EU Class Actions; IASB on Pensions; More

The European Union is contemplating more forceful action against companies that violate its antitrust laws, including collective legal actions—although officials there want to avoid what they call the “excesses” of U.S. class-action litigation.

The European Commission itself has been taking a tougher line on enforcing Europe’s competition laws for the last year. Still, significant barriers remain in the way of businesses and individuals who want to seek private legal actions for antitrust violations. Those violations include breaches of EU rules on restrictive business practices and abuse of dominant market positions.

Kroes

Officials recently published a white paper outlining proposals to remove some of those barriers. “The suggestions are about justice for consumers and businesses, who lose billions of euros each and every year as a result of companies breaking EU antitrust rules,” Competition Commissioner Neelie Kroes said in a statement. “These people have a right to compensation through an effective system that complements public enforcement, while avoiding the potential excesses of the U.S. system.”

The Commission wants to let consumers and small businesses consolidate their claims and bring joint actions, but only through “suitable representatives” such as recognized consumer groups, rather than law firms. That approach would lead to class actions “in which victims can choose to participate, as opposed to class actions run by law firms for an unidentified number of claimants,” the proposal says.

The paper also calls for safeguards on the information that companies must disclose. Judges should get the full picture of a case so parties should release all relevant evidence to them, the paper says, but there should be no automatic right to discovery. Such a right “could lead to procedural abuses, where defendants settle merely to avoid the heavy costs that excessive wide-ranging discovery can create.”

The paper is an attempt to deal with the problems identified in a 2005 European Commission study of damages for competition abuse. That report argued that claimants only had a “theoretical” right to compensation because the rules on civil liability in most of the 27 EU member states were inappropriate for antitrust damage.

IASB to Fix ‘Inadequate’ Pension Standard

The International Accounting Standards Board has published a discussion paper aimed at improving the way companies report their pension liabilities and the cost of other post-employment benefits.

The paper is IASB’s answer to criticism that current reporting rules (International Accounting Standard No. 19, Employee Benefits) allow companies to publish misleading financial statements by deferring the recognition of pension gains or losses. The paper also seeks to address complaints that the current rules make comparisons between companies difficult, because they have too much choice in how they account for pensions.

Tweedie

The Board said its preliminary view is that companies should have fewer pension accounting options. IASB Chairman Sir David Tweedie says accounting for pensions is a complex area of huge importance: “The financial statement of a company must provide investors, analysts, and companies with clear, reliable, and comparable information on a company’s pension obligations. It is in the interest of all of us to find ways to improve this area of financial reporting.”

Pension liabilities are an increasingly important issue for companies. IASB says the total liability for 80 of the top global companies is around $1.38 trillion; in some cases, the pension liability even exceeds the market capitalization of the company. A recent survey from Pension Capital Strategies claimed that 78 percent of London-based equity analysts are asking companies for more information about the solvency of their pension schemes, because their reported disclosures lack the information they want.

Cowling

“The results of this survey should sound a loud warning bell to company management,” says PCS managing director Charles Cowling. London financiers and investment banks “are becoming more wary of company pension schemes. In particular, IAS 19 is seen as an inadequate measure of the pension liability, and the favorable treatment of pension scheme investment in equities under IAS 19 is increasingly disregarded by analysts.”

IASB’s discussion paper is open for comment until the end of September. The Board expects to have a new standard available by 2011.

FSA Outlines Coming Crackdown

Financial firms operating in London have been expecting a much tougher compliance environment following the failure of the Northern Rock banking concern earlier this year. Now the Financial Services Authority has published a report detailing the changes it plans to make.

The FSA unveiled its list of priority actions when it published the summary of a report by its own internal auditors, who had reviewed the agency’s failure to provide better supervision of Northern Rock. The audit review identified several areas where the FSA needed to improve regulation urgently.

Most of the changes relate to improving the number and quality of the staff regulating high-risk financial firms. The FSA is creating a new group of supervisory specialists to review regularly the supervision of all high-impact firms to check that procedures are rigorously followed. It will assign more staff to supervise high-impact firms and make sure a minimum number of staff covers each firm. Staff will get better training, and more senior managers will be directly involved in supervision.

Sants

Other changes relate to a shift in compliance focus. The FSA says it will look more closely at liquidity, particularly with firms that serve retail customers. There will also be more emphasis on assessing the competence of a firm’s senior management.

Hector Sants, chief executive of the FSA, says it was clear from the regulator’s internal audit report that “our supervision of Northern Rock in the period leading up to the market instability of late last summer was not carried out to a standard that is acceptable.”

Europe Targets Four Credit Crisis Improvements

Europe’s finance ministers have agreed on four areas of oversight they should improve to avoid further turmoil in the financial markets. Charlie McCreevy, the EU’s commissioner for the Internal Market, outlined the regulatory priorities after a recent meeting of ministers.

First is to enhance transparency for investors, markets, and regulators, in particular on exposure to structured products and off-balance-sheet vehicles—the types of instruments that caused the current troubles in the credit markets. The European Commission has asked the financial services industry to produce “a credible, comprehensive proposal” to make better data available to investors and regulators.

McCreevy

Second is to enhance evaluation standards, especially for illiquid assets. McCreevy said ministers were happy to hear that IASB is reviewing fair-value measurement. He said there was a growing debate on whether fair-value accounting and “mark to market” measurements may have aggravated the crisis.

“I want to make it clear that I believe that there are some real accounting issues and anomalies to examine, such as the consolidation of special purpose entities or the measurement and information disclosed on risk exposures,” McCreevy said.

Third is to enhance the way the financial markets function. In particular, McCreevy mentioned potential conflicts of interest among credit rating agencies as one concern. “If the industry does not come up with satisfactory responses, we will consider regulatory alternatives,” he warned. “In particular, they need to strengthen the way potential conflicts of interest inherent in their business models are managed.”

The fourth and final priority, McCreevy said, is to “reinforce the prudential framework and risk management in the banking sector.” Action in this area will take the form of a review of Europe’s Capital Requirements Directive.