Financial Services Bill

The Queen delivered the legislative programme for Parliament for the next session this morning in Westminster.  There has been huge media interest in the Queen’s speech as the Labour government throws down the gauntlet to its rival parties in the run up to the General Election next year.

The Financial Services Bill is one of 14 and applies to the whole of the UK.  If implemented as the Government intend, it would:

• Establish a Council for Financial Stability. 
• Strengthen the FSA’s powers to curb bankers’ pay. 
• Force banks to set up a “living will” to make them easier to wind down if necessary.
• Ban unsolicited credit card cheques.
• Allow groups to bring court actions against financial institutions.

Another bill you might be interested in, is the (re-incarnation of the) Bribery Bill that makes it illegal to bribe a foreign official to obtain or retain business.  A business that fails to prevent a bribe being paid by their employees will incur a penalty, if the Bill is passed as proposed.   The Bribery Bill extends to England, Wales and Northern Ireland.

The BBC have a summary of all the Bills as do the FT.  General coverage of the Queen’s Speech at BBC and FT.

New Acts

It has been interesting to watch the progress of bills going through Parliament this month.  Both Houses of Parliament officially prorogued on 12 November, marking the formal end to the parliamentary year and will meet again for the State Opening of Parliament on 18 November.  During the past month, nearly 40 bills have lapsed or been dropped.  The Government appears to be clearing the table to concentrate on the bills that are important to them.  During the prorogation announcement on 12 November, 13 Bills became Acts:

• Apprenticeships, Skills, Children and Learning Bill
• Autism Bill
• Coroners and Justice Bill
• Driving Instruction (Suspension and Exemption Powers) Bill
• Green Energy (Definition and Promotion) Bill
• Health Bill
• Holocaust (Return of  Cultural Objects) Bill
• Law Commission Bill
• Local Democracy, Economic Development and Construction Bill
• Marine and Coastal Access Bill
• Perpetuities and Accumulations Bill
• Policing and Crime Bill
• Welfare Reform Bill

A couple of bills, the Equality Bill and the Constitutional Reform and Governance Bill have the benefit of carry-over provisions so that, not having completed by the end of this Parliamentary session, they can continue their progress in the next session.  Other bills will have to be re-presented in the next session.  There is a bit more detail in my “Tracker“.

Limited partnerships – proving their existence

From the 1 October 2009, banks will be able to rely on a certificate of registration as conclusive evidence of a limited partnership’s existence and registration.  The Legislative Reform (Limited Partnerships) Order will clarify the process for registration of limited partnerships by the registrar of companies.

Limitation periods – proposals for reform

A bill is to be published later this year that will propose a “primary” 3-year period for contract (and other) claims starting from, broadly, the date on which the claimant knows of the facts which give rise to the action and a “longstop” 10-year period starting from, broadly, the date of accrual of the cause of action. 

The ‘Limitation Bill’ will be published in draft as part of the provisions of the Civil Law Reform Bill later this year (2009) for pre-legislative scrutiny.  The draft Limitation Bill is expected to follow the terms of the draft Bill that was published by the Law Commission in 2001 with their report, following their consultation on reform of the Limitation Act 1980.  There is a shorter, 31 page, executive summary from 2001.

Equality Bill

The Government introduced the Equality Bill to the House of Commons on 27 April 2009.  The Bill is to strengthen existing equality law and introduce new measures against discrimination. The Bill makes it unlawful to discriminate against someone aged 18 or over when providing services, which will include the provision of financial services.  The second reading is due on 11 May 2009.

The Banking Bill

Roomfuls of people are playing games of “Pass the parcel of debt” for years.  Sometimes one room joins up with another roomful and they swap, paying each other as they go, and interchange with other rooms.  The music stops in some rooms.   What are those parcels worth when they are opened?  The Telegraph’s analaysis “The decade of debt is coming to a bloody end” gives an explanation of the financial position, although I think it ought to have included the huge pile of securitised consumer debt. 

Desperate times.  A new Banking Bill was laid before Parliament on 7 October 2008.  Events are happening faster than the legislators and consultees can react.  The creation of a Bank Reconstruction Fund reported in the FT (“Treasury readies fund to aid banks“) is not – yet – built into the draft Bill.  

The new law will be needed for any unfortunate bank that cannot be rescued by the Government.  For over a year, the Government have been mulling plans for legislation to cope with bank insolvency.  Last February, the found they needed to rush out the Banking (Special Provisions) Act 2008 to cope with the foundering of Northern Rock.  (The Act is not specfic to the Rock and, originally with a short shelf-life, has been extended to February 2009.)  Now the Banking Bill has been published which creates a permanent statutory regime for dealing with insolvent banks.   

Failing banks

The Bill creates “stabilisation powers” in a “Special Resolution Regime” (SRR) that gives the tri-partite authorities, the FSA, the Bank of England and HM Treasury a method to deal with banks in financial difficulty.  The stabilisation powers are the powers to effect the transfer of shares by law.  Under the SRR, there is a “power to protect certain interests” – security interests, set-off, close-out or netting arrangements.  There are three stabilisation options: transfer to a private sector purchaser, transfer to a bridge bank or transfer to temporary public sector ownership.

Depositor protection

A new Bank Insolvency Procedure (BIP) sets out the way to wind up a failed bank and to make rapid Financial Services Compensation Scheme payments to claimants (or to another bank).

There are new powers for HM Treasury in relation to the use of the Financial Services Compensation Scheme to contribute to the cost of the Special Resolution Regime.  The Schemes rules are governed by the FSA and the rules were changed by the FSA on 7 October to increase the protection of consumer deposits to 100% of the first £50,000.  Bank directors who have deposited their cash with their own bank are not covered.

Bank administration

There is a new bank administration procedure.  A court-appointed administrator would administer the affairs of an insolvent residual bank where the rest of the bank is transferred to a private sector purchaser or a bridge bank under the SRR.

Payment systems to be regulated

The Bill will give the Bank of England a formal regulatory role in bank payment systems.  Payment systems are different networks for the transfer of money (or credit) between members of the systems.  They are governed by their own rules and at the moment are not subject to formal regulation.  The FSA has a statutory responsibility for Recognised Clearing Houses which have payment systems.

Scottish and Northern Irish banknotes

The Bill then turns (Part 6) to the issue of banknotes by Scottish and Northern Irish banks.  The banks have been allowed to issue their own notes for over 150 years but the Bank of England does not stand behind them: the notes are a liability of the issuing bank. The Bill permits the banks to continue to issue them but only in accordance with the Bill (issues relating to backing assets) and existing legislation is amended.

No disclosure of funding recipients

There are some provisions relating to the governance of the Bank of England, including a provsion which means the Bank does not have to disclose to whom it provides emergency liquidity. 

Building Societies

The Bill allows (s 229) HM Treasury to modify the Building Societies Act 1986 to allow financial assistance to be given to building societies.

Registration of charges

If the Bank of England or another central bank including the European Central Bank are granted a charge, the charge does not have to be registered under Part 25 of the Companies Act 2006 (registration of charges) (s230).  Along with non-reporting of emergency funding provision, this presumably is to keep bail-outs shrouded in a discreet veil.

“Funds attached” rule

The Bill abolishes (s 231) the “funds attached” rule of Scottish cheques.  The rule is that where a cheque is presented to the drawee for payment, it operates as an assignation (the Scottish term for assignment) of the sum for which it is drawn in favour of the holder of the bill.  The Bills of Exchange Act 1882 is amended and section 11 of the Law Reform (Misc Provs) (Scotland) Act 1985 ceases to have effect.  This section will come into effect 2 months after Royal Assent is granted to the Bill.

Financial Collateral

Right at the end of the Bill is the section on Financial Collateral Arrangements (s 232) which allows HM Treasury to make regulations about security, not limited to the Financial Collateral Arrangements Directive and to allow HM Treasury to make any provision that it thinks necessary to make financial collateral arrangements “commercially useful and effective”.  These can be retrospective.  And I see the Government have taken the opportunity to smooth over an issue a small band of us have been raising since the introduction of the Financial Collateral Arrangements (no 2) Regulations 2003: that the regulations were ultra vires because they went beyond the sope of the original Directive.   s 232 (5) provides for the regulations to be treated as having effect despite any lack of vires.

Events are moving fast – and move faster every weekend in the breathing space from the markets and their dense red screens.  The Government has got used in the space of a week to planning to deal with high-profile banks by shoring them up with cash, not by drafting infinitely complex legislative provisions to deal with the insolvency of putative, but presumably relatively insignificant institutions, in an orderly manner.   There is a black humour to be found in para 533 to the notes to the Bill, where “the Government anticipates that the provisions in this Bill will lessen the risk posed to public expenditure by the need to resolve failing banks.”

Financial Collateral Arrangements

Will we see any UK case law soon on the Financial Collateral Arrangements (No. 2) Regulations?  Recent events at Lehman’s in particular might throw up some issues.  In any case, the Privy Council are set to hear the Alpha Telecom v Cukurova British Virgin Islands’ case on 23 February 2009.  The Financial Markets Law Committee issued a paper on 17 July 2008 on the extent to which the Regs are ultra vires under the European Communities Act 1972.  When the UK gold-plated the Regulations back in 2002, I thought there might be an Animal v Oakley  vires problem and quite a number of other people thought so too.  However, the praticalities of undoing all the transactions since the Regulations were passed are too horrible to think about – which is perhaps why the Court of Appeal in the BVI reached the conclusion they did.

Rome 2

If you are dealing with cross-border finance agreements, “Rome 2″ might affect the drafting of your governing law and submission-to-jurisdiction clauses.  “Rome 2″ is the EU Regulation that harmonises conflict of law rules in non-contractual obligations (tort) in civil and commercial matters. 

Rome 2 applies from 11 January 2009.  Don’t relax.  It came into force on 20 August 2007 and the Regulation says, it “shall apply to events giving rise to damage which occur after its entry into force”.  Remember, there has to be a cross-border element to the transaction for Rome 2 to apply.  A purely domestic transaction will not be affected.  Under Article 4(2), where the contracting parties have their “habitual residence” in the same country when the event constituting the tort happens, there is no need to worry about Rome 2.  But as the habitual residence of companies and other bodies is the place of central administration (not the place of incorporation) it is possible for a company’s residency to change. 

The rules are complex.  There is a lot more to be said on the subject than can be squeezed in here, but very roughly, Rome 2 might apply to acts in tort in the context of lending and in the fields of competition, IP, product liability.

Tortious acts in the lending context might include a breach of the duty of care owed by an arranger to the syndicate; negligent misrepresentation by a bank to a prospective security provider; nuisance for wrongful entry by a mortgagee; or breach of the duty of care by a security trustee in relation to the realisation of the security. 

Some non-contractual obligations are excluded from Rome 2: the most important exclusion for bank lawyers relates to bills of exchange, cheques and other negotiable instruments.

Bribery and corruption

The Government plan to introduce a bribery bill in the 2008/9 parliamentary session, according to this year’s Draft Legislative Plan.  There was a Corruption Bill in the 2005/6 session, that did not survive the end of the session.  It is too early to say whether the new bill will be more or less a repeat of the abandoned one, but the Plan says it will reform the criminal law of bribery.  It will “provide for a new, modern and consolidated scheme of bribery offences to cover bribery both in this country and by foreign public officials abroad, and equip prosecutors and courts with the tools they need to tackle bribery of all kinds.”  The next Parliamentary session is scheduled to open on 3 December 2008.

Companies (Particulars of Company Charges) Regulations 2008

BERR have published The Companies (Particulars of Company Charges) Revised Draft Regulations 2008.  They, Err …, deal with the information to be provided to the Registrar of Companies on the registration of company charges under Part 25 of the Companies Act 2006.  These are timetabled to come into force on 1 October 2009. 

They are still in draft and capable of revision but I think this is unlikely.  The prescribed particulars for English and Welsh companies are—
“(a) the date of the creation of the charge;
(b) a description of the instrument (if any) creating or evidencing the charge;
(c) the amount secured by the charge;
(d) the name and address of the person entitled to the charge; and
(e) short particulars of the property charged.”

For Scotland, the prescribed particulars are:

“(a) the particulars prescribed by regulation 2; and
(b) in the case of a floating charge, a statement as to any provisions of the charge and of any instrument relating to it which prohibit or restrict or regulate the power of the company to grant further securities ranking in priority to, or pari passu with, the floating charge, or which vary or otherwise regulate the order of ranking of the floating charge in relation to subsisting securities.”