Use the Lexology Getting The Deal Through tool to compare the answers in this article with those from other jurisdictions.

Nature of claims

Common causes of action

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

Breach of fiduciary duty, negligence, fraud or misrepresentation and, for broker-dealers, suitability and failure to supervise claims are the most common causes of action where customers bring claims against banks or other financial institutions. Such claims may be brought before the courts or, for Financial Industry Regulatory Authority (FINRA)-regulated broker-dealers, before a FINRA arbitral panel. Banks, in addition, face litigation brought by borrowers in some circumstances, such as where a bank has declined to make further advances under a credit facility and the borrower contends that advances were contractually required. FINRA data for 2017 (applicable only to broker-dealers) reflects the following categorisation of FINRA arbitral disputes involving a FINRA member firm:

Disputes by type

Cases filed

Breach of fiduciary duty

1,899

Misrepresentation

1,663

Negligence

1,662

Failure to supervise

1,621

Suitability

1,606

Omission of facts

1,493

Fraud

1,389

Breach of contract

1,318

Violation of blue-sky laws

547

Manipulation

299

Unauthorised trading

263

Churning

88

Errors - charges

66

Elder abuse

61

Execution error

53

Non-contractual duties

In claims for the misselling of financial products, what types of non-contractual duties have been recognised by the court? In particular is there scope to plead that duties owed by financial institutions to the relevant regulator in your jurisdiction are also owed directly by a financial institution to its customers?

Depending on the nature of the financial products at issue, there are extensive statutory and regulatory disclosure requirements, often with an accompanying private right of action that permits customers to sue for breach of such duties. Securities disclosure requirements, Truth in Lending Act disclosure requirements for consumer credit products and state-level regulation all may create duties owed directly by a financial institution to its customers. For securities broker-dealers, where a broker has the capability to make investment recommendations or the discretionary authority to trade client accounts, ‘suitability’ claims (eg, that the investments recommended were inappropriate for a particular client) and ‘churning’ claims (eg, involving alleged excessive trading intended to generate fees) are also relatively common. Litigation by investors following the 2008 global financial crisis frequently raised fraud and misrepresentation claims surrounding the risk of collateralised debt obligations and credit derivative products (eg, concealment of terms, improper pricing and misleading risk disclosures), and the failure to disclose potential conflicts of interest. In addition, fraud and securities law violations, as well as antitrust claims, have been asserted in connection with foreign exchange and London Inter-Bank Offered Rate-rigging litigation.

Statutory liability regime

In claims for untrue or misleading statements or omissions in prospectuses, listing particulars and periodic financial disclosures, is there a statutory liability regime?

Yes. US securities laws provide a statutory liability regime for misstatements in prospectuses, offering documents and periodic financial disclosures. Section 10-b of the Exchange Act of 1934, and Rule 10b-5 promulgated thereunder, provide for liability for false or misleading statements in connection with the purchase or sale of securities. Section 11 of the Securities Act of 1933 provides for a species of strict liability on the part of underwriters where false or misleading information is found in a securities prospectus. Pursuant to the ‘fraud-on-the-market’ theory, where a plaintiff can show that the securities in question trade in an efficient market, individual reliance on the purported misrepresentations need not be shown. Neither the Securities Act nor the Exchange Act displace common-law or state statutory causes of action.

Duty of good faith

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?

Yes. New York law and the law of most US states impose an implied duty of good faith and fair dealing whenever there is a contractual relationship between the parties. While the implied duty of good faith does not permit a court to add obligations not present in the contract between the parties, it does provide a remedy where a party’s bad-faith conduct defeated the objective of the bargain in question.

The duty of good faith means that a party may not act to injure or destroy the other party’s right to receive the benefits of the contract, and fair dealing requires that each party act honestly and behave as a reasonable business person. Courts will presume that contractual parties act in good faith and, in order to prove a breach of the implied covenant, a plaintiff must make an ‘extraordinary showing of disingenuous or dishonest failure to carry out’ the contract. It is not sufficient to show a few examples of unreasonable conduct, or to show that a party acted inadvertently or carelessly. See Gordon v Nationwide Mut Ins, 285 NE2d 849 (NY 1972). In addition, courts examine not only the express language of the parties’ contract but also any course of performance or course of dealing that may exist between the parties to determine if there has been a breach of the implied covenant. Accordingly, whether specific conduct violates the duty of good faith and fair dealing will depend upon the particular facts of the case.

Fiduciary duties

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

The existence of a fiduciary relationship depends on the facts and circumstances; in particular, whether a special relationship of trust and confidence exists between the parties, going well beyond what is normally present in the marketplace between those involved in arm’s-length business transactions. While a contractual relationship is not required for a fiduciary relationship, if the parties do not create their own relationship of higher trust, ‘courts should not ordinarily transport them to the higher realm of relationship and fashion the stricter duty for them’. See Oddo Asset Management v Barclays Bank plc, 19 NY3d 584 (2012) (Oddo Asset). There is generally no fiduciary obligation in a contractual arm’s-length relationship between a debtor and creditor (Oddo Asset). Nor, in the absence of a trust or similar relationship, does a bank owe fiduciary duties to its customers. In a small number of cases, borrowers have successfully maintained breach of fiduciary duty claims where, for example, a bank’s role in providing business guidance and advice to a borrower went far beyond typical practice, involving the bank in the provision of detailed guidance, advice or directives concerning the operation of the borrower’s business.

Master agreements

How are standard form master agreements for particular financial transactions treated?

Standard form master agreements, especially where entered into between sophisticated parties such as banks or other financial institutions, will generally be given effect by the courts. Litigation concerning the International Swaps and Derivatives Association (ISDA) Master Agreement has been relatively uncommon in the United States, occurring most often in the context of bankruptcy proceedings, and the terms of the Master Agreement have generally been enforced by US courts where such disputes have been litigated.

In particular, the Lehman Brothers bankruptcy has produced noteworthy decisions construing provisions of the ISDA Master Agreement and the impact of the US Bankruptcy Code. For example, examining the Code’s ‘safe harbour’ and suspension of payments under section 2(a)(iii) of the Master Agreement, a US bankruptcy court held that a non-defaulting party could not withhold payment obligations under that section, and further, that a one-year delay waived its right to terminate the agreement. See In re Lehman Brothers Holdings, No. 08-13555. There has also been litigation concerning the calculation of early termination amounts (section 6(e)) and the exercise of set-off rights (section 6(f)).

Limiting liability

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

Parties generally can define and limit the scope of their liability by contract, with certain exceptions, and subject to those exceptions, New York courts will enforce agreed liability limitations, exclusions or waivers. New York courts will not, however, apply liability waivers to bar claims based on wilful misconduct or gross negligence. In addition, a financial institution cannot, as a general matter, disclaim its statutory liability under provisions such as the US federal securities laws. However, risk disclosures, disclaimers of reliance on extra-contractual representations and similar provisions may be given effect so as to bar liability in purported fraud cases, where the disclaimers ‘track the substance’ of any alleged misrepresentations. Such disclaimers are more likely to be given effect when the parties to the transaction in question are sophisticated institutional investors.

Freedom to contact

What other restrictions apply to the freedom of financial institutions to contract?

New York recognises a number of exceptions to the freedom of financial institutions to contract. Contractual provisions that contravene mandatory statutory duties will not be enforced, and provisions that contravene ‘public policy’, typically as measured by relevant statutory and regulatory provisions, will not be enforced. New York law, and that of most states, also prohibits the enforcement of contractual ‘penalty’ clauses where a liquidated damages provision bears no reasonable relationship to the parties’ expectations at the time of contracting, regarding actual damages. Contracts that are substantively and procedurally ‘unconscionable’ will not be enforced. This is a very high standard that requires the terms to be unreasonably favourable to one party and an ‘absence of meaningful choice’ in entering into the contract on the part of the other party.

Litigation remedies

What remedies are available in financial services litigation?

n/a

Limitation defences

Have any particular issues arisen in financial services cases in your jurisdiction in relation to limitation defences?

The US Court of Appeals for the DC Circuit has held that a three-year limitation period applied to administrative enforcement actions by the Consumer Financial Protection Bureau (CFPB), in contrast to the CFPB’s contention that its actions in an administrative forum are not subject to any limitation. PHH Corporation v CFPB, 839 F3d 1 (DC Cir 2016), en banc 881 F.3d 75 (DC Cir 2016).

Procedure

Specialist courts

Do you have a specialist court or other arrangements for the hearing of financial services disputes in your jurisdiction? Are there specialist judges for financial cases?

In some states, specialist courts have been established to hear cases involving business transactions with commercial banks and other financial institutions, and the parties may request assignment of their cases to these courts or divisions. These specialist courts may impose minimum thresholds for the value of claims they can hear or apply specific procedures to matters before them. For example, in New York, the rules of the Commercial Division impose tighter discovery limitations and timetables, apply harsher sanctions for non-compliance and include an optional accelerated adjudicatory procedure. To be heard in the Commercial Division, a dispute must exceed the monetary threshold and involve one of several designated claims, including:

  • breach of contract;
  • breach of fiduciary duty;
  • fraud;
  • uniform commercial code transactions;
  • shareholder derivative actions; and
  • commercial class actions and business transactions involving or arising out of dealings with commercial banks and other financial institutions.

Procedural rules

Do any specific procedural rules apply to financial services litigation?

No. There are no procedural rules specifically governing financial services litigation or the issues of timing of motions, damages calculations, etc, as distinguished from the procedural rules of the relevant forum court, which may differ depending on the specific state or federal venue in which an action proceeds. However, as noted, the rules applicable in certain state specialist courts that hear financial services litigation, such as the Commercial Division of the New York Supreme Court, vary in certain respects from ordinary court procedures, often in order to promote the more rapid and efficient resolution of commercial disputes.

Litigants in financial services disputes should also be cognisant of all available bases for federal court jurisdiction. For example, the Edge Act (12 USC section 632) provides a specific statutory basis for removal to federal court in disputes involving a federally chartered bank that otherwise might not be removable based on the type of claims or the lack of diversity among parties. To qualify for removal under the Edge Act:

  • the suit must be a civil suit ‘at common law or in equity’ (which encompasses state law claims);
  • at least one party must be a ‘corporation organised under the laws of the United States’ (ie, an Edge Act corporation); and
  • the suit must ‘aris[e] out of’ one of three types of offshore transactions or operations: ‘transactions involving international or foreign banking, or banking in a dependency or insular possession of the United States, or out of other international or foreign financial operations’. See American Intern Group v Bank of America Corp, 712 F3d 775 (2d Cir 2013).

The Class Action Fairness Act of 2005 (CAFA) provides for expanded federal diversity jurisdiction over class action lawsuits, including in cases under state consumer protection laws.

Arbitration

May parties agree to submit financial services disputes to arbitration?

Yes. Arbitration of financial services disputes is extremely common, and the rules of certain financial services self-regulatory organisations, such as FINRA, provide for arbitration of customer disputes, at the customer’s election, even in the absence of an arbitration clause between the parties. Arbitration clauses are commonly enforced in the context of customer disputes, but depending on the nature of the claim, some courts may find that a particular arbitration clause unduly burdens the exercise of statutory rights. Where an arbitration clause is present in an agreement between sophisticated commercial parties, courts are even more likely to give it effect, because the US Federal Arbitration Act (FAA) establishes a federal policy in favour of arbitration where the parties have chosen it contractually.

Statistics showing the number of reported new FINRA arbitrations over the past 10 years are provided in the table below.

Year

Cases filed

2017

3,456

2016

3,681

2015

3,435

2014

3,822

2013

3,714

2012

4,299

2011

4,729

2010

5,680

2009

7,137

2008

4,982

The circumstances under which the FAA’s pro-arbitration aims will be ‘overridden by a contrary congressional command’ continue to be defined through litigation and regulatory action. In 2012, for example, the US Supreme Court held that language in the Credit Repair Organizations Act providing for a ‘right to sue’ did not preclude the arbitration of consumer claims brought under that statute. See CompuCredit Corp v Greenwood, 132 SCt 665 (2012). Under the Dodd-Frank Act, the CFPB recently proposed a rule that would prohibit the application of pre-dispute arbitration agreements to class litigation in court, but that did not impose an outright ban on mandatory arbitration clauses.

Out of court settlements

Must parties initially seek to settle out of court or refer financial services disputes for alternative dispute resolution?

Generally, parties are not required to seek to settle out of court or to resolve disputes through alternative dispute resolution (ADR), although some US district courts, state court systems or even particular judges, require the parties to participate in mediation. There is no pre-filing obligation to engage in ADR procedures, unless the parties have contractually agreed that particular ADR measures must be exhausted before litigation is commenced.

Pre-action considerations

Are there any pre-action considerations specific to financial services litigation that the parties should take into account in your jurisdiction?

There are none specific to financial services litigation. Parties litigating in the US should be attuned to the fact that initial document disclosures may be required in a relatively short timeframe following the commencement of suit.

Unilateral jurisdiction clauses

Does your jurisdiction recognise unilateral jurisdiction clauses?

US courts have enforced unilateral jurisdiction clauses as part of the parties’ agreement. However, in some states, such unilateral clauses can be held invalid (or read as reciprocal regardless of their text), usually on the grounds of mutual obligation or unconscionability. Courts view a significant disparity in the parties’ bargaining power as an important, if not essential, factor in evaluating such agreements.

In particular, the use of unilateral jurisdiction clauses in arbitration agreements has produced some disagreement among courts given that certain states have continued to reject one party’s exclusive option to litigate in court. In Sabia v Orange County Metro Realty, Inc, California’s highest court is currently considering whether an unconscionability defence survives the US Supreme Court’s 2011 decision in AT&T Mobility v Concepcion, 563 US 333 (2011). The answer in federal courts has been more straightforward. For example, the US Court of Appeals for the Tenth Circuit recently ruled that the FAA trumps the presumption under New Mexico state common law that a provision applying primarily or exclusively to the claims of one party is unenforceable. See THI of NM at Hobbs Ctr, LLC v Patton, 2014 US App LEXIS 1687 (10th Cir 2014)).

Disclosure

Disclosure obligations

What are the general disclosure obligations for litigants in your jurisdiction? Are banking secrecy, blocking statute or similar regimes applied in your jurisdiction? How does this affect financial services litigation?

Applicable disclosure obligations vary by jurisdiction and court. In the federal courts, certain mandatory initial disclosures must be made, even if they are not requested by the other party. Such information includes the identification of individuals likely to have relevant information, a copy of documents that the possessing party may use to support its claims or defences and certain other documents. Disclosure pursuant to the discovery requests of an opposing party is relatively liberal and includes an obligation, subject to certain limitations, to provide documents, deposition testimony and answers to written questions, where such information is reasonably calculated to lead to the discovery of admissible evidence, and where disclosure is not unduly burdensome. Non-US bank secrecy and blocking statutes may be given effect, either as a matter of international comity or because compliance in violation of foreign law would be excessively burdensome. However, US courts, applying a balancing test, sometimes do not give effect to such secrecy and blocking statutes; in particular, where there is little evidence that penalties are likely to be imposed based on non-compliance and where the evidence sought may be important in the context of the US proceedings.

Protecting confidentiality

Must financial institutions disclose confidential client documents during court proceedings? What procedural devices can be used to protect such documents?

In general, confidentiality, either as a result of a confidentiality agreement with a third party or because of the business or competitive sensitivity of the information generally, does not provide a basis for a financial institution to refuse disclosure of otherwise discoverable material. However, most US courts will condition the disclosure of such material, where a strong basis for confidentiality can be shown, on the entry of a ‘protective order’ that restricts the dissemination and use of the confidential information in various ways. For example, the order may prohibit the dissemination of such information to third parties, or its use for purposes other than the litigation, and the court may order the receiving party to return confidential materials to the producing party at the end of the case. For particularly sensitive information, a court may additionally order that disclosure is to be restricted to the parties’ counsel, rather than the parties themselves.

Disclosure of personal data

May private parties request disclosure of personal data held by financial services institutions?

Yes. If such information is relevant to the litigation or is reasonably calculated to lead to the discovery of admissible evidence. However, the rules in many US courts, including all federal courts, require the redaction of certain personally identifying information, such as bank account numbers and social security numbers from all publicly filed (eg, those not filed under seal) copies of documents containing such information. Disclosure of personal healthcare data is further restricted by certain US federal statutory provisions.

Data protection

What data governance issues are of particular importance to financial disputes in your jurisdiction? What case management techniques have evolved to deal with data issues?

The volume of electronic data that must be searched and retained by financial institutions for litigation purposes has expanded massively in recent years because of technological developments. Electronic document retention obligations often pre-exist litigation, where a financial institution is subject to regulatory records retention requirements. The use of automatic backup, archiving and other data retention practices is critical to ensure that regulatory requirements are met, and that documents are retained in order to avoid claims of spoliation or document destruction in litigation. Predictive coding, the use of specialist document review firms in the United States and elsewhere, and careful negotiation of the scope of discovery in litigation can help financial institutions to navigate this landscape.

Interaction with regulatory regime

Authority powers

What powers do regulatory authorities have to bring court proceedings in your jurisdiction? In particular, what remedies may they seek?

Regulatory agencies, depending on the specific agency and regulatory regime in question, have extensive powers to bring court proceedings against financial services providers. Such actions can generally be brought whenever the entity sued is subject to the regulatory regime in question and where the regulatory body has a sufficient basis to believe that the regulatory provisions that it administers have been violated. Monetary penalties, including both fines and, potentially, compensation to injured private parties and disgorgement of improper gains, may be ordered, and injunctive relief is generally available to restrain future violations and to remedy the effects of past violations. Criminal penalties may also be imposed, with respect to a financial institution or persons associated with it, where a violation rises to the level of criminal conduct.

Disclosure restrictions on communications

Are communications between financial institutions and regulators and other regulatory materials subject to any disclosure restrictions or claims of privilege?

In most US jurisdictions, disclosure of otherwise-privileged documents to a regulator will operate to waive the privilege against third parties. A minority of jurisdictions recognise a doctrine of ‘selective waiver’, pursuant to which the production of privileged documents to a regulator, subject to an agreement that such disclosure will not waive the privilege, will enable the privilege to survive as against third parties. Under Dodd-Frank, the CFPB promulgated a rule of selective waiver (12 CFR 1070.48), by which the submission of any information to the CFPB for any purpose in the course of a supervisory or regulatory process of the CFPB is not to impact any claim of privilege over the information as to third parties. The possibility of a privilege waiver introduces a tension between a financial institution’s desire to preserve the privilege and its desire to cooperate with regulators, such as by providing them with privileged material, where counsel has conducted a privileged internal investigation and regulators seek the results of that investigation.

The US federal Freedom of Information Act often applies so as to provide members of the public with a presumptive right to obtain copies of documents submitted to federal regulators. Most US states maintain similar provisions with respect to disclosures to state regulators. Under such freedom of information laws, confidentiality may provide a basis to avoid disclosure, but a claim of confidential status generally must be made in writing at the time the documents are produced. In certain specialised contexts, such as confidential disclosures to bank examiners, there may also be a broad legal prohibition on disclosure, by the regulated institution, of its statements to regulators.

Private claims

May private parties bring court proceedings against financial institutions directly for breaches of regulations?

Some US state and federal regulatory provisions contain an accompanying private right of action authorising private parties to bring claims for breach of regulatory duties. For example, the anti-fraud provisions of the US federal securities laws may be the basis for claims by private parties. In general, however, in the absence of clear indications that the legislature intended to establish a private right of action, regulatory duties may not form the direct basis for a private-damages claim. However, a breach of regulatory duties may form part of the indirect basis for a private claim, where a financial institution’s breaches of regulatory requirements were the subject of inaccurate securities disclosures, causing injury to investors that may be compensable under the federal securities laws.

In a claim by a private party against a financial institution, must the institution disclose complaints made against it by other private parties?

There is no general or automatic obligation to disclose such information. Where a plaintiff can show that prior complaints are relevant in a particular way to a pending case; for example, where a history of prior complaints evidences culpable knowledge of the state of affairs complained about, such information may be discoverable in response to a specific request by a party.

Enforcement

Where a financial institution has agreed with a regulator to conduct a business review or redress exercise, may private parties directly enforce the terms of that review or exercise?

Generally, not, but admissions contained in an agreement with a regulator may sometimes be used by private parties to establish the truth of the matters admitted in private litigation.

Changes to the landscape

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

The expansion of the regulatory regime following the 2008 global financial crisis has given considerable impetus to public and private litigation against financial institutions. A large volume of private litigation has followed on the heels of public enforcement efforts and regulatory actions involving, for example, credit derivative products that performed poorly during the global financial crisis, leading to a number of large private settlements. The Securities and Exchange Commission (SEC), for example, reports that its enforcement actions relating to the global financial crisis have led to charges against 198 entities and individuals, with penalties, disgorgement, interest and other monetary charges totalling more than US$3.76 billion. Judges and juries are also, in some cases, more sceptical of the business practices and litigation conduct of banks and other financial institutions than was the case before 2008.

Complaints procedure

Is there an independent complaints procedure that customers can use to complain about financial services firms without bringing court claims?

There are a number of federal, state and independent regulatory agencies and organisations that act upon customer complaints against financial services firms, including the SEC, CFPB, Commodity Futures Trading Commission, National Futures Association and FINRA. There is no requirement that customers make use of these out-of-court complaints procedures in order to bring a court action and, unlike a civil lawsuit, compensation for an actionable financial loss to a customer is generally not the primary objective in investigating such complaints, which focus on enforcing industry regulations or possible criminal prosecution. A customer who files a claim through FINRA’s programme, for example, may not receive payment or the return of securities and funds even where the complaint leads to formal disciplinary action and the imposition of sanctions against the brokerage firm or employee.

Recovery of assets

Is there an extrajudicial process for private individuals to recover lost assets from insolvent financial services firms? What is the limit of compensation that can be awarded without bringing court claims?

Yes. An extrajudicial process may be available to private individuals without resort to court claims. The limit of compensation, availability of recovery and specific claims process, among other factors, will vary depending on the nature of the financial institution, the assets held, and other circumstances. For example, the Federal Deposit Insurance Corporation provides standard coverage of US$250,000 at insured banks for deposit accounts, and because the receiver of a failed bank may also process claims from uninsured depositors and other claimants. The Securities Investors Protection Corporation, a non-government entity, protects securities customer accounts up to US$500,000, including up to US$250,000 in cash, if a member brokerage or bank brokerage subsidiary fails.

Updates & Trends

UPDATE & TRENDS

Updates & Trends

Updates and trends

Priority areas in 2018 for the SEC’s enforcement division include cybersecurity, cryptocurrency offerings, protection of retail investors and a continued focus on use of technology and data analysis to generate and support investigations. In September 2017, the agency announced the creation of its Retail Strategy Task Force, focused on developing means of proactively identifying misconduct that impacts retail investors, including:

  • fee disclosures;
  • mutual fund offerings;
  • exchange-traded fund suitability issues;
  • churning; and
  • retail investor fraud with respect to initial coin offerings.

Cryptocurrencies, including the role firms and registered representatives may play in effecting transactions in such assets and ICOs, was also identified by FINRA as a priority for 2018, along with:

  • sales practice risks;
  • including recommendations of complex products to unsophisticated investors;
  • the protection of customer assets;
  • the accuracy of firms’ financial data;
  • market integrity, (including best execution);
  • manipulation across markets and products; and
  • fixed income data integrity.

Recent cases involving constitutional challenges to the appointment of administrative law judges have created a circuit split that the United States Supreme Court is expected to resolve in the coming months. Post Dodd-Frank, there have been an increasing number of enforcement actions brought before the SEC’s administrative law judges, as alternative venues to the federal courts.