High Court determines that reliance issues in context of a s.90A FSMA claim should be heard at first trial

At a recent case management conference where a split trial was proposed by the parties in relation to a section 90A Financial Services and Markets Act 2000 (FSMA) claim, the High Court has held that reliance issues should be heard at the first trial rather than held over to the second trial: Allianz Global Investors GmbH & 76 Ors v RSA Insurance Group plc [2021] EWHC 570 (Ch).

Trial structure tends to be a key case management battleground in securities class actions. For strategic and practical reasons, claimants often seek to postpone issues involving reliance, causation and quantum (i.e. issues which concern the conduct of the claimants) to the second trial and render issues surrounding the issuer’s alleged liability the sole focus of the first trial (see our banking litigation blog post on The Tesco Litigation: lessons learned from split trial orders in the context of securities class actions for further details).

The judgment therefore provides noteworthy and helpful guidance to issuers faced with securities claims in advocating for a trial structure with a fairer allocation of the burden of preparing for trial. The court referred to various factors which influenced its decision that reliance issues should be heard at the first trial. In summary, the court was of the view that an early determination on reliance may increase the chance of a settlement, and that since questions concerning reliance are primarily factual, these should be determined as early as possible during the trial process, particularly where the claimants had issued proceedings deep into the limitation period.

There are two particular points of note from the judgment:

  1. the court acknowledged the claimants’ argument that the inclusion of reliance issues could lead to a longer first trial; however, the court found that this was not a telling factor in a claim of this size and significance, and that the claimants who had brought the claim “must be ready to take part in it fully” especially as litigation funding had been arranged; and
  2. the allocation of the litigation burden between the parties was one of the factors which had a bearing on the court’s decision. The court noted that the claimants who brought the claim “should be prepared to undertake substantial work in ensuring the expeditious progress of the proceedings to resolution”.

The additional implication of these points is that further securities class actions may be more costly or practically burdensome for claimants to pursue, as they may need to invest more time and costs in anticipation of being required to participate more fully throughout the proceedings from the outset.

We consider the court’s decision in more detail below.

Background

In late 2013, RSA Insurance Group plc (RSA) made public announcements in respect of certain misconduct and accounting irregularities which had occurred in its Irish subsidiary (RSA Ireland) during the period of 2009-2013. Following the 2013 market announcements, a reduction was observed in RSA’s share price.

A claimant group of institutional investors subsequently brought proceedings under section 90A and Schedule 10A FSMA against RSA on the basis that:

  • the misconduct within RSA Ireland meant RSA’s published information during 2009-2013 contained alleged false/misleading statements and/or omissions, and/or RSA had dishonestly delayed the publication of relevant information; and
  • they had suffered loss as a result of acquiring/continuing to hold RSA shares during 2009-2013 in reasonable reliance on the alleged false/misleading statements and/or omissions and/or dishonest delay of relevant information.

RSA denies the allegations and is robustly defending the s.90A FSMA claim being brought against it.

One of the main issues the parties asked the court to consider during the case’s first CMC was how the trial should be structured. It was common ground that there should be a split trial; however, the parties disagreed as to where that spilt should lie.

The parties framed the debate by reference to an agreed list of issues. It was agreed between the parties that issues relating to whether RSA is liable under section 90A FSMA (the RSA Issues) and issues relating to quantum should be heard in the first and second trial respectively. The dispute arose in relation to issues relating to reliance and causation which are issues which concern the actions of the claimants (the Claimant Issues) and in which trial such issues should be heard.

The claimants submitted that the first trial should deal solely with the RSA Issues only, leaving the reliance and causation issues to the second trial; whereas RSA submitted that in addition to the RSA Issues, the court should also determine issues of reliance in the first trial, and that as an alternative fall-back position, the court might also determine causation issues in the first trial.

Decision

The court found in favour of RSA and held that it was appropriate that issues of reliance should be included in the first trial for the reasons set out below:

  1. Settlement – The court noted that it was preferable, on balance, for more issues rather than fewer to be tried at the first trial, and that a determination on both the RSA Issues as well as the reliance issues at that juncture was more likely to bring about a settlement of the remaining issues.
  2. Timing for the determination of the reliance issues – The court was of the view that the timeline produced by RSA’s proposed split would lead to a faster determination of the factual issues concerning reliance. The potential difference between the parties’ suggested timelines amounted to approximately a year. The court was not persuaded by the claimants’ submission that such a difference was marginal and that a year or so of delay should be avoided if possible. The court agreed with RSA that the claimants had chosen to bring the claim late in the limitation period, and the more time which passed, the more difficult it would be for the parties and the court to establish what had happened on a true factual basis.
  3. First trial length – The court noted that there was some force in the claimants’ argument that their proposed spilt would lead to a shorter first trial. However, the court commented that in a case of this scale and importance, this ought not to be a particularly telling factor. The claimants who brought this claim “must be ready to take part in it fully”, even if it resulted in a longer first trial. The court further noted that it did not think a trial of 25-30 court days to be excessively onerous for parties who were as well funded as the claimants (who had secured litigation funding).
  4. Overlap between causation and reliance – Whilst the court recognised that there was some force in the claimants’ argument concerning the potential overlap between reliance and causation issues, and noted that in an ideal world it would be preferable to have a spilt trial structure which cleanly separated the Claimant Issues from the RSA Issues; however, the court did not deem such a division to be pragmatic in the present case. It further noted that it did not consider it likely for the potential overlap in reliance and causation evidence to lead to a serious risk of inconsistencies in the evidence or the court’s findings. The court acknowledged it may be unsatisfactory for the same witness to be called to provide evidence twice (once in the first trial for reliance, and another time in the second trial for causation); however, it was of the view that the process of taking causation evidence should be fairly short and self-contained in the second trial.
  5. Expert evidence – The court agreed with RSA that it was possible that no expert evidence would be required for issues of reliance. The proposition advanced by the claimants was that the price of securities on the London Stock Exchange was influenced by published information. The court’s initial view was that such an argument was self-evident and required no expert evidence. Nonetheless, the court noted that should expert evidence be required, it did not expect the process to be a long one.
  6. Possibility of appeals – Overall, the court noted that there was some force in RSA’s argument that if there were to be appeals following the first trial, it would be better for the appellate court to hear as many issues as possible at the same time. The court also regarded there to be a real risk that the determination of reliance issues could be further postponed, in the scenario where such issues are put off to the second trial and an appeal occurs after the first trial. As per the reasons above, the court deemed this to be unsatisfactory since reliance questions are essentially factual and should be dealt with sooner rather than later.
  7. Litigation burden – On the allocation of the litigation burden between the parties, the court agreed with RSA that the claimants’ proposed split effectively meant that the claimants’ burden would be postponed to the second trial and almost all the work for the first trial would rest solely with RSA. The court noted that both parties should be entitled to scrutinise each other’s case, and that there may be times where the litigation burden between the parties is lopsided by the nature of the litigation; however, that was not the case here – as such an imbalance would be created by the claimants’ proposals for a split trial. In its consideration, the court also underlined that the claimants, having brought the claim, “should be prepared to undertake substantial work in ensuring the expeditious progress of the proceedings to resolution”. This includes providing disclosure, preparing witness statements and being prepared to provide evidence at trial. The court was of the view that RSA’s proposal represented a fairer allocation of the litigation burden between the parties, which although not a determining factor by itself did however have some bearing.

Herbert Smith Freehills LLP acts for the defendant, RSA, in this matter. 

Ceri Morgan
Ceri Morgan
Professional Support Consultant
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Nihar Lovell
Nihar Lovell
Professional Support Lawyer
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Karen Wu
Karen Wu
Associate
+44 20 7466 2369

EU Advocate General considers interpretation of Prospectus Directive in relation to an issuer’s liability for a prospectus marketed to both retail and qualified investors

The Advocate General (AG) of the Court of Justice of the European Union (CJEU) has handed down an unsurprising opinion on the interpretation of Directive 2003/71/EC (the Prospectus Directive), considering the liability of issuers to qualified investors in respect of inaccuracies in a prospectus: Bankia SA v UMAS (Case C-910/19) EU:C:2021:119 (11 February 2021), (Advocate General Richard de la Tour).

The referral was made by the Spanish Supreme Court on the interpretation of Article 3(2)(a) and Article 6 of the Prospective Directive, which (before its repeal – as discussed further below) provided the framework for a “single passport” for prospectuses throughout the EU. As an EU Directive, it required further implementation measures by EU Member States to be effective. In the UK, the relevant provisions considered by the AG are found at s.90 of the Financial Services and Markets Act 2000 (FSMA).

The context for the referral was the relatively commonplace scenario in a securities issuance, where an issuer publishes a prospectus to the public at large, and as a consequence it is received by qualified investors as well as retail investors (e.g. where there is a combined offer). The question for the AG was whether the issuer could be liable (under Article 6 of the Prospectus Directive) to qualified investors (as well as retail investors) for any inaccuracies in the prospectus in circumstances where, if the offer had been directed solely at qualified investors, the issuer would have been exempt from publishing the prospectus under Article 3(2)(a) of the Prospectus Directive. If the qualified investor is entitled to bring a claim in these circumstances, the AG was asked if the qualified investor’s awareness of the true situation of the issuer could be taken into consideration.

In response to these questions, the AG’s opinion (which is non-binding but influential on the CJEU) concluded as follows:

  1. Article 6 of the Prospectus Directive, in light of Article 3(2)(a), must be interpreted as meaning that where an offer of shares to the public for subscription is directed at both retail and qualified investors, and a prospectus is issued, an action for damages arising from the prospectus may be brought by qualified investors; although it is not necessary to publish such a document where the offer concerns exclusively such investors.
  2. Article 6(2) of the Prospectus Directive must be interpreted as not precluding, in the event of an action in damages being brought by a qualified investor on grounds of an inaccurate prospectus, that investor’s awareness of the true situation of the issuer being taken into consideration besides the inaccurate or incomplete terms of the prospectus, since such awareness may also be taken into account in similar actions for damages and taking it into account does not in practice have the effect of making it impossible or excessively difficult to bring that action, which is a matter for the referring court to determine.

From a UK perspective (and as prefaced above), this is an unsurprising outcome in the context of s.90 FSMA. In particular, because the second point (awareness of the true position of the issuer) is expressly included in the Schedule 10 defences to a s.90 claim.

Securities lawyers will immediately question the impact of the AG’s opinion in the light of the Prospectus Regulation (EU) 2017/1129 and Brexit.  Although the Prospectus Regulation repealed and replaced the Prospectus Directive (see our banking litigation blog post), the substance of the Articles considered by the AG have been carried forward into the equivalent Prospectus Regulation provisions.

As to Brexit, although the UK is no longer a member of the EU (following the end of the Brexit transition period on 31 December 2020), the AG’s opinion may still be of relevance to the interpretation of s.90 FSMA claims. S.90 FSMA represents “retained EU law” post-Brexit because it is derived from an EU Directive. In interpreting retained EU law, CJEU decisions post-dating the end of the transition period are not binding on UK courts, although the courts may have regard to them so far as relevant (see our litigation blog post on the practical implications of Brexit for disputes). As noted above, AG opinions are not binding in any event, but this will be the status of the CJEU decision when finally handed down.

The AG’s opinion is considered in more detail below.

Background

In 2011, the appellant Spanish bank (Bank) issued an offer of shares to the public, for the purpose of becoming listed on the Spanish stock exchange. The offer consisted of two tranches: one for retail investors and the other for qualified investors. A book-building period, in which potential qualified investors could submit subscription bids, took place between June and July 2011. As part of the subscription offer, the Bank contacted the respondent (UMAS), a mutual insurance entity and therefore a qualified investor. UMAS agreed to purchase 160,000 shares at a cost of EUR 600,000. The Bank’s annual financial statements were subsequently revised. This led to the shares losing almost all their value on the secondary market and being suspended from trading.

UMAS issued proceedings in the Spanish court against the Bank seeking to annul the share purchase order, on the grounds that the consent was vitiated by error; or alternatively for a declaration that the Bank was liable on the grounds that the prospectus was misleading. Having lost at first instance, the Bank appealed to the Spanish Provincial Court, which dismissed the action for annulment but upheld the alternative action for damages brought against the Bank on the grounds that the prospectus was inaccurate.

On the Bank’s appeal to the Spanish Supreme Court, the court held that neither the Prospectus Directive nor Spanish law expressly provided that it is possible for qualified investors to hold the issuer liable for an inaccurate prospectus where the offer made to the public to subscribe for securities is addressed to both retail and qualified investors.

The Spanish Supreme Court decided to stay the proceedings and referred two key questions to the ECJ for a preliminary ruling:

  • When an offer of shares to the public for subscription is directed at both retail and qualified investors, and a prospectus is issued for the retail investors, is an action for damages arising from the prospectus available to both kinds of investor or only to retail investors?
  • In the event that an action for damages arising from the prospectus is also available to qualified investors, is it possible to assess the extent to which they were aware of the economic situation of the issuer of the offer of shares to the public for subscription otherwise than through the prospectus, on the basis of their legal and commercial relations with that issuer (e.g. being shareholders of the issuer or members of its management bodies etc)?

Decision

We consider below each of the issues addressed by the AG in his opinion.

Issue 1: Inaccurate prospectus as the basis for a qualified investor’s action for damages

The AG concluded that Article 6 of the Prospectus Directive, in the light of Article 3(2)(a), must be interpreted as meaning that, where an offer of shares to the public for subscription is directed at both retail and qualified investors, and a prospectus is issued, an action for damages arising from the prospectus may be brought by qualified investors, although it is not necessary to publish such a document where the offer concerns exclusively such investors.

In the AG’s view, this interpretation was supported by both a literal/systematic interpretation of the Prospectus Directive, and a teleological interpretation (paying attention to the aim and purpose of EU law).

Before considering each approach to interpretation below, and by way of reminder, Article 3(2)(a) of the Prospectus Directive contains an exemption from the obligation to publish a prospectus where the offer is limited to qualified investors. However, the publication of a prospectus is mandatory where there is a combined offer to the public (i.e. both non-qualified and qualified investors) (Article 3(1)); or in the event of an issue of shares for trading on a regulated market (Article 3(3)).

Literal/systematic interpretation

Considering first the linguistic interpretation of the words used, the AG noted that Article 6 establishes a principle of liability in respect of inaccurate/incomplete prospectuses, but does not provide for an exception to that principle based on the nature of the combined offer, whether it is offered solely to the public or is intended for trading on a regulated market.

The AG contrasted the approach in other provisions of the Prospectus Directive, which do provide for exemptions from the obligation to publish a prospectus, based either on the person to whom the offer is addressed (Article 3(2)(a)), the number of shares or total offer issues (Article 3(2)), or on the nature of the shares issued (Article 4). However, those exemptions from the publication obligation do not prohibit voluntary publication of a prospectus by an issuer who will then benefit from the “single passport” if the shares are issued on a regulated market.

From a systematic perspective, the AG pointed out that the effect of the exemptions was to create circumstances in which qualified investors will receive a prospectus, even if they would not have received one if the offer had been directed solely at qualified investors. For example, where there is a combined offer (as in the present case) or where the prospectus is published voluntarily to benefit from the “single passport”.

The AG commented that the referring court appeared to start from the premise that, since the prospectus was intended solely to protect and inform retail investors, qualified investors could not rely on the inaccuracy of the prospectus in order to bring an action for damages. In the AG’s view, a literal and systematic interpretation of the Prospectus Directive cast doubt on the idea that a prospectus is produced merely in order to protect non-qualified investors.

Teleological interpretation (looking at the aim and purpose of EU law)

The AG said the interpretation of Article 6 of the Prospectus Directive must have regard to and balance two objectives: (i) the completion of a single securities market through the development of access to financial markets; and (ii) the protection of investors whilst taking account of the different requirements for the protection of the various categories of investors and their level of expertise.

Again, in the AG’s view, the presence of exemptions in Articles 3 and 4 versus the lack of any exemptions in Article 6, must lead to an interpretation that where a prospectus exists it must be possible to bring an action for damages on the basis of the inaccuracy of that prospectus irrespective of the type of investor.

The AG also commented that if it were accepted that each Member State could determine itself whether or not qualified investors may bring an action for damages in the event of an inaccurate prospectus, that would lead to possible distortions occurring among Member States that would undermine, disproportionately, the objective of completing the single securities market. A uniform interpretation of Article 6 is required, therefore, concerning persons who may bring proceedings against the issuer in connection with an offer.

Issue 2: Qualified investor’s awareness of the true situation of the issuer

The AG concluded that a Member State has the discretion to provide in its legislation or regulations that awareness by a qualified investor of the true situation of the issuer should be taken into account, in the event of an action for damages being brought by a qualified investor on the grounds of an inaccurate prospectus (i.e. that Article 6(2) does not preclude this principle). However, this is subject to the condition that the principles of effectiveness and equivalence are observed.

The AG said that the extent of liability for inaccuracies in a prospectus is a matter for Member States (in terms of whether to take account of the contributory fault of the investor and questions of causation). Accepting that Member States may factor in the awareness of a qualified investor in their legislation, the AG drew an analogy with the reasoning of the CJEU’s decision in Hirmann C‑174/12, EU:C:2013:856. In Hirmann, the court accepted that a Member State may limit the civil liability of the issuer by limiting the amount of compensation by reference to the date on which the share price is determined for the compensation (although again, the Member State must observe the principles of equivalence and effectiveness).

In terms of observing those principles of equivalence and effectiveness, the AG emphasised the need to take the investor’s awareness into consideration specifically in a given situation, which will require the courts of Member States to assess the evidence of such awareness and of the extent to which that awareness has been taken into consideration.

Harry Edwards
Harry Edwards
Partner
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Sarah Hawes
Sarah Hawes
Head of Corporate Knowledge, UK
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Ceri Morgan
Ceri Morgan
Professional Support Consultant
+44 20 7466 2948
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
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Sousan Gorji
Sousan Gorji
Senior Associate
+44 20 7466 2750

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

Securities class actions in England and Wales: the challenges for funders and a perspective from Australia

Herbert Smith Freehills LLP have published an article in Butterworths Journal of International Banking and Financial Law on the principal characteristics of third party litigation funding in the securities class action markets in Australia and England and Wales.

In Australia, the rise of securities class actions over the last decade has been driven in part by the presence of an active third party litigation funding market: every shareholder class action to date has been backed by litigation funders. In England and Wales, securities class actions are a more recent trend (but rapidly growing), in which third party litigation funders are increasingly taking an active role.

In our article, we compare and contrast how recent case law developments in Australia and England and Wales may impact the approach adopted by third party litigation funders to securities class actions, and therefore the risks faced by listed companies in each of these jurisdictions.

This article can be found here: Securities class actions in England and Wales: the challenges for funders and a perspective from Australia. This article first appeared in the September 2020 edition of JIBFL.

Harry Edwards
Harry Edwards
Partner
+61 3 9288 1821
Hannah Lau
Hannah Lau
Associate
+44 20 7466 2314

What does Lloyds/HBOS tell us about sections 90 and 90A of FSMA?

Herbert Smith Freehills LLP have published an article in Butterworths Journal of International Banking and Financial Law considering how the findings in Sharp v Blank [2019] EWHC 3078 (Ch) (also known as The Lloyds/HBOS litigation) may be of assistance in interpreting sections 90 and 90A of the Financial Services and Markets Act 2000.

Lloyds/HBOS is the only securities class action to have reached trial in England and Wales to date. While this case considered the common law duty not to negligently misstate and equitable duty to provide shareholders with sufficient information, there are parallels between these duties and the bases for shareholder claims found in the statutory regime under sections 90 and 90A FSMA.

The article can be found here: What does Lloyds/HBOS tell us about sections 90 and 90A of FSMA? This article first appeared in the February 2020 edition of JIBFL.

Harry Edwards
Harry Edwards
Partner
+61 3 9288 1821
Sarah Penfold
Sarah Penfold
Associate
+44 20 7466 2619
Ceri Morgan
Ceri Morgan
Professional Support Lawyer
+44 20 7466 2948

The Lloyds/HBOS litigation: The first shareholder class action judgment in England & Wales

The first judgment in a shareholder class action in England & Wales has been handed down by the High Court today in Sharp v Blank [2019] EWHC 3078 (Ch) (also known as The Lloyds/HBOS litigation).

In rejecting the claim brought by a group of shareholders against Lloyds relating to its acquisition of HBOS in 2008, the decision of the High Court provides clarity on some of the most important battlegrounds which arise in shareholder class actions as well as guidance for listed companies and their directors on various key aspects of capital markets and M&A transactions.

This significant decision will have ramifications for listed companies, and their advisers, in the UK.

A briefing paper setting out our observations and insights is available here.

Harry Edwards
Harry Edwards
Partner
+44 20 7466 2221
Damien Byrne Hill
Damien Byrne Hill
Partner
+44 20 7466 2114
Sarah Penfold
Sarah Penfold
Associate
+44 20 7466 2619
Ceri Morgan
Ceri Morgan
Professional Support Lawyer
+44 20 7466 2948