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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?
One of the most common types of claims against banks and other financial services providers (financial institutions) is for the alleged misselling of financial products. Another common type of claim is the allegation of unauthorised trading in a non-discretionary execution account where the bank is alleged to have made trades without proper authorisation of the client.
In the past, actions for misselling have been commonly cast as actions for common law or statutory misrepresentation (pursuant to the Misrepresentation Ordinance), fraudulent, negligent or innocent misrepresentation. In addition, there are provisions under the Securities and Futures Ordinance (SFO), which provide for civil compensation to investors, for example, under section 108, for fraudulent, reckless or negligent misrepresentation inducing them to invest in securities, structured products or collective investment schemes. However, this section is not available in cases where a right of action is available under section 40 of the Companies (Winding Up and Miscellaneous Provisions) Ordinance (C(WUMP)O) (see question 3). In the case of a fraudulent or reckless misrepresentation giving rise to the above consequences, the party making the misrepresentation may also incur criminal liability under section 107 of the SFO.
Actions for unauthorised trading are, of course, claims of breach of contract.
Going forward, in the light of regulatory requirements introduced in June 2017, it is expected that misselling actions will become more common (see questions 2 and 26).
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?
Aside from claims made on the basis of duties arising under a contract, it is clear that in the absence of valid exclusion or limitation clauses, a financial institution would also owe a tortious duty of care to a customer (individual or institutional) in so far as it was recommending investments. To date, however, the claims made in Hong Kong have largely concentrated on contractual terms and conditions. In addition, the courts have resisted implying non-contractual duties in claims for the misselling of financial products. In particular, the courts have consistently applied the general rule that obligations cannot be implied into agreements that would be contrary to the express terms of the agreement. Non-reliance statements have generally been upheld in the context of misselling claims, and the courts have demonstrated a clear willingness to uphold the principles of contractual estoppel and to enforce the terms of the written contract between the parties, except in two recent decisions: Li Kwok Heem John v Standard Chartered International (USA) Ltd (2016) and Chang Pui Yin v Bank of Singapore Ltd (2017), where the court held in different approaches that the non-reliance clause in the client agreement did not protect the bank.
On the facts of Li Kwok Heem John, the non-reliance clause was found not to have covered the nature of the investment in question and to have failed to satisfy the requirement of reasonableness under the Control of Exemption Clause Ordinance (CECO), because the bank had employed a team of investment advisers whose duty was to give advice and recommendations on investments to clients. In Chang Pui Yin, the Court of Appeal held that it was neither conscionable nor reasonable for the bank to exclude or restrict liability as regards the duties and obligations represented to its clients to select investment products for them according to their investment objectives when, in reality, the bank was proposing products to them that did not adhere to their investment objectives.
Although in these two cases the banks were unable to rely on the non-reliance clauses in their respective client agreements, both decisions very much turned on their facts and do not suggest that banks are barred from relying on contractual estoppel as a defence to misselling claims. In fact, the Court of Appeal in Chang Pui Yin overturned the lower court’s ruling on contractual interpretation and held that the exclusion clauses in the bank’s services agreement did apply to the plaintiffs’ non-discretionary accounts. The Court of Appeal, however, went on to find that the exclusion clauses the bank sought to rely on to limit its liability were unconscionable under the Unconscionable Contracts Ordinance (UCO) and did not satisfy the requirement of reasonableness under the CECO.
The possibility of pleading that duties owed by financial institutions to the regulator are also owed directly by financial institutions to their customers has also been examined by the courts. For example, in Kwok Wai Hing Selina v HSBC Private Bank (Suisse) SA (2012) and DBS Bank (Hong Kong) Limited v San-Hot HK Industrial Company Limited and Hao Ting (2013), the customer sought to rely on the Code of Conduct for Persons Licensed by or Registered with the Securities and Futures Commission (SFC Code) to impose actionable duties on the bank. However, the courts found that, based on a proper construction, the SFC Code had not been incorporated into the contract (DBS) and the SFC Code could not be used to imply any duties into the contract that were inconsistent with the express wording in the bank’s standard terms (Kwok Wai Hing Selina).
However, this profusion of case law could soon become largely academic, particularly with respect to financial institutions that are subject to regulation under the SFO. Since 9 June 2017, where a written client agreement is required under the Securities and Futures Commission (SFC) regulations, there is a regulatory requirement to include a ‘suitability’ clause in the agreement, which, in effect, prevents SFO-regulated financial institutions from relying on contractual estoppel and non-reliance clauses as defences to a misselling claim. In other words, the express contractual duty of care that is owed by financial institutions to their clients must now mirror the duty owed by financial institutions to the regulator under the SFC Code (see question 26). In light of these changes, it is expected that misselling actions against such financial institutions will become more common because a major line of defence to such claims has been removed.
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?
In claims such as these, there are a number of statutes that potentially affect liability.
The C(WUMP)O provides a statutory basis for civil and criminal liability, pursuant to sections 40 and 40A, for misstatements in prospectuses. Claimants would need to show reliance on the prospectus to claim loss sustained by reason of any untrue statement.
The SFO imposes civil and criminal liability pursuant to sections 277 and 298, for disclosing false or misleading information that is likely to induce a transaction or affect the price of securities and futures contracts in Hong Kong. This is a type of market misconduct under the SFO. A person can be liable under the civil or criminal market misconduct regime, but not both. A party may also commence civil proceedings under sections 281 or 305 to seek compensation from any person who has engaged in market misconduct for pecuniary losses sustained as a result of the market misconduct.
Section 384 of the SFO makes it an offence for any person to knowingly or recklessly provide information that is false or misleading in a material particular to entities such as the SFC or the Hong Kong Stock Exchange that is in purported compliance with a statutory requirement to provide information.
The SFO also prohibits fraudulent or reckless misrepresentation made to induce others to enter into investments, which can result in both criminal and civil liability (see reference to sections 107 and 108 in question 1). This prohibition is wide enough to cover misrepresentation and misstatements in a prospectus. Civil (but not criminal) liability also applies to negligent misrepresentation.
The statutory liability regime does not rule out common law claims. However, if a remedy is available under the C(WUMP)O, no right of action arises under the SFO for compensation for fraudulent, reckless or negligent misrepresentation.
Generally, liability would rest with the company and its directors. However, the SFC considers that sponsors can also be liable under the C(WUMP)O for untrue or misleading statements or omissions in prospectuses.
In addition, the SFC is empowered under section 213 of the SFO to seek a range of orders from the civil court where it appears to the SFC that the abovementioned SFO and C(WUMP)O provisions have been or may be breached. The orders may include, for example, orders to pay damages to shareholders affected by misstatements in prospectuses or to restore their positions to that prior to the breach.
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?
The issue of whether an implied duty or obligation of good faith exists in contracts is generally a complex one that has not yet been explored in detail in Hong Kong. In particular, there is no appellate authority to establish such an obligation as part of Hong Kong’s jurisprudence. There is, therefore, no established implied duty of good faith in contracts between financial institutions and their customers.
Evidently, however, where a financial institution takes on a role as or akin to a trustee, then they will owe the usual trustee fiduciary duties to the beneficiaries. These, however, are not the same as an obligation of good faith.
In what circumstances will a financial institution owe fiduciary duties to its customers? What is the effect of such duties on financial services litigation?
There are currently no common or established circumstances in which a financial institution will owe fiduciary duties to its customers. It is feasible that the courts could find that a financial institution did in fact owe fiduciary duties to a customer if the circumstances made it so but this will be dependent on the facts of a particular relationship. In fact, the court has very recently confirmed in Zhang Hong Li v DBS Bank (Hong Kong) Ltd (2017) that the establishment of a fiduciary relationship in the commercial setting of a banker-customer relationship required ‘exceptional circumstances’. Fiduciary duties may arise, for example, where a financial services firm acts as a discretionary asset manager, in relation to trust property or when acting as an agent.
The scope of fiduciary duty, if parties are concerned that one may come to exist, can be carefully defined with certain activities being excluded, although exclusion clauses must be clear and unambiguous, and cannot exclude deliberate breaches of fiduciary duty, fraud or bad faith.
How are standard form master agreements for particular financial transactions treated?
There is no distinction made between standard form master agreements for financial transactions and other contracts. Both are subject to normal contract interpretation rules, although the use of a standard form agreement may give more certainty to the parties if relevant provisions have already been subject to scrutiny by the courts.
For example, clause 6 (Early Termination) of the 2002 International Swaps and Derivatives Association (ISDA) Master Agreement came before the court in Re Grande Holdings Ltd (2015). The court confirmed the interpretation given by Simon Firth in ‘Derivatives: Law and Practice’ at paragraph 11.175: ‘once a determination had been made on the early termination amount, this was final and binding on the parties’.
Can a financial institution limit or exclude its liability? What statutory protections exist to protect the interests of consumers and private parties?
As is the case with other contracting parties, financial institutions, too, may limit their liability. Non-reliance statements have, in the past, generally been upheld in the context of misselling claims, and the courts have demonstrated a clear willingness to uphold the principles of contractual estoppel and enforce the terms of the written contract between the parties, except in the recent decision of Li Kwok Heem John (see question 2). Note also that the latest reform to client agreement requirements may well prevent the reliance on contractual estoppel and the existence of non-reliance clauses as defences to misselling claims (see questions 2 and 26).
Contractual provisions cannot, however, limit or exclude regulatory obligations or fraud. In addition, the CECO requires limitation or exclusion clauses to be reasonable. Under section 3(1) of the CECO, the requirement for reasonableness is only satisfied: ‘if the court or arbitrator determines that the term was a fair and reasonable one to be included having regard to the circumstances which were, or ought reasonably to have been, known to or in the contemplation of the parties when the contract was made’. For example, the court in Li Kwok Heem John decided that the non-reliance clause was not reasonable as, on the facts, the bank had employed a team of investment advisers to give advice and recommendations on investments to clients (see question 2).
Other than the CECO, the decision in Chang Pui Yin affirmed that the UCO would be applicable to contracts for private banking services entered into between a financial institution and a private party dealing as consumer. Where a contract or part of a contract is found to have been unconscionable in the circumstances relating to the contract at the time it was made, different types of relief may be granted, including enforcement of the contract without the unconscionable part, or by limiting the application of, or revising or altering any unconscionable part. Under section 3(3) of the UCO, the party who claims that a person does not deal as consumer has the onus of proving the allegation. In determining whether a contract or part of a contract is unconscionable in the circumstances relating to the contract at the time it was made, section 6(1) of the UCO outlines a statutory list of factors that may be taken into account, including:
- the relative strengths of the bargaining positions of the parties;
- whether the consumer was required to comply with conditions that were not reasonably necessary for the protection of the other party’s legitimate interests;
- whether the consumer was able to understand the documents in relation to the services provided;
- whether any undue influence or pressure was exerted on the consumer; and
- the amount for which the consumer could have acquired identical or similar services otherwise.
However, this statutory list is by no means exhaustive and other factors may be taken into account to determine unconscionability. In Chang Pui Yin, the Court of Appeal took into account, and made reference to, the obligations under the SFC Code, which was applicable to the defendant bank, in assessing what was unconscionable in the context of the UCO, although it made clear that not every breach of the SFC Code would give rise to unconscionability in the context of the UCO because that would depend on the facts and circumstances of each case. The Court expressly stated that it would refrain from imposing by the backdoor, through the operation of the UCO, a duty on the part of the bank which was coterminous with its duties under the SFC Code.
Freedom to contact
What other restrictions apply to the freedom of financial institutions to contract?
Other than the new requirement for a ‘suitability’ clause (see questions 2 and 26), there are no restrictions specific to the freedom of financial institutions to contract. However, financial institutions are still subject to the normal restrictions that apply to any contracting party (eg, restrictions as to the enforceability of penalty clauses and contractual estoppel, the latter of which was raised in the misselling cases of DBS and Li Kwok Heem John). In DBS, the contractual estoppel operated in the bank’s favour and the court found that, even if misrepresentations had been made, the bank’s standard terms established a contractual estoppel and the customer was estopped from claiming, among other things, that she relied on representations of the bank and did not make independent decisions herself. In contrast, the court decided in Li Kwok Heem John that, on the facts, the contractual estoppel did not provide the bank with a defence as the scope of investment in question was different from what was contemplated under the relevant non-reliance clause.
Going forward, however, these findings by the court will become largely academic, particularly in respect of financial institutions that are subject to regulation under the SFO. As discussed in questions 2 and 26, since 9 June 2017, where a written client agreement is required under the SFC regulations, there is a new regulatory requirement to include a ‘suitability’ clause in the agreement that, in effect, will prevent SFO-regulated financial institutions from relying on contractual estoppel and non-reliance clauses as defences to a misselling claim.
What remedies are available in financial services litigation?
The remedies available in financial services litigation are the same as those available for any standard litigation with no distinction made between the two. Examples of such remedies include:
- specific performance;
- injunctive relief;
- declarations and orders for an account of profit;
- restitution of property; and
As is the case in many other common law jurisdictions, exemplary or punitive damages are hardly ever awarded under Hong Kong law. In very rare and extreme financial services cases, restitutionary damages may be awarded that not only compensate the plaintiff but also deprive the defendant of any benefit received.
Have any particular issues arisen in financial services cases in your jurisdiction in relation to limitation defences?
No particular issues in relation to limitation defences have arisen in financial services cases and the limitation periods applicable to financial services cases are the same as those applicable to any contract and tort cases brought before the courts in Hong Kong generally.
Limitation periods for contract and tort are set out in the Limitation Ordinance (LO). For claims based in contract, the limitation period is generally six years from the breach. This is extended to 12 years from the breach if the contract was created by deed. For most claims based in tort (other than personal injury), the limitation period is six years from the date of loss or damage. Where a relationship gives rise to concurrent duties in both contract and tort, it may be that the tort claim has a limitation period that expires later, because the breach may occur before the date the loss or damage is suffered. In cases of fraud, the limitation period does not begin to run until the fraud is discovered.
The LO also provides for extension of the limitation period in respect of negligence claims in tort where the damage complained of was not discovered until after the expiry of the usual six-year limitation period. This is known as latent damage. For latent damage, the LO provides a three-year limitation period commencing on a starting date that is dependent upon, among other things, the plaintiff acquiring certain knowledge about the material facts relating to the act or omission for which the damage is claimed and the identity of the defendant. This provision in the LO is subject to a long-stop date (ie, a final time limit of 15 years from the date of the defending party’s negligent act or omission).
No limitation period stipulated in the LO applies to an action by a beneficiary under a trust:
- in respect of any fraud or fraudulent breach of trust; and
- to recover trust property (or its proceeds) from a trustee.
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?
There is no specialist court list in Hong Kong (such as the Financial List in England) that is created specifically for financial services disputes to be heard. There is, however, a Commercial List that facilitates the disposal of actions involving commercial matters. Most financial services disputes are dealt with through the Commercial List (but this is not mandatory nor is it exclusively so).
Separately, outside of the court process, individual investors may, within a limitation period of 24 months (counting from the date of purchase of financial services, or from the date of first knowledge of monetary loss arising out of the financial services, whichever is later), seek resolution of disputes that are monetary in nature and involve a claim of not more than HK$1 million (or its foreign currency equivalent) with certain financial institutions. They include Hong Kong Monetary Authority (HKMA) authorised banking institutions and SFC-licensed intermediaries, except those that only provide credit rating services. This is done through the Financial Dispute Resolution Scheme (FDRS), which is administered by the Financial Dispute Resolution Centre (FDRC). The aforesaid financial institutions are required to be members of the FDRS and must comply with the terms of reference and procedures prescribed by the FDRC for the FDRS.
The FDRS’s jurisdiction has recently been expanded. Prior to 1 January 2018, the limitation period was 12 months and the maximum claimable amount was HK$500,000. In addition, since 1 January 2018, the FDRC may handle cases outside of the intake criteria (such as claims exceeding HK$1 million and claims made beyond the 24-month limitation period), provided there is a signed consent by the parties. The FDRC will also accept applications for claims, which are under current court proceedings, without requiring the claimant to withdraw those proceedings.
Under the FDRS, an individual or a sole proprietor who has or had a customer relationship with a financial institution described above, or who has been provided with a financial service by such an institution, may apply to the FDRC for resolution of a dispute through mediation, provided that he or she has filed a written complaint to the institution, and:
- he or she has received a final written reply from the institution but the dispute cannot be resolved; or
- he or she has received no final written reply from the institution after 60 days from the filing of the complaint.
From 1 July 2018, ‘eligible claimants’ under the FDRS also includes small enterprises, which are limited companies or partnerships that meet all of the following requirements as per their latest financial statements:
- annual turnover is not more than HK$50 million;
- gross assets are not more than HK$50 million; and
- number of employees in Hong Kong is not more than 50.
If the small enterprise is a subsidiary or a holding company within a group, the group’s consolidated figures will be used to determine compliance with the above criteria.
Upon acceptance of an application, the FDRC will appoint a mediator to facilitate settlement between the parties. In the event that a settlement cannot be reached, the eligible claimant may file a request with the FDRC for arbitration, which is usually conducted on a documents-only basis. Where parties agree to refer cases outside of the intake criteria to the FDRC (as described above), they may depart from the ‘mediation first, arbitration next’ process, and opt for ‘mediation only’ or ‘arbitration only’.
Do any specific procedural rules apply to financial services litigation?
No. The general civil procedure rules (Rules of the High Court and Rules of the District Court) apply to financial services litigation.
May parties agree to submit financial services disputes to arbitration?
Yes, if there is an arbitration agreement to such an effect or the parties consent to submit the dispute to arbitration (whether under the FDRS or otherwise).
Out of court settlements
Must parties initially seek to settle out of court or refer financial services disputes for alternative dispute resolution?
There are no specific alternative dispute resolution provisions for financial disputes heard in the courts. Practice Direction 31 on Mediation, which applies to almost all actions begun by writ, except some specialist actions (eg, proceedings in the Construction and Arbitration List), comes into effect once litigation proceedings are underway (but not before they have commenced).
Under Practice Direction 31, there will be adverse costs consequences if parties unreasonably refuse to mediate. Reasonable explanations for failure to engage in mediation may include the fact that active without prejudice settlement negotiations between the parties are progressing or that the parties are actively engaged in some other form of alternative dispute resolution to settle the dispute.
Are there any pre-action considerations specific to financial services litigation that the parties should take into account in your jurisdiction?
No. The general limited pre-action considerations, which are applicable to any dispute, will apply to financial services disputes. Details of some of those considerations are given below.
Demand letter or letter before action
Prospective plaintiffs may issue a demand letter to the defendant prior to commencing proceedings asking for rectification, compensation or repayment (as the case may be) within a certain period of time. Such letters are not formally required by the Civil Procedure Rules as a pre-condition for commencing litigation, however, they are common practice and all prospective plaintiffs issue it as a matter of course.
Applications can be made for pre-action discovery from those who are likely to be parties to subsequent civil proceedings in Hong Kong. This is intended to assist an applicant that may be aware or suspect that its legal rights have been infringed but does not have sufficient details to advance a claim. The scope is generally confined to documents that the applicant knows exist, or which must exist and are of central or direct relevance to the dispute.
In addition, there are a number of narrow circumstances where pre-action discovery can be obtained against third parties, as follows:
- under the Norwich Pharmacal jurisdiction;
- following the Bankers Trust line of cases; and
- under section 21 of the Evidence Ordinance (generally referred to as the bankers’ books’ jurisdiction).
A Norwich Pharmacal is an order for discovery against third parties in advance of commencement of proceedings against the alleged wrongdoers, enabling the applicant to trace the passage of information or assets, in order to be in a position to commence proceedings or to preserve assets, whether in Hong Kong or abroad.
Bankers Trust orders are usually obtained against banks or professional advisers where there are particular problems with confidentiality issues. An order can be sought where the applicant claims a proprietary interest in assets of the alleged wrongdoers or the application is made in aid of an interlocutory application for Mareva or Anton Piller relief.
As for bankers’ books’ jurisdiction, there is a general implied duty on a banker in Hong Kong to maintain secrecy about his or her customers’ affairs. However, an exception to this rule is where, under section 21 of the Evidence Ordinance, a bank can be ordered to provide a third party with access to entries in a banker’s book.
Unilateral jurisdiction clauses
Does your jurisdiction recognise unilateral jurisdiction clauses?
Yes. Unilateral jurisdiction clauses are recognised in Hong Kong.
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?
There are no banking secrecy, blocking statute or other similar statutory regimes in Hong Kong. However, a bank owes its customers a common law duty not to disclose to third parties information relating to the customers that it acquired through the keeping of the customers’ accounts, except with the express or implied consent of its customers, where disclosure is under compulsion of law, where the interests of the bank requires disclosure or where there is a duty to the public to disclose. In addition, a branch office in Hong Kong of a bank incorporated overseas is treated as a separate legal entity from its parent company (or any other branches around the world) and any confidential information stored at the Hong Kong premises is not disclosable merely because the parent company (or another foreign branch) is obliged to comply with a disclosure order. This forces parties in foreign proceedings to apply for a Hong Kong court order where they are seeking the disclosure of confidential information located at the Hong Kong premises.
There are no discovery obligations that are specific to financial services disputes. A wide scope of discovery applies to civil proceedings in Hong Kong (under Order 24 of the Rules of the High Court) following the principles under the English case of Compagnie Financière du Pacifique v Peruvian Guano (1882). Parties must disclose documents that:
- would tend to prove or disprove a matter in issue;
- it is reasonable to suppose contain information that may enable the party receiving discovery either to advance his or her own case or to damage the case of his or her adversary; or
- may fairly lead to a train of inquiry that indirectly does the above.
For the purposes of discovery, the relevance of a document should not be solely tested against the pleaded issues, but rather whether it is relevant to parties’ pleaded case in the broad sense (Chan Hung v Yung Kwong Chung (2009)).
Discovery will be disallowed where it is fishing and oppressive or where it is not necessary either for disposing fairly of the case or for saving costs.
Must financial institutions disclose confidential client documents during court proceedings? What procedural devices can be used to protect such documents?
Yes. Confidential client documents that do not fall under the scope of recognised exemptions from discovery (eg, legal professional privilege, privilege against self-incrimination, public interest immunity and statutory secrecy) must be disclosed. Failure to comply may result in proceedings for contempt of court with the penalty of imprisonment, an ‘unless order’, or the striking out of a pleading (eg, statement of claim).
There is an implied undertaking by parties who obtain discovery not to use the disclosed documents for a collateral or ulterior purpose (ie, where the use of the information is not reasonably necessary for the proper conduct of the action) unless leave is obtained from the court or consent is obtained from the party providing the discovery (Derek Joseph Parry & Anor v Nicholas Bryan Bentley & Anor (1993)).
The court also has jurisdiction to extract an express undertaking as to confidentiality from the party seeking disclosure, and such terms may go further than those obligations under an implied undertaking (Ngan In Leng v Chu Yuet Wah (2013)).
Disclosure of personal data
May private parties request disclosure of personal data held by financial services institutions?
Yes. An individual (or a person authorised in writing by that individual to act on their behalf) may make a data access request in relation to that individual’s own personal data pursuant to section 18 of the Personal Data (Privacy) Ordinance.
However, the courts have recognised that it is not the purpose of the Personal Data (Privacy) Ordinance to supplement rights of discovery in legal proceedings, nor to add any wider action for Norwich Pharmacal discovery for the purpose of discovering the identity of a wrongdoer (Wu Kit Ping v Administrative Appeals Board (2007), applied in Chan Yim Wah Wallace v New World First Ferry Services Ltd (2015)). Any party in civil proceedings who wishes to seek discovery of documents must do so by a process of applying for discovery of those documents:
- from parties in the course of the proceedings;
- from a person likely to be a party to subsequent proceedings to be brought, pursuant to section 41 of the High Court Ordinance and Order 24 Rule 7A(1) of the Rules of the High Court; or
- from a non-party in existing proceedings, pursuant to section 42 of the High Court Ordinance and Order 24 Rule 7A(2) of the Rules of the High Court, or by means of a Norwich Pharmacal application.
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?
Financial services disputes usually involve the disclosure of a large volume of documents. To assist with the demand, a Pilot Scheme for Discovery and Provision of Electronically Stored Documents in Cases in the Commercial List came into effect on 1 September 2014 and is governed by Practice Direction SL1.2 (PD SL1.2). While PD SL1.2 applies to all actions in the Commercial List where the claim or counterclaim exceeds HK$8 million and there are at least 10,000 documents to be searched for the purposes of discovery, it may also apply to other non-Commercial List cases upon the court’s direction.
‘Electronic documents’ are defined under paragraph 3 of PD SL1.2 as:
[...] any data or information held in electronic form, including e-mails and other electronic communications such as text messages and voicemail, word-processed documents and files, images, sound recordings, videos, web-pages, and databases, that are stored on any device, including data or information stored on portable devices such as memory sticks and mobile phones.
It includes data or information stored on servers and back-up systems and data or information held in electronic form that has been deleted, but not yet overwritten, as well as metadata and other embedded data that is not typically visible on screen or a printout.
The wide Peruvian Guano scope of discovery (see question 17) does not apply to electronic discovery. The scope of electronic discovery is limited to electronic documents directly relevant to an issue arising in the proceedings, being electronic documents that are likely to be relied on by any party to the proceedings or electronic documents that support or adversely affect any party’s case. Any party seeking specific discovery of ‘background’ electronic documents or electronic documents that might lead to a ‘train of enquiry’ may make an application for such documents (supported by affidavit evidence) only after discovery, supply of electronic copies and service of factual and expert evidence has been completed.
Interaction with regulatory regime
What powers do regulatory authorities have to bring court proceedings in your jurisdiction? In particular, what remedies may they seek?
In Hong Kong, financial institutions are primarily regulated by the SFC and the HKMA. Broadly speaking, intermediaries (such as brokers, financial advisers, asset managers and corporate finance advisers) are regulated by the SFC, whereas banking institutions (such as banks and deposit-taking companies) are regulated by the HKMA.
The SFC is entitled under the SFO to seek a wide range of orders from the civil courts to achieve its regulatory objectives. For example:
- Under section 213, the SFC may seek injunctive or remedial orders where a breach of any specified condition or legislative provision has or appears to have occurred. They include, for example, orders freezing an alleged offender’s assets and using such assets to restore the positions of the parties affected by the breach. The SFC has, on numerous occasions, obtained such orders, either on their own or in conjunction with other proceedings (civil, criminal or disciplinary), against persons in breach. As stated in question 3, the SFC can also seek orders to pay damages to shareholders affected by misstatements in prospectuses or to restore their positions to that prior to the breach.
- Under section 212, the SFC may seek a winding-up order against a corporation (except for an HKMA-regulated entity) or a bankruptcy order against an SFC-licensed individual. This enforcement tool is less commonly used given its draconian nature.
Unlike disciplinary proceedings, which can generally only be instituted against individuals or entities licensed by or registered with the SFC (and such entities’ senior management), the above orders may be sought against a wide range of parties in breach.
The HKMA is empowered to initiate civil court proceedings in very limited circumstances under the Banking Ordinance (BO), for example, in relation to restrictions in shares held by certain shareholder controllers of banking institutions. Winding-up orders against banking institutions can only be sought by the Financial Secretary of Hong Kong.
The SFO and the BO provide for specialist civil tribunals (outside of the court system) to hear certain matters, such as the Market Misconduct Tribunal and the Banking Review Tribunal.
Most of the criminal offences under the SFO and the BO are prosecuted by the Department of Justice (the government prosecutor). Some of the offences can be prosecuted by the SFC and (in limited circumstances) by the HKMA.
Disclosure restrictions on communications
Are communications between financial institutions and regulators and other regulatory materials subject to any disclosure restrictions or claims of privilege?
Information regarding regulatory investigations
Secrecy provisions apply to information regarding investigations conducted by the SFC and the HKMA under the SFO. A breach of these secrecy provisions constitutes a criminal offence.
In broad terms, save for the categories of disclosure permitted under the SFO:
- the SFC and the HKMA (and their employees or agents) are required to preserve the secrecy of any information acquired by them by virtue of their appointment or performance of their functions under the SFO; and
- persons who directly or indirectly receive information relating to an investigation under the SFO (such as suspects and witnesses) are also required to preserve the secrecy of the information.
Examples of permitted disclosure include:
- where an SFC employee is disclosing information (eg, to a suspect or witness at an interview) for the purpose of carrying out an investigation;
- where the information is already in the public domain;
- where disclosure is for the purpose of seeking legal or other professional advice; and
- where disclosure is in accordance with a court order or the law.
Consent for disclosure may also be sought from the SFC for specific circumstances.
A more limited obligation of secrecy is imposed in relation to investigations under the BO, which primarily applies to the HKMA and its employees or agents.
Information requested by regulators
Regulators have no power to compel the disclosure by financial institutions of materials that are subject to legal professional privilege (including legal advice privilege and litigation privilege).
In the Guidance Note on Cooperation with the SFC, published in March 2006 and updated in December 2017, the SFC notes that it recognises legal professional privilege as a fundamental right and that it will not regard a bona fide refusal to waive such a privilege in document production as uncooperative conduct. Nonetheless, if a person voluntarily waives a claim to legal professional privilege over a document (even on a limited basis), this may be recognised by the SFC as cooperation, which may be taken into account when the SFC considers the appropriate enforcement outcome.
The right to privilege against self-incrimination is usually limited in a regulatory investigation. This means that a person is not excused from providing information or answers as required by the SFC or the HKMA on the ground that to do so might lead to self-incrimination. However, if the person claims privilege against self-incrimination prior to providing such information or answers, the requirement and the information provided, or the questions and answers, will not be admissible in evidence against the person in criminal proceedings, subject to certain exceptions.
May private parties bring court proceedings against financial institutions directly for breaches of regulations?
Apart from the statutory provisions for civil compensation discussed in questions 1 and 3, there is no regime for private parties to bring such court proceedings. Further examples of the aforesaid statutory provisions for civil compensation include those that relate to other types of market misconduct, such as insider dealing, false trading, price rigging and stock market manipulation.
Complaints against intermediaries and banking institutions may be lodged with the SFC and the HKMA.
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 special rule or regime relating to the disclosure of complaints made by other private parties against financial institutions, but such complaints may be disclosable if they satisfy the general rules of discovery or disclosure.
Order 24 of the Rules of the High Court requires the mutual discovery or disclosure by parties to an action of documents that are (or have been) in their possession, custody or power, relating to any matter in question between them in the action. See question 17 in relation to the test for relevance and other principles relating to discovery or disclosure.
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?
There is no regime for private parties to directly enforce the terms of such business review or redress exercise.
Changes to the landscape
Have changes to the regulatory landscape following the financial crisis impacted financial services litigation?
Following the 2008 global financial crisis, the SFC introduced various reforms to enhance protection for investors. For example, in March 2016, the SFC implemented an enhanced professional investor regime by increasing protection for individual investors and redefining the criteria for assessing corporate investors’ knowledge and experience. Most of the investor protection requirements (aside from those that are more administrative in nature) can no longer be dis-applied by intermediaries in respect of individual investors, even though they are classified as ‘professional investors’ under SFC rules on the basis that they have met the portfolio threshold. As for corporate investors, even though they are classified as ‘professional investors’ based on portfolio or asset thresholds, intermediaries are not permitted to dis-apply the relevant investor protection requirements (such as the requirement to ensure the suitability of a recommendation or solicitation) unless various steps are taken, including ensuring that their corporate investor clients satisfy an enhanced principles-based knowledge and experience assessment for each product type or market.
As discussed above, since the 2008 global financial crisis, there have been a number of court decisions on claims brought by aggrieved investors against financial institutions alleging misselling of products or mismanagement of accounts. In most of these decisions, the courts have found in favour of the financial institutions and upheld the express terms of the client agreements, which typically stated that the relevant investment accounts were operated on an ‘execution-only’ basis and that any information given to the client by the financial institutions did not constitute investment advice.
In light of these court decisions, the SFC implemented a new client agreement requirement on 9 June 2017. Since that date, where a written client agreement is required under SFC regulations (ie, primarily where individual investors and inexperienced corporate investors are involved), a financial institution subject to the SFO is obliged to include a mandatory ‘suitability’ clause in the agreement, which states that if it solicits or recommends a financial product to a client, the product must be reasonably suitable for such a client having regard to the client’s financial situation, investment experience and investment objectives. Such a financial institution is not permitted to derogate from this obligation by way of any other contractual agreement. This new requirement will expose financial institutions that are subject to regulation under the SFO to higher risks of civil claims from clients. There will likely be an increase in claims, particularly during times of deteriorating market conditions. With the recent expansion of the FDRC’s jurisdiction, an increase in claims brought under the FDRS is likely (see question 11).
Is there an independent complaints procedure that customers can use to complain about financial services firms without bringing court claims?
Individuals or sole proprietors (and from 1 July 2018, small enterprises) may make use of the FDRS to seek resolution of disputes which are monetary in nature and involve a claim of not more than HK$1 million with certain financial institutions (see question 11).
Complaints against intermediaries and banking institutions may be filed with the SFC and the HKMA respectively. The SFC and the HKMA will investigate a complaint where there is sufficient evidence of a potential breach of regulations by the financial institution in question, which (if established), may result in regulatory action against the institution. However, the SFC and the HKMA do not themselves have the power to order a financial institution to pay compensation to the customer without involving the court process. A customer who wishes to seek monetary compensation from a financial institution will need to file a claim under the FDRS or commence court proceedings.
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?
Individuals may seek compensation as a result of the insolvency of certain intermediaries and banking institutions under the Investor Compensation Fund (ICF) and the Deposit Protection Scheme (DPS).
The ICF (which is administered by the Investor Compensation Company Limited) compensates clients of certain defaulting financial institutions who suffer pecuniary losses in their securities or futures account(s). The financial institutions covered include intermediaries or banking institutions licensed or registered to deal in securities or futures contracts, or which provide securities margin financing. In other words, all regulated brokerage firms and banks that provide securities and futures contracts trading services are covered. Default refers to where the financial institution in question, its employee or associated person is in bankruptcy, winding up or insolvency or has committed breach of trust, defalcation, fraud or misfeasance.
The upper limit for compensation is HK$150,000 per person per financial institution for losses sustained in relation to securities (regardless of how many securities accounts the person has with the financial institution). The same upper limit applies to losses sustained in relation to futures contracts. As it is a ‘per person’ limit, the compensation limit of HK$150,000 will apply to each account holder in the case of a joint account.
The DPS protects all deposits denominated in Hong Kong dollars, renminbi or any other currency deposits held with the Hong Kong offices of a DPS member, except for the following types of deposits:
- structured deposits;
- time deposits with a maturity longer than five years;
- bearer instruments; and
- offshore deposits.
Financial products other than deposits are not protected by the DPS. All licensed banks, unless exempted by the Hong Kong Deposit Protection Board (DP Board), are required to be DPS members. Restricted licence banks and deposit-taking companies, on the other hand, are not members.
Eligible deposits are protected by the DPS automatically. In the event a DPS member fails, the DP Board will identify the depositors entitled to compensation and it is not necessary for the depositors of the failed DPS member to file a claim. Depositors may, however, be required to provide information in support of their entitlement to compensation.
The maximum protection is HK$500,000 per depositor per DPS member, including both principal and interest. Deposits in separate accounts for the same depositor in the same bank will be combined in calculating the protected deposit amount.
Updates & Trends
UPDATE & TRENDS
Updates & Trends
Updates and trends
The regulatory reforms introduced by the SFC to enhance investor protection, in particular the mandatory ‘suitability’ clause that is required to be incorporated into relevant client agreements since 9 June 2017, will fundamentally change the financial services litigation landscape (see question 26). Although no litigation stemming from the new form client agreements has been noted, any substantial change in market conditions will likely result in increased litigation by investors against financial institutions and an increased chance of success against financial institutions in cases where product suitability is at issue. The usage of the FDRS as a means to resolve such disputes is also likely to increase in light of the expanded jurisdiction of the FDRC through an increase in the maximum claim amount, limitation period and categories of claimants.