Financial Markets Disputes View - September 2023

Welcome to the first edition of Financial Markets Disputes View!

Thomas Jefferson noted that the most valuable of all talents is that of never using two words when one will do. This monthly update will highlight recent litigation and contentious regulatory issues which we think should be on your radar. We hope to abide by Jefferson's guidance as we explain these issues, why we think they are relevant to you, and consider the wider or longer-term implications.

Summer hasn't yielded much respite for financial institutions disputes (particularly in light of some highly publicised market events), and with regulators seemingly keen to flex their muscles the next few months are likely to keep us on our toes.

If you would like to discuss any of these issues in more detail, please speak to the contacts identified below or your usual contact at Team Simmons. Alternatively, please email us here.

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What's coming up...

• Insuring the Future webinar series - On Tuesday and Thursday mornings at 10am from 26 September to 5 October, members from across our international network will consider the claims, underwriting, policy wording and regulatory implications for insurers of 4 topical risks. These include: AI and professional liability risks, product risks, geopolitical risks and ESG risks. Click here to register and find out more.
• Contract masterclass webinar series - From 31 October to 23 November, our dispute resolution team will deliver a series of eight webinars providing up to date guidance on contractual issues in English law covering: formation, interpretation, frustration and force majeure, and much more. A registration link will be included in next month's View.
• Economic crime reform - Significant changes are being made to the law on economic crime in the UK. In particular, a new criminal offence of Failure to Prevent Fraud and a new legal test for holding corporates liable for economic crimes, are expected to be introduced this year. Over the coming weeks, our Criminal Law team will be publishing a series of videos, podcasts and articles on these reforms. If you would like to hear more on this topic, please contact Camilla de Silva or Jon Malik.

Non-financial misconduct: Guidance expected shortly

To what extent does the FCA's remit encompass non-financial misconduct and, in particular, when does such misconduct amount to a breach of the regulator's conduct rules? Unfortunately, there is no proper guidance and the answers are not entirely obvious. The FCA clearly believes that in certain cases it can and must take action. However, in a recent appearance before the Treasury Select Committee prompted in part by the regulator's handling of the Odey affair, the FCA's Nikhil Rathi noted that when it comes to excluding individuals from the sector, its ability to take action is limited by its core objectives. He suggested that legislation might be required to provide clarity. This implies that any formal guidance as to when misconduct will lead to regulatory action (whilst sorely needed) might not be quite as helpful as hoped. Nevertheless, guidance is expected to be published jointly by the FCA and the Bank of England in September. We will be watching and reporting back to you.

In the absence of guidance, we have seen firms setting their own standards or cultural expectations from their people - with clear training and policies - often borrowing guidance from other regulated sectors. A number of firms are also conducting culture "audits" to assess their risks, as well as doing a backward looking assessment of prior decisions relating to non-financial misconduct. Firms which already have policies in place will need to review them in the light of the guidance; those without policies will need to design them with the guidance in mind.

Since the implementation of SM&CR, the majority of complex conduct issues on which we've advised involve an element of non-financial misconduct so this isn't a challenge that is going away soon.

For more on this, please read our insight article here or contact Emma Sutcliffe.

Debanking and DSARs: The devil's in the detail

In the midst of the buzz surrounding debanking, numerous issues have emerged, but most have arisen from the process at the heart of the issue: the Data Subject Access Request (DSAR).

When individuals find themselves dissatisfied or bewildered by an organisation's decision, they often turn to a DSAR. It grants them access to their personal data held by the organisation, providing an explanation and possibly a means to challenge the organisation. Even before the recent surge in attention, banks, especially those catering to high and ultra-high net worth individuals, have encountered DSARs from debanked individuals as a precursor to litigation or a substitute for pre-litigation disclosure. 

If you do not already have a DSAR policy you should consider one. It should cover the search process and where to look for data (eg whether personal devices, whatsapp messages and Slack should be included, and how you will deal with data held in other jurisdictions). The policy should also cover available exemptions and the use of redactions, and provide for a thorough review of decisions made in order to ensure consistency. Proper record keeping is essential and thought also needs to be given to the interaction with financial crime obligations and thorough team training.

Having developed effective DSAR policies for clients and assisted with numerous requests, we know from experience that he devil's in the detail when it comes to DSARs.

Our recent podcast explores the DSAR process through the lens of debanking. To discuss, contact Robert Allen.

The PRA: Increasingly sharp teeth

For the first 5 or so years after its inception in 2013, PRA Enforcement pursued its enforcement investigations at leisurely pace and one would be forgiven for having paid it relatively little attention amongst the panoply of global regulators. Indeed, between April 2013 and December 2019, PRA Enforcement's (from an enforment perspective) output consisted of only 8 Final Notices against firms and 7 against individuals.

By comparison, the 3.5 years from 2020 have seen 7 Final Notices against firms and 5 against individuals - including, in 2023, the first action brought under the SM&CR and the largest fine that the PRA has levied against a firm (with the greatest number of Fundamental Rule breaches (4!)). If we were betting people we'd expect this trend to continue with the PRA dishing out as many Final Notices in the next 5 years as we have seen in the past 10.

In that spirit of organisational renewal, the Bank of England's (relatively new) Head of Enforcement and Litigation, Oliver Dearie, has spent some time sprucing up and combining what was a smorgasbord of enforcement polices from across the Bank, including in relation to the Bank Notes regime, Financial Markets Infrastructure firms and the PRA's Approach to Enforcement. The Bank published a consultation on enforcement in May 2023 setting out a number of interesting proposals, including what is promised to be a mechanism for the speedy resolution of investigations into well-defined issues, the opportunity for a 50% discount (if you make some serious admissions of liability) and a revised approach to the calculation of penalty at Step 2 to the PRA's penalty framework (higher fines seem likely...).

We submitted a response to this consultation in August with kind input from a number of clients (we're very happy to share that response). Our webinar on the topic is available here.

As you may know, Tom Makin (a Managing Associate in our Contentious Regulatory team) has recently returned from a year in the PRA Enforcement Team and has some great insights. Do reach out to Tom, Richard Sims or Tim Boyce for any PRA related queries.

FCA and mitigation: How far do you have to go?

There are many enforcement investigations where it appears that the penalty calculation has been adjusted so as to reach the number the FCA first thought of. Whilst that isn't the official approach, this may have more truth than practitioners would like. The ex-Director of Enforcement (Mark Steward) said in a speech in February 2020 that the penalty process is "a price for breach that is intended to deter others", not a detailed financial analysis of the harm.

Against that backdrop one might wonder if there are mitigating steps one can take that will have any practical impact on the potential fine. Recent cases do suggest there might be some cause for optimism - if you are able and prepared to go this far. Examples include:

• Provision of internal investigation reports without asserting privilege - Lighthouse Advisory Services (2023), ED&F Man (2023), Lloyds Bank (2020)
• Continuing to employ a key employee solely so that they could assist with the provision of information to the FCA - Lighthouse Advisory Services (2023)
• Accepting that steps were taken without reasonable care - Metro Bank (2022)
• Proactively bring information to the attention of the FCA which enabled it to scope targeted information requirements - Lighthouse Advisory Services (2023)
• Undertaking an extensive redress exercise, including going significantly beyond what the firm was legally obliged to do - Lloyds Bank (2020), Lighthouse Advisory Services (2023)

To find out more, contact Caroline Hunter-Yeats, Emma Sutcliffe or Tim Boyce.

Fraud reimbursement obligations: Short-lived relief for FIs

The highly-anticipated Supreme Court decision in Philipp v Barclays was handed down in July. This confirmed that the so-called Quincecare duty does not extend to authorised push payments (APP) and related scams where the customer is not acting through an agent (meaning that natural persons will generally be out of scope). Relief will be short lived, however, as this decision coincides with regulatory changes which will make compensation for APP fraud victims mandatory - likely from 2 April 2024. The Payment Services Regulator recognises that this will be a challenging deadline for firms to meet but is insisting that they start work on it now. 

Our on demand flash call explores the implications of the Philipp judgment and how it interacts with the new mandatory obligations and the existing Consumer Duty. It also considers the impact of the proposed criminal offence of failure to prevent fraud.

There are restrictions on the application of the mandatory compensation requirement. Key restrictions include:

• international payments are excluded;
• only payments over Faster Payments are in scope (currently - CHAPs may be included in future); 
• only victims who are consumers, charities or microenterprises are entitled to compensation;
• there will be a cap on compensation, which the PSR has suggested should be £415,000 per claim); and
• consumers who were 'grossly negligent' will not be entitled to compensation.

Consultation on the new rules to implement these changes is ongoing and will continue through Q3 2023. The PSR is currently consulting on the meaning of 'gross negligence' in this context, albeit the proposed guidance leaves a lot to be desired. Firms will need to monitor the consultation process carefully to guide their own work on implementation.

Firms will also need to prepare for the process of sharing 50/50 the cost of compensation between sending and receiving payment service providers - something which seems likely to give rise to teething issues and possible disputes.

For more information, please contact Robert Allen, Doug Robinson or Jon Malik.

Focus on contract: this month's developments

Some interesting points come up in the context of summary judgment applications. This month they have provided two of our contract cases. The first, EE Limited v Virgin Mobile Telecoms Ltd [2023] EWHC 1989 (TCC), was a claim for losses caused by the unlawful diversion of customers to a different network. The contract in question contained an exclusion clause which effectively excluded damages claims by either party in respect of "anticipated profits". The claimant's attempt to characterise its claim as being for "charges unlawfully avoided" could not obscure the fact that it was, in reality, a claim for loss of profit and was therefore caught by the exclusion clause. The claim was suitable for summary dismissal and the court duly dismissed it. There is a lesson in there about the effectiveness of properly drafted exclusion clauses as well as a warning against overly technical attempts to avoid the obvious when formulating issues.

The second summary judgment case concerns a dispute over the alleged formation of a contract. The question was whether an email gave rise to an obligation on the part of a venture capitalist company to subscribe for shares worth £40 million in a medical and health technology company. On this occasion, the court decided that the issue was not suitable for determination at the summary judgment stage. A fuller investigation was required into the facts than was possible or permissible on summary judgment. This is an interesting contrast with the EE case we have just looked at and suggests that a realistic approach is needed before attempting to knock out a contract claim at an early stage. In both cases it is fairly safe to assume that significant costs were incurred but with very different results. Ventura Capital GP Ltd v DNANudge Ltd [2023] EWHC 1631 (Ch).

In the final contract case for this month, Drax Energy Solutions Ltd v Wipro Ltd [2023] EWHC 1342 (TCC), the court was asked to decide two preliminary issues which turned on the construction of a limited liability clause. The judgment contains a helpful summary of the principles of contractual interpretation (paras 36 to 51) - worth a read by way of a reminder - which were then applied to the wording of the clause. Here the judge concluded that the language of the limited liability clause read with similar language in a nearby clause in the same agreement, and taking into account commercial considerations, showed that the clause imposed a single liability cap for all claims arising out of the agreement, and not multiple caps with a separate limit applying to each claim.

Claims in Russian courts in breach of jurisdiction clauses

Financial institutions have long been careful about jurisdiction clauses when dealing with Russian counterparties. It is common to select arbitration, which is seen as neutral, and widely enforceable.

In the past six months there has been a significant increase in claims brought in Russia by sanctioned Russian counterparties, in breach of jurisdiction clauses. The Russian Courts have held that (i) any sanctioned Russian person/entity cannot get justice abroad, and (ii) on that basis, the Russian Courts will accept jurisdiction over disputes brought by a sanctioned entity, even where this breaches a jurisdiction clause.

As at mid-August, we were aware of seven major banks facing Russian proceedings. A common fact pattern is that the Russian Claimant seeks payment of a substantial debt, which the non-Russian party cannot pay due to sanctions. Given that Russian judgments are still recognised and enforceable in several jurisdictions, this creates significant business risk for defendant parties.

To compound this problem, if the non-Russian party sues their sanctioned Russian counterparty in the correct forum (eg in arbitration), including to seek anti-suit relief, then the Russian court can - under Russian law - impose a very substantial penalty on the non-Russian party.

These situations naturally give rise to complex issues, often requiring specialists across litigation/arbitration, sanctions compliance, and the relevant product (eg derivatives). If you would like to hear more on this topic, and the risk mitigation steps that may be needed, please contact Adam Brown or Emily Blower.