Lawyers to the finance and financial services industries
take stock
Summer 2003
contents
Research guidelines
1
Short selling
2
Mortgage endowment
complaints
3
Mis-selling
4
Changing control of
an ‘authorised firm’
5
Changes to the AIM Rules
5
Market abuse/spreadbetting
6
Pensions taxation
7
Employee incentives
7
welcome to the new
look take stock
It's not only the format that has
changed. By popular demand this
issue now contains articles
covering a wider spread of topics
in addition to its financial
FSA proposes to toughen up
research guidelines
Consultation Paper 171 sets out the
Financial Services Authority’s (“FSA”)
proposed guidelines to stamp out
biased stock researching and regulate
the management of issues of
securities. These proposed changes
will bring the UK into line with many
of the new laws introduced in the US
following the recent high profile
scandals.
regulatory focus. It also marks the
launch of our new Finance
systematic bias
Industry Group, bringing together
Howard Davies, Chairman of the FSA,
said: "In London we have been spared
the worst of the abusive practices
seen on Wall Street. But we have
found evidence of systematic bias in
analyst recommendations, and of bad
management of conflicts of interest."
specialists in the finance and
financial services industries from
across the firm who together can
provide clients in these industries
with a comprehensive range of
legal services.
www.ngj.co.uk
The proposals provide that regulated
firms should have systems and
controls in place to ensure their own
interests do not improperly influence
the content of research reports.
analyst restrictions
Under the FSA proposals analysts
would not be allowed to pitch for
new investment banking business or
market new issues. Their personal
dealings would be restricted and their
research reports would state whether
they have any financial interest in the
securities of the company covered.
The FSA have also advised that
analysts’ reward structures should be
reviewed to remove any direct
incentive for an analyst's judgement
to be compromised.
take stock
...FSA continued
quiet periods
The FSA have proposed the
introduction of a quiet period for
primary issues. During the period of
30 days from the date of issue no
research may be published by the lead
or co- manager of the issue or by any
member of the underwriting
syndicate. For secondary issues there
will be no quiet period but the firm
would need to justify any material
published at this time.
The proposals aim to provide
that regulated firms should
have systems and controls in
place to ensure their own
Philip Morgan is a partner in our
corporate department specialising in
all aspects of Financial Services Law.
For further information on this and
other financial services issues please
contact Philip direct on 020 7360
8123 or philip.morgan@ngj.co.uk
interests do not improperly
influence the content of
research reports.
systems and controls
In addition it is proposed that firms
put in place systems and controls to
prevent abuses with initial public
offerings ("IPO's"). The FSA propose
to tighten up the rules on "spinning"
- allocating shares in IPOs to sweeten
investment banking relations. These
include providing the issuer with
relevant information about the
proposed allocation policy for the
issue before accepting a mandate.
The FSA found no clear evidence of
the abuse of "laddering" - where
investors are offered stock at a
reduced price in exchange for a
promise to buy more shares at a
higher price. This practice has been
accused in the US of causing some of
the inflated prices achieved during
dot-com flotations.
no independent research
The FSA have not proposed to follow
the US in demanding that investment
banks pay for independent research
for retail investors. US banks are
currently being forced to contribute
$450 million towards a separate
independent research company.
The consultation period ended on 12
2
May 2003. The full consultation paper
can be found online at
www.fsa.gov.uk/pubs/.
Short selling the outcome
On 30 April 2003 the FSA
announced the conclusions of its
consultation on the suitability of
the current regulatory approach to
short selling.
The FSA found that there was
support for increasing the
transparency of short selling. The
most favoured option to achieve
this transparency was to publish
securities lending data. It was
generally recognised that this data
would be useful to the market
and, given that it is already
collated by CRESTCo, the UK
securities settlement system, it
would not be costly to publish.
In addition CRESTCo will publish
data on settlement failures in
individual securities. The London
Stock Exchange and virt-x have
agreed in principle to notify the
market when specific illiquid
securities are experiencing a
significant build-up of settlement
failures. The Stock Exchange will
also consider shortening the 'buyin' timeframe for certain illiquid
securities experiencing settlement
delays.
CRESTCo expects to be in a
position to publish this information
by late Summer 2003.
Summer 2003
mortgage endowment complaints
- is time running out?
Over the last few years around six
million endowment mortgage holders
have been receiving re-projection
letters warning them that their
endowments may well fall short of
paying off their mortgages. Although
the FSA has accepted that there are a
significant number of people who
were badly advised, it stopped short
of recommending an industry-wide
review and instead opted for
encouraging those who may have lost
out to come forward and complain.
They (together with a number of
consumer organisations) have certainly
succeeded in that respect as a brief
review of the wealth of material on
the internet pointing borrowers to
making complaints (including proforma, "fill the blanks" letters of
complaint) shows.
On receipt of such complaint letters,
lenders should keep a particular eye
on issues of timing, especially as many
of the relevant endowment sales were
completed many years ago. The
following issues might be considered,
for example:
is the complaint FSA
regulated?
This will depend, in particular,
upon whether the mortgage was
entered into pre "A-day" (29 April
1988 when the Financial Services
Act 1986 came into force). If FSA
regulated, the complaint must be
dealt with in accordance with the
FSA's formal complaint handling
when the complainant "ought
reasonably to have known that
he/she had a claim for damages".
The re-projection letters sent to
borrowers ought to set the clock
ticking for that extended three
year time limit if the letters are
"red", and probably also if
"amber", rather than "green".
Additionally there is an absolute
outer limit barring court
proceedings from being issued
where the sale took place more
than 15 years ago.
procedure as opposed to simply
being treated as a threat of
potential litigation. Although the
regulatory requirements (eg "best
advice" and record keeping) will
not apply to pre-A day sales,
general legal principles will still
apply such as the duty to act with
reasonable care and skill and not
to make negligent mis-statements.
is the complaint time
barred as far as Court
proceedings are
concerned?
Under the Limitation Act 1980 a
claim for damages in the courts
would need to be brought within
six years of (normally) the initial
sale of the mortgage, or, if this
allows the complainant more time,
within three years from the date
does the complaint fall
within the Financial
Ombudsman Services
("FOS") jurisdiction?
Even if the complaint is timebarred under the Limitation Act,
the FOS may still review the
3
take stock
complaint and determine the
complaint, as it does, by what is
fair and reasonable in the
circumstances, as opposed to a
strict application of legal principles.
It is worth noting that even pre Aday cases may still fall within the
FOS jurisdiction if, for example, the
sale was made not through an IFA
but through a building society or
bank (which were covered by
former ombudsman schemes).
Aside from these issues of timing, the
implications for the regime governing
the complaint and how it should be
dealt with and whether the FOS
and/or the Courts are able to deal
with the matter, the two key issues to
consider are of course:
was the mortgage
wrongly sold?
The relevant adviser and the
records may have long disappeared
but the lender should muster
whatever evidence is available so
as to deal with the complaint,
which will commonly involve the
allegation that the endowment
was unsuitable (given the
borrower's attitude to risk), that a
4
guarantee was given that the
policy would definitely produce
sufficient to repay the loan or that
the policy extended into the
borrower's retirement.
FSA defines
mis-selling
On 17 April 2003 the FSA published a
has any loss resulted?
This can be a difficult issue. The
usual approach of the FOS in
deciding whether compensation is
appropriate and, if so, at what
level is to compare the current
financial position of the
complainant as against that which
the complainant would have been
in if he/she had instead taken out
a repayment mortgage at the
outset. Evidence and examples as
to how firms might approach the
issue of redress are set out in the
FSA handbook which can be
viewed online at
www.fsa.gov.uk/handbook/.
note clarifying the definition of misselling under the FSA's regulatory
regime.
The note emphasised that it is the
suitability of the recommendation for
the individual consumer and not the
investment performance of the
product that matters. If suitability was
established at the time of sale, and
Peter Morton is a solicitor in
our litigation department
specialising in all aspects of
commercial litigation. For further
information on this or any other
commercial litigation issues please
contact Peter direct on 020 7360
8199 peter.morton@ngj.co.uk
the required explanation of risk given,
then consumer dissatisfaction about
investment returns achieved gives no
basis for an allegation of mis-selling.
Summer 2003
changing control of
an ‘authorised firm’
When a change in control of a firm
authorised to conduct investment
business is being considered,
obtaining regulatory approval can be a
time consuming and detailed process.
At the heart of the Financial Services
and Markets Act 2000 (the “Act”) is
the aim of investor protection and
with this in mind the FSA must
consider whether any proposed
controller is a "fit and proper person"
to control an authorised firm, and
whether there is any threat to
consumers from the proposed change
in control.
The Act says that control is acquired
where a person
holds 10% or more of the shares of
the firm or its parent
can exercise significant influence
over the management of the firm or
its parent by means of its
shareholding
has up to 3 months to consider
whether to grant its approval (which
may be subject to conditions) or to
refuse to permit the change of
control. We were recently involved in
an application where the FSA took the
full period allowed under the Act to
consider a change of control
application although in that case there
were certain prima facie issues for the
FSA to consider regarding the
suitability of the applicant.
Applicants seeking to manage the
application process should consider
changes to the AIM rules
AIM has announced its intention to create a speedier admission
route for companies traded on "AIM Designated Markets" in order
to attract more non-UK companies onto the AIM market. The
markets which are currently proposed to be AIM Designated
Markets are the:
is entitled to exercise or control the
exercise of 10% or more of the
voting power in the firm or its
parent; or
is able to exercise significant
influence over the management of
the firm or its parent by means of
its voting power
opening a channel of communication
with the FSA at an early stage. If the
FSA proposes conditions on its
approval of a change of control,
applicants should be prepared to
discuss the extent and nature of those
conditions with the regulator. In our
experience, the FSA may be ready to
consider limited modifications to
proposed conditions, depending on
the degree to which it is satisfied by
information it receives from
applicants, before it finally settles
those conditions.
Australian Stock Exchange
NYSE
Euronext
Stockholmsbörsen
Deutsche Börse
Swiss Exchange
Johannesburg Stock
Exchange
Toronto Stock Exchange
NASDAQ
UKLA Official List
The consultation period closed on 15 April 2003 and the amendments to the
AIM rules should be published shortly.
Owen Waft is the partner who heads up our AIM team which was
The authorised firm and any proposed
controller must apply to the FSA for
prior approval before control of that
firm may change. The regulator then
awarded 2001 AIM Law Firm of the Year (Runner Up) - Growth Company
Investor. If you have any queries on this or any other AIM issues please contact
Owen direct on 020 7360 8123 or owen.waft@ngj.co.uk.
5
takestock
market abuse/spreadbetting the market’s response
In February 2002, Paul Davidson ("the
Plumber") lodged a bet with City
Index that shares in Cyprotex - a
company in which he was the
principal shareholder - would rise after
it was floated. After accepting
Davidson's bet, City Index protected
itself against potential losses by
entering into hedging arrangements
with Dresdner Kleinwort Wasserstein.
The bank in turn insured itself with a
matching purchase of Cyprotex
shares. The spread bet was not
disclosable.
Spreadbets and other contracts for
differences ("CFD's"), referenced to
movements in the price of a
company's securities, have become a
popular way of taking advantage of
fluctuations in a company's share
price without the need to buy or sell
shares. However, the status of
dealings in CFD's has raised questions
about whether the associated lack of
transparency might disguise what
would otherwise amount to market
abuse.
In response to the issue, the AIM
Rules were amended in August 2002
so that the definition of a "deal" now
includes acquisitions, disposals and
the discharge of spreadbets and CFD's
relating to AIM securities. In addition,
the company must disclose any such
deals in admission documents and on
a continuing basis.
6
The UKLA now proposes a change to
the definition of "dealing" in the
Model Code on directors' dealings, to
extend the provisions of the Code to
spreadbets and other CFD's.
We believe this revision, resulting in a
prohibition on dealing during close
periods and/or on the basis of
considerations of a short term nature,
is likely to preclude most instances of
dealings by directors and applicable
employees in spreadbets and CFD's.
However, there may be circumstances
where such deals are not prohibited
under the Model Code as amended.
In such cases, the company may not
necessarily be required to make
disclosure to the market of any such
dealings.
We have therefore made a submission
to the UKLA, in response to their
consultation on this matter, that the
Model Code be amended along the
same lines as the AIM Rules, to
require any director, or member of a
director's family, to disclose dealings
in CFD's to the company, the
company being required to disclose
such information to the market, both
in listing documents and on a
continuing basis.
The results of the consultation are
awaited, but the UKLA have
provisionally said that they may not
act to seal the gap that we perceive,
as the Market Abuse Directive is
expected to address our concerns.
The Directive is likely to require
primary legislative changes, as
directors will be required to make
disclosure of spreadbets and CFD's
under the Companies Act. It is
proposed that the Directive will be
implemented in EU member states
within the next 18 months.
Kevin McGuinness is a partner
in our Company department advising
on all aspects of mainstream
corporate work and non-contentious
employment law. For further
information on this and other
corporate issues please contact him
direct on 020 7360 8120 or
kevin.mcguinness@ngj.co.uk.
Summer 2003
possible changes to pensions taxation
In December 2002, the Government
announced its plans for a radical
overhaul of the UK pension system.
Comments were requested by midApril 2003. As this deadline has
passed, it is worth summarising the
Government's proposals.
The aim is to replace the plethora of
pension tax regimes with a single
"one size fits all" regime. The
age/salary limits on contributing to
pension schemes will be abolished.
Instead individuals will get tax relief
on contributions up to an annual limit
of £200,000 or 100% of salary
(whichever is the lower). There will be
a single lifetime limit of £1.4m on an
individual's total pension savings.
Both the lifetime and annual limits will
be indexed.
This simplicity has its drawbacks. Any
amounts above the lifetime limit will
face a recovery charge of one third of
the excess. In addition, any income
drawn from these additional funds
above the lifetime limit will be taxable
in full. The effective rate of tax on the
excess will be around 60%.
The new rules will still allow people to
choose whether to draw all of their
pension benefits as income or take
part as a lump sum of up to 25% of
the value of the pension fund. If the
savings are less than the lifetime limit
this lump sum will be tax free. In
addition, it will be possible to start
pension draw-down whilst still
working. This is to allow phased
retirement. The minimum retirement
age (other than for ill-health) will be
increased to age 55.
The Government has suggested it may
introduce the new rules as early as
April 2004 but the pensions industry
feels this is unrealistic. The date of
introduction of the new regime will be
called "A day". Existing schemes with
pension rights above the lifetime limit
must be registered. These pre-A day
rights will be not be taxed, provided
they do not increase in value beyond
indexation. Once the new regime has
been introduced, all further pension
rights will be determined under the
new rules.
employee incentives update
The Finance Bill published on 16 April
2003 includes a large range of
measures concerning employee share
schemes and employee benefit trusts.
The changes will affect many existing
schemes and in some cases the
changes have already come into force.
Some of the "highlights" are
described below.
employee share schemes
A package of measures has been
introduced to simplify the operation
of Inland Revenue approved employee
share schemes. As a result, scheme
rules may need to be amended.
Changes are proposed to Company
Share Option Plans (CSOPs), Save as
You Earn (SAYE) Schemes and Share
Incentive Plans. For instance, there
are amendments to the SAYE rules
concerning when an option may be
exercised on an employee leaving
employment, but we understand that
the Inland Revenue are already
redrafting the text set out in the Bill.
The restriction on exercising a CSOP
option free of income tax within 3
years of a previous tax privileged
exercise has been lifted with effect
from 9 April 2003 and income-tax
free exercises are also to be permitted
on retirement within 3 years of grant.
For Unapproved Schemes, the
deadline for employees to refund
PAYE on share option gains to their
employer is extended from 30 days to
90 days and this will also apply to
Class 1 NICs where the tax has not
already been reimbursed. For income
tax, this change is already effective.
There are also massive changes to the
taxation of convertible and restricted
shares and securities. The new
provisions on convertible securities will
apply to interests irrespective of when
they were acquired, and not just to
interests acquired on or after 16 April
2003. A special edition of Boardroom
Tacks will shortly be issued
highlighting the main changes. If you
would like to be added to the mailing
7
take stock
...employee incentives
continued
run out of ideas?
Nicholson Graham & Jones will
sponsor and has been appointed
"official lawyers" to the British
10K Road Race. This is a major
event taking place in central
London on Sunday 13 July and
will be broadcast live on Channel
5.
list for this publication please contact
Jeremy Glover (details below).
new corporation tax
deduction
A statutory Corporation Tax deduction
for the costs of providing shares for
employee share schemes is now
available for accounting periods
starting on or after 1 January 2003.
If you are interested you can join
the race as either an individual or
a team in the "Corporate
Challenge" part of the Race
raising money for your
company's nominated charity.
The winning team will be judged
on sponsorship raised with up to
12 runners in each team.
Everyone from fun runners to
international athletes will be
taking part. The NGJ team will be
raising money for Save the
Children.
employee benefit trusts
(EBTs)
As announced last November,
corporation tax deductions for
contributions to an employee benefit
trust will be deferred until qualifying
benefits are provided, or qualifying
expenses are paid out of the
contribution. The purpose of the
legislation is to counter the avoidance
of tax and National Insurance
contributions through the abuse of
EBTs.
Michael Jacobs is the head of our
Private Client Department and
specialises in Employee Benefits and
Share Schemes. Jo Goldby is a
partner advising on all aspects of
personal taxation issues, trusts and
the financial consequences of moving
to or from the UK. Jeremy Glover
has recently joined Nicholson Graham
& Jones from Ernst & Young where he
headed their equity reward team
advising entrepreneurial clients on all
aspects of share options and
incentives. For further information
on this or any other personal financial
or employee reward related issues
please contact Michael on 020 7360
8260 or michael.jacobs@ngj.co.uk; Jo
on 020 7360 8263 or
jo.goldby@ngj.co.uk; or Jeremy on
020 7360 8113 or
jeremy.glover@ngj.co.uk.
Who to contact
Philip Morgan 020 7360 8123
philip.morgan@ngj.co.uk
Nicholson Graham & Jones
110 Cannon Street, London EC4N 6AR
020 7648 9000
8
Internationally a member of GlobaLex
The contents of these notes have been
gathered from various sources. You should
take advice before acting on any material
covered in take stock.
For more information about the
race, route and how to enter see
www.thebritish10klondon.co.uk
Lawyers are not known for their
athletic prowess and so we will
be holding lunchtime training
sessions in the run up to the
race. If you are interested in
joining us in training please
contact Trevor Rowles on 020
7360 8328 or
trevor.rowles@ngj.co.uk.