The London securities litigation landscape has been evolving rapidly. A growing number of claims under ss 90 and 90A of the Financial Services and Markets Act 2000 (the “FSMA”) are progressing through the English courts, often arising from alleged failures in public company disclosure following accounting irregularities, instances of corruption, compliance failures, or other regulatory issues.
For insurers, these developments are often viewed through the lens of risk. FSMA claims may give rise to substantial defence costs and exposure under financial lines policies, particularly directors and officers (“D&O”) cover. Listed insurers may also find themselves on the receiving end of securities claims. Yet that perspective captures only part of the picture, as FSMA claims may also represent a potential recovery opportunity for insurers acting as institutional investors.
Not unlike pension funds and asset managers, insurers may suffer losses where securities are acquired, held, or disposed of on the basis of misleading market disclosures. Although publicly available information provides only limited visibility of insurers pursuing FSMA claims, they are exposed to the same factors that have prompted other institutional investors to seek recovery through securities litigation.
This article outlines the legal framework governing claims under ss 90 and 90A FSMA and certain related causes of action, and considers the three principal ways in which such claims may affect insurers: as institutional investors seeking recovery; as underwriters of public company risk; and as listed companies that may themselves face securities claims.
Legal framework
Statutory (FSMA) claims
The FSMA statutory regime distinguishes between two principal causes of action:
- Section 90 provides investors with a statutory remedy for losses resulting from untrue or misleading statements or omissions in a prospectus or listing particulars; and
- Section 90A and Schedule 10A address a different problem: misleading statements, dishonest omissions, or dishonest delay in continuing market disclosures.
Taken together, ss 90 and 90A create the principal statutory liability regime for inaccurate public disclosures by listed companies. Broadly speaking, s 90 focusses on disclosure at the point securities are offered to investors through prospectuses and listing particulars, whereas s 90A addresses inaccuracies in information provided to the market after listing, including annual reports and trading updates.
The distinction between ss 90 and 90A goes beyond the type of disclosure in issue. Amongst other things:
- Section 90 contains no express requirement for a claimant to establish individual reliance on the prospectus or listing particulars, which may significantly reduce the evidential burden in claims involving multiple investment managers or decision-makers;
- Liability under s 90 does not generally depend on proof of dishonesty, recklessness, or knowledge of falsity, but on whether the prospectus or listing particulars contained an untrue or misleading statement or omission giving rise to a loss;
- The statutory regime is balanced by statutory defences under Schedule 10 FSMA, including where the responsible person reasonably believed the statement was true and not misleading, where it was made or authorised by an expert, where a correction was published before the securities were acquired, or where the claimant knew of the relevant inaccuracy. There has been little judicial consideration of these defences to date;
- Claims may be brought against a wider range of defendants, including the issuer, its directors, and other persons responsible for the relevant prospectus or listing particulars, as seen in proceedings arising out of Glencore's 2011 IPO¹.
- Unlike s 90A, s 90 provides no statutory “safe harbour” from alternative causes of action, so investors may pursue s 90 claims alongside common law or other statutory claims where the facts allow.
By contrast, under s 90A:
- Claims may only be brought against the issuer. Unlike s 90, the statutory cause of action does not permit direct claims against directors or other persons responsible for the disclosure;
- Claimants must establish the requisite state of mind specified in Schedule 10A. In broad terms, liability arises only where a person discharging managerial responsibilities within the issuer knew that the statement was untrue or misleading, was reckless as to that fact, knew that an omission was a dishonest concealment of a material fact, or acted dishonestly in delaying the publication of information. This requirement was considered in detail in the Autonomy litigation:² Hildyard J found that the requisite state of mind had to be established separately for each impugned statement or omission;
- Claimants must also establish reliance on the relevant published information, which has become, in practice, one of the most heavily litigated aspects of the regime. In a recent claim against a listed bank, Leech J found that the claimants relying solely on the market price could not satisfy the reliance requirement in para. 3 of Schedule 10A unless their representatives had read and considered the relevant published information, or third parties who directed or influenced their investment decisions had done so. He left open whether, in the case of an untrue or misleading statement, the claimant must additionally show that the particular statement was present to the mind of the decision-maker.³
- The regime is not accompanied by the equivalent statutory defences found in Schedule 10. Instead, liability is constrained by the higher fault threshold and the requirement to establish reliance, causation, and loss;
- Section 90A reflects a legislative attempt to create a special liability regime for continuing market disclosures, with carefully calibrated requirements concerning fault, reliance, and causation. Consistent with that objective, Schedule 10A limits the extent to which claimants may circumvent the statutory framework through alternative causes of action, which limitation is sometimes described as a statutory “safe harbour”.
From an investor perspective, s 90 will often be more attractive than s 90A, principally because it does not require proof of individual reliance, avoiding substantial evidential hurdles in claims involving large institutional portfolios. Conversely, issuers may find it easier, in some respects, to defend s 90A claims.
Alternative (non-FSMA) claims
For completeness, the statutory regime sits alongside, rather than entirely displaces, possible common law claims such as deceit or negligent misstatement. In practice, however, those claims may be materially more difficult for investors to pursue. A claim in deceit requires proof of a false representation made fraudulently (that is, knowingly, without belief in its truth) or recklessly as to its truth, together with an intention that the claimant should rely on the representation, actual reliance, causation, and loss.⁴ A claim in negligent misstatement is a distinct cause of action requiring the claimant to establish, amongst other things, that the defendant owed it a duty of care, that it relied on the statement, and that the reliance caused a loss.⁵ Establishing the requisite duty of care may itself be difficult in a securities context, particularly where disclosures are made to the market at large rather than to a specific investor.
Litigation arising from a major banking acquisition during the 2008 financial crisis illustrates the difficulties of pursuing disclosure claims outside the statutory FSMA framework. The proceedings concerned the recommendation and information provided to shareholders before they voted on the acquisition. Although Norris J found that the shareholder circular should have disclosed certain matters concerning emergency financial support provided to the acquisition target,⁶ the claimants failed to establish that, had those matters been disclosed, the acquisition would not have been approved or that the omissions caused their alleged loss.⁷
By contrast, the Autonomy litigation illustrates how a s 90A claim may form part of a broader fraud action. Following HP’s acquisition of Autonomy in 2011, HP alleged that Autonomy’s published financial information had overstated the company’s performance and misrepresented its business model. The s 90A claim had an unusual two-stage structure: HP’s acquisition vehicle first had to establish Autonomy’s liability as issuer; then Autonomy sought recovery from its former CEO and CFO as persons discharging managerial responsibilities.⁸ Separately, the claimants pursued direct claims against the two individuals in deceit and, in the alternative, under s 2(1) of the Misrepresentation Act 1967,⁹ with the loss directly claimed from the individuals carved out of the s 90A claim to prevent double recovery.¹⁰ Hildyard J ultimately upheld substantial parts of the s 90A claim, as well as the claims in deceit and under the Misrepresentation Act,¹¹ with quantum determined in a later judgment.¹²
Claims under s 2(1) of the Misrepresentation Act 1967 may also be available in appropriate circumstances. Unlike a claim in deceit, the representor may avoid liability only by showing that it had reasonable grounds to believe, and did in fact believe, that the represented facts were true up to the time the contract was made. The burden therefore falls on the representor to establish both the reasonableness of its belief and the fact that the belief was genuinely held.¹³
In the context of securities claims, s 2(1) will generally be of limited assistance to an investor purchasing on the secondary market, since the relevant contract is ordinarily made with another market participant rather than the issuer. The Court of Appeal has confirmed that s 2(1) does not extend to an obligation acquired from a third party.¹⁴
These distinctions are particularly important in group litigation. Section 90 contains no express requirement to prove individual reliance, while s 90A retains that requirement but avoids some of the additional hurdles that may arise in non-FSMA claims, including those concerning the duty of care and contractual privity. Sections 90 and 90A will therefore provide the more natural starting point for claims arising from market-wide disclosures.
Why FSMA claims matter to insurers
As investors
Insurers are often viewed primarily as risk carriers for policyholders. However, they are also major institutional investors managing substantial portfolios and must balance investment performance against long-term liabilities to policyholders, making capital preservation and loss recovery important considerations. Investment losses arising from misleading corporate disclosures affect insurers in much the same way as pension funds, sovereign wealth funds, and asset managers.
At present, publicly available information provides only limited visibility of insurers pursuing FSMA claims, with most reported actions instead brought by asset managers, investment funds, and other institutional investors. Where investment entities affiliated with insurance groups have appeared as claimants in major securities litigation, public materials do not generally reveal whether the relevant investments represented insurance assets, third-party client assets, or a combination of the two.
Against that background, FSMA claims may not necessarily be viewed as a default response to every fall in share price. Market losses may arise for many reasons. That said, the more practical question is whether credible evidence suggests that losses were caused by misleading prospectuses or ongoing market disclosures, such that a potential FSMA claim warrants investigation as a route to recovery. Although there is no general duty to bring such a claim, a material recovery opportunity should at least be identified and properly considered through the insurer’s governance and decision-making processes, consistent with the standard of care generally expected of those processes.
One of the material considerations in such a decision-making process is, of course, the economics of securities litigation. Litigation funding and, in some cases, after-the-event insurance have reduced some of the financial barriers associated with large securities claims by shifting or mitigating legal costs and adverse costs risk. For insurers acting as investors, that may alter the recovery analysis. A claim that would once have been uneconomic may become a more viable asset-recovery opportunity if pursued through a third-party funded group of claimants.
The same development also cuts the other way. Funding and ATE insurance may make claimant groups larger, better organised and more willing to pursue claims. While the availability of litigation funding may facilitate recovery when insurers participate as investors, it also contributes to the increase in frequency, scale, and cost of claims faced by issuers and their D&O insurers.
As underwriters of public company risk
The same developments that may make FSMA claims more attractive to investors also create challenges for insurers underwriting public company risk. Section 90 claims may be brought not only against issuers but also against directors and other persons responsible for the relevant prospectus or listing particulars. Section 90A claims are directed against issuers, but they commonly involve allegations about senior management knowledge, governance failures, regulatory issues, or disclosure controls.
For D&O insurers, the exposure is not confined to claims against individual directors. Many D&O programmes for public companies include entity securities cover (“Side C”), under which the company itself may be insured in respect of securities claims. Industry commentary¹⁵ increasingly identifies ss 90 and 90A FSMA as a material source of D&O and securities litigation exposure, with particular focus on defence costs, settlements, judgments, Side C cover, policy limits and claims handling. Where proceedings involve both the issuer and individual directors (as may occur in s 90 claims), questions may also arise as to the interaction between Side A, Side B, and Side C cover and the allocation of defence costs and liability.
Even where it remains uncertain whether the issuer or its directors will ultimately be found liable, securities claims can generate substantial defence costs from an early stage. Such claims often involve extensive disclosure, expert evidence, and contested case-management applications (including disputes over trial structure and the use of sample claimants). From an insurer’s perspective, FSMA claims are therefore relevant not only because of possible indemnity exposure, but also because of the substantial defence costs, management time, and settlement pressure that such claims can generate.
As listed companies
FSMA claims may affect insurers not only as investors seeking recovery or as underwriters of public company risk. Many insurers and insurance groups are themselves listed companies and are therefore subject to the same disclosure obligations as other issuers. Insurance companies routinely make public statements about reserve adequacy, claims experience, underwriting performance, capital position, regulatory compliance, governance arrangements, and risk management.
If disclosures concerning such matters are later alleged to have been inaccurate, incomplete, or misleading, that may become the foundation of securities claims in much the same way as disclosures concerning accounting irregularities, sanctions, compliance failures, or corruption investigations can in other sectors. As a result, the same securities litigation risks that arise in relation to banks, energy companies, retailers, and industrial businesses may also arise within the insurance sector.
The proceedings against a listed insurance group provide a useful illustration of how issues arising in the ordinary conduct of an insurance business may become the subject of securities litigation. Following the group's disclosure of accounting and reserving irregularities within its Irish subsidiary, and the resulting fall in its share price, investors brought proceedings under s 90A FSMA alleging that the group’s annual reports and related disclosures had been misleading.¹⁶ The ensuing proceedings generated important decisions concerning limitation and the case management of large multi-party securities claims, but ultimately settled before trial, without any judicial determination of liability.
For listed insurers, reserve adequacy, capital management, and regulatory compliance are therefore not merely operational or prudential matters. Those issues may also become disclosure issues where investors allege that published information failed to adequately reflect the insurer’s true position.
Looking ahead
Despite the increasing volume of claims, English securities litigation remains comparatively immature, though it is no longer as niche as it might once have appeared.
Many of major claims settled before a substantive trial, while Autonomy remains the only reported claim under ss 90 or 90A FSMA to have produced judgments on both liability and quantum. The market has now seen enough claims to identify recurring themes, but not enough judgments on the merits to provide comprehensive answers to many of the most important questions.
Those unresolved questions include the scope of reliance under s 90A, particularly for passive or index investors; the treatment of dishonest delay; the approach to causation and loss; and the mechanisms through which large securities claims should be organised and determined.
At the same time, the subject matter of securities litigation is expanding beyond conventional accounting scandals into areas such as bribery, sanctions, ESG disclosures, supply-chain governance, regulatory compliance, and reserving practices.
The increasing availability of litigation funding, growing involvement of institutional investors, and continued development of group litigation mechanisms are likely to contribute to a more active securities litigation market. For insurers, the practical implications are likely to become more significant rather than less.
