Regulatory updates

Falling Fowl in personal injury claims: the Animals Act 1971, fundamental dishonesty, quantum and forum shopping

Wed, 11 Jun 2025 12:06:00 +0100

The claim

The claimant was employed as a rider and a stable hand for the defendant, whose business was as a racehorse breeder and trainer. The claimant was an experienced horse rider and at the time of the incident was riding a horse known as 'Foxy'. It was the claimant's case that Foxy was known to shy/jink and did so on this occasion, causing her to fall off and suffer an injury.

The claimant's case was brought under the Animals Act 1971, alleging the defendant's strict liability under section 2(2). The defendant denied liability and alleged the claimant was fundamentally dishonest in the presentation of her injuries and ongoing disability. The claimant refuted that allegation and pleaded she had not exaggerated the effects of the accident. The defendant also sought clarification that payments made to the claimant under the Racing Industry Accident Benefit Scheme, ought to be taken into account in any award for damages.

The Animals Act 1971

The Animals Act 1971 creates strict liability for damage done by animals. However, its drafting has been much criticised, with even Lord Denning having commented that the Act was "very cumbrously worded and will give rise to several difficulties in the future". Ormrod J described it as using "remarkably opaque language …" The wording of the Act clearly vexed the parties and the court in this case, resulting in a judgment running to 100 pages

The key clause is section 2(2), which states:
"Where damage is caused by an animal which does not belong to a dangerous species, a keeper of the animal is liable for the damage, except as otherwise provided by this Act, if—

the damage is of a kind which the animal, unless restrained, was likely to cause or which, if caused by the animal, was likely to be severe; and
the likelihood of the damage or of its being severe was due to characteristics of the animal which are not normally found in animals of the same species or are not normally so found except at particular times or in particular circumstances; and
those characteristics were known to that keeper or were at any time known to a person who at that time had charge of the animal as that keeper’s servant or, where that keeper is the head of a household, were known to another keeper of the animal who is a member of that household and under the age of sixteen[SL1][GR2]."

The judge drew attention to the leading authority for claims under the Animals Act 1971, which was the House of Lords decision in Mirvahedy v Henley [2003][SL3].

In terms of (a), 'damage' under Section 11 is defined as 'death or injury to any person including any disease and any impairment of physical or mental condition'. For the purposes of this case, the judge held that 'under restraint' was not comparable to the use of ordinary riding equipment but was more akin to fixed leashes or chains on a dog.

It was also held to be important not to assess the 'likely to cause' or 'likely to be severe' element with hindsight and therefore just because a claimant had suffered an injury does not mean that it was likely to cause an injury. It was clear to the court that if a rider falls from a horse, then it is possible for that rider to suffer an injury. However, distinction was drawn between when a rider falls from a horse that 'rears' up and one that 'shys/jinks', the former often resulting in a rider falling and suffering an injury and the latter being unusual for a rider to fall. As the two are different from each other, the likelihood of damage and the likelihood of that damage being severe, was therefore different. The Judge confirmed it was important to assess the particular circumstances of the fall, namely whether the fall happened on tarmac, on a road or, as in the claimant's case, on the defendant's gallop which was a horse-shoe shape with a carpet fibre surface. Upon consideration of the vast amount of evidence before the court, the judge was not satisfied that the criteria for (a) had been reached. The judge determined that it was a possibility that a rider could fall if a horse shied or jinked whilst being ridden, but this was not likely, and it was not likely that they would suffer (or reasonably be expected) to suffer a severe injury.

Even though the Judge deemed the claimant's claim had not satisfied this element and therefore the claim would fail, the judge gave a detailed analysis on the other subsections of the act.

The correct interpretation of sub-section (b) is notoriously unclear and the court in this case described it as ambiguous, highlighting the two possible competing interpretations discussed by their lordships in Mirvahedy:

There are two relevant types of potential damage that attract liability: (i) risk of damage due to characteristics not usually found in animals of the same species; and (ii) risk of damage due to normal characteristics of animals of the same species, but only a specific times or under certain conditions. Presumably the claimant only needs to satisfy one to make our their claim for damages under the section (assuming the other criteria are met).
There is only one type of damage that gives rise to liability; ie that which was 'likely or likely to be severe, because of characteristics not normally found in animals of the same species even if they were found in such animals at particularly times or in particular circumstances'[SL4] (emphasis added).

The judge adopted the latter interpretation of s2(2)(b).

Much evidence was heard as to the particular characteristics of Foxy. The Judge indicated there were issues with the Claimant's evidence in this regard. The Claimant claimed Foxy was prone to shying/jinking and would 'shy at a blade of grass' therefore constituting specific characteristics not usual to horses. However, upon consideration of all the evidence presented, the Judge disagreed, drawing the conclusion that, if this were accurate, then a number of riders would have fallen from Foxy on multiple occasions, including the Claimant. The judge found that Foxy did not possess any characteristics that were not usually found in horses.

When considering whether horses of Foxy's type typically shy or jink at particular times or circumstances, the judge again distinguished between a horse that bucks or rears when it is frightened or perceives a threat and a movement sideways in response to something that a horse hears or sees. The judge also explained that, with horses, this can happen at 'very many times and in very many circumstances', therefore it was held that this behaviour was not sufficiently rare to attract liability under s2(2)(b). Having established that Foxy had no special characteristics which increased the risk of damage, it was not necessary to consider sub-section (c): who knew about her characteristics.

Strict liability regimes are often perceived as attractive to claimants; however, what we can take from the above analysis is that cases brought under the strict liability regime of the Animals Act 1971 are by no means simple. Consideration must be given to the animal in question, the characteristics of that animal and whether they are characteristics of the species or the particular animal, alongside the type of damage alleged. Much of the analysis will be fact specific; not just in relation to the particular circumstances of the accident, but also in relation to the usual characteristics of the species and circumstances – something which will often be the subject of expert evidence.

Fundamental dishonesty

In recent months we have seen an increasing number of claims seeking to be defended on the basis that the claimant has been fundamentally dishonest. Under the Criminal Justice and Courts Act 2015 Section 51 (1), it states that, "if the Court is satisfied on the balance of probabilities that the claimant has been fundamentally dishonest in relation to the primary claim or related claim, the court must dismiss the primary claim, unless it is satisfied that the claimant would suffer substantial injustice if the claim were dismissed".

The burden of proof here is on the defendant to establish the claimant's dishonesty. The leading case is Ivey v Genting Casinos UK Limited (t/a Crockfords Club), which sets out the test for determining whether the claimant has been dishonest. The test is a combined subjective/objective test which asks whether, in light of the claimant's knowledge or belief of the facts, reasonably honest people would consider the claimant's actions dishonest.

Once that has been determined, the court must then decide whether that dishonesty is fundamental to the primary or related claim. Upon considering the vast caselaw in this area, the judge referred to previous questions that he had himself set down in the case of Muyepa:

when did the dishonest conduct start?
'Does the dishonesty taint the whole of the claim or is it limited to a divisible element?' and
What is the comparison between the dishonestly inflated claim and the underlying value of the claim?

In summary, the court must decide whether the dishonesty goes to the heart of the claim, and how it impacts the sums claimed.

In consideration of the evidence given by the claimant, both to the experts in their examination and her witness evidence and cross-examination at trial, the judge found the Claimant to be dishonest. The Claimant had exaggerated the restrictions to her movements to the experts and stated her disability to be such that she could not comb her hair, do any significant cooking, walk her dogs in her right hand etc. The claimant also failed to inform either expert that she had resumed football and rugby training in 2020.

The judge went through the three questions referred to above, from Muyepa and, whilst it was clear the claimant had dishonesty exaggerated her disability and had not represented her recovery accurately before the court, that exaggeration/dishonesty could not realistically inflate part of her claim, other than that of suffering and loss of amenity. The judge maintained that 'the core of heart of the claim remained unaffected by the exaggeration'. Elements that were considered in reaching that conclusion were the fact that the claimant was not making a claim for continuing care or equipment and that the schedule remained largely the same throughout the course of the litigation. The claimant was still taking painkillers, was restricted in her movement (even if this was not as severe as she had claimed) and she was unable to work with horses. The judge deemed the claim a 'dishonest embellishment in an attempt to underpin an essentially honest claim'.

What was clear from the judgment is the power of surveillance and photographic evidence in alleging arguments of fundamental dishonesty. That evidence must prove that the dishonesty goes to root of the claim, thereby undermining the claimant's claim. In addition, this evidence must be considered in light of what the claimant is seeking to recover. As discussed in this case, the elements where the claimant was found to have been dishonest did not significantly change the amounts she was seeking. Had the claimant been seeking ongoing care requirements and equipment etc, the judge may have found differently. It is therefore important to closely examine the extent of the injury the claimant is claiming and how this impacts the amounts they are seeking to recover from the defendant, alongside whether this is supported by surveillance and/or witness evidence.

Quantum

As with the liability and dishonesty elements of the claim, quantum was also in dispute. One of the main issues were whether the payments the claimant had received from the Racing Industry Accident Benefit Scheme (RIABS) should be credited against any damages awarded to reduce the defendant's liability.

The judge held that the payment should be credited within the claim and that there were two exceptions to the rule against double recovery, which fall under the case of Parry v Cleaver [1970]: the benevolence exception and insurance monies. The judge held that the payments from this scheme could not be classified as the same as payments by third parties out of sympathy. The judge referred to Lord Justice Dyson's comments in Gaca at paragraph 56 where he said: "the insurance monies must be deducted unless it is shown that the claimant paid or contributed to the insurance premium directly or indirectly". The judge confirmed that the claimant, whilst aware of the scheme, was not making any contribution herself to it and it was a 'perk' of her employment. As such, the damages that would have been payable by the defendant (had the claim succeeded) would have been reduced to reflect the £77,159.23 that the claimant received from RIABS.

One other point to note from the quantum arguments in the case, was the claimant's claim for her loss of employment. The claimant was initially seeking £20,000; however, the judge deemed that she was unlikely to be able to ride professionally past the age of 50 and therefore limited the award to £2,750.

Final criticisms by the judge

After giving the judgment, the judge also made many criticisms of the case. The first was that consideration should have been given to having a trial of liability as a preliminary issue. Particularly criticism in this regard was given because the cases cited in respect of the claim under the Animals Act 1971, had done precisely that: been decided at the trial of a preliminary issue. This should have alerted the parties to the fact that this would have been an appropriate way of dealing with the case at the first Case Management hearing.

The second significant criticism was that the parties had not given due consideration to the appropriate forum for the claim. For the judge, this was the Cardiff County Court, particularly given the parties were 'relatively close' to Cardiff and the claim was valued at under £500,000. The reasons for the forum selection by the parties, such as the remote evidence abilities of the high court being preferable, were inadequate, particularly given the issues with some of the remote evidence and not being able to hear witnesses adequately.

Key Takeaways

Always remember the burden of proof is on the defendant to establish fundamental dishonesty. Not only does the defendant need to prove, on the balance of probabilities that the claimant has been dishonest, but that the dishonesty is fundamental to the claim or part of the claim. It will be important for defendant's representatives to manage their client's expectations: even if evidence appears to reveal the claimant's honesty, if it is mere exaggeration, it will not be fatal to the claim.
Surveillance evidence can be extremely useful in supporting fundamental dishonesty arguments. This should be considered in light of the expert's evidence and claimant's claim as to the level of injury suffered and the claimant's recovery.
Consider whether the extent of the dishonesty goes to the heart of the claim and whether it impacts the amounts the claimant is seeking.
Consider the value of the claim – should it be listed in a different court? If it is less than £500,000 it should be issued in a county court.
Consider how you will be able to justify issuing in the High Court. In this case, the claimant's argument of remote evidence being preferable/better in the High Court was not borne out as there were difficulties in hearing evidence from some of the witnesses
Consideration should have been given to a trial of liability as a preliminary issue as each of the cases that had been cited to the judge had done so. Failure to do so can result in cost consequences and criticism from the court
The litigation should be managed in an objectively reasonable way (and heard in a District Registry if that is proximate to the parties) and not organised for the convenience of the solicitor or counsel team. In particular, parties should bear in mind whether they will be able to recover the costs of instructing solicitors in London when local solicitors would have been available.

Regulators support government growth objective and aim to reduce regulatory burden

Mon, 27 Jan 2025 14:27:00 Z

Since the general election, the new Labour government has been signalling its intentions for financial services as a key driver of its economic growth agenda and, following the Autumn Budget, HM Treasury launched a call for evidence which outlined the government's plans for its Financial Services Growth & Competitiveness Strategy (Strategy). The Strategy (due to be published in Spring 2025) will set the government's approach to the financial services sector for the next 10 years and will serve as the framework through which the government will deliver sustainable, inclusive growth for the sector and secure the UK's competitiveness as an international financial centre.

The call for evidence sets out five core policy pillars which the government says are central to the sustainable growth of the sector. These are:

Innovation & technology: enabling and supporting increased digital adoption, including AI, which have the potential to increase productivity and open up new products and services.
Regulatory environment: ensuring there is a robust and transparent regulatory framework to support growth whilst also maintaining financial stability.
Regional growth: promoting growth across all regions to ensure the benefits of the UK's financial sector are felt nationwide.
Skills & access to talent: ensuring a strong pipeline of homegrown talent and that the UK remains an attractive destination for top talent internationally.
International partnerships & trade: maintaining the UK's success as a global financial hub through strong trade arrangements and international leadership on financial regulation.

The government also highlighted several key priority growth opportunities, including the London insurance and reinsurance markets, and the government has committed to listen to the sector about what it needs to continue to succeed.

In relation to the "regulatory environment" pillar, the government called out several of the FCA and PRA's ongoing workstreams and praised the UK regulators for actively considering ways to help the insurance and reinsurance markets grow and compete. Despite this, the government considers that there is still work to be done to ensure that financial regulation is proportionate and supportive of economic growth in the UK.

One example is the current certification regime under the SM&CR, which the government thinks is overly costly and an administrative burden, and should therefore be replaced with a more proportionate approach. The Chancellor recently confirmed that when the FCA and PRA publish the outcome of their review of SM&CR, this will include a commitment by the regulators to consult on removing the current certification regime from legislation.

FCA response

In a letter addressed to the Prime Minister, Nikhil Rathi (FCA CEO) has now set out the FCA's wider plans to support economic growth in line with the Strategy. In particular, the FCA will look to reduce the regulatory burden on firms by:

Streamlining the FCA Handbook following input from industry on rules which could be simplified or removed.
Making the SM&CR more flexible (as noted above, the regulators are likely to consult on removing the current certification regime to reduce cost and administrative burden for firms).
Removing the need for a Consumer Duty Board Champion now the Duty is in effect.
Ensuring that future consultations on consumer protection ask if the Consumer Duty is sufficient or whether new rules are required.
Reviewing the proportionality of reporting requirements and removing redundant returns (initially expected to benefit 16,000 firms).
Working with the BoE/PRA to reduce reporting requirements more generally.
Reducing conduct requirements for wholesale insurers.
Reforming the Consumer Credit Act 1974.
Simplifying responsible lending and advice rules for mortgages, supporting home ownership and opening a discussion on the balance between access to lending and levels of defaults.
Consulting on removing maturing interest-only mortgage and other outdated guidance.
Working with the government to remove overlapping standards, eg the Mortgage Charter.

The letter also says that the FCA could go even further and, with government support, reduce costs of AML measures by relaxing KYC requirements on small transactions.

PRA response

The PRA is also proposing to support the Strategy by:

Simplifying the prudential regime for small banks.
Increasing the ability of the insurance sector to invest in the UK economy.
Improving the UK framework for Insurance Special Purpose Vehicles (ISPVs) including simplifying and accelerating the ISPV authorisation process.
Making further amendments to remuneration requirements to enhance competitiveness.
Simplifying regulatory data reporting from banks.

In addition, the PRA would like to explore with the government whether there are wider changes which could support UK growth as follows:

'Concierge service' for new inbound foreign firms.
Rationalising the UK financial services regulators' 'have regards'.
Looking for potential overlaps between the PRA's governance and disclosure requirements and those of legislation or other relevant regulators.

What's next?

The government's proactive approach to fostering growth in the financial services sector is commendable and, by targeting innovation and regulatory reform, the Strategy sets a robust foundation for economic development. Streamlining current regulatory requirements, eg the SM&CR, and reducing the administrative burden on firms could enhance the UK's attractiveness as a global financial hub. However, any regulatory adjustment must be carefully managed to avoid compromising financial stability and the FCA has already stressed that it will not deregulate where consumers may be at risk.

While the Strategy is promising, its success will depend on effective collaboration between the government, regulators and industry stakeholders. The government's commitment to listening to the sector and adapting policies based on feedback is encouraging but continuous dialogue and a flexible and responsive approach to regulation will be key to achieving sustainable growth and enhanced competitiveness for the UK's financial services sector.

FCA consults on new reporting obligations for (i) incidents and (ii) third party arrangements

Thu, 16 Jan 2025 16:19:00 Z

On 13 December 2024, the FCA published consultation paper CP24/28 (the CP) on proposals for firms to report on operational incidents and, separately, on material third party arrangements. The CP mirrors similar proposals put forward by the PRA and Bank of England on the same day and is designed to align with current international standards (e.g. the EU Regulation on digital operational resilience (DORA)).

Operational incident reporting

Firms are currently required to notify the FCA of operational incidents under Principle 11 and SUP15.3. However, the FCA notes that some firms are unclear on when to report incidents and that reporting is often inconsistent as there is no standardised template. The proposals in the CP aim to introduce a consistent, sufficient, and timely reporting framework. The FCA has also aligned these proposals with other incident reporting regimes (e.g. DORA and the Financial Stability Board's FIRE) where possible.

These proposals apply to (regulated) firms, payment service providers, UK Recognised Investment Exchanges, registered trade repositories and registered credit rating agencies.

The FCA proposes that an "operational incident" be defined as a single event (or series of linked events) that disrupts the firm's operations where it either: (i) disrupts the delivery of a service to the firm's clients or a user external to the firm; or (ii) impacts the availability, authenticity, integrity or confidentiality of information or data relating to or belonging to the firm's clients or a user external to the firm.

Firms would be required to report on operational incidents that breach one or more of the following thresholds:

Consumer harm: the incident could cause or has caused intolerable levels of harm to consumers, and they cannot easily recover as a result.
Market integrity: the incident could pose or has posed a risk to market stability, market integrity, or confidence in the UK financial system.
Safety and soundness: the incident could pose or has posed a risk to the safety and soundness of the firm or other market participants.

Firms would be required to assess for themselves whether an incident has met these thresholds. The FCA does not intend to introduce specific metrics or an exhaustive list of incident types. However, it has provided the following factors for firms to take into account:

the direct and indirect impact on the firm's clients or the wider sector;
the direct and indirect impact on the firm's consumers;
the firm's ability to provide adequate services;
the firm's or the sector's reputation;
the firm's ability to meet its legal and regulatory obligations; and
the firm's ability to safeguard the availability, authenticity, integrity or confidentiality of data or information relating to or belonging to a client or user.

Firms that must report an operational incident will be required to provide an initial incident report, (where relevant) intermediate incident reports to update the FCA on progress, and a final incident report. Reports are to be submitted on an online FCA platform to be developed and following a standardised template. The categories of data required to complete the various reports are set out in Appendix 2 of the CP. The FCA has also included a proposed process for reporting summarised in the figure below:

Source: FCA Consultation CP24/28, section 3.28

Third party arrangements reporting

The FCA also aims to improve its visibility of material third party arrangements and expects that this additional information will assist in identifying systemic risks. The FCA has said that it will use this information to help it identify critical third parties under the separate Critical Third Parties oversight regime (see RPC summary here).

The proposals in the CP apply to a smaller sub-set of firms comprising: (i) enhanced scope Senior Managers & Certification Regime firms; (ii) banks; (iii) PRA-designated investment firms; (iv) building societies; (v) Solvency II firms; (vi) Client Assets Sourcebook large firms; (vii) UK recognised investment exchanges; (viii) authorised electronic money institutions or authorised payment institutions; and (ix) consolidated tape providers.

Firms are currently only required to notify the FCA of material outsourcing arrangements under SUP 15. However, the FCA has found the information provided to be limited and inconsistent. It also considers that the distinction between outsourcing and non-outsourcing third party arrangements is no longer useful as the latter may be just as critical as the former.

As a result, the FCA proposes to include two new definitions in the Handbook:

"third party arrangement" is any arrangement for products or services between a firm and service provider, and includes both outsourcing and non-outsourcing arrangements as well as intra-group arrangements

"material third party arrangement" is any third party arrangement where a disruption or failure in performance could do one or more of the following: (i) cause intolerable levels of harm to the firm's clients; (ii) pose a risk to the soundness, stability, resilience, confidence, or integrity of the UK financial system; or (iii) cast serious doubt on the firm's ability to satisfy the threshold conditions (under the Handbook) or meet its obligations under the FCA's Principles for Business or under SYSC 15A (operational resilience).

When determining the materiality of a third party arrangement, firms would be required to consider the following factors:

direct connection to the performance of a regulated activity;
size and complexity of the business area/function supported by the third party arrangement;
the potential impact of a disruption, failure, or inadequate performance of the third party arrangement on the firm;
the firm's ability to scale up the third party service; and
the firm's ability to substitute the service provider or bring the service in-house.

The FCA has clarified that basic utilities (e.g. electricity) and functions that are statutorily required to be performed by a service provider (e.g. audits) are out of scope of this framework.

Firms would be required to notify the FCA of any material third party arrangement prior to entering into or significantly changing the material third party arrangement. The FCA has proposed templates for notifications (in Appendix 3 of the CP) which have been aligned, as far as possible, with other requirements e.g. the EBA Outsourcing Guidelines and DORA. Firms would also have to maintain and submit a register of material third party arrangements annually using an FCA platform..

The existing definition of "material outsourcing" remains as is. Firms which are caught by this new reporting framework would only need to notify material outsourcings under the new rules, so will not need to notify the FCA twice. Firms which are not caught by the new reporting framework would still need to notify the FCA of material outsourcings under SUP 15.

Finally, there is reference in the CP (section 4.13) to firms being required to implement "controls that are appropriate to the materiality" of a third party arrangement. The FCA states (in the consultation) that these controls would not have to be the same that apply to outsourcings under SYSC 8 (SYSC 13.9 for insurers) but does not otherwise explain what is expected of firms in this regard.

Next steps

The deadline for comments is 13 March 2025. The FCA will consider feedback and publish finalised rules in H2 2025.

Failure to prevent fraud: key guidance released

Fri, 08 Nov 2024 10:14:00 Z

Important new guidance released

On 6 November 2024, the Home Office released its much-anticipated guidance on the new failure to prevent fraud offence and the procedures that organisations can implement to prevent associated persons from committing fraud offences. Running to 44 pages, this guidance is crucial as it provides a framework for large organisations to establish effective fraud prevention measures.

In scope companies now have nine months to ensure their fraud prevention procedures meet these standards. In this article we will consider some of the key issue arising from the guidance and look at practical considerations for companies that our expert, multi-disciplinary team has identified in our work advising several companies as they have been preparing for the new offence.

Overview

The Economic Crime and Corporate Transparency Act (ECCTA), which passed into law in October 2023, introduced the offence of failure to prevent fraud. This corporate criminal offence applies to large organisations that fail to prevent their “associated persons” – which includes employees, subsidiaries, agents, and other third parties providing services on their behalf – from committing fraud offences that benefit the organisation. Consequences can be severe, with organisations facing potentially unlimited fines if convicted.

The new offence marks a sea change in the way large companies should consider fraud risk. At present, the vast majority of companies' fraud policies focus on the risk of a company losing money to fraud. The new offence requires to consider the risk of it and its associated persons perpetrating fraud.

The offence

The offence targets "large organisations", that is to say, organisations that meet at least two of the following criteria: 250 or more employees, a turnover of £36m or more, and/or assets of £18m or more.

Key fraud offences in scope include those specified in the Fraud Act 2006, such as fraud by false representation, failing to disclose information, and abuse of position, and also offences under the Theft Act 1968 like false accounting and false statements by organisation directors. Additionally, the Act covers cheating the public revenue, and fraudulent trading under the Companies Act 2006.

Under the ECCTA, frauds committed by "associated persons" intending to benefit the organisation, whether directly or indirectly, are particularly targeted. This could include, for instance, greenwashing or misleading environmental claims, misselling of products or services, and other misrepresentations made by "associated persons" for the benefit of the organisation with the intention of making a gain for that organisation, causing a loss, or exposing another to risk of loss.

The reasonable procedures defence and guidance

Organisations can establish a defence by demonstrating that, at the time its "associated person" committed an underlying fraud offence on its behalf, it had reasonable fraud prevention procedures in place. The newly released guidance outlines what is expected of organisations to meet this standard and includes wide ranging requirements including regular risk assessments, adequate resourcing and appropriate use of data analytics and AI.

During the process of drafting the guidance, the Home Office sought input from numerous industry sectors and bodies, including the from the legal profession. Sam Tate, Head of White-Collar Crime and Compliance at RPC was a contributing member of the City of London Law Society group that provided input, reviewed and commented on the guidance before publication.

The offence will come into effect on 1 September 2025. This means, organisations now have nine months to ensure their procedures align with the standards set out in the guidance. Although this sounds like a fairly long time period, many companies will face much work to meet the standards set out in the guidance, and those that have not already begun to develop their fraud prevention procedures should start now. The importance of taking prompt action has been emphasised by Nick Ephgrave, the Director of the SFO, who stated on the release of the guidance that "time is running short for corporations to get their house in order or face criminal investigation.”

Key practical considerations from the guidance and steps to take for companies

Timing – the offence will come in to force on 1 September 2025. This gives companies nine months to develop their fraud prevention plans.

Principles-based guidance – the guidance is structured around six risk-based principles of compliance; these principles essentially mirror those that were the basis of the guidance issued in support of the Bribery Act 2010, for establishing "adequate procedures" to prevent bribery. Therefore, many compliance professionals will be well acquainted with this principles-based approach to establish effective controls.

These principles, which are intended to be outcome-focused and proportionate to the risks a business faces, are:

top-level commitment
risk assessment
proportionate risk-based prevention procedures
due diligence
communication (including training)
monitoring and review.

The guidance contains detailed recommendations and suggestions across all six of these principles. Below we set out some key elements of the guidance that highlight the steps companies should consider as they prepare for the offence to come into force.

Conducting risk assessments – the guidance places particular importance on conducting thorough risk assessments. For most companies, a fraud risk assessment will be the first step in their fraud prevention plan, with the outcome indicating what areas of their organisation might require additional resourcing and focus and what steps might need to be taken next. Risk assessments are not static documents and should be reviewed at regular intervals. The guidance suggests this might be annually or biannually, depending on the risks faced by the business. Failure to review the risk assessment regularly may bring the reasonableness of the organisation's fraud prevention programme into question. RPC's team has extensive experience advising companies in conducting risk assessments across a wide range of financial crime areas and is now advising numerous companies in conducting their fraud risk assessments.

Jurisdiction and territoriality – the offence has potentially very broad extra-territorial application, and the guidance provides important context on this point. The offence applies to companies established anywhere in the world, but it will only apply where the associated person commits an underlying UK fraud offence. This means that, in general, the fraudulent act must involve one or more acts taking place in the UK or result in a gain or loss occurring in the UK. If there are UK-based victims of the fraud offence, this would likely meet the territoriality threshold. This means that when conducting their fraud risk assessments, companies (including those mainly operating outside the UK) should consider whether there are any elements of UK nexus across their business, including internationally, in their wider group.

The "fraud triangle" and risk typologies – under the new guidance, companies are encouraged to approach risk assessment proportionately, focusing on how “associated persons” may pose fraud risks. This begins with an understanding of the “fraud triangle” – motives, opportunities, and rationalisations that might drive individuals to commit fraud. By evaluating these drivers, organisations can create typologies, or risk profiles, tailored to their operations, helping to spot vulnerabilities more proactively. The guidance indicates that this may include assessing the typologies of associated persons an organisation engages as a starting point and considering the circumstances under which each of these groups might attempt to commit fraud. Risk assessments are expected to be dynamic; a tailored, evolving process that combines data analysis, industry trends, and past cases to stay resilient against emerging fraud threats.

Emergency scenarios – the guidance indicates that it may be reasonable to expect an organisation to consider the types of fraud prevention measures that might need to be taken in emergency scenarios, as well as how it may transition back to business as usual once the emergency has passed. Therefore, some organisations may need to develop contingency plans that ensure they can swiftly implement and roll back emergency fraud prevention measures where necessary.

Resourcing and training – the guidance places emphasis on the importance of organisations providing sufficient resources and budget to address fraud risks. This includes:

(i) ensuring adequate leadership and staffing to implement and manage its fraud prevention framework
(ii) ensuring that staff receive training tailored to their roles, helping them understand both specific fraud risks and reporting procedures
(iii) potentially providing funding for technology such as third party due diligence platforms and tools.

Use of data, technology, and AI – there are several references in the guidance to the use of data analytics, technology, and artificial intelligence (AI) as tools that might be deployed in an organisation's fraud detection and prevention programme. This might include using these tools to assist with ongoing monitoring and review through the detection of anomalous or high-risk behaviours. Having advised multiple companies on the development and implementation of technology platforms as part of their compliance framework, RPC has found that investing in these tools not only enhances oversight but introduces real benefits in identifying and mitigating fraud risk. The use of such tools also demonstrates a robust commitment to fraud prevention.

Management information – relatedly, the guidance states companies should establish systems to collect management information on fraud-related activities, which may include tracking incident trends, compliance metrics, and risk assessments. Regular reporting enables leadership to assess the effectiveness of anti-fraud measures and adjust strategies as necessary to address vulnerabilities.

Learning from past incidents – organisations are expected to learn lessons from internal data in the form of previous audits, investigations, and issues that have arisen as well as external data such as industry trends and, once they occur, prosecutions or deferred prosecution agreements related to the offence. These lessons should be factored into fraud prevention procedures, risk assessments, communications to employees, and the way fraud risk is monitored and reviewed.

Policy and code of conduct – while the guidance does not specifically require an organisation to create a standalone fraud policy, it does indicate that companies are expected to at least include fraud prevention principles within existing policies or codes of conduct. Such policies should articulate the organisation’s commitment to preventing fraud, outline key anti-fraud procedures, and clarify consequences for non-compliance.

Fraud prevention procedures – with respect to policy and procedure, the guidance states that reasonable procedures may include steps such as:

employee vetting: conduct thorough vetting, particularly for high-risk positions, to ensure integrity and prevent fraud
financial controls: implement best practices for financial reporting, emphasising transparency and accountability
conflict of interest management: assess the adequacy of existing conflict of interest procedures and if necessary, strengthen procedures
third-party contract review: ensure contracts with third parties include anti-fraud clauses, with regular reviews to adapt to evolving risks and changing relationships.
clear disciplinary measures: establish, and communicate, clear consequences for employees who commit fraud

Investigations – companies should consider the ways in which they will investigate incidents of potential fraud committed for its benefit. This may involve reviewing existing procedures relating to internal investigations, including oversight of those processes and when it will be suitable to appoint an external, independent investigator. Companies should also consider how the outcomes of fraud investigations are communicated within the organisation, including to management, along with how any lessons learned will be integrated into the fraud prevention procedures.

Fraud risk impact assessment – the guidance recommends conducting fraud risk impact assessments to address the unique and novel risks that may arise in relation to new services or the engagement of new associated persons. This is to ensure that existing controls are sufficient to address new risks presented, and where they are not, to ensure countermeasures are deployed.

Differentiated procedures – it may be acceptable for an organisation to apply different fraud prevention procedures to different categories of associated persons, such as employees and overseas agents, especially where overseas law limits the controls that can be implemented.

Developments since the Bribery Act

The guidance for ECCTA builds on the foundation laid by the guidance to the Bribery Act 2010. Overall, the ECCTA guidance provides a more detailed and structured set of procedural recommendations providing companies with a more comprehensive guide to developing their fraud prevention framework. This is, at least in part, likely due to the maturation of the sector as a whole since the introduction of the Bribery Act. Examples include references to the use of management information and conducting internal investigations as key components of establishing an effective compliance framework.

Within the guidance, this is effectively acknowledged by the Home Office which advises organisations to leverage their existing compliance mechanisms and processes. This should help to enable organisations to develop a cohesive approach to financial crime, streamlining their compliance efforts and avoiding duplication of work.

Finally, the passage of time since the Bribery Act also sees this guidance seek to take advantage of the many technological developments within the financial crime compliance sector. The guidance emphasises the use of advanced technology and data analytics to detect and prevent fraud. This includes leveraging AI and other technological tools to enhance fraud detection and monitoring processes. Furthermore, the guidance envisages the data captured through these tools will be integrated into management information systems ensuring that organisations, and in particular their senior managers, can effectively track and respond to fraud risks.

Conclusion

The ECCTA guidance sets out clear, actionable expectations for organisations to prevent fraud. It emphasises the need for effective, risk-based procedures that address both internal and third-party risks, tailored to different roles and regional contexts. This guidance underscores the importance of financial controls, due diligence, and accountability, offering practical steps to help organisations meet legal obligations. The approach taken in the guidance not only reinforces corporate transparency but also promotes a culture of ethical integrity, which should hopefully help to deter fraud effectively.

Government consults on regulation of Buy-Now Pay-Later products

Fri, 25 Oct 2024 10:00:00 +0100

This followed recommendations made in the Woolard Review which raised concerns about the increased use of BNPL products during the pandemic and the significant risk that these unregulated credit products could cause consumer harm.

The government initially consulted on policy options to deliver a proportionate approach to regulation, and then consulted in 2023 on draft legislation to bring BNPL within the regulatory perimeter. Building on this work, the new Labour government has now launched a third consultation setting out its plans and draft legislation for regulating the BNPL market. The FCA has welcomed the government's consultation.

Draft legislation

The consultation sets out the government's position in various key areas covered in the draft legislation. These include scope, disclosure requirements and a Temporary Permissions Regime (TPR).

Scope of regulation

The government has largely decided to follow the approach of the previous government by limiting the scope of regulation in the first instance to agreements offered by third-party lenders. This means that agreements provided directly by merchants (i.e. the provider of the goods and services that the agreement finances) will continue to be exempt under Article 60F(2) RAO.

To bring third-party agreements within scope of regulation, the government proposes to add a new category of regulated agreement – a Regulated Deferred Payment Credit (DPC) Agreement – that would not be subject to the Article 60F(2) exemption. The draft legislation published alongside the consultation creates three new regulated activities in respect of regulated DPC agreements:

entering into a regulated DPC agreement as lender
exercising, or having the right to exercise, the lender's rights and duties under a regulated DPC agreement
credit broking (for domestic premises suppliers that offer newly regulated agreements)

Although the immediate focus is on third-party DPCs, the government intends to monitor developments in the merchant-provided credit sector closely and will act if it sees evidence of substantial growth in that market or significant potential for consumer harm.

Other exemptions

The draft legislation specifically aims to preserve the Article 60F(2) exemption for certain arrangements that are not considered to present a substantive risk of consumer harm. These are set out in the proposed Article 60F(7B) RAO and include agreements financing contracts of insurance, registered social landlords and employer/employee lending.

Information requirements

One of the key principles driving the government's approach to regulation of BNPL is that consumers must have access to simple, clear, understandable and accessible information. The government intends for the FCA to develop an information disclosure regime in line with the Consumer Duty and therefore the information requirements applicable to BNPL will be set out in the FCA Handbook, rather than the Consumer Credit Act 1974 (CCA).¹ This means that various CCA provisions will be disapplied for BNPL, including the requirement to provide pre-contract credit information and the provisions governing arrears, default and termination notices.

When developing its rules, the FCA will also consider the suitability of the existing Consumer Credit sourcebook requirements for BNPL lending and whether further rules are appropriate.

Temporary permissions regime (TPR)

The government intends to introduce a TPR to allow unauthorised firms to continue to operate their BNPL lending until their application for full authorisation has been processed. In order to enter the TPR, firms will have to have (i) already been engaged in the BNPL activity at the date when the FCA is permitted to set up the TPR, (ii) registered for the TPR and (iii) paid the FCA registration fee. Firms will then be able to use the TPR until their authorisation application has been approved, refused, withdrawn, or if they fail to apply within their designated landing slot.

Other regulatory controls

Although not covered in the draft legislation, the government intends for the following existing consumer protections to apply to newly regulated BNPL agreements:

Section 75 CCA
Creditworthiness and affordability assessments
Credit reporting
Financial Ombudsman Service

What's next?

The consultation closes on 29 November 2024 and responses should be submitted to BuyNowPayLater@hmtreasury.gov.uk. The government will then look to publish its final policy position before bringing forward legislation as soon as parliamentary time allows.

The FCA will then consult on its detailed rules, publish its final rules and open registration for the TPR. There will be a period between final rules and 'Regulation Day' for firms to finish preparing and to update practices and processes. The FCA has made it clear that it will be engaging with firms that it expects to be authorised very soon. Firms will then be subject to full regulation 12 months after the legislation is made.

¹The consultation confirms that the government is prioritising BNPL regulation at this stage but it plans to consult on wider reform of CCA in due course.

FCA consults on changes to the payments safeguarding regime

Thu, 24 Oct 2024 14:30:00 +0100

Current safeguarding requirements are set out in the PSRs and EMRs, with guidance contained in the Financial Conduct Authority's (FCA) Approach Document.

The FCA has long held concerns about the adequacy of the current payments safeguarding requirements and the impact this has on consumers, in particular those with characteristics of vulnerability. Although the FCA has issued guidance on safeguarding for payments firms, it is concerned that poor practices still exist across the industry. These have resulted in significant consumer harm where payments firms have entered insolvency as they have, for instance, led to shortfalls in the safeguarded funds held or delays in funds being returned to consumers. FSCS cover also does not apply in these situations which, added to the risks highlighted above, may mean that consumers lose money when a payments firm fails.

The FCA is also concerned about the risk of harm from the current legal framework, particularly following the Ipagoo and Allied Wallet judgments which have led to confusion and misinterpretation of the current requirements and have raised many questions as to the status of safeguarded funds on insolvency.

As a consequence, the FCA recently published its long-awaited consultation on proposed changes to the safeguarding regime for payments and e-money firms.

In its consultation, the FCA proposes radical reforms which will ultimately replace the existing requirements with a new CASS-style regime. The proposals represent a significant shift in how payments firms safeguard funds but the regulator says the changes will improve practices across the sector and minimise the risk of consumer harm.

The changes will be made in two stages – interim rules will provide clarity on (and support a greater level of compliance with) the existing requirements and end-state rules will replace the existing requirements and require relevant funds and assets to be held on trust.

Key proposed changes include:

Interim-state proposed rules

more detailed record-keeping and reconciliation requirements building on existing guidance (these will be similar to CASS 7 for investment firms)
requirement for firms to maintain a resolution pack
new monthly regulatory return and annual audit requirement
requirement for firms to allocate oversight of compliance with safeguarding requirements to a specified individual
additional safeguards where firms invest funds in secure liquid assets
requirement for firms to consider diversification of third parties with which they hold, deposit, insure or guarantee relevant funds and to undertake due diligence
more detailed requirements on safeguarding by insurance or comparable guarantee

End-state proposed rules (CASS-style regime)

requirement for firms to receive relevant funds directly into an appropriately designated account at an approved bank (except where funds are received through an acquirer or an account used to participate in a payment system)
a ban on agents and distributors receiving relevant funds unless their principal safeguards sufficient equivalent funds in designated safeguarding accounts
imposition of a statutory trust over relevant funds held by payments firms, and relevant assets, insurance policies/guarantees and cheques
more detail around when the safeguarding obligation starts and when funds become subject to the trust

The new rules will apply to PIs, EMIs, small EMIs and relevant credit unions, and small PIs will be able to opt-in (as they can currently).

What's next?

The consultation closes on 17 December 2024 and the FCA plans to publish its final interim rules in H1 2025.

It is anticipated that firms will have a 6 month implementation window before the interim rules come into effect so firms should start to consider the impact these rule changes will have on their operational processes and governance.

First conviction under section 2 CJA 1987 overturned – RPC Analysis

Mon, 23 Sep 2024 09:51:00 +0100

Background

In December 2018, Anna Machkevitch, daughter of Eurasian Natural Resources Corp ("ENRC") co-founder Alexander Mashkevich, was issued with a notice to produce specified documents under section 2(3) of the Criminal Justice Act 1987 ("Section 2 Notice"). This notice was issued in the context of the SFO's investigation into allegations of bribery, fraud, and corruption at ENRC. Although Ms Machkevitch was not a suspect in the ENRC investigation, section 2(3) enables the SFO to compel any person to produce documents which it believes relates to any matter relevant to its investigation.

On 30 January 2020, Ms Machkevitch was found guilty of failing to comply with the SFO's Section 2 Notice and was ordered to pay a £800 fine, a victim surcharge of £181 and the SFO's legal costs.

This conviction was significant for company officials and third parties who work closely with companies and may find themselves subject to a Section 2 Notice, as it highlighted the SFO's willingness to charge and prosecute witnesses for failing to comply with a Section 2 Notice. It is worth noting that although Ms Machkevitch did eventually supply the documents to the SFO after being charged, the SFO continued to pursue a conviction. The prosecution was presumably intending to send a clear message about the consequences of non-compliance with Section 2 Notices and the importance of cooperating with SFO investigations generally.

Why was the conviction overturned?

In May 2022, following a civil claim made by ENRC against its former law firm, the SFO and others, Mr Justice Waksman ruled that both ENRC's solicitor and senior officers at the SFO had breached their respective duties during the investigation into ENRC. The court found that the SFO officers had accepted information from ENRC's solicitor knowing that he was unauthorised to give the information and that in doing so, he would be acting against his client's best interests. The court ruled that the SFO had induced the solicitor's breaches of contract and had displayed "bad faith opportunism". Subsequently, in August 2023, the SFO dropped its criminal investigation into ENRC citing "insufficient admissible evidence to prosecute".

Ms Machkevitch appealed her 2020 conviction for breach of the Section 2 Notice. Ms Machkevitch's legal counsel argued that the judge's findings against the SFO in the ENRC claim "nullified the legitimacy of the prosecution against Anna Machkevitch". The reason for this being that for there to be a conviction under section 2 of the Criminal Justice Act 1987 there must be a related investigation and had the SFO not breached its duties, there would have been no investigation into ENRC.

The court granted Ms Machkevitch leave to appeal and the SFO offered no evidence to oppose the appeal acknowledging that there was "no realistic possibility of conviction". On this basis, the court allowed the appeal and overturned Ms Machkevitch's conviction.

What next?

This case will likely have limited application to future convictions under section 2(3) because only in very rare circumstances will the investigation be invalid from the start. It is also important to note that section 211 of the Economic Crime and Corporate Transparency Act 2023 (ECCTA) will empower the SFO to compel a person to provide documents during its pre-investigation stage in cases of suspected bribery, corruption, or fraud. Meaning the SFO will not be required to lodge a formal investigation before it issues a Section 2 Notice.

Analysis by:

Sam Tate – Sam.Tate@rpclegal.com

Oluchi Nnadi – Oluchi.Nnadi@rpclegal.com

If you want to know more about corruption, fraud and bribery please contact our White Collar Crime team.

The Corporate Sustainability Due Diligence Directive expert briefing

Mon, 08 Jul 2024 17:36:00 +0100

CSDDD will have a seismic effect on many companies, requiring those in-scope to conduct due diligence to identify, prevent and mitigate the adverse environmental and human rights risks and impacts of their business operations and supply chains. It will also require companies to adopt and implement a net zero transition plan in line with the 1.5°C target in the Paris Agreement.

While this law is primarily targeted at large European Union companies it will also impact certain non-EU companies operating in the Union meeting specific turnover and employee thresholds.

Companies that fail to comply could see themselves facing large regulatory fines with a maximum level of no less than 5% of the company's net worldwide turnover in addition to potential civil claims.

The transition to compliance with the CSDDD will undoubtedly present challenges, but it also offers opportunities for companies to demonstrate leadership in sustainability and responsible business conduct. By proactively addressing environmental and human rights issues, companies can enhance their reputations, build trust with stakeholders, and potentially gain a competitive advantage.

For a deeper dive into the specifics of the CSDDD and how it may impact your business, we invite you to read our expert briefing here, which answers FAQs, including:

what are the key obligations under the CSDDD?
which companies are in scope?
when will the new rules apply?
what are the risks of non-compliance?

The Economic Crime and Corporate Transparency Act: the clock is ticking for companies to prepare

Tue, 14 Nov 2023 18:01:00 Z

Significant changes to the English law of corporate criminal liability have been introduced as part of the Economic Crime and Corporate Transparency Act 2023 (the Act), which received royal assent on 25 October 2023. Companies now face enhanced criminal risks (including potentially unlimited fines) in connection with conduct that previously might have remained in the civil Courts and raised expectations around compliance programmes. Companies now have a limited period of time to prepare for the changes presented by the new legal landscape.

In this article we look at two key reforms to the law of corporate criminal liability introduced by the Act.

The Act has created a new offence of "failure to prevent" fraud, which is expected to come into force by the end of the first quarter 2024. This new offence is part of a wider reform of corporate criminal liability, but applies only to large organisations and their subsidiaries.
The Act also expands the reach of the identification doctrine, which is the process by which the acts of individuals are attributed to a company, for the purpose of attributing criminal liability to the company for a broad range of economic offences.

The changes are made in the context of an increased focus on fraud among regulators and prosecutors, particularly since Government statistics released in 2022 indicated that fraud accounted for 41% of all crime against individuals in England and Wales. The failure to prevent fraud offence is one tool being introduced to seek to address this rise in fraud and it will mark a sea change in the way large companies are expected to structure their compliance procedures with respect to fraud. At present, the vast majority of companies' fraud policies focus on the risk of a company losing money to fraud.

Companies should now start to review their compliance programmes in order to determine if they will need to be updated to ensure they cover the risk of the company and its associated parties defrauding others.

Set out below is:

an overview of the key elements of the new failure to prevent fraud offence and some practical examples of how this offence may apply to large companies in different circumstances, such as when making statements about the company's performance and/or green credentials and sales practices;
an overview of the changes to the test for corporate criminal liability and its likely impact on companies of all sizes; and
practical steps companies can take now to prepare for the coming changes.

1. The failure to prevent fraud offence

The offence's mechanics

The failure to prevent fraud offence is set out in section 199 of the Act. Under the new offence, a large organisation (and its subsidiaries) will be liable if it fails to prevent an associated person committing a specified fraud offence where that fraud is intended to benefit the organisation or a person to whom services are provided on behalf of the organisation.

Significantly, there is a total defence to the failure to prevent fraud offence where an organisation can demonstrate it had in place reasonable procedures at the time of the offending.

It should also be noted that an organisation will not be liable for the offence in certain circumstances where it can show it was the intended victim of the underlying fraud.

Which fraud offences are in scope?

The fraud offences covered by the offence are set out in schedule 13 of the Act. They are wide ranging and include (as well as aiding, abetting, or procuring the commission of such offences) the following offences (along with further offences under Scottish and Northern Irish criminal law):

Fraud by false representation (section 2, Fraud Act 2006);
Fraud by failing to disclose information (section 3, Fraud Act 2006);
Fraud by abuse of position (section 4, Fraud Act 2006);
Participation in a fraudulent business (section 9, Fraud Act 2006);
Obtaining services dishonestly (section 11, Fraud Act 2006);
False accounting (section 17, Theft Act 1968);
False statements by company directors (Section 19, Theft Act 1968);
Fraudulent trading (section 993, Companies Act 2006); and
Cheating the public revenue (common law).

In practice, this list of offences will capture a broad range of conduct. This will likely include statements made by companies in their financial documents and accounts, regulatory filings, sales materials, insurance claims and prospectuses. In all cases though, the underlying fraud offence must be made out, so a prosecutor would always need to establish dishonesty on the part of the perpetrator as a first step. Also, while the failure to prevent offence itself does not impose any jurisdictional limits on how closely connected to the UK the conduct must be, the jurisdictional limits of the underlying fraud offence must be met in any prosecution.

Which organisations are in scope?

As a starting point, the failure to prevent offence applies to companies and partnerships, wherever in the world they are incorporated or formed. However, there is an important limitation based on an organisation's size.

Prior to the Act receiving royal assent, a final area of debate between the Houses of Commons and Lords revolved around whether all companies and partnerships, regardless of size, should be in scope for the new offence. Ultimately, it was determined that the principal failure to prevent fraud offence only applies to "large organisations".

Large organisations are defined as organisations which in the financial year prior to the year of the offence, satisfy two or more of the following:

Turnover of more than £36 million;
Balance sheet total of more than £18 million; or
More than 250 employees.

This does not, however, mean that companies that do not meet those thresholds are completely outside the scope of the new offence. Subsidiaries of large organisations, regardless of their size, will be liable for fraud offences committed by their employees (but not a wider group of associated persons) where the intention of the conduct was to benefit the subsidiary. This could mean that small, UK based subsidiaries of larger overseas companies may fall within the scope of the offence.

Who is an associated person?

The definition of an associated person is similar to that under the Bribery Act 2010 but with some important distinctions. Like with the Bribery Act, a person who performs services for or on behalf of a company will be an associated person under the new offence. However, unlike under the Bribery Act, under the new offence, employees, agents and subsidiaries will automatically be associated persons of a company. This marks a change from the Bribery Act, particularly in the case of subsidiaries, where there is often real analysis to be performed as to whether they are in fact performing services on behalf of their parent company.

Who might be an associated person?

Employees
Agents
Subsidiaries
Advertisers hired by a company
Brokers and sales agents acting for a company
Professional advisers

Hypothetical examples of the failure to prevent fraud offence

Let's consider three hypothetical scenarios alongside this new failure to prevent fraud offence.

Scenario 1 – Greenwashing in an annual report: A FTSE 250 UK consumer goods business claims in its annual report that the creation of its products is net-zero with respect to CO2 emissions. This statement was inserted by a team of analysts who knew it was not likely to be true when tested but wanted to satisfy shareholder demands around sustainability and the good press that would flow from making this statement. It is subsequently determined that this environmental claim is misleading.

In this scenario, it would appear likely that the employees who made the statement were associated persons of the company and, subject to establishing dishonesty on their part, committed an underlying fraud offence.

This is, therefore, likely to mean that the corporate (assuming it is sufficiently large and does not have in place reasonable prevention procedures) will have committed the offence of failing to prevent this fraud from taking place, even if no senior individuals in the company knew about it.

Scenario 2 – Misleading telesales scripts: A junior employee in the telesales team at a company selling boilers drafts a script that contains deliberately misleading statements about the safety record of one of the boilers he is trying to sell with the intention of increasing sales of the boiler. He uses that script when speaking to potential customers.

Even though the employee here is junior within the company, it is likely the boiler company (assuming it is sufficiently large and does not have in place reasonable prevention procedures) will be liable for the failure to prevent fraud offence on the basis of his conduct.

Scenario 3 – Misleading search engine adverts: A search engine runs an advertisement for a carbon credit trading scheme that is identified as a sham.

It is unlikely that the fraudster setting up the carbon credit trading scheme would be an associated person of the search engine company and would not be acting for the benefit of the search engine in creating this fraudulent scheme. Therefore, it is unlikely this would lead to a prosecution of the company that runs the search engine for failing to prevent this fraud.

2. Revision of the identification doctrine for economic crime offences

The failure to prevent fraud offence is just one way the Act seeks to reform the law around corporate criminal liability. Additional changes are also made under the Act to extend the scope of corporate criminal liability for all companies in relation to a range of wider economic offences. These wider changes to the law of corporate criminal liability are explored below and will take effect sooner than the failure to prevent offence; from late December 2023.

Currently, corporate criminal liability is generally established under English law by using the "identification doctrine". This is a legal test for determining whether the actions of a natural person can be attributed to a corporate to create criminal liability for the corporate. Under current law, the natural person in question must be the "directing mind and will" of the company for its actions to be attributed to the company.

The identification doctrine has been criticised for causing difficulty when prosecuting corporates as it has been very narrowly interpreted by the Courts. This has created significant challenges for prosecutors when pursuing large organisations in particular as they generally have multiple layers of management, so it is difficult to identify the directing mind and will. By way of example, the Serious Fraud Office's (SFO) prosecution of the Chief Executive Officer and Chief Financial Officer of Barclays Bank Plc, amongst other senior leaders, failed in 2020 as the Court found these individuals did not represent the directing mind and will of the bank.

Section 196 of the Act is set to change this test for a wide range of economic crime offences to better reflect modern, complex corporate structures. The identification doctrine will remain as the test for attributing the action of an individual to a company, but the directing mind and will test will be replaced by a new test based on whether or not the individuals involved are considered to be "senior managers" of the company. A senior manager is defined as an individual who plays a significant role in the decision making, management or organisation of the whole or substantial part of the activities of a body corporate or partnership. This is likely to include a much broader range of individuals than those that make up the directing mind and will of the company.

The updated identification doctrine applies a list of offences set out in Schedule 12 of the Act which include theft, various fraud and tax offences, bribery offences under the Bribery Act, money laundering offences under the Proceeds of Crime Act 2002 and terrorist financing offences under the Terrorism Act 2000.

Unlike the failure to prevent fraud offence, this change will apply to all companies, with no limitations based on size. There will also be no defence based on preventative procedures.

3. How organisations can start to prepare

Preparing for the failure to prevent fraud offence

The failure to prevent fraud offence will not take effect until statutory guidance is published on what can be expected of a company in implementing the reasonable prevention procedures required to establish a defence under the Act. That guidance is expected to be finalised before the end of the first quarter 2024, after which, companies may have only limited time to respond and prepare.

What will the statutory guidance say?

The starting point for the statutory guidance is likely to be the guidance issued to support the Bribery Act in 2011 and the failure to prevent tax evasion offence in 2017. However, there are expectations that it will be updated and enhanced to reflect developments in corporate practice over the last decade, in particular the use of technology in compliance programmes. For example, we anticipate there could be direction on subjects that are absent from the Bribery Act guidance, such as how a company uses data analytics and management information to manage fraud risk and around how companies might investigate fraud issues internally.

Updating the guidance in this way will be important. The more detailed and current the guidance, the more effective it is likely to be in assisting companies in combatting fraud. In recent years, agencies in other jurisdictions (particularly the US and France) have continued to provide increasingly up-to-date guidance on their expectations of companies' compliance frameworks. To provide guidance mirroring the guidance of the Bribery Act would risk perpetuating an outdated model and make the UK somewhat of an outlier in that respect.

Even in advance of the guidance being published, organisations can take steps to prepare for the new compliance standards that will likely be created as a result of this new failure to prevent fraud offence. Steps that large organisations should consider taking include:

Reviewing and assessing policies and procedures to determine whether there are pre-existing provisions relating to the prevention of fraud by employees, subsidiaries and agents against third parties. If there are not, organisations should decide how they wish to implement such policies and procedures through their existing compliance framework (e.g., updating an existing fraud policy).
Giving consideration to where relevant risks and responsibilities for managing such risks sits within the organisation, given the wide range of conduct potentially caught by the new offence – from management of third parties, to tax matters, to preparing and filing accounts.
Starting to map out communications and training plans to ensure companies are in a position to identify these new risks created by their associated persons, although the content may be further refined when the statutory guidance is published.

Preparing for the changes to the identification doctrine

Companies should also take steps to prepare for the changes to the law around the attribution of corporate criminal liability. These changes will come into force sooner than the failure to prevent fraud offence, in late December 2023, and no guidance is expected prior to them taking effect.

The aim of the legislative change is to broaden the group of employees deemed senior enough to have their acts attributed to the company. Companies may begin preparations on that basis.

Companies may wish to consider the following actions to address this expansion of the identification principle:

Identify which employees are exercising management responsibilities and are therefore sufficiently senior to have their actions attributed to the company.
Review existing records to determine whether that group has been fully trained in relation to the wide range of financial crime offences in the scope of this new law and whether any historical issues have arisen relating to the conduct of the employees at that level.
Ensure that group of managers are properly trained in relation to a wide range of financial crimes and associated risks, including how the company communicates with that group around training.
Review recruitment processes for the hiring of individuals into management roles to address the risks a particular individual may present in terms of compliance with criminal law.

4. Further steps in the Act to combat economic crime and enhance transparency

The Act is a large, wide ranging piece of legislation and the corporate criminal liability reforms discussed in this article are only a small set of the changes being introduced.

One additional area of change that may have an impact on companies in the area of economic crime relates to an expansion of the SFO's pre-investigation powers of compulsion of evidence under the Criminal Justice Act 1987.

Previously, the SFO was only able to use its powers of compulsion before opening a formal investigation, to assist in its determination of whether to commence such an investigation, in cases of potential bribery and corruption. The Act removes that limitation, allowing the SFO to use those powers of compulsion in respect of a wider range of economic crimes, including fraud.

These additional powers will be a useful tool for the SFO as it begins to look at potential cases using the new failure to prevent fraud offence and it may result in more section 2 Criminal Justice Act notices, more dawn raids, and ultimately more formal SFO fraud investigations now that a significant initial obstacle to getting them off the ground has been removed.

Additionally, the Act introduces numerous changes relating to enhancing corporate transparency. Our colleagues in our Corporate team have considered some of those developments here.

Compliance Handbook Update: Bribery and corruption

Tue, 20 Jun 2023 17:03:00 +0100

The Bribery Act 2010 (the Act) modernised the UK's antiquated bribery laws, which dated back to the 19th century and were contained in a mixture of statute and common law. The 2010 Act provides a more comprehensive and effective penalty regime for those committing bribery, whether individuals or corporates, in the public or private sector.

The bribery and corruption chapter in the compliance handbook provides guidance to regulated firms on how they can ensure that they have adequate systems and controls in place to respond to the particular issues posed by the legislation.

It should also be noted that, while English anti-bribery law (in particular, the Act) has broad criminal application, there are also further specific obligations and expectations on regulated entities. This chapter not only examines the ways in which the Act operates and the associated best practices, but also considers specific regulatory obligations.

Recent Financial Conduct Authority (FCA) enforcement cases against regulated firms for bribery and corruption control failings illustrate the regulator's enforcement work and how important it is for regulated firms to ensure they have implemented suitable controls. The FCA's recent focus on these issues was demonstrated by the combined penalties of £143 million across seven bribery and corruption-related enforcement actions in 2022.

While the FCA will not itself prosecute breaches of the Act, it will take a keen interest in the anti-corruption systems and controls of the firms it supervises. It may take regulatory enforcement action against firms who do not comply with their responsibilities.

New content

The chapter has been updated to provide more detail on recent corporate prosecutions; for example, SFO v Glencore Energy UK Ltd. Glencore was ordered to pay £280,965,092.95 (over $400 million) after a Serious Fraud Office (SFO) investigation revealed it had paid $29 million in bribes to maximise its oil trading profits in five African countries. The SFO estimated Glencore’s bribery to have created a financial benefit of approximately £93.5 million for the company.

The Glencore case was the first example of a company being convicted under Section 1 of the Act, meaning that the SFO was able to meet the threshold for establishing corporate criminal liability through the involvement of senior individuals at the company.

The chapter is written and maintained for Regulatory Intelligence by Sam Tate, Kate Langley, and Alexandra Prato of RPC.

Handbooks on Regulatory Intelligence

The UK compliance handbook is a guide to certain key aspects of the Prudential Regulation Authority (PRA) and FCA rules. The handbook covers a wide range of subjects, from obtaining authorisation from one or both UK regulators, to discussing the requirements of the General Data Protection Regulation (GDPR). Not all subjects are drawn from the PRA or FCA's specific rules, but they are subjects about which compliance practitioners need to be aware.

The handbook emphasises providing compliance practitioners with insight into the practical application of FCA and PRA rules. Each chapter is discussed in the statutory and regulatory context with practical analysis of the subject, together with tips and guidance that firms may find helpful.

The handbook can be used for reference, or as a training aid for those who are new to the compliance industry. (Lindsay Anderson, Regulatory Intelligence)

This article was produced and published on the Thomson Reuters Accelus Regulatory Intelligence.

To access the latest ABC chapter of the Thomson Reuters Compliance Handbook visit http://go-ri.tr.com/kNVDJQ [paywall] or get in touch with the RPC's White Collar Crime & Compliance team to request a copy.

The Digital Markets, Competition and Consumers Bill – What's New on the Competition Side?

Fri, 05 May 2023 16:55:51 +0100

In addition to the headline landscape reforms to digital markets (see our update here) and consumer protection (see here), the much-anticipated Digital Markets, Competition and Consumers Bill (the Bill), introduced into Parliament on 25 April 2023, makes wide-ranging enhancements to the competition powers of the Competition and Markets Authority (the CMA) and changes to the UK merger regime.

Melanie Musgrave and Leonia Chesterfield take a look at a few key changes to competition law proposed by the Bill.

Game Changing Corporate Offence of Failure to Prevent Fraud: RPC Analysis and Practical Guidance

Tue, 25 Apr 2023 10:00:00 +0100

"The introduction of this offence is likely to be the most significant change in financial crime legislation in the UK for ten years and larger companies should now start to take practical steps to get ready for the new law." - Sam Tate, Head of White-Collar Crime and Compliance and co-author of Bribery: a Compliance Handbook

On 11 April, the highly anticipated failure to prevent fraud offence was introduced in an amendment to the Economic Crime and Corporate Transparency Bill (the Economic Crime Bill or the Bill). Although there has been much discussion of this potential offence since the start of this year, this amendment is significant as it is the first time that structure and detail of the offence has been formally included in the Bill. The amendment gives a much clearer indication of how the failure to prevent fraud offence might operate when it comes into force.

When enacted, this offence promises to become an important tool for UK economic crime prosecutors and is likely to see major changes to the compliance programmes of large companies in the UK and overseas.

In this article, we will look at how the act is likely to operate, focusing on the developments that will be interesting to monitor as the Bill continues through Parliament along with offering some practical steps companies might take now to be as prepared as possible.

The Context to the Failure to Prevent Fraud Offence

Even prior to the amendment's introduction into the Bill, the failure to prevent fraud offence has received a great deal of attention. Its introduction arises out of the long running consultation and related discussions regarding corporate criminal liability in the UK, in particular calls to reform the identification doctrine, which has presented challenges for prosecutors when pursuing corporates.

The need to reform the tools to prosecute fraud, in particular, has come under scrutiny. In its November 2022 report, the parliamentary Fraud Act 2006 and Digital Fraud Committee identified that fraud accounted for 41% of all crime committed against individuals in the UK and called for the introduction of a failure to prevent offence as one aspect of the approach to combat the offending.

Throughout discussions of the Economic Crime Bill, there appears to have been real cross-party appetite for the introduction of such a "failure to prevent" offence.

How will the new offence operate?

The amendment provides, for the first time, some relatively clear indications of how the offence will work in practice once it comes into law.

Many of the concepts contained in the failure to prevent fraud offence – such as associated persons, a defence based on preventative procedures and unlimited fines for offenders – are familiar from the failure to prevent offences already on the statute books (namely failure to prevent bribery under s.7 of the Bribery Act 2010 and failure to prevent tax evasion under Part 3 of the Criminal Finances Act 2017). There are however some key distinctions in how the failure to prevent fraud offence will operate. Of course, given the relatively early stage of the parliamentary debate over the offence, there is a chance changes may still be made to its structure.

Under the current drafting, a large organisation will be subject to an unlimited fine if:

A person who is associated with a relevant body commits a fraud offence with the intention of benefitting their organisation, or an organisation who they provide services to on behalf of the relevant body; and
The relevant body did not have in place reasonable fraud prevention procedures.

As currently drafted, the new failure to prevent fraud offence is unlikely to effectively address many of the issues identified by the parliamentary Fraud Act 2006 and Digital Fraud Committee in its November 2022 report. That report focused on digital fraud schemes, including online scams. It does not appear, for example, that the failure to prevent fraud offence will be a tool that could be used to prosecute companies operating search engines for putting up misleading adverts. Rather, the new offence is perhaps best viewed as an attempt to address issues with the English law of corporate criminal liability, by introducing a further corporate offence that prosecutors will be able to pursue without meeting the high threshold of the "directing mind and will" test established by the identification principle.

We will look at how some of the specific aspects of the offence are likely to operate.

Which fraud offences are in scope?

The fraud offences covered by the offence are wide ranging and will include (as well as the aiding, abetting, or procuring the commission of such offences) the following offences:

Fraud by false representation (section 2, Fraud Act 2006);
Fraud by failing to disclose information (section 3, Fraud Act 2006);
Fraud by abuse of position (section 4, Fraud Act 2006);
Obtaining services dishonestly (section 11, Fraud Act 2006);
Participation in a fraudulent business (section 9, Fraud Act 2006);
False statements by company directors (Section 19, Theft Act 1968);
False accounting (section 17, Theft Act 1968);
Fraudulent trading (section 993, Companies Act 2006); and
Cheating the public revenue (common law).

To whom does the new offence apply?

The drafting of the amendment makes it clear that the new offence will only apply to "large organisations". These are defined as organisations who in the financial year prior to the year of the offence, satisfy two or more of the following:

Turnover of more than £36 million;
Balance sheet total of more than £18 million; or
More than 250 employees.

Prior to the introduction of the amendment, there had been some discussion around whether the new offence would apply in the same way to companies of all sizes. One perhaps unintended consequence of the failure to prevent offence in the Bribery Act, which does not expressly distinguish between companies of different size and resource, has been the significant attention smaller companies have needed to pay to implementing and managing anti-bribery policies and procedures, often at great expense. It now seems clear that smaller companies will not be obliged to make equivalent changes for fraud prevention policies.

Scenarios where the new offence may affect the likelihood of a corporate criminal prosecution:

Scenario 1 – Misleading investors in an IPO: During an IPO process, an employee or agent of a company makes a deliberately misleading statement in its offer documents to bidders as to the value of the underlying assets of the company. Even if senior management of the company did not instruct the employee to make the misleading statement, under the new offence, establishing criminal liability against the company is likely to be easier than under current law.

Scenario 2 – Misleading consumers as to the environmental impact of a product: Sales agents of a company that manufactures cars make deliberately misleading statements to potential customers as to the environmental impact of the cars when in operation. Even where the manufacturing company did not have knowledge that the sales agents planned to make this statement, a corporate prosecution will be easier under the new offence.

Scenario 3 – Manipulation of interbank rates: An employee of a bank intentionally submits false interest rate figures to manipulate an interbank rate. The new offence would not require prosecutors to establish knowledge of the scheme by senior management of the bank to establish a criminal prosecution.

Scenario 4 – Insurance mis-selling: A broker, acting on behalf of an insurance company, sells an insurance policy to a consumer, knowing that the policy was not suitable for that customer. Even where the insurer was not involved in the sale, and there was nothing inherently wrong with the policy that was sold (if sold to the intended customers), prosecutors may be able to prosecute the insurer under the new offence.

A scenario where the new offence is unlikely to affect the likelihood of a corporate prosecution:

Misleading search engine adverts: A search engine runs an advertisement for a carbon credit trading scheme that is identified as a sham. It is unlikely under the new offence that the fraudster setting up the carbon credit trading scheme would be an associate person of the search engine company, and therefore it is unlikely this would lead to a prosecution of that company under for failure to prevent fraud.

It should also be noted that the offence as currently drafted does not apply to individuals. There had been some earlier indications in proposed amendments to the Bill that individual liability for failure to prevent economic crime offences might form part of the new package of offences. It will be interesting to monitor if this prospect is raised again in subsequent discussions in Parliament.

Will the new offence have extra-territorial reach?

The offence will have extra-territorial reach. Organisations based outside the UK could be prosecuted if an associated person commits the offence under UK law or when targeting those in the UK.

There are some issues surrounding the breadth of the offence's jurisdiction still to be resolved, but the failure to prevent fraud offence seems likely to have a jurisdiction that is as broad, or even broader than the Bribery Act s.7 offence. Unlike the failure to prevent offence in the Bribery Act, which applies only to companies incorporated in the UK or those that carry on business in the UK, as currently drafted, there are no equivalent limitations to the entities to which the failure to prevent fraud offence will apply. It will be interesting to see if there is discussion in Parliament about the jurisdictional scope of the offence, in particular, how it applies to companies with no connection to the UK.

Who will be a person who is associated with a relevant body?

The definition is similar to an "associated person" under the Bribery Act. A person who performs services for or on behalf of a company will be an associated person under the new offence. As with the Bribery Act, employees, agents and subsidiaries are identified as potential associated persons. However, unlike under the Bribery Act, under the new offence, as currently drafted, employees, agents and subsidiaries will automatically be associated persons of a company. This would mark a change from the Bribery Act, particularly in the case of subsidiaries, where there is often real analysis to be performed as to whether they are in fact performing services on behalf of their parent company.

Who might be an associated person?

Employees
Agents
Subsidiaries
Advertisers hired by a company
Brokers and sales agents acting for a company
Professional advisers

How will the preventative procedures defence work?

Like the failure to prevent bribery and tax evasion offences, there will be a complete defence to the failure to prevent fraud offence if a company can show it had reasonable preventive procedures in place.

The amendment requires the Government to produce guidance on how companies will be able to demonstrate reasonable preventative procedures, so more specifics on the steps companies might be required to take will follow. However, even before that guidance is published, it is possible to make an educated assessment of what will be expected of large companies.

One area we anticipate the guidance will cover will be how large companies use technology and data analytics in their fraud prevention. While the guidance to the Bribery Act did not specifically refer to this, there are two factors that may now lead to an increased expectation on the use of technology and data as part of a suite of effective preventative measures. First, more than a decade has passed since the guidance to the Bribery Act was issued. Compliance-focused technology has improved and become significantly more widely used by companies in that intervening period. An increased focus on technology and data in the guidance would be consistent with the approach taken in guidance on compliance programmes in other jurisdictions, such as in the 2020 US Department of Justice's guidance to federal prosecutors on evaluating corporate compliance programmes. Second, the fact that the failure to prevent fraud offence will only apply to large companies might lead to a greater expectation that those companies already employ, or have the financial capability to employ, data analytics as part of their compliance programmes.

Given the similarity of the preventative procedures defence to the defence in s.7 of the Bribery Act, it is likely that guidance issued for that legislation will be helpful in determining what is expected for this new offence. Companies can reasonably expect that fraud prevention procedures would need to be proportionate and demonstrate top level commitment. The procedures will need to involve conducting due diligence on third parties and risk assessments. Companies will need to have clear plans for communicating their procedures to employees and for providing related training. There will also need to be plans in place for the monitoring and review of the procedures. Importantly, as was made clear when the failure to prevent tax evasion offence was introduced, it will be important that these procedures are designed by reference to the new offence specifically, and not only as part of a broader overall compliance programme.

What Actions can Companies take now?

The introduction of the failure to prevent fraud offence is likely to mark one of the most significant changes to economic crime enforcement in the UK since the introduction of the Bribery Act. The new offence will mark a sea change in the way large companies structure their compliance procedures with respect to fraud. At present, the vast majority of companies' fraud policies focus on the risk of a company losing money to fraud. Such programmes will need to be updated to ensure they cover the risks of the company and its third parties defrauding others. This will extend to all employees and agents, but potentially other third parties like payment processors, accountants and advertisers.

The offence may come into law as soon as the final quarter of this year. It will be up to companies to demonstrate they have the appropriate controls in place. With this in mind, prudent larger companies may take this opportunity to begin to plan for the enactment of the Bill. That preparation may involve mapping the company's fraud controls already in place, especially as they apply to third parties and third-party risk management.

RPC's White-Collar Crime and Compliance team has prepared a toolkit for companies to use to conduct such a mapping exercise and we would be happy to discuss the issues presented by the new offence and how best to prepare for it.

2023 Update - CAT Collective Proceedings

Fri, 10 Feb 2023 09:46:00 Z

A new era of consumer-focussed competition class actions is now well underway. It kicked off with the first collective proceedings order (CPO) granted by the Competition Appeal Tribunal (CAT) in Merricks in the summer of 2021, opening the gates for further collective claims to be certified.

The UK's fledgling competition class action regime, brought in under the Consumer Rights Act 2015, has now taken flight.

As at February 2023, 29 collective proceedings applications have been registered with the CAT under the new regime. 10 are now certified and have moved to the substantive stage of proceedings. Many more are currently awaiting certification and affect multiple sectors, ranging from musical instruments and PlayStation consoles through to cryptocurrency and social media. There are further class actions in the wings with recent collective proceedings publicised including claims against Google, Amazon and water companies.

Now eighteen months after the CAT's first certification ruling in Merricks, early 2023 has already got off to a flying start.

Chris Ross and Leonia Chesterfield take a look at recent developments and what to watch out for in the competition collective proceedings space, both this year and beyond.

Changes incoming - Improving the Appointed Representatives regime

Thu, 24 Nov 2022 14:24:00 Z

What is happening?

The FCA's changes to improve the appointed representatives regime takes effect on 8 December 2022. The changes are aimed at enhancing consumer protection and placing more responsibility on authorised financial services firms ("Principals") for their appointed representatives ("ARs").

The new rules see a tightening of supervision and controls of ARs, as principal firms will be required to:

increase the level of oversight of their ARs, including ensuring ARs have adequate systems, controls and resources;
carry out annual reviews of their ARs and an annual self-assessment of the Principal's own compliance;
assess and monitor the risk that ARs pose to consumers;
provide additional information to the FCA on their existing and new ARs;
notify the FCA of any future appointments at least 30 calendar days prior to its effect; and
annually provide to the FCA data relating to complaints and revenue.

What actions should you take?

Firms should understand their obligations under the FCA's updated rules and expectations and take the relevant steps to be ready to comply.

Principals will need to:

notify the FCA of AR appointments at least 30 calendar days prior to the appointment taking effect;
collate data on existing ARs as well as any new AR appointments to provide to the FCA – this information includes the primary reason behind the appointment and whether the AR will provide services to retail clients;
check the accuracy of the details of their ARs on the FCA register;
provide the FCA with complaints and revenue data on their ARs, up to 60 business days after the principal's accounting reference data; and
integrate the annual review requirements into existing internal reporting processes

However, the FCA has put in place transitional arrangement to give firms more time to comply with some of the new rules, such as those required to submit information on an on-going basis and to review ARs and self-assess annually.

Is there anything else you should look out for?

As part of the FCA's enhanced reporting requirements, Principals should expect to receive a Section 165 request for data about their current ARs at some point in December (potentially between 8-10 December). Firms will then have until 28 February 2023 to respond.

The Powerful And The Penalised

Mon, 27 Jun 2022 12:37:00 +0100

Introduction

On 23rd May 2022 the Solicitors Regulation Authority (SRA) announced its plans to increase its fining powers from £2,000 to £25,000, along with a strengthening of its punitive powers in other respects. This article will outline these and point out some of the pitfalls ahead.

Increased fining powers

The SRA said it will increase its fining power twelvefold to a maximum of £25,000. The SRA justified this increase by arguing that cases with fines under £25,000 are relatively straightforward and do not justify the time, cost and stress involved with a hearing before the Solicitors Disciplinary Tribunal (SDT).

In doing so it has ignored the SDT's recommendation that the SRA's fining powers should be limited to £7,000 for an individual. A similar view on the upper limit was held by the Law Society. The Law Society said, "The independence of the SDT from both the regulator and the profession, its clearly defined processes and transparency means that solicitors generally have more confidence in the SDT’s decision-making processes”, whereas SRA decisions are not publicly scrutinised.

It is understandable that the SRA's current limit of £2,000 has led to more cases being referred to the SDT and thus caused delays and an increase in costs and impact on those subject to disciplinary proceedings. However, the SRA does not seem to be taking into account the recommendations of the Law Society and the SDT – they are suggesting more moderate increases. The SDT's indicative guidance that fines between £7,500 and 15,000 were more than moderately serious and those over £15,000 were very serious. Whether very serious cases should be decided without independent scrutiny is a concern, although the SRA has addressed this by saying there would be a clear division between SRA investigators and SRA decision-makers and that the independence of decision makers would be safeguarded.

Under the new arrangements, solicitors and firms retain the right to appeal adverse decisions to the SDT but respondents to the Consultation question whether this is an adequate safeguard. Many firms and individuals would be quite understandably daunted at the prospect of an appeal and its associated cost. Solicitors facing SRA investigations will be only too aware of the likelihood that they will bear the regulator's costs as well as their own and may recall the 2021 ruling in the case of Liz Ellen, a solicitor who was cleared of misconduct but still had to pay her own defence costs, estimated at £534,000.

Supporters of an increase in limits will point to the fining powers in relation to Alternative Business Structures which can be fined up to £50m for firms and £50m for individuals. The SRA accepts arguments for greater parity between ABS and traditional firms in this regard.

Sliding scale of penalties

The SRA will also take into account the turnover of firms and the income of individuals when setting fines, with the intention to introduce more impactful consequences for City firms and lawyers who breach the rules. Fines for firms would be capped at 5% of annual domestic turnover from SRA authorised activities in the last year prior to the misconduct, up from the current 2.5%. For individuals it is proposed that an individual's income related to the tax year prior to the employment in which the misconduct occurred should be used for setting fines.

The SRA argue that the increased cap would potentially be a more effective deterrent and that a fine at that level would be unlikely to affect the viability of a firm. Firms and individuals would also be able to make representations concerning their ability to pay a fine. However, there are other arguments that profit based/net worth metrics may be more appropriate, as The Law Society highlighted, turnover may not be a reliable indicator of profitability or ready cash.

The SRA gives the example of different levels of fine issued for the same offence to a low earning junior solicitor compared with a senior equity partner. While this is understandable, there is an issue with disparity of penalty for the same crime. It also glosses over the differences in aggravating and mitigating circumstances in individual cases.

The SRA counters this by referring to the fining powers of other regulators such as the FCA, arguing that other regulators have shifted their approach to financial penalties as an effective deterrent.

Fixed penalties for lower-level breaches

The SRA plans to introduce fixed penalties of up to £1,500 for lower-level breaches. The SRA stressed that fixed penalties would not change the bar for its decision to take action, stating "this change will allow us to streamline our approach to misconduct that is currently suitable for a low-level fine…" it also hopes that it can foster "greater transparency around possible disciplinary outcomes for failure to cooperate with [the SRA] as a regulator and more administrative breaches". An example of where they envision this working is a breach such as failure to comply with transparency rules. The SRA argue that "these kind of matters are capable of objective determination and attracting standardised penalties".

The SRA proposes to begin with fixed penalties in a small number of defined areas and then take stock of the effectiveness of the scheme before extending it further. Their current suggested fine would be a maximum of £800 for a first breach and £1,500 for subsequent offences.

While this approach would be welcome, more needs to be understood on what the straightforward administrative breaches are. The SRA have stated that they will consult this summer on a schedule of fixed penalties and procedural rules to introduce these. They have also said that the opportunity to put matters right would be given before the fine is issued and there would be a right to have the decision reviewed.

Penalties for misconduct/harassment

Arguably, one of the most controversial and difficult changes is that SRA guidance will be amended to dictate that cases involving sexual misconduct, discrimination or other forms of harassment will result in a restriction of practice, suspension or strike off rather than a fine, unless there are exceptional circumstances.

Whilst allegations of this kind of misconduct should always be treated seriously, there is a wide spectrum of behaviour encompassed by this sort of misconduct and a complicating factor is the subjective nature of some of the legal elements to these infractions. The SRA’s approach of treating such behaviours automatically at the very serious end, unless exceptional circumstances apply, seems at first glance to be insufficiently nuanced. However, the proposed guidance has not been published at the time of writing.

Another source of uncertainty is that some of these concepts (especially discrimination and harassment) are not given specific definitions in the SRA’s regulatory arrangements. For example, the SRA Principles refer to the obligation to encourage “equality, diversity and inclusion” (Principle 6), but a rule based on the need ‘to encourage’ is a challenging one to enforce. The SRA Code for Solicitors says at para. 1.1, “You do not unfairly discriminate by allowing your personal views to affect your professional relationships and the way in which you provide your services”, but that does not refer to “harassment”, and it is unclear if the reference to “discriminate” targets the legal concept of discrimination under the Equality Act 2010.

Whilst the SRA states that their aim in this regard is to ensure their approach aligns with public expectations, we have seen considerable difficulties and controversy in the exercise of that approach in high profile cases. We appreciate that many of these cases are difficult to quantify financially, and that suspension or strike off may be appropriate in many cases, we suggest that the SRA could address this while maintaining flexibility and discretion to address individual circumstances particularly where there may be significant aggravating or mitigating factors. There is a risk here of virtue signalling, leading to the delivery of unfair outcomes.

Conclusion

Anna Bradley, SRA Chair, has said, "These changes will mean we can resolve issues more quickly, saving time and cost for everyone and, importantly, reducing the inevitable stress for those in our enforcement processes.”

These are laudable aims and would certainly be welcome by most solicitors who are at the sharp end of delay during the investigation and enforcement processes. However, the SRA needs to reassure the profession that it has the resources and capability to manage these increased powers and that these will translate into faster timescales. These reforms may speed things up in straightforward matters. However, the challenge will be the more complex ones.

There also remains the worry that the SRA has not really addressed concerns about the fairness of it investigating potential breaches and determining the outcome without a sufficient degree of independent scrutiny. While there are problems with the SDT regime, it certainly does involve a greater degree of independence and transparency.

In conclusion, while it is hard to argue against the proposition that a decade-old fining regime needed updating, perhaps more weight should have been given to the concerns outlined by respondents such as the SDT and The Law Society.

Operational Resilience - preparations for 31 March 2022

Tue, 15 Mar 2022 17:28:37 Z

Financial resilience and business continuity has dominated the boardrooms of many financial services organisations over the last decade, but as this sector seeks to embrace digital transformation, in part assisted by the acceleration due to Covid-19, (and with much reliance on technology, cloud solutions and outsourced IT services) attention has shifted to operational resilience.

What is operational resilience? Think of it as cartilage.

In their 2018 discussion paper, the Bank of England, the Prudential Regulation Authority (PRA) and the Financial Conduct Authority (FCA) define operational resilience as the ability "to prevent, respond to, recover and learn from operational disruptions". Clear as mud, right?

Basically, it's a bit like cartilage. In a healthy human body, cartilage acts as a cushion and provides flexible support to joints and bones. Operational resilience works in the same way and essentially gives structure and processes to a business, enabling it to absorb shocks resulting from volatility and disruptions (whether arising from external or internal events or circumstances). These may include economic shocks, cyber-attacks, or technological failures. Operational resilience seeks to ensure that organisations are prepared, enabling them to adapt and react quickly to either prevent incidents from occurring or at the very least minimising impact / disruption.

Operational resilience in the limelight: Why does it matter?

The financial services sector is core to modern day society not only in a domestic context, but also globally. With a globally connected world, the increase in cyber-attacks, (unplanned) system outages, increased reliance on digital services and the increasing complexity of systems and their interactions and interfaces, the shift in focus by regulators isn't surprising.

COVID has been an example of why robust business continuity and operational resilience is necessary as much of the world moved to home working overnight. It has also resulted in the rapid adoption of technology to enable and sustain new ways and locations of working. With these changes come solutions/innovations but also challenges, such as potentially increasing security, data and resiliency risks.

In respect of cloud-based services, the rapid adoption of these by firms (including in response to the pandemic) carries its own unique risks, as an overreliance on a select few providers can exacerbate the scale of any disruption when issues do inevitably occur; as evidenced by Amazon Web Services' (AWS') most recent high-profile outage in December 2021, which affected everything from delivery operations to mobile banking apps.

It is a matter of record that these "concentration risks" are very much of concern to UK regulators.
The BOE and the PRA, and the FCA all launched consultations in 2019. In light of the pandemic and the conclusions drawn following responses (that disruptions and the unavailability of important business services have the potential to cause wide-reaching harm to consumers and market integrity), the BOE, PRA and FCA have developed in partnership a set of rules aimed at increasing the overall operational resilience of UK businesses.

Who do these new rules apply to?

The rules apply to the usual subjects (e.g., banks, investment firms, building societies and insurers), but interestingly, also impact the relatively new kids on the block - payment and electronic money institutions.

Certain rules will become effective from 31 March 2022, so with less than a month to go, let's remind ourselves as to what is expected come 31 March.

What is the expectation come 31 March 2022?

The expectation come 31 March (or shortly thereafter should the FCA come knocking at your door) is that impacted organisations will have (and have an audit trail demonstrating):

Identified their important busines services. These are services, which could, if disrupted, likely cause intolerable harm to their customers/the financial markets within which they operate.
Set impact tolerances to effectively measure/gauge the extent to which said services are able to withstand certain levels of disruption.
Mapped the resources necessary to deliver the important business services and tested their ability to remain within any tolerance levels set against a range of adverse scenarios.
Developed their internal and external communications strategies.
Prepared a self-assessment document showing how they will meet their operational resilience requirements.

So what's next?

It's important to remember that this is just the first step in building an "operational resilience framework". In-scope firms are encouraged to ensure that sufficient mapping and testing activities have been undertaken to ensure that firms remain in their impact tolerances in respect of each impacted business service as soon as possible but no later than 31 March 2025.

It is crucial therefore, that firms stay ahead of the curve and are proactive in aligning their business functions with these incoming regulations. Certainly, for most, growing that cartilage has and will continue to take some considerable time and effort going forward!

Tackling economic crime and sanctions evasion

Tue, 08 Mar 2022 17:09:33 Z

The draft Economic Crime (Transparency and Enforcement) Bill has been in the works for several years but its previously slow progress through Parliament has picked up at lightning speed as a result of the Russian invasion of Ukraine.

The newly revived Bill was introduced to Parliament on 1 March 2022 and has three core components:

1. Create an overseas entities register

This register will be overseen by Companies House and will require all overseas entities that own UK property to provide certain information, including the identity of the ultimate beneficial owner of the property. This will be of crucial assistance to the UK Government in enforcing sanctions against individuals holding UK property behind webs of offshore companies. The time limit for providing the ownership information is likely to shorten to 6 months from the original proposal of 18 months after the Act comes into force, increasing the pressure for transparency. However, there remains a question of who at Companies House will be reviewing this information and what action they will be able to take with the limited resources available.

2. Expand the Unexplained Wealth Order (UWO) regime

The Bill will give relevant authorities new grounds for seeking both UWOs and related interim freezing injunctions, which will help to avoid the targets of UWOs selling assets before the UWO bites. Authorities' liability for costs in seeking UWOs will also be limited going forwards. Only a handful of UWOs have been granted in the UK to date, but we expect this combination of new measures to increase the number of UWOs sought in the UK, with a focus on Russian oligarchs in the current climate.

3. Expand the UK sanctions regime

The bill looks to introduce significant changes to the sanctions regime to make it easier for the government to impose sanctions on companies and individuals, especially those already sanctioned by the EU or US. It also creates a civil "strict liability" offence for those found to be acting in breach of sanctions by removing the need for a party to have known or had reasonable grounds to suspect they were acting in breach. This is a significant departure that creates an offence akin to the "failure to prevent" offences under the Bribery Act 2010 for failing to prevent bribery and the Criminal Finances Act 2017 for failing to prevent the facilitation of tax evasion.

There is broad cross-party approval of the Bill, albeit there is also pressure from some quarters for the measures to go even further (such as a shorter period of 28 days for registering overseas entities with Companies House).

Overall, we expect a key focus of discussions to be resourcing for authorities to enforce the Bill's new measures. There is a concern that the Bill's bark will be worse than its bite if authorities such as Companies House, the NCA and OFSI do not have the financing and resources to enforce these new powers. The Treasury Committee addressed the likely need for further resourcing for entities such as the NCA, which is said to have had "real term" cuts over the past 5 years, despite requesting an increased budget. It remains to be seen whether this support will be provided.

For more information, or to discuss any of these takeaways further, please do not hesitate to contact us or visit our corporate crime page to find out how the team can help.

Hong Kong – Appeal case reviews adequacy of regulator’s reasons not to proceed with complaint

Fri, 18 Feb 2022 09:00:00 Z

The issue arose in the context of an application for judicial review. The applicant had made a complaint against a certified public accountant and sought to challenge the respondent's decision that no prima facie case of professional misconduct had been shown by claiming that the respondent had failed to give adequate or sufficient reasons for the decision. While there is (as yet) no common law general duty on the part of an administrative body to give reasons for their decisions, this is a developing area of the law in Hong Kong and much depends on the legal framework within which a regulator takes a decision.² Where reasons are given, they need only deal with the relevant and substantial issues before the regulator and explain why the regulator came to the decision. In this case, the respondent had adequately explained the decision that no prima facie case of professional misconduct had been disclosed against the accountant.

The applicant is the owner of a flat in a residential building in Hong Kong. He became dissatisfied with renovation works that had taken place at the building in 2012-13. The applicant set out his concerns in a letter, dated 30 June 2015, to the certified public accountant who had been engaged by the building's incorporated owners to audit its accounts for the years during which the renovation works had been carried out. Dissatisfied with the accountant's reply and follow-up action, the applicant made a formal complaint to the Hong Kong Institute of Certified Public Accountants (the respondent) on 10 August 2015. Further correspondence followed between the applicant and the staff of the respondent's compliance department which had also sought representations from the accountant.

The compliance department submitted a report to the respondent's professional conduct committee (the committee) which concluded that the applicant had not provided sufficient evidence to establish a prima facie case of professional misconduct on the part of the accountant. The respondent had delegated to the committee the task of considering reports from the compliance department with respect to complaints of professional misconduct. It is worth noting that the committee was made up of independent certified public accountants. The committee agreed with the compliance department's finding and resolved to take no further action.

The compliance department notified the applicant of the committee's decision by letter on 3 February 2016, explaining that the committee had reviewed the complaint and "Based on the information before it, the Committee considers that no prima facie case was shown". Pursuant to the applicant's request by subsequent emails, the respondent further explained in writing the essential reasons for the committee's decision – in short, confirming that the respondent was satisfied that the information and documents provided by the applicant had not been sufficient to establish the applicant's allegations.

Dissatisfied with the respondent's decision, the applicant applied for judicial review. In essence, the applicant claimed that the respondent had failed to provide sufficient reasons regarding the committee's decision. A judge dismissed the application in a fully reasoned decision, dated 11 January 2021.³ The judge found that the reasons given by the respondent for dismissing the applicant's complaint were sufficient to enable him to understand why the committee had come to its decision and what conclusions had been reached on the principal issues that arose. In the course of arriving at his decision, the judge had regard to several other considerations – including (among others) the impact on the applicant's rights, any alleged prejudice suffered by the applicant and the nature of the committee's role.

The applicant appealed to the Court of Appeal. The applicant raised several grounds of appeal. The main issue for consideration by the Court of Appeal was whether the respondent had given sufficient reasons for the committee's decision.

Appeal

Adequacy of Reasons

In considering the adequacy of the reasons given for the committee's decision, the Court of Appeal made a number of observations. These included:

where a decision-maker gives reasons as part of a regulatory investigation, the reasons may be brief and succinct.⁴
it is not necessary for a decision-maker to consider and deal with every single issue raised by a complainant. The decision-maker need only deal with the relevant and substantial issues and explain why they have come to their decision. ⁵
applying settled case law, whether the reasons given by a decision-maker in a regulatory context are sufficient depends on the legal framework within which the regulator takes a decision and upon the facts of the case – context and common sense should guide the court's approach.⁶
there is no rule that all of a decision-maker's reasons must be set out in one document or decision letter. The Court of Appeal observed that:

"The reasons for a decision may be gleaned from more than one document in a chain of communications between the decision-maker and the applicant."⁷

Applying these principles, the Court of Appeal noted that the main issue before the judge had been whether the committee's decision and the chain of emails passing between the applicant and the respondent had: (i) sufficiently addressed the substantial issues relevant to whether there was a prima facie case of professional misconduct based on the materials available and (ii) adequately explained to the applicant why the respondent considered that there was no prima facie case.⁸

In conclusion, as regards the adequacy of reasons, the Court of Appeal stated:

"In considering whether the reasons given by the Institute for the Decision are adequate or sufficient, it is important to bear in mind that the issue is not whether the Decision is reasonable or correct. The present judicial review is not about the rationality, still less the correctness, of the Decision. It is only concerned with the adequacy or sufficiency of the reasons given by Institute. We consider that the Institute has given sufficient reasons for the Decision in the context of the present case."⁹

Overall Assessment

As regards the applicant's specific grounds of appeal, the Court of Appeal rejected all of them.

Interestingly, the Court of Appeal specifically addressed the applicant's argument that the judge (at first instance) had taken into account several other considerations in order to, in effect, relieve the respondent of a duty to give sufficient reasons. The Court of Appeal explained that this was a misreading of the judgment – what the judge had done was to explain why, having regard to these other considerations, the respondent was not under any duty to provide "more detailed reasons".¹⁰ Without deciding the point, the Court of Appeal considered that a preferable approach would have been to take these other considerations into account in an overall assessment of the adequacy of the reasons given.¹¹

The Court of Appeal dismissed the applicant's appeal.

Comment

Both the Court of Appeal's and the lower court's judgments are interesting and useful summaries regarding the adequacy of a regulator's reasons not to proceed with a complaint of professional misconduct – in particular, in the context of a decision made by a professional body that, after an initial investigation, there is no prima facie case to proceed.

While there is (as yet) in Hong Kong no common law general duty on the part of administrative body to give reasons for their decisions, this is a developing area of the law to which legal practitioners and regulators (and those they regulate) should pay attention. It is an area that is probably ripe for further appellate court clarification as the demands on regulators and those they regulate increase. However, the reference in the Court of Appeal's judgment to case law that emphasises the importance of "context" and "common sense" is a good guiding principle.

It is worth emphasising that, in judicial review challenges such as this one, the issue for determination by the courts does not concern whether the regulator's decision is correct – rather, the focus is on the adequacy of the reasons given for the decision.

Finally, there is an interesting passage in the Court of Appeal's judgment regarding the relevance of any alleged prejudice to the applicant arising from either a failure to give adequate reasons or the decision itself and the distinction between the two. In addition to showing that a decision-maker has failed to give sufficient reasons, it is for an applicant to show that they have suffered substantial prejudice by that alleged failure.¹² In this case, it is not entirely clear what prejudice the applicant claimed to have suffered. However, the issue of alleged prejudice was secondary to the main point of the Court of Appeal's judgment – the takeaway point being that, when it comes to the adequacy of the reasons for a regulator's decision, the context is crucial.

This article was originally published in the Litigation Newsletter of the International Law Office.

RPC acted for the respondent in the proceedings. Please contact Samuel Hung by email (samuel.hung@rpclegal.com) or by telephone (+852 2216 7138), if you have any queries regarding the general issues raised in this article.

References

¹Ng Shek Wai v Hong Kong Institute of Certified Public Accountants [2021] HKCA 1920, 20 December 2021.
² For example, Keung Kin Wah v Law Society of Hong Kong [2021] 5 HKLRD 413, 8 November 2021 and Capital Rich Development Ltd v Town Planning Board [2007] 2 HKLRD 155.
³ [2021] HKCFI 46.
⁴ Supra note 1, at para 22.
⁵ Supra note 1, at para 22.
⁶ Capital Rich Development Ltd v Town Planning Board [2007] 2 HKLRD 155.
⁷ Supra note 1, at para 24.
⁸ Supra note 1, at para 25.
⁹ Supra note 1, at para 30.
¹⁰ Supra note 1, at para 34.
¹¹ Supra note 1, at para 35. Also see Keung Kin Wah v Law Society of Hong Kong [2021] 5 HKLRD 413, at para 42.
¹² Supra note 1, at paras 37-39.

White-collar crime and compliance predictions for 2022

Thu, 03 Feb 2022 09:39:00 Z

1. Reform of corporate criminal liability – expansion of failure to prevent

Although initially scheduled to be released at the end of 2021, the Law Commission's option paper, setting out its suggestions on how the law relating to corporate criminal liability might be reformed, is now set to be released early this year.

The tone of the Law Commission seems to have shifted from its conclusion in 2010 that there was no general reform necessary; at the time they argued for specific provisions to be created in criminal offences. However, twelve years following the Law Commission's 2010 conclusion, there has been a near constant call for these offences to be expanded and in 2020, Lisa Osofsky, Director of the Serious Fraud Office (SFO), stated an extension of the 'failure to prevent' offences was at the top of her wish list.

We predict that the Law Commission will recommend a significant expansion of failure to prevent offences and compliance programs (which are the only corporate defence to these crimes) will once again be thrown into focus across larger corporates.

2. NFTs and money laundering – come under FCA scrutiny

Non-fungible tokens (NFTs) have now established themselves as an increasingly popular alternative asset class for investors, yet the financial crime risks associated with this innovative technology are arguably higher than other common alternative investments such as wine, art and classic cars. This is because there is no physical asset to move and there is a decentralised currency as a central part of any transaction. Given recent news that money laundering involving cryptocurrency is estimated to have increased by 30% in 2021, NFTs need to be carefully considered for money-laundering and fraud risk.

It is not that these concerns went unnoticed entirely in 2021, the Advertising Standards Agency has displayed a proactive approach to the marketing of NFTs, calling it a 'red alert' priority issue. The Treasury's consultation in 2020 on regulating the cryptoasset industry also focused on promotions and communications. However, we expect the FCA to assert their jurisdiction over NFTs – specifically in relation to fraud and money-laundering and create new guidance or rules accordingly.

3. DOJ/SFO investigations – significantly increase

In 2021 the United States 'Strategy on Countering Corruption' outlined a government-wide approach to tackling corruption. The strategy included key areas such as improving international intelligence collection, engaging partner countries in detecting and disrupting foreign bribery and encouraging the corporate compliance programs.

At the sharp end of this strategy, the DOJ warned late last year of an impending crackdown on companies with one focus being those companies which have violated the terms of their deferred prosecution agreements and another being companies which were failing to invest in their compliance systems. We predict more investigations focused in these areas and more investigations generally across the globe. We expect this to extend to the SFO, not only because of the stronger relations created with the US by the current director, but also the amount of fraud during COVID19 and impending UK insolvencies revealing financial crime issues to the public and press.

For more information, or to discuss any of these takeaways further, please do not hesitate to contact us or visit our corporate crime page to find out how the team can help.

FCA's Perimeter Report – observations for the insurance market

Mon, 15 Nov 2021 09:32:00 Z

In late October, the FCA published this year's version of its Perimeter Report.

The Perimeter Report is intended to clarify some of the complexities about what the FCA does and does not regulate. It also sets out some areas where the FCA sees potential for customer harm.

Here are some of the key takeaways from the report for the insurance market:

1. Appointed representatives (AR) - the FCA intends to intensify its scrutiny of all principal firms, and applicants which intend to appoint ARs. The FCA also notes that in a pilot study on AR applications, 50% of applicant firms intending to appoint ARs either withdrew their applications or their applications were refused.

2. Outsourcing - the FCA suggests that regulated firms have an increasing dependency on unregulated service providers (especially in technology and information systems) and reminds regulated firms that they need to:

identify and manage their third party risks; and
notify the FCA of critical, important or material outsourcings.

3. Operational Resilience - related to the point on 'Outsourcing' above, the FCA notes that while the new Operational Resilience rules do not apply directly to unregulated third party service providers (or to insurance brokers), the new rules will require insurers to work effectively with third party service providers to ensure that services can be mapped and tested to identify vulnerabilities. In essence, this means that outsourcing agreements will need to include provisions ensuring that insurers can monitor, oversee and control where necessary, and take steps to address any vulnerabilities or issues in third party services.

4. The definition of insurance - The FCA notes that there is sometimes uncertainty on whether some products should be classed as insurance and that some in the market have attempted to structure products to be outside the regulatory remit when the FCA considers these products should properly be considered insurance. The two areas of concern outlined below are mentioned specifically by the FCA and the FCA also notes that it may be looking to update its guidance as a result (Perimeter / PERG):

Discretionary products - some providers have sought to structure contracts so that claim payments are made on a discretionary basis in an attempt to circumvent the principle that an insurance contract requires an undertaking to pay money or provide a benefit to a recipient. In some cases the FCA suggests that such discretion could either be an illusion or in fact be considered an unfair term and questions whether in these cases, the contract should be categorised as insurance; and
Warranty repair services - the FCA considers that many warranties which are mainly repair service contracts with a minor indemnity element are artificially described and in reality are insurance contracts.

5. BI Test Case - the FCA speaks about its role in the BI Test Case but also notes that it is aware of policyholders continuing to dispute coverage, causation and calculation of claims and policyholders pursuing these disputes in the court and at the Financial Ombudsman Service. The FCA further confirmed that it (together with the PRA) will be considering this over the coming year.

Regulatory Initiative Grid sets out multi-regulator pipeline of planned/ongoing regulatory initiatives in the financial services market

Thu, 04 Nov 2021 10:00:00 Z

At the beginning of the week, a number of UK regulators published this year's version of the 'Regulatory Initiatives Grid' which aims to provide a combined pipeline from a number of regulators on ongoing and planned regulatory initiatives affecting the financial services market. Regulators involved include, amongst others, the Financial Conduct Authority, Prudential Regulation Authority, Payments Systems Regulator and Information Commissioners Office.

The multi-regulator report is useful as it not only sets out everything coming down the line from the regulators but it also makes it easier to get a complete picture of the various initiatives, who they affect and when they are happening. The dashboard tool and drilldown filter is also useful to navigate the information particularly as there 134 initiatives included in the report.

Here are a few high level comments from some of our regulatory team on the initiatives:

Insurance – Jonathan Charwat

There are nine specific initiatives aimed at the insurance market and as a sector accounts this only accounts for 7% of all initiatives across all sectors. However, as the insurance market will surely attest, this statistic does not give the full picture as ongoing initiatives on pricing practices, product governance and operational resilience are arguably going to be some of the most ground-breaking and significant regulatory change projects for the insurance market for some time.

In addition, a good deal of the multi-sector initiatives listed in the report will also affect the insurance market (such as the initiatives on consumer duty, outsourcing and third party risk management, financial promotions as well as the data protection initiatives mentioned below). Finally, the report states that a consultation is pencilled in for early 2022 in respect of the ongoing review of Solvency II.

Credit and Payments – Whitney Simpson

Credit – There are 28 initiatives across the banking, credit and lending multi sector. This is double the amount (or almost) compared to the other single sectors contained in the grid. One of the initiatives aimed at enhancing consumer protection and which has a high indicative impact on firms is the HM Treasury consultation on Buy Now Pay Later or Deferred Payment Credit products which runs until 6 January 2022.

Payments – The grid contains 12 initiatives which are aimed at promoting competition, innovations and protections in payments to improve the quality and security of services provided to consumers and businesses including, a consultation on updates to the Payment Services and Electronic Money Approach Document and Technical Standards, and Access to Cash legislation. One of the initiatives not included on the grid is the Payment Landscape Review as this review was concluded by HM Treasury on 11 October 2021. That's not to say the initiative has concluded though as to how HM Treasury plans to take forward the identified areas of focus is still to be determined.

A number of the multi-sector initiatives will also impact both of these markets so it’s a jam-packed regulatory landscape ahead.

Data protection – Jon Bartley

The grid includes an update on the recent activities of the Information Commissioner's Office, particularly the ICO's consultations on new guidance. However, as almost all the ICO consultations were closed before the publication of the grid, these entries are not as helpful for organisations wishing to identify upcoming initiatives that they can contribute to. However, they provide useful flags of ICO initiatives, such as the Accountability Framework, which many organisations have used as a means of benchmarking their data protection compliance programmes. The guidance on international transfers is also an important development, with many FS organisations considering how to navigate data transfers post-Brexit, particularly when they are subject to both EU and UK GDPR.

Arguably the most important recent development in data protection law has not been included in the grid, due to the fact that it is not an ICO initiative. However, the UK government is currently consulting on some material changes to the UK data protection regime in the post-Brexit landscape. The consultation, "Data: A New Direction", is open for responses until 19th November.

Sanctions – A New World?

Fri, 26 Feb 2021 09:44:31 Z

Prior to the UK's departure from the EU, and the end of the transition period on 31 December 2020, the UK's sanctions regime was primarily derived from EU law. When sanctions were imposed by the EU, the regulations implementing them took direct effect in the UK.

Now that the UK is no longer part of the EU – with the result that EU regulations no longer take direct effect in the UK – the UK has implemented its own sanctions regime. The cornerstone of this is the Sanctions and Money Laundering Act 2018 (SAMLA).

SAMLA

SAMLA empowers ministers to impose a variety of sanctions, falling into broad categories:

Financial sanctions – such as asset freezing orders, orders preventing financial services or funds from being provided to or from sanctions targets, and proscribing ownership interests in sanctions targets;
Immigration sanctions, applying restrictions under UK immigration law;
Trade sanctions – the broadest category, preventing, amongst other things, the import/export of goods with origins in, or destined for, designated countries or with connections to sanctions targets; preventing technologies from being made available, and preventing services from being provided by or to sanctions targets;
Aircraft and shipping sanctions, detaining or controlling the movement of designated vessels / vessels owned by designated people, and preventing the ownership/operation/registration of vessels owned by or chartered to designated persons, and
'Other' sanctions for the purposes of UN obligations – this is a 'sweeper' provision and it enables the relevant minister to impose such sanctions as he/she considers appropriate for the purposes of compliance with a UN obligation.

These sanctions can be imposed by reference to designated persons, persons connected with a prescribed country, or of a prescribed description and connected with a prescribed country.

Plus ça change

In practice, despite the implementation of a 'new regime', there is a striking similarity between the list of individuals subject to sanctions by the UK and those subject to sanctions under the EU regime. In its press release introducing the new UK regime, the government noted that 113 entries previously subject to sanctions under the EU-derived regime would no longer be subject to asset freezes under UK legislation, and a handful of UN listings, although still subject to a travel ban, would no longer be subject to financial sanctions. However, in the context of a UK sanctions list that is 564 A4 pages long, this is very much a case of tinkering and minor adjustments rather than wholesale change. Time will tell whether the UK's sanctions targets diverge further from the EU's list – but for now, it is very much a case of business as usual.

Sanctions in practice

Despite the large degree of similarity between the UK and EU sanctions lists, it is still going to be necessary for businesses based in, or that deal with the UK, to consider the UK sanctions regime in developing their business plans. This adds to the existing load of sanctions regimes to consider – a prudent business will already have been bearing in mind the effect of (at least) the US, EU and UN sanctions regimes, as well as any local sanctions regimes that relate to jurisdictions in which, or with which, they plan to do business. Given the scale of the financial penalties that can apply for sanctions breaches (in February 2020, the UK imposed a penalty in excess of £20m– and that is after a reduction of 30% for voluntary disclosure – on a bank for sanctions breaches) it is worth taking the time to guard against falling foul of sanctions regimes.

Part 2: Top 5 corporate crime compliance trends for the year ahead

Tue, 26 Jan 2021 10:53:26 Z

Sam Tate, Head of our White Collar Crime Team, and Kate Langley share their thoughts on five likely developments to the corporate crime compliance landscape.

1. UK legislation on financial crime will become more complex: The full application of the Sanctions and Anti-Money Laundering Act 2018 from 1 January 2021 paves the way for further UK specific rules post-Brexit. In particular, the creation of a broader corporate criminal offence of "failure to prevent economic crime" remains on the legislative agenda, with the Law Commission due to publish an Options Paper in late 2021 (as previously discussed by RPC here).

2. Investment in Technology will be key to sustaining robust controls: As employees continue to work remotely, organisations will need to leverage technological developments to bolster their financial crime controls. From remote KYC/CDD activities, to onboarding new employees, training and monitoring the workforce, the pandemic has provided a timely opportunity for organisations to review their risk assessments and consider implementing further controls to ensure a robust response to new and emerging threats.

3. Cryptocurrency industry under the regulatory spotlight: In early 2020 the scope of crypto regulation was broadened to incorporate peer-to-peer exchanges and custodian wallet providers, pursuant to the EU's 5th Money Laundering Directive. The latest UK National Risk Assessment on Money Laundering and Terrorist Financing flags the expansion of the "cryptoasset ecosystem" as leading to an increased risk of money laundering. Existing cryptoasset businesses were required to be registered by 10 January 2021 and therefore the FCA is likely to commence enquiries on those failing to meet this deadline.

4. The net around Modern Slavery will be expanded: The risk of individual exploitation has been exacerbated during the pandemic, with decreasing corporate visibility over supply chains. In-scope organisations are obligated to publish their modern slavery statements annually, revisiting relevant controls in place. The Home Office is likely to continue to follow up with businesses in relation to outstanding and out of date statements.

5. Reporting obligations will continue to increase: In Q1 2021, the FCA is due to publish a policy statement on extending annual financial crime reporting obligations. More firms will be in scope if revenue thresholds are removed and/or wider application placed upon those conducting higher risk regulated activities. Even for the non-regulated sector, timely and accurate Management Information on financial crime risk should remain a priority for organisations, along with an established self-reporting roadmap (in tandem with legal advice) should potential breaches arise.

For more information, or to discuss any of these takeaways further, please do not hesitate to contact the us or visit our corporate crime page to find out how our team can help.

For Part 1, on the top 5 corporate crime enforcement trends you need to be aware of, click here.

Part 1: Top 5 corporate crime enforcement trends for the year ahead

Tue, 19 Jan 2021 13:15:52 Z

Sam Tate, Head of our White Collar Crime and Compliance team, and Kate Langley share their thoughts on five likely areas of corporate crime investigations and enforcement activity.

1. Tackling Covid-19 related fraud will be a new priority: The speed and size of the various government stimulus schemes has created opportunities for fraudsters. It is estimated that up to £3.5bn in Coronavirus Job Retention Scheme payments may have been claimed fraudulently, with HMRC reviewing 27,000 "high risk" cases where abuse or fraud is suspected. In addition, fears have arisen over the distribution of fake vaccines, along with the growing risk of cyber criminality in our virtual world. As new risk typologies emerge, organisations will need to be ready to investigate and respond accordingly, taking a risk-based approach.

2. Economic circumstances will present new challenges: As witnessed in the aftermath of the previous global economic crisis, financial pressures on individuals could result in civil unrest, along with an increase in fraudulent activities, such as by employees at risk of redundancy. The efficacy of Whistleblowing programmes will be tested, and organisations should ensure that such schemes are fully embedded into their BAU operations.

3. The first "failure to prevent" prosecution?: We await the first test case on the failure to prevent the facilitation of tax evasion (Corporate Criminal Offences), pursuant to the Criminal Finances Act 2017. A recent report indicated that HMRC has at least 13 live Corporate Criminal Offence investigations with a further 18 opportunities under review, spanning 10 business sectors. It appears likely that charging decisions will commence this year and provide businesses with further insight into the types of tax evasion conduct being targeted by prosecutors.

4. Prosecutions of individuals will be a top priority for the prosecutor: While there has been an increase in Deferred Prosecution Agreements (DPAs) with corporate entities over the past couple of years, there have been several acquittals of associated individuals. Lisa Osofsky, Director of the Serious Fraud Office (SFO) notes that the successful prosecution of individuals remains a regulatory priority, with recent SFO guidance expressly seeking company co-operation with the future prosecutions of individuals.

5. Cross-regulator, cross-border and public-private co-operation: Cooperation will continue and, despite Brexit, there will be continued efforts to increase regulatory co-operation. For example, we expect to see more agreements such as the recent Memorandum of Understanding between the Competition Markets Authority and the Serious Fraud Office. Increasing partnership between the public and private sectors will also be key to tacking corporate crime, as envisaged in the UK's Economic Crime Plan 2019-2022.

For more information, or to discuss any of these takeaways further, please do not hesitate to contact the us or visit our corporate crime page to find out how our team can help.

Is the current law on corporate criminal liability about to get more teeth?

Thu, 05 Nov 2020 14:08:37 Z

The Government response can be read here.

Sam Tate, Head of our White Collar Crime Team, and Lucy Kerr share their key expectations regarding the next steps in this process:

1. The long-standing "Identification Principle" will be the focal point of the review as it is the fundamental route to corporate criminal liability at present, whereby a company may only be held criminally liable through the individuals that represent its "directing mind and will".

2. The Identification Principle has proven to be a great obstacle to the prosecution of companies in recent years (especially large ones) for economic crimes. The failed prosecution of Barclays Bank by the Serious Fraud Office in 2018 will no doubt be a significant influence on reassessing this area of law, where even the CEO and CFO of Barclays Bank did not constitute the company's directing mind and will.

3. There has, nonetheless, already been some significant movement in the law on corporate criminal liability in the last decade with the introduction of the offences of: (i) failing to prevent bribery under the Bribery Act 2010; and (ii) failing to prevent corporate tax evasion under the Criminal Finances Act 2017.

4. The House of Commons Treasury Committee report in March 2019 urged reform to the existing economic crime law, so it is anticipated that a new wider "failure to prevent" offence will be a key option put forward by the Law Commission. However, the mechanics of any such offence for new categories of economic crime, such as fraud, will need to be approached with caution. Unlike bribery, the corporate is often the victim of a fraud offence at the hands of its employees, rather than being a beneficiary. In addition, for money laundering offences any adequate procedure defence will need to dovetail with FCA requirements or risk creating confusion and unnecessary complexity. Getting these and other issues right will be important to avoid burdening companies with unwieldy regulation as they adapt to the twin impacts of COVID19 and Brexit.

5. The publication of the Law Commission report is not expected until late 2021. Therefore, whatever options are put forward, we expect that any changes to the law will be slow to appear and not occur until 2022 or even later.

For more information, or to discuss any of these takeaways further, please do not hesitate to contact the us or visit our corporate crime page to find out how our team can help.

New SFO guide to DPAs: material change, or confirmation of approach?

Wed, 28 Oct 2020 15:12:59 Z

Sam Tate, Head of our White Collar Crime and Compliance, and Lucy Kerr believe the guidance represents less of a material change to the existing procedure and more of a welcome confirmation of the SFO's approach and its priorities. They have shared their five key takeaways from the detailed guidance:

Admissions of guilt: The guidance confirms that a company entering into a DPA is not required formally to admit guilt in respect of the offences charged in the indictment, albeit it will need to admit the contents and meaning of key documents referred to in the Statement of Facts that accompanies the DPA.
Approach to cooperation and privilege: Cooperation with the SFO remains a key priority for the SFO in considering whether to offer a DPA (and when it comes to deciding on the discount to be offered in relation to any financial penalty). Cooperation is confirmed to include the well-established steps of self-reporting the wrongdoing to the SFO, taking remedial action and preserving evidence, amongst others. The guidance also reinforces the SFO's longstanding view that waiving privilege over material is considered to be a significant sign of cooperation (although the guidance confirms that a company cannot be penalised for maintaining privilege).
Identification of third parties: The guidance indicates the SFO may intend to move away from its previous habit of identifying individuals in DPAs, aligning itself more with the approach of the Financial Conduct Authority, which maintains anonymity for third parties in its public enforcement notices. The guidance highlights that consideration must be given to compliance with the Data Protection Act 2018 and the European Convention on Human Rights when considering whether to identify third parties in a DPA. Therefore, we expect more anonymisation for individuals in future DPAs.
Financial penalty: The guidance acknowledges that calculating the profit made by a company as a result of the wrongdoing (which forms the basis for any disgorgement payment and/or financial penalty) may not be a "straightforward exercise" and the guidance observes that accountancy advice may be helpful to companies.
Discounts: The guidance confirms the established principle that any discount on a financial penalty under a DPA should be comparable to a fine imposed as a result of a guilty plea in a prosecution. The guidance goes on to acknowledge the precedent that has been set in the majority of previous DPAs for awarding a 50% discount in recognition of the level of cooperation habitually offered to the SFO.

To access the SFO's guide to its approach to DPAs, click here.

For more information, or to discuss any of these takeaways further, please do not hesitate to contact the us or visit our corporate crime page to find out how our team can help.

COVID-19: The Dairy Sector and Welsh health services granted temporary UK competition law exemptions and the European Commission issues first 'Comfort Letter' to Pharmaceutical Manufacturers

Mon, 01 Jun 2020 12:58:05 +0100

Exclusion Orders

The Government has followed up with two further, temporary legislative exemptions from the Chapter I prohibition under the Competition Act 1998, one being for health services in Wales (following a similar exemption for England) and the second for the dairy sector.

The dairy industry's specific Covid-19 challenges have been well-documented, particularly the impact of decreased demand from the hospitality sector with farmers having to pour milk away. The purpose of the three-month exemption is to enable collaboration between dairy farmers and producers in order to avoid/minimise surplus milk being wasted and the consequent environmental harm of disposing of large volumes of milk and also to maintain milk production capacity for the future. Collective efforts to identify processing opportunities to produce storable milk products, such as butter, cheese and skimmed milk powder will be permitted, along with the sharing of labour and facilities. Any co-ordination regarding a temporary reduction of milk products will also be permitted, provided that the object is not to exclude a dairy produce supplier from the market. However, in common with the other Covid-19 related Chapter I exemptions, it is made clear that the exemption does not apply to any arrangement involving the sharing of pricing or costs information.

One of the conditions for exemption under the various Exemption Orders is that the relevant agreement is duly notified to the Secretary of State. On 21 May 2020, the Government published its register of such agreements for the first time. Although it was too soon to cover agreements in the dairy sector, the register lists three notifications in relation to health services for patients in England and Wales, two in respect of Solent maritime crossings and thirteen in the groceries sector.

CMA's Covid-19 Task Force

The CMA has published its second Covid-19 Task Force update. It has received 60,000 contacts since it was set up. Whilst the majority of the complaints received initially related to price increases (with the price of hand sanitiser and paracetamol topping these complaints), since mid-April the majority of complaints have been about unfair practices relating to cancellations and refunds. The Task Force has now added package holidays to its initial priority sectors for investigation about possible breaches of the law, namely: holiday accommodation; weddings and events; and nursery/childcare providers. About a fifth of cancellation/refund complaints have related to airlines and these have been passed to the CAA. The Task Force has also written to 264 businesses, which combined represent approximately a third of the actionable complaints about unjustifiable price rises.

European Commission's First Comfort Letter

In addition to highlighting its general guidance, publishing its Temporary Framework providing guidance on the competition law compliance assessment of business cooperation in response to "situations of urgency" due to the COVID-19 pandemic and offering ad hoc guidance to businesses and trade associations, the European Commission had stated that, in exceptional circumstances, it would consider providing a more formal 'comfort letter'.

It has published its first such letter confirming to Medicines for Europe ("MFE") that the proposed co-operation in relation to COVID-19 medicines does not raise competition concerns under Article 101 of the TFEU. The European Commission was satisfied that the purpose of the co-operation was "to expeditiously and effectively increase supply and production of urgently needed COVID-19 medicines" and that the co-operation was necessary to achieve this. MFE has accepted certain conditions, namely:

the co-operation is open to any pharmaceutical manufacturer whether or not it is a member of MFE;
all meetings will be minuted and copies of any agreements entered into as part of the co-operation will be provided to the European Commission;
the exchange of confidential information will be limited to what is indispensable for achieving the objectives and will be collated by the MFE or third party appointed by it and shared on an aggregated basis; and
the co-operation will be of limited duration, i.e. only whilst the risk of shortages remains.

In addition, the European Commission has made very clear that the comfort letter does not cover any pricing discussions and is also subject to the co-operation participants not increasing their prices beyond what is justified due to any increases in their costs.

Regulated Activities Order amendments for the new Bounce Back Loan Scheme

Tue, 05 May 2020 17:14:32 +0100

This Order amends Article 60C of the Regulated Activities Order and creates a new type of exempt agreement. The amendment provides that a credit agreement is exempt where the lender provides a borrower with credit of £25,000 or less which is for the purposes of a business carried on, or intended to be carried on, by the borrower and where the agreement is entered into under the Bounce Back Loan ("BBL") scheme.

The Order also amends Article 39H to state that the exclusion for lenders in relation to debt collecting does not apply to lenders of BBL scheme loans. This means that the instrument allows for the existing regulatory regime to continue to apply to lenders who carry on debt collecting activity in relation to loans under the BBL scheme. This amendment is a transitional provision and only applies to loans entered under BBL scheme.

The instrument has been made to remove certain legislative obstacles which could inhibit the granting of loans by lenders to small businesses under the BBL scheme. Before this instrument was put before Parliament, the BBL scheme might otherwise have fallen within scope of the UK's regulated consumer credit regime and needed to comply with the prescriptive requirements of the Consumer Credit Act 1974.

This is another development relating to the UK's Coronavirus Business Interruption Loan ("CBIL") Scheme and the new BBL scheme. The FCA published a statement setting out its approach to these two schemes on 4 May 2020.

The FCA clarified that it doesn't expect firms who comply with the relevant requirements of CBIL and BBL schemes, to comply with the rules in the Consumer Credit sourcebook that relate to creditworthiness assessments (CONC 5.2A – 5.2A.34) where the lending is regulated. However, in respect of all other regulated lending, firms must still undertake a reasonable assessment of a customer's creditworthiness in line with CONC 5.2A.

The statement also provided clarity on the Senior Managers and Certification Regime for relevant individuals in authorised firms involved in the CBIL scheme. The FCA explained that it intended to give similar clarity on the BBL scheme upon launched.

Finally, the FCA made comments on financial crime risks stating that for existing customers where a firm has already carried out appropriate due diligence, it would not need to make further checks (unless the customer poses a higher risk). However, for new customers the risk may be slightly higher and so firms should carry out the normal CCD processes, but firms has discretion to decide on a simplified due diligence is the risks are low and it is appropriate.

For more information, on the CBIL and BBL schemes, please see earlier Big Deal blog posts written by Sukh Ahark and Lauren Murphy.

COVID-19: What is the CMA's current approach to UK merger assessment?

Wed, 29 Apr 2020 10:55:14 +0100

On 18 March, the CMA published a statement about its working practices in light of Covid-19 developments. It confirmed that its staff were working remotely and that meetings and hearings were being conducted remotely either via videoconference or by telephone. At the time, the CMA also made clear that much of its work (i.e. its mergers work in particular) was subject to binding, statutory timetables, and that it intended "to continue progressing its cases, making decisions and meeting deadlines".

Over the last month, the CMA has focused its statements and guidance on reassuring businesses as to its approach to co-operation between competitors which is necessary during the pandemic to ensure security of supplies of essential goods and services and to warn against businesses seeking to profiteer from the crisis.

However, the CMA is also aware that pressures arising from the crisis "could have a material impact on its merger control work" and has now issued guidance on its approach to merger assessment during the pandemic.

Click below to read our commentary on the guidance.

COVID-19: Coronavirus and Competition Law - The Current Enforcement Scene

Mon, 06 Apr 2020 09:55:03 +0100

Mon, 06 Apr 2020 09:55:03 +0100Regulatory updatesThe CMA and other competition regulators are keen to ensure that competition law enforcement concerns do not stand in the way of co-operation between competitors which is necessary in order to deal with the coronavirus crisis and ensure security of supplies of essential products and services. However, the message is that, even in these very difficult times, competition law still applies, and competition regulators will not tolerate unscrupulous businesses exploiting the situation either through illegal collusion under cover of the current crisis or profiteering through charging excessive/unjustifiable prices.

A Summary of Developments:

Enforcement

Specific temporary exclusions from the application of the UK's Chapter I prohibition for certain agreements ~~for~~ involving the grocery, health services and Solent ferries sectors
Reassurances and guidance from the CMA that businesses not benefiting from these specific exemptions may co-operate during the crisis without fear of enforcement action where their action:
- is appropriate and necessary to avoid a shortage or ensure security of supply;
- is clearly in the public interest;
- contributes to the benefit or wellbeing of consumers;
- deals with critical issues resulting from the pandemic crisis; and
- lasts no longer than is necessary. (For a more detailed summary of the CMA's guidance, please click here)
The launch of a CMA task force to monitor sales and pricing practices to ensure that the relaxation of the rules does not give rise to exploitative business practices like excessive pricing for in-demand goods (such as hand sanitiser and face masks)
The CMA has written an open letter to the pharmaceuticals and food and drinks industries about reports that a minority of companies in these important sectors are charging unjustifiably high prices for essential goods or making misleading claims about their efficacy
The CMA is continuing with its other investigations and decision-making
The Financial Conduct Authority and Payment Systems Regulator are supportive of the CMA's guidance and will adopt a consistent approach in their enforcement activities
The European Competition Network has confirmed that it will not actively intervene against necessary and temporary measures put in place in order to avoid a shortage of supply, but it will take enforcement action against companies exploiting the current situation "by cartelising or abusing their dominant position"
The European Commission is offering the possibility of further guidance for specific co-operation initiatives in certain circumstances

Merger Control

UK: The CMA is continuing to meet its statutory deadlines when conducting its merger investigations, but may make use of permitted extensions to the fixed timetables, where necessary. It is understood to be asking that merging parties engage early to discuss timing of notifications as the current crisis may impede its ability to conduct market testing
EU: The European Commission is actively encouraging merging parties to delay merger notifications originally planned until further notice

State Aid

The European Commission has put in place various supporting measures, including issuing guidance and adopting on 19 March 2020 a Temporary Framework for state aid measure to support the economy in the current COVID-19 outbreak
Although the UK withdrew from the EU on 31 January 2020, it is still subject to the state aid rules during the Transition Period.

Please click below to read the full article.

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COVID-19: CMA provides guidance to business on its approach to co-operation in response to the pandemic

Wed, 01 Apr 2020 14:20:22 +0100

The CMA has published its promised guidance on its approach to co-operation in response to COVID-19; its driver is an acknowledgement that competition law enforcement concerns may impede business co-operation which is necessary in order to deal with the current crisis and ensure the security of supply of essential products and services.

What can businesses do?

They can coordinate action on a temporary basis where this action:

is appropriate and necessary to avoid a shortage or ensure security of supply;
is clearly in the public interest;
contributes to the benefit or wellbeing of consumers;
deals with critical issues resulting from the pandemic crisis; and
lasts no longer than is necessary.

On this basis, provided that the co-ordination does not go beyond what is necessary, there is unlikely to be a competition law concern arising from co-ordinated action to:

avoid a shortage or ensure security of supply;
ensure a fair distribution of scarce products;
continue essential services; or
provide new services, such as food deliveries to vulnerable consumers.

What must they not do?

They should not exploit the current situation either through using the crisis as cover for illegal collusion or by profiteering and charging inflated prices, as has been seen with much sought-after hand sanitisers; as previously reported, the CMA has set up a task force to monitor developments.

Specifically, the CMA has made it clear that business should not:

exchange commercially sensitive information about future pricing or business strategies;
exclude smaller rivals from efforts to co-operate/collaborate to ensure security of supply or denying rivals access to supplies/services;
collude to keep prices artificially high in order to mitigate falling demand; or
co-ordinate beyond the scope of what is necessary.

What about businesses in the financial services sector?

The Financial Conduct Authority and the Payment Systems Regulator, as concurrent competition regulators with the CMA, have confirmed that they are supportive of the CMA's guidance and will take a consistent approach to their competition law enforcement activities in the financial services sector.

Need further guidance on whether your initiatives comply with UK or EU competition law?

The CMA intends to keep its guidance under review and update it, if necessary. It has also indicated a willingness to provide additional, informal guidance (subject to resourcing constraints) where, despite the guidance, businesses and their legal advisors remain 'genuinely uncertain' about the legality of proposed actions and the matter is 'of critical importance'.

The European Commission has also announced that it has set up a dedicated mailbox for companies seeking informal guidance on the compatibility of their specific co-operation initiatives with EU competition law.

To read more, click the link below.