In this issue of Signature Litigation’s Financial and Regulatory Disputes Update, the first of 2016, we consider the implementation of the Market Abuse Directive II, which will take effect from July of this year. We review what degree of confidentiality exists for third parties involved in regulatory investigations. Our last article looks at the decision in Thornbridge Ltd v Barclays Bank Plc. It represents another mis-selling claim in which a bank was found not to have taken on an advisory role.
Market Abuse: Ramping up the Regulation?
Market abuse continues to be a focus area for the regulators and prosecutors, as evidenced by the multitude of fines imposed by the FCA (see our November 2015 edition of this newsletter), and the investigations and prosecutions relating to benchmark rigging.
The upcoming implementation of the Market Abuse Directive II (“MAD II”) indicates that there will be no let up in this kind of enforcement activity. The MAD II “package”, which will take effect from 3 July 2016, comprises the Market Abuse Regulation (Regulation (EU) No 596/2014) (“MAR”) and the Criminal Sanctions for Market Abuse (Directive 2014/57/EU) (“CSMAD”). The MAR will repeal and replace the existing Market Abuse Directive (2003/6/EC). The UK has not opted into CSMAD and is therefore not obliged to transpose its provisions into national law.
The current market abuse regime
Market abuse covers both insider trading (i.e. use of inside information when trading in related financial instruments) and market manipulation (i.e. manipulation of the markets through practices such as spreading false information or rumours and conducting of trades which secure prices at abnormal levels). The original regime was introduced in order to guarantee the integrity of European financial markets and increase investor confidence. It brought in requirements for insider lists, suspicious transaction reports and the disclosure of managers’ share transactions. It also gave national competent authorities powers to investigate, take administrative measures and impose effective, proportionate and dissuasive sanctions.
The new regime
The aim of the MAR is to expand the original regime, aimed at supporting the smooth functioning of the securities markets and encouraging public confidence. The changes include:
- An extension of the application of the market abuse framework
The regime will be extended to include any financial instrument admitted to trading on a multilateral trading facility, over-the-counter (“OTC”), or an organised trading facility, the latter being a new category of trading venue. This is to ensure that the rules can cope with the introduction of new technologies and platforms. The definition of inside information will be extended to include commodity derivatives, which have become increasingly global and intertwined with derivative markets. Manipulation through algorithmic and high frequency trading will also be covered.
- The creation of wider market abuse offences
The new regime will extend to any attempts to engage in market manipulation. It also prohibits any attempted or actual manipulation of benchmarks, picking up on recent episodes relating to LIBOR, FX and other benchmarks. The spreading of false and misleading information offence will include rumours and false or misleading news, and the dissemination of false or misleading information through social media is also prohibited. As to the definition of inside information, rather than focussing on whether or not information might be price sensitive, one will have to consider whether the information was information which a reasonable investor would be likely to use as part of the basis of its investment decisions.
- The creation of a more stringent whistleblower regime
This includes the introduction of: specific procedures for the receipt and follow-up of infringement reports, including the establishment of secure communication channels for such reports; appropriate protection in the workplace for whistleblowers reporting breaches or who are accused of breaches; measures to protect the identity of whistleblowers and those who are the subject of reports (unless national law provides that the confidentiality cannot be protected); and financial incentives for whistleblowers when reporting suspected market abuse (much like the current regime in the US when disclosing misconduct to the SEC).
New sanctions and increased power of competent authorities
The UK has opted out of CSMAD but UK firms operating across EU Member States’ borders should note that CSMAD requires all Member States to create harmonised criminal offences of insider dealing and market manipulation, and to impose criminal terms of imprisonment of at least two to four years, depending on the relevant offence.
The MAR also sets out a minimum set of supervisory and investigatory powers with which national competent authorities will be entrusted under national law. These include the right to: (i) access any document or data and to receive or take a copy thereof; (ii) carry out on-site inspections or to require recordings or data traffic held by investment firms, credit institutions or financial institutions and, insofar permitted by national law, by telecommunications operators; and (iii) impose a temporary prohibition of the exercise of professional activity.
The UK already has a well-established regulatory and criminal regime for market abuse; however, MAR will bring a unified approach throughout Europe which will without doubt affect the treatment of cross-border transactions and financial relations. The FCA has predicted that the result of this will be to increase market integrity and investor protection across the EU, ultimately increasing the attractiveness of securities markets for raising capital within the EU.
The changes bring in a hugely expanded scope of instruments to which the regime will apply and its limits are not clearly defined. The widening of the offence of market abuse to include any attempts to commit market abuse, coupled with the fact that regulatory authorities will be applying more objective standards in key areas such as the definition of inside information, increases the scope for regulatory or financial disputes in relation to the application of the new rules.
Confidentiality of Third Parties in Regulatory Decisions: An Update
Regulatory investigations are by their nature invasive. It is not just the immediate subject of the investigation who can be affected. Often, the investigation can draw in third parties who – ultimately – are adjudged to have done no wrong. No decision, however, as to innocence, or lack of guilt, is ever published. Instead, the third parties may be vulnerable to the inference that they have simply got away with it: “no smoke without fire”. That inference can be reinforced when the actual decision, even though it does not name the third party in terms, hints strongly at their involvement. Recent decisions serve to highlight the problem, in the context of financial services and competition investigations respectively.
The Financial Conduct Authority (“FCA”) continues to grapple with the impact of section 393 Financial Services and Markets Act 2000 (“FSMA”) on publicity and reporting of decisions following an investigation. Sections 393(1), (3) and (4) FSMA confer statutory rights on a third party who is identified in a warning or decision notice which is prejudicial to him or her to be given prior sight of the notice, and to have the opportunity to make representations in relation to it. Inevitably, this can cause delay and sometimes impact settlements, so the FCA has attempted to circumvent the need to notify and consult with third parties by attempting (albeit unsuccessfully) to anonymize its notices.
On 10 November 2015, the Tax and Chancery Chamber of the Upper Tribunal dealt a blow to the FCA in its judgment1 concerning the case of Christian Bittar. Mr Bittar was the former head of the money markets derivatives desk at Deutsche Bank. On 23 April 2015, the FCA issued a decision notice fining the bank £226.8 million for its part in the LIBOR/EURIBOR scandal. The reasons for the decision made reference to a “Manager B” and the Upper Tribunal was asked to decide whether Mr Bittar was a person “identified” in the notice2. It concluded that:
“… there is no doubt that when reading the Final Notice the relevant reader would conclude that Manager B was Mr Bittar …”
The Upper Tribunal reached its decision by applying the construction put on s 393 FSMA by the Court of Appeal in Financial Conduct Authority v. Macris3. Whether or not a person is “identified” in a notice is a question of fact, to be assessed objectively. In her leading judgment in Macris, Gloster LJ had said that the question should be approached in 2 stages:
- First, can the third party be “identified” by statements made in the notice alone? Inference is not enough for these purposes.
- Second, can the third party be “identified” by reference to external material which objectively would have been known to a reader of the notice at the time it was issued?
The relevant “readers” for these purposes were “persons acquainted with the third party, or who operate in his area of the financial services industry, and therefore would have the requisite specialist knowledge of the relevant circumstances…”4 Since the FCA had conceded that the purpose of s. 393 was to ensure that it treated the reputation of third parties fairly, Gloster LJ stated: “it is unrealistic to disregard what is already known to the market over and above the information stated in the notice.”5
Applying that judgment in Bittar, the Upper Tribunal also confirmed that:
- The crux of the matter is what relevant readers would reasonably know and conclude, not whether it is logically possible to deduce the person’s identity from publicly available material;
- The test is applied by reference to a hypothetical person rather than an actual acquaintance or market participant whose evidence is adduced;
- The knowledge of the hypothetical person should be based on information in the public domain, not that which could be obtained after extensive investigation; and
- The burden of proof is on the individual to demonstrate that he or she is in fact “identified”.
More recently, in the case of Christopher Ashton6, the Upper Tribunal applied an identical analysis, but concluded that Mr Ashton had not been identified in the notices. In that case the FCA had attempted to anonymize the notices by referring to “firms”, not “traders”, but, in having quoted evidence of conversations on internet chat rooms, the notices clearly contained a “key or pointer” to separate individuals who had participated. Mr Ashton nevertheless failed at the second stage, because there were too many uncertainties as to the identity of the participants, such that relevant readers would not necessarily conclude that they included Mr Ashton.
On 3 November 2015 (after the Bittar hearing but before the Upper Tribunal gave its judgment), the Supreme Court gave permission to the FCA to appeal the Macris decision. It remains to be seen whether the Supreme Court will uphold the wider interpretation of the s 393 rights, or perhaps comment on the gloss added in Bittar, but there does appear to be a shift towards ensuring that confidentiality of third parties is not only respected but, to an extent, maximised.
That is also true in the competition sphere. In Air Canada and ors v. Emerald Supplies Limited and ors7 the Court of Appeal recently reaffirmed the rights to confidentiality of non-addressees of a European Commission decision fining British Airways and others for an illegal cartel fixing prices in the air freight sector8. The Commission (as is often the case) had only released a redacted version of its decision, pending its own review of the document to remove any third party or confidential references. The claimants (all shippers of air freight) sought disclosure of an unredacted copy of the decision from British Airways, to whom it had been addressed, before the Commission had been allowed to complete this task. This would potentially have given the claimants access to prejudicial statements concerning the third party non-addressees. The Judge at first instance ordered disclosure to a limited “confidential ring” comprising the claimants and their advisors, but the Court of Appeal held he was wrong to do so9.
In its judgment10 the Court of Appeal reaffirmed the general principle of EU law that no decision should contain any formal finding or even any allusion to the liability of any person unless they had enjoyed all the usual guarantees to defend themselves. This derives from the presumption of innocence11. In Pergan12, the General Court annulled a Commission decision rejecting an application to remove references to a non-addressee and their conduct from a decision concerning the organic peroxides cartel. As a non-addressee, the applicant had had no standing to challenge the references, and it was wrong for the statements to remain part of the decision when they had not been contested or when there was no opportunity for them to be challenged. This reasoning applied equally to any third party who had no means to question a decision, by appeal or judicial review. Under EU law, which guarantees the confidentiality of third parties, the claimants in the English action would not (without some other good reason) have been able to obtain any unredacted decision. Accordingly, they should not be permitted to do so in national proceedings either.
These decisions are to be welcomed. Key to understanding them both is the ability of the third party, or lack of it, to defend itself – by making representations or otherwise – against a potentially prejudicial decision before it is issued, made public or becomes binding. What is less desirable, however, is the fact that these third parties have been unable to enforce their rights to anonymity without proceedings. They are therefore required to enter a public forum to air grievances which were intended to be treated confidentially and which ought to have remained confidential. This is counter-intuitive. Equally, and despite the existence of statutory rights to protect those prejudiced by identification in a regulator’s decision, there is no similar protection for those who are not identified in a decision but are tainted by association, simply because they are part of a category of persons to whom the decision appears to allude. What is really required, in all cases, is a sea-change in the conduct of regulatory bodies charged with investigations. In drafting their decisions, they must not only give effect to the letter of statutory or fundamental rights, but also the spirit and principles which underlie them. This should be done irrespective of whether the third party is an entity or an individual. Whilst this may cause tensions with regards to the regulators’ other concerns for transparency and expediency, without change we will continue to see regulators penalised in costs or damages in private law actions, when their primary focus should be elsewhere.
1  UKUT 602 (TCC)
2 The FCA conceded that if he was identified in the Notice, Mr Bittar was prejudiced by it. “Prejudicial” is not defined, and the issue of whether or not a notice is “prejudicial” depends on the “opinion of the” FCA itself: see section 393(1)(b), for example.
3  EWCA Civ 490.The case concerned a notice issued against JP Morgan, Mr Macris’ former employer, for failings leading to USD 6.2 billion losses in 2012 as a result of the ‘London Whale’ trades.
4 Paragraph  judgment
5 Paragraph  judgment
6  UKUT 0005 (TCC).The case involved notices issued against UBS and Barclays relating to misconduct in the FX market. Mr Ashton was the former global head of G10Voice Spot FX at Barclays in London for part of the period when the misconduct was found to have occurred.
7  EWCA Civ 1024
8 It should be noted that the General Court has since annulled the Commission’s decisions against the airlines alleged to have been involved.The decision against British Airways was only partly annulled since its lawyers failed to ask the General Court for full relief.
9 See, in another context, the Opinion of the Commission dated 29 October 2015 (addressed to the English High Court) regarding disclosure of confidential information from the Commission’s own files in litigation between Sainsbury’s and Mastercard. The Commission opined that a confidentiality ring would not necessarily satisfy third parties.
10 Also contributed, in the relevant part, by Gloster LJ.
11 The presumption of innocence can be infringed by the mere dissemination of statements made by the regulator, which either describe conduct which is characterised by the regulator as illegal or allude to such characterisation.
12 Pergan Hilfsstoffe für industrielle Prozesse GmbH v Commission  ECR II-4225.The presumption of innocence is enshrined in Article 48 of the Charter of Fundamental Rights of the European Union.
Mis-selling Claim Fails – No Advisory Duty
The recent case of Thornbridge Ltd v Barclays Bank Plc1 is the latest dealing with a mis-selling claim brought against a bank. The decision in Thornbridge is a useful reminder of the underlying law in this area. In her decision, Mrs Justice Moulder considered whether Barclays Bank PLC (“Barclays”) accepted responsibility to act as an adviser in the course of selling an interest rate swap product and whether the underlying documentation for the swap prevented any liability arising.
Thornbridge, a property investment business, sought damages from Barclays for losses suffered allegedly as a result of entering into an interest rate swap with the bank in 2008. Thornbridge entered into a loan with Barclays for the purpose of purchasing a property in April 2008 (the “Loan”). However, one of the conditions of the Loan was that before it could be drawn down, Thornbridge had to enter into an interest rate hedge acceptable to Barclays, or alternatively the interest rate was to be on a fixed basis for the first five years on the whole of the amount of the borrowing.
One of the directors of Thornbridge was put in contact with a “Corporate Risk Adviser” at Barclays to discuss interest rate hedging. Several discussions and a number of email exchanges took place, during which a presentation entitled “Interest Rate Risk Management Strategy” was sent to the Thornbridge director. The director was told that if Thornbridge entered into a fixed rate swap, Thornbridge would pay a fixed sum per month irrespective of how interest rates moved.
Following these discussions, on 30 May 2008, Thornbridge entered into a five year swap with Barclays. The agreement was made orally over the telephone and the parties then entered into a written swap confirmation which incorporated the 1992 ISDA Master Agreement.The initial notional amount under the swap was £5,652,000 (the same as the Loan amount), which then reduced monthly as provided for in the swap agreement. Under the swap, Barclays paid to Thornbridge an amount calculated by reference to the weighted average of the base rate for that month. Thornbridge, on the other hand, paid a fixed amount each month to Barclays, calculated at the rate of 5.65% per annum. Both the fixed and floating payments were calculated by applying the relevant interest rate to the relevant (declining) notional amount set out in the swap for the relevant period. In July 2008, the payments under the loan and swap commenced.
In 2008 there were a number of reductions in the Bank of England base rate (and accordingly Barclays’ base rate).Therefore, from July to November, although the swap amount payable by Thornbridge was fixed, as the floating amount payable by Barclays reduced with the falling base rate, the difference between the fixed amount payable by Thornbridge and the payment payable by Barclays increased. In mid 2009,Thornbridge considered a restructuring but it would have been liable to pay significant break costs of approximately £565,000 in order to terminate the swap. Accordingly, the swap continued to maturity in 2013 and Thornbridge paid considerably higher sums under the swap than had been anticipated.
Thornbridge claimed that Barclays had provided unsuitable advice to enter the swap. Thornbridge alleged that Barclays had a duty to advise / provide information on the financial consequences of the mismatch between the loan and swap and should have advised on other hedging products instead and in particular an interest rate cap. Thornbridge further alleged that Barclays failed to ensure that the information that was presented was not misstated.
Thornbridge advanced materially the same claim on the basis that Barclays had acted negligently, in breach of contract and in breach of their statutory duty under the Financial Services and Markets Act 2000 (“FSMA”).
The Decision and its implications
Mrs Justice Moulder found in favour of Barclays, Thornbridge losing on all counts. It was found that Barclays did not advise Thornbridge and did not assume an advisory relationship. Barclays was selling a swap and although Thornbridge was dealing with a “Corporate Risk Adviser” they were not advising in return for a fee. Applying the principles established in JP Morgan v Springwell2, it was held that although Barclays provided information about the swap in terms of how it would work, including making predictions on the direction of future interest rates, this did not cross the line into the giving of advice.
In making her decision, the Judge rejected the finding in Crestsign Limited v NatWest plc and RBS plc3 that there is a middle ground duty to explain “fully and accurately” the terms of any products for which a bank volunteers an explanation. Disagreeing with the approach in Crestsign, Mrs Justice Moulder confirmed that although Barclays was obliged to ensure that any information it did in fact give to Thornbridge was accurate and not misleading, it did not, by reason of that limited obligation, also undertake a wider obligation to ensure that the information that it gave was full, accurate and proper.
Mrs Justice Moulder went further in determining that, in any event, an advice claim would be prevented by contractual estoppel.The terms of the swap prevented Thornbridge from asserting that Barclays had given advice. Mrs Justice Moulder further determined that the clause giving rise to contractual estoppel was not subject to the Unfair Contract Terms Act 1977 but, even if it had been, it would have been reasonable.
Lastly, although Thornbridge was categorised as a retail customer because it was “carrying on business”, it was prevented from pursuing a claim under FSMA for alleged breaches of the then FSA’s rules. Thornbridge’s claim that the FSA rules were incorporated into the contract between it and Barclays also failed.
This case represents another bank friendly decision in a mis-selling claim, confirming the principles established in Springwell and validating some of the familiar defences in such cases. However, each case remains fact specific, and we are likely to continue to see claims of this nature testing the courts.
1  EWHC 3430
2  EWHC 1186
3  EWHC3043 (Ch)
May 29, 2020
May 28, 2020