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The Financial Crisis - Where are we now?

04 December 2013. Published by Alan Williams, Partner

"The first thing we do, let's kill all the lawyers" was the cry that famously went up in a peasant's revolt dramatised by Shakespeare centuries ago.

If the cry went up today, it likely would not target the lawyers, however, but rather the bankers. In this environment, more claims are being made against banks than ever before. However, it is also clear that the 'tsunami' of 'credit-crunch' litigation on a 'scale we have not seen before' famously predicted in September 2008 by England's former Lord Chancellor, Lord Falconer, has not materialised to the extent feared – or hoped for. Rather there has been a steady upward trajectory in the number of financial services disputes and also significant regulatory investigatory work.

The last few years of litigation

Many cases now being litigated may not be directly related to the 'credit-crunch' or the 'global financial crisis', but have nevertheless been given added impetus by the new financial world order where banks are held to account for their actions in an unprecedented way. Banks are having to address claims for mis-selling financial products, claims from their own disgruntled employees for unpaid bonuses, and now claims arising from the LIBOR-fixing scandal.

A key development has been a scrabble by regulators to toughen-up enforcement activity, leading to a focus on regulatory investigatory work. That said, as with LIBOR, it is clear that regulatory action can trigger litigation. Such scandals may yet give rise to further litigation, if regulatory investigations into Barclays' 2008 capital raising prove to be justified; or vice versa in relation to claims brought against RBS arising from the prospectus for its 2008 rights issue.  

Claims against distressed and failed banks

An expected upsurge in litigation against directors of loss-making banks has not turned out to be the case. The Court of Appeal's rejection of the Northern Rock shareholders' appeal, grounded in human rights law rather in insolvency law or on company law principles, in SRM Global Master Fund LP, RAB Special Situations (Master) Fund Ltd, Dennis Grainger & Others v Commissioners of HM Treasury [2009] EWCA Civ 788 highlighted the weak position of shareholders of banks which failed during the financial crisis.

The current plight of the Co-Operative Bank illustrates that more financial institutions may find themselves in distressed circumstances. How the Co-Operative Bank responds to its problems will be informed by recent cases: in Assenagon Asset Management SA v Irish Bank Resolution Corporation [2012] EWHC 2090 (Ch), a "bail-in" re-structuring was disrupted when the English High Court held that the necessary resolution was not validly passed, as the requirement for the "exit consent" from participating noteholders for the exchange of their notes, for replacement notes with a reduced value, was an unlawful "coercive threat". Following this case it seems highly unlikely that the Co-Op will launch an offer on similarly aggressive terms. However, Azevedo v Importacao Exportaacao E Industria De Oleos Ltda [2012] EWHC 1849 (Comm), points the way to an alternative approach of incentivising consent to a bail-in. The court found it was lawful for a company to offer the "carrot" of an additional payment to bondholders who vote in favour of an amendment where that additional payment is not made to those that do not vote, or vote against the change.

Investor and client claims against Banks

Typical mis-selling claims involve a unsuitable product recommended by the bank, where risk/break clauses were not adequately explained, or the presentation of the product was misleading. Claims are for breach of statutory duty, negligent advice and misrepresentation. Typical mis-selling defences are that the product was suitable, there was no advisory relationships on the facts, and that there has been a contractual estoppel precluding any claim. Many cases in England concern the validity and scope of clauses in the agreement that protect the banks from claims in tort – especially from misrepresentation. The Court of Appeal in Springwell Navigation v JP Morgan Chase Bank and Others [2010] EWCA Civ 1221 upheld and enforced the principle of contractual estoppel arising from exclusion clauses to thwart claims for misrepresentation.

A further blow to investors was struck in Euroption Strategic Fund Ltd v Skandanivaviska Enskilda Banken AB [2012] EWHC 584 (Comm). The claimant argued that the bank had negligently delayed the close-out and conducted it incompetently. The court held that the bank had not delayed but in any event it owed no tortious duty of care to the claimant. Imposing such a duty would expand the law of negligence into a new context, namely, loss of investment opportunities. The claimant also unsuccessfully argued that there was an implied term of the mandate that the bank would conduct the close-out using reasonable care and to a suitably professional standard. The court held that it was not necessary to imply such a term to give business efficacy to the contract. The court also held that although the mandate was a contract for the supply of services with the Supply of Goods and Services Act 1982, the implied term in s.13 of that Act only applied to services contemplated by the mandate and closing out of the portfolio was not a service that the bank had agreed to carry out under the mandate.

More recently the balance has shifted against the banks: the decision in Rubenstein v HSBC Bank plc [2012] EWCA Civ 1184suggests that financial advisors will be kept to an increasingly high standard. The Court of Appeal found that it is reasonably foreseeable that if a financial advisor misleads a client as to the nature of its recommended investment and puts its client into an investment which is unsuitable when they could have just as easily put the client into something that was more suitable, then the financial advisor could be liable for loss resulting from the investment. In circumstances where the financial adviser is not only obliged to avoid injuring his client but also to protect him from the particular loss which has come about, the scope of the adviser's duty may extend to even unusual events, which will not be considered too remote.

However, the court's decision in Camerata Property Inc v Credit Suisse Securities (Europe) Ltd [2012] EWHC 7 (Comm) can be contrasted to the decision in Rubenstein. In Camarata losses incurred on a Lehman Brothers' note were unrecoverable, as the collapse of Lehman Brothers was held to be unforeseeable. The difference between the cases may, as ever, be on the facts – in Camerata the claimant had invested in increasingly adventurous investments over time and was viewed as a knowledgeable and experienced investor, by contrast to Mr Rubenstein who wasn't and who has asked for specific assurances in relation to the particular risk which led to his loss.

Interest Rate Swap Litigation

One category of investor claims has been in relation to the (alleged) mis-selling of interest rate swap agreements. In Green v RBS Plc [2012] EWHC 3661 (QB) the court dismissed a claim for negligent misstatement and breach of duty to give suitable advice, in relation to the sale of an interest rate swap agreement. However, the court emphasised that the case was highly fact sensitive.

Until Green v RBS there had been no reported decisions of the English Court on this issue, possibly because cases may have settled before reaching trial. Notwithstanding the court's decision in Green, there will is likely to be further litigation of interest swap agreements, particularly as the outcome of reviews the FSA (now FCA) has ordered several banks to carry out into their selling of such products, becomes clear. This conclusion is reinforced by the fact that the Financial Ombudsman Service noted in their 2012/2013 review that they had received 258 complaints from businesses about interest rate hedging products sold by banks – but could not deal with most of these as they were from non-eligible businesses.  

ISDA Master Agreement Litigation

There have also been a number of cases arising from uncertainty in the correct interpretation in provisions in ISDA Master Agreements, for example, in disputes arising from the unilateral close-out of trading accounts and/or loan facilities. The current provision in the ISDA Master Agreement for disputes to be dealt with under the jurisdiction of the English Court or the New York Court has given rise to the recent litigation in England. The ISDA Law Reform Committee has discussed the possibility of inserting an arbitration clause into the next iteration of the ISDA Master Agreement. Whether arbitration will be adopted remains to be seen. The same might also be said about the PRIME Arbitration initiative.

As decisions have been made, the scope for disagreement over provisions in the 1992 and 2002 ISDA Master Agreements has been reduced. For example, Lomas v JFB Firth Rixon Inc [2012] EWCA Civ 419, the conjoined appeal of a number of claims relating to the close-out and valuation provisions in the 1992 ISDA Master Agreement, has provided important clarification for market participants.


In June 2012 the LIBOR-fixing scandal broke when it was announced that Barclays had agreed to pay around $453 million to regulators in the US and UK to settle charges that its conduct had resulted in the manipulation of LBOR. Subsequently UBS and RBS have had to pay huge fines as well.  

The fixing of LIBOR, relied on in thousands of contracts for financial products has raised the prospect of further regulatory action (against other banks including HSBC, Deutsche Bank and Societe Generale), including criminal prosecutions, class-action suits in the USA and even cartel action by the European and other authorities (for example, in Singapore).

In Graiseley Properties Limited (Guardian Care Homes) v Barclays Bank plc ­[2012] EWHC 3093 (Comm), the High Court allowed an interim application by the claimant to amend its claim for the mis-selling of interest rate swaps in order to plead alleged implied misrepresentations and breach of implied terms concerning the alleged manipulation of LIBOR in the bank's favour. While the court permitted the amendments on the basis that they were arguable, the claimant will face significant challenges to make good the claim, particularly in proving causation.

The Guardian Care Homes case can already be contrasted to the court's ruling in Deutsche Bank and Others v Unitech Global and Another [2013] EWHC 471, rejecting the defendant's application to amend their defence and counter-claim to claim that Deutsche Bank had made LIBOR related misrepresentations which had induced the defendant to enter into an interest rate swap agreement and associated credit agreement, and that in making these misrepresentations Deutsche Bank had given an implied warranty that the representations were true, on the basis that the amended claims had no reasonable prospect of success. The court acknowledged that its decision ran counter to that in Guardian Care Homes but said each case must be decided on its merits.

Permission has been granted for appeals of both decisions, raising the prospect of the Court of Appeal reconciling the position in the two cases and providing a more definitive statement of the position to be adopted by the courts in considering claims arising from LIBOR manipulation. In any event, how the cases develop will continue to be watched closely; whether, or not, other investors launch LIBOR-related claims is likely to be informed by what happens next.


There may not have been a shattering surge of litigation since the onset of the financial crisis, but there has been a steady increase in financial services litigation. In some cases the courts have provided helpful guidance and certainty to market participants, reducing the scope for further disputes to arise. However, just as the financial crisis itself is far from being over, so we can continue to expect plenty of financial services disputes over the years to come. Banks are likely to face future claims from investors arising from causes of action uncovered by more vigorous regulatory enforcement. But a topic for another day is who will fund the litigation….?