Financial Markets Disputes and Regulatory Update dentons.com Issue 3 | July 2016 Insight Contents What is worth remembering from the first half of 2016? 3 Judgments 6 CoCos – Supreme Court decision in litigation between Lloyds and its noteholders 6 Skilled person not amenable to judicial review in relation to IRHP review 7 Right to convert bonds 7 Construction of LMA terms 8 Construction of ISDA Master Agreement 8 Dispute as to which version of the ISDA Master Agreement applied, and construction of ISDA boilerplate 10 Deutsche Bank successful in its appeal in relation to Unitech 11 Bank does not owe a duty of care in relation to the review of sales of IRHPs 11 Effect of article 3(3) of Rome Convention and mandatory rules of law 12 Rights of Class X noteholder in CMBS transaction 13 Regulatory decisions 17 Senior managers regime, certification regime and conduct rules 17 Consultation on changes required as a result of removal of notification requirements 17 Developments in relation to enforcement 18 Final notices 18 Ring-fencing 21 Benchmarks 22 FCA publishes Business Plan for 2016-2017 23 Financial Advice Market Review (FAMR) 23 Capital markets 24 Other developments 24 In this edition of Dentons Financial Markets and Regulatory Update, we have considered the key financial markets cases, and UK conduct-related regulatory action, from the first half of 2016, and distilled them into a list of points which are worth taking away. We hope this will provide readers with a digestible series of considerations to feed into on-going work. dentons.com What is worth remembering from the first half of 2016? Court decisions / impacts It is often difficult to identify common themes arising from judgments that happen to be handed down at the same time, and the first half of 2016 has proved no exception. There have, however, been some interesting judgments in relation to agreements concluded on standard terms, both ISDA and LMA, and these are likely to be of use to those using these documents in future. The judgment of the Court of Appeal in Goldman Sachs International v. Videocon is of particular interest. There are also cases (LSREF III Wight and Hayfin) shedding light on more general principles of contractual construction. Disputes involving derivatives contracts with quasi-public bodies continue to make for interesting case law. On this occasion, the court has considered again (in Banco Santander Totta) the provisions of the Rome Convention in relation to the applicability of mandatory rules of the law of another jurisdiction, and has come to a conclusion which seems to contradict a judgment we summarised in the last edition of this Update. There have been developments in various different cases involving litigation relating to interest rate hedging products. Two judgments (Holmcroft and CGL) have (for different reasons) apparently despatched the possibility of claims being made for damages on the basis of the way in which banks have conducted their reviews of past sales. In addition, the Court of Appeal has reversed a first instance decision in the Deutsche Bank v. Unitech litigation, which would have precluded Deutsche Bank from receiving payment before trial of a substantial sum that it would be owed regardless of the outcome of the proceedings. Regulatory developments The SMR and parts of the certification regime were implemented during this period, but this has created few further waves over the first half of the year. We have seen, however, further movement in relation to another major project for banks, in the form of publication of the PRA's and the FCA's approach documents in relation to ring-fencing transfer schemes. It seems likely that there will be a number of difficult practical issues to overcome for all concerned in seeking to have such schemes approved, as well as the inherent difficulty of designing a ring-fenced structure. We believe that the role of the skilled person, for example, will require a careful approach. The final report of the Financial Advice Markets Review was also published, and it appears to acknowledge genuine difficulties in ensuring the provision of affordable, accessible financial advice to all who need it. Many of the issues raised in the report are unlikely to be quickly solved, and this is likely to be something of a long-term project for the FCA and others. Less tangibly, there have been recurrent appearances of accountability and enforcement as themes. As well as final notices in individual enforcement cases (some of which are interesting), there have been developments in relation to the FCA's own likely approach to enforcement, settlement and its view on specific conduct issues. What to watch out for Litigation The second half of the year is likely to see the handing down of judgment in several key cases to which we have referred in earlier editions of this Update: • The trial of the claims by Property Alliance Group against RBS (which include claims relating to alleged misrepresentations in relation to LIBOR) started in late May and is ongoing, but judgment is expected in the second half of 2016. dentons.com 3 • The trial of the Libyan Investment Authority's claims against Goldman Sachs for undue influence in respect of equity derivatives entered into by the sovereign wealth fund began in June, and judgment is likely to be handed down by the end of the year. • The appeal in Deutsche Trustee Company Limited v. Cheyne Capital Management (in relation to issues of construction in a CMBS transaction) was due to be heard in May, and judgment is therefore likely to be handed down over the coming months. In addition, the appeal in the litigation involving Taberna and the failed Danish bank, Roskilde, is expected to take place in November, and is likely to be significant in the context of the purchase of notes in the secondary market (we considered the first instance decision in an earlier edition of this Update). Regulatory and other developments Many of the publications from the first half of the year are likely to have some consequence in the second. Banks will be starting to consider the PRA's and the FCA's approaches to ring-fencing transfer schemes, and working with appointees or potential appointees as skilled persons. The FCA is likely to publish its revised rules in relation to enforcement, following its consultation in relation to the implementation of high-profile recommendations for changes. Such revised rules may overhaul practice in relation to settlement of enforcement cases in particular, and it is likely that the FCA's role in this regard will also remain subject to scrutiny from parliament in particular. The implementation of the SMR, certification regime and conduct rules is far from complete, and some key further publications are awaited. The regulators' proposed approach to the duty of responsibility has not been set out, but is likely to follow the enactment of the necessary primary legislation. There are also likely to be conduct rules for non-executive directors not subject to the SMR. In addition, the FCA has promised to clarify whether or not it expects those with overall responsibility for the legal function within banks to be approved as performing a controlled function. There are likely to be other teething problems with the new regime to resolve, and the regulators and HM Treasury will also need to have an eye to the promised roll-out of the SMR to other regulated firms. 4 dentons.com CoCos – Supreme Court decision in litigation between Lloyds and its noteholders BNY Mellon Corporate Trustee Services Limited v. LBG Capital No 1 Plc and another  UKSC 29 June 2016 saw the publication of the Supreme Court judgment in this case involving Lloyds Banking Group (LBG) and its attempt to redeem contingent convertible securities (CoCos) (please see our previous summary, CoCos - litigation between Lloyds and its shareholders). In 2009, LBG issued, via two special purpose vehicles, the so-called Enhanced Capital Notes (ECNs) which were CoCos. Although the ECNs had different maturities, they could be redeemed early if a Capital Disqualification Event (CDE) took place. The dispute arose between LBG and holders of the ECNs (represented by the trustee, BNY Mellon) as to whether a CDE had in fact taken place which would entitle LBG to redeem the £3.3 billion of ECNs, which would otherwise have carried a rate of interest over 10% p.a. The ECNs were issued in November 2009, at a time when LBG was seeking to increase its capital in order to satisfy the relevant regulatory requirements, then governed by the EU Capital Requirements Directive (CRD I). In relation to the ECNs, a CDE was defined as including an event whereby, as a result of changes to regulatory capital requirements, the ECNs would cease to be taken into account in whole or in part for the purposes of any stress test applied by the regulator "in respect of the Consolidated Core Tier 1 Ratio". However, the drafting of this definition did not take into account the possibility that Core Tier 1 (CT1) capital ratios could disappear as a concept, as subsequently took place under the Fourth Capital Requirements Directive (CRDIV), published in July 2013, which replaced CT1 with Common Equity Tier 1 (CET1) capital. In December 2014, the PRA carried out a stress rest in relation to LBG's CET1 ratio. That stress test did not include the ECNs. Therefore, LBG declared a CDE and sought to redeem the ECNs early. BNY Mellon argued that this was wrong. Firstly, because the stress test was not "in respect of Consolidated Core Tier 1 Ratio" as set out in the definition of a CDE; rather, it was a stress test in respect of a CET1 capital ratio. Secondly, BNY Mellon argued that the fact that the ECNs were not taken into account by the PRA in the December 2014 stress test was not enough to trigger a CDE; in order to satisfy the CDE definition, ECNs must be disallowed in principle from being taken into account for the purposes of the Tier 1 ratio. At first instance, the judge rejected the first of these arguments but accepted the second and found in favour of BNY Mellon that the ECNs were not redeemable. The Court of Appeal agreed as regards the first point but disagreed with the second argument and, accordingly, allowed LBG's appeal having concluded that the ECNs were redeemable. The Supreme Court agreed with the Court of Appeal that the ECNs were redeemable. The court considered that it made no commercial sense to limit the reference to "Core Tier 1 Capital" to CT1 capital as opposed to holding that it could apply to CET1 capital; the definition should be treated as a reference to "its then regulatory equivalent" i.e. in the current context, CET1 capital. In that respect the Supreme Court noted, as had the Court of Appeal, that it was one of the essential features of the ECNs that, if necessary, they could be converted into LBG core capital, whatever expression was used to define it. Interestingly, the Supreme Court questioned whether this conclusion even required a departure from the "literal meaning" of the definitions of "Core Tier 1 Capital" and "Tier 1 Capital"; the Court considered that, if this was the case, such a departure Judgments 6 dentons.com amounted to a rather pedantic approach to interpretation. As regards the second of BNY Mellon's arguments, the Supreme Court agreed with LBG's position that, in light of changes to the regulatory capital requirements, the ECNs could no longer be taken into account in assisting LBG in passing the stress test. Unusually, the case gave rise to judicial disagreement with the majority of the Supreme Court (Lord Neuberger, President, Lords Mance and Toulson) agreeing with the Court of Appeal and Lords Sumption and Clarke dissenting. Lord Sumption considered that the ECNs, as long dated securities, cannot have been intended to be redeemed early except in some extreme event undermining their intended function and requiring their replacement with some other form of capital. The function of the ECNs was to be available to boost LBG's top tier capital in the event that the ratio of top tier capital to risk-weighted assets fell below the conversion trigger; the ECNs had, and still did, serve that function and Lord Sumption considered it irrelevant whether that function remained as important to LBG now as it had in 2009. Lord Sumption also noted that although the case was of financial importance to the parties, it raises no issues of wider legal significance. Skilled person not amenable to judicial review in relation to IRHP review The Queen on the application of Holmcroft Properties Limited v. KPMG LLP (Defendant) and Financial Conduct Authority and Barclays Bank PLC (Interested Parties)  EWHC 323 KPMG was appointed by Barclays as a skilled person (pursuant to section 166 of FSMA) in relation to a review agreed with the FCA, pursuant to which Barclays (and other banks) would set up a process to provide redress for customers missold interest rate hedging products (IRHPs). KPMG's role was to oversee the implementation and application of the review process, and to approve any offers of redress Barclays made. Holmcroft was offered redress as part of the review, but its claim to be compensated for consequential losses failed. It applied for judicial review, on the basis that KPMG had reached a decision on redress that was not properly open to it, having been reached via a defective process. The court rejected, with some hesitation, the suggestion that KPMG was amenable to judicial review. The court accepted that KPMG's role was "woven into" the regulatory function, and that Barclays would not have given KPMG the extensive powers that it did, had it not been required to do so by the FCA. However, the court also noted that: • the review scheme adopted was an entirely voluntary one, and that the precise role KPMG played could not have been imposed by the FCA as part of the exercise of its powers, had Barclays not agreed to it; • KPMG were appointed contractually by Barclays, not by the FCA, and that they had no relationship with those of Barclays' customers who were participating in the review; • merely assisting with the achievement of public law objectives was insufficient to render a body amenable to judicial review; • it was highly unlikely that the FCA could have performed KPMG's role had KPMG not agreed to do so, and it would have had to choose a different route to secure the objectives that were met by the review; and • the FCA retained the ability to play an active role. The court went on to consider whether, if judicial review was available as against KPMG, Holmcroft's claim would have been made out. It decided that it would not. Holmcroft's argument rested on the fact that in deciding on an appropriate offer of redress, Barclays (and KPMG) had considered material that was not supplied to Holmcroft. The court agreed with Barclays that there was no obligation, in the circumstances, to provide Holmcroft with all of the bank's records, provided that Barclays fairly summarised the reasons for its decision (which the court found that it had). The court declined to make any finding that potential skilled persons would be discouraged from agreeing to act, if they believed that they might be amenable to judicial review. Nonetheless, the reasoning contained in this judgment may be relevant to the FCA's appetite for appointing skilled persons directly. The judgment also provides some support for banks in the context of the IRHP review, assuming that other banks have followed a similar process to that adopted by Barclays. Right to convert bonds Citicorp International Ltd. v. Castex Technologies Ltd.  EWHC 349 (Comm) This claim was brought by the claimant as trustee of convertible bonds issued by the defendant. The issue to be determined was whether a conversion notice (which would have the effect of converting the bonds into equity shares) served by Castex was valid. The judge held that it was. The judgment necessarily turns on the drafting and construction of the terms and conditions of both the bonds and the relevant notice, but it raises (albeit obiter) an issue relevant to construction generally. dentons.com 7 There was a dispute between the parties as to whether the heading of the controversial clause in the terms and conditions of the bonds could be taken into account in construing the clause's meaning. The trustee relied on a standard provision in the trust deed (that headings were to be ignored in construing the trust deed) in order to persuade the judge that he was not entitled to take the relevant heading into account. The judge disagreed, on two bases. The first was that the relevant language about headings was included in the trust deed, not the terms and conditions of the notes. Although the trust deed referred to the terms and conditions, they could not be treated as forming part of the trust deed. Second, the judge held that he would, in any event, "find it impossible not to be assisted by the heading", and that it would "astonish" the commercial parties to the contract were he to ignore the clear words in the heading. This conclusion was based upon dicta in earlier cases that the court could look at a heading where it was "descriptive of what the provision is about". The judge in this case appears to have taken the view that this was permissible to the extent that the heading was not inconsistent with the content of the clause (which he held that it was not). The judgment in this case did not turn on this issue, but it: (a) provides a reminder that parties must be careful to ensure that any relevant boilerplate language is replicated in each contract, where there is more than one; and (b) highlights what is perhaps a surprising willingness by the court to look at clause headings, in circumstances where the draftsman might have expected the court to refuse to do so. Construction of LMA terms GSO Credit -A Partners LP (and others) v. HCC International Insurance Company PLC  EWHC 146 (Comm) The disputed transaction in this case was agreed to be covered by the LMA's Standard Terms and Conditions for Par and Distressed Trade Transactions (Bank Debt/ Claims) dated 14 May 2012 (the LMA Terms). The subject matter of the dispute was what, exactly, GSO had purchased from HCC (indirectly, via back-to-back transactions with Barclays), and consequently which of GSO and HCC was to be the payer under the transaction. As part of a wider facilities agreement, HCC was a lender to a gaming company called Codere under a surety bonds facility. Pursuant to this facility, HCC issued surety bonds in favour of public authorities in Italy and Spain. Codere was obliged to pay HCC the amount of any claim by a public authority under the surety bonds. The parties agreed that GSO would purchase a portion of HCC's commitment under the surety bonds facility (in fact, equal to HCC's maximum liability under the surety bonds). HCC alleged that GSO had only purchased HCC's rights as lender against Codere (and was therefore obliged to pay it some €18 million). GSO believed that it had also purchased HCC's obligations to the public authorities (which would mean that GSO was not the payer, and was entitled to receive payment of approximately €5.5 million). The first issue decided by the judge was whether HCC was correct in its submission that the definition of "Purchased Assets" in the LMA Terms was different to (and excluded) the definition of "Purchased Obligations", and that HCC's obligations to the public authorities were therefore not included as purchased assets. The judge disagreed. He held that in a transaction in respect of a surety bonds facility on the LMA Terms, the seller ordinarily traded its position. This would include its obligations. Such a conclusion was supported by the LMA Terms. Second, in relation to the calculation of sums due, the judge considered the meaning of the terms "funded" and "unfunded" in this context. He determined that "funded" did not mean the same as drawn, and that the purchased assets were therefore only funded to the extent that HCC had actually paid sums out pursuant to the surety bonds (which it had not). The fact that the surety bonds facility had been utilised did not mean that the assets were "funded" within the meaning of the LMA Terms. Construction of ISDA Master Agreement (1) Videocon Global Limited; (2) Videocon Industries Limited v. Goldman Sachs International  EWCA Civ 130 This was the appeal of a successful summary judgment application by Goldman Sachs International (GSI) in relation to a termination notice served by it under clause 6(d) of the 1992 ISDA Master Agreement. Clause 6(d) requires that notice of the amount due on early termination (and details of the account to which it should be paid) must be provided on or as soon as reasonably practicable following the occurrence of an early termination date. In terms of background, GSI and Videocon entered into a number of currency swaps under the umbrella of an ISDA Master Agreement. GSI terminated that agreement on 2 December 2011 following Videocon's failure to meet various margin calls. GSI provided a notice setting out the amount it sought (approximately US$4 million) on 14 December 2011, and later applied for summary judgment. At the hearing of such application (in September 2013), Videocon was held to be liable to GSI in principle, but the judge at that hearing also decided that GSI had 8 dentons.com failed to provide the "reasonable detail" of its calculations which clause 6(d) requires. It therefore failed to obtain judgment, and did not serve a revised calculation until March 2014. Having done so, it made a second application for summary judgment, which was successful at first instance. The judge hearing the application determined that, even though it was a breach of contract for the party serving the termination notice not to do so as soon as reasonably practicable, such breach did not make the notice ineffective once it was served in a compliant form. The Court of Appeal gave permission to appeal (because of the importance of the issue, rather than the merits of the appeal itself), and then rejected the appeal. In doing so, Gloster LJ noted that in clause 6 of the Master Agreement (as in other clauses), there was a difference between the debt obligation of the payer (which arose on the early termination date) and the payment obligation, as earlier cases had indicated. The question was therefore the date on which the early termination payment became payable (as opposed to due), and whether the payment obligation was subject to a condition precedent, such that it did not arise if an effective termination notice was not served as soon as reasonably practicable. In relation to the first of these issues, Gloster LJ held that the early termination amount became payable at the point when there was effective service of notice of the amount payable. In that regard, Gloster LJ said that she did not agree that a notice had to comply with all of the requirements of clause 6(d) in order to be effective for these purposes (GSI had conceded this point at first instance). The word "effective" was used, rather, to identify the date on which the notice was effectively served in accordance with the service provisions of clause 12 of the Master Agreement. On that basis, she concluded that GSI's original notice had been effectively given. In relation to the second issue, Gloster LJ held that there was no basis for concluding that the requirement to provide a notice as soon as reasonably practicable imposed a condition precedent to the payment obligation under the Master Agreement. Any other decision would be contrary to the wording, overall scheme and commercial sense of the Master Agreement. The Court of Appeal's conclusion is not a surprising one, but its reasoning differs in some respects from the judgment at first instance, and contains a detailed and helpful analysis of clause 6 of the ISDA Master Agreement. The Court of Appeal's separate treatment of the debt obligation and payment obligation, and its interpretation of what "effective" means in the context of clause 6, are particularly significant aspects of the judgment. dentons.com 9 Dispute as to which version of the ISDA Master Agreement applied, and construction of ISDA boilerplate LSREF III Wight Ltd. v. Millvalley Ltd.  EWHC 466 (Comm) In this unusual dispute, the court considered the proper approach to construction and rectification, and contrasted the two. Millvalley entered into an interest rate swap with Anglo Irish Bank (AIB) in 2006. It was common ground that the parties intended this swap to be governed by the terms of the 1992 ISDA Master Agreement, but while they executed a confirmation, they never executed either the Master Agreement itself or a Schedule. As part of a restructuring in 2011 (with the Irish Bank Resolution Corporation (IBRC) as successor to AIB), the parties entered into a Master Agreement and Schedule in the form of the 2002 version, with the effect that, from that date, the original swap was governed by the terms of the 2002 Master Agreement. The swap was further restructured in 2012. As a result of an administrative error within IBRC, the 2012 confirmation in relation to the restructured swap again referred in generic terms to the 1992 ISDA Master Agreement. Wight (as successor to the IBRC) argued that as a matter of construction, the restructured swap was governed by the 2002 Master Agreement. Alternatively, it said that the confirmation should be rectified to that effect. The practical importance of this was that the 2002 version of the Master Agreement gave Wight the right to terminate the swap if a loan was repaid (which was the case here), whereas the 1992 version did not. The judge held that, as a matter of construction, the clear wording of the confirmation indicated that the 1992 Master Agreement applied. This was clear from the wording, and it could not be said that something had gone so awry with the language that the parties' objectively expressed intention was for the 2002 version to apply. Nor was the plain meaning of the confirmation commercially absurd. The judge held, however, that the confirmation ought to be rectified. In giving his conclusions on this point, he referred to an ongoing debate as to the applicable principles in this regard. He expressed some disquiet at the prospect of a judge rectifying an agreement to reflect what a reasonable observer would have understood the parties to mean, in circumstances where one of the parties did not in fact share that understanding. In this case, however, he held that the distinction was not relevant. There was a continuing intention by the parties at the time of the restructuring that the 2002 Master Agreement they had already executed would apply to the swap, and the judge noted that Millvalley did not take a point on this for some time. The judge also considered Millvalley's submission that some of the boilerplate language in the Master Agreement (at clause 9) and the confirmation (in relation to non-reliance and operational matters) precluded a claim for rectification. The judge declined to decide whether clauses of this 10 dentons.com type could ever have such an effect, but decided that these specific provisions did not. The judgment shows the importance of ensuring that transactions using ISDA terms are documented in the appropriate way, and it also resolves a point of construction in relation to boilerplate language that might be relevant in other cases. Deutsche Bank successful in its appeal in relation to Unitech Deutsche Bank AG and others v. Unitech Global Limited and another  EWCA Civ 119 This judgment of the Court of Appeal considered a judgment at first instance of Teare J, that was itself handed down in somewhat complex circumstances. It is helpful to bear in mind that there are two related actions in the Deutsche Bank v. Unitech litigation: one relates to lending by Deutsche and others, in the sum of approximately US$150 million, and the other relates to a swap between Deutsche and Unitech, pursuant to which Deutsche claims some US$11 million. Unitech asserts that both loan and swap formed part of the same package, and that both were procured by misrepresentation (including in relation to LIBOR). There was some debate as to whether it was open to Unitech to seek rescission as a remedy at all, in that the relevant loan agreements had been novated, but that argument will proceed to trial. Teare J's judgment (which was the subject of the appeal) reversed his own earlier judgment refusing Unitech permission to claim rescission as a remedy. It also considered an application by Deutsche for an order requiring Unitech to pay US$120 million, pursuant to any and all of: CPR Part 24 (summary judgment); CPR Part 3 (case management powers); and CPR 25.7 (interim payments). At the heart of Deutsche's arguments was the practical point that, even if Unitech succeeded at trial in its claim for rescission, it would be obliged to repay this amount in any event. If Unitech's claim failed, it would be obliged to pay some US$177 million. Teare J refused Deutsche's application, however, and Deutsche appealed (with his permission). That application was successful. The Court of Appeal considered section 32 of the Senior Courts Act 1981, which provides (in summary) that rules of court may make provision for interim payments "on account of any damages, debt or other sum … which that party may be held liable to pay to or for the benefit of another party to the proceedings if a final judgment or order of the court in the proceedings is given or made in favour of that other party." The Court of Appeal held that this wording was broad enough to apply to the present case. However, as the Court of Appeal also noted, this provision only allows for the making of rules, and it therefore had to go on to consider the content of the rules themselves, which were to be interpreted in accordance with the overriding objective. The Court of Appeal therefore considered the interim payment provisions at CPR 25.1(1)(k), which it also considered wide enough to cover the present case (the drafting is similar, for obvious reasons, to that used in section 32). Unlike Teare J, the Court of Appeal did not think that Deutsche needed to show that it would succeed in a cause of action in order for the interim payment to be ordered. The Court of Appeal also concluded that as a matter of case management, it was appropriate under Part 3 of the CPR to make Unitech's right to plead its rescission defence conditional on payment of the US$120 million into court. The Court of Appeal also considered an appeal by Unitech in relation to Teare J's refusal to allow it to make five unrelated amendments to its pleaded case. One such amendment related to an argument that Deutsche should have disclosed to the Unitech guarantor (which was itself also a party to the relevant loan agreement) unusual features of the contractual relationship between the lenders and the Unitech borrower. Such unusual features were said to include the manipulation of LIBOR. The Court of Appeal noted that the doctrine of unusual features was an evolving area of law, but considered that it was not open to Unitech to rely on it, because one of the clauses of the guarantee agreement (properly construed) meant that it was not only a guarantee but an indemnity. The Court of Appeal said that not every clause conferring on the guarantor the status of primary obligor would mean that the guarantor was also providing an indemnity, but this clause did. As such, the doctrine of unusual features did not apply. This litigation has been closely followed to date, and the contents of this judgment in relation both to interim payments in a case such as this, and the doctrine of unusual features, are of general relevance. Bank does not owe a duty of care in relation to the review of sales of IRHPs CGL Group Limited v. The Royal Bank of Scotland plc  EWHC 281 (QB) In this case, the claimant alleged (essentially) that RBS had missold it two IRHPs, in that it had failed to provide certain advice and information. There were two applications before the court. The first was to strike out the claim on the basis that it was time-barred. The second was an application by the claimant to amend, such as to include allegations in relation to RBS's conduct of the review agreed by it with the (then) FSA in relation to the sale of IRHPs. In relation to the first application, the claimant relied on section 14A of the Limitation Act 1980 and alleged that it had not had sufficient knowledge to bring its claims until the FSA review was announced in 2012. dentons.com 11 RBS pointed to discussions between it and the claimant in 2009 in which misselling was alleged. The judge agreed that the claimant had the requisite knowledge by November 2009 (and certainly by January 2012) to bring its claim. Accordingly, the claim was time-barred and should be struck out. In relation to the second application, the claimant argued that having agreed to conduct the review, RBS owed it a common law duty of care to: (a) conduct the review in accordance with its agreement with the FSA, and the agreed methodology; (b) provide fair and reasonable redress; and (c) conduct the review with reasonable skill and care. Amendments to allow similar pleadings were recently allowed by the Bristol Mercantile Court in Suremime Ltd. v. Barclays Bank. In this case, the judge concluded that the decision in Suremime was reached without the benefit of the range of materials available to him. He concluded that RBS could not reasonably be said to have assumed a duty of care, when its agreement with the FSA expressly said that it had not. He also held that to impose such a duty would be to "ride a coach and horses" through a clearly defined statutory scheme. This judgment should shut the door opened by Suremime. The judge effectively endorsed the detailed arguments advanced on behalf of RBS as to why no duty of care arose in relation to the review of interest rate hedging products, and there seems no reason why those arguments should not apply in other cases. Effect of article 3(3) of Rome Convention and mandatory rules of law Banco Santander Totta SA v. Companhia de Carris de Ferro de Lisboa SA (and others)  EWHC 465 (Comm) In this case, Santander and the defendants (the Companies), which are Portuguese public transport companies, had entered into nine long-term interest rate swaps on the terms of an ISDA Master Agreement. As has happened in other cases where public, or quasi-public entities have entered into derivatives agreements, the Companies sought to argue that they had lacked capacity. They also argued that although English law governed the agreements, article 3(3) of the Rome Convention meant that, if all the elements relevant to the situation at the time when English law was selected, connected the transaction exclusively with Portugal, the choice of English law could not displace mandatory rules of Portuguese law. Such mandatory rules were alleged to give rise to two specific defences. In addition, the Companies argued that Santander had breached various elements of the Portuguese Securities Code in presenting the swaps to it. We do not consider below the first and third of these claims (which were unsuccessful), on the basis that they are specific to Portugal, and therefore less likely to be of general relevance. We have, however, summarised the judge's conclusions in relation to article 3(3). 12 dentons.com It is worth noting that all the swaps in this case were agreed before 17 December 2009, and the Rome Convention (as opposed to the Rome Regulation) therefore applied. There is, however, little difference in substance between the two so far as the relevant provisions are concerned, so this judgment is also likely to be relevant to cases determined by reference to the Rome Regulation. There was a fundamental difference between the parties as to the approach that the court should adopt. Santander said that there was no need to identify as relevant the law of another particular country – the issue was whether "all elements of the situation" were linked to one country only. Elements with an "international character" should therefore be relevant. The Companies argued that the court should look for connecting factors to a legal system other than that of Portugal (aside from the choice of English law). The judge agreed with Santander, concluding that "in determining whether, choice of law aside, 'all elements relevant to the situation are connected with one country only', the enquiry is not limited to elements that are local to another country, but includes elements that point directly from a purely domestic to an international situation." In this case, the court held that the swaps were agreed in the context of an international capital market, in which a number of international banks competed for the Companies' business. The parties chose to use the internationally standard ISDA documentation (rather than a Portuguese framework agreement) and also chose the "Multicurrency – cross border" version (as opposed to "Local currency – single jurisdiction"). The judge held that use of this documentation facilitated hedging and restructuring, as well as promoting legal certainty. If the court were to hold that mandatory rules of local law also applied, it would increase the prospect of different rules applying to the swaps, agreements that were back-to-back with them, and any hedging. It was relevant that the swaps were part of a back-to-back chain, ultimately hedged by Santander Spain, the assistance of which was needed in this regard (and in others) by its Portuguese sister company in entering into the swaps, even though the Companies had no knowledge of it. The judge also held that the right of either party to assign was a relevant factor in this regard, in that such rights were not limited to assignment to Portuguese entities. It was therefore contemplated that a non-Portuguese entity might become a party to the swaps. By contrast, the judge did not find the use of international reference rates such as LIBOR and EURIBOR to be relevant. It was likewise irrelevant that Santander provided a UK address for service. One of the interesting aspects of the judgment in this regard is that it arrives at a different conclusion from that reached in a judgment we considered in the last edition of this update, Dexia Crediop v. Comune di Prato. In that case, the judge held that mandatory rules of Italian law applied, and that neither the use of ISDA documentation nor the international hedging of the relevant swaps were elements connecting the transaction with a jurisdiction other than Italy. The Companies said this approach ought to be followed. The judge in the present case said little specifically about this, other than distinguishing a particular factual issue, and noting that he respectfully disagreed to some extent with the judgment in Dexia. The court also considered (because the point had been fully argued) the circumstances in which a rule could be said to be mandatory. In that regard, the judge held that it was sufficient to take a rule out of article 3(3), if the rule could be disapplied by agreement between the parties. The rule did not need to be capable of being ousted altogether. It seems to us that the court's approach to article 3(3) in this case is significant. In particular, for banks seeking to do business in a number of jurisdictions on the basis of standard documentation, the decision in this case must be preferable to that in Dexia, which requires banks to take into account some potentially complex local factors when pricing and entering into agreements. In that case, mandatory rules were said to include the obligation to specify a coolingoff period during which the relevant transaction could be terminated at no cost to the counterparty. The approach in the present case allows for more consistency. Until one or other judgment is appealed, however, it will be impossible to know which approach is correct. Rights of Class X noteholder in CMBS transaction Hayfin Opal Luxco 3 Sarl and another v. Windermere VII CMBS PLC and others  EWHC 782 (Ch) This judgment considered the proper calculation of interest due to the claimants (Hayfin), who were the holders of class X notes issued by the defendant (Windermere), as part of a CMBS transaction. The proceeds of the notes were used to purchase various loans made in relation to (and secured on) commercial property, and the income generated by such property was intended to service the payments due under the terms of the notes. In common with class X notes issued as part of other CMBS transactions, the class X notes here did not involve a right to payment of a specific rate of interest, but to payment of any excess interest in the hands of the issuer (excess spread) arising from the underlying commercial properties, after payment of the interest due on the other classes of note, and certain other costs. The class X notes were originally retained by the Lehman dentons.com 13 Brothers entity that arranged the CMBS transaction, and then sold. The judge noted commentary on the traditional opacity as to the calculation and use of excess spreads. Hayfin's first two arguments related to the proper construction of provisions in the intercreditor agreement relating to one of the loans purchased with the proceeds of the notes. The relevance of this issue was that the payment of excess interest to the class X noteholder was to be calculated by reference to expected available interest (in essence, the amount of interest that should be available by applying the provisions of the relevant agreements). Hayfin asserted that one of these provisions ought to be construed so as to correct what Hayfin claimed was a clear mistake in the drafting. The way in which Hayfin contended that the relevant provision ought to be interpreted involved (in effect) the addition of a substantial amount of further text to that already contained in the agreement. The judge considered the authorities and concluded that, in this case, it was impossible to conclude that the parties would, had they discussed it, have agreed the alternative wording proposed by Hayfin. In this context, the judgment is interesting to consider in conjunction with that in the LSREF III Wight judgment referred to above. The second category of argument articulated by Hayfin related to the capitalisation of unpaid interest due from another borrower. Such capitalisation had the effect of removing the unpaid interest from the calculation of expected available interest, and so reducing the amount to be paid to Hayfin. The judge held that this was the correct approach to the clause – capitalisation of unpaid interest was plainly a possibility under the loan agreement, and the class X noteholder must therefore have understood that it could be utilised as a tool. As a final point, there was a dispute as to what interest rate should apply in the event that the judge found there to have been historic underpayments of the amounts due to the class X noteholder. Hayfin asserted that any underpayments should attract interest at the contractual class X rate, whereas the issuer asserted that any interest should only be payable pursuant to statute. The judge did not find that there had been any underpayments, but reached a conclusion on the point nonetheless. He agreed that, based on the wording of the relevant clause, interest was only payable to the class X noteholder on determination of the relevant amount. If that determination was incorrect, the clause did not provide that the class X noteholder was entitled to interest from that point on the correct sum. Instead, the issuer could be ordered to compensate any shortfall, with interest claimed pursuant to statute. The judge also noted that he agreed with the point underlying two further submissions by the issuer, that it would be surprising for shortfalls in payment to be compensated at the class X rate, which was not a conventional rate of interest, and rose at points to levels around 6,000 per cent. He pointed out, however, that the issuer's assertion was not reflected in the contractual drafting, and that there was no indication in that drafting as to what rate the parties would have agreed, even if use of the class X rate was commercially absurd. He also considered the issuer's argument that use of the class X rate would effectively be a penalty, in light of the Supreme Court's recent decision in Cavendish Square Holdings v. Makdessi. The judgment on this point is somewhat unusual, in that it is obiter, and the judge was not convinced that the penalties doctrine applied at all. He found that, if it did, the amount of interest payable using the class X rate would most likely be exorbitant, and therefore a penalty. These conclusions are tentative to say the least, but they represent an early analysis of what has been a much commented-upon Supreme Court decision. In addition, the draftsmen of future CMBS documentation may wish to be alive to the need to draft class X rights more tightly. Credit Suisse Asset Management LLC v. Titan Europe 2006-1 plc and others  EWHC 969 (Ch) This judgment followed shortly after the one in Hayfin above, and also considered the rights of the holders of class X notes in four securitisation structures, in respect of which the documentation was identical. In this case, there had been significant defaults in the loans underlying the CMBS structure, such that some €17 million in accrued default interest remained unpaid. All classes of notes issued by the four issuers had maturity dates of 25 January 2016. The Credit Suisse entity that was the claimant in this case was the investment manager. The holder of the class X notes was, however, another Credit Suisse entity (the Originator), which had been the originator of the loans and had assigned them to the issuer as part of the securitisation process. The judge recorded that the class X notes were intended to provide the Originator with a "fee". The principal amount of the class X notes (much of which had been repaid by the time of the judgment) was paid into a segregated account, and secured by a charge on that account. Class X interest was calculated in accordance with a series of definitions in the terms of the notes but, in practice, varied between 9,024 per cent and 114,508 per cent. According to the priority order for payments, payment of class X interest ranked equally with class A, both ahead of class A principal and the principal and interest due in relation to other classes. 14 dentons.com The first issue considered by the judge was whether the calculation of the class X interest rate ought to take account of any additional interest due under the loans (which Credit Suisse said it should). The judge disagreed, holding that the words "per annum interest rate" were not intended to include default interest. He reached this view on the basis of a number of points of construction of the relevant documents, but also by considering the interpretation that was most likely to carry the commercial outcome intended by the parties. In this context, the judge accepted that it was not intended for the issuer to be left with any proceeds of the structure, and noted Credit Suisse's argument that its interpretation had the effect of "mopping up" any such surplus. However, the judge said that Credit Suisse's interpretation meant that the worse the loans performed, the higher the proportion of loan income that would be paid to the Originator, which (he held) was counter-intuitive, and there was no indication that this was what was intended. The judge also questioned whether the parties could have intended the complex calculation of class X interest that would follow a finding in Credit Suisse's favour. He also noted that the calculation of class X interest (unlike the other classes) did not take into account periodic expenses associated with the recovery of default payments, and that it would be commercially extraordinary were the Originator to benefit from additional payments referable to defaults under the loans, when it did not contribute to the costs of making good those defaults. The judge accepted the argument made by certain of the defendants that the class X notes should be redeemed immediately on maturity. Credit Suisse argued against this, again on the basis that unless the class X notes remained outstanding, there was no mechanism to absorb any surplus in the hands of the issuer. The judge held that redemption was mandatory under the terms of the notes, and also relied on his findings in relation to the issue summarised above. He held that it could not have been intended that the class X notes should exist indefinitely, "creaming off payments from the borrowers", given that the Originator had never risked any capital for the purchase of the notes, and the remaining €5,000 in principal outstanding was available to be paid. Finally, the judge agreed that interest should accrue on the class X notes after the maturity date at a rate of 8 per cent (being the judgment rate), rather than at the class X rate. This judgment considers the construction of specific contractual provisions, but is interesting for the judge's approach to the question of the commercial intention behind the relevant agreements, particularly in the specific class X context. dentons.com 15 Regulatory decisions For further information or analysis in relation to any of the issues raised below, please contact us directly. Senior managers regime, certification regime and conduct rules Crucially, this period has seen the start of implementation of the new regime for individual accountability, although it will take a further year for it to become fully effective. We have set out below the further rule changes that have taken place over the last six months, together with related publications. Consultation on changes required as a result of removal of notification requirements FCA CP16/1, PRA CP1/16 and SS28/15, January 2016 In these consultation papers, the FCA and the PRA consulted on the rule changes that would be necessary in light of HM Treasury's announcement last autumn that it would not implement a provision of FSMA that was to require firms to notify the appropriate regulator of all known or suspected breaches of the conduct rules. The PRA also updated its Supervisory Statement 28/15. Overall responsibility for the legal function under the SMR FCA's supervisory statement, 27 January 2016 In this statement, the FCA acknowledged that there was significant uncertainty as to whether the individual with overall responsibility for the legal function within a firm needed to be approved under the SMR. The FCA stated that it would consult on this issue in due course, but that firms need not depart in the interim from decisions already reached on this point in good faith. Extension to certification regime and FCA's interim rules on regulatory references FCA PS16/3, February 2016 The FCA announced the outcome of its consultation in relation to extension of the certification regime. The key changes are to extend the territorial scope of the regime (for UK firms) so that there is no territorial limitation as regards the application of certification requirements to those classified as material risk takers. The FCA has also introduced two new certifications, referred to as the "client-dealing function" and the "algorithmic trading function". The FCA also announced that it would not be implementing its full set of new rules on regulatory references at the same time as implementation of the SMR. Instead, its existing rules in relation to requesting references for approved persons would continue to apply until new rules were finalised. PRA's interim reference rules and rules on insurers and Swiss insurers PRA PS5/16 and FCA PS16/5, February 2016 Much of this publication related to rules on insurers, but the PRA also announced that it would delay adopting a full set of new rules on regulatory references. Instead, it too has opted to continue its current requirements until new rules are finalised. The PRA has also retained the requirement it originally imposed as part of the SMR that firms seek five years' worth of references in relation to applicants to perform senior management functions. PRA finalises Supervisory Statement in relation to corporate governance and board responsibilities PRA PS13/16 and Supervisory Statement 5/16, March 2016 The PRA has published the final version of its Supervisory Statement in relation to corporate governance and board responsibilities, on which it consulted in May 2015. The Supervisory Statement applies to all PRA-regulated firms, not only those affected by the SMR. It does not provide a complete code as to the dentons.com 17 issues it covers, but it does contain a number of points of useful guidance as to the PRA's expectations. Such guidance includes issues such as board composition, the responsibilities and role of nonexecutive directors, appropriate management information, strategy setting, and specific considerations in relation to the boards of significant subsidiaries (which has been recast somewhat from the version on which the PRA consulted). Developments in relation to enforcement Proposed implementation of the Enforcement Review and the Green Report FCA CP16/10 and PRA CP14/16 The FCA and the PRA have published a joint consultation paper on implementing the reforms to enforcement processes recommended in a review by HM Treasury in December 2014, and the Green Report into the FSA's enforcement action following the collapse of HBOS. The Consultation Paper does not contain the PRA's full proposals in relation to enforcement, and its response in relation to settlement and contested decisionmaking in particular is still awaited. Even in terms of the FCA's approach, the contents of the Consultation Paper are not universally clear or comprehensive. It is apparent in places that the FCA has shied away (no doubt understandably in many instances) from tying its own hands too much in terms of the conduct of enforcement cases. The Consultation Paper looks at referral decision-making, cooperation between the regulators, and subjects' understanding and representations in joint enforcement investigations. In relation to joint investigations, the FCA and the PRA say that they will issue further guidance as to their conduct, but do not do so at present. Perhaps the most significant aspects of the Consultation Paper are the chapters (specific to the FCA) dealing with settlement and contested decision-making. In relation to the latter, there is to be an expedited process for referrals to the Upper Tribunal, effectively bypassing the Regulatory Decisions Committee (RDC). In relation to settlement, it is proposed that the discounts for early settlement at stages two and three should be scrapped, and there is a question within the consultation as to whether the discount system adequately incentivises early admissions. Further, there is a proposal for the subjects of investigations to be able to agree the FCA's conclusion on facts and (effectively) liability, but refer to the RDC on the limited question of the consequences that should follow. The FCA has also raised the possibility of other types of limited settlement agreement, removing the current "all or nothing" approach, but has not advanced any decided view of its own as to whether this would be desirable. Changes to DEPP and the Enforcement Guide (EG) for implementation of the Market Abuse Regulation (2014/596/EU) (MAR) Consultation Paper 16/13 This consultation follows the FCA's consultation (in November 2015) in relation to other changes to be made to its Handbook in order to implement MAR. The changes proposed in relation to DEPP and EG include (to reflect statutory changes) the creation of a new power to prohibit an individual from carrying on management functions or dealing in financial instruments on his or her own account. The FCA will also be required to produce a warning notice and a decision notice in relation to any decision to refuse an application to vary or revoke a prohibition, but HM Treasury is (it appears) reconsidering this requirement. The FCA's power to make and enforce the disclosure rules is to be removed, and replaced with a power to enforce breaches of MAR (and related legislation). It will, however, continue to apply its existing policy in relation to sanctions. Similarly, the FCA will have the power to impose suspensions, restrictions, conditions or limitations on authorised persons for contravention of MAR, and on employees of authorised persons and approved persons for being knowingly concerned in contraventions, but the FCA will continue to apply its current policy when doing so. The FCA will also apply the same policy to its power to make certain prohibitions in relation to individuals. There is further guidance in relation to such prohibitions, and the FCA has confirmed (unsurprisingly) that it does not expect to apply its settlement discount regime to permanent prohibitions it decides to impose. Final notices PRA imposes fines in relation to Co-op Bank Barry Tootell and Keith Alderson, 14 January 2016 The PRA fined Mr Tootell £173,802 and Mr Alderson £88,890 for breaches of Statement of Principle 6 for Approved Persons (requiring them to act with due skill, care and diligence in managing the business of the firm for which they are responsible in their controlled functions), and being knowingly concerned in the breach by Co-op Bank of Principle 3 (requiring a firm to take reasonable care to organise and control its affairs responsibly and effectively with adequate risk management systems). Both individuals were also prohibited from carrying on any significant influence function in relation to a regulated activity carried on by a PRA-regulated firm, on the grounds of lack of fitness and propriety. Mr Tootell performed director and CEO controlled functions at the firm (having previously been CFO). Mr Alderson was responsible for management of the firm's 18 dentons.com corporate banking division, and performed director and significant influence controlled functions. The final notices refer to Co-op Bank's acquisition of Britannia, and the difficulties caused by impairments to Britannia's commercial real estate portfolio. It also refers to Co-op Bank's breaches of Principle 3, as a result of its failures to have in place an adequate control framework or risk management framework policies, and the poor quality of available management information. The final notices identify specific failures on the part of Mr Tootell and Mr Alderson. These include (on Mr Tootell's part): a failure to ensure that the bank's second line of defence (specifically risk) was providing appropriate independent challenge, rather than being overly-involved in first line business matters; participating in a culture that prioritised the short-term financial position at the expense of the longer-term capital position of the bank, and making decisions that were not in line with the bank's (stated) cautious risk appetite; failure to oversee the exercise of adopting a clear and effective strategy in relation to an identified significant risk relating to the corporate loan book; and not briefing the bank's board adequately. In Mr Alderson's case, the PRA identified: his failure to take reasonable steps to ensure that Co-op Bank took adequate steps to assess the risks arising from the Britannia corporate loan book; the fact that he did not escalate risks or implement strategy appropriately; failure to ensure that his division exercised its role as first line of defence properly; participation in a culture that encouraged overreliance on previous impairment forecasts; and failure to provide adequate management information. Enforcement action in relation to solicitors' professional indemnity insurance Shay Reches, 1 February 2016 The FCA and the PRA issued final notices recording the enforcement action they had taken in relation to failures in entities providing solicitors' professional indemnity insurance (PII), in respect of which cover failed in the three consecutive years from 2011 to 2014. The failures identified led to the inability of various of the insurance companies involved to pay claims, and the FSCS needing to pay a total of some £9.1 million by July 2015 in respect of two companies in default. Of the various final notices produced, the one that is perhaps most central to these events is that issued by the FCA to Shay Reches, recording a fine imposed on him of £1,050,000, plus any unpaid portion of a sum of £13,130,000 that Mr Reches had agreed to pay to various of the companies involved. Mr Reches was also prohibited from performing any function in relation to any regulated activities carried on by an authorised or exempt person, or exempt professional firm. The FCA found that he had shown a lack of integrity, and was not a fit and proper person. In addition, the FCA's enforcement action was based on section 63A of FSMA, which allows it to impose a penalty of such amount as it considers appropriate on a person who has performed a controlled function without approval, and who knew (or could reasonably be expected to have known) that he or she was doing so. In this case, dentons.com 19 the FCA held that Mr Reches, who was never an approved person, had carried out a number of functions for the relevant companies, including performing the director controlled function, and influencing and directing the companies and their management. In particular, Mr Reches had been responsible for directing the payment of insurance premiums by solicitors to companies he controlled, rather than to the insurers and reinsurers who would ultimately be liable to meet any claims under the insurance. This led to such insurers being unable to discharge those liabilities. It is interesting to note that, in its penalty analysis, the FCA states that the entire penalty imposed upon Mr Reches was predicated on Step 4 (deterrence), Steps 1 to 3 having produced a nil figure. Both the PRA and the FCA took action against other firms and individuals in relation to these events. FCA imposes fine on an individual in connection with the London Whale affair Achilles Macris, 9 February 2016 The decision of the Supreme Court as to whether the FCA identified Mr Macris in a final notice to JP Morgan dated 18 September 2013 (the JPM final notice) is still awaited. In the meantime, however, the FCA has published its final notice to Mr Macris, fining him some £792,900 for breach of Statement of Principle 4 for Approved Persons. Statement of Principle 4 requires that an approved person deal with the FCA in an open and cooperative way, and disclose appropriately any information of which the FCA would reasonably expect notice. The losses that JP Morgan incurred in relation to the London Whale trades related to trading in a particular portfolio, carried out by a Londonbased team. Mr Macris did not have day-to-day oversight of that portfolio, but he was responsible for the activities of the relevant division outside the US. He was approved to perform the CF29 (significant management) and CF30 (customer) functions. The final notice contains an account of Mr Macris' role as events in relation to the London Whale trades unfolded, but the point of focus for the FCA was on Mr Macris' actions once concern at JP Morgan about the portfolio escalated. The criticism made of Mr Macris was that, at each of a meeting and a call with the FCA during the crucial period in 2012, he provided insufficient disclosure to the FCA of the extent of the difficulties that the relevant trading portfolio was experiencing. The final notice sets out a list of matters known to Mr Macris that he did not relate to the FCA. More generally, the final notice states that had he given a greater indication that there was cause for concern, the FCA could have followed up on it. The FCA also found that leadership from Mr Macris in this regard would have encouraged more junior employees to take an open approach to discussions with the FCA. The implication is that Mr Macris delivered the message that the firm had agreed should be delivered publicly in relation to the trades, without regard to the different considerations that apply to dealing with a regulator. The final notice does not find, as the JPM final notice did, that the FCA was deliberately misled by the actions of Mr Macris (albeit that Mr Macris was not named in the JPM final notice). Instead, the failings identified are that Mr Macris was not open and cooperative, and failed to meet the standard expected of an approved person. The section of the final notice dealing with sanction states in terms that his breach was negligent. It therefore seems that the FCA consciously abandoned the allegation that Mr Macris was deliberately misleading. This inference is supported by the settlement discount applied. Ordinarily, settling at stage 2 (as Mr Macris did) would attract a 20 per cent discount. The FCA may, however, accept in an exceptional case that there has been a substantial change in the nature or seriousness of the action taken, and that settlement at an earlier stage would have been possible had the action commenced on a different footing. On that basis, the FCA applied a 30 per cent discount to the fine it would otherwise have imposed. The final notice does not specify the "exceptional circumstances" of this case, but it seems likely that they may include the fact that there appears originally to have been an allegation of deliberate concealment by Mr Macris, which he could reasonably have been expected to take seriously. Fine and restriction for failures relating to market abuse WH Ireland, 22 February 2016 WH Ireland (WHI) was fined £1,200,000 and restricted for a period of 72 days from taking new clients into its Corporate Broking Division. These penalties were imposed in relation to failings identified over a six-month period at the start of 2013. The FCA considered such failings to be in breach of various specific rules in SYSC, and Principle 3 (requiring a firm to take reasonable care to organise and control its affairs responsibly and effectively, with adequate risk management systems). The FCA found that WHI had failed to take reasonable care to organise and control effective systems and controls to protect against the risk of market abuse occurring during the relevant period. There is no indication from the final notice that any market abuse actually took place. The failings identified by the FCA included weak controls to detect and mitigate against the risk of market abuse arising from the way in which inside information was handled, personal account dealing and conflicts of interest. The FCA said that the risks inherent within WHI's business made it particularly 20 dentons.com vulnerable to potential market abuse. Such risks involved the dual existence of "private side" lines of business through which inside information was acquired, and "public side" business such as market making, stockbroking and investment research. The FCA identified three particular types of trading which should have attracted different compliance treatment: market making; non-employee dealing (including issues relating to individuals crossing Chinese walls in order to access inside information); and employees trading on their own account. The FCA also identified deficient compliance oversight, and was critical of the fact that WHI's compliance function was based solely in London and Manchester, while the business had offices in many more locations. There were also failures in governance, including (as the FCA noted on a number of occasions) in relation to the preparation of appropriate management information. Market abuse was not a standing item at meetings of the Compliance and Risk Committee, and there was "little documented discussion of market abuse matters" at board meetings. The FCA noted that while various potentially serious issues were raised with the board in relation to market abuse, there was no evidence of a plan being put in place as a result. WHI's training of its staff (both in relation to market abuse, and of its compliance staff generally), and the recording of it, was also found to be inadequate. Failure to apply capital regime QIB (UK) Plc, 8 April 2016 The PRA has fined QIB (UK) Plc £1,384,950 for breaches of Principle 2 (requiring a firm to conduct its business with due skill, care and diligence), and Principle 3 (requiring a firm to take reasonable care to organise and control its affairs responsibly and effectively, with adequate risk management systems). The relevant period for these purposes is 30 June 2011 to 21 December 2012, and it is not clear from the final notice why the matter has only now been concluded. The firm failed, in summary, to identify that it needed to comply with what is defined in the final notice as the "overall Pillar 2 rule" (at GENPRU 1.2.30R of the FSA's Handbook at the relevant time), and therefore failed to conduct any of the necessary capital assessments it involved. In addition, the firm failed to identify and report large exposures to a group of connected clients. That group defaulted on its obligations, requiring the firm's parent to inject a substantial amount of capital to deal with the resulting undercapitalisation. Ring-fencing Regulators publish guidance on approach to ring-fencing transfer schemes PRA's PS10/16 and Statement of Policy, and FCA's FG16/1 The PRA and the FCA have published documents confirming their approach to ring-fencing transfer schemes. Significantly, this includes commentary on the role of the skilled person who will prepare a report in relation to the scheme, and matters relating to the skilled person's dentons.com 21 appointment. It is likely that there will be areas that are challenging both for banks and the skilled person, in light of the requirements of FSMA and the regulators' interpretation of them. In particular, the scheme report will need to cover a wide range of issues, and the interests of a number of different parties. Both the PRA and the FCA also consider the role of the regulators (including how they will work together), and matters relating to process. The FCA's guidance also deals with notification requirements. It is likely that the process of obtaining approval for individual ring-fencing transfer schemes from the court will be complex and timeconsuming, not least given the broad spectrum of people who will be entitled to make representations as part of that process. Disclosures to consumers by nonring-fenced bodies FCA PS16/9 These rules made by the FCA apply to non-ring-fenced bodies (NFRBs), i.e. non-ring-fenced deposit takers that are within the same group as a ring-fenced deposit taker (subject to certain other criteria). The FCA has confirmed that the disclosure requirements will not be applied to deposit takers to whom the ringfencing regime does not apply at all. It has also confirmed, in general terms, that NFRBs will have to communicate some contextual material, in terms of the purpose of ring-fencing, and the risks to which a depositor in an NFRB might be exposed, including an explanation of any activities carried on by the NFRB that would not be permitted were it to be a ring-fenced body. There has, however, been no clarification by the FCA as to the precise constituency of consumers to whom the relevant disclosure must be made. The FCA has noted queries by respondents as to the scope of NFRBs' obligations in this regard, and has stated that this is an issue for the Treasury. The Policy Statement also confirms the FCA's approach in relation to the timing and form of disclosures. The relevant rule changes are largely contained in BCOBS 4.3. Benchmarks Fair, reasonable and non-discriminatory access to regulated benchmarks Policy Statement 16/4 The FCA has confirmed its final rules (contained in MAR 8.3) in relation to fair, reasonable and non-discriminatory (FRAND) access to regulated benchmarks. The new rules apply only to regulated benchmarks, and protect users of them who are central counterparties, regulated markets or multilateral trading facilities. The FCA has not deviated to any great extent from the proposals on which it consulted. Such proposals arose out of feedback it received following its inclusion of an additional seven regulated benchmarks, as recommended by the Fair and Effective Markets Review. Such feedback indicated concerns on the part of benchmark users that benchmark administrators had an unconstrained ability to set prices for access to benchmarks. The FCA has now created rules designed to 22 dentons.com ensure FRAND access to licences to use the relevant benchmark, and relevant information in relation to the benchmark. The FCA has made it clear that while price is one element of FRAND access, it is not the only one. The FCA has specified, however, that access must be granted at a reasonable commercial price, and there is some guidance for firms in the final rules (and the Policy Statement) on what this, and other FRAND considerations, involves. The new rules will affect new and existing pricing and licensing arrangements, although it will not affect the terms of any arrangement (including price) on the basis of which services have already been provided. ESMA produces Consultation Paper on Benchmarks Regulation ESMA Discussion Paper 15 February 2016 and ESMA Consultation Paper 27 May 2016 The European Parliament is to vote on a compromise text for the Benchmarks Regulation, originally proposed in September 2013. ESMA provided a Discussion Paper on 15 February 2016, following which a list of responses to the Discussion Paper was also published. On 27 May 2016 ESMA then published its Consultation Paper on this topic. The deadline for comments on the Consultation Paper was 30 June 2016. The Consultation Paper covers 5 key areas in relation to which the European Commission has requested advice, and reflects the complexity of the issues to be determined, not least the difficulties in agreeing the relevant definition of "benchmark" and in identifying when an index is made available to the public (as discussed in Chapter 2 of the Consultation Paper). There are clear overlaps between these definitions in the Benchmarks Regulation and the IOSCO definition currently relied on by the FCA, for example, but they are not identically worded. Interestingly, among the topics covered in the Discussion Paper but not addressed in the Consultation Paper is the creation of codes of conduct by the administrators of benchmarks. There are issues as to the extent to which individual codes can and should be tailored to specific benchmarks. ESMA also notes, in its Discussion Paper, that a balance must be struck between the creation of a sufficiently detailed code, and deterring possible contributors with overly demanding requirements. There are certain matters set out in the Discussion Paper as required areas for codes of conduct to cover, including contributor systems and controls. Many such matters are, unsurprisingly, resonant of some of the failures in this area that contributed to benchmark manipulation. However, whilst these points are not covered in the Consultation Paper, it may be worth noting that ESMA intends to publish a second consultation paper regarding the Benchmarks Regulation in the second half of 2016. FCA publishes Business Plan for 2016-2017 Announcement of key priorities FCA's Business Plan The FCA has produced its Business Plan for the coming year, setting out its priorities. The Business Plan identifies culture and conflicts of interest as being among the key factors driving risk within firms operating in the market. The FCA lists its priorities as: pensions; financial crime and AML; wholesale financial markets; advice; innovation and technology; culture and governance; and treatment of existing customers. Many of these priorities represent a continuation of current work, some of which is referred to elsewhere in this Update. In relation to financial crime and AML, there are already signs of pressure on the FCA in terms of its response to the Panama papers, and whether it should be doing more to prevent, rather than simply punish, poor practice. The FCA does not appear, this year, to have published a full list of the material it expects to produce. There is an appendix providing an update on current market-based activity, but it does not appear to include all the FCA's likely work over the coming year (such as the further publications expected in relation to the SMR). Financial Advice Market Review (FAMR) Final report published Final report, March 2016 The final report of FAMR provoked considerable interest. Its introduction notes that consumers are now required to take an ever-growing number of decisions in relation to their finances, that they are generally distrustful of the sector, and that there are barriers to the provision of affordable and accessible financial advice. FAMR's recommendations are divided among three broad headings: 1. Affordability – the report notes that good quality advice is available to those with substantial assets. It also acknowledges, however, the high cost of providing face-to-face advice. It also notes that not all consumers want or need a full personal recommendation for every investment decision, and that firms are not confident of the boundary between provision of regulated advice and more general forms of guidance. The report recommends building on existing changes in order to give firms more confidence in providing "streamlined" advice, including by the use of technology. It may be worth noting that the FCA published Finalised Guidance 15/1 in January 2015 in order to clarify what amounted to regulated advice, and in relation to dentons.com 23 simplified and basic advice. The Call for Input from FAMR began in October 2015, so it would appear that simply providing guidance in the form of FG15/1 did not have the effect of increasing firms' confidence. The report makes nine recommendations in this context, one of which is the amendment of the definition of "regulated advice", so that it corresponds to the provision of a personal recommendation within the meaning of MiFID. 2. Accessibility – as background to its further nine recommendations in this area, the report pointed to low demand for advice, perceived to be for a number of reasons, including mistrust, and the perceived lack of benefit of paying a relatively larger amount for advice in relation to investing a smaller sum. FAMR suggests that the workplace might be the best forum in which to reach people not currently engaging with financial advisory services, and there is clearly some connection in this context between the recommendation (which involves working with employers) and the increasing need for people to take charge of their own pension arrangements in particular. 3. Liability and access to redress – the report accepts that there is a tension between the need to ensure appropriate consumer protection (particularly in light of the mistrust mentioned elsewhere in the report), and firms' hesitation in providing advice, in view of concerns about future liabilities. FAMR recommends reviewing the FSCS funding model in order to reduce the risks of variable and unpredictable costs to advisory firms, and exploring the availability of PII cover for smaller advisory firms. It rejects the idea of a longstop date for complaints to the FOS, but says that it has worked with the FOS in order to improve transparency for firms, and reduce uncertainty. The specific points of discussion with the FOS are included among FAMR's recommendations in this context. Capital markets Investment and Corporate Banking Market Study MS15/1.2 - interim report The FCA has published an interim report as part of its investment and corporate banking market study. The final report is expected to be published in the summer. In general terms, the FCA's findings in relation to primary market activities (equity capital markets, debt capital markets and mergers and acquisitions) are not dramatic. The areas in which it has positively recommended changes include: the removal of contractual provisions purporting to limit clients' choice of a firm to act for them (although a right to pitch seems likely to remain permissible); changes in the way in which firms are to present league table information to clients; timing of provision of IPO information; and allocation issues in relation to IPOs, which are to be followed up with specific firms. The FCA identified a number of other areas that had the potential to cause concern, including reciprocity, firms divesting themselves of smaller (less profitable) clients, and costs. It did not, however, recommend that any positive changes be made, and found that clients generally did not have problems with access. UK Debt Market Forum – practical measures to improve the effectiveness of UK listed primary debt markets FCA's report The FCA convened the UK Debt Market Forum in November 2015 in order to look into the functioning of the UK's primary listed debt markets. The FCA's report notes indications that the UK's share of the debt listing market may be declining. Part of the focus of the report is on the operation of the UKLA itself, and the report indicates that improvements will be made in order to ensure a prompt, consistent response from the UKLA. The FCA will extend its current Wholesale Debt Approach to more debt documents, and indicates that it will substantially extend its current same-day review of supplementary debt disclosures to include more documents. The law firms with which the UKLA deals most often will be assigned a dedicated point of contact, and easier access to advice will also be established for other firms, as well as an early engagement team to discuss the UK listing process. These changes generally had an anticipated implementation date at the end of May 2016. It appears that there were also concerns that the UKLA interprets aspects of the Prospectus Rules differently to regulators in other EU member states, but only one concrete example of this was apparently found (on which the FCA will consult). There was also discussion as to whether other jurisdictions benefited from operating multilateral trading facilities (MTFs) that are not subject to the same disclosure requirements, and whether there would therefore be a benefit to the UK in having a major MTF platform. This is an issue that the FCA says it will consider in more detail. Other developments FCA's determination of an individual's fitness and propriety held to be incorrect Abi Fol Consulting Limited v. The Financial Conduct Authority  UKUT 49 (TCC) Abi Fol Consulting Limited (Abi Fol) applied to the FCA for permission to carry on a range of regulated activities. Its sole director and 24 dentons.com shareholder was Mr Abi Ladele. Mr Ladele was a former employee of HSBC. In 2010, Mr Ladele accessed HSBC's IT system in order to obtain the details of two of its customers. Evidence showed that the information he accessed was used in order to perpetrate frauds on both customers. Following an internal investigation (which the Upper Tribunal criticised in a number of respects), blame was cast on Mr Ladele. Mr Ladele was prosecuted for fraud by abuse of position but, for various reasons, the Crown Prosecution Service offered no evidence against him. Mr Ladele was acquitted of the charges against him in 2012. When Abi Fol came to make its application to the FCA, however, the FCA concluded on the balance of probabilities that Mr Ladele had been involved in the frauds. It therefore determined that it was not satisfied that Mr Ladele could be expected to act with probity and, on that basis, Abi Fol would not be a fit and proper person. Mr Ladele referred the FCA's decision to the Upper Tribunal. The Upper Tribunal approached the issue by looking at the consistency of Mr Ladele's evidence (both internal and when compared with other evidence), and at the inherent probabilities of the case. It concluded that there was: no suggestion of a credible motive for Mr Ladele to have participated in the frauds; no evidence of either a connection with the fraudsters or the receipt of a direct benefit from the fraud; and nothing unsatisfactory in Mr Ladele's evidence. On that basis, the Upper Tribunal found that Mr Ladele was a person of honesty and integrity who had been subject to an unjustified accusation. It remitted Abi Fol's application to the FCA for reconsideration in light of the Upper Tribunal's findings. Whether interim permission to carry on consumer credit activities ceases automatically when FCA issues decision notice refusing permission Firm A v. The Financial Conduct Authority  UKUT 18 (TCC) This judgment concerns an aspect of the transition of regulation of consumer credit activities to the FCA. As part of that transition, amendments were made to the Regulated Activities Order 2001. Consumer credit firms were given interim permission to carry on their regulated activities, but they had to make an application for permission to the FCA within a specified timeframe. The applicant in this case, which was a firm undertaking debt-management activities, applied to the FCA for permission and received a decision notice stating that permission would be refused. The wording of the relevant statutory instrument suggested (and the FCA took the view) that, once a decision notice to this effect was provided, the interim permission automatically ceased to have effect. The firm challenged this, on the basis that its ability to carry on business would then cease pending the outcome of its reference to the Upper Tribunal, which did not accord with the practice where decision notices were issued by the FCA in relation to other matters. The court held that the firm's analysis of the nature and function of a decision notice was inaccurate. While the outcome was harsh, in that it was at odds with other areas of financial services law, it was clearly the intention in the statutory instrument that interim permissions would cease to have effect once the decision notice was issued. This could not be described as an "action" by the FCA, it was an effect that arose by the operation of law. The judge agreed that there was dentons.com 25 an effective remedy elsewhere in the regulation in order to hold the ring pending the outcome of any reference to the Upper Tribunal, but that such remedy was not obvious to any but experienced practitioners. On that basis, he recommended that the FCA draw the relevant provisions specifically to the firms' attention where it refused an application for permission. The judgment was initially handed down in anonymised form, but it became clear sometime later that the applicant firm was PDHL Limited. The FCA announced on 10 March 2016 that it was contacting 16,000 customers of the firm to inform them that the firm could no longer carry on debt management activities. Assessing suitability: research and due diligence of products and services FCA TR16/1, February 2016 The FCA conducted a thematic review of the research and due diligence processes carried out by advisory firms recommending products and services to clients. In general terms, the FCA found that firms were trying to do a good job, although there was some room for improvement. The FCA's review considered firms that research the market, rather than those which are vertically integrated such that the range of products they recommend are determined by their group structure. The FCA noted that a culture of challenge was a key driver in this area, and that firms that did not challenge adequately their own bias, or conflicts of interest, were not at the better end of the range of firms assessed. The FCA also emphasised the need for good systems and controls, and for appropriate structure to ensure that clear criteria were used in order to assess suitability. Following the review, three firms were required to provide attestations as to the work they undertook, and one was required to undertake a past business review. FCA and PRA announcement on compliance with EBA's remuneration guidelines FCA announcement and PRA's announcement 29 February 2016 The FCA and the PRA have announced that they will implement all aspects of the European Banking Authority's (EBA's) Guidelines on Sound Remuneration Policies except one. That exception, however, represents a substantial divergence of approach between the EBA and the UK regulators. The PRA and the FCA have stated that the ability of national authorities to take a proportionate approach to implementation of the Capital Requirements Directive (under article 92(2)) means, in their view, that they can decide not to apply a requirement to a particular type of firm at all. The FCA and the PRA also cite concerns about increases in fixed pay since the introduction of bonus caps. On that basis, the regulators say that they will not extend the bonus cap (which continues to apply to large and systemically important firms) to all CRD firms. Identification of individuals in final notices: Ashton and Vogt Ashton v. Financial Conduct Authority  UKUT 5 (TCC) and Vogt v. Financial Conduct Authority  UKUT 103 (TCC) There has been considerable focus on the issue of whether the FCA has, historically, identified individual employees in notices addressed to their firms, including by referring to them as, for example, "Trader A" or "Submitter B". The relevance of this is that where the FCA prejudicially identifies an individual in a warning notice not addressed to him or her, the individual has the right (in essence) to see what the FCA proposes to say and make representations to it. The same consideration applies to individuals prejudicially identified in decision notices, save that their entitlement is to a copy of the notice, and to refer any failure in this regard, as well as the content of the notice itself, to the Upper Tribunal. Decisions of the Upper Tribunal in this regard increased in number after the decision of the Court of Appeal in the Macris case (referred to above, and summarised in the January - May 2015 edition of this update) indicated that the FCA's approach to the question of identification was incorrect. Since then, a number of bankers have successfully argued that the FCA identified them in notices addressed to the firms for which they worked. Not all, however, have been successful, and the last six months have seen two failures, in the form of Christopher Ashton (formerly of Barclays) and Joerg Vogt (formerly of Deutsche Bank). Mr Ashton claimed he had been identified in two notices relating to FX manipulation, to Barclays and to UBS. The UBS final notice quoted specific exchanges between traders at UBS and their counterparts at other banks, including Barclays. While the exchanges were not attributed to a specific individual at Barclays (referred to as Firm A), Mr Ashton said that information in the public domain identified them as being from him. The Barclays notice also attributed to Barclays specific communications that were, in fact, sent from Mr Ashton. The Upper Tribunal held (unsurprisingly) that the decision to quote from specific communications meant that the notices identified an individual (rather than the firm corporately) in connection with the criticisms made. It also considered, however, the press reports available at the relevant time 26 dentons.com and concluded that taking the final notices in conjunction with them, Mr Ashton was not identified, as the relevant reader would have had to make a number of assumptions about the specific group of individuals as between whom particular exchanges were sent. Mr Vogt alleged that he was identified in a notice relating to LIBOR manipulation, addressed to Deutsche Bank. The drafting of the notice, and the way in which it used defined terms, was considered in a successful argument before the Upper Tribunal that the notice identified Christian Bittar as "Trader B". Mr Vogt alleged that the notice contained extracts from exchanges attributed to "Submitter C" which were in fact drawn from communications between him and Mr Bittar, and that he was identifiable to a relevant reader of the notice, including by reference to materials in the public domain at the time of its publication. The Upper Tribunal made various criticisms in relation to the way in which both Mr Ashton and Mr Vogt had presented their evidence, including the lack of a witness statement from either man. In the Vogt case, the Upper Tribunal also (essentially) found that the material in the public domain about Mr Vogt was too diffuse for a relevant reader to identify him from the notice. Such reader would have had to read the notice in conjunction with equivalent material published in the US in relation to Deutsche Bank, assume that the same submitter was referred to, and then locate and review a judgment in employment proceedings in Frankfurt some months before in order to identify Mr Vogt. The Upper Tribunal did not accept that the relevant reader would do this. Mr Vogt is seeking permission to appeal against that decision and his application in that regard has been stayed pending the Supreme Court's judgment in the Macris case. These judgments show that what was starting to appear as something of a free-for-all has its limits, and it may be that the fact these individuals have now quite effectively identified themselves will act as a deterrent to others making similar arguments. It has also recently been announced that Andrew Green QC will be leading a team preparing a report to the Treasury Select Committee in relation to the issue of Maxwellisation, and it will be interesting to see whether and how his report deals with the statutory provisions relevant to the FCA's obligations in this regard. dentons.com 27 Regulatory barriers to innovation in digital and mobile solutions FS16/2 This Feedback Statement represents another instalment in the FCA's "Project Innovate", dealing specifically with the responses it received in relation to barriers to the increasing use of technology to respond to customer expectations. It is clear from the Feedback Statement that uncertainties over future developments in regulation (and indeed technology) are contributing to firms' hesitation in this area, and the FCA has not been able to resolve these uncertainties completely, for obvious reasons. In particular, the FCA says that it will provide further specific feedback in relation to consumer communications, in response to a separate discussion paper published in June 2015. The FCA states that it intends to work with all relevant parties in relation to future developments in AML requirements, with a view to encouraging the use of digital CDD measures. Similarly, the FCA can do little more than keep firms' concerns to the forefront in implementing Payment Services Directive II. It will also publish finalised guidance on the use of cloud data storage in the summer, while advice issues that might hinder innovation are to be explored through the Financial Advice Market Review. No such thing as a free lunch Key findings of FCA's 2015 thematic review in relation to conflicts of interest and inducements, 18 April 2016 The FCA has not published a full report of its thematic review in relation to conflicts of interest and inducements at firms carrying out MiFID business, and those carrying on regulated activities in relation to a regulated product. Instead, it has published a page on its website summarising its key findings, with further coverage of these issues to come in the FCA's MiFID II consultation paper. The key findings are chiefly directed at corporate hospitality, with the FCA largely disapproving of events not designed to improve the quality of service to clients. Such events included sporting events, and social events such as dinners, even where such events follow training sessions for example. The FCA further stated that where advisory firms "facilitate" training or educational material supplied by product providers, such firms should not make a profit from doing so, but should only be paid their costs. There were also complaints about hospitality logs, and the adequacy of disclosures to clients. 28 dentons.com FCA succeeds in proving land investment to have been Collective Investment Scheme Asset Land Investment plc v. The Financial Conduct Authority  UKSC 17 Asset Land sold investors individual plots at six development sites, representing to them that it was responsible for seeking the rezoning of the sites and their sale to a developer. The FCA agreed with Asset Land that it would cease to make such representations and, in 2008, Asset Land's solicitors informed the FCA that Asset Land had offered existing investors a choice between repurchasing the plots sold, and exchanging them for allegedly "enhanced" plots, in respect of which the investors could apply for planning permission themselves. The FCA became concerned about the situation once more in 2011, obtained a worldwide freezing order against Asset Land and its principal, Mr Banner-Eve, in 2012, and obtained judgment in 2013. That judgment found Asset Land to have been operating a Collective Investment Scheme (CIS) without authorisation, in breach of FSMA. Restitutionary orders were made under section 382 of FSMA for a total of £20 million. The findings were upheld on appeal. Asset Land and Mr BannerEve appealed to the Supreme Court on the question of whether Asset Land was operating a CIS within the meaning of section 235 of FSMA. Section 235 provides (in summary) that a CIS means any arrangement in respect of property the purpose of which is to allow a person taking part to participate or share in income. The arrangements must be such that the participants do not have day-to-day control over the management of the property. In a speech by Lord Carnwath, the Supreme Court noted the evolution of land investment offerings in order to ensure that they were not treated as CIS. It noted that the FCA's position was that the wording of brochures, contracts and marketing material now simply ignored the reality that the intention behind the investments offered was for investors to benefit from the collectivised increase in value of the plots sold, to be brought about by the operator without any real involvement from the individual investors. It was accepted by Asset Land that it had made what could be termed "arrangements" for the purposes of section 235, but it did not accept that the court should place weight on investors' perception of those arrangements, only on (in effect) their contractual form, which contradicted what investors were given to understand in places. The Supreme Court found this approach artificial, holding that investors' common understanding of the arrangements could conform to the first instance judge's findings of fact as to what Asset Land intended the arrangements to be. The Supreme Court also agreed with the trial judge's conclusion that the relevant "property" for these purposes was each of the sites taken as a whole, not (as Asset Land submitted) the aggregate of the individual plots. Again, the Supreme Court held that this distinction was not one of substance. It was necessary to consider the mechanisms by which control over the property was exercised, and such mechanisms might not be contractual. The fact that individual participants had the right to make the final decision as to whether to participate in a sale did not mean that they had day-to-day control over its management in the meantime. It was necessary to look at the reality of the arrangements. Lord Sumption gave a separate speech, although largely agreeing with Lord Carnwath, and agreeing with his conclusion. Lord Sumption's speech is helpful to consider, in that it deals more directly with the difficult boundary between what is a CIS within the meaning of section 235 and what is not. One of the key points to take away from the Supreme Court's decision as a whole, however, is that it agreed that it was necessary to consider the substance of an alleged scheme, not only at the terms on which it was documented. FSCS – changes to the COMP sourcebook FCA Policy Statement 16/14 The FCA has set out changes that will be made to the elements of COMP that relate to the FSCS. It is worth bearing in mind that the FCA intends to consult on other matters relating to FSCS funding later in the year. The broad list of changes introduced pursuant to this Policy Statement is: • increase in the compensation limit for some types of noninvestment insurance mediation (pure protection, PII and some general insurance claims); • changes in the rules relating to eligibility of trustees of pension schemes; • perhaps most significantly, bringing claims against a successor firm in respect of the acts or omissions of a predecessor firm within the scope of the FSCS (although a claimant cannot claim against both the original and the successor firm in respect of the same loss); • introduction of some flexibility for the FSCS as to whether it follows a claimant's instruction to pay the claimant's compensation to a person other than the claimant; • allowing the FSCS to pay compensation for a shortfall in client assets to a firm that takes over the business of a failed firm; • rules relating to the assignment of claims electronically; • an express requirement that firms deal with the FSCS in an open, cooperative and timely way. dentons.com 29 About Dentons’ Financial Markets Disputes and Regulatory practice Our dedicated team, comprising lawyers exclusively devoted to banking and finance regulatory and disputes work, represents major financial sector clients in a wide variety of complex and often high-profile disputes and regulatory matters. We support a range of domestic and international clients, providing swift, concise and practical advice that secures the best possible outcomes. Recognised for our pragmatic and hands-on approach, we are increasingly engaged by long-standing banking clients of the Firm to support them on regulatory matters. We closely monitor regulatory developments and continue to enhance our practice to meet client needs and advise across national, regional and global platforms. Thanks to the following lawyers at Dentons who have contributed to this publication: Richard Caird Partner, London D +44 20 7246 7262 firstname.lastname@example.org Clare Stothard Partner, Watford D +44 1923 690033 email@example.com Steven Mills Partner, Watford D +44 1923 215036 firstname.lastname@example.org Alexandra Doucas Senior Associate, London D +44 20 7246 7030 email@example.com If you have any queries, or would like to receive regular technical updates or information on client training initiatives from this team, please contact any of the individuals listed above. For more information, visit dentons.com Felicity Ewing Partner, London D +44 20 7320 6066 firstname.lastname@example.org dentons.com 31 © 2016 Dentons. This publication is not designed to provide legal or other advice and you should not take, or refrain from taking, action based on its content. Attorney Advertising. Please see dentons.com for Legal Notices. 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