Whilst a number of cases in the first six months of 2017 dealt with issues of particular interest to litigators (e.g. LBI EHF v. Raiffeisen on default provisions and service by fax, BPE Solicitors v. Hughes-Holland on loss flowing from negligence), the recent case with perhaps the widest implications for lawyers and investigators is SFO v. ENRC. Like the RBS Rights Issue decision at the end of 2016, this takes a restrictive approach to privilege and is likely to encourage the SFO and FCA still further in following their approach of recent years of scrutinising and challenging privilege claims.
With regard to the obligations banks have to their customers, there is sometimes a tension between the approach of the courts – which tend to emphasise the contractual position – and that of regulators – which tend to have regard to broad principles of fairness. In Thomas v. Triodos the High Court interpreted the bank’s statement that it would comply with a voluntary code as creating an additional duty to give the customer a balanced view of a product on request, over and above the bank’s Hedley Byrne duty not to mislead. This may indicate that the courts are moving towards a more “regulatory” – and some would say paternalistic – position.
Two High Court decisions dealt with judicial reviews from the Financial Ombudsman Service (FOS). It is rare for such applications to be allowed, and in Full Circle Asset Management the application was duly rejected, the court robustly defending the wide FOS “fair and reasonable” jurisdiction. More unusually, in Aviva Life & Pensions the application succeeded, albeit on narrow grounds, and the judge made some concerned comments about the interaction between the FOS jurisdiction and the law. It remains to be seen whether this case will herald closer scrutiny of FOS decisions in future cases.
As ever, the regulators issued a plethora of policy communications. The most significant were perhaps the FCA Mission Statement and business plan – these repay a detailed read, but future developments for financial institutions include the retail banking business model review, follow up work on the investment and corporate banking market study, and discovery work into the non- workplace pensions market.
In contrast, there were fewer significant enforcement cases in the last six months than in past periods. The Tesco final notice, and those given to Niall O’Kelly and Lukhvir Thind (formerly of Worldspreads), demonstrate the importance of listed companies having robust controls over internal and external financial reporting, and making sure that accurate financial information flows up to those who have to sign off the accounts.
Whilst not widely commented on, the Express Gifts remediation agreement is of considerable interest as it shows the FCA considerably extending the “treating customers fairly” principle to, in effect, regulate the price of financial products merely because they were poor value for money, in the absence of mis-selling. Firms will need to take a step back and consider whether their products are reasonable and appropriately priced, irrespective of how clearly they are described to customers.
The outcome of the FCA/PRA Enforcement Review means that firms under investigation should expect – and feel entitled to push for – a more open approach from investigation teams. Firms will need to give careful consideration as to whether the new “focused resolution agreement” procedure is preferable to either reaching a full settlement and drawing a line under the matter, or having full freedom of argument in the Regulatory Decisions Committee (RDC).
What to watch out for
The second half of 2017 is likely to see the Court of Appeal hand down judgment in relation to UBS’s appeal of the 2014 judgment in its litigation with Kommunale Wasserwerke Leipzig GmbH and others. The judgment is likely to consider a number of interesting issues, including in connection with bribery, agency, dishonest assistance, deceit and the use of rescission as a remedy. Other well-publicised cases in which judgment is likely to be handed down over the next few months include: National Bank Trust v. Ilya Yurov (in relation to the collapse of National Bank Trust); Fortress v. BNP Paribas (in relation to the execution of an Islamic finance transaction); and Sharp and others v. Blank and others (in relation to information provided to shareholders regarding Lloyds’s takeover of HBOS).
Regulatory and other developments
Brexit looms, but in the meantime firms have many other upcoming regulatory changes to deal with. Firms not currently subject to the Senior Managers and Certification Regimes (SMCR) can expect a consultation paper shortly, and judging by the experience of banks will have a considerable amount of work to do before the go-live next year.
The regulators will be under political pressure to show that the SMCR has “worked” in banks. The FCA has ongoing enforcement investigations in relation to senior managers. Firms and senior managers should scrutinise any resulting final notices closely for applicable lessons.
The final report of the asset management market study was published shortly before going to press, accompanied by a consultation paper setting out the FCA's proposals in relation to fund governance, risk-free box profits and share class switching. The industry will be responding to the consultation, which closes on 28 September 2017, and awaiting further detail from the FCA on what the SMCR will look like for asset managers. The FCA will also flesh out its Mission Statement with regard to authorisation, supervision, enforcement, competition and market design.
Most firms should be far advanced in their MiFID II preparation by now, but will need to ensure that there are no surprises in the second FCA policy statement, due to be issued soon.