information disclosure. The TD (i) focuses on what information companies must disclose periodically, how they handle investor disclosures and how they distribute regulated information and; (ii) ensures that investors disclose their stakes in companies. Directive 2013/50/EU or the Transparency Directive Amending Directive (TDAD) amends the TD. It also amends Directive 2007/14/EC (the Transparency Directive Implementing Directive (TDID)) and Directive 2003/71/EC (the Prospectus Directive (PD)). The implementation of the TDAD is a responsibility that is shared between HM Treasury and the Financial Conduct Authority (FCA). Consultation Paper CP15/11 concerns the implementation of the TDAD and other Disclosure Rule and Transparency Rule changes. The European Commission reviewed the TD and the TDAD came into force on 26 November 2013. It undertakes a revision of the regime for notification of major holdings of voting rights, introducing the rule of aggregation of holdings of shares with holdings of financial instruments and harmonising the calculation of notification thresholds and exemptions from the notification requirements.

It is required that each Member State must implement the TDAD within 24 months of that date. At the Treasury’s request, the FCA implemented the new requirement to report on payments to governments, which is effective for financial years beginning on or after 1 January 2015. Moreover, the FCA has already removed the requirement to publish interim management statements from the DTRs. Both changes are reflected in the Disclosure Rules and Transparency Rules (DTRs) contained in the FCA Handbook. The implementation of the remaining provisions of the TDAD are addressed in this consultation. It is a joint consultation between HM Treasury and the FCA Read the rest of this entry »





Consultation on New Benchmarks entering the Regulatory Perimeter

1 10 2014

images-10The Fair and Effective Financial Markets Review (FEMR or the “review”) – a triumvirate headed by Nemat Minouche Shafik (Bank of England) and co-chaired by Martin Wheatley (FCA) and Charles Roxburgh (HM Treasury) – has the twofold objective of (i) reinforcing confidence in the fairness and effectiveness of wholesale financial market activity conducted in the United Kingdom and (ii) influencing the international debate on trading practices, including highlighting issues that can only be addressed through co-ordinated international action. The review, which is expected to produce a final report by June 2015, focuses on both regulated and unregulated wholesale markets – such as fixed-income, currency and commodity markets, including associated derivatives and benchmarks – in relation to which most of the recent concerns about misconduct have arisen.

However, at the Chancellor of the Exchequer’s invitation, until the delivery of the final report in June 2015, the review has recommended a list of additional major benchmarks across the fixed income, currency and commodity markets (FICC) that should be included in the regulatory framework originally implemented in the wake of the LIBOR scandal. The review considers the Wheatley Review of LIBOR 2012 to be the blueprint for reform and recalls that Mr Wheatley had envisaged adding further benchmarks to the present LIBOR regime (see here). The ambit of the review includes matters such as trading practices, scope of regulation, supervision of firms and markets and the impact of recent and forthcoming regulation. Read the rest of this entry »