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Russell-Cooke Solicitors - Monthly Business Law Update

May 2013


FCA revises its approach to swap and hedge mis-selling

Following the announcement last year by the FCA that it was intending to investigate serious failings by some banks in the sale of interest rate hedging products (IRHPs) to small businesses, it has completed a pilot review and outlined its findings in a report issued earlier this Spring.

This article summarises some key developments as a result of this FCA report (for convenience we refer only to the FCA the Financial Conduct Authority in this article, although it only took over responsibility for regulation in this area from the FSA (Financial Services Authority) earlier this year).  The full text of the report is available here.

The pilot review has confirmed the FCA’s initial findings that there has been significant mis-selling of IRHPs.  As a result, the FCA are taking this matter very seriously and will soon be writing to customers of all banks under review to inform them of these findings.  Going forward, the FCA will continue to monitor the effectiveness of the independent reviewers appointed to scrutinise the banks’ reviews, and have stated that they will not hesitate to take action if they have any concerns.

Any future review will continue, as previously outlined, to determine on a case-by-case basis both (a) whether an IRHP sale failed to comply with the necessary regulatory requirements, and (b) whether this failure caused the customer loss.  There will, however, be two key changes as a result of the pilot review:

(1) Sophistication Test

The basic test remains the same.  Essentially, a customer will be ‘non-sophisticated’ (for the purposes of the review), if at the time of the IRHP sale they were a small business with limited access to the specific expertise necessary to understand fully the risks associated with IRHPs. 

The authorities want any review to focus on sales to customers that qualify as ‘non-sophisticated’ (because this group is perceived to have potentially suffered the most loss through mis-selling). 

Consequently, the sophistication test has been modified so that the types of entities listed below will be automatically included or excluded from the review exercise (regardless of whether technically they qualify as ‘non-sophisticated’ or not):

  • Companies which employ just over 50 people (i.e. exceeding the top-limit permitted for a ‘non-sophisticated’ customer), but which also have ‘live’ IRHPs equal to or more than 10m will now be included.
  • Subsidiaries or SPVs forming part of a large group will be excluded.
  • Groups unable to take advantage of the lighter reporting requirements for small groups under the Companies Act 2006 will now be excluded.
  • SPVs falling outside the Companies Act 2006 definition of a group, but which are connected entities and have ‘live’ IRHPs totalling over 10m will be excluded.

There have been reports of an action group formed of medium-sized businesses seeking to challenge the criteria under which a company’s ‘sophisticated’ or ‘non-sophisticated’ status would be assessed.  However, this appears to be at a pre-action stage and as such it is not clear what prospects the group has of successfully challenging the criteria nor how long such a challenge is likely to take.

(2) Principles of Redress

A set of principles has been created to ensure consistency across the banks in determining fair and reasonable redress.

Provided that the regulatory breach has caused a customer actual loss, the customer can expect to receive either (a) an alternative product or (b) full redress (i.e. be granted an exit from the IRHP at no charge).

The banks are expected to aim to complete all necessary reviews within 6 to 12 months.

It is important to note that there are time limits for bringing a claim for miss-selling.  Any claim must be brought within six years of the act of miss-selling.  As such the time limits for IRHPs entered into in 2007 and 2008 are starting to run out and companies should be aware that inclusion in the redress scheme does not stop that time running.  Most banks appear willing to enter into agreements to freeze time if the company is included in the review but these will need to be requested rather than occurring automatically.

Finally, it is worth bearing in mind that any company included in the review scheme can request a moratorium on payments due under the relevant IRHP.  There is no automatic right to a moratorium and it is important to remember that in the event that one is granted payments are merely paused and may need to be made at a later date.

For further information please contact:

DAVID WEBSTER on 020 7440 4825, David.Webster@russell-cooke.co.uk

FRANCESCA KAYE on 020 8394 6477, Francesca.Kaye@russell-cooke.co.uk


Private company share buybacks: deregulation

On 30 April 2013 deregulatory changes to the share buyback rules for private limited companies, as recommended by the Nuttall review in July 2012, came into force.

Some of the changes will not have a particularly significant effect on the operation of the buy-back regime in practice outside the context of employee share schemes, although there are some developments which will have a wider impact.

The key changes are:

1. The ability to authorise off-market share buybacks by ordinary (rather than special) resolution.
2. The possibility of a private company being able to buy back shares using amounts of cash (not exceeding the lower of 15,000 or 5% of share capital in any financial year) which do not have to be accounted for from distributable reserves, where the company's articles allow. (If there is no provision in the articles, a special resolution will be required to make the necessary amendments.)
3. Allowing private companies (and unlisted public companies) to hold shares bought back in treasury on a similar basis to that already permitted for certain public companies.
4. Providing greater scope to authorise in advance multiple share buyback contracts by private companies. 
5. Allowing ‘bought-back’ shares to be paid for in instalments with no maximum time limits for such payments.
6. Simplifying the process for financing buy-backs out of capital, subject to the signing of a solvency statement and special resolution.

Points 4 to 6 apply only to buybacks for the purposes of, or pursuant to, an employees' share scheme. 

The Department of Business, Innovation & Skills plans to conduct a review within three years of implementing these changes to consider any issues that may arise.

For further information please contact:

DAVID WEBSTER on 020 7440 4825, David.Webster@russell-cooke.co.uk


Tax and llps

HMRC have recently published their consultation paper on changes to the taxation of partnerships and LLPs.

Click here to view.

In broad terms the intention is to challenge what HMRC perceives as tax avoidance schemes using either corporate members to shelter profits or classifying people who would normally be employees as self employed.

Numbers of professional practices shelter profits in corporate members of their LLP and they need to watch this consultation carefully. At present though, it appears legislation is not likely before the end of the year.

The consultation paper does make it clear that it is not intended to penalise traditional structures with more junior members whose participation in profits is largely by way of fixed profit share.

For more information please contact:

SCOTT LEONARD on 020 7440 4809, or Scott.Leonard@russell-cooke.co.uk


Leap of Faith?

A recent decision of the High Court in England has suggested that, contrary to generally accepted views, the courts may well be willing to imply a general duty of good faith into all commercial contracts under English law.

A more detailed note on the case appears here.  Broadly, the dispute concerned a distribution agreement where a supplier granted a distributor exclusive rights to distribute certain fragrances and toiletries in defined areas overseas.  The relationship between the supplier and the distributor broke down over time and the distributor brought various claims against the supplier.

As part of the discussion the merits of these claims the court considered in detail whether there could be a general duty of good faith under English commercial law.  It came to the conclusion, perhaps surprisingly, that such a duty did exist or at the very least could be implied into contracts on the basis it reflected the underlying intention of the parties as to commercially acceptable standards of behaviour.

At one level the existence or otherwise of this duty may seem like something of an academic legal argument. However, the decision has potentially significant implications for how parties to a contract can conduct themselves in practice. 

For example, whilst English law will normally offer a remedy to a party who has been positively and deliberately lied to, the content of this new duty could be such that parties are obliged to volunteer information relevant to the contract in question even where they were under no contractual obligation to do so, and the disclosure could act to their detriment.

For further information please contact:

DAVID WEBSTER on 020 7440 4825, or David.Webster@russell-cooke.co.uk



The Corporate & Commercial Team
Russell-Cooke LLP
2 Putney Hill
SW15 6AB

Tel: 020 8789 9111

This material does not give a full statement of the law. It is intended for guidance only, and is not a substitute for professional advice. No responsibility for loss occasioned as a result of any person acting or refraining from acting can be accepted by Russell-Cooke LLP.

Copyright Russell-Cooke LLP, May 2013

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