Controlling and Coercive Behaviour: Widening the Net
There are a vast number of individuals and business considering whether to litigate against banks in the wake of the global financial crisis. Before starting any such action, it would be wise to weigh up the following issues:
The time limit for bringing a claim for misrepresentation, breach of statutory duty, negligent advice and negligent misstatement is 6 years from the date of the transaction. Alternatively, claims for negligent advice and misstatement can be issued in court within 3 years of the claimant gaining the requisite knowledge about the claim (e.g. discovery of breakage costs in a hedging product). Realistically, most transactions which are subject to scrutiny were entered into before the global financial collapse in 2008. Therefore, potential claimants need to get moving if they do not want their claims to be time barred. Even those claimants awaiting the outcome of the FCA Review Scheme ought to consider preserving their position by entering into standstill agreements with the banks or by issuing protective court proceedings.
2. Entitlement to claim
Not all potential claimants that have been mis-sold a financial product and/or have received bad advice have the same rights. For example, individuals and partnerships can claim for breach of statutory duty under FSMA and the FSA Handbook, whereas companies and LLPs cannot. The most likely basis for companies and LLPs to bring claims against banks will be for misrepresentation, negligent advice and negligent miss-statement. In my view, it is somewhat unfair that a business entering into an isolated financial transaction, say for example a hedging product, is treated differently to an individual with a similar level of knowledge/experience in the financial market.
3. Exclusion clauses
The bank’s standard documentation will often contain disclaimers and agreements which exclude liability for mis-selling or negligence related claims. Typical exclusion clauses will say that the bank has not given advice or that the customer has not relied on recommendations from the bank. It is difficult for potential claimants to get round such clauses, but not impossible. The clauses must be reasonable, they cannot be imposed retrospectively and statutory liability for breach of the FSA Handbook cannot be excluded. Ultimately, it will turn on the facts of each case whether the bank can rely on its own terms and conditions in order to defeat a claim.
4. Duty of Care
Establishing the nature of the relationship between the bank and its customer is the first step. In a number of cases, it will be apparent that the bank has merely provided the customer with information, rather than advice or personal recommendations to invest in or purchase a particular financial product. This distinction is critical to any potential claim against the banks. It will depend on the facts of each case but a duty to advise probably involves the bank giving value judgments about a particular product or advice which is tailored to the circumstances of the customer. As I have indicated above, an additional obstacle in this regard is that the bank’s terms and conditions may contain provisions which state whether the bank is providing advice and whether that advice should be relied on by the customer.
If a duty to advise can be established, it is necessary to show that the bank is in breach. This is arguably one of the easier hurdles to overcome (if a duty exists) because prior to the global economic crisis there were a number of products being sold that were unsuitable for customers. The duties laid out in the FSA Handbook are relevant to the standard of care in relation to advice given. This means, for example, that it may not be a defence if 90% of advisors would have given the same advice, if the advisor failed to adhere to the rules in the FSA Handbook. It is difficult to see, for example, how a bank would not be negligent for advising a small business to restrict its financial movement by locking itself in to a long term hedging product, which it cannot now exit because the breakage costs are too high.
Claimants must establish that they relied on the bank’s advice and that, had it not been for the advice, they would have acted differently. Establishing a breach of duty alone is not enough. This is arguably the biggest hurdle for claimants to get over (if they can establish a duty to advise), particularly sophisticated investors who generally rely on their own judgement, or aggressive investors who may have been attracted to higher risk products irrespective of the bank’s advice. The exercise of establishing what the claimant would have done had it not been for the advice or had the product not been sold can be complex, particularly where claimants entered into consequential transactions as a result of the breach.
Where negligent advice has been given, all foreseeable loss is recoverable. This can in some cases include losses arising from the fact that the transaction happened at all. The difficulty, and the overlap with causation, is that it is not unusual that customers will have entered into ‘knock on’ transactions (such as a loan for a property) as a result of purchasing, for example, a hedging product. It may be difficult to persuade a court that the additional liability was caused by the negligent advice and/or to what extent any loss arising from it was foreseeable. Consequential losses will often have been incurred as a result of the breach, such as overdraft charges and extra borrowing. It makes the question of assessing loss more problematic. In terms of foreseeability, it should also be noted that not many people predicted such a collapse of the world financial markets in 2008.
8. Understanding the product
It can be a considerable challenge to understand (and be able to explain to the court), the nature of a particular financial instrument. Claimants have the burden of establishing why such a product ought not to have been sold to them and demonstrating why statements about the product made by the bank were untrue. These are complex issues, usually requiring the use of specialised expert witnesses. In respect of hedging products, the reality is that most non sophisticated investors did not truly understand them, which is of course part of the problem of why they should never have been sold in the first place. The nature of SCARPS (Structured Capital At Risk Products) for example is such that if these were sold to unsophisticated retail customers then those claims may be particularly likely to succeed.
9. FSA/FCA Redress Scheme
The FSA/FCA Redress Scheme is the most significant development for non-sophisticated customers who have been sold interest rate hedging products. The review is based on compliance with the FSA Handbook and in each case the reviewer will ensure that the bank has implemented its review process appropriately and confirm redress which is appropriate, reasonable and fair. Not all businesses are eligible for the review and there is therefore likely to be a judicial review to force the FCA to reconsider the eligibility criteria, especially as it does appear that the criteria is too tight and complex, and unfairly penalises small to mid-sized businesses with healthy balance sheets. See previous blog: Is the Financial Conduct Authority’s Redress Scheme really offering redress?). It will be interesting to see the outcome of the review and whether it leads to a spate of litigation involving customers who feel that the banks have not properly considered their case and evidence.
The reality is that it is not a level playing field in litigation between customers and banks. The banks have deep pockets and are prepared to spend big to guard against a landmark claimant win which potentially opens the floodgates. Many individuals and businesses that are entitled to bring claims for mis-selling or bad advice do not have the resources to fund the cost of litigation, particularly where expert evidence is needed. As a result of the recent changes to the rules for litigation funding in the UK, access to success related funding products like CFA’s may be blocked further. However, lawyers looking to represent claimants in claims against the banks will need to be more creative and flexible as to the funding options that are made available for prospective clients.
The above is just an overview of issues for potential claimants to consider. It is not intended to frighten off claimants from litigating against the banks, but rather highlight the need to obtain good advice early on instead of diving head first into a claim before undertaking the necessary groundwork.
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