Barlow Clowes, Lloyd's, BCCI, Maxwell, home income plans, pension-mis-selling, Barings; these are just a few of the names and terms that have gained notoriety in recent years as the courts, regulators, lawyers and accountants have increasingly had to grapple with fraud and negligence in the financial services sector.
The immediate victims range from some of the most vulnerable in our society who have been relieved of their meagre savings to the largest banks and financial institutions. There are also victims drawn from the ranks of professional advisers, banks, insurers and others, as plaintiffs unable to recover from the primary wrongdoers pursue the “secondary recovery” actions against those perceived to bear some responsibility and to have deep pockets. In their cases, litigation often turns on loss containment services, contributory negligence, contributions and statutory relief and, when insured, on coverage issues (especially aggregation: that is, how many “claims”).
A distinctive feature of financial services litigation is the regulatory context. A series of statutes establish different regimes. The main statutes are the Banking Act 1987, the Financial Services Act 1986 (FSA), the Building Societies Act 1986, the Friendly Societies Act 1992, the Insurance Companies Act 1982, the Pensions Act 1995 and the (private) Lloyd's Act 1982. The regimes and statutes are subject to continuing modification and amendment, frequently affected by delegated legislation.
Regulation is both proactive and reactive. Taking the FSA as an example, criteria are set to allow certain individuals to carry on investment business in the UK and regulators are given powers to enforce these. They include a range of information-seeking, monitoring, intervention and winding-up powers.
Claims may be brought against regulated individuals not only by investors but also by regulators. Regulators have disciplinary powers and a system of ombudsmen has been designed to resolve claims without recourse to the courts.
There is a compensation scheme funded by regulated individuals. The public nature of the functions performed by regulators means that they have to be subject to judicial review. While practitioners must be acute to the limits of their powers, regulators in general enjoy a favourable track record as several unsuccessful judicial review applications demonstrate.
Familiarity with the relevant regulatory regime is critical. But other areas are also important. In relation to individuals regulated under the FSA, professional negligence principles, fiduciary and trustee liability, confidentiality, judicial review, insurance, and appropriate EC legislation are all relevant.
The last is increasingly reflected in the FSA and regulations made under the Act, giving effect, for example, to the Investment Services Directive, the UCITS directive and directives related to offer documents. A similar position prevails in relation to banking and insurance regulation. And “whistle-blowing” and money-laundering regulations apply across the whole financial sector.
As the slimming of the welfare state heralds a Brave New World of greater resort to private provision for pensions, health and education, so the importance of a healthy and well-regulated savings and investment sector increases. But there is likely to be no hiding place from the inventive fraudster nor the incompetent adviser.
Constant vigilance calls for many roles. While formal regulators such as the Securities and Investments Board, SROs and RPBs in the case of the FSA, form the apex of the regulatory pyramid, its various tiers include the principals, directors and compliance officers of regulated firms, bankers, insurers, accountants, auditors and lawyers as well as the courts and disciplinary tribunals. In a sense, we are all regulators now. Litigation often demands many skills and frequent co-operation between lawyers and accountants, not least to pursue the documentary odyssey in a complex fraud.
Regrettably, inevitable compartmentalisation of specialisations among lawyers (barristers and solicitors alike) results in frequent regulatory ignorance, amnesia or misjudgement.
What may be obviously discloseable to a litigation lawyer, honed by interlocutory discovery battles, may not be obvious to the “can do” corporate lawyer of a pressing client. On the other hand, the litigation lawyer may not recognise an “investment activity” under the FSA or even an unauthorised collective investment scheme.
Although complaints handling systems, including disciplinary proceedings, compensation schemes, ombudsmen and, more specifically, the pension review, often avoid the need for litigation, financial services litigation is likely to increase.