Getting in on the action

As some of the nation's leading banks have recently discovered, class actions are on the rise in the UK. What are the implications for financial services firms, and how do class actions in the UK compare to those taken in the US?

Class actions by investors are commonplace in the US: 78 were filed in the first half of 2014 alone, according to Cornerstone Research, which analyses the area. From Enron's false accounting to BP's Gulf of Mexico oil spill, US investors are eager to seek redress for losses they have suffered.

In the UK, securities class actions are much less common, in part due to its legal system. But recent actions against Royal Bank of Scotland and Lloyds Banking Group indicate that shareholders outside the US are becoming more willing to consider taking such action too.

The concept of class actions, also known as group-action litigation, is simple. A group of people team up to bring an action against someone - usually a company in the case of securities actions - with the aim of seeking redress for losses suffered. All members of the group, or class, must have the same potential claim as each other so that the courts will allow them to be considered together.
"Institutional investors are waking up to the fact that the US is not the only place where securities class actions can be successfully pursued" Acting together should reduce costs and relieve congestion in the legal process, as there is only one case to deal with. It should also increase the power of litigants by demonstrating that the issue has affected a wide range of people and organisations.

Mounting class actions is, however, much harder in the UK than in the US. Across the Atlantic, 'opt-out' actions are allowed, under which a case can be taken on behalf of a class of people even if they have not all signed up to the action; in the UK, litigants have to actively opt-in to participate. The US also encourages 'no-win, no-fee' litigation, which means plaintiffs do not have to be concerned about the risk and costs of failure.


Turning pointBut Noah Wortman, Chief Operations Officer, Americas at class action specialists Goal Group, thinks the UK "may be at a turning point". He points to the action being taken against Royal Bank of Scotland - which alleges that the bank misled investors about its financial position when it launched a £12bn rescue rights issue in 2008 - as "testing the water in the UK court system. It could clear the path for other investors to pursue [these] types of litigation in the UK".
78
The number of class actions filed in the US by investors in the first half of 2014*

£12bn
The size of the rescue rights issue launched by Royal Bank of Scotland in 2008

300+
The number of institutional shareholders Stewarts Law is acting for in a case against Tesco**

Sources:
*Cornerstone Research
**Stewarts Law

Indeed, that action has been followed by claims against directors and advisers of Lloyds, as well as some of its former executives, alleging that they breached their fiduciary duty with the acquisition of HBOS at the height of the financial crisis. Action is also being considered against Tesco following the disclosure of accounting irregularities at the retail group last year.

Gina Slotosch, Head of Global Custody Product Management at HSBC, says: "We think that UK and other global class actions will increase." She cites a number of reasons for this forecast: a recent US case - Morrison versus National Australia Bank - limited the ability of foreign investors to pursue action in US courts; growing media reporting of class actions is encouraging investors to participate in the hope of getting some compensation; and corporate governance requirements increasingly cite a responsibility to consider seeking redress.

Legal redressGoal Group's Wortman points out that the latest guidelines from the International Corporate Governance Network include a section recommending that investors consider seeking legal redress where appropriate, while the National Association of Pension Funds has produced guidelines on class actions for its members. "I see growing change amongst UK institutions generally, looking at class actions from a corporate governance standpoint," he notes.

The key advantage of joining class actions is financial: the prospect of getting some compensation for losses suffered, albeit that any financial gain is likely to be below the level of these losses.

Class actions have governance implications, signalling to the wider investment community that shareholders take their responsibilities seriously and are committed to acting in the interests of the ultimate beneficiaries of their funds, whether they are pensioners, ISA investors or their own shareholders.

Potential disadvantages There are, however, also potential disadvantages to consider before deciding whether to take action. The first is cost. While no-win, no-fee actions are not possible here, Wortman says there will usually be insurance after the event to cover the costs of unsuccessful actions. There may, however, be costs involved in administering claims, finding documents and so on, so investors must weigh up whether these costs will be justified by the potential gains; the smaller the shareholding, the more marginal these benefits will be.

Second is reputation risk. In the US opt-out system, investors can sit on the sidelines until the action is settled, then join in with the general class of plaintiffs; in the UK, investors are required to actively opt in and, as that becomes public, it could result in adverse media comment.

Third, any class action needs critical mass to justify the costs and to increase the chances of survival. Often, the legal firms leading class actions will establish shareholder groups and may offer web-based participation and information services.

Harcus Sinclair, which is running the Lloyds TSB action, has a dedicated website for information and registration. It has been granted a Group Litigation Order by the High Court and is asking individual shareholders interested in joining to sign up quickly to avoid prejudicing their right to claim. Stewarts Law, which is preparing a case against Tesco, is acting for more than 300 institutional shareholders.

Considerable debate The UK, inspired by EU regulations, is expected to allow opt-out actions in the UK, although it is still uncertain when this will come into effect. There is also considerable debate over whether securities class actions will be included in the opt-out provisions: the Government may be deterred by the huge potential cost of opt-out litigation over companies like Royal Bank of Scotland, which are owned by the taxpayer.

On the EU regulations, Slotosch says: "Our information is that the UK Government is looking to introduce an opt-out option, similar but not equivalent to that in the US. If it does, that would lead to an increase in class actions as the costs of actions would fall and the risks to investors participating would decrease."

Whatever the outcome of these negotiations, class actions are likely to become increasingly common in the UK. Wortman concludes: "Institutional investors, especially those in the UK, are waking up to the fact that the US is not the only place where securities class actions can be successfully pursued."
Published: 03 Feb 2015
Categories:
  • Wealth Management
  • Compliance, Regulation & Risk
  • The Review
  • Features
Tags:
  • integrity and ethics
  • Finance
  • class actions
  • banking standards

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