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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?
The most common source of claims against banks and other financial services providers is the alleged misselling of financial products. Misselling is not a cause of action in itself. Claims are usually brought in negligent misrepresentation under section 2(1) of the Misrepresentation Act 1967 (MA 1967) or the tort of negligent misstatement; claims in fraudulent misrepresentation (deceit) are possible but are less common. A claim may also be brought for breach of an advisory duty in contract (under an express clause or implied term of the contract pursuant to section 13 of the Supply of Goods and Services Act 1982) or tortious duty of care. For further details on the imposition of an advisory duty at common law, see question 2. Banks and financial services providers are also commonly subject to actions for breach of contract, although the precise nature of the alleged breach is usually fact-specific.
In addition, claims can arise in relation to misleading information in listing particulars and prospectuses, which is actionable under section 90 of the Financial Services and Markets Act 2000 (FSMA 2000), or other published information (or delay to such publication), actionable under section 90A of FSMA 2000 (see question 3). Another type of claim, in relation to the public listing of securities which has been recognised by the High Court, is that an arranging bank may owe a tortious duty of care to investors (Golden Belt 1 Sukuk Company v BNP Paribas and others  EWHC 3182 (Comm)). The High Court has granted permission for the bank to appeal.
Further, banks and financial services providers are subject to regulatory duties which are enforced by the Financial Conduct Authority (FCA), previously known as the Financial Services Authority (FSA). The regulatory rules are set out in the Conduct of Business Sourcebook rules (COBS), which include an obligation to ensure that their communications with customers are clear, fair and not misleading (COBS 4.2). Breaches of such statutory duty can be actionable by a ‘private person’, pursuant to section 138D of FSMA 2000.
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?
A number of non-contractual duties in misselling claims have been identified in question 1. Of these, the imposition of a tortious duty to provide advice in relation to the sale of financial products is often a key area of contention. This is because, if an advisory duty in tort is established, the concurrent regulatory duties (ie, COBS) will inform the scope of the duty (Green & Rowley v The Royal Bank of Scotland plc  EWHC 3661 (QB)). The type of claimant is important, as the regulatory rules imposed for dealing with retail customers are more extensive than those for institutional investors. However, unlike section 138D of FSMA 2000, a claim for breach of advisory duty at common law may be brought regardless of whether the claimant is a private person. For a duty of care to exist, the usual three tests to establish a duty of care in negligence apply:
- voluntary assumption of responsibility by the defendant;
- the three-stage test set down in Caparo Industries plc v Dickman  UKHL 2 of foreseeability, proximity and whether it would be fair, just and reasonable to impose the duty; and
- the incremental test (ie, that the law should develop novel categories of negligence incrementally and by analogy with established categories).
In JP Morgan Chase Bank v Springwell Navigation Corporation & Ors  EWHC 1186 Comm, where it was held that the financial institution had not assumed any responsibility for a general advisory relationship, the fact that the claimant was a sophisticated investor was identified as a significant factor. An advisory relationship with a financial institution is therefore likely to be more common in the retail environment than for institutional investors, although it will still be subject to contractual limitations and exclusions. Contractual disclaimers and non-reliance clauses have been regularly upheld in the context of misselling claims. An example of this is Crestsign Ltd v National Westminster Bank plc and The Royal Bank of Scotland plc  EWHC 3043 (Ch). See question 7.
In a non-advisory relationship (where no broader duty is established following application of the tests in the previous paragraph), there is no ‘intermediate’ or ‘mezzanine’ duty of care imposed on financial institutions to explain the nature or effect of a proposed arrangement to a prospective customer. The extent of the duty will typically be a duty not to misstate (Court of Appeal decision in Property Alliance Group Limited v The Royal Bank of Scotland Plc  EWCA Civ 355) (Property Alliance). Further, absent special circumstances, there is no positive duty on financial institutions when selling financial products to disclose the internal contingent liability figure for the financial product (Deslauriers & Anor v Guardian Asset Management Limited  UKPC 34).
As to allegations in respect of London Interbank Offered Rate (LIBOR) manipulation, the Court of Appeal in Property Alliance recognised the possibility that the bank made a narrow, implied representation, at the time of entering into the interest rate hedging product (IRHP), that it was not itself seeking to manipulate pound-sterling LIBOR and did not intend to do so in the future. However, on the facts, the claimant could not prove that the representation (concerning pound-sterling LIBOR) was false. Under section 138D of FSMA 2000, customers who qualify as ‘private persons’ can bring private actions against regulated financial services firms for breaches of statutory duty (which include regulatory rules). See question 23.
There have been unsuccessful attempts by customers to claim for breach of regulatory duties at common law. Such claims effectively seek to circumvent the proper parameters of section 138D of FSMA 2000, by expanding the scope of common law duties owed by financial institutions to their customers by reference to their regulatory duties. In Green and Rowley v The Royal Bank of Scotland Plc  EWCA Civ 1197, the claimant argued that the duty of care at common law not to misstate is co-extensive with a bank’s duty to comply with the relevant regulatory rules, even in a non-advised situation. This proposition was rejected by the Court of Appeal. The fact that a financial institution owes a duty to the FCA does not mean that a similar duty is automatically owed by the institution to its customer at common law.
Claimants have also sought to impose a common law duty of care in connection with past business reviews mandated by the FCA; a proposition now rejected by the Court of Appeal. The High Court has also rejected an alternative formulation of this claim for a declaration that the defendant bank failed properly to property conduct its past business review. See question 25.
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?
There is a statutory claim available to purchasers of securities who suffer loss as a result of untrue or misleading statements or omissions in listing particulars and prospectuses, which is provided in section 90 of FSMA 2000. In addition, section 90A of FSMA 2000 provides a remedy to investors who have suffered loss, having reasonably relied on a misleading statement or omission, or where there is a delay in publishing that information (other than listing particulars or a prospectus) (whether buying, selling or holding securities).
A statutory claim for negligent misrepresentation under section 2(1) of MA 1967 may arise if an investor can prove that they relied upon a misleading statement of fact made by or attributable to the defendant when they entered into a contract. Alternatively, a common-law claim for negligent misstatement or a claim for the tort of deceit may arise if it is established that a duty of care was owed (and, in the case of deceit, that the defendant knew the information was false, or was reckless as to whether it was false). Such claims may be brought in relation to a broader set of documents than statutory claims under FSMA 2000, including any document on the basis of which investment decisions were made, such as general corporate announcements and accounts as well as listing particulars and prospectuses. For these claims, a claimant must also show materiality and reliance (which is arguably not required for a section 90 claim under FSMA 2000).
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?
English law does not imply a general duty of good faith into contracts between financial institutions and their customers (or indeed any English law contracts).
Duties of good faith can be implied in particular circumstances, where it is so obvious as to go without saying or necessary to give business efficacy to a contract, but it will generally be limited to that specific context and will not be deemed to apply to the contract or relationship as a whole.
Where a contractual right gives rise to a discretion that involves several options, the English court has implied limitations on the exercise of that discretion by reference to concepts of honesty, good faith, and genuineness, and the need for the absence of arbitrariness, capriciousness, perversity and irrationality. The concern is that the discretion should not be abused (see Socimer International Bank Ltd (In Liquidation) v Standard Bank London Ltd (No.2)  EWCA Civ 116). To fulfil this duty, a proper process for the decision-making process, including taking into account the material points and not taking into account irrelevant points, must be followed (Braganza v BP Shipping  UKSC 17. BHL v Leumi ABL Ltd  EWHC 1871 (QB) provides an unusual example where the court found that the financial institution’s discretion was exercised in breach of the duty; however, where a party has an absolute contractual right and there is no discretion to be exercised, no such term of honesty or good faith will be implied.
In what circumstances will a financial institution owe fiduciary duties to its customers? What is the effect of such duties on financial services litigation?
Fiduciary duties will not arise in the ordinary course of dealing (see Bailey v Barclays Bank plc  EWHC 2882 (QB)). However, they can arise in particular relationships, for example, when a financial services firm is acting as a discretionary asset manager, in relation to trust property or when acting as an agent. In the Bailey case, the High Court held that there was nothing exceptional in the facts that would give rise to a fiduciary duty. Further, the contractual documents expressly excluded the existence of such a relationship.
The scope of fiduciary duties can be carefully defined with some activities being excluded, but 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?
Standard form master agreements (such as the International Swaps and Derivatives Association (ISDA) Master Agreement) will form part of the contract if they are incorporated into the contract by reference.
The global financial crisis and the insolvency of Lehman Brothers led to uncertainty as to the operation of particular provisions relating to default. This resulted in significant litigation in relation to the following clauses of the ISDA Master Agreement in particular:
- the suspension of payments under clause 2(a)(iii);
- payment netting under clause 2(c);
- the appropriate method for calculating close-out payments under clause 6(e); and
- set-off under clause 6(f).
The general rule is that the principles of contractual interpretation under English law apply to the ISDA Master Agreement. However, in relation to service of notices under the ISDA Master Agreement, a more-strict approach has been applied. A statement setting out the manner in which notices may be given means that such notices may only be given in such manner (see Greenclose Ltd v National Westminster Bank Plc  EWHC 1156 (Ch)).
Under the 1992 ISDA Master Agreement, if an agreement is governed by English law, then the English courts have non-exclusive jurisdiction in relation to proceedings. The jurisdiction of the English court will be exclusive in English law agreements that incorporate the 2002 ISDA Master Agreement if the proceedings do not involve a Convention court.
Can a financial institution limit or exclude its liability? What statutory protections exist to protect the interests of consumers and private parties?
Parties can define and delimit liabilities by contract, and this can sometimes exclude any assumption of a wider common law duty (see Henderson v Merrett Syndicates Ltd  2 AC 145). The English courts attach importance to the specific documentation agreed by parties and have upheld contractual disclaimers and non-reliance clauses. In contracts detailing the terms of advisory agreements, where a financial institution assumes a contractual duty to provide advice, the terms on which that advice is provided are likely to include a large number of caveats to limit any potential liability.
Contractual provisions cannot be used to exclude regulatory obligations or fraud, including fraudulent misrepresentation, where applicable. The Unfair Contract Terms Act 1977 (UCTA 1977) also requires exclusion clauses to be reasonable. The court has distinguished between exclusion clauses and basis clauses (which set out the basis upon which the parties have entered into a transaction). If a clause is found to be a ‘basis’ clause, rather than an ‘exclusion’ clause, the test of reasonableness under UCTA 1977 will not apply (see Crestsign Ltd v National Westminster Bank plc and The Royal Bank of Scotland plc  EWHC 3043 (Ch)). For the most part, UCTA 1977 has been replaced by the Consumer Rights Act 2015 (CRA 2015), which applies to all consumer contracts made on or after 1 October 2015. Section 62 of CRA 2015 provides that a consumer is not bound by a term that is ‘unfair’. CRA 2015 does not distinguish between exclusion clauses and other types of clauses, and so basis clauses in consumer contracts will likely still need to satisfy the fairness test under CRA 2015. The formulation of the general test of unfairness of terms in consumer contracts in CRA 2015 is all but identical to the test required by 1999 Regulations that CRA 2015 replaced.
Freedom to contact
What other restrictions apply to the freedom of financial institutions to contract?
The principle of contractual estoppel under English law provides that contracting parties may agree that they are conducting their dealings on the basis of a particular fact, even if that fact is not true, and that agreement will give rise to an estoppel. In Springwell Navigation Corporation v JP Morgan Chase Bank  EWCA Civ 1221, the Court of Appeal held that a party was bound contractually by a statement that no representation or warranty had been made and therefore estopped from claiming misrepresentation. To the extent that the relevant term seeks to exclude or restrict liability for misrepresentation, it must be reasonable (section 3 of MA 1967 and section 11(1) of UCTA 1977). The same requirements of UCTA 1977 and CRA 2015 apply as set out in question 7.
Penalty clauses are unenforceable on the grounds of public policy. However, the trend in the English court is to avoid interfering in contracts freely negotiated between commercial parties of similar bargaining power, and the court has taken an increasingly narrow interpretation of what will constitute a penalty clause. The test was effectively rewritten in the case of Cavendish Square Holding BV v Talal El Makdessi and ParkingEye Ltd v Beavis  UKSC 67. The new test is that a penalty may be described as a contractual provision that imposes a detriment on the party in breach of a primary obligation, which is out of all proportion to any legitimate interest of the innocent party in the performance of that obligation.
Regulatory obligations or statutory provisions may also restrict financial institutions’ freedom to contract. For example, UCTA 1977 imposes limitations as described in question 7, and the CRA 2015 provides protection from unfair terms in consumer contracts.
What remedies are available in financial services litigation?
Ordinary damages, intended to compensate the claimant rather than punish the defendant, are the usual remedy. In an equitable claim or claim for misrepresentation, rescission of a contract may be available if there has not been a delay or change of position.
General common law and equitable remedies (including injunctions and specific performance) may be available, depending on the particular claim.
Have any particular issues arisen in financial services cases in your jurisdiction in relation to limitation defences?
The rules on limitation are well established and the principal statute is the Limitation Act 1980. The relevant limitation period will depend on a number of factors, with the starting point being whether the claim is brought in contract, tort, or restitution and the precise grounds of relief sought. For contractual claims, execution by deed will increase the period from six to 12 years. For claims in tort, the limitation period is generally six years but for negligence claims, it may be three years from the date when the loss could reasonably have been discovered. In the case of fraud, the limitation period does not begin to run until the claimant has or could reasonably have discovered the fraud.
This principle was tested in Qadir v Barclays Bank Plc  EWHC 1092 (Comm), where a claim against the bank for negligent advice in selling loans with interest rate swaps was struck out owing to expiry of the limitation period. The claimants had known that the swaps were loss-making and that there had been alternative products available over three years before the action was brought. The court held that the relevant knowledge was the factual essence of what was subsequently alleged as negligence in the claim. The running of time was not dependent on the claimant knowing that the alleged acts or omissions were negligent and, therefore, that it had a legal complaint. As the claim related to the suitability of the swaps, the relevant ‘building blocks’ of knowledge needed were that the swaps were loss making and that alternatives had been available.
Where a claimant has concurrent claims, they are entitled to choose between them even if the only motivation is because limitation may have expired (Henderson v Merrett Syndicates Ltd  2 AC 145).
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?
Yes. The Financial List, which was launched in October 2015, was created to allow complex financial disputes to be heard by specialist judges with the requisite experience to manage and hear cases that fall within the court’s purview. Part 63A of the Civil Procedure Rules (CPR) provides the criteria for a claim to be admitted to the Financial List (although in certain circumstances cases need not fit the criteria to be included in the Financial List):
- a financial dispute where the claim is in excess of £50 million;
- requires particular expertise in the financial markets; or
- raises issues of general importance to the financial markets.
The Chancery Division and the Commercial Court (one of the specialist courts of the Queen’s Bench Division of the High Court) have shared jurisdiction over the Financial List. Financial disputes that do not qualify for the Financial List or that have otherwise been issued outside of that list should be commenced in the Chancery Division or the Commercial Court directly.
Do any specific procedural rules apply to financial services litigation?
Additional procedural rules apply to claims in the Financial List (CPR 63A and its practice direction). For example, all claims in the Financial List are docketed to a specific Financial List judge (CPR 63A.4).
In the Financial List, there is also a financial markets test case scheme (Practice Direction 51M), which was extended from 30 September 2017 until 30 September 2020 and applies to claims started after 1 October 2015. The scheme was also expanded so that it applies to any Financial List claims that raise issues of general importance in relation to which immediately relevant authoritative English law guidance is needed. It is no longer necessary for claims to raise issues of general importance to the financial markets specifically. In the test case scheme, each side will generally be responsible for its own costs (contrary to the usual position in litigation in England and Wales, where the loser must pay the winner’s costs).
May parties agree to submit financial services disputes to arbitration?
Yes. While there are advantages to arbitration in terms of privacy (particularly relevant where claims are brought by other financial institutions), arbitration is not common. The disadvantage for financial institutions in arbitration is that there is no deterrence effect for successful defences (although this can cut both ways).
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. For further discussion of the general provisions, refer to Getting the Deal Through: Dispute Resolution.
Are there any pre-action considerations specific to financial services litigation that the parties should take into account in your jurisdiction?
No; the general pre-action considerations apply. For further discussion of the general provisions, refer to Getting The Deal Through: Dispute Resolution.
Unilateral jurisdiction clauses
Does your jurisdiction recognise unilateral jurisdiction clauses?
Yes. This was confirmed by the Commercial Court in Mauritius Commercial Bank Ltd v Hestia Holdings Ltd & Anor  EWHC 1328 (Comm). There has been no effect within the jurisdiction of England and Wales following the decisions of the courts of other jurisdictions. The Commercial Court has held that article 31(2) of the Recast Brussels Regulation should apply equally to a unilateral or asymmetric jurisdiction clause (Commerzbank Aktiengesellschaft v Liquimar Tankers Management Inc  EWHC 161 (Comm)). The consequence of this decision is that a party that is required to sue in a specified jurisdiction under a unilateral clause will not be able to delay proceedings in that jurisdiction by launching a ‘torpedo’ action elsewhere in breach of the clause.
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 disclosure obligations that are specific to financial services litigation. For further discussion of the general provisions, refer to Getting the Deal Through: Dispute Resolution.
There is no banking secrecy or blocking statute regime in place in England and Wales. Regulation (EC) No. 1206/2001 provides a framework for courts within EU member states to seek disclosure from different jurisdictions (even where blocking statutes are in place). Accordingly, this Regulation applies to litigation in England and Wales in circumstances where disclosure is sought from another jurisdiction that is subject to banking secrecy or blocking statute.
The framework allows for two possibilities for the taking of evidence:
- the competent court of another member state to take evidence (article 1(1)(a)); and
- to take evidence directly in another member state (article 1(1)(b)).
In addition to the Regulation, parties can seek a disclosure order in the English court to be enforced against parties in jurisdictions subject to blocking statutes. In three 2013 cases involving disclosure orders against French-domiciled parties who were subject to the French blocking statute, the Court of Appeal ruled that the English court had jurisdiction over the proceedings and was entitled to make a disclosure order without resorting to the Regulation. In addition, the court was entitled to disregard the fact that the making of the disclosure orders would potentially open up the parties to prosecution under their own regime.
Must financial institutions disclose confidential client documents during court proceedings? What procedural devices can be used to protect such documents?
Where documents containing confidential information should be disclosed as part of standard disclosure (or pursuant to a disclosure order), financial institutions must disclose the documents in question. Failure to comply may result in proceedings for contempt of court with the penalty of imprisonment, or an ‘unless order’, striking out a party’s statement of case if they do not comply with the order.
In Harlequin Property (SVG) Ltd v Wilkins Kennedy  EWHC 3050 (TCC), the court concluded that third-party confidential documents should be disclosed even though it was ‘highly likely’ they would be irrelevant. The decision was made on the basis that if the documents were irrelevant then they would not be relied upon, therefore no prejudice would be caused. The decision marks a significant departure from previous decisions in relation to confidential documents (see Decura IM Investments LLP v UBS AG, London Branch  EWHC 3476 (Comm).
However, there are a number of procedural devices that can be used to protect the information from entering the public domain, for example:
- where the confidential client information is irrelevant to the proceedings, the financial institution can seek to redact the information prior to making disclosure;
- the parties to the proceedings can enter into a ‘confidentiality club’, which limits the distribution of documents to a defined group. Generally, the ‘members’ of the club will include solicitors, counsel, witnesses and experts. Clients are not always guaranteed to be a member of the confidentiality club (see Ipcom GmbH & Co Kg v HTC Europe Co Ltd & Ors  EWHC 2880 (Ch)). In Libyan Investment Authority v Societe Generale SA  EWHC 550 (QB), a confidentiality club was extended to a client’s representative and used to preserve anonymity; and
- a hearing can also be held in private to prevent confidential client documents becoming public. While hearings in private run counter to the principal of open justice with the result that the courts are very reluctant to permit them, CPR 39.2(3)(c) allows a hearing (or part of a hearing) to be heard in private where confidential information is involved and publicity would damage the confidentiality.
Disclosure of personal data
May private parties request disclosure of personal data held by financial services institutions?
Private parties may request disclosure of their personal data from financial services institutions pursuant to section 7 of the Data Protection Act 1998 (DPA 1998). The request must be made in writing, and the financial services institution has 40 days to comply with the request.
Subject access requests can be used by litigants to procure documentation from a financial services institution that they may otherwise not be entitled to under the standard disclosure rules. The Court of Appeal in Dawson-Damer v Taylor Wessing LLP  EWCA Civ 74 clarified that the court is not prevented from ordering compliance with a subject access request simply because the applicant proposes to use the information for some purpose other than verifying or correcting the data held about him. It follows that a subject access request may be used to obtain information for the purposes of litigation, whether or not the information would be disclosable in the litigation in question. The court does, however, retain a broad discretion, and may refuse an order if, for example, the application is found to be an abuse of the court’s process. The decision also confirmed that the exception from section 7 for information which is subject to legal professional privilege (under paragraph 10, schedule 7 of DPA 1998) should be interpreted narrowly, so that it applies only to legal professional privilege recognised in proceedings in any part of the UK.
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 routinely involve extensive disclosure exercises. To assist with the demands of these large exercises, the courts have utilised electronic disclosure of documents. The rules governing electronic disclosure require the parties to work together to ensure that disclosure is carried out in a reasonable and proportionate manner. There are a number of tools and techniques listed in practice direction 31B(9) to assist with the exercise, such as the use of agreed ‘keyword’ searches.
In addition to electronic disclosure, the English court has endorsed the use of technology-assisted review (or ‘predictive coding’) for a large disclosure exercise where both parties endorsed the use of the technology (Pyrrho Investments Ltd v MWB Property Ltd  EWHC 256 (Ch)). The English court subsequently reaffirmed its approval of the use of predictive coding in Brown v BCA Trading Ltd  EWHC 1464 (Ch) where the parties had contested the use of the technology for the electronic disclosure. We expect the move towards predictive coding being utilised in large financial disputes to become more prevalent in the coming years. However, parties should be mindful of the need for predictive coding reviews to be transparent and independently verifiable (Triumph Controls UK Ltd and another v Primus International Holding Co and others  EWHC 176 (TCC)).
Interaction with regulatory regime
What powers do regulatory authorities have to bring court proceedings in your jurisdiction? In particular, what remedies may they seek?
The regulators have the power to take proceedings in England and Wales against a person or a company, making applications under the following provisions of FSMA 2000 for (most significantly):
- an injunction restraining actual or anticipated contraventions of a relevant regulatory requirement (section 380(1));
- restitution in respect of profits accrued, losses or other adverse effects suffered as a result of a contravention of a regulatory requirement (section 382(2)); or
- initiating winding-up proceedings of an authorised representative, an appointed representative or an unauthorised firm that has been carrying on regulated activities, for inability to pay debts or on just and equitable grounds (Part XXIV).
Separate injunction and restitution powers, in respect of market abuse cases, formerly contained in sections 381 and 383 of FSMA 2000, were removed on the coming into force of the Market Abuse Regulation (EU) No. 596/2014 in the UK on 3 July 2016. Injunctions and restitution relating to breach of that Regulation will, however, still be available under sections 380 and 382 of FSMA 2000 respectively.
The FCA commonly brings court proceedings in respect of the carrying on of unauthorised investment business. However, it has been relatively uncommon for the regulators to apply to the court for remedies against authorised firms; they will usually issue penalties themselves using their own administrative powers under section 123 FSMA 2000. However, since neither the regulators nor the Upper Tribunal (the independent judicial body that deals with referrals of regulatory decisions) have the power to issue injunctions, the regulators must apply to the court for injunctive relief. Pursuant to section 129 of FSMA 2000 (as amended by the Financial Services and Markets Act 2000 (Market Abuse) Regulations 2016), the court may be seised of proceedings for restitution or injunctive relief under FSMA 2000 in respect of market abuse. This provision gives the court the power, if it considers it appropriate, to make an order which does one or more of the following:
- require the person concerned to pay to the FCA a penalty of such amount as the court considers appropriate;
- if the person concerned is an individual, impose a temporary prohibition or a permanent prohibition on that individual; or
- impose a suspension or restriction on the person concerned.
The regulators may also favour a court application if they are concerned about enforceability outside of the jurisdiction (given the mechanisms to enforce court orders under the Recast Brussels Regulation, Lugano Convention 2007 and the Hague Convention on Choice of Court Agreements 2005).
The regulators may make a range of other applications to the court, including applications:
- to sanction schemes to transfer certain financial businesses;
- for injunctions in respect of certain overseas insurance companies;
- to obtain information to support the Financial Services Compensation Scheme (FSCS);
- to remove or replace the manager of an Authorised Unit Trust Scheme; and
- to participate in administration, receivership and insolvency proceedings initiated by third parties.
Disclosure restrictions on communications
Are communications between financial institutions and regulators and other regulatory materials subject to any disclosure restrictions or claims of privilege?
Confidential information obtained by a regulator is subject to a duty of confidentiality imposed on the regulator and on any third parties who obtain that information from the regulator, by section 348 of FSMA 2000. The regulator or third party cannot disclose that confidential information without the consent of the person(s) from whom the regulator obtained the information and anyone else to whom the information relates. Section 349 of FSMA 2000 provides exceptions to section 348 of FSMA 2000 where the regulator is sharing the confidential information to facilitate the carrying out a public function and the disclosure is permitted by certain regulations. These generally relate to sharing information with other regulators and public authorities.
Communications between financial institutions and regulators do not attract privilege. However, a form of ‘without prejudice’ protection can arise in communications between financial institutions and a regulator if the communications come about as part of genuine settlement discussions. This has the effect of allowing such communications to be withheld from inspection in the context of civil proceedings brought by private parties. The status of without prejudice communications with the FCA as being privileged from disclosure to third parties was confirmed by the court in Property Alliance.
In the context of investigations, the regulators have the power to request information or the production of documents. However, under section 413 of FSMA 2000, a person is not required to produce, disclose or permit the inspection of ‘protected items’, being (broadly) communications to which legal professional privilege attaches. Privileged material may be disclosed to a regulator without losing privilege more widely, provided that the regulator agrees that confidentiality and privilege are maintained against third parties. In other words, the English law principle of limited waiver can apply where privileged documents are provided to a regulator. The regulator may nonetheless transmit the information to an overseas authority under section 348 of FSMA 2000, with the risk that it will nonetheless constitute a waiver under foreign law (eg, in the United States).
May private parties bring court proceedings against financial institutions directly for breaches of regulations?
The regulators may provide for rules in their handbooks to be actionable privately in proceedings for damages brought by affected parties directly against the authorised firm that has contravened the rule (under section 138D of FSMA 2000). In respect of most such rules, only ‘private persons’ can bring such a claim, although section 138D(4) of FSMA 2000 provides for prescribed rules to be actionable by those who are not private persons. The rulebooks themselves set out which rules are actionable and by whom. Any claimant must show they have suffered loss and the other usual requirements for a claim of breach of statutory duty apply. The position as to whether a company can bring a claim as a ‘private person’ under section 138D of FSMA 2000 depends on whether it suffers the loss complained of in the course of ‘carrying out business of any kind’. If so, the company will be prevented from qualifying as a ‘private person’.
In practice, the ‘private person’ test has been a difficult test to satisfy as the court has historically adopted a broad interpretation of the words ‘carrying out business of any kind’. This effectively prevented companies from bringing proceedings, even where the transaction sat apart from the company’s normal business (Titan Steel Wheels Ltd v The Royal Bank of Scotland plc  EWHC 211 (Comm)). However, in the case of MTR Bailey Trading Ltd and another v Barclays Bank plc  EWCA Civ 667, the Court of Appeal granted permission to appeal this point of interpretation, commenting that precluding companies from being ‘private persons’ in effect ‘robs the provision of its substance because most companies will be in business of some kind’. However, it is understood that this case settled before the Court of Appeal had the opportunity to consider the point.
In Sivagnanam v Barclays Bank plc  EWHC 3985, a section 138D claim was brought by the sole shareholder and director, rather than the company itself, in an attempt to circumvent the difficulty of the private person test. This approach failed because the shareholder and director were not the customer of the bank. The company itself was the customer and the relevant regulatory duties were therefore owed only to the company. Accordingly, the court granted summary judgment in favour of the financial institution.
In the context of securities litigation, Hall v Cable and Wireless plc  EWHC 1793 (Comm) confirmed that a claim under section 138D of FSMA 2000 was not available in respect of an alleged breach of the civil market abuse provisions in FSMA 2000 or of listing rules made pursuant to Part 6 of FSMA 2000. However, the position is less clear since Regulation (EU) No. 596/2014 on market abuse came into force on 3 July 2016, which replaced the civil market abuse provisions in FSMA 2000.
In a claim by a private party against a financial institution, must the institution disclose complaints made against it by other private parties?
In most cases, where standard disclosure is ordered, financial institutions will not be automatically required to disclose complaints made against them by other private parties, unless it is relevant to a fact in issue in the proceedings. However, a claimant may seek specific disclosure of complaints made by other private parties under CPR 31.12.
In Claverton Holdings Ltd v Barclays Bank plc  EWHC 3603 (Comm), the court considered such an application for specific disclosure. The application was for documents relating to other allegations of swaps misselling. The claimant contended that evidence of other allegations and complaints would be admissible as similar fact evidence. In dismissing the application, the court held that the disclosure sought would merely provide evidence that similar complaints had been made or hearsay evidence of the underlying facts alleged. It would not adduce evidence of similar facts and so was not legally admissible. The court found that the application had become a ‘fishing expedition’ that was wholly disproportionate in the context of the claim. Even if the evidence had been legally admissible, the court would have had discretion as to whether the evidence should be admitted. However, this is likely to be fact-specific rather of general application.
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?
KPMG’s role in the large-scale review of mis-sold IRHPs was considered in R (on the application of Holmcroft Properties Ltd) v KPMG LLP  EWHC 323 (Admin). The Divisional Court found that KPMG was not fulfilling a public function and so was not amenable to judicial review by a private party. An appeal of this decision is due to be heard by the Court of Appeal in May 2018.
This question has also been considered by the English court in connection with agreements reached in 2012 between the FSA (now FCA) and a number of major financial institutions, in which the financial institutions agreed to carry out a past business review of their sales of interest rate hedging products and to offer redress as appropriate. In three conjoined appeals, the Court of Appeal found that it was not arguable that the defendant banks owed tortious duties to the claimants to conduct their past business reviews with reasonable skill and care (CGL Group Ltd v The Royal Bank of Scotland Plc  EWCA Civ 1073). This was primarily because such a duty would undermine the statutory and regulatory regime, which grants customers rights to bring claims against financial institutions only in certain defined circumstances (see question 23). The Supreme Court has refused permission to appeal.
Changes to the landscape
Have changes to the regulatory landscape following the financial crisis impacted financial services litigation?
The approach of the FCA and PRA has led to unprecedented regulatory oversight in England and Wales. Investigations by the FCA and Prudential Regulation Authority (PRA) have exposed regulatory failures by financial institutions, which have in turn resulted in a significant increase in private party litigation, both in terms of the number and value of claims. Specific examples of types of claims that have a nexus to regulatory investigations are the misselling of financial services products (in particular interest rate swaps and payment protection insurance), FX, LIBOR and other benchmark manipulation.
Several regulatory actions by the FCA have also prompted connected litigation by private parties.
Is there an independent complaints procedure that customers can use to complain about financial services firms without bringing court claims?
Yes. The Financial Ombudsman Service (FOS) decides complaints made by retail customers and businesses that fall within the definition of ‘small and medium sized entities’. The FOS decides cases on the basis of a ‘fair and reasonable’ test rather than strictly applying the law. The maximum redress that the FOS can bind a regulated firm to pay is currently £150,000, but it can recommend the firm pays a higher amount.
Firms’ obligations in the complaints process are set out in the DISP section of the FCA’s rules. The firm must recognise an expression of dissatisfaction to them as a complaint, and assess the complaint on an impartial basis, sending a final response letter to the customer with the outcome of the assessment. If the customer is dissatisfied with the outcome the customer can refer the complaint to the FOS. The firm is entitled to make representations to the FOS during this process. Complaints are almost always dealt with in writing and not at a hearing. A customer who accepts money offered under the award or voluntarily by the firm cannot bring a claim on the same facts as this acceptance is treated as a binding settlement.
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?
The FSCS compensates certain categories of customers of insolvent firms regulated by the PRA or the FCA, or both. The limit on compensation depends on the type of product the customer has taken out. The table below sets out an overview of the main products protected and the upper limit on the value protected.
£85,000 per person per firm
Temporary high balances held with a bank, building society or credit union
£50,000 per person per firm
£50,000 per person per firm
a) Long-term insurance benefits
b) Claims under compulsory insurance, professional insurance and certain claims for injury, sickness or infirmity of the policyholder
c) Other types of claim
d) General Insurance advice and arranging
The FSCS offers compensation once it has established that an authorised firm is in default, and provided that the loss incurred is a financial loss. There are several important limitations to the compensation offered:
- Although private individuals are generally protected, for businesses and charities eligibility will depend on the type of claim being made, as well as the type of business. Small businesses and sole traders have greater protection than large firms. Persons who, in the opinion of the FSCS, were wholly or partially responsible for the default, overseas financial services institutions and municipal authorities are also excluded, among others.
- Apart from for some insurance claims, businesses in the Channel Islands and Isle of Man are not covered.
Exact conditions of eligibility depend on the combination of product and claimant.
* The authors would like to thank Harry Edwards for his assistance with this chapter.
Updates & Trends
UPDATE & TRENDS
Updates & Trends
Updates and trends
One of the key trends over the past year has been the robust approach adopted by the courts to claims for the misselling of IRHPs, including the first substantive decision (as opposed to interlocutory application) to reach the Court of Appeal (Property Alliance). The bank was successful in resisting the appeal in full. In this case and other IRHP misselling claims, creative attempts by claimants to surmount various legal obstacles have been repeatedly quashed by the courts. Taken as a whole, these decisions are likely to make the IRHP misselling environment a more challenging one for claimants.
One of the more noteworthy decisions of the past year is Golden Belt, in which the High Court found that a bank arranging a publicly listed issue of debt securities owed a tortious duty of care to investors and that it breached that duty. Until that decision, those advising on such transactions had operated on the basis that - while there was a risk that an arranging bank may owe a tortious duty to investors (which has typically been addressed by appropriately worded disclaimers) - this risk was relatively low in the absence of a precedent holding that such a duty existed. A precedent now exists, at least for the time being. The High Court has granted permission for the bank to appeal the decision.
This period of review has brought a number of decisions on privilege that are of particular relevance to financial services litigation, in particular two potentially conflicting High Court decisions on the approach to litigation privilege in the context of investigations. In one case (Serious Fraud Office v Eurasian Natural Resources Corporation Ltd  EWHC 1017 (QB)), the court applied a strict approach to litigation privilege in the context of criminal proceedings (finding that litigation was not in reasonable contemplation), even though a criminal investigation by the SFO was reasonably contemplated. Yet in another case (Bilta (UK) Ltd (in Liquidation) v The Royal Bank of Scotland  EWHC 3535 (Ch)), the court found that documents prepared by the defendant in the course of an investigation into allegations by HMRC were protected by litigation privilege. This apparent conflict will hopefully be resolved by the Court of Appeal during 2018, with the Serious Fraud Office v Eurasian Natural Resources Corp Ltd  EWHC 1017 (QB) decision having been appealed.