Credit Suisse class action could force banks to clean up their act, says finance expert

The recent class actions filed against investment bank Credit Suisse send a strong message that companies with international importance must clean up their act, says a finance expert.

Tom Davey, Co-Founder and Director of Factor Risk Management, a global litigation finance company, believes the current lack of effective regulation leaves bondholders and shareholders "carrying the can".

Earlier this year, Credit Suisse and the U.S. Securities and Exchange Commission (SEC) became embroiled in a debate over the severity of reporting deficiencies that led the Swiss bank to delay its annual report.

Credit Suisse said in March it had postponed the annual filing after a "late call" with the regulator which raised questions about earlier financial statements.

However, correspondence published in the SEC's online database on Tuesday shows that agency staff first raised questions with Credit Suisse officials in July 2022.

The last-minute delay concerned analysts and sent Credit Suisse shares to near an all-time low.

Figures from Morningstar Direct show that more than $450m (£369m) was withdrawn from Credit Suisse's US and European-managed funds between 13 and 15 March, as retail and institutional investors pulled their money from the embattled lender.

Credit Suisse's chairman apologised to shareholders for bringing the 167-year-old lender to the brink of bankruptcy.

"I am truly sorry," Axel Lehmann said, addressing the final meeting of shareholders last week. "I apologise that we were no longer able to stem the loss of trust."

The collapse of the banking firm led the Swiss government to use an emergency law to push through a state-backed mega-merger of the Union Bank of Switzerland (UBS) and Credit Suisse, controversially sidelining the country's parliament in the process.

Switzerland's two parliamentary chambers voted to reject the government's 109 billion Swiss francs ($122.82 billion) in aid for the deal between the country's two biggest banks.

A recent Sotomo poll showed two-thirds of the population was against the UBS takeover of Credit Suisse, while a third of respondents were angry that emergency laws had been used to bypass parliament.

The collapse and subsequent merger of Credit Suisse with UBS has left them facing at least 6-class action lawsuits.

US investors claim that it overstated its prospects before last month's shares crash, while bondholders are also preparing a lawsuit over the write-down of the company's bonds, as they now face only receiving a fraction of their value before the UBS takeover.

According to Davey, the increased use of private criminal prosecutions as well as civil action against banks could force them to improve their entity management.

He said: "The greatest regulator of behaviour is the credible threat of paying compensation."

With the threat of legal action looming over the Swiss firm, shareholders lashed out at the board of directors and former management, including advisory firm Ethos, who in turn denounced the "greed and incompetence of the bank's managers."

"Shareholders have lost considerable amounts of money and thousands of jobs are on the line," the firm stated.

UBS reportedly plans to cut its current workforce by up to 30 per cent, which translates to approximately 36,000 positions worldwide, after completing its takeover of the troubled Swiss lender.

The two companies jointly employed over 120,000 people at the end of 2022, including 30 per cent of the total workforce in Switzerland.

While UBS said it will soon provide better clarity on the layoffs, the latest cutback surpasses the 9,000 layoffs announced by Credit Suisse last month.

Following the Swiss Firm's dramatic collapse, Silicon Valley Bank also teetered on bankruptcy after revealing it had a hole in its finances.

The demise of both banks is the biggest bank failure in the US since the financial crisis of 2008, leading to heightened demands for banks to face tougher regulations on their management of legal entity governance and compliance.

With this in mind, American President Joe Biden called on Congress to allow regulators to impose tougher penalties on the executives of failed banks, including clawing back pay and bonuses and making it easier to bar them from working in the industry again.

Biden said: "No one is above the law - and strengthening accountability is an important deterrent to prevent mismanagement in the future."

After the 2008 Financial Crisis and significant conduct failures such as the manipulation of the London Interbank Offered Rate, the UK government began to initiate reforms on entity management regulations, however, other countries have been slower to the punch.

What was once considered "housekeeping" must now be the focus of a cultural shift within organisations, according to Daniel Connell, Deloitte Global Leader for Legal Entity Management, to satisfy revenue authorities and meet expectations of transparency on a global scale.

In March 2022, the Securities and Exchange Commission (SEC) issued proposed rules that would require public companies to include extensive climate-related information in their registration statements and periodic reports.

Disclosure concerning climate-related risks and impacts, oversight and governance of climate-related risks, climate-related financial statement metrics, climate-related goals, and greenhouse gas emissions would become a legal requirement.

A report released on Wednesday revealed that the World's Biggest Banks Continued to Pour Billions into Fossil Fuel Expansion.

The 14th annual Banking on Climate Chaos report, endorsed by 624 organizations from 75 countries, showed that U.S. banks dominate fossil fuel financing, accounting for 28 per cent of all fossil fuel financing in 2022.

JPMorgan Chase remains the world's worst funder of climate chaos since the Paris Agreement. Citi, Wells Fargo, and Bank of America are still among the top 5 fossil financiers since 2016.

Lucie Pinson, executive director and founder of Reclaim Finance, said it is "business as usual" for most banks and investors who continue to support fossil fuel developers without any restrictions, despite their high-profile commitments to carbon neutrality.

Despite the recent turmoil in the banking industry, JPMorgan Chase reported a jump in first-quarter profits Friday alongside fellow banking giants Citigroup and Wells Fargo, reassuring investors and easing contagion fears.