Supreme Court to decide if London Whale notices identified Achilles Macris

In a previous blog we described how the FCA is facing a number of challenges from individuals arguing that they are identifiable from regulatory notices addressed to their employers. Individuals are granted third party rights under section 393 of the Financial Services and Markets Act 2000 (“FSMA“), which essentially provides that, if an FCA notice identifies someone other than the person to whom the notice has been given and is prejudicial to that person, a copy of the notice must be given to that person. Section 394 then allows the individual to make representations and request relevant documents before the  notice is published. In several live cases the FCA is accused of failing to respect those safeguards.

In mid-October the UK Supreme Court heard the FCA’s appeal from the Court of Appeal judgment in FCA v Macris [2015]. In that case the FCA had issued warning, decision and final notices informing JP Morgan that it was to be fined (to the tune of £138 million) due to failings in respect of a credit derivatives trading portfolio that lost the bank over $6 billion: the so-called “London Whale” trades.

Achilles Macris had a role in managing the portfolio. He has been personally fined £793,000 by the FCA for not raising the alarm about the trades being undertaken by JP Morgan’s chief investment office (“CIO“).  Whilst the FCA notices to JP Morgan did not refer to Macris by name, he argued that references in them to the “CIO London Management label” meant that he could be identified and that his third party rights should have been respected.

The Upper Tribunal and the Court of Appeal have both previously decided that Macris was identifiable in the notices. The Court of Appeal applied the following two stage test:

  • whether the relevant statements in a notice said to identify a third party, construed in the context of the notice alone, refer to someone other than the person to whom notice was given; and if so
  • whether (in the opinion of the relevant authority) words used in the notice would lead persons “acquainted” with the third party or who operate in the relevant industry (and who therefore have specialist knowledge of the circumstances) to believe, at the date of the notice, that the third party is prejudicially affected by the matters in the notice.

This test has subsequently been applied in Bittar v The Financial Conduct Authority [2015] (also discussed in our earlier blog). In that case it was decided that Mr Bittar was identifiable in a notice given to Deutsche Bank.  Mr Vogt (also a former Deutsche Bank employee) made a reference to the Upper Tribunal at the same time as Mr Bittar.  But it was decided that Mr Vogt could not be identified in the relevant notice.  Mr Vogt is seeking permission to appeal this decision. His application has been stayed pending the Supreme Court decision in Macris.

The FCA appeal to the Supreme Court in respect of Macris was heard before Lord Neuberger, Lord Mance, Lord Wilson, Lord Sumption and Lord Hodge. A date for the handing down of judgment is awaited. We will report on the court’s ruling once it is published.

If the Supreme Court agrees with the decisions of the tribunals below, the FCA will clearly need to exercise more caution as to the level of detail it includes in future decision notices. It may be diffficult for the FCA to make references to individuals in a way that does not make them identifiable by others in the financial services industry, particularly in respect of high profile matters. There is a risk this will neuter FCA notices and make it even harder to discern the full reasons behind adverse regulatory findings.

A related issue in some cases has been the risk of identification prejudicing the positions of individuals facing criminal prosecutions before a jury. Also, if individuals are identifiable, their rights to make representations and request disclosure of relevant material held by the FCA could further delay and complicate future investigations.  There is a fine balance to be struck by the FCA between avoiding a more complex process, having the ability to make clear public criticism of financial services firms, and safeguarding individuals’ rights under FSMA. The Supreme Court decision is awaited with interest.

One too many: summary judgment for bank in pub swaps case

Mr Marsden was in the business of buying, restoring and selling pubs and hotels, financed by loans from Barclays. In July 2006 he entered into an interest rate swap with the bank to hedge floating rate loans of £1.6 million advanced to buy two pubs in Suffolk and Derby (£750,000 and £850,000 respectively). The swap was terminated by Mr Marsden in July 2007 and he received a cancellation payment of £30,000 as interest rates had risen above the fixed rate.

In May 2007 he sold the Suffolk property and repaid the £750,000 loan. The Bank lent him a further £1.4 million (in addition to the remaining loan of £850,000) to buy another pub in Shropshire.  Further swaps were entered into as a hedge against the interest rate risk under the outstanding loans at a fixed rate of 5.63%.

After a fall in interest rates in 2008, like many similar borrowers Mr Marsden began having to make payments to the bank under the swaps. By 2009 he was in financial difficulty. In August 2009, he complained to the Financial Ombudsman Service that the bank had mis-sold him the swaps.  The FOS did not notify the bank of the complaint until May 2010.   Payments to the bank stopped for a period in 2010. In July 2010 the parties met to discuss a restructuring of the indebtedness. The bank said it would not agree a restructuring whilst the FOS complaint remained unresolved.  In September 2010, Mr Marsden withdrew the complaint.

Following further negotiations the bank offered a new loan in January 2011 to consolidate the liabilities. It was a condition of the offer that the swaps were broken. Mr Marsden accepted the offer in February 2011, and in March a settlement agreement was signed. In it he acknowledged that the settlement was “in full and final settlement of all complaints, claims and causes of action which arise directly or indirectly, or may arise, out of or are in any way connected with the Swaps“.

Despite the restructuring, the business continued to struggle and in May 2012 Mr Marsden was declared bankrupt.

In June 2012 the FCA announced that the bank (along with four other banks) had agreed to review past sales of interest rate hedging products to certain categories of customers. The bank subsequently offered Mr Marsden redress totalling £608,601.14 including interest. The offer provided that Mr Marsden could make a claim within 40 days for consequential losses, should he wish to do so.

Called to the bar

Mr Marsden sued alleging breach of statutory duty, negligence, breach of contract and misrepresentation in the sale of the swaps. The bank argued that these causes of action had been compromised by the 2011 settlement agreement.

Mr Marsden also brought claims for (i) restitution, on the grounds that the swaps were contrary to public policy and/or failed to comply with “statutory preconditions”; (ii) deceit; and (iii) breach of contract in conducting the review. The bank argued that, as well as being compromised by the settlement agreement, these claims were hopeless. The bank applied for summary judgment. The claimant argued as follows:

  • That the bank gave no consideration for the settlement agreement. But the judge concluded that the new loan agreement and the cancellation of the swaps were “part and parcel of the same overall transaction as the Settlement Agreement” and as such there was adequate consideration for the release of future claims against the bank.
  • That the bank’s refusal to restructure the lending until he withdrew his FOS complaint and signed the settlement agreement amounted to duress. The judge re-iterated the ingredients of duress: “…pressure, (a) whose practical effect is that there is compulsion on, or a lack of practical choice for, the victim, (b) which is illegitimate, and (c) which is a significant cause inducing the Claimant to enter into the contract”. It was held that the settlement agreementwas part of a commercial negotiation of the terms on which the Bank would provide a large new loan to a defaulting debtor“. There was no obligation on the bank to lend further to Mr Marsden while there was a complaint outstanding. As such, the settlement agreement was signed due to commercial considerations and not duress.


  • The scope of the settlement agreement was not wide enough to cover (or was incapable of covering) alleged misconduct, breach of regulatory duties, fraud, “sharp practice” (whereby the bank was aware of claims not known to the claimant), and breach of contract in respect of the swaps review. The court cited case law on the construction of settlement agreements, including Lord Bingham’s statement in Bank of Credit and Commerce SA (In Liquidation) v Ali (No.1):A party may, at any rate in a compromise agreement supported by valuable consideration, agree to release claims or rights of which he is unaware and of which he could not be aware, even claims which could not on the facts known to the parties have been imagined, if appropriate language is used to make plain that this is his intention“. It was held that the settlement agreement release clause was wide enough to cover all possible future claims, whether known or not. It was highlighted that even the widest wording would not normally exclude future fraud claims. As Mr Marsden had already made a misrepresentation claim, the settlement agreement was viewed as wide enough to cover deceit claims. In any case, the judge found no “sharp practice” by the bank.


The bank was awarded summary judgment against on the basis that the settlement agreement had compromised any possible claims in relation to the swaps. The claims had no realistic prospect of success. The judgment is reported as Marsden v Barclays Bank Plc [2016] EWHC 1601 (QB).

One for the road

This decision reasserts in the swaps mis-selling context that borrowers will be held to their agreements, including settlement agreements. It will remain very difficult indeed for a borrower that has signed up to a commercial settlement to unwind that agreement later by making creative allegations like economic duress, lack of consideration or that it can avoid the release it gave by alleging sharp practice. Banks can take comfort in the enforceability of settlements they agree (although remembering the limits on settling unknown or future fraud claims). They can also take heart that it is still possible to get fundamentally weak claims dismissed on a summary basis without the costs of a full trial.

MasterCard faces one of the UK’s first class-action lawsuits

Class Actions in the UK

Class actions have long been a feature of the US legal landscape. But until October 2015 there was no genuine “class action” procedure in the UK. Then the Consumer Rights Act 2015 (“CRA“) introduced collective proceedings that can be brought in the Competition Appeal Tribunal (“CAT“) by representatives of consumers or businesses.

While previously the UK had “opt-in” group litigation orders, these were really just a means of organising litigation where large numbers of claimants were actively pursuing similar claims. The CRA permitted “opt-out” collective actions for the first time.  In “opt-out” cases anyone resident in the UK who is within the defined class is automatically included in the action unless they opt out. There is no need for the representatives to identify all of the members or specify their losses. If the claim succeeds, aggregate damages will be awarded to the group of claimants (as opposed to an individualised assessment for each claimant).

Initially, the Government’s intention was to exclude funders, law firms and special purpose vehicles from acting as representatives for either consumers or businesses in collective proceedings. But no such provision was incorporated into the legislation or the CAT rules.

The new CRA regime will apply retrospectively. Collective proceedings are to be expected in respect of competition law infringements which have historically been identified by the UK and/or EU competition authorities.

The consumer class action against MasterCard

MasterCard now finds itself faced with a legal challenge brought by a representative under the CRA on behalf of consumers, on an “opt-out” basis.

 Multilateral Interchange Fees (“MIFs“) 

The action relates to a previous finding by the EU Commission that MasterCard’s MIFs were kept unfairly high. Interchange fees are paid by a retailer’s card acceptance provider to a consumer’s card issuer (such as MasterCard) every time a card transaction takes place.  The retailer’s bank pays the retailer the cost of the goods/services, less a service charge that is largely determined by the level of MIF.  Retailers then pass on the cost of accepting card payments to their customers, by way of increased retail prices.  Interchange fees can be bilaterally agreed between the issuing bank and the retailers bank, or, the default fee established multilaterally by MasterCard (the MIF) will apply.  The MIF should be limited to no more than 0.3% on credit cards and 0.2% on debit cards.

European Commission decision

In 2007, the European Commission issued a decision against MasterCard which was applicable to cross-border transactions using MasterCard and Maestro credit and debit cards in the European Economic Area. It found that MasterCard’s MIF breached Article 101 of the Treaty on the Functioning of the European Union (“TFEU“), because they restricted competition between retailers’ banks and inflated the cost of card acceptance by retailers. The Article 101(3) exemptions were not satisfied.   MasterCard failed in an appeal and in September 2014 the European Court of Justice confirmed that MasterCard’s MIF restricted competition.

Current collective proceedings

The representative of the consumer proceedings is Walter Merricks CBE, who was previously the Chief Financial Services Ombudsman and is a non-practising solicitor. Mr Merricks has instructed a law firm to file the claim.  This includes a plan for managing the claim – it is said that “the proposed class of 46 million consumers will be communicated with through a claims website, newspapers, magazines and social media”. It is reported that the claim has been quantified at £14 billion worth of charges borne by consumers.  The claim relates to MasterCard’s MIF to 2008, as following the European Commission judgment referred to above, MasterCard undertook to reduce its cross-border MIF to the recommended level. A litigation funder will provide funding of up to £40 million to Mr Merricks and his legal advisers.

The Sainsbury’s Supermarkets Ltd v MasterCard decision

The recent judgment in Sainsbury’s Supermarkets Ltd v MasterCard Incorporated and others is likely to have an impact on this consumer action.  In 2012, Sainsbury’s filed a claim against MasterCard UK seeking damages for loss suffered by Sainsbury’s due to MasterCard’s infringement of competition law, through its setting of the UK MIF.   On 14 July 2016, the CAT awarded Sainsbury’s £68.5 million plus interest, ruling that MasterCard had restricted competition by setting fees on card transactions in the UK.

MasterCard tried to use the “passing-on” defence, asking the CAT reduce the damages award because Sainsbury’s passed the costs to its customers. The CAT ruled that “no identifiable increase in retail price has been established, still less one that is causally connected to the UK MIF. Nor can MasterCard identify any purchaser or class of purchasers of Sainsbury’s to whom the overcharge has been passed who would be in a position to claim damages“.  The CAT confirmed that MasterCard would have had to prove that there was a further class of claimant (the consumers) who could bring an action because the overcharge was passed on. The CAT’s ruling on this point will potentially cut the other way now MasterCard is facing a class action by the consumers like those who could not be shown to have suffered a loss in the Sainsbury’s case.

Best in class?

The introduction of “opt-out” class actions along the lines of the US model is controversial, with many fearing it will see the rise of a US-style litigious culture driven by entrepreneurial funders and law firms seeking out opportunities to certify large classes and generate returns as much for themselves as the class they purport to represent. On the other hand, the competition law context might be one in which individual consumers lack the incentives and resources to take on large organisations without a class-action regime, meaning wide-reaching anti-competitive behaviour would never be redressed. Now that the CRA has one of its first high-profile cases, there will be a chance to see what the pros and cons of the new procedure will be in practice.

Financial Ombudsman makes adviser pay for failing to stop £250,000 fraud on client

The Financial Ombudsman Service has sent a clear message to financial advisers that they must be vigilant to the risk of fraud when processing transactions on behalf of their clients. In its 23 August newsletter the FOS highlighted a recent case in which an adviser was ordered to pay fraud losses that the Ombudsman considered could have been avoided had the advisor heeded clear “alarm bells” that a transaction might be fraudulent.

The Fraud

In the case before the FOS, a financial adviser’s client lost £250,000 in bond savings. Scammers hacked her email account and instructed her adviser to transfer funds to an account said to be a solicitor’s bank account in Hong Kong. The adviser instructed the client’s investment provider to make the transfer. But the investment provider could not trace the solicitors firm, and so declined to make the transfer.

The adviser emailed the client to explain that the money could not be transferred. The fraudsters replied providing details of a UK bank account in the client’s name. Although the account was in the client’s name, it was not her account. The investment provider highlighted to the adviser that the account details were different to their records. The adviser confirmed they were correct and the transfer went ahead.

The investment provider later sent a letter to the client confirming the withdrawal, which alerted her to the fraud.

The Remedy

The client reported the fraud to the police and luckily was able to recover £170,000. She asked her adviser to reimburse the shortfall. The adviser offered to pay only 25% of the £80,000 residual loss. The client brought her case to the FOS.

During the FOS investigation it came to light that the client had been a customer of the adviser for more than ten years and always attended face-to-face meetings when she wanted to discuss her investments. The client therefore expected the adviser to have at least phoned her before acting on email instructions to transfer a significant sum. In its defence, the adviser confirmed that the client had recently been emailing about a mortgage, so the email regarding the transfer did not seem odd. As the client had previously worked in Asia, it seemed reasonable for her to use a bank account in Hong Kong.

The FOS noted that “as a finance professional, the adviser would have been aware of the risk of fraud and scams”. It decided that the nature and content of the communications with the fraudsters should have put the adviser on notice of the risk of fraud. It commented that, “having received an email asking for such a large sum of money to be transferred overseas, the adviser could have realised something was not right. If that wasn’t enough, we thought alarm bells should certainly have started ringing when the investment provider said they couldn’t trace the firm of solicitors. We found it hard to see why, at that point, the adviser hadn’t phoned [the client]”. The FOS concluded that the adviser should have prevented the fraud, and ordered it to make good the shortfall in the client’s investments.

With an estimated £755 million lost to financial fraud in 2015, including £121 million lost to fraudulent bank transfer scams, this ruling suggests advisers will be called upon to be the first line of defence for their clients. They need to make sure they are up to date with potential fraud risks and remain vigilant, or risk bearing the cost.

End in sight for PPI claims? FCA updates on cut-off deadline

In our blog post “Shift towards a PPI cut-off deadline reported” (24 June), we explained that internal documents had revealed that the FCA was backing a call by banks for the introduction of a two year cut-off for new PPI claims.

The official FCA announcement was made on 2 August 2016. It confirmed that the FCA considers that its package of proposals regarding PPI complaints (as set out in the FCA’s November 2015 consultation) should be taken forward. The proposals included setting a deadline for bringing new PPI complaints, and a communications campaign to bring the proposed cut-off deadline to consumers’ attention.  It has been suggested that the consumer communication campaign could cost up to £42 million, which is likely to be shouldered by the banks.

Before making a final decision on the package of proposals, the FCA is “consulting on changes to the proposed rules and guidance concerning the handling of PPI complaints in light of Plevin” (the Supreme Court decision in Plevin v Paragon Personal Finance Ltd [2014] UKSC 61).

The proposed changes to the rules and guidance concerning the handling of PPI complaints were flagged by the FCA following responses received to its November 2015 consultation. They relate to three key aspects of the current rules and guidance:

  • to include profit share in the FCA’s approach to assessing fairness and redress;
  • to allow rebates received by a consumer when cancelling their PPI policy to be partly reflected in any redress due (reducing the redress); and
  • clarifying how firms should assess redress where commission or profit share rates varied during the life of the PPI policy.

Consultation on these proposed changes will close on 11 October 2016. If after that the FCA makes the final decision to proceed with the package of proposals, it has said it anticipates that:

  1. guidance concerning the PPI deadline, who is to meet the cost of the consumer communications campaign fee, and how changes to the handling of PPI complaints post-Plevin, will be published before the end of December 2016;
  2. any changes to the rules and guidance post-Plevin would come into force by the end of March 2017; and
  3. the rule setting the PPI cut-off deadline would come into force by the end of June 2017, with the consumer communication campaign starting at the same time, meaning a cut-off deadline in June 2019.

This delay could force Banks to set aside yet further funds to cover claims made during this longer than anticipated period. At least it now looks like final clarity on the matter can be expected before the end of 2016.

The future of market rigging investigations?

Forex hit the headlines once again in late July, after the arrest of HSBC global head of forex cash trading (Mark Johnson) at JFK airport in New York.   The US Department of Justice alleges that Mr Johnson (and Stuart Scott, who was HSBC’s head of forex cash trading for Europe, the Middle East and Africa until 2014) used a technique called “ramping” when arranging for Cairn Energy to purchase $3.5 billion in sterling. This means that the bank is said to have purchased the sterling for HSBC’s owns accounts, caused the price of sterling to jump, and resold it to Cairn at higher prices.

Accusations of misconduct in FX trading are sadly nothing new. But here the Cairn trade had already been scrutinised and given the all clear. In 2013 HSBC had engaged a law firm to conduct an investigation into its currency trading, including this trade. Such internal investigations are common in the financial services sector, and the regulator often relies heavily upon their findings to supplement its own work (although the regulator will generally “test” the evidence and conclusions). In this instance no breaches of the bank’s internal code of conduct were found.

The incident raises again the question whether the reliance on internal investigations into market manipulation scandals can continue, or, whether there will be pressure on regulators to insist upon independent external investigations in the future.

Forex rigging – a recap

The issues with FX manipulation arose in part because the FX market is unregulated, and as such there are no specific rules governing it. The absence of a physical FX marketplace also lends itself to the potential for rigging. Trading takes place on electronic systems, operated by large banks – and approximately 40% of the world’s dealing goes through London.  Currency prices fluctuate based on supply and demand, and in response to economic news.

To help with valuing multi-currency assets and liabilities, daily spot FX benchmarks (known as “fixes”) are determined. Until recently, the main fixes were calculated by Reuters based upon currency trades which took place between 30 seconds before and 30 seconds after 4pm GMT.  Because the fix was based such a short period, traders were able to collaborate and place aggressive orders during the one minute window to distort the fix.   Traders also shared confidential information regarding their clients’ activities to enable fixes to be manipulated. In 2014, the FCA fined five banks a collective of £1.1 billion for their roles in G10 spot FX manipulation.  Since then the fix window has been lengthened to five minutes, making it harder to manipulate.

Changes to the conduct of investigations?

Once it began to emerge that market rigging may have taken place, the banks involved all conducted their own internal investigations. The findings of those internal investigations were passed to the FCA and other authorities.

In 2014, the FCA announced a remediation programme, which required firms to “review their systems and controls and policies and procedures in relation to their spot FX business to ensure that they are of sufficiently high standard to effectively manage the risks faced by the business”.   Senior managers were asked to confirm that such action had been taken, with the focus being on clear accountability for the specific issues which the FCA had highlighted as requiring change.  Despite the advantages of a remediation programme, this still put the emphasis on firms to ensure their own compliance and accountability, with limited external checks.

In 2015 Jamie Symington – Director in Enforcement (Wholesale, Unauthorised Business and Intelligence) at the FCA – highlighted the perceived benefits of allowing firms to conduct their own investigations: an understanding of their own business enabling them quickly to investigate, establish the facts and remediate.  But Mr Symington noted that, in circumstances where the FCA may be considering taking enforcement action, it must consider whether an internal investigation will help or hinder the FCA’s investigation.  The FCA is alive to the fact that firms will have their own interests in mind when an investigation is being conducted.

If incidents like Mr Johnson’s arrest, some three years after an internal investigation found no fault, continue to arise, there is clearly a risk that regulators will think again about the way in which investigations in the financial services sector are conducted. That may ultimately entail fully independent, external investigations, either by skilled persons appointed under section 166 of FSMA or by some other bespoke procedure. Such a move would undoubtedly make investigations more costly and cumbersome to run, and as such more of a burden for the firms under investigation. The Johnson case certainly highlights once more the need for firms asking regulators to rely on internal investigations to ensure they are conducted by genuinely independent external professionals in a robust manner that will withstand scrutiny. Otherwise firms face the risk that scrutiny may be brought to bear in the US courts.

Financial Disputes Roundtable: “Get me my money back!” Tracing the Proceeds of Fraud and Cybercrime

For the next in our breakfast roundtable series, Laurence Winston and I will be joined by intelligence and investigations specialists James Stothard and Damian Ozenbrook of Blue Square Global to look at tracing and recovering stolen assets. Following on from our well-received recent roundtable session on how to react to a cyber-theft or fraud, we are looking forward to another lively Chatham House Rules discussion of a range of issues including:

  • Effective use of investigators and other asset tracing techniques
  • The investigator’s perspective
  • Looking behind complex trust structures and tracing ultimate owners
  • Following the money across jurisdictions
  • Enforcement tactics in the UK, EU and beyond

The roundtable will be taking place on 20 September 2016, with registration and breakfast from 8:15 and the discussion getting underway from 8:45. If you would like to join us please register here: places are limited.

Upper Tribunal refuses to stay regulatory proceedings pending a criminal trial


The Upper Tribunal (Tax and Chancery Chamber) hears references from decisions and supervisory notices issued by the Financial Conduct Authority (“FCA”) and other specified regulators. In this case three references were made by two former employees of Deutsche Bank (Messrs Bittar and Vogt) and a former Barclays Bank employee (Mr Moryoussef).

The references related to their third party rights under section 393 of the Financial Services and Markets Act 2000 (“FSMA”).  In essence, section 393 of FSMA provides that if an FCA notice identifies someone other than the person to whom the notice is given and is prejudicial to that person, a copy of the notice must be given to that person.  The references were made because the individuals in question had not been provided with copies of the FCA decision notices against their employers regarding LIBOR/EURIBOR manipulation.

There was some dispute about whether the individuals were identifiable in the notices. In November 2015 the Upper Tribunal had found that Mr Bittar was identifiable in the decision notice against Deutsche Bank.   In March 2016 it found that Mr Vogt was not identifiable. Mr Vogt is seeking permission to appeal this decision: his application has been stayed pending the Supreme Court’s judgment in Macris v Financial Conduct Authority [2015] EWCA Civ 490.

Mr Bittar, Mr Moryoussef and others have also been charged by the Serious Fraud Office with conspiracy to defraud in relation to EURIBOR manipulation.  The facts of the criminal proceedings overlap with the references to the Upper Tribunal.

FCA’s Applications

The FCA applied to stay Mr Bittar’s reference until the Macris judgment is released (the Supreme Court hearing is expected in October 2016) and the criminal proceedings have been concluded. The FCA also applied for Mr Bittar’s and Mr Moryoussef’s references to be consolidated, arguing that this would further the overriding objective.

Mr Moryoussef, Deutsche Bank and the SFO all supported the FCA’s application to stay the References.  Mr Moryoussef argued that he wanted to use his limited resources to defend himself in the criminal proceedings in priority to pursuing his reference and await the Supreme Court decision in Macris. He also shared the SFO’s concerns about whether the criminal trials would be fair if the regulatory proceedings had already been decided.

The SFO’s concerns regarding fairness were:

  • the risk of prejudice through publicity which might flow from any finding on dishonesty ahead of the criminal trial;
  • inconsistency between the Upper Tribunal and the criminal court; and
  • the risk of parties seeking to identify inconsistencies between the evidence during the regulatory proceedings and the approach of the prosecution in the criminal proceedings.

Mr Bittar opposed a stay, arguing that regulatory proceedings have an important public function and it was not appropriate to stay them simply because there are parallel criminal proceedings.


Timothy Herrington (the Upper Tribunal Judge) said “there is a strong presumption against a stay and it is a power which has to be exercised with great care and only where there is a real risk of serious prejudice which may lead to injustice“.  In his view, the only concern raised by the SFO could meet this test was the risk of publicity from a dishonesty finding ahead of the criminal trial.   This would be less of an issue if there was a significant time gap between the end of civil proceedings and the start of a criminal trial.

The risk of inconsistent decisions had previously been discounted by the Courts in R v Panel on Takeovers and Mergers, ex parte Fayed and others [1992] BCC 524.  In addition, the Upper Tribunal could put safeguards in place by restricting the use of material from its proceedings and/or not publicising its decision until after the criminal trial – Mr Herrington referred to Bankas Snoras v Antonov and another [2013] EWCA 131.

To further the overriding objective, the Upper Tribunal had to avoid delay, whilst balancing the competing interests of the parties.  It was unusual for the subject of criminal proceedings not to wish to stay parallel civil proceedings.  But in Mr Bittar’s case the risk of injustice could be addressed through case management.   The timing needed to be kept under review to ensure that the civil proceedings are not heard shortly before the criminal trial, leaving publicity fresh in the minds of the jury and/or witnesses.

Mr Moryoussef satisfied the Upper Tribunal that it was appropriate for his reference to remain stayed until the Supreme Court’s judgment in Macris, and to allow him to focus his resources on the criminal proceedings.  So it was decided that the question of consolidating the references would be revisited if the court decided to lift the stay on Mr Moryoussef’s reference.

The decision was published on 6 June 2016.

High Court backs bank on whether hedging is gambling

Derivatives can be used to hedge, speculate, or a hybrid of the two. An astute gambler may claim his strategy is like a “naked” derivative: a calculated attempt to profit from a mismatch between the odds and the chances of the bet paying out.   But is a buyer using derivatives doing the same thing as a gambler?  This question was revisited in WW Property Investments Limited v National Westminster Bank plc [2016] EWHC 378 (QB).

The background

Between 2004 and 2010, WW borrowed money from the bank on a floating interest rate.  To hedge those interest obligations, WW entered into three interest rate “collars” with the bank and later a swap. The collars and the swap turned out to be disadvantageous to WW. They were reviewed as part of the Interest Rate Hedging Product Review undertaken by the bank by agreement with the FCA. The review resulted in WW and the bank entering into a compromise agreement in respect of claims relating to the collars, although WW reserved a right to claim for additional losses under the review. No compromise was reached in relation to the swap. WW later sued for losses under the swap.

WW’s hand

Among other things, WW claimed that the collars and the swap were unlawful wagers. Counsel for WW played the following cards:

  1. interest rate hedges amount to “contracts for differences”, which are wagers at common law;
  2. wagers contain implied terms that the chances are equal and the parties possess equal knowledge about the odds;
  3. the collars and the swap were subject to these implied terms as they were not betting contracts regulated by the Gambling Act 2005;
  4. the collars and the swap each had a market value at day one in favour of the bank that the bank failed to disclose; and
  5. the bank was therefore liable to WW for breach of the implied terms.

His Honour Judge Roger Kaye QC, sitting in the High Court, did not consider the collars, holding that all claims relating to these had been compromised in the earlier settlement. He considered the arguments on the swap.

Betting against the odds

The judge had an advantage: the exact same hand had been played several times before. Notably it had been played by the same counsel on six occasions in two recent cases. Each time it was rejected.

In Nextia Properties Ltd v Royal Bank of Scotland and another [2013] EWHC 3167 (QB), it had been rejected summarily by the High Court, and then permission to appeal had been refused on three occasions: first, by Lord Justice Christopher Clarke on paper; second, by Lord Justice Vos sitting in the Court of Appeal ([2014] EWCA 740); and third, by Lord Justice Vos again following a renewed application for permission to appeal. It also failed in Derek Gladwin Ltd v Barclays Bank plc (2015, unreported) in both the High Court and (at the permission stage) in the Court of Appeal.

The judge criticised WW’s counsel for re-heating similar arguments, calling this “pointless, expensive, and wasteful litigation to the detriment of the courts time and resources and needs of other litigants”.

The judge followed the Nextia and Gladwin decisions and affirmed the decision in Morgan Grenfell v Welwyn [1995] 1 All ER 1 that a contract for differences could not be a wager if the “purpose and interest of [the parties] was something other than wagering” (i.e. if at least one party had a genuine commercial purpose). In the judge’s opinion, WW had entered into the swap to limit its interest rate risk on its loans as part of a genuine hedging strategy. The bank was under no obligation to ensure equal chance, or to disclose the day one “market value” of the contracts.

The judge also approved of Lord Justice Vos’s view in Nextia that the Gambling Act 2005 had replaced the common law on wagers entirely, such that contracts regulated under the Financial Services and Markets Act 2000 were now beyond the ambit of gambling law.


There is a history of buyers of derivative contracts arguing that they are unenforceable as either wagers or insurance agreements that did not comply with the respective legal rules. It is notable that the latest round of such attacks since the financial crisis has again been rebuffed by the courts.

That said, the judgments in Nextia, Gladwin, and WW Properties are brief, as they were in response to strike out, summary judgment and permission to appeal applications rather than full trials. They also did not have the most promising fact pattern for an attack on derivatives as wagers. Maybe another litigant will gamble on playing a better hand more successfully in the future.

Closing out derivative contracts following Brexit

Since the shock Brexit vote on 23 June there have been big movements in a number of financial markets, as participants of all types reposition themselves for the period of uncertainty that the leave vote has ushered in. Regardless of the eventual terms of a UK exit from the EU, market movements that have already happened can be expected to cause defaults under derivative contracts linked to the affected markets, such as FX and equity index derivatives. For example we can expect:

  • Margin calls made on out of the money counterparties not being met.
  • Events of default or potential events of default arising, for example, from ratings downgrades on sovereigns, financial institutions or corporates.
  • Repudiation of loss-making contracts by counterparties claiming not to be bound to honour their terms.

In a client alert published today on the Squire Patton Boggs website (here), we have set out our guidance for handling these defaults, drawn from our experience of dealing with the wave of defaults that followed the 2008 financial crisis.