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The future of collaboration in financial services “Moral hazard” and clearance: The concerns for banks and companies Nordea Bank: The jewel in the Nordic and Baltic Sea Newsletter June 2005 This Newsletter is a quarterly journal of the Association of Foreign Banks 1 Bengal Court, London EC3V 9DD Tel: 020 7283 8300 Fax: 020 7283 8302 Email: secretariat@foreignbanks.org.uk Web: www.foreignbanks.org.uk John Treadwell Managing Director Carol Henderson Executive Assistant Gina Prentice Executive Assistant Editor: Lucia Dore NEWS IBAN solution from CB.NET and ACE to dramatically improve STP Reference data provider CB.Net and SWIFT Gold accredited software solution provider, ACE Software Solutions (ACE) are now providing a joint IBAN solution for financial institutions. The solution is a direct response to meet the current demands of correspondent banks in the eurozone and initiatives including EBA, STEP2 and TARGET2. By combining ACE’™s robust software and CB.Net™s accurate international payments reference data, a product is now available to detect, normalise, validate and cross-check IBAN information against upto-date BICs, National Codes and all IBANs in the creation of MT103 message types. In addition, as a rule-driven message repair module, this IBAN solution allows for any type of customer-specific rule to be written using either, all the data extracted from the IBAN, or all the data retrieved (via IBAN processing) from the reference data files. For example, rules exist to allow the enrichment of a payment message in order to create a straight through message MT103+ instead of the more costly MT103. Al Danino, commercial director at ACE said: “We know that if incorrect IBANs and BICs are used, the ordering client can face higher charges or incorrect payments. The beneficiary on the other hand can face delays or worse still, non- payment. Our combined solution aims to mitigate against these risks”. With 960,000 sq ft of office space, the tower would also have substantially more floor area than other City blocks but a similar size to the Canary Wharf towers. The tower’s lowest three storeys would house an arcade running through the building that would be open to the public. There would also be publicly accessible sky lobbies on higher levels. The building’s chances of approval are good. Tel: 020 8747 9677 lucia@powerful-communication.com Julian Perrott julian@barkweb.co.uk Photography & Layout CONTENTS PAGE 2 PAGE 4 News The future of collaboration in financial services by Stuart Brown of Reuters The effect of the new market abuse directive by Michael Raffan of Freshfields Bruckhaus Deringe “Moral Hazard” and clearance:: The concerns for banks and companies by Philip Goodchild of Stephenson Harwood Profile Nordea Bank: The jewel in the Nordic and Baltic Sea by Lucia Dore Company moves: changing faces AFB New Members AFB Mansion House Lunch 11th April 2005 The Chairmans letter Mark Garvin The heart of the City Challenge 2005 a report by Wiveca Kivi The MD’s Corner John Treadwell PAGE 6 PAGE 8 PAGE 9 Artists impression of The Bishopsgate Tower PAGE 11 PAGE 11 PAGE 12 City’s costly money laundering rules driving out business Anti money laundering rules are becoming so expensive to implement that they could drive business away from the City, the Corporation of London has warned. The cost of complying with the regulations aimed at preventing the City being used to transfer illicit cash are higher than abroad, according to a report commissioned by the Corporation. The report, co-commissioned with the Institute of Chartered Accountants in England and Wales, also argued that the continued on page 3 News Round Up Tower set to dominate skyline Plans for the tallest building yet have been submitted to the Corporation of London for approval. At 1,008ft, the Bishopsgate Tower would dwarf the former NatWest skyscraper, the 600ft Tower 42 - currently the City’s tallest - and would be only eight feet smaller than the London Bridge Tower, or “Shard of Glass”, which has received planning permission from Southwark council. PAGE 14 PAGE 15 PAGE 16 www.foreignbanks.org.uk Page 2 Newsletter June 2005 continued from page 2 regulations are not effective in deterring money launderers. Customs & Exercise estimates that some £25bn is laundered each year. The research is based on interviews with 34 anti-money laundering experts and an online survey to which there were 386 responses. It concludes that Britain needs to make its current regime more effective - such as with prosecutions or seizure of assets - rather than introduce new rules. Philip Robinson, financial crime sector leader at the FSA, has acknowledged that the regulator does “not yet” have an effective framework in place to fight money launderers but that much progress has been made in the 14 months since the present regime was introduced. UK investment bucks Europe-wide slowdown Foreign investment flooded into the UK last year as continental Europe suffered a slowdown, according to the latest figures to highlight the divergent fates of the two economies. Investors pumped almost $80bn (£45bn) into the UK economy last year, four times the $20bn they invested in 2003. The rise propelled Britain to 2nd among the 30 industrialised countries that belong to the OECD up from 7th in 2003. This contrasted with a withdrawal of more than $38bn from Germany by foreign investors and a halving in the amount of money coming into France. Thatcherite Europe is beating UK on reform Britain’s tax and regulatory burden is rising so fast it may soon surpass European levels, as Germany, Holland, Scandinavia, Spain and other states adopt Thatcherite policies. While Chancellor Gordon Brown exhorted Europe to embrace reform and denounced EU red tape in his recent Mansion House speech, a growing number of critics warn that Britain itself risks being outflanked by the wave of tax-cutting and free-market policies across The Channel. According to OECD data, Britain’s public spending will rise to 45.2% of GDP in 2006, up from 40.2% in 1998 and now far above the average for developed countries worldwide. Meanwhile, Spain and Italy have both cut state spending by 9% of GDP, Sweden has come down 16%, while Sweden, Denmark, Belgium, Holland and Austria have all cut by over 6%. Germany has reduced the state sector to 46.1% of GDP. Hedge fund regulation faces review by City watchdog The FSA has reignited the debate over the regulation of hedge funds by publishing two discussion papers to examine whether tighter rules are needed to govern the sector, and whether the funds should be made more accessible to private investors. The papers come almost two years after the FSA last looked at the sector, when it once again resisted calls for greater regulation over short selling. Bank of England MPC members, Paul Tucker and Sir Andrew Large have said that hedge funds pose a threat to domestic and global financial stability. Fears of a repeat of the Long-Term Capital Management scandal, which rocked global equity markets eight years ago, have increased recently after a string of hedge funds suffered crippling losses over the downgrade of General Motors’ credit rating to “junk”. It pays to be a fund manager in Britain UK fund managers and analysts earn far more than their counterparts around the world, according to the latest survey from the CFA Institute. The survey found that bankers in the City earned up to 40% more than investment professionals in 10 other countries, including the US and Japan. The CFA Institute, a global professional trade association representing analysts and portfolio managers, found that the median total compensation for UK-based professionals was £115,000 - including £70,000 of base salary, anticipated cash bonus of £30,000 and non-cash compensation of £5,000. The highest paid were those that managed hedge funds. Pay among this group was about 60% higher than the average. Security broker dealers were also paid more than the average - about 32%. Despite their high pay, investment professionals in the City earned only slightly more than those located outside the Square Mile and Canary Wharf. A person with more than a decade of experience earned 47% more than the median. In the second-best-paid category were Switzerland, Japan and the US, while bankers in Australia, Germany and South Africa formed the third tier. Investment professionals in Singapore, Canada and Hong Kong earned far less. City jobs fear as UniCredito bags HVB Hundreds of City investment and privatebanking jobs face an uncertain future after UniCredito Italiano’s takeover of Germany’s HVB and its eastern European units in a deal worth €15.4bn (£10.5bn). It is Europe’s biggest cross-border banking takeover but as many as 10,000 jobs are under threat, mostly in Germany, according to experts there and in Italy. The purchase makes UniCredito Europe’s 8thlargest bank by assets and the biggest in central and eastern Europe, where lending is growing almost three times faster than in the eurozone. The takeover by Unicredito, Italy’s most profitable bank with a 2004 net profit of €2.13bn, is the price HVB is paying for the long real estate crisis in Germany and the previous merger that led to the bank’s creation in 1998. It was set up when Bayerische Vereinsbank tied up with HypoBank, which specialised in real estate loans, especially in east Germany. Defaults on these forced it into a €5.7bn writedown over the past three years. The new company will employ about 127,000 people, with cost savings of about €900m a year, according to reports. Rationalisation is on the way: HVB employs 58,000 staff in total, 30,000 of those outside of Germany but refused to give a figure for London. Unicredito expects the purchase to yield annual net savings of €745m by 2008 and is aiming for a return on equity of 18% in 2007, according to chief executive Alessandro Profumo. The combined company will have almost 11m clients in eastern and central Europe and more than 20% of the market in Poland, Croatia and Bulgaria. It will almost triple UniCredito’s assets to about €733bn www.foreignbanks.org.uk Page 3 Newsletter June 2005 THE FUTURE OF COLLABORATION IN FINANCIAL SERVICES Financial institutions must increasingly use collaborative technologies to improve performance and stay ahead of the competition. One of the main tools by which this can be done is by using instant messaging, as Stuart Brown, head of global collaboration services, sales and trading, at Reuters explains. Instant messaging (IM) and chat rooms are starting to change the way traders, brokers and buy-side firms collaborate. However collaboration is a very broad subject so it is important to provide an overview of the market – starting with instant messaging (IM). Instant messaging vendors fall into two broad categories: consumer IM vendors (CIM)- those that service consumers (or the public); and enterprise IM vendors (EIM)- those that serve the organisation or enterprise. Within the consumer IM space we find three dominant players – AOL (AOL Instant Messaging), Microsoft (MSN Messenger), and Yahoo! (Yahoo! Messenger). For enterprise IM we, as Reuters, who are focused on the financial services market, further divide the vendors in this camp. First, there are those vendors that have cross-industry solutions; in other words they offer features and capabilities that are generic enough to meet the needs of most, if not all, industries. Second, there are those vendors that are focused more specifically on the financial services industry. Communicator and Parlano, for example, are companies whose core focus is addressing the needs of the financial services industry regarding collaboration. While Parlano may be interested in moving into other verticals, to date its customer base has been rooted in the financial services industry – largely because it is a spin-off of UBS and this is where its roots lie. Reuters (while also a market data and transaction service provider – like Bloomberg and Thomson), offers a stand-alone and integrated instant messaging solution for the financial services industry. Bloomberg and Thomson have instant messaging solutions (Bloomberg’s strength however lies more in Bloomberg Mail rather than Instant Bloomberg, its IM solution). The features augment their core product instead of a suite of capabilities that standalone. According to a report by IDC published in Q3 04 the instant messaging market is anticipated to grow significantly, for both consumer and enterprise instant messaging. It is estimated that there will be a total of over 250 million IM users by end of year 2005. This is anticipated to grow, by almost, 100 million in 2008 to 350 million users. While both enterprise IM and consumer IM are anticipated to grow, and both serve different market needs, EIM is growing considerably and is anticipated to increase its market share of the overall IM market. In 2005, EIM represents 15% of all instant messaging seats while according to IDC this will grow to 24% by end of year 2008. The importance of EIM to the financial services market cannot be overemphasised. According to some analysts, the market opportunity for EIM vendors is dominated by financial services. This continued on page 5 Consumer IM Identities Aliases only with no reference to company domains making auditing difficult to impossible No encryption of messages from user-to-user, subject of interception by third party Out-of-the-box solutions do not provide means for storing and retrieving messages Enterprise IM Identities are typically authenticated upon lon-on Encryption of messages is a standard feature of EIM EIM solutions typically provide logging and compliance solutions (directly or via third parties) that adhere to SEC and NASD regulations Serve needs of professionals by providing tools such as persistent chat, market alerts and third party application integration for transactions Privacy Logging & Compliance Value added Focused on ad revenue, Services generated by large audiences and focus on services such as online dating, weather postings and icons www.foreignbanks.org.uk Page 4 Newsletter June 2005 continued from page 4 highlights the fact that your peers are also seeking out EIM solutions to speed up the way they conduct business. Differences between EIM and CIM Let’s now turn to some key differences between EIM and consumer IM. While we have seen some adoption by professionals of consumer IM, largely we recommend against this tactic. In fact many are switching now that viable alternatives are available. Value added services Professionals in the financial services sector require enterprise instant messaging to have the following features: - Logging and compliance - Unique identification of end users - A community of financial services professionals - A hosted solution (which is more affordable) and is relevant for a subset of the market especially buy side participants, which tend to be small firms. - Value added services for financial services such as, for example, persistent chat, forms, and connectivity. 2005 market trends Recent announcements include – - Mobility for enterprise instant messaging, specifically related to Reuters IM (Blackberry). RM anticipates having this capability by the second half of 2006. - Connectivity to public instant messaging network. RM will have this with release 5.0 - Differentiating features of consumer instant messaging networks, further emphasizing their specific focus. Community building is hard, but with the active participation of both the buy and sell sides we are seeing a massive shift. Currently, there is no comprehensive solution for a large community of buy and sell side professionals, but a comprehensive directory of such professionals will facilitate communication and will increase the value of the community. Other points to note include: - The proliferation of intraenterprise only solutions. RM and Communicator with Hub Connex are the exceptions. Thomson’s solution is the AIM network and it is debatable how “cross enterprise” that solution is. Microsoft is also offering LCS to the LCS federation, but it is a manual option and not an open searchable directory of end users. - Either the cost of EIM in general will decrease and/or more hosted offerings will appear, enabling smaller shops to buy EIM solutions. - Presence too is fundamental to IM. This is the ability see if a buddy is online, busy, or away from the desk. In the financial markets, presence can help considerably in mission critical activities, whether it is getting deals done or releasing credit limits. Today, there is basic integration of IM with standalone applications within the financial services industry but in the future there will be deep integration, allowing buy-side access to sell-side counterparts with their presence direct from trade tickets and trade applications. And while, right now, presence and identity is largely proprietary and closed, presence and identity in applications will be independent of the EIM vendor and application developer. And lastly, we see massive improvements in policy management facilitated by compliance solutions. As government stats inflicting penalties, all firms will begin to implement solutions that comply with SEC regulations, the freedom of Information Act and Sarbanes-Oxley. Corporations will realise improved workflow and productivity thanks to IM. And affordability and ease of implementation will facilitate the adoption of both EIM and compliance solutions. Finally, sophisticated policy management as a result of compliance solutions will help corporations manage communication, from within and outside the enterprise. “Today, there is basic integration of IM with standalone applications within the financial services industry but in the future there will be deep integration, allowing buy-side access to sell-side counterparts with their presence direct from trade tickets and trade applications.” The role of Reuters Reuters has an important role to play in the collaboration space. Many people still perceive Reuters as a news organisation but as well as providing news, data and transactional services to 350,000 users Reuters sees a huge potential in the financial services industry for the provision of collaboration tools. We launched our own EIM in October 2002, working with Microsoft. We now have 60,000 active users, a number growing on a weekly basis. The current version of Reuters Messaging offers financial services significant advantages over public IM solutions, addressing many of the market requirements around security. Our next release also echoes where we see the future – the delivery of cost effective, hosted chat rooms and interconnectivity to AOL and MSN. Persistent chat rooms for secure intra and inter-company communication of market data will be the norm. Stuart Brown was the keynote speaker at an event held in the City on 16 June on Collaboration in Financial Services. For more information see www.KnowledgeEvents.com www.foreignbanks.org.uk Page 5 Newsletter June 2005 THE EFFECT OF THE NEW MARKET ABUSE DIRECTIVE On 1 July 2005, the UK legislation implementing the EU Directive on insider dealing and market manipulation (market abuse) (2003/6/EC) (the directive) will come into force. Michael Raffan describes its legal complexities. Implementation has required significant changes to the Financial Services and Markets Act 2000 (the FSMA), among other things, to alter the definition of market abuse to include the new prohibitions (the related Financial Services and Markets Act 2000 (Prescribed Markets and Qualifying Investments) Order 2001 has also been heavily amended). The FSA handbook has also been subject to significant amendment: the Code of Market Conduct has been replaced in its entirety and the supervision manual has been amended to include provisions on reporting of suspicious transactions. Overview of the Directive The main provisions of the directive contemplate: • Updated prohibitions on the misuse of inside information. • New prohibitions on market manipulation (some member states have or have had no legislation in this area). • A uniform defence in respect of stabilisation and share buy-backs. • A new obligation on intermediaries to report suspicious transactions. • Strengthened announcement obligations on issuers whose investments are publicly traded and ancillary requirements to keep insider lists (a new obligation) and for senior management and their connected persons to disclose their transactions in shares or derivatives (new in some member states, though not in the UK). • Regulation of the presentation of, and disclosures in, research recommendations (new obligations). • A single regulator for market abuse in each member state and increased co-operation among regulators. The Treasury (as the implementing ministry) have taken the position that the directive is a minimum harmonisation directive and, as explained further below, have chosen to retain additional regulation in relation to the misuse of information and market manipulation. The existing market abuse regime in Part VIII FSMA will remain in effect until at least until 30 June 2008. Form of implementation Market abuse prohibitions The implementation method chosen has resulted in a very complex piece of legislation. The detailed and specific prohibitions contained in the directive have effectively been grafted on top of the existing regime and the investment and market scope of the graft is not the same as that of its parent. This complexity is increased when one also takes into account: • the relevant criminal legislation (Part V Criminal Justice Act 1993 for misuse of information and section 397 FSMA for market manipulation); • the obligations of an authorised person under the FSA’s Principle for Businesses 5 and of its relevant approved persons under FSA Statement of Principle 3 to observe proper standards of market conduct (which, broadly speaking, extend the market abuse regime beyond its investment and market boundaries); and • any relevant exchange rules. Market abuse is punishable by the FSA by an unlimited fine or public censure. The FSA also has power to seek injunctions and compensation or restitution orders. However, transactions are not unenforceable. Scope of the market abuse prohibitions The market abuse regime applies, among other things, to bonds and related derivatives and to exchange-traded interest rate and currency derivatives. The regime applies to behaviour in relation to qualifying investments admitted to trade on a UK exchange (the recognised investment exchanges and Ofex), whether that behaviour takes place in or outside the UK. In addition, where behaviour occurs in relation to an investment admitted to trading on an EU regulated market, the competent authority in the state where that regulated market is located will have jurisdiction under the directive. For behaviour to fall within the regime it must occur in relation to a qualifying investment (shares, bonds, depositary receipts, derivatives) which is admitted to trading on a UK exchange or, in the case of the new provisions, on an EU regulated market or in respect of which a request for admission to such trading has been made. The misuse of information prohibitions (new and existing), also prohibit behaviour which occurs in relation to a “related investment” (an investment whose price or value depends on the price or value of the qualifying investment) - new prohibitions only – or a relevant product (anything which is the subject matter of that qualifying investment; an investment whose price or value is expressed by reference to the price or value of that qualifying investment; or an investment whose subject matter is that qualifying investment) – existing prohibitions only. This would include, for example, an OTC continued on page 7 www.foreignbanks.org.uk Page 6 Newsletter June 2005 continued from page 6 derivative on a bond admitted to trading on the London or Luxembourg stock exchanges. As regards market manipulation, the proscribed effect must occur in relation to a qualifying investment admitted to trading on a prescribed market; it does not appear to matter how that effect is caused (perhaps by dealing in an underlying product). This is subject to the fact that, for the purposes of the existing market manipulation prohibition, the effect must be caused by behaviour related to that qualifying investment or a relevant product. Misuse of information prohibitions There are now four separate prohibitions: (a) dealing or attempting to deal in a qualifying investment admitted to trading on a prescribed market or a related investment on the basis of inside information, subject to certain defences; (b) disclosing inside information relating to a qualifying investment admitted to trading on a prescribed market or a related investment otherwise than in the proper course of the exercise of one’s employment, profession or duties; (c) behaviour (not falling within (a) or (b)) relating to a qualifying investment admitted to trading on a domestic market or a relevant product which is based on relevant information and which is likely to be regarded by a regular user as a failure on the part of the person concerned to observe the standard of behaviour reasonably expected of that person (taking into account their position in relation to the market); and (d) requiring or encouraging any of the above. The changes made by the imposition of the specific prohibitions in (a) and (b) are probably not in practice that great as, generally, most would consider (c) to cover the behaviour they now cover. It is expected that the FSA will seek to use (c) where there is doubt about whether information meets the tests of precision or significant effect required by the definition of inside information, where there is doubt whether the dealing is in an investment which is covered by the new prohibitions (both the Code of Market Conduct and the Treasury’s Regulatory Impact Assessment give as an example of this a fixed odds bet) and where the behaviour in question is not dealing or disclosure. Misuse of information defences There have been big changes in the defences, however. The most important are to defences for use of trading information. Under the existing regime, customer abuses (such as front-running) are not treated as market abuse; there is a wide defence for behaviour that is based on secondary market trading information. The directive requires a change in this philosophy. Frontrunning is now to be treated as market abuse and, as a result, this broad trading information defence has been replaced by two defences which are closer in scope to the “market information” defences found in the criminal insider dealing legislation. These defences are: • for market makers and others trading as principal, pursuing their legitimate business of dealing; and • the dutiful carrying out, and arranging for the dutiful carrying out of orders on behalf of another. It is also permissible to give effect to one’s own trading intentions (i.e. it is permissible to sell a stake which is large enough that information about the proposals is inside information without having to pre-announce one’s intention to do so). Market manipulation prohibitions There are now six of these: (a) creation of a false or misleading impression in relation to qualifying investments admitted to trading on an EU regulated or domestic market through transactions or orders to trade, subject to a legitimate reasons and accepted market practices defence (“false or misleading trading”); (b)positioning of the price of such investments at an abnormal or artificial level through transactions or orders to trade, subject to a legitimate reasons and accepted market practices defence (“price positioning”); (c) effecting transactions or orders to trade using fictitious devices or other forms of deception (“deceptive trading”); (d)dissemination of information giving a false or misleading impression as to investments admitted to trading on an EU regulated or domestic market where the disseminator knew or could reasonably be expected to have known that the information was false or misleading (“dissemination”); (e) behaviour that gives a false or misleading impression or distorts the market in qualifying investments admitted to trading on a domestic market (or the subject of a request for such admission), subject to the regular user test; (f) requiring or encouraging another to do any of the above. Suspicious transactions A person authorised under the FSMA which arranges or executes a transaction with or for a client in a qualifying investment admitted to trading on a prescribed market and has reasonable grounds to suspect that the transaction might constitute market abuse is obliged to notify the FSA without delay. To fit in with the territorial requirements of the directive, this obligation only applies to activities carried on from a UK establishment. However, transaction structures may involve more than one branch of an authorised person or investment businesses in more than one jurisdiction, in which case a report to more than one regulator is likely to be required. The requirements and expectations of regulators on what has to be reported, timing and content and related systems and controls may well not be identical. Michael Raffan is a partner in Freshfields Bruckhaus Deringer and a member of AFB’s Legal and Regulatory Committee. www.foreignbanks.org.uk Page 7 Newsletter June 2005 “MORAL HAZARD” AND CLEARANCE: THE CONCERNS FOR BANKS AND COMPANIES 6 April 2005 marked the launch of a new Pensions Regulator and the Pension Protection Fund under the provisions of the Pensions Act 2004. In this article Philip Goodchild discusses the “moral hazard” provisions, under which the new regulator may require a company or an individual to pay a sum to an underfunded defined benefit (“final salary”) pension scheme in certain circumstances, and explain the new clearance procedure, which is an important consideration for anyone contemplating a corporate transaction or restructuring involving a company with a defined benefit pension scheme. Financial Support Directions Contribution Notices and A financial support direction may be issued where the employer in relation to the scheme is either a service company or insufficiently resourced, and the regulator is of the opinion that it is reasonable to impose the requirements of the financial support direction on that person. It may be issued to the employer in relation to the scheme or any person connected with or an associate of the employer. Where the employer is an individual, a financial support direction may be issued to any other individual who is an associate of the employer (but not only by reason of being employed by him). The main distinguishing feature between the two is that a contribution notice involves the parties being at fault i.e. there needs to be an act or a failure to act. Whereas a financial support direction can be issued without any party being at fault as it can be issued simply because of the circumstances of the employer. One concern for companies and any banks that have loaned money to those companies is that companies may become liable as a result of a contribution notice or financial support directions to make up deficiencies in an underfunded scheme even if the companies have never actually participated as employers in that scheme. In practice, this issue should be considered prior to any corporate transaction or restructuring involving a company that operates a final salary pension scheme, since the transaction may result in the issuing of contribution notices or financial support directions to the purchaser and seller, which would force them to pay into an underfunded scheme. The new Pension Protection Fund (“PPF”), established under the Pensions Act 2004, will operate to compensate employees who have lost (or may lose) their pension entitlement as a result of a sponsoring employer of their defined benefit pension scheme becoming insolvent. To protect against claims on the PPF, the Pensions Act 2004 has introduced new anti avoidance provisions (known as “moral hazard” provisions) which give the new pensions regulator power to serve “Contribution Notices” and to make “Financial Support Directions” on the sponsoring employers of underfunded defined benefit schemes and on certain other companies and individuals in certain circumstances, requiring them to pay a specified sum to either the trustees or managers of a pension scheme or to the Board of the Pension Protection Fund. In brief and very general terms, a contribution notice may be issued where a person has acted or deliberately failed to act with the purpose of preventing the recovery of all or part of a statutory debt on the employer which either was due or might become due to a scheme under Section 75 of the Pensions Act 1995 or, otherwise than in good faith preventing such a debt becoming due, compromising or otherwise settling such a debt or reducing the amount of such a debt that would otherwise become due. A contribution notice may be served on the employer in relation to the scheme or any person connected with or an associate of the employer. Clearance An optional clearance procedure has, however, been introduced to give greater certainty to those considering transactions involving companies with defined benefit schemes. The intention is that those concerned could gain assurance via a clearance statement issued by the pensions regulator that the action they intended would not result in the service of contribution notices or the issuing of financial support directions. continued on page 10 www.foreignbanks.org.uk Page 8 Newsletter June 2005 NORDEA BANK: THE JEWEL IN THE NORDIC AND BALTIC SEA Nordea bank was formed by a multitude of mergers which has proved to be a hugely successful move, creating the leading bank in the region. Lucia Dore speaks with UK general manager, Henrik Bjorn, to find out how the UK branch has been transformed. Nordea, the leading financial services group in the Nordic and Baltic Sea region, has an impressive pedigree and is one of the most “merged” banks around. When I meet with Nordea’s UK general manager, Henrik Bjorn, in the bank’s office in the City of London it is hardly surprising then that the conversation immediately moves onto mergers. “Cross-border mergers are very big for Nordea. We specialise in this area,” he says. And there is certainly no doubt that Bjorn has a great deal of experience handling mergers, having to oversee the integration of four banks to create the entity Nordea is today. Merita Bank, Nordbanken, Unibank, and Christiania Bank og Kreditkasse, from Finland, Sweden, Denmark and Norway respectively, have, in stages, all been merged into a single entity. Since December 2001 all operations have been conducted under the brand name of Nordea — the word itself stemming from “Nordic” and “idea”. The bank’s head office is based in Sweden and its shares are traded on the stock exchanges of Stockholm, Helsinki and Copenhagen. Bjorn adds too that sometime this year the bank hopes to be registered as a Societe European (SE). The rationale for these mergers was, says Bjorn, to achieve critical mass across four countries. And according to the bank’s literature it was about creating new possibilities. “The possibilities of providing better financial solutions - better for the customer, better than the competitors, better than before - and to do this at lower cost and with higher quality.” The result of these mergers is that Nordea is now the largest financial services group in the region. It operates through three business areas: retail banking, corporate and institutional banking and asset management and life. The Nordea Group has almost 11 million customers and 1,198 bank branches and has a presence in 21 countries. Although the mergers have consolidated the bank’s position in the Nordic countries, some countries have a stronger representation than others. The bank has, for example, a very strong representation in Denmark and Finland while more can be done in Sweden and Norway. Recently, Nordea also signed an agreement to purchase Sampo’s Polish life and pension companies, the fifth largest pension fund in Poland. The transaction is expected to be completed in the fourth quarter this year following approval by the relevant authorities. The purchase price is EUR 95m, and includes the two companies Sampo PTE and Sampo Life S.A in Poland. Nordea is also considering buying part of Skandia Insurance. Nordea is also a world leader in internet banking, with 4 million e-customers and has won numerous awards for its internet technology. Recently, the invoicing system received an award by The Banker magazine, a leading banking industry publication owned by the Financial Times Group. The award came in the category Technology: Retail Payments Solution of the Year 2005. Emphasis was placed on how Nordea’s e-invoice solution saves costs for corporate customers, overall savings in invoicing often adding up to more than 50 per cent. Nordea started marketing the e-invoice mainly to large corporate customers in 1999. The current version was launched in September 2004 and it is also marketed to SMEs. To date, Nordea has made nearly 18,000 e-invoice agreements, the majority of them in Finland. The merger experience Bjorn, who is Danish, has, not surprisingly, a very multi-cultural outlook gained from Henrik Bjorn his own hands-on experience dealing with numerous mergers and working in various countries. In the 1970s he lived in Canada for six years, working in the pharmaceutical and banking industry, as well as in Belgium and the US. In 1978 he joined Privatbanken in Denmark from Bank of America, which then bought United International Bank in London, a consortium bank (there were 10 shareholders, one of which was Privatbanken) as an account manager. He then spent time in Singapore and New York where he oversaw the merger between SDS and Privatbanken in 1990 and returned to London in 1992 as general manager of what was now called Unibank. When he returned he arrived to a state of continued on page 10 www.foreignbanks.org.uk Page 9 Newsletter June 2005 continued from page 9 affairs that he describes as an “absolute mess”, a result of the UK property slump. The consolidated Nordea started to turn itself around in 2000, becoming more tightly focused and concentrated on its core business - Nordic clients who tend to operate in pulp and paper, agriculture, energy and the shipping sectors. Since that time the bank has become profitable. And the London office has been streamlined from 200 staff in 2000 to 60 people in 2005. “It took about three years to get into shape says Bjorn but “it is now has been very profitable achieving very acceptable ratios and economic profit.” Integrating so many mergers and paring the operation down can’t have been easy but Bjorn seems to have enjoyed it well enough. He says he is accustomed to dealing with different cultures and different ways of doing business. Perhaps most importantly he recognises the character differences between Scandinavians - that Swedes, for example, make decisions in a very consensus seeking way. . As for his own management philosophy Bjorn says he believes in giving freedom along with responsibility, will allow people to get along with work, is not a “detail” person, and says he is good at assessing people. To my surprise, he also says he is not necessarily a consensus seeking person. His biggest triumph has been the successful completion of the latest merger, which, he says, was tough. But the results have been very good with the contribution from the UK branch continuing to increase. And his biggest disappointment? “I’m a relatively optimistic guy,” he says. Explaining the lessons to be learnt from a merger he says the plan must be transparent and made clear to everybody. “What is most important,” he says,” is to build up team support. It is also very important to be upfront with people and let them participate with what is going to happen. Staff can’t just plod on. They need to be involved in the outcome.” Bjorn says he has always tried to be very open with everybody and explained to them what is happening in terms of “why me?” “It is important to instill people with self-confidence as this makes it possible to conquer things,” he says. And Bjorn has clearly conquered a great deal. Key facts: - The leading financial services group in the region with approximately EUR 284.2 billion in total assets. - A world-leading internet banking and e-commerce operation with 4.1 million customers. - Significant positions in Nordic banking markets: 40 per cent in Finland, 25 per cent in Denmark, 20 per cent in Sweden and 15 per cent in Norway. - Significant positions in Nordic insurance markets. Life insurance: Finland 35%, Denmark 10%, Norway 9% and Sweden 2%. - The largest customer base of any financial services group in the region, including 9.6 million personal customers and 930,000 corporate customers. - A leading asset manager in the Nordic financial market with EUR 136 billion (including private banking) under management. - The most comprehensive distribution network in the region including 1,150 bank branch offices and leading telephone banking and Internet services. continued from page 8 According to guidance issued by the pensions regulator, clearance should be sought in respect of any event affecting an entity that is financially detrimental to the ability of a defined benefit pension scheme to meet its liabilities. To assess whether a particular event has a financially detrimental effect on the pension scheme (referred to as the “pension creditor”), it is necessary to consider where the pension creditor sits in the allocation of proceeds in the event of the insolvency of the employer, and then consider the impact of that event on the potential allocation. In particular, it may be appropriate to seek clearance in the following specified circumstances: • Change in priority i.e. a change in the level of security given to creditors, with the consequence that the pension creditor might receive a reduced dividend in the event of insolvency. Examples include the granting or extending of a fixed or floating charge. • Return of capital i.e. a reduction in the overall assets of the company which could be used to fund a pension deficit. Examples include dividends, share buy backs, dividend strips, distribution in species, demergers. • Change in control structure i.e. a change or partial change in the group structure of an employer, which reduces the overall employer covenant and could affect the ability of an employer to meet a potential section 75 debt and lead to the Regulator imposing a financial support direction. Examples include a change of employer or participating employer, or a change of the parties connected with or associated with the employer. This note provides only a brief summary of the new provisions but if you would like to discuss the implications of these provisions in greater detail, please contact: Philip Goodchild at philip.goodchild@shlegal.com or 020 7809 2166. Philip Goodchild is a partner in the Stephenson Harwood Pension Team www.foreignbanks.org.uk Page 10 Newsletter June 2005 COMPANY MOVES: CHANGING FACES Mellon appoints co-chairs Mellon Financial Corporation has appointed Jon Little, chief executive of Mellon Global Investments (MGI), and Helena Morrissey, chief executive of Newton Investment Management, as co-chairs of Mellon Europe. This is in addition to their existing roles and was effective 3 May. Jack Klinck, who has served as Mellon Europe chairman since Autumn 2001, will be repatriating to the US by the end of July after completing his nearly four-year assignment in London. Klinck, also a vice chairman of Mellon Financial Corporation, will continue in his role as president of Investment Manager Solutions (IMS) business of Mellon’s Asset Servicing sector. As part of his responsibility for IMS, Klinck manages the Mellon European Fund Services and the Dublin asset servicing businesses, and will continue to spend significant time in Europe as he develops the IMS businesses globally. He will also remain on the board of ABN AMRO Mellon Global Securities Services B.V. Morrissey will join Little on Mellon’s global Senior Management Committee, effective immediately. Both will report to Martin McGuinn, Mellon’s chairman and chief executive, in their Mellon Europe roles and will continue to report directly to Mellon vice chairman Ron O’Hanley as leaders of their asset management businesses internationally. SG CIB apoints head of leveraged finance in UK SG Corporate & Investment Banking (SG CIB) has promoted Nigel Ball to the position of managing director and head of UK leveraged finance. In this role, he will be responsible for managing SG CIB’s leveraged finance team in London, which includes 14 professionals. Ball (38) will report to René de Laigue, global head of leveraged & acquisition finance. Both are based in London. This position has been newly created and reflects the continued development of SG CIB’s leveraged finance business with London based private equity houses. Ball joined SG CIB in January 2003 as director in the UK leveraged finance team. As one of three directors in London, he was responsible for the origination, structuring and execution of sponsordriven leveraged finance transactions and the co-management of the London team. Prior to joining SG CIB, Ball was a director and senior originator at Dresdner Kleinwort Wasserstein where he held responsibility for originating and executing European LBOs, Before this he was with HSBC Investment Bank and Midland Bank, working mostly in leveraged and acquisition finance. Nigel’s previous position as director will be taken up by Nick Corrigan who has been promoted from vice president in the SG CIB leveraged finance team. Jon Little Helena Morrissey AFB NEW MEMBERS We are delighted to welcome the following nine banks who have become members of the AFB during the first half of 2005. This is a very encouraging start to the year and a supportive endorsement of the work that the AFB does on behalf of the international banking community. Banif - Banco Internacional do Funchal, SA Indusind Bank Ltd Lateko Banka Macquarie Bank Ltd & Macquarie Europe Ltd Oesterreichische Nationalbank Punjab National Bank Syndicate Bank The Chiba Bank Ltd Zions Bank International Ltd www.foreignbanks.org.uk Page 11 Newsletter June 2005 AFB ANNUAL MANSION HOUSE LUNCH The AFB Mansion House lunch was held on 11 April, an annual event hosted by the Lord Mayor at his official residence. This year it was Alderman Michael Savory who was the principal host, opening up his 18th century residence, situated in the heart of the City of London, so that AFB members could enjoy the palatial Palladian surroundings. The lunch itself, with the usual spread of delicious food and menu of speeches, with guest speaker Chris Tupker, took place in the Egyptian Hall, though the deco is in fact in classical GrecoRoman style. A collage of photos from the lunch, and the preceding reception, are shown below. www.foreignbanks.org.uk Page 12 Newsletter June 2005 (picture above, from left to right) Alderman & Sheriff John Hughesdon, Rollo Greenfield, COO, BACB, The Rt. Hon The Lord Mayor Alderman Michael Savory, Mark Garvin, Chairman AFB, Chris Tupker ,Chairman of the Board of Directors, Euroclear SA/NV. www.foreignbanks.org.uk Page 13 Newsletter June 2005 THE CHAIRMAN’S LETTER Mark Garvin This is my first letter as chairman of this august organisation, the only forum in the UK designed exclusively to represent foreign-owned financial institutions. Representing EU and non-EU-owned banks, it provides an excellent opportunity for networking, not only with other likeminded organisations but also with regulatory bodies and decision-making authorities. Along with our “awareness raising” initiatives, we also have a broad remit to inform and educate members. Our challenge is a very specific one: to ensure that our voice is heard by leading industry associations, regulatory bodies and government policy-makers and to influence their thinking, especially on matters of tax and regulation. Central to the process of formulating policy and influencing industry policy-makers are our committees which meet regularly and carry out a great deal of worthwhile work, of which we are all immensely appreciative. My role as chairman is to provide further direction and guidance to the board and to help shape the association’s agenda, in concert with each of the committee chairmen. Our key challenge is to balance priorities across different geographic areas; in other words, to strike a balance of priorities which are of interest to our entire constituency. We must tackle concerns that appeal to our breadth of membership and represent the breadth of interests that lie within our organisation. Coming as I do from the former American Financial Services Association (before it merged to become what we now know as the AFB), which was a highly cohesive group of 20 American banks, all espousing the same agenda, I find this broad range of constituency interests daunting. Consequently, finding common ground among these disparate interests proves challenging. Nonetheless, there are some issues on which there seems be unanimous agreement, the primary one being the cost Mark Garvin of doing business in London - regulation, the cost of living and the quality of infrastructure. The impact of EU changes also continues to be a very relevant concern and on European matters generally there is a surprising degree of commonality among bankers. My intention going forward in my year as chairman is to choose the agenda carefully, to focus on a few things well and to report on the deliverables. We must also remember, however, that membership of this association is not all about work. The social aspect too, developing fellowship and a better understanding of cultural issues, must also be encouraged and nurtured. The over-riding concern for members is to see that the financial services industry in the UK is, and remains in, a healthy state. London is a market where people are very alert to what happens elsewhere in the world. It has a huge and unrivalled knowledge base and this must be protected and built upon. There is incredible knowhow within the Square Mile and the AFB has an important role to play in nurturing this talent. Mark Garvin is chairman of the AFB and chief administrative officer of Treasury and Security Services, EMEA, JP Morgan Chase “Our challenge is a very specific one: to ensure that our voice is heard by leading industry associations, regulatory bodies and government policy-makers and to influence their thinking, especially on matters of tax and regulation. Central to the process of formulating policy and influencing industry policymakers are our committees which meet regularly and carry out a great deal of worthwhile work, of which we are all immensely appreciative.“ www.foreignbanks.org.uk Page 14 Newsletter June 2005 THE HEART OF THE CITY CHALLENGE The Annual AFB SEB charity shooting day at the Bisley Shooting Ground (or The Country Diary of some City Ladies) By Wiveca Kivi It is a grey Friday morning in early May, just after sunrise, when we set off towards Surrey. Despite the very early hour and the threatening rain clouds, the mood is bright, even enthusiastic. We have all prepared for weeks, press-ups and arm lifts and even the occasional shooting lesson. Today is the big day – the Heart of the City Challenge at Bisley! It is a particularly special occasion for us women: Carol Henderson of the AFB and Anna Gjörstrup, Helen Norberg, Sonia Keogh and Wiveca Kivi, all from SEB, as we have created an elite Ladies team to give the men something to aim for. The Heart of the City Challenge is an annual charity shooting day sponsored by SEB and supported by the AFB. It brings together different businesses and their clients from all sides of the City while giving direct support to a children’s charity. This year it is the Michael Palin Centre for Stammering Children. AFB members turned out in force and as well as our SEB hosts we found whole teams of member CEOs headed by our own chairman, Mark Garvin. By the time we arrive at the Bisley shooting ground the clouds have nearly disappeared and the first rays of sunshine are coming through. As the first of the 250 guests arrives the air fills with the aroma of freshly brewed coffee and bacon sandwiches – apparently the quintessential prelude to any shooting day. All the team members register, and put on their jackets and rather fetching candy pink hats. Carol and Helen who are running the registration agree that everyone has commented on the hats. A brief welcome and security briefing from SEB general manager and AFB vice chairman, Roger Gifford, and event organiser at SEB, Marcus Scarlett, before the day begins. Although some of the guests have shooting experience, many returning here for the sixth or seventh year, the event actively encourages everyone to participate, from the complete novice to the pro. To ensure everyone gets the most from the day, the field is divided into four schools reflecting the abilities of each team, based upon past shooting history at the event and a mini self-assessment. Each team is then assigned an instructor to bring out the best in them all. Needless to say our instructor is a man with a great deal of patience and a sense of humour. The teams return to the clubhouse for lunchtime refreshments. Over sandwiches, crisps and chocolate bars, half the crowd discuss their morning’s attempts at the “crossers” and “rabbits” while the other half just sits back and enjoys the sunshine and the music provided by the jazz ensemble from “Music for Youth”. Rather too soon for our team, it is time for the serious business, the afternoon’s competition. Teams shoot five different targets or “stands” individually and then join together to hit as many as possible in the “flush” – where 50 clays seem to be in the air at the same time all moving in different directions. The final element of the competition is to try to knock down the “Gnat”, a three foot long model aeroplane with explosive charges on its wings – it’s not as easy as it sounds. “It is a particularly special occasion for us women: Carol Henderson of the AFB and Anna Gjörstrup, Helen Norberg, Sonia Keogh and Wiveca Kivi, all from SEB, as we have created an elite Ladies team to give the men something to aim for.” The “Gnat” Leaving the clubhouse for the shooting grounds, there is an exited level of team talking as members psyche themselves up for the fray, but within moments it’s replaced by the thud of the guns and the air fills with the glorious smell of gunpowder. Suddenly we are on our own, no friendly instructor to guide us, and the reality of competition hits us, literally on the shoulder. Now the clays seem much smaller and they move faster, the guns seem heavier and our arms are weaker. Despite all that, however, it’s great fun. Gathering for the “Flush” we sense the continued on page 16 www.foreignbanks.org.uk Page 15 Newsletter June 2005 THE MD’S CORNER John Treadwell Goodness! I have been here six months already; it hardly seems half a year has passed since I moved into 1 Bengal Court. It has been a very exciting time as I have started to find out about the Association. I say started because I am sure there is more to discover. We have had a very hectic first half with seven seminars, as well as the joint conference with the Association of Corporate Treasurers. Carol and Gina have carried on in their own inimitable style and ensured that all runs as smoothly as it always does. They have discovered that I don’t (can’t?) make coffee and consequently I am well looked after! Unfortunately we have had to cancel a couple of social functions which is always a pity since there should be room for relaxation as well as work. We have been enormously grateful to Joseph Chow and the Bank of East Asia’s corporate debenture at Wentworth, which has allowed us to hold a hugely discounted golf day there. We are looking at alternative venues and hope to reintroduce the golf day again next year; if anyone has any ideas, please let me know. We had also arranged a River Thames boat cruise and dinner that we had to cancel owing to lack of support. Again, if you have any ideas for social functions, please let us know; watching the MD bungee jump off the top tier of Tower Bridge is, I’m afraid, not a starter! The summer holidays are soon upon us and I hope that everyone planning to go away has a good break. If you are passing by Bengal Court, do drop in, as we would always be pleased to see you. For those of you who are unsure where Bengal Court is, we are next to the George and Vulture. In fact, if I drilled through my office wall, I would get through into the G and V; now there’s a thought. John Treadwell Have a great summer! continued from page 15 tension in the air. Waiting teams assess the performance of those shooting and a happy banter continues between watchers and performers. This makes a nervewracking set up for us, but we actually managed to do quite well – 28 out of 50! Having given their best, the teams return to base for some well-deserved drinks. Scores are handed in and entered onto the computer so that everyone can see the leader board develop on the screen. Spit roast pork cooking just outside adds to the building atmosphere and as the last results are in we can announce this year’s winners: a team from Interior Integration with 182 out of a possible 230; Steve Smith (from the winning team) won the individual Top Gun after a shoot out with Jonathon Baltesz, who both shot 27 out of 30. Finally, we admit we came last, with an impressive 73. With supper comes the prize giving and then the money raising. The auction of donated prizes is superbly run by Henry Wyndham, chairman of Sotheby’s, and raises nearly £18,000 in a few minutes. The Marcus Scarlett (left) and Roger Gifford raffle draw and some less formal auctioning by Marcus and Michael Dicks 9 June 2006. Put it in your diaries now. adds to the tally so that by the end the You can get further details, or register now, day has raised £70,000 for our charities. by contacting: We shall of course be back next year. Marcus (marcus.scarlett@seb.co.uk) or We, and all at SEB, hope that many more Wiveca (wiveca.kivi@seb.co.uk). of you will join in next year’s challenge on www.foreignbanks.org.uk Page 16