D&O and PI insurers could face an increase in high value claims if the Financial Services Bill, currently at the Committee Stage in the House of Lords, is adopted. The Bill proposes fundamental changes to the way in which class actions are pursued in the UK in the area of financial services.
Potential implications of the proposed class actions regime
- Increased volume in claims against the financial sector
- Increased D&O and PI insurance claims
- Establishment of a class action model to be adopted in other sectors
Current regime and concerns about proposed class actions regime
There is no direct UK equivalent to the US style of class action lawsuit and traditionally there has been opposition within the UK to introducing such a system. Concerns regarding class actions have included the need to avoid defendants being subjected to unmeritorious claims as well as the desire to avoid the development of a 'compensation culture'.
In the Financial Services Bill House of Commons Committee Stage Report of 20 January 2010 it was noted that there were fears that the UK would develop a US style litigation culture and queries as to why a new class action system was being introduced in the financial services sector first, a sector with a greater degree of regulation than almost any other. Despite these and other concerns, the Commons Committee did not amend the Bill.
Various mechanisms for pursuing group complaints do exist in the UK, for example through Group Litigation Orders (GLOs), but these are not "opt-out" actions where claimants in an action must pro-actively "opt-out" of the claim once they have been identified and notified. It is the "opt-out" style of class action which has produced the gargantuan claims that the US is (in)famous for. The pursuit of class actions in the UK has also been relatively low with only 69 GLOs made since their introduction in 1999.
Process for collective actions under the Bill
If adopted, the Financial Services Bill would almost certainly lead to an increase in the volume of collective action claims against the financial sector, resulting in greater numbers of claims against D&O and PI insurers of financial institutions. The individuals and organisations against whom "Financial Services claims" can be brought will include banks, financial institutions, investment managers, insurers, financial advisers and insurance brokers.
Under the Financial Services Bill there is no 'last resort' criterion for bringing a collective action, meaning that regulatory procedures need not be exhausted for the collective action to proceed and it will not need to be established that a collective action is the 'best' means of redress.
To bring a collective action on the basis of the Bill, a court would have to authorise a "collective proceedings order" for any matter which is made up of "same, similar or related issues of fact or law" and would determine in each case whether the action should proceed on an "opt-in" or "opt-out" basis; however, any claimant domiciled outside the UK would be unable to "opt-out", which would provide much greater certainty in terms of potential multijurisdictional disputes for the parties involved and make settlements more probable.
The proposed regulations provide for an aggregation of damages, the distribution of damages to successful claimants and a mechanism for dealing with undistributed damages. Costs will be set out in court rules and the costs shifting rule is likely to remain. However, there is provision for rules to be introduced which would allow payment of claimants' legal costs out of the damages award.
There is significant disagreement as to whether or not this Bill will be passed into law before the election and even less certainty as to what will occur if there is a change of Government. Lord Barnett commented on 10 March during the House of Lords Committee that there was "not a cat in hell's chance of the Bill getting anywhere near the statue book when the House rises or prorogues shortly after Easter." The Government position is that it remains confident that the Bill will complete Parliamentary scrutiny before the end of the current session; however, a large number of amendments are currently under discussion in the House of Lords. Though the future of the Bill remains unclear, given the potential impact to insurers it warrants monitoring.