High Court considers scope of jurisdiction and meaning of records under Bankers’ Book Evidence Act 1879

The High Court has dismissed an application (under the Bankers’ Book Evidence Act 1879) by the CFO of a telecommunications company for access to bank documents for use in Canadian extradition proceedings (initiated by US prosecutors who were seeking to join the CFO as a co-defendant to criminal proceedings in the US because she was alleged to have misled the respondent banks into processing transactions linked to Iran which were in contravention of US sanctions law): Meng v HSBC Bank Plc & Ors [2021] EWHC 342 (QB)

This decision is a reassuring one for financial institutions faced with applications under the Bankers’ Book Evidence Act 1879 (the Act) for disclosure of bank documents for use in foreign or domestic legal proceedings. Such applications may be made by parties to legal proceedings in addition to disclosure applications under the CPR and other avenues for obtaining disclosure, which may increase the administrative burden and cost of business for a financial institution. Despite the longevity of the Act, there is relatively little reported authority interpreting the Act. This decision highlights the narrow scope of the court’s jurisdiction, and helpfully limits the type of documents which may be obtained, under the Act. Additionally, the decision underlines the fact that even if certain conditions in the Act are met for ordering disclosure, the court still ultimately retains the discretion as to whether to order disclosure.

In summary, the court found that it had no jurisdiction under the Act to make the disclosure order sought by the applicant. The Act was limited to UK legal proceedings and did not extend to making orders for the purposes of foreign legal proceedings. The court also said that if even it had found in favour of the applicant on the jurisdiction issue, it would have still refused the application on the basis that the documents/records sought by the applicant did not fall within the scope of the Act (which was limited to transactional records and did not include non-transactional records, such as attendance notes or correspondence between a bank and its customer). The court also noted that even if the applicant had been successful on both the jurisdiction and the records issues, the court would not have not exercised its discretionary power to grant the application. A number of factors which the court took into account in declining to exercise its discretion included the express US prohibition order on the use of the documents in the Canadian extradition proceedings, the likelihood of the applicant having a fair trial before the Canadian courts and the failure of the applicant to link the documents requested sufficiently clearly to specific regulatory duties to maintain records.

We consider the decision in more detail below.

Background

The applicant was the CFO in a telecommunications company (Company), which had a banking relationship with a global banking group. Between 2007 and 2017, the Company, two of its subsidiaries, and the applicant allegedly deceived the global banking group which included the respondents and the US government as to the Company’s business activities in Iran. The employees of the Company are alleged to have made misrepresentations about the relationship of the Company with an unofficial subsidiary in Iran and to the effect that the Company had not violated any US laws or regulations relating to Iran.

In reliance on the misrepresentations by the Company, the global banking group and its US subsidiary in particular cleared more than USD $100 million of transactions relating to the Company’s unofficial subsidiary in Iran between 2010 and 2014; this was in contravention of US sanctions law and exposed the global banking group to potential civil or criminal penalties.

In 2019, US prosecutors brought criminal charges against the Company, the two subsidiaries involved and the applicant for financial fraud. The applicant had in the meantime been detained in Canada. The US government sought the applicant’s extradition to the US so that she could be prosecuted as a co-defendant in the US criminal proceedings.

The applicant subsequently applied to the English High Court under section 7 of the Act seeking disclosure from three UK subsidiaries of the global banking group (the respondent banks) of 13 categories of documents to support her arguments in the Canadian extradition proceedings. The applicant’s case was that the documents were held by the US government, emanated from within the global banking group and were not ‘discoverable’ in the Canadian extradition proceedings or through the US criminal proceedings.

Decision

The court found in favour of the respondent banks and dismissed the application. In summary, the court held that it had no jurisdiction to make the disclosure order sought by the applicant. The court also said that even if it had found in favour of the applicant on the jurisdiction issue, it would have still refused the application on the basis that the documents/records sought by the applicant did not fall within the scope of the Act. The court also noted that even if the applicant had been successful on both the jurisdiction and the records issues, the court would not have not exercised its discretionary power to grant the application.

We consider below some of the key issues considered by the court in relation to the application.

Issue 1: Jurisdiction

The applicant argued that the court had the necessary jurisdiction under section 7 of the Act to make the disclosure order sought on the basis that the Act also applied to foreign legal proceedings anywhere in the world, not just legal proceedings in the UK.

The court held that it had no jurisdiction to make the disclosure order sought by the applicant. The court commented that Parliament had intended that the scope of the Act be restricted to legal proceedings in the UK and that there were statutory schemes in place for foreign courts, public authorities and international authorities – not a private party or criminal defendant – to make a formal request for assistance in obtaining evidence. Such statutory schemes would in effect be bypassed in the case of entries in bankers’ books if the court acceded to the applicant’s submissions; however, the court did not accept that this could have been Parliament’s intention with respect to how the Act was intended to operate.

Issue 2: Documents/Records

The applicant argued that the references in the Act to “entries in” and “other records used in the ordinary business of the bank” included both transactional records and non-transactional records maintained for regulatory compliance.

The court said that even if it had found in favour of the applicant on the jurisdiction issue, it would have still refused the application on the basis that the documents/records sought by the applicant did not fall within the scope of the Act as they were not transactional records. The court underlined that “entries in” and “other records used in the ordinary business of the bank” meant transactional records and did not include non-transactional records maintained for regulatory compliance. The court noted that the Act was never intended to cover everything that a bank has, or does, or writes down, in the course of its ordinary business as a bank; for example, an attendance note of a conversation with a customer or prospective customer or correspondence between the bank and a customer or prospective customer will not fall within the scope of the Act.

Issue 3: Exercise of the court’s discretion

The applicant argued that the court should exercise its discretion to order the respondent banks to provide access to the 13 categories of documents sought in order to promote and ensure fairness in the Canadian extradition proceedings. The applicant said that: (i) the US prosecuting authorities’ case against her was clearly based to a significant extent on information provided to the US authorities by entities and individuals within the global banking group; (ii) the documents sought were plainly material to the Canadian extradition proceedings; and (iii) nothing would be forced on the Canadian courts who would still have to decide admissibility and relevance.

The court noted that even if the applicant had been successful on both the jurisdiction and the records issues, the court would not have not exercised its discretionary power to grant the application. The court said that the documents sought were subject to an express prohibition order, made in the US criminal proceedings, that they could not be used in the Canadian extradition proceedings; the court must therefore proceed on the basis that the express prohibition was lawful under US law. Also, in the court’s view, there was nothing to suggest that without those documents the applicant would be denied a fair hearing before the Canadian court. Finally, the court highlighted that the applicant had failed to provide a clear link between the particular documents sought and specific regulatory duties to maintain records; if it was correct that records for regulatory compliance did fall within the scope of the Act, the applicant was required to specify the records sought and reference them to a specific regulatory duty to maintain those records.

Simon Clarke
Simon Clarke
Partner
+44 20 7466 2508
Nihar Lovell
Nihar Lovell
Professional Support Lawyer
+44 20 7374 8000

Climate-related disclosures for issuers: further steps towards mandatory requirements?

In November 2020, the UK Joint Government Regulator TCFD Taskforce published its “roadmap towards mandatory climate-related disclosures”, which set out a vision for the next five years. As an initial step towards fulfilling that vision, in January 2021, the new Listing Rule 9.8.6(8) (LR) came into force. The LR requires premium-listed issuers, in their periodic reporting, to publish disclosures in line with the Task Force on Climate-Related Financial Disclosures (TCFD) recommendations on a ‘comply or explain’ basis. However, the Financial Conduct Authority (FCA) has recognised that some issuers may need more time to deal with modelling, analytical, metric or data-based challenges.

This flexibility in the new LR’s compliance basis reflects the challenges and evolving experiences with working on data and metrics in the context of climate risk. Key stakeholders should now be redoubling their efforts to meet the challenges and with the promise of further TCFD guidance on data and metrics later this year and the recent launch of a Department for Business, Energy and Industrial Strategy (BEIS) consultation seeking views on proposals to mandate climate-related financial disclosures in line with the TCFD recommendations from 6 April 2022, the step to a mandatory climate-related disclosure regime may be closer than initially envisaged.

In light of the ever-evolving regulatory landscape, it is important issuers continue to monitor the impact of any changes to their disclosure requirements and to consider what, if any, litigation risks may arise (particularly, under s90 FSMA, s90A FSMA, or in common law or equity) in connection with their climate-related disclosures.

The key developments on data and metrics, as well as the key proposals from the BEIS consultation, are examined below. We also consider what these developments and proposals mean for issuers in terms of regulatory reporting requirements.

Climate Financial Risk Forum

Following its fifth quarterly meeting in November 2020, the Climate Financial Risk Forum (CFRF) noted the importance of progress in the development and understanding of climate data and metrics. In light of this, the CFRF announced that all of its working groups will focus on climate data and metrics in the next phase of work. This is a shift from the CFRF’s previous approach of allocating different focus areas to its working groups.

TCFD Financial Metrics Consultation

The TCFD has this month published a summary of the responses to its ‘Forward-looking Financial Metrics’ Consultation, which was conducted between October 2020 and January 2021. The consultation aimed to collect feedback on decision-useful, forward-looking metrics to be disclosed by financial institutions. The TCFD solicited feedback on specific metrics and views on the shift to, and usefulness of, forward-looking metrics more broadly.

46% of the 209 respondents were financial services firms from around the world, and over half of the respondents were EMEA based, with just over a quarter from North America.

These findings will inform the work on metrics and targets which the TCFD plans to tackle in 2021. The TCFD announced that it will publish broader, additional draft guidance for market review and consideration later this year.

BEIS Consultation

BEIS launched a consultation this month on mandating climate-related disclosures by publicly quoted companies, large private companies and LLPs. The consultation proposes that, for financial periods starting on or after 6 April 2022, certain UK companies with more than 500 employees (including premium-listed companies) be required to report climate-related financial disclosures in the non-financial information statement which forms part of the Strategic Report. Such disclosures are required to be in line with the four overarching pillars of the TCFD recommendations (Governance, Strategy, Risk Management, Metrics & Targets).

BEIS has stated that the proposed rules are intended to be complementary to the FCA’s requirement that premium-listed companies make disclosures in line with the four pillars and 11 recommended disclosures of the TCFD. BEIS proposes to introduce the new rules via secondary legislation which will amend the Companies Act 2006.

The Financial Reporting Council will be responsible for monitoring and enforcing the proposed rules, while the FCA will supervise and enforce disclosures within the scope of the LR.

The consultation is open until 5 May 2021.

Regulatory reporting requirements

The new TCFD guidance, once published, is likely to feed into the LR requirements. The new LR expressly refers to the TCFD Guidance on Risk Management Integration and Disclosure and the TCFD Guidance on Scenario Analysis for Non-Financial Companies published in October 2020. Additionally, the FCA’s Policy Statement dated December 2020, which accompanied the new LR, stated that the FCA would be considering how best to include references to any further TCFD guidance in the FCA Handbook Guidance. This is likely to be achieved through the use of the FCA Quarterly Consultation Papers.

The new LR is not a mandatory disclosure requirement and the new rules proposed by the BEIS consultation are yet to have legislative force. However, we are getting a clearer picture of the likely disclosure regime in the UK and in particular: the regulatory guidance around the compliance basis; the clear anticipated milestones this year relating to data and metrics guidance and best practice; and the forthcoming Consultation Paper by the FCA on the scope expansion (including compliance basis) of the new LR. That picture suggests the transition to mandatory climate-related disclosure requirements may well be a small step, rather than a giant leap.

Simon Clarke
Simon Clarke
Partner
+44 20 7466 2508
Nihar Lovell
Nihar Lovell
Professional Support Lawyer
+44 20 7374 8000
Sousan Gorji
Sousan Gorji
Senior Associate
+44 20 7466 2750

High Court dismisses disclosure application by a group of unidentified investors on the grounds that it amounted to a “fishing expedition”

The High Court has dismissed an application by a group of unidentified investors for Norwich Pharmacal relief (or, alternatively, pre-action disclosure under CPR 31.16) in relation to a potential GBP £50 million damages claim against the defendant bank for an alleged breach of contract/negligence in connection with the sale of various tax mitigation schemes: Zeus Investors v HSBC Bank plc [2020] EWHC 3273 (Comm).

This decision is a reassuring one for financial institutions faced with broad applications for disclosure before proceedings have been commenced by prospective claimants; especially from those who may not be parties to the contractual arrangement which is the subject of the dispute and who are not identified precisely in the applications. Such applications may be used tactically by claimants seeking to put pressure on defendant banks with requests that are time-consuming to deal with and/or seek disclosure of potentially confidential documents. The decision highlights the narrow scope of the court’s Norwich Pharmacal jurisdiction, with claimants being required to: (a) evidence the vital need for the documentation requested in order to be able to plead their case; (b) engage appropriately with the requisite pre-action protocols; and (c) identify upfront and precisely who the applicants are.

In the present case, the court was satisfied that the information sought by the claimants was not necessary in order to plead their claim, given the material already available to them. This did not suggest to the court that a missing piece of the jigsaw was required to be able to formulate their case. In addition, the court found that the claimants’ application was unfocused and over wide, providing all the hallmarks of a fishing expedition. In particular, the court drew attention to the electronic search terms proposed by the claimants, which would likely have generated a large number of responsive materials and required a manual review prior to disclosure. These search terms did not appear to the court to be formulated by reference to a potential claim, with the claimants instead seeking every document of the slightest relevance for a purported claim which would be particularised at a later date. It was therefore not in the interests of justice to order the disclosure sought.

The court also found that, had the claimants sought to pursue their application for pre-action disclosure under CPR 31.16, this application would similarly have been refused. Due to the wide nature of the disclosure sought by the claimants which went further than standard disclosure, the test under CPR 31.16(3)(c) was not met. The pre-action disclosure application was ultimately not pursued by the claimants, as they recognised that if they could not meet the conditions for Norwich Pharmacal relief, it would not be possible to meet the requirements of CPR 31.16.

Background

The claimants were investors in a series of tax mitigation schemes (Schemes) promoted by Zeus Partners LLP, a subsidiary of a UK brokerage (Subsidiary). These Schemes had allegedly been developed and masterminded by the defendant bank (Bank), pursuant to a 2007 agreement between the Bank and the Subsidiary (Agreement). The claimants were not parties to that Agreement, which also expressly provided that there were no third party enforcement rights.

By 2008 both the Treasury and HMRC had threatened taking legislative action against what they claimed to be aggressive tax management arrangements. Six investors in the Schemes were subsequently charged with conspiracy to cheat HMRC, with the Schemes reportedly having been designed and intended to illegally evade tax (the Criminal Proceedings). The Criminal Proceedings were discontinued and formally dismissed in June 2017.

Following the disclosure of certain internal Bank email exchanges by HMRC as part of the Criminal Proceedings, the claimants apparently became aware that the Bank in early 2008 became concerned that the Schemes were ineffective and high risk from a legal and regulatory perspective. But rather than providing cautionary advice to those who were owed advisory duties under the Agreement, the Bank purportedly instead chose to continue to allow the Schemes to be sold and profited from those sales.

The claimants (with a view to properly assessing, formulating and pleading their proposed claim against the Bank in relation to the Schemes) subsequently applied to the court seeking disclosure from the Bank of additional internal documents via a Norwich Pharmacal order. The claimants belatedly also applied, albeit through their skeleton arguments rather than amending the application notice, for pre-action disclosure under CPR 31.16. The claimants argued that the documents sought would form the bulk of what had only been seen in snippet form as a result of disclosure during the Criminal Proceedings.

Decision

The court dismissed the claimants’ application for Norwich Pharmacal relief. The court also said that if a formal application for pre-action disclosure had been made, it was satisfied that the application would have failed on its merits.

The key issues which are likely to be of broader interest to financial institutions are summarised below.

Application for Norwich Pharmacal relief

The claimants advanced a number of arguments in favour of Norwich Pharmacal relief. A key argument was that the disclosure of the documents sought from the Bank would provide a more complete picture of the nature and scope of the alleged breach of advisory duties. These documents were said to be required so that the investors in the Schemes could consider fully any breaches and particularise them in detail for any potential claims, avoiding the need for future amendments to their claim form.

The court rejected the claimants’ arguments and held that the requirements for Norwich Pharmacal relief had not been met.

In reaching its conclusion, the court cited the following factors, amongst others, as influential in its decision:

  • No contractual wrongdoing. On the evidence, there was no good arguable case of any contractual wrongdoing between the Bank and claimants. The services under the Agreement were provided by the Bank to the Subsidiary, the claimants were not a contractual party to the Agreement, and the Agreement expressly provided that there were no third party rights of enforcement.
  • Not necessary in interests of justice. The claimants failed to demonstrate that the Norwich Pharmacal order sought was necessary in the interests of justice. Certain documents were already available to the claimants (including the Agreement), which would allow the pleading out of an alleged tortious duty, breach and loss. The court added that this had even been acknowledged to a certain extent by the claimants’ own witness evidence, which showed it was already possible to plead a claim against the Bank without further disclosure. As a result, the court was not satisfied that the information sought was vital for a decision to sue the Bank or an ability to plead the claimants’ case. The claimants’ arguments regarding the need for the full picture in order to advance their claims or to avoid future amendments to the claim form were not proper justifications for Norwich Pharmacal relief.
  • Unfocused application. The claimants’ application was unfocused and over wide, which had the hallmarks and characteristics of a “fishing expedition”. In particular, the court drew attention to the claimants’ lengthy list of keywords, which were not proportionate and would not provide the necessary documentation in order to plead their claim. These electronic search terms would have generated a significant number of documents requiring a manual review prior to disclosure. The search terms were considered by the court as not being properly formulated by reference to the underlying claim and were not seen as absolutely necessary. The court found that the search terms were instead akin to a wish list of every document of even possible relevance to any purported claim the claimants may have chosen to particularise in the future. As such, there was a real risk that the claimants’ proposed search terms would have generated a mass of irrelevant documentation. The court noted that the disclosure sought was therefore not within standard disclosure, and would only rarely be ordered in an “exceptional case” under category E of the Disclosure Pilot.
  • Lack of pre-action protocol engagement. There had been little attempt by the claimant to engage in substantive pre-action correspondence. The claimants had not engaged with the necessary pre-action protocols and had made little attempt to obtain focused or specific documentation.
  • Unidentified claimants. There was continuing uncertainty as to the identity of the claimants. The court noted that there were estimated to be at least 200 investors in the claimant group; not all of them had been identified precisely. Also, the application sought information which had the potential to be confidential and which could only be used for a specific purpose. There was therefore a need to be clear as to who was applying for the information, who was receiving that information and who could use it so that it could be assessed whether they had an entitlement to such information and whether it was inappropriate to give them such information.

Interestingly, the court commented that even if the requirements for Norwich Pharmacal relief had been met, it still would not have considered it appropriate in the exercise of the court’s jurisdiction to have granted the relief sought. In the court’s view, such relief was neither vital nor necessary in advance of any action being commenced and the information sought was not required in order for justice to be done.

Application for pre-action disclosure under CPR 31.16

The claimants ultimately did not pursue their application for pre-action disclosure under CPR 31.16, recognising that if they did not meet the requirements for Norwich Pharmacal relief, it would not be possible to meet the requirements of CPR 31.16.

However, the court noted that it would not have been an appropriate case to permit the application for pre-action disclosure, on the basis that: (a) the application was not supported by evidence addressing the CPR 31.16 test; (b) the disclosure being sought by the claimants was wider than what would be ordered under the Bank’s duty of standard disclosure if the proceedings had already commenced (as required by CPR 31.16(3)(c)) and therefore a fishing expedition; and (c) such disclosure was not desirable and was not necessary to dispose fairly of the anticipated proceedings (which could properly and fairly be commenced without it), nor would it assist the parties in resolving their dispute without proceedings, nor would it save costs.

Ceri Morgan
Ceri Morgan
Professional Support Consultant
+44 20 7466 2948
Nihar Lovell
Nihar Lovell
Professional Support Lawyer
+44 20 7374 8000
Elizabeth Stephens
Elizabeth Stephens
Associate
+44 20 7466 6324

Climate-related disclosures for issuers: FCA publishes final rules

The Financial Conduct Authority (FCA) has published a Policy Statement (PS20/17) and final rules and guidance in relation to climate-related financial disclosures for UK premium listed companies.

Companies will be required to include a statement in their annual financial report which sets out whether their disclosures are consistent with the Task Force on Climate-related Financial Disclosures (TCFD) June 2017 recommendations, and to explain if they have not done so. The rule will apply for accounting periods beginning on or after 1 January 2021.

As well as some additional guidance, the FCA has made only one material change to the rules consulted upon in March 2020 (CP20/03) with the final LR 9.8.6(8)(b)(ii)(C) R requiring non-compliant companies to set out details of how and when they plan to be able to make TCFD-aligned disclosures in the future.

With regard to monitoring compliance with the new listing rule, the FCA confirmed in its Policy Statement that it will provide further information on its supervisory approach to the new rule in a Primary Market Bulletin later in 2021.

In light of this latest regulatory development, issuers may also want to consider what, if any, litigation risks may arise in connection with climate-related disclosures (and indeed other sustainability-related disclosures which are made in response to these regulatory developments). There may be an increased risk of litigation under s90 FSMA, s90A FSMA, or in common law or equity. This was considered in greater detail in our recent Journal of International Banking & Financial Law article (published in October 2020) in which we also examined the existing climate-related disclosure requirements, the impact of the FCA’s proposals on issuers and how issuers can mitigate against such litigation risks.

Our article can be found here: Climate-related disclosures: the new frontier?

For a more detailed analysis of the FCA’s Policy Statement, please see our Corporate Notes blog post.

Simon Clarke
Simon Clarke
Partner
+44 20 7466 2508
Nihar Lovell
Nihar Lovell
Professional Support Lawyer
+44 20 7374 8000
Sousan Gorji
Sousan Gorji
Senior Associate
+44 20 7466 2750

Climate-related disclosures for issuers: next steps from UK financial regulators outlined

This month, there have been some significant regulatory announcements in relation to climate-related disclosures. These announcements are a result of the increasing focus on climate change and sustainability risks across governments, regulators and industry and a continued move towards corporate compliance with the Task Force on Climate-related Financial Disclosures’ (TCFD) recommendations.

While not launching new developments or heralding the unexpected, these announcements are noteworthy for issuers as they mark a change in tone from the UK regulators regarding climate-related disclosures. Previously, the Financial Conduct Authority (FCA) and Prudential Regulation Authority took a cooperative and directional view, in recognising that issuers’ capabilities were continuingly developing in some areas which might limit their ability to model and report scenarios in the manner recommended by the TCFD. With the latest announcements, it seems increasingly likely that there will now be a shift away from voluntary climate-related disclosures towards mandatory TCFD aligned disclosures across the UK economy.

Key announcements

Recent key announcements include:

  • HM Treasury publishing the Interim Report of the UK’s Joint Government-Regulator TCFD Taskforce (the Taskforce) on the implementation of the TCFD recommendations and a roadmap towards mandatory climate-related disclosures;
  • the Governor of the Bank of England’s (BoE) speech reaffirming what the BoE is doing to ensure that the UK financial system plays its part in tackling climate change;
  • the FCA’s speech on rising to the climate challenge; and
  • the Financial Reporting Council’s (FRC) publication of its Thematic Review on climate-related risk.

Summary of key announcements

These announcements highlight the UK’s financial regulators’ strategy for improving and developing climate-related disclosures. The key points from these announcements include:

Taskforce

  • The Taskforce’s Interim Report highlighted the UK government’s commitment to introduce mandatory climate-related financial reporting, with a “significant portion” in place by 2023, and mandatory requirements across the UK economy by 2025. The Interim Report considered regulatory steps around tackling climate change, and also identified proposed legislative changes from the Department for Business, Energy and Industrial Strategy (which is intending to consult in the first half of 2021 on changes to the Companies Act 2006 to insert requirements around the TCFD recommendations on compliant disclosures in the Strategic Report of companies’ Annual Reports and Accounts, including large private companies registered in the UK).
  • The Taskforce strongly supports the International Financial Reporting Standards Foundation’s proposal to create a new global Sustainability Standards Board on the basis that internationally agreed standards will help to achieve consistent and comparable reporting on environmental and, social and governance (ESG) matters.

BoE

  • The BoE reaffirmed its commitment to driving forward the business world’s response to tackling climate change and reiterated the importance of data and disclosure in firms’ attempts to manage climate risk.
  • The BoE announced that the delayed climate risk stress test (its biennial exploratory scenario dubbed “Climate BES”) for the financial services and insurance sectors would be carried out in June 2021.
  • While the Climate BES will not be used by the BoE to size firms’ capital buffers, the BoE has put down the marker that it expects firms to be assessing the impact of climate change on their capital position over the coming year and will be reviewing firms’ approaches in years to follow.
  • The BoE also directed financial firms and their clients to the TCFD recommendations to encourage focus and drive decision-making, pointing to the benefits that the BoE has itself felt from reporting this year in line with the TCFD recommendations.

FCA

  • The FCA confirmed that from 1 January 2021 new rules will be added to the Listing Rules requiring premium-listed commercial company issuers to report in line with the TCFD recommendations. As anticipated by last year’s Feedback Statement, the new rule will be introduced on a ‘comply or explain’ basis. The general expectation is that companies will comply, with expected allowances for modelling, analytical or data based challenges. It is expected that these allowances would be limited in scope. The Taskforce’s Interim Report notes that the FCA is considering providing guidance on the “limited circumstances” where firms could explain rather than comply. A full policy statement and confirmation of the final rules are expected before the end of 2020.
  • The FCA is also intending to consult on “TCFD-aligned disclosure” by asset managers and life insurers. These disclosures would be aimed at “clients” and “end-investors”, rather than shareholders in the firm itself. The consultation is intended for the first half of 2021 and is stated that “there will be interactions with related international initiatives, including those that derive from the EU’s Sustainable Finance Action Plan” (it should be noted that such standards cover much more than climate disclosures). Current indications are that these disclosure standards would come into force in 2022.
  • The FCA is co-chairing a workstream on disclosures under IOSCO’s Sustainable Finance Task Force, with the aim of developing more detailed climate and sustainability reporting standards and promoting consistency across industry.

FRC

  • The FRC emphasised that all entities (boards, companies, auditors, professional advisers, investors and regulators) needed to “do more” to integrate the impact of climate change into their decision making. One of the FRC’s ongoing workstreams is investigating developing investor expectations and better practice reporting under the TCFD recommendations.

Regulatory reporting requirements and litigation risks for issuers

The recent announcements are a reminder by the UK’s financial regulators that issuers must look beyond the current Covid-19 crisis to the oncoming climate emergency. It is clear that not engaging is not an option, even as the regulatory environment continues to change. Issuers and firms will therefore want to consider the impact of those disclosure requirements/suggestions across the board, from investor interactions to regulatory reporting to meeting supervisory expectations.

As the sands shift, issuers may also want to consider what, if any, litigation risk may arise in connection with climate-related disclosures (and indeed other sustainability related disclosures that are brought out from the shadows with these regulatory developments). There may be an increased risk of litigation under s90 FSMA, s90A FSMA, or in common law or equity. This was considered in greater detail in our recent Journal of International Banking & Financial Law article (published in October 2020) where we also examined the existing climate-related disclosure requirements, the impact of the FCA’s proposals on issuers and how issuers can mitigate against such litigation risks.

Our article can be found here: Climate-related disclosures: the new frontier?

Simon Clarke
Simon Clarke
Partner
+44 20 7466 2508
Nish Dissanayake
Nish Dissanayake
Partner
+44 20 7466 2365
Nihar Lovell
Nihar Lovell
Senior Associate
+44 20 7374 8000
Sousan Gorji
Sousan Gorji
Senior Associate
+44 20 7466 2750

Climate-related disclosures: the new frontier?

Herbert Smith Freehills LLP have published an article in Butterworths Journal of International Banking and Financial Law on the Financial Conduct Authority (FCA)’s proposals for regulating climate-related disclosures and the litigation risks which may arise for issuers from such proposals.

Climate change has been part of the political and regulatory discourse for years. However, it is an issue which is gaining increasing prominence on the global stage. Over a thousand companies now support the Task Force on Climate-related Financial Disclosures (TCFD)’s recommendations, while shareholder activism in the climate arena is stretching beyond Greenpeace’s proposed resolutions at energy companies’ AGMs. Against this backdrop, both the EU and the UK have advocated for adapting their financial systems to address climate risks. Whilst the European Central Bank and Bank of England are addressing the risks from climate change in their financial systems, attention has also turned to how companies themselves can be affected by climate change, both in terms of risk assessment and management, and in terms of investor and market-facing disclosures. The current legal framework regarding issuer disclosure already provides some requirements for issuers to disclose climate-related risks in certain circumstances. However, the existing disclosure requirements fall short when it comes to consistent and meaningful disclosures. There are therefore systemic and policy drivers to increase transparency, reporting and potential regulation in this space.

The FCA has noted that voluntary adoption of the TCFD’s recommendations has been increasing. However, based on the feedback that the FCA received in response to a 2018 Discussion Paper, the FCA considers that there is evidence to support the case for it to intervene to accelerate such progress.

In our article, we examine the existing disclosure requirements for issuers, the FCA’s new proposals for regulating climate-related disclosures, the FCA’s reasons behind the proposals, how issuers will be impacted by the proposed regulatory change, the litigation risks which may arise for issuers and how issuers can mitigate against such litigation risks.

This article can be found here: Climate-related disclosures: the new frontier? This article first appeared in the October 2020 edition of JIBFL.

Simon Clarke
Simon Clarke
Partner
+44 20 7466 2508
Nihar Lovell
Nihar Lovell
Senior Associate
+44 20 7374 8000
Sousan Gorji
Sousan Gorji
Senior Associate
+44 20 7466 2750

High Court requires claimant investors to disclose their investment history to show their level of sophistication and appetite for risk

In a recent decision in the group litigation brought in respect of the Ingenious Media film partnerships the High Court has ruled that each claimant should provide disclosure in relation to their investment history, as this may be relevant to: (a) their financial sophistication and risk appetite, which may in turn inform the scope of the defendants’ duty of care in giving advice; and (b) whether or not the investments caused any loss as a result of allegedly misrepresenting the Ingenious schemes: Rowe and Ors v Ingenious Media and Ors [2020] EWHC 1731 (Ch).

The decision follows a recent CMC relating largely to disclosure issues under the Disclosure Pilot, and comes after the court awarded the defendants security for their costs against the claimants’ litigation funder (considered here).

This decision will be of interest to financial institutions and financial advisers as it demonstrates that the courts are willing to encourage disclosure of an investor’s investment history (both before and after the disputed investment(s) in question). The investment history can also include all actual and potential investments, whether or not they were made through the financial institution or financial adviser who is a party to the dispute. Such disclosure may be helpful to financial institutions and financial advisers when resisting mis-selling claims.

Background

The Ingenious Litigation concerns claims by over 500 individual claimant investors in relation to their investments in the Ingenious Media film partnerships. The claims are against various defendant companies and individuals associated with the Ingenious Media group. A large number of the claimants also claim against the financial institution which provided lending to facilitate the investments, and some of the claimants claim against their financial advisers in relation to the advice provided concerning the investments.

The defendants sought disclosure from the claimants of investments made and investment advice received during the period before and immediately after their investment in the Ingenious Media film partnerships. In relation to the claims against financial advisers, this disclosure was sought on the basis that (i) the claimants’ financial experience would inform the scope of the defendants’ duty of care, and (ii) the claimants’ investment history would shed light on their appetite for risk, which the defendants argued was relevant to causation.

The relevance of the claimants’ financial sophistication to the “advisory” claims was not disputed. The claimants volunteered to provide a schedule detailing their investment history (subject to a value threshold and date range). This schedule would be followed by limited disclosure of documents “sufficient to show” the nature of the investments and the degree of risk associated with them. The claimants stated that the schedule would not include potential investments on which advice was given but which were not made.

The defendants in the “non-advisory” claims argued that individuals’ investment history was also relevant to the issue of loss, given the defendants’ plea that the claimants would have sought to invest in similar tax-efficient schemes, had they not invested in the Ingenious Media film partnerships, which would also have failed. Given that the claimants agreed to provide the investment history schedule to the “non-advisory” defendants as well, this issue did not need to be decided. However, the claimants resisted providing the second stage (limited disclosure of “sufficient to show” documents) that had been volunteered in respect of the “advisory” claims.

Decision

The court held that two-stage disclosure should be given by each of the individual claimants on their investment history.

The court noted that the nature of the case that the defendants in the “advisory” claims were facing differed from the “non-advisory” claims. In the “advisory” claims, the central question was whether the Ingenious schemes were suitable for the claimants, and their general financial sophistication and appetite for risk could be relevant to that. However, the central claim against the “non-advisory” defendants was that they misrepresented the Ingenious schemes (whether on the basis of deceit, or negligent misrepresentation, or under the Misrepresentation Act, or as a claim for rescission). In the “non-advisory” claims, the court noted that it is far less apparent how a claimant’s appetite for risk or experience with other investments can affect the question of whether misrepresentations were made and relied on. The court did, however, accept that it should in principle be open to the defendants to show that a claimant would have invested in another scheme which would have failed, if they had not invested in the Ingenious Media film partnerships – and so disclosure of the claimants’ investment history would be relevant to that argument.

In any event, the court considered the claimants’ proposed first stage (disclosure of the schedule of investment history) to be a useful starting point, which would assist with future disclosure requests and the selection of claimants whose claims ultimately proceed to trial as “Test Claims”. The court underlined that it was not ordering the claimants to provide the schedule in any particular form (as it had been volunteered), but that the following was required in order for the schedule to suffice as an alternative to extended disclosure, which was to be provided to both the “advisory” and “non-advisory” defendants:

  1. the date range for relevant investments should start 3 years prior to each individual claimant’s investment in the Ingenious Media film partnerships, as this is not significantly more onerous than the 2 year timeframe suggested by the claimants and will give a fuller picture. The end-date should be one year after the date of the investments in the Ingenious Media film partnerships, on the basis that most individuals’ degree of financial sophistication does not rapidly change, and subsequent investments may shed light on the claimants’ sophistication at an earlier date;
  2. it would be sensible to have some value thresholds in relation to what investments are included in the schedule or not. Given the disparity between the various claimants’ investments in the Ingenious Media film partnerships, the court left it to the parties to have a sensible debate regarding what that threshold would be and, if no agreement could be reached, the defendants could ask the court for a ruling once the schedule has been provided; and
  3. in addition to actual investments made by the claimants, the schedule should include specific potential investments involving tax planning schemes, on which the claimants took or received professional advice. The court referred to Castle Water Ltd v Thames Water Utilities [2020] EWHC 13744 TCC and noted that when understanding someone’s risk appetite and understanding of risks it was as important to know what they have rejected as what they have accepted.

The court also held that this should be followed by a second stage of disclosure of documents “sufficient to show” the nature of the investments and the degree of risk associated with them. He extended this second stage to the “non-advisory” claims on the basis that such disclosure was not unduly onerous.

The court also noted in relation to the “advisory” claims that it would be helpful for the schedule to show all investments in the relevant period whether or not made through the adviser who is a party to the dispute. This would provide a better snapshot of the claimants’ investment history.

Finally, the court noted the guidance provided by the court in McParland and Partners Ltd v Whitehead [2020] EWHC 298 (Ch) (considered here), in particular that the “watchword” of the Disclosure Pilot is that an order for extended disclosure must be “fair, proportionate and reasonable”. The court considered it to be relevant context that the burden of the disclosure that had already been agreed by the parties fell significantly heavier on some of the defendants (whose anticipated disclosure costs were close to £4 million) than it did on the claimants (whose disclosure costs were expected to be approximately £200,000), but stated that this should not be a determining factor when considering whether a particular issue requires extended disclosure. The claims in the Ingenious Litigation are thought to collectively exceed £200 million, and it follows that the similar disclosure exercises may not be considered to be proportionate in lower value cases.

Damien Byrne Hill
Damien Byrne Hill
Partner
+44 20 7466 2114
John Mathew
John Mathew
Senior Associate
+44 20 7466 2913
Holly McCann
Holly McCann
Associate
+44 20 7466 7595
Nihar Lovell
Nihar Lovell
Senior Associate
+44 20 7374 8000

Privilege in the context of regulatory investigations: latest guidance from the High Court

Another recent High Court decision has considered the question of privilege in a regulatory context: A v B & Anor [2020] EWHC 1491 (Ch).

As with other recent decisions of this kind, the issue arose in the context of an auditor required to produce documents to its regulator, the Financial Reporting Council (“FRC”). The decision is likely to be of broader interest to financial services institutions, because it may indicate the approach the court is willing to take more generally in cases involving a regulator using its powers of document compulsion, such as the FCA.

In the present case, the FRC sought disclosure from the auditor of documents belonging to the auditor’s client, and over which the client claimed privilege. However, there was a dispute between the auditor and its client as to whether the documents were – in fact – privileged. Importantly, the court held that the auditor must form its own view on whether documents are privileged and can therefore be withheld on that ground, regardless of whether the privilege is that of the auditor or its underlying client. It considered that the duty to disclose was on the auditor and disclosure could only be refused on the grounds that a document was actually privileged. Mere assertion of privilege by the client was insufficient.

In the context of the FCA’s powers to compel a regulated person to disclose documents, the question would be whether the client’s documents are “protected items” under s.413 of the Financial Services and Markets Act 2000. Following the decision in Sports Direct International plc v The Financial Reporting Council [2020] EWCA Civ 177 (see our post here), there could be no argument that disclosure of the documents (if indeed subject to privilege) would not amount to infringement of the client’s privilege, or that the client’s privilege has been lost by providing those documents (on a limited waiver basis) to the regulated person.

However, the same question may arise as to which party is required to determine whether privilege attaches to the documents in question. Subject to any appeal, the decision suggests that the regulated person cannot refuse to produce documents on the grounds that a claim to privilege has been asserted or could be asserted by a client (or other third party to whom duties of confidentiality are owed); the regulated person must take its own view on the privilege claim.

For a more detailed analysis of the decision, please read our litigation blog post.

High Court takes expansive view of when reference to legal advice may result in broader waiver

The High Court has held that a bank waived privilege in all contemporaneous communications with its lawyers relating to particular transactions that were alleged to be a sham, as the bank had deployed the lawyers’ advice that the transactions were lawful in order to support its case on the merits. That was regardless of whether the particular documents relied on had already lost privilege by the time the bank had deployed them (having been provided to the SFO and used in a separate criminal trial): PCP Capital Partners LLP v Barclays Bank plc [2020] EWHC 1393 (Comm).

This is an application of the principle of collateral waiver, or the “cherry picking rule”, which says that a party who relies on privileged material to support its claim may be required to disclose other privileged material relating to the same issue or transaction. The principle is designed to avoid the unfairness which might result if the court were denied the full picture.

The decision will be of particular interest to financial institutions, because it considered the scenario where the bank had provided the documents relied on in this case to the SFO under a limited waiver of privilege, and the documents had been relied on by the SFO in the context of criminal proceedings. Unusually for cases involving waiver, the documents had therefore already lost their privileged status by the time the bank deployed them in the present civil proceedings. The court rejected the argument that, because of this, reliance could not result in a waiver. The bank had provided the documents to the SFO knowing they might be deployed at the criminal trial. The decision leaves open whether the position might have been different if the bank had had no involvement at all in their deployment. However, this could leave financial institutions in the position where privileged documents put in the public domain through criminal or regulatory investigations, cannot be relied on in follow-on civil proceedings, for fear of collateral waiver of privilege attaching to a broader set of privileged communications.

In many previous cases the court has held that privilege will not be waived if a party relies on the “effect” of privileged material rather than its “content” – though the dividing line in practice has been far from clear. The court in this case equates the “effect” of legal advice with its conclusion or outcome, but says the distinction cannot be applied mechanistically. Instead, the question of whether privilege has been waived depends on an “acutely fact-sensitive exercise” as to whether there is reliance, the purpose of that reliance and the particular context. It’s clear that, if this approach is followed in other cases, a waiver may result even if only the conclusion of legal advice is relied on. But beyond that, the decision arguably makes it no easier to draw a line between references that will result in a waiver and those that will not.

For a more detailed discussion of the decision, please see our litigation blog post.

Litigation funder fails in attempt to obtain trading data from the London Stock Exchange

Burford Capital, one of the largest litigation funders, has been in the press regularly since the publication of a series of tweets and opinion pieces by Muddy Waters (the US investment firm) which also short-sold Burford shares. These events triggered a period of weakness in Burford’s share price. Burford contended that its share price fell not only as a result of the legitimate short-selling activity, but also that Muddy Waters was implicated in an alleged conspiracy to manipulate the market unlawfully, through “spoofing” or “layering” activity.

A recent judgment in the context of Burford’s high profile campaign to identify the culprits of such trading activity has addressed some novel questions regarding the direct actionability of the Market Abuse Regulation (MAR) by the issuer: Burford v London Stock Exchange [2020] EWHC 1183 (Comm). In doing so, the court has emphasised the role of regulators, rather than private parties, in enforcing the rules around market abuse. The judgment also contains some other snippets of interest for those who follow developments in securities litigation in the UK.

Basis of Burford’s application

To identify those involved in the alleged unlawful market manipulation (and to help support litigation and/or a complaint to the regulators against them), Burford brought an application for Norwich Pharmacal relief against the London Stock Exchange (LSE). The terms of the application sought disclosure of the identity of all parties trading in its shares in the relevant period, with a view to bringing claims against market manipulators for breach of MAR.

In determining whether to grant Norwich Pharmacal relief, the court had to carefully weigh a number of factors, including:

  • the strength of Burford’s case against the market manipulators;
  • the extent to which the order sought would cut across, or would not be required because of, a regulatory regime for investigating and taking action in relation to suspected market manipulation; and
  • the possible impact on the UK as an equity trading venue of the court intervening under the Norwich Pharmacal jurisdiction.

The application was resoundingly dismissed on the basis that Burford was unable to provide any sound evidence to support the suggestion that there had been any inappropriate trading activity. Evidence produced by its expert, which was based on anonymised trading data which was publically available, was comprehensively rejected. The court was entirely persuaded by the evidence from the LSE to the effect that the regulators had analysed the non-public data and found that there was nothing to suggest that the trading activity illustrated any spoofing or layering techniques.

Euro-tort claim

Notwithstanding that the court dismissed the application at the first stage of the analysis, the court went on to analyse whether Burford could have a claim in tort against the alleged market manipulators.

In particular, it considered whether the type of market manipulation alleged by Burford, and prohibited by MAR, would be actionable by Burford as a euro-tort, in the manner recognised in Muñoz (Case C-253/00), concluding that it would not be.

In reaching its conclusion, the court considered Hall v Cable and Wireless plc [2009] EWHC 1793 (Comm). In that case, Teare J held that no personal right of action in tort arose for breach of statutory duty under the sections of the Financial Services and Markets Act 2000 (FSMA) that implemented the provisions of the Market Abuse Directive. As the Market Abuse Directive was enacted through FSMA, Teare J applied English law in reaching his conclusion, rather than Muñoz.

The FSMA provisions which were considered by Teare J in Hall were replaced by the directly applicable provisions of MAR which were relied upon by Burford. The court did not however consider there to be “any material difference” between the legislative language in FSMA which implemented the Directive and MAR, nor any real reason to think that Muñoz would give a different answer to that given by English law.

The collateral damage arising from making trading data available

There was an interesting discussion in the judgment regarding the collateral damage which might arise if the LSE was required to provide Burford with the trading data which it sought.

The LSE relied upon evidence to the effect that the provision of this information would:

  1. be unprecedented in the context of a UK and European exchange;
  2. result in one market participant having access to information on UK trading data contrary to the principles and protections provided in the legal and regulatory regime; and
  3. serve as a disruption to the UK financial markets and have a detrimental impact on trading securities in the UK, rendering UK markets less favourable when compared to other European and developed country markets who maintain their participants’ confidentiality according to the legal and regulatory regime.

The court found that, in principle, such concerns would not prohibit the court from making an order such as that sought by Burford. The court considered that the concerns expressed by the LSE were only realistic where the markets considered the court to be “trigger-happy to intervene”, whereas, if the court were seen to be willing in principle to intervene, but only where it was “tolerably clear that a powerful claim of wrongdoing had slipped through the regulatory cracks”, then intervention by the court might in fact provide added reassurance about the robustness of UK markets as attractive venues for lawful activity.

Promoters of securities litigation

The judgment also highlights the level of activity of certain participants, which we commonly see seeking to identify, and raise complaints about, potential misconduct in public capital markets.

The court made reference to a letter sent by the UK Shareholders’ Association and Sharesoc to Burford which it had sent in support of Burford’s concerns that the share price had been impacted by inappropriate trading activity. These organisations, formed of individual shareholders, are often vocal in their campaigns about listed shares (especially those on the junior market, AIM) held by their members which have lost value as a result of some allegedly wrongful activities and have been known to agitate for claims to be brought.

The letter asserted that there is “a widespread belief among investors that there is little appetite by regulators to investigate allegations of wrongdoing on the AIM market”. However, the court dismissed this argument and criticised the letter in strident terms, stating that:

The UKSA/ShareSoc letter was transparently partisan and built up to an unwelcome in terrorem conclusion that, unless Burford’s claim succeeded, “the perception of private investors is likely to be that the preference of the authorities is to ignore, rather than investigate, market manipulation”. The thought that the court could and should be trusted to assess the case for itself, independently and impartially, appears not to have occurred to the authors”.

Harry Edwards
Harry Edwards
Partner
+61 448 072 588
Sarah Penfold
Sarah Penfold
Associate
+44 20 7466 2619