PLC Global Finance update for August 2009: United Kingdom

Practical Law UK Articles 9-500-1599 (Approx. 4 pages)

PLC Global Finance update for August 2009: United Kingdom

by Norton Rose LLP

Corporate governance

FSA sends letter to clarify the role of activist shareholders

Laura Hodgson

The FSA has written to the Institutional Shareholder Committee (ISC) to set out how activist shareholders should engage with the boards of companies in which they have invested to promote good governance.

Stronger shareholder engagement with boards of directors was among the recommendations of Sir David Walker in his July Consultation 'A review of corporate governance in UK banks and other financial industry entities'.

The failure of institutional investors to use their influence to prevent poor management has been seen by many commentators as one of the failings at the root of the current financial crisis.

FSA chief executive, Hector Sants, believes that investors have a responsibility to be more active - both individually and in collaboration with other investors - to maintain the effectiveness of boards and to prevent mis-management.

The letter to the ISC responded to concerns expressed by institutional investors over the extent to which more active shareholder engagement was consistent with elements of the existing regulatory regime.

The main areas which had raised concerns were: market abuse; disclosure of substantial shareholdings; and change in control. The FSA letter sets out the regulator's approach to these issues:

Market abuse. The FSA states that the market abuse rules do not prevent investors from engaging collectively with the management of an investee company. However, the FSA considers that trading on the basis of knowing another investor's intentions or working jointly to avoid disclosure of shareholdings could constitute market abuse.
Disclosure of substantial shareholdings. The FSA rules on disclosure of major shareholders require that investors who have agreed to follow the same long-term voting strategy should aggregate their shareholdings when considering whether their shareholdings reach the threshold level required for disclosure. This is unlikely to include the kind of ad hoc discussions and understandings which might be reached between institutional shareholders in relation to particular issues or corporate events.
Change in control. Under the EU Acquisitions Directive, implemented in the UK earlier this year, FSA approval is required when investors are acting "in concert" and where a controlling shareholding is reached in a regulated firm (10% or more). Although "acting in concert" is not defined in the Directive, the FSA considers that it is not intended that the phrase should capture ad hoc discussions and understandings reached in good faith solely aimed at exerting influence intended to promote generally accepted principles of good corporate governance.

The FSA letter states that the regulator is "satisfied that there is no fundamental inconsistency" between existing regulatory requirements and an increase in collective engagement by institutional shareholders designed to raise concerns on corporate issues or matters of governance.

Financial institutions

Icelandic financial crisis survey - international investors left out in the cold

Tomas Gardfors and Joe Tirado

The Norton Rose Group has just published its fifth survey tracking market views on the global financial crisis. The subject of the latest survey – the consequences of Iceland's actions in dealing with its financial crisis – is the first country-specific survey we have carried out.

The survey sought the views of international financial institutions about Iceland's handling of its financial crisis. The respondents were mainly large, mainstream European banks.

A quarter had market values of EUR2 billion to EUR10 billion with almost half capitalised at EUR10 billion to EUR20 billion. They represent institutions who invested savers' money in what was believed to be a successful western economy closely affiliated to the European Union.

The survey finds a collapse of trust in Iceland among international investors at a time when some commentators are speaking of Iceland's application to join the EU being "fast-tracked".

There is near unanimity (95%) among respondents that the Icelandic authorities did not respond properly to the country's crisis. Respondents criticised lack of disclosure and dialogue with creditors and long delays in the process.

Almost all respondents (98%) say Iceland has not treated international creditors fairly, the most condemnatory verdict on any of the questions. Respondents point to lack of transparency and inclusion, arbitrary treatment, self-interested actions and long-term damage to Iceland's credibility.

Key to the country's loss of credibility is investors' belief (74%) that Iceland has failed to comply with laws by making retroactive changes to its own legislation and flouting international conventions and practices governing the treatment of creditors. The country added to this lack of trust through what investors see as a lack of transparency (77%) or dialogue (81%).

Investors are now ready to take legal action to secure a fairer settlement for international creditors, with 93% of respondents saying they would consider doing so.

Almost 90% of respondents see no recovery in the country's financial sector for at least two years. No one expects a quick fix, reflecting investors' complete loss of faith in Iceland's financial system and institutions.

There is a complete collapse of confidence in Iceland's institutions, with lack of faith in the government (91%) and lack of trust in the financial regulator (97%).

Investors see Iceland's problems as largely of its own making rather than as a direct result of the international financial crisis. Some 86% point to lack of domestic controls, and more than a quarter blame a home-grown financial crisis or simple greed. As one investor says, "The global crisis only revealed what was wrong with Iceland."

This loss of trust threatens Iceland's access to the future foreign investment it needs to get back on its feet. More than 90% of respondents, who already hold a stake in Iceland, say they are unlikely or highly unlikely to invest again. This reflects the belief among international creditors that Iceland has failed to give fair and equitable treatment to international investors and has refused to play by the international rules expected of trusted economies.

Iceland is negotiating to join the EU but three-quarters of respondents do not believe it is ready to do so. The sentiment suggested by the survey from international investors is that Iceland is isolating itself. The country needs to change that view if it is to restore faith in its financial system and economy.

For more information on the survey, click here.

What's on your agenda?

Simon Lovegrove

This year the financial services industry has been inundated with papers from the FSA on a level not seen since the implementation of MiFID in 2007. For example, the FSA has so far published 15 Policy Statements, whereas last year it only published 13. During 2007 the FSA published 24 Policy Statements and it is even money whether this will be exceeded this year.

The figures tell a similar story when Consultation Papers are considered. So far this year the FSA has produced 22 Consultation Papers. Last year it produced 25 and in 2007 24 Consultation Papers were produced.

The high volume of papers being produced by the FSA begs the question whether there is actual adequate consultation on each paper. Whilst firms need to pay attention to what the regulator is publishing they also need to carry on with their business. Often, they simply will not have time to consider every detail being produced. In light of this, the role of industry bodies (which have been working very hard this year) in the consultation process becomes even more crucial.

The summer break has only offered a momentary respite to the avalanche of FSA papers. The question now is what further papers will be produced for the remainder of the year. At the end of August the FSA published its latest Handbook development newsletter and listed its forthcoming publications. Key publications will include:

Discussion Paper on Solvency II: Preparing for implementation (September 2009).
Policy Statement on strengthening liquidity standards 3 (September 2009).
Policy Statement on strengthening liquidity standards 3 - liquidity transitional measures (September 2009).
Policy Statement on liquidity standards 2 - liquidity reporting (September 2009).
Consultation Paper on improving standards of governance (Q4 2009).
Discussion Paper on the FSA's mortgage market review (October 2009).
Policy Statement on stress and scenario testing (November 2009).
Policy Statement on a specialist sourcebook for Building Societies (December 2009).
Policy Statement on funds of alternative investment funds (December 2009)

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