INTRODUCTION

WELCOME

DLA Piper’s Financial Services International Regulatory team welcomes you to the twenty-second edition of ‘Exchange – International’ – an international newsletter designed to keep you informed of regulatory developments in the financial services sector.

This issue includes INTERNATIONAL updates, as well as contributions from EUROPE, AUSTRIA, FRANCE, NORWAY, THE NETHERLANDS, HONG KONG, SINGAPORE the UK and the UNITED STATES.

In particular, the French section gives an overview of the new law on crowd funding. The Norwegian section reports on the implementation of CRD IV into Norwegian law and the Netherlands section examines the Dutch bill on remuneration policy of financial undertakings. We also cover the FCA’s new competition role in the UK.

Please click on the links below to access updates for the relevant jurisdictions.

Our aim is to assist you in providing an overview of developments outside your own jurisdiction which may be of interest to you. In each issue we will also focus on a topic of wider international interest. In this edition, “In Focus” looks at the USA’s release of the final rules applying enhanced prudential standards to foreign banking organisations.

Please click on the links below to access updates for the relevant jurisdictions.

Your feedback is important to us. If you have any comments or suggestions for future issues, we would be very glad to hear from you.

CONTaCTs

Editor

Michael McKeeLondon T +44 20 7153 7468 michael.mckee@dlapiper.com

Gavin PuniaLondon T +44 20 7153 7072 gavin.punia@dlapiper.com

Europe

Dr. Mathias HantenFrankfurt T +49 69 271 33 381 mathias.hanten@dlapiper.com

Us

Jeffrey L. HareWashington D.C. T +1 202 799 4375 jeffrey.hare@dlapiper.com

Exchange – International NewsletterIssue 22 – april 2014

FINaNCIaL sERVICEs REGULaTION

CONTENTs

INTERNaTIONaL | EUROPE | aUsTRIa | FRaNCE | NORWaY | NETHERLaNDs | HONG KONG | sINGaPORE | UK | UNITED sTaTEsIN FOCUs | CONTaCTs

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EUROPE

EU COURT DECLaREs DaTa RETENTION DIRECTIVE INVaLID

EU law permits national courts to refer questions on the interpretation of EU legislation to the European Court of Justice (“ECJ”). In a digital context, the Irish and the Austrian courts submitted a reference for a preliminary ruling on the validity of the Data Retention Directive (2006/24/EC) (the “Data Directive”). The Data Directive was adopted in the aftermath of deadly terrorist attacks in Madrid and London in 2006, primarily to combat serious crime and it obliges member states to introduce laws compelling the storage of telecommunications data.

In its judgement (C-293/ and C-594/12) dated 8 April 2014, the ECJ found the Data Directive incompatible with articles 7 and 8 of the EU Charter of Fundamental Rights (the “Charter”), the right to privacy and data protection respectively.

The European lawmakers had gone beyond what was proportionate by applying the Data Directive to all traffic data of all users of all means of electronic communications. The Data Directive entailed “an interference with the fundamental rights of practically the entire European population”. It was held that the Data Directive did not require a relationship between the data retained and serious crime or public security and there was an absence of sufficient restrictions for access to and use of the data by national authorities. Considering the lack of guidelines on data security and deletion measures, the ECJ drew attention to the risk of abuse or unauthorised access.

The judgement demonstrates the ECJ’s willingness to invoke fundamental rights enshrined in the Charter invalidating European legislation and shows a robust interpretation of the right to privacy and data protection. It also puts pressure on EU legislators to adopt a new version of the Data Directive to remedy the invalidity and creates uncertainty for those EU telecom providers who have been collecting and using data since the 2006 law enacted. Most of the 28 EU member states have transposed the Directive through their implementation of national legislation.

EMIR: DELEGaTED REGULaTION ON EsMa PROCEDURE FOR IMPOsING FINEs aND PERIODIC PENaLTY PaYMENTs ON TRaDE REPOsITORIEs

The European Commission has published a delegated Regulation made under the European Market Infrastructure Regulation (“EMIR”), (the Regulation on OTC derivative transactions, central counterparties (CCPs) and trade repositories (Regulation 648/2012)) relating to the rules of procedure for penalties imposed on trade repositories by the European Securities and Markets Authority (“ESMA”).

On 13 March 2014, the European Commission published a delegated Regulation relating to the powers of ESMA to impose fines and penalties on trade repositories under EMIR. Article 64(7) of EMIR requires the European Commission to adopt by delegated act procedural rules relating to ESMA’s powers to fine or impose penalties on trade repositories.

The delegated Regulation specifies the rules of procedure to be followed by ESMA in the exercise of its power to impose fines or periodic penalty payments on trade repositories, including rights of defence for trade repositories subject to a sanctioning procedure. Its provisions are largely of a procedural nature, referring to limitation periods, procedures for the right to be heard and access to files. It is expressed as being in line with European Commission delegated Regulation (EU) No 946/2012 of 12 July 2012 concerning the rules of procedure to impose fines on credit rating agencies by ESMA.

The next step will be for the Council of the EU and the European Parliament to consider the delegated Regulation. In the interest of “immediate and effective supervisory and enforcement activity”, the delegated Regulation will come into force on the third day following publication in the Official Journal of the EU. ESMA published a final report setting out technical advice to the European Commission on the rules of procedure in December 2013.

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EUROPEaN COMMIssION REsPONDs TO EsMa ON EMIR DERIVaTIVE DEFINITION

On 20 March 2014, a letter (dated 26 February 2014) was published from Jonathan Faull, European Commission Director General for Internal Market and Services, to Steven Maijoor, the ESMA Chair, about the definition of a “derivative” or “derivative contract” under EMIR (the Regulation on OTC derivative transactions, central counterparties (CCPs) and trade repositories (Regulation 648/2012)). The letter has been written in response to correspondence dated 14 February 2014 from ESMA.

Mr Faull agrees that there is a lack of clarity about the precise delineation between FX forward contracts and currency spot contracts under the Markets in Financial Instruments Directive (2004/39/EC) (“MiFID”) which is referred to in EMIR. He sets out the following preliminary views:

■ The European Commission will need to consider which delivery periods are appropriate in the FX forwards market when considering the delineation between derivative and spot contracts. ESMA is asked to provide details of how the definition of a derivative and an FX forward have been transposed by national competent regulators. ESMA is also asked to provide details of the commonly accepted delivery periods for currencies in the member states and the developments in the FX markets since the implementation of MiFID.

■ “The commercial purpose” of the conclusion of a derivative contract is only foreseen as a criterion for physically settled commodity derivative contracts.

■ The issue of the definition of commodity forwards that can be physically settled was discussed during MiFID II negotiations and further work will be carried out on this point. ESMA is asked to assess the status of physically settled forwards as part of its work on MiFID II.

EsMa’s THIRD aNNUaL REPORT ON CREDIT RaTING aGENCIEs

On 21 February 2014, ESMA published its third annual report (ESMA/2014/151) on its supervision of EU-regulated credit rating agencies (“CRAs”).

The concept of regulating CRAs through a centralised EU regulator emerged in the aftermath of the first phase of the global financial crisis. A single regulator was seen as essential to address fundamental concerns about the nature of the industry and, in particular, its transparency and integrity. 

The new EU regime created with the CRA Regulation supports the principles of integrity, transparency, responsibility and good governance on which CRAs’ credit rating activities should be based. It also emphasises the importance of robust internal controls of CRAs, conduct of business rules, and the disclosure requirements for methodologies, models and rating assumptions. ESMA’s immediate challenge as a supervisor was to assess the state of play in the industry, build up its supervisory resources, and define how its approach to supervision would deliver the Regulation’s over-arching principles in order to ensure the quality and independence of the rating process. 

According to its annual report, ESMA believes that CRAs’ compliance with the CRA Regulation (Regulation 1060/2009, as last amended by the CRA III Regulation Regulation (EU) No 462/2013) has continued to progress, including improved internal transparency and disclosure to the market on credit rating activities as well as empowerment of the compliance function. However, ESMA considers that improvements are still needed, particularly in the following areas:

■ Validation of rating methodologies, to ensure that a credit rating assessment is a comprehensive risk assessment;

■ Internal governance, ensuring the full independence of the internal review function to reduce the risk of conflicts of interest; and

■ Robust IT systems to support the rating process. 

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The report also outlines ESMA’s supervisory work plan for 2014. The above issues form the basis for much of ESMA’s supervision activities outlined in its work plan. This includes the completion of the two on-going supervisory reviews into CRAs’ monitoring of structured finance ratings and into small and medium-sized CRAs.

ESMA will also launch a new thematic investigation on how CRAs review and validate their rating methodologies and, following the entry into force of the CRA III Regulation, ESMA will complete a specific assessment on CRAs’ compliance with the CRA regulatory requirements.

EBa FINaL DRaFT RTs ON INsTRUMENTs aPPROPRIaTE FOR VaRIaBLE REMUNERaTION

On 19 February 2014, the European Banking Authority (“EBA”) published its final draft regulatory technical standards (“RTS”) on classes of instruments that are appropriate to be used for the purposes of variable remuneration under Article 94(2) of the CRD IV Directive (2013/36/EU). 

The aim of the draft RTS is to ensure that instruments for variable remuneration reflect the credit quality of an institution and incentivise prudent risk-taking. They prescribe that the institutions’ long-term interests be reflected in the classes of instruments used for variable remuneration. In particular, the draft RTS specify the classes of instrument that can be used for variable remuneration and introduce specific requirements for additional Tier 1, Tier 2 and other instruments. They define the write-down, write-up and conversion mechanisms for Tier 2 and other instruments.

To ensure a write down or conversion at going concern conditions, the draft RTS introduces for all instruments a uniform trigger event of 7% of the Common Equity Tier 1 capital and defines the respective mechanisms. Instruments must have a sufficient maturity to cater for deferral and retention arrangements and must be issued at market conditions. The draft RTS require that a significant portion of at least 60% be issued 

publicly or privately to other investors. If instruments are used for the sole purpose of variable remuneration a cap is set on the distributions paid out.

An accompanying press release states that the EBA has submitted the draft RTS to the European Commission for their adoption and they will enter into force after they are published in the Official Journal of the EU. The EBA consulted on a draft version of these technical standards in July 2013.

UK GOVERNMENT’s aPPLICaTION TO ECJ CHaLLENGING CRD IV BONUs CaP PROVIsIONs PUBLIsHED IN OJ

The text of the UK government’s application to the Court of Justice of the EU (“ECJ”) challenging certain provisions in the CRD IV legislative package relating to the permissible payment of variable remuneration to specified employees of credit institutions and certain investment firms (commonly known as the “cap on bankers’ bonuses”), has been published in the Official Journal of the EU as United Kingdom of Great Britain and Northern Ireland v European Parliament, Council of the European Union (Case C-507/13). The challenge was brought on 20 September 2013 and subsequently announced by HM Treasury.

The UK government is seeking the annulment of a number of remuneration-related provisions in the CRD IV Directive (2013/36/EU) and the Capital Requirements Regulation (Regulation 575/2013) (“CRR”), on various grounds. In particular, the UK government is seeking the annulment of the following provisions:

■ Articles 94(1)(g), 94(2) and 162(1) and (3) of the CRD IV Directive (2013/36/EU). Article 94(1)(g) sets a limit on the variable remuneration that can be paid to certain “material risk takers”. Under Article 94(2), the European Banking Authority (“EBA”) is assigned the task of determining the criteria by which material risk takers are identified in any particular institution and developing guidelines relating to a discount rate that may be applied to long-term variable remuneration. 

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■ Articles 450(1)(d), 450(1)(i), 450(1)(j) and 521(2) of the CRR. Article 450 requires institutions to make public certain details of material risk takers’ salaries.

The UK government is requesting that the above provisions be annulled on the grounds that:

■ They have an inadequate Treaty legal base.

■ They are disproportionate or fail to comply with the principle of subsidiarity (or both).

■ They have been brought into effect in a manner which infringes the principle of legal certainty.

■ The assignment of certain tasks to the EBA and conferral of certain powers on the European Commission is ultra vires.

■ The provisions in the CRR regarding disclosure of details of material risk takers’ salaries offend principles of data protection and privacy under EU law.

■ To the extent the cap on bankers’ bonuses under Article 94(1)(1)(g) of the CRD IV Directive is required to be applied to employees of non-EEA institutions, it infringes Article 3(5) of the Treaty on European Union and the principle of territoriality found in customary international law.

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aUsTRIa

aPPLICaBILITY OF aUsTRIaN BaNKING LaWs

A recent decision (VwGH 25.6.2013, 2009/17/0039) of the Austrian Supreme Administrative Court (Verwaltungsgerichtshof, the “Court”) treats various aspects of Austrian financial services supervision. Its findings demonstrate again that Austrian courts and authorities tend to interpret the applicability of Austrian banking laws broadly. 

Facts of the case

The facts of the case are as follows – an investment firm offered its customers within the framework of investment management agreements, participation in a computerised trading system that dealt with futures in the USA. Various customers of the investment firm were subsequently informed that due to a total failure of the routing software, major losses were incurred and trading was suspended. An error log of the system failure, however, did not exist.

One of the customers immediately requested that the trading on his account be suspended. In addition, the customer was given a verbal guarantee statement, which guaranteed the account balance for a fixed period of time, by the chairman of the management board of the investment firm. A copy of this undated guarantee was also sent per fax to the customer.

From the investment firm’s viewpoint the account was closed, and thus, not further observed. Several weeks later, the customer informed the investment firm that against his wishes, further trading was still carried out on his account, with subsequent losses. Confirmation was given by the USA trading company that, as a result of the plummeting numbers, the account was erroneously reactivated.

Merits

In deciding the merits of this case, the Court considered whether the investment firm, carried out trading on the account contrary to the customer’s instructions and whether the securities services company acted on their own account, through the provision of the guarantee without having the required licenses. It was also considered if the security service company had sufficient control and security measures in relation to the electronic data processing procedures. 

According to the Court’s findings, a guarantee for certain monetary benefits given by the management board of an investment firm for the event of a loss, is attributable to the company and constitutes a guarantee according to the Austrian Banking Act (Bankwesengesetz, “BWG”). Although no remuneration is required for the individual guarantee, commerciality is still present, when this forms part of the business with the customer.

The Court stated also that the trading of futures in conjunction with a third party, for the benefit or detriment of a customer, does not relate to asset management, but to the trading of futures and options according to the Austrian Banking Act. 

In addition, the Court clarified that the compliance requirements of Section 18 of the Securities Supervision Act (Wertpapieraufsichtsgesetz, “WAG”) are infringed, even when software problems cannot be traced due to the lack of a system log.

It also resolved that it is sufficient for Austrian laws to apply from a territoriality perspective when guarantee statements or instructions relating to the changes in account balances, originate from the domestic company headquarters.

Please contact jasna.zwitter-tehovnik@dlapiper.com for further information. 

07 | Exchange – International Newsletter

FRaNCE

FRaNCE TO EasE THE LEGaL BaRRIERs HOLDING BaCK CROWDFUNDING

Recently, crowdfunding (known in France as “financement participatif”, literally participative financing) has been subject to a growing interest in France by the government and the regulators. Law n° 2014-1 of 2 January 2014 allows the French government to amend certain provisions of the French Monetary and Financial Code obstructing the development of crowdfunding and adopt new rules facilitating it. 

Crowdfunding is an alternative mode of financing which consists in the funding of a project by raising small amounts of money from a large number of people, generally via a platform accessible on the internet.

Generally, the following types of crowdfunding platforms are distinguished:

■ platforms that collect donations;

■ platforms that permit the financing of projects via loans granted by participants with or without interest (lending crowdfunding); and

■ platforms allowing participants to invest in a project by via the subscription of securities (equity crowdfunding).

Under French law, crowdfunding raises major banking and finance legal issues. Willing to ease the constraints of French law, the government published proposals creating a dedicated regulatory framework applicable to crowdfunding activities.

LEGaL CONsTRaINTs IMPEDING THE DEVELOPMENT OF CROWDFUNDING

On May 2013, the French financial markets supervisory authority, the Autorité des marchés financiers (“AMF”), and its banking counterpart, the Autorité de contrôle prudentiel et de resolution (“ACPR”) published a guide on crowdfunding. Depending 

on the type of platform, the guide details the rules that crowdfunding operators must comply with.

Crowdfunding platforms faces major legal obstacles in France. First, crowdfunding activity may be qualified as the provision of banking, payment or investment services. Second, equity crowdfunding platforms may be subject to the rules governing public offering of financial securities. 

Banking monopoly

Only companies duly licensed as credit institutions (établissement de crédit), financing companies (sociétés de financement) in France or duly passported EEA credit institutions are allowed to carry out credit operations for profit (à titre onéreux) on a regular basis. The organisation and activities of such entities is heavily regulated and poorly adapted to crowdfunding (e.g. minimum capital requirements, client information, anti-money laundering rules, etc.).

It is worth noting that platforms permitting their users to grant loans without interest are not subject to prior authorisation.

Payment services regulations

With regard to payment services, as defined in the Directive 2007/64/EC of 13 November 2007 concerning payment services, only companies duly licensed as payment services providers are allowed to provide such services on a regular basis. Donation-based crowdfunding platforms may provide payment services (money remittance, execution of payment transactions) consequently, such platforms would be required to be licensed as payment services providers. 

Crowdfunding platforms may be exempted from this requirement if the offered payment services are based on instruments used to acquire goods or services under a commercial agreement with the issuer either within a limited network of service providers or for

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a limited range of goods or services. The guide published by the French supervisory authorities indicates that crowdfunding platforms allowing their participants to make donations in exchange for a reward (e.g. audio CDs) may benefit from their activities without registration.

Investment services regulations

The rules governing the provision of investment services may potentially apply to crowdfunding platforms, in particular to equity crowdfunding platforms. Equity crowdfunding platforms usually act as intermediaries, between investors and project leaders, by carrying out different investment services (e.g. reception and transmission of orders in relation to financial instruments, placing of financial instruments, execution of orders on behalf of clients, investment advice). As such, these platforms must be duly authorised by the ACPR as investment services providers (i.e. a credit institution or an investment firm) in order to conduct their activity on a regular basis and fully comply with the provisions of Directive 2004/39/EC on markets in financial instruments as implemented in France.

Public offering of financial instruments

Directive 2003/71/EC of 4 November 2003 (as amended), implemented in France, requires that, inter alia, entities offering securities to the public publish a prospectus approved by the AMF. Offering of securities to the public is defined as any communication to persons, presenting sufficient information on the terms of the offer and the securities to be offered, so as to enable an investor to decide to purchase or subscribe to these securities. Accordingly, equity crowdfunding platforms promoting the offering of securities to potential investors would be required to publish a prospectus. Such a requirement, made to protect investors, is particularly burdensome for crowdfunding platforms given the low amounts invested. 

Exemptions from this requirement are available for private placement of financial securities. (securities offered either to qualified investors or fewer than 150 investors), 

offerings of less than €100,000 in total or specific high value placement (€100,000 per investor or €100,000 per security). However, equity crowdfunding platforms offer securities to a multitude of potential investors and are unlikely to meet all these conditions.

NEWs PROPOsaLs TO MaKE CROWDFUNDING MORE aTTRaCTIVE

On 14 February 2014, the government announced new proposals to clear the legal hurdles hampering the activity of lending and equity crowdfunding platforms.

Concerning lending crowdfunding, project leaders and companies would be allowed to raise up to €1 million through crowdfunding platforms. In addition, a new regulated actor will be created for lending platforms: the “intermédiaire en financement participatif” (crowdfunding intermediary). Lending platforms registered as intermédiaire en financement participatif, will be created without any minimum capital requirements but will be subject to information and transparency rules. Lenders’ ability to lend will be limited to €1000 per project and the platform will be required to inform lenders about the risks incurred by their loans.

As for equity crowdfunding platforms, a new regulated actor is to be created, the “conseiller en investissement participatif” (crowdfunding investment advisor). Any crowdfunding platforms permitting its users to invest in a project via the subscription of securities will need to be registered as a conseiller en investissement participatif without being subject to any minimum capital requirements. These platforms will be able to raise up to €1 million per project without published a prospectus (investor information would be summarised in a few pages). 

It is worth noting that these proposals share certain similarities with the rules introduced in the US in 2012 by the JOBS Act facilitating the activity of crowdfunding platforms. The new proposals should be adopted by the French parliament and enter into force by the end of the summer.

Please contact Fabrice.Armand@dlapiper.com for further information. 

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IMPLEMENTaTION OF CRD IV INTO NORWEGIaN LaW

Introduction

The implementation of the CRD IV package into Norwegian law has created some challenges in Norway. The CRD IV framework will not be directly applicable in Norway as it is a non-EU member state. The CRD IV framework is, however, EEA-relevant and is intended to be incorporated into the EEA Agreement. Due to certain constitutional challenges in Norway in connection with the transfer of decision-making-powers to the European Banking Authority (“EBA”) and other EU institutions, this incorporation is still outstanding. At this point in time, the CRD IV framework cannot be implemented into Norwegian law, however, the Norwegian authorities have started to revise and adopt transition legislation to mitigate the delay.

Implementation process in Norway of the CRD IV package

New high level rules were adopted in June 2013 setting out the new minimum capital requirements, the capital requirement buffers (the buffer range and not the actual level), the institution-specific assessment of total capital needs and requirements to disclose information as well as some other provisions. 

With respect to the more detailed rules applying to the capital buffers, the proposals for new regulations have been published during autumn 2013. The proposals are on hold until February 2014 and we are awaiting the revised regulation from the Ministry of Finance (save for the counter-cyclical buffer regulation which has already been implemented). In Norway, the capital conservation buffer will be 2.5% as of 1 July 2013. The systemic risk buffer will be 2% for the period covering 1 July 2013 to 30 June 2014 and after that 3%. Based on the advice from the Norwegian Central Bank, the Ministry of Finance announced in November 2013 that the counter-cyclic buffer rate will be 1% as of 1 July 2015. The systemic institution risk buffer will be 2% for the 

period covering 1 July 2015 to 30 June 2016 and then 2% from 1 July 2016 onwards. According to the proposed regulation on systemic institution risk buffer, the buffer requirement will most likely be 2% and shall not differ between banks. The following banks have been proposed to be systematic risk institutions: DNB, Nordea Bank Norge, SpareBank 1 Nord-Norge, SpareBank 1 SR Bank, SpareBank 1 SMN, Sparebanken Vest, Sparebanken Sør and Sparebanken Pluss. The Ministry of Finance has stated in its press release that the existing capital requirement regime will continue to apply until the CRD IV/CRR regulations have been adopted.

The proposal for implementing the rules on capital, implementing the basis of calculation of own funds, large engagements, liquidity requirements, reporting requirements, supervision, etc. were published in January 2014. It will also be a revision of the local Norwegian rules applying to branches of banks domiciled in EU/EEA area.

The EBA technical standards and guidelines constitute an important part of the CRD IV framework by ensuring harmonised application of the rules. The Norwegian regulatory financial authority has published the EBA regulatory technical standards and guidelines on its website and stated that they will be followed in practice. The Norwegian authorities have currently only adhered to six EBA guidelines as set out on their website: http://www.finanstilsynet.no/no/Bank-og-finans/Banker/Regelverk/EBA-anbefalinger/.

IMPaCT ON BaNK BRaNCHEs BY EaRLY CRD IV IMPLEMENTaTION

The Norwegian authorities decision to introduce new capital requirements at an earlier stage than the CRD IV framework requires, risks causing some confusion for branches operating in Norway. However, the rule is clear, a Norwegian branch of a foreign institution domiciled within the EU/EEA territory, will be subject to its home member states implementation of the CRD IV framework. Due to this early implementation in Norway, this may result in a situation whereby Norwegian institutions are subject to the capital requirements, but the branches of foreign banks are not.

NORWaY

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According to publicly available sources, the Norwegian regulatory authorities have in July 2013 contacted the competent authorities in Sweden to seek their approval of the Norwegian counter-cyclical capital buffer applying to Swedish exposures in Norway. Whilst the approval has not yet been granted, political meetings between the Nordic authorities to seek further collaboration are currently on-going.

THE POssIBILITIEs FOR NORDIC sUPERVIsION COORDINaTION

On a political level, the key focus is being put on the close integration of Nordic financial markets given that most Nordic foreign institutions operating in the Nordic countries are domiciled in other Nordic countries. Due to the close integration, financial stability in the Nordic region may depend on the soundness of financial institutions in the Nordic region as a whole. A Nordic working group reviewed and recommended inter alia to strengthen cooperation and coordination when it comes to the supervision of branches in general, mutual recognition of counter-cyclical capital buffers, internal ratings based

(“IRB”) calibrations and real estate risk weights issues. Part of the discussions refers to applying a coordinated approach as a supervisory tool and reporting standards, to ease comparison and improve transparency for Nordic institutions. The working group report was established in 2012. However, then the work lapsed and it has been put back on the agenda after the change of government in Norway.

Please contact Fredrik.Lindblom@dlapiper.com and Camilla.Wollan@dlapiper.com for further information.

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THE NETHERLaNDs

DRaFT aCT ON REMUNERaTION POLICY OF FINaNCIaL UNDERTaKINGs – INTRODUCTION OF a MaXIMUM BONUs CaP OF 20%

Introduction

The remuneration policy of financial undertakings has been a point of attention on the financial markets and for (international) politics over the past couple of years. Consequently, the Dutch government announced in its coalition agreement that it would implement measures that avert inducements that lead to excessive risk-taking and short-termism. 

As a result, on 26 November 2013, the Dutch government published a consultation version of the legislative proposal regarding the remuneration policy of financial undertakings (Wet Beloningsbeleid Financiële Ondernemingen, the “Draft Bill”). Through the Draft Bill, the Dutch legislator, among others, imposes a maximum bonus cap of 20% on variable remuneration (the “Bonus Cap”). The envisaged date of entry into force of the Draft Bill is 1 January 2015.

sCOPE OF THE BONUs CaP: UNDERTaKINGs aND PERsONs aFFECTED

The Bonus Cap has a wide scope and applies to the following financial undertakings:

■ all regulated financial undertakings with their statutory seat in the Netherlands;

■ all subsidiaries of regulated financial undertakings with their statutory seat in the Netherlands, regardless of whether these subsidiaries are located in or outside the Netherlands;

■ all financial undertakings that form part of a group, if the (regulated) parent company of that group has its statutory seat in the Netherlands (except if the main activities of the group do not consist of activities within the financial sector); and

■ Dutch branch offices of financial undertakings that have their statutory seat in another state, unless it concerns a branch office of a bank or an investment firm that falls under the scope of CRD IV (as defined below), in which case the remuneration rules of the home member state apply.

Importantly, the Bonus Cap applies to all individuals employed under the responsibility of the financial undertaking in question, either through an employment contract or otherwise.

Exceptions

Some exceptions to the Bonus Cap apply, on the basis of which it is possible to grant a variable bonus exceeding 20% of fixed remuneration. The most significant exceptions are:

■ for individuals whose main activities take place in the Netherlands, and who have agreed on remuneration in deviation of an applicable collective wage agreement, a bonus cap applies of 20% of fixed remuneration on average. As a result, certain employees within a group of employees may receive a bonus exceeding the 20% cap, as long as the total amount of bonuses distributed among that group of employees does not exceed 20% of the total fixed remuneration of that same group of employees;

■ individuals whose main activities are performed in an EEA country other than the Netherlands may receive a variable bonus of up to 100% of the fixed remuneration of that individual; and

■ individuals whose main activities are performed outside of the EEA may receive a variable bonus of up to 200% of the fixed remuneration of that individual, subject to a decision to that effect by the shareholders or unitholders of the relevant financial undertaking.

■ Furthermore, the Bonus Cap does not apply to:

■ managers of alternative investment funds;

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■ managers of UCITS funds; and

■ investment firms that solely deal for own account with own capital and without external clients.

European context: CRD IV

Directive 2013/36/EU (“CRD IV”) also includes a bonus cap for a specific group of employees of banks and certain investment firms. This bonus cap is set at 100% of fixed remuneration, that may, provided certain conditions are met, be increased to 200%. 

Pursuant to Article 94, subsection 1, under g (i) and (ii) of CRD IV, member states may set a lower maximum percentage of variable remuneration. The Netherlands has made use of this right and set a bonus cap of 20% instead of 100%/200%. 

The Draft Bill and the accompanying Bonus Cap furthermore deviates from CRD IV on the following points:

■ the Bonus Cap applies to all financial undertakings (as specified in paragraph 2), as opposed to banks and certain investment firms; and

■ the Bonus Cap applies to all individuals employed under the responsibility of financial undertakings (as specified in paragraph 2) as opposed to a selected group of employees of banks and certain investment firms. 

Other measures

Besides the Bonus Cap, the Draft Bill contains provisions regarding the following topics:

■ severance payments. In accordance with CRD IV, severance payments may not exceed 100% of fixed remuneration. In addition, a prohibition to distribute any severance payments applies under certain circumstances;

■ claw-back of variable bonuses. Via the Draft Bill, certain powers to adjust distributed bonuses or to reclaim distributed bonuses are extended in order to apply to all individuals employed under the responsibly of a financial undertaking that falls under the scope of the Draft Bill;

■ disclosure requirements. Certain disclosure and transparency requirements will apply in relation to the remuneration policy of financial undertakings that fall under the scope of the Draft Bill;

■ ban on guaranteed variable remuneration; and

■ retention payments. A financial undertaking is allowed to incidentally deviate from the Bonus Cap in order to retain either high-quality employees or to safeguard the continuity and value of the financial undertaking in question.

Please contact Paul.Hopman@dlapiper.com or Leon.Korsten@dlapiper.com for further information.

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HONG KONG

HONG KONG COURT VaRIED INTERIM INJUNCTION TO aLLOW LEGaL EXPENsEs (BUT NOT OPERaTIONaL EXPENsEs) WITHDRaWN FROM FROZEN assETs sEIZED BY HONG KONG REGULaTOR

Qunxing Paper Holdings Limited (“Qunxing”) was listed on the Stock Exchange of Hong Kong Limited in 2007.  Qunxing and its subsidiary, Best Known Group Limited (“Best Known”), raised substantial funds in Hong Kong through the initial public offering in 2007 and an open offer of new shares and an issue of unlisted warrants in January 2011.

The Securities and Futures Commission of Hong Kong (“SFC”) found that Qunxing exaggerated its turnover in its annual results for 2006 to 2011 and this information was published in its IPO prospectus and the announcements of its annual results for 2007 to 2011. The SFC alleged that the prospectus and the annual results contained materially false or misleading information, in contravention of the Securities and Futures Ordinance (“SFO”).  

The SFC made an application to the court on 12 December 2013 under section 213 of the SFO for an interim injunction to stop any dissipation of assets by Qunxing pending the end of its investigation and to ensure there are enough assets to satisfy any restoration or compensation orders for distribution to the current public shareholders and unlisted warrant holders.  The SFC obtained an interim injunction freezing assets of Qunxing of up to HK$1,968,000,000.  

Qunxing and Best Known applied for a variation of the injunction order for withdrawing money out of the frozen accounts to pay their (a) operational expenses and (b) legal costs arising from these proceedings. The SFC opposed the application on the ground that Quxing’s main operations are in China and it has other means of meeting its Hong Kong liabilities based on its most recent interim consolidated financial reports.  The SFC also submitted that the evidence provided by Qunxing are not enough to demonstrate that the moneys should be so paid out of the frozen accounts and the application is premature.

The court allowed Qunxing, as an interim measure, to withdraw HK$500,000 from the frozen assets for legal expenses, but decline Qunxing’s application to use money in the frozen bank accounts as operational expenses as there was no evidence that such expenses were paid from the frozen accounts in the ordinary course of Qunxing’s business.

The injunction obtained by the SFC against Qunxing is yet another clear indication that the SFC is becoming more robust on the regulatory front and that it is prepared to utilise its powers under section 213 of the SFO to punish companies and their executives for publishing false or misleading information in the course of the listing process. This case follows the precedent set in the case of Hontex in which the Court made an order in 2013 to direct Hontex to pay HK$1.03 billion to its public shareholders for allegedly misleading information in its listing prospectus.

Please contact Harris.Chan@dlapiper.com or adrian.elms@dlapiper.com for further information.

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sINGaPORE

CONsULTaTION PaPER ON REVIEW OF THE BaNKING aCT

On 28 November 2013, the Monetary Authority of Singapore (“MAS”) has issued the consultation paper ‘Review of the Banking Act’. The changes seek to rationalise and enhance the supervisory powers of the MAS over banks and their directors, executive officers and external auditors. The MAS intends to codify its expectations as to the information that banks should provide to the MAS and the risk management practices that banks should implement and to ensure that the Banking Act remains current. The consultation period ended 15 January 2014.

The MAS previously consulted on the introduction of prohibition orders and the repeal of bank directors’ liability in related party transactions and together with those amendments, it is proposed that all changes to the Banking Act be effected collectively before the end of 2014.

The consultation paper proposes the following key changes:

Bank’s duty to inform MAS of material developments

Banks will be required to notify the MAS as soon as they become aware of any material adverse development affecting the bank or any entity in its group. Material adverse developments would include the breach (or possible breach) of any laws or regulations, business rules or codes of conduct, whether in Singapore or elsewhere. 

Notification requirements are also proposed in relation to any material information which may negatively affect the fitness and propriety of a key appointment holders (including CEO, deputy CEO, CFO and CRO) whose appointment has been approved by the MAS. 

To assist the MAS in monitoring the suitability of substantial shareholders and controllers of locally incorporated banks on an on-going basis, the MAS proposes that banks incorporated in Singapore be required to notify MAS as soon as they become aware of any material information that may negatively affect the suitability of their substantial shareholders and controllers.

MAS control over key officers and auditors

The MAS proposes replacing the current grounds for removal of a director with a single criterion of the director or executive officer ceasing to be fit and proper and to include ‘interest of the Singapore financial system’ as an additional premise for such removal. In relation to auditors, the MAS proposes enacting a safe harbour provision in the Banking Act to protect bank auditors which disclose information to the MAS in good faith in the course of their duties for liability for breach of confidentiality or defamation. 

Bank’s duty to implement adequate risk management systems and controls

The MAS seeks to codify its expectation in the Banking Act that all banks implement adequate risk management systems and controls. Specifically, banks will be required to establish a comprehensive risk management framework and internal controls that match their risk appetite as well as the scale and complexity of their operations. 

CONsULTaTION PaPER ON RELaTED PaRTY TRaNsaCTION REQUIREMENTs FOR BaNKs

On 5 December 2013, the Monetary Authority of Singapore (“MAS”) has issued the consultation paper ‘Related Party Transaction Requirements for Banks’ proposing changes to the requirements on banks’ transactions with their related parties (“RPTs”). The RPTs requirements are set out in in the MAS Notice 643 on Transactions with Related Parties (“MAS Notice”) dated 2 April 2013 and in the Banking Act. Banks in Singapore are required to set up systems and procedures to comply with the requirements in MAS Notice before 1 July 2014, the effective date of the MAS Notice. The proposed changes are intended to address the industry feedback that the MAS has received, as well as to ensure oversight and controls over RPTs, to minimise the risk of abuses arising from conflicts of interest. The consultation period ended on 15 January 2014.

In the consultation paper, the MAS proposes, among others, changes to the MAS Notice in respect of the following areas:

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The definition of ‘transaction’

Whether to include a de minimis threshold and exempt RPTs below S$100,000 from the scope of the MAS Notice which currently applies to all types of transactions, including both exposure (e.g. credit facilities) and non-exposure transactions (e.g. deposit-taking, service contracts, asset sales and purchases, lease agreements and constructions contracts). MAS has received feedback that it is onerous to require banks to subject all RPTs, regardless of value, to the RPT requirements.

The arm’s length dealing requirement

The MAS Notice currently requires all RPTs, except loans to directors and employees as part of their overall remuneration package, to be conducted free of conflicts of interest and on no more favourable terms than similar transactions with non-related parties in similar circumstances. MAS has received feedback that, aside from loans, banks also offer other special banking privileges to staff, as part of staff benefits and the MAS therefore proposes expanding the current exception to the arm’s length dealing requirement for staff loans to other staff transactions, provided these transactions are granted as part of the employee’s overall remuneration package, in accordance with a staff remuneration policy that has been approved by the board.

The definition of ‘related parties’

Bank’s ‘related parties’ are currently defined as the persons in its director groups, senior management groups, financial group, substantial shareholder groups and related corporation group as well as any person whose interests, in the opinion of the bank’s board of directors, conflict with that of the bank and who is specified by the board as a related party. However, the MAS considers that this list of related parties may not capture all relationships which are potentially susceptible to abuse and therefore intend to amend the definition of ‘related parties’ seeking comments on: 

■ whether to exclude a bank’s majority owned subsidiaries from the bank’s ‘relates parties’ and the level of majority shareholding in a subsidiary required for the subsidiary to qualify for the exclusion;

■ expanding the definition of ‘director group’ and ‘senior management group’ to include companies in which bank directors or senior management members are directors or agents;

■ whether to limit the definition of ‘senior management’ for a bank incorporated outside Singapore to the senior management of the bank in Singapore;

■ expanding the definition of ‘substantial shareholder group’ to include the substantial shareholders of all the holding companies of a bank incorporated in Singapore; and

■ reviewing the substantial shareholding threshold and the 20 per cent shareholding threshold for determining the affiliates of substantial shareholders of a bank incorporated in Singapore. 

The board approval requirements

To ameliorate the operational challenges in implementing the board approval requirement, the MAS is seeking comments on whether the requirements for obtaining the board’s prior approval for RPTs should be confined to the following circumstances: 

■ where the counterparty is not an intra-group entity;

■ if aggregated exposures to a related party group exceed a specified materiality threshold; or

■ if a non-exposure transaction exceeds a specified materiality threshold. 

Please contact Ben.Sandstad@dlapiper.com for further information. 

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UK

TRaNsFER OF CONsUMER CREDIT REGULaTION FROM OFT TO THE FCa

On 19 February 2014, the Financial Services and Markets Act 2000 (Regulated Activities) (Amendment) Order 2014 (SI 2014/366) was published together with an explanatory memorandum. The Order relates to the transfer of consumer credit regulation from the OFT to the FCA. It was made on 13 February 2014 and to the extent not already in force, came into force on 1 April 2014, which is when responsibility for consumer credit transfers to the FCA.

Among other things, the draft Order:

– amends the Financial Services and Markets Act 2000 (Regulated Activities) Order 2001 (SI 2001/544) (“RAO”) to:

■ specify additional credit-related activities as regulated activities;

■ provide for exclusions from certain regulated activities; and

■ provide that local authorities are only required to be authorised if they undertake credit-related activity that is within the scope of the Consumer Credit Directive (2008/28/EC) (“CCD”).

– makes consequential amendments to other primary and secondary legislation, including the Financial Services and Markets Act 2000 (“FSMA”), the Consumer Credit Act 1974 (“CCA”) and the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005 (SI 2005/1529) (“FPO”).

– provides for the FCA to undertake a review of the CCA to consider whether the remaining provisions of the CCA in force after 1 April 2014 could be replaced by rules or guidance made by the FCA under FSMA. The draft version of the Order was published on 15 January 2014.

FIRsT COMPETITION-BasED MaRKET sTUDY INTO INsURaNCE aDD-ON PRODUCTs

On 11 March 2014, the FCA published a report (MS14/1) setting out the provisional findings from its market study into general insurance add-on products. The aim of the study was to test whether competition in the add-ons market is effective or not and, if not, to understand why this might be the case. The FCA analysed a range of information from insurers and intermediaries, including product literature and data relating to sales. It carried out both quantitative and qualitative consumer research. Using behavioural economics as a key tool during the study, consumers’ reactions to the add-on mechanism were tested in a simulated environment.

The market study into general insurance add-on products is the first of its kind by the FCA. In future, these studies will form the mainstay of how the FCA gathers evidence to assess competition problems, and where it can intervene to promote better outcomes for consumers. 

Generally, the FCA found that competition in the market for general insurance add-ons is not effective. This can lead to poor consumer outcomes, with many consumers not getting value for money when they buy products as add-ons. The FCA has used the claims ratio (that is, the proportion of the premiums consumers pay that is paid out in claims) as its core measure of value. It estimates that consumers overpay for the add-on products considered during the study by around £108 million to £200 million per annum. As a result, the FCA believes there is a clear case for it to intervene to make competition in the market for general insurance add-ons more effective for consumers. A number of proposed remedies are set out in the report, including:

■ Banning pre-ticked boxes (known as “opt-outs”) to ensure consumers actively choose to buy an add-on, and are clear when and how they purchase a product.

■ Requiring firms to publish claims ratios to highlight low-value products.

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■ Mandating that the sale of guaranteed asset protection (“GAP”) insurance cannot be concluded at the point of sale of the car or car finance, but only at a later point (known as the “deferred opt-in”).

■ Improving the way that add-ons are offered through price comparison websites, focusing on what information consumers can access about add-ons and when this is introduced.

Comments can be made on the provisional findings and proposed remedies until 8 April 2014. The remedies will be further refined and subject to cost-benefit-analysis. The FCA plans to publish its final findings from the study in due course, and to publish its consultation on remedies before the end of 2014. However, it intends to introduce its remedies on GAP insurance on an accelerated timetable.

FCa’s NEW COMPETITION ROLE

On 11 March 2013, the FCA published a speech by Christopher Woolard, Director of Policy, Risk and Research at the FCA on ‘Promoting competition in the financial services sector’. 

Since the FCA was created in April 2013, it has had a new competition duty – an objective to promote effective competition in the interests of consumers. Since April, the FCA has evolved as a regulator to meet this objective and grown into its new competition skin. In a short period of time, the FCA has brought to life its competition objective and started to take action where it saw that markets might not be working in the interests of consumers. To achieve this, it has steadily built its competition resources.

The FCA has established strong working relationships with the Office of Fair Trading (“OFT”) and the new Competition and Markets Authority (“CMA”). In July, the FCA confirmed its first market study – looking at the issue of competition in the general insurance add-ons market (see previous article). In September, the FCA built on this to 

announce a full suite of market studies. On 11 March 2014, the FCA has announced the next step on that journey: the first results of its work – into the general insurance add-ons market.

Mr Woolard asks himself what competition looks like through an FCA lens. He mentions that it is not distinct from the FCA’s other regulatory objectives and functions. Issues that the FCA spots through authorisation, supervision and during enforcement investigations will inform its work in competition. The same is true in reverse: insights from the competition department will help inform thematic work, supervisory action and other policy interventions.

During the course of our market studies we will be looking to promote competitive markets; protect consumers and help firms by building trust in the markets they rely on for growth. And this is where today’s study enters the picture.

On 21 March 2014, the Association of British Insurers (“ABI”) published a paper on the FCA’s competition role. In the paper, the ABI considers the importance and potential implications of the FCA’s new role to promote competition. It notes that the FCA has already launched a series of market studies and thematic reviews in insurance markets where the FCA considers there may be issues with the operation of competition. The ABI considers the impact of the studies and offers some challenges and recommendations to both the FCA and the industry to ensure that the new regulatory objectives can be pursued in a way that delivers on the common goal of making competition work in the interests of consumers.

The ABI notes that it is still early days in assessing how the FCA’s new objective will impact on its overall approach to regulation. However, it considers that the FCA’s new competition role means an increased focus on market dynamics, such as the benefits of innovation in the market, market entry and exit, the prevalence and ease of consumer switching, and the extent to which consumers can access products that meet their needs. In addition, the FCA is placing a greater scrutiny on pricing, value for money and profitability.

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FCa sPEECH ON REGULaTION OF CaPITaL MaRKETs

On 12 March 2014, the FCA published a speech given by David Lawton, FCA Director of Markets, on regulatory developments and the changing market structure.

In his speech, Mr Lawton considers the “big picture” for capital markets. Of particular interest are his comments regarding:

The global perspective

Mr Lawton states that “regulators must increasingly face outwardly to the international stage if they are to build and support resilient and stable financial sectors in their own jurisdictions”. He points out that the balance of regulation for capital markets has shifted from the domestic to the international, and that there have been some successes in managing this change in emphasis. An example of this is the work on EU and US cross border regulation, such as the July 2013 “Path Forward” agreement between the European Commission and the Commodity Futures Trading Commission (“CFTC”). 

The EU perspective

At EU level (and also globally), some clear themes have emerged in the direction of capital markets regulation, namely increased transparency, reporting, and higher standards of risk management. Mr Lawton notes that, in this context, regulators have started to lead discussions around standards in market data reporting and quality. More broadly, regulators have a growing role in the development of key reference data standards and ensuring they are appropriately defined.

The domestic perspective

Mr Lawton mentions the FCA’s “significant” domestic agenda, including its renewed focus on wholesale conduct regulation, because poor conduct in wholesale markets results in poor outcomes in retail markets. In this context, he refers to the FCA’s work on its client assets regime, dealing commission, and the listing and sponsor regimes. 

CO-OPERaTIVE aND COMMUNITY BENEFIT sOCIETIEs aND CREDIT UNIONs REGULaTIONs

On 11 March 2014, the Co-operative and Community Benefit Societies and Credit Unions (Investigations) Regulations 2014 (2014/574), and explanatory memorandum, were published.

The Regulations were made on 10 March 2014 and come into force on 6 April 2014. They repeal section 48 of the Industrial and Provident Societies Act 1965, replacing it with more extensive powers for the FCA to investigate co-operative societies, community benefit societies and credit unions where circumstances suggest their behaviour may be improper or unlawful. 

The Regulations apply provisions of Part 14 of the Companies Act 1985 to societies and are intended to create a level playing field with the requirements that companies face and increase confidence in the co-operative and community benefit society form. Among other things, the Regulations include a requirement for the FCA to appoint an inspector if a court instructs them to do so, and give the FCA power to appoint an inspector to investigate the affairs of a society. Other powers include those relating to the expenses of the investigation.

The Regulations are made under section 4(1) and (2)(a) of the Co-operative and Community Benefit Societies and Credit Unions Act 2010 (2010 Act), which gives HM Treasury the power to apply Parts 14 and 15 of the Companies Act 1985 to Co-operative and Community Benefit Societies, with modifications. The Regulations also contain amendments to other legislation consequential on the repeal of section 48. Under the 2010 Act, industrial and provident societies (“IPSs”) are to be re-named community benefit or co-operative societies from 1 August 2014

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ENFORCEMENT NOTICEs

FCa BaNs aND FINEs TRaDER £662,700 FOR MaNIPULaTING GILT PRICE

On 20 March 2014, the FCA published the final notice it has issued to Mark Stevenson, a bond trader with nearly 30 years’ experience and formerly employed by Credit Suisse Securities (Europe) Limited. The FCA has imposed a prohibition order on Mr Stevenson and fined him £662,700 for behaviour amounting to market abuse, particularly market manipulation within the meaning of section 118(5) of the Financial Services and Markets Act 2000 (“FSMA”). 

The FCA found that Mr Stevenson had deliberately manipulated a UK government gilt (the UKT 8.75% 2017) on a single day in October 2011, during the second round of quantitative easing (“QE”) in the UK by the Bank of England (“BoE”). UK government bonds are commonly referred to as gilts and are extensively traded, with turnover of £7.2 trillion in the interdealer broker market in 2011.

By way of background, the government authorised the BoE to run two programmes of QE between 2009 and 2012 to stimulate the economy, with the aim of improving liquidity, and moving inflation towards the 2% target. The BoE was authorised to set up an asset purchase facility to purchase high quality assets through the program of QE and the assets targeted for purchase in large quantity by the BoE were gilts. The BoE purchased eligible gilts in QE through a competitive reverse auction process and was not primarily concerned with the profitability of its gilt acquisitions, but with the stimulus effect of those trades. As public money was involved (an indemnity was provided by the government to indemnify against losses arising from the asset purchase facility) it was also concerned with QE’s stated aim of injecting funds into the economy. With the BoE entering the market as a large guaranteed buyer of gilts, QE gave market participants an opportunity to sell large numbers of gilts (including less liquid gilts) to the BoE. 

Mr Stevenson bought £331 million of the gilt (which was relatively illiquid) in the morning of 10 October 2011. As a direct result of Mr Stevenson’s trading, the price and yield of the gilt significantly outperformed all gilts of similar maturity on that date. In line with the QE offers for sale process, during the afternoon of 10 October 2011, Mr Stevenson offered to sell £850 million of the gilt (including the £331 million acquired that day) to the BoE. His offer price was based upon the prevailing market price for the gilt, which had been heavily influenced upwards by his trading that day. 

The FCA has concluded that Mr Stevenson’s trading was designed to move the price of the gilt in an attempt to sell it to the BoE at an abnormal and artificial level, thereby increasing the potential profit made from the sale. In the event, the BoE identified the highly unusual price movement of the gilt and, within 40 minutes of Mr Stevenson’s offer, announced that it had rejected all offers received by it in that gilt “ following significant changes in its yield in the run up to the auction”. This is the only time the BoE has taken this step. Mr Stevenson then stopped buying the gilt and, later in the afternoon of 10 October 2011, its intraday performance had completely reversed. Had Mr Stevenson’s offer to trade with the BoE been accepted, he would have accounted for 70% of the £1.7 billion allocated to QE on that day. If the BoA had accepted his offer any subsequent losses it made would have been indemnified by the government – at taxpayers’ expense.

Mr Stevenson’s behaviour is regarded by the FCA as a particularly serious example of market abuse, in that he sought to profit unreasonably from QE, at the expense of the BoE and ultimately the taxpayer, at a time when the economy was very weak and confidence in the UK financial system was low. 

The FCA has determined that Mr Stevenson was solely responsible for the abusive trading and there is no evidence of collusion with traders in other banks. With regard to the fine, Mr Stevenson agreed to settle at an early stage of the investigation, qualifying for a 30% discount. Without this discount, the FCA would have imposed a fine of £946,800. 

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An FCA press release reporting on the fine and ban imposed on Mr Stevenson states that this is the first enforcement action for attempted or actual manipulation of the gilt market. This case sends a clear message about how seriously the FCA views attempts to manipulate the market. 

FCa BaNs FORMER CEO FOR LaCK OF INTEGRITY

On 27 February 2014, the FCA published the final notice (dated 24 February 2014) it has issued to Arnold Eber. The FCA has prohibited Mr Eber from performing any function relating to any regulated activity carried on by any authorised or exempt person or exempt professional firm because it considers that he is not a fit and proper person due to concerns over his integrity.

Mr Eber was the CEO and sole director of CIB Partners Limited (“CIB”) between 5 September 2007 and 15 September 2010. Between September 2007 and mid-2009, CIB was engaged as an adviser to SLS Capital S.A. (“SLS”), a Luxembourg-based special purpose vehicle that issued bonds underpinning investments that were sold to investors in the UK.

The FCA found that Mr Eber demonstrated a lack of integrity in causing CIB to issue inaccurate and misleading (and in two instances false) information and reports relating to SLS. Mr Eber’s conduct gave the misleading impression that SLS bonds were soundly backed assets when he had grave concerns about their viability. In September 2007, Mr Eber became aware that without continuous cash injections, there was a high risk that the SLS portfolio would suffer from severe liquidity issues within a year, but he still issued a number of misleading documents about the strength of the SLS portfolio. 

Mr Eber also failed to be candid and truthful in all his dealings with the FSA (the FCA’s predecessor) and did not inform the FCA of his concerns. The FCA considered the failings to be particularly serious because some of the information was relied on by third parties as giving some assurance that sufficient asset cover was in place for the SLS bonds.

An accompanying FCA press release states that CIB ceased to exist in April 2012 when it was dissolved and struck off the UK company register. It also states that the SLS bonds and asset portfolio underpinned certain products issued by Keydata Investment Services Ltd (in administration). 

FCa FINEs FXCM £4 MILLION FOR MaKING UNFaIR PROFITs

On 26 February 2014, the FCA published the final notice (dated 24 February 2014) and fined Forex Capital Markets Ltd (“FXCM Ltd”) and FXCM Securities Ltd (collectively “FXCM UK”) £4,000,000 for allowing the US-based FXCM Group to withhold profits worth approximately £6 million that should have been passed on to FXCM UK’s clients.

The FCA has fined FXCM Ltd £3,200,000, together with any redress that remains unclaimed by customers after 15 months from the date of the final notice, for breaches of Principle 6 (Customers’ interests) and the best execution rules set out in section 11.2 of the Conduct of Business Sourcebook (“COBS”) and section 7.5 of the old Conduct of Business Sourcebook (“COB”). The FCA has also censured FXCM Securities for breaches of Principle 6 and COBS 11.2. 

FXCM UK placed OTC foreign exchange transactions known as rolling spot forex contracts on behalf of retail clients, which were then executed by another part of the FXCM Group. Between August 2006 and December 2010, FXCM Ltd failed to pass on profits to its customers and instead kept the profits from favourable market movements between the time the orders were placed by FXCM UK and executed by FXCM Group, while any losses were passed on to clients in full – a practice known as “asymmetric price slippage”. Similarly, limit orders placed by customers were also treated asymmetrically as positive price movements were retained by the FXCM Group but negative price movements resulted in the customer losing the opportunity to have the order executed. 

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The FCA decided not to impose a financial penalty on FXCM UK in respect of breaches of COBS 11.2, other than disgorgement of profits, from 13 June 2008 onwards as they were acting in reliance on incorrect legal advice that they received on that date. 

The FCA has also fined FXCM UK a joint financial penalty of £800,000 for breaches of Principle 11 (relations with regulators), for failing to disclose to the FSA (the FCA’s predecessor) information of which it would reasonably expect notice. FXCM failed to inform the FSA that in July 2010 US authorities had begun to investigate the use of asymmetric pricing by FXCM and that FXCM had subsequently settled with the US authorities and paid redress to US customers affected. The FSA only learnt this information in August 2011 from monitoring press coverage. 

In the accompanying press release, the FCA states that it is conducting a thematic review of firms’ execution practices including the way services are described to clients and that it expects to publish the results by the end of the second quarter of 2014. 

FCa WINDs UP BOILER ROOM

On 20 March 2014, the FCA published a press release announcing that, at a hearing on 18 March 2014, the High Court made a winding up order against First Capital Wealth Ltd (“FCW”). Boiler room operations usually use high-pressure selling techniques to persuade consumers to buy shares that are often worth very little or nothing at all. Because the people selling shares through boiler rooms do not have permission from the FCA to do so, boiler room scams constitute unauthorised business.

FCW had been promoting the sale of membership shares in a company called Berkeley Brookes LLC without FCA authorisation. The press release states that FCW adopted aggressive and persistent sales practices and made unsolicited calls to investors that, among other things, claimed investors would receive guaranteed returns of between 25% and 128% following investments of one to three years. 

The FCA intervened to wind up FCW because it was unauthorised and because it was concerned about FCW’s ability to repay investors. Given that the FCW was unauthorised, customers who invested through FCW had no recourse in relation to their investments. According to the press release the FCA believes that, between June and November 2013, 27 investors which were mainly UK-based consumers together invested approximately £660,000. The FCA is aware that any consumers invested tens of thousands of pounds with the company. The FCA obtained a worldwide freezing order against FCW in November 2013.

RECENT PUBLICaTIONs

CONsULTaTION PaPER 14/3: FURTHER aMENDMENTs TO DEPP aND EG

On 28 February 2014, the FCA published a consultation paper proposing amendments to the Decision Procedure and Penalties Manual (“DEPP”) and Enforcement Guide (“EG”). The consultation paper forms part of the FCA’s wider work in relation to the transfer of consumer credit regulation from the OFT to the FCA from 1 April 2014 and is in addition to previous amendments made in August 2013 (PS 13/8), September 2013 (CP13/10) and those proposed in FCA CP13/10 and Quarterly Consultation No.3. 

In this consultation paper, the FCA proposes to make amendments to the FCA Handbook in light of powers, previously held by the OFT, granted to the FCA to prohibit or restrict EEA authorised payment institutions and electronic money institutions from undertaking certain consumer credit business in the UK. It follows that EEA authorised payment institutions and electronic money institutions in particular are directly affected by the proposed changes. 

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The changes relating to DEPP 2 include:

■ Annex 1 G is amended so that FCA staff under executive procedures will be the decision-maker when the FCA is proposing to refuse an application to vary the period, event or condition of a prohibition or to remove a prohibition, or to vary or remove a restriction; and

■ Annex 2 G is amended so that the Regulatory Decisions Committee (“RDC”) will be the decision maker where we are exercising our power to impose a prohibition or to impose or vary a restriction under the Electronic Money Relegations 2011 or the Payment Services Regulations. FCA staff under executive procedures will be the decision maket whenever a firm agrees not to contest the imposition of a prohibition or imposition or variation of a restriction. 

■ The changes relating to EG propose to apply the FCA’s current approach to enforcement to the exercise of the new powers and include:

■ New EG 19.92A is inserted to note the FCA’s new power to prohibit or restrict the carrying out of certain regulated activities by EEA authorised payment institutions; and

■ New EG 19.104A is inserted to note the FCA’s new power to prohibit or restrict the carrying out of certain regulated activities by EEA authorised electronic money institutions.

The consultation was open to comments until 14 March 2014. 

POLICY sTaTEMENT 14/3: FINaL RULEs FOR CONsUMER CREDIT FIRMs

On 28 February 2014, the FCA published its final rules for consumer credit firms in a policy statement and a guide for firms to help them prepare for the transfer of consumer credit regulation from the OFT to the FCA. These final rules result from the 300 

responses received from the consultation (CP13/10) launched in October 2013 and set the scene for the biggest overhaul of the consumer credit industry in the UK in four decades. All companies who supply credit will be affected.

The FCA will take a tough approach to consumer credit with stronger powers to clamp down on poor practice than the previous OFT regime and has, for example, been given the power to ban misleading advertisements from payday lenders.

The new rules will give consumers additional protection from rogue practices and put the onus on credit providers to ensure that they treat customers fairly at all times. Whilst the FCA has carried across many standards from the Consumer Credit Act (“CCA”) and the OFT guidance, higher standards have been set for payday and other high-cost short-term lenders and for debt management firms. 

The key changes for payday lenders and debt management companies include:

■ limiting the number of loan roll-overs to two and borrowers must be informed about sources of debt advice before a loan is refinanced; 

■ restricting the number of times a firm can seek repayment of a loan using a continuous payment authority to two unsuccessful attempts;

■ requiring to provide information to customers on how to get free debt advice; and

■ requiring debt management firms to pass on more money to creditors from day one of a debt management plan, and to protect client money. 

Other changes comprise amendments to the risk warning that high-cost short-term credit lenders will have to include in financial promotions, i.e. in their advertisements, which should now read as follows: “Warning: Late repayment can cause you serious money problems. For help, go to moneyadviceservice.org.uk”. In addition, the new rules on continuous payment authorities now allow for high-cost short-term loans to be repaid by instalments.

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To ensure a smooth transition to the new consumer credit regime, for those consumer credit firms with an existing and valid OFT licence, an interim permission regime has been put in place between 1 April 2014 and 31 March 2016. It follows that firms with a licence from the OFT that want to continue carrying out consumer credit activities had to register with the FCA for interim permission by 31 March 2014 or they could be breaking the law. New entrants to the market after 31 March 2014 will not be able to take advantage of this interim permission regime and will need to apply for full authorisation if they wish to carry on consumer credit related activities after this date. The FCA intends to soon publish more information for firms who obtain interim permission about when they should apply for full FCA authorisation or variation of permission. 

POLICY sTaTEMENT 14/4: THE FCa’s REGULaTORY aPPROaCH TO CROWDFUNDING OVER THE INTERNET

Crowdfunding can be described as a way in which people, organisations and businesses (including business start-ups) can raise money through online portals (crowdfunding platforms) to finance or re-finance their activities and enterprises. Some crowdfunding is unregulated, but if it involves a regulated activity, without an exemption applying, then the FCA is responsible for its regulation. The crowdfunding sectors have grown in recent years as a result of two key factors: technological innovation and the financial crisis, which has led to constraints on lending by traditional credit providers to the real economy.

On 6 March 2014, the FCA published a policy statement (PS14/4) which summarises and gives responses to feedback to its consultation launched in October 2013 (CP13/13). The new rules aim to boost consumer protection by ensuring that consumers have access to fair, clear information that is not misleading, when using loan-based, or securities-based crowdfunding platforms. The policy statement outlines the new regime that will apply to firms operating loan-based crowdfunding platforms including peer-to-peer (loans from individual investors to other individuals) and peer-to-business (loans from

individuals to businesses) lending platforms. The FCA also updated the regime applying to firms that either operate investment-based crowdfunding platforms (platforms on which consumers can buy investments, such as equity or debt securities that are not listed or traded on a recognised exchange, or units in an unregulated collective investment scheme) or carry on similar regulated activities (such as using offline media to communicate or approve direct offer financial promotions for non-readily realisable equity or debt securities to retail clients). 

The FCA has replaced the terms “unlisted share” and “unlisted debt security” with a new defined term of “non-readily realisable security” to more clearly describe the intended scope of the proposed rules. High-cost short-term payday loans are considered to be higher risk than other types of loans, such as those made to borrowers with easy access to credit. 

The rules on loan-based crowdfunding focus on ensuring that consumers interested in lending to individuals or businesses have access to clear information, which allows them to assess the risk and to understand who will ultimately borrow the money. Firms running the loan-based platforms will be required to have plans in place so that loan repayments continue to be collected even if the online platform gets into financial difficulties. New prudential regulations will be introduced over time so that these firms have capital to help withstand financial shocks. This is important as consumers who lend money through these firms will not be able to claim through the Financial Services Compensation Scheme. The FCA believes that loan-based crowdfunding firms pose a risk to consumers, and advocates that the fixed minimum prudential requirements of £20,000 (for the transitional period) and £50,000 for the final policy are consistent with this risk.

The new rules on securities-based crowdfunding keep the crowd in crowdfunding by allowing anyone to invest up to 10 per cent of their available assets while those who take advice or have the relevant knowledge and experience can invest more. These rules also apply to equity and debt securities such as mini-bonds, which are difficult to cash in.

24 | Exchange – International Newsletter

The FCA ensured that the same level of protection is provided to investors whether they engage with firms online, or offline as a result of the direct marketing or telephone selling. 

The new rules come into force on 1 April 2014, subject to certain transitional arrangements. The transitional arrangements will apply to all firms once they become fully FCA-authorised and will do so until 31 March 2017. OFT-regulated loan-based crowdfunding firms will not be subject to FCA prudential standards until they 

become fully FCA-authorised. As a next step in this area, the FCA plans to review the crowdfunding market, its regulatory framework and the implementation of the new rules in 2016 to identify whether further changes are required. 

Please contact michael.mckee@dlapiper.com for further information.

25 | Exchange – International Newsletter

UNITED sTaTEs

Us sECURITY aND EXCHaNGE COMMIssION CONFERENCE

At this year’s Security and Exchange Commission (“SEC”) conference held on 21 February 2014, SEC Chair Mary Jo White discussed the SEC’s priorities for 2014. By way of background, the SEC is an agency of the US federal government which holds primary responsibility for enforcing the federal securities laws and regulating the securities industry, the nation’s stock and options exchanges, and other activities and organisations, including the electronic securities markets in the United States. 

Mrs White stated that the SEC agency is facing an unprecedented rulemaking agenda. Between the Dodd-Frank and JOBS Acts, the SEC was given nearly 100 new rulemaking mandates ranging from rules that govern the previously unregulated derivatives markets, impose proprietary trading restrictions on many financial institutions, increase transparency for hedge funds and private equity funds, give investors a say-on-executive pay, establish a new whistleblower program, lift the ban on general solicitation, reform and more intensely oversee credit rating agencies. 

In 2014, in addition to continuing to complete important rulemakings, the SEC wants to intensify its consideration of the question of the role and duties of investment advisers and broker dealers, with the goal of enhancing investor protection. Increased focus will be placed on the fixed income markets and further progress is expected on credit rating agency reform. The SEC intends to prioritise its review of equity market structure, focusing closely on how it impacts investors and companies of every size. One near-term project that Mrs White will be pushing forward is the development and implementation of a tick-size pilot, along carefully defined parameters, that would widen the quoting and trading increments and test, among other things, whether a change like this improves liquidity and market quality. 

One significant vulnerability was highlighted by Mrs White, namely the risk of cyber attacks which needs to be addressed across both the public and private sectors. Commissioner Luis Aguilar enumerated the glowing cyber-threats faced by registrants,

the capital markets and investors. There has recently been a serious of high-profile cyber-attacks on American companies and financial institutions. Websites of several major US banks have been repeatedly knocked offline for hours or days at a time by denial-of-service cyber-attacks. The SEC will be holding a cyber security roundtable which will be open to the public on 26 March 2014 to encourage a discussion and sharing of information and best practices. 

With regard to enforcement, the SEC has to date charged 169 individuals or entities with wrongdoing stemming from the financial crisis – 70 of whom were CEOs, CFOs, or other senior executives. At the same time, the Commission also brought landmark insider trading cases and created specialized units that pursued complex cases against investment advisers, broker dealers and exchanges, as well as cases involving FCPA violations, municipal bonds and state pension funds. In 2013 alone, Enforcement’s labours yielded orders to return $3.4 billion in disgorgement and civil penalties, the highest amount in the agency’s history. The SEC wants to maintain such vigorous and comprehensive enforcement of securities laws. 

On investment management, the SEC’s new focus will be on risk monitoring of asset managers and funds. To enhance its asset manager risk management oversight programme, the SEC’s initiatives include expanded stress testing, more robust data reporting and increased oversight of the largest asset management.

Please contact Jeffrey.Hare@dlapiper.com for further information.

PUBLICaTION OF DRaFT FOUR-YEaR sTRaTEGIC PLaN

On 3 February 2014, the Security and Exchange Commission (“SEC”) published a draft strategic plan outlining its strategic goals for fiscal years 2014 to 2018. The draft plan examines forces shaping the regulatory environment and outlines more than 70 initiatives that the SEC has designed to support its primary strategic goals. Comments had to be submitted by 10 March 2014.

26 | Exchange – International Newsletter

Some of the initiatives outlined in the draft stategic plan include:

Engage in rulemaking mandated by Congress

The SEC will continue to fulfill its obligations under the Dodd-Frank Act and the Jumpstart Our Business Startups (“JOBS”) Act to develop and promulgate mandated rules and regulations with appropriate notice and comment and economic analysis.

Strengthen proxy infrastructure

The SEC will consider issues related to the mechanics of proxy voting and shareholder-company communications, including the role of proxy advisory firms.

Modernise beneficial ownership reporting

The SEC will consider how to modernise its beneficial ownership reporting requirements to, among other things, address the disclosure obligations relating to the use of equity swaps and other derivative instruments.

Analyse regulatory structures for investment advisers and broker-dealers provid-ing personalised investment advice

The SEC will continue to analyse whether the different regulatory obligations that apply to broker-dealers and investment advisers providing personalised investment advice should be changed for the protection of investors. 

Strengthen oversight of municipal advisors

The SEC will continue to enhance the program for registration and oversight of municipal advisors, with a particular focus on registering municipal advisors under the permanent registration rules and reviewing rule filings by the Municipal Securities Rulemaking Board to implement the permanent municipal advisor registration rules.

Build upon the establishment and successes of the Office of the Whistleblower

The SEC will continue to encourage individuals and entities with timely, credible and specific information about potential securities law violations to provide information to the Commission to further investigations and promote more efficient use of the Commission’s limited resources.

Update disclosure and reporting requirements to reflect the informational needs of today’s investors

The SEC will continue its efforts to enhance disclosure requirements for the benefit of investors, including a reassessment of current core corporate disclosure requirements. In proposing changes for the Commission to consider, the staff will seek to modernize disclosure requirements and eliminate redundant reporting requirements. The staff’s efforts will continue to include a review of proxy voting and shareholder communications to identify ideas and proposals for potential improvement to those rules.

Please contact Jeffrey.Hare@dlapiper.com for further information.

27 | Exchange – International Newsletter

IN FOCUs

FEDERaL REsERVE RELEasEs FINaL RULE aPPLYING ENHaNCED PRUDENTIaL sTaNDaRDs TO FOREIGN BaNKING ORGaNIsaTIONs

Section 165 of the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”) requires the Federal Reserve to establish enhanced prudential standards for the largest domestic and foreign banks. In 2012, the Federal Reserve proposed two rules that would apply a range of enhanced regulatory and supervisory requirements to large US bank holding companies (“BHCs”) and foreign banking organisations (“FBOs”), including increased standards related to capital planning, stress testing and enhanced risk- and liquidity-management standards. On February 18, 2014, the Federal Reserve released a final rule that reduces the number of foreign banks subject to the strictest of those enhanced requirements and extends the effective date by which such FBOs will need to become compliant (the “Final Rule”).

The Final Rule requires FBOs with $50 billion or more in US non-branch assets to form a US intermediate holding company (“IHC”) over their US subsidiaries. US non-branch assets are defined as the sum of the consolidated assets of each of the FBO’s top-tier US subsidiaries, excluding branch and agency assets. According to the Federal Reserve, the Final Rule reduces the number of FBOs that will need to form an IHC from roughly to 25 to 20 or fewer by raising the US non-branch assets threshold from $10 billion under the proposed rules to the current $50 billion. These reorganisation provisions are likely to affect five of the largest US broker-dealers, which are owned by FBOs. 

An IHC will be subject to the same standards under the Final Rule that apply to US BHCs with total consolidated assets of $50 billion or more, including requirements to (i) appoint a chief risk officer and an independent risk committee of the board of directors; (ii) develop an enterprise-wide risk management policy and a specific liquidity-risk management policy; (iii) conduct company-run liquidity stress-testing; and (iv) accumulate a buffer of highly liquid assets to meet liquidity requirements under various stressed scenarios. In addition, IHCs are subject to other previously released Dodd-Frank Act requirements for enhanced prudential standards, including the Basel

III risk-based capital and leverage requirements, released in July 2013, and requirements to conduct supervisory and company-run capital stress tests, released in October 2012. In addition, the Federal Reserve would have authority to examine any IHC and any of its subsidiaries.

FBOs with total consolidated assets of $50 billion, but fewer than $50 billion in US non-branch assets, are not required to form IHCs. These organisations will still need to meet capital, liquidity, risk-management, and stress testing requirements, but generally may satisfy these obligations by certifying compliance with the standards of their home country regulators. FBOs with $10 billion or more in total consolidated assets will also be required to conduct stress tests, and, if publicly traded, to form an enterprise-wide risk committee. 

Recognizing the cost and time associated with forming an IHC and restructuring their US assets, the Final Rule extends the compliance period for FBOs that must form an IHC by one year. An FBO that meets or exceeds the $50 billion US non-branch assets threshold on July 1, 2015 must transfer its interests in any US BHC subsidiary or bank subsidiary, and US subsidiaries representing 90% of its assets not held by either a BHC or bank subsidiary, to its IHC no later than July 1, 2016. The FBO then has until July 1, 2017 to transfer its interest in any other US subsidiaries to the IHC. In addition, based on comments received on the transitional burdens of complying with the US rules implementing the Basel III capital framework, the Federal Reserve is deferring application of the leverage capital requirements until January 1, 2018.

All other FBOs that exceed either the $50 billion or $10 billion asset thresholds as of July 1, 2015 will be required to meet the applicable requirements no later than July 1, 2016. Finally, any FBO that meets the $50 or $10 billion consolidated asset thresholds or the $50 billion US non-branch asset threshold later than July 1, 2015, must meet the appropriate requirements for their size on or before the start of the ninth quarter after the date on which its assets exceeded the applicable threshold. 

Please contact Jeffrey.Hare@dlapiper.com for further information.

28 | Exchange – International Newsletter

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CONTaCT Us

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30 | Exchange – International Newsletter

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