Europe: new credit rating agency rules come into force

New rules governing credit rating agencies came into force today. For further information see: Commission press release | FAQs. The legislation is available here. Note, too, that earlier this week the European Securities and Markets Authority published its final report Guidelines and Recommendations on the Scope of the CRA Regulation: see here (pdf).

UK: Parliamentary Commission on Banking Standards - a response from the Chancellor

The Chancellor delivered his annual Mansion House speech yesterday evening: see here. He commented on the final report published earlier in the day by the Parliamentary Commission on Banking Standards and stated:

"...The Commission’s central judgment is absolutely right. As they put it: 'High standards in banking should not be a substitute for global success. On the contrary, they can be a stimulus to it. There’s a lot of detail here – I will respond more fully next month. We’ve already supported the recommendations on new criminal sanctions and cancelling bonuses where banks are bailed out. And let me be clear: where legislation is needed, the Banking Bill currently before Parliament will be amended to ensure the recommendations can be quickly enacted."

UK: Government 'Action Plan to prevent the misuse of companies and legal arrangements'

The Government has published a short plan to prevent the misuse of companies and legal arrangements: see here (pdf). The plan includes proposed amendments to the Companies Act 2006 in order create a central registry of information on companies' beneficial ownership to be maintained by Companies House. A consultation on the proposals, including whether the registry should be publicly available, is expected later this year. For further information see here.

UK: 'Changing banking for good' - Banking Standards Commission publishes final report

The Parliamentary Commission on Banking Standards, established in July last year, published its fourth and final report today. Titled 'Changing banking for good', the report makes recommendations the purpose of which are to improve standards across the banking industry. The report is divided into two sections: volume one contains the summary, conclusions and recommendations (here or here, pdf); volume two contains chapters one to eleven, annexes and formal minutes (here or here, pdf).

There is much in the wide-ranging report concerning corporate governance, most specifically in chapter seven which is titled 'Bank governance, standards and culture'. The Commission states that there is no quick single fix but is wary of making many recommendations which, in its view, "may do little more than create yet more lucrative work for corporate governance professionals" (para. 676). This said, some recommendations are made against the background of the Commission's view that relying on greater shareholder empowerment is not the answer, given the misalignment between asset manager incentives and the long-term interests of a company, together with the fact that shareholders contribute only a small proportion of a bank’s capital. The Commission's recommendations in chapter seven include the following:

• The Financial Reporting Council should publish proposals, within six months, designed to address the widespread perception that some ‘natural challengers’ are sifted out by the nomination process. Consideration should be given to whether the Nomination Committee should be chaired by the Chairman of a bank or by the Senior Independent Director. 
• Regulators should examine the merits of requiring each non-executive vacancy on the board of a bank above the ring-fence threshold to be publicly advertised.
• The UK Corporate Governance Code should be amended to require directors of banks to attach the utmost importance to the safety and soundness of the firm.
• The PRA Principles for Businesses should be amended to include a requirement that a bank must operate in accordance with the safety and soundness of the firm and that directors’ responsibilities to shareholders are to be interpreted in the light of this requirement.
• The Government should consult on a proposal to amend section 172 of the Companies Act 2006 to remove shareholder primacy in respect of banks, requiring directors of banks to ensure the financial safety and soundness of the company ahead of the interests of its members.
• A full-time Chairman should be the norm; the Chairman should not usually hold any other large commercial non-executive or executive positions.

Elsewhere in the report, recommendations are made with regard to remuneration (see chapter eight) and for reform of the approved persons regime (chapter six). Chapter ten makes recommendations concerning sanctions and enforcement, including the Commission's view - widely reported in today's press - that there is a strong case in principle for a new criminal offence of reckless misconduct in the management of a bank.

UK: England and Wales: client money distribution and the jurisdiction of the court

The ICLR, as part of its free case summary service, has provided a summary for the recent High Court decision Re MF Global UK Ltd (in special administration) [2013] EWHC 1655 (Ch): see here. The headnote reads: "The court had an inherent jurisdiction to give such directions as would enable the administrators of a regulated investment firm, holding client money under rules imposing a statutory trust, to put in place a client money distribution procedure for dealing with rejected claims and unknown claims which could provide a degree of certainty and protection and ensure a timely return of client money."

Europe: EBA, ESMA and EIOPA publish annual reports for 2012

The European Banking Authority, European Securities and Markets Authority and European Insurance and Occupational Pensions Authority have published their annual reports for 2012: see, respectively, here (pdf), here (pdf) and here.

UK: financial stability and foreign bank branches

Last Friday the Bank of England published Financial Stability Paper No. 22 - Which way do foreign branches sway? Evidence from the recent UK domestic credit cycle: see here (pdf). The report notes that lending to the UK economy by foreign branches has been more volatile than by UK-incorporated banks, UK-owned banks and foreign subsidiaries. Close monitoring of the risks posed by foreign branches with respect to financial stability is recommended, as is the need for the Bank of England’s Financial Policy Committee to monitor closely the growth in domestic lending not only in aggregate but also by different types of banks and to different sectors of the economy.

Guernsey: GFSC proposes consolidation of the financial supervisory legislation

The Guernsey Financial Services Commission has published a consultation paper in which it sets out proposals to consolidate much of the legislation relating to its supervisory functions: see here (pdf).

In addition, some changes to the legislative framework are proposed, including extending the activities requiring a licence from the GFSC as well amending the minimum licensing criteria to include a requirement that a licensee’s board of directors should discharge its functions with the necessary skills, knowledge and experience in relation to the company’s activities and associated risks. It is also proposed that the minimum criteria should be standardised to provide that the board of directors include such number of executive directors and non-executive directors as the GFSC considers appropriate.

Singapore: MAS censures banks for benchmark deficiencies and outlines new framework

The Monetary Authority of Singapore has censured twenty banks for deficiencies in their governance, risk management, internal controls, and surveillance systems, with regard to financial benchmarks including SIBOR. The banks - listed here (pdf) - have been directed to take corrective action and to subject such action to independent review. One hundred and thirty three traders were found to have engaged in several attempts to inappropriately influence the benchmarks. The Authority has also outlined proposals for a new regulatory framework for financial benchmarks: see here. The Authority's consultation paper is available here (pdf).

UK: The Enterprise and Regulatory Reform Act 2013 (Commencement No. 1, Transitional Provisions and Savings) Order 2013

The Enterprise and Regulatory Reform Act 2013 (Commencement No. 1, Transitional Provisions and Savings) Order 2013 - the first commencement order to made under the Enterprise and Regulatory Reform Act 2013 - was made on June 8: see here or here (pdf).

Europe: EBA opinions - good practice in responsible mortgage lending and treating borrowers in difficulty

The European Banking Authority has published two opinions, directed at competent authorities within the Member States, setting out good practice in respect of responsible mortgage lending and the treatment of borrowers experiencing payment difficulties: see, respectively, here (pdf) and here (pdf). One of the EBA's aims in publishing the opinions is to promote common practice by the authorities.

UK: FRC consults on auditor regulatory sanctions procedure guidance

The Financial Reporting Council has published for consultation a draft of proposed guidance in respect of its auditor regulatory sanctions procedure: see here (pdf). The guidance is intended for members of the FRC's Monitoring Committee and the Independent Sanctions Tribunal.

UK: Government to raise the credit union maximum interest rate cap

HM Treasury began a consultation last year in which it sought views on raising the maximum monthly interest rate cap that credit unions can charge their members from the current two percent to three percent: see here (pdf). Yesterday the Treasury published its response to the consultation - see here (pdf) - and announced that it would go ahead with the proposed increase. Legislation is expected in the autumn.

UK: Key facts and trends in the accountancy profession

Earlier this week the Financial Reporting Council published its annual publication Key facts and trends in the accountancy profession: see here (pdf). It is reported, amongst other things, that there has been little change in recent years in the proportion of listed companies audited by the larger registered audit firms outside of the so-called Big Four.

UK: England and Wales: sovereign immunity claim rejected in unfair prejudice case

The ICLR has provided a summary of the Court of Appeal's decision in Al Saud v Apex Global Management Ltd. [2013] EWCA Civ 642: see here. The court upheld the trial judge's decision to dismiss the application by two Saudi Arabian princes in which they claimed sovereign immunity in respect of claims made against them under section 994 of the Companies Act 2006 (the unfair prejudice remedy).

Europe: ESMA Guidelines on remuneration policies and practices (MiFID)

The European Securities and Markets Authority has published its final report Guidelines on remuneration policies and practices (MiFID): see here (pdf). The purpose of the guidelines is to ensure the consistent and improved implementation of the existing MiFID conflicts of interest and conduct of business requirements in the area of remuneration.

UK: Supreme Court gives judgment in Petrodel - appeal allowed - corporate veil not pierced but resulting trust found

The Supreme Court gave judgment today in Prest v Petrodel Resources Limited & Others [2013] UKSC 34, one of the most important recent company law cases. A copy of the judgment is available here or here (pdf). A summary is available here (pdf).

The court unanimously held, in the context of proceedings for financial remedies following a divorce, that there were three possible legal bases on which company assets might be available to satisfy a lump sum order against the husband: (1) where, exceptionally, the court may disregard the corporate veil in order to give effective relief; (2) that section 24 of the Matrimonial Causes Act 1973 confers a distinct power to disregard the corporate veil in matrimonial cases; or (3) that the companies hold the properties on trust for the husband, not because of his status as sole shareholder and controller of the company, but in the particular circumstances of the case.

The court held that the facts before it fell into the the third category, finding that the properties were held on a resulting trust by the company for the husband. Nevertheless, the judgment contains much discussion of the boundaries of the first category. Lord Sumption, delivering the leading opinion, stated (at paras.[27] and [28]):

.... the principle that the court may be justified in piercing the corporate veil if a company’s separate legal personality is being abused for the purpose of some relevant wrongdoing is well established in the authorities. It is true that most of the statements of principle in the authorities are obiter, because the corporate veil was not pierced. It is also true that most cases in which the corporate veil was pierced could have been decided on other grounds. But the consensus that there are circumstances in which the court may pierce the corporate veil is impressive. I would not for my part be willing to explain that consensus out of existence. This is because I think that the recognition of a limited power to pierce the corporate veil in carefully defined circumstances is necessary if the law is not to be disarmed in the face of abuse. I also think that provided the limits are recognised and respected, it is consistent with the general approach of English law to the problems raised by the use of legal concepts to defeat mandatory rules of law.

The difficulty is to identify what is a relevant wrongdoing. References to a “facade” or “sham” beg too many questions to provide a satisfactory answer. It seems to me that two distinct principles lie behind these protean terms, and that much confusion has been caused by failing to distinguish between them. They can conveniently be called the concealment principle and the evasion principle. The concealment principle is legally banal and does not involve piercing the corporate veil at all. It is that the interposition of a company or perhaps several companies so as to conceal the identity of the real actors will not deter the courts from identifying them, assuming that their identity is legally relevant. In these cases the court is not disregarding the “facade”, but only looking behind it to discover the facts which the corporate structure is concealing. The evasion principle is different. It is that the court may disregard the corporate veil if there is a legal right against the person in control of it which exists independently of the company’s involvement, and a company is interposed so that the separate legal personality of the company will defeat the right or frustrate its enforcement. Many cases will fall into both categories, but in some circumstances the difference between them may be critical. This may be illustrated by reference to those cases in which the court has been thought, rightly or wrongly, to have pierced the corporate veil."

Lord Sumption also stated (at para. [52]):

Whether assets legally vested in a company are beneficially owned by its controller is a highly fact-specific issue. It is not possible to give general guidance going beyond the ordinary principles and presumptions of equity, especially those relating to gifts and resulting trusts. But I venture to suggest, however tentatively, that in the case of the matrimonial home, the facts are quite likely to justify the inference that the property was held on trust for a spouse who owned and controlled the company. In many, perhaps most cases, the occupation of the company’s property as the matrimonial home of its controller will not be easily justified in the company’s interest, especially if it is gratuitous. The intention will normally be that the spouse in control of the company intends to retain a degree of control over the matrimonial home which is not consistent with the company’s beneficial ownership. Of course, structures can be devised which give a different impression, and some of them will be entirely genuine. But where, say, the terms of acquisition and occupation of the matrimonial home are arranged between the husband in his personal capacity and the husband in his capacity as the sole effective agent of the company (or someone else acting at his direction), judges exercising family jurisdiction are entitled to be sceptical about whether the terms of occupation are really what they are said to be, or are simply a sham to conceal the reality of the husband’s beneficial ownership.

A recording of Lord Sumption, delivering the court's opinion this morning, is available below:

UK: Enterprise and Regulatory Reform Act 2013 - guide published

The Enterprise and Regulatory Reform Act 2013 received Royal Assent earlier this year: see here. A copy of the Act is available here or here (pdf). Yesterday the Government published a short guide to the Act: see here (pdf). The Act contains, amongst other things, some of the provisions necessary to introduce the new regime for shareholder approval of quoted company directors' remuneration. These are briefly explained in chapter 13 of the new guide. More detailed information is available in the explanatory memorandum accompanying the Act: see here.

UK: The Companies Act 2006 (Strategic Report and Directors’ Report) Regulations 2013

A draft of the Companies Act 2006 (Strategic Report and Directors’ Report) Regulations 2013 was published yesterday: see here (pdf). The Regulations make amendments to existing legislation, including the Companies Act 2006, in order to implement the new narrative reporting regime for companies (including the preparation of a strategic report). The Regulations come into force on 1 October 2013.

Europe: ESMA reports on prospectus liability regimes within the Member States

The European Securities and Markets Authority has published a report in which it reports on prospectus liability regimes within the Member States: see here (pdf).

UK: Treasury Select Committee begins new inquiry - appointment and conduct of FPC, MPC and Court members

The House of Commons Treasury Select Committee has begun an inquiry considering the rules governing the appointment and conduct of members of the Bank of England’s Financial Policy Committee, Monetary Policy Committee and Court, as well as the independence of the Financial Policy Committee: see here.

UK: The supervision of central counterparties by the Bank of England

The Bank of England published its latest quarterly bulletin yesterday: see here (pdf). The bulletin explains the role of central counterparties and the Bank's approach to their supervision.

New Zealand: Government tables amendments to the Companies and Limited Partnerships Amendment Bill

Last week a supplementary order paper was tabled in Parliament containing amendments to the Companies and Limited Partnerships Amendment Bill: see here (pdf). Four main proposals are contained within the amendments, one of which is new: granting the Registrar of Companies to identify the controllers of companies. Other amendments concern Clause 4 of the Bill, which has been redrafted and now provides that a director will commit a criminal offence where he exercises powers or performs duties as a director (or omits to exercise powers or perform duties) in bad faith towards the company and believing the conduct is not in the best interests of the company and knowing, or being reckless whether, the conduct will cause [i] serious loss to the company, or [ii] benefit or advantage to a person who is not the company (including, for example, the director).

UK: England and Wales: company assets not controlled by sole director/shareholder for purposes of freezing order

Judgment was given yesterday in Group Seven Ltd v Allied Investment Corporation Ltd [2013] EWHC 1509 (Ch). At issue was whether an asset of a company, a chose in action, was to be treated as an asset of the company's sole director (also its only shareholder) for the purposes of a freezing order to which the director was subject. The freezing order was drafted so as to apply to all of the director's assets "whether or not they are in his own name ... For the purposes of this order the [director's] assets include any asset which he has the power, directly or indirectly, to dispose of or deal with as if it were his own".

The trial judge held that a company with a sole director, who also owned all its shares, did not hold or control its assets in accordance with that director/shareholder's direct or indirect instructions within the terms of the freezing order. The judge stated that this finding was mandated by settled principles of company law, referring to the judgments of Rimer and Patten LJJ in Petrodel Resources Ltd v Prest [2012] EWCA Civ 1395, [2013] 2 WLR 557. His answer was, he stated, one that "may dilute the efficacy of the standard CPR form of freezing order, and surprise and unsettle not a few; but to my mind, there is no escape from it." (para. [65]).

Note: Petrodel was the subject of an appeal to the Supreme Court, heard by a panel of seven justices earlier this year. Judgment will be given next Wednesday.

Update (12 June 2013) - a summary of the case has been provided by the ICLR: see here.

UK: England and Wales: no partnership between four individuals

The Court of Appeal gave judgment today in Ilott v Williams & Ors [2013] EWCA Civ 645. The court unanimously upheld the trial judge's decision that no partnership existed between four individuals within section 1(1) of the Partnership Act 1890. Lady Justice Arden, delivering the only reasoned judgment, noted that section 1(1) reflected the deliberate legislative policy that in order for a partnership to exist, there needed to be more than a decision to set up a business.

UK: England and Wales: no jurisdiction to wind-up company

The Court of Appeal gave judgment yesterday in Olympic Airlines SA Pension & Life Insurance Scheme v Olympic Airlines SA [2013] EWCA Civ 643. At first instance (see [2012] EWHC 1413 (Ch)) the trial judge held that the court had jurisdiction to wind-up a company under Article 3(2) of Council Regulation (EC) 1346/2000 (the Insolvency Regulation) because the company had an establishment in England on the date the winding-up petition was presented. The Court of Appeal disagreed: there was no jurisdiction because the company did not have an establishment, the trial judge having erred in, amongst other things, overlooking the Virgós-Schmit report as an authoritative commentary on the Regulation.

Update (12 June 2013) - a summary of the case has been provided by the ICLR: see here.

UK: FRC going concern guidance consultation - update and proposals

Earlier this year, in response to the recommendations made in the final report of the Sharman Panel of Inquiry, the Financial Reporting Council published a consultation paper setting out proposed revisions to its going concern guidance and to the International Standards on Auditing (UK and Ireland): see here (pdf). The responses received by the FRC have now been published - see here - and the FRC has provided an overview of the proposals it intends to implement in respect of its going concern guidance: see here.

Europe: Commission consults on harmonisation of national laws regarding single member limited liability companies

The European Commission has started a consultation seeking views on the desirability of harmonising national laws regarding single-member limited liability companies: see here.

Europe: EBA-ESMA Principles for benchmark setting processes in the European Union

The European Banking Authority and European Securities and Markets Authority have published their joint final report Principles for benchmark setting processes in the EU: see here (pdf).

UK: The company's separate legal personality - Supreme Court to give Petrodel judgment next week

The Supreme Court has announced that it will hand down its judgment in Petrodel Resources Limited v Prest next week: see here.

The issue for the court, as outlined in its case summary, was: is it open to the court in ancillary relief proceedings to treat the assets of a company of which a spouse is the sole controller as being assets to which that spouse is ‘entitled’ for the purposes of section 24(1)(a) of the Matrimonial Causes Act 1973. In the Court of Appeal the majority (Rimer and Patten LJJ; Thorpe LJ dissenting) provided a strong endorsement of the company's separate legal personality: see [2012] EWCA Civ 1395. Rimer LJ stated: "... the separate corporate identity of a company is a fact of legal life that all courts are required to recognise and respect, whatever jurisdiction they are exercising" (para. [155]). Patten LJ stated that section 24(1)(a) did not give the court the power to disapply the established principles of legal and beneficial ownership or of company law (para. [160]).