Financial and Regulatory Disputes Update – Edition 9

By Signature Litigation
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In this issue of Signature Litigation’s Financial and Regulatory Disputes Update, Partner Abdulali Jiwaji and Trainee Solicitor Elliott Fellowes take a close look at the FCA’s Business Plan 2018/19 and consider the impact Brexit may have on the regulator’s enforcement regime.

Our second article, written by Partner Simon Bushell, takes a fresh look at the decision in the PAG v RBS appeal and considers how the Libor Saga could continue with time running out.

Our third and final article written by Abdulali Jiwaji, Professional Support Lawyer, Johnny Shearman and Associate, Harry Denlegh-Maxwell, considers the Court of Appeal’s ruling on the meaning of the words “fair market value” in the default valuation provisions in the Global Master Repurchase agreement 2000 edition.

A downloadable link to the June issue can be found here.


Changes to the FCA business Plan 2018/2019

Partner Abdulali Jiwaji and Trainee Elliott Fellowes’ article has been published in the following publications:
FT Adviser – 10 May 2018
Law360 – 29 May 2018

On 9 April 2018, the Financial Conduct Authority (“FCA“) published its annual Business Plan.  The Business Plan gives some helpful insights into the FCA’s intentions and priorities for the year ahead.   It will be particularly interesting this year to see whether special projects relating to Brexit have any impact on the FCA’s enforcement agenda.

Juggling FCA resources

It is no surprise that Brexit related matters are a prominent feature of this years Business Plan.

High on the FCA’s agenda for its Brexit-related work is providing governmental support, in particular, to any transitional arrangement with the EU-27.  The regulator identifies two potential issues here: firstly, in relation to firms regulated in the UK which operate across the European Economic Area (“EEA“); and secondly, EEA firms with a presence in the UK.  The FCA states that it is prepared to “take action where appropriate” in relation to any transitional arrangements which impact UK regulated firms and their users.  Further, the regulator will work to “ensure there is an appropriate transition to a future model” for the regulation of EEA firms.

In order to undertake the additional Brexit workload, the FCA states that it will be “reprioritising, delaying or reducing non-critical activity“. Whilst this sounds abstract what is clear is that budgetary constraints will force the regulator’s hand. The FCA has budgeted £30m for its Brexit related work, and intends to fund £14m of this budget through the delaying and reducing of non-critical work.

It is unlikely though that any of the scaling back will be permitted to impact on the important activities of supervision and enforcement, and in those respects it is likely to be business as usual.

FCA enforcement priorities 

The Business Plan helpfully sets out some areas of focus for FCA enforcement activities.

Andrew Bailey, FCA chief executive, states in this year’s Business Plan that the regulator will focus on areas where “intervention will have the most impact“.  This suggests that the FCA will maintain its enforcement activity in areas of cross-sector focus.

We see FCA enforcement being particularly focused on three key areas:

  1. Senior Managers and Certification Regime (“SMCR“)

The SMCR is being extended to all Financial Services and Markets Act 2000 (“FSMA“) firms – around 47,000 firms will be covered in total.

Of the thirteen fines imposed by the FCA during 2017, eight were against individuals and this trend of personal accountability seems set to continue.  The FCA has made it clear that it expects robust governance and that it will hold individuals accountable for their actions or those of their staff.

This is an important stream of work for the FCA in its efforts to encourage a shift in the culture of institutions and to keep the focus on the tone from the top.

  1. Financial Crime/Anti-Money Laundering (“AML“)

A further cross-sector priority for the coming year is financial crime and AML.  The FCA wants to increase consumer protection and hold London’s financial markets up as an example of a healthy regulatory system.  In doing so, the regulator states that it will “use the full range of supervision and regulatory enforcement tools” at its disposal.

This will require the regulator to work with international and supranational agencies given the complex and global nature of the UK’s financial markets.  The regulator is keen to ensure that post-Brexit Britain will continue to meet, and set, international standards on financial crime.  Further, the FCA is currently undertaking diagnostic work in the e-money sector.  The FCA has already confirmed that crypto currency derivatives are capable of being financial instruments under MiFiD II and therefore constitute a regulated activity[1].  This is a fast-moving area and the FCA will see this as an opportunity to lead the pack in terms of the international approach to this sector.

  1. Consumer protection

Flowing from the financial crime and AML priority, the FCA also highlights its ScamSmart campaign aimed at protecting consumers from investment fraud.  The FCA will work with The Pensions Regulator to combat scams which overlap pension and investment frauds.

Also on the FCA’s radar is the increase in fraudulent investment firms advertising online and in particular via social media. These scams target younger consumers in a manner in which traditional scams have not, and the FCA seems set on taking a proactive approach in this regard.

Approach to enforcement

We have certainly seen a shift in the FCA’s approach on enforcement over the past couple of years.

Under current head of enforcement, Mark Steward, the FCA opened 75% more investigations in the past year.  In explaining this change, the FCA has indicated over the past year or so that it wants the market to understand that investigations are opened by the FCA as fact finding exercises, rather than as an enforcement tool[2].

Shortly before publishing the Business Plan, the FCA published a Mission Statement on its Approach to Enforcement[3], which provides some further context.

The Mission Statement emphasises that firms should self-regulate and take proactive steps to redress any harm.  The FCA will give “substantial credit to wrongdoers who speedily address wrongdoing“.  The message is that cooperation through an investigation may assist in heading off enforcement action.  This is a noble aim, but the dynamics of the investigation process remain largely adversarial.

The Mission Statement goes on to say that “[o]pening an investigation does not mean we believe misconduct has occurred“.  As to the opening of investigations, this suggests a wider approach is being taken, and this is felt in the 75% increase mentioned above.  The consequence is a larger number of open investigations, with the inevitable market disruption and stress that goes with the process.

From the FCA’s perspective, alongside an increase in workload, the more open investigations there are, the more choice it has as to which cases to pursue.  It can select the best cases, both from the point of view of strength of evidence and for the purposes of sending the right messages to the market.  With this in mind, it is likely that in the later part of this year and early next year we will see a pick-up in enforcement activity reflecting the results of the investigations which are currently underway.





Fresh Libor claims may follow the PAG appeal, but the clock is ticking

Partner Simon Bushell’s article has been featured in the following publications:
F.X. Week – 13 April 2018
Global Investor Group – 20 March 2018
FTSE Global Markets – 20 March 2018

The LIBOR scandal continues to resonate in English courts. The latest case to be heard by the Court of Appeal was brought by Property Alliance Group (PAG) against RBS over allegations that the bank had mis-sold interest rate swaps, entitling it to rescission of the swaps and/or damages. Three Court of Appeal judges, led by the master of the rolls, refused PAG’s appeal.

The case has a long history. PAG alleged that RBS had mis-sold interest rate swaps between 2004 and spring 2008; proceedings were issued in 2013 and the initial judgment was given by the High Court in December 2016. It finally reached the Court of Appeal in January and judgment was handed down earlier this month.

Despite the fact that UK and US regulators have imposed very heavy fines totalling billions of dollars on a series of banks for LIBOR manipulation, civil claims in the UK against those banks – including Barclays, Deutsche, Lloyds, Rabobank, RBS and UBS – have been relatively few and far between. This is largely because proving loss has been extremely complex. The Court of Appeal decision in PAG is therefore ground-breaking because it sets a path to rescission (irrespective of loss) on the basis that there was an implied representation on behalf of a bank that it was not manipulating LIBOR at the same time that bank was entering into a LIBOR related product with a customer.

The Court of Appeal endorsed the following test: “Whether a reasonable representee would naturally assume that the true state of facts did not exist and that, if it did, he would necessarily have been informed of it”.

Although PAG lost its appeal, the judgment potentially opens the floodgates for future litigation by a raft of claimants who may be entitled to unravel their LIBOR related transactions they entered into opposite one of the banks which have either admitted or were found guilty of manipulating LIBOR.

There are three additional ingredients to a potential claim: falsity, fraud and reliance. In terms of falsity, the extensive findings published by US and UK regulatory authorities, together with some admissions from certain of the banks, establish that LIBOR was manipulated in the four major currencies of Pounds (GBP), Dollars (USD), Yen (JPY) and Swiss Francs (CHF) by various of the banks referred to above. In PAG, it was determined that RBS had not manipulated the GBP LIBOR, whereas it has been found that it did manipulate CHF and JPY (but PAG’s claims were based on GBP LIBOR).

Accordingly, claimants may well be in a position to be able to establish a strong case for falsity with little difficulty, based on the regulatory findings. Equally, reliance would seem to follow as a matter of logic, because if the counterparty had known that the bank proposing a transaction to it based on LIBOR was in fact manipulating LIBOR, in the vast majority of cases it would not have concluded the contract.

This brings us to the third element: fraud. Banks engaging in LIBOR manipulation have already been penalised by regulators on both sides of the Atlantic. In addition, a series of trials involving traders at various banks has resulted in criminal convictions for the deliberate manipulation of LIBOR. Despite this, it is not axiomatic that the banks can all be said to have been acting fraudulently. Many of these banks would argue that those responsible for, and with knowledge of the manipulation, did not represent the controlling mind of the banks concerned. However, this begs the question: did those who are incontrovertibly the controlling mind and will of the bank (i.e. its directors) have the requisite knowledge of what was going on beneath them? Knowledge in this context will include actual or “constructive” knowledge, i.e. an awareness of the circumstance or of issues which, if followed up and investigated, would have revealed the wrongdoing. The traders who faced criminal charges were not rogue traders acting in isolation like Nick Leeson – the man who brought down Barings – they have claimed that they were acting with the tacit consent of, or sometimes, the encouragement of their superiors.

As Georgina Philippou, the Financial Conduct Authority director, said when commenting on the fine agreed by Deutsche Bank for Libor manipulation, “This case stands out for the seriousness and duration of the breaches … One division at Deutsche Bank had a culture of generating profits without proper regard to the integrity of the market. This wasn’t limited to a few individuals but, on certain desks, it appeared deeply ingrained.” In April 2015, Deutsche agreed to pay $2.5bn in fines – $2.175bn by US regulators, and a €227m penalty by the FCA.

If all four elements are proved, this leads to rescission, which undoes a contract between parties by unwinding the transaction and restoring the previous position, i.e. the status quo, before the contract was agreed. If interest or other payments were made, they can be restored.

The potential consequences of the PAG decision are far-reaching in scope and scale. Any counterparty that entered into a Libor-related transaction – in GBP, USD, JPY or CHF – has the potential to bring a claim for rescission in the event that the counterparty bank that they contracted with has been found guilty of LIBOR manipulation in the relevant currency.

But claimants will need to act quickly. The relevant limitation period is likely to expire after six years from the point at which fraud or concealment is discovered, or could with reasonable diligence have been discovered. The publication of the various regulatory findings against the relevant banks is likely to be the point from which the six-year period will be counted. In the case of Barclays, the FCA published their Final Notice on 27 June 2012, so potential claimants will need to begin legal proceedings within the next three months. The clock is therefore ticking.


“Fair market value” and its place in English Courts

Partner Abdulali Jiwalji, Associate Harry Denlegh-Maxwell and Professional Support Lawyer Johnny Shearman’s article has been featured in the following publications:
Global Banking & Finance Review – 16 May 2018
Law360 – 4 June 2018

In a claim brought by LBI EHF (formerly Landsbanki Islands hf) (“LBI“) relating to repurchase (or “repo”) transactions against Raiffeisen Zentral Bank Österreich AG (now Raiffeisen Bank International AG) (“RZB“), the Court of Appeal has ruled on the meaning of the words “fair market value” in the default valuation provisions in the Global Master Repurchase Agreement 2000 edition (the “GMRA“).

Following on from the recent decision in Lehman Brothers International (Europe) v Exxonmobil Financial Services BV[1] (which also involved the 2000 edition of the GMRA), the Court of Appeal has avoided limiting the wide discretion given to the non-Defaulting Party when determining “fair market value” under the GMRA, particularly in distressed markets.


In October 2008, at the time of LBI’s collapse, there were 11 open positions between it and RZB relating to repo trades which were on the terms of the GMRA.

The failure and insolvency of LBI constituted an Event of Default under paragraph 10 of the GMRA.  In short, the terms of the GMRA required LBI (as the Defaulting Party) to pay RZB (as the non-Defaulting Party) the agreed Repurchase Price for the securities minus the Default Market Value of Equivalent Securities.  The methods of valuation provided for under the GMRA depended upon whether the non-Defaulting Party had served a Default Valuation Notice by the Default Valuation Time.

In this case, RZB had not served a Default Valuation Notice by the Default Valuation Time.  In this circumstance, the GMRA required RZB to determine the “fair market value” of the relevant Equivalent Securities.  Paragraph 10(e)(ii) of the GMRA provided:

…the Default Market Value of the relevant Equivalent Securities…shall be an amount equal to their Net Value at the Default Valuation Time; provided that, if at the Default Valuation Time the non-Defaulting Party reasonably determines that, owing to circumstances affecting the market in the Equivalent Securities…in question, it is not possible for the non-Defaulting Party to determine a Net Value of such Equivalent Securities…which is commercially reasonable, the Default Market Value of such Equivalent Securities…shall be an amount equal to their Net Value as determined by the non-Defaulting Party as soon as reasonably practical after the Default Valuation Time“.

“Net Value” was defined in paragraph 10(d)(vi) of the GMRA as meaning “…the amount which, in the reasonable opinion of the non-Defaulting Party, represents their fair market value, having regard to such pricing sources and methods…as the non-Defaulting Party considers appropriate…“.

Crucial to this definition of “Net Value” was what factors the non-Defaulting Party may take into consideration when determining the “fair market value” of the Equivalent Securities.  The Default Valuation Time for the securities in question in this case was 15 October 2008, the height of the financial crisis and a time of extreme distress in the markets.  The question of whether or not the distress in the markets could be taken into consideration, therefore, was of critical importance.

The decision at first instance

It was common ground, by the end of the trial, that RZB had not carried out the correct valuation process. This meant the court had to consider a counter-factual question as to what Default Market Value RZB would have arrived at if it had acted in accordance with the GMRA.  As such, the primary issue that the court had to consider was the meaning of “fair market value” in the GMRA.

It was argued by LBI that the words “fair market value” should carry the meaning attributed to them in a variety of other legal and financial contexts, both domestically and internationally.  LBI argued that these other definitions showed that there was a consistently recognised concept associated with “fair market value” involving a willing buyer, a willing seller, knowledge of the asset in question and a lack of compulsion.  The “lack of compulsion” element was central to LBI’s argument.  This, it submitted, excluded prices achieved in a distressed market.  However, the court found this argument “difficult to reconcile with the fact that under paragraph 10(e)(i) of GMRA the non-Defaulting Party may actually sell the securities, in what may be a distressed market, and determine the Default Market Value on the basis of the prices obtained, provided always that it acts in good faith“.

On the basis of the judgment in Socimer Bank Ltd v Standard Bank Ltd[2], LBI accepted that the task for the court was to put itself in the shoes of the decision maker and ask what decision it would have reached, acting rationally and not arbitrarily or perversely.

In Exxonmobil, it was held that the securities should be ascribed a fair market value in accordance with the opinion which the non-Defaulting Party (acting rationally) would have formed if it had conducted the valuation exercise required by paragraph 10(e)(ii).  This was largely a question of fact.

At the point of the written closing submissions, RZB provided what it thought was the “fair market value” for each of the bonds as at 15 October 2008, and the information that it had used to arrive at that value.  The court acknowledged that the information available in this case was “imperfect”, but “the circumstances at that time were imperfect“, and “[a]ny assessment of fair market value would have been imperfect but the non-Defaulting Party was nonetheless entitled to make one“.  Accordingly, at first instance, it was accepted that the figures provided by RZB met the requirement “for a rational, honest determination of fair market value as at 15 October 2008“.

The appeal

The appeal concerned whether, on the true construction of the GMRA, the non-Defaulting Party’s assessment of “fair market value” of securities could be based on prices achieved or quotations obtained in a distressed or illiquid market.

LBI submitted that the words “fair market value” in the definition of “Net Value” required the non-Defaulting Party to assess the price from the perspective of a willing buyer and a willing seller, neither being under any particular compulsion to trade.  Such an assessment should not therefore reflect liquidity issues or distress that happen to feature in a particular market at a particular time.

LBI submitted that this would be consistent with the meaning attributed to “fair market value” (albeit in different contexts) in authorities from Australia and Canada.  However, the Court of Appeal concluded that these cases were of no real assistance as they involved different factual contexts; the meaning of “fair market value” in the present case had to be “determined as a matter of construction of this particular contract in its particular context[3].  Accordingly, the correct starting point when determining the meaning of “fair market value” was to consider the definition of “Net Value”.

Instead, it was held that the meaning ascribed to the words “fair market value” by LBI was not one which was to be found in the express terms of the GMRA.  Furthermore, there was no basis for it to be implied, because it was “contrary to the express language of the GMRA and, in particular, the wide discretion conferred on the non-Defaulting Party“.

LBI’s appeal was dismissed and the Court of Appeal concluded that the wording of the GMRA “entitled the non-Defaulting Party to have regard to any evidence and information as to the particular market at the particular time” (as held by Knowles J).  Similarly, there was “no warrant for limiting the width of the discretion provided by the contract wording by requiring the non-Defaulting Party to disregard the evidence of the market merely because it was illiquid or distressed at the particular time“.


The English courts have resisted setting out an interpretation or definition of “fair market value”. The risk of doing so would be to restrict what, under the GMRA, is a wide discretion given to the non-Defaulting Party to assess the “fair market value” of the Equivalent Securities by reference to “such pricing sources and methods…as the non-Defaulting Party considers appropriate“.  Furthermore, a tailor-made definition of “fair market value” to fit the facts of this case would have been inappropriate, because the GMRA was used in respect of a wide variety of financial instruments.

This case confirms that a non-Defaulting Party is given a wide discretion in reaching a determination on “fair market value”, particularly in distressed situations.  In the absence of an express or implied term in the GMRA on the exercise of discretion, as a matter of principle, the only limitation when determining “fair market value” will be the one recognised in Socimer, that the decision-maker “must have acted rationally and not arbitrarily or perversely“.

Parties who are trying to value securities in a distressed or illiquid market should derive some comfort from this judgment. However, what the meaning of “fair market value” is will be determined as a matter of construction of the particular contract in its particular context.

[1] [2016] EWHC 2699 (Comm)

[2] [2008] EWCA Civ 116

[3] Per Longmore LJ in Barclays Bank plc v Unicredit Bank AG [2014] EWCA Civ 302; [2014] 2 Lloyd’s Rep 59

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