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Banking and financial services litigation: 2021 in review
By Sarah Parkes and Emma Probyn. This article first appeared in the January/February 2022 issue of PLC Magazine.
A number of key decisions from the English courts in 2021 illustrate the litigation trends that are likely to have implications for the financial services industry in 2022 and beyond (see below “Cases to watch in 2022”).
Market misconduct and mis-selling
In the first of a series of claims issued by ECU Group Plc in relation to alleged wrongdoing in the foreign exchange markets by a number of banks, the High Court held that:
• The claim was time-barred because ECU Group had been in a position to set out most of its claims in 2006 when it made a formal complaint to HSBC Bank in connection with certain transactions, and could have been in that position with all of its claims had it exercised reasonable diligence.
• In any event, any alleged wrongdoing by HSBC would have caused no loss given ordinary market movements (ECU Group Plc v HSBC Bank Plc [2021] EWHC 2875 (Comm)).
ECU Group subsequently withdrew a similar claim against a second bank (ECU Group plc v NatWest Markets Plc, formerly the Royal Bank of Scotland Plc). Claims against five other banks remain.
In a sign that claims relating to London Interbank Offered Rate (LIBOR) misconduct may be reaching the end of the line, the High Court held that a claim against two banks in respect of a mis-selling claim concerning two LIBOR-referencing interest rate hedging products sold to the claimant had been issued outside of the statutory limitation period (Boyse (International) Ltd v NatWest Markets plc and another [2021] EWHC 1387 (Ch). The issuing of a final notice by the Financial Services Authority (the predecessor to the Financial Conduct Authority (FCA)) in February 2013 detailed the necessary facts. Further time for investigation after the publication of the final notice was not required.
Duty of care
A number of decisions saw the court decline to extend the scope of the Quincecare duty (Barclays Bank plc v Quincecare Ltd [1992] 4 All ER 363). In Philipp v Barclays Bank UK plc, the High Court found that the Quincecare duty did not include an obligation to have in place policies and procedures for detecting potential authorised push payment fraud and to protect individuals from the consequences of this fraud where the payment instructions were valid and not fraudulently given ([2021] EWHC 10 (Comm)).
In a case before the Hong Kong Court of First Instance, a defendant bank was found not to be liable for losses caused to a customer arising out of a fraudulent investment offered by a bank employee, as the customer had instructed the payment herself (Luk Wing Yan v CMB Wing Lung Bank Ltd [2021] HKCFI 279). The Quincecare duty can only arise in circumstances where the misappropriation of a customer’s funds occurred by an authorised or trusted agent of the customer, not where a customer directly induces or instructs payments.
In Stanford International Bank Ltd v HSBC Bank Plc, the Court of Appeal reiterated that the Quincecare duty is owed to a bank’s customers and not to its creditors ([2021] EWCA Civ 535). The court held that Stanford International Bank had not itself sustained loss where, before entering an insolvency process, it paid money out of its accounts in alleged breach of the Quincecare duty. Although the payment reduced the funds available to the bank’s creditors in the insolvency process, having those funds available was a benefit to the creditors rather than the bank. The Supreme Court has granted permission to appeal this decision.
The Supreme Court reconsidered the application of principles for determining whether a claimant’s loss falls within the scope of a professional’s duty of care (Manchester Building Society v Grant Thornton UK LLP [2021] UKSC 20; Khan v Meadows [2021] UKSC 21). In the leading case of South Australia Asset Management Corporation v York Montague Ltd (SAAMCO), the House of Lords drew a distinction between situations where the professional’s duty is to give advice and where it is to provide information only ([1997] AC 191). In Manchester Building Society and Khan, the Supreme Court moved away from a strict application of SAAMCO, preferring a more straightforward test looking at what purpose the duty of care assumed by the professional was objectively intended to serve and whether it was intended to guard against the loss actually suffered.
In a welcome decision for lenders, the Court of Appeal confirmed that a lender is not under any implied duty to a borrower to exercise reasonable care and skill when negotiating refinancing proposals with a borrower in default, nor was the lender in this case under an implied contractual duty to act in good faith (Morley (t/a Morley Estates) v The Royal Bank of Scotland Plc [2021] EWCA Civ 338).
COVID-19
The Supreme Court dismissed an appeal by certain insurers and substantially allowed an appeal by the FCA concerning business interruption insurance (BII) (Financial Conduct Authority v Arch Insurance (UK) Ltd and others [2021] UKSC 1). The FCA had sought legal clarity about the meaning and effect of certain policy wordings: an issue affecting a large number of SMEs in the UK due to the COVID-19 pandemic. The High Court found that coverage was available under some, but not all, of the policy wordings that it considered. The Supreme Court’s decision assists in resolving coverage and general causation issues in respect of disputed BII claims arising during the pandemic under certain affected policies. Following the decision, among other things, the FCA published a further Dear CEO letter and guidance on proving the presence of COVID-19, and updated its statement on non-damage BII settlements and deductions made for government support.
Class and representative actions
Shareholder claims have become a feature of English litigation in recent years. In a claim under section 90A of the Financial Services and Markets Act 2000 (FSMA) (section 90A), the High Court ordered a split trial but held that the issue of reliance on market announcements should be heard in the first trial, rather than being held over to the second trial (Allianz Global Investors GmbH and others v RSA Insurance Group plc [2021] EWHC 570 (Ch)). The decision means that claims under section 90A may be more expensive or burdensome for claimants to pursue because they will be faced with disclosure and evidential obligations from the outset. The court also refused the defendant’s application to strike out certain of the claims on the grounds of limitation because, among other things, the issue of reasonable discoverability is factual and the position may differ for different claimants ([2021] EWHC 2950 (Ch)).
In Bankia SA v Unión Mutua Asistencial de Seguros, the European Court of Justice held that an investor that buys securities where a prospectus has been published may rely on the information given in that prospectus, whether or not the prospectus was issued for that investor, and therefore can bring an action for damages on the basis of that information (C-910/19). Although the case concerned the Prospectus Directive (2003/71/EC), the UK courts may have regard to Bankia when interpreting section 90 of FSMA as it is derived from that directive.
Competition law infringements continue to generate follow-on litigation involving financial institutions. In Walter Hugh Merricks CBE v Mastercard Incorporated and others, the Competition Appeal Tribunal granted the UK’s first ever collective proceedings order on an opt-out basis ([2021] CAT 28). In Allianz Global Investors GmbH and others v Barclays Bank plc and others, the High Court refused to strike out the defendant banks’ pass-on defences to claims issued by various investment funds alleging losses caused by the defendant banks’ anti-competitive manipulation of foreign exchange markets ([2021] EWHC 399 (Comm)). The court held that a trust beneficiary can claim its own damages when it has suffered a loss because of a breach of competition rules.
In Lloyd v Google, the Supreme Court held that damages cannot be awarded under the Data Protection Act 1998 (DPA 1998) for loss of control over data in the absence of financial loss or distress ([2021] UKSC 50). Therefore, the claim was not suitable to proceed as an opt-out representative action because any compensation would need to be assessed individually. Although the decision concerned the DPA 1998, the equivalent provision in the retained EU law version of the General Data Protection Regulation (679/2016/ EU) (UK GDPR) is worded in substantively similar terms. As a result, Lloyd is likely to have substantially reduced the threat for data controllers, including financial institutions, of mass claims from affected individuals seeking damages for the mere fact of a data breach or cyber attack based on data protection legislation.
Access to information
In R (on the application of KBR Inc) v Director of the Serious Fraud Office, the Supreme Court held that the Serious Fraud Office’s (SFO) powers under section 2(3) of the Criminal Justice Act 1987 do not have extraterritorial effect and cannot be used to obtain documents from a non-UK company that neither has a registered office nor carries on business in the UK ([2021] UKSC 2). While the decision provides welcome clarity in respect of the SFO’s powers, the court warned against reading across to the powers vested in other UK regulatory agencies.
The High Court held that litigation privilege did not attach to an accountant’s investigative report prepared at the request of the defendant bank’s lawyers following a potential hack or leak that led to it being published online (State of Qatar v Banque Havilland SA and others [2021] EWHC 2172 (Comm)). At the time that the report was prepared, the bank had not received any communications from the claimant and, while its regulator was asking questions of the bank at the time, the court considered that this was not adversarial. Accordingly, it could not be said that the report was prepared for the sole or dominant purpose of litigation or adversarial proceedings.
Regulatory actions
In R (T and another) v Financial Conduct Authority, the High Court held that proceedings brought by the FCA’s Regulatory Decisions Committee (RDC) against the applicant should be stayed pending the outcome of a preliminary trial in related civil proceedings ([2021] EWHC 396 (Admin)). Although the applicant was not a party to the civil proceedings, his conduct as a CEO was in issue. There was therefore a risk of serious prejudice to the applicant if the RDC proceedings were not stayed, and this outweighed the public interest in a swift resolution of the RDC proceedings.
In The Financial Conduct Authority v Carillion Plc, the High Court determined that actions by the FCA under section 91 or section 123 of FSMA do not constitute proceedings under section 130 of the Insolvency Act 1986 and, therefore, as expected, FCA investigations can continue against companies in insolvency ([2021] EWHC 2871 (Ch)).
Other cases of interest
In PCP Capital Partners LLP v Barclays Bank plc, although the defendant bank was found to have made misrepresentations in its negotiations with the claimant, the High Court dismissed the claim for lack of causation and loss ([2021] EWHC 307 (Comm)). In particular, the court held that, when the hypothetical actions of the defendant are in issue, the claimant must prove its case on a balance of probabilities, as opposed to on a loss of chance basis.
Cases to watch in 2022
The Quincecare duty will remain a hot topic of English litigation in 2022, with permission to appeal to the Court of Appeal and Supreme Court having been granted in Philipp v Barclays Bank UK plc and Stanford International Bank Ltd v HSBC Bank plc respectively ([2021] EWHC 10 (Comm); [2021] EWCA Civ 535).
The scope of the Quincecare duty is also in issue in The Federal Republic of Nigeria v JPMorgan Chase Bank NA, which is due to go to trial in the High Court in February 2022. The Court of Appeal previously upheld the High Court’s decision in an interim hearing that a bank’s Quincecare duty can be excluded only by clear and explicit language in the customer agreement ([2019] EWCA Civ 1641).
With financial institutions beginning to find themselves the subject of shareholder claims under section 90A of the Financial Services and Markets Act 2000, practitioners should watch for developments in Allianz v RSA Insurance Group plc, as well as a claim issued by shareholders against Standard Chartered PLC in September 2021 (The trustees for the Victory Portfolios and others v Standard Chartered PLC).
Financial services practitioners should also watch out for the judgments in respect of two competing applications made to the Competition Appeal Tribunal for a collective proceedings order in the foreign exchange litigation, Mr Philip Evans v Barclays Bank plc and others and Michael O’Higgins FX Class Representative Limited v MOL (Europe Africa) Ltd and others, which are expected in the first half of 2022.
