Banking Litigation Update

Welcome to our latest Banking Litigation Update in which we highlight a number of the most important cases and developments affecting UK financial institutions over the past 12 months. As you will see, it has been a busy year with many important decisions for banks.

As was the case last year, there have been a number of decisions relating to the mis-selling of interest rate hedging products ("IRHPs"), including the first substantive decision (as opposed to interlocutory skirmish) to reach the Court of Appeal: PAG v RBS. In this significant decision, the claimant's IRHP mis-selling and LIBOR manipulation claims were dismissed in full, with the Court of Appeal providing helpful guidance that there is no "mezzanine" or intermediate duty of care owed by banks to their customers, a point on which there had been a number of conflicting High Court decisions. More widely, the news is generally positive for banks, with creative attempts by claimants to surmount the legal obstacles being quashed by the courts (including various attempts to rely on an alleged failure by banks to conduct properly their FCA past business reviews into the sale of IRHPs, and assertions that banks should have disclosed their contingent liabilities at the time of entering into IRHPs). Taken as a whole, these decisions are likely to make the IRHP mis-selling environment a more challenging one for claimants.

One of the more noteworthy decisions of the past year is Golden Belt, in which the High Court found that a bank arranging a publicly listed issue of debt securities owed a tortious duty of care to investors and that it breached that duty. Until that decision, those advising on such transactions had operated on the basis that – while there was a risk that an arranging bank may owe a tortious duty to investors (which has typically been addressed by appropriately worded disclaimers) – this risk was relatively low in the absence of a precedent holding that such a duty existed. A precedent now exists, at least for the time being. The High Court has granted permission for the bank to appeal the decision. Another significant decision was the Court of Appeal's refusal to allow the claimant permission to appeal in the LIA v GSI case, in which this firm acted for the defendant bank.

This period of review has brought a number of significant decisions on privilege, in particular two potentially conflicting High Court decisions on the approach to litigation privilege in the context of investigations. In one case (SFO v ENRC) the court applied a strict approach to litigation privilege in the context of criminal proceedings (finding that litigation was not in reasonable contemplation, even though a criminal investigation by the SFO was reasonably contemplated). Yet in another case (Bilta v RBS), the court found that documents prepared by the defendant in the course of an investigation into allegations by HMRC were protected by litigation privilege. This apparent conflict will hopefully be resolved by the Court of Appeal during 2018, the SFO v ENRC decision having been appealed.

Our update also includes a number of decisions on contractual construction (including guidance on interpretation of the ISDA Master Agreement); governing law and jurisdiction (in particular the location of a debt due under a letter of credit, and the effect of Sharia non-compliance on the enforceability of an English law agreement in an Islamic finance structure); and costs and funding (with clarification of when parties may depart from costs budgets and Court of Appeal guidance as to the extent to which an ATE insurance policy is relevant when considering security for costs).

The next 12 months should see resolution of whether we can return to what might be considered a more orthodox view of litigation privilege, when the Court of Appeal considers the appeal in SFO v ENRC. The appeal in Golden Belt should also be heard within this period, and it remains to be seen whether there will be an appeal to the Supreme Court in PAG v RBS. 2018 will also feature the re-listed appeal in the Holmcroft Properties v KMPGjudicial review of the independent reviewer's assessment of redress under the FCA scheme in relation to IRHPs, the outcome of which will be keenly monitored by banks across the industry.

We hope you find our update useful and, as ever, please feel free to contact one of us or your usual Herbert Smith Freehills contact if there are any topics which you would like to discuss further.

Read our full Banking Litigation Update.