Trade finance and sanctions An update on key developing issues 26 November 2014 – Dubai
Introductions
• Exchange Name Cards
• Introduce yourself to your colleagues
• Summarise what your group wants to achieve today
A. Warehouse Financing
B. PRC Law on L/C Fraud & Injunctions
C. Governing Law
D. Classic Injunction Case - SPC
E. Bank Guarantee Case
Topics to discuss
Warehouse financing
WarehouseReceipts to Financing Banks
WarehouseReceipts to Collateral Managers
WarehouseOperator
WarehouseReceipts to Financing
Banks
WarehouseReceipts to Financing
Banks
WarehouseReceipts to Collateral Managers
WarehouseReceipts to Collateral Managers
CMA
Pledge Agreement
(Borrower)
(CollateralManager) Goods
(Lending Bank)
Import Agent(Applicant)
Sellers(Beneficiaries)
L/C IssuingBank
2. LC Application.
3. NegotiationContract
4. ReimbursementContract
UltimateBuyer
1. Agency Contract.Collateral
Manager’s W. R. to overseas
co. for L/C negotiation
Forged BL based on genuine
information
NegotiatingBank
Letter of credit fraud
Forged or fraudulent doc.
created or presented by
bene.w.o. notice??
Carrier
No shipment(bad faith) orgoods no value!
Bene. & appli. or 3rdparty collaborate topresent fraudulent doc.w.o. genuine transaction.
Other L/C Fraud
Fraud Exception (Art. 8)
Art. 8 + Irreparable
Damage
Confirming bank honoured its
payment undertaking in
good faith
Pyt already made by
nominated party in good
faith
$Doc. Negotiated
in good faith
Stop Payment Orders – Exception (Art 9 & 10)
Issuing Bank
Discounting Bank
Sinotani v. ABC
Please
discount.
Sent to
ABC
1. We acceptthe doc.
& will pay onmaturity.
2. Discounted
•Governing law - available with ABC by acceptance?
•May ABC refuse payment?
• Agritrade v ICBC Case – available by negotiation in HK
•Marconi v Pan Indonesia Bank – available by negotiation in England but no negotiation
Pass to CM and then to supplier
(4) Pre doc & got acceptance Nego
Bank
(3) Negotiation
(4) Release doc
PRC Injunction – L/C Autonomy
(2) Usance L/C
L/C issuing bank in China
Supplier
(1) Import Agt
PRC Import Agent
Buyer
Subjective or Objective Test?
Intent to defraud
Burden of Proof
I am totally convinced.
Negligence=
Bad faith
Good or bad faith?
Import Agent(Applicant)
Seller(Beneficiary)
L/C IssuingBank
3. LC App.
6. Nego. C.5. Adv. C.
AdvisingBank
NegotiatingBank
UltimateBuyer
1. Agency C.
SWIFT
Independence principle
Silent confirmation
Import Agent(Applicant)
Seller(Beneficiaries)
L/C IssuingBank
3. LC App.
6. Nego. C.5. Adv. C.
Advising Bank
NegotiatingBank
UltimateBuyer
1. Agency C.
7. Reim C
Foreign companiesset up
Import Agent(Applicant)
Seller(Beneficiaries)
L/C IssuingBank
3. LC App.
6. Nego. C.
NegotiatingBank
UltimateBuyer
1. Agency C.
7. Reim C
What did the bank staff do and get?
Ultimate Buyer
Applicant(unconnected)
Beneficiaries
L/C IssuingBank
LC App. Fin. C.
NominatedBank
Reim. C.
Adv. C.
Advising Bank
Guarantor
Warrants checking
Documentationchallenges
Mitigation
Barclays Bank (England)
English Suppliers
(3) Guarantee
1st demand & w.o. proof or
condition
L/CUnconfirmed & conditional
(1)Sales Contract
(Libyan jurisdiction)
Independence of Bank Guarantee
Buyers (Libya)
(2) Counter-Guarantee Umma Bank (Libya)
•Edward Owen Engineering Ltd. v. Barclays Bank International Limited
1. Fraud? 2. Even if fraud – injunction against Umma?
3. Is no remedy against the buyers in Libya a valid ground for injunction?
4. Precautionary measures for the suppliers
For more information or advice please contact:
King Tak FungPartner+852 2186 [email protected]
Michael YauPartner+852 2186 3237 [email protected]
UK sanctions
Sources Targets Impact Obligations Penalties
UNSCR EU regs UK regs CTA 2008 TAFA 2010
Individuals- assets- travel
Entities- assets
Sectors- oil and gas- precious metals
Governments
UK citizens UK
incorporated bodies
Extraterritorial effect
Freeze funds No economic
resources (directly/indirectly)
No circumvention
Individual: - imprisonment and/or unlimited fine)
Corporate entity:- unlimited fine
The UK sanctions regulators
• Foreign and Commonwealth OfficeFCO
• Her Majesty’s TreasuryHMT
• Department for Business Innovation and SkillsBIS
• Her Majesty’s Revenue and CustomsHMRC
• Financial Conduct AuthorityFCA
The UK sanctions regulators
• policyFCO
• financial sanctions (consolidated list)/breaches/licencesHMT
• trade sanctions/licencesBIS
• trade breachesHMRC
• regulated persons/SYSCFCA
• individuals and entities subject to asset freeze
Consolidated
• financial institutions subject to restrictionsUkraine Investment ban
• not in useConfidential
• individuals and entities with Iranian linksBIS Iran
• organisations banned in the UKUKHO proscribed terror
organisations
The UK sanctions regulators
Current UK regime list
Afghanistan
Al-Qaida & Taliban
Belarus
Democratic Republic of
Congo
Egypt
Eritrea
Federal Republic of
Yugoslavia & Serbia
Iran
Iraq
Ivory Coast
Lebanon and Syria
Liberia
Libya
North Korea (Democratic
People’s Republic of
Korea)
Republic of Guinea
Republic of Guinea-Bissau
Somalia
SudanSyria
Terrorism and terrorist financing
Tunisia
Ukraine
Zimbabwe
US sanctions
Sources Targets Impact Obligations Penalties
UNSCR IEEPA CFR Executive
Orders TWEA CISADA NDAA ITRSHA
Jurisdictions Individuals
- assets- travel
Entities- assets
Sectors- oil and gas- precious metals
Governments
USA citizens US
incorporated bodies
USDtransactions
Extraterritorial effect
Freeze/Block Report Notify
transgressions Information
requests NB “owned or
controlled (50% aggregate rule)”
Individual: - Imprisonmentand/or $250 fine (or x2 gain)
Corporate entity:- $1m fine(or x2 gain)
• US Department of StateState Department
• US Treasury’s Office of Foreign Assets Control
OFAC
• Bureaus of Industry and SecurityBIS
• US Department of JusticeDOJ
Federal Reserve • The Federal Reserve System
DANY• District Attorney of New York/New York
Department of Financial ServicesDANY/DFS
The US sanctions regulators
• policyState Department
• financial sanctions (SDN list)/civil breaches/ licences
OFAC
• trade sanctions/licencesBIS
• criminal breachesDOJ
Federal Reserve • regulated FI
DANY • bank licensingDANY/DFS
The US sanctions regulators
• individuals and entities subject to blockingSpecially Designated Nationals
• financial institutions subject to restrictionsPart 561
• individuals subject to rejection of businessForeign Sanctions Evaders
• individuals and entities subject to product restriction
Sectoral Sanctions
Section 311 Patriot Act • entities/jurisdictions of money laundering concern
DANY • de-barred/unverified/denied personsBIS lists
The US sanctions lists
Are there any exemptions?
• Information materials
• Travel exemption
• Humanitarian donations
• Personal communications
• Journalistic activity
• Official business
• Specific/general licences
The US sanctions regime
Base penalty matrix – Egregious case
No Yes
(1)One-half of transaction value
(capped at $125,000 per violation/$32,500 per
TWEA violation)
(3)One-half of applicable statutory maximum
(2)Applicable schedule amount
(capped at $250,000 per violation/$65,000 per
TWEA violation)
(4)Applicable statutory maximum
Yes
No
Voluntary self-disclosure
Where the base penalty amount would otherwise exceed the statutory maximum civil penalty amount applicable to an apparent violation, the base penalty amount shall equal such applicable statutory maximum amount.
• Hong Kong Monetary AuthorityHKMA
SFC
• Joint Financial Intelligence Unit Hong KongJFIU
• Hong Kong Department of Trade and Industry
Trade and Industry department
• Hong Kong Securities and Futures Commission
The HK sanctions regulators
HK sanctions
Sources Targets Impact Obligations Penalties
UNSCR UNATMO
(Cap 575) UNSO
(Cap 537) WMDO
(Cap 526) UNSR OFAC?
Individuals- assets
Entities- assets
HK permanent residents
HK incorporated bodies
Extraterritorial effect
Freeze funds No economic
resources (directly/indirectly)
No circumvention
Individual: - Imprisonment (14 years) and/ or unlimited fine
Corporate entity:- unlimited fine
• financial sanctions/breaches/licences (Authorised Institutions (AI))
HKMA
• financial sanctions (Listed non-AI)SFC
• reporting transactionsJFIU
• trade sanctions/licences/trade breachesTrade and Industry
department
The HK sanctions regulators
Financial sanctions workshop
Complying with sanctions
Zia Ullah – PartnerJames Robinson – Partner
26 November 2014
Sanctions compliance
Key compliance challenges (internal):
• Hit rates
• Identification of prohibited business/customers
• Monitoring of activity
• Escalation and exceptions
• Cost of compliance v cost of breaches
• IT tools
• Training
Key compliance challenges (external):
• Balancing conflicting regimes
• Regulatory focus
• Reputational damage
• Legislative change
• List consolidation
Regulatory expectation:
• Awareness
• Screening
• Assurance
• Training
• Benchmarking
• Engagement
Sanctions compliance
Awareness:
• Legal and Regulatory
• Senior management
• Public Policy
• Private Policy
• External stakeholders (e.g., FCA,HMT)
• Internal stakeholders, BUs
Sanctions compliance
Screening:
• List management
• Policy:– Payments/customers– Domestic/cross-border– Message types– Trade documentation– Legacy systems
• Technology
• Escalation
• False positive strategy
Sanctions compliance
Assurance:
• Testing:– People– Technology– Policy– Escalation– False positive strategy– Awareness– Systems and controls
• By whom?:– Internal/external audit
Sanctions compliance
Training:
• How:– Ftf– E-learning
• Who:– Specific roles-e.g trade finance– all/?
• What:– One size fits all?
Sanctions compliance
Benchmarking:
• Industry guidance:– JMLSG/DFSA/OFAC
• Regulatory guidance:– FCA financial crime guidance/DFSA guidance
• Peer group:– Wolfsberg
Sanctions compliance
Engagement:
• Regulatory:– HMT/AFU/UAE central bank– FCA/DFSA– BIS
• Disclosure
Sanctions compliance
• Who are you dealing with?
• Non-cooperation
• Location of interested parties
• Policy implementation versus law/regulation
• Directly versus indirectly
• Audit/termination rights
• KYB
The critical issues
Russian/Ukraine sanctions –2014 timeline
• March 5/6 – US and EU authorise sanctions (EO 13660); EU freezes assets of Ukrainian individuals
• March 20 – the Russian Foreign Ministry published a list of reciprocal sanctions against certain American citizens, which consisted of 10 names, including Speaker of the House of Representatives John Boehner, Senator John McCain, and two advisers to Barack Obama
• July 16 – US sectoral sanctions- Rosneft, Novatek, Gazprombank and Vneshekonombank
• July 31 – EU introduced a further round of (sectoral) sanctions. Sanctions included financial sector (all majority government-owned Russian banks), trade restrictions relating to the Russian energy and defence industries, and additional individuals and entities designated under the EU asset freezing provisions
• August 6 – Putin signed a decree "On the use of specific economic measures", which mandated an effective embargo for a one-year period[30] on imports of most of the agricultural products
• August 12 – US imposed sanctions on Russia's largest bank (Sberbank), a major arms maker and arctic (Rostec), deepwater and shale exploration by its biggest oil companies (Gazprom, Gazprom Neft, Lukoil, Surgutneftegas and Rosneft)
• September 12 – US and EU expands sanctions to additional people and entities, as well as providing for further sectoral sanctions
Country programmes – Russia
EU:
• Regulation 208/2014 (misappropriation and human rights):– Assets/economic resources– 6/3/14
• Regulation 269/2014 (sovereignty and territorial integrity):– Assets/economic resources– 17/3/14
Ukraine/Russia
EU and US restrictions
• EU Reg 833/2014 –money market instruments or transferable securities>90 days maturity post 1/8/14
energy
finance
export
50% extra-EU subsidiaries
• EO 13662 – debt or equity>90 days maturity post 16/7/14
energy
finance
export
General Licence No.1
• EU Reg 960/2014 – money market instruments or transferable securities>30 days maturity post 12/9/14
energy
finance
export
50% extra-EU subsidiaries
• EO 13662 – debt or equity>30/90 days maturity post 12/9/14
energy (90)
finance (30)
export (30)
General Licences Nos.1a/2
Ukraine/Russia
EU and US restrictions
Country programmes
UK:
• The Ukraine (European Union Financial Sanctions) Regulations 2014
• The Ukraine (European Union Financial Sanctions) (No.2) Regulations 2014
EU:
• Regulation 267/2012 (prohibition on dealing with Iranian):– Assets/economic resources– Crude oil– Petroleum/petrochemical products– Precious metals/stones/currency notes
• Builds upon Regulation 961/2010
Country programmes
Regulation 267 (main restrictions):
• Designated persons/entities (including, IRISL/IRGC)
• Transfers to/from Iran > EUR ? – notification
• Transfers to/from Iran > EUR ? – approval
• Restricts finance/insurance
• Restricts access to SWIFT
Country programmes
Regulation 267 ((main restrictions (cont’d)):
• Importation of Iranian Oil into EU
• Purchase of Iranian originated CO/PP
• Transportation
• Financing relating to above
• Extra-territorial (e.g., UK national facilitating transfer b/w China and UAE of Iranian origin oil)
Country programmes
Regulation 267 (other restrictions):
• Provision of loans or credit
• Buying shares
• Joint Ventures
• ‘cooperation’:– NG– LNG transmission
Country programmes
UK:
• The Iran (European Union Financial Sanctions) Regulations 2012
• Export Control (Iran Sanctions) Order 2012
• The Iran (Asset-Freezing) Regulations 2011
• The Iran (European Union Financial Sanctions) (Amendment) Regulations 2014
Country programmes
• Joint Plan of Action between the P5 +1 (E3 +3) and Iran (JPOA)
• Suspends certain US/EU sanctions until two days ago!! –news?
• Permitted?
– Petrochemical exports– Gold and precious metals– Automotive dealing– Release of frozen funds– Civil aviation licensing
The Iranian conundrum- P5+1
Financial sanctions workshop
Case studies
Zia Ullah – PartnerJames Robinson – Partner
26 November 2014
SWIFT 103 definitions
Field Tag Field Name
23B Bank Operation Code
32A Value Date/Currency/Interbank settled amount
33B Currency/Original Ordered Amount
50K Ordering Customer, Amount & Name and Address
52D Ordering Institution
53A Senders Correspondent
59 Beneficiary
70 Remittance Information
71A Details of Charges
72 Send to Receiver Information
Case study 1
• In January 2014, the Dubai Branch of your UK incorporated bank provided an RMB 1m import L/C for the benefit of its Cypriot client, a manufacturer of oil and gas valves used for shale gas projects.
• Your trade team conducted EDD on opening the facility and it transpired that the Cypriot client was beneficially owned by Rosneft bank.
• In late September 2014, a SWIFT message was received from the advising bank’s trade team: please note that the seller has advised goods linked to this facility will be sourced from Crimea….
• In November 2014, the underlying documents were received by your trade desk.
Case study questions
1. What are the key issues for you as issuing bank?
2. Does the fact that the deal is in RMB matter?
3. What difference would it make to the deal if the L/C was denominated in:
– USD
– Euro
4. Can you make any payments as issuing bank?
5. Why/why not?
6. If your client informed you that the products were to be used for Russian government projects, would that change matters?
Case study 2• A USD payment is being made from a
German manufacturer inbound to your customer, a Dubai based industrials group. The payment references Myanmar in Field 70 of the payment message.
• The Relationship Manager is contacted by the compliance team investigating the payment and advises that the payment is in relation to the manufacture of anti-mine equipment supplied to a company 52% owned by the Myanmar Ministry of defence.
• Upon instruction from the compliance team, the Relationship Manager questions the customer about the existence of an OFAC licence, to which the customer states that as a Dubai firm, they are not subject to US sanctions and are not required to be licensed for the activity undertaken.
20:YT16560567400845
:23B:CRED
:32A:080613USD6757,35
:33B:USD67570,35
:50K:/GDR76300040099900016016
15459
EUROPEAN METAL
COMPANY
123 Volks Strasse
Berlin
:52A:HSBCGDR
:53A:HSBCUS3NXXX
:54A:BCDUS53XXX
:59:/UAE19ABCC200000XXXXXXX
Dubai industrials
PO BOX 245
UAE
:70:MYANMAR MOD
107a 15728 UWR 9541
245462
:71A:SHA
-5:{CHK:A70C2FE9CC5B}{PFX:}}
1. What are the key issues for you?
2. Why is an OFAC licence necessary?
3. Does the fact that the deal is in USD matter?
4. What difference would it make to the deal if the paymentwas sent from the Thai MOD?
5. What difference would it make to the deal if the paymentwas sent from an entity owned 49% by an OFAC SDN?
6. What if the payment came from an entity whosemanagement and oversight was controlled by a party thatonly owned 22% of the shares and was located in the EU?
Case study questions
Financial sanctions workshop
A company perspective
Zia Ullah – PartnerJames Robinson – Partner
26 November 2014
• Same fundamental rules
• Reputation
• Do you need a licence for product / service?
• Can you be paid?
• Who is exporter / Who responsible licensing?
• Whole supply chain
– Directly or indirectly
– Back-to-Back
– Sale for stock?
• Warranties
• Termination rights – force majeure enough?
The critical issues
Common mistakes – products
• More than one regime applies
• Missing continued impact
– US consequences from lawful Iran trading
– USA re-export and deemed export
• Technology
• Warranties, controls, liability and termination need to join up
• Internal process and records
• Every step covered e.g.Exports within EU for export out of EU
Common mistakes – funding
• Unexpected elements giving jurisdiction
– Nationality / Green card
– Use of currency or banking system
– Knowledge in indirect payments
– Military items - broking
For more information or advice please contact:
Zia UllahPartner+44 161 831 8454 [email protected]
James RobinsonPartner+44 207 919 0978
Looking to the future
Ben Moylan – Partner
Clint Dempsey – Principal Associate
26 November 2014
Middle East perspective
Looking to the future
Overview
• Very liquid market, flight to safety into certain countries within
the region means financial institutions are sat on large cash
deposits. Competitive market is driving prices down
• Diverse sectors driving growth: real estate, tourism,
transportation, oil and gas, infrastructure and consumer
• Mena-China trade has increased 50-fold in the past 20 years to nearly US$300 billion
• EU-GCC total trade in goods in 2013 amounted to around €152 billion (significant increase from €100,6 billion in 2010)
• The EU is negotiating a free trade agreement with the six countries of the Gulf Cooperation Council
Overview
• Significant developments in the Middle East
– Qatar 2022 World Cup
– Dubai Expo 2020
– Renewable Energy developments
– Suez Canal Expansion
– The Kingdom Tower in Jeddah
• Trade finance will continue to grow across the Middle East
• Gateway between North, South, East and West
Growth areas
• Two key areas for growth in trade finance:
– Bank Payment Obligations (BPO)
– Islamic Trade Finance
Growth areas
• BPO
– Innovative bank assisted trade instrument
– Irrevocable undertaking given by one bank to another
bank that payment will be made on a specified date
after successful electronic matching of data
– April 2013 ICC Banking Commission approved the
URBPO, contractual rules to govern BPO
– BPO relies on electronic matching, not paper based,
using global standard ISO 20022 messages
Growth areas
• BPO
• Advantages
– BPO guarantees exchange of goods for payment based
on electronic presentation of compliant data
– Slow start, but increasing in popularity. 40 corporates
across the globe are using BPO (BP, 7-Eleven, PTT
Polymer)
– Reduction in overall operational costs to banks, allows
for competitive pricing
– Safer than prepayment, buyer does not have to pay
upfront before receiving goods
– Automated data matching reduces complexity
– Cross-sale opportunities for banks e.g. financing and
working capital management systems
Growth areas
• BPO
• Potential shortfalls
– Capital cost to banks in investing in new systems,
supporting and communicating with ISO20022
compliant messages as well as Transaction Matching
Application
– Physical trade documents are required under local
legislation and to release delivery of goods from
customs
– Not defined for the purposes of Basel Capital Adequacy
Requirements, most bank’s treat BPO the same as LC
(capital conversion factor 20% sitting on balance sheet
i.e. still cheap for banks to hold these assets)
Growth areas
• Islamic Trade Finance
– Increasing popularity in the region
– Shifting preference towards Shari’ah-compliant banking
– Liquidity of Islamic banks in the region means
competitive pricing in the region
Growth areas
• Islamic Finance
• Typical structures
– Murabaha – Bank will purchase the commodities from
the supplier and then sell them to the beneficiary with a
deferred payment arrangement. The difference between
the purchase price and the sale price is the bank’s profit
– Syndicated Murabaha – Bank appointed by syndicate of
banks pursuant to Mudaraba agreement, bank (as
Mudarib) will then enter into Murabaha agreement with
customer. Profits are split between the syndicate of
banks
Growth areas
• Islamic Finance
• Typical structures
– Instalment Sale – Bank purchases the asset on
beneficiary’s behalf and immediately transfers
ownership upon delivery to the beneficiary. Beneficiary
will provide the same asset delivered to it as security.
The sale price will usually be paid in instalments.
Structure is often backed by guarantee
Growth areas
• Islamic Finance
• Typical structures
– Istisna’a – The bank agrees to buy an asset to be
delivered once construction or manufacturing of that
asset is complete. The bank pays the purchase price of
the asset in accordance with the progress of the asset's
construction or manufacture that gives the
contractor/manufacturer the liquidity it needs to
construct or manufacture the asset. Once manufacture
or construction is complete, the bank acquires the asset
that it can then sell or lease to the
contractor/manufacturer or a third party for a profit
For more information or advice please contact:
Ben MoylanPartner+97 44 49 67 39 [email protected]
Clint DempseyPrincipal Associate+97 14 38 97 01 8 [email protected]
Greg Brandman, Partner, Eversheds LLP
26 November 2014
Recent developments in the regulation of individuals in UK financial services
New senior management arrangements and
conduct rules
Greg Brandman - Partner
26 November 2014
New Senior Manager arrangements and conduct rules - overview
• “Restore trust and improve culture”
• “Individual accountability has often been unclear and confused”
• New regime for employees of UK banks, building societies, credit unions and PRA-designated investment firms
– Senior Managers regime
– Certification regime
– New Conduct Rules (PRA + FCA)
How things are changing
New Senior Managers regime
• Senior Manager Function (SMF) replaces Significant Influence Function
• 18 SMFs and some new functions
• Each SMF must have a statement of responsibilities
• Firms must maintain a Responsibilities Map that describes the firm’s management and governance arrangements
• Firms must vet Senior Managers for fitness and propriety before approval and on an annual basis
• Senior Managers must be vetted for each function they hold
• Senior Managers must provide handover notes to a successor
SMFs of particular interest
• PRA prescribed functions
– oversight of whistleblowing policy
– culture and standards and staff behaviours
• FCA prescribed functions
– Money Laundering Reporting and Compliance Oversight
– individuals with overall responsibility for certain key functions or identified risks, including:
• establishing and operating systems and controls in relation to financial crime
New Certification Regime
• Applies to functions that can cause ‘significant harm’ to a firm or its customers
• Certification is role specific and if multiple functions are performed by an individual must assess against each function
• Firms must assess and certify that individuals within the regime are fit and proper at least annually
• Consultation also includes a proposal that prospective employers seek a “regulatory reference” before hiring a senior manager or certified employee
• Regulators cannot intervene in individual certification decisions but may challenge the overall effectiveness of a firm’s process
• Senior manager must be allocated to oversee the Certification Regime
The new rules of conduct - overview
• For relevant firms, these will replace the existing APER principles and guidance
• Contained in a new code of conduct sourcebook: C-CON
• PRA and FCA will apply their own rules separately
• They will apply to:
– senior managers
– persons within the certification regime
– “all individuals within relevant firms who are in a position to have an impact on the PRA/FCA’s statutory objectives”
• APER will continue to apply to approved persons at other firms
Increased training, policing and reporting obligations for firms
• Only senior management functions will be subject to prior regulatory approval
• Relevant firms are now responsible for
– assessing the fitness and propriety of employees within the certification regime
– policing the compliance of other conduct rules staff with the conduct rules
• far wider population of staff than before
• increased training and compliance burden
• notification and reporting requirements
Scope of the conduct rules
• FCA and PRA will apply the conduct rules separately
• FCA will apply its own conduct rules “to the large majority of those working within relevant firms”
• FCA conduct rules will cover all who are in a position to impact its statutory objectives
– all individuals approved by FCA/PRA as senior managers
– all individuals covered by FCA/PRA certification regime
– all other employees save ancillary staff specifically excluded in C-CON
• Certain conduct rules will apply to SMFs only
Staff not subject to the new conduct rules
• Those whose role would be fundamentally the same, if they did not work for a financial services firm:
– receptionists / switchboard staff
– post room / repro staff
– facilities / events management
– security / concierge staff
– cleaners and catering staff
– IT support / archive staff
Rules common to both PRA and FCA
• Tier 1 (applying to all relevant staff)
– 1. You must act with integrity
– 2. You must act with due skill, care and diligence
– 3. You must be open and cooperative with the FCA, the PRA and other regulators
Additional FCA conduct rules
• Tier 1 (applying to all relevant staff)
– 4. You must pay due regard to the interests of customers and treat them fairly
– 5. You must observe proper standards of market conduct.
Other rules common to both PRA and FCA
• Tier 2 (Senior Managers only)
– SM1: You must take reasonable steps to ensure that the business of the firm for which you are responsible is controlled effectively
– SM2: You must take reasonable steps to ensure that the business of the firm for which you are responsible complies with the relevant requirements and standards of the regulatory system
– SM3: You must take reasonable steps to ensure that any delegation of your responsibilities is to an appropriate person and that you oversee the discharge of the delegated responsibility effectively
– SM4: You must disclose appropriately any information of which the FCA or PRA would reasonably expect notice
Complying with the Tier 2 conduct rules for senior managers
• What the regulators will take into account broadly follows existing APER 5-7 guidance:
– exercised reasonable care when considering the information available
– reached a reasonable conclusion upon which to act
– scale and complexity of the firm’s business
– their role and responsibility as determined by reference to the relevant statement of responsibility
– the knowledge that they had, or should have had, of regulatory requirements
Personal Culpability
• A person will only be in breach of any of the new Conduct Rules where they are “personally culpable”. This means where:
– the person’s conduct was deliberate; or
– the person’s standard of conduct was below that which would be reasonable in all the circumstances.
Presumption of Responsibility (senior managers only)
• Concept of personal culpability may be inverted for senior managers where the firm has contravened a requirement
• Effect: reversal of the burden of proof for individual misconduct
– no longer for the FCA to show the senior manager failed to act reasonably; instead
– the senior manager must satisfy the regulator that he took reasonable steps to prevent/stop the contravention
• Criteria for taking action against a senior manager – case by case basis
• When bringing enforcement action against senior manager (whether under the presumption of responsibility or otherwise) the FCA will use the Statement of Responsibilities and the firm’s Responsibilities Map to help inform it of the scope of the Senior Manager’s duties
Implications of the new rules
• FSMA (as amended) places 3 key obligations on relevant firms with regard to the Conduct Rules
– awareness and training
– notification of breaches
– notification of disciplinary action
Notification of suspicions and formal disciplinary action
• When does the firm need to notify ?
• Firms will have to inform the regulators if:
– they suspect / are aware that a person has breached a Conduct Rule
– having previously notified a breach, they reach a subsequent or different determination
– they have issued a formal written warning to, suspended or dismissed or reduced or recovered remuneration from an employee as a result of conduct amounting to a breach of the Conduct Rules
When / whom to notify ?
• Senior Manager breaches (known or suspected)
– notify within 7 business days
• Other individuals – notify quarterly
– list of known or suspected breaches
– identities of persons to whom notifications relate
– disciplinary action taken in that quarter
• Known or suspected breaches by persons subject to the PRA’s conduct rules should be notified to PRA
Employment law concerns
• Employment rights of conduct rules staff ?
– prior to notifying, the firm must satisfy itself that it has reasonable grounds to suspect
– timing of notifications ?
– internal investigation first ?
– employee right of reply before notification ?
– incorporate rights in future employment contracts ?
– nb s398 FSMA !
Applying the new regime to UK branches of foreign banks
• FSMA gives HM Treasury powers to bring non-UK institutions (including UK branches of overseas firms) into scope by Order
• The Chancellor has announced he intends to extend the regime to all banks that operate in the UK, including the branches of foreign banks
• HMT Consultation and draft Order due later this year
Next Steps
• Consultation has closed (31 October 2014)
• Technical CP to follow
– operational and consequential aspects of the new regime
– forms
– transitional arrangements
• Policy Statement with final rules due Q1 2015
• Implementation Q3 2015-Q1 2016 for senior managers and certification regime staff
• Other conduct rules staff after that
For more information or advice please contact:
Greg BrandmanPartner +44 207 919 [email protected]