Welcome to the Q1 2017 edition of our Banking Disputes Quarterly, designed to keep you up to date with the latest news and legal developments and to inform you about future developments that may affect your practice.

ON THE HORIZON RECENT DEVELOPMENTS & CASES SPOTLIGHT ON…

APRIL 2017

QUARTERLY

BANKING DISPUTESQ1 2017

ON THE HORIZON

MEMBERS OF THE SHARI’AH BOARD – RELIGIOUS SCHOLARS OR LAWYERS?

By Adam Ibrahim (Partner) and Sohail Ali (Senior Associate)

Introduction

Golden Belt v BNP Paribas (Golden Belt) is perhaps the most high profile English case on Islamic Finance for more than a decade. In it the High Court will be asked to determine an issue which has potentially enormous ramifications for Islamic Banking. Arguably it is not since Beximco Pharmaceutical Ltd and others v Shamil Bank of Bahrain [2004], when the Court of Appeal held that it was not permissible for general principles of Shari’ah law to be incorporated into a contract in addition to English law, that a decision has been so eagerly awaited by legal and banking practitioners in this field.

Golden Belt will be of particular importance to Shari’ah Boards (who comprise of religious scholars (not lawyers) with specialised knowledge of the Islamic laws on transacting) on the issue as to whether their pronouncements could amount not only to expressions of religious but also legal opinion. If the High Court

determines that pronouncements of the Shari’ah Board can amount to enforceable legal opinions, this is likely to have a significant impact on the nature of the pronouncements that Shari’ah Boards may be willing to make.

Role of the Shari’ah board

A financial institution offering Islamic Finance products or services must obtain prior approval from a Shari’ah Board to confirm that the service and/or product being offered has complied with the Shari’ah principles. The role of the Shari’ah Board is therefore absolutely critical in Islamic Finance transactions.

The facts

Golden Belt concerns a US$650 million Sukuk (Islamic Bond) issued by an SPV (acting as trustee) by the name of Golden Belt 1 Sukuk Company B.S.C (Golden Belt). BNP Paribas (London branch) was the Arranger and Sole Bookrunner in relation to the Sukuk.

The ultimate economic borrower of the Sukuk was a company called Saad Trading, Contracting and Financial Services Company (Saad). The sum of US$650 million is said to have passed from Golden Belt to Saad via

lease agreements. Under one of the lease agreements Saad purported to issue a Promissory Note in favour of Golden Belt for US$650 million. The Promissory Note was purportedly executed by the Chairman of Saad. The Promissory Note was governed by Saudi Arabian law.

The Sukuk was offered to the market by means of an Offering Circular in May 2007. The Offering Circular contained a pronouncement of the BNP Paribas Shari’ah Board which stated that that the Shari’ah Board: (i) had “reviewed the structure, mechanism and the documentation for the proposed issuance of the Sukuk”; (ii) “was of the view that…the structure and mechanism…is acceptable within the principles of Shari’ah”; and (iii) approved the “proposed issue of the Sukuk” (the Pronouncement).

In 2009 Saad defaulted on its obligations under one of the lease agreements. Golden Belt sought to enforce the Promissory Note. However, a dispute is ongoing in Saudi Arabia between Golden Belt and Saad as to whether the Promissory Note was validly executed since the signature on behalf of Saad was not a “wet-ink” original signature as required under Saudi Arabian law.

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The dispute

Golden Belt has issued a claim against BNP Paribas in the English High Court. Golden Belt alleges, amongst other things, that the Pronouncement of the BNP Shari’ah Board amounted to a representation that the Promissory Note had been validly executed and was enforceable as a matter of Saudi Arabian law (which Golden Belt asserts, in whole, or in part, reflects Shari’ah law).

BNP Paribas deny the allegations contending, amongst other things, that the Pronouncement of the BNP Shari’ah Board was purely a religious opinion rather than a legal opinion on the validity and enforceability of the Sukuk documents.

The decision of the High Court will be keenly awaited by Islamic Finance Shari’ah Boards given the consequences and potential legal liability that could arise in respect of their pronouncements if the claim succeeds.

Comment

The authors consider it unlikely that a court will find that the opinion of the BNP Shari’ah Board amounted to a legal opinion.

First, there was no express opinion on the validity and enforceability of the Sukuk documents. The Pronouncement was in relation to the compliance of the “structure and mechanism” of the transaction with Shari’ah principles.

Second, to assert in the absence of any express words, that the Pronouncement has the effect of being a legal opinion that a document is valid and/or enforceable in any court of law seems very unreasonable. Shari’ah Boards comprise of religious scholars not lawyers and such a conclusion would therefore seem totally illogical.

Third, the authors understand that the executed documents were not reviewed by the Shari’ah Board. In the circumstances, it seems unreasonable to suggest that that the Shari’ah Board could be said to have opined on the validity and enforceability of the executed documents.

Fourth, following Beximco it is likely that the courts will be reluctant to determine that reference to general principles of Shari’ah law can be intended to be incorporated into a governing law of a contract.

Practical tips

Regardless of the outcome, the case serves as a reminder to Shari’ah Boards and Islamic Finance institutions to take care when issuing pronouncements and to clarify the scope of their role. The following practical tips are recommended:

■ Disclaimer – Any pronouncement by the Shari’ah Board should be accompanied with a clear disclaimer that members of the Shari’ah Board are not lawyers and do not purport to give any legal opinion or advice in relation to the transaction by making the pronouncement.

■ Independent Advice – The pronouncement should make it clear that all parties should obtain their own independent advice (legal and/or financial) as they deem necessary.

■ Non-reliance – A Shari’ah Board should look to obtain written representations from all parties to confirm that they have not received any advice or legal opinion from the Shari’ah Board and/or do not purport to be relying on any advice or legal opinion from it.

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■ Exclusion/Limitation of Liability – The pronouncement should contain a properly drafted exclusion or limitation of liability clause.

■ Entire Agreement – The pronouncement should contain an entire agreement clause to prevent parties from raising any misrepresentation claims in respect of pre-contractual statements.

It is not yet clear when this case will come to trial. If you are interested in knowing the outcome or want to discuss the issues the case raises please email us at sohail.ali@dlapiper.com

PPI COMPLAINTS – FCA PUBLISHES FINAL RULES AND GUIDANCE

By Adam Ibrahim (Partner) and Paula Johnson (Senior Professional Support Lawyer)

Payment Protection Insurance (PPI) mis-selling has been a huge issue for firms. Not only has it damaged public trust and confidence but it has also been an enormous drain on resources with firms handling over 18.4 million PPI complaints and paying out over £26 billion in redress since 2011. Firms will therefore welcome the news that the Financial Conduct Authority (FCA) has finally

completed its lengthy consultation on the future conduct of such claims and has published final rules and guidance. Importantly it has concluded that the PPI issue must be brought to an orderly close by imposing a two year deadline on consumers within which they must make their claims or lose their right to have them assessed by firms or by the Financial Ombudsman Service.

Why were new rules and guidance needed?

Rules and guidance on the handling of PPI complaints have been in force since December 2010 but consumer bodies have been lobbying the FCA asking for more to be done to help consumers understand the potential issues and complain if dissatisfied. Firms themselves have also expressed concerns about the dubious practices of some Claims Management Companies (CMCs) which have resulted in valuable resource and time being wasted on dealing with speculative and poorly evidenced claims.

Also, in 2014, the Supreme Court handed down a significant judgment in Plevin v Paragon Personal Finance Ltd [2014] UKSC 61. This decided that despite there being no regulatory requirement for firms to disclose commission paid to a lender or intermediary out of a PPI

premium, there could come a tipping point where the commission paid became so large that non-disclosure could (depending on all other circumstances) render the lender’s relationship with the consumer unfair under s.140A of the Consumer Credit Act 1974 (CCA). The court did not indicate exactly where that tipping point lay other than ruling that in Mrs Plevin’s case non-disclosure of commission which equated to 71.8% of the premium was “beyond the tipping point”. Her case was remitted to the County Court for that court to decide what relief if any should be granted, taking into account all the individual circumstances and specific facts of her case. The decision led to fears that there would be uncertainty and inconsistency in how non-disclosure of commission complaints would be handled by County Courts.

Against that backdrop the FCA has been consulting on a package of measures designed to improve firms’ handling of PPI complaints since November 2015.

What do the final rules and guidance say?

The final rules and guidance provide for:

■ A new rule which will require consumers to make PPI complaints within a two year deadline or lose their right to have them assessed by firms or the Financial

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Ombudsman Service. This rule will come into force on 29 August 2017 with the deadline falling on 29 August 2019;

■ An FCA led communications campaign designed to inform consumers of the deadline. This will start on 29 August 2017. The estimated cost of this is £42.2 million which the FCA will recover by a fee levied on the 18 firms which have generated the most PPI complaints. The first half of the fee will be collected on 30 April 2017;

■ New rules and guidance on the handling of PPI complaints in light of the Supreme Court’s decision in Plevin which will come into force on 29 August 2017.

The new rules and guidance on Plevin

The final rules and guidance provide that when a firm is assessing a complaint in respect of a PPI policy covering a credit agreement under s.140 of the CCA it should presume that a failure to disclose a commission and anticipated profit share which together amount to more than 50% of the total amount paid for the policy does give rise to an unfair relationship.

In such cases the firm should offer redress amounting to:

■ The amount of commission plus an amount representing the actual value of any payment(s) made in respect of the PPI policy under profit share agreements expressed as a percentage of the premium, less 50%. (So, for example, if 70% of the premium comprised commission and profit share, the difference between that percentage and 50% would be 20%); and

■ Historic interest the customer paid on that portion (i.e. the interest paid, in this example, on the 20%); plus

■ Annual simple interest on the sum of the two points above.

How do the final rules and guidance differ from past proposals?

There are four main points to note:

1. When the FCA originally looked at the issue of non-disclosure it focussed solely on non-disclosure of commission. Following its last round of consultation it has concluded that “profit share” arrangements should also be taken into account. Such arrangements typically

entitle firms to receive back some PPI premium money which has gone to the insurer but is not ultimately used to cover claims on policies but often this is on an aggregate non-customer specific basis varying across different time periods and depending on which insurer was involved. Non-disclosure of any anticipated profit share sums must now be taken into account, where possible, as well as non-disclosure of commission, both in terms of identifying whether an unfair relationship exists and in respect of any redress that is then due to the customer.

2. The FCA was mindful that there are customers who may have previously made PPI complaints which were rejected but who may now be eligible to make a further complaint in light of Plevin. It estimated that around 1.2 million customers fall into that category. It is now requiring firms to identify such customers and write to them explaining this.

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3. The original rules and guidance on the handling of PPI complaints in the light of Plevin were anticipated to come into force by the end of March 2017. This has been pushed back to 29 August 2017 giving firms more time to prepare.

4. The FCA has clarified that the deadline rule will not apply to future complaints which concern a rejected claim on a live PPI policy, if the claim was rejected for reasons connected to the sale, such as ineligibility, exclusions or limitations.

Comment

The change to the Plevin rules and guidance to include profit share will complicate the way in which claims need to be evaluated and how redress is calculated. It will also lead to an increase in the number of cases where an unfair relationship is presumed and where redress will need to be paid. In the short term there is also likely to be a spike in marketing activity by CMCs leading to increased volumes of claims. Firms will have to dedicate considerable resource to dealing with this but will now have five months to prepare. Overall, firms will pleased

that the FCA has remained committed to introducing the two year deadline rule and has not extended the deadline further. Although the consumer campaign costs are high, an overall reduction in uncertainty about PPI liabilities may lead to a reduction in firms’ long term weighted cost of capital. The rules and guidance should help firms bring the PPI issue to an orderly conclusion.

Is this the last chapter?

Not everyone has welcomed the final rules and guidance. CMCs in particular have been outspoken in their opposition suggesting that the FCA’s move to introduce a deadline for claims without requiring firms to embark on a full letter writing campaign is legally unsound. One newspaper report suggests that one CMC, “We Fight any Claim”, has actually launched a judicial review of the FCA’s decision to introduce a time bar but we have not been able to substantiate whether that is indeed the case. Given that the threat of judicial review has been mooted a number of times in the past, the FCA has been on notice and will surely have taken legal advice on the point before publishing its final policy statement to make sure any challenge can be resisted. However, time will tell….

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RECENT DEVELOPMENTS & CASES

COMMERCIAL COURT CONFIRMS THAT ASYMMETRIC JURISDICTION CLAUSES MAY BE EXCLUSIVE FOR THE PURPOSES OF EU LAW

by Jeremy Andrews (Partner), Giles Hutt (Head of KM UK Litigation & Regulatory) and Sean McGuiness (Associate)

Asymmetric jurisdiction clauses – also known as one-sided or ‘for the benefit’ clauses – are common in international financial services agreements, but their validity under EU law has been questioned in recent years by the French Supreme Court. The English High Court has now confirmed their validity and, in particular, that they are capable of benefiting from the protection given to all exclusive clauses by new provisions in the Brussels Regulation Recast EU 1215/2015 (Brussels Recast). This decision is reassuring for banks and other financial institutions, although courts in other EU Member States may side with the French rather than English courts on the issue, and the Court of Justice of the European Union

(CJEU) has yet to consider it. The defendants are seeking the Court of Appeal’s permission to appeal the High Court decision.

Background

Asymmetric jurisdiction clauses ordinarily require a borrower or guarantor to bring proceedings in a specified jurisdiction whilst allowing the lender to bring proceedings in any court of competent jurisdiction. Financial institutions have historically included these clauses in finance documentation to ensure that they retain control over where they are sued, whilst retaining the freedom to sue a borrower or guarantor wherever its assets are located.

The status of asymmetric jurisdiction clauses in Europe and elsewhere has been uncertain since the decision of the French Supreme Court (Court de Cassation) in 2012 in Mme X v Société Banque Privé Edmond de Rothschild, in which it was held that asymmetric jurisdiction clauses may be invalid under EU as well as French national law, depending on how they are drafted. More recently, the

French Supreme Court has issued further decisions that qualify that view, but doubts as to the validity of asymmetric clauses persist.

Even if such clauses are valid under EU law, it is not obvious that they enjoy the special protection afforded by Brussels Recast to exclusive jurisdiction clauses in general. The basic lis pendens rule is that jurisdiction issues should be decided by the court first seised of a matter while other courts stay proceedings pending the first court’s decision (Articles 29 and 30). However, Article 31(2) creates an exception where exclusive clauses are concerned, allowing the chosen court to decide these questions itself, regardless of when it was seised. This new exception has been widely welcomed because it limits the scope for delaying tactics, in particular the ‘Italian torpedo’: pre-emptive proceedings commenced in an EU Member State where the wheels of justice are known to turn slowly and/or jurisdiction questions are decided at the end rather than the beginning of litigation.

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Facts

In Commerzbank Aktiengesellschaft v Pauline Shipping and Liquimar Tankers 2017 EWHC 161 (Comm) (Commerzbank), Pauline was the borrower under a loan agreement with Commerzbank for the construction of a vessel. Liquimar was the guarantor of that loan and other loans made under separate loan agreements for the construction of other vessels. The loan agreements and guarantee agreements contained asymmetric jurisdiction clauses obliging Pauline and Liquimar to bring proceedings in the English courts, but allowing Commerzbank to commence proceedings in any other court of competent jurisdiction.

The loans went into default and, following discussions, Commerzbank notified Liquimar of its intention to commence proceedings in England. Liquimar subsequently issued proceedings in Greece in June 2015 seeking a declaration of non-liability, and Liquimar and Pauline together commenced additional proceedings in December 2015, also in Greece. In May 2016 Commerzbank commenced proceedings in England seeking declarations and damages in respect of the loan agreements and guarantees.

Decision

Commerzbank argued in England that the asymmetric jurisdiction clauses were exclusive jurisdiction clauses for the purposes of Article 31 of Brussels Recast, whereas Liquimar and Pauline sought to set aside or stay the English proceedings on lis pendens grounds, arguing that the Greek court should decide jurisdiction questions as it was the court first seised of the matter, and that the asymmetric jurisdiction clause was at best irrelevant and possibly invalid under the Regulation.

Mr Justice Cranston rejected this argument, holding that asymmetric jurisdiction clauses are valid and may be exclusive for the purpose of Article 31, even where they restrict only one party. He did not see the need to follow Mme X v Société Banque Privé Edmond de Rothschild, stressing instead that an autonomous approach was required when interpreting Brussels Recast’s provisions.

The judge noted that the declared aims of Brussels Recast supported his analysis. Recital 19 of Brussels Recast states that the autonomy of the parties should be respected subject to limited exceptions. In this case the parties had

agreed that Liquimar and Pauline were only entitled to sue under the agreements in the English courts. The specific purpose of Article 31 was to enhance the effectiveness of exclusive jurisdiction clauses and neutralise Italian torpedoes (Recital 22). To treat all asymmetric clauses in effect as non-exclusive jurisdiction clauses would both undermine the agreement reached by parties and frustrate the policy objectives set out in the Recitals.

Comment

The decision of the Commercial Court in Commerzbank is not unexpected, and does not carry the weight of a Court of Appeal or Supreme Court decision, but it is welcome nonetheless. However, clarity can ultimately be provided only by the CJEU, if and when it is asked to decide the issue. By then the UK may have left the EU, of course, and both asymmetric and regular exclusive jurisdiction agreements in favour of English courts could have limited force in the remaining EU Member States if they are regarded then as agreements favouring courts of ‘third states’ and therefore unsupported by EU law.

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Whether they will in fact have that status depends on the form that Brexit takes. The UK may remain subject to a version of the EU rules by re-joining the 2007 Lugano Convention, for example – something it can theoretically do whether or not it joins the European Free Trade Association. Unfortunately, the 2005 Hague Convention on Choice of Court Agreements, containing the new global regime that sometimes overrides EU law in this area, is unlikely to be of assistance since it does not appear to support asymmetric jurisdiction agreements in the normal course of events (see Articles 3(a) and 22 and paragraph 32 of the accompanying Explanatory Report). Financial institutions should therefore consider now whether asymmetric jurisdiction agreements serve their interests in the longer term, however the issues discussed in Commerzbank are finally resolved.

IS THERE A NEED FOR EXPERT EVIDENCE IN IRHP MIS-SELLING DISPUTES?

By Hugh Evans (Partner) and Rachel Tookey (Senior Associate)

An earlier version of this article first appeared in the February 2017 issue of Butterworths’ Journal of International Banking and Financial Law.

Sometimes cases can be decided purely on the basis of the factual evidence. At other times expert evidence may be needed to assist with specialist or technical areas but such evidence can only be brought with the court’s permission. Claimants in interest rate hedging product (IRHP) mis-selling disputes often seek permission to adduce expert evidence on issues such as the suitability of a given interest rate product or the adequacy of the information provided about it. Defendant banks routinely oppose such applications but claimants are often granted permission. Interestingly however, in the recent case of Darby Properties Limited and Another v Lloyds Bank plc [2016] EWHC 2464 (Ch) permission was refused on the basis that

there is no acknowledged body of expertise in the field of interest hedging instruments and expert evidence was not reasonably required to resolve the issues.

Facts

The claimants entered into a number of IRHPs with Lloyds Bank plc (Bank) (to replace existing IRHPs) with some products having lengthy terms. They later sued the Bank for damages for breach of contract and negligence and/or mis-representation arising out of the alleged advice/recommendations/explanations and information provided by the Bank claiming that the IHRPs were inherently unsuitable. The Bank defended the claim, arguing that the products were suitable as the claimants’ objective was to achieve a reduction in their interest costs and the IHRPs provided short term relief from the existing arrangements. The products were properly explained and understood by them.

It was in the context of that claim that the claimants sought permission to adduce expert evidence on issues such as: the characteristics of the IHRPs and the market for those products; the suitability of the products and the adequacy of the information provided by the Bank.

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Decision

The judge reiterated the familiar principle that evidence of fact is admissible, if relevant, but evidence of opinion, even if relevant, is not. It is an exception to this rule that expert evidence of opinion is admissible, if relevant, but only if there is an acknowledged body of expertise in the issues in respect of which expert evidence is to be adduced which is “governed by recognised standards and rules of conduct and capable of influencing the court’s decision”.

The judge drew a distinction between a professional negligence claim against, say, a doctor or an accountant and an IRHP mis-selling claim. Professionals belong to professional bodies which are regulated. Professionals are judged against recognised standards applying to professionals possessing ordinary skill in their particular field. In contrast, in the IRHP field there is no particular professional body which has recognised expertise. There are merely people with experience and expertise. If you ask them to express an opinion about whether a product

was suitable or whether adequate information was provided you are in danger of asking them to express a purely subjective opinion which would be inadmissible.

Leaving that considerable hurdle to one side, the judge then considered whether expert evidence was in any event actually required in this case. He accepted that the products in question were complex and that, to that extent, the court might benefit from a “tutorial” about their characteristics and practice in the IRHP market. That evidence would however be of a factual kind, akin to the sort of evidence which might be given by an engineer explaining how a machine works. In that situation the engineer has the expertise to understand how the machine works but gives evidence of a factual nature. In English law permission is not needed to adduce such evidence.

Where however the proposed expert evidence was supposed to address suitability of a product or the adequacy of information then this would require the permission of the court, which would only be granted if such evidence was reasonably required to decide the issues. Having reviewed

the pleaded issues in the case, the judge decided that they were largely matters of fact and information and that expert evidence was not necessary to determine them. He refused the claimants leave to adduce expert evidence.

Comment

If applied carefully, the decision should be welcomed by banks involved in litigation, as allowing technical explanations to be contained in statements of fact will undoubtedly save the time and expense of formal expert reports which can be costly. Judges will however need to be vigilant in ensuring that expert evidence is not allowed in ‘via the backdoor’ and without having met the strict evidential rules. It will be interesting to see whether this approach is followed by other judges and how the courts will keep a rein on “factual” experts to ensure that they do only give evidence of a purely factual nature.

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A WARNING TO ALL INSTITUTIONS HANDLING CLIENT MONIES

By Adam Ibrahim (Partner) and Ben Fellows (Associate)

The recent case of Singularis Holdings Ltd v Daiwa Capital Markets Europe Ltd [2017] EWHC 257 (Ch) (Singularis) is an important decision affecting any institution that handles client payments, including banks. It decided that a stock broker was liable in negligence for having breached its duty of care to its customer, Singularis Holdings Ltd (in liquidation) (Singularis), by paying monies out of its client account on the instruction of one of Singularis’ directors and its only shareholder, Mr Al Sanea.

Background

Daiwa paid $204 million of Singularis’ funds to bank accounts not in the name of Singularis but to related entities. Various warning signs were present that indicated Mr Al Sanea’s instructions may not have been bona fide. The money paid out was lost. The liquidators of Singularis sought repayment by Daiwa.

The claim in negligence

25 years ago the case of Barclays Bank Plc v Quincecare [1992] 4 All ER 363 established that a bank will be liable to its customer for damages in negligence if it makes a payment in circumstances where it had reasonable grounds for believing that the instruction to make the payment was an attempt to misappropriate the funds of its customer. This is commonly described as a Quincecare duty.

Daiwa advanced two arguments as to why it should not be subject to a Quincecare duty:

1. the claim was precluded by the fact that the claim was being brought on behalf of the creditors; and/or

2. Singularis was precluded from bringing the claim because it was a “one-man company”.

On the first point, Daiwa relied on passages in Stone & Rolls Ltd (in liquidation) v Moore Stephens (a firm) [2009] UKHL 39 (Stone & Rolls), as emphasising that a duty that is owed to the company customer is not owed to the creditors of the company. This was rejected by the judge, Mrs Justice Rose.

On the second submission, Daiwa relied upon the dicta of the Supreme Court in Jetvia SA & anr v Bilta Limited (in liquidation) & ors [2015] UKSC 23 (Bilta) arguing that Singularis’ claim was defeated by the attribution of Mr Al Sanea’s fraud to the company. This argument was also rejected by the judge, who found that, in any event, on the facts of the case, Singularis was not a “one-man company” (in the sense that that term was used in Stone & Rolls and Bilta) as there were other professional and experienced businessmen, who were also directors of Singularis. Mr Al Sanea was merely a singular, rogue director.

Breach of the Quincecare duty by Daiwa

Mrs Justice Rose held: “the Quincecare duty…require[s] a bank to do something more than accept at face value whatever strange documents and implausible explanations are proffered by the officers of a company facing serious financial difficulties”.

Daiwa breached that duty as “any reasonable banker would have realised that there were many obvious, even glaring, signs that Mr Al Sanea was perpetrating a fraud on the company when he instructed the money to be paid to other parts of his business operations”.

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The defence of illegality

Could Daiwa escape liability on the basis that Mr Al Sanea’s illegal behaviour should be attributed to Singularis, which would effectively mean that Singularis would have to rely on its own illegality to bring its claim?

No. The judge had already found that Singularis was not a “one-man company”. Further, Singularis was not a company, like Stone & Rolls, created purely to perpetrate a fraud. She held that the defence of illegality should fail because of the very nature of the duty relied upon by Singularis, i.e. the Quincecare duty. The existence of that duty is predicated on the assumption that the person whose fraud is suspected is a trusted employee or officer, so when the duty arises it is a duty to save the company from the fraudulent conduct of that trusted person. She concluded that it would not be right to attribute Mr Al Sanea’s wrongdoing to Singularis “because such an attribution would denude the duty of any value in cases where it is most needed”.

Daiwa was ordered to pay Singularis $152,806,425. Damages were reduced by 25% to reflect Singularis’ contributory negligence, pursuant to the Law Reform (Contributory Negligence) Act 1945.

A warning to all institutions that handle client monies

The judge described the case before her as “unusual”. Many of the factors cited in previous cases as to why it would be impracticable to impose too heavy a duty on a bank did not apply here as Daiwa was not a bank and was not “administrating hundreds of bank accounts with thousands of payment instructions every week”.

Whilst Singularis therefore undoubtedly represents a worrying trend towards imposing a heavier duty on financial institutions in monitoring a client’s account, application of the dicta in Singularis to cases against “everyday” banking institutions would arguably be a step too far, and encroach upon the well-trodden principles outlined in earlier cases.

The decision in Singularis should not be overlooked however, and indeed the judge refers to Daiwa several times as a “bank” in her judgment. Singularis represents a stark warning to any institution that holds client funds and highlights the risks associated with what may ordinarily be viewed as payment requests made in line with the contractual relationship between a client and its advisor/bank.

What should institutions do to ensure they do not fall victim to the same type of fraud?

The judge was critical of Daiwa for failing to make adequately clear to the individuals who handled the payment requests what steps they should take to verify them. Had Daiwa ensured that all individuals were aware of the risks and the steps necessary prior to authorising any requests, it is likely that no payments would have been authorised.

Institutions should ensure that sufficient anti-fraud controls are in place and that, as soon as any suspicion arises in relation to a customer, appropriate flags are

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placed on their accounts. Individuals responsible for processing and/or authorising payments should be made aware of the clear and defined process they must follow.

POLICING AND CRIME ACT 2017 – HOW SHARP WILL OFSI’S TEETH PROVE TO BE?

By Stewart Plant (Partner), John Gollaglee (Partner) and James Moss (Senior Associate)

The Policing and Crime Act 2017 (‘PCA’) received Royal Assent on 31 January 2017. Buried within Part 8 are a number of provisions which make significant changes to the financial sanctions regulatory landscape. Most likely to be of concern to financial institutions is the prospect of fines of £1 million or more being imposed outside the usual judicial process by the Office of Financial Sanctions Implementation (OFSI). The key provisions came into force from 1 April 2017.

OFSI was formed in March 2016 with the stated aim:

‘(to)ensure financial sanctions make the fullest possible contributions to the UK’s foreign policy and national security goals and help maintain the integrity of and confidence in the UK financial services sector’

The government committed to introducing new laws to ensure that suitable remedies were available to address breaches of financial sanctions.

The new measures introduced by the PCA cover three key areas:

■ Sentencing – an increase in maximum criminal penalties

■ Enforcement – new powers to impose civil penalties and other orders

■ Implementation – a more direct approach to implementing asset freeze provisions.

A full analysis of these issues is beyond the scope of this article; we therefore focus on the key issues likely to have the most significant impact.

Sentencing

The PCA will substantially increase the maximum penalties for the criminal offence of failing to comply with a prohibition under a freezing order. A freezing order is an order which prohibits any person in the UK, any UK national or any UK company from making funds available to or for the benefit of any named person.

Previously the maximum penalty for breaching such an order was, for individuals, two years custody, this is now increased to seven years. Further, where an offence is committed with the consent or connivance of a body corporate, or through the neglect of its officer, both are guilty of the offence and liable to be punished accordingly.

To date this provision has not been widely used and there have been no reported prosecutions. However, the maximum penalties now align more closely with those available for other breaches of the sanctions regime, and reflect the level of seriousness of such a breach. Whilst it is difficult to imagine that the increase in maximum penalty will make a substantive difference in terms of deterrence it should certainly focus the minds of those charged with keeping their organisations on the right side of the line.

Enforcement

Whilst custodial sentences may grab the headlines, in our view it is the introduction of a new civil financial penalty which is of greater practical concern. This will be available where, on the balance of probabilities, there has been a

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breach of financial sanctions and the person responsible either knew or has reasonable cause to suspect that they were in breach.

The maximum penalty in such circumstances will be £1 million or 50% of the value of the funds involved, whichever is greater. The impact of this change is spelt out in the recently published OFSI guidance on monetary penalties which is in force as of April 2017.

Key issues to note from the guidance document include:

■ The decision to impose a penalty rests with the Treasury. Decisions can be reviewed by a Minister of the Crown and then by appeal to the Upper Tribunal.

■ The Treasury may impose a penalty on “a person”. This includes both a legal person and a natural person.

■ If a monetary penalty is payable by a body, a penalty can also be imposed on an officer of that body if the relevant breach took place with their consent or connivance or by their neglect.

■ Cases involving deliberate circumvention will be treated particularly seriously and are very likely to be dealt with by prosecution or a financial penalty.

■ Voluntary disclosure may mean that a less serious view of a case is taken than the facts might merit. It may also reduce the level of penalty imposed by up to 50%.

■ The level of any penalty will be calculated with reference to the statutory maximum and then adjusted to ensure it is reasonable and proportionate.

This new power appears similar in effect to the ability of HMRC to impose a Compound Penalty for breach of export controls in lieu of a criminal prosecution, a disposal which they have pursued with some enthusiasm as being quicker and less costly than bringing a prosecution.

We can expect an escalating scale for dealing with breaches; the imposition of a monetary penalty follows enforcement correspondence and the making of a reference to the relevant professional body or regulator. It remains to be seen how far OFSI will be prepared to engage in promoting compliance before resorting to the option of imposing a financial penalty.

Breaches of financial sanctions are now included under the list of offences for which a Deferred Prosecution Agreement (DPA) may be considered. As demonstrated

by the recent high profile DPA’s for Rolls Royce and Tesco such arrangements are likely in practical terms to be reserved for the most serious and complex cases.

In addition there is also the power to impose a Serious Organised Crime Prevention Order (SOCPO), which is a civil sanction but where breach is a criminal offence punishable by up to five years custody for individuals or an unlimited fine. Historically whilst SOCPO’s can be imposed either post-conviction in the Crown Court, or as a standalone order in the High Court, the former route has been the most usual chiefly for cases involving drugs, money laundering and proceeds of crime offences. It remains to be seen how often they will be used in financial sanctions cases.

Comment

From April 2017 the gravity and consequences of a breach of financial sanctions has increased. Organisations must take action to satisfy themselves that their processes and people are not exposing them to significant monetary and reputational risk.

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SPOTLIGHT ON …

OUR BANKING LITIGATION PRACTICE IN SCOTLAND

DLA Piper’s highly experienced Scottish banking litigation team acts for a broad range of clients in the finance sector, including major international banks, building societies, challenger banks, investors and card payment providers. Based in Edinburgh, the UK’s second financial centre, our team provides local and international services to our clients in relation to both disputes and regulatory issues. We regularly work in collaboration with our colleagues throughout the UK and beyond to provide seamless cross-border solutions to our clients.

On the litigation side, we advise on commercial loans and securities, insolvency litigation, fraud and asset tracing and guarantee enforcement as well as a wide range of general commercial litigation relating to contractual and property matters. We support our UK colleagues with advice on the Scottish aspects of major projects, for example, in relation to Swaps litigation and advising on potential class actions.

In terms of retail banking, we recently advised a number of credit providers on a portfolio of section 75 claims related to mis-sold products, negotiating a settlement framework with the representative claims company within an expedited timeframe. We also

regularly advise on the more complex enforcement and insolvency issues that can arise with retail customers and have recently handled sensitive litigation with a high profile party litigant for one of the major international banks.

On the regulatory side, our privacy and cyber-security lawyers have advised a number of clients in the finance sector both in the UK and overseas with the compliance requirements of the new General Data Protection Regulation (GDPR) which is scheduled to come into place in May 2018. We are presently advising a number of clients on these issues including in relation to the impact of Brexit on implementation and the putting into place of processes and delivery of training to ensure timeous compliance.

Our regulatory lawyers have also advised extensively on the potential impact of the constitutional changes arising out of Brexit and the earlier Scottish Independence Referendum, for example in relation to key contract provisions, contract strategy and management of supplier chains, and the impact on the potential changes on contract enforcement having regard to jurisdiction and choice of law clauses.

If you would like to speak to someone in our Scottish banking litigation team, please contact Alistair Drummond or Jo Clark. 

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www.dlapiper.com

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