This is the first issue of Signature’s Financial and Regulatory Disputes Update, which will be issued going forward as a regular quarterly review of recent developments in financial markets litigation and regulatory enforcement. In this issue, we reflect on enforcement activity by the Financial Conduct Authority (FCA) in 2014 and look ahead to the FCA’s likely priorities for 2015, including the impact of the new senior managers regime. We also consider recent trends in mis-selling cases, and review a recent High Court decision on the meaning of suspicion in the context of anti-money laundering reports.
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FCA ENFORCEMENT ACTIVITY
Reflections on 2014 and a look at who’s next in the firing line
As we start the new year, it is timely to reflect on the enforcement activity by the
FCA in 2014 and look ahead to the issues likely to form the focus over the next
According to its Business Plan for 2014/15, some of the FCA’s key enforcement
priorities included: (i) taking action against firms and individuals that abuse
financial markets and fail to observe proper standards of conduct; (ii) taking
action where customers have been treated unfairly to ensure effective redress;
and (iii) pursuing major investigations into LIBOR and the FX markets. Reflecting
these priorities, some highlights from 2014 are:
- In relation to benchmarks, further fines were issued as a result of the LIBOR
scandal. Martin Brokers (UK) Limited, an inter-dealer broker, was fined
£630,000 for its misconduct. It was found to have colluded with a trader
as part of an attempt to influence JPY LIBOR submissions and manipulate
the rate. The initial fine faced by Martin Broker was £6.3m but this figure
was reduced on the basis that the firm would have been unable to carry on
trading in light of further fines it faces in relation to LIBOR. In November
2014, the FCA announced that five banks were to be fined £1.1bn
collectively for failing to control business practices in their G10 spot FX
trading operations. This represents the biggest fine handed out not only in
the FCA’s short history but also that of its predecessor the Financial Services
Authority (FSA). In line with its enforcement priorities, the FCA worked
closely with overseas regulators and simultaneous fines were imposed by
Swiss and US regulators.
- Turning to mis-selling, Stonebridge International Insurance Limited was fined
£8.4m for mis-selling accident insurance products and an estimated 486,444
customers could be compensated as a result. Three former senior executives
of Swinton Group Limited were also fined, following previous enforcement
action taken against Swinton in relation to an aggressive sales strategy that
resulted in the mis-selling of monthly add-on insurance policies.
- The FCA also continued to pursue market abuse. An individual was fined
£662,700 for deliberately manipulating a government bond which had been
part of the UK’s quantitative easing programme. Charges have been brought
against the former treasurer and head of tax at Wm Morrisons for two
offences of insider dealing relating to trading in Ocado shares.
- We expect 2015 to be a similarly busy year for enforcement. As aspects of the FCA’s bigger investigations appear to be reaching a conclusion and significant resources are freed up it will be interesting to see how the new Acting Director of Enforcement and Market Oversight at the FCA develops the enforcement strategy.
- Currently LIBOR is the only regulated benchmark. However the FCA recently issued a consultation paper outlining seven additional UK based benchmarks that it anticipates it may regulate from April 2015. Further enforcement action can be expected as the FCA’s remit expands. Looking at the wider context of this enforcement activity, customers and institutional investors which have suffered losses as a result of benchmark manipulation will naturally consider litigation options.
- In 2014, thematic reviews were published in relation to anti-money laundering (AML) and corruption and bribery. The FCA reviewed the AML position in relation to small banks. It found that there were still significant weaknesses in most of the small banks’ AML systems which it reviewed. As a result, the FCA has started enforcement investigations into two banks and further action can be expected in 2015. In a separate thematic review, the regulator identified failings with how insurance brokers assessed and managed their risk of bribery and corruption. Again if improvements are not implemented then enforcement action may follow.
- Most significantly, we see scope for heightened activity in relation to senior individuals. Interestingly, 2014 saw the number of fines levied by the FCA against individuals decrease. This may seem remarkable but may just be a reflection of the focus on larger investigations relating to benchmarks taking up resource, and from what we see the FCA has not taken its eye off this as a priority. Going forward the FCA will be assisted by the introduction of the new Senior Persons Regime allowing it to pursue criminal sanctions against senior management of banks that are guilty of “reckless misconduct”.
- In July 2014 the FCA and Prudential Regulation Authority (PRA) issued a joint consultation paper “Strengthening accountability in banking: a new regulatory framework for individuals”. The new regime will substantially change the dynamics of regulatory enforcement action against those at the more senior level. For example, it proposes to introduce a presumption of responsibility and the reversing of the burden of proof. This will result in senior managers being presumed to be personally culpable for failures within the business areas that they are said to be responsible for unless they can demonstrate that they took reasonable steps to prevent the failure. For a summary of the July consultation paper and, specifically, the potential for conflicts to arise from the proposed regime see our previous article here.
The consultation period ended on 31 October 2014 and the FCA and PRA intend to respond to comments in due course.
Since the July consultation paper, the FCA and PRA published a further consultation paper in December 2014, which is to be read in conjunction with the July paper. The December paper sets out the technical changes to the Handbook and Rulebook and the transitional arrangements required for the new regime to be implemented. Significantly, it includes the template of the statement of responsibilities which will be required to be signed by senior managers. The statements will be critical in identifying who is accountable in the event of a failure of the firm. The regulators have indicated that any free text that firms may choose to add must not dilute, qualify or undermine the responsibilities prescribed or required by the regulators and should be justified and seek to serve a useful regulatory purpose, namely to clarify the nature and extent of a senior manager’s responsibilities. No doubt this is to pre-empt any defensive strategies in the completion of the form. The consultation period for the December paper ends on 27 February 2015
These reforms do raise concerns about the balance in future enforcement actions involving senior individuals. We have seen how the FCA’s predecessor, the FSA, approached its action against the former Chief Executive of UBS’ Wealth Management Division, John Pottage. The FSA had imposed a penalty on Mr Pottage for misconduct in light of his alleged failure to comply with Statement of Principle 7 in failing to conduct an “initial assessment” of the firm. The FSA took the view that Mr Pottage had been too accepting of the assurances he received from others within the firm. However, the Upper Tribunal reversed this decision and found that Mr Pottage had taken reasonable steps upon coming into the role and subsequently.
In light of the introduction of the presumption of responsibility and the reversal of the burden of proof, senior individuals will be concerned to know exactly how the regulator will approach the question of whether the senior individual in question has done enough to satisfy the regulator that the steps that have been taken are “reasonable”. Often in regulatory enforcement proceedings, there is a mismatch between the on the ground realities of how businesses are run, and the practicalities, and the sometimes rigid views of the regulator on how things should have been done. Common sense would dictate that one should take account of the nature of the individual’s role, put it in the context of the particular business, and allow for the need for delegation of certain tasks and to prioritise some areas over others. However, when things go wrong, one often sees the regulator taking a dogmatic view of matters, guided by hindsight. One would hope that Pottage represents the high watermark of that sort of attitude by the regulator, and that when these reforms are implemented, disciplinary and enforcement action will fairly reflect the lessons learnt from Pottage.
The road is long, with many a binding term
A number of significant mis-selling judgments were issued in 2014, confirming and, in some cases, developing the principles surrounding duties owed by banks and contractual certainty between commercial parties. Below are some of the key principles coming out of the more significant mis-selling cases of 2014.
First, contractual estoppel continues to bite where standard terms clearly define the basis of the parties’ relationship as non-advisory, preventing claimants from asserting a duty of care – Crestsign Ltd v National Westminster Bank plc and Royal Bank of Scotland plc  EWHC 3043 (Ch).
- “Non-reliance” and “no advice” clauses are more properly to be regarded as “basis” clauses, defining the nature of the parties’ relationship. However, clauses which attempt to “rewrite history” and depart from reality may be regarded in some circumstances (eg when the bank’s counterparty is unsophisticated) as “exclusion clauses” that would be subject to the statutory reasonableness test under Unfair Contract Terms Act 1977.
- Where a bank undertakes to explain the nature and effect of a transaction or particular product, it owes a duty to take reasonable care to do so fully and properly, and the nature of this duty will depend on the facts. However, the bank does not have a duty to explain fully and properly those products that it does not wish to recommend and sell.
Second, the 1992 ISDA Master Agreement entire agreement and non-reliance clauses do not exclude liability for all negligent or innocent misrepresentations – UBS AG (London Branch) and Anor v Kommunale Wasserwerke Leipzig GMBH  EWHC 3615.
- The court found that the bank’s entire agreement clause was not drafted clearly enough to be capable of excluding liability for any kind of misrepresentation.
- It also found that the non-reliance clause in the ISDA was limited to the exclusion of liability for investment advice or recommendations, and did not cover wider misrepresentations. Whether or not communications had been relied upon as advice or recommendations depended on the substance of the claim made.
Third, capacity arguments can be used by foreign corporates to support a claim, but may be defeated by the drafting of the representations and warranties – Credit Suisse International v Stichting Vestia Groep  EWHC 3103 (Comm).
- In Vestia it was confirmed that where a party, in defence to a claim, raises issues of capacity, the issue of capacity will be determined by the local law of incorporation of the entity, with the effect of the lack of capacity on the contract in question being determined by the law of the underlying agreement, in this case English law
- The Court found that a number of the transactions were ultra vires. However, Vestia had capacity to enter into the overarching Master Agreement in which “additional representations” that the investor had the capacity to enter into the underlying transactions were enforceable warranties
- These warranties engaged the principle of contractual estoppel and therefore Vestia was estopped from denying that it had capacity to enter into the transactions.
Fourth, in negligence cases the limitation period begins to run once the claimant has been alerted to the facts that gave rise to the claim so as to enable it to take advice and issue proceedings – Kays Hotels Ltd v Barclays Bank Plc  EWHC 1927 (Comm).
- In Kays, the bank was seeking to apply for summary judgment or to strike out the claimant’s claim on the basis that the claim was time-barred. In cases of negligence, section 14A of the Limitation Act 1980 extends the general limitation period where facts relevant to the cause of action are not known to the claimant at the time when the cause of action accrued.
- It was found that the test was when the claimant has been alerted to the facts that gave rise to the claim so as to enable it to take advice and issue proceedings. This was said to be when the claimant had reason to begin to investigate. In this case, the court found that there was an arguable case that the claimant could rely on s.14A and it was not appropriate to dismiss the claim summarily.
With a number of appeals listed, and the potential for further claims to be issued based on allegations of benchmark manipulation, 2015 is likely to be another active year. Even though certain principles now seem well entrenched, we are likely to see further development of the law as the claims progress.
AML SUSPICIOUS ACTIVITY REPORTS
What’s on your mind?
As regulators globally become increasingly assertive in their enforcement activities, organisations in the regulated sector remain under the spotlight for the steps taken in response to corrupt practices. Compliance with anti-money laundering measures is a key part of this response, and one particularly difficult aspect is the need for such organisations to balance their reporting obligations under the Proceeds of Crime Act 2002 (POCA), while maintaining commercial relationships with customers. As seen in cases such as Shah v HSBC Private Bank (UK) Ltd  EWHC 1283, customers who suffer financial losses as a result of delays following a suspicious activity report (SAR) may seek redress from the courts – particularly if they feel there was insufficient basis for any suspicion of money laundering. This is an issue which the High Court has recently considered in Iraj Parvizi v Barclays Bank Plc  EWHC B2 (QB).
The Claimant claimed that he had suffered financially as a result of a SAR submitted by the Defendant in June 2013 to the Serious Organised Crime Agency (which was replaced by the National Crime Agency as the UK’s financial intelligence unit in October 2013). He claimed that he had been denied access to his funds at a critical time and that he would otherwise have made considerable gains through his gambling activities.
In assessing the Defendant’s suspicion of money laundering, the Court considered R v Da Silva  EWCA Crim 1654, a key case which established that suspicion must be a possibility which is more than fanciful – a “vague feeling of unease would not suffice”. However, the suspicion need not be clear or firmly grounded and targeted on specific factors nor based upon reasonable grounds.
It is for the Defendant to establish the primary fact of the suspicion in order to justify not following the customer’s instructions. In this case, the Defendant provided the witness statement, and contemporaneous manuscript notes, of an analyst in its anti-money laundering team who was responsible for overseeing disclosures relating to money laundering offences and, ultimately, for submitting the SAR in question. The witness statement revealed that concerns had existed regarding the significant gambling activity on the Claimant’s account, and that the source of the underlying funds could not be established.
The Court noted that there were some inconsistencies between the explanation given in the witness statement, the “rather sketchy” manuscript notes and the content of the SAR itself. However, it was significant that these documents were, of course, not envisaged as documents to be pored over by lawyers. Therefore, and notwithstanding an arguable lack of reasoning in some of the evidence, it did establish a clear belief of suspicion which was more than fanciful. Accordingly, the Court found that there was no reason why the case should continue to trial as there was no real prospect of success.
The cases in this area clearly indicate that any suspicion that the customer is engaged in money laundering must be honestly and genuinely held, but need not be of a settled nature. As a result, if a dispute does arise, customers will need to press for early disclosure of evidence from the individual responsible for deciding to make the SAR, including any working notes they may have prepared at the time. In any such claim, firms in the regulated sector will find their position easier to defend if they have produced, and retained, clear and comprehensive records to explain why money laundering was suspected, and they may face criticism if this audit trail is inconsistent with the reasoning provided in the disclosure ultimately made to SOCA. Any claim for damages in these circumstances will, of course, also be subject to arguments as to causation – as in Shah. These arguments will turn on the facts of each case and, for example, the envisaged use of the account.
25 October 2021
25 October 2021
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25 October 2021