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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.

Are we nearing the end of the French credit monopoly?

28/04/2016 | Bruno Fatier
The decree implementing Article 167 of law no. 2015-990 of 6 August 2015 (“Act”) has finally been adopted and published, 6 months behind schedule. Better late than never? The decree (“Decree”

The decree implementing Article 167 of law no. 2015-990 of 6 August 2015 (“Act”) has finally been adopted and published,[1] 6 months behind schedule. Better late than never? The decree (“Decree”) puts the finishing touches to the new exemption from the not so-widely known monopoly[2] on the extension of “credit”,[3] applicable regardless of whether the borrower is a mere consumer or a business, an individual or a legal entity. Large lending structurers and non-EU institutional investors are generally well aware of the monopoly and have structured their offer accordingly, by booking credit transactions outside France and keeping or moving relevant teams outside France. However, smaller or more occasional lenders may not be as well informed, unless they are facing criminal charges or enforcement difficulties in France.

The Decree is indeed another breakthrough into the French credit monopoly, yet it is not its end. The sole purpose of the new framework is to facilitate short term intercompany lending out of cash flow surpluses on an ancillary basis, under a quite dense set of rules which, in addition to being complex, are silent on the quite important question of cross-border lending towards France.

Surprisingly, as this is not what the legislator gave the government authority for, the Decree widens the scope of the new exemption from an intercompany exemption to an intergroup exemption,[4] which, unfortunately, brings about inconsistency and complexity to the whole scheme. Why make things simple if one can make them complicated? That is the question.

In fact, what was mainly expected of the Decree was a more tangible definition of the rather vague (and, may I say, quite politically tainted) concept of “justified economic links” required by the Act.  Thankfully, the government has come up with a down-to-earth list of eligible “economic links”, among which one exemption stands out as being generally available, where a threshold of client-supplier relationship has been reached, of either EUR 500 K of sales or 5% of turnover. However, complexity reaches its peak where the method for applying the threshold and the surrounding conditions are set out by the Decree. Indeed, why make things simple where one can make them complicated?

Surprisingly, as the legislator only gave the government authority to set out the conditions and limits under which eligible companies may lend money to micro-enterprises or small, medium and intermediate size companies, the Decree does not further define eligible borrowers according to their size. Instead, the Decree goes the opposite direction by prohibiting lenders from lending more than EUR 10 million, EUR 50 million or EUR 100 million if they are, respectively, (i) small or medium size companies, (ii) intermediate size companies or (iii) large companies (or, if lower, more than 50% of their own net cash flow or 10% of the net cash flow calculated on a group consolidation basis as the case may be).

Other prudential requirements apply including general own fund and EBITDA requirements, as well as specific caps on loans per borrower.

Furthermore, auditors will be responsible for ensuring that the conditions for the new exemption to apply are met, under a certificate to be issued annually and appended to the lender’s management report.

It goes without saying (but the government found it useful to confirm) that the other exemptions from the French credit monopoly remain available, e.g. the client-supplier and intra-group exemptions, although these two old exemptions share a same scope of application as the new exemption to a quite noticeable extent. Luckily, the old exemptions are less complex and burdensome than the new exemption, and their validity and enforceability have long been tested before courts. In this respect, it is worth noting that the attractiveness of the new exemption is further dampened by the rather surprising and unexplained prohibition to securitise the receivables arising from the loans made under the new exemption.

With the new exemption, the scope of French credit monopoly is indeed reduced, but the regime applicable to the new exemption leaves room for a great deal of uncertainty and, sooner or later, legal challenges as well as clarification amendments. Making things simple in the first instance will then be seen in hindsight as the best option, undoubtedly.

[1]      Decree no. 2016-501 dated 22 April 2016, published on 24 April 2016.

[2]      Pursuant to the Financial and Monetary Code, it is prohibited for a person other than a credit or a finance institution to extend credit on a “regular” basis and for consideration (à titre onéreux).

[3]      In its broadest meaning including all types of credit commitments, loan refinancing/restructuring schemes, guarantees as well as the acquisition of unmatured receivables.

[4]      Subject to the group(s) involved meeting consolidation and cash centralisation conditions as set out by the Decree.


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 Bruno Fatier on 020 7955 1478

DIRECTORS’ FIDUCIARY DUTIES: A SALIENT REMINDER

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

BACKGROUND

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.

FACTS

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.

DECISION

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.

COMMENTS

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.

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