In Principle: 10 Things Authorised Firms Need To Know For 2019

Part 2

Helen Marshall and Ezra Zahabi, Financial Regulatory partners, Akin Gump, London
Originally published in the April | May 2019 issue
  • This was originally published in January 2019

In the 2018 edition of this publication, we ended the introduction with the line, “We can only hope that we will enter 2019 with greater certainty than 2018 as to how the regulatory landscape will look”. Unfortunately, certainty still remains in rather short supply. With Brexit now (at least in theory) a matter of weeks away, it remains unclear what will happen: the government’s original proposed Withdrawal Agreement has been decisively rejected, but Parliament has indicated that it would support that agreement if the “Irish Backstop” provisions are renegotiated. The Prime Minister has therefore been mandated to return to negotiations on this point, in the face of statements by European Union leaders that there is no prospect of such negotiations going ahead. At the same time, Parliament has signalled that it “rejects” a no-deal Brexit, but not agreed to a proposal which would have made this rejection binding. Further Parliamentary proceedings are now planned for the middle of February. Whether there is a hard, soft or no Brexit, there remain a number of issues beyond Brexit that authorised firms will have to consider in the year ahead. Including Brexit, here are 10 things that authorised firms need to know for 2019.

Part 1

The first part of this article, from The Hedge Fund Journal Issue 139, can be found here.

Executive Summary

1. EU Securities Financing Transaction Regulation

The Securities Financing Transaction Regulation (SFTR) is one of the major pieces of post-financial crisis legislative reforms and introduces a reporting and transparency regime applicable to firms that parallels the over-the-counter (OTC) derivatives reporting requirements under the European Market Infrastructure Regulation (EMIR). All counterparties are required to report details of any securities financing transactions that they have concluded, modified or terminated to a registered or recognised trade repository. Whilst the reporting obligation under the SFTR is not expected to take full effect until 2020 at the soonest, for firms that regularly deal with repos and buy-sellback transactions, this piece of legislation should be firmly on the radar, given the requirement to build operational infrastructure to support the new reporting requirement.

2. Amendments to the European Market Infrastructure Regulation

EMIR is subject to a significant reform proposal, the EMIR “refit,” which includes a number of changes that are expected to become effective in 2019. These are, in some way or other, likely to impact all firms currently subject to EMIR. EMIR is proposed to be extended in scope by clarifying that all alternative investment funds (AIF) should be considered to be financial counterparties (FC), which has caused some confusion as to the proper classification of non-EU AIFs with non-EU managers. The refit seeks to alleviate some of the regulatory burden for smaller counterparties by introducing an FC+ and FC- concept to exclude the below-threshold FCs from the scope of the clearing obligation and by making NFC- reporting the responsibility of counterparty FCs. A number of the amendments that are likely to take effect in 2019 therefore seek to address issues raised by industry since before EMIR was published in 2012. Clearing and margin requirements established under the current EMIR regime will also continue to be phased in during 2019, thereby completing the phase-in requirements for all counterparty categories subject to clearing.

3. EU Benchmarks Regulation and LIBOR Cessation

We are now in the “transitional period” of the Benchmarks Regulation (BMR), whereby EU-based existing “users” of benchmarks may continue to use non-EU-administered benchmarks in financial instruments until 1 January 2020, notwithstanding that such benchmarks are not listed on the European Securities and Market Authority’s (ESMA)s register of “approved benchmarks.” Post-1 January 2020 treatment of non-EU benchmarks is unclear, given the lack of available “routes” into the EU for non-EU-administered benchmarks under the BMR: No jurisdiction has, for example, been declared “equivalent” to the EU such that benchmarks administered in that jurisdiction may continue to be used. An additional wrinkle to 2019 compliance is that LIBOR is expected to cease to exist from the end of 2021. The FCA has stated that, from that time, it no longer expects panel banks to contribute to LIBOR; thus, it is expected to disappear. The impact of this is that, to the extent that users of benchmarks currently reference LIBOR in financial instruments and wish to continue to do so, the fact of LIBOR’s possible cessation will need to be addressed in “robust written plans”, which users of benchmarks are expected to prepare and, on request, make available to the FCA. As explained in the following, the FCA has also indicated that benchmark supervision is an important supervisory priority for this year.

4. EU Action Plan on Sustainability and Asset Management

In November 2018, the EU Commission issued a consultation on whether, and how, asset managers should be required to take principles of sustainability into account when making decisions. This proposal signals a key shift in using financial regulation to address environmental and social concerns, whether or not it is the case in practice that such matters are currently addressed by asset managers. While there is currently no clear indication of the shape of the rules affecting managers, the industry will be keeping a keen eye on these initiatives.

5. Individuals on the Enforcement Agenda: 2018 Key Cases and Enforcement Round-Up

In keeping with investigations that take longer, it is perhaps no surprise that the amount of case law that was generated in 2018 is somewhat smaller than in previous years. This notwithstanding, both the Upper Tribunal (which hears references from the FCA’s Regulatory Decisions Committee (RDC)) and the courts have provided several relevant judgments. With the wider rollout of the SMCR, it seems likely that the regulator will continue, and perhaps sharpen, its focus on individuals this year.

Whether there is a hard, soft or no Brexit, there remain a number of issues beyond Brexit that authorised firms will have to consider in the year ahead.

1. EU Securities Financing Transaction Regulation1

2019 will see the final legislative steps being taken to finalise core provisions of the EU SFTR relating to reporting of securities financing transactions (SFT) – essentially covering repos and buy-sellback transactions.

Investment firms and credit institutions will not be required to comply with reporting provisions until 12 months from the date of the European Commission adopting the relevant regulatory and implementing technical standards, and for UCITS and AIFs, until 18 months has elapsed from the date of their adoption. The SFT reporting rules have not yet been finalised following extended disagreement between the Commission and ESMA.2 Although compliance will not be required until early/mid-2020, many financial market participants will need this time to put in place relevant IT and operational systems for collateral management and the reporting of SFTs. It is possible, however, that much of the work required may already have been done where systems have been introduced for EMIR, given similarities with regard to a number of the reporting provisions.3

Notwithstanding the final form or timing of Brexit, the UK is likely to adopt any rules that enter into force in the EU after “exit day” in substantively similar form to that in which they are published, given that the rules originate from globally agreed G20 standards.

2. Amendments to the European Market Infrastructure Regulation

EMIR has caused some difficulties since its promulgation in 2012, which a large EMIR reform project, expected to be finalised in a number of respects in 2019, is intended to address. As explained below, this so-called EMIR “refit” proposal will affect a large number of the requirements under EMIR, impacting all types of participants subject to the rules. There are also requirements under the current EMIR package that are scheduled for phase-in during 2019 relating to clearing and margin, for which participants should be preparing to the extent applicable to them. Finally, an intragroup exemption from clearing is expected to be extended following its expiry at the end of 2018.

(i) The EMIR Refit Proposal

Although the EMIR refit is still in the midst of the European legislative process and certain requirements may therefore find themselves altered by the time of its conclusion, the following sets out a number of key areas of the reform package as they currently stand in the process:

  • Proposal that all AIFs become “financial counterparties”: One of the key changes in the EMIR refit is the proposal that the definition of FC be amended to capture all AIFs, and not only AIFs that have an authorised or registered Alternative Investment Fund Manager (AIFM).4
  • Introduction of a “small financial counterparty”: A definition of “small financial counterparty” (SFC) is proposed to be introduced for entities that trade infrequently and do not pose a systemic risk; these entities would be exempt from the clearing obligation under EMIR.5
  • Amendment of the time reference for the clearing threshold determination: The proposal is for a once-yearly determination based on the aggregate month-end average total notional amount for March, April and May, replacing the current 30- day rolling average determination.
  • Proposal to remove the requirement that clearing for one asset triggers clearing requirement for all asset classes: The EMIR refit is expected to remove the requirement that, where the clearing obligation is triggered by an NFC for one asset class subject to the clearing obligation, it is then subject to the clearing obligation for all asset classes subject to the clearing obligation. Instead, it is proposed that the NFC would be in scope for only the clearing obligation requirements for the class of derivative that has fallen over the relevant clearing obligation threshold; this change would significantly reduce the clearing burden for many entities that trade clearable products only relatively infrequently.
  • Proposed amendment of reporting requirement for NFC entities: It has been proposed that the reporting requirement be amended so that, where an FC has entered into a derivative transaction with an NFC falling below the clearing threshold, the FC would be responsible for reporting on behalf of both parties.
  • Proposed extension of the clearing exemption for pension schemes, which expired on 16 August 2018.

(ii) Phase-In of Requirements Relating to Clearing and Margin

The clearing obligation under EMIR will continue to be phased in during 2019 for Category 3 and Category 4 counterparties.6 Phase-in of the initial margin requirements under EMIR will also continue in 2019, with the threshold for mandatory initial margin falling to an aggregate average notional amount of uncleared derivatives on a groupwide basis above EUR 750 billion from 1 September 2019.

Entities subject to the clearing and margin rules will need to consider, among other matters, whether their clearing/CCP relationships are adequate and, for initial margin purposes, which custodian they will use, and the required steps to implement custodial relationships.

(iii) Extension of the Intragroup Exemption from the Clearing Obligation

On 27 September 2018, ESMA submitted proposed amendments to the European Commission relating to the secondary legislation under EMIR concerning intragroup transactions with a third-country entity.7 These changes, once passed (which we fully expect to happen), will extend the expiry date for the exemption from clearing for interest rate derivative classes denominated in the G4 currencies to 21 December 2020.8

Many industry participants have not prepared for expiry of the exemption, partly because it was expected that the exemption would be extended until third-country equivalence decisions are in place. These are currently absent. ESMA therefore issued a statement9 on 31 October 2018 in which it emphasised that national regulators should apply a “risk-based approach” to enforcement of noncompliance with the clearing obligation by entities utilising the intragroup exemption from clearing.

3. EU Benchmarks Regulation and LIBOR Cessation

The BMR10 entered into force on 1 January 2018, regulating the “use,” “contribution to” and “administration” of benchmarks. The BMR continues to raise issues into 2019, in particular, for “users” of benchmarks, which will include asset managers.

(i) Challenges for Users of Benchmarks

In 2019, users of benchmarks are finding themselves with the difficult question of whether they are able to continue to use non-EU administered benchmarks from the end of the year.

The “use” restrictions in the BMR prevent EU-based entities from referencing a non-EU administered and non-ESMA authorised “index” used as a benchmark in financial instruments from 1 January 2020, unless, in broad terms:

i.  The jurisdiction of the administrator of the index has been declared “equivalent” to the EU for the purposes of the BMR by the European Commission.
ii. An administrator located outside of the EU has been recognised by an EU member state under the BMR. or
iii. An EU located administrator endorses a non- EU benchmark and takes responsibility for its supervision.

Although we are currently in the middle of a “transitional period” under the BMR (which permits entities located in the EU to use existing indices/ benchmarks until 1 January 2020, even where none of these circumstances are met, provided that they “used” the benchmark when the BMR entered into force), there is the problem that, to date, no jurisdiction has yet been declared “equivalent” to the EU for the purposes of the BMR. Recognition and endorsement of benchmarks have also not proved popular. It is not clear therefore how non-EU benchmarks may be used after the transitional period.

Given this concern, a number of financial industry groups collaborated in November 2018 to formally request by letter to ESMA and the Commission that the transition period be extended.11 We expect that it is very likely that regulatory guidance will be published during the course of 2019 to assist with these issues.

(ii) Users’ Updates to “Robust Written Plans” and the Impact of the Future Cessation of LIBOR

In 2019, updates to benchmark plans may be needed in light of LIBOR ceasing to exist.

Under the BMR, users of benchmarks are required to have in place a “robust written plan” to address fallbacks for any benchmarks used in case they cease to be available or if they change such that they can no longer be used.12 These plans are required to be made available to the FCA at their request.

Written plans for benchmarks should be looked at carefully in 2019, particularly where any plans reference LIBOR. As is now well known, the LIBOR benchmark rate is expected to cease to exist from the end of 2021 following the FCA’s statement in July 2017 that panel bank contributors to LIBOR will no longer be encouraged by the FCA to provide quotes to set LIBOR. Monitoring preparations for LIBOR’s cessation also appears to be an FCA supervisory priority for 2019.13 

(iii) Brexit and the BMR

On 23 November 2018, the UK government published an explanatory stating how the BMR will be “on-shored” in the event of a “no-deal” Brexit.14 According to the memo, the UK plans to introduce a “UK version” of the BMR that would effectively be a copyout of the EU version of the BMR as in force on exit day. Benchmarks on the ESMA register are proposed to be grandfathered for use in the UK for 24 months from the date of the UK’s exit from the EU. The extent to which the “UK BMR” would reflect updates to the “EU BMR” post-Brexit is not clearly addressed; however, it is not inconceivable that the two regimes could diverge over time in significant respects.

4. EU Action Plan on Sustainability and Asset Management

In November 2018, the European Commission published a consultation15 for input from stakeholders regarding the extent to which institutional investors and asset managers should be subject to duties of “sustainability,” and reflect these in their decision- making relating to investments. The consultation follows publication of an interim report by the EU High Level Expert Group on sustainable finance in July 2017, which recommended that the Commission clarify the fiduciary duties of institutional investors and asset managers concerning environmental, social and governance factors, and long-term sustainability.

The striking aspect of the consultation is the planned shift to using financial regulation as a tool to encourage the sustainability of investments. No laws or regulations have been proposed at this stage.

Although respondents who have published their replies publically have generally agreed that sustainability should be more directly addressed in the legal framework applicable to investment decision- making, some have resisted the assumptions that asset managers have hitherto ignored sustainability as an integral part of their investment process.

Questions that have been asked include the following:

  • “Do you think relevant investment entities should consider sustainability factors in their investment decision-making?”
  • “What are the sustainability factors that the relevant investment entities should consider?” (Choices include climate factors, social factors, governance factors and other environmental factors.)
  • “Which of the following entities should consider sustainability factors in their investment decision- making?” (Choices include collective investment funds (AIFs, UCITS, etc.), insurance providers, and individual portfolio managers.)
  • “Within the portfolio’s asset allocation, should relevant investment entities consider sustainability factors even if the consideration of these factors would lead to lower returns to beneficiaries/clients in the medium/short term?”

5. Individuals on the Enforcement Agenda: 2018 Key Cases and Enforcement Round-Up

As discussed more fully in the previous section, there were comparatively few enforcement cases in 2018, and correspondingly few final notices or decisions from the Upper Tribunal. Of the few cases that were decided, however, we note the following:

Jes Staley16

On 11 May 2018, the FCA and the PRA fined Barclays’ CEO, Jes Staley, a total of £642,430 for allegedly failing to act with due skill, care and diligence in the way that he conducted himself in response to an anonymous letter received by Barclays in June 2016. Barclays is also now subject to special requirements by which it must report annually to the regulators detailing how it handles whistleblowing, with personal attestations required from Senior Managers responsible for the relevant systems and controls.

According to the regulatory notices, in June 2016, a member of Barclays’ board received an anonymous letter from an individual outside the bank, purportedly a shareholder, citing concerns about a senior employee, Barclays’ process for hiring him and Mr. Staley’s role in dealing with those concerns at a previous employer. Later that month, Barclays received a second anonymous letter expressed as being from a Barclays employee. Mr. Staley became concerned that the letters were part of a campaign against the employee and targeted at undermining Mr. Staley’s hiring strategy. Mr. Staley instructed the firm’s security team to identify the author of the first letter. Mr. Staley was informed that the letter was being treated as a whistleblower, and so he should not attempt to uncover the author. Although Mr. Staley initially accepted this advice, he later resumed his search to identify the author after he mistakenly interpreted an update from compliance that the correspondence was no longer being treated as a whistleblower.

The final notices addressed to Mr. Staley from the FCA and the PRA found that the Barclays CEO was in breach of the requirement to act with due skill, care and diligence (individual conduct rule 2) because he should have identified that:

  • He had a conflict of interest in relation to the letter and needed to take particular care to maintain an appropriate distance from Barclays’ internal investigation.
  • There was a risk that he would not be able to exercise impartial judgment in relation to how Barclays should respond.
  • Once the complaint was in the hands of the Compliance team, it was important that Compliance retained control over its investigation process.

While the regulators said that Mr. Staley made serious errors of judgment, they did not find him to have acted with a lack of integrity. They did, however, point out that the standard of conduct expected from a CEO under individual conduct rule 2 was more exacting than for other employees and that CEOs must ensure that appropriate standards of governance are maintained. The final notices make no allegations regarding the Senior Manager Conduct Rules.

Although the regulators acknowledged that Mr. Staley made no personal gain from the events, they viewed his misconduct as sufficiently serious for each to impose a penalty of 10% of his annual income (with a 30% reduction in the overall fine for agreeing to settle at an early stage in proceedings). Barclays has also announced that it reduced Mr. Staley’s compensation for 2016 by £500,000.

In addition to the penalty imposed on Mr. Staley, Barclays agreed to enhanced reporting requirements under which it must inform the regulators on an annual basis how it handles whistleblowing, with personal attestations required from those Senior Managers responsible for the relevant systems and controls.

In related proceedings, New York State’s financial regulator fined Barclays Bank Plc and its New York branch US$15 million based on the same conduct that underlies the enforcement in the UK.17 The New York agency accused the bank of governance shortfalls and suggested that it had taken a “step back” after prior enforcement for other violations.

Alistair Rae Burns18

Mr. Burns’ case was factually complicated. The Upper Tribunal’s judgment is informative on some important questions of principle, however: To what extent is an approved person liable to ensure that a particular investment is suitable for a particular customer when it is known that that customer is receiving independent advice from a third party?

Mr. Burns was an approved person holding the CF1 (director) position at TailorMade Independent Limited (TMI). TMI itself was authorised by the FCA and acted as an independent financial advisor, particularly advising customers on the benefits of transferring their pensions into Self-Invested Personal Pension Schemes (SIPP). Mr. Burns also had interests in other companies that functioned under the “TailorMade” brand (e.g., TailorMade Alternative Investments Limited (TMAI)). TMAI was not authorised by the FCA, although its business was the promotion of comparatively illiquid and esoteric investments to customers. Many of these investments were inappropriate, and, eventually, TMI and TMAI had to stop trading, and TMI’s authorisation was removed.

Amongst other allegations, the FCA alleged against Mr. Burns that he had failed to take reasonable steps to ensure that TMI, as a regulated entity, gave advice that was suitable for its customers. Further, the FCA alleged that TMI failed to obtain the necessary information from its clients to ensure that it had enough information so that it had a reasonable basis to believe that such investment advice given was suitable (e.g., information on the customer’s financial situation, investment objectives, and knowledge and experience in relation to the relevant types of investment). These rules are laid out in the FCA handbook at COBS 9.2.

In defence, Mr. Burns pointed out that the investments in question were not “specified investments”; that is, they were not investments subject to regulation in all contexts. Second, Mr. Burns argued that all TMI did was arrange to set up a SIPP for a customer and that it did not give advice on the investments that went into the SIPP, and that it was TMAI that did this.

The Tribunal found that, in any circumstance where a firm gives advice to a customer on the merits of establishing a SIPP, any advice given on the merits of the underlying assets to be held within the SIPP must fall within the scope of the regulator’s rules, whether or not they would, in another context, be considered specified investments. Mr. Burns’ first argument was therefore unsuccessful: The investments in a SIPP are subject to regulation in this context.

Second, whilst the Tribunal accepted that, where a customer has “genuinely made a decision without advice from the IFA firm which arranges for the establishment of the SIPP to acquire investments to be held within the SIPP, then the obligations of the IFA firm … may be more limited.”19 The Tribunal accepted that a SIPP exists for the customer to make some of his or her own decisions about investments and that merely setting up a SIPP for a customer did not necessarily mean that TMI would have to scrutinise the investments as if it had offered to advise on them alone. The Tribunal thought, however, that any “limitation” on the COBS 9.2 principles on which TMI might try to avail itself was narrow. It was open to TMI to take into account the fact that the customer had already decided (possibly with advice) the type of investments that he or she wanted to hold in a SIPP when assessing the client’s knowledge of the sector. It did not, however, mean that TMI or Mr. Burns was excused from advising on the underlying investments at all; it was still necessary for them to gather enough information about the customer to decide whether the proposed investments were suitable.

The Tribunal approved a lower-than-requested financial penalty against Mr. Burns of £60,000 and upheld the FCA’s decision to impose a prohibition on Mr. Burns.

Investment advisers should be aware that the COBS 9.2 rules (to gather enough information about a customer to determine whether a particular investment is suitable) may apply to investments that might otherwise not be regulated if the client is being advised in relation to another, related action that is regulated. Further, advisers should beware that instructions from a customer cannot be followed without thought. If the customer has received advice from another firm, the adviser may take this into account, but still must decide whether the advice that the customer has received is suitable.

Angela Burns20

On 24 May 2013, the FCA published a decision notice against Angela Burns fining her £154,800 and issuing a prohibition order. Five and a half years later, after references to the Upper Tribunal and the Court of Appeal, and an attempted appeal to the Supreme Court, the FCA issued its final notice against Ms. Burns in December 2018.

Ms. Burns had been an NED at two mutual societies and acted as chair for their investment committees. Ms. Burns was engaged by the societies to provide investment advice, and she suggested a registered investment advisor.

Unbeknownst to the mutual societies, however, Ms. Burns, at the same time, was trying to elicit consultancy work for herself with the investment advisor. In her approach to the investment advisor, Ms. Burns explicitly referred to her NED positions in the mutual societies to make herself more attractive.

In falsely holding herself out as a neutral investment advisor for the mutual societies, and aggravating this by relying on her position in those societies for her own gain with the investment advisor, the FCA – and the Upper Tribunal and the Court of Appeal agreed – decided that Ms. Burns was in breach of Principle 1, to act with integrity in carrying out her accountable functions. The FCA determined that she should have declared her conflicts of interest.

Consequently, the FCA issued a prohibition order against Ms. Burns. The one success that Ms. Burns had before the Upper Tribunal, which was not disturbed on appeal to the Court of Appeal, was to have the proposed fine of £154,800 reduced to £20,000.


Firms often bring in external law firms to conduct investigations and to provide reports on what has happened. Firms choose to instruct outside counsel for these investigations for a number of reasons, but one important reason is the hope that the final

report will be protected by legal professional privilege and so will not have to be disclosed to a court or the regulator.

Last year, we drew attention to two cases where the court had taken a narrow view of privilege, and compelled the firms involved to disclose various notes and papers produced by external law firms during the investigation. One of those cases, Eurasian Natural Resources Corporation Limited v. Serious Fraud Office, has now been successfully appealed to the Court of Appeal.

The judgment given is helpful for firms, but it still does not mean that everything produced by a law firm during an investigation will be covered by privilege. In particular, timing will matter.

In December 2010, ENRC received an email from a whistleblower alleging criminal conduct in Kazakhstan and Africa. ENRC appointed external lawyers to investigate this. By March 2011, ENRC was aware that the SFO was interested in the situation, and ENRC’s general counsel arranged for the firm’s dawn-raid procedures to be reviewed and upgraded in response. ENRC’s head of compliance predicted a dawn-raid before the end of summer 2011. In August, the SFO wrote to ENRC advising it to consider carefully the SFO’s Self-Reporting Guidelines, and requested a meeting with its general counsel.

The relevant question in this case was whether documents created by the external law firm, including notes of interviews with employees, after this letter was received would be protected by privilege.

There are two branches of legal professional privilege, namely legal advice privilege and litigation privilege. ENRC argued that the documents in dispute should generally be protected under litigation privilege, and further that the notes of interviews with employees should also be protected under legal advice privilege. In broad terms, legal advice privilege protects professional communications between a lawyer and a client whenever these communications are made. Litigation privilege, on the other hand, protects communications that are made when legal proceedings are “reasonably contemplated” and when the communications are made for the “sole or dominant purpose” of those proceedings.

At first instance last year, Mrs. Justice Andrews decided that the notes of interviews with employees could not be protected by legal advice privilege.22 There is Court of Appeal authority that legal advice privilege can arise between only lawyers and employees who have been specially authorised to seek and receive legal advice. These employees had not been specially designated, and so she decided that legal advice privilege would not apply.

Mrs. Justice Andrews further decided that, in the relevant period after the SFO’s letter in August 2011, ENRC did not reasonably contemplate that proceedings would be brought. Consequently, she found that litigation privilege could also not apply to these documents.

The Court of Appeal rarely overrules its own precedents. Whilst it was overtly critical of the authority restricting legal advice privilege to communications between a lawyer and only some employees, the Court left it to the Supreme Court to decide the question. The SFO has said that it does not plan to appeal this decision; we may have to wait some time for another case to reach the Supreme Court.

In any event, overruling this decision would not have made a difference to the outcome of this case, since the Court of Appeal thought that litigation privilege should apply to the documents in this case, including notes made of interviews with employees. It held that, in all the circumstances of this case, and especially where (a) the SFO had gone beyond merely stating general principles from its guidelines and (b) lawyers had been appointed to conduct an investigation, there was “clear ground” to say that proceedings were reasonably in contemplation. Indeed, much of what ENRC was attempting to do was avoid the proceedings that it thought would be coming its way.

The message from this case is generally positive. Even though legal advice privilege remains somewhat unhelpful in terms of protecting investigation material, the courts should now look more favourably on litigation privilege claims.


On 19 December 2018, the FCA fined Santander

£32.8 million for failing to effectively process the accounts and investments of deceased customers. The FCA found that, between 1 January 2013 and 11 July 2016, the bank breached:

  • Principle 3 of its Principles for Businesses (management and control) by failing to take reasonable care to organise and control its probate and bereavement process responsibly and effectively with adequate risk management systems.
  • Principle 6 (customers’ interests) by failing to ensure that its probate and bereavement process paid due regard to the interests of its customers and their representatives and treated them fairly.

The FCA said that the bank’s probate and bereavement process contained weaknesses that reduced its ability to effectively identify all the funds that it held that formed part of a deceased customer’s estate. This resulted in it being unable to effectively follow up with representatives of the deceased customer. Such weaknesses meant that the process would start, but would stall and remain incomplete, meaning that funds would not be transferred to those who were entitled to receive them.

Since 2015, Santander has carried out remediation exercises to transfer funds from affected accounts to the rightful beneficiaries. These exercises are almost complete, which means that most of the 40,000 affected customers have now received the funds, together with interest and compensation for any consequential loss.

The bank was also found to have breached Principle 11 (relations with regulators) for failing to promptly disclose information relating to the above-detailed issues to the FCA.

Mark Steward, the FCA’s head of enforcement, cautioned that the FCA remains “on the lookout for firms with poor systems and controls and will take action to deter such failings to ensure customers are properly protected.”24

Arif Hussein25

The FCA issued a decision notice prohibiting Arif Hussein from performing any function in relation to any regulated activity on the grounds that Mr. Hussein had knowingly or recklessly engaged in conduct that he believed was improper; that Mr. Hussein was knowingly or recklessly complicit in his employer, UBS’s, manipulation of LIBOR; and that Mr. Hussein lacked honesty and integrity. In particular, the FCA alleged that Mr. Hussein had engaged in improper internal chats with a trader- submitter at UBS for the purpose of influencing UBS’s LIBOR submissions. Mr. Hussein referred this notice to the Upper Tribunal.

Before the FCA’s RDC, Mr. Hussein had contended that he had been involved in internal chats with trader-submitters to explore internal opportunities to hedge or “net” his trading positions (in short, he had engaged with trader-submitters in their capacities as short-end derivatives traders, rather than as LIBOR submitters). Before the Upper Tribunal, Mr. Hussein repeated this defence, but he also stated that he believed at that time that it was acceptable for trader-submitters to take into account trading positions when determining what a LIBOR submission would be.

The FCA contended that Mr. Hussein had changed his defence between the interviews he had had at the FCA and the RDC hearing, and then at the Upper Tribunal hearing, and that this change indicated a lack of integrity.

The Upper Tribunal agreed with Mr. Hussein’s position that he had thought his chats with the trader- submitters to be appropriate. The Upper Tribunal noted that, at the relevant time, there were no formal procedures within UBS regulating the LIBOR submission process, and Mr. Hussein did believe that his trading positions could be taken into account by the submitters. The Tribunal found that Mr. Hussein did not act dishonestly or recklessly and that his participation in the chats was not contrary to the standards required of him.

The Tribunal accepted, however, that Mr. Hussein had misled the FCA through his answers at interview and that he should have appreciated during the proceedings before the RDC that the chats had had a dual purpose: The chats had not simply been exploration into his hedging or netting options. The Tribunal found that Mr. Hussein should have told the RDC that he thought it permissible for his trading positions to be taken into account in the LIBOR submissions. The Tribunal therefore agreed with the FCA that Mr. Hussein had changed his position and that this meant that he must have misled the regulator and failed in his duty to be candid with the FCA. Somewhat reluctantly it appears, the FCA agreed that this failing by Mr. Hussein was sufficiently serious that it was reasonable for the FCA to impose a prohibition order on him. Notwithstanding that the Tribunal disagreed with the RDC and the FCA’s submissions on many issues, therefore, the Tribunal dismissed Mr. Hussein’s reference.

Interestingly, the Upper Tribunal expressed some concern that a comparatively junior trader should have received a prohibition order from the FCA whilst more senior managers had apparently escaped sanction.

Whilst the Upper Tribunal has no power to do anything more than express its strong concerns about this to the FCA, this statement is somewhat unusual.

The most important message from this case is the obligation to reflect and be truthful about what happened from as early in the investigation as possible. Had Mr. Hussein’s position remained consistent throughout the proceedings, it seems likely that the Tribunal would have found for him; as the Tribunal said, “we do not believe him to be a thoroughly bad person. He made a serious error of judgment.” 

Unlike in court litigation, where parties are expected to develop their cases as the proceedings progress, the duty of candour to the FCA means that this approach is not open in these regulatory proceedings. Everything that an authorised or approved person does, whether before the investigation or during the investigation, is open to scrutiny, and litigation conduct must adapt accordingly.

Tesco Personal Finance plc26

In November 2016, Tesco Personal Finance plc (Tesco Bank) reported that it had suffered a serious cyber breach during which £2.26 million was stolen from 9,000 consumers’ accounts. Tesco Bank quickly refunded any customers who had lost money in the attack.

In October 2018, the FCA announced that it would fine Tesco Bank £16.4 million for failing to exercise due skill, care and diligence in protecting its customers.

The FCA noted that this sort of cyber-attack was a “foreseeable risk” from which Tesco Bank had failed to protect its customers. Further, the FCA determined that, once it became aware of the cyber breach, Tesco Bank had failed to act with “sufficient rigour, skill and urgency.”

Even if the cyber breach had been too sophisticated for Tesco Bank reasonably to be expected to have been able to prevent – which was not the case here – the FCA was critical that Tesco Bank did not have in place a response plan that would permit a swift recovery. The FCA requires firms to have an effective plan in place setting out what to do if a damaging event occurs, whether that event should have been foreseen or not.


1. Regulation (EU) 2015/2365 of the European Parliament and of the Council of 25 November 2015 on transparency of securities financing transactions and of reuse and amending Regulation (EU) No 648/2012.

2. The Commission announced its intention in July 2018 to endorse the RTS and the ITS, with some amendments compared to the draft submitted by ESMA to the Commission. ESMA has issued a statement that it does not agree with one of the amendments relating to the Commission’s proposal to drop ESMA’s provision that makes it mandatory for reports to include Legal Entity Identifiers for branches and Unique Transaction Identifiers once these have been developed and “endorsed by ESMA” – the Commission takes the view that this amounts to a delegation of power to ESMA to make changes to the reporting requirements that does not accord with the scope of their legal powers.

3. For example, if both entities that are subject to an SFT are located in the EU, they will both be required to report the trade to an authorised trade repository on a T+1 basis.

4. Original drafts of the legislation had suggested that non-EU AIFs with a non-EU AIFM would be reclassified as FCs, which would have represented a significant expansion of the scope of EMIR to non-EU AIFMs. More recently, the definition of FC has been narrowed so that it captures EU AIFs (regardless of the location of the AIFM), as well as, per existing rules, AIFs (wherever located) with an authorised or registered AIFM.

5. The determination for whether an entity is an FC or an SFC would, in current proposals, be made by applying the same clearing only once yearly, based on the aggregate month-end average total notional amount for March, April and May. Risk mitigation rules would however continue to apply to the SFC.

6. For (i) Category 3 counterparties (i.e., FCs whose group’s aggregate month-end average of outstanding notional amount of OTC derivatives is below 8 billion EUR, assessed over January/ February/March, and AIFs that are NFCs below the threshold) from 21 June 2019 for CDS; and (ii) for Category 4 counterparties (those that are NFCs not falling within any other category), from 9 May 2019.

7. 151-1768_final_report_no.6_on_the_clearing_obligation_intragroup. pdf.

8. The exemption expired on 21 December 2018, for interest rate derivative classes denominated in G4 currencies subject to the clearing obligation and will expire on later dates for CDS and certain other interest rate derivatives.

9. 151-1773_public_statement_on_co_and_to_for_intragroup_as_well_ as_cat_4.pdf.

10. Regulation (EU) 2016/1011 of the European Parliament and of the Council of 8 June 2016, on indices used as benchmarks in financial instruments and financial contracts or to measure the performance of investment funds and amending Directives 2008/48/ EC and 2014/17/EU and Regulation (EU) No 596/2014.

11. the-transition-period-of-the-benchmark-regulation/.

12. Article 28(2).

13. In September last year, the FCA sent a “Dear CEO” to large UK banks and insurance companies in which the FCA asked for details of recipients’ preparations and the actions being taken to manage transition from LIBOR to alternative interest rate benchmarks. Although the audience consisted of large banking and insurance institutions, it is difficult to preclude the FCA looking at these issues more generally for entities under their supervision, including asset managers.

14. amendment-and-transitional-provision-eu-exit-regulations-2019/the-benchmarks-amendment-eu-exit-regulations-2018-explanatory- information.

15. sustainability-consultation-document_en.pdf.

16. edward-staley-2018.pdf.

17. whistle-blower-fine.html.


19. [2018] UKUT 246 (TCC), [268].

20. burns-2018.pdf.



23. pdf.

24. fined-serious-failings-its-probate-and-bereavement-process.


26. finance-plc-2018.pdf.