By Sarfraz Thind
Group litigation remains very much the preserve of US funds even though failure to engage in class actions can leave billions in unclaimed settlements and compromise portfolio returns. A benchmark case against Royal Bank of Scotland may prove a watershed moment in for UK fund managers aiming to to enter the courts.
“In the US it’s a no-brainer to sue, but over there virtually every pension fund has an in-house lawyer. That’s not the case here.”
Robin Ellison
In April over a hundred institutional investors launched a compensation claim of up to £4bn against RBS putting securities class actions firmly in the spotlight. The case, likely to be one of the biggest of its kind in British history, is viewed as a watershed for future group action lawsuits in the UK.
“The Royal Bank of Scotland case is the first serious securities action in Britain,” says Pinsent Masons head of strategic development and iiTRA (the Institutional Investors Tort Recovery Association) chairman, Robin Ellison. “The case has also transformed public perception by including a mixture of private and institutional investors – showing that it’s not just fatcats suing fatcats.”
The shareholder group battling the case – which is being represented by law firm Bird & Bird – claims that the bank’s prospectus for a £15bn rights offering in April 2008 contained misstatements which led to material losses for shareholders when the bank’s share price plummeted following the financial crisis.
Locksley Ryan, spokesman for the shareholder group, says that the case was a last resort after shareholders found no answer for their claims from the Financial Services Authority and UK Treasury investigations into the bank in 2012. Given the time and effort in getting the litigation together, clearly the group feels it has a strong case. But the institutions involved have been reluctant to be named, says Ryan.
It is hardly surprising. While they may have a strong case, this kind of class action is not popular in the UK. So what is the problem? In reality the UK and Europe does not have a class action structure comparable to the kinds of big-ticket litigation seen in the US, where one party or often a group of parties may sue as a representative of a larger class, and can include absent or unidentified parties.
US class action cases often proceed on the basis of lawyers uncovering a potential claim to litigate on, finding claimants in the case and putting themselves forward as general representative. The cases are driven by lawyers who do not have to face potential huge administration costs. In the UK the costs can be prohibitive.
“In the US class action suits are primarily driven by litigators who operate on a contingency model and can take up to 30% or more of an award,” says Michael McNicholas, general counsel at Atlas Global Investment Management. “In a big products liability case, be it financial, pharma or consumer products, the consumer or investor may see very little money, however the lawyers can reap tens of millions in profits.”
Winner takes all
More importantly, the US has a ‘loser pays rule’, unlike in the UK where shared costs can be a big deterrent in proceeding with class action. The latter means that it is not financially viable for individual claimants to take cases forward on an individual basis, says McNicholas, who has been in consultation with institutions over bringing loss cases against banks.
Prior to the £4bn action, Stewarts Law instigated proceedings against RBS on behalf of 21 institutional investors for £140m prior to the £4bn case. Clive Zietman, head of commercial litigation at the firm, says the lack of opt-out clause means that UK firms face a lot of work in getting all the signatories involved in a huge case.
Getting all claimants involved in a group litigation in the UK formally signed up to the process, means that administration costs can be huge.
“In the US you have jury trials, much larger damages awards and an “opt-out” class action system that is nothing like the legal structures in this country,” says Zietman. “Moreover, there is no adverse costs regime. Class actions in the US are thus part of a very different system and a very different culture.”
Zietman says that the adverse costs regime has prevented many viable claims here. “ Anyone conducting litigation here needs to think long and hard about it, not least of all because of the costs consequences,” he says.
UK reforms
In January this year, the UK government drafted plans for reforming the UK private enforcement regime. The wide-ranging reforms controversially included the creation of a US-style opt-out collective action for competition law claims and the implementation of a “loser pays” policy. The proposals provoked a backlash from business groups and still remain on the table. Whether they will get passed remains an open question.
“Group actions in the financial services sphere have not really evolved over the last five years or so since the proposal to introduce a specific collective action procedure for financial services claims was dropped from the Financial Services Bill prior to the last general election,” says Simon Clarke, a partner at Herbert Smith Freehills, which is representing RBS in the current case.
So what about investor responsibility? Generally courts in the US and UK have been quite firm on refusing to imply any fiduciary duty on the part of asset managers unless it is explicitly stated or someone has imposed they will act as fiduciary.
Trust law
Dan Summerfield, co-head of responsible investment at Universities Superannuation Scheme (USS) which, with approximately £38bn in assets under management for nearly 400 participating employers, is the second largest private sector defined benefit pension scheme in the UK, says that client trust plays a big part in carrying out of legal duties for investors.
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