After the crackdown: litigation report

While High Court data shows the number of claims made against banks has dwindled in the last year, the major UK banks’ annual accounts – which are trickling out this month – show there’s no slowdown on the amount of money to be made in the banking and finance disputes market.

With UK banking reporting season in full swing, RBS, Barclays, Lloyds Banking Group, Standard Chartered and HSBC all upped their provisions for settlements and claims.

Barclays unveiled it had set aside an extra £1.45bn for future claims arising solely out of PPI mis-selling this month. Meanwhile, total litigation and conduct costs for last year were up £2.8bn on 2014 to a colossal £4.4bn.

Likewise, HSBC revealed in February its legal spend jumped by half a billion pounds last year to $1.65bn, following a year of heavy ongoing regulation and investigations relating to foreign exchange rate manipulation.

Lloyds Bank increased provisions for legal and regulatory matters to £813m, an increase from £521m on the previous year, while Standard Chartered – suffering from a year of corruption and bribery probes – upped provisions by 6 per cent to $115m.

RBS announced last month it would set aside an extra £2bn for past scandals including claims relating to mortgage-back securities, PPI and claims arising out of the US.

These figures follow a staggering revelation that emerged in the middle of last year: the total cost of litigation brought against the 16 biggest global banks since 2010 broke the £200bn barrier for the first time last June. The news ended the belief that the banking world was through the worst of post-financial crisis reparations, with the total amount spent on fines, settlements and other legal costs climbing by nearly a fifth just last year.

A quick glance at the High Court cause list also shows a range of big banking disputes to hit London over the next 18 months, with a number making it into The Lawyer’s Top 20 Cases of 2016.

Property Alliance Group’s £30m claim against RBS – the most advanced Libor claim before the courts – will be heard in June, for example. Meanwhile, Guardian Care Homes subsidiary Wingate has reignited its dispute with Lloyds over rate manipulation, currently in the case management conference (CMC) stage. The challenge follows the care home operator’s previous headline challenge against Barclays in 2014, which led to the first major out-of-court settlement over Libor.

Next March, RBS will face its shareholders in a £4bn battle over its 2008 rights issue in a major battle that is already set to cost the bank around £90m in legal fees. This and a raft of foreign exchange rigging related claims set to be filed this year mean that 2017 could be an even bigger year for the banking and finance disputes space.

The Lawyer spoke to a number of leading disputes partners about the rise of financial litigation in London and their predictions for the market in the coming years.

Q: What trends are shaping the banking and finance litigation market in London?

John Reynolds, partner, White & Case: The most prominent trend dominating the market right now – as it has been for the last few years – is the sheer number of investigations taking place, predominantly led by the Financial Conduct Authority (FCA). As a consequence, the litigation teams within legal divisions at banks are as much regulatory enforcement teams as they are litigation teams.

Last year, George Osborne suggested that it’s time to stop ‘bank bashing’. In reality, it will take a while for the pipeline of investigations to diminish (even assuming the FCA is listening to the Chancellor). Regulatory enforcement has a long tail, though, in the form of the private litigation that flows from it.

Ian Moulding, head of banking litigation, Clifford Chance: The financial crisis led to a surge in work, but more recently the industry-wide cross-border regulatory investigations, such as Libor and Forex, are dominating the market. Continuing market volatility plus increased activity and co-operation between regulatory authorities around the world will ensure there is a high volume of disputes in the coming years. In London specifically, the emergence and growth of specialist claimant firms is driving volume. A lot of these firms have started to be innovative in terms of funding arrangements and packages, and these are likely to increase in scope.

“George Osborne suggested that it’s time to stop ‘bank bashing’ but regulatory enforcement has a long tail”

The initial surge of work post-2010 was very much connected with the global financial crisis, though we’re arguably in a ‘second-wave’ now, which is more connected with huge regulatory investigations. What will define the third wave? Who knows, but continued activity by regulators and volatility in markets will continue to dominate.

Andrew Stafford QC, Kobre & Kim: Firstly, the fall-out from Libor and Forex manipulation continues, and is moving quite rapidly from the regulatory field into commercial litigation. In addition, class actions relating to mis-selling are starting to gain real traction, again, with the issues of market manipulation at the forefront of allegations. Finally, there is clearly a willingness for distressed companies to litigate against banks on the basis that they were ‘pushed’ further into distress by the banks.

In the future, the Senior Managers Regime, which strengthens the accountability of bank senior management, will both generate internal friction and will also become a source of evidence in banking litigation. This is particularly true as customers press for discovery of documents showing how responsibilities were or were not discharged internally.

Justin McClelland, partner, Winston & Strawn: The focus on the personal responsibility of individuals (with the advent of the Senior Managers and Certification regimes) will likely witness an increase in regulatory work and the possibility of follow-on litigation of sorts. The move towards greater individual accountability mirrors developments in the US.

Issues relating to data protection and the threat of cyber attack are of increasing concern. Data breaches can cause huge reputational damage and a loss of consumer confidence from which it can be difficult for institutions to recover unless they are fully prepared, act swiftly and knowledgeably and are able to show that every precaution has been taken.

“The focus on the personal responsibility of individuals will likely lead to an increase in regulatory work”

Alex Sciannaca, head of banking litigation, Hogan Lovells: We are starting to see the tail-end of actions brought as a result of the financial crisis, as claims become time-barred. This has not resulted in a return to ‘business as usual’, though – instead, we are seeing an increase in follow-on litigation arising out of recent regulatory findings, along with disputes connected to the fall in commodity prices. Looking to the future, the next trend may well be FinTech litigation – this is an unknown quantity at the moment, but given that FinTech firms are pushing the boundaries of traditional banking and “disrupting” elements of the traditional model such as mobile payments, money transfers, loans, fundraising and even asset management, it is conceivable that litigation will start to flow from this untested part of the market.

Q: How will the Financial List change banking and finance disputes?

Simon Davis, partner, Clifford Chance: The introduction of the Financial List shows the English commercial court is thinking commercially. Essentially, any solutions the courts can offer that reduce the time and expense burdens on the parties means people will be more inclined to bring their big disputes to the English courts.

McClelland: The effects of the Financial List remain to be seen as, since its introduction in October 2015, there has been only one concluded trial of a case on the list (in which judgment has not yet been handed down). That said, the list is clearly a positive step. At the very least, it should help reduce costs and make the process more streamlined and efficient, with docketed judges from start to finish. The fact that the judges on the list are all experienced in highly technical cases should allow disputes to be resolved faster and more efficiently.

It will also be interesting to see how the Financial Markets Test Case Scheme pans out. The scheme is certainly innovative in allowing parties to seek the court’s guidance on novel points of law without the usual requirement of a present cause of action between the parties. However, this scheme may only be of limited practical use given that many disputes in the sector revolve around contractual interpretation – a highly fact-specific exercise – in which parties will likely still wish to bring traditional claims with a cause of action.

Reynolds: Whichever side of the bank/claimant divide you sit on, the Financial List is a welcome innovation and should further bolster the reputation of the English courts and judiciary in this area. It’s unlikely to mean that we see more banking/finance disputes than would otherwise have been the case, but it does mean that parties have the assurance of a system that is tailored to the demands of their cases. In due course, this may well mean that parties are more willing to contract to have disputes determined by the English Court.

“There is a willingness for distressed companies to litigate against banks on the basis that they were ‘pushed’ further into distress by the banks”

We may find that there is less appetite for the financial markets test case scheme. It will depend on the issue, of course, but I would expect the circumstances in which institutions would be willing to see, for example, standard forms of documentation and market practice adjudicated upon, are narrow.

Stafford: The list has the potential to strengthen London’s reputation as a leading forum for dispute resolution with streamlined court procedure and allocated judges, leading to greater control, certainty, and clarity in cases of importance. It’s possible that banks will see the test case element of the list as a venue where legal issues can be litigated without the ‘sting’ of an unfavourable evidential background.

The capacity of interested parties to participate in test cases in the list could be important. However, if interested parties are allowed to intervene, the court will need to resist any ‘lobbying’ effect of having numerous banks arguing on one side of a particular issue.

Moulding: The Financial List is a very welcome development, but the proof in the pudding will be in the day-to-day experience. There is a continuing need for London to prove itself in this area as it’s under some attack by other bodies and regions – the Prime Finance Initiative, for example, or the Singapore Commercial Court, though it does still hold primacy in international banking and finance disputes.

Sciannaca: It’s definitely going to have an impact, but we are waiting to see how dramatic it will be. Having a docketed judge with the right expertise to hear a case from start to finish is a very welcome change, and should make hearings more efficient and economical – there used to be a lot of time wasted explaining the complex mechanisms of a financial product to a judge at a hearing, only to have to go through the same process with a different judge at a subsequent hearing.

The innovative ‘market test case’ scheme may also help resolve areas of uncertainty more quickly and cleanly, but one wonders whether the banks will want to incur costs on resolving issues which impact the industry generally when they themselves are not at the coalface of a particular dispute. Rather, it seems more likely that regulators will bring “proceedings” of this kind. More generally, the introduction of the Financial List shows that the UK courts continue to innovate and should help cement London’s position as the best place to resolve financial services litigation.

Q: How has increased regulation and regulatory investigations shaped the banking and finance disputes market?

Stafford: Investigations have revealed the existence of possible claims that might otherwise have remained undiscovered. Prospective claimants have been emboldened to take on banks by the previous regulatory outcomes. The fruits of internal investigations have made disclosure a significant battleground for banks, and have thrown a sharp light on issues of privilege.

McClelland: Without the regulatory investigations many of the current raft of civil claims wouldn’t exist, so they’ve obviously had a massive impact.

You only have to look at a bank’s financial statements to see the billions of pounds being channelled into legal fees, litigation costs and regulatory fines to get a sense of how it’s shaping the market. Prior to 2008, these matters barely registered; now they dominate reporting of results.

Davis: We are starting to look more American as the days go by. There is a great appetite at the moment for any time someone’s name is up in lights with a regulatory issue attached, they will be met with a raft of claims.

Sciannaca: The main impact has been an increase in follow-on litigation, which has resulted in the development of legal teams that specialise in both investigatory and litigation work.

Regulators are continuing to take an aggressive approach to investigations, but we still find that they are receptive if clients put forward constructive proposals. Also, by its nature, increased regulation – combined with the Senior Managers Regime and a more interventionist approach by regulators – has made banks tighten up their systems and controls in all areas. The theory is that this will mean fewer disputes in the future, such as mis-selling and mismanagement type claims, but that remains to be seen.

“Banks are also much more willing to bring claims than they were and defend poor claims”

Q: Have banks and financial institutions changed the way they approach litigation in recent years, both as a defendant and claimant?

Moulding: Prior to the financial crisis, banks were much more reluctant to take cases to trial, often because of publicity issues but also because they had other things to do. In recent years they are much more willing to defend poor claims, particularly now that being in the press is part of day-to-day business.

Also, a number of cases have strengthened the banks’ hands, such as the Springwell v JP Morgan Chase case, and financial pressures on banks means people are a lot more rigorous. Mediation and careful pre-litigation assessment are now very much standard fare in these types of cases, and banks are keen to apply cost benefit analysis at every stage of the litigation process.

Banks are also much more willing to bring claims than they were. Ten years ago bringing a claim was very rare but business relationships are more fragmented, less close and more transient now, and as a result banks, when they happen to be in the claimant position, are more willing to bring cases against customers or counter parties than in the past.

Davis: The biggest development for in-house lawyers at banks is the huge amount of documents, emails, metadata etcetera that now needs to be considered in any litigation process. An entire third party document review industry has essentially exploded as a result of the increase in big banking litigation where e-disclosure can be a mammoth task. This will only get more complicated in the future and the quantity of materials will continue to rise.

Stafford: The impact of regulatory action has forced banks to engage with the detail of their transactions and client relationships in a way that previously they felt able to resist. Banks have started to pay closer attention to and scrutinise the legal team acting for claimants, leading in at least one case to a challenge on grounds of conflict. Some have regarded this as symptomatic of the pressure being felt by banks.

Sciannaca: We are seeing an increased focus on horizon-spotting by clients in an effort to stay ahead of developing trends and problems, although it’s too early to tell whether this will reduce the amount of litigation in the long run.  Ever-increasing amounts of data mean that costs control of litigation (and disclosure in particular) is now hugely important. Clients are also being far more receptive to innovative fee structures – and, in fact, now expect this from their law firms.

McClelland: The increase in regulatory investigations and their follow-on litigation has required banks and financial institutions to adopt a more global approach to litigation than was previously the case with the settlement of regulatory matters in one jurisdiction having to take account of litigation exposure in another. Having a global reach will become more important in the future for law firms if they are to service the needs of banks.