EU Update: auditors liability, and the Collateral Directive

Corporate Blawg has toured widely in Europe, and left a small deposit of his friendship in every country he visited.  From a deaf Oboe player and his wife in Eger, to the professional croupier and gambler in Dubrovnic; from hot Israelie rave-chicks in Samothraki, to a famous painter of horse bottoms in Barcelona.  With these fond memories tucked under his armpit, Corporate Blawg cannot forget that he is a member of the EU - not as a State but in a state of community and involvement in the global market economy.
            Accordingly, Corporate Blawg proposes a end-of-the-month round-up of EU information that is kind-of relevant to the subject-matter of this blog. So here we go:

Auditors' liability caps

On 18 January the Commission began its consultation on possible reform of auditors' liability rules in the EU. The U.K. is leaps ahead of the E.U. which shows some disparity in the Member States' approaches to limiting auditor liability (s.532-538 of the Companies Act 2006 in the UK limits auditors liability to a "fair and reasonable" amount negotiated by contract on a yearly basis).  The Commission has suggested four possible options for reforming regimes, and invites stakeholders to respond by the Ides of March (15th) 2007. 
              As Commissioner Charlie McCreevy pointed out, auditors cannot often obtain sufficient insurance to cover their risks.  Charlie says "there is a real danger of one of the "Big Four" being faced with a claim that could threaten its existance".  God forbid threatening the existence of a complacent auditing firm!  The four modes, as suggested in a study by the thinktank London Economics in October 2006 are:

• a fixed monetary cap at European level;
• a cap based on the size (market capitalisation) of the audited company;
• a cap basd on a multiple of teh audit fees charged to the client; and
• introduction of the principle of proportionate liabilty, meaning that the auditor is only liable for the portion of the loss that corresponds to the party's degree of responsibility.

Since the final bullet point is vague, subjective and uses the word "proportionate" (thereby allowing each Member State to exercise a relative proportion of protectionist-oriented discretion), Corporate Blawg considers it very likely that this loose EU legal colloqualism will be the way ultimately chosen. 

Collateral damage prevention of finance directive

The Commission Press Release of 9 January on increasing the scope of the Financial Collateral Directive (FCD) states ever-so-succinctly that: financial collateral means assets provided by a borrower to a lender in order to minimise the risk of financial loss to the lender in the event of the borrower defaulting under his obligations to the lender.  Corporate Blawg is better than EU Press Releases and can summarise financial collateral as assets provided in security of a default between a borrower and a lender.  Faster, sharper, and quicker-off-the-block! Like Superman.
            The Commission informs us that the 'classic' way of providing collateral is by a "pledge". Here, the borrower provides the lender with cash or securities collateral. The ownership remains with the borrower but is usually "blocked" in favour of the lender. If the debt is not repaid, the lender can liquidate the collateral and redeem the debt.
           The 'not so classic' way of providing collateral is by a "title of transfer" (an example includes repurchase agreements - also known as "repo").  Here, the borrower sells the collateral to the lender in exchange for the loan. At the same time, the parties agree that at a future date the lender will sell the collateral back to the borrower at an agreed price (typically including interest on the loan).
         The big news here is that the Commission proposes to extend the Collateral Arrangements Directive (2002/47/EC) to include certain credit claims that are elligible as collateral for Eurosystem credit operations from 1 January 2007.  This will enable cross-European collateral supported transaction to progress even more smoothly and transparently.

Corporate Blawg hopes you enjoyed this whistle stop of two EU press releases, and will be happy to introduce you to further primary materials on request. 

Queue: Corporate Blawg playing air-trombone whilst humming the French National Anthem, and marching up and down the Champs Elise of his office corridor. 

Check: Corporate Blawg is not bound in white sheets and bundled out of the office and into the back of an ambulance.

Stop.

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