Tom Otter, Elaina Bailes 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 second part of the global overview covers crypto assets, shareholder claims, the coronavirus crisis and draws conclusions on the future diversity of financial services disputes.
Crypto assets
Litigation involving crypto assets is expected to grow despite 2020 being a relatively quiet year for cases in the sector. Currently, most crypto-investments are not specified investments under the Financial Services and Markets Act 2000 (FSMA) and so customers do not benefit from statutory or regulatory protection. That said, the English courts have now laid the groundwork for successful crypto-asset cases as a result of cases such as Robertson v Persons Unknown (unreported), 16 July 2019, (Commercial Court) and AA v Persons Unknown [2019] EWHC 3556 (Comm). As the digital asset class grows in value, the market will expand and lead to disputes. Moreover, the increase in scams and frauds during 2020 (most of which were perpetrated using cryptocurrencies) means that the time is ripe for litigation in this area.
On the consumer side, a similar phenomenon could be seen to the trend seen pre-2008 of retail customers being sold unsuitable complex interest rate products they did not fully understand, leading to mis-selling claims. The FCA has recommended that retail customers are not sold derivatives based on cryptocurrencies, but crypto-mis-selling claims may yet still appear. The English judiciary has taken steps to ensure its courts are fully equipped to deal with legal issues arising from crypto assets. In November 2019, the Chancellor of the High Court, Sir Geoffrey Vos, launched the Legal Statement on Crypto assets and Smart Contracts, which aimed to bring clarity on the ‘likely’ status of crypto assets under English law. This is an unprecedented step in a common law jurisdiction of anticipating how future cases may be decided and shows how the judiciary sees this as a future growth litigation area.
Shareholder claims
In recent years, UK investors have become a lot more active following in the footsteps of their American brethren. This has resulted in a number of claims brought before the English courts against financial institutions and businesses by their shareholders on the basis of section 90 and section 90A of FSMA.
Section 90 of FSMA imposes a liability on listed companies for untrue and misleading statements (or omission of particular matters) in the listing prospectus. The RBS Rights Issue litigation, commenced in 2013, was the first group action of its kind in England, in which a large number of shareholders sued the Royal Bank of Scotland under section 90 of FSMA on the grounds that the prospectus for the bank’s 2008 rights issue of shares was untrue and misleading. Although the case settled in 2016 before trial, it established some procedural guidance in relation to when a group litigation order can be made and that where there is a large discrepancy in the values of claimants’ individual claims, the court may depart from the usual rule of apportioning claimant common costs on an equal basis.
Section 90A (and Schedule 10A) of FSMA in turn covers a wide range of publications made by a listed company and imposes a liability for any statement that is untrue or misleading or for an omission in a statement that was a dishonest concealment of a material fact. Unlike section 90, for a section 90A claim, the claimant needs to show that he has relied on the misleading statement. The Tesco shareholder action was the first claim under section 90A. The background to the proceedings is that on 22 September 2014 Tesco Plc admitted to overstating its profits for the half-year of 2014–2015 by £250m. This resulted in a huge drop in the share price and a significant loss for shareholders.
Tesco applied to have the claim struck out and lost, which resulted in a landmark judgment clarifying section 90A of FMSA. The vast majority of the claimants in the proceedings held their shares in ‘dematerialised form’ through the CREST system via a chain of custodians or sub-custodians in whose name the shares were registered. Tesco Plc argued that this meant that the claimants: (1) did not have an interest in the securities; and (2) could not be properly said to have ‘acquired, continued to hold or disposed of’ any interest in securities. Both of these are a necessary prerequisite for a section 90A claim (see Omers Administration Corporation & ors v Tesco Plc [2019] EWHC 2858 (Ch)).
Mr Justice Hildyard observed the fundamental importance of this issue given the prevalence of custody chains in the dematerialised securities market and the underlying purpose of section 90A of FSMA. If Tesco was correct on its construction as to the nature of the claimants’ ‘interest in securities’ under Schedule 10A of FSMA, the statute would be unfit for purpose and require further consideration and amendment. However, ultimately the judge dismissed both of Tesco Plc’s arguments. Though the Tesco case settled before trial, this is an important decision for potential securities actions for claimants, confirming that section 90A has teeth.
We expect to see an increase in securities actions over the next few years. Unfortunately, the economic crisis sparked by the covid-19 pandemic may lead institutions in financial difficulty to mislead their investors as to their performance – we have already seen a trend for furlough fraud and deliberate misuse of emergency covid legislation. The popular focus on climate change issues is another area that is likely to come under scrutiny as corporate reporting of environmental, social and governance (ESG) credentials. UK companies are required to publish information relating to a broad spectrum of ESG issues, which range from climate footprint to human rights. In November 2020, the UK Joint Government Regulator Task Force on Climate-related Financial Disclosures published a roadmap towards mandatory climate-related disclosures. This sets out its plans for regulation in this area, and further guidance is expected in 2021.
Investors are increasingly concerned that their investments are ethical, and many funds have strict investment criteria for ethical investments. Therefore, where it transpires that a company has published untrue and misleading statements regarding its ESG record, investors may be able to easily establish reliance under section 90A of FSMA if they can show that the true credentials would not have met the investment criteria. In the US there have been nearly 40 securities litigation claims alleging inaccurate ESG disclosures, suggesting the trend will transfer to this side of the Atlantic.
Coronavirus crisis
The Covid-19 pandemic has had a tremendous impact on all businesses around the world. Despite the lockdown restrictions, the High Court (and in particular the Financial List) has continued operating by way of virtual hearings. Shortly after the UK lockdown began, the court remotely heard the case of National Bank of Kazakhstan and another v The Bank of New York Mellon and ors [2020] EWHC 916 (Comm), which was a claim for circa US$530 million. The Commercial Court also dealt with a very complex case involving the Serious Fraud Office and very serious allegations of dishonesty and wrongdoing in SFO & Anr v Litigation Capital Ltd & 46 Ors (In re Gerald Martin Smith) [2021] EWHC 1272 (Comm). In that case, the court implemented special measures to ensure that witnesses giving evidence via a video link were not assisted or prompted by a third party.
The insolvency of many businesses as a result of the crisis may trigger defaults in financial documents, which financial institutions will no doubt wish to pursue. However, the Corporate Insolvency and Governance Act 2020, enacted in response to the crisis, brings in sweeping reforms to the existing insolvency rules, including restrictions on winding-ups and bankruptcies until (at least) 30 June 2021, so the full impact of business failure has not yet been seen.
A significant event having an impact on a number of financial institutions was the large number of business interruption insurance claims. To assist the swift resolution of these claims, the FCA, in conjunction with eight insurers, selected a representative sample of 21 policy wordings for the court to consider. The case was expedited and the Supreme Court handed down its judgment on 15 January 2021 (see FCA v Arch Insurance (UK) Ltd and others [2021] UKSC 1). The case is important for a number of reasons, including as a showcase of the expedience and efficiency of the English legal system in dealing with important issues affecting an entire industry, and its result, which now makes it more difficult for insurers to deny claims. However, despite the Supreme Court’s judgment, which helps provide guidance for interpreting similar policy wording, we believe that there will still be litigation in this area as individual cases will turn on the specific circumstances.
Much has been said about force majeure disputes as a result of covid-19. It still remains to be seen whether such disputes will see significant litigation. So far, there appears to have been only one such reported case (see Dwyer (UK) Franchising Ltd v Fredbar Ltd & Bartlett [2021] EWHC 1218 (Ch)). However, the 2002 ISDA Master Agreement’s force majeure clause is a potential target. The clause applies to ‘force majeure or acts of state’ that prevent the party from making a payment or delivery in respect of a transaction under the agreement. Whether the clause is engaged or not would be a fact-specific exercise.
Conclusion
As the above illustrates, we believe that the next few years will see a more diverse range of financial services disputes than was seen in the wake of the 2008 financial crisis. Then, litigation was focused around a number of key causes of action available to customers arising from a pattern of behaviour of financial institutions across the board. It was easier then to point blame and ask for regulatory reform. There were extreme examples, such as in the case of RBS, where problems pervaded every aspect of the business, leading to shareholder claims being brought. However, in the current climate, financial institutions face litigation risk on a number of different fronts not of their own doing. Political – in the form of Brexit, ESG issues and sanctions; technological – in the form of legal uncertainty regarding crypto assets and the new social distancing norms; and economic, but this time as a result of a health crisis not directly related to the industry itself. For the judiciary and litigators, it will be predictably fascinating, in unpredictable ways.
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