Singularis v Daiwa: Supreme Court Judgment A case with “far-reaching implications” (FT) Oliver Lodge as Expert Witness

Despite limited press attention, the Supreme Court judgment delivered in late October in the case of Singularis v Daiwa should be of considerable interest and concern to regulated financial services firms in this country. The case began three years earlier in the Chancery Division of the High Court and, in February 2017, Mrs Justice Rose delivered a judgment, which was subsequently upheld in both the Court of Appeal and the Supreme Court.

The case amounted to a suit against Daiwa, a UK domiciled and regulated subsidiary of the Japanese bank, by the liquidators of Singularis for $200 million. Oliver Lodge was appointed by Daiwa as an expert witness. The judgment awarded some $150 million to Singularis’ liquidators. Before its insolvency, Singularis, a Cayman-domiciled company, had been a client of Daiwa. When that client relationship came to an end, the sole shareholder of the company instructed Daiwa to make payments of some $200 million to two other companies under his control. These instructions were held by the court to be an attempt to defraud the creditors of Singularis. There are a number of aspects of the judgment which have considerable general significance.

Among the completely unsurprising findings was the key conclusion that the firm’s record keeping was inadequate. Such a finding must be the most common of any in the context of financial services judgments, whether from the courts or the regulator. In this case, it could be that the firm would have been fully indemnified through the disclaimers in its terms of business had it retained a reliable record of presenting them to its client. The absence of such records led the judge to disregard completely all disclaimers. The message is obvious.

Equally obvious was the point about the need for experience and expertise. The firm was held to have invited a member of its staff who was not accustomed to managing major transactions to manage a series of major transactions. The consequence of his inexperience in this area was that the firm proceeded to make large payments on the instructions of the client’s director, who has been held to have acted fraudulently. The firm was unable to explain how it was that this member of its staff was put in that position. Mrs Justice Rose commented that “it was remarkable that when [the firm’s chief executive of the time] was asked at the close of his cross-examination who he thought should have been in charge of checking whether the payment was a proper one, his answer was confused and confusing.”

The judge also took the view that although senior management exchanged a wealth of emails between themselves, stressing how great care, extreme caution and so forth needed to be exercised in handling any requests for payment from the client, no one explained to those processing the transactions what they needed to do. In short, management was not managing.

Other aspects of the judgment were a great deal less obvious.

Although the fraud was held to have been committed by the dominant director and sole shareholder of the client, the firm was held liable for the loss essentially because it had failed to prevent the fraud. The judge took the view that denial of the claim against Daiwa would have a material impact on the growing reliance on banks and other financial institutions to play an important part in reducing and uncovering financial crime and money laundering. She pointed out that both expert witnesses had described how these matters had been the subject of substantial policy focus by the regulator for a number of years. She then concluded “if, however, a regulated entity can escape from the consequences of failing to identify and prevent financial crime by casting on the customer the illegal conduct of its mandated employee, that policy will be undermined.”

This is not a comfortable conclusion. The regulator requires that “A firm must establish, implement and maintain adequate policies and procedures sufficient … for countering the risk that the firm might be used to further financial crime(SYSC 6.1.1R). Clearly, such an obligation falls short of a requirement to prevent financial crime, particularly where it is perpetrated by an authorised signatory against his own company.

It is also remarkable to note that the culpability of the client was held to amount to a mere 25% contributory negligence. In awarding to the client damages of 75% of the value of the misappropriated money, the judge rejected the proposition that the client company had itself acted fraudulently. She ruled that the knowledge and actions of the individual who she concluded had committed the fraud could not be attributed to the company itself, despite being the sole shareholder, the Chairman, the Treasurer and the authorised signatory, because there were six other directors on the board, albeit that, as she commented, they “do not appear to have performed any kind of supervisory function even when the fortunes of the [group] started to decline” and had not troubled themselves to hold a Board meeting for two years. Still more to the point, the client company had not seen fit to put in place any discernible controls to reduce the risk of fraud.

So, how should firms react? I take as read the need for proper records, adequate expertise and effective management. Of much greater concern is the conclusion that a client can expect to recover losses from a firm which fails to prevent a fraud perpetrated by the client’s signatory, while the client itself neglects to put in place even rudimentary systems and controls to counter that very risk.

Two observations are worth making.

First, if firms are to bear so much responsibility, they will need to instruct their clients in basic business management. This needs to ensure that the client adopts and maintains effective anti-fraud measures, especially in relation to dealings between the client and the firm. It might even be necessary to go so far as introducing a process by which clients produce a certificate from their auditors confirming the adequacy of their anti-fraud procedures. While that may be a pretty unpalatable proposition, the extent of the liability emerging indicates the need for a radical review of prevailing standards.

Secondly, it should be noted that this judgment has been unanimously upheld by both the Court of Appeal and the Supreme Court. This is the new reality in financial services in this country.



Posted in: CASS, FCA
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A Liking for Liquid Assets

Despite Brexit, the FCA continues to supervise the financial services industry and even to take stock of the appropriateness of the obligations that it imposes. In fact, something approaching normal life continues.

As Andrew Bailey keeps on saying, financial services regulation has become much too detailed and would be better if based on broad principles. Controversial as it might be, we have seen recent examples of this approach, including the introduction of the Investors’ Best Interest rule brought in as part of the Asset Management Market Study. But in PS 19/24 addressing the problems associated with illiquidity in open-ended funds (, we get the opposite. More rules, more details, more categories, more definitions. The sensation is one of trimming the sails moments before tacking – tacking away from the European shore.

Despite Woodford, the FCA has finally proceeded, in the Policy Statement, with its plans set out in CP 18/27 to address concerns relating to the suspension of a number of authorised property funds after the Brexit referendum, more than three years ago. None of the output from this review is relevant to Woodford; the consultation and the new rules apply only to NURSs, partly because Woodford post-dated the consultation and partly because Woodford’s renowned fund was a UCITS and was therefore regulated under the EU directive. Although the UK could impose gold-plating rules, an approach so often vilified in the past, as Bailey pointed out in his letter of 6thAugust to Lord Myners (, the majority of UCITS funds marketed in the UK are domiciled elsewhere in the EEA and would therefore not be caught by any such FCA measures. Welcome or not, Brexit offers opportunities to raise standards of investor protection where needed. But we aren’t there yet.

The pre-tack trimming looks very similar to the pre-Woodford consultation proposals. Key measures include a new trigger for suspensions, enhanced liquidity-risk management, increased disclosure, greater involvement of depositaries and a new definition to decide which funds are caught. FIIAs, as they will be known, if anyone can pronounce it, (funds investing in inherently illiquid assets), defined intriguingly as a NURS, 50% of whose scheme property[1]is in ‘inherently illiquid assets’, now newly defined, excluding securities listed on an eligible market. Where have we heard that before? Like they say, this does not address Woodford.

Of these new measures, one aspect stands out; that depositaries will have additional duties. With a couple of honourable exceptions, depositaries have built their businesses on the principle of staying below the parapet. A glance at the AMMS suggests that the approach was alive and well when the Investors’ Best Interest requirement went whistling over their heads. You just can’t afford to drop your guard.

But there must be questions over the effectiveness of the new disclosure requirement. Given that a fund can move between being an FIIA and not, the newly-mandated notice will come too late for those already invested. How are they expected to react to the news? With disappointment, perhaps. Or might they take the hint and stampede for the exit, crystallising the suspension risk?

None of this comes into force for twelve months. Meanwhile, we are promised that FCA is considering what to do about the Woodford problem – not the fund, not the firm, not the man, but the rules that allowed illiquidity creep. Some say that Woodford has demonstrated something that we already knew – that you can lose money in an investment fund. They might add that to have one suspension among 3000 authorised funds is an acceptable level of risk. Others, of a more risk-averse disposition and more inclined to focus on perceptions, take a very different view. And, as Bailey has openly criticised the UCITS requirements, appropriate action must follow. Furthermore, as we now know, parliamentarians are on the case and will press for action with their usual display of in-depth knowledge and understanding of the financial services industry.

So, action it will be. What we should expect to see is both the new NURS measures applied to UCITS and the application of most of the FCA’s ideas trailed in the Policy Statement, including the introduction of notice periods for big investors. While many of these steps might have been adopted voluntarily by fund managers as post-Woodford reassurance for investors, we now have, not only the paralysis caused by impending regulation, but also an early divergence from the globally-recognised UCITS standard. How then do we promote the new improved post-Brexit post-Woodford UK UCITS? Lines to take:

  • Our UCITS are better than theirs
  • We do like big investors really
  • Woodford was a one-off, anyway we have sorted it out now and he’s gone away
  • Our investment funds are no longer built on a lie and that nice Mr Carney is going too
  • If you want instant access to your money, buy a new mattress

Maybe we should leave that bit to the advertising consultants.



Originally published by Thomson Reuters © Thomson Reuters


[1]‘Scheme property’: enjoy the FCA’s magnificently circular definition.

Posted in: Brexit, EU, FCA, UCITS
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D-Day for Independent Directors

Independent Directors must now be in place at all authorised fund managers (AFMs). They must comprise at least 25% of the Board, subject to a minimum of two. There can be no doubt that FCA will:

  • Check to see that every AFM has at least the required number of NEDs on the Register;
  • Challenge the independence of NEDs, especially where they have roles elsewhere in the group or have served for many years;
  • Conduct a thematic review to test the effectiveness of Independent Directors within the context of their firm and Board and in relation to their direct responsibilities.

OWL is providing support to Independent Directors, to assist them to meet the expectations of the Regulator before they meet the Regulator.

Posted in: Assessment of Value, Asset Management Market Study, FCA
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