Financial Markets Disputes View: September 2024

Having enjoyed what may have been the final weekend of summer there is no denying that “end of the holidays” feeling. With this, the first View of the new term, we thought it would be a good opportunity to catch up with some of the developments which took place while we were still in that holiday mood. We look at the new Arbitration Bill and a couple of recent judgments and we draw themes from some of the more significant final notices published over the summer. We also bring you some points of interest from our disputes colleagues in France. As always, please do contact us with any thoughts.

What’s Coming Up...

Financial Markets Legal Update - Join us as we keep you updated on developments in financial institutions and the asset management sector. View our full programme detailing the topics and sessions we will cover here. You can choose between four sessions that run simultaneously across three streams, each picking up on market themes and developments that are relevant to the everyday running of your businesses. We look forward to welcoming you and hope you can join us!

Contentious Asset Management Podcast series - Our CAM team is releasing a series of podcasts in two tranches covering contentious trends in the asset management and investments funds sector. Among other trends, the podcasts will cover:

• Reputational risk management
• Market abuse
• Conflicts of interest
• FCA enforcement trends
• Digital assets
• Mismanagement claims
• S.90a FSMA claims

We will also be distributing the podcasts through Disputes View. You can listen to our first podcast here, concerning reputational risk management.

Insuring the Future webinar series - Join our international insurance team in early October for five webinars on key emerging risks for insurers. For more information, or to register click here.

Russia sanctions litigation webinar - Join our webinar, co-hosted with Alrud law firm as we explore key trends in Russia sanctions litigation and ways to mitigate risks. For more information, or to register click here.

FCA annual report

The FCA has published its annual report for the year ended 31 March 2024. As usual it is packed full of statistics but several struck us as interesting from an enforcement perspective.

Staffing and operating costs - First off, the regulator is bigger and more expensive than ever. Staff turnover is down but total headcount has seen a very significant increase and an extra £29 million has been spent on IT costs. The FCA’s explanation of the increases suggests a clear focus on building investigations and data monitoring and analysis capability.

Enforcement data - For 2023/24 the FCA has reported “enforcement operations” rather than by individual or firm cases – so, a single operation may investigate several subjects at the same time. As of 31 March 2024, there were 188 open enforcement operations, investigating 341 individuals and 162 firms. The FCA groups these operations by reference to its 3 strategic priorities:

• reducing and preventing financial crime (83 operations)
• putting consumers’ needs first (35 operations)
• strengthening the UK’s position in global wholesale markets (55 operations).

There were also 15 other operations not aligned to one of these priorities.

During the year, the FCA opened 24 operations – down on the 34 opened the previous year. It is interesting to note that of the new operations opened, more than half related to financial crime – again highlighting the growing importance of this aspect of the FCA’s work.

Looking at outcomes, a total of 316 final notices were issued compared to 70 in the previous year. This looks like a significant increase until one drills down further to discover that only 12 financial penalties were issued compared to 24 in 22/23. The amount of those penalties shows an even more stark picture. Total fines in 23/24 amounted to just over £42.5 million. The comparable figure for the previous year was £199.3 million. Again, we need to look to financial crime to see a material uptick. 11 criminal convictions were secured compared to just 1 in the previous year.

Financial crime - The FCA has focussed considerable resource on financial crime and tackling it is a major priority. Since April 2023, the FCA has charged 21 people with financial crime offences which is the highest number of charges it has made in a single year. It secured 9 freezing orders, 6 more than in 2022, and restrained £21.1 million in assets of individuals under investigation.

In a speech published on the same day on which the annual report was released, Sarah Pritchard confirmed that the FCA intends to use data and technology to increase its capacity to identify illegal financial promotions. The regulator has also created a dedicated financial crime function within its Consumer Investments department – an area where it says it has seen evolving threats of financial crime and fraud.

Skilled persons reports - The FCA used its powers in 83 cases. Retail banking accounted for a nearly a quarter of these cases, closely followed by retail investments, wholesale financial markets and retail lending. The remaining sectors made up under 15% of the total. Looking at the subject areas covered by the reviews, by far the largest majority focussed on 3 areas – conduct of business (28), controls and risk management frameworks (26) and financial crime (23).

FCA Final and Decision Notices

A number of recent notices have caught our eye.

Recent notices have revealed several firsts:

• The FCA fined PwC over its failure to report fraudulent activity at collapsed mini-bond provider London Capital & Finance - the first time the regulator has fined an auditor.
• CB Payments Limited (part of the Coinbase Group which offers a prominent cryptoasset trading platform) was fined £3,503,546 by the FCA for repeatedly breaching a requirement that prevented the firm from offering services to high-risk customers. The action was taken under the Electronic Money Regulations 2011 - the first time the FCA has taken enforcement action using these powers.
• Lastly, and not strictly a notice but still a first, environmental group, ClientEarth has reportedly used a freedom of information request to discover that the FCA opened its first-ever enforcement investigation into a company over climate-related issues last year. No further information about the type of firm or the alleged misconduct has been provided at this stage.

Plus a number of notices against individuals:

• the FCA has imposed a ban and fines on three individuals who were involved in operating SVS Securities Plc’s discretionary fund management business. Two of the individuals have referred the decision to the Upper Tribunal. The FCA found that SVS invested customer funds into high-risk illiquid bonds, including instruments issued by companies operated by some of SVS’ directors. This resulted in systematic conflicts of interest and, the FCA alleges, undisclosed commissions of up to 12% of the customers’ investments. The bonds have since defaulted, leaving customers with only a fraction of their original investment. The FCA found that the individuals breached Statement of Principle 6 (Due skill care and diligence) and Statement of Principle 1 (Act with integrity), as a result of their reckless decision to mark down customers' valuations when they disinvested from fixed income assets. Of particular interest is the FCA’s finding that one individual had closed his mind to the risk that customers would lose out financially, and another, who the FCA concluded had actively dismissed concerns from others regarding the potentially negative impact on customers.

  The Notices are a reminder to firms and Senior Managers to ensure that decision-making is well documented and that any concerns regarding potential customer harm are considered, taken on board and that the way in which any concerns or potential customer detriment have been rectified is reflected in contemporaneous documentation.

• The final notice issued to Martin Sarl contains a different message. Mr Sarl was the sole director at Perry Prowse (insurance Consultants) Limited. The FCA found that he had failed to segregate client monies and failed to pass clients’ premiums to insurers, meaning that some customers were left uninsured without their knowledge. He then compounded the situation by lying to customers. The FCA took a very dim view and banned him. He was also fined £63,600 reduced to £5021 (the amount by which he had profited from his actions) on evidence that the higher amount would have caused serious financial hardship. The FCA noted that it “continues to take failures to segregate appropriately seriously.”

• The Upper Tribunal has ruled in the FCA’s favour on the refusal to allow Thomas Llewellyn Kalaris to perform senior manager functions. It found that Mr Kalaris was dishonest in 2 enforcement interviews the FCA conducted into events that occurred during his time with a former employer. A key reminder for Senior Managers is that failing to be open and cooperative is multi-faceted – it can involve proactive dishonesty, providing incorrect information and also the omission of information of half-truths which serve as a smokescreen and a distraction. Failing to acknowledge ones mistakes/failings is also problematic and ill-advised as is evident from the UT’s decision.

• Decision Notices against Mr Stephen Burdett and Mr James Goodchild (an SMF 27) fining them £311,762 and £47,600 respectively and banning both individuals. Both of these decisions have been referred to the Upper Tribunal. The FCA alleges that personal pension funds worth over £10 million were switched to high-risk portfolios which were obviously unsuitable for most customers. Both individuals were found to have acted without integrity by creating misleading client information which led customers to believe they were getting low or medium risk portfolios. Mr Burdett also acted as a director despite knowing he wasn’t approved and failed to co-operate with the FCA’s investigation.

• Final notices to Steven Harbinder Singh Sahota, Anthony Dale Cuming and Kyle Anthony Jones. The FCA found that an investment scheme in which they were all involved was driven by significant marketing fees which were not disclosed to customers. Investments were made without regard to suitability and were high risk and with limited liquidity. All three individuals were banned and received large fines which the FCA agreed not to enforce in return for much smaller payments to the FSCS which represented all of their “available assets”.

Other interesting notices included Cypriot contract for differences firm Forex TB Limited fined £276,100 by the FCA for failing to treat its customers fairly, and for providing investment advice without being authorised to do so and the FCA’s final notice, imposing a prohibition order on Clive Harris Mongelard who was knowingly concerned in multiple breaches of sections 19 and 21 of FSMA and section 89 of the Financial Services Act 2012, by two companies operated as a joint business.

If you have any questions, please reach out to Caroline Hunter-Yeats (Partner), Emma Sutcliffe (Partner) and Thomas Makin (Managing Associate).

FOS complaints and the Consumer duty

In July, the FOS published its annual complaints data for the year to March 2024. It received 198,798 new complaints compared with 165,149 the previous year. Complaints about current accounts, credit cards and fraud drove a significant increase in banking and payment complaints. The most complained about product was current accounts. On average, across all financial products, the FOS upheld 37% of the complaints it resolved, which is slightly higher than the 35% recorded in 2022/23.

The annual publication does not specifically mention the Consumer Duty but its impact on the work of the FOS was the subject of the speech given by its Chief Executive, Abby Thomas for the FCA’s webinar marking the first anniversary of the Duty.

Ms Thomas highlighted how the Consumer Duty has influenced their case assessments and has impacted what is considered fair and reasonable in individual cases. She shared examples of common complaints, such as poor communication and customer service, and stressed the importance of firms actively considering the root causes of complaints and using those insights to improve customer experiences, hopefully reducing the need for complaints to escalate to the FOS. She also noted that the Duty emphasizes support for vulnerable customers, encouraging firms to consider individual needs and provide appropriate adjustments.

She offered this advice to firms “your team should understand their role in delivering the Consumer Duty and the true value of good complaints handling, as well as the role of insights of complaints, insight in designing and delivering a product or service. By taking the time to listen and understand the customer's concerns, firms can get a better picture of how a problem has impacted that customer and many others in a similar position. By looking at quantitative data, firms can establish where problems are occurring and where the opportunities for improvement exist.”

The FCA has indicated that one of the ways in which it will evaluate the success of the Duty is through complaints data. It is likely therefore that it will be looking for evidence that individual firms are using their own data to drive the learning and improvement process.

If you would like to discuss any of the issues raised, please contact Robert Allen (Partner).

Reputational risk management

Increased public and media interest in asset managers’ and financial institutions’ investment and financing activities has brought with it an increased risk of reputational harm. This has been reflected in the recent uptick in enquiries received by our longstanding reputation management team, whose work covers proactive and reactive steps that can be taken to preserve and protect individuals’ and firms’ reputations. In recent months that work has been focussed the following areas, among others:

• Removal of harmful online content
• Engaging with print journalists about proposed news stories
• Removal of “clone firm” websites and other imitative online content
• Reputation management issues arising from key personnel departures / arrivals
• Regulatory reporting in connection with reputational risk management issues
• Development of playbooks for triaging and responding to reputation management issues

If you would like more information on the team’s capabilities and how they might assist with any reputational risk management issues please contact: Robert Allen (Partner), Tom Marsh (Managing Associate), Jordane Watson (Supervising Associate) or James Cherry (Associate).

A podcast concerning reputational risk management considerations for asset managers can be accessed here.

The Arbitration Bill 2024 - Back to the Future

The new UK government has reintroduced the Arbitration Bill 2024 to give effect to recommendations issued by the Law Commission in 2023 for amending the Arbitration Act 1996.

We are currently seeing a rapid increase in the number of cases being referred to arbitration for FI clients and the Bill, which aims to update and refresh the Arbitration Act in order to protect London's reputation as a leading arbitral seat, is seen by many as a timely and necessary reform.

It includes a number of significant changes to the 1996 Act, such as allowing tribunals to issue awards on a summary basis, clarifying that courts can make orders in support of arbitration against third parties and for compliance with emergency arbitrators' orders and providing that the governing law of the arbitration agreement should be the law of the seat unless otherwise specified by the parties.

The Bill does not adopt some other possible amendments considered by the Law Commission, such as creating a statutory presumption of confidentiality for arbitrations seated in England & Wales, making discriminatory provisions in arbitration agreements unenforceable and changing the approach to appealing points of law under section 69 of the 1996 Act. The Law Commission's view was that these proposals were either unnecessary, too contentious, or too complex.

The Bill has already started its passage in the House of Lords and is expected to be passed into law in 2025.

Our article contains more detail on the Bill. If you would like to discuss further, please contact Basil Woodd-Walker (Counsel) or Will Dunning (Supervising Associate).

Navigating Investigations, Litigation and Communication

Corporate crises can threaten an organisation's reputation, financial stability, and even its very existence. Effective crisis leadership involves the ability to deal with the concerns of all stakeholders in a timely fashion. At such times, organisations and their management must navigate an intricate triangle of challenges: internal and external investigations, potential litigation, and critical communications. This article from our Disputes team in Singapore explores how these three elements intertwine and how effective management of this triad is crucial for successfully steering an organisation through crises. The article has obviously been written from the Singapore perspective but makes many points of wider application.

To discuss any of the issues raised, please contact [Terence Seah] (mailto:terence.seah@simmons-simmons.com) (Partner), Joavan Pereira (Associate) or your usual contact at Simmons & Simmons in London.

Collective proceedings tracker

With collective proceedings coming thick and fast it can be challenging to maintain oversight of what claims have been issued and what stage they’ve reached. Our tracker monitors the collective proceedings issued in the Competition Appeal Tribunal and outlines the current stage of each set of proceedings, as well as providing a summary of each claim and links to the key documents. We regularly update the tracker to ensure the latest developments are captured to maintain oversight of trends, developments and opportunities.

If you have any questions, or would like to discuss the Competition Appeal Tribunal’s collective proceedings regime in more detail, please contact us.

French duty of vigilance

The French Corporate Duty of Vigilance Law was published in March 2017 (see our previous alert on the scope of the law) and many cases grounded on it have now been brought before the French Courts.

The law applies to every company having its head office in France and employing 5,000 employees within the company and its subsidiaries in France; or 10,000 employees within the company and its subsidiaries in France and abroad.

Through the publication of a due diligence plan (referred to as a vigilance plan), the law requires the identification of every risk threatening human rights and fundamental freedoms, personal health/safety, and the environment that might result from the activities of the parent company, its subsidiaries, its controlled affiliates, and its suppliers/subcontractors. Once identified, the company must take appropriate actions to mitigate those risks or prevent serious harm and implement a system to ensure that alerts are raised for every risk that emerges from the vigilance plan.

This tracker provides an overview of relevant cases and aims to keep you up-to-date with the latest developments related to each case.

To discuss further, please speak to Etienne Kowalski (Partner) or Jean Cappelié (Supervising Associate).

ESG Disputes Radar

We've released new updates on our ESG Disputes Radar including a discussion of the Supreme Court’s decision in the Manchester Ship Canal case which permits private law claims to be brought for water pollution. You can read the update here.

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

Recent cases

The Supreme Court is going to look again at the vexed question of when a bank should be on inquiry as to the presence of undue influence in the context of a loan having given permission to appeal in the case of One Savings Bank Plc v Waller-Edwards. The defendant, seeking to avoid repossession of her property, had argued that in a hybrid case (involving a loan partly for the benefit of one of two borrowers and partly for joint purposes) a lender is put on inquiry unless the element of the transaction that is for the sole benefit of one of the borrowers is trivial. The Court of Appeal disagreed and held that the House of Lords decision in Etridge requires the court to look at a non-commercial hybrid transaction as a whole and to decide, as a matter of fact and degree, whether the loan was being made for the purposes of the borrower with the debts, as distinct from their joint purposes. In this case, the loan was, looked at as a whole and from the point of view of what the bank knew, a joint borrowing made for their joint purposes. The Etridge test is arguably easier to apply in practice than the one proposed by the defendant here. Lending banks may need to adapt their internal procedures if the Supreme Court alters the test to be applied. We await the outcome with interest.

In Financial Conduct Authority v Seiler the FCA (unsuccessfully) challenged an order made by the Upper Tribunal requiring it to contribute to the costs of the respondents who had successfully referred decision notices which had been issued to them. Under the Tribunal Rules, the threshold condition for the Tribunal to award costs is that it considers that a party acted unreasonably in bringing, defending or conducting the proceedings. Here it considered that the FCA's conduct in defending the references had been unreasonable. It criticised the FCA for failing to consider whether certain potentially material witnesses should be called and not making sufficient effort to seek the attendance of other witnesses. Overall, the FCA had not demonstrated to the Tribunal that it had tried to obtain all relevant evidence. The Tribunal also criticised the FCA's failure to engage with a request Mr Seiler had made for further information. The Court of Appeal rejected the FCA’s attempt to cast its appeal as a point of law. It noted that the Tribunal was ideally placed to come to a considered conclusion on the threshold condition for awarding costs. In reaching the conclusions it had, it could not be said to have erred in law. The decision is a welcome confirmation that the Tribunal has teeth when holding the FCA to account over its handling of the evidential stages of proceedings.

Finally, a reminder that HMRC will not look kindly on tax schemes which are purely tax driven and devoid of any commercial purpose. In HMRC v Altrad Services Ltd the Court of Appeal applied the Ramsay approach to a circular and entirely tax motivated capital allowances scheme. The decision, whilst not surprising on its facts, contains significant analysis of the Ramsay principle drawing in particular on the recent Supreme Court decision in Rossendale. These cases appear to re-emphasise the scope of the principle and its potential to ignore arrangements which might clearly meet the technical wording of legislation but fail a broader, real world, purposive interpretation. Our article on the case and its implications is here.