Financial Markets Disputes View: June 2024

Summer has now hopefully started after a spring that was at times tantalising with glimpses of sun and then drenching us with yet more rain. And, as if that wasn’t enough, we now have a general election to contend with. Into this sea of uncertainty we launch our June edition of Disputes View and bring you an update on the FCA’s enforcement consultation (another ship encountering stormy weather). We also take a look at, amongst other things, the new FIRS scheme, anti-suit injunctions in the context of sanctions against Russian entities, some potential new SRA guidance for in house lawyers, recent Supreme Court, Court of Appeal and Upper Tribunal decisions and the SFO’s new found sense of direction. As ever, please let us know if you have any thoughts.

What's Coming Up...

Join us for our Financial Crime webinar series. These concise 30-minute sessions have been crafted to provide you with insights into key issues and financial crime risks that are high on FCA and law enforcement agendas. Register today to stay ahead of the curve. You can watch the first episode (which covered the Economic Crime and Corporate Transparency Act 2023) on demand here and the second episode (which covered risk management lessons from final notices and s165/166 reviews) here.

We will be hosting three panel events as part of London International Disputes Week. On 5 June we explored the future of ESG disputes in 2024 and beyond. An on-demand recording will be available in due course, or you can speak to Emily Blower (Managing Associate) or Frances Gourdie (Managing Associate). On 6 June the panel will consider how law firms and their clients are adapting to AI. You can sign up here or speak to Emily Monastiriotis (Partner) or Jonathan Schuman (Managing Associate). On 7 June we will be focusing on preparing to defend class actions and practical steps. We will be joined on the panel by Jason Keenan from FTI, Michael Weekes from Oxera and Emily Wesley from BT. Please do sign up here or speak to Eleanore Di Claudio (Managing Associate) for more information.

In our webinar on 27 June, Tom Makin and Lily Mortimer will examine the drivers behind the PRA's new approach to enforcement, its key features and the practical considerations firms should have in mind at the outset of a PRA enforcement investigation, with particular focus on the Early Account Scheme. To find out more, register here.

Our ECCTA Fraud Prevention Toolkit to tackle the increased corporate criminal risks arising from the Economic Crime and Corporate Transparency Act is live! The toolkit provides a range of resources to help organisations understand, assess and mitigate the risks created by the reforms and to develop reasonable anti-fraud procedures. Click here for more information on the reforms and Toolkit, or speak to Camilla de Silva (Partner).

FCA enforcement consultation update

In the last edition we reviewed the key proposals contained in the FCA's Consultation Paper CP 24/2 and explained our initial thoughts on them, having spoken with Therese Chambers in our webinar (available on demand here)

In essence, the FCA's proposed changes would involve:

• Public announcements that the FCA has opened an investigation into a firm with one day's notice;
• Subsequent publication of updates on an investigation, including closure; and
• Amendments to the Enforcement Guide to remove duplication with other parts of the FCA Handbook and related legislation.

We have now submitted to the FCA a detailed response to the consultation. Having engaged with stakeholders across the market, including the FCA, industry bodies and a significant number of our clients we consider that the proposal in its current form is misconceived. In particular, the benefit of naming the subjects of an investigation is far outweighed by the burden that it would impose on firms and we believe that the FCA should take an alternative approach to achieve its objective of increasing the transparency of its investigations.

The obvious alternative approach, which would allow the FCA to be more transparent about its investigations work, to educate regulated firms about the issues that it has identified as requiring investigation and to reassure the public and the FCA's political stakeholders, is for the FCA to periodically (for example quarterly) publish on its website and/or in a Market Watch style publication the themes of its investigations, the market segments in which those investigations are being undertaken and the lessons that it considers regulated firms should learn and apply to their own businesses. Our experience of working with regulated firms is that publications such as this are read and that firms take proactive steps to implement guidance published by the FCA.

An anonymised publication such as this would be less impacted by the restrictions such as those imposed by section 348 FSMA. In practice, this would mean that the FCA could share more information publicly than if it were to identify the subject of an investigation. The fact that more could be achieved by publishing less information about the subject of a given investigation emphasises the irrationality of the Publicity Proposal.

If you would like a copy of our response or would like to discuss any of the issues raised by the consultation more generally please contact Caroline Hunter-Yeats (Partner), Thomas Makin (Managing Associate) or Emma Sutcliffe (Partner).

Anti suit injunctions and Russian parties

Since sanctions were imposed on a wide range of Russian companies following the invasion of Ukraine in 2022, we have seen numerous court cases started by Russian parties in Russia, contrary to agreements to arbitrate or to refer disputes to the English courts. In these cases, it is possible for the non-Russian party to apply to the English court for an anti-suit injunction, prohibiting the Russian party from continuing to take steps in the Russian proceedings started in breach of the agreement and, ultimately, requiring the Russian party to withdraw those proceedings.

The English courts have issued a number of judgments when granting such anti-suit injunctions, upholding the parties' agreements to arbitrate or to refer disputes to the English courts. Russian parties have sought to justify their commencing of proceedings in Russia on the basis that, as a result of sanctions, they would be unable to obtain justice in England. However, the English courts have robustly rejected these arguments, highlighting the various measures in place (such as the legal fees general license) which permit sanctioned parties to pursue proceedings in England either via arbitration or in the courts.

Some of the arbitration agreements in question have specified Paris as the seat of any arbitration. The French courts do not grant anti-suit injunctions and the Russian courts are unlikely to heed any submissions attempting to prevent them taking jurisdiction, particularly in light of Russian legislation passed in 2020 which confers exclusive jurisdiction on the Russian courts where the dispute involves a Russian party subject to sanctions, even in the face of a valid arbitration agreement. Non-Russian parties are therefore left with no remedy other than resisting enforcement of any resulting Russian judgment and commencing an arbitration against the Russian party for breach of contract. Parties in this position have sought help from the English courts, raising the question as to whether English courts can grant anti-suit injunctions in support of arbitrations seated in other jurisdictions.

The Supreme Court has again shown the willingness of the English courts to uphold parties' agreements to arbitrate, even when the seat of arbitration is not England. The decision (given orally) in Unicredit Bank GmbH v RusChemAlliance was the result of a fast track appeal to the Supreme Court in the UK, following a Court of Appeal decision in February. No judgment was handed down and the reasons for the decision will follow, but the effect is that the declarations and anti-suit injunction granted by the Court of Appeal remain in effect. Our analysis of the issues raised by the RusChemAlliance case is available here. 

In recent months, the Simmons team has successfully represented several clients facing these issues, and obtained anti-suit relief on their behalf. If you would like more information, please contact Jayne Bentham (Partner), Adam Brown (Partner), Basil Woodd-Walker (Counsel) or Craig Gilchrist (Supervising Associate).

Post script: It was reported in the Financial Times that a Russian court on 16 May 2024 seized over €700m of assets owned by UniCredit and other banks to satisfy RusChemAlliance's claims.

Draft SRA guidance for in house lawyers

The SRA has issued a suite of new draft guidance for lawyers working in-house, following on from the in-house solicitors thematic review last year. The draft guidance was published just prior to the SRA's second annual in-house solicitors conference, with the SRA expressing its ongoing commitment to supporting the in-house community particularly in light of recent high-profile cases such as Post Office. The draft guidance seeks to educate in-house lawyers and their employers on navigating the regulatory framework, and in our view is a welcome development; in-house lawyers do not benefit from the same clear reporting lines for regulatory issues as lawyers in private practice, and we have seen a growing number of queries from in-house legal teams in recent months as scrutiny by the SRA has increased.

This is of interest to all those working in-house but, in particular, large in-house teams, and you will note there is separate guidance for Employers in this context.

In the investigations context, the Internal investigations guidance applies to law firms as well as in-house, and follows the SRA's guidance on Supporting your client with interviews during external investigations published last year. It:

• describes internal investigations as an essential aspect of risk management and cautions that failing to identify an issue or concern that requires internal investigation, or to carry out an investigation properly, can expose firms and organisations to significant regulatory, legal, employment, and reputational risks;
• provides helpful guidance on defining and managing the investigation process, including supporting those involved, interviews and managing evidence, as well as reporting decision-making; and
• addresses when conduct should be reported to the SRA.

We provided comments on the draft guidance and await the finalised guidance, expected later this year. Our webinar on the new draft guidance is available here. 

If you have any queries, please contact Michelle Allison (Partner).

The UK's Foreign Influence Registration Scheme

The National Security Act 2023 received Royal Assent in July 2023 and introduced the Foreign Influence Registration Scheme ("FIRS") - the United Kingdom's response to the perceived increasing risk of covert foreign influence over aspects of UK politics and business.  FIRS is currently expected to come into force in 2024. The broad-reaching two-tier registration scheme will require both individuals and entities in the United Kingdom to register certain arrangements carried out at the direction of a 'foreign power'.

With the introduction of FIRS, the UK has mirrored action taken by the United States (through its Foreign Agents Registration Act) and Australia (through its Foreign Influence Transparency Scheme Act).  FIRS is intended to herald an era of improved transparency and scrutiny over political and commercial activity, detecting instances where a foreign power might otherwise exert influence over UK affairs.

However, there are ongoing concerns about the potential unintended consequences arising from FIRS' extensive scope, which may (for example) make ordinary banking arrangements with sovereign wealth funds of specified states registrable and add a large compliance burden to joint ventures with some state-owned entities.  Given that an election is due this year, it is possible that the implementation of FIRS may be delayed.  As we wait for more detail about implementation, our article looks in more detail at the potential unintended consequences of the legislation and sets out key actions that would be useful for UK entities to consider in the near term.

If you would like to discuss further please contact Nick Benwell (Partner), Firoza Dodhi (Associate) or David Bridge (Senior Professional Support Lawyer).

ESG Disputes Radar

We've released a new update on our ESG Disputes Radar. In this edition, we discuss the implications of a unique climate change criminal case that has been brought against TotalEnergies. You can read the update here

Please contact Emily Blower (Managing Associate) for more information.

Supply chains and the risk of potential criminal conduct\

The World Uyghur Congress (WUC), a human rights NGO, applied for a judicial review of the decisions made by three UK government agencies - the Border Force, HMRC, and the National Crime Agency. The WUC had previously contacted these agencies in April 2020, urging them to investigate and block imports of cotton originating from the Xinjiang Uyghur Autonomous Region (XUAR) in China, alleging forced labour and links to UK companies. However, the agencies concluded that the evidence was insufficient to warrant an investigation or block imports. The WUC challenged this decision, arguing that the agencies had misinterpreted the Foreign Prison Made Goods Act 1897 (FPMGA) and the Proceeds of Crime Act 2002 (POCA), which could potentially apply to the cotton produced in XUAR.

The agencies have defended their decision, stating that the evidence provided by the WUC did not meet the required standard of proof, which requires a specific link between a consignment of goods and a foreign prison. Regarding POCA, the WUC claimed that the agencies should investigate the imports as potential criminal property. The National Crime Agency, however, argued that for a POCA investigation, specific criminal conduct and property must be clearly identified, which was not the case here. The judge at first instance agreed with the agencies' interpretation of the legislation. However, he did acknowledge the widespread abuses in the XUAR cotton industry.

The case is an example of growing activism by NGOs and is currently subject to appeal. Should the appeal be successful, it would have significant impacts on the supply chains of companies where there is potential criminal misconduct and would increase the importance of carrying out supply chain due diligence to proactively manage risks to business.

Please speak to Camilla de Silva (Partner) or Sam Wilson (Associate) for more information.

International arbitration

The latest edition of our International Arbitration Newsletter is available here.

Please speak to Stuart Dutson (Partner) if you would like to know more.

FCA - Dear CEO Letters - Consumer Duty

In a flurry of Dear CEO letters, the FCA has sent out not one, not two, but six Dear CEO letters regarding the implementation the Consumer Duty for closed products to: asset managers, retail banks, life insurers, consumer finance firms, consumer investment firms and everyone else subject to the Consumer Duty. Like with everything Consumer Duty related they're quite long - but the main point for this email is the FCA has said that they expect firms' senior management to carefully consider the contents of this letter and take steps to ensure their firm is compliant with the Duty by the deadline (31 July 2024). More details on these letters is in Consumer Duty View.

We're doing a lot of work with clients on meeting this deadline and also with their annual report for open products and services - if you need any help or guidance we are here.

If you have any questions, please contact Caroline Hunter-Years (Partner).

SFO strategy

The SFO has recently published its new 5-year strategy (for 2024 to 2029) setting out the direction it intends to take under its new director, Nick Ephgrave. It outlines four strategy outcomes, being:

• to have a highly specialised, engaged and skilled workforce;
• to harness new technology;
• to effectively combat crime through intelligence, enforcement and prevention; and
• to be a proactive, authoritative player in the domestic and global justice system.

It is clear the SFO intends to achieve these goals by focusing on both its workforce and use of technology. For instance, it wants to develop its own use of machine learning AI and apply its resources to tasks that actually require human input. This, together with efforts to streamline casework, should let the SFO gather evidence and build cases in a shorter timeframe.

The plan emphasises the threat posed by fraud. Fraud is now estimated to be the most prevalent crime in the UK and the SFO's strategy raises the alarm that established methods of pursuing justice appear outdated in light of innovative ways criminals are able to harness technology to hide assets and manipulate victims. It will be interesting to see how the SFO reacts to combat fraud, especially in light of the new "failure to prevent fraud" offence which will come into effect later this year.

The SFO already appears to be making good on this intention, with it reporting dawn raids in February and March of this year in respect of a £140m property fraud investigation and a £76m fraud involving luxury care homes, respectively.

Please speak to Camilla de Silva (Partner) or Sam Wilson (Associate) for more information

Case update

The decisions which have caught our eye this month include:

• The Supreme Court's judgment in *Mur Shipping BV v RTI Ltd. *interpreting a force majeure clause in a shipping contract between Mur and RTI. RTI ran into difficulties making payment in US dollars as required by the contract when its parent was sanctioned by the US government. It offered to make payment in Euros instead but this was rejected by Mur which sought to rely on the force majeure clause to suspend its obligation to load cargo. RTI argued that Mur couldn't rely on the clause because in refusing its offer, Mur had failed to satisfy the reasonable endeavours proviso. Overturning the earlier Court of Appeal decision, the Supreme Court held that an obligation to use reasonable endeavours to stop a force majeure event preventing performance of a contract was an obligation to enable performance of the contract as drafted, not an obligation to alter contractual performance. It could not extend to obliging a party to accept payment in Euros where the contract specified payment in US dollars. 
• The Supreme Court's judgment in Lifestyle Equities CV v Ahmed. The primary issue was when directors of a company are liable as accessories for causing the company to commit a tort of strict liability - in this case, trademark infringement. The court held that a person who causes another person to do a wrongful act will only be jointly liable as an accessory for the wrong done if they have knowledge of the essential facts which make the act done wrongful. That was not the case here. Interestingly, the court noted that this principle is not particular to company directors and does not depend on any special feature of their role.
• The Court of Appeal's decision to certify two legal points for Tom Hayes, former trader with Citigroup and UBS, and Carlo Palombo, an ex-Barclays banker. The points are whether traders gave a 'genuine or honest answer' when submitting Libor or Euribor rates with their own commercial interests in mind and whether the submission had to be an assessment of the single cheapest rate the banks could borrow at rather than a selection from within a range of borrowing rates. Although the Court of Appeal denied the pair direct permission to appeal, the decision potentially opens the way for them to the Supreme Court assuming they can persuade their Lordships to hear the points.
• The Court of Appeal's judgment in *Options UK Personal Pensions LLP v FOS *(Simon Fletcher and the FCA were interested parties). This was an application brought by Options UK (formerly Carey Pensions) to judicially review a FOS finding against them in favour of Mr Fletcher with regard to his pension. Options argued three grounds. First, that the Ombudsman should have identified and explained departure from legal standards. This was rejected. The Ombudsman had given adequate reasons including as to why he had relied on FCA Principles. Secondly, that the Ombudsman had misunderstood the legal obligations of a SIPP administrator - he had not. Thirdly, that it had been irrational to conclude that Options' duties had been breached. The Court emphasised the high hurdle for irrationality arguments and concluded that there was nothing irrational in the decision. 

FCA - Key Final Notices and Decision Notices

There has been a flurry of activity from the FCA over the last few weeks. 

• There have been 2 cases where the FCA would have imposed a significant fine, but instead made a public censure with sums being paid to FSCS/investors:
  • Link Fund Solutions was required to pay restitution of more than £200m to investors in LF Woodford Equity Income Fund for breaching Principles 2 (skill, care and diligence) and 6 (fair treatment of customers) of the FCA's Principles for Business. The FCA indicated that a fine of £50,000,000 would have been appropriate but considered that this would have reduced the sum available to Link Investors. It also took into account a significant voluntary contribution (up to £230m) by Link's parent and instead of a fine issued a censure in the form of the final notice.
  • Arthur Cobill was found to have breached Principle 2 (skill, care and diligence) under the Approved Persons Regime for providing incompetent and unsuitable advice to customers. The FCA would have imposed a £1,113,225 fine on him but has instead agreed to a public censure and for Mr. Cobill to pay £120,000 to the FSCS to contribute to relevant customers' redress.
• HSBC has been fined £6,280,100 for failures in its treatment of customers who were in arrears or experiencing financial difficulty in breach of Principles 3 (management and control) and 6 (fair treatment of customers) of the FCA's Principles for Business.
• The PRA has fined Citigroup Global Markets Limited £33,880,000 for failings in its trading systems and controls. The FCA also imposed a financial penalty of £27,766,200 on the firm following an FCA investigation into related matters. Failures in the firm's systems and controls led to US$1.4bn of equities being sold in European markets when they should not have been. The two regulators' investigations were conducted in parallel.
• In the latest cum-ex case, Nailesh Teraiya has been fined £5.95 million and banned from carrying out any regulated activity given his role as sole controller and CEO of Indigo Global Partners Limited which participated in a sham trading scheme. Mr. Teraiya was found to have breached Principle 1 (act with integrity) under the Approved Persons Regime. Mr. Teraiya has referred his Decision Notice to the Upper Tribunal.
• After an 8 week trial, Mr. Stuart Bayes was found guilty of insider dealing. He both traded relevant shares himself, and also encouraged another individual to do the same. He was subsequently sentenced to 18 months' imprisonment, suspended for two years. The FCA has also commenced confiscation proceedings against him with a hearing listed for later this year.
• William Hofstetter has been found to have breached Principle 7 (take reasonable steps to ensure that the business of the firm for which they are responsible complies with the relevant requirements and standards of the regulatory system) under the Approved Persons Regime because he incompetently oversaw a defined benefit pension advice process which resulted in customers' retirement funds being put unnecessarily at risk. Mr. Hofstetter has also been banned from performing a SMF role in the future and the FCA has withdrawn his SMF 3 (director) and SMF 16 (compliance officer) approvals.
• Following two separate instances of providing incorrect information, which was required for finalising accounts, James William Edward Lewis, former CEO of Shard Capital Partners, was found to have breached Principle 2 (skill, care and diligence) under the Approved Persons Regime and later to have breached Conduct Rule 1 (acting with integrity). Mr. Lewis was later also found to lack fitness and propriety, was fined £120,300 and has been banned from performing a SMF role in the future. Interestingly there were WhatsApp messages disclosed to the regulator where it was evident that Mr. Lewis acknowledged the seriousness of his misconduct and said that he expected to face serious consequences, including a significant penalty and prohibition.
• The decision of the Upper Tribunal in Banque Havilland v FCA. The FCA issued Decision Notices to Banque Havilland and three individuals in relation to alleged improper advice given by Banque Havilland in a presentation which it is alleged recommended manipulating trading strategies which could be a criminal offence, had it taken place in the UK. The notices were referred to the UT. The present decision dealt with various applications for directions. Of these, the most interesting was a strike out application made by one of the individuals, Mr Rowland, who argued that the FCA's contention that he was "knowingly concerned" in breaches of Principle 3 (management and control) and/or SYSC 6.1.1R had no reasonable prospect of success and should be struck out. The Tribunal agreed. It noted that the FCA's case as currently pleaded was in reality not a case about a failure to implement systems and controls but one that sought to identify responsibility for the contents of the presentation. That had rightly been characterised as a misconduct case falling within the scope of Principle 1 and could not be characterised as a Principle 3 or SYSC 6.1.1R case. Although Mr Rowland's role in the presentation may have resulted in a failure of those systems and controls, it would be highly artificial, and not within the purpose of the relevant provisions, to say that Mr Rowland himself caused the breach to occur by virtue of not having put in place measures designed to prevent the breach happening.

Please do reach out to Caroline Hunter-Yeats (Partner), Thomas Makin (Managing Associate) or Amy Sumaria (Managing Associate) or if you have any specific questions.