UK: the FSA's powers of prosecution

The Supreme Court gave its judgment today in R v Rollins [2010] UKSC 39. The case concerned the Financial Service Authority's powers of prosecution. It was argued that the FSA's power to prosecute criminal offences was limited to the offences referred to in Sections 401 and 402 of the Financial Services and Markets Act (2000) and that the FSA could not, therefore, prosecute other offences including those of money laundering contrary to Sections 327 and 328 of the Proceeds of Crime Act (2002). A unanimous Supreme Court rejected this argument. A summary of the court's judgment is available here (pdf).

UK: issuer liability - Government response to the Davies review

Section 1270 of the Companies Act (2006) inserted Section 90A of the Financial Services and Markets Act (2000) and established a statutory civil liability regime for issuer misstatements to the market. A review of this regime was conducted by Professor Paul Davies FBA QC - the Davies review - and recommendations published in June 2007.  The Government has published its response in "Extension of the statutory regime for issuer liability", in which it outlines its proposals which include the following:

• There is to be no change to the current basis of liability (which is based on fraud).
  
• The liability regime should apply to [a] issuers of all securities admitted to trading on a UK regulated market or multilateral trading facility and [b] issuers of securities admitted to trading on an EEA regulated market or multilateral trading facility, where the UK is the home state for the issuer under the Transparency Directive (2004/109/EC) or the issuer has its registered office in the UK.
  
• The regime should apply to "transferable securities" as defined in Section 102A(3) of the Financial Services and Markets Act (2000).
  

A draft statutory instrument - The Financial Services and Markets Act 2000 (Liability of Issuers) Regulations 2008 - has been included in the Government's response document.

For further information see:

HM Treasury: Davies review page

England and Wales: the financial ombudsman and English law

Today the Court of Appeal delivered an important decision concerning the operation of the Financial Ombudsman Scheme (FOS). In Heather Moor & Edgecomb Ltd, R (on the application of) v Financial Ombudsman Service & Anor [2008] EWCA Civ 642 the court considered, inter alia, the operation of Section 228(2) of the Financial Services and Markets Act (2000). Section 228(2) provides that "[a] complaint is to be determined by reference to what is, in the opinion of the ombudsman, fair and reasonable in all the circumstances of the case".  One of the arguments made was that Section 228 required the Ombudsman to determine complaints in accordance with English law.  The Court of Appeal rejected this argument; Stanley Burnton LJ observed (para. [36]):

If I confine myself to the wording of section 228 and the other relevant provisions of the 2000 Act, in my judgment they do not require the Ombudsman to determine a complaint in accordance with the common law. If section 228 had simply provided that a complaint is to be determined by the ombudsman, it would have been implicit that it was to be determined in accordance with the law apart from that section. But Parliament did not so provide. The words "by reference to what is, in the opinion of the ombudsman, fair and reasonable in all the circumstances of the case" in section 228 are inappropriate and unnecessary if what Parliament intended was a determination in accordance with the law apart from section 228".

Of interest, too, is what Rix LJ said with regard to the operation of the FOS (at para. [87]-[88]):

...it is possible to see in the "fair and reasonable" jurisdiction of the ombudsman the source not merely of an alternative dispute resolution service but of an important new source of law. That "fair and reasonable" jurisdiction may be flexible and (subject to judicial review) for the ombudsman and not for the courts to discern: nevertheless, these are concepts long familiar to English law, and, given the legal and industry background to which the scheme rules bid the ombudsman to have regard, it is hard to think that the parties to complaints submitted to the ombudsman's jurisdiction will find themselves in unrecognised country".

UK: the super equivalence of the market abuse rules

In February this year, HM Treasury launched a consultation concerning the definition of market abuse within the Financial Services and Markets Act (2000). The FSMA definition is wider than that found in the European Market Abuse Directive (2003/6/EC) (it includes, for example, behaviour based on a wider set of information than the Directive).  For this reason HM Treasury sought views on the desirability of this position of "super equivalence".  HM Treasury's response to the consultation has now been published; to quote directly from the response document (para. 1.2):

Having an effective set of tools to tackle market abuse is crucial. This is a shared objective at the EU level and we are therefore keen that the EU review of the Market Abuse Directive should ultimately deliver an outcome that we consider fully satisfactory for combating market abuse. Pending this work we have decided to retain the areas in which we are superequivalent to the EU’s Market Abuse Directive until December 2009 to enable a wider consideration of their benefits for addressing identified issues with the EU regime and to minimise transition costs for industry".

For further information about the European Market Abuse Directive, see here and for discussion see Siems, M."The EU Market Abuse Directive: A Case-Based Analysis", 2007, available on SSRN here.

Postscript (11 June 2008): The Financial Services and Markets Act 2000 (Market Abuse) Regulations 2008, which will extend the super equivalent provisions until 31 December 2009, have been published and come into force on 30 June 2008. 

UK: England and Wales: the Winterflood case and market abuse

The ICLR, as part of its (free) WLR Daily service has published a summary for Winterflood Securities Ltd & Ors v The Financial Services Authority [2010] EWCA Civ 423: see here.

UK: England and Wales: FSA wins market abuse case in Court of Appeal

The Court of Appeal gave judgment yesterday in Winterflood Securities Ltd & Ors v The Financial Services Authority [2010] EWCA Civ 423, an important decision concerning market abuse under Section 118 of the Financial Services and Markets Act (2000).

The court held that an actuating purpose - defined in the FSA Handbook glossary as "a purpose which motivates or incites a person to act" - was not required in respect of two examples of market abuse (price positioning and artificial transactions) in the Code of Market Conduct.

The FSA has welcomed the decision: see its announcement here. Background facts for the case are available here (pdf).

UK: election 2010 - Lib Dem bank bonus proposals

As part of their general election campaign, and ahead of the publication of their manifesto, the Liberal Democrats published a statement yesterday setting out proposed new rules governing bank bonuses: see here. The proposed rules are as follows (to quote directly from the statement):

• No cash bonuses – We will require all bonuses in excess of £2,500 to be paid in shares. These shares will only be redeemable after five years; it will be written into the right of entitlement of these shares that they will revert to the company if they are pledged or used as security prior to the date of their redemption.
• No bonuses at board level – We will ensure there are no bonuses at the board level of banks. This is not to say that board directors should not be well paid, but that they should have the long term interests of a company at heart - bonus payments do not encourage this.
• No rewards for failure – We will extend the Financial Services Act [and Markets Act (2000)] to ensure that no regulated institution which has made a loss can pay discretionary bonuses.
• Total transparency – We will require the publication of the names of all bank staff that have salaries and bonuses that are greater than the Prime Minster’s salary (which is just under £200,000). In addition we will require the FSA to publish its assessment of all regulated firms remuneration policy.
• Holding directors to account – We will extend the powers of the FSA to ensure that the directors of banks are personally fined if their institution breaks the current code of practice for remuneration.

UK: the Financial Services and Markets Act 2000 (Amendments to Part 18A etc.) Regulations 2010

The Financial Services and Markets Act 2000 (Amendments to Part 18A etc.) Regulations 2010 were laid before Parliament on April 7 and come into force today. A copy of Regulations is available here (html) and here (pdf). In the accompanying explanatory memorandum - available here (pdf) - the purpose of the Regulations is explained as follows:

The Markets in Financial Instruments Directive (MiFID) required competent authorities to be given powers to suspend trading in a financial instrument. The FSA was given these powers under [the Financial Services and Markets Act 2000 (FSMA)] as the competent authority in the UK. The FSA is currently required to give written notice individually to each institution on whom it proposes to impose a requirement to suspend or remove a financial instrument (such as the shares of a particular firm) from trading. The FSA does not find this procedure practical or efficient as they would have to identify and write to the thousands of firms who trade bilaterally (known as ‘over-the-counter’ or OTC trading). As a result, the FSA is not able to impose a trading suspension with immediate effect ...

The purpose of these Regulations is to amend Part 18A of the FSMA to permit the FSA to suspend trading in a financial instrument or class of financial instrument by notice to the market without the need for separate written notice to the institutions concerned".

UK: the Financial Services and Markets Act 2000 (Liability of Issuers) Regulations 2010

The Financial Services and Markets Act 2000 (Liability of Issuers) Regulations 2010 were laid before Parliament on April 7 and come into force on October 1. A copy of the Regulations is available here (html) and here (pdf). In the accompanying explanatory memorandum - available here (pdf) - the purpose of the Regulations is explained as follows:

The purpose of these Regulations is to amend the Financial Services and Markets Act 2000 (FSMA) by substituting section 90A and inserting a new Schedule into the Act providing for a new regime for the liability of issuers to pay compensation to third parties who have suffered loss as a result of misstatements, or dishonest omissions in information published by the issuer, or dishonest delay by the issuer in publishing information".

UK: the Financial Services and Markets Act 2000 (Market Abuse) Regulations 2009

The Financial Services and Markets Act 2000 (Market Abuse) Regulations 2009 were made on 30 November, laid before Parliament yesterday and come into force on 31 December 2009. The Regulations have been published on OPSI: see here (html) or here (pdf). In the accompanying explanatory memorandum their purpose is explained (paras. 7.1 to 7.3): 

The United Kingdom currently has a wider definition of market abuse than that established in the EU’s 2003 Market Abuse Directive. When the Treasury transposed the Directive, the main challenge was to decide how much change was appropriate to the civil market abuse regime that had been put in place as part of Financial Services and Markets Act (FSMA) in 2000. The FSMA regime and the Market Abuse Directive cover similar ground but adopt a slightly different approach to prohibiting abusive behaviour. The original FSMA regime defined market abuse in fairly broad terms and then qualified it by the requirement that behaviour is only abusive if it is likely to be regarded as such by a ‘regular user’ of the market. The Directive set out more specific descriptions of the type of behaviour that is to be prohibited.

On balance, it was decided to retain the scope of the existing market abuse prohibitions to the extent that these go beyond the prohibitions in the Directive (the new sections 118(4) and 118(8) of FSMA) but to make them subject to a sunset clause whereby the provisions would expire after a period of three years pending the outcome of a review by HM Treasury to assess whether they remain justified.

It was initially decided to extend the sunset clauses until 31 December 2009 until the outcome of the EU’s review of the Market Abuse Directive became known. This was done in the 2008 Regulations. The EU’s review of the Market Abuse Directive was subsequently delayed. The call for evidence was only launched on 20 April 2009, and the Commission has not yet published proposals to amend the Directive. It has therefore been decided to extend the sunset clauses further until 31 December 2011".

UK: the Financial Services Bill - first reading in the House of Commons

The Financial Services Bill received its first reading in the House of Commons today. The Bill's second reading is provisionally scheduled for 30 November. A copy of the Bill as introduced at first reading is available here (html) and here (pdf). Explanatory notes are available here (html) and here (pdf). The Bill contains 19 clauses, arranged as follows:

• The Council for Financial Stability (clauses 1, 2, 3 and 4).
• The objectives of the Financial Services Authority (clauses 5, 6, 7 and 8).
• The remuneration of executives of authorised persons (clauses 9, 10 and 11).
• Recovery and resolution plans (clause 12).
• Short selling (clause 13).
• The FSA's disciplinary powers (clauses 14, 15, 16 and 17).
• Collective proceedings (clauses 18 and 19).
  

The clauses concerning remuneration have attracted widespread attention. Clause 9 gives the Treasury the power to make regulations (a form of secondary legislation) regarding the preparation, approval and disclosure of executives' remuneration reports. 

Clause 11 will amend the Financial Services and Markets Act (2000) through the insertion of new section 139A. Section 139A will require the Financial Services Authority to impose on authorised firms the obligation to have, and to act in accordance with, a remuneration policy. This remuneration policy must be consistent with the effective management of risks and the Implementation Standards for Principles for Sound Compensation Practices issued by the Financial Stability Board on 25 September 2009. Where a remuneration policy is not consistent with these requirements, Section 139A(7) states that the FSA "must take such steps as it considers appropriate to deal with the failure" and in this regard it is specifically given the power to require changes in the remuneration policy. 

Section 139A(9) provides that the FSA's rules on remuneration may prohibit individuals from receiving certain types of remuneration, with agreements in contravention of this prohibition being void.

UK: issuer liability - extending the statutory regime

HM Treasury has published its response to last year's consultation on extending the statutory regime for issuer liability: see here (pdf). The Financial Services and Markets Act (2000) will be amended in order to provide for the liability of issuers to pay compensation to investors in respect of (a) a misleading statement or dishonest omission in certain published information relating to securities, or (b) a dishonest delay in publishing such information. This will be achieved by the Financial Services and Markets Act 2000 (Liability of Issuers) Regulations 2010, a draft of which has been published here (pdf). An explanatory memorandum is available here (pdf).

UK: England and Wales: assisting overseas regulators

The Court of Appeal gave judgment this week in Financial Services Authority v Amro International SA [2010] EWCA Civ 123. This is an important decision concerning the powers conferred by the Financial Services and Markets Act (2000) on the Financial Services Authority to support overseas regulators. A summary of the decision has been provided here by the ICLR as part of its free WLR Daily service.

UK: FSA imposes largest fine to date against an individual for market abuse

The Financial Services Authority has fined Mehmet Sepil, the chief executive officer of Genel Enerji, a Turkish oil exploration company, £967,005 for dealing in the shares of a UK listed company (Heritage Oil Plc) on the basis of inside information. The fine was made up of a profit disgorgement element (£ 267,005) and penalty (£ 700,000) and is the largest so far imposed by the FSA against an individual for market abuse under the Financial Services and Markets Act (2000). The penalty of £ 700,000 was reduced from £ 1,000,000 because Mr Sepil agreed to settle at an early stage in the FSA's investigation. In its final notice, the FSA stated (paras. 3.3 and 3.4):

The FSA finds that you did not set out to commit market abuse, that you were not familiar with the legal requirements which prohibited you from dealing in Heritage shares, and that you had not received advice on these at the time. This was a serious example of insider dealing by a person in a key position of responsibility. While you were not an approved person, you were the Chief Executive Officer of a company engaged in takeover discussions and had inside information about Heritage’s operations".

Genel Enerji’s chief commercial officer and its exploration manager were also fined for dealing in Heritage’s shares on the basis of inside information.

For further background information see here.