Regulatory Investigations Update 1

September 2013

Regulatory Investigations Update.

The FCA showed little sign of slowing down this summer, announcing its

first competition initiative, a redress package for CPP clients mis-sold PPI

and a trio of market abuse fines against individuals. September has seen

the imposition of further significant financial penalties on a number of

firms, with the decisions reflecting common concerns such as suitability of

advice, client money and LIBOR manipulation. With the amendments to

the Banking Reform Bill incorporating the recommendations of the

Parliamentary Commission on Banking Standards currently being debated

in the House of Lords, the pressure on regulated firms and those who

manage them has never been greater.

UK: News

Bankers guilty of reckless misconduct could face seven year prison

term

Senior bankers who are found guilty of the proposed offence of “reckless

misconduct in the management of a bank” could face up to seven years in

prison under recent amendments to the Financial Services (Banking Reform)

Bill. The introduction of the offence was recommended in the final Report of

the Parliamentary Commission on Banking Standards (“PCBS”), which was

published in July (see further the July 2013 edition of this Update) as one of a

series of measures intended to restore the reputation of the banking sector in

the wake of the 2008 financial crisis. The amendments to the Bill also create

the statutory framework for the Senior Persons Regime (“SPR”)

recommended by the PCBS; enables the FCA to reverse the burden of proof

in enforcement cases against senior managers of UK banks where a

regulatory breach has occurred at the bank in an area for which the senior

manager had responsibility; and extends the period for taking enforcement

action against approved persons from three to six years.

The new “reckless misconduct” criminal offence will apply only to those

employed by UK banks who qualify as senior persons under the new SPR.

The Government has accepted that it may be difficult to secure a conviction

for the new offence, not least because of the evidential burden inherent in

criminal proceedings. It believes, however, that the threat of up to seven

Contents UK: News .......................... 1

UK: Policy and Practice .... 3

UK: Recent Decisions ....... 5

EU: Policy and Practice .. 10

France: News .................. 11

Hong Kong: News ........... 11

U.S.: News ...................... 12

Regulatory Investigations Update 2

years in prison and/or an unlimited fine will encourage bank senior managers

to think more carefully before making key decisions.

First FCA market studies announced

One of the most significant distinguishing features of the new FCA is the

introduction of its new competition objective, which sees the regulator

charged with promoting effective competition within the financial services

sector in the interests of consumers. In the months since its inception the

FCA has been looking to recruit individuals with competition expertise in order

to take forward this new area of work. In July the regulator launched its first

market study into the sale of insurance add-ons, that is, policies sold at the

same time as other products or services. The FCA indicated at the time that it

is concerned that customers may not fully understand such products or may

feel pressured to buy them without looking at alternatives, which stifles

competition. The study will look at whether consumers are paying too much

for such products, whether the insurance is appropriate and how far

customers shop around before purchasing add-on insurance. Draft findings

are likely to be published in early 2014.

This was followed in September by a separate announcement that the FCA is

to conduct a market study into competition in cash savings. The emphasis in

both studies will be upon how competition operates in that particular market,

whether that market works well for consumers and whether there are grounds

for the FCA to intervene. Such intervention could take the form of policy or

rule changes, published guidance, enforcement action against individual firms

or proposals for improved industry self regulation. FCA Director of Policy, Risk

and Research, Christopher Woolard, used a recent speech to underline that

the competition objective will be “written into the DNA” of the FCA.

Amendments to the Financial Services (Banking Reform) Bill (discussed

above) also envisage the FCA being given concurrent competition powers

under the Competition Act and Enterprise Act (alongside the Competition and

Markets Authority) to conduct market investigations in respect of activities in

the financial sector. The regulator is clear that it will be pro-active in

investigating areas in which there may be competition issues, with the

ultimate aim of improving outcomes for consumers. How this area of work will

interact with the regulator’s other powers, notably those to issue product

bans, remains to be seen.

FCA confirms investigation into ISDAfix manipulation

The FCA has revealed that it is participating in a global investigation into the

possible manipulation of the ISDAfix benchmark rate, which is used to price

trillions of dollars of interest rate swaps. Responding to questions from

Treasury Select Committee Chairman Andrew Tyrie MP, FCA CEO Martin

Wheatley confirmed that the regulator had begun its own inquiry, which was

described as being at an early stage. The regulator had previously been

understood to be assisting ongoing investigations by US regulators.

Regulatory Investigations Update 3

Redress package for customers mis-sold CPP insurance announced: 22

August 2013

The FCA has agreed a proposal to establish a Scheme of Arrangement which

will enable redress to be paid to customers mis-sold card and identity

protection insurance policies by Card Protection Plan Limited (“CPP”). This

follows the imposition by the regulator of a £10.5m fine on CPP in November

2012 after the FSA concluded that customers had been given unclear or

misleading information, prompting them to purchase policies that were either

unnecessary or to cover greatly exaggerated risks. A number of high street

banks and credit card issuers, who introduced customers to CPP, have also

agreed to be part of the Scheme. The Scheme of Arrangement must be voted

on by consumers and will be subject to the approval of the High Court.

Consequently, payments are unlikely to be made until spring 2014. CPP

began writing to customers at the end of August and a series of adverts for

the Scheme will also be run in the national press. FCA CEO Martin Wheatley

said that the regulator had been encouraged that “a large number of firms

have voluntarily come together to create a redress scheme that will provide a

fair outcome for consumers”.

UK: Policy and Practice

FCA publishes results of review of PPI complaints handling in medium

sized firms: 25 September 2013

The results of a thematic review into PPI complaints handling at medium

sized firms have recently been published by the FCA (the “Report”). Although

the 18 firms surveyed account for only 16% of the total PPI complaints, the

Report indicates that the FCA is determined to ensure that all firms, whatever

their size, deal with complaints appropriately. Although some firms were found

to be dealing with complaints fairly, others were found to have significant

issues to correct. The regulator’s ongoing focus on senior management

responsibility was reflected in the FCA’s insistence that senior management

and boards ensure that they exercise control over the PPI complaints

process. The five most common instances of poor complaints handling were:

Overlooking the inadequate demands and needs assessment that

took place at the time of sale in an advised sale.

Overlooking the inadequate assessment in an advised sale of

whether a single premium policy would meet the customer’s demands

and needs.

Paying insufficient regard to poor disclosure of the limitations and

exclusions of a policy at the time of sale.

Not identifying poor disclosure of the cost of a policy at the time of

sale.

Providing inadequate explanations of complaint decisions and redress

offers.

Regulatory Investigations Update 4

One firm has been referred to Enforcement for further investigation as a result

of the FCA’s findings. A thematic review of PPI complaints handling at the six

larger firms responsible for 80% of PPI complaints is underway. The FCA will

expect all firms, large or small, involved in the resolution of PPI complaints to

take into account the Review’s findings. Several firms have previously been

fined for failing to adhere to the FCA’s guidance on PPI complaints handling.

Consequently, it is vital that all firms review their complaints handling

arrangements and ensure that they are compliant with regulatory

requirements and FCA guidance as to best practice.

Interim report on thematic review into mobile banking published: 27

August 2013

The FCA has published an interim report (the “Report”) exploring some early

findings of its thematic review into mobile banking services. The review, which

covers contactless payments, financial transfers and account monitoring on

smartphones and other handheld devices, aims to investigate the adequacy

of providers’ systems as well as to highlight potential risks to consumers. The

FCA stated that it was publishing the Report as part of its ongoing

commitment to greater transparency. Firms developing mobile banking

services are warned to consider fraud and security risks, as well as the

potential issues arising from the use of third parties and interruptions in

service. Banks are also cautioned to take into account customers’ levels of

understanding and the increased likelihood of mistakes being made whilst

services are new to them.

During the next stage of the review, the FCA will carry out a more detailed

assessment, testing a sample of firms providing mobile banking services. The

assessment work should conclude later this year with a final report likely to be

published in the first half of 2014. FCA Director of Supervision Clive Adamson

stated that, with the market for online banking growing, it was the “right time

for [the FCA] to take stock and, as part of the FCA’s forward looking

approach, to ensure that consumers are appropriately protected”.

FCA outlines plans to increase transparency in enforcement work: 5

August 2013

The Feedback Statement (FS13/1) on the FCA’s Discussion Paper on

transparency (DP13/1, published in March) suggests that the publication of

further details of post-enforcement feedback meetings is just one of a number

of ways in which the regulator plans to increase the openness of its

enforcement function. The FCA indicated in DP13/1 that it intended to be

more communicative about the aims of its enforcement policy, setting out why

it was focusing on particular topics and outlining both its achievements and

areas in which it has learned lessons. Statistical information about the

average length and cost of investigations and the allocation of resources will

also be made available.

A small number of firms voiced concerns about the proposal to publish more

information about post-enforcement feedback meetings, citing the

preservation of anonymity and the misuse of information by the media and

Regulatory Investigations Update 5

others as key concerns. In response, the FCA states that it will strive to

provide contextualised material where possible and explanations in order to

limit the potential for information to be misused. The regulator has, however,

resisted calls from respondents to the Discussion Paper for further

information about the FCA’s use of s.166 reports. It argues that it already

publishes details of the cost and number of such reviews and that the factors

which supervisors will consider when deciding whether to order an

investigation are set out in the FCA Handbook. Given the fact-specific nature

of each individual s.166 review, the FCA takes the view that further

information would be of little value to stakeholders.

HM Treasury announces first super-complainant applicants: 31 July

2013

The names of the first consumer groups to apply for super-complainant status

under Part 16A FSMA have been announced by HM Treasury. The

organisations featured on the list, which comprises Citizens Advice Bureau,

Which?, the Consumer Council for Northern Ireland and the Federation of

Small Businesses, are largely unsurprising. Under Part 16A, consumer

bodies designated by HM Treasury as super-complainants will have the

power to refer to the FCA features of the market which they consider to pose

a significant harm to consumers. Comments on the four applicants will now

be sought from stakeholders, with the deadline for submissions 23 October

2013.

UK: Recent Decisions

First inter-dealer broker fined for LIBOR manipulation: 25 September

2013

ICAP Europe Limited (“ICAP”) has become the fourth regulated firm and the

first inter-dealer broker to be fined for LIBOR manipulation. The FCA found

that between October 2006 and November 2010 ICAP brokers colluded with

bank traders to manipulate the Japanese yen LIBOR submissions made by

various submitting banks, causing the firm to breach Principles 3 (systems

and controls) and 5 (market conduct) of the FCA’s Principles for Businesses.

Daily “Run-Through” emails, which the ICAP brokers in question considered

to have a significant influence on submitting banks’ figures, were deliberately

skewed. In addition, ICAP brokers asked certain submitting banks to make

specific Japanese LIBOR submissions where this would benefit the traders

with which it was colluding. Such was the confidence one of the ICAP brokers

had in his ability to influence Japanese LIBOR, that he is said to have

referred to himself as “Mr LIBOR” or even “Lord LIBOR” on occasion. Another

received quarterly corrupt bonus payments of £5,000 as a reward for his

attempts to influence banks’ LIBOR submissions. The FCA also found that

ICAP failed to have adequate risk management systems or effective controls

in place to monitor or oversee the broking activity in question. What controls

did exist were, it concluded, easily circumvented.

Commenting on the fine, FCA Director of Enforcement Tracey McDermott

said that the findings demonstrated individuals acting with a “cavalier

Regulatory Investigations Update 6

disregard” for their own regulatory obligations and the need to preserve the

integrity of the market. The FCA described the breach as “extremely serious”.

When setting the fine the regulator was mindful of the fact that ICAP is one of

the largest, most sophisticated and best-resourced inter-dealer brokerages.

As such the breaches merited a substantial penalty of £14m, which includes a

30% discount for early settlement.

Bank fined £8.9m for failing to treat its customers fairly: 24 September

2013

Clydesdale Bank Plc (“Clydesdale”) has been fined £8,904,000 for breaches

of Principle 6 (treating customers fairly) in connection with errors it made in

calculating mortgage payments between April 2009 and April 2012. The

errors meant that customers’ repayments were insufficient to repay their

mortgages at the end of their agreed terms. Clydesdale took the decision that

it was entitled to recover from customers the capital losses which had

accrued, notwithstanding their mistake, resulting in sudden increases in

demands for mortgage repayments to cover the bank’s error. Although

Clydesdale investigated the cause of the inaccuracies, its enquiries were

protracted, prolonging the impact of the mistake on its customers. The

communication exercise undertaken by Clydesdale in notifying consumers of

its miscalculation was also criticised as having been both unclear and unfair.

This is underlined by the fact that, despite the fact the capital shortfall caused

by the error was £21.2m, the amount of redress paid was only around £3.6m.

The FCA considers that had the bank’s communications been clear and fair, a

far higher amount would have been paid out in redress.

In a novel move, despite the fact that the breaches occurred both before and

after the introduction of the FCA’s new fining policy on 6 March 2010, the

regulator opted to apply its new policy to the entirety of the relevant period.

This was done on the basis that the most serious aspect of the misconduct,

the implementation of the unclear and unfair communications exercise, took

place after the new policy was introduced. Applying the policy, the FCA also

concluded that the bank’s agreement to pay redress to all affected customers

effectively obviates any financial benefit that might have accrued to it as a

result of the breach. As such the resulting fine does not contain any element

of disgorgement at step one of the FCA’s five-step fining process. The

revenue generated by Clydesdale from its mortgage book was also

considered not to be an appropriate indicator of harm when applying step two

of fining process. The regulator opted instead to use as its starting point the

total capital shortfall that had accrued on accounts affected by the bank’s

mistake.

Clydesdale’s fine was reduced to reflect the fact that it has agreed to

undertake a further redress exercise. Interestingly, the final notice indicates

that, had this not been offered, a redress scheme would have been ordered

by the FCA and this would have counted as an aggravating factor. The

voluntary offer of redress beyond that which the regulator would have ordered

garnered the bank significant credit with the regulator, as did the fact that

redress would be provided automatically, without subjecting consumers to a

Regulatory Investigations Update 7

further communications exercise. This resulted in a reduction in the ultimate

fine. Firms considering offering redress should take note of the FCA’s

expectations in this case and also work done by the FCA earlier this year on

behavioural economics, which provides an insight into the FCA’s views

regarding how to ensure that redress communications are formulated in a

way most likely to elicit a response from consumers.

FCA levies second highest ever fine in response to derivatives trading

losses: 18 September 2013

The FCA has fined JP Morgan Chase Bank NA (JPM) £137.6m for breaches

of Principles 2, 3, 5 and 11 in connection with a $6.2bn trading loss in its

Synthetic Credit Portfolio (“SCP”) in 2012. The FCA fine is part of a $920m

overall settlement with US and UK regulators. The substantial trading losses

have been attributed to former JPM derivatives trader Bruno Iksil, nicknamed

the “London Whale”. The FCA’s final notice sets out in detail its findings as to

how it believes a combination of systemic weaknesses, poor risk

management and inadequate responses to key information combined to allow

SCP traders to conceal the trading losses by mismarking. The FCA states

that, when the true extent of the losses came to light, JPM was forced to

restate its first quarter earnings in July 2012 as the initial filing in May was

found to have overvalued the SCP’s position. The FCA considers that this,

when combined with the failings above, threatened the integrity of the UK

financial markets, thereby undermining one of the FCA’s three operational

objectives. The firm received a 30% discount for early settlement.

AXA latest wealth management firm to be fined for failing to ensure the

suitability of its advice: 12 September 2013

AXA Wealth Services Ltd (“AXA”) has been fined £1,802,200 by the FSA for

breaches of Principle 9 (suitability of advice) occurring between September

2010 and April 2012. The firm sold investment products through sales

advisers based in a number of banks and building societies, to customers

who generally had little experience of investments and were often near

retirement. An FCA investigation uncovered significant failures in both AXA’s

delivery of investment advice and its supervision of sales staff during the

relevant period. In particular, the firm had an inadequate process for

establishing customers’ risk appetites and investment objectives and did not

ensure that sales advisers either gathered the required information before

making recommendations or ensured that charges and recommendations

were adequately explained. In addition, AXA operated an incentives scheme

in which bonus payments were linked to sales, increasing the risk that this

would motivate staff to make unsuitable investment decisions.

The FCA has taken action against a number of wealth management firms for

Principle 9 breaches (including Savoy Investment Management Ltd, JP

Morgan International Bank Ltd and Coutts & Co) following the publication of

guidance on assessing suitability and a Dear CEO letter in 2011. The AXA

final notice reflects a number of common themes arising out of these FCA

investigations. The importance of ensuring that client files contain sufficient

evidence to demonstrate that the advice given was suitable cannot be

Regulatory Investigations Update 8

overstated, nor can the need to consider carefully relevant FCA guidance.

Although AXA responded to the 2011 letter, the steps it took to review the

relevant systems were judged “inadequate” by the FCA. Clearly it is the

quality of the response which counts. The link between sales and bonus

payments is also a key concern for the FCA, whose predecessor the FSA

issued final guidance on the Risks to customers from financial incentives in

January 2013. Firms assessing their systems for ensuring suitability of advice

will need to demonstrate behavioural change that pervades the firm to satisfy

the regulator.

Individuals fined for facilitating market abuse: 8 August 2013

The FCA has published its decision to fine the broker and senior partner of

the broking firm used by Rameshkumar Goenka in his manipulation of the

closing price of Global Depository Receipts (“GDRs”) traded in a closing

auction on the London Stock Exchange in order to avoid a loss on a related

structured product. Mr Goenka received the largest fine for market abuse

ever imposed by the then FSA on an individual in October 2011. The broker,

Vandana Parikh was fined £45,673.50 for breaching Principle 2 APER by

failing to exercise due skill, care and diligence. Mr Goenka was referred to

Mrs Parikh by his asset manager. During their first discussion, Mr Goenka

enquired about the operation of closing auctions and how to alter the closing

price of the GDRs through dealings. Despite these queries and suspicions

that he might have an ulterior motive for his trades, Mrs Parikh did not

question Mr Goenka’s intentions. The FCA found that Mrs Parikh should have

challenged Mr Goenka and made enquiries to satisfy herself that no market

abuse risk existed before continuing to work with him.

David Davis, the senior partner in the relevant broking firm, was fined

£70,258 and prohibited from performing certain SIF functions in the future.

The FCA found that he had breached Principle 6 APER by failing to exercise

due skill, care and diligence in managing the business of the broking firm for

which he was responsible in his compliance oversight function. In particular,

he was informed about the possibility of Mr Goenka holding an underlying

product in relation to the GDRs being traded and was aware of the large size

and timing of the trades, but failed to challenge or prevent them being

concluded. The FCA has also decided to fine Tariq Carrimjee, Mr Goenka’s

asset manager, £89,004 and ban him from performing any approved function

in connection with a breach of Principle 1 APER. The regulator concluded that

he had failed to act with integrity when he “recklessly assisted” Mr Goenka’s

plan to manipulate the closing price of the GDRs, turning a blind eye to the

risk that market manipulation was his client’s ultimate goal. Mr Carrimjee has

referred the decision to the Upper Tribunal.

The FCA’s approach in fining those who facilitated Mr Goenka’s manipulation

of the market is similar to that which followed the Einhorn/Greenlight market

abuse fine in January 2012. In that case the regulator fined Greenlight’s

former compliance and money laundering officer for failing to spot that the

trade ordered by Mr Einhorn was potentially abusive. The trading desk

director who executed the sale was also fined for failing to report a suspicion

Regulatory Investigations Update 9

in relation to the trade once information regarding the secondary issue by

Punch had been announced. Speaking at the time, FCA Director of

Enforcement Tracey McDermott indicated that the FSA would not hesitate to

take action where people put their relationships with employers or colleagues

before their regulatory duty. The FCA expects Approved Persons to be vigilant

as to the risk of market abuse and other regulatory breaches occurring in their

business area. As these decisions demonstrate, any failure to do so could

result in a fine and even the withdrawal of FCA approval.

Asset management firm fined for client money breaches: 2 September

2013

The FCA has fined Aberdeen Asset Managers Limited and Aberdeen Fund

Management Limited (together “Aberdeen”) £7,192,500 for breaches of

Principles 3 (systems and controls) and 10 (client money) and related CASS

rules between August 2008 and August 2011. The firm was found to have

failed to appreciate that monies it placed on behalf of clients in money market

deposits (“MMDs”) were subject to the FCA’s client money regime.

Consequently, it failed to take reasonable care that there were adequate risk

management systems in place in respect of money it held on behalf of clients

and failed to arrange adequate protection for certain client assets. Trust

letters and acknowledgements of the trust status of clients’ funds held by third

party banks were not obtained. This meant that client monies in the relevant

accounts were not properly protected and in an insolvency situation would

have been at risk of set-off and consequential diminution.

Aberdeen’s failings were considered to be particularly serious as there was a

“high level of awareness” during the relevant period about the importance of

handling client money correctly in the wake of the collapse of Lehman

Brothers in 2008. Crucially, Aberdeen had confirmed, in response to a Dear

CEO letter in January 2010, that the firm was complying with the CASS rules.

It also failed to identify the issue despite the fact the issue of whether the

CASS rules applied to funds held in MMDs was questioned by employees

new to the firm on two occasions during the relevant period. The firm was,

however, given credit for reporting the issue to the FCA once it was

discovered. The FCA calculated the fine using its pre- and post-2010 fining

policies. When applying its pre-2010 fining policy, the final penalty levied by

the regulator was approximately 1% of the average client money balances

held over the relevant period. In applying its new fining policy the FCA again

took the average client money balances held by the firm over the relevant

period as its starting point, following a precedent set in the Xcap Securities

plc decision earlier this year. The fine was then calculated using a percentage

of that figure to reflect the seriousness of the breach. The decision

demonstrates that compliance with the client money rules remains a key

priority for the FCA, emphasising the importance for firms of considering

closely the application of the relevant rules to their particular businesses.

Regulatory Investigations Update 10

Court rejects claim for compensation where appropriate redress

scheme in place: 24 July 2013

The High Court has struck out a claim for damages arising out of the mis-

selling of PPI in circumstances where full monetary compensation for losses

incurred (but no legal costs) had been awarded under an alternative dispute

resolution (“ADR”) scheme. In Binns v Firstplus Financial Group plc the

claimants had been offered compensation under a past business review or

redress scheme established by the defendant firm following rule changes

made by the FSA in 2010 in respect of the way in which complaints about

mis-sold PPI should be dealt with. The claimants had engaged solicitors to

bring their redress claim, but the terms of the offer under the redress scheme

excluded compensation for legal costs. Consequently, they brought a claim in

respect of their legal costs against the defendant firm.

The Court held that claimants should ordinarily use ADR such as the redress

scheme in preference to litigation where this offers swift justice and full

redress. Consequently, it was open to the Court to strike out the claim as

unreasonable because full redress had already been offered by the redress

scheme. In cases where a claimant might be able to secure more damages or

some other material advantage by pursuing litigation then it would be

appropriate to allow such a case to succeed (although there could be a costs

penalty if it was subsequently found that ADR had been unreasonably

avoided). Where, however, all that was sought was a small additional element

of the claim such as the legal costs in this case, then the litigation should be

struck out.

The judge’s reasoning will no doubt be welcomed by firms embroiled in the

PPI mis-selling and interest rate hedging products sagas, limiting as it does

the potential for additional compensation claims outside of the relevant

redress schemes. Such schemes are favoured by the regulator, as they allow

swift redress for consumers and require lower FCA resource - they are

operated by firms themselves, under strict conditions. The High Court’s

insistence that such schemes should be used instead of litigation unless the

latter offers some material advantage may enable firms better to quantify their

likely exposure when compelled by the regulator to offer redress.

EU: Policy and Practice

Text of the new Market Abuse Regulation approved by European

Parliament: 10 September 2013

The European Parliament has endorsed the political agreement on new

Market Abuse Regulation (“MAR”). The new Regulation will apply directly

across Europe and will extend the EU market abuse regime to cover a wider

range of products and platforms including electronic trading platforms,

abusive strategies executed through high frequency trading and the

manipulation of benchmarks such as LIBOR. The MAR also provides for

minimum administrative sanctions (maximum fines of at least three times the

profit made from market abuse or 15% of turnover for companies). In the UK

the potential financial penalties are already unlimited. Final adoption will take

Regulatory Investigations Update 11

place after a final political agreement on MiFID II, since aspects of the MAR

(notably its scope) depend on the final text of MiFID II and these will need to

be aligned. The new Regulation is likely to take effect in 2014.

At the same time as proposals for the MAR were published, the European

Commission also put forward proposals for a directive introducing minimum

rules on criminal offences and criminal sanctions for market abuse and

manipulation (including the manipulation of benchmarks) (the “Directive”).

Under the present market abuse regime member states are only required to

introduce administrative penalties for such offences. The resulting

inconsistencies between states and limited impact of purely financial

sanctions are felt to be hampering attempts to stamp out market abuse within

the EU. It is understood that the European Parliament should begin its

negotiations with member states on the Directive in October. The UK has

opted out of the Directive for the time being, citing uncertainties regarding its

implications (which are largely dependant on the final text of MAR and MiFID

II). In addition, the UK already has criminal sanctions for market abuse which

go further than is required under the current European regime, in capturing

market abuse which is committed recklessly as well as intentionally. The

Government has, however, continued to participate in the negotiations in the

hope that it may be able to opt back in at a later date.

France: News

Powers of the AMF: development of the power to settle

In previous editions of this Update, we have dealt with the power to settle

cases granted to the AMF by the Law of 22 October 2010 in relation to

banking and financial regulation.

At the time, the President of the AMF had estimated that 10 cases out of 40

dealt with each year could be resolved by way of settlement. However, until

now, settlement does not seem to be as popular as expected; only nine

settlement agreements have been ratified in total, with only one so far in

2013.

The reason may be timing: once signed, settlement agreements have to go

through a long validation process which requires approval from the AMF

Board and ratification by the Enforcement Commission. It may therefore take

a while for the settlement procedure, which was only introduced a couple of

years ago, to produce results. This long process may, however, be a serious

issue for those who expected to save time compared to standard proceedings

before the Enforcement Commission. The fact that settlement agreements

are made public may also be acting as a deterrent.

Hong Kong: News

SFC to wind up China Metal Recycling (Holdings) Limited

On 29 July 2013, the Securities and Futures Commission (“SFC”) announced

that it had petitioned to wind up China Metal Recycling (Holdings) Limited

(“China Metal”) pursuant to section 212 of the Securities and Futures

Regulatory Investigations Update 12

Ordinance (“SFO”). Section 212 of the SFO gives the SFC power to bring

winding up proceedings that are in the “public interest”. This is the first time

the SFC has sought to invoke section 212 of the SFO against a Hong Kong-

listed company.

During an SFC investigation of China Metal, the SFC found evidence that the

company wrongly stated its financial position in its prospectus for its initial

public offering. Moreover, the SFC alleges the existence of fictitious

purchases by China Metal’s subsidiary from its three major suppliers in 2007,

2008 and 2009. This could also affect China Metal’s 2012 financial results.

As a result, provisional liquidators have been appointed to take possession of

the company’s assets and to investigate the company’s affairs. This has led

to the suspension of the current board, with the control of the company being

given to the provisional liquidators. Provisional liquidators have also been

appointed to two wholly-owned subsidiaries of China Metal.

Premature selling of placing shares

On 1 August 2013, the SFC issued a notice to warn investors and

intermediaries against prematurely selling placing shares, as this may result

in criminal prosecution and disciplinary action for illegal short selling under

the SFO. “Naked” short sales of shares are prohibited in Hong Kong.

The SFC released this reminder after conducting investigations which

demonstrated that there was misunderstanding about the permissible timing

for the sale of placing shares. Specifically, the SFC found that some investors

believed they could sell placing shares before completion/settlement, in

reliance on confirmations from placing agents about their allotment. However,

the SFC does not consider this to be correct. The allotment remains

conditional until the completion of the placement, as the placement is subject

to external permissions and listing. The only exception to a possible finding of

illegal short selling is if the person holds an “exercisable and unconditional

right to vest the securities in the purchaser” to complete the trade regardless

of the allotment.

U.S.: News

CFTC seeks comment on risk controls and system safeguards for

automated trading environments

The U.S. Commodity Futures Trading Commission (“CFTC”) is seeking

comment on whether to require registration for automated trading firms – a

first step in potential restrictions on high-speed and algorithmic derivatives

trading. On September 9, 2013, the CFTC issued a concept release

requesting input on more than 100 questions. The concept release considers

ways to limit the maximum number of trading orders a firm can place in a

given amount of time and whether to expand testing and supervision of high-

speed trading strategies. The concept release states that “[t]he operational

centers of modern markets now reside in a combination of automated trading

systems (‘ATSs’) and electronic trading platforms that can execute repetitive

Regulatory Investigations Update 13

A17203502/0.4/14 Oct 2013

Authors: Sara Cody

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tasks at speeds orders of magnitude greater than any human equivalent.

Traditional risk controls and safeguards that relied on human judgment and

speeds, and which were appropriate to manual and/or floor-based trading

environments, must be re-evaluated in light of new market structures”.

Recognizing that the U.S. derivatives market is vulnerable to flawed

algorithms and insufficient testing, the CFTC states that its aim is to ensure

that regulations promote stability and limit systemic risk.

The full text of the CFTC concept release can be found here.