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Class Actions: "Class Actions in the UK … Surely Not!"


While there is an absence of a class action culture in the UK, we may soon be catching the same contentious bug as our friends across the pond if a new Bill (introduced into Parliament on 19 November 2009) is given Royal Assent. Consumers who believe they have been victims of alleged wrongdoing by large financial groups may soon be able to bring US style class action lawsuits against them. The Queen's speech referred to legislation that would make such group litigation easier. Investor groups have already said that they would be quick to use the new powers to allow a timely introduction for a collective redress regime.1 Some may think that the proposed Bill is a political statement in response to the financial crisis ….. we will leave that to your judgment.

Overview of Multi Party Actions Currently in Place in the UK

There is currently no direct equivalent to the US class action in the UK. However, the UK has developed various procedural methods of dealing with multi party claims:

  • Representative Proceedings ("RPs") - This is where claims may be made by (or against) more than one person who have the same interest in every part of the claim. A judgment or order given in a representative claim is binding on all persons represented in the claim unless the court directs otherwise.
  • Group Litigation Orders ("GLOs") - The 1999 procedural reforms aided the introduction of GLOs in order to promote access to justice. GLOs are claims which "give rise to common or related issues of fact or law". The test of "common or related issues" is wider than the "same interest" requirement of RPs and therefore GLOs are more commonly used. The claims are brought as a group, usually with at least 10 claimants and often using the same lawyers. GLOs differ from US class actions (where all potential claimants are bound unless they opt out of the class), in that all claimants wishing to join group litigation must apply for entry onto the group register or opt in by a date specified by the Court. Judgments, orders and directions of the court will be binding on all claims within the GLO.2

Despite the growing economic uncertainty and the corporate scandals of the last few years, there has been relatively limited use of existing procedures of collective redress. A summary of the main reasons are as follows3:

  • One of the main reasons is the cost involved with bringing such litigation to trial in the UK. Participants to RPs and GLOs are normally required to pay their own costs. Some legal firms have attempted to offer alternatives to these arrangements by suggesting conditional fee arrangements, where lawyers would claim a lesser fee (or no fee at all) should their client lose the case. However, if a claim should fail, the claimants would be liable to pay the defendant's costs, which could be quite substantial. This has worrying implications as many litigants under a conditional fee arrangement are very unlikely to be able to meet these costs. This differs from the US style class action model in which most firms operate on "a no win no fee basis" and there is no requirement to pay the other sides costs if the claim is lost.
  • Recently the Jackson Report has aggressively recommended that contingency fees be allowed which seems to suggest a drive towards U.S. litigation.
  • A representative body that does not itself have a cause of action may not bring a court action.
  • The UK Financial Services Authority's ("FSA") powers to secure restitution have not been used as much as expected. The FSA's resources are limited and it must take its own costs into account.
  • The UK Financial Ombudsman Service ("FOS") is not primarily a vehicle for collective redress because it is designed to deal with complaints by deciding what is fair and reasonable in all circumstances of each individual case. It cannot decide a case in absence of a complaint, although many people may have been affected by the alleged conduct.
  • The procedures may be underused or insufficiently misunderstood and many consumers may not realise they have the basis for a complaint.

The Need for Change - The Financial Services Bill

The need for change was identified by the FOS. Its annual report revealed that consumers were awarded compensation in nearly 80% of complaints in 2009, compared with a normal level of 30%- 40% range in 2001. The FOS annual report also revealed that firms were not willing to take on such small matters and the FSA was failing to act on behalf of disgruntled consumers.

The UK government introduced the Financial Services Bill to Parliament on the 19 November 2009 in response to a consultation document entitled "Reforming Financial Markets" in July 2009. Responses were received from a number of representative bodies including the British Bankers Association (BBA), the London Investment Banking Association (LIBA) and the Investment Managers Association (IMA), FOS and FSA.

The Government recognised that there was a need for "sensible processes" to be introduced to deal with problems faced by customers of financial products and services and for providing redress and compensation when such products or services fail. Such mechanisms were important as a way a firm deals with customer complaints is a key determinant of consumer confidence. The HM Treasury's Reforming Financial Markets report states "Failure to resolve a problem can have a disproportionate impact in direct costs, loss of business and goodwill to the industry as a whole.….. Effective complaints handling … reduces the need for regulatory action. It engenders trust in an industry that depends on trust."4 The report identified that even with the current financial climate and the fact that consumers have suffered detriment by the actions of regulated firms, there has been limited use of the existing procedures for collective redress as a result of the aforementioned reasons.

Relevant provisions of the Financial Services Bill (as introduced)5

Clause 18 of the Financial Services Bill as introduced provides that the court can authorise collective proceedings to be brought on behalf of a group of financial services claims that share the same or similar related issues of fact or law. These proceedings may be brought by a representative group such as the FSA or Which? (the consumer group), to take action on behalf of all consumers.

Clause 19 goes further to provide that the court must determine whether collective proceedings should take place on an "opt in" or "opt out" basis. In the former, a person who wishes their claim to be represented in the collective proceedings is required to identify themselves to the representative by a time specified by the court. In the latter, everyone with a suitable claim will be included within the represented group without the need to identify themselves, although they will have the ability to opt out of the group within a certain period of time specified by the court. Persons who are not domiciled in the UK will not be adversely affected by these procedures as they may also have their claims included provided they opt in by a time specified by the court.

Clause 20 provides that the court will determine whether an order made by the court will bind represented persons or whether the order should bind one of the parties or individual group members.

Clause 23 discusses the award of damages. It provides that a court may be able to award a lump sum based on its estimate of the damages that would likely be recoverable in each claim. The court therefore will not need to hear evidence in respect of individual losses incurred by each member of the group. The court will be able to direct that the group member should share in the damages in accordance with a formula that will apply to the calculation of individual group member's entitlements.6 Therefore a person may receive less or more than they were entitled to receive had their losses been assessed individually.

Clause 24 includes a discussion relating to representatives, costs, counterclaims, evidence, appeals and notices. It may be regarded as counterproductive for group members to have the right to appeal judgments as the person who represents them will make such decisions for them on their behalf. The settling of class actions does allow defendants "global peace" which in essence is an advantage and prevents repeat litigation of the same matter.

The advantages of such a proposal is that consumers would not be required to pursue individual claims and risk a backlog at the courts or the FOS. Consumers will also be able to take advantage of cost savings as a large number of claims may be dealt with by firms in a collective action and an efficient settlement process. The HM Treasury's Financial Services Impact Assessment report states that the estimated savings through reduced FOS caseload are in the region of £30 million per year and the potential benefit to consumers who do not normally complain is £30 million to £60 million per year.

Other Key features of the Financial Services Bill include:

  • Streamlining the FSA's powers to order a review of past business and to secure compensation if there have been legal or regulatory breaches.
  • A new consumer financial education body established by the FSA, to increase financial education and awareness among consumers.
  • Free nationwide money guidance service from 2010 that will deliver accessible, impartial financial guidance.

The Bill received its second reading on 30 November 2009 and proceeded on to the Committee stage, where a detailed examination of the bill took place. The Committee considered the bill on 8, 10 and 15 December and is currently considering the bill in its entirety.

What does thus mean for D&O insurance and Financial Institutions?

Whilst it is not expected that there will be an immediate avalanche of US style litigation by disgruntled shareholders, it should be noted that changes in UK company legislation will place directors under closer scrutiny. Furthermore, with the possibility of a class action procedure in the UK, company directors may find themselves exposed to risks that resemble (in size and number) the type of litigation that is frequently seen in the US.

The amplification of such risks to corporate directors and officers will emphasise the perceived need for D&O insurance. Most large European companies carry some amount of D&O insurance whereas many small to mid-sized European public companies do not purchase D&O insurance at all. The changing legal environment could encourage more companies to purchase D&O insurance, which represents a growth for D&O insurers.

If this Bill is given Royal Assent, loud groans will be heard from the UK financial services sector, as what was once an issue that was envisaged to be strictly a US problem is now going global.

Click link for a PDF of the Financial Services Bill (as introduced).

1 "Get ready for birth of class action in Britain", Times Online 22 November 2009.
2 PLC Articles: Class Actions, 28 February 2002
3 H M Treasury's Reforming Financial Markets report, July 2009
4H M Treasury's Reforming Financial Markets report (Chapter 8, para 8.52), July 2009
5 Explanatory Notes to the Financial Services Bill
6 Explanatory Notes to the Financial Services Bill

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