Two years on, how much of an impact has the pandemic had on banking litigation?
Considerably less than anybody predicted. I wrote a piece about a month into the first lockdown about some economic trends we might see and I’m pleased to say few of those bleak assessments came to pass. The reason they did not come to pass is largely because of Government financial support. Banking and financial markets litigation is closely correlated to the state of the economy, probably more so than most other litigation areas and we have seen the bounce back of the economy from the pandemic. The relative stability of the markets throughout 2020 and 2021 have meant that some of the things that we feared might happen economically have not materialised.
What types of disputes have materialised as a result?
In March 2020 when the pandemic began, financial markets nosedived. From the commodities markets, and oil market in particular, to the equity markets. We did see disputes off the back of those movements, almost instantly. Some of the disputes we are still working out, particularly in the derivatives space.
Could we see similar issues arising from current market volatility?
Significant volatility in financial markets gives rise to disputes, particularly when there are very significant movements very quickly, even if the market then bounces back. This is because participants in the market are often entitled to make margin calls against counterparties. When you get extreme margin calls that parties cannot meet, you then get the forced closeout of positions, often resulting in valuation disputes.
The way financial markets, particularly commodity markets, have been reacting to what’s happening in Ukraine has an economic impact on those involved in those markets. We have seen the price of oil moving all over the place and other commodities have seen similar price movements. Somebody somewhere in the economic environment will be on the losing side of those price movements and very often that gives rise to disputes as to whether margin calls have been properly made.
We continue to see an increase in fraud disputes, what is driving this?
Two things are driving this. Firstly, in times of economic turbulence, the tide goes out and you see who has and has not got clothes on, so to speak. Significant corporate frauds, whatever form they might take, often materialise when the economy is stressed and there is no longer money coming in the front door to cover off that going out the back.
The other factor is the disaggregation of the financial markets over time. Banks themselves continue to make up a very significant part of the financial environment. They are pretty much fundamental to everything we do on a daily basis, whether visible or not, but there are now a lot of other platforms and instruments that have emerged into the financial markets. You only have to look at the emergence of cryptocurrencies in all their various guises and related crypto exchanges. Regulation is patchy at best, particularly in some of the jurisdictions most relevant to these assets. Once you get into that type of scenario, the door is open to fraudsters.
We have had a mass of crypto fraud enquiries. It is indicative of the experiences people can have when they deal with these more peripheral exchanges and crypto markets.
What other trends are you seeing in your practice?
Over the last decade people have become much more willing to litigate generally and are more willing to go head-to-head with a bank. The pure volume of banking litigation that we saw a few years ago post global financial crisis – where you had many disputes being determined involving derivatives close-outs, swap mis-selling and the like, has all washed through, bar the odd case. But it has been replaced, not by dozens of cases which fall within a particular single category, but instead by an increase in business-as-usual banking disputes.
Recent cases have put the Quincecare duty in the spotlight, what does this mean for banking litigation?
There has been the recent case of Philipp v Barclays Bank which is an interesting development because it effectively acknowledges at least the possibility that it is a duty which extends to individuals, and not just corporates, including those who gave the relevant instruction to the bank themselves. Traditionally Quincecare was a duty which protected corporates from the fraudulent actions of their directors and their agents.
ESG is now prominent, in every part of life frankly. It has come from nowhere to everywhere in the space of a year.
The decision in Philipp is obviously an interesting potential extension to the duty. The Court of Appeal in this case was only overturning a summary judgment decision, so they were not saying definitively that the duty was extended. Instead, they were saying that they are not going to rule out that that could happen on the particular facts of this case. The court, however, emphasised the public policy considerations underpinning the Quincecare duty which reflects the role of banks in combatting fraud.
There is also the Nigeria v JP Morgan case which took place in late February to early April this year and which concerns the Quincecare duty. Judgment is awaited. So, it’s a case of ‘watch this space’ with regard to Quincecare.
Do you still expect to see banking litigation arise from the LIBOR transition?
There is no doubt that the process of market participants transitioning their contracts away from LIBOR has gone slower than the regulators wanted. It is not necessarily easy to do. Some market participants never really woke up to the fact that it had to be done. By extending the transition period beyond December 2021 and allowing the use of synthetic LIBOR, the FCA has taken some of the sting out of the risks that were evident. A cliff edge has been avoided.
It has been a wake-up call and given people an opportunity to do what they need to do. There may well be disputes down the line, but I do not think that they will be as widespread as they would have been had there not been the extended transition. There will be some people who do not get their act together, but it is not going to be the potential systemic issue that some people were concerned about 18 months ago.
Have ESG issues reached financial markets litigation?
I can definitely see it arising. ESG is now prominent, in every part of life frankly. It has come from nowhere to everywhere in the space of a year. In financial markets litigation, the area where it might first appear will be funds or products that have marketed themselves as green or meeting some particular ESG criteria and which have been mis-sold because they haven’t in fact, met the advertised criteria.
That could cause a chain reaction where a particular product is not compliant with an ESG benchmark which it claimed to have been, and that product then becomes included in a green investment fund, putting the fund outside of its authorised investment parameters. In that context the legal principles are not really any different to any other misstatement or mis-selling scenario. So I can see people beginning to scrutinize whether products actually meet stated ESG criteria and what claims they might have if sold to them on a false basis. There is however a potentially interesting issue around loss as many ESG products have in fact performed well.
We have not seen this materialise in litigation as yet, but as people focus on it, we will inevitably see investors kicking the tyres on such claims. You can see this area growing just by the fact that people are focusing more on ESG credentials and the market for ESG compliant products and funds is expanding rapidly.
How would you describe RPC’s banking litigation practice?
Expansive and mature. The team at RPC has been operating in this space for 12 years now and we have grown enormously within that time. There is a huge amount of experience amongst the partners and associates in the group going back to the mid 1990s.
We are helped too, because we have soft borders between practice groups. We have a really experienced and very internationally-focused banking litigation practice, but we are also surrounded by other teams within the firm which are very relevant to what we do.
A number of the disputes we deal with have a restructuring or an insolvency angle and we have a team that specialises in that and provides support to us. Other cases need corporate advice. For example, I had a very high value dispute last year against an investment bank where the client needed advice as to whether it needed to notify the issue to the markets. The corporate team could provide that to us.
What differentiates RPC’s banking litigation practice from other firms?
The majority of our work is claimant side, so the other firms who would be bringing those same claims against the investment banks would be large boutiques. What sets us apart from those firms is that we have support around us from different practice areas within the firm, such as the regulatory, corporate, insolvency and restructuring teams that I mentioned.
As against other more ‘full-service’ firms, we are one of the few full-service City firm that does not act for any of the top 20 largest investment banks. We have significant room for manouevre to act against those banks, unencumbered by transactional relationships.
Simon Hart, RPC