Financial Services—a review of 2014’s cases

Our panel of experts examines the impact of 2014’s cases on financial services lawyers and their clients.

The experts

Duncan Black, partner, contentious financial services, Fieldfisher

Jon Holland, partner and co-head of the global financial services litigation team, Hogan Lovells

Nathan Willmott, partner, financial services investigations and head of the commercial dispute resolution group, Berwin Leighton Paisner

 

What were the most significant cases of 2014?

Duncan Black: Aside from the main cases regarding Libor and the Foreign Exchange there was an interesting Financial Conduct Authority (FCA) investigation against a large and well known retail asset manager called Invesco. There were two Invesco companies involved and they were fined over £18.5m by the FCA for failings in their fund management business and through those failings they exposed their investors to a much higher level of risk than their investors thought they were running.

The FCA found that Invesco hadn’t recorded the trades of their clients on a timely basis or managed their allocations by their fund managers’ trades and they were also criticised for the documentation that was given out to investors. There’s been a lot of discussion over the years about the paperwork you get when you invest—it’s swung from not being enough to now deluging people with information—but the FCA said in this case the key investor information in the prospectuses given to the investors on some of these funds weren’t sufficient.

I think this is interesting for a few reasons. Firstly, although there was a very heavy fine there were no situations where investors had actually lost money. It was a penalty for not doing it in the correct way whether or not investors had suffered.

Secondly, you also don’t see this type of business being targeted by FCA enforcement quite as much as you see broking or banking.

It’s particularly important for businesses in retail investment management to observe very high standards because the consequences can be much more dramatic if they are affecting retired people for example, and I think the FCA is particularly keen to make sure that retail business is conducted correctly.

Nathan Willmott: I think the case that has kept most people very busy during 2014 has been the investigation into the foreign exchange markets (Forex). It’s a hugely intensive process in reviewing and analysing communications and there has been lots of very proactive work by firms alongside the huge amount of analysis within the regulators in the UK and internationally.

Jon Holland: With my benchmark hat on I think the cases that have been interesting for banks have been the ones that were linked to claims in which allegations have been made in relation to Libor.

Looking back to two cases: Graiseley Properties against Barclays (Graiseley Properties Ltd v Barclays Bank Plc [2013] EWCA Civ 1372, [2013] All ER (D) 100 (Nov)) and Deutsche Bank against Unitech Deutsche Bank AG v Unitech Global Ltd [2014] EWHC 3117 (Comm), [2014] All ER (D) 55 (Oct)), both of those cases related to applications to strike out allegations relating to Libor. In the Graiseley case the claimant was the borrower and in the Deutsche Bank case the borrower was the defendant and in both those cases the borrowers made allegations relating to misconduct in the setting of Libor by some banks which they said affected swap contracts that they had entered into in connection with loans they had taken out.

There were two conflicting judgements: in the Barclays case the judge decided that the allegations were arguable and therefore should not be struck out and in the Deutsche Bank case the judge decided that the allegations were not arguable and should be struck out. In November 2013 the Court of Appeal decided that the claims were arguable—which had the effect of enabling a number of claims to be made by other borrowers which may not be susceptible to strike out application as a result.

For me one of the interesting things next year is going to be when the first of those cases gets to trial and there is a ruling on whether the allegations can be made good or not. One of the things that banks will be watching is going to be the first decision that comes out saying whether or not a claim, having survived or been immunised against a strike out application as a result of the Court of Appeal’s ruling can be made good against the bank concerned—whichever bank that happens to be.

Barclays settled the Graiseley proceedings in April 2014. Deutsche Bank did not get permission to appeal to the Supreme Court and so that may be the first decision, if it doesn’t settle. The implications of the first decision have a lot riding on them because it is not difficult to imagine similar claims being made—in relation to other conduct.

How did some of the 2014 cases change practice?

Duncan Black: [With respect to the Invesco case,] the clients we deal with are not complacent but I think it’s a warning when you see a well-known and respected player in the industry getting a big fine like that even when there’s been no loss. It’s saying that the FCA is going to be on your back in any procedural irregularities so the consequences are that clients are double and triple checking the way they’re doing business internally and asking us if everything is fine or anything needs improvement.

Nathan Willmott: [With respect to the Forex investigation,] I think that there are a couple of ways that the investigation has changed practice.

One is the use by the FCA of what it called its ‘interview protocol’ which required firms either not to conduct internal interviews with staff, or to record those interviews onto digital media and for a copy of the recording to be provided to the regulator potentially for use in disciplinary or even criminal proceedings. This is the first time they’ve used a protocol of that nature and there are some serious question marks over the extent which the regulator can require firms to conduct their investigations in that way. My understanding is that the majority of firms pushed back quite hard on the regulator and it will be interesting to see if that was a one off or whether they adopt that approach in future investigations.

The investigation itself has caused firms—and this is an ongoing process—to re-examine established market practices in their businesses, particularly from a competition perspective, to assess what information is being shared between traders at different banks and whether that exchange of commercial information is strictly necessary or whether it breaches competition law. This is particularly complex where traders at competing banks need to communicate with one another in order to agree trades between them. More generally, it seems that the competition authorities are now much more willing to look at practices in the financial services sector in a way that previously they might have put in the ‘too difficult’ category.

Interviewed by Fran Benson.

The views expressed by our Legal Analysis interviewees are not necessarily those of the proprietor.

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