Welcome to our quarterly update, in which we review some of the key developments affecting financial services and markets in the areas of disputes, investigations and financial crime, in the last quarter
Judicial highlights include the Court of Appeal providing summary guidance on the approach to determining the scope of competing jurisdiction clauses and the Supreme Court’s decision permitting third party access to trial documents based on the principle of open justice.
The FCA issued its third largest fine of the year for a Principle 11 breach and indicated that this trend is set to continue in its 2018/19 Enforcement Report.
Meanwhile, the SFO entered into its fifth DPA, and the High Court considered a bank’s termination of a customer relationship due to concerns about proceeds of crime, providing practical guidance to financial institutions in similar circumstances.
Court of Appeal upholds exclusive jurisdiction clause in swap transaction
InBNP Paribas SA (BNP) v Trattamento Rifiuti Metropolitani SPA (TRM)  EWCA Civ 768, the Court of Appeal upheld the decision of Knowles J that an Italian jurisdiction clause (IJC) in a financing agreement did not prevail over an English jurisdiction clause (EJC) in a separate ISDA master agreement entered into by the same parties as part of a swap transaction.
TRM had challenged the English Court's jurisdiction under article 25 of the European Regulation (1215/2012) TEST to hear BNP's claim for declaratory relief, in connection with the swap transaction, namely that TRM had acted for its own account, made its own independent decisions to enter into the transaction and had not relied on any communications (written or oral) of BNP as investment advice or as a recommendation to enter into the transaction.
TRM relied upon the Schedule to the Master Agreement which stated that the parties acknowledged that their respective rights under the master agreement were subject to the terms of the financing agreement. TRM argued that even if the EJC did capture any of BNP's claims in the English proceedings, the effect of the Schedule was that primacy was given to the financing agreement and the IJC.
In keeping with the relevant test for determining jurisdiction, Knowles J considered that BNP had much the better of the argument. In particular, TRM's argument was not engaged as there was no conflict between agreements in this case, and BNP's claim, as formulated, only related to the Master Agreement and the swap transaction. To seek confirmation in the form of a declaration was a legitimate way of realising a contractual estoppel where a defendant may deny the truth of representations made in a contract.
The two jurisdiction clauses as a matter of language readily bore the interpretation that the EJC was concerned with the master agreement and the IJC with the financing agreement. This fitted perfectly well in the context of the parties' dealings, and recognised that the parties had more than one relationship.
In upholding Knowles J’s judgment in this case, the Court of Appeal set out the established principles for determining the scope of competing jurisdiction clauses, including:
- the starting presumption is that competing jurisdiction clauses are to be interpreted on the basis that each deals exclusively with its own subject matter and they are not overlapping, provided the language and surrounding circumstances so allow; and
- the language and surrounding circumstances may, however, make it clear that a dispute falls within the ambit of both clauses. In that event, the result may be that either clause can apply rather than one clause to the exclusion of the other.
For the purposes of the interlocutory application in the present case, both parties had adduced expert evidence of Italian law without applying to the court for permission to do so. The Court of Appeal stated that it was for the court to determine the meaning of a contract and that the opinion of an expert on what a contract means is irrelevant and inadmissible.
Court grants summary judgment in case on contractual interpretation
In CFH Clearing Limited v Merrill Lynch International  EWHC 963 (Comm), the Commercial Court gave summary judgment in favour of Merrill Lynch International (MLI) and decisively rejected an attempt by CFH to impose broad obligations relating to market practice and best execution on a series of trades. This case serves as a useful reminder that the court can "grasp the nettle" and determine clear-cut cases without a protracted evidential process or full trial – even where the applicable factual background is theoretically broad and serious allegations of market conduct are involved. The judgment suggests that the court will be more readily persuaded to order summary judgment in respect of contractual disputes where sophisticated commercial parties have entered into comprehensive documentation such as an ISDA – in those circumstances, implied terms or factual context are less likely to be relevant.
The dispute arose from the "de-pegging" of the Swiss franc from the euro by the Swiss National Bank, which took place without prior notice at 9.30am on 15 January 2015. Thereafter, the Swiss franc appreciated rapidly and experienced extremely high volatility as markets reacted to the news. At 9.47am that morning, CFH submitted 27 automated market orders to purchase Swiss francs from, and sell euros to, the bank, at market prices, pursuant to the ISDA in place between the parties. The transaction prices were far less favourable to CFH than typical market lows on the day (including the official EBS - the e-trading platform for Swiss francs interbank trades - low).
Although the bank voluntarily repriced the trades at a more generous rate, CFH alleged that the bank was instead obliged to reprice the trades at the EBS low. CFH argued that there had been a breach of an express or implied term as to market practice, a term as to best execution and a duty to avoid a conflict of interest and treat CFH fairly. CFH also brought a parallel claim in tort for negligence.
The bank applied to strike out and for summary judgment in respect of the claim. The court focused on the summary judgment application, which it had discretion to grant if satisfied both that CFH had no real prospect of succeeding on its claim and that there was no other compelling reason for a trial. In applying this test, the court followed the summary of principles in Easyair Ltd v Opal Telecom Ltd  EWHC 339 (Ch) (as subsequently confirmed by the Court of Appeal). The court was guided in particular by limb (vii) of that summary, which provides that summary judgment can be granted in respect of contractual interpretation if the court is satisfied that it has the "evidence necessary for the proper determination of the question before it and the parties have had the opportunity to make oral arguments.
The court found that the bank’s standard terms on which CFH relied were unlikely to apply at all to the transactions in question and, even if they did, the interpretations of those terms advanced by CFH were found to be non-literal. The court described CFH’s argument that there was a duty to comply with "market practice" as presenting "commercial difficulty", since it would have imposed conflicting duties on the bank. It was found unlikely that a general implied term would arise where a comprehensive ISDA was already in place. The court succinctly dismissed the other arguments put forward by CFH for similar reasons and held in favour of MLI on all relevant issues and granted summary judgment. It concluded that CFH had no real prospect of success on any basis advanced and there was no other reason for a trial.
Norwich Pharmacal applications – Court of Appeal issues fresh guidance on costs and responding to information requests
In Jofa Limited v Benherst Finance Limited  EWCA Civ 899, the Court of Appeal set aside a costs order made against the targets of a Norwich Pharmacal application (the Order). This Order required the targets to reimburse the applicants for the additional costs they incurred as a result of the targets’ failure to voluntarily provide the information sought or to agree to adopt a "neutral position" in the threatened application.
In setting aside the Order, the court provided useful guidance on how the costs of Norwich Pharmacal applications will normally be dealt with:
- the starting point for any costs assessment is that the costs of a Norwich Pharmacal application should be paid by the applicant, with the court emphasising that Norwich Pharmacal applications are not "ordinary adversarial proceedings". This does not however preclude the making of an alternative order where the circumstances justify doing so;
- it may be appropriate for the court to make any costs award dependant on the outcome of any subsequent litigation – e.g. an order may be made for the applicant to pay the target’s costs unless a claim is initiated within a defined period of time, in which case the costs of the application may be determined at the appropriate stage of the subsequent proceedings; and
- the recipient of a request for information under the Norwich Pharmacal jurisdiction owes no legal duty to provide information without a court order, and as such only in circumstances which are "hard to envisage" will a costs order be made against a target which declines to provide information prior to the applicant obtaining a court order.
The court also noted that whilst there are no formal pre-action requirements for Norwich Pharmacal applications, it would be considered "reasonable" to expect a recipient of a request to at the very least indicate their position, and if they intend to resist any application, to confirm the grounds on which they intend to do so. In light of the court’s comments, businesses operating in the financial services sector should ensure that they have adequate procedures in place for responding to information requests in a timely manner.
Implied duty of good faith in “relational” contracts
In a lengthy judgment, the High Court has held that certain contracts between the Post Office and sub-postmasters are "relational contracts" (despite being the Post Office’s standard terms of business) and consequently subject to an implied obligation on the parties to act in good faith (Bates v Post Office (No. 3)  EWHC 606 (QB). It concluded that good faith goes beyond a duty to act honestly: in such contracts, the parties must refrain from conduct which would be regarded as commercially unacceptable by reasonable and honest people.
The court held that there are specific characteristics which may cause a commercial contract to be categorised as a relational contract when set in its commercial context. Those specific characteristics listed by the judge (in paragraph 725 of his judgment) include:
- a long term contractual relationship;
- the parties intend their roles to be performed with integrity and fidelity to their bargain;
- the parties are committed to collaborating with one another to perform the contract;
- the spirit and objectives of their venture may not be capable of being expressed exhaustively in the written contract;
- the parties expect trust and confidence of one another, but different from that involved in a fiduciary relationship;
- the contract requires a high degree of communication, cooperation and predictable performance based on mutual trust and confidence, and expectations of loyalty;
- there may be a degree of significant investment by one or all parties in the venture (which may be a substantial financial commitment); and
- exclusivity of relationship.
However, if there are "express terms to prevent the implication of a duty of good faith, then that will be the end of the matter." From a practice perspective therefore, an express exclusion of a duty of good faith is effective; and when using standard terms of business without negotiation, it is advisable for the party providing the standard terms to require the counterparty to seek legal advice on the terms; and to require them to sign the terms. Of course, consideration as to the perceived fairness and reasonableness of the terms from the perspective of an independent bystander will also assist.
Supreme Court upholds decision to allow non-party access to trial documentation
In Cape Intermediate Holdings Ltd (Cape) v Dring  UKSC 38, the Supreme Court considered Cape’s appeal disputing the extent of non-party access to written material placed before the court in a civil action. The judges considered the extent and operation of the principle of open justice in light of a party’s desire to preserve confidentiality, emphasising that the purpose of the open justice principle is to enable the public to understand and scrutinise the justice system of which the courts are the administrators.
Voluminous documentation had been produced by the parties in the original trial. Following the settlement of the claims, The Asbestos Victims Support Groups Forum UK (the Forum) (a non-party to the proceedings), applied to obtain access to "records of the court", which included access to copies of all the documents used at or disclosed for the trial, pursuant to CPR 5.4C. The master made an ex parte order (the Order), providing for access to the trial bundle, disclosure documents, witness statements, expert reports, transcripts and written submissions. Cape appealed on the grounds that, among other things, the master did not have jurisdiction to make such an extensive order.
Upon considering the Court of Appeal’s decision approving the Order, the Supreme Court recognised three important issues in this case:
(1) the scope of CPR 5.4C(2);
(2) whether access to court documents is governed solely by the CPR; and
(3) if the court has an inherent power outside of the CPR, how far it extends and how it should it be exercised.
Referring to the decision in R (Guardian News and Media Ltd) v City of Westminster Magistrates Court (Article 19 intervening)  EWCA Civ 420, the court recognised that the default position is that the public should be allowed access to all documents placed before the court and referred to during the hearing. However, it also noted that the applicant (A) has no automatic right to access; A must explain the reason for the request and how such access will advance the open justice principle. A may be denied access on grounds of national security, protection of the interests of the vulnerable, protection of privacy, trade secrets and commercial confidentiality. When exercising discretion under CPR 5.4C(2), the main test is for the court to "balance the non-party’s reasons for seeking disclosure against the party’s reasons for wanting to preserve confidentiality". It also stated that the court "would be likely to lean in favour of granting access if the principle of open justice is engaged and the applicant has a legitimate interest in inspecting the documents".
For the purpose of this case, the Supreme Court found that the Court of Appeal not only had jurisdiction to make the Order it did, but it also had jurisdiction to make a wider order if it were right so to do. The basis of any wider order should be in support of the open justice principle.
FCA and PRA jointly fine retail bank for outsourcing failings
On 30 May 2019, the FCA and the PRA published final notices against R. Raphael & Sons plc (Raphaels) with respect to failings in the management of the Bank’s outsourcing arrangements. The fines amount to a combined total of £1.89m.
Raphaels' failings related to the outsourcing of services which were critical to the performance of its Payment Services Division. The issues were brought to the regulators’ attention following an IT incident which occurred on Christmas Eve in 2015, as a result of a technology failure at one of the bank’s outsourced service providers. The FCA and the PRA found that the incident was exacerbated by Raphaels' inadequate management and oversight of outsourcing risk from Board level down.
The final notices provide a practical example of the regulators’ heightened focus on outsourcing arrangements and make it clear that firms cannot delegate accountability with respect to outsourced services. The FCA enforcement action also demonstrates the importance of fully investigating previous incidents and implementing any lessons learned as appropriate. In this case, Raphaels had failed to take proper steps to investigate a previous IT incident, which meant that it did not put arrangements in place to manage similar future incidents. As a result of this failing, Raphaels breached Principle 2 of the FCA’s Principles for Businesses (the requirement for a firm to conduct its business with due skill, care and diligence), as well as Principle 3 (the requirement to have adequate risk management systems in place).
The final notices also provide an example of the co-operation between the FCA and the PRA with respect to enforcement matters. In a recent speech, Miles Bake (Head of Legal at the Regulatory Action Division of the PRA) explained that of the 22 enforcement cases the PRA has opened since April 2013, 12 have been (or are being) carried out jointly with the FCA.
FCA issues third biggest fine of 2019 for a Principle 11 breach
In June, the FCA imposed a fine of £46m against Bank of Scotland (BoS) for failures to disclose information about its suspicions that fraud may have occurred at the Reading-based Impaired Assets Team (IAR).
In breach of Principle 11 (requiring a firm to deal with its regulators in an open and cooperative way and to disclose appropriately anything relating to the firm of which those regulators would reasonably expect notice), and SUP 15.3.17R (which requires a firm to notify the FCA immediately if the firm becomes aware that an employee may have committed a significant fraud against it) BoS failed to be open and cooperative and did not disclose information to the FCA appropriately.
The failures identified by the FCA took place over 10 years ago, between May 2007 and January 2009, prior to the acquisition of BoS by Lloyds Banking Group (LBG). It was only at the regulator's request that BoS fully disclosed its suspicions to the then FSA, in July 2009. At that point, it disclosed details of an investigation the bank had conducted in 2007, i.e. more than two years after the event.
BoS also did not report its suspicions to any other law enforcement agency, despite being contacted by two police forces in 2008 about allegations of fraud. The FSA reported the matter to the NCA (then the Serious Organised Crime Agency) on 26 June 2009. If BoS had communicated its suspicions appropriately to the FSA, as it should have done, the criminal misconduct could have been identified much earlier. This delay risked creating difficulties for Thames Valley Police when obtaining and reviewing evidence years after the fraud had taken place and risked prejudicing the interests of justice.
In addition to the fine on BoS, six individuals were sentenced (in 2017) for their part in the £245m loan scam, committed through the IAR. The FCA also banned four individuals from working in financial services.
LBG has also implemented a voluntary review of the cases of customers who may have been affected by the fraud to evaluate redress. The review is outside the FCA’s remit as the corporate lending involved was unregulated; and LBG has estimated that the total compensation to all customers (including those outside the review) could amount to as much as £115m.
Bigger fines; larger remit and longer timelines: the FCA’s 2018/19 Enforcement Report
The FCA’s Enforcement Annual Performance Report conveyed the following themes of interest.
The value of financial penalties imposed by the FCA has significantly increased
The actual number of fines imposed by the FCA has remained consistent in the last three years (15, 16 and 16 in each year respectively). However, in 2017/18 the total value of these fines was £69.9m, whereas the total value of fines imposed in 2018/19 was £227.3m.
The FCA remains heavily focused on its regulatory/civil role
During 2018/19, the FCA issued 265 final notices and secured 288 outcomes using its enforcement powers. Of these, 276 related to regulatory/civil action compared to just 12 relating to criminal enforcement. Nevertheless, the criminal side of the FCA’s enforcement strategy can still be significant, as illustrated by the recent conviction of a compliance officer at UBS AG and another for insider dealing. Both individuals were sentenced to three years’ imprisonment.
FCA cases still take a very long time to resolve
The average length of an FCA regulatory/civil case to be resolved by agreement in 2018/19 was 29.1 months. While this is an improvement on the previous year, it compares poorly to 2016/17 when the average was 23.2 months. Keeping firms and/or individuals under investigation for such a long time is not desirable. A further example of the problem lies in the average length of time for a case to be referred to the Regulatory Decisions Committee, which is now 50.8 months rather than the much lower average of 33.6 in 2016/17. Cases that are referred to Upper Tribunal take an average of 74.1 months to resolve.
The caseload of the FCA continues to grow
No doubt related to the growing length of time required to resolve a case, the total number of FCA cases currently open has risen sharply. By way of example, during 2018/19, the FCA opened the 343 cases, but only closed 189. The FCA clearly has no lack of appetite or ambition to flex its investigation powers, but the effectiveness of investigations and their outcomes is yet to be evaluated in the face of such a large caseload.
It is noteworthy that the FCA dedicated a significant part of its report to explaining its role in the National Economic Crime Centre and the Joint Money Laundering Intelligence Taskforce. These collaborative efforts with other agencies show how the UK authorities may be moving towards an ever more joined-up approach on cases.
The FCA also considered feedback from individuals and firms that have been the subject of investigations. On the whole, the comments it reported were positive, but it was particularly interesting to note that the FCA observed: "Investigation teams were open to narrowing the scope of information requirements, to avoid unnecessary requests for information where appropriate." This may represent an important message for the subject of future investigations, in that a request from the FCA for information or documents might be flexible, and may warrant entering into a dialogue before providing a response.
The SFO’s fifth DPA: parent company bears the burden
The Serious Fraud Office (SFO) entered into its fifth deferred prosecution agreement (DPA) in the UK in early July.
The SFO's investigation related to fraudulent conduct by Serco Geografix Limited (Serco) whereby Serco fraudulently "cooked its books" to retain additional profit from government contracts to provide "tagging" services to the Ministry of Justice.
Under the terms of the DPA, Serco was fined £19.2m as well being ordered to pay the SFO's legal costs of more than £3.7m. The DPA will remain in place for three years, during which time Serco must fully cooperate with all law enforcement and regulatory agencies and will commit to enhancing the effectiveness of its ethics and compliance programme.
This case was an interesting example of how a company should go about obtaining a DPA. In particular, Serco:
- self-reported to the SFO;
- instructed an independent law firm to conduct an internal investigation, the results of which were shared with the SFO; and
- waived privilege over certain accounting material.
All of this went towards Serco being praised for demonstrating "substantial cooperation" with the SFO.
In approving the DPA, the judge also took the time in his judgment to note that the company that was investigated and that entered into the DPA is actually now dormant and without assets. Therefore, the financial penalty and the practical burden of the DPA – such as the three-year remediation programme – will all be borne instead by the parent company. If this model is followed in the future, rogue subsidiaries may come to implicate their parent companies and wider groups in the consequences of criminal misconduct.
Bank terminating a customer relationship without notice on suspecting proceeds of crime
In N v The Royal Bank of Scotland Plc  EWHC 1770 (Comm), the Commercial Court comprehensively dismissed claims brought against The Royal Bank of Scotland (RBS) for its decision to terminate a banking relationship without notice. RBS terminated its relationship with N on the basis that it suspected that some of N's accounts contained the proceeds of crime. The decision provides valuable guidance for banks dealing with the National Crime Agency (NCA) and the filing of Suspicious Activity Reports (SARs).
N, a money service business, held a number of accounts with RBS. Following an investigation, RBS formed a suspicion that several of N's customers were running scams and that the proceeds of these scams were being held in several of N's accounts with RBS. In light of this, RBS froze certain of N's accounts and made multiple suspicious activity reports to the NCA seeking consent to return N's funds and terminate the banking relationship. On an application for an interim mandatory injunction by N, the court ordered RBS to make a number of specified payments and declared that they would not be committing a criminal offence by doing so.
In the main action, N brought a claim for damages flowing from RBS's decision to terminate the banking relationship without notice. The court rejected all claims brought against RBS and dismissed all of the alternative suggestions N made, e.g. ring-fencing suspected funds. The court's key findings were:
- RBS considered, rationally and in good faith, that there were exceptional circumstances;
- if RBS's view was required to meet a standard of objective reasonableness, then it did meet that standard;
- RBS's discretion was exercised in a reasonable manner and the circumstances fully justified the steps decided upon;
- RBS held the opinion that a refusal to process payments was prudent in the interests of crime prevention and that opinion was reasonable, legally correct and based on a sound understanding of the relevant legal principles; and
- the Bank had adopted a proportionate approach taking account of the adverse impact that any freeze would have on N's business.
The decision provides guidance on how banks should respond to suspected money laundering. The judgment suggests:
- suspecting that a customer is knowingly or unknowingly holding or dealing with proceeds of crime would qualify as an exceptional circumstance for the purposes of exercising a termination clause requiring the same;
- a bank may not necessarily be required to seek alternative ways of mitigating money laundering risk, such as ring-fencing suspicious funds; and
- an investigation of a similar nature to that of RBS's may be considered to be reasonable and fully justified.