ESG disclosure investigations – Are you ready?

November 21, 2023

Listed companies across various sectors and industries are grappling with how to manage and disclose ESG issues, particularly relating to climate. These issues include:

  • Accounting for carbon and other greenhouse gas (GHG) emissions of their business, suppliers and value chain partners.
  • Considering the downstream effects of their products and services.
  • Integrating energy transition plans and climate targets into their business strategy.
  • Deciding how best to communicate these plans and targets and their progress in relation to them, to all their stakeholders – shareholders, consumers, employees, lenders, investors and the wider public.

This communication of ESG targets and performance is attracting considerable interest from regulators tasked with managing and enforcing increasing levels of mandatory disclosures on ESG factors, climate change and GHG emissions. This has changed regulators’ approach to greenwashing and enforcement in relation to sustainability claims and regulatory investigations into ESG disclosures are rising globally.

This article in our series on climate disputes explores how the proliferation of ESG and climate-related disclosure requirements has focused regulatory minds on enforcement in relation to sustainability claims and how investigations in the area are on the rise globally.

To follow the rest of this series, please subscribe to our ESG Notes blog or see our Climate Disputes Hub.

On the hook – Who pays when customers are scammed

October 25, 2023

Fuelled by the Covid-19 pandemic and increasing digital transformation of many industries, online fraud and scams are a growing problem throughout the world. For context, the UK alone reported over £1.2 billion being lost to fraud in 2022 and the banking and finance industry prevented a further £1.2 billion getting into the hands of criminals. Of that £1.2 billion in fraud, £485.2 million was attributed to authorised push payment (APP) fraud – where individuals are deceived into sending money under false pretences – the most prevalent being purchase scams and investment scams.

Banks are often unwitting facilitators of fraud, effecting the transfer of funds from victims to criminals. This has led to a growing body of case law where victims have attempted to recover lost funds from banks – with mixed results. Regulators have long seen the bank’s role as pivotal in combatting scams, and banks have a strong incentive to dedicate time and resources to address the issue.

A key Supreme Court ruling and an evolving regulatory landscape could provide some answers. We discuss our global insights in our recent article: On the hook – Who pays when customers are scammed.

This article is part of our Global Bank Review 2023: Trust Matters.

UK government confirms plans for compulsory mediation for small claims in the County Court

August 1, 2023

The UK government has announced that it is proceeding with plans to introduce compulsory mediation as a mandatory procedural step in all Small Claims in the County Court.  All parties in cases allocated to the Small Claims track (ie most claims valued below £10,000) will be required to attend a free mediation appointment with a court mediator before their case can progress to a hearing.

This is the first stage of a plan to progressively integrate a mandatory mediation step into higher value claims in the County Court: within the fast-track (£10,000-25,000) and multi-track (over £25,000).

The announcements came in the government’s published Response to the consultation process it conducted last year on “Increasing the use of mediation in the civil justice system“.  At the same time, the government announced that it has decided against introducing a centralised statutory regime to regulate the private mediation industry.

This update will likely be of particular interest to financial institutions with SME and consumer-facing operations. It will be interesting to see whether this development has an impact on whether lower-value complaints are pursued via the FOS or through the court system.

For more information, please see this post on our ADR Notes blog.

UK listing and prospectus regime reform: potential impact on securities litigation

June 14, 2023

The FCA has proposed a revolutionary restructuring of the UK listing framework. Its consultation paper (published in May 2023) sets out a blueprint for the UK’s new listing regime.

For an overview of the key proposals in the FCA’s consultation paper, please see our Capital Markets team’s briefing paper: UK Listing Regime Reform.

While the driver of the rule changes is the desire to attract and retain more listed companies in London, they are likely to have an impact on securities litigation. In this blog post, we consider the significance of these changes for claims brought by shareholders, in particular claims under ss.90 and 90A of the Financial Services and Markets Act 2000 (FSMA). Before considering the impact of the rule changes on litigation risk, we set out below a quick recap of these causes of action:

  • Section 90 FSMA provides a statutory remedy for shareholders who acquire securities and who suffer loss as a result of untrue or misleading statements in, or omissions of necessary information from, prospectuses or listing particulars relating to those securities (in essence, a “negligence” standard). It is a defence to such a claim if the defendant can show that it reasonably believed a statement was true and not misleading or an omission was properly made (the “reasonable belief defence”).
  • Section 90A (and its successor, Schedule 10A FSMA) is the statutory regime imposing civil liability for untrue or misleading statements in, or the omission of required information from, published information disclosed by listed issuers to the market via a recognised information service. An issuer will only be liable to the extent a director of the issuer: (i) knew a statement was untrue or misleading; or (ii) was reckless as to whether it was untrue or misleading; or (iii) knew an omission to be a dishonest concealment of a material fact (the “recklessness” standard). It is a requirement for a successful claim under Section 90A and Schedule 10A that a shareholder must have acquired, continued to hold or disposed of securities in reliance on the published information to which the claim relates.
  • Other potential bases for shareholder actions include claims brought under the Misrepresentation Act 1967 and common law claims for deceit and negligent misstatement as well as for breach of fiduciary and other equitable duties.

We consider below the impact of the key changes to the listing regime on future shareholder claims.

1. A single listing category

The FCA is proposing to collapse the current standard and premium listing segments into one single listing category for “equity shares in commercial companies” (the ESCC category), with one set of eligibility requirements and one set of continuing obligations for companies in that category.

The continuing obligations and eligibility requirements combine the existing requirements for premium and standard listed companies. This means that there will be some relaxations for premium listed companies and some increase in regulation for standard listed companies.

2. Class 1 and related party transaction shareholder votes and circulars to be dropped

One of the most revolutionary proposed changes, is the end to the requirements for mandatory shareholder approval and shareholder circulars in most cases on “Class 1” transactions (broadly those worth 25% or more of the listed company) under Listing Rule 10, and the consequent removal of the requirements to disclose historical financial information and a working capital statement. Similarly, the FCA is proposing removing the requirement for shareholder approval and a shareholder circular for large, related party transactions (broadly those worth 5% or more of the listed company).

From a litigation perspective, the most obvious consequence of removing the requirement for shareholders to approve Class 1 and related party transactions, is to eliminate a potential trigger point for claims.

This is most readily understood by reflecting on The Lloyds/HBOS litigation (see our briefing paper). In this case, the claims were centred on the all-share acquisition by Lloyds of its competitor bank, HBOS, at the height of the 2008 financial crisis. As a Class 1 transaction, Lloyds’ shareholders were required to approve the acquisition at an Extraordinary General Meeting. For this purpose, a shareholder circular was produced in November 2008, explaining the benefits and risks of the acquisition and containing a recommendation from the Lloyds directors as to how shareholders should vote. The key elements of the claim were that the directors of Lloyds negligently recommended to the shareholders that they should vote in favour of the acquisition of HBOS, and that they failed to provide shareholders with sufficient information to make an informed decision on how to exercise that vote and/or made negligent misstatements about the merits of the acquisition.

If the facts of this case took place in the future, under the proposed rule changes there would have been no requirement for the Lloyds directors to seek shareholder approval and no shareholder circular prepared, thereby removing the fundamental basis of the claim. However, the new rules provide that a transaction meeting the current Class 1 threshold of 25% would require an announcement containing the information currently required for a “Class 2” transaction (worth 5% or more of the listed company). A Class 2 style announcement requires a description of the effect of the transaction on the listed company, including any benefits which are expected to accrue to the company as a result of the transaction.

In our hypothetical scenario, this would have changed the shape of the litigation. Class 2 style announcements would have provided a platform for the Lloyds shareholders to bring a s.90A FSMA claim on the assertion that Lloyds made statements to the market about the proposed acquisition which were misleading. It would have been a challenging claim to bring in a number of respects, particularly given the higher fault standard under s.90A (dishonesty or recklessness rather than negligence) and the requirement to prove reliance for s.90A FSMA claims (which, although a necessary element of the negligent misstatement case brought against Lloyds and its directors, was not a feature of the negligent recommendation or sufficient information elements of the claim based on the shareholder circular).

More generally and notwithstanding the challenges to bringing a claim under s.90A FSMA (for the reasons set out in the previous paragraph), the importance of the disclosures to be made under the proposed rule changes will be magnified, such that claims may become more likely. In other words, if less information is required to be disclosed, the importance of the information which is disclosed (and the risk of not disclosing material information) increases. In particular, Class 2 style announcements may provide a hook for claims, on the basis that the company is required to give a “true” description of the effect of the transaction on the company and that it did not, for example by not disclosing a piece of information which, with the benefit of hindsight, turned out to be material. It is also worth noting that the requirements for Class 2 style announcements impose quite a high-level test which creates greater scope for argument as to whether it has been met or not.

One further impact of the changes is that there may be less internal scrutiny of a company’s disclosures, and less involvement from professional advisers (for example in preparing a working capital statement), particularly for smaller (less than 25%) transactions. In the Lloyds case, the board was able to take comfort from the large amount of work undertaken internally by management as part of the Class 1 process, and by its sponsors and other professional advisers. If professional advisers are not involved in the assessment of smaller transactions, it will be even more important for companies to ensure that statements made in any announcement can be justified, and that a comprehensive record is kept of judgment calls as to the materiality of information and what should be included/excluded from announcements. It may be that the wisest course to protect against future liability under s.90A will be to continue to undertake a fulsome verification exercise in relation to any transaction-related disclosures.

For other matters that will continue to need shareholder approval, the risks are likely to remain the same (eg cancellation of listing, reverse takeovers, transactions by companies in financial difficulties, issuing shares at a discount and share buybacks).

3. Governance Code and annual reporting

The FCA has proposed that other reporting and “comply or explain” requirements, which currently apply to premium listed companies only, will be applied to all companies in the ESCC category. For example, the FCA is proposing to retain the current key disclosure and “comply or explain” requirements which apply to standard and premium listed companies, in relation to climate and diversity related annual report disclosures.

ESG poses challenges to listed companies, including banks, in many forms – new taxonomies and disclosure standards; scrutiny of banks’ financial exposures to climate change; shareholder resolutions from activists; enhanced due diligence requirements to protect human rights; and warning shots about avoiding greenwashing, to mention a few. The more disclosures made in connection with ESG, the greater the risk of litigation under s.90 FSMA, s.90A FSMA, or at common law or in equity.

4. Simplified eligibility requirements

Some of the eligibility requirements for issuers seeking admission to listing which are seen as acting as a deterrent to companies listing, will be modified and investors will instead need to look to the disclosures made by issuers to make an informed investment decision. The FCA is looking to open the market to more diverse business models and more complex corporate structures.

For example, the FCA is proposing to remove the eligibility requirements relating to historical financial information and revenue earning track record. It is also proposing to delete the requirement that an applicant for listing satisfies the FCA that it has sufficient working capital (ie that it can give a clean working capital statement).

This rule change is underpinned by the principle that many investors are sophisticated enough to analyse financial disclosures to make informed choices. Of course, there will remain a need for specific prospectus regime disclosure requirements in this context, and we look forward to detailed rules from the FCA in this regard. However, the key takeaway from a litigation perspective, is that this shift will inevitably magnify the importance (and potentially increase the number) of financial disclosures made by issuers wishing to carry out an initial public offering (IPO). The simple point is that this may also increase the risks of s.90 FSMA claims in respect of allegedly misleading statements in/omissions from prospectuses.

5. Prospectus regime

The FCA is also taking bold steps to reform the UK’s prospectus regime and has published a series of engagement papers setting out in more detail the key issues it is considering. The engagement papers can be found on the following FCA webpage: New regime for public offers and admissions to trading. Our Capital Markets colleagues have published a full note on the prospectus engagement papers here: UK Prospectus Regime review – bold reform ahead.

The matters on which the FCA is currently seeking views are set out below, together with our initial analysis of the likely impact on litigation risk.

Admission to trading on a regulated market (Engagement Paper 1)

The FCA says that the requirement for a prospectus on an IPO will remain and it will continue to need to contain sufficient detail to meet the “necessary information” test. Accordingly, the overall disclosure standard for prospectuses will be maintained, preserving the status quo for s.90 FSMA claims, in this respect at least.

The FCA is asking for views on when exemptions to this requirement should apply, the required content and format of a prospectus in this context, and the responsibility for, and approval of, such a prospectus.

Further issuances of equity on regulated markets (Engagement Paper 2)

The FCA says there will be no requirement for a listed company to publish a prospectus when it issues further equity securities unless there is a clear need for one. It asks whether there should be a threshold (set by reference to the percentage of existing share capital that the issuance represents) above which a prospectus would be required and what document (if any) should be required if/where a prospectus is not required.

A reduction in the number of prospectuses published would increase investor/market scrutiny of company disclosures/announcements related to equity issues since s.90A claims may be available for any untrue or misleading statements made to the market, or omissions or delays in publishing required information.

Protected forward-looking statements (PFLS) (Engagement Paper 3)

The FCA seeks views on how PFLS, which will be subject to the higher recklessness liability standard under the FCA’s proposals, should be defined. It also asks whether the FCA should set certain minimum criteria for the production of PFLS, how they should be presented and labelled in prospectuses, and whether sustainability-related disclosures should be PFLS.

As a reminder, the rationale for changing the statutory standard of liability for PFLS was underpinned by Lord Hill’s view that the existing prospectus regime deters issuers from including forward-looking information in their prospectuses, due to the current level of liability attached (ie the “negligence” standard under s.90 FSMA described above). In order to improve the quality of information that investors receive directly, Lord Hill recommended adjusting the standard of liability for PFLS to the same recklessness standard as under s.90A FSMA and s.463 of the Companies Act 2006 (in respect of directors’ liability for untrue/misleading statements in, and omissions from, a directors’ report etc.).

Recklessness is a higher fault standard than negligence. While negligence generally involves a failure to exercise reasonable skill and care, recklessness requires a higher degree of awareness and disregard for risk. In ACL Netherlands BV & Ors v Lynch & Ors [2022] EWHC 1178 (Ch) (commonly referred to as the Autonomy judgment), the High Court confirmed that recklessness in this context will have the meaning laid down in Derry v Peek (1889) 14 App. Cas. 337: “not caring about the truth of the statement, such as to lack an honest belief in its truth. Honest belief in the truth of a statement defeats a claim of recklessness, no matter how unreasonable the belief (though of course the more unreasonable the belief asserted the less likely the finder of fact is to accept that it was genuinely held)”. You can find our blog post on the Autonomy decision here: How to navigate the Autonomy judgment: guidance for corporate issuers defending Section 90A / Schedule 10A FSMA shareholder claims.

Accordingly, it will be more difficult for an investor to bring a successful claim for breach of s.90 FSMA in respect of a PFLS as a result of these reforms. In turn, this means that how a PFLS is defined will be very important, to give issuers clarity as to the potential risks attached to any forward-looking statements. The fact that the FCA is looking at whether PFLS includes sustainability-related disclosures will elevate the significance of this engagement paper, given the growing trend of ESG-related litigation, and emerging regulatory requirements to make sustainability disclosures.

Initial thoughts on the engagement papers

If the reforms outlined in the engagement papers go ahead, the likely overall impact will be fewer prospectuses, at least for secondary capital raises, and therefore fewer bases on which to bring s.90 FSMA claims. When combined with the potentially higher liability threshold for forward-looking statements in prospectuses (a shift from negligence to recklessness), it seems likely that we will see more claims being brought instead under s.90A.

From a practical perspective, although prospectuses will no longer be mandated for further equity securities under these reforms, it remains to be seen what disclosures companies will need to make in order to market a particular offer of shares outside the UK, and particularly into the US. It may be that a company has to provide additional information to the market beyond that mandated by UK rules to satisfy overseas securities laws, or that professional advisors recommend additional voluntary disclosures in order to seek to protect the company from potential non-UK liabilities.

6. Next steps

The FCA’s consultation on listing rule reforms closes on 28 June 2023 and written responses to the questions raised by the prospectus engagement papers must be submitted by 29 September 2023. Following the consultation and engagement process, the FCA expects to publish a second consultation paper containing draft listing rules in the autumn and plans to accelerate its final rule making processes. We expect the new listing rules to be implemented in early 2024. A consultation paper on new draft prospectus rules will follow later in 2024.

If you have any specific queries in relation to the impact of the proposals on s.90/90A FSMA claims, please get in touch with one of the contacts below or your usual HSF contact.

Rupert Lewis
Rupert Lewis
Head of Banking Litigation
+44 20 7466 2517
Simon Clarke
Simon Clarke
Partner
+44 20 7466 2508
Sarah Hawes
Sarah Hawes
Head of Corporate Knowledge, UK
+44 20 7466 2953
Ceri Morgan
Ceri Morgan
Professional Support Consultant
+44 20 7466 2948
Sarah Penfold
Sarah Penfold
Senior Associate
+44 20 7466 2619

The end of the road for USD LIBOR?

June 7, 2023

The USD LIBOR panel ceases later this month, on 30 June 2023, marking a major milestone in the transition away from LIBOR to robust Risk-Free Reference Rates.

However, this is not quite the end of the road for USD LIBOR. Publication of the 1-, 3- and 6-month USD LIBOR settings will continue under an unrepresentative “synthetic” methodology until end-September 2024 published by LIBOR’s administrator, ICE Benchmark Administration Limited, following an announcement earlier this year by the FCA.

The FCA’s decision offers a bridging solution for users of USD LIBOR, both within and outside the UK. It is intended to deal with the significant pool of outstanding legacy USD LIBOR contracts governed by UK or other non-US law, which have no realistic prospect of being amended to transition away from USD LIBOR by end-June 2023.  Publication of synthetic USD LIBOR by ICE is intended to “flow through” to global users of existing LIBOR contracts continuing to reference the rate (subject to other jurisdictions’ legislative frameworks). The extra time provided by synthetic USD LIBOR should allow parties to continue to transition away from the benchmark until end-September 2024.

For USD LIBOR contracts governed by US law, US federal legislation will move contracts that contain no, or unworkable, fallbacks, to alternative rates when the USD LIBOR panel ends (under the Adjustable Interest Rate (LIBOR) Act). For these contracts, references to USD LIBOR will be replaced, by operation of law, with a SOFR-based benchmark replacement. The FCA has confirmed that synthetic USD LIBOR, published by ICE in the UK, will be calculated on the same basis as the replacement rate under the US LIBOR Act, to avoid bifurcation between legacy USD LIBOR contracts governed under non-US law and US law.

From a distance, this appears to offer a complete global solution for the end of USD LIBOR, with the jurisdictional jigsaw pieces of the UK and US regimes fitting neatly together. However, the extraterritorial effect of synthetic USD LIBOR gives rise to a potential risk of conflicts of laws. For a detailed analysis of how these risks might arise for US law and non-US law contracts respectively, see our blog post: Will publication of synthetic USD LIBOR impact the litigation risks of transition?

You can find all of our previous blog posts commenting on the evolving risks of LIBOR transition here.

UK contacts:

Rupert Lewis
Rupert Lewis
Partner, London
+44 20 7466 2517
Nick May
Nick May
Partner, London
+44 20 7466 2617
Ceri Morgan
Ceri Morgan
Professional Support Consultant, London
+44 20 7466 2948


US contacts:

Marc Gottridge
Marc Gottridge
Partner, New York
+1 917 542 7807
Lisa Fried
Lisa Fried
Partner, New York
+1 917 542 7865

Failure to prevent fraud – an introduction to the proposed new offence

April 13, 2023

This week saw the government’s long-awaited introduction of a proposed new offence of “failure to prevent fraud” in amendments to the existing Economic Crime and Corporate Transparency Bill.

The new legislation will be of interest to in-house lawyers at financial institutions. It is intended to protect the public from a wide range of harms, including dishonest sales practices, false accounting and hiding important information from consumers or investors. The government has issued a press release, stating that the new offence could also hold companies to account for dishonest practices in financial markets and quotes the current Director of the Serious Fraud Office, Lisa Osofsky, as saying that the offence would be a “game changer” for law enforcement, helping them “crack down on fraudulent enterprises, compensate their victims and ultimately protect the integrity of our economy”.

Our Corporate Crime & Investigations colleagues have prepared a briefing looking at the newly proposed offence and its key elements.  Please read the full briefing here.

Will publication of synthetic USD LIBOR impact the litigation risks of transition?

December 2, 2022

Despite numerous warnings from the FCA that “firms shouldn’t be relying on…a “synthetic” US dollar LIBOR as we have given for sterling and yen” (see speech by the FCA’s Edwin Schooling Latter on 8 December 2021), last week the regulator confirmed that it would allow market participants to do just that.

In this blog post, we explore how this recent development may impact the litigation risks of LIBOR transition, in particular from a conflicts of laws perspective.

Background

The UK’s legislative framework to deal with LIBOR cessation provides the FCA with new regulatory powers to publish so-called “synthetic” LIBOR in currencies and tenors to be determined by the FCA (following consultation with the market). The legislation provides that any references to LIBOR, in a contract or arrangement, should be “deemed” (i.e. read) to be the synthetic form since inception of the contract, regardless of how references to LIBOR are expressed. For a detailed analysis of the UK legislative solution, see our previous blog post: Final part of UK LIBOR legislative solution receives Royal Assent.

To date, the FCA has made three major announcements as to the use of its regulatory powers to require LIBOR’s administrator (Ice Benchmark Administration, IBA) to continue to publish LIBOR in a synthetic form:

  1. Sterling/yen LIBOR. On 29 September 2021, the FCA confirmed that it would compel IBA to publish synthetic 1-, 3- and 6-month sterling LIBOR and all yen LIBOR tenors for the duration of 2022 (which would otherwise have ceased on 31 December 2021). See FCA press release.
  2. Sterling/yen LIBOR. On 23 November 2022, the FCA confirmed that 3-month synthetic sterling LIBOR will continue until end-March 2024. The three synthetic yen LIBOR settings will cease at end-2022 the 1- and 6-month synthetic sterling LIBOR settings will cease at end-March 2023. See FCA press release.
  3. USD LIBOR. On 23 November, the FCA also announced its intention to require publication of the 1-, 3- and 6-month USD LIBOR settings under an unrepresentative synthetic methodology until end-September 2024. See FCA press release.

We examine below the key features of the synthetic USD LIBOR proposal, before considering the potential impact on litigation risks.

Synthetic USD LIBOR proposal

In June 2022, the FCA launched a consultation seeking information on market participants’ exposure to USD LIBOR (CP22/11).

There is significant exposure to USD LIBOR outside the US, including in the UK. The ARRC estimated in 2021 that globally, over US$70 trillion of USD LIBOR exposures would remain outstanding beyond the cessation of the USD LIBOR panel at end-June 2023. Having considered responses to the June consultation, the FCA expects that there will be a pool of outstanding legacy contracts governed by UK or other non-US law, that are not covered by the US legislative solution and that have no realistic prospect of being amended to transition away from the 1-, 3-, and 6-month US dollar LIBOR settings by end-June 2023.

Following feedback, the FCA published a further consultation in November 2022 on its proposal to require publication of synthetic USD LIBOR for the 1-, 3-, and 6-month settings (CP22/21). The key elements of this proposal are as follows:

  • Temporary. Synthetic USD LIBOR in the settings identified will be available only until end-September 2024. The FCA thinks that a further 15 months (on top of the additional 18 months of panel bank USD LIBOR), should allow the majority of the population of non-US law governed legacy contracts to transition away or reach maturity, and therefore secure an orderly transition.
  • Not representative. The FCA has reiterated that, while in its view synthetic LIBOR settings are a fair and reasonable approximation of what LIBOR might have been had it continued to exist, they are not representative of the markets that the original LIBOR settings were intended to measure. As a result, any contracts with non-representativeness fallbacks will be triggered when 1-, 3- and 6-month USD LIBOR panels cease at the end of June 2023, notwithstanding the continued publication of these settings on a synthetic basis (see the FCA’s March 2021 statement on the non-representativeness of all LIBOR settings).
  • Impact on cessation fallbacks. Some respondents to the November consultation noted the inoperability of cessation fallbacks if LIBOR continues to be published under a synthetic methodology. The FCA remarked that there is a balance to be struck between the impact on: (a) contracts without any fallbacks at all, which are in need of a synthetic USD LIBOR; and (b) contracts which contain cessation fallbacks, whose operation will be delayed by publication of a synthetic USD LIBOR. The extra time provided by synthetic USD LIBOR should allow parties to continue to transition away, and if any contracts containing cessation fallbacks have not been actively transitioned during that extra time, then the cessation fallback will be triggered at end-September 2024.
  • Will apply to all contracts except cleared derivatives. The FCA says that it has drawn on experience from the approach taken to sterling and yen LIBOR settings last year, to inform its proposals for USD LIBOR, in particular for the scope of permitted legacy use of synthetic USD LIBOR. In respect of sterling/yen LIBOR, the FCA previously concluded that that there were considerable barriers to transitioning existing contracts away from LIBOR within the timeframe available, and that it was extremely difficult to distinguish with certainty specific classes, categories, types or other subsets of legacy contracts that could be amended within the time available, with the exception of cleared derivatives. These contracts did not need to use synthetic settings because clearing houses could use standardised mechanisms to move them to relevant overnight RFRs. The FCA has concluded that it should follow the same approach for USD LIBOR settings as for sterling and yen LIBOR settings.
  • Interaction with the US legislative solution. In the US, federal legislation (the Adjustable Interest Rate (LIBOR) Act (the LIBOR Act – see our previous blog post: US Enacts LIBOR Transition Law) was enacted in March 2022 to establish a process to move contracts governed by US law that contain no, or unworkable, fallbacks, to alternative rates when the USD LIBOR panel ends. For these contracts, references to LIBOR will be replaced, by operation of law, with a SOFR-based benchmark replacement that the Federal Reserve Board (FRB) will identify in regulations. The LIBOR Act also provides a “safe harbour”, under which a party who has discretion to select a successor rate may choose the benchmark replacement identified by the FRB with certain protections against liability for doing so. Notwithstanding the broad scope of the LIBOR Act, in the FCA’s view, a restriction preventing the use of synthetic USD LIBOR settings in contracts governed by US law would add extra complexity – as well as the risk that some contracts could face legal uncertainty and the potential for litigation. Accordingly, the FCA proposes to make synthetic USD LIBOR settings available for both non-US and US law governed contracts. This is discussed further in the litigation risks section below.
  • Methodology for synthetic USD LIBOR. The FCA has confirmed that synthetic USD LIBOR will be calculated on the same basis as the replacement rate under the US LIBOR Act, to avoid bifurcation between legacy USD LIBOR contracts governed under non-US law and US law. The calculation methodology will be the sum of the CME Group Benchmark Administration Limited’s (CME) Term SOFR Reference Rate plus the International Swaps and Derivatives Association (ISDA) fixed spread adjustment for the corresponding LIBOR setting (the ISDA fixed spread adjustments are identical to the spread adjustments specified in the LIBOR Act). There are two term SOFR reference rates available, produced by CME and IBA respectively. It is significant that the FCA intends to incorporate the CME rate in synthetic USD LIBOR, rather than the IBA rate, particularly when the IBA term SONIA rate was selected by the FCA for synthetic sterling LIBOR. However, the FCA has decided to follow the same approach as the US in order to maintain international consistency, to avoid market fragmentation or unwanted basis risk. CME and IBA have both confirmed to the FCA their agreement to produce a synthetic USD LIBOR rate on this basis.

Impact on litigation risks

As the home jurisdiction of LIBOR’s administrator, the UK has taken a different approach to its legislative framework in comparison to other key LIBOR jurisdictions (i.e. the US and EU). The FCA expects the publication of synthetic LIBOR to “flow through” to global users of existing LIBOR contracts continuing to reference the rate (subject to other jurisdictions’ legislative frameworks).

The November consultation demonstrates the FCA’s intention to offer a bridging solution for users of USD LIBOR, both within and outside the UK.

The impact of synthetic USD LIBOR on non-UK law contracts is likely to be a question of contractual construction according to the governing law of the contract. However, the potential extraterritorial effect may give rise to a risk of conflicts of laws. We suggest how these risks might arise for US law and non-US law contracts below.

US law contracts

The primary risk for US law contracts referencing USD LIBOR, will be for those contracts falling outside of the LIBOR Act (i.e. non-covered contracts).

For any US law contracts covered by the LIBOR Act, the trigger for replacing USD LIBOR with the FRB-selected benchmark replacement is the “LIBOR Replacement Date”, which means the date on which the relevant LIBOR setting becomes unrepresentative. Given that synthetic LIBOR settings are permanently unrepresentative, contracts covered by the LIBOR Act should transition to the FRB-selected benchmark and avoid synthetic USD LIBOR.

However, contracts governed by US law that contain workable non-LIBOR fallbacks are generally not affected by the LIBOR Act. If, under the contractual terms, these fallbacks are only triggered by LIBOR’s cessation, then these contracts might use a synthetic USD LIBOR setting for as long as it is published. They would only move to their intended fallback rate under the contract when the synthetic setting ceases. For these non-covered contracts, there is a risk of potential litigation challenging the appropriateness of using a synthetic setting (given the unrepresentative nature of synthetic settings and that contract parties may not have envisaged the existence of such a rate when the contracts were drafted).

Non-US law contracts

As noted above, the rate to be applied to a USD LIBOR-referencing contract which is not governed by UK or US law will depend upon the question of contractual construction according to the governing law of the contract.

In the absence of domestic legislation/regulatory guidance for such contracts, parties may look first to synthetic USD LIBOR, particularly given the FCA’s stated intention that synthetic LIBOR should flow through to global users of LIBOR.

However (and while the US LIBOR Act appears on its face to be limited in scope to US law contracts), there may be a risk of parties arguing that the contract is covered by the US LIBOR Act and should not incorporate synthetic USD LIBOR, for example, if the parties or subject matter of the contract have a close connection with the US. This type of risk seems less likely to emerge following the FCA’s confirmation that synthetic USD LIBOR will be calculated on the same basis as the replacement rate under the US LIBOR Act. However, there is a divergence in the protections offered by the two jurisdictions, which could provide a commercial advantage to transitioning under one solution or the other, thereby creating uncertainty and risk.

UK contacts:

Rupert Lewis
Rupert Lewis
Partner, London
+44 20 7466 2517
Nick May
Nick May
Partner, London
+44 20 7466 2617
Ceri Morgan
Ceri Morgan
Professional Support Consultant, London
+44 20 7466 2948


US contacts:

Marc Gottridge
Marc Gottridge
Partner, New York
+1 917 542 7807
Lisa Fried
Lisa Fried
Partner, New York
+1 917 542 7865

ESG for financial institutions – Top five trends in UK and EU regulation for 2023

October 12, 2022

As financial institutions get to grips with the opportunities and challenges presented by the constantly evolving ESG landscape, our FSR colleagues have outlined the top five trends that they are seeing in this space. From a disputes perspective, particularly for mis-selling and securities class action claims, it is important that firms take note of these trends as they are likely to influence the ESG agenda into 2023 and beyond.

The top 5 trends are as follows:

  • Impact of the energy crisis on the ESG agenda
  • Increasing focus on the ‘S’ and ‘G’ in ESG
  • Divergence and convergence in international approaches
  • The ESG data challenge
  • Greenwashing and ESG enforcement

For more information on each of the trends, please see our FSR Notes blog post.

Russian sovereign debt defaults: a disputes perspective

September 30, 2022

Herbert Smith Freehills LLP have published an article in Butterworths Journal of International Banking and Financial Law (JIBFL) on Russia’s default on its foreign currency sovereign debts from the perspective of potential disputes and litigation.

Russia’s default on its foreign currency sovereign bonds is unprecedented and likely to lead to bondholder litigation as well as derivatives disputes. The article highlights the reasons for Russia’s default and explores the scope of potential bondholder litigation, together with some of the obstacles which bondholders may face in bringing claims against Russia. The article then considers the ripple effect on the derivatives market, where it is possible that investors in products linked to Russian debt may seek to recover losses by bringing mis-selling claims.

The article can be found here: Russian sovereign debt defaults: a disputes perspective and first appeared in the September 2022 edition of JIBFL.

Daniel May
Daniel May
Senior Associate
+44 20 7466 7608
Ceri Morgan
Ceri Morgan
Professional Support Consultant
+44 20 7466 2948
Nick May
Nick May
Partner
+44 20 7466 2617
Susannah Cogman
Susannah Cogman
Partner
+44 20 7466 2580
Minolee Shah
Minolee Shah
Professional Support Consultant
+44 20 7466 207

Navigating UK sanctions against Russian persons in English court proceedings

September 21, 2022

The UK is one of many countries which have introduced extensive sanctions against Russia, its individuals and entities in light of the military action in Ukraine which began on 24 February 2022. The application of the sanctions is generally limited to the territory of the UK and the conduct of UK persons (as defined) inside or outside the UK, but their practical effect is nevertheless wide-ranging.

An area where the UK sanctions regime may have significant impact, but which is not often discussed, is the effect on proceedings in the English court involving sanctioned Russian parties. Whilst UK sanctions generally do not restrict court proceedings against Russian individuals or entities subject to sanctions, the effect of the overall sanctions regime means that pursuing such claims may involve practical difficulties, such as delays to the proceedings or issues with enforcement. Those who wish to pursue claims against sanctioned Russian persons in the English courts therefore need to understand how to navigate the relevant sanctions in order not to be caught off-guard by such difficulties.

For a background to the sanctions regime and potential difficulties arising from asset freeze restrictions, please see our Litigation Notes blog post.