The Law Spot highlights some legal points of interest / cases / legislation which have arisen during the month in the UK. It is not intended to be comprehensive in any way, merely a summary of a selection of the legal issues which have affected the financial services industry during the period.
This first anniversary of the Law Spot edition brings a range of articles which will be of particular interest to students studying or working in insurance, compliance, investment banking and corporate banking.
Persons of Significant Control (PSC) – new disclosure regime
Since 6 April 2016, all UK companies and UK Limited Liability Partnerships (LLPs) have been required to maintain a register of all those persons who have significant control over the company or LLP. However, Birketts LLP (2017) state that they regularly come across companies and LLPs who are not complying with the new PSC regime, in particular, farming companies, which are frequently controlled and owned by one family but where the underlying ownership may be held in trusts.
All UK companies and LLPs are required to keep and maintain a PSC register including subsidiary and dormant companies. The only exceptions are for certain publicly traded companies. An individual is a person who exercises significant control (a PSC) over a company if the individual meets any one of the following five conditions.
- Holds, directly or indirectly, more than 25% by nominal value of the company’s shares.
- Is entitled, directly or indirectly, to exercise more than 25% of the voting rights of the company.
- May, directly or indirectly, appoint or remove a majority of the board of directors of the company.
- Has the right to exercise or actually exercises significant influence or control over the company.
- Has the right to exercise or actually exercises significant influence or control over a trust or firm which is not a legal entity but which itself satisfies one of the above conditions.
- An individual is a PSC over an LLP if the individual meets any one of the following five conditions.
A new disclosure regime came into force on Monday 26 June 2017 (Lewis Silkin, 2017), and broadly states that:
- The PSC disclosures now come under “event driven filings” at Companies House; they are no longer part of the company’s annual confirmation statement.
- A company must enter new information on its own PSC register within 14 days and provide the updated information to Companies House within a further 14 days, once it has:
- become aware of a change;
- obtained all the information needed to enter on its own PSC register; and
- confirmed the information if it relates to an individual
Corporate Relationship Managers / Corporate Support should bear this in mind and check and remind limited company / LLP customers of the need to maintain a PSC register as a matter of good customer service.
The Final Report of its Asset Management Market Study
Of interest to any students aspiring to become investment bankers is the Final Report of the FCA’s Asset Management Market Study which was recently published. This follows consultation on the interim report which was published in November 2016.
MacFarlanes (2017) highlight the key elements of the report:
- A strengthened duty on fund managers to act in the best interests of investors.
- A minimum of two independent directors on fund managers' boards.
- A requirement to disclose a single all-in fee, plus standardised disclosure of costs and charges to institutional investors.
- A working group on making fund objectives more useful; and on use of benchmarks and performance reporting.
- A market study into investment platforms.
- Final decision on whether to refer the institutional advice / consultancy market to the Competition and Markets Authority to be published in September”.
The full report is available from here.
The Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017
The Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017 (MLR 2017) (SI 2017/692) were published and came into force on 26 June 2017. Addleshaw Goddard (2017) note that the 2017 Regulations are intended to update UK laws to take into account the measures included in the EU's Fourth Money Laundering Directive and to amend the UK's anti-money laundering and counter-terrorist financing regime to ensure it is kept up to date, effective and proportionate.
The new Regulations reflect the evolution of financial regulation and customer due diligence requirements to combat changing and increasingly sophisticated money laundering and terrorist financing activities and introduce a number of new requirements on companies, including requirements relating to internal controls, senior management responsibility, employee supervision and training, record keeping and in particular, to customer due diligence procedures.
The evolving approach to FCA investigations
Jamie Symington, director of investigations at the Financial Conduct Authority (FCA) outlines the evolving approach that will be taken to future investigations. Reports published in 2015 and 2014 highlighted that the “FCA’s approach to investigation was problematic as the decision to investigate was largely determined on the likelihood of achieving a successful Enforcement outcome. This created a situation where the FCA were only investigating cases they thought they would win” (Kingsley Napley, 2017).
In light of this, the FCA is taking a new approach to investigations, with an investigation being seen as one of a range of ‘diagnostic tools’. Mr Symington said that an investigation should not be viewed simply as a precursor to formal enforcement action being taken, but a tool to allow the FCA to understand what has happened in a way which is proportionate and fair.
Mr Symington anticipates that the number of investigations instigated by the Enforcement division will continue to increase, but that proportionately fewer investigations will progress to a formal enforcement outcome.
The importance of disclosure in insurance contracts
Dalecroft Properties Ltd v Underwriters  EWHC 1263 (Comm) confirmed the defendant insurers’ right to avoid a property insurance policy where various misrepresentations were made relating to the state of repair of the insured property and non-disclosures relating to acts of vandalism to the property.
The property in question was subsequently destroyed by fire and a claim was made by the insured. However, the insurers were able to successfully avoid the claim on the basis of the misrepresentations and non-disclosures.
It is worth noting that the insurance policies were entered into prior to the Insurance Act 2015 coming into force. However, the judge commented that even under the 2015 Act, the insured’s claim would have failed, on the basis that there was no fair presentation of the risk (as that expression is now defined in the 2015 Act) and that the defendant insurers would have declined to write the risk at all, had a fair presentation been made.
A new trade body has been launched in the UK – UK Finance. It has been created by combining most of the activities of existing UK finance associations – the Asset Based Finance Association, the British Bankers’ Association, the Council of Mortgage Lenders, Financial Fraud Action UK, Payments UK and the UK Cards Association. It operates across 300 companies and societies, who themselves operate in finance, lending, banking, markets, fraud prevention and payments. Its role will be to help its members build customer trust, facilitate industry-wide collaboration and innovation, and work with policy makers and regulators in the UK, European Union and at a global level to ensure that the UK retains its position as a global leader in financial services.
Addleshaw Goddard (2017) InCredit - 27 June 2017 [online]. Available at: https://www.addleshawgoddard.com/en/insights/insights-briefings/2017/financial-regulation/incredit-27-june-2017/. [Accessed: 4 July 2017]
Birkett (2017) Significant Control [online]. Available at: http://www.birketts.co.uk/insights/legal-updates/significant-control. [Accessed: 4 July 2017]
Cooley (2017) Commercial court upholds the right of insurer to avoid policy for misrepresentation and non-disclosure [online]. Available at: https://insure.cooley.com/2017/06/15/commercial-court-upholds-right-of-insurer-to-avoid-policy-for-misrepresentation-and-non-disclosure/#page=1 [Accessed: 5 July 2017]
Kingsley Napley (2017) FCA Investigations - the evolving approach [online]. Available at: https://www.kingsleynapley.co.uk/insights/blogs/criminal-law-blog/fca-investigations-the-evolving-approach#page=1 [Accessed: 4 July 2017]
Lewis Silkin (2017) People with Significant Control - changes in force from Monday 26 June 2016 [online]. Available at: http://www.lewissilkin.com/News/People-with-Significant-Control-changes-in-force-from-Monday-26-June-2016. [Accessed: 4 July 2017]
MacFarlanes (2017) FCA Asset Management market study final report [online]. Available at: http://www.macfarlanes.com/media/781772/FCA-Asset-Management-Market-Study-Final-Report.pdf. Accessed: 4 July 2017]
UK Finance (2017) Launch of UK Finance – our day one priorities [online]. Available at: https://www.ukfinance.org.uk/. [Accessed: 7 July 2017]
Caroline Murray is a Senior Lecturer in the full-time banking and finance degree programmes at The London Institute of Banking & Finance.