Financial Markets Disputes View: February 2024

Spring is nearly upon us and new life is appearing all around. As if to mirror the natural world we have been presented with bold new approaches from both the Bank of England and the FCA. This month’s View also takes a look at the future of greenwashing, various AI-related developments, collective proceedings and a recent decision on damages in cyber attack cases amongst other things.

BOE sets out final Approach to Enforcement

You may recall last year's Bank of England consultation, CP9/23, which set out proposed changes to the Bank of England's approach to enforcement documentation. The Bank has now confirmed its final approach documents in PS1/24, published on 30 January 2024. PS1/24 reflects the Bank's consideration of the 20 responses that it received, which it says were generally welcoming of the proposals.

The amendments set out in PS1/24 leave the PRA’s initial proposals relatively untouched, including some of the more challenging elements such as the requirement for an attestation from a senior manager. Notwithstanding those tricky elements, this is an innovative proposal that offers an investigation route that is quite different to that followed by other regulators. It will be very interesting to see whether the EAS is taken up and, where it is, whether it delivers outcomes more quickly than the traditional iterative investigative approach. The changes took effect on Tuesday 30 January 2024 (noting that the prior 'approach' documents will remain in force for conduct before that date). In this note, we cover the changes made to the Bank's initial proposals.

For further background we can recommend our webinar which covered the key proposed changes to the approach documents floated in CP9/23 - the Early Account Scheme, Enhanced Settlement Discount and proposed changes to the determination of the Step 2 starting point for penalty calculation which can be accessed on demand here.

To discuss this development, please contact Thomas Makin (Managing Associate), who spent 12 months in the PRA Enforcement team or Caroline Hunter-Yeats (Partner).

The FCA’s new enforcement approach

The FCA published CP24/2 “Our Enforcement Guide and publicising enforcement investigations - a new approach” on 27 February with a commitment to carrying out enforcement cases more quickly. The regulator also plans to increase transparency of its enforcement process by naming (some) firms that it places under investigation, and giving updates throughout the enforcement process (including where investigations are closed without further action). As Therese Chambers put it in her speech published on the same day "The first rule of enforcement club is that you do in fact talk about enforcement club." The aim is to shorten the gap between the activity and any public outcome, and therefore increase deterrence.

The FCA says that it will, in future, focus on “a streamlined portfolio of cases, aligned to its strategic priorities where it can deliver the greatest impact.” It will also close cases where no outcome is achievable, more quickly.

If implemented, the proposals would represent a step change from the existing process where investigations are only announced in very limited circumstances.

The consultation closes on 16 April 2024 and we will be one of many firms responding on this hot topic. If you would like to discuss our response, please contact Caroline Hunter-Yeats (Partner).

Economic Crime and Corporate Transparency Act - Fraud Prevention Toolkit

The Act, which received Royal Assent in October 2023, contains the most fundamental changes to the law on economic crime since the Bribery Act. The reforms have extraterritorial effect and will require organisations in all sectors to take steps to ensure that they meet the requirements under the Act.

Key Reform I: A new “Senior Manager” Attribution Test for corporates (in force)

• Adds to the existing “directing mind and will” identification test to include a “senior manager” as defined in the Act, acting within the scope of their authority.
• The Offence applies to “senior manager” in all corporations: An individual who plays a significant role in decision-making about, or the managing or organising of, the whole or substantial part of the activities of the organisation.

Key Reform II: A new corporate offence of Failure to Prevent Fraud (expected Q3 2024)

• Introduces corporate criminal liability for fraud offences by an “associate”, if intended to benefit the organisation or its clients – unless reasonable fraud prevention procedures are in place.

Practical examples of the types of scenarios that could engage the new offence include: misselling, manipulation of financial forecasts/accounts/sales targets or issuing misleading company statements (e.g. greenwashing).

Our ECCTA Fraud Prevention Toolkit to tackle the increased corporate criminal risks arising from the Economic Crime and Corporate Transparency Act is now live! The toolkit provides a range of resources to help organisations understand, assess and mitigate the risks created by the reforms and to develop reasonable anti-fraud procedures. Click here for more information on the reforms and Toolkit or speak to Camilla de Silva (Partner) or Jon Malik (Supervising Associate).

Important CJEU ruling on cyber attack damages

Even before the inception of the GDPR there has been lively argument over what damages are available for breach of data protection rights, not least in the leading Vidal-Hall and Lloyd cases, both against Google. In December 2023, The Court of Justice of the European Union issued a judgment that provides some important points of clarity on the issue, at least for those in the European Union. For those of us in other jurisdictions, the judgment provides useful guidance which should be taken into account by Courts considering the issue.

The ruling has far-reaching implications for both data controllers and data subjects. For the former, it provides a roadmap to ensure minimisation of risk in circumstances where a data breach arises as a result of a cyber attack by ensuring the design and implementation of appropriate security measures. For the latter, it provides clear boundaries as to what a credible claim for damages following a data breach looks like, and should dissuade the more speculative claims often brought. Hopefully a ruling of similar clarity and breadth will come along in England & Wales in order to provide some direct precedent.

Our article looks in more depth at the issues raised. Please contact Robert Allen (Partner) if you would like to discuss further.

Collective Proceedings issued in the UK’s Competition Appeal Tribunal

With collective proceedings coming thick and fast it can be challenging to maintain oversight of what claims have been issued and what stage they’ve reached. Our tracker monitors the collective proceedings issued in the Competition Appeal Tribunal and outlines the current stage of each set of proceedings, as well as providing a summary of each claim and links to the key documents. We regularly update the tracker to ensure the latest developments are captured to maintain oversight of trends, developments and opportunities.

If you have any questions, or would like to discuss the Competition Appeal Tribunal’s collective proceedings regime in more detail, please contact Patrick Boylan (Partner), Eleanore Di Claudio (Managing Associate) or Anna Crellin (Of Counsel).

Greenwashing: The year ahead

Join our expert lawyers as they dissect the latest regulatory trends, unpack the complexities of compliance, and offer strategic insights for staying ahead in the rapidly evolving landscape of environmental claims and marketing. In this podcast episode, we explore decisions by the UK's Competition and Markets Authority and Advertising Standards Authority and the EU Commission to give you practical tips to navigate the regulatory risks of greenwashing. We also look ahead to key pieces of legislation, such as the EU Green Claims Directive, and what impact they will have on businesses marketing their green products or services.

Click to find out more about our ESG Litigation and Regulatory Investigations Tracker and the ESG Disputes Radar!

Please speak to Robert Allen (Partner) or Emily Blower (Managing Associate) for more information.

NZ Supreme Court allows climate tort claim to proceed

In the landmark case, Smith v Fonterra, New Zealand's Supreme Court has this month overturned a previous ruling and held that tort claims against the country's major greenhouse gas emitters can proceed to trial, in likely the first mass climate tort claim in a common law jurisdiction to reach trial. Smith's claims to reduce emissions allege that the defendants' contribution to climate change constitutes public nuisance, negligence, and breach of a novel climate duty, all of which he alleges personally affect him through environmental and cultural impacts.

The New Zealand Court of Appeal, previously threw out the case, holding that Smith´s claims were bound to fail. It considered that due to the lack of a direct causal link between the defendants and the global effects of climate change, Smith’s claims could constitute “open-ended liability for defendants”.

The Supreme Court disagreed, finding that Smith’s main claim in public nuisance amounted to a “reasonably arguable cause of action”. The causation issues were found to be fundamentally similar to other public nuisances involving multiple contributors and the Court ruled that these should receive “evidence and policy analysis” at trial.

Broader implications: Although the case has been allowed to proceed to trial, this should not be understood as an endorsement of the merits of Smith’s claims. The Court has only ruled that they are not ¨bound to fail¨. However, the Supreme Court's willingness to entertain a mass tort claim opens the door for future litigation which could compel major polluters to mitigate their environmental impact, particularly if there are more proximate causation arguments.

For more information please contact Robert Allen (Partner) or Emily Blower (Managing Associate).

AIMA releases new report on hedge fund managers' views on Generative AI

On 1 February 2024, the Alternative Investment Management Association published a report on hedge fund managers' attitudes towards generative AI, drawn from a survey of 157 hedge fund managers globally.

Of note, 86% of hedge fund manager respondents allow their staff to use generative AI tools at work, with ChatGPT being the top choice in the industry.

Whilst a large number of hedge fund managers are leveraging generative AI, there are costs and challenges that come with tailoring AI tools to effectively add value to businesses. The report states that the cost of training AI tools on internal data can be anywhere between USD 4 million and USD 10 million, and each function within a hedge fund manager will need tailored training as their uses of generative AI will differ.

Read the full report here. If you would like more information, please contact Minesh Tanna (Partner).

Italian DPA says ChatGPT breaches privacy rules

The Italian Data Protection Authority has notified OpenAI that its AI chatbot, ChatGPT, has breached the EU's General Data Protection Regulation.

This follows the DPA's ban on ChatGPT last March over privacy concerns, after which ChatGPT was allowed to resume operating when OpenAI announced a number of additional privacy controls. This included offering a new opt-out form that allows users to decline the use of their personal data to train its algorithms, and introducing a setting that allows users to turn off their chat history.

OpenAI has 30 days to respond to the DPA.

Read the DPA's press release here. If you would like more information, please contact Minesh Tanna (Partner).

For more on this decision please see our latest AI View.

Legal professional privilege

The recent Court of Appeal judgment in Al Sadeq v Dechert considers several important issues in the context of privilege and is well worth a read. We focus briefly here on just two of those.

First, the court confirmed that litigation privilege can extend to non-parties in certain circumstances. In this case the non-party concerned was the victim of an alleged crime but the court alluded to more common examples of where this may be relevant. These included a liability insurer conducting the defence of a claim or, in the context of group litigation, non-parties involved in the collection of evidence and also litigation funders. The dominant purpose test will have to be satisfied but the court left open the question of whether or not the non-party has to have a sufficient interest in the contemplated proceedings.

Secondly, the court rejected an attempt to extend to litigation privilege the well known and much criticised Three Rivers test as to who is the “client” for the purposes of a claim to legal advice privilege. It was accepted that the Court of Appeal here was bound by the decision in Three Rivers but the point was argued for the purposes of preserving it for any subsequent appeal to the Supreme Court. It appears therefore that the Supreme Court may at last be presented with an opportunity to reconsider the law on this.