UK: Dispute Resolution Group Regulatory Update - November 2010

Last Updated: 5 November 2010
Article by Julian Connerty

Introduction

Since our last newsletter, regulatory reform of the financial sector has continued at a rapid pace. Over the summer, we saw the Coalition Government announce reforms to the current system of financial services regulation. We have set out below the major changes proposed.

We have also entered a period of tightening regulation in the EU and US, with a common understanding that regulation between these markets will be more effective if the systems are symbiotic. In this newsletter, we discuss reforms in the EU and US, and the ways in which regulation is being mutually influenced.

The Bribery Act 2010 is set to enter into force in April 2011. We included in our previous newsletter some practical guidance regarding procedures that organisations can put in place to avoid prosecution for bribery. In this newsletter, we discuss the Guidance currently under consultation by the Ministry of Justice.

Bribery Act 2010 – Ministry of Justice Consultation

The Ministry of Justice has produced draft Guidance regarding the procedures commercial organisations can put in place to avoid committing an offence under the Bribery Act. The draft Guidance annexed to the Consultation Paper can be found by clicking here.

The Ministry of Justice has invited comments on this Guidance before the consultation period closes on 8 November 2010. Comments can be made directly through the Ministry of Justice by clicking here. Clyde & Co is also compiling a detailed response to the consultation. If you would like to complete our anonymous survey please click on this link. We expect the finalised guidance to be published in January 2011.

In light of the widely drafted offences created under the Act, including the new corporate offence of failing to prevent bribery, it will be essential for organisations to ensure high levels of compliance. Furthermore, the scope of the Act extends to the global activities of organisations doing business in the UK. Therefore, this is likely to result in a large number of organisations falling within the scope of the Act.

The Guidance will be useful for organisations in determining the procedures necessary for compliance. It will remain Principles based, as with the FSA regulations, and this will give the Serious Fraud Office (SFO) maximum scope for interpretation and enforcement. Many anticipate that the question of whether an organisation has adequate procedures in place to prevent bribery will be a question for the courts to decide.

New Government set to reform Financial Services Regulation

Following the dawning of a new era in British government, speculation regarding financial services reform has been rife. There was a great deal of uncertainty as to whether the tripartite system of regulation between the Bank of England, the Treasury and the Financial Services Authority would be abolished in favour of greater regulation by the Bank of England.

The answer was provided in George Osborne's speech at Mansion House on 16 June 2010. Despite the FSA cracking down on the City, and issuing a stream of fines, this was too little too late in the eyes of the new Government. Plans were outlined to take power away from the FSA, a Labour creation, and to move power back to the Bank of England. The suggested reforms are currently under a period of review. Below is a brief summary of the major changes:

  • The Bank of England will be placed in charge of a Prudential Regulation Authority (the PRA), which will be responsible for regulating insurers, investment banks and deposit taking organisations. The PRA will be chaired by the Governor of the Bank of England;
  • A Consumer Protection and Markets Authority (CPMA) will be established to take on the FSA's role in consumer protection and conduct regulation, overseeing wholesale market regulation, and consumer protection;
  • The CPMA will also take on the FSA's responsibility for the Financial Ombudsman Service, and will oversee a new body, the Consumer Financial Education Body (CFEB);
  • Responsibility for consumer credit will be transferred from the Office of Fair Trading to the CPMA;
  • A single agency will be created to tackle serious economic crime;
  • Hector Sants, current CEO of the FSA, will take on the role of CEO of the PRA.

It is unclear what substantial effect these changes will have on the financial regulatory system, but it is clear that the Coalition Government is trying to make its mark. In a letter to the Chancellor, the Financial Reporting Council called for a separate regulatory body to be established, with the sole function of regulating securities markets (which will be something like the SEC).

The British Banking Association has also raised concerns that too much weight is being given to consumer protection, and not enough to retail and wholesale markets. In the current proposals, this function would be carried out by one body. The period of consultation regarding the reforms closed on 18 October 2010, and we now await the outcome of this consultation.

FSA goes public

The FSA has been granted new powers to publicise decision notices as well as final notices. This allows the FSA to publicise enforcement actions at the decision notice stage, rather than waiting for the final notice, which typically happens after appeals to the Tribunal, and a period of lengthy delays.

This change will ensure that publicity is timely and relevant and the FSA hopes it will serve as an added deterrent for firms. However, there are serious implications as firms under investigation may now face bad publicity even before the final decision has been made. Given the scope for considerable reputational damage, the FSA will need to get its facts straight to avoid tarnishing a firm's reputation without good reason.

Client money – largest ever fine – JP Morgan

The protection of client money has been in focus lately with the creation of a specialist client asset unit, intensive supervisory work, and firms from a range of industry sectors referred to Enforcement. The FSA's concern is to ensure that clients' money is protected and returned to them if firms become insolvent, a risk that was highlighted in the Lehman's failure, and is now a hot topic.

Earlier this year, the FSA issued its largest ever fine of over £33 million against JP Morgan Securities Ltd for failing to protect client money by segregating it appropriately. Clearly, any firm that holds client money should ensure that the relevant rules are being complied with or they run the risk of similar punishment.

Consumer Redress Scheme

On 12 October 2010, the FSA's power to deliver effective redress for consumers was activated, as part of the changes brought about by the Financial Services Act 2010. The consumer redress scheme gives the FSA power to order firms to investigate potential breaches of the regulations, assess whether fillings have caused loss and what the redress should be. Furthermore, the FSA can then order firms to return any redress due to its customers.

This is a far reaching power, and is likely to have huge consequences for regulated firms and authorised persons, as it is not limited to retail customers. The consumer redress scheme is, however, an important tool for the FSA to ensure that consumers are recompensed quickly and fairly. Sally Dewar, the FSA's managing director of risk, has said that "[t]his power would obviously be used proportionately."

Hedge Fund Regulation Reform – Europe and the US

Following the effects of the recession, markets globally have been looking to increase regulation of Hedge Funds, Private Equity Funds and other investment vehicles. This has been particularly so in the US and the EU.

In the US, on 21 July 2010, the Dodd-Frank Wall Street Reform and Consumer Protection Act came into force.

On 15 September 2010, the European Commission published a remarkably similar proposal regulating financial markets.

This is indicative of commitment to harmonising regulation between these markets. The Dodd-Frank Act was introduced in the US to ensure greater oversight of the financial sector, brining in greater reporting obligations for a larger number of entities. The Act introduces a Commodity Futures Trading Commission (CFTC) which is responsible for providing clearance for swaps accepted by registered clearing organisations. It is hoped that greater transparency will lead to better regulation and less risk of losses on the scale we have seen so recently.

The EC Regulation proposes to establish a European Securities and Market Authority (ESMA), similar to the CFTC, with the responsibility of clearing all OTC derivatives through a central counterparty. The EC Regulation also proposes to allow hedge funds who are registered in one EU jurisdiction, to then have a "passport" to all the other EU jurisdictions, without having to register again. This would mirror the regulations concerning organisations regulated by the Financial Services Authority.

Insurance Broker Jailed

On 26 October 2010, an insurance broker was sentenced to 21 months' imprisonment and fined £100,000 for authorising corrupt payments of nearly US$2 million to Costa Rican officials.

Mr Messent was initially investigated by the SFO for allegations concerning his time as a director of PWS International Ltd (PWS), a London based insurance company. PWS acted as insurance broker for a Costa Rican insurance company and the Costa Rican telecoms provider, both of which were state-owned. During Messent's time at PWS, he authorised 41 corrupt payments to Costa Rican officials. Suspicions were first roused after an election in Costa Rica in 2002, resulting in a change in officials, and enquiries regarding the PWS contract.

Messent admitted to the allegations of corruption pursuant to the Prevention of Corruption Act 1906. In passing the sentence, HHJ Rivlin QC noted that "it is no mitigation to say others do it or that it is the way of doing business...anyone minded to do it should be deterred from doing so".

Richard Alderman, Director of the SFO said "[t]his case shows how determined we are to pursue business men who bribe. Working with agencies in other countries is a key feature of our approach which can result in action being taken against both sides of the bribe."

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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