Several factors have aligned to increase the risk to businesses of being on the receiving end of a class action.
In the financial services sector, class actions represent a powerful tool for investors to fight against securities fraud and other forms of misconduct. Picture a group of people united in their quest for justice, seeking to hold those responsible for their actions accountable. These lawsuits offer a chance for recovery of losses suffered by the collective and bring the issue of wrongdoings to the forefront.
In the context of the financial services industry, class actions are typically brought by investors who have been collectively harmed by securities fraud or other forms of misconduct. The purpose of these lawsuits is to recover losses suffered by the group and hold the responsible party accountable for their actions.
The UK market
A number of factors are contributing to the rise in such activity across the UK. Firstly, an increasingly challenging economic climate is causing an increase in litigation generally. A claimant is far more likely to pursue litigation if it promises meaningful compensation and very little risk.
Further, improvements in technology and better access to funding means that group actions have become more attractive to claimants. In the UK, there has been a significant increase in "class action specialist" law firms, some of which have the benefit of overseas investment to promote and advertise claims about which potential claimants might otherwise have been unaware. Such specialist firms also have the resources to pursue claims for large volumes of claimants.
In Europe, class action activity is increasing as opt-out mechanisms become more widely available. The EU’s Representative Action Directive, a legal framework for consumer representative actions, has now been implemented across member states.
The Directive enables qualified entities to bring representative actions, for both injunctive (requiring the infringing conduct to be stopped or prohibited) and redress measures (such as compensation, repair or price reduction), against traders who are infringing the provisions of EU law. The Directive includes both an opt-in and opt-out system.
This Directive provides consumers with an alternative to pursuing costly, lengthy individual legal proceedings, by way of an efficient method to obtain collective redress. The existence of such a mechanism is likely to lead to an uptick in such class actions being run.
Likely growth areas in the FS Sector
In the UK, group actions have been filed across a range of sectors, including the financial sector. Class actions for breaches of competition law continue to increase exponentially.
It has recently been reported that British banks are currently facing over 100 class actions across a number of jurisdictions. Whilst the majority of these are being brought in the US, 6 class actions lawsuits are being brought in Britain. The claims include allegations of price fixing of foreign exchange rates and manipulation of interest rates.
We also predict that ESG and its associated compliance requirements will drive a growing number of class action cases as investors, consumers and employees are increasingly looking beyond bottom-lines and assessing what businesses are doing to address climate change, tackle human rights abuse and improve diversity.
A good example of this is the class action being brought by environmental law organisation Client Earth, on behalf of activist shareholders, claiming that Shell’s 13 directors are personally liable under the Companies Act for failing to devise a strategy in line with the Paris agreement around emissions targets.
We foresee an increase in data breach class actions, such as the British Airways (BA) Group Litigation Order, which followed a breach of BA's security systems leading to leaked data. A claim was filed on behalf of those impacted by the mass breach seeking compensation for non-material damage – including inconvenience, distress, annoyance and loss of control of their personal data. Given the potential for such data breaches to take place, it is likely that such actions will increase.
Finally, we see that there is potential for class action type complaints in the financial services regulated sector, given the associated rules and reporting obligations of the FCA.
As the number of class actions rises what can be done to mitigate the risk to your business?
It is impossible to know when the next class action will arise, but there are steps which can be taken now, to include:
- Having in place a crisis/incident response plan
- Risk assessing the company's readiness to respond to group litigation
- Ensuring that there is a cyber-incident response strategy
- Tracking complaints received from customers, and monitoring any arising trends
- Getting advice on how best to comply with the FCA's reporting obligations around complaints.
Please get in touch with our class actions team to discuss further.