Corporate weekly highlights—14 October 2016

Welcome to the weekly highlights from the Lexis®PSL Corporate team for the week ending 14 October 2016, which provide news updates and a comprehensive list of dates for your diary.
This week’s edition features: the FCA’s latest policy development update; the FRC’s guidance on annual reports; ESMA’s new Q&A on investor protection under MiFID II; ESMA’s consultation on MiFID II guidelines on trade halts; ESMA’s updated Q&A on AIFMD; ESMA’s opening statement at the ECON hearing on AIFMD passporting; the BVCA survey looking at economic optimism post-Brexit, business concerns and company perspectives on the EU; andpexels-photo-27406 details of the disclosure by the signatories to the Women in Finance Charter of their gender diversity targets. It also includes analysis on the lessons which can be learnt from the Yahoo hack; the Fourth Money Laundering Directive; and the decision in Hosking v Marathon regarding whether a partner's profit share can be subject to forfeiture if the partner has breached his/her fiduciary duties to the partnership.

Equity capital markets—FCA

FCA publishes policy development update

The Financial Conduct Authority (FCA) has published its latest policy development update, which provides information on its recent and upcoming publications, including forthcoming consultations on the revised Markets in Financial Instruments Directive (MiFID II) (Directive 2014/65/EU), the Market Abuse Regulation and pension transfers.

The document highlights the following prospective developments: a fourth consultation paper on MiFID II implementation will be published in late 2016; a one-month consultation regarding proposed changes to the FCA Handbook will be launched in Autumn 2016; a three-month consultation on the redress methodology for pension transfers will be launched in Autumn 2016; a three-month consultation on creditworthiness assessments in consumer credit will be launched in November 2016; a two-month consultation on regulatory fees and levies will be launched in November 2016; a three-month consultation on the Financial Services Compensation Scheme funding review will be launched at the end of 2016; and a policy statement on Pension Wise standards will be published in either December 2016 or January 2017.

Accounts and reports

Guidance on annual reports published by FRC

Guidance for preparers of the annual reports of around 1,200 large and smaller listed companies has been published by the Financial Reporting Council (FRC). The FRC’s letter outlines the key issues and improvements to be made to such reports in the 2016 reporting season in order to foster investment in the UK.

The FRC advises that annual reports should be presented in a user-friendly, clear and concise manner. It further states that companies should also consider a broad range of factors when determining principal risks and uncertainties, including cyber-risk and climate change.

The FRC also sets out that investors expect the following from annual reports: a clear explanation of the relationship between IFRS or UK GAAP measures, and any alternative performance measures used; business model reporting should provide clear explanations of how the company makes money and what differentiates it from its peers; a clear link should be disclosed between sources of income described in the business model and the revenue recognition policies; and dividend disclosures should detail how dividend policies operate in practice and the potential impact of risks and capital management decisions on such policies.

MiFID II related developments

ESMA publishes new Q&A on investor protection under MiFID II

The European Securities and Markets Authority (ESMA) has published a Questions and Answers (Q&A) document regarding the implementation of investor protection topics under MiFID II and Regulation (EU) 600/2014 (MiFIR). MiFID II will enter into application on 3 January 2018 and will strengthen the protection of investors by both introducing new requirements and strengthening existing ones.

The Q&A provides clarifications on the following topics: best execution; suitability and appropriateness; recording telephone conversations and electronic communications; record keeping; investment advice on an independent basis; underwriting and placement of a financial instrument; and inducements (research).

ESMA consults on MiFID II guidelines on trade halts

ESMA has published consultation paper 2016/1440 which contains proposed guidelines aimed at providing guidance to regulated markets on the calibration of trading halts in reaction to a significant price movement in a financial instrument on that market during a short period.

Article 48(5) of MiFID II provides that Member States shall require a regulated market to be able to temporarily halt or constrain trading if there is a significant price movement in a financial instrument on that market or a related market during a short period. Article 48(13) mandates ESMA to develop guidelines in relation to such trading halts.

The proposed guidelines apply to National Competent Authorities (NCAs) and trading venues including those that allow or enable algorithmic trading and set out principles for trading venues to calibrate volatility parameters according to a pre-defined, statistically supported methodology. The proposed guidelines consider such matters as: the nature of the financial instrument; the liquidity profile and the quotation level of the financial instrument; the order imbalance; trading venue mode and rules; external references; duration of the halts; and newly-issued instruments.

ESMA will consider the responses received to the consultation paper and aim to finalise the guidelines and publish a final report in Q1 2017.

AIFMD related developments

ESMA publishes updated Q&A on AIFMD

ESMA has published an update to its Q&A document (including one new Q&A) on the application of the Alternative Investment Fund Managers Directive (Directive 2011/61/EU) (AIFMD).

Pursuant to the requirements of the Securities Financing Transactions Regulation for Alternative Investment Fund Managers (EU) 2015/2365, Art 13, the Q&A document includes one new Q&A on the commencement of periodical reporting. It clarifies that the information to investors required by Article 13 should be included in the next annual or half-yearly report to be published after 13 January 2017.

ECON hearing on AIFMD passporting—ESMA opening statement

ESMA has published the opening statement of Steven Maijoor, ESMA chair, at the hearing of the Economic and Monetary Affairs Committee of the European Parliament (ECON) on passporting under AIFMD. Mr Maijoor summarised the advice which ESMA gave in July 2015 and July 2016 on the application of the AIFMD passport to Alternative Investment Fund Managers (AIFMs) and Alternative Investment Funds (AIFs) in a number of non-EU countries and the further steps that ESMA will need to take, including focussing on putting in place the extensive framework foreseen by the EU co-legislators in case the decision is made to extend the AIFMD passport to one or more non-EU countries.

Brexit

BVCA survey finds private equity businesses optimistic post-Brexit

A survey of post-Brexit business confidence has found that private equity and venture capital firms are optimistic they can adapt to life outside the EU. The survey was published by the British Private Equity and Venture Capital Association (BVCA), and looked at economic optimism post-Brexit, business concerns and company perspectives on the EU.

The survey found that economic confidence had fallen significantly since the previous survey, which was published in March, prior to the EU referendum. The survey also found: confidence in general economic conditions has decreased since January 2016; more that two-thirds of business owners are more confident in their own businesses; around 84% of companies are positive about company revenue growth, with 91% of survey participants also optimistic about their ability to retain talented people; and 85% of UK businesses backed by private equity and venture capital are optimistic they can adapt to life outside the EU and continue to grow. However, a number of survey participants, did voice concerns about the UK's future trading relationships with the EU.

Women in Finance Charter

Women in Finance Charter ‘omits’ certain male-dominated firms

The 72 signatories to the Women in Finance Charter (Charter) were recently revealed. Each signatory has disclosed their targets against which they seek to improve gender diversity. Together the signatories, including banks and insurers, employ half a million people.

The Charter found women made up only 14% of financial services firms' executive committees. Furthermore, the Charter found that financial services firms have the widest pay gap, despite being the highest paid sector.

The Charter signatories have agreed to increase female representation in senior roles and look at ways to make the workplace more equal. 60 of the 72 signatories have committed to having at least 30% women in senior roles by 2021. This includes 13 organisations which are aiming for complete gender parity. Firms have set out strategies for how they will meet these targets. Signatories have also agreed to make an individual executive responsible for overseeing the Charter’s targets. 20 of the firms involved have nominated their CEO to fulfil this role.

The need to disclose progress of gender diversity is widely believed to be a positive step. However, certain employment lawyers have commented that while 72 signatories appears impressive, in reality it represents a very small proportion of the total number of institutions within the City. These lawyers have also told LexisNexis there are some notable omissions from the list of signatories, including pension funds and hedge funds which are largely ‘male-dominated’ organisations. Moreover, they further note that for the Charter to be a success, firms will need to 'buy into' its objectives, and not simply offer women roles which are senior only in name.

Relevant updates from other practice areas

IP & IT

Keeping data safe—the Yahoo hack and the changing landscape of cybercrime

Yahoo recently revealed that it had been subjected to a large scale hack, compromising millions of email accounts. In this analysis, Megan Holden, solicitor at Shoosmiths, and Anastasia Fowle, a partner at the firm, explain what happened and consider the lessons which can be learned.

Over recent years, headlines have told of an increasing number of companies, such as LinkedIn and MySpace, that have fallen victim to online intrusions. Along with reputational and customer relations issues, companies who fail to adequately protect their customer data could find themselves in hot water with regulators and claimants worldwide. Unfortunately, it seems that many businesses remain ill-equipped to deal with such threats.

The Yahoo hack is particularly controversial because it has been alleged that Yahoo was made aware of the hack around two months prior to announcing it to the public. This has angered its customers and the company has come under intense public scrutiny for its seemingly slow response. It remains to be seen what action, if any, Yahoo is planning to take against its attackers and their alleged sponsors.

Given its worldwide customer base, US-based Yahoo could face legal challenges from regulators and customers across the globe.

The control of personal data in the UK is governed by the Data Protection Act 1998 (DPA 1998). Case law makes clear that domestic data protection law will apply to a global business with a corporate presence and customers within an EU Member State. Within days of the hack, the Information Commissioner's Office (ICO), the UK’s data protection regulator, confirmed that UK customers were affected and advised them to change their passwords. If the ICO considers that such a breach has occurred, it has a number of powers open to it, including issuing a fine of up to £500,000. Recent fines issued have demonstrated that the ICO is not opposed to issuing fines in the hundreds of thousands. Its powers, which are not exclusive, also include criminal and non-criminal enforcement and requiring companies to give undertakings. Affected customers may also make a claim for compensation.

Importantly, the General Data Protection Regulation, Regulation (EU) 2016/679 (GDPR) is likely to replace DPA 1998 in England and Wales from May 2018, bringing with it a significant strengthening of European data protection legislation, both in terms of obligations imposed on organisations and the rights granted to individuals.

The authors state that businesses need to take action to protect their customer data by considering the following questions. Firstly, do you have policies and procedures in place which minimise the risk of a breach and that would ensure that a breach could be quickly and readily identified, contained and remedied? Secondly, do your security measures need reviewing? Thirdly, have you undertaken due diligence on your suppliers who process personal data on your behalf and are your contracts sufficiently robust with appropriate indemnities and obligations for reporting breaches within prescribed time limits? Fourthly, have you appointed a Data Protection Officer who is appropriately trained and experienced in relation to data protection compliance? Fifthly, do you have an internal reporting policy in place and strategy for dealing with external reputational management—especially in the immediate aftermath? Finally, are group companies who are based outside of the EU aware of their obligations under the GDPR if they target EU customers?

Corporate Crime

Clean money—the Fourth Money Laundering Directive

The Fourth Money Laundering Directive was published in the Official Journal of the EU in June 2015. A government consultation last month invited views on meeting the UK’s obligation to transpose the Directive into national law. In this analysis, Jenny Barker of counsel at Peters & Peters Solicitors LLP examines the proposals raised in the consultation.

Member States have until 26 June 2017 to transpose the Directive into national law. HM Treasury (HMT) recently published a 'Consultation on the Transposition of the Fourth Money Laundering Directive'. The consultation closes on 10 November 2016. HMT will then review the responses and publish draft legislation which will be subject to a second consultation, with final legislation coming into force before the deadline.

The purpose of the Directive is to bring EU Member States in line with the updated Financial Action Task Force (FATF) standards. The main changes being considered in order to give effect to the Directive are: a reduction in the cash transaction threshold for persons trading goods from €15,000 to €10,000; an absolute turnover threshold of £100,000; using a non-exhaustive list of factors, rather than list of products, when determining whether simplified customer due diligence is appropriate; setting a threshold for the size and nature of a business required to appoint a compliance officer and independent audit function; exemption for certain gambling providers on the basis of proven low risk; appointment of professional or self-regulatory body supervisors of estate agents; new definition of correspondent banking, to include relationships between and among credit institutions and financial institutions; central register of beneficial ownership, including trusts; making one-off company formations subject to due diligence; giving all supervisors an express power to refuse to register or to cancel an existing registration; extending the criminality test to high value dealers; and no upper limit on financial sanctions.

The author identifies a number of potential impacts of the proposals for practitioners. Firstly, the Directive places a strong emphasis on using a risk-based approach to anti-money laundering, meaning that law firms may need to reinforce their compliance programmes with this emphasis in mind, and be prepared for increased scrutiny. Secondly, the change to customer due diligence means there will be no automatic exemption, and this could create a significant additional administrative burden. Finally, the Directive removes the distinction between domestic and foreign politically exposed persons (PEPs), meaning that UK PEPs will, for the first time, be subjected to enhanced due diligence measures.

The author concludes by noting that although the Directive will be implemented into UK law prior to any Brexit negotiations being finalised, the UK's FATF membership is separate to its EU membership. Consequently, very similar legislation would need to be enacted in the UK regardless of Brexit, to ensure alignment with the latest FATF standards.

Dispute Resolution

Forfeiture of fiduciary's remuneration applies to partner's profit share (Hosking v Marathon)

This analysis considers the decision in Hosking v Marathon Asset Management LLP [2016] EWHC 2418 (Ch). In this case, Mr Justice Newey held that the profit share of a partner or a limited liability partnership (LLP) member can potentially be subject to forfeiture where the partner or member has breached their fiduciary duties to the partnership.

This case confirms that the remedy of forfeiture of a partner or member's entitlement to profit shares in the partnership can apply where the partner or member in question has breached their fiduciary duties to the partnership. In so doing, it traces the authorities on the forfeiture principle and considers the relevant legislation concerning partnerships.

The case centred on Mr Hosking, who was a member of Marathon Asset Management LLP (Marathon). As an executive member he was entitled to 'full rations' in the profit share of the partnership, which was then reduced to a 50% share on his retirement, when he became a non-executive member. On Mr Hosking's retirement Marathon commenced arbitration proceedings against him which concluded with the arbitrator's finding that Mr Hosking had breached contractual and fiduciary duties owed to Marathon by discussing with a number of its employees the possibility of starting a new business and producing a business plan outlining his thoughts. As part of the remedies award, the arbitrator decided that Mr Hosking should return to Marathon (ie forfeit) certain sums paid to him during the period of his breaches of duty. Mr Hosking appealed the remedies award, submitting that forfeiture had no application to partnership profits, the distribution of which is always a matter of contractual bargain and that such a remedy was inconsistent with the provisions of the LLP deed governing the partnership.

In agreeing with Marathon in the case that the profit share of a partner or LLP member can potentially be subject to forfeiture and therefore that the appeal against the arbitral remedies award should be dismissed, Newey J observed in his ruling among other matters that: while the forfeiture principle has in the past been invoked mainly in relation to agents, the rationale for it extends more widely to other fiduciaries too, noting that a partner or LLP member is an agent and his difficulty in seeing why the mere fact that someone is a partner or LLP member as well as an agent should preclude the operation of a principle which affects agents more generally; the distinction between profit share and remuneration was not well-founded, noting that while it will often be impossible to characterise all or any particular part of the profit share of a partner or LLP member as 'remuneration', that should not always be the case, as indicated by LA 1890, s 2(3)(b) and the decision in M Young Legal Associates Ltd; the legislation did not require him to reach a different conclusion since it does not attempt to provide an exhaustive account of the relevant law and states that 'rules of equity and of common law' are preserved (in the case of LA 1890) or that the default rules are 'subject to the provisions of the general law' (in the case of the Limited Liability Partnerships Regulations); and the fact that the contractual documentation relating to a partnership or LLP contains no provision for forfeiture cannot necessarily mean that there is no scope for it, noting that while the forfeiture principle can doubtless be excluded by contract, it has been taken to apply where there is no reference to it in a relevant contract (eg, Imageview).

DateSubjects covered
17 October 2016The deadline for responses to the Board of the International Organization of Securities Commissions (IOSCO) consultation report (CR04/2016) of good practices for termination of investment funds. In August 2016, IOSCO published a consultation report proposing a set of good practices for the voluntary termination of investment funds.
26 October 2016The deadline for submissions to the inquiry launched by the Business, Innovation and Skills (BIS) Committee in the House of Commons. The inquiry is on corporate governance and focuses on executive pay, directors’ duties and boardroom composition. It follows the BIS Committee's recent inquiries into BHS and Sports Direct, which highlighted certain corporate governance failings, and the commitments to overhaul corporate governance that have been made by the Prime Minister. The BIS Committee will examine executive pay, directors' duties and board composition.
28 October 2016The deadline for responses to the FCA's consultation paper (CP16/19) seeking feedback on the implementation of the Markets in Financial Instruments Directive 2014/65/EU (MiFID II). The consultation follows on from CP15/43, published in December 2015, and covers the following issues: commodity derivatives; supervision; prudential standards; senior management arrangements, systems and controls; remuneration requirements for sales staff; whistleblowing; client assets sourcebook; complaint handling; and fees manual.
10 November 2016The deadline for comments on HM Treasury's consultation paper regarding the transposition of the Money Laundering Directive into UK law. The consultation paper was published by HM Treasury in September 2016.

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