Welcome to the third edition of Financial Services Litigation. There has been a significant rate of global growth of litigation in this sector following the 2008 global financial crisis, which seems to be continuing, and therefore it seems appropriate to have a dedicated guide for practitioners in this area. While the existence of financial services litigation is truly a global phenomenon, it has become apparent through the process of compiling this edition that the law and procedures in relation to such disputes have evolved in different ways across the jurisdictions. In this overview we consider some of the principal similarities and differences in the sector.
The United Kingdom and the United States have arguably experienced the greatest volume of financial services litigation. In these jurisdictions, the law has been subjected to significant testing, which has helped to develop the key principles. Typically, in jurisdictions where there have been lower levels of financial services litigation, the more complex questions of law have not yet been addressed by the judiciary or parliament. However, there are exceptions to this generality, for example, in the United Arab Emirates (UAE). Even as a relatively young economy, the law in this jurisdiction has developed considerably through the introduction of new legislation and rules.
With the exception of Switzerland (see below), the misselling of financial products, in particular interest rate hedging products, has been identified as one of the most common types of claim. Although no jurisdiction recognises misselling as a cause of action in itself, such claims are brought pursuant to contract, common law or statute. The duties owed by financial institutions to their customers when selling such products vary considerably. The UK is at one end of the spectrum, where the obligation is simply not to misstate (unless the institution in question has taken on an advisory role). France and Spain sit at the other end of the spectrum, where a general duty to provide information is automatically owed to clients. In France, this duty has been extended further since 1 October 2016 with an amendment to the French Civil Code. An example of where a similarly expansive approach has been taken outside of the European Union is Korea, where there is a statutory duty to protect customers (both retail and institutional) when selling financial products. This includes requirements to both provide sufficient information and to assess suitability. In Hong Kong, the law was previously similar to that of the United Kingdom, but from June 2017 certain financial institutions have been obliged to include a mandatory ‘suitability’ clause, which will have the effect of preventing regulated firms from relying on contractual estoppel and non-reliance clauses as defences to misselling claims. In the light of these changes, it is expected that misselling actions against financial institutions in Hong Kong will become more common, as a major line of defence to such claims has been removed. In Switzerland, however, litigation arising from the misselling of financial products has not been as prominent as in EU member states. It is suggested that this is because, under existing Swiss laws, non-contractual duties are not as detailed as EU laws, although this may change with a new Swiss Financial Services Act, which is expected to be enacted in 2019–2020. Likewise, while misselling of financial products is a common claim brought by consumers in Brazil, disputes involving large commercial debtors are less frequent and tend to relate solely to the calculation of interest rate.
Different jurisdictions have suggested various reasons for growth trends in financial services litigation. One of the factors highlighted by Belgium is the introduction of new legislation, particularly the introduction of EU-wide regulations and directives applicable to financial institutions. This is particularly relevant in Belgium’s case, where common-law claims can be brought for breach of regulatory duties. The same principle (that customers have a private law action for breach of regulatory duties) applies across other EU member states, such as Ireland, France, Italy and Portugal, and more globally, such as Australia and South Africa. This can be contrasted with the laws of onshore UAE and Hong Kong, where no such right exists and so customers must seek redress through the regulatory framework, not the courts. England and Wales currently adopt a middle-ground approach, where ‘private persons’ may bring court proceedings for breach of regulatory duties, but those not qualifying under this definition (typically companies) may not.
The United States suggests that the expansion of the regulatory regime following the global financial crisis has given considerable impetus to public and private litigation against financial institutions. The United States also suggests that this effect may have been amplified by the fact that judges and juries are, in some cases, more sceptical of the business practices and litigation conduct of financial institutions than they were before 2008. There have also been jurisdiction-specific factors to explain the increase in financial services litigation, such the collapse of the Espirito Santo Group in Portugal and the write-offs imposed on investors in Greek government bonds in Greece. Conversely, Sweden has not experienced the same upturn in litigation in this sector, which has remained fairly limited, possibly because institutional investors tend to resolve disputes through arbitration. Likewise, Australia and South Africa suggest that there has been less of an impact because of the regulatory requirements in place prior to the global financial crisis.
One trend worth monitoring is that investigations by global regulators, such as those relating to the London Inter-bank Offered Rate (LIBOR), are increasingly forming part of misselling claims in some jurisdictions. For instance, the UK has seen the first full trial (and appeal) of allegations of implied misrepresentations in relation to LIBOR manipulation in the context of financial products. Interest rate hedging products, which frequently reference LIBOR, have formed the first wave of such claims, but it is possible that claims relating to other benchmarks will follow.
The capacity of the courts to deal with the (generally speaking) increased volume of financial services litigation is a theme that appears in a number of chapters. In a number of jurisdictions there have been attempts to divert low-value or consumer claims away from the court system and towards various forms of alternative dispute resolution; for example, the Financial Dispute Resolution Scheme in Hong Kong, the financial dispute resolution ‘facilitation’ procedure in Indonesia and the Financial Banking Arbitrator in Italy. Interestingly, in Austria, certain appellate courts consist of two professional judges and one lay judge, who must have a professional commercial background or expertise. The United Kingdom and some states of the United States are the only jurisdictions to have established a specialist court for hearing financial services disputes. In the United Kingdom, the Financial List was launched in October 2015 to allow complex financial disputes to be heard by specialist judges docketed to individual cases.
Austria suggests that the implementation of class action regimes may help to alleviate pressure on the courts system, about which there is ongoing discussion in that jurisdiction. Germany is due to introduce a declaratory model action regime in November 2018 (proposed in response to emission revelations), which it says may be relevant to financial institutions. This is not a class-action regime as such, but a form of representative action, where the outcome of the model action is binding on all potential claimants who opted in. Similarly, Ireland has commented that representative actions on behalf of consumers may be facilitated by proposed changes to EU law. Shareholder class actions are prevalent in the United States and Australia, which have established approaches to such claims. The United Kingdom is also emerging as a major player in this market, with the first class-action shareholder claim reaching trial in 2017. This case is likely to clarify how complex issues of reliance, damages and loss calculation will be dealt with in England and Wales in circumstances where there are multiple claimants.