To what extent is the current crisis similar to the 2008 financial crisis?
They are very different. Every economic crisis has different drivers, despite people tending to lump them together. The consequences for the legal market are always different as a result. Why? 2008 was a once-in-a-lifetime event, just like the pandemic, but of a different type. Undercapitalised banks themselves were one of the main causes of the crisis, they were right at the heart. The economy was on the precipice because the banks were so over-leveraged.
No-one is pointing at the banks this time around. The economic stress we are suffering is plainly due to the pandemic. The banks are in the mix, just because they are so fundamental to the global economy, they are one of the parties that provide the oil for the wheels of international trade and business. They are relevant, but not the cause.
Even if banks are not at the epicentre of the crisis, will the follow-on work for lawyers resemble the post-banking crisis period?
The reality is that the banks were so vilified after the financial crisis that they were very tolerant with their loan books. In reality, there was a sense that the banking sector understood the unspoken message from government that ‘you’ve had our money, don’t go kicking the legs out from under the economy.’
This time, the banks are not seen as the ogres on the block. I suspect they will take a much more robust approach to enforcing their rights and looking after their own interests than they did post 2008. That approach will generate its own disputes.
People tend to predict a rise in fraud after a financial crisis, do you expect to see that?
Completely. If the tide is always rising, you can mask all sorts of things, but as soon as asset prices decline, you’re no longer able to pay people to maintain the merry-go-round. I have no doubt we’ll see an uptick in fraud.
You can see the liquidity pressures beginning to rise in the economy, putting links in the chain under pressure. Let me give you a very recent example: A New York-based hedge fund office was unable to meet its margin calls last month, and therefore had to de-leverage very quickly. All the investment banks who lent them money were selling securities in large chunks which drove down the price of those securities. Whatever the cause of that implosion, you can see how quickly things can unravel.
Contractual disputes are taking their time to surface, is there a lag factor at play?
I think there is but at the moment we see many clients wanting to ‘kick the tyres’ on their documents. In distressed times, people are more willing to engage their lawyers to review in this way. When times are easier, people are more likely to do a cost/benefit analysis and move onto the next deal. This type of contractual review, in anticipation of disputes, doesn’t get the airtime that the more exciting litigation cases will do but it is ongoing work below the surface.
Given that the banks are not at the epicentre of this crisis, will we see a sustainable long-term pipeline of disputes emerge in the same way as the last financial crisis?
There are banks and then there are wider financial markets. Much of the work from the 2008 crisis, was highly technical, structured products related claims such as CDO (collateralized debt obligation) disputes. I don’t think you’ll see that type of litigation but you will see disputes between banks and their borrowers.
I’ve always said that banking litigation is not just limited to technical banking issues. It’s claims involving banks; for example, we have seen breach of confidence claims, where the bank breached confidentiality obligations concerning a third party’s propriety information. You could substitute any number of parties into that dispute, it just happened to be a bank in the context of a financing.
We are currently working on one of the biggest banking disputes presently in the English courts. It’s the well publicised dispute between JP Morgan and the Republic of Nigeria. That’s a case where monies which are alleged to be part of a fraudulent scheme passed through the hands of JP Morgan. Effectively they were providing banking services and ended up in the middle of that fraud.
‘If you go back to the premise that the banks are at the heart of all economic crises, the work may change and evolve, but it’s always there. Life never stands still in any practice area.’
Simon Hart, RPC
So, the nature of the disputes will be different. There aren’t the systemic threats from the banking sector or widespread market claims such as those which arose out of swaps mis-selling.
Is the lack of systemic work a long-term concern for lawyers?
Not really. If you go back to the premise that the banks are at the heart of all economic crises, the work may change and evolve, but it’s always there. Life never stands still in any practice area.
Given this more holistic idea of banking litigation, are litigators forced to adapt to any new or interesting niches?
Our firm has been looking at cryptocurrency for a while now and it is definitely an area to watch. It’s interesting from a fraud angle because it’s much more difficult to lay your hands on the pot of money as the source of recovery. That market is constantly developing and innovating, and as our regulatory lawyers would tell you, it’s highly unregulated.
I can see that being an area for continuing growth of disputes.
How would you describe RPC’s banking litigation practice?
I’d call it mature and high performing. The practitioners in the group are very experienced – I’ve been doing this for 25 years and Tom Hibbert for longer. Other key members of the team, such as Jake Hardy, have 20 years’ experience. And others in the group have similar pedigree. By size we have one of the largest and most experienced banking disputes practices in the City. But we are not only a City-based practice, we also have teams in our offices in Singapore and Hong Kong, working on international, cross border financial disputes.
We were doing it before it was fashionable! Long before the financial crisis. I doubt there is a type of banking dispute we haven’t been involved in. A mature practice of seasoned practitioners.
We have very deliberately kept ourselves conflict-free against the largest 20 or so global banks. But the advantage of the practice being part of a full service firm is that we have access to other practice areas which are relevant to and can support the banking litigation practice, such as data protection and restructuring. So, we offer the best of both worlds.
Simon Hart is head of RPC’s financial markets disputes team.