UK: the future of the UK financial reporting - revised proposals from the ASB

The Accounting Standards Board, part of the Financial Reporting Council, has published revised proposals for the future of financial reporting in the UK.  In brief, the ASB has decided not to go ahead with its proposals for a three tier framework but is instead proposing to replace all current accounting standards with a single Financial Reporting Standard, based on the IFRS for SMEs (although the Financial Reporting Standard for Smaller Entities will be retained). Further information is available here and a key facts document is available here (pdf). The relevant Financial Reporting Exposure Drafts are available here.

UK: financial regulation reform - Financial Services Bill introduced in Parliament

The Financial Services Bill was introduced in Parliament last Thursday and received its First Reading. Second Reading, which will provide MPs with their first opportunity to debate the main principles of the Bill, is scheduled for today. The Bill's progress can be followed here. A copy of the Bill as introduced is available here (html) and here (pdf). Explanatory notes are available here (html) and here (pdf).

The Government has also published another White Paper - A new approach to financial regulation: securing stability, protecting consumers, available here (pdf) - which builds on earlier White Papers and sets out its response to some of the recommendations made by the Treasury Select Committee and Pre-Legislative Scrutiny Committee in respect of an earlier draft of the Bill. Revised objectives have, for example, been provided for the Financial Conduct Authority (FCA); an explicit "duty to supervise" will be given to the Prudential Regulation Authority (PRA); and the Chancellor will be given a limited statutory power of direction over the Bank of England where a notification of risk to public funds has been made by the Bank's Governor and there is a serious threat to financial stability.

The White Paper also explains some new policy decisions including, for example, a much greater role for the FCA with regard to consumer credit. The Government also appears to have rejected calls for the creation of a Supervisory Board for the Bank of England, preferring instead the Bank's proposal for an Oversight Committee. Further consultation is promised in respect of the suggestion that the Threshold Conditions for authorisation should be reviewed and also with regard to the manner in which these Conditions are divided between the FCA and PRA. Further consultation is also to take place with regard to the macro-prudential tools available to the Financial Policy Committee (FPC). The Paper also explains that the Government will be consulting later this year in respect of a couple of issues identified by the Financial Services Authority in its report into the failure of Royal Bank of Scotland: should regulatory pre-approval be required for all significant merger and acquisition activity in the banking sector and are changes necessary to the liability regime for senior management and directors?

One of the recommendations made by the Scrutiny Committee was for the publication, alongside the Bill, of relevant secondary legislation including the Order under which the scope of the PRA's prudential supervision role would be defined. This has been done: a draft of the Financial Services and Markets Act 2000 (PRA-Regulated Activities) Order has been published (see here, pdf) along with further draft secondary legislation and draft memoranda of understanding (including a memorandum setting out the framework for coordination of financial crisis management between the Treasury, Bank of England and the PRA: see here.

Update (30 January 2012): Hansard, when recording the Bill's First Reading, also states that Second Reading was scheduled for today. This is a mistake. According to the Parliamentary Calendar, Second Reading has been timetabled for 6 February 2012.

UK: England and Wales: directors' duties - disclosure, creditors and other matters

Mr Justice Newey gave judgment earlier this week in GHLM Trading Ltd v Maroo [2012] EWHC 61 (Ch). Amongst the matters for consideration was a claim that a sale of stock by directors to another company shortly before they were removed as directors involved a breach of duty. The decision is interesting for several reasons. First, there is discussion of the consequences of insolvency (or near insolvency) on the application of the duty found in Section 172 of the Companies Act (2006). In this regard, the trial judge noted that "Where creditors are relevant, it will ... be a director's duty to have regard to the interests of the creditors as a class. If a director acts to advance the interests of a particular creditor, without believing the action to be in the interests of creditors as a class, it seems to me that he will commit a breach of duty" (para. [168]).

Second, the trial judge considered the consequences of a sale of stock by directors in pursuit of their own self-interest and not the company's where the contracting party had notice of this fact: the contract was void. Third, there is discussion of Item Software (UK) Ltd v Fassihi [2004] EWCA Civ 1244, in which Arden LJ held that a director could be required to disclose his own misconduct as part of the director's duty to act in what he in good faith considers to be the best interests of his company (the duty now incorporated in Section 172). Noting the controversy surrounding Arden LJ's decision, Mr Justice Newey observed (at paras. [193] and [194]):

Arguably, it breaks new ground in treating a fiduciary duty as prescriptive rather than merely proscriptive. Its result can perhaps now be justified also by reference to section 172 of the Companies Act 2006, which came into force on 1 October 2007. The duty to promote the success of a company which that provision imposes can be said to be expressed in prescriptive terms (a director "must act in the way he considers, in good faith, would be most likely to promote the success of the company …" – emphasis added). Be that as it may, Item Software (UK) Ltd v Fassihi is clearly binding on me. I therefore proceed on the basis that a director's duty of good faith can potentially require him to disclose misconduct. .... a company complaining of a director's failure to disclose a matter must, I think, establish that the fiduciary subjectively concluded that disclosure was in his company's interests or, at least, that the director would have so concluded had he been acting in good faith". 

Fourth, Mr Justice Newey considered to whom the director was required to disclose information and stated (at para. [198] and [199]):

... it is perfectly possible to conceive of a director being bound to disclose a matter to someone other than fellow board members. Since the "touchstone" is the duty of a director to act in what he considers in good faith to be in the best interests of the company, the focus must be on what the relevant director in fact believed to be in the company's interests or would have believed to be in the company's interests had he been acting in good faith. If a director subjectively concluded that it was in the company's interests for a matter to be disclosed to a person who was not a member of the board (or if he would have so concluded had he been acting in good faith), it would, it appears, be incumbent on him to ensure that such disclosure was made. On the other hand, a director's duty of good faith is owed to his company, not to shareholders. The question is therefore as to what the director thought (or would have thought) was in the company's interests. That disclosure might have been in a shareholder's interests will not matter as such.

UK: FSA seeks views on premium listing regime and proposes other amendments

The Financial Services Authority has published for consultation proposed amendments to the Listing Rules, Prospectus Rules, and the Disclosure Rules and Transparency Rules: see here (pdf). The FSA is also seeking views on the nature of the premium listing standard more generally and whether changes are needed to enhance the protections provided to shareholders regarding, for example, related party transactions, free float requirements and whether it should be a condition of listing that companies with controlling shareholders should be capable of carrying out their business independently of such controlling shareholders.

UK: financial regulation reform - the approach of the FCA

Martin Wheatley, the chief executive designate of the new Financial Conduct Authority, spoke today at the British Bankers' Association about his vision for the FCA: see here. Briefly put, Mr Wheatley said that "getting a fair deal for consumers" would be at the heart of the FCA's work and noted that "The global world of regulation has moved on from a belief that providing information to people combined with some conduct rules over the people selling products will lead to good outcomes". Much in his speech was about cultural change in firms but he also referred to the way in which the FCA would operate by, for example, taking an earlier judgment as to the suitability of products.