The UK Supreme Court has significantly reformulated the scope of duty test that applies in cases of professional negligence. It handed down its decision in the case of Manchester Building Society v Grant Thornton UK LLP  UKSC 20 on 18 June 2021. SPB acted for the successful party, Manchester Building Society.
Last month, the Financial Conduct Authority (“FCA”) published updated guidance regarding COVID-19 business interruption settlements and deductions made for Government support.
The FCA first commented on this issue in August 2020, following reports that some insurers were making deductions for Government support received by policyholders, when calculating payments for business interruption insurance claims.
The FCA’s recent statement follows its January “Dear CEO letter”, which we discussed in our previous blog post here. In this letter, the FCA re-iterated its expectations that insurers should only deduct Government support from claim payments if the appropriateness of such a deduction has been thoroughly considered and the insurers’ conclusions properly documented.
In March 2018, Mrs Philipp transferred two payments to accounts in the UAE, totalling £700,000, representing her and her husband, Dr Philipp’s savings. In doing so, Mrs and Dr Philipp thought they were assisting an investigation by the FCA and National Crime Agency (“NCA”) into fraudulent activities. Unfortunately for the Philipp family, they were, in fact, the victims of that fraud, not helping to tackle it.
Dr Philipps authorised transfers to Mrs Philipps’ accounts from his own, and Mrs Philipps authorised the transfers to the two UAE-based bank accounts. They knew the destination of the funds, and meant for them to be sent. What they did not know was that the two accounts were controlled by fraudsters, who had tricked them into making the payments to “safe” accounts, as part of investigations into an alleged fraud.
This type of scam is known as authorised push payment (“APP”) fraud. The customer instructs their bank or other payment services provider to transfer money from their account and the transaction is carried out with their consent. As such it is authorised by the customer (even if the authorisation resulted from a fraud). APP fraud is a growing problem in the UK.
Whilst Mrs Philipp’s bank tried to get the funds back from the receiving bank on being made aware of the APP fraud, it was unable to do so. Mrs Philipp sued the Bank, on the basis that it was under a duty to do more to prevent Mrs Philipp failing victim to the scam. This blog analyses the judgment on a summary judgment application made by the Bank, which sought to have Mrs Philipp’s claim struck out.
While trading frenzies are as old as the markets themselves, the novelty of widespread retail trading in obscure US stocks fueled by Reddit chat forums has prompted recent interventions by regulators on both sides of the Atlantic.
Unfortunately the FCA’s terse 29 January statement on “recent share trading issues” gave little insight into how it viewed these events from a regulatory perspective. The FCA said only that buying shares in volatile markets is “risky“, and “unlikely to be covered” by the FSCS.
Several of the major online securities trading platforms responded to the volatility by stopping orders in affected securities. The FCA was supportive, noting that broking firms “are not obliged to offer trading facilities to clients“, and “may withdraw their services, in line with customer terms and conditions if…they consider it necessary or prudent to do so“.
The US Securities and Exchange Commission (SEC) US was only slightly more forthcoming, stating that it would “work to protect investors, to maintain fair, orderly, and efficient markets” and would “act to protect retail investors when the facts demonstrate abusive or manipulative trading activity”.
This brevity is perhaps understandable when regulators are responding to rapidly emerging issues. We hope they will comment further when time permits, because these events raise a range of regulatory issues.
The first vexed question these events raise is whether the Reddit traders have done anything wrong.
The Market Abuse Regulation (preserved in UK law post-EU exit) proscribes behaviour which “gives, or is likely to give, false or misleading signals as to the supply of, demand for, or price of, a financial instrument” that falls within its jurisdictional scope, including by “disseminating information through the media, including the internet, or by any other means”. While it appears some traders have profited enormously from encouraging trading, it is not clear if they have given false or misleading signals as to supply, demand, or price. The trading strategy being promoted was for enough retail investors to buy target securities to drive up prices, forcing short sellers to buy at those prices to close out short positions. The short positions are made public in regulatory disclosures: UK investors must make a public notification when short on 0.5% or more of a company’s shares; and similar requirements apply to US funds. The signals given were arguably therefore accurate and based on public regulatory filings.
MAR also proscribes “conduct by a person, or persons acting in collaboration, to secure a dominant position over the supply of or demand for a financial instrument…which has, or is likely to have, the effect of fixing, directly or indirectly, purchase or sale prices, or creates, or is likely to create, other unfair trading conditions“. This provision could be engaged, but it seems doubtful whether this ad hoc crowdsourcing amounts to collaboration or securing a dominant position.
US-traded GameStop’s shares are not within the scope of MAR, but other instruments that are within MAR (such as instruments and securities linked to silver prices) have been targeted using the same strategies. It would be helpful to know how the FCA sees these issues, given that we can likely anticipate copycat incidents in relation to UK/EU traded financial instruments sooner or later.
More broadly, whether crowdsourced trading strategies are legitimate or not under current law, they pose novel challenges for the FCA as a conduct regulator tasked with ensuring the integrity of UK financial markets, protecting consumers, and preventing financial crime. While the FCA monitors vast amounts of markets data, it cannot possibly monitor every online chatroom or forum that might be used by retail traders. It may be that market conduct rules will need to be reformed if it is concluded that the current regime cannot respond, and that the extreme volatility witnessed is not conducive to efficient market functioning.
Protection of consumers
Consumer protection is a key FCA focus. It is active in seeking to warn consumers of the risks of financial fraud and scams through ScamSmart and public awareness campaigns. The regulator has weathered recent criticism for high profile failures to protect ordinary investors from high risk investments marketed using social media and online advertising. That is reflected in the FCA’s focus on risks to retail investors and FSCS cover in its 29 January alert. There is growing debate over how regulators can protect retail investors from fraud and excessive risk in the digital age without having a chilling effect on consumer access to genuinely innovative investment opportunities.
Online trading platforms are put in an immensely difficult position when markets become highly volatile. As the FCA notes, platforms will generally have the contractual right to suspend trading access. But that must be balanced with the need to treat its retail customers fairly, both in explaining clearly to customers that the power exists, and in deciding when and how to exercise it. The SEC, warned that it would “closely review actions taken by regulated entities that may disadvantage investors or unduly inhibit their ability to trade certain securities”. Class action claims have already been initiated in the US, where “stock drop” securities litigation is commonplace. US platforms are accused of suspending retail trading, while allowing more remunerative institutional clients to continue to trade. Similar claims may follow in other jurisdictions, although in the UK securities litigation is still underdeveloped. Platforms will want to review their policies for responding to abnormal volatility and trading patterns around particular securities and assess their exposure.
Some hedge funds were caught out and suffered significant losses in closing short positions in affected securities. It is unclear to what extent any funds managed by UK-regulated managers have been materially impacted, let alone whether losses might reflect any failure of regulatory risk management requirements. However, fund managers deploying short selling strategies will need to ensure that their risk management processes for short trading are adequate to avoid exposure to losses of a magnitude that could put their viability in jeopardy.
Arguably these events are not anomalous, but are a symptom of wider trends. The democratizing effect of ready access to securities trading platforms, mass communications, and abundant data for retail traders, combined with the fragmentation of the financial services ecosystem, create growing challenges for regulators such as the FCA in ensuring market integrity, protecting consumers, and preventing fraud and financial crime. The regulatory framework and the approach of regulators will need to continue to develop to keep pace with rapid innovation in all forms in the financial markets.
Last month, the FCA launched its Defined Benefit Advice Assessment Tool (“DBAAT“) as part of its strategy to reduce harm to consumers and improve the suitability of defined benefit (“DB“) transfer advice. The tool will help firms to understand precisely how the FCA assesses the suitability of DB transfer advice.
What is SFDR?
The SFDR is part of the European Commission’s package of reforms to implement its sustainable finance strategy. The strategy focuses on three areas:
- Strengthening the foundations for sustainable investment by creating an enabling framework. The Commission believes many financial (and non-financial) companies still focus excessively on short term financial performance instead of long term development and sustainability-related challenges and opportunities.
- Increasing opportunities to have a positive impact on sustainability for citizens, financial institutions and corporates – enabling them to “finance green”.
- Integrating climate, environmental, and social risks into financial institutions and the financial system as a whole.
To that end SDFR introduces a series of disclosure requirements for investment firms to address environmental, social and governance (ESG) concerns. It applies to asset and fund managers (e.g. MiFID investment managers, alternative investment fund managers (AIFMs), and UCITS managers), and investment firms, as well as credit institutions and insurers. The SFDR entered into force in December 2019 and its implementation date is on 10 March 2021.
How does it apply to UK firms?
To general surprise, the UK government has opted not to implement the SFDR into UK domestic law following the end of the UK’s Brexit transition period. However, SFDR will most likely still be relevant for UK firms either as a requirement under the regulation or in practical terms. For example, if a UK-based private equity firm wants to market into the EU or manage EU-based funds, it will be subject to the SFDR in its capacity as an Alternative Investment Fund Manager (AIFM). Additionally, we are likely to see firms complying with the SFDR for commercial reasons, particularly due to client or investor pressure.
Even if a UK firm does not have to comply with the SFDR, the UK government has made no secret about its intentions to put green finance high on its agenda. In November 2020, Rishi Sunak announced that the UK will be the first country in the world to make disclosures that are aligned with the Task Force on Climate related Financial Disclosures (TCFD) fully mandatory by 2025, going beyond the “comply or explain” approach adopted under the SFDR. See our Roadmap here. For asset managers, the FCA is consulting in H1 2021 on potential TCFD-aligned client disclosure rules, aimed at providing ESG information at the firm, fund, and portfolio level to aid decision-making for investors. That nascent UK regime is therefore likely to overlap substantially with SFDR.
What changes will SFDR bring?
The SFDR disclosure requirements involve a number of potentially challenging compliance hurdles for firms to overcome. There is a requirement to disclose “principal adverse impacts” (PAIs) of investment decisions on sustainability factors on a “comply or explain” basis. PAIs are defined as impacts of investment decisions and advice that result in negative effects on sustainability factors. The key challenge will be the collection of data. Firms will need to collect data from various sources, then map that data into a singular and robust data model. Data quality checks and transparency will be important compliance factors. Challenges like these will be costly and time consuming.
At the very least, firms now should be getting up to speed with the SFDR and the related Taxonomy Regulation and understanding where they fall within the scope of the regulation and what changes that will entail to their current practice. In light of the requirements, firms should start reviewing marketing materials and website disclosures. Firms should prepare their position on PAIs. If PAIs are voluntary then firms may wish to implement a phased approach, whereby they explain in March that they aren’t ready to disclose against the rules but will be reporting later in the year.
Firms should not wait to start making implementation plans. Client and investor demand remains a key developing driver of ESG changes and firms need to make headway in this area or risk being left behind.
The text of the SFDR can be viewed here.
The Financial Conduct Authority (the “FCA”) has published a ‘Dear CEO’ letter to insurers following the recent decision made in the Supreme Court test case on non-physical damage business interruption (“BI”) insurance. The FCA is determined to make the next steps on the recent ruling as clear as possible.
The Financial Conduct Authority’s (“FCA“) test case on non-physical damage business interruption (“BI”) insurance has been the focal point for policyholders suffering from BI financial losses as a result of Covid-19.
The Financial Reporting Council (FRC) has just published the outcome of new research into the approach that Audit Committee Chairs (ACCs) take to audit quality. The findings suggest inconsistency among ACCs on what constitutes audit quality, and how it should be approached, which the FRC says “lends weight to the proposals for reforms in the audit sector”.
At the end of last week, the FCA announced that it had commenced a consultation exercise on a piece of draft guidance it has prepared to assist policyholders, insurers and insurance intermediaries to prove the presence or otherwise of COVID-19 in a particular area, which is a requirement of some Business Interruption (BI) policies.