The Law Spot highlights some legal points of interest / cases / legislation which have arisen during the month in the UK. It is not intended to be comprehensive in any way, merely a summary of a selection of the legal issues which have affected the financial services industry during the period.
This month focuses largely on regulation, and ends with a reflection that pubs are places in which to drink and not to conduct business (in most cases!)
The FCA's key themes for 2017/18
The FCA has recently released its reflections on the key developments which took place in first half of its financial year 2017/18, together with its anticipated areas of activity for the second half of the year.
Its executive summary states that:
“The FCA continues to advance the priorities laid out in its latest Business Plan. AML, and Governance and Conduct are key areas of development so far in relation to the FCA’s regulatory framework. We expect more Enforcement outcomes from the FCA in the second half of the year for the troubled sectors of pension transfers and contracts for difference (CFD) platforms, as well as, continued AML Enforcement actions across the spectrum of financial services firms” (FCA, 2017).
Further details are available from the source detailed below.
RPC (2017) The FCA: key themes for 2017/2018 [online]. Available here [Accessed: 10 October 2017]
The FCA's consults on creditworthiness assessments
Burges Salmon (2017) report that the newly launched FCA consultation in credit assessment distinguishes between two main areas of risk when assessing consumer credit. ‘Credit risk’, is defined as the risk to lenders that the consumer will not repay the debt, whilst 'affordability risk' on the other hand is the risk faced by consumers that they will not be able to afford to repay the debt. The FCA’s concerns centre around borrowing where the credit risk indicates the credit will be profitable for the lender, while the affordability risk shows that it may not be affordable for the consumer.
The FCA is therefore consulting on an amendment to its rules contained the Consumer Credit Sourcebook (CONC) to clarify the FCA's requirements for assessing consumer creditworthiness. Burges Salmon (2017) note that “the current rules are high-level and largely principles-based. The FCA’s proposed changes are therefore intended to improve firms' understanding of correctly assessing creditworthiness, rather than prescribing a set process”.
The proposed changes to CONC include clarification that consumer creditworthiness assessment includes the affordability of the borrower (not just credit risk to the lender); the requirement that income assessment should be 'reasonable in the circumstances' and that it will not generally be sufficient to rely on the borrower's statement of income; and the need to ensure that assessments of creditworthiness are proportionate to the individual circumstances.
Burges Salmon (2017) Consumer credit: FCA consultation targets creditworthiness assessments [online]. Available here. [Accessed: 10 October 2017]
Prudential Regulation and Brexit
Reuters.com have reported on the PRA expectations of financial services firms in their preparations for Brexit. Mr Woods, Chief Executive officer of the PRA, stated that the “PRA expects 130 financial firms from across the EU to apply for authorisation to continue to carry on investment business in the UK after Brexit. He also commented that the PRA will have to decide by Christmas 2017 if EU branches located in London will have to convert into subsidiaries and be directly supervised by the PRA.” (Addleshaw Goddard, 2017)
Addleshaw Goddard (2017) PRA update on banks' Brexit preparations [online]. Available here [Accessed: 10 October 2017]
The end of the London Interbank Offered Rates (LIBOR)
The Financial Conduct Authority (FCA) recently announced that the London Interbank Offered Rate (LIBOR) is to be phased out by the end of 2021. Finch and Hancock (2017) explain that “LIBOR is a daily benchmark interest rate set at approximately 11:45 a.m. (London time) every morning by a panel of leading banks in the U.K. It is the average rate the banks estimate they’d be able to borrow money from each other in different currencies and over different time periods. In other words, it is the applicable rate for unsecured bank-to-bank borrowing. LIBOR is currently used as a reference to price trillions of dollars of financial contracts around the world, including mortgages, loans, credit cards and complex derivatives contracts”.
LIBOR has seen its reputation severely damaged following the rate-fixing scandals which resulted in billions of dollars of bank fines as well as the criminal conviction of several bankers. The rate is subject to the risk of manipulation, and additionally, the FCA argues “that LIBOR is a problematic benchmark rate because the market supporting LIBOR — that is, the market for unsecured wholesale term lending to banks — is no longer “sufficiently active”” (Finch and Hancock, 2017). As a result, the FCA plans to replace LIBOR by the end of 2021 with an alternative rate that is based firmly on market transactions.
DLA Piper (2017) Claims management companies face stronger regulation [online]. Available here. [Accessed: 6 September 2017]
And finally...pubs are for drinking in...
The question of whether a casual conversation in a pub could create a legally binding contract was heard recently by the Commercial Court in the case of Blue v Ashley  EWHC 1928, 26 July 2017. There a number of elements to creating a valid and enforceable contract including offer, acceptance, consideration and the intention to create legal relations. Without each of these elements, there can be no valid contract, so the issue in this case hinged on whether the parties to the contract intended it to be binding. The test for the existence of legal relations is objective one, i.e. how the words, in context, would be understood by a reasonable person.
Travers Smith (2017) report the details of the case.
“Mr Ashley, a well-known businessman, and Mr Blue, whose background is in investment banking, attended a business meeting at a bar in London. Both Mr Blue and Mr Ashley drank alcohol at the meeting, and Mr Blue subsequently alleged that during the meeting Mr Ashley and he agreed that should the share price in Sports Direct International plc (a company in which Mr Ashley is the majority shareholder) double, Mr Ashley would pay Mr Blue £15 million.
This alleged agreement was not recorded in writing or otherwise. After the share price doubled, and Mr Ashley refused to pay to Mr Blue the full amount which the latter considered was owed to him, Mr Blue commenced proceedings against Mr Ashley. Mr Justice Leggatt dismissed the claim, stating that "in the course of a jocular conversation…Mr Ashley said that he would pay Mr Blue £15 million if Mr Blue could get the price of Sports Direct shares (then trading at around £4 per share) to £8. Mr Blue expressed his agreement to that proposal and everyone laughed…no reasonable person present in the Horse & Groom on 24 January 2013 would have thought that the offer to pay Mr Blue £15 million was serious and was intended to create a contract, and no one who was actually present in the Horse & Groom that evening – including Mr Blue – did in fact think so at the time. They all thought it was a joke. The fact that Mr Blue has since convinced himself that the offer was a serious one, and that a legally binding agreement was made, shows only that the human capacity for wishful thinking knows few bounds."
A cautionary tale, and one which illustrates the importance of ensuring all the essential elements are in place to create a contract, whether that be for commercial trading contracts, bank facility letters, security documentation. or any other manner of contract.
Travers Smith (2017) Commercial Court reaffirms approach to the issue of intention to create legal relations in contract formation [online]. Available here. [Accessed: 10 October 2017]
Caroline Murray is a Senior Lecturer in the full-time banking and finance degree programmes at The London Institute of Banking & Finance.