Biannual Banking Litigation Update: October 2019 – April 2020

Welcome to our latest Banking Litigation Update, in which we highlight a number of the most important cases and developments affecting UK financial institutions over the past six months. You can read our full briefing here: Banking Litigation Update.

Publishing this update in April 2020, we must begin with a reference to the COVID-19 pandemic. While it is primarily a humanitarian crisis, it has of course resulted in unprecedented levels of global financial market volatility and the future economic outlook is uncertain. This inevitably exposes financial services institutions to heightened legal risk in relation to their lending and other banking businesses. However these sorts of issues will take time to manifest and either resolve or work their way through the courts system. To date, therefore, the judgments handed down by the UK courts relating to COVID-19 have dealt exclusively with practical and procedural issues. We have included a COVID-19 section in this publication, highlighting the most important judicial developments in this context so far. However, this is an area of rapid change, and so please check out our COVID-19 crisis hub for our latest insights to keep you abreast of legal issues impacting your business now and those you may face next.

The past six months have been a busy period for securities class actions. The most important development in this sector is undoubtedly judgment being handed down in The Lloyds/HBOS Litigation, which was the first securities class action to reach trial in the UK. HSF successfully defended the claim against Lloyds and the judgment provides much needed clarification on some of the most important battlegrounds which arise in shareholder class actions as well as guidance for listed companies and their directors on various key aspects of capital markets and M&A transactions. But other judgments during this period have also helped to shed light on key issues such as reliance (Tesco), whether s.90A of the Financial Services and Markets Act 2000 (FSMA) applies to shares held in dematerialised form (Tesco again), and the liabilities/obligations of commercial litigation funders to put up security for costs (Rowe v Ingenious Media) and/or to pay the other side’s costs when a claim it has funded fails (Chapelgate v Money). In the world of class actions more generally, the latest big news is the decision of the Supreme Court in Morrisons, which held that the corporation was not vicariously liable for the actions of a rogue employee in leaking employee data to a publicly available file-sharing website. From a class actions perspective, it’s clear that data breach class actions are on the rise in the UK and this judgment should be seen as a setback not a roadblock.

The so-called Quincecare duty of care continues to attract judicial scrutiny, with judgment being handed down by the Supreme Court in the very first case in which this duty was found to have been owed and breached (Singularis v Daiwa). As a reminder, this is the duty imposed on a bank where it has reasonable grounds (although not necessarily proof) for believing that a payment mandate by an authorised signatory of its customer is an attempt to misappropriate the funds of its customer. The spate of recent judgments considering this duty has exposed a risk area for financial institutions as to how payment requests are managed and monitored. Judicial clarification is continuing to evolve, which will determine what (if any) changes need to be made to standard practice, and so we are monitoring developments closely.

This update would not be complete without the obligatory ground-breaking decision on disclosure/privilege. In this edition, we have the decision of the Court of Appeal in Jet2, which found in favour of a dominant purpose test for legal advice privilege. The good news, from the perspective of those seeking to obtain the protection of legal advice privilege for lawyer/client communications to seek or obtain legal advice, is that the decision in this case should not significantly narrow down the protection of legal advice privilege as it was previously understood.

Since the last edition of this update, we have seen a noticeable uptick in communications from the UK regulators in relation to the discontinuation of LIBOR by end-2021, a deadline the regulators say they remain committed to notwithstanding the COVID-19 crisis. We continue to monitor these developments and consider the effect they may have on the litigation risks of transition, in particular for “tough” legacy contracts which reference LIBOR and are not moved off LIBOR before the benchmark rate ceases. You can find our most recent publications in the relevant section below. Of particular note is the discussion of the US regulator’s bold move to introduce a legislative fix for LIBOR discontinuation, where we have considered its effect on the litigation and regulatory risks posed by LIBOR transition, and highlighted the potential consequences for UK financial markets.

In the current environment, where the need to multi-task is greater than ever before for many people, our banking litigation podcast series offers an easy way to keep up to date with relevant legal developments. You can find archived podcast episodes here and subscribe for the podcast channel here, to listen to our regular bite-sized broadcasts covering both litigation and regulatory developments for banks and other financial institutions.

We hope you find our update useful and, as ever, please feel free to contact one of us or your usual Herbert Smith Freehills contact if there are any topics which you would like to discuss further.

For more information, please read our Banking Litigation Update.