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The challenge of BREXIT for the financial services industry

29/06/2016 | Bruno Fatier
Today we are starting a series of e-bulletins dedicated to considering the consequences of BREXIT on business in general, starting with the impact of BREXIT on the financial services industry. The

Today we are starting a series of e-bulletins dedicated to considering the consequences of BREXIT on business in general, starting with the impact of BREXIT on the financial services industry.

There is no denying that the financial services industry is now facing challenging times, where threats will be generally more visible than opportunities yet to be explored.

From a financial services regulatory perspective, one main threat ahead is the risk of losing EU passport rights whilst one main opportunity is deregulation, but both threat and opportunity are only potential at this stage, as the decision to leave the EU is not yet effective and nobody knows the extent to which gains and losses will effectively materialise.

From a purely EU passport perspective, the later the decision to leave the EU enters into force the better, as more time will be given not only to enjoy the passporting regime but also to prepare for facing all possible BREXIT scenarios including the least comfortable one where no immediately available equivalent of the EU passport rights will be made available from or towards the UK.

The question of timing is therefore important. In this respect, Article 50 of the European Union Treaty provides for a 2-year notice for exit unless a withdrawal agreement has been reached earlier or “unless the European Council, in agreement with the Member State concerned, unanimously decides to extend [the two-year] period”.  The 2-year notice starts from the date on which the leaving Member State notifies the European Council of its intention (this has not yet been given). From a purely EU passport perspective, as explained above, rushing things would not be the best option.

It is also worth noting that Article 50 (not drafted to be actually enforced but rather to frighten prospective leavers) only says that the “framework” of the future relationships should be taken into account when negotiating and concluding a withdrawal agreement. However, there is no denying that it does make sense that both issues be agreed at the same time as part of the same deal, in order to avoid a black hole in between.

Whether the risk of not relying on a satisfactory equivalent of the EU passporting regime to and from the UK will materialise is uncertain. All depends on the outcome of the negotiations between the UK government and the EU.

If the risk materialises, financial services firms from both sides have a lot to lose, i.e. not only UK financial services firms passporting to the rest of the EU but also EU financial services firms passporting to the UK.

Over the last decade or so, banks, investment firms, asset managers and payment services providers licensed in the UK have been relying a lot on the EU Freedom to Provide Services (“FPS”). Doing business directly out of London has been a dominant trend, with fewer and fewer firms deciding to set up or maintain branches in other EU countries under the EU Right of Establishment (“RE”). Cost, convenience and efficiency have been the key driving factors.

By being stripped of the EU passport to do business across the entire EU market, UK licensed financial services firms would have to rely on locally licensed subsidiaries set up in the EU. The likes of Barclays have already such subsidiaries and would “only” be working on relocating staff and activities on an intra-group basis, subject to seizing sale opportunities. As a general rule, EU branches of UK licensed financial services firms would either have to be closed down or converted into branches of the EU subsidiary chosen to provide services all across the EU (subject to exploring sale opportunities). Smaller firms are likely to be those who will most suffer, as setting up a licensed subsidiary is time consuming, uncertain and costly, as is trying to buy one of the few existing EU licensed businesses available for sale on the market.

EU financial services firms holding a passport to do business in the UK would face similar issues, save that the scale of the reshuffling will be narrowed down to the UK and to London in particular.

The risk of not being granted an immediately available and satisfactory equivalent of the FPS and the RE is only the tip of the iceberg. Below the surface, restructuring of credit syndication or euro trading activities currently centralised in London would need to be carried out. Incidentally but noticeably, one would expect EU supervisory bodies based in London to relocate to a country which will still be part of the EU when the UK effectively leaves it. The EBA is the most visible example of the move ahead.

One should also note that UK licensed banks will no longer be part of the European guarantee deposit scheme once BREXIT becomes effective, which leads to the question whether the UK government will decide to provide better, equivalent or lower protection than that available in the EU.

Whilst losses are still hypothetical and one should not panic at the thought of them materialising, one should also coolly think about the alternative opportunities brought about by BREXIT, including that of deregulation. One should not forget that the financial services industry itself has for years vehemently complained about overregulation in many areas such as regulatory capital, remuneration or investor/customer protection.

However, deregulation does not mean that financial service firms licensed in the UK should stop preparing themselves for complying with EU directives adopted at EU level but yet to be implemented nationally (e.g. MiFID2, AMLD 4 or PSD 2), as the risk of having to comply with them or with equivalent rules when providing services towards EU markets, as part of a possible BREXIT deal, may materialise.

Having said that, opportunities for growing a financial services industry more lightly regulated, turned towards non-EU markets, should indeed be explored as much as the potentiality of losses should be assessed. The current burden of EU regulation on activities turned towards outside the EU should not be overestimated, as EU law does not generally regulate services provided towards non-EU countries as much as it regulates services provided towards the EU. But gaining market shares outside the EU will be challenging as there is no readily available equivalent of the FPS or RE outside the EU and local regulations will continue to apply after BREXIT.

The possibility of enjoying the “best of both worlds” is likely to require restructuring business models to segregate deregulated activities turned towards non-EU jurisdictions from activities turned towards the EU.  As many EU regulations apply on a group basis, businesses structured as groups of companies will need to be revisited.

The FIN TECH sector can be partially protected from, and can even continue growing despite the loss of EU passporting rights from and to the UK, but only to the extent of those technology services the provision of which towards the EU does not require holding such rights. However, one example where EU regulation will be soon regulating a significant number of FIN TECH firms is PSD2 (due to enter into force before the 2-year Article 50 deadline), under which licensing requirements will be extended further to reach payment aggregators, initiators and the like. And one cannot rule out that the EU will threaten, and even seek to further extend the scope of what it is subjecting to licensing requirements in order to protect the EU market from outsiders.



Brexit – What happens next?

27/06/2016 | Lucy Hamilton-James
Following the outcome of the EU Referendum, this article deals briefly with the formal process of the UK to withdraw from the EU.  The decision of the electorate for the UK to leave the EU is the st

Following the outcome of the EU Referendum, this article deals briefly with the formal process of the UK to withdraw from the EU.  The decision of the electorate for the UK to leave the EU is the start of what could be a long divorce process.  Until that process is complete, the UK will remain part of the EU.

The formal process for an EU member state to withdraw from the EU is contained in a so far unused exit clause – Article 50 – within the Lisbon Treaty.  Article 50 contains 5 short paragraphs which provide guidance as to the steps which must be taken by the withdrawing state and the remaining states to facilitate a withdrawal.

In brief; the first formal step is for the UK to formally notify the EU Council of its intention to withdraw from the EU.  This has been referred to in the press as the “Article 50 Notice”.  The service of the Article 50 Notice will be followed (and quite possibly preceded) by a negotiation period during which the remaining EU states and the UK take steps to reach an agreed form of Withdrawal Agreement.   During this negotiation period, EU laws still apply to the UK which would also continue to participate generally in EU business.  The UK would not however participate in internal negotiations within the remaining EU states regarding their discussions and decisions on the Withdrawal Agreement.  The negotiations themselves will take place between the EU Council and the UK but it is the EU which has the final say on its terms.

The disapplication of the EU Treaties, and thus the actual departure of the UK from the EU, occurs at the earlier of the date of entry into force of the Withdrawal Agreement or 2 years after Article 50 is invoked by the UK having notified the EU Council of its intention to withdraw.  However, Article 50 provides for the extension of that 2 year period should there be unanimous agreement between the EU Council and the withdrawing state for it to be so extended.

Considering the pretty significant function for which the provisions in Article 50 were designed to manage, it is striking how vague it is.  This is likely to be because its actual use was never considered a possibility.  That said, in view of the involvement of 28 countries, including the withdrawing state, and the EU institutions themselves, in the negotiations, the lack of detail could be a distinct advantage in that it will also allow for a degree of flexibility and will likely make the negotiation process easier to manage.  In addition, and from the EU’s internal side of the negotiations the Withdrawal Agreement need only have a qualified majority of the remaining states’ agreement for it to be concluded.

So, where does that leave the UK?  Despite calls by EU representatives over the weekend, only the UK can invoke Article 50 and the timing of that is solely in its gift.  The Prime Minister has indicated that the formal process will not commence until his successor is appointed (the 1922 Committee has today announced that the new leader of the Conservative Party will be chosen by 2 September 2016).  In a speech on 27 June 2016, The Chancellor, George Osborne, sought to provide reassurance by confirming that “In the meantime, and during the negotiations that will follow, there will be no change to people’s rights to travel and work, and to the way our goods and services are traded, or to the way our economy and financial system is regulated.”

While the result of the EU referendum continues to sink in, the posturing and strongly worded rhetoric from the EU has begun but is unlikely to last.  The UK and the EU are perfectly capable of working together and indeed need each other so the threats of punishment on the UK and calls for immediate disengagement being made by certain EU state ministers can be seen for what they are.  It is notable that the Heads of State, including those from outside the EU are quite rightly remaining calm and measured in their responses to the referendum result, however shocking,  which can only help to reassure the public and the markets and ensure that stability is returned sooner rather than later.  Whatever side of the fence they are on, the powers that be are well aware of the unilateral damage that prolonging uncertainty can cause and no one wants that.

STOP PRESS!- Supreme Court consider celebrity threesomes to be “at the bottom end of the spectrum of importance”

20/05/2016 | Justin Nimmo
The facts – such as they are public knowledge – have been well-rehearsed. Early this year, the Sun on Sunday wished to publish an article disclosing a sexual encounter by one half of a celebrity

The facts – such as they are public knowledge – have been well-rehearsed. Early this year, the Sun on Sunday wished to publish an article disclosing a sexual encounter by one half of a celebrity couple. An interim injunction on publication was sought and granted to protect the couple’s and their children’s Article 8 right to privacy. Inevitably perhaps, the story was then published outside the UK, details appeared on social media, and the press became ever so slightly self-righteous  – “these injunctions bring the system into disrepute,” cried the Times, “a farce,” wept the Sun, “write to your MPs”.  Blood boiled, freedom was dead, we were urged to fight for our right to salivate over celebrity threesomes.

More soberly, News Group Newspapers argued that the injunction infringed its Article 10 right to freedom of expression and, with the story circulating on the web, no longer served any useful purpose. The Court of Appeal agreed, the couple appealed again, and the Supreme Court stepped in.

Concluding that a permanent injunction would be likely to be granted at trial in the interest of the couple and especially their children, it has today ordered the continuation of the interim injunction. Its reasoning is fourfold.

Firstly, it concluded that  (i) neither Article 10 nor 8 have precedence over each other. (ii) Where their values are in conflict, what is necessary is an intense focus on the comparative importance of the rights being claimed in the individual case, (iii) the justifications for interfering with or restricting each right must be taken into account and (iv) the proportionality test must be applied.

Secondly,  there was no public interest in a legal sense in publishing the story; every case turns on its fact, but it decided that stories such as this one were “at the bottom end of the spectrum of importance”. Rejecting NGN’s argument that it was entitled to criticise the couple’s conduct, in the Court’s view, “criticism of conduct cannot be a pretext for invasion of privacy by disclosure of alleged sexual infidelity which is of no real public interest in a legal sense.”

Thirdly, the Court rejected the argument that the story’s appearance in social media meant the dam had burst. Consideration had to be given to medium and form which the injunction was intended to cover. In this case, press publication would add extensively and in a qualitatively different way to the invasion of the couple’s privacy, and in particular the privacy of their children – an invasion of privacy which was likely to be “clear, serious and injurious”.

Fourthly, the Court concluded that damages would not be an adequate remedy for such an invasion of privacy. Once your privacy has gone, no amount of cash is going to put it back in the box.

In age where the Web has supposedly rendered privacy impossible, the Supreme Court has ruled that injunctions to protect privacy do still have their purpose. The dam may be holed, but where it can, and where there is no public interest in doing otherwise,  the law will still plug the gaps.


22/04/2016 | Elizabeth Shaw
BACKGROUND The recently heard case in the Chancery Division of Haysport Properties Ltd and another v Ackerman EWHC 393 (CH) provides a stark warning regarding the importance of directors adhering


The recently heard case in the Chancery Division of Haysport Properties Ltd and another v Ackerman [2016] EWHC 393 (CH) provides a stark warning regarding the importance of directors adhering to their fiduciary duties, particularly in respect of transactions involving other companies or entities that they have an association or connection with. In addition, the case also dealt with the issue of whether the claim should be statute barred under the Limitation Act 1980.


Mr Ackerman, a well-known property magnate, was approached in 2005 in connection with the purchase of some commercial and residential properties that formed part of the “Liberty One” development. The properties were to be purchased via an offshore company named New Liberty Property Holdings Limited (“NLPH”), which was wholly owned by a discretionary trust of which Mr Ackerman was a beneficiary. Mr Ackerman was not a director of NLPH but was the driving force behind the deal.

Mr Ackerman was also at this time the sole active director of both Haysport Properties Ltd and (“Haysport”) and Twinsectra Limited (“Twinsectra”), both of which were subsidiaries of Delapage Limited (“Delapage”), a charitable company that was incorporated to gift excess profits generated by its subsidiaries to charitable causes. The other director of both Haysport and Twinsectra was Mr Ackerman’s sister-in-law but she was submissive to all that Mr Ackerman did.

In connection with NPHL’s financing of the aforementioned acquisition, Mr Ackerman caused both Haysport and Twinsectra to secure certain assets they held in respect of a £10m million bank liability owed by NLPH (as NPLH had no assets of significance). The (meagre) consideration given to Haysport and Twinsectra in return for the provision of this security was £25,000, which was found never to have been paid. As well as that, Mr Ackerman caused Twinsectra to loan £4 million to NLPH against unsecured loan notes carrying an interest rate of 8% and which, again, were never repaid.

NLPH eventually entered into insolvent liquidation in December 2009 and, in order to prevent the enforcement of the bank’s security, Twinsectra had been paying interest to the bank in respect of the debt owed by NLPH. Mr Ackerman eventually resigned as a director of Haysport and Twinsectra in 2011 following an intervention by the Charity Commission in respect of irregularities concerning Delapage.

Haysport and Twinsectra subsequently brought proceedings against Mr Ackerman alleging that he had breached the fiduciary duties he owed to Haysport and Twinsectra and that he should (i) repay the £4 million loan made by Twinsectra (together with the interest accrued thereon) and (ii) indemnify Haysport and Twinsectra for all other losses that they suffered as a result of Mr Ackerman’s breach of his fiduciary duties in respect of the security that Haysport and Twinsectra each provided and the loan provided by Twinsectra.


In ruling in favour of Haysport and Twinsectra, the judgment found that Mr Ackerman was “hopelessly conflicted” and that he had clearly breached the fiduciary duties he owed to both Haysport and Twinsectra. Despite Mr Ackerman’s assertion that he had considered the commercial benefits that Twinsectra and Haysport would derive from entering into this transaction, the judgment found that there was “no real incentive” for either of them in doing so. Contrarily, Twinsectra would be an unsecured creditor behind a large queue of secured lenders in respect of the £4 million loan that it made. Whilst this was clearly an attractive venture for NLPH, the same could not be said for Twinsectra and Haysport and Mr Ackerman had not fully evaluated the evident risks that they would each be subjected to.

In respect of whether the claim was deemed time barred under the Limitation Act 1980, as the loans and security were granted to a party controlled by Mr Ackerman, they fell within section 21(1)(b) (recovery of trust property) of the Limitation Act 1980, and as such the limitation period would be disapplied. In addition, as Mr Ackerman had a duty to disclose his breaches of duty, and he had failed to do so, sections 32(1)(b) and 32(2) of the Limitation Act (deliberate concealment and deliberate breach of duty) applied and consequently the limitation period was disregarded.


The case is a salient reminder for directors of their need to fully evaluate the benefits and risks of any transaction and to avoid having their judgement clouded by the interests of any other company that they are involved with. Company directors should always be advised to record in detail the factors they have considered when reaching their decision, so that they can be seen to be acting so as to promote the success of the company, particularly in cases involving connected parties. The judgment illustrates that courts will look to assess whether directors have exercised independent judgement (and, where appropriate, sought independent advice) in respect of each company that they are representing. The judgement also highlights that in claims involving breach of duty, it is not always clear cut as to whether such claims will be statute barred under the Limitation Act 1980.


This article should not be taken as definitive legal advice on any of the subjects covered. If you do require legal advice in relation to any of the above, please contact Elizabeth Shaw on 020 7955 1456.

Are bitcoins and the like truly unregulated in Europe?

22/12/2015 | Bruno Fatier
Notwithstanding attempts made by some to include blockchain-based currencies into the scope of the forthcoming PSD2, bitcoins and similar cryptocurrencies are quite sensibly not generally seen as e-m

Notwithstanding attempts made by some to include blockchain-based currencies into the scope of the forthcoming PSD2,[1] bitcoins and similar cryptocurrencies are quite sensibly not generally seen as e-money or payment services regulated under the EMD[2] and (the existing and forthcoming) legislative PSD framework.[3] The main reasons are because there is no (responsible) issuer behind cryptocurrencies (which excludes their qualification as e-money) and the object of a service (cryptocurrencies) should not be mistaken for the service itself (a payment service consisting in “placing, transferring or withdrawing funds” within the meaning of PSD1[4]).

However, not all courts in Europe have yet become familiar and at ease with the quite complex scope of application of the harmonised payment legislative framework.[5] In addition, certain jurisdictions within the EEA have shown themselves, at least via their governments, regulators or courts, rather conservative in their approach to cryptocurrencies. France is unsurprisingly one example of such a jurisdiction.

Consequently, it is not that surprising that “pro-regulation” court decisions may pop up within the EEA[6] from time to time, in the wake of the Paris court of appeal decision held at the end of 2013[7] and followed by its regulatory backing in 2014.[8] In substance, the court of appeal of Paris held that trading in bitcoins, to the extent that it entails receiving euros from buyers and transferring them to sellers, amounted to providing a payment service requiring authorisation pursuant to (the French law provisions faithfully implementing) PSD1.

Unfortunately, the risk of inconsistency across the EEA has yet to be monitored by the ECJ,[9] notwithstanding the decision held in October this year[10] on the very subject of bitcoins and their trading within the EEA. Indeed, the VAT angle from which the subject was addressed,[11] as well as the reasoning behind the pragmatic conclusion reached by the ECJ should prevent one from drawing any non-VAT conclusion out of the ECJ court decision. As part of its reasoning, the ECJ arguably took the view that the trading in bitcoins should be seen as a service subject to same VAT exemption as currencies having legal tender status, even if bitcoins do not meet the explicit exemption condition of having legal tender status. Also, the ECJ supported the idea that bitcoins have “no purpose other than to be a means of payment”, which is questionable having regard to the fact that holding bitcoins may be seen as a purpose in itself, e.g. to make a speculative gain.

Faced with the real and often criminally sanctioned risk of on-boarding customers based in “pro-regulation” jurisdictions, businesses whose object is to provide services in connection with bitcoins and other cryptocurrencies should perhaps start considering the other side of the regulatory coin. Indeed, being authorised in one jurisdiction as a PSP[12] allows one to provide one’s services across the EEA (including the UK even after 2017, unless the BREXIT scenario comes true …) without having to worry about authorisation in all the other EEA host jurisdictions, thanks to the EU freedom to provide cross-border services and the EU right of establishment. Customers and regulators would feel more comfortable if a regulated entity was to remain responsible, given that the currencies in question are not real currencies. There is indeed no issuer or intermediary in the middle to provide a guarantee. One may argue that there is no need for a guarantee but one may also object that a guarantee provides at least some peace of mind and might perhaps come in useful, e.g. in a catastrophic scenario where regulators, investors and cryptocurrency holders will be desperate to find someone liable in the blockchain, other than an anonymous mining geek based on the other side of the world.

[1]  Proposal for a directive of the European Parliament and of the Council on payment services in the internal market and amending Directives 2002/65/EC, 2013/36/EU and 2009/110/EC and repealing Directive 2007/64/EC.
[2]  The so-called Electronic Money Directive 2009/110/EC of the European Parliament and of the Council dated 16 September 2009 (repealing the first electronic money directive adopted in 2000).
[3]  The so-called Payment Service Directive (otherwise referred to as “PSD1”) 2007/64/EC dated 13th November 2007.
[4]  Article 4.5 of PSD1.
[5]  Which also includes the issuance or administration of “means of payment” falling within the scope of Directive 2013/36/EU of the European Parliament and of the Council of 26 June 2013.
[6]   European Economic Area.
[7]   Court of Appeal of Paris, 26 September 2013, SAS Macaraja versus SA Crédit Industriel et Commercial.
[8]   Position issued on 29th January 2014 by the French Autorité de Contrôle Prudentiel et de Résolution.
[9]   European Court of Justice.
[10] HEDQVIST ruling issued on 22nd October 2015.
[11] The request for a preliminary ruling made to the ECJ related to the interpretation of Articles 2(1) and 135(1) of Council Directive 2006/112/EC of 28th November 2006.
[12] Payment Service Provider, as defined by the PSD.


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