In this post, we summarise emerging litigation and investigations trends and their practical implications for financial institutions (FIs).
Litigation trends are largely dependent on social and political changes and we continue to see the impact of the global pandemic and the related financial downturn on emerging litigation trends.
Civil fraud claims
2022 has seen a notable increase in fraud claims, with almost 50% of banking litigation claims in the English courts relating to fraud, and the High Court recently handing down a decision in the largest ever civil fraud case in the UK (ACL Netherlands BV v Lynch  EWHC 1178 (Ch) in which the directors were found liable under FSMA for misleading statements in annual reports). This is a stark increase from fewer than 10% of claims relating to fraud in 2016. The increase is, in part, related to the pandemic which provided new opportunities for fraudsters to exploit weaknesses in financial systems which had to be adopted quickly in order to adapt to the challenges of the Pandemic.
In relation to payment fraud, a number of recent judicial decisions have expanded upon the Quincecare duty for banks to not execute payment instructions where they have reasonable grounds to believe the instruction is fraudulent.
In Philipp v Barclays Bank  EWCA Civ 318, the Court of Appeal confirmed that the Quincecare duty does extend to cover account holders who are individuals as well as corporates. However, the Privy Council in RBS v JP SPC 4  UKPC 18 did not extend the duty further to cover third-party beneficial owners of funds in an account. In Nigeria v JPMorgan  EWHC 1447 (Comm), the High Court dismissed a claim for breach of the Quincecare duty. The court held that the existence of the Quincecare duty was clear and that it could apply to instructions given directly by the principal and not just through agents and could apply to ‘external’ as well as ‘internal’ fraud. This is a developing area which continues to be a space to watch for FIs.
FIs should note that fraud claims tend to last longer and be more difficult to resolve than their non-fraud related counterparts and the potential for increased time and costs on litigation should be taken into account when considering case strategy.
Group litigation/representative actions
In 2022, we have seen legislative and judicial developments, growing litigation funding and increasing claimant law firm activities which have fuelled group litigation and representative claims. We summarise some of the key group litigation areas below:
- Opt-out claims: The 2021 Supreme Court decision in Lloyd v Google UKSC 2019/0213 applied a more restrictive interpretation of the “opt out” representative action regime set out in CPR 6 than had been applied by the Courts previously. The court held that “opt-out” representative actions cannot proceed unless the claimant proves material damage and shows that each class member is seeking the same compensation. Claimants will still be able to bring an “opt-out” action where damages can be quantified on a common basis across the class.
- Data privacy: We anticipate an increased number of data privacy claims by data subjects in relation to the misuse of their data. As cyber-attacks continue to rise and pose a significant threat to FIs, claimant law firms have been increasingly targeting data subjects whose data may have been subject to a data leak.
- Shareholder and ESG-related claims: We expect to see an increased number of shareholder actions for misleading statements or omissions in relation to ESG. FIs should ensure that they comply with enhanced ESG disclosure requirements and can expect increasing scrutiny of purported “green investments”.
Smart contracts & Decentralised Finance (DeFi)
In 2022, FIs invested heavily in FinTech and are increasing the use of FinTech in commercial products. This will likely lead to increased judicial consideration of legal issues relating to smart contracts and DeFi platforms, such as those underpinning cryptocurrencies like Bitcoin. We can also expect an increase in crypto related litigation this year given the current volatilities in the crypto markets which may lead to novel issues arising in the courts. Key issues to consider include:
- Smart legal contracts: See here for our introduction to smart legal contracts (a legally binding contract in which some or all of the contractual obligations are defined in and/ or performed automatically by a computer program) and the key issues for lawyers to be aware of in this burgeoning area of law. The Law Commission recently published a report considering the issues that arise from smart legal contracts which we summarise in our article. Another two Law Commission projects – on electronic trade and digital assets – are ongoing, and will result in further reports;
- Litigation risk in DeFi: See here for our summary of the uncertainty regarding the legal rights and obligations of those using DeFi and smart contract protocols and the ability to enforce them when disputes arise. The article summarises the issues that are likely to give rise to disputes in the DeFi context and considers the importance for users of incorporating mechanisms for the orderly resolution of any disputes that should arise.
In addition to continued focus on AML and sanctions issues, we are seeing a renewed focus on anti-bribery and corruption (ABC) and fraud issues and an ever-increasing focus on ESG issues. We are continuing to see significant delays in bringing regulatory and criminal investigations, as well as complexities arising out of the parallel civil disputes and regulatory investigations (for example, as a result of the impact of the new witness statement Practice Direction and Statement of Best Practice on witness statements on investigative interviews).
Data privacy and practical issues around the collection and use of mobile phone data continue to pose difficulties, with increased challenges from individuals on the use of their data (in particular in relation to the review of mobile devices) as well as novel issues related to the collection of new categories of data brought about by the move to hybrid working.
The Information Commissioner’s Office has recently published a report calling for a government review into the systemic risks and areas for improvement around the use of private correspondence channels such as private email, WhatsApp and instant messaging services. The issues and concerns flagged in the report will have application to the businesses of FIs.
See our webinar here for some of the key issues to consider.
Fundamental recent changes to witness statement rules have introduced significant changes to the way that witness statements are produced. The changes include the way in which witnesses are shown documents (and which documents they are shown); requiring full notes to be taken of all interviews with witnesses and a focus on matters of fact of which the witness has personal knowledge. Whilst the rules are limited to civil proceedings, we expect to see a knock-on impact on investigations, given that often investigations will have parallel civil proceedings – or at least a risk of civil proceedings at a later stage. For example, taking clear notes and making sure that you have a clear record of documents shown to interviewees in investigations will be particularly important, along with ensuring that the interviewer is asking very precise – and not leading – questions.
Russia-related sanctions has been a key focus in 2022, with a range of potential areas for disputes arising out of the new sanctions regime across multiple jurisdictions, including:
- Conflict of law issues: Cross-border financial transactions are subject to the laws of multiple jurisdictions. Where some countries impose sanctions, these laws may conflict, leading to uncertainty and disputes about which laws take precedence. While the law specified in the governing law clause will be one consideration, several other laws may be relevant.
- Excusing the performance of a financial counterparty: Some activities may still be permitted under the sanctions regime even if others have become illegal, which could lead to inconsistent outcomes between the right to terminate under a contract and the entitlement of a party to refuse performance. There may be disputes about precisely when such a clause is engaged, for example whether it is sufficient that there is a risk of sanctions in another jurisdiction.
- Enforcing judgment debt: Sanctions may impact on the ability of a party to enforce a judgment debt against assets subject to an asset freeze under the sanctions.
A more detailed overview of the key disputes risks arising from the new sanctions regime can be found here.
ABC is becoming a renewed area of focus, particularly as FIs focus on growth in regions with a higher ABC risk profile. FIs are therefore subject to increased risk of ABC-related criminal and regulatory investigations and civil litigation. We have recently seen a UK insurance business fined £7.8 million for financial crime control failings which allowed bribery of over $3 million to take place. We are seeing a trend towards heightened disclosures of ABC-related issues in FIs’ annual reports in an effort to ward off potential investor claims and as a result of increasing pressure from auditors to disclose potential issues. See our article considering the main risks for FIs here.
In addition to the significant increase in fraud litigation, there will likely be an increase in criminal and regulatory fraud investigations. This has been a huge area of regulatory focus from the HMRC, SFO, NCA, FCA and the Police. In October 2021, the government announced the relaunch of the Joint Fraud Taskforce to tackle the rise in fraud during the pandemic, and in April 2022, the FCA launched a new three-year strategy to target fraud – indicating that it will renew its focus on fraud following criticisms in the London Capital & Finance report last year. In particular, they have indicated that they will focus additional efforts on investment fraud and authorised push payment fraud, as well as focussing on firms assessing their susceptibility to fraud.
We will continue to see scrutiny from regulators (as well as civil litigants) of the duties of banks in preventing fraud. There is also the potential for reform of corporate criminal liability, including a potential failure to prevent fraud offence outline in the Law Commission’s recent paper, summarised here.
The FCA have made a recent statement that it wants to regulate ESG rating firms to stop “greenwashing”. There is currently no universal definition of ESG and as such, rating agencies are using their own methodologies, creating inconsistencies between the rating systems. Bringing ESG data into the regulatory perimeter would consolidate ESG ratings and allow the FCA to take greater action against “greenwashing”. In this article we examine some of the key regulatory risks for FIs in the UK and US relating to ESG and how to manage them.
Anti-money laundering and the prevention of financial crime continues to be a key focus for the FCA, which reiterated in its most recent Business Plan its commitment to continue to use its enforcement powers to pursue those committing financial crime and their enablers. Read our article here on a recent FCA decision to fine Ghana International Bank Plc approximately £5.8 million for deficiencies in anti-money laundering and counter-terrorist financing controls over its correspondent banking activities.
The legalisation of cannabis in various jurisdictions is also continuing to cause difficulties for FIs (Germany is the latest country to announce a potential legalisation of cannabis). We consider the key issues arising out of cannabis related investments and funds in our blog post here.