Financial institutions - market insights Q3/Q4 2024

Group actions 

Eclipse litigation proceedings: In May, the English High Court ruled in favour of HSBC and against the group action brought by hundreds of investors.   

In July, Serco settled its investors’ securities class action, shortly after the trial had commenced. Investors alleged overbilling/ mischarging on the part of the British multi-national which is one of the world's largest providers of public services to governments. 

The terms of the settlement have not been disclosed, which leaves unresolved a number of issues which the case was likely to be the first authority for in relation to securities claim.  

A number of other London-listed companies are facing securities class actions in the High Court, including Glencore, Standard Chartered and Barclays. Further, Fox Williams LLP are understood to be planning an action against Ladbrokes concerning alleged bribery and corruption in the Group’s Turkish division. 

This picture is replicated in the US where at least 10 class actions have been filed against the shale oil companies. The allegations are that they knowingly constrained shale oil production, which in effect raised US retail petrol prices. 

According to Cornerstone’s Securities Class Action Filings 2024 Midyear Assessment,112 securities class action lawsuits were filed in the first half of 2024, which is generally in line with the two previous six-month periods. However, the potential damages associated with the 2024 filings are US$185 billion, which is approximately 55% higher than the semi-annual average from 1997 to 2023. While there was a sharp decline in SPAC and other M&A-related filings, COVID-19-related filings are on pace to increase by 27% on year in 2024. There have not been any securities class action filings related to the bank failures in 2023, which could reflect that the banking sector is stabilising.

We have also identified group actions as a key update in the Complex casualty section.

Third party litigation funding (TPLF)   

The Litigation Funding Agreements (Enforceability) Bill, which was introduced in March 2024 to restore the pre-PACCAR position and ensure that TPLF remains a viable funding method for claimants, was dropped following the dissolution of Parliament on 30 May 2024. The Bill was not reintroduced in July’s King’s Speech, meaning the uncertainty generated by the PACCAR judgment over the enforceability of litigation funding agreements will . 

The government will not re-introduce the Bill until the Civil Justice Council (CJC) has completed its ongoing review of TPLF, which will set out the current position of litigation funding in the UK, including TPLF. It will also consider access to justice, its effectiveness and regulatory options and make recommendations for change, where necessary. The CJC’s full report is expected by summer 2025.

The EU’s mapping study of TPLF in the European Union is continuing. As part of the study, a survey was conducted by Civic Consulting and the British Institute of International and Comparative Law, to assist the European Commission in analysing information on the legal framework and the practical operation of TPLF and to inform future policy decisions on TPLF.  Views and data were sought from a wide range of interested stakeholders. The survey closed on 3 September 2024.

Litigation funding in Ireland

The outcome of the Law Commission’s Consultation Paper on Third Party Litigation funding (to which Kennedys submitted a response) is expected to be published in the coming months. The Consultation sought views on the potential for legalising third party funding in Ireland, which is currently prohibited.

Regulatory developments 

UK Corporate Governance Code 2024     

The 2024 Code will apply to financial years beginning on or after 1 January 2025. 

Directors should familiarise themselves with the new Code and new FRC guidance in readiness for reporting on the Code in its annual report and accounts for the year ending 31 December 2025 (if they have a financial year end of 31 December).    

FCA Roundup 

The FCA has now entered its final year of the 3 year strategy plan which it announced in 2022. The FCA’s next strategy statement is expected in April 2025, and is currently being worked on at an executive and board level. 

Criminal background checks

The FCA has confirmed it will consult on recommendations concerning the wider use of criminal background checks on beneficial owners and on controllers of financial institutions. The FCA currently conducts criminal background checks only when specific concerns about an individual’s fitness and propriety arise. The proposal requires standard or basic background checks where an application is made for FCA authorisation or where a notice is provided on a change in control of a financial institution. These checks bring the review of beneficial ownership of financial institutions in line with the current senior managers regime, seeking to ensure that criminals cannot become financial controllers. It could apply as early as January 2025. 

Enforcement

The FCA’s consultation on its plans to improve the pace and transparency of its enforcement cases closed on 16 April 2024. A policy statement and feedback statement is awaited, but the regulator may elect to re-open future calls for evidence in response to concerns raised in an open letter from the Treasury Sub-Committee on Financial Services Regulations, as well as comments from the then Chancellor of the Exchequer, Jeremy Hunt who warned that the plans could undermine their objective to promote growth. 

Treatment of high-profile individuals

In July, the FCA issued a guidance to all financial services to take steps to ensure that high profile individuals (including politically exposed persons) and their families are not treated unfairly. Concerns around ‘de-banking’ (the closing of accounts following public expressions of political opinions) made headlines in July 2023 when Nigel Farage’s account was closed. The guidance was issued after a FCA review of the financial sector found widespread deficiencies in the practices across all lenders surveyed.  

Consumer Duty: Call for Input 

On 29 July 2024, the FCA launched a Call for Input on the review of its regulatory requirements following the introduction of the Consumer Duty in July 2023.

The FCA primarily wants to learn where it can refine its retail conduct rules and guidance. It aims to address potential areas of complexity, duplication, confusion or over-prescription, which create regulatory costs with limited or no consumer benefit. The FCA also wants to include appropriate flexibility in its rules so that they are responsive to future changes and innovation.   Views are sought from a range of stakeholders, and Kennedys are preparing to submit a response.  

The Call for Input closes on 31 October 2024, following which the FCA will outline its approach in early 2025.

Insolvencies  

According to the UK Government’s Insolvency Service department’s statistics for April 2024, the number of registered company insolvencies was 18% higher than in April 2023. The UK is still seeing a much higher number of corporate insolvencies than during the COVID pandemic, and from between 2014-2019. The numbers are, however, lower than during the 2008-9 recession.  

The five industries that experienced the highest number of insolvencies in the 12 months to March 2024 were: construction 17%; wholesale and retail trade; repair of motor vehicles and motorcycles 16%; accommodation and food service activities 15% administrative and support service activities 9%; and professional, scientific and technical activities 8%. 

We have also identified insolvencies as a key update in the Construction section.

ESG 

The FCA has been taking an increasingly proactive approach to ESG issues, and in particular, the risk that authorised entities may not be presenting a factually accurate picture of their own management of these risks, or the sustainability of their products, to the consumer. This includes the introduction of the anti-greenwashing rule, which came into force on 31 May 2024.  The new rule is designed to protect consumers by ensuring sustainable products and services are accurately described. 

In May, the FCA confirmed that there would be a pause in implementing its new regulatory framework on Diversity and Inclusion in the financial sector whilst the terms of the government’s Draft Race Equality Bill were finalised such that the regulator could consider the interaction of its proposals with government’s plans.  

New government bills

The Draft Audit Reform and Corporate Governance Bill

The FRC have welcomed the Government’s announcement that they will publish a draft Audit Reform and Corporate Governance Bill, which will change the FRC into the Audit, Reporting and Governance Authority (ARGA).  

FRC CEO, Richard Moriarty, said: 

"The FRC welcomes the Government’s announcement of draft legislation to modernise its regulatory toolkit. 

We will work with the Department of Business and Trade as it brings forward this draft legislation while continuing to use our existing powers to deliver good standards of corporate governance, financial reporting and audit and fulfilling our remit to support growth across the UK.” 

Case developments  

US Supreme Court’s decision regarding penalties for securities fraud [27.06.2024] 

The US Supreme Court held in SEC v Jarkesy that the SEC’s use of in-house courts and administrative law judges to adjudicate potential civil penalties violates the Seventh Amendment right to a jury. The decision is expected to impact the length of SEC enforcement actions where the SEC is seeking civil penalties, because such actions must now be brought in federal court. 

Developing D&O claims based on AI disclosures in the US 

On 20 June 2024, a class action complaint was filed against UiPath Inc., a global software company that makes robotic process automation software, and its directors and officers, for making materially false and misleading statements regarding the success of the company’s turnaround strategy.  

On 11 June 2024, the SEC charged Ilit Raz, the CEO of AI recruitment startup Joonko Diversity, Inc., with defrauding investors by making false and misleading statements about the quantity and quality of company’s customers, the number of candidates on its platform, and the company’s revenue. 

On 26 August 2024, the SEC filed an enforcement action against QZ Asset Management Limited and the company’s CEO. Among other alleged false and misleading statements, the SEC’s complaint alleges that the defendants “falsely claimed that QZ Asset would use its proprietary AI-based technology to help generate extraordinary weekly returns while promising ‘100%’ protection for client funds and that well-known and reputable financial and legal firms were providing services to the company.”

On 4 September 2024, a plaintiff shareholder filed a securities class action lawsuit against Gitlab Inc. and two of its executives alleging that they misled investors by overstating the company’s ability to develop AI software features that would increase market demand for the company’s software platform. 

Supreme Court introduces new knowledge requirement for directors ’ accessory liability 

Lifestyle Equities v Ahmed & Another [15.05.2024] 

The UK Supreme Court has confirmed that a director will only be liable as an accessory to a wrongful act committed by their company if they had actual knowledge of that wrongdoing. 

This decision is good news for directors as they should be protected from a finding of accessory liability, where they have no actual knowledge of the wrongful act committed by their company. However, directors should review their practices to mitigate the risk of them being criticised for “turning a blind eye” to the facts of a tort. 

Home truths for directors in the wake of BHS insolvency

Wright and Rowley, BHS and others v Chappell and others [11.06.24]

In a lengthy judgment following a 5-week trial, the High Court held the defendant directors of British Home Stores (BHS) liable for wrongful trading and misfeasance; they had unjustifiably caused an already insolvent company to increase its financial deficit by £140 million.  The two defendant directors, Mr Chandler and Mr Henningson, were each held liable to pay £6.5 million by way of contribution to BHS’s assets.   The directors had the benefit of a D&O policy with a limit of indemnity of £20 million including defence costs, which by the time of the trial had already been significantly eroded. Mr Chandler was not personally wealthy, but even though no finding of dishonesty was made against him, the judge refused to limit his personal liability.  Both defendants may now face personal bankruptcy.

This case is of great significance to directors of distressed companies. The judgment illustrates the need for sufficient D&O cover, as well as the potentially enormous costs of defending complex claims against directors. It also highlights that a key part of a director’s role can be to protect the company - and its creditors - from the actions of unscrupulous owners, and for directors to demonstrate expertise and robust independence. D&O insurers will no doubt be carefully considering the insurance coverage implications of the highly critical findings in this judgment, including any applicable exclusions and the possibility of policy avoidance.

It is likely that this saga will continue, given an upcoming hearing to determine quantum and possibility that the parties may seek to appeal this decision.