Regulatory action against banks has been a principal theme in financial services litigation in recent years. The most notorious regulatory finding against UK banks concerned misselling of payment protection insurance (PPI), which according to the Financial Conduct Authority (FCA), has cost lenders more than £20bn since January 2011
Further investigations have revealed manipulation of more sophisticated products and market mechanisms. These include the foreign exchange (FX) scandal, where traders manipulated the value of currency to obtain a profit, and the rigging of the London Interbank Offered Rate (LIBOR) or similar ends. HSBC, Barclays, RBS, Citigroup, JP Morgan and UBS have received regulatory fines in the UK and US, with Deutsche Bank this year agreeing to pay $2.5 billion relating to LIBOR and other currency manipulation.
Despite the pursuit by the regulators, civil redress against the banks has been much more limited than in PPI, although the exposure is potentially much larger. One factor is the complicated nature of picking apart such financial claims. In the example of FX, negotiating the currency risk, convoluted financial structures, assessment of damages and collecting sufficient evidence amongst a vast array of digital data is daunting. It can be problematic for a business or investor without the most intricate and sophisticated knowledge of the sector to analyse the potential liability and make a claim.
Such detailed understanding of the sector is also required of any tribunal. To this end, the Government is attempting to improve the position at judicial level with the creation of a new Financial List of specialist financial services judges. The List is a joint initiative between the Chancery Division and the Commercial Court (part of the Queen’s Bench Division) that will hear disputes relating to financial claims valued at more than £50 million or which pertain to significant market issues, such as cases involving equity, derivatives, FX and commodities markets.
The Financial List attracted a great deal of attention, not least for the possible impact on financial services litigation. Parham Kouchikali, a partner at RPC, observes: “Some of the cases that reach the List will be the multi-million pound oligarch-type disputes but I think we will also continue to see complex financial product litigation and claims against banks, including by investors and counterparties who could have substantial losses arising from benchmark manipulation, for example FX.”
While the creation of a specific Financial List has been broadly welcomed, uncertainty remains over the format and practicality of the List. With the announcement of the List come both new case management procedures specific to financial services cases, and a new test case procedure for matters of market importance. It is proposed that parties to test cases bear their own costs, forgoing to the normal loser-pays principle. However, it is unclear whether litigants would be willing to assume the risk for costs in a case against a bank with no possibility of recovery.
“There remain questions over how a specialist court will entertain more creative claims against banks,” Kouchikali says. “Recent decisions suggest that courts may be moving away from the bank-centric approach with an eye on developments in the regulatory environment which have led regulators, like the FCA or the Securities and Exchange Commission in the US, sanctioning banks for improper conduct."
Threat of litigation
The threat of litigation is looming, however. US law firm Scott and Scott has already said to be exploring a multi-million pound case against a number of UK and US banks over the FX manipulation. In July, it was reported that the firm was looking for UK and European claimants. Any such case, of course, would be issued in the US, where class action proceedings (and usually settlements) are more common.
While the existence of a new List may serve to temper future conduct of banks, it may also increase banks’ exposure claims if investors’ confidence in the new judicial system grows. Critics of recent regulatory fines suggest that quantum is derived not from any transparent calculation but from the particular bank’s ability to pay. But while any regulatory system must be transparent, predictable and consistent, few banks will want to settle claims publicly while the banking sector has some distance to go in restoring public (and political) trust.
Kouchikali observes that banks really do not want to go over historic wrongdoings in open court or disclose lots of potentially damaging documents, which means that confidential mediation and early settlements are likely to be an attractive option for them. “High-profile claims generate lots of media exposure and the banks do not want the reputation impact such cases have. It may be preferable to try to avoid going to court,” he concludes.
ADR, therefore, will likely form a component in the operation of the new Financial List, and those mediators with experience of the sector will see increased demand.
This post was written by Antony Collins who is a freelance journalist. He can be contacted at firstname.lastname@example.org