Financial Regulation – Increased focus on culture raises question: is everything OK?

Our second one-day summit dedicated to banking disputes and regulatory actions returned in February with a host of sponsors, speakers and more than 150 guests in central London. Backed by a string of top names in contentious banking work, including headline sponsor White & Case, as well as Freshfields Bruckhaus Deringer, Boies Schiller Flexner, One Essex Court and Norton Rose Fulbright (NRF), the event was guaranteed a heavyweight line-up.

There was no mistaking the core theme for the day, which White & Case banking disputes chief John Reynolds set out in his opening remarks. Arguing that cultural issues sat at the heart of the global financial crisis over a decade ago, Reynolds gave a jaded assessment of the progress since, despite the string of post-crisis reforms, like the Senior Managers Regime, ringfencing and legislation on bonuses.

‘It is widely said that the City has changed dramatically, but has it really? Have these measures fooled us into thinking everything is OK?’ said Reynolds.

‘There is some evidence in the Banking Standards Board [BSB]’s annual review. The BSB asked 72,000 employees across 26 banks in the UK a series of survey questions. The truth is things have not really progressed to any significant degree.’

Illustrating his point, Reynolds noted BSB findings showing little change in recent years, while only 42% of responding bank staff that had raised a concern over the previous year felt that it was dealt with seriously.

‘Those stats do not feel like evidence of a sufficient or significant culture change in this area,’ commented Reynolds, adding: ‘Let me offer a short perspective on culture change, as a disputes lawyer. If culture in banks has not changed, it is simply a question of time before the old problems rear their heads again. While there has certainly been a change in the industry, it has been largely organisational – ringfencing, reduction in bonuses and so on – the underlying culture is still in need of attention and, even with due attention, it is going to take at least a generation to change in any significant way.’

‘It does feel momentum is starting to grow, all of which is subject to what the Supreme Court decides in Mastercard this year.’
Chris Easdon, Barclays

The kind of knotty cultural issues banks are facing was certainly touched upon in one of the set-piece debates of the day, which cast its eye ahead to the kind of major disputes before the courts that are impacting on financial institutions.

Moderating the discussion, NRF partner Matthew Waudby called on his panel to first address the single topic that has arguably most concerned the banking industry: the potential long-term impact of a series of high-profile competition claims, drawing on ‘opt-out’ provisions that make it much easier to bring group claims.

One Essex Court’s Sonia Tolaney QC highlighted the impact of litigation in the wake of regulation actions for competition breaches against banks in relation to LIBOR and forex change across the High Court and Competition Appeal Tribunal (CAT). Tolaney noted that follow-on claims made it easier for claimants to pursue banks as ‘liability is not an issue and the focus is on causation and loss’.

Meanwhile, the Consumer Rights Act 2015, which allows opt-out claims in competition disputes, in theory makes it far easier to pursue group claims, particularly with external funding support.

Barclays disputes head Chris Easdon noted that the CAT will this year resolve a number of key points that will have huge impact on future claims. ‘The FX litigation, in common with some other notable examples, for instance, the Mastercard litigation, the Trucks litigation, are very good examples of how these aggregated, very large opt-out class actions brought with the benefit of third-party litigation funding are starting to enter the mainstream. [The CAT] has still to make a collective proceedings order allowing any of these actions to proceed, but there are now a number of cases pending and it does feel momentum is starting to grow, all of which is subject to what the Supreme Court decides in the Mastercard litigation later this year.’

Picking up the theme, Easdon noted how fundamental the Mastercard ruling would be, calling it ‘the main substantive issue. That will consider the appropriate threshold for certification and it will decide how difficult it is for one of these actions to get off the ground.’

‘If culture in banks has not changed, it is a question of time before the old problems rear their heads again. The underlying culture still needs attention.’
John Reynolds, White & Case

Easdon also noted that the CAT is currently ‘entering into some uncharted territory’ with FX litigation in assessing how to handle new procedures. Pressed on the main issue should the cases make it to trial, he commented: ‘The main focus will be on market manipulation and causation and loss. One of the advantages of a follow-on damages claim is that you can rely on the finding of infringement coming out of the competition authority decisions. However, that only takes the claimant so far. You still need to prove loss and the quantum of that loss.’

Expanding duties

If the impact of competition claims largely turns on yet-to-be-settled procedural points, the realities of expanding liabilities are already present for major banking groups thanks to the litigation surrounding a largely forgotten obligation: the Quincecare duty covering suspicious payments.

Turning to the impact of recent disputes concerning Quincecare, the obligation on banks to investigate, rather than execute a transaction if they have grounds to suspect fraudulent activity. Given the conflict between ethical obligations and duties to their clients, until recently Quincecare was viewed as only applying in ‘very narrow, extreme circumstances’, Norton Rose Fulbright’s Adam Sanitt told delegates.

However, a recent Supreme Court decision, Singularis Holdings Ltd (in liquidation) v Daiwa Capital Markets Europe Ltd, which ruled that the bank was obliged to investigate a $204m transaction, upended that expectation and has triggered another high-profile dispute involving JPMorgan Chase & Co.

The US bank is being sued by the Nigeria state over a contested $875m payment authorised by the Nigerian government. The case is being watched closely given that JPMorgan argued its terms expressly excluded the duty – a position that was rejected by the High Court last year and is currently on appeal.

The case opens the possibility of common law being used to extend liabilities on banks to reflect wider shifts in regulatory policy. Noting that ‘we have not yet seen an example of a contract that has successfully excluded that Quincecare duty’, Sanitt concluded: ‘Courts will seek to impose liability that supports the regulatory and statutory liability that can arise particularly through fraud.’

Picking up the point, Tolaney QC commented: ‘This duty was something that was pleaded against banks a lot and has never led to a decision until now, where it rather came out of the blue and a lot of people had forgotten this duty even existed. It is definitely a policy-driven development in the light of trying to get institutions, alongside the whole development of vicarious liability, to take responsibility in a scenario where previously that had not been imposed.’

Given the wider trend to expand liability against institutions on multiple fronts, Easdon argued that the primary defence must be ‘ensuring that robust processes are in place, ensuring that when red flags are raised they are investigated and any concerns are resolved before any payment is allowed to go’.

Still dealing with the increasingly common issue of fraud allegations against banks, the panel turned to cases involving intermediaries and claims of corruption and bribery. Recent high-value claims in the area include separate litigation targeting JP Morgan, UBS, Societe Generale, Credit Suisse and ABN AMRO Bank. Easdon told delegates: ‘The use of intermediaries remains one of the hottest compliance topics for financial institutions.’

Sanitt noted that the courts were following the Quincecare approach of using developing case law to ‘back up regulatory and statutory liability with common law duties’.

The panel warned of particular challenges in the area of managing civil litigation alongside regulatory or criminal proceedings and that the nature of these bribery claims was typically involving multimillion-pound sums.

Turning to longer-term predictions, the panel highlighted the potential for claims touching on climate change and sustainability. Standard Chartered Bank litigation head Helen Dodds noted the huge potential for misselling claims against institutions offering ‘green’ securities and financial products for not living up to their environmental billing, so-called ‘greenwashing’ claims.

Dodds also highlighted the rising tide of ‘climate justice’ disputes, which seek damages for failing to tackle pollution, though these are primarily targeted at large emitters and state entities.

The panel also looked ahead to litigation that could arise from the looming replacement for the LIBOR benchmark for institutional lending rates, which is due to happen in 2021.

The broader conclusion was that banks would continue to face challenges on multiple fronts – from regulators, civil claims and the courts – and would have to learn to adapt to the harsher environment.

Given that context, banks would be well advised to address the pernicious cultural issues that Reynolds highlighted in his opening remarks. LB

alex.novarese@legalease.co.uk

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