ICLG
A practical cross-border insight into financial services disputes work
1st edition
Financial Services Disputes 2019The International Comparative Legal Guide to:
Published by Global Legal Group, in association with CDR, with contributions from:
Allen & Gledhill LLP Barun Law LLC Blake, Cassels & Graydon LLP Borenius Attorneys Ltd Debevoise & Plimpton LLP Dethomas Peltier Juvigny & Associés DQ Advocates Limited Financial Services Lawyers Association (FSLA) Hannes Snellman Attorneys Ltd Homburger Jones Day
Kantenwein Matheson MinterEllisonRuddWatts Mori Hamada & Matsumoto PLMJ RPC Rui Bai Law Firm Stibbe Trench Rossi Watanabe Advogados Wachtell, Lipton, Rosen & Katz Wolf Theiss
CC RRDDCommercial Dispute Resolution
WWW.ICLG.COM
The International Comparative Legal Guide to: Financial Services Disputes 2019
General Chapters:
Country Question and Answer Chapters:
1 The Evolving Landscape of Financial Services Litigation – Julie Murphy-O’Connor &
Karen Reynolds, Matheson 1
2 Levelling the Playing Field in Banking Litigation – Victoria Brown, Financial Services Lawyers
Association (FSLA) 4
3 Lessons Learned: 10 Years of Financial Services Litigation Since the Financial Crisis –
Elaine P. Golin & Jonathan M. Moses, Wachtell, Lipton, Rosen & Katz 8
4 Australia Jones Day: John Emmerig & Michael Legg 14
5 Austria Wolf Theiss: Holger Bielesz & Florian Horak 21
6 Brazil Trench Rossi Watanabe Advogados: Giuliana Bonanno Schunck &
Gledson Marques De Campos 29
7 Canada Blake, Cassels & Graydon LLP: Alexandra Luchenko 35
8 China Rui Bai Law Firm: Wen Qin & Juliette Ya’nan Zhu 42
9 England & Wales RPC: Simon Hart & Daniel Hemming 47
10 Finland Borenius Attorneys Ltd: Markus Kokko & Vilma Markkola 54
11 France Dethomas Peltier Juvigny & Associés: Arthur Dethomas &
Dessislava Zadgorska 60
12 Germany Kantenwein: Marcus van Bevern & Dr. Carolin Sabel 67
13 Ireland Matheson: Julie Murphy-O’Connor & Karen Reynolds 73
14 Isle of Man DQ Advocates Limited: Tara Cubbon & Sinead O’Connor 80
15 Japan Mori Hamada & Matsumoto: Shinichiro Yokota 86
16 Korea Barun Law LLC: Wonsik Yoon & Ju Hyun Ahn 92
17 Netherlands Stibbe: Roderik Vrolijk & Daphne Rijkers 97
18 New Zealand MinterEllisonRuddWatts: Jane Standage & Matthew Ferrier 103
19 Poland Wolf Theiss: Peter Daszkowski & Marcin Rudnik 110
20 Portugal PLMJ: Rita Samoreno Gomes & Rute Marques 117
21 Singapore Allen & Gledhill LLP: Vincent Leow 124
22 Sweden Hannes Snellman Attorneys Ltd: Andreas Johard & Björn Andersson 130
23 Switzerland Homburger: Roman Baechler & Reto Ferrari-Visca 135
24 USA Debevoise & Plimpton LLP: Matthew L. Biben & Mark P. Goodman 143
Contributing Editors
Julie Murphy-O’Connor, Karen Reynolds & Claire McLoughlin, Matheson
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Account Director
Oliver Smith
Sales Support Manager
Toni Hayward
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CEO
Dror Levy
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Alan Falach
Publisher
Rory Smith
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1
Chapter 1
Matheson
Julie Murphy-O’Connor
Karen Reynolds
The Evolving Landscape of Financial Services Litigation
Introduction
From an Irish perspective, many of the financial services disputes
which currently occupy the courts emanated from the financial crisis
which commenced over a decade ago. Mis-selling claims continue
to be central to financial services disputes, although those which
arose pre or during the financial crisis are likely to be time-barred if
not yet instituted. Interestingly, the Financial Services and Pensions
Ombudsman Act 2017 extended the time limit for bringing
complaints specifically relating to long-term financial services.
This together with some notable judgments in this area suggests we
may yet see another peak in mis-selling disputes. Disputes in the
financial services sphere increasingly incorporate fraud and
conspiracy claims, with the usual cases of alleged breach of a duty
of care. The impact and significance of the financial crisis and the
litigation which followed has resulted in regulatory reform in
Ireland, largely aimed at preventing a future crisis but also to
address accusations that “light touch” regulation led to banking
failures in the first place. Reliance on breaches of regulatory
obligations is becoming a more common feature of private civil
litigation, and the courts are more inclined to consider, of their own
volition, regulatory obligations, especially in consumer cases.
Increased regulation has driven growth in related enforcements and
investigations and this is set to continue as financial services firms
move to and grow in Ireland.
The consequences of the global recession are likely to continue to
shape the nature, complexity and volume of financial services
disputes before the Irish courts. Whilst Brexit has not yet had a
significant impact on the number of cases commenced in Ireland,
there has been a discernable acceleration in obtaining final orders
where there is a potential need for cross-border enforcement into the
UK. It is too soon to tell precisely what additional impact Brexit
will have on the volume and nature of financial services litigation in
Ireland but an event of such legal and political significance will
inevitably shape the landscape for years to come. The ISDA Master
Agreement in 2018 means that Irish law will now be an option for
parties to its derivatives documentation. This is a significant
development in its own right and one which underscores the
attractiveness of Ireland in the context of certain international
transactions post-Brexit. The benefits for users of derivatives of
using ISDA Master Agreements governed by a law within the EU
legal framework include the automatic recognition and enforcement
of judgments obtained in one EU Member State in other EU
Member States and the fact that the legislative framework protects
financial collateral arrangements and provides certainty on certain
insolvency related matters.
The growing scale and complexity of financial services disputes
poses many challenges for courts and litigants alike. Technology
presents solutions and problems in almost equal measures. Parties
to complex financial services disputes face the challenges of
funding litigation in the context of rising costs, increasing
regulatory burdens and potential uncertainties where laws and
regulations are either as yet judicially untested or subject to
legislative and/or judicial re-evaluation – whether in Ireland or
abroad. A number of these issues have been the subject of recent
financial services disputes before the Irish courts and in respect of
which landmark judgments have been delivered.
Recent Landmark Decisions of Irish Courts
in Financial Services Disputes
Limitation Periods in Financial Services Disputes
The cases of Gallagher v ACC Bank [2012] IESC 35 (“Gallagher”)
and Cantrell v AIB PLC & Ors [2017] IEHC 254 (“Cantrell”) are
considered landmark decisions in Ireland in the context of financial
services disputes in Ireland. These decisions provide clarity as to
how the Irish courts will apply the rules governing limitation
periods in relation to financial loss.
The leading judgment on this issue in an investment dispute context
was delivered in the Supreme Court by Mr. Justice Fennelly in
Gallagher. The Supreme Court found that, in light of its specific
characteristics, the investment was inherently unsuitable for the
claimant from the moment of investment. Therefore, his loss
accrued at the time he made his investment. The proceedings were
issued over six years after that and were therefore statute-barred.
However, in Gallagher, the Supreme Court was careful to
acknowledge that were another type of investment in issue, the
characteristics could vary and the action might not accrue at the
same time. The court considered, obiter, that if a claim arose from
mis-management of an investment – rather than mis-selling – loss
might accrue at a later stage. More recently, in the High Court in
Geraldine Cantrell v Allied Irish Banks Plc, the Second Belfry Properties (UK) Plc and Others, the claimant sought damages for
negligent misstatement, breach of contract and breach of statutory
duty. Whilst the court ultimately held the claim was statute-barred,
it found that the loss at issue had not arisen at the time the
investment was made (and the general rule that a claim in tort should
be brought within six years of the investment did not apply). In so
finding, the High Court relied on the comments of the Supreme
Court in Gallagher to the effect that “the cause of action accrues in
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the case of financial loss when the Plaintiff has suffered actual damage”, and, obiter, that “the mere possibility of loss arising from advice given or the entry upon a transaction is not enough to constitute actual loss at that point in time. There must be some probability of loss”. In Cantrell the High Court held that the
claimant could not be required to come to court before she could
quantify her loss, and therefore, should not be time-barred for
having waited to do so. Accordingly, as a result of the decision in
Cantrell, financial services providers do not have certainty that
claims in tort expire after six years from the date of investment. It
remains to be seen whether an appellate court will take a different
view.
Litigation Funding
Litigation funding is an important feature of litigation in many
jurisdictions. In the UK, litigation funding has been a feature of the
legal landscape since the Criminal Law Act 1967 which abolished
the rules on maintenance and champerty. Many civil law EU
jurisdictions permit the use of litigation funding. In the US, third-
party litigation funding is a newer concept, but hardly novel.
Federal law is silent as to champerty, and the law on litigation
funding varies from state to state.
In Ireland, litigation funding still falls foul of the old rules against
champerty and maintenance and has been the subject of a number of
recent, landmark decisions in relation to litigation funding in the
context of financial services disputes.
The decision in Persona Digital Telephony Limited and Another v the Minister for Public Enterprise and Others [2017] IESC 27
(“Persona”) provoked comments on the Irish position from the then
Chief Justice, Ms. Justice Susan Denham.
“It may be said that in light of modern issues, such as Ireland being an international trading State, issues arising on international arbitrations, and in the Commercial Court, it might well be appropriate to have a modern law on champerty and the third party funding of litigation. However, that is a complex multifaceted issue, more suited to a full legislative analysis.”
The comments in Persona were echoed last year in the context of a
large-scale financial services case before the Irish Supreme Court,
SPV Osus Limited v HSBC Institutional Trust Services (Ireland) Limited [2018] IESC 44 (“Osus”). This case arose out of litigation
relating to the Madoff Ponzi scheme and, on appeal, focused on the
issue of whether the assignment of claims transferred by an
investment company (Optimal Strategic) to an SPV (SPV Osus), in
the context of the administration of a company could be allowed to
stand. In Osus, the Court reviewed the body of Irish law in relation
to the assignment of claims and litigation funding. In doing so the
Court acknowledged the contemporary obstacles which individuals
face in gaining access to the courts, but against this, the Court was
cognisant of the complex and multi-faceted issues which would
arise in permitting litigation funding and considered that such issues
would be best addressed by the legislature and appropriate
regulation.
The Chief Justice of Ireland, Mr. Justice Frank Clarke (the “Chief
Justice”), has publicly raised the issue. This is reflective of his
judgment in Osus where, although he cautions against unregulated
reform, he encourages the legislature to address the competing
issues identified in the case before him. In a statement in September
2018, the Chief Justice noted that the judiciary’s objective is to
make access to justice as straightforward and uncomplicated as it
can be while at the same time ensuring that the court process is fair
and comprehensive.
The Irish Law Reform Commission and the ongoing Review of
Civil Justice Administration, which is led by Mr. Justice Peter Kelly,
the President of the High Court, are tasked with considering and
reporting on the desirability of litigation funding in Ireland. The
landscape may well be set to evolve.
Legal Certainty, Implied Duties, Penalty Clauses
Irish courts are traditionally reluctant to re-write or otherwise
intervene in contractual agreements between commercial parties –
and particularly slow to do so on vague grounds of doing fairness
between parties.
This approach was demonstrated recently by the Court of Appeal in
Flynn & Anor v Breccia & Anor [2017] IECA 74 and in doing so the
Court of Appeal restored certainty that, under Irish law, there is no
general implied duty of good faith in the context of commercial
contracts. The case arose in the context of an acquisition of secured
debt from a defunct Irish bank by a corporate shareholder in the
company on which the debt was secured. A shareholders’ agreement
existed and the debtor argued that the acquirer of debt – also a
shareholder – was prohibited from enforcing the security as a result
of alleged implied duties of good faith under the shareholders’
agreement. The High Court at first instance departed from
established principles of Irish contract law, which could have had
significant consequences for long-term commercial contractual
relationships and the secondary market in non-performing loans
(“NPLs”) had it not been overturned on appeal. However, the Court
of Appeal was not persuaded by the High Court reasoning (nor by
some recent case law in the UK where a duty of good faith and fair
dealing had been implied into “relational contracts”) preferring
instead to maintain the traditional approach, and refusing to
recognise any general doctrine of good faith under Irish contract law.
However, in the related cases of Flynn v Breccia and Sheehan v Breccia [2018] IECA 286, also before the Court of Appeal, the court
held that a surcharge interest clause in a financing agreement was an
unenforceable penalty (thus departing from the traditional approach
of upholding clear and express commercial terms). The Court of
Appeal held that a generic surcharge interest clause contained in the
lender’s standard general terms and conditions could not represent a
genuine attempt by the parties to estimate in advance the loss which
would result from a breach/default of the terms and conditions of the
loan. The Court of Appeal arguably missed an opportunity to
reevaluate the interpretation and application of the test originally set
out by Lord Dunedin in the case of Dunlop Pneumatic Tyre Co Ltd v New Garage Motor Co Ltd [1915] A.C. 79 and applied in Ireland
in the 1998 Supreme Court judgment of Pat O’Donnell & Co v Truck and Machinery Sales [1998] 4 I.R. 191. The UK courts
recently revisited their approach in the joint cases of Cavendish Square Holding BV v Talal Wl Makdessi 67 and ParkingEye Limited v Beavis [2015] UKSC 67. There, the UK Supreme Court clarified
that clauses which have the effect of imposing a penalty for
contractual default would, generally, be enforceable, except where
the impact is to impose a detriment on the defaulting party which is
out of all proportion to any legitimate interest of the innocent party
in the enforcement of the main purpose of the contract. Although
the Irish Court of Appeal was not persuaded by the approach taken
by the UK Supreme Court, the judgment leaves the door open for
the Irish Supreme Court to consider the issue in the future.
Continuing Evolution
The Chief Justice of Ireland is a strong advocate for the continual
development of the Irish courts system. Plans are in train to build on
Matheson The Evolving Landscape of Financial Services Litigation
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the success of the specialist commercial division of the Irish High
Court by introducing a specialist financial disputes list. Legislation
to double the number of judges in the recently formed Court of
Appeal is imminent. Further developments are evident by the trial
and gradual acceptance of e-litigation in this jurisdiction and this
will likely be expanded upon in the recommendations to be made by
the Review Group established to review and reform the
administration of civil justice in the State.
It is expected that the certainty provided by Ireland’s membership of
the EU will contribute to its popularity as a jurisdiction for
international financial disputes post-Brexit. Ireland, as a member of
the EU, benefits from the re-cast Brussels I Regulation and the
Lugano Convention. These legal instruments together ensure that
judgments and choice of law and jurisdiction in civil matters are
recognised and enforced in a straightforward and predictable
manner across the EU. This is particularly important for financial
services disputes which are regulatory and cross-border in nature
and often rely on the enforceability of interim protective measures
such as mareva injunctions (for the freezing of assets) across the
EU. The benefits of a legal system integrated into a wider EU
framework together with the importance of ensuring pan-European
measures for enforcement have come into sharp focus in the recent
Brexit negotiations. It remains to be seen how financial services
disputes will be impacted in the context of the evolving political
landscape and the continued uncertainty associated with Brexit.
Undoubtedly, whatever the outcome of the Brexit negotiations, both
risks and opportunities will arise across many jurisdictions and this
will be no different in the area of financial services disputes.
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Matheson The Evolving Landscape of Financial Services Litigation
© Published and reproduced with kind permission by Global Legal Group Ltd, London
Julie Murphy-O’Connor
Matheson
70 Sir John Rogerson’s Quay
Dublin 2
Ireland
Tel: +353 1 232 2192 Email: [email protected] URL: www.matheson.com
Karen Reynolds
Matheson
70 Sir John Rogerson’s Quay
Dublin 2
Ireland
Tel: +353 1 232 2192 Email: [email protected] URL: www.matheson.com
Julie is a Partner at Matheson, practising in all aspects of contentious
and non-contentious restructuring, recovery and insolvency law
matters and is an experienced litigator specialising in banking and
financial services and shareholder disputes. Julie was a member of
the Council of the Irish Society of Insolvency Practitioners from 2011 to
2014 during which time she acted as secretary and as chair of its
educational committee. Julie is a regular contributor to Irish and
international legal publications. She lectures on insolvency law and
directors’ duties at the Law Society of Ireland and Dublin Solicitors Bar
Association. She is co-author of the Law Society’s insolvency manual.
She is a member of the Commercial Litigation Association of Ireland
and co-author of the Practitioner’s Guide to the Commercial Court in Ireland. Julie is a non-executive director of Coillte Teoranta (Irish State
forestry company). She is ranked as one of Ireland’s top insolvency
lawyers by international legal directories.
Established in 1825 in Dublin, Ireland and with offices in Cork, London, New York, Palo Alto and San Francisco, more than 700 people work across
Matheson’s six offices, including 96 partners and tax principals and over 470 legal and tax professionals. Matheson services the legal needs of
internationally focused companies and financial institutions doing business in and from Ireland. Our clients include over half of the world’s 50 largest
banks, six of the world’s 10 largest asset managers, seven of the top 10 global technology brands and we have advised the majority of the Fortune 100.
Karen is a Partner in the Commercial Litigation and Dispute Resolution
Department at Matheson, and co-head of the firm’s Regulatory and
Investigations Group.
Karen has a broad financial services and commercial dispute
resolution practice. She has over 10 years’ experience providing
strategic advice and dispute resolution to financial institutions,
financial services providers, domestic and internationally focused
companies and regulated entities and persons. She advises clients in
relation to contentious regulatory matters, investigations, inquiries,
compliance and governance related matters, white-collar crime and
corporate offences, commercial and financial services disputes, anti-
corruption and bribery legislation and document disclosure issues.
Karen has substantial experience in corporate restructuring and
insolvency law matters, having had a lead role in some of the most
high-profile corporate rescue transactions of the last 10 years. She
advises liquidators, regulators, directors and insolvency practitioners
in relation to corporate offences and investigations, shareholder rights
and remedies, directors’ duties, including in relation to fraudulent and
reckless trading and disqualification and restriction proceedings.
Chapter 2
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Financial Services Lawyers Association (FSLA) Victoria Brown
Levelling the Playing Field in Banking Litigation
Levelling the Playing Field in Banking
Litigation
Banks are likely to provide the following three services to SMEs:
deposit-taking; the sale of specific financial products such as
interest rate swaps; and lending. Since the 2008 financial crisis, the
provision of these services has been the focus of considerable
attention by both regulators and the courts.
Whilst deposits have been entirely protected by regulatory action
and the sale of financial products is largely regulated to the same
standards across the EU, lending by banks to SMEs generally falls
outside the regulatory regime. This gives rise to certain difficulties
for SMEs: in the event they wish to seek redress against a bank,
conduct of one of the core services is not subject to regulatory
oversight.
A further difficulty for SMEs seeking redress is the existing scope of
the Financial Ombudsman Service (FOS) regime. Presently, only
an SME that is a micro-enterprise may bring a complaint to the FOS.
However, from April 2019, the FOS regime will expand to include
small businesses with an annual turnover below £6.5 million, an
annual balance sheet total under £5 million and fewer than 50
employees.
Richard Samuel of 3 Hare Court suggested a permanent, specialist
Financial Services Tribunal (FST) in a series of articles in the
Capital Markets Law Journal. That idea gained widespread support
and in October 2018 the Treasury Select Committee (TSC)
concluded that the Treasury should bring forward proposals to
create the FST.
This chapter examines the advantages and disadvantages of the FST
regime and, where lacunas in protection for SMEs remain, sets out
measures that might help level the playing field for SMEs in
successfully seeking redress against banks.
Difficulties for SMEs in Achieving Redress
The courts
Although there is a specialist Financial List in the High Court, it is
limited to complex financial claims worth more than £50 million or
claims raising issues of general importance. Accordingly, most
legal claims brought by SMEs are litigated in the County Court or
non-specialist High Court lists.
SMEs often find it near impossible to take banks to court for the
following reasons:
■ resources may not allow it. The issue fee for claims is 5% of
their value, with a cap (for claims worth over £200,000) of
£10,000. If an SME loses, it is likely to have to cover the
bank’s legal costs. Those costs can be very high; a claimant
has little or no control over a defendant’s spending, subject
only to the costs recovery rules;
■ even well-resourced SMEs might struggle to take a bank to
court. Financial services disputes often cause cash flow
stresses. Cost and speed of redress is often critical to an
SME’s ability to stay in business. Many SMEs will have
limited access to finance and reserves, and have limited or no
ability to diversify investments;
■ litigation funders are not readily available. Legal fees can
involve unexpected outlay, such as expert fees and forensic
accountants;
■ there can be a lacuna in legal services for those claiming
against banks. Many banks engage solicitors through legal
advice panels, which often involve law firms covenanting not
to act in any matter against the bank; and
■ unlike individuals,1 SMEs have no right of action for
damages for breach of the Financial Conduct Authority
(FCA) rules and must instead rely on general legal principles.
In practice, this means claims for misrepresentation,
negligence, breach of contract, etc. Banks may attempt to
limit general legal liabilities by contractual terms to the
extent permissible under the FCA rules.
The FOS
The FOS regime exists to provide eligible complainants (until April
2019 only individuals and micro-enterprises; thereafter it will be
expanded to broadly include small businesses) with an easier means
of recourse against providers of financial services. It should be
noted, however, that even from 2019 only regulated activities such
as the sale of financial products will fall within the scope of the
FOS: non-regulated activities such as lending to small businesses
will not be in its scope. Likewise, an SME with permissions for the
regulated activities about which it complains is unable to complain
to the FOS.2
The FOS has many advantages. It is quick and informal,3 and free
for the complainant with only a small case fee for the bank. Its
decisions are binding on the respondent if the complainant accepts
the decision,4 and there is no right of appeal. It is especially
accessible for the unsophisticated complainant as decisions are
taken on the basis of what is ‘fair and reasonable’ in all the
circumstances, rather than on legal principles.5
For a number of reasons, the FOS does not fix all the woes of the
court system. There is no live evidence and no power to compel
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witnesses. The financial award is presently limited to £150,000
although this will rise to £350,000 for SMEs in April 2019.
Accordingly, there remains a large gap in the ‘middle market’ where
mid-sized SMEs or SMEs with mid-sized complaints may not be
within the scope of the FOS and, for one or more of the reasons set
out above, unable to avail themselves of the courts. Similarly, an
SME with a dispute involving a dissolved business or a business
subject to insolvency proceedings may fall within this gap.
What Could Plug the Gap?
FOS increase
Further legislation to expand the scope of eligible complainants to
the FOS or the size of awards the FOS may require is unlikely, in the
near or medium term, given the changes due to come into effect in
April 2019. Nicky Morgan MP, Chair of the TSC, wrote to the FCA
on 23 July 2018 to express doubt about the FOS’s ability to increase
its remit to include SMEs by April 2019 following the Lloyd
Review. This suggests that proposals for further expansion will be
met with considerable resistance.
Banks accept the ‘rough justice’ of a FOS decision and lack of
appeal largely because of the caps placed on the size of awards
within the regime. Should those caps increase considerably, it is
likely that there would be an expectation of a more court-like regime
in terms of decision-making, evidence-gathering, appeal or financial
exposure in the event of loss. Such changes will fundamentally
change the nature of the FOS regime and put an end to many of its
beneficial features including speed of decision-making and low
cost.
Industry resistance is also likely to take the form of competition-
based arguments: expanding access to the FOS runs the risk of
harming competition by increasing the expense for new firms to
enter the financial services markets and provide products or services
to SMEs. Expansion necessarily increases the minimum cost of
servicing SMEs in circumstances where they, individually, generate
relatively little revenue for the bank. Expansion may, therefore,
decrease access to products or quality of service, or slow the process
of developing new products and bringing them to market.
A FST
In October 2018, the TSC recommended to the Treasury the creation
of a FST which will allow SMEs to enforce their rights against
financial institutions. The Committee also recommended amending
s138D FSMA to allow SMEs a private right of action for breaches
of FCA rules in any such tribunal.
A tribunal could be established under the Tribunal Courts and
Enforcement Act 2007. It would, necessarily, make decisions in
accordance with legal principles. As with other tribunals, it would
be sensible for the tribunal to have an appellate tier to which appeals
could be made. Appeals from the appellate tier would be made to
the Court of Appeal. A tribunal would have powers to compel
witness attendance and test evidence by cross-examination.
A tribunal could be presided over by a judge alone, or by panels of
three to include a judge and two ‘wing-members’. For example, a
FST could host wing-members from representatives of both the
‘buy’ and ‘sell’ sides of the market. Where wing-members sit, all
three panellists would have equal votes.
The tribunal might be adversarial but with some inquisitorial
aspects. For example, the Employment Tribunal is obliged to
consider certain questions whether or not they are raised by the
parties. This would be particularly beneficial to SMEs who may not
have access to the same degree or quality of legal representation as
banks.
A key benefit of the tribunal system would be the capacity for
different costs rules from the Civil Procedure Rules and the usual
rule of ‘winner pays the loser’s costs’ in the courts. For example, in
the tax tribunal, each party generally bears their own costs unless the
case is classified as complex.6 In the Employment Tribunal, parties
again generally bear their own costs unless the claim has no
prospect of success or a party has behaved in some way
unreasonably.7 In the Intellectual Property and Enterprise Court (a
low-cost jurisdiction which deals with small intellectual property
cases), the loser pays the winner’s costs but those costs are capped
at £50,000 following a full liability trial.8
A particular advantage of the FST will be the speed of decisions.
Particularly in relation to larger SMEs, banks are unlikely to become
aware of problems with products or services promptly. The reasons
are obvious: services are often bespoke or tailored; the client
population is small; there are high levels of market concentration;
and distribution chains can be complex. FST decisions will alert the
industry and the FCA to problem products or problem contractual
terms. This may allow for the avoidance of high-impact failures.
At present, firms must take previous FOS decisions into account
when handling complaints.9 Similarly, firms must identify (from
complaints or otherwise) recurring or systemic problems in their
provision of a financial service (or lack thereof) and put them
right.10 FOS decisions therefore increase the quality of firm
decision-making. The same would self-evidently be true of FST
decisions. In fact, this advantage would be felt even more acutely as
the decisions would also clarify the legal position. In turn, it is
likely that higher standards of conduct will increase SME
engagement with the financial services industry by removing
uncertainty and increasing user confidence.
However, there are also problems with establishing a FST. In the long
term the tribunal is likely to increase regulatory certainty, particularly
in the interpretation of FCA rules where often little guidance exists,
and so save firms money. But in the short to medium term firms will
incur costs in defending tribunal claims which SMEs will ultimately
have to bear. Clearly, there will be a cost to the industry of increasing
eligible complaints from SMEs. First, the obligations to investigate,
assess and resolve complaints.11 Second, the obligations to increase
awareness of consumers’ protections.12
There is also a danger that increased litigation risk will reduce
product offerings or make them increasingly expensive as firms
withdraw from the market.
A FST: A Panacea?
The core difficulty for SMEs in taking action against a bank is the
inequality of arms.
Steps put in place to amend the FOS regime go some way towards
addressing this but a large pool of medium-sized SMEs will not
benefit from these changes. It should also be noted that banks’
lending activities do not (and will not post April 2019) fall within
the scope of the FOS regime and therefore any claims an SME may
have in regard to these services must be brought on strict legal
grounds within the courts. It is probably not a contentious
observation to make that courts have historically been protective of
banks on these matters for public policy reasons.
The tribunal system recommended by the TSC may go some way
towards levelling the playing field for SMEs, but the complexity of
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banking litigation and the likely sums of claims may mean a tribunal
is not the panacea for SMEs’ difficulties.
Two further proposals in relation to statutory or voluntary mass-
redress schemes could ameliorate the position for SMEs:
1) Requirement for the firm(s) to appoint an independent entity
(such as an accountancy firm or a law firm) to negotiate the
terms of a scheme on behalf of its customers.
2) Requirement for the establishment of a redress scheme in the
event of a prima facie case of criminal activity.
Appointing an independent negotiator
Under s404 FSMA, the FCA can set up an industry-wide consumer
redress scheme where it appears that there may have been a
widespread or regular failure to comply with requirements, such as
FCA rules. This power can only be used where a remedy or relief
would be available in legal proceedings. The FCA may also require
a firm to establish a redress scheme which corresponds to, or is
similar to, an industry-wide scheme.13 The FOS is bound to apply
the terms of such schemes to any complaints received about the
subject matter, unless both firm and complainant agree the scheme
should not apply.
Firms are also obliged to consider whether any systemic problems
have caused detriment or disadvantage to customers and whether it
is fair and reasonable for the firm to proactively undertake a redress
exercise, which may include contacting those who have not
complained.14 Firms must identify and remedy any recurring or
systemic problems by analysing root causes of complaints and
considering whether they may impact on any other processes or
products.15 Firms must also report complaints in aggregate to the
FCA.16
Mass-redress schemes have often been used post the 2008 financial
crisis but as a result of the limitations discussed above, SMEs have
often not qualified. Accordingly, many relevant mass-redress
schemes have been voluntary. Many of these schemes have been
criticised as lacking transparency and fairness. The schemes are
often thought to be biased. Banks have often investigated and
reviewed their own behaviour or those appointed as independent
reviewers have been criticised as too closely linked to the firm(s) in
question. Further, many schemes have been kept confidential which
gives rise to further problems, such as the lack of opportunity for the
market to learn from previous mistakes and legal and factual
analysis of those mistakes. Other criticisms include suppression of
disclosure or prevention of access for the SME to the independent
reviewer.
To date, the FCA has negotiated the terms of such schemes on behalf
of bank customers; a task the FCA has made clear that it is
uncomfortable taking on, not least because its role as a supervisor
and regulator does not sit well with dispute resolution.17 Perceived
FCA failings to negotiate such terms robustly have led to
considerable criticism of the FCA in performing this role. For
example, the IRHP voluntary agreement was much criticised after it
became apparent that the FCA had conceded to numerous requests
of the banks.
An obligation for banks setting up voluntary schemes to pay for an
independent entity (such as an accountancy firm or a law firm) to
negotiate the terms of a scheme on behalf of its customers may be an
alternative solution. The FCA has the power to require a firm to
provide a report by a skilled person, or to appoint a skilled person to
produce a report under s166 FSMA. This could support, for
example, the design of a redress scheme in the report’s findings.
There is no reason why such findings could not recommend terms of
the scheme.
Prima facie criminal misconduct
Similarly, there may be scope to consider whether the obligation to
establish a redress scheme should be expanded to include situations
in which there is a prima facie case of criminal misconduct by a
bank or one of its agents.
Presently, s384 FSMA allows the FCA to require authorised persons
to make restitution to consumers where a breach of a requirement of
FSMA caused loss to that consumer.
A burden of proof shift would require banks to prove to an
independent reviewer that no misconduct took place. This is likely
to encourage disclosure from banks and increase desire for reasoned
decisions, which in turn counters many of the earlier criticisms
made of mass-redress schemes.
Conclusion
The FST will be key to addressing a number of the difficulties SMEs
face in seeking redress against banks. This chapter has attempted to
show that, nevertheless, the FST is not a panacea for SMEs, and has
made two suggestions to facilitate SME access to justice.
Endnotes
1. See rights of ‘private persons’ in s138D Financial Services &
Markets Act 2000 (FSMA).
2. DISP 2.7.9(1)(a).
3. S225 FSMA.
4. S228 FSMA.
5. S228 FSMA.
6. The Tribunal Procedure (First-tier Tribunal) (Tax Chamber)
Rules 2009, Rule 10 and see Rule 23 for a definition of
complex claims.
7. The Employment Tribunal (Constitution and Rules of
Procedure) Regulations 2013, Rule 76.
8. CPR r.45.31(1)(a).
9. DSIP 1.3.2A.
10. DISP 1.3.6.
11. DISP 1.4.1.
12. DISP 1.2.1 and 1.2.2.
13. Ss55J and 55L FSMA.
14. DISP 1.3.6.
15. DISP 1.3.3.
16. DISP 1.10.
17. Evidence of Andrew Bailey to the TSC on 20 July and 9
November 2016 and letter to the Committee on 22 January
2018.
Financial Services Lawyers Association (FSLA) Levelling the Playing Field
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Victoria Brown
Outer Temple Chambers
222 Strand
London WC2R 1BA
United Kingdom
Tel: +44 20 7353 6381 Email: [email protected] URL: www.outertemple.com
FSLA provides a forum for the open exchange of views and the dissemination of knowledge and ideas relating to financial services law and
regulation. It creates opportunities for financial services lawyers to meet each other at a variety of educational and social events which take place
throughout the year. The aim of FSLA is to foster co-operation between the various financial services stakeholders including lawyers and policy
experts in industry, academia, regulators and government.
Victoria advises on all aspects of financial services law, including those
related to regulatory perimeter issues and obligations imposed on
regulated firms and approved persons. She acts for and against
regulators, firms and individuals in the courts and before decision-
making committees. Victoria is also familiar with investigations,
including document reviews, interviews, responses and representation.
In addition to the key areas above, Victoria has cross-over expertise in
matters related to employment and pensions.
Outer Temple Chambers’ Financial Services team has broad
experience in the banking and financial services industry. Barristers at
Outer Temple have featured in many of the leading cases arising out of
the financial crisis, including at appellate level. The team has
particular experience of high-value cases involving alleged
misconduct by banks, often following regulatory findings.
Financial Services Lawyers Association (FSLA) Levelling the Playing Field
Chapter 3
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Wachtell, Lipton, Rosen & Katz
Elaine P. Golin
Jonathan M. Moses
Lessons Learned: 10 Years of Financial Services Litigation Since the Financial Crisis
The financial crisis and the Great Recession began a little more than
10 years ago, on September 15, 2008, when Lehman Brothers filed
for bankruptcy. The next day, September 16, the Federal Reserve
implemented a rescue of AIG, and the day after that the markets
were in a state of free fall. On September 18, the government
announced a further rescue proposal, and, on September 19, the
Treasury Department guaranteed U.S. money market funds, an
unprecedented move. The ensuing crisis led to manifold legislative,
regulatory, and political reactions in the United States and abroad.
The business and legal landscapes for financial institutions were,
and remain, significantly altered. For financial institutions, the
crisis also produced years of litigation in the United States spanning
a broad range of claims.
Ten years out from the beginning of the Great Recession, it is worth
reflecting on the course of that litigation, which appears to be finally
reaching the beginning of the end. Perhaps the largest category of
such litigation related to the growth of the mortgage market that
marked the decade before the financial crisis and the expansion of
both the government-sponsored and private securitisation markets,
in particular for residential mortgage-backed securities (“RMBS”)
that emerged to finance that growth. The downturn in the U.S.
housing market, the resulting impact on mortgage performance, and
the ensuing domino effect on institutions and investors arguably
were among the most significant causes of the financial crisis.
The extent and depth of the financial crisis took the financial
institutions that had participated in the mortgage market by surprise.
One thing is clear: the legal infrastructure that supported the mortgage
underwriting and securitisation markets was not created with such a
crisis in mind. The securitisation contracts upon which billions of
dollars in liability ultimately turned were often hastily put together, and
few, if any, parties to the contracts had reflected on what would happen
if a substantial percentage of the securitised mortgages failed to
perform (as opposed to the low default rates typical in the boom years).
As might be expected, the ensuing waves of litigation took some time
to emerge, were sometimes dominated by the “bad facts” of the crisis,
inspired legal creativity and ingenuity, and required the courts to craft
new applications of traditional legal principles. Ultimately, well-
established legal rules generally prevailed and financial institutions
and other market participants developed an understanding of how
better to address potential legal risks going forward.
The Course of Financial Crisis Era
Litigation
Litigation stemming from the financial crisis emerged in waves as
different aspects of the mortgage-related markets came into focus.
In reviewing the course of this litigation, it is worth keeping in mind
the many different types of financial institutions connected to the
mortgage underwriting and securitisation markets; none were left
untouched by financial crisis-related litigation. These businesses
reflected the gamut of financial institutions: mortgage brokers and
mortgage companies that specialised in making subprime
mortgages; retail banks that increased their mortgage and other
home lending activities; commercial and investment banks that
specialised in RMBS and/or commercial mortgage securitisations
(“CMBS”) and in even more complicated financial instruments,
such as collateralised debt obligations (“CDOs”); the bond rating
agencies that deemed such securities to be investment quality; the
insurance companies that issued protection for some securitisations;
the hedge funds and bank trading operations that invested in such
securities; the trustee companies responsible for administering the
trusts issuing such securities; and mortgage-servicing businesses,
often operated by banks, that were responsible for servicing such
mortgages once underwritten. Government or quasi-government
institutions were also heavily involved in the mortgage markets, in
particular the Federal Housing Authority (“FHA”), which
guarantees smaller and more standard mortgages in an effort to
make home ownership more accessible, and Government-
Sponsored Enterprises (“GSEs”), such as Fannie Mae and Freddie
Mac, that guarantee mortgages as part of their huge mortgage
securitisation activities and even purchased enormous amounts of
the RMBS issued during the pre-crisis years, which, in turn, fuelled
the growth and expansion of that market.
The financial-crisis litigation emerged in waves. While it is beyond
the scope of this chapter to discuss in detail each type or subset of
financial-crisis litigation, in hindsight it generally can be
categorised into three main waves. The initial wave focused on the
institutions most immediately and visibly affected by the crisis.
Thus, corporate and securities litigation against firms that suffered
significant losses as a result of their mortgage exposure or even
went out of business represented the first wave. Government-led
investigations and civil actions dominated the next wave as public
attention focused on the effect the crisis was having on ordinary
people subjected to foreclosure. Finally, private civil litigation
expanded as various investors in mortgage-related products realised
the extent of their losses (or seized the opportunity to buy bonds at
distressed prices as a litigation investment) and began to press
litigation against the various parties involved in making and
securitising mortgages – or at least those parties who by then still
remained in business.
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First Wave: Corporate and Securities Litigation
The first wave of litigation was marked by corporate and securities
cases involving the firms that suffered the greatest initial losses on
the financial markets. Thus, as some of the largest financial
institutions experienced significant and highly publicised losses as a
result of their exposure to the mortgage markets, the companies and
their directors faced shareholder corporate and securities litigation.
These litigations did not break particular new ground, although they
were the initial battleground over the extent to which financial
institutions and their officers and directors should be viewed as
having legal responsibility for losses related to the financial crisis.
Generally, the financial institutions and their officers and directors
did well in these cases. The legal theories pursued in these cases
required showing intentional or reckless misconduct or bad faith, a
high standard. For example, in 2009, in an early victory for a
financial institution, Citigroup obtained dismissal of all but one
claim in a shareholder derivative action that sought recovery for
Citigroup’s losses in the subprime lending market. The plaintiffs,
shareholders of Citigroup, claimed that the defendants, directors and
former directors of Citigroup, breached their fiduciary duty by
allegedly not properly monitoring and evaluating the risks Citigroup
faced in its exposure to subprime loans. The Delaware Court of
Chancery held that plaintiffs’ allegations did not establish the bad
faith required for liability for a director’s oversight lapses.1 This
early victory for a financial institution board likely prevented what
would have been a host of similar claims.
Second Wave: Government-Led Investigations and Civil
Litigation
The second wave of litigation was instigated by the government,
which eventually directed significant resources to enforcement
related to perceived lapses in mortgage origination, servicing, and
securitisation. This effort was driven both by political imperatives
and a real need for government intervention to assist those hit hardest
by the financial crisis. The Obama Administration established the
RMBS Working Group, which brought together federal and state
agencies to investigate the securitisation market, while the Financial
Fraud Enforcement Task Force focused on issues of fraud more
broadly. Notably, the government relied more on civil tools than
criminal ones. This generated public criticism from those who felt
individual bankers responsible for the crisis should serve jail time,
even as one of the earliest criminal cases brought in the wake of the
financial crisis against two Bear Stearns hedge fund managers
resulted in outright acquittals of all charges. The government’s focus
on civil tools nonetheless proved to be a smart strategy as its civil
remedies were more flexible and subject to lower burdens of proof,
thereby allowing the government to make its cases more easily.
The first significant government intervention began as a result of a
practice that came to be known as “robo-signing”. This term
referred to the alleged practice by mortgage-servicing companies,
which were responsible for handling mortgage foreclosures, of
having individuals sign foreclosure documents under oath without a
proper basis for doing so. While in most cases, although not all, the
foreclosures were nonetheless legitimate, the scandal captured
attention as it put a spotlight on the public’s concern that financial
institutions were not doing enough to help struggling homeowners
avoid foreclosure. In February 2012, the Department of Justice
(“DOJ”) and the Department of Housing and Urban Development,
along with the attorneys general of 49 states, reached a $25 billion
agreement – the “national mortgage settlement” – with the five
largest servicers of mortgage loans, Bank of America, J.P. Morgan,
Wells Fargo, Citigroup, and Ally Financial, as settlement for alleged
abuses in the banks’ handling of their mortgage loan servicing and
foreclosure businesses. The agreement required the mortgage
servicers to commit more than $20 billion toward financial relief for
consumers. It also created new standards intended to prevent future
foreclosure inadequacies and abuses, such as stricter oversight of
the foreclosure process, with compliance to be conducted under the
oversight of an independent monitor.
The DOJ also obtained significant settlements through its use of a
statute that had been mostly forgotten until the financial crisis.
Passed in the aftermath of a prior banking crisis – the savings and
loan crisis of the 1980s – the Financial Institutions Reform,
Recovery, and Enforcement Act of 1989 (“FIRREA”) allows the
government to seek civil monetary penalties based on violation of
certain criminal statutes that relate to financial institutions. But,
most importantly, it provides the government with tools to
undertake pre-litigation civil investigations. The DOJ, with state
attorneys general and other regulators often running parallel
inquiries, used FIRREA to undertake investigations that resulted in
additional significant settlements out of court to resolve RMBS
claims. While the government had a great deal of leverage in these
negotiations, financial institution lawyers were able to negotiate
broad releases and innovative settlement components that gave the
banks settlement credit for consumer relief activities. Although the
settlement totals were large, the breadth of the releases across
multiple federal and state agencies allowed affected institutions to
make the case to the markets that the financial crisis was “behind
them”. These settlements included, both in cash and other
consideration such as consumer relief: $16.65 billion from Bank of
America; $13 billion from J.P. Morgan; $7.2 billion from Deutsche
Bank; $7 billion from Citigroup; $5.28 billion from Credit Suisse;
$5.06 billion from Goldman Sachs; $4.9 billion from RBS; $2.6
billion from Morgan Stanley; $2.09 billion from Wells Fargo; $2
billion from Barclays; and $1.375 billion from Standard & Poor’s.
Another, even older, legal tool put to use was the qui tam action, in
which a private plaintiff brings a lawsuit under the False Claims Act
claiming the government was defrauded. If successful, the private
plaintiff gets a portion of the recovery. Often these actions are
initially filed under seal, enabling the government to investigate the
private plaintiff’s claims and determine whether to intervene. Such
cases, common in other industries, were previously not typically
used in the financial arena, but, in light of the various ways the
government subsidised the mortgage markets, these cases provided
a fruitful avenue for plaintiff firms and the government. One
notable example of such a case was brought against Countrywide
Home Loans, a leading originator of subprime mortgage loans, by a
former executive. The government later intervened and
significantly broadened the scope of the case, adding several
additional defendants and claims under FIRREA for civil penalties
for certain alleged violations of federal mail and wire fraud laws.
This would later prove to be a grave overreach. The government
prevailed at trial, with the jury rendering a general verdict in favour
of the government. The district court then entered a $1.27 billion
judgment against Countrywide.
But, in a rare victory for a financial institution, that verdict and the
$1.27 billion judgment were reversed on appeal. The Second
Circuit concluded that instead of proving mail or wire fraud
sufficient for FIRREA liability, the government had merely proved
intentional breach of contract.2 The case was a significant setback
for the government, which had sought to broaden the parameters of
federal mail and wire fraud beyond the traditional requirements of
common law fraud. It is also a clear example of the courts’
consistent application of traditional common law contract and tort
requirements to financial crisis and recession era cases.
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Third Wave: Private Civil Litigation
The final wave of litigation, which gained momentum in 2011 and
2012 and continues even today, involved private civil litigation
related to the securitisation markets. These cases even pitted
financial institution against financial institution, as they were often
brought by investors in mortgage-backed securities or other financial
institutions that touched an aspect of the mortgage markets.
Many of these cases rested on contractual claims that required no
finding of fault – just the willingness of courts to enforce the plain
language of securitisation and other agreements underlying the
mortgage securitisation markets. On the other hand, the courts’
adherence to traditional contract principles meant that plaintiffs had
to prove contractual breaches, and generalised pleading of
widespread wrongdoing did not suffice. While not a comprehensive
review of all such cases, the civil litigation that financial institutions
faced can be sorted into several categories, including securities and
fraud claims related to the purchase of RMBS, repurchase claims for
defaulted mortgages, claims against servicers, and claims against
trustees. Other areas of litigation not covered here included claims
by monoline insurers who guaranteed many RMBS deals, claims by
investors in complex instruments such as CDOs, and claims against
the bond rating agencies.
Securities Claims Many of the first cases filed by RMBS investors were claims under
the securities laws, alleging that the prospectus supplements that
accompanied the sale of each securitisation contained misstatements
about the quality of the loans underlying the securitisations.
Critically, these claims do not require evidence of scienter by the
seller or reliance upon the false statement by the buyer. The Federal
Housing Finance Agency (“FHFA”), an independent agency created
by Congress to act as the conservator of Fannie Mae and Freddie
Mac, instituted litigation in 2011 against 18 financial institution
defendants, alleging violations of the federal securities laws in the
sale of mortgage-backed securities to Freddie Mac and Fannie Mae.
Because of the near strict liability nature of Securities Act claims,
FHFA was able to secure more than $20 billion in settlements from
bank defendants. The one bank that went to trial against FHFA –
Nomura – lost.3 As the Nomura court framed it, at the centre of
these highly complex cases was merely the simple question of
whether, under the Securities Act, defendants’ securities offering
documents accurately described the home mortgages underlying the
securities. That court found the magnitude of the falsity to be
“enormous”. Private litigants also pursued such claims, often as
class actions.
However, because Securities Act claims based on misstatements in
a securities prospectus have a very strict three-year statute of
limitations, this wave of RMBS litigation was the first to be
resolved, and very little of it remains outstanding.
Loan Repurchase Claims Loan repurchase claims constituted a large category of litigation
against financial institutions. A loan repurchase claim, sometimes
referred to as a “putback claim”, flows from an alleged breach on
the part of a defendant RMBS sponsor, originator, or other
contractually responsible party of representations and warranties
about the nature of the underwriting of the loans and of the diligence
conducted on the overall quality of the loans. The claims are
therefore generally for breach of contract – of the representations
and warranties – and made by a trustee on behalf of a securitisation
trust. As such, repurchase claims must be brought by parties to the
contract, and investors must act through the trustee to press such
claims. RMBS contracts, typically known as pooling and servicing
agreements, generally provided for three equitable remedies in the
event of a breach: cure the breach; repurchase the breaching loan; or
provide a substitute compliant loan.
Courts typically applied traditional common law legal principles to
loan repurchase claims. This resulted in some early decisions that
significantly helped to cabin litigation and ultimately limit financial
institutions’ exposure. As noted, most securitisation agreements
provide for a trustee to act on behalf of the certificate-holders, who
are the trustee’s beneficiaries, and these agreements contain
provisions, called “no-action clauses”, that restrict the certificate-
holders’ ability to act directly instead of through the trustee on their
behalf. Courts have strictly interpreted these provisions,
significantly restricting the proliferation of litigation. In an early
case, Walnut Place, the Appellate Division of the New York
Supreme Court, First Department, interpreting a no-action clause,
held that a certificate-holder could only sue on behalf of the trustee
if it met the strict requirements of the no-action clause. In that case,
as in most RMBS contracts, the no-action clause required the
certificate-holder to notify the trustee of an “Event of Default”
before it could bring its own suit and contained other restrictions.4
This strict enforcement of no-action clauses foreclosed direct
contract actions by investors and required them to work through
trustees, who typically required evidence of substantial ownership
and an indemnity from investors before bringing suit on their behalf.
Although the volume of representation and warranties litigation was
large, Walnut Place and subsequent similar decisions meant that
there was far less of it than if every individual investor – including
opportunistic investors who bought distressed RMBS securities
long after the financial crisis – could have sued in their own names.
Another important New York case, Ace, concerned the strict
application of the six-year statute of limitations for repurchase
claims, resulting in another application of traditional contract law
that helped limit the sprawl of post-crisis litigation. Applying
traditional principles of state contract law, the New York Court of
Appeals held that breaches of representations and warranties about
loan quality occur, and thus claims for breach accrue, on the date the
representations are made (usually the date the securitisation closes),
and not when the representations and warranties are discovered to
be false or (as some plaintiffs argued) when an RMBS sponsor
refuses to repurchase a loan. The Court of Appeals noted the general
principle that statutes of limitation, in serving the public policy goal
of repose, generally apply regardless of potential harshness, and that
New York law repeatedly disfavours cause of action accrual dates
that cannot be ascertained with certainty in contrast to bright line
rules.5 Because New York law limits tolling for contract claims to
six years beyond the six-year statute of limitations, for a total of 12
years after issuance, and because the very last pre-crisis RMBS
trusts closed in late 2007, the timeline for bringing claims – at least
under New York law – is just about running out.
The New York courts have also cabined liability through strict
application of the “sole remedy” clause in RMBS contracts, which
requires trustees to prove their claims through the “loan-by-loan”
repurchase protocol rather than through generalised allegations of
wrongdoing.6 For example, in one recent case, Ambac, the Court of
Appeals reiterated the “well settled” principle of contract law that
contract terms providing for sole remedies are strictly enforced, as
they represent the parties’ agreement on the allocation of risk of
economic loss. Although there has been some divergence in the
courts about the admissibility of statistical sampling to prove
repurchase claims, the court in the one repurchase case to have gone
to trial prohibited statistical sampling and ultimately forced the
trustee to prove breach on a loan-by-loan basis for thousands of
loans, a process that was very expensive and time-consuming.7
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These proof requirements, and the doubts around the validity of
statistical sampling, may have contributed to a trend of pre-trial
settlements.
Faced with proliferating claims, and wanting to demonstrate to
shareholders, regulators and others that the legacy of the financial
crisis was manageable, some of the largest American banks, first
Bank of America, then J.P. Morgan, Citigroup, and others,
negotiated bulk settlements with groups of investors and RMBS
trustees to obtain broad releases for origination and servicing claims
across hundreds of trusts. These settlements made use of New
York’s Article 77 procedure, which allows a trustee to seek approval
of a decision made with respect to a trust (here, the decision to settle
all potential claims), binding all investors who have received notice
and an opportunity to be heard. While the headline numbers on
these bulk settlements were large, the preemptive settlements
effectively cut off the threat of mushrooming litigation, the
settlement rates as a percentage of losses ended up being very
favourable compared to cases that did go to litigation, and
shareholders and other constituencies were reassured that the banks
had a plan for containing legacy liabilities.
Claims Against Servicers
In contrast to repurchase claims, private claims against servicers
have been both less successful and, correspondingly, less common.
This is because it is difficult to prove a breach of the servicing
standards in the securitisation agreements, which are often phrased
generally, such as imposing the obligation to service loans
“prudently” or in accord with “industry custom and practice”.
Servicers could defend claims by arguing that their servicing of the
loans was within their business judgment or consistent with
(arguably previously low) industry standards. Further,
securitisation agreements often contained exculpatory provisions
that restricted servicers’ liability only to instances of willful
misconduct or gross negligence.
As such, servicer claims (outside of the government enforcement
context discussed above) had little success. Indeed, one trial court,
though permitting the claim to survive summary judgment, noted
that it was doubtful an expert’s opinion that a servicer’s conduct
deviated from contractual servicing standards could amount to
“gross negligence, malfeasance, or bad faith”, as the securitisation
agreement required.8 And, in that case, the plaintiff then abandoned
its pursuit of that claim at trial.
Some investors, such as those who pursued the bulk settlement
strategy discussed above, rather than pursuing litigation chose to
negotiate with servicers for improved servicing practices as part of
a global resolution of claims.
Claims Against Trustees Perhaps the final wave of RMBS litigation has involved claims by
securitisation investors against trustees in which the investors
claimed that the trustees improperly administered the trusts. The
allegations in these cases often highlighted trustees’ failures to bring
repurchase claims within the strict statute of limitations discussed
above.
Investors asserted both contract and negligence claims against
trustees, as well as statutory claims under the federal Trust Indenture
Act. Because the trustee’s duties are set out by the relevant contract,
negligence claims were often dismissed in light of the familiar rule
that a breach of contract is not a tort unless a duty independent of the
contract was breached. Under New York law, an indenture trustee’s
duties are strictly defined and limited to the terms of the indenture.
As such, contract claims brought against trustees flow from the
provisions of an indenture or a pooling and servicing agreement for
particular lapses, such as the failure to notify investors of breaches,
the failure to take proper steps if there is an event of default, or the
failure to maintain collateral files. Many of these cases turned on
whether an event of default occurred, as such an event often triggers
additional duties for the trustee. Courts often permitted these claims
to proceed to discovery when the allegations were based on public
information about alleged breaches while cautioning that such
public information would alone not be sufficient evidence for
liability, which often required proof of actual notice of a breach of
the contract. As such, the trustee’s notice or knowledge of an event
of default as defined by the relevant contract is often a critical issue.
Even when they survive motions to dismiss, however, claims
against trustees face significant barriers to establishing damages. In
a seminal case, a federal appellate court noted that a trustee’s
misconduct must be shown “loan-by-loan and trust-by-trust”.9 In
the wake of that decision, numerous courts held that statistical
sampling cannot be used to prove claims against trustees. For
example, a recent decision in the Southern District of New York
held that “[l]oan-by-loan proof is required to establish the Trustee’s
liability to the Certificate-holders because, under . . . [the pooling
and servicing agreements], the Trustee has neither the obligation nor
the ability to demand cure, substitution, or repurchase of a
nonconforming loan unless – among other things – it can identify a
[representation and warranties] breach . . . that ‘materially and
adversely’ affects the value of that particular loan”.10
And, also recently, the courts have declined to certify classes of
investors in trustee litigations, noting that difference in timing and
structure of investors’ investments make class litigation infeasible.11
The trend has been to deny class certification because of the myriad
individualised determinations that would be necessary to determine
standing, statutes of limitations, and damages. Such limitations on
class actions also applied in securities actions brought by RMBS
investors.
Lessons Learned
The financial crisis that began in the fall of 2008 led to a cascade of
litigation against financial institutions. The course of that litigation
is a case study in how major litigation can wind its way through the
legal system. But it also provides valuable lessons for financial
institutions going forward when facing such an onslaught of
litigation. Financial institutions would do well to remember these
lessons:
Traditional legal principles should win out, but may take time. The
litigation unleashed by the financial crisis emerged in waves. At
times, the “bad facts” of the crisis overwhelmed the ability of
financial institutions to fight back. But, ultimately, traditional
common law legal principles generally prevailed. Financial
institutions paid a significant cost for their financial-crisis litigation
exposure, but ultimately were able to cabin it and move forward.
Legal innovation and creativity will emerge. The legal system set
up for the mortgage industry was not built in anticipation of the
mass defaults and related claims that resulted from the financial
crisis. Lawyers on both sides of the “v.” were able to develop
innovative ways to resolve these cases and judges were open to
adopting them as long as they did not stray too far from legal
principles. Many of those innovations will be part of the litigation
arsenal going forward.
Financial institutions need to think carefully through the legal
structures that they build for new products and services and the
long-term risk of going into new business areas. The regulatory
environments faced by financial institutions in the mortgage-related
product area changed forever as a result of the financial crisis. But
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the financial industry is constantly changing and a product that
looks safe in good times may pose unexpected legal risk when times
turn bad. The mortgage legal structure was not built for the mass
litigation that resulted from the financial crisis. Well-run financial
institutions now spend more time thinking through the risks posed
by new products and expansion, and more frequently involve
counsel and risk personnel in the decision-making process.
We can all hope that no similar financial crisis will soon emerge. If
one does, the 10-year course of financial crisis-related litigation
fortunately teaches that the legal system should have the tools and
flexibility to address the resulting legal fallout.
Endnotes
1. In re Citigroup Inc. S’holder Derivative Litig., 964 A.2d 106
(Del. Ch. 2009).
2. See United States ex rel. O’Donnell v. Countrywide Home Loans, Inc., 822 F.3d 650 (2d Cir. 2016).
3. See Fed. Hous. Fin. Agency v. Nomura Holding America, Inc., 104 F. Supp. 3d 441 (S.D.N.Y. 2015).
4. Walnut Place LLC v. Countrywide Home Loans, Inc., 96
A.D.3d 684 (N.Y. App. Div. 1st Dept. 2012).
5. See ACE Sec. Corp. v. DB Structured Prods., Inc., 36 N.E.3d
623 (N.Y. 2015).
6. See, e.g., Ambac Assurance Corp. v. Countrywide Home Loans, Inc., 106 N.E.3d 1176 (N.Y. 2018).
7. U.S. Bank, Nat’l Ass’n v. UBS Real Estate Sec. Inc., 205 F.
Supp. 3d 386 (S.D.N.Y. 2016).
8. Assured Guar. Mun. Corp. v. Flagstar Bank, FSB, 892 F.
Supp. 2d 596, 607 (S.D.N.Y. 2012).
9. See Ret. Bd. of the Policemen’s Annuity and Benefit Fund of the City of Chicago v. Bank of New York Mellon, 775 F.3d 154
(2d Cir. 2014).
10. See, e.g., Royal Park Inv. SA/NV v. Deutsche Bank Nat’l Trust Co., No. 14 Civ. 4394 (AJN) (BCM), 2018 WL 4682220, at
*5 (S.D.N.Y. Sept. 28, 2018).
11. See, e.g., Royal Park Inv. SA/NV v. Deutsche Bank Nat’l Trust Co., No. 14 Civ. 4394 (AJN), 2018 WL 1750595 (S.D.N.Y.
Apr. 11, 2018).
Acknowledgment
The authors are very grateful for the assistance of their colleague
Justin L. Brooke in preparing this chapter.
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Elaine P. Golin
Wachtell, Lipton, Rosen & Katz
51 West 52nd Street
New York, NY 10019
USA
Tel: +1 212 403 1118 Email: [email protected] URL: www.wlrk.com
Jonathan M. Moses
Wachtell, Lipton, Rosen & Katz
51 West 52nd Street
New York, NY 10019
USA
Tel: +1 212 403 1388 Email: [email protected] URL: www.wlrk.com
Wachtell, Lipton, Rosen & Katz is one of the most prominent business law firms in the United States. The firm’s pre-eminence in the fields of
mergers and acquisitions, takeovers and takeover defence, strategic investments, corporate and securities law, and corporate governance means
that it regularly handles some of the largest, most complex and demanding transactions in the United States and around the world. The firm also
handles significant white-collar criminal investigations and other sensitive litigation matters and counsels boards of directors and senior management
in the most sensitive situations. It features consistently in the top rank of legal advisors. Its attorneys are also recognised thought leaders, frequently
teaching, speaking and writing in their areas of expertise.
Elaine P. Golin is a partner of the firm’s Litigation Department. Her
practice includes contracts, corporate governance, RMBS and
securities litigation, as well as other types of complex commercial
litigation. Ms. Golin also focuses on the negotiated resolution of
complex matters.
Recently, Ms. Golin has represented Bank of America, PNC and other
financial institutions in numerous disputes concerning mortgage-related
matters. Representations include Bank of America’s groundbreaking
settlement of claims relating to Countrywide mortgage-backed
securities and related litigation, Bank of America’s multi-faceted
resolutions with FHFA, MBIA, FGIC and AIG, Bank of America’s global
RMBS agreement with the DoJ, and PNC in mortgage litigation with
RFC.
Ms. Golin received a B.A. from Yale College, a diploma in Literature
from the University of Edinburgh, and a J.D. from Columbia Law
School, where she was an articles editor of The Columbia Law Review
and a James Kent Scholar. She clerked for the Honorable Judge
Sandra Lynch of the United States Court of Appeals for the First Circuit.
Among other professional recognitions, Ms. Golin has been named by
Lawdragon as one of the 500 leading lawyers in the United States and
by Benchmark Litigation as one of the top 250 women in litigation.
Ms. Golin serves on the board of the Sadie Nash Leadership Project,
a non-profit providing leadership education to high-school and college
women.
Jonathan M. Moses is co-chair of the firm’s Litigation Department,
which he joined in 1998. He has represented clients in diverse
industries, including banks and financial institutions, media companies
and industrial firms. His practice includes complex commercial and
securities litigation, government investigative proceedings, and
international arbitration.
Prior to joining the firm, Mr. Moses served as an attorney for the New York Daily News, where he worked on First Amendment issues. Mr.
Moses is also a former journalist, having served, among other
positions, as a staff reporter for The Wall Street Journal.
Mr. Moses received an A.B. from Harvard University in 1988 and a J.D.
from Columbia Law School in 1996, where he was an editor of the Law Review and a James Kent Scholar. Following graduation from
Harvard, Mr. Moses was the recipient of a Fulbright Fellowship in Hong
Kong. Mr. Moses also served as a law clerk to the Honorable Stephen
F. Williams of the United States Court of Appeals for the District of
Columbia Circuit following graduation from law school.
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Jones Day
John Emmerig
Michael Legg
Australia
1 Bringing a Claim – Initial Considerations
1.1 What are the most common causes of actions taken by or against financial institutions and service providers in your jurisdiction?
The most common causes of action in relation to financial services
(excluding traditional banking/lending and insurance) may be
considered from the perspective of private causes of action and
regulatory causes of action:
■ Private:
■ Breach of contract, including implied terms of good faith,
rendering services with due care and skill, and services
will be reasonably fit for the purpose for which they are
supplied.
■ Tort of negligence.
■ Fiduciary duty.
■ Regulatory:
■ Breach of provisions of an Australian Financial Services
Licence, including failing to have ‘adequate
arrangements for the management of conflicts of interest’
– s 912A(1)(aa) of the Corporations Act 2001 (Cth)
(Corporations Act).
■ Breach of financial advice (general and personal advice)
obligations, which can be broadly described as financial
advice that does not comply with the ‘best interests’
obligation and related obligations (prioritising the client’s
interests over the advice provider’s interests) in Part 7.7A
of the Corporations Act.
■ Both:
■ Statutory prohibition on misleading or deceptive conduct
under the Corporations Act and the Australian Securities and Investments Commission Act 2001 (Cth) (ASIC Act).
■ Statutory and equitable prohibition on unconscionable
conduct (e.g., ss 12CA and 12CB of the ASIC Act).
■ Statutory unfair contracts provisions (e.g. Part 2 Division
2 Subdivision BA of the ASIC Act).
1.2 What remedies are most likely to be awarded?
Private litigation almost always seeks compensation for loss or
damages incurred. However, in some circumstances, equitable
remedies such as rescission may be sought.
Regulatory actions have a range of remedies available in keeping
with the enforcement pyramid: criminal penalty; banning orders;
civil penalty; enforceable undertakings; and infringement notices.
1.3 Who has a right of action in financial services
disputes? Does it make a difference if the customer is
an individual or a commercial entity?
The entity suffering loss will usually have standing to bring private
litigation. Some causes of action may be limited to consumers or
small businesses such as unfair contract terms: s 12BF of the ASIC
Act. The regulator has standing to commence enforcement action.
1.4 Is third-party funding available in financial services
litigation (crowdfunding, maintenance, champerty,
etc.)? Does litigation insurance operate in your
jurisdiction and, if so, what are the implications for
this?
Third-party litigation funding is well established in Australia and
primarily funds financial services class actions. Litigation
insurance is a newer phenomenon but is being used by both
litigation funders and class action lawyers to guard against adverse
costs orders; see question 4.2 below.
1.5 Are class action law suits available in your
jurisdiction? If so, has this impacted financial
services litigation? Has there been an increase in
class action suits post the financial crisis?
Class actions have been available in Australia since 1992. Financial
services class actions have become the most common form of class
action in Australia, although this is based on multiple class actions
being commenced in relation to contraventions. The financial crisis
resulted in an increase in class actions but these have now been
largely resolved. A further impetus to financial services class
actions will be the Royal Commission into Misconduct in the
Banking, Superannuation and Financial Services Industry.
2 Before Commencing Proceedings
2.1 What are the main barriers to financial service
litigation for customers? Are there exclusionary
clauses or duty defining clauses in customer
contracts which prevent customers from bringing a
case?
Both legal and practical barriers face persons seeking to commence
court proceedings against financial services providers. Legal
barriers may include the impact of liability exclusion clauses and
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contractual warranties (made by service recipients) in financial
services contracts that include or reduce a service provider’s
exposure to liability. Further, alternative dispute resolution (ADR)
clauses may delay a party’s commencement of court proceedings,
but cannot obstruct the commencement of those proceedings.
Practical barriers include the impecuniosity of, or restricted
resources available to, many clients (and the obverse, being the
substantial cost of litigation). Further, the often substantial
knowledge asymmetry concerning the service provider’s conduct
and its consequences may (and often does) prevent or hinder the
recipient of financial services from realising or fully comprehending
misfeasance on misconduct affecting their interests.
2.2 Is there a time limit within which financial services
disputes must be commenced? If so, is it different
depending on whether proceedings are brought
before a regulatory body or before the courts? Does
the commencement of a regulatory process ‘stop the
clock’?
Time limits to commence proceedings in Australian courts are
imposed by statute, and if no statutory bar on commencing
proceedings exists, there is no temporal limitation. This, too, is the
case in the context of financial services litigation. Common law and
statutory causes of action in tort, contract and misleading and
deceptive conduct generally have a statutory limitation period of six
years from the time the cause of action accrued (with some
exceptions, such as in cases where the cause of action is based on
fraud or deceit). Equitable causes of action are not directly subject
to statutory limitation periods, but may be subject to limitation
periods where they are sufficiently analogous to a statute-barred
common law action, so as to prevent the use of the courts of equity
to circumvent statutory time bars. Equitable causes of action may
also be barred by findings of laches or delay, which are
discretionary.
The commencement of a regulatory investigation does not stop a
statutory limitation period from running. However, it is worth
noting that a limitation period does not commence until a cause of
action accrues or the plaintiff is reasonably capable of being aware
of the facts underlying it, and the investigation may bring to light the
factual circumstances that may form the basis of a given cause of
action.
2.3 Can parties in financial services litigation avail of
litigation and/or legal advice privilege? Are
investigations conducted by regulated bodies
considered ‘litigation’ in the context of privilege?
Parties to financial services litigation may assert legal professional
privilege over materials prepared for the dominant purpose of
giving or obtaining legal advice or the provision of legal services
(including representation) in legal proceedings. Communications
between a client and their legal advisor may be protected either by
common law legal professional privilege or privilege prescribed by
the Evidence Act 1995 (Cth) (and applicable state evidence statutes),
the latter of which is restricted to preventing privileged materials
from being adduced as evidence in court proceedings.
While materials prepared for the dominant purpose of preparing for
and complying with obligations in the course of regulatory
investigations are not protected by litigation privilege (the
investigatory process not being ‘litigation’), they may be protected
by common law advice privilege if they were prepared for the
dominant purpose of advising the entity under investigation in
relation to the investigation.
2.4 Are standard form master agreements used in your jurisdiction for financial institutions (for example, the ISDA Master Agreement)? How are they treated?
Standard form master agreements are commonly used in Australia
in the context of derivative and asset securitisation transactions.
They are subject to modification or addition through the use of
‘special conditions’, which make them suited to being tailored to a
transaction and the needs of clients. They are typically used in the
context of transactions involving sophisticated clients.
2.5 Are there any non-contractual duties which are binding on financial services entities (for example, a particular fiduciary duty or a code of conduct)? Can they be contracted out of?
There are an array of non-contractual duties owed by providers of
financial services to their customers, including fiduciary duties, the
common law duty of care and statutory duties. Generally, liability
for breach of common law and equitable duties can be excluded or
limited by contractual agreement, and the wording of such an
exemption will define its scope. However, a breach may be of a
certain character such that a contractual exemption will not operate
to limit or negate liability (for example, in cases of fraud).
There are also a range of statutory duties and obligations imposed
by various regulatory regimes that supplement and overlap with the
duties imposed on financial service providers under the general law,
such as the various duties under the Australian Financial Services
Licence regime. These include duties owed by Australian Financial
Services Licence holders to act in the best interests of their clients,
provide appropriate advice and prioritise the interests of their clients
above their own in circumstances where there is a conflict: see Part
7.7A Division 2 of the Corporations Act. Parties cannot contract out
of these obligations: see s 960A.
Industry codes also exist, such as the Association of Financial
Advisors Code of Conduct and the Financial Planning Association
of Australia Code of Professional Practice. An ASIC-approved
Code of Ethics for Financial Advisers is currently being developed
by the Association of Financial Advisors (with guidance from
ASIC), which is expected to be instituted in 2020.
3 Progressing the Case
3.1 Is there a specialist court or specialist judges for financial services litigation?
There are no specialist courts or specialist judges for financial
services litigation in Australia. However, courts that deal with
commercial litigation often have specific lists for such matters that
are administered by judges with commercial expertise.
3.2 Does the method of service of proceedings differ for financial service litigation?
No, the method of service of proceedings does not differ.
3.3 Are there any specific pre-trial procedures that must be followed for financial services litigation in your jurisdiction? If so, what are they and what are the consequences of not abiding by them?
No. However, in the Federal Court, parties to certain civil disputes
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are required to file a ‘genuine steps statement’, outlining the steps
taken to resolve the issues in the dispute or the reasons why no such
steps were taken.
It is considered good practice to issue a notice of intention to claim
outlining the nature of an intended cause of action and seek to
resolve the matter prior to instituting proceedings, as this may affect
cost orders at the conclusion of proceedings.
3.4 Are there any alternative dispute resolution (ADR)
regulations that apply to financial services disputes in
your jurisdiction? Are ADR clauses typically included
in financial services contracts, and is ADR commonly
used to resolve financial services disputes in your
jurisdiction?
The Corporations Act requires all Australian Financial Services
Licensees providing services to retail clients to have a dispute
resolution framework, consisting of internal and external dispute
resolution procedures. A financial firm that does not comply with
this obligation is in breach of its licence and can be subject to
administrative action.
Internal dispute resolution procedures must comply with the
standards and requirements provided in s 912A(2)(a)(i) of the
Corporations Act. Membership of an ASIC-approved external
dispute resolution scheme is a licence condition of financial firms
that provide financial products and services. On 1 November 2018,
the Australian Financial Complaints Authority (AFCA) became the
single external dispute resolution scheme available to financial
services firms, replacing the Financial Ombudsman Service (FOS),
the Credit and Investments Ombudsman (CIO) and the
Superannuation Complaints Tribunal (SCT).
ADR clauses are typically included in financial services contracts in
Australia. ADR is increasingly popular in Australia and almost all
state courts have the power to refer matters to ADR.
3.5 How are claims for negligent misstatement/mis-selling
dealt with in your jurisdiction?
Financial services providers owe their clients a ‘special’ duty of care
as they provide information or advice requiring a degree of skill and
knowledge which is intended to be relied upon. To prove negligent
misrepresentation, the representee must demonstrate that the
representor owed them a duty of care, that the representor knew or
ought to have known that the representation would be relied upon,
that the representor breached their duty of care in giving the
representation and that material damage to the representee resulted
from the representation. The damage claimed in negligent
misrepresentation cases is the financial loss resulting from the
negligent advice or information.
In Australia, misrepresentations may also be pursued through the
statutory prohibition on misleading or deceptive conduct: s 1041H(1)
of the Corporations Act; s 12DA(1) of the ASIC Act; and s 18 of the
Australian Consumer Law. The relevant provisions provide that a
person must not engage in conduct that is misleading or deceptive or
is likely to mislead or deceive. S 1041H applies to conduct in
relation to a ‘financial product or a financial service’, s 12DA applies
to ‘financial services’ and s 18 applies broadly across the economy.
Strict liability is imposed on a company or individual who engages
in misleading or deceptive conduct and such conduct is assessed by
the court on an objective basis. Any person who suffers loss as a
result of misleading or deceptive conduct may recover
compensatory damages. As such, misleading or deceptive conduct
is a cause of action that is regularly employed in financial services
cases including class actions. A finding of misleading or deceptive
conduct may also lead to other civil remedies including injunctions,
orders for non-party consumers and non-punitive orders.
3.6 How have unfair terms in contracts been interpreted
in your jurisdiction? Are there any causes of action or
defences available specifically to consumers? How
broad is the definition of a ‘consumer’ in your
jurisdiction?
Part 2 Division 2 of the ASIC Act sets out the unfair contracts
regime in the financial services context. The ASIC Act defines a
consumer in terms of the characteristics of the contract, rather than
the individual. A ‘consumer contract’ is a contract where at least one
individual whose acquisition of financial products or services under
the contract is wholly or predominantly acquired for personal,
domestic or household use or consumption. The unfair contract
term protections in the Act also apply to small businesses; that is, a
business employing fewer than 20 people. Again, the focus is on the
contract; it must be a contract for the supply of financial goods or
services and the upfront price payable must not exceed $300,000.
The ASIC Act requires unfair terms to be contained within standard
form contracts, determination of which largely turns on the degree
of bargaining power of the consumer and opportunity for
negotiation.
Whether a term is ‘unfair’ depends on the factual equality of the
parties’ respective rights and obligations arising under the contract,
how necessary the term is to protect the advantaged party, and the
detriment caused to the other party.
3.7 How is data protection/freedom of information dealt
with in financial services litigation? Can a financial
services customer access their personal data? How is
commercially sensitive or confidential information
dealt with in the context of discovery or disclosure?
All private organisations, including financial services institutions,
must comply with the general rules applicable to data protection.
These are contained in the Privacy Act 1988 (Cth). The Act contains
the Australian Privacy Principles (APPs), which govern the
collection, use, storage and disclosure of ‘personal information’.
APP 12 provides that an entity which holds ‘personal information’
about an individual must, on request, give that individual access to
the information.
Confidential information obtained by discovery or subpoena may
only be used for purposes reasonably related to the proceedings in
which the information was obtained. This is known as the ‘Harman’
or implied undertaking. Reasonable uses include disclosure to
counsel, witnesses and the directors of corporate litigants. These
individuals are also bound by the rule.
Secondly, the courts may make orders limiting disclosure of court
proceedings and information to the public. ‘Non-publication’ orders
prohibit or restrict the publication of information and ‘suppression
orders’ prohibit or restrict the disclosure of information by
publication or otherwise. Such orders may be made in relation to
commercially sensitive or confidential information, especially
where the nature and value of the information would be altered or
diminished by its disclosure in a public forum. The High Court has
clarified the high threshold to the test – the orders must be necessary
to prevent prejudice to the proper administration of justice. A court
may also make orders for a closed court hearing, whereby the court
is not open to the public.
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4 Post Trial
4.1 Is there a right of appeal in financial services disputes?
Yes, Australian courts provide for a right to appeal from a first
instance decision. The right of appeal is derived from legislation
and the scope of the appeal depends on the terms of the legislation.
4.2 How does the court deal with costs in financial services disputes?
In Australian litigation the court has a wide discretion to award costs.
The usual position is that costs follow the event, or ‘the loser pays’,
so that a costs order will be made requiring the unsuccessful party to
pay the reasonable costs of the successful party. However, the court
has discretion to award only part of the successful party’s costs or it
may order costs on a higher indemnity basis in certain circumstances,
such as where a claim or defence had no chance of success.
5 Cross-Border Issues
5.1 What issues typically arise in cross-border disputes or investigations involving financial institutions and how are they catered for in your jurisdiction?
Issues that typically arise in cross-border financial services disputes
include those relating to service of documents (including originating
processes) and enforcement of orders on overseas entities, obtaining
information (including evidence) located abroad and the sharing of
information between regulatory bodies.
Service on an overseas financial institution may be problematic
unless the dispute is contractual and there is a submission to forum
(or arbitration) clause in the relevant contract, or there is a local
subsidiary (and it is sufficient that the subsidiary be joined as a
party). Even if service is effected (including overseas, with the
leave of the Australian court), enforcement of any outcome on an
overseas entity with no Australian assets may be difficult (as any
money judgment will need to be enforced in the foreign jurisdiction
in which assets are located and, depending on the laws of the foreign
country, any non-monetary outcome may not be enforced).
Australian courts are generally protective of proceedings before them
and have sometimes been restrictive in litigants’ use of processes
overseas to obtain information for use in Australian proceedings (as
explained in question 5.2 below). Australia is a signatory to, and has
implemented the structures required for, the Hague Service
Convention and Hague Evidence Convention, which provide ways by
which litigants can gather information located abroad.
ASIC has signed memoranda of understanding with other regulators
regarding the exchange of information and cooperation, including
the IOSCO’s Multilateral Memorandum of Understanding
Concerning Consultation and Cooperation and the Exchange of
Information. These sharing arrangements sometimes raise further
issues, such as privileges against self-exposure to civil penalties.
5.2 What is the general approach of the courts in your jurisdiction to co-operating with foreign courts or regulatory bodies or officials in financial services disputes (including investigations)?
Australian courts are, in general, mindful of the importance of
international comity in making decisions involving cross-border
issues. Australia has entered into and has implemented the Hague
Evidence Convention and Hague Service Convention, and accedes
to requests from other countries under the procedures set down in
those treaties. Australian courts can also enforce certain foreign
money judgments according to the relevant procedures (although
there may be difficulties in seeking to enforce judgments with a
penal character, such as fines or civil penalties arising out of a
financial services regulator).
Litigants in Australian proceedings should be careful to seek the
Australian court’s approval before obtaining foreign assistance, as
Australian courts tend to be protective of the integrity of their own
processes. For example, there have been a recent line of cases in
which Australian courts have disallowed (by anti-suit injunctions
and otherwise) litigants’ use of the information-gathering
procedures in US courts under 28 USC § 1782 in circumstances
where they did not first seek the Australian court’s imprimatur.
5.3 Is extra-territorial jurisdiction typically asserted in
your jurisdiction and, if so, in what circumstances?
Australian courts regularly hear financial services disputes under
Australian law involving at least one non-Australian party,
although, as mentioned above, there may be attendant issues when a
foreign party is involved. In situations where there is a dispute as to
the appropriate forum, including where there is a jurisdiction clause
in the relevant contract, Australian courts take note if a party is
claiming remedies that may only be available under Australian law
(for example, for statutory misleading or deceptive conduct).
Australian laws do not generally have extra-territorial application,
although there are certain aspects of Australian financial services
laws that are capable of extra-territorial application. For example,
the conditions upon satisfaction of which a person must hold an
Australian Financial Services Licence are capable of being met
easily, even by financial institutions based abroad, although there
are currently broad exemptions that apply to overseas entities.
ASIC works with foreign regulators and law enforcement agencies
to assist in its compliance and enforcement activities.
5.4 Are unilateral jurisdiction clauses valid and
enforceable in your jurisdiction?
Jurisdiction clauses (both exclusive and non-exclusive) are
routinely considered and given effect to by Australian courts. There
have been fewer decisions on unilateral, or asymmetrical,
jurisdiction clauses, which require only one party to submit to the
exclusive jurisdiction of a specified forum (in financial contracts,
typically the borrower is required to submit on an exclusive basis).
They are in principle enforceable, and there has been at least some
judicial support for them. With all jurisdiction clauses, however, the
Australian court can decide not to enforce the clause, taking into
account relevant factors, including mandatory laws of the forum.
Unilateral jurisdiction clauses may, for example, be liable to be
caught, and held void, by the unfair contract terms regime in the
ASIC Act and the Competition and Consumer Act 2010 (Cth).
6 Regulated Bodies
6.1 What bodies, apart from the courts, regulate financial
services disputes in your jurisdiction?
Financial services disputes are regulated by ASIC and AFCA. ASIC
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is the Australian government regulator in relation to financial
services. AFCA is the external dispute resolution provider as
referred to in question 3.4 above.
6.2 What powers (investigative/inquisitorial/
enforcement/sanctions) do these regulatory bodies
have?
ASIC has a number of information-gathering powers provided for
under the ASIC Act which enable ASIC to require persons or entities
to provide it with documents and information or to attend an
examination to answer questions and provide assistance. ASIC also
has the power to apply for and execute search warrants to obtain
certain documents.
AFCA has a broad range of powers to assist it when considering a
financial complaint. For example, AFCA can require parties to
attend interviews or examinations or request that the parties provide
relevant information such as policy documents and records or files
kept by the financial firm.
6.3 Are the decisions of regulatory bodies binding on the
parties to a financial services dispute?
AFCA deals with disputes through negotiation, conciliation or
through formal methods. The final stage of the dispute resolution
process undertaken by AFCA is a determination, which is
considered to be a binding decision. For all complaints other than
superannuation complaints, the complainant has the option of
accepting the determination (or not accepting the determination). If
the complainant does accept the determination, the financial firm
which is the subject of the complaint must comply with the remedy
stipulated in the complaint within the timeframe outlined in the
determination. If the financial firm does not comply, AFCA will
report such failure to ASIC. If the complainant does not accept the
determination, they can pursue their claim further through the
courts.
A separate procedure is followed in relation to superannuation
complaints. After a complaint has been made to AFCA about a
superannuation provider, AFCA has the power to either affirm the
decision of a superannuation provider, vary the decision, remit the
decision back to the original decision maker or set aside the decision
and substitute their own decision. AFCA is obliged to provide
reasons for their determination in relation to the superannuation
complaint. These determinations do not require the complainant to
accept the determination.
ASIC has the power to conduct administrative hearings relating to
regulation of financial services such as licensing. In relation to
ASIC, a binding decision will be made by an ASIC delegate
following an ASIC administrative hearing. An ASIC administrative
hearing is conducted informally and the rules of evidence do not
apply. The ASIC delegate will make a decision based on the parties’
submissions and the relevant material.
6.4 What rights of appeal from regulatory decisions
exist?
A financial firm party to a determination by AFCA may elect to
appeal the determination through the courts. Similarly, the
complainant may elect to pursue the claim through the courts if they
elect not to accept the determination. However, in this instance, the
complainant would be commencing proceedings rather than
appealing the decision.
Parties to a decision by ASIC can appeal the decision to the
Administrative Appeals Tribunal within 28 days of the decision
being made.
6.5 Are decisions of regulatory bodies publicly
accessible?
AFCA publishes both case studies and anonymised determinations,
but does not publish full decisions. ASIC administrative hearings
are conducted either publicly or privately, although the decision
itself is not published. If the ASIC delegate’s decision is appealed,
then the appeal judgment is publicly available. ASIC also maintains
a register of other regulatory actions such as enforceable
undertakings and an infringement notices register. In certain
instances, ASIC may also be required to publish orders it makes in
the Gazette.
7 Updates – Cases and Trends
7.1 Summarise any legislative developments in this area
expected in the coming year. Describe any practical
trends in your jurisdiction (e.g., has the financial
crisis impacted legislation? Has there been an
increase in the powers of regulatory bodies as a
reaction to the crisis? Has there been a change in the
amount and type of cases being brought by and
against financial service providers?).
In December 2017 the Royal Commission into Misconduct in the
Banking, Superannuation and Financial Services Industry was
established. After lengthy and highly publicised hearings
throughout 2018 the interim report was published in September
2018. The final report is due in February 2019. The Royal
Commission is expected to lead to an increase in the variety and
volume of cases being brought against banks and financial
institutions as well as statutory and non-statutory reforms to the
banking and financial services industry. By way of example, a class
action has been recently filed against one of Australia’s largest
banks after admissions of misconduct in the Royal Commission.
Recent reforms to the industry have expanded regulatory powers and
increased accountability. The Banking Executive Accountability
Regime (BEAR) was introduced in 2018 to impose heightened
obligations of accountability and transparency on financial
institutions, their directors and executives. Examples of new
obligations include the submission of an ‘accountability map’ setting
out responsibilities of officers and their reporting lines, and joint
liability for persons with shared accountability. The regime also
seeks to make these expectations and their penalties as clear as
possible as part of a broader goal to engender market confidence in a
stable, resilient banking system. BEAR is currently still in the
adoption process as some smaller banks are yet to implement policies
in line with the legislation.
The Australian Government has announced plans to greatly increase
civil and criminal penalties in the Corporations Act and increase the
regulator’s powers to ban individuals from financial services roles,
revoke licences, and use seized and intercepted material and
information. Additionally, whistleblower legislation has been
tabled before the Commonwealth Parliament which broadens the
persons protected under the Corporations Act and the range of
protected disclosures.
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7.2 On an international level, would your jurisdiction be
considered to be more financial institution- or
customer-friendly?
From a comparative perspective, Australia is relatively more
customer-friendly due to the array of statutory protections and
causes of action. However, the costs rules for litigation tend to
favour the better resourced party.
7.3 Please identify any significant cases regarding
financial services disputes during the past 12 months.
Please highlight the significance of the case(s), any
new or novel issues raised and what lessons can be
drawn from them.
ASIC pursued claims against a number of banks in relation to
manipulation of the Bank Bill Swap Reference Rate (BBSW)
including one that went to trial and found the bank to be in breach of
their Australian Financial Services Licence by failing to do all
things necessary to ensure that their services were provided fairly
and efficiently and failing to have adequate procedures and training
in place. The BBSW enforcement actions have emphasised the need
for compliance with Australian Financial Services Licence
requirements.
In a civil penalty case dealing with the assessment of home loan
applications and alleged breach of the National Consumer Credit Protection Act 2009 (Cth), the court rejected a $35 million
settlement agreed between ASIC and a bank. The decision marks a
departure from the courts’ past routine approval of civil penal
settlements agreed with regulators. This case suggests that in the
future the courts must be satisfied that a contravention occurred and
the penalty reflects the seriousness of the breach.
The financial services and banking sector experienced the highest
incidence of class action filings in 2018. Five shareholder class
actions were filed against AMP, triggered by admissions of
misconduct in the Royal Commission, and foreshadow sustained
class action pressure in the financial services sector in the near
future.
The ability of class actions to extract significant sums of
compensation was demonstrated by the settlement of six related
proceedings for $215 million in relation to the credit ratings given to
complex financial products that were purchased by local councils
and charities.
7.4 Have global economic changes caused any changes
to financial services litigation/regulation in your
jurisdiction?
No, they have not caused any changes.
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John Emmerig
Jones Day
Aurora Place
Level 41, 88 Phillip Street
Sydney NSW 2000
Australia
Tel: +61 2 8272 0506 Email: [email protected] URL: www.jonesday.com
Michael Legg
Jones Day
Aurora Place
Level 41, 88 Phillip Street
Sydney NSW 2000
Australia
Tel: +61 2 8272 0500 Email: [email protected] URL: www.jonesday.com
John Emmerig is one of Australia’s leading litigation lawyers. He has
30+ years’ experience in high-stakes litigation representing the
interests of global and major domestic corporations, financial
institutions, and government.
John’s core practice areas are class action defence, major commercial
disputes (“bet-the-company” level), and government/regulator litigation.
He has a national reputation for his experience and outstanding record
in each of these fields.
John’s work in other high-stakes commercial disputes routinely
involves him representing key parties in some of the largest and most
complex matters litigated in Australian superior courts, in international
commercial litigation, and in major test cases.
Mr. Emmerig holds a number of other distinguished appointments,
including as an Adjunct Professor of Law at the University of Notre
Dame Australia, a Fellow of the Australian Academy of Law, the Co-
Chair of the Class Actions Committee of the Law Council and the Co-
Chair of the Transnational Litigation Committee. He also serves as a
member of two Federal Court of Australia national liaison committees
(one on Class Actions and the other on Practice and Procedure), and
as a member of the Editorial Board of both the Journal of Equity and
also the Journal of Civil Litigation and Practice.
Jones Day is a global law firm with more than 2,500 lawyers in 43 offices across five continents. The Firm is distinguished by: a singular tradition of
client service; the mutual commitment to, and the seamless collaboration of, a true partnership; formidable legal talent across multiple disciplines and
jurisdictions; and shared professional values that focus on client needs.
Jones Day has long recognised the growing role of Australia in the global economy. The Firm expanded to Australia in 1998 with its first office in
Sydney and opened offices in: Perth in 2014; Brisbane in 2016; and Melbourne in 2018. There are now more than 85 Jones Day lawyers practising
Australian law and providing market-leading capabilities on a wide range of services for clients.
Michael Legg is Of Counsel and has 20 years’ experience as a litigator
having practised in Australia and the United States. His practice
focuses on class actions, regulatory proceedings, and complex
commercial disputes. He has represented clients in Australian
Securities and Investment Commission investigations. He is also a
Professor at the University of New South Wales in Sydney, Australia.
Jones Day Australia
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Chapter 5
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Wolf Theiss
Holger Bielesz
Florian Horak
Austria
1 Bringing a Claim – Initial Considerations
1.1 What are the most common causes of actions taken
by or against financial institutions and service
providers in your jurisdiction?
In Austria, the most common causes of actions taken in financial
service disputes are:
■ investors’ claims for wrongful advice or wrongful prospectus
information;
■ loan or mortgage lawsuits; and
■ lawsuits against immoral or severe disadvantageous terms
and conditions from financial service entities.
1.2 What remedies are most likely to be awarded?
Civil proceedings are commenced by filing a lawsuit with the
competent court. Within the lawsuit the plaintiff has to include the
relief or remedy sought. Under Austrian law, there are three types of
lawsuits:
■ suit for performance;
■ Declaratory Action; or
■ suit for the creation, amendment or cancellation of a legal
relationship.
Most common in financial service disputes are suits for
performance, e.g. investors’ claims for wrongful advice and loan or
mortgage lawsuits.
In case of a sole monetary claim, which does not exceed the amount
of EUR 75,000, a payment order will be issued by the court. The
defendant may file an objection to the payment order within four
weeks after its service. In case no objection is filed in time, the
payment order becomes final and enforcement proceedings may be
initiated.
For non-sole monetary claims or claims which exceed the amount of
EUR 75,000, the defendant will be ordered to file a statement of
defence. The statement of defence has to be filed within four weeks
after the service of the claim, which is combined with the order to
file a statement of defence.
In case a sole monetary claim exceeds the amount of EUR 75,000,
or in case of non-sole monetary claims, the ordinary proceeding will
be initiated only if a statement of defence has been filed in time.
This also applies in case the defendant files an objection to the
payment order in time. After the taking of evidence has been
concluded by the court, the proceeding will be closed and a
judgment will be issued. In Austria, it is most common that the
judgment will be issued in writing.
In addition, there is the possibility to file a request for interim
remedies, e.g. preliminary injunctions. Such request may be filed
before filing a lawsuit or even during litigation proceedings. A
preliminary injunction will only be issued by the court if:
i. the defendant will prevent or endanger the enforcement of a
potential judgment by destroying, concealing or transferring
his assets; or
ii. the judgment would otherwise have to be enforced in a state
in which enforcement is not guaranteed by international
treaties or the laws of the European Union.
1.3 Who has a right of action in financial services
disputes? Does it make a difference if the customer is
an individual or a commercial entity?
Under Austrian law, there are no procedural restrictions as to who
may initiate proceedings. Thus, it is not relevant whether the
customer is an individual or a commercial entity.
1.4 Is third-party funding available in financial services
litigation (crowdfunding, maintenance, champerty,
etc.)? Does litigation insurance operate in your
jurisdiction and, if so, what are the implications for
this?
Third-party funding to obtain the necessary monetary funds to
initiate proceedings is allowed in Austria. Third-party funders will,
however, regularly only be interested in funding the case, if:
i. the aggregate amount in dispute is big enough to cover its
compensation;
ii. the litigation is successful; and
iii. the opponent is expected to dispose of the funds required to
satisfy a future court judgment.
In Austria, litigation insurance is available too. Litigation insurance
companies will not only cover the own costs of litigation
proceedings but also the opponent’s attorney fees and the court fee
in case the proceeding is lost. As the main barrier for customers are
the expected costs of litigation proceedings (see question 2.1),
litigation insurance may determine whether a customer decides to
bring/defend a case against a financial service entity or not.
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1.5 Are class action law suits available in your
jurisdiction? If so, has this impacted financial
services litigation? Has there been an increase in
class action suits post the financial crisis?
No, the Austrian civil procedural law does not provide the possibility
for class action lawsuits. Attempts at the level of the Ministry of
Justice did not translate into any legislative initiative, which was
mainly due to the resistance of the domestic entrepreneurship.
However, there is the possibility for – most frequently – consumer
organisations to initiate model proceedings by bringing claims for
parties who assigned their rights to such entities. The EU Commission
is currently working on a directive setting up rules for class actions.
2 Before Commencing Proceedings
2.1 What are the main barriers to financial service
litigation for customers? Are there exclusionary
clauses or duty defining clauses in customer
contracts which prevent customers from bringing a
case?
The main barriers to financial service litigation for customers are the
costs of litigation proceedings. According to Austrian law, the
losing party has to reimburse the costs of the proceeding to the
winning party (see question 4.2). Thus, customers may be reluctant
to initiate proceedings or defend a case.
Under Austrian law, a clause in customer contracts, which prevents
customers in advance of a dispute from bringing a case, would be
considered null and void.
2.2 Is there a time limit within which financial services
disputes must be commenced? If so, is it different
depending on whether proceedings are brought
before a regulatory body or before the courts? Does
the commencement of a regulatory process ‘stop the
clock’?
There are no specific time limits with regard to financial services
disputes. However, a claim can only be enforced within a litigation
proceeding if it is not time-barred. Therefore, the statute of
limitation has to be observed in advance of filing a lawsuit.
Under Austrian law, the statute of limitation is subject to the
substantive law which is applicable to the respective claim. In
general, the statute of limitation is 30 years. In addition, there is a
short statute of limitation of three years, which is applicable for, e.g.,
damage claims. The period for the statute of limitation commences
at the time the right could have been exercised for the first time. The
statute of limitation is suspended once a lawsuit has been filed with
the competent court and if the plaintiff properly pursues his claim.
There are no regulatory bodies in Austria, who are competent for
financial services disputes. Thus, the commencement of a regulatory
process does not inhibit the statute of limitation (but see question
3.4). To prevent a claim from being time-barred, a proceeding has to
be brought before the court.
2.3 Can parties in financial services litigation avail of
litigation and/or legal advice privilege? Are
investigations conducted by regulated bodies
considered ‘litigation’ in the context of privilege?
Austrian attorneys are bound to professional secrecy in accordance with
the Attorney’s Code of Professional Conduct. In Austria, professional
secrecy for lawyers is considered as one of the most important
obligations for lawyers. Thus, Section 9, paragraph 2 of the Austrian
Lawyers Act (“Rechtsanwaltsordnung”, “RAO”) sets forth the lawyer’s
duty of confidentiality regarding all matters that were disclosed to him
or her in his or her function as counsel; the non-disclosure of such
matters being in the interest of the client. Therefore, a lawyer has the
right and the obligation to deny testifying in court, or before any other
authority, if this would result in a disclosure of secrets out of the client
relationship (“attorney-client privilege”). Section 9, paragraph 3 RAO
prohibits circumventing this principle by, for example, interrogation of
employees of the lawyer or seizing communications.
In civil law proceedings the attorney-client privilege is regulated in
Section 321 of the Code of Civil Procedure (“Zivilprozessordnung”,
“ZPO”).
2.4 Are standard form master agreements used in your
jurisdiction for financial institutions (for example, the
ISDA Master Agreement)? How are they treated?
In Austria, it is standard for financial service entities to apply their
terms and conditions to all contractual relationships. If terms and
conditions are agreed on, they are determining the conditions of the
contract. Nevertheless, such terms and conditions may be
considered as immoral or severely disadvantageous to the customer
and in such case they will be declared null and void. The ISDA
Master Agreement is used by Austrian banks as well.
2.5 Are there any non-contractual duties which are
binding on financial services entities (for example, a
particular fiduciary duty or a code of conduct)? Can
they be contracted out of?
Yes. E.g. the pre-contractual duties of care, which any financial
institution has to observe when entering into contact with customers
in view of the future conclusion of the contract, are considered non-
contractual both under Austrian law and EU law (cf. Rome II
Regulation). The potential breach of such duties usually plays a
significant role in damage claims for alleged wrongful advice.
Further, claims based on prospectus liability are considered tort
claims, i.e. they exist irrespective of a contract.
3 Progressing the Case
3.1 Is there a specialist court or specialist judges for
financial services litigation?
The Austrian court system distinguishes between District Courts
and Regional Courts as the court of first instance. For financial
services litigation, District Courts are competent for monetary
claims up to an amount in dispute of EUR 15,000. If the claim
exceeds this amount, the proceeding has to be initiated at the
competent Regional Court.
In case a decision rendered by the District Court is appealed, the
Regional Court acts as the Court of Appeal. In case the Regional
Court was competent as the court of first instance, the appellate
proceeding takes place before the Higher Regional Court.
As the Austrian legal system is based on a three-instance proceeding,
the appeal decision of the Regional Court or the Higher Regional
Court may be appealed to the Austrian Supreme Court (subject to
certain limitations aiming to limit the third instance to cases of broad
legal relevance). The Supreme Court’s decision is final.
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With the exception of the city of Vienna, all Austrian courts are
competent for any and all matters of civil law, e.g. commercial law
and labour and employment law matters. In Vienna, there is a
special District Court for commercial matters in Vienna
(“Bezirksgericht für Handelssachen Wien”) and on a regional level
the Commercial Court Vienna (“Handelsgericht Wien”). Both
special Viennese Courts only deal with commercial matters, in case
the defendant is an entrepreneur. E.g. a claim filed by a financial
service provider against a consumer as customer may not be filed
with the District Court for commercial matters or the Commercial
Court Vienna.
Besides, there is also a special Labour and Social Court in Vienna,
which only deals with labour and employment or social law matters.
As the judges from the District Court for commercial matters in
Vienna and the Commercial Court Vienna are specialised in
commercial matters only, they also have a lot of experience in
financial services litigation and thus may be considered as specialist
judges.
3.2 Does the method of service of proceedings differ for
financial service litigation?
No, there are no special rules for the service of proceedings in
financial services litigation. In general, the service of proceedings is
regulated in the Service of Documents Act (“Zustellgesetz”). The
service of the document instituting proceedings is considered as an
act with authority.
3.3 Are there any specific pre-trial procedures that must
be followed for financial services litigation in your
jurisdiction? If so, what are they and what are the
consequences of not abiding by them?
No, there are no specific pre-trial procedures under Austrian law
that must be followed. However, there is the possibility to initiate a
non-mandatory alternative dispute resolution proceeding before
filing a lawsuit (see question 3.4).
3.4 Are there any alternative dispute resolution (ADR)
regulations that apply to financial services disputes in
your jurisdiction? Are ADR clauses typically included
in financial services contracts, and is ADR commonly
used to resolve financial services disputes in your
jurisdiction?
The Federal Act on Alternative Dispute Resolution in Consumer
Affairs (“Alternative-Streitbeilegung-Gesetz”, “AStG”) entered into
force on 14 August 2015. The provisions of the AStG are only
applicable for contracts entered into between an Austrian-based
entrepreneur and a consumer with his place of residence in Austria or
a country which is a signatory to the Agreement on the European
Economic Area. The AStG provides for procedural rules of alternative
dispute resolution proceedings before special arbitration bodies. With
regard to financial services disputes, the competent arbitration body is
the “Gemeinsame Schlichtungsstelle der Österreichischen Keditwirtschaft”. The initiation of such a proceeding is non-
mandatory and the proceeding is free of charge for the parties.
In Austria, alternative dispute resolution clauses are not typically
included in financial services contracts and according to our
experience they are not commonly used to resolve financial services
disputes. However, Austrian law encourages judges to initiate
settlement talks at the beginning of litigation proceedings. As
mediation has been implemented into the Austrian legal system by
the Law on Mediation in Civil Law Matters, there is also the
possibility for a judge to assign a mediator who will be present at the
court hearing. However, taking part in mediation is not mandatory
and the parties have to pay fees for the mediator if they agree to start
a mediation proceeding.
There is the possibility to conduct either stand-alone mediation
proceedings or a combination of arbitration and mediation. If a
settlement is reached through mediation, arbitration proceedings
can be initiated in order to render an arbitration award on the agreed
terms. In addition, parties who agreed to a written settlement in a
mediation procedure may also conclude a settlement within the
litigation proceeding. Such a settlement before an ordinary Austrian
court will be regarded as enforceable according to the Austrian
Enforcement Act (“Exekutionsordnung”, “EO”).
3.5 How are claims for negligent misstatement/mis-selling
dealt with in your jurisdiction?
There are no specifics applicable in such disputes from a
procedural law perspective, i.e. they are handled in the same way
as other civil and commercial law disputes. In practice, claims for
misstatement/mis-selling may be prospectus liability claims
governed by applicable Capital Market law and/or civil law, where
the investor seeks redress for a misled investment decision.
Besides, in cases where publication requirements had to be
observed, damaged investors may also file claims based on the
breach of ad hoc publicity requirements. Such duties are
considered protective laws, which is why damaged parties may
file claims for redress, if they made an investment or omitted to
divest because of a misleading ad hoc notice.
Finally, within contractual relationships, damage claims for
misstatement/mis-selling may be deducted from breaches of
contractual or pre-contractual duties of care, which includes the
duty to comply with information requirements. To what extent such
an information requirement exists is a matter of contract
interpretation and subject to assessment in the individual case.
3.6 How have unfair terms in contracts been interpreted
in your jurisdiction? Are there any causes of action or
defences available specifically to consumers? How
broad is the definition of a ‘consumer’ in your
jurisdiction?
Terms and conditions in contracts which are considered to be
immoral or severely disadvantageous to the customer will be
declared null and void. If a party to the proceeding is a consumer,
the strict provisions of the Austrian Consumer Protection Act
(“Konsumentenschutzgesetz”, “KSchG”) apply to the case.
According to Section 1 of the KSchG, a consumer is defined as “a
person who does not enter into the transaction in the course of his
business”. Thus, any transaction of an individual or a legal entity,
which is not part of his/her business, is considered to be a consumer
contract. The person, who wants to rely on the rights under the
KSchG, bears the burden of proof that it did not enter into the
specific transaction within the course of business.
3.7 How is data protection/freedom of information dealt
with in financial services litigation? Can a financial
services customer access their personal data? How is
commercially sensitive or confidential information
dealt with in the context of discovery or disclosure?
Judicial proceedings are public in Austria, which limits the
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possibility to keep personal data confidential. In addition, financial
service providers are not bound by statutory banking secrecy
towards a certain customer in case of a dispute against this very
customer.
Financial service providers are obligated by law to perform due
diligence on customers for anti-money laundering and terrorist
financing reasons. To comply with these provisions, financial
service providers have to obtain and verify information on the
beneficial ownership of their customers, including the details of the
beneficial interests held, their costumers’ identity, the purpose of the
intended business relationship, the origin of funds and the identity
of possible trustees. A financial services customer is entitled to
access his personal data held by the financial service entity.
Within the Austrian legal system there is no discovery and only very
limited disclosure. Practically speaking, each party presents the
documents and information it deems useful for its case. There are
means to compel the other party or a third party to disclose a specific
document by way of a court order. However, such request must be
very specific and the applicant must show a specific right to learn
the contents of the document. Also, only disclosure orders towards
third parties are enforceable, whereas a failure of the other party to
comply with a court order to disclose a specific document may only
lead to an unfavourable inference by the court.
Finally, in accordance with Directive (EU) 2016/943 of the European
Parliament and of the Council on the protection of undisclosed know-
how and business information (trade secrets) against their unlawful
acquisition, use and disclosure, on 28 December 2018, the Austrian
Civil Procedural Code was amended. According to Section 172,
paragraph 2 ZPO, the public may be excluded from oral hearings upon
request of a party of the proceeding if a trade secret has to be revealed
in order for the court to make its decision.
4 Post Trial
4.1 Is there a right of appeal in financial services
disputes?
Yes, as the general rules of civil procedural law are also applicable
in financial services disputes there is a right of appeal. A party to a
proceeding has a right of appeal as it was adversely affected by the
decision, e.g. the party did not completely prevail within the
proceeding.
Under Austrian procedural law, the deadline to file an appeal against
the first instance judgment is four weeks after its service. It is not
allowed to add any allegations in the appeal which were not raised
in the first instance proceedings. Appellate proceedings are mainly
decided on basis of the court file. Only in very rare cases the Court
of Appeal will take up evidence by itself.
The decision of the Court of Appeal may also be appealed to the
Supreme Court within four weeks after its service (subject to certain
conditions).
4.2 How does the court deal with costs in financial
services disputes?
There are no special rules on costs in financial services disputes but
the general rules of cost reimbursement are also applicable.
According to the Austrian Code of Civil Procedure, the winning
party is entitled to cost reimbursement by the losing party.
However, if either party partly prevails, the costs are divided on a
pro rata basis.
Under Austrian law, costs for litigation, including financial services
disputes, mainly consist of court fees, attorney fees and
disbursements (e.g. expert opinions, travel cost compensation for
witnesses, translation costs). Court fees are regulated in the Act on
Court Fees (“Gerichtsgebührengesetz”). The court fees depend on
the amount in dispute. Court fees have to be paid in advance upon
filing the claim. Further court fees will be triggered upon filing an
appeal or a revision.
Attorney fees are regulated in the Act on Attorney’s Tariffs
(“Rechtsanwaltstarifgesetz”) and also depend on the amount in
dispute. Subject to cost reimbursement are fees only according to
the Act on Attorney’s Tariffs. Thus, the losing party is not obligated
to reimburse higher fees paid to the attorney according to a separate
fee agreement (e.g. hourly rates).
The decision on the costs is included within the judgment. The cost
decision may also be appealed separately by the losing party. If the
judgment is only appealed with regard to the cost decision, the
deadline to file such an appeal is two weeks after the service of the
decision.
5 Cross-Border Issues
5.1 What issues typically arise in cross-border disputes
or investigations involving financial institutions and
how are they catered for in your jurisdiction?
Cross-border financial services disputes in Austria have – in recent
years – been characterised by extensive disputes on jurisdiction.
Further, conflict of laws questions come up, in particular with
respect to disputes filed by consumers.
A cross-border situation typically arises if Austrian customers file
suit against non-domestic financial institutions in Austria at the
place of their respective domicile. Plaintiffs do so on the basis of
Article 7, no. 1 of the Brussels Ia Regulation, which allows for
bringing an action at the place of performance of a contract.
Depending on the circumstances, consumers may rely on Article 17
et seq. of the said regulation, which provides for additional rights to
sue at the place where the consumer is domiciled. Finally, claims
based on tort may be filed at the place of the damaging event or
where the damage occurred pursuant to Article 7, no. 3 of the
regulation. These alternative places of jurisdiction triggered
referrals to the ECJ for preliminary rulings by the Austrian courts
and recently the Supreme Court issued several decisions, which
should clarify the jurisdictional issues to some extent (cf. question
7.3). More rarely, claims are brought on the basis of an agreed place
of jurisdiction (Article 25).
While the applicable private international law framework, in
particular the Rome I and II Regulations including Austrian
domestic conflict of laws rules, generally allow for the parties to
freely decide on the applicable law, this choice is limited in
contractual relationships involving consumers, which are often on
the plaintiff’s side in financial services disputes. In the first place,
Article 6 Rome I Regulation provides that contracts entered into by
consumers in an EU Member State, in which the entrepreneur is
commercially active, must not deviate from the mandatory rights of
the consumer applicable in that Member State by way of a choice of
law clause. This does not affect the validity of a choice of law
clause with respect to the rights and obligations which constitute a
financial instrument and other aspects related to transferable
securities and units in collective investment, other than financial
services (Article 6, paragraph 4, letter d Rome I Regulation).
Additional protective rules apply if the parties opt out of the
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otherwise applicable law of an EEA Member State into a third-state
law. Finally, Austrian law explicitly foresees that general contract
terms have to comply with the general Austrian law transparency
and validity requirements, no matter which law is applicable to the
respective contract (Section 13a KSchG).
5.2 What is the general approach of the courts in your
jurisdiction to co-operating with foreign courts or
regulatory bodies or officials in financial services
disputes (including investigations)?
There are no specific rules for international judicial co-operation in
financial services disputes. Generally, the Austrian courts grant
judicial assistance upon request of foreign courts dealing with civil
and commercial law disputes. Likewise, the Austrian courts make
use of the opportunity to obtain evidence from foreign courts for the
purposes of conducting proceedings before them. Especially within
the European Union, mutual judicial assistance in civil law
proceedings has been substantially improved following the
enactment and several years’ practice with the Evidence Regulation
No. 1206/2001. The regulation provides for a variety of measures
simplifying and accelerating judicial assistance ranging from
service of process to evidence-taking, in particular collecting
documentary evidence located outside the court’s jurisdiction or the
examination of witnesses residing abroad. Further, Austria ratified
the Hague Convention of 1954 on Civil Procedure relating to
international judicial jurisdiction (but not the Hague Convention of
1970 on the Taking of Evidence). Finally, judicial assistance is
facilitated by way of bilateral agreements with numerous states.
Even in the absence of any international law instrument, Austria
generally grants judicial assistance to any requesting state in
accordance with the diplomatic standards.
5.3 Is extra-territorial jurisdiction typically asserted in
your jurisdiction and, if so, in what circumstances?
The means for the Austrian courts to exercise extra-territorial
jurisdiction are limited. Generally, regarding financial services
disputes, the Austrian courts would only assume jurisdiction if there
is a sufficiently strong connection to Austria. However, while in
former times, this “sufficiently strong connection to Austria” was
independently assessed and could theoretically be denied, even if an
Austrian seized court had jurisdiction based on applicable civil
procedural law, the Austrian courts are nowadays deemed
competent if – based on the applicable law – the claimant can
establish an Austrian place of jurisdiction.
Depending on the circumstances, these rules may lead to far-
reaching competences of the Austrian courts to decide on cases with
a strong extra-territorial nexus (even though they may not be
considered as pure examples of extra-territorial jurisdiction). E.g.
outside the scope of the Brussels Ia and Lugano Conventions,
Austrian law still foresees the possibility to sue a defendant in
Austria, because the defendant has assets there, without requiring
any additional connection to Austria. Further, within the scope of
the Brussels Ia Regulation, foreign companies (based elsewhere
within the EU) may be sued before an Austrian court for various
reasons, e.g. based on the place of performance of a contract or
based on the place of the occurrence of a damage giving rise to a tort
claim. Further, consumers based in the EU may file a lawsuit at the
place where they are domiciled against their contract partners under
the prerequisites of Article 17 et seq. Brussels Ia Regulation, even if
the contract partners are not domiciled in the EU at all.
5.4 Are unilateral jurisdiction clauses valid and
enforceable in your jurisdiction?
In general, unilateral jurisdiction clauses cannot be validly agreed in
(financial services) contracts towards consumers, because under both
the regime (and the prerequisites of the above-mentioned Article 17
et seq.) of the Brussels Ia Regulation and under Austrian domestic
procedural law consumers are entitled to file lawsuit at the place of
their domicile and their contract partners have to file lawsuit at the
place where the consumer is domiciled (Section 14 KSchG).
To the extent the above limitations do not apply, Austrian law does
not exclude unilateral jurisdiction clauses. It cannot be ruled out
that, in some instances, the courts may view them as problematic, if
they confer to one party a particularly stronger contractual position
than to the counterparty, but this will likely have to be considered in
light of the overall rights and obligations of the contractual parties
and not solely with a view to the forum clause.
6 Regulated Bodies
6.1 What bodies, apart from the courts, regulate financial
services disputes in your jurisdiction?
Financial services disputes are solely decided by the courts and
arbitral tribunals. In contrast, the diverse tasks of the Austrian
financial regulatory bodies (mainly the Financial Market Authority
(“FMA”) and the Austrian National Bank) relate to the general
supervision of banks, insurance companies and pension funds and
the supervision of securities.
The supervision of the FMA also extends to the conduct of financial
institutions in providing customer advice and information, when
dealing with customers in general. This supervision may lead to rules,
which the financial institutions have to observe. E.g. in the context of
foreign currency loans the FMA issued minimum standards in order to
assist the gradual reduction of the risks stemming from such loans both
for customers and the banks. These minimum standards have, however,
no bearing on specific disputes with certain customers, although the
courts may draw a negative inference on the bank if a dispute arises and
the FMA’s standards have not been observed in the specific case. The
FMA is not allowed to interfere with the individual contractual
relationship between the financial institution and the customer.
The Austrian National Bank also assumes a supervisory role as to
the conduct of banks active in Austria. The Austrian National Bank
generally does so together with the FMA. Again, these tasks do not
interfere with the individual contractual relationships between
banks and their customers.
6.2 What powers (investigative/inquisitorial/
enforcement/sanctions) do these regulatory bodies
have?
While the powers of the above-mentioned regulatory bodies – the
FMA and the Austrian National Bank – over the supervised financial
institutions are fairly wide, these powers do not extend to resolving
financial services disputes.
6.3 Are the decisions of regulatory bodies binding on the
parties to a financial services dispute?
The Austrian regulatory authorities cannot issues any decisions to
resolve financial services disputes.
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6.4 What rights of appeal from regulatory decisions
exist?
The decisions of the regulatory bodies are subject to appeals within
the administrative process, an appeal primarily leading to the First
Instance Administrative Court (Verwaltungsgerichte) and the
Administrative Court (Verwaltungsgerichtshof) including the
Constitutional Court (Verfassungsgerichtshof). Yet, these decisions
relate to the rights and obligations of the affected financial
institution based on applicable regulatory law. In contrast, any and
all financial services disputes have to be resolved by the civil courts
and do not require or allow the interference of the mentioned
regulatory bodies.
6.5 Are decisions of regulatory bodies publicly
accessible?
The FMA is requested by law to publish certain relevant information
including administrative law decisions on its website. These include
the imposition of sanctions on affected financial institutions, decisions
regarding the regulatory status of the supervised institutions,
withdrawal of concessions, etc. In view of the tasks of the FMA, none
of these decisions concern individual financial services disputes.
7 Updates – Cases and Trends
7.1 Summarise any legislative developments in this area
expected in the coming year. Describe any practical
trends in your jurisdiction (e.g., has the financial
crisis impacted legislation? Has there been an
increase in the powers of regulatory bodies as a
reaction to the crisis? Has there been a change in the
amount and type of cases being brought by and
against financial service providers?).
The aftermath of the financial market crisis led to a massive increase
of court disputes, which did affect the financial services sector to a
significant degree. In terms of legislative changes, both the EU and
the national legislator increased the duties of care incumbent on
financial institutions when advising on the risks involved with
financial products. A major recent milestone was the
implementation of the MiFiD II directive by the EU Member States,
which was due by 3 January 2018. The impact of the legislative
changes of the recent years on the Austrian courts’ case law remains
yet to be seen, but it can be expected that the courts will take these
regulatory law rules into consideration when assessing claims filed
by investors for wrongful investment advice going forward.
Currently, investors’ claims for wrongful advice are declining. At
the same time, more disputes initiated by consumer associations
against financial institutions challenging purportedly unlawful or
“non-transparent” contractual terms could be noticed. The Austrian
Supreme Court developed a fairly strict regime, which imposes
hardship on the industry to ensure compliance with all consumer
protection rules.
Further, digitalisation in the financial market industry brings about
challenges, which is likely to have an effect on future financial
services litigation work. Not very different from other regions,
“Fintech” companies are currently fighting for market shares in the
financial services sector, which does not only increase competition
in the market. Some raise concerns from a consumer protection
perspective and claim that small customers may be lured into a
greater risk exposure including loans at excessive interest rates.
Finally, the EU Commission plans to implement a directive on
representative actions for the protection of the collective interests of
consumers. As things stand today, the directive shall also include
disputes in the domain of financial services and may facilitate the
filing of lawsuits by a larger number of customers against financial
institutions. This would bring about significant changes in Austria
in particular, where a specific statutory regime for collective action
proceedings has so far not been implemented.
7.2 On an international level, would your jurisdiction be
considered to be more financial institution- or
customer-friendly?
The case law differentiates between the types of cases affected,
which make a general answer difficult. The above-mentioned case
law on general contract terms used by banks and other financial
institutions is clearly in favour of consumers, while the financial
service providers are struggling to bring their terms and conditions
in line with the equivalence and transparency requirements imposed
by the Supreme Court. In contrast, the case law became fairly strict
towards claimants in the context of time limitation periods for
pursuing damage claims. A sizeable number of cases filed against
banks, e.g. in the context of FX loans which had been marketed very
widely in Austria years ago, were rejected, because the courts
considered them time-barred. Other cases must be considered in
light of their individual facts and do not seem to weigh in favour of
one particular side. It is fair to say that the courts do expect a certain
degree of diligence even from consumers with respect to simple
financial products. In contrast, the more complex the financial
product, the harder it is for the responding service provider to prove
compliance with its advisory duties.
7.3 Please identify any significant cases regarding
financial services disputes during the past 12 months.
Please highlight the significance of the case(s), any
new or novel issues raised and what lessons can be
drawn from them.
The case law in the field of financial services disputes is abundant.
A major part of cases concerns representative actions challenging
general contract terms used by banks. Other proceedings concern
damage claims filed by retail investors based on wrongful advice
including prospectus liability claims. Below we set out some
examples which we consider illustrative, without providing an
exhaustive list:
■ Recently, the Austrian Supreme Court had to decide on the
determination of the place of jurisdiction for claims based on
prospectus liability. The cases dealt with the difficulties
identifying “the place of the damaging event” for the
purposes of Article 7 (2) Brussels Ia Regulation in such cases.
In a case decided in July 2017 the Supreme Court denied
jurisdiction of the Austrian courts, since the prospectus in
dispute had been issued abroad and the investor had made the
investment outside Austria as well. In a couple of other
subsequent cases, the facts were more complex. Therefore,
the Supreme Court requested a preliminary ruling from the
ECJ, which was rendered in September 2018. The
underlying facts concerned one out of a bundle of lawsuits
against an international bank based on the Brussels Ia
Regulation. While the ECJ had already denied the
jurisdiction of the Austrian courts based on contract and
consumer contract jurisdiction a couple of years earlier (in
case C-375/13, Kolassa v. Barclays Bank plc, with a view to
the non-contractual nature of prospectus liability claims), it
recently confirmed that under specific conditions, which
establish a sufficiently strong connection of the claim to the
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place of the claimant’s domicile, the claimant may file a
prospectus liability claim based on tort at the place of his own
domicile (ECJ C-304/17, Helga Löber v. Barclays Bank PLC).
■ In another case decided by the Austrian Supreme Court on 28
September 2017, the Austrian Consumers’ Association
(“VKI”) had filed a representative action against an Austrian
bank concerning a clause in the bank’s general terms regarding
notifications to customers via e-banking. It was questionable
whether a general contract clause was valid stating that upon
the customer’s consent the bank was allowed to send notices
and statements only electronically. The issue tied into the
interpretation of Directive 2007/64/EC requiring the financial
institutions to provide such information in a “durable” manner.
The ECJ ruled that the electronic transmission is in compliance
with the Directive if the communication is stored in a way that
the customer may access it and reproduce it unchanged for an
adequate period. Further, the service provider needs to actively
draw the customer’s attention to new information available on
the service provider’s website. Based on the preliminary ruling
by the ECJ, the litigious clause was found impermissible by the
Supreme Court.
■ Further, the Austrian Supreme Court rendered a couple of
decisions clarifying whether banks which provide a loan to
their customer may be obligated to pay interest to their
customers in case of negative interest rates:
■ In two cases decided in March and April 2017 the
Supreme Court ruled that in view of the normal terms of a
loan contract and the mutual understanding of the parties,
the bank cannot be expected to pay interest to a customer
for borrowing money from the bank. Therefore, the bank
was allowed to freeze the interest rate at zero per cent,
even though the negative interest rate would theoretically
result in an interest claim of the customer towards the
bank.
■ In two more cases decided in May 2017 a loan had to be
assessed, where the interest rate consisted of a fixed and a
variable interest component, the variable interest rate
being negative. The bank claimed that it was at least
entitled to charge the customer the fixed interest
component, which the Supreme Court denied. A negative
variable interest rate may therefore reduce the fixed
interest rate component accordingly. The Supreme Court
confirmed these decisions in a couple of subsequent cases.
7.4 Have global economic changes caused any changes
to financial services litigation/regulation in your
jurisdiction?
In the years following the 2008 financial crisis, financial services
litigation played a significant role before the Austrian courts. In
particular, damage claims filed by retail investors for wrongful
advice or wrongful prospectus information were responsible for
capacity restraints before the courts. The sheer number of these
lawsuits and their complex nature contributed to the significance of
these litigation cases in Austria after 2008. Nowadays, such claims
are in decline as many cases not yet filed with the court are under
increased risk of being rejected as time-barred. This decline does
not seem to have been compensated by new cases.
Obviously, the Austrian regulator reacted to the difficulties caused
by the financial market crisis both for the banks and for their
customers. Although the FMA is not permitted to interfere with
individual disputes, the authority issued guidelines to address
general problems between the banks and their customers. One
example is the measures taken by the FMA in the context of the
Swiss franc loans, which used to be a very favourable and
widespread in Austria before they were practically banned by the
FMA for consumers.
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Holger Bielesz
Wolf Theiss
Schubertring 6
1010 Vienna
Austria
Tel: +43 1 515 10 5620 Email: [email protected] URL: www.wolftheiss.com
Florian Horak
Wolf Theiss
Schubertring 6
1010 Vienna
Austria
Tel: +43 1 515 10 5623 Email: [email protected] URL: www.wolftheiss.com
Holger Bielesz is a member of the Dispute Resolution team in Vienna.
He specialises in civil and commercial litigation and arbitration, and
also represents clients in high-profile white-collar crime cases. Holger
regularly advises clients in relation to financial services disputes,
internal investigations, bribery and corruption cases, as well as
general commercial disputes. Holger also acted as party’s counsel
before the European Court of Justice. He is a postgraduate of the
College of Europe, a highly reputed academic institution in the domain
of European Union law. Before joining Wolf Theiss, Holger gained in-
depth professional expertise in EU law at a high-profile international
law firm in Brussels.
Wolf Theiss is one of the leading law firms in Central, Eastern and South-Eastern Europe (CEE/SEE). We have built our reputation on a combination
of unrivalled local knowledge and strong international capability. Our team now brings together over 340 lawyers from a diverse range of
backgrounds, working in offices in 13 countries throughout the CEE/SEE region.
Over 80% of our work involves cross-border representation of international clients. Our full range of services covers: Banking & Finance; Business
Crime; Capital Markets; Competition & Antitrust; Compliance; Corporate / Mergers & Acquisitions; Dispute Resolution; Employment Law; Energy &
Renewables; Infrastructure; Intellectual Property & Information Technology; International Arbitration; Investment Funds; Life Science; Real Estate &
Construction; Regulatory & Procurement; Retail; and Tax.
We have concentrated our energies on a unique part of the world: the complex, fast-developing markets of the CEE/SEE region. Through our
international network of offices, we work closely with our clients to help them solve problems and create opportunities.
For more information go to the interactive web profile by following this link: http://brochures.wolftheiss.com/de/zudhJrSO/short-firm-profile.
Florian Horak is a member of the Dispute Resolution team in Vienna.
His main practice areas are civil and commercial litigation and white-
collar crime disputes, including bribery and corruption, fraud and
compliance. Florian regularly advises clients in relation to financial
services disputes, internal investigations, bribery and corruption
cases, as well as general commercial disputes. Florian has extensive
experience in both court litigation and out-of-court dispute resolution.
He has a law degree from the University of Vienna.
Wolf Theiss Austria
29
Chapter 6
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Trench Rossi Watanabe Advogados
Giuliana Bonanno Schunck
Gledson Marques De Campos
Brazil
1 Bringing a Claim – Initial Considerations
1.1 What are the most common causes of actions taken
by or against financial institutions and service
providers in your jurisdiction?
In Brazil, the most common causes of action brought against banks
and other financial institutions are claims alleging breach of
consumer protection rules. Commercial banks and financial entities
that grant loans for individuals and legal entities usually have a high
number of lawsuits and consumer claims filed against them. There
are several factors driving this phenomenon, one of the main factors
being the high level of interest rates practised in Brazil. These
claims usually challenge accrual of interest, excessive rates, lack of
suitability over-indebtedness, etc.
Lawsuits claiming the payment of moral damages to bank clients
that complain about improper listing of the name of the debtor in a
public list of debtors are another major type of claim. These claims
are divided into lawsuits filed by bank clients against financial
institutions, and counterclaims filed in connection with collection
lawsuits and foreclosures filed by the banks against debtors. The
claims are usually grounded in statutory consumer laws and alleged
contractual breach derived therefrom.
Judicial disputes involving large commercial debtors are rare, but
when a dispute arises it usually involves a challenge to the form of
calculation of interest rate (e.g., accrual) and other alleged unfair,
excessive or non-transparent practices in respect to calculation of
interest and costs and charges. It is also common to have arbitration
in more sophisticated contracts.
1.2 What remedies are most likely to be awarded?
Customers that feel damaged by any action of financial institutions
may:
■ seek damages;
■ request the termination of the agreements;
■ request the specific performance of an obligation, or the
performance of any obligation by the financial institution, if
applicable; or
■ request injunctive reliefs (e.g., to stop payments until a final
decision on the merits of the case).
These are the most common remedies, but customers may also seek
other remedies, if applicable, depending on the case.
1.3 Who has a right of action in financial services
disputes? Does it make a difference if the customer is
an individual or a commercial entity?
Anyone that feels damaged has a right of action in financial services
disputes. However, although there are several suitability rules in the
laws and regulations, applicable specifically to Brazilian financial
institutions, claims alleging mis-selling of financial products are
usually grounded in the Brazilian Consumer Code. The Brazilian
Consumer Code has certain general rules that allow these claims.
Such rules encompass the obligation of the service provider to
provide correct information regarding the features of the product,
establishing that the consumer must be treated as the weak party of
the contractual relationship and be treated accordingly.
Breach of suitability rules or mis-selling of financial products
usually expose the sellers to regulatory sanctions, but judicial claims
are more likely to be grounded in consumer legislation.
1.4 Is third-party funding available in financial services
litigation (crowdfunding, maintenance, champerty,
etc.)? Does litigation insurance operate in your
jurisdiction and, if so, what are the implications for
this?
Third-party funding is available to financial services litigation in the
same sense it is available to any other kind of dispute. Litigation
insurance is available but not usually used in Brazil.
1.5 Are class action law suits available in your
jurisdiction? If so, has this impacted financial
services litigation? Has there been an increase in
class action suits post the financial crisis?
Yes, class actions and other collective claims can be filed by certain
class entities, the District Attorney and other persons ‘in
substitution’ (or on behalf) of the customers or the damaged parties.
Regulatory authorities (such as the Brazilian Securities and
Exchange Commission – CVM – which is the regulatory agency in
charge of the regulation of public offering of securities, registering
listed companies, securities public trading, custody of securities and
supervision of publicly traded companies, among other things
(pursuant to Law No. 4,595/64, only a licensed financial institution
may perform banking and finance activities such as the collection,
intermediation and investment of its own or third parties’ funds))
may act as assistant to the plaintiffs or defendants, in the role of
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‘amicus curiae’ (i.e., the person that is assisting with the application
of the law).
No, the financial crisis has not impacted litigation as the Brazilian
financial system had been already regulated in the areas that proved
more problematic during the financial crisis of 2008 (e.g., real estate
finance and derivatives).
2 Before Commencing Proceedings
2.1 What are the main barriers to financial service
litigation for customers? Are there exclusionary
clauses or duty defining clauses in customer
contracts which prevent customers from bringing a
case?
In general, except for court costs that may be high (it varies from State
to State but may be equivalent to 1% of the amount in dispute), there
are no obstacles for customers to file financial services litigation.
Court costs may also be avoided if the customer is an individual and
can prove that they cannot support the court costs. It is rare to have
clauses preventing customers from bringing a case as, from a
Brazilian law standpoint, provisions in this regard may be considered
abusive and so disregarded by courts. As most of the financial
institutions’ agreements are standard forms, usually customers cannot
change or discuss the language being proposed, so in case of abusive
clauses they will be either disregarded (especially if the customer is an
individual and, in such case, the rules of the Brazilian Consumer Code
will apply) or interpreted in the most favourable way to the customer
(according to the Brazilian Civil Code).
2.2 Is there a time limit within which financial services
disputes must be commenced? If so, is it different
depending on whether proceedings are brought
before a regulatory body or before the courts? Does
the commencement of a regulatory process ‘stop the
clock’?
The time limit is related to the statute of limitations provided in
statutes. For claims involving consumers, the statute of limitations
is five years from the moment the consumer suffered the damage or
from the moment the specific fact that gave rise to the lawsuit
occurred. If claims do not involve consumers, the statute of
limitations may vary. It may be three years depending on the
customer allegation or 10 years – the general rule of the Civil Code.
2.3 Can parties in financial services litigation avail of
litigation and/or legal advice privilege? Are
investigations conducted by regulated bodies
considered ‘litigation’ in the context of privilege?
Privilege can be availed by the parties concerning communications
exchanged with lawyers. Also, banking secrecy is respected in
Brazil, but it does not prevent financial institutions from being
ordered to present information in court if necessary. This is because
information that is secret or confidential (such as banking, business
and industry secrets) is protected, and if it must be presented in court
the lawsuit will be sealed so that only the parties involved will have
access to that information, and the confidentiality or secrecy will not
be spoiled. The party cannot simply allege that it will not present
the information because it is confidential or secret. If that piece of
information is really necessary for the comprehension or
understanding of the case and the party holds the information, the
party will need to present it (and may request the case to be sealed
to guarantee confidentiality); otherwise, the case may go against
that specific party because the right was not properly evidenced.
The same happens with witness evidence. If the witness testifies
regarding confidential information, the case will be sealed and no
third parties will have access to it. Only in the case of certain
specific professionals (for example, doctors) will the testimony be
dismissed just because the information is confidential.
The discovery concept (as it is defined in common law, with fishing
expeditions, etc.) does not apply in Brazilian law. Each party is
required to produce evidence in its favour, but the party cannot
simply take information that the other party does not want to
voluntarily disclose.
However, if the judge understands that a party could have presented
a document or piece of information that was important to the
interpretation of the facts, but that did not occur, the judge is
allowed to hold adverse inference because of the failure of that party
to provide that piece of evidence.
Communications between financial institutions and regulatory
bodies are covered by banking secrecy laws. The data exchanged
between them may not be disclosed to third parties and are not
publicly available.
2.4 Are standard form master agreements used in your
jurisdiction for financial institutions (for example, the
ISDA Master Agreement)? How are they treated?
Yes, standard form master agreements are usually accepted and
enforced, to the extent that they have been validly entered into by
parties with adequate capacity to contract. Their purpose is lawful
and is determined to be achievable. In agreements used for mass
products (such as bank accounts, consumer loans, etc.), such
standard forms are not negotiated by the parties; on the contrary,
these agreements are viewed as ‘adhering agreements’. These
adhering agreements are more favourable to the adhering party and
the Brazilian Consumer Code is applied to overrule any conflicting
clause or any clause that may be viewed as jeopardising the
relationship causing damage to the customer.
In respect to standard form agreements, which are more complex
and sophisticated, and have certain conditions subject to negotiation
(such as International Swaps and Derivatives Association
agreements), courts may construe these agreements in a more
balanced manner and interpret the agreement from a more literal and
objective standpoint. However, because of the risk that courts apply
general principles of civil law, which may lead to equitable
decisions that are detrimental to objective decisions based on the
literal construction of the agreement, financial institutions and their
clients generally rely on arbitration clauses in case of more
sophisticated agreements. Thus, most of the more complex standard
form agreements include arbitration as means for dispute resolution.
2.5 Are there any non-contractual duties which are
binding on financial services entities (for example, a
particular fiduciary duty or a code of conduct)? Can
they be contracted out of?
In Brazil, there is an implied duty of good faith in all contracts (not
only financial). In fact, the Brazilian Civil Code sets forth:
■ in article 113 that the contracts or transaction shall be
interpreted according to good faith and the practice of the
place in which they were formed; and
■ in article 422 that the contracting parties shall observe the
principles of probity and good faith, both in entering into the
contract and in its performance.
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Although article 422 does not mention the phases prior to the
execution of the contract and after the performance is concluded,
our scholars and court decisions understand that the parties shall
observe good faith before execution (i.e., during the negotiations of
the contract), at the performance of the contract and after the
contract has already been concluded or terminated.
The characteristics of good-faith duties may vary according to the
parties involved, the practices of the specific market, etc., as per
article 113 mentioned above.
The duty of good faith also determines that the parties should
behave consistently, so that unexpected changes in their behaviour
will be interpreted as a breach of the duty of good faith (similar to
the common law concept of estoppel).
The good-faith duty in contracts set forth in Brazilian law has its
origins in German law and is also very similar to what is provided in
the Principles of European Contract Law and in the International
Institute for the Unification of Private Law Principles.
For financial institutions, the duty of good faith may also
encompass, depending on the specific product, the fiduciary duty
and the duty of care, meaning that the financial institution shall act
in the best interests of the customers (especially in case of funds,
among other things).
In addition, for financial institutions and their customers, a large
portion of the contracts may fall into the category of consumer
contracts, as most of the time the customer purchases or uses the
products or services as the final addressee or beneficiary (as per
article 2 of the Brazilian Consumer Code).
In such cases, the interpretation of the duties of good faith is even
stricter as the consumer, considered to be vulnerable, is protected by
certain concepts of the Brazilian Consumer Code. This provides
greater obligations to the service provider in terms of disclosure of
accurate and complete information.
On the other hand, when the customer is sophisticated or has great
knowledge of the financial market, the judges tend to interpret their
condition as a consumer with more flexibility and in a less strict
manner.
Thus, in summary, the effects of the duty of good faith on financial
services litigation are normally associated with:
■ complete and accurate information provided by the financial
institution to the customer (mainly when they may be
considered consumers); and
■ the duty of care (i.e., to act diligently with the resources of the
customer).
As the duties that arise out of good faith cannot be described
beforehand (i.e., only after a certain situation occurs will it be
possible to verify if the parties acted according to them) Brazilian
law does not authorise the parties to exclude them from an
agreement.
3 Progressing the Case
3.1 Is there a specialist court or specialist judges for
financial services litigation?
No, Brazil does not have specialist courts or other arrangements for
financial services disputes. The regular State courts entertain
jurisdiction to hear financial cases. Depending on the city where the
case will be held, there are some special State courts for corporate
issues in general that will hear financial cases, particularly when
they do not involve consumer contracts (in such cases, the regular
court will hear the case).
There are no specific requirements for a case against a financial
institution to be heard in court. The general requirements for civil
procedure apply for such cases (meaning payment of court costs,
correctly presenting the case, etc.).
All Brazilian judges start their career in public examinations. There
are special requirements for judges in the Superior Court of Justice
(the final court to decide on federal laws) and in the Supreme Court
(the final court to decide on constitutional law), who are appointed
by the Brazilian President after certain other specific approvals.
3.2 Does the method of service of proceedings differ for
financial service litigation?
No, service of process will follow the general rules provided by the
Brazilian Code of Civil Procedure.
3.3 Are there any specific pre-trial procedures that must
be followed for financial services litigation in your
jurisdiction? If so, what are they and what are the
consequences of not abiding by them?
No, there are no specific pre-trial procedures for financial services
litigation.
3.4 Are there any alternative dispute resolution (ADR)
regulations that apply to financial services disputes in
your jurisdiction? Are ADR clauses typically included
in financial services contracts, and is ADR commonly
used to resolve financial services disputes in your
jurisdiction?
No, the general rules of ADR also apply to financial services
disputes. As mentioned above, especially for more sophisticated
contracts, the parties usually include arbitration provisions in the
contracts. Arbitration is very serious and well recognised in Brazil
in general (not only for financial services disputes).
3.5 How are claims for negligent misstatement/mis-selling
dealt with in your jurisdiction?
Claims of misstatement/mis-selling typically involve breach of the
good-faith duty (lack of accurate and complete information to the
customer, i.e., whether the bank has fully disclosed the risk to the
customers) and lack of diligence of the bank in informing the
customers that they could stop losses. In consumer cases, it is also
common to see customers alleging that banks did not act in good
faith when applying abusive interest rates, or regarding other issues
related to loan contracts. Claims based on breach of fiduciary duties
may expose the defendant to damages, which in all cases must be
proven and quantified. Also, damages must be proven to have been
caused directly by the action or omission of the defendant. Brazilian
laws do not allow claims for punitive damages, and jury trials do not
apply to litigation other than certain criminal offences that are life-
threatening.
3.6 How have unfair terms in contracts been interpreted
in your jurisdiction? Are there any causes of action or
defences available specifically to consumers? How
broad is the definition of a ‘consumer’ in your
jurisdiction?
Unfair terms in contracts are usually interpreted to the benefit of the
customer because most of the time unfair terms are contemplated in
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general forms. In case of consumer disputes, the unfair term can be
either disregarded or interpreted to favour the consumer, according
to the Brazilian Consumer Code. In contracts which are not
governed by the Brazilian Consumer Code but by the Civil Code the
unfair term may be interpreted to the benefit of the customer if there
is any interpretation dispute. According to article 2 of the Brazilian
Consumer Code, the consumer is the customer that purchases or
uses the products or services as the final addressee or beneficiary. It
is not relevant if the customer is an individual or an entity, both can
be considered consumers. However, the provisions of the Brazilian
Consumer Code are, in some cases, more protective to individuals.
3.7 How is data protection/freedom of information dealt
with in financial services litigation? Can a financial
services customer access their personal data? How is
commercially sensitive or confidential information
dealt with in the context of discovery or disclosure?
As mentioned above, banking secrecy is respected in Brazil, but it
does not prevent financial institutions from being ordered to present
information in court if necessary. Please refer to question 2.3 above
for more details.
Customers can access their data and may request court to force
financial institutions to present their data.
Note that Brazil has a new General Data Protection Law (GDPL)
which is not in effect yet and will likely be in force in August 2019
(its effectiveness may be changed, as has already occurred in the
past). The GDPL will still allow financial institutions to use
confidential information in court to support their interests and
allegations.
Also, as mentioned in question 2.3 above, the discovery concept (as
it is defined in common law, with fishing expeditions, etc.) does not
apply in Brazilian law.
4 Post Trial
4.1 Is there a right of appeal in financial services
disputes?
Yes, in Brazil, the parties can appeal after a decision is issued by the
trial court and in some cases even after a decision is issued by the
Court of Appeals.
4.2 How does the court deal with costs in financial
services disputes?
Costs follow the general rules. The plaintiff is normally the one that
pays court costs to commence the lawsuit (around 1% of the amount
in dispute), costs for an expert investigation, etc. However, if the
plaintiff alleges that it cannot support court costs, it can be granted
financial aid and be exempted from costs.
5 Cross-Border Issues
5.1 What issues typically arise in cross-border disputes
or investigations involving financial institutions and
how are they catered for in your jurisdiction?
It is not usual to have cross-border litigation involving disputes
between private parties. Usually, such cases involve criminal
issues. Brazilian courts tend to cooperate in cross-border disputes
or investigations but sovereignty shall not be jeopardised.
5.2 What is the general approach of the courts in your
jurisdiction to co-operating with foreign courts or
regulatory bodies or officials in financial services
disputes (including investigations)?
Brazilian courts will cooperate according to treaties and if the
requests do not offend Brazilian sovereignty.
5.3 Is extra-territorial jurisdiction typically asserted in
your jurisdiction and, if so, in what circumstances?
Extra-territorial jurisdiction is not generally asserted in Brazil.
5.4 Are unilateral jurisdiction clauses valid and
enforceable in your jurisdiction?
Based on changes to the Brazilian Code of Civil Procedure that
became effective in March 2016, the parties are now free to choose
foreign venues (this was discussed in the past and sometimes
Brazilian courts agreed to hear cases even when the parties chose
foreign courts). In view of that, in theory such unilateral jurisdiction
clauses could be accepted. However, if the potentially damaged
party (with such clause) decides to dispute the clause and the fact
that it may not be considered balanced, Brazilian courts may decide
that this lack of balance between the parties is not acceptable and
may disregard the clause, deciding to hear the case in Brazil.
6 Regulated Bodies
6.1 What bodies, apart from the courts, regulate financial
services disputes in your jurisdiction?
The banking sector and capital markets integrate the Brazilian
financial system, which is strictly and extensively regulated.
Brazilian statutory laws and regulations establish the types of
financial institutions that are allowed to be licensed, and what
activities such financial institutions may undertake. The Brazilian
financial system consists of the National Monetary Council (CMN),
the Central Bank of Brazil (Central Bank), the National Bank for
Economic and Social Development, the public and private financial
institutions and payment institutions. Insurance is also regulated,
but is not considered within the Brazilian financial system.
Financial services is a broader concept that includes banking and
finance activities as well as capital markets. More recently,
payment services have been regulated and are carried by payment
institutions, which may require a licence from the Central Bank
depending on their size, role or systemic importance. Banking
activities and financial services are regulated by statutory and infra-
statutory laws enacted by the Brazilian Congress and the CMN,
respectively. The CMN is an ad hoc regulatory body that is
composed of the Ministry of Finance, the Ministry of Planning and
the President of the Central Bank, and its main role is to issue
regulations and guidelines for public policy concerning credit and
currency affairs (including monetary and foreign exchange
policies). The Central Bank is responsible for the implementation
and enforcement of the regulations and guidelines set forth by the
CMN. The main goal of the Central Bank is to promote the stability
and purchasing power of the Brazilian currency, as well as to
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strengthen the local monetary system and supervise the conduct of
financial institutions. The Central Bank is responsible for
implementing monetary policies, as well as exercising control over
foreign investments and inflow and outflow of capital in Brazil, as
provided by Law No. 4,595/1964 and several other specific rules
enacted by the CMN. The Central Bank is also competent to grant
licences to financial institutions, including securities brokers.
Suitability is decided, in a diverse manner, by all of the regulators
mentioned above. One exception is the sale of securities, which has
been regulated by the CVM in a more systematic manner.
Specifically, the CVM issued Instruction 554/14, directed to the
financial institutions that distribute and sell securities (such as
shares, bonds, units of investment funds, collective investment
agreements and other securities listed in the applicable legislation),
imposing specific conflict and suitability rules. Breach of this
regulation exposes the entity or the individuals, as the case may be,
to sanctions imposed by law.
6.2 What powers (investigative/inquisitorial/
enforcement/sanctions) do these regulatory bodies
have?
Normally, such regulatory bodies can investigate and enforce
sanctions but not related to private disputes but rather involving
breaches of suitability or specific rules of the sector imposed to the
financial institutions. Regulators are not involved, as a rule, in
disputes related to customers.
6.3 Are the decisions of regulatory bodies binding on the
parties to a financial services dispute?
As mentioned above, regulatory authorities are not entitled to decide
disputes involving customers. Thus, as a general rule, their
decisions are much more related to suitability and/or the activities of
the financial institutions and not to private relationships with
customers.
6.4 What rights of appeal from regulatory decisions
exist?
The rights of appeal are normally provided for in the specific body’s
regulations. As a general rule, regulatory bodies allow appeals in
the proceedings.
6.5 Are decisions of regulatory bodies publicly
accessible?
They are usually confidential.
7 Updates – Cases and Trends
7.1 Summarise any legislative developments in this area
expected in the coming year. Describe any practical
trends in your jurisdiction (e.g., has the financial
crisis impacted legislation? Has there been an
increase in the powers of regulatory bodies as a
reaction to the crisis? Has there been a change in the
amount and type of cases being brought by and
against financial service providers?).
We do not expect legislative developments in this area in the coming
year. The Brazilian financial system has been already regulated in
the areas that proved more problematic during the financial crisis of
2008 (e.g., real estate finance and derivatives), so there has not been
an increase in the powers of regulatory bodies – neither in the
amount and type of cases disputed.
7.2 On an international level, would your jurisdiction be
considered to be more financial institution- or
customer-friendly?
In general, Brazilian courts are more customer-friendly as most of
the cases are governed by the Brazilian Consumer Code and there is
a trend of courts being protective to consumers.
7.3 Please identify any significant cases regarding
financial services disputes during the past 12 months.
Please highlight the significance of the case(s), any
new or novel issues raised and what lessons can be
drawn from them.
On December 2018, the Brazilian Superior Court ruled an appeal is
considered repetitive if the decision will apply to several other
appeals that deal with the same issues. The Superior Court
understands that certain provisions which, among others, relate to
(i) services rendered by third parties and with which the banks
request reimbursement to the consumer, and (ii) reimbursement of
costs associated with a banking correspondent, are abusive and
therefore should be disregarded. The fees charged by banks related
to such provisions should not be allowed. The decision, however,
deals with consumer disputes and fees charged by the banks in
consumer relationships. As stated above, the Brazilian Consumer
Code is very protective and sets forth severe obligations to
suppliers, especially regarding duty of information, transparency,
etc.
7.4 Have global economic changes caused any changes
to financial services litigation/regulation in your
jurisdiction?
We currently see lawsuits involving new products, such as new
payment forms, etc.
Acknowledgment
The authors would like to acknowledge the invaluable contribution
of their colleague, Jose Augusto Martins, in the preparation of this
chapter.
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Giuliana Bonanno Schunck
Trench Rossi Watanabe Advogados
Arquiteto Olavo Redig de Campos Street, 105
31º floor – EZ Towers Building – Tower A
04711-904 São Paulo, SP
Brazil
Tel: +55 11 5091 5831 Email: [email protected] URL: www.trenchrossi.com
Gledson Marques De Campos
Trench Rossi Watanabe Advogados
Arquiteto Olavo Redig de Campos Street, 105
31º floor – EZ Towers Building – Tower A
04711-904 São Paulo, SP
Brazil
Tel: +55 11 3048 6968 Email: [email protected] URL: www.trenchrossi.com
Considered one of the largest law firms in Brazil, Trench Rossi Watanabe Advogados has a comprehensive and cutting-edge operation, with
expertise in all areas of law. Founded in 1959, the Firm provides legal services to national and international clients across several markets, helping
them to manage their business in an ethical and efficient way. With 400 practitioners in the key cities of São Paulo, Brasília, Rio de Janeiro and Porto
Alegre, we can steer you with knowledge and confidence through Brazil’s laws, legal systems and pragmatic business vision.
Giuliana has more than 15 years’ experience in civil and commercial
litigation. She regularly participates in cases involving contract law,
intellectual property, corporate law, insolvency and bankruptcy
(including restructuring). She is the author of two books related to
contract law and several articles about contract law, procedural law
and insolvency. She was recognised by Chambers and Partners for
Dispute Resolution in 2015, 2016 and 2017.
Gledson has more than 20 years of experience and a deep knowledge
of international litigation, arbitration and bankruptcy/insolvency and
debt restructuring. Gledson’s practice focuses primarily on complex
litigation, involving global corporations and multiple jurisdictions.
Gledson has more than 20 published articles and is the author of two
books related to the new Procedural Civil Code. Additionally, he is a
professor of Civil Law at FMU (Faculdades Metropolitanas Unidas).
Trench Rossi Watanabe Advogados Brazil
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Chapter 7
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Blake, Cassels & Graydon LLP Alexandra Luchenko
Canada
1 Bringing a Claim – Initial Considerations
1.1 What are the most common causes of actions taken
by or against financial institutions and service
providers in your jurisdiction?
Canadian financial service providers are governed by a number of
federal, provincial and self-regulating bodies (“SROs”). Financial
institutions may face: (a) civil claims by individual plaintiffs,
consumer protection organisations, or in the context of class actions,
a number of affected parties; (b) regulatory sanction by SROs; or (c)
other provincial bodies as well as complaints by customers to other
bodies as set out below. In some cases, these proceedings will
overlap.
For consumers not inclined to commence proceedings before the
Courts, the Ombudsman for Banking Services and Investments
(“OBSI”) offers dispute resolution services. Banks in Canada have
an obligation to advise clients about the OBSI dispute resolution
process. The most common complaints about financial products
made to the OBSI in 2017 were about credit cards, mortgage loans
and transaction accounts (Ombudsman for Banking Services and
Investments, Year in Review – Annual Report 2017, p. 25 [OBSI,
AR 2017]). The most common investment complaints were about
the suitability of the investment, fee disclosures and the suitability
of margin or leverage for the investor (OBSI, AR 2017, p. 31). It
would be reasonable to assume that claims in the civil context are
most commonly seen in similar areas.
The Financial Consumer Agency of Canada (“FCAC”) is a federal
body that monitors federally regulated financial institutions to
ensure they comply with the consumer protection measures. The
FCAC investigates and, where necessary, sanctions financial
institutions on the basis of complaints received.
Additionally, the Bank Act requires domestic and foreign authorised
banks to have their own internal dispute resolution process as well
as an external complaints body (“ECB”) that customers can elevate
their complaint to once they have exhausted the bank’s internal
dispute resolution process.
Issues relating to, amongst other things, breaches of disclosure,
suitability or fiduciary obligations may also bring regulatory action
(concurrently or otherwise) by provincial securities commissions
and certain SROs (most notably the Investment Industry Regulatory
Organization in Canada (“IIROC”) and the Mutual Fund Dealers
Association of Canada (“MFDA”)).
1.2 What remedies are most likely to be awarded?
A number of remedies are available in financial services disputes in
Canada.
In the civil context, financial awards remain the most commonly-
awarded remedy in the event liability is established and the plaintiff
can establish damages. Awards vary widely but tend to be relatively
small in comparison to jurisdictions such as the United States.
For consumer disputes, the OBSI may recommend the financial or
investment institution pay damages up to $350,000 or remedy the
mistake.
The provincial securities commissions, IIROC and the MFDA may
order monetary penalties but may also make orders affecting firms
and individuals operating in the market when they breach securities
laws. These orders may include, but are not limited to, halting trade,
ceasing trade and restitution orders, as well as fines and sanctions.
Securities commissions may also, amongst other things, place
additional restrictions on firms operating in the securities market.
Regulatory breaches may also result in a firm or individual being
placed on a list of disciplined registrants.
1.3 Who has a right of action in financial services
disputes? Does it make a difference if the customer is
an individual or a commercial entity?
Legal persons (whether corporations or individuals) may commence
civil proceedings in Canada. Whether a proceeding is commenced
by a corporation or individual does not have a material impact on
such proceeding. Some provincial-territorial jurisdictions in
Canada also allow consumer organisations to commence legal
proceedings on behalf of consumers with their consent.
1.4 Is third-party funding available in financial services
litigation (crowdfunding, maintenance, champerty,
etc.)? Does litigation insurance operate in your
jurisdiction and, if so, what are the implications for
this?
A wide variety of third-party funding is available in Canada. Available
sources include crowdfunding, litigation financing agreements,
contingency fees arrangements and litigation insurance. Securities
crowdfunding is governed by each province’s securities commission.
Canada also permits companies to offer litigation funding.
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Courts may review these agreements to determine whether the
interest rate in the agreement is conscionable. Where the interest
contracted for effectively nullifies any access to an award for a
litigant who is otherwise financially limited from pursuing their
claim, the Courts may modify or set aside the agreement.
Contingency fee arrangements are also available. They are regulated
by Canada’s provinces and territories. While contingency fees are
permitted, they are uncommon in commercial litigation. Permissible
fee amounts typically range between 30 to 33.33 per cent.
Litigation insurance to cover legal costs and expenses during
litigation is also available in Canada. The existence of litigation
insurance has procedural implications including whether such
expenses are properly recoverable as a disbursement in the event
that the insured party is successful. Litigation insurance policies
may also be discoverable in civil litigation.
1.5 Are class action law suits available in your
jurisdiction? If so, has this impacted financial
services litigation? Has there been an increase in
class action suits post the financial crisis?
Class actions are well established in the Canadian legal landscape.
Financial institutions and service providers are common targets of
such proceedings.
With the exception of Quebec, a class action must be certified by the
Court. Such process is often time-consuming and expensive. It is
possible, and relatively common, that separate class actions
involving essentially the same subject matter be commenced in
multiple Canadian jurisdictions.
There does not appear to have been a drastic increase in the number
of class action suits being adjudicated by the Courts since the
financial crisis.
2 Before Commencing Proceedings
2.1 What are the main barriers to financial service
litigation for customers? Are there exclusionary
clauses or duty defining clauses in customer
contracts which prevent customers from bringing a
case?
Account-holder disclosure documentation circumscribes the duties
of financial institutions and service providers to their consumers in
almost all cases.
However, an even larger prohibitive barrier to financial service
litigation for consumers remains the cost of civil litigation in Canada.
While an award of costs is generally available to a successful party in
civil litigation, the amount of such award often only covers a fraction
of the legal costs associated with pursuing a claim. Accordingly, even
litigants with strong cases must decide whether the potential damage
award is worth pursuing in circumstances where the legal costs to win
such award may approach or even outstrip the overall award. The
OBSI provides an alternative mechanism to address such issues.
2.2 Is there a time limit within which financial services
disputes must be commenced? If so, is it different
depending on whether proceedings are brought
before a regulatory body or before the courts? Does
the commencement of a regulatory process ‘stop the
clock’?
Civil proceedings are subject to the relevant province’s legislation
governing the limitations period. Typically, this period is two years
from the time the claim was discovered.
Where proceedings are brought before a regulatory body, the
limitations period can vary greatly. Each provincial securities
commission, the MFDA and IIROC all have their own limitations
periods. These organisations caution consumers with a complaint to
contact a lawyer in the province or territory where they are bringing
the complaint to ensure no relevant limitations periods are missed.
The commencement of regulatory proceedings does not generally
impact civil limitations periods, although such proceedings may
have implications for the discoverability of a given claim.
2.3 Can parties in financial services litigation avail of
litigation and/or legal advice privilege? Are
investigations conducted by regulated bodies
considered ‘litigation’ in the context of privilege?
Yes. Any documents made in preparation for litigation will be
covered by litigation privilege in both the civil and regulatory
context. Whether documents are considered to be subject to
litigation privilege depends on whether it is possible to demonstrate
the dominant purpose for the creation of the document was for the
purposes of litigation (which may include regulatory proceedings).
Investigations conducted by regulatory bodies have been the subject
of successful claims of litigation privilege where the necessary test
is met.
2.4 Are standard form master agreements used in your
jurisdiction for financial institutions (for example, the
ISDA Master Agreement)? How are they treated?
Canadian financial institutions often use the International Swaps
and Derivatives Association Inc.’s (“ISDA”) standard form Master
Agreement. Typically, the ISDA maintains a standard form and a
schedule of negotiated and material terms is appended to it. These
agreements are treated like any other standard form commercial
contract. In some instances, the presence of a standard form
contract, such as an ISDA Master Agreement, is crucial for a
mandatory clearable derivative between affiliated counterparties to
be exempt from the clearance requirements in National Instrument
94-101 – Mandatory Central Counterparty Clearing of Derivatives.
2.5 Are there any non-contractual duties which are
binding on financial services entities (for example, a
particular fiduciary duty or a code of conduct)? Can
they be contracted out of?
In Canada, financial service providers may owe statutory or
common law fiduciary duties to their customers. Often, securities
law, professional organisations or SROs will also impose upon
registrants, under the act, a fiduciary duty to act in the client’s best
interest.
Whether the provider owes a common law duty involves a highly
contextual analysis based on factors such as vulnerability, trust,
reliance, discretion, confidence, complexity of the subject matter,
and the nature of the parties and their relationship. While it is
unlikely that the entirety of a party’s fiduciary obligations can be
contracted out of, in some instances, Canadian Courts have allowed
fiduciaries to limit their liability. However, Canadian legislation is
becoming increasingly strict with respect to the types of duties that
may or may not be contracted out of. This is especially so as efforts
to increase protections for the consumers of financial products in
Canada continue to be increased.
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3 Progressing the Case
3.1 Is there a specialist court or specialist judges for
financial services litigation?
There are no specialist Courts or judges that handle financial
services litigation, although some provinces have a commercial list
that hears specific business disputes. Because financial institutions
governed by the federal Bank Act in Canada are regulated by the
federal government, certain litigation will take place in Federal
Court (as opposed to provincial Court, which presides over most
civil proceedings).
As mentioned above, consumers may also avail themselves to the
other regulatory and dispute resolution processes offered by SROs,
securities commissions, the OBSI, the FCAC, IIROC, and the MFDA.
3.2 Does the method of service of proceedings differ for
financial service litigation?
No. The method of service for civil litigation involving the financial
services industry is the same as other civil litigation in Canada. The
method of service will be dictated by the Court in which the
proceeding is filed. Similarly, SROs, securities commissions, the
OBSI, the FCAC, IIROC and the MFDA have their own processes
regarding service.
3.3 Are there any specific pre-trial procedures that must
be followed for financial services litigation in your
jurisdiction? If so, what are they and what are the
consequences of not abiding by them?
While the process varies in the different provinces and territories in
Canada, many Canadian Courts have introduced pre-trial alternative
dispute resolution (“ADR”) (such as mediation and settlement
conferences) as well as procedural conferences. Many such steps
are mandatory (and may arise either automatically or by election of
one of the parties to the litigation) and participation cannot be
avoided. Consequences of not attending such mandatory pre-trial
events vary widely by jurisdiction and Courts often retain
significant powers to require compliance but rarely order anything
more significant than a relatively small adverse cost award.
3.4 Are there any alternative dispute resolution (ADR)
regulations that apply to financial services disputes in
your jurisdiction? Are ADR clauses typically included
in financial services contracts, and is ADR commonly
used to resolve financial services disputes in your
jurisdiction?
Arbitration clauses between financial providers and consumers are
rare. Instead, ADR is built into the financial services industry
through the mechanisms noted above including the OBSI, the
FCAC and the requirement that banks have an internal complaint
processing mechanism, amongst others.
3.5 How are claims for negligent misstatement/mis-selling
dealt with in your jurisdiction?
Canada has significant regulatory and legislative protections in
place to protect consumers from negligent misstatements/mis-
selling. While claims for breaches do occur in the civil context, they
are often cost-prohibitive.
The FCAC ensures federally regulated financial services providers
are not making misstatements or engaging in mis-selling. Each
province’s or territory’s securities legislation also has laws
governing false and misleading statements, advertising and
promotional materials. Additional regulation is also done by the
MFDA and IIROC. Individuals or firms who breach securities laws
or applicable rules or either the MFDA or IIROC may be fined,
sanctioned, or ordered to temporarily or permanently stop
participating in the securities market.
3.6 How have unfair terms in contracts been interpreted
in your jurisdiction? Are there any causes of action or
defences available specifically to consumers? How
broad is the definition of a ‘consumer’ in your
jurisdiction?
Common law doctrines of illegality and unconscionability may be
used by consumers in contract disputes relating to financial services.
The doctrine of unconscionability applies where a consumer can
show that there was unequal bargaining power and that a
substantially unfair bargain resulted. In the context of financial
disputes, Courts have been reluctant to find unconscionability in the
absence of a sufficiently serious breach of the bank’s duties.
Additionally, contracts for illegal acts may not be binding. For
example, contracts that amount to the debtor paying a criminal rate
of interest in the financial services industry. Section 347(1) of
Canada’s Criminal Code makes it an indictable offence to enter into
an agreement for or to receive payment of criminal interest rates.
Federally regulated financial institutions in Canada are unlikely to
charge a criminally high interest rate. However, some smaller
private investment companies have been found to have done so.
The definition of consumer in Canada is broadening. On October
29, 2018, the federal government introduced Bill C-86, Budget Implementation Act, 2018 No. 2 (“Bill C-86”). While “consumer” is
not a defined term, the purpose of Bill C-86 suggests the definition
will extend to any legal person who consumes a financial service.
As Bill C-86 is not yet in force, it is unclear how expansive this new
framework will be.
3.7 How is data protection/freedom of information dealt
with in financial services litigation? Can a financial
services customer access their personal data? How is
commercially sensitive or confidential information
dealt with in the context of discovery or disclosure?
Civil litigation in Canada generally brings with it broad document
disclosure obligations. Financial services litigation is no exception.
Exceptions preventing the disclosure of commercially sensitive or
confidential information do exist, although establishing the requisite
level of necessity is difficult as Canadian Courts tend to favour
comprehensive disclosure. At the discovery stage, information
disclosed in litigation is subject to an implied undertaking of
confidentiality between litigants, but if such document is presented
in Court by either party, it will be available to the public absent a
sealing order. Sealing orders may be available to ensure
commercially sensitive or confidential information is only disclosed
to the parties involved in the litigation, although many Courts are
reluctant to make such orders.
Consumers may also avail themselves to freedom of information
requests. Federally regulated banks in Canada are governed by the
Personal Information and Protection of Electronic Documents Act (“PIPEDA”). Generally speaking, customers can obtain personal
information the bank has about them (or ask that certain information
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be removed from the bank’s data) by making a written request to the
branch or office where they do their banking. Customers can also
obtain information about how their information has been used.
Information obtained through this mechanism can be used in civil
litigation.
PIPEDA does not sanction the disclosure of information protected
by solicitor-client privilege, nor does it require a bank to disclose
personal information generated in the course of a formal dispute
resolution process. A bank may also refuse access if disclosure
would reveal confidential business information (an assessment
which the consumer may then appeal to the Privacy Commissioner).
In addition to PIPEDA, most major banks in Canada also have their
own individual privacy codes that can be accessed by the public on
their websites.
4 Post Trial
4.1 Is there a right of appeal in financial services
disputes?
In the civil context, final orders may generally be appealed to the
applicable provincial Court of Appeal as a right; however, in some
cases, leave to appeal must first be granted.
4.2 How does the court deal with costs in financial
services disputes?
In the civil context, each province or territory has their own set of
rules governing their provincial and superior level Courts. These
rules will be determinative of how costs are allocated. As noted
above, the successful party in civil litigation is generally awarded
costs. However, in most provinces, Courts have the discretion to
order otherwise. The quantum of costs awards in Canada rarely
accounts for the amount of legal cost any party has actually
incurred.
5 Cross-Border Issues
5.1 What issues typically arise in cross-border disputes
or investigations involving financial institutions and
how are they catered for in your jurisdiction?
In the regulatory context, there is a high level of cooperation in
North America and many other jurisdictions abroad to protect the
integrity of the securities market and its investors.
5.2 What is the general approach of the courts in your
jurisdiction to co-operating with foreign courts or
regulatory bodies or officials in financial services
disputes (including investigations)?
Canadian regulatory bodies generally cooperate with their
counterparts abroad in the context of investigations. Further, the
rules of many Canadian Courts include provisions whereby those
Courts can grant requests for assistance from foreign Courts (most
commonly used in the context of gathering evidence). Finally,
provisions exist under the various provincial and territorial rules of
Court whereby orders of certain reciprocating jurisdiction are
recognised in a given Canadian Court.
5.3 Is extra-territorial jurisdiction typically asserted in
your jurisdiction and, if so, in what circumstances?
Canada has the Foreign Extraterritorial Measures Act, R.S.C.,
1985, c. F-29 (“FEMA”), which governs how assertions of extra-
territorial jurisdiction are handled. FEMA authorises the making of
orders relating to the production of records and the giving of
information for the purposes of proceedings in foreign tribunals,
relating to measures of foreign states or foreign tribunals affecting
international trade or commerce and in respect of the recognition
and enforcement in Canada of certain foreign judgments.
5.4 Are unilateral jurisdiction clauses valid and
enforceable in your jurisdiction?
Canadian Courts engage in a contextual analysis in determining
whether or not a unilateral jurisdiction clause is valid and enforceable.
Typically, where the parties are equally as sophisticated, a choice of
jurisdiction clause will be upheld. However, a party to a dispute may
convince the Court it would be unjust to enforce the clause. This is
especially so where one party is an unsophisticated consumer and the
other is a large financial services provider. It is also important to note
that a choice of law clause will not operate as a unilateral jurisdiction
clause and could simply result in the chosen law being applied in a
different jurisdiction.
6 Regulated Bodies
6.1 What bodies, apart from the courts, regulate financial
services disputes in your jurisdiction?
There are several different bodies in Canada that regulate financial
services.
The Office of the Superintendent of Financial Institutions
supervises and regulates federally registered banks, insurers, trust
and loan companies, and private pension plans subject to federal
oversight. It also assesses an institution’s material risks and the
quality of its risk management practices.
As noted above, the FCAC monitors federally regulated financial
institutions. It also monitors ECBs to ensure they are also adhering
to federal regulations when reviewing customer disputes. The
FCAC does not provide redress or compensation to consumers or
get involved with individual disputes.
The Canadian Securities Administrators (“CSA”) are responsible for
coordinating the securities regulations across Canada. Members of
the CSA investigate or regulate securities dealers. The individual
securities commissions are responsible for ensuring securities dealers
in each province or territory adhere to that jurisdiction’s securities
legislation. The CSA and individual securities commissions also
provide oversight and operational reviews to IIROC and the MFDA.
IIROC regulates individual dealers in Canada while the MFDA
oversees dealers that distribute mutual funds and exempt fixed
income products.
At a provincial level, SROs govern professionals who provide
financial services unrelated to the securities market. For example,
in British Columbia, SROs such as the Insurance Council of British
Columbia, Real Estate Council of British Columbia, Registrar of
Mortgage Brokers, and the Superintendent of Financial Institutions
make decisions governing their members.
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Finally, in many cases, financial institutions must have their own
complaint-handling procedures.
6.2 What powers (investigative/inquisitorial/
enforcement/sanctions) do these regulatory bodies
have?
Each province’s securities commission, as well as IIROC, the
MFDA and the FCAC have broad investigative powers. The
commissions, IIROC and the MFDA have the power to compel
document disclosure and interviews. At the conclusion of an
investigation and hearing, these bodies can issue sanctions, impose
fines and penalties, and restrict the party’s ability to operate in the
market. The commissions and IIROC can also make restitution
orders requiring the financial services provider to repay the
investor’s loss. The MFDA does not make orders for compensation
or restitution but can levy fines and sanctions on its members.
The OBSI and ECBs also have investigative powers, although these
bodies differ somewhat in that financial service providers
voluntarily subscribe to their powers.
6.3 Are the decisions of regulatory bodies binding on the
parties to a financial services dispute?
The decisions of SROs, securities commissions, the FCAC, IIROC,
the MFDA and the FST are binding on the parties to a financial
dispute, though they may be appealed. While OBSI orders are not
binding on the parties, in 2017, the OBSI reported that there were no
instances in which a subscriber to the OBSI failed to make the
recommended remediation.
6.4 What rights of appeal from regulatory decisions
exist?
Appeals may generally be taken from regulatory decisions.
Whether an appeal exists as a right (rather than requiring leave to
appeal) depends on the regulatory body engaged by the dispute. The
body to appeal to also depends on the specific regulatory body in
question and may also vary by jurisdiction.
6.5 Are decisions of regulatory bodies publicly
accessible?
The decisions of the following regulatory bodies are publicly
available: each provincial securities commission; IIROC; the
FCAC; and the MFDA. While the OBSI does not publish its
decisions and recommendations, it does publish when a firm refuses
to comply with a recommendation.
7 Updates – Cases and Trends
7.1 Summarise any legislative developments in this area
expected in the coming year. Describe any practical
trends in your jurisdiction (e.g., has the financial
crisis impacted legislation? Has there been an
increase in the powers of regulatory bodies as a
reaction to the crisis? Has there been a change in the
amount and type of cases being brought by and
against financial service providers?).
Broadly speaking, the Canadian financial services industry
weathered the 2007/08 financial crisis well. Since the crisis, there
have been minor increases in capital and liquidity requirements for
Canadian banks; however, they were already well capitalised and
well regulated going into the financial crisis.
In the securities market, the CSA regularly releases staff notices
informing the Canadian public and securities dealers generally
about new problems that have come to the CSA’s attention and
potential regulatory changes that might result from them.
Recently, the CSA published for comment a staff notice outlining a
proposed Trading Fee Rebate Pilot Study to evaluate the impact of
trading fees and rebates on the behaviour of market participants. If
implemented, it would temporarily prohibit Canadian marketplaces,
including exchanges and alternative trading systems, from paying
trading fee rebates to dealers for a sample set of equity securities. It
would run concurrently with the United States Securities and
Exchange Commission’s Proposed Transaction Fee Pilot.
The CSA also recently cautioned companies to avoid disclosure and
promotional practices that are manipulative or that may mislead
investors.
Canada is also making changes to its laws relating to whistleblowers
in the securities or banking industry. Some jurisdictions in Canada
have started offering financial incentives to whistleblowers.
New legislation has also proposed an expanded financial consumer
protection framework for banks. This framework will provide
protections for customers that are not typically considered to be
“consumers”, such as commercial entities and more prescriptive
requirements for regulating the disclosure of information to bank
customers. An enhanced complaint-handling regime is also being
contemplated.
Additional changes to the financial services industry are anticipated
as Canada legalised cannabis in 2018. Each province is responsible
for regulating the distribution of cannabis. As such, the financial
services market has been evolving to adapt to the new and widely
varied regulations in each province and territory. New best practices
are being developed to help established financial services providers
effectively conduct due diligence on the consumers of their products
in the cannabis industry. Given the varied regulations in each
province, and the notable lack of compliance in the industry thus far,
those companies seeking to lend to, amalgamate with, or take over a
company in the cannabis industry need to carefully conduct their
due diligence to ensure the target company follows the cannabis and
securities regulations in its jurisdiction.
Canada is also slowly increasing its regulation of cryptocurrencies.
The CSA published Staff Notice 46-307 – Cryptocurrency Offerings, which outlines how securities law requirements apply to
initial token and coin offerings. The notice notes that prospectus,
registration and/or marketplace requirements may apply to
cryptocurrency offerings. Whether or not the offering will be
captured by securities laws is a contextual analysis where the CSA
has indicated it will consider substance over form. IIROC is also
taking steps to increase regulation of blockchain applications and
digital assets through the creation of a working group to comment
on potential regulatory responses.
Several Canadian SROs and federal governing bodies are also
working together to develop best practices to reduce elder abuse in
the financial services industry. For example, in 2018, the Ontario
Securities Commission published Staff Notice 11-779 – Seniors Strategy to increase protection for elders using financial services.
IIROC and the MFDA have also published guidelines on matters
relating to aging and the prevention of financial exploitation while
the FCAC has developed a national strategy to enhance the financial
literacy of seniors.
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7.2 On an international level, would your jurisdiction be
considered to be more financial institution- or
customer-friendly?
Canada is increasingly expanding its consumer protection
framework in the financial services industry. As noted above, there
are a number of new laws and initiatives, as well as SROs and
ECBs, seeking to protect not only individual consumers, but the
integrity of the financial services market in Canada generally.
7.3 Please identify any significant cases regarding
financial services disputes during the past 12 months.
Please highlight the significance of the case(s), any
new or novel issues raised and what lessons can be
drawn from them.
In November 2018, the Supreme Court of Canada released
Reference re Pan-Canadian Securities Regulation, 2018 SCC 48,
reversing the Quebec Court of Appeal’s decision that the
cooperative capital markets regulatory system was unconstitutional.
This opened the door for the development of a pan-Canadian
securities regulator. Canada is also considering the implementation
of a centralised securities regulator. Under this system a single
regulator – the Capital Markets Authority (“Authority”) – would
receive delegated powers from the federal government and the
provincial and territorial governments that agree to participate
(currently the governments of Ontario, British Columbia,
Saskatchewan, New Brunswick, Prince Edward Island and the
Yukon). Other Canadian jurisdictions oppose a national regulator.
The Authority would administer the proposed federal Capital Markets Stability Act and a uniform Capital Markets Act which
would be adopted by all participating provinces. If the Authority is
implemented, significant changes to Canadian securities law and
regulation would take effect.
In early 2018, the Ontario Court of Appeal published Finkelstein v. Ontario Securities Commission, 2018 ONCA 61, which clarified the
appropriate test for determining insider trading/tipping liability for
individuals several parties removed from the tipping “chain”. The
Court of Appeal reviewed the definition of a “person in a special
relationship with an issuer” as provided for by Ontario’s securities
legislation. The Court concluded that a person may be found liable
for insider trading/tipping even where they have no subjective
knowledge that the person who shared the material, non-public
information was a “special person”. It is sufficient that they “ought
to have known”. In engaging in this analysis, the Court of Appeal
reiterated the significant deference accorded to securities
commissions by appellate courts due to their specialisation in the
securities market. Leave to appeal to the Supreme Court of Canada
was denied in late 2018, bringing this case to an end.
7.4 Have global economic changes caused any changes
to financial services litigation/regulation in your
jurisdiction?
As noted above, the Canadian financial services market is stable and
well regulated. However, some changes continue to be
implemented. For example, in response to the financial crisis,
beginning in 2014, Canada increased its regulation of its over-the-
counter derivatives market. In 2014, Canadian provinces adopted
the Canadian Reporting Requirements which require the reporting
of over-the-counter derivative transaction data by market
participants to increase post-trade transparency.
Additionally, changes in financial technology create challenges for
Canadian regulators. Increasing phishing and cyber-attacks on
financial providers are leading to an increased focus on “tech
hygiene” so that consumers’ private information are kept safe.
Additionally, it remains to be seen how Canadian markets will
respond to a growing cryptocurrency market and the effect
increased regulation in this area will have on the Canadian banking
and securities industry.
Acknowledgment
The author would like to thank Devon Luca (an articled student) for
her assistance with the preparation of this chapter.
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Alexandra Luchenko
Blake, Cassels & Graydon LLP
595 Burrard Street
P.O. Box 49314
Vancouver, BC, V7X 1L3
Canada
Tel: +1 604 631 4166 Email: [email protected] URL: www.blakes.com
Alexandra focuses on complex commercial and securities-related
matters focusing on regulatory compliance, transactional litigation and
investigations and crisis management. She has significant experience
working on behalf of financial institutions as well as mining, resource,
health sciences and technology companies.
Alexandra has appeared before the British Columbia Supreme Court,
the British Columbia Court of Appeal and the Supreme Court of
Canada, as well as before a number of administrative tribunals,
including the British Columbia Securities Commission, the Investment
Industry Regulatory Organization of Canada and the Mutual Fund
Dealers Association of Canada.
Alexandra’s experience in regulatory compliance includes responding
to allegations of disclosure violations as well as insider trading. In
addition to domestic proceedings, she regularly assists in cross-border
matters including in the United States, the United Kingdom and Hong
Kong.
As one of Canada’s top business law firms, Blake, Cassels & Graydon LLP (Blakes) provides exceptional legal services to leading businesses in
Canada and around the world.
Thanks to our clients, in 2018, Blakes was named the leading law firm brand for the fourth time and third year running in Acritas’ Canadian Law Firm
Brand Index. We were also awarded Canada Law Firm of the Year by Who’s Who Legal for the 10th consecutive year and received the highest
number of ranked lawyers of any Canadian law firm for the second year in a row in Chambers Global: The World’s Leading Lawyers for Business.
In addition, many of our lawyers are continuously recognised as leaders in their respective fields in The Canadian Legal Lexpert Directory, Canada’s
leading guide to lawyers.
Blakes was also named as one of Canada’s Best Diversity Employers for 2018 by Mediacorp Canada Inc., an honour we have received eight times
since 2008.
Serving a diverse national and international client base, our integrated network of offices worldwide provides clients with access to the Firm’s full
spectrum of capabilities in virtually every area of business law. Whether an issue is local or multi-jurisdictional, practice-area specific or
interdisciplinary, Blakes handles transactions of all sizes and levels of complexity.
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Rui Bai Law Firm
Wen Qin
Juliette Ya’nan Zhu
China
1 Bringing a Claim – Initial Considerations
1.1 What are the most common causes of actions taken
by or against financial institutions and service
providers in your jurisdiction?
The most common causes of actions are financial contracts disputes,
securities disputes, trust disputes, insurance disputes, disputes in
relation to futures trading, disputes in relation to instruments, and
disputes in relation to letters of credit.
1.2 What remedies are most likely to be awarded?
Damages and specific performance are the most likely remedies to
be awarded.
1.3 Who has a right of action in financial services
disputes? Does it make a difference if the customer is
an individual or a commercial entity?
Any party to the financial services contract has a right of action. It
does not make a difference if the customer is an individual or a
commercial entity.
1.4 Is third-party funding available in financial services
litigation (crowdfunding, maintenance, champerty,
etc.)? Does litigation insurance operate in your
jurisdiction and, if so, what are the implications for
this?
There is no specific restriction on third-party funding; in fact, there
are no such rules on third-party funding. Litigation insurance does not
exist in China. However, when applying for property preservation, an
insurance policy is acceptable as a security deposit according to the
latest court rules.
1.5 Are class action law suits available in your
jurisdiction? If so, has this impacted financial
services litigation? Has there been an increase in
class action suits post the financial crisis?
There is no specific rule on class actions under Chinese law.
According to Civil Procedure Law, where the subject matter of
litigation is common, and there are multiple persons (including
individuals and organisations) comprising one party to the lawsuit,
the litigants may elect representatives to participate in the
proceeding. If the number of individuals cannot be ascertained at
the time of filing of a lawsuit, the court may issue a public
announcement, stating the facts and claims, and notify the potential
plaintiffs to register with the court within a stipulated period. The
judgment or ruling is binding on all the parties which participated in
the proceedings. For those who do not register with the court, the
judgment or ruling will also apply if they bring claims before the
court within the statute of limitations.
2 Before Commencing Proceedings
2.1 What are the main barriers to financial service
litigation for customers? Are there exclusionary
clauses or duty defining clauses in customer
contracts which prevent customers from bringing a
case?
There are no significant barriers for customers. However, as the
standard contracts of the financial institutions are used and the
jurisdiction clauses often favour the financial institutions, it tends to
cause inconvenience to some of the customers to bring up litigations
in a court far from their own domiciles.
2.2 Is there a time limit within which financial services
disputes must be commenced? If so, is it different
depending on whether proceedings are brought
before a regulatory body or before the courts? Does
the commencement of a regulatory process ‘stop the
clock’?
The general time limit (three years) applies to financial services
dispute resolutions. Regulatory bodies only have the power to deal
with financial services disputes by means of alternative dispute
resolution (“ADR”), such as mediation, which is not enforceable.
The clock will stop when one party brings up litigation or
arbitration, requests the other party to perform its obligation, or the
other party agrees to fulfil its obligation.
2.3 Can parties in financial services litigation avail of
litigation and/or legal advice privilege? Are
investigations conducted by regulated bodies
considered ‘litigation’ in the context of privilege?
The concept of privilege does not exist under Chinese law and there
is no specific rule on litigation and/or legal advice privilege.
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2.4 Are standard form master agreements used in your
jurisdiction for financial institutions (for example, the
ISDA Master Agreement)? How are they treated?
Financial institutions tend to use their own standard form contracts;
international master agreements are not widely used.
2.5 Are there any non-contractual duties which are
binding on financial services entities (for example, a
particular fiduciary duty or a code of conduct)? Can
they be contracted out of?
According to the Law on Commercial Banks, commercial banks
shall determine its own interest rates in accordance with the upper
and lower limits for deposit interests set by the People’s Bank of
China. Commercial banks shall follow the principles of voluntary
deposit and free withdrawal, paying interest to depositors and
handling individual savings deposits in secret for depositors.
Commercial banks have the right to refuse any entity or individual
to inquire about, freeze or deduct individual savings accounts,
unless it is otherwise prescribed by law.
3 Progressing the Case
3.1 Is there a specialist court or specialist judges for
financial services litigation?
The first specialised financial court in China, the Shanghai Financial
Court, which is an intermediate level court, was established by the
decree of the Standing Committee of the National People’s
Congress on 27 April 2018.
3.2 Does the method of service of proceedings differ for
financial service litigation?
There is no specific procedure rule for financial service litigation.
3.3 Are there any specific pre-trial procedures that must
be followed for financial services litigation in your
jurisdiction? If so, what are they and what are the
consequences of not abiding by them?
There is no specific procedure rule for financial service litigation.
3.4 Are there any alternative dispute resolution (ADR)
regulations that apply to financial services disputes in
your jurisdiction? Are ADR clauses typically included
in financial services contracts, and is ADR commonly
used to resolve financial services disputes in your
jurisdiction?
There are no uniformed ADR regulations that apply to financial
services disputes. The China International Economic and Trade
Arbitration Commission formulated and adopted specific arbitration
rules for financial disputes in 2015, but whether to choose
arbitration is subject to the autonomy of the contracting parties.
3.5 How are claims for negligent misstatement/mis-selling
dealt with in your jurisdiction?
There is no specific rule on negligent misstatement/mis-selling.
3.6 How have unfair terms in contracts been interpreted
in your jurisdiction? Are there any causes of action or
defences available specifically to consumers? How
broad is the definition of a ‘consumer’ in your
jurisdiction?
According to the Law on the Protection of Consumers, business
operators shall not impose unfair and unreasonable terms on
consumers such as elimination or restriction of consumer rights,
aggravation of consumer liability, mitigation or exemption of
business operators’ liability, etc. by way of standard clauses. If a
standard contract contains terms mentioned above, such terms shall
be invalid.
According to the Implementing Measures of the People’s Bank of
China for the Protection of Financial Consumers’ Rights and
Interests (“Measures of Protection of Financial Consumers”), a
standard contract provided by a financial institution shall not
contain any misleading or fraudulent information that infringes on
the legitimate rights or interests of financial consumers, and shall
not contain any standard clauses that mitigate or exempt the liability
of the financial institution, aggravate the liability of financial
consumers, restrict or exclude the legitimate rights and interests of
financial consumers, or any unreasonable terms such as compulsory
transactions by virtue of technical means.
According to the Law on the Protection of Consumers, a consumer is
entitled to increase compensation if business operators providing
goods or services commit fraud; the increased compensation amount
shall be three times the amount of the price of the goods purchased
by the consumer or the fee of the service received by the consumer.
According to the Measures of Protection of Financial Consumers,
financial consumers refer to the natural persons who purchase and use
the financial products and services provided by financial institutions.
3.7 How is data protection/freedom of information dealt
with in financial services litigation? Can a financial
services customer access their personal data? How is
commercially sensitive or confidential information
dealt with in the context of discovery or disclosure?
According to the Measures of Protection of Financial Consumers,
personal financial information shall be collected under the principle
of legitimacy, reasonableness and necessity. The term “personal
financial information” refers to the personal information acquired,
processed and preserved by financial institutions in the process of
carrying out business or through other channels, including the
information on personal identity, property, accounts, credit and
financial transactions and other information that can reflect certain
conditions of a particular individual. Financial institutions and their
relevant employees shall keep confidential the personal financial
information they access in their business operation, and shall not
illegally copy, store, use, sell to others or disclose by any other
illegal means such personal financial information.
The concept of discovery or disclosure does not exist under Chinese
law and there is no specific rule about discovery or disclosure.
4 Post Trial
4.1 Is there a right of appeal in financial services
disputes?
An appeal to a first instance judgment is as of right and can be
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initiated by filing a notice of appeal within 15 days after such
judgment is served. A second instance judgment is final and cannot
be appealed.
4.2 How does the court deal with costs in financial
services disputes?
Litigation fees payable to the court are advanced by the plaintiff and
will be borne by the losing party or prorated by the court per the
outcome of the judgment.
5 Cross-Border Issues
5.1 What issues typically arise in cross-border disputes
or investigations involving financial institutions and
how are they catered for in your jurisdiction?
In addition to jurisdiction, service and choice of law, the most
typical issue which arises in cross-border disputes is that any
evidence formed outside the territory of China needs to be notarised
and legalised.
5.2 What is the general approach of the courts in your
jurisdiction to co-operating with foreign courts or
regulatory bodies or officials in financial services
disputes (including investigations)?
The general approach of the courts to co-operating with foreign
courts in disputes resolution is through the channels stipulated in the
international treaties or through diplomatic channels where no such
treaties exist.
5.3 Is extra-territorial jurisdiction typically asserted in
your jurisdiction and, if so, in what circumstances?
Extra-territorial jurisdiction is not typically asserted in China.
5.4 Are unilateral jurisdiction clauses valid and
enforceable in your jurisdiction?
Unilateral jurisdiction clauses are generally valid and enforceable.
6 Regulated Bodies
6.1 What bodies, apart from the courts, regulate financial
services disputes in your jurisdiction?
The Financial Consumer Protection Bureau of the People’s Bank of
China and the China Banking and Insurance Regulatory
Commission are the main regulatory bodies in China. However, the
regulatory bodies only have the power to deal with financial
services disputes by mediation, which is not enforceable.
6.2 What powers (investigative/inquisitorial/
enforcement/sanctions) do these regulatory bodies
have?
In mediation proceedings, the regulatory bodies shall have the right
to investigate and collect evidence, question the concerned parties,
and consult and copy the information relating to the disputes.
6.3 Are the decisions of regulatory bodies binding on the
parties to a financial services dispute?
The decisions are not binding on the parties.
6.4 What rights of appeal from regulatory decisions
exist?
Since the decisions made by the regulatory bodies are not binding,
either party may commence litigation proceedings or arbitration
proceedings when there is a valid arbitration clause at any time
within the statute of limitations.
6.5 Are decisions of regulatory bodies publicly
accessible?
Such decisions are not publicly accessible.
7 Updates – Cases and Trends
7.1 Summarise any legislative developments in this area
expected in the coming year. Describe any practical
trends in your jurisdiction (e.g., has the financial
crisis impacted legislation? Has there been an
increase in the powers of regulatory bodies as a
reaction to the crisis? Has there been a change in the
amount and type of cases being brought by and
against financial service providers?).
Financial supervision has always been the focus of financial law
research. Financial institutions are encouraged to use mediation,
arbitration and other non-litigation methods to resolve the disputes
over financial consumption with financial consumers. Under the
influence of the economy, financial cases show a rapid upward
trend. In the past three years, after the rapid development of the
internet financial industry in China, due to the lack of supervision
system, market access, industry self-discipline, remedies and so on,
problems frequently occurred, resulting in a rapid increase in
disputes, especially in the field of P2P network loan cases, and
disputes involving a large group of investors emerge frequently.
7.2 On an international level, would your jurisdiction be
considered to be more financial institution- or
customer-friendly?
Since there is no specific rule on financial services disputes that
impose any special burden on any parties, in another words, there is
no special protection to financial consumers, one can say that our
jurisdiction is more financial institution-friendly.
7.3 Please identify any significant cases regarding
financial services disputes during the past 12 months.
Please highlight the significance of the case(s), any
new or novel issues raised and what lessons can be
drawn from them.
Case 1: The Insurance Brokerage is Liable to Indemnify the
Policyholder Due to the Failure to Fulfil the Duty of Diligence –
Company C vs. Insurance Company A & Insurance Brokerage Company B Over the Property Insurance Contract
Company C commenced a litigation against Insurance Company A
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and Insurance Brokerage Company B for the indemnity obligations
of cargo transportation insurance jointly and severally. The court
ruled that Insurance Brokerage Company B should compensate
Company C for its losses as it had failed to fulfil its duty of diligence
to inform Company C of the exemption clauses. Insurance
Company A has made a clear statement about the exemption clause
to Insurance Brokerage Company B, which is the agent for
Company C (the policyholder), and thus Insurance Company A can
be relieved from the liability.
Keynote: Insurance brokerage companies always play an important
part in the freight insurance business due to the traits of the shipping
industry. The duty of the insurance brokerage company, as the agent
of the policyholder, is not confined to deal-making, but to fulfil the
duty of diligence. In addition, the agent shall explain the insurance
terms to the policyholder in a timely manner to eliminate the
information imbalance between the insured and the insurer. The
judgment of this case conforms to the provisions of the Insurance
Law on the insurance broker’s duty of diligence, and clarifies the
legal relationship among the policyholder, insurance broker and
insurer. It is clear that the insurance broker shall bear the liability
for the loss caused by the failure to fulfil the duty of diligence,
which plays an active role in regulating the development of the
insurance broker industry.
Case 2: Financial Consumers Misrepresented in Risk-taking
Assessment Test Shall Bear the Assumption of Risk – Shen vs. Bank A over Financial Service Contract
Shen commenced a litigation against Bank A for his loss (around
RMB 226,000) in the investment of one high-risk fund product.
Before the investment, Bank A conducted a risk-taking assessment
test for Shen and the Customer’s Risk Level for Shen was
“Radical”. The court ruled that Bank A shall pay Shen RMB
100,000 for damages and overruled other requests made by Shen.
Keynote: Over the past few years, the so-called “rigid redemption”
(refers to trust products that require the trust company distribute the
principal and interests to the investor unconditionally) in the
financial market has contributed to the irrational behaviours of some
financial consumers. With new regulations on capital management
coming into effect, the practice of “rigid redemption” with expected
return from financial institutions has been broken. On the premise
of a comprehensive review of the responsibilities of financial
institutions, the judgment of this case emphasises the principle of
“caveat emptor” of financial consumers. Generally speaking, in
order to compensate for the asymmetries, “the seller is responsible”,
and thus financial institutions are obligated to disclose product risks
beforehand, to assess financial consumers’ risk tolerance, to
periodically disclose products performance during their term, and to
manage financial consumers’ eligibility. When financial institutions
have fulfilled their obligations, if financial consumers do not
purchase products prudently for their own reasons, consumers
should be responsible for financial losses. This judgment reveals
the principle of good faith and the spirit of contracts in modern
financial transactions, which is conducive to financial institutions’
return to healthy development.
7.4 Have global economic changes caused any changes
to financial services litigation/regulation in your
jurisdiction?
Global economic changes have promoted the formation and
improvement of the financial trial system, such as the establishment
of the Shanghai Financial Court.
Note
The information contained in this chapter is of a general nature only.
It is not meant to be comprehensive and does not constitute the
rendering of legal, tax or other professional advice or service by Rui
Bai Law Firm or its partners and lawyers. Rui Bai Law Firm or its
partners and lawyers have no obligation to update the information as
law and practices change. The application and impact of laws can
vary widely based on the specific facts involved. Before taking any
action, please ensure that you obtain advice specific to your
circumstances from your usual contact or your other advisers.
Rui Bai Law Firm China
Chin
a
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Wen Qin
Rui Bai Law Firm
Unit 01, 6/F Fortune Financial Center
5 Dongsanhuan Zhong Road
Chaoyang District, Beijing 100020
China
Tel: +86 10 8540 4653 Email: [email protected] URL: www.ruibailaw.com
Juliette Ya’nan Zhu
Rui Bai Law Firm
Unit 01, 6/F Fortune Financial Center
5 Dongsanhuan Zhong Road
Chaoyang District, Beijing 100020
China
Tel: +86 10 8540 4659 Email: [email protected] URL: www.ruibailaw.com
Wen is a Partner of Rui Bai Law Firm, which is an independent law firm
and a member of the PwC global network of firms. Prior to joining Rui
Bai Law Firm, Wen was a partner of a local law firm in Beijing. He
specialises in employment law, tax law, dispute resolution and general
corporate law. Wen obtained a Master’s of Law degree from China
University of Political Science and Law. Wen is a native Chinese
speaker and is fluent in English.
As a legal counsel to foreign investment enterprises, Wen’s services
have been praised by clients. As a result, he has been continuously
recommended as one of the leading lawyers by the well-known ranking
and recognition organisations in the legal profession, such as
Chambers and Partners, The Legal 500 and Asialaw Leading Lawyers.
In 2015, he was ranked as one of the “Eminent Practitioners” by
Chambers and Partners. Chambers and Partners also quotes one of
his clients saying that “he has a sound understanding of the CHINA and
global aspects of a case”.
Rui Bai Law Firm is an independent China law firm and is a member of the PwC global network of firms. We have access to the most geographically
extensive PwC global legal services network of over 3,500 lawyers in over 90 countries and territories, including over 20 offices across 15 countries
and territories in Asia-Pacific. Uniquely among law firms, we provide clients with integrated legal services, working closely with tax, human resources,
corporate finance, forensic accounting, valuation and other service teams within the PwC global network.
We can deliver integrated solutions including specialists in banking and finance, corporate, M&A, regulatory compliance, intellectual property, aircraft
and equipment leasing, litigation, arbitration and dispute resolution, labour and employment, and tax dispute resolution. We are able to deliver
solutions to the most challenging business endeavour.
Our lawyers combine local market knowledge and international experience into a unique skillset. Our lawyers also combine extensive private
practice law firm experience with in-depth understanding and knowledge working in-house. We put ourselves in our clients’ shoes and we share a
common language with the client.
Juliette is an Attorney of Rui Bai Law firm, which is an independent law
firm and a member of the PwC global network of firms. She graduated
from China University of Political Science and Law with a Master’s of
Law degree and a Master’s degree in European and International Law
(LL.M.) from the University of Hamburg. Her practice area focuses on
dispute resolution, including international and domestic commercial
arbitration and litigation, covering various subjects such as Chinese-
foreign joint ventures, direct investment, international sale of goods,
etc. She is fluent in both Chinese and English.
Rui Bai Law Firm China
47
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RPC
Simon Hart
Daniel Hemming
England & Wales
1 Bringing a Claim – Initial Considerations
1.1 What are the most common causes of actions taken
by or against financial institutions and service
providers in your jurisdiction?
A non-exhaustive selection of the more common causes of action
taken by or against financial institutions and service providers are:
1. Breach of contract for express or implied contractual terms.
2. Negligent misrepresentation under s. 2(1) of the
Misrepresentation Act 1967 (and/or negligent misstatement
in tort).
3. Other claims in the tort of negligence, for example relating
to the provision of advice.
4. Claims under s. 138D of the Financial Services and
Markets Act 2000 (FSMA) which creates a right of action
for ‘private persons’ who have suffered loss as a result of
breaches of specified rules made by the Financial Conduct
Authority (FCA) / Prudential Regulation Authority (PRA).
1.2 What remedies are most likely to be awarded?
There are a range of remedies available to the English courts. The
main ones likely to be awarded in financial services disputes are:
1. Damages – compensatory in nature.
2. Injunctions – require a party to do or refrain from doing a
specified action.
3. Restitution – reverses an unjust enrichment by returning any
benefit or enrichment to the claimant.
4. Rescission – restores the parties to the position they were in
before the contract was entered into.
1.3 Who has a right of action in financial services
disputes? Does it make a difference if the customer is
an individual or a commercial entity?
An individual and a commercial entity have the same rights of
action in financial services disputes although the claims available
may be different (e.g. the right of action under s. 138D of FSMA is
only available to ‘private persons’, which means individuals (with
limited exceptions)).
1.4 Is third-party funding available in financial services
litigation (crowdfunding, maintenance, champerty,
etc.)? Does litigation insurance operate in your
jurisdiction and, if so, what are the implications for
this?
Third-party litigation funding has become increasingly common over
the last 10 years. This allows a claim to be progressed without any
financial expenditure by the claimant receiving the funding. The
funding arrangements can also incorporate protection against
adverse costs orders in the event a claim is unsuccessful. The
funding is usually provided on a non-recourse basis, meaning that the
funder will recoup its funding and receive any return only out of the
damages recovered on the conclusion of a successful claim; where
there is no recovery there is no repayment to the litigation funder.
The conduct of the litigation must remain with the claimant, being
the party who has received the funding. In accordance with the rules
of champerty and maintenance, if a professional funder attempts to
exercise control over the litigation or is in a position to recover
disproportionate sums, a court can hold the funding agreement to be
unenforceable.
There are various forms of litigation insurance. After the event
(ATE) insurance is an indemnity for future adverse costs awards in
a civil dispute that has already arisen. Before the event (BTE)
insurance is taken out in order to cover the legal costs of various
legal scenarios before they arise. An insurer may agree to a deferred
premium arrangement, where it is only paid a premium if the funded
case is successful.
Litigants can also manage the costs and risk of litigation using:
■ conditional fee agreements (CFAs) under which the lawyers
make some or all of their fees conditional upon success, in
return for an additional uplift payable upon success
(calculated as a percentage of the fees incurred); and
■ damages-based agreements (DBAs) under which the lawyers’
fees are limited to a share of the proceeds of successful
litigation.
1.5 Are class action law suits available in your
jurisdiction? If so, has this impacted financial
services litigation? Has there been an increase in
class action suits post the financial crisis?
Broadly speaking, class actions (or collective actions as they are
more commonly known) in the UK are opt-in regimes which mean
that a claimant has to take active steps in order to join any collective
action.
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Various types of collective actions are available under the Civil
Procedure Rules (CPR) which govern court proceedings although
the primary procedural mechanism is the Group Litigation Order
(GLO). A GLO is an order under CPR Part 19 which provides for
claims which give rise to common or related issues of fact or law to
be case-managed together. There are other options available under
CPR Part 19 such as representative actions (claims begun or pursued
by representatives who are considered to have a shared interest in
the claim with those they represent, on an opt-out basis) and more
informal procedures such as test cases, the ability to name multiple
claimants and consolidation of multiple individual claims.
Collective Proceedings Orders (CPOs) are available in the
Competition Appeal Tribunal. A CPO is a form of collective action
for infringements of competition law. CPOs can be ordered either
on an opt-in or opt-out basis.
As a result of the increasing use of litigation funding, collective
actions are becoming more common in financial services disputes.
2 Before Commencing Proceedings
2.1 What are the main barriers to financial service
litigation for customers? Are there exclusionary
clauses or duty defining clauses in customer
contracts which prevent customers from bringing a
case?
Contractual estoppel is one of the main defences to claims
(particularly mis-selling-type claims) brought by customers against
financial services providers. Estoppel can operate to prevent a
customer from asserting anything that is inconsistent with its
previous agreement/actions.
There are frequently clauses in contracts between financial services
providers and customers which purport to exclude or restrict
liability or set out an agreed basis upon which the parties are
contracting. For example, this may involve the customer
representing that they are a sophisticated investor and have not
relied on any information given to them by the financial services
provider as investment advice. Such clauses may cause a customer
to be estopped (i.e. prevented) from asserting that the true facts were
different. This would operate as a bar to a successful claim even if
there was advice and it was negligently given.
2.2 Is there a time limit within which financial services
disputes must be commenced? If so, is it different
depending on whether proceedings are brought
before a regulatory body or before the courts? Does
the commencement of a regulatory process ‘stop the
clock’?
The time limits for bringing financial services claims are the same
as those for any other type of civil dispute. These time limits are
prescribed by the Limitation Act 1980.
Subject to certain exceptions in each case, for claims in respect of a
contract a claimant has six years from the date of the breach to bring
a claim, and for tortious claims, the claim must be brought within six
years from the date the damage caused by the tortious act was
suffered. The issuing of a claim form at court is the procedural step
which determines whether a claim has been brought within the
relevant period.
Parties in dispute are able to enter into a standstill agreement the
terms of which suspend the running of the limitation period for an
agreed period. The commencement of a regulatory process does not
‘stop the clock’.
2.3 Can parties in financial services litigation avail of
litigation and/or legal advice privilege? Are
investigations conducted by regulated bodies
considered ‘litigation’ in the context of privilege?
There are two forms of legal professional privilege available to
parties in civil litigation in England & Wales:
■ Legal advice privilege applies to confidential communications
between a client and a client’s lawyer and which have come
into existence for the purpose of giving or receiving legal
advice about what should be done in the relevant legal
context.
■ Litigation privilege applies to communications between a
lawyer (acting in their capacity as a lawyer) and a client, or
between either of them and a third party, made at a time when
litigation is reasonably in contemplation and for the dominant
purpose of litigation.
If litigation privilege is to apply in the context of an investigation
conducted by a regulated body, the investigation must be considered
sufficiently ‘adversarial’ (i.e. the dominant purpose of any
documents created in the course of the investigation was to defend
the expected litigation).
2.4 Are standard form master agreements used in your
jurisdiction for financial institutions (for example, the
ISDA Master Agreement)? How are they treated?
Standard form master agreements are used in England & Wales by
financial institutions for dealings with counterparties. By way of
example, ISDA Master Agreements are commonly used for
derivatives transactions and Global Master Repurchase Agreements
for repo transactions. Other industry standard form agreements are
commonly used, such as LMA agreements for loan facilities.
Courts are generally slow to deviate from the express terms of
master agreements and other industry standard form agreements by
implying terms into them. This is in order to ensure certainty of
terms across markets.
2.5 Are there any non-contractual duties which are
binding on financial services entities (for example, a
particular fiduciary duty or a code of conduct)? Can
they be contracted out of?
There is no general fiduciary duty owed by a financial services
provider to its customer. However, financial service providers
which conduct regulated activities will be subject to rules prescribed
by the FCA.
A financial service provider may also owe a duty of care in tort in
respect of any advice it gives to customers, in certain circumstances.
The extent of this duty of care will depend upon the facts of any case
including the extent of the relevant customer’s/s’ own experience
and sophistication. A financial service provider will generally also
owe a duty of care not to make negligent misstatements.
Parties cannot contract out of the rules imposed on them by
regulatory bodies such as the FCA. However, it is possible to
include non-reliance clauses and/or limitation/exclusion clauses in
the parties’ contracts. The extent to which such clauses may be
deemed to be reasonable is context-specific. Nevertheless, English
courts have been shown generally to be keen to uphold such clauses
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on the basis that commercial, sophisticated parties should be free to
contract as they wish/ensure certainty of terms.
3 Progressing the Case
3.1 Is there a specialist court or specialist judges for
financial services litigation?
Claims involving financial services matters are primarily
commenced in the Commercial Court. The Commercial Court is a
specialist court which is part of the Business and Property Courts of
the High Court of Justice. The Commercial Court specialises in
complex national and international business disputes, including
cases which involve banking and financial services.
The Financial List was introduced in 2015 as a specialist cross-
division list set up to address cases involving financial matters.
Cases will be accepted in the Financial List if they relate to complex
finance or banking matters worth more than £50 million or
equivalent, need expert judicial knowledge of the financial markets
or raise issues of general importance for financial markets.
3.2 Does the method of service of proceedings differ for
financial service litigation?
The method of service of legal proceedings does not differ for
financial services litigation; the same provisions of the CPR and
Practice Directions (PDs) apply. Part 6 of the CPR sets out the rules
for service of claim forms and all other court documents upon
defendants inside and outside of the jurisdiction of the courts.
There are some differences between the conduct of proceedings
started in the Commercial Court and those in other divisions of the
courts. For example, in the Commercial Court an acknowledgment
of service must be filed within 14 days of service of the claim form
(rather than 14 days after service of the particulars of claim which is
the default rule). Proceedings in the Financial List are generally
subject to the procedural rules of the Commercial Court.
3.3 Are there any specific pre-trial procedures that must
be followed for financial services litigation in your
jurisdiction? If so, what are they and what are the
consequences of not abiding by them?
Litigation in England & Wales will typically have the following
phases, although there is considerable flexibility given to the parties
and the court as to how legal proceedings are conducted. The CPR
does not prescribe any specific differences for the conduct of
financial services litigation.
1. Consideration of alternative dispute resolution (ADR)
options – mediation (settlement facilitated by the assistance
of a neutral third party) and Part 36 offers to settle.
2. Consideration of limitation issues, the guidelines relating to
pre-action conduct in the Practice Direction on Pre-action
Conduct and Protocols and any relevant pre-action protocol.
There is no specific pre-action protocol for financial services
disputes but there is one for Professional Negligence claims.
3. Funding and insurance – consideration of options as
outlined at question 1.4 above.
4. Issuing and serving the claim form – the claim form filed
and served by the claimant will contain a precise statement of
the claim and remedy sought as well as a value for the claim.
5. Statements of case – following the issuance of the claim
form, the claimant will prepare the particulars of claim which
details their claim in full to which the defendant will respond
with a defence. The claimant may then respond to the
defence with a formal reply. A defendant may also file a
counterclaim. Various other interim applications may be
prepared and there will be Case Management Conferences at
which case management directions will be made.
6. Evidence (experts and witnesses) – the parties will need to
adduce evidence to support their claim(s)/defence. This
evidence will comprise (a) contemporaneous documents, (b)
statements taken from factual witnesses, and (c) expert
evidence where necessary to assist the court.
7. Disclosure – parties make available documents (very broadly
defined) which either support or undermine any party’s case. This
is often the most time-consuming and expensive stage of litigation.
Any non-compliance with any of these steps and/or the relevant rules
pertaining to each under the CPR, including the late filing of any
necessary documents at court or service on the parties, could be taken into
account by the court when making case management directions or orders
as to costs. Breaches of the CPR may also result in certain documents not
being permitted to be filed/served or relied on in the proceedings.
3.4 Are there any alternative dispute resolution (ADR)
regulations that apply to financial services disputes in
your jurisdiction? Are ADR clauses typically included
in financial services contracts, and is ADR commonly
used to resolve financial services disputes in your
jurisdiction?
There are no ADR regulations that apply to financial services
disputes specifically.
ADR is one of the aims of the pre-action protocols and the English courts
may look for evidence that the parties have considered it. However,
ADR clauses are not typically included in financial services contracts.
The terms of the ISDA, GMRA and LMA agreements do not, for
example, make it compulsory for parties to explore any form of ADR
before commencing proceedings. However, it is common for mediation
to be used pre-trial to attempt to settle financial services disputes.
3.5 How are claims for negligent misstatement/mis-selling
dealt with in your jurisdiction?
Mis-selling claims are often brought against financial services
providers. Mis-selling is not in and of itself a cause of action but is
rather an umbrella term for a wide range of claims which may arise
in the context of investments/financial products.
Mis-selling claims encompass various causes of action, broadly: (i)
claims for breach of statutory duty (such as claims under s. 138D of
FSMA); (ii) claims in contract or tort (such as negligent
misrepresentation or other claims in the tort of negligence) relating to
advice provided by the financial service provider; and (iii) claims
arising from statements made in the selling process (misrepresentation;
breach of duty not to misstate negligently).
Contractual estoppel is a common defence to claims of mis-selling.
3.6 How have unfair terms in contracts been interpreted
in your jurisdiction? Are there any causes of action or
defences available specifically to consumers? How
broad is the definition of a ‘consumer’ in your
jurisdiction?
The two main types of contract term which the courts consider may
be unfair are limitation and exclusion clauses. The extent to which
any contract term is considered to be reasonable/fair is decided by
reference to the following legislation:
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■ Unfair Contract Terms Act 1977 (UCTA) – from 1 October
2015 when the Consumer Rights Act 2015 (CRA) came into
force, UCTA does not apply to consumer contracts (i.e.
contracts between individuals acting outside that individual’s
business/trade/profession and traders). It only applies to non-
consumer contracts, which means that the defendant must be
acting in the course of business and it is only relevant to
business liability.
UCTA provides that a business cannot exclude or restrict its
liability for negligence except insofar as the term or notice
satisfies the requirement of reasonableness. In s. 11 of UCTA
there is guidance on whether the requirement for a term to be
‘reasonable’ has been satisfied. UCTA would be the relevant
legislation for terms contained in a financial services contract
between sophisticated financial parties.
■ Misrepresentation Act 1967 – this provides that a contract
term which would exclude or restrict any liability to which a
party may be subject by reason of any pre-contract
misrepresentation (or any remedy flowing from it) is of no
effect except insofar as it satisfies the UCTA reasonableness
test.
■ Unfair Terms in Consumer Contract Regulations 1999
(UTCCRs) – until 1 October 2015 UCTA was supplemented
by UTCCRs. UTCCRs (alongside UCTA) continue to apply
to consumer contracts concluded before 1 October 2015.
■ CRA – on 1 October 2015, the CRA was introduced in order
to consolidate and update consumer law in the UK. The CRA
only applies to contracts between a trader and a consumer;
business-to-business contracts are not caught.
3.7 How is data protection/freedom of information dealt
with in financial services litigation? Can a financial
services customer access their personal data? How is
commercially sensitive or confidential information
dealt with in the context of discovery or disclosure?
Data protection/freedom of information is dealt with in the context of
financial services litigation (as it is in any other context in the UK) under
the terms of the EU General Data Protection Regulation (GDPR).
Under the GDPR, a data subject has the right to obtain confirmation
from a controller of data as to whether or not the controller
processes personal data relating to them. If the controller does
process the data subject’s personal data it must provide the data
subject with access to the data.
In the context of discovery/disclosure, sensitive or confidential
information that is irrelevant to the issues in dispute can be redacted
before it is disclosed to another party. The extent of and rationale
for such redaction may be subject to challenge.
4 Post Trial
4.1 Is there a right of appeal in financial services
disputes?
Parties have the right to ask for permission to appeal any decision of
a lower court (and this is no different in the case of financial services
disputes). The parties can ask the lower court whose decision it
wishes to appeal for permission to appeal. If that request is refused,
there is a right to ask the appellate court for permission to appeal.
However, the granting of permission to appeal is at the discretion of
the courts and there is no absolute right of appeal.
Appeals from the High Court will be heard by the Court of Appeal
(save in rare cases where appeals from the High Court ‘leapfrog’
directly to the Supreme Court).
4.2 How does the court deal with costs in financial
services disputes?
Costs are dealt with in financial services disputes as they are in all
civil disputes in England & Wales. The general rule is that the losing
party pays the successful party’s legal costs. Costs will be assessed
on the standard basis or indemnity basis. Where multiple issues are
being determined, and a party is only successful in relation to certain
issues, it is possible for the court to make an issues-based costs order.
On the standard basis the court will only allow the recovery of costs
which are reasonably incurred, reasonable in amount and
proportionate to the matters in issue. Any doubt which it may have
in this regard will be resolved in favour of the paying party.
On the indemnity basis there is no requirement for the costs to be
proportionate in order to be recovered. They must still be
reasonably incurred and reasonable in amount but the court will
resolve any doubt which it may have in that regard in favour of the
receiving party. The indemnity basis is intended to be punitive in
nature and is only ordered by the court in certain circumstances.
Once a costs award is made, the receiving party can either agree the
amount to be paid with the paying party or apply to the court for
costs to be assessed.
5 Cross-Border Issues
5.1 What issues typically arise in cross-border disputes
or investigations involving financial institutions and
how are they catered for in your jurisdiction?
Jurisdictional issues – there are broadly two sets of rules which
determine whether the English court has jurisdiction in a civil dispute
– the European regime (Recast Brussels Regulation alongside the 2001
Brussels Regulation, 2007 Lugano Convention and 1968 Brussels
Convention) and the common law rules. Where the European regime
applies, it takes precedence over the common law rules. The European
regime will apply in circumstances where the defendant is domiciled in
the EU as well as in certain other circumstances. Where there is an
exclusive jurisdiction clause in favour of the English court, the EU
regime will apply under the Recast Brussels Regulation regardless of
whether or not either party is domiciled in the EU.
Save in limited circumstances, the permission of the court is
required to serve English proceedings outside of the jurisdiction,
which will generally be necessary where the defendant is domiciled
outside the jurisdiction and does not have a branch or establishment
in the jurisdiction.
A party sued in England that wishes to contest the English court’s
jurisdiction should do so by making an application following the
service upon it of the claim form.
Applicable law – in a cross-border dispute, it may be necessary to
determine which law should be applied to the parties’ contractual
obligations and any civil dispute arising from that contract. The rules
set down under Rome I and/or the Rome Convention apply in such
circumstances; the former with respect to contracts concluded before
17 December 2009 and the latter on or after 17 December 2009.
Both Rome I and the Rome Convention give effect to an express
choice of law by the contracting parties and provide rules and
assumptions as to applicable law in the absence of express choice.
Data transfer – the disclosure obligation in civil proceedings
means the parties will often have to collect, review and disclose
large amounts of data. This can give rise to issues relating to data
protection and confidentiality. In cross-border disputes there may
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be issues around the transfer of data in circumstances where data
needs to pass between borders if different rules apply to the
processing and storage of that data.
5.2 What is the general approach of the courts in your
jurisdiction to co-operating with foreign courts or
regulatory bodies or officials in financial services
disputes (including investigations)?
The English courts will make all reasonable efforts to co-operate
with foreign courts in order to resolve a civil dispute.
The English courts may do this in a variety of ways, such as
responding to letters of request (a request by a court in one
jurisdiction to a court in another to take evidence, and transmit the
evidence to the requesting court for use in judicial proceedings) or
in certain circumstances staying proceedings in favour of other EU
and international courts.
5.3 Is extra-territorial jurisdiction typically asserted in
your jurisdiction and, if so, in what circumstances?
The most common circumstance in which the courts of England &
Wales will exercise extra-territorial jurisdiction is ordering a
worldwide freezing order (WFO). That is, in certain circumstances,
the courts of England & Wales have jurisdiction to grant freezing
injunctions in respect of overseas assets. In considering whether to
grant a WFO, the courts will need to establish the basis of the court’s
jurisdiction and how it would be enforced, as well as any potential
risk of oppression.
In exceptional circumstances the courts will appoint receivers in
respect of overseas assets to facilitate the enforcement of unsatisfied
English judgments.
5.4 Are unilateral jurisdiction clauses valid and
enforceable in your jurisdiction?
Unilateral jurisdiction clauses, also known in England as
asymmetric jurisdiction clauses, will generally be upheld by English
courts. Such clauses are common in English law finance documents
(including LMA agreements), where they provide that the borrower
can only sue the lender in a specific country whilst the lender can
sue the borrower in a court of its choosing.
6 Regulated Bodies
6.1 What bodies, apart from the courts, regulate financial
services disputes in your jurisdiction?
The main regulatory bodies in the UK are as follows:
■ Bank of England (BoE) – The BoE has two main purposes
which are to ensure monetary and financial stability.
■ The FCA / The PRA – The PRA and the FCA are the lead bank
regulators in the UK. The PRA (which is part of the BoE) is
the prudential regulator and the FCA is the conduct regulator.
■ Financial Ombudsman Service (FOS) – The FOS has
responsibility for handling complaints from retail banking
customers, subject to a financial limit.
6.2 What powers (investigative/inquisitorial/
enforcement/sanctions) do these regulatory bodies
have?
The UK’s banking regulatory bodies will not ordinarily intervene in
civil proceedings. However, the FCA has a wide range of
enforcement powers to protect consumers and to take action against
firms and individuals that do not meet their standards.
The FCA’s disciplinary process generally involves an investigation
followed by the issuance of a statutory notice. The warning notice
outlines to the entity in question the action which the FCA proposes
to take, the decision notice is issued in circumstances where the FCA
has decided to take action and a final notice is issued when the FCA
takes action. The FCA can issue public statements and censures as
well as impose financial penalties. Alternatively, it might issue a
non-statutory private warning. The FCA also has a range of other
disciplinary measures at its disposal such as variation or cancellation
of a firm’s permissions to carry out regulated activities or withdrawal
of an individual’s status as an approved person.
The PRA has similar enforcement powers to the FCA but is only
able to impose penalties on PRA-authorised firms.
The PRA is part of the BoE and exercises its functions through the
Prudential Regulation Committee. The BoE also has various powers
in the context of crisis management under a special resolution regime
and in its role as overseer of financial market infrastructures.
6.3 Are the decisions of regulatory bodies binding on the
parties to a financial services dispute?
Yes, the decisions of regulatory bodies are binding on the party in
respect of which the decision is issued.
6.4 What rights of appeal from regulatory decisions
exist?
A party may challenge the decision of the FCA, PRA or BoE by
appealing to the Upper Tribunal (Tax and Chancery Chamber).
6.5 Are decisions of regulatory bodies publicly
accessible?
Yes, most decisions/notices of the FCA/PRA are publicly accessible
online – however, this will depend upon the type of notice that has
been issued and type of action the regulator has chosen to take. A
private warning, for example, will not be publicly available. The
FOS also publishes its decisions online.
7 Updates – Cases and Trends
7.1 Summarise any legislative developments in this area
expected in the coming year. Describe any practical
trends in your jurisdiction (e.g., has the financial
crisis impacted legislation? Has there been an
increase in the powers of regulatory bodies as a
reaction to the crisis? Has there been a change in the
amount and type of cases being brought by and
against financial service providers?).
The financial crisis did lead to an increase in claims brought against
financial services providers, both as a direct result of the conduct of
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certain financial services providers in that period and the increased
regulatory scrutiny resulting from the crises. In several different
contexts, regulatory findings have served as the evidential
springboard for civil claims. There has also been a significant
expansion of the regulatory framework in the financial services
sector as a result of the financial crisis.
Another significant practical trend arises out of the liberalisation
and growth of the litigation funding market in England & Wales.
This has made it possible for practitioners to identify claims arising
from particular conduct by financial services providers or financial
products and then seek to attract groups of potentially affected
individuals and/or companies to bring those claims on a no- or low-
risk basis.
7.2 On an international level, would your jurisdiction be
considered to be more financial institution- or
customer-friendly?
Financial institutions are often able to avoid and resist claims
through use of exclusion and limitation of liability clauses.
However, the UK provides a robust regulatory environment with
significant protections for retail customers in particular.
7.3 Please identify any significant cases regarding
financial services disputes during the past 12 months.
Please highlight the significance of the case(s), any
new or novel issues raised and what lessons can be
drawn from them.
The Director of the Serious Fraud Office v Eurasian Natural Resources Corporation Ltd [2018] EWCA Civ 2006 – this Court of
Appeal decision overturned a controversial High Court decision in
which the judge had concluded that certain internal documents
created by the appellant, Eurasian Natural Resources Corporation
Ltd (ENRC), during an SFO investigation were not protected by
litigation privilege, as they had not been brought into existence for
the dominant purpose of resisting or avoiding contemplated
criminal proceedings against ENRC. The High Court judge had
ordered that the documents be provided to the respondent, the SFO,
for inspection. The Court of Appeal instead concluded that
litigation was in reasonable contemplation when the SFO initiated
its investigation and that the documents created by ENRC in the
course of the investigation were privileged. The High Court
decision had potentially significant implications for those subject to
regulatory investigations and enforcement and its reversal has been
widely welcomed.
UBS AG and UBS Limited v Kommunale Wasserwerke Leipzig GmbH and others [2017] EWCA Civ 1567 – the Court of Appeal
found that the High Court was correct to have rescinded certain
credit protection agreements between a bank and its customer on the
basis of a corrupt arrangement between the bank and the customer’s
advisor. The High Court held that a bribe paid by the customer’s
advisor to a director of the customer was paid by the advisor as the
bank’s agent (even though the bank did not know about the bribe).
The Court of Appeal did not consider that the bribe was paid by the
advisor as an agent of UBS but held that the bank’s conscience was
nevertheless sufficiently affected by the bribe that it would be
inequitable for the credit agreements to be enforceable. This
introduces an arguably novel principle that where a third party
dishonestly sets out to undermine a fiduciary relationship, equity
may fix that third party with responsibility for a bribe paid by the
fiduciary that it was not aware of. This decision demonstrates that
the courts are willing to apply equitable principles creatively in
order to avoid what they perceive to be substantial injustice. Property Alliance Group Ltd v The Royal Bank of Scotland Plc [2018] EWCA Civ 355 – this was a much anticipated Court of
Appeal judgment in this interest rate swap mis-selling and LIBOR
manipulation test case. Whilst the appeal was dismissed in full
(such that the customer’s claims failed), the Court of Appeal’s
decision clarified a number of aspects of the law in this area. The
Court of Appeal found that in selling the LIBOR-linked swap
products, The Royal Bank of Scotland Plc (RBS) had made an
implied representation that it was not seeking to manipulate the
LIBOR reference rate and that it did not intend to do so in future.
However, the Court of Appeal held that Property Alliance Group Ltd
(PAG) had not proved that the representation was false, in particular
because although RBS had admitted that it had manipulated Yen and
Swiss Franc LIBOR, there was no such admission in respect of GBP
LIBOR and insufficient evidence to provide manipulation. The
Court of Appeal also disapproved of the concept of a bank owing an
‘intermediate’ or ‘mezzanine’ duty of care (more than a duty not to
misstate/mislead, less than a full advisory duty).
First Tower Trustees Limited & Intertrust Trustees Limited v CDS (Superstores International) Limited [2018] EWCA Civ 1396 –
although not itself a financial services decision, this is an important
decision in relation to contractual estoppel, which is one of the main
defences arising in financial services disputes. The dispute
concerned misrepresentations by the appellant landlords to a
prospective tenant in relation to asbestos issues in the properties to
be leased. The leases contained non-reliance clauses to the effect
that the tenant had not relied on any representations made by the
landlords before entering into the leases. The High Court decided
that the landlords were liable and the landlords appealed. The Court
of Appeal dismissed the appeal, holding that the non-reliance
clauses fell within s. 3 of the Misrepresentation Act 1967 such that
they were of no effect except insofar as they satisfied the
requirement of reasonableness under UCTA, which they did not.
The Court of Appeal did not accept that clauses excluding reliance
on pre-contract representations could be characterised as ‘basis
clauses’ (defining the basis of which the parties were contracting
rather than excluding liability) – if, but for the clause, there would
be liability then the clause is an exclusion clause subject to the
statutory controls. In light of other recent decisions, this one
potentially marks a shift in the attitude of the courts.
7.4 Have global economic changes caused any changes
to financial services litigation/regulation in your
jurisdiction?
The historic low interest rate environment which has followed the
financial crisis led to significant regulatory scrutiny and claims
relating to the pre-crisis sale of interest rate derivatives, particular to
retail customers. There has also been growth in English litigation as
an export product, with parties (either when contracting or
subsequently) choosing the courts of England & Wales as their
dispute resolution jurisdiction despite the lack of an obvious
connection between the dispute and the jurisdiction.
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Simon Hart
RPC
Tower Bridge House
St Katharine’s Way
London E1W 1AA
United Kingdom
Tel: +44 20 3060 6671 Email: [email protected] URL: www.rpc.co.uk
Daniel Hemming
RPC
Tower Bridge House
St Katharine’s Way
London E1W 1AA
United Kingdom
Tel: +44 20 3060 6806 Email: [email protected] URL: www.rpc.co.uk
RPC’s Financial Disputes team specialises in complex, high-value, high-profile disputes in investment banking, fund management and capital
markets. We have over two decades of experience acting for institutional investors, borrowers and market counterparties. Unlike most law firms in
the City of London, we can take on instructions which make us adverse to the investment banks and other financial institutions.
Our clients, often international, include hedge funds, pension funds, European banks, private equity firms, investment advisors, commodity houses,
corporates, family offices and high-net-worth individuals.
RPC is a broad-based professional services firm made up of 82 partners, over 300 other lawyers and more than 600 people in total. Our international
practice has a particular focus on Asia and we work closely with our offices in Hong Kong and Singapore. Where we need to work alongside lawyers
in other jurisdictions, we are part of the TerraLex network and have access to over 150 law firms in 100 jurisdictions across the globe.
You can follow our Financial Disputes team on Twitter @conflictfreeRPC.
Simon Hart is a Partner in the Commercial Disputes practice and Head
of our Financial Disputes team.
Simon’s litigation practice has seen him guide clients through a
number of complex banking disputes, often acting against the largest
investment banks. He has acted in claims involving derivatives,
structured products, hedging arrangements and CDOs. He regularly
advises on disputes arising out of loan facilities, trade finance and
financial restructurings. He has acted for a wide variety of clients
including hedge funds, high-net-worth investors, financial institutions
and insolvency office holders.
He also has many years of experience of advising clients in relation to
multi-jurisdictional litigation involving fraud, asset tracing and recovery,
and enforcement of judgments as well as commercial contracts and
shareholder disputes.
Simon has assisted corporate clients with regulatory and internal
investigations, of a cross-border nature, often relating to anti-
corruption.
Daniel Hemming is a Senior Associate in the Financial Disputes team.
Daniel acts for a broad range of clients, with a particular focus on the
financial services sector in which he has advised banks, asset
managers, hedge funds and high-net-worth individuals. He has acted
and continues to act adverse to the largest investment banks and has
expertise in disputes relating to derivative products, the close-out of
financial transactions (including under industry-standard master
agreements) and securities valuations.
Daniel also has experience of complex jurisdictional issues and
proceedings relating to the enforcement of foreign judgments in
England.
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Borenius Attorneys Ltd
Markus Kokko
Vilma Markkola
Finland
1 Bringing a Claim – Initial Considerations
1.1 What are the most common causes of actions taken
by or against financial institutions and service
providers in your jurisdiction?
Typical disputes involving financial institutions are disputes
concerning the right to insurance compensation and the right of
recourse of insurance companies, disputes related to guarantees or
security, and alleged breaches of obligation to give information and
the duty of loyalty. Typical actions taken against customers include
debt collection.
Often claims by or against financial institutions are settled or
resolved in out-of-court bodies before they proceed to litigation. In
the financial services sector, the competent out-of-court body in
many cases is the Finnish Financial Ombudsman Bureau (FINE).
For example, non-professional investors tend to bring cases
concerning investment disputes to FINE rather than issue legal
proceedings in court.
1.2 What remedies are most likely to be awarded?
In general, compensation for damages is typically awarded in
financial services disputes. The aim is to put the suffered party in
the financial position in which it would have been if the other party
would have fulfilled its obligations as agreed. Punitive damages as
such are not available under Finnish law. Also, rescission and
adjustment of contracts and injunctions are possible remedies.
1.3 Who has a right of action in financial services
disputes? Does it make a difference if the customer is
an individual or a commercial entity?
In general, parties to a financial services contract have a right of
action. Under certain conditions, third parties may also have a right
of action.
In the financial services sector, litigation is used both in disputes
between businesses and in disputes between businesses and
individuals. In disputes between businesses, arbitration is
sometimes the chosen method of dispute resolution, but litigation
remains more popular in the financial services sector. Business
parties may include a prorogation clause to their agreement stating
that, for example, only one particular court or the courts of one
country have jurisdiction over a dispute. Typically, the chosen
domestic court is the District Court of Helsinki.
If the customer is a consumer, the stricter provisions of the Finnish
Consumer Protection Act (1978/38, as amended) apply.
Additionally, other statutes relating to financial services impose
stricter rules on contractual relationships in which one of the parties
is a consumer and the other one a financial institution. The court
procedure in state courts is similar irrespective of whether both
parties are businesses or one party is a business and the other one an
individual customer.
In Finland, there are also out-of-court bodies that issue
recommended resolutions to disputes. Some out-of-court bodies are
only available to certain types of contracting parties. Please see
section 6 on out-of-court bodies.
1.4 Is third-party funding available in financial services
litigation (crowdfunding, maintenance, champerty,
etc.)? Does litigation insurance operate in your
jurisdiction and, if so, what are the implications for
this?
Third-party funding is possible, and it is most commonly realised by
way of insurance. Other types of third-party funding are reasonably
uncommon, although they have been used in certain landmark cases
that concerned entire industries or cases with multiple claimants.
In Finland, both private individuals and businesses may take
advantage of insurance policies that cover litigation expenses. The
specific terms and conditions depend on the insurance product and
the insurance company in question. Generally, parties to a contract
may be more eager to commence proceedings if they have an
insurance that covers a part of the potential costs.
1.5 Are class action law suits available in your
jurisdiction? If so, has this impacted financial
services litigation? Has there been an increase in
class action suits post the financial crisis?
In Finland, class action law suits have been available since 2007. To
this day, no class action law suits have been filed. Class actions are
only available to consumers in civil cases between consumers and
businesses.
Under the Finnish Act on Class Actions (2007/444, as amended), a
case may be heard as a class action if: several consumers have
claims against the same defendant, based on the same or similar
circumstances; the hearing of the case as a class action is expedient
in view of the size of the class, the subject matter of the claims
presented and the proof offered; and the class has been defined with
adequate precision.
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In Finland, only the Consumer Ombudsman, which also represents
the class, has the authority to bring a class action. Only consumers
who opt in will become class members.
2 Before Commencing Proceedings
2.1 What are the main barriers to financial service
litigation for customers? Are there exclusionary
clauses or duty defining clauses in customer
contracts which prevent customers from bringing a
case?
The main barriers are the cost risk related to litigation and the
potentially long duration of the proceedings. Therefore, disputes
related to financial services are often resolved amicably or in out-of-
court bodies.
Generally, exclusionary or duty defining clauses are not used in
customer contracts, apart from monetary limitations of liability.
2.2 Is there a time limit within which financial services
disputes must be commenced? If so, is it different
depending on whether proceedings are brought
before a regulatory body or before the courts? Does
the commencement of a regulatory process ‘stop the
clock’?
In Finland, the limitation periods are governed by the Act on the Statute
of Limitations on Debt (2003/728, as amended). The general limitation
period is three years. The starting time of the limitation period depends
on the type of the case. For example, in cases concerning compensation
based on a breach of contract the time starts when the party to the
contract notices or should have noticed the breach.
Generally, a limitation period can be interrupted either in an informal
way, e.g. by reminding the other party of the obligation, or with a
statutory measure that interrupts the limitation period, e.g. by filing a
claim before court or initiating proceedings in an out-of-court body. A
new limitation period of equal duration starts after the interruption and
it can be interrupted several times. Generally, initiating proceedings in
a competent out-of-court body interrupts the limitation period.
In some cases, there are also specific periods for filing a suit. These
periods apply to, e.g., actions brought against board members. The
specific period for filing a law suit can only be interrupted with a
statutory measure that interrupts the limitation period, in most cases
only by filing a claim.
2.3 Can parties in financial services litigation avail of
litigation and/or legal advice privilege? Are
investigations conducted by regulated bodies
considered ‘litigation’ in the context of privilege?
The rules on privilege in civil proceedings are similar to the
exemptions of giving a testimony. Attorneys and their assistants are
not allowed to present a document in court if it can be assumed that
the document contains something on which they may not be heard
on as a witness. In-house counsels do not enjoy this privilege. The
court can order, under certain conditions, an attorney to testify and
produce documents when the attorney has not acted for the client in
court proceedings, i.e. only acted in an advisory role.
Any witness may also refuse to testify regarding a commercial
secret, unless weighty reasons require that the witness be heard on
the subject matter. Similarly, a party may refuse to provide
documents containing such information.
Generally, the aforementioned privileges also apply to procedures
conducted by out-of-court bodies.
The Finnish Financial Supervisory Authority (FIN-FSA) has,
notwithstanding confidentiality provisions, certain rights to obtain
and inspect information that is necessary for the exercise of its
statutory duties. In specific cases, the FIN-FSA is entitled to obtain
information, documents or records from attorneys or their assistants
concerning clients of the attorneys. This includes the right to obtain
information concerning market abuse, disclosure of information
affecting the value of securities, or trading on a regulated market or
multilateral trading facility.
2.4 Are standard form master agreements used in your
jurisdiction for financial institutions (for example, the
ISDA Master Agreement)? How are they treated?
The International Swaps and Derivatives Association (ISDA)
Master Agreement is widely used both between banks and between
banks and large commercial customers. In many cases, the law
governing such agreements is English law. However, derivative
contracts governed by national law are also used.
2.5 Are there any non-contractual duties which are
binding on financial services entities (for example, a
particular fiduciary duty or a code of conduct)? Can
they be contracted out of?
In the financial services legislation, there are provisions concerning
procedures and marketing practices that financial services entities
must follow. For example, under the Finnish Insurance Contracts
Act (1994/543, as amended), the insurer must provide the applicant
with information that is necessary in assessing the insurance
requirement and selecting the appropriate insurance. Under the
Finnish Act on Credit Institutions (2014/610, as amended), credit
institutions must in their marketing provide the customer with all the
information that is necessary for the customer’s decision-making
concerning the commodity.
The FIN-FSA issues regulations and guidelines for financial
institutions. These regulations and guidelines cover a variety of
topics, e.g. code of conduct, accounting and financial reports as well
as commencement of activities. The regulations are legally binding
and financial services entities must comply with them. Guidelines
generally include the FIN-FSA’s interpretations of legal provisions
and its recommendations for financial services entities and are
recommendatory in their nature.
Additionally, principles of good practice, e.g. principles of good
banking practice and good securities market practice, and self-
regulation norms guide financial institutions in their activities.
General contractual principles also impose a duty of loyalty on
contracting parties. They must loyally co-operate in the completion
of a contract, which includes, for example, taking into account the
opposing parties interests and assisting that party in mitigating
damages. Additionally, during pre-contractual negotiations, a duty
of good faith exists.
3 Progressing the Case
3.1 Is there a specialist court or specialist judges for
financial services litigation?
There are no specialist courts or judges for financial services
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disputes in Finland. In general, the state courts, which are District
Courts, Courts of Appeal and the Supreme Court, handle disputes
regarding financial services. Depending on the type of the case,
Administrative Courts and the Supreme Administrative Court or the
Market Court may also have jurisdiction over disputes concerning
financial services.
3.2 Does the method of service of proceedings differ for
financial service litigation?
The method of service of proceedings for financial service litigation
follows the customary method of service of proceedings. Under the
Finnish Code of Judicial Procedure (1734/4, as amended), the basic
principle is that the court sees to the service of proceedings. At the
request of a party, the court may entrust the service of a notice to the
party.
3.3 Are there any specific pre-trial procedures that must
be followed for financial services litigation in your
jurisdiction? If so, what are they and what are the
consequences of not abiding by them?
In Finland, there are no specific pre-trial requirements in financial
services disputes. In general, an advocate must notify the opposing
party before commencing legal action. This is considered good
advocacy practice. A claim is filed when the claimant submits an
application for summons to the registry of the court. The
application for summons must comply with certain formal
requirements set out in the Code of Judicial Procedure. If the
application for summons does not meet these requirements, the
court exhorts the claimant to supplement it.
3.4 Are there any alternative dispute resolution (ADR)
regulations that apply to financial services disputes in
your jurisdiction? Are ADR clauses typically included
in financial services contracts, and is ADR commonly
used to resolve financial services disputes in your
jurisdiction?
ADR methods, such as arbitration and mediation, may in most cases
be used in case the parties so agree. However, litigation continues
to be the preferred method in resolving disputes even between
businesses.
Consumers are not bound by a term in a contract concluded before
the dispute arises, under which a dispute between a consumer and a
business shall be settled in arbitration. If one of the parties is a
consumer, the dispute is typically resolved in an appropriate out-of-
court body or in state courts.
Court mediation in accordance with the Finnish Act on Mediation in
Civil Matters and Confirmation of Settlements in General Courts
(2011/394, as amended) is also a possibility in financial services
disputes, but is relatively rarely used in practice.
3.5 How are claims for negligent misstatement/mis-selling
dealt with in your jurisdiction?
The relevant authorities closely supervise operators in the financial
market and may impose sanctions for negligent misstatement and
mis-selling. For example, the FIN-FSA may issue public warnings
or conditional fines to financial market operators that make
negligent misstatements or pursue mis-selling in their activities.
Also, a police investigation may be requested if the FIN-FSA
suspects that a criminal offence has been committed.
Additionally, the Consumer Ombudsman monitors financial market
operators and their activities in relation to consumers. The
Consumer Ombudsman or the Market Court, depending on the case,
may impose prohibitions and penalty payments on financial market
operators.
The injured party may claim the contract to be invalid and seek
damages based on the misstatement or mis-selling. These claims are
handled in ordinary civil proceedings according to the provisions of
contract law and tort law.
3.6 How have unfair terms in contracts been interpreted
in your jurisdiction? Are there any causes of action or
defences available specifically to consumers? How
broad is the definition of a ‘consumer’ in your
jurisdiction?
Unfair terms are generally considered to be terms that unreasonably
favour one party to the detriment of the other party. The terms may
govern, for example, payments, delivery or duration of the contract.
The evaluation is made on a case-by-case basis. Unfair terms
mostly occur in contractual relationships in which one party is in a
weaker position than the other one.
An unfair term does not necessarily make the entire contract null
and void. Under the Finnish Contracts Act (1929/228, as amended),
unfair contract terms may be adjusted or set aside. If one of the
parties to the contract is a consumer, the provisions of the Consumer
Protection Act concerning adjusting and setting aside of unfair
terms in contracts apply. Depending on the unfair contract term, the
rest of the contract may also be adjusted or the whole contract may
even be declared terminated.
Consumers are widely protected under the Finnish legislation.
Under the Consumer Protection Act and certain other acts, stricter
provisions have been imposed on businesses providing goods and
services to consumers. These provisions concern, for example,
marketing and information to be provided prior to the conclusion of
a contract.
Under the Consumer Protection Act, a consumer is defined as a
natural person who acquires consumer goods and services primarily
for a use other than business or trade. If the primary use of the good
or service acquired is private use, the person that acquires the good
or service is generally regarded as a consumer, even if the good or
service is partly utilised in business. Consumer goods and services
are goods and services that are offered to natural persons or which
such persons acquire, to an essential amount, for their private
households.
The aforementioned class action law suit is only available to
consumers. In Finland, class actions follow an opt-in model, which
requires consumers who want to belong to a class to submit a letter
of accession to the class.
Consumers can also submit disputes to the Consumer Dispute Board
or to FINE, depending on the type of the case.
3.7 How is data protection/freedom of information dealt
with in financial services litigation? Can a financial
services customer access their personal data? How is
commercially sensitive or confidential information
dealt with in the context of discovery or disclosure?
Under the Finnish Act on the Publicity of Court Proceedings in
General Courts (2007/370, as amended), trial documents and court
proceedings are public unless provided otherwise. The parties to the
case have the right to be informed about the contents of trial
documents that are not public.
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Discovery and disclosure as exercised in common law countries do
not exist in the Finnish judicial system. However, the court may,
based on the request of a party and under certain conditions, order
the opposing party or a third party to produce specific documents.
The court may order those documents to be confidential. Otherwise,
all documents are publicly available.
Further, financial institutions must comply with the provisions set
out in the General Data Protection Regulation (GDPR). The
provisions of the GDPR concerning right of access to the personal
data by the data subject apply to financial customers’ access to their
personal data.
4 Post Trial
4.1 Is there a right of appeal in financial services
disputes?
In general, there is a right of appeal in financial services disputes.
The judgment of District Courts can be appealed to the competent
Court of Appeal. After the judgment has been rendered in the Court
of Appeal, a party may petition the Supreme Court for a leave to
appeal. The Supreme Court may grant a leave to appeal, if this is
important for the application of law or the consistency of court
practice. A leave to appeal may also be granted if there is a reason
for this because of a procedural or other error, or if there is another
important reason. In practice, a leave to appeal is seldom granted.
The decisions of the Administrative Courts can normally be
appealed in the Supreme Administrative Court. Certain types of
cases require a leave to appeal. The decisions of the Market Court
can generally be appealed either to the Supreme Administrative
Court or to the Supreme Court. A leave to appeal may be required.
4.2 How does the court deal with costs in financial
services disputes?
Under the Code on Judicial Procedure, the basic principle is that the
losing party is liable for all the reasonable and necessary legal costs
of the opposing party. The reasonableness and necessity of the costs
are evaluated on a case-by-case basis.
Under the Code on Judicial Procedure, it is also possible for the
court to reduce the payment liability of the party, if it would be
manifestly unreasonable to render one party liable for the legal cost
of the opposing party. The circumstances giving rise to the
proceedings, the situation of the parties and the significance of the
issue are factors that the court takes into account when evaluating
the payment liability. The reduction of the payment liability rarely
applies to disputes between businesses.
5 Cross-Border Issues
5.1 What issues typically arise in cross-border disputes
or investigations involving financial institutions and
how are they catered for in your jurisdiction?
So far, cross-border financial disputes involving financial
institutions have been very rare in Finland. On a general level,
issues regarding jurisdiction of courts and enforceability of
judgements are typical in disputes involving foreign parties. As a
European Union Member State, Finland is bound by various EU
regulations that are applied in cross-border disputes.
5.2 What is the general approach of the courts in your
jurisdiction to co-operating with foreign courts or
regulatory bodies or officials in financial services
disputes (including investigations)?
Co-operation with foreign countries occurs, especially when
authorities are investigating criminal offences connected to foreign
countries. Also, out-of-court dispute resolution bodies may co-
operate with corresponding bodies in other countries.
There are different kinds of mechanisms of co-operation based on
EU legislation, international conventions and national laws. As an
EU Member State, Finland is bound by, for example, Regulation
(EC) No 1206/2001 on co-operation between the courts of the
Member States in the taking of evidence in civil or commercial
matters.
Finland is a member of certain international financial services
networks, e.g. the FIN-NET network of the European Commission
and the International Network of Financial Services Ombudsman
Schemes (INFO Network). Finland has signed and ratified certain
international conventions concerning dispute resolution, e.g. the
Convention on the Settlement of Investment Disputes between
States and Nationals of Other States (the ICSID Convention).
5.3 Is extra-territorial jurisdiction typically asserted in
your jurisdiction and, if so, in what circumstances?
Extra-territorial jurisdiction may be applied in certain criminal
matters, e.g. in connection with criminal offences committed
outside of the Finnish territory that have been directed at Finnish
citizens or Finnish legal entities and that under Finnish law may be
punishable by imprisonment for more than six months.
Extra-territorial jurisdiction is also applied in certain data protection
issues.
5.4 Are unilateral jurisdiction clauses valid and
enforceable in your jurisdiction?
In general, unilateral jurisdiction clauses are valid and enforceable.
However, a court may mitigate such a clause in cases where the
contracting parties are not of equal merit. Unilateral jurisdiction
clauses may not go against peremptory provisions of law. In
contracts concluded between businesses and consumers, the use of
unilateral jurisdiction clauses is limited and these clauses usually
only apply to the advantage of the consumer.
6 Regulated Bodies
6.1 What bodies, apart from the courts, regulate financial
services disputes in your jurisdiction?
In Finland, some out-of-court bodies issue recommendations to
financial disputes. The competent body depends on the type of the
dispute and the parties involved.
In the financial services sector, the main body is FINE. Its office
and three complaints boards issue recommendatory resolutions to
financial services disputes. The boards are the Insurance, Banking
and Securities Complaints Boards. The Insurance Complaints
Board examines insurance-related disputes of both consumers and
companies, whilst the Banking Complaints Board examines
disputes in which one party is a consumer, a small or medium-sized
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enterprise or other comparable customer. The Securities
Complaints Board hears disputes between service providers and
non-professional investor customers.
If a financial services dispute between businesses does not fall under
the competence of FINE, the available options for dispute resolution
are generally mediation, arbitration or litigation.
Certain out-of-court bodies are available only to consumers. For
example, consumer advisors who work at local Register Offices
assist and mediate disputes and the Consumer Disputes Board issues
recommended resolutions to a variety of consumer matters.
In addition to the aforementioned out-of-court bodies, certain
authorities monitor service providers operating in the financial
services sector to see if they comply with legislation and good
practices. These include, inter alia, the FIN-FSA, the Consumer
Ombudsman, the Data Protection Ombudsman and the Finnish
Competition Authority when competition issues are involved.
6.2 What powers (investigative/inquisitorial/
enforcement/sanctions) do these regulatory bodies
have?
FINE, its Complaints Boards and the Consumer Disputes Board
issue recommendations to the disputes brought before them by the
parties. The parties are not bound by the recommendations, and the
recommendations are not enforceable as such. Generally, the
outcome is either a recommendation for compensation or no
recommendation for compensation.
The examination of disputes is based on the documentation
provided by the parties. Oral hearings are possible in FINE and its
Complaints Boards but they are conducted only for particular
reasons. The bodies may also acquire, at their own expense, expert
opinions if that is necessary in the case.
The FIN-FSA supervises entities that operate in the financial
markets, e.g. banks, insurance and pension companies and
investment firms, in accordance with the Act on the Financial
Supervisory Authority (2008/878, as amended). The FIN-FSA has
the right to receive and inspect information and documents, which
are necessary for it to fulfil its legal supervisory obligations. The
FIN-FSA may impose administrative sanctions, which include
administrative fines, public warnings and penalty payments. It may
also request an investigation if it suspects that a criminal offence has
been committed.
6.3 Are the decisions of regulatory bodies binding on the
parties to a financial services dispute?
FINE, its Complaints Boards and the Consumer Disputes Board
only give recommendations. However, businesses generally tend to
comply with these recommendations. The decisions of the FIN-
FSA are binding.
6.4 What rights of appeal from regulatory decisions
exist?
Since the decisions of the out-of-court bodies are not binding upon
the parties, they are as such not subject to appeal. However, it is
possible to file a claim before court if either of the parties is not
satisfied with the outcome of the body’s decision. The decisions of
the FIN-FSA can be appealed to the Administrative Court or the
Market Court, the competent court depending on the case.
6.5 Are decisions of regulatory bodies publicly
accessible?
The recommendations issued by the Consumer Disputes Board and the
Boards of FINE are publicly accessible. The personal details of the
parties and certain specific details of the case are deleted from the
public versions in such a way that the parties cannot be recognised.
The recommendations are collected in databases that are accessible
online. The FIN-FSA publishes online its administrative sanctions and
supervisory measures.
7 Updates – Cases and Trends
7.1 Summarise any legislative developments in this area
expected in the coming year. Describe any practical
trends in your jurisdiction (e.g., has the financial
crisis impacted legislation? Has there been an
increase in the powers of regulatory bodies as a
reaction to the crisis? Has there been a change in the
amount and type of cases being brought by and
against financial service providers?).
The amount of regulation in the financial services sector has
increased and become more complicated over the years particularly
due to the financial crisis. Also, the supervisory powers of the FIN-
FSA have increased during the past 10 years. Despite the regulatory
changes there is no clear change to be seen in the amount or type of
disputes brought before court.
7.2 On an international level, would your jurisdiction be
considered to be more financial institution- or
customer-friendly?
On one hand, there is a lot of legislation protecting the customers of
banks, insurance companies and investment firms in Finland and also
the supervisory authorities are relatively active. There are several acts,
guidelines and self-regulation norms as well as principles of good
practice that guide financial institutions in their actions. On the other
hand, there are only a few cases in Finland in which judgments have
been rendered against financial institutions, which can be seen as a
sign of a financial institution-friendly approach.
7.3 Please identify any significant cases regarding
financial services disputes during the past 12 months.
Please highlight the significance of the case(s), any
new or novel issues raised and what lessons can be
drawn from them.
No particularly significant cases have been published within the
past 12 months. As stated above, financial services disputes are
often settled or resolved in out-of-court bodies.
7.4 Have global economic changes caused any changes
to financial services litigation/regulation in your
jurisdiction?
There have been no major changes in terms of litigation or dispute
resolution. On the other hand, the amount of regulation directed at
businesses in the financial service industry has clearly increased
during the past few years, which is a result of the global economic
changes and increased insecurity and instability in the financial
industry.
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Markus Kokko
Borenius Attorneys Ltd
Eteläesplanadi 2
00130 Helsinki
Finland
Tel: +358 20 713 3482 Email: [email protected] URL: www.borenius.com
Vilma Markkola
Borenius Attorneys Ltd
Eteläesplanadi 2
00130 Helsinki
Finland
Tel: +358 20 713 3302 Email: [email protected] URL: www.borenius.com
Borenius Attorneys Ltd offers legal services in all aspects of domestic and cross-border dispute resolution, including conflict management and
strategic planning. The dispute resolution team is one of the largest and most respected in Finland. It combines wide experience with knowledge of
various industry sectors. In addition to civil proceedings, Borenius regularly represents Finnish and foreign clients in arbitration proceedings under
various arbitration rules, as well as in ad hoc arbitration proceedings. Our experts frequently serve as arbitrators in domestic and international
commercial proceedings.
Markus Kokko regularly advises major domestic and international
clients on dispute resolution and corporate crime cases.
Markus has in-depth experience of domestic and international
corporate and commercial disputes and he has acted as lead counsel
in numerous extensive cases. His field of experience encompasses
cases related to a wide variety of business sectors, such as the
chemicals industry, financial markets, international trade, retail and
wholesale and mining. Markus also has an exceptional track record in
handling a broad range of litigation and arbitration cases.
Markus frequently advises companies and executives in relation to
complex corporate crime cases and criminal investigations regarding,
inter alia, insider trading, environmental violations, corruption and tax.
Markus’ efficient and client-oriented approach has earned him an
excellent reputation which has been recognised by rankings in
Chambers Global, Chambers Europe, The Legal 500 and Best Lawyers.
Markus heads the Litigation & Arbitration and Corporate Crime teams
at Borenius Attorneys Ltd.
Vilma Markkola is an Associate at Borenius Attorneys Ltd. Vilma is
specialised in questions related to dispute resolution. In addition to
both domestic and international litigation and arbitration and corporate
crime-related cases, Vilma frequently advises clients on issues
relating to employment and insolvency law.
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Dethomas Peltier Juvigny & Associés
Arthur Dethomas
Dessislava Zadgorska
France
1 Bringing a Claim – Initial Considerations
1.1 What are the most common causes of actions taken
by or against financial institutions and service
providers in your jurisdiction?
The most common causes of actions taken by financial institutions
and service providers against clients relate to loan default or fraud to
the detriment of the financial institutions.
The most common causes of actions taken by clients relate to:
■ the breach of the financial institutions’ or service providers’
general duty to inform, advise and alert their clients of the
risks related to investments or associated with a specific
financial product;
■ the infringement of specific regulations relating to the form
and substance of the contracts, namely governing personal
loans and contracts with consumers; and
■ general civil liability in matters where bank wire-transfers are
made. For instance, there has been a recent increase in Forex
trading fraud cases (e.g. the use by individuals of false
trading schemes to defraud investors, mostly individuals with
little market experience, by convincing them that they can
expect to gain a high profit. In these instances, bank wire-
transfers are used and the financial institutions are the only
remaining potential defendants).
1.2 What remedies are most likely to be awarded?
Whether the action be founded in contract or in tort, damages are
most likely to be awarded.
If the claim is based on contract, besides damages the following
remedies could be available, alternatively or on a cumulative basis
(if they are compatible):
■ specific performance, except where it is materially
impossible or if the cost of specific performance would
evidently be disproportionate;
■ withholding performance;
■ reduction in the price initially agreed; and/or
■ termination of the contract.
1.3 Who has a right of action in financial services
disputes? Does it make a difference if the customer is
an individual or a commercial entity?
As a general rule, any interested party may bring an action. This
rule applies to financial services disputes. In practice, the action
may be brought by financial institutions, by their clients (individuals
or legal entities) or by accredited associations.
The court having jurisdiction over a claim is determined depending
on whether the customer is an individual or a commercial entity.
Where the claimant is a financial institution the claim shall be brought:
■ before the commercial court if the defendant is a commercial
entity or person; or
■ before the civil court (tribunal de grande instance) or the
small claims civil court (tribunal d’instance) if the defendant
is an individual or a non-commercial legal entity. The small
claims civil court has jurisdiction over claims worth less than
EUR10,000 and exclusive jurisdiction over consumer loans
disputes where the value of the claim is EUR75,000 or less.
Where the claimant is an individual or a non-commercial legal
entity, the claim articulated against a financial institution may be
brought either before the commercial court or before the civil court,
at the claimant’s choice.
1.4 Is third-party funding available in financial services
litigation (crowdfunding, maintenance, champerty,
etc.)? Does litigation insurance operate in your
jurisdiction and, if so, what are the implications for
this?
Third-party funding is available in financial services litigation.
There are no torts of champerty or maintenance as the case may be
in some common law systems.
In practice, third-party funding is mostly used in arbitration
proceedings which are, in France, significantly more expensive than
state court proceedings.
Although third-party funding is not subject to formal regulation, the
Cour de Cassation (the French supreme jurisdiction) recognised the
validity of third-party funding agreements as sui generis contracts.
In addition, on 21 February 2017, the Paris Bar Council issued a
resolution recognising third-party funding for both the parties and
their counsels, providing in essence that:
■ the attorney remains solely accountable to his client, not to
the third-party funder;
■ only the client (and not the funder) enjoys the attorney-client
privilege; and
■ the funded party’s attorney is required to “encourage his client to disclose the existence of such funding to the arbitrators”
and should warn the funded party about the possible
consequences of not disclosing it (e.g. namely a conflict-of-
interest issue that may result in the nullity of the award).
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Litigation insurance is available under French law and may cover
the insured party’s legal fees and court costs.
1.5 Are class action law suits available in your
jurisdiction? If so, has this impacted financial
services litigation? Has there been an increase in
class action suits post the financial crisis?
Class actions, as understood in common law jurisdictions, were
introduced in 2014. A class action (referred to as a “group action”)
may be brought in relation to consumer and competition law
disputes, health product liability, environmental liability,
discrimination and personal data protection. The French class
action is an opt-in mechanism (except the “simplified group action”,
available under consumer law, which is closer to an opt-out
mechanism) and may be initiated only by certified associations or
given groups (labour unions).
Approximately 10 class actions have been made public thus far, and
relate to the banking, real estate and health sectors or to
discrimination law. Their impact on financial services litigation is
difficult to assess at this stage.
In addition, several other mechanisms enable claimants to act
jointly, including (i) a legal action taken by associations
representing their members for a claim as to a collective loss, and
(ii) a joint representative action taken by certain accredited
associations, namely in the investment law sector.
2 Before Commencing Proceedings
2.1 What are the main barriers to financial service
litigation for customers? Are there exclusionary
clauses or duty defining clauses in customer
contracts which prevent customers from bringing a
case?
The main barriers to financial service litigation for customers seem
to be cost- and time-related (a judgment in a claim for civil liability
is usually given within 18 months to two years).
Limitation or exclusion of liability clauses as well as duty defining
clauses are, in principle, valid and enforceable. However, due to the
protection granted by law against unfair terms of contracts (see
question 3.6), such clauses are frequently deemed invalid by courts
and, therefore, do not prevent, in practice, customers from bringing
a case. In particular, such clauses will be deemed invalid:
■ in all types of contracts where the clause contradicts the
essential obligation of the contract or where the contract
breach was made intentionally or resulted from gross
negligence;
■ in all contracts with consumers or non-professionals; and
■ in all “non-negotiated contracts” (contrats d’adhésion) if the
clause results in a significant imbalance in the rights and
obligations of the parties.
2.2 Is there a time limit within which financial services
disputes must be commenced? If so, is it different
depending on whether proceedings are brought
before a regulatory body or before the courts? Does
the commencement of a regulatory process ‘stop the
clock’?
Before the courts, depending on the cause of action, various time
limits apply. The French general statute of limitation is five years,
starting from the day the holder of a right knew or should have
known the facts enabling him to exercise his right. A specific two-
year limitation period applies, however, to claims by professionals
against consumers. The Cour de Cassation ruled that this two-year
limitation period was “a general rule” that applies “to all financial services provided by professionals to private individuals”. The
parties of a contract are also given the possibility to arrange and
determine the time limit which shall apply to the actions under the
terms of their contract.
Before regulatory bodies, except in cases where claims against
financial institutions in relation to investment services are submitted
to a regulatory mediator, individuals or entities may not, stricto sensu, bring a case before regulatory authorities. In order to obtain
remedies, the claimant in a financial dispute may bring an action
only before the courts.
A three-year time limit applies to sanction and enforcement
proceedings brought by the Financial Markets Authority (Autorité des Marchés Financiers or “AMF”). By contrast, disciplinary
actions brought by the French authority responsible for overseeing
and licensing banks, insurance companies and mutual insurers
(Autorité de Contrôle Prudentiel et de Résolution or “ACPR”) are
not subject to any statutory or legal limitation period.
Either way, the commencement of a regulatory process does not
interrupt time limits applicable to actions brought before the courts.
2.3 Can parties in financial services litigation avail of
litigation and/or legal advice privilege? Are
investigations conducted by regulated bodies
considered ‘litigation’ in the context of privilege?
French law does not provide for a litigation or legal advice privilege
as understood in common law systems.
Concerning legal advice, French lawyers are bound by professional
secrecy. In this respect:
■ communications between lawyers are covered by a general
legal privilege; lawyers are, however, entitled to waive
confidentiality by specifying that a document is “non-
confidential” (officiel); and
■ communications between lawyers and their clients are also
covered by a full legal privilege which may not be waived by
the client.
By contrast, in-house lawyers do not benefit from legal privilege in
France, the French concept of legal privilege being based on an in personam approach to confidentiality rather than on the content of
the communication as the case may be in common law systems.
As regards litigation, French law only provides for secrecy of
criminal investigations (including financial services criminal
investigations). Parties to disputes brought before the civil courts,
including financial services cases, cannot avail of litigation
privilege. However, in practice, briefs and evidence relating to
pending civil proceedings are not publicly accessible, unlike
judgments which are available to the public.
Concerning investigations conducted by regulatory bodies, AMF
and ACPR inspectors, controllers and employees are bound by
professional secrecy which applies to facts, acts and information
that may come to their attention when performing their duties as
well to documents and information obtained in the course of their
inspections. However, as an exception to this principle, professional
secrecy cannot be raised:
■ in defence against the judicial authorities acting within the
scope of criminal proceedings, or in connection with judicial
liquidation proceedings brought against financial institutions
and entities;
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■ against the national financial intelligence unit (Tracfin), the
French Court of Auditors or a parliamentary investigation
committee when they are carrying out their duties; and
■ against administrative courts seized of an action relating to
ACPR duties.
Professional secrecy may also be waived with regard to counterpart
foreign authorities or other domestic authorities when they are
performing their duties.
2.4 Are standard form master agreements used in your
jurisdiction for financial institutions (for example, the
ISDA Master Agreement)? How are they treated?
Standard form master agreements are frequently used by French
financial institutions and are, in principle, valid and enforceable.
Moreover, in 2018, ISDA launched and published a new 2002 ISDA
Master Agreement governed by French law. This master agreement,
which is the first civil law-governed ISDA Master Agreement, is
intended to provide options for financial institutions that would
prefer, in the Brexit context, to continue trading under a European
Union (“EU”) Member State law with EU jurisdiction clauses.
Specific provisions on “non-negotiated contracts” were recently
introduced in the French Civil Code (by Order dated 10 February
2016). Standard form master agreements are, in fact, likely to be
regarded by courts as non-negotiated contracts and, therefore,
affected by the new legal provisions applicable to such contracts
stating that:
■ any clause which would result in a significant imbalance in
the rights and obligations of the parties is invalid; and
■ ambiguous clauses are interpreted against the party which
drafted the contract.
2.5 Are there any non-contractual duties which are
binding on financial services entities (for example, a
particular fiduciary duty or a code of conduct)? Can
they be contracted out of?
Financial services entities are bound by several non-contractual
duties arising from the law (especially from the French Monetary
and Financial Code and the Consumer Code), from regulation,
recommendations and guidelines issued by the AMF and the ACPR,
and from case law based on the general principles of contract law.
In a non-exclusive manner, examples of duties binding on financial
services entities include organisation rules, conduct of business
rules (such as, for instance, assessment of the suitability and
appropriateness of the service), and a general duty to inform or warn
the customer of the risks associated with financial products.
Investors are entitled to bring court proceedings against financial
services entities on the basis of a regulatory breach provided that a
causal link between said breach and the harm suffered is
demonstrated.
In addition, case law recognises that banks and financial institutions
owe a general duty of information to their clients even before the
signing of the contract. Courts have also imposed a duty on banks
to warn the clients of the potential consequences and risks
associated with loans: banks are obliged to gather information
regarding their clients’ assets and ability to repay, and may be held
liable for granting an inappropriate or excessive loan to a non-
sophisticated borrower. Moreover, regarding specifically regulated
products (such as, for example, personal loans), financial services
entities must follow strict rules as to the form and substance of the
contracts.
As a general rule, investment service providers are obliged to act
“honestly, fairly and professionally” and “in the best interests of clients and the integrity of the market”. Generally speaking, the
above-mentioned non-contractual duties cannot be contracted out of.
3 Progressing the Case
3.1 Is there a specialist court or specialist judges for
financial services litigation?
There is no specialist court for financial services litigation in
France.
Certain larger courts, such as the Paris court of appeals or the Paris
civil court, have specialised chambers devoted to financial services
disputes.
In addition, two international chambers were recently created within
the Paris commercial court and the Paris court of appeals. These
chambers, specifically designed to hear international trade cases,
operate along reformed procedures and methods, inspired by
common law systems, which are particularly interesting for cross-
border financial services litigations:
■ proceedings may be conducted in English, and documentary
evidence may be submitted in the original English version;
■ the judges are selected on the basis of their experience with
cross-border business litigation and have a good knowledge
of banking and financial law;
■ the specific procedural rules allow a quick settlement of the
dispute; and
■ judges may hear parties, witnesses and experts.
3.2 Does the method of service of proceedings differ for
financial service litigation?
No. The proceedings’ rules will vary depending on the court before
which the claim is brought (civil court, small claims civil court,
commercial court) rather than on the nature of the litigation.
3.3 Are there any specific pre-trial procedures that must
be followed for financial services litigation in your
jurisdiction? If so, what are they and what are the
consequences of not abiding by them?
Save for legitimate reasons relating to an emergency or to the nature
of the matter, the claimant must describe in the summons the actions
taken to try to attempt a settlement. However, there is no sanction
stipulated for this obligation.
There is no, as such, pre-trial obligation for parties to refer their
disputes to an ADR mechanism. As an exception to this principle,
all claims referred to small claims civil courts, including, as the case
may be, financial services claims, have to be, subject to some
exceptions, first referred to a judicial conciliator in order to attempt
a settlement.
3.4 Are there any alternative dispute resolution (ADR)
regulations that apply to financial services disputes in
your jurisdiction? Are ADR clauses typically included
in financial services contracts, and is ADR commonly
used to resolve financial services disputes in your
jurisdiction?
There are no specific ADR regulations applicable to financial
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services disputes. Generally, apart from arbitration, several ADR
mechanisms are available under French law: mediation (conducted
by an extra-judicial mediator); conciliation (conducted by a judicial
conciliator); and the participative procedure.
Regarding regulatory proceedings, the AMF can, under certain
conditions, offer a formal settlement (“administrative composition”)
to persons charged with having engaged in certain regulatory
breaches or market abuse. In addition, French law provides for two
settlement mechanisms relating to criminal investigations, inspired
by Anglo-Saxon systems and particularly appropriated for financial
criminal litigation: a “guilty plea” (comparution sur reconnaissance préalable de culpabilité); and “judicial settlement of public interest”
(convention judiciaire d’intérêt public).
Parties can also contractually agree to settle their disputes via ADR
mechanisms, e.g. via mediation, conciliation or arbitration.
However, in contracts with consumers, ADR clauses are deemed
unfair unless the contrary is proved by the professional. In addition,
concerning arbitration clauses, the financial institution will not be
able to enforce the clause against the consumer without the latter’s
consent.
In practice, arbitration clauses are rarely included in financial
services contracts. Mediation and conciliation mechanisms are
more often stipulated, but, generally, ADR seems barely used to
resolve financial services disputes in France, although one of the
expected ADR developments in the near future is the
implementation of a general obligation to attempt settlement before
judicial proceedings can be brought.
3.5 How are claims for negligent misstatement/mis-selling
dealt with in your jurisdiction?
A contract may be rescinded by courts where the consent of one of
the parties was obtained as a result of misstatement schemes (with
the intent of inducing error) or decisive information as to the
consent of a party has been intentionally withheld. The misled party
is also entitled to seek damages. These rules are public policy rules:
the parties may not contractually agree to disregard or limit them.
In addition, as they are required to provide information in a “fair, exact, non-misleading and comprehensible” manner, investment
service providers which provide false, imprecise or misleading
information may be subject to regulatory sanctions.
3.6 How have unfair terms in contracts been interpreted
in your jurisdiction? Are there any causes of action or
defences available specifically to consumers? How
broad is the definition of a ‘consumer’ in your
jurisdiction?
French law provides for several general rules relating to the
interpretation of unfair provisions:
■ in all types of contracts, clauses contradicting the essential
obligation of the contract are invalid or avoided where the
contract breach was made intentionally or resulted from gross
negligence (case law); and
■ in all “non-negotiated contracts” (i) ambiguous clauses are
interpreted against the party who drafted the contract, and (ii)
non-negotiated clauses which result in a significant
imbalance in the rights and obligations of the parties are
invalid.
Regarding consumer protection specifically:
■ financial services providers have a broader obligation
regarding information and advice provided to consumers or
non-professionals; and
■ clauses which result in a significant imbalance in the rights
and obligations of the parties to the consumer’s or non-
professional’s detriment are invalid, either in negotiated and
non-negotiated contracts; among these clauses certain terms
are regarded as unfair and invalid in an irrefutable manner
(for instance, limitation and exclusion of liability clauses),
other type of clauses are regarded as unfair, and are therefore
deemed invalid, unless the contrary is proved by the
professional (for instance, ADR clauses).
A consumer is broadly defined under French law as any individual
acting for purposes which are outside his/her professional activities.
French law also encompasses the notion of “non-professional”, e.g.
any legal entity acting outside its professional activities (preliminary
Article of the Consumer Code). Non-professionals benefit from
several consumer protection provisions, namely regarding unfair
clauses.
3.7 How is data protection/freedom of information dealt
with in financial services litigation? Can a financial
services customer access their personal data? How is
commercially sensitive or confidential information
dealt with in the context of discovery or disclosure?
Personal data gathered by financial services is covered by
professional secrecy in general and banking secrecy in particular.
However, professional secrecy cannot be opposed as an impediment
to the communication of documents in regulatory proceedings
before the AMF or the ACPR or in criminal proceedings. To the
contrary, professional and banking secrecies are legitimate
impediments to the communication of documents in civil and
commercial proceedings, except where:
■ the client has expressly agreed to the communication; and
■ the dispute is between a financial institution and one of its
clients: in such disputes, financial institutions may use any
legitimately held information relating to their client.
Financial services customers have a permanent access to their
personal data according to applicable personal data regulations
(French legislation and EU General Data Protection Regulation
2016/679).
There is no discovery process nor a general disclosure obligation for
litigants, the general principle being that each party freely decides
what evidence it will produce in order to support its case. Specific
pieces of evidence can, however, be subject to an order of
production by the court, the court being at liberty to make any
inferences it deems appropriate if the person detaining such piece of
evidence does not comply with the order and/or to impose a fine.
4 Post Trial
4.1 Is there a right of appeal in financial services
disputes?
Yes, except for disputes worth less than EUR4,000. Appeal is
brought before the territorially competent court of appeals. When
the appeal is not possible the case can be brought before the Cour de Cassation.
4.2 How does the court deal with costs in financial
services disputes?
There are no specific regulations relating to the costs in financial
services disputes.
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As a general rule, civil procedure rules allow the winning party to
obtain payment by the other party of the costs and disbursements
incurred throughout the proceedings (dépens) as well as all the other
expenses incurred in the course of the trial, including attorneys’
fees. In practice, however, the court freely determines the amounts
of legal fees awarded, which tend to correspond to only a portion of
those incurred, especially when the defeated party is an individual.
5 Cross-Border Issues
5.1 What issues typically arise in cross-border disputes
or investigations involving financial institutions and
how are they catered for in your jurisdiction?
Extra-territorial jurisdiction, applicable law and access to evidence
are the most typical issues arising in cross-border disputes. Inside
the EU, such issues are governed by European regulations (Brussels
I Regulation Recast, Regulation (EC) 1206/2001) which offer
relatively clear and efficient solutions. Outside the EU, solutions
are mainly based on international cooperation agreements which
often result in much more complex legal concerns.
5.2 What is the general approach of the courts in your
jurisdiction to co-operating with foreign courts or
regulatory bodies or officials in financial services
disputes (including investigations)?
France is a party to several international cooperation agreements,
whether bilateral or multilateral. Most notably, Regulation (EC)
1206/2001 will apply where a Member State court requests the
competent court of another Member State to obtain evidence or
requests permission to carry out investigations. Outside the EU,
courts seeking evidence abroad will apply international cooperation
agreements, such as the Hague Convention of 1970.
The AMF and the ACPR exchange information with foreign
regulators and may conclude bilateral interstate conventions on
mutual legal assistance. The AMF is, in particular, a signatory to the
International Organization of Securities Commission’s Multilateral
Memorandum of Understanding (information-sharing arrangement
for securities regulators). The ACPR may exchange information
even in the absence of a bilateral convention, either with counterpart
EU authorities or outside of the EU, subject to reciprocity and to the
extent the information exchanged is covered by professional secrecy
at least equivalent to this applicable to French authorities.
5.3 Is extra-territorial jurisdiction typically asserted in
your jurisdiction and, if so, in what circumstances?
Extra-territorial jurisdiction is typically asserted when the dispute
contains cross-border elements (e.g. parties established in different
states, contract performed in a foreign country, harmful event or
damage occurred outside France).
5.4 Are unilateral jurisdiction clauses valid and
enforceable in your jurisdiction?
Although it previously stated that unilateral jurisdiction clauses are
invalid both under French civil law (as a “potestative” condition),
Brussels I Regulation No 44/2001 and the Lugano Convention
(Rothchild case, 26 September 2012; Crédit Suisse case, 15 March
2015), the Cour de Cassation finally ruled that a unilateral
jurisdiction clause is valid, since it permits the identification of the
jurisdictions before which a claim could be brought (Apple Ltd
case, 7 October 2015).
Therefore, unilateral jurisdiction clauses complying with the
requirement of sufficient predictability are deemed valid, either
because they explicitly name the competent jurisdiction or because
objective criteria to define it are stated. The enforceability of
unilateral jurisdiction clauses remains, however, fragile in France
and such clauses are frequently deemed invalid by the trial judges.
6 Regulated Bodies
6.1 What bodies, apart from the courts, regulate financial
services disputes in your jurisdiction?
Two administrative authorities regulate the French financial sector:
■ the AMF, which regulates participants and products on
French financial markets; and
■ the ACPR, which regulates the activities of banks and
insurance companies.
The AMF and the ACPR regulate financial services disputes since
they may initiate a regulatory sanction proceeding against
professionals under their supervision, individuals acting under the
professionals’ authority and, regarding the AMF, any person that
commits market abuse. By contrast, as mentioned above, claimants
cannot bring an action before regulatory authorities in order to
obtain remedies.
6.2 What powers (investigative/inquisitorial/
enforcement/sanctions) do these regulatory bodies
have?
The AMF and the ACPR both have regulatory and repressive
powers.
The AMF can carry out inspections and investigations, enter into
administrative settlement agreements, issue formal notices and
impose administrative sanctions (including financial penalties).
The ACPR can carry out investigations, issue injunctions to comply,
and impose enforcement and protective measures (for instance,
appointment of a provisional administrator) as well as disciplinary
sanctions (including financial penalties).
Nor the AMF or the ACPR have the power to order payment of
damages for breach of a regulatory duty.
6.3 Are the decisions of regulatory bodies binding on the
parties to a financial services dispute?
Subject to appeal, the AMF’s and the ACPR’s decisions are binding
on the parties directly concerned by the decision. However,
regulatory authorities’ decisions are not, as such, binding for courts
which are free to settle the case in a different manner.
6.4 What rights of appeal from regulatory decisions
exist?
Appeals against the ACPR’s decisions (relating to sanctions or not)
are brought before the Conseil d’Etat (the French administrative
supreme jurisdiction).
The Conseil d’Etat also has jurisdiction on appeals against certain
AMF decisions concerning professionals and individuals acting
under their authority or on their behalf. Appeals against AMF
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decisions concerning any other person are brought before the Paris
court of appeals.
The time limit for the appeal is, in all cases, two months as of the
decision’s notification.
Non-sanction decisions of both authorities may be appealed by the
concerned person. Sanction decisions may be appealed by the
respondent and by the authority’s chairman.
Appeals do not have a suspensive effect, except in the cases where
sanctioned individuals apply for a stay of execution.
Finally, instructions, interpretations, recommendations, rulings and
other opinions may be subject to an action for excessive use of
power before the Conseil d’Etat (recours pour excès de pouvoir).
6.5 Are decisions of regulatory bodies publicly
accessible?
The decisions of the AMF and the ACPR are publicly accessible on
their respective websites.
7 Updates – Cases and Trends
7.1 Summarise any legislative developments in this area
expected in the coming year. Describe any practical
trends in your jurisdiction (e.g., has the financial
crisis impacted legislation? Has there been an
increase in the powers of regulatory bodies as a
reaction to the crisis? Has there been a change in the
amount and type of cases being brought by and
against financial service providers?).
In the aftermath of the financial crisis, regulators put forth a
substantial number of new or strengthened regulations, which are
now being evaluated and adjusted as necessary. Financial service-
related legislation has, in particular, expanded exponentially on a
European level (Packaged Retail and Insurance-based Investment
Products Regulation, Markets in Financial Instruments Directive
(“MiFID2”), Payment Services Directive, and Insurance
Distribution Directive).
Regarding expected EU regulations, the Commission has proposed
regulation on crowdfunding service providers introducing an EU-
wide authorisation and passporting regime for crowdfunding
platforms. This regulation should lead to a specific MiFID2
amendment. Against the backdrop of Brexit, proposals giving
greater supervisory powers to the European supervisory authorities
have been published and are expected to be discussed (Omnibus 3
proposal).
On a national level, in its priorities for 2019, the AMF has prioritised
the promotion of innovation. In this respect, France is currently
working to pass measures that should give the AMF greater
responsibility vis-à-vis crypto-assets under the framework of the
“Pacte” Law introducing an optional licensing regime for token
issuances, new regulatory regimes for a range of crypto-asset
intermediaries, and fast-track registration processes for crypto-
custodians and exchanges.
7.2 On an international level, would your jurisdiction be
considered to be more financial institution- or
customer-friendly?
Given the high protection offered to customers by French law (see
questions 2.1, 2.5 and 3.6), France is a customer-friendly jurisdiction.
7.3 Please identify any significant cases regarding
financial services disputes during the past 12 months.
Please highlight the significance of the case(s), any
new or novel issues raised and what lessons can be
drawn from them.
The last 12 months were marked by the following significant
trends/cases:
1. On 19 November 2018, the French bank Société Générale
agreed to pay U.S. federal and state authorities $1.4 billion to
settle investigations into its handling of dollar transactions
executed to parties in countries subject to embargoes or
otherwise sanctioned by the United States (e.g. Iran, Sudan,
Cuba and Libya). The bank also agreed to pay $95 million to
settle a dispute over violations of anti-money laundering
regulations. These fines are some of the largest imposed on a
bank for violating U.S. sanctions. The case demonstrates the
role of regulatory sanctions of the economic powers, firms
agreeing to plead guilty in order to avoid a law suit or prevent
a banking licence withdrawal.
2. On 21 December 2018, the ACPR sanctioned La Banque Postale to a €50 million sanction for failing to meet customer
verification requirements on money laundering and terrorism
financing. This particularly high penalty takes into account
the nature, duration, exceptional gravity and potential
consequences of the shortcomings. This case follows
previous ACPR decisions on the same ground (€1 million
penalty imposed on Crédit Mutuel in 2018, €10 million
penalty on BNP Paribas and €5 million penalty on Société Générale in 2017) and testify to the importance and
frequency of the investigations/sanctions related to customer
identity verification, anti-money laundering and terrorism
financing.
3. Forex Fraud cases increased significantly and became, at a
national level, a mass dispute affecting several French and
foreign banks of international reputation and representing a
billion of potential damages.
7.4 Have global economic changes caused any changes
to financial services litigation/regulation in your
jurisdiction?
Following the financial crisis, the EU embarked on a wide-ranging
set of regulatory reforms, including new rules to strengthen
financial supervision and an improved regulatory framework for
banks, insurance, securities markets and other sectors. A decade
later, this project seems now complete, with the last major
legislative measure of the post-crisis regulatory agenda, MiFID2,
which started to apply from 3 January 2018. Attention is now more
acutely focused on new technology challenges and related litigation,
namely concerning FinTech firms and crypto-assets.
Dethomas Peltier Juvigny & Associés France
Fran
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Arthur Dethomas
Dethomas Peltier Juvigny & Associés
49 avenue de l’Opéra
75002 Paris
France
Tel: +33 1 4225 7878 Email: [email protected] URL: www.dpjaparis.com/en
Dessislava Zadgorska
Dethomas Peltier Juvigny & Associés
49 avenue de l’Opéra
75002 Paris
France
Tel: +33 1 4225 7878 Email: [email protected] URL: www.dpjaparis.com/en
Arthur Dethomas is licensed in Paris and in New York.
He began his career at Salans, before joining CVML where he was
elected to the partnership in 2007.
He was appointed Premier Secrétaire de la Conférence of the Paris
Bar in 2003.
Renowned for his expertise in stock exchange and financial litigation
and white-collar criminal law, he is an expert at the Club des Juristes (a French legal think-tank).
He is also a lecturer at Sciences-Po Paris in Banking and Financial
regulations.
Arthur Dethomas has a Master’s Degree in Business Law (University
of Paris X) and an LL.M. from Washington College of Law (A.U.). He
is fluent in French and English. A former lecturer in law at the
University of Phnom Penh, Cambodia (1998–1999), he also speaks
Khmer.
Since 2014, he has constantly been ranked as one of the “40 Great
Strategists” in litigation by Décideurs Magazine.
Dethomas Peltier Juvigny & Associés is an independent law firm dedicated to litigation and complex corporate operations, composed of
experienced partners from the best French and international firms.
We advise our clients in strategic matters, essentially related to litigation and arbitration, mergers and acquisitions, corporate finance, governance,
competition and merger control.
Our expertise is well recognised in the practice of stock exchange, financial and banking litigation (disputes relating to the structuring of financial
instruments, bankers’ liability, litigation related to various fraudulent schemes, notably Madoff and Forex frauds) as well as company law,
shareholders’, post-acquisition and governance disputes.
With its combined understanding of criminal procedure and knowledge of the business and financial world, our firm provides counsel to clients in
economic and financial criminal law matters, particularly in cases of stock exchange and banking frauds. We have a highly regarded practice in
defence before the French Financial Markets Authority.
Dessislava Zadgorska joined the Paris Bar in 2008 and is a member
of the French Arbitration Association. She started her career at CVML
before joining the firm in 2013.
She is specialised in litigation and arbitration and handles for French
and international clients strategic bank liability, stock market and
financial litigations, as well as shareholders’, post-acquisition and
governance litigations, before state and arbitration courts. She also
handles white-collar crime cases before the French Financial Markets
Authority.
She has a post-graduate degree in business and tax law from the
University of Paris II – Panthéon Assas (2005).
She is fluent in French and English. She also speaks Bulgarian and
Russian.
Dethomas Peltier Juvigny & Associés France
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Kantenwein
Marcus van Bevern
Dr. Carolin Sabel
Germany
1 Bringing a Claim – Initial Considerations
1.1 What are the most common causes of actions taken
by or against financial institutions and service
providers in your jurisdiction?
Though there is no national statistic covering all courts and disputes,
cases decided by the Federal High Court (Bundesgerichtshof ) show
that, as far as civil law is concerned, in recent years a high number
of financial services disputes concerned (i) the payment or
repayment of fees charged by the banks or the validity of fee
arrangements in general, (ii) the revocation and rescission of
consumer loans due to faulty revocation instructions, (iii) damage
claims based on mal-advice in derivatives (e.g. swaps), securities
and other investments, and (iv) the premature termination of home
saving agreements by home saving banks as a result of the market
situation in interest rates.
As far as regulatory and criminal proceedings are concerned, the
German authorities were (and still are) investigating tax-driven
share transactions which took place around the dividend record date
and involved the acquisition of shares with (cum) dividends due on
or just before the dividend record date and delivery of these shares
after the dividend record date without (ex) dividends. This structure
made it possible to obtain multiple returns of capital gains tax that
had only been paid to the German tax authorities once (so-called
“Cum-Ex” trades). Allegedly, the damage cost European treasuries
€55 billion.
1.2 What remedies are most likely to be awarded?
Most judgments rewarded by the courts concern the payment of a
certain amount of money, e.g. a repayment of invalid fees incurred
by a bank or the payment of damages resulting from mal-advice.
However, there could also be a declaratory judgment as a result of
an affirmative action, e.g. when a consumer protection association
brings a claim against general terms of business used by a financial
institution. Note that German law does not allow for punitive
damages.
1.3 Who has a right of action in financial services
disputes? Does it make a difference if the customer is
an individual or a commercial entity?
Under the German Code of Civil Procedure (Zivilprozessordnung),
any person having legal capacity also has the capacity of being a
party to court proceedings, i.e. individuals, companies and public-
law entities with legal capacity. Non-incorporated German
associations, though having no legal capacity, may also sue and be
sued. In financial services disputes this would particularly concern
consumer protection associations. On the merits, most claims are
based on contract or pre-contract and brought by one of the
contractual parties. However, a right of action could also result
from law of torts which may include the violation of supervisory
law provided that the relevant supervisory law aimed at the
protection of the rights of individual persons.
Consumer protection law only applies to individuals. Consumers
may rely on a multitude of consumer protection laws which do not
apply to companies or legal entities. E.g. there are special provisions
for consumer credit agreements, in particular with respect to
preliminary contract information obligations. Furthermore, legal
prohibitions applying to general terms of business are less restrictive
with respect to contracts with companies. Finally, certain form
requirements do not apply to companies – e.g. a company may enter
into a warranty in an oral agreement.
1.4 Is third-party funding available in financial services
litigation (crowdfunding, maintenance, champerty,
etc.)? Does litigation insurance operate in your
jurisdiction and, if so, what are the implications for
this?
Litigation insurance is a common tool for individuals, but rather
seldom for companies. It is mostly restricted to certain disputes, e.g.
employment law or traffic accidents. Financial services disputes are
often not included or require special insurance coverage. The
insurance holders are usually required to substantiate a claim or a
statement of defence prior to commencing a cause of action and
such substantiation is to be confirmed by a lawyer and will be
double-checked by the insurance company. The insurance cover is
usually restricted to statutory fees.
There is a constantly growing number of companies offering
services in the field of maintenance and champerty, including
crowdfunding. Contingency fees for attorneys are, however, not
allowed.
In addition, under the Code of Civil Procedure, any parties who, due
to their personal and economic circumstances, are unable to pay the
costs of litigation, or are able to so pay them only in part or only as
instalments, may be granted assistance with the court costs upon
filing a corresponding application, provided that the action they
intend to bring or their defence against an action that has been
brought against them has sufficient prospects of success and does
not seem frivolous.
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1.5 Are class action law suits available in your
jurisdiction? If so, has this impacted financial
services litigation? Has there been an increase in
class action suits post the financial crisis?
Historically, German civil procedure was strictly bi-partisan and did
not know a US-style class action. In 2005, the Act on Model Case
Proceedings in Disputes under Capital Markets Law
(Kapitalanleger-Musterverfahrensgesetz) came into force.
However, contrary to a class action, a model case proceeding is not
designed to finally decide on the merits of all class members.
Rather, it is limited to clarifying certain preliminary questions which
are common to a multitude of parties and their claims or defences.
These preliminary questions have to refer to the establishment of the
(non-)existence of certain conditions justifying or ruling out
entitlement or the clarification of certain legal questions, e.g. the
existence of a faulty prospectus (the so-called “establishment
objective”). Once the court deciding the model case proceeding has
rendered a decision on this objective, each individual case will
proceed and be decided on the basis of the binding model case
decision and those other individual questions in dispute which were
not subject of the model case proceeding.
As an aftermath to the financial crisis there have been a number of
model cases that were brought to the courts, mainly based on
prospectus liability and ad hoc announcements of financial
institutions. However, in terms of numbers, these proceedings are
still rather an exception.
2 Before Commencing Proceedings
2.1 What are the main barriers to financial service
litigation for customers? Are there exclusionary
clauses or duty defining clauses in customer
contracts which prevent customers from bringing a
case?
The main barriers to financial service litigation for customers are (i)
estoppel (cf. question 2.2 below), (ii) costs (if not covered by
insurance), and (iii) burden of evidence. With respect to costs, a
claimant has to advance court fees when filing a claim and the fees
will be calculated depending on the amount in dispute. With respect
to burden of evidence, a claimant in general has to provide evidence
with respect to all single prerequisites giving rise to the claim.
Although exclusionary clauses or duty defining clauses are
frequently used in contracts, they rarely prevent customers from
bringing a case to court. This is mainly because such clauses are
considered standard terms of business and are often held invalid by
the courts. In particular, courts have frequently held that a bank or
financial institution must not restrict its liability for its main
contractual obligations.
2.2 Is there a time limit within which financial services
disputes must be commenced? If so, is it different
depending on whether proceedings are brought
before a regulatory body or before the courts? Does
the commencement of a regulatory process ‘stop the
clock’?
The general time limit applying to most civil causes of action (in
particular, damage claims) is three years commencing as of the end
of the year in which the claim was due and the claimant became
aware of the debtor and the facts giving rise to the claim. Longer
prescription periods can apply to securities (up to 30 years) and in
case of lack of knowledge (10 years).
In regulatory proceedings the time limit depends on the maximum
legal consequences (penalties or fines) set forth in the law with
respect to the violation of the law that is subject to the accusation.
E.g. if a fine of up to €250,000 could be determined by the
regulatory body, the time limit would be one year commencing as of
the time the alleged act was committed.
The commencement of a regulatory process does not stop the clock for
civil claims. However, a civil court may suspend its proceedings if its
decision depends on the outcome of regulatory or administrative
proceedings.
2.3 Can parties in financial services litigation avail of
litigation and/or legal advice privilege? Are
investigations conducted by regulated bodies
considered ‘litigation’ in the context of privilege?
German civil procedure does not know a pre-trial discovery or
general disclosure obligation. Rather, each party to a proceeding
has to bring forward the facts supporting its claim. Only under
certain circumstances may a court direct one of the parties or a third
party to produce records or documents, as well as any other
material, that are in its possession and to which one of the parties has
made reference. As a result, document production is scarcely
applied for and the question of litigation and/or legal advice
privilege is often of no importance in court proceedings.
If, however, criminal charges are brought against financial
institutions or service providers, certain documents will be
exempted from confiscation by the investigating authorities
pursuant to paragraph 97 of the German Criminal Procedure Code.
This exemption includes documents in the possession of the
attorney as well as all documents relating to attorney-client
communications in terms of paragraph 148 of the German Criminal
Procedure Code. Also, attorneys have the right to refuse testimony
on matters covered by the attorney’s duty to secrecy.
2.4 Are standard form master agreements used in your
jurisdiction for financial institutions (for example, the
ISDA Master Agreement)? How are they treated?
German banks and financial institutions are making use of the ISDA
Master Agreement as well as of the German equivalents, i.e. the
Master Agreement for Financial Derivatives Transactions issued by
the German Banking Association. Furthermore, banks use their
own standard forms or standard forms elaborated by banking
associations which provide for similar standards but are not
completely identical.
Under German law, all these agreements qualify as general terms of
business which are subject to a number of restrictions and
prohibitions set forth in the German Civil Code (Bürgerliches Gesetzbuch – BGB). In particular, standard business terms must not
unreasonably disadvantage the other party to the contract – a test
which is often not met in court proceedings. If that happens, the
court would declare the disputed contractual clause invalid and
apply statutory law instead. Netting clauses contained in the ISDA
Master Agreement or the German Master Agreement for Financial
Derivatives are, however, safe-guarded under the German
Insolvency Code (Insolvenzordnung) and should therefore be held
valid.
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2.5 Are there any non-contractual duties which are
binding on financial services entities (for example, a
particular fiduciary duty or a code of conduct)? Can
they be contracted out of?
German statutory law provides for numerous obligations which are
either considered statutory obligations of certain defined forms of
contract (e.g. for payment services contracts) or are defined as non-
contractual duties under supervisory law. All these obligations are
often driven by requirements under European directives or
regulations. To give an example, the Securities Trading Act
(Wertpapierhandelsgesetz) contains obligations with respect to the
documentation and code of conduct for investment advisory
services. Although such duties under supervisory law are usually
not considered a direct contractual obligation, courts tend to assume
identical contractual obligations as “implicit” duties under the
contract. In addition, a financial service institution could be held
liable towards its customer for violation of duties under supervisory
law based on law of torts.
In general, all these obligations are legally binding and may not be
deviated from unless explicitly allowed by the law. The only
possibility for contracting out certain secondary obligations would
be to exclude the main obligation to which the secondary obligation
relates. E.g. a financial institution would not be obliged to inquire
its client’s practical experience and knowledge in securities if it
excludes the provision of advisory services and limits its services to
execution-only transactions. However, if the financial institution
wants to provide advisory services, its obligation to inquire the
client’s practical experience and knowledge cannot be contracted
out.
3 Progressing the Case
3.1 Is there a specialist court or specialist judges for
financial services litigation?
The German Judicature Act (Gerichtsverfassungsgesetz) does not
provide for a specialist court for financial services litigation.
Financial services disputes are brought before local or regional
courts depending on the amount in dispute. However, regional
courts are divided into chambers specialised in certain fields of
private law. Thus, large regional courts, in particular at banking
places (e.g. Frankfurt and Munich), are equipped with a chamber
focusing on financial services disputes.
3.2 Does the method of service of proceedings differ for
financial service litigation?
There is no special approach in financial service litigation.
3.3 Are there any specific pre-trial procedures that must
be followed for financial services litigation in your
jurisdiction? If so, what are they and what are the
consequences of not abiding by them?
A pre-trial procedure may only be obligatory in minor cases:
pursuant to section 15a of the Introductory Act to the Code of Civil
Procedure (EGZPO), the federal states (Bundesländer) can
determine that the filing of the action in minor cases (i.e. up to €750)
is not permissible before an attempt has been made (and has failed)
by a conciliator, set up or recognised by the respective
administration of justice of that federal state, to resolve the dispute
by mutual agreement. In fact, quite a few federal states’ laws have
introduced respective provisions. In these cases, the attempt for
conciliation or mediation has to be made by the claimant prior to
filing a law suit with a court. If the claimant has not complied with
this stipulation, its claim would be rejected as inadmissible. During
the conciliation proceedings the statute of limitations is suspended.
3.4 Are there any alternative dispute resolution (ADR)
regulations that apply to financial services disputes in
your jurisdiction? Are ADR clauses typically included
in financial services contracts, and is ADR commonly
used to resolve financial services disputes in your
jurisdiction?
Mediation proceedings involving an ombudsman offer a fast and
cost-efficient solution in financial services disputes between banks
and their customers. For more details, see question 6.1 below.
Contrary to mediation and despite various promotion attempts in
recent years, arbitration remains relatively uncommon in financial
services contracts. This is also a result of the specialist court
chambers for disputes concerning banking and financial services,
which have, in general, a good reputation. Further, an arbitration
agreement with a consumer has to be in written form and must not
be included in the contractual agreement; it has to be separated from
it. Arbitration is therefore – if at all – rather a tool used in
commercial contracts.
3.5 How are claims for negligent misstatement/mis-selling
dealt with in your jurisdiction?
German law provides for an informed investor concept: according
to the jurisdiction of the German Federal High Court, the entering of
a financial institution with its client into discussions concerning the
sale and recommendation of securities or other investments is
considered an implied counselling contract. Although this does not
mean that the bank will be held liable for the economic success of
the investment or its further chart development, the contract goes
along with a number of secondary obligations. These obligations
are mostly identical with those laid down under supervisory law in
the Securities Trading Act – in fact, the Securities Trading Act
implemented the jurisdiction of the German Federal High Court into
the law. In particular, a bank or financial institution is obliged to
inquire the customer’s practical expertise and knowledge in
securities and other investment measures as well as the customer’s
risk awareness and financial circumstances plus the purpose and
intended duration of the envisaged investment. With respect to the
investment, the bank/financial institution has to gather and evaluate
all publicly available information. Any recommendation has to be
based on such information and has to comply with the client’s
knowledge and purposes and has to reveal the relevant risks. A
negligent misstatement is considered a breach of contract resulting
in a damage claim for rewinding the sale.
3.6 How have unfair terms in contracts been interpreted
in your jurisdiction? Are there any causes of action or
defences available specifically to consumers? How
broad is the definition of a ‘consumer’ in your
jurisdiction?
Unless individually negotiated and agreed, contractual terms which
are pre-formulated by a financial institution and used vis-à-vis
numerous counterparties are considered general terms of business.
These terms of business have to comply with a multitude of special
prohibitions which are stricter if consumers are involved. In both
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cases, general terms of business must not unreasonably
disadvantage the other party to the contract. Otherwise, they will be
held invalid. In case of doubt, unfair terms are interpreted in a way
least favourable for the counterparty – and then held void. German
courts reject an interpretation that only aims to avoid the invalidity
of a clause.
Individuals qualify as consumers unless acting for purposes that are
within their trade, business or profession.
3.7 How is data protection/freedom of information dealt
with in financial services litigation? Can a financial
services customer access their personal data? How is
commercially sensitive or confidential information
dealt with in the context of discovery or disclosure?
As mentioned, there is no pre-trial discovery or general disclosure
obligation but only a very limited right to request document
production if a specific document is referred to by one of the parties
in dispute and held in the hands of the other party. Therefore, the
question of commercially sensitive or confidential information does
not often arise.
Despite the fact that there is, in general, a high level of data
protection under German law, this would not jeopardise the right of
a bank or financial institution to disclose its customer’s personal
data in civil litigation provided it concerns a dispute with the
customer. In this case, the disclosure of personal data would be
regarded as the bank’s legitimate interest in enforcing or defending
its own rights. This may, however, be different when the data
concerned is of third parties who are not involved in the litigation.
In this case, the disclosure of information concerning the third
parties could be a violation of data protection and contractual
confidentiality rules.
According to article 15 of the European Union’s General Data
Protection Regulation (GDPR), which is immediately applicable in
Germany, any person whose personal data are being processed has
comprehensive access to the data processed, including, inter alia,
the purposes and duration of the processing and the recipients or
categories of the recipients to whom the personal data have been or
will be disclosed, in particular recipients in third countries or
international organisations.
4 Post Trial
4.1 Is there a right of appeal in financial services
disputes?
German Civil Procedure generally allows for an appeal of all
decisions rendered in first instance, provided the amount in dispute
exceeds €600. First instance rulings by the local courts may be
appealed to the regional courts. In the case of first instance
judgments by the regional courts, parties have the right to appeal to
the higher regional courts. An appeal to the Federal High Court is
only admissible in cases of fundamental significance.
4.2 How does the court deal with costs in financial
services disputes?
Costs in civil proceedings are to be borne by the losing party and
include court and lawyer fees, both limited to statutory fees which
are calculated depending on the amount in dispute. If a claim is
partially admitted, costs will be split proportionately.
5 Cross-Border Issues
5.1 What issues typically arise in cross-border disputes
or investigations involving financial institutions and
how are they catered for in your jurisdiction?
Typical procedural issues would be security for costs, forum and
legal capacity. With respect to costs of the proceedings, plaintiffs
from outside the European Union or the European Economic Area
have to provide security covering court and lawyers’ fees in advance
if demanded by the defendant. Regarding the forum, a contractual
choice of the court of first instance is admitted provided the parties
are businessmen or legal entities. Legal capacity might be
jeopardised in case of letter box companies without a genuine link to
the jurisdiction where they were founded, i.e. if there is a conflict
between domicile and establishment. Outside the European Union,
German International Company Law traditionally follows the rule
of seat (Sitztheorie).
With respect to the merits of a case, the main issue would be the law
governing the contract. In general and in accordance with the Rome
I Regulation, German International Private Law confirms the
freedom of parties to choose the governing law of their contracts.
5.2 What is the general approach of the courts in your
jurisdiction to co-operating with foreign courts or
regulatory bodies or officials in financial services
disputes (including investigations)?
German courts offer mutual legal assistance in civil and commercial
disputes in accordance with European law and, outside the
European Union, the Hague Convention on the Service Abroad of
Judicial and Extrajudicial Documents in Civil or Commercial
Matters and the Hague Convention on the Taking of Evidence
Abroad in Civil or Commercial Matters to which Germany is a
party.
5.3 Is extra-territorial jurisdiction typically asserted in
your jurisdiction and, if so, in what circumstances?
The German Civil Procedure Code as well as the European Brussels
Ia Regulation (EuGVVO) provide for a conclusive catalogue of
venues all of which require a certain connection to Germany, e.g.
place of residence or domicile, registered seat, location of assets,
and forum rei sitae for property claims or party agreements. Absent
an agreement or any other connection of the parties to Germany, it
would be rather uncommon and difficult to assert the jurisdiction of
a German court. An exception might apply in cases of law of torts,
provided that at least parts of the committed offence or its success
occurred in Germany.
5.4 Are unilateral jurisdiction clauses valid and
enforceable in your jurisdiction?
No. A choice of court requires a contractual agreement and may
only be made by businessmen or legal entities. If a unilateral
jurisdiction clause is contained in standard business terms, it would
also only be valid if the terms have been validly agreed by the
parties to be included in the contract and if the counterparty is not a
consumer. Even if the counterparty is a businessman or legal entity,
a jurisdiction clause in standard business terms could be invalid if
none of the parties has any connection with the chosen forum.
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6 Regulated Bodies
6.1 What bodies, apart from the courts, regulate financial
services disputes in your jurisdiction?
Pursuant to paragraph 14 subsection 1 of the German Injunction Act
(UKlaG) as well as the new German Regulation on Financial
Dispute Resolution Entities (FinSV), involved parties may,
irrespective of their right to call the courts, also call a private
consumer dispute resolution entity recognised by the German
Federal Office of Justice (Bundesamt für Justiz). A number of banks
and banking associations have introduced such recognised
mediation proceedings (Ombudsmannverfahren) offering out-of-
court mediation by certified mediators (often former judges of the
Federal High Court) in consumer cases up to a limited amount in
dispute (€10,000). Due to the diversity of the banking system in
Germany, a variety of different official mediation entities are
available. Renowned institutions are the mediation bodies of the
Association of German Banks (Bankenverband), the Association of
German Public Banks (VÖB), the National Association of German
Cooperative Banks (BVR), the Association of German Private-
Sector Building Societies (VdpB) and the Regional Building
Societies (LBS). For all banks not affiliated with a specific
mediation entity, the mediation body of the German Central Bank
(Deutsche Bundesbank) is the competent institution to turn to. In
addition, consumers may also file a complaint with the German
Federal Financial Supervisory Authority (BaFin) with the
possibility of entering into mediation proceedings.
6.2 What powers (investigative/inquisitorial/
enforcement/sanctions) do these regulatory bodies
have?
Proceedings before an ombudsman are ruled by party autonomy.
For instance, the ombudsman does not have the right to summon
witnesses to the proceedings without consent of the parties. Thus,
the mediation bodies themselves do not have any investigative,
inquisitorial, enforcement or sanction powers. These powers are
assigned separately to BaFin.
6.3 Are the decisions of regulatory bodies binding on the
parties to a financial services dispute?
In general, the decisions rendered by an ombudsman are nonbinding
on the parties. However, the parties do have the right to explicitly
accept the proposal provided by the mediator. Also, if the amount
awarded does not exceed €5,000, pursuant solely to a number of
mediation rules, the bank is bound by the decision. Nevertheless,
proceedings before an ombudsman suspend the statute of limitations
of the disputed claims.
6.4 What rights of appeal from regulatory decisions
exist?
There is no right to appeal these mediatory decisions. The parties
may only resort to court proceedings.
6.5 Are decisions of regulatory bodies publicly
accessible?
The mediation bodies officially appointed by the banks publish
yearly statistics of proceedings conducted. The individual
proceedings, names of parties and outcomes, however, remain
confidential.
7 Updates – Cases and Trends
7.1 Summarise any legislative developments in this area
expected in the coming year. Describe any practical
trends in your jurisdiction (e.g., has the financial
crisis impacted legislation? Has there been an
increase in the powers of regulatory bodies as a
reaction to the crisis? Has there been a change in the
amount and type of cases being brought by and
against financial service providers?).
As a reaction to the insolvency of Procon, a wind energy provider
whose insolvency damaged more than 10,000 small investors, the
lawmaker started an initiative for the protection of small investors in
order to better protect consumers against dubious and untransparent
retail investment products. In particular, providers are requested to
publish more and more up-to-date information in their prospectuses.
The new law shall apply to participations in companies and trusts,
profit-participation certificates, subordinated loans as well as
registered bonds and comparable investments. The banking
supervisory agency (BaFin) will be authorised to prohibit or restrict
specific products or financial practices.
7.2 On an international level, would your jurisdiction be
considered to be more financial institution- or
customer-friendly?
Although German law generally supports freedom of contract,
consumer protection laws – and the jurisdiction based upon them –
have become more and more restrictive, thereby particularly
limiting the legal leeway for standard terms in retail banking and
other typical bulk transactions. Apart from that, on the level of
individual transactions, German law is rather liberal and allows for
freedom of contract.
7.3 Please identify any significant cases regarding
financial services disputes during the past 12 months.
Please highlight the significance of the case(s), any
new or novel issues raised and what lessons can be
drawn from them.
In March 2018, the Federal High Court held that arrangement and
handling fees in loan agreements form invalid standard terms of
business – and not individual agreements which would have been
valid – even when the counterparty had a pre-formulated choice
between two alternatives, i.e. higher interest rates without fees or
lower interest rates plus fees (BGH, XI ZR 291/16). The decision
goes along with a number of further decisions rendered in 2018 in
which the Federal High Court confirmed its landmark decision of
July 2017 that arrangement fees are invalid even when used in a
commercial loan agreement without the participation of a consumer
in further cases concerning various kinds of fee arrangements. The
case highlights that there is currently no legal certainty under
German law for the validity of any kind of fee arrangements in loan
agreements which are absolutely customary in the international
financial markets. In the eyes of the Federal High Court, the only
valid consideration owed by the borrower for a loan facility is the
interest payment. This jurisdiction has been fiercely criticised by
banks and banking associations arguing that the jurisdiction no
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longer differentiates between consumers and business companies
and puts the German financial industry at a disadvantage to its
international competitors. This criticism goes along with the
banking supervisory agency (BaFin) requesting banks to strengthen
their income basis and make it independent from interest payments
in times of low interest rates. In the meantime, an initiative has been
founded with the support of a number of business associations
requesting a modernisation of the law on general terms of business
from the lawmaker. As long as the law remains unchanged, it can be
seen that banks and financial institutions are trying to escape from
German law.
7.4 Have global economic changes caused any changes
to financial services litigation/regulation in your
jurisdiction?
The impact of digitalisation and new products in the finance
industry, such as bitcoin and other crypto-currencies and blockchain
technology in general, remains to be seen. Generally, it appears that
the lawmaker is reticent to issue new laws and rather prefers if
supervisory agencies apply the existing legal framework and
measures. To give an example, there is no specific law on crypto-
currencies. Rather, the banking supervisory agency (BaFin) has
determined that crypto-currencies qualify as “units of account”
(Rechnungseinheiten) according to the German Banking Act
(Kreditwesengesetz) and that neither the use nor the mining of such
units requires a particular permission. However, exchange
platforms offering the commercial trade in crypto-currencies may
need a special permit, depending on the technical implementation
and design of the respective platform.
Kantenwein Germany
Marcus van Bevern
Kantenwein
Theatinerstraße 8
80333 Munich
Germany
Tel: +49 89 8996 86 0 Email: [email protected] URL: www.kantenwein.de
Dr. Carolin Sabel
Kantenwein
Theatinerstraße 8
80333 Munich
Germany
Tel: +49 89 8996 86 0 Email: [email protected] URL: www.kantenwein.de
Marcus van Bevern is an attorney-at-law specialised in banking and
capital markets. He advises in banking- and capital market-related
litigation and arbitration as well as in financing transactions. He is also
regularly appointed as arbitrator in arbitration proceedings. Until 2006
he worked in the Litigation & Arbitration department of an international
law firm, where he represented, amongst others, national and
international financial institutions in complex litigation and arbitration
matters. Later he became in-house counsel and Head of Transaction
Management in an internationally active German finance group. By
the end of 2009 he had joined Kantenwein.
Dr. Carolin Sabel is an attorney-at-law specialised in banking- and
capital market-related dispute resolution. Before joining Kantenwein
she worked in the M&A department of an international law firm, where
she, i.a., advised on transactions in the financial sector, and in the
Bavarian Ministry of Economic Affairs.
Kantenwein is a multidisciplinary law firm consisting of lawyers, tax consultants, and auditors. The firm provides advisory services to entrepreneurs
and businesses facing legal and tax-related decision-making situations. The firm’s practice areas cover the entire spectrum ranging from law and
taxes (including tax crime) to auditing.
Kantenwein was founded at the beginning of the year 2003. However, the founders’ professional experience dates back as far as 1985. When
founding the law firm, the idea was to create a multidisciplinary entity consisting of lawyers, tax consultants, and auditors. This setup allows the firm
to assemble interdisciplinary teams in order to assess economic issues efficiently from different angles.
Among the firm’s clients are companies and entrepreneurs operating in Germany and abroad.
73
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Matheson
Julie Murphy-O’Connor
Karen Reynolds
Ireland
1 Bringing a Claim – Initial Considerations
1.1 What are the most common causes of actions taken
by or against financial institutions and service
providers in your jurisdiction?
Causes of actions commonly taken by customers and other stakeholders
against financial institutions include actions arising from alleged mis-
selling of financial products, misstatement claims, claims for breach of
fiduciary, contractual and other duties. Cases against financial services
entities often involve allegations of misrepresentation, negligent
misstatement, breach of contract and/or breach of a duty of care, fraud
and deceit. Actions in tort and contract can be pursued concurrently.
Certain statutory provisions impose civil liability for breaches, e.g.,
under the Companies Act 2014. This would include, for example,
actions for loss or damage where, as a result of untrue statements or
omissions of information in a prospectus, a person acquires securities in
a publicly traded company, and actions for civil liability for breaches of
market abuse legislation in connection with securities traded on the
Main Securities Market, the Enterprise Securities Market and the
Global Enterprise Market of Euronext Dublin (formerly the Irish Stock
Exchange).
Actions arising from enforcement action by secured lenders/acquirers
of Non-Performing Loans (NPLs) are quite common; for example,
defensive/injunctive actions by borrowers. The recent decision of the
Court of Appeal in Tanager Designated Activity Company v Kane & Ors [2018] IECA 352 was much anticipated in the Irish financial
services market and has restored certainty as regards the
enforceability of assigned security rights in loan portfolio sales.
The Central Bank of Ireland (CBI) is responsible for prudential and
conduct of business supervision and regulation of financial services
firms which provide financial services in Ireland. Pursuant to section
44 of the Central Bank (Supervision and Enforcement) Act 2013, any
failure by a regulated financial service provider to comply with any
obligation under financial services legislation is actionable by the
customer who suffers loss or damage as a result of such failure.
1.2 What remedies are most likely to be awarded?
The main remedy awarded in claims against financial institutions is
damages. Damages may come in the form of general damages, special
damages, punitive or nominal damages. Irish courts tend to award
compensatory and not punitive damages, meaning that the courts look
to the damage done rather than punishing the offender and deterring
others, although aggravated damages and exemplary/punitive
damages are available. Other remedies depend on the nature of the
claim; general common law and equitable remedies which are
available include specific performance, declaratory relief, and
injunctive relief. In appropriate circumstances, orders for rescission
may be made.
1.3 Who has a right of action in financial services
disputes? Does it make a difference if the customer is
an individual or a commercial entity?
Any recipient of financial services, or any person who believes they
have been impacted by the actions, omissions or statements of a
financial services provider, whether an individual or a corporate, has
the right to issue proceedings (see question 1.1 above in relation to
the types of claims).
1.4 Is third-party funding available in financial services
litigation (crowdfunding, maintenance, champerty,
etc.)? Does litigation insurance operate in your
jurisdiction and, if so, what are the implications for
this?
Litigation is usually funded by the individual parties, but the
unsuccessful party is typically ordered to pay the successful party’s
costs. Third Party Funding (TPF) is generally prohibited by the
common law principles of maintenance and champerty (the
Maintenance and Embracery (Ireland) Act 1634). In the case of
Persona Digital Telephony Limited & anor v The Minister for Public Enterprise Ireland & ors [2017] IESC 27, the Supreme Court
upheld the prohibition against litigation being funded by a person
with no legitimate interest in the claim. In SPV OSUS Limited v HSBC Institutional Trust Services (Ireland) Limited & Ors [2018]
IESC 44 (SPV), the Supreme Court upheld the prohibition on
litigation trafficking. A party with a legitimate interest in
proceedings (a shareholder or creditor) does not come under this
prohibition (Moorview Development Limited & Ors v First Active Plc & ors [2018] IESC 33).
Parties to litigation in Ireland may avail of after the event insurance
policy (Greenclean Waste Management Ltd v Leahy (No 2) [2014]
IEHC 314).
1.5 Are class action law suits available in your
jurisdiction? If so, has this impacted financial
services litigation? Has there been an increase in
class action suits post the financial crisis?
Under Irish law, it is possible to bring representative actions which
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are currently the closest thing to class actions. Test cases or
“pathfinder cases” also exist. The parties agree to be bound by the
decision of the test case, which becomes the benchmark by which
the remaining cases will be resolved.
Class actions will indirectly be facilitated in Ireland through the
European Commission’s “New Deal for Consumers” which was
published by the European Commission in April 2018. If enacted,
this would import an increased litigation risk for industry sectors
subject to EU regulation, including in relation to financial services.
Class party actions will only be available for individuals, and
commercial entities (including law firms) will be excluded.
2 Before Commencing Proceedings
2.1 What are the main barriers to financial service
litigation for customers? Are there exclusionary
clauses or duty defining clauses in customer
contracts which prevent customers from bringing a
case?
The fact that neither TPF nor class actions are permissible, at
present, under Irish law could be described as barriers to litigating
against financial services entities. Irish courts recognise and
enforce exclusion clauses; however, they are generally strictly
interpreted, and may be impacted by applicable consumer protection
legislation and regulation (for example, the CBI’s Consumer
Protection Code) and would not, generally, be perceived to be an
obstacle to litigation.
The European Communities (Unfair Terms in Consumer Contracts)
Regulations (Unfair Terms Regulation) (SI 27/1995), as amended
(the Regulations), provide protection for consumers if an exclusion
clause is present on a standardised form (see McCaughey v IBRC Ltd & Anor [2013] IESC 17, AGM Londis plc v Gorman’s Supermarket Ltd [2014] IEHC 95 and Start Mortgages Ltd v Hanley
[2016] IEHC 320).
2.2 Is there a time limit within which financial services
disputes must be commenced? If so, is it different
depending on whether proceedings are brought
before a regulatory body or before the courts? Does
the commencement of a regulatory process ‘stop the
clock’?
The majority of financial services disputes relate to matters of
contract law or tort, where the limitation period is six years. The
Financial Services and Pensions Ombudsman Act 2017 extended
the time limit for bringing certain financial complaints relating to
long-term financial services. The limitation period runs from the
point in time where the customer was aware or ought reasonably to
have become aware of the conduct giving rise to the complaint. The
Ombudsman has discretion to extend the period further. In cases of
fraud, the limitation period does not start to run until the claimant
became aware of, or should have become aware of, the impugned
conduct. Parties can enter into agreements to shorten, or pause, a
limitation period. The commencement of proceedings “stops the
clock”.
For cases which do not come under the Financial Services and
Pensions Ombudsman Act 2017, Gallagher v ACC Bank [2012]
IESC 35 (Gallagher) and Cantrell v AIB PLC & Ors [2017] IEHC
254 (Cantrell) clarified that although the limitation period is
calculated from when the loss occurred, the clock may not begin to
run if there is only a mere possibility of loss. In Cantrell, the court
further clarified that the clock will only begin to run in financial
disputes when the loss has actually occurred – i.e. when the tort is
complete.
Actions for insider trading, unlawful disclosure of inside
information and market manipulation under the Companies Act
2014 are subject to a two-year limitation period.
2.3 Can parties in financial services litigation avail of
litigation and/or legal advice privilege? Are
investigations conducted by regulated bodies
considered ‘litigation’ in the context of privilege?
Yes – litigation privilege protects from disclosure confidential
communications between lawyer and client made for the dominant
purpose of being used to prepare for existing or contemplated
litigation. Litigation privilege may also extend to communications
between a client and a third party, where the dominant purpose is to
prepare for existing or contemplated litigation and is therefore
considered to offer a greater level of protection. Litigation privilege
rarely continues beyond the final judicial determination of the
proceedings in which it was asserted (see UCC v ESB [2014] 2 IR
525).
Legal advice privilege can arise in circumstances where litigation is
not in contemplation, and is similar to “attorney-client privilege” in
the US. Legal advice privilege protects confidential communications
between lawyer and client made for the dominant purpose of seeking
or giving legal advice. Unlike litigation privilege, it does not protect
communications between client/lawyer and third parties.
Communications with financial regulators do not generally attract
the protection of litigation or legal advice privilege. There is,
however, a clear line of authority which has evolved and supports
the application of litigation privilege to documents generated for the
purpose of engaging in regulatory investigations and inquiries (see:
Ahern v Mahon [2008] 4 IR 704, in relation to privilege before a
statutory investigation or inquiry, such as a tribunal; Quinn & ors v Irish Bank Resolution Corporation Ltd & Anor [2015] IEHC 315, in
relation to litigation privilege over documents created for the
dominant purpose of engaging with regulatory and investigative
processes involving the financial regulator and the Office of
Director of Corporate Enforcement; and The Director of Corporate Enforcement v Leslie Buckley [2018] IEHC 51, relating to the
preparation of a response to the State corporate enforcer’s
investigation of a whistleblower complaint).
The Irish High Court in UCC v ESB (referred to above) has adopted
a narrow interpretation of “client” for the purposes of legal privilege
(similar to the Three Rivers No. 5 test in the UK). It remains to be
seen if the commentary in SFO v ENRC [2018] EWCA Civ 2006,
which suggests a willingness to depart from the restrictive
interpretation (noting that English law appeared to be so out of sync
with international common law on the point), will be persuasive
here.
2.4 Are standard form master agreements used in your
jurisdiction for financial institutions (for example, the
ISDA Master Agreement)? How are they treated?
Many financial services providers utilise standard form contracts
and generally applicable terms and conditions. See question 3.6
below in relation to protections for consumers in connection with
standardised contracts and question 7.3 below in relation to a recent
case where the surcharge interest provision in a lender’s standard
terms and conditions was held to constitute an unenforceable
penalty clause.
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ISDA Master Agreements are used in Ireland mainly for cross-
jurisdictional agreements. On 3 July 2018, ISDA released an Irish
law ISDA Master Agreement (a French law version has also been
published). The adoption of ISDA agreements, which are governed
by the law of EU Member States other than the UK, is a welcome
development given the anticipated departure of the UK from the EU.
2.5 Are there any non-contractual duties which are
binding on financial services entities (for example, a
particular fiduciary duty or a code of conduct)? Can
they be contracted out of?
As mentioned, the CBI is the local regulator of financial services
entities in Ireland. The CBI issues codes of conduct, which set out
the CBI’s policy and which supplement applicable financial services
legislation. These statutory codes of conduct set out the minimum
requirements which are binding on regulated financial services
firms when providing financial services. Failure to comply can
result in an investigation and the imposition of an administrative
sanction by the Central Bank.
A bank owes a duty of confidentiality to its customers. The
foundation of this duty is contractual in nature but increasingly the
position taken in Irish courts is to analyse the duty against the
backdrop of public policy. Fiduciary duties may be owed in the
context of a bank and customer relationship. Recently, the Irish
Court of Appeal affirmed that Irish contract law does not recognise
any general principle of good faith and fair dealing in commercial
contracts (Flynn & Anor v Breccia & Anor [2017] IECA 74).
3 Progressing the Case
3.1 Is there a specialist court or specialist judges for
financial services litigation?
No. However, most cases are heard by the Commercial Court, a
“fast track” division of the High Court which deals with commercial
contracts and business disputes with a monetary value in excess of
€1 million. Plans are in train to build on the success of the
Commercial Court list with the introduction of a separate, specialist
financial services court (together with other specialist courts
including a specialist IP court).
3.2 Does the method of service of proceedings differ for
financial service litigation?
In general, financial services litigation follows the same procedural
rules as any other type of litigation. High Court proceedings are
commenced by issuing and serving an originating summons.
Service on an individual is to be done personally (where
practicable). Service on a registered company is affected by leaving
a summons at the registered office of the company or service by
ordinary pre-paid post to the company’s registered office and
keeping the postal certificate.
3.3 Are there any specific pre-trial procedures that must
be followed for financial services litigation in your
jurisdiction? If so, what are they and what are the
consequences of not abiding by them?
Pre-trial steps are the same in financial services litigation as they are
in other litigation cases. However, there are specific pre-trial
procedures for the Commercial Court which differ slightly.
3.4 Are there any alternative dispute resolution (ADR)
regulations that apply to financial services disputes in
your jurisdiction? Are ADR clauses typically included
in financial services contracts, and is ADR commonly
used to resolve financial services disputes in your
jurisdiction?
The Mediation Act 2017 requires litigants to confirm to the courts
that they have considered mediation. The solicitors on record must
evidence this by completing a statutory declaration in advance of the
commencement of proceedings. If an agreement contains an ADR
clause, any court proceedings instigated can be stayed by an
application from the other side, for the case to be referred to
arbitration. A compliant made by a consumer to the Financial
Services and Pensions Ombudsman (the FSPO) must have initially
been attempted to be resolved between the consumer and the
financial institution using the financial institution’s complaints
resolution system.
3.5 How are claims for negligent misstatement/mis-selling
dealt with in your jurisdiction?
Mis-selling of financial products claims can be dealt with by way of
litigation or can be the subject of complaints to the FSPO and/or the
CBI. In Ireland, the issue of mis-sold payment protection insurance
was addressed by way of a redress and compensation scheme under
the Central Bank Act 1942 (as amended). In order to prove negligent
misstatement, a claimant is required to show the existence of a
special relationship between the claimant and the financial services
firm such that the firm owed a duty of care to the claimant, that the
firm misstated something on which the claimant relied and, as a
result of such reliance, caused loss or detriment and that the firm
should reasonably have foreseen that the claimant would rely on its
(mis)statement. For negligent misrepresentation claims to succeed,
the claimant must establish that the financial services firm made a
representation to the claimant on foot of which the claimant was
induced into entering into an agreement, that the financial services
firm lacked the requisite level of due care in making the
representation, and the claimant’s loss was caused by the incorrect
representation provided. The Irish High Court noted in Walsh v Jones Lang LaSalle Ltd [2017] IEHC 38 that a disclaimer could limit
liability for a negligent misstatement. However, Mr. Justice
O’Donnell did state that a disclaimer of this nature would only be
upheld if it was clear that the reader should take all responsibility to
ensure the information in the prospectus was accurate.
Civil liability for untrue statements or omissions in prospectuses is
addressed under section 1349 of the Companies Act 2014 and
criminal liability is addressed under section 1357 of the Companies
Act 2014. Under section 1349 of the Companies Act 2014, there is
a statutory compensatory regime for customers who have acquired
securities on the faith of a prospectus that contains an untrue
statement or an omission of information required by EU prospectus
law to be contained in the prospectus.
3.6 How have unfair terms in contracts been interpreted
in your jurisdiction? Are there any causes of action or
defences available specifically to consumers? How
broad is the definition of a ‘consumer’ in your
jurisdiction?
The Regulations provide statutory protections against the use of unfair
contractual terms in consumer contracts (particularly where there are
standard form contracts). The Irish courts more and more frequently
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consider the application of the Regulations of their own volition. The
EU Unfair Commercial Practices Directive (Directive 2005/28/EC of
11 May 2005) was implemented in Ireland pursuant to the Consumer
Protection Act 2007. This legislation provides protection against
unfair, aggressive or misleading business-to-consumer commercial
practices. The Competition and Consumer Protection Commission
and the CBI are empowered to enforce the legislation.
The High Court in KBC Bank Ireland Plc v Osborne [2015] IEHC 795
(relating to commercial loan facilities where the borrower had
confirmed by way of executing a facility letter that he was not
borrowing as a consumer) held that a person other than a natural person
cannot be a consumer. In AIB v Higgins [2010] IEHC 219, the High
Court found that a person can have more than one business trade or
profession and that the same person can be regarded as a consumer for
certain transactions and as an economic operator in relation to others.
3.7 How is data protection/freedom of information dealt
with in financial services litigation? Can a financial
services customer access their personal data? How is
commercially sensitive or confidential information
dealt with in the context of discovery or disclosure?
The data protection landscape in Ireland was previously made up of
the Data Protection Act 1988 and the Data Protection Act 2003
(which transposed the European Directive 95/46/EC on data
protection into Irish law) (together, the Pre-GDPR Regime). The
General Data Protection Regulations (the GDPR) came into force in
May 2018 along with the Data Protection Act 2018 to give further
effect to the GDPR and repeal certain parts of the Pre-GDPR
Regime. Under Article 15 of the GDPR, any individual has a right
to obtain a copy of any information relating to them which is kept in
a structured manual filing system. There are certain exceptions to
this right; for example, information which relates to judicial
proceedings, an active criminal investigation, the administration of
tax or in contemplation or in preparation of a legal defence.
There are no specific disclosure or discovery requirements which
apply solely to financial services litigation. Order 31 of the Rules of
the Superior Courts of Ireland governs the main disclosure
requirements which apply in any litigation. Recent court decisions
have emphasised that orders for extensive discovery should only be
made when all other avenues have been exhausted (see Tobin v The Minister for Defence & Ors, which is subject to an appeal to the
Supreme Court on the basis that the discovery point is one of public
importance). Cross-border discovery requests are possible through
EU Regulation (EC) No. 1206/2001.
The Data Protection Act 2018 has introduced new court rules on
media access to and reporting of court cases commenced on or after
1 August 2018.
In Ireland, almost all cases are heard in public. This means that
commercially sensitive information which has been included in
discovery may be publicised. Parties may apply to the court for an
order to maintain confidentiality and, if successful, those documents
may be redacted to block disclosure of sensitive information.
4 Post Trial
4.1 Is there a right of appeal in financial services
disputes?
Generally, financial services disputes are litigated in the High Court
(and the Commercial Court) from which an appeal lies to the Court
of Appeal. The Court of Appeal does not hear oral evidence and
considers findings of fact arrived at by the High Court. In limited
circumstances, it is possible to bring a further appeal from the Court
of Appeal to the Supreme Court. Leave of the Supreme Court must
be obtained in advance. The Supreme Court may hear an appeal on
a decision from the Court of Appeal if it is satisfied that the decision
involves a matter of general public importance, or the interests of
justice require it. A “leapfrog appeal” from the High Court directly
to the Supreme Court is possible where the Supreme Court is
satisfied that there are exceptional circumstances warranting a direct
appeal. Any finding by the Supreme Court cannot be appealed,
unless the case involves an issue of interpretation of EU law in
which case it may be referred to the European Court of Justice.
4.2 How does the court deal with costs in financial
services disputes?
In Ireland, costs generally “follow the event” and are usually
awarded on a party-party basis. Costs are ultimately awarded at the
discretion of the court. There is a growing trend to make issues-
based costs awards. It is also common for costs sanctions to be
imposed where the court is dissatisfied with certain aspects of the
conduct of the proceedings, or for not availing of mediation or
conciliation, unless there is a good reason for the refusal. The court
will also take into account any lodgements or tenders made. In
Thema International Plc v HSBC Institutional Trust Services (Ireland) Ltd [2011] IEHC 357, the High Court affirmed the court’s
jurisdiction to impose liability for costs on a third-party funder who
had a legitimate interest in the proceedings, though not a party to the
litigation, in light of his role in driving the action.
5 Cross-Border Issues
5.1 What issues typically arise in cross-border disputes
or investigations involving financial institutions and
how are they catered for in your jurisdiction?
The issue of jurisdiction is typically the biggest concern in cross-
border disputes and is generally resolved by reference to common
law principles for disputes involving non-EU Member States or by
reference to EU regulations for disputes involving EU Member
States.
Clauses of express jurisdiction in civil and commercial contracts
between parties in different EU Member States are recognised
pursuant to Regulation (EC) 593/2008 on the law of contractual
obligations. In addition, the Irish courts respect a choice of jurisdiction
in a commercial contract in accordance with the Recast Brussels
Regulation (Regulation EU No. 2015/2012). The Recast Brussels
Regulation provides priority to a court nominated in an exclusive
jurisdiction clause. Failing a jurisdiction clause, the appropriate
jurisdiction will be determined by the nature of the dispute.
Otherwise, and for all non-EU Member States, the common law
rules apply and jurisdiction can be determined in the Irish courts’
favour by mandatory provisions of Irish law or if the application of
foreign legal provisions to the dispute would be manifestly
incompatible with Irish public policy.
5.2 What is the general approach of the courts in your
jurisdiction to co-operating with foreign courts or
regulatory bodies or officials in financial services
disputes (including investigations)?
International co-operation between Ireland and other countries is
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primarily governed by the Criminal Justice (Mutual Assistance) Act
2008 and the Criminal Justice (Mutual Assistance) (Amendment)
Act 2015 (together, the Mutual Assistance Acts). Co-operation with
foreign courts or regulatory bodies generally is dependent on the
identity of the corresponding State and their ratification of relevant
international agreements or existence of a mutual assistance treaty.
Co-operation is most evident between Ireland and other EU Member
States. In addition to the Mutual Assistance Acts, there are numerous
frameworks in place which enhance Ireland’s co-operation with
other EU Member States; for example, the Council Framework
Decision on the European Evidence Warrant (2008/978/JHA) and the
Council Framework Decision on Freezing Orders (2003/577/JHA).
A court in any EU Member State (with the exception of Denmark)
can also take evidence from a witness in Irish court proceedings, as
provided for in the Evidence Regulation (Council Regulation
1206/2001) and the Rules of the Superior Courts of Ireland.
The applicable law of enforcement of foreign judgments depends
primarily on the jurisdiction that has issued the foreign judgment.
For judgments emanating from an EU Member State, the Brussels I
Regulation (EC 44/2001) and the Brussels I Recast Regulation (EC
1215/2012) provide for the recognition and enforcement of
judgments in civil and commercial matters. For all non-EU
Member States, common law rules apply and the court will consider
whether the judgment is for a definite sum, if it is final and
conclusive, and the competency of the jurisdiction which issued the
judgment amongst other factors.
Irish courts will not enforce non-EU Member State judgments in
Ireland unless an applicant can show some legitimate benefit that
will ensue from an order recognising the non-EU judgment in
Ireland (see Albaniabeg Ambient Shpk v Enel SpA and Enelpower SpA [2018] IECA 46).
5.3 Is extra-territorial jurisdiction typically asserted in
your jurisdiction and, if so, in what circumstances?
In general, Ireland does not exert extra-territorial jurisdiction.
Extra-territorial jurisdiction is conferred in Ireland by way of statute
and a consideration of the relevant offence must be made before it
can be determined if Ireland can exercise extra-territorial
jurisdiction.
5.4 Are unilateral jurisdiction clauses valid and
enforceable in your jurisdiction?
Unilateral jurisdiction clauses are valid and enforceable in Ireland.
The Recast Brussels Regulation addressed the issue of “torpedo
actions” with respect to an exclusive jurisdiction clause. This matter
has not been clarified with respect to unilateral jurisdiction clauses.
Disputes arising under contracts containing such a clause could
potentially fall victim to a “torpedo action”.
6 Regulated Bodies
6.1 What bodies, apart from the courts, regulate financial
services disputes in your jurisdiction?
The CBI is the main regulator dealing with financial services
disputes in Ireland. The CBI can impose significant monetary
penalties on regulated entities, up to a maximum of the greater of
€10 million or 10% of turnover of the regulated entity. The CBI can
also impose financial penalties on those involved in the
management of regulated entities up to a maximum of €1 million.
The FSPO deals with disputes with financial services providers.
6.2 What powers (investigative/inquisitorial/
enforcement/sanctions) do these regulatory bodies
have?
The CBI may commence an investigation into conduct of a
regulated financial services provider where it has reason to believe
that a contravention of applicable law or regulation has occurred.
The CBI may conduct on-site inspections, interview individuals,
compel the production of documents, carry out dawn raids and
summon witnesses. There are a number of potential outcomes from
the ASP which include a criminal prosecution, a supervisory
warning, an inquiry, a settlement or no further action. The CBI may
hold an inquiry to determine if a prescribed contravention has
occurred and, if so, the appropriate sanction which could include
caution or reprimand, monetary penalties as described in question
6.1 above, suspension or revocation of authorisation (or submission
of proposal to suspend or revoke authorisation if the entity is
authorised by the European Central Bank), disqualification of a
person, a direction to cease a contravention and a direction to pay
the CBI all or part of its costs. Under the Central Bank (Supervision
and Enforcement) Act 2013, the CBI has power to make directions
as to the regulated entity’s business and order redress for customers.
The FSPO has the power to obtain information and make such
inquiries. The FSPO can award compensation of up to €500,000
and it can also direct a regulated provider to rectify the conduct that
is the subject of a complaint. There is no limit on the value of the
rectification that can be directed.
6.3 Are the decisions of regulatory bodies binding on the
parties to a financial services dispute?
Decisions of the CBI are binding on the regulated entity or person.
Failure to comply with any decisions of the CBI under the
administrative sanctions procedure could result in the revocation of
a regulated entity’s authorisation (or a submission of a proposal to
suspend or revoke authorisation if the entity is authorised by the
European Central Bank). Under the CBI’s Fitness and Probity
regime, individuals who carry out a “controlled function” can be
suspended pending a Fitness and Probity investigation and, if found
not to be of appropriate fitness and probity, they can be prohibited
from carrying out a controlled function for a specified period or
indefinitely. Fines may be imposed by the CBI of up to €10 million
for firms and up to €1 million for individuals.
The decisions of the FSPO are binding.
6.4 What rights of appeal from regulatory decisions
exist?
There is a right of appeal for regulated entities to the Irish Financial
Services Appeals Tribunal (IFSAT) in respect of certain CBI
decisions. With respect to administrative decisions which are
appealed, IFSAT can uphold, vary, substitute, set aside or refer the
decision back to the regulator. For a supervisory decision, IFSAT
can affirm or refer the decision back to the regulator.
The decision of IFSAT can be appealed to the High Court. The
appeal does not affect the operation of the IFSAT decision. Rights
of quasi-appeal of a regulated body with respect to a decision of a
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regulator include constitutional challenge and judicial review.
These actions are taken in the High Court.
Decisions of the FSPO may be appealed to the High Court.
6.5 Are decisions of regulatory bodies publicly
accessible?
Details of decisions of the CBI following an inquiry or a settlement
following an investigation under the ASP are published and will
include the name of the regulated entity, details of the contraventions
and details of any sanction imposed, including monetary penalties.
7 Updates – Cases and Trends
7.1 Summarise any legislative developments in this area
expected in the coming year. Describe any practical
trends in your jurisdiction (e.g., has the financial
crisis impacted legislation? Has there been an
increase in the powers of regulatory bodies as a
reaction to the crisis? Has there been a change in the
amount and type of cases being brought by and
against financial service providers?).
The focus on regulation and enforcement has intensified since the
financial crisis. This has led to an increase in legislation in this area
at both national and European level to enhance the powers of
regulatory bodies, to facilitate information sharing between relevant
authorities and to increase transparency to ensure effective
regulation of transactions.
The Criminal Justice (Money Laundering and Terrorist Financing)
(Amendment) Act 2018 was enacted in November 2018 and
transposes the Fourth Anti-Money Laundering Directive (4AMLD)
into Irish law.
The Markets in Financial Instruments Act 2018 makes provision for
indictable offences for contraventions under the MiFID II
Regulations. The sanctions for these contraventions represent a
significant increase on those provided for under the European
Communities Act 1972. Under the 2018 Act, the sanction for a person
found to be guilty of a relevant offence on indictment is a fine not
exceeding €10 million and/or a prison term not exceeding 10 years.
As part of its recommendations to the Law Reform Commission and
the July 2018 publication by the CBI of a report on the Behaviour
and Culture of the Irish Retail Banks (the Report), the CBI has
proposed the introduction of an Individual Accountability
Framework. The proposals include the introduction of enforceable
Conduct Standards which would set out the behaviour that the CBI
expects of regulated firms and the individuals working within them
as well as a Senior Executive Accountability Regime.
Investigations by the CBI and the FSPO have shone a light on
regulatory failings by financial institutions, which in turn has led to
an escalation in the number of private party actions brought against
such institutions. One significant example of this is in relation to
tracker mortgages.
7.2 On an international level, would your jurisdiction be
considered to be more financial institution- or
customer-friendly?
Ireland has a proven track record in its commitment to
understanding and facilitating the evolving needs of international
business, and, in particular, those of the financial services industry
which has been central to the country’s economic growth. This
commitment is recognised at an international level. Beginning with
the establishment of the International Financial Services Centre in
1987, business-friendly policies have been adopted over the years
by successive Governments to foster a supportive and stable legal,
tax and regulatory environment, which combined with access to the
European market and a skilled workforce make Ireland an attractive
location for financial institutions.
7.3 Please identify any significant cases regarding
financial services disputes during the past 12 months.
Please highlight the significance of the case(s), any
new or novel issues raised and what lessons can be
drawn from them.
From a regulatory perspective, the decision of the Court of Appeal in
Fingleton v The Central Bank of Ireland [2018] IECA 105 in April
2018 clarified that a settlement by a financial institution with the CBI
will not, in and of itself, act as a bar to its pursuit of individuals
within that institution by way of inquiry on grounds of bias.
In relation to costs, in Moorview Development Limited & Ors v First Active Plc & ors [2018] IESC 33, the Supreme Court confirmed that
a costs order can be made against a person who funds litigation even
if that person is not a party to the proceedings. In Defender Limited v HSBC Institutional Trust Services (Ireland) DAC & ors [2018]
IEHC 322, the High Court gave judgment on a preliminary issue in
favour of the defendant, HSBC Institutional Trust Services DAC, in
a claim for $141 million taken against it by Defender.
In SPV, the Supreme Court reaffirmed the prohibition on
unconnected third parties profiting in litigation. While upholding
the prohibition, Chief Justice Frank Clarke and McKechnie J. urged
legislators to reconsider the absolute ban on TPF.
In the linked cases of Flynn & Benray Limited v Breccia [2018]
IECA 273 and Sheehan v Breccia & Ors [2018] IECA 286, the Court
of Appeal upheld the High Court’s decision that a 4% surcharge
interest provision in a loan agreement constituted an unenforceable
penalty clause. In particular, the court was influenced by the fact
that the impugned provision was located in the lender’s standard
terms and conditions and, therefore, was not specifically negotiated.
This decision demonstrates that the Irish courts will not deviate
from the traditional penalty clause test of whether the clause is a
genuine pre-estimate of the loss which would occur on default (and
therefore is in contrast to the position in the UK under Cavendish Square Holding BV v Talal El Makdessi [2015] UKSC 67).
The Regulations were an area of focus in 2018. The Regulations are
increasingly relied on by borrowers in defending enforcement
proceedings. In the recent judgment of Binchy J. in The Governor and Company of the Bank of Ireland v McMahon & anor [2018]
IEHC 455, Binchy J. held that the Regulations, which place
obligations for contracts to be drafted in “plain, intelligible language”
do not apply to mortgages. This is a departure from other recent cases
including Ulster Bank Ireland Limited v Costelloe & anor [2018]
IEHC 289 and Permanent TSB Plc formerly Irish Life & Permanent Plc v Fox [2018] IEHC 292. Whilst these cases demonstrate differing
approaches, a common theme is that where borrowers have entered
into an agreement following receipt of independent legal advice, the
court is more likely to determine that the agreed terms are not unfair.
7.4 Have global economic changes caused any changes
to financial services litigation/regulation in your
jurisdiction?
In Ireland, since the 2008 global financial crisis, there has been an
increased emphasis on regulatory action, increased oversight,
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Julie Murphy-O’Connor
Matheson
70 Sir John Rogerson’s Quay
Dublin 2
Ireland
Tel: +353 1 232 2192 Email: [email protected] URL: www.matheson.com
Karen Reynolds
Matheson
70 Sir John Rogerson’s Quay
Dublin 2
Ireland
Tel: +353 1 232 2192 Email: [email protected] URL: www.matheson.com
Julie is a Partner at Matheson, practising in all aspects of contentious
and non-contentious restructuring, recovery and insolvency law
matters and is an experienced litigator specialising in banking and
financial services and shareholder disputes. Julie was a member of
the Council of the Irish Society of Insolvency Practitioners from 2011 to
2014 during which time she acted as secretary and as chair of its
educational committee. Julie is a regular contributor to Irish and
international legal publications. She lectures on insolvency law and
directors’ duties at the Law Society of Ireland and Dublin Solicitors Bar
Association. She is co-author of the Law Society’s insolvency manual.
She is a member of the Commercial Litigation Association of Ireland
and co-author of the Practitioner’s Guide to the Commercial Court in Ireland. Julie is a non-executive director of Coillte Teoranta (Irish State
forestry company). She is ranked as one of Ireland’s top insolvency
lawyers by international legal directories.
Established in 1825 in Dublin, Ireland and with offices in Cork, London, New York, Palo Alto and San Francisco, more than 700 people work across
Matheson’s six offices, including 96 partners and tax principals and over 470 legal and tax professionals. Matheson services the legal needs of
internationally focused companies and financial institutions doing business in and from Ireland. Our clients include over half of the world’s 50 largest
banks, six of the world’s 10 largest asset managers, seven of the top 10 global technology brands and we have advised the majority of the Fortune 100.
Karen is a Partner in the Commercial Litigation and Dispute Resolution
Department at Matheson, and co-head of the firm’s Regulatory and
Investigations Group.
Karen has a broad financial services and commercial dispute
resolution practice. She has over 10 years’ experience providing
strategic advice and dispute resolution to financial institutions,
financial services providers, domestic and internationally focused
companies and regulated entities and persons. She advises clients in
relation to contentious regulatory matters, investigations, inquiries,
compliance and governance related matters, white-collar crime and
corporate offences, commercial and financial services disputes, anti-
corruption and bribery legislation and document disclosure issues.
Karen has substantial experience in corporate restructuring and
insolvency law matters, having had a lead role in some of the most
high-profile corporate rescue transactions of the last 10 years. She
advises liquidators, regulators, directors and insolvency practitioners
in relation to corporate offences and investigations, shareholder rights
and remedies, directors’ duties, including in relation to fraudulent and
reckless trading and disqualification and restriction proceedings.
investigations and enforcement. The CBI has developed a more
intrusive risk-based framework for supervision and its enforcement
and redress powers have been enhanced significantly by legislation.
Significantly, the Central Bank Reform Act 2010 strengthened the
CBI’s powers under the Fitness and Probity Regime and enabled it
to remove individuals performing controlled functions and pre-
approval controlled functions from industry, or to prevent
individuals who do not meet the Fitness and Probity Standards
issued by the CBI from performing pre-approval controlled
functions. In addition, the Central Bank (Supervision and
Enforcement) Act 2013 increased the CBI’s powers to administer
sanctions in response to regulatory breaches by regulated financial
service providers and the level of fines that it could levy under its
Administrative Sanctions Procedure. In 2017, the CBI restructured
its financial regulation function into two distinct pillars: one
dedicated to the regulation of financial conduct; and the other to
prudential regulation. The CBI is also increasing its focus on
personal responsibility and has expressed the view that “individual accountability is integral to the regulation of firms”. In its recent
Report on Behaviour and Culture of the Irish Retail Banks, it has
called for additional legislative reforms to facilitate the introduction
of an Individual Accountability Framework, a key component of
which will be a Senior Executive Accountability Regime (as
outlined at question 7.1 above).
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DQ Advocates Limited
Tara Cubbon
Sinead O’Connor
Isle of Man
1 Bringing a Claim – Initial Considerations
1.1 What are the most common causes of actions taken
by or against financial institutions and service
providers in your jurisdiction?
The most common causes of action are: debt recovery claims;
claims for breach of contract and professional negligence; and
claims for misrepresentation or misstatements. There may also be
claims involving corporate and trust service providers including
claims against trustees for negligence or breach of fiduciary duty
and claims against directors for negligence or breach of directors’
duties.
The Isle of Man Financial Services Authority (the “FSA”) can also
take certain regulatory actions under the Financial Services Act
2008 and the Collective Investment Schemes Act 2008 against
financial service providers including issuing prohibitions, warning
notices, directions and civil penalties. This can include the issuance
of orders prohibiting persons from acting as directors.
Directors and other company officers can also be disqualified under
the Company Officers (Disqualification) Act 2009.
Claims may also be brought against financial service providers for
breaches of the Anti-Money Laundering and Countering the
Financing of Terrorism Code 2015 (as amended 2018) (the “AML /
CFT Code”).
1.2 What remedies are most likely to be awarded?
In respect of civil claims brought by or against financial institutions,
likely remedies include compensatory damages, rescission of
contracts, restitution and the accounting of profits. Injunctions and
orders for specific performance may also be granted. In respect of
certain claims, the courts may also order the removal and
replacement of trustees and directors.
1.3 Who has a right of action in financial services
disputes? Does it make a difference if the customer is
an individual or a commercial entity?
There are no differences between the rights of individuals and
commercial entities to bring actions in the High Court in respect of
financial services disputes.
The Isle of Man Financial Ombudsman Scheme is, however, only
open to individuals. The Scheme is a free, independent dispute
resolution service for customers with a complaint against an Isle of
Man financial firm such as a bank, insurance company or financial
adviser which the firm has been unable to resolve.
1.4 Is third-party funding available in financial services
litigation (crowdfunding, maintenance, champerty,
etc.)? Does litigation insurance operate in your
jurisdiction and, if so, what are the implications for
this?
Third-party funding is not common in the Isle of Man but is
permissible. It is subject to the common law rules of maintenance
and champerty. Isle of Man Advocates are not permitted to enter
into conditional fee agreements and contingency arrangements.
Litigation insurance does operate in the Isle of Man. The fact that a
party has litigation insurance will not affect how any claim will
proceed. The insured party will remain subject to any court
judgment or order and the terms of any cover for the same will be a
matter between the insured party and the insurer.
1.5 Are class action law suits available in your
jurisdiction? If so, has this impacted financial
services litigation? Has there been an increase in
class action suits post the financial crisis?
Representative actions and group litigation are permitted and
provided for under the Isle of Man High Court Rules 2009 (the
“HCR”). There has not been an increase in such actions post the
financial crisis and the same continue to be uncommon in the Isle of
Man.
2 Before Commencing Proceedings
2.1 What are the main barriers to financial service
litigation for customers? Are there exclusionary
clauses or duty defining clauses in customer
contracts which prevent customers from bringing a
case?
Individual terms of business between financial services firms and
their clients may limit rights of recovery under exclusion clauses,
limitation of liability clauses and indemnity clauses. In particular
contracts, for example, in respect of investments managed by
trustees, trustees may seek to exclude any liability for product
choice or advice.
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2.2 Is there a time limit within which financial services
disputes must be commenced? If so, is it different
depending on whether proceedings are brought
before a regulatory body or before the courts? Does
the commencement of a regulatory process ‘stop the
clock’?
There are no specific time limits that apply specifically to financial
services disputes. It will depend upon the cause of action being
relied on. In general, an action founded on tort and contract cannot
be brought after the expiration of six years from the date on which
the cause of action accrued. Generally speaking, any regulatory
action will not ‘stop the clock’ in respect of civil claims.
2.3 Can parties in financial services litigation avail of
litigation and/or legal advice privilege? Are
investigations conducted by regulated bodies
considered ‘litigation’ in the context of privilege?
Parties to financial services litigation can avail of litigation and legal
advice privilege as would apply in any civil proceedings.
There are no precedent cases which have considered whether or not
investigations constitute ‘litigation’ and the Isle of Man would likely
follow England and Wales on this point.
2.4 Are standard form master agreements used in your
jurisdiction for financial institutions (for example, the
ISDA Master Agreement)? How are they treated?
Yes, these are quite common especially in large lending
transactions. They will form part of the contract with a financial
institution if they are clearly and properly incorporated into the
contract by reference.
2.5 Are there any non-contractual duties which are
binding on financial services entities (for example, a
particular fiduciary duty or a code of conduct)? Can
they be contracted out of?
There are no specific non-contractual duties that are binding on
financial services entities but duties of care and/or fiduciary duties
may arise in particular circumstances. For example, as set out
below, claims for negligent misstatement may be brought. Claims
may also be brought on the basis of a tortious duty to provide advice.
Directors are subject to common law and equitable duties including
the duties to act within their powers, to promote the success of the
company, to exercise independent judgment, to exercise reasonable
care, skill and diligence, to avoid conflicts of interest, to not accept
benefits from third parties and to declare an interest in a proposed
transaction or arrangement. Trustees also owe fiduciary duties to
their trusts and the beneficiaries of those trusts.
The FSA has issued corporate governance guidance and guidance
on directors’ duties and good practice. Compliance with these
standards is supervised by the FSA.
Attempts to contract out of non-contractual duties are subject to the
law on exclusion and limitation of liability.
3 Progressing the Case
3.1 Is there a specialist court or specialist judges for
financial services litigation?
There is no specialist court, nor are there specialist Deemsters (Isle
of Man judges), that deal with financial services litigation. All such
litigation would be dealt with by the High Court; however, the type
of action would determine the court ‘procedure’ that the action
followed. For example, a high value debt claim would be dealt with
under the ‘ordinary procedure’ whereas a claim for removal of
trustees of a trust would be heard under the ‘chancery procedure’.
The latter ‘procedure’ typically deals with claims relating to
companies and trusts that are not simply monetary claims.
The Financial Services Appeal Tribunal will hear appeals by
aggrieved persons against actions taken by the FSA under the
Financial Services Act 2008 and/or the Collective Investment
Schemes Act 2008.
3.2 Does the method of service of proceedings differ for
financial service litigation?
The method of service of proceedings does not differ in respect of
financial service litigation. The HCR apply to all types of civil
litigation.
3.3 Are there any specific pre-trial procedures that must
be followed for financial services litigation in your
jurisdiction? If so, what are they and what are the
consequences of not abiding by them?
There are no pre-action protocols in the Isle of Man. However, the
overriding objective of the HCR is for cases to be dealt with justly
including proportionately, expeditiously and fairly. The Isle of Man
courts therefore typically expect parties to have sent letters before
action to the other side and attempted to resolve disputes prior to
proceedings being commenced.
3.4 Are there any alternative dispute resolution (ADR)
regulations that apply to financial services disputes in
your jurisdiction? Are ADR clauses typically included
in financial services contracts, and is ADR commonly
used to resolve financial services disputes in your
jurisdiction?
There are no ADR regulations that apply in the Isle of Man;
however, the Isle of Man courts do expect parties to attempt ADR as
an alternative to court proceedings and there is a continuing duty on
parties to consider this.
ADR clauses are seen in financial services contracts and these will
govern how a dispute is resolved at least in the first instance. The
most common type of ADR used for the resolution of financial
services disputes in the Isle of Man is mediation. As set out above,
the Financial Ombudsman Scheme also provides for the resolution
of disputes.
3.5 How are claims for negligent misstatement/mis-selling
dealt with in your jurisdiction?
Claims for mis-selling may be dealt with by way of a claim for
negligent misrepresentation under the Misrepresentation and Unfair
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Contract Terms Act 1980 (“MUCTA”) or a tortious claim for
negligent misstatement. The tort of deceit may also found a claim
for fraudulent misrepresentation.
3.6 How have unfair terms in contracts been interpreted
in your jurisdiction? Are there any causes of action or
defences available specifically to consumers? How
broad is the definition of a ‘consumer’ in your
jurisdiction?
The Consumer Protection Act 1991 (the “CPA 1991”) deals with unfair
contract terms in consumer contracts. Section 39 provides that a
contract term which has not been individually negotiated shall be
regarded as unfair if it causes a significant imbalance in the parties’
rights and obligations arising under the contract, which is to the
detriment of the consumer and cannot be justified. A term will always
be regarded as not having been individually negotiated where it has
been drafted in advance and the consumer has therefore not been able to
influence the substance of the term. The unfairness of the contract term
will be assessed having regard to the following matters (as at the time
the contract was concluded): (a) the nature of the goods or services to be
supplied; (b) all the circumstances attending the conclusion of the
contract; and (c) all the other terms of the contract and of any other
contract on which it is dependent. Where a term is found to be unfair it
will not be binding on the consumer and the contract will continue if it
is capable of existing without the unfair term. Injunctions can be
obtained to prevent the continued use of unfair terms.
As set out above, MUCTA deals with misrepresentation and also
deals with limitations and exclusions of liability. In respect of
consumers, certain types of liability can be excluded subject to
reasonableness whilst other types of liability cannot be excluded or
limited at all.
The Supply of Goods and Services Act 1996 also provides
protection to consumers by implying certain terms into contracts for
the supply of services including in respect of the care and skill
applied to the performance of the contract.
Section 40F of the CPA 1991 defines ‘consumer’ as any person who
is acting for purposes which are outside his trade, business or
profession.
Similarly, section 14 of MUCTA provides that a party to a contract
“deals as consumer” in relation to another party if: (a) he neither
makes the contract in the course of a business nor holds himself out
as doing so; (b) the other party does make the contract in the course
of a business; and (c) in the case of a contract governed by the law
of sale of goods or hire-purchase, the goods passing under or in
pursuance of the contract are of a type ordinarily supplied for
private use or consumption.
3.7 How is data protection/freedom of information dealt
with in financial services litigation? Can a financial
services customer access their personal data? How is
commercially sensitive or confidential information
dealt with in the context of discovery or disclosure?
A financial services customer can access their personal data by
exercising their data subject access right under the Isle of Man’s
data protection legislation. There are a range of matters which can
be excluded from any response to a data subject access request
which includes information which might be legally privileged.
Freedom of information requests can be served on public authorities
and as the FSA qualifies as a public authority, a data subject could
access data through this channel as well. Discovery and disclosure
is dealt with under the Code of Practice on Access to Government
Information (“the Code”) which states that information that is
reasonably requested will be disclosed except where disclosure
would not be in the public interest. The exceptions are found in part
II of the Code which include: security and external relations;
internal discussion and advice; communications with the royal
household and the governor; law enforcement and legal
proceedings; and more.
4 Post Trial
4.1 Is there a right of appeal in financial services
disputes?
Where a financial services dispute has been determined by way of a
civil claim in the High Court, the ordinary right of appeal that applies
to all civil claims will apply. Unless a court orders otherwise, the
usual time for appealing is: 42 days from the lower court’s judgment
or final order; or 14 days in the case of any other order.
In respect of regulatory action taken by the FSA, appeals are
permitted under section 32 of the Financial Services Act 2008 and
section 21 of the Collective Investment Schemes Act 2008.
4.2 How does the court deal with costs in financial
services disputes?
A financial services dispute determined by way of a civil claim will be
subject to the ordinary position on costs for civil claims as set out in the
HCR. The court has a wide discretion on costs. The normal position
is that the successful party is entitled to recover its costs from the
unsuccessful party; however, the court will take into account a number
of factors when awarding costs including: (a) the conduct of the
parties; (b) whether a party has succeeded on part of its case; and (c)
whether an admissible offer to settle was previously made. Depending
upon the circumstances, the amount of costs will be subject to
summary assessment by the court that dealt with the proceedings or
they will be subject to detailed assessment by the costs assessor.
5 Cross-Border Issues
5.1 What issues typically arise in cross-border disputes
or investigations involving financial institutions and
how are they catered for in your jurisdiction?
Typical cross-border issues include requests from foreign courts to
the High Court for recognition of foreign liquidators or trustees in
bankruptcy, requests for examination of Isle of Man company
officers and requests for assistance in obtaining evidence for use in
foreign proceedings. In respect of trusts, there may also be issues
where orders made by foreign courts seek to affect trust assets (for
example, investments) or require disclosure by the trustees of
information in respect of trust assets.
Isle of Man courts are also regularly required to consider the
recognition of foreign judgments under the common law and also
the Judgment (Reciprocal Enforcement) (Isle of Man) Act 1968.
5.2 What is the general approach of the courts in your
jurisdiction to co-operating with foreign courts or
regulatory bodies or officials in financial services
disputes (including investigations)?
The Isle of Man judiciary is very open to co-operation with foreign
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courts and regulators in the context of disputes and investigations.
The Isle of Man courts recognise that the Isle of Man is an
independent jurisdiction and that all requests for assistance need to
be properly made, cannot be abusive fishing expeditions and need to
be based on a properly founded jurisdiction. However, they also
recognise that the Isle of Man has a role to play in the international
community that exists between friendly and sophisticated
jurisdictions and this had led to a trend towards international judicial
co-operation.
Just one example of this attitude is displayed in the case of Assessor of Income Tax v Holmcroft (judgment of His Honour The Deemster
Doyle dated 23 September 2016) which involved a Tax Information
Exchange Request from Her Majesty’s Revenue and Customs to the
Isle of Man Income Tax Assessor. In delivering his judgment, the
then First Deemster, Deemster Doyle, commented: “The Isle of Man
does not and should not shelter those who do not comply with the
law and pay their taxes. The Isle of Man does not and should not
facilitate wrongdoers attempting to evade tax in their home
jurisdictions. We should assist others in ensuring that legal
obligations, including the payment of tax, are complied with
worldwide.”
He also referred to his ruling in a previous case where he remarked:
“Those endeavouring to make use of the equivalent of Harry
Potter’s invisibility cloak to prevent sight of information or
documents regarding the proceeds of wrong doing will find, to their
disappointment, that it does not work in this jurisdiction.”
5.3 Is extra-territorial jurisdiction typically asserted in
your jurisdiction and, if so, in what circumstances?
Failing to prevent the facilitation of UK tax evasion will have extra-
territorial jurisdiction which may be applied to organisations and
conduct. There are also extra-territorial provisions in the UK
Bribery Act which could extend to the Isle of Man.
5.4 Are unilateral jurisdiction clauses valid and
enforceable in your jurisdiction?
Unilateral jurisdiction clauses are valid and enforceable under Isle
of Man law. The Isle of Man courts have confirmed that they can be
overridden in certain circumstances; however, the general rule is
that the courts will respect and enforce the parties’ choice of forum
and “strong cause” is required for the court to order otherwise.
6 Regulated Bodies
6.1 What bodies, apart from the courts, regulate financial
services disputes in your jurisdiction?
As set out above, customers with a complaint against an Isle of Man
financial firm can make a complaint to the Financial Services
Ombudsman. The FSA also has regulatory powers that may be
applied to financial institutions where there are failures to comply
with legislation and the Financial Services Rulebook.
6.2 What powers (investigative/inquisitorial/
enforcement/sanctions) do these regulatory bodies
have?
As set out above, the FSA has a range of powers under the Financial
Services Act 2008 (and the Collective Investment Schemes Act
2008) which include civil sanctions being applied should the nature
of the financial services dispute indicate that there was non-
compliance with the regulatory requirements at play. In addition,
where there has been a material breach of the regulatory
requirements, the FSA can levy a monetary fine under the Financial
Services (Civil Penalties) Regulations 2015.
The Financial Ombudsman can issue awards by way of
compensation up to £150,000 for defined financial loss and small
sums for any material distress and inconvenience suffered.
6.3 Are the decisions of regulatory bodies binding on the
parties to a financial services dispute?
Yes, these are binding on the parties. Non-compliance with a
decision of the FSA can often result in additional action being taken
which can result in court action being brought by the FSA.
6.4 What rights of appeal from regulatory decisions
exist?
Section 32 of the Financial Services Act 2008 provides for appeal to
the Financial Services Tribunal and there are appeal provisions built
into other legislation and regulation which would be applicable to
the financial services industry.
Where the Financial Ombudsman makes an award, it will be
binding on both the supplier and customer. An appeal to the High
Court can only be made where the adjudicator has made an error in
law.
6.5 Are decisions of regulatory bodies publicly
accessible?
Normally, these decisions are not made public but the FSA does
have the power to make public statements if it considers it in the
interests of consumers to do so. The prohibition and disqualification
of directors is public. Additionally, any court decision is
automatically made public through the online publication of
judgments of the Isle of Man courts.
7 Updates – Cases and Trends
7.1 Summarise any legislative developments in this area
expected in the coming year. Describe any practical
trends in your jurisdiction (e.g., has the financial
crisis impacted legislation? Has there been an
increase in the powers of regulatory bodies as a
reaction to the crisis? Has there been a change in the
amount and type of cases being brought by and
against financial service providers?).
Due to the international scrutiny to which the Isle of Man is subject,
further enforcement in the financial services sector is expected.
This is principally due to the Isle of Man’s need to demonstrate that
the powers which are available under legislation and regulation will
be used when necessary. The Mutual Evaluation Report issued by
MONEYVAL in 2017 was critical of the over-reliance by the FSA
on remediation rather than enforcement and also commented
adversely on the low level of prosecutions for financial crime.
Since the financial crisis, there has been an apparent increase in the
number of claims involving corporate and trust service providers
where those providers have been involved in the management of
investments that have failed.
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7.2 On an international level, would your jurisdiction be
considered to be more financial institution- or
customer-friendly?
Our jurisdiction would be considered neutral.
7.3 Please identify any significant cases regarding
financial services disputes during the past 12 months.
Please highlight the significance of the case(s), any
new or novel issues raised and what lessons can be
drawn from them.
Apex Fund Services Limited (“Apex”) was the first Isle of Man
organisation to be prosecuted under the AML/CFT Code and the
first recipient of a civil penalty from the FSA. Action was taken by
the FSA due to failings relating to AML/CFT and a public statement
was issued by the Regulator. The FSA highlighted in the public
statement how corporate governance failures had contributed to
Apex’s non-compliance and how a focus by the Board on financial
performance rather than compliance had been particularly
detrimental. Similar issues were raised by the FSA when it sought
to prohibit the directors of OCRA Isle of Man and publicly stated at
the time that an inappropriate focus on compliance would lead to
regulatory intervention.
An Isle of Man High Court recently heard a claim by an investment
fund against an Isle of Man corporate service provider and corporate
director that provided corporate and director services to a company
that acted as the loan manager in relation to an investment fund. The
shareholders of the fund attempted to argue that the corporate
director (and administrator) did not only owe duties to the company
it was director of (as is the normal position under Williams v Natural Life Health Foods Ltd [1998] AC 830) but owed the same duties
directly to the fund and its shareholders. The defendants had the
claim struck out on appeal and the claimants were refused
permission to appeal to the Privy Council (Peacock Management Limited & Another v Axiom Legal Financing Fund Master SP (judgment of the Staff of Government Appeal Division dated 21
September 2017)). The case confirms that the courts will not easily
extend the duties of service providers including directors and
corporate administrators to third parties. There was nothing on the
facts of the case that showed that the director and the administrator
had assumed direct responsibility beyond the ordinary duties of care
they owed to the company.
7.4 Have global economic changes caused any changes
to financial services litigation/regulation in your
jurisdiction?
Global economic changes have influenced the introduction of
substance requirements as groups such as the EU look to protect
Member States’ tax bases and apply pressure to other jurisdictions.
In addition, EU developments in relation to AML/CFT such as the
fourth, fifth and sixth Money Laundering Directives have an
influence on the Isle of Man legislative and regulatory environment
as the Isle of Man seeks to stay in line with what is expected. The
threat of blacklisting is often wielded and as such the Isle of Man
seeks to be a responsible jurisdiction introducing legislation and
regulation which can demonstrate that the Isle of Man wishes to be
a co-operative jurisdiction.
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Tara Cubbon
DQ Advocates Limited
The Chambers, 5 Mount Pleasant
Douglas, IM1 2PU
Isle of Man
Tel: +44 1624 626 999 Email: [email protected] URL: www.dq.im
Sinead O’Connor
DQ Advocates Limited
The Chambers, 5 Mount Pleasant
Douglas, IM1 2PU
Isle of Man
Tel: +44 1624 626 999 Email: [email protected] URL: www.dq.im
DQ Advocates is a leading Isle of Man based law firm with an international reach.
We offer a full range of legal, regulatory and compliance services to our local and global clients.
DQ are accessible, responsive and commercial with client-oriented strategies and goals. Our specialist lawyers are recommended as leading
lawyers in Chambers & Partners and The Legal 500.
Tara is a Senior Associate in the Dispute Resolution team. The
majority of Tara’s practice is corporate and commercial litigation. She
regularly advises banking institutions, corporations, liquidators and
local corporate and trust service providers on high value and complex
contentious matters; making regular appearances before the Isle of
Man High Court of Justice and Staff of Government (Appeal Division).
Tara has been ranked as an Associate to Watch by Chambers & Partners with clients noting “her skills in the courtroom are very impressive. She communicates well and puts her clients at ease”.
Sinead is Head of the Regulatory & Compliance Services team. She
works with clients across the financial services industry covering
banking, insurance, corporate service providers and funds. Sinead
has worked in the compliance industry since 1995 so has a wealth of
experience to bring to clients. Sinead is an accredited Data Protection
Practitioner.
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Mori Hamada & Matsumoto Shinichiro Yokota
Japan
1 Bringing a Claim – Initial Considerations
1.1 What are the most common causes of actions taken
by or against financial institutions and service
providers in your jurisdiction?
The most common claims against financial institutions and service
providers in Japan are those for alleged mis-selling of and
misstatement related to financial products. The causes of actions for
mis-selling and misstatement claims are typically based on tort
under the Civil Code or breach of the financial institutions’ duty to
explain certain important matters as stipulated in Article 3 of the Act
on Sales, etc. of Financial Instruments (ASFI) to its customers at or
before the time of selling financial products.
The Financial Instrument and Exchange Act (FIEA) stipulates
several duties of financial institutions for the protection of
customers, including the prohibition against providing false
information or conclusive evaluations related to the financial
products which they are selling (FIEA, Article 38(1)) and the
principle of suitability (Id., Article 40). Although breaching these
duties does not automatically lead to liability on the part of financial
institutions in private actions, depending on the circumstances of
each case, a financial institution may be held liable under tort based
on its breach of such duties. The Supreme Court of Japan held in its
decision dated 14 July 2005 that a financial institution may bear a
tort liability where it solicits and enters into securities transactions
which deviate significantly from the principle of suitability,
considering its customers’ experience, knowledge, intention,
financial conditions and other factors.
Financial institutions also have a duty to explain certain important
matters as stipulated in Article 3 of the ASFI, and a breach of that
duty can be a cause of action in itself under Article 5 of the ASFI. In
such a case, the amount of damages arising from the financial
institution’s breach is presumed to be basically the amount of loss
incurred by the customer in the transaction.
1.2 What remedies are most likely to be awarded?
Where customers prevail in litigation against financial institutions
and service providers, monetary compensation is most likely to be
awarded. Generally, the amount of monetary compensation will be
determined by calculating the amount of loss incurred by the
customers in the financial transactions, but, in most cases,
compensation is reduced because of the comparative negligence of
customers.
1.3 Who has a right of action in financial services
disputes? Does it make a difference if the customer is
an individual or a commercial entity?
Any person who incurs damages in transactions with financial
institutions and service providers has a right of action in financial
services disputes.
In deciding the liability of financial institutions and the amount of
damages, a court weighs the degree of the financial institutions’
duties depending on the level of sophistication (e.g., experience,
knowledge, intention, financial status and other factors) of the
customers in each case. A commercial entity tends to be regarded as
more sophisticated, although of course there are very sophisticated
individuals and, therefore, this statement cannot be generalised.
It should also be noted that the key duties of financial institutions
under the FIEA (such as the principle of suitability) do not apply to
customers who are professional investors, including, for example,
listed stock corporations and stock corporations with a stated capital
of at least ¥500 million.
1.4 Is third-party funding available in financial services
litigation (crowdfunding, maintenance, champerty,
etc.)? Does litigation insurance operate in your
jurisdiction and, if so, what are the implications for
this?
As far as we are aware, litigation insurance is not utilised in Japan.
In addition, there has been no substantial discussion in Japan in
relation to third-party funding in general or specifically in financial
services litigation. It should be noted that, although litigation
funding is not specifically prohibited under Japanese law, it is illegal
for a person who is not an attorney or a legal professional
corporation to act as an intermediary between a client and an
attorney in connection with lawsuits for the purpose of obtaining
compensation.
1.5 Are class action law suits available in your
jurisdiction? If so, has this impacted financial
services litigation? Has there been an increase in
class action suits post the financial crisis?
Since 2013 when the Act on Special Provisions of Civil Procedure
for the Collective Recovery of Property Damage of Consumers was
introduced, class action lawsuits have been available in Japan, but
the scope of available class actions is limited compared to collective
actions in other jurisdictions, such as US class actions.
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Under the Japanese class action system, only a “Certified Qualified
Consumer Organisation” (the Organisation) approved by the
government may file a class action claim on behalf of consumers for
certain types of monetary damages arising from consumer contracts.
At the first stage of a class action for consumers, the Organisation
will request the court to determine the existence of a “common
obligation” in the claims. If a “common obligation” is found by the
court or under an agreement between the parties and the court finds
that the defendant is responsible, then a second stage procedure will
commence to determine the claims of the consumers.
At the second stage, the Organisation will notify, directly or by
public notice through the internet, newspapers or television ads,
consumers who may have claims against the defendant subject to
the class action. Those consumers may give the Organisation
authority to recover claims on their behalf. If the defendant rejects
the claims, the court will determine whether the claims exist,
through a simplified procedure in which the court will examine only
documentary evidence. If a consumer objects to the court’s
determination, an ordinary litigation procedure will be commenced.
As mentioned above, this Japanese class action system was
introduced in 2013 and the scope of the class actions is limited.
Thus, we do not believe that this class action system has had
significant impact on financial services litigation or that class
actions related to financial services have increased.
2 Before Commencing Proceedings
2.1 What are the main barriers to financial service
litigation for customers? Are there exclusionary
clauses or duty defining clauses in customer
contracts which prevent customers from bringing a
case?
The main barrier to financial service litigation for customers is the
burden of proof required to establish mis-selling or misstatement by
financial institutions, as it is generally understood that the principle
of self-responsibility applies to financial product transactions.
With respect to exclusionary clauses or duty defining clauses, the
Consumer Contract Act stipulates that (i) clauses which exclude the
tort liability of business operators (including financial institutions)
to consumers as a whole on occasion of the business operators’
performance of consumer contracts, and (ii) clauses which exclude
a part of the tort liability of business operators to consumers arising
out of any intentional act or gross negligence of a representative or
employee of the business operators in the performance of consumer
contracts, are void. That said, financial institutions may put (a)
clauses which exclude their liability as a whole in contracts with
business operators (not consumers), or (b) clauses which exclude a
part of their liability arising out of the simple negligence of their
representative or employee in the performance of consumer
contracts. However, it is rare in practice to find those exclusionary
clauses in contracts between financial institutions and their
customers given that financial product transactions are regulated by
the FIEA and financial institutions owe a variety of duties under the
FIEA and the ASFI which cannot be renounced by agreement
between the parties. Further, any such agreement could be
considered as an act against public policy, which is void under the
Civil Code.
2.2 Is there a time limit within which financial services
disputes must be commenced? If so, is it different
depending on whether proceedings are brought
before a regulatory body or before the courts? Does
the commencement of a regulatory process ‘stop the
clock’?
Claimants may not bring financial services disputes after the lapse
of the relevant period under the statute of limitations: three years
from the time when the claimant becomes aware of the damages and
the identity of the perpetrator for a tort claim, and 10 years for other
claims. The commencement of a financial ADR proceeding, as
discussed in further detail in question 3.4 below, interrupts the
prescription period.
2.3 Can parties in financial services litigation avail of
litigation and/or legal advice privilege? Are
investigations conducted by regulated bodies
considered ‘litigation’ in the context of privilege?
Japanese law does not recognise the concept of litigation or legal
advice privilege such as attorney-client communications or work
product protection. However, lawyers have a duty and a right of
confidentiality under the Attorney Act and the Code of Civil
Procedure. Thus, as one of the exceptions to the general obligation
to submit documents in court under Article 220 of the Code of Civil
Procedure, the holder of a document, such as a lawyer, may refuse to
submit the document if it contains materials or information which
professionals, including lawyers, have learnt in the course of their
duties and regarding which they have an obligation to keep secret,
although their clients may release them from their duty of secrecy
(Code of Civil Procedure, Article 220(iv)(c)).
2.4 Are standard form master agreements used in your
jurisdiction for financial institutions (for example, the
ISDA Master Agreement)? How are they treated?
Standard form master agreements, such as the International Swaps
and Derivatives Association (ISDA) Master Agreement, can be
entered into by financial institutions and their customers, and are
indeed used, to govern the contractual relationship between the
parties and are generally valid and effective.
However, it should be noted that the Supreme Court of Japan, in its
decision dated 8 July 2016, held that a party (the “setting-off party”)
may not set off its obligation to the other party against an obligation
which the other party owes to the setting-off party’s affiliates at the
insolvency proceedings of the other party, even when the parties
have agreed in advance in the ISDA Master Agreement between
them that such setting-off would be allowed.
2.5 Are there any non-contractual duties which are
binding on financial services entities (for example, a
particular fiduciary duty or a code of conduct)? Can
they be contracted out of?
As discussed in question 1.1 above, financial institutions have a
duty to explain certain important matters as stipulated in Article 3 of
the ASFI, and a breach of that duty can be a cause of action in itself
under Article 5 of the ASFI.
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In addition, under the FIEA, financial institutions are regulated and
owe a variety of duties, including the prohibition against providing
false information or conclusive evaluations related to the financial
products which they are selling (FIEA, Article 38(1)) and the
principle of suitability (Id., Article 40). Although these duties are
not contractual in nature, a breach of these duties can lead to a
finding of tort liability against the financial institutions.
The view in the legal community is that these duties cannot be
renounced by contract.
3 Progressing the Case
3.1 Is there a specialist court or specialist judges for
financial services litigation?
No. There is no specialist court or specialist judge for financial
services litigation.
3.2 Does the method of service of proceedings differ for
financial service litigation?
No. The method of service of proceedings for financial service
litigation is the same as that for other litigation.
3.3 Are there any specific pre-trial procedures that must
be followed for financial services litigation in your
jurisdiction? If so, what are they and what are the
consequences of not abiding by them?
No. There are no specific pre-trial procedures for financial services
litigation.
3.4 Are there any alternative dispute resolution (ADR)
regulations that apply to financial services disputes in
your jurisdiction? Are ADR clauses typically included
in financial services contracts, and is ADR commonly
used to resolve financial services disputes in your
jurisdiction?
Under the FIEA and other laws related to financial institutions (such
as the Banking Act and the Insurance Business Act), “dispute
resolution organisations” are designated by each business category,
such as banks and securities companies, to handle ADR proceedings
related to financial product transactions.
Even though no ADR clause is included in a financial service
contract, if a customer initiates ADR proceedings at a relevant
dispute resolution organisation, the respondent financial institution
may not refuse to participate in the ADR proceedings without
justifiable grounds. Furthermore, the financial institution is required
to provide necessary information and documents and may not refuse
the provision of information and documents without justification.
The dispute will be assigned to a dispute resolution committee.
Generally, a dispute resolution committee consists of certain
professionals, for example, attorneys, judicial scriveners, and
persons with experience in the financial institution business, and it
is tasked with providing a settlement proposal (special conciliation
proposal). In principle, the financial institution is expected to accept
the special conciliation proposal.
In the case where the financial institution refuses to participate in
the ADR proceedings or to accept a special conciliation proposal,
the Ministry of Finance may issue an order compelling compliance
if it is found that certain actions are necessary to ensure the
appropriate operation of the financial institution’s business.
This ADR system is commonly used to resolve financial services
disputes. However, the right to resolve a dispute in court is not
waived even if customers start ADR proceedings. In fact, it is
possible for customers to proceed with court proceedings in parallel
with the ADR proceedings.
3.5 How are claims for negligent misstatement/mis-selling
dealt with in your jurisdiction?
Basically, there is no discrepancy between cases where misstatement
or mis-selling is made through negligence and cases where it is made
through wilful misconduct or gross negligence.
3.6 How have unfair terms in contracts been interpreted
in your jurisdiction? Are there any causes of action or
defences available specifically to consumers? How
broad is the definition of a ‘consumer’ in your
jurisdiction?
Generally, unfair terms may be considered void as acts against
public policy under Article 90 of the Civil Code.
Moreover, unfair terms which restrict the rights of consumers,
expand the duties of consumers, and impair the interests of
consumers unilaterally may be considered contrary to the
fundamental principle of, and can be void under, Article 10 of the
Consumer Contract Act.
A “consumer” under the Consumer Contract Act is defined as an
individual other than a person who becomes a party to a contract as
a business operator or for the purpose of its business (Consumer
Contract Act, Article 2(1)).
3.7 How is data protection/freedom of information dealt
with in financial services litigation? Can a financial
services customer access their personal data? How is
commercially sensitive or confidential information
dealt with in the context of discovery or disclosure?
In principle, outside of litigation, customers may request a financial
institution to disclose personal data which relate to them and are
retained by the financial institution, pursuant to Article 28 of the Act
on the Protection of Personal Information. However, the financial
institution may refuse the request if disclosing the requested personal
data is likely to seriously impede the proper execution of its business
(Act on the Protection of Personal Information, Article 28(2)(ii)).
The Code of Civil Procedure does not recognise an extensive
discovery or disclosure process equivalent to that of the United
States. Under the Code of Civil Procedure, the parties basically
produce their own documents as evidence in court and it is not often
that a party can obtain evidence from the opposing party or a third
party. That said, there are some measures for evidence collection
under the Code of Civil Procedure, as follows.
Interrogatories: A party may send interrogatories to the other party
regarding matters which the requesting party finds necessary to
prepare its allegations or proof, and give a reasonable period for the
other party to respond (Code of Civil Procedure, Articles 133-2 and
163). However, it should be noted that although the opposing party
who receives the interrogatories has an obligation to respond, there
is no tangible sanction for failing to respond.
Order to Submit Documents: A party may request the court to order
the holder of a document to submit that document (Code of Civil
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Procedure, Article 219). The holder of the document may be the
other party or any third party, although in the case of a third party the
court must first examine the third party before ordering it to submit
any document. The requesting party must state the following in its
request: (i) a description of the document; (ii) the purport of the
document; (iii) the holder of the document; (iv) the facts to be
proven by the document; and (v) the grounds for the obligation of
the requested person to submit the document (Code of Civil
Procedure, Article 221). Note that Article 220 of the Code of Civil
Procedure provides for the general obligation of holders of
documents to submit documents upon the order of the court, with
some exceptions.
Judges tend to be deliberate when they are considering any order to
submit a document. In order for the court to issue that order, the
requesting party must demonstrate a high necessity and the
importance of the documents requested for its case. However, even
where a court does not issue a formal order, it often urges (either
upon the request of a party or at the court’s initiative) the parties to
voluntarily submit documents in their possession if the court
believes that those documents would help the court understand the
case (Code of Civil Procedure, Article 149).
4 Post Trial
4.1 Is there a right of appeal in financial services
disputes?
Yes, district court judgments may be appealed to the high courts,
and high court judgments may be appealed to the Supreme Court.
While high courts decide on the merits of appeals, the Supreme
Court may reject and, in fact, often rejects accepting appeals of high
court judgments even if the procedural requirements are satisfied.
4.2 How does the court deal with costs in financial
services disputes?
The cost of financial services litigation is handled in the same way
as in other litigation cases: the losing party bears the filing fees paid
by the parties and other costs and fees, such as the cost of the service
of process and fees of court-appointed experts. However, it should
be noted that attorneys’ fees and other expenses such as travel fees
and fees of party-appointed experts cannot be recovered from the
losing parties, except as damage claims where the plaintiff’s
attorney’s fees may be awarded as one of the elements of damages
(in that case, the courts usually assume that the plaintiff’s attorney’s
fees are 10% of the total amount of the other damages regardless of
the actual amount paid by the plaintiff to its attorney).
5 Cross-Border Issues
5.1 What issues typically arise in cross-border disputes
or investigations involving financial institutions and
how are they catered for in your jurisdiction?
Although Japanese courts have not had much opportunity to address
cross-border financial services disputes (and they hardly are involved
in investigations involving financial institutions), the most common
issue we see in cross-border disputes is that of jurisdiction. There is
no special law on cross-border disputes involving financial
institutions; however, a foreign financial institution may be sued in
Japan if it has its principal office or a business office in Japan or the
domicile of a representative or any other principal person in charge of
its business is in Japan. Even if the financial institution has no office,
director or employee in Japan, it may be sued if the tortious act was
committed in Japan, although it would be practically ineffective to
bring a suit against a foreign financial institution as litigation against
a foreign defendant is typically time-consuming and sometimes
practically impossible, given the requirements at various stages, from
the service of process to the execution of a judgment.
5.2 What is the general approach of the courts in your
jurisdiction to co-operating with foreign courts or
regulatory bodies or officials in financial services
disputes (including investigations)?
There is no special law on cross-border disputes involving financial
institutions. However, since Japan is a contracting state to the
Convention on the Service Abroad of Judicial and Extrajudicial
Documents in Civil or Commercial Matters and the Convention on
Civil Procedure, Japan is obliged to respond to other contracting
states if they request Japan to serve documents or take evidence
concerning civil or commercial cases under the rules of these
conventions. In those cases, Japanese courts will assist foreign
courts or regulatory bodies related to the service of judicial
documents or taking of evidence (such as the interrogation of a
witness before a Japanese court).
If a foreign state is not a contracting state to any of these
conventions but has a bilateral treaty or a comprehensive agreement
on mutual judicial assistance with Japan, then its request will be
addressed based on the treaty or agreement. If it does not have any
agreement, Japan will respond to the request for judicial assistance
in each specific case under Japan’s Law Relating to the Reciprocal
Judicial Aid to be Given at the Request of Foreign Courts.
5.3 Is extra-territorial jurisdiction typically asserted in
your jurisdiction and, if so, in what circumstances?
It is not typical but as discussed in question 5.1 above, even if the
financial institution has no office, director or employee in Japan, it
may be sued if the tortious act (i.e., the misstatement or the mis-
selling) was committed in Japan.
5.4 Are unilateral jurisdiction clauses valid and
enforceable in your jurisdiction?
The parties may agree on the court but only as to the court of first
instance, and any such agreement will be effective if it is made with
respect to an action based on certain legal relationships and is made
in writing (Code of Civil Procedure, Article 3-7(1) and (2)). A
unilateral jurisdiction clause will be valid unless it gives the
exclusive jurisdiction to a foreign court and the foreign court may
not legally or actually exercise such jurisdiction or, to the extent that
it is included in a consumer contract, it gives the exclusive
jurisdiction to the court where the consumer has a domicile at the
time of execution of the contract.
6 Regulated Bodies
6.1 What bodies, apart from the courts, regulate financial
services disputes in your jurisdiction?
There is no regulatory body in Japan, apart from the courts, which
regulates financial services disputes.
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6.2 What powers (investigative/inquisitorial/
enforcement/sanctions) do these regulatory bodies
have?
As stated in question 6.1 above, there is no regulatory body in Japan,
apart from the courts, which regulates financial services disputes.
Regulatory authorities in Japan, however, may take regulatory
actions by issuing administrative orders pursuant to relevant laws
and regulations, such actions include revocation of registration or
suspension of business where violations of laws or regulations by
financial institutions are serious and malicious.
6.3 Are the decisions of regulatory bodies binding on the
parties to a financial services dispute?
This is not applicable, as there is no regulatory body other than the
courts which handles financial services disputes between private
parties.
6.4 What rights of appeal from regulatory decisions
exist?
If a regulatory authority issues an administrative order, financial
institutions may file a petition in court for the cancellation of the
administrative order.
6.5 Are decisions of regulatory bodies publicly
accessible?
Generally, orders issued by regulatory authorities are published,
typically on their websites, and publicly accessible.
7 Updates – Cases and Trends
7.1 Summarise any legislative developments in this area
expected in the coming year. Describe any practical
trends in your jurisdiction (e.g., has the financial
crisis impacted legislation? Has there been an
increase in the powers of regulatory bodies as a
reaction to the crisis? Has there been a change in the
amount and type of cases being brought by and
against financial service providers?).
The current Cabinet Office Order on Financial Instruments
Business, etc. is expected to be amended in 2019 to strengthen the
management of settlement risks for OTC FX transactions and the
disclosure of risk information related to OTC FX transactions.
In recent years, the regulatory bodies had been paying attention and
reacting to technological developments in this area. For example, in
2014, the FIEA and related regulations were amended to facilitate
investment-oriented crowdfunding. Additionally, there were
amendments to the FIEA in 2017 regarding registration requirements
for high-frequency traders who conduct regulated algorithmic trading
at financial instruments exchanges or proprietary trading system
markets based in Japan.
7.2 On an international level, would your jurisdiction be
considered to be more financial institution- or
customer-friendly?
We believe Japan would be considered a relatively financial
institution-friendly jurisdiction. While there is a low barrier for
customers to file financial services litigation with the court,
customers bear the burden of proof in mis-selling or misstatement
cases in court, and it is not easy for customers to establish facts
relevant to the alleged mis-selling or misstatement. In most cases,
even if a customer prevails, the compensation is reduced because of
comparative negligence of the customer.
7.3 Please identify any significant cases regarding
financial services disputes during the past 12 months.
Please highlight the significance of the case(s), any
new or novel issues raised and what lessons can be
drawn from them.
Decisions on financial services disputes are often made on a very
case-specific basis, and we have found no significant cases during
the past 12 months. The most important recent case is the Supreme
Court’s decision dated 7 March 2014 where the Supreme Court
found that the bank-respondent was not liable for not explaining the
adequacy of the pricing in an interest swap transaction (i.e.,
adequacy of the level of the fixed interest rate). Although this
decision is a case-specific decision, the lower courts tend to follow
this decision and are, thus, getting more financial institution-
friendly.
7.4 Have global economic changes caused any changes
to financial services litigation/regulation in your
jurisdiction?
After the global recession caused significant losses to customers of
financial institutions in Japan (after 2007), financial services
litigation had increased. However, as the Japanese economy has
recovered and maintained a moderate recovery trend after hitting the
bottom in November 2012, financial services litigation has
decreased recently.
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Shinichiro Yokota
Mori Hamada & Matsumoto
16th Floor, Marunouchi Park Building
2-6-1 Marunouchi, Chiyoda-ku
Tokyo 100-8222
Japan
Tel: +81 3 6212 8365 Email: [email protected] URL: www.mhmjapan.com/en
Mori Hamada & Matsumoto is one of the largest full-service law firms in Japan. We have been ranked at the highest levels on a wide range of
practice areas, including international/domestic dispute resolution, corporate/M&A, capital markets, tax, anti-trust and IT/IP. Leveraging our
experienced team and expertise, we are committed to providing the best services for our clients. Our dispute resolution team consists of 48 partners
and 61 other lawyers, including former chief judges of the Tokyo High Court and prominent scholars. Most of its team members are based at its main
office in Tokyo; but it also offers significant regional capabilities, through its offices in Singapore, Beijing, Shanghai, Bangkok, Yangon and Jakarta.
Shinichiro Yokota is active in the fields of domestic and cross-border
dispute resolutions and acts on behalf of domestic clients as well as
global clients in a wide variety of domestic litigations and international
arbitrations. He also handles a wide variety of general corporate legal
matters, employment matters, and regulatory and compliance matters.
Mr. Yokota graduated from the University of Tokyo in 2002 and holds
an LL.M. from Duke University School of Law (2010).
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Barun Law LLC
Wonsik Yoon
Ju Hyun Ahn
Korea
1 Bringing a Claim – Initial Considerations
1.1 What are the most common causes of actions taken
by or against financial institutions and service
providers in your jurisdiction?
Although statistical data regarding court cases brought by or
brought against financial institutions was unavailable, according to
the results of financial dispute mediation cases handled by the
Financial Supervisory Service (FSS), insurance disputes, which
occupied 90.06% of a total of 25,043 cases, were most frequent.
Among insurance disputes, 10,455 cases were about whether the
computation of insurance benefit was appropriate, which turned out
to be the most common cause of initiating a mediation with a
financial company.
1.2 What remedies are most likely to be awarded?
Depending on the individual cause of action, through a court
decision, one may be paid the deposit or insurance benefit or may be
able to get damages by proving one’s injuries. However, in some
cases, the claim may be dismissed. (Please note that statistical data
regarding how courts have ruled in financial disputes was
unavailable.)
1.3 Who has a right of action in financial services
disputes? Does it make a difference if the customer is
an individual or a commercial entity?
In most cases, financial consumers initiate finance disputes, but, in
some cases, finance companies also file lawsuits. Among financial
consumers, one can initiate a financial dispute regardless of one
being an individual or a company.
1.4 Is third-party funding available in financial services
litigation (crowdfunding, maintenance, champerty,
etc.)? Does litigation insurance operate in your
jurisdiction and, if so, what are the implications for
this?
Third-party funding is not being used in Korean litigation. Because
financial dispute mediation provided by the FSS is free, its necessity
is questionable. Litigation expenses insurance exists, but is rarely
used and barely has any effects on resolving finance disputes.
1.5 Are class action law suits available in your
jurisdiction? If so, has this impacted financial
services litigation? Has there been an increase in
class action suits post the financial crisis?
Since the enactment of the Securities-Related Class Action Act in
2004, in cases where injuries were incurred by numerous parties
during a securities transaction, one can file a class action lawsuit.
However, evidenced by the fact that only six of such cases have
been filed between 2004 and and 2014, it is rarely used and the
number of such class actions filed also did not increase
meaningfully before and after the Global Financial Crisis in 2007–
2008.
2 Before Commencing Proceedings
2.1 What are the main barriers to financial service
litigation for customers? Are there exclusionary
clauses or duty defining clauses in customer
contracts which prevent customers from bringing a
case?
With regards to financial disputes, asymmetry of information
between financial consumers and financial institutions and the cost
and time required for litigation have been major sticking points to
filing lawsuits. The contract of a financial product includes a
provision which allows the consumer or any interested parties to
apply for financial dispute mediation at the FSS. However, the
contract rarely includes specific exclusionary clauses or duty
defying clauses.
2.2 Is there a time limit within which financial services
disputes must be commenced? If so, is it different
depending on whether proceedings are brought
before a regulatory body or before the courts? Does
the commencement of a regulatory process ‘stop the
clock’?
There is no time limit to initiating financial dispute mediation, but
the statute of limitations to individual financial products may run
out. In theory, there are no differences between the application of
the statute of limitations by the FSS and that by the courts. On the
other hand, the statute of limitations stops running upon applying
for mediation at the FSS. In Korea, the statute of limitations is
based on substantive laws such as the Civil Code and the
Commercial Code, and thereby treated as an issue of substantive
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law as opposed to procedural law. Thus, it does not procedurally
time-bar the commencement of lawsuits before the Korean courts.
Therefore, it is still possible to file a lawsuit even after the statute of
limitations has run out. However, if the defendant raises a defence
of statute of limitations, the case will be dismissed by the court.
With regards to financial dispute mediation before the FSS, the FSS,
in practice, tends to relax the application of the statute of limitations
to financial consumers. Even if the statute of limitations has run out,
the FSS frequently recommends a mediation plan which is
favourable to the consumer despite the running of the statute of
limitations.
2.3 Can parties in financial services litigation avail of
litigation and/or legal advice privilege? Are
investigations conducted by regulated bodies
considered ‘litigation’ in the context of privilege?
In Korea, there is no such concept of legal advice privilege as in the
Anglo-American tradition.
2.4 Are standard form master agreements used in your
jurisdiction for financial institutions (for example, the
ISDA Master Agreement)? How are they treated?
Depending on the type of a financial product, whether it be an
insurance policy or a deposit account, standardised form master
agreements are used. In those cases, financial companies draft
customised provisions in accordance with the terms of such
agreements and use them as the basis of interpretation in case of
contract formation or financial disputes regarding interpretation of
the terms of the contract arise.
2.5 Are there any non-contractual duties which are
binding on financial services entities (for example, a
particular fiduciary duty or a code of conduct)? Can
they be contracted out of?
Individual financial laws, such as the Banking Act, the Insurance
Business Act and the Financial Investment Services and Capital
Markets Act, prescribe fiduciary duty or code of product mainly to
financial companies. Such provisions are mostly compulsory
provisions designed to protect financial consumers and therefore
cannot be contracted out of. Even those provisions that are not
compulsory are rarely contracted out of and if contracted out of, it is
highly likely that the FSS or the courts will invalidate them as unfair
provisions.
3 Progressing the Case
3.1 Is there a specialist court or specialist judges for
financial services litigation?
There is no specialist court or specialist judges for financial services
litigation.
3.2 Does the method of service of proceedings differ for
financial service litigation?
The method of service of proceedings does not differ for financial
service litigation. However, if the Securities-Related Class Action
Act is applied, one would follow the class action procedures.
3.3 Are there any specific pre-trial procedures that must
be followed for financial services litigation in your
jurisdiction? If so, what are they and what are the
consequences of not abiding by them?
There are no specific pre-trial procedures before financial disputes.
3.4 Are there any alternative dispute resolution (ADR)
regulations that apply to financial services disputes in
your jurisdiction? Are ADR clauses typically included
in financial services contracts, and is ADR commonly
used to resolve financial services disputes in your
jurisdiction?
There are no individual laws that are dedicated to the regulation of
financial services disputes. However, the Enforcement Decree of
the Act on the Establishment, Etc. of the Financial Services
Commission regulates relevant contents and the Detailed Rules on
Financial Dispute Settlement of the FSS stipulate the details of the
financial disputes proceedings including procedures and binding
effects. Moreover, the contract of a financial product includes a
provision which allows the consumer or any interested parties to
bring a case to the FSS for dispute mediation. Mediation at the FSS
is the most frequently used ADR by financial consumers.
Evidenced by the total of 25,205 cases of financial disputes that
were registered to the FSS in 2017 alone, ADR is used widely. In
addition to mediation at the FSS, a consumer may also use ADR
offered by the Korea Consumer Agency, the Korea Exchange and
the Korea Financial Investment Association.
3.5 How are claims for negligent misstatement/mis-selling
dealt with in your jurisdiction?
Negligent misstatement and mis-selling are generally a tort under
civil law and become a cause of liability for damages. However,
depending on the degree of illegality, they can also be a fraud under
civil law and the financial consumer can cancel the commodity
transaction. The difference between the two is that for liability for
damages the financial consumer’s negligence is taken into
consideration, while for the cancellation of a commodity transaction
based on fraud it is not and all transaction costs must be returned to
the consumer.
3.6 How have unfair terms in contracts been interpreted
in your jurisdiction? Are there any causes of action or
defences available specifically to consumers? How
broad is the definition of a ‘consumer’ in your
jurisdiction?
The courts have invalidated unfair terms that violated the principle
of good faith. Provisions unjustly unfavourable to consumers or
provisions that are difficult to predict given the type of the
transaction are deemed unfair. Consumers can claim invalidation of
such unfair provisions pursuant to relevant laws and regulations.
For example, consumers can claim invalidation of an exemption
clause that excludes liability caused by gross negligence of a
business owner, agents, or employees, a provision that makes
consumers liable for damages such as unreasonably excessive
damages for delay, a provision that unjustly limits the cancellation
of contract by excluding consumers’ rights to cancellation or
limiting exercising those rights, a provision allowing unjust
fulfilment of an obligation such as enabling a business owner to
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unilaterally decide or change the terms of payment, a provision that
unfairly prevents consumers from bringing lawsuits unfavourable to
the business, a jurisdiction agreement clause, or a provision that
unfairly shifts the burden of proof to consumers. Although it may
differ depending on individual laws, the Framework Act on
Consumers defines the term “consumers” as those who use the
goods and services including facilities provided by enterprisers for
their daily lives as consumers or for their production activities.
3.7 How is data protection/freedom of information dealt
with in financial services litigation? Can a financial
services customer access their personal data? How is
commercially sensitive or confidential information
dealt with in the context of discovery or disclosure?
In Korea, there is no separate act regarding data protection/freedom of
information which allows applicants to ask for information about
someone else. Naturally, a financial consumer can access his/her own
data during litigation. However, Korea does not have a process
equivalent to discovery or disclosure in the Anglo-American tradition.
With regards to commercially sensitive or confidential information, a
consumer would have to prove the relevance of such information to
the lawsuit and that the financial company is in possession of such
information in order to obtain the court order requiring the financial
institution to produce the information in the lawsuit.
4 Post Trial
4.1 Is there a right of appeal in financial services
disputes?
Each party has a right of appeal in financial services disputes.
4.2 How does the court deal with costs in financial
services disputes?
The court distributes the costs in financial services disputes in
accordance with the amount of damages each party wins on a pro rata basis. However, with regards to attorney’s fees, it does not
mean all costs a party incurred are taken into consideration.
Generally, the amount smaller than the actual amount spent on the
attorney’s fees is recognised by the courts.
5 Cross-Border Issues
5.1 What issues typically arise in cross-border disputes
or investigations involving financial institutions and
how are they catered for in your jurisdiction?
It is rare that cross-border disputes arise with financial consumers.
They often arise in the context of a sale of a Korean financial
institution to a foreign investor or a Korean financial institution
making foreign investments. Generally, such disputes are resolved
through international arbitration.
5.2 What is the general approach of the courts in your
jurisdiction to co-operating with foreign courts or
regulatory bodies or officials in financial services
disputes (including investigations)?
The Korean courts have rarely resolved financial service disputes or
engaged in investigations by cooperating with foreign courts or
regulatory bodies or officials. Therefore, there is no general
approach to such matters.
5.3 Is extra-territorial jurisdiction typically asserted in
your jurisdiction and, if so, in what circumstances?
Extra-territorial jurisdiction plays a significant role in the regulation
of cross-border anti-competitive practices in South Korea. In the
financial area, a clause as to extra-territorial jurisdiction could be
found in data protection-related issues. We introduce a clause of the
Electronic Financial Transactions Act below.
Article 4 (Reciprocity)
This Act also applies to a foreigner or a foreign corporation:
provided that, with respect to any foreigner or foreign corporation of
the State which fails to provide protections corresponding to this Act
for any national or corporation of the Republic of Korea, any
protection under this Act or the treaties acceded to or concluded by
the Republic of Korea may be restricted commensurately therewith.
5.4 Are unilateral jurisdiction clauses valid and
enforceable in your jurisdiction?
The Korean courts’ position on unilateral jurisdiction clauses is that
they are unenforceable. The Supreme Court, in a case where the
binding effect of an unilateral jurisdiction agreement stating one
party must sue the other party in a forum designated by the other
party was an issue, invalidated such clauses holding that the clauses
unjustly infringe upon the other party’s rights and violate the
principle of fairness (The Supreme Court’s decision dated
1977.11.9, case: 77ma284).
6 Regulated Bodies
6.1 What bodies, apart from the courts, regulate financial
services disputes in your jurisdiction?
Pursuant to Article 53 of the Act on the Establishment, Etc. of the
Financial Services Commission, the FSS processes the mediation
cases received from financial institutions and financial consumers
such as depositors and other interested parties when financial
disputes arise.
6.2 What powers (investigative/inquisitorial/
enforcement/sanctions) do these regulatory bodies
have?
The FSS is South Korea’s integrated financial regulator that
examines and supervises financial institutions under the broad
oversight of the Financial Services Commission (FSC), the
government regulatory authority staffed by civil servants. The FSS
has investigative/inquisitorial/sanctions powers. With regards to
enforcement power, all parties involved must consent to the
mediation plan to have the same effect as the reconcillation in a trial.
6.3 Are the decisions of regulatory bodies binding on the
parties to a financial services dispute?
The mediation plan of the Financial Dispute Settlement Committee
(FDSC) of the FSS has the same effect as reconcillation in a trial
only when all parties consented to it. Given that financial
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institutions rarely object to the FSS’s mediation plan, practically it
has a unilateral binding effect as to the financial institutions.
6.4 What rights of appeal from regulatory decisions
exist?
Financial consumers can choose not to follow the FSS’s
recommendation to settle or the FSS’s decision not to refer the
matter to the FDSC or the FDSC’s mediation plan and file a lawsuit.
Financial institutions can also object to the same. However, given
that they are under the supervision of the FSS, financial institutions
usually submit to the FSS’s decisions considering its
investigative/inquisitorial/sanctions powers.
6.5 Are decisions of regulatory bodies publicly
accessible?
Yes. Anyone can publicly access the decisions of the FSS on its
website (http://www.fcsc.kr/D/fu_d_03.jsp).
7 Updates – Cases and Trends
7.1 Summarise any legislative developments in this area
expected in the coming year. Describe any practical
trends in your jurisdiction (e.g., has the financial
crisis impacted legislation? Has there been an
increase in the powers of regulatory bodies as a
reaction to the crisis? Has there been a change in the
amount and type of cases being brought by and
against financial service providers?).
Korea experienced two major catastrophes with regards to its financial
consumers. One was the insolvency of many mutual savings banks in
2011, and the other was the mis-selling of corporate papers (CP) of the
Tongyang conglomerate in 2013. Thus, the Korean government
proposed the Financial Consumer Protection Act to build a framework
which covers the entire process of financial consumption: providing
prior information; selling financial instruments; and post-remedies for
damages. One of the main issues of the government proposal was to
build a new financial consumer protection agency that conducts
business on behalf of consumers’ profit and be relatively independent
from prudential matters of financial institutions. Although the
government proposal was abolished because of complicated interests
by many stakeholders, the discussion is still valid and there is the
possibility that the issues can be debated in the near future.
7.2 On an international level, would your jurisdiction be
considered to be more financial institution- or
customer-friendly?
Given that the Korean government does not acknowledge the unilateral
binding authority of financial institutions with regards to the FDSC’s
mediation plan and that class actions are rarely used, it is more likely
that Korea will be considered to be more financial institution-friendly.
7.3 Please identify any significant cases regarding
financial services disputes during the past 12 months.
Please highlight the significance of the case(s), any
new or novel issues raised and what lessons can be
drawn from them.
Some life insurance companies sold “immediate annuities”, a policy
purchased with an upfront single lump-sum payment which starts
paying a guaranteed income pension almost immediately. And once
the policy matures, a policyholder was to receive the payout. The
dispute arose because insurance companies were meant to deduct
part of a payout as a working expense, but failed to specifically
mention it in the contract. A policyholder of one of the insurers’
immediate annuity plan filed a complaint with the FSS claiming that
the insurance payout he received was lower than specified in his
contract.
In the mediation, the FSS sided with the policyholder and ordered
the life insurers to return the disputed amount because the insurers
did not specifically mention the deductions in their contract terms.
The FSS ordered all life insurers to pay full compensation to all
policyholders of the “immediate annuities”. For the largest seller of
such policy, this meant paying KRW 430,000,000,000 to 55,000
policyholders. The insurance companies are defying the FSS’s
ruling claiming that they will turn to the courts to make a ruling on
the issue. There will be a heightened interest in the executive power
of the financial dispute mediation depending on the outcome of the
lawsuit.
7.4 Have global economic changes caused any changes
to financial services litigation/regulation in your
jurisdiction?
Global economic changes did not cause much change to financial
services litigation/regulation in Korea.
Acknowledgment
Wonsik Yoon and Ju Hyun Ahn would like to acknowledge the third
author, Thomas Pinansky, and fourth author of this chapter, Seung
Hyun Kang.
Mr. Thomas Pinansky is a Senior Foreign Attorney at Barun Law
LLC. He plays a leading role in the firm’s international practice and
advises an extensive number of international and Korean clients on
business and legal issues arising in the context of international
operations, including international transactions, reorganisation
proceedings, and cross-border disputes. Mr. Pinansky has been
involved in over 200 cross-border M&A transactions and in over
120 international arbitration matters, either as an arbitrator or as
counsel. Mr. Pinansky recently completed a three-year term as a
Vice Chairman of the American Chamber of Commerce in Korea.
He serves on the Board of the Canadian Chamber of Commerce in
Korea and as Special Advisor to the Kiwi Chamber of Commerce in
Korea. He was appointed as the “Honorary Ambassador” of the US
State of Maine to Korea. He served two terms as the Chairman of
the Asia-Pacific Council of American Chambers of Commerce.
Barun Law LLC
Barun Law Building
92gil 7, Teheran-ro, Gangnam-gu
Seoul
Korea
Tel: +82 2 3479 7517 Email: [email protected] URL: barunlaw.com
Ms. Seung Hyun Kang is a Foreign Attorney at Barun Law LLC. As
a junior member of the Corporate Advisory Group, she assists
Korean and international clients on a broad range of corporate
issues. She is also involved in the international arbitration practice
at the firm.
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Wonsik Yoon
Barun Law LLC
Barun Law Building
92gil 7, Teheran-ro, Gangnam-gu
Seoul
Korea
Tel: +82 2 3479 7824 Email: [email protected] URL: barunlaw.com
Ju Hyun Ahn
Barun Law LLC
Barun Law Building
92gil 7, Teheran-ro, Gangnam-gu
Seoul
Korea
Tel: +82 2 3479 2449 Email: [email protected] URL: barunlaw.com
Mr. Wonsik Yoon is the Co-Chair of the International Arbitration &
Cross-Border Litigation Practice Group at Barun Law LLC. He is a
member of the Korean Bar Association and the State Bar of California.
Mr. Yoon has handled numerous international arbitration cases before
numerous institutions including KCAB, AAA/ICDR, LCIA, CAS and
ICC. He has also successfully represented domestic and foreign
clients in court proceedings in multiple jurisdictions including all levels
of the Korean courts. Mr. Yoon also has extensive experience in
practising general corporate, real estate, M&A, cross-border
investment and Japanese-related matters as well as international
dispute resolution. He currently serves as a director of the Korean
Arbitrators Association and a member of the international panel of the
Korean Commercial Arbitration Board. He was recognised by Asialaw
as a Leading Lawyer for Dispute Resolution & Litigation in 2016, 2017
and 2018.
Barun Law LLC (“Barun Law”) is Korea’s fastest growing and most dynamic full-service law firm. Founded in 1998, Barun Law has quickly taken its
place among Korea’s top full-service law firms. Conveniently located in Seoul’s Gangnam Business District, next to one of Asia’s largest and most
prestigious convention centre complexes, Barun Law is comprised of over 200 attorneys who, together with highly qualified support staff, provide a
full range of legal services.
The firm’s partners include some of the most prominent and well respected members of the Korean Bar, while a sophisticated and highly experienced
team of foreign lawyers adds international savvy and recognised expertise, creating a substantial comfort factor for international clients.
Mr. Ju Hyun Ahn is a Partner at Barun Law LLC. Unique among
lawyers, Mr. Ahn was a medical doctor before he passed the Korean
Bar Exam in 2007. Right after he completed his training at the Judicial
Research and Training Institute, he joined Barun Law LLC in 2010. He
has practised mainly in pharmaceutical and medical areas. In 2012,
Mr. Ahn entered the FSS as a senior investigator in the Dispute
Settlement Department and mediated disputes concerning various
types of insurance, including life insurance and indemnity insurance.
He continued his service as a Senior Bank and Credit Unions
examiner until 2016. After his studies, he returned to Barun Law LLC
in 2017, and since then he has vigorously engaged himself in the fields
of financial regulation and financial transactions, not to mention
pharmaceutical and medical practice in which he has demonstrated
outstanding professionalism.
Barun Law LLC Korea
Ms. Kang received her B.A. from Cornell University majoring in
China and Asia-Pacific Studies and received her J.D. from Boston
College Law School. She is fluent in Korean, English and
Chinese.
Barun Law LLC
Barun Law Building
92gil 7, Teheran-ro, Gangnam-gu
Seoul
Korea
Tel: +82 2 3479 2667 Email: [email protected] URL: barunlaw.com
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Stibbe
Roderik Vrolijk
Daphne Rijkers
Netherlands
1 Bringing a Claim – Initial Considerations
1.1 What are the most common causes of actions taken
by or against financial institutions and service
providers in your jurisdiction?
Liability arising from tort Art. 6:162 of the Dutch Civil Code (Burgerlijk Wetboek, “DCC”) states
that the party who commits a tort towards another person is required to
compensate the losses which the other party suffers as a result. In order to
succeed, an action on grounds of a tort must meet five requirements: (i)
unlawfulness; (ii) attributability; (iii) loss; (iv) causality; and (v) relativity.
Breach of contract When there is an attributable failure in the performance of an
obligation under a contract.
Breach of duty of care In financial services disputes, it is common for a plaintiff to claim that
duty of care or loyalty was breached by a financial institution. Under
Dutch law, the breach of duty of care is a wrongful act or a breach of
contract (or both). In principle, this means that compensation for
damages (schadevergoeding) can be claimed.
1.2 What remedies are most likely to be awarded?
Under Dutch law, various remedies can be awarded in financial
services disputes, including the right to claim specific performance
of the contract (nakoming) or damages. Other remedies that can be
awarded are the rescission of the agreement (ontbinding), due to the
other party not fulfilling its contractual obligations, or annulment
(vernietiging) of the agreement due to undue influence,
misrepresentation or error. Damages can also be claimed along with
claiming specific performance or rescission of the contract.
Another remedy that can be awarded is a declaratory decision
(verklaring voor recht) confirming the existence (or absence) of a
certain legal relationship (e.g. the declaratory decision that an
agreement is null and void). In matters related to a breach of
contract or tort (onrechtmatige daad), a Dutch court can also issue
an injunction ordering a defendant to abstain from certain acts.
1.3 Who has a right of action in financial services
disputes? Does it make a difference if the customer is
an individual or a commercial entity?
Both private individuals and commercial entities have a right of
action in financial services disputes. There is no difference if the
customer is a private individual or a commercial entity, even though
an individual customer might benefit from additional legal protection.
In addition, claims vehicles to which parties have assigned their
claims or statutory claim foundations may have a right of action in
financial services disputes.
1.4 Is third-party funding available in financial services
litigation (crowdfunding, maintenance, champerty,
etc.)? Does litigation insurance operate in your
jurisdiction and, if so, what are the implications for
this?
Third-party litigation funding is allowed in the Netherlands. It is
already common in mass claims, which are often litigated or settled
through special claims vehicles. With regard to individual claims,
third-party litigation funding is not particularly widespread. There
seems to be little interest from the judiciary as to whether or not
litigation in the courts is funded by a third party. At present, the
legislator does not seem inclined to regulate third-party funding.
Litigation insurance schemes operate in the Netherlands. This type
of insurance is particularly taken by private individuals and small
businesses.
1.5 Are class action law suits available in your
jurisdiction? If so, has this impacted financial
services litigation? Has there been an increase in
class action suits post the financial crisis?
Class actions law suits are permitted in the Netherlands. Under the
Collective Settlement of Mass Claims Act (2005) (Wet collectieve afwikkeling massaschade, “WCAM”), the Amsterdam Court of
Appeals can declare a collective settlement binding on all the
aggrieved parties, whether Dutch or foreign, on an opt-out basis.
The settlement agreement must be entered into by a special
litigation vehicle duly representing the interests of the aggrieved
parties and a party that has committed itself to compensate the
aggrieved parties, such entity not necessarily being the party that
caused the damages. This mechanism has often been applied with
great success in international mass claims. The special litigation
vehicle may be funded by third parties. Collective redress in group
actions is presently not possible, but the justice ministry is working
on an act enabling collective redress in group actions as well.
On 16 November 2016, a legislative proposal was introduced in the
Dutch Parliament, to amend the existing WCAM so as to permit
representative organisations to claim damages. The proposal
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intends to facilitate collective redress in the form of a collective opt-
out mechanism. It provides incentives to conclude the case with a
class settlement. Although it is still uncertain whether the proposal
will be adopted in its current form, or at all, the legislative process is
actively ongoing and an amended proposal was presented to
Parliament on 12 January 2018. The proposal in its current form
provides for a wide-scope rule for admissibility of collective
actions. Currently, the proposal bill is still pending in the Dutch
House of Representatives (Tweede Kamer).
2 Before Commencing Proceedings
2.1 What are the main barriers to financial service
litigation for customers? Are there exclusionary
clauses or duty defining clauses in customer
contracts which prevent customers from bringing a
case?
In general, court fees and legal fees could constitute barriers for
customers to start a legal procedure. Generally speaking, the
amounts of court fees are not considered prohibitive. The Financial
Services Complaints Tribunal (Klachteninstituut Financiële Dienstverlening, “Kifid”) available to private individuals is also a
cost-effective alternative to court proceedings.
Generally, customer contracts do not prevent customers from bringing
a case against a financial services provider. Such a clause would most
likely be unenforceable when included in contracts with retail clients.
2.2 Is there a time limit within which financial services
disputes must be commenced? If so, is it different
depending on whether proceedings are brought
before a regulatory body or before the courts? Does
the commencement of a regulatory process ‘stop the
clock’?
Dutch law provides for statute of limitation, imposing time limits
for a civil claim to be brought. This system of statutory limitations
of actions is known as verjaring and is laid down in the DCC. Most
causes of action in the Netherlands are subject to limitation periods
of five years, with a few types of claims having extra short (one to
two years) or extra-long (20 to 30 years) limitation periods.
Under Dutch law, a limitation period can be interrupted by:
1. Acknowledgment by the debtor.
2. Legal action (initiating civil legal proceedings; the
commencement of a regulatory process as such does not stop
the clock).
3. Any act of judicial recourse instituted in a legally required
form or in the form agreed by the parties.
4. Written warnings (in certain circumstances).
By interrupting a limitation period, a new limitation period will
begin on the day following the interruption.
2.3 Can parties in financial services litigation avail of
litigation and/or legal advice privilege? Are
investigations conducted by regulated bodies
considered ‘litigation’ in the context of privilege?
Parties in financial services litigation can avail of legal privilege.
The rules on disclosure acknowledge professional legal privilege.
In addition, the request for inspection of documents may be refused
pursuant to weighty reasons, which could, in a particular case, result
in a privilege based on a statutory duty of confidentiality.
2.4 Are standard form master agreements used in your
jurisdiction for financial institutions (for example, the
ISDA Master Agreement)? How are they treated?
Dutch financial and non-financial institutions extensively make use
of derivatives. Most over-the-counter (“OTC”) derivatives are
entered into under an ISDA Master Agreement. Dutch law
generally does not affect the enforceability of provisions in the
Master Agreement on early termination and settlement of
transactions.
2.5 Are there any non-contractual duties which are
binding on financial services entities (for example, a
particular fiduciary duty or a code of conduct)? Can
they be contracted out of?
Financial institutions may have a special duty of care (bijzondere zorgplicht) vis-à-vis their retail clients. This duty of care cannot be
limited or excluded by contract.
3 Progressing the Case
3.1 Is there a specialist court or specialist judges for
financial services litigation?
There is no specialised court or specialist civil judge for financial
services litigation between private individuals and financial services
providers. A specific ADR Forum (Kifid) is however available,
which specialises in financial services litigation.
On 11 December 2018, the Dutch Senate approved the bill for the new
international trade chamber of the Amsterdam District Court, known
as the Netherlands Commercial Court (“NCC”), and the Netherlands
Commercial Court of Appeal (“NCCA”). This specialised trade
chamber offers professional market parties the opportunity to litigate
in English and will be able to give judgments in English.
3.2 Does the method of service of proceedings differ for
financial service litigation?
There are two main types of civil proceedings in the Netherlands:
initiated by a draft of summons (dagvaarding); or by an application
(verzoekschrift). There is no specific method of service of proceedings for financial
service litigation.
3.3 Are there any specific pre-trial procedures that must
be followed for financial services litigation in your
jurisdiction? If so, what are they and what are the
consequences of not abiding by them?
In the Netherlands, there are no specific pre-trial procedures that
must be followed for financial services litigation.
3.4 Are there any alternative dispute resolution (ADR)
regulations that apply to financial services disputes in
your jurisdiction? Are ADR clauses typically included
in financial services contracts, and is ADR commonly
used to resolve financial services disputes in your
jurisdiction?
In accordance with the Dutch Financial Supervision Act (Wet op het
Stibbe Netherlands
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financieel toezicht, “Wft”), Dutch financial services providers are
required to be affiliated with a disputes agency. At present, the Kifid
is the only disputes agency recognised by the Minister of Finance
and it is a very often used means of dispute resolution in financial
services disputes.
3.5 How are claims for negligent misstatement/mis-selling
dealt with in your jurisdiction?
Claims relating to negligent misstatements or mis-selling can be
based on liability arising from tort, breach of contract or a breach of
a duty of care.
3.6 How have unfair terms in contracts been interpreted
in your jurisdiction? Are there any causes of action or
defences available specifically to consumers? How
broad is the definition of a ‘consumer’ in your
jurisdiction?
In 2008, the Unfair Commercial Practices Act (Wet oneerlijke handelspraktijken) entered into force, which prohibits unfair
commercial practices and is enforced by the Dutch Consumer Authority
(Autoriteit Consument & Markt) and the Netherlands Authority for the
Financial Markets (Stichting Autoriteit Financiële Markten, the
“AFM”). It implements the European Directive concerning unfair
business-to-consumer commercial practices from 2005.
Dutch civil law and the Wft define a ‘consumer’ as any private
individual not acting in the pursuit of its business or profession.
3.7 How is data protection/freedom of information dealt
with in financial services litigation? Can a financial
services customer access their personal data? How is
commercially sensitive or confidential information
dealt with in the context of discovery or disclosure?
Data protection and freedom of information may clash in financial
services litigation. Legal procedural documents are not published
by the courts. Commercially sensitive information and confidential
information may, in certain circumstances, be left out in the event of
a legal discovery or disclosure procedure. In order to protect
commercially sensitive information, a Dutch court can also impose
an obligation of confidentiality upon the recipient of such
information. Also, the court can order that certain documents are to
be deposited at the court where they can be studied in person, but not
photocopied. Furthermore, the parties can request the court to order
that the proceedings will be conducted behind closed doors. If such
request will be allowed, this means that the parties to the
proceedings cannot make statements to third parties about what was
discussed during the hearing. Finally, a judgment can be redacted
before it is published.
4 Post Trial
4.1 Is there a right of appeal in financial services
disputes?
Matter brought before the Dutch civil courts Yes, in the Netherlands there is a right of appeal in most financial
services disputes.
Kifid Disputes Committee and Appeals Committee The Kifid provides an alternative way of dispute resolution. If there
is a party that disagrees with a non-binding opinion, there is the
possibility to appeal to the Appeals Committee of the Kifid.
4.2 How does the court deal with costs in financial
services disputes?
The court may order the losing party to cover the litigation costs of
the prevailing party, such as court fees, witness and expert fees and
fixed compensation for legal fees.
5 Cross-Border Issues
5.1 What issues typically arise in cross-border disputes
or investigations involving financial institutions and
how are they catered for in your jurisdiction?
Disputes between financial institutions based in different countries
require specialist legal support to deal with the often complex issues
which result from multiple jurisdictions. The following conflict of
law issues may, in particular, arise: (i) the question of which
jurisdiction the claim can best be brought; (ii) other merits and
disadvantages of each possible jurisdiction; (iii) the applicable law
which governs the claim; (iv) any issues regarding potentially
relevant data and witnesses located in different jurisdictions; and (v)
the merits of challenging the jurisdiction.
5.2 What is the general approach of the courts in your
jurisdiction to co-operating with foreign courts or
regulatory bodies or officials in financial services
disputes (including investigations)?
The Dutch judiciary finds itself in a rapidly internationalised legal
order, both within the European Union and outside it. This demands
a wide cross-border perspective with regard to judicial cooperation
and international relations.
The AFM also works closely on a bilateral basis with a large number
of its fellow supervisory authorities in other countries both within
Europe and abroad. The AFM may enter into agreements with
national and international supervisory authorities in the form of a
covenant, a Memorandum of Understanding (“MoU”) or an
Exchange of Letters.
The Dutch Central Bank (De Nederlandsche Bank, “DNB”) sits on
several European bodies that consult and exercise supervision on
payment systems, securities transactions, insurers and pension providers.
Also, DNB is part of the European System of Central Banks and of the
Eurosystem. On a global cooperation level, DNB sits on several global
bodies that consult and exercise supervision on banks, payment systems,
securities transactions, insurers and pension providers.
5.3 Is extra-territorial jurisdiction typically asserted in
your jurisdiction and, if so, in what circumstances?
Competent court The general rules for cross-border litigation apply. The starting point
is that a civil case can be brought before a Dutch court if the
defendant has its domicile in the Netherlands. However, there are a
few alternative methods to establish jurisdiction before Dutch courts.
On the basis of the Brussels I bis Regulation, tort claims may be
brought before the court in the place where the harmful event
occurred. In this context, the Kolassa/Barclays Bank case before the
Court of Justice of the EU is noteworthy.
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Claims can also be brought before a Dutch court if parties
contractually agree to do so.
With regard to proceedings for the binding declaration of
international settlements under the WCAM, the Amsterdam
Court of Appeal assumes jurisdiction rather easily, even if the
case is not substantively connected to the Netherlands. In three
WCAM cases, Shell (ECLI:NL:GHAMS2009:BIS5744),
Converium (ECLI:NL:GHAMS:2012:BV1026) and Fortis
(ECLI:NL:GHAMS:2017:2257), the Court assumed jurisdiction
with regard to the shareholders domiciled outside the
Netherlands, but within the EU, Switzerland, Iceland or
Norway, as their potential claims were ‘so closely connected’ to
the claims of the shareholders domiciled in the Netherlands that
it was ‘expedient to hear and determine them together to avoid
the risk of irreconcilable judgments resulting from separate
proceedings’.
The decision by the Court on international jurisdiction in
Converium implies that even if the case is not substantively
connected to the Netherlands, but a minority of the interested parties
are domiciled in the Netherlands, and one of the parties to the
settlement is a Dutch entity, the Court will assume jurisdiction.
The WCAM was developed exclusively as a mechanism to offer the
opportunity to give a wide effect to settlements reached. The
international relevance of the Dutch mechanism for collective
settlements has increased and the Netherlands may become a serious
alternative for the certification of collective settlements involving non-
US investors in non-US securities listed on a non-US stock exchange.
5.4 Are unilateral jurisdiction clauses valid and
enforceable in your jurisdiction?
Unilateral jurisdiction clauses are valid in the Netherlands. Claims
can also be brought before a Dutch court if parties contractually
agree to do so.
6 Regulated Bodies
6.1 What bodies, apart from the courts, regulate financial
services disputes in your jurisdiction?
The AFM is responsible for conduct-of-business supervision on the
Dutch financial markets, which aims, among other things, to foster
orderly and transparent market processes, maintain integrity in the
relationship between market parties and protect consumers. As
such, the AFM also has an impact on the regulation of financial
services disputes in the Netherlands.
DNB is responsible for prudential supervision of the Dutch financial
markets.
6.2 What powers (investigative/inquisitorial/
enforcement/sanctions) do these regulatory bodies
have?
DNB and the AFM have the discretionary power to investigate and
enforce (alleged) breaches of the Wft and the rules promulgated
thereunder.
To enforce compliance, the AFM and DNB can take both informal
and formal action:
The Dutch regulators regularly use informal methods such as
entering into discussions about a (perceived) violation of standards
or sending a warning letter. The Dutch regulators may also impose
the following administrative sanctions (among others) without prior
judicial authorisation:
■ order a certain course of action to comply with the Wft
(instruction order);
■ order a particular duty, backed by a penalty for non-
compliance;
■ give an administrative fine; and
■ withdraw or limit the licence of a financial undertaking.
The regulators may request information and seek access to business
data and documents. In principle, everybody has a duty to cooperate
with the financial regulators. The regulators and their employees are
subject to a general confidentiality obligation regarding information
obtained through their work under the Wft. However, they may
share information with, among others, the Netherlands Consumer
and Market Authority (Autoriteit Consument & Markt, “ACM”), the
tax authorities and the public prosecutor.
6.3 Are the decisions of regulatory bodies binding on the
parties to a financial services dispute?
Yes, an administrative decision of the AFM or DNB is binding on
the parties to a financial services dispute.
6.4 What rights of appeal from regulatory decisions
exist?
Written objection (bezwaar) An interested party is, in principle, able to object to a decision, within a
period of six weeks (art. 6:7 of the General Administrative Law Act
(“Awb”)). Objection takes place by lodging an objection to the financial
regulator who made the enforcement decision (art. 6:4(1) of the Awb).
During the objection stage, the financial regulator has to reconsider the
decision made at the objection (art. 7:11(1) of the Awb). To the extent
that reconsideration gives cause to do so, the AFM or DNB revokes the
decision made and makes a new, replacement decision. In principle, the
interested party may not be put in a worse position than the position he
would have been in if he did not object (reformation in peius). With respect to a number of decisions, direct appeal to the Trade and
Industry Appeals Tribunal (“CBb”) is possible, so the objection
stage can be skipped.
Appeal and further appeal (beroep en hoger beroep) The interested party can lodge an appeal against the decision on
objection within six weeks (art. 6:7 of the Awb). An appeal with
respect to an enforcement decision which is made on the ground of
the Wft has to be lodged with the Court of Rotterdam (art. 8:6 jo.
Annex 2 and art. 7 of the Awb). Against the judgment of the Court
of Rotterdam, a further appeal can be lodged with the CBb (art.
8:105 jo. Annex 2 and art. 11 of the Awb).
The further appeal is directed against the judgment of the court.
This further appeal can be lodged by the addressee of the sanction
decision, but also by the AFM or DNB. After a further appeal has
been lodged, the other party can lodge a cross-appeal, whether
conditionally or not (art. 8:110 of the Awb).
6.5 Are decisions of regulatory bodies publicly
accessible?
Yes. In accordance with the Wft, the Dutch regulators will, in
principle, disclose their decision to impose an administrative
sanction pursuant to the Wft. The disclosure will take place as soon
as the decision has become irrevocable.
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7 Updates – Cases and Trends
7.1 Summarise any legislative developments in this area
expected in the coming year. Describe any practical
trends in your jurisdiction (e.g., has the financial
crisis impacted legislation? Has there been an
increase in the powers of regulatory bodies as a
reaction to the crisis? Has there been a change in the
amount and type of cases being brought by and
against financial service providers?).
The financial crisis and its aftermath have triggered a substantial
wave of legislation, both at an EU and a national level. National
developments include restrictions on remuneration applicable to the
financial industry generally (in addition to applicable restrictions at
an EU level), a national resolution and recovery regime for
insurance companies, the introduction of a generic duty of care in
financial supervision legislation, the introduction of a banker’s oath
and an expansion of information and enforcement powers of
regulators.
7.2 On an international level, would your jurisdiction be
considered to be more financial institution- or
customer-friendly?
The Netherlands follows a relatively middle course on this topic.
Pacta sunt servanda is one of the underlying principles of Dutch
civil law: if a party fails to comply with its obligations, these
obligations, or associated security rights, can be enforced, which
also includes cases where enforcement leads to tough or pitiful
situations. At the same time, all obligations under Dutch law are
governed by the principle of reasonableness and fairness. This, in
combination with the function of banks in society and their position
as professional service providers, has in case law resulted in a so-
called special duty of care of banks towards their clients. These
mechanisms provide financial situations with the possibility to
conclude binding and enforceable agreements, while at the same
time protecting the legitimate interests of their contracting parties.
7.3 Please identify any significant cases regarding
financial services disputes during the past 12 months.
Please highlight the significance of the case(s), any
new or novel issues raised and what lessons can be
drawn from them.
Recently, the European Court of Justice rendered a judgment that
limits the obligation of confidentiality to which financial
supervisory authorities are bound (see Case C-15/16 Bundesanstalt
für Finanzdienstleistungsaufsicht v Ewald Baumeister). The
European Court of Justice decided that the mere fact that
information is present in files of the financial supervisory authority
does not automatically render that information confidential. In
addition, the European Court of Justice held that commercial
information that is older than five years is, in principle, considered
outdated and no longer subject to the obligation of confidentiality.
We have also seen an increase in the number of cases in the
Netherlands in which parties lodge a demand, either against the
opposing party or a third party, to provide certain information or
documents in support of their claim, in financial services disputes.
The criteria to allow such a request are quite broad. Nevertheless,
case law shows that – provided sound and specific reasoning is
given – financial institutions are able to keep their internal
deliberations confidential. In addition, the Dutch Supreme Court
made clear in a recent judgment that the obligation of confidentiality
of financial supervisory authorities, such as the AFM, regarding
information about regulated parties, cannot be ‘circumvented’ by
requesting the information exchanged with the supervisory
authority from the regulated party itself. Lastly, a significant
number of cases in financial services disputes over the past year
concerned the duty of care of financial institutions towards their
customers.
7.4 Have global economic changes caused any changes
to financial services litigation/regulation in your
jurisdiction?
Against the historic back-drop of the financial crises and given the
current period of relative global economic growth, we notice that
the Dutch legislator has specifically taken steps to limit the chances
that the errors from the past will be made again. It, for instance,
tackled ‘overlending’ by, among other things, implementing rules
that prevent consumers on the housing market from borrowing an
amount equal to the full market value of a property, meaning that
consumers have to put in their own money as well.
Acknowledgment
The authors would like to acknowledge the invaluable contribution
of their colleague, Niels Didden, in the preparation of this chapter.
Stibbe Netherlands
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Roderik Vrolijk
Stibbe
Beethovenplein 10
1077 WM Amsterdam
Netherlands
Tel: +31 20 546 01 58 Email: [email protected] URL: www.stibbe.com/en
Daphne Rijkers
Stibbe
Beethovenplein 10
1077 WM Amsterdam
Netherlands
Tel: +31 20 546 09 54 Email: [email protected] URL: www.stibbe.com/en
Advising financial institutions active both nationally and internationally,
Roderik provides advice in respect of securities law and financial
supervision – specialising in financial markets regulation in the
broadest sense. His expertise is built on experience in Stibbe’s
banking and capital markets practice in Amsterdam, where he acted
on a large number of significant financing transactions, IPOs and M&A
transactions in the financial services industry. Furthermore, Roderik is
regularly active in the area of institutional asset management, acting
for some of the world’s largest asset managers as well as for
institutional investors. Roderik has a Master of Laws from Utrecht
University (2008, cum laude). He also attended the Stibbe MBA
Highlights Programme (2015). In addition, Roderik is a member of the
Dutch Association for Securities Law and is a member of the editorial
board of the Dutch Financial Law Review.
Stibbe is an independent law firm with around 400 lawyers advising on the laws of the Netherlands, Belgium and Luxembourg, as well as EU law.
Stibbe has main offices in Amsterdam, Brussels and Luxembourg and also branch offices in Dubai, London and New York.
Daphne specialises in commercial litigation, combining her expertise
on complex cases with clear pragmatism.
She handles a variety of matters such as corporate fraud, contractual
and tort disputes, matters of enforcement and execution of claims.
Daphne is experienced in civil attachment law and regularly advises
international clients on the execution of foreign judgments in the
Netherlands. In addition, she represents financial institutions in
proceedings regarding financial disputes.
Daphne attended the Stibbe MBA Highlights Programme at INSEAD
(2017).
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MinterEllisonRuddWatts
Jane Standage
Matthew Ferrier
New Zealand
1 Bringing a Claim – Initial Considerations
1.1 What are the most common causes of actions taken
by or against financial institutions and service
providers in your jurisdiction?
There are a range of different causes of action brought against
financial services institutions including typical commercial causes
of action (e.g. breach of contract and negligence) and regulatory
prosecutions.
The main regulators of financial institutions in New Zealand are the
Financial Markets Authority (FMA), the Reserve Bank of New
Zealand (the Reserve Bank) and the Commerce Commission.
They have statutory rights of action – criminal and civil – under (for
example) the Financial Markets Conduct Act 2013 (FMCA),
Financial Advisers Act 2008, the Fair Trading Act 1986 and the
Credit Contracts and Consumer Finance Act 2003 (CCCFA).
There has not been a large volume of litigation by the main financial
regulators in the past 12 months as the FMA and the Reserve Bank
have been focused on a thematic Conduct and Culture Review of the
banking, insurance, superannuation and financial adviser sectors.
This review was the New Zealand regulators’ response to the issues
raised in the Australian Royal Commission into Misconduct in the
Banking, Superannuation and Financial Services Industry.
Recent causes of action in regulatory proceedings, however, relate
to insider trading, market manipulation, untrue or misleading
statements in offer documents, failing to meet continuous disclosure
requirements, and failure to meet record keeping, monitoring and
reporting obligations under anti-money laundering and countering
financing of terrorism legislation.
The Commerce Commission is also active with a key focus on
responsible lending primarily targeting high-cost, short-term and
online lenders rather than major financial institutions. Relevant
causes of action in this sphere are under the Fair Trading and
Consumer Credit Contract legislation.
1.2 What remedies are most likely to be awarded?
The main remedies are monetary. For instance, damages for loss in
ordinary civil proceedings, civil pecuniary penalties and
compensation orders in civil regulatory proceedings, fines and
reparation orders in criminal prosecutions, and compensation orders
for complaints resolved by dispute resolution schemes.
The FMA may also prohibit organisations from doing certain things
(e.g. offering financial products, distributing disclosure documents).
It can also (for example) de-register organisations from being
Financial Service Providers (FSPs) and make banning orders.
Criminal offences can result in imprisonment.
Disciplinary proceedings against Authorised Financial Advisers
(AFA) can result in a range of penalties, most commonly including
censuring the AFA, imposing a fine or making a recommendation
that the FMA cancel or suspend an AFA’s authorisation.
1.3 Who has a right of action in financial services
disputes? Does it make a difference if the customer is
an individual or a commercial entity?
An individual or entity can bring a claim for breach of contract or
negligence against a financial services entity. Under the FMCA,
individuals or entities can also bring claims for compensation or
seek other remedies such as variation or cancellation of an
agreement or an order restraining rights in relation to financial
products. These claims arise, for example, for breach of the fair
dealing provisions under Part 2 of the FMCA (prohibitions on
misleading and deceptive conduct in dealing in financial products or
supply or promotion of financial services) or for false or misleading
statements in offer documents. Under the Financial Advisers Act
2008, persons receiving “financial adviser services” can also claim
compensation for losses as a result of breaches of duties such as the
duty to exercise care, diligence and skill. However, the Financial
Advisers Act is set to be repealed by the Financial Services
Legislation Amendment Bill (FSLAB) with those duties being
incorporated into the FMCA (see question 7.1 below).
The FMA can itself also prosecute a financial services entity or a
person who has contravened the FMCA. Under s 34 of the FMA Act
2011, the FMA has the right to bring proceedings on behalf of
financial markets participants where it is in the public interest for it
to do so. This provision permits the FMA to bring an action on
behalf of a class of financial markets participants.
1.4 Is third-party funding available in financial services
litigation (crowdfunding, maintenance, champerty,
etc.)? Does litigation insurance operate in your
jurisdiction and, if so, what are the implications for
this?
Litigation funding is available in financial services litigation in New
Zealand. The New Zealand courts do not currently regulate
litigation funding arrangements, save that they will ensure that
litigation funding does not result in an abuse of process. The New
Zealand Law Commission is currently reviewing the regulation of
litigation funding.
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“Litigation” or “after the event” insurance is available in New
Zealand, but is not common. This may be because the New Zealand
courts generally award costs on a scale basis (i.e. less than actual
costs – see question 4.2 below) and so exposure to an adverse costs
award may be less than in other jurisdictions.
1.5 Are class action law suits available in your
jurisdiction? If so, has this impacted financial
services litigation? Has there been an increase in
class action suits post the financial crisis?
New Zealand does not have a formal legal framework for dealing with
class actions; however, these proceedings are permitted under High
Court Rule 4.24. This Rule allows one or more persons to sue or be
sued “on behalf of or for the benefit of all persons with the same interest in the subject matter of a proceeding” with the consent of
persons with the same interest or following an application to the court.
Class actions are relatively new in New Zealand; however, the
courts have generally taken a permissive approach towards
applications to commence such proceedings. This has led to an
increase in class actions in recent years. Notable class actions have
included the “Fair Play on Fees” class action, which was issued
against the major banks in New Zealand in relation to fees charged
for the late payment of credit cards, unarranged overdrafts and
dishonoured payments, and the Feltex litigation, discussed at
question 7.3 below.
2 Before Commencing Proceedings
2.1 What are the main barriers to financial service
litigation for customers? Are there exclusionary
clauses or duty defining clauses in customer
contracts which prevent customers from bringing a
case?
The cost of court proceedings can be a barrier. However, all FSPs
registered in New Zealand must belong to an approved dispute
resolution service which provides free resolution of claims under
$200,000 (see question 3.4 below). New Zealand also allows class
actions and third-party litigation funding – see questions 1.4 and 1.5
above.
Exclusionary clauses and duty defining clauses are sometimes used
in financial services contracts. However, these clauses are subject to
potentially being declared “unfair” under the unfair contract terms
provisions in the Fair Trading Act 1986 if the term is contained in a
standard form consumer contract and causes “significant
imbalance” between a consumer and the financial entity and is not
necessary to protect legitimate interests of the financial entity.
However, a term is only unfair if the New Zealand Commerce
Commission obtains a declaration from the courts. The law on
unfair terms is currently under review.
2.2 Is there a time limit within which financial services
disputes must be commenced? If so, is it different
depending on whether proceedings are brought
before a regulatory body or before the courts? Does
the commencement of a regulatory process ‘stop the
clock’?
This depends on the type of proceedings being filed.
Civil disputes will be brought before the courts and, in that event,
will generally have a six-year statutory limitation period from when
the relevant act or omission occurred. The limitation period in
respect of criminal offences generally depends on the maximum
penalty for the offence (and can be six months, 12 months or five
years), but there are exceptions in particular Acts. The more
common offences under the FMCA have a three-year limitation
period beginning after the date on which the offence was committed.
A regulatory process does not “stop the clock” and so there can
sometimes be a flurry of activity to complete investigations in
regulatory matters around the limitation period and sometimes
proceedings (both civil and criminal) are commenced in order to
stop the clock whilst the investigation continues.
Complaints to authorised dispute resolution schemes under the FSPs
process have time limits based around the time of a “deadlock”. A
complainant has to first complain to the FSP and if the provider does
not respond within a set timeframe, or there is a deadlock, a
complaint can be made to the provider’s dispute resolution scheme.
The complaint to the scheme has to be made within two months of
the deadlock occurring. There is no long-stop.
2.3 Can parties in financial services litigation avail of
litigation and/or legal advice privilege? Are
investigations conducted by regulated bodies
considered ‘litigation’ in the context of privilege?
Parties to financial services litigation can avail themselves of
litigation privilege and/or legal advice privilege.
It is also likely that entities subject to regulatory investigations can
claim litigation privilege in relation to information and
communications made during the course of regulatory investigations.
Litigation privilege can be claimed in relation to communications
made for the dominant purpose of preparing for an apprehended
proceeding, and a proceeding may well be apprehended where a
regulatory investigation has commenced.
2.4 Are standard form master agreements used in your
jurisdiction for financial institutions (for example, the
ISDA Master Agreement)? How are they treated?
The ISDA Master Agreement is used in New Zealand and is
amended as necessary to suit the transaction. There are standard
form agreements for different sectors of the financial services
industry. For instance, banks have standard terms and conditions
which apply to customers and there are standard form documents
such as the Auckland District Law Society forms for mortgages.
2.5 Are there any non-contractual duties which are
binding on financial services entities (for example, a
particular fiduciary duty or a code of conduct)? Can
they be contracted out of?
There are duties under the FMCA and the Financial Advisers Act
2008 which require (for example) that financial advisers must act
with care, diligence and skill and not engage in misleading or
deceptive conduct. In addition, AFAs must comply with the
minimum standards in the Code of Conduct for AFAs. There is no
right to contract out of these statutory duties or the Code. See
question 7.1 below for a discussion of reforms to these duties and
the Code as a result of the FSLAB. In addition, there is the Code of
Banking Practice which is governed by the Banking Ombudsman.
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3 Progressing the Case
3.1 Is there a specialist court or specialist judges for
financial services litigation?
No; however, the New Zealand High Court does operate a
“Commercial List”. The purpose of this List is to allow for efficient
case management; when a case is ready for hearing, it is transferred
back to the general list and will be heard by any High Court judge.
3.2 Does the method of service of proceedings differ for
financial service litigation?
No, it does not differ.
3.3 Are there any specific pre-trial procedures that must
be followed for financial services litigation in your
jurisdiction? If so, what are they and what are the
consequences of not abiding by them?
No – but class actions have different procedures and there is a
Commercial List.
3.4 Are there any alternative dispute resolution (ADR)
regulations that apply to financial services disputes in
your jurisdiction? Are ADR clauses typically included
in financial services contracts, and is ADR commonly
used to resolve financial services disputes in your
jurisdiction?
All entities which provide financial services to retail clients must
belong to an approved dispute resolution scheme (e.g. the Banking
Ombudsman). Retail clients can make claims of up to $200,000 in
this forum. The dispute resolution service is free and results in a
binding decision on the FSP. However, if the claim is for more than
$200,000, the normal route is via the courts.
Parties can choose to resolve disputes by mediation and arbitration
in New Zealand. However, ADR clauses are not commonplace in
financial services contracts in New Zealand. Sophisticated parties
sometimes prefer to have an ADR clause for significant financial
services contracts where privacy and the ability to select the
decision-maker (arbitrator) are important to the parties.
3.5 How are claims for negligent misstatement/mis-selling
dealt with in your jurisdiction?
Negligent misstatement and mis-selling claims are dealt with under
a number of different statutes:
■ the Fair Trading Act 1986 prohibits misleading or deceptive
conduct in trade;
■ the FMCA prohibits false or misleading representations about
financial products or services, and unsubstantiated
representations. If these provisions are breached, the FMA
can prosecute and (amongst other things) apply for a
pecuniary penalty order; and
■ the Contract and Commercial Law Act 2017 provides for
damages where a party has been induced into a contract by
misrepresentation, whether innocent or fraudulent. These
damages are to be calculated as if the representation were a
term of the contract that has been breached.
3.6 How have unfair terms in contracts been interpreted
in your jurisdiction? Are there any causes of action or
defences available specifically to consumers? How
broad is the definition of a ‘consumer’ in your
jurisdiction?
The Fair Trading Act 1986 allows the Commerce Commission to
apply to the court for a declaration that a term in a standard form
consumer contract is unfair. If that declaration is made, it cannot be
included in any standard form agreement or enforced. “Consumer contract” is defined broadly to include any contract that involves the
acquisition of goods or services for personal, domestic or household
use.
A term will be declared “unfair” if it creates a significant imbalance
in the consumer’s rights under the contract to their detriment and if
the term is not reasonably necessary in order to protect the interests
of the advantaged party. A term will, however, be exempt from
these provisions if it is part of the main subject matter of the
contract.
A discussion paper has recently been released by the Ministry of
Business, Innovation and Employment on whether the unfair terms
rules should be extended to businesses.
3.7 How is data protection/freedom of information dealt
with in financial services litigation? Can a financial
services customer access their personal data? How is
commercially sensitive or confidential information
dealt with in the context of discovery or disclosure?
A financial services customer can access their personal data, in the
same way that any individual may request access to personal
information, held by an agency, under the Privacy Act 1993.
Privacy Principle Six provides that, where an agency holds personal
information in such a way that it can readily be retrieved, the
individual concerned shall be entitled to obtain confirmation from
the agency about whether or not it holds personal information, and
have access to such information.
There is an obligation on an agency to respond within 20 working
days of receiving a request, unless an extension of time applies. An
agency is also able to refuse access to personal information where
disclosure would breach legal professional privilege or would
involve disclosure of the affairs of another individual. In addition,
from a practical perspective, an agency may refuse a request if the
information is not readily retrievable, does not exist or cannot be
found. While most information is “retrievable”, if it will be
unreasonably costly or difficult to retrieve information it is unlikely
to be considered “readily retrievable”. Where an agency refuses a
request, it must cite the reason for its refusal.
Parliament is in the process of reforming the Privacy Act. The aim
of the reform is to restore individuals’ confidence in agencies that
their personal information is secure and to provide the Privacy
Commissioner with greater powers to address failures by agencies
to handle personal information appropriately. Access to personal
information is an area where agencies have been somewhat relaxed
in their approach to compliance. Accordingly, the Bill proposes to
bolster the powers of the Privacy Commissioner so that its decisions
on access requests are binding. This includes the ability to set a
deadline for when an agency will be required to comply with a
request, and a $10,000 fine if an agency, without reasonable excuse,
fails to comply with an access order.
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Regarding commercially sensitive or confidential information, this
information is still discoverable in civil proceedings if the
information is relevant to the substance of the proceeding.
However, parties can seek orders from the court to protect such
information such as agreeing that certain information will not be
disclosed to the public and/or that the information will only be
provided on a counsel-to-counsel basis.
4 Post Trial
4.1 Is there a right of appeal in financial services
disputes?
There is a right of appeal against any court decision in New Zealand.
4.2 How does the court deal with costs in financial
services disputes?
In general, a successful party to litigation is entitled to costs. Costs
are ordinarily awarded on a “scale” basis, with proceedings
classified according to their complexity and significance. These
“scale” costs are intended to allow for the recovery of two-thirds of
the party’s actual legal costs.
The courts may award increased costs if a party has contributed
unnecessarily to the time or expense of the proceeding or the nature
of the proceeding is such that the time required would substantially
exceed the maximum scale costs available. The courts may also
award indemnity costs where a party has acted vexatiously,
frivolously, improperly or unnecessarily in commencing, continuing
or defending a proceeding, or has ignored or disobeyed an order or
direction of the court.
5 Cross-Border Issues
5.1 What issues typically arise in cross-border disputes
or investigations involving financial institutions and
how are they catered for in your jurisdiction?
The key questions in a cross-border financial dispute are whether
the New Zealand courts have jurisdiction to hear the dispute and
whether the New Zealand courts are the most convenient forum.
The New Zealand courts will have jurisdiction if proceedings are
properly served under New Zealand law on a person or entity.
Whether New Zealand is the most convenient forum will depend on
factors such as location of witnesses, existence of litigation in
another jurisdiction and the law governing the dispute.
Focusing on service of proceedings, under New Zealand law, New
Zealand proceedings can be served on a defendant outside New
Zealand as of right in specified circumstances, e.g. where the
contract at issue is governed by New Zealand law or was entered
into in New Zealand. In other circumstances, the claimant will need
to obtain leave from the New Zealand courts to serve proceedings
outside New Zealand and must show that the claim has a real and
substantial connection to New Zealand.
Where a defendant does not have assets in New Zealand one of the
key issues for plaintiffs is how to enforce New Zealand court
judgments overseas. This depends on reciprocal agreements
between New Zealand and the relevant jurisdiction.
Similarly, foreign judgments against New Zealand financial entities
have no direct operation in New Zealand but can be enforced either
by registering the judgment under the Reciprocal Enforcement of
Judgments Act 1934 (which only applies to a specific list of
jurisdictions) or by bringing an action in the New Zealand courts
based on the common law.
There is now a special regime under the Trans-Tasman Proceedings
Act 2010 which streamlines service of New Zealand proceedings in
Australia, introduces statutory criteria for determining appropriate
jurisdiction and registration of judgments.
Arbitral awards are binding under the New Zealand Arbitration Act
1996 except in limited circumstances.
See question 5.2 below for a summary of how the New Zealand
courts and financial regulators co-operate with overseas regulators.
5.2 What is the general approach of the courts in your
jurisdiction to co-operating with foreign courts or
regulatory bodies or officials in financial services
disputes (including investigations)?
The New Zealand courts and regulators seek to co-operate and assist
foreign courts in financial services disputes by, for example:
■ enforcing arbitral awards in New Zealand irrespective of the
country in which the award was made. To be enforceable in
a New Zealand court, an arbitral award must simply be valid
under law, relate to a dispute capable of being settled by
arbitration under New Zealand law, and follow the correct
procedure in accordance with the agreement between parties;
■ enforcing subpoenas, whether they were issued in New
Zealand or Australia; and
■ the New Zealand High Court has the power to make freezing
orders in aid of substantive foreign proceedings.
In addition, regulators assist in obtaining evidence for proceedings
taking place in overseas jurisdictions. The FMA may obtain
information, documents or evidence that, in its opinion, is likely to
assist with a request by overseas regulators.
5.3 Is extra-territorial jurisdiction typically asserted in
your jurisdiction and, if so, in what circumstances?
Generally, New Zealand law does not apply to activities, property or
persons outside New Zealand. However, under the FMCA, some
provisions apply to conduct outside New Zealand. For instance,
under s 33 of the FMCA, the fair dealing provisions (which prohibit
misleading and deceptive conduct in relation to dealing in financial
products or the supply or possible supply of financial services)
apply to conduct outside New Zealand by any person resident,
incorporated, registered or carrying on business in New Zealand to
the extent the conduct relates to dealing in financial products or
supplying financial services in New Zealand.
The laws on insider trading, market manipulation, continuous
disclosure, disclosure of substantial product holders in listed issuers
and disclosure of relevant interests in financial products by directors
and senior management of listed issuers all apply to conduct in
relation to quoted financial products or listed issuers regardless of
whether the conduct is in New Zealand or outside New Zealand.
5.4 Are unilateral jurisdiction clauses valid and
enforceable in your jurisdiction?
Unilateral jurisdiction clauses require one party to bring proceedings
in one jurisdiction only and permit the other party to choose where to
sue. These clauses are enforceable as between financial business
entities in New Zealand. However, if this type of clause is included
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in standard form financial consumer contracts (agreements with
consumers where the terms have not been subject to effective
negotiation between the parties), there is a risk they could be
declared by the courts to be unfair – see above at question 3.6.
6 Regulated Bodies
6.1 What bodies, apart from the courts, regulate financial
services disputes in your jurisdiction?
All entities which provide financial services to retail customers
must belong to a dispute resolution scheme (e.g. the Banking
Ombudsman). The Financial Advisers Disciplinary Committee
(FADC) conducts disciplinary proceedings arising out of
complaints regarding adviser conduct. The FMA, Commerce
Commission and Reserve Bank of New Zealand have powers to
investigate a range of financial services issues and to seek
enforcement action and sanctions.
6.2 What powers (investigative/inquisitorial/
enforcement/sanctions) do these regulatory bodies
have?
The FMA has enforcement powers including giving direction
orders, issuing temporary banning orders or stop orders, revoking
licences, or seeking injunctive relief, banning orders and other relief
in respect of payment/transfer of funds or other property from the
High Court. The FMA also has a right under s 34 of the FMA Act
2011 to bring proceedings seeking compensation on behalf of
financial markets participants where it is in the public interest. The
FMA can also require production of information or require a person
to give evidence in person under s 25 of the FMA Act and has search
powers under s 29 of the same Act. At the lower end of the
enforcement spectrum, the FMA can issue infringement notices or
public warnings, or accept undertakings and enforce them in the
High Court if there is non-compliance with those undertakings.
The Commerce Commission has powers under the CCCFA to
investigate and take action in relation to credit contracts and
consumer credit contracts. The Reserve Bank of New Zealand
(New Zealand’s central bank), which is responsible for undertaking
prudential supervision of regulated banks, has information
gathering powers, can require that the registered bank provide a
report prepared by an approved person on certain matters relating to
the registered bank and, in certain circumstances, has search and
seizure powers.
6.3 Are the decisions of regulatory bodies binding on the
parties to a financial services dispute?
Generally, proceedings are brought before another body, such as a
court or tribunal, and it is the decision of that body which is binding
on the parties to the dispute rather than any decision of the regulator.
Some decisions of regulators are binding, however, such as the
decision to use compulsory information gathering powers, issue
confidentiality orders, and make temporary banning orders referred
to above at question 6.2.
The FMA can also direct the Registrar of the Financial Service
Providers Register (FSPR) to de-register and/or prevent the
registration of institutions and individuals where there is potential
harm to consumers or New Zealand’s financial markets. These
decisions are binding.
Dispute resolution schemes, which are quasi-regulatory bodies,
have authority to determine complaints against FSPs (where they
are members of the scheme) and can make decisions that are binding
on the FSP.
Disciplinary decisions of the FADC are binding on the AFA in
question.
6.4 What rights of appeal from regulatory decisions
exist?
The use of compulsory investigative powers are not subject to rights
of appeal, but can generally be challenged in the High Court’s
supervisory jurisdiction relying on traditional judicial review
grounds (although this is rare).
Temporary banning orders made by the FMA are subject to a right
of appeal to the High Court on a question of law only.
A direction that a business or individual should be de-registered
from and/or prevented from registering on the FSPR is subject to a
right of general appeal to the High Court.
There is no right of appeal from decisions of authorised dispute
resolution schemes in relation to FSPs but these decisions are only
binding on the provider if accepted by the complainant, so can be
taken elsewhere, including to the courts.
Decisions of the FADC to take disciplinary action against an AFA
can be appealed to the District Court.
6.5 Are decisions of regulatory bodies publicly
accessible?
Decisions of regulatory bodies are not always publicly accessible
and will depend on whether the decision is confidential or
commercially sensitive.
7 Updates – Cases and Trends
7.1 Summarise any legislative developments in this area
expected in the coming year. Describe any practical
trends in your jurisdiction (e.g., has the financial
crisis impacted legislation? Has there been an
increase in the powers of regulatory bodies as a
reaction to the crisis? Has there been a change in the
amount and type of cases being brought by and
against financial service providers?).
2018 saw scrutiny in Australia of financial services entities as a
result of the Australian Royal Commission into Misconduct in the
Banking, Superannuation and Financial Services Industry. This was
echoed in a review by New Zealand regulators of the major banks
and life insurers’ conduct and culture.
The regulators identified weaknesses in banks’ governance and
management of conduct risks, and “significant gaps” in the
measurement and reporting of customer outcomes. Banks will each be
working on a plan to address their specific risks identified by the
FMA/Reserve Bank. Conduct and culture will be an ongoing focus for
all financial market participants with the FMA expecting participants
(not just banks) to proactively focus on measuring themselves against
the FMA’s Guide to Conduct dated February 2017. As noted above at
question 6.2, the FMA has a wide range of investigative and
enforcement tools which were bolstered following the GFC when the
FMCA was passed. We expect the FMA be on the look-out for
appropriate opportunities to flex those enforcement muscles.
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The reform of the financial advice regime continues with the
FSLAB likely to be passed in 2019. The Bill repeals the Financial
Advisers Act and moves the adviser duties to the FMCA. It also
creates new duties such as the duty to give priority to clients’
interests and the duty on Financial Advice Providers (FAPs) not to
give or offer to give inappropriate incentives. Furthermore, the Bill
states that FAPs must also take all reasonable steps to ensure:
persons engaged to provide regulated advice comply with their
duties under the legislation; and that FAPs have effective processes
and controls to oversee representatives and not provide
inappropriate incentives that are likely to have the effect of
encouraging a representative to engage in conduct that contravenes
the duty provisions. Following this, a new version of the Code of
Conduct for financial advisers is expected to be finalised by mid-
2019. Financial entities will then transition to a new licensing
regime.
There has also been considerable focus on the Anti-Money
Laundering/Countering Financing of Terrorism Act 2009 with some
of the first civil proceedings filed with substantial fines sought. In
the lending sector, the Commerce Commission has continued to
focus on responsible lending principles under the CCCFA and
compliance with the Responsible Lending Code.
See question 7.3 below for a discussion on significant cases.
7.2 On an international level, would your jurisdiction be
considered to be more financial institution- or
customer-friendly?
This is finely balanced, but probably more consumer-friendly.
There is strong consumer protection legislation and the regulators
are increasingly active. There is also a clear expectation from key
financial regulators – the FMA and the Reserve Bank in particular –
that financial institutions should not just comply with the law but be
focused on delivering good customer outcomes.
Against that, the jurisdiction is generally not litigious and ordinary
civil proceedings against financial services institutions by private
citizens are not overly common.
The recent thematic Conduct and Culture Review carried out by the
FMA and Reserve Bank (referred to above at questions 1.1 and 7.1)
is likely to tip the balance toward a consumer-friendly focus for the
foreseeable future. It is being promoted by the regulators (and is
seen by financial institutions) as a clear shot across the bows. The
relatively recent influx of litigation funders, and developing activity
in the class action area, is likely to cement this.
7.3 Please identify any significant cases regarding
financial services disputes during the past 12 months.
Please highlight the significance of the case(s), any
new or novel issues raised and what lessons can be
drawn from them.
Over the past 12 months, the financial services sector has been
focused on the Conduct and Culture Review conducted jointly by
the Reserve Bank and the FMA; however, recent significant cases
include:
■ Warminger: this case concerned alleged market manipulation
by a fund manager at an investment bank, and is the first New
Zealand case which analyses what does and does not amount
to market manipulation. In this case, a $400,000 penalty was
imposed.
■ Feltex: this case was brought by a large number of former
shareholders in Feltex in relation to misstatements included
in that company’s 2004 prospectus. Feltex went into
receivership in 2006, resulting in a total loss to its
shareholders. There was an issue as to whether a revenue and
dividend forecast amounted to an untrue statement and
whether it could give rise to liability. The Supreme Court
held in August 2018 that this forecast could give rise to
liability, provided that investors acquired shares in reliance
on the prospectus generally, and that they suffered loss as a
result. This decision is significant because it demonstrates
that reliance and loss will not be difficult to prove. Reliance
will be satisfied if an investor relied on a prospectus
generally; they do not need to have read the prospective or
relied on the specific statement said to be untrue. Investors
will have suffered a loss if the price they paid for shares was
higher than if the prospectus had not been misleading.
■ Ping An: in this case, the Court ordered a money remitter to
pay a $5.3 million pecuniary penalty for breaches of the Anti-
Money Laundering and Countering Financing of Terrorism
Act 2009. The defendant had received a warning in mid-
2015. This case evidences that the Department of Internal
Affairs will monitor entities who have been warned about
their compliance, and will prosecute if adequate steps to
ensure compliance are not taken.
7.4 Have global economic changes caused any changes
to financial services litigation/regulation in your
jurisdiction?
The global financial crisis (GFC) led to an overhaul of the way
financial markets were regulated in New Zealand. In 2011, the
FMA was established to promote and facilitate the fair, efficient and
transparent financial markets (previously the regulator was the
Securities Commission). The FMCA and the Financial Advisers Act
both resulted from the GFC reforms.
As noted above, the Royal Commission in Australia has had a flow-
on effect in New Zealand.
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Jane Standage
MinterEllisonRuddWatts
Lumley Centre, Level 20
88 Shortland Street
Auckland 1010
New Zealand
Tel: +64 9 353 9754 Email: [email protected] URL: www.minterellison.co.nz
Matthew Ferrier
MinterEllisonRuddWatts
18/125 The Terrace
Wellington 6011
New Zealand
Tel: +64 4 498 5057 Email: [email protected] URL: www.minterellison.co.nz
Jane is a partner in MinterEllisonRuddWatts’ Dispute Resolution team.
She is an experienced litigator with particular expertise in banking and
financial services litigation, class action disputes, complex contractual
disputes, and disputes involving issues of companies and securities
law.
Jane has acted on large-scale commercial disputes in New Zealand
and internationally. She regularly advises clients in relation to
regulatory investigations and engagement with the New Zealand
regulators. In addition, Jane has: acted for one of the top four audit
firms defending a professional negligence claim in relation to audit
engagements; acted in proceedings against an investment fund which
invested client money in Madoff feeder funds; and acted for a major
New Zealand bank in defence of a class action claim regarding
account fees and credit fees.
Prior to returning to New Zealand, Jane was an associate at Allen &
Overy in London and completed her LL.M. at New York University.
MinterEllisonRuddWatts is one of New Zealand’s premier law firms.
The legal teams collaborate to deliver exceptional outcomes for clients. The firm’s dedicated financial services team is at the forefront of
development in this highly regulated and fast-evolving sector. The team provides seamless solutions from managing regulatory requirements to
resolving disputes. In 2018, the firm has advised clients in relation to the FMA/Reserve Bank Conduct and Culture Review in the financial services
sector and other substantial financial services regulatory investigations.
The team is regarded as opinion leaders on new regulatory and market developments affecting the financial services sector such as the Financial
Markets Conduct Act, the Financial Advisers Act, the Anti-Money Laundering and Countering Financing of Terrorism Act, and on providing guidance
in relation to dealing with the FMA, Commerce Commission and Reserve Bank of New Zealand. The team is also experienced in advising insurers
under the Insurance (Prudential Supervision) Act.
Matthew is a senior associate in MinterEllisonRuddWatts’ Dispute
Resolution team.
He has a broad commercial litigation and regulatory practice and
significant experience assisting clients respond to regulatory and
criminal investigations. He is a member of the team currently advising
a major Australasian bank in relation to the Conduct and Culture
Review being carried out jointly by the main regulators in New
Zealand, the Financial Markets Authority and the Reserve Bank of
New Zealand.
Prior to joining MinterEllisonRuddWatts, Matthew was a senior Crown
prosecutor working for the office of the Crown Solicitor in Wellington.
In addition to Crown prosecution and civil litigation work, he acted for
a number of major regulators in relation to both civil and criminal
regulatory enforcement, including the Financial Markets Authority and
Serious Fraud Office. In 2016, Matthew spent nine months on
secondment in the Financial Markets Authority’s litigation team.
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Wolf Theiss
Peter Daszkowski
Marcin Rudnik
Poland
1 Bringing a Claim – Initial Considerations
1.1 What are the most common causes of actions taken
by or against financial institutions and service
providers in your jurisdiction?
Causes of actions taken against financial institutions vary depending
on the circumstances of each case; however, one of the most
common causes are disputes concerning Swiss franc loan
agreements. In the past (years 2005–2007), loans denominated in
Swiss francs were particularly popular in Poland, as both the Swiss
franc exchange rate and the applicable loan interest were fairly low.
Favourable loan conditions could be obtained. However, since mid-
2008, the Swiss franc exchange rate has increased significantly to
the detriment of borrowers, who then needed to purchase Swiss
francs at a much higher rate to repay their loans.
As a result, borrowers have initiated many successful disputes
against the banks using various argumentation in order to invalidate
the loan agreements, in part or in full, or to convert the Swiss franc
loan into a Polish zloty (“PLN”) loan. Generally, the main
arguments of the consumers are the following: (i) misrepresentation
by the banks; (ii) the banks not providing sufficient information on
the risks connected with a Swiss franc denominated loan; (iii)
abusive clauses leaving the bank too much leeway to determine the
substance of the obligations of the customer; and (iv) violation of
good business practices and good faith principles by the banks.
Financial institutions in turn claim for payment of due and payable
financial obligations of their customers (in the event of defaults or
early termination of loan agreements). However, in many cases,
such claims are assigned to debt collection companies or
securitisation funds which pursue the claim on their own.
There is also a relatively steady number of cases connected with
insider trading and an increasing number of cyber crime cases and
related disputes.
1.2 What remedies are most likely to be awarded?
As a rule, claims made against or by a financial institution constitute
payment claims. Depending on the circumstances of the case, the
customer might also pursue damages, compensation or partial/full
reimbursement of the amounts already repaid to the financial
institution.
In the Swiss franc cases, the consumers would also like the court to
declare the contract, or particular provisions of the contract, null and
void or ineffective.
1.3 Who has a right of action in financial services
disputes? Does it make a difference if the customer is
an individual or a commercial entity?
The customer and the financial institution have a full right of action
in financial service disputes and there is no difference if the
customer is an individual or a commercial entity.
In disputes concerning the protection of consumer rights, legal
actions may be brought by non-governmental organisations but only
with the consent of the consumer. Such an organisation can also
join a pending case and take necessary actions at any stage of the
proceedings.
Moreover, in those disputes, the district (municipal) consumer
ombudsman may bring actions on behalf of consumers and, with
their consent, join a case at any stage.
The Financial Ombudsman is also entitled to take action for
consumers in cases concerning unfair market practices by financial
institutions. He may also, with the consent of the consumer, take
part in pending proceedings.
The public prosecutor may request the initiation of proceedings in
any civil case, as well as take part in ongoing proceedings, if,
according to his assessment, it is required to protect the rule of law,
citizens’ rights or public interest.
1.4 Is third-party funding available in financial services
litigation (crowdfunding, maintenance, champerty,
etc.)? Does litigation insurance operate in your
jurisdiction and, if so, what are the implications for
this?
Third-party funding is still not fully developed and well-established
in Poland, thus it is not covered by any relevant legal provisions,
including those regarding financial services litigation. As a rule,
third-party funding is admissible under Polish law; however, the
specific content of a third-party funding agreement would be based
on the freedom of contract. A third party cannot formally take part
in the proceedings, unless the claim is assigned to it.
Litigation insurance is available in Poland; however, similarly to
third-party funding, it is not common and broadly known or
accepted. According to public information, only around 3% of
Poles have litigation insurance and the quality of such products still
needs improvement. We are not aware of any specific insurance
product that covers financial services litigation. Basic litigation
insurance covers legal counsel’s fees and court fees, leaving the
scope of insurance protection in the financial services litigation to
be quite limited.
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1.5 Are class action law suits available in your
jurisdiction? If so, has this impacted financial
services litigation? Has there been an increase in
class action suits post the financial crisis?
Class action law suits are an option available to pursue in Poland as
they were introduced to the Polish legal system by the Act of 17
December 2009 on pursuing claims in group proceedings (in Polish:
ustawa o dochodzeniu roszczeń w postępowaniu grupowym). A class
action law suit may be initiated if the party to the dispute is a consumer.
However, the implementation of this law has had little impact on
financial services disputes. Even though taking legal steps against
big financial institutions by means of class action suits seems easier
than by means of individual claims, as collective law suits allow for
joint opposition to illegal practices which could have been
committed by banks or other financial institutions, the popularity of
class actions is to date very limited. For example, in 2017, the latest
date for which we have official information, only a few class action
claims were initiated in Poland.
Because the law on class actions was only introduced in Poland in
late 2009 (i.e., during the financial crisis), it is still not possible to
fully assess this type of litigation. Still, among the current batch of
class action claims, a significant number are connected with
financial services litigation, in particular Swiss franc loans.
2 Before Commencing Proceedings
2.1 What are the main barriers to financial service
litigation for customers? Are there exclusionary
clauses or duty defining clauses in customer
contracts which prevent customers from bringing a
case?
Apart from court and lawyer fees, there are no specific legal barriers
to financial service litigation for customers. Under Polish law, a
party cannot be legally restricted from bringing a case to court, so
exclusionary clauses or duty defining clauses are not applicable.
The only barriers that a customer would have to overcome would be
of practical nature. A consumer is set in a difficult situation when
entering into a dispute against big specialised institutions. Still, in
Poland, there are multiple specialised institutions that aim at
providing balance among the parties of financial services disputes,
including, for example, the Financial Ombudsman, mainly by
supporting the consumer in various ways.
Another possible barrier to financial service litigation would be the
excessive length of the proceedings, and lack of specialised courts.
Financial service litigation cases are generally quite complex which
requires judges possessing comprehensive financial knowledge.
This is not common in Poland (see question 3.1 below). Such
proceedings also usually take longer than average disputes. For
example, the average length of a proceeding before the court of the
first instance regarding Swiss franc loan agreements takes around
two or three years.
2.2 Is there a time limit within which financial services
disputes must be commenced? If so, is it different
depending on whether proceedings are brought
before a regulatory body or before the courts? Does
the commencement of a regulatory process ‘stop the
clock’?
A time limit is set by the provisions regarding limitation of claims in
the Civil Code. Property claims become time-barred by the statute
of limitations. After the limitations period has lapsed, the person
against whom a claim is made may avoid satisfying it unless he
waives his right to use the statute of limitations as a defence. As a
rule, the limitation period is six years, and for claims concerning
periodical performances and claims connected with conducting
business activity, three years calculated from the moment a claim
became or could have become due and payable. The limitation
period always ends on the last day of the year in which the three- or
six-year period lapsed. So the general time limit for consumers to
pursue a claim is six years and for financial institutions three years,
as such claims will always be connected to their business activity.
The running of the limitations period is interrupted by:
■ any action before a court or other authority appointed to hear
cases or enforce claims of a given type or before an
arbitration tribunal taken directly to either assert, establish,
satisfy or secure a claim;
■ recognition of a claim by the person against whom the claim
is made; and
■ commencement of mediation.
The above regulations in Poland do not formally ‘stop the clock’
because after taking the abovementioned actions the limitation
period starts to run anew.
In financial services disputes, a dispute between a client and a
financial institution may also be resolved by the means of special
proceedings before the Financial Ombudsman (see question 3.4
below). The commencement of such proceedings will ‘stop the
clock’.
However, the commencement of regulatory proceedings connected
with a financial dispute does not have any influence on the running
of the statute of limitations.
2.3 Can parties in financial services litigation avail of
litigation and/or legal advice privilege? Are
investigations conducted by regulated bodies
considered ‘litigation’ in the context of privilege?
The parties in financial litigation may benefit from attorney-client
privilege. Based on the regulations of the Polish Civil Procedure, a
legal advisor/advocate being called as a witness may refuse to
answer questions if a significant attorney-client privilege may be
violated.
Attorney-client privilege is even stronger in investigations
conducted by regulatory bodies because a regular (and not only
significant) attorney-client privilege is also respected.
2.4 Are standard form master agreements used in your
jurisdiction for financial institutions (for example, the
ISDA Master Agreement)? How are they treated?
Many standard forms are regularly used by financial institutions in
Poland. Major financing transactions (exceeding EUR 10M) are
typically based on LMA documentation. As in most jurisdictions,
LMA standard documentation very often constitutes the basis for a
first draft that is subsequently heavily negotiated. The Polish
Banking Association has also prepared its own Polish law-governed
standard loan agreement that is taken into consideration while
drafting LMA-style loan agreements.
In hedging transactions, ISDA Master Agreements are commonly
used in major transactions with international parties. Most Polish
banks use the Polish Master Agreement (provided in the Polish
language) prepared by the Polish Banking Association. In bilateral
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transactions, banks usually insist that their internal standard form
master agreements apply.
Standard form documentation is used as a basis to start a negotiation
process. The willingness of banks to introduce changes depends on
the commercial strength of the customer and the specifics of a
particular transaction. In dealings with consumers, negotiation of
such forms is usually very limited.
2.5 Are there any non-contractual duties which are
binding on financial services entities (for example, a
particular fiduciary duty or a code of conduct)? Can
they be contracted out of?
Under Polish law, banks are considered professional entities of
public trust and the extent of their duty of care (in Polish: należyta staranność) is greater than, in particular, the duty of care of
consumers or other commercial market players. Such duty of care
cannot be contracted out, especially with respect to potentially
intentional damages. Furthermore, banks are bound by strict
secrecy rules and heavy compliance/notifications duties.
We have observed in recent years increasing regulatory obligations
for banks. Most of such obligations come as a result of the
implementation of European law. National legislation adds to that
regulatory burden. Financial institutions should also follow
recommendations published by the Polish Financial Supervision
Authority (in Polish: Komisja Nadzoru Finansowego) (“FSA”),
which constitute a set of rules on the internal and external behaviour
of financial institutions.
3 Progressing the Case
3.1 Is there a specialist court or specialist judges for
financial services litigation?
There is no specialist court for financial services litigation. Such
matters are decided by regular common courts (civil or commercial
law divisions). In the majority of cases, the parties include a
jurisdiction clause in the contract, which usually provides that the
court competent for the seat of the financial institution should
decide upon the case. In situations where there is no such
jurisdiction clause in place (for example, claims based on non-
contractual basis, torts), a party can be sued before a court
competent in its seat or a court located where the damage was
caused or the agreement was (to be) performed.
There are also no specialist judges deciding upon cases in financial
litigation. The allocation of judges to specific cases is carried out
via a special IT system based on a lottery, so, generally, cases are
assigned randomly. For this reason, there is no guarantee that the
judge will be an expert or experienced in financial services
litigation.
The only specialist courts/institutions available to decide upon
financial disputes are the ones mentioned in question 3.4 below
within the ADR procedures.
3.2 Does the method of service of proceedings differ for
financial service litigation?
The method of service of proceedings in financial services litigation
is no different than in regular litigation. A statement of claim is filed
directly with the competent court and the court delivers a
counterpart of the statement of claim to the opposing party.
3.3 Are there any specific pre-trial procedures that must
be followed for financial services litigation in your
jurisdiction? If so, what are they and what are the
consequences of not abiding by them?
There are no obligatory pre-trial procedures that need to be
undertaken in financial services litigation before initiating litigation.
However, because a statement of claim needs to contain information
about whether the parties engaged in a settlement attempt prior to filing
the claim, and, if not, what was the reason for not doing so, in practice,
a request for payment is sent by the creditor to the debtor to satisfy the
abovementioned formal requirement. Non-fulfilment of this practice
does not, however, have any negative consequences for the claimant.
At a pre-trial stage, a consumer may also file a complaint against a
financial institution, regarding the infringement of its rights. This is,
however, also optional and does not constitute any formal pre-trial
procedure that needs to be undertaken.
3.4 Are there any alternative dispute resolution (ADR)
regulations that apply to financial services disputes in
your jurisdiction? Are ADR clauses typically included
in financial services contracts, and is ADR commonly
used to resolve financial services disputes in your
jurisdiction?
Apart from the general regulations of the Polish Civil Procedure
regarding mediation and reconciliation proceedings, there are
several ADR regulations that can apply strictly to financial services
disputes, in particular:
■ Bank Consumer Arbitration is an institution competent for
the amicable settlement of disputes between consumers and
banks. In order to file a case to an arbitrator, the consumer
needs to go through the entire complaint process with the
bank and the value of the dispute must not exceed PLN
12,000 (approx. EUR 2,800). The whole procedure takes an
average of two months, and the decision issued by the
arbitrator is final for the bank, whereas the consumer still has
an opportunity to appeal.
■ The Court of Arbitration at the FSA is a permanent,
independent court competent to resolve disputes between
participants of the financial market, in particular, between
entities subject to the supervision of the FSA and recipients of
services provided by them (including consumers). There is
also a Mediation Centre established at this court of arbitration.
■ Parties can refer a dispute to the Financial Ombudsman, a
specialist entity established by law to deal with financial
disputes. The participation of a financial institution in
proceedings before the Financial Ombudsman is compulsory.
ADR clauses are typically not included in financial services
contracts. Nonetheless, parties can refer a dispute to a potential
mediation centre/institution, even without a prior agreement to do
so. In practice, ADR is not commonly used to resolve financial
services disputes as they are predominantly decided by common
courts in Poland.
3.5 How are claims for negligent misstatement/mis-selling
dealt with in your jurisdiction?
Negligent misstatement and mis-selling are the principal causes of
actions in claims raised by consumers against financial institutions.
Because financial institutions are bound by a higher standard of care
than regular market players, negligent misstatements or mis-selling
might be a ground to invalidate a contract or specific contractual
provisions.
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Misstatement and mis-selling have been defined in the Act on
Competition and Consumer Protection as practices infringing
collective consumer interests. Consumers are granted the right to
report such practices to the Office for Competition and Consumer
Protection (“OCCP”). Such a notice can serve as the basis for
initiating administrative proceedings regarding infringement of
collective consumer interests and may result in imposition of a
substantial administrative fine upon the infringer.
3.6 How have unfair terms in contracts been interpreted
in your jurisdiction? Are there any causes of action or
defences available specifically to consumers? How
broad is the definition of a ‘consumer’ in your
jurisdiction?
Unfair terms in contracts have been directly defined in the Civil
Code. A contract provision will be deemed as an unlawful clause if
it declares consumers’ rights and obligations in a way that is contrary
to good practice or grossly violates consumers’ interests. Such
provisions will not be binding upon the consumer; however, the
parties are bound by the remaining part of the contract. This does not
apply to provisions setting forth the main obligations of the parties,
including price or remuneration, so long as they are worded clearly.
Article 3853 of the Civil Code explicitly states which clauses may be
considered unlawful; for example, a clause excluding or limiting
liability towards the consumer for personal injury or depriving only
the consumer of the right to dissolve, rescind or terminate the
contract. Moreover, the OCCP, which investigates the market with
respect to unfair terms in consumer contracts, may declare them
abusive after conducting relevant proceedings and maintains an
extensive list of clauses considered to be abusive. The list of the
clauses can be found at: https://www.rejestr.uokik.gov.pl/.
There is no unified definition of a consumer in Polish law and many
legal acts use their own consumer concept, which may differ from
act to act. The definition of a consumer that is predominantly
applicable to financial services may be found in the Polish Civil
Code. A consumer is any natural person undertaking with an
entrepreneur a legal act which is not directly related to his business
or professional activity. As a rule, a high value of the content of the
legal act (for example, a bank loan in a high amount) does not
deprive the person of their consumer status.
3.7 How is data protection/freedom of information dealt
with in financial services litigation? Can a financial
services customer access their personal data? How is
commercially sensitive or confidential information
dealt with in the context of discovery or disclosure?
There are no specific rules regarding data protection in financial
services litigation. A customer/client may request their personal
data from a financial services institution at any time. The
consumer/client is the holder of personal data, as well as
confidential banking data, and may request access to it. Sensitive
data or confidential information may not be disclosed without
permission of the consumer/client. The unauthorised processing of
sensitive data is punishable (for example, by imprisonment).
With regard to the disclosure of information, Polish law explicitly
describes in which proceedings a bank may be obliged to disclose
data which is considered a bank secret. Those are:
■ inheritance proceedings;
■ proceedings regarding the division of property between
spouses;
■ proceedings commenced against a natural person who is a
party to a contract regarding maintenance;
■ maintenance allowance; and
■ wrongful money transfer.
As a rule, banks will not be obliged to disclose information
considered a bank secret for the purpose of a financial dispute.
Moreover, the Polish Civil Procedure Code does not provide for any
specific restrictions in dealings with commercially sensitive
information in financial services disputes. If there is a risk that such
information might be disclosed to a third party, the court hearing
will not be open to the public.
4 Post Trial
4.1 Is there a right of appeal in financial services
disputes?
A party not satisfied with a judgment is granted the right to appeal in
financial services disputes on the basis of the general principles set
forth in the Code of Civil Procedure. An appeal is filed with the
court which rendered the appealed judgment within two weeks of
the judgment being served on the appellant. The appellee may,
within two weeks of being served with an appeal, file a reply brief
directly with the court of second instance.
4.2 How does the court deal with costs in financial
services disputes?
There are no specific rules regarding costs in financial services
disputes, which means that while deciding on costs, the courts will
refer to the general rules set forth in the Code of Civil Procedure.
General principle provides that the unsuccessful party will be
obliged to reimburse the opposing party for any costs necessary to
present its case. The necessary costs of proceedings include court
fees incurred by the party, travelling expenses incurred by the party
or its attorney and the equivalent of earnings lost as a result of the
party’s appearance in court.
Additionally, parties represented by an attorney will be reimbursed
for costs in accordance with the legal provisions on attorney fees
(which are capped and dependent on the value of the subject of the
dispute).
5 Cross-Border Issues
5.1 What issues typically arise in cross-border disputes
or investigations involving financial institutions and
how are they catered for in your jurisdiction?
The main issues that typically arise in cross-border disputes are
connected with securing or enforcing a claim outside of Poland.
This may create a serious obstacle in the effectiveness of a judgment
because of the lack of jurisdiction of Polish courts over assets that
are located outside of Poland.
Moreover, cross-border disputes often necessitate an analysis of
foreign law concepts which the Polish legal system is not familiar
with. This holds true, in particular, for any common law concepts or
complex financial structures/mechanisms not common on the Polish
market or not known to its judges.
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5.2 What is the general approach of the courts in your
jurisdiction to co-operating with foreign courts or
regulatory bodies or officials in financial services
disputes (including investigations)?
The co-operation of Polish courts with foreign courts is in principle
limited to summoning and questioning a foreign-based witness
before a foreign local court.
Due to the fact that there is little cross-border litigation in financial
services disputes, there is no standard practice with regard to co-
operation of Polish courts with regulatory bodies or officials in
financial services disputes.
5.3 Is extra-territorial jurisdiction typically asserted in
your jurisdiction and, if so, in what circumstances?
No. As a rule, extra-territorial jurisdiction is not asserted in Poland.
Only in commercial financing cases, where a loan agreement is
governed by foreign law (in particular, the laws of England and
Wales), are such agreements usually subject to the jurisdiction of
foreign courts.
5.4 Are unilateral jurisdiction clauses valid and
enforceable in your jurisdiction?
The Polish Code on Civil Procedure provides for a general
prohibition of unilateral jurisdiction clauses as they are in breach of
the principle of equality. This holds true, however, only for the
clauses governed by Polish law. When such clause is valid under
foreign law which may govern a contract, as a rule, Polish courts
should respect the parties’ choice and uphold the validity of the
clause.
6 Regulated Bodies
6.1 What bodies, apart from the courts, regulate financial
services disputes in your jurisdiction?
From a regulatory perspective, the FSA is the main regulatory body
to oversee the financial services market in Poland and conduct any
regulatory proceedings in cases of misconduct within the financial
services sector.
The OCCP is the body that oversees the market from the perspective
of competition and consumer protection. It does not directly
regulate or settle financial services disputes; however, it has an
indirect influence on regulating those issues. The OCCP deals with
abusive clauses and also acts of financial institutions that generally
affect consumers’ interests, which often is the basis of claims in
financial services litigation. The main tasks of the OCCP comprise
of matters connected with eliminating illicit practices of financial
institutions that violate collective consumer interests (like mis-
selling or misstatements), as well as declaring clauses in contractual
documentation abusive.
6.2 What powers (investigative/inquisitorial/
enforcement/sanctions) do these regulatory bodies
have?
The FSA has extensive investigative powers. An investigation (in
Polish: postępowanie wyjaśniające) may be commenced in order to
establish whether there are grounds to file a statement on a criminal
offence to the public prosecutor or for the FSA to conduct
administrative proceedings within the scope of violations of matters
under the supervision of the FSA. Should a violation of the latter be
established in relevant administrative proceedings, then the main
sanctions imposed by the FSA will be a fine to be paid by the
infringer.
The OCCP has the power to investigate matters connected with
practices violating collective consumer interests, as well as the
implementation of unfair contractual terms. In certain cases, the
OCCP may conduct raids in order to collect evidence connected
with a particular violation of competition law. Finally, the OCCP
may impose heavy fines on companies or persons violating the rules
under the Act on Competition and Consumer Protection.
6.3 Are the decisions of regulatory bodies binding on the
parties to a financial services dispute?
As a rule, the decisions issued by the OCCP or the FSA do not
directly refer to the financial services dispute, but to the relevant
actions that were taken or not taken by a financial institution. The
decisions are, however, binding for the financial institution that was
addressed in the decision.
If a clause is declared abusive by the OCCP by a final decision, then
both the entrepreneur, which applied the clause, and all the
consumers that concluded a contract with the entrepreneur based on
such clause are bound by such declaration.
6.4 What rights of appeal from regulatory decisions
exist?
If the FSA issues a decision, a party that is not satisfied with the
content of the decision may file, within 14 days, a motion to
reconsider the matter to the FSA. As a result of such a motion, a
second decision is issued by the FSA on the same matter. The
second decision of the FSA can be appealed against, within 30 days
from the time the decision is delivered to a party, to the Voivode
Administrative Court in Warsaw. If a party is not satisfied with the
judgment of the Voivode Administrative Court, it may file a
cassation claim to the Supreme Administrative Court.
Even though the proceedings before the President of the OCCP are
administrative proceedings, a party to the proceedings may, within
one month from the date of delivery of the decision, appeal against
it to a specialist common court, namely the Competition and
Consumer Protection Court in Warsaw. Any judgment of this court
can be appealed against to the Court of Appeal in Warsaw within
two weeks from the time of receipt of the judgment.
6.5 Are decisions of regulatory bodies publicly
accessible?
Yes. As a rule, decisions of the regulatory bodies are publicly
accessible. They constitute public information and should be made
available if requested by a third party. Some decisions are published
directly on the website of the relevant body. However, if a decision
contains confidential information, the relevant information
(including, in some cases, descriptions of the parties) will be
redacted.
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7 Updates – Cases and Trends
7.1 Summarise any legislative developments in this area
expected in the coming year. Describe any practical
trends in your jurisdiction (e.g., has the financial
crisis impacted legislation? Has there been an
increase in the powers of regulatory bodies as a
reaction to the crisis? Has there been a change in the
amount and type of cases being brought by and
against financial service providers?).
Although the General Data Protection Regulation (“GDPR”)
already entered into force in May 2018, the Polish Parliament is
working on a new law amending 160 statutes and reconciling the
GDPR with particular provisions of Polish law. Banks are actively
objecting to the proposed changes to banking law which would limit
the scope of personal information that the banks can collect about
their customers. The banks claim it may limit their ability to
examine creditworthiness of their consumers. Additionally, changes
to the law concerning bailiffs may result in enforcement being more
time-consuming.
There is a visible trend in Poland of depriving banks of their historic
privileges and, in terms of their powers towards third parties,
treating them as equal to ordinary entrepreneurs. Banks can no
longer issue their own enforcement title and, by way of recent
changes to the Civil Code, banks have been deprived of their right to
charge interest on interest.
There has been no true increase in the powers of regulatory bodies
as a result of the financial crisis. However, regulatory bodies (in
particular, the OCCP and the FSA) have started to use their powers
to control and influence the market/financial institutions more
diligently and to make use of the legal instruments granted to them.
Such increased activity of the regulatory bodies is also connected
with, and depends on, whether there have been any recent
circumstances on the financial market which caused consumers to
lose their investments.
It is to be expected that in the future the majority of cases against
financial institutions will, similar to the Swiss franc loan cases, still
be based on mis-selling and misstatements.
7.2 On an international level, would your jurisdiction be
considered to be more financial institution- or
customer-friendly?
The Polish legal regime is based on French and German principles
of civil law and, as such, is more customer-friendly. However, in the
commercial finance regime, the broad use of LMA documentation,
including the extensive scope of security interests and the institution
of notarial submission to enforcement which lets creditors skip
court settlement procedures, allows the banks to enforce their
receivables relatively quickly and efficiently.
7.3 Please identify any significant cases regarding
financial services disputes during the past 12 months.
Please highlight the significance of the case(s), any
new or novel issues raised and what lessons can be
drawn from them.
During the past 12 months, financial services litigation in Polish
courts mostly concerned Swiss franc loans. The courts are
continuing the trend of declaring loan agreements denominated in
Swiss francs as null and void (which was, in particular, confirmed
by judgments of the Court of Appeal in Warsaw). This trend was
indirectly confirmed by a resolution of the Supreme Court of 20
June 2018 (case file no. III CZP 29/17) in which the Supreme Court
ruled that the unfair nature of the terms of the contract should be
determined with a reference to the time of the conclusion of the
contract.
Currently, the FSA is investigating several financial market players
(brokerage houses and investment funds) in connection with
misbehaviour in dealing with bonds issued by GetBack S.A. In their
first decision, the FSA imposed a heavy fine and withdrew the
licence of a brokerage house. The GetBack affair will play a
significant role in shaping the standard of vigilance of financial
authorities in Poland and the duty of care of entities involved in
offering securities/bonds to investors.
7.4 Have global economic changes caused any changes
to financial services litigation/regulation in your
jurisdiction?
Because financial services disputes are dealt with by various non-
specialised common courts in Poland, we have not observed any
visible changes to financial services litigations as a result of global
economic changes. With regard to financial services regulations,
they are heavily influenced by European law and therefore follow
the trends introduced by various legal instruments at an EU level.
Wolf Theiss Poland
Pola
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Peter Daszkowski
Wolf Theiss
Mokotowska 49
00-542 Warsaw
Poland
Tel: +48 22 378 8900 Email: [email protected] URL: www.wolftheiss.com
Marcin Rudnik
Wolf Theiss
Mokotowska 49
00-542 Warsaw
Poland
Tel: +48 22 378 8900 Email: [email protected] URL: www.wolftheiss.com
Wolf Theiss is one of the leading law firms in Central, Eastern and South-Eastern Europe (CEE/SEE). We have built our reputation on a combination
of unrivalled local knowledge and strong international capability. Our team now brings together over 340 lawyers from a diverse range of
backgrounds, working in offices in 13 countries throughout the CEE/SEE region.
Over 80% of our work involves cross-border representation of international clients. Our full range of services covers: Banking & Finance; Business
Crime; Capital Markets; Competition & Antitrust; Compliance; Corporate / Mergers & Acquisitions; Dispute Resolution; Employment Law; Energy &
Renewables; Infrastructure; Intellectual Property & Information Technology; International Arbitration; Investment Funds; Life Science; Real Estate &
Construction; Regulatory & Procurement; Retail; and Tax.
We have concentrated our energies on a unique part of the world: the complex, fast-developing markets of the CEE/SEE region. Through our
international network of offices, we work closely with our clients to help them solve problems and create opportunities.
For more information go to the interactive web profile by following this link: http://brochures.wolftheiss.com/de/zudhJrSO/short-firm-profile.
Peter Daszkowski is the Co-Managing Partner of Wolf Theiss in
Poland. For over 20 years he has been advising major international
corporations on various M&A transactions, including privatisations,
banking and finance matters as well as project and real estate
transactions. He also represents clients in major litigation and
arbitration proceedings. He advises international clients on nearly
every aspect of Polish corporate and business law as well as on real
estate and labour law. His career experience includes advising
leading European banks and entrepreneurs on project finance
matters, on restructuring loans and securities. He advised a leading
international technology company on implementation of an electronic
toll collection system in Poland. Peter has particular experience of
public procurement and PFI/PPP contracts.
Peter is a graduate of the University of Bonn and a German qualified
lawyer admitted to the Bar in Germany and in Poland. He is the author
of numerous legal publications.
Marcin Rudnik is a Senior Associate and a member of the Dispute
Resolution, Competition and Antitrust and Real Estate and Public
Procurement practice groups of Wolf Theiss in Poland. He focuses on
advising and representing clients in civil, administrative, insolvency
and arbitration proceedings regarding construction contracts, real
estate, corporate and competition law. He has participated in
numerous public procurement, PPP and project finance transactions,
mostly on the side of lenders, and also advises clients on construction
and development matters, including FIDIC contracts, as well on the
leasing of commercial and industrial premises.
Marcin studied law at the Universities of Gdańsk and Toruń, and at the
University of Regensburg, Germany, and was awarded an LL.M.
degree. He also completed the English and European law school
organised in co-operation with the University of Cambridge. He is
admitted to the Polish Bar and speaks Polish, English and German
fluently.
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Chapter 20
PLMJ
Rita Samoreno Gomes
Rute Marques
Portugal
1 Bringing a Claim – Initial Considerations
1.1 What are the most common causes of actions taken
by or against financial institutions and service
providers in your jurisdiction?
In Portugal, the most common cause of action taken against
financial institutions and financial services providers is the breach
of legal and contractual duties (such as suitability, information,
transparency and fiduciary duties) in transactions involving the
subscription/acquisition of financial instruments by investors (mis-
selling). The causes of actions most commonly taken by financial
institutions are related to the non-performance of financing or loan
agreements by costumers (credit default or other events of default).
1.2 What remedies are most likely to be awarded?
The most common remedies to be awarded by Portuguese courts in
actions against financial institutions are compensation for loss and
damage and the declaration of invalidity (nullity or annulment) of
the agreements and/or transactions between financial institutions or
financial services providers and their customers. In actions taken by
financial institutions (or financial services providers), credit
recovery is the most common remedy to be awarded by the courts.
1.3 Who has a right of action in financial services
disputes? Does it make a difference if the customer is
an individual or a commercial entity?
Both individuals and commercial entities have right of action
against financial institutions and financial services providers.
Under Portuguese law, the important distinction is between
professional and non-professional investors. The latter are usually
individuals but, under some circumstances, commercial entities can
also be classified as such. Non-professional investors generally
benefit from greater protection under Portuguese law, as they are
treated as consumers for the purposes of financial intermediation
agreements and benefit from protection resulting therefrom and
from the stricter duties of conduct imposed on financial institutions
and financial services providers. Moreover, the Portuguese
Securities Code also gives non-professional investors that invest in
financial instruments (and the associations that protect those
investors) a class action right to protect individuals’ shared interests
or the collective interests of this class of investor.
1.4 Is third-party funding available in financial services
litigation (crowdfunding, maintenance, champerty,
etc.)? Does litigation insurance operate in your
jurisdiction and, if so, what are the implications for
this?
Portugal has no legislation that directly regulates third-party
funding and, although some players claim to have resorted (or are in
the process of resorting) to third-party funding solutions, there are
no official numbers regarding this issue. Also, there are no judicial
precedents about third-party funding on Portuguese courts and the
debate around it amongst scholars is still in a very early stage.
Being a very immature market as far as third-party funding is
concerned, there is an increasingly growing appetite from funders
regarding Portugal and it will be interesting to follow the upcoming
debate on the challenges it poses vis-à-vis the Portuguese legal
system. Although it pretty much depends on the features of the
contractual and business models to be implemented, we see no
fundamental legal obstacle to implementing third-party funding
schemes in Portugal. In fact, while quota litis or arrangements of
share of the lawyer’s fees are forbidden by the Portuguese Bar
Association Statute, maintenance and champerty are not forbidden
per se.
As for litigation insurance, this form of managing the litigation risk
exists and is commonly used in Portugal in cases of tort liability
(especially accidents, automobile and otherwise) and, more
recently, in cases of directors’ and officers’ liability.
1.5 Are class action law suits available in your
jurisdiction? If so, has this impacted financial
services litigation? Has there been an increase in
class action suits post the financial crisis?
Class action law suits are available in Portugal under the general
class actions rules and, in particular, under the Portuguese Securities
Code. This Code gives non-professional investors and associations
that protect investors in financial instruments (under some
circumstances) a class action right to protect individuals’ shared
interests or the collective interests of this class of investor. Class
actions have seen a large increase in the wake of the recent financial
crisis, which saw the collapse of important financial and credit
institutions including: Banco Espírito Santo, S.A.; Banco Português
de Negócios, S.A.; and Banif – Banco Internacional do Funchal,
S.A. Against this background, Portugal witnessed a significant
increase in class action law suits brought by groups of customers
and investors, and by consumer protection organisations. Several
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class actions seeking compensation for the loss and damage suffered
– mainly as a consequence of investing in financial instruments
issued or placed by those institutions or other institutions in the
same economic group – were brought against financial institutions,
their board members, their external auditors and even against the
Portuguese State and the Portuguese regulatory bodies (the Bank of
Portugal and the Portuguese Securities Market Commission
(CMVM)). Class action law suits have also been taken against the
Bank of Portugal seeking to reverse the resolution measures applied
to some financial and credit institutions (including Banco Espírito
Santo, S.A.).
2 Before Commencing Proceedings
2.1 What are the main barriers to financial service
litigation for customers? Are there exclusionary
clauses or duty defining clauses in customer
contracts which prevent customers from bringing a
case?
As a general rule, Portuguese law seeks to mitigate the effect of
clauses aimed at preventing or hampering customers from bringing
cases against financial institutions or financial services providers.
Another general rule is that standard exclusionary or duty defining
clauses are only valid if transparently communicated to the
customer and any standard clauses against good faith are null and
void (the Portuguese Standard Contracts Act sets out an indicative
list of the clauses that are per se or may, depending on the specifics
of the case, be deemed invalid).
Even if they pass the communication test, standard clauses such as
clauses excluding or limiting a party’s contractual liability, in cases
of dolus or serious fault, may be deemed null and void. Conversely,
in the context of mis-selling, clauses excluding the suitability duties
that apply to the financial institutions within the scope of the
execution-only regime are valid under Portuguese law, provided
they are communicated in writing to the customer.
Although this is a controversial issue, pre-contractual
misrepresentations are usually taken into account by Portuguese
courts when assessing the obligations assumed by the parties in a
financial intermediation agreement. These representations are also
relevant to help interpret contracts and with regards to standard
clauses they are relevant to determine whether contractual clauses
should be considered unfair and hence null and void.
Whilst Portuguese law and the Portuguese courts can be described
as customer-friendly, customers still experience some barriers to
litigating against financial institutions. Litigation costs and lack of
financial expertise are amongst the most relevant obstacles that
customers face. The fact that they are litigating against well-funded
opponents and the length of judicial cases and the extra pressure this
poses on a financial level are also issues to be considered.
2.2 Is there a time limit within which financial services
disputes must be commenced? If so, is it different
depending on whether proceedings are brought
before a regulatory body or before the courts? Does
the commencement of a regulatory process ‘stop the
clock’?
Depending on the grounds of the claim, financial services disputes
may be subject to statutory time limitations. For instance, (i) the
Portuguese Securities Code establishes that the liability of financial
intermediaries is subject to a two-year limitation period from the
date the customer acknowledges the conclusion of the agreement or
transaction and of its actual terms (except in cases of dolus or
serious misconduct of the financial intermediary, where a general
20-year limitation period applies), (ii) the Portuguese Civil Code,
which applies on a subsidiary basis to financial services, provides a
limitation period of three years for cases of non-contractual liability
and a general 20-year limitation period for cases of contractual
liability, and (iii) the annulment of the agreements/transactions
entered into between the financial institutions or service providers
and the customer based on a relevant error (relating to the object of
the agreement), in its turn, is subject to a one-year limitation period.
The above limitation periods are the maximum periods within
which the relevant legal claims can be brought. Starting regulatory
proceedings does not “stop the clock”.
2.3 Can parties in financial services litigation avail of
litigation and/or legal advice privilege? Are
investigations conducted by regulated bodies
considered ‘litigation’ in the context of privilege?
The Portuguese Bar Association Statute provides that any
communications between a lawyer and their client are protected by
attorney-client privilege. Conversely, no litigation privilege exists
outside of the attorney-client relationship.
2.4 Are standard form master agreements used in your
jurisdiction for financial institutions (for example, the
ISDA Master Agreement)? How are they treated?
Standard form master agreements (especially the ISDA Master
Agreements) are commonly used by Portuguese financial
institutions in swaps or other OTC derivatives transactions. Those
types of agreements are usually treated as standard contracts and,
thus, subject to the Portuguese Standard Contracts Act.
2.5 Are there any non-contractual duties which are
binding on financial services entities (for example, a
particular fiduciary duty or a code of conduct)? Can
they be contracted out of?
Portuguese financial institutions are subject to several non-
contractual duties (i.e., legal duties). These include the duties of
having a high technical competence, diligence and transparency, as
well as respect for the interests entrusted, information and assistance
duties and duties of secrecy. The legal rules on these types of duties
are mandatory and therefore it is not possible to contract out of
them, except for the secrecy duty, which can be mitigated or
governed differently by the parties.
3 Progressing the Case
3.1 Is there a specialist court or specialist judges for
financial services litigation?
In Portugal, regarding civil claims, there are no specialist courts or
judges for financial services litigation. Any disputes arising
between financial institutions or services providers and their
customers are brought in the common civil courts. Conversely, the
judicial review of the Bank of Portugal and the CMVM’s decisions
regarding regulatory infringements are heard before the
Competition, Regulation and Supervision Court, which is a
specialist court.
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3.2 Does the method of service of proceedings differ for
financial service litigation?
No, service of proceedings for financial service litigation is similar
to all other types of court litigation: by letter with acknowledgment
of receipt, through an enforcement agent, a court clerk, or a lawyer;
or by public notice, depending on the specifics of the case. Service
abroad but within the EU is effected under the terms of Regulation
(EC) no. 1393/2007 of the European Parliament and of the Council
of 13 November 2007 on the Service in the Member States of
Judicial and Extrajudicial Documents in Civil or Commercial
Matters (Service of Documents). Outside the EU, the service must
be effected under the Convention of 15 November 1965 on the
Service Abroad of Judicial and Extrajudicial Documents in Civil or
Commercial Matters, provided that the countries in question have
signed or ratified the Convention.
3.3 Are there any specific pre-trial procedures that must
be followed for financial services litigation in your
jurisdiction? If so, what are they and what are the
consequences of not abiding by them?
Unless otherwise contracted by the parties, there are no pre-trial
procedures to be followed for financial services litigation. If the
parties agree to some type of pre-trial procedures, non-compliance
with those procedures may give rise to contractual liability.
3.4 Are there any alternative dispute resolution (ADR)
regulations that apply to financial services disputes in
your jurisdiction? Are ADR clauses typically included
in financial services contracts, and is ADR commonly
used to resolve financial services disputes in your
jurisdiction?
Financial services disputes can be settled by any of the forms of
ADR provided for in Portuguese law: mediation; conciliation; and
arbitration. In particular, the CMVM provides a Conflict Mediation
Service aimed at mediating between the parties and resolving the
conflict. This service also seeks to protect non-institutional
investors as regards the activities of financial intermediaries,
independent consultants, and the management bodies of the
securities markets or issuers.
Nevertheless, except for arbitration, which is commonly agreed by
the parties to financial services contracts, the other forms of ADR
are not often used to resolve financial services disputes.
3.5 How are claims for negligent misstatement/mis-selling
dealt with in your jurisdiction?
In Portugal, claims for negligent misstatement/mis-selling are not
subject to any specific rules and are dealt on the same basis as any
other type of common civil claim, save for limitation periods (please
refer to question 2.2 above).
3.6 How have unfair terms in contracts been interpreted
in your jurisdiction? Are there any causes of action or
defences available specifically to consumers? How
broad is the definition of a ‘consumer’ in your
jurisdiction?
Under Portuguese law, “consumer” means any person, whether an
individual or a commercial entity, to whom goods or services are
provided, or to whom any rights are transferred, for non-
professional use by a person engaged, on a professional basis, in an
economic activity aimed at obtaining benefits.
Consumers benefit from greater protection by Portuguese law,
which is particularly strict on the information duties of the service
provider towards the consumers. For instance, under the Portuguese
Consumer Protection Law, whenever the information provided is
insufficient or unclear and compromises the proper use of the goods
or services, the consumer may withdraw from the contract within
seven working days of the date of receipt of the goods or of the
conclusion of the service contract. Moreover, under that same Law,
service providers are prevented from making use of any contractual
clauses that cause a significant imbalance to the detriment of the
consumer.
Consumers may also benefit from the Portuguese Standard
Contracts Act provisions, which provide that any clauses against
good faith are forbidden and prohibits a wide range of clauses that
could impact the balance of the contract. For example, the Act
prohibits clauses that: (i) exclude or limit a party’s contractual
liability, in cases of dolus or serious misconduct; (ii) grant the
proponent the exclusive right to interpret any clause of the contract;
(iii) exclude or limit in advance the possibility of requesting judicial
protection; or (iv) limit or change the obligations undertaken by the
proponent, among others, thus protecting the consumer from unfair
terms in standard contracts.
3.7 How is data protection/freedom of information dealt
with in financial services litigation? Can a financial
services customer access their personal data? How is
commercially sensitive or confidential information
dealt with in the context of discovery or disclosure?
Like most civil claims, financial services law suits are public, save
for injunctions or if otherwise determined by the court. This means
that these court files are publicly available not only to the parties,
but also to any attorney and to any third party that evidences a
relevant interest in accessing them. Customers can also access their
personal data, either by means of an in- or out-of-court request.
Portuguese law does not impose a duty of disclosure on the parties.
In turn, discovery is only permitted in restricted terms: for instance,
so-called fishing expeditions are not permitted and all requests for
documents must identify as much as possible the documents
specifically required and the facts intended to be proven with them.
In addition, Portuguese law provides for commercial and bank
secrecy. As a result, and as a rule, commercial or professional
secrecy can be invoked to oppose any discovery requests relating to
information covered by secrecy (the secrecy can, however, be lifted
by an appeal court or by the Supreme Court, at the opposing party’s
request and by balancing the interests at issue in the case).
4 Post Trial
4.1 Is there a right of appeal in financial services
disputes?
Judgments in financial services disputes are subject to appeal in the
same general terms as any other civil dispute: generally, and save for
specific circumstances in which the appeal is always allowed,
decisions of the first instance court may be appealed to the appeal
court when the value attributed to the proceedings exceeds EUR
5,000 and, in turn, the decisions of the appeal court may be appealed
to the Supreme Court when the value attributed to the proceedings
exceeds EUR 30,000.
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Only the appeal court decisions on the merits of the case or that
otherwise extinguish the proceedings – in relation to one or to all of
the defendants – can be subject to appeal to the Supreme Court.
Appeal to the Supreme Court is excluded, however, if the first
instance court judgment is upheld by the appeal court on broadly
similar grounds and without any dissenting opinions. Appeal court
decisions on procedural matters can only be subject to appeal to the
Supreme Court in very narrow circumstances. The Supreme Court
only decides on matters of law and, as a general rule, cannot review
a second instance judgment on the facts.
4.2 How does the court deal with costs in financial
services disputes?
There are no specific rules regarding costs in financial services
disputes. In Portugal, court costs are directly related to the value
attributed to the proceedings, which, in turn, depends on the
economic utility of the claim.
5 Cross-Border Issues
5.1 What issues typically arise in cross-border disputes
or investigations involving financial institutions and
how are they catered for in your jurisdiction?
The issues that typically arise in cross-border disputes relate to
determining the applicable law and competent jurisdiction, and
these are resolved under the general rules of private international
law. This type of issue is commonly prevented through jurisdiction
clauses and clauses on the applicable law. When it comes to the
investigations carried out by the regulatory bodies, the main
difficulties relate to establishing the jurisdiction of the Portuguese
and foreign body over the facts under investigation.
5.2 What is the general approach of the courts in your
jurisdiction to co-operating with foreign courts or
regulatory bodies or officials in financial services
disputes (including investigations)?
Portuguese procedural rules on co-operation with foreign entities
are somewhat rigid and only provide for co-operation (information
requests, any evidentiary production or any judiciary acts) by means
of rogatory letters addressed to foreign courts or entities and sent
through consular or diplomatic channels. Yet, Portugal is party to
some important treaties and conventions, especially in the EU
context, such as the Convention of 1 March 1954 on Civil Procedure
and the 1970 Evidence Convention. These international agreements
seek to strengthen and facilitate co-operation between the signatory
states and allow direct communication between their authorities and
other foreign individuals or entities.
In spite of the above, co-operation of Portuguese entities is
extremely lengthy (and the reverse is also true) which substantially
delays the progress and conclusion of law suits.
5.3 Is extra-territorial jurisdiction typically asserted in
your jurisdiction and, if so, in what circumstances?
Yes, it is common for Portuguese courts to decline jurisdiction over
financial services disputes. This happens usually in face of valid
jurisdiction clauses attributing jurisdiction to foreign courts (for
instance, Portuguese courts have recently declined jurisdiction over
several disputes related with standard form master agreements –
ISDA Master Agreements – entered into between a Portuguese and
a foreign party).
5.4 Are unilateral jurisdiction clauses valid and
enforceable in your jurisdiction?
No. Under Portuguese law, jurisdiction clauses are only binding if
agreed by both parties. Moreover, this type of clause must be based
on a serious interest of both parties or, at least, of one of the parties
and provided that it does not involve serious inconvenience to the
other party.
6 Regulated Bodies
6.1 What bodies, apart from the courts, regulate financial
services disputes in your jurisdiction?
In Portugal, only courts (and the forms of ADR referred to above)
can award compensation to customers or to the financial institutions
on financial services disputes. The Bank of Portugal and the
CMVM may, however, by their own motion or following a
customer’s complaint, inspect and assess financial institutions and
regulated services providers’ activity and/or conduct towards their
customers. They may then open administrative offence proceedings
that may result in the application of a fine to the financial institution.
6.2 What powers (investigative/inquisitorial/
enforcement/sanctions) do these regulatory bodies
have?
The Bank of Portugal and the CMVM have a wide range of
investigative and inquisitorial powers. In administrative offence
proceedings, the Bank of Portugal may search any locations and
seize any documents or other objects. Only searches and seizures in
homes and searches in lawyers’, auditors’ or medical offices require
the intervention of a judge. The Bank of Portugal may also order the
freezing of any securities. During the inspections, entities subject to
the supervision of the Bank of Portugal must give it unrestricted
access to their systems and files (including computer files) where
information relating to customers or transactions is stored.
In administrative offence proceedings, the CMVM may ask for the
handing over or proceed with the seizure of any documents, assets
or other objects relating to the infringement. It may also ask any
person or entity for all the clarifications and information needed for
the investigation in the proceedings under its competence. Once it
acknowledges any facts that may be considered a crime against the
securities or other financial instruments market, the CMVM may
also decide to open a preliminary investigation. In this
investigation, among other things, it can: demand or require any
items, documents and information from any person or entity; seize,
freeze or inspect any documents, assets or other objects possibly
related to the crime; and ask the competent authorities for the
disclosure of telephone records or of other means of data
transmission.
Both the Bank of Portugal and the CMVM may also impose
precautionary measures against the infringers. These include the
preventive suspension of the activities or functions carried out by
the infringer or subjecting the engagement in those
activities/functions to certain conditions (for instance, compliance
with some information duties), to ensure the markets and their
agents are safeguarded.
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These regulatory bodies may impose fines and/or ancillary
sanctions. The fines imposed by the Bank of Portugal may vary
between EUR 3,000 and EUR 5,000,000, depending on the
infringement and on the offender (whether it is an individual or
commercial entity). Furthermore, these fines may be increased if
the double of the economic benefit obtained by the offender exceeds
the limit of the applicable fine. The fines imposed by the CMVM
may vary between EUR 2,500 and EUR 5,000,000, depending on
the infringement and they may also be increased if the double of the
economic benefit obtained by the offender exceeds the limit of the
applicable fine. In both cases, the ancillary sanctions include the
loss of the economic benefit obtained from the infringement, the
publication of the administrative decision and a prohibition on
holding any positions in corporate bodies or management functions
of the entities subject to the supervision of the Bank of Portugal.
The Portuguese Securities Code and the Portuguese Banking Act
expressly provide that anyone who refuses to comply with the
legitimate orders of the Bank of Portugal or the CMVM, or creates
obstacles to their execution, commits the crime of qualified
disobedience. The same applies to those who fail to comply with,
obstruct or frustrate the execution of ancillary sanctions or
precautionary measures applied within administrative offence
proceedings.
6.3 Are the decisions of regulatory bodies binding on the
parties to a financial services dispute?
No. The decisions of the regulatory bodies are not binding on the
parties to a financial services dispute (nor on the court). In
litigation, courts are not bound by any regulatory decisions and can
freely assess the evidence produced by the parties (including
regulatory bodies’ decisions, which are only taken into account as
documentary evidence for litigation purposes). Although not
binding, the decisions of regulatory bodies may have persuasive
authority over the court.
6.4 What rights of appeal from regulatory decisions
exist?
The Bank of Portugal and the CMVM decisions that impose a fine
or an ancillary sanction, or that impose a precautionary measure, are
appealable to the Competition, Regulation and Supervision Court.
Decisions from this court may also be subject to appeal to the
Lisbon Appeal Court, although limited to the legal aspects of the
case. In some circumstances, interim decisions from regulatory
bodies may also be subject to appeal to the Competition, Regulation
and Supervision Court.
6.5 Are decisions of regulatory bodies publicly
accessible?
As a general rule, the decisions of the Bank of Portugal and of the
CMVM that hold the infringer has committed one or more serious
offences are disclosed, partially or in full, on the relevant regulatory
bodies’ websites. However, in certain cases – for example, the cases
in which the disclosure of the decisions could jeopardise the
stability or soundness of the financial markets, compromise an
ongoing criminal investigation or cause disproportionate damage to
the infringer – public disclosure may be excluded by the regulators.
7 Updates – Cases and Trends
7.1 Summarise any legislative developments in this area
expected in the coming year. Describe any practical
trends in your jurisdiction (e.g., has the financial
crisis impacted legislation? Has there been an
increase in the powers of regulatory bodies as a
reaction to the crisis? Has there been a change in the
amount and type of cases being brought by and
against financial service providers?).
The financial crisis undoubtedly had a serious impact on Portuguese
and EU legislation. In fact, such a deep crisis – along with the
development of the financial markets – made it necessary to adopt
legislation to safeguard the protection of investors and to protect the
stability of the financial markets.
The stability and soundness of the financial markets were pursued
through different prudential measures. These included strengthening
the quality of the capital of financial institutions (to support the risks
assumed by these entities), increasing liquidity levels, and lowering
financial leverage levels. They also included some significant
changes in the corporate governance of credit institutions and
financial companies. The recent Law no. 35/2018, in force since
August 2018, brought sweeping changes to the regulatory
framework for financial intermediary activity and to the negotiation
of financial instruments. These changes increased the powers of
intervention of the national authorities to prohibit or limit the
commercialisation, distribution or selling of certain financial
instruments. The changes also (i) increased the conduit duties of
financial intermediaries towards customers (information duties,
evaluation of the adequacy of products and services and customers’
categorisation), (ii) required a high level of experience and
qualifications for financial intermediaries’ employees and
collaborators, and (iii) introduced important changes to the duties of
organisation of financial intermediaries (product governance and
conflict-of-interest policies), among several others.
New legislation also sought to improve and reinforce the
supervision authorities’ powers, including with regard to resolution
measures, which were provided with a new set of tools to intervene
sufficiently earlier in an unsound or failing institution, to ensure the
continuity of the institution’s critical financial and economic
functions, while trying to minimise the impact of an institution’s
failure on the economy and financial system.
Although some years have passed, these new packages and
legislative measures are still a challenge to the Portuguese
authorities, financial institutions and services providers. They will
certainly be subject to further developments in the coming years,
including in relation to resolution measures, which are still “under
test” in the failure of some important institutions, as is the case of
Banco Espírito Santo, S.A. and Banif – Banco Internacional do
Funchal.
It is also beyond any doubt that the financial crisis led to a massive
increase in the litigation brought against financial institutions and
service providers (and against the regulatory bodies – the Bank of
Portugal and the CMVM – and even the Portuguese State) by
customers and investors. This litigation arose from the Banco
Espírito Santo, S.A. and Banif – Banco Internacional do Funchal
resolution measures, which caused losses to thousands of investors
in equity and in other financial instruments (commercial paper and
bonds) sold at the branches of these banks. As mentioned above,
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these law suits have a particular focus on the breach of financial
intermediaries’ duties of conduct or on the liability of regulatory
bodies or members of corporate bodies for the collapse of those
institutions.
7.2 On an international level, would your jurisdiction be
considered to be more financial institution- or
customer-friendly?
The Portuguese jurisdiction can be considered a customer-friendly
jurisdiction. Indeed, as one can see above, Portugal favours
increasing and reinforcing financial institutions’ duties of conduct
towards their customers over implementing or promoting financial
education policies and personal responsibility for investment
decisions made, which could certainly contribute to greater
efficiency in the financial markets and in the protection of the
investors themselves. Portuguese courts and regulatory bodies, in
turn, tend to look at customers as the most fragile party in a financial
relationship. Therefore, they adopt a more protective approach
towards them. On the other side of the same coin, these entities are
quite demanding in their assessment of whether the actions of
financial institutions (and services providers) are adequate and
comply with the applicable rules and regulations.
7.3 Please identify any significant cases regarding
financial services disputes during the past 12 months.
Please highlight the significance of the case(s), any
new or novel issues raised and what lessons can be
drawn from them.
As mentioned above, Portugal and its litigation system are still
suffering from the impact of the Banco Espírito Santo, S.A. and
Banif – Banco Internacional do Funchal resolution measures and,
thus, the main novel issues raised in financial litigation are closely
related to the effects of such measures and the delimitation of the
perimeter of the assets and liabilities transferred to the bridge banks,
as well as investors’ claims (mis-selling and otherwise).
In recent years, the Portuguese courts have also dealt with some
significant cases addressing the question of whether it was possible
to terminate or modify a swap agreement – which, by definition, is
aimed at managing a certain risk – based on the “abnormal change
in circumstances” provided for in the Portuguese Civil Law. An
example of this is the case of the abrupt fall in the rates of interest
indexed to Euribor following the 2008 financial crisis. In the past
year, the Supreme Court of Justice held that, although, by their
nature, interest rate swap agreements involve the risk of variation in
the reference rate, they are still covered by the “unforeseeable and
abnormal change in circumstances” concept and, therefore, can be
terminated or modified on the basis of an unforeseen abrupt fall in
the Euribor reference rates in the context of the 2008 financial crisis.
7.4 Have global economic changes caused any changes
to financial services litigation/regulation in your
jurisdiction?
Yes, global economic changes caused some changes to financial
services litigation and regulation in Portugal. Financial services
customers and investors, especially non-professional investors, are
increasingly more conscious about their rights, and about the duties
of financial institutions and services providers. Furthermore, the
Portuguese courts are now more experienced in and familiar with
financial services disputes and legislation than 10 years ago, leading
to a progressive increase of judges’ expertise in this area.
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PLMJ Portugal
Rita Samoreno Gomes
PLMJ
Av. Liberdade, 224
1250-148 Lisboa
Portugal
Tel: +351 213 197 300 Email: [email protected] URL: www.plmj.com/en
Rute Marques
PLMJ
Av. Liberdade, 224
1250-148 Lisboa
Portugal
Tel: +351 213 197 300 Email: [email protected] URL: www.plmj.com/en
Rita Samoreno Gomes is a partner in PLMJ’s Banking and Finance
Litigation team. She has over 15 years’ experience in advising clients
from the financial sector. Rita specialises in banking and financial
litigation and represents international clients in very complex litigation
and dispute resolution cases. She has been successfully involved in
several high-profile court cases, representing a wide range of major
international banks.
PLMJ is Portugal’s largest and most senior law firm with over 280 lawyers, including 61 partners. With over 50 years of history and experience, PLMJ
stands out as a full-service firm that offers a high degree of specialisation gained from working across industries, sectors and countries. The firm is
recognised for its unparalleled quality in advising Portuguese, international and foreign investment clients on a wide range of matters through its solid
network that includes partnerships with local, independent firms in Angola, Mozambique, China, Guinea-Bissau, São Tomé and Príncipe, Brazil and
Cape Verde. PLMJ also has specialised desks for France, Switzerland, Germany, the United Kingdom, Benelux, Scandinavia and Italy, to cover the
key markets for outbound and inbound investment in Portuguese-speaking countries.
With many years’ experience in working on the highest-profile financial litigation cases in Portugal and internationally, involving the largest banks
operating in Portugal, PLMJ is the only Portuguese law firm that has a team of litigation lawyers focused on representing clients from the banking
sector. This team can provide a response to the specific needs of the sector in litigation and risk management matters including: mis-selling;
construction financing and contractual liability; derivatives; liability for issuing prospectuses for public offers of securities; class actions; injunctions
and litigation involving consumer rights; pre-litigation and litigation relating to D&O liability insurance claims by directors of banking institutions; and
regulatory and administrative offence proceedings before the Bank of Portugal, the Portuguese Securities Market Commission (CMVM) and the
Competition, Regulation and Supervision Court.
Rute Marques is a senior associate in PLMJ’s Banking and Finance
Litigation team. She has almost 10 years’ experience in advising
clients from the financial sector. Rute specialises in banking and
financial litigation.
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Allen & Gledhill LLP Vincent Leow
Singapore
1 Bringing a Claim – Initial Considerations
1.1 What are the most common causes of actions taken
by or against financial institutions and service
providers in your jurisdiction?
The most common causes of action taken by or against financial
institutions and service providers in Singapore would be claims
under contract and/or tort. In relation to tort claims, they would
generally include misrepresentation and/or negligence.
1.2 What remedies are most likely to be awarded?
The most common remedy is an award of damages. The Singapore
Courts may, in certain cases, also award injunctive relief including
specific performance where it is just and equitable to do so.
1.3 Who has a right of action in financial services
disputes? Does it make a difference if the customer is
an individual or a commercial entity?
This generally depends on the nature of the claim in question.
Generally, in a claim for breach of contract, only the contracting
parties would have the right of action. Third parties (including
subsidiaries of the contracting parties) are generally excluded save
in certain limited circumstances such as if the contract expressly
provides that the third party can make a claim under the contract.
As for a claim in tort, this would depend on the tort in question. In
claims for negligence, the party commencing the action would have
to establish that he is owed a duty of care.
Whether the customer is an individual or a commercial entity does
not generally affect the right of action.
1.4 Is third-party funding available in financial services
litigation (crowdfunding, maintenance, champerty,
etc.)? Does litigation insurance operate in your
jurisdiction and, if so, what are the implications for
this?
Third-party funding is generally prohibited for contravening the
laws of maintenance and champerty. However, there is some
Singapore case law where the Courts have allowed limited litigation
funding where there is a legitimate interest by the funder in the
litigation.
There have also been recent amendments to Singapore law in 2017
to generally allow third-party funding for international arbitration
and related proceedings (third-party funding contracts for other
types of proceedings remain generally unavailable).
In particular, the 2017 amendments allowed third-party funding for
the following categories of proceedings:
(a) international arbitration proceedings;
(b) Court proceedings arising from or out of or in any way
connected with international arbitration proceedings;
(c) mediation proceedings arising out of or in any way connected
with international arbitration proceedings;
(d) application for the enforcement of an arbitration agreement,
including an application for a stay of Court proceedings; and
(e) proceedings for or in connection with the enforcement of an
arbitration award.
Litigation insurance (in particular D&O policies) is used in
Singapore, though this is still an emerging market. Litigation
insurance may be utilised as a strategic tool to help businesses
manage and mitigate litigation expenses.
1.5 Are class action law suits available in your
jurisdiction? If so, has this impacted financial
services litigation? Has there been an increase in
class action suits post the financial crisis?
Singapore law does not recognise class action law suits insofar as
this is conventionally referred to in the United States of America.
However, Singapore law provides for representative proceedings in
which a single person can commence a proceeding on behalf of
various persons who have the same interest in any proceedings.
2 Before Commencing Proceedings
2.1 What are the main barriers to financial service
litigation for customers? Are there exclusionary
clauses or duty defining clauses in customer
contracts which prevent customers from bringing a
case?
The main barriers to financial service litigation would include the
costs of litigation as well as the contractual limitations to liability.
For the latter, it is common for customer contracts to include clauses
to exclude or limit the financial institution’s/service provider’s
liability for any representation, statement, act or omission
(including negligence but excluding fraud). It is also common to
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include duty defining clauses to set out clearly the obligations that
are owed to the customer. The Singapore Courts will generally
uphold these clauses.
The contract may also expressly provide that the financial
institution/service provider has the discretion in certain matters, and
the Courts will generally not interfere in the exercise of such discretion
unless exercised in an arbitrary, capricious or irrational manner.
2.2 Is there a time limit within which financial services
disputes must be commenced? If so, is it different
depending on whether proceedings are brought
before a regulatory body or before the courts? Does
the commencement of a regulatory process ‘stop the
clock’?
The limitation period for claims in contract and tort is generally six
years, though this period can be extended in certain situations. For
example, in cases involving fraud, the limitation period generally only
starts to run from the time the fraud is actually discovered or could
have been discovered with reasonable diligence (whichever is earlier).
The limitation period, however, does not vary simply because the
proceedings are brought before a regulatory body instead of the
Courts. The commencement of a regulatory process does not
generally “stop the clock”.
2.3 Can parties in financial services litigation avail of
litigation and/or legal advice privilege? Are
investigations conducted by regulated bodies
considered ‘litigation’ in the context of privilege?
Parties in financial services litigation may generally avail
themselves of litigation and/or legal advice privilege if the
respective requirements are met.
Generally, legal advice privilege covers communications made to
the customer’s lawyers, documents which the customer’s lawyers
have become acquainted with, and the advice given to the customer.
Litigation privilege covers any document, provided that there was a
reasonable contemplation of litigation and the document was
created for the dominant purpose of litigation. Whether or not the
requirements are satisfied is largely a question of fact.
Investigations conducted by regulated bodies are not generally
considered “litigation” in the context of litigation privilege.
However, the legal advice given in the course of the investigation
can be protected under legal advice privilege.
2.4 Are standard form master agreements used in your
jurisdiction for financial institutions (for example, the
ISDA Master Agreement)? How are they treated?
Financial institutions in Singapore do use standard form master
agreements such as the ISDA Master Agreement for applicable
transactions. The terms of such agreements may, however, be varied
by consent. Generally, the Singapore Courts uphold such clauses
except where any vitiating factors apply (e.g. undue influence,
unconscionability).
2.5 Are there any non-contractual duties which are
binding on financial services entities (for example, a
particular fiduciary duty or a code of conduct)? Can
they be contracted out of?
Financial institutions (which include banks, finance companies,
insurance companies, etc.) are subject to various regulations
imposed by the regulator, namely the Monetary Authority of
Singapore. There are also self-imposed codes of conduct such as the
Association of Banks in Singapore Private Banking Code of
Conduct which do not have the force of law.
In regards to fiduciary obligations, under Singapore law, a fiduciary
relationship generally arises only if it falls within one of the
established categories of relationships or by contract.
Further, financial service entities (and their representatives) would
generally owe a tortious duty of care to their customers although it
is possible to limit the scope of this duty by contract save where
such limitation is excluded by statute (for example, under the Unfair
Contract Terms Act (UCTA)).
3 Progressing the Case
3.1 Is there a specialist court or specialist judges for
financial services litigation?
The Singapore High Court does not have a specialist Court for
hearing financial services litigation although financial services
litigation are generally placed before a specialist list of judges who
hear such matters.
Where the dispute is transnational in nature, it may be heard by the
Singapore International Commercial Court (SICC) where the
jurisdictional requirements are met. The SICC is a division of the
High Court and it has the jurisdiction to hear and try an action if: (a)
the claim is of an international and commercial nature; (b) the
parties have submitted to the SICC’s jurisdiction under a written
jurisdiction agreement; and (c) the parties do not seek any relief in
the form of a prerogative order. Additionally, it is also possible for
a case to be transferred from the High Court to the SICC.
3.2 Does the method of service of proceedings differ for
financial service litigation?
The method of service of proceedings does not differ for financial
service litigation. Generally, the claimant will have to serve the
Court documents personally on the defendant within the
jurisdiction, and leave of the Court is required if the defendant is
located outside Singapore.
3.3 Are there any specific pre-trial procedures that must
be followed for financial services litigation in your
jurisdiction? If so, what are they and what are the
consequences of not abiding by them?
The pre-trial procedures for financial services litigation are the same
as those for general civil disputes. There are no additional pre-trial
procedures that are specific to financial services litigation.
3.4 Are there any alternative dispute resolution (ADR)
regulations that apply to financial services disputes in
your jurisdiction? Are ADR clauses typically included
in financial services contracts, and is ADR commonly
used to resolve financial services disputes in your
jurisdiction?
There are no specific ADR regulations that apply to financial
services disputes. The general framework that applies to
commercial disputes would apply, and the general trend is that ADR
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clauses (including arbitration) are often included in financial
services contracts.
However, it is common for low value financial services disputes to
be resolved at the Financial Industry Disputes Resolution Centre
Ltd (FIDReC).
The FIDReC is an independent institution that was set up in 2005 to
provide an ADR scheme for most types of disputes for the banking,
insurance and financial sectors in Singapore. All regulated financial
institutions that have dealings with retail consumers are required to
subscribe as members of FIDReC.
Access to FIDReC is available to all consumers who are individuals
or sole-proprietors. Unless otherwise agreed, there is a limit of
S$100,000 per claim.
After a consumer files a complaint within FIDReC’s jurisdiction,
the parties are first encouraged to resolve the dispute by mediation.
In appropriate cases, FIDReC’s case manager mediates the dispute.
If the dispute cannot be settled by mediation, it will be heard and
adjudicated either by a single adjudicator or a panel of adjudicators
appointed by FIDReC.
The decision of the adjudicator or panel of adjudicators is final and
binding on the financial institution, but not on the consumer.
There is no appeal from the decision of the adjudicator or panel of
adjudicators. However, as the decision does not bind the consumer, the
consumer is entitled to reject the decision and pursue the complaint
through other avenues (e.g. by commencing fresh Court proceedings).
This option is, however, not available to financial institutions.
3.5 How are claims for negligent misstatement/mis-selling
dealt with in your jurisdiction?
Claims for negligent misstatement/mis-selling are generally dealt
with under the common law or under the Financial Advisers Act
(Cap 110, Rev. Ed. 2007).
Under the common law, a claim for negligent misstatement/mis-selling
may be framed as an action for contractual misrepresentation or
negligent misstatement. For a claim in contractual misrepresentation,
the claimant generally has to establish that the defendant made a false
statement of fact which induced the claimant to enter into the contract.
For a claim in negligent misstatement, the claimant generally has to
show that it is owed a duty of care by the defendant, and that the
defendant breached its duty to cause the claimant to suffer loss.
Separately, where the defendant is a licensed financial adviser, it
may be possible for the customer to make a claim for a breach of the
certain specified obligations owed under the Financial Advisers Act,
namely:
■ First, the financial adviser has an obligation to disclose all
material information relating to any designated investment
product that it recommends to every client and prospective
client.
■ Second, the financial adviser has an obligation not to make a
false or misleading statement in respect of any investment
product or financial advisory service. This obligation is
breached if the financial adviser does not care whether the
statement is true or false or it knows or ought reasonably to
have known that the statement is false or misleading.
■ Third, the financial adviser must not make any recommendation
with respect to an investment product to a person who may
reasonably be expected to rely on the recommendation if the
financial adviser does not have a reasonable basis for making
the recommendation.
3.6 How have unfair terms in contracts been interpreted
in your jurisdiction? Are there any causes of action or
defences available specifically to consumers? How
broad is the definition of a ‘consumer’ in your
jurisdiction?
Under the common law, where the contract in question is a standard
form contract, in the event that there is any ambiguity as to the
meaning of a term, the Court may interpret the term in a manner that
is against the interests of the drafter.
In addition to the common law, there are two statutes which may be
applicable. The first is the UCTA, which imposes limits on the
extent to which civil liability for breach of contract, negligence or
other breach of duty can be contracted out of. For example, the
UCTA prohibits the exclusion or restriction of liability for death or
personal injury resulting from negligence. Liability for all other
losses arising from negligence may be excluded or restricted only if
reasonable. Reasonableness is a question of fact which can be
answered only by having regard to all the circumstances.
The UCTA also provides specific protections for any person
“dealing as consumer”. A person “deals as consumer” if: (a) he
neither makes the contract in the course of a business nor holds
himself out as doing so; and (b) the other party does make the
contract in the course of a business. An example of such protection
can be found in section 4 of the UCTA, which provides that a person
dealing as consumer cannot be made to indemnify another person in
respect of liability that may be incurred by the other for negligence
or breach of contract, except insofar as the contract term is
reasonable. Again, reasonableness is a question of fact that has to be
determined by having regard to all the circumstances.
The second statute that may be applicable is the Consumer
Protection (Fair Trading) Act (CPFTA). The CPFTA was enacted to
protect consumers against unfair practices and to give them
additional rights in respect of goods and services (including
financial products and services) that do not conform to contract.
Where a consumer has entered into a transaction involving an unfair
practice, the CPFTA provides that the consumer may have a cause of
action against the supplier. Under the CPFTA, a “consumer” means
an individual who, otherwise than exclusively in the course of
business, (a) receives or has the right to receive goods or services
from a supplier, or (b) has a legal obligation to pay a supplier for
goods or services that have been or are to be supplied to another
individual.
3.7 How is data protection/freedom of information dealt
with in financial services litigation? Can a financial
services customer access their personal data? How is
commercially sensitive or confidential information
dealt with in the context of discovery or disclosure?
A financial services customer can access his/her personal data.
Generally, all organisations, including financial institutions, have an
obligation under the Personal Data Protection Act to provide, as
soon as reasonably possible, an individual’s personal data upon
request. However, there are exceptions. For example, organisations
are not required to provide the personal data if the request is
frivolous or vexatious. Organisations are also prohibited from
providing the personal data in certain situations, such as if the
provision of that personal data could reasonably be expected to
threaten the safety or physical or mental health of an individual
other than the individual who made the request.
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The fact that information is commercially sensitive or confidential is
not a ground for refusing to disclose the information in discovery.
That being said, the party to whom the information is disclosed
would provide an implied undertaking to the Court not to use or
disclose such information otherwise than in the proceedings in which
discovery is given, unless leave is granted by the Court to do so.
It is also possible to apply to the Court for an order that the Court file
or a specific document be sealed against access by third parties
where the Court file or document contains commercially sensitive
or confidential information.
4 Post Trial
4.1 Is there a right of appeal in financial services
disputes?
Generally speaking, where the dispute is heard before the State
Courts, there is an automatic right of appeal to the High Court where
the amount in dispute or the value of the subject-matter exceeds
S$50,000, and leave of Court is otherwise required.
Generally speaking, where the dispute is heard before the High
Court, there is an automatic right of appeal to the Court of Appeal
where the amount in dispute or the value of the subject-matter
exceeds S$250,000, and leave of Court is otherwise required.
4.2 How does the court deal with costs in financial
services disputes?
Costs are awarded at the discretion of the Court. Generally
speaking, the Court will normally make an award of costs in favour
of the successful party at litigation, though the Court may depart
from this principle depending on the circumstances of the case (e.g.
if the successful party acted unreasonably in the course of the
litigation).
The Court ultimately has the discretion to determine the quantum of
costs, though for certain cases (e.g. default judgment applications) it
would usually have regard to the guidelines set out in the Rules of
Court.
5 Cross-Border Issues
5.1 What issues typically arise in cross-border disputes
or investigations involving financial institutions and
how are they catered for in your jurisdiction?
In cross-border disputes, one issue that normally arises is the
jurisdiction in which the dispute should be heard. In this regard, the
inquiry starts with whether there is an applicable jurisdiction clause.
Where the parties had agreed to an exclusive jurisdiction clause, the
Singapore Court would generally enforce that clause. Similarly,
where the parties have agreed to a non-exclusive jurisdiction clause
(in favour of Singapore), the Singapore Courts would generally
enforce the clause unless there is strong cause for not doing so.
However, if there is no applicable jurisdiction clause, then the
Singapore Courts would determine which forum (Singapore or the
foreign jurisdiction) is the natural forum to hear the dispute, and the
inquiry involves (but is not limited to) a consideration of which
jurisdiction has the most real and substantial connection to the
dispute. This is largely a question of fact.
In cross-border investigations, two issues that often arise is the
difference in laws and the location of the documents/evidence.
With respect to the first issue, one key factor that arises is the
difference in the treatment of legal advice and/or litigation privilege
between jurisdictions. Hence, the financial institutions have to be
aware of these differences and address them at the commencement
of any investigation.
As for the latter issue, the location of the documents/evidence is
often located outside Singapore. In such instances, the ability of the
financial institution and/or regulator to obtain these
documents/evidence is often circumscribed by the laws of the
foreign jurisdictions.
Presently, Singapore regulators have taken various steps towards
strengthening international cooperation with their foreign
counterparts. For example, in November 2018, Singapore concluded
and exchanged cooperation agreements with China, including a
Financial Technology (FinTech) Cooperation Agreement with the
People’s Bank of China, and a Memorandum of Understanding
between the China Securities Regulatory Commission.
5.2 What is the general approach of the courts in your
jurisdiction to co-operating with foreign courts or
regulatory bodies or officials in financial services
disputes (including investigations)?
The Singapore Courts do not unilaterally cooperate with foreign
Courts or regulatory bodies or officials. Instead, the Singapore
Courts would hear applications that are normally brought either by
the party to the litigation or the Attorney General of Singapore on
behalf of the foreign entity, and make determinations according to
the law governing those applications.
5.3 Is extra-territorial jurisdiction typically asserted in
your jurisdiction and, if so, in what circumstances?
Generally, Singapore laws only apply on a territorial basis (namely,
over persons, property and acts within the jurisdiction).
However, there may be exceptions to this general principle where
the Singapore Parliament has enacted laws providing for
extraterritorial jurisdiction. The scope of such application turns on
the specific law in question.
Extraterritorial acts may, in certain cases, also constitute criminal
offences.
By way of an example, for offences relating to corruption, the
Prevention of Corruption Act provides for extraterritorial
jurisdiction insofar as Singapore citizens are concerned (i.e.
Singapore citizens may incur criminal liability in Singapore even
for acts committed outside Singapore), while the Securities and
Futures Act provides that extraterritoriality can be asserted if the act
in question, while committed outside Singapore, has a substantially
and reasonably foreseeable effect in Singapore.
5.4 Are unilateral jurisdiction clauses valid and
enforceable in your jurisdiction?
Unilateral jurisdiction clauses, in which only one party is bound to
sue in a particular forum while the other party is not so bound, are
valid and enforceable in Singapore. Generally, the Singapore
Courts will require strong cause before deciding not to enforce such
clauses.
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6 Regulated Bodies
6.1 What bodies, apart from the courts, regulate financial
services disputes in your jurisdiction?
There is generally no body that specifically regulates financial services
disputes in Singapore. However, the Monetary Authority of Singapore
is the primary regulator of financial institutions in Singapore and it will
address any complaints that are raised to it by consumers.
6.2 What powers (investigative/inquisitorial/
enforcement/sanctions) do these regulatory bodies
have?
The Monetary Authority of Singapore has extensive powers,
including investigation, over financial institutions that it regulates.
6.3 Are the decisions of regulatory bodies binding on the
parties to a financial services dispute?
This is not applicable in our jurisdiction.
6.4 What rights of appeal from regulatory decisions
exist?
This is not applicable in our jurisdiction.
6.5 Are decisions of regulatory bodies publicly
accessible?
This is not applicable in our jurisdiction.
7 Updates – Cases and Trends
7.1 Summarise any legislative developments in this area
expected in the coming year. Describe any practical
trends in your jurisdiction (e.g., has the financial
crisis impacted legislation? Has there been an
increase in the powers of regulatory bodies as a
reaction to the crisis? Has there been a change in the
amount and type of cases being brought by and
against financial service providers?).
The Singapore Securities and Futures Act was recently amended to
provide for additional regulatory scrutiny including the protection
of safeguards for protecting retail investors as well as the
enhancement of regulatory sanctions for market misconduct.
There are no significant changes in the claims brought by or against
financial service providers in the past year, although more matters
are now resolved by way of ADR methods.
For example, for the financial year ended 30 June 2018, FIDReC
received 1,251 complaints, out of which 47% were against life
insurers, 33% were against banks and finance companies, and 14%
were against general insurers. The balance were against individual
financial advisers and brokers or capital markets services licensees.
This should be compared to the previous financial year where
FIDReC received 893 complaints, out of which 32% were against
life insurers, 44% were against banks and finance companies and
16% against general insurers. The balance were against individual
financial advisers and brokers or capital markets services licensees.
7.2 On an international level, would your jurisdiction be
considered to be more financial institution- or
customer-friendly?
Singapore is generally viewed as being more financial institution-
friendly.
7.3 Please identify any significant cases regarding
financial services disputes during the past 12 months.
Please highlight the significance of the case(s), any
new or novel issues raised and what lessons can be
drawn from them.
We have set out below three cases regarding financial services
disputes that were decided in 2018.
The first case (Macquarie Bank Ltd v Graceland Industry Pte Ltd
[2018] 4 SLR 87) involved a dispute between a bank and its
customer in relation to a commodity swap agreement. This case was
heard in the SICC. The bank had claimed for losses suffered as a
result of the customer’s wrongful repudiation of the commodity
swap agreement. In its defence, the customer claimed that it was
under the belief that the swap would be effected by the bank as its
agent with another third party. Hence, the customer denied the
bank’s claim on the basis of mistake and that the bank was in breach
of its fiduciary duties. The Court rejected the customer’s arguments
and held that the contractual documentation clearly showed that the
transaction was being entered into between the bank and customer
as counterparties. The Court further held that the bank was not a
fiduciary and it was not in breach of any fiduciary duties that might
have existed. This case serves as a reminder that a fiduciary
relationship generally arises only if it falls within one of the
established categories of relationships or by contract.
The second case (AL Shams Global Ltd v BNP Paribas [2018]
SGHC 143) involved a customer’s claim against its bank for
refusing to accept incoming payments into its account. The High
Court rejected the customer’s claim after finding that the contract
between the parties conferred on the bank the discretion to decide
whether to accept any incoming payment, and this discretion was
subject only to the bank exercising such discretion in good faith and
not in an arbitrary, capricious or perverse manner. There was no
evidence that the bank exercised its discretion in an arbitrary,
capricious or perverse manner, or in bad faith. This case
demonstrates that the Courts would respect the terms of the contract
and a high threshold has to be crossed before a party can be said to
have exercised its contractual discretion improperly.
The last case (Vinmar Overseas (Singapore) Pte Ltd v PTT International Trading Pte Ltd [2018] SGCA 65) does not per se
involve a financial services dispute but it illustrates the Singapore
Courts’ approach towards giving effect to an exclusive jurisdiction
clause which is a relevant consideration in most cross-border financial
services disputes. This case involved the Court having to decide
whether to grant a stay of proceedings to give effect to an exclusive
jurisdiction clause in favour of a foreign jurisdiction, even where the
defendant is unable to raise any meritorious defence to the plaintiff’s
substantive claim (i.e. the plaintiff has an open-and-shut case). The
Singapore Court of Appeal departed from precedent and held that the
merits of any defence that the defendant intends to raise are irrelevant.
Hence, even if the plaintiff has an open-and-shut case on the merits,
this would not in itself be sufficient for the Court to allow the litigation
to proceed in Singapore. This decision highlights the extent to which
the Singapore Courts would respect party autonomy in relation to
jurisdiction clauses, and demonstrates the high threshold required for a
party to persuade the Court not to enforce such clauses.
Allen & Gledhill LLP Singapore
Sing
apor
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7.4 Have global economic changes caused any changes
to financial services litigation/regulation in your
jurisdiction?
The emergence of new technologies has resulted in a reshaping of
the economy and jobs. The financial services sector is no different
especially with the emergence of FinTech. FinTech such as cloud
computing, blockchain, artificial intelligence, etc. has begun to
transform the way in which financial services are produced,
distributed and consumed, and this has created new risks and
challenges. The Monetary Authority of Singapore has been taking
steps to regulate this area.
For example, the Monetary Authority of Singapore has proposed a
new Payment Services Bill (which is presently being considered by
the Singapore Parliament) to provide a more conducive
environment for innovation in payment services and ensure that
risks across payments value chains are mitigated.
The Monetary Authority of Singapore has also introduced the
FinTech Regulatory Sandbox to allow financial institutions more
leeway to experiment with innovative financial products or services
within a well-defined space and duration. Further, the Monetary
Authority of Singapore has been taking steps to highlight the risks
associated with digital token offerings and sought to regulate
intermediaries that provide virtual currency services.
Allen & Gledhill LLP Singapore
Vincent Leow
Allen & Gledhill LLP
One Marina Boulevard, #28-00
Singapore 018989
Singapore
Tel: +65 6890 7807 Email: [email protected] URL: www.allenandgledhill.com
Vincent’s practice focuses on banking, employment, and shareholder
disputes, as well as contentious investigations and inquiries. He has
substantial experience in acting for banking and financial institutions,
major corporates, and regulators on complex contentious matters. He
also regularly advises clients on regulatory and risk management
issues.
Vincent is consistently recognised for his expertise in the areas of dispute
resolution, and labour and employment by leading legal publications.
The Legal 500 Asia Pacific lists him as a “Leading Individual” and
describes Vincent as “one of the market leaders”, “responsive and reliable”, “highly experienced”, “understands commercial issues” and
providing “robust, thorough and sound advice”. He is described in
Benchmark Litigation Asia Pacific as “highly commercial and provides very good service”.
Vincent is presently on the faculty of the Singapore Institute of
Directors, and teaches at the Singapore Institute of Legal Education.
Allen & Gledhill is an award-winning full-service South-east Asian commercial law firm which provides legal services to a wide range of premier
clients, including local and multinational corporations and financial institutions. Established in 1902, the Firm is consistently ranked as one of the
market leaders in Singapore and South-east Asia, having been involved in a number of challenging, complex and significant deals, many of which
are first of its kind. The Firm’s reputation for high-quality advice is regularly affirmed by the strong rankings in leading publications, and by the various
awards and accolades it has received from independent commentators and clients. The Firm is consistently ranked band one in the highest number
of practice areas, and is one of the firms with the highest number of lawyers recognised as leading individuals. Over the years, the Firm has also
been named ‘Regional Law Firm of the Year’ and ‘SE Asia Law Firm of the Year’ by many prominent legal awards. With a growing network of
associate firms and offices, Allen & Gledhill is well-placed to advise clients on their business interests in Singapore and beyond, in particular, on
matters involving South-east Asia and the Asia region. Together with its associate firm, Rahmat Lim & Partners, in Malaysia and office in Myanmar,
Allen & Gledhill has over 450 lawyers in the region, making it one of the largest law firms in South-east Asia.
Chapter 22
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Hannes Snellman Attorneys Ltd
Andreas Johard
Björn Andersson
Sweden
1 Bringing a Claim – Initial Considerations
1.1 What are the most common causes of actions taken
by or against financial institutions and service
providers in your jurisdiction?
The most common claims brought by private customers against
financial institutions before the Swedish general courts involve
misleading prospectuses and negligent advice. Many cases also
derive from the mis-selling of financial products, such as credit
loans and investment products. Insurance intermediaries are also
increasingly facing claims concerning negligent advice.
As most disputes between institutional customers and financial
institutions are resolved through arbitration, it is difficult to draw
general conclusions but it would be fair to say that breach of
contract is a common cause for action between such parties; albeit it
is not possible to state any fact-specific circumstances that would
constitute breaches of contract that commonly occur.
1.2 What remedies are most likely to be awarded?
Remedies that can be awarded in financial services disputes are the
same as those which are awarded in any other dispute under
Swedish law. Remedies may include an order to pay damages
(including liquidated damages), a rescission of a contract or
injunctive relief. The most likely remedies to be awarded are
injunctive relief and damages.
1.3 Who has a right of action in financial services
disputes? Does it make a difference if the customer is
an individual or a commercial entity?
Anyone that has legal competence has a right of action in financial
services disputes before the general courts in Sweden. There is no
difference depending on the claimant being an individual or a
commercial entity.
Furthermore, consumers have a right to bring a claim before the
National Board for Consumer Disputes (“ARN”), which is an
alternative dispute resolution mechanism in Sweden. Decisions
issued by the ARN are not binding legally or formally, but are
recommendations on how the assessed disputes rightfully should be
resolved. Nonetheless, companies that do not follow the ARN’s
decisions are included on a public blacklist, which is why most
companies choose to comply with the recommended solution to the
dispute.
1.4 Is third-party funding available in financial services
litigation (crowdfunding, maintenance, champerty,
etc.)? Does litigation insurance operate in your
jurisdiction and, if so, what are the implications for
this?
There is no legislation or other rules that specifically regulate the
funding of claims. Third-party funding is not particularly common
in Sweden, but it has increased in recent years.
Most insurance policies in Sweden contain legal assistance
insurance, from which the insurance holder may receive
compensation up to a limited amount for their legal costs in
litigation, usually approximately EUR 20,000 excluding a
deductible, which arises after such insurance has come into force.
In Sweden, there are no available insurances for claimants for after
the event (“ATE”) litigation cost protection through policies issued
by underwriters on a case-by-case basis.
1.5 Are class action law suits available in your
jurisdiction? If so, has this impacted financial
services litigation? Has there been an increase in
class action suits post the financial crisis?
Class action law suits are available in Sweden and are regulated by the
Group Proceeding Act (2002:599) (“GPA”), according to which class
actions can be brought with regard to claims that can be raised in general
court in accordance with the Swedish Code of Judicial Procedures
(1942:740). Furthermore, in some cases, the ARN can review a dispute
between a group of consumers and a company as a class action. If such
a collective action is being examined by the ARN, the decision by the
ARN applies to all consumers with similar requirements, including those
who have not been in contact with the ARN.
Even though there has been an increase in class action suits since the
financial crisis, such actions are rare and have not impacted
financial services litigation in any particular way.
2 Before Commencing Proceedings
2.1 What are the main barriers to financial service
litigation for customers? Are there exclusionary
clauses or duty defining clauses in customer
contracts which prevent customers from bringing a
case?
Even though it should not be categorised as a barrier, claimants are
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required to pay an application fee in order to bring a claim before the
courts in Sweden. The application fee is either SEK 900 or SEK
2,800 (dependent on the size of the claim).
For a consumer to bring a claim before the ARN, the said claim must
exceed the sum of SEK 2,000.
There are no legal requirements or specific procedural rules for
financial services litigation that need to be met before an action may
be initiated. A claimant is also not required to have pre-action
communications with a respondent. However, pre-action
communications are customary in Sweden. Furthermore, if a
counsel – who is a member of the Swedish Bar Association – is
representing a claimant, such counsel has an ethical obligation to
notify the respondent and provide it with the opportunity to respond
to the claim prior to initiating legal action (save in situations where
there is an imminent danger for the claimant).
Financial institutions may not, in principle, limit their statutory
duties and liabilities towards consumers. In comparison, however,
financial institutions are free to limit their contractual liabilities
towards commercial customers to an extent. However, any
provisions in customer contracts that would be considered
unreasonably burdensome are not valid under Swedish law and may
be mitigated in accordance with Section 36 of the Swedish
Contracts Act (1915:218). For example, the Swedish courts would
very likely mitigate any contractual provision that limits the liability
for damages caused by intent or gross negligence.
2.2 Is there a time limit within which financial services
disputes must be commenced? If so, is it different
depending on whether proceedings are brought
before a regulatory body or before the courts? Does
the commencement of a regulatory process ‘stop the
clock’?
The general statute of limitation in Sweden is 10 years. However, the
claimant must notify the respondent of its damage in due time subsequent
to the event giving rise to the alleged damages. This includes the
commencement of a regulatory process. The statute of limitation does not
constitute a procedural hindrance from bringing a claim in court.
For filing a claim with the ARN, the consumer must have filed a
complaint within a year from the first notification to the financial
institution. If a matter is under a court’s review, the ARN will not
review the complaint.
2.3 Can parties in financial services litigation avail of
litigation and/or legal advice privilege? Are
investigations conducted by regulated bodies
considered ‘litigation’ in the context of privilege?
Documents sent to and from Swedish governmental agencies are
generally considered public. Both regulated bodies such as the
Financial Supervisory Authority (“FSA”) and the Swedish courts
are considered governmental agencies. In that sense, investigation
by government-regulated bodies and “litigation” is the same in
relation to privilege. Parties may request to restrict disclosure in
both processes. Business information or information regarding
business practices is generally deemed confidential and will not be
disclosed, even upon request.
2.4 Are standard form master agreements used in your
jurisdiction for financial institutions (for example, the
ISDA Master Agreement)? How are they treated?
Standard form master agreements, such as the ISDA Master
Agreement, are commonly used in Sweden. However, disputes in
relation to such agreements are uncommon, if not non-existent, in
Swedish courts since the agreements are normally governed by
English law and subject to the jurisdiction of English courts.
2.5 Are there any non-contractual duties which are
binding on financial services entities (for example, a
particular fiduciary duty or a code of conduct)? Can
they be contracted out of?
The concept of fiduciary duties is not formally recognised in
Swedish law. However, a party may have a duty of loyalty towards
the other party.
Many financial services entities have their own regulatory codes of
conduct, which are not legally binding per se, but an estimate on
how the entity is expected to act on the market.
3 Progressing the Case
3.1 Is there a specialist court or specialist judges for
financial services litigation?
There are no specialist courts or specialist judges for financial
services disputes in Sweden.
3.2 Does the method of service of proceedings differ for
financial service litigation?
No, it is the same proceeding as for any other dispute brought before
a general court.
3.3 Are there any specific pre-trial procedures that must
be followed for financial services litigation in your
jurisdiction? If so, what are they and what are the
consequences of not abiding by them?
No, there are no specific pre-trial procedures that must be followed
in Sweden.
3.4 Are there any alternative dispute resolution (ADR)
regulations that apply to financial services disputes in
your jurisdiction? Are ADR clauses typically included
in financial services contracts, and is ADR commonly
used to resolve financial services disputes in your
jurisdiction?
There are no specific ADR regulations that apply between
commercial parties. Parties may resolve the dispute through
arbitration, which is governed by the Swedish Arbitration Act
(1999:116) if seated in Sweden, or mediation, which is not governed
by any law. Arbitration is a common choice of dispute resolution
mechanism in contractual relationships between financial
institutions and commercial customers.
With respect to consumers, the Swedish Act on Alternative Dispute
Resolution in Consumer Relations (2015:671) regulates ADR for
consumer relations. ADR clauses are not commonly included in
financial services contracts to which consumers are a contractual
party.
However, as Swedish courts are obliged to try to resolve disputes
though settlement, mediation is common, with respect to both
commercial parties and consumers.
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Furthermore, the ARN is a commonly used ADR method for claims
brought by consumers. The ARN follows Swedish law and case law
when reviewing a complaint. Decisions by the ARN are not legally
binding upon the parties; they are recommendations for how the
assessed disputes should be resolved.
3.5 How are claims for negligent misstatement/mis-selling
dealt with in your jurisdiction?
A claim for negligent misstatement/mis-selling must be transformed
into a claim for damages or a declaratory claim. Such claims are
treated the same way as any other claim under Swedish law.
3.6 How have unfair terms in contracts been interpreted
in your jurisdiction? Are there any causes of action or
defences available specifically to consumers? How
broad is the definition of a ‘consumer’ in your
jurisdiction?
A consumer is defined in the Swedish Consumer Sales Act
(1990:932) (“SCSA”) as “a natural person acting primarily for non-business purposes”. The term is also defined in other legal acts
with a similar definition. In an economic context, the term
“Consumer” has a broader definition and is defined as “each person who is the final consumer of goods and services”.
Unfair terms in contracts can be mitigated in accordance with
Section 36 of the Swedish Contracts Act. Furthermore, unfair terms
in consumer relations are dealt with in the SCSA in such a way that
terms that are inferior than those stipulated in the SCSA are not
binding upon the consumer.
Only consumers may initiate an action with the ARN. Otherwise,
there are no specific remedies only available to consumers.
3.7 How is data protection/freedom of information dealt
with in financial services litigation? Can a financial
services customer access their personal data? How is
commercially sensitive or confidential information
dealt with in the context of discovery or disclosure?
According to article 15 of General Data Protection Regulation No.
2016/679 on the protection of natural persons with regard to the
processing of personal data and on the free movement of such data,
and repealing Directive 95/46/EC, a financial institution must, like
any other company, upon request confirm as to whether or not
personal data concerning a person is being processed, and when that
is the case give access to that personal data and relevant
information.
A financial institution must also, upon request from a customer,
supply the customer with proof that a transaction has been carried
out in accordance with the financial institution’s guidelines, as well
as copies of any loan agreement entered into by the financial
institution and the customer.
The right to obtain documents through discovery or disclosure in
Sweden is limited, and there is no such general obligation for the
parties to a dispute. However, a party can obtain a court order for
the other party or a third party to disclose an identified document or
group of documents. Should the requested document(s) contain,
e.g., trade secrets or other confidential information the document
must only be disclosed if exceptional reasons exist. Furthermore,
the courts have a possibility to decide that the information shall not
be publicly accessible.
4 Post Trial
4.1 Is there a right of appeal in financial services
disputes?
Yes. The right to appeal in financial services disputes is the same as
in any other dispute before the general courts. In order to have an
appeal determined, an appealing party needs to be granted a leave of
appeal by the higher instance court, regardless if it concerns an
appeal to the Appeal Court or to the Supreme Court.
Decisions by the ARN are not binding upon the parties and cannot
be appealed.
4.2 How does the court deal with costs in financial
services disputes?
The rules of the Swedish Code of Judicial Procedures apply for
court cases. Unless nothing is stipulated in the contract between the
parties, the general rule of “loser pays” applies.
5 Cross-Border Issues
5.1 What issues typically arise in cross-border disputes
or investigations involving financial institutions and
how are they catered for in your jurisdiction?
There is no difference in how the matters are handled when there is
a cross-border dispute other than ensuring that national legislation is
complied with in all countries. This naturally demands a lot of co-
operation between counsel.
If a claimant is domiciled in a country outside of the European
Economic Area (“EEA”), the respondent may order the claimant to
deposit a security for the costs of litigation. Generally, the
respondent must request such a deposit of security in connection
with its first writ, otherwise the right is considered forfeited.
5.2 What is the general approach of the courts in your
jurisdiction to co-operating with foreign courts or
regulatory bodies or officials in financial services
disputes (including investigations)?
The Swedish courts generally take a passive role in litigation and
neither co-operate with regulatory bodies or officials in financial
services, nor take part in investigations. The Swedish courts may
co-operate with foreign courts only on administrative matters, such
as the taking of evidence.
5.3 Is extra-territorial jurisdiction typically asserted in
your jurisdiction and, if so, in what circumstances?
In relation to financial services disputes, we are not aware of
Swedish courts ever asserting jurisdiction in connection with any
foreign event or exercising authority outside of the Swedish
territory.
Swedish courts may assist foreign courts with the taking of evidence
in civil matters, such as hearing witnesses, in accordance with the
applicable regulations. Likewise, Swedish courts may request the
assistance of foreign courts for the same purpose. If the requesting
and assisting courts are within the EU, Regulation (EC) No.
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1206/2001 on co-operation between the courts of the Member States
in the taking of evidence in civil or commercial matters is
applicable. Otherwise, the applicable legislations are the Taking of
Evidence for a Foreign Court Act (1946:816) and the Taking of
Evidence at a Foreign Court Act (1946:817). The former applies
when Swedish courts are the assisting courts, and the latter when the
Swedish courts are the requesting courts. The Convention of 18
March 1970 on the Taking of Evidence Abroad in Civil or
Commercial Matters (Hague Evidence Convention) is relevant in
relation to jurisdictions such as Mexico, Singapore and may be
relevant in relation to the UK after Brexit.
5.4 Are unilateral jurisdiction clauses valid and
enforceable in your jurisdiction?
In Swedish law, there are no statutory regulations against unilateral
jurisdiction clauses and therefore general contractual principles
apply. Depending on the specific case and if the parties are of equal
merit or not, a court can decide to mitigate such a clause.
6 Regulated Bodies
6.1 What bodies, apart from the courts, regulate financial
services disputes in your jurisdiction?
Only the Swedish courts handle financial services disputes. In
addition to the general courts and arbitration, the FSA supervises the
regulations on the financial market.
Even though it is not a regulatory body, the ARN can review
disputes between consumers and businesses (upon request by a
consumer). The decisions by the ARN are not legally binding, but
are generally complied with in order to avoid public blacklisting.
6.2 What powers (investigative/inquisitorial/
enforcement/sanctions) do these regulatory bodies
have?
The FSA has several rather extensive remedies at its disposal. The
FSA may, e.g., order a financial institution to supply documents and
order employees to submit to hearings, subject to a conditional fine.
The FSA may also revoke a financial institution’s licence to conduct
business in financial services and also order prohibitory injunctions.
Furthermore, the FSA may penalise a company that does not apply
for approval of a required prospectus in time. The FSA can also
apply for the liquidation of a company.
The ARN can only give recommendations and its decisions are not
legally binding. However, since the ARN keeps a record of whether
parties follow its recommendations and such information is publicly
accessible, many commercial parties follow the recommendations.
6.3 Are the decisions of regulatory bodies binding on the
parties to a financial services dispute?
Decisions of the FSA are binding on the parties. The ARN’s
recommendations are not binding on the parties.
6.4 What rights of appeal from regulatory decisions
exist?
The FSA is a government authority and its decisions may be
appealed to the general administrative courts in Sweden.
6.5 Are decisions of regulatory bodies publicly
accessible?
All documents submitted to, or sent from, Swedish governmental
agencies are, in general, public. A decision by the FSA or a
judgment by the general courts in Sweden is therefore, in general,
publicly accessible. However, the right to freedom of information
can be limited by secrecy.
7 Updates – Cases and Trends
7.1 Summarise any legislative developments in this area
expected in the coming year. Describe any practical
trends in your jurisdiction (e.g., has the financial
crisis impacted legislation? Has there been an
increase in the powers of regulatory bodies as a
reaction to the crisis? Has there been a change in the
amount and type of cases being brought by and
against financial service providers?).
Legislation in Sweden follows directives and regulations from the
EU. Regulation has changed and tightened following the financial
crisis.
Furthermore, subsequent to the financial crisis, the FSA
strengthened its operations and supervision. The FSA’s regulatory
powers have also increased.
Consumer rights in financial services agreements have increasingly
become a matter of focus. Subsequent to the financial crisis,
consumers have brought cases against banks and other financial
institutions, primarily concerning negligent advice and asset
management.
There has been an increase in the amount of cases following the
financial crisis, but the cases primarily concern board/management
liability or professional liability. In this context, there has been a
highly publicised case between the shareholders and the board of a
Swedish investment bank (HQ Investment Bank). The claim was
unsuccessful.
7.2 On an international level, would your jurisdiction be
considered to be more financial institution- or
customer-friendly?
Sweden would be considered financial institution-friendly but with
an extensive protection for consumers.
7.3 Please identify any significant cases regarding
financial services disputes during the past 12 months.
Please highlight the significance of the case(s), any
new or novel issues raised and what lessons can be
drawn from them.
As mentioned above (question 7.1), there recently has been some
cases of interest in the financial services sector, but such cases have
primarily been targeting the liability of boards and management of
companies as well as their advisors’ professional liability.
Furthermore, most disputes between commercial customers and
financial institutions are resolved by way of arbitration, which is why
significant cases usually do not become publicly known or available.
There are no recent significant arbitration cases concerning financial
services that we can address in this context.
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Andreas Johard
Hannes Snellman Attorneys Ltd
Kungsträdgårdsgatan 20, P.O. Box 7801
SE 103 96 Stockholm
Sweden
Tel: +46 760 000 027 Email: andreas.johard@
hannessnellman.com URL: www.hannessnellman.com
Björn Andersson
Hannes Snellman Attorneys Ltd
Kungsträdgårdsgatan 20, P.O. Box 7801
SE 103 96 Stockholm
Sweden
Tel: +46 760 000 038 Email: bjorn.andersson@
hannessnellman.com URL: www.hannessnellman.com
Andreas has extensive experience in both competition law and
transactions but is specialised in commercial dispute resolution and
specifically international arbitration. He is a member of the board of
Young Arbitrators Sweden (YAS). Andreas has acted as counsel in
both domestic and international arbitrations under, for example, the
SCC and the ICC rules, as well as ad hoc proceedings. Andreas has
further acted as counsel before domestic courts, including the Supreme
Court. Andreas’ dispute resolution experience encompasses, inter alia,
the fields of general commercial law, international sales, post M&A,
international investment law, complex disputes in the financial sector,
construction and energy. Furthermore, Andreas has acted several
times as counsel for states in complex setting-aside proceedings
regarding investments made under the Energy Charter Treaty (ECT).
Hannes Snellman’s dispute resolution practice has a long and proven track record of generating successful results for the Firm’s clients. We advise
clients in their business disputes, regulatory investigations and cases of insolvency. We have a wealth of experience in domestic and cross-border
litigation, ad hoc and administered arbitration proceedings as well as in mediation and other forms of alternative dispute resolution. With a focus on
complex international cases, we provide a dedicated team of experts who litigate and arbitrate disputes across different business sectors and under
a wide variety of jurisdictions in an efficient and results-oriented manner. On financial services disputes, we work closely with our market-leading
colleagues in our Banking & Finance team.
Björn is an experienced dispute resolution lawyer and advises clients
on all matters relating to commercial disputes, with a focus on Swedish
and international arbitration as well as litigation before the Swedish
district courts and the courts of appeal. He regularly assists clients
with risk analysis and risk management in connection with ongoing
disputes as well as for the prevention of future disputes.
Björn has acted as counsel for numerous Swedish and foreign clients
in both ad hoc and institutional arbitrations, for example under the
SCC’s rules for ordinary as well as expedited proceedings. He has
advised and represented clients in disputes relating to, inter alia,
construction, franchise, distribution and agency, IT, post M&A and
general commercial agreements.
As concerns financial services litigation before the Swedish general
courts, there is a limited supply of significant cases under the past 12
months. In general, as most court cases are filed by consumers, the
rights of consumers against financial institutions is a common
denominator and the cases often concern misleading prospectuses,
negligent advice and/or the mis-selling of financial products, such
as credit loans and investment products (see also question 1.1).
7.4 Have global economic changes caused any changes
to financial services litigation/regulation in your
jurisdiction?
Negative global economic changes also cause instability on the
Swedish market. This will give rise to financial services litigation
and regulation. This was especially evident subsequent to the
financial crisis in 2008. The type of changes in regulation that
follow from EU directives and regulations will not be expanded
upon in this context.
Hannes Snellman Attorneys Ltd Sweden
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Chapter 23
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Homburger
Roman Baechler
Reto Ferrari-Visca
Switzerland
1 Bringing a Claim – Initial Considerations
1.1 What are the most common causes of actions taken
by or against financial institutions and service
providers in your jurisdiction?
In Switzerland, financial institutions and services providers are most
often sued by their clients for performance of a contract or for
breach of contract. If a bank makes a payment to a third party
without valid authorisation by its customer, it will in principle
damage itself. The customer, on the other hand, retains his or her
contractual right to repayment of the assets deposited with the bank.
Bank customers therefore often claim that the bank has executed
certain transactions without a valid authorisation. In addition to
such deficiencies in legitimacy, bank customers also frequently
claim that the bank misadvised them or failed to warn them of
certain risks, thereby committing a breach of contract.
1.2 What remedies are most likely to be awarded?
If a customer’s claim is approved, the financial institutions and
services providers are usually ordered to pay a certain amount of
money or recover other assets.
1.3 Who has a right of action in financial services
disputes? Does it make a difference if the customer is
an individual or a commercial entity?
In principle, each contracting party has the right to bring an action
against the other contracting party (for untrue or misleading
statements in prospectuses or similar documents see question 3.5
below).
In cantons that have a commercial court, companies entered in the
commercial register must file claims against their bank with the
commercial court if the amount in dispute is over CHF 30,000. By
contrast, individuals have the choice as to whether they wish to
bring their action before the commercial court or the ordinary
district courts (Article 6 of the Code of Civil Procedure (CCP)). In
contrast to commercial entities, individual consumers also have the
right to bring an action at their own domicile (Article 32 of the
CCP).
1.4 Is third-party funding available in financial services
litigation (crowdfunding, maintenance, champerty,
etc.)? Does litigation insurance operate in your
jurisdiction and, if so, what are the implications for
this?
Third-party funding is generally permitted and available under
Swiss civil procedure law. In a recently published proposal for a
revision of the CCP, the Federal Council even suggested that the
courts should draw the attention of every plaintiff to this possibility.
Litigation insurance is likewise available and popular in
Switzerland. Typically, litigation insurance policies cover the
insured person’s attorney fees, court costs and a possible
compensation for the counterparty’s legal costs. Litigation
insurance thus lowers the hurdles for initiating a lawsuit.
Nevertheless, the well-insured Swiss are not known for their
particular litigiousness.
1.5 Are class action law suits available in your
jurisdiction? If so, has this impacted financial
services litigation? Has there been an increase in
class action suits post the financial crisis?
Actual class actions are not available in Switzerland. However,
pursuant to Article 71 of the CCP, two or more parties may jointly
bring an action or be sued jointly if their rights and duties result
from similar circumstances or legal grounds, and if each case is
subject to the same type of proceedings. In its recently published
proposal for a revision of the CCP, the Federal Council further
contemplated introducing a collective redress mechanism according
to which not-for-profit organisations would be able to bring claims
on behalf of their members if they have been authorised to do so in
a form that permits proof to be evidenced by text. Pursuant to
Article 89 of the CCP, such mechanism is currently only available
for requesting injunctive and declaratory relief concerning the
infringement of personality rights.
2 Before Commencing Proceedings
2.1 What are the main barriers to financial service
litigation for customers? Are there exclusionary
clauses or duty defining clauses in customer
contracts which prevent customers from bringing a
case?
Procedural costs are a significant barrier to financial services
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litigation for customers. Pursuant to Article 98 of the CCP, the
courts may require the plaintiff to make an advance payment for the
expected court costs. In financial services disputes, the plaintiff will
normally have to make such an advance payment. The amount to be
advanced depends on the court and the amount in dispute (e.g., for
an amount in dispute of CHF 1 million, the basic tariff for the court
costs in Zurich is CHF 30,750).
In addition, at the request of the respondent in ordinary proceedings,
the plaintiff may be required to provide security for the respondent’s
potential legal costs under certain conditions, in particular, if the
plaintiff has no domicile or registered office in Switzerland or in a
country that entered into a treaty with Switzerland excluding
security for party costs (Article 99 of the CCP). Therefore, Swiss
financial institutions and services providers often request a security
for their legal costs if the plaintiff is not based in Switzerland.
In its recently published proposal for a revision of the CCP, the
Federal Council suggests that the advance payment be limited to
half of the expected court costs.
In most agreements and general terms and conditions, Swiss
financial institutions and service providers use clauses meant to
limit their duty of care. Swiss banks (i.e., licensed financial
institutions), however, can generally only exclude liability for slight
negligence. In addition, courts may even nullify an exclusion of
liability for slight negligence at their own discretion (Article 100 of
the Swiss Code of Obligations (CO)).
2.2 Is there a time limit within which financial services
disputes must be commenced? If so, is it different
depending on whether proceedings are brought
before a regulatory body or before the courts? Does
the commencement of a regulatory process ‘stop the
clock’?
Pursuant to Swiss law, contractual claims generally become time-
barred after 10 years unless otherwise provided (Article 127 of the
CO).
The statute of limitations regarding the contractual obligation to
repay of the assets deposited with the bank does not commence as
long as the banking relationship exists. It becomes time-barred 10
years after the relationship was terminated (Federal Tribunal, case
no. 133 III 37). The statute of limitations of 10 years also applies to
the customer’s claim for reimbursement of retrocessions (Federal
Tribunal, case no. 4A_508/2016).
For interest on capital, the statute of limitations is five years (Article
128(1) of the CO).
The statutory limitation periods may be interrupted by initiating debt
enforcement proceedings, filing an application for reconciliation, or
submitting a statement of claim to a court (Article 135(2) of the CO).
However, the commencement of a regulatory process does not
interrupt the statutory limitation periods.
Swiss civil courts do not observe statutory limitation periods ex officio. Therefore, the respondent must raise the defence that the
claim has become time-barred.
2.3 Can parties in financial services litigation avail of
litigation and/or legal advice privilege? Are
investigations conducted by regulated bodies
considered ‘litigation’ in the context of privilege?
In Switzerland, attorney-client communication is protected by
attorney-client privilege. For the purpose of attorney-client
privilege, it is irrelevant when the communication took place or
where the records of such communication are located. However,
attorney-client privilege only applies if the communication between
a client and an attorney relates to the attorney’s typical professional
activity in the form of legal representation and legal advice. Not
covered by attorney-client privilege are activities with a commercial
focus (e.g., business advice, asset or real estate management, acting
as a board member or escrow agent).
According to the Federal Tribunal, a Swiss bank may not delegate
its obligations under Swiss anti-money laundering regulations to a
law firm and refer to attorney-client privilege. However, the Federal
Tribunal confirmed that parts of the investigation report that clearly
represent legal advice remain protected by attorney-client privilege
(Federal Tribunal, case no. 1B_85/2016). Due to the broad
language, which could be read as the abolition of attorney-client
privilege in the context of internal investigations and fact-findings
by attorneys, the decision met harsh and unanimous criticism from
Swiss attorneys and the legal doctrine.
In Switzerland, there is currently no legal privilege for in-house
counsels. However, in its recently published proposal for a revision
of the CCP, the Federal Council contemplated introducing legal
privilege for in-house counsels.
The Financial Market Supervisory Authority (FINMA) often
appoints law firms or attorneys to conduct audits at supervised
entities and persons (Article 36 of the Federal Act on the Swiss
Financial Market Supervisory Authority (FINMASA)). However,
the communication and work products of these lawyers are not
covered by attorney-client privilege because they are appointed by
FINMA and thus do not act as attorneys.
2.4 Are standard form master agreements used in your
jurisdiction for financial institutions (for example, the
ISDA Master Agreement)? How are they treated?
In Switzerland, financial institutions commonly use standard form
master agreements such as the ISDA Master Agreement for OTC
Derivatives Transactions, the Swiss Master Agreement for OTC
Derivatives Transactions or the Global Master Securities Lending
Agreement. These standard form master agreements are adapted in
a schedule to meet the specific needs of the contracting parties. The
individual transactions under this contractual basis are then
recorded in trading confirmations. Under Swiss law, standard form
master agreements and their schedules are treated as individually
negotiated contracts and not as general terms and conditions to
which specific rules on validity and interpretation would apply. It
should be noted, however, that only the Swiss Master Agreement for
OTC Derivatives Transactions is governed by Swiss law.
2.5 Are there any non-contractual duties which are
binding on financial services entities (for example, a
particular fiduciary duty or a code of conduct)? Can
they be contracted out of?
Pursuant to Article 11 of the Federal Act on Stock Exchanges and
Securities Trading (SESTA), Swiss securities dealers must observe
certain duties toward their clients (duty to provide information, duty
of due diligence and best execution, and duty of loyalty). These
duties may be specified in contractual agreements. However, terms
that abolish or contradict these duties are not valid.
Upon enactment of the Financial Services Act (FinSA) on January
1, 2020, all Swiss financial services providers will need to comply
with duties similar to those stipulated in the EU Markets in
Financial Instruments Directive (MiFID) and European Markets in
Financial Instruments Regulation (MiFIR). They include
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provisions regarding information duties, the assessment of the
appropriateness and suitability of investment advice given to clients,
documentation and rendering of accounts as well as transparency
and care in client orders.
3 Progressing the Case
3.1 Is there a specialist court or specialist judges for
financial services litigation?
There are no specialist courts for financial services litigation in
Switzerland. In four cantons (Aargau, Bern, St Gallen and Zurich),
however, specialised commercial courts act as first and sole
cantonal instances for commercial and corporate disputes (Article 6
of the CCP). Commercial courts employ specialised judges
(including specialists from the financial industry) to ensure that the
know-how and the experience needed for deciding each case is
available to the court.
3.2 Does the method of service of proceedings differ for
financial service litigation?
In Switzerland, procedural rules for financial services litigation do
not differ from other civil law litigation.
3.3 Are there any specific pre-trial procedures that must
be followed for financial services litigation in your
jurisdiction? If so, what are they and what are the
consequences of not abiding by them?
A financial services litigation is normally initiated by filing an
application for reconciliation with a cantonal justice of the peace
(Article 202 of the CCP). If no agreement is reached in the
reconciliation proceedings, the plaintiff is authorised to file an
action with the competent cantonal court of first instance (Article
209 of the CCP). The authorisation is valid for three months. If the
plaintiff files an action with the cantonal court of first instance
without a valid authorisation from the competent cantonal justice of
the peace, the cantonal court of first instance will reject the action.
In Aargau, Bern, St Gallen and Zurich, the plaintiff may directly file
an action with the commercial court without first going through
reconciliation proceedings (Article 198(f) of the CPC) if the claim is
considered a commercial litigation. If only the respondent is
registered in a commercial register, the plaintiff may choose
between the commercial court and the ordinary court (Articles 6 (2)
and 6 (3) of the CCP).
3.4 Are there any alternative dispute resolution (ADR)
regulations that apply to financial services disputes in
your jurisdiction? Are ADR clauses typically included
in financial services contracts, and is ADR commonly
used to resolve financial services disputes in your
jurisdiction?
There are provisions for mediation in Swiss civil procedural law
(Articles 213 et seqq. of the CCP) but there is no requirement or
expectation that the parties engage in mediation. However, most
court proceedings are preceded by reconciliation proceedings (see
question 3.3 above).
In general, ADR clauses are not included in financial services
contracts and thus ADR is not commonly used to resolve financial
services disputes in Switzerland.
FinSA, which will be enacted on January 1, 2020, will introduce the
principle that financial services disputes between clients and
financial services providers shall be resolved in mediation
proceedings before an ombudsman (Article 74 of FinSA).
However, mediation proceedings before an ombudsman will not be
mandatory. If the parties went through mediation proceedings, the
plaintiff may unilaterally abstain from initiating reconciliation
proceedings and directly file an action with the competent cantonal
court (Article 76 of FinSA).
3.5 How are claims for negligent misstatement/mis-selling
dealt with in your jurisdiction?
Pursuant to Article 752 of the CO, acquirers of shares, bonds or
other securities may bring an action against any person involved in
disseminating inaccurate, misleading or unlawful information in
issue prospectuses or similar statements. The plaintiff bears the
burden of proof for the violation of duty, the damage, causality and
negligence.
Apart from a prospectus liability suit, the plaintiff may invoke the
general remedies available under Swiss contract and tort law. A
person providing false or misleading information intentionally may
also become subject to criminal prosecution.
FinSA, which will be enacted on January 1, 2020, will introduce
various changes to the current Swiss prospectus regime. According
to the new provisions, wilful false statements or withholding
significant facts in a prospectus will be sanctioned with a fine of up
to CHF 500,000.
Mis-selling may constitute a breach of contract and a violation of
Article 11 of SESTA (see question 2.5 above). The plaintiff bears
the burden of proof for the violation of duty, the damage and
causality. Culpability is assumed, but the respondent may prove that
he or she was not at fault and thereby exclude liability.
3.6 How have unfair terms in contracts been interpreted
in your jurisdiction? Are there any causes of action or
defences available specifically to consumers? How
broad is the definition of a ‘consumer’ in your
jurisdiction?
If there is a clear discrepancy between performance and
consideration under a contract concluded as a result of one party’s
exploitation, the exploited party may declare within one year that he
or she will not honour the contract and demand restitution of any
performance already made (Article 21 of the CO). This provision
applies to both consumers and professionals. For professionals,
however, it is difficult to establish that they have been exploited.
Pursuant to Article 8 of the Unfair Competition Act (UCA), terms in
standardised agreements with consumers are unlawful if they create,
in a manner contrary to good faith, a considerable and unjustifiable
imbalance between contractual rights and obligations to the
disadvantage of the consumer. A consumer is an individual who acts
in the pursuit of his or her personal or domestic affairs. Therefore,
sophisticated and professional investors are not considered
consumers.
3.7 How is data protection/freedom of information dealt
with in financial services litigation? Can a financial
services customer access their personal data? How is
commercially sensitive or confidential information
dealt with in the context of discovery or disclosure?
Most contracts with Swiss financial institutions and services
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providers are at least partially subject to Swiss agency law (Articles
394 et seqq. of the CO). Pursuant to Article 400(1) of the CO, Swiss
financial institutions and services providers must give account of
their activities for the clients and return anything received as a result
of their activities. Therefore, clients have a right to obtain
information regarding their contractual relationship with their
counterparty (e.g., client profile, contracts, account statements,
correspondence, and documentation on client contacts). The client
may make the request for information at any time. However, this
right to obtain information generally does not cover commercially
sensitive or confidential information. In the absence of a specific
agreement, the client has to bear the costs for the provision of
information. The right to obtain information becomes time-barred
10 years after the contractual relationship has ended.
Pursuant to Article 8 of the Data Protection Act (DPA), Swiss
financial institutions and services providers must provide all
available personal data of a client in their data collection upon
request by the client. Article 8 of the DPA currently applies to both
individuals and legal entities. In general, Swiss financial
institutions and services providers must comply with such requests
in writing within 30 days. The request may be denied, restricted or
delayed under certain conditions (Article 9 of the DPA). The right
to obtain information based on Article 8 of the DPA is not subject to
any statute of limitation. However, Article 8 is not applicable if the
client has already initiated civil or criminal proceedings (Article
2(2)(c) of the DPA).
FinSA, which will be enacted on January 1, 2020, will introduce an
additional right to information for clients. Pursuant to the new
provisions, clients are at any time entitled to request a copy of their
dossier and any other documents relating to them, which the
financial service provider has produced in the course of the business
relationship. Swiss financial institutions and services providers
must comply with such requests in writing within 30 days and free
of charge. The right to obtain information becomes time-barred 10
years after the contractual relationship has ended.
4 Post Trial
4.1 Is there a right of appeal in financial services
disputes?
Decisions in financial services disputes may be appealed in the same
way as decisions in other civil law matters.
Decisions rendered by a cantonal court of first instance (district
court) may be appealed to the cantonal court of appeal within 30
days on grounds of incorrect establishment of the facts or incorrect
application of the law if the amount in dispute is at least CHF 10,000
(Articles 308 and 310 of the CCP). Judgments below this threshold
and procedural decisions may be appealed within 30 days (or 10
days in case of summary decisions and procedural orders) for
incorrect application of the law or obviously incorrect establishment
of the facts (Articles 319 and 320 of the CCP).
Decisions rendered by a cantonal court of appeal may be further
appealed to the Federal Tribunal if the amount in dispute is a least
CHF 15,000 (disputes relating to employment and tenant law) or
CHF 30,000 (any other disputes), respectively (Article 74 of the
Federal Tribunal Act (FTA)).
Judgments rendered by a commercial court may directly and
exclusively be appealed to the Federal Tribunal (Article 75 of the
FTA). The Federal Tribunal reviews cases appealed to it for legal
and gross factual errors (Articles 95 et seqq. of the FTA).
4.2 How does the court deal with costs in financial
services disputes?
There are no special rules regarding cost allocation for financial
services disputes in Switzerland.
As a rule, the losing party must bear the procedural costs (court
costs and party costs). If neither party has entirely prevailed, the
court will allocate the procedural costs in accordance with the
outcome of the case (Article 106 of the CCP). Under certain
conditions, the court may diverge from this general rule and allocate
the costs at its own discretion, in particular, if a party was caused to
litigate in good faith or if the allocation of the costs in accordance
with the outcome of the case would lead to an inequitable result
(Article 107 of the CCP).
In case of a settlement, the court usually allocates the procedural
costs according to the terms of the settlement agreement (Article
109 of the CCP).
Since each canton has its own tariff for the procedural costs (Article
97 of the CCP), the costs differ from canton to canton but
principally depend on the amount in dispute.
5 Cross-Border Issues
5.1 What issues typically arise in cross-border disputes
or investigations involving financial institutions and
how are they catered for in your jurisdiction?
The typical issue in cross-border disputes or investigations
involving financial institutions is the transfer of personal data to
foreign courts, regulators, or enforcement authorities.
Several legal provisions restrict disclosure of personal data to
foreign authorities; inter alia, the prohibition of unlawful activities
on behalf of a foreign state (Article 271 of the Criminal Code (CC)),
Swiss banking secrecy (Article 47 of the Banking Act (BA)), Swiss
data protection and labour laws. Additionally, contractual secrecy
obligations or confidentiality agreements may prevent the
disclosure of data.
Article 271 of the CC prohibits and sanctions activities on behalf of
a foreign state on Swiss territory unless the responsible
administrative body has granted an authorisation. Article 271 of the
CC protects Switzerland’s territorial sovereignty and aims at
preventing foreign states or parties from circumventing
international conventions on mutual legal assistance. In general,
Swiss-based financial institutions and individuals are thus required
to obtain an authorisation by the Swiss government if they intend to
disclose personal data to foreign authorities.
Pursuant to Article 47 of the BA, it is a crime to disclose confidential
information relating to current or former clients of a Swiss bank.
Swiss banking secrecy applies to all employees, agents and
representatives of Swiss banks, including outside counsel. A breach
of Swiss banking secrecy may not only trigger criminal sanctions
but also administrative measures or proceedings and civil liability.
The DPA requires, inter alia, that personal data only be processed
lawfully, in good faith and in a proportionate manner (Article 4 of
the DPA). In addition, the DPA provides that personal data may not
be disclosed to recipients outside of Switzerland if this seriously
endangers the privacy of the data subject (Article 6 of the DPA).
Such risk is presumed as a matter of statutory law if the country of
destination is lacking adequate data protection regulation. The
Swiss Data Protection Commissioner maintains a list of countries
that are deemed to have adequate data protection.
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5.2 What is the general approach of the courts in your
jurisdiction to co-operating with foreign courts or
regulatory bodies or officials in financial services
disputes (including investigations)?
As mentioned under question 5.1 above, it is a criminal act to
perform activities on behalf of a foreign state on Swiss territory
without an authorisation. Taking of evidence in Switzerland is
deemed to be in the sole purview of Swiss courts. For example,
private attorneys may not conduct depositions in Switzerland and
later on use them in a foreign litigation without having been
authorised to do so pursuant to the Hague Convention on the Taking
of Evidence Abroad in Civil or Commercial Matters (HEC).
According to the HEC, judicial authorities of another contracting
state may also request the competent Swiss authority, by means of a
letter of request, to obtain evidence. However, Switzerland made a
reservation that it will not execute letters of request issued for the
purpose of obtaining pre-trial discovery of documents as known in
common law countries if (i) the requested documents are not
directly and necessarily connected to the underlying proceedings
abroad, (ii) a party or third person is asked to indicate which
documents relating to the dispute are in its possession, or (iii) other
legitimate interests are endangered.
Consequently, Switzerland only provides judicial assistance for
foreign pre-trial discovery proceedings if the requesting party
describes the evidence specifically and the evidence is reasonably
connected to assertions made in the respective litigation (Federal
Tribunal, case no. 132 III 291).
In addition, according to case law of the Federal Tribunal, a bank
client must have been given the opportunity to take part in the
proceedings of the requesting foreign court if the bank is requested
to produce documents relating to that client. If the client’s right to
be heard was not respected, Switzerland will not comply with a
letter of request because this would violate fundamental principles
of Swiss law (Federal Tribunal, case no. 142 III 116).
Swiss financial institutions may transmit non-public information to
foreign financial market supervisory authorities if the prerequisites
for granting international administrative assistance are fulfilled.
However, the foreign institution must preserve business and Swiss
banking secrecy, data protection and employee rights (Article 42c of
FINMASA).
FINMA may transmit non-public information to foreign financial
market supervisory authorities only if (i) this information is used
exclusively to implement financial market law, and (ii) the
requesting authorities are bound by official or professional secrecy
(Article 42 of FINMASA). Foreign authorities whose activities
relate exclusively to criminal prosecution and taxation do not
qualify as financial market supervisory authorities.
5.3 Is extra-territorial jurisdiction typically asserted in
your jurisdiction and, if so, in what circumstances?
Extra-territorial jurisdiction is not typically asserted in Switzerland.
In Switzerland, jurisdiction is governed by Articles 9 et seqq. of the
CCP for domestic disputes, and by the Private International Law Act
(PILA) for international disputes unless an international treaty (e.g.,
Lugano Convention on Jurisdiction and the Recognition of
Judgments in Civil and Commercial Matters (LugC)) is applicable
(Article 1 of the PILA).
In general, in order to establish jurisdiction in Switzerland, either (i)
the respondent must have domicile or a registered office in
Switzerland, (ii) the parties must have agreed on a Swiss forum
based on a valid jurisdiction clause, or (iii) a Swiss forum is
applicable based on a legal provision for special matters (e.g.,
contract law or tort law).
5.4 Are unilateral jurisdiction clauses valid and
enforceable in your jurisdiction?
Swiss law generally recognises unilateral jurisdiction clauses as
long as they meet the applicable requirements for jurisdiction
agreements. A unilateral jurisdiction clause is valid, inter alia, if it
is based on the parties’ consent and relates to a particular legal
relationship (Article 17 of the CCP, Article 5 of the PILA and Article
23 of the LugC).
6 Regulated Bodies
6.1 What bodies, apart from the courts, regulate financial
services disputes in your jurisdiction?
FINMA is Switzerland’s independent financial-markets regulator.
FINMA’s main task is to supervise banks, insurance companies,
exchanges, securities dealers, collective investment schemes, and
their asset managers and fund management companies.
SIX Exchange Regulation AG (SIX Regulation) is an autonomous
and independent body within the SIX Group. It is responsible for
the supervision and enforcement of the applicable stock exchange
laws and rules at the trading venues of the SIX Group (SIX Swiss
Exchange Ltd, SIX Corporate Bonds Ltd and SIX Repo Ltd). SIX
Swiss Exchange Ltd is the leading stock exchange in Switzerland.
For certain administrative infractions, the competent administrative
authorities are in charge of the prosecution (Articles 13 and 357 of
the Criminal Procedure Code (CrimPC)). The Federal Department
of Finance (FDF) is responsible for prosecuting failures to notify
qualified shareholdings or omissions to file a suspicious activity
report to the Money Laundering Reporting Office Switzerland
(MROS).
Prosecution authorities (in particular, the Office of the Attorney
General at the federal level and cantonal prosecutors at the cantonal
level) assisted by the police are responsible for criminal proceedings
whenever a criminal act might have been committed (Articles 1 and
12 et seqq. of CrimPC). In criminal proceedings, persons who have
suffered damages may bring civil claims as a private plaintiff
(Articles 119 and 122 et seqq. of CrimPC).
The Swiss Banking Ombudsman is an independent mediator for
complaints raised by clients against banks based in Switzerland.
The mediation services of the Banking Ombudsman are free of
charge for the client. Mediation services will not be provided if
proceedings before a court have already been initiated. In 2017, the
Swiss Banking Ombudsman concluded 2,027 cases. 20% of the
cases are related to banking fees.
6.2 What powers (investigative/inquisitorial/
enforcement/sanctions) do these regulatory bodies
have?
FINMA has a wide set of enforcement tools (Articles 24a and 29 et seqq. of FINMASA). It may (i) demand that information and
documentation be provided, (ii) open formal administrative
proceedings against supervised entities and persons, (iii) appoint an
independent and qualified person to conduct audits, (iv) order
measures to restore compliance with the law, (v) issue a declaratory
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ruling if the supervised entities and persons have seriously violated
supervisory provisions, (vi) prohibit individuals from acting in a
management capacity or exercising a professional activity, (vii)
carry out the disgorgement of profits, and (viii) withdraw licences
and order the liquidation of financial institutions. However, FINMA
has no authority to impose any fines or other sanctions on
supervised entities and persons.
SIX Regulation may (i) appoint experts, and (ii) interrogate the
parties involved and third parties. In case of a violation, SIX
Regulation may impose the following sanctions: (i) reprimand; (ii)
fine of up to CHF 1 million (in cases of negligence) or CHF 10
million (in cases of wrongful intent); (iii) suspension of trading; (iv)
delisting or reallocation to a different regulatory standard; (v)
exclusion from further listings; and (vi) withdrawal of recognition.
The FDF and prosecution authorities, which have a wide range of
powers in order to gather evidence, may, inter alia, (i) demand that
information and documentation be provided, (ii) interview an
accused person, witnesses and other informants, (iii) conduct
inspections, (iv) appoint experts, and (v) conduct inspections. The
sanctions to be imposed depend on the violation or crime
committed.
The Swiss Banking Ombudsman only acts as an independent
mediator and thus has no powers. However, the Swiss Banking
Ombudsman is entitled to contact the Swiss bank in question and
obtain documentation and information from the bank if the bank
client has released the bank from Swiss bank secrecy towards the
Swiss Banking Ombudsman.
6.3 Are the decisions of regulatory bodies binding on the
parties to a financial services dispute?
As a general rule, civil courts form their opinion based on their free
assessment of the evidence taken (Article 157 of the CCP). This
rule also applies to financial services disputes. Therefore, decisions
of regulatory bodies are not binding for civil courts. However, civil
courts do not commonly differ from the facts established by the
regulatory bodies without good cause.
The recommendations of the Swiss Banking Ombudsman are not
binding. However, in the vast majority of the cases (96%), for
which the Swiss Banking Ombudsman recommended concessions
from the Swiss bank in question in 2017, the bank followed the
recommendation.
6.4 What rights of appeal from regulatory decisions
exist?
The decisions of FINMA may be appealed to the Federal
Administrative Court (Article 47(1)(c) of the Administrative
Procedure Act (APA)). The Federal Administrative Court’s decision
may be further appealed to the Federal Tribunal (Article 82 of the
FTA).
The decisions of SIX Regulation may be appealed to the Sanctions
Commission of the SIX Group. Depending on the sanction, the
Sanctions Commission’s decisions may be appealed either to an
independent appeal board or the court of arbitration.
The decisions of the FDF on administrative infractions may be
appealed to the Federal Criminal Court (Article 50(2) of
FINMASA). The Federal Criminal Court’s decisions may further
be appealed to the Federal Tribunal (Article 78 of the FTA).
Bank clients do not take part in proceedings of FINMA, SIX
Regulation and FDF and thus may not appeal decisions of these
regulatory bodies.
Since the Swiss Banking Ombudsman’s recommendations are non-
binding, there is no right of appeal.
6.5 Are decisions of regulatory bodies publicly
accessible?
The decisions of FINMA are not publicly accessible. However,
since 2015, FINMA has published an annual enforcement report. In
these reports, FINMA publishes anonymised summaries of the cases
processed and decided during the past year. The report also includes
references to court rulings and statistics on FINMA’s enforcement
activity.
SIX Regulation publishes the decisions that have become legally
enforceable on its website in anonymised form.
In general, the decisions of the EFD and prosecution authorities are
not published whereas the decisions of the courts of appeal are
published.
The recommendations of the Swiss Banking Ombudsman are not
publicly accessible. However, the Swiss Banking Ombudsman has
published around 300 anonymised case reports on its website. In
addition, the Swiss Banking Ombudsman publishes an annual
report, which also includes anonymised case reports.
7 Updates – Cases and Trends
7.1 Summarise any legislative developments in this area
expected in the coming year. Describe any practical
trends in your jurisdiction (e.g., has the financial
crisis impacted legislation? Has there been an
increase in the powers of regulatory bodies as a
reaction to the crisis? Has there been a change in the
amount and type of cases being brought by and
against financial service providers?).
In its recently published proposal for a revision of the CCP, the
Federal Council suggests several changes that will lower the
barriers for customers to litigate (e.g., reduction of advance
payments for court costs, new rules regarding the liquidation of
procedural costs, reconciliation hearings before commercial courts
and class settlements).
FinSA, which will be enacted on January 1, 2020, will introduce
several changes to the Swiss regulatory framework: (i) obligation
for foreign services providers to register if they intend to provide
services in Switzerland; (ii) client categorisation rules based on the
EU concept of professional and private clients; (iii) market conduct
rules (see question 2.5 above); (iv) uniform prospectus rules; and (v)
supervision of external asset managers by an independent
supervisory organisation approved and monitored by FINMA.
Following the financial crisis, the powers of neither FINMA nor the
FDF have been increased. Since the financial crisis, however, an
increase of proceedings and sanctions against individuals can be
observed.
7.2 On an international level, would your jurisdiction be
considered to be more financial institution- or
customer-friendly?
In general, the burden of proof with regard to a breach of contract,
the damage and causation lies with the customer as plaintiff.
Furthermore, cost barriers may prevent clients from filing an action
against financial institutions (see question 2.1 above). In this
respect, Switzerland is not very plaintiff-friendly.
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On the other hand, in particular at the district courts, judges show
sympathy and understanding for retail clients. In addition, the
requirements for the duty of care to be observed by Swiss banks
have become increasingly stricter.
7.3 Please identify any significant cases regarding
financial services disputes during the past 12 months.
Please highlight the significance of the case(s), any
new or novel issues raised and what lessons can be
drawn from them.
In a decision of January 29, 2018 (case no. 4A_54/2017), the
Federal Tribunal ruled that if a bank client cannot prove that the
bank advisor has recommended an investment, the court will assess
based on the circumstances whether or not the bank has assumed an
obligation to advise the client. In this case, the client was unable to
establish that the bank actually recommended the investment.
According to the Federal Tribunal, it was more likely that the client
wanted to invest on his or her own initiative. As a result, the Federal
Tribunal concluded that the bank had no special duty to provide
information or advice.
In a decision of April 16, 2018 (case no. 4A_586/2017), the Federal
Tribunal upheld the appeal of a private bank against a judgment of
the Zurich Commercial Court, as the bank client had not sufficiently
substantiated the asserted losses. According to the Federal Tribunal,
the client must prove the loss for each single investment. The client,
however, had improperly calculated the loss based on the difference
between the bank advisor’s statements, which did not include the
unauthorised investments, and the actual value of the securities
account.
In a decision of May 29, 2018 (case no. 4A_81/2018), the Federal
Tribunal held that when a bank fulfils its contractual obligations in
connection with the execution of payment orders, the bank client
must prove in the event of fraud that a third party has misused his or
her identity or means of communication. In this case, however, the
client was unable to establish that his or her email account had
actually been hacked.
In a decision of August 14, 2018 (case no. 6B_689/2016), the
Federal Tribunal confirmed the conviction of an external asset
manager for criminal breach of trust, as he had not informed his
clients about the receipt of retrocessions. According to the court, a
person who, in breach of contractual duties, does not inform his or
her client about retrocessions received in connection with activities
for this client, and thus causes the client to be unable to claim the
surrender of the payments, commits a criminal breach of trust.
7.4 Have global economic changes caused any changes
to financial services litigation/regulation in your
jurisdiction?
Following the financial crisis of 2008, various regulations in the
Swiss banking sector were tightened. For example, banks today
must meet higher capital requirements than before the crisis.
Moreover, as an indirect result of the financial crisis, Switzerland
has entered into several multilateral agreements that provide a basis
for an automatic exchange of information for tax purposes between
Switzerland and other states. Meanwhile, most Swiss banks have
also settled their dispute with the US regarding undeclared assets
and have generally adopted the strategy of only accepting correctly
taxed assets. Both the cooperation with the US authorities and the
adoption of the automatic exchange of information in tax matters
have led to a wave of lawsuits concerning data transfers abroad.
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Roman Baechler
Homburger
Prime Tower
Hardstrasse 201
8005 Zurich
Switzerland
Tel: +41 43 222 10 00 Email: [email protected] URL: www.homburger.ch
Reto Ferrari-Visca
Homburger
Prime Tower
Hardstrasse 201
8005 Zurich
Switzerland
Tel: +41 43 222 10 00 Email: [email protected] URL: www.homburger.ch
As a leading Swiss corporate law firm, Homburger advises and represents enterprises and entrepreneurs in all aspects of commercial law –
transactions, proceedings and complex cases in both a domestic and a global context. Homburger offers its clients legal advice, supports them
through negotiations, represents them before public authorities and in court, and protects their interests in administrative proceedings. Homburger’s
more than 150 lawyers are registered with the Bar Association of the Canton of Zurich and/or practise as tax advisors. Thanks to the teamwork of
experienced specialists, Homburger can offer comprehensive and professional advice in all key areas of commercial law. Homburger is particularly
proud of its dispute resolution team, which is one of the largest and most effective in Switzerland.
Roman Baechler studied law at the University of Zurich, from which he
graduated in 2002. After working as an academic assistant at the
University of Zurich and as a law clerk at the District Court of Zurich,
he obtained a doctorate in law in 2007. Starting in 2008, he worked as
a law clerk with special duties and deputy judge at the District Court of
Zurich and was admitted to the bar in Switzerland one year later. In
2010, he joined Homburger as an associate, and in 2014 he graduated
with a Master of Laws (LL.M.) from Columbia Law School. In 2019,
Roman Baechler became a partner at Homburger. He specialises in
domestic and international commercial litigation.
Reto Ferrari-Visca graduated from the University of Bern in 2009. He
later worked as a law clerk at the District Court of Thun and the
government of the district of Oberaargau. He was admitted to the bar
in Switzerland in 2012 and joined Homburger as an associate in the
same year. In 2016, he obtained a postgraduate diploma in Financial
Market Law from the University of Zurich. He specialises in domestic
and international litigation and administrative proceedings, as well as
in internal investigations and regulatory/compliance matters. His
practice also focuses on privacy and data protection law and he
regularly advises clients on cross-border privacy and data protection
issues. He is fluent in German and English and understands French
and Italian.
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Debevoise & Plimpton LLP
Matthew L. Biben
Mark P. Goodman
USA
1 Bringing a Claim – Initial Considerations
1.1 What are the most common causes of actions taken
by or against financial institutions and service
providers in your jurisdiction?
Common causes of action brought by and against financial
institutions can be organised into several broad categories.
The first category of claims is the sort of general business litigation
that all large corporations face: this includes employment and labour
disputes and suits with vendors for breach of contract.
The second category relates to litigation brought by or against
counterparties and investors, including consumers, borrowers, joint
venture partners, and shareholders, the most common forms of which
include suits for breach of fiduciary duty, shareholder derivative
claims, misrepresentation, negligence, breach of contract, statutory
claims under federal and state consumer protection laws (including
pursuant to “unfair or deceptive practices” or “UDAP” laws), fraud
and, for broker-dealers, suitability and failure to supervise claims.
Some of these lawsuits are brought as class actions. In the last 10
years, many actions were brought both by and against financial
institutions relating to alleged fraud, misrepresentation, and breach
of contract arising from mortgage securities, collateralised debt
obligations, and credit derivative products.
The third category involves civil and occasionally criminal cases
brought by government agencies, such as state attorneys general and
district attorneys acting under their respective state’s UDAP statute
and other laws, and federal agencies such as the Securities and
Exchange Commission (“SEC”), Consumer Financial Protection
Bureau (“CFPB”), Commodity Futures Trading Commission
(“CFTC”), Department of Housing and Urban Development
(“HUD”), and Department of Justice (“DOJ”), acting pursuant to
federal securities, banking, and consumer protection laws. In the
last 10 years, federal and state agencies were especially active in
bringing enforcement actions against financial institutions for
alleged wrongdoing relating to the financial crisis, particularly with
respect to the packaging, rating, marketing, and sale of mortgage
securities. In addition, regulators investigated and brought
enforcement actions relating to interest rate-fixing schemes (e.g.,
LIBOR), high-frequency trading, insider trading, share class
selection disclosures, mortgage default and foreclosure practices,
credit card collection practices, and cryptocurrencies.
Investigations and enforcement actions brought pursuant to the
Financial Institutions Reform, Recovery, and Enforcement Act
(“FIRREA”) and False Claims Act (“FCA”) have been particularly
common given the relatively long statutes of limitation applicable to
each and the breadth of financial services-related conduct they
cover, including consumer lending and securities.
1.2 What remedies are most likely to be awarded?
The most common remedies awarded in litigation involving financial
institutions are money damages, civil money penalties (including
fines), and equitable relief to restrain future violations and remedy the
effects of past violations. Regulatory agencies commonly seek
monetary penalties, restitution to injured private parties,
disgorgement of improper gains, cease-and-desist orders, and onerous
compliance plans that impose duties on the board of directors and
sometimes must be monitored by an independent third party.
1.3 Who has a right of action in financial services
disputes? Does it make a difference if the customer is
an individual or a commercial entity?
The availability of a cause of action will depend on the jurisdiction
and the nature of the alleged injury. Typically, anyone who suffers a
statutory, common law, or contractual injury will have standing to
bring suit. While the availability of a cause of action does not
typically turn on whether the customer is an individual or a
commercial entity, sophisticated entities may face a higher burden in
establishing certain elements of a cause of action or defence – e.g., the
detrimental reliance that is an element of fraud claims in many states.
Certain statutes create a right of action that can only be enforced by
government actors or agencies and not private parties. Other federal
and state laws contain, or have been interpreted to contain, a private
right of action authorising private parties to bring claims for breach
of regulatory duties. While the general rule of statutory
interpretation is that in the absence of express legislative intent,
duties imposed by statute or regulation may not form the basis for a
private right of action, courts have sometimes found that a private
right of action is “implied” in the text of the statute. For example,
courts have ruled that there is an implied private right of action to
enforce the anti-fraud provisions of the federal securities laws. The
scope of an implied right of action is construed narrowly.
1.4 Is third-party funding available in financial services
litigation (crowdfunding, maintenance, champerty,
etc.)? Does litigation insurance operate in your
jurisdiction and, if so, what are the implications for
this?
The doctrines of champerty and maintenance – which have
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historically operated to preclude third parties from encouraging or
funding lawsuits – are permitted in some states and prohibited or
abandoned in others. Where the champerty and maintenance
doctrines do not act as a bar, litigation finance has become an
increasingly important part of dispute resolution. Financing is far
more common for plaintiffs than defendants, but the defendant-side
market is developing. Many plaintiff-side lawyers also offer
alternative fee arrangements, such as contingency fees, which lower
the downside risk for plaintiffs and encourages litigation.
On the defendant side, most companies provide directors and
officers with liability insurance that covers litigation costs and
settlements that arise out of acts they perform on behalf of the
company. Such policies typically contain exclusions and
limitations, including for criminal or deliberately fraudulent
conduct.
1.5 Are class action law suits available in your
jurisdiction? If so, has this impacted financial
services litigation? Has there been an increase in
class action suits post the financial crisis?
Class action lawsuits are available in the United States and require:
that the members of the class be numerous; that there be common
questions of law or fact among the class members; that the class
representatives have claims typical of the class; and that those
representatives will fairly protect the class’ interest. The most
common class actions brought against financial services firms are
shareholder derivative actions, suits under federal and state
consumer protection laws (e.g., the Telephone Consumer Protection
Act, state UDAP statutes), and claims under federal and state
securities laws.
Immediately following the financial crisis, there was a significant
spike in the number of securities class action suits brought against
companies in the financial sector. Since 2010, new filings of such
class actions appear to have fallen back to pre-crisis levels.
In many cases, class actions are precluded by arbitration clauses in
consumer contracts. In July 2017, the CFPB promulgated a rule
aimed at limiting the ability of financial services providers to insert
such waivers into consumer contracts, but that rule was abrogated
by a federal statute passed in November 2017, so class action
waivers remain permissible for now.
The Class Action Fairness Act of 2005 expanded the ability of
financial services firms to remove class action lawsuits from state
court to federal court.
2 Before Commencing Proceedings
2.1 What are the main barriers to financial service
litigation for customers? Are there exclusionary
clauses or duty defining clauses in customer
contracts which prevent customers from bringing a
case?
Arbitration clauses in consumer contracts are one of the main
barriers to litigation for customers. The Federal Arbitration Act
(“FAA”) promotes the enforceability of arbitration clauses and
applies broadly to any “contract evidencing a transaction involving
commerce”. The FAA reflects a U.S. policy in favour of arbitration
and has been held to pre-empt state statutes limiting the
enforceability of arbitration clauses.
Other barriers to financial services litigation include liability
limitations, exclusions, or waivers incorporated into consumer
contracts. Liability waivers are generally enforced, except in cases
where the financial institution has engaged in wilful misconduct or
gross negligence.
Arbitration clauses and liability waivers will not be enforced if they
are unconscionable or if they contravene a mandatory statutory duty
or public policy. Demonstrating that a contractual provision is
unconscionable is an exceedingly high burden and requires a
showing that the clause is “fundamentally unfair or oppressive to
one of the bargaining parties”.
2.2 Is there a time limit within which financial services
disputes must be commenced? If so, is it different
depending on whether proceedings are brought
before a regulatory body or before the courts? Does
the commencement of a regulatory process ‘stop the
clock’?
Statutes of limitations differ depending on the underlying cause of
action. In New York, for example, claims for breach of contract and
fraud are subject to a six-year statute of limitations. In Delaware, a
recent law allows parties to contractually provide for a 20-year
statute of limitations for breach claims involving contracts valued at
more than $100,000.
Actions brought under the FIRREA – a broad civil anti-fraud statute
that subjects financial institutions to civil money penalties for
violating any one of a number of other federal statutes – are subject
to a 10-year statute of limitations. Claims pursued under the FCA
must be pursued either (1) six years from when the fraud was
committed, or (2) three years after the United States knew or should
have known about the material facts surrounding the fraud (but in no
event more than 10 years after the date on which the violation is
committed). Civil enforcement actions pursued by the SEC are
subject to the general five-year statute of limitations for government
actions seeking a “civil fine, penalty, or forfeiture”.
Claims for securities fraud pursued by the New York Attorney
General under the far-reaching Martin Act are subject to a three-year
statute of limitations.
When a federal or state government agency launches an
investigation, it is common practice for the company under
investigation to enter into an agreement to toll the applicable statute
of limitations. This can sometimes lead to prolonged investigations.
Refusing an agency’s request to sign a tolling agreement can be
interpreted by the regulator as an indicia of a lack of cooperation.
2.3 Can parties in financial services litigation avail of
litigation and/or legal advice privilege? Are
investigations conducted by regulated bodies
considered ‘litigation’ in the context of privilege?
The attorney-client privilege can be asserted to withhold documents
or information in financial services litigation. In the context of a
regulatory examination or investigation, certain federal agencies,
including the Federal Reserve, the Office of the Comptroller of the
Currency (“OCC”), the Federal Deposit Insurance Corporation
(“FDIC”), and the CFPB, have asserted their authority to compel
banking institutions to produce information that would otherwise be
covered by the attorney-client privilege. In addition, parties cannot
invoke the attorney-client privilege to withhold documents or
information in connection with an investigation by the U.S.
Congress.
U.S. jurisdictions differ over whether the voluntary disclosure of
attorney-client privileged material to a regulatory agency waives
privilege as to third parties, known as the selective waiver doctrine.
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A majority of U.S. jurisdictions hold that disclosure of a privileged
document to a government regulatory agency will destroy the
privilege as against third parties; the remaining jurisdictions take the
opposite view. The CFPB has specified in a rule that an institution
submitting information to the Bureau does not waive privilege with
respect to third parties.
2.4 Are standard form master agreements used in your
jurisdiction for financial institutions (for example, the
ISDA Master Agreement)? How are they treated?
Regulated entities in the United States typically document their
qualified financial contracts pursuant to ISDA Master Agreements
and master repurchase agreements. U.S. courts generally enforce
standard form master agreements, especially when the agreements
are between two sophisticated parties, such as financial institutions.
The ISDA Master Agreement has not been subject to much litigation
in the United States outside of the realm of bankruptcy proceedings.
2.5 Are there any non-contractual duties which are
binding on financial services entities (for example, a
particular fiduciary duty or a code of conduct)? Can
they be contracted out of?
Non-contractual duties that are binding on financial institutions
include duties imposed by the common law, such as fiduciary duties,
and by federal and state statutes.
Securities broker-dealers and financial advisors generally owe a
fiduciary duty to their clients. Fiduciary duties may also exist when
a financial services entity acts in an advisory capacity with a
customer. Corporations, and directors who serve on corporate
boards, have fiduciary duties to shareholders. When a corporation
enters the zone of insolvency, the directors also owe fiduciary duties
to creditors and must act in accordance with the creditors’ interests.
Delaware law allows corporate directors to contract out of part of
their duty of loyalty to the corporation, specifically with respect to
corporate opportunities.
Financial services entities are not subject to fiduciary duties when
they engage in arms-length transactions, such as traditional creditor-
debtor relationships or loan participation agreements.
Securities disclosure requirements (pursuant to the Securities Act of
1933, Securities Exchange Act of 1934, and the Investment
Advisors Act of 1940), disclosure requirements imposed by the
federal Truth in Lending Act (“TILA”) for consumer credit
products, and numerous state regulatory statutes establish duties
owed by a financial institution to its investors and customers. A
financial institution cannot contractually disclaim its statutory
liability.
The common law of most states imposes an implied duty of good
faith and fair dealing whenever there is a contractual relationship
between the parties. Because they are implied duties, courts
generally construe them very narrowly.
3 Progressing the Case
3.1 Is there a specialist court or specialist judges for
financial services litigation?
In the United States, civil litigation is brought either in federal court
or state court. Federal courts are courts of limited civil jurisdiction;
they will hear (1) civil cases involving issues arising under federal
law, and (2) civil cases where the amount in controversy exceeds
$75,000 and the parties are “diverse” from one other (meaning they
differ in state and/or nationality). State courts, by contrast, are
courts of general jurisdiction and do not impose subject-matter
restrictions on the civil cases they will hear.
In the federal court system, there are no specialist courts or judges
for financial services litigation. Federal administrative proceedings,
however, are overseen by administrative law judges who have
familiarity with specific regulatory topics; SEC administrative law
judges, for example, have expertise with respect to the federal
securities laws administered by the SEC. In addition, claims against
broker-dealers registered with the Financial Industry Regulatory
Authority (“FINRA”) can be brought before a FINRA arbitral panel,
composed of industry experts.
At the state level, some states, including New York, Florida, and
Illinois, have dedicated commercial courts established to hear cases
involving business transactions with financial institutions, among
other commercial entities. In New York, the Commercial Division
hears cases involving a wide range of financial services litigation,
including breach of contract or fiduciary duty, fraud, derivative
actions, commercial class actions, and statutory violations arising
out of business dealings. Claims generally must exceed a minimum
amount in controversy. Special civil procedures often apply in these
courts, such as shorter discovery timetables.
3.2 Does the method of service of proceedings differ for
financial service litigation?
Service methods do not vary by type of proceeding, but often vary
by court. It is critical to review the rules specific to the court or
district in which the litigation is taking place.
3.3 Are there any specific pre-trial procedures that must
be followed for financial services litigation in your
jurisdiction? If so, what are they and what are the
consequences of not abiding by them?
There are no pre-trial procedures that are unique to financial services
litigation; however, as discussed in question 3.2, it is important to
recognise that pre-trial procedures vary by court. For example, New
York’s Commercial Division imposes tight discovery limitations and
timetables and applies harsher sanctions for non-compliance.
With regard to regulatory enforcement actions and rulings, a party
may be required to exhaust administrative remedies before seeking
judicial review of an agency determination.
For derivative actions brought by shareholders, many state
corporations laws require that a pre-suit demand be made to the
board of directors before an action may be filed.
3.4 Are there any alternative dispute resolution (ADR)
regulations that apply to financial services disputes in
your jurisdiction? Are ADR clauses typically included
in financial services contracts, and is ADR commonly
used to resolve financial services disputes in your
jurisdiction?
The FAA promotes the enforceability of arbitration clauses and
applies broadly to any “contract evidencing a transaction involving
commerce”. The FAA reflects a U.S. policy in favour of arbitration
and has been held to pre-empt state statutes limiting the
enforceability of arbitration clauses. Arbitration of financial
services disputes is very common and many consumer contracts
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contain arbitration clauses. In 2015, the CFPB found that 53% of
the total credit card market included mandatory arbitration clauses
in their consumer contracts, and so did 44% of the checking account
market.
Certain self-regulatory organisations, such as FINRA, provide for
arbitration of disputes, even in the absence of a contractual
arbitration provision between the parties.
3.5 How are claims for negligent misstatement/mis-selling
dealt with in your jurisdiction?
Many state jurisdictions recognise common law causes of action for
negligent misrepresentation. A plaintiff suing for negligent
misrepresentation generally must show: (1) a misrepresentation; (2)
justifiable reliance; (3) causation; and (4) pecuniary loss. In addition
to the common law cause of action, many plaintiffs can seek
statutory remedies for negligent misrepresentation under state
consumer protection statutes.
3.6 How have unfair terms in contracts been interpreted
in your jurisdiction? Are there any causes of action or
defences available specifically to consumers? How
broad is the definition of a ‘consumer’ in your
jurisdiction?
Courts generally uphold contract terms even if they are the result of
a certain level of unequal bargaining power, although contract terms
that are unconscionable or contrary to public policy will not be
upheld. Unfair terms also can run afoul of federal and state UDAP
laws, which define unfair practices broadly.
Numerous federal and state UDAP and consumer protection statutes
grant a private right of action to consumers to bring suits relating to
violations of regulatory requirements and unfair or deceptive
business practices.
The term “consumer” is defined differently depending on the
jurisdiction and the context, but, in general, state definitions tend to
be broader than federal ones. For example, the Texas Deceptive
Trade Practices Act (Texas’ UDAP statute) defines “consumer” as
any “individual, partnership, corporation, this state, or a subdivision
or agency of this state who seeks or acquires by purchase or lease,
any goods or services”. On the other hand, the CFPB’s definition of
“consumer” varies from regulation to regulation, but is usually
restricted to natural persons, and often to only those individuals who
have purchased products or services from a particular company.
3.7 How is data protection/freedom of information dealt
with in financial services litigation? Can a financial
services customer access their personal data? How is
commercially sensitive or confidential information
dealt with in the context of discovery or disclosure?
Commercially sensitive and confidential information is not
presumptively protected from discovery in litigation. Most courts
will condition the disclosure of such material pursuant to a
protective order, which restricts the dissemination and use of the
material in several ways.
Many regulatory agencies that seek the production of large
quantities of financial data in connection with supervisory
examinations or investigations have put in place stringent data
security protections in recent years.
In the context of litigation, a customer can request disclosure of
personal data held by a financial services institution if the
information is relevant to the litigation or reasonably calculated to
lead to the discovery of admissible evidence. Most courts, including
all federal courts, require the redaction of certain personally
identifiable information, such as social security numbers, health
data, and bank account numbers, from all documents publicly filed
on the court’s docket.
Federal and state laws, such as the federal Freedom of Information
Act, grant members of the public, including the media, the
presumptive right to obtain documents submitted to federal and
state regulators. Under such laws, confidentiality may provide a
basis to resist disclosure, but a claim of confidentiality must be
made at the time of production to the government agency.
4 Post Trial
4.1 Is there a right of appeal in financial services
disputes?
There is a right to appeal decisions made by lower federal and state
courts to appeals courts. Parties also have a right to appeal a
decision by a federal or state administrative agency; typically, the
initial appeal is heard internally within the agency, and then the
party can file a petition for judicial review with the appropriate U.S.
Court of Appeals or state court.
Certain self-regulatory organisations also provide for a right of
appeal. For example, parties have the right to appeal decisions
made by FINRA hearing panels to FINRA’s National Adjudicatory
Council (“NAC”). Parties can further appeal the NAC’s
determination to the SEC and federal court.
4.2 How does the court deal with costs in financial
services disputes?
Consistent with the “American Rule”, each party is responsible for
its own attorney’s fees and litigation costs in civil litigation. Fee-
shifting statutes are the exception to the rule and are generally
applicable to public interest cases rather than financial services
litigation.
5 Cross-Border Issues
5.1 What issues typically arise in cross-border disputes
or investigations involving financial institutions and
how are they catered for in your jurisdiction?
Disputes over the recognition and enforcement of arbitration
provisions and arbitral awards typically arise in cross-border
litigation. In disputes between U.S. and foreign financial
institutions arising from contracts governed by U.S. law, arbitration
clauses are often upheld as valid and enforceable. With respect to
purely international disputes, outside of U.S. jurisdiction, U.S.
courts recognise and enforce international arbitral awards pursuant
to the U.S. being a signatory of the New York Convention.
With respect to the enforcement of foreign judgments in U.S. courts,
although there is no federal law governing the issue, federal courts
will apply relevant state law in determining whether to recognise
and enforce a foreign judgment. Most state laws recognise and
enforce foreign judgments and states that rely on common law to do
so base their decisions on international comity.
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Issues relating to extraterritorial jurisdiction and unilateral
jurisdiction clauses are also common in cross-border disputes. The
SEC is permitted to assert extraterritorial jurisdiction as long as
conduct substantially furthering the securities violation was
committed in the United States or conduct outside the United States
substantially affected the United States. Unilateral jurisdiction
clauses are usually recognised in U.S. courts and can be enforced
through a motion to transfer to the court chosen by the contractual
parties.
Cross-border disputes and investigations present complications
related to the discovery of evidence. U.S. courts allow for broad
discovery and one tool employed to collect evidence abroad is the
letter of request, known also as a letter rogatory, through which the
U.S. court can appeal to a foreign court for its assistance in
gathering evidence located in that country. Engaging in discovery
by letters rogatory can be a lengthy process, and such requests are
not always granted by foreign courts, which sometimes decide that
the discovery requests are overbroad.
In contrast to its broad approach to discovery, the United States
affords rigid protections to privileged attorney-client
communications and the right against self-incriminating testimony.
If a U.S. proceeding implicates a foreign privilege law, the U.S.
court commonly applies the “touch base” choice-of-law test to
determine which country has the strongest interest in whether the
communications should remain privileged or confidential. With
regard to the right against self-incrimination, the protection against
having to provide self-incriminating testimony generally applies in
a U.S. proceeding even if a foreign sovereign compelled the same
testimony in accordance with its law.
5.2 What is the general approach of the courts in your
jurisdiction to co-operating with foreign courts or
regulatory bodies or officials in financial services
disputes (including investigations)?
As addressed in question 5.1, U.S. courts cooperate with foreign
courts by means of letters of request (or letters rogatory), which seek
the assistance of foreign courts in: cross-border civil discovery;
enforcement of forum-selection clauses in parties’ contracts; and the
recognition and enforcement of foreign judgments under the policy
of international comity.
There continues to be high-level cooperation among U.S. and
foreign regulators of financial services entities to combat fraud and
ensure the safety and soundness of the financial sector. In 2012, for
example, the SEC and foreign regulatory bodies issued a joint
statement reflecting their shared commitment to cooperation on the
cross-border regulation of OTC derivatives.
In the current global economy, nationalist and protectionist
tendencies are increasing. As a result, there has been some retreat
from cooperation with regulatory bodies in the banking regulation
sector. National jurisdictions, including the United States, seem to
be increasingly focused on creating the optimal regulatory
environments for financial institutions based on the problems
occurring within their borders, rather than on global issues.
5.3 Is extra-territorial jurisdiction typically asserted in
your jurisdiction and, if so, in what circumstances?
The Supreme Court has ruled in decisions such as Morrison v. National Australia Bank Ltd. and Kiobel v. Royal Dutch Petroluem Co. that statutes are presumed not to create extraterritorial
jurisdiction in the absence of express legislative intent. The
presumption against extraterritoriality exists to preserve comity
among nations and prevent unintentional disputes between domestic
and foreign laws.
Nevertheless, some federal statutes expressly have extraterritorial
effect and are enforced pursuant to the exercise of extraterritorial
jurisdiction. The Dodd-Frank Act, for example, expressly permits
the SEC to bring actions against non-U.S. firms involved in
securities fraud where conduct substantially furthering the securities
violation was committed in the United States or conduct outside the
United States substantially affected the United States.
5.4 Are unilateral jurisdiction clauses valid and
enforceable in your jurisdiction?
Unilateral jurisdiction clauses, known as forum selection clauses in
the United States, are valid and enforceable in U.S. courts. If the
parties have a forum selection clause in their agreement, and one
party sues in an improper forum, the other party can move to
transfer the case by invoking the doctrine of forum non conveniens.
While both private and public factors are usually considered when
the court evaluates a motion to transfer, the U.S. Supreme Court has
ruled that courts should not unnecessarily depart from the parties’
expectations. However, in some states, unilateral clauses can be
held invalid on the grounds of mutual obligation or
unconscionability; a significant disparity in the parties’ bargaining
power is an important factor in evaluating such agreements.
6 Regulated Bodies
6.1 What bodies, apart from the courts, regulate financial
services disputes in your jurisdiction?
There are a number of federal, state, and independent regulatory
agencies and organisations that provide a forum for disputes
involving financial services firms. Federal regulatory agencies that
exercise supervisory and enforcement authority over financial
services entities, such as the OCC, Federal Reserve, FDIC, SEC,
CFPB, HUD, FTC, and CFTC, can bring enforcement actions
against financial services firms in federal district court or before
administrative law judges.
Generally, state regulatory agencies, which possess supervisory and
enforcement authority over state chartered banks and many other
financial services firms, may similarly bring an enforcement action
before an administrative panel or state court.
Certain self-regulatory organisations specific to the financial
services industry also provide forums for disputes involving
registered members. FINRA, for example, provides an arbitral
forum to resolve disputes between investors (whether or not
registered with FINRA) and registered brokerage firms and brokers.
FINRA itself may bring a complaint against a registered broker or
firm before a FINRA administrative panel composed of a FINRA
hearing officer and two industry experts.
Securities exchanges provide a forum for disputes involving listed
financial services firms. The New York Stock Exchange (“NYSE”),
for example, has authority to take disciplinary action against issuers
that violate its internal rules as well as federal securities laws on the
basis of internal referrals, investor complaints, examinations, and
referrals from the SEC. Proceedings are conducted before a hearing
panel consisting of industry members and a member of the NYSE
staff.
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Self-regulatory organisations, like FINRA and the NYSE, generally
only have authority to discipline registered members; they do not
have the power to bring enforcement actions against non-members.
6.2 What powers (investigative/inquisitorial/
enforcement/sanctions) do these regulatory bodies
have?
Generally, each federal, state, and self-regulatory agency has
supervisory and enforcement authority with respect to specific
products, services, or laws and regulations.
The federal prudential banking regulators – the OCC, Federal
Reserve, and FDIC – are responsible for monitoring and regulating
banks for safety and soundness and adequate capital. Each agency
possesses visitorial powers over the affairs of regulated banks and
enforcement authority with respect to violations of laws and
regulations and unsafe or unsound practices. To penalise
noncompliance, the OCC, Federal Reserve, and FDIC can impose
civil money penalties and injunctive penalties – such as
suspensions, cease-and-desist orders, and restitution for harmed
consumers.
Other federal agencies with jurisdiction over financial services
firms – such as the SEC and CFPB – also have broad supervisory
and enforcement powers, including subpoena power, the power to
conduct investigations, enforce noncompliance, and issue monetary
and injunctive sanctions.
State banking agencies have supervisory power over state chartered
banks, sharing this power with the FDIC with respect to such banks
that are not members of the Federal Reserve System. State banking
agencies may also enforce state laws, exercise subpoena power, and
issue penalties, although state agencies are pre-empted from
enforcing many state laws with respect to nationally chartered
banks. State securities regulators regulate investment advisors who
are not required to register with the SEC and enforce state securities
laws and regulations.
Self-regulatory organisations have more limited authority with
respect to their members. FINRA and the NYSE, for example, lack
subpoena power, although compliance with FINRA and NYSE
investigative demands is a requirement of continued membership.
FINRA and the NYSE can bring enforcement actions before their
own administrative panels to enforce violations of securities laws
and organisational rules and can impose sanctions. FINRA, for
example, can seek injunctive relief (including suspensions), fines
and penalties, and order restitution to harmed investors. The NYSE
has the authority to delist a financial services firm that is found to
not be in compliance with a rule or regulation.
6.3 Are the decisions of regulatory bodies binding on the
parties to a financial services dispute?
Yes, the decision of an administrative proceeding is binding on the
parties, although typically the parties have the right to appeal the
decision.
6.4 What rights of appeal from regulatory decisions
exist?
Most regulatory decisions are appealable. Decisions of federal
administrative law judges, whether at the SEC, CFPB, HUD, CFTC,
or other agency, are initially appealable to the agency itself and then
to the appropriate U.S. Court of Appeals. Decisions of state
regulatory agencies are generally appealable to state courts. In
appeals of administrative decisions, federal and state courts generally
grant substantial deference to the administrative panel’s factual
determinations, and less deference to any legal determinations,
except in cases where the legal determination is uniquely within the
agency’s expertise.
Appeals of the decisions of self-regulatory organisations follow a
similar path – with respect to FINRA and the NYSE, the decisions
must first be appealed internally, and then to the SEC, and then the
appropriate U.S. Court of Appeals.
6.5 Are decisions of regulatory bodies publicly
accessible?
Federal and state agencies typically make regulatory enforcement
decisions publicly accessible, usually on the agencies’ websites.
Many self-regulatory organisations, including FINRA and the
NYSE, also make the decisions of internal administrative
proceedings public on their websites.
7 Updates – Cases and Trends
7.1 Summarise any legislative developments in this area
expected in the coming year. Describe any practical
trends in your jurisdiction (e.g., has the financial
crisis impacted legislation? Has there been an
increase in the powers of regulatory bodies as a
reaction to the crisis? Has there been a change in the
amount and type of cases being brought by and
against financial service providers?).
In January of 2019, the Democratic Party assumed control of the
U.S. House of Representatives, leading to a split in party control of
Congress. Because of this split, it is unlikely that there will be any
major developments in federal law in the coming year.
Some state law developments are anticipated, however. California,
for instance, just enacted a new Consumer Privacy Act, which grants
consumers the right to request deletion of personal information
maintained by companies, including financial institutions, and
creates a private right of action when a consumer’s information is
subject to unauthorised access due to a company’s failure to
maintain reasonable privacy procedures. In addition, a number of
states, including New Jersey, are considering implementation of
their own fiduciary rules to replace the U.S. Department of Labor’s
fiduciary rule (requiring retirement planning advisors to act as
fiduciaries to their clients), which was recently rolled back.
There has been a considerable expansion in regulatory power since
the financial crisis. The CFPB, created in 2011 by the Dodd-Frank
Act, has already assessed billions of dollars in fines against financial
institutions, including a $1 billion fine against Wells Fargo in 2018.
Previously-existing regulatory agencies have been filing
enforcement actions at elevated rates in the years since the crisis.
The SEC has continually topped its own records for enforcement
actions and disgorgements, reaching 868 individual enforcement
actions in 2016. These numbers have not seen a particularly
significant drop-off in the last two years.
7.2 On an international level, would your jurisdiction be
considered to be more financial institution- or
customer-friendly?
The U.S. is consumer-friendly in some ways and financial
institution-friendly in others. Consumers are empowered under
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numerous statutory and common law causes of action to bring
lawsuits against financial institutions to vindicate their contractual,
statutory, and common law rights. There are numerous federal and
state consumer protection statutes that apply with respect to specific
types of financial products (e.g., mortgages, credit cards, consumer
loans, student loans, securities, etc.), most of which authorise
private parties to bring suits, including class actions. In addition,
financial institutions are regulated by a large number of federal and
state regulatory agencies, which sometimes take enforcement
actions to protect consumers and seek restitution for harmed
consumers.
The U.S. is also financial institution-friendly in some respects,
including the willingness of courts to uphold contract provisions
mandating arbitration or waiving the ability to participate in a class
action. Courts in the U.S. also offer a great deal of predictability,
allowing financial services institutions to plan around potential
future liability. Stable courts, informed and experienced judges, and
a meaningful body of case law and precedent in many areas of
financial services litigation provide an excellent framework for
corporate decision-making.
7.3 Please identify any significant cases regarding
financial services disputes during the past 12 months.
Please highlight the significance of the case(s), any
new or novel issues raised and what lessons can be
drawn from them.
In PHH Corp. v. Consumer Financial Protection Bureau, the U.S.
Court of Appeals for the D.C. Circuit upheld the constitutionality of
the CFPB’s organisational structure. The case was significant
because the CFPB is unique among federal agencies in being
managed by a single director who is removable by the President
only for cause. (Most other regulatory agencies are managed by
committees.) The current CFPB director, Kathy Kraninger, will
likely serve for the next five years and is expected to usher in further
deregulatory reforms at the agency.
A controversial issue in U.S. financial services litigation is whether
an arbitration clause permits class arbitration. Two circuit courts
recently ruled that courts possess the presumptive authority to
decide if class arbitration is permitted under an ambiguous
arbitration clause. These decisions demonstrate that if a financial
services entity does not expressly delegate the permissibility of
class arbitration to the arbitrator, the decision could instead be taken
up by a court.
New York’s highest court, in Schneiderman v. Credit Suisse Securities (USA) LLC, held that claims brought by the New York
Attorney General under the Martin Act, the state’s far-reaching
securities anti-fraud law, are subject to a three-year, rather than a
six-year, statute of limitations. The Martin Act bestows tremendous
power on the New York Attorney General, since only proof of a
material misstatement, and not intent or reliance by investors, is
required to demonstrate a securities violation.
7.4 Have global economic changes caused any changes
to financial services litigation/regulation in your
jurisdiction?
The expansion of the regulatory regime following the 2008 global
financial crisis has given considerable impetus to public and private
litigation against financial institutions. A large volume of private
litigation has followed on the heels of public enforcement efforts
and regulatory actions involving, for example, credit derivative
products that performed poorly during the global financial crisis,
leading to a number of large private settlements. The SEC, for
example, reports that its enforcement actions relating to the global
financial crisis have led to charges against 198 entities and
individuals, with penalties, disgorgement, interest and other
monetary charges totalling more than $3.76 billion.
Technological advances and the rise of FinTech have caused shifts
in enforcement focus at major U.S. federal regulators. The SEC has
indicated that its main enforcement priorities are cybersecurity,
cryptocurrency offerings, and a continued focus on the use of
technology and data analysis to generate and support investigations.
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Matthew L. Biben
Debevoise & Plimpton LLP
919 Third Avenue
New York, NY 10022
USA
Tel: +1 212 909 6606 Email: [email protected] URL: www.debevoise.com
Mark P. Goodman
Debevoise & Plimpton LLP
919 Third Avenue
New York, NY 10022
USA
Tel: +1 212 909 7253 Email: [email protected] URL: www.debevoise.com
Debevoise & Plimpton LLP is a premier law firm with market-leading practices, a global perspective and strong New York roots. Clients look to
Debevoise to bring a distinctively high degree of quality, intensity and creativity to resolve legal challenges effectively and cost-efficiently.
Deep partner commitment, industry experience and a strategic approach enable Debevoise to bring clear commercial judgment to every matter.
Debevoise draws on the strength of its culture and structure to deliver the best to every client through true collaboration.
Debevoise’s Litigation Department handles complex matters in courts in the United States, the United Kingdom, Hong Kong, France and elsewhere,
as well as before arbitration tribunals, agencies and administrative bodies worldwide. Areas of concentration include white-collar crime,
investigations, general commercial litigation, international dispute resolution, crisis management, intellectual property and media, cybersecurity and
data privacy, bankruptcy, insurance industry disputes, antitrust, securities litigation and product liability.
Matthew L. Biben is a Litigation Partner, Co-Leader of the firm’s
Banking Industry Group, and a member of the firm’s White Collar &
Regulatory Defense Group. His practice is focused on the expert
negotiations and litigation of complex and diverse issues, including
civil, regulatory and enforcement matters on behalf of both individuals
and organisations, with a concentration on matters related to financial
institutions and sensitive situations involving the government.
Mr. Biben has garnered extensive experience advising boards and
senior management through extensive enforcement and advisory
work. He routinely acts as counsel in internal investigations of both
domestic and international matters involving the DOJ, SEC, FRB,
OCC, CFPP, NYDFS, State Attorneys General and foreign regulators.
He is recommended by The Legal 500 US (2016) where he is
described as a “tenacious but balanced litigator”.
Mr. Biben received a B.S. from Cornell University and a J.D. from the
University of Pennsylvania Law School.
For over 10 years, Mr. Biben served as Executive Vice President and
General Counsel of JPMorgan Chase’s consumer businesses and
Executive Vice President and Deputy General Counsel of The Bank of
New York Mellon.
At Debevoise, he has advised Spanish, Canadian, French, Japanese,
Pakistani, English, Chinese, and German banks as well as all types of
U.S. banks, including universal, regional, super-regional, and local
U.S. banks.
Mark P. Goodman is the Co-Chair of the firm’s Commercial Litigation
Group, a senior member of its White Collar & Regulatory Defense
Group and spent six years as a member of the firm’s Management
Committee. He represents clients, including financial institutions, in a
broad variety of matters, with emphasis on complex civil litigation. Mr.
Goodman routinely advises corporate boards and board committees
and is a fellow of the American College of Trial Lawyers. From 1992 to
1995, Mr. Goodman served as an Assistant U.S. Attorney for the
Southern District of New York (Criminal Division). As a federal
prosecutor, he participated in and supervised numerous investigations
and prosecutions involving, among other crimes, securities fraud,
bank fraud, mail and wire fraud, and money laundering.
Mr. Goodman is a graduate of the New York University School of Law
and Sarah Lawrence College. Mr. Goodman is recommended by
Chambers USA, The Legal 500 US and IFLR Benchmark Litigation Guide.
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