UK: FRC publishes revised codes and auditing standards

The Financial Reporting Council has today published updated editions of the UK Corporate Governance Code and the UK Stewardship Code, following a consultation on proposed changes earlier this year: see, respectively, here (pdf) and here (pdf). The revised codes will apply from 1 October 2012. A summary of the changes that have been made is available here. The FRC has also published revised audit committee guidance reflecting the changes made to the UK Corporate Governance Code: see here (pdf). One of the changes to the Corporate Governance Code is the inclusion of a new provision, C.3.7., stating that FTSE350 companies should put the external audit contract out to tender at least every ten years.

The FRC has also published several revised International Standards on Auditing (UK and Ireland), in order to support the changes made to the UK Corporate Governance Code and audit committee guidance: see here. These revised standards include (in pdf):

• 260 Communication with those charged with governance.
• 700 The auditor's report on financial statements.
• 705 Modifications to the opinion in the independent auditor's report.
• 706 Emphasis of matter paragraphs and other matter paragraphs in the independent auditor's report.
• 720A The auditor's responsibilities relating to other information in documents containing audited financial statements.

UK: Wheatley Review of LIBOR - final report published

Martin Wheatley, the chief executive designate of the new Financial Conduct Authority, has published his proposals for the reform of the London Inter-Bank Offered Rate (LIBOR) setting process: see here (pdf).

Comprehensive reform of LIBOR, rather than its replacement, is advocated. The report proposes, amongst other things, that market participants should continue to play a major role in the production and oversight of LIBOR. However, it recommends that a new administrator (a private organisation not a public authority) should be formed to take over responsibility for LIBOR from the British Bankers' Association. It also recommends that administration of LIBOR, and the submission of rates, should be subject to greater statutory regulation. It is, for example, suggested that section 397 ("Misleading statesments and practices") of the Financial Services and Markets Act 2000 should be amended to cover manipulation of LIBOR. With regard to banks' submissions, one of the main findings of the report is that these should be explicitly and transparently supported by transaction data. A short video, in which Martin Wheatley sets out his proposals, is available below (with acknowledgements to the BBC). The text of the speech he delivered this morning is available here.



Note: The setting of interbank rates in other countries is also under review, including, for example, Euribor, SIBOR, BUBOR and HIBOR.

Isle of Man: application granted to convene general meeting

The High Court gave judgment a few days ago in Re DRGN Ltd. (case no. 117 of 2012): see here. The case concerned an application by a shareholder under section 114(2) of the Companies Act 1931 to convene an extraordinary general meeting of the company with a notice period shorter than the 21 days required under the company's articles of association. The meeting was required at short notice in order that directors could be properly appointed. With reference to English authorities, including Wheeler v Ross [2011] EWHC 2527 (Ch), and referring to section 306 of the UK's Companies Act 2006, the trial judge granted the application. The meeting will take place this Friday: the notice is available here (pdf).

Europe: EBA adopts draft technical standards on capital requirements for central counterparties

The European Banking Authority has adopted draft technical standards on capital requirements for central counterparties under Regulation (EU) No 648/2012: see here (pdf).

UK: England and Wales: LLP member was not a worker

The Court of Appeal gave judgment yesterday in Clyde & Co LLP v Bates Van Winkelhof [2012] EWCA Civ 1207 and held, amongst other things, that a member of a limited liability partnership could not be regarded as an employee or worker of the LLP by virtue of their membership alone.

Hong Kong: board diversity - HKEX consultation

The Hong Kong Stock Exchange has published for comment a consultation paper containing proposed amendments to the Corporate Governance Code and Corporate Governance Report concerning board diversity: see here (pdf). Amongst other things, a new code provision (operating on the basis of 'comply or explain') is proposed requiring the nomination committee (or board) to have a board diversity policy.

Jordan: new governance code published

The codes and principles directory maintained by the European Corporate Governance Institute was updated on Monday this week to include a copy of Jordan's corporate governance code for private shareholder companies, limited liability companies and non-listed public shareholding companies: see here.

UK: Supreme Court hearings in the Michaelmas term

Details of the cases to be heard by the Supreme Court in the Michaelmas term, which begins next week, were published yesterday: see here (pdf). Three cases in particular stand out.

The first, the hearing for which begins on November 6, will see the court consider an appeal from a decision of the Court of Appeal given two years ago: Prudential Plc & Anor, R (on the application of) v Special Commissioner of Income Tax & Ors [2010] EWCA Civ 1094. The issue for the Supreme Court, as explained in its case summary, is whether communications between accountants and their clients are subject to legal professional privilege at common law where advice is given in respect of tax law. The Court of Appeal held that this privilege did not apply.

In the second hearing, starting on November 12 and lasting for three days, the court will hear an appeal from the Court of Appeal decision in VTB Capital Plc v Nutritek International Corp. [2012] EWCA Civ 808. The issue for the court, as stated in its case summary, is this: where a person uses a puppet company to enter a contract with a third party in order to perpetrate fraud on that third party, can the court pierce the corporate veil and treat that person as a party to the contract? The Court of Appeal held that such a person could not be made party to the contract.

A month later, starting on December 10, the court has set aside a couple of days to hear an appeal from the Court of Appeal decision in Digital Satellite Warranty Cover Ltd v The Financial Services Authority [2011] EWCA Civ 1413. The issue identified for consideration in the court's case summary is this: are extended warranties provided for television equipment 'contracts of general insurance' as defined by Article 3 of the Financial Services and Markets Act 2000 (Regulated Activities) Order 2001? The Court of Appeal held that they were.

Note: A live video stream of Supreme Court proceedings is available here.

UK: London Stock Exchange publishes new guide 'Corporate Governance for Main Market and AIM Companies'

The London Stock Exchange has published a new guide titled Corporate Governance for Main Market and AIM Companies: see here (pdf). The guide is wide-ranging in its reach, with chapters on the UK regulatory framework, structuring an effective board, managing directors' conflicts and board evaluation. Several chapters, either wholly or in part, compare the UK framework with that in other jurisdictions.

Joint Forum publishes Principles for the Supervision of FInancial Conglomerates

The Joint Forum, which consists of representatives from the Basel Committee on Banking Supervision, the International Organization of Securities Commissions and the International Association of Insurance Supervisors, has published its revised Principles for the Supervision of Financial Conglomerates: see here (pdf). These are more extensive than the so-called '1999 Principles' which they replace. There are, for example, new high level principles concerning corporate governance (in particular the responsibilities of the board and senior management, the treatment of conflicts of interest and remuneration policy).

New Zealand: Financial Markets Conduct Bill - Commerce Committee report published

The Financial Markets Conduct Bill received its first reading earlier this year and was subsequently referred to the Commerce Committee for consideration. The Committee published its report earlier this month and has recommended that the Bill be passed subject to various amendments: see here. An overview of the Bill, the purpose of which is to reform the regulation of financial market conduct, is available in the Bills Digest available here (pdf).

UK: FTSE100 executive director remuneration - Deloitte report published

Deloitte has published an overview of the principal findings in its 2012 report on FTSE100 executive director remuneration: see here. Amongst other things, the report notes that the majority of directors (58%) hold shares in their company with a value of at least 200% of their salary.

UK: Tribunal finds dividend unlawful in stamp duty land tax case

Earlier this month, in Vardy Properties (Teeside) Ltd. v HMRC [2012] UKFTT 564, the First-Tier Tribunal (Tax Chamber) considered, amongst other things, the lawfulness of a dividend under sections 263 ("Certain distributions prohibited") and 270 ("Distribution to be justified by reference to company's accounts") of the Companies Act 1985 (now sections 830 and 836 of Companies Act 2006). The dividend had been declared during the company's first accounting reference period. As such, under section 270(4), the relevant accounts (termed "initial accounts") for the purposes of justifying the distribution were those necessary to enable a reasonable judgment to be made as to the amounts of the company's (a) profits, losses, assets and liabilities; (b) certain provisions including depreciation; and (c) share capital and reserves. At issue was whether the company had produced accounts which met this requirement. The Tribunal held that it had not and stated (at para. [63]):

We consider that section 270 CA85, properly interpreted in context, requires the production of an identifiable contemporaneous single document which records the required items under section 270(2) CA85. The degree of detail and formality of that document may vary, depending on the context, but a single document is, in our view, required in all cases. We draw a clear distinction between a company's accounting records (which will be used in preparation of accounts) and its accounts (which are compiled from those records, on the basis of judgments made by the directors)."

UK: England and Wales: director found to have breached section 172 of the Companies Act 2006

A copy of the High Court decision Odyssey Entertainment Ltd. v Kamp [2012] EWHC 2316 (Ch) was added to the BAILII database last Friday although the judgment was given in early August. This decision is noteworthy because of the judge's finding that a director had breached the statutory duty to promote the success of the company found in section 172 of the Companies Act 2006. Amongst other things, the director was found to have misled the company's board regarding the company's viability (which influenced the decision to put the company in liquidation) and had pursued opportunities that probably would have gone to the company. The director was also found to have breached section 175 of the 2006 Act. In the course of judgment, the trial judge observed (at para. [214]):

"... it seems to me that where a director has decided or is even seriously contemplating carrying on a business similar to that carried on by the company and is recommending the closure of the company's business, the legal obligation of good faith under s.172 will not be met by remaining silent about that fact or serious possibility."

South Africa: liability for fraudulent conduct under the Companies Act 1973

The Supreme Court of Appeal gave judgment earlier this week in C Fourie v FirstRand Bank Ltd. (578/2012) [2012] ZASCA 119: see here (pdf). The decision is an important one concerning the operation of section 424 ("Liability of directors and others for fraudulent conduct of business") of the Companies Act 1973 (one of a group of sections which appears to have remained in force notwithstanding the passing of the Companies Act 2008 and a provision very similar to the UK's section 213 of the Insolvency Act 1986). Against the background of apparently conflicting authorities, the court unanimously held that section 424 did not require proof of a causal link between the relevant conduct and the company's inability to pay.

Update (21 September 2012): a summary of the decision has been published here (pdf).

Australia: Treasury proposes changes to financial regulation framework

Legislative changes have been proposed by the Treasury in a consultation paper concerning prudential supervision by the Australian Prudential Regulation Authority: see here (pdf). The paper sets out various options for reform, including those relating to the role and powers of the APRA with regard to crisis management and the giving of binding directions to regulated entities.

UK: England and Wales: anti-competitive acts, corporate groups and the imputation of knowledge

Judgment was given by the Court of Appeal in KME Yorkshire Ltd. v Toshiba Carrier UK Ltd. [2012] EWCA Civ 1190 last week. The case concerned an unsuccessful appeal against the trial judge's decision (at [2011] EWHC 2665 (Ch)) to dismiss an application to strike out a claim for damages for breach of the anti-cartel provisions in Article 101 of the Treaty on the Functioning of the European Union. The judgment contains some interesting discussion, albeit obiter, on the circumstances in which the anti-competitive acts of a parent company can be imputed to its subsidiary companies in the context of Article 101. Etherton LJ (with whom Tomlinson and Ward LJJ agreed) observed (at paras. [37] to [39]):

... it is clear that, save in a case where the parent company exercises "a decisive influence" (in the language of EU jurisprudence) over its subsidiary or the same is true of a non-parent member of the group over another member, there is no scope for imputation of knowledge, intent or unlawful conduct.

The jurisprudence on this aspect is, in my view, plain and settled. Article 101 is concerned with agreements, decisions and concerted practices by and between undertakings. An undertaking for this purpose is any entity engaged in economic activity, regardless of its legal status and the way in which it is financed. Furthermore, in this context the concept of an undertaking includes an economic unit which may consist of more than one legal or natural person, such as a group of companies. Where, for example, a company does not decide independently on its own conduct on the market, but in all material respects carries out the instructions given to it by its parent company, having regard to the economic, organisational and legal links between them, the unlawful conduct of the subsidiary will be imputed to the parent company. In such a situation, in the language of EU jurisprudence, the parent exercises a "decisive influence" over its subsidiary. The subsidiary is not absolved from its own personal responsibility, but its parent company is liable because in that situation they form a single economic entity for the purposes of Article 101. In EU jurisprudence, the (rebuttable) presumption is that a parent company exercises a decisive influence over the market conduct of a wholly owned subsidiary and that they therefore constitute a single undertaking within Article 101 ... By contrast, the mere fact that the share capital of two commercial companies is held by the same person or the same family is insufficient in itself to establish that those two companies are an economic unit with the result that, for the purposes of Article 101, the actions of one company can be attributed to the other."

UK: the Competition Commission's statutory audit services market investigation

In the past couple of months the Competition Commission, as part of its statutory audit services market investigation, has published nine new working papers, including (all in pdf): Evidence on switching costs (and implications for barriers to entry), Liability, insurance and settlements, The suppliers of statutory audit services to large companies and Restrictions on entry or expansion. All of the working papers, including another on law and regulation published in April, are available here. In November this year the Commission expects to publish its provisional findings and, if required, possible remedies (a complete timetable is available here, pdf).

Europe: ESMA consults on proposed Guidelines on remuneration policies and practices under MiFID

The European Securities and Markets Authority has published for consultation its proposed Guidelines on remuneration policies and practices under the Markets in Financial Instruments Directive (MiFID): see here (pdf).

UK: financial regulation reform - consultation on the FPC's macro-prudential tools

HM Treasury has set out, for the purposes of consultation, its proposals concerning the macro-prudential tools to be given to the Financial Policy Committee under the new financial regulatory framework: see here (pdf). The Government proposes to give the FPC: [a] responsibility for setting the level of the UK's counter-cyclical capital buffer (as set out in Basel III and the European Commission's CRD IV proposals); [b] the power to impose sectoral capital requirements; and [c] a time-varying leverage ratio direction-making tool (but not earlier than 2018). The paper also seeks views on whether other tools should be available to the FPC, including those relating to liquidity and LTV and LTI ratios.

Australia: the AGM and shareholder engagement - CAMAC discussion paper published

The Corporations and Markets Advisory Committee has published a discussion paper titled The AGM and Shareholder Engagement: see here (pdf). There is much of interest in this wide-ranging discussion paper, which focuses on three core issues: [1] the role of the AGM as part of the relationship between the board and shareholders; [2] the content of the annual report considered at the AGM; and [3] the current functioning of the AGM and its future function and format. A useful summary of the questions asked in the discussion paper is provided in the accompanying press release.

BCBS updates its Core Principles for Effective Banking Supervision

The Basel Committee on Banking Supervision has published an updated edition of its Core Principles for Effective Banking Supervision: see here (pdf). A brief overview of the changes made, together with further background information, is available here.

UK: auditor clauses in debt contracts

The Competition Commission, as part of its statutory audit services market investigation, has published a report it commissioned regarding auditor clauses in debt contracts: see here (pdf). The authors report on research from the US and UK with regard to the use of clauses in loan agreements regarding the identity of the borrower's auditor and highlight questions for further investigation. One such question, with regard to the UK, concerns the reasons for the absence of auditor clauses in many contracts: is this explained by the expectation that large listed firms would already have one of the large audit firms?

UK: The Community Interest Company (Amendment) Regulations 2012

The Community Interest Company (Amendment) Regulations 2012 were laid before Parliament last week and come into force on 1 October: see here or here (pdf). The purpose of the Regulations is to fully reinstate the requirement for the directors of a community interest company to delivery a copy of the community interest company report to the registrar. For further information see the accompanying explanatory memorandum available here (pdf).

UK: The Money Laundering (Amendment) Regulations 2012

A copy of Money Laundering (Amendment) Regulations 2012, which come into force on 1 October, have been published by HM Treasury: see here (pdf). The Regulations, laid before Parliament last week, make amendments to the Money Laundering Regulations 2007, following a review of their operation by HM Treasury.

UK: The work of the Parliamentary Committee on Banking Standards

The Parliamentary Committee on Banking Standards has announced that next month it will be begin pre-legislative scrutiny of the draft Banking Reform Bill, through which the Government proposes to implement the Vickers recommendations: see here. A written record of the oral evidence given to the Committee last week by Sir David Walker, the chairman of Barclays Bank plc, has also been published: see here (a video recording is available here). Sir David offered his views on a wide range of governance issues and reflected on the report he produced in 2009 on the governance of banks (available here, pdf). Looking back at his report, Sir David stated that he was struck by the fact that his 2009 report did not say much about culture or reputation.

Singapore: Companies Act review - an update

Josephine Teo, the Minister of State for Finance and Transport, delivered a speech last week in which she provided an update on the ongoing review of the Companies Act and reflected on some of the feedback received, particularly with regard to the codification of directors' duties and whether corporate directorships should be permitted: see here. Mrs Teo stated that the review was almost completed and that a summary of the feedback received would be published soon.

UK: financial regulation reform - FSA consults on rulebook changes

The Financial Services Authority has published a consultation paper in which it seeks views on proposed changes to the FSA Handbook, part of work it is undertaking to create separate PRA and FCA handbooks in preparation for the new regulatory framework expected to come into force early next year: see here (pdf). Further information is available here.

Europe: a single supervisory mechanisms for euro zone banks - Commission publishes legislative proposals

The European Commission published legislative proposals yesterday for the creation of a single supervisory mechanism for euro zone banks under which the European Central Bank will play a central role: see here. The proposed legislation consists of two Regulations - see here (pdf) and here (pdf) - together with a Communication in which the Commission sets out its overall vision for the creation of a banking union covering the single rulebook, common deposit protection and a single bank resolution mechanism: see here (pdf). For further information see: Commission press release and FAQs.

UK: financial sector resolution consultation - draft legislation published

Earlier this year HM Treasury published a consultation paper titled Financial sector resolution: broadening the regime: see here (pdf). This contained proposals regarding the mechanisms available to deal with the failure of systematically important investment firms, insurers, central counterparties and non-central counterparty financial market infrastructures. Since publication of the paper, draft legislation and explanatory notes have been published: see, respectively, here (pdf) and here (pdf).

Europe: structural reform of the EU banking sector

The Financial Times reports that "... people close to the project [the High Level Expert Group considering possible structure reforms to the structure of the EU banking sector] said a clear majority was emerging in favour of a combination of the UK and UK approach to structural reform of banks - taking elements of both the Volcker and Vickers rules": see here. The Expert Group's report is expected within the next month or so.

UK: England and Wales: appeal launched in exit consent case

It has been reported that Irish Bank Resolution Corporation Ltd. has begun its appeal against the decision earlier this year of Mr Justice Briggs in Assenagon Asset Management SA v Irish Bank Resolution Corporation Ltd [2012] EWHC 2090 (Ch): see here. For further background information see here.

UK: BIS Committee launches 'women in the workplace' inquiry

The Business, Innovation and Skills Commons Select Committee has begun an inquiry titled 'Women in the Workplace': see here. The Committee's call for evidence includes questions on the success (or otherwise) of Lord Davies' recommendations and the benefits of having a greater proportion of women on boards.

Canada: OSFI proposals for the life insurance regulatory framework

The Office of the Superintendent of Financial Institutions has published information about proposed changes to the life insurance regulatory framework, including governance and risk management: see here (pdf).

Europe: the diversity of company boards

Egon Zehinder International has published the 2012 edition of its European Board Diversity Analysis Report: see here. A summary of the report's findings is available here. The report notes that women represent one third of new board members at Europe's largest companies.

UK: Government publishes audit exemption and change of accounting framework proposals

The Department for Business, Innovation and Skills has today published proposals to extend the exemption from audit to a wider range of companies, following a consultation last year: see here (pdf). A press release is available here. The Government is also proposing to allow companies that prepare their accounts under IFRS to move to UK GAAP for any reason, provided they have not changed to UK GAAP in the previous 5 years. The secondary legislation required to achieve these changes is likely to come into force on 1 October 2012, after first being laid before Parliament.

Europe: Commission consults on the regulation of indices used as benchmarks in financial and other contracts

The European Commission has published for discussion a paper concerning the regulatory framework governing the production and use of indices serving as benchmarks in financial and others contracts: see here (pdf). The paper does not contain any firm proposals but instead seeks to identify the issues and shortcomings in the production and use of benchmarks in order to consider whether regulatory change is required.

UK: financial services and the risks to customers from sales staff financial incentives

The Financial Services Authority has begun work to address the risks of mis-selling arising from the incentives received by sales staff working in retail financial services. This work will be continued by the new Financial Conduct Authority. In a review of 22 authorised firms (including banks, building societies, insurance companies and investment firms), the FSA found that most firms did not have effective systems and control in place to manage adequately the risks of mis-selling arising from sales staff incentives. In 20 of the 22 firms reviewed, the FSA found that the incentives schemes were structured in ways that increased the risk of mis-selling. In order to assist firms identify and manage the risks arising from their incentive schemes, guidance has been published by the FSA for consultation: see here (pdf). Where the potential for mis-selling from particular incentives cannot be mitigated, the guidance makes clear that those incentives should not be provided to staff.

Martin Wheatley, the managing director of the Conduct Business Unit in the Financial Services Authority and chief executive designate of the new Financial Conduct Authority, spoke about the FSA's findings and proposals in a speech today titled "The incentivisation of sales staff – are consumers getting a fair deal?": see here. The speech is noteworthy for its tone. Mr Wheatley makes clear that cultural change within institutions is required: customers should not, in his words, be regarded simply as sales targets. Moreover, he made clear that the behaviour and attitude of firms - from the boardroom to point of sale - would be examined and assessed by the new FCA as part of its consumer protection role. A short video extract from Mr Wheatley's speech is available below (with acknowledgements to the BBC).

Europe: gender diversity of company boards - a quota from Europe and updated UK data

Details of the European Commission's proposals regarding the gender diversity of company boards are beginning to emerge. The Financial Times contains a report titled "EU pushes 40% quota for women on boards" referring to proposals under discussion within the Commission for a Directive requiring at least 40% of non-executive positions to be held by women: see here (subscription required). The quota would apply to companies on the basis of turnover and number of employees. Sanctions for non-compliance are envisaged (e.g. fines) but how and when these are imposed would be left for Member States to decide. The draft proposals are also being reported by Deutsch Welle: see here.

Meanwhile, in the UK the Professional Boards Forum has today published updated figures regarding the gender diversity of FTSE100 and FTSE250 company boards: see here. This reports that 44% of FTSE100 board appointments since 1 March 2012 have been women. 17.3% of FTSE100 directors are women (the figure for FTSE250 companies is lower at 11.3%). It is also reported that 8 FTSE100 companies have no female directors.

Singapore: the corporate governance of insurers

Earlier this year the Monetary Authority of Singapore published a consultation paper containing, amongst other things, proposals to extend the application of the MAS Insurance (Corporate Governance) Regulations and MAS Guidelines on Corporate Governance for Banks, Financial Holding Companies and Direct Insurers to all locally incorporated insurers and reinsurers (see here). MAS published a summary of the feedback received, together with its response, last month: see here (pdf). MAS states that it is proceeding with its proposal to extend the Regulations and Guidelines to all locally incorporated insurers and reinsurers.

UK: computer trading in financial markets - policy proposal evaluation

In November 2010 the Department for Business, Innovation and Skills launched a project to consider the future of computer trading in financial markets: see here. As part of this project a working paper has recently been published titled 'Economic impact assessments on MiFID II policy measures related to computer trading in financial markets': see here (pdf). The paper considers evidence evaluating the likely effectiveness and benefit of various policy proposals including notification of algorithms, circuit breakers, minimum tick size requirements, market maker obligations, minimum resting times and minimum order-to-execution ratios.

UK: financial regulation - complexity demands simplicity

Andrew Haldane, the executive director for financial stability at the Bank of England, delivered a speech last week titled 'The Dog and the Frisbee': see here (pdf). In a wide ranging speech, Mr Haldane expressed concern with the growing complexity of regulatory responses to the financial crisis, including Basel III and developments in the UK and USA, and argued that regulation should be grounded in simplicity. He noted, however, that this would require a dramatic change of approach by regulators.