On March 6, the U.K. Financial Services Authority (FSA) issued a consultation paper (CP) to outline the regulatory regime for consumer credit markets after its regulatory powers transfer to the Financial Conduct Authority (FCA). The FCA is a new regulatory body that will succeed the FSA later this year, and will assume regulatory responsibility over the U.K.’s consumer credit and retail markets regulatory responsibilities. In addition to those markets, the FCA also will regulate conduct in wholesale markets, supervise the trading infrastructure that supports retail and wholesale markets, and prudentially regulate firms not regulated by the new Prudential Regulatory Authority. The CP outlines (i) the supervision of and reporting by covered firms, (ii) the interim permission for OFT license holders to continue operations, (iii) the supervision of credit advertising being subject to the Financial Services and Markets Act financial promotions regime, (iv) prudential requirements for debt management firms, (v) the Consumer Credit Act provisions that survive under the new FCA credit regime, and (vi) the sources of funding for the regime. Comments on the proposal are due by May 1, 2013.
On March 12, the European Commission announced that the European Parliament voted to support new legislation governing the out-of-court resolution of contractual disputes resulting from online transactions for the sale of goods or services, referred to as Online Dispute Resolution (ODR). The ODR legislation establishes a single EU-wide platform to handle disputes between traders and consumers arising from cross-border online transactions. The platform, which would not be applicable to offline transactions, will: (1) allow consumers and traders to electronically submit complaints related to online transactions along with related documents to an alternative dispute resolution entity; (2) allow alternative dispute resolution entities to receive and transmit information electronically; and (3) allow the parties to conduct and resolve the dispute resolution process via the platform. The platform is intended to be operational by 2015.
On March 6, the U.K. Office of Fair Trading (OFT) announced that it will institute enforcement actions and seek to revoke the licenses of payday lenders that do not change certain business practices within 12 weeks. The action applies to the leading 50 payday lenders who account for 90 percent of the U.K. payday market. The OFT action comes in a final report on a broad payday lending investigation, which revealed widespread irresponsible lending and a failure to comply with the standards set out in the OFT’s Irresponsible Lending Guidance. The OFT also proposed to refer the payday lending market to the Competition Commission to investigate competition in that market.
On February 28, the European Parliament announced that negotiators from the Parliament and the European Council agreed to alter bank capital rules and limit executive pay. The capital requirements, developed to implement aspects of Basel III, would raise to eight percent the minimum thresholds of high quality capital that banks must retain. The announcement does not specify what types of capital would satisfy the requirement, but does indicate that good quality capital would be mostly Tier 1 capital. With regard to executive pay, the base salary-to-bonus ratio would be 1:1, but the ratio could increase to a maximum of 1:2 with the approval of at least 65 percent of shareholders owning half the shares represented, or of 75 percent of votes if there is no quorum. Further, if a bonus is increased above 1:1, then a quarter of the whole bonus would be deferred for at least five years. Finally, the legislation would require banks to disclose to the European Commission certain information that subsequently would be made public, including profits, taxes paid, and subsidies received country by country. The European Parliament is expected to vote on the legislation in mid-April, and each member state also must approve the legislation. Once approved, member states must implement the rules through their national laws by January 2014.
On February 19, the U.K.’s Financial Services Authority announced a fine against three related banks for failing to promptly redress customers lodging complaints about the banks’ payment protection insurance (PPI) product. The FSA states that over a 10 month period, the bank failed to pay redress within the FSA-required 28-day period for nearly a quarter of the banks’ customers who submitted complaints regarding PPI, with some customers waiting over six months for payment. The FSA states that its investigation revealed (i) the banks failed to establish an adequate process for preparing redress payments to send to PPI complainants; (ii) bank staff engaged on the redress process did not have the collective knowledge and experience to ensure that the process worked properly; (iii) the banks failed to effectively track PPI redress payments; (iv) the banks failed to monitor effectively whether they were making all payments of PPI redress promptly and did not gather sufficient management information to identify, in a timely manner, the full nature and extent of the payments failings; and (v) the banks’ approach to risk management when preparing redress payments to send to PPI complainants was ineffective. The FSA has been active in addressing PPI issues. Last month, the FSA and the Office of Fair Trading jointly published final guidance to help prevent the problems associated with PPI recurring in a new generation of products. The FSA’s guidance for payment protection products within its jurisdiction stresses that firms should ensure that product features reflect the needs of the consumers they are targeting. It describes the importance of (i) identifying the target market for protection products; (ii) ensuring that the cover offered meets the needs of that target market; and (iii) avoiding the creation of barriers to comparing, exiting or switching cover.
On February 4, Britain’s HM Treasury introduced legislation—entitled the Banking Reform Bill—that would provide regulators with new authority to break up a bank if its investment activities put deposits at risk. The legislation goes a step beyond previously proposed policies that would merely require banks to separate retail banking from investment banking. Under the proposed legislation, in addition to requiring that institutions ring-fence deposits, the Bank of England could force an institution to sell off certain businesses if it determines that the institution has failed to protect retail banking activities from high-risk investments. The bill also would, among other things, provide depositors preference if a bank becomes insolvent, and set new leverage caps. The introduction of the bill is the first step in the legislative process, which Britain’s Chancellor of the Exchequer stated he expects to be finalized next year.
On January 7, the Basel Committee released its revised Liquidity Coverage Ratio (LCR), a component of the comprehensive Basel III accords that also address capital standards. The committee’s LCR is intended to promote short-term resilience of a bank’s liquidity risk and reduce the risk of the banking sector harming the broader economy by failing to absorb shocks arising from financial and economic stress. The LCR requires that a bank have an adequate stock of unencumbered high-quality liquid assets that can be converted into cash easily and immediately in private markets to meet a 30-day liquidity stress scenario. The revised LCR updates standards originally adopted by the Committee in 2010. Given slower than expected strengthening of the banking system and the broader economy, and in response to industry requests, the Committee decided to expand the range of eligible assets to include corporate debt, unencumbered equities, and highly-rated residential mortgage-backed securities. The Committee also clarified its intention to allow banks use their high-quality liquid assets in times of stress. Finally, the Committee revised the timetable for phase-in of the standard. The standard will take effect as planned on January 1, 2015, but the minimum requirement will begin at 60%, rising 10 percentage points each year until full implementation on January 1, 2019.
DOJ Announces LIBOR-related Criminal Charges and Penalties, Regulators Announce Parallel Civil Enforcement Actions
On December 19, both federal law enforcement and U.S. and foreign regulatory authorities announced that a Japanese bank and its Swiss bank parent company agreed to pay more than $1.5 billion to resolve criminal and civil investigations into the firms’ role in the manipulation of the London Interbank Offered Rate (LIBOR), a global benchmark rate used in financial products and transactions. The DOJ announced that the Japanese bank has signed a plea agreement, whereby the bank agreed to pay a $100 million fine and plead guilty to one count of engaging in a scheme to defraud counterparties to interest rate derivatives trades by secretly manipulating LIBOR benchmark interest rates. In addition, its parent company entered into a non-prosecution agreement (NPA), whereby the parent company agreed to pay an additional $400 million penalty, admit to specified facts, and assist the DOJ with its ongoing LIBOR investigation. The DOJ explained that the NPA reflects the parent company’s substantial cooperation in discovering and disclosing LIBOR misconduct within the institution and recognizes the significant remedial measures undertaken by new management to enhance internal controls. Domestic and foreign regulators also announced penalties and disgorgement to resolve parallel civil investigations, including a $700 million penalty obtained by the CFTC, $259.2 million as a result of a U.K. Financial Services Authority action, and $64.3 million to resolve a Swiss Financial Markets Authority action.
Recently, the United Nations Commission on International Trade Law (UNCITRAL) published the Report of Working Group IV (Electronic Commerce), reflecting the group’s work during its forty-sixth session, held in late October and early November. The report describes the Working Group’s continued efforts to explore issues related to electronic transferable records and to address the need for an international regime to facilitate the cross-border use of such records. During this most recent session, the Working Group considered in detail the legal issues relating to the use of electronic transferrable records, and developed parameters for a set of rules to address those issues. Working Group members expressed broad support for a draft model law that would incorporate the parameters identified, while allowing for flexibility when addressing differences in national substantive laws. Some members also expressed support for the preparation of guidance texts, such as a legislative guide, and Working Group members discussed the possible consideration of a binding instrument, such as a treaty, to establish a legal framework for the cross-border transfer of electronic records. The Working Group will follow up on these issues during its forty-seventh session to be held in New York from May 13-17, 2013.
On November 20, the European Parliament adopted a nonbinding resolution calling for the development of common rules and standards for personal credit and debit card payments. The resolution explains that such rules would bring the card payment market “closer to its full potential and efficiency.” The Members of Parliament called on the European Commission to develop the legislative proposals needed to extend the current single Euro payments area (SEPA) regulation, which governs euro credit and direct debit transactions among banks, to the market for card, internet and mobile payments, but cautioned that lawmakers should avoid regulating the internet and mobile payment market too heavily, so as not to hinder its growth and innovation. The resolution also claims that current fees for handling card payments are high relative to the costs they need to cover, but does not call for caps. Finally, the resolution states that minimum security requirements for card, internet and mobile payments should be the same in all EU member states.
On October 19, the UK FSA announced that it fined a bank £4.2 million ($6.7 million) for failing to keep accurate records regarding 250,000 mortgages it was servicing. In monitoring a consumer forum website, the FSA found that certain of the bank’s borrowers had complained of being excluded from a bank program meant to remedy a separate problem. Upon investigation, the FSA determined that the bank held its mortgage information on two separate unaligned systems. The FSA also identified problems with two other processes where manual updates were not always carried out. The FSA claimed that, as a result of its recordkeeping practices, the bank relied on incorrect records for certain of its mortgages over a seven-year period. Because the bulk of the alleged misconduct occurred before the FSA’s new penalty framework came into force in March 2010, the penalty was assessed under the prior regime. Further, since the bank agreed to settle at an early stage of the investigation, it qualified for a 30% discount pursuant to the FSA’s executive settlement procedures.
On October 9, the United Kingdom Serious Fraud Office (SFO) issued policy statements and frequently-asked-questions (FAQs) with regard to: (1) facilitation payments, (2) hospitality and gifts, and (3) self-reporting. While the bulk of the guidance reasserts existing policies, the SFO did revise its guidance on self-reporting. The new guidance makes clear SFO’s position that self-reporting will not always shield a company from prosecution. The fact that a corporate body has reported itself will be a relevant consideration if it forms part of a “genuinely proactive approach adopted by the corporate management team when the offending is brought to their notice.” A decision by the SFO to prosecute will be based on the Full Code Test in the Code for Crown Prosecutors, the joint prosecution Guidance on Corporate Prosecutions and, where relevant, the Joint Prosecution Guidance of the Director of the SFO and the Director of Public Prosecutions on the Bribery Act 2010. As explained in the FAQs, the revised statement of policy is not limited to allegations involving overseas bribery and corruption, and if the requirements of the Full Code Test are not established, the SFO may consider civil recovery as an alternative to a prosecution.
On September 24, the Joint Forum, which brings together the Basel Committee on Banking Supervision, the International Organization of Securities Commissions, and the International Association of Insurance Supervisors to coordinate regulation of financial conglomerates, published final principles for the supervision of financial conglomerates. The principles are meant to provide an overarching policy framework to support consistent and effective supervision of financial conglomerates across borders, while closing regulatory gaps. The final guidelines, which update a framework originally adopted in 1999, are organized in five categories—(i) supervisory powers and authority, (ii) supervisory responsibility, (iii) corporate governance, (iv) capital adequacy and liquidity, and (v) risk management—and provide implementation criteria and comments explaining each principle.
Recently, Canada’s Department of Finance published a consultation paper that proposes an addendum to the Code of Conduct for the Credit and Debit Card Industry in Canada to apply the Code to mobile payments. The Code, which took effect in August 2010, is a voluntary measure applicable to credit and debit card networks and covers point-of-sale, Internet, and phone payment methods. The addendum would extend the Code to apply explicitly to payments initiated by consumers that access a deposit or credit account through a payment network accessed by mobile device at the point-of-sale. The addendum also would clarify the way in which five of the ten elements of the code would apply to mobile payments. For example, the addendum would prohibit credit and debit card functions from co-residing in the same mobile payment application. Canada’s Department of Finance has invited stakeholder comments on all aspects of the proposal.
On September 3, an appeals court in the United Kingdom held that a contract of guarantee executed in a series of emails duly authenticated by the electronic signature of the guarantor is enforceable. Golden Ocean Group Ltd. v. Salgaocar Mining Indus. PVT Ltd., No A3/2001/0440, 0438. In this case, a ship owner sought to enter into a long-term charter of the ship with a mining conglomerate. The shipping brokers negotiating the contract on behalf of the parties did so through a series of emails. An early email contained the provision of guarantee, but the guarantee was not explicitly restated in the final email that culminated the agreement. The court held that under English law the emails at issue here properly formed a contract, including the guarantee. The court added that the electronic signature of the guarantor’s agent on the culminating email is proper authentication of the contract of guarantee contained in the earlier email, and that generally, “an electronic signature is sufficient and that a first name, initials, or perhaps a nickname will suffice.” The court upheld the lower court’s decision and dismissed the appeal.