Managing litigation risk in banking investigations

The conclusion of a banking investigation is increasingly unlikely to mark the end of the matter. Financial institutions face ‘follow-on’ actions brought by customers, third party suppliers and ex-personnel. The growth in claims management companies and shareholder action groups, combined with uncertainties in economic outlook serves only to fuel this litigious activity.

The steps taken throughout an investigation can have a significant impact upon subsequent litigation. As such, it is essential that litigation risk is effectively managed throughout all stages of the investigatory process.

In this article we address issues in follow-on litigation. We provide a high-level checklist of different litigation risks specific to follow-on claims. Then we provide some practical guidance when preparing for investigations that addresses those risks, including in relation to efficient data management, reputational risk and privilege.

Banks face a number of challenges in defending follow-on litigation claims. A brief overview of the principal risks is as follows.

Regulatory notices

The publication of regulatory notices online provides a gateway for prospective litigants. Pursuant to s138D of the Financial Services and Markets Act 2000 (FSMA), private persons who have suffered a loss as a result of the breach of Financial Conduct Authority (FCA) or Prudential Regulation Authority (PRA) rules (such as the FCA’s Conduct of Business Sourcebook (COBS)), can bring an action for damages. Despite the regulator producing its findings on the basis of relatively limited access to documentation, claimants may present the content of these notices as established facts. For example, in the recent interest rate hedging product (IRHP) mis-selling case, Hockin v The Royal Bank of Scotland [2016] EWHC 925 (Ch), the Court permitted the claimant to amend their claim to incorporate LIBOR misrepresentation allegations supported by inferences drawn from the conclusions of regulatory authorities, following the position established in Graiseley Properties Ltd v Barclays Bank plc [2012] EWHC 3093 (Comm).

In addition, pursuant to the Civil Procedure Rules (CPR17.4(2)), claimants can add new claims even after the expiry of the limitation period, providing the new claim arises out of the same or ‘substantially similar’ facts as the existing claim, as per Mercer Ltd v Ballinger [2014] EWCA Civ 996. The publication of regulatory notices can trigger such amendments.

Unless the claimant has entered into a tightly worded ‘full and final’ settlement agreement, it may seek to use regulatory notices to raise new causes of action and unpick the former settlement, exposing the financial institution to further liability. In WW Property Investments Ltd v National Westminster Bank Plc [2016] EWCA Civ 1142, another IRHP mis-selling case, the Court held that settlement agreements were binding in relation to collar products but not in relation to the overarching swap agreement. This highlights the need for clarity in drafting settlement agreements.

Witnesses

The unavailability of key witnesses (such as relationship managers and salespeople) can prove challenging. Often, given the passage of time, key individuals may have moved on to work at another institution or even left the industry. Former senior stakeholders may have since retired and have little incentive to engage with their former employer. Alternatively, individuals may themselves be subject to investigation which may discourage them from assisting with an investigation.

Documents

Banks will often not receive notification of follow on litigation until a considerable time after the relevant events. This can exacerbate the difficulties in promptly sourcing relevant documentation, retrieving emails and hard copy files. For historic claims, this may require time-consuming searches of back up tapes.

A bank’s customers may attempt to obtain documents outside of the formal disclosure process via a Data Subject Access Request (DSAR). This approach was challenged in Dawson-Damer v Taylor Wessing LLP [2015] EWHC 2366 (Ch) which indicated that the English courts will be disinclined to enforce DSARs made for the purpose of advancing litigation (although this case is being appealed).

Privilege

Banks may seek to rely upon privilege to protect legal advice between lawyers and their clients. The recent decision in PAG v RBS [2015] EWHC 1557 (Ch) provides some reassurance to institutions undergoing regulatory investigations, demonstrating that it is not necessary to distinguish between legal advice and factual communications provided the latter forms part of a "continuum of communications and meetings between solicitor and client." The ruling appears to confirm that legal advice privilege can be protected within an advisory committee provided that the participating lawyers convey information and provide legal advice in respect of the regulatory investigation. However, the scope of those covered by privilege looks set to be narrowed, further to The RBS Rights Issue Litigation [2016] EWHC 3161 (Ch). In that case, the High Court found that interviews conducted by a bank’s solicitors with its employees were not covered by legal advice privilege, as the employees were not the lawyers’ "clients." This decision may lead to a re-examination of the seminal case of Three Rivers District Council v The Governor & Company of the Bank of England Rev 1 [2003] EWCA Civ 474 and as such its appeal has been leapfrogged up to the Supreme Court, due to be heard in early 2017.

Documents primarily concerning business advice or administration will not attract legal privilege. In addition, privilege can be harder to maintain in an international investigation. While common law jurisdictions such as the UK, US and Australia recognise legal privilege, civil law jurisdictions such as the People’s Republic of China do not.

Litigation privilege may protect confidential communications between parties if the dominant purpose of such communications is in relation to adversarial proceedings either pending, reasonably contemplated or in existence. In practise, litigation privilege can prove difficult to assert and requires specialist advice to determine its precise coverage. Purely internal investigations or investigations conducted to assist with early stage regulatory investigations may not attract litigation privilege, as the dominant purpose of such work is unlikely to be in anticipation of future litigation.

Reputational risk

Although an investigation may commence in relative privacy, as the process continues the risk increases of reputational damage from breaches in confidentiality, such as via information leaks or whistleblowers. Reputational risks will increase further once follow-on litigation commences.

It is important to identify any actual and potential litigation risk areas at the outset of an investigation and to monitor these throughout the investigatory process. It may be appropriate to diarise a regular legal team meeting to discuss these risk areas and to maintain a risks log, rating each item against a scale. The risks log should recognise that investigations based in one jurisdiction may prompt follow-on litigation in another. The creation of an action plan can help to communicate these risks to the business. An assessment of the conduct of the individuals involved in the investigation (including former employees) is necessary to consider whether any may require separate legal advisors.

Document management policies should identify the bank’s operations, functions and jurisdictions affected by the scope of the investigation and include the location details of the relevant data servers and systems. The unnecessary transfer of data to other jurisdictions should be prevented. It is prudent to check whether document retention polices have been adhered to and, pursuant to CPR Practice Direction 31B, that a ‘litigation hold’ is put in place in co-ordination with the IT department Any routine systematic destruction of documents relevant to the dispute should be suspended.

Careful consideration should be given to how to maintain privilege throughout the investigation, including over records of meetings and interviews, along with communications with regulators. A privilege protocol should be created which is tailored to the intricacies of the investigation and covers all in-scope jurisdictions. Although the label ‘Privileged and Confidential’ will not create privilege over a document, it is helpful to label such documents accordingly. It is important to consider whether lawyers can attend meetings to create a privileged record and to consult with the business to determine whether privilege can be waived over any particular documents. Care should be taken to limit the number of people involved in the investigation to reduce the risk of information leaks. Interviewees should be informed that all matters addressed in interviews are confidential and should not be discussed.

The need to communicate with regulators should be carefully balanced against the risks of creating additional documents which may be disclosable during litigation. Members of the investigation team should therefore refrain from creating new documents which summarise legal advice received.

• Engage with regulators at the outset of the investigation and seek to establish a communications protocol to help maintain privilege over interparty correspondence.
• Establish a privilege policy tailored to the jurisdictions involved to ensure that privilege is not inadvertently waived.
• Develop an understanding of how your organisation responds to data subject access requests (DSARs), including the teams involved and usual response timescales. Seek to be notified of any DSARs brought by litigious customers.
• Ensure that complaints are managed efficiently to reduce matters being escalated to the Financial Ombudsman
  or comprising the basis for litigation.
• Develop a PR response plan, including templates for briefing key internal stakeholders and the press. Consider how best to manage issues arising from social media. Ensure the bank’s PR team is kept aware of legal deadlines and key dates within the litigation process so they can plan communications to minimise or maximise their impact as required.

Litigation risk is something to be considered and managed throughout the life cycle of an investigation, particularly in light of the likely costly implications and potential reputational damage arising from defending claims. Dedicating time to the careful planning of an investigation will prove worthwhile in effectively managing litigation risk.