Financial Scandals: Stage Set for Battle of Biblical Proportions

In the wake of the Financial Conduct Authority imposing fines totalling £1.1bn on five banks- Citibank, HSBC, JPMorgan, the Royal Bank of Scotland and UBS- for attempted mass manipulation of foreign exchange rates, the prospect of group litigation in England and Wales has reared its head again.

This time however, the market has changed.

Contingency based funding has been introduced to redress the imbalance between individual claimants, corporates and institutional shareholders on one hand, and the big banks on the other.

The stage is set for a battle of biblical proportions.

Over the last couple of years we have seen the advent of damages based agreements (DBAs) and the emergence of third party litigation funding. DBAs are a means of funding a claim on a contingency basis.

Lawyers can enter into DBAs on a "no win – no fee" arrangement, but take a percentage of the damages recovered by their client if they win. Meanwhile third party litigation funding is where a third party agrees to fund the legal costs of the claim for a proportion of the damages recovered.

These alternative methods of financing a dispute have been viewed with suspicion amongst many financial institutions.

This is because contingency based funding is associated with US style class actions and the threat of mass speculative claims.

But this is only half of the story.

A number of significant differences exist between collective action in the US and England and Wales.

For example: a developed plaintiff bar in the US v. rare group litigation orders in this country; punitive and multiple damages in the US v. compensatory damages here; litigants pay their own costs in the US v the "loser pays the winner's costs" here; and trial by jury in the US v. trial by judge.

It is clear that whilst DBAs and third party funding is one big step in the direction of a class action system, we are still some way off becoming a class action jurisdiction.

The most recent analogy to US class actions in England and Wales has been the ongoing litigation against the Royal Bank of Scotland and Lloyds Banking Group.

RBS and Lloyds have been sued by their respective shareholder action groups for breaches of fiduciary and statutory duty under the Financial Services and Markets Act.

These groups are comprised of thousands of individual, corporate and institutional shareholders. Whilst the cost of defending both of these actions will, to a large extent, be indirectly footed by the taxpayer; both the Royal Bank of Scotland Shareholder Action Group – one of the claimants in the RBS litigation – and the Lloyds Action Now Group – the claimant in the Lloyds litigation – are taking advantage of alternative means of funding their respective claims and being bankrolled by third party funders.

However, the success of these actions – and their reliance on contingency funding – is in the short term a grey and untested area. As such, entities interested in entering into DBAs and third party funding will have to weigh up the potential benefits and risks.

There are three key benefits for individuals, corporates and institutional shareholders considering alternative litigation funding.

First DBAs and third party funding promote access to justice. This is not merely limited to individual claimants, but also for institutional claimants, including the hundreds of institutional shareholders in the RBS and Lloyds litigation.

Second, the costs of litigation are off the balance sheet, reducing financial risk and increasing cash flow. Third, they promote expert stakeholder interest in the matter – you have buy-in from specialist lawyers and third party funders.

On the other hand, there are numerous risks. DBAs are unproven, untested and the legislation that governs them is widely derided; whilst third party funding is not regulated by an independent body.

If DBAs and third party funding are combined with after-the-event insurance, parties may become more entrenched, less likely to settle and more inclined to pursue a speculative claim. Finally, whilst stakeholder interest can be beneficial – it may add complexity to the matter and dilute recovery for the overall claimant.

There is much to be welcomed about the introduction of DBAs and third party funding to England and Wales. However, institutional claimants should proceed with caution.

Contingency based litigation funding is a recent development and as such, everyone is still learning how it works. But with banks now being fined by regulators on a regular basis there is an inevitable demand, from lawyers and institutional clients alike, for law makers to act quickly and clarify the position.

Robert Campbell is a partner and James Wagner is an associate at Faegre Baker Daniels LLP