Legal Shorts including updated draft Financial Services Regulations 2019 published by HM Treasury

Updated draft Financial Services (Miscellaneous) (Amendment) (EU Exit) Regulations 2019 published by HM Treasury

On 12 February 2019, HM Treasury published an updated draft of the Financial Services (Miscellaneous) (Amendment) (EU Exit) Regulations 2019 (Regulations). The purpose of the Regulations is to make minor and technical amendments to UK primary and secondary legislation and to retained EU legislation relating to financial services in preparation for a no-deal Brexit. They also revoke certain statutory instruments and EU legislation, particularly legislation relating to the single supervisory mechanism and the single resolution mechanism. In addition, they introduce transitional provisions relating to, among other things, insurance business transfers and disclosures concerning credit agreements.

The Regulations will enter into force on exit day, with the exception of amendments to statutory instruments made under European Union (Withdrawal) Act 2018 (EUWA), which will come into force before exit day.

New Prospectus Regulation: ESMA list of thresholds below which prospectus not required

On 8 February 2019, ESMA published a list of the thresholds below which an offer of securities to the public does not need a prospectus in the various member states of the EU.

The document, which ESMA states contains information provided by national competent authorities, sets out, for each member state:

  • a short description of the national thresholds below which no prospectus is required.
  • a summary of any national rules which apply to offers below that threshold.
  • hyperlinks to the relevant national legislation and rules.

ESMA plans to update and republish the document when it receives notifications from member states that the information has changed.

Special administrators of investment firm authorised to distribute assets, extinguishing claims of unresponsive clients

The High Court has authorised the special administrators appointed over the investment firm Pritchard Stockbrokers Ltd (PSL) to distribute the firm’s remaining assets (the client money pool) despite there being a large number of untraceable clients with beneficial interests in that pool. The FCA had agreed to modify the relevant client money rules to allow PSL to distribute the client money pool with any unresponsive client ceasing to have a beneficial interest in that pool once distributed. However, for their own protection, the special administrators still needed to apply to court for directions authorising them to implement this scheme of distribution on behalf of PSL.

The court noted that the proposed method of distribution was unusual: most previous methods authorised in this context preserved the right of unresponsive clients to pursue claims to client monies even after the final distribution. However, there was precedent for the court authorising a method that extinguished outstanding claims (in Re Alpari, unreported, 29 September 2016). The court noted that in providing guidance to the administrators, it would always be concerned to see evidence:

  • of the exact nature and scale of the problem relating to the distribution of client money held on trust.
  • of the precise steps taken to identify clients and quantify each claim.
  • that every reasonable step had been taken to effect a distribution to everyone entitled, having regard to the claim’s size, the cost and difficulty of investigation (and who bears the cost) and the need to return client assets to all clients as soon as reasonably practicable.
  • of the details of the proposed distribution mechanism and what steps were to be taken in relation to those who would not receive a distribution.
  • of why a mechanism extinguishing beneficial interests of unresponsive clients was the preferred option.

This decision appears to be the first fully reported case on a distribution method of this kind, and it provides helpful guidance for future cases like this. It also helpfully highlights the difference between the FCA formally authorising a modification to the relevant client money rules to allow such a scheme of distribution, and the separate need for the court to authorise the special administrators to effect that distribution as a matter of insolvency and trust law.

FCA begins High Court Proceedings against Samuel Golding, Shantelle Golding, Digital Wealth Limited and Outsourcing Express Limited

On 4 February 2019 the FCA commenced proceedings in the High Court against Samuel Golding, Shantelle Golding and two of their companies, Digital Wealth Limited and Outsourcing Express Limited (the Defendants).

The FCA is seeking a declaration that the Defendants have contravened, or been knowingly concerned in, contraventions of sections 19 and 21 of the Financial Services and Markets Act 2000 (FSMA). The FCA also seeks a restitution order against the Defendants under s. 382 FSMA enabling the orderly return of consumer funds and holding the Defendants liable to pay any shortfall in those funds, together with an injunction under s. 380 FSMA restraining the Defendants from future contraventions

FCA fines former fund manager Paul Stephany

The FCA has fined Paul Stephany, a former fund manager at Newton Investment Management Limited, £32,200 for his conduct in relation to an Initial Public Offering (IPO) and a placing.

On two separate occasions, Mr Stephany submitted orders as part of a book build for shares that were to be quoted on public exchanges. Prior to the order books for the new shares closing, Mr Stephany contacted other fund managers at competitor firms and attempted to influence them to cap their orders at the same price limit as his own orders. The FCA found that Mr Stephany risked undermining the integrity of the market and the book build by trying to use their collective power. As a consequence, Mr Stephany failed to observe proper standards of market conduct. He was also found to have acted without due skill, care and diligence by failing to give proper consideration to the risks of engaging in these communications.

Mark Steward, Executive Director of Enforcement and Market Oversight at the FCA, said:

‘This matter underscores the importance of fund managers taking care to avoid undermining the proper price formation process in both IPOs and placings. These markets play a vital role in helping companies raise capital in the UK’s financial markets and when they are put at risk the FCA will take action.’

FSB 2019 work programme

On 12 February 2019, the Financial Stability Board (FSB) published its 2019 work programme.

The main areas of the FSB’s work during 2019 will relate to the following:

  • Addressing new and emerging vulnerabilities in the financial system. The FSB will continue to scan the horizon to identify and assess emerging risks through regular discussion by its members of macro-financial developments. It will also continue to assess the impact of evolving market structures and of technological innovation (that is, FinTech) on global financial stability. This includes the resilience of financial markets in stress, the implications of the growth of non-bank financial intermediation and operational issues such as cyber risks.
  • Finalising and operationalising post-crisis reforms. The FSB is working with standard-setting bodies (SSBs) to complete work on a few final issues in the main reform areas. These include finalising the insurance capital standard (ICS) and the common framework for the supervision of internationally active insurance groups (ComFrame), making derivatives markets safer and promoting resilient non-bank financial intermediation. In addition, with the policy development for addressing “too big to fail” for banks largely completed, the FSB’s focus has turned to the technical and operational issues that arise in resolution as well as issues relating to systemic risk in the insurance sector and financial market infrastructures.
  • Implementation of G20 reforms. The FSB, in collaboration with SSBs, will continue work on implementation monitoring through regular progress reports and peer reviews. This includes monitoring the implementation of Basel III, the FSB’s key attributes of effective resolution regimes for financial institutions, OTC derivatives market reforms and the implementation of the FSB principles and standards for sound compensation practices.

Evaluating effects of the reforms. The FSB will take forward its programme to evaluate the effects of post-crisis reforms. The objective is to assess whether reforms are operating as intended in an efficient manner, and to identify and deliver adjustments where appropriate, without compromising on the agreed level of resilience. As in previous years, these issues will be discussed in the annual FSB report on the implementation and effects of reforms.

Claire Cummings

Claire practises financial services law with a focus on regulatory issues, cryptocurrencies and tokens, trading and brokerage documentation and advising both existing and start-up funds and fund managers.

If you would like to discuss any of the points we raise, please contact me or one of our other lawyers.

Phone: 0207 585 1406
Email: claire.cummings@cummingsfisher.com

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