Financial Markets Disputes View - October 2023

Welcome to the October edition of Financial Markets Disputes View!

The end of the courts' summer break this year seems to have coincided with a big increase in activity both on the litigation and regulatory fronts. In this edition, we take a look at the revised penalty statement which has recently been published by the Payment Systems Regulator and the Parliamentary progress of the Bill which will introduce a new criminal offence and make significant changes to the way in which companies can be held liable for economic crimes. We examine a Court of Appeal decision which is likely to require a different approach to Russian sanctions and, at a more macro level, we touch on the potential litigation risks posed by two huge themes - ESG and AI.

As ever, please do reach out to us with any feedback or questions.

What's Coming Up...

• 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. If you would like to register please click here.

• ESG disputes - To help you stay up to date on the latest global developments in contentious ESG matters, we are launching our ESG Disputes Radar. It comprises email briefings which aim to keep you up-to-date by delivering key updates - when they happen - to help you adapt to developments likely to impact your organisation. Our radar coverage spans the globe, keeping you updated on litigation, ground-breaking investigations, and complaints brought before international bodies. Read more and sign up today here.

PSR CP23/2 Proposed revised penalty statement

The PSR has recently published a Revised Penalty Statement setting out its approach to imposing financial penalties on firms that fail to comply with the rules that it enforces, following a Consultation that took place in March/April this year. The key changes are:

• The PSR has changed the way in which it considers the duration of a compliance failure and how it takes account of revenue when calculating penalties. As a starting point for the penalty calculation, the PSR will use revenue realised during the entire period in which a compliance failure occurs and will use a percentage scale of 0-20%, with three bands of seriousness: 0-6%, 7-13% and 14-20%, representing lesser, moderate and high seriousness respectively. This maps much closer to the FCA's approach.

• The PSR has provided a list of non-exhaustive factors which may indicate that a person holds a senior management position within a firm (for example, whether the individual was tasked with relevant decision-making, was a key decision-maker in a group, has a senior role, or given the circumstances the person ought to have been tasked with decision-making). Who falls within the definition of senior management is relevant because, in determining the seriousness of a compliance failure and the appropriate level of any financial penalty, a relevant factor is the extent to which a firm's senior management were aware of and involved in the compliance failure.

• The PSR has clarified the circumstances in which it considers a compliance failure is deliberate or reckless so that they now largely mirror the FCA's approach in DEPP. There are no substantive changes from the Proposed Revised Penalty Statement annexed to the Consultation, save that - following the recent case of Seiler, Raitzin and Whitestone v FCA Upper Tribunal - the PSR are no longer saying that awareness of a risk can be assessed on an objective basis when considering whether a compliance failure is reckless -- instead, this assessment must be made on a subjective basis. This was one of the changes that we advocated for in our response to the Consultation (as summarised in April's Payments View).

The PRA is also consulting on proposed changes to its approach to enforcement and a consultation was published in May 2023 setting out a number of interesting proposals, including the opportunity for a 50% discount (if you make some serious admissions of liability). It is interesting that this approach is not replicated by the PSR which still provides for a maximum settlement discount of 30%. We submitted a response to the PRA consultation in August and our webinar on the topic is available here. We are still waiting for the outcome of that consultation and will report back once we have it.

To discuss further, please contact Amy Cook, Tom Makinor Caroline Hunter-Yeats.

Court of Appeal suggests all Russian companies subject to sanctions

In a highly significant judgment (Mints v PJSC National Bank Trust) the Court of Appeal has indicated (albeit obiter) that the "control" test in Russian sanctions legislation cannot be read restrictively to exclude political or corporate office. In this case, it was "sensible and realistic" to treat PJSC National Bank Trust, a subsidiary of the Russian Central Bank, as controlled by either Vladimir Putin or Ms Elena Nabiullina (the Governor of the Central Bank).

Going forward, it would therefore appear reasonable to treat the Russian Central Bank and its subsidiaries as frozen. That has significant implications, for instance in relation to payment of taxes in Russia which is likely to now amount to an offence (absent a licence).

However, as expressly accepted by the Court, the implications are potentially far broader. Giving the sanctions legislation its proper wide meaning may as a result mean all Russian economic entities may ultimately be considered controlled by Vladimir Putin and thus subject to asset freezing sanctions.

Inhouse counsel and compliance officers dealing with the sanctions regime should now consider afresh the permissibility of any continued dealings with Russian entities, with a particular focus on state owned enterprises.

Our article provides more in depth analysis but please contact Camilla de Silva, Tom Bowenor Cherie Spinks if you would like to discuss further.

Climate-related litigation guidance

The threat of climate related litigation is growing. The Network for Greening the Financial System (NGFS) has just published two complementary reports which help to provide some technical analysis of the nature of risks posed.

The first report - Climate-related litigation: recent trends and developments - offers a useful categorisation of existing litigation and disputes data that can impact the financial sector, corporates, central banks and supervisors. It notes that litigation is likely to grow in parallel to new legislation, particularly relating to greenwashing, climate disclosures and corporate due diligence. This trend may be particularly relevant for the financial sector, which is increasingly being required to disclose under new regulation.

The second - Report on micro prudential supervision of climate-related litigation risks - offers insight on the current supervisory landscape on climate-related litigation risk (CLR) and notes the challenges of reliably evaluating and predicting the evolution of these risks. NGFS takes the position that CLR are a subset of physical and transition risks rather than a stand-alone risk category. The report outlines that CLR manifests within existing prudential frameworks for supervision and is oftentimes treated as a subset of operational risk by international standard-setting bodies. There is still a long way for supervisory approaches to go to appropriately capture CLR, both with regards to defining it, adopting supervision methodologies and filling data gaps, to name just a few areas. The report goes on to explore possible supervisory approaches and emerging practices, whist noting that this area will likely only grow in importance.

If you would like more information, please speak to Rob Allen orEmily Blower.

UK's First Environmental Collective Action

In this case, the Proposed Class Representative (Professor Carolyn Roberts, an environmental and water consultant) has issued a claim against the first of six water companies which, she alleges, each hold a monopoly position for providing water and sewerage services to household customers in their geographic area. She alleges that the companies have been misleading their regulators by underreporting the number of pollution incidents, which has resulted in higher customer bills.

She is seeking to represent 8 million customers who have paid a water bill to Severn Trent Water since April 2020. The claim is being brought as an opt-out class action, meaning customers will be automatically included within the class, and entitled to their share of any awarded damages, unless they explicitly opt-out of the proceedings. The combined value of all six claims is expected to be around £800 million in total.

This is the first time an environmental collective action has been brought in the UK's Competition Appeal Tribunal. There is a risk that the Tribunal may see this as an attempt to shoehorn an environmental claim into the remit of the collective action regime in the CAT. The first hurdle will therefore be 'certification', meaning the claim will need to pass the gatekeepers of the Tribunal before it is allowed to proceed. We will be watching this development with interest and will report back shortly.

You can read more about collective proceedings issued in the CAT here or please speak toEmily Bloweror Vanessa Sharman.

Failure to prevent fraud and the identification principle

The Economic Crime and Corporate Transparency Bill is expected to receive Royal Assent shortly and contains two important changes for corporate criminal liability.

The first is the introduction of a new offence of "Failure to prevent fraud", which will make companies and partnerships liable for failing to stop employees or agents committing fraud for the benefit of the organisation or its customers.

The second change is to the way in which companies can be held liable for any economic crimes, the so called identification principle, so that the involvement of a "senior manager" will suffice to convict the company.

Over the coming weeks we will explore these changes in a series of podcasts and the first two in the series have just been published. In the first podcast we talk to one of the architects of the changes, Lord Garnier KC. Our second podcast looks at the identification principle.

If you would like to discuss issues raised by the podcasts or, more generally by the Bill, please speak to Camilla de Silva or Jon Malik.

Data risks of developing AI

The potential benefits of AI are significant but there is a risk that in the rush to develop AI tools, businesses overlook the laws protecting the privacy of the data on which they ultimately rely.

In June of this year, the Information Commissioner's Office issued a warning to businesses in the UK not to be "blind" to AI risks in adopting generative AI technology. Generative AI produces content by collecting vast amounts of information from publicly accessible sources online (including people's personal data), and can also be deployed in businesses at a smaller scale, for example to analyse customer data in order to identify certain behaviours and trends. It is quickly becoming an area of increased focus for regulators, not least because of the privacy issues involved. The ICO makes clear in its warning that the laws already existing to protect people's privacy rights apply to generative AI as an emerging technology, and that they will be checking whether businesses have tackled these risks before rollout.

For proof of the potential risks we can look to the US. For example, on 5 September 2023, OpenAI and Microsoft were hit with a class action lawsuit in San Francisco federal court for allegedly breaching several privacy laws in the development of the popular chatbot ChatGPT (among other generative AI systems). The complaint was filed on behalf of two unnamed software engineers who use ChatGPT, and accuses the companies of training their technology using stolen personal information from "hundreds of millions" of internet users. A similar class action lawsuit was filed against Google this summer, also addressing concerns around the misuse of personal information in the context of generative AI.

Protection of personal data in the context of AI technology is likely to remain a hot topic as technologies continue to develop and more and more businesses look to implement AI systems. We will be keeping an eye out for litigation involving these issues looking for themes and we will keep you updated.

In the meantime, if you would like to talk to a specialist about a particular project, please contact Minesh Tanna.

Focus on contract: this month's developments

A couple of cases this month on the courts' approach to contractual arbitration clauses.

In Republic of Mozambique v Privinvest Shipbuilding SAL the Supreme Court held that certain specific issues in English court proceedings (alleging corruption by the respondents which Mozambique claims led to its liability under guarantees for $2bn related to the "tuna bonds" scandal) were not "matters" which fell within the scope of arbitration agreements in contracts between SPVs owned by Mozambique and three of the respondents. The court in ascertaining the scope of an arbitration agreement "must have regard to what rational businesspeople would contemplate." Rational businesspeople would not seek to send to arbitration subordinate factual issues (such as these) and the arbitration agreements had to be construed accordingly. The court proceedings will therefore continue.

In Deutsche Bank AG v RusChemAlliance LLC the Court of Appeal gave its reasons (in the case previously named SQD v QYP) for its earlier decision (7 September) to allow on appeal the grant of an anti-suit injunction to restrain a Russian company that has issued proceedings in the Russian courts in breach of an arbitration clause in an English law governed agreement with a specified arbitral seat of Paris. The Court held that as the French courts have no procedural rules through which to grant an anti-suit injunction, and there being no evidence that the French courts were hostile to such orders, it was appropriate for the English court to make an order to prevent the parties from departing from their agreement.