PLC Global Finance update for July 2009: United Kingdom

Practical Law UK Articles 0-422-1229 (Approx. 5 pages)

PLC Global Finance update for July 2009: United Kingdom

by Norton Rose LLP

Dispute resolution

Important cross-border enforcement decision by the New York courts

Michael Godden

The New York Court of Appeals has held that a New York court has the power to order a bank over which it has personal jurisdiction to turn over property of a judgment debtor located outside New York to a judgment creditor.

The consequences of this decision are far reaching for banks because entities which have registered in New York are subject to the personal jurisdiction of the New York courts by virtue of their registration. An unsatisfied foreign arbitration award or judgment could now be enforced in New York by obtaining a turnover order against the judgment debtor's bank registered in New York and that bank will be obliged to turn over the funds of that customer even if the customer's bank account is held at an overseas branch of the bank.

For judgment creditors, this presents an excellent new opportunity to enforce against judgment debtors' assets worldwide. However, banks subject to these orders may find themselves in a difficult position. If, for example, a New York court orders the New York branch of a bank to turn over the funds of a customer held by that bank in England, the bank may find that it would be acting in breach of mandate to its customer in England if it turns over the funds (meaning it will likely end up paying out of its own funds). If the bank fails to comply with the turnover order though, its New York branch will be in contempt of court.

By contrast, the English courts will not allow a third party debt order to be made in circumstances where the payment by the bank would not be a good discharge of the debt owed to its customer.

The decision in Koehler v The Bank of Bermuda Limited may yet be subject to appeal in the US Supreme Court. However, in the meantime this decision creates opportunities for judgment creditors with unsatisfied judgment debts or arbitral awards.

For more information about the case and its implications, click here.

Financial institutions

Enhancing the FSA's powers - Reforming financial markets

Simon Lovegrove

Earlier this year the FSA's CEO, Hector Sants, warned firms that they should be "very afraid" of the FSA. The FSA has put forward a new Supervisory Enhancement Programme (SEP) whereby the effectiveness and intensity of its supervision of banks is being increased. The SEP also requires the FSA to focus on the business models and strategies of firms, as well as the systems and processes they put in place to support this.

But for the UK Government this has not been enough. On 8 July 2009, HM Treasury published a White Paper, Reforming financial markets, which set out further proposals for regulatory reform in light of the financial crisis. Among the reforms that the UK Government proposed was an extension of the powers and objectives of the FSA.

The proposed extension involves:

The FSA being provided with a formal, statutory objective for financial stability and its rule-making powers extended to give it clearer legal authority to set rules the purpose of which is to protect wider financial stability.
The FSA's powers are extended to deal with individual institutions on a case-by-case basis through firm specific interventions.
The FSA to receive enhanced enforcement powers to enable it to deal with market misconduct. The Government proposes, within any limits set in EU law, to give the FSA a power to suspend individuals or firms for misconduct and to penalise individuals who perform a controlled function without FSA approval.
The FSA to be given the power to keep the scope of regulation under review, gathering necessary information from unregulated institutions to determine whether they pose a threat to stability and whether they should be brought under formal FSA supervision.

The extended powers came two days after the FSA said that it would double or triple the size of fines for misbehaviour and compliance failings, ushering in an era of penalties of GB£50 million or more.

Perhaps the time has come when we should start being very afraid of the FSA.

In the meantime, the deadline for responses to the Government's White Paper is 30 September 2009.

The Walker Review

Prudence Richards and Mathew Rutter

On 16 July 2009, HM Treasury published a consultation paper prepared by Sir David Walker (Walker Review) in which he recommends substantial changes to the way the boards of banks and other financial institutions (BOFIs) function, in particular through boosting the role of non-executive directors in the risk and remuneration process.

The Walker Review contains 39 recommendations based on five key themes:

The existing UK Combined Code on Corporate Governance (Combined Code), administered by the Financial Reporting Council (FRC), remains fit for purpose. The "comply or explain" approach to guidance and provisions under the Combined Code should continue to provide the basis for better corporate governance practice in BOFIs, although some provisions require amplification and better observance.
A "culture of challenge" within the boards of BOFIs, especially on decisions relating to risk, will be encouraged. To achieve this, close attention should be paid to board composition and non-executive directors (NEDs) should be expected to commit more to their role in terms of time and training. The chairman's role in all of this will be paramount.
As the core objective of a BOFI is the successful arbitrage of risk, board level engagement in the high level risk process should be materially increased. In particular, this will involve a dedicated NED to focus on risk issues in addition to, and separately from, the executive risk committee process.
There is a need for increased communication and engagement with institutional shareholders to support long-term improvement in performance. New "Principles of Stewardship" will be introduced, with which all institutions that are authorised to manage assets for others will be expected to conform on a "comply or explain" basis.
Existing board remuneration committees should be extended to cover the remuneration framework for the entire organisation, with an obligation to disclose details of the remuneration of certain high-earners. Incentive payments should be deferred. At least half of variable remuneration should be in the form of long-term incentive schemes with vesting deferred for up to five years. If the remuneration report receives less than 75% of the total votes cast, the chairman of the remuneration committee should be subject to re-election.

The Walker Review envisages that most of its recommendations will be incorporated as guidance and provisions in a revised Combined Code (which the Financial Reporting Council (FRC) is also reviewing at the same time).

The consultation extends until 1 October 2009 and the final version of the Walker Review and recommendations are due to be published in November 2009.

Tax

Tax Code of Practice for Banks

Louise Higginbottom

HM Revenue & Customs (HMRC) are consulting on a voluntary tax code of practice which banks operating in the UK will be asked to sign (Code). The Code represents a significant departure from normal practice as banks which sign up will no longer be able to arrange their affairs as they please, but will be required to reject transactions that result in tax avoidance. This will be determined not by reference to the letter of the law, but by its 'spirit', or the so-called intention of Parliament. Although signing up will be voluntary, banks which do not will face greater scrutiny.

The Code has three sections:

Governance. This requires banks to have a formal tax governance regime which includes a process for approving tax products.
Tax planning. This requires banks not to engage in tax planning, other than that which supports genuine economic activity. Where a bank is acting as principal, transactions should not be structured with tax results that are inconsistent with the economic result unless this is the aim of specific legislation. In such cases, transactions must not be structured so as to give a tax result that is 'contrary to the intentions of Parliament'. Banks should also not promote arrangements that are contrary to the intentions of Parliament. They should also ensure that remuneration is structured so that proper amounts of tax and national insurance are paid.
Relationship with HMRC. This requires banks to work co-operatively and openly with HMRC. Where proposed transactions may be contrary to the intentions of Parliament they should be explained to HMRC in advance.

Although implementing the governance and relationship aspects of the Code should not be too onerous for banks, the breadth of the tax planning provisions is likely to be of concern as they appear to leave little scope for tax planning. Examples of tax avoidance are cited, but these do not contain sufficient detail to provide a satisfactory understanding of HMRC's reasoning and there is no commentary on how or why the examples go against Parliament's intention: "it is usually self-evident that a tax result is contrary to the intention", seems to be the approach.

In the current economic climate banks may find it hard to justify not signing the Code. However, banks which do sign will find themselves in a different position from near competitors in different sectors, and banks that do not sign up. A more balanced approach may be a code which combines the governance and relationship proposals with a tax planning section which prohibits extremes of tax avoidance.

PLC Global Finance update for July 2009: United Kingdom | Practical Law