Following a recommendation by the Rights Issue Review Group established by HM Treasury, the Association of British Insurers (ABI) has changed its guidelines on the expectations of institutional investors on the issue of shares. The new guidelines are expected to speed up the rights issue process and are likely to lead to a series of new capital raisings.

The new guidelines concern the requirement on companies to obtain shareholder authorisation of power to allot new shares and for the disapplication of pre-emption rights (sections 80 and 95, Companies Act 1985).

The guidelines will mean that companies are able to issue up to two-thirds of their existing capital without the requirement to hold an extraordinary general meeting. The previous guidelines allowed for only a third of existing capital to be issued.

The FSA has used a breach of the Principles for Businesses to call Aon (the risk management and insurance company) to account for inadequate systems and controls specifically related to preventing corrupt activity in connection with the promotion of their business in high risk jurisdictions.

Aon discovered two suspicious groups of transactions involving third parties in June 2006. A proper assessment was not undertaken until May 2007, following enquiry from an overseas enforcement agency. Shortly afterwards Aon self-reported the potential irregularity to the FSA.

Aon's review and the FSA investigation resulted in the identification of 66 irregular payments to foreign parties operating in Bahrain, Bangladesh, Bulgaria, Burma, Indonesia and Vietnam, and the imposition of a GB£5.25 million financial penalty.

The penalty was in respect of behaviour on behalf of the corporate which was neither deliberate nor reckless, in circumstances where the company had compliance measures in place, including third party authorisation and payment procedures, a code of conduct and an annual self certification process to ensure that staff had read the code.

In the FSA's view these were clearly not enough and more focused training, better due diligence processes concerning business acquisition in high risk jurisdictions and better monitoring of those processes were required.

The FSA's Final Notice was the outcome of a settlement agreement and the standards set out in the Notice were not the subject of any judicial scrutiny, are not necessarily binding precedent and do no more than state the regulator's expectations of the standards required.

But it serves to demonstrate that, in the regulated world, if something goes wrong, the presumption of the regulator will be that the systems and controls designed to mitigate the risk of that happening are inadequate and it will require proof of a well documented and impressive system to rebut that presumption. Further, the Notice shows the importance of an organisation acting promptly in relation to its systems and controls and not just focusing on the incident of corruption itself.

This result may be a foretaste of things to come in the fight against corruption and other instances of unethical behaviour. The FSA is able to use its enforcement powers within the regulated sector for these purposes. However, the Law Commission has recently recommended, and in due course we can expect to see, new legislation on corruption which will expose all companies to criminal sanctions where they are found to have inadequate systems in place to deter corrupt activity when it occurs. Any conviction for this new offence, however, would be by a jury verdict rather than as a consequence of an administrative decision by a regulator.

In December 2008 the FSA published its much anticipated consultation paper (Strengthening liquidity standards (CP08/22)) setting out its views on the future of liquidity regulation in the UK. The proposals contained in CP08/22 are far reaching and as a result many institutions will need to significantly reshape their business model over the next few years. The FSA makes no apology for its new 'tough prudential standards'.

One of the key components of the new regime for UK banks, building societies and full scope BIPRU investment firms (excluding BIPRU limited licence and limited activity firms) is the Individual Liquidity Adequacy Standards (ILAS).

The FSA has opted for the ILAS approach as it feels that the current one-size-fits all quantitative liquidity regimes do not capture the particular circumstances of individual firms and may discourage firms from assessing and mitigating their own liquidity risk properly.

Under the FSA's proposals ILAS BIPRU firms will be required to carry out an individual liquidity adequacy assessment (ILAA) of the type and quality of liquidity resources it thinks it should hold against the sources of liquidity risk that could occur.

The different kinds of ILAA stresses are discussed in detail in paragraphs 4.22 to 4.29 of CP08/22 and generally cover:

The FSA has determined the number of sources of liquidity risk that it thinks would crystallise as a result of the stresses. These are covered in detail at paragraphs 4.30 to 4.72 of CP08/22 and include:

The FSA will expect a firm to carry out its ILAA at least once a year. More frequent ILAAs are expected where the firm changes its business, strategy, nature or scale of the activities or operational environment in a way that suggests that its level of liquidity resources is no longer adequate. The FSA will review a firm's ILAA as part of its Supervisory Liquidity Review Process.

The deadline for comments on the ILAS proposals in CP08/22 is 4 March 2009.

During an economic downturn, long-term share awards can decrease in value to such an extent that they cease to incentivise employees or facilitate their retention.

This is particularly the case for "underwater" share options, which have exercise prices greater than the current share price. For many companies, options granted before the current downturn will now be underwater.

Set out below are some practical solutions to underwater options that companies may wish to explore as part of their annual review.

The UK Government has published details of its proposed worldwide debt cap. This will place an upper limit on the amount which UK companies can obtain tax relief for group financing expenses. This limit should, however, not restrict tax relief for the funding costs of most third party debt (for example, interest on facilities from third party banks) as it will, generally, only apply to intra-group financing expenses (including the financing element of certain finance leases, and debt factoring arrangements).

Calculating the amount of the restriction may not be straightforward. It requires two figures to be calculated, and then compared to each other. The first amount (the tested amount) is the (internal) financing expenses of the UK members of the group. This is the most that can be disallowed. The second amount (the available amount) is the net external financing expenses, as set out in the consolidated accounts, of the worldwide group which the UK companies are members of. As the worldwide debt cap does not deny tax relief for the funding cost of most third party debt, the corollary is that such financing is excluded from the available amount. The available amount determines the amount actually denied - relief is denied to the extent that the tested amount exceeds the available amount.

As the cap operates by reference to the worldwide group's level of external financing expenses, it will favour more highly externally leveraged groups. These groups will be able to locate more tax-deductible debt in UK companies than will groups which are not so highly leveraged. Of course, as other restrictions on funding costs will continue to apply, a UK company may be denied tax relief for funding costs even though its net intra-group financing expenses are less than the worldwide group's net external financing expenses; for example, if that UK company is thinly capitalised, or within anti-avoidance rules (which are being extended at the same time).

The worldwide debt cap does operate in a simpler manner than the interest allocation rules operated in other jurisdictions, and which were rejected by the UK Government. However, the proposed cap is not without difficulties and complexities; for example, special provisions are required to apply it to certain financial institutions (such as banks and insurance companies) and others required to hold regulatory capital.

The rules could come into force later this year, although the exact date will be determined by a Treasury order.