Elaina Bailes, Tom Otter and Aleks Valkov have acted as contributing editors for the latest edition of ‘Getting the Deal Through’, authoring the global overview and UK chapter of Financial Services Litigation 2021. The full guide can be viewed here, subscription required.
This first part of the global overview covers trends to watch in 2021, Brexit, the end of LIBOR and international sanctions.
Predicting the unpredictable: financial services litigation trends in 2021
Predicting litigation trends is notoriously tricky, and is even more so in the current times, which are fraught with uncertainty. Disputes arise from unique, random or bizarre events and (for most clients) litigation is, by its nature, outside the course of ‘business as usual’. It is therefore difficult for litigators to look at market trends in their clients’ sectors and draw conclusions. The coronavirus pandemic has added a further curveball, creating a second level of uncertainty for business over and above Brexit.
Having said that, financial services is an area where litigation patterns can be more easily recognised than in other fields. One reason for this is the size of the sector – in 2019, the financial services sector made up 6.9 per cent of total economic output and contributed £132 billion to the UK economy. At that scale, when things go wrong, they go wrong more than once. Other features of the sector that lend themselves to the potential for disputes include:
- the use of standard form agreements, leading to disputes involving the interpretation of their terms;
- the unequal relationship between financial institutions and retail customers who are dealing outside their own area of expertise, leading to disputes as to whether banks and other financial services companies have treated customers fairly and whether they have discharged any duties of care that may apply; and
- the difficulties faced by regulators attempting to enforce fair practices in an industry driven by profit which has long had an issue with a culture that rewards ruthless behaviour – disputes arise where the line between sharp practice and fraudulent/misleading conduct becomes blurred.
In this article and part two, we set out our predictions for the growth areas in financial services disputes over the next 12 months and the decade beyond. As the UK’s largest litigation-only firm, Stewarts has acted on many of the key English cases in the financial services sector in the past 10 years and know from experience where pressure points lie. More than a decade has passed since the last great financial crisis, but the English courts are still dealing with the tail end of its fallout. It is therefore likely that the downturn caused by the coronavirus crisis, plus the other trends we identify, will leave financial services litigators busy for many years to come.
Brexit continues to cause issues that even the covid-19 pandemic has failed to overshadow. The UK financial services industry has certainly felt its impact. The Trade and Cooperation Agreement did not provide a comprehensive free trade arrangement for financial services between the EU and UK, most significantly with passporting ceasing to apply on 1 January 2021. UK firms may find themselves lacking the authorisations to carry out services in the EU under existing contracts, leading to disputes with counterparties and the risk that they will fall foul of regulatory requirements in other jurisdictions.
A further area that remains in flux and which may affect financial services is jurisdiction and the enforcement of UK judgments. The UK stopped being a member of the EU on 31 January 2020. At this point, as a result of the EU–UK Withdrawal Agreement, the UK ceased to apply the current EU regime in relation to whether EU member state courts have jurisdiction to hear a dispute (found in Regulation (EU) 1215/2012 of the European Parliament and of the Council of 12 December 2012 on jurisdiction and the recognition and enforcement of judgments in civil and commercial matters). The Convention on jurisdiction and the enforcement of judgments in civil and commercial matters signed in Lugano on 30 October 2007 (the Lugano Convention) applied during the transition period (which ended on 31 December 2020).
On 8 April 2020, the UK applied to become a signatory of the Lugano Convention after the transition period came to an end. However, it has so far faced opposition. As a result, the common law rules on jurisdiction take precedent, meaning the enforcement of English judgments in the EU becomes less straightforward.
There has been much speculation as to whether Brexit will mean a loss of business for the English courts compared to European rivals who are able to provide justice within the EU framework. However, the courts have taken significant steps to minimise this risk. In a speech on 16 June 2021, Mrs Justice Cockerill (the head of the Commercial Court) noted that the English courts’ response to the pandemic (mentioning Stewarts’ National Bank of Kazakhstan and another v The Bank of New York Mellon and ors  EWHC 916 (Comm), which was one of the first cases to be conducted as a virtual trial) proved to be instrumental, together with:
- the quality of judges;
- the well-established reputation of English law;
- efficient remedies;
- the responsiveness of English law to the requirements of modern transactions;
- procedural effectiveness and speed; and
- forum neutrality.
Moreover, the existence of the Financial List since 2015, a specialist list within the commercial and chancery divisions, has seen the High Court upping its game in the efficient disposal of suitable financial cases by specially selected judges.
Therefore, we believe that England and Wales will continue to be a very busy legal forum for financial services disputes, despite the challenges of Brexit.
The end of LIBOR
LIBOR has been a hotly debated (and litigated) issue in the wave of claims from the 2008 financial crisis. Claimants have had limited success when bringing misrepresentation claims based on the manipulation of LIBOR, as it is difficult for claimants to establish reliance on the misrepresentation (most recently seen in the struck-out claim in Leeds City Council and ors v Barclays Bank  EWHC 363).
However, a new stream of claims is possible as a result of the announcement by the Financial Conduct Authority (the FCA) in 2017 that banks would not be asked to contribute to the rate after 2021. It is expected that when panel banks cease to submit quotes, LIBOR will no longer be published or will effectively become redundant. LIBOR currencies will be replaced with Risk-Free Rates (RFRs). In the case of sterling, the Sterling Overnight Index Average (SONIA) has been identified as the preferred RFR. There are some key differences between RFRs and LIBOR: RFRs are backwards-looking – in other words, they are published the following day and are reset daily – whereas LIBOR is forward-looking and available in longer periods. LIBOR is numerically larger than SONIA. Parties contracting from now onwards can consider whether it is appropriate to benchmark their agreements to SONIA or use a different benchmark.
For existing LIBOR-referenced contracts that continue beyond the end of 2021, it will not always be a straightforward case of replacing references in an agreement to LIBOR with an RFR or another benchmark. Legislators, regulatory and industry bodies in the main LIBOR jurisdictions have been grappling since 2017 with how to mitigate the problem of these ‘tough legacy’ contracts.
The Financial Services Act 2021 provides for a legislative fix to this problem, giving the FCA enhanced powers to designate a change to the methodology by which LIBOR is set. The practical effect of this is that where a tough legacy contract references LIBOR, it will be treated as a reference to the new methodology; in other words, a synthetic LIBOR rate. However, exactly to which contracts this will apply remains uncertain; the FCA’s latest consultation, dealing with the definition of tough legacy contracts, closed on 17 June 2021, and further publications are expected later in the year.
Despite policymakers’ attempts to reduce situations where disputes may arise, there will inevitably be situations where parties will not be able to agree a solution. Though the legal principles surrounding interpreting contracts where circumstances change dramatically are well established, these have not yet been applied to the LIBOR situation, so we expect to see parties and regulators resorting to the courts for guidance. Conflict of laws issues may arise in relation to financial instruments such as syndicated lending agreements and bond issues where contracts within the transaction framework are governed by different laws. Where such disputes are litigated, there is the potential for diverging judgments from different jurisdictions, which could complicate matters even further. There is also the potential for mis-selling claims to be brought in relation to contracts entered into after the 2017 announcement that LIBOR will cease (especially consumer contracts) and for claims alleging impossibility of performance of LIBOR-referenced contracts post-2021.
This is very much uncharted territory that could potentially become a highly litigious area as courts establish principles for determining the substitute rate.
Where international sanctions operate as a restriction on supply chains, disputes can arise in many different sectors, but since all businesses need access to finance, this has a knock-on impact on the financial services sector. For example, if new sanctions are imposed in a customer’s jurisdiction, a financial institution may decide to cancel lending facilities in breach of contract; the risk to the lender of being penalised by sanctions authorities or excluded from the relevant jurisdiction is greater than that of breaching their contract.
In recent years, there have been a number of disputes arising from investment in the UK and Europe by investors from politically unstable jurisdictions where sanctions are now in place (such as Libya and Iran). As this instability sadly shows no signs of disappearing, with political tensions with the key financial markets of China and Russia increasing, we expect disputes to continue.
Further, post-Brexit, the UK is no longer part of the EU sanctions regime and has begun to apply its own laws, principally under the Sanctions and Money Laundering Act 2018. Financial services firms therefore face a further compliance challenge to make sure they do not expose themselves or their officers to financial or criminal penalties. Though the new regime largely follows that of the EU, there is heightened litigation risk in areas of divergence as firms could be required to immediately stop doing business with individuals and entities.
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