UK: Financial Services - A Look Forward 2015

Last Updated: 13 January 2015
Article by Duncan Black

Financial Services analysis: Our panel of experts considers the cases, legislation and trends likely to affect financial services lawyers and their clients in 2015.

The experts

Duncan Black, partner, contentious financial services, Fieldfisher
Jon Holland, partner and co-head of the global financial Services Litigation team, Hogan Lovells
Nathan Willmott, partner, financial services investigations and head of the commercial dispute resolution group, Berwin Leighton Paisner

What are the key cases and legislation for 2015?

Jon Holland: The interesting thing for me in 2015 is going to be the fallout of the various settlements between a number of banks and the various authorities in relation to misconduct around Libor and Forex. There may be other issues currently being investigated but those are the two headline grabbing ones right now.

Nathan Willmott: The implementation of the senior managers' regime is a significant change coming in. It is a new regime for the regulation of individual members of senior management at banks and the extension of binding regulatory duties to all employees of UK banks. There is going to be a huge compliance cost involved in implementing the new regime--and also on an ongoing basis, as banks will need to conduct a series of annual reassessments of fitness and propriety, more training of all staff on their new regulatory duties, implement a series of new policies and document the responsibilities of senior management (both individually and collectively) in a formal manner which will then be shared with the regulators.

It is likely to result in a lot more disciplinary cases being taken both against senior management, where there will be a reverse burden of proof when a problem occurs, and then also for more junior members of staff if they are involved in an event that amounts to a regulatory breach by the bank.

Duncan Black: I would agree that the increasing responsibility on bank employees in the new conduct rules is likely to be a major thing. It is certainly something which clients are anxious about because senior people in banks and other firms are now being told up front that they are going to be personally responsible for things when they go wrong.

Historically when things have gone wrong the criticism has been that the senior person has escaped responsibility because they didn't know the detail of what was going on and that's the impetus behind these rules.

And now with the managers there is a presumption of individual responsibility so the starting point is not can we pin on you some knowledge of something going wrong, but that you are presumed by virtue of your managerial capacity to be aware of and responsible for these things which have happened and that sharpens the mind quite a lot.

Firms will have to draw up a statement of responsibility listing the roles allocated to each individual--which are accepted by the relevant manager during the approval process--and if something does go wrong then that list shows where the buck stops.

Under the new conduct rules the number of individuals who are now responsible has increased, it affects all bank staff, not just those registered as approved persons of the FCA.

At a high level I think this is going to be a major area for 2015.

What are you seeing in terms of trends and do you have any predictions for future developments?

Jon Holland: We are still seeing a number of decisions relating to derivatives contracts--by which I don't mean the selling of derivatives contracts to small and medium size enterprises (SMEs) that the FCA intervened in and required the industry to sort out, but continuing decisions relating to derivatives contracts (often entered into by public entities, for example) which we started seeing at the back end of the credit crisis. The counterparties typically allege misconduct by the banks concerned in relation to the particular transaction or in some cases saying that they lacked the capacity to enter into the contract. There have been a number of those decisions in 2014 and I don't see any sign of that abating in the coming year because the sums involved are often quite significant.

Another interesting theme for next year is the extent to which the FCA grapples with its new competition responsibilities and its general enforcement stance, the way it is choosing to pursue proceedings against clients and the significant increases in the levels of the penalties that it is imposing.

I don't know whether there is going to be a tipping point--there hasn't yet been a point where the level of the proposed penalty relative to the underlying conduct has meant that a bank has challenged the FCA rather than reach a settlement and that is obviously a difficult dynamic as no bank wants to fall out with its regulator. You can have your own view on whether the penalties are proportionate to the underlying conduct, but some of the penalties being imposed are very high, for example the Forex penalties, and I don't know whether there is going to come a point where a bank says it thinks a proposed penalty is too high and decides to take that to the Regulatory Decisions Committee or possibly to court.

Nathan Willmott: Another development which I think will have significant consequences is the appointment of the FCA as a concurrent competition regulator from April 2015. The FCA will therefore have the power to investigate and discipline firms for breaches of competition law as well as breaches of regulation. There will be some quite difficult issues to be worked out in terms of how to reconcile a firm's duties to be open and cooperative with the FCA under Principle 11 with its right to seek immunity where it discovers a breach of competition law and promptly discloses that to the competition authorities. How those two conflicting aspects will interrelate when the FCA becomes a competition regulator is still being thought through by the FCA.

Duncan Black: I think the prediction is that there is no stopping the tide of regulation coming from different sources. Firstly there's English regulation and then European regulation, which doesn't always overlap in a coherent way.

Being the world's biggest economy, the US doesn't seem to regard its border as a point where its regulations end and English businesses inevitably will have some contract or involvement with US businesses or customers and they are sometimes surprised by the reach of US regulation into English business practices.

Because of the increasing flow of new rules not just in England but around the world I predict that we're going to see even more head scratching in financial services businesses as they cope to comply with all the different regulations in all the different jurisdictions.

Interviewed by Fran Benson.

The views expressed by our Legal Analysis interviewees are not necessarily those of the proprietor.

This article was first published on LexisPSL Financial Services on 2nd January 2015.

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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