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BANKING & FINANCE LITIGATION UPDATE

ISSUE 64

We wish to establish a dialogue with our readers. CONTENTS Please contact us at &FL Update and let us know Domestic Banking ...... 2 which particular areas you are interested in and what you would find helpful. Domestic General ...... 3

The Banking & Finance Litigation Update is European Banking ...... 5 published monthly and covers current developments affecting the Group's area of practice and its clients European General ...... 6 during the preceding month. International Banking...... 7 This publication is a general overview and discussion of the subjects dealt with. It should not be used as a International General ...... 8 substitute for taking legal advice in any specific situation. DLA Piper UK LLP accepts no Press Releases ...... 9 responsibility for any actions taken or not taken in reliance on it. Case Law ...... 10

Where references or links (which may not be active Legislation ...... 13 links) are made to external publications or websites, the views expressed are those of the authors of those publications or websites which are not necessarily those of DLA Piper UK LLP, and DLA Piper UK LLP accepts no responsibility for the contents or accuracy of those publications or websites.

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DOMESTIC BANKING 7. could potentially make $70 million from its part in the battle for , the OF ENGLAND computer manufacturer, which is expected to 1. The Bank of England and the Treasury are produce $400 million in -income for the considering an extension to the Funding for involved in providing advice. Lending Scheme, whereby banks can get cheap loans as long as the money is passed on to Guardian, 5 April 2013 customers in the form of loans to small business and low rate mortgages. 8. Barclays' failure to sell £590 million worth of shares it had underwritten in Ziggo, the Dutch Independent, 18 April 2013 cable company, for Cinven and Warburg Pincus, means that it will have to wait until the shares 2. From 2 April, the new system of financial rally in price before it can sell them, or take on the regulation in the UK will place the Bank of loss. The failure to sell was a result of a England at its centre. Its new subsidiary, the widespread drop in share value across Europe Prudential Regulation Authority ("PRA"), will caused by worries about the Cypriot financial replace the Authority ("FSA") crisis. and will work alongside its own Financial Policy Committee and the newly formed Financial Times, 23 March 2013 Conduct Authority ("FCA") in "resetting the system of financial regulation" in the UK. HSBC Guardian, 2 April 2013 9. In advance of changes to the rules that will make lenders carry out more stringent affordability 3. The Bank of England's financial policy committee checks on borrowers requesting loans, and in a has identified £25 billion worth of hidden bank move that will affect residential purchases but not losses, a shortfall it says banks will need to fill by buy-to-let, HSBC and Yorkshire Building Society the end of the year. Vince Cable, the business have become the latest lenders to stop offering secretary, has warned that if banks are forced to new customers interest-only mortgages. increase their capital it could have a negative impact on lending during the recession. Guardian.co.uk, 22 March 2013

Guardian, 27 March 2013

BARCLAYS 10. and The Royal ("RBS") have rejected proposals that their 4. Rich Ricci, the head of at auditors should be limited to just seven years in Barclays, and Tom Kalaris, who ran Barclays' post. The proposals from the Competition wealth arm, have both left as Anthony Jenkins Commission have been roundly criticised by both moves to shake up the culture at the bank. banks. They argue that they should be able to keep the same auditor for as long as they want. Daily Telegraph, 19 April 2013 Financial Times, 12 April 2013 5. Barclays annual profits have risen from £7.048 billion to £7.599 billion as a result of changes to accounting standards which meant the bank could THE restate its accounts. 11. A consortium bidding for more than 300 RBS Daily Telegraph, 17 April 2013 branches has lost its leader after John Tiner dropped out. The exit of the former chief 6. The Association of British Insurers will not give executive of the FSA comes in advance of its approval to the use of complex financial anticipated criticism regarding the conduct of the instruments known as CoCos by Barclays and has FSA in the run up to the financial crisis from the given an "amber top" warning to investors not to Parliamentary Commission on Banking Standards. support the bank's plan to use them. Daily Telegraph, 19 April 2013 Guardian 16 April 2013

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12. RBS is bringing in a new monthly borrowing fee Bingley, could perform the same role for RBS. which will result in thousands of customers with a His comments came following reports that the RBS or NatWest current account soon paying Parliamentary Commission on Banking Standards more for their overdraft. A monthly charge of £6 is considering splitting up RBS into three separate will be imposed on those who use their overdraft entities: RBS, NatWest and a third "" to which is in addition to the interest, payable at be managed by UKAR. 19.89pc on the overdraft. Times, 26 March 2013 Telegraph.co.uk, 18 April 2013

13. RBS has been unsuccessful in its attempt to stop a DOMESTIC GENERAL fraud claim by Highland Capital. The Texan 18. Shadow City minister, Chris Leslie, has tabled investment firm claimed it lost approximately amendments to the banking reform bill, as Labour $100m when RBS aborted a derivatives contract calls for bankers and other financial services and seized the underlying loans in 2008. A Texan professionals to have a new licensing system, with court will hear the fraud case. An earlier ruling a breach of the terms of their licence bringing the that the company owed RBS in the region of threat of being "struck off". £19m was overturned by the Court of Appeal. Financial Times, 16 April 2013 Sunday Times, 14 April 2013 19. Shadow Business Secretary, Chuka Umunna, has 14. The FCA has announced that it is investigating a said that Labour would only look to introduce a computer failure in the summer of 2012 which financial transactions tax if one was also levied on could result in a fine for RBS. The IT glitch . Mr Umunna also said that the party affected millions of customers across the bank's would not embrace the financial transactions tax RBS, NatWest and divisions who put forward by Brussels, which is currently backed could not access their accounts. The lender said by 11 of the EU member states. the computer failure was "unacceptable" and that significant improvements had already been made Times, 16 April 2013 and hundreds of millions would be invested in its systems over the coming three years. 20. Andrew Bailey, head of PRA and the country's senior banking regulator, has questioned the fact Daily Telegraph, 10 April 2013 that there have been no formal charges laid against any of the bosses of failed UK banks for their roles 15. Hedge funds GLG and Lansdowne are in in the financial crisis. Bailey also said that the fact discussions to back a £1bn bid for the 316 no senior directors have been disqualified was a branches which the RBS must sell after being "source of surprise". bailed-out by the Government. The hedge funds are thought to be amongst over 20 companies Guardian, 16 April 2013 interested in making an offer for the branches. 21. The claim by banks that their consistently weak Daily Telegraph, 9 April 2013 lending to small businesses is purely down to a lack of desire for credit, has been rejected by 16. High Court proceedings have been issued against independent research commissioned by the RBS and four of its former executives including Government. The report from the National . Up to £4bn in damages is being Institute of Economic and Social Research sought by the RBS Shareholder Action Group (NIESR), says evidence of continuing tight credit which alleges that shareholders were deceived supply conditions is clear, blaming the attitude of about the bank's financial condition when it asked banks to risk, the pressure on them to improve them for £12bn in fresh capital just months before their capital positions and the negative impact of it collapsed. the fact that four giant high street banks have a Times, 4 April 2013 stranglehold on lending to SMEs.

17. The chief executive of UK Asset Resolution Daily Telegraph, 12 April 2013 Limited (UKAR), Richard Banks, has said that the bank, created to manage debts following the collapse of and Bradford &

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22. The Post Office has announced that it is to offer 27. has been brought under the net of statutory current accounts at its almost 12,000 UK regulation for the first time under wide-ranging branches, leaving high street banks facing a new changes to the system of financial regulation. competitor that has a considerable existing high Formal regulation for Libor was introduced by the street network. government following the controversy over rigging of the benchmark rate which has led to Financial Times, 11 April 2013 large fines for a number of banks. Following a review of Libor by Martin Wheatley, the rates 23. In the first phase of the government's new banks submit to the Libor panel will, from July, be business bank, £300 million is to be pledged by published with a three-month delay. Mr Wheatley Vince Cable for small and medium-sized also recommended that the number of Libor enterprises that are struggling to get access to currencies should be reduced to five from the finance. The money will be invested alongside the current 10. same amount, at least, from the private sector. The first transactions should occur in the autumn. Guardian, 3 April 2013

Financial Times 10 April 2013 28. The first three months of 2013 saw the FSA hand out fines of £136 million to financial firms, City 24. A stinging report from the Parliamentary workers and other wrongdoers, the largest amount Commission on Banking Standards has urged in the first quarter of a year in the FSA's 15 years regulators to consider stripping three of HBOS's of existence. There is unlikely to be much of a top directors of their right to run a financial drop in the high level of fines under the FSA's company. The 96-page report accuses Lord successor, the FCA as its chief executive has said Stevenson, the bank's former chairman, and Sir there will be no let up as it aims to clear up James Crosby and Andy Hornby, its two former London's financial centre. chief executives, of presiding over a "colossal failure". The bank collapsed in 2008, and the Independent, 30 March 2013 report says it cost taxpayers a total of £28 billion of capital after it was folded into Lloyds, which 29. The FSA has announced that new banks may only itself then had to be bailed out by the government. need €5 million ($4.25 million) of capital to get started. Startups will be allowed to fail more Financial Times, 5 April 2013 easily, potentially putting savings above the level of £85,000 at risk. 25. Britain's top bank watchdog has predicted that repeated bank failures, including the most recent Guardian, 27 March 2013 problems seen in , are leading to the "dying out" of the longstanding practice of allowing EU 30. The "bad bank" responsible for winding down banks to take retail deposits across national lines. nationalised lenders Northern Rock and Bradford Historically banks have been permitted under EU & Bingley's mortgage books, paid the government single market rules to open deposit-taking back £4 billion in 2012, a 40 per cent increase in branches anywhere in the 27-member bloc without the amount it returned in 2011. submitting to local regulation. The bank's home countries are supposed to be responsible for Financial Times, 26 March 2013 supervision and deposit . 31. A survey of 2,300 finance professionals by think Financial Times, 4 April 2013 tank Z/Yen, has shown London retaining its place at the top of the league of global financial centres, 26. PRA, the new financial regulator, has given a followed by , Hong Kong and swift example of its powers. On its first official . However, the research also found that day it announced that it had overseen a deal hubs overseas are closing the gap, with the likes of safeguarding the deposits of customers of the Paris, Zurich and Geneva seeing higher year-on- failed Cypriot bank Laiki. Money belonging to year increases than London. depositors with the UK operations of Laiki is to be automatically transferred to UK. Financial Times, 25 March 2013

Financial Times, 3 April 2013

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EUROPEAN BANKING 36. Credit Suisse will increase its UK business with wealthy customers twofold when it purchases 's European and Middle Eastern 32. An investment in a Manchester office block which arm. No details of the value cost Bank of Ireland £33 million in 2007 is now of the sale has been revealed although it has been said to be worth virtually nothing. The bank sold suggested the deal is worth around $150 million almost 50 per cent of the building to its customers for a business with $13 billion of assets under who invested at least £50,000 each and who were management and offices in London, Dubai and expecting a return on their investment in 2014. . The bank has now told investors that it is "unlikely" they will recover the value of their Financial Times 28 March 2013 investment.

Sunday Times, 7 April 2013 37. In an effort to head off criticism of excessive 33. The Treasury Select Committee has ordered the corporate salaries, Deutsche Bank has announced head of the FCA, Martin Wheatley, to provide it that its co-chief executives are to have their pay with more details about the Bank of Ireland's capped. The proposals were put forward by the decision to raise its mortgage tracker interest rates supervisory board of the bank for approval by and to explain the FSA's response to the issue. shareholders in May, and are likely to be followed beyond this year. Even if they exceed all their Daily Telegraph, 29 March 2013 targets, Anshu Jain and Jürgen Fitschen will not receive the maximum possible bonus for 2013. Their maximum capped pay out of €9.85 million BANK OF this year would still be twice what they earned in 34. The former directors, managers and auditors of 2012 however, though any bonus would be capped Italian bank Monte dei Paschi may have to pay a at €7.55 million. penalty of up to €5 million as a result of the instigation of sanctions procedures against it by Financial Times, 18 April 2013 the Bank of Italy following an investigation into derivatives losses. The Bank of Italy has been criticised for the way it supervised the country's EUROPEAN CENTRAL BANK third largest bank. 38. Renewed north-south political tensions over the role of the European Central Bank ("ECB") in Financial Times, 5 April 2013 battling the debt crisis affecting the Eurozone, have been highlighted by calls from the Spanish prime minister, Mariano Rajoy, for the ECB to be CREDIT SUISSE handed more powers. Mr Rajoy mentioned the 35. The former global head of structured credit trading Bank of England and the US as at Credit Suisse, Kareem Serageldin, has pleaded possible models, though he did not set out what guilty to , making him the most additional powers he was thinking about. senior person in the City to be convicted of the offence. Following his arrest in London in Financial Times, 9 April 2013 September 2012, Serageldin appeared before a US District Court to face charges of inflating the price 39. Mario Draghi, president of the ECB has signalled of mortgage-backed assets. Two other colleagues that an interest rate cut is moving up the agenda at had previously pleaded guilty saying that they had the ECB. Mr Draghi revealed that the ECB's followed orders from Serageldin, who had wanted governing council had had an "extensive" to protect his £4.5 million bonus. Serageldin will discussion about interest rate policy. Though low, be sentenced on 2 August and is likely to face 5 the bank's rates are still higher than those of the years in prison. UK, US or .

Independent, 14 April 2013 Financial Times, 5 April 2013

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40. Whilst avoiding any acknowledgment of blame 45. The European Commission has adopted a report to for the bungled Cyprus bail-out, Mario Draghi has the European Parliament and the Council on the said that urgent lessons are to be learned about the international treatment of central banks and public need for specifying a "pecking order" of assets entities managing public debt with regard to OTC that could be raided in future rescues. He said that derivatives transactions. It provides a comparative the initial agreement between Cyprus, Eurozone analysis of the treatment of central banks and debt finance ministers and the ECB that would have management offices within the legal frameworks seen a tax levied on insured deposits below of a significant number of non-EU countries. This €100,000 was a mistake. report is a first step towards exempting certain non -EU countries' central banks and public debt Financial Times, 5 April 2013 management offices from the scope of Regulation 648/2012 on OTC derivatives, central counterparties and trade repositories (EMIR). It EUROPEAN GENERAL will be updated regularly as the reform process 40. The , , has advances in the countries where the legislation is written to Mario Draghi accusing the governor of not yet final, as well as in other G20 jurisdictions Cyprus's central bank of alleged errors of not yet included in the report. supervision which were then followed by the closure of Laiki bank and the financial problems European Commission, 22 March 2013 that ensued on the island. http://eur-lex.europa.eu/LexUriServ/LexUriServ.do? Financial Times, 17 April 2013 uri=COM:2013:0158:FIN:EN:PDF

41. The European Parliament has voted through a 46. Following questions over whether inside package of reforms aimed at strengthening EU information was used by a company managed by banks. The reforms include a stiffening of his son-in-law in the transfer of over €20 million supervision, a cap on banker's bonuses to curb from Laiki Bank in the days before it collapsed, speculative risk-taking and a step up in capital judges looking into the banking disaster in Cyprus provisions in order to help banks cope better with have been urged by Cypriot president, Nicos Anastasiades, to examine as a "priority" any future crises. transactions that were handled by his family law European Parliament, 16 April 2013 firm in an attempt to diffuse public anger over last minute transfers made by some Cypriots, Russians 42. is insisting that, even if it takes a and Ukranians who avoided a "haircut" on their number of years, a revision of EU treaties is uninsured deposits as a result. necessary to create a single authority to wind up banks. This puts a significant barrier in the way of Financial Times, 3 April 2013 any attempt to speedily create a European banking 47. Jeroen Dijsselbloem, chairman of the group of union. Eurozone finance ministers, has said that the €10 Financial Times, 15 April 2013 billion Cypriot rescue is a watershed moment for how failing banks are dealt with by the Eurozone, 43. Amid increasing pressure for a crackdown on tax with leaders now committed to "pushing back the evasion in Europe, Austria and Luxembourg are risks" of paying for bank to private preparing to ease their controversial bank secrecy investors instead of taxpayers. rules. Financial Times, 26 March 2013 Financial Times, 10 April 2013

44. Following pressure from international lenders ahead of a €50 billion recapitalisation of 's four largest banks planned for April, the merger of Eurobank and has been suspended. The move reflects fears over the possible concentration of risk that such a merger could create.

Financial Times, 9 April 2013

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INTERNATIONAL BANKING 52. The 50-year relationship between and has been reinforced after his investment vehicle agreed to swap billions of 48. The Bank of America owned mortgage provider, dollars of warrants for shares, thereby becoming Countrywide Financial, has reached a settlement one of the bank's largest shareholders. The deal is with its investors worth $500 million in a lawsuit structured in a way that allows Berkshire related to the selling of mortgage-backed Hathaway to take the stake without using the $5 securities. The settlement is awaiting approval by billion of cash required to exercise the warrants. the US District Court of . Financial Times, 27 March 2013 Independent, 18 April 2013 GOLDMAN SACHS 53. According to a court filing in the , 49. Goldman Sachs has been granted a licence by the Lehman Brothers has agreed to pay Barclays $769 British regulator, though sources close to the bank million (£500 million). The two have been say it has no immediate plans to create an entity to fighting over assets and a judge ordered Lehman rival private bank in offering services to Brothers to keep £5.5 billion on hand for its wealthy clients. The licence was granted by the dispute with the British bank. Approval for the FSA at the end of March and enables Goldman to payment will need to be given by a judge. The take retail deposits, and provide other advisory, ongoing dispute stems from Barclays' purchase of banking and trading products. Lehman's US division during the credit crisis in 2008. Times, 18 April 2013 Daily Telegraph, 17 April 2013 50. A seven per cent increase in first quarter profit has seen Goldman Sachs beat Wall Street 54. Four and a half years after it collapsed, creditors of expectations. Net profits were up from $2.11 the European arm of Lehman Brothers look likely billion in the first three months of 2012, to $2.26 to get all their money back, possibly with interest billion in the same period for 2013, with revenues paid. Administrators, PwC, have sent a report to increasing by 1.4 per cent to $10.09 billion. The creditors saying that following a number of legal bank said that the increase in earnings was a victories against other defunct Lehman entities reflection of "significantly" higher revenues from over the past six months, there was a "reasonable related to commercial property chance" of full repayment of the £15 billion in transactions and leveraged finance. unsecured claims.

Daily Telegraph, 17 April 2013 Financial Times, 15 April 2013

51. Goldman Sachs is to launch a listed vehicle to lend to US middle-market firms. The measure is MORGAN STANLEY aimed at bypassing the 's curbs on the 55. A slowdown in trading activity saw investment sponsoring by banks of investment funds. A filing bank Morgan Stanley report lower revenues for the from the bank said that the plan is to launch an first quarter, though it recorded higher profits with initial public offering (IPO) for the vehicle, the help of cost controls. The first three months of managed by its Liberty Harbor Capital 2013 saw revenues of $8.5 billion, down from $8.9 team. The aim is to invest between $5 million and billion for the same period in 2012. The bank said $50 million in companies that have earnings of that advisory fees, equity trading and fixed income between $5 million and $75 million. were all lower.

Financial Times, 2 April 2013 Financial Times, 19 April 2013

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NOMURA 60. Global securities regulators have said that interbank lending rates and other benchmarks 56. Italian prosecutors have obtained an order to seize should be tied to real transactions and should also €1.8bn of assets from the Milan of Nomura use codes of conduct to make them as conflict free as part of on-going legal action by Banca Monte as possible. The group, led by top US and UK dei Paschi di Siena, which accuses Nomura of regulators, and driven by the Libor rate fixing selling it risky deals which pushed it to scandal, called upon other regulators to ensure that the brink of nationalisation during the European benchmarks in their jurisdiction comply with a set sovereign debt crisis. Prosecutors are also of principles aimed at stopping manipulation. investigating Raffaele Ricci, a senior Nomura executive, and Sadeq Sayeed, a former Nomura Financial Times, 17 April 2013 regional chief, for allegedly obstructing regulators. Nomura says no assets have yet been seized and 61. Looking to head off accusations that the global that it would "vigorously contest any suggestions economy could be distorted by its aggressive of wrongdoing". monetary policy, the Bank of Japan has said that it will operate its new 2 per cent inflation target Times, 17 April 2013 "very flexibly". The bank's new governor, Haruhiko Kuroda, argued that his strategy to JP MORGAN double the country's money supply would not lead to asset bubbles and was not an attempt to 57. JP Morgan announced higher than expected manipulate the value of the yen. quarterly profits. The bank made a record net income of $6.5 billion for the first quarter of 2013, Financial Times, 12 April 2013 an increase of $1.6 billion on figures at the same time in 2012. However, revenues were down by 62. According to a couple of new reports, some banks $1 billion, at $25.8 billion, on those from last year may struggle to sustain global operations as a - $600 million less than analysts had predicted. result of the strain placed on investment bank returns by the myriad tough new rules that they are Independent, 13 April 2013 facing. The radical regulatory and technological changes they are facing, together with persistently 58. , the chief executive of JP Morgan, weak revenues are causing investment banks to has said that the main priority for the bank going struggle. forward will be compliance. "We have work to do to strengthen our controls and carry out our Financial Times, 12 April 2013 compliance mission", he stated, as the bank released its quarterly profit figures. 63. In an apparent widening of the libor rate-rigging scandal, it has emerged that regulators in the Daily Telegraph, 13 April 2013 United States are stepping up an investigation into whether there was manipulation of Isdafix, a key benchmark used to value trillions of dollars of INTERNATIONAL GENERAL derivatives contracts. 59. magazine's annual poll of the world's largest companies has been topped by Chinese Times, 10 April 2013 firms for the first time. Exxon Mobil was replaced as the world's biggest company by 64. According to a poll of officials who are Chinese bank ICBC, with Construction collectively responsible for reserves of nearly $7 Bank replacing JP Morgan in second spot. trillion, central bankers are compensating for ultra- low returns on US Treasuries by changing their Guardian.co.uk, 17 April 2013 usually risk-averse investment behaviour and looking at assets and exotic currencies. Reserves worth $10.9 trillion are managed by the world's central bankers, with most of it held in the bonds of safer Eurozone states and US government debt.

Financial Times, 8 April 2013

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65. Tactics to mitigate the impact of impending bonus 69. IOSCO Consults on Principles for Financial caps from the EU are being increased by foreign Benchmarks banks in the City. Financial centres in the Gulf could be the ones to benefit from the fact that, The International Organization of Securities according to bankers, US institutions are Commissions (IOSCO) has published a considering whether basing Europe, Middle East consultation paper on Principles for Financial and Africa (EMEA) business in London still Benchmarks, which seeks public comments on a makes sense. set of high-level principles for benchmarks used in global financial markets. Financial Times, 2 April 2013 IOSCO, 16 April 2013 66. Following the global scandal over the manipulation of other key rates, the new head of Press Release: http://www.iosco.org/news/pdf/ the banking lobby in Japan has vowed to find ways IOSCONEWS276.pdf to improve the dependability of Tibor, the domestic lending benchmark. Consultation: http://www.iosco.org/library/ pubdocs/pdf/IOSCOPD409.pdf Financial Times, 2 April 2013 70. Report to G20 Finance Ministers and Central Bank Governors on monitoring implementation PRESS RELEASES of Basel III regulatory reform 67. Santander UK to contact more than 270,000 This report updates G20 Finance Ministers and borrowers after raising cap on mortgage Central Bank Governors on progress in adoption standard variable rate in 2008 without being of the Basel III regulatory reforms since the Basel clear Committee on Banking Supervision issued its October 2012 report. The scope of this update is The FCA has reached an agreement with broader than previous progress reports to the G20. Santander UK plc that will see it contact over 270,000 mortgage customers about unclear Bank for International Settlements and Basel information it gave before increasing the cap on its Committee on Banking Supervision, 12 April 2013 mortgage standard variable rate (SVR) in 2008. http://www.bis.org/publ/bcbs249.pdf Financial Conduct Authority, 19 April 2013 71. Closure of Public Co Ltd http://www.fca.org.uk/news/press-releases/ (Laiki Bank UK) and transfer of all deposits to santander-contact-borrowers-svr Bank of Cyprus UK

68. FCA publishes complaints data for the second Cyprus Popular Bank Public Co Ltd operating in half of 2012 the UK under the trading name "Laiki Bank UK" has reached an agreement with Bank of Cyprus The FCA has published the latest complaints data UK Ltd to transfer all deposits to Bank of Cyprus showing complaints to financial services firms UK, a UK subsidiary fully regulated by the PRA between July and December 2012. and the FCA and covered by the UK Financial Services Compensation Scheme up to £85,000 per Financial Conduct Authority, 15 April 2013 depositor. The agreement does not affect access to http://www.fca.org.uk/news/press-releases/fca- bank accounts and therefore all customers who publishes-complaints-data-for-the-second-half-of- had an account with Laiki Bank UK will be able to 2012 access funds as normal and do not need to do anything.

Bank of England, 2 April 2013

http://www.bankofengland.co.uk/publications/ Pages/news/2013/058.aspx

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72. LIBOR becomes a regulated activity 75. FSA finalises proposals for the regulation and supervision of benchmarks On 2 April, secondary legislation came into force amending the Regulated Activities Order, making The Financial Services Authority has finalised "the administering of, and providing information new rules and regulations for financial to, specified benchmarks" a regulated activity benchmarks. This follows the recommendations under FSMA [the Financial Services and Markets of the Wheatley Review of the Libor. Act 2000]. Initially, the only specified benchmark is BBA LIBOR. This means that until a new FSA 25 March 2013 LIBOR administrator is appointed, the part of the British Bankers' Association responsible for http://www.fsa.gov.uk/library/communication/ overseeing this benchmark became regulated. pr/2013/029.shtml

British Bankers' Association, 2 April 2013 CASE LAW http://www.bba.org.uk/media/article/libor- 76. Actual interest losses claimed as damages must becomes-a-regulated-activity/press-releases/ be specifically pleaded and proved

73. Government plans to open up banking sector In this case the court looked at the appropriate rate take a step forward of interest which a successful claimant was entitled to having obtained judgment on liability. The Government has launched a consultation The claimant, JSC BTA Bank ("Bank"), claimed setting out proposals for introducing a new system interest at common law at a rate of 8% per annum of competition-focused regulation for payment on a compound basis with annual rests, or systems. This forms part of the Government's alternatively simple interest at 8% per annum work to create a more competitive, consumer- pursuant to section 35A of the Senior Courts focussed banking sector. Strong new powers will Act 1981("SCA"). be given to an existing regulator to ensure that challenger banks have the opportunity to compete The defendants argued that the Bank was not on a level playing field with their larger entitled to interest at common law as it had not competitors. This could include setting a fair price been pleaded and that the Bank was only entitled for big banks to charge for access to payments to interest pursuant to section 35A of the SCA. infrastructure. The judge referred to the House of Lords case of HM Treasury, 26 March 2013 Sempra Metals v IRC [2008] 1 AC 561 which established that compound interest can be http://www.hm-treasury.gov.uk/press_31_13.htm recovered as damages at common law. However 74. The FSA and the Bank of England relax the that case made it clear that such damages must be barriers to entry for new bank entrants properly pleaded and proved as the common law does not assume that delay in payment of a debt The FSA and the Bank of England have published will of itself cause damage. the results of their review into barriers to new entrants to the banking sector. This review sets The Bank had claimed that it had paid away very out significant changes to regulatory requirements considerable amounts of money as a result of and authorisation processes which, taken together, fraud. Paying away such sums meant that the will reduce some of the regulatory barriers to entry Bank was unable to use those sums in whatever into the banking sector and, as a result, enable an other way it would have done. For example, it increased competitive challenge to existing banks. might have provided the money to other bona fide borrowers or might have used the money as part of Financial Services Authority, 26 March 2013 the Bank's capital reserves and thereby reduced the extent of the Bank's own borrowings. http://www.fsa.gov.uk/library/communication/ pr/2013/030.shtml If the Bank had intended to allege and prove that in addition to the loss of the sums it paid away it had suffered additional losses by reason of loss of use of that money then it should have pleaded as much and alleged what use it would have made of

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the money. It had not done so and could therefore 77. Permission refused to amend case to include only claim simple interest pursuant to section 35A allegations of LIBOR manipulation of SCA. Deutsche Bank AG ("Bank") entered into a credit There was no dispute that simple interest should facility agreement with Unitech Global Limited be awarded at the rate of interest at which ("UGL") which was supported by a guarantee borrowers with the general attributes of the Bank from UGL's parent company, Unitech ("U"). The could have borrowed money over the relevant credit facility agreement provided for payment of period. The Bank persuaded the court that interest by reference to LIBOR. The Bank and "Kazakh banks" should be the appropriate class of UGL also entered into an interest rate swap borrower as opposed to "banks" or "financial agreement ("IRSA") as a hedge against interest institutions" more generally. Having heard rate fluctuations. Under the IRSA the obligations evidence on the point the judge concluded that the under the floating rate payment provisions were appropriate rate of interest at which a Kazakh determined by reference to the six month US bank could borrow money for the relevant period dollar LIBOR rate. was 7.3% and that was the rate he awarded. UGL failed to pay instalments due and the Bank There was some discussion as to whether the pursued UGL and U for £150 million pursuant to interest should run from the date upon which the the terms of the credit facility agreement and Bank's cause of action accrued or from the date of £11 million in respect of the IRSA. judgment. The defendants argued that Maher v Groupama Grand Est supported the proposition U and UGL counterclaimed that the Bank had that the court could take account of the treatment misrepresented that the IRSA was suitable for of interest according to the lex causae (i.e. UGL when it was not. They alleged that Kazakh law in this case) and that interest in misrepresentations had induced UGL and U to Kazakh law ran from the date of the judgment. enter into both the IRSA and the credit facility agreement and that the Bank had been in breach of The judge considered the meaning and effect of a duty of care. Article 353 of the Kazakh Civil Code and concluded that there was no provision expressly In the course of proceedings, UGL and U applied dealing with the date from which interest could be for permission to amend their defence and claimed. He decided that on a purposive counterclaims to include further claims for implied construction interest should be paid from the date misrepresentation, negligent breach of duty and on which the defendant caused the damage. breach of a contractual warranty. These claims were based on allegations of four LIBOR Even if he had been wrong on that point he misrepresentations which, it was alleged, induced indicated that he would still, in the exercise of his the defendants to enter into the transactions. discretion, have awarded interest from the date on which the cause of action accrued. This was The proposed amendments arose because of the because the court awards simple interest as some, publicity given to allegations of manipulation of albeit imperfect, compensation for the claimant LIBOR by a number of banks and material which being deprived of the use of his money. To award suggested that the Bank had been involved in the it only from the date of judgment would, in a case manipulation of the yen LIBOR rate and possibly such as this where the causes of action accrued other LIBOR rates between 2005 and 2011. The from 2006-8 and the judgment was given in 2013, alleged LIBOR representations were said to arise substantially deprive the Bank of that by virtue of the Bank's membership of a panel compensation. Interest under section 35A is ("Panel") of banks which reported daily to essentially a procedural remedy and it was Thomson on behalf of the British Banking appropriate when the court was awarding its own Association. procedural remedy, to have regard to economic reality. Interest should therefore be awarded form The four misrepresentations were as follows: the date on which the cause of action accrued. 1. LIBOR was a genuine average of the JSC BTA Bank v Ablyazov and others, estimated rate at which members of the Commercial Court 19 April 2013 Panel could borrow from each other in a reasonable market size just prior to 11 am London time on any given day;

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2. the LIBOR rate itself was a rate based on term sheet for the loan also included statements the respective Panel member banks' making it clear that the document was not to be submissions to Thomson Reuters which construed as an offer or recommendation to enter were good faith accurate estimates of the into any transaction, that the Bank was not acting rate at which they could actually borrow as financial advisor or in a fiduciary capacity, that from each other in a reasonable market size UGL should take steps to ensure it understood the just prior to 11 am London time on any transaction and that it should make an independent given day; assessment of its appropriateness and should consider seeking advice from its own advisers. 3. the Bank had not itself acted, was not acting, and had no intention of acting, in a The judge could not see what, in those way which would, or would be likely to, circumstances, a reasonable representee in the undermine the integrity of LIBOR; position of UGL or U could see as a representation in relation to the LIBOR provisions 4. the Bank was not aware of any conduct of either the loan or swap agreement. Both those (either its own, or of other banks on the agreements referred to a LIBOR rate as it Panel) which would, or would be likely to, appeared on a screen at a particular time. No undermine the integrity of LIBOR. representation could be spelt out about the way in which that figure came to be found there, or the U and UGL argued that if they had been aware of manner in which it came to be calculated. the falsity of these representations they would not have entered into the transactions. Alternatively, The first two alleged LIBOR representations they argued that the LIBOR representations were sought to place in the mouth of one bank a made negligently, in breach of duty of care and statement about the overall integrity of the system dishonestly; and that in making the LIBOR or of an individual bank's contributions to it; representations the Bank gave an implied neither of which lay solely within the control of warranty that the representations were true. any individual bank. The allegations amounted to saying that every bank participating in any panel The judge refused to grant permission for the on any one of the 150 LIBOR rates would be amendments. taken as making this representation about the whole system and the parts played by every bank The alleged misrepresentations were based on within it. This was unrealistic. The width and representation by conduct or implication and were uncertainty of those representations ran far not linked to any plea of express representation. beyond anything that any reasonable representee The test for implied representations is set out in could imagine. IFE Fund v Goldman Sachs and provides that the court has to consider "what a reasonable person In relation to the third and fourth representations would have inferred was being implicitly the judge pointed to a real difference when represented by the representor's words and entering into a transaction which is based on a conduct in their context". particular LIBOR rate, between an implied term that a party will not manipulate the specific Here the court had to consider whether a LIBOR rate that is referred to in it (which might reasonable representee in the position of and with go without saying) and a separate non contractual the known characteristics of U and UGL would representation that nothing has been done in the reasonably have understood that an implied past, or is now being done, to impact on any of the statement was being made by reason of the fact many LIBOR rates calculated in the past or a that the Bank was a LIBOR panel bank and representation as to intention as to the future. entered into the swap which was linked to LIBOR or into the credit facility agreement. Linking a payment obligation to a LIBOR rate cannot be enough to give rise to a representation The judge was unable to see how any such about how that LIBOR rate was, is, or will be, representation could be made out. In addition, the compiled. If it was every contracting party on draft term sheets and the final term sheet for the either or both sides of a contract would make such swap contained a disclaimer of responsibility for a representation in the many transactions where any representations as to information provided in such reference is made. The fact that one party is the document itself. The confirmation of the swap a panel bank and contributes to reporting for one also contained an entire agreement clause and a or more of such rates does not give rise to an representation by UGL as to non-reliance. The

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implied representation. The argument that a mere LEGISLATION offer of a product and/or the conclusion of a transaction by a panel member which refers to 78. 2013/721 The Bank of England (Call Notice) LIBOR could give rise to the implied statements (Benchmark Rate of Interest) Order 2013 was unsustainable and had no prospect of success. The Cash Ratio Deposits (Value Bands and The negligence claim could not succeed either as Ratios) Order 2013 changes the percentage of that was also dependent upon the representations eligible liabilities that eligible financial institutions being made by implication or conduct and this had are required to deposit in a non-interest bearing account at the Bank of England under the cash not been made out. ratio deposit (CRD) scheme. The CRD scheme None of the pleas of misrepresentation could stand funds the Bank of England's monetary policy and as implied warranties either as they did not meet financial stability functions. the test set out in Attorney General of Belize v Belize Telecom Ltd [2009] UKPC 10. The http://www.legislation.gov.uk/uksi/2013/721/pdfs/ representations sought to be implied would not uksi_20130721_en.pdf spell out in express words what the document, This bulletin is intended as a general overview and read against the relevant background, would discussion of the subjects dealt with. It is not intended, reasonably be understood to mean. and should not be used, as a substitute for taking legal If there was a breach of warranty as opposed to a advice in any specific situation. DLA Piper UK LLP will tortious form of misrepresentation, the measure of accept no responsibility for any actions taken or not taken damages would be based on the assumption that on the basis of this publication. If you would like further the representations and statements were true, as advice, please contact: opposed to them never having been made. That Leeds: Hugh Evans would give rise to damages which essentially reflected the difference between any manipulated T 0113 369 2200 LIBOR rate applied to the contract and that which E [email protected] would have applied in the absence of such

manipulation. It would not give relief from the basic obligation to repay the loan. London: Jean-Pierre Douglas-Henry T 020 7153 7373 None of the proposed amendments satisfied the test of reasonable prospect of success and could E [email protected] not therefore be justified. They were not therefore allowed. Manchester: Stewart Plant Deutsche Bank AG v Unitech Global Limited, T 0161 235 4544 Commercial Court, 28 February 2013 E [email protected]

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