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Current litigation risks

Whereas banks can still hope to achieve a decision before the English and New York courts based on a proper analysis of the relevant law and facts, it is plain that this is not necessarily the case when claims against them are determined before a regulatory ombudsman.

Banks should not expect issues such as causation or the quantification of loss to be assessed with the same degree of rigour by the UK Financial Ombudsman Service (FOS) (who strives to achieve a “fair” result) as they would be if these issues were considered by the courts. The danger for banks in this divergence of standards lies in the propensity for the consumer lobby to build irresistible regulatory pressure from a basis of “wrong doing” determined by the FOS.

Regulatory fines continue to increase (see the recent “London Whale” fines) and criminal sanctions are now regularly sought by UK regulators. The ongoing LIBOR litigation in the UK and the U.S. (and elsewhere) is producing escalating civil fines, anti-trust settlements are yet to be announced and criminal proceedings have commenced against individuals. Regulatory focus is now turning to trading in other commodities, including gold and silver. More recently, authorities in the UK (and elsewhere) have launched investigations into FX trading.

This regulatory onslaught is playing out against a new legislative backdrop.

As Philip Annett outlines at page 36 of the Risk Note, details of the proposed amendments to the UK Financial Services (Banking Reform) Bill have been published. Key amendments include a new criminal offence of reckless misconduct in the management of a bank and a “reversal of the burden of proof ” to ensure that senior managers in banks can be “held to account for contraventions of regulatory requirements in their areas of responsibility unless they can demonstrate they took all reasonable steps to prevent the contravention occurring or continuing”.

Pressure continues to mount on banks in other jurisdictions. As reported by William E White at page 12 of the Risk Note, in the U.S., the Securities and Exchange Commission (SEC) has said that in some cases it will require an admission of wrongful conduct as part of any settlement. The settlement by JP Morgan of the “London Whale” case required such an admission, as well as a payment of USD 200 million in penalties because of inadequate internal controls. But, returning to a threat very present in the UK, the settlement specifically allows the prospect of separate criminal prosecution against individuals involved.

The danger for banks in divergence of standards lies in the propensity for the consumer lobby to build irresistible regulatory pressure from a basis of 'wrong doing' determined by the FOS.

Tim House, Partner (United States)

Legal and Regulatory Risk Note
United Kingdom