UK: Finance And Banking Regulatory Update - February 2011

Last Updated: 28 February 2011
Article by Julian Connerty

Bribery Act

We recently reported on a possible review of the Bribery Act and advised that final guidance was expected to be published by the end of January. Publication of that guidance has been delayed (probably because of increased public and political pressure) and is now not expected until mid-late February.

The draft guidance sets out six principles for commercial organisations to help them plan for the new anti-bribery legislation:

  • risk assessment;
  • top level commitment;
  • due diligence;
  • clear, practical and accessible policies and procedures;
  • effective implementation; and
  • monitoring and review.

The final guidance may look significantly different to this but at the very least companies will broadly need to consider these principles when implementing the procedures to prevent bribery which the Act requires, and now is a good time to start.

There has been no suggestion that the Bribery Act itself will be amended, although commencement will be delayed by three months from publication of the Guidance to ensure that companies have time to implement any changes required.

Clyde & Co is hosting two presentations in March in association with the Ministry of Justice, the Serious Fraud Office ("SFO") and Transparency International to discuss the guidance and enforcement of the Act. Please see our website for more information.

BAE Fined in Criminal Prosecution

You may recall the controversial plea bargain in the Innospec case earlier in 2010 and now the Courts have sanctioned yet another plea bargain with BAE (see below). This gives a ray of hope to global commercial entities who may be fighting corruption charges on both sides of the Atlantic or in other jurisdictions and who want the certainty of reaching a global settlement rather than fighting multiple and long running battles.

BAE was fined £500,000 and ordered to pay £225,000 costs following its guilty plea in November for books and records offences in breach of section 221 of the Companies Act 1985. This was part of a controversial plea bargain arrangement with the SFO under which BAE agreed to pay £29.5m in reparations to the Tanzanian Government and the SFO agreed not to bring any prosecutions for any bribery offences which might come to light pre-dating February 2010. The guilty plea followed BAE's global settlement with the US Department of Justice and UK's Serious Fraud Office in 2010. By making no admissions as to bribery offences BAE has been able to ensure that it is still able to tender for Government and EU contracts. The Judge noted the pressure placed upon the Court to ensure the fine it ordered was limited, disclosing that under the deal the fine would be deducted from BAE's reparations to Tanzania and that this was unsatisfactory. The judge also said that the UK Plea Agreement had been loosely and hastily drafted but despite this, and to the surprise of many commentators, the Court agreed the settlement.

The SFO initially began its investigations in 2004, after allegations concerning a contract in Saudi Arabia. The investigations centred on a contract agreed in 1999 between BAE and the government of Tanzania for US$ 39.97 million. This contract was for the supply of a radar defence system for Dar-es-Slam International Airport. BAE engaged Shailesh Vithlani, a local businessman, to advise on its negotiations with the Tanzania government. Between January 2000 and December 2005 approximately US$ 12.4 million was paid to Mr Vithlani. BAE has since accepted that a large proportion of this would have been used to favour BAE in negotiations with the government.

In his judgment, Mr Justice Bean noted that he was "surprised to find a prosecutor granting a blanket indemnity for all offences committed in the past, whether disclosed or otherwise". In his judgment, Mr Justice Bean makes it clear that he thinks the SFO had been too lenient with BAE. He also noted that the "structure of this Settlement Agreement places moral pressure on the Court to keep the fine to a minimum so that the reparation is kept at a maximum." BAE was also ordered to pay £225,000 towards the prosecution's costs.

European Reform

As part of the continuation of financial reform, the European Union has established three new supervisory authorities and a systemic risk board to tighten the net on financial regulation in Europe. The new authorities are intended to achieve better co-ordination between national authorities, and to detect potential risk.

The European Banking Authority ("EBA") was established on 24 November 2010, and has been operating since 1 January 2011. Located in London, the EBA has effectively taken over all existing and ongoing tasks from the Commission of European Banking Supervisors ("CEBS"). The main tasks of the EBA are: to develop guidelines, supervise the implementation of EU legislation, co-ordinate supervisory authorities and improve transparency and disclosure of information. It is hoped that having the EBA in London there will be a particular benefit to the City, as it will prevent regulatory arbitrage, and encourage co-ordination.

The European Securities and Markets Authority ("ESMA") was established to encourage supervisory coordination between securities regulators. The ESMA has effectively taken over the function of the Committee of European Securities Regulators ("CESR"). The main functions of ESMA are to monitor systemic risks of cross-border financial institutions, resolve disagreements between national authorities and draft technical standards that are legally binding in EU member states. ESMA also contributes to the work of the European Systemic Risk Board.

The European Insurance and Occupational Pensions Authority ("EIOPA") has also been established and functions as an independent advisory board to the European Parliament, the Council of the European Union and the European Commission. Its responsibilities include ensuring transparency of financial markets and protection of insurance policy holders.

It will be interesting to see whether these reforms will have any real effect in substance, but it is seems to be a step in the right direction to providing more stable, transparent and co-ordinated markets.

MiFID II Review

On 8 December 2010, the European Commission published the MiFID II Review paper. The proposed changes to MiFID will be far-reaching and will impact regulated firms significantly. As part of the Review, the EC has suggested an abolition of execution-only business, and an extension of the products covered by MiFID regulation. Changes have also been proposed regarding the inducements regime, to increase transparency. The responses to the Review will be available on the EC website, and the finalised EC proposal is currently scheduled for release in Spring 2011. However, MiFID II already faces strong criticism from the banking industry with suggestions that it isn't really necessary and just a knee jerk reaction to the credit crunch. Click here for a link to the full Review paper.

FSA fines RBS, NatWest and Barclays

The FSA has continued its string of fines, this time clamping down on the big banks.

In the first few weeks of the New Year, the FSA fined NatWest and RBS £2.8 million for poor complaints handling. The FSA found that RBS and NatWest failed to establish an adequate complaints handling team, and that the complaints team in place did not take account of all relevant considerations. The FSA has suggested that senior management should be more involved to ensure complaints are adequately dealt with.

Shortly thereafter, Barclays found itself facing a fine of £7.7 million for miss-selling funds to investors. Despite identifying problems with the sales of the fund in question early on, Barclays failed to rectify these problems. Barclays' main failing was in providing inadequate advice. The FSA found that Barclays' staff were not sufficiently trained to provide investors with suitable advice.

The fine imposed is the largest ever for failings of retail advice and retail sales. The size of the fine was determined according to the financial resources of Barclays, the seriousness of the breaches, and the deterrent effect to others. It is likely that the vulnerability of those affected, most of whom were over retirement age, was a contributing factor to the size of the fine. Peter Vicary-Smith of the Consumer association Which? has said that the fine imposed by the FSA is too small, and will not act as a strong enough deterrent. However, Barclays has already started to compensate the 12,331 people affected could face a possible £60 million redress bill. Not to mention the cost to Barclays of investigating, and fixing the problem within the bank. In a separate offence, Barclays Capital has also been fined £1.2 million for failing to protect and segregate client money held in sterling money market deposits.

Third Party Payments to unauthorised companies uncovered

In December 2010, the FSA banned and fined a number of accountants working for Natrocell for making payments to third parties without effective checks or controls on those payments.

SLRV, an accountancy firm was initially instructed by Natrocell when Natrocell's shareholders decided to raise capital by selling its shares. SLRV was aware that shares were to be sold by foreign entities not authorised by the FSA. Furthermore, these foreign third parties were to receive 60% commission. Communications were made between SLRV and the third parties using Hotmail and Gmail accounts, and sales were made using methods of cold calling.

Numerous customers took up their concerns directly with SLRV regarding the way the shares were being sold, and investors queried the foreign entities. SLRV failed to realise the problems with Natrocell, and did not inform the FSA as a result of scant regard to money laundering procedures and financial regulation.

SLRV was fined £163,140, and three employees were also fined and banned, with the Money Laundering Reporting Officer, Laurence Finger, being personally fined £35,000. The FSA found that Mr Finger did not properly understand the money laundering reporting rules, and was not properly trained to understand the obvious red flags.

With the dawning of the Bribery Act coming into force, it is vital that firms have in place adequate procedures and measures to prevent obvious failings going under the radar. Firms must undertake proper due diligence of their own, and not rely on that obtained by others.

Senior manager jailed for insider dealing and money laundering

On 21 January 2011, Neil Rollins, a former senior manager of a waste industry firm, was sentenced to 27 months imprisonment for insider dealing and money laundering. Mr Rollins was also ordered to pay nearly £200,000 in compensation.

When Mr Rollins discovered the worsening financial position of PM Group plc, he sold his entire shareholding, and told his wife to do the same. When the financial position of the company was announced to the market, the share price immediately fell by 17% and continued to do so for weeks thereafter. On discovering the FSA's investigations into these dealings, he attempted to hide his conduct by laundering the proceeds, something that the FSA considered aggravated the crime. It is an interesting debate as to whether he did in fact launder the proceeds from this sale, as the sale itself was not actually benefitting from the crime, but merely preventing suffering a loss.

There was a separate civil action in this matter, where Rollins tried to argue that the FSA did not have the power to bring proceedings for money laundering offences. The Supreme Court confirmed on 28 July 2010 that the FSA did have such powers.

Shortly after Rollins was convicted, a city banker and his wife were sentenced for insider dealing. The couple pocketed nearly £600,000 as a result of their insider dealing. His Honour, Judge Leonard QC said that sentences need to deter others: "Those rogue traders that let down the honest, discreet majority must be made to pay". Margaret Cole of the FSA added: "people who commit these market offences will not go unpunished." These convictions show that insider dealing is a real focus for the FSA at the moment.

Revised FSA Remuneration Code: A proportionate response?

On 1 January 2011, the FSA's Revised Remuneration Code came into force rolling out a radical new remuneration regime to around 2,500 financial services firms in the UK. The implications for remuneration structure and policy are set out in an article which can be viewed here. Whilst directly relevant to the financial services sector, the insurance sector should take note as we expect a similar regime for the insurance sector as part of the Solvency II Directive. This is currently due to be implemented at the end of 2012 although it is generally expected that the implementation date will be pushed back into January 2013. Further details on this new regime are expected during the course of 2011 and we will keep you updated on any developments.

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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