Big Data = big risk

We predict that risk will accumulate in unexpected ways due to the increased reliance on technological solutions and new risk modelling will need to be employed to measure such exposures adequately. The FinTech industry and financial institutions more generally are increasingly turning to Big Data and the use of artificial intelligence in financial modelling to devise products and inform their sales and distribution networks. In theory, at least, automation can reduce the risk of human error, for example in sales, which has seen significant claim volumes in recent years. However, with the increased use of technology comes new risks and new challenges for financial institutions and their insurers.

Litigation funders will encourage more sophisticated claims and test cases

Shareholder activism has found its voice in sophisticated high-profile test cases backed by litigation funding. Collective shareholder actions were instigated against RBS and its directors for misstatements in its 2008 financial prospectus (Rights Issue Litigation) and against Tesco and its directors for overstatement of its profits in 2014. The claims concerned the appropriate measure of damages under the Financial Services and Markets Act 2000, which provides statutory redress for misleading listing particulars and inaccurate financial disclosures. These remedies had not been pursued by claimants to date and accordingly the outcome of these cases was eagerly awaited. Unfortunately, it seems we may have to wait a little longer for the answer as the majority of the claimants have now settled and the scheduled trial has been called off. Whilst it is conceivable the small minority of claimant investors yet to settle may still try to resurrect the trial, that possibility looks increasingly unlikely.

Increasing pressure and focus on corporate governance

The first question the Financial Conduct Authority (FCA) and Prudential Regulation Authority (PRA) are likely to ask senior management when something goes wrong is ‘who is responsible?’ Requirements to map managerial responsibility will extend to all regulated entities from 2018, including insurers and insurance brokers. Implementation requires clarification and documentation of the chain of responsibility between risks and the executive management team, certified staff and staff subject to conduct rules. There are clear implications for recruiting, contracts and discipline. The FCA/PRA can use the Responsibilities Map to identify senior managers responsible for breaching the statutory requirements and conduct rules and take action for their failure to take reasonable steps to avoid the breach occurring, identify the breach or stop it continuing.

Directors beware increased cyber risk

Cyber risk has been identified as a top-five risk on the boardroom agenda for a number of years. Cyber attacks continue to increase in frequency and severity. However, save for a handful of almost entirely unsuccessful claims against directors in the US, there has been little litigation specifically against the board resulting from a failure to prevent a cyber attack. We predict this will change as the litigation environment is worsening for directors. In particular it is proposed to make directors personally liable for breaches of the Privacy and Electronic Communications Regulations with fines of up to £500,000 being imposed by the Information Commissioner’s Office.

Key developments