PLC Global Finance update for September 2010: United Kingdom

Practical Law UK Articles 8-503-4821 (Approx. 5 pages)

PLC Global Finance update for September 2010: United Kingdom

by Norton Rose LLP

Financial markets regulation

Green light given to European regulatory overhaul

Laura Hodgson

On 7 September 2010, the European Council formally approved plans to rebuild the supervisory architecture of financial services in the European Union (EU). The plans will introduce three new supervisory authorities responsible for the stability of banking, insurance, and securities markets, as well as create a European Systemic Risk Board in a move which many believe will represent a shift towards greater centralised control over financial services in Europe.

The reforms have been introduced in response to failings identified during the financial crisis. The de Larosière report, published in February 2009, identified that a patchwork of divergent rules and gaps in regulation had left European financial markets exposed to unprecedented risk. The report recommended a series of measures to strengthen the supervisory structure in the EU. These recommendations have since been endorsed by the Commission and were formalised in proposals for reform in May 2009.

A new European Systemic Risk Board (ESRB) will monitor potential macro-economic threats to financial stability and, where necessary, make recommendations for appropriate action to be taken to reduce risks to European financial markets. The ESRB has been described by Michel Barnier, Commissioner for Internal Markets, as a "European radar screen". It is anticipated that the ESRB will be able to identify any emerging threats and act swiftly to deflate any future financial crisis.

The new supervisory authorities (ESAs) will be given powers and responsibilities to oversee the supervision of banks, insurers and securities markets. The current Level 3 Committees (CEBS, CESR and CEIOPS) will be replaced by the European Banking Authority (EBA), the European Securities and Markets Authority (ESMA) and the European Insurance and Occupational Pensions Authority (EIOPA). The main decision making body of each ESA will be a Board of Supervisors consisting of the heads of the relevant national supervisors from Member States, as well as a chairman.

There have been considerable negotiations on the powers of the ESAs, with member states strongly resisting too much control being handed to the new authorities. It seems, however, that agreement has now been reached on the role and responsibilities of these new bodies. The ESAs will have the power to develop various technical standards to ensure that exceptions, derogations and inconsistencies in the application of EU law are removed. At present, the Level 3 Committees can only issue non-binding guidance. Under the new regime, ESAs will be able to produce technical standards for those areas specified in relevant legislation which will then be endorsed by the Commission in order that they have direct legal effect.

The authorities will be given the power to take decisions which are directly applicable to individual financial institutions in cases of manifest breach or non-application of EU law. In addition, this power will allow each ESA to direct financial institutions where national authorities are in dispute. They will also have the power to prohibit or restrict harmful financial activities or products in "emergency situations". Following considerable negotiation, only national governments will be able to declare the existence of such emergency circumstances.

The new ESAs will have a strong role to play in the supervision of cross-border financial institutions. The ESAs will be able to settle disputes where national supervisors in a college disagree over a course of action. The Commission has stressed that this course of action will only be applied where the action of a national authority would have a serious detrimental impact on either the protection of policyholders or the financial stability of a member state.

The agreement will be put to a European Parliament plenary vote later in September. If approved, the new system is expected to be up and running by January 2011.

Pensions

Payments to employers: Section 251 of the Pensions Act 2004

Ed Hunnisett

Section 251 of the Pensions Act 2004 (Section 251) restricts payments of funding surplus to participating employers from pension schemes to which it applies. These pension schemes may not make such payments unless a resolution in the required form has been passed by the pension scheme's trustees. If the trustees decide to pass such a resolution (which they are not obliged to do), it must be passed before 6 April 2011; otherwise, the ability to make such payments will be lost completely.

Broadly, Section 251 applies to pension schemes which were established before 6 April 2006 and immediately before that date which:

Were occupational pension schemes established under trust (including both defined benefit and defined contribution pension schemes).
Were not winding up.
Were "exempt approved" for the purposes of receiving favourable tax treatment from HM Revenue and Customs.
Had 12 or more members.

Subject to the passing of a resolution, Section 251 states that "no payment" may be made to participating employers from these pension schemes. A common sense interpretation of this restriction is that it only applies to payments of funding surplus to participating employers whilst the scheme is on-going. However, Section 251 could be interpreted literally as restricting any payment to participating employers from the pension scheme. This literal interpretation could result in the restrictions applying to the payment of surplus on a winding-up or other amounts owed to the participating employers by the pension scheme.

Written notice of the proposal to pass the resolution must be provided to the pension scheme's members and participating employers at least three months before the resolution's effective date. Therefore, the latest date for giving notice is 5 January 2011. Trustees and participating employers should review their pension scheme's rules to establish whether they include provisions which are affected by Section 251. If so, consideration should be given as to whether a resolution to maintain the status quo should be passed.

Tax

Tax treaty relief: HMRC Syndicated Loans Scheme

Adam Willman

From 1 September 2010, HMRC's guidance relating to streamlined treaty relief for syndicated loans has been reissued as the Syndicated Loan Scheme (SLS). Where certain payments of interest are made from UK borrowers to lenders in other jurisdictions, any UK withholding tax may be reduced or eliminated pursuant to a relevant double tax treaty, provided clearance is first received from HMRC.

The formal treaty clearance process involves certificated claims from all foreign lenders and takes some time to complete. In 1999, in order to mitigate the borrower's cost of paying interest during this period, the Provisional Treaty Relief Scheme (PTRS) was introduced to allow the borrower "temporary" permission to pay interest at the reduced or nil rate pending the outcome of the formal clearance application. The scheme was restricted to two situations:

A single non-UK lender and an unconnected UK corporate borrower (a one-to-one loan).
Where there were multiple non-UK corporate lenders with a syndicate manager (SM) acting on their behalf, and an unconnected UK borrower (a syndicated loan).

From 1 September 2010, HMRC discontinued the PTRS for one-to-one loans and replaced it with the Double Tax Treaty Passport Scheme. (See DTTPS). For syndicated loans, the substance of the PTRS remains in place but has been reissued as the SLS.

What is the SLS?

The SLS is a working arrangement that allows the SM to apply for withholding tax relief and provide the associated necessary information to HMRC on behalf of all qualifying lenders in the syndicate, the SM generally acting as the main channel for communications. The application details the lenders in "blocks" according to the rate of treaty relief. If HMRC is happy for a syndicate to be accepted into the SLS, it will issue a formal direction to each UK borrower that it can pay interest gross or with the appropriate reduced deduction (as the case may be). The SLS includes a procedure for existing syndicates whose members have already individually obtained directions, to enter the SLS upon a new member joining the syndicate.

The SLS does not apply to "see-through" entities (such as US limited liability companies or partnerships) which must make their own applications. However, if "see-through" entities are providing less than 20% of the total value of the loan and make up less than 20% of the total number of lenders, an SM may continue to make an application on behalf of the other lenders. Periodically, HMRC may review the members of a syndicate and request an SM to provide details of the arrangements in place to meet its SLS undertakings.

SLS v PTRS: the main differences

The SLS Guidelines for syndicates are very similar to those for the PTRS with a number of small changes:

The SLS Guidelines include a section detailing the necessary commitment required of the syndicate and the SM. For example, HMRC expects a syndicate's participation in the SLS to be a long-term venture. Where there is evidence to the contrary, HMRC may decline to accept a syndicate into the SLS.
HMRC will issue a formal direction to each UK borrower at the outset. Previously HMRC issued the SM with a provisional letter of acceptance which the SM then had to copy to each lender.
The application forms for an SM to apply for authorisation to enter the SLS remain largely unchanged, although they have been updated and made more user-friendly.
The SLS application form requires the SM to include an additional block containing lenders which are "treaty passport holders" under the new DTTPS (as long as the SM is satisfied that the lender so qualifies).
As mentioned above, HMRC will continue to conduct periodic reviews of the membership of individual syndicates and the arrangements that SMs have made to meet their SLS undertakings. However, the previous timetabling for such reviews has not been repeated in the SLS Guidance.

Conclusion

The SLS will help to reduce the compliance burden for UK borrowers and foreign lenders in syndicates wishing to obtain UK treaty relief clearance, which in recent times has been a cumbersome and time-consuming process. It is to be hoped that this new process will allow UK borrowers to be able to enter into loans with non-UK banks without having to worry about potentially having to gross up for withholding tax, if treaty clearance is delayed.

PLC Global Finance update for September 2010: United Kingdom | Practical Law