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Welcome to Legal Shorts, a short briefing on some of the week’s developments in the financial services industry.

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


Claire Cummings

020 7585 1406


EIOPA joins Sustainable Insurance Forum

On 8 August 2018, EIOPA published a press release announcing that it has become a member of the Sustainable Insurance Forum (SIF). The SIF is a network of insurance supervisors and regulators from around the world working together on sustainability challenges facing the insurance sector. In July 2018, SIF and the International Association of Insurance Supervisors (IAIS) jointly published an issues paper on climate change risk in the insurance sector. In the paper, SIF and the IAIS call on the insurance sector to enhance awareness of climate change risk. EIOPA considers that the case studies on supervisory practice set out in the paper are of "high value" for all supervisors. EIOPA will consider transition and physical risks relating to climate change. It will also provide input from an EU perspective on taxonomy, fiduciary duty, governance, own risk and solvency assessment (ORSA), as well as disclosure in the sustainable action plan it intends to publish in autumn 2018. The Bank of England (BoE) announced that it was "deepening" its work in this area with the insurance sector in June 2017.


ICO calls for views on data sharing code of practice

ICO has issued a call for views on updating its existing data sharing code of practice which provides good practice advice to organisations that share personal data. ICO has issued a call for views on updating the existing code and plans to first address the changes in data protection legislation, including transparency, lawful bases for processing, the new accountability principle and the requirement to record processing activities, and then provide further case studies and deal with technical and other developments since 2011. The call for views seeks responses on:

  • Which changes to the legislation the ICO should focus on in updating the code and any other non-legislative developments that should be covered.

  • Whether the existing code strikes the right balance between data sharing and data protection.

  • Any areas of the existing code that are either too detailed, not covered in enough detail, or not covered at all.

  • Any case studies or scenarios that could be included in the updated code.

The call for views is the first stage in the consultation process. The deadline for submission of responses is 10 September 2018 and the questions are available from the ICO's website.


FMLC report on legal uncertainty arising in context of robustness of financial contracts after Brexit

The Financial Markets Law Committee (FMLC) recently published a report on issues of legal uncertainty arising in the context of the robustness of financial contracts after Brexit. The FMLC has considered whether, in the context of a hard Brexit, the performance of existing (sometimes called "legacy") financial contracts would continue, or whether Brexit would make their performance illegal, impractical or impossible in some way. The analysis focuses on existing contracts, although the FMLC notes some of the points raised may be equally relevant to new contracts concluded after exit day. For the most part, the FMLC finds it agrees with the European Commission's July 2018 communication.

It considers it unlikely that Brexit will give rise to issues of contractual continuity in a general sense, so far as it is a matter of English law and jurisdiction. Nevertheless, the FMLC has explored the potential consequences to all concerned, including clients and markets, where authorisations are lost without adequate alternatives. It has also examined some of the ways in which the identified issues might be mitigated by firms themselves and through legislative action, including within an agreement between the UK and the EU.


BCBS, CPMI, FSB and IOSCO second report on central clearing interdependencies

The Basel Committee on Banking Supervision (BCBS), Committee on Payments and Market Infrastructures (CPMI), Financial Stability Board (FSB) and International Organization of Securities Commissions (IOSCO) recently published their second report on central clearing interdependencies. The report analyses interdependencies between central counterparties (CCPs) and their clearing members and other financial services providers. The results are broadly consistent with the previous analysis and demonstrate that:

  • Prefunded financial resources are concentrated at a small number of CCPs.

  • CCP exposures are concentrated among a small number of entities.

  • Relationships mapped are characterised, to varying degrees, by a core of highly connected CCPs and entities and a periphery of less highly connected CCPs and entities.

  • A small number of entities tend to dominate the provision of the critical services required by CCPs.

  • Clearing members and clearing member affiliates are also important providers of other critical services required by CCPs and can maintain several types of relationships with multiple CCPs simultaneously.

The analysis is a useful starting point for understanding potential sources of systemic risk in central clearing and is intended to assist with the design of supervisory stress tests. It has also informed the policy work set out in the joint workplan to promote CCP resilience, recovery and resolvability.


ESMA updates EMIR validation rules: August 2018

On 9 August 2018, ESMA published an updated version of its validation rules for the reports submitted under the revised technical standards on reporting under Article 9 of EMIR. The amendments are shown in red font. In a related press release, ESMA explains that it has updated the validation rules, with effect from 5 November 2018, relating to the following fields: (i) reporting timestamp; (ii) reporting counterparty ID; (iii) ID of the other counterparty; (iv) underlying identification; and (v) confirmation means. ESMA last updated the validation rules in March 2018.


No general equitable duty for lender to act in good faith (High Court)

The High Court has considered a claim that a lender breached an equitable duty to act in good faith by taking a significant shareholding in a borrower in a debt restructuring. Receivers and mortgagees owe equitable duties (for example, to act in good faith) to a mortgagor when selling a mortgaged property. In Medforth v Blake [2000] Ch 86 it was stated that the "duties imposed on a mortgagee in possession, and on a mortgagee exercising his powers whether or not in possession, were introduced in order to ensure that a mortgagee dealt fairly and equitably with the mortgagor". The claimants argued that as the duties arise even when a mortgagee is not in possession, a lender holding a real property mortgage has a general implied duty to act in good faith and to act fairly, even when not exercising powers under its security. Rejecting this argument, Chief Master Marsh noted that the Medforth case concerned whether a receiver owed similar duties when managing the mortgagor's business to when selling a mortgaged property. It was impossible to extrapolate from this to a wide-ranging duty of good faith, applying to all the lender's dealings with the mortgagor, even when it has not enforced (or threatened to enforce) its security, merely because it holds a real estate mortgage.

The claimants' other arguments that there had been a breach of an implied contractual duty of good faith and a breach of the lender's fiduciary duties as a shadow director were also rejected. The claim was struck out as the particulars of claim showed no reasonable grounds for bringing the claim. Lenders will be relieved that the attempt to extend a mortgagee's equitable duty to act in good faith in relation to enforcing security to a restructuring situation was given short-shrift. Extension of this duty would open an avenue for challenging additional lender protections, enhanced pricing, or the grant of an equity stake agreed with a secured lender during a debt restructuring.

Case: Standish and others v The Royal Bank of Scotland Plc and another [2018] EWHC 1829 (Ch) (30 July 2018) (Chief Master Marsh).


Court gives its reasons for sanctioning a scheme of the Lehmans' Waterfall litigation (High Court)

The High Court has sanctioned a scheme of Lehman Brothers International Europe, the purpose of which is to compromise the outstanding issues in the Lehmans' Waterfall litigation and enable the administrators to distribute the remaining surplus. The scheme also included a mechanism to settle the claims of those creditors who are entitled to contractual interest at a rate higher than the 8% statutory minimum. Hildyard J had previously provided a short ex tempore judgment sanctioning the scheme, but had indicated he would hand down a full judgment elaborating on his reasoning. This is that judgment. The judgment considers various matters in relation to class composition, the fair representation of class creditors, the fairness of the scheme generally and the court's jurisdiction to sanction a scheme under the Recast Brussels Regulation. Hildyard J concluded there was no reason not to sanction the scheme (Re Lehman Brothers International (Europe) (in administration) [2018] EWHC 1980 (Ch)).


FCA Dear CEO letter on cross-border booking arrangements

On 8 August 2018, the FCA published a Dear CEO letter on cross-border booking arrangements. In the letter, the FCA explains that the UK withdrawal from the EU has resulted in firms needing to put in place contingency plans which, when executed, will impact current business models, legal entity strategies and booking arrangements. It appreciates the information firms have already provided on their plans, and reminds firms of the importance of continuing to provide all necessary information. Firms should not take decisions without speaking to the FCA first.

Firms expanding their presence elsewhere in the EU must ensure that the structures put in place enable the FCA to supervise the conduct of their UK business effectively. They must also ensure continued compliance with the FCA's Threshold Conditions. When designing the structures, firms should assess whether the proposed changes are in clients' best interests. The FCA is aware that some EU supervisors have set out specific business model requirements. The FCA is open to a broad range of legal entity structures or booking models. This includes those making use of back-to-back and remote booking, providing the associated conduct risks are effectively controlled and managed. Its starting point is not to restrict business models, but to understand the principles and practices involved, and how the conduct risks arising from them are managed. The FCA sets out in the letter six principles that booking models should comply with.

The FCA expects UK boards and senior managers to ensure that effective governance is in place to identify and mitigate the potential harm that could arise from modified booking arrangements. Firms should also be able to demonstrate how the principles have been observed and implemented. For dual-regulated firms, the FCA explains that this approach is consistent with the PRA's established approach to booking practices. It continues to liaise closely with the PRA in the context of EU withdrawal work.


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25 05 2019

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