Elaina Bailes, Tom Otter and Aleks Valkov have written the global overview and UK chapter of Lexology’s latest Getting the Deal Through guide to Financial Services Litigation. You can read the full guide including chapters on the UK, Australia, Greece, Hong Kong, South Korea and Switzerland here (subscription required), and our summary of the 2022 global overview here.

Read on for a selection from the UK section of the guide, addressing the financial services litigation landscape in 2022, current trends and changes to the regulatory landscape.

What are the most common causes of action brought against banks and other financial services providers by their customers?

Common claims include those for mis-selling and breach of duty. Retail (rather than institutional) customers often bring misrepresentation claims (negligent or fraudulent) in mis-selling cases. Claims also arise from suspected criminal activity (eg, freezing of an individual’s account or banks’ employees or agents’ involvement in bribery or other criminal schemes). Claims in fraud and conspiracy are not uncommon.

Institutional customers more commonly bring claims related to breach or interpretation of contracts (such as structured products or debt instruments) or claims based on statutory provisions giving rise to liability for securities actions. Retail clients and consumers benefit from greater regulatory and legal protection when dealing with financial services firms compared to businesses (and sophisticated individuals).

Regulated financial services providers must comply with the applicable rules contained in the Financial Conduct Authority (FCA)’s Conduct of Business Sourcebook (COBS) and relevant provisions of the Financial Services and Markets Act 2000 (the FSMA 2000). Breaches of COBS and the FSMA 2000 may give rise to civil claims. The Prudential Regulation Authority is the prudential regulator of about 1,500 financial firms, supervising them to ensure their products and services are safe and sound.

Is there an implied duty of good faith in contracts concluded between financial institutions and their customers? What is the effect of this duty on financial services litigation?

There is no general duty of good faith in English law. However, there are exceptions where the court accepts that a party has a duty to act fairly, equitably and reasonably. Examples include the following.

• Certain types of contracts attract a duty of good faith as a result of legislation or the implied nature of the relationship between the parties (eg insurance, mortgage contracts or contracts involving fiduciary duties – see Downsview Ltd v First City Corp Ltd [1993] AC 295, 312). Furthermore, in Bates v Post Office Ltd (No. 3 Common Issues) [2019] EWHC 606 (QB), the court supported the idea that a special category of cases existed called ‘relational contracts’, which includes an implied term requiring good faith (for a recent example see Essex County Council v UBB Waste (Essex) Ltd [2020] EWHC 1581 (TCC)).
• Parties may expressly include a ‘duty of good faith’ term in a contract. Enforceability will depend on the circumstances and the wording of the contract.

Relatedly, where a party has discretionary powers to act within a contract, the English court has established that the party must exercise those powers in good faith and not arbitrarily or capriciously (see Braganza v BP Shipping Ltd [2015] UKSC 17).

In what circumstances will a financial institution owe fiduciary duties to its customers? What is the effect of such duties on financial services litigation?

Under English law, the relationship between a financial institution and a customer is not a fiduciary one (Governor and Company of the Bank of Scotland v A Ltd [2001] EWCA Civ 52). However, special circumstances may arise under the nature of a specific relationship (eg of a financial adviser or a custodian of securities) or where the financial institution has acted in a way that constitutes such a relationship (see Diamantides v JP Morgan Chase Bank [2005] EWCA Civ 1612 for a case involving investor and investment manager and Fahad Al Tamimi v Mohamad Khodari [2009] EWCA Civ 1109 for a case involving a bank manager and customer).

Can a financial institution limit or exclude its liability? What statutory protections exist to protect the interests of consumers and private parties?

The enforceability of exclusion or limitation clauses is limited by common law and statute. English law favours freedom to contract but balances this with protecting counterparties (particularly consumers) against having no remedy for non-performance. Typical limitation clauses include those applying a cap on damages for breach, exclusions on certain remedies and restrictions on specific categories of loss. Parties can never exclude liability for their fraud.

The main statutory controls are the Unfair Contract Terms Act 1977 (the UCTA 1977) and the Consumer Rights Act 2015 (the CRA 2015). The UCTA 1977 applies to all commercial relationships and controls the exclusion or restriction of liability for breach of contractual obligations and the common law duty of care. Section 11(1) of the UCTA 1977 applies a reasonableness test, requiring exclusion or limitation clauses to be fair and reasonable in the circumstances known to the parties when contracting.

The CRA 2015 applies a fairness test to all terms in consumer contracts. A term will be regarded as unfair if it causes a significant imbalance to the parties’ positions to the consumer’s detriment.

Common law rules also apply general principles of reasonableness to contractual terms, although the assessment is fact specific. To be operative, exclusion clauses must be incorporated into the contract, cover the liability in question and not be too broad in scope. Onerous terms will only be incorporated by reference or conduct where fairly brought to the other party’s attention (Bates v Post Office Ltd (No 3) [2019] EWHC 606 (QB)). Reasonableness will likely be found where a contract is fully negotiated between parties of equal bargaining power (Raiffeisen Zentralbank Osterreich AG v Royal Bank of Scotland plc [2010] EWHC 1392).

Have changes to the regulatory landscape following the financial crisis impacted financial services litigation?

The regulatory regime has tightened since the 2008 global financial crisis. In response, most financial institutions have expanded their compliance functions and improved processes, but that has not meant an end to claims. Instead, regulatory investigations and enforcement actions often give rise to information in the public domain that then provides a foundation for civil claims. Documents (or sometimes admissions) published concerning regulator reviews have been used in recent years by claimants to support their case in relation to claims under sections 90 and 90A (now Schedule 10A) of the FSMA 2000. The number of cases (especially based on section 90A/ Schedule 10A) has steadily increased in recent years.

The increase in third-party litigation funding means that individuals (and institutions) enjoy a more level playing field. Alongside after-the-event insurance that protects against adverse costs, the availability of funding means that it is now more attractive for claimants to seek redress from financial institutions. This has led to group action being seen as the norm rather than as something uncommon in the sector.

What are the principal challenges currently facing the financial services litigation landscape in 2022?

The transition from the Covid-19 pandemic, the strict sanctions regime in response to the war in Ukraine and the pressures this has had on the economy have definitely been felt by the financial services industry.

Of particular note are the recent cases relating to Quincecare duty (ie, a duty imposed on the financial institution to protect a customer where the institution is on reasonable inquiry that there may be fraud), which is shaping to be an important tool to be used against financial institutions. The expected judgment of the Supreme Court in Stanford International Bank Ltd (in liquidation) v HSBC Bank PLC will hopefully provide much needed clarification in this area.

Shareholder action has started to pick up speed with a number of new claims being issued. The fact that litigation funding and after-the-event (ATE) insurance have now become ubiquitous has played a significant role.

As predicted last year, litigation involving crypto-assets is growing steadily. The English courts’ sophistication and their familiarity with crypto as well as the high level of legal services offered is a major attraction for claimants. Of particular note is the claim Dr Craig Wright brought seeking a court ordering to re-write the blockchain and give him access to a significant amount of bitcoin.

The recent sanctions imposed on Russian (or related) entities as well as the complication as a result of the divergence of the US and EU sanctions regimes (eg under Regulation (EC) No. 2271/96 (the Blocking Regulation) has created significant issues for financial institutions and could generate complex legal issues in the future.

Stewarts Litigate

Stewarts has launched a ground-breaking after the event (ATE) insurance facility with Arthur J. Gallagher Insurance Brokers Limited. ‘Stewarts Litigate‘ is designed to work alongside our alternative funding agreements. The facility provides our commercial disputes clients with rapid access to comprehensive ATE insurance at pre-agreed market leading rates. The facility can provide coverage of up to £4 million in three business days and up to £18 million within ten business days.

Find out more about Stewarts Litigate here.

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