Securities litigation: High Court clarifies meaning of ‘reliance’ in s90A Financial Services and Markets Act 2000

In Allianz Funds Multi-Strategy Trust & Ors v Barclays Plc [2024] EWHC 2710 (Ch), the High Court clarified the requirement for ‘reliance’ by shareholder claimants in securities litigation. Leech J held that claimants must show that they read or heard an alleged misrepresentation in order to have relied on it and rejected a wider US-style approach. This is a significant limitation on the scope of securities litigation, especially for passive investors such as index tracker funds.

The claimants alleged that the bank published misleading information in a number of annual statements and prospectuses for which it was liable under s90A of the Financial Services and Markets Act 2000 (“FSMA”). One category of claimants was tracker funds who invested in shares comprising part or all of an index and may not have read the particular documents that contained the misleading information about one constituent of that index while carrying out their investments.

Leech J held that ‘reliance’ in s90A referred to the settled common law test of reliance as used in the tort of deceit. Accordingly, reliance was distinct from causation and was intended to be a separate requirement of liability and to limit recovery. For express representations, the claimants must show that they read or heard the representation, understood it in the way it was alleged to be false and that it caused them to act in a way that caused them loss – eg, by purchasing securities. As the tracker funds did not read or consider the relevant documents, their claim failed.

Leech J applied a gloss to this test where the relevant failure was an omission. In that situation, it was not necessary to show that the claimant relied on the omitted statement. Instead, the test was whether the claimant had relied on the published statement from which the information was omitted.

Leech J accepted that the test for reliance on implied representations might be unclear or at least in a state of development. In Farol Holdings Limited v Clydesdale Bank PLC [2024] EWHC 593 (Ch) (see our blogpost here) and Loreley Finance v Credit Suisse [2023] EWHC 2759 (Comm) (see our blogpost here), the High Court held that there must be some sort of awareness or active presence in the mind of the representee of the implied representation for reliance to be established. Leech J considered that this test might be reconsidered by the Court of Appeal and that the law was not necessarily settled on this point. But this did not affect the outcome of the present dispute.

This robust rejection of wider approaches to securities litigation such as the US theory of a ‘fraud on the market’ will be welcomed by issuers and financial institutions. Leech J’s detailed analysis of the reports and consultations leading up to the revision of s90A in FSMA clearly showed that ‘reliance’ was intended to be an important control on the scope of liability to investors.

The discussion of omissions and implied representations may be significant for other financial litigation, such as misselling claims. Leech J’s interpretation of reliance for omission in s90A derives support from the legislative context, but how it will be applied to claims in deceit is less clear. Similarly, the application of reliance to implied representations and representation by conduct is still a developing area. Where the allegation is that a statement was not made, showing active reliance on its omission or on an implied representation that it would have been made is a difficult hurdle for claimants to surmount. Clarification by the Court of Appeal would be welcome both for investors and financial institutions.