Cases which consider the construction and use of standard form financial agreements almost always deserve reading. Most notable in this category is the judgment of the Court of Appeal in Dexia v. Comune di Prato, allowing an appeal by Dexia against a first instance decision that would have caused considerable uncertainty for parties using standard form agreements governed by English law (in this case, the 1992 ISDA Master Agreement) in other jurisdictions.
The Supreme Court has intervened to correct longstanding errors in relation to two areas of law: first, in overhauling the Ghosh test applied to criminal cases involving dishonesty, and second, in dealing with the question of where debts due pursuant to Letters of Credit are situated.
The court has also been called upon in two cases we consider below to decide claims based on the way in which the banks involved exercised their discretion. There have recently been a number of cases involving similar claims, suggesting that this is an area where boundaries are still being tested. The judgments we summarise below contribute to defining those boundaries.
Finally, it is also well worth considering the Court of Appeal's judgment in UBS v. Kommunale Wasserwerke Leipzig. The judgment considers a number of complex areas of the law, including agency, bribery (and its effects) and conflict of interest. Banks will wish to reflect on the implications of the case for, amongst other things, their procedures for communicating with a counterparty's agent.
Many of the key regulatory developments of the past six months fit within broad patterns of interest on the part of the FCA, and we can expect these patterns to repeat into next year.
In terms of enforcement, the second half of the year, like the first, has not seen a large number of fines compared to previous years, but the FCA's Enforcement annual performance account for 2016/2017 indicates that it has a large and increasing number of open investigations, the areas of financial crime, insider dealing and market manipulation seeing a particular upsurge in activity. There has also been a small but significant increase in the number of capital market disclosure investigations (and fines issued), reflecting the FCA's stated concerns in this area. Listed companies and their advisers will want to ensure they have the right internal procedures for escalating and considering information that could affect the share price.
The FCA has started a large piece of work in relation to asset management which nicely illustrates some of its general areas of interest both within and outside this specific sector. First, the FCA is showing considerable interest in the functioning of competition in the asset management industry – it has initiated its first use of its own competition enforcement powers, and has also pressed ahead with a reference to the Competition and Markets Authority in relation to investment consultancy services. Second, the FCA has targeted part of its remedies package at issues surrounding fund governance, and at the composition and considerations required of fund manager boards.
Part of this relates to a third, continuing preoccupation within the FCA in relation to pricing. One of the key planks in the FCA's response to its view of weak competition in the asset management industry is to require the boards of fund managers to report annually on the extent to which a fund has achieved value for money for its investors, and the FCA has supplied some mandatory considerations that must feed into this assessment. It seems quite likely that, should the FCA consider that this approach has worked, it might be adapted to other areas. Continuing the theme, the FCA produced a Strategic Review of Retail Banking Business Models in October 2017, which has as one of its key focuses the "free-if-in-credit" model for retail banking.
In turn linked to this is a dual interest in behavioural economics, and the use of technology. The Strategic Review referred to above is also concerned with the development of business models in light of the increasing demand for, and use of, financial technology. Much of the FCA's recent work in relation to advice models (following the Financial Advice Market Review) has focused on automated or semi-automated systems and on the importance of analysing the behaviour of customers using them. Finally, it is also clear that the FCA has its eye on technology more widely – in a recent speech, Stefan Hunt, the Head of Behavioural Economics at the FCA, outlined the future of technology as a regulatory tool, including in predicting potential issues.
These are wider trends that we can see illustrated by developments in the second half of 2017, but which we can also expect to see rolling forwards into next year.
What to watch out for
The trial in Sharp v. Blank (in relation to the acquisition by Lloyds of HBOS at the height of the financial crisis) has attracted some press coverage, and it seems likely that judgment in that case will be handed down in the first half of 2018.
The trial of claims by Dutch housing co-operative Stichting Vestia against Deutsche Bank, in relation to the sale of interest rate derivatives allegedly procured by bribery, is expected to start in spring 2018, and is likely to be interesting.
In addition, appeals in a number of significant cases are due to be heard early next year. Of these, one relates to the first decision in LBI v. RZB (in relation to close out under the GMRA), and is due to be heard in March. Another is the appeal in Property Alliance Group v. RBS, in which the Court of Appeal will consider the only first instance decision on whether a LIBOR setting bank, when selling products referenced to a LIBOR rate, made implied representations as to the veracity of that rate. Judgment in both is likely to follow in the first half of 2018.
Regulatory and other developments
The big event of early 2018 is the implementation of MiFID II, at the very start of the year. Other developments in the first half of next year are likely to include the publication of final rules in relation to the extension of the Senior Managers and Certification Regimes to all authorised firms. The FCA may also take the opportunity to clarify the position of General Counsel under these regimes, which has been an outstanding issue for some time.
The FCA has a long-outstanding promise to review its financial penalty policy; though no specific date has been set, it is likely to consult on this issue in 2018.
Early 2018 is also likely to see final rules introduced following some of the consultations to which we refer in this update. This includes final rules relating to pension transfers, and incentives, remuneration and performance management in consumer credit firms.
There are also likely to be further developments in relation to two of the FCA's larger projects: in relation to asset management (where the FCA has several items of unfinished business); retail banking, where an update is promised in Q2; and benchmarks, chiefly the introduction of the Benchmarks Regulation and the planned transition from LIBOR to SONIA.