By Bellamy Forde

1 May 2012

There is a wind of change blowing through employment law landscape. Employers need to think carefully during all stages of the employment relationship before taking any steps.
The law recognises six forms of discrimination; namely sex, race, age, religion and sexual orientation. Despite discrimination law having been with us for some time, there has been a perception that Employment Tribunals have struggled to interpret the law, reflected by modest levels of success for claimants appearing before them.

But could the tide be turning against employers?
A number of recent cases suggest that this might be the case. Miriam O’Reilly’s claim against the BBC was the first successful claim of age discrimination in favour of a female television presenter. In Noor v The Foreign and Commonwealth Office, the claimant succeeded before the Employment Tribunal (subsequently overturned on appeal) in his claim of disability discrimination against the F & C. In that case, Mr Noor contended that F & C had failed to remove the “obstacle” in the way of him being considered the same as other candidates for a job role he had applied for i.e. that F & C had failed to make reasonable adjustments to the job selection process. Mr Noor suffered from dyslexia and dyspraxia and had responded to a job advertisement which contained a mistake, namely that it stated that “problem solving and judgment” was a desired competency. At interview he was asked questions about “strategic awareness” and was unprepared to deal with them. Mr Noor asserted that he was in a substantial disadvantage as a consequence of that change and asked for a re-interview which was refused to him. The Employment Tribunal considered that the failure to offer him a re-interview constituted a failure to make a reasonable adjustment and upheld his claim for disability discrimination.

The Noor case highlights not only that discrimination can arise out of seemingly innocent circumstances but also that the claims can be very complicated both factually and legally. Perhaps more surprisingly, the tribunal was asked to address a claim that had arisen during the job selection process i.e. before employment had begun. Moreover, it shows that tribunals are more prepared to grapple with the challenges that this difficult and legally complex area of law presents.

Lastly, in one of the few reported cases in respect of discrimination on the basis of sexual orientation, the Employment Appeal Tribunal upheld the finding in the case of Bivonas LLP v Bennett. In that case, Mr Bennett, who is gay, was successful in his claim of discrimination. Essential to the case was the fact that Mr Bennett was able to see an internal memo which stated the following: “Lee – takes our cases to his batty boy mate…..”. This comment is again repeated within the memo. Mr Bennett is reported as having signed off sick from work with insomnia due to work issues and cites his concerns as to what are obviously homophobic remarks to his employers. He was successful in his claim before both the Employment Tribunal in the Employment Appeal Tribunal.

What all of the above cases suggest is that there is a willingness on the part of Tribunals to adjudicate on allegations of discrimination at all stages of the employment relationship. Indeed, it can be said that their willingness to do so is in contrast to the historical failure rates attributable to discrimination claims generally. What it tells us is that employers (and prospective employers in the case of Mr. Noor) need to be careful and vigilant.

We are pleased that the IPCC have reviewed their decision and upheld our client’s complaint. In particular, the IPCC stated that once the police had searched our client on the street and not found any suspicious items, there was no reason for a further search; the force used by the police to conduct a further search was not justified; there was no reason for our client to be arrested or detained; and there was no reason for him to be subjected to a strip search.

The IPCC stated that the police should not use section 5 of the Public Order Act as justification for an arrest when the matter could be appropriately dealt with by a Fixed Penalty Notice.

The Civil Actions team have also obtained a number of successful settlements of damages in cases against the Metropolitan Police. One such settlement involved a claim for breaches of the Data Protection Act and Article 8 of the Human Rights Act concerning the unlawful disclosure by police officers of details of a client’s arrest to members of the general public, which caused our client a great deal of stress and damage to his reputation.

A successful result was also obtained in a claim for misfeasance in public office by a prisoner who was re-categorised from a category D to a category B. Our client had worked hard to earn his category D status and privileges yet this was all ruined on the basis of false and malicious allegations provided by the police to the prison service.

By Bellamy Forde

27 March 2012

Employers need to think carefully during all stages of the employment relationship before taking any steps.

The law recognises six forms of discrimination; namely sex, race, age, religion and sexual orientation. Despite discrimination law having been with us for some time, there has been a perception that Employment Tribunals have struggled to interpret the law, reflected by modest levels of success for claimants appearing before them.

But could the tide be turning against employers?

A number of recent cases suggest this might be the case. Miriam O’Reilly’s claim against the BBC was the first successful claim of age discrimination in favour of a female television presenter. In Noor v The Foreign and Commonwealth Office, the claimant succeeded before the Employment Tribunal (subsequently overturned on appeal) in his claim of disability discrimination against the F & C. In that case, Mr Noor contended that F & C had failed to remove the “obstacle” of him being considered the same as other candidates for a job role he had applied for i.e. that F & C had failed to make reasonable adjustments to the job selection process. This case highlights that tribunals are more prepared to grapple with the challenges
that this difficult and legally complex area of law presents.

Lastly, in one of the few reported cases in respect of discrimination of the basis of sexual orientation, the Employment Appeal Tribunal upheld the finding in the case of Bivonas LLP v Bennett. In that case, Mr Bennett, who is gay, was successful in his claim of discrimination. Essential to the case was the fact that Mr Bennett was able to see an internal memo which stated the following, “Lee – takes our cases to his batty boy mate…..”. This comment is again repeated within the memo. Mr Bennett is reported as having signed off sick from work with insomnia due to work issues and cites his concerns as to what are obviously homophobic remarks to his employers. He was successful in his claim before both the Employment Tribunal and in the Employment Appeal Tribunal.

What all of the above cases suggest is that there is a willingness on the part of Tribunals to adjudicate on allegations of discrimination at all stages of the employment relationship. Indeed, it can be said that their willingness to do so is in contrast to the historical failure rates attributable to discrimination claims generally. What it tells us is that employers (and prospective employers in the case of Mr. Noor) need to be careful and vigilant.

Bellamy Forde is Head of Dispute Resolution and a solicitor at Saunders Law. He is also a member of the Police Actions Lawyers Group, Employment Lawyers Association, London Litigation Solicitors Association and the Association of Personal Injury Lawyers.

By Stephen Gilchrist

The Financial Services Authority (FSA) was the dream child of the incoming Labour government in 1997- the ultimate answer to City regulation.

Previously (as TV mini series would have it), it was Margaret Thatcher’s own financial offspring, the Securities and Investment Board (SIB)  that was the great white hope of financial regulation which was to deal with the rapid changes affecting the financial services industry  in the early 1980s.  It died young.

In 1997 Gordon Brown, then Chancellor, described the division of authority between the SIB on the one hand, and a series of self-regulating authorities on the other, as “inefficient, confusing for investors and lacking accountability and a clear allocation of responsibilities”. The cure –all, one stop shop was to be the FSA.

Now the FSA meet its early demise after only a decade or so, not having covered itself in glory, to say the least. The financial crisis (for which read bank debacle), and the PPI and endowment miselling issues (being just two examples) have caused the FSA to suffer terminal ill health.

In June 2010, the government announced that it intended to replace the FSA with two new successor bodies: the Financial Conduct Authority (FCA) and the Prudential Regulation Authority (PRA). A third regulatory body, the Financial Policy Committee (FPC), would also be created to monitor the stability of the financial system on a macro level, but would not have direct regulatory oversight of any particular types of firms. Interestingly The original name of the FCA was to be the Consumer Protection and Markets Authority (CPMA). This was changed after the Treasury Select Committee pressured the government by pointing out that this name could mislead consumers!

And so, a triplet offspring of FSA, the FCA, arises from the ashes (or is that a mixed metaphor?). In the words of Chair of the Treasury Committee, Andrew Tyrie MP: “The creation of the FCA is an opportunity to create something much better.

[but] if we are not careful, the FCA will become the poor relation among the new institutions. But it is the one that will matter most to millions of consumers.”

And so, in July 2010 HM Treasury opened a public consultation on its proposals for “A new approach to financial regulation” with the expression of hope that  the new Financial Conduct Authority (FCA), would ensure that business is conducted in such a way that advances the interests of all users and participants of theUKfinancial sector.

In September 2011, The Treasury Committee announced an inquiry into the Financial Conduct Authority and the government’s  draft Bill

Among the questions posed were:

• Are the objectives of the Financial Conduct Authority clear and appropriate?
• Does the FCA’s approach to regulation, as outlined in the Financial Services Authority’s June 2011 document, represent an improvement on that of the FSA?
• To whom should the FCA be accountable? Are the lines of accountability clear?
• Are the powers of the FCA suitable? Will the exercise of FCA powers be subject to appropriate scrutiny? How should the FCA be interacting with industry as well as using its intervention powers?
• How should the FCA be interacting with other domestic regulators and agents? How should the FCA be interacting with international regulators?

Well, the Treasury Committee finally  reported in January 2012 with some serious criticism of  government proposals:

The Report set out a number of key recommendations.  Amongst those are:

• FCA should have an additional primary objective “to promote effective

competition for the benefit of consumers” .

• The strategic objective to “protect and enhance confidence in theUK

financial system” should be removed in order to simplify the FCA’s

objectives

• Further consideration should be given to how the FCA, and its mandate

and powers, should differentiate between retail and wholesale consumers

• FCA accountability, transparency and scrutiny should be strengthened

• The FPC, and not the PRA, should hold the power of veto over FCA

decisions – the legislation should detail the circumstances in which the

veto may be used

• With a thematic approach, policy should be aligned with industry realities

• The legislation should provide for far more extensive cost-benefit analysis

and consultation and the regulators should make such assessments more

meaningful

• FCA should seek to improve communication between the regulator and

regulated firms

• Product intervention powers should be sparingly used, after careful

consideration of the merits

• The FSA should consult on its more detailed proposals for more proactive

intervention

• Further consultation on the proposed power for early publication of warning

notices

• The merits and costs of a scheme for pre-approval of financial products

should be reviewed; FCA should reconsider the scope for differentiating

between more complex products, and simple products that can be preapproved

• The Government must clarify whether it intends the FCA to play a role as a

price regulator – if so, the case for this should be made and consulted on.

On 28^th February 2012 the Committee published a further short report identifying four areas where there appeared to be confusion, defects or other weaknesses in the Government’s approach to reform of the Financial Conduct Authority (FCA) with Tyrie, commenting:

“The Committee remains deeply concerned that this legislation is being rushed.

The structure and objectives of the FCA will sit at the heart of this new regulatory system. Unless sufficient time is given to getting these reforms right, we could end up, once again, with a defective regulatory framework.”

Areas of Concern

On accountability

The Committee has called for the accountability of the FCA to be enhanced in four main areas:

•  The board of the FCA should publish full board minutes of each meeting
• The CEO of the FCA should be subject to pre-appointment scrutiny by the Treasury Committee
• The FCA board should be responsible for responding to requests for factual information and papers from Parliament
• Parliament, through the Treasury Committee, should be able to request retrospective reviews of the FCA’s work

As Tyrie commented: “The FCA has been given huge powers.  It is not enough, as the Government has proposed, merely to match the weak, pre-existing accountability arrangements of the FSA…”

On the objectives of the FCA

The Committee remained concerned about the effect that an overarching objective is likely to have on the operation of the FCA. Indeed, the Government appears confused about whether it wants to impose a strategic objective or a “mission statement.” These are not the same thing: “…A mission statement should have no place in primary legislation..”

On the PRA veto over the FCA

The Committee believes the Financial Policy Committee (FPC) – rather than the Prudential Regulation Authority (PRA) as suggested by the Government – should be granted a veto over the FCA in areas relating to financial stability: “”Financial stability is the responsibility of the FPC. If anyone is to wield a veto over the FCA, it should therefore be the FPC and not the PRA”.

On cost-benefit analysis

The Committee has called on the Government to include in the Financial Services Bill requirements for far more extensive cost-benefit analysis to take place and for greater consultation with firms, representative bodies and panels prior to the introduction of new regulations: “”Regulatory and cost burdens on the financial services sector often seem to rise inexorably. It is consumers who have to foot the bill for these costs…”

Whilst it is important, indeed essential, to promote public confidence the financial services industry it is also vital to ensure that firms operating within the industry , especially smaller firms, do not feel overwhelmed by costly and time-consuming regulatory burdens.

We shall see.

By Stephen Gilchrist

2012 started badly for about 400 investors who placed £25 million with Ark Business Consulting and who stand to lose millions of pounds in a fraudulent pension “unlocking” scheme. Pension schemes have coming under the spotlight in recent months as a result of scrutiny by the combined might of the Pension Regulator, the FSA and HMRC.  Last year both the FSA and HMRC warned investors of the risks they face when accessing pension funds before they reach age 55.

Unfortunately for those pension scheme members who subscribed to a ‘Pensions Reciprocation Plan’ (PRP) within a structure rather optimistically called “Maximising Pension Value Arrangement” (MPVA), it recently all ended in prospective disaster.

The dodgy scheme was spotted last year by the Pensions Regulator-the regulator of work-based pension schemes in the UK. In May 2011 and the Regulator appointed independent trustee firm Dalriada Trustees to seize control of the bank accounts of six schemes used for pension reciprocation and on 16th December 2011 the High Court in London ruled that the scheme was indeed illegal.

Dalriada had referred the scheme to the High Court for a determination as to its lawfulness and to ascertain whether the loans were valid exercises of the powers of investment under the schemes.This cunning plan involved two pension schemes making reciprocal loans of funds to specific members of each other’s schemes and operated by paying out 50pc of a member’s pension fund in the form of a reciprocal loan with another investor. Using loans, Ark managed to make payments before the normal 55 minimum age.

The defendants in the case were either scheme members or former scheme trustees who had made such loans. In the rather complex legal argument, Dalriada argued that a loan was a “payment” within the meaning of the Finance Act 2004 s.161(2)-FA 20014- (a payment made or benefit provided under, or in connection with, an investment acquired using sums or assets held for the purposes of a registered pension scheme). FA 2004 s.160(2) defines “unauthorised member payment” as meaning:

(a) a payment by a registered pension scheme to or in respect of a person who is or has been a member of the pension scheme which is not authorised by section 164, and

(b) anything which is to be treated as an unauthorised payment to or in respect of a person who is or has been a member of the pension scheme under this Part.

Dalriada Trustees Limited, the Claimant in the High Court action, maintained that any payment, including a loan which was not within the list in s. 164(1) was an unauthorised member payment and that it was immaterial that members of the reciprocal schemes were not necessarily paired.

The Court concluded that that the MPVA loans were unauthorised member payments as defined by s 160(2) of the Finance Act 2004 . Counsel in the case agreed that if that was the case they were outside the powers of the Schemes’ trustees and void in equity, and could not be validated either retrospectively or prospectively by the amendments recently made to the Schemes.

The Court then went on to consider whether the  MPVA loans were “investments”.

The Court characterised the purpose of the PRP as being not investment but disinvestment. Accordingly the MPVA loans were outside the scope of the power of investment in the Schemes.

The Court then considered the position of the Trustees and their power of investment.

The Court held that the powers of the trustees are to make “investments” as set out in Clause 8.1 of each Trust Deed. The fact that everyone involved with the transactions wished to validate MPVA loans did not prevent the loans from being a fraud on the trustees’ powers.

The Court finally found that amendments to the Schemes could not retrospectively validate the MPVA loans.

In summary, no payment of a pension may be made before the day on which the member reaches normal minimum pension age and S.164 sets out what payments are lawful. The loans made under the scheme did not fall into any of the ‘lawful’ categories and so, for those unfortunate individuals who had participated in the scheme, Mr Justice Bean found that the loans were outside the powers of the schemes’ trustees, and were therefore void, as they constituted unauthorised payments. The Court also held that the making of the loans was a “fraud on the power of investment”. The judge described the regulator’s intervention as “plainly justified.

To add insult to injury much of the fund that was not invested in MPVAs has gone into unconventional property related investments abroad where there may be further losses.

If the judgment stands, Dalriada will need to consider how to go about recovering the MPVA loans already made. Likewise because MPVA loans made to date have been adjudged ‘unauthorised payments’, HMRC may look to impose ‘unauthorised payment charges’ on those members who have received an MPVA loan.

On 11th January 2012, Dalriada received copies of Notices of Appeal, lodged by Athena and Minerva (two of the Defendants). The Court has indicated that it will aim to make its first decision in the window 1st to 22nd March 2012. At that point, the Court could allow Athena and Minerva permission to appeal, or it could refuse permission or, alternatively, require a hearing to determine whether or not to allow permission. If permission to appeal is allowed, a hearing of the appeal will follow.

Dalriada advised Members who had received an MPVA payment that they should now arrange their financial affairs on the basis that they are required to repay all of the money they have received.

If judgement stands in favour of Dalriada (on behalf of the Pension Regulator) and if victim members were advised to participate in this shady arrangement on the basis that it was legal, they may have a professional negligence action against their IFA, and, may be able to seek some recompense from the financial services compensation scheme if their authorised IFA defaults. Also it is not inconceivable that a class action may be brought by the losers against those responsible for operating the scheme.

gilchrist@saunders.co.uk
www.saunders.co.uk

Saunders Law is a central London law firm with 37 years’ litigation experience, particularly known for its work in criminal defence, motoring, fraud, regulatory and litigation.

11th April 2011

Why hasn’t anyone been prosecuted for their part in the financial crisis? Jon Hawkins finds out.

There’s somethign very British about Fred Goodwin being stripped of his knighthood earlier this year. It was a peculiarly polite public humiliation of the kind that, in times past, might instead have involved him being placed in the stocks while the public hurled rotten tomatoes at him. Everyone goes home radiating the warm, satisfied glow of retribution but no one gets hung.

Some, however, suggest that removing three letters from the beginning of an exceptionally rich man’s name doesn’t go very far in healing wounds caused by a financial crisis in which Goodwin played a starring role. Instead, he – and, to broaden out somewhat from the nation’s banking pariah au choix, other senior bankers – should be facing jail.

Certainly, there would be no shortage of supporting voices if that were the case. So, after all the forensic analysis of the financial crisis – which turned up a crime scene riddled with the banks’ dirty fingerprints – why have no senior bankers even appeared in court? And those calling for bankers to face jail terms: do they have a point?

In the early days of the crisis, at least, it appeared they had powerful support in one David Cameron MP, then the Leader of the Opposition. “To send out the right message about our country’s values to help stop this crisis from happening again and to help restore the City of London’s reputation, I believe it is now vital that investigations are vigorously pursued to their appropriate conclusion,” he said in a speech at Thomson Reuters’ Canary Wharf base in December 2008.

And if that meant criminal prosecutions, then so be it. “We need to make it 100% clear that those who break the law should face prosecution.” It won’t have escaped anyone’s attention that this hasn’t happened, which suggests that either: all senior bankers are squeaky clean and no one has broken the law; we don’t have the right laws in place; or there hasn’t been much by way of Cameron’s ‘vigorous pursuit’. Or all of the above.

THE LATTER TWO theories have gathered the most traction, and with good reason. For all of Cameron’s strong words, politicians, regulators and the banks themselves have hardly been falling over themselves to point the finger of blame in any meaningful way. Last December’s 450-page FSA report into RBS found mistakes were made by both bank and regulator, but stopped some way short of suggesting there was criminal activity at play.

But surely when incompetent, even reckless, management lands the public with a hefty bill and contributes to the worst financial crisis in almost 80 years, someone has to pay? According to Stephen Gilchrist, chairman of central London law firm Saunders Law, reckless business decisions may not even be criminal, “and usually aren’t in relation to offences of dishonesty since an intention to commit a criminal offence is usually required,” he says. “However, placing a company in jeopardy by a continuing series of reckless decisions may have implications within regulatory legislation.”

Like many others, Gilchrist says he is unsurprised no senior banker or regulator has been jailed for their role in the financial crisis. “Bankers and regulators live in their own bubble, protected from the ordinary pressures and threats of criminal justice by the politics of economics and the perception that at, all costs, chaos must not prevail,” Gilchrist explains. “Politicians and regulators fear most – entirely without justification – a breakdown of public order if the economic edifice is seen to be breaking down.”

So, have we created an environment in which not only are banks too big too fail, but their CEOs and senior bankers are too big to go to jail? “No one is above the law,” cautions Gilchrist, “but the fear of the implications of bank failure and/or the prosecution of their high and mighty is often too great to contemplate.”

GERAINT ANDERSON, AUTHOR of Cityboy and Just Business and a man whose revelations about the darker side of banking earned him the title ‘City whistleblower’, says that while bankers may not be above the law, “some of the white- collar crimes that some of them do engage in – such as fraud, insider trading, money laundering and market manipulation – are so damned difficult to gain convictions for they may well feel above it.”

He cites the FSA’s 2010 revelation that 30% of takeovers in the previous year were preceded by suspicious share price movements. “Yet the number of insider trading convictions can be counted on one hand,” he adds.

If they feel that way now, there are at least signs that things might be about to change. The FSA’s report into RBS may not have been spicy enough for some tastes, but its chairman, Lord Adair Turner, did at least question the adequacy of existing legislation: “If action cannot be taken under existing rules, should not the rules be changed for the future?”

And, lo and behold, that’s exactly what the Government is now looking to address, with the announcement in January of plans to introduce the new criminal offence of ‘corporate negligence’, under which City executives guilty of financial recklessness could be prosecuted. The Treasury is due to consult on proposals in the spring, though Saunders Law’s Gilchrist admits the definition of ‘corporate negligence’ isn’t yet clear. “Negligence is a term that can be, and has been, defined many times in civil and criminal law,” he says. “‘Corporate negligence’, presumably, is negligence by the company and the people running it, but beyond that I’ve got no idea what he [George Osborne] has got in mind.”

Along similar lines, Conservative backbench MP Steve Baker has also promoted a bill “to enforce strict liability on directors of financial institutions,” by, among other measures, requiring directors to post personal bonds as additional bank capital. In short, the bill aims to fix the lack of accountability at the top that many suggest helped land us in our current predicament in the first place. The Financial Institutions (Reform) Bill 2012 is due to get its second hearing in late April.

“Surely, when incompetent management contributes to the worst crisis for 80 years, someone has to pay”

BUT IRRESPECTIVE OF what the future holds for the banks and bankers, many people will feel some of the financial crisis’s key protagonists have escaped with little more than a slap on the wrist and a polite request to be good boys and girls in the future. And that our inability to punish those who have inflicted so much damage on the economy demonstrates the extent to which the Government is in thrall to this colossally powerful industry. Gilchrist, though, feels it’s time we moved on.

“Look, what’s happened has happened,” he says. “It’s all water under the bridge, and I’m a real believer in learning lessons from these situations rather than dwelling on the past. People aren’t being prosecuted, but let’s learn from it and make sure it doesn’t happen again.”

Only time will tell whether the Government and regulators are strong enough, this time, to be true to their word. Failing that, there will always be rotten tomatoes and the stocks to fall back on.

February 28, 2012

By Neil Baker

With the European Commission planning to introduce a tougher model of corporate oversight, Britain’s Financial Reporting Council is fighting to defend its more flexible “comply or explain” approach.

The FRC’s latest salvo is a report urging all companies to reveal more detail about their governance arrangements, even if they aren’t doing anything unusual that needs explaining. But the regulator has admitted that companies with securities listed jointly in London and the United States could expose themselves to extra legal risks if they start make the kind of disclosures it wants to see.

The British approach to oversight of corporate governance—which has been widely adopted elsewhere in Europe—says companies must follow the general principles set out in the FRC’s Corporate Governance Code. But companies do have choice in how they achieve the goals of the code. Each principle within it is accompanied by a set of more detailed provisions; companies must disclose any areas where they haven’t complied and then explain how they still meet the principles of the code even if they are not following the letter of its provisions.

The European Commission, however, has grown uncomfortable with the comply-or-explain philosophy. Last year it published a consultation paper to pose ideas about how European corporate governance might need to change after the financial crisis; one suggestion was a tougher approach than comply-or-explain. Too many companies were neither complying nor explaining, the Commission said, and national regulators weren’t doing anything about it. The Commission suggested that national securities regulators should be given powers to monitor the quality of companies’ explanations and demand better disclosures.

A yearly look at governance compliance from Grant Thornton supports that argument. Its latest analysis shows that only 50 percent of FTSE 350 companies reported full compliance with the U.K. Corporate Governance Code.

But the FRC puts a more positive spin on those numbers. Its new report (titled ”What Constitutes an Explanation Under Comply-or-Explain?”) contends that two-thirds of the companies that didn’t comply with the code did explain how they were meeting its principles. The other third did explain, but with less detail. “In no case did a company that failed to comply with a provision of the code fail to provide any explanation at all,” the FRC said.

It argues that in most instances, a company that hasn’t complied with the code will only have skipped one or two provisions—but that still leaves the company in compliance with 96 percent of the relevant parts. “This is a strong result, and it would be difficult to conclude that the compliance cost of more formal regulation could be justified simply to raise the figure by a mere four percentage points,” the FRC says.

“Do we want the more prescriptive approach favored in Europe with accountability to a regulator? Or should—as the U.K. prefers—the shareholders be the arbiters of good governance?”

—Stephen Gilchrist,
Chairman,
Saunders Law

But the regulator does admit it has a compliance problem: “A very few egregious or notorious deviations can undermine support for the whole concept of comply-or-explain.” The FRC isn’t naming any names, but said its own analysis of 60 annual reports found explanations for non-compliance were “sometimes rather perfunctory.” It continued, “They can come across as an assertion of difference rather than a full explanation of why the company in question has chosen to deviate from agreed best practice.”

The best way to improve compliance, the FRC argues, is not tougher regulation (the European Commission’s solution) but rather, more guidance for companies about what a good explanation looks like.

To that end, the Financial Reporting Council recently organized two meetings with senior investors and companies to thrash out some common ground, and a consensus did emerge. First, a good explanation must be specific to the company, not a generic off-the-shelf statement. Explanations also should only apply to deviations from the provisions of the code—not its principles, which are sacrosanct. And a company should give the context and historical background to its non-compliance. It should provide “a convincing rationale” for its actions and show how it is meeting the relevant principle of the code. Lastly, a good explanation should state whether the non-compliance is temporary and when the company will fall back into line.

OBSTACLES

Below is an excerpt from the FRC report on comply or explain detailing some of the obstacles to disclosure.

… One corporate participant said concern about stakeholder reaction created a need to be clear to whom annual reports were directed. Many companies might feel comfortable with less rather than more disclosure. However, one investor said that active investors, in particular, place a great deal of faith in companies that can show they have thought about their governance arrangements and give cogent reasons for any deviation from the provisions of the Code. Another shareholder said that not all companies faced adverse media publicity. He cited the case of one company which did not have a permanent chairman but rotated the position among members of its board. This had not attracted media coverage because the company concerned was not a household name. The key to addressing these situations was engagement. This would engender trust and, when trust was there, an explanation was more likely to be accepted.

While participants recognized the difficulties facing some companies on disclosure, the general view, summed up by one participant, was that the process of explanation should involve recognition of a full audience of stakeholders but had to be directed primarily to shareholders. Dialogue with shareholders and an articulation of the governance arrangements could help address these issues.

From the shareholder perspective, a number of participants also mentioned the need for trust, particularly when boards were making judgments about independence. One corporate participants said that boards were not by-and-large malevolent towards shareholders, but both companies and shareholders had difficulty with issues that were subjective. Investors did not always understand the dynamics of boards and this sometimes made the latter unnecessarily defensive. Another corporate participant said there were few blatant abusers and explanations had been improving in recent years. One investor agreed with this though he said there were still information gaps. Another said investors should not be satisfied with just reading a governance statement. The issue was about dialogue. This was critical, even though investors did have to prioritize.

Source: FRC.

In more practical terms, one anonymous investor referenced in the FRC report said explanations should be “relevant, specific, and sufficiently informative, providing enough information to those shareholders who could not simply pick up the phone and talk to the company.” Another said if shareholders felt that they needed a follow-up meeting, the explanation wasn’t good enough.

The FRC’s call for fuller disclosures might sound fine in theory, but some of the companies involved in the meetings were worried about saying more on their governance arrangements and any associated risks. They didn’t fancy the extra attention they’d attract from the media, non-governmental organizations, and proxy agencies. Those with securities listed on a U.S. market feared litigation, the FRC said.

The answer to these worries is better engagement, the regulator believes. Hence its warning that all companies should be making fulsome disclosures, even if they fully comply with the code already. “This would engender trust and, when trust was there, an explanation was more likely to be accepted,” it said.

Stephen Gilchrist, chairman of the law firm Saunders Law, says worries that fuller disclosures could expose companies to U.S. litigation are “overrated.”

“If a major international company either complies with the code or provides a more coherent, discursive, and transparent explanation … as to why it has departed from the Code, any perceived fear of a State-side attack from investors or other stakeholders should prove unfounded,” he says. Companies must be careful, but “a sensible board should have no fears.”

Gilchrist believes that, on balance, making the disclosures needed for comply-or-explain to work is better than having to deal with the European Commission’s alternative.

“Do we want the more prescriptive approach favored in Europe with accountability to a regulator? Or should—as the U.K. prefers—the shareholders be the arbiters of good governance?” he says.

FRC Chairman Baroness Sarah Hogg said the FRC’s comply-or-explain report was “designed to reinforce our approach at a time when Europe has shown signs of driving toward more prescriptive regulation with a consequent diminution of shareholder rights. It should also make shareholders better equipped to push for full explanations on the relatively rare occasions when these are not forthcoming.”

She added: “The comply-or-explain approach to corporate governance has given us flexibility and enabled us to raise the standards of U.K. corporate governance over the years in ways that regulation cannot always achieve.”

28th February 2012

By Stephen Gilchrist

On 16^th December 2011 the London High Court ruled illegal, a pension scheme to which some 400 members had subscribed. This was a ‘Pensions Reciprocation Plan’ within a structure rather optimistically entitled a “Maximising Pension Value Arrangement” (MPVA). The pension members placed £25 million with Ark Business Consulting and stand to lose millions of pounds in this fraudulent pension “unlocking” scheme.

The devious scheme was spotted by the UK Pensions Regulator who, in May 2011, appointed independent trustee firm Dalriada Trustees to seize control of the bank accounts of six pension reciprocation schemes due to concerns the loans could be legally void.

Dalriada referred the scheme to the High Court for a legal determination and to ascertain whether the loans were valid exercises of the powers of investment under the schemes.

This crafty plan involved two pension schemes making reciprocal loans of funds to specific members of each other’s schemes and operated by paying out 50pc of a member’s pension fund in the form of a reciprocal loan with another investor. Using loans, Ark managed to make payments before the minimum retirement age.

The defendants in the case were either scheme members or former scheme trustees who had made such loans. Dalriada argued that a loan amounted to a “payment” within the meaning of the Finance Act 2004 s.161(2) (a payment made or benefit provided under an investment acquired using sums or assets held for the purposes of a registered pension scheme) and was not lawful as it was an unauthorised member payment (as it was not within the list in s. 164(1))

S.164 sets out what payments are lawful. The loans made under the scheme did not fall into any of the ‘lawful’ categories

For those unlucky individuals who had participated in the scheme, Mr Justice Bean found that the loans were outside the powers of the schemes’ trustees, and were therefore void.  The Court also held that the making of the loans was a “fraud on the power of investment”. To add insult to injury much of the fund that was not invested in MPVAs has gone into unconventional property related investments abroad where there may be further losses.

An appeal has been filed but if the judgment stands, Dalriada will need to consider how to go about recovering the MPVA loans already made. Likewise because MPVA loans made to date have been adjudged ‘unauthorised payments’, HMRC may look to impose ‘unauthorised payment charges’ on those members who have received an MPVA loan.

If victim members were advised to participate in this shady arrangement on the basis that it was legal, they may have a professional negligence action against their IFA, and, may be able to seek some recompense from the financial services compensation scheme if their authorised IFA defaults. Also it is not inconceivable that a class action may be brought by the losers against those responsible for operating the scheme.

www.saunders.co.uk

Saunders Law is a central London law firm with 37 years’ litigation experience, particularly known for its work in criminal defence, motoring, fraud, regulatory and litigation.

February 2012

By Stephen Gilchrist

Over past decades Timeshare selling has developed an unviable  reputation. The industry has certainly attracted its share of rogue traders.  Aggressive sales techniques (often starting only metres from airport arrivals) , and ‘free trips’ to mainland Europe with a condition of having to sit through a lengthy, hard sell presentation, have not engendered confidence in this sector.

More recently some legitimate traders and resort developers have tried to market their product by terming it ‘fractional ownership’, a US concept. There is some confusion surrounding the difference between the two. Both are a form of shared ownership in leisure properties or holiday homes. But in its purest form fractional ownership and timeshare properties are very different. Obviously everything depends on the wording of the purchase agreement. Fractional ownership may actually be nothing more than timeshare in real terms.

Timeshare typically involves the purchase of one or two weeks per annum use share while true fractional ownership involves the purchase of a ‘fraction’ of real estate.

This difference, for UK purposes, may impact upon the legitimacy of the underlying sale by the trader and the rights of a consumer.

To put it briefly, timeshare sales would normally amount to what is known as a ‘collective investment scheme’ (CIS). Under the Financial Services and Markets Act 2000, operation of a CIS is a regulated activity requiring FSA authorisation. The essential criteria of such schemes are:

• Participation or receipt of profits or income from the acquisition;
• No day-to-day control by the participants;
• And either: (a) pooled contributions or (b) management by or on behalf of the operator of the scheme (think Unit trusts)

Obviously most, if not all, traders selling timeshare rights are not authorised by the FSA.

However, certain arrangements are excluded from what would otherwise amount to a CIS, specifically under The Financial Services and Markets Act 2000 (Collective Investment Schemes) Order 2001 (the Order).

Under the Order, arrangements do not amount to a collective investment scheme if the rights or interests of the participants are timeshare rights.

Likewise arrangements are exempt if the predominant purpose of the arrangements is to enable the participants to share in the use or enjoyment of property or to make its use or enjoyment available gratuitously to others.

The Timeshare, Holiday Products, Resale and Exchange Contracts Regulations 2010 define a ‘Timeshare contract’ as a contract of duration of more than one year under which a consumer, for consideration, acquires the right to use one or more overnight accommodation for more than one period of occupation.

Thus to take advantage of the exemption, the sale must be of ‘timeshare rights’, or the predominant use provisions.

This brings me back to ‘fractional ownership’. If the terms of the contract either do not fall strictly within the timeshare definition or the predominant use provision is not met (for example where the real intention of the contract, and its main purpose is to transfer actual real estate- as opposed to just a slice of time for personal use), then it could be construed as a CIS outside the exemptions. In such a case, the unauthorised operator could be liable to civil and criminal and civil sanctions consequent upon inviting investment in a CIS and all such contracts are unenforceable and monies paid by the consumer/purchaser would have to be returned.

Sellers of this type of product should therefore be sure of their ground and take legal advice to ascertain whether the sale of their product is exempt. Otherwise, there may be trouble ahead!

The author: Stephen Gilchrist is a solicitor and Chairman and Head of Regulatory Law at Saunders Law Limited – www.saunders.co.uk

With most of England preoccupied with who should succeed Fabio Capello as manager of the England Football Team, there appears to be a growing majority of opinion that the person who is appointed should be English or at least British. Can the FA just seek to hire an English man? Can your business do similar? Bellamy Forde investigates.

The Law

Race is identified as a protected characteristic by Section 4 of the Equality Act which defines race as including “colour”, “nationality” and “ethnic or national origins”.  A “racial group” is a “group of persons defined by a reference to race”.

Therefore it is clear that identifying a “race” to a particular job or role can amount to discrimination on racial grounds.  In the case of job advertisements, it is unlawful to publish or cause to be published an advertisement which invites applications for a job or role which  may be determined by reference to race, subject to the genuine occupational qualification defence.

As regards to the engagement of an individual, the Equality Act states as follows:-

“An employer (A) must not discriminate a person (B) –

(a) in the arrangements (A) makes for deciding to whom to offer employment,

(b) as to the terms on which (A) offers (B) employment.

(c) by not offering (B) employment”.

So, what this means is that positive discrimination of the sort of which might lead to an English or British appointment as England manager would amount to discrimination.

Can the selection be justified? Broadly speaking, it can.

If an employer can show that the appointment was based upon a genuine requirement or qualification for a particular job, the employer may have a defence to race discrimination.

However, it should be noted that this defence is not a licence to discriminate.  The first exception for a genuine occupational requirement applies where the discrimination relates to a determination by the employer as to who to offer employment, a refusal to offer employment or dismissal.

This exception applies where it is shown that “being of a particular race or of a particular ethnic or national origins” “is a genuine and determining occupational requirement” and that it would be proportionate to apply that requirement to the particular case under consideration.

The second exception is known as the genuine occupational qualification. It is only available where the discrimination is in the form of arrangements made for the purposes of determining who should be offered employment or not - whichever the case may be.  This is subject to a number of strictly defined circumstances, none of which can be said to apply to the manager’s job.

Bellamy is a solicitor who specialises in Litigation and Employment at City law firm Saunders Law Limited. He has extensive experience of a number of areas of litigation and heads the employment and AAP team. He is a member of the Police Actions Lawyers Group, Employment Lawyers Association, London Litigation Solicitors Association and the Association of Personal Injury Lawyers.