2015: The calm before another storm?

Round up of the top 10 UK regulatory developments

In last year’s regulatory update, Emma Radmore looked at several key changes which had either already taken place in the UK, or were on the horizon. This year, the regulators have remained busy, but to some extent the year has been about consolidation of recently implemented measures, while planning for significant new laws. Many changes took effect in 2014, with others finalised and ready to take effect in 2016. And, of course, the cycle of regulatory change continues for 2017 and beyond. This year’s top 10 is a mixture of changes that took effect during the year; the impact of changes that were already in force; and a look ahead to priorities for 2016.

Regulation, Regulatory Reforms

The ISDA 2015 Universal Resolution Stay Protocol: Novelties of the Stay Recognition for financial contracts

Financial contracts such as derivatives, repurchase agreements and securities lending transactions serve vital functions for financial institutions as they facilitate risk management and provide liquidity. The agreements may provide for rights to liquidate, terminate, cancel, rescind or accelerate the relevant agreement or transaction (‘default rights’) of the contract if the counterparty is in the vicinity of insolvency or insolvency proceedings are commenced against it, thereby inter alia mitigating the expected loss from the default. The termination can however have disastrous consequences, for example due to the loss of aforementioned functions for the distressed financial institution. The Financial Stability Board[1] (‘FSB’)’s paper published on 3 November 2015 stipulates that:

Regulation, Trading

Combating corruption worldwide: SEC reinforces FCPA enforcement

Since the news of German company Siemens AG[1] being sentenced to a record-setting $450m fine in 2008, non-US corporations have had a firm eye on developments regarding the Foreign Corrupt Practices Act 1977 (FCPA) and its enforcement. As (criminal) wrongdoings, committed or facilitated by employees, cannot be completely prevented regardless of how comprehensive and elaborate the implemented criminal compliance[2] structures might be, corporations pay particular attention to possible benefits or advantages which can be gained during the preliminary stages of prosecutions or proceedings. Such benefits could range from Deferred Prosecution Agreements (DPA) or Non-Prosecution Agreements (NPA) to reduced charges and penalties. In order to be eligible for any of these benefits, corporations must cooperate with law enforcement authorities.

Regulation, Financial Crime

We won’t cry for Argentina: Did the interpretation of Pari Passu in NML Capital, Ltd v Republic of Argentina change the status quo? – Part II

While the holdout problem in sovereign debt restructuring had been widely acknowledged for years, NML Capital created broad-based interest amongst the sovereign debt community to find a solution. Because NML Capital’s expansive interpretation of ‘rateable payment’ was a radical departure from years of attempts by the sovereign debt community to repair the damage caused by the Elliott decision, its positive and normative significance must be assessed with reference to the reactions of key players in this field – the policymakers, courts and sovereign issuers.

Financial Industry, Trading

‘Runaway bosses’ in China: Private lending, credit crunches and the regulatory response

In recent years, the term ‘pao lu lao ban’, or ‘runaway bosses’ in English, has drawn intense attention from Chinese and Western media.[1] In China, it has been difficult for privately owned businesses to obtain loans from the state-run banking sector, as Chinese banks tend to make loans to other state-owned enterprises (SOEs) and refuse to lend to what they perceive as risky start-ups. Even though small and medium-sized enterprises (SMEs) generate 60 per cent of the region’s economic output and 80 per cent of all jobs, they have received only a fifth of bank loans.[2] Therefore, a large number of Chinese entrepreneurs rely on the shadow banking system to acquire funding for their business ventures, and many of them have borrowed heavily from professional money lenders, or underground money houses, which often charge excessive interest of more than 20 per cent annually. With the Chinese economy gradually slowing down after the global financial crisis, many borrowers have found it nearly impossible to repay private loans, as their declining businesses have been unable to generate enough profit to compensate for the high cost of private lending.[3] As a result, China has recently witnessed frequent waves of private lending defaults, which have led to thousands of insolvent enterprises, and their management, who are heavily indebted, often choose to run away to evade debts. However, why those entrepreneurs regard running away, instead of staying and filing for insolvency, as an optimal choice remains unknown.

Regulation, Financial Crime

Turning the compliance straitjacket into a bulletproof vest

In the last few years, several banks have received some of the largest fines ever issued by regulators as a result of manipulating systemically important interest benchmarks (SIIB) – think LIBOR and EURIBOR – and the Payment Protection Insurance (PPI) mis-selling scandal has cost a number of banks more than £18 billion. People across industries are definitely aware of, and thinking about, regulation and compliance.

Regulation, Financial Crime

EU cross-border bank resolution challenges remain severe despite the common framework

The resolution of financial institution groups dispersed over several member states has been a persistent challenge. The Bank Recovery and Resolution Directive[1] (BRRD) which seeks to establish a harmonised regime to manage distressed financial institutions, and the Directive on the Reorganisation and Winding-Up of Credit Institutions (WUD)[2], which seeks to determine the jurisdiction in a reorganisation or liquidation procedure, seem to only partially ameliorate this challenge. Recent decisions in Goldman Sachs International v Novo Banco SA (Novo Banco) (Queen’s Bench)[3] and Bayerische Landesbank v Hypo Alpe Adria Bank International AG (HAA) (Regional Court (Landgericht) of Munich)[4] suggest that (English and German) courts take a narrow view on the application of the measures set out in the BRRD and WUD. The failure to strictly apply the provisions set out in the BRRD and WUD will result in the resolution measure not being recognised in another member state. The article will explore the motivation of the decision and options to alleviate the problem of cross-border recognition.

Regulation, Financial Industry

Fighting bribery in the Republic of Azerbaijan

This paper analyses bribery in the context of legislation in the Republic of Azerbaijan.

Legislation/Directives, Financial Crime, Rest of the World

Allegations of bribery and corruption in FIFA – are there implications for the banking sector?

The arrests in May 2015, of some of the senior officials within FIFA (Dept. Of Justice, 2015) not only provides content for the media, it also provides financial practitioners and academics with an opportunity to study some of the emerging insights of crime within global enterprises. This includes a deeper understanding of the alleged levels of bribery, money laundering and corruption within one of the largest sporting organisations in the world (Phillips, Hills & Graham, 2015). It also provides an opportunity to review again the processes by which the formal financial services sector has been used as a conduit for moving illicit funds. This paper explores some of the developments and mechanisms behind the money laundering accusations and considers the impact for the banking and financial services sector.

Banking, Legislation/Directives, Financial Crime

‘The relationship between money laundering and reporting entities and the fourth money laundering directive - A critical reflection’

The aim of this paper is to critically consider the appropriateness and effectiveness of the UK’s anti-money laundering reporting obligations under the Proceeds of Crime Act 2002 and the Money Laundering Regulations 2007.

Legislation/Directives, Financial Crime

We won’t cry for Argentina: Will NML Capital Ltd v Republic of Argentina change the status quo? – Part I

In December 2001, the Republic of Argentina announced a temporary moratorium on its debt service payments in the midst of a financial crisis and defaulted on more than US$95 billion in external debt. This constituted the biggest sovereign default in history of its time. A debt restructuring exercise of monumental proportions proved inevitable. In 2005 and 2010, the Republic initiated two exchange offers, allowing holders of old defaulted bonds to exchange their bonds for new debt at less than 30 cents on the dollar. After the two exchange offers, Argentina managed to restructure over 91 per cent of external debt on which it had defaulted in 2001. Unfortunately, there were no contractual mechanisms in the old bonds to compel the remaining minority of old bondholders to accept Argentina’s exchange offer. Distressed debt hedge funds, known pejoratively as ‘vulture funds’, purchased large amounts of Argentina’s debt at significant discounts on the secondary market and refused to participate in the exchanges. These holdout creditors then sought full collection of their debt through aggressive litigation.

Financial Industry, Trading

High-frequency trading and dark pools: What does the future hold?

Andrew Tyrie MP, the chairman of the Treasury select committee who is leading attempts to reform banking, is one of the latest high-profile figures to warn of the risks posed by high-frequency trading (HFT) in equity markets.

Financial Industry, Trading

Debit Card fraud: Criminals rush to cash in before EMV deadline in US

Earlier this year, FICO reported a startling fact about fraud on UK debit cards. Cross-border fraud had risen 25% in 2014 over 2013. But the real eye-opener was this: 47% of the cross-border fraudulent transactions were taking place in the US.

Financial Crime, Fraud

Legal and practical risks of submitting SARs on ML– A comparative analysis of the UK and UAE regimes

A suspicious activity report contains information on a specific, suspicious transaction or activity related to money laundering or proceeds from criminal activities.

Financial Crime, Rest of the World

Strengthening the compliance function for banks and insurers

Strengthening internal governance for banks and insurers is an issue for European and Dutch bank and insurance supervisory authorities.

Regulation, Financial Industry, Banking, Europe

The relationship between money laundering and reporting entities and the fourth money laundering directive – A critical reflection

The aim of this paper is to critically consider the appropriateness and effectiveness of the UK’s anti-money laundering reporting obligations under the Proceeds of Crime Act 2002 and the Money Laundering Regulations 2007.

Financial Crime, UK