21 Jul 2014

The Sharp End - Summer 2014

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Cutting edge insights into corporate law

In this issue

  • Viewpoint - As crowd-lending increasingly comes to the attention of the public and regulators, we ask William Saunders and Kate Longman, investment funds specialists in our Corporate practice, for their views on developments in the peer-to-peer lending industry. We discuss how they see the industry evolving and possible future regulatory and political interventions.
  • All change! - There is a lot of passion about the railways in Great Britain and barely a week goes by without the rail industry being front page news. Recently we've seen the introduction of the new railway franchising timetable, following the high-profile cancellation of the West Coast competition a couple of years ago. Tammy Samuel and Darren Fodey of our Rail team discuss the changing face of railway franchising and suggest areas that bidders should consider when preparing their proposals. They also highlight the opportunities not just for train operators but also for the wider supply chain.
  • Where there's a Will there's a way - Have you spent the winter months dreaming of your own place in the sun or are you already one of the growing number of second home owners with a property abroad? Ever thought about what will happen to your home abroad in the event of your death? Viv Wild, a member of our Private Wealth team, offers some essential advice as to how a local Will can help you avoid getting burnt when buying a property abroad.
  • Tactical defences - With Cabinet Office statistics stating 81% of large corporations and 60% of small businesses reported a cyber-breach in 2013, with the worst costing between £600,000 to £1.15 million for large businesses, organisations have pressing commercial reasons to prepare robust cyber-security defences. In this article, Jonny Kirsop, who heads our Data Protection and Information practice, reports on recent developments in compliance certification and offers tips on how organisations can improve their line of defence and mitigate the risks of a cyber-breach.

Viewpoint

We have heard a lot about peer-to-peer lending this year but what exactly is it? 

Also known as crowd-lending, peer-to-peer (P2P) lending websites bring together lenders and borrowers through efficient online platforms. The platforms, which have started to capture market share from the traditional banks, provide both consumer and corporate borrowers with an alternative source of finance and lenders with the opportunity to receive attractive rates of return on their investments. The major UK platforms are seeing loan origination volume growth in excess of 100% per annum. 

What developments have you seen in the industry this year?

P2P platforms became regulated by the Financial Conduct Authority (FCA) on 1 April this year. P2P lending platforms must now hold FCA interim permission in connection with their regulated activities and in due course, will need to seek full authorisation from the FCA.

This year also saw a milestone in the industry's development, with the launch of the UK's first listed investment fund dedicated to investing in peer-to-peer loans and related alternative finance investments, P2P Global Investments PLC (P2PGI). Stephenson Harwood acted on the launch of P2PGI, which raised £200 million in May this year and is structured as an investment trust. 

How do you see the industry evolving in the near future?

The US P2P market is considered to be more mature than the UK market. Institutional lenders from hedge funds to commercial banks have deployed their capital through the P2P lending space. The extent to which the UK P2P space will follow suit in attracting institutional capital is yet to be seen, although this year already saw the launch of P2PGI and in June, Funding Circle (a UK SME borrower platform) announced a new partnership with Santander UK. A referral arrangement will see Santander refer small business customers looking for a loan to Funding Circle. This is the first partnership between a UK bank and an online finance provider.

To date, the platforms have focused on prime credit borrowers. As the market develops, platforms and investors may emerge looking for potentially higher returns offered by loans to borrowers across a broader credit spectrum. 

Now that P2P lending is on the regulatory radar, how will this affect the industry?

Once the P2P platforms move from the FCA's transitional interim permission regime to full FCA authorisation, they will be subject to increased requirements relating to regulatory capital and systems and controls and will fall under the FCA's approved persons regime. Investors in consumer loans via the platforms who are considered to be investing by way of business will, in the absence of guidance to the contrary, continue to be pushed towards obtaining FCA authorisation before entering into regulated consumer credit agreements via the platforms.

Are there any political interventions or changes on the horizon?

The UK government is currently consulting on whether it should be mandatory for banks to refer small businesses to other non-bank providers. Although detracting from the original concept of peer-to-peer lending, any partnership between the traditional big banking institutions and smaller alternative finance providers such as the P2P platforms should assist in creating sufficient loan inventory for investors such as P2PGI and may result in the arrival of other fund vehicles seeking a return from this asset class.

Another potential boost for the sector is the anticipated launch by the Treasury this month of a consultation on how investors might gain access to the peer-to-peer lending market, through individual savings accounts and whether a new type of ISA should be created for the purpose. The move follows an announcement in the March Budget that P2P investing can be included within the ISA tax-free wrapper for the first time next April.

All change!

There is a lot of passion about the railways in Great Britain and barely a week goes by without the rail industry being front page news: whether it is the development of High Speed 2, the collapse of the East Coast operator (which led to a partly nationalised rail service) or the annual January fares increases. 

Cancellations and delays

One of the highest profile front page stories of recent years dates from October 2012. Patrick McLoughlin (the Secretary of State for Transport) was forced to admit to tendering irregularities in the Department for Transport's competition for the West Coast rail franchise, resulting in the high-profile cancellation of the competition. This saw Virgin Trains losing and then being re-awarded the West Coast franchise, the temporary suspension of all franchise competitions and a number of inquiries and reviews by leading figures being undertaken, with policies and agreements written, torn up and then re-written.

Timetable ambitions

It also led to the tearing up of the railway franchising timetable. Earlier this year, the government issued its updated timetable, with the majority of passenger rail operations coming up for retender in the next 8 years. The timetable indicates an ambitious schedule of transactions, including a number of short-term directly awarded contracts to existing operators. These short term contracts will allow the government to manage the large number of longer term contract competitions, with 2 to 3 franchises being let every year for the next 8 years, whereupon the franchising process will start up again. It really is expected to be “All change” for the railways. 

Resuming normal service

The latest franchise timetable is an attempt by the Department for Transport to bring some order and certainty back into the franchising market. 

Back on track?

Recent months have seen the award of the Caledonian Sleeper (Transport Scotland-led), Thameslink, Southern and Great Northern and Essex Thameside franchises. The East Coast franchise is next. This has been the subject of considerable political discussion as it has been in public hands since 2009 and will be reprivatised, before the 2015 general election.

Getting ahead

With plenty of governmental reflection taking place following the West Coast debacle, a number of changes are being made by the Department for Transport in new franchise competitions. 

Quality scoring
Particularly important is the increasing weight being given to the quality of a bid submitted, this is something which will be specifically scored. Previous competitions were almost always determined on the basis of financials alone. Going forward, however, the outcome of a competition could be decided by a bid which offers something extra or innovative for passengers. That said, quality forms a comparatively small part of the overall bid assessment, so a winning bid will still have to be competitively priced.

Innovation
Innovation is another buzzword of recent times, with the Department for Transport looking to buy a bid which offers something new or different, particularly if it promises passenger, taxpayer or environmental benefits. This could factor into both the financial scoring (if the innovation results in optimum pricing) and quality scoring (if the innovation leads to something which offers a passenger benefit).

Partnership working
In addition, the importance of partnerships is increasing. Rather than managing by a contract in an almost adversarial manner, the Department for Transport wants to work in partnership with future franchisees for the benefit of passengers. Partnership working in other areas of the industry is also being encouraged. This is something which bidders should consider when preparing their proposals. 

Sustainability
Finally, sustainability is becoming an integral part of future franchises. Whilst rail travel is by its nature more environmentally-friendly than certain other transport modes, the Department for Transport is keen to enhance its credentials further, as well as encouraging progression in other areas of sustainability. Future franchisees can therefore expect to provide more detailed information on the sustainability of the franchise, as well as offer initiatives to further promote it.

Wider opportunities

Of course, the rail industry offers opportunities not just for train operators but also for the wider supply chain. Indeed, the Department for Transport is trying to encourage greater use of small and medium enterprises within the industry in its latest franchise competitions. Train operators will need many suppliers to be able to deliver their service. Whilst much will depend upon the franchise proposal in question, there may be opportunities to provide CCTV systems, customer information screens, catering services, cleaning and asset management services, as well as security services to the franchise. The supply chain should try and engage with potential bidders before a franchise competition gets underway as decisions on supply contracts will usually be during the main competition period. If a supplier can offer something innovative, which could help the train operator to win, it will be very well received.

Competition hots up

With the establishment of the Competition and Markets Authority (CMA) in April of this year, we are seeing a renewed and increased interest in the rail passenger franchising market, with a number of merger investigations expected as franchises are awarded. We have been advising rail clients on what this means to them at this early stage in the CMA's existence, giving us a key insight into the policy and processes of this competition authority and how it interacts with the EU Commission on passenger rail franchise cases.

Where there's a will there's a way

Are you considering the purchase of a holiday home abroad or do you already own one? If so, you should seek advice on making a local Will in the jurisdiction where your foreign property is located, to dispose of it on your death.

Here are our 5 top tips highlighting the importance of making a local Will and pointing out some of the traps and pitfalls.

Tip 1 – Never rely on your English Will to do the job

A Will disposing of real estate must be valid in the jurisdiction where the property is situated for the gift of the real estate to be effective. Although your existing English Will may state that it applies to all property owned by you wherever it is, the local law where your property is situated may not regard your English Will as valid nor uphold the validity of the gift contained in it.

Many jurisdictions will regard a Will as valid if it conforms to the law where the Will was made or where the person whose Will it is was domiciled. However, not all jurisdictions have agreed to adhere to this code of practice and a jurisdiction may not recognise the validity of an English Will disposing of real estate in that jurisdiction, if that Will does not satisfy its own laws on the validity of Wills.

Tip 2 – Get some local legal advice!

The validity of a gift of a foreign property in a Will is usually determined by the laws of the jurisdiction where the foreign property is located. So even though you are domiciled in England and Wales, this may affect your freedom to leave your foreign property in your Will as you choose.

You may not be able to leave your foreign property to your chosen beneficiaries. Some jurisdictions, Spain and France for example, have rules on "forced heirship", requiring all or a specific portion of an estate to be left to particular relatives on death. Similarly, where your Will directs foreign property to be held on the terms of a trust, it may be that the foreign jurisdiction does not recognise trusts or regard those trust provisions as valid.

Making a local Will helps to ensure the validity of the Will disposing of the foreign property and enables you to obtain relevant legal advice on the nature and application of any forced heirship rules.

Tip 3 – Make it easier for your loved ones

Even if the jurisdiction where your foreign property is located is going to uphold the validity of the gift in your English Will, the process of administering the foreign property using an English Will may be costly and time-consuming. It may need to be translated into the local language and sent to a foreign court for a grant of probate to be obtained in that jurisdiction. This will delay the administration of the estate and may incur additional costs, which should be avoided by putting in place a local Will to dispose solely of the foreign property.

Tip 4 – Dovetail the local Will with your English Will

It is crucial that the preparation of a local Will is carefully coordinated with the preparation of a new English Will or with a thorough review of your existing English Will. It is all too easy to revoke an existing English Will when making a new foreign Will, as many Wills include a clause automatically revoking any earlier Wills.

If you have an English Will you should review it, as additional provisions may need to be included to assist in the administration of your foreign property on your death. You should also deal with issues affecting both your English Will and the local Will, for example, the allocation of the burden of tax and other liabilities in relation to the foreign property.

Tip 5 – Think about UK inheritance tax

Remember that if you are domiciled here, your estate will be subject to UK inheritance tax on your worldwide assets, including the foreign property. This will be in addition to any form of inheritance tax levied in the jurisdiction where the foreign property is located. There are rules dealing with the payment of tax in more than one jurisdiction to avoid a double charge to tax arising and these should be considered in light of your circumstances.

Tactical defences

Cyber-security is a topic of increasing prominence within both government and industry, due to the increasing volume of information held in networks together with the prevalence of (and potential damage caused by) cyber-crime. In this context, the European Union is in the process of approving new legislation in the form of the Network & Information Security (or “Cyber-Security”) Directive which will impose minimum security standards and certain network breach notification obligations, to a wide range of public and private organisations. 

Tackling the problem

Regardless of the legal obligations, organisations have pressing commercial reasons to prepare robust cyber-security defences. Consumers and businesses were estimated to have lost over £27bn in 2012 through cyber-crime and Cabinet Office statistics state that the worst cyber-security breach costs an estimated £600,000 to £1.15 million for large businesses and £65,000 to £115,000 for smaller ones. Likewise, consumer awareness of the issue is increasingly pronounced with companies such as Sony, Target and Tesco all being on the wrong-end of some negative headlines for cyber-breaches in recent years.

Kicking-off certification

The Cyber-Security Directive is estimated to come into force in or around 2016 but long before that organisations will need to address the growing threat to their business. Indeed last month, the UK Department for Business Innovation & Skills (BIS) launched a "Cyber-Essentials" assurance framework which would allow organisations to be certified for cyber-security compliance. 

Awarding good practices

Certification is of particular relevance to organisations who bid to supply products or services to government. As from 1 October this year, it has stated it will require all bidders for contracts which involve handling of high-risk data to be "Cyber-Essentials" certified. The scheme is also being backed by some of the big insurers and underwriters such as AIG, suggesting that insurance against cyber-breach might become contingent on certification in the future. BIS have reported that Barclays and HP are amongst the first to apply for the award.

What can you do?

To mitigate the risk of cyber-breaches whether malicious or otherwise, organisations should consider taking the following steps:

  • Identify information assets and the impact on your business if they were compromised.
  • Increase network security and protection against malware.
  • Provide staff training to increase knowledge and awareness.
  • Be aware of developments in cyber-threats and prepare defences.
  • Consider the segregation of data and avoiding placing “all your eggs in one basket” in a network environment.
  • Monitor your organisation's exposure and vulnerabilities as technologies and the business develop.
  • Have a defined response plan to invoke so as to deal with cyber-security breaches quickly and ensure that weaknesses are protected across the organisation.
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Ben Mercer

Ben Mercer
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