The financing of physical trade is essential for ensuring the smooth flow of goods and commodities from the Middle East to the rest of the world. However, the complexity of the financial and regulatory landscape is increasing, and keeping pace with the many changes in the geopolitical sphere that have direct implications for financial institutions and their customers is becoming challenging. Through a day of workshops and presentations to an audience of lawyers and bankers, experts from Eversheds’ Trade Finance and Sanctions teams examined the legal and regulatory environment behind these international issues.

1. Trade finance and
sanctions
An update on key
developing issues
26 November 2014 – Dubai

2. Trade finance and
sanctions
An update on key
developing issues
26 November 2014 – Dubai

3. International trade finance
King Tak Fung – Partner
Michael Yau – Partner
26 November 2014
workshop

4. Introductions
• Exchange Name Cards
• Introduce yourself to your colleagues
• Summarise what your group wants to achieve
today

5. Background &
key focus
TOPICS
W: W: W:
W: W: H:

6. Topics to discuss
A. Warehouse Financing
B. PRC Law on L/C Fraud & Injunctions
C. Governing Law
D. Classic Injunction Case - SPC
E. Bank Guarantee Case

7. Warehouse financing
Warehouse
Receipts to
Financing
Banks
Warehouse
Receipts to
Collateral
Managers
Pledge Agreement
Warehouse
Operator
Warehouse
Receipts to
Financing
Banks
Warehouse
Receipts to
Financing
Banks
Warehouse
Receipts to
Collateral
Managers
Warehouse
Receipts to
Collateral
Managers
CMA
(Borrower)
(Collateral
Manager) Goods
(Lending Bank)

8. Import Agent
(Applicant)
Sellers
(Beneficiaries)
2. LC Application.
L/C Issuing
Bank
3. Negotiation
Contract
4. Reimbursement
Contract
Ultimate
Buyer
1. Agency Contract.
Collateral
Manager’s W.
R. to overseas
co. for L/C
negotiation
Forged BL
based on
genuine
information
Negotiating
Bank
Letter of credit fraud

9. Forged or
fraudulent doc.
created or
presented by
bene.
w.o. notice??
Carrier
No shipment
(bad faith) or
goods no value!
Bene. & appli. or 3rd
party collaborate to
present fraudulent doc.
w.o. genuine
transaction.
Other L/C
Fraud
Fraud Exception (Art. 8)

10. Stop Payment Orders – Exception
(Art 9 & 10)
Art. 8 +
Irreparable
Damage
Pyt already
made by
nominated
party in good
faith
Confirming bank
honoured its
payment
undertaking in
good faith
$
Doc. Negotiated
in good faith

11. Issuing Bank
Discounting Bank
Sinotani v. ABC
Please
discount.
Sent to
ABC
1. We accept
the doc.
& will pay on
maturity.
2. Discounted

12. •Governing law - available with ABC by acceptance?
•May ABC refuse payment?
• Agritrade v ICBC Case – available by negotiation
in HK
•Marconi v Pan Indonesia Bank – available by
negotiation in England but no negotiation

13. PRC Injunction – L/C Autonomy
Pass to CM and then
to supplier
(3) Negotiation
(4) Pre doc &
got acceptance Nego
Bank
(4) Release doc
(2) Usance L/C
L/C issuing bank
in China
Supplier
(1) Import Agt
PRC Import
Agent
Buyer

14. Good or bad faith?
Subjective
or Objective
Test?
Intent to
defraud
Burden of
Proof
I am
totally
convinced
.
Negligence
=
Bad faith

15. Independence principle
Import Agent
(Applicant)
Seller
(Beneficiary)
3. LC App.
L/C Issuing
Bank
5. Adv. C. 6. Nego. C.
Advising
Bank
Negotiating
Bank
Ultimate
Buyer
1. Agency C.
SWIFT
Silent
confirmation

16. Import Agent
(Applicant)
Seller
(Beneficiaries)
3. LC App.
L/C Issuing
Bank
5. Adv. C. 6. Nego. C.
Advising
Bank
Negotiating
Bank
Ultimate
Buyer
1. Agency C.
7. Reim C
Foreign companies
set up

17. Import Agent
(Applicant)
Seller
(Beneficiaries)
3. LC App.
L/C Issuing
Bank
6. Nego. C.
Negotiating
Bank
Ultimate
Buyer
1. Agency C.
7. Reim C
What did the bank
staff do and get?

18. Ultimate Buyer
Applicant
(unconnected)
Beneficiaries
LC App. Fin. C.
L/C Issuing
Bank
Nominated
Bank
Adv. C.
Advising
Bank
Reim. C.
Guarantor
Warrants
checking
Documentation
challenges
Mitigation

19. Independence of Bank Guarantee
•Edward Owen Engineering Ltd. v. Barclays Bank International
Limited
Barclays Bank (England)
English Suppliers
(2) Counter-Guarantee Umma Bank (Libya)
(3) Guarantee
1st demand &
w.o. proof or
condition
L/C
Unconfirmed
& conditional
(1) Sales Contract
(Libyan jurisdiction)
Buyers (Libya)
1. Fraud? 2. Even if fraud – injunction against Umma?
3. Is no remedy against the buyers in Libya a valid ground for injunction?
4. Precautionary measures for the suppliers

21. How is your performance?
Fraud
Detector

22. For more information or
advice please contact:
King Tak Fung
Partner
+852 2186 3232
kingtakfung@eversheds.com
Michael Yau
Partner
+852 2186 3237
michaelyau@eversheds.com

23. Financial sanctions workshop
Zia Ullah – Partner
James Robinson – Partner
26 November 2014

24. UK sanctions
Sources Targets Impact Obligations Penalties
 UNSCR
 EU regs
 UK regs
 CTA 2008
 TAFA 2010
 Individuals
- assets
- travel
 Entities
- assets
 Sectors
- oil and gas
- precious
metals
 Governments
 UK citizens
 UK
incorporated
bodies
 Extraterritorial
effect
 Freeze funds
 No economic
resources
(directly/
indirectly)
 No
circumvention
 Individual:
- imprisonment
and/or
unlimited fine)
 Corporate
entity:
- unlimited fine

25. The UK sanctions regulators
FCO • Foreign and Commonwealth Office
HMT • Her Majesty’s Treasury
BIS • Department for Business Innovation and Skills
HMRC • Her Majesty’s Revenue and Customs
FCA • Financial Conduct Authority

26. The UK sanctions regulators
FCO • policy
• financial sanctions (consolidated list)/
breaches/licences HMT
BIS • trade sanctions/licences
HMRC • trade breaches
FCA • regulated persons/SYSC

27. The UK sanctions regulators
• individuals and entities subject to asset
freeze
Consolidated
Ukraine Investment ban • financial institutions subject to restrictions
Confidential • not in use
BIS Iran • individuals and entities with Iranian links
• organisations banned in the UK
UKHO proscribed terror
organisations

28. Current UK regime list
Afghanistan
Al-Qaida &
Taliban
Belarus
Democratic
Republic of
Congo
Egypt
Eritrea
Federal
Republic of
Yugoslavia &
Serbia
Iran
Lebanon and
Syria
Ivory Coast
Iraq
Liberia
Libya
North Korea
(Democratic
People’s
Republic of
Korea)
Republic of
Guinea
Republic of
Guinea-Bissau
Somalia
Sudan
Syria
Ukraine
Terrorism and
terrorist
financing
Tunisia
Zimbabwe

29. US sanctions
Sources Targets Impact Obligations Penalties
 UNSCR
 IEEPA
 CFR
 Executive
Orders
 TWEA
 CISADA
 NDAA
 ITRSHA
 Jurisdictions
 Individuals
- assets
- travel
 Entities
- assets
 Sectors
- oil and gas
- precious
metals
 Governments
 USA citizens
 US
incorporated
bodies
 USD
transactions
 Extraterritorial
effect
 Freeze/Block
 Report
 Notify
transgressions
 Information
requests
 NB “owned or
controlled
(50%
aggregate
rule)”
 Individual:
- Imprisonment
and/or $250 fine
(or x2 gain)
 Corporate
entity:
- $1m fine
(or x2 gain)

30. The US sanctions regulators
State Department • US Department of State
• US Treasury’s Office of Foreign Assets
Control
OFAC
BIS • Bureaus of Industry and Security
DOJ • US Department of Justice
Federal Reserve • The Federal Reserve System
DANY
• District Attorney of New York/New York
DANY/DFS Department of Financial Services

31. The US sanctions regulators
State Department • policy
• financial sanctions (SDN list)/civil breaches/
licences
OFAC
BIS • trade sanctions/licences
DOJ • criminal breaches
Federal Reserve • regulated FI
DADNAYN/DYFS • bank licensing

32. The US sanctions lists
Specially Designated Nationals • individuals and entities subject to blocking
Part 561 • financial institutions subject to restrictions
Foreign Sanctions Evaders • individuals subject to rejection of business
• individuals and entities subject to product
restriction
Sectoral Sanctions
Section 311 Patriot Act • entities/jurisdictions of money laundering
concern
BDISA NlisYts • de-barred/unverified/denied persons

33. The US sanctions regime
Are there any exemptions?
• Information materials
• Travel exemption
• Humanitarian donations
• Personal communications
• Journalistic activity
• Official business
• Specific/general licences

34. Base penalty matrix – Egregious case
No Yes
(1)
One-half of transaction value
(capped at $125,000 per
violation/$32,500 per
TWEA violation)
(3)
One-half of applicable
statutory maximum
(2)
Applicable schedule amount
(capped at $250,000 per
violation/$65,000 per
TWEA violation)
(4)
Applicable statutory maximum
Yes
Voluntary
self-disclosure
No
Where the base penalty amount would otherwise exceed the statutory maximum
civil penalty amount applicable to an apparent violation, the base penalty amount
shall equal such applicable statutory maximum amount.

35. The HK sanctions regulators
HKMA • Hong Kong Monetary Authority
SFC
JFIU • Joint Financial Intelligence Unit Hong Kong
• Hong Kong Department of Trade
and Industry
Trade and Industry
department
• Hong Kong Securities and Futures
Commission

36. HK sanctions
Sources Targets Impact Obligations Penalties
 UNSCR
 UNATMO
(Cap 575)
 UNSO
(Cap 537)
 WMDO
(Cap 526)
 UNSR
 OFAC?
 Individuals
- assets
 Entities
- assets
 HK permanent
residents
 HK
incorporated
bodies
 Extraterritorial
effect
 Freeze funds
 No economic
resources
(directly/
indirectly)
 No
circumvention
 Individual:
- Imprisonment
(14 years) and/
or unlimited fine
 Corporate
entity:
- unlimited fine

37. The HK sanctions regulators
• financial sanctions/breaches/licences
(Authorised Institutions (AI))
HKMA
SFC • financial sanctions (Listed non-AI)
JFIU • reporting transactions
• trade sanctions/licences/trade breaches
Trade and Industry
department

38. High Risk Jurisdictions

39. High risk jurisdictions

40. Financial sanctions workshop
Complying with sanctions
Zia Ullah – Partner
James Robinson – Partner
26 November 2014

41. Sanctions compliance
Key compliance
challenges (internal):
• Hit rates
• Identification of prohibited
business/customers
• Monitoring of activity
• Escalation and exceptions
• Cost of compliance v
cost of breaches
• IT tools
• Training
Key compliance
challenges (external):
• Balancing conflicting
regimes
• Regulatory focus
• Reputational damage
• Legislative change
• List consolidation

42. Sanctions compliance
Regulatory expectation:
• Awareness
• Screening
• Assurance
• Training
• Benchmarking
• Engagement

43. Sanctions compliance
Awareness:
• Legal and Regulatory
• Senior management
• Public Policy
• Private Policy
• External stakeholders (e.g., FCA,HMT)
• Internal stakeholders, BUs

44. Sanctions compliance
Screening:
• List management
• Policy:
– Payments/customers
– Domestic/cross-border
– Message types
– Trade documentation
– Legacy systems
• Technology
• Escalation
• False positive strategy

45. Sanctions compliance
Assurance:
• Testing:
– People
– Technology
– Policy
– Escalation
– False positive strategy
– Awareness
– Systems and controls
• By whom?:
– Internal/external audit

46. Sanctions compliance
Training:
• How:
– Ftf
– E-learning
• Who:
– Specific roles-e.g trade finance
– all/?
• What:
– One size fits all?

47. Sanctions compliance
Benchmarking:
• Industry guidance:
– JMLSG/DFSA/OFAC
• Regulatory guidance:
– FCA financial crime guidance/DFSA guidance
• Peer group:
– Wolfsberg

48. Sanctions compliance
Engagement:
• Regulatory:
– HMT/AFU/UAE central bank
– FCA/DFSA
– BIS
• Disclosure

49. The critical issues
• Who are you dealing with?
• Non-cooperation
• Location of interested parties
• Policy implementation versus law/regulation
• Directly versus indirectly
• Audit/termination rights
• KYB

51. Russian/Ukraine sanctions –
2014 timeline
• March 5/6 – US and EU authorise sanctions (EO 13660); EU freezes assets of Ukrainian
individuals
• March 20 – the Russian Foreign Ministry published a list of reciprocal sanctions against
certain American citizens, which consisted of 10 names, including Speaker of the House of
Representatives John Boehner, Senator John McCain, and two advisers to Barack Obama
• July 16 – US sectoral sanctions- Rosneft, Novatek, Gazprombank and Vneshekonombank
• July 31 – EU introduced a further round of (sectoral) sanctions. Sanctions included
financial sector (all majority government-owned Russian banks), trade restrictions relating
to the Russian energy and defence industries, and additional individuals and entities
designated under the EU asset freezing provisions
• August 6 – Putin signed a decree "On the use of specific economic measures", which
mandated an effective embargo for a one-year period[30] on imports of most of the
agricultural products
• August 12 – US imposed sanctions on Russia's largest bank (Sberbank), a major arms
maker and arctic (Rostec), deepwater and shale exploration by its biggest oil companies
(Gazprom, Gazprom Neft, Lukoil, Surgutneftegas and Rosneft)
• September 12 – US and EU expands sanctions to additional people and entities, as well
as providing for further sectoral sanctions

52. Country programmes – Russia
EU:
• Regulation 208/2014 (misappropriation and human rights):
– Assets/economic resources
– 6/3/14
• Regulation 269/2014 (sovereignty and territorial integrity):
– Assets/economic resources
– 17/3/14

53. Ukraine/Russia
EU and US restrictions
• EU Reg 833/2014 –
money market
instruments or
transferable
securities>90 days
maturity post 1/8/14
 energy
 finance
 export
 50% extra-EU
subsidiaries
• EO 13662 – debt or
equity>90 days maturity
post 16/7/14
 energy
 finance
 export
 General Licence No.1

54. • EU Reg 960/2014 – money
market instruments or
transferable securities>30
days maturity post 12/9/14
 energy
 finance
 export
 50% extra-EU
subsidiaries
• EO 13662 – debt or
equity>30/90 days maturity
post 12/9/14
 energy (90)
 finance (30)
 export (30)
 General Licences Nos.1a/2
Ukraine/Russia
EU and US restrictions

55. Country programmes
UK:
• The Ukraine (European Union Financial Sanctions)
Regulations 2014
• The Ukraine (European Union Financial Sanctions) (No.2)
Regulations 2014

56. Country programmes
The Iranian regime:

57. Country programmes
EU:
• Regulation 267/2012 (prohibition on dealing with Iranian):
– Assets/economic resources
– Crude oil
– Petroleum/petrochemical products
– Precious metals/stones/currency notes
• Builds upon Regulation 961/2010

58. Country programmes
Regulation 267 (main restrictions):
• Designated persons/entities (including, IRISL/IRGC)
• Transfers to/from Iran > EUR ? – notification
• Transfers to/from Iran > EUR ? – approval
• Restricts finance/insurance
• Restricts access to SWIFT

59. Country programmes
Regulation 267 ((main restrictions (cont’d)):
• Importation of Iranian Oil into EU
• Purchase of Iranian originated CO/PP
• Transportation
• Financing relating to above
• Extra-territorial (e.g., UK national facilitating transfer b/w
China and UAE of Iranian origin oil)

60. Country programmes
Regulation 267 (other restrictions):
• Provision of loans or credit
• Buying shares
• Joint Ventures
• ‘cooperation’:
– NG
– LNG transmission

61. Country programmes
UK:
• The Iran (European Union Financial Sanctions) Regulations
2012
• Export Control (Iran Sanctions) Order 2012
• The Iran (Asset-Freezing) Regulations 2011
• The Iran (European Union Financial Sanctions) (Amendment)
Regulations 2014

62. The Iranian conundrum- P5+1
• Joint Plan of Action between the P5 +1 (E3 +3) and Iran
(JPOA)
• Suspends certain US/EU sanctions until two days ago!! –
news?
• Permitted?
– Petrochemical exports
– Gold and precious metals
– Automotive dealing
– Release of frozen funds
– Civil aviation licensing

63. Financial sanctions workshop
Case studies
Zia Ullah – Partner
James Robinson – Partner
26 November 2014

64. SWIFT 103 definitions
Field Tag Field Name
23B Bank Operation Code
32A Value Date/Currency/Interbank settled amount
33B Currency/Original Ordered Amount
50K Ordering Customer, Amount & Name and Address
52D Ordering Institution
53A Senders Correspondent
59 Beneficiary
70 Remittance Information
71A Details of Charges
72 Send to Receiver Information

65. Case study 1
• In January 2014, the Dubai Branch of your UK incorporated
bank provided an RMB 1m import L/C for the benefit of its
Cypriot client, a manufacturer of oil and gas valves used for
shale gas projects.
• Your trade team conducted EDD on opening the facility and it
transpired that the Cypriot client was beneficially owned by
Rosneft bank.
• In late September 2014, a SWIFT message was received from
the advising bank’s trade team: please note that the seller
has advised goods linked to this facility will be sourced from
Crimea….
• In November 2014, the underlying documents were received
by your trade desk.

66. Case study questions
1. What are the key issues for you as issuing bank?
2. Does the fact that the deal is in RMB matter?
3. What difference would it make to the deal if the L/C
was denominated in:
– USD
– Euro
4. Can you make any payments as issuing bank?
5. Why/why not?
6. If your client informed you that the products were to be
used for Russian government projects, would that change
matters?

67. Case study 2
• A USD payment is being made from a
German manufacturer inbound to your
customer, a Dubai based industrials group.
The payment references Myanmar in Field
70 of the payment message.
• The Relationship Manager is contacted by
the compliance team investigating the
payment and advises that the payment is
in relation to the manufacture of anti-mine
equipment supplied to a company 52%
owned by the Myanmar Ministry of defence.
• Upon instruction from the compliance
team, the Relationship Manager questions
the customer about the existence of an
OFAC licence, to which the customer states
that as a Dubai firm, they are not subject
to US sanctions and are not required to be
licensed for the activity undertaken.
20:YT16560567400845
:23B:CRED
:32A:080613USD6757,35
:33B:USD67570,35
:50K:/GDR76300040099900016016
15459
EUROPEAN METAL
COMPANY
123 Volks Strasse
Berlin
:52A:HSBCGDR
:53A:HSBCUS3NXXX
:54A:BCDUS53XXX
:59:/UAE19ABCC200000XXXXXXX
Dubai industrials
PO BOX 245
UAE
:70:MYANMAR MOD
107a 15728 UWR 9541
245462
:71A:SHA
-5:{CHK:A70C2FE9CC5B}{PFX:}}

68. Case study questions
1. What are the key issues for you?
2. Why is an OFAC licence necessary?
3. Does the fact that the deal is in USD matter?
4. What difference would it make to the deal if the payment
was sent from the Thai MOD?
5. What difference would it make to the deal if the payment
was sent from an entity owned 49% by an OFAC SDN?
6. What if the payment came from an entity whose
management and oversight was controlled by a party that
only owned 22% of the shares and was located in the EU?

69. Financial sanctions workshop
A company perspective
Zia Ullah – Partner
James Robinson – Partner
26 November 2014

70. The critical issues
• Same fundamental rules
• Reputation
• Do you need a licence for product / service?
• Can you be paid?
• Who is exporter / Who responsible licensing?
• Whole supply chain
– Directly or indirectly
– Back-to-Back
– Sale for stock?
• Warranties
• Termination rights – force majeure enough?

71. Common mistakes – products
• More than one regime applies
• Missing continued impact
– US consequences from lawful Iran trading
– USA re-export and deemed export
• Technology
• Warranties, controls, liability and termination
need to join up
• Internal process and records
• Every step covered e.g.Exports within EU for
export out of EU

72. Common mistakes – funding
• Unexpected elements giving jurisdiction
– Nationality / Green card
– Use of currency or banking system
– Knowledge in indirect payments
– Military items - broking

73. Tools
• Electronic training
• Systems design
• Audit
• Privacy
• Voluntary disclosure

74. For more information or
advice please contact:
Zia Ullah
Partner
+44 161 831 8454
ziaullah@eversheds.com
James Robinson
Partner
+44 207 919 0978
jamesrobinson@eversheds.com

75. Looking to the future
Middle East perspective
Looking to the future
Ben Moylan – Partner
Clint Dempsey – Principal Associate
26 November 2014

76. Overview
• Very liquid market, flight to safety into certain countries within
the region means financial institutions are sat on large cash
deposits. Competitive market is driving prices down
• Diverse sectors driving growth: real estate, tourism,
transportation, oil and gas, infrastructure and consumer
• Mena-China trade has increased 50-fold in the past 20 years to
nearly US$300 billion
• EU-GCC total trade in goods in 2013 amounted to around €152
billion (significant increase from €100,6 billion in 2010)
• The EU is negotiating a free trade agreement with the six
countries of the Gulf Cooperation Council

77. Overview
• Significant developments in the Middle East
– Qatar 2022 World Cup
– Dubai Expo 2020
– Renewable Energy developments
– Suez Canal Expansion
– The Kingdom Tower in Jeddah
• Trade finance will continue to grow across the Middle East
• Gateway between North, South, East and West

78. Growth areas
• Two key areas for growth in trade finance:
– Bank Payment Obligations (BPO)
– Islamic Trade Finance

79. Growth areas
• BPO
– Innovative bank assisted trade instrument
– Irrevocable undertaking given by one bank to another
bank that payment will be made on a specified date
after successful electronic matching of data
– April 2013 ICC Banking Commission approved the
URBPO, contractual rules to govern BPO
– BPO relies on electronic matching, not paper based,
using global standard ISO 20022 messages

80. Growth areas
• BPO
• Advantages
– BPO guarantees exchange of goods for payment based
on electronic presentation of compliant data
– Slow start, but increasing in popularity. 40 corporates
across the globe are using BPO (BP, 7-Eleven, PTT
Polymer)
– Reduction in overall operational costs to banks, allows
for competitive pricing
– Safer than prepayment, buyer does not have to pay
upfront before receiving goods
– Automated data matching reduces complexity
– Cross-sale opportunities for banks e.g. financing and
working capital management systems

81. Growth areas
• BPO
• Potential shortfalls
– Capital cost to banks in investing in new systems,
supporting and communicating with ISO20022
compliant messages as well as Transaction Matching
Application
– Physical trade documents are required under local
legislation and to release delivery of goods from
customs
– Not defined for the purposes of Basel Capital Adequacy
Requirements, most bank’s treat BPO the same as LC
(capital conversion factor 20% sitting on balance sheet
i.e. still cheap for banks to hold these assets)

82. Growth areas
• Islamic Trade Finance
– Increasing popularity in the region
– Shifting preference towards Shari’ah-compliant banking
– Liquidity of Islamic banks in the region means
competitive pricing in the region

83. Growth areas
• Islamic Finance
• Typical structures
– Murabaha – Bank will purchase the commodities from
the supplier and then sell them to the beneficiary with a
deferred payment arrangement. The difference between
the purchase price and the sale price is the bank’s profit
– Syndicated Murabaha – Bank appointed by syndicate of
banks pursuant to Mudaraba agreement, bank (as
Mudarib) will then enter into Murabaha agreement with
customer. Profits are split between the syndicate of
banks

84. Growth areas
• Islamic Finance
• Typical structures
– Instalment Sale – Bank purchases the asset on
beneficiary’s behalf and immediately transfers
ownership upon delivery to the beneficiary. Beneficiary
will provide the same asset delivered to it as security.
The sale price will usually be paid in instalments.
Structure is often backed by guarantee

85. Growth areas
• Islamic Finance
• Typical structures
– Istisna’a – The bank agrees to buy an asset to be
delivered once construction or manufacturing of that
asset is complete. The bank pays the purchase price of
the asset in accordance with the progress of the asset's
construction or manufacture that gives the
contractor/manufacturer the liquidity it needs to
construct or manufacture the asset. Once manufacture
or construction is complete, the bank acquires the asset
that it can then sell or lease to the
contractor/manufacturer or a third party for a profit

86. For more information or
advice please contact:
Ben Moylan
Partner
+97 44 49 67 39 5
benmoylan@eversheds.com
Clint Dempsey
Principal Associate
+97 14 38 97 01 8
clintdempsey@eversheds.com

87. Recent developments in the
regulation of individuals in UK financial
services
New senior management arrangements and
conduct rules
Greg Brandman, Partner, Eversheds LLP
26 November 2014
Greg Brandman - Partner
26 November 2014

88. New Senior Manager arrangements
and conduct rules - overview
How things are changing
• “Restore trust and improve culture”
• “Individual accountability has often been unclear and
confused”
• New regime for employees of UK banks, building societies,
credit unions and PRA-designated investment firms
– Senior Managers regime
– Certification regime
– New Conduct Rules (PRA + FCA)

89. New Senior Managers regime
• Senior Manager Function (SMF) replaces Significant
Influence Function
• 18 SMFs and some new functions
• Each SMF must have a statement of responsibilities
• Firms must maintain a Responsibilities Map that describes
the firm’s management and governance arrangements
• Firms must vet Senior Managers for fitness and propriety
before approval and on an annual basis
• Senior Managers must be vetted for each function they
hold
• Senior Managers must provide handover notes to a
successor

90. SMFs of particular interest
• PRA prescribed functions
– oversight of whistleblowing policy
– culture and standards and staff behaviours
• FCA prescribed functions
– Money Laundering Reporting and Compliance
Oversight
– individuals with overall responsibility for certain
key functions or identified risks, including:
• establishing and operating systems and controls
in relation to financial crime

91. New Certification Regime
• Applies to functions that can cause ‘significant harm’ to a firm or
its customers
• Certification is role specific and if multiple functions are
performed by an individual must assess against each function
• Firms must assess and certify that individuals within the regime
are fit and proper at least annually
• Consultation also includes a proposal that prospective employers
seek a “regulatory reference” before hiring a senior manager or
certified employee
• Regulators cannot intervene in individual certification decisions
but may challenge the overall effectiveness of a firm’s process
• Senior manager must be allocated to oversee the Certification
Regime

92. The new rules of conduct - overview
• For relevant firms, these will replace the existing APER
principles and guidance
• Contained in a new code of conduct sourcebook: C-CON
• PRA and FCA will apply their own rules separately
• They will apply to:
– senior managers
– persons within the certification regime
– “all individuals within relevant firms who are in a
position to have an impact on the PRA/FCA’s statutory
objectives”
• APER will continue to apply to approved persons at other
firms

93. Increased training, policing and
reporting obligations for firms
• Only senior management functions will be subject to prior
regulatory approval
• Relevant firms are now responsible for
– assessing the fitness and propriety of employees within
the certification regime
– policing the compliance of other conduct rules staff with
the conduct rules
• far wider population of staff than before
• increased training and compliance burden
• notification and reporting requirements

94. Scope of the conduct rules
• FCA and PRA will apply the conduct rules separately
• FCA will apply its own conduct rules “to the large majority
of those working within relevant firms”
• FCA conduct rules will cover all who are in a position to
impact its statutory objectives
– all individuals approved by FCA/PRA as senior managers
– all individuals covered by FCA/PRA certification regime
– all other employees save ancillary staff specifically
excluded in C-CON
• Certain conduct rules will apply to SMFs only

95. Staff not subject to the new conduct
rules
• Those whose role would be fundamentally the same, if
they did not work for a financial services firm:
– receptionists / switchboard staff
– post room / repro staff
– facilities / events management
– security / concierge staff
– cleaners and catering staff
– IT support / archive staff

96. Rules common to both PRA and FCA
• Tier 1 (applying to all relevant staff)
– 1. You must act with integrity
– 2. You must act with due skill, care and
diligence
– 3. You must be open and cooperative with the
FCA, the PRA and other regulators

97. Additional FCA conduct rules
• Tier 1 (applying to all relevant staff)
– 4. You must pay due regard to the interests of
customers and treat them fairly
– 5. You must observe proper standards of
market conduct.

98. Other rules common to both PRA and
FCA
• Tier 2 (Senior Managers only)
– SM1: You must take reasonable steps to ensure that the
business of the firm for which you are responsible is
controlled effectively
– SM2: You must take reasonable steps to ensure that the
business of the firm for which you are responsible complies
with the relevant requirements and standards of the
regulatory system
– SM3: You must take reasonable steps to ensure that any
delegation of your responsibilities is to an appropriate person
and that you oversee the discharge of the delegated
responsibility effectively
– SM4: You must disclose appropriately any information of
which the FCA or PRA would reasonably expect notice

99. Complying with the Tier 2 conduct
rules for senior managers
• What the regulators will take into account broadly follows
existing APER 5-7 guidance:
– exercised reasonable care when considering the
information available
– reached a reasonable conclusion upon which to act
– scale and complexity of the firm’s business
– their role and responsibility as determined by reference
to the relevant statement of responsibility
– the knowledge that they had, or should have had, of
regulatory requirements

100. Personal Culpability
• A person will only be in breach of any of the new
Conduct Rules where they are “personally
culpable”. This means where:
– the person’s conduct was deliberate; or
– the person’s standard of conduct was below
that which would be reasonable in all the
circumstances.

101. Presumption of Responsibility (senior
managers only)
• Concept of personal culpability may be inverted for senior
managers where the firm has contravened a requirement
• Effect: reversal of the burden of proof for individual misconduct
– no longer for the FCA to show the senior manager failed to
act reasonably; instead
– the senior manager must satisfy the regulator that he took
reasonable steps to prevent/stop the contravention
• Criteria for taking action against a senior manager – case by case
basis
• When bringing enforcement action against senior manager
(whether under the presumption of responsibility or otherwise)
the FCA will use the Statement of Responsibilities and the firm’s
Responsibilities Map to help inform it of the scope of the Senior
Manager’s duties

102. Implications of the new rules
• FSMA (as amended) places 3 key obligations on
relevant firms with regard to the Conduct Rules
– awareness and training
– notification of breaches
– notification of disciplinary action

103. Notification of suspicions and formal
disciplinary action
• When does the firm need to notify ?
• Firms will have to inform the regulators if:
– they suspect / are aware that a person has breached a
Conduct Rule
– having previously notified a breach, they reach a
subsequent or different determination
– they have issued a formal written warning to,
suspended or dismissed or reduced or recovered
remuneration from an employee as a result of conduct
amounting to a breach of the Conduct Rules

104. When / whom to notify ?
• Senior Manager breaches (known or suspected)
– notify within 7 business days
• Other individuals – notify quarterly
– list of known or suspected breaches
– identities of persons to whom notifications
relate
– disciplinary action taken in that quarter
• Known or suspected breaches by persons subject
to the PRA’s conduct rules should be notified to
PRA

105. Employment law concerns
• Employment rights of conduct rules staff ?
– prior to notifying, the firm must satisfy itself
that it has reasonable grounds to suspect
– timing of notifications ?
– internal investigation first ?
– employee right of reply before notification ?
– incorporate rights in future employment
contracts ?
– nb s398 FSMA !

106. Applying the new regime to UK
branches of foreign banks
• FSMA gives HM Treasury powers to bring non-UK
institutions (including UK branches of overseas
firms) into scope by Order
• The Chancellor has announced he intends to
extend the regime to all banks that operate in
the UK, including the branches of foreign banks
• HMT Consultation and draft Order due later this
year

107. Next Steps
• Consultation has closed (31 October 2014)
• Technical CP to follow
– operational and consequential aspects of the
new regime
– forms
– transitional arrangements
• Policy Statement with final rules due Q1 2015
• Implementation Q3 2015-Q1 2016 for senior
managers and certification regime staff
• Other conduct rules staff after that

108. For more information or
advice please contact:
Greg Brandman
Partner
+44 207 919 0757
gregbrandman@eversheds.com

109. Keep updated:
www.eversheds.com/financialinstitutions
@EvershedsFI