Supreme Court hears a Firm’s Client that was Defrauded by its own Owner Director

At the end of July, the Supreme Court heard the ultimate appeal by Daiwa Capital Management against the judgment of the Court of Appeal in the case of Singularis v Daiwa, in which Oliver Lodge acted as expert witness. Whether the Supreme Court upholds or overturns the Appeal Court’s findings against Daiwa, the case has significant, if widely unexpected, lessons for the banking and investment sectors, or indeed any firm that makes payments on the instructions of its clients. Is it now inevitable that the firm will be held liable for any losses suffered by a client, even where that client has been negligent to the point of recklessness? How can firms minimise the risks and their exposure to them? Few will have recognised the extent of the risks they are running nor the extent to which a client’s failings can result in enormous losses to the firm. We advise every firm that is subject to English law to take careful note of this case.

Posted in: CASS
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The Song of the Independent Director

As Independent Directors get their feet under the boardroom table, so the spot-light of the FCA falls upon them. There is no such thing as a free boardroom lunch, especially with the Supervisors on the other side of the table. The question is whether the FCA is friend or foe.

Having answered the call of Your Regulator needs You, IDs will bask in the warm glow of satisfaction, knowing that they fill a much-needed role, being the investor’s friend, being the Regulator’s placeman, seeing that everyone is well-served and knowing that they are getting exceptional value from their funds. But there is a chillier aspect awaiting the unwary. And that, as ever, will be the test of character.

Why, after all, did the FCA insist that every Authorised Fund Manager had its pair of IDs, paid to take the executive to task? Although it now seems a long time ago, when reporting on its Asset Management Market Study, FCA made clear its concerns about innocent, ill-informed investors buying funds whose value for money was questionable. While the instincts of most might be to suggest that better investment advice was required, the Regulator is only too conscious that its own measures have resulted in much-reduced take up of advice. So it is that FCA, observing the frailty of the consumer, is seeking to effect the desired change through the producer.

In insisting that AFMs, and other firms before long, you may be sure, act in the best interests of investors, it is not firms’ owners that FCA seeks to protect, but rather that AFMs discard their respect and regard for shareholders in order to promote the interests of the unitholders. And what shall be the mechanism for driving the change? None other than the IDs, aided by the introduction of the Assessment of Value. So it is that they find themselves as the agents of beneficial change, the investor’s and Regulator’s friend.

The perspective of the executive may be a little less rosy. Here is a merry pair determined to dent the company’s profits from its funds and simultaneously costing real money to entertain. That may be the first unwelcome reaction that IDs experience, but the second may be more challenging yet.

How will it be when the Supervisor calls? Summoned to the table, the IDs may look forward to a glad hand and a welcoming smile for services to the investing community. But it may not be like that for long. It may be that the ride is rougher, the regulator more demanding, the glare a little steelier. Imagine the scene. “We thought we would start with the philosophy before we talk about your funds. How do you ensure the company looks after the investors’ best interests while complying with your statutory duties as a director?” Good question. “To what extent do you rely on your indemnification from all comers…except us?” Thank you for asking that. “What conflicts of interest do you recognise in your role?” Next.

“Now Mr Niceguy, what examples can you give us of your challenges to the executive? How have you benefited the investors? How have you ensured the validity of the Assessments of Value? How have you provided input and challenge in the assessment process? How have you ensured that sufficient steps have been taken to address poor value? Where do we find that in the minutes?” Is it time for lunch?

The chair may be comfortable; the ride may not be. It is not for the faint-hearted nor for the uninitiated. And it is not just a rehearsal for meeting the FCA. The substance should be the focus, the Regulator the guide. At least, it will be a guide for the willing and for the diligent; it will be a task-master for the indigent and the supine. Among the challenges must be relationships: relationships with the unitholders, relationships with the shareholders, relationships with the executive, relationships with the Regulator. And all the while, retaining independence, avoiding the group-think, resisting the pressure, maintaining the vision.

But don’t let me put you off; let us help you prepare. Your Regulator needs you.

Originally published by Thomson Reuters © Thomson Reuters



Posted in: Asset Management Market Study, FCA
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SRD II – Late Notice, Urgent Action

Although remarkably little has been said about it and the FCA has only just published its Policy Statement (PS 19/13), the revised Shareholder Rights Directive (SRD II) comes into force on Monday (10th June). There is immediate action associated with this new directive.

The impact of the new rules is that investment firms must publish an Engagement Policy and annually disclose how the Policy has been implemented, including how the firm has voted in significant corporate ballots. Alternatively, firms are permitted to ‘explain’, that is to say publicly disclose a reasoned explanation of why they have chosen not to publish an Engagement Policy or the annual disclosed about implementation.

The Policy, which must set out how the firm engages with the companies that it invests in on behalf of clients, should, strictly, be published by Monday. FCA recognises that that is not going to happen and has said that for an ‘initial period’ firms can comply by explaining what they are dong to develop a Policy. That means that all affected firms should have a statement on their website relating to their Engagement Policy by Monday.

Although not irrevocable, firms have an immediate choice of whether to comply or explain. Controversial as it may be to opt out (explain), it is worthy of consideration. There are questions of principle about client confidentiality and there are risks that the disclosure is abused by pressure groups. However, that explanation must also be published by Monday.

Firms wanting further information on this should call us on 020.3911.5528.


Posted in: EU, FCA, SRD, Stewardship Code
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