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. Read on for a summary of the 2022 global overview. You can read the full guide including chapters on the UK, Australia, Greece, Hong Kong, South Korea and Switzerland here (subscription required).
Predicting litigation trends is notoriously tricky, 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 and draw conclusions. Brexit, Covid-19 and Russia’s invasion of Ukraine have come in quick succession to create geopolitical fragility that impacts businesses in every sector.
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 2021, the financial services sector made up 8.6 per cent (up from 6.9 per cent the previous year) of total economic output and contributed £164.8 billion to the UK economy. At that scale, when things go wrong, they go wrong more than once.
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 current geopolitical instability and tough economic climate, 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. This is particularly in circumstances where although the UK has replicated much of the EU’s equivalence framework in domestic law, allowing EU financial institutions access to the UK’s markets (provided they meet certain criteria), the EU is yet to make such equivalence decisions.
A further area that remains in flux and may affect financial services is rules on 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).
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 LIBOR-related 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. On 31 December 2021, most LIBOR benchmark settings ceased, with the remaining to follow. LIBOR currencies will be replaced with Risk-Free Rates (RFRs).
The international response to Russia’s invasion of Ukraine has brought into sharp focus the impact of sanctions on international finance. The UK, US and EU package of sanctions has been unprecedented. UK financial institutions have been scrambling to comply by ceasing operations and severing financial arrangements with Russian entities. This will inevitably give rise to disputes. For example, a financial institution may decide to cancel lending facilities in breach of contract as the risk to the lender of being penalised by sanctions authorities is greater than that of breaching their contract. Counterparties may seek to bring claims against banks outside Russia that have an interest in the transaction.
Outside of Russia, 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, and with political tensions with the key financial markets, including China, increasing, we expect disputes to continue.
Litigation involving crypto-assets continues to grow, and we expect more high-profile cases will soon become the norm.
Currently, most crypto-investments are not specified investments under the Financial Services and Markets Act 2000 (FSMA), so customers do not benefit from statutory or regulatory protection. This has become a particularly acute issue with the advent of NFTs and as a result of many celebrities and influencers becoming involved in the marketing of various schemes that prove to be fraudulent (or a ‘rug pull’).
In recent years, UK investors have become much 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 Schedule 10A of FSMA.
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.
Environmental, social and governance
The popular focus on climate change issues is another area that is likely to come under scrutiny as part of the 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. The Financial Conduct Authority (FCA) has introduced ‘comply or explain’ regulations requiring listing companies to comply with the guidance on climate-related disclosures published by the UK Joint Government Regulator Task Force on Climate-related Financial Disclosures, or explain why they have not done so.
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 establish reliance under Schedule 10A of FSMA if it 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.
As the above illustrates, we believe that the next few years will see a more diverse range of financial services disputes than 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.
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 around crypto-assets), and economic. For the judiciary and litigators, it will be predictably fascinating in unpredictable ways.
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