ICLG - Association of Corporate Counsel

ICLG

A practical cross-border insight into financial services disputes work

1st edition

Financial Services Disputes 2019The International Comparative Legal Guide to:

Published by Global Legal Group, in association with CDR, with contributions from:

Allen & Gledhill LLP Barun Law LLC Blake, Cassels & Graydon LLP Borenius Attorneys Ltd Debevoise & Plimpton LLP Dethomas Peltier Juvigny & Associés DQ Advocates Limited Financial Services Lawyers Association (FSLA) Hannes Snellman Attorneys Ltd Homburger Jones Day

Kantenwein Matheson MinterEllisonRuddWatts Mori Hamada & Matsumoto PLMJ RPC Rui Bai Law Firm Stibbe Trench Rossi Watanabe Advogados Wachtell, Lipton, Rosen & Katz Wolf Theiss

CC RRDDCommercial Dispute Resolution

WWW.ICLG.COM

The International Comparative Legal Guide to: Financial Services Disputes 2019

General Chapters:

Country Question and Answer Chapters:

1 The Evolving Landscape of Financial Services Litigation – Julie Murphy-O’Connor &

Karen Reynolds, Matheson 1

2 Levelling the Playing Field in Banking Litigation – Victoria Brown, Financial Services Lawyers

Association (FSLA) 4

3 Lessons Learned: 10 Years of Financial Services Litigation Since the Financial Crisis –

Elaine P. Golin & Jonathan M. Moses, Wachtell, Lipton, Rosen & Katz 8

4 Australia Jones Day: John Emmerig & Michael Legg 14

5 Austria Wolf Theiss: Holger Bielesz & Florian Horak 21

6 Brazil Trench Rossi Watanabe Advogados: Giuliana Bonanno Schunck &

Gledson Marques De Campos 29

7 Canada Blake, Cassels & Graydon LLP: Alexandra Luchenko 35

8 China Rui Bai Law Firm: Wen Qin & Juliette Ya’nan Zhu 42

9 England & Wales RPC: Simon Hart & Daniel Hemming 47

10 Finland Borenius Attorneys Ltd: Markus Kokko & Vilma Markkola 54

11 France Dethomas Peltier Juvigny & Associés: Arthur Dethomas &

Dessislava Zadgorska 60

12 Germany Kantenwein: Marcus van Bevern & Dr. Carolin Sabel 67

13 Ireland Matheson: Julie Murphy-O’Connor & Karen Reynolds 73

14 Isle of Man DQ Advocates Limited: Tara Cubbon & Sinead O’Connor 80

15 Japan Mori Hamada & Matsumoto: Shinichiro Yokota 86

16 Korea Barun Law LLC: Wonsik Yoon & Ju Hyun Ahn 92

17 Netherlands Stibbe: Roderik Vrolĳk & Daphne Rĳkers 97

18 New Zealand MinterEllisonRuddWatts: Jane Standage & Matthew Ferrier 103

19 Poland Wolf Theiss: Peter Daszkowski & Marcin Rudnik 110

20 Portugal PLMJ: Rita Samoreno Gomes & Rute Marques 117

21 Singapore Allen & Gledhill LLP: Vincent Leow 124

22 Sweden Hannes Snellman Attorneys Ltd: Andreas Johard & Björn Andersson 130

23 Switzerland Homburger: Roman Baechler & Reto Ferrari-Visca 135

24 USA Debevoise & Plimpton LLP: Matthew L. Biben & Mark P. Goodman 143

Contributing Editors

Julie Murphy-O’Connor, Karen Reynolds & Claire McLoughlin, Matheson

Sales Director

Florjan Osmani

Account Director

Oliver Smith

Sales Support Manager

Toni Hayward

Sub Editor

Oliver Chang

Senior Editors

Caroline Collingwood Rachel Williams

CEO

Dror Levy

Group Consulting Editor

Alan Falach

Publisher

Rory Smith

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Disclaimer

This publication is for general information purposes only. It does not purport to provide comprehensive full legal or other advice. Global Legal Group Ltd. and the contributors accept no responsibility for losses that may arise from reliance upon information contained in this publication. This publication is intended to give an indication of legal issues upon which you may need advice. Full legal advice should be taken from a qualified professional when dealing with specific situations.

1

Chapter 1

Matheson

Julie Murphy-O’Connor

Karen Reynolds

The Evolving Landscape of Financial Services Litigation

Introduction

From an Irish perspective, many of the financial services disputes

which currently occupy the courts emanated from the financial crisis

which commenced over a decade ago. Mis-selling claims continue

to be central to financial services disputes, although those which

arose pre or during the financial crisis are likely to be time-barred if

not yet instituted. Interestingly, the Financial Services and Pensions

Ombudsman Act 2017 extended the time limit for bringing

complaints specifically relating to long-term financial services.

This together with some notable judgments in this area suggests we

may yet see another peak in mis-selling disputes. Disputes in the

financial services sphere increasingly incorporate fraud and

conspiracy claims, with the usual cases of alleged breach of a duty

of care. The impact and significance of the financial crisis and the

litigation which followed has resulted in regulatory reform in

Ireland, largely aimed at preventing a future crisis but also to

address accusations that “light touch” regulation led to banking

failures in the first place. Reliance on breaches of regulatory

obligations is becoming a more common feature of private civil

litigation, and the courts are more inclined to consider, of their own

volition, regulatory obligations, especially in consumer cases.

Increased regulation has driven growth in related enforcements and

investigations and this is set to continue as financial services firms

move to and grow in Ireland.

The consequences of the global recession are likely to continue to

shape the nature, complexity and volume of financial services

disputes before the Irish courts. Whilst Brexit has not yet had a

significant impact on the number of cases commenced in Ireland,

there has been a discernable acceleration in obtaining final orders

where there is a potential need for cross-border enforcement into the

UK. It is too soon to tell precisely what additional impact Brexit

will have on the volume and nature of financial services litigation in

Ireland but an event of such legal and political significance will

inevitably shape the landscape for years to come. The ISDA Master

Agreement in 2018 means that Irish law will now be an option for

parties to its derivatives documentation. This is a significant

development in its own right and one which underscores the

attractiveness of Ireland in the context of certain international

transactions post-Brexit. The benefits for users of derivatives of

using ISDA Master Agreements governed by a law within the EU

legal framework include the automatic recognition and enforcement

of judgments obtained in one EU Member State in other EU

Member States and the fact that the legislative framework protects

financial collateral arrangements and provides certainty on certain

insolvency related matters.

The growing scale and complexity of financial services disputes

poses many challenges for courts and litigants alike. Technology

presents solutions and problems in almost equal measures. Parties

to complex financial services disputes face the challenges of

funding litigation in the context of rising costs, increasing

regulatory burdens and potential uncertainties where laws and

regulations are either as yet judicially untested or subject to

legislative and/or judicial re-evaluation – whether in Ireland or

abroad. A number of these issues have been the subject of recent

financial services disputes before the Irish courts and in respect of

which landmark judgments have been delivered.

Recent Landmark Decisions of Irish Courts

in Financial Services Disputes

Limitation Periods in Financial Services Disputes

The cases of Gallagher v ACC Bank [2012] IESC 35 (“Gallagher”)

and Cantrell v AIB PLC & Ors [2017] IEHC 254 (“Cantrell”) are

considered landmark decisions in Ireland in the context of financial

services disputes in Ireland. These decisions provide clarity as to

how the Irish courts will apply the rules governing limitation

periods in relation to financial loss.

The leading judgment on this issue in an investment dispute context

was delivered in the Supreme Court by Mr. Justice Fennelly in

Gallagher. The Supreme Court found that, in light of its specific

characteristics, the investment was inherently unsuitable for the

claimant from the moment of investment. Therefore, his loss

accrued at the time he made his investment. The proceedings were

issued over six years after that and were therefore statute-barred.

However, in Gallagher, the Supreme Court was careful to

acknowledge that were another type of investment in issue, the

characteristics could vary and the action might not accrue at the

same time. The court considered, obiter, that if a claim arose from

mis-management of an investment – rather than mis-selling – loss

might accrue at a later stage. More recently, in the High Court in

Geraldine Cantrell v Allied Irish Banks Plc, the Second Belfry Properties (UK) Plc and Others, the claimant sought damages for

negligent misstatement, breach of contract and breach of statutory

duty. Whilst the court ultimately held the claim was statute-barred,

it found that the loss at issue had not arisen at the time the

investment was made (and the general rule that a claim in tort should

be brought within six years of the investment did not apply). In so

finding, the High Court relied on the comments of the Supreme

Court in Gallagher to the effect that “the cause of action accrues in

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the case of financial loss when the Plaintiff has suffered actual damage”, and, obiter, that “the mere possibility of loss arising from advice given or the entry upon a transaction is not enough to constitute actual loss at that point in time. There must be some probability of loss”. In Cantrell the High Court held that the

claimant could not be required to come to court before she could

quantify her loss, and therefore, should not be time-barred for

having waited to do so. Accordingly, as a result of the decision in

Cantrell, financial services providers do not have certainty that

claims in tort expire after six years from the date of investment. It

remains to be seen whether an appellate court will take a different

view.

Litigation Funding

Litigation funding is an important feature of litigation in many

jurisdictions. In the UK, litigation funding has been a feature of the

legal landscape since the Criminal Law Act 1967 which abolished

the rules on maintenance and champerty. Many civil law EU

jurisdictions permit the use of litigation funding. In the US, third-

party litigation funding is a newer concept, but hardly novel.

Federal law is silent as to champerty, and the law on litigation

funding varies from state to state.

In Ireland, litigation funding still falls foul of the old rules against

champerty and maintenance and has been the subject of a number of

recent, landmark decisions in relation to litigation funding in the

context of financial services disputes.

The decision in Persona Digital Telephony Limited and Another v the Minister for Public Enterprise and Others [2017] IESC 27

(“Persona”) provoked comments on the Irish position from the then

Chief Justice, Ms. Justice Susan Denham.

“It may be said that in light of modern issues, such as Ireland being an international trading State, issues arising on international arbitrations, and in the Commercial Court, it might well be appropriate to have a modern law on champerty and the third party funding of litigation. However, that is a complex multifaceted issue, more suited to a full legislative analysis.”

The comments in Persona were echoed last year in the context of a

large-scale financial services case before the Irish Supreme Court,

SPV Osus Limited v HSBC Institutional Trust Services (Ireland) Limited [2018] IESC 44 (“Osus”). This case arose out of litigation

relating to the Madoff Ponzi scheme and, on appeal, focused on the

issue of whether the assignment of claims transferred by an

investment company (Optimal Strategic) to an SPV (SPV Osus), in

the context of the administration of a company could be allowed to

stand. In Osus, the Court reviewed the body of Irish law in relation

to the assignment of claims and litigation funding. In doing so the

Court acknowledged the contemporary obstacles which individuals

face in gaining access to the courts, but against this, the Court was

cognisant of the complex and multi-faceted issues which would

arise in permitting litigation funding and considered that such issues

would be best addressed by the legislature and appropriate

regulation.

The Chief Justice of Ireland, Mr. Justice Frank Clarke (the “Chief

Justice”), has publicly raised the issue. This is reflective of his

judgment in Osus where, although he cautions against unregulated

reform, he encourages the legislature to address the competing

issues identified in the case before him. In a statement in September

2018, the Chief Justice noted that the judiciary’s objective is to

make access to justice as straightforward and uncomplicated as it

can be while at the same time ensuring that the court process is fair

and comprehensive.

The Irish Law Reform Commission and the ongoing Review of

Civil Justice Administration, which is led by Mr. Justice Peter Kelly,

the President of the High Court, are tasked with considering and

reporting on the desirability of litigation funding in Ireland. The

landscape may well be set to evolve.

Legal Certainty, Implied Duties, Penalty Clauses

Irish courts are traditionally reluctant to re-write or otherwise

intervene in contractual agreements between commercial parties –

and particularly slow to do so on vague grounds of doing fairness

between parties.

This approach was demonstrated recently by the Court of Appeal in

Flynn & Anor v Breccia & Anor [2017] IECA 74 and in doing so the

Court of Appeal restored certainty that, under Irish law, there is no

general implied duty of good faith in the context of commercial

contracts. The case arose in the context of an acquisition of secured

debt from a defunct Irish bank by a corporate shareholder in the

company on which the debt was secured. A shareholders’ agreement

existed and the debtor argued that the acquirer of debt – also a

shareholder – was prohibited from enforcing the security as a result

of alleged implied duties of good faith under the shareholders’

agreement. The High Court at first instance departed from

established principles of Irish contract law, which could have had

significant consequences for long-term commercial contractual

relationships and the secondary market in non-performing loans

(“NPLs”) had it not been overturned on appeal. However, the Court

of Appeal was not persuaded by the High Court reasoning (nor by

some recent case law in the UK where a duty of good faith and fair

dealing had been implied into “relational contracts”) preferring

instead to maintain the traditional approach, and refusing to

recognise any general doctrine of good faith under Irish contract law.

However, in the related cases of Flynn v Breccia and Sheehan v Breccia [2018] IECA 286, also before the Court of Appeal, the court

held that a surcharge interest clause in a financing agreement was an

unenforceable penalty (thus departing from the traditional approach

of upholding clear and express commercial terms). The Court of

Appeal held that a generic surcharge interest clause contained in the

lender’s standard general terms and conditions could not represent a

genuine attempt by the parties to estimate in advance the loss which

would result from a breach/default of the terms and conditions of the

loan. The Court of Appeal arguably missed an opportunity to

reevaluate the interpretation and application of the test originally set

out by Lord Dunedin in the case of Dunlop Pneumatic Tyre Co Ltd v New Garage Motor Co Ltd [1915] A.C. 79 and applied in Ireland

in the 1998 Supreme Court judgment of Pat O’Donnell & Co v Truck and Machinery Sales [1998] 4 I.R. 191. The UK courts

recently revisited their approach in the joint cases of Cavendish Square Holding BV v Talal Wl Makdessi 67 and ParkingEye Limited v Beavis [2015] UKSC 67. There, the UK Supreme Court clarified

that clauses which have the effect of imposing a penalty for

contractual default would, generally, be enforceable, except where

the impact is to impose a detriment on the defaulting party which is

out of all proportion to any legitimate interest of the innocent party

in the enforcement of the main purpose of the contract. Although

the Irish Court of Appeal was not persuaded by the approach taken

by the UK Supreme Court, the judgment leaves the door open for

the Irish Supreme Court to consider the issue in the future.

Continuing Evolution

The Chief Justice of Ireland is a strong advocate for the continual

development of the Irish courts system. Plans are in train to build on

Matheson The Evolving Landscape of Financial Services Litigation

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the success of the specialist commercial division of the Irish High

Court by introducing a specialist financial disputes list. Legislation

to double the number of judges in the recently formed Court of

Appeal is imminent. Further developments are evident by the trial

and gradual acceptance of e-litigation in this jurisdiction and this

will likely be expanded upon in the recommendations to be made by

the Review Group established to review and reform the

administration of civil justice in the State.

It is expected that the certainty provided by Ireland’s membership of

the EU will contribute to its popularity as a jurisdiction for

international financial disputes post-Brexit. Ireland, as a member of

the EU, benefits from the re-cast Brussels I Regulation and the

Lugano Convention. These legal instruments together ensure that

judgments and choice of law and jurisdiction in civil matters are

recognised and enforced in a straightforward and predictable

manner across the EU. This is particularly important for financial

services disputes which are regulatory and cross-border in nature

and often rely on the enforceability of interim protective measures

such as mareva injunctions (for the freezing of assets) across the

EU. The benefits of a legal system integrated into a wider EU

framework together with the importance of ensuring pan-European

measures for enforcement have come into sharp focus in the recent

Brexit negotiations. It remains to be seen how financial services

disputes will be impacted in the context of the evolving political

landscape and the continued uncertainty associated with Brexit.

Undoubtedly, whatever the outcome of the Brexit negotiations, both

risks and opportunities will arise across many jurisdictions and this

will be no different in the area of financial services disputes.

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Matheson The Evolving Landscape of Financial Services Litigation

© Published and reproduced with kind permission by Global Legal Group Ltd, London


Matheson

70 Sir John Rogerson’s Quay

Dublin 2

Ireland

Tel: +353 1 232 2192 Email: [email protected] URL: www.matheson.com

Karen Reynolds

Matheson


Dublin 2

Ireland


Julie is a Partner at Matheson, practising in all aspects of contentious

and non-contentious restructuring, recovery and insolvency law

matters and is an experienced litigator specialising in banking and

financial services and shareholder disputes. Julie was a member of

the Council of the Irish Society of Insolvency Practitioners from 2011 to

2014 during which time she acted as secretary and as chair of its

educational committee. Julie is a regular contributor to Irish and

international legal publications. She lectures on insolvency law and

directors’ duties at the Law Society of Ireland and Dublin Solicitors Bar

Association. She is co-author of the Law Society’s insolvency manual.

She is a member of the Commercial Litigation Association of Ireland

and co-author of the Practitioner’s Guide to the Commercial Court in Ireland. Julie is a non-executive director of Coillte Teoranta (Irish State

forestry company). She is ranked as one of Ireland’s top insolvency

lawyers by international legal directories.

Established in 1825 in Dublin, Ireland and with offices in Cork, London, New York, Palo Alto and San Francisco, more than 700 people work across

Matheson’s six offices, including 96 partners and tax principals and over 470 legal and tax professionals. Matheson services the legal needs of

internationally focused companies and financial institutions doing business in and from Ireland. Our clients include over half of the world’s 50 largest

banks, six of the world’s 10 largest asset managers, seven of the top 10 global technology brands and we have advised the majority of the Fortune 100.

Karen is a Partner in the Commercial Litigation and Dispute Resolution

Department at Matheson, and co-head of the firm’s Regulatory and

Investigations Group.

Karen has a broad financial services and commercial dispute

resolution practice. She has over 10 years’ experience providing

strategic advice and dispute resolution to financial institutions,

financial services providers, domestic and internationally focused

companies and regulated entities and persons. She advises clients in

relation to contentious regulatory matters, investigations, inquiries,

compliance and governance related matters, white-collar crime and

corporate offences, commercial and financial services disputes, anti-

corruption and bribery legislation and document disclosure issues.

Karen has substantial experience in corporate restructuring and

insolvency law matters, having had a lead role in some of the most

high-profile corporate rescue transactions of the last 10 years. She

advises liquidators, regulators, directors and insolvency practitioners

in relation to corporate offences and investigations, shareholder rights

and remedies, directors’ duties, including in relation to fraudulent and

reckless trading and disqualification and restriction proceedings.

Chapter 2


Financial Services Lawyers Association (FSLA) Victoria Brown

Levelling the Playing Field in Banking Litigation

Levelling the Playing Field in Banking

Litigation

Banks are likely to provide the following three services to SMEs:

deposit-taking; the sale of specific financial products such as

interest rate swaps; and lending. Since the 2008 financial crisis, the

provision of these services has been the focus of considerable

attention by both regulators and the courts.

Whilst deposits have been entirely protected by regulatory action

and the sale of financial products is largely regulated to the same

standards across the EU, lending by banks to SMEs generally falls

outside the regulatory regime. This gives rise to certain difficulties

for SMEs: in the event they wish to seek redress against a bank,

conduct of one of the core services is not subject to regulatory

oversight.

A further difficulty for SMEs seeking redress is the existing scope of

the Financial Ombudsman Service (FOS) regime. Presently, only

an SME that is a micro-enterprise may bring a complaint to the FOS.

However, from April 2019, the FOS regime will expand to include

small businesses with an annual turnover below £6.5 million, an

annual balance sheet total under £5 million and fewer than 50

employees.

Richard Samuel of 3 Hare Court suggested a permanent, specialist

Financial Services Tribunal (FST) in a series of articles in the

Capital Markets Law Journal. That idea gained widespread support

and in October 2018 the Treasury Select Committee (TSC)

concluded that the Treasury should bring forward proposals to

create the FST.

This chapter examines the advantages and disadvantages of the FST

regime and, where lacunas in protection for SMEs remain, sets out

measures that might help level the playing field for SMEs in

successfully seeking redress against banks.

Difficulties for SMEs in Achieving Redress

The courts

Although there is a specialist Financial List in the High Court, it is

limited to complex financial claims worth more than £50 million or

claims raising issues of general importance. Accordingly, most

legal claims brought by SMEs are litigated in the County Court or

non-specialist High Court lists.

SMEs often find it near impossible to take banks to court for the

following reasons:

■ resources may not allow it. The issue fee for claims is 5% of

their value, with a cap (for claims worth over £200,000) of

£10,000. If an SME loses, it is likely to have to cover the

bank’s legal costs. Those costs can be very high; a claimant

has little or no control over a defendant’s spending, subject

only to the costs recovery rules;

■ even well-resourced SMEs might struggle to take a bank to

court. Financial services disputes often cause cash flow

stresses. Cost and speed of redress is often critical to an

SME’s ability to stay in business. Many SMEs will have

limited access to finance and reserves, and have limited or no

ability to diversify investments;

■ litigation funders are not readily available. Legal fees can

involve unexpected outlay, such as expert fees and forensic

accountants;

■ there can be a lacuna in legal services for those claiming

against banks. Many banks engage solicitors through legal

advice panels, which often involve law firms covenanting not

to act in any matter against the bank; and

■ unlike individuals,1 SMEs have no right of action for

damages for breach of the Financial Conduct Authority

(FCA) rules and must instead rely on general legal principles.

In practice, this means claims for misrepresentation,

negligence, breach of contract, etc. Banks may attempt to

limit general legal liabilities by contractual terms to the

extent permissible under the FCA rules.

The FOS

The FOS regime exists to provide eligible complainants (until April

2019 only individuals and micro-enterprises; thereafter it will be

expanded to broadly include small businesses) with an easier means

of recourse against providers of financial services. It should be

noted, however, that even from 2019 only regulated activities such

as the sale of financial products will fall within the scope of the

FOS: non-regulated activities such as lending to small businesses

will not be in its scope. Likewise, an SME with permissions for the

regulated activities about which it complains is unable to complain

to the FOS.2

The FOS has many advantages. It is quick and informal,3 and free

for the complainant with only a small case fee for the bank. Its

decisions are binding on the respondent if the complainant accepts

the decision,4 and there is no right of appeal. It is especially

accessible for the unsophisticated complainant as decisions are

taken on the basis of what is ‘fair and reasonable’ in all the

circumstances, rather than on legal principles.5

For a number of reasons, the FOS does not fix all the woes of the

court system. There is no live evidence and no power to compel

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witnesses. The financial award is presently limited to £150,000

although this will rise to £350,000 for SMEs in April 2019.

Accordingly, there remains a large gap in the ‘middle market’ where

mid-sized SMEs or SMEs with mid-sized complaints may not be

within the scope of the FOS and, for one or more of the reasons set

out above, unable to avail themselves of the courts. Similarly, an

SME with a dispute involving a dissolved business or a business

subject to insolvency proceedings may fall within this gap.

What Could Plug the Gap?

FOS increase

Further legislation to expand the scope of eligible complainants to

the FOS or the size of awards the FOS may require is unlikely, in the

near or medium term, given the changes due to come into effect in

April 2019. Nicky Morgan MP, Chair of the TSC, wrote to the FCA

on 23 July 2018 to express doubt about the FOS’s ability to increase

its remit to include SMEs by April 2019 following the Lloyd

Review. This suggests that proposals for further expansion will be

met with considerable resistance.

Banks accept the ‘rough justice’ of a FOS decision and lack of

appeal largely because of the caps placed on the size of awards

within the regime. Should those caps increase considerably, it is

likely that there would be an expectation of a more court-like regime

in terms of decision-making, evidence-gathering, appeal or financial

exposure in the event of loss. Such changes will fundamentally

change the nature of the FOS regime and put an end to many of its

beneficial features including speed of decision-making and low

cost.

Industry resistance is also likely to take the form of competition-

based arguments: expanding access to the FOS runs the risk of

harming competition by increasing the expense for new firms to

enter the financial services markets and provide products or services

to SMEs. Expansion necessarily increases the minimum cost of

servicing SMEs in circumstances where they, individually, generate

relatively little revenue for the bank. Expansion may, therefore,

decrease access to products or quality of service, or slow the process

of developing new products and bringing them to market.

A FST

In October 2018, the TSC recommended to the Treasury the creation

of a FST which will allow SMEs to enforce their rights against

financial institutions. The Committee also recommended amending

s138D FSMA to allow SMEs a private right of action for breaches

of FCA rules in any such tribunal.

A tribunal could be established under the Tribunal Courts and

Enforcement Act 2007. It would, necessarily, make decisions in

accordance with legal principles. As with other tribunals, it would

be sensible for the tribunal to have an appellate tier to which appeals

could be made. Appeals from the appellate tier would be made to

the Court of Appeal. A tribunal would have powers to compel

witness attendance and test evidence by cross-examination.

A tribunal could be presided over by a judge alone, or by panels of

three to include a judge and two ‘wing-members’. For example, a

FST could host wing-members from representatives of both the

‘buy’ and ‘sell’ sides of the market. Where wing-members sit, all

three panellists would have equal votes.

The tribunal might be adversarial but with some inquisitorial

aspects. For example, the Employment Tribunal is obliged to

consider certain questions whether or not they are raised by the

parties. This would be particularly beneficial to SMEs who may not

have access to the same degree or quality of legal representation as

banks.

A key benefit of the tribunal system would be the capacity for

different costs rules from the Civil Procedure Rules and the usual

rule of ‘winner pays the loser’s costs’ in the courts. For example, in

the tax tribunal, each party generally bears their own costs unless the

case is classified as complex.6 In the Employment Tribunal, parties

again generally bear their own costs unless the claim has no

prospect of success or a party has behaved in some way

unreasonably.7 In the Intellectual Property and Enterprise Court (a

low-cost jurisdiction which deals with small intellectual property

cases), the loser pays the winner’s costs but those costs are capped

at £50,000 following a full liability trial.8

A particular advantage of the FST will be the speed of decisions.

Particularly in relation to larger SMEs, banks are unlikely to become

aware of problems with products or services promptly. The reasons

are obvious: services are often bespoke or tailored; the client

population is small; there are high levels of market concentration;

and distribution chains can be complex. FST decisions will alert the

industry and the FCA to problem products or problem contractual

terms. This may allow for the avoidance of high-impact failures.

At present, firms must take previous FOS decisions into account

when handling complaints.9 Similarly, firms must identify (from

complaints or otherwise) recurring or systemic problems in their

provision of a financial service (or lack thereof) and put them

right.10 FOS decisions therefore increase the quality of firm

decision-making. The same would self-evidently be true of FST

decisions. In fact, this advantage would be felt even more acutely as

the decisions would also clarify the legal position. In turn, it is

likely that higher standards of conduct will increase SME

engagement with the financial services industry by removing

uncertainty and increasing user confidence.

However, there are also problems with establishing a FST. In the long

term the tribunal is likely to increase regulatory certainty, particularly

in the interpretation of FCA rules where often little guidance exists,

and so save firms money. But in the short to medium term firms will

incur costs in defending tribunal claims which SMEs will ultimately

have to bear. Clearly, there will be a cost to the industry of increasing

eligible complaints from SMEs. First, the obligations to investigate,

assess and resolve complaints.11 Second, the obligations to increase

awareness of consumers’ protections.12

There is also a danger that increased litigation risk will reduce

product offerings or make them increasingly expensive as firms

withdraw from the market.

A FST: A Panacea?

The core difficulty for SMEs in taking action against a bank is the

inequality of arms.

Steps put in place to amend the FOS regime go some way towards

addressing this but a large pool of medium-sized SMEs will not

benefit from these changes. It should also be noted that banks’

lending activities do not (and will not post April 2019) fall within

the scope of the FOS regime and therefore any claims an SME may

have in regard to these services must be brought on strict legal

grounds within the courts. It is probably not a contentious

observation to make that courts have historically been protective of

banks on these matters for public policy reasons.

The tribunal system recommended by the TSC may go some way

towards levelling the playing field for SMEs, but the complexity of

Financial Services Lawyers Association (FSLA) Levelling the Playing Field


banking litigation and the likely sums of claims may mean a tribunal

is not the panacea for SMEs’ difficulties.

Two further proposals in relation to statutory or voluntary mass-

redress schemes could ameliorate the position for SMEs:

1) Requirement for the firm(s) to appoint an independent entity

(such as an accountancy firm or a law firm) to negotiate the

terms of a scheme on behalf of its customers.

2) Requirement for the establishment of a redress scheme in the

event of a prima facie case of criminal activity.

Appointing an independent negotiator

Under s404 FSMA, the FCA can set up an industry-wide consumer

redress scheme where it appears that there may have been a

widespread or regular failure to comply with requirements, such as

FCA rules. This power can only be used where a remedy or relief

would be available in legal proceedings. The FCA may also require

a firm to establish a redress scheme which corresponds to, or is

similar to, an industry-wide scheme.13 The FOS is bound to apply

the terms of such schemes to any complaints received about the

subject matter, unless both firm and complainant agree the scheme

should not apply.

Firms are also obliged to consider whether any systemic problems

have caused detriment or disadvantage to customers and whether it

is fair and reasonable for the firm to proactively undertake a redress

exercise, which may include contacting those who have not

complained.14 Firms must identify and remedy any recurring or

systemic problems by analysing root causes of complaints and

considering whether they may impact on any other processes or

products.15 Firms must also report complaints in aggregate to the

FCA.16

Mass-redress schemes have often been used post the 2008 financial

crisis but as a result of the limitations discussed above, SMEs have

often not qualified. Accordingly, many relevant mass-redress

schemes have been voluntary. Many of these schemes have been

criticised as lacking transparency and fairness. The schemes are

often thought to be biased. Banks have often investigated and

reviewed their own behaviour or those appointed as independent

reviewers have been criticised as too closely linked to the firm(s) in

question. Further, many schemes have been kept confidential which

gives rise to further problems, such as the lack of opportunity for the

market to learn from previous mistakes and legal and factual

analysis of those mistakes. Other criticisms include suppression of

disclosure or prevention of access for the SME to the independent

reviewer.

To date, the FCA has negotiated the terms of such schemes on behalf

of bank customers; a task the FCA has made clear that it is

uncomfortable taking on, not least because its role as a supervisor

and regulator does not sit well with dispute resolution.17 Perceived

FCA failings to negotiate such terms robustly have led to

considerable criticism of the FCA in performing this role. For

example, the IRHP voluntary agreement was much criticised after it

became apparent that the FCA had conceded to numerous requests

of the banks.

An obligation for banks setting up voluntary schemes to pay for an

independent entity (such as an accountancy firm or a law firm) to

negotiate the terms of a scheme on behalf of its customers may be an

alternative solution. The FCA has the power to require a firm to

provide a report by a skilled person, or to appoint a skilled person to

produce a report under s166 FSMA. This could support, for

example, the design of a redress scheme in the report’s findings.

There is no reason why such findings could not recommend terms of

the scheme.

Prima facie criminal misconduct

Similarly, there may be scope to consider whether the obligation to

establish a redress scheme should be expanded to include situations

in which there is a prima facie case of criminal misconduct by a

bank or one of its agents.

Presently, s384 FSMA allows the FCA to require authorised persons

to make restitution to consumers where a breach of a requirement of

FSMA caused loss to that consumer.

A burden of proof shift would require banks to prove to an

independent reviewer that no misconduct took place. This is likely

to encourage disclosure from banks and increase desire for reasoned

decisions, which in turn counters many of the earlier criticisms

made of mass-redress schemes.

Conclusion

The FST will be key to addressing a number of the difficulties SMEs

face in seeking redress against banks. This chapter has attempted to

show that, nevertheless, the FST is not a panacea for SMEs, and has

made two suggestions to facilitate SME access to justice.

Endnotes

1. See rights of ‘private persons’ in s138D Financial Services &

Markets Act 2000 (FSMA).

2. DISP 2.7.9(1)(a).

3. S225 FSMA.

4. S228 FSMA.

5. S228 FSMA.

6. The Tribunal Procedure (First-tier Tribunal) (Tax Chamber)

Rules 2009, Rule 10 and see Rule 23 for a definition of

complex claims.

7. The Employment Tribunal (Constitution and Rules of

Procedure) Regulations 2013, Rule 76.

8. CPR r.45.31(1)(a).

9. DSIP 1.3.2A.

10. DISP 1.3.6.

11. DISP 1.4.1.

12. DISP 1.2.1 and 1.2.2.

13. Ss55J and 55L FSMA.

14. DISP 1.3.6.

15. DISP 1.3.3.

16. DISP 1.10.

17. Evidence of Andrew Bailey to the TSC on 20 July and 9

November 2016 and letter to the Committee on 22 January

2018.



Victoria Brown

Outer Temple Chambers

222 Strand

London WC2R 1BA

United Kingdom

Tel: +44 20 7353 6381 Email: [email protected] URL: www.outertemple.com

FSLA provides a forum for the open exchange of views and the dissemination of knowledge and ideas relating to financial services law and

regulation. It creates opportunities for financial services lawyers to meet each other at a variety of educational and social events which take place

throughout the year. The aim of FSLA is to foster co-operation between the various financial services stakeholders including lawyers and policy

experts in industry, academia, regulators and government.

Victoria advises on all aspects of financial services law, including those

related to regulatory perimeter issues and obligations imposed on

regulated firms and approved persons. She acts for and against

regulators, firms and individuals in the courts and before decision-

making committees. Victoria is also familiar with investigations,

including document reviews, interviews, responses and representation.

In addition to the key areas above, Victoria has cross-over expertise in

matters related to employment and pensions.

Outer Temple Chambers’ Financial Services team has broad

experience in the banking and financial services industry. Barristers at

Outer Temple have featured in many of the leading cases arising out of

the financial crisis, including at appellate level. The team has

particular experience of high-value cases involving alleged

misconduct by banks, often following regulatory findings.


Chapter 3


Wachtell, Lipton, Rosen & Katz

Elaine P. Golin

Jonathan M. Moses

Lessons Learned: 10 Years of Financial Services Litigation Since the Financial Crisis

The financial crisis and the Great Recession began a little more than

10 years ago, on September 15, 2008, when Lehman Brothers filed

for bankruptcy. The next day, September 16, the Federal Reserve

implemented a rescue of AIG, and the day after that the markets

were in a state of free fall. On September 18, the government

announced a further rescue proposal, and, on September 19, the

Treasury Department guaranteed U.S. money market funds, an

unprecedented move. The ensuing crisis led to manifold legislative,

regulatory, and political reactions in the United States and abroad.

The business and legal landscapes for financial institutions were,

and remain, significantly altered. For financial institutions, the

crisis also produced years of litigation in the United States spanning

a broad range of claims.

Ten years out from the beginning of the Great Recession, it is worth

reflecting on the course of that litigation, which appears to be finally

reaching the beginning of the end. Perhaps the largest category of

such litigation related to the growth of the mortgage market that

marked the decade before the financial crisis and the expansion of

both the government-sponsored and private securitisation markets,

in particular for residential mortgage-backed securities (“RMBS”)

that emerged to finance that growth. The downturn in the U.S.

housing market, the resulting impact on mortgage performance, and

the ensuing domino effect on institutions and investors arguably

were among the most significant causes of the financial crisis.

The extent and depth of the financial crisis took the financial

institutions that had participated in the mortgage market by surprise.

One thing is clear: the legal infrastructure that supported the mortgage

underwriting and securitisation markets was not created with such a

crisis in mind. The securitisation contracts upon which billions of

dollars in liability ultimately turned were often hastily put together, and

few, if any, parties to the contracts had reflected on what would happen

if a substantial percentage of the securitised mortgages failed to

perform (as opposed to the low default rates typical in the boom years).

As might be expected, the ensuing waves of litigation took some time

to emerge, were sometimes dominated by the “bad facts” of the crisis,

inspired legal creativity and ingenuity, and required the courts to craft

new applications of traditional legal principles. Ultimately, well-

established legal rules generally prevailed and financial institutions

and other market participants developed an understanding of how

better to address potential legal risks going forward.

The Course of Financial Crisis Era

Litigation

Litigation stemming from the financial crisis emerged in waves as

different aspects of the mortgage-related markets came into focus.

In reviewing the course of this litigation, it is worth keeping in mind

the many different types of financial institutions connected to the

mortgage underwriting and securitisation markets; none were left

untouched by financial crisis-related litigation. These businesses

reflected the gamut of financial institutions: mortgage brokers and

mortgage companies that specialised in making subprime

mortgages; retail banks that increased their mortgage and other

home lending activities; commercial and investment banks that

specialised in RMBS and/or commercial mortgage securitisations

(“CMBS”) and in even more complicated financial instruments,

such as collateralised debt obligations (“CDOs”); the bond rating

agencies that deemed such securities to be investment quality; the

insurance companies that issued protection for some securitisations;

the hedge funds and bank trading operations that invested in such

securities; the trustee companies responsible for administering the

trusts issuing such securities; and mortgage-servicing businesses,

often operated by banks, that were responsible for servicing such

mortgages once underwritten. Government or quasi-government

institutions were also heavily involved in the mortgage markets, in

particular the Federal Housing Authority (“FHA”), which

guarantees smaller and more standard mortgages in an effort to

make home ownership more accessible, and Government-

Sponsored Enterprises (“GSEs”), such as Fannie Mae and Freddie

Mac, that guarantee mortgages as part of their huge mortgage

securitisation activities and even purchased enormous amounts of

the RMBS issued during the pre-crisis years, which, in turn, fuelled

the growth and expansion of that market.

The financial-crisis litigation emerged in waves. While it is beyond

the scope of this chapter to discuss in detail each type or subset of

financial-crisis litigation, in hindsight it generally can be

categorised into three main waves. The initial wave focused on the

institutions most immediately and visibly affected by the crisis.

Thus, corporate and securities litigation against firms that suffered

significant losses as a result of their mortgage exposure or even

went out of business represented the first wave. Government-led

investigations and civil actions dominated the next wave as public

attention focused on the effect the crisis was having on ordinary

people subjected to foreclosure. Finally, private civil litigation

expanded as various investors in mortgage-related products realised

the extent of their losses (or seized the opportunity to buy bonds at

distressed prices as a litigation investment) and began to press

litigation against the various parties involved in making and

securitising mortgages – or at least those parties who by then still

remained in business.


First Wave: Corporate and Securities Litigation

The first wave of litigation was marked by corporate and securities

cases involving the firms that suffered the greatest initial losses on

the financial markets. Thus, as some of the largest financial

institutions experienced significant and highly publicised losses as a

result of their exposure to the mortgage markets, the companies and

their directors faced shareholder corporate and securities litigation.

These litigations did not break particular new ground, although they

were the initial battleground over the extent to which financial

institutions and their officers and directors should be viewed as

having legal responsibility for losses related to the financial crisis.

Generally, the financial institutions and their officers and directors

did well in these cases. The legal theories pursued in these cases

required showing intentional or reckless misconduct or bad faith, a

high standard. For example, in 2009, in an early victory for a

financial institution, Citigroup obtained dismissal of all but one

claim in a shareholder derivative action that sought recovery for

Citigroup’s losses in the subprime lending market. The plaintiffs,

shareholders of Citigroup, claimed that the defendants, directors and

former directors of Citigroup, breached their fiduciary duty by

allegedly not properly monitoring and evaluating the risks Citigroup

faced in its exposure to subprime loans. The Delaware Court of

Chancery held that plaintiffs’ allegations did not establish the bad

faith required for liability for a director’s oversight lapses.1 This

early victory for a financial institution board likely prevented what

would have been a host of similar claims.

Second Wave: Government-Led Investigations and Civil

Litigation

The second wave of litigation was instigated by the government,

which eventually directed significant resources to enforcement

related to perceived lapses in mortgage origination, servicing, and

securitisation. This effort was driven both by political imperatives

and a real need for government intervention to assist those hit hardest

by the financial crisis. The Obama Administration established the

RMBS Working Group, which brought together federal and state

agencies to investigate the securitisation market, while the Financial

Fraud Enforcement Task Force focused on issues of fraud more

broadly. Notably, the government relied more on civil tools than

criminal ones. This generated public criticism from those who felt

individual bankers responsible for the crisis should serve jail time,

even as one of the earliest criminal cases brought in the wake of the

financial crisis against two Bear Stearns hedge fund managers

resulted in outright acquittals of all charges. The government’s focus

on civil tools nonetheless proved to be a smart strategy as its civil

remedies were more flexible and subject to lower burdens of proof,

thereby allowing the government to make its cases more easily.

The first significant government intervention began as a result of a

practice that came to be known as “robo-signing”. This term

referred to the alleged practice by mortgage-servicing companies,

which were responsible for handling mortgage foreclosures, of

having individuals sign foreclosure documents under oath without a

proper basis for doing so. While in most cases, although not all, the

foreclosures were nonetheless legitimate, the scandal captured

attention as it put a spotlight on the public’s concern that financial

institutions were not doing enough to help struggling homeowners

avoid foreclosure. In February 2012, the Department of Justice

(“DOJ”) and the Department of Housing and Urban Development,

along with the attorneys general of 49 states, reached a $25 billion

agreement – the “national mortgage settlement” – with the five

largest servicers of mortgage loans, Bank of America, J.P. Morgan,

Wells Fargo, Citigroup, and Ally Financial, as settlement for alleged

abuses in the banks’ handling of their mortgage loan servicing and

foreclosure businesses. The agreement required the mortgage

servicers to commit more than $20 billion toward financial relief for

consumers. It also created new standards intended to prevent future

foreclosure inadequacies and abuses, such as stricter oversight of

the foreclosure process, with compliance to be conducted under the

oversight of an independent monitor.

The DOJ also obtained significant settlements through its use of a

statute that had been mostly forgotten until the financial crisis.

Passed in the aftermath of a prior banking crisis – the savings and

loan crisis of the 1980s – the Financial Institutions Reform,

Recovery, and Enforcement Act of 1989 (“FIRREA”) allows the

government to seek civil monetary penalties based on violation of

certain criminal statutes that relate to financial institutions. But,

most importantly, it provides the government with tools to

undertake pre-litigation civil investigations. The DOJ, with state

attorneys general and other regulators often running parallel

inquiries, used FIRREA to undertake investigations that resulted in

additional significant settlements out of court to resolve RMBS

claims. While the government had a great deal of leverage in these

negotiations, financial institution lawyers were able to negotiate

broad releases and innovative settlement components that gave the

banks settlement credit for consumer relief activities. Although the

settlement totals were large, the breadth of the releases across

multiple federal and state agencies allowed affected institutions to

make the case to the markets that the financial crisis was “behind

them”. These settlements included, both in cash and other

consideration such as consumer relief: $16.65 billion from Bank of

America; $13 billion from J.P. Morgan; $7.2 billion from Deutsche

Bank; $7 billion from Citigroup; $5.28 billion from Credit Suisse;

$5.06 billion from Goldman Sachs; $4.9 billion from RBS; $2.6

billion from Morgan Stanley; $2.09 billion from Wells Fargo; $2

billion from Barclays; and $1.375 billion from Standard & Poor’s.

Another, even older, legal tool put to use was the qui tam action, in

which a private plaintiff brings a lawsuit under the False Claims Act

claiming the government was defrauded. If successful, the private

plaintiff gets a portion of the recovery. Often these actions are

initially filed under seal, enabling the government to investigate the

private plaintiff’s claims and determine whether to intervene. Such

cases, common in other industries, were previously not typically

used in the financial arena, but, in light of the various ways the

government subsidised the mortgage markets, these cases provided

a fruitful avenue for plaintiff firms and the government. One

notable example of such a case was brought against Countrywide

Home Loans, a leading originator of subprime mortgage loans, by a

former executive. The government later intervened and

significantly broadened the scope of the case, adding several

additional defendants and claims under FIRREA for civil penalties

for certain alleged violations of federal mail and wire fraud laws.

This would later prove to be a grave overreach. The government

prevailed at trial, with the jury rendering a general verdict in favour

of the government. The district court then entered a $1.27 billion

judgment against Countrywide.

But, in a rare victory for a financial institution, that verdict and the

$1.27 billion judgment were reversed on appeal. The Second

Circuit concluded that instead of proving mail or wire fraud

sufficient for FIRREA liability, the government had merely proved

intentional breach of contract.2 The case was a significant setback

for the government, which had sought to broaden the parameters of

federal mail and wire fraud beyond the traditional requirements of

common law fraud. It is also a clear example of the courts’

consistent application of traditional common law contract and tort

requirements to financial crisis and recession era cases.

Wachtell, Lipton, Rosen & Katz Lessons Learned


Third Wave: Private Civil Litigation

The final wave of litigation, which gained momentum in 2011 and

2012 and continues even today, involved private civil litigation

related to the securitisation markets. These cases even pitted

financial institution against financial institution, as they were often

brought by investors in mortgage-backed securities or other financial

institutions that touched an aspect of the mortgage markets.

Many of these cases rested on contractual claims that required no

finding of fault – just the willingness of courts to enforce the plain

language of securitisation and other agreements underlying the

mortgage securitisation markets. On the other hand, the courts’

adherence to traditional contract principles meant that plaintiffs had

to prove contractual breaches, and generalised pleading of

widespread wrongdoing did not suffice. While not a comprehensive

review of all such cases, the civil litigation that financial institutions

faced can be sorted into several categories, including securities and

fraud claims related to the purchase of RMBS, repurchase claims for

defaulted mortgages, claims against servicers, and claims against

trustees. Other areas of litigation not covered here included claims

by monoline insurers who guaranteed many RMBS deals, claims by

investors in complex instruments such as CDOs, and claims against

the bond rating agencies.

Securities Claims Many of the first cases filed by RMBS investors were claims under

the securities laws, alleging that the prospectus supplements that

accompanied the sale of each securitisation contained misstatements

about the quality of the loans underlying the securitisations.

Critically, these claims do not require evidence of scienter by the

seller or reliance upon the false statement by the buyer. The Federal

Housing Finance Agency (“FHFA”), an independent agency created

by Congress to act as the conservator of Fannie Mae and Freddie

Mac, instituted litigation in 2011 against 18 financial institution

defendants, alleging violations of the federal securities laws in the

sale of mortgage-backed securities to Freddie Mac and Fannie Mae.

Because of the near strict liability nature of Securities Act claims,

FHFA was able to secure more than $20 billion in settlements from

bank defendants. The one bank that went to trial against FHFA –

Nomura – lost.3 As the Nomura court framed it, at the centre of

these highly complex cases was merely the simple question of

whether, under the Securities Act, defendants’ securities offering

documents accurately described the home mortgages underlying the

securities. That court found the magnitude of the falsity to be

“enormous”. Private litigants also pursued such claims, often as

class actions.

However, because Securities Act claims based on misstatements in

a securities prospectus have a very strict three-year statute of

limitations, this wave of RMBS litigation was the first to be

resolved, and very little of it remains outstanding.

Loan Repurchase Claims Loan repurchase claims constituted a large category of litigation

against financial institutions. A loan repurchase claim, sometimes

referred to as a “putback claim”, flows from an alleged breach on

the part of a defendant RMBS sponsor, originator, or other

contractually responsible party of representations and warranties

about the nature of the underwriting of the loans and of the diligence

conducted on the overall quality of the loans. The claims are

therefore generally for breach of contract – of the representations

and warranties – and made by a trustee on behalf of a securitisation

trust. As such, repurchase claims must be brought by parties to the

contract, and investors must act through the trustee to press such

claims. RMBS contracts, typically known as pooling and servicing

agreements, generally provided for three equitable remedies in the

event of a breach: cure the breach; repurchase the breaching loan; or

provide a substitute compliant loan.

Courts typically applied traditional common law legal principles to

loan repurchase claims. This resulted in some early decisions that

significantly helped to cabin litigation and ultimately limit financial

institutions’ exposure. As noted, most securitisation agreements

provide for a trustee to act on behalf of the certificate-holders, who

are the trustee’s beneficiaries, and these agreements contain

provisions, called “no-action clauses”, that restrict the certificate-

holders’ ability to act directly instead of through the trustee on their

behalf. Courts have strictly interpreted these provisions,

significantly restricting the proliferation of litigation. In an early

case, Walnut Place, the Appellate Division of the New York

Supreme Court, First Department, interpreting a no-action clause,

held that a certificate-holder could only sue on behalf of the trustee

if it met the strict requirements of the no-action clause. In that case,

as in most RMBS contracts, the no-action clause required the

certificate-holder to notify the trustee of an “Event of Default”

before it could bring its own suit and contained other restrictions.4

This strict enforcement of no-action clauses foreclosed direct

contract actions by investors and required them to work through

trustees, who typically required evidence of substantial ownership

and an indemnity from investors before bringing suit on their behalf.

Although the volume of representation and warranties litigation was

large, Walnut Place and subsequent similar decisions meant that

there was far less of it than if every individual investor – including

opportunistic investors who bought distressed RMBS securities

long after the financial crisis – could have sued in their own names.

Another important New York case, Ace, concerned the strict

application of the six-year statute of limitations for repurchase

claims, resulting in another application of traditional contract law

that helped limit the sprawl of post-crisis litigation. Applying

traditional principles of state contract law, the New York Court of

Appeals held that breaches of representations and warranties about

loan quality occur, and thus claims for breach accrue, on the date the

representations are made (usually the date the securitisation closes),

and not when the representations and warranties are discovered to

be false or (as some plaintiffs argued) when an RMBS sponsor

refuses to repurchase a loan. The Court of Appeals noted the general

principle that statutes of limitation, in serving the public policy goal

of repose, generally apply regardless of potential harshness, and that

New York law repeatedly disfavours cause of action accrual dates

that cannot be ascertained with certainty in contrast to bright line

rules.5 Because New York law limits tolling for contract claims to

six years beyond the six-year statute of limitations, for a total of 12

years after issuance, and because the very last pre-crisis RMBS

trusts closed in late 2007, the timeline for bringing claims – at least

under New York law – is just about running out.

The New York courts have also cabined liability through strict

application of the “sole remedy” clause in RMBS contracts, which

requires trustees to prove their claims through the “loan-by-loan”

repurchase protocol rather than through generalised allegations of

wrongdoing.6 For example, in one recent case, Ambac, the Court of

Appeals reiterated the “well settled” principle of contract law that

contract terms providing for sole remedies are strictly enforced, as

they represent the parties’ agreement on the allocation of risk of

economic loss. Although there has been some divergence in the

courts about the admissibility of statistical sampling to prove

repurchase claims, the court in the one repurchase case to have gone

to trial prohibited statistical sampling and ultimately forced the

trustee to prove breach on a loan-by-loan basis for thousands of

loans, a process that was very expensive and time-consuming.7



These proof requirements, and the doubts around the validity of

statistical sampling, may have contributed to a trend of pre-trial

settlements.

Faced with proliferating claims, and wanting to demonstrate to

shareholders, regulators and others that the legacy of the financial

crisis was manageable, some of the largest American banks, first

Bank of America, then J.P. Morgan, Citigroup, and others,

negotiated bulk settlements with groups of investors and RMBS

trustees to obtain broad releases for origination and servicing claims

across hundreds of trusts. These settlements made use of New

York’s Article 77 procedure, which allows a trustee to seek approval

of a decision made with respect to a trust (here, the decision to settle

all potential claims), binding all investors who have received notice

and an opportunity to be heard. While the headline numbers on

these bulk settlements were large, the preemptive settlements

effectively cut off the threat of mushrooming litigation, the

settlement rates as a percentage of losses ended up being very

favourable compared to cases that did go to litigation, and

shareholders and other constituencies were reassured that the banks

had a plan for containing legacy liabilities.

Claims Against Servicers

In contrast to repurchase claims, private claims against servicers

have been both less successful and, correspondingly, less common.

This is because it is difficult to prove a breach of the servicing

standards in the securitisation agreements, which are often phrased

generally, such as imposing the obligation to service loans

“prudently” or in accord with “industry custom and practice”.

Servicers could defend claims by arguing that their servicing of the

loans was within their business judgment or consistent with

(arguably previously low) industry standards. Further,

securitisation agreements often contained exculpatory provisions

that restricted servicers’ liability only to instances of willful

misconduct or gross negligence.

As such, servicer claims (outside of the government enforcement

context discussed above) had little success. Indeed, one trial court,

though permitting the claim to survive summary judgment, noted

that it was doubtful an expert’s opinion that a servicer’s conduct

deviated from contractual servicing standards could amount to

“gross negligence, malfeasance, or bad faith”, as the securitisation

agreement required.8 And, in that case, the plaintiff then abandoned

its pursuit of that claim at trial.

Some investors, such as those who pursued the bulk settlement

strategy discussed above, rather than pursuing litigation chose to

negotiate with servicers for improved servicing practices as part of

a global resolution of claims.

Claims Against Trustees Perhaps the final wave of RMBS litigation has involved claims by

securitisation investors against trustees in which the investors

claimed that the trustees improperly administered the trusts. The

allegations in these cases often highlighted trustees’ failures to bring

repurchase claims within the strict statute of limitations discussed

above.

Investors asserted both contract and negligence claims against

trustees, as well as statutory claims under the federal Trust Indenture

Act. Because the trustee’s duties are set out by the relevant contract,

negligence claims were often dismissed in light of the familiar rule

that a breach of contract is not a tort unless a duty independent of the

contract was breached. Under New York law, an indenture trustee’s

duties are strictly defined and limited to the terms of the indenture.

As such, contract claims brought against trustees flow from the

provisions of an indenture or a pooling and servicing agreement for

particular lapses, such as the failure to notify investors of breaches,

the failure to take proper steps if there is an event of default, or the

failure to maintain collateral files. Many of these cases turned on

whether an event of default occurred, as such an event often triggers

additional duties for the trustee. Courts often permitted these claims

to proceed to discovery when the allegations were based on public

information about alleged breaches while cautioning that such

public information would alone not be sufficient evidence for

liability, which often required proof of actual notice of a breach of

the contract. As such, the trustee’s notice or knowledge of an event

of default as defined by the relevant contract is often a critical issue.

Even when they survive motions to dismiss, however, claims

against trustees face significant barriers to establishing damages. In

a seminal case, a federal appellate court noted that a trustee’s

misconduct must be shown “loan-by-loan and trust-by-trust”.9 In

the wake of that decision, numerous courts held that statistical

sampling cannot be used to prove claims against trustees. For

example, a recent decision in the Southern District of New York

held that “[l]oan-by-loan proof is required to establish the Trustee’s

liability to the Certificate-holders because, under . . . [the pooling

and servicing agreements], the Trustee has neither the obligation nor

the ability to demand cure, substitution, or repurchase of a

nonconforming loan unless – among other things – it can identify a

[representation and warranties] breach . . . that ‘materially and

adversely’ affects the value of that particular loan”.10

And, also recently, the courts have declined to certify classes of

investors in trustee litigations, noting that difference in timing and

structure of investors’ investments make class litigation infeasible.11

The trend has been to deny class certification because of the myriad

individualised determinations that would be necessary to determine

standing, statutes of limitations, and damages. Such limitations on

class actions also applied in securities actions brought by RMBS

investors.

Lessons Learned

The financial crisis that began in the fall of 2008 led to a cascade of

litigation against financial institutions. The course of that litigation

is a case study in how major litigation can wind its way through the

legal system. But it also provides valuable lessons for financial

institutions going forward when facing such an onslaught of

litigation. Financial institutions would do well to remember these

lessons:

Traditional legal principles should win out, but may take time. The

litigation unleashed by the financial crisis emerged in waves. At

times, the “bad facts” of the crisis overwhelmed the ability of

financial institutions to fight back. But, ultimately, traditional

common law legal principles generally prevailed. Financial

institutions paid a significant cost for their financial-crisis litigation

exposure, but ultimately were able to cabin it and move forward.

Legal innovation and creativity will emerge. The legal system set

up for the mortgage industry was not built in anticipation of the

mass defaults and related claims that resulted from the financial

crisis. Lawyers on both sides of the “v.” were able to develop

innovative ways to resolve these cases and judges were open to

adopting them as long as they did not stray too far from legal

principles. Many of those innovations will be part of the litigation

arsenal going forward.

Financial institutions need to think carefully through the legal

structures that they build for new products and services and the

long-term risk of going into new business areas. The regulatory

environments faced by financial institutions in the mortgage-related

product area changed forever as a result of the financial crisis. But



the financial industry is constantly changing and a product that

looks safe in good times may pose unexpected legal risk when times

turn bad. The mortgage legal structure was not built for the mass

litigation that resulted from the financial crisis. Well-run financial

institutions now spend more time thinking through the risks posed

by new products and expansion, and more frequently involve

counsel and risk personnel in the decision-making process.

We can all hope that no similar financial crisis will soon emerge. If

one does, the 10-year course of financial crisis-related litigation

fortunately teaches that the legal system should have the tools and

flexibility to address the resulting legal fallout.

Endnotes

1. In re Citigroup Inc. S’holder Derivative Litig., 964 A.2d 106

(Del. Ch. 2009).

2. See United States ex rel. O’Donnell v. Countrywide Home Loans, Inc., 822 F.3d 650 (2d Cir. 2016).

3. See Fed. Hous. Fin. Agency v. Nomura Holding America, Inc., 104 F. Supp. 3d 441 (S.D.N.Y. 2015).

4. Walnut Place LLC v. Countrywide Home Loans, Inc., 96

A.D.3d 684 (N.Y. App. Div. 1st Dept. 2012).

5. See ACE Sec. Corp. v. DB Structured Prods., Inc., 36 N.E.3d

623 (N.Y. 2015).

6. See, e.g., Ambac Assurance Corp. v. Countrywide Home Loans, Inc., 106 N.E.3d 1176 (N.Y. 2018).

7. U.S. Bank, Nat’l Ass’n v. UBS Real Estate Sec. Inc., 205 F.

Supp. 3d 386 (S.D.N.Y. 2016).

8. Assured Guar. Mun. Corp. v. Flagstar Bank, FSB, 892 F.

Supp. 2d 596, 607 (S.D.N.Y. 2012).

9. See Ret. Bd. of the Policemen’s Annuity and Benefit Fund of the City of Chicago v. Bank of New York Mellon, 775 F.3d 154

(2d Cir. 2014).

10. See, e.g., Royal Park Inv. SA/NV v. Deutsche Bank Nat’l Trust Co., No. 14 Civ. 4394 (AJN) (BCM), 2018 WL 4682220, at

*5 (S.D.N.Y. Sept. 28, 2018).

11. See, e.g., Royal Park Inv. SA/NV v. Deutsche Bank Nat’l Trust Co., No. 14 Civ. 4394 (AJN), 2018 WL 1750595 (S.D.N.Y.

Apr. 11, 2018).

Acknowledgment

The authors are very grateful for the assistance of their colleague

Justin L. Brooke in preparing this chapter.



Elaine P. Golin


51 West 52nd Street

New York, NY 10019

USA

Tel: +1 212 403 1118 Email: [email protected] URL: www.wlrk.com

Jonathan M. Moses


51 West 52nd Street

New York, NY 10019

USA

Tel: +1 212 403 1388 Email: [email protected] URL: www.wlrk.com

Wachtell, Lipton, Rosen & Katz is one of the most prominent business law firms in the United States. The firm’s pre-eminence in the fields of

mergers and acquisitions, takeovers and takeover defence, strategic investments, corporate and securities law, and corporate governance means

that it regularly handles some of the largest, most complex and demanding transactions in the United States and around the world. The firm also

handles significant white-collar criminal investigations and other sensitive litigation matters and counsels boards of directors and senior management

in the most sensitive situations. It features consistently in the top rank of legal advisors. Its attorneys are also recognised thought leaders, frequently

teaching, speaking and writing in their areas of expertise.

Elaine P. Golin is a partner of the firm’s Litigation Department. Her

practice includes contracts, corporate governance, RMBS and

securities litigation, as well as other types of complex commercial

litigation. Ms. Golin also focuses on the negotiated resolution of

complex matters.

Recently, Ms. Golin has represented Bank of America, PNC and other

financial institutions in numerous disputes concerning mortgage-related

matters. Representations include Bank of America’s groundbreaking

settlement of claims relating to Countrywide mortgage-backed

securities and related litigation, Bank of America’s multi-faceted

resolutions with FHFA, MBIA, FGIC and AIG, Bank of America’s global

RMBS agreement with the DoJ, and PNC in mortgage litigation with

RFC.

Ms. Golin received a B.A. from Yale College, a diploma in Literature

from the University of Edinburgh, and a J.D. from Columbia Law

School, where she was an articles editor of The Columbia Law Review

and a James Kent Scholar. She clerked for the Honorable Judge

Sandra Lynch of the United States Court of Appeals for the First Circuit.

Among other professional recognitions, Ms. Golin has been named by

Lawdragon as one of the 500 leading lawyers in the United States and

by Benchmark Litigation as one of the top 250 women in litigation.

Ms. Golin serves on the board of the Sadie Nash Leadership Project,

a non-profit providing leadership education to high-school and college

women.

Jonathan M. Moses is co-chair of the firm’s Litigation Department,

which he joined in 1998. He has represented clients in diverse

industries, including banks and financial institutions, media companies

and industrial firms. His practice includes complex commercial and

securities litigation, government investigative proceedings, and

international arbitration.

Prior to joining the firm, Mr. Moses served as an attorney for the New York Daily News, where he worked on First Amendment issues. Mr.

Moses is also a former journalist, having served, among other

positions, as a staff reporter for The Wall Street Journal.

Mr. Moses received an A.B. from Harvard University in 1988 and a J.D.

from Columbia Law School in 1996, where he was an editor of the Law Review and a James Kent Scholar. Following graduation from

Harvard, Mr. Moses was the recipient of a Fulbright Fellowship in Hong

Kong. Mr. Moses also served as a law clerk to the Honorable Stephen

F. Williams of the United States Court of Appeals for the District of

Columbia Circuit following graduation from law school.


Chapter 4


Jones Day

John Emmerig

Michael Legg

Australia

1 Bringing a Claim – Initial Considerations

1.1 What are the most common causes of actions taken by or against financial institutions and service providers in your jurisdiction?

The most common causes of action in relation to financial services

(excluding traditional banking/lending and insurance) may be

considered from the perspective of private causes of action and

regulatory causes of action:

■ Private:

■ Breach of contract, including implied terms of good faith,

rendering services with due care and skill, and services

will be reasonably fit for the purpose for which they are

supplied.

■ Tort of negligence.

■ Fiduciary duty.

■ Regulatory:

■ Breach of provisions of an Australian Financial Services

Licence, including failing to have ‘adequate

arrangements for the management of conflicts of interest’

– s 912A(1)(aa) of the Corporations Act 2001 (Cth)

(Corporations Act).

■ Breach of financial advice (general and personal advice)

obligations, which can be broadly described as financial

advice that does not comply with the ‘best interests’

obligation and related obligations (prioritising the client’s

interests over the advice provider’s interests) in Part 7.7A

of the Corporations Act.

■ Both:

■ Statutory prohibition on misleading or deceptive conduct

under the Corporations Act and the Australian Securities and Investments Commission Act 2001 (Cth) (ASIC Act).

■ Statutory and equitable prohibition on unconscionable

conduct (e.g., ss 12CA and 12CB of the ASIC Act).

■ Statutory unfair contracts provisions (e.g. Part 2 Division

2 Subdivision BA of the ASIC Act).

1.2 What remedies are most likely to be awarded?

Private litigation almost always seeks compensation for loss or

damages incurred. However, in some circumstances, equitable

remedies such as rescission may be sought.

Regulatory actions have a range of remedies available in keeping

with the enforcement pyramid: criminal penalty; banning orders;

civil penalty; enforceable undertakings; and infringement notices.

1.3 Who has a right of action in financial services

disputes? Does it make a difference if the customer is

an individual or a commercial entity?

The entity suffering loss will usually have standing to bring private

litigation. Some causes of action may be limited to consumers or

small businesses such as unfair contract terms: s 12BF of the ASIC

Act. The regulator has standing to commence enforcement action.

1.4 Is third-party funding available in financial services

litigation (crowdfunding, maintenance, champerty,

etc.)? Does litigation insurance operate in your

jurisdiction and, if so, what are the implications for

this?

Third-party litigation funding is well established in Australia and

primarily funds financial services class actions. Litigation

insurance is a newer phenomenon but is being used by both

litigation funders and class action lawyers to guard against adverse

costs orders; see question 4.2 below.

1.5 Are class action law suits available in your

jurisdiction? If so, has this impacted financial

services litigation? Has there been an increase in

class action suits post the financial crisis?

Class actions have been available in Australia since 1992. Financial

services class actions have become the most common form of class

action in Australia, although this is based on multiple class actions

being commenced in relation to contraventions. The financial crisis

resulted in an increase in class actions but these have now been

largely resolved. A further impetus to financial services class

actions will be the Royal Commission into Misconduct in the

Banking, Superannuation and Financial Services Industry.

2 Before Commencing Proceedings

2.1 What are the main barriers to financial service

litigation for customers? Are there exclusionary

clauses or duty defining clauses in customer

contracts which prevent customers from bringing a

case?

Both legal and practical barriers face persons seeking to commence

court proceedings against financial services providers. Legal

barriers may include the impact of liability exclusion clauses and

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contractual warranties (made by service recipients) in financial

services contracts that include or reduce a service provider’s

exposure to liability. Further, alternative dispute resolution (ADR)

clauses may delay a party’s commencement of court proceedings,

but cannot obstruct the commencement of those proceedings.

Practical barriers include the impecuniosity of, or restricted

resources available to, many clients (and the obverse, being the

substantial cost of litigation). Further, the often substantial

knowledge asymmetry concerning the service provider’s conduct

and its consequences may (and often does) prevent or hinder the

recipient of financial services from realising or fully comprehending

misfeasance on misconduct affecting their interests.

2.2 Is there a time limit within which financial services

disputes must be commenced? If so, is it different

depending on whether proceedings are brought

before a regulatory body or before the courts? Does

the commencement of a regulatory process ‘stop the

clock’?

Time limits to commence proceedings in Australian courts are

imposed by statute, and if no statutory bar on commencing

proceedings exists, there is no temporal limitation. This, too, is the

case in the context of financial services litigation. Common law and

statutory causes of action in tort, contract and misleading and

deceptive conduct generally have a statutory limitation period of six

years from the time the cause of action accrued (with some

exceptions, such as in cases where the cause of action is based on

fraud or deceit). Equitable causes of action are not directly subject

to statutory limitation periods, but may be subject to limitation

periods where they are sufficiently analogous to a statute-barred

common law action, so as to prevent the use of the courts of equity

to circumvent statutory time bars. Equitable causes of action may

also be barred by findings of laches or delay, which are

discretionary.

The commencement of a regulatory investigation does not stop a

statutory limitation period from running. However, it is worth

noting that a limitation period does not commence until a cause of

action accrues or the plaintiff is reasonably capable of being aware

of the facts underlying it, and the investigation may bring to light the

factual circumstances that may form the basis of a given cause of

action.

2.3 Can parties in financial services litigation avail of

litigation and/or legal advice privilege? Are

investigations conducted by regulated bodies

considered ‘litigation’ in the context of privilege?

Parties to financial services litigation may assert legal professional

privilege over materials prepared for the dominant purpose of

giving or obtaining legal advice or the provision of legal services

(including representation) in legal proceedings. Communications

between a client and their legal advisor may be protected either by

common law legal professional privilege or privilege prescribed by

the Evidence Act 1995 (Cth) (and applicable state evidence statutes),

the latter of which is restricted to preventing privileged materials

from being adduced as evidence in court proceedings.

While materials prepared for the dominant purpose of preparing for

and complying with obligations in the course of regulatory

investigations are not protected by litigation privilege (the

investigatory process not being ‘litigation’), they may be protected

by common law advice privilege if they were prepared for the

dominant purpose of advising the entity under investigation in

relation to the investigation.

2.4 Are standard form master agreements used in your jurisdiction for financial institutions (for example, the ISDA Master Agreement)? How are they treated?

Standard form master agreements are commonly used in Australia

in the context of derivative and asset securitisation transactions.

They are subject to modification or addition through the use of

‘special conditions’, which make them suited to being tailored to a

transaction and the needs of clients. They are typically used in the

context of transactions involving sophisticated clients.

2.5 Are there any non-contractual duties which are binding on financial services entities (for example, a particular fiduciary duty or a code of conduct)? Can they be contracted out of?

There are an array of non-contractual duties owed by providers of

financial services to their customers, including fiduciary duties, the

common law duty of care and statutory duties. Generally, liability

for breach of common law and equitable duties can be excluded or

limited by contractual agreement, and the wording of such an

exemption will define its scope. However, a breach may be of a

certain character such that a contractual exemption will not operate

to limit or negate liability (for example, in cases of fraud).

There are also a range of statutory duties and obligations imposed

by various regulatory regimes that supplement and overlap with the

duties imposed on financial service providers under the general law,

such as the various duties under the Australian Financial Services

Licence regime. These include duties owed by Australian Financial

Services Licence holders to act in the best interests of their clients,

provide appropriate advice and prioritise the interests of their clients

above their own in circumstances where there is a conflict: see Part

7.7A Division 2 of the Corporations Act. Parties cannot contract out

of these obligations: see s 960A.

Industry codes also exist, such as the Association of Financial

Advisors Code of Conduct and the Financial Planning Association

of Australia Code of Professional Practice. An ASIC-approved

Code of Ethics for Financial Advisers is currently being developed

by the Association of Financial Advisors (with guidance from

ASIC), which is expected to be instituted in 2020.

3 Progressing the Case

3.1 Is there a specialist court or specialist judges for financial services litigation?

There are no specialist courts or specialist judges for financial

services litigation in Australia. However, courts that deal with

commercial litigation often have specific lists for such matters that

are administered by judges with commercial expertise.

3.2 Does the method of service of proceedings differ for financial service litigation?

No, the method of service of proceedings does not differ.

3.3 Are there any specific pre-trial procedures that must be followed for financial services litigation in your jurisdiction? If so, what are they and what are the consequences of not abiding by them?

No. However, in the Federal Court, parties to certain civil disputes

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are required to file a ‘genuine steps statement’, outlining the steps

taken to resolve the issues in the dispute or the reasons why no such

steps were taken.

It is considered good practice to issue a notice of intention to claim

outlining the nature of an intended cause of action and seek to

resolve the matter prior to instituting proceedings, as this may affect

cost orders at the conclusion of proceedings.

3.4 Are there any alternative dispute resolution (ADR)

regulations that apply to financial services disputes in

your jurisdiction? Are ADR clauses typically included

in financial services contracts, and is ADR commonly

used to resolve financial services disputes in your

jurisdiction?

The Corporations Act requires all Australian Financial Services

Licensees providing services to retail clients to have a dispute

resolution framework, consisting of internal and external dispute

resolution procedures. A financial firm that does not comply with

this obligation is in breach of its licence and can be subject to

administrative action.

Internal dispute resolution procedures must comply with the

standards and requirements provided in s 912A(2)(a)(i) of the

Corporations Act. Membership of an ASIC-approved external

dispute resolution scheme is a licence condition of financial firms

that provide financial products and services. On 1 November 2018,

the Australian Financial Complaints Authority (AFCA) became the

single external dispute resolution scheme available to financial

services firms, replacing the Financial Ombudsman Service (FOS),

the Credit and Investments Ombudsman (CIO) and the

Superannuation Complaints Tribunal (SCT).

ADR clauses are typically included in financial services contracts in

Australia. ADR is increasingly popular in Australia and almost all

state courts have the power to refer matters to ADR.

3.5 How are claims for negligent misstatement/mis-selling

dealt with in your jurisdiction?

Financial services providers owe their clients a ‘special’ duty of care

as they provide information or advice requiring a degree of skill and

knowledge which is intended to be relied upon. To prove negligent

misrepresentation, the representee must demonstrate that the

representor owed them a duty of care, that the representor knew or

ought to have known that the representation would be relied upon,

that the representor breached their duty of care in giving the

representation and that material damage to the representee resulted

from the representation. The damage claimed in negligent

misrepresentation cases is the financial loss resulting from the

negligent advice or information.

In Australia, misrepresentations may also be pursued through the

statutory prohibition on misleading or deceptive conduct: s 1041H(1)

of the Corporations Act; s 12DA(1) of the ASIC Act; and s 18 of the

Australian Consumer Law. The relevant provisions provide that a

person must not engage in conduct that is misleading or deceptive or

is likely to mislead or deceive. S 1041H applies to conduct in

relation to a ‘financial product or a financial service’, s 12DA applies

to ‘financial services’ and s 18 applies broadly across the economy.

Strict liability is imposed on a company or individual who engages

in misleading or deceptive conduct and such conduct is assessed by

the court on an objective basis. Any person who suffers loss as a

result of misleading or deceptive conduct may recover

compensatory damages. As such, misleading or deceptive conduct

is a cause of action that is regularly employed in financial services

cases including class actions. A finding of misleading or deceptive

conduct may also lead to other civil remedies including injunctions,

orders for non-party consumers and non-punitive orders.

3.6 How have unfair terms in contracts been interpreted

in your jurisdiction? Are there any causes of action or

defences available specifically to consumers? How

broad is the definition of a ‘consumer’ in your

jurisdiction?

Part 2 Division 2 of the ASIC Act sets out the unfair contracts

regime in the financial services context. The ASIC Act defines a

consumer in terms of the characteristics of the contract, rather than

the individual. A ‘consumer contract’ is a contract where at least one

individual whose acquisition of financial products or services under

the contract is wholly or predominantly acquired for personal,

domestic or household use or consumption. The unfair contract

term protections in the Act also apply to small businesses; that is, a

business employing fewer than 20 people. Again, the focus is on the

contract; it must be a contract for the supply of financial goods or

services and the upfront price payable must not exceed $300,000.

The ASIC Act requires unfair terms to be contained within standard

form contracts, determination of which largely turns on the degree

of bargaining power of the consumer and opportunity for

negotiation.

Whether a term is ‘unfair’ depends on the factual equality of the

parties’ respective rights and obligations arising under the contract,

how necessary the term is to protect the advantaged party, and the

detriment caused to the other party.

3.7 How is data protection/freedom of information dealt

with in financial services litigation? Can a financial

services customer access their personal data? How is

commercially sensitive or confidential information

dealt with in the context of discovery or disclosure?

All private organisations, including financial services institutions,

must comply with the general rules applicable to data protection.

These are contained in the Privacy Act 1988 (Cth). The Act contains

the Australian Privacy Principles (APPs), which govern the

collection, use, storage and disclosure of ‘personal information’.

APP 12 provides that an entity which holds ‘personal information’

about an individual must, on request, give that individual access to

the information.

Confidential information obtained by discovery or subpoena may

only be used for purposes reasonably related to the proceedings in

which the information was obtained. This is known as the ‘Harman’

or implied undertaking. Reasonable uses include disclosure to

counsel, witnesses and the directors of corporate litigants. These

individuals are also bound by the rule.

Secondly, the courts may make orders limiting disclosure of court

proceedings and information to the public. ‘Non-publication’ orders

prohibit or restrict the publication of information and ‘suppression

orders’ prohibit or restrict the disclosure of information by

publication or otherwise. Such orders may be made in relation to

commercially sensitive or confidential information, especially

where the nature and value of the information would be altered or

diminished by its disclosure in a public forum. The High Court has

clarified the high threshold to the test – the orders must be necessary

to prevent prejudice to the proper administration of justice. A court

may also make orders for a closed court hearing, whereby the court

is not open to the public.

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4 Post Trial

4.1 Is there a right of appeal in financial services disputes?

Yes, Australian courts provide for a right to appeal from a first

instance decision. The right of appeal is derived from legislation

and the scope of the appeal depends on the terms of the legislation.

4.2 How does the court deal with costs in financial services disputes?

In Australian litigation the court has a wide discretion to award costs.

The usual position is that costs follow the event, or ‘the loser pays’,

so that a costs order will be made requiring the unsuccessful party to

pay the reasonable costs of the successful party. However, the court

has discretion to award only part of the successful party’s costs or it

may order costs on a higher indemnity basis in certain circumstances,

such as where a claim or defence had no chance of success.

5 Cross-Border Issues

5.1 What issues typically arise in cross-border disputes or investigations involving financial institutions and how are they catered for in your jurisdiction?

Issues that typically arise in cross-border financial services disputes

include those relating to service of documents (including originating

processes) and enforcement of orders on overseas entities, obtaining

information (including evidence) located abroad and the sharing of

information between regulatory bodies.

Service on an overseas financial institution may be problematic

unless the dispute is contractual and there is a submission to forum

(or arbitration) clause in the relevant contract, or there is a local

subsidiary (and it is sufficient that the subsidiary be joined as a

party). Even if service is effected (including overseas, with the

leave of the Australian court), enforcement of any outcome on an

overseas entity with no Australian assets may be difficult (as any

money judgment will need to be enforced in the foreign jurisdiction

in which assets are located and, depending on the laws of the foreign

country, any non-monetary outcome may not be enforced).

Australian courts are generally protective of proceedings before them

and have sometimes been restrictive in litigants’ use of processes

overseas to obtain information for use in Australian proceedings (as

explained in question 5.2 below). Australia is a signatory to, and has

implemented the structures required for, the Hague Service

Convention and Hague Evidence Convention, which provide ways by

which litigants can gather information located abroad.

ASIC has signed memoranda of understanding with other regulators

regarding the exchange of information and cooperation, including

the IOSCO’s Multilateral Memorandum of Understanding

Concerning Consultation and Cooperation and the Exchange of

Information. These sharing arrangements sometimes raise further

issues, such as privileges against self-exposure to civil penalties.

5.2 What is the general approach of the courts in your jurisdiction to co-operating with foreign courts or regulatory bodies or officials in financial services disputes (including investigations)?

Australian courts are, in general, mindful of the importance of

international comity in making decisions involving cross-border

issues. Australia has entered into and has implemented the Hague

Evidence Convention and Hague Service Convention, and accedes

to requests from other countries under the procedures set down in

those treaties. Australian courts can also enforce certain foreign

money judgments according to the relevant procedures (although

there may be difficulties in seeking to enforce judgments with a

penal character, such as fines or civil penalties arising out of a

financial services regulator).

Litigants in Australian proceedings should be careful to seek the

Australian court’s approval before obtaining foreign assistance, as

Australian courts tend to be protective of the integrity of their own

processes. For example, there have been a recent line of cases in

which Australian courts have disallowed (by anti-suit injunctions

and otherwise) litigants’ use of the information-gathering

procedures in US courts under 28 USC § 1782 in circumstances

where they did not first seek the Australian court’s imprimatur.

5.3 Is extra-territorial jurisdiction typically asserted in

your jurisdiction and, if so, in what circumstances?

Australian courts regularly hear financial services disputes under

Australian law involving at least one non-Australian party,

although, as mentioned above, there may be attendant issues when a

foreign party is involved. In situations where there is a dispute as to

the appropriate forum, including where there is a jurisdiction clause

in the relevant contract, Australian courts take note if a party is

claiming remedies that may only be available under Australian law

(for example, for statutory misleading or deceptive conduct).

Australian laws do not generally have extra-territorial application,

although there are certain aspects of Australian financial services

laws that are capable of extra-territorial application. For example,

the conditions upon satisfaction of which a person must hold an

Australian Financial Services Licence are capable of being met

easily, even by financial institutions based abroad, although there

are currently broad exemptions that apply to overseas entities.

ASIC works with foreign regulators and law enforcement agencies

to assist in its compliance and enforcement activities.

5.4 Are unilateral jurisdiction clauses valid and

enforceable in your jurisdiction?

Jurisdiction clauses (both exclusive and non-exclusive) are

routinely considered and given effect to by Australian courts. There

have been fewer decisions on unilateral, or asymmetrical,

jurisdiction clauses, which require only one party to submit to the

exclusive jurisdiction of a specified forum (in financial contracts,

typically the borrower is required to submit on an exclusive basis).

They are in principle enforceable, and there has been at least some

judicial support for them. With all jurisdiction clauses, however, the

Australian court can decide not to enforce the clause, taking into

account relevant factors, including mandatory laws of the forum.

Unilateral jurisdiction clauses may, for example, be liable to be

caught, and held void, by the unfair contract terms regime in the

ASIC Act and the Competition and Consumer Act 2010 (Cth).

6 Regulated Bodies

6.1 What bodies, apart from the courts, regulate financial

services disputes in your jurisdiction?

Financial services disputes are regulated by ASIC and AFCA. ASIC

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is the Australian government regulator in relation to financial

services. AFCA is the external dispute resolution provider as

referred to in question 3.4 above.

6.2 What powers (investigative/inquisitorial/

enforcement/sanctions) do these regulatory bodies

have?

ASIC has a number of information-gathering powers provided for

under the ASIC Act which enable ASIC to require persons or entities

to provide it with documents and information or to attend an

examination to answer questions and provide assistance. ASIC also

has the power to apply for and execute search warrants to obtain

certain documents.

AFCA has a broad range of powers to assist it when considering a

financial complaint. For example, AFCA can require parties to

attend interviews or examinations or request that the parties provide

relevant information such as policy documents and records or files

kept by the financial firm.

6.3 Are the decisions of regulatory bodies binding on the

parties to a financial services dispute?

AFCA deals with disputes through negotiation, conciliation or

through formal methods. The final stage of the dispute resolution

process undertaken by AFCA is a determination, which is

considered to be a binding decision. For all complaints other than

superannuation complaints, the complainant has the option of

accepting the determination (or not accepting the determination). If

the complainant does accept the determination, the financial firm

which is the subject of the complaint must comply with the remedy

stipulated in the complaint within the timeframe outlined in the

determination. If the financial firm does not comply, AFCA will

report such failure to ASIC. If the complainant does not accept the

determination, they can pursue their claim further through the

courts.

A separate procedure is followed in relation to superannuation

complaints. After a complaint has been made to AFCA about a

superannuation provider, AFCA has the power to either affirm the

decision of a superannuation provider, vary the decision, remit the

decision back to the original decision maker or set aside the decision

and substitute their own decision. AFCA is obliged to provide

reasons for their determination in relation to the superannuation

complaint. These determinations do not require the complainant to

accept the determination.

ASIC has the power to conduct administrative hearings relating to

regulation of financial services such as licensing. In relation to

ASIC, a binding decision will be made by an ASIC delegate

following an ASIC administrative hearing. An ASIC administrative

hearing is conducted informally and the rules of evidence do not

apply. The ASIC delegate will make a decision based on the parties’

submissions and the relevant material.

6.4 What rights of appeal from regulatory decisions

exist?

A financial firm party to a determination by AFCA may elect to

appeal the determination through the courts. Similarly, the

complainant may elect to pursue the claim through the courts if they

elect not to accept the determination. However, in this instance, the

complainant would be commencing proceedings rather than

appealing the decision.

Parties to a decision by ASIC can appeal the decision to the

Administrative Appeals Tribunal within 28 days of the decision

being made.

6.5 Are decisions of regulatory bodies publicly

accessible?

AFCA publishes both case studies and anonymised determinations,

but does not publish full decisions. ASIC administrative hearings

are conducted either publicly or privately, although the decision

itself is not published. If the ASIC delegate’s decision is appealed,

then the appeal judgment is publicly available. ASIC also maintains

a register of other regulatory actions such as enforceable

undertakings and an infringement notices register. In certain

instances, ASIC may also be required to publish orders it makes in

the Gazette.

7 Updates – Cases and Trends

7.1 Summarise any legislative developments in this area

expected in the coming year. Describe any practical

trends in your jurisdiction (e.g., has the financial

crisis impacted legislation? Has there been an

increase in the powers of regulatory bodies as a

reaction to the crisis? Has there been a change in the

amount and type of cases being brought by and

against financial service providers?).

In December 2017 the Royal Commission into Misconduct in the

Banking, Superannuation and Financial Services Industry was

established. After lengthy and highly publicised hearings

throughout 2018 the interim report was published in September

2018. The final report is due in February 2019. The Royal

Commission is expected to lead to an increase in the variety and

volume of cases being brought against banks and financial

institutions as well as statutory and non-statutory reforms to the

banking and financial services industry. By way of example, a class

action has been recently filed against one of Australia’s largest

banks after admissions of misconduct in the Royal Commission.

Recent reforms to the industry have expanded regulatory powers and

increased accountability. The Banking Executive Accountability

Regime (BEAR) was introduced in 2018 to impose heightened

obligations of accountability and transparency on financial

institutions, their directors and executives. Examples of new

obligations include the submission of an ‘accountability map’ setting

out responsibilities of officers and their reporting lines, and joint

liability for persons with shared accountability. The regime also

seeks to make these expectations and their penalties as clear as

possible as part of a broader goal to engender market confidence in a

stable, resilient banking system. BEAR is currently still in the

adoption process as some smaller banks are yet to implement policies

in line with the legislation.

The Australian Government has announced plans to greatly increase

civil and criminal penalties in the Corporations Act and increase the

regulator’s powers to ban individuals from financial services roles,

revoke licences, and use seized and intercepted material and

information. Additionally, whistleblower legislation has been

tabled before the Commonwealth Parliament which broadens the

persons protected under the Corporations Act and the range of

protected disclosures.

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7.2 On an international level, would your jurisdiction be

considered to be more financial institution- or

customer-friendly?

From a comparative perspective, Australia is relatively more

customer-friendly due to the array of statutory protections and

causes of action. However, the costs rules for litigation tend to

favour the better resourced party.

7.3 Please identify any significant cases regarding

financial services disputes during the past 12 months.

Please highlight the significance of the case(s), any

new or novel issues raised and what lessons can be

drawn from them.

ASIC pursued claims against a number of banks in relation to

manipulation of the Bank Bill Swap Reference Rate (BBSW)

including one that went to trial and found the bank to be in breach of

their Australian Financial Services Licence by failing to do all

things necessary to ensure that their services were provided fairly

and efficiently and failing to have adequate procedures and training

in place. The BBSW enforcement actions have emphasised the need

for compliance with Australian Financial Services Licence

requirements.

In a civil penalty case dealing with the assessment of home loan

applications and alleged breach of the National Consumer Credit Protection Act 2009 (Cth), the court rejected a $35 million

settlement agreed between ASIC and a bank. The decision marks a

departure from the courts’ past routine approval of civil penal

settlements agreed with regulators. This case suggests that in the

future the courts must be satisfied that a contravention occurred and

the penalty reflects the seriousness of the breach.

The financial services and banking sector experienced the highest

incidence of class action filings in 2018. Five shareholder class

actions were filed against AMP, triggered by admissions of

misconduct in the Royal Commission, and foreshadow sustained

class action pressure in the financial services sector in the near

future.

The ability of class actions to extract significant sums of

compensation was demonstrated by the settlement of six related

proceedings for $215 million in relation to the credit ratings given to

complex financial products that were purchased by local councils

and charities.

7.4 Have global economic changes caused any changes

to financial services litigation/regulation in your

jurisdiction?

No, they have not caused any changes.

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John Emmerig

Jones Day

Aurora Place

Level 41, 88 Phillip Street

Sydney NSW 2000

Australia

Tel: +61 2 8272 0506 Email: [email protected] URL: www.jonesday.com

Michael Legg

Jones Day

Aurora Place

Level 41, 88 Phillip Street

Sydney NSW 2000

Australia

Tel: +61 2 8272 0500 Email: [email protected] URL: www.jonesday.com

John Emmerig is one of Australia’s leading litigation lawyers. He has

30+ years’ experience in high-stakes litigation representing the

interests of global and major domestic corporations, financial

institutions, and government.

John’s core practice areas are class action defence, major commercial

disputes (“bet-the-company” level), and government/regulator litigation.

He has a national reputation for his experience and outstanding record

in each of these fields.

John’s work in other high-stakes commercial disputes routinely

involves him representing key parties in some of the largest and most

complex matters litigated in Australian superior courts, in international

commercial litigation, and in major test cases.

Mr. Emmerig holds a number of other distinguished appointments,

including as an Adjunct Professor of Law at the University of Notre

Dame Australia, a Fellow of the Australian Academy of Law, the Co-

Chair of the Class Actions Committee of the Law Council and the Co-

Chair of the Transnational Litigation Committee. He also serves as a

member of two Federal Court of Australia national liaison committees

(one on Class Actions and the other on Practice and Procedure), and

as a member of the Editorial Board of both the Journal of Equity and

also the Journal of Civil Litigation and Practice.

Jones Day is a global law firm with more than 2,500 lawyers in 43 offices across five continents. The Firm is distinguished by: a singular tradition of

client service; the mutual commitment to, and the seamless collaboration of, a true partnership; formidable legal talent across multiple disciplines and

jurisdictions; and shared professional values that focus on client needs.

Jones Day has long recognised the growing role of Australia in the global economy. The Firm expanded to Australia in 1998 with its first office in

Sydney and opened offices in: Perth in 2014; Brisbane in 2016; and Melbourne in 2018. There are now more than 85 Jones Day lawyers practising

Australian law and providing market-leading capabilities on a wide range of services for clients.

Michael Legg is Of Counsel and has 20 years’ experience as a litigator

having practised in Australia and the United States. His practice

focuses on class actions, regulatory proceedings, and complex

commercial disputes. He has represented clients in Australian

Securities and Investment Commission investigations. He is also a

Professor at the University of New South Wales in Sydney, Australia.

Jones Day Australia

21

Chapter 5


Wolf Theiss

Holger Bielesz

Florian Horak

Austria


1.1 What are the most common causes of actions taken

by or against financial institutions and service

providers in your jurisdiction?

In Austria, the most common causes of actions taken in financial

service disputes are:

■ investors’ claims for wrongful advice or wrongful prospectus

information;

■ loan or mortgage lawsuits; and

■ lawsuits against immoral or severe disadvantageous terms

and conditions from financial service entities.


Civil proceedings are commenced by filing a lawsuit with the

competent court. Within the lawsuit the plaintiff has to include the

relief or remedy sought. Under Austrian law, there are three types of

lawsuits:

■ suit for performance;

■ Declaratory Action; or

■ suit for the creation, amendment or cancellation of a legal

relationship.

Most common in financial service disputes are suits for

performance, e.g. investors’ claims for wrongful advice and loan or

mortgage lawsuits.

In case of a sole monetary claim, which does not exceed the amount

of EUR 75,000, a payment order will be issued by the court. The

defendant may file an objection to the payment order within four

weeks after its service. In case no objection is filed in time, the

payment order becomes final and enforcement proceedings may be

initiated.

For non-sole monetary claims or claims which exceed the amount of

EUR 75,000, the defendant will be ordered to file a statement of

defence. The statement of defence has to be filed within four weeks

after the service of the claim, which is combined with the order to

file a statement of defence.

In case a sole monetary claim exceeds the amount of EUR 75,000,

or in case of non-sole monetary claims, the ordinary proceeding will

be initiated only if a statement of defence has been filed in time.

This also applies in case the defendant files an objection to the

payment order in time. After the taking of evidence has been

concluded by the court, the proceeding will be closed and a

judgment will be issued. In Austria, it is most common that the

judgment will be issued in writing.

In addition, there is the possibility to file a request for interim

remedies, e.g. preliminary injunctions. Such request may be filed

before filing a lawsuit or even during litigation proceedings. A

preliminary injunction will only be issued by the court if:

i. the defendant will prevent or endanger the enforcement of a

potential judgment by destroying, concealing or transferring

his assets; or

ii. the judgment would otherwise have to be enforced in a state

in which enforcement is not guaranteed by international

treaties or the laws of the European Union.




Under Austrian law, there are no procedural restrictions as to who

may initiate proceedings. Thus, it is not relevant whether the

customer is an individual or a commercial entity.





this?

Third-party funding to obtain the necessary monetary funds to

initiate proceedings is allowed in Austria. Third-party funders will,

however, regularly only be interested in funding the case, if:

i. the aggregate amount in dispute is big enough to cover its

compensation;

ii. the litigation is successful; and

iii. the opponent is expected to dispose of the funds required to

satisfy a future court judgment.

In Austria, litigation insurance is available too. Litigation insurance

companies will not only cover the own costs of litigation

proceedings but also the opponent’s attorney fees and the court fee

in case the proceeding is lost. As the main barrier for customers are

the expected costs of litigation proceedings (see question 2.1),

litigation insurance may determine whether a customer decides to

bring/defend a case against a financial service entity or not.

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No, the Austrian civil procedural law does not provide the possibility

for class action lawsuits. Attempts at the level of the Ministry of

Justice did not translate into any legislative initiative, which was

mainly due to the resistance of the domestic entrepreneurship.

However, there is the possibility for – most frequently – consumer

organisations to initiate model proceedings by bringing claims for

parties who assigned their rights to such entities. The EU Commission

is currently working on a directive setting up rules for class actions.






case?

The main barriers to financial service litigation for customers are the

costs of litigation proceedings. According to Austrian law, the

losing party has to reimburse the costs of the proceeding to the

winning party (see question 4.2). Thus, customers may be reluctant

to initiate proceedings or defend a case.

Under Austrian law, a clause in customer contracts, which prevents

customers in advance of a dispute from bringing a case, would be

considered null and void.






clock’?

There are no specific time limits with regard to financial services

disputes. However, a claim can only be enforced within a litigation

proceeding if it is not time-barred. Therefore, the statute of

limitation has to be observed in advance of filing a lawsuit.

Under Austrian law, the statute of limitation is subject to the

substantive law which is applicable to the respective claim. In

general, the statute of limitation is 30 years. In addition, there is a

short statute of limitation of three years, which is applicable for, e.g.,

damage claims. The period for the statute of limitation commences

at the time the right could have been exercised for the first time. The

statute of limitation is suspended once a lawsuit has been filed with

the competent court and if the plaintiff properly pursues his claim.

There are no regulatory bodies in Austria, who are competent for

financial services disputes. Thus, the commencement of a regulatory

process does not inhibit the statute of limitation (but see question

3.4). To prevent a claim from being time-barred, a proceeding has to

be brought before the court.





Austrian attorneys are bound to professional secrecy in accordance with

the Attorney’s Code of Professional Conduct. In Austria, professional

secrecy for lawyers is considered as one of the most important

obligations for lawyers. Thus, Section 9, paragraph 2 of the Austrian

Lawyers Act (“Rechtsanwaltsordnung”, “RAO”) sets forth the lawyer’s

duty of confidentiality regarding all matters that were disclosed to him

or her in his or her function as counsel; the non-disclosure of such

matters being in the interest of the client. Therefore, a lawyer has the

right and the obligation to deny testifying in court, or before any other

authority, if this would result in a disclosure of secrets out of the client

relationship (“attorney-client privilege”). Section 9, paragraph 3 RAO

prohibits circumventing this principle by, for example, interrogation of

employees of the lawyer or seizing communications.

In civil law proceedings the attorney-client privilege is regulated in

Section 321 of the Code of Civil Procedure (“Zivilprozessordnung”,

“ZPO”).

2.4 Are standard form master agreements used in your

jurisdiction for financial institutions (for example, the

ISDA Master Agreement)? How are they treated?

In Austria, it is standard for financial service entities to apply their

terms and conditions to all contractual relationships. If terms and

conditions are agreed on, they are determining the conditions of the

contract. Nevertheless, such terms and conditions may be

considered as immoral or severely disadvantageous to the customer

and in such case they will be declared null and void. The ISDA

Master Agreement is used by Austrian banks as well.

2.5 Are there any non-contractual duties which are

binding on financial services entities (for example, a

particular fiduciary duty or a code of conduct)? Can

they be contracted out of?

Yes. E.g. the pre-contractual duties of care, which any financial

institution has to observe when entering into contact with customers

in view of the future conclusion of the contract, are considered non-

contractual both under Austrian law and EU law (cf. Rome II

Regulation). The potential breach of such duties usually plays a

significant role in damage claims for alleged wrongful advice.

Further, claims based on prospectus liability are considered tort

claims, i.e. they exist irrespective of a contract.


3.1 Is there a specialist court or specialist judges for

financial services litigation?

The Austrian court system distinguishes between District Courts

and Regional Courts as the court of first instance. For financial

services litigation, District Courts are competent for monetary

claims up to an amount in dispute of EUR 15,000. If the claim

exceeds this amount, the proceeding has to be initiated at the

competent Regional Court.

In case a decision rendered by the District Court is appealed, the

Regional Court acts as the Court of Appeal. In case the Regional

Court was competent as the court of first instance, the appellate

proceeding takes place before the Higher Regional Court.

As the Austrian legal system is based on a three-instance proceeding,

the appeal decision of the Regional Court or the Higher Regional

Court may be appealed to the Austrian Supreme Court (subject to

certain limitations aiming to limit the third instance to cases of broad

legal relevance). The Supreme Court’s decision is final.

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With the exception of the city of Vienna, all Austrian courts are

competent for any and all matters of civil law, e.g. commercial law

and labour and employment law matters. In Vienna, there is a

special District Court for commercial matters in Vienna

(“Bezirksgericht für Handelssachen Wien”) and on a regional level

the Commercial Court Vienna (“Handelsgericht Wien”). Both

special Viennese Courts only deal with commercial matters, in case

the defendant is an entrepreneur. E.g. a claim filed by a financial

service provider against a consumer as customer may not be filed

with the District Court for commercial matters or the Commercial

Court Vienna.

Besides, there is also a special Labour and Social Court in Vienna,

which only deals with labour and employment or social law matters.

As the judges from the District Court for commercial matters in

Vienna and the Commercial Court Vienna are specialised in

commercial matters only, they also have a lot of experience in

financial services litigation and thus may be considered as specialist

judges.

3.2 Does the method of service of proceedings differ for

financial service litigation?

No, there are no special rules for the service of proceedings in

financial services litigation. In general, the service of proceedings is

regulated in the Service of Documents Act (“Zustellgesetz”). The

service of the document instituting proceedings is considered as an

act with authority.

3.3 Are there any specific pre-trial procedures that must

be followed for financial services litigation in your

jurisdiction? If so, what are they and what are the

consequences of not abiding by them?

No, there are no specific pre-trial procedures under Austrian law

that must be followed. However, there is the possibility to initiate a

non-mandatory alternative dispute resolution proceeding before

filing a lawsuit (see question 3.4).






jurisdiction?

The Federal Act on Alternative Dispute Resolution in Consumer

Affairs (“Alternative-Streitbeilegung-Gesetz”, “AStG”) entered into

force on 14 August 2015. The provisions of the AStG are only

applicable for contracts entered into between an Austrian-based

entrepreneur and a consumer with his place of residence in Austria or

a country which is a signatory to the Agreement on the European

Economic Area. The AStG provides for procedural rules of alternative

dispute resolution proceedings before special arbitration bodies. With

regard to financial services disputes, the competent arbitration body is

the “Gemeinsame Schlichtungsstelle der Österreichischen Keditwirtschaft”. The initiation of such a proceeding is non-

mandatory and the proceeding is free of charge for the parties.

In Austria, alternative dispute resolution clauses are not typically

included in financial services contracts and according to our

experience they are not commonly used to resolve financial services

disputes. However, Austrian law encourages judges to initiate

settlement talks at the beginning of litigation proceedings. As

mediation has been implemented into the Austrian legal system by

the Law on Mediation in Civil Law Matters, there is also the

possibility for a judge to assign a mediator who will be present at the

court hearing. However, taking part in mediation is not mandatory

and the parties have to pay fees for the mediator if they agree to start

a mediation proceeding.

There is the possibility to conduct either stand-alone mediation

proceedings or a combination of arbitration and mediation. If a

settlement is reached through mediation, arbitration proceedings

can be initiated in order to render an arbitration award on the agreed

terms. In addition, parties who agreed to a written settlement in a

mediation procedure may also conclude a settlement within the

litigation proceeding. Such a settlement before an ordinary Austrian

court will be regarded as enforceable according to the Austrian

Enforcement Act (“Exekutionsordnung”, “EO”).



There are no specifics applicable in such disputes from a

procedural law perspective, i.e. they are handled in the same way

as other civil and commercial law disputes. In practice, claims for

misstatement/mis-selling may be prospectus liability claims

governed by applicable Capital Market law and/or civil law, where

the investor seeks redress for a misled investment decision.

Besides, in cases where publication requirements had to be

observed, damaged investors may also file claims based on the

breach of ad hoc publicity requirements. Such duties are

considered protective laws, which is why damaged parties may

file claims for redress, if they made an investment or omitted to

divest because of a misleading ad hoc notice.

Finally, within contractual relationships, damage claims for

misstatement/mis-selling may be deducted from breaches of

contractual or pre-contractual duties of care, which includes the

duty to comply with information requirements. To what extent such

an information requirement exists is a matter of contract

interpretation and subject to assessment in the individual case.





jurisdiction?

Terms and conditions in contracts which are considered to be

immoral or severely disadvantageous to the customer will be

declared null and void. If a party to the proceeding is a consumer,

the strict provisions of the Austrian Consumer Protection Act

(“Konsumentenschutzgesetz”, “KSchG”) apply to the case.

According to Section 1 of the KSchG, a consumer is defined as “a

person who does not enter into the transaction in the course of his

business”. Thus, any transaction of an individual or a legal entity,

which is not part of his/her business, is considered to be a consumer

contract. The person, who wants to rely on the rights under the

KSchG, bears the burden of proof that it did not enter into the

specific transaction within the course of business.






Judicial proceedings are public in Austria, which limits the

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possibility to keep personal data confidential. In addition, financial

service providers are not bound by statutory banking secrecy

towards a certain customer in case of a dispute against this very

customer.

Financial service providers are obligated by law to perform due

diligence on customers for anti-money laundering and terrorist

financing reasons. To comply with these provisions, financial

service providers have to obtain and verify information on the

beneficial ownership of their customers, including the details of the

beneficial interests held, their costumers’ identity, the purpose of the

intended business relationship, the origin of funds and the identity

of possible trustees. A financial services customer is entitled to

access his personal data held by the financial service entity.

Within the Austrian legal system there is no discovery and only very

limited disclosure. Practically speaking, each party presents the

documents and information it deems useful for its case. There are

means to compel the other party or a third party to disclose a specific

document by way of a court order. However, such request must be

very specific and the applicant must show a specific right to learn

the contents of the document. Also, only disclosure orders towards

third parties are enforceable, whereas a failure of the other party to

comply with a court order to disclose a specific document may only

lead to an unfavourable inference by the court.

Finally, in accordance with Directive (EU) 2016/943 of the European

Parliament and of the Council on the protection of undisclosed know-

how and business information (trade secrets) against their unlawful

acquisition, use and disclosure, on 28 December 2018, the Austrian

Civil Procedural Code was amended. According to Section 172,

paragraph 2 ZPO, the public may be excluded from oral hearings upon

request of a party of the proceeding if a trade secret has to be revealed

in order for the court to make its decision.

4 Post Trial

4.1 Is there a right of appeal in financial services

disputes?

Yes, as the general rules of civil procedural law are also applicable

in financial services disputes there is a right of appeal. A party to a

proceeding has a right of appeal as it was adversely affected by the

decision, e.g. the party did not completely prevail within the

proceeding.

Under Austrian procedural law, the deadline to file an appeal against

the first instance judgment is four weeks after its service. It is not

allowed to add any allegations in the appeal which were not raised

in the first instance proceedings. Appellate proceedings are mainly

decided on basis of the court file. Only in very rare cases the Court

of Appeal will take up evidence by itself.

The decision of the Court of Appeal may also be appealed to the

Supreme Court within four weeks after its service (subject to certain

conditions).

4.2 How does the court deal with costs in financial

services disputes?

There are no special rules on costs in financial services disputes but

the general rules of cost reimbursement are also applicable.

According to the Austrian Code of Civil Procedure, the winning

party is entitled to cost reimbursement by the losing party.

However, if either party partly prevails, the costs are divided on a

pro rata basis.

Under Austrian law, costs for litigation, including financial services

disputes, mainly consist of court fees, attorney fees and

disbursements (e.g. expert opinions, travel cost compensation for

witnesses, translation costs). Court fees are regulated in the Act on

Court Fees (“Gerichtsgebührengesetz”). The court fees depend on

the amount in dispute. Court fees have to be paid in advance upon

filing the claim. Further court fees will be triggered upon filing an

appeal or a revision.

Attorney fees are regulated in the Act on Attorney’s Tariffs

(“Rechtsanwaltstarifgesetz”) and also depend on the amount in

dispute. Subject to cost reimbursement are fees only according to

the Act on Attorney’s Tariffs. Thus, the losing party is not obligated

to reimburse higher fees paid to the attorney according to a separate

fee agreement (e.g. hourly rates).

The decision on the costs is included within the judgment. The cost

decision may also be appealed separately by the losing party. If the

judgment is only appealed with regard to the cost decision, the

deadline to file such an appeal is two weeks after the service of the

decision.


5.1 What issues typically arise in cross-border disputes

or investigations involving financial institutions and

how are they catered for in your jurisdiction?

Cross-border financial services disputes in Austria have – in recent

years – been characterised by extensive disputes on jurisdiction.

Further, conflict of laws questions come up, in particular with

respect to disputes filed by consumers.

A cross-border situation typically arises if Austrian customers file

suit against non-domestic financial institutions in Austria at the

place of their respective domicile. Plaintiffs do so on the basis of

Article 7, no. 1 of the Brussels Ia Regulation, which allows for

bringing an action at the place of performance of a contract.

Depending on the circumstances, consumers may rely on Article 17

et seq. of the said regulation, which provides for additional rights to

sue at the place where the consumer is domiciled. Finally, claims

based on tort may be filed at the place of the damaging event or

where the damage occurred pursuant to Article 7, no. 3 of the

regulation. These alternative places of jurisdiction triggered

referrals to the ECJ for preliminary rulings by the Austrian courts

and recently the Supreme Court issued several decisions, which

should clarify the jurisdictional issues to some extent (cf. question

7.3). More rarely, claims are brought on the basis of an agreed place

of jurisdiction (Article 25).

While the applicable private international law framework, in

particular the Rome I and II Regulations including Austrian

domestic conflict of laws rules, generally allow for the parties to

freely decide on the applicable law, this choice is limited in

contractual relationships involving consumers, which are often on

the plaintiff’s side in financial services disputes. In the first place,

Article 6 Rome I Regulation provides that contracts entered into by

consumers in an EU Member State, in which the entrepreneur is

commercially active, must not deviate from the mandatory rights of

the consumer applicable in that Member State by way of a choice of

law clause. This does not affect the validity of a choice of law

clause with respect to the rights and obligations which constitute a

financial instrument and other aspects related to transferable

securities and units in collective investment, other than financial

services (Article 6, paragraph 4, letter d Rome I Regulation).

Additional protective rules apply if the parties opt out of the

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otherwise applicable law of an EEA Member State into a third-state

law. Finally, Austrian law explicitly foresees that general contract

terms have to comply with the general Austrian law transparency

and validity requirements, no matter which law is applicable to the

respective contract (Section 13a KSchG).

5.2 What is the general approach of the courts in your

jurisdiction to co-operating with foreign courts or

regulatory bodies or officials in financial services

disputes (including investigations)?

There are no specific rules for international judicial co-operation in

financial services disputes. Generally, the Austrian courts grant

judicial assistance upon request of foreign courts dealing with civil

and commercial law disputes. Likewise, the Austrian courts make

use of the opportunity to obtain evidence from foreign courts for the

purposes of conducting proceedings before them. Especially within

the European Union, mutual judicial assistance in civil law

proceedings has been substantially improved following the

enactment and several years’ practice with the Evidence Regulation

No. 1206/2001. The regulation provides for a variety of measures

simplifying and accelerating judicial assistance ranging from

service of process to evidence-taking, in particular collecting

documentary evidence located outside the court’s jurisdiction or the

examination of witnesses residing abroad. Further, Austria ratified

the Hague Convention of 1954 on Civil Procedure relating to

international judicial jurisdiction (but not the Hague Convention of

1970 on the Taking of Evidence). Finally, judicial assistance is

facilitated by way of bilateral agreements with numerous states.

Even in the absence of any international law instrument, Austria

generally grants judicial assistance to any requesting state in

accordance with the diplomatic standards.



The means for the Austrian courts to exercise extra-territorial

jurisdiction are limited. Generally, regarding financial services

disputes, the Austrian courts would only assume jurisdiction if there

is a sufficiently strong connection to Austria. However, while in

former times, this “sufficiently strong connection to Austria” was

independently assessed and could theoretically be denied, even if an

Austrian seized court had jurisdiction based on applicable civil

procedural law, the Austrian courts are nowadays deemed

competent if – based on the applicable law – the claimant can

establish an Austrian place of jurisdiction.

Depending on the circumstances, these rules may lead to far-

reaching competences of the Austrian courts to decide on cases with

a strong extra-territorial nexus (even though they may not be

considered as pure examples of extra-territorial jurisdiction). E.g.

outside the scope of the Brussels Ia and Lugano Conventions,

Austrian law still foresees the possibility to sue a defendant in

Austria, because the defendant has assets there, without requiring

any additional connection to Austria. Further, within the scope of

the Brussels Ia Regulation, foreign companies (based elsewhere

within the EU) may be sued before an Austrian court for various

reasons, e.g. based on the place of performance of a contract or

based on the place of the occurrence of a damage giving rise to a tort

claim. Further, consumers based in the EU may file a lawsuit at the

place where they are domiciled against their contract partners under

the prerequisites of Article 17 et seq. Brussels Ia Regulation, even if

the contract partners are not domiciled in the EU at all.



In general, unilateral jurisdiction clauses cannot be validly agreed in

(financial services) contracts towards consumers, because under both

the regime (and the prerequisites of the above-mentioned Article 17

et seq.) of the Brussels Ia Regulation and under Austrian domestic

procedural law consumers are entitled to file lawsuit at the place of

their domicile and their contract partners have to file lawsuit at the

place where the consumer is domiciled (Section 14 KSchG).

To the extent the above limitations do not apply, Austrian law does

not exclude unilateral jurisdiction clauses. It cannot be ruled out

that, in some instances, the courts may view them as problematic, if

they confer to one party a particularly stronger contractual position

than to the counterparty, but this will likely have to be considered in

light of the overall rights and obligations of the contractual parties

and not solely with a view to the forum clause.

6 Regulated Bodies



Financial services disputes are solely decided by the courts and

arbitral tribunals. In contrast, the diverse tasks of the Austrian

financial regulatory bodies (mainly the Financial Market Authority

(“FMA”) and the Austrian National Bank) relate to the general

supervision of banks, insurance companies and pension funds and

the supervision of securities.

The supervision of the FMA also extends to the conduct of financial

institutions in providing customer advice and information, when

dealing with customers in general. This supervision may lead to rules,

which the financial institutions have to observe. E.g. in the context of

foreign currency loans the FMA issued minimum standards in order to

assist the gradual reduction of the risks stemming from such loans both

for customers and the banks. These minimum standards have, however,

no bearing on specific disputes with certain customers, although the

courts may draw a negative inference on the bank if a dispute arises and

the FMA’s standards have not been observed in the specific case. The

FMA is not allowed to interfere with the individual contractual

relationship between the financial institution and the customer.

The Austrian National Bank also assumes a supervisory role as to

the conduct of banks active in Austria. The Austrian National Bank

generally does so together with the FMA. Again, these tasks do not

interfere with the individual contractual relationships between

banks and their customers.



have?

While the powers of the above-mentioned regulatory bodies – the

FMA and the Austrian National Bank – over the supervised financial

institutions are fairly wide, these powers do not extend to resolving

financial services disputes.



The Austrian regulatory authorities cannot issues any decisions to

resolve financial services disputes.

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exist?

The decisions of the regulatory bodies are subject to appeals within

the administrative process, an appeal primarily leading to the First

Instance Administrative Court (Verwaltungsgerichte) and the

Administrative Court (Verwaltungsgerichtshof) including the

Constitutional Court (Verfassungsgerichtshof). Yet, these decisions

relate to the rights and obligations of the affected financial

institution based on applicable regulatory law. In contrast, any and

all financial services disputes have to be resolved by the civil courts

and do not require or allow the interference of the mentioned

regulatory bodies.


accessible?

The FMA is requested by law to publish certain relevant information

including administrative law decisions on its website. These include

the imposition of sanctions on affected financial institutions, decisions

regarding the regulatory status of the supervised institutions,

withdrawal of concessions, etc. In view of the tasks of the FMA, none

of these decisions concern individual financial services disputes.










The aftermath of the financial market crisis led to a massive increase

of court disputes, which did affect the financial services sector to a

significant degree. In terms of legislative changes, both the EU and

the national legislator increased the duties of care incumbent on

financial institutions when advising on the risks involved with

financial products. A major recent milestone was the

implementation of the MiFiD II directive by the EU Member States,

which was due by 3 January 2018. The impact of the legislative

changes of the recent years on the Austrian courts’ case law remains

yet to be seen, but it can be expected that the courts will take these

regulatory law rules into consideration when assessing claims filed

by investors for wrongful investment advice going forward.

Currently, investors’ claims for wrongful advice are declining. At

the same time, more disputes initiated by consumer associations

against financial institutions challenging purportedly unlawful or

“non-transparent” contractual terms could be noticed. The Austrian

Supreme Court developed a fairly strict regime, which imposes

hardship on the industry to ensure compliance with all consumer

protection rules.

Further, digitalisation in the financial market industry brings about

challenges, which is likely to have an effect on future financial

services litigation work. Not very different from other regions,

“Fintech” companies are currently fighting for market shares in the

financial services sector, which does not only increase competition

in the market. Some raise concerns from a consumer protection

perspective and claim that small customers may be lured into a

greater risk exposure including loans at excessive interest rates.

Finally, the EU Commission plans to implement a directive on

representative actions for the protection of the collective interests of

consumers. As things stand today, the directive shall also include

disputes in the domain of financial services and may facilitate the

filing of lawsuits by a larger number of customers against financial

institutions. This would bring about significant changes in Austria

in particular, where a specific statutory regime for collective action

proceedings has so far not been implemented.



customer-friendly?

The case law differentiates between the types of cases affected,

which make a general answer difficult. The above-mentioned case

law on general contract terms used by banks and other financial

institutions is clearly in favour of consumers, while the financial

service providers are struggling to bring their terms and conditions

in line with the equivalence and transparency requirements imposed

by the Supreme Court. In contrast, the case law became fairly strict

towards claimants in the context of time limitation periods for

pursuing damage claims. A sizeable number of cases filed against

banks, e.g. in the context of FX loans which had been marketed very

widely in Austria years ago, were rejected, because the courts

considered them time-barred. Other cases must be considered in

light of their individual facts and do not seem to weigh in favour of

one particular side. It is fair to say that the courts do expect a certain

degree of diligence even from consumers with respect to simple

financial products. In contrast, the more complex the financial

product, the harder it is for the responding service provider to prove

compliance with its advisory duties.





drawn from them.

The case law in the field of financial services disputes is abundant.

A major part of cases concerns representative actions challenging

general contract terms used by banks. Other proceedings concern

damage claims filed by retail investors based on wrongful advice

including prospectus liability claims. Below we set out some

examples which we consider illustrative, without providing an

exhaustive list:

■ Recently, the Austrian Supreme Court had to decide on the

determination of the place of jurisdiction for claims based on

prospectus liability. The cases dealt with the difficulties

identifying “the place of the damaging event” for the

purposes of Article 7 (2) Brussels Ia Regulation in such cases.

In a case decided in July 2017 the Supreme Court denied

jurisdiction of the Austrian courts, since the prospectus in

dispute had been issued abroad and the investor had made the

investment outside Austria as well. In a couple of other

subsequent cases, the facts were more complex. Therefore,

the Supreme Court requested a preliminary ruling from the

ECJ, which was rendered in September 2018. The

underlying facts concerned one out of a bundle of lawsuits

against an international bank based on the Brussels Ia

Regulation. While the ECJ had already denied the

jurisdiction of the Austrian courts based on contract and

consumer contract jurisdiction a couple of years earlier (in

case C-375/13, Kolassa v. Barclays Bank plc, with a view to

the non-contractual nature of prospectus liability claims), it

recently confirmed that under specific conditions, which

establish a sufficiently strong connection of the claim to the

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place of the claimant’s domicile, the claimant may file a

prospectus liability claim based on tort at the place of his own

domicile (ECJ C-304/17, Helga Löber v. Barclays Bank PLC).

■ In another case decided by the Austrian Supreme Court on 28

September 2017, the Austrian Consumers’ Association

(“VKI”) had filed a representative action against an Austrian

bank concerning a clause in the bank’s general terms regarding

notifications to customers via e-banking. It was questionable

whether a general contract clause was valid stating that upon

the customer’s consent the bank was allowed to send notices

and statements only electronically. The issue tied into the

interpretation of Directive 2007/64/EC requiring the financial

institutions to provide such information in a “durable” manner.

The ECJ ruled that the electronic transmission is in compliance

with the Directive if the communication is stored in a way that

the customer may access it and reproduce it unchanged for an

adequate period. Further, the service provider needs to actively

draw the customer’s attention to new information available on

the service provider’s website. Based on the preliminary ruling

by the ECJ, the litigious clause was found impermissible by the

Supreme Court.

■ Further, the Austrian Supreme Court rendered a couple of

decisions clarifying whether banks which provide a loan to

their customer may be obligated to pay interest to their

customers in case of negative interest rates:

■ In two cases decided in March and April 2017 the

Supreme Court ruled that in view of the normal terms of a

loan contract and the mutual understanding of the parties,

the bank cannot be expected to pay interest to a customer

for borrowing money from the bank. Therefore, the bank

was allowed to freeze the interest rate at zero per cent,

even though the negative interest rate would theoretically

result in an interest claim of the customer towards the

bank.

■ In two more cases decided in May 2017 a loan had to be

assessed, where the interest rate consisted of a fixed and a

variable interest component, the variable interest rate

being negative. The bank claimed that it was at least

entitled to charge the customer the fixed interest

component, which the Supreme Court denied. A negative

variable interest rate may therefore reduce the fixed

interest rate component accordingly. The Supreme Court

confirmed these decisions in a couple of subsequent cases.



jurisdiction?

In the years following the 2008 financial crisis, financial services

litigation played a significant role before the Austrian courts. In

particular, damage claims filed by retail investors for wrongful

advice or wrongful prospectus information were responsible for

capacity restraints before the courts. The sheer number of these

lawsuits and their complex nature contributed to the significance of

these litigation cases in Austria after 2008. Nowadays, such claims

are in decline as many cases not yet filed with the court are under

increased risk of being rejected as time-barred. This decline does

not seem to have been compensated by new cases.

Obviously, the Austrian regulator reacted to the difficulties caused

by the financial market crisis both for the banks and for their

customers. Although the FMA is not permitted to interfere with

individual disputes, the authority issued guidelines to address

general problems between the banks and their customers. One

example is the measures taken by the FMA in the context of the

Swiss franc loans, which used to be a very favourable and

widespread in Austria before they were practically banned by the

FMA for consumers.

Wolf Theiss Austria

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Holger Bielesz

Wolf Theiss

Schubertring 6

1010 Vienna

Austria

Tel: +43 1 515 10 5620 Email: [email protected] URL: www.wolftheiss.com

Florian Horak

Wolf Theiss

Schubertring 6

1010 Vienna

Austria

Tel: +43 1 515 10 5623 Email: [email protected] URL: www.wolftheiss.com

Holger Bielesz is a member of the Dispute Resolution team in Vienna.

He specialises in civil and commercial litigation and arbitration, and

also represents clients in high-profile white-collar crime cases. Holger

regularly advises clients in relation to financial services disputes,

internal investigations, bribery and corruption cases, as well as

general commercial disputes. Holger also acted as party’s counsel

before the European Court of Justice. He is a postgraduate of the

College of Europe, a highly reputed academic institution in the domain

of European Union law. Before joining Wolf Theiss, Holger gained in-

depth professional expertise in EU law at a high-profile international

law firm in Brussels.

Wolf Theiss is one of the leading law firms in Central, Eastern and South-Eastern Europe (CEE/SEE). We have built our reputation on a combination

of unrivalled local knowledge and strong international capability. Our team now brings together over 340 lawyers from a diverse range of

backgrounds, working in offices in 13 countries throughout the CEE/SEE region.

Over 80% of our work involves cross-border representation of international clients. Our full range of services covers: Banking & Finance; Business

Crime; Capital Markets; Competition & Antitrust; Compliance; Corporate / Mergers & Acquisitions; Dispute Resolution; Employment Law; Energy &

Renewables; Infrastructure; Intellectual Property & Information Technology; International Arbitration; Investment Funds; Life Science; Real Estate &

Construction; Regulatory & Procurement; Retail; and Tax.

We have concentrated our energies on a unique part of the world: the complex, fast-developing markets of the CEE/SEE region. Through our

international network of offices, we work closely with our clients to help them solve problems and create opportunities.

For more information go to the interactive web profile by following this link: http://brochures.wolftheiss.com/de/zudhJrSO/short-firm-profile.

Florian Horak is a member of the Dispute Resolution team in Vienna.

His main practice areas are civil and commercial litigation and white-

collar crime disputes, including bribery and corruption, fraud and

compliance. Florian regularly advises clients in relation to financial

services disputes, internal investigations, bribery and corruption

cases, as well as general commercial disputes. Florian has extensive

experience in both court litigation and out-of-court dispute resolution.

He has a law degree from the University of Vienna.

Wolf Theiss Austria

29

Chapter 6

ICLG TO: FINANCIAL SERVICES DISPUTES 2019 WWW.ICLG.COM

Trench Rossi Watanabe Advogados

Giuliana Bonanno Schunck

Gledson Marques De Campos

Brazil





In Brazil, the most common causes of action brought against banks

and other financial institutions are claims alleging breach of

consumer protection rules. Commercial banks and financial entities

that grant loans for individuals and legal entities usually have a high

number of lawsuits and consumer claims filed against them. There

are several factors driving this phenomenon, one of the main factors

being the high level of interest rates practised in Brazil. These

claims usually challenge accrual of interest, excessive rates, lack of

suitability over-indebtedness, etc.

Lawsuits claiming the payment of moral damages to bank clients

that complain about improper listing of the name of the debtor in a

public list of debtors are another major type of claim. These claims

are divided into lawsuits filed by bank clients against financial

institutions, and counterclaims filed in connection with collection

lawsuits and foreclosures filed by the banks against debtors. The

claims are usually grounded in statutory consumer laws and alleged

contractual breach derived therefrom.

Judicial disputes involving large commercial debtors are rare, but

when a dispute arises it usually involves a challenge to the form of

calculation of interest rate (e.g., accrual) and other alleged unfair,

excessive or non-transparent practices in respect to calculation of

interest and costs and charges. It is also common to have arbitration

in more sophisticated contracts.


Customers that feel damaged by any action of financial institutions

may:

■ seek damages;

■ request the termination of the agreements;

■ request the specific performance of an obligation, or the

performance of any obligation by the financial institution, if

applicable; or

■ request injunctive reliefs (e.g., to stop payments until a final

decision on the merits of the case).

These are the most common remedies, but customers may also seek

other remedies, if applicable, depending on the case.




Anyone that feels damaged has a right of action in financial services

disputes. However, although there are several suitability rules in the

laws and regulations, applicable specifically to Brazilian financial

institutions, claims alleging mis-selling of financial products are

usually grounded in the Brazilian Consumer Code. The Brazilian

Consumer Code has certain general rules that allow these claims.

Such rules encompass the obligation of the service provider to

provide correct information regarding the features of the product,

establishing that the consumer must be treated as the weak party of

the contractual relationship and be treated accordingly.

Breach of suitability rules or mis-selling of financial products

usually expose the sellers to regulatory sanctions, but judicial claims

are more likely to be grounded in consumer legislation.





this?

Third-party funding is available to financial services litigation in the

same sense it is available to any other kind of dispute. Litigation

insurance is available but not usually used in Brazil.





Yes, class actions and other collective claims can be filed by certain

class entities, the District Attorney and other persons ‘in

substitution’ (or on behalf) of the customers or the damaged parties.

Regulatory authorities (such as the Brazilian Securities and

Exchange Commission – CVM – which is the regulatory agency in

charge of the regulation of public offering of securities, registering

listed companies, securities public trading, custody of securities and

supervision of publicly traded companies, among other things

(pursuant to Law No. 4,595/64, only a licensed financial institution

may perform banking and finance activities such as the collection,

intermediation and investment of its own or third parties’ funds))

may act as assistant to the plaintiffs or defendants, in the role of


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‘amicus curiae’ (i.e., the person that is assisting with the application

of the law).

No, the financial crisis has not impacted litigation as the Brazilian

financial system had been already regulated in the areas that proved

more problematic during the financial crisis of 2008 (e.g., real estate

finance and derivatives).






case?

In general, except for court costs that may be high (it varies from State

to State but may be equivalent to 1% of the amount in dispute), there

are no obstacles for customers to file financial services litigation.

Court costs may also be avoided if the customer is an individual and

can prove that they cannot support the court costs. It is rare to have

clauses preventing customers from bringing a case as, from a

Brazilian law standpoint, provisions in this regard may be considered

abusive and so disregarded by courts. As most of the financial

institutions’ agreements are standard forms, usually customers cannot

change or discuss the language being proposed, so in case of abusive

clauses they will be either disregarded (especially if the customer is an

individual and, in such case, the rules of the Brazilian Consumer Code

will apply) or interpreted in the most favourable way to the customer

(according to the Brazilian Civil Code).






clock’?

The time limit is related to the statute of limitations provided in

statutes. For claims involving consumers, the statute of limitations

is five years from the moment the consumer suffered the damage or

from the moment the specific fact that gave rise to the lawsuit

occurred. If claims do not involve consumers, the statute of

limitations may vary. It may be three years depending on the

customer allegation or 10 years – the general rule of the Civil Code.





Privilege can be availed by the parties concerning communications

exchanged with lawyers. Also, banking secrecy is respected in

Brazil, but it does not prevent financial institutions from being

ordered to present information in court if necessary. This is because

information that is secret or confidential (such as banking, business

and industry secrets) is protected, and if it must be presented in court

the lawsuit will be sealed so that only the parties involved will have

access to that information, and the confidentiality or secrecy will not

be spoiled. The party cannot simply allege that it will not present

the information because it is confidential or secret. If that piece of

information is really necessary for the comprehension or

understanding of the case and the party holds the information, the

party will need to present it (and may request the case to be sealed

to guarantee confidentiality); otherwise, the case may go against

that specific party because the right was not properly evidenced.

The same happens with witness evidence. If the witness testifies

regarding confidential information, the case will be sealed and no

third parties will have access to it. Only in the case of certain

specific professionals (for example, doctors) will the testimony be

dismissed just because the information is confidential.

The discovery concept (as it is defined in common law, with fishing

expeditions, etc.) does not apply in Brazilian law. Each party is

required to produce evidence in its favour, but the party cannot

simply take information that the other party does not want to

voluntarily disclose.

However, if the judge understands that a party could have presented

a document or piece of information that was important to the

interpretation of the facts, but that did not occur, the judge is

allowed to hold adverse inference because of the failure of that party

to provide that piece of evidence.

Communications between financial institutions and regulatory

bodies are covered by banking secrecy laws. The data exchanged

between them may not be disclosed to third parties and are not

publicly available.




Yes, standard form master agreements are usually accepted and

enforced, to the extent that they have been validly entered into by

parties with adequate capacity to contract. Their purpose is lawful

and is determined to be achievable. In agreements used for mass

products (such as bank accounts, consumer loans, etc.), such

standard forms are not negotiated by the parties; on the contrary,

these agreements are viewed as ‘adhering agreements’. These

adhering agreements are more favourable to the adhering party and

the Brazilian Consumer Code is applied to overrule any conflicting

clause or any clause that may be viewed as jeopardising the

relationship causing damage to the customer.

In respect to standard form agreements, which are more complex

and sophisticated, and have certain conditions subject to negotiation

(such as International Swaps and Derivatives Association

agreements), courts may construe these agreements in a more

balanced manner and interpret the agreement from a more literal and

objective standpoint. However, because of the risk that courts apply

general principles of civil law, which may lead to equitable

decisions that are detrimental to objective decisions based on the

literal construction of the agreement, financial institutions and their

clients generally rely on arbitration clauses in case of more

sophisticated agreements. Thus, most of the more complex standard

form agreements include arbitration as means for dispute resolution.





In Brazil, there is an implied duty of good faith in all contracts (not

only financial). In fact, the Brazilian Civil Code sets forth:

■ in article 113 that the contracts or transaction shall be

interpreted according to good faith and the practice of the

place in which they were formed; and

■ in article 422 that the contracting parties shall observe the

principles of probity and good faith, both in entering into the

contract and in its performance.

Trench Rossi Watanabe Advogados Brazil

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Although article 422 does not mention the phases prior to the

execution of the contract and after the performance is concluded,

our scholars and court decisions understand that the parties shall

observe good faith before execution (i.e., during the negotiations of

the contract), at the performance of the contract and after the

contract has already been concluded or terminated.

The characteristics of good-faith duties may vary according to the

parties involved, the practices of the specific market, etc., as per

article 113 mentioned above.

The duty of good faith also determines that the parties should

behave consistently, so that unexpected changes in their behaviour

will be interpreted as a breach of the duty of good faith (similar to

the common law concept of estoppel).

The good-faith duty in contracts set forth in Brazilian law has its

origins in German law and is also very similar to what is provided in

the Principles of European Contract Law and in the International

Institute for the Unification of Private Law Principles.

For financial institutions, the duty of good faith may also

encompass, depending on the specific product, the fiduciary duty

and the duty of care, meaning that the financial institution shall act

in the best interests of the customers (especially in case of funds,

among other things).

In addition, for financial institutions and their customers, a large

portion of the contracts may fall into the category of consumer

contracts, as most of the time the customer purchases or uses the

products or services as the final addressee or beneficiary (as per

article 2 of the Brazilian Consumer Code).

In such cases, the interpretation of the duties of good faith is even

stricter as the consumer, considered to be vulnerable, is protected by

certain concepts of the Brazilian Consumer Code. This provides

greater obligations to the service provider in terms of disclosure of

accurate and complete information.

On the other hand, when the customer is sophisticated or has great

knowledge of the financial market, the judges tend to interpret their

condition as a consumer with more flexibility and in a less strict

manner.

Thus, in summary, the effects of the duty of good faith on financial

services litigation are normally associated with:

■ complete and accurate information provided by the financial

institution to the customer (mainly when they may be

considered consumers); and

■ the duty of care (i.e., to act diligently with the resources of the

customer).

As the duties that arise out of good faith cannot be described

beforehand (i.e., only after a certain situation occurs will it be

possible to verify if the parties acted according to them) Brazilian

law does not authorise the parties to exclude them from an

agreement.




No, Brazil does not have specialist courts or other arrangements for

financial services disputes. The regular State courts entertain

jurisdiction to hear financial cases. Depending on the city where the

case will be held, there are some special State courts for corporate

issues in general that will hear financial cases, particularly when

they do not involve consumer contracts (in such cases, the regular

court will hear the case).

There are no specific requirements for a case against a financial

institution to be heard in court. The general requirements for civil

procedure apply for such cases (meaning payment of court costs,

correctly presenting the case, etc.).

All Brazilian judges start their career in public examinations. There

are special requirements for judges in the Superior Court of Justice

(the final court to decide on federal laws) and in the Supreme Court

(the final court to decide on constitutional law), who are appointed

by the Brazilian President after certain other specific approvals.



No, service of process will follow the general rules provided by the

Brazilian Code of Civil Procedure.





No, there are no specific pre-trial procedures for financial services

litigation.






jurisdiction?

No, the general rules of ADR also apply to financial services

disputes. As mentioned above, especially for more sophisticated

contracts, the parties usually include arbitration provisions in the

contracts. Arbitration is very serious and well recognised in Brazil

in general (not only for financial services disputes).



Claims of misstatement/mis-selling typically involve breach of the

good-faith duty (lack of accurate and complete information to the

customer, i.e., whether the bank has fully disclosed the risk to the

customers) and lack of diligence of the bank in informing the

customers that they could stop losses. In consumer cases, it is also

common to see customers alleging that banks did not act in good

faith when applying abusive interest rates, or regarding other issues

related to loan contracts. Claims based on breach of fiduciary duties

may expose the defendant to damages, which in all cases must be

proven and quantified. Also, damages must be proven to have been

caused directly by the action or omission of the defendant. Brazilian

laws do not allow claims for punitive damages, and jury trials do not

apply to litigation other than certain criminal offences that are life-

threatening.





jurisdiction?

Unfair terms in contracts are usually interpreted to the benefit of the

customer because most of the time unfair terms are contemplated in


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general forms. In case of consumer disputes, the unfair term can be

either disregarded or interpreted to favour the consumer, according

to the Brazilian Consumer Code. In contracts which are not

governed by the Brazilian Consumer Code but by the Civil Code the

unfair term may be interpreted to the benefit of the customer if there

is any interpretation dispute. According to article 2 of the Brazilian

Consumer Code, the consumer is the customer that purchases or

uses the products or services as the final addressee or beneficiary. It

is not relevant if the customer is an individual or an entity, both can

be considered consumers. However, the provisions of the Brazilian

Consumer Code are, in some cases, more protective to individuals.






As mentioned above, banking secrecy is respected in Brazil, but it

does not prevent financial institutions from being ordered to present

information in court if necessary. Please refer to question 2.3 above

for more details.

Customers can access their data and may request court to force

financial institutions to present their data.

Note that Brazil has a new General Data Protection Law (GDPL)

which is not in effect yet and will likely be in force in August 2019

(its effectiveness may be changed, as has already occurred in the

past). The GDPL will still allow financial institutions to use

confidential information in court to support their interests and

allegations.

Also, as mentioned in question 2.3 above, the discovery concept (as

it is defined in common law, with fishing expeditions, etc.) does not

apply in Brazilian law.

4 Post Trial


disputes?

Yes, in Brazil, the parties can appeal after a decision is issued by the

trial court and in some cases even after a decision is issued by the

Court of Appeals.


services disputes?

Costs follow the general rules. The plaintiff is normally the one that

pays court costs to commence the lawsuit (around 1% of the amount

in dispute), costs for an expert investigation, etc. However, if the

plaintiff alleges that it cannot support court costs, it can be granted

financial aid and be exempted from costs.





It is not usual to have cross-border litigation involving disputes

between private parties. Usually, such cases involve criminal

issues. Brazilian courts tend to cooperate in cross-border disputes

or investigations but sovereignty shall not be jeopardised.





Brazilian courts will cooperate according to treaties and if the

requests do not offend Brazilian sovereignty.



Extra-territorial jurisdiction is not generally asserted in Brazil.



Based on changes to the Brazilian Code of Civil Procedure that

became effective in March 2016, the parties are now free to choose

foreign venues (this was discussed in the past and sometimes

Brazilian courts agreed to hear cases even when the parties chose

foreign courts). In view of that, in theory such unilateral jurisdiction

clauses could be accepted. However, if the potentially damaged

party (with such clause) decides to dispute the clause and the fact

that it may not be considered balanced, Brazilian courts may decide

that this lack of balance between the parties is not acceptable and

may disregard the clause, deciding to hear the case in Brazil.

6 Regulated Bodies



The banking sector and capital markets integrate the Brazilian

financial system, which is strictly and extensively regulated.

Brazilian statutory laws and regulations establish the types of

financial institutions that are allowed to be licensed, and what

activities such financial institutions may undertake. The Brazilian

financial system consists of the National Monetary Council (CMN),

the Central Bank of Brazil (Central Bank), the National Bank for

Economic and Social Development, the public and private financial

institutions and payment institutions. Insurance is also regulated,

but is not considered within the Brazilian financial system.

Financial services is a broader concept that includes banking and

finance activities as well as capital markets. More recently,

payment services have been regulated and are carried by payment

institutions, which may require a licence from the Central Bank

depending on their size, role or systemic importance. Banking

activities and financial services are regulated by statutory and infra-

statutory laws enacted by the Brazilian Congress and the CMN,

respectively. The CMN is an ad hoc regulatory body that is

composed of the Ministry of Finance, the Ministry of Planning and

the President of the Central Bank, and its main role is to issue

regulations and guidelines for public policy concerning credit and

currency affairs (including monetary and foreign exchange

policies). The Central Bank is responsible for the implementation

and enforcement of the regulations and guidelines set forth by the

CMN. The main goal of the Central Bank is to promote the stability

and purchasing power of the Brazilian currency, as well as to


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strengthen the local monetary system and supervise the conduct of

financial institutions. The Central Bank is responsible for

implementing monetary policies, as well as exercising control over

foreign investments and inflow and outflow of capital in Brazil, as

provided by Law No. 4,595/1964 and several other specific rules

enacted by the CMN. The Central Bank is also competent to grant

licences to financial institutions, including securities brokers.

Suitability is decided, in a diverse manner, by all of the regulators

mentioned above. One exception is the sale of securities, which has

been regulated by the CVM in a more systematic manner.

Specifically, the CVM issued Instruction 554/14, directed to the

financial institutions that distribute and sell securities (such as

shares, bonds, units of investment funds, collective investment

agreements and other securities listed in the applicable legislation),

imposing specific conflict and suitability rules. Breach of this

regulation exposes the entity or the individuals, as the case may be,

to sanctions imposed by law.



have?

Normally, such regulatory bodies can investigate and enforce

sanctions but not related to private disputes but rather involving

breaches of suitability or specific rules of the sector imposed to the

financial institutions. Regulators are not involved, as a rule, in

disputes related to customers.



As mentioned above, regulatory authorities are not entitled to decide

disputes involving customers. Thus, as a general rule, their

decisions are much more related to suitability and/or the activities of

the financial institutions and not to private relationships with

customers.


exist?

The rights of appeal are normally provided for in the specific body’s

regulations. As a general rule, regulatory bodies allow appeals in

the proceedings.


accessible?

They are usually confidential.










We do not expect legislative developments in this area in the coming

year. The Brazilian financial system has been already regulated in

the areas that proved more problematic during the financial crisis of

2008 (e.g., real estate finance and derivatives), so there has not been

an increase in the powers of regulatory bodies – neither in the

amount and type of cases disputed.



customer-friendly?

In general, Brazilian courts are more customer-friendly as most of

the cases are governed by the Brazilian Consumer Code and there is

a trend of courts being protective to consumers.





drawn from them.

On December 2018, the Brazilian Superior Court ruled an appeal is

considered repetitive if the decision will apply to several other

appeals that deal with the same issues. The Superior Court

understands that certain provisions which, among others, relate to

(i) services rendered by third parties and with which the banks

request reimbursement to the consumer, and (ii) reimbursement of

costs associated with a banking correspondent, are abusive and

therefore should be disregarded. The fees charged by banks related

to such provisions should not be allowed. The decision, however,

deals with consumer disputes and fees charged by the banks in

consumer relationships. As stated above, the Brazilian Consumer

Code is very protective and sets forth severe obligations to

suppliers, especially regarding duty of information, transparency,

etc.



jurisdiction?

We currently see lawsuits involving new products, such as new

payment forms, etc.

Acknowledgment

The authors would like to acknowledge the invaluable contribution

of their colleague, Jose Augusto Martins, in the preparation of this

chapter.


Braz

il


Giuliana Bonanno Schunck


Arquiteto Olavo Redig de Campos Street, 105

31º floor – EZ Towers Building – Tower A

04711-904 São Paulo, SP

Brazil

Tel: +55 11 5091 5831 Email: [email protected] URL: www.trenchrossi.com

Gledson Marques De Campos


Arquiteto Olavo Redig de Campos Street, 105

31º floor – EZ Towers Building – Tower A

04711-904 São Paulo, SP

Brazil

Tel: +55 11 3048 6968 Email: [email protected] URL: www.trenchrossi.com

Considered one of the largest law firms in Brazil, Trench Rossi Watanabe Advogados has a comprehensive and cutting-edge operation, with

expertise in all areas of law. Founded in 1959, the Firm provides legal services to national and international clients across several markets, helping

them to manage their business in an ethical and efficient way. With 400 practitioners in the key cities of São Paulo, Brasília, Rio de Janeiro and Porto

Alegre, we can steer you with knowledge and confidence through Brazil’s laws, legal systems and pragmatic business vision.

Giuliana has more than 15 years’ experience in civil and commercial

litigation. She regularly participates in cases involving contract law,

intellectual property, corporate law, insolvency and bankruptcy

(including restructuring). She is the author of two books related to

contract law and several articles about contract law, procedural law

and insolvency. She was recognised by Chambers and Partners for

Dispute Resolution in 2015, 2016 and 2017.

Gledson has more than 20 years of experience and a deep knowledge

of international litigation, arbitration and bankruptcy/insolvency and

debt restructuring. Gledson’s practice focuses primarily on complex

litigation, involving global corporations and multiple jurisdictions.

Gledson has more than 20 published articles and is the author of two

books related to the new Procedural Civil Code. Additionally, he is a

professor of Civil Law at FMU (Faculdades Metropolitanas Unidas).


35

Chapter 7


Blake, Cassels & Graydon LLP Alexandra Luchenko

Canada





Canadian financial service providers are governed by a number of

federal, provincial and self-regulating bodies (“SROs”). Financial

institutions may face: (a) civil claims by individual plaintiffs,

consumer protection organisations, or in the context of class actions,

a number of affected parties; (b) regulatory sanction by SROs; or (c)

other provincial bodies as well as complaints by customers to other

bodies as set out below. In some cases, these proceedings will

overlap.

For consumers not inclined to commence proceedings before the

Courts, the Ombudsman for Banking Services and Investments

(“OBSI”) offers dispute resolution services. Banks in Canada have

an obligation to advise clients about the OBSI dispute resolution

process. The most common complaints about financial products

made to the OBSI in 2017 were about credit cards, mortgage loans

and transaction accounts (Ombudsman for Banking Services and

Investments, Year in Review – Annual Report 2017, p. 25 [OBSI,

AR 2017]). The most common investment complaints were about

the suitability of the investment, fee disclosures and the suitability

of margin or leverage for the investor (OBSI, AR 2017, p. 31). It

would be reasonable to assume that claims in the civil context are

most commonly seen in similar areas.

The Financial Consumer Agency of Canada (“FCAC”) is a federal

body that monitors federally regulated financial institutions to

ensure they comply with the consumer protection measures. The

FCAC investigates and, where necessary, sanctions financial

institutions on the basis of complaints received.

Additionally, the Bank Act requires domestic and foreign authorised

banks to have their own internal dispute resolution process as well

as an external complaints body (“ECB”) that customers can elevate

their complaint to once they have exhausted the bank’s internal

dispute resolution process.

Issues relating to, amongst other things, breaches of disclosure,

suitability or fiduciary obligations may also bring regulatory action

(concurrently or otherwise) by provincial securities commissions

and certain SROs (most notably the Investment Industry Regulatory

Organization in Canada (“IIROC”) and the Mutual Fund Dealers

Association of Canada (“MFDA”)).


A number of remedies are available in financial services disputes in

Canada.

In the civil context, financial awards remain the most commonly-

awarded remedy in the event liability is established and the plaintiff

can establish damages. Awards vary widely but tend to be relatively

small in comparison to jurisdictions such as the United States.

For consumer disputes, the OBSI may recommend the financial or

investment institution pay damages up to $350,000 or remedy the

mistake.

The provincial securities commissions, IIROC and the MFDA may

order monetary penalties but may also make orders affecting firms

and individuals operating in the market when they breach securities

laws. These orders may include, but are not limited to, halting trade,

ceasing trade and restitution orders, as well as fines and sanctions.

Securities commissions may also, amongst other things, place

additional restrictions on firms operating in the securities market.

Regulatory breaches may also result in a firm or individual being

placed on a list of disciplined registrants.




Legal persons (whether corporations or individuals) may commence

civil proceedings in Canada. Whether a proceeding is commenced

by a corporation or individual does not have a material impact on

such proceeding. Some provincial-territorial jurisdictions in

Canada also allow consumer organisations to commence legal

proceedings on behalf of consumers with their consent.





this?

A wide variety of third-party funding is available in Canada. Available

sources include crowdfunding, litigation financing agreements,

contingency fees arrangements and litigation insurance. Securities

crowdfunding is governed by each province’s securities commission.

Canada also permits companies to offer litigation funding.

Cana

da


Courts may review these agreements to determine whether the

interest rate in the agreement is conscionable. Where the interest

contracted for effectively nullifies any access to an award for a

litigant who is otherwise financially limited from pursuing their

claim, the Courts may modify or set aside the agreement.

Contingency fee arrangements are also available. They are regulated

by Canada’s provinces and territories. While contingency fees are

permitted, they are uncommon in commercial litigation. Permissible

fee amounts typically range between 30 to 33.33 per cent.

Litigation insurance to cover legal costs and expenses during

litigation is also available in Canada. The existence of litigation

insurance has procedural implications including whether such

expenses are properly recoverable as a disbursement in the event

that the insured party is successful. Litigation insurance policies

may also be discoverable in civil litigation.





Class actions are well established in the Canadian legal landscape.

Financial institutions and service providers are common targets of

such proceedings.

With the exception of Quebec, a class action must be certified by the

Court. Such process is often time-consuming and expensive. It is

possible, and relatively common, that separate class actions

involving essentially the same subject matter be commenced in

multiple Canadian jurisdictions.

There does not appear to have been a drastic increase in the number

of class action suits being adjudicated by the Courts since the

financial crisis.






case?

Account-holder disclosure documentation circumscribes the duties

of financial institutions and service providers to their consumers in

almost all cases.

However, an even larger prohibitive barrier to financial service

litigation for consumers remains the cost of civil litigation in Canada.

While an award of costs is generally available to a successful party in

civil litigation, the amount of such award often only covers a fraction

of the legal costs associated with pursuing a claim. Accordingly, even

litigants with strong cases must decide whether the potential damage

award is worth pursuing in circumstances where the legal costs to win

such award may approach or even outstrip the overall award. The

OBSI provides an alternative mechanism to address such issues.






clock’?

Civil proceedings are subject to the relevant province’s legislation

governing the limitations period. Typically, this period is two years

from the time the claim was discovered.

Where proceedings are brought before a regulatory body, the

limitations period can vary greatly. Each provincial securities

commission, the MFDA and IIROC all have their own limitations

periods. These organisations caution consumers with a complaint to

contact a lawyer in the province or territory where they are bringing

the complaint to ensure no relevant limitations periods are missed.

The commencement of regulatory proceedings does not generally

impact civil limitations periods, although such proceedings may

have implications for the discoverability of a given claim.





Yes. Any documents made in preparation for litigation will be

covered by litigation privilege in both the civil and regulatory

context. Whether documents are considered to be subject to

litigation privilege depends on whether it is possible to demonstrate

the dominant purpose for the creation of the document was for the

purposes of litigation (which may include regulatory proceedings).

Investigations conducted by regulatory bodies have been the subject

of successful claims of litigation privilege where the necessary test

is met.




Canadian financial institutions often use the International Swaps

and Derivatives Association Inc.’s (“ISDA”) standard form Master

Agreement. Typically, the ISDA maintains a standard form and a

schedule of negotiated and material terms is appended to it. These

agreements are treated like any other standard form commercial

contract. In some instances, the presence of a standard form

contract, such as an ISDA Master Agreement, is crucial for a

mandatory clearable derivative between affiliated counterparties to

be exempt from the clearance requirements in National Instrument

94-101 – Mandatory Central Counterparty Clearing of Derivatives.





In Canada, financial service providers may owe statutory or

common law fiduciary duties to their customers. Often, securities

law, professional organisations or SROs will also impose upon

registrants, under the act, a fiduciary duty to act in the client’s best

interest.

Whether the provider owes a common law duty involves a highly

contextual analysis based on factors such as vulnerability, trust,

reliance, discretion, confidence, complexity of the subject matter,

and the nature of the parties and their relationship. While it is

unlikely that the entirety of a party’s fiduciary obligations can be

contracted out of, in some instances, Canadian Courts have allowed

fiduciaries to limit their liability. However, Canadian legislation is

becoming increasingly strict with respect to the types of duties that

may or may not be contracted out of. This is especially so as efforts

to increase protections for the consumers of financial products in

Canada continue to be increased.

Blake, Cassels & Graydon LLP Canada

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da





There are no specialist Courts or judges that handle financial

services litigation, although some provinces have a commercial list

that hears specific business disputes. Because financial institutions

governed by the federal Bank Act in Canada are regulated by the

federal government, certain litigation will take place in Federal

Court (as opposed to provincial Court, which presides over most

civil proceedings).

As mentioned above, consumers may also avail themselves to the

other regulatory and dispute resolution processes offered by SROs,

securities commissions, the OBSI, the FCAC, IIROC, and the MFDA.



No. The method of service for civil litigation involving the financial

services industry is the same as other civil litigation in Canada. The

method of service will be dictated by the Court in which the

proceeding is filed. Similarly, SROs, securities commissions, the

OBSI, the FCAC, IIROC and the MFDA have their own processes

regarding service.





While the process varies in the different provinces and territories in

Canada, many Canadian Courts have introduced pre-trial alternative

dispute resolution (“ADR”) (such as mediation and settlement

conferences) as well as procedural conferences. Many such steps

are mandatory (and may arise either automatically or by election of

one of the parties to the litigation) and participation cannot be

avoided. Consequences of not attending such mandatory pre-trial

events vary widely by jurisdiction and Courts often retain

significant powers to require compliance but rarely order anything

more significant than a relatively small adverse cost award.






jurisdiction?

Arbitration clauses between financial providers and consumers are

rare. Instead, ADR is built into the financial services industry

through the mechanisms noted above including the OBSI, the

FCAC and the requirement that banks have an internal complaint

processing mechanism, amongst others.



Canada has significant regulatory and legislative protections in

place to protect consumers from negligent misstatements/mis-

selling. While claims for breaches do occur in the civil context, they

are often cost-prohibitive.

The FCAC ensures federally regulated financial services providers

are not making misstatements or engaging in mis-selling. Each

province’s or territory’s securities legislation also has laws

governing false and misleading statements, advertising and

promotional materials. Additional regulation is also done by the

MFDA and IIROC. Individuals or firms who breach securities laws

or applicable rules or either the MFDA or IIROC may be fined,

sanctioned, or ordered to temporarily or permanently stop

participating in the securities market.





jurisdiction?

Common law doctrines of illegality and unconscionability may be

used by consumers in contract disputes relating to financial services.

The doctrine of unconscionability applies where a consumer can

show that there was unequal bargaining power and that a

substantially unfair bargain resulted. In the context of financial

disputes, Courts have been reluctant to find unconscionability in the

absence of a sufficiently serious breach of the bank’s duties.

Additionally, contracts for illegal acts may not be binding. For

example, contracts that amount to the debtor paying a criminal rate

of interest in the financial services industry. Section 347(1) of

Canada’s Criminal Code makes it an indictable offence to enter into

an agreement for or to receive payment of criminal interest rates.

Federally regulated financial institutions in Canada are unlikely to

charge a criminally high interest rate. However, some smaller

private investment companies have been found to have done so.

The definition of consumer in Canada is broadening. On October

29, 2018, the federal government introduced Bill C-86, Budget Implementation Act, 2018 No. 2 (“Bill C-86”). While “consumer” is

not a defined term, the purpose of Bill C-86 suggests the definition

will extend to any legal person who consumes a financial service.

As Bill C-86 is not yet in force, it is unclear how expansive this new

framework will be.






Civil litigation in Canada generally brings with it broad document

disclosure obligations. Financial services litigation is no exception.

Exceptions preventing the disclosure of commercially sensitive or

confidential information do exist, although establishing the requisite

level of necessity is difficult as Canadian Courts tend to favour

comprehensive disclosure. At the discovery stage, information

disclosed in litigation is subject to an implied undertaking of

confidentiality between litigants, but if such document is presented

in Court by either party, it will be available to the public absent a

sealing order. Sealing orders may be available to ensure

commercially sensitive or confidential information is only disclosed

to the parties involved in the litigation, although many Courts are

reluctant to make such orders.

Consumers may also avail themselves to freedom of information

requests. Federally regulated banks in Canada are governed by the

Personal Information and Protection of Electronic Documents Act (“PIPEDA”). Generally speaking, customers can obtain personal

information the bank has about them (or ask that certain information


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da


be removed from the bank’s data) by making a written request to the

branch or office where they do their banking. Customers can also

obtain information about how their information has been used.

Information obtained through this mechanism can be used in civil

litigation.

PIPEDA does not sanction the disclosure of information protected

by solicitor-client privilege, nor does it require a bank to disclose

personal information generated in the course of a formal dispute

resolution process. A bank may also refuse access if disclosure

would reveal confidential business information (an assessment

which the consumer may then appeal to the Privacy Commissioner).

In addition to PIPEDA, most major banks in Canada also have their

own individual privacy codes that can be accessed by the public on

their websites.

4 Post Trial


disputes?

In the civil context, final orders may generally be appealed to the

applicable provincial Court of Appeal as a right; however, in some

cases, leave to appeal must first be granted.


services disputes?

In the civil context, each province or territory has their own set of

rules governing their provincial and superior level Courts. These

rules will be determinative of how costs are allocated. As noted

above, the successful party in civil litigation is generally awarded

costs. However, in most provinces, Courts have the discretion to

order otherwise. The quantum of costs awards in Canada rarely

accounts for the amount of legal cost any party has actually

incurred.





In the regulatory context, there is a high level of cooperation in

North America and many other jurisdictions abroad to protect the

integrity of the securities market and its investors.





Canadian regulatory bodies generally cooperate with their

counterparts abroad in the context of investigations. Further, the

rules of many Canadian Courts include provisions whereby those

Courts can grant requests for assistance from foreign Courts (most

commonly used in the context of gathering evidence). Finally,

provisions exist under the various provincial and territorial rules of

Court whereby orders of certain reciprocating jurisdiction are

recognised in a given Canadian Court.



Canada has the Foreign Extraterritorial Measures Act, R.S.C.,

1985, c. F-29 (“FEMA”), which governs how assertions of extra-

territorial jurisdiction are handled. FEMA authorises the making of

orders relating to the production of records and the giving of

information for the purposes of proceedings in foreign tribunals,

relating to measures of foreign states or foreign tribunals affecting

international trade or commerce and in respect of the recognition

and enforcement in Canada of certain foreign judgments.



Canadian Courts engage in a contextual analysis in determining

whether or not a unilateral jurisdiction clause is valid and enforceable.

Typically, where the parties are equally as sophisticated, a choice of

jurisdiction clause will be upheld. However, a party to a dispute may

convince the Court it would be unjust to enforce the clause. This is

especially so where one party is an unsophisticated consumer and the

other is a large financial services provider. It is also important to note

that a choice of law clause will not operate as a unilateral jurisdiction

clause and could simply result in the chosen law being applied in a

different jurisdiction.

6 Regulated Bodies



There are several different bodies in Canada that regulate financial

services.

The Office of the Superintendent of Financial Institutions

supervises and regulates federally registered banks, insurers, trust

and loan companies, and private pension plans subject to federal

oversight. It also assesses an institution’s material risks and the

quality of its risk management practices.

As noted above, the FCAC monitors federally regulated financial

institutions. It also monitors ECBs to ensure they are also adhering

to federal regulations when reviewing customer disputes. The

FCAC does not provide redress or compensation to consumers or

get involved with individual disputes.

The Canadian Securities Administrators (“CSA”) are responsible for

coordinating the securities regulations across Canada. Members of

the CSA investigate or regulate securities dealers. The individual

securities commissions are responsible for ensuring securities dealers

in each province or territory adhere to that jurisdiction’s securities

legislation. The CSA and individual securities commissions also

provide oversight and operational reviews to IIROC and the MFDA.

IIROC regulates individual dealers in Canada while the MFDA

oversees dealers that distribute mutual funds and exempt fixed

income products.

At a provincial level, SROs govern professionals who provide

financial services unrelated to the securities market. For example,

in British Columbia, SROs such as the Insurance Council of British

Columbia, Real Estate Council of British Columbia, Registrar of

Mortgage Brokers, and the Superintendent of Financial Institutions

make decisions governing their members.


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Finally, in many cases, financial institutions must have their own

complaint-handling procedures.



have?

Each province’s securities commission, as well as IIROC, the

MFDA and the FCAC have broad investigative powers. The

commissions, IIROC and the MFDA have the power to compel

document disclosure and interviews. At the conclusion of an

investigation and hearing, these bodies can issue sanctions, impose

fines and penalties, and restrict the party’s ability to operate in the

market. The commissions and IIROC can also make restitution

orders requiring the financial services provider to repay the

investor’s loss. The MFDA does not make orders for compensation

or restitution but can levy fines and sanctions on its members.

The OBSI and ECBs also have investigative powers, although these

bodies differ somewhat in that financial service providers

voluntarily subscribe to their powers.



The decisions of SROs, securities commissions, the FCAC, IIROC,

the MFDA and the FST are binding on the parties to a financial

dispute, though they may be appealed. While OBSI orders are not

binding on the parties, in 2017, the OBSI reported that there were no

instances in which a subscriber to the OBSI failed to make the

recommended remediation.


exist?

Appeals may generally be taken from regulatory decisions.

Whether an appeal exists as a right (rather than requiring leave to

appeal) depends on the regulatory body engaged by the dispute. The

body to appeal to also depends on the specific regulatory body in

question and may also vary by jurisdiction.


accessible?

The decisions of the following regulatory bodies are publicly

available: each provincial securities commission; IIROC; the

FCAC; and the MFDA. While the OBSI does not publish its

decisions and recommendations, it does publish when a firm refuses

to comply with a recommendation.










Broadly speaking, the Canadian financial services industry

weathered the 2007/08 financial crisis well. Since the crisis, there

have been minor increases in capital and liquidity requirements for

Canadian banks; however, they were already well capitalised and

well regulated going into the financial crisis.

In the securities market, the CSA regularly releases staff notices

informing the Canadian public and securities dealers generally

about new problems that have come to the CSA’s attention and

potential regulatory changes that might result from them.

Recently, the CSA published for comment a staff notice outlining a

proposed Trading Fee Rebate Pilot Study to evaluate the impact of

trading fees and rebates on the behaviour of market participants. If

implemented, it would temporarily prohibit Canadian marketplaces,

including exchanges and alternative trading systems, from paying

trading fee rebates to dealers for a sample set of equity securities. It

would run concurrently with the United States Securities and

Exchange Commission’s Proposed Transaction Fee Pilot.

The CSA also recently cautioned companies to avoid disclosure and

promotional practices that are manipulative or that may mislead

investors.

Canada is also making changes to its laws relating to whistleblowers

in the securities or banking industry. Some jurisdictions in Canada

have started offering financial incentives to whistleblowers.

New legislation has also proposed an expanded financial consumer

protection framework for banks. This framework will provide

protections for customers that are not typically considered to be

“consumers”, such as commercial entities and more prescriptive

requirements for regulating the disclosure of information to bank

customers. An enhanced complaint-handling regime is also being

contemplated.

Additional changes to the financial services industry are anticipated

as Canada legalised cannabis in 2018. Each province is responsible

for regulating the distribution of cannabis. As such, the financial

services market has been evolving to adapt to the new and widely

varied regulations in each province and territory. New best practices

are being developed to help established financial services providers

effectively conduct due diligence on the consumers of their products

in the cannabis industry. Given the varied regulations in each

province, and the notable lack of compliance in the industry thus far,

those companies seeking to lend to, amalgamate with, or take over a

company in the cannabis industry need to carefully conduct their

due diligence to ensure the target company follows the cannabis and

securities regulations in its jurisdiction.

Canada is also slowly increasing its regulation of cryptocurrencies.

The CSA published Staff Notice 46-307 – Cryptocurrency Offerings, which outlines how securities law requirements apply to

initial token and coin offerings. The notice notes that prospectus,

registration and/or marketplace requirements may apply to

cryptocurrency offerings. Whether or not the offering will be

captured by securities laws is a contextual analysis where the CSA

has indicated it will consider substance over form. IIROC is also

taking steps to increase regulation of blockchain applications and

digital assets through the creation of a working group to comment

on potential regulatory responses.

Several Canadian SROs and federal governing bodies are also

working together to develop best practices to reduce elder abuse in

the financial services industry. For example, in 2018, the Ontario

Securities Commission published Staff Notice 11-779 – Seniors Strategy to increase protection for elders using financial services.

IIROC and the MFDA have also published guidelines on matters

relating to aging and the prevention of financial exploitation while

the FCAC has developed a national strategy to enhance the financial

literacy of seniors.


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customer-friendly?

Canada is increasingly expanding its consumer protection

framework in the financial services industry. As noted above, there

are a number of new laws and initiatives, as well as SROs and

ECBs, seeking to protect not only individual consumers, but the

integrity of the financial services market in Canada generally.





drawn from them.

In November 2018, the Supreme Court of Canada released

Reference re Pan-Canadian Securities Regulation, 2018 SCC 48,

reversing the Quebec Court of Appeal’s decision that the

cooperative capital markets regulatory system was unconstitutional.

This opened the door for the development of a pan-Canadian

securities regulator. Canada is also considering the implementation

of a centralised securities regulator. Under this system a single

regulator – the Capital Markets Authority (“Authority”) – would

receive delegated powers from the federal government and the

provincial and territorial governments that agree to participate

(currently the governments of Ontario, British Columbia,

Saskatchewan, New Brunswick, Prince Edward Island and the

Yukon). Other Canadian jurisdictions oppose a national regulator.

The Authority would administer the proposed federal Capital Markets Stability Act and a uniform Capital Markets Act which

would be adopted by all participating provinces. If the Authority is

implemented, significant changes to Canadian securities law and

regulation would take effect.

In early 2018, the Ontario Court of Appeal published Finkelstein v. Ontario Securities Commission, 2018 ONCA 61, which clarified the

appropriate test for determining insider trading/tipping liability for

individuals several parties removed from the tipping “chain”. The

Court of Appeal reviewed the definition of a “person in a special

relationship with an issuer” as provided for by Ontario’s securities

legislation. The Court concluded that a person may be found liable

for insider trading/tipping even where they have no subjective

knowledge that the person who shared the material, non-public

information was a “special person”. It is sufficient that they “ought

to have known”. In engaging in this analysis, the Court of Appeal

reiterated the significant deference accorded to securities

commissions by appellate courts due to their specialisation in the

securities market. Leave to appeal to the Supreme Court of Canada

was denied in late 2018, bringing this case to an end.



jurisdiction?

As noted above, the Canadian financial services market is stable and

well regulated. However, some changes continue to be

implemented. For example, in response to the financial crisis,

beginning in 2014, Canada increased its regulation of its over-the-

counter derivatives market. In 2014, Canadian provinces adopted

the Canadian Reporting Requirements which require the reporting

of over-the-counter derivative transaction data by market

participants to increase post-trade transparency.

Additionally, changes in financial technology create challenges for

Canadian regulators. Increasing phishing and cyber-attacks on

financial providers are leading to an increased focus on “tech

hygiene” so that consumers’ private information are kept safe.

Additionally, it remains to be seen how Canadian markets will

respond to a growing cryptocurrency market and the effect

increased regulation in this area will have on the Canadian banking

and securities industry.

Acknowledgment

The author would like to thank Devon Luca (an articled student) for

her assistance with the preparation of this chapter.


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Alexandra Luchenko

Blake, Cassels & Graydon LLP

595 Burrard Street

P.O. Box 49314

Vancouver, BC, V7X 1L3

Canada

Tel: +1 604 631 4166 Email: [email protected] URL: www.blakes.com

Alexandra focuses on complex commercial and securities-related

matters focusing on regulatory compliance, transactional litigation and

investigations and crisis management. She has significant experience

working on behalf of financial institutions as well as mining, resource,

health sciences and technology companies.

Alexandra has appeared before the British Columbia Supreme Court,

the British Columbia Court of Appeal and the Supreme Court of

Canada, as well as before a number of administrative tribunals,

including the British Columbia Securities Commission, the Investment

Industry Regulatory Organization of Canada and the Mutual Fund

Dealers Association of Canada.

Alexandra’s experience in regulatory compliance includes responding

to allegations of disclosure violations as well as insider trading. In

addition to domestic proceedings, she regularly assists in cross-border

matters including in the United States, the United Kingdom and Hong

Kong.

As one of Canada’s top business law firms, Blake, Cassels & Graydon LLP (Blakes) provides exceptional legal services to leading businesses in

Canada and around the world.

Thanks to our clients, in 2018, Blakes was named the leading law firm brand for the fourth time and third year running in Acritas’ Canadian Law Firm

Brand Index. We were also awarded Canada Law Firm of the Year by Who’s Who Legal for the 10th consecutive year and received the highest

number of ranked lawyers of any Canadian law firm for the second year in a row in Chambers Global: The World’s Leading Lawyers for Business.

In addition, many of our lawyers are continuously recognised as leaders in their respective fields in The Canadian Legal Lexpert Directory, Canada’s

leading guide to lawyers.

Blakes was also named as one of Canada’s Best Diversity Employers for 2018 by Mediacorp Canada Inc., an honour we have received eight times

since 2008.

Serving a diverse national and international client base, our integrated network of offices worldwide provides clients with access to the Firm’s full

spectrum of capabilities in virtually every area of business law. Whether an issue is local or multi-jurisdictional, practice-area specific or

interdisciplinary, Blakes handles transactions of all sizes and levels of complexity.


Chapter 8


Rui Bai Law Firm

Wen Qin

Juliette Ya’nan Zhu

China





The most common causes of actions are financial contracts disputes,

securities disputes, trust disputes, insurance disputes, disputes in

relation to futures trading, disputes in relation to instruments, and

disputes in relation to letters of credit.


Damages and specific performance are the most likely remedies to

be awarded.




Any party to the financial services contract has a right of action. It

does not make a difference if the customer is an individual or a

commercial entity.





this?

There is no specific restriction on third-party funding; in fact, there

are no such rules on third-party funding. Litigation insurance does not

exist in China. However, when applying for property preservation, an

insurance policy is acceptable as a security deposit according to the

latest court rules.





There is no specific rule on class actions under Chinese law.

According to Civil Procedure Law, where the subject matter of

litigation is common, and there are multiple persons (including

individuals and organisations) comprising one party to the lawsuit,

the litigants may elect representatives to participate in the

proceeding. If the number of individuals cannot be ascertained at

the time of filing of a lawsuit, the court may issue a public

announcement, stating the facts and claims, and notify the potential

plaintiffs to register with the court within a stipulated period. The

judgment or ruling is binding on all the parties which participated in

the proceedings. For those who do not register with the court, the

judgment or ruling will also apply if they bring claims before the

court within the statute of limitations.






case?

There are no significant barriers for customers. However, as the

standard contracts of the financial institutions are used and the

jurisdiction clauses often favour the financial institutions, it tends to

cause inconvenience to some of the customers to bring up litigations

in a court far from their own domiciles.






clock’?

The general time limit (three years) applies to financial services

dispute resolutions. Regulatory bodies only have the power to deal

with financial services disputes by means of alternative dispute

resolution (“ADR”), such as mediation, which is not enforceable.

The clock will stop when one party brings up litigation or

arbitration, requests the other party to perform its obligation, or the

other party agrees to fulfil its obligation.





The concept of privilege does not exist under Chinese law and there

is no specific rule on litigation and/or legal advice privilege.

Chin

a





Financial institutions tend to use their own standard form contracts;

international master agreements are not widely used.





According to the Law on Commercial Banks, commercial banks

shall determine its own interest rates in accordance with the upper

and lower limits for deposit interests set by the People’s Bank of

China. Commercial banks shall follow the principles of voluntary

deposit and free withdrawal, paying interest to depositors and

handling individual savings deposits in secret for depositors.

Commercial banks have the right to refuse any entity or individual

to inquire about, freeze or deduct individual savings accounts,

unless it is otherwise prescribed by law.




The first specialised financial court in China, the Shanghai Financial

Court, which is an intermediate level court, was established by the

decree of the Standing Committee of the National People’s

Congress on 27 April 2018.



There is no specific procedure rule for financial service litigation.





There is no specific procedure rule for financial service litigation.






jurisdiction?

There are no uniformed ADR regulations that apply to financial

services disputes. The China International Economic and Trade

Arbitration Commission formulated and adopted specific arbitration

rules for financial disputes in 2015, but whether to choose

arbitration is subject to the autonomy of the contracting parties.



There is no specific rule on negligent misstatement/mis-selling.





jurisdiction?

According to the Law on the Protection of Consumers, business

operators shall not impose unfair and unreasonable terms on

consumers such as elimination or restriction of consumer rights,

aggravation of consumer liability, mitigation or exemption of

business operators’ liability, etc. by way of standard clauses. If a

standard contract contains terms mentioned above, such terms shall

be invalid.

According to the Implementing Measures of the People’s Bank of

China for the Protection of Financial Consumers’ Rights and

Interests (“Measures of Protection of Financial Consumers”), a

standard contract provided by a financial institution shall not

contain any misleading or fraudulent information that infringes on

the legitimate rights or interests of financial consumers, and shall

not contain any standard clauses that mitigate or exempt the liability

of the financial institution, aggravate the liability of financial

consumers, restrict or exclude the legitimate rights and interests of

financial consumers, or any unreasonable terms such as compulsory

transactions by virtue of technical means.

According to the Law on the Protection of Consumers, a consumer is

entitled to increase compensation if business operators providing

goods or services commit fraud; the increased compensation amount

shall be three times the amount of the price of the goods purchased

by the consumer or the fee of the service received by the consumer.

According to the Measures of Protection of Financial Consumers,

financial consumers refer to the natural persons who purchase and use

the financial products and services provided by financial institutions.






According to the Measures of Protection of Financial Consumers,

personal financial information shall be collected under the principle

of legitimacy, reasonableness and necessity. The term “personal

financial information” refers to the personal information acquired,

processed and preserved by financial institutions in the process of

carrying out business or through other channels, including the

information on personal identity, property, accounts, credit and

financial transactions and other information that can reflect certain

conditions of a particular individual. Financial institutions and their

relevant employees shall keep confidential the personal financial

information they access in their business operation, and shall not

illegally copy, store, use, sell to others or disclose by any other

illegal means such personal financial information.

The concept of discovery or disclosure does not exist under Chinese

law and there is no specific rule about discovery or disclosure.

4 Post Trial


disputes?

An appeal to a first instance judgment is as of right and can be

Rui Bai Law Firm China

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initiated by filing a notice of appeal within 15 days after such

judgment is served. A second instance judgment is final and cannot

be appealed.


services disputes?

Litigation fees payable to the court are advanced by the plaintiff and

will be borne by the losing party or prorated by the court per the

outcome of the judgment.





In addition to jurisdiction, service and choice of law, the most

typical issue which arises in cross-border disputes is that any

evidence formed outside the territory of China needs to be notarised

and legalised.





The general approach of the courts to co-operating with foreign

courts in disputes resolution is through the channels stipulated in the

international treaties or through diplomatic channels where no such

treaties exist.



Extra-territorial jurisdiction is not typically asserted in China.



Unilateral jurisdiction clauses are generally valid and enforceable.

6 Regulated Bodies



The Financial Consumer Protection Bureau of the People’s Bank of

China and the China Banking and Insurance Regulatory

Commission are the main regulatory bodies in China. However, the

regulatory bodies only have the power to deal with financial

services disputes by mediation, which is not enforceable.



have?

In mediation proceedings, the regulatory bodies shall have the right

to investigate and collect evidence, question the concerned parties,

and consult and copy the information relating to the disputes.



The decisions are not binding on the parties.


exist?

Since the decisions made by the regulatory bodies are not binding,

either party may commence litigation proceedings or arbitration

proceedings when there is a valid arbitration clause at any time

within the statute of limitations.


accessible?

Such decisions are not publicly accessible.










Financial supervision has always been the focus of financial law

research. Financial institutions are encouraged to use mediation,

arbitration and other non-litigation methods to resolve the disputes

over financial consumption with financial consumers. Under the

influence of the economy, financial cases show a rapid upward

trend. In the past three years, after the rapid development of the

internet financial industry in China, due to the lack of supervision

system, market access, industry self-discipline, remedies and so on,

problems frequently occurred, resulting in a rapid increase in

disputes, especially in the field of P2P network loan cases, and

disputes involving a large group of investors emerge frequently.



customer-friendly?

Since there is no specific rule on financial services disputes that

impose any special burden on any parties, in another words, there is

no special protection to financial consumers, one can say that our

jurisdiction is more financial institution-friendly.





drawn from them.

Case 1: The Insurance Brokerage is Liable to Indemnify the

Policyholder Due to the Failure to Fulfil the Duty of Diligence –

Company C vs. Insurance Company A & Insurance Brokerage Company B Over the Property Insurance Contract

Company C commenced a litigation against Insurance Company A


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and Insurance Brokerage Company B for the indemnity obligations

of cargo transportation insurance jointly and severally. The court

ruled that Insurance Brokerage Company B should compensate

Company C for its losses as it had failed to fulfil its duty of diligence

to inform Company C of the exemption clauses. Insurance

Company A has made a clear statement about the exemption clause

to Insurance Brokerage Company B, which is the agent for

Company C (the policyholder), and thus Insurance Company A can

be relieved from the liability.

Keynote: Insurance brokerage companies always play an important

part in the freight insurance business due to the traits of the shipping

industry. The duty of the insurance brokerage company, as the agent

of the policyholder, is not confined to deal-making, but to fulfil the

duty of diligence. In addition, the agent shall explain the insurance

terms to the policyholder in a timely manner to eliminate the

information imbalance between the insured and the insurer. The

judgment of this case conforms to the provisions of the Insurance

Law on the insurance broker’s duty of diligence, and clarifies the

legal relationship among the policyholder, insurance broker and

insurer. It is clear that the insurance broker shall bear the liability

for the loss caused by the failure to fulfil the duty of diligence,

which plays an active role in regulating the development of the

insurance broker industry.

Case 2: Financial Consumers Misrepresented in Risk-taking

Assessment Test Shall Bear the Assumption of Risk – Shen vs. Bank A over Financial Service Contract

Shen commenced a litigation against Bank A for his loss (around

RMB 226,000) in the investment of one high-risk fund product.

Before the investment, Bank A conducted a risk-taking assessment

test for Shen and the Customer’s Risk Level for Shen was

“Radical”. The court ruled that Bank A shall pay Shen RMB

100,000 for damages and overruled other requests made by Shen.

Keynote: Over the past few years, the so-called “rigid redemption”

(refers to trust products that require the trust company distribute the

principal and interests to the investor unconditionally) in the

financial market has contributed to the irrational behaviours of some

financial consumers. With new regulations on capital management

coming into effect, the practice of “rigid redemption” with expected

return from financial institutions has been broken. On the premise

of a comprehensive review of the responsibilities of financial

institutions, the judgment of this case emphasises the principle of

“caveat emptor” of financial consumers. Generally speaking, in

order to compensate for the asymmetries, “the seller is responsible”,

and thus financial institutions are obligated to disclose product risks

beforehand, to assess financial consumers’ risk tolerance, to

periodically disclose products performance during their term, and to

manage financial consumers’ eligibility. When financial institutions

have fulfilled their obligations, if financial consumers do not

purchase products prudently for their own reasons, consumers

should be responsible for financial losses. This judgment reveals

the principle of good faith and the spirit of contracts in modern

financial transactions, which is conducive to financial institutions’

return to healthy development.



jurisdiction?

Global economic changes have promoted the formation and

improvement of the financial trial system, such as the establishment

of the Shanghai Financial Court.

Note

The information contained in this chapter is of a general nature only.

It is not meant to be comprehensive and does not constitute the

rendering of legal, tax or other professional advice or service by Rui

Bai Law Firm or its partners and lawyers. Rui Bai Law Firm or its

partners and lawyers have no obligation to update the information as

law and practices change. The application and impact of laws can

vary widely based on the specific facts involved. Before taking any

action, please ensure that you obtain advice specific to your

circumstances from your usual contact or your other advisers.


Chin

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Wen Qin

Rui Bai Law Firm

Unit 01, 6/F Fortune Financial Center

5 Dongsanhuan Zhong Road

Chaoyang District, Beijing 100020

China

Tel: +86 10 8540 4653 Email: [email protected] URL: www.ruibailaw.com

Juliette Ya’nan Zhu

Rui Bai Law Firm

Unit 01, 6/F Fortune Financial Center

5 Dongsanhuan Zhong Road

Chaoyang District, Beijing 100020

China

Tel: +86 10 8540 4659 Email: [email protected] URL: www.ruibailaw.com

Wen is a Partner of Rui Bai Law Firm, which is an independent law firm

and a member of the PwC global network of firms. Prior to joining Rui

Bai Law Firm, Wen was a partner of a local law firm in Beijing. He

specialises in employment law, tax law, dispute resolution and general

corporate law. Wen obtained a Master’s of Law degree from China

University of Political Science and Law. Wen is a native Chinese

speaker and is fluent in English.

As a legal counsel to foreign investment enterprises, Wen’s services

have been praised by clients. As a result, he has been continuously

recommended as one of the leading lawyers by the well-known ranking

and recognition organisations in the legal profession, such as

Chambers and Partners, The Legal 500 and Asialaw Leading Lawyers.

In 2015, he was ranked as one of the “Eminent Practitioners” by

Chambers and Partners. Chambers and Partners also quotes one of

his clients saying that “he has a sound understanding of the CHINA and

global aspects of a case”.

Rui Bai Law Firm is an independent China law firm and is a member of the PwC global network of firms. We have access to the most geographically

extensive PwC global legal services network of over 3,500 lawyers in over 90 countries and territories, including over 20 offices across 15 countries

and territories in Asia-Pacific. Uniquely among law firms, we provide clients with integrated legal services, working closely with tax, human resources,

corporate finance, forensic accounting, valuation and other service teams within the PwC global network.

We can deliver integrated solutions including specialists in banking and finance, corporate, M&A, regulatory compliance, intellectual property, aircraft

and equipment leasing, litigation, arbitration and dispute resolution, labour and employment, and tax dispute resolution. We are able to deliver

solutions to the most challenging business endeavour.

Our lawyers combine local market knowledge and international experience into a unique skillset. Our lawyers also combine extensive private

practice law firm experience with in-depth understanding and knowledge working in-house. We put ourselves in our clients’ shoes and we share a

common language with the client.

Juliette is an Attorney of Rui Bai Law firm, which is an independent law

firm and a member of the PwC global network of firms. She graduated

from China University of Political Science and Law with a Master’s of

Law degree and a Master’s degree in European and International Law

(LL.M.) from the University of Hamburg. Her practice area focuses on

dispute resolution, including international and domestic commercial

arbitration and litigation, covering various subjects such as Chinese-

foreign joint ventures, direct investment, international sale of goods,

etc. She is fluent in both Chinese and English.


47

Chapter 9


RPC

Simon Hart

Daniel Hemming

England & Wales





A non-exhaustive selection of the more common causes of action

taken by or against financial institutions and service providers are:

1. Breach of contract for express or implied contractual terms.

2. Negligent misrepresentation under s. 2(1) of the

Misrepresentation Act 1967 (and/or negligent misstatement

in tort).

3. Other claims in the tort of negligence, for example relating

to the provision of advice.

4. Claims under s. 138D of the Financial Services and

Markets Act 2000 (FSMA) which creates a right of action

for ‘private persons’ who have suffered loss as a result of

breaches of specified rules made by the Financial Conduct

Authority (FCA) / Prudential Regulation Authority (PRA).


There are a range of remedies available to the English courts. The

main ones likely to be awarded in financial services disputes are:

1. Damages – compensatory in nature.

2. Injunctions – require a party to do or refrain from doing a

specified action.

3. Restitution – reverses an unjust enrichment by returning any

benefit or enrichment to the claimant.

4. Rescission – restores the parties to the position they were in

before the contract was entered into.




An individual and a commercial entity have the same rights of

action in financial services disputes although the claims available

may be different (e.g. the right of action under s. 138D of FSMA is

only available to ‘private persons’, which means individuals (with

limited exceptions)).





this?

Third-party litigation funding has become increasingly common over

the last 10 years. This allows a claim to be progressed without any

financial expenditure by the claimant receiving the funding. The

funding arrangements can also incorporate protection against

adverse costs orders in the event a claim is unsuccessful. The

funding is usually provided on a non-recourse basis, meaning that the

funder will recoup its funding and receive any return only out of the

damages recovered on the conclusion of a successful claim; where

there is no recovery there is no repayment to the litigation funder.

The conduct of the litigation must remain with the claimant, being

the party who has received the funding. In accordance with the rules

of champerty and maintenance, if a professional funder attempts to

exercise control over the litigation or is in a position to recover

disproportionate sums, a court can hold the funding agreement to be

unenforceable.

There are various forms of litigation insurance. After the event

(ATE) insurance is an indemnity for future adverse costs awards in

a civil dispute that has already arisen. Before the event (BTE)

insurance is taken out in order to cover the legal costs of various

legal scenarios before they arise. An insurer may agree to a deferred

premium arrangement, where it is only paid a premium if the funded

case is successful.

Litigants can also manage the costs and risk of litigation using:

■ conditional fee agreements (CFAs) under which the lawyers

make some or all of their fees conditional upon success, in

return for an additional uplift payable upon success

(calculated as a percentage of the fees incurred); and

■ damages-based agreements (DBAs) under which the lawyers’

fees are limited to a share of the proceeds of successful

litigation.





Broadly speaking, class actions (or collective actions as they are

more commonly known) in the UK are opt-in regimes which mean

that a claimant has to take active steps in order to join any collective

action.

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Various types of collective actions are available under the Civil

Procedure Rules (CPR) which govern court proceedings although

the primary procedural mechanism is the Group Litigation Order

(GLO). A GLO is an order under CPR Part 19 which provides for

claims which give rise to common or related issues of fact or law to

be case-managed together. There are other options available under

CPR Part 19 such as representative actions (claims begun or pursued

by representatives who are considered to have a shared interest in

the claim with those they represent, on an opt-out basis) and more

informal procedures such as test cases, the ability to name multiple

claimants and consolidation of multiple individual claims.

Collective Proceedings Orders (CPOs) are available in the

Competition Appeal Tribunal. A CPO is a form of collective action

for infringements of competition law. CPOs can be ordered either

on an opt-in or opt-out basis.

As a result of the increasing use of litigation funding, collective

actions are becoming more common in financial services disputes.






case?

Contractual estoppel is one of the main defences to claims

(particularly mis-selling-type claims) brought by customers against

financial services providers. Estoppel can operate to prevent a

customer from asserting anything that is inconsistent with its

previous agreement/actions.

There are frequently clauses in contracts between financial services

providers and customers which purport to exclude or restrict

liability or set out an agreed basis upon which the parties are

contracting. For example, this may involve the customer

representing that they are a sophisticated investor and have not

relied on any information given to them by the financial services

provider as investment advice. Such clauses may cause a customer

to be estopped (i.e. prevented) from asserting that the true facts were

different. This would operate as a bar to a successful claim even if

there was advice and it was negligently given.






clock’?

The time limits for bringing financial services claims are the same

as those for any other type of civil dispute. These time limits are

prescribed by the Limitation Act 1980.

Subject to certain exceptions in each case, for claims in respect of a

contract a claimant has six years from the date of the breach to bring

a claim, and for tortious claims, the claim must be brought within six

years from the date the damage caused by the tortious act was

suffered. The issuing of a claim form at court is the procedural step

which determines whether a claim has been brought within the

relevant period.

Parties in dispute are able to enter into a standstill agreement the

terms of which suspend the running of the limitation period for an

agreed period. The commencement of a regulatory process does not

‘stop the clock’.





There are two forms of legal professional privilege available to

parties in civil litigation in England & Wales:

■ Legal advice privilege applies to confidential communications

between a client and a client’s lawyer and which have come

into existence for the purpose of giving or receiving legal

advice about what should be done in the relevant legal

context.

■ Litigation privilege applies to communications between a

lawyer (acting in their capacity as a lawyer) and a client, or

between either of them and a third party, made at a time when

litigation is reasonably in contemplation and for the dominant

purpose of litigation.

If litigation privilege is to apply in the context of an investigation

conducted by a regulated body, the investigation must be considered

sufficiently ‘adversarial’ (i.e. the dominant purpose of any

documents created in the course of the investigation was to defend

the expected litigation).




Standard form master agreements are used in England & Wales by

financial institutions for dealings with counterparties. By way of

example, ISDA Master Agreements are commonly used for

derivatives transactions and Global Master Repurchase Agreements

for repo transactions. Other industry standard form agreements are

commonly used, such as LMA agreements for loan facilities.

Courts are generally slow to deviate from the express terms of

master agreements and other industry standard form agreements by

implying terms into them. This is in order to ensure certainty of

terms across markets.





There is no general fiduciary duty owed by a financial services

provider to its customer. However, financial service providers

which conduct regulated activities will be subject to rules prescribed

by the FCA.

A financial service provider may also owe a duty of care in tort in

respect of any advice it gives to customers, in certain circumstances.

The extent of this duty of care will depend upon the facts of any case

including the extent of the relevant customer’s/s’ own experience

and sophistication. A financial service provider will generally also

owe a duty of care not to make negligent misstatements.

Parties cannot contract out of the rules imposed on them by

regulatory bodies such as the FCA. However, it is possible to

include non-reliance clauses and/or limitation/exclusion clauses in

the parties’ contracts. The extent to which such clauses may be

deemed to be reasonable is context-specific. Nevertheless, English

courts have been shown generally to be keen to uphold such clauses

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on the basis that commercial, sophisticated parties should be free to

contract as they wish/ensure certainty of terms.




Claims involving financial services matters are primarily

commenced in the Commercial Court. The Commercial Court is a

specialist court which is part of the Business and Property Courts of

the High Court of Justice. The Commercial Court specialises in

complex national and international business disputes, including

cases which involve banking and financial services.

The Financial List was introduced in 2015 as a specialist cross-

division list set up to address cases involving financial matters.

Cases will be accepted in the Financial List if they relate to complex

finance or banking matters worth more than £50 million or

equivalent, need expert judicial knowledge of the financial markets

or raise issues of general importance for financial markets.



The method of service of legal proceedings does not differ for

financial services litigation; the same provisions of the CPR and

Practice Directions (PDs) apply. Part 6 of the CPR sets out the rules

for service of claim forms and all other court documents upon

defendants inside and outside of the jurisdiction of the courts.

There are some differences between the conduct of proceedings

started in the Commercial Court and those in other divisions of the

courts. For example, in the Commercial Court an acknowledgment

of service must be filed within 14 days of service of the claim form

(rather than 14 days after service of the particulars of claim which is

the default rule). Proceedings in the Financial List are generally

subject to the procedural rules of the Commercial Court.





Litigation in England & Wales will typically have the following

phases, although there is considerable flexibility given to the parties

and the court as to how legal proceedings are conducted. The CPR

does not prescribe any specific differences for the conduct of

financial services litigation.

1. Consideration of alternative dispute resolution (ADR)

options – mediation (settlement facilitated by the assistance

of a neutral third party) and Part 36 offers to settle.

2. Consideration of limitation issues, the guidelines relating to

pre-action conduct in the Practice Direction on Pre-action

Conduct and Protocols and any relevant pre-action protocol.

There is no specific pre-action protocol for financial services

disputes but there is one for Professional Negligence claims.

3. Funding and insurance – consideration of options as

outlined at question 1.4 above.

4. Issuing and serving the claim form – the claim form filed

and served by the claimant will contain a precise statement of

the claim and remedy sought as well as a value for the claim.

5. Statements of case – following the issuance of the claim

form, the claimant will prepare the particulars of claim which

details their claim in full to which the defendant will respond

with a defence. The claimant may then respond to the

defence with a formal reply. A defendant may also file a

counterclaim. Various other interim applications may be

prepared and there will be Case Management Conferences at

which case management directions will be made.

6. Evidence (experts and witnesses) – the parties will need to

adduce evidence to support their claim(s)/defence. This

evidence will comprise (a) contemporaneous documents, (b)

statements taken from factual witnesses, and (c) expert

evidence where necessary to assist the court.

7. Disclosure – parties make available documents (very broadly

defined) which either support or undermine any party’s case. This

is often the most time-consuming and expensive stage of litigation.

Any non-compliance with any of these steps and/or the relevant rules

pertaining to each under the CPR, including the late filing of any

necessary documents at court or service on the parties, could be taken into

account by the court when making case management directions or orders

as to costs. Breaches of the CPR may also result in certain documents not

being permitted to be filed/served or relied on in the proceedings.






jurisdiction?

There are no ADR regulations that apply to financial services

disputes specifically.

ADR is one of the aims of the pre-action protocols and the English courts

may look for evidence that the parties have considered it. However,

ADR clauses are not typically included in financial services contracts.

The terms of the ISDA, GMRA and LMA agreements do not, for

example, make it compulsory for parties to explore any form of ADR

before commencing proceedings. However, it is common for mediation

to be used pre-trial to attempt to settle financial services disputes.



Mis-selling claims are often brought against financial services

providers. Mis-selling is not in and of itself a cause of action but is

rather an umbrella term for a wide range of claims which may arise

in the context of investments/financial products.

Mis-selling claims encompass various causes of action, broadly: (i)

claims for breach of statutory duty (such as claims under s. 138D of

FSMA); (ii) claims in contract or tort (such as negligent

misrepresentation or other claims in the tort of negligence) relating to

advice provided by the financial service provider; and (iii) claims

arising from statements made in the selling process (misrepresentation;

breach of duty not to misstate negligently).

Contractual estoppel is a common defence to claims of mis-selling.





jurisdiction?

The two main types of contract term which the courts consider may

be unfair are limitation and exclusion clauses. The extent to which

any contract term is considered to be reasonable/fair is decided by

reference to the following legislation:

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■ Unfair Contract Terms Act 1977 (UCTA) – from 1 October

2015 when the Consumer Rights Act 2015 (CRA) came into

force, UCTA does not apply to consumer contracts (i.e.

contracts between individuals acting outside that individual’s

business/trade/profession and traders). It only applies to non-

consumer contracts, which means that the defendant must be

acting in the course of business and it is only relevant to

business liability.

UCTA provides that a business cannot exclude or restrict its

liability for negligence except insofar as the term or notice

satisfies the requirement of reasonableness. In s. 11 of UCTA

there is guidance on whether the requirement for a term to be

‘reasonable’ has been satisfied. UCTA would be the relevant

legislation for terms contained in a financial services contract

between sophisticated financial parties.

■ Misrepresentation Act 1967 – this provides that a contract

term which would exclude or restrict any liability to which a

party may be subject by reason of any pre-contract

misrepresentation (or any remedy flowing from it) is of no

effect except insofar as it satisfies the UCTA reasonableness

test.

■ Unfair Terms in Consumer Contract Regulations 1999

(UTCCRs) – until 1 October 2015 UCTA was supplemented

by UTCCRs. UTCCRs (alongside UCTA) continue to apply

to consumer contracts concluded before 1 October 2015.

■ CRA – on 1 October 2015, the CRA was introduced in order

to consolidate and update consumer law in the UK. The CRA

only applies to contracts between a trader and a consumer;

business-to-business contracts are not caught.






Data protection/freedom of information is dealt with in the context of

financial services litigation (as it is in any other context in the UK) under

the terms of the EU General Data Protection Regulation (GDPR).

Under the GDPR, a data subject has the right to obtain confirmation

from a controller of data as to whether or not the controller

processes personal data relating to them. If the controller does

process the data subject’s personal data it must provide the data

subject with access to the data.

In the context of discovery/disclosure, sensitive or confidential

information that is irrelevant to the issues in dispute can be redacted

before it is disclosed to another party. The extent of and rationale

for such redaction may be subject to challenge.

4 Post Trial


disputes?

Parties have the right to ask for permission to appeal any decision of

a lower court (and this is no different in the case of financial services

disputes). The parties can ask the lower court whose decision it

wishes to appeal for permission to appeal. If that request is refused,

there is a right to ask the appellate court for permission to appeal.

However, the granting of permission to appeal is at the discretion of

the courts and there is no absolute right of appeal.

Appeals from the High Court will be heard by the Court of Appeal

(save in rare cases where appeals from the High Court ‘leapfrog’

directly to the Supreme Court).


services disputes?

Costs are dealt with in financial services disputes as they are in all

civil disputes in England & Wales. The general rule is that the losing

party pays the successful party’s legal costs. Costs will be assessed

on the standard basis or indemnity basis. Where multiple issues are

being determined, and a party is only successful in relation to certain

issues, it is possible for the court to make an issues-based costs order.

On the standard basis the court will only allow the recovery of costs

which are reasonably incurred, reasonable in amount and

proportionate to the matters in issue. Any doubt which it may have

in this regard will be resolved in favour of the paying party.

On the indemnity basis there is no requirement for the costs to be

proportionate in order to be recovered. They must still be

reasonably incurred and reasonable in amount but the court will

resolve any doubt which it may have in that regard in favour of the

receiving party. The indemnity basis is intended to be punitive in

nature and is only ordered by the court in certain circumstances.

Once a costs award is made, the receiving party can either agree the

amount to be paid with the paying party or apply to the court for

costs to be assessed.





Jurisdictional issues – there are broadly two sets of rules which

determine whether the English court has jurisdiction in a civil dispute

– the European regime (Recast Brussels Regulation alongside the 2001

Brussels Regulation, 2007 Lugano Convention and 1968 Brussels

Convention) and the common law rules. Where the European regime

applies, it takes precedence over the common law rules. The European

regime will apply in circumstances where the defendant is domiciled in

the EU as well as in certain other circumstances. Where there is an

exclusive jurisdiction clause in favour of the English court, the EU

regime will apply under the Recast Brussels Regulation regardless of

whether or not either party is domiciled in the EU.

Save in limited circumstances, the permission of the court is

required to serve English proceedings outside of the jurisdiction,

which will generally be necessary where the defendant is domiciled

outside the jurisdiction and does not have a branch or establishment

in the jurisdiction.

A party sued in England that wishes to contest the English court’s

jurisdiction should do so by making an application following the

service upon it of the claim form.

Applicable law – in a cross-border dispute, it may be necessary to

determine which law should be applied to the parties’ contractual

obligations and any civil dispute arising from that contract. The rules

set down under Rome I and/or the Rome Convention apply in such

circumstances; the former with respect to contracts concluded before

17 December 2009 and the latter on or after 17 December 2009.

Both Rome I and the Rome Convention give effect to an express

choice of law by the contracting parties and provide rules and

assumptions as to applicable law in the absence of express choice.

Data transfer – the disclosure obligation in civil proceedings

means the parties will often have to collect, review and disclose

large amounts of data. This can give rise to issues relating to data

protection and confidentiality. In cross-border disputes there may

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be issues around the transfer of data in circumstances where data

needs to pass between borders if different rules apply to the

processing and storage of that data.





The English courts will make all reasonable efforts to co-operate

with foreign courts in order to resolve a civil dispute.

The English courts may do this in a variety of ways, such as

responding to letters of request (a request by a court in one

jurisdiction to a court in another to take evidence, and transmit the

evidence to the requesting court for use in judicial proceedings) or

in certain circumstances staying proceedings in favour of other EU

and international courts.



The most common circumstance in which the courts of England &

Wales will exercise extra-territorial jurisdiction is ordering a

worldwide freezing order (WFO). That is, in certain circumstances,

the courts of England & Wales have jurisdiction to grant freezing

injunctions in respect of overseas assets. In considering whether to

grant a WFO, the courts will need to establish the basis of the court’s

jurisdiction and how it would be enforced, as well as any potential

risk of oppression.

In exceptional circumstances the courts will appoint receivers in

respect of overseas assets to facilitate the enforcement of unsatisfied

English judgments.



Unilateral jurisdiction clauses, also known in England as

asymmetric jurisdiction clauses, will generally be upheld by English

courts. Such clauses are common in English law finance documents

(including LMA agreements), where they provide that the borrower

can only sue the lender in a specific country whilst the lender can

sue the borrower in a court of its choosing.

6 Regulated Bodies



The main regulatory bodies in the UK are as follows:

■ Bank of England (BoE) – The BoE has two main purposes

which are to ensure monetary and financial stability.

■ The FCA / The PRA – The PRA and the FCA are the lead bank

regulators in the UK. The PRA (which is part of the BoE) is

the prudential regulator and the FCA is the conduct regulator.

■ Financial Ombudsman Service (FOS) – The FOS has

responsibility for handling complaints from retail banking

customers, subject to a financial limit.



have?

The UK’s banking regulatory bodies will not ordinarily intervene in

civil proceedings. However, the FCA has a wide range of

enforcement powers to protect consumers and to take action against

firms and individuals that do not meet their standards.

The FCA’s disciplinary process generally involves an investigation

followed by the issuance of a statutory notice. The warning notice

outlines to the entity in question the action which the FCA proposes

to take, the decision notice is issued in circumstances where the FCA

has decided to take action and a final notice is issued when the FCA

takes action. The FCA can issue public statements and censures as

well as impose financial penalties. Alternatively, it might issue a

non-statutory private warning. The FCA also has a range of other

disciplinary measures at its disposal such as variation or cancellation

of a firm’s permissions to carry out regulated activities or withdrawal

of an individual’s status as an approved person.

The PRA has similar enforcement powers to the FCA but is only

able to impose penalties on PRA-authorised firms.

The PRA is part of the BoE and exercises its functions through the

Prudential Regulation Committee. The BoE also has various powers

in the context of crisis management under a special resolution regime

and in its role as overseer of financial market infrastructures.



Yes, the decisions of regulatory bodies are binding on the party in

respect of which the decision is issued.


exist?

A party may challenge the decision of the FCA, PRA or BoE by

appealing to the Upper Tribunal (Tax and Chancery Chamber).


accessible?

Yes, most decisions/notices of the FCA/PRA are publicly accessible

online – however, this will depend upon the type of notice that has

been issued and type of action the regulator has chosen to take. A

private warning, for example, will not be publicly available. The

FOS also publishes its decisions online.










The financial crisis did lead to an increase in claims brought against

financial services providers, both as a direct result of the conduct of

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certain financial services providers in that period and the increased

regulatory scrutiny resulting from the crises. In several different

contexts, regulatory findings have served as the evidential

springboard for civil claims. There has also been a significant

expansion of the regulatory framework in the financial services

sector as a result of the financial crisis.

Another significant practical trend arises out of the liberalisation

and growth of the litigation funding market in England & Wales.

This has made it possible for practitioners to identify claims arising

from particular conduct by financial services providers or financial

products and then seek to attract groups of potentially affected

individuals and/or companies to bring those claims on a no- or low-

risk basis.



customer-friendly?

Financial institutions are often able to avoid and resist claims

through use of exclusion and limitation of liability clauses.

However, the UK provides a robust regulatory environment with

significant protections for retail customers in particular.





drawn from them.

The Director of the Serious Fraud Office v Eurasian Natural Resources Corporation Ltd [2018] EWCA Civ 2006 – this Court of

Appeal decision overturned a controversial High Court decision in

which the judge had concluded that certain internal documents

created by the appellant, Eurasian Natural Resources Corporation

Ltd (ENRC), during an SFO investigation were not protected by

litigation privilege, as they had not been brought into existence for

the dominant purpose of resisting or avoiding contemplated

criminal proceedings against ENRC. The High Court judge had

ordered that the documents be provided to the respondent, the SFO,

for inspection. The Court of Appeal instead concluded that

litigation was in reasonable contemplation when the SFO initiated

its investigation and that the documents created by ENRC in the

course of the investigation were privileged. The High Court

decision had potentially significant implications for those subject to

regulatory investigations and enforcement and its reversal has been

widely welcomed.

UBS AG and UBS Limited v Kommunale Wasserwerke Leipzig GmbH and others [2017] EWCA Civ 1567 – the Court of Appeal

found that the High Court was correct to have rescinded certain

credit protection agreements between a bank and its customer on the

basis of a corrupt arrangement between the bank and the customer’s

advisor. The High Court held that a bribe paid by the customer’s

advisor to a director of the customer was paid by the advisor as the

bank’s agent (even though the bank did not know about the bribe).

The Court of Appeal did not consider that the bribe was paid by the

advisor as an agent of UBS but held that the bank’s conscience was

nevertheless sufficiently affected by the bribe that it would be

inequitable for the credit agreements to be enforceable. This

introduces an arguably novel principle that where a third party

dishonestly sets out to undermine a fiduciary relationship, equity

may fix that third party with responsibility for a bribe paid by the

fiduciary that it was not aware of. This decision demonstrates that

the courts are willing to apply equitable principles creatively in

order to avoid what they perceive to be substantial injustice. Property Alliance Group Ltd v The Royal Bank of Scotland Plc [2018] EWCA Civ 355 – this was a much anticipated Court of

Appeal judgment in this interest rate swap mis-selling and LIBOR

manipulation test case. Whilst the appeal was dismissed in full

(such that the customer’s claims failed), the Court of Appeal’s

decision clarified a number of aspects of the law in this area. The

Court of Appeal found that in selling the LIBOR-linked swap

products, The Royal Bank of Scotland Plc (RBS) had made an

implied representation that it was not seeking to manipulate the

LIBOR reference rate and that it did not intend to do so in future.

However, the Court of Appeal held that Property Alliance Group Ltd

(PAG) had not proved that the representation was false, in particular

because although RBS had admitted that it had manipulated Yen and

Swiss Franc LIBOR, there was no such admission in respect of GBP

LIBOR and insufficient evidence to provide manipulation. The

Court of Appeal also disapproved of the concept of a bank owing an

‘intermediate’ or ‘mezzanine’ duty of care (more than a duty not to

misstate/mislead, less than a full advisory duty).

First Tower Trustees Limited & Intertrust Trustees Limited v CDS (Superstores International) Limited [2018] EWCA Civ 1396 –

although not itself a financial services decision, this is an important

decision in relation to contractual estoppel, which is one of the main

defences arising in financial services disputes. The dispute

concerned misrepresentations by the appellant landlords to a

prospective tenant in relation to asbestos issues in the properties to

be leased. The leases contained non-reliance clauses to the effect

that the tenant had not relied on any representations made by the

landlords before entering into the leases. The High Court decided

that the landlords were liable and the landlords appealed. The Court

of Appeal dismissed the appeal, holding that the non-reliance

clauses fell within s. 3 of the Misrepresentation Act 1967 such that

they were of no effect except insofar as they satisfied the

requirement of reasonableness under UCTA, which they did not.

The Court of Appeal did not accept that clauses excluding reliance

on pre-contract representations could be characterised as ‘basis

clauses’ (defining the basis of which the parties were contracting

rather than excluding liability) – if, but for the clause, there would

be liability then the clause is an exclusion clause subject to the

statutory controls. In light of other recent decisions, this one

potentially marks a shift in the attitude of the courts.



jurisdiction?

The historic low interest rate environment which has followed the

financial crisis led to significant regulatory scrutiny and claims

relating to the pre-crisis sale of interest rate derivatives, particular to

retail customers. There has also been growth in English litigation as

an export product, with parties (either when contracting or

subsequently) choosing the courts of England & Wales as their

dispute resolution jurisdiction despite the lack of an obvious

connection between the dispute and the jurisdiction.

RPC England & Wales

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Simon Hart

RPC

Tower Bridge House

St Katharine’s Way

London E1W 1AA

United Kingdom

Tel: +44 20 3060 6671 Email: [email protected] URL: www.rpc.co.uk

Daniel Hemming

RPC

Tower Bridge House

St Katharine’s Way

London E1W 1AA

United Kingdom

Tel: +44 20 3060 6806 Email: [email protected] URL: www.rpc.co.uk

RPC’s Financial Disputes team specialises in complex, high-value, high-profile disputes in investment banking, fund management and capital

markets. We have over two decades of experience acting for institutional investors, borrowers and market counterparties. Unlike most law firms in

the City of London, we can take on instructions which make us adverse to the investment banks and other financial institutions.

Our clients, often international, include hedge funds, pension funds, European banks, private equity firms, investment advisors, commodity houses,

corporates, family offices and high-net-worth individuals.

RPC is a broad-based professional services firm made up of 82 partners, over 300 other lawyers and more than 600 people in total. Our international

practice has a particular focus on Asia and we work closely with our offices in Hong Kong and Singapore. Where we need to work alongside lawyers

in other jurisdictions, we are part of the TerraLex network and have access to over 150 law firms in 100 jurisdictions across the globe.

You can follow our Financial Disputes team on Twitter @conflictfreeRPC.

Simon Hart is a Partner in the Commercial Disputes practice and Head

of our Financial Disputes team.

Simon’s litigation practice has seen him guide clients through a

number of complex banking disputes, often acting against the largest

investment banks. He has acted in claims involving derivatives,

structured products, hedging arrangements and CDOs. He regularly

advises on disputes arising out of loan facilities, trade finance and

financial restructurings. He has acted for a wide variety of clients

including hedge funds, high-net-worth investors, financial institutions

and insolvency office holders.

He also has many years of experience of advising clients in relation to

multi-jurisdictional litigation involving fraud, asset tracing and recovery,

and enforcement of judgments as well as commercial contracts and

shareholder disputes.

Simon has assisted corporate clients with regulatory and internal

investigations, of a cross-border nature, often relating to anti-

corruption.

Daniel Hemming is a Senior Associate in the Financial Disputes team.

Daniel acts for a broad range of clients, with a particular focus on the

financial services sector in which he has advised banks, asset

managers, hedge funds and high-net-worth individuals. He has acted

and continues to act adverse to the largest investment banks and has

expertise in disputes relating to derivative products, the close-out of

financial transactions (including under industry-standard master

agreements) and securities valuations.

Daniel also has experience of complex jurisdictional issues and

proceedings relating to the enforcement of foreign judgments in

England.

RPC England & Wales

Chapter 10


Borenius Attorneys Ltd

Markus Kokko

Vilma Markkola

Finland





Typical disputes involving financial institutions are disputes

concerning the right to insurance compensation and the right of

recourse of insurance companies, disputes related to guarantees or

security, and alleged breaches of obligation to give information and

the duty of loyalty. Typical actions taken against customers include

debt collection.

Often claims by or against financial institutions are settled or

resolved in out-of-court bodies before they proceed to litigation. In

the financial services sector, the competent out-of-court body in

many cases is the Finnish Financial Ombudsman Bureau (FINE).

For example, non-professional investors tend to bring cases

concerning investment disputes to FINE rather than issue legal

proceedings in court.


In general, compensation for damages is typically awarded in

financial services disputes. The aim is to put the suffered party in

the financial position in which it would have been if the other party

would have fulfilled its obligations as agreed. Punitive damages as

such are not available under Finnish law. Also, rescission and

adjustment of contracts and injunctions are possible remedies.




In general, parties to a financial services contract have a right of

action. Under certain conditions, third parties may also have a right

of action.

In the financial services sector, litigation is used both in disputes

between businesses and in disputes between businesses and

individuals. In disputes between businesses, arbitration is

sometimes the chosen method of dispute resolution, but litigation

remains more popular in the financial services sector. Business

parties may include a prorogation clause to their agreement stating

that, for example, only one particular court or the courts of one

country have jurisdiction over a dispute. Typically, the chosen

domestic court is the District Court of Helsinki.

If the customer is a consumer, the stricter provisions of the Finnish

Consumer Protection Act (1978/38, as amended) apply.

Additionally, other statutes relating to financial services impose

stricter rules on contractual relationships in which one of the parties

is a consumer and the other one a financial institution. The court

procedure in state courts is similar irrespective of whether both

parties are businesses or one party is a business and the other one an

individual customer.

In Finland, there are also out-of-court bodies that issue

recommended resolutions to disputes. Some out-of-court bodies are

only available to certain types of contracting parties. Please see

section 6 on out-of-court bodies.





this?

Third-party funding is possible, and it is most commonly realised by

way of insurance. Other types of third-party funding are reasonably

uncommon, although they have been used in certain landmark cases

that concerned entire industries or cases with multiple claimants.

In Finland, both private individuals and businesses may take

advantage of insurance policies that cover litigation expenses. The

specific terms and conditions depend on the insurance product and

the insurance company in question. Generally, parties to a contract

may be more eager to commence proceedings if they have an

insurance that covers a part of the potential costs.





In Finland, class action law suits have been available since 2007. To

this day, no class action law suits have been filed. Class actions are

only available to consumers in civil cases between consumers and

businesses.

Under the Finnish Act on Class Actions (2007/444, as amended), a

case may be heard as a class action if: several consumers have

claims against the same defendant, based on the same or similar

circumstances; the hearing of the case as a class action is expedient

in view of the size of the class, the subject matter of the claims

presented and the proof offered; and the class has been defined with

adequate precision.

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In Finland, only the Consumer Ombudsman, which also represents

the class, has the authority to bring a class action. Only consumers

who opt in will become class members.






case?

The main barriers are the cost risk related to litigation and the

potentially long duration of the proceedings. Therefore, disputes

related to financial services are often resolved amicably or in out-of-

court bodies.

Generally, exclusionary or duty defining clauses are not used in

customer contracts, apart from monetary limitations of liability.






clock’?

In Finland, the limitation periods are governed by the Act on the Statute

of Limitations on Debt (2003/728, as amended). The general limitation

period is three years. The starting time of the limitation period depends

on the type of the case. For example, in cases concerning compensation

based on a breach of contract the time starts when the party to the

contract notices or should have noticed the breach.

Generally, a limitation period can be interrupted either in an informal

way, e.g. by reminding the other party of the obligation, or with a

statutory measure that interrupts the limitation period, e.g. by filing a

claim before court or initiating proceedings in an out-of-court body. A

new limitation period of equal duration starts after the interruption and

it can be interrupted several times. Generally, initiating proceedings in

a competent out-of-court body interrupts the limitation period.

In some cases, there are also specific periods for filing a suit. These

periods apply to, e.g., actions brought against board members. The

specific period for filing a law suit can only be interrupted with a

statutory measure that interrupts the limitation period, in most cases

only by filing a claim.





The rules on privilege in civil proceedings are similar to the

exemptions of giving a testimony. Attorneys and their assistants are

not allowed to present a document in court if it can be assumed that

the document contains something on which they may not be heard

on as a witness. In-house counsels do not enjoy this privilege. The

court can order, under certain conditions, an attorney to testify and

produce documents when the attorney has not acted for the client in

court proceedings, i.e. only acted in an advisory role.

Any witness may also refuse to testify regarding a commercial

secret, unless weighty reasons require that the witness be heard on

the subject matter. Similarly, a party may refuse to provide

documents containing such information.

Generally, the aforementioned privileges also apply to procedures

conducted by out-of-court bodies.

The Finnish Financial Supervisory Authority (FIN-FSA) has,

notwithstanding confidentiality provisions, certain rights to obtain

and inspect information that is necessary for the exercise of its

statutory duties. In specific cases, the FIN-FSA is entitled to obtain

information, documents or records from attorneys or their assistants

concerning clients of the attorneys. This includes the right to obtain

information concerning market abuse, disclosure of information

affecting the value of securities, or trading on a regulated market or

multilateral trading facility.




The International Swaps and Derivatives Association (ISDA)

Master Agreement is widely used both between banks and between

banks and large commercial customers. In many cases, the law

governing such agreements is English law. However, derivative

contracts governed by national law are also used.





In the financial services legislation, there are provisions concerning

procedures and marketing practices that financial services entities

must follow. For example, under the Finnish Insurance Contracts

Act (1994/543, as amended), the insurer must provide the applicant

with information that is necessary in assessing the insurance

requirement and selecting the appropriate insurance. Under the

Finnish Act on Credit Institutions (2014/610, as amended), credit

institutions must in their marketing provide the customer with all the

information that is necessary for the customer’s decision-making

concerning the commodity.

The FIN-FSA issues regulations and guidelines for financial

institutions. These regulations and guidelines cover a variety of

topics, e.g. code of conduct, accounting and financial reports as well

as commencement of activities. The regulations are legally binding

and financial services entities must comply with them. Guidelines

generally include the FIN-FSA’s interpretations of legal provisions

and its recommendations for financial services entities and are

recommendatory in their nature.

Additionally, principles of good practice, e.g. principles of good

banking practice and good securities market practice, and self-

regulation norms guide financial institutions in their activities.

General contractual principles also impose a duty of loyalty on

contracting parties. They must loyally co-operate in the completion

of a contract, which includes, for example, taking into account the

opposing parties interests and assisting that party in mitigating

damages. Additionally, during pre-contractual negotiations, a duty

of good faith exists.




There are no specialist courts or judges for financial services

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disputes in Finland. In general, the state courts, which are District

Courts, Courts of Appeal and the Supreme Court, handle disputes

regarding financial services. Depending on the type of the case,

Administrative Courts and the Supreme Administrative Court or the

Market Court may also have jurisdiction over disputes concerning

financial services.



The method of service of proceedings for financial service litigation

follows the customary method of service of proceedings. Under the

Finnish Code of Judicial Procedure (1734/4, as amended), the basic

principle is that the court sees to the service of proceedings. At the

request of a party, the court may entrust the service of a notice to the

party.





In Finland, there are no specific pre-trial requirements in financial

services disputes. In general, an advocate must notify the opposing

party before commencing legal action. This is considered good

advocacy practice. A claim is filed when the claimant submits an

application for summons to the registry of the court. The

application for summons must comply with certain formal

requirements set out in the Code of Judicial Procedure. If the

application for summons does not meet these requirements, the

court exhorts the claimant to supplement it.






jurisdiction?

ADR methods, such as arbitration and mediation, may in most cases

be used in case the parties so agree. However, litigation continues

to be the preferred method in resolving disputes even between

businesses.

Consumers are not bound by a term in a contract concluded before

the dispute arises, under which a dispute between a consumer and a

business shall be settled in arbitration. If one of the parties is a

consumer, the dispute is typically resolved in an appropriate out-of-

court body or in state courts.

Court mediation in accordance with the Finnish Act on Mediation in

Civil Matters and Confirmation of Settlements in General Courts

(2011/394, as amended) is also a possibility in financial services

disputes, but is relatively rarely used in practice.



The relevant authorities closely supervise operators in the financial

market and may impose sanctions for negligent misstatement and

mis-selling. For example, the FIN-FSA may issue public warnings

or conditional fines to financial market operators that make

negligent misstatements or pursue mis-selling in their activities.

Also, a police investigation may be requested if the FIN-FSA

suspects that a criminal offence has been committed.

Additionally, the Consumer Ombudsman monitors financial market

operators and their activities in relation to consumers. The

Consumer Ombudsman or the Market Court, depending on the case,

may impose prohibitions and penalty payments on financial market

operators.

The injured party may claim the contract to be invalid and seek

damages based on the misstatement or mis-selling. These claims are

handled in ordinary civil proceedings according to the provisions of

contract law and tort law.





jurisdiction?

Unfair terms are generally considered to be terms that unreasonably

favour one party to the detriment of the other party. The terms may

govern, for example, payments, delivery or duration of the contract.

The evaluation is made on a case-by-case basis. Unfair terms

mostly occur in contractual relationships in which one party is in a

weaker position than the other one.

An unfair term does not necessarily make the entire contract null

and void. Under the Finnish Contracts Act (1929/228, as amended),

unfair contract terms may be adjusted or set aside. If one of the

parties to the contract is a consumer, the provisions of the Consumer

Protection Act concerning adjusting and setting aside of unfair

terms in contracts apply. Depending on the unfair contract term, the

rest of the contract may also be adjusted or the whole contract may

even be declared terminated.

Consumers are widely protected under the Finnish legislation.

Under the Consumer Protection Act and certain other acts, stricter

provisions have been imposed on businesses providing goods and

services to consumers. These provisions concern, for example,

marketing and information to be provided prior to the conclusion of

a contract.

Under the Consumer Protection Act, a consumer is defined as a

natural person who acquires consumer goods and services primarily

for a use other than business or trade. If the primary use of the good

or service acquired is private use, the person that acquires the good

or service is generally regarded as a consumer, even if the good or

service is partly utilised in business. Consumer goods and services

are goods and services that are offered to natural persons or which

such persons acquire, to an essential amount, for their private

households.

The aforementioned class action law suit is only available to

consumers. In Finland, class actions follow an opt-in model, which

requires consumers who want to belong to a class to submit a letter

of accession to the class.

Consumers can also submit disputes to the Consumer Dispute Board

or to FINE, depending on the type of the case.






Under the Finnish Act on the Publicity of Court Proceedings in

General Courts (2007/370, as amended), trial documents and court

proceedings are public unless provided otherwise. The parties to the

case have the right to be informed about the contents of trial

documents that are not public.


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Discovery and disclosure as exercised in common law countries do

not exist in the Finnish judicial system. However, the court may,

based on the request of a party and under certain conditions, order

the opposing party or a third party to produce specific documents.

The court may order those documents to be confidential. Otherwise,

all documents are publicly available.

Further, financial institutions must comply with the provisions set

out in the General Data Protection Regulation (GDPR). The

provisions of the GDPR concerning right of access to the personal

data by the data subject apply to financial customers’ access to their

personal data.

4 Post Trial


disputes?

In general, there is a right of appeal in financial services disputes.

The judgment of District Courts can be appealed to the competent

Court of Appeal. After the judgment has been rendered in the Court

of Appeal, a party may petition the Supreme Court for a leave to

appeal. The Supreme Court may grant a leave to appeal, if this is

important for the application of law or the consistency of court

practice. A leave to appeal may also be granted if there is a reason

for this because of a procedural or other error, or if there is another

important reason. In practice, a leave to appeal is seldom granted.

The decisions of the Administrative Courts can normally be

appealed in the Supreme Administrative Court. Certain types of

cases require a leave to appeal. The decisions of the Market Court

can generally be appealed either to the Supreme Administrative

Court or to the Supreme Court. A leave to appeal may be required.


services disputes?

Under the Code on Judicial Procedure, the basic principle is that the

losing party is liable for all the reasonable and necessary legal costs

of the opposing party. The reasonableness and necessity of the costs

are evaluated on a case-by-case basis.

Under the Code on Judicial Procedure, it is also possible for the

court to reduce the payment liability of the party, if it would be

manifestly unreasonable to render one party liable for the legal cost

of the opposing party. The circumstances giving rise to the

proceedings, the situation of the parties and the significance of the

issue are factors that the court takes into account when evaluating

the payment liability. The reduction of the payment liability rarely

applies to disputes between businesses.





So far, cross-border financial disputes involving financial

institutions have been very rare in Finland. On a general level,

issues regarding jurisdiction of courts and enforceability of

judgements are typical in disputes involving foreign parties. As a

European Union Member State, Finland is bound by various EU

regulations that are applied in cross-border disputes.





Co-operation with foreign countries occurs, especially when

authorities are investigating criminal offences connected to foreign

countries. Also, out-of-court dispute resolution bodies may co-

operate with corresponding bodies in other countries.

There are different kinds of mechanisms of co-operation based on

EU legislation, international conventions and national laws. As an

EU Member State, Finland is bound by, for example, Regulation

(EC) No 1206/2001 on co-operation between the courts of the

Member States in the taking of evidence in civil or commercial

matters.

Finland is a member of certain international financial services

networks, e.g. the FIN-NET network of the European Commission

and the International Network of Financial Services Ombudsman

Schemes (INFO Network). Finland has signed and ratified certain

international conventions concerning dispute resolution, e.g. the

Convention on the Settlement of Investment Disputes between

States and Nationals of Other States (the ICSID Convention).



Extra-territorial jurisdiction may be applied in certain criminal

matters, e.g. in connection with criminal offences committed

outside of the Finnish territory that have been directed at Finnish

citizens or Finnish legal entities and that under Finnish law may be

punishable by imprisonment for more than six months.

Extra-territorial jurisdiction is also applied in certain data protection

issues.



In general, unilateral jurisdiction clauses are valid and enforceable.

However, a court may mitigate such a clause in cases where the

contracting parties are not of equal merit. Unilateral jurisdiction

clauses may not go against peremptory provisions of law. In

contracts concluded between businesses and consumers, the use of

unilateral jurisdiction clauses is limited and these clauses usually

only apply to the advantage of the consumer.

6 Regulated Bodies



In Finland, some out-of-court bodies issue recommendations to

financial disputes. The competent body depends on the type of the

dispute and the parties involved.

In the financial services sector, the main body is FINE. Its office

and three complaints boards issue recommendatory resolutions to

financial services disputes. The boards are the Insurance, Banking

and Securities Complaints Boards. The Insurance Complaints

Board examines insurance-related disputes of both consumers and

companies, whilst the Banking Complaints Board examines

disputes in which one party is a consumer, a small or medium-sized


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enterprise or other comparable customer. The Securities

Complaints Board hears disputes between service providers and

non-professional investor customers.

If a financial services dispute between businesses does not fall under

the competence of FINE, the available options for dispute resolution

are generally mediation, arbitration or litigation.

Certain out-of-court bodies are available only to consumers. For

example, consumer advisors who work at local Register Offices

assist and mediate disputes and the Consumer Disputes Board issues

recommended resolutions to a variety of consumer matters.

In addition to the aforementioned out-of-court bodies, certain

authorities monitor service providers operating in the financial

services sector to see if they comply with legislation and good

practices. These include, inter alia, the FIN-FSA, the Consumer

Ombudsman, the Data Protection Ombudsman and the Finnish

Competition Authority when competition issues are involved.



have?

FINE, its Complaints Boards and the Consumer Disputes Board

issue recommendations to the disputes brought before them by the

parties. The parties are not bound by the recommendations, and the

recommendations are not enforceable as such. Generally, the

outcome is either a recommendation for compensation or no

recommendation for compensation.

The examination of disputes is based on the documentation

provided by the parties. Oral hearings are possible in FINE and its

Complaints Boards but they are conducted only for particular

reasons. The bodies may also acquire, at their own expense, expert

opinions if that is necessary in the case.

The FIN-FSA supervises entities that operate in the financial

markets, e.g. banks, insurance and pension companies and

investment firms, in accordance with the Act on the Financial

Supervisory Authority (2008/878, as amended). The FIN-FSA has

the right to receive and inspect information and documents, which

are necessary for it to fulfil its legal supervisory obligations. The

FIN-FSA may impose administrative sanctions, which include

administrative fines, public warnings and penalty payments. It may

also request an investigation if it suspects that a criminal offence has

been committed.



FINE, its Complaints Boards and the Consumer Disputes Board

only give recommendations. However, businesses generally tend to

comply with these recommendations. The decisions of the FIN-

FSA are binding.


exist?

Since the decisions of the out-of-court bodies are not binding upon

the parties, they are as such not subject to appeal. However, it is

possible to file a claim before court if either of the parties is not

satisfied with the outcome of the body’s decision. The decisions of

the FIN-FSA can be appealed to the Administrative Court or the

Market Court, the competent court depending on the case.


accessible?

The recommendations issued by the Consumer Disputes Board and the

Boards of FINE are publicly accessible. The personal details of the

parties and certain specific details of the case are deleted from the

public versions in such a way that the parties cannot be recognised.

The recommendations are collected in databases that are accessible

online. The FIN-FSA publishes online its administrative sanctions and

supervisory measures.










The amount of regulation in the financial services sector has

increased and become more complicated over the years particularly

due to the financial crisis. Also, the supervisory powers of the FIN-

FSA have increased during the past 10 years. Despite the regulatory

changes there is no clear change to be seen in the amount or type of

disputes brought before court.



customer-friendly?

On one hand, there is a lot of legislation protecting the customers of

banks, insurance companies and investment firms in Finland and also

the supervisory authorities are relatively active. There are several acts,

guidelines and self-regulation norms as well as principles of good

practice that guide financial institutions in their actions. On the other

hand, there are only a few cases in Finland in which judgments have

been rendered against financial institutions, which can be seen as a

sign of a financial institution-friendly approach.





drawn from them.

No particularly significant cases have been published within the

past 12 months. As stated above, financial services disputes are

often settled or resolved in out-of-court bodies.



jurisdiction?

There have been no major changes in terms of litigation or dispute

resolution. On the other hand, the amount of regulation directed at

businesses in the financial service industry has clearly increased

during the past few years, which is a result of the global economic

changes and increased insecurity and instability in the financial

industry.


Finl

and


Markus Kokko


Eteläesplanadi 2

00130 Helsinki

Finland

Tel: +358 20 713 3482 Email: [email protected] URL: www.borenius.com

Vilma Markkola


Eteläesplanadi 2

00130 Helsinki

Finland

Tel: +358 20 713 3302 Email: [email protected] URL: www.borenius.com

Borenius Attorneys Ltd offers legal services in all aspects of domestic and cross-border dispute resolution, including conflict management and

strategic planning. The dispute resolution team is one of the largest and most respected in Finland. It combines wide experience with knowledge of

various industry sectors. In addition to civil proceedings, Borenius regularly represents Finnish and foreign clients in arbitration proceedings under

various arbitration rules, as well as in ad hoc arbitration proceedings. Our experts frequently serve as arbitrators in domestic and international

commercial proceedings.

Markus Kokko regularly advises major domestic and international

clients on dispute resolution and corporate crime cases.

Markus has in-depth experience of domestic and international

corporate and commercial disputes and he has acted as lead counsel

in numerous extensive cases. His field of experience encompasses

cases related to a wide variety of business sectors, such as the

chemicals industry, financial markets, international trade, retail and

wholesale and mining. Markus also has an exceptional track record in

handling a broad range of litigation and arbitration cases.

Markus frequently advises companies and executives in relation to

complex corporate crime cases and criminal investigations regarding,

inter alia, insider trading, environmental violations, corruption and tax.

Markus’ efficient and client-oriented approach has earned him an

excellent reputation which has been recognised by rankings in

Chambers Global, Chambers Europe, The Legal 500 and Best Lawyers.

Markus heads the Litigation & Arbitration and Corporate Crime teams

at Borenius Attorneys Ltd.

Vilma Markkola is an Associate at Borenius Attorneys Ltd. Vilma is

specialised in questions related to dispute resolution. In addition to

both domestic and international litigation and arbitration and corporate

crime-related cases, Vilma frequently advises clients on issues

relating to employment and insolvency law.


Chapter 11


Dethomas Peltier Juvigny & Associés

Arthur Dethomas

Dessislava Zadgorska

France





The most common causes of actions taken by financial institutions

and service providers against clients relate to loan default or fraud to

the detriment of the financial institutions.

The most common causes of actions taken by clients relate to:

■ the breach of the financial institutions’ or service providers’

general duty to inform, advise and alert their clients of the

risks related to investments or associated with a specific

financial product;

■ the infringement of specific regulations relating to the form

and substance of the contracts, namely governing personal

loans and contracts with consumers; and

■ general civil liability in matters where bank wire-transfers are

made. For instance, there has been a recent increase in Forex

trading fraud cases (e.g. the use by individuals of false

trading schemes to defraud investors, mostly individuals with

little market experience, by convincing them that they can

expect to gain a high profit. In these instances, bank wire-

transfers are used and the financial institutions are the only

remaining potential defendants).


Whether the action be founded in contract or in tort, damages are

most likely to be awarded.

If the claim is based on contract, besides damages the following

remedies could be available, alternatively or on a cumulative basis

(if they are compatible):

■ specific performance, except where it is materially

impossible or if the cost of specific performance would

evidently be disproportionate;

■ withholding performance;

■ reduction in the price initially agreed; and/or

■ termination of the contract.




As a general rule, any interested party may bring an action. This

rule applies to financial services disputes. In practice, the action

may be brought by financial institutions, by their clients (individuals

or legal entities) or by accredited associations.

The court having jurisdiction over a claim is determined depending

on whether the customer is an individual or a commercial entity.

Where the claimant is a financial institution the claim shall be brought:

■ before the commercial court if the defendant is a commercial

entity or person; or

■ before the civil court (tribunal de grande instance) or the

small claims civil court (tribunal d’instance) if the defendant

is an individual or a non-commercial legal entity. The small

claims civil court has jurisdiction over claims worth less than

EUR10,000 and exclusive jurisdiction over consumer loans

disputes where the value of the claim is EUR75,000 or less.

Where the claimant is an individual or a non-commercial legal

entity, the claim articulated against a financial institution may be

brought either before the commercial court or before the civil court,

at the claimant’s choice.





this?

Third-party funding is available in financial services litigation.

There are no torts of champerty or maintenance as the case may be

in some common law systems.

In practice, third-party funding is mostly used in arbitration

proceedings which are, in France, significantly more expensive than

state court proceedings.

Although third-party funding is not subject to formal regulation, the

Cour de Cassation (the French supreme jurisdiction) recognised the

validity of third-party funding agreements as sui generis contracts.

In addition, on 21 February 2017, the Paris Bar Council issued a

resolution recognising third-party funding for both the parties and

their counsels, providing in essence that:

■ the attorney remains solely accountable to his client, not to

the third-party funder;

■ only the client (and not the funder) enjoys the attorney-client

privilege; and

■ the funded party’s attorney is required to “encourage his client to disclose the existence of such funding to the arbitrators”

and should warn the funded party about the possible

consequences of not disclosing it (e.g. namely a conflict-of-

interest issue that may result in the nullity of the award).

Fran

ce


Litigation insurance is available under French law and may cover

the insured party’s legal fees and court costs.





Class actions, as understood in common law jurisdictions, were

introduced in 2014. A class action (referred to as a “group action”)

may be brought in relation to consumer and competition law

disputes, health product liability, environmental liability,

discrimination and personal data protection. The French class

action is an opt-in mechanism (except the “simplified group action”,

available under consumer law, which is closer to an opt-out

mechanism) and may be initiated only by certified associations or

given groups (labour unions).

Approximately 10 class actions have been made public thus far, and

relate to the banking, real estate and health sectors or to

discrimination law. Their impact on financial services litigation is

difficult to assess at this stage.

In addition, several other mechanisms enable claimants to act

jointly, including (i) a legal action taken by associations

representing their members for a claim as to a collective loss, and

(ii) a joint representative action taken by certain accredited

associations, namely in the investment law sector.






case?

The main barriers to financial service litigation for customers seem

to be cost- and time-related (a judgment in a claim for civil liability

is usually given within 18 months to two years).

Limitation or exclusion of liability clauses as well as duty defining

clauses are, in principle, valid and enforceable. However, due to the

protection granted by law against unfair terms of contracts (see

question 3.6), such clauses are frequently deemed invalid by courts

and, therefore, do not prevent, in practice, customers from bringing

a case. In particular, such clauses will be deemed invalid:

■ in all types of contracts where the clause contradicts the

essential obligation of the contract or where the contract

breach was made intentionally or resulted from gross

negligence;

■ in all contracts with consumers or non-professionals; and

■ in all “non-negotiated contracts” (contrats d’adhésion) if the

clause results in a significant imbalance in the rights and

obligations of the parties.






clock’?

Before the courts, depending on the cause of action, various time

limits apply. The French general statute of limitation is five years,

starting from the day the holder of a right knew or should have

known the facts enabling him to exercise his right. A specific two-

year limitation period applies, however, to claims by professionals

against consumers. The Cour de Cassation ruled that this two-year

limitation period was “a general rule” that applies “to all financial services provided by professionals to private individuals”. The

parties of a contract are also given the possibility to arrange and

determine the time limit which shall apply to the actions under the

terms of their contract.

Before regulatory bodies, except in cases where claims against

financial institutions in relation to investment services are submitted

to a regulatory mediator, individuals or entities may not, stricto sensu, bring a case before regulatory authorities. In order to obtain

remedies, the claimant in a financial dispute may bring an action

only before the courts.

A three-year time limit applies to sanction and enforcement

proceedings brought by the Financial Markets Authority (Autorité des Marchés Financiers or “AMF”). By contrast, disciplinary

actions brought by the French authority responsible for overseeing

and licensing banks, insurance companies and mutual insurers

(Autorité de Contrôle Prudentiel et de Résolution or “ACPR”) are

not subject to any statutory or legal limitation period.

Either way, the commencement of a regulatory process does not

interrupt time limits applicable to actions brought before the courts.





French law does not provide for a litigation or legal advice privilege

as understood in common law systems.

Concerning legal advice, French lawyers are bound by professional

secrecy. In this respect:

■ communications between lawyers are covered by a general

legal privilege; lawyers are, however, entitled to waive

confidentiality by specifying that a document is “non-

confidential” (officiel); and

■ communications between lawyers and their clients are also

covered by a full legal privilege which may not be waived by

the client.

By contrast, in-house lawyers do not benefit from legal privilege in

France, the French concept of legal privilege being based on an in personam approach to confidentiality rather than on the content of

the communication as the case may be in common law systems.

As regards litigation, French law only provides for secrecy of

criminal investigations (including financial services criminal

investigations). Parties to disputes brought before the civil courts,

including financial services cases, cannot avail of litigation

privilege. However, in practice, briefs and evidence relating to

pending civil proceedings are not publicly accessible, unlike

judgments which are available to the public.

Concerning investigations conducted by regulatory bodies, AMF

and ACPR inspectors, controllers and employees are bound by

professional secrecy which applies to facts, acts and information

that may come to their attention when performing their duties as

well to documents and information obtained in the course of their

inspections. However, as an exception to this principle, professional

secrecy cannot be raised:

■ in defence against the judicial authorities acting within the

scope of criminal proceedings, or in connection with judicial

liquidation proceedings brought against financial institutions

and entities;

Dethomas Peltier Juvigny & Associés France

Fran

ce


■ against the national financial intelligence unit (Tracfin), the

French Court of Auditors or a parliamentary investigation

committee when they are carrying out their duties; and

■ against administrative courts seized of an action relating to

ACPR duties.

Professional secrecy may also be waived with regard to counterpart

foreign authorities or other domestic authorities when they are

performing their duties.




Standard form master agreements are frequently used by French

financial institutions and are, in principle, valid and enforceable.

Moreover, in 2018, ISDA launched and published a new 2002 ISDA

Master Agreement governed by French law. This master agreement,

which is the first civil law-governed ISDA Master Agreement, is

intended to provide options for financial institutions that would

prefer, in the Brexit context, to continue trading under a European

Union (“EU”) Member State law with EU jurisdiction clauses.

Specific provisions on “non-negotiated contracts” were recently

introduced in the French Civil Code (by Order dated 10 February

2016). Standard form master agreements are, in fact, likely to be

regarded by courts as non-negotiated contracts and, therefore,

affected by the new legal provisions applicable to such contracts

stating that:

■ any clause which would result in a significant imbalance in

the rights and obligations of the parties is invalid; and

■ ambiguous clauses are interpreted against the party which

drafted the contract.





Financial services entities are bound by several non-contractual

duties arising from the law (especially from the French Monetary

and Financial Code and the Consumer Code), from regulation,

recommendations and guidelines issued by the AMF and the ACPR,

and from case law based on the general principles of contract law.

In a non-exclusive manner, examples of duties binding on financial

services entities include organisation rules, conduct of business

rules (such as, for instance, assessment of the suitability and

appropriateness of the service), and a general duty to inform or warn

the customer of the risks associated with financial products.

Investors are entitled to bring court proceedings against financial

services entities on the basis of a regulatory breach provided that a

causal link between said breach and the harm suffered is

demonstrated.

In addition, case law recognises that banks and financial institutions

owe a general duty of information to their clients even before the

signing of the contract. Courts have also imposed a duty on banks

to warn the clients of the potential consequences and risks

associated with loans: banks are obliged to gather information

regarding their clients’ assets and ability to repay, and may be held

liable for granting an inappropriate or excessive loan to a non-

sophisticated borrower. Moreover, regarding specifically regulated

products (such as, for example, personal loans), financial services

entities must follow strict rules as to the form and substance of the

contracts.

As a general rule, investment service providers are obliged to act

“honestly, fairly and professionally” and “in the best interests of clients and the integrity of the market”. Generally speaking, the

above-mentioned non-contractual duties cannot be contracted out of.




There is no specialist court for financial services litigation in

France.

Certain larger courts, such as the Paris court of appeals or the Paris

civil court, have specialised chambers devoted to financial services

disputes.

In addition, two international chambers were recently created within

the Paris commercial court and the Paris court of appeals. These

chambers, specifically designed to hear international trade cases,

operate along reformed procedures and methods, inspired by

common law systems, which are particularly interesting for cross-

border financial services litigations:

■ proceedings may be conducted in English, and documentary

evidence may be submitted in the original English version;

■ the judges are selected on the basis of their experience with

cross-border business litigation and have a good knowledge

of banking and financial law;

■ the specific procedural rules allow a quick settlement of the

dispute; and

■ judges may hear parties, witnesses and experts.



No. The proceedings’ rules will vary depending on the court before

which the claim is brought (civil court, small claims civil court,

commercial court) rather than on the nature of the litigation.





Save for legitimate reasons relating to an emergency or to the nature

of the matter, the claimant must describe in the summons the actions

taken to try to attempt a settlement. However, there is no sanction

stipulated for this obligation.

There is no, as such, pre-trial obligation for parties to refer their

disputes to an ADR mechanism. As an exception to this principle,

all claims referred to small claims civil courts, including, as the case

may be, financial services claims, have to be, subject to some

exceptions, first referred to a judicial conciliator in order to attempt

a settlement.






jurisdiction?

There are no specific ADR regulations applicable to financial


Fran

ce


services disputes. Generally, apart from arbitration, several ADR

mechanisms are available under French law: mediation (conducted

by an extra-judicial mediator); conciliation (conducted by a judicial

conciliator); and the participative procedure.

Regarding regulatory proceedings, the AMF can, under certain

conditions, offer a formal settlement (“administrative composition”)

to persons charged with having engaged in certain regulatory

breaches or market abuse. In addition, French law provides for two

settlement mechanisms relating to criminal investigations, inspired

by Anglo-Saxon systems and particularly appropriated for financial

criminal litigation: a “guilty plea” (comparution sur reconnaissance préalable de culpabilité); and “judicial settlement of public interest”

(convention judiciaire d’intérêt public).

Parties can also contractually agree to settle their disputes via ADR

mechanisms, e.g. via mediation, conciliation or arbitration.

However, in contracts with consumers, ADR clauses are deemed

unfair unless the contrary is proved by the professional. In addition,

concerning arbitration clauses, the financial institution will not be

able to enforce the clause against the consumer without the latter’s

consent.

In practice, arbitration clauses are rarely included in financial

services contracts. Mediation and conciliation mechanisms are

more often stipulated, but, generally, ADR seems barely used to

resolve financial services disputes in France, although one of the

expected ADR developments in the near future is the

implementation of a general obligation to attempt settlement before

judicial proceedings can be brought.



A contract may be rescinded by courts where the consent of one of

the parties was obtained as a result of misstatement schemes (with

the intent of inducing error) or decisive information as to the

consent of a party has been intentionally withheld. The misled party

is also entitled to seek damages. These rules are public policy rules:

the parties may not contractually agree to disregard or limit them.

In addition, as they are required to provide information in a “fair, exact, non-misleading and comprehensible” manner, investment

service providers which provide false, imprecise or misleading

information may be subject to regulatory sanctions.





jurisdiction?

French law provides for several general rules relating to the

interpretation of unfair provisions:

■ in all types of contracts, clauses contradicting the essential

obligation of the contract are invalid or avoided where the

contract breach was made intentionally or resulted from gross

negligence (case law); and

■ in all “non-negotiated contracts” (i) ambiguous clauses are

interpreted against the party who drafted the contract, and (ii)

non-negotiated clauses which result in a significant

imbalance in the rights and obligations of the parties are

invalid.

Regarding consumer protection specifically:

■ financial services providers have a broader obligation

regarding information and advice provided to consumers or

non-professionals; and

■ clauses which result in a significant imbalance in the rights

and obligations of the parties to the consumer’s or non-

professional’s detriment are invalid, either in negotiated and

non-negotiated contracts; among these clauses certain terms

are regarded as unfair and invalid in an irrefutable manner

(for instance, limitation and exclusion of liability clauses),

other type of clauses are regarded as unfair, and are therefore

deemed invalid, unless the contrary is proved by the

professional (for instance, ADR clauses).

A consumer is broadly defined under French law as any individual

acting for purposes which are outside his/her professional activities.

French law also encompasses the notion of “non-professional”, e.g.

any legal entity acting outside its professional activities (preliminary

Article of the Consumer Code). Non-professionals benefit from

several consumer protection provisions, namely regarding unfair

clauses.






Personal data gathered by financial services is covered by

professional secrecy in general and banking secrecy in particular.

However, professional secrecy cannot be opposed as an impediment

to the communication of documents in regulatory proceedings

before the AMF or the ACPR or in criminal proceedings. To the

contrary, professional and banking secrecies are legitimate

impediments to the communication of documents in civil and

commercial proceedings, except where:

■ the client has expressly agreed to the communication; and

■ the dispute is between a financial institution and one of its

clients: in such disputes, financial institutions may use any

legitimately held information relating to their client.

Financial services customers have a permanent access to their

personal data according to applicable personal data regulations

(French legislation and EU General Data Protection Regulation

2016/679).

There is no discovery process nor a general disclosure obligation for

litigants, the general principle being that each party freely decides

what evidence it will produce in order to support its case. Specific

pieces of evidence can, however, be subject to an order of

production by the court, the court being at liberty to make any

inferences it deems appropriate if the person detaining such piece of

evidence does not comply with the order and/or to impose a fine.

4 Post Trial


disputes?

Yes, except for disputes worth less than EUR4,000. Appeal is

brought before the territorially competent court of appeals. When

the appeal is not possible the case can be brought before the Cour de Cassation.


services disputes?

There are no specific regulations relating to the costs in financial

services disputes.


Fran

ce


As a general rule, civil procedure rules allow the winning party to

obtain payment by the other party of the costs and disbursements

incurred throughout the proceedings (dépens) as well as all the other

expenses incurred in the course of the trial, including attorneys’

fees. In practice, however, the court freely determines the amounts

of legal fees awarded, which tend to correspond to only a portion of

those incurred, especially when the defeated party is an individual.





Extra-territorial jurisdiction, applicable law and access to evidence

are the most typical issues arising in cross-border disputes. Inside

the EU, such issues are governed by European regulations (Brussels

I Regulation Recast, Regulation (EC) 1206/2001) which offer

relatively clear and efficient solutions. Outside the EU, solutions

are mainly based on international cooperation agreements which

often result in much more complex legal concerns.





France is a party to several international cooperation agreements,

whether bilateral or multilateral. Most notably, Regulation (EC)

1206/2001 will apply where a Member State court requests the

competent court of another Member State to obtain evidence or

requests permission to carry out investigations. Outside the EU,

courts seeking evidence abroad will apply international cooperation

agreements, such as the Hague Convention of 1970.

The AMF and the ACPR exchange information with foreign

regulators and may conclude bilateral interstate conventions on

mutual legal assistance. The AMF is, in particular, a signatory to the

International Organization of Securities Commission’s Multilateral

Memorandum of Understanding (information-sharing arrangement

for securities regulators). The ACPR may exchange information

even in the absence of a bilateral convention, either with counterpart

EU authorities or outside of the EU, subject to reciprocity and to the

extent the information exchanged is covered by professional secrecy

at least equivalent to this applicable to French authorities.



Extra-territorial jurisdiction is typically asserted when the dispute

contains cross-border elements (e.g. parties established in different

states, contract performed in a foreign country, harmful event or

damage occurred outside France).



Although it previously stated that unilateral jurisdiction clauses are

invalid both under French civil law (as a “potestative” condition),

Brussels I Regulation No 44/2001 and the Lugano Convention

(Rothchild case, 26 September 2012; Crédit Suisse case, 15 March

2015), the Cour de Cassation finally ruled that a unilateral

jurisdiction clause is valid, since it permits the identification of the

jurisdictions before which a claim could be brought (Apple Ltd

case, 7 October 2015).

Therefore, unilateral jurisdiction clauses complying with the

requirement of sufficient predictability are deemed valid, either

because they explicitly name the competent jurisdiction or because

objective criteria to define it are stated. The enforceability of

unilateral jurisdiction clauses remains, however, fragile in France

and such clauses are frequently deemed invalid by the trial judges.

6 Regulated Bodies



Two administrative authorities regulate the French financial sector:

■ the AMF, which regulates participants and products on

French financial markets; and

■ the ACPR, which regulates the activities of banks and

insurance companies.

The AMF and the ACPR regulate financial services disputes since

they may initiate a regulatory sanction proceeding against

professionals under their supervision, individuals acting under the

professionals’ authority and, regarding the AMF, any person that

commits market abuse. By contrast, as mentioned above, claimants

cannot bring an action before regulatory authorities in order to

obtain remedies.



have?

The AMF and the ACPR both have regulatory and repressive

powers.

The AMF can carry out inspections and investigations, enter into

administrative settlement agreements, issue formal notices and

impose administrative sanctions (including financial penalties).

The ACPR can carry out investigations, issue injunctions to comply,

and impose enforcement and protective measures (for instance,

appointment of a provisional administrator) as well as disciplinary

sanctions (including financial penalties).

Nor the AMF or the ACPR have the power to order payment of

damages for breach of a regulatory duty.



Subject to appeal, the AMF’s and the ACPR’s decisions are binding

on the parties directly concerned by the decision. However,

regulatory authorities’ decisions are not, as such, binding for courts

which are free to settle the case in a different manner.


exist?

Appeals against the ACPR’s decisions (relating to sanctions or not)

are brought before the Conseil d’Etat (the French administrative

supreme jurisdiction).

The Conseil d’Etat also has jurisdiction on appeals against certain

AMF decisions concerning professionals and individuals acting

under their authority or on their behalf. Appeals against AMF


Fran

ce


decisions concerning any other person are brought before the Paris

court of appeals.

The time limit for the appeal is, in all cases, two months as of the

decision’s notification.

Non-sanction decisions of both authorities may be appealed by the

concerned person. Sanction decisions may be appealed by the

respondent and by the authority’s chairman.

Appeals do not have a suspensive effect, except in the cases where

sanctioned individuals apply for a stay of execution.

Finally, instructions, interpretations, recommendations, rulings and

other opinions may be subject to an action for excessive use of

power before the Conseil d’Etat (recours pour excès de pouvoir).


accessible?

The decisions of the AMF and the ACPR are publicly accessible on

their respective websites.










In the aftermath of the financial crisis, regulators put forth a

substantial number of new or strengthened regulations, which are

now being evaluated and adjusted as necessary. Financial service-

related legislation has, in particular, expanded exponentially on a

European level (Packaged Retail and Insurance-based Investment

Products Regulation, Markets in Financial Instruments Directive

(“MiFID2”), Payment Services Directive, and Insurance

Distribution Directive).

Regarding expected EU regulations, the Commission has proposed

regulation on crowdfunding service providers introducing an EU-

wide authorisation and passporting regime for crowdfunding

platforms. This regulation should lead to a specific MiFID2

amendment. Against the backdrop of Brexit, proposals giving

greater supervisory powers to the European supervisory authorities

have been published and are expected to be discussed (Omnibus 3

proposal).

On a national level, in its priorities for 2019, the AMF has prioritised

the promotion of innovation. In this respect, France is currently

working to pass measures that should give the AMF greater

responsibility vis-à-vis crypto-assets under the framework of the

“Pacte” Law introducing an optional licensing regime for token

issuances, new regulatory regimes for a range of crypto-asset

intermediaries, and fast-track registration processes for crypto-

custodians and exchanges.



customer-friendly?

Given the high protection offered to customers by French law (see

questions 2.1, 2.5 and 3.6), France is a customer-friendly jurisdiction.





drawn from them.

The last 12 months were marked by the following significant

trends/cases:

1. On 19 November 2018, the French bank Société Générale

agreed to pay U.S. federal and state authorities $1.4 billion to

settle investigations into its handling of dollar transactions

executed to parties in countries subject to embargoes or

otherwise sanctioned by the United States (e.g. Iran, Sudan,

Cuba and Libya). The bank also agreed to pay $95 million to

settle a dispute over violations of anti-money laundering

regulations. These fines are some of the largest imposed on a

bank for violating U.S. sanctions. The case demonstrates the

role of regulatory sanctions of the economic powers, firms

agreeing to plead guilty in order to avoid a law suit or prevent

a banking licence withdrawal.

2. On 21 December 2018, the ACPR sanctioned La Banque Postale to a €50 million sanction for failing to meet customer

verification requirements on money laundering and terrorism

financing. This particularly high penalty takes into account

the nature, duration, exceptional gravity and potential

consequences of the shortcomings. This case follows

previous ACPR decisions on the same ground (€1 million

penalty imposed on Crédit Mutuel in 2018, €10 million

penalty on BNP Paribas and €5 million penalty on Société Générale in 2017) and testify to the importance and

frequency of the investigations/sanctions related to customer

identity verification, anti-money laundering and terrorism

financing.

3. Forex Fraud cases increased significantly and became, at a

national level, a mass dispute affecting several French and

foreign banks of international reputation and representing a

billion of potential damages.



jurisdiction?

Following the financial crisis, the EU embarked on a wide-ranging

set of regulatory reforms, including new rules to strengthen

financial supervision and an improved regulatory framework for

banks, insurance, securities markets and other sectors. A decade

later, this project seems now complete, with the last major

legislative measure of the post-crisis regulatory agenda, MiFID2,

which started to apply from 3 January 2018. Attention is now more

acutely focused on new technology challenges and related litigation,

namely concerning FinTech firms and crypto-assets.


Fran

ce


Arthur Dethomas


49 avenue de l’Opéra

75002 Paris

France

Tel: +33 1 4225 7878 Email: [email protected] URL: www.dpjaparis.com/en

Dessislava Zadgorska


49 avenue de l’Opéra

75002 Paris

France

Tel: +33 1 4225 7878 Email: [email protected] URL: www.dpjaparis.com/en

Arthur Dethomas is licensed in Paris and in New York.

He began his career at Salans, before joining CVML where he was

elected to the partnership in 2007.

He was appointed Premier Secrétaire de la Conférence of the Paris

Bar in 2003.

Renowned for his expertise in stock exchange and financial litigation

and white-collar criminal law, he is an expert at the Club des Juristes (a French legal think-tank).

He is also a lecturer at Sciences-Po Paris in Banking and Financial

regulations.

Arthur Dethomas has a Master’s Degree in Business Law (University

of Paris X) and an LL.M. from Washington College of Law (A.U.). He

is fluent in French and English. A former lecturer in law at the

University of Phnom Penh, Cambodia (1998–1999), he also speaks

Khmer.

Since 2014, he has constantly been ranked as one of the “40 Great

Strategists” in litigation by Décideurs Magazine.

Dethomas Peltier Juvigny & Associés is an independent law firm dedicated to litigation and complex corporate operations, composed of

experienced partners from the best French and international firms.

We advise our clients in strategic matters, essentially related to litigation and arbitration, mergers and acquisitions, corporate finance, governance,

competition and merger control.

Our expertise is well recognised in the practice of stock exchange, financial and banking litigation (disputes relating to the structuring of financial

instruments, bankers’ liability, litigation related to various fraudulent schemes, notably Madoff and Forex frauds) as well as company law,

shareholders’, post-acquisition and governance disputes.

With its combined understanding of criminal procedure and knowledge of the business and financial world, our firm provides counsel to clients in

economic and financial criminal law matters, particularly in cases of stock exchange and banking frauds. We have a highly regarded practice in

defence before the French Financial Markets Authority.

Dessislava Zadgorska joined the Paris Bar in 2008 and is a member

of the French Arbitration Association. She started her career at CVML

before joining the firm in 2013.

She is specialised in litigation and arbitration and handles for French

and international clients strategic bank liability, stock market and

financial litigations, as well as shareholders’, post-acquisition and

governance litigations, before state and arbitration courts. She also

handles white-collar crime cases before the French Financial Markets

Authority.

She has a post-graduate degree in business and tax law from the

University of Paris II – Panthéon Assas (2005).

She is fluent in French and English. She also speaks Bulgarian and

Russian.


67

Chapter 12


Kantenwein

Marcus van Bevern

Dr. Carolin Sabel

Germany





Though there is no national statistic covering all courts and disputes,

cases decided by the Federal High Court (Bundesgerichtshof ) show

that, as far as civil law is concerned, in recent years a high number

of financial services disputes concerned (i) the payment or

repayment of fees charged by the banks or the validity of fee

arrangements in general, (ii) the revocation and rescission of

consumer loans due to faulty revocation instructions, (iii) damage

claims based on mal-advice in derivatives (e.g. swaps), securities

and other investments, and (iv) the premature termination of home

saving agreements by home saving banks as a result of the market

situation in interest rates.

As far as regulatory and criminal proceedings are concerned, the

German authorities were (and still are) investigating tax-driven

share transactions which took place around the dividend record date

and involved the acquisition of shares with (cum) dividends due on

or just before the dividend record date and delivery of these shares

after the dividend record date without (ex) dividends. This structure

made it possible to obtain multiple returns of capital gains tax that

had only been paid to the German tax authorities once (so-called

“Cum-Ex” trades). Allegedly, the damage cost European treasuries

€55 billion.


Most judgments rewarded by the courts concern the payment of a

certain amount of money, e.g. a repayment of invalid fees incurred

by a bank or the payment of damages resulting from mal-advice.

However, there could also be a declaratory judgment as a result of

an affirmative action, e.g. when a consumer protection association

brings a claim against general terms of business used by a financial

institution. Note that German law does not allow for punitive

damages.




Under the German Code of Civil Procedure (Zivilprozessordnung),

any person having legal capacity also has the capacity of being a

party to court proceedings, i.e. individuals, companies and public-

law entities with legal capacity. Non-incorporated German

associations, though having no legal capacity, may also sue and be

sued. In financial services disputes this would particularly concern

consumer protection associations. On the merits, most claims are

based on contract or pre-contract and brought by one of the

contractual parties. However, a right of action could also result

from law of torts which may include the violation of supervisory

law provided that the relevant supervisory law aimed at the

protection of the rights of individual persons.

Consumer protection law only applies to individuals. Consumers

may rely on a multitude of consumer protection laws which do not

apply to companies or legal entities. E.g. there are special provisions

for consumer credit agreements, in particular with respect to

preliminary contract information obligations. Furthermore, legal

prohibitions applying to general terms of business are less restrictive

with respect to contracts with companies. Finally, certain form

requirements do not apply to companies – e.g. a company may enter

into a warranty in an oral agreement.





this?

Litigation insurance is a common tool for individuals, but rather

seldom for companies. It is mostly restricted to certain disputes, e.g.

employment law or traffic accidents. Financial services disputes are

often not included or require special insurance coverage. The

insurance holders are usually required to substantiate a claim or a

statement of defence prior to commencing a cause of action and

such substantiation is to be confirmed by a lawyer and will be

double-checked by the insurance company. The insurance cover is

usually restricted to statutory fees.

There is a constantly growing number of companies offering

services in the field of maintenance and champerty, including

crowdfunding. Contingency fees for attorneys are, however, not

allowed.

In addition, under the Code of Civil Procedure, any parties who, due

to their personal and economic circumstances, are unable to pay the

costs of litigation, or are able to so pay them only in part or only as

instalments, may be granted assistance with the court costs upon

filing a corresponding application, provided that the action they

intend to bring or their defence against an action that has been

brought against them has sufficient prospects of success and does

not seem frivolous.

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Historically, German civil procedure was strictly bi-partisan and did

not know a US-style class action. In 2005, the Act on Model Case

Proceedings in Disputes under Capital Markets Law

(Kapitalanleger-Musterverfahrensgesetz) came into force.

However, contrary to a class action, a model case proceeding is not

designed to finally decide on the merits of all class members.

Rather, it is limited to clarifying certain preliminary questions which

are common to a multitude of parties and their claims or defences.

These preliminary questions have to refer to the establishment of the

(non-)existence of certain conditions justifying or ruling out

entitlement or the clarification of certain legal questions, e.g. the

existence of a faulty prospectus (the so-called “establishment

objective”). Once the court deciding the model case proceeding has

rendered a decision on this objective, each individual case will

proceed and be decided on the basis of the binding model case

decision and those other individual questions in dispute which were

not subject of the model case proceeding.

As an aftermath to the financial crisis there have been a number of

model cases that were brought to the courts, mainly based on

prospectus liability and ad hoc announcements of financial

institutions. However, in terms of numbers, these proceedings are

still rather an exception.






case?

The main barriers to financial service litigation for customers are (i)

estoppel (cf. question 2.2 below), (ii) costs (if not covered by

insurance), and (iii) burden of evidence. With respect to costs, a

claimant has to advance court fees when filing a claim and the fees

will be calculated depending on the amount in dispute. With respect

to burden of evidence, a claimant in general has to provide evidence

with respect to all single prerequisites giving rise to the claim.

Although exclusionary clauses or duty defining clauses are

frequently used in contracts, they rarely prevent customers from

bringing a case to court. This is mainly because such clauses are

considered standard terms of business and are often held invalid by

the courts. In particular, courts have frequently held that a bank or

financial institution must not restrict its liability for its main

contractual obligations.






clock’?

The general time limit applying to most civil causes of action (in

particular, damage claims) is three years commencing as of the end

of the year in which the claim was due and the claimant became

aware of the debtor and the facts giving rise to the claim. Longer

prescription periods can apply to securities (up to 30 years) and in

case of lack of knowledge (10 years).

In regulatory proceedings the time limit depends on the maximum

legal consequences (penalties or fines) set forth in the law with

respect to the violation of the law that is subject to the accusation.

E.g. if a fine of up to €250,000 could be determined by the

regulatory body, the time limit would be one year commencing as of

the time the alleged act was committed.

The commencement of a regulatory process does not stop the clock for

civil claims. However, a civil court may suspend its proceedings if its

decision depends on the outcome of regulatory or administrative

proceedings.





German civil procedure does not know a pre-trial discovery or

general disclosure obligation. Rather, each party to a proceeding

has to bring forward the facts supporting its claim. Only under

certain circumstances may a court direct one of the parties or a third

party to produce records or documents, as well as any other

material, that are in its possession and to which one of the parties has

made reference. As a result, document production is scarcely

applied for and the question of litigation and/or legal advice

privilege is often of no importance in court proceedings.

If, however, criminal charges are brought against financial

institutions or service providers, certain documents will be

exempted from confiscation by the investigating authorities

pursuant to paragraph 97 of the German Criminal Procedure Code.

This exemption includes documents in the possession of the

attorney as well as all documents relating to attorney-client

communications in terms of paragraph 148 of the German Criminal

Procedure Code. Also, attorneys have the right to refuse testimony

on matters covered by the attorney’s duty to secrecy.




German banks and financial institutions are making use of the ISDA

Master Agreement as well as of the German equivalents, i.e. the

Master Agreement for Financial Derivatives Transactions issued by

the German Banking Association. Furthermore, banks use their

own standard forms or standard forms elaborated by banking

associations which provide for similar standards but are not

completely identical.

Under German law, all these agreements qualify as general terms of

business which are subject to a number of restrictions and

prohibitions set forth in the German Civil Code (Bürgerliches Gesetzbuch – BGB). In particular, standard business terms must not

unreasonably disadvantage the other party to the contract – a test

which is often not met in court proceedings. If that happens, the

court would declare the disputed contractual clause invalid and

apply statutory law instead. Netting clauses contained in the ISDA

Master Agreement or the German Master Agreement for Financial

Derivatives are, however, safe-guarded under the German

Insolvency Code (Insolvenzordnung) and should therefore be held

valid.

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German statutory law provides for numerous obligations which are

either considered statutory obligations of certain defined forms of

contract (e.g. for payment services contracts) or are defined as non-

contractual duties under supervisory law. All these obligations are

often driven by requirements under European directives or

regulations. To give an example, the Securities Trading Act

(Wertpapierhandelsgesetz) contains obligations with respect to the

documentation and code of conduct for investment advisory

services. Although such duties under supervisory law are usually

not considered a direct contractual obligation, courts tend to assume

identical contractual obligations as “implicit” duties under the

contract. In addition, a financial service institution could be held

liable towards its customer for violation of duties under supervisory

law based on law of torts.

In general, all these obligations are legally binding and may not be

deviated from unless explicitly allowed by the law. The only

possibility for contracting out certain secondary obligations would

be to exclude the main obligation to which the secondary obligation

relates. E.g. a financial institution would not be obliged to inquire

its client’s practical experience and knowledge in securities if it

excludes the provision of advisory services and limits its services to

execution-only transactions. However, if the financial institution

wants to provide advisory services, its obligation to inquire the

client’s practical experience and knowledge cannot be contracted

out.




The German Judicature Act (Gerichtsverfassungsgesetz) does not

provide for a specialist court for financial services litigation.

Financial services disputes are brought before local or regional

courts depending on the amount in dispute. However, regional

courts are divided into chambers specialised in certain fields of

private law. Thus, large regional courts, in particular at banking

places (e.g. Frankfurt and Munich), are equipped with a chamber

focusing on financial services disputes.



There is no special approach in financial service litigation.





A pre-trial procedure may only be obligatory in minor cases:

pursuant to section 15a of the Introductory Act to the Code of Civil

Procedure (EGZPO), the federal states (Bundesländer) can

determine that the filing of the action in minor cases (i.e. up to €750)

is not permissible before an attempt has been made (and has failed)

by a conciliator, set up or recognised by the respective

administration of justice of that federal state, to resolve the dispute

by mutual agreement. In fact, quite a few federal states’ laws have

introduced respective provisions. In these cases, the attempt for

conciliation or mediation has to be made by the claimant prior to

filing a law suit with a court. If the claimant has not complied with

this stipulation, its claim would be rejected as inadmissible. During

the conciliation proceedings the statute of limitations is suspended.






jurisdiction?

Mediation proceedings involving an ombudsman offer a fast and

cost-efficient solution in financial services disputes between banks

and their customers. For more details, see question 6.1 below.

Contrary to mediation and despite various promotion attempts in

recent years, arbitration remains relatively uncommon in financial

services contracts. This is also a result of the specialist court

chambers for disputes concerning banking and financial services,

which have, in general, a good reputation. Further, an arbitration

agreement with a consumer has to be in written form and must not

be included in the contractual agreement; it has to be separated from

it. Arbitration is therefore – if at all – rather a tool used in

commercial contracts.



German law provides for an informed investor concept: according

to the jurisdiction of the German Federal High Court, the entering of

a financial institution with its client into discussions concerning the

sale and recommendation of securities or other investments is

considered an implied counselling contract. Although this does not

mean that the bank will be held liable for the economic success of

the investment or its further chart development, the contract goes

along with a number of secondary obligations. These obligations

are mostly identical with those laid down under supervisory law in

the Securities Trading Act – in fact, the Securities Trading Act

implemented the jurisdiction of the German Federal High Court into

the law. In particular, a bank or financial institution is obliged to

inquire the customer’s practical expertise and knowledge in

securities and other investment measures as well as the customer’s

risk awareness and financial circumstances plus the purpose and

intended duration of the envisaged investment. With respect to the

investment, the bank/financial institution has to gather and evaluate

all publicly available information. Any recommendation has to be

based on such information and has to comply with the client’s

knowledge and purposes and has to reveal the relevant risks. A

negligent misstatement is considered a breach of contract resulting

in a damage claim for rewinding the sale.





jurisdiction?

Unless individually negotiated and agreed, contractual terms which

are pre-formulated by a financial institution and used vis-à-vis

numerous counterparties are considered general terms of business.

These terms of business have to comply with a multitude of special

prohibitions which are stricter if consumers are involved. In both

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cases, general terms of business must not unreasonably

disadvantage the other party to the contract. Otherwise, they will be

held invalid. In case of doubt, unfair terms are interpreted in a way

least favourable for the counterparty – and then held void. German

courts reject an interpretation that only aims to avoid the invalidity

of a clause.

Individuals qualify as consumers unless acting for purposes that are

within their trade, business or profession.






As mentioned, there is no pre-trial discovery or general disclosure

obligation but only a very limited right to request document

production if a specific document is referred to by one of the parties

in dispute and held in the hands of the other party. Therefore, the

question of commercially sensitive or confidential information does

not often arise.

Despite the fact that there is, in general, a high level of data

protection under German law, this would not jeopardise the right of

a bank or financial institution to disclose its customer’s personal

data in civil litigation provided it concerns a dispute with the

customer. In this case, the disclosure of personal data would be

regarded as the bank’s legitimate interest in enforcing or defending

its own rights. This may, however, be different when the data

concerned is of third parties who are not involved in the litigation.

In this case, the disclosure of information concerning the third

parties could be a violation of data protection and contractual

confidentiality rules.

According to article 15 of the European Union’s General Data

Protection Regulation (GDPR), which is immediately applicable in

Germany, any person whose personal data are being processed has

comprehensive access to the data processed, including, inter alia,

the purposes and duration of the processing and the recipients or

categories of the recipients to whom the personal data have been or

will be disclosed, in particular recipients in third countries or

international organisations.

4 Post Trial


disputes?

German Civil Procedure generally allows for an appeal of all

decisions rendered in first instance, provided the amount in dispute

exceeds €600. First instance rulings by the local courts may be

appealed to the regional courts. In the case of first instance

judgments by the regional courts, parties have the right to appeal to

the higher regional courts. An appeal to the Federal High Court is

only admissible in cases of fundamental significance.


services disputes?

Costs in civil proceedings are to be borne by the losing party and

include court and lawyer fees, both limited to statutory fees which

are calculated depending on the amount in dispute. If a claim is

partially admitted, costs will be split proportionately.





Typical procedural issues would be security for costs, forum and

legal capacity. With respect to costs of the proceedings, plaintiffs

from outside the European Union or the European Economic Area

have to provide security covering court and lawyers’ fees in advance

if demanded by the defendant. Regarding the forum, a contractual

choice of the court of first instance is admitted provided the parties

are businessmen or legal entities. Legal capacity might be

jeopardised in case of letter box companies without a genuine link to

the jurisdiction where they were founded, i.e. if there is a conflict

between domicile and establishment. Outside the European Union,

German International Company Law traditionally follows the rule

of seat (Sitztheorie).

With respect to the merits of a case, the main issue would be the law

governing the contract. In general and in accordance with the Rome

I Regulation, German International Private Law confirms the

freedom of parties to choose the governing law of their contracts.





German courts offer mutual legal assistance in civil and commercial

disputes in accordance with European law and, outside the

European Union, the Hague Convention on the Service Abroad of

Judicial and Extrajudicial Documents in Civil or Commercial

Matters and the Hague Convention on the Taking of Evidence

Abroad in Civil or Commercial Matters to which Germany is a

party.



The German Civil Procedure Code as well as the European Brussels

Ia Regulation (EuGVVO) provide for a conclusive catalogue of

venues all of which require a certain connection to Germany, e.g.

place of residence or domicile, registered seat, location of assets,

and forum rei sitae for property claims or party agreements. Absent

an agreement or any other connection of the parties to Germany, it

would be rather uncommon and difficult to assert the jurisdiction of

a German court. An exception might apply in cases of law of torts,

provided that at least parts of the committed offence or its success

occurred in Germany.



No. A choice of court requires a contractual agreement and may

only be made by businessmen or legal entities. If a unilateral

jurisdiction clause is contained in standard business terms, it would

also only be valid if the terms have been validly agreed by the

parties to be included in the contract and if the counterparty is not a

consumer. Even if the counterparty is a businessman or legal entity,

a jurisdiction clause in standard business terms could be invalid if

none of the parties has any connection with the chosen forum.

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6 Regulated Bodies



Pursuant to paragraph 14 subsection 1 of the German Injunction Act

(UKlaG) as well as the new German Regulation on Financial

Dispute Resolution Entities (FinSV), involved parties may,

irrespective of their right to call the courts, also call a private

consumer dispute resolution entity recognised by the German

Federal Office of Justice (Bundesamt für Justiz). A number of banks

and banking associations have introduced such recognised

mediation proceedings (Ombudsmannverfahren) offering out-of-

court mediation by certified mediators (often former judges of the

Federal High Court) in consumer cases up to a limited amount in

dispute (€10,000). Due to the diversity of the banking system in

Germany, a variety of different official mediation entities are

available. Renowned institutions are the mediation bodies of the

Association of German Banks (Bankenverband), the Association of

German Public Banks (VÖB), the National Association of German

Cooperative Banks (BVR), the Association of German Private-

Sector Building Societies (VdpB) and the Regional Building

Societies (LBS). For all banks not affiliated with a specific

mediation entity, the mediation body of the German Central Bank

(Deutsche Bundesbank) is the competent institution to turn to. In

addition, consumers may also file a complaint with the German

Federal Financial Supervisory Authority (BaFin) with the

possibility of entering into mediation proceedings.



have?

Proceedings before an ombudsman are ruled by party autonomy.

For instance, the ombudsman does not have the right to summon

witnesses to the proceedings without consent of the parties. Thus,

the mediation bodies themselves do not have any investigative,

inquisitorial, enforcement or sanction powers. These powers are

assigned separately to BaFin.



In general, the decisions rendered by an ombudsman are nonbinding

on the parties. However, the parties do have the right to explicitly

accept the proposal provided by the mediator. Also, if the amount

awarded does not exceed €5,000, pursuant solely to a number of

mediation rules, the bank is bound by the decision. Nevertheless,

proceedings before an ombudsman suspend the statute of limitations

of the disputed claims.


exist?

There is no right to appeal these mediatory decisions. The parties

may only resort to court proceedings.


accessible?

The mediation bodies officially appointed by the banks publish

yearly statistics of proceedings conducted. The individual

proceedings, names of parties and outcomes, however, remain

confidential.










As a reaction to the insolvency of Procon, a wind energy provider

whose insolvency damaged more than 10,000 small investors, the

lawmaker started an initiative for the protection of small investors in

order to better protect consumers against dubious and untransparent

retail investment products. In particular, providers are requested to

publish more and more up-to-date information in their prospectuses.

The new law shall apply to participations in companies and trusts,

profit-participation certificates, subordinated loans as well as

registered bonds and comparable investments. The banking

supervisory agency (BaFin) will be authorised to prohibit or restrict

specific products or financial practices.



customer-friendly?

Although German law generally supports freedom of contract,

consumer protection laws – and the jurisdiction based upon them –

have become more and more restrictive, thereby particularly

limiting the legal leeway for standard terms in retail banking and

other typical bulk transactions. Apart from that, on the level of

individual transactions, German law is rather liberal and allows for

freedom of contract.





drawn from them.

In March 2018, the Federal High Court held that arrangement and

handling fees in loan agreements form invalid standard terms of

business – and not individual agreements which would have been

valid – even when the counterparty had a pre-formulated choice

between two alternatives, i.e. higher interest rates without fees or

lower interest rates plus fees (BGH, XI ZR 291/16). The decision

goes along with a number of further decisions rendered in 2018 in

which the Federal High Court confirmed its landmark decision of

July 2017 that arrangement fees are invalid even when used in a

commercial loan agreement without the participation of a consumer

in further cases concerning various kinds of fee arrangements. The

case highlights that there is currently no legal certainty under

German law for the validity of any kind of fee arrangements in loan

agreements which are absolutely customary in the international

financial markets. In the eyes of the Federal High Court, the only

valid consideration owed by the borrower for a loan facility is the

interest payment. This jurisdiction has been fiercely criticised by

banks and banking associations arguing that the jurisdiction no

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longer differentiates between consumers and business companies

and puts the German financial industry at a disadvantage to its

international competitors. This criticism goes along with the

banking supervisory agency (BaFin) requesting banks to strengthen

their income basis and make it independent from interest payments

in times of low interest rates. In the meantime, an initiative has been

founded with the support of a number of business associations

requesting a modernisation of the law on general terms of business

from the lawmaker. As long as the law remains unchanged, it can be

seen that banks and financial institutions are trying to escape from

German law.



jurisdiction?

The impact of digitalisation and new products in the finance

industry, such as bitcoin and other crypto-currencies and blockchain

technology in general, remains to be seen. Generally, it appears that

the lawmaker is reticent to issue new laws and rather prefers if

supervisory agencies apply the existing legal framework and

measures. To give an example, there is no specific law on crypto-

currencies. Rather, the banking supervisory agency (BaFin) has

determined that crypto-currencies qualify as “units of account”

(Rechnungseinheiten) according to the German Banking Act

(Kreditwesengesetz) and that neither the use nor the mining of such

units requires a particular permission. However, exchange

platforms offering the commercial trade in crypto-currencies may

need a special permit, depending on the technical implementation

and design of the respective platform.

Kantenwein Germany

Marcus van Bevern

Kantenwein

Theatinerstraße 8

80333 Munich

Germany

Tel: +49 89 8996 86 0 Email: [email protected] URL: www.kantenwein.de

Dr. Carolin Sabel

Kantenwein

Theatinerstraße 8

80333 Munich

Germany

Tel: +49 89 8996 86 0 Email: [email protected] URL: www.kantenwein.de

Marcus van Bevern is an attorney-at-law specialised in banking and

capital markets. He advises in banking- and capital market-related

litigation and arbitration as well as in financing transactions. He is also

regularly appointed as arbitrator in arbitration proceedings. Until 2006

he worked in the Litigation & Arbitration department of an international

law firm, where he represented, amongst others, national and

international financial institutions in complex litigation and arbitration

matters. Later he became in-house counsel and Head of Transaction

Management in an internationally active German finance group. By

the end of 2009 he had joined Kantenwein.

Dr. Carolin Sabel is an attorney-at-law specialised in banking- and

capital market-related dispute resolution. Before joining Kantenwein

she worked in the M&A department of an international law firm, where

she, i.a., advised on transactions in the financial sector, and in the

Bavarian Ministry of Economic Affairs.

Kantenwein is a multidisciplinary law firm consisting of lawyers, tax consultants, and auditors. The firm provides advisory services to entrepreneurs

and businesses facing legal and tax-related decision-making situations. The firm’s practice areas cover the entire spectrum ranging from law and

taxes (including tax crime) to auditing.

Kantenwein was founded at the beginning of the year 2003. However, the founders’ professional experience dates back as far as 1985. When

founding the law firm, the idea was to create a multidisciplinary entity consisting of lawyers, tax consultants, and auditors. This setup allows the firm

to assemble interdisciplinary teams in order to assess economic issues efficiently from different angles.

Among the firm’s clients are companies and entrepreneurs operating in Germany and abroad.

73

Chapter 13


Matheson


Karen Reynolds

Ireland





Causes of actions commonly taken by customers and other stakeholders

against financial institutions include actions arising from alleged mis-

selling of financial products, misstatement claims, claims for breach of

fiduciary, contractual and other duties. Cases against financial services

entities often involve allegations of misrepresentation, negligent

misstatement, breach of contract and/or breach of a duty of care, fraud

and deceit. Actions in tort and contract can be pursued concurrently.

Certain statutory provisions impose civil liability for breaches, e.g.,

under the Companies Act 2014. This would include, for example,

actions for loss or damage where, as a result of untrue statements or

omissions of information in a prospectus, a person acquires securities in

a publicly traded company, and actions for civil liability for breaches of

market abuse legislation in connection with securities traded on the

Main Securities Market, the Enterprise Securities Market and the

Global Enterprise Market of Euronext Dublin (formerly the Irish Stock

Exchange).

Actions arising from enforcement action by secured lenders/acquirers

of Non-Performing Loans (NPLs) are quite common; for example,

defensive/injunctive actions by borrowers. The recent decision of the

Court of Appeal in Tanager Designated Activity Company v Kane & Ors [2018] IECA 352 was much anticipated in the Irish financial

services market and has restored certainty as regards the

enforceability of assigned security rights in loan portfolio sales.

The Central Bank of Ireland (CBI) is responsible for prudential and

conduct of business supervision and regulation of financial services

firms which provide financial services in Ireland. Pursuant to section

44 of the Central Bank (Supervision and Enforcement) Act 2013, any

failure by a regulated financial service provider to comply with any

obligation under financial services legislation is actionable by the

customer who suffers loss or damage as a result of such failure.


The main remedy awarded in claims against financial institutions is

damages. Damages may come in the form of general damages, special

damages, punitive or nominal damages. Irish courts tend to award

compensatory and not punitive damages, meaning that the courts look

to the damage done rather than punishing the offender and deterring

others, although aggravated damages and exemplary/punitive

damages are available. Other remedies depend on the nature of the

claim; general common law and equitable remedies which are

available include specific performance, declaratory relief, and

injunctive relief. In appropriate circumstances, orders for rescission

may be made.




Any recipient of financial services, or any person who believes they

have been impacted by the actions, omissions or statements of a

financial services provider, whether an individual or a corporate, has

the right to issue proceedings (see question 1.1 above in relation to

the types of claims).





this?

Litigation is usually funded by the individual parties, but the

unsuccessful party is typically ordered to pay the successful party’s

costs. Third Party Funding (TPF) is generally prohibited by the

common law principles of maintenance and champerty (the

Maintenance and Embracery (Ireland) Act 1634). In the case of

Persona Digital Telephony Limited & anor v The Minister for Public Enterprise Ireland & ors [2017] IESC 27, the Supreme Court

upheld the prohibition against litigation being funded by a person

with no legitimate interest in the claim. In SPV OSUS Limited v HSBC Institutional Trust Services (Ireland) Limited & Ors [2018]

IESC 44 (SPV), the Supreme Court upheld the prohibition on

litigation trafficking. A party with a legitimate interest in

proceedings (a shareholder or creditor) does not come under this

prohibition (Moorview Development Limited & Ors v First Active Plc & ors [2018] IESC 33).

Parties to litigation in Ireland may avail of after the event insurance

policy (Greenclean Waste Management Ltd v Leahy (No 2) [2014]

IEHC 314).





Under Irish law, it is possible to bring representative actions which

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are currently the closest thing to class actions. Test cases or

“pathfinder cases” also exist. The parties agree to be bound by the

decision of the test case, which becomes the benchmark by which

the remaining cases will be resolved.

Class actions will indirectly be facilitated in Ireland through the

European Commission’s “New Deal for Consumers” which was

published by the European Commission in April 2018. If enacted,

this would import an increased litigation risk for industry sectors

subject to EU regulation, including in relation to financial services.

Class party actions will only be available for individuals, and

commercial entities (including law firms) will be excluded.






case?

The fact that neither TPF nor class actions are permissible, at

present, under Irish law could be described as barriers to litigating

against financial services entities. Irish courts recognise and

enforce exclusion clauses; however, they are generally strictly

interpreted, and may be impacted by applicable consumer protection

legislation and regulation (for example, the CBI’s Consumer

Protection Code) and would not, generally, be perceived to be an

obstacle to litigation.

The European Communities (Unfair Terms in Consumer Contracts)

Regulations (Unfair Terms Regulation) (SI 27/1995), as amended

(the Regulations), provide protection for consumers if an exclusion

clause is present on a standardised form (see McCaughey v IBRC Ltd & Anor [2013] IESC 17, AGM Londis plc v Gorman’s Supermarket Ltd [2014] IEHC 95 and Start Mortgages Ltd v Hanley

[2016] IEHC 320).






clock’?

The majority of financial services disputes relate to matters of

contract law or tort, where the limitation period is six years. The

Financial Services and Pensions Ombudsman Act 2017 extended

the time limit for bringing certain financial complaints relating to

long-term financial services. The limitation period runs from the

point in time where the customer was aware or ought reasonably to

have become aware of the conduct giving rise to the complaint. The

Ombudsman has discretion to extend the period further. In cases of

fraud, the limitation period does not start to run until the claimant

became aware of, or should have become aware of, the impugned

conduct. Parties can enter into agreements to shorten, or pause, a

limitation period. The commencement of proceedings “stops the

clock”.

For cases which do not come under the Financial Services and

Pensions Ombudsman Act 2017, Gallagher v ACC Bank [2012]

IESC 35 (Gallagher) and Cantrell v AIB PLC & Ors [2017] IEHC

254 (Cantrell) clarified that although the limitation period is

calculated from when the loss occurred, the clock may not begin to

run if there is only a mere possibility of loss. In Cantrell, the court

further clarified that the clock will only begin to run in financial

disputes when the loss has actually occurred – i.e. when the tort is

complete.

Actions for insider trading, unlawful disclosure of inside

information and market manipulation under the Companies Act

2014 are subject to a two-year limitation period.





Yes – litigation privilege protects from disclosure confidential

communications between lawyer and client made for the dominant

purpose of being used to prepare for existing or contemplated

litigation. Litigation privilege may also extend to communications

between a client and a third party, where the dominant purpose is to

prepare for existing or contemplated litigation and is therefore

considered to offer a greater level of protection. Litigation privilege

rarely continues beyond the final judicial determination of the

proceedings in which it was asserted (see UCC v ESB [2014] 2 IR

525).

Legal advice privilege can arise in circumstances where litigation is

not in contemplation, and is similar to “attorney-client privilege” in

the US. Legal advice privilege protects confidential communications

between lawyer and client made for the dominant purpose of seeking

or giving legal advice. Unlike litigation privilege, it does not protect

communications between client/lawyer and third parties.

Communications with financial regulators do not generally attract

the protection of litigation or legal advice privilege. There is,

however, a clear line of authority which has evolved and supports

the application of litigation privilege to documents generated for the

purpose of engaging in regulatory investigations and inquiries (see:

Ahern v Mahon [2008] 4 IR 704, in relation to privilege before a

statutory investigation or inquiry, such as a tribunal; Quinn & ors v Irish Bank Resolution Corporation Ltd & Anor [2015] IEHC 315, in

relation to litigation privilege over documents created for the

dominant purpose of engaging with regulatory and investigative

processes involving the financial regulator and the Office of

Director of Corporate Enforcement; and The Director of Corporate Enforcement v Leslie Buckley [2018] IEHC 51, relating to the

preparation of a response to the State corporate enforcer’s

investigation of a whistleblower complaint).

The Irish High Court in UCC v ESB (referred to above) has adopted

a narrow interpretation of “client” for the purposes of legal privilege

(similar to the Three Rivers No. 5 test in the UK). It remains to be

seen if the commentary in SFO v ENRC [2018] EWCA Civ 2006,

which suggests a willingness to depart from the restrictive

interpretation (noting that English law appeared to be so out of sync

with international common law on the point), will be persuasive

here.




Many financial services providers utilise standard form contracts

and generally applicable terms and conditions. See question 3.6

below in relation to protections for consumers in connection with

standardised contracts and question 7.3 below in relation to a recent

case where the surcharge interest provision in a lender’s standard

terms and conditions was held to constitute an unenforceable

penalty clause.

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ISDA Master Agreements are used in Ireland mainly for cross-

jurisdictional agreements. On 3 July 2018, ISDA released an Irish

law ISDA Master Agreement (a French law version has also been

published). The adoption of ISDA agreements, which are governed

by the law of EU Member States other than the UK, is a welcome

development given the anticipated departure of the UK from the EU.





As mentioned, the CBI is the local regulator of financial services

entities in Ireland. The CBI issues codes of conduct, which set out

the CBI’s policy and which supplement applicable financial services

legislation. These statutory codes of conduct set out the minimum

requirements which are binding on regulated financial services

firms when providing financial services. Failure to comply can

result in an investigation and the imposition of an administrative

sanction by the Central Bank.

A bank owes a duty of confidentiality to its customers. The

foundation of this duty is contractual in nature but increasingly the

position taken in Irish courts is to analyse the duty against the

backdrop of public policy. Fiduciary duties may be owed in the

context of a bank and customer relationship. Recently, the Irish

Court of Appeal affirmed that Irish contract law does not recognise

any general principle of good faith and fair dealing in commercial

contracts (Flynn & Anor v Breccia & Anor [2017] IECA 74).




No. However, most cases are heard by the Commercial Court, a

“fast track” division of the High Court which deals with commercial

contracts and business disputes with a monetary value in excess of

€1 million. Plans are in train to build on the success of the

Commercial Court list with the introduction of a separate, specialist

financial services court (together with other specialist courts

including a specialist IP court).



In general, financial services litigation follows the same procedural

rules as any other type of litigation. High Court proceedings are

commenced by issuing and serving an originating summons.

Service on an individual is to be done personally (where

practicable). Service on a registered company is affected by leaving

a summons at the registered office of the company or service by

ordinary pre-paid post to the company’s registered office and

keeping the postal certificate.





Pre-trial steps are the same in financial services litigation as they are

in other litigation cases. However, there are specific pre-trial

procedures for the Commercial Court which differ slightly.






jurisdiction?

The Mediation Act 2017 requires litigants to confirm to the courts

that they have considered mediation. The solicitors on record must

evidence this by completing a statutory declaration in advance of the

commencement of proceedings. If an agreement contains an ADR

clause, any court proceedings instigated can be stayed by an

application from the other side, for the case to be referred to

arbitration. A compliant made by a consumer to the Financial

Services and Pensions Ombudsman (the FSPO) must have initially

been attempted to be resolved between the consumer and the

financial institution using the financial institution’s complaints

resolution system.



Mis-selling of financial products claims can be dealt with by way of

litigation or can be the subject of complaints to the FSPO and/or the

CBI. In Ireland, the issue of mis-sold payment protection insurance

was addressed by way of a redress and compensation scheme under

the Central Bank Act 1942 (as amended). In order to prove negligent

misstatement, a claimant is required to show the existence of a

special relationship between the claimant and the financial services

firm such that the firm owed a duty of care to the claimant, that the

firm misstated something on which the claimant relied and, as a

result of such reliance, caused loss or detriment and that the firm

should reasonably have foreseen that the claimant would rely on its

(mis)statement. For negligent misrepresentation claims to succeed,

the claimant must establish that the financial services firm made a

representation to the claimant on foot of which the claimant was

induced into entering into an agreement, that the financial services

firm lacked the requisite level of due care in making the

representation, and the claimant’s loss was caused by the incorrect

representation provided. The Irish High Court noted in Walsh v Jones Lang LaSalle Ltd [2017] IEHC 38 that a disclaimer could limit

liability for a negligent misstatement. However, Mr. Justice

O’Donnell did state that a disclaimer of this nature would only be

upheld if it was clear that the reader should take all responsibility to

ensure the information in the prospectus was accurate.

Civil liability for untrue statements or omissions in prospectuses is

addressed under section 1349 of the Companies Act 2014 and

criminal liability is addressed under section 1357 of the Companies

Act 2014. Under section 1349 of the Companies Act 2014, there is

a statutory compensatory regime for customers who have acquired

securities on the faith of a prospectus that contains an untrue

statement or an omission of information required by EU prospectus

law to be contained in the prospectus.





jurisdiction?

The Regulations provide statutory protections against the use of unfair

contractual terms in consumer contracts (particularly where there are

standard form contracts). The Irish courts more and more frequently

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consider the application of the Regulations of their own volition. The

EU Unfair Commercial Practices Directive (Directive 2005/28/EC of

11 May 2005) was implemented in Ireland pursuant to the Consumer

Protection Act 2007. This legislation provides protection against

unfair, aggressive or misleading business-to-consumer commercial

practices. The Competition and Consumer Protection Commission

and the CBI are empowered to enforce the legislation.

The High Court in KBC Bank Ireland Plc v Osborne [2015] IEHC 795

(relating to commercial loan facilities where the borrower had

confirmed by way of executing a facility letter that he was not

borrowing as a consumer) held that a person other than a natural person

cannot be a consumer. In AIB v Higgins [2010] IEHC 219, the High

Court found that a person can have more than one business trade or

profession and that the same person can be regarded as a consumer for

certain transactions and as an economic operator in relation to others.






The data protection landscape in Ireland was previously made up of

the Data Protection Act 1988 and the Data Protection Act 2003

(which transposed the European Directive 95/46/EC on data

protection into Irish law) (together, the Pre-GDPR Regime). The

General Data Protection Regulations (the GDPR) came into force in

May 2018 along with the Data Protection Act 2018 to give further

effect to the GDPR and repeal certain parts of the Pre-GDPR

Regime. Under Article 15 of the GDPR, any individual has a right

to obtain a copy of any information relating to them which is kept in

a structured manual filing system. There are certain exceptions to

this right; for example, information which relates to judicial

proceedings, an active criminal investigation, the administration of

tax or in contemplation or in preparation of a legal defence.

There are no specific disclosure or discovery requirements which

apply solely to financial services litigation. Order 31 of the Rules of

the Superior Courts of Ireland governs the main disclosure

requirements which apply in any litigation. Recent court decisions

have emphasised that orders for extensive discovery should only be

made when all other avenues have been exhausted (see Tobin v The Minister for Defence & Ors, which is subject to an appeal to the

Supreme Court on the basis that the discovery point is one of public

importance). Cross-border discovery requests are possible through

EU Regulation (EC) No. 1206/2001.

The Data Protection Act 2018 has introduced new court rules on

media access to and reporting of court cases commenced on or after

1 August 2018.

In Ireland, almost all cases are heard in public. This means that

commercially sensitive information which has been included in

discovery may be publicised. Parties may apply to the court for an

order to maintain confidentiality and, if successful, those documents

may be redacted to block disclosure of sensitive information.

4 Post Trial


disputes?

Generally, financial services disputes are litigated in the High Court

(and the Commercial Court) from which an appeal lies to the Court

of Appeal. The Court of Appeal does not hear oral evidence and

considers findings of fact arrived at by the High Court. In limited

circumstances, it is possible to bring a further appeal from the Court

of Appeal to the Supreme Court. Leave of the Supreme Court must

be obtained in advance. The Supreme Court may hear an appeal on

a decision from the Court of Appeal if it is satisfied that the decision

involves a matter of general public importance, or the interests of

justice require it. A “leapfrog appeal” from the High Court directly

to the Supreme Court is possible where the Supreme Court is

satisfied that there are exceptional circumstances warranting a direct

appeal. Any finding by the Supreme Court cannot be appealed,

unless the case involves an issue of interpretation of EU law in

which case it may be referred to the European Court of Justice.


services disputes?

In Ireland, costs generally “follow the event” and are usually

awarded on a party-party basis. Costs are ultimately awarded at the

discretion of the court. There is a growing trend to make issues-

based costs awards. It is also common for costs sanctions to be

imposed where the court is dissatisfied with certain aspects of the

conduct of the proceedings, or for not availing of mediation or

conciliation, unless there is a good reason for the refusal. The court

will also take into account any lodgements or tenders made. In

Thema International Plc v HSBC Institutional Trust Services (Ireland) Ltd [2011] IEHC 357, the High Court affirmed the court’s

jurisdiction to impose liability for costs on a third-party funder who

had a legitimate interest in the proceedings, though not a party to the

litigation, in light of his role in driving the action.





The issue of jurisdiction is typically the biggest concern in cross-

border disputes and is generally resolved by reference to common

law principles for disputes involving non-EU Member States or by

reference to EU regulations for disputes involving EU Member

States.

Clauses of express jurisdiction in civil and commercial contracts

between parties in different EU Member States are recognised

pursuant to Regulation (EC) 593/2008 on the law of contractual

obligations. In addition, the Irish courts respect a choice of jurisdiction

in a commercial contract in accordance with the Recast Brussels

Regulation (Regulation EU No. 2015/2012). The Recast Brussels

Regulation provides priority to a court nominated in an exclusive

jurisdiction clause. Failing a jurisdiction clause, the appropriate

jurisdiction will be determined by the nature of the dispute.

Otherwise, and for all non-EU Member States, the common law

rules apply and jurisdiction can be determined in the Irish courts’

favour by mandatory provisions of Irish law or if the application of

foreign legal provisions to the dispute would be manifestly

incompatible with Irish public policy.





International co-operation between Ireland and other countries is

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primarily governed by the Criminal Justice (Mutual Assistance) Act

2008 and the Criminal Justice (Mutual Assistance) (Amendment)

Act 2015 (together, the Mutual Assistance Acts). Co-operation with

foreign courts or regulatory bodies generally is dependent on the

identity of the corresponding State and their ratification of relevant

international agreements or existence of a mutual assistance treaty.

Co-operation is most evident between Ireland and other EU Member

States. In addition to the Mutual Assistance Acts, there are numerous

frameworks in place which enhance Ireland’s co-operation with

other EU Member States; for example, the Council Framework

Decision on the European Evidence Warrant (2008/978/JHA) and the

Council Framework Decision on Freezing Orders (2003/577/JHA).

A court in any EU Member State (with the exception of Denmark)

can also take evidence from a witness in Irish court proceedings, as

provided for in the Evidence Regulation (Council Regulation

1206/2001) and the Rules of the Superior Courts of Ireland.

The applicable law of enforcement of foreign judgments depends

primarily on the jurisdiction that has issued the foreign judgment.

For judgments emanating from an EU Member State, the Brussels I

Regulation (EC 44/2001) and the Brussels I Recast Regulation (EC

1215/2012) provide for the recognition and enforcement of

judgments in civil and commercial matters. For all non-EU

Member States, common law rules apply and the court will consider

whether the judgment is for a definite sum, if it is final and

conclusive, and the competency of the jurisdiction which issued the

judgment amongst other factors.

Irish courts will not enforce non-EU Member State judgments in

Ireland unless an applicant can show some legitimate benefit that

will ensue from an order recognising the non-EU judgment in

Ireland (see Albaniabeg Ambient Shpk v Enel SpA and Enelpower SpA [2018] IECA 46).



In general, Ireland does not exert extra-territorial jurisdiction.

Extra-territorial jurisdiction is conferred in Ireland by way of statute

and a consideration of the relevant offence must be made before it

can be determined if Ireland can exercise extra-territorial

jurisdiction.



Unilateral jurisdiction clauses are valid and enforceable in Ireland.

The Recast Brussels Regulation addressed the issue of “torpedo

actions” with respect to an exclusive jurisdiction clause. This matter

has not been clarified with respect to unilateral jurisdiction clauses.

Disputes arising under contracts containing such a clause could

potentially fall victim to a “torpedo action”.

6 Regulated Bodies



The CBI is the main regulator dealing with financial services

disputes in Ireland. The CBI can impose significant monetary

penalties on regulated entities, up to a maximum of the greater of

€10 million or 10% of turnover of the regulated entity. The CBI can

also impose financial penalties on those involved in the

management of regulated entities up to a maximum of €1 million.

The FSPO deals with disputes with financial services providers.



have?

The CBI may commence an investigation into conduct of a

regulated financial services provider where it has reason to believe

that a contravention of applicable law or regulation has occurred.

The CBI may conduct on-site inspections, interview individuals,

compel the production of documents, carry out dawn raids and

summon witnesses. There are a number of potential outcomes from

the ASP which include a criminal prosecution, a supervisory

warning, an inquiry, a settlement or no further action. The CBI may

hold an inquiry to determine if a prescribed contravention has

occurred and, if so, the appropriate sanction which could include

caution or reprimand, monetary penalties as described in question

6.1 above, suspension or revocation of authorisation (or submission

of proposal to suspend or revoke authorisation if the entity is

authorised by the European Central Bank), disqualification of a

person, a direction to cease a contravention and a direction to pay

the CBI all or part of its costs. Under the Central Bank (Supervision

and Enforcement) Act 2013, the CBI has power to make directions

as to the regulated entity’s business and order redress for customers.

The FSPO has the power to obtain information and make such

inquiries. The FSPO can award compensation of up to €500,000

and it can also direct a regulated provider to rectify the conduct that

is the subject of a complaint. There is no limit on the value of the

rectification that can be directed.



Decisions of the CBI are binding on the regulated entity or person.

Failure to comply with any decisions of the CBI under the

administrative sanctions procedure could result in the revocation of

a regulated entity’s authorisation (or a submission of a proposal to

suspend or revoke authorisation if the entity is authorised by the

European Central Bank). Under the CBI’s Fitness and Probity

regime, individuals who carry out a “controlled function” can be

suspended pending a Fitness and Probity investigation and, if found

not to be of appropriate fitness and probity, they can be prohibited

from carrying out a controlled function for a specified period or

indefinitely. Fines may be imposed by the CBI of up to €10 million

for firms and up to €1 million for individuals.

The decisions of the FSPO are binding.


exist?

There is a right of appeal for regulated entities to the Irish Financial

Services Appeals Tribunal (IFSAT) in respect of certain CBI

decisions. With respect to administrative decisions which are

appealed, IFSAT can uphold, vary, substitute, set aside or refer the

decision back to the regulator. For a supervisory decision, IFSAT

can affirm or refer the decision back to the regulator.

The decision of IFSAT can be appealed to the High Court. The

appeal does not affect the operation of the IFSAT decision. Rights

of quasi-appeal of a regulated body with respect to a decision of a

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regulator include constitutional challenge and judicial review.

These actions are taken in the High Court.

Decisions of the FSPO may be appealed to the High Court.


accessible?

Details of decisions of the CBI following an inquiry or a settlement

following an investigation under the ASP are published and will

include the name of the regulated entity, details of the contraventions

and details of any sanction imposed, including monetary penalties.










The focus on regulation and enforcement has intensified since the

financial crisis. This has led to an increase in legislation in this area

at both national and European level to enhance the powers of

regulatory bodies, to facilitate information sharing between relevant

authorities and to increase transparency to ensure effective

regulation of transactions.

The Criminal Justice (Money Laundering and Terrorist Financing)

(Amendment) Act 2018 was enacted in November 2018 and

transposes the Fourth Anti-Money Laundering Directive (4AMLD)

into Irish law.

The Markets in Financial Instruments Act 2018 makes provision for

indictable offences for contraventions under the MiFID II

Regulations. The sanctions for these contraventions represent a

significant increase on those provided for under the European

Communities Act 1972. Under the 2018 Act, the sanction for a person

found to be guilty of a relevant offence on indictment is a fine not

exceeding €10 million and/or a prison term not exceeding 10 years.

As part of its recommendations to the Law Reform Commission and

the July 2018 publication by the CBI of a report on the Behaviour

and Culture of the Irish Retail Banks (the Report), the CBI has

proposed the introduction of an Individual Accountability

Framework. The proposals include the introduction of enforceable

Conduct Standards which would set out the behaviour that the CBI

expects of regulated firms and the individuals working within them

as well as a Senior Executive Accountability Regime.

Investigations by the CBI and the FSPO have shone a light on

regulatory failings by financial institutions, which in turn has led to

an escalation in the number of private party actions brought against

such institutions. One significant example of this is in relation to

tracker mortgages.



customer-friendly?

Ireland has a proven track record in its commitment to

understanding and facilitating the evolving needs of international

business, and, in particular, those of the financial services industry

which has been central to the country’s economic growth. This

commitment is recognised at an international level. Beginning with

the establishment of the International Financial Services Centre in

1987, business-friendly policies have been adopted over the years

by successive Governments to foster a supportive and stable legal,

tax and regulatory environment, which combined with access to the

European market and a skilled workforce make Ireland an attractive

location for financial institutions.





drawn from them.

From a regulatory perspective, the decision of the Court of Appeal in

Fingleton v The Central Bank of Ireland [2018] IECA 105 in April

2018 clarified that a settlement by a financial institution with the CBI

will not, in and of itself, act as a bar to its pursuit of individuals

within that institution by way of inquiry on grounds of bias.

In relation to costs, in Moorview Development Limited & Ors v First Active Plc & ors [2018] IESC 33, the Supreme Court confirmed that

a costs order can be made against a person who funds litigation even

if that person is not a party to the proceedings. In Defender Limited v HSBC Institutional Trust Services (Ireland) DAC & ors [2018]

IEHC 322, the High Court gave judgment on a preliminary issue in

favour of the defendant, HSBC Institutional Trust Services DAC, in

a claim for $141 million taken against it by Defender.

In SPV, the Supreme Court reaffirmed the prohibition on

unconnected third parties profiting in litigation. While upholding

the prohibition, Chief Justice Frank Clarke and McKechnie J. urged

legislators to reconsider the absolute ban on TPF.

In the linked cases of Flynn & Benray Limited v Breccia [2018]

IECA 273 and Sheehan v Breccia & Ors [2018] IECA 286, the Court

of Appeal upheld the High Court’s decision that a 4% surcharge

interest provision in a loan agreement constituted an unenforceable

penalty clause. In particular, the court was influenced by the fact

that the impugned provision was located in the lender’s standard

terms and conditions and, therefore, was not specifically negotiated.

This decision demonstrates that the Irish courts will not deviate

from the traditional penalty clause test of whether the clause is a

genuine pre-estimate of the loss which would occur on default (and

therefore is in contrast to the position in the UK under Cavendish Square Holding BV v Talal El Makdessi [2015] UKSC 67).

The Regulations were an area of focus in 2018. The Regulations are

increasingly relied on by borrowers in defending enforcement

proceedings. In the recent judgment of Binchy J. in The Governor and Company of the Bank of Ireland v McMahon & anor [2018]

IEHC 455, Binchy J. held that the Regulations, which place

obligations for contracts to be drafted in “plain, intelligible language”

do not apply to mortgages. This is a departure from other recent cases

including Ulster Bank Ireland Limited v Costelloe & anor [2018]

IEHC 289 and Permanent TSB Plc formerly Irish Life & Permanent Plc v Fox [2018] IEHC 292. Whilst these cases demonstrate differing

approaches, a common theme is that where borrowers have entered

into an agreement following receipt of independent legal advice, the

court is more likely to determine that the agreed terms are not unfair.



jurisdiction?

In Ireland, since the 2008 global financial crisis, there has been an

increased emphasis on regulatory action, increased oversight,

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Matheson


Dublin 2

Ireland


Karen Reynolds

Matheson


Dublin 2

Ireland


Julie is a Partner at Matheson, practising in all aspects of contentious

and non-contentious restructuring, recovery and insolvency law

matters and is an experienced litigator specialising in banking and

financial services and shareholder disputes. Julie was a member of

the Council of the Irish Society of Insolvency Practitioners from 2011 to

2014 during which time she acted as secretary and as chair of its

educational committee. Julie is a regular contributor to Irish and

international legal publications. She lectures on insolvency law and

directors’ duties at the Law Society of Ireland and Dublin Solicitors Bar

Association. She is co-author of the Law Society’s insolvency manual.

She is a member of the Commercial Litigation Association of Ireland

and co-author of the Practitioner’s Guide to the Commercial Court in Ireland. Julie is a non-executive director of Coillte Teoranta (Irish State

forestry company). She is ranked as one of Ireland’s top insolvency

lawyers by international legal directories.

Established in 1825 in Dublin, Ireland and with offices in Cork, London, New York, Palo Alto and San Francisco, more than 700 people work across

Matheson’s six offices, including 96 partners and tax principals and over 470 legal and tax professionals. Matheson services the legal needs of

internationally focused companies and financial institutions doing business in and from Ireland. Our clients include over half of the world’s 50 largest

banks, six of the world’s 10 largest asset managers, seven of the top 10 global technology brands and we have advised the majority of the Fortune 100.

Karen is a Partner in the Commercial Litigation and Dispute Resolution

Department at Matheson, and co-head of the firm’s Regulatory and

Investigations Group.

Karen has a broad financial services and commercial dispute

resolution practice. She has over 10 years’ experience providing

strategic advice and dispute resolution to financial institutions,

financial services providers, domestic and internationally focused

companies and regulated entities and persons. She advises clients in

relation to contentious regulatory matters, investigations, inquiries,

compliance and governance related matters, white-collar crime and

corporate offences, commercial and financial services disputes, anti-

corruption and bribery legislation and document disclosure issues.

Karen has substantial experience in corporate restructuring and

insolvency law matters, having had a lead role in some of the most

high-profile corporate rescue transactions of the last 10 years. She

advises liquidators, regulators, directors and insolvency practitioners

in relation to corporate offences and investigations, shareholder rights

and remedies, directors’ duties, including in relation to fraudulent and

reckless trading and disqualification and restriction proceedings.

investigations and enforcement. The CBI has developed a more

intrusive risk-based framework for supervision and its enforcement

and redress powers have been enhanced significantly by legislation.

Significantly, the Central Bank Reform Act 2010 strengthened the

CBI’s powers under the Fitness and Probity Regime and enabled it

to remove individuals performing controlled functions and pre-

approval controlled functions from industry, or to prevent

individuals who do not meet the Fitness and Probity Standards

issued by the CBI from performing pre-approval controlled

functions. In addition, the Central Bank (Supervision and

Enforcement) Act 2013 increased the CBI’s powers to administer

sanctions in response to regulatory breaches by regulated financial

service providers and the level of fines that it could levy under its

Administrative Sanctions Procedure. In 2017, the CBI restructured

its financial regulation function into two distinct pillars: one

dedicated to the regulation of financial conduct; and the other to

prudential regulation. The CBI is also increasing its focus on

personal responsibility and has expressed the view that “individual accountability is integral to the regulation of firms”. In its recent

Report on Behaviour and Culture of the Irish Retail Banks, it has

called for additional legislative reforms to facilitate the introduction

of an Individual Accountability Framework, a key component of

which will be a Senior Executive Accountability Regime (as

outlined at question 7.1 above).

Matheson Ireland

Chapter 14


DQ Advocates Limited

Tara Cubbon

Sinead O’Connor

Isle of Man





The most common causes of action are: debt recovery claims;

claims for breach of contract and professional negligence; and

claims for misrepresentation or misstatements. There may also be

claims involving corporate and trust service providers including

claims against trustees for negligence or breach of fiduciary duty

and claims against directors for negligence or breach of directors’

duties.

The Isle of Man Financial Services Authority (the “FSA”) can also

take certain regulatory actions under the Financial Services Act

2008 and the Collective Investment Schemes Act 2008 against

financial service providers including issuing prohibitions, warning

notices, directions and civil penalties. This can include the issuance

of orders prohibiting persons from acting as directors.

Directors and other company officers can also be disqualified under

the Company Officers (Disqualification) Act 2009.

Claims may also be brought against financial service providers for

breaches of the Anti-Money Laundering and Countering the

Financing of Terrorism Code 2015 (as amended 2018) (the “AML /

CFT Code”).


In respect of civil claims brought by or against financial institutions,

likely remedies include compensatory damages, rescission of

contracts, restitution and the accounting of profits. Injunctions and

orders for specific performance may also be granted. In respect of

certain claims, the courts may also order the removal and

replacement of trustees and directors.




There are no differences between the rights of individuals and

commercial entities to bring actions in the High Court in respect of


The Isle of Man Financial Ombudsman Scheme is, however, only

open to individuals. The Scheme is a free, independent dispute

resolution service for customers with a complaint against an Isle of

Man financial firm such as a bank, insurance company or financial

adviser which the firm has been unable to resolve.





this?

Third-party funding is not common in the Isle of Man but is

permissible. It is subject to the common law rules of maintenance

and champerty. Isle of Man Advocates are not permitted to enter

into conditional fee agreements and contingency arrangements.

Litigation insurance does operate in the Isle of Man. The fact that a

party has litigation insurance will not affect how any claim will

proceed. The insured party will remain subject to any court

judgment or order and the terms of any cover for the same will be a

matter between the insured party and the insurer.





Representative actions and group litigation are permitted and

provided for under the Isle of Man High Court Rules 2009 (the

“HCR”). There has not been an increase in such actions post the

financial crisis and the same continue to be uncommon in the Isle of

Man.






case?

Individual terms of business between financial services firms and

their clients may limit rights of recovery under exclusion clauses,

limitation of liability clauses and indemnity clauses. In particular

contracts, for example, in respect of investments managed by

trustees, trustees may seek to exclude any liability for product

choice or advice.

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clock’?

There are no specific time limits that apply specifically to financial

services disputes. It will depend upon the cause of action being

relied on. In general, an action founded on tort and contract cannot

be brought after the expiration of six years from the date on which

the cause of action accrued. Generally speaking, any regulatory

action will not ‘stop the clock’ in respect of civil claims.





Parties to financial services litigation can avail of litigation and legal

advice privilege as would apply in any civil proceedings.

There are no precedent cases which have considered whether or not

investigations constitute ‘litigation’ and the Isle of Man would likely

follow England and Wales on this point.




Yes, these are quite common especially in large lending

transactions. They will form part of the contract with a financial

institution if they are clearly and properly incorporated into the

contract by reference.





There are no specific non-contractual duties that are binding on

financial services entities but duties of care and/or fiduciary duties

may arise in particular circumstances. For example, as set out

below, claims for negligent misstatement may be brought. Claims

may also be brought on the basis of a tortious duty to provide advice.

Directors are subject to common law and equitable duties including

the duties to act within their powers, to promote the success of the

company, to exercise independent judgment, to exercise reasonable

care, skill and diligence, to avoid conflicts of interest, to not accept

benefits from third parties and to declare an interest in a proposed

transaction or arrangement. Trustees also owe fiduciary duties to

their trusts and the beneficiaries of those trusts.

The FSA has issued corporate governance guidance and guidance

on directors’ duties and good practice. Compliance with these

standards is supervised by the FSA.

Attempts to contract out of non-contractual duties are subject to the

law on exclusion and limitation of liability.




There is no specialist court, nor are there specialist Deemsters (Isle

of Man judges), that deal with financial services litigation. All such

litigation would be dealt with by the High Court; however, the type

of action would determine the court ‘procedure’ that the action

followed. For example, a high value debt claim would be dealt with

under the ‘ordinary procedure’ whereas a claim for removal of

trustees of a trust would be heard under the ‘chancery procedure’.

The latter ‘procedure’ typically deals with claims relating to

companies and trusts that are not simply monetary claims.

The Financial Services Appeal Tribunal will hear appeals by

aggrieved persons against actions taken by the FSA under the

Financial Services Act 2008 and/or the Collective Investment

Schemes Act 2008.



The method of service of proceedings does not differ in respect of

financial service litigation. The HCR apply to all types of civil

litigation.





There are no pre-action protocols in the Isle of Man. However, the

overriding objective of the HCR is for cases to be dealt with justly

including proportionately, expeditiously and fairly. The Isle of Man

courts therefore typically expect parties to have sent letters before

action to the other side and attempted to resolve disputes prior to

proceedings being commenced.






jurisdiction?

There are no ADR regulations that apply in the Isle of Man;

however, the Isle of Man courts do expect parties to attempt ADR as

an alternative to court proceedings and there is a continuing duty on

parties to consider this.

ADR clauses are seen in financial services contracts and these will

govern how a dispute is resolved at least in the first instance. The

most common type of ADR used for the resolution of financial

services disputes in the Isle of Man is mediation. As set out above,

the Financial Ombudsman Scheme also provides for the resolution

of disputes.



Claims for mis-selling may be dealt with by way of a claim for

negligent misrepresentation under the Misrepresentation and Unfair

DQ Advocates Limited Isle of Man

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Contract Terms Act 1980 (“MUCTA”) or a tortious claim for

negligent misstatement. The tort of deceit may also found a claim

for fraudulent misrepresentation.





jurisdiction?

The Consumer Protection Act 1991 (the “CPA 1991”) deals with unfair

contract terms in consumer contracts. Section 39 provides that a

contract term which has not been individually negotiated shall be

regarded as unfair if it causes a significant imbalance in the parties’

rights and obligations arising under the contract, which is to the

detriment of the consumer and cannot be justified. A term will always

be regarded as not having been individually negotiated where it has

been drafted in advance and the consumer has therefore not been able to

influence the substance of the term. The unfairness of the contract term

will be assessed having regard to the following matters (as at the time

the contract was concluded): (a) the nature of the goods or services to be

supplied; (b) all the circumstances attending the conclusion of the

contract; and (c) all the other terms of the contract and of any other

contract on which it is dependent. Where a term is found to be unfair it

will not be binding on the consumer and the contract will continue if it

is capable of existing without the unfair term. Injunctions can be

obtained to prevent the continued use of unfair terms.

As set out above, MUCTA deals with misrepresentation and also

deals with limitations and exclusions of liability. In respect of

consumers, certain types of liability can be excluded subject to

reasonableness whilst other types of liability cannot be excluded or

limited at all.

The Supply of Goods and Services Act 1996 also provides

protection to consumers by implying certain terms into contracts for

the supply of services including in respect of the care and skill

applied to the performance of the contract.

Section 40F of the CPA 1991 defines ‘consumer’ as any person who

is acting for purposes which are outside his trade, business or

profession.

Similarly, section 14 of MUCTA provides that a party to a contract

“deals as consumer” in relation to another party if: (a) he neither

makes the contract in the course of a business nor holds himself out

as doing so; (b) the other party does make the contract in the course

of a business; and (c) in the case of a contract governed by the law

of sale of goods or hire-purchase, the goods passing under or in

pursuance of the contract are of a type ordinarily supplied for

private use or consumption.






A financial services customer can access their personal data by

exercising their data subject access right under the Isle of Man’s

data protection legislation. There are a range of matters which can

be excluded from any response to a data subject access request

which includes information which might be legally privileged.

Freedom of information requests can be served on public authorities

and as the FSA qualifies as a public authority, a data subject could

access data through this channel as well. Discovery and disclosure

is dealt with under the Code of Practice on Access to Government

Information (“the Code”) which states that information that is

reasonably requested will be disclosed except where disclosure

would not be in the public interest. The exceptions are found in part

II of the Code which include: security and external relations;

internal discussion and advice; communications with the royal

household and the governor; law enforcement and legal

proceedings; and more.

4 Post Trial


disputes?

Where a financial services dispute has been determined by way of a

civil claim in the High Court, the ordinary right of appeal that applies

to all civil claims will apply. Unless a court orders otherwise, the

usual time for appealing is: 42 days from the lower court’s judgment

or final order; or 14 days in the case of any other order.

In respect of regulatory action taken by the FSA, appeals are

permitted under section 32 of the Financial Services Act 2008 and

section 21 of the Collective Investment Schemes Act 2008.


services disputes?

A financial services dispute determined by way of a civil claim will be

subject to the ordinary position on costs for civil claims as set out in the

HCR. The court has a wide discretion on costs. The normal position

is that the successful party is entitled to recover its costs from the

unsuccessful party; however, the court will take into account a number

of factors when awarding costs including: (a) the conduct of the

parties; (b) whether a party has succeeded on part of its case; and (c)

whether an admissible offer to settle was previously made. Depending

upon the circumstances, the amount of costs will be subject to

summary assessment by the court that dealt with the proceedings or

they will be subject to detailed assessment by the costs assessor.





Typical cross-border issues include requests from foreign courts to

the High Court for recognition of foreign liquidators or trustees in

bankruptcy, requests for examination of Isle of Man company

officers and requests for assistance in obtaining evidence for use in

foreign proceedings. In respect of trusts, there may also be issues

where orders made by foreign courts seek to affect trust assets (for

example, investments) or require disclosure by the trustees of

information in respect of trust assets.

Isle of Man courts are also regularly required to consider the

recognition of foreign judgments under the common law and also

the Judgment (Reciprocal Enforcement) (Isle of Man) Act 1968.





The Isle of Man judiciary is very open to co-operation with foreign


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courts and regulators in the context of disputes and investigations.

The Isle of Man courts recognise that the Isle of Man is an

independent jurisdiction and that all requests for assistance need to

be properly made, cannot be abusive fishing expeditions and need to

be based on a properly founded jurisdiction. However, they also

recognise that the Isle of Man has a role to play in the international

community that exists between friendly and sophisticated

jurisdictions and this had led to a trend towards international judicial

co-operation.

Just one example of this attitude is displayed in the case of Assessor of Income Tax v Holmcroft (judgment of His Honour The Deemster

Doyle dated 23 September 2016) which involved a Tax Information

Exchange Request from Her Majesty’s Revenue and Customs to the

Isle of Man Income Tax Assessor. In delivering his judgment, the

then First Deemster, Deemster Doyle, commented: “The Isle of Man

does not and should not shelter those who do not comply with the

law and pay their taxes. The Isle of Man does not and should not

facilitate wrongdoers attempting to evade tax in their home

jurisdictions. We should assist others in ensuring that legal

obligations, including the payment of tax, are complied with

worldwide.”

He also referred to his ruling in a previous case where he remarked:

“Those endeavouring to make use of the equivalent of Harry

Potter’s invisibility cloak to prevent sight of information or

documents regarding the proceeds of wrong doing will find, to their

disappointment, that it does not work in this jurisdiction.”



Failing to prevent the facilitation of UK tax evasion will have extra-

territorial jurisdiction which may be applied to organisations and

conduct. There are also extra-territorial provisions in the UK

Bribery Act which could extend to the Isle of Man.



Unilateral jurisdiction clauses are valid and enforceable under Isle

of Man law. The Isle of Man courts have confirmed that they can be

overridden in certain circumstances; however, the general rule is

that the courts will respect and enforce the parties’ choice of forum

and “strong cause” is required for the court to order otherwise.

6 Regulated Bodies



As set out above, customers with a complaint against an Isle of Man

financial firm can make a complaint to the Financial Services

Ombudsman. The FSA also has regulatory powers that may be

applied to financial institutions where there are failures to comply

with legislation and the Financial Services Rulebook.



have?

As set out above, the FSA has a range of powers under the Financial

Services Act 2008 (and the Collective Investment Schemes Act

2008) which include civil sanctions being applied should the nature

of the financial services dispute indicate that there was non-

compliance with the regulatory requirements at play. In addition,

where there has been a material breach of the regulatory

requirements, the FSA can levy a monetary fine under the Financial

Services (Civil Penalties) Regulations 2015.

The Financial Ombudsman can issue awards by way of

compensation up to £150,000 for defined financial loss and small

sums for any material distress and inconvenience suffered.



Yes, these are binding on the parties. Non-compliance with a

decision of the FSA can often result in additional action being taken

which can result in court action being brought by the FSA.


exist?

Section 32 of the Financial Services Act 2008 provides for appeal to

the Financial Services Tribunal and there are appeal provisions built

into other legislation and regulation which would be applicable to

the financial services industry.

Where the Financial Ombudsman makes an award, it will be

binding on both the supplier and customer. An appeal to the High

Court can only be made where the adjudicator has made an error in

law.


accessible?

Normally, these decisions are not made public but the FSA does

have the power to make public statements if it considers it in the

interests of consumers to do so. The prohibition and disqualification

of directors is public. Additionally, any court decision is

automatically made public through the online publication of

judgments of the Isle of Man courts.










Due to the international scrutiny to which the Isle of Man is subject,

further enforcement in the financial services sector is expected.

This is principally due to the Isle of Man’s need to demonstrate that

the powers which are available under legislation and regulation will

be used when necessary. The Mutual Evaluation Report issued by

MONEYVAL in 2017 was critical of the over-reliance by the FSA

on remediation rather than enforcement and also commented

adversely on the low level of prosecutions for financial crime.

Since the financial crisis, there has been an apparent increase in the

number of claims involving corporate and trust service providers

where those providers have been involved in the management of

investments that have failed.


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customer-friendly?

Our jurisdiction would be considered neutral.





drawn from them.

Apex Fund Services Limited (“Apex”) was the first Isle of Man

organisation to be prosecuted under the AML/CFT Code and the

first recipient of a civil penalty from the FSA. Action was taken by

the FSA due to failings relating to AML/CFT and a public statement

was issued by the Regulator. The FSA highlighted in the public

statement how corporate governance failures had contributed to

Apex’s non-compliance and how a focus by the Board on financial

performance rather than compliance had been particularly

detrimental. Similar issues were raised by the FSA when it sought

to prohibit the directors of OCRA Isle of Man and publicly stated at

the time that an inappropriate focus on compliance would lead to

regulatory intervention.

An Isle of Man High Court recently heard a claim by an investment

fund against an Isle of Man corporate service provider and corporate

director that provided corporate and director services to a company

that acted as the loan manager in relation to an investment fund. The

shareholders of the fund attempted to argue that the corporate

director (and administrator) did not only owe duties to the company

it was director of (as is the normal position under Williams v Natural Life Health Foods Ltd [1998] AC 830) but owed the same duties

directly to the fund and its shareholders. The defendants had the

claim struck out on appeal and the claimants were refused

permission to appeal to the Privy Council (Peacock Management Limited & Another v Axiom Legal Financing Fund Master SP (judgment of the Staff of Government Appeal Division dated 21

September 2017)). The case confirms that the courts will not easily

extend the duties of service providers including directors and

corporate administrators to third parties. There was nothing on the

facts of the case that showed that the director and the administrator

had assumed direct responsibility beyond the ordinary duties of care

they owed to the company.



jurisdiction?

Global economic changes have influenced the introduction of

substance requirements as groups such as the EU look to protect

Member States’ tax bases and apply pressure to other jurisdictions.

In addition, EU developments in relation to AML/CFT such as the

fourth, fifth and sixth Money Laundering Directives have an

influence on the Isle of Man legislative and regulatory environment

as the Isle of Man seeks to stay in line with what is expected. The

threat of blacklisting is often wielded and as such the Isle of Man

seeks to be a responsible jurisdiction introducing legislation and

regulation which can demonstrate that the Isle of Man wishes to be

a co-operative jurisdiction.


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Tara Cubbon


The Chambers, 5 Mount Pleasant

Douglas, IM1 2PU

Isle of Man

Tel: +44 1624 626 999 Email: [email protected] URL: www.dq.im

Sinead O’Connor


The Chambers, 5 Mount Pleasant

Douglas, IM1 2PU

Isle of Man

Tel: +44 1624 626 999 Email: [email protected] URL: www.dq.im

DQ Advocates is a leading Isle of Man based law firm with an international reach.

We offer a full range of legal, regulatory and compliance services to our local and global clients.

DQ are accessible, responsive and commercial with client-oriented strategies and goals. Our specialist lawyers are recommended as leading

lawyers in Chambers & Partners and The Legal 500.

Tara is a Senior Associate in the Dispute Resolution team. The

majority of Tara’s practice is corporate and commercial litigation. She

regularly advises banking institutions, corporations, liquidators and

local corporate and trust service providers on high value and complex

contentious matters; making regular appearances before the Isle of

Man High Court of Justice and Staff of Government (Appeal Division).

Tara has been ranked as an Associate to Watch by Chambers & Partners with clients noting “her skills in the courtroom are very impressive. She communicates well and puts her clients at ease”.

Sinead is Head of the Regulatory & Compliance Services team. She

works with clients across the financial services industry covering

banking, insurance, corporate service providers and funds. Sinead

has worked in the compliance industry since 1995 so has a wealth of

experience to bring to clients. Sinead is an accredited Data Protection

Practitioner.


Chapter 15


Mori Hamada & Matsumoto Shinichiro Yokota

Japan





The most common claims against financial institutions and service

providers in Japan are those for alleged mis-selling of and

misstatement related to financial products. The causes of actions for

mis-selling and misstatement claims are typically based on tort

under the Civil Code or breach of the financial institutions’ duty to

explain certain important matters as stipulated in Article 3 of the Act

on Sales, etc. of Financial Instruments (ASFI) to its customers at or

before the time of selling financial products.

The Financial Instrument and Exchange Act (FIEA) stipulates

several duties of financial institutions for the protection of

customers, including the prohibition against providing false

information or conclusive evaluations related to the financial

products which they are selling (FIEA, Article 38(1)) and the

principle of suitability (Id., Article 40). Although breaching these

duties does not automatically lead to liability on the part of financial

institutions in private actions, depending on the circumstances of

each case, a financial institution may be held liable under tort based

on its breach of such duties. The Supreme Court of Japan held in its

decision dated 14 July 2005 that a financial institution may bear a

tort liability where it solicits and enters into securities transactions

which deviate significantly from the principle of suitability,

considering its customers’ experience, knowledge, intention,

financial conditions and other factors.

Financial institutions also have a duty to explain certain important

matters as stipulated in Article 3 of the ASFI, and a breach of that

duty can be a cause of action in itself under Article 5 of the ASFI. In

such a case, the amount of damages arising from the financial

institution’s breach is presumed to be basically the amount of loss

incurred by the customer in the transaction.


Where customers prevail in litigation against financial institutions

and service providers, monetary compensation is most likely to be

awarded. Generally, the amount of monetary compensation will be

determined by calculating the amount of loss incurred by the

customers in the financial transactions, but, in most cases,

compensation is reduced because of the comparative negligence of

customers.




Any person who incurs damages in transactions with financial

institutions and service providers has a right of action in financial

services disputes.

In deciding the liability of financial institutions and the amount of

damages, a court weighs the degree of the financial institutions’

duties depending on the level of sophistication (e.g., experience,

knowledge, intention, financial status and other factors) of the

customers in each case. A commercial entity tends to be regarded as

more sophisticated, although of course there are very sophisticated

individuals and, therefore, this statement cannot be generalised.

It should also be noted that the key duties of financial institutions

under the FIEA (such as the principle of suitability) do not apply to

customers who are professional investors, including, for example,

listed stock corporations and stock corporations with a stated capital

of at least ¥500 million.





this?

As far as we are aware, litigation insurance is not utilised in Japan.

In addition, there has been no substantial discussion in Japan in

relation to third-party funding in general or specifically in financial

services litigation. It should be noted that, although litigation

funding is not specifically prohibited under Japanese law, it is illegal

for a person who is not an attorney or a legal professional

corporation to act as an intermediary between a client and an

attorney in connection with lawsuits for the purpose of obtaining

compensation.





Since 2013 when the Act on Special Provisions of Civil Procedure

for the Collective Recovery of Property Damage of Consumers was

introduced, class action lawsuits have been available in Japan, but

the scope of available class actions is limited compared to collective

actions in other jurisdictions, such as US class actions.

Japa

n


Under the Japanese class action system, only a “Certified Qualified

Consumer Organisation” (the Organisation) approved by the

government may file a class action claim on behalf of consumers for

certain types of monetary damages arising from consumer contracts.

At the first stage of a class action for consumers, the Organisation

will request the court to determine the existence of a “common

obligation” in the claims. If a “common obligation” is found by the

court or under an agreement between the parties and the court finds

that the defendant is responsible, then a second stage procedure will

commence to determine the claims of the consumers.

At the second stage, the Organisation will notify, directly or by

public notice through the internet, newspapers or television ads,

consumers who may have claims against the defendant subject to

the class action. Those consumers may give the Organisation

authority to recover claims on their behalf. If the defendant rejects

the claims, the court will determine whether the claims exist,

through a simplified procedure in which the court will examine only

documentary evidence. If a consumer objects to the court’s

determination, an ordinary litigation procedure will be commenced.

As mentioned above, this Japanese class action system was

introduced in 2013 and the scope of the class actions is limited.

Thus, we do not believe that this class action system has had

significant impact on financial services litigation or that class

actions related to financial services have increased.






case?

The main barrier to financial service litigation for customers is the

burden of proof required to establish mis-selling or misstatement by

financial institutions, as it is generally understood that the principle

of self-responsibility applies to financial product transactions.

With respect to exclusionary clauses or duty defining clauses, the

Consumer Contract Act stipulates that (i) clauses which exclude the

tort liability of business operators (including financial institutions)

to consumers as a whole on occasion of the business operators’

performance of consumer contracts, and (ii) clauses which exclude

a part of the tort liability of business operators to consumers arising

out of any intentional act or gross negligence of a representative or

employee of the business operators in the performance of consumer

contracts, are void. That said, financial institutions may put (a)

clauses which exclude their liability as a whole in contracts with

business operators (not consumers), or (b) clauses which exclude a

part of their liability arising out of the simple negligence of their

representative or employee in the performance of consumer

contracts. However, it is rare in practice to find those exclusionary

clauses in contracts between financial institutions and their

customers given that financial product transactions are regulated by

the FIEA and financial institutions owe a variety of duties under the

FIEA and the ASFI which cannot be renounced by agreement

between the parties. Further, any such agreement could be

considered as an act against public policy, which is void under the

Civil Code.






clock’?

Claimants may not bring financial services disputes after the lapse

of the relevant period under the statute of limitations: three years

from the time when the claimant becomes aware of the damages and

the identity of the perpetrator for a tort claim, and 10 years for other

claims. The commencement of a financial ADR proceeding, as

discussed in further detail in question 3.4 below, interrupts the

prescription period.





Japanese law does not recognise the concept of litigation or legal

advice privilege such as attorney-client communications or work

product protection. However, lawyers have a duty and a right of

confidentiality under the Attorney Act and the Code of Civil

Procedure. Thus, as one of the exceptions to the general obligation

to submit documents in court under Article 220 of the Code of Civil

Procedure, the holder of a document, such as a lawyer, may refuse to

submit the document if it contains materials or information which

professionals, including lawyers, have learnt in the course of their

duties and regarding which they have an obligation to keep secret,

although their clients may release them from their duty of secrecy

(Code of Civil Procedure, Article 220(iv)(c)).




Standard form master agreements, such as the International Swaps

and Derivatives Association (ISDA) Master Agreement, can be

entered into by financial institutions and their customers, and are

indeed used, to govern the contractual relationship between the

parties and are generally valid and effective.

However, it should be noted that the Supreme Court of Japan, in its

decision dated 8 July 2016, held that a party (the “setting-off party”)

may not set off its obligation to the other party against an obligation

which the other party owes to the setting-off party’s affiliates at the

insolvency proceedings of the other party, even when the parties

have agreed in advance in the ISDA Master Agreement between

them that such setting-off would be allowed.





As discussed in question 1.1 above, financial institutions have a

duty to explain certain important matters as stipulated in Article 3 of

the ASFI, and a breach of that duty can be a cause of action in itself

under Article 5 of the ASFI.

Mori Hamada & Matsumoto Japan

Japa

n


In addition, under the FIEA, financial institutions are regulated and

owe a variety of duties, including the prohibition against providing

false information or conclusive evaluations related to the financial

products which they are selling (FIEA, Article 38(1)) and the

principle of suitability (Id., Article 40). Although these duties are

not contractual in nature, a breach of these duties can lead to a

finding of tort liability against the financial institutions.

The view in the legal community is that these duties cannot be

renounced by contract.




No. There is no specialist court or specialist judge for financial

services litigation.



No. The method of service of proceedings for financial service

litigation is the same as that for other litigation.





No. There are no specific pre-trial procedures for financial services

litigation.






jurisdiction?

Under the FIEA and other laws related to financial institutions (such

as the Banking Act and the Insurance Business Act), “dispute

resolution organisations” are designated by each business category,

such as banks and securities companies, to handle ADR proceedings

related to financial product transactions.

Even though no ADR clause is included in a financial service

contract, if a customer initiates ADR proceedings at a relevant

dispute resolution organisation, the respondent financial institution

may not refuse to participate in the ADR proceedings without

justifiable grounds. Furthermore, the financial institution is required

to provide necessary information and documents and may not refuse

the provision of information and documents without justification.

The dispute will be assigned to a dispute resolution committee.

Generally, a dispute resolution committee consists of certain

professionals, for example, attorneys, judicial scriveners, and

persons with experience in the financial institution business, and it

is tasked with providing a settlement proposal (special conciliation

proposal). In principle, the financial institution is expected to accept

the special conciliation proposal.

In the case where the financial institution refuses to participate in

the ADR proceedings or to accept a special conciliation proposal,

the Ministry of Finance may issue an order compelling compliance

if it is found that certain actions are necessary to ensure the

appropriate operation of the financial institution’s business.

This ADR system is commonly used to resolve financial services

disputes. However, the right to resolve a dispute in court is not

waived even if customers start ADR proceedings. In fact, it is

possible for customers to proceed with court proceedings in parallel

with the ADR proceedings.



Basically, there is no discrepancy between cases where misstatement

or mis-selling is made through negligence and cases where it is made

through wilful misconduct or gross negligence.





jurisdiction?

Generally, unfair terms may be considered void as acts against

public policy under Article 90 of the Civil Code.

Moreover, unfair terms which restrict the rights of consumers,

expand the duties of consumers, and impair the interests of

consumers unilaterally may be considered contrary to the

fundamental principle of, and can be void under, Article 10 of the

Consumer Contract Act.

A “consumer” under the Consumer Contract Act is defined as an

individual other than a person who becomes a party to a contract as

a business operator or for the purpose of its business (Consumer

Contract Act, Article 2(1)).






In principle, outside of litigation, customers may request a financial

institution to disclose personal data which relate to them and are

retained by the financial institution, pursuant to Article 28 of the Act

on the Protection of Personal Information. However, the financial

institution may refuse the request if disclosing the requested personal

data is likely to seriously impede the proper execution of its business

(Act on the Protection of Personal Information, Article 28(2)(ii)).

The Code of Civil Procedure does not recognise an extensive

discovery or disclosure process equivalent to that of the United

States. Under the Code of Civil Procedure, the parties basically

produce their own documents as evidence in court and it is not often

that a party can obtain evidence from the opposing party or a third

party. That said, there are some measures for evidence collection

under the Code of Civil Procedure, as follows.

Interrogatories: A party may send interrogatories to the other party

regarding matters which the requesting party finds necessary to

prepare its allegations or proof, and give a reasonable period for the

other party to respond (Code of Civil Procedure, Articles 133-2 and

163). However, it should be noted that although the opposing party

who receives the interrogatories has an obligation to respond, there

is no tangible sanction for failing to respond.

Order to Submit Documents: A party may request the court to order

the holder of a document to submit that document (Code of Civil


Japa

n


Procedure, Article 219). The holder of the document may be the

other party or any third party, although in the case of a third party the

court must first examine the third party before ordering it to submit

any document. The requesting party must state the following in its

request: (i) a description of the document; (ii) the purport of the

document; (iii) the holder of the document; (iv) the facts to be

proven by the document; and (v) the grounds for the obligation of

the requested person to submit the document (Code of Civil

Procedure, Article 221). Note that Article 220 of the Code of Civil

Procedure provides for the general obligation of holders of

documents to submit documents upon the order of the court, with

some exceptions.

Judges tend to be deliberate when they are considering any order to

submit a document. In order for the court to issue that order, the

requesting party must demonstrate a high necessity and the

importance of the documents requested for its case. However, even

where a court does not issue a formal order, it often urges (either

upon the request of a party or at the court’s initiative) the parties to

voluntarily submit documents in their possession if the court

believes that those documents would help the court understand the

case (Code of Civil Procedure, Article 149).

4 Post Trial


disputes?

Yes, district court judgments may be appealed to the high courts,

and high court judgments may be appealed to the Supreme Court.

While high courts decide on the merits of appeals, the Supreme

Court may reject and, in fact, often rejects accepting appeals of high

court judgments even if the procedural requirements are satisfied.


services disputes?

The cost of financial services litigation is handled in the same way

as in other litigation cases: the losing party bears the filing fees paid

by the parties and other costs and fees, such as the cost of the service

of process and fees of court-appointed experts. However, it should

be noted that attorneys’ fees and other expenses such as travel fees

and fees of party-appointed experts cannot be recovered from the

losing parties, except as damage claims where the plaintiff’s

attorney’s fees may be awarded as one of the elements of damages

(in that case, the courts usually assume that the plaintiff’s attorney’s

fees are 10% of the total amount of the other damages regardless of

the actual amount paid by the plaintiff to its attorney).





Although Japanese courts have not had much opportunity to address

cross-border financial services disputes (and they hardly are involved

in investigations involving financial institutions), the most common

issue we see in cross-border disputes is that of jurisdiction. There is

no special law on cross-border disputes involving financial

institutions; however, a foreign financial institution may be sued in

Japan if it has its principal office or a business office in Japan or the

domicile of a representative or any other principal person in charge of

its business is in Japan. Even if the financial institution has no office,

director or employee in Japan, it may be sued if the tortious act was

committed in Japan, although it would be practically ineffective to

bring a suit against a foreign financial institution as litigation against

a foreign defendant is typically time-consuming and sometimes

practically impossible, given the requirements at various stages, from

the service of process to the execution of a judgment.





There is no special law on cross-border disputes involving financial

institutions. However, since Japan is a contracting state to the

Convention on the Service Abroad of Judicial and Extrajudicial

Documents in Civil or Commercial Matters and the Convention on

Civil Procedure, Japan is obliged to respond to other contracting

states if they request Japan to serve documents or take evidence

concerning civil or commercial cases under the rules of these

conventions. In those cases, Japanese courts will assist foreign

courts or regulatory bodies related to the service of judicial

documents or taking of evidence (such as the interrogation of a

witness before a Japanese court).

If a foreign state is not a contracting state to any of these

conventions but has a bilateral treaty or a comprehensive agreement

on mutual judicial assistance with Japan, then its request will be

addressed based on the treaty or agreement. If it does not have any

agreement, Japan will respond to the request for judicial assistance

in each specific case under Japan’s Law Relating to the Reciprocal

Judicial Aid to be Given at the Request of Foreign Courts.



It is not typical but as discussed in question 5.1 above, even if the

financial institution has no office, director or employee in Japan, it

may be sued if the tortious act (i.e., the misstatement or the mis-

selling) was committed in Japan.



The parties may agree on the court but only as to the court of first

instance, and any such agreement will be effective if it is made with

respect to an action based on certain legal relationships and is made

in writing (Code of Civil Procedure, Article 3-7(1) and (2)). A

unilateral jurisdiction clause will be valid unless it gives the

exclusive jurisdiction to a foreign court and the foreign court may

not legally or actually exercise such jurisdiction or, to the extent that

it is included in a consumer contract, it gives the exclusive

jurisdiction to the court where the consumer has a domicile at the

time of execution of the contract.

6 Regulated Bodies



There is no regulatory body in Japan, apart from the courts, which

regulates financial services disputes.


Japa

n




have?

As stated in question 6.1 above, there is no regulatory body in Japan,

apart from the courts, which regulates financial services disputes.

Regulatory authorities in Japan, however, may take regulatory

actions by issuing administrative orders pursuant to relevant laws

and regulations, such actions include revocation of registration or

suspension of business where violations of laws or regulations by

financial institutions are serious and malicious.



This is not applicable, as there is no regulatory body other than the

courts which handles financial services disputes between private

parties.


exist?

If a regulatory authority issues an administrative order, financial

institutions may file a petition in court for the cancellation of the

administrative order.


accessible?

Generally, orders issued by regulatory authorities are published,

typically on their websites, and publicly accessible.










The current Cabinet Office Order on Financial Instruments

Business, etc. is expected to be amended in 2019 to strengthen the

management of settlement risks for OTC FX transactions and the

disclosure of risk information related to OTC FX transactions.

In recent years, the regulatory bodies had been paying attention and

reacting to technological developments in this area. For example, in

2014, the FIEA and related regulations were amended to facilitate

investment-oriented crowdfunding. Additionally, there were

amendments to the FIEA in 2017 regarding registration requirements

for high-frequency traders who conduct regulated algorithmic trading

at financial instruments exchanges or proprietary trading system

markets based in Japan.



customer-friendly?

We believe Japan would be considered a relatively financial

institution-friendly jurisdiction. While there is a low barrier for

customers to file financial services litigation with the court,

customers bear the burden of proof in mis-selling or misstatement

cases in court, and it is not easy for customers to establish facts

relevant to the alleged mis-selling or misstatement. In most cases,

even if a customer prevails, the compensation is reduced because of

comparative negligence of the customer.





drawn from them.

Decisions on financial services disputes are often made on a very

case-specific basis, and we have found no significant cases during

the past 12 months. The most important recent case is the Supreme

Court’s decision dated 7 March 2014 where the Supreme Court

found that the bank-respondent was not liable for not explaining the

adequacy of the pricing in an interest swap transaction (i.e.,

adequacy of the level of the fixed interest rate). Although this

decision is a case-specific decision, the lower courts tend to follow

this decision and are, thus, getting more financial institution-

friendly.



jurisdiction?

After the global recession caused significant losses to customers of

financial institutions in Japan (after 2007), financial services

litigation had increased. However, as the Japanese economy has

recovered and maintained a moderate recovery trend after hitting the

bottom in November 2012, financial services litigation has

decreased recently.


Japa

n


Shinichiro Yokota

Mori Hamada & Matsumoto

16th Floor, Marunouchi Park Building

2-6-1 Marunouchi, Chiyoda-ku

Tokyo 100-8222

Japan

Tel: +81 3 6212 8365 Email: [email protected] URL: www.mhmjapan.com/en

Mori Hamada & Matsumoto is one of the largest full-service law firms in Japan. We have been ranked at the highest levels on a wide range of

practice areas, including international/domestic dispute resolution, corporate/M&A, capital markets, tax, anti-trust and IT/IP. Leveraging our

experienced team and expertise, we are committed to providing the best services for our clients. Our dispute resolution team consists of 48 partners

and 61 other lawyers, including former chief judges of the Tokyo High Court and prominent scholars. Most of its team members are based at its main

office in Tokyo; but it also offers significant regional capabilities, through its offices in Singapore, Beijing, Shanghai, Bangkok, Yangon and Jakarta.

Shinichiro Yokota is active in the fields of domestic and cross-border

dispute resolutions and acts on behalf of domestic clients as well as

global clients in a wide variety of domestic litigations and international

arbitrations. He also handles a wide variety of general corporate legal

matters, employment matters, and regulatory and compliance matters.

Mr. Yokota graduated from the University of Tokyo in 2002 and holds

an LL.M. from Duke University School of Law (2010).


Chapter 16


Barun Law LLC

Wonsik Yoon

Ju Hyun Ahn

Korea





Although statistical data regarding court cases brought by or

brought against financial institutions was unavailable, according to

the results of financial dispute mediation cases handled by the

Financial Supervisory Service (FSS), insurance disputes, which

occupied 90.06% of a total of 25,043 cases, were most frequent.

Among insurance disputes, 10,455 cases were about whether the

computation of insurance benefit was appropriate, which turned out

to be the most common cause of initiating a mediation with a

financial company.


Depending on the individual cause of action, through a court

decision, one may be paid the deposit or insurance benefit or may be

able to get damages by proving one’s injuries. However, in some

cases, the claim may be dismissed. (Please note that statistical data

regarding how courts have ruled in financial disputes was

unavailable.)




In most cases, financial consumers initiate finance disputes, but, in

some cases, finance companies also file lawsuits. Among financial

consumers, one can initiate a financial dispute regardless of one

being an individual or a company.





this?

Third-party funding is not being used in Korean litigation. Because

financial dispute mediation provided by the FSS is free, its necessity

is questionable. Litigation expenses insurance exists, but is rarely

used and barely has any effects on resolving finance disputes.





Since the enactment of the Securities-Related Class Action Act in

2004, in cases where injuries were incurred by numerous parties

during a securities transaction, one can file a class action lawsuit.

However, evidenced by the fact that only six of such cases have

been filed between 2004 and and 2014, it is rarely used and the

number of such class actions filed also did not increase

meaningfully before and after the Global Financial Crisis in 2007–

2008.






case?

With regards to financial disputes, asymmetry of information

between financial consumers and financial institutions and the cost

and time required for litigation have been major sticking points to

filing lawsuits. The contract of a financial product includes a

provision which allows the consumer or any interested parties to

apply for financial dispute mediation at the FSS. However, the

contract rarely includes specific exclusionary clauses or duty

defying clauses.






clock’?

There is no time limit to initiating financial dispute mediation, but

the statute of limitations to individual financial products may run

out. In theory, there are no differences between the application of

the statute of limitations by the FSS and that by the courts. On the

other hand, the statute of limitations stops running upon applying

for mediation at the FSS. In Korea, the statute of limitations is

based on substantive laws such as the Civil Code and the

Commercial Code, and thereby treated as an issue of substantive

Kor

ea


law as opposed to procedural law. Thus, it does not procedurally

time-bar the commencement of lawsuits before the Korean courts.

Therefore, it is still possible to file a lawsuit even after the statute of

limitations has run out. However, if the defendant raises a defence

of statute of limitations, the case will be dismissed by the court.

With regards to financial dispute mediation before the FSS, the FSS,

in practice, tends to relax the application of the statute of limitations

to financial consumers. Even if the statute of limitations has run out,

the FSS frequently recommends a mediation plan which is

favourable to the consumer despite the running of the statute of

limitations.





In Korea, there is no such concept of legal advice privilege as in the

Anglo-American tradition.




Depending on the type of a financial product, whether it be an

insurance policy or a deposit account, standardised form master

agreements are used. In those cases, financial companies draft

customised provisions in accordance with the terms of such

agreements and use them as the basis of interpretation in case of

contract formation or financial disputes regarding interpretation of

the terms of the contract arise.





Individual financial laws, such as the Banking Act, the Insurance

Business Act and the Financial Investment Services and Capital

Markets Act, prescribe fiduciary duty or code of product mainly to

financial companies. Such provisions are mostly compulsory

provisions designed to protect financial consumers and therefore

cannot be contracted out of. Even those provisions that are not

compulsory are rarely contracted out of and if contracted out of, it is

highly likely that the FSS or the courts will invalidate them as unfair

provisions.




There is no specialist court or specialist judges for financial services

litigation.



The method of service of proceedings does not differ for financial

service litigation. However, if the Securities-Related Class Action

Act is applied, one would follow the class action procedures.





There are no specific pre-trial procedures before financial disputes.






jurisdiction?

There are no individual laws that are dedicated to the regulation of

financial services disputes. However, the Enforcement Decree of

the Act on the Establishment, Etc. of the Financial Services

Commission regulates relevant contents and the Detailed Rules on

Financial Dispute Settlement of the FSS stipulate the details of the

financial disputes proceedings including procedures and binding

effects. Moreover, the contract of a financial product includes a

provision which allows the consumer or any interested parties to

bring a case to the FSS for dispute mediation. Mediation at the FSS

is the most frequently used ADR by financial consumers.

Evidenced by the total of 25,205 cases of financial disputes that

were registered to the FSS in 2017 alone, ADR is used widely. In

addition to mediation at the FSS, a consumer may also use ADR

offered by the Korea Consumer Agency, the Korea Exchange and

the Korea Financial Investment Association.



Negligent misstatement and mis-selling are generally a tort under

civil law and become a cause of liability for damages. However,

depending on the degree of illegality, they can also be a fraud under

civil law and the financial consumer can cancel the commodity

transaction. The difference between the two is that for liability for

damages the financial consumer’s negligence is taken into

consideration, while for the cancellation of a commodity transaction

based on fraud it is not and all transaction costs must be returned to

the consumer.





jurisdiction?

The courts have invalidated unfair terms that violated the principle

of good faith. Provisions unjustly unfavourable to consumers or

provisions that are difficult to predict given the type of the

transaction are deemed unfair. Consumers can claim invalidation of

such unfair provisions pursuant to relevant laws and regulations.

For example, consumers can claim invalidation of an exemption

clause that excludes liability caused by gross negligence of a

business owner, agents, or employees, a provision that makes

consumers liable for damages such as unreasonably excessive

damages for delay, a provision that unjustly limits the cancellation

of contract by excluding consumers’ rights to cancellation or

limiting exercising those rights, a provision allowing unjust

fulfilment of an obligation such as enabling a business owner to

Barun Law LLC Korea

Kor

ea


unilaterally decide or change the terms of payment, a provision that

unfairly prevents consumers from bringing lawsuits unfavourable to

the business, a jurisdiction agreement clause, or a provision that

unfairly shifts the burden of proof to consumers. Although it may

differ depending on individual laws, the Framework Act on

Consumers defines the term “consumers” as those who use the

goods and services including facilities provided by enterprisers for

their daily lives as consumers or for their production activities.






In Korea, there is no separate act regarding data protection/freedom of

information which allows applicants to ask for information about

someone else. Naturally, a financial consumer can access his/her own

data during litigation. However, Korea does not have a process

equivalent to discovery or disclosure in the Anglo-American tradition.

With regards to commercially sensitive or confidential information, a

consumer would have to prove the relevance of such information to

the lawsuit and that the financial company is in possession of such

information in order to obtain the court order requiring the financial

institution to produce the information in the lawsuit.

4 Post Trial


disputes?

Each party has a right of appeal in financial services disputes.


services disputes?

The court distributes the costs in financial services disputes in

accordance with the amount of damages each party wins on a pro rata basis. However, with regards to attorney’s fees, it does not

mean all costs a party incurred are taken into consideration.

Generally, the amount smaller than the actual amount spent on the

attorney’s fees is recognised by the courts.





It is rare that cross-border disputes arise with financial consumers.

They often arise in the context of a sale of a Korean financial

institution to a foreign investor or a Korean financial institution

making foreign investments. Generally, such disputes are resolved

through international arbitration.





The Korean courts have rarely resolved financial service disputes or

engaged in investigations by cooperating with foreign courts or

regulatory bodies or officials. Therefore, there is no general

approach to such matters.



Extra-territorial jurisdiction plays a significant role in the regulation

of cross-border anti-competitive practices in South Korea. In the

financial area, a clause as to extra-territorial jurisdiction could be

found in data protection-related issues. We introduce a clause of the

Electronic Financial Transactions Act below.

Article 4 (Reciprocity)

This Act also applies to a foreigner or a foreign corporation:

provided that, with respect to any foreigner or foreign corporation of

the State which fails to provide protections corresponding to this Act

for any national or corporation of the Republic of Korea, any

protection under this Act or the treaties acceded to or concluded by

the Republic of Korea may be restricted commensurately therewith.



The Korean courts’ position on unilateral jurisdiction clauses is that

they are unenforceable. The Supreme Court, in a case where the

binding effect of an unilateral jurisdiction agreement stating one

party must sue the other party in a forum designated by the other

party was an issue, invalidated such clauses holding that the clauses

unjustly infringe upon the other party’s rights and violate the

principle of fairness (The Supreme Court’s decision dated

1977.11.9, case: 77ma284).

6 Regulated Bodies



Pursuant to Article 53 of the Act on the Establishment, Etc. of the

Financial Services Commission, the FSS processes the mediation

cases received from financial institutions and financial consumers

such as depositors and other interested parties when financial

disputes arise.



have?

The FSS is South Korea’s integrated financial regulator that

examines and supervises financial institutions under the broad

oversight of the Financial Services Commission (FSC), the

government regulatory authority staffed by civil servants. The FSS

has investigative/inquisitorial/sanctions powers. With regards to

enforcement power, all parties involved must consent to the

mediation plan to have the same effect as the reconcillation in a trial.



The mediation plan of the Financial Dispute Settlement Committee

(FDSC) of the FSS has the same effect as reconcillation in a trial

only when all parties consented to it. Given that financial

Barun Law LLC Korea

Kor

ea


institutions rarely object to the FSS’s mediation plan, practically it

has a unilateral binding effect as to the financial institutions.


exist?

Financial consumers can choose not to follow the FSS’s

recommendation to settle or the FSS’s decision not to refer the

matter to the FDSC or the FDSC’s mediation plan and file a lawsuit.

Financial institutions can also object to the same. However, given

that they are under the supervision of the FSS, financial institutions

usually submit to the FSS’s decisions considering its

investigative/inquisitorial/sanctions powers.


accessible?

Yes. Anyone can publicly access the decisions of the FSS on its

website (http://www.fcsc.kr/D/fu_d_03.jsp).










Korea experienced two major catastrophes with regards to its financial

consumers. One was the insolvency of many mutual savings banks in

2011, and the other was the mis-selling of corporate papers (CP) of the

Tongyang conglomerate in 2013. Thus, the Korean government

proposed the Financial Consumer Protection Act to build a framework

which covers the entire process of financial consumption: providing

prior information; selling financial instruments; and post-remedies for

damages. One of the main issues of the government proposal was to

build a new financial consumer protection agency that conducts

business on behalf of consumers’ profit and be relatively independent

from prudential matters of financial institutions. Although the

government proposal was abolished because of complicated interests

by many stakeholders, the discussion is still valid and there is the

possibility that the issues can be debated in the near future.



customer-friendly?

Given that the Korean government does not acknowledge the unilateral

binding authority of financial institutions with regards to the FDSC’s

mediation plan and that class actions are rarely used, it is more likely

that Korea will be considered to be more financial institution-friendly.





drawn from them.

Some life insurance companies sold “immediate annuities”, a policy

purchased with an upfront single lump-sum payment which starts

paying a guaranteed income pension almost immediately. And once

the policy matures, a policyholder was to receive the payout. The

dispute arose because insurance companies were meant to deduct

part of a payout as a working expense, but failed to specifically

mention it in the contract. A policyholder of one of the insurers’

immediate annuity plan filed a complaint with the FSS claiming that

the insurance payout he received was lower than specified in his

contract.

In the mediation, the FSS sided with the policyholder and ordered

the life insurers to return the disputed amount because the insurers

did not specifically mention the deductions in their contract terms.

The FSS ordered all life insurers to pay full compensation to all

policyholders of the “immediate annuities”. For the largest seller of

such policy, this meant paying KRW 430,000,000,000 to 55,000

policyholders. The insurance companies are defying the FSS’s

ruling claiming that they will turn to the courts to make a ruling on

the issue. There will be a heightened interest in the executive power

of the financial dispute mediation depending on the outcome of the

lawsuit.



jurisdiction?

Global economic changes did not cause much change to financial

services litigation/regulation in Korea.

Acknowledgment

Wonsik Yoon and Ju Hyun Ahn would like to acknowledge the third

author, Thomas Pinansky, and fourth author of this chapter, Seung

Hyun Kang.

Mr. Thomas Pinansky is a Senior Foreign Attorney at Barun Law

LLC. He plays a leading role in the firm’s international practice and

advises an extensive number of international and Korean clients on

business and legal issues arising in the context of international

operations, including international transactions, reorganisation

proceedings, and cross-border disputes. Mr. Pinansky has been

involved in over 200 cross-border M&A transactions and in over

120 international arbitration matters, either as an arbitrator or as

counsel. Mr. Pinansky recently completed a three-year term as a

Vice Chairman of the American Chamber of Commerce in Korea.

He serves on the Board of the Canadian Chamber of Commerce in

Korea and as Special Advisor to the Kiwi Chamber of Commerce in

Korea. He was appointed as the “Honorary Ambassador” of the US

State of Maine to Korea. He served two terms as the Chairman of

the Asia-Pacific Council of American Chambers of Commerce.

Barun Law LLC

Barun Law Building

92gil 7, Teheran-ro, Gangnam-gu

Seoul

Korea

Tel: +82 2 3479 7517 Email: [email protected] URL: barunlaw.com

Ms. Seung Hyun Kang is a Foreign Attorney at Barun Law LLC. As

a junior member of the Corporate Advisory Group, she assists

Korean and international clients on a broad range of corporate

issues. She is also involved in the international arbitration practice

at the firm.

Barun Law LLC Korea

Kor

ea


Wonsik Yoon

Barun Law LLC

Barun Law Building


Seoul

Korea


Ju Hyun Ahn

Barun Law LLC

Barun Law Building


Seoul

Korea


Mr. Wonsik Yoon is the Co-Chair of the International Arbitration &

Cross-Border Litigation Practice Group at Barun Law LLC. He is a

member of the Korean Bar Association and the State Bar of California.

Mr. Yoon has handled numerous international arbitration cases before

numerous institutions including KCAB, AAA/ICDR, LCIA, CAS and

ICC. He has also successfully represented domestic and foreign

clients in court proceedings in multiple jurisdictions including all levels

of the Korean courts. Mr. Yoon also has extensive experience in

practising general corporate, real estate, M&A, cross-border

investment and Japanese-related matters as well as international

dispute resolution. He currently serves as a director of the Korean

Arbitrators Association and a member of the international panel of the

Korean Commercial Arbitration Board. He was recognised by Asialaw

as a Leading Lawyer for Dispute Resolution & Litigation in 2016, 2017

and 2018.

Barun Law LLC (“Barun Law”) is Korea’s fastest growing and most dynamic full-service law firm. Founded in 1998, Barun Law has quickly taken its

place among Korea’s top full-service law firms. Conveniently located in Seoul’s Gangnam Business District, next to one of Asia’s largest and most

prestigious convention centre complexes, Barun Law is comprised of over 200 attorneys who, together with highly qualified support staff, provide a

full range of legal services.

The firm’s partners include some of the most prominent and well respected members of the Korean Bar, while a sophisticated and highly experienced

team of foreign lawyers adds international savvy and recognised expertise, creating a substantial comfort factor for international clients.

Mr. Ju Hyun Ahn is a Partner at Barun Law LLC. Unique among

lawyers, Mr. Ahn was a medical doctor before he passed the Korean

Bar Exam in 2007. Right after he completed his training at the Judicial

Research and Training Institute, he joined Barun Law LLC in 2010. He

has practised mainly in pharmaceutical and medical areas. In 2012,

Mr. Ahn entered the FSS as a senior investigator in the Dispute

Settlement Department and mediated disputes concerning various

types of insurance, including life insurance and indemnity insurance.

He continued his service as a Senior Bank and Credit Unions

examiner until 2016. After his studies, he returned to Barun Law LLC

in 2017, and since then he has vigorously engaged himself in the fields

of financial regulation and financial transactions, not to mention

pharmaceutical and medical practice in which he has demonstrated

outstanding professionalism.

Barun Law LLC Korea

Ms. Kang received her B.A. from Cornell University majoring in

China and Asia-Pacific Studies and received her J.D. from Boston

College Law School. She is fluent in Korean, English and

Chinese.

Barun Law LLC

Barun Law Building


Seoul

Korea


97

Chapter 17


Stibbe

Roderik Vrolĳk

Daphne Rĳkers

Netherlands





Liability arising from tort Art. 6:162 of the Dutch Civil Code (Burgerlijk Wetboek, “DCC”) states

that the party who commits a tort towards another person is required to

compensate the losses which the other party suffers as a result. In order to

succeed, an action on grounds of a tort must meet five requirements: (i)

unlawfulness; (ii) attributability; (iii) loss; (iv) causality; and (v) relativity.

Breach of contract When there is an attributable failure in the performance of an

obligation under a contract.

Breach of duty of care In financial services disputes, it is common for a plaintiff to claim that

duty of care or loyalty was breached by a financial institution. Under

Dutch law, the breach of duty of care is a wrongful act or a breach of

contract (or both). In principle, this means that compensation for

damages (schadevergoeding) can be claimed.


Under Dutch law, various remedies can be awarded in financial

services disputes, including the right to claim specific performance

of the contract (nakoming) or damages. Other remedies that can be

awarded are the rescission of the agreement (ontbinding), due to the

other party not fulfilling its contractual obligations, or annulment

(vernietiging) of the agreement due to undue influence,

misrepresentation or error. Damages can also be claimed along with

claiming specific performance or rescission of the contract.

Another remedy that can be awarded is a declaratory decision

(verklaring voor recht) confirming the existence (or absence) of a

certain legal relationship (e.g. the declaratory decision that an

agreement is null and void). In matters related to a breach of

contract or tort (onrechtmatige daad), a Dutch court can also issue

an injunction ordering a defendant to abstain from certain acts.




Both private individuals and commercial entities have a right of

action in financial services disputes. There is no difference if the

customer is a private individual or a commercial entity, even though

an individual customer might benefit from additional legal protection.

In addition, claims vehicles to which parties have assigned their

claims or statutory claim foundations may have a right of action in






this?

Third-party litigation funding is allowed in the Netherlands. It is

already common in mass claims, which are often litigated or settled

through special claims vehicles. With regard to individual claims,

third-party litigation funding is not particularly widespread. There

seems to be little interest from the judiciary as to whether or not

litigation in the courts is funded by a third party. At present, the

legislator does not seem inclined to regulate third-party funding.

Litigation insurance schemes operate in the Netherlands. This type

of insurance is particularly taken by private individuals and small

businesses.





Class actions law suits are permitted in the Netherlands. Under the

Collective Settlement of Mass Claims Act (2005) (Wet collectieve afwikkeling massaschade, “WCAM”), the Amsterdam Court of

Appeals can declare a collective settlement binding on all the

aggrieved parties, whether Dutch or foreign, on an opt-out basis.

The settlement agreement must be entered into by a special

litigation vehicle duly representing the interests of the aggrieved

parties and a party that has committed itself to compensate the

aggrieved parties, such entity not necessarily being the party that

caused the damages. This mechanism has often been applied with

great success in international mass claims. The special litigation

vehicle may be funded by third parties. Collective redress in group

actions is presently not possible, but the justice ministry is working

on an act enabling collective redress in group actions as well.

On 16 November 2016, a legislative proposal was introduced in the

Dutch Parliament, to amend the existing WCAM so as to permit

representative organisations to claim damages. The proposal

Net

herl

ands


intends to facilitate collective redress in the form of a collective opt-

out mechanism. It provides incentives to conclude the case with a

class settlement. Although it is still uncertain whether the proposal

will be adopted in its current form, or at all, the legislative process is

actively ongoing and an amended proposal was presented to

Parliament on 12 January 2018. The proposal in its current form

provides for a wide-scope rule for admissibility of collective

actions. Currently, the proposal bill is still pending in the Dutch

House of Representatives (Tweede Kamer).






case?

In general, court fees and legal fees could constitute barriers for

customers to start a legal procedure. Generally speaking, the

amounts of court fees are not considered prohibitive. The Financial

Services Complaints Tribunal (Klachteninstituut Financiële Dienstverlening, “Kifid”) available to private individuals is also a

cost-effective alternative to court proceedings.

Generally, customer contracts do not prevent customers from bringing

a case against a financial services provider. Such a clause would most

likely be unenforceable when included in contracts with retail clients.






clock’?

Dutch law provides for statute of limitation, imposing time limits

for a civil claim to be brought. This system of statutory limitations

of actions is known as verjaring and is laid down in the DCC. Most

causes of action in the Netherlands are subject to limitation periods

of five years, with a few types of claims having extra short (one to

two years) or extra-long (20 to 30 years) limitation periods.

Under Dutch law, a limitation period can be interrupted by:

1. Acknowledgment by the debtor.

2. Legal action (initiating civil legal proceedings; the

commencement of a regulatory process as such does not stop

the clock).

3. Any act of judicial recourse instituted in a legally required

form or in the form agreed by the parties.

4. Written warnings (in certain circumstances).

By interrupting a limitation period, a new limitation period will

begin on the day following the interruption.





Parties in financial services litigation can avail of legal privilege.

The rules on disclosure acknowledge professional legal privilege.

In addition, the request for inspection of documents may be refused

pursuant to weighty reasons, which could, in a particular case, result

in a privilege based on a statutory duty of confidentiality.




Dutch financial and non-financial institutions extensively make use

of derivatives. Most over-the-counter (“OTC”) derivatives are

entered into under an ISDA Master Agreement. Dutch law

generally does not affect the enforceability of provisions in the

Master Agreement on early termination and settlement of

transactions.





Financial institutions may have a special duty of care (bijzondere zorgplicht) vis-à-vis their retail clients. This duty of care cannot be

limited or excluded by contract.




There is no specialised court or specialist civil judge for financial

services litigation between private individuals and financial services

providers. A specific ADR Forum (Kifid) is however available,

which specialises in financial services litigation.

On 11 December 2018, the Dutch Senate approved the bill for the new

international trade chamber of the Amsterdam District Court, known

as the Netherlands Commercial Court (“NCC”), and the Netherlands

Commercial Court of Appeal (“NCCA”). This specialised trade

chamber offers professional market parties the opportunity to litigate

in English and will be able to give judgments in English.



There are two main types of civil proceedings in the Netherlands:

initiated by a draft of summons (dagvaarding); or by an application

(verzoekschrift). There is no specific method of service of proceedings for financial

service litigation.





In the Netherlands, there are no specific pre-trial procedures that

must be followed for financial services litigation.






jurisdiction?

In accordance with the Dutch Financial Supervision Act (Wet op het

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financieel toezicht, “Wft”), Dutch financial services providers are

required to be affiliated with a disputes agency. At present, the Kifid

is the only disputes agency recognised by the Minister of Finance

and it is a very often used means of dispute resolution in financial

services disputes.



Claims relating to negligent misstatements or mis-selling can be

based on liability arising from tort, breach of contract or a breach of

a duty of care.





jurisdiction?

In 2008, the Unfair Commercial Practices Act (Wet oneerlijke handelspraktijken) entered into force, which prohibits unfair

commercial practices and is enforced by the Dutch Consumer Authority

(Autoriteit Consument & Markt) and the Netherlands Authority for the

Financial Markets (Stichting Autoriteit Financiële Markten, the

“AFM”). It implements the European Directive concerning unfair

business-to-consumer commercial practices from 2005.

Dutch civil law and the Wft define a ‘consumer’ as any private

individual not acting in the pursuit of its business or profession.






Data protection and freedom of information may clash in financial

services litigation. Legal procedural documents are not published

by the courts. Commercially sensitive information and confidential

information may, in certain circumstances, be left out in the event of

a legal discovery or disclosure procedure. In order to protect

commercially sensitive information, a Dutch court can also impose

an obligation of confidentiality upon the recipient of such

information. Also, the court can order that certain documents are to

be deposited at the court where they can be studied in person, but not

photocopied. Furthermore, the parties can request the court to order

that the proceedings will be conducted behind closed doors. If such

request will be allowed, this means that the parties to the

proceedings cannot make statements to third parties about what was

discussed during the hearing. Finally, a judgment can be redacted

before it is published.

4 Post Trial


disputes?

Matter brought before the Dutch civil courts Yes, in the Netherlands there is a right of appeal in most financial

services disputes.

Kifid Disputes Committee and Appeals Committee The Kifid provides an alternative way of dispute resolution. If there

is a party that disagrees with a non-binding opinion, there is the

possibility to appeal to the Appeals Committee of the Kifid.


services disputes?

The court may order the losing party to cover the litigation costs of

the prevailing party, such as court fees, witness and expert fees and

fixed compensation for legal fees.





Disputes between financial institutions based in different countries

require specialist legal support to deal with the often complex issues

which result from multiple jurisdictions. The following conflict of

law issues may, in particular, arise: (i) the question of which

jurisdiction the claim can best be brought; (ii) other merits and

disadvantages of each possible jurisdiction; (iii) the applicable law

which governs the claim; (iv) any issues regarding potentially

relevant data and witnesses located in different jurisdictions; and (v)

the merits of challenging the jurisdiction.





The Dutch judiciary finds itself in a rapidly internationalised legal

order, both within the European Union and outside it. This demands

a wide cross-border perspective with regard to judicial cooperation

and international relations.

The AFM also works closely on a bilateral basis with a large number

of its fellow supervisory authorities in other countries both within

Europe and abroad. The AFM may enter into agreements with

national and international supervisory authorities in the form of a

covenant, a Memorandum of Understanding (“MoU”) or an

Exchange of Letters.

The Dutch Central Bank (De Nederlandsche Bank, “DNB”) sits on

several European bodies that consult and exercise supervision on

payment systems, securities transactions, insurers and pension providers.

Also, DNB is part of the European System of Central Banks and of the

Eurosystem. On a global cooperation level, DNB sits on several global

bodies that consult and exercise supervision on banks, payment systems,

securities transactions, insurers and pension providers.



Competent court The general rules for cross-border litigation apply. The starting point

is that a civil case can be brought before a Dutch court if the

defendant has its domicile in the Netherlands. However, there are a

few alternative methods to establish jurisdiction before Dutch courts.

On the basis of the Brussels I bis Regulation, tort claims may be

brought before the court in the place where the harmful event

occurred. In this context, the Kolassa/Barclays Bank case before the

Court of Justice of the EU is noteworthy.

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Claims can also be brought before a Dutch court if parties

contractually agree to do so.

With regard to proceedings for the binding declaration of

international settlements under the WCAM, the Amsterdam

Court of Appeal assumes jurisdiction rather easily, even if the

case is not substantively connected to the Netherlands. In three

WCAM cases, Shell (ECLI:NL:GHAMS2009:BIS5744),

Converium (ECLI:NL:GHAMS:2012:BV1026) and Fortis

(ECLI:NL:GHAMS:2017:2257), the Court assumed jurisdiction

with regard to the shareholders domiciled outside the

Netherlands, but within the EU, Switzerland, Iceland or

Norway, as their potential claims were ‘so closely connected’ to

the claims of the shareholders domiciled in the Netherlands that

it was ‘expedient to hear and determine them together to avoid

the risk of irreconcilable judgments resulting from separate

proceedings’.

The decision by the Court on international jurisdiction in

Converium implies that even if the case is not substantively

connected to the Netherlands, but a minority of the interested parties

are domiciled in the Netherlands, and one of the parties to the

settlement is a Dutch entity, the Court will assume jurisdiction.

The WCAM was developed exclusively as a mechanism to offer the

opportunity to give a wide effect to settlements reached. The

international relevance of the Dutch mechanism for collective

settlements has increased and the Netherlands may become a serious

alternative for the certification of collective settlements involving non-

US investors in non-US securities listed on a non-US stock exchange.



Unilateral jurisdiction clauses are valid in the Netherlands. Claims

can also be brought before a Dutch court if parties contractually

agree to do so.

6 Regulated Bodies



The AFM is responsible for conduct-of-business supervision on the

Dutch financial markets, which aims, among other things, to foster

orderly and transparent market processes, maintain integrity in the

relationship between market parties and protect consumers. As

such, the AFM also has an impact on the regulation of financial

services disputes in the Netherlands.

DNB is responsible for prudential supervision of the Dutch financial

markets.



have?

DNB and the AFM have the discretionary power to investigate and

enforce (alleged) breaches of the Wft and the rules promulgated

thereunder.

To enforce compliance, the AFM and DNB can take both informal

and formal action:

The Dutch regulators regularly use informal methods such as

entering into discussions about a (perceived) violation of standards

or sending a warning letter. The Dutch regulators may also impose

the following administrative sanctions (among others) without prior

judicial authorisation:

■ order a certain course of action to comply with the Wft

(instruction order);

■ order a particular duty, backed by a penalty for non-

compliance;

■ give an administrative fine; and

■ withdraw or limit the licence of a financial undertaking.

The regulators may request information and seek access to business

data and documents. In principle, everybody has a duty to cooperate

with the financial regulators. The regulators and their employees are

subject to a general confidentiality obligation regarding information

obtained through their work under the Wft. However, they may

share information with, among others, the Netherlands Consumer

and Market Authority (Autoriteit Consument & Markt, “ACM”), the

tax authorities and the public prosecutor.



Yes, an administrative decision of the AFM or DNB is binding on

the parties to a financial services dispute.


exist?

Written objection (bezwaar) An interested party is, in principle, able to object to a decision, within a

period of six weeks (art. 6:7 of the General Administrative Law Act

(“Awb”)). Objection takes place by lodging an objection to the financial

regulator who made the enforcement decision (art. 6:4(1) of the Awb).

During the objection stage, the financial regulator has to reconsider the

decision made at the objection (art. 7:11(1) of the Awb). To the extent

that reconsideration gives cause to do so, the AFM or DNB revokes the

decision made and makes a new, replacement decision. In principle, the

interested party may not be put in a worse position than the position he

would have been in if he did not object (reformation in peius). With respect to a number of decisions, direct appeal to the Trade and

Industry Appeals Tribunal (“CBb”) is possible, so the objection

stage can be skipped.

Appeal and further appeal (beroep en hoger beroep) The interested party can lodge an appeal against the decision on

objection within six weeks (art. 6:7 of the Awb). An appeal with

respect to an enforcement decision which is made on the ground of

the Wft has to be lodged with the Court of Rotterdam (art. 8:6 jo.

Annex 2 and art. 7 of the Awb). Against the judgment of the Court

of Rotterdam, a further appeal can be lodged with the CBb (art.

8:105 jo. Annex 2 and art. 11 of the Awb).

The further appeal is directed against the judgment of the court.

This further appeal can be lodged by the addressee of the sanction

decision, but also by the AFM or DNB. After a further appeal has

been lodged, the other party can lodge a cross-appeal, whether

conditionally or not (art. 8:110 of the Awb).


accessible?

Yes. In accordance with the Wft, the Dutch regulators will, in

principle, disclose their decision to impose an administrative

sanction pursuant to the Wft. The disclosure will take place as soon

as the decision has become irrevocable.

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The financial crisis and its aftermath have triggered a substantial

wave of legislation, both at an EU and a national level. National

developments include restrictions on remuneration applicable to the

financial industry generally (in addition to applicable restrictions at

an EU level), a national resolution and recovery regime for

insurance companies, the introduction of a generic duty of care in

financial supervision legislation, the introduction of a banker’s oath

and an expansion of information and enforcement powers of

regulators.



customer-friendly?

The Netherlands follows a relatively middle course on this topic.

Pacta sunt servanda is one of the underlying principles of Dutch

civil law: if a party fails to comply with its obligations, these

obligations, or associated security rights, can be enforced, which

also includes cases where enforcement leads to tough or pitiful

situations. At the same time, all obligations under Dutch law are

governed by the principle of reasonableness and fairness. This, in

combination with the function of banks in society and their position

as professional service providers, has in case law resulted in a so-

called special duty of care of banks towards their clients. These

mechanisms provide financial situations with the possibility to

conclude binding and enforceable agreements, while at the same

time protecting the legitimate interests of their contracting parties.





drawn from them.

Recently, the European Court of Justice rendered a judgment that

limits the obligation of confidentiality to which financial

supervisory authorities are bound (see Case C-15/16 Bundesanstalt

für Finanzdienstleistungsaufsicht v Ewald Baumeister). The

European Court of Justice decided that the mere fact that

information is present in files of the financial supervisory authority

does not automatically render that information confidential. In

addition, the European Court of Justice held that commercial

information that is older than five years is, in principle, considered

outdated and no longer subject to the obligation of confidentiality.

We have also seen an increase in the number of cases in the

Netherlands in which parties lodge a demand, either against the

opposing party or a third party, to provide certain information or

documents in support of their claim, in financial services disputes.

The criteria to allow such a request are quite broad. Nevertheless,

case law shows that – provided sound and specific reasoning is

given – financial institutions are able to keep their internal

deliberations confidential. In addition, the Dutch Supreme Court

made clear in a recent judgment that the obligation of confidentiality

of financial supervisory authorities, such as the AFM, regarding

information about regulated parties, cannot be ‘circumvented’ by

requesting the information exchanged with the supervisory

authority from the regulated party itself. Lastly, a significant

number of cases in financial services disputes over the past year

concerned the duty of care of financial institutions towards their

customers.



jurisdiction?

Against the historic back-drop of the financial crises and given the

current period of relative global economic growth, we notice that

the Dutch legislator has specifically taken steps to limit the chances

that the errors from the past will be made again. It, for instance,

tackled ‘overlending’ by, among other things, implementing rules

that prevent consumers on the housing market from borrowing an

amount equal to the full market value of a property, meaning that

consumers have to put in their own money as well.

Acknowledgment

The authors would like to acknowledge the invaluable contribution

of their colleague, Niels Didden, in the preparation of this chapter.

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Roderik Vrolijk

Stibbe

Beethovenplein 10

1077 WM Amsterdam

Netherlands

Tel: +31 20 546 01 58 Email: [email protected] URL: www.stibbe.com/en

Daphne Rijkers

Stibbe

Beethovenplein 10

1077 WM Amsterdam

Netherlands

Tel: +31 20 546 09 54 Email: [email protected] URL: www.stibbe.com/en

Advising financial institutions active both nationally and internationally,

Roderik provides advice in respect of securities law and financial

supervision – specialising in financial markets regulation in the

broadest sense. His expertise is built on experience in Stibbe’s

banking and capital markets practice in Amsterdam, where he acted

on a large number of significant financing transactions, IPOs and M&A

transactions in the financial services industry. Furthermore, Roderik is

regularly active in the area of institutional asset management, acting

for some of the world’s largest asset managers as well as for

institutional investors. Roderik has a Master of Laws from Utrecht

University (2008, cum laude). He also attended the Stibbe MBA

Highlights Programme (2015). In addition, Roderik is a member of the

Dutch Association for Securities Law and is a member of the editorial

board of the Dutch Financial Law Review.

Stibbe is an independent law firm with around 400 lawyers advising on the laws of the Netherlands, Belgium and Luxembourg, as well as EU law.

Stibbe has main offices in Amsterdam, Brussels and Luxembourg and also branch offices in Dubai, London and New York.

Daphne specialises in commercial litigation, combining her expertise

on complex cases with clear pragmatism.

She handles a variety of matters such as corporate fraud, contractual

and tort disputes, matters of enforcement and execution of claims.

Daphne is experienced in civil attachment law and regularly advises

international clients on the execution of foreign judgments in the

Netherlands. In addition, she represents financial institutions in

proceedings regarding financial disputes.

Daphne attended the Stibbe MBA Highlights Programme at INSEAD

(2017).

Stibbe Netherlands

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Chapter 18

ICLG TO: FINANCIAL SERVICES DISPUTES 2019 WWW.ICLG.COM

MinterEllisonRuddWatts

Jane Standage

Matthew Ferrier

New Zealand





There are a range of different causes of action brought against

financial services institutions including typical commercial causes

of action (e.g. breach of contract and negligence) and regulatory

prosecutions.

The main regulators of financial institutions in New Zealand are the

Financial Markets Authority (FMA), the Reserve Bank of New

Zealand (the Reserve Bank) and the Commerce Commission.

They have statutory rights of action – criminal and civil – under (for

example) the Financial Markets Conduct Act 2013 (FMCA),

Financial Advisers Act 2008, the Fair Trading Act 1986 and the

Credit Contracts and Consumer Finance Act 2003 (CCCFA).

There has not been a large volume of litigation by the main financial

regulators in the past 12 months as the FMA and the Reserve Bank

have been focused on a thematic Conduct and Culture Review of the

banking, insurance, superannuation and financial adviser sectors.

This review was the New Zealand regulators’ response to the issues

raised in the Australian Royal Commission into Misconduct in the

Banking, Superannuation and Financial Services Industry.

Recent causes of action in regulatory proceedings, however, relate

to insider trading, market manipulation, untrue or misleading

statements in offer documents, failing to meet continuous disclosure

requirements, and failure to meet record keeping, monitoring and

reporting obligations under anti-money laundering and countering

financing of terrorism legislation.

The Commerce Commission is also active with a key focus on

responsible lending primarily targeting high-cost, short-term and

online lenders rather than major financial institutions. Relevant

causes of action in this sphere are under the Fair Trading and

Consumer Credit Contract legislation.


The main remedies are monetary. For instance, damages for loss in

ordinary civil proceedings, civil pecuniary penalties and

compensation orders in civil regulatory proceedings, fines and

reparation orders in criminal prosecutions, and compensation orders

for complaints resolved by dispute resolution schemes.

The FMA may also prohibit organisations from doing certain things

(e.g. offering financial products, distributing disclosure documents).

It can also (for example) de-register organisations from being

Financial Service Providers (FSPs) and make banning orders.

Criminal offences can result in imprisonment.

Disciplinary proceedings against Authorised Financial Advisers

(AFA) can result in a range of penalties, most commonly including

censuring the AFA, imposing a fine or making a recommendation

that the FMA cancel or suspend an AFA’s authorisation.




An individual or entity can bring a claim for breach of contract or

negligence against a financial services entity. Under the FMCA,

individuals or entities can also bring claims for compensation or

seek other remedies such as variation or cancellation of an

agreement or an order restraining rights in relation to financial

products. These claims arise, for example, for breach of the fair

dealing provisions under Part 2 of the FMCA (prohibitions on

misleading and deceptive conduct in dealing in financial products or

supply or promotion of financial services) or for false or misleading

statements in offer documents. Under the Financial Advisers Act

2008, persons receiving “financial adviser services” can also claim

compensation for losses as a result of breaches of duties such as the

duty to exercise care, diligence and skill. However, the Financial

Advisers Act is set to be repealed by the Financial Services

Legislation Amendment Bill (FSLAB) with those duties being

incorporated into the FMCA (see question 7.1 below).

The FMA can itself also prosecute a financial services entity or a

person who has contravened the FMCA. Under s 34 of the FMA Act

2011, the FMA has the right to bring proceedings on behalf of

financial markets participants where it is in the public interest for it

to do so. This provision permits the FMA to bring an action on

behalf of a class of financial markets participants.





this?

Litigation funding is available in financial services litigation in New

Zealand. The New Zealand courts do not currently regulate

litigation funding arrangements, save that they will ensure that

litigation funding does not result in an abuse of process. The New

Zealand Law Commission is currently reviewing the regulation of

litigation funding.


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“Litigation” or “after the event” insurance is available in New

Zealand, but is not common. This may be because the New Zealand

courts generally award costs on a scale basis (i.e. less than actual

costs – see question 4.2 below) and so exposure to an adverse costs

award may be less than in other jurisdictions.





New Zealand does not have a formal legal framework for dealing with

class actions; however, these proceedings are permitted under High

Court Rule 4.24. This Rule allows one or more persons to sue or be

sued “on behalf of or for the benefit of all persons with the same interest in the subject matter of a proceeding” with the consent of

persons with the same interest or following an application to the court.

Class actions are relatively new in New Zealand; however, the

courts have generally taken a permissive approach towards

applications to commence such proceedings. This has led to an

increase in class actions in recent years. Notable class actions have

included the “Fair Play on Fees” class action, which was issued

against the major banks in New Zealand in relation to fees charged

for the late payment of credit cards, unarranged overdrafts and

dishonoured payments, and the Feltex litigation, discussed at

question 7.3 below.






case?

The cost of court proceedings can be a barrier. However, all FSPs

registered in New Zealand must belong to an approved dispute

resolution service which provides free resolution of claims under

$200,000 (see question 3.4 below). New Zealand also allows class

actions and third-party litigation funding – see questions 1.4 and 1.5

above.

Exclusionary clauses and duty defining clauses are sometimes used

in financial services contracts. However, these clauses are subject to

potentially being declared “unfair” under the unfair contract terms

provisions in the Fair Trading Act 1986 if the term is contained in a

standard form consumer contract and causes “significant

imbalance” between a consumer and the financial entity and is not

necessary to protect legitimate interests of the financial entity.

However, a term is only unfair if the New Zealand Commerce

Commission obtains a declaration from the courts. The law on

unfair terms is currently under review.






clock’?

This depends on the type of proceedings being filed.

Civil disputes will be brought before the courts and, in that event,

will generally have a six-year statutory limitation period from when

the relevant act or omission occurred. The limitation period in

respect of criminal offences generally depends on the maximum

penalty for the offence (and can be six months, 12 months or five

years), but there are exceptions in particular Acts. The more

common offences under the FMCA have a three-year limitation

period beginning after the date on which the offence was committed.

A regulatory process does not “stop the clock” and so there can

sometimes be a flurry of activity to complete investigations in

regulatory matters around the limitation period and sometimes

proceedings (both civil and criminal) are commenced in order to

stop the clock whilst the investigation continues.

Complaints to authorised dispute resolution schemes under the FSPs

process have time limits based around the time of a “deadlock”. A

complainant has to first complain to the FSP and if the provider does

not respond within a set timeframe, or there is a deadlock, a

complaint can be made to the provider’s dispute resolution scheme.

The complaint to the scheme has to be made within two months of

the deadlock occurring. There is no long-stop.





Parties to financial services litigation can avail themselves of

litigation privilege and/or legal advice privilege.

It is also likely that entities subject to regulatory investigations can

claim litigation privilege in relation to information and

communications made during the course of regulatory investigations.

Litigation privilege can be claimed in relation to communications

made for the dominant purpose of preparing for an apprehended

proceeding, and a proceeding may well be apprehended where a

regulatory investigation has commenced.




The ISDA Master Agreement is used in New Zealand and is

amended as necessary to suit the transaction. There are standard

form agreements for different sectors of the financial services

industry. For instance, banks have standard terms and conditions

which apply to customers and there are standard form documents

such as the Auckland District Law Society forms for mortgages.





There are duties under the FMCA and the Financial Advisers Act

2008 which require (for example) that financial advisers must act

with care, diligence and skill and not engage in misleading or

deceptive conduct. In addition, AFAs must comply with the

minimum standards in the Code of Conduct for AFAs. There is no

right to contract out of these statutory duties or the Code. See

question 7.1 below for a discussion of reforms to these duties and

the Code as a result of the FSLAB. In addition, there is the Code of

Banking Practice which is governed by the Banking Ombudsman.

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No; however, the New Zealand High Court does operate a

“Commercial List”. The purpose of this List is to allow for efficient

case management; when a case is ready for hearing, it is transferred

back to the general list and will be heard by any High Court judge.



No, it does not differ.





No – but class actions have different procedures and there is a

Commercial List.






jurisdiction?

All entities which provide financial services to retail clients must

belong to an approved dispute resolution scheme (e.g. the Banking

Ombudsman). Retail clients can make claims of up to $200,000 in

this forum. The dispute resolution service is free and results in a

binding decision on the FSP. However, if the claim is for more than

$200,000, the normal route is via the courts.

Parties can choose to resolve disputes by mediation and arbitration

in New Zealand. However, ADR clauses are not commonplace in

financial services contracts in New Zealand. Sophisticated parties

sometimes prefer to have an ADR clause for significant financial

services contracts where privacy and the ability to select the

decision-maker (arbitrator) are important to the parties.



Negligent misstatement and mis-selling claims are dealt with under

a number of different statutes:

■ the Fair Trading Act 1986 prohibits misleading or deceptive

conduct in trade;

■ the FMCA prohibits false or misleading representations about

financial products or services, and unsubstantiated

representations. If these provisions are breached, the FMA

can prosecute and (amongst other things) apply for a

pecuniary penalty order; and

■ the Contract and Commercial Law Act 2017 provides for

damages where a party has been induced into a contract by

misrepresentation, whether innocent or fraudulent. These

damages are to be calculated as if the representation were a

term of the contract that has been breached.





jurisdiction?

The Fair Trading Act 1986 allows the Commerce Commission to

apply to the court for a declaration that a term in a standard form

consumer contract is unfair. If that declaration is made, it cannot be

included in any standard form agreement or enforced. “Consumer contract” is defined broadly to include any contract that involves the

acquisition of goods or services for personal, domestic or household

use.

A term will be declared “unfair” if it creates a significant imbalance

in the consumer’s rights under the contract to their detriment and if

the term is not reasonably necessary in order to protect the interests

of the advantaged party. A term will, however, be exempt from

these provisions if it is part of the main subject matter of the

contract.

A discussion paper has recently been released by the Ministry of

Business, Innovation and Employment on whether the unfair terms

rules should be extended to businesses.






A financial services customer can access their personal data, in the

same way that any individual may request access to personal

information, held by an agency, under the Privacy Act 1993.

Privacy Principle Six provides that, where an agency holds personal

information in such a way that it can readily be retrieved, the

individual concerned shall be entitled to obtain confirmation from

the agency about whether or not it holds personal information, and

have access to such information.

There is an obligation on an agency to respond within 20 working

days of receiving a request, unless an extension of time applies. An

agency is also able to refuse access to personal information where

disclosure would breach legal professional privilege or would

involve disclosure of the affairs of another individual. In addition,

from a practical perspective, an agency may refuse a request if the

information is not readily retrievable, does not exist or cannot be

found. While most information is “retrievable”, if it will be

unreasonably costly or difficult to retrieve information it is unlikely

to be considered “readily retrievable”. Where an agency refuses a

request, it must cite the reason for its refusal.

Parliament is in the process of reforming the Privacy Act. The aim

of the reform is to restore individuals’ confidence in agencies that

their personal information is secure and to provide the Privacy

Commissioner with greater powers to address failures by agencies

to handle personal information appropriately. Access to personal

information is an area where agencies have been somewhat relaxed

in their approach to compliance. Accordingly, the Bill proposes to

bolster the powers of the Privacy Commissioner so that its decisions

on access requests are binding. This includes the ability to set a

deadline for when an agency will be required to comply with a

request, and a $10,000 fine if an agency, without reasonable excuse,

fails to comply with an access order.


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Regarding commercially sensitive or confidential information, this

information is still discoverable in civil proceedings if the

information is relevant to the substance of the proceeding.

However, parties can seek orders from the court to protect such

information such as agreeing that certain information will not be

disclosed to the public and/or that the information will only be

provided on a counsel-to-counsel basis.

4 Post Trial


disputes?

There is a right of appeal against any court decision in New Zealand.


services disputes?

In general, a successful party to litigation is entitled to costs. Costs

are ordinarily awarded on a “scale” basis, with proceedings

classified according to their complexity and significance. These

“scale” costs are intended to allow for the recovery of two-thirds of

the party’s actual legal costs.

The courts may award increased costs if a party has contributed

unnecessarily to the time or expense of the proceeding or the nature

of the proceeding is such that the time required would substantially

exceed the maximum scale costs available. The courts may also

award indemnity costs where a party has acted vexatiously,

frivolously, improperly or unnecessarily in commencing, continuing

or defending a proceeding, or has ignored or disobeyed an order or

direction of the court.





The key questions in a cross-border financial dispute are whether

the New Zealand courts have jurisdiction to hear the dispute and

whether the New Zealand courts are the most convenient forum.

The New Zealand courts will have jurisdiction if proceedings are

properly served under New Zealand law on a person or entity.

Whether New Zealand is the most convenient forum will depend on

factors such as location of witnesses, existence of litigation in

another jurisdiction and the law governing the dispute.

Focusing on service of proceedings, under New Zealand law, New

Zealand proceedings can be served on a defendant outside New

Zealand as of right in specified circumstances, e.g. where the

contract at issue is governed by New Zealand law or was entered

into in New Zealand. In other circumstances, the claimant will need

to obtain leave from the New Zealand courts to serve proceedings

outside New Zealand and must show that the claim has a real and

substantial connection to New Zealand.

Where a defendant does not have assets in New Zealand one of the

key issues for plaintiffs is how to enforce New Zealand court

judgments overseas. This depends on reciprocal agreements

between New Zealand and the relevant jurisdiction.

Similarly, foreign judgments against New Zealand financial entities

have no direct operation in New Zealand but can be enforced either

by registering the judgment under the Reciprocal Enforcement of

Judgments Act 1934 (which only applies to a specific list of

jurisdictions) or by bringing an action in the New Zealand courts

based on the common law.

There is now a special regime under the Trans-Tasman Proceedings

Act 2010 which streamlines service of New Zealand proceedings in

Australia, introduces statutory criteria for determining appropriate

jurisdiction and registration of judgments.

Arbitral awards are binding under the New Zealand Arbitration Act

1996 except in limited circumstances.

See question 5.2 below for a summary of how the New Zealand

courts and financial regulators co-operate with overseas regulators.





The New Zealand courts and regulators seek to co-operate and assist

foreign courts in financial services disputes by, for example:

■ enforcing arbitral awards in New Zealand irrespective of the

country in which the award was made. To be enforceable in

a New Zealand court, an arbitral award must simply be valid

under law, relate to a dispute capable of being settled by

arbitration under New Zealand law, and follow the correct

procedure in accordance with the agreement between parties;

■ enforcing subpoenas, whether they were issued in New

Zealand or Australia; and

■ the New Zealand High Court has the power to make freezing

orders in aid of substantive foreign proceedings.

In addition, regulators assist in obtaining evidence for proceedings

taking place in overseas jurisdictions. The FMA may obtain

information, documents or evidence that, in its opinion, is likely to

assist with a request by overseas regulators.



Generally, New Zealand law does not apply to activities, property or

persons outside New Zealand. However, under the FMCA, some

provisions apply to conduct outside New Zealand. For instance,

under s 33 of the FMCA, the fair dealing provisions (which prohibit

misleading and deceptive conduct in relation to dealing in financial

products or the supply or possible supply of financial services)

apply to conduct outside New Zealand by any person resident,

incorporated, registered or carrying on business in New Zealand to

the extent the conduct relates to dealing in financial products or

supplying financial services in New Zealand.

The laws on insider trading, market manipulation, continuous

disclosure, disclosure of substantial product holders in listed issuers

and disclosure of relevant interests in financial products by directors

and senior management of listed issuers all apply to conduct in

relation to quoted financial products or listed issuers regardless of

whether the conduct is in New Zealand or outside New Zealand.



Unilateral jurisdiction clauses require one party to bring proceedings

in one jurisdiction only and permit the other party to choose where to

sue. These clauses are enforceable as between financial business

entities in New Zealand. However, if this type of clause is included


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in standard form financial consumer contracts (agreements with

consumers where the terms have not been subject to effective

negotiation between the parties), there is a risk they could be

declared by the courts to be unfair – see above at question 3.6.

6 Regulated Bodies



All entities which provide financial services to retail customers

must belong to a dispute resolution scheme (e.g. the Banking

Ombudsman). The Financial Advisers Disciplinary Committee

(FADC) conducts disciplinary proceedings arising out of

complaints regarding adviser conduct. The FMA, Commerce

Commission and Reserve Bank of New Zealand have powers to

investigate a range of financial services issues and to seek

enforcement action and sanctions.



have?

The FMA has enforcement powers including giving direction

orders, issuing temporary banning orders or stop orders, revoking

licences, or seeking injunctive relief, banning orders and other relief

in respect of payment/transfer of funds or other property from the

High Court. The FMA also has a right under s 34 of the FMA Act

2011 to bring proceedings seeking compensation on behalf of

financial markets participants where it is in the public interest. The

FMA can also require production of information or require a person

to give evidence in person under s 25 of the FMA Act and has search

powers under s 29 of the same Act. At the lower end of the

enforcement spectrum, the FMA can issue infringement notices or

public warnings, or accept undertakings and enforce them in the

High Court if there is non-compliance with those undertakings.

The Commerce Commission has powers under the CCCFA to

investigate and take action in relation to credit contracts and

consumer credit contracts. The Reserve Bank of New Zealand

(New Zealand’s central bank), which is responsible for undertaking

prudential supervision of regulated banks, has information

gathering powers, can require that the registered bank provide a

report prepared by an approved person on certain matters relating to

the registered bank and, in certain circumstances, has search and

seizure powers.



Generally, proceedings are brought before another body, such as a

court or tribunal, and it is the decision of that body which is binding

on the parties to the dispute rather than any decision of the regulator.

Some decisions of regulators are binding, however, such as the

decision to use compulsory information gathering powers, issue

confidentiality orders, and make temporary banning orders referred

to above at question 6.2.

The FMA can also direct the Registrar of the Financial Service

Providers Register (FSPR) to de-register and/or prevent the

registration of institutions and individuals where there is potential

harm to consumers or New Zealand’s financial markets. These

decisions are binding.

Dispute resolution schemes, which are quasi-regulatory bodies,

have authority to determine complaints against FSPs (where they

are members of the scheme) and can make decisions that are binding

on the FSP.

Disciplinary decisions of the FADC are binding on the AFA in

question.


exist?

The use of compulsory investigative powers are not subject to rights

of appeal, but can generally be challenged in the High Court’s

supervisory jurisdiction relying on traditional judicial review

grounds (although this is rare).

Temporary banning orders made by the FMA are subject to a right

of appeal to the High Court on a question of law only.

A direction that a business or individual should be de-registered

from and/or prevented from registering on the FSPR is subject to a

right of general appeal to the High Court.

There is no right of appeal from decisions of authorised dispute

resolution schemes in relation to FSPs but these decisions are only

binding on the provider if accepted by the complainant, so can be

taken elsewhere, including to the courts.

Decisions of the FADC to take disciplinary action against an AFA

can be appealed to the District Court.


accessible?

Decisions of regulatory bodies are not always publicly accessible

and will depend on whether the decision is confidential or

commercially sensitive.










2018 saw scrutiny in Australia of financial services entities as a

result of the Australian Royal Commission into Misconduct in the

Banking, Superannuation and Financial Services Industry. This was

echoed in a review by New Zealand regulators of the major banks

and life insurers’ conduct and culture.

The regulators identified weaknesses in banks’ governance and

management of conduct risks, and “significant gaps” in the

measurement and reporting of customer outcomes. Banks will each be

working on a plan to address their specific risks identified by the

FMA/Reserve Bank. Conduct and culture will be an ongoing focus for

all financial market participants with the FMA expecting participants

(not just banks) to proactively focus on measuring themselves against

the FMA’s Guide to Conduct dated February 2017. As noted above at

question 6.2, the FMA has a wide range of investigative and

enforcement tools which were bolstered following the GFC when the

FMCA was passed. We expect the FMA be on the look-out for

appropriate opportunities to flex those enforcement muscles.


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The reform of the financial advice regime continues with the

FSLAB likely to be passed in 2019. The Bill repeals the Financial

Advisers Act and moves the adviser duties to the FMCA. It also

creates new duties such as the duty to give priority to clients’

interests and the duty on Financial Advice Providers (FAPs) not to

give or offer to give inappropriate incentives. Furthermore, the Bill

states that FAPs must also take all reasonable steps to ensure:

persons engaged to provide regulated advice comply with their

duties under the legislation; and that FAPs have effective processes

and controls to oversee representatives and not provide

inappropriate incentives that are likely to have the effect of

encouraging a representative to engage in conduct that contravenes

the duty provisions. Following this, a new version of the Code of

Conduct for financial advisers is expected to be finalised by mid-

2019. Financial entities will then transition to a new licensing

regime.

There has also been considerable focus on the Anti-Money

Laundering/Countering Financing of Terrorism Act 2009 with some

of the first civil proceedings filed with substantial fines sought. In

the lending sector, the Commerce Commission has continued to

focus on responsible lending principles under the CCCFA and

compliance with the Responsible Lending Code.

See question 7.3 below for a discussion on significant cases.



customer-friendly?

This is finely balanced, but probably more consumer-friendly.

There is strong consumer protection legislation and the regulators

are increasingly active. There is also a clear expectation from key

financial regulators – the FMA and the Reserve Bank in particular –

that financial institutions should not just comply with the law but be

focused on delivering good customer outcomes.

Against that, the jurisdiction is generally not litigious and ordinary

civil proceedings against financial services institutions by private

citizens are not overly common.

The recent thematic Conduct and Culture Review carried out by the

FMA and Reserve Bank (referred to above at questions 1.1 and 7.1)

is likely to tip the balance toward a consumer-friendly focus for the

foreseeable future. It is being promoted by the regulators (and is

seen by financial institutions) as a clear shot across the bows. The

relatively recent influx of litigation funders, and developing activity

in the class action area, is likely to cement this.





drawn from them.

Over the past 12 months, the financial services sector has been

focused on the Conduct and Culture Review conducted jointly by

the Reserve Bank and the FMA; however, recent significant cases

include:

■ Warminger: this case concerned alleged market manipulation

by a fund manager at an investment bank, and is the first New

Zealand case which analyses what does and does not amount

to market manipulation. In this case, a $400,000 penalty was

imposed.

■ Feltex: this case was brought by a large number of former

shareholders in Feltex in relation to misstatements included

in that company’s 2004 prospectus. Feltex went into

receivership in 2006, resulting in a total loss to its

shareholders. There was an issue as to whether a revenue and

dividend forecast amounted to an untrue statement and

whether it could give rise to liability. The Supreme Court

held in August 2018 that this forecast could give rise to

liability, provided that investors acquired shares in reliance

on the prospectus generally, and that they suffered loss as a

result. This decision is significant because it demonstrates

that reliance and loss will not be difficult to prove. Reliance

will be satisfied if an investor relied on a prospectus

generally; they do not need to have read the prospective or

relied on the specific statement said to be untrue. Investors

will have suffered a loss if the price they paid for shares was

higher than if the prospectus had not been misleading.

■ Ping An: in this case, the Court ordered a money remitter to

pay a $5.3 million pecuniary penalty for breaches of the Anti-

Money Laundering and Countering Financing of Terrorism

Act 2009. The defendant had received a warning in mid-

2015. This case evidences that the Department of Internal

Affairs will monitor entities who have been warned about

their compliance, and will prosecute if adequate steps to

ensure compliance are not taken.



jurisdiction?

The global financial crisis (GFC) led to an overhaul of the way

financial markets were regulated in New Zealand. In 2011, the

FMA was established to promote and facilitate the fair, efficient and

transparent financial markets (previously the regulator was the

Securities Commission). The FMCA and the Financial Advisers Act

both resulted from the GFC reforms.

As noted above, the Royal Commission in Australia has had a flow-

on effect in New Zealand.


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Jane Standage


Lumley Centre, Level 20

88 Shortland Street

Auckland 1010

New Zealand

Tel: +64 9 353 9754 Email: [email protected] URL: www.minterellison.co.nz

Matthew Ferrier


18/125 The Terrace

Wellington 6011

New Zealand

Tel: +64 4 498 5057 Email: [email protected] URL: www.minterellison.co.nz

Jane is a partner in MinterEllisonRuddWatts’ Dispute Resolution team.

She is an experienced litigator with particular expertise in banking and

financial services litigation, class action disputes, complex contractual

disputes, and disputes involving issues of companies and securities

law.

Jane has acted on large-scale commercial disputes in New Zealand

and internationally. She regularly advises clients in relation to

regulatory investigations and engagement with the New Zealand

regulators. In addition, Jane has: acted for one of the top four audit

firms defending a professional negligence claim in relation to audit

engagements; acted in proceedings against an investment fund which

invested client money in Madoff feeder funds; and acted for a major

New Zealand bank in defence of a class action claim regarding

account fees and credit fees.

Prior to returning to New Zealand, Jane was an associate at Allen &

Overy in London and completed her LL.M. at New York University.

MinterEllisonRuddWatts is one of New Zealand’s premier law firms.

The legal teams collaborate to deliver exceptional outcomes for clients. The firm’s dedicated financial services team is at the forefront of

development in this highly regulated and fast-evolving sector. The team provides seamless solutions from managing regulatory requirements to

resolving disputes. In 2018, the firm has advised clients in relation to the FMA/Reserve Bank Conduct and Culture Review in the financial services

sector and other substantial financial services regulatory investigations.

The team is regarded as opinion leaders on new regulatory and market developments affecting the financial services sector such as the Financial

Markets Conduct Act, the Financial Advisers Act, the Anti-Money Laundering and Countering Financing of Terrorism Act, and on providing guidance

in relation to dealing with the FMA, Commerce Commission and Reserve Bank of New Zealand. The team is also experienced in advising insurers

under the Insurance (Prudential Supervision) Act.

Matthew is a senior associate in MinterEllisonRuddWatts’ Dispute

Resolution team.

He has a broad commercial litigation and regulatory practice and

significant experience assisting clients respond to regulatory and

criminal investigations. He is a member of the team currently advising

a major Australasian bank in relation to the Conduct and Culture

Review being carried out jointly by the main regulators in New

Zealand, the Financial Markets Authority and the Reserve Bank of

New Zealand.

Prior to joining MinterEllisonRuddWatts, Matthew was a senior Crown

prosecutor working for the office of the Crown Solicitor in Wellington.

In addition to Crown prosecution and civil litigation work, he acted for

a number of major regulators in relation to both civil and criminal

regulatory enforcement, including the Financial Markets Authority and

Serious Fraud Office. In 2016, Matthew spent nine months on

secondment in the Financial Markets Authority’s litigation team.


Chapter 19


Wolf Theiss

Peter Daszkowski

Marcin Rudnik

Poland





Causes of actions taken against financial institutions vary depending

on the circumstances of each case; however, one of the most

common causes are disputes concerning Swiss franc loan

agreements. In the past (years 2005–2007), loans denominated in

Swiss francs were particularly popular in Poland, as both the Swiss

franc exchange rate and the applicable loan interest were fairly low.

Favourable loan conditions could be obtained. However, since mid-

2008, the Swiss franc exchange rate has increased significantly to

the detriment of borrowers, who then needed to purchase Swiss

francs at a much higher rate to repay their loans.

As a result, borrowers have initiated many successful disputes

against the banks using various argumentation in order to invalidate

the loan agreements, in part or in full, or to convert the Swiss franc

loan into a Polish zloty (“PLN”) loan. Generally, the main

arguments of the consumers are the following: (i) misrepresentation

by the banks; (ii) the banks not providing sufficient information on

the risks connected with a Swiss franc denominated loan; (iii)

abusive clauses leaving the bank too much leeway to determine the

substance of the obligations of the customer; and (iv) violation of

good business practices and good faith principles by the banks.

Financial institutions in turn claim for payment of due and payable

financial obligations of their customers (in the event of defaults or

early termination of loan agreements). However, in many cases,

such claims are assigned to debt collection companies or

securitisation funds which pursue the claim on their own.

There is also a relatively steady number of cases connected with

insider trading and an increasing number of cyber crime cases and

related disputes.


As a rule, claims made against or by a financial institution constitute

payment claims. Depending on the circumstances of the case, the

customer might also pursue damages, compensation or partial/full

reimbursement of the amounts already repaid to the financial

institution.

In the Swiss franc cases, the consumers would also like the court to

declare the contract, or particular provisions of the contract, null and

void or ineffective.




The customer and the financial institution have a full right of action

in financial service disputes and there is no difference if the

customer is an individual or a commercial entity.

In disputes concerning the protection of consumer rights, legal

actions may be brought by non-governmental organisations but only

with the consent of the consumer. Such an organisation can also

join a pending case and take necessary actions at any stage of the

proceedings.

Moreover, in those disputes, the district (municipal) consumer

ombudsman may bring actions on behalf of consumers and, with

their consent, join a case at any stage.

The Financial Ombudsman is also entitled to take action for

consumers in cases concerning unfair market practices by financial

institutions. He may also, with the consent of the consumer, take

part in pending proceedings.

The public prosecutor may request the initiation of proceedings in

any civil case, as well as take part in ongoing proceedings, if,

according to his assessment, it is required to protect the rule of law,

citizens’ rights or public interest.





this?

Third-party funding is still not fully developed and well-established

in Poland, thus it is not covered by any relevant legal provisions,

including those regarding financial services litigation. As a rule,

third-party funding is admissible under Polish law; however, the

specific content of a third-party funding agreement would be based

on the freedom of contract. A third party cannot formally take part

in the proceedings, unless the claim is assigned to it.

Litigation insurance is available in Poland; however, similarly to

third-party funding, it is not common and broadly known or

accepted. According to public information, only around 3% of

Poles have litigation insurance and the quality of such products still

needs improvement. We are not aware of any specific insurance

product that covers financial services litigation. Basic litigation

insurance covers legal counsel’s fees and court fees, leaving the

scope of insurance protection in the financial services litigation to

be quite limited.

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Class action law suits are an option available to pursue in Poland as

they were introduced to the Polish legal system by the Act of 17

December 2009 on pursuing claims in group proceedings (in Polish:

ustawa o dochodzeniu roszczeń w postępowaniu grupowym). A class

action law suit may be initiated if the party to the dispute is a consumer.

However, the implementation of this law has had little impact on

financial services disputes. Even though taking legal steps against

big financial institutions by means of class action suits seems easier

than by means of individual claims, as collective law suits allow for

joint opposition to illegal practices which could have been

committed by banks or other financial institutions, the popularity of

class actions is to date very limited. For example, in 2017, the latest

date for which we have official information, only a few class action

claims were initiated in Poland.

Because the law on class actions was only introduced in Poland in

late 2009 (i.e., during the financial crisis), it is still not possible to

fully assess this type of litigation. Still, among the current batch of

class action claims, a significant number are connected with

financial services litigation, in particular Swiss franc loans.






case?

Apart from court and lawyer fees, there are no specific legal barriers

to financial service litigation for customers. Under Polish law, a

party cannot be legally restricted from bringing a case to court, so

exclusionary clauses or duty defining clauses are not applicable.

The only barriers that a customer would have to overcome would be

of practical nature. A consumer is set in a difficult situation when

entering into a dispute against big specialised institutions. Still, in

Poland, there are multiple specialised institutions that aim at

providing balance among the parties of financial services disputes,

including, for example, the Financial Ombudsman, mainly by

supporting the consumer in various ways.

Another possible barrier to financial service litigation would be the

excessive length of the proceedings, and lack of specialised courts.

Financial service litigation cases are generally quite complex which

requires judges possessing comprehensive financial knowledge.

This is not common in Poland (see question 3.1 below). Such

proceedings also usually take longer than average disputes. For

example, the average length of a proceeding before the court of the

first instance regarding Swiss franc loan agreements takes around

two or three years.






clock’?

A time limit is set by the provisions regarding limitation of claims in

the Civil Code. Property claims become time-barred by the statute

of limitations. After the limitations period has lapsed, the person

against whom a claim is made may avoid satisfying it unless he

waives his right to use the statute of limitations as a defence. As a

rule, the limitation period is six years, and for claims concerning

periodical performances and claims connected with conducting

business activity, three years calculated from the moment a claim

became or could have become due and payable. The limitation

period always ends on the last day of the year in which the three- or

six-year period lapsed. So the general time limit for consumers to

pursue a claim is six years and for financial institutions three years,

as such claims will always be connected to their business activity.

The running of the limitations period is interrupted by:

■ any action before a court or other authority appointed to hear

cases or enforce claims of a given type or before an

arbitration tribunal taken directly to either assert, establish,

satisfy or secure a claim;

■ recognition of a claim by the person against whom the claim

is made; and

■ commencement of mediation.

The above regulations in Poland do not formally ‘stop the clock’

because after taking the abovementioned actions the limitation

period starts to run anew.

In financial services disputes, a dispute between a client and a

financial institution may also be resolved by the means of special

proceedings before the Financial Ombudsman (see question 3.4

below). The commencement of such proceedings will ‘stop the

clock’.

However, the commencement of regulatory proceedings connected

with a financial dispute does not have any influence on the running

of the statute of limitations.





The parties in financial litigation may benefit from attorney-client

privilege. Based on the regulations of the Polish Civil Procedure, a

legal advisor/advocate being called as a witness may refuse to

answer questions if a significant attorney-client privilege may be

violated.

Attorney-client privilege is even stronger in investigations

conducted by regulatory bodies because a regular (and not only

significant) attorney-client privilege is also respected.




Many standard forms are regularly used by financial institutions in

Poland. Major financing transactions (exceeding EUR 10M) are

typically based on LMA documentation. As in most jurisdictions,

LMA standard documentation very often constitutes the basis for a

first draft that is subsequently heavily negotiated. The Polish

Banking Association has also prepared its own Polish law-governed

standard loan agreement that is taken into consideration while

drafting LMA-style loan agreements.

In hedging transactions, ISDA Master Agreements are commonly

used in major transactions with international parties. Most Polish

banks use the Polish Master Agreement (provided in the Polish

language) prepared by the Polish Banking Association. In bilateral

Wolf Theiss Poland

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transactions, banks usually insist that their internal standard form

master agreements apply.

Standard form documentation is used as a basis to start a negotiation

process. The willingness of banks to introduce changes depends on

the commercial strength of the customer and the specifics of a

particular transaction. In dealings with consumers, negotiation of

such forms is usually very limited.





Under Polish law, banks are considered professional entities of

public trust and the extent of their duty of care (in Polish: należyta staranność) is greater than, in particular, the duty of care of

consumers or other commercial market players. Such duty of care

cannot be contracted out, especially with respect to potentially

intentional damages. Furthermore, banks are bound by strict

secrecy rules and heavy compliance/notifications duties.

We have observed in recent years increasing regulatory obligations

for banks. Most of such obligations come as a result of the

implementation of European law. National legislation adds to that

regulatory burden. Financial institutions should also follow

recommendations published by the Polish Financial Supervision

Authority (in Polish: Komisja Nadzoru Finansowego) (“FSA”),

which constitute a set of rules on the internal and external behaviour

of financial institutions.




There is no specialist court for financial services litigation. Such

matters are decided by regular common courts (civil or commercial

law divisions). In the majority of cases, the parties include a

jurisdiction clause in the contract, which usually provides that the

court competent for the seat of the financial institution should

decide upon the case. In situations where there is no such

jurisdiction clause in place (for example, claims based on non-

contractual basis, torts), a party can be sued before a court

competent in its seat or a court located where the damage was

caused or the agreement was (to be) performed.

There are also no specialist judges deciding upon cases in financial

litigation. The allocation of judges to specific cases is carried out

via a special IT system based on a lottery, so, generally, cases are

assigned randomly. For this reason, there is no guarantee that the

judge will be an expert or experienced in financial services

litigation.

The only specialist courts/institutions available to decide upon

financial disputes are the ones mentioned in question 3.4 below

within the ADR procedures.



The method of service of proceedings in financial services litigation

is no different than in regular litigation. A statement of claim is filed

directly with the competent court and the court delivers a

counterpart of the statement of claim to the opposing party.





There are no obligatory pre-trial procedures that need to be

undertaken in financial services litigation before initiating litigation.

However, because a statement of claim needs to contain information

about whether the parties engaged in a settlement attempt prior to filing

the claim, and, if not, what was the reason for not doing so, in practice,

a request for payment is sent by the creditor to the debtor to satisfy the

abovementioned formal requirement. Non-fulfilment of this practice

does not, however, have any negative consequences for the claimant.

At a pre-trial stage, a consumer may also file a complaint against a

financial institution, regarding the infringement of its rights. This is,

however, also optional and does not constitute any formal pre-trial

procedure that needs to be undertaken.






jurisdiction?

Apart from the general regulations of the Polish Civil Procedure

regarding mediation and reconciliation proceedings, there are

several ADR regulations that can apply strictly to financial services

disputes, in particular:

■ Bank Consumer Arbitration is an institution competent for

the amicable settlement of disputes between consumers and

banks. In order to file a case to an arbitrator, the consumer

needs to go through the entire complaint process with the

bank and the value of the dispute must not exceed PLN

12,000 (approx. EUR 2,800). The whole procedure takes an

average of two months, and the decision issued by the

arbitrator is final for the bank, whereas the consumer still has

an opportunity to appeal.

■ The Court of Arbitration at the FSA is a permanent,

independent court competent to resolve disputes between

participants of the financial market, in particular, between

entities subject to the supervision of the FSA and recipients of

services provided by them (including consumers). There is

also a Mediation Centre established at this court of arbitration.

■ Parties can refer a dispute to the Financial Ombudsman, a

specialist entity established by law to deal with financial

disputes. The participation of a financial institution in

proceedings before the Financial Ombudsman is compulsory.

ADR clauses are typically not included in financial services

contracts. Nonetheless, parties can refer a dispute to a potential

mediation centre/institution, even without a prior agreement to do

so. In practice, ADR is not commonly used to resolve financial

services disputes as they are predominantly decided by common

courts in Poland.



Negligent misstatement and mis-selling are the principal causes of

actions in claims raised by consumers against financial institutions.

Because financial institutions are bound by a higher standard of care

than regular market players, negligent misstatements or mis-selling

might be a ground to invalidate a contract or specific contractual

provisions.

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Misstatement and mis-selling have been defined in the Act on

Competition and Consumer Protection as practices infringing

collective consumer interests. Consumers are granted the right to

report such practices to the Office for Competition and Consumer

Protection (“OCCP”). Such a notice can serve as the basis for

initiating administrative proceedings regarding infringement of

collective consumer interests and may result in imposition of a

substantial administrative fine upon the infringer.





jurisdiction?

Unfair terms in contracts have been directly defined in the Civil

Code. A contract provision will be deemed as an unlawful clause if

it declares consumers’ rights and obligations in a way that is contrary

to good practice or grossly violates consumers’ interests. Such

provisions will not be binding upon the consumer; however, the

parties are bound by the remaining part of the contract. This does not

apply to provisions setting forth the main obligations of the parties,

including price or remuneration, so long as they are worded clearly.

Article 3853 of the Civil Code explicitly states which clauses may be

considered unlawful; for example, a clause excluding or limiting

liability towards the consumer for personal injury or depriving only

the consumer of the right to dissolve, rescind or terminate the

contract. Moreover, the OCCP, which investigates the market with

respect to unfair terms in consumer contracts, may declare them

abusive after conducting relevant proceedings and maintains an

extensive list of clauses considered to be abusive. The list of the

clauses can be found at: https://www.rejestr.uokik.gov.pl/.

There is no unified definition of a consumer in Polish law and many

legal acts use their own consumer concept, which may differ from

act to act. The definition of a consumer that is predominantly

applicable to financial services may be found in the Polish Civil

Code. A consumer is any natural person undertaking with an

entrepreneur a legal act which is not directly related to his business

or professional activity. As a rule, a high value of the content of the

legal act (for example, a bank loan in a high amount) does not

deprive the person of their consumer status.






There are no specific rules regarding data protection in financial

services litigation. A customer/client may request their personal

data from a financial services institution at any time. The

consumer/client is the holder of personal data, as well as

confidential banking data, and may request access to it. Sensitive

data or confidential information may not be disclosed without

permission of the consumer/client. The unauthorised processing of

sensitive data is punishable (for example, by imprisonment).

With regard to the disclosure of information, Polish law explicitly

describes in which proceedings a bank may be obliged to disclose

data which is considered a bank secret. Those are:

■ inheritance proceedings;

■ proceedings regarding the division of property between

spouses;

■ proceedings commenced against a natural person who is a

party to a contract regarding maintenance;

■ maintenance allowance; and

■ wrongful money transfer.

As a rule, banks will not be obliged to disclose information

considered a bank secret for the purpose of a financial dispute.

Moreover, the Polish Civil Procedure Code does not provide for any

specific restrictions in dealings with commercially sensitive

information in financial services disputes. If there is a risk that such

information might be disclosed to a third party, the court hearing

will not be open to the public.

4 Post Trial


disputes?

A party not satisfied with a judgment is granted the right to appeal in

financial services disputes on the basis of the general principles set

forth in the Code of Civil Procedure. An appeal is filed with the

court which rendered the appealed judgment within two weeks of

the judgment being served on the appellant. The appellee may,

within two weeks of being served with an appeal, file a reply brief

directly with the court of second instance.


services disputes?

There are no specific rules regarding costs in financial services

disputes, which means that while deciding on costs, the courts will

refer to the general rules set forth in the Code of Civil Procedure.

General principle provides that the unsuccessful party will be

obliged to reimburse the opposing party for any costs necessary to

present its case. The necessary costs of proceedings include court

fees incurred by the party, travelling expenses incurred by the party

or its attorney and the equivalent of earnings lost as a result of the

party’s appearance in court.

Additionally, parties represented by an attorney will be reimbursed

for costs in accordance with the legal provisions on attorney fees

(which are capped and dependent on the value of the subject of the

dispute).





The main issues that typically arise in cross-border disputes are

connected with securing or enforcing a claim outside of Poland.

This may create a serious obstacle in the effectiveness of a judgment

because of the lack of jurisdiction of Polish courts over assets that

are located outside of Poland.

Moreover, cross-border disputes often necessitate an analysis of

foreign law concepts which the Polish legal system is not familiar

with. This holds true, in particular, for any common law concepts or

complex financial structures/mechanisms not common on the Polish

market or not known to its judges.

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The co-operation of Polish courts with foreign courts is in principle

limited to summoning and questioning a foreign-based witness

before a foreign local court.

Due to the fact that there is little cross-border litigation in financial

services disputes, there is no standard practice with regard to co-

operation of Polish courts with regulatory bodies or officials in




No. As a rule, extra-territorial jurisdiction is not asserted in Poland.

Only in commercial financing cases, where a loan agreement is

governed by foreign law (in particular, the laws of England and

Wales), are such agreements usually subject to the jurisdiction of

foreign courts.



The Polish Code on Civil Procedure provides for a general

prohibition of unilateral jurisdiction clauses as they are in breach of

the principle of equality. This holds true, however, only for the

clauses governed by Polish law. When such clause is valid under

foreign law which may govern a contract, as a rule, Polish courts

should respect the parties’ choice and uphold the validity of the

clause.

6 Regulated Bodies



From a regulatory perspective, the FSA is the main regulatory body

to oversee the financial services market in Poland and conduct any

regulatory proceedings in cases of misconduct within the financial

services sector.

The OCCP is the body that oversees the market from the perspective

of competition and consumer protection. It does not directly

regulate or settle financial services disputes; however, it has an

indirect influence on regulating those issues. The OCCP deals with

abusive clauses and also acts of financial institutions that generally

affect consumers’ interests, which often is the basis of claims in

financial services litigation. The main tasks of the OCCP comprise

of matters connected with eliminating illicit practices of financial

institutions that violate collective consumer interests (like mis-

selling or misstatements), as well as declaring clauses in contractual

documentation abusive.



have?

The FSA has extensive investigative powers. An investigation (in

Polish: postępowanie wyjaśniające) may be commenced in order to

establish whether there are grounds to file a statement on a criminal

offence to the public prosecutor or for the FSA to conduct

administrative proceedings within the scope of violations of matters

under the supervision of the FSA. Should a violation of the latter be

established in relevant administrative proceedings, then the main

sanctions imposed by the FSA will be a fine to be paid by the

infringer.

The OCCP has the power to investigate matters connected with

practices violating collective consumer interests, as well as the

implementation of unfair contractual terms. In certain cases, the

OCCP may conduct raids in order to collect evidence connected

with a particular violation of competition law. Finally, the OCCP

may impose heavy fines on companies or persons violating the rules

under the Act on Competition and Consumer Protection.



As a rule, the decisions issued by the OCCP or the FSA do not

directly refer to the financial services dispute, but to the relevant

actions that were taken or not taken by a financial institution. The

decisions are, however, binding for the financial institution that was

addressed in the decision.

If a clause is declared abusive by the OCCP by a final decision, then

both the entrepreneur, which applied the clause, and all the

consumers that concluded a contract with the entrepreneur based on

such clause are bound by such declaration.


exist?

If the FSA issues a decision, a party that is not satisfied with the

content of the decision may file, within 14 days, a motion to

reconsider the matter to the FSA. As a result of such a motion, a

second decision is issued by the FSA on the same matter. The

second decision of the FSA can be appealed against, within 30 days

from the time the decision is delivered to a party, to the Voivode

Administrative Court in Warsaw. If a party is not satisfied with the

judgment of the Voivode Administrative Court, it may file a

cassation claim to the Supreme Administrative Court.

Even though the proceedings before the President of the OCCP are

administrative proceedings, a party to the proceedings may, within

one month from the date of delivery of the decision, appeal against

it to a specialist common court, namely the Competition and

Consumer Protection Court in Warsaw. Any judgment of this court

can be appealed against to the Court of Appeal in Warsaw within

two weeks from the time of receipt of the judgment.


accessible?

Yes. As a rule, decisions of the regulatory bodies are publicly

accessible. They constitute public information and should be made

available if requested by a third party. Some decisions are published

directly on the website of the relevant body. However, if a decision

contains confidential information, the relevant information

(including, in some cases, descriptions of the parties) will be

redacted.

Wolf Theiss Poland

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Although the General Data Protection Regulation (“GDPR”)

already entered into force in May 2018, the Polish Parliament is

working on a new law amending 160 statutes and reconciling the

GDPR with particular provisions of Polish law. Banks are actively

objecting to the proposed changes to banking law which would limit

the scope of personal information that the banks can collect about

their customers. The banks claim it may limit their ability to

examine creditworthiness of their consumers. Additionally, changes

to the law concerning bailiffs may result in enforcement being more

time-consuming.

There is a visible trend in Poland of depriving banks of their historic

privileges and, in terms of their powers towards third parties,

treating them as equal to ordinary entrepreneurs. Banks can no

longer issue their own enforcement title and, by way of recent

changes to the Civil Code, banks have been deprived of their right to

charge interest on interest.

There has been no true increase in the powers of regulatory bodies

as a result of the financial crisis. However, regulatory bodies (in

particular, the OCCP and the FSA) have started to use their powers

to control and influence the market/financial institutions more

diligently and to make use of the legal instruments granted to them.

Such increased activity of the regulatory bodies is also connected

with, and depends on, whether there have been any recent

circumstances on the financial market which caused consumers to

lose their investments.

It is to be expected that in the future the majority of cases against

financial institutions will, similar to the Swiss franc loan cases, still

be based on mis-selling and misstatements.



customer-friendly?

The Polish legal regime is based on French and German principles

of civil law and, as such, is more customer-friendly. However, in the

commercial finance regime, the broad use of LMA documentation,

including the extensive scope of security interests and the institution

of notarial submission to enforcement which lets creditors skip

court settlement procedures, allows the banks to enforce their

receivables relatively quickly and efficiently.





drawn from them.

During the past 12 months, financial services litigation in Polish

courts mostly concerned Swiss franc loans. The courts are

continuing the trend of declaring loan agreements denominated in

Swiss francs as null and void (which was, in particular, confirmed

by judgments of the Court of Appeal in Warsaw). This trend was

indirectly confirmed by a resolution of the Supreme Court of 20

June 2018 (case file no. III CZP 29/17) in which the Supreme Court

ruled that the unfair nature of the terms of the contract should be

determined with a reference to the time of the conclusion of the

contract.

Currently, the FSA is investigating several financial market players

(brokerage houses and investment funds) in connection with

misbehaviour in dealing with bonds issued by GetBack S.A. In their

first decision, the FSA imposed a heavy fine and withdrew the

licence of a brokerage house. The GetBack affair will play a

significant role in shaping the standard of vigilance of financial

authorities in Poland and the duty of care of entities involved in

offering securities/bonds to investors.



jurisdiction?

Because financial services disputes are dealt with by various non-

specialised common courts in Poland, we have not observed any

visible changes to financial services litigations as a result of global

economic changes. With regard to financial services regulations,

they are heavily influenced by European law and therefore follow

the trends introduced by various legal instruments at an EU level.

Wolf Theiss Poland

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Peter Daszkowski

Wolf Theiss

Mokotowska 49

00-542 Warsaw

Poland

Tel: +48 22 378 8900 Email: [email protected] URL: www.wolftheiss.com

Marcin Rudnik

Wolf Theiss

Mokotowska 49

00-542 Warsaw

Poland

Tel: +48 22 378 8900 Email: [email protected] URL: www.wolftheiss.com

Wolf Theiss is one of the leading law firms in Central, Eastern and South-Eastern Europe (CEE/SEE). We have built our reputation on a combination

of unrivalled local knowledge and strong international capability. Our team now brings together over 340 lawyers from a diverse range of

backgrounds, working in offices in 13 countries throughout the CEE/SEE region.

Over 80% of our work involves cross-border representation of international clients. Our full range of services covers: Banking & Finance; Business

Crime; Capital Markets; Competition & Antitrust; Compliance; Corporate / Mergers & Acquisitions; Dispute Resolution; Employment Law; Energy &

Renewables; Infrastructure; Intellectual Property & Information Technology; International Arbitration; Investment Funds; Life Science; Real Estate &

Construction; Regulatory & Procurement; Retail; and Tax.

We have concentrated our energies on a unique part of the world: the complex, fast-developing markets of the CEE/SEE region. Through our

international network of offices, we work closely with our clients to help them solve problems and create opportunities.

For more information go to the interactive web profile by following this link: http://brochures.wolftheiss.com/de/zudhJrSO/short-firm-profile.

Peter Daszkowski is the Co-Managing Partner of Wolf Theiss in

Poland. For over 20 years he has been advising major international

corporations on various M&A transactions, including privatisations,

banking and finance matters as well as project and real estate

transactions. He also represents clients in major litigation and

arbitration proceedings. He advises international clients on nearly

every aspect of Polish corporate and business law as well as on real

estate and labour law. His career experience includes advising

leading European banks and entrepreneurs on project finance

matters, on restructuring loans and securities. He advised a leading

international technology company on implementation of an electronic

toll collection system in Poland. Peter has particular experience of

public procurement and PFI/PPP contracts.

Peter is a graduate of the University of Bonn and a German qualified

lawyer admitted to the Bar in Germany and in Poland. He is the author

of numerous legal publications.

Marcin Rudnik is a Senior Associate and a member of the Dispute

Resolution, Competition and Antitrust and Real Estate and Public

Procurement practice groups of Wolf Theiss in Poland. He focuses on

advising and representing clients in civil, administrative, insolvency

and arbitration proceedings regarding construction contracts, real

estate, corporate and competition law. He has participated in

numerous public procurement, PPP and project finance transactions,

mostly on the side of lenders, and also advises clients on construction

and development matters, including FIDIC contracts, as well on the

leasing of commercial and industrial premises.

Marcin studied law at the Universities of Gdańsk and Toruń, and at the

University of Regensburg, Germany, and was awarded an LL.M.

degree. He also completed the English and European law school

organised in co-operation with the University of Cambridge. He is

admitted to the Polish Bar and speaks Polish, English and German

fluently.

Wolf Theiss Poland


Chapter 20

PLMJ

Rita Samoreno Gomes

Rute Marques

Portugal





In Portugal, the most common cause of action taken against

financial institutions and financial services providers is the breach

of legal and contractual duties (such as suitability, information,

transparency and fiduciary duties) in transactions involving the

subscription/acquisition of financial instruments by investors (mis-

selling). The causes of actions most commonly taken by financial

institutions are related to the non-performance of financing or loan

agreements by costumers (credit default or other events of default).


The most common remedies to be awarded by Portuguese courts in

actions against financial institutions are compensation for loss and

damage and the declaration of invalidity (nullity or annulment) of

the agreements and/or transactions between financial institutions or

financial services providers and their customers. In actions taken by

financial institutions (or financial services providers), credit

recovery is the most common remedy to be awarded by the courts.




Both individuals and commercial entities have right of action

against financial institutions and financial services providers.

Under Portuguese law, the important distinction is between

professional and non-professional investors. The latter are usually

individuals but, under some circumstances, commercial entities can

also be classified as such. Non-professional investors generally

benefit from greater protection under Portuguese law, as they are

treated as consumers for the purposes of financial intermediation

agreements and benefit from protection resulting therefrom and

from the stricter duties of conduct imposed on financial institutions

and financial services providers. Moreover, the Portuguese

Securities Code also gives non-professional investors that invest in

financial instruments (and the associations that protect those

investors) a class action right to protect individuals’ shared interests

or the collective interests of this class of investor.





this?

Portugal has no legislation that directly regulates third-party

funding and, although some players claim to have resorted (or are in

the process of resorting) to third-party funding solutions, there are

no official numbers regarding this issue. Also, there are no judicial

precedents about third-party funding on Portuguese courts and the

debate around it amongst scholars is still in a very early stage.

Being a very immature market as far as third-party funding is

concerned, there is an increasingly growing appetite from funders

regarding Portugal and it will be interesting to follow the upcoming

debate on the challenges it poses vis-à-vis the Portuguese legal

system. Although it pretty much depends on the features of the

contractual and business models to be implemented, we see no

fundamental legal obstacle to implementing third-party funding

schemes in Portugal. In fact, while quota litis or arrangements of

share of the lawyer’s fees are forbidden by the Portuguese Bar

Association Statute, maintenance and champerty are not forbidden

per se.

As for litigation insurance, this form of managing the litigation risk

exists and is commonly used in Portugal in cases of tort liability

(especially accidents, automobile and otherwise) and, more

recently, in cases of directors’ and officers’ liability.





Class action law suits are available in Portugal under the general

class actions rules and, in particular, under the Portuguese Securities

Code. This Code gives non-professional investors and associations

that protect investors in financial instruments (under some

circumstances) a class action right to protect individuals’ shared

interests or the collective interests of this class of investor. Class

actions have seen a large increase in the wake of the recent financial

crisis, which saw the collapse of important financial and credit

institutions including: Banco Espírito Santo, S.A.; Banco Português

de Negócios, S.A.; and Banif – Banco Internacional do Funchal,

S.A. Against this background, Portugal witnessed a significant

increase in class action law suits brought by groups of customers

and investors, and by consumer protection organisations. Several

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class actions seeking compensation for the loss and damage suffered

– mainly as a consequence of investing in financial instruments

issued or placed by those institutions or other institutions in the

same economic group – were brought against financial institutions,

their board members, their external auditors and even against the

Portuguese State and the Portuguese regulatory bodies (the Bank of

Portugal and the Portuguese Securities Market Commission

(CMVM)). Class action law suits have also been taken against the

Bank of Portugal seeking to reverse the resolution measures applied

to some financial and credit institutions (including Banco Espírito

Santo, S.A.).






case?

As a general rule, Portuguese law seeks to mitigate the effect of

clauses aimed at preventing or hampering customers from bringing

cases against financial institutions or financial services providers.

Another general rule is that standard exclusionary or duty defining

clauses are only valid if transparently communicated to the

customer and any standard clauses against good faith are null and

void (the Portuguese Standard Contracts Act sets out an indicative

list of the clauses that are per se or may, depending on the specifics

of the case, be deemed invalid).

Even if they pass the communication test, standard clauses such as

clauses excluding or limiting a party’s contractual liability, in cases

of dolus or serious fault, may be deemed null and void. Conversely,

in the context of mis-selling, clauses excluding the suitability duties

that apply to the financial institutions within the scope of the

execution-only regime are valid under Portuguese law, provided

they are communicated in writing to the customer.

Although this is a controversial issue, pre-contractual

misrepresentations are usually taken into account by Portuguese

courts when assessing the obligations assumed by the parties in a

financial intermediation agreement. These representations are also

relevant to help interpret contracts and with regards to standard

clauses they are relevant to determine whether contractual clauses

should be considered unfair and hence null and void.

Whilst Portuguese law and the Portuguese courts can be described

as customer-friendly, customers still experience some barriers to

litigating against financial institutions. Litigation costs and lack of

financial expertise are amongst the most relevant obstacles that

customers face. The fact that they are litigating against well-funded

opponents and the length of judicial cases and the extra pressure this

poses on a financial level are also issues to be considered.






clock’?

Depending on the grounds of the claim, financial services disputes

may be subject to statutory time limitations. For instance, (i) the

Portuguese Securities Code establishes that the liability of financial

intermediaries is subject to a two-year limitation period from the

date the customer acknowledges the conclusion of the agreement or

transaction and of its actual terms (except in cases of dolus or

serious misconduct of the financial intermediary, where a general

20-year limitation period applies), (ii) the Portuguese Civil Code,

which applies on a subsidiary basis to financial services, provides a

limitation period of three years for cases of non-contractual liability

and a general 20-year limitation period for cases of contractual

liability, and (iii) the annulment of the agreements/transactions

entered into between the financial institutions or service providers

and the customer based on a relevant error (relating to the object of

the agreement), in its turn, is subject to a one-year limitation period.

The above limitation periods are the maximum periods within

which the relevant legal claims can be brought. Starting regulatory

proceedings does not “stop the clock”.





The Portuguese Bar Association Statute provides that any

communications between a lawyer and their client are protected by

attorney-client privilege. Conversely, no litigation privilege exists

outside of the attorney-client relationship.




Standard form master agreements (especially the ISDA Master

Agreements) are commonly used by Portuguese financial

institutions in swaps or other OTC derivatives transactions. Those

types of agreements are usually treated as standard contracts and,

thus, subject to the Portuguese Standard Contracts Act.





Portuguese financial institutions are subject to several non-

contractual duties (i.e., legal duties). These include the duties of

having a high technical competence, diligence and transparency, as

well as respect for the interests entrusted, information and assistance

duties and duties of secrecy. The legal rules on these types of duties

are mandatory and therefore it is not possible to contract out of

them, except for the secrecy duty, which can be mitigated or

governed differently by the parties.




In Portugal, regarding civil claims, there are no specialist courts or

judges for financial services litigation. Any disputes arising

between financial institutions or services providers and their

customers are brought in the common civil courts. Conversely, the

judicial review of the Bank of Portugal and the CMVM’s decisions

regarding regulatory infringements are heard before the

Competition, Regulation and Supervision Court, which is a

specialist court.

PLMJ Portugal

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No, service of proceedings for financial service litigation is similar

to all other types of court litigation: by letter with acknowledgment

of receipt, through an enforcement agent, a court clerk, or a lawyer;

or by public notice, depending on the specifics of the case. Service

abroad but within the EU is effected under the terms of Regulation

(EC) no. 1393/2007 of the European Parliament and of the Council

of 13 November 2007 on the Service in the Member States of

Judicial and Extrajudicial Documents in Civil or Commercial

Matters (Service of Documents). Outside the EU, the service must

be effected under the Convention of 15 November 1965 on the

Service Abroad of Judicial and Extrajudicial Documents in Civil or

Commercial Matters, provided that the countries in question have

signed or ratified the Convention.





Unless otherwise contracted by the parties, there are no pre-trial

procedures to be followed for financial services litigation. If the

parties agree to some type of pre-trial procedures, non-compliance

with those procedures may give rise to contractual liability.






jurisdiction?

Financial services disputes can be settled by any of the forms of

ADR provided for in Portuguese law: mediation; conciliation; and

arbitration. In particular, the CMVM provides a Conflict Mediation

Service aimed at mediating between the parties and resolving the

conflict. This service also seeks to protect non-institutional

investors as regards the activities of financial intermediaries,

independent consultants, and the management bodies of the

securities markets or issuers.

Nevertheless, except for arbitration, which is commonly agreed by

the parties to financial services contracts, the other forms of ADR

are not often used to resolve financial services disputes.



In Portugal, claims for negligent misstatement/mis-selling are not

subject to any specific rules and are dealt on the same basis as any

other type of common civil claim, save for limitation periods (please

refer to question 2.2 above).





jurisdiction?

Under Portuguese law, “consumer” means any person, whether an

individual or a commercial entity, to whom goods or services are

provided, or to whom any rights are transferred, for non-

professional use by a person engaged, on a professional basis, in an

economic activity aimed at obtaining benefits.

Consumers benefit from greater protection by Portuguese law,

which is particularly strict on the information duties of the service

provider towards the consumers. For instance, under the Portuguese

Consumer Protection Law, whenever the information provided is

insufficient or unclear and compromises the proper use of the goods

or services, the consumer may withdraw from the contract within

seven working days of the date of receipt of the goods or of the

conclusion of the service contract. Moreover, under that same Law,

service providers are prevented from making use of any contractual

clauses that cause a significant imbalance to the detriment of the

consumer.

Consumers may also benefit from the Portuguese Standard

Contracts Act provisions, which provide that any clauses against

good faith are forbidden and prohibits a wide range of clauses that

could impact the balance of the contract. For example, the Act

prohibits clauses that: (i) exclude or limit a party’s contractual

liability, in cases of dolus or serious misconduct; (ii) grant the

proponent the exclusive right to interpret any clause of the contract;

(iii) exclude or limit in advance the possibility of requesting judicial

protection; or (iv) limit or change the obligations undertaken by the

proponent, among others, thus protecting the consumer from unfair

terms in standard contracts.






Like most civil claims, financial services law suits are public, save

for injunctions or if otherwise determined by the court. This means

that these court files are publicly available not only to the parties,

but also to any attorney and to any third party that evidences a

relevant interest in accessing them. Customers can also access their

personal data, either by means of an in- or out-of-court request.

Portuguese law does not impose a duty of disclosure on the parties.

In turn, discovery is only permitted in restricted terms: for instance,

so-called fishing expeditions are not permitted and all requests for

documents must identify as much as possible the documents

specifically required and the facts intended to be proven with them.

In addition, Portuguese law provides for commercial and bank

secrecy. As a result, and as a rule, commercial or professional

secrecy can be invoked to oppose any discovery requests relating to

information covered by secrecy (the secrecy can, however, be lifted

by an appeal court or by the Supreme Court, at the opposing party’s

request and by balancing the interests at issue in the case).

4 Post Trial


disputes?

Judgments in financial services disputes are subject to appeal in the

same general terms as any other civil dispute: generally, and save for

specific circumstances in which the appeal is always allowed,

decisions of the first instance court may be appealed to the appeal

court when the value attributed to the proceedings exceeds EUR

5,000 and, in turn, the decisions of the appeal court may be appealed

to the Supreme Court when the value attributed to the proceedings

exceeds EUR 30,000.

PLMJ Portugal

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Only the appeal court decisions on the merits of the case or that

otherwise extinguish the proceedings – in relation to one or to all of

the defendants – can be subject to appeal to the Supreme Court.

Appeal to the Supreme Court is excluded, however, if the first

instance court judgment is upheld by the appeal court on broadly

similar grounds and without any dissenting opinions. Appeal court

decisions on procedural matters can only be subject to appeal to the

Supreme Court in very narrow circumstances. The Supreme Court

only decides on matters of law and, as a general rule, cannot review

a second instance judgment on the facts.


services disputes?

There are no specific rules regarding costs in financial services

disputes. In Portugal, court costs are directly related to the value

attributed to the proceedings, which, in turn, depends on the

economic utility of the claim.





The issues that typically arise in cross-border disputes relate to

determining the applicable law and competent jurisdiction, and

these are resolved under the general rules of private international

law. This type of issue is commonly prevented through jurisdiction

clauses and clauses on the applicable law. When it comes to the

investigations carried out by the regulatory bodies, the main

difficulties relate to establishing the jurisdiction of the Portuguese

and foreign body over the facts under investigation.





Portuguese procedural rules on co-operation with foreign entities

are somewhat rigid and only provide for co-operation (information

requests, any evidentiary production or any judiciary acts) by means

of rogatory letters addressed to foreign courts or entities and sent

through consular or diplomatic channels. Yet, Portugal is party to

some important treaties and conventions, especially in the EU

context, such as the Convention of 1 March 1954 on Civil Procedure

and the 1970 Evidence Convention. These international agreements

seek to strengthen and facilitate co-operation between the signatory

states and allow direct communication between their authorities and

other foreign individuals or entities.

In spite of the above, co-operation of Portuguese entities is

extremely lengthy (and the reverse is also true) which substantially

delays the progress and conclusion of law suits.



Yes, it is common for Portuguese courts to decline jurisdiction over

financial services disputes. This happens usually in face of valid

jurisdiction clauses attributing jurisdiction to foreign courts (for

instance, Portuguese courts have recently declined jurisdiction over

several disputes related with standard form master agreements –

ISDA Master Agreements – entered into between a Portuguese and

a foreign party).



No. Under Portuguese law, jurisdiction clauses are only binding if

agreed by both parties. Moreover, this type of clause must be based

on a serious interest of both parties or, at least, of one of the parties

and provided that it does not involve serious inconvenience to the

other party.

6 Regulated Bodies



In Portugal, only courts (and the forms of ADR referred to above)

can award compensation to customers or to the financial institutions

on financial services disputes. The Bank of Portugal and the

CMVM may, however, by their own motion or following a

customer’s complaint, inspect and assess financial institutions and

regulated services providers’ activity and/or conduct towards their

customers. They may then open administrative offence proceedings

that may result in the application of a fine to the financial institution.



have?

The Bank of Portugal and the CMVM have a wide range of

investigative and inquisitorial powers. In administrative offence

proceedings, the Bank of Portugal may search any locations and

seize any documents or other objects. Only searches and seizures in

homes and searches in lawyers’, auditors’ or medical offices require

the intervention of a judge. The Bank of Portugal may also order the

freezing of any securities. During the inspections, entities subject to

the supervision of the Bank of Portugal must give it unrestricted

access to their systems and files (including computer files) where

information relating to customers or transactions is stored.

In administrative offence proceedings, the CMVM may ask for the

handing over or proceed with the seizure of any documents, assets

or other objects relating to the infringement. It may also ask any

person or entity for all the clarifications and information needed for

the investigation in the proceedings under its competence. Once it

acknowledges any facts that may be considered a crime against the

securities or other financial instruments market, the CMVM may

also decide to open a preliminary investigation. In this

investigation, among other things, it can: demand or require any

items, documents and information from any person or entity; seize,

freeze or inspect any documents, assets or other objects possibly

related to the crime; and ask the competent authorities for the

disclosure of telephone records or of other means of data

transmission.

Both the Bank of Portugal and the CMVM may also impose

precautionary measures against the infringers. These include the

preventive suspension of the activities or functions carried out by

the infringer or subjecting the engagement in those

activities/functions to certain conditions (for instance, compliance

with some information duties), to ensure the markets and their

agents are safeguarded.

PLMJ Portugal

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These regulatory bodies may impose fines and/or ancillary

sanctions. The fines imposed by the Bank of Portugal may vary

between EUR 3,000 and EUR 5,000,000, depending on the

infringement and on the offender (whether it is an individual or

commercial entity). Furthermore, these fines may be increased if

the double of the economic benefit obtained by the offender exceeds

the limit of the applicable fine. The fines imposed by the CMVM

may vary between EUR 2,500 and EUR 5,000,000, depending on

the infringement and they may also be increased if the double of the

economic benefit obtained by the offender exceeds the limit of the

applicable fine. In both cases, the ancillary sanctions include the

loss of the economic benefit obtained from the infringement, the

publication of the administrative decision and a prohibition on

holding any positions in corporate bodies or management functions

of the entities subject to the supervision of the Bank of Portugal.

The Portuguese Securities Code and the Portuguese Banking Act

expressly provide that anyone who refuses to comply with the

legitimate orders of the Bank of Portugal or the CMVM, or creates

obstacles to their execution, commits the crime of qualified

disobedience. The same applies to those who fail to comply with,

obstruct or frustrate the execution of ancillary sanctions or

precautionary measures applied within administrative offence

proceedings.



No. The decisions of the regulatory bodies are not binding on the

parties to a financial services dispute (nor on the court). In

litigation, courts are not bound by any regulatory decisions and can

freely assess the evidence produced by the parties (including

regulatory bodies’ decisions, which are only taken into account as

documentary evidence for litigation purposes). Although not

binding, the decisions of regulatory bodies may have persuasive

authority over the court.


exist?

The Bank of Portugal and the CMVM decisions that impose a fine

or an ancillary sanction, or that impose a precautionary measure, are

appealable to the Competition, Regulation and Supervision Court.

Decisions from this court may also be subject to appeal to the

Lisbon Appeal Court, although limited to the legal aspects of the

case. In some circumstances, interim decisions from regulatory

bodies may also be subject to appeal to the Competition, Regulation

and Supervision Court.


accessible?

As a general rule, the decisions of the Bank of Portugal and of the

CMVM that hold the infringer has committed one or more serious

offences are disclosed, partially or in full, on the relevant regulatory

bodies’ websites. However, in certain cases – for example, the cases

in which the disclosure of the decisions could jeopardise the

stability or soundness of the financial markets, compromise an

ongoing criminal investigation or cause disproportionate damage to

the infringer – public disclosure may be excluded by the regulators.










The financial crisis undoubtedly had a serious impact on Portuguese

and EU legislation. In fact, such a deep crisis – along with the

development of the financial markets – made it necessary to adopt

legislation to safeguard the protection of investors and to protect the

stability of the financial markets.

The stability and soundness of the financial markets were pursued

through different prudential measures. These included strengthening

the quality of the capital of financial institutions (to support the risks

assumed by these entities), increasing liquidity levels, and lowering

financial leverage levels. They also included some significant

changes in the corporate governance of credit institutions and

financial companies. The recent Law no. 35/2018, in force since

August 2018, brought sweeping changes to the regulatory

framework for financial intermediary activity and to the negotiation

of financial instruments. These changes increased the powers of

intervention of the national authorities to prohibit or limit the

commercialisation, distribution or selling of certain financial

instruments. The changes also (i) increased the conduit duties of

financial intermediaries towards customers (information duties,

evaluation of the adequacy of products and services and customers’

categorisation), (ii) required a high level of experience and

qualifications for financial intermediaries’ employees and

collaborators, and (iii) introduced important changes to the duties of

organisation of financial intermediaries (product governance and

conflict-of-interest policies), among several others.

New legislation also sought to improve and reinforce the

supervision authorities’ powers, including with regard to resolution

measures, which were provided with a new set of tools to intervene

sufficiently earlier in an unsound or failing institution, to ensure the

continuity of the institution’s critical financial and economic

functions, while trying to minimise the impact of an institution’s

failure on the economy and financial system.

Although some years have passed, these new packages and

legislative measures are still a challenge to the Portuguese

authorities, financial institutions and services providers. They will

certainly be subject to further developments in the coming years,

including in relation to resolution measures, which are still “under

test” in the failure of some important institutions, as is the case of

Banco Espírito Santo, S.A. and Banif – Banco Internacional do

Funchal.

It is also beyond any doubt that the financial crisis led to a massive

increase in the litigation brought against financial institutions and

service providers (and against the regulatory bodies – the Bank of

Portugal and the CMVM – and even the Portuguese State) by

customers and investors. This litigation arose from the Banco

Espírito Santo, S.A. and Banif – Banco Internacional do Funchal

resolution measures, which caused losses to thousands of investors

in equity and in other financial instruments (commercial paper and

bonds) sold at the branches of these banks. As mentioned above,

PLMJ Portugal

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these law suits have a particular focus on the breach of financial

intermediaries’ duties of conduct or on the liability of regulatory

bodies or members of corporate bodies for the collapse of those

institutions.



customer-friendly?

The Portuguese jurisdiction can be considered a customer-friendly

jurisdiction. Indeed, as one can see above, Portugal favours

increasing and reinforcing financial institutions’ duties of conduct

towards their customers over implementing or promoting financial

education policies and personal responsibility for investment

decisions made, which could certainly contribute to greater

efficiency in the financial markets and in the protection of the

investors themselves. Portuguese courts and regulatory bodies, in

turn, tend to look at customers as the most fragile party in a financial

relationship. Therefore, they adopt a more protective approach

towards them. On the other side of the same coin, these entities are

quite demanding in their assessment of whether the actions of

financial institutions (and services providers) are adequate and

comply with the applicable rules and regulations.





drawn from them.

As mentioned above, Portugal and its litigation system are still

suffering from the impact of the Banco Espírito Santo, S.A. and

Banif – Banco Internacional do Funchal resolution measures and,

thus, the main novel issues raised in financial litigation are closely

related to the effects of such measures and the delimitation of the

perimeter of the assets and liabilities transferred to the bridge banks,

as well as investors’ claims (mis-selling and otherwise).

In recent years, the Portuguese courts have also dealt with some

significant cases addressing the question of whether it was possible

to terminate or modify a swap agreement – which, by definition, is

aimed at managing a certain risk – based on the “abnormal change

in circumstances” provided for in the Portuguese Civil Law. An

example of this is the case of the abrupt fall in the rates of interest

indexed to Euribor following the 2008 financial crisis. In the past

year, the Supreme Court of Justice held that, although, by their

nature, interest rate swap agreements involve the risk of variation in

the reference rate, they are still covered by the “unforeseeable and

abnormal change in circumstances” concept and, therefore, can be

terminated or modified on the basis of an unforeseen abrupt fall in

the Euribor reference rates in the context of the 2008 financial crisis.



jurisdiction?

Yes, global economic changes caused some changes to financial

services litigation and regulation in Portugal. Financial services

customers and investors, especially non-professional investors, are

increasingly more conscious about their rights, and about the duties

of financial institutions and services providers. Furthermore, the

Portuguese courts are now more experienced in and familiar with

financial services disputes and legislation than 10 years ago, leading

to a progressive increase of judges’ expertise in this area.

PLMJ Portugal

Port

ugal


PLMJ Portugal

Rita Samoreno Gomes

PLMJ

Av. Liberdade, 224

1250-148 Lisboa

Portugal

Tel: +351 213 197 300 Email: [email protected] URL: www.plmj.com/en

Rute Marques

PLMJ

Av. Liberdade, 224

1250-148 Lisboa

Portugal

Tel: +351 213 197 300 Email: [email protected] URL: www.plmj.com/en

Rita Samoreno Gomes is a partner in PLMJ’s Banking and Finance

Litigation team. She has over 15 years’ experience in advising clients

from the financial sector. Rita specialises in banking and financial

litigation and represents international clients in very complex litigation

and dispute resolution cases. She has been successfully involved in

several high-profile court cases, representing a wide range of major

international banks.

PLMJ is Portugal’s largest and most senior law firm with over 280 lawyers, including 61 partners. With over 50 years of history and experience, PLMJ

stands out as a full-service firm that offers a high degree of specialisation gained from working across industries, sectors and countries. The firm is

recognised for its unparalleled quality in advising Portuguese, international and foreign investment clients on a wide range of matters through its solid

network that includes partnerships with local, independent firms in Angola, Mozambique, China, Guinea-Bissau, São Tomé and Príncipe, Brazil and

Cape Verde. PLMJ also has specialised desks for France, Switzerland, Germany, the United Kingdom, Benelux, Scandinavia and Italy, to cover the

key markets for outbound and inbound investment in Portuguese-speaking countries.

With many years’ experience in working on the highest-profile financial litigation cases in Portugal and internationally, involving the largest banks

operating in Portugal, PLMJ is the only Portuguese law firm that has a team of litigation lawyers focused on representing clients from the banking

sector. This team can provide a response to the specific needs of the sector in litigation and risk management matters including: mis-selling;

construction financing and contractual liability; derivatives; liability for issuing prospectuses for public offers of securities; class actions; injunctions

and litigation involving consumer rights; pre-litigation and litigation relating to D&O liability insurance claims by directors of banking institutions; and

regulatory and administrative offence proceedings before the Bank of Portugal, the Portuguese Securities Market Commission (CMVM) and the

Competition, Regulation and Supervision Court.

Rute Marques is a senior associate in PLMJ’s Banking and Finance

Litigation team. She has almost 10 years’ experience in advising

clients from the financial sector. Rute specialises in banking and

financial litigation.

Chapter 21


Allen & Gledhill LLP Vincent Leow

Singapore





The most common causes of action taken by or against financial

institutions and service providers in Singapore would be claims

under contract and/or tort. In relation to tort claims, they would

generally include misrepresentation and/or negligence.


The most common remedy is an award of damages. The Singapore

Courts may, in certain cases, also award injunctive relief including

specific performance where it is just and equitable to do so.




This generally depends on the nature of the claim in question.

Generally, in a claim for breach of contract, only the contracting

parties would have the right of action. Third parties (including

subsidiaries of the contracting parties) are generally excluded save

in certain limited circumstances such as if the contract expressly

provides that the third party can make a claim under the contract.

As for a claim in tort, this would depend on the tort in question. In

claims for negligence, the party commencing the action would have

to establish that he is owed a duty of care.

Whether the customer is an individual or a commercial entity does

not generally affect the right of action.





this?

Third-party funding is generally prohibited for contravening the

laws of maintenance and champerty. However, there is some

Singapore case law where the Courts have allowed limited litigation

funding where there is a legitimate interest by the funder in the

litigation.

There have also been recent amendments to Singapore law in 2017

to generally allow third-party funding for international arbitration

and related proceedings (third-party funding contracts for other

types of proceedings remain generally unavailable).

In particular, the 2017 amendments allowed third-party funding for

the following categories of proceedings:

(a) international arbitration proceedings;

(b) Court proceedings arising from or out of or in any way

connected with international arbitration proceedings;

(c) mediation proceedings arising out of or in any way connected

with international arbitration proceedings;

(d) application for the enforcement of an arbitration agreement,

including an application for a stay of Court proceedings; and

(e) proceedings for or in connection with the enforcement of an

arbitration award.

Litigation insurance (in particular D&O policies) is used in

Singapore, though this is still an emerging market. Litigation

insurance may be utilised as a strategic tool to help businesses

manage and mitigate litigation expenses.





Singapore law does not recognise class action law suits insofar as

this is conventionally referred to in the United States of America.

However, Singapore law provides for representative proceedings in

which a single person can commence a proceeding on behalf of

various persons who have the same interest in any proceedings.






case?

The main barriers to financial service litigation would include the

costs of litigation as well as the contractual limitations to liability.

For the latter, it is common for customer contracts to include clauses

to exclude or limit the financial institution’s/service provider’s

liability for any representation, statement, act or omission

(including negligence but excluding fraud). It is also common to

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include duty defining clauses to set out clearly the obligations that

are owed to the customer. The Singapore Courts will generally

uphold these clauses.

The contract may also expressly provide that the financial

institution/service provider has the discretion in certain matters, and

the Courts will generally not interfere in the exercise of such discretion

unless exercised in an arbitrary, capricious or irrational manner.






clock’?

The limitation period for claims in contract and tort is generally six

years, though this period can be extended in certain situations. For

example, in cases involving fraud, the limitation period generally only

starts to run from the time the fraud is actually discovered or could

have been discovered with reasonable diligence (whichever is earlier).

The limitation period, however, does not vary simply because the

proceedings are brought before a regulatory body instead of the

Courts. The commencement of a regulatory process does not

generally “stop the clock”.





Parties in financial services litigation may generally avail

themselves of litigation and/or legal advice privilege if the

respective requirements are met.

Generally, legal advice privilege covers communications made to

the customer’s lawyers, documents which the customer’s lawyers

have become acquainted with, and the advice given to the customer.

Litigation privilege covers any document, provided that there was a

reasonable contemplation of litigation and the document was

created for the dominant purpose of litigation. Whether or not the

requirements are satisfied is largely a question of fact.

Investigations conducted by regulated bodies are not generally

considered “litigation” in the context of litigation privilege.

However, the legal advice given in the course of the investigation

can be protected under legal advice privilege.




Financial institutions in Singapore do use standard form master

agreements such as the ISDA Master Agreement for applicable

transactions. The terms of such agreements may, however, be varied

by consent. Generally, the Singapore Courts uphold such clauses

except where any vitiating factors apply (e.g. undue influence,

unconscionability).





Financial institutions (which include banks, finance companies,

insurance companies, etc.) are subject to various regulations

imposed by the regulator, namely the Monetary Authority of

Singapore. There are also self-imposed codes of conduct such as the

Association of Banks in Singapore Private Banking Code of

Conduct which do not have the force of law.

In regards to fiduciary obligations, under Singapore law, a fiduciary

relationship generally arises only if it falls within one of the

established categories of relationships or by contract.

Further, financial service entities (and their representatives) would

generally owe a tortious duty of care to their customers although it

is possible to limit the scope of this duty by contract save where

such limitation is excluded by statute (for example, under the Unfair

Contract Terms Act (UCTA)).




The Singapore High Court does not have a specialist Court for

hearing financial services litigation although financial services

litigation are generally placed before a specialist list of judges who

hear such matters.

Where the dispute is transnational in nature, it may be heard by the

Singapore International Commercial Court (SICC) where the

jurisdictional requirements are met. The SICC is a division of the

High Court and it has the jurisdiction to hear and try an action if: (a)

the claim is of an international and commercial nature; (b) the

parties have submitted to the SICC’s jurisdiction under a written

jurisdiction agreement; and (c) the parties do not seek any relief in

the form of a prerogative order. Additionally, it is also possible for

a case to be transferred from the High Court to the SICC.



The method of service of proceedings does not differ for financial

service litigation. Generally, the claimant will have to serve the

Court documents personally on the defendant within the

jurisdiction, and leave of the Court is required if the defendant is

located outside Singapore.





The pre-trial procedures for financial services litigation are the same

as those for general civil disputes. There are no additional pre-trial

procedures that are specific to financial services litigation.






jurisdiction?

There are no specific ADR regulations that apply to financial

services disputes. The general framework that applies to

commercial disputes would apply, and the general trend is that ADR

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clauses (including arbitration) are often included in financial

services contracts.

However, it is common for low value financial services disputes to

be resolved at the Financial Industry Disputes Resolution Centre

Ltd (FIDReC).

The FIDReC is an independent institution that was set up in 2005 to

provide an ADR scheme for most types of disputes for the banking,

insurance and financial sectors in Singapore. All regulated financial

institutions that have dealings with retail consumers are required to

subscribe as members of FIDReC.

Access to FIDReC is available to all consumers who are individuals

or sole-proprietors. Unless otherwise agreed, there is a limit of

S$100,000 per claim.

After a consumer files a complaint within FIDReC’s jurisdiction,

the parties are first encouraged to resolve the dispute by mediation.

In appropriate cases, FIDReC’s case manager mediates the dispute.

If the dispute cannot be settled by mediation, it will be heard and

adjudicated either by a single adjudicator or a panel of adjudicators

appointed by FIDReC.

The decision of the adjudicator or panel of adjudicators is final and

binding on the financial institution, but not on the consumer.

There is no appeal from the decision of the adjudicator or panel of

adjudicators. However, as the decision does not bind the consumer, the

consumer is entitled to reject the decision and pursue the complaint

through other avenues (e.g. by commencing fresh Court proceedings).

This option is, however, not available to financial institutions.



Claims for negligent misstatement/mis-selling are generally dealt

with under the common law or under the Financial Advisers Act

(Cap 110, Rev. Ed. 2007).

Under the common law, a claim for negligent misstatement/mis-selling

may be framed as an action for contractual misrepresentation or

negligent misstatement. For a claim in contractual misrepresentation,

the claimant generally has to establish that the defendant made a false

statement of fact which induced the claimant to enter into the contract.

For a claim in negligent misstatement, the claimant generally has to

show that it is owed a duty of care by the defendant, and that the

defendant breached its duty to cause the claimant to suffer loss.

Separately, where the defendant is a licensed financial adviser, it

may be possible for the customer to make a claim for a breach of the

certain specified obligations owed under the Financial Advisers Act,

namely:

■ First, the financial adviser has an obligation to disclose all

material information relating to any designated investment

product that it recommends to every client and prospective

client.

■ Second, the financial adviser has an obligation not to make a

false or misleading statement in respect of any investment

product or financial advisory service. This obligation is

breached if the financial adviser does not care whether the

statement is true or false or it knows or ought reasonably to

have known that the statement is false or misleading.

■ Third, the financial adviser must not make any recommendation

with respect to an investment product to a person who may

reasonably be expected to rely on the recommendation if the

financial adviser does not have a reasonable basis for making

the recommendation.





jurisdiction?

Under the common law, where the contract in question is a standard

form contract, in the event that there is any ambiguity as to the

meaning of a term, the Court may interpret the term in a manner that

is against the interests of the drafter.

In addition to the common law, there are two statutes which may be

applicable. The first is the UCTA, which imposes limits on the

extent to which civil liability for breach of contract, negligence or

other breach of duty can be contracted out of. For example, the

UCTA prohibits the exclusion or restriction of liability for death or

personal injury resulting from negligence. Liability for all other

losses arising from negligence may be excluded or restricted only if

reasonable. Reasonableness is a question of fact which can be

answered only by having regard to all the circumstances.

The UCTA also provides specific protections for any person

“dealing as consumer”. A person “deals as consumer” if: (a) he

neither makes the contract in the course of a business nor holds

himself out as doing so; and (b) the other party does make the

contract in the course of a business. An example of such protection

can be found in section 4 of the UCTA, which provides that a person

dealing as consumer cannot be made to indemnify another person in

respect of liability that may be incurred by the other for negligence

or breach of contract, except insofar as the contract term is

reasonable. Again, reasonableness is a question of fact that has to be

determined by having regard to all the circumstances.

The second statute that may be applicable is the Consumer

Protection (Fair Trading) Act (CPFTA). The CPFTA was enacted to

protect consumers against unfair practices and to give them

additional rights in respect of goods and services (including

financial products and services) that do not conform to contract.

Where a consumer has entered into a transaction involving an unfair

practice, the CPFTA provides that the consumer may have a cause of

action against the supplier. Under the CPFTA, a “consumer” means

an individual who, otherwise than exclusively in the course of

business, (a) receives or has the right to receive goods or services

from a supplier, or (b) has a legal obligation to pay a supplier for

goods or services that have been or are to be supplied to another

individual.






A financial services customer can access his/her personal data.

Generally, all organisations, including financial institutions, have an

obligation under the Personal Data Protection Act to provide, as

soon as reasonably possible, an individual’s personal data upon

request. However, there are exceptions. For example, organisations

are not required to provide the personal data if the request is

frivolous or vexatious. Organisations are also prohibited from

providing the personal data in certain situations, such as if the

provision of that personal data could reasonably be expected to

threaten the safety or physical or mental health of an individual

other than the individual who made the request.


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The fact that information is commercially sensitive or confidential is

not a ground for refusing to disclose the information in discovery.

That being said, the party to whom the information is disclosed

would provide an implied undertaking to the Court not to use or

disclose such information otherwise than in the proceedings in which

discovery is given, unless leave is granted by the Court to do so.

It is also possible to apply to the Court for an order that the Court file

or a specific document be sealed against access by third parties

where the Court file or document contains commercially sensitive

or confidential information.

4 Post Trial


disputes?

Generally speaking, where the dispute is heard before the State

Courts, there is an automatic right of appeal to the High Court where

the amount in dispute or the value of the subject-matter exceeds

S$50,000, and leave of Court is otherwise required.

Generally speaking, where the dispute is heard before the High

Court, there is an automatic right of appeal to the Court of Appeal

where the amount in dispute or the value of the subject-matter

exceeds S$250,000, and leave of Court is otherwise required.


services disputes?

Costs are awarded at the discretion of the Court. Generally

speaking, the Court will normally make an award of costs in favour

of the successful party at litigation, though the Court may depart

from this principle depending on the circumstances of the case (e.g.

if the successful party acted unreasonably in the course of the

litigation).

The Court ultimately has the discretion to determine the quantum of

costs, though for certain cases (e.g. default judgment applications) it

would usually have regard to the guidelines set out in the Rules of

Court.





In cross-border disputes, one issue that normally arises is the

jurisdiction in which the dispute should be heard. In this regard, the

inquiry starts with whether there is an applicable jurisdiction clause.

Where the parties had agreed to an exclusive jurisdiction clause, the

Singapore Court would generally enforce that clause. Similarly,

where the parties have agreed to a non-exclusive jurisdiction clause

(in favour of Singapore), the Singapore Courts would generally

enforce the clause unless there is strong cause for not doing so.

However, if there is no applicable jurisdiction clause, then the

Singapore Courts would determine which forum (Singapore or the

foreign jurisdiction) is the natural forum to hear the dispute, and the

inquiry involves (but is not limited to) a consideration of which

jurisdiction has the most real and substantial connection to the

dispute. This is largely a question of fact.

In cross-border investigations, two issues that often arise is the

difference in laws and the location of the documents/evidence.

With respect to the first issue, one key factor that arises is the

difference in the treatment of legal advice and/or litigation privilege

between jurisdictions. Hence, the financial institutions have to be

aware of these differences and address them at the commencement

of any investigation.

As for the latter issue, the location of the documents/evidence is

often located outside Singapore. In such instances, the ability of the

financial institution and/or regulator to obtain these

documents/evidence is often circumscribed by the laws of the

foreign jurisdictions.

Presently, Singapore regulators have taken various steps towards

strengthening international cooperation with their foreign

counterparts. For example, in November 2018, Singapore concluded

and exchanged cooperation agreements with China, including a

Financial Technology (FinTech) Cooperation Agreement with the

People’s Bank of China, and a Memorandum of Understanding

between the China Securities Regulatory Commission.





The Singapore Courts do not unilaterally cooperate with foreign

Courts or regulatory bodies or officials. Instead, the Singapore

Courts would hear applications that are normally brought either by

the party to the litigation or the Attorney General of Singapore on

behalf of the foreign entity, and make determinations according to

the law governing those applications.



Generally, Singapore laws only apply on a territorial basis (namely,

over persons, property and acts within the jurisdiction).

However, there may be exceptions to this general principle where

the Singapore Parliament has enacted laws providing for

extraterritorial jurisdiction. The scope of such application turns on

the specific law in question.

Extraterritorial acts may, in certain cases, also constitute criminal

offences.

By way of an example, for offences relating to corruption, the

Prevention of Corruption Act provides for extraterritorial

jurisdiction insofar as Singapore citizens are concerned (i.e.

Singapore citizens may incur criminal liability in Singapore even

for acts committed outside Singapore), while the Securities and

Futures Act provides that extraterritoriality can be asserted if the act

in question, while committed outside Singapore, has a substantially

and reasonably foreseeable effect in Singapore.



Unilateral jurisdiction clauses, in which only one party is bound to

sue in a particular forum while the other party is not so bound, are

valid and enforceable in Singapore. Generally, the Singapore

Courts will require strong cause before deciding not to enforce such

clauses.


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6 Regulated Bodies



There is generally no body that specifically regulates financial services

disputes in Singapore. However, the Monetary Authority of Singapore

is the primary regulator of financial institutions in Singapore and it will

address any complaints that are raised to it by consumers.



have?

The Monetary Authority of Singapore has extensive powers,

including investigation, over financial institutions that it regulates.



This is not applicable in our jurisdiction.


exist?



accessible?











The Singapore Securities and Futures Act was recently amended to

provide for additional regulatory scrutiny including the protection

of safeguards for protecting retail investors as well as the

enhancement of regulatory sanctions for market misconduct.

There are no significant changes in the claims brought by or against

financial service providers in the past year, although more matters

are now resolved by way of ADR methods.

For example, for the financial year ended 30 June 2018, FIDReC

received 1,251 complaints, out of which 47% were against life

insurers, 33% were against banks and finance companies, and 14%

were against general insurers. The balance were against individual

financial advisers and brokers or capital markets services licensees.

This should be compared to the previous financial year where

FIDReC received 893 complaints, out of which 32% were against

life insurers, 44% were against banks and finance companies and

16% against general insurers. The balance were against individual

financial advisers and brokers or capital markets services licensees.



customer-friendly?

Singapore is generally viewed as being more financial institution-

friendly.





drawn from them.

We have set out below three cases regarding financial services

disputes that were decided in 2018.

The first case (Macquarie Bank Ltd v Graceland Industry Pte Ltd

[2018] 4 SLR 87) involved a dispute between a bank and its

customer in relation to a commodity swap agreement. This case was

heard in the SICC. The bank had claimed for losses suffered as a

result of the customer’s wrongful repudiation of the commodity

swap agreement. In its defence, the customer claimed that it was

under the belief that the swap would be effected by the bank as its

agent with another third party. Hence, the customer denied the

bank’s claim on the basis of mistake and that the bank was in breach

of its fiduciary duties. The Court rejected the customer’s arguments

and held that the contractual documentation clearly showed that the

transaction was being entered into between the bank and customer

as counterparties. The Court further held that the bank was not a

fiduciary and it was not in breach of any fiduciary duties that might

have existed. This case serves as a reminder that a fiduciary

relationship generally arises only if it falls within one of the

established categories of relationships or by contract.

The second case (AL Shams Global Ltd v BNP Paribas [2018]

SGHC 143) involved a customer’s claim against its bank for

refusing to accept incoming payments into its account. The High

Court rejected the customer’s claim after finding that the contract

between the parties conferred on the bank the discretion to decide

whether to accept any incoming payment, and this discretion was

subject only to the bank exercising such discretion in good faith and

not in an arbitrary, capricious or perverse manner. There was no

evidence that the bank exercised its discretion in an arbitrary,

capricious or perverse manner, or in bad faith. This case

demonstrates that the Courts would respect the terms of the contract

and a high threshold has to be crossed before a party can be said to

have exercised its contractual discretion improperly.

The last case (Vinmar Overseas (Singapore) Pte Ltd v PTT International Trading Pte Ltd [2018] SGCA 65) does not per se

involve a financial services dispute but it illustrates the Singapore

Courts’ approach towards giving effect to an exclusive jurisdiction

clause which is a relevant consideration in most cross-border financial

services disputes. This case involved the Court having to decide

whether to grant a stay of proceedings to give effect to an exclusive

jurisdiction clause in favour of a foreign jurisdiction, even where the

defendant is unable to raise any meritorious defence to the plaintiff’s

substantive claim (i.e. the plaintiff has an open-and-shut case). The

Singapore Court of Appeal departed from precedent and held that the

merits of any defence that the defendant intends to raise are irrelevant.

Hence, even if the plaintiff has an open-and-shut case on the merits,

this would not in itself be sufficient for the Court to allow the litigation

to proceed in Singapore. This decision highlights the extent to which

the Singapore Courts would respect party autonomy in relation to

jurisdiction clauses, and demonstrates the high threshold required for a

party to persuade the Court not to enforce such clauses.


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jurisdiction?

The emergence of new technologies has resulted in a reshaping of

the economy and jobs. The financial services sector is no different

especially with the emergence of FinTech. FinTech such as cloud

computing, blockchain, artificial intelligence, etc. has begun to

transform the way in which financial services are produced,

distributed and consumed, and this has created new risks and

challenges. The Monetary Authority of Singapore has been taking

steps to regulate this area.

For example, the Monetary Authority of Singapore has proposed a

new Payment Services Bill (which is presently being considered by

the Singapore Parliament) to provide a more conducive

environment for innovation in payment services and ensure that

risks across payments value chains are mitigated.

The Monetary Authority of Singapore has also introduced the

FinTech Regulatory Sandbox to allow financial institutions more

leeway to experiment with innovative financial products or services

within a well-defined space and duration. Further, the Monetary

Authority of Singapore has been taking steps to highlight the risks

associated with digital token offerings and sought to regulate

intermediaries that provide virtual currency services.


Vincent Leow

Allen & Gledhill LLP

One Marina Boulevard, #28-00

Singapore 018989

Singapore

Tel: +65 6890 7807 Email: [email protected] URL: www.allenandgledhill.com

Vincent’s practice focuses on banking, employment, and shareholder

disputes, as well as contentious investigations and inquiries. He has

substantial experience in acting for banking and financial institutions,

major corporates, and regulators on complex contentious matters. He

also regularly advises clients on regulatory and risk management

issues.

Vincent is consistently recognised for his expertise in the areas of dispute

resolution, and labour and employment by leading legal publications.

The Legal 500 Asia Pacific lists him as a “Leading Individual” and

describes Vincent as “one of the market leaders”, “responsive and reliable”, “highly experienced”, “understands commercial issues” and

providing “robust, thorough and sound advice”. He is described in

Benchmark Litigation Asia Pacific as “highly commercial and provides very good service”.

Vincent is presently on the faculty of the Singapore Institute of

Directors, and teaches at the Singapore Institute of Legal Education.

Allen & Gledhill is an award-winning full-service South-east Asian commercial law firm which provides legal services to a wide range of premier

clients, including local and multinational corporations and financial institutions. Established in 1902, the Firm is consistently ranked as one of the

market leaders in Singapore and South-east Asia, having been involved in a number of challenging, complex and significant deals, many of which

are first of its kind. The Firm’s reputation for high-quality advice is regularly affirmed by the strong rankings in leading publications, and by the various

awards and accolades it has received from independent commentators and clients. The Firm is consistently ranked band one in the highest number

of practice areas, and is one of the firms with the highest number of lawyers recognised as leading individuals. Over the years, the Firm has also

been named ‘Regional Law Firm of the Year’ and ‘SE Asia Law Firm of the Year’ by many prominent legal awards. With a growing network of

associate firms and offices, Allen & Gledhill is well-placed to advise clients on their business interests in Singapore and beyond, in particular, on

matters involving South-east Asia and the Asia region. Together with its associate firm, Rahmat Lim & Partners, in Malaysia and office in Myanmar,

Allen & Gledhill has over 450 lawyers in the region, making it one of the largest law firms in South-east Asia.

Chapter 22


Hannes Snellman Attorneys Ltd

Andreas Johard

Björn Andersson

Sweden





The most common claims brought by private customers against

financial institutions before the Swedish general courts involve

misleading prospectuses and negligent advice. Many cases also

derive from the mis-selling of financial products, such as credit

loans and investment products. Insurance intermediaries are also

increasingly facing claims concerning negligent advice.

As most disputes between institutional customers and financial

institutions are resolved through arbitration, it is difficult to draw

general conclusions but it would be fair to say that breach of

contract is a common cause for action between such parties; albeit it

is not possible to state any fact-specific circumstances that would

constitute breaches of contract that commonly occur.


Remedies that can be awarded in financial services disputes are the

same as those which are awarded in any other dispute under

Swedish law. Remedies may include an order to pay damages

(including liquidated damages), a rescission of a contract or

injunctive relief. The most likely remedies to be awarded are

injunctive relief and damages.




Anyone that has legal competence has a right of action in financial

services disputes before the general courts in Sweden. There is no

difference depending on the claimant being an individual or a

commercial entity.

Furthermore, consumers have a right to bring a claim before the

National Board for Consumer Disputes (“ARN”), which is an

alternative dispute resolution mechanism in Sweden. Decisions

issued by the ARN are not binding legally or formally, but are

recommendations on how the assessed disputes rightfully should be

resolved. Nonetheless, companies that do not follow the ARN’s

decisions are included on a public blacklist, which is why most

companies choose to comply with the recommended solution to the

dispute.





this?

There is no legislation or other rules that specifically regulate the

funding of claims. Third-party funding is not particularly common

in Sweden, but it has increased in recent years.

Most insurance policies in Sweden contain legal assistance

insurance, from which the insurance holder may receive

compensation up to a limited amount for their legal costs in

litigation, usually approximately EUR 20,000 excluding a

deductible, which arises after such insurance has come into force.

In Sweden, there are no available insurances for claimants for after

the event (“ATE”) litigation cost protection through policies issued

by underwriters on a case-by-case basis.





Class action law suits are available in Sweden and are regulated by the

Group Proceeding Act (2002:599) (“GPA”), according to which class

actions can be brought with regard to claims that can be raised in general

court in accordance with the Swedish Code of Judicial Procedures

(1942:740). Furthermore, in some cases, the ARN can review a dispute

between a group of consumers and a company as a class action. If such

a collective action is being examined by the ARN, the decision by the

ARN applies to all consumers with similar requirements, including those

who have not been in contact with the ARN.

Even though there has been an increase in class action suits since the

financial crisis, such actions are rare and have not impacted

financial services litigation in any particular way.






case?

Even though it should not be categorised as a barrier, claimants are

Swed

en


required to pay an application fee in order to bring a claim before the

courts in Sweden. The application fee is either SEK 900 or SEK

2,800 (dependent on the size of the claim).

For a consumer to bring a claim before the ARN, the said claim must

exceed the sum of SEK 2,000.

There are no legal requirements or specific procedural rules for

financial services litigation that need to be met before an action may

be initiated. A claimant is also not required to have pre-action

communications with a respondent. However, pre-action

communications are customary in Sweden. Furthermore, if a

counsel – who is a member of the Swedish Bar Association – is

representing a claimant, such counsel has an ethical obligation to

notify the respondent and provide it with the opportunity to respond

to the claim prior to initiating legal action (save in situations where

there is an imminent danger for the claimant).

Financial institutions may not, in principle, limit their statutory

duties and liabilities towards consumers. In comparison, however,

financial institutions are free to limit their contractual liabilities

towards commercial customers to an extent. However, any

provisions in customer contracts that would be considered

unreasonably burdensome are not valid under Swedish law and may

be mitigated in accordance with Section 36 of the Swedish

Contracts Act (1915:218). For example, the Swedish courts would

very likely mitigate any contractual provision that limits the liability

for damages caused by intent or gross negligence.






clock’?

The general statute of limitation in Sweden is 10 years. However, the

claimant must notify the respondent of its damage in due time subsequent

to the event giving rise to the alleged damages. This includes the

commencement of a regulatory process. The statute of limitation does not

constitute a procedural hindrance from bringing a claim in court.

For filing a claim with the ARN, the consumer must have filed a

complaint within a year from the first notification to the financial

institution. If a matter is under a court’s review, the ARN will not

review the complaint.





Documents sent to and from Swedish governmental agencies are

generally considered public. Both regulated bodies such as the

Financial Supervisory Authority (“FSA”) and the Swedish courts

are considered governmental agencies. In that sense, investigation

by government-regulated bodies and “litigation” is the same in

relation to privilege. Parties may request to restrict disclosure in

both processes. Business information or information regarding

business practices is generally deemed confidential and will not be

disclosed, even upon request.




Standard form master agreements, such as the ISDA Master

Agreement, are commonly used in Sweden. However, disputes in

relation to such agreements are uncommon, if not non-existent, in

Swedish courts since the agreements are normally governed by

English law and subject to the jurisdiction of English courts.





The concept of fiduciary duties is not formally recognised in

Swedish law. However, a party may have a duty of loyalty towards

the other party.

Many financial services entities have their own regulatory codes of

conduct, which are not legally binding per se, but an estimate on

how the entity is expected to act on the market.




There are no specialist courts or specialist judges for financial

services disputes in Sweden.



No, it is the same proceeding as for any other dispute brought before

a general court.





No, there are no specific pre-trial procedures that must be followed

in Sweden.






jurisdiction?

There are no specific ADR regulations that apply between

commercial parties. Parties may resolve the dispute through

arbitration, which is governed by the Swedish Arbitration Act

(1999:116) if seated in Sweden, or mediation, which is not governed

by any law. Arbitration is a common choice of dispute resolution

mechanism in contractual relationships between financial

institutions and commercial customers.

With respect to consumers, the Swedish Act on Alternative Dispute

Resolution in Consumer Relations (2015:671) regulates ADR for

consumer relations. ADR clauses are not commonly included in

financial services contracts to which consumers are a contractual

party.

However, as Swedish courts are obliged to try to resolve disputes

though settlement, mediation is common, with respect to both

commercial parties and consumers.

Hannes Snellman Attorneys Ltd Sweden

Swed

en


Furthermore, the ARN is a commonly used ADR method for claims

brought by consumers. The ARN follows Swedish law and case law

when reviewing a complaint. Decisions by the ARN are not legally

binding upon the parties; they are recommendations for how the

assessed disputes should be resolved.



A claim for negligent misstatement/mis-selling must be transformed

into a claim for damages or a declaratory claim. Such claims are

treated the same way as any other claim under Swedish law.





jurisdiction?

A consumer is defined in the Swedish Consumer Sales Act

(1990:932) (“SCSA”) as “a natural person acting primarily for non-business purposes”. The term is also defined in other legal acts

with a similar definition. In an economic context, the term

“Consumer” has a broader definition and is defined as “each person who is the final consumer of goods and services”.

Unfair terms in contracts can be mitigated in accordance with

Section 36 of the Swedish Contracts Act. Furthermore, unfair terms

in consumer relations are dealt with in the SCSA in such a way that

terms that are inferior than those stipulated in the SCSA are not

binding upon the consumer.

Only consumers may initiate an action with the ARN. Otherwise,

there are no specific remedies only available to consumers.






According to article 15 of General Data Protection Regulation No.

2016/679 on the protection of natural persons with regard to the

processing of personal data and on the free movement of such data,

and repealing Directive 95/46/EC, a financial institution must, like

any other company, upon request confirm as to whether or not

personal data concerning a person is being processed, and when that

is the case give access to that personal data and relevant

information.

A financial institution must also, upon request from a customer,

supply the customer with proof that a transaction has been carried

out in accordance with the financial institution’s guidelines, as well

as copies of any loan agreement entered into by the financial

institution and the customer.

The right to obtain documents through discovery or disclosure in

Sweden is limited, and there is no such general obligation for the

parties to a dispute. However, a party can obtain a court order for

the other party or a third party to disclose an identified document or

group of documents. Should the requested document(s) contain,

e.g., trade secrets or other confidential information the document

must only be disclosed if exceptional reasons exist. Furthermore,

the courts have a possibility to decide that the information shall not

be publicly accessible.

4 Post Trial


disputes?

Yes. The right to appeal in financial services disputes is the same as

in any other dispute before the general courts. In order to have an

appeal determined, an appealing party needs to be granted a leave of

appeal by the higher instance court, regardless if it concerns an

appeal to the Appeal Court or to the Supreme Court.

Decisions by the ARN are not binding upon the parties and cannot

be appealed.


services disputes?

The rules of the Swedish Code of Judicial Procedures apply for

court cases. Unless nothing is stipulated in the contract between the

parties, the general rule of “loser pays” applies.





There is no difference in how the matters are handled when there is

a cross-border dispute other than ensuring that national legislation is

complied with in all countries. This naturally demands a lot of co-

operation between counsel.

If a claimant is domiciled in a country outside of the European

Economic Area (“EEA”), the respondent may order the claimant to

deposit a security for the costs of litigation. Generally, the

respondent must request such a deposit of security in connection

with its first writ, otherwise the right is considered forfeited.





The Swedish courts generally take a passive role in litigation and

neither co-operate with regulatory bodies or officials in financial

services, nor take part in investigations. The Swedish courts may

co-operate with foreign courts only on administrative matters, such

as the taking of evidence.



In relation to financial services disputes, we are not aware of

Swedish courts ever asserting jurisdiction in connection with any

foreign event or exercising authority outside of the Swedish

territory.

Swedish courts may assist foreign courts with the taking of evidence

in civil matters, such as hearing witnesses, in accordance with the

applicable regulations. Likewise, Swedish courts may request the

assistance of foreign courts for the same purpose. If the requesting

and assisting courts are within the EU, Regulation (EC) No.


Swed

en


1206/2001 on co-operation between the courts of the Member States

in the taking of evidence in civil or commercial matters is

applicable. Otherwise, the applicable legislations are the Taking of

Evidence for a Foreign Court Act (1946:816) and the Taking of

Evidence at a Foreign Court Act (1946:817). The former applies

when Swedish courts are the assisting courts, and the latter when the

Swedish courts are the requesting courts. The Convention of 18

March 1970 on the Taking of Evidence Abroad in Civil or

Commercial Matters (Hague Evidence Convention) is relevant in

relation to jurisdictions such as Mexico, Singapore and may be

relevant in relation to the UK after Brexit.



In Swedish law, there are no statutory regulations against unilateral

jurisdiction clauses and therefore general contractual principles

apply. Depending on the specific case and if the parties are of equal

merit or not, a court can decide to mitigate such a clause.

6 Regulated Bodies



Only the Swedish courts handle financial services disputes. In

addition to the general courts and arbitration, the FSA supervises the

regulations on the financial market.

Even though it is not a regulatory body, the ARN can review

disputes between consumers and businesses (upon request by a

consumer). The decisions by the ARN are not legally binding, but

are generally complied with in order to avoid public blacklisting.



have?

The FSA has several rather extensive remedies at its disposal. The

FSA may, e.g., order a financial institution to supply documents and

order employees to submit to hearings, subject to a conditional fine.

The FSA may also revoke a financial institution’s licence to conduct

business in financial services and also order prohibitory injunctions.

Furthermore, the FSA may penalise a company that does not apply

for approval of a required prospectus in time. The FSA can also

apply for the liquidation of a company.

The ARN can only give recommendations and its decisions are not

legally binding. However, since the ARN keeps a record of whether

parties follow its recommendations and such information is publicly

accessible, many commercial parties follow the recommendations.



Decisions of the FSA are binding on the parties. The ARN’s

recommendations are not binding on the parties.


exist?

The FSA is a government authority and its decisions may be

appealed to the general administrative courts in Sweden.


accessible?

All documents submitted to, or sent from, Swedish governmental

agencies are, in general, public. A decision by the FSA or a

judgment by the general courts in Sweden is therefore, in general,

publicly accessible. However, the right to freedom of information

can be limited by secrecy.










Legislation in Sweden follows directives and regulations from the

EU. Regulation has changed and tightened following the financial

crisis.

Furthermore, subsequent to the financial crisis, the FSA

strengthened its operations and supervision. The FSA’s regulatory

powers have also increased.

Consumer rights in financial services agreements have increasingly

become a matter of focus. Subsequent to the financial crisis,

consumers have brought cases against banks and other financial

institutions, primarily concerning negligent advice and asset

management.

There has been an increase in the amount of cases following the

financial crisis, but the cases primarily concern board/management

liability or professional liability. In this context, there has been a

highly publicised case between the shareholders and the board of a

Swedish investment bank (HQ Investment Bank). The claim was

unsuccessful.



customer-friendly?

Sweden would be considered financial institution-friendly but with

an extensive protection for consumers.





drawn from them.

As mentioned above (question 7.1), there recently has been some

cases of interest in the financial services sector, but such cases have

primarily been targeting the liability of boards and management of

companies as well as their advisors’ professional liability.

Furthermore, most disputes between commercial customers and

financial institutions are resolved by way of arbitration, which is why

significant cases usually do not become publicly known or available.

There are no recent significant arbitration cases concerning financial

services that we can address in this context.


Swed

en


Andreas Johard


Kungsträdgårdsgatan 20, P.O. Box 7801

SE 103 96 Stockholm

Sweden

Tel: +46 760 000 027 Email: andreas.johard@

hannessnellman.com URL: www.hannessnellman.com

Björn Andersson


Kungsträdgårdsgatan 20, P.O. Box 7801

SE 103 96 Stockholm

Sweden

Tel: +46 760 000 038 Email: bjorn.andersson@

hannessnellman.com URL: www.hannessnellman.com

Andreas has extensive experience in both competition law and

transactions but is specialised in commercial dispute resolution and

specifically international arbitration. He is a member of the board of

Young Arbitrators Sweden (YAS). Andreas has acted as counsel in

both domestic and international arbitrations under, for example, the

SCC and the ICC rules, as well as ad hoc proceedings. Andreas has

further acted as counsel before domestic courts, including the Supreme

Court. Andreas’ dispute resolution experience encompasses, inter alia,

the fields of general commercial law, international sales, post M&A,

international investment law, complex disputes in the financial sector,

construction and energy. Furthermore, Andreas has acted several

times as counsel for states in complex setting-aside proceedings

regarding investments made under the Energy Charter Treaty (ECT).

Hannes Snellman’s dispute resolution practice has a long and proven track record of generating successful results for the Firm’s clients. We advise

clients in their business disputes, regulatory investigations and cases of insolvency. We have a wealth of experience in domestic and cross-border

litigation, ad hoc and administered arbitration proceedings as well as in mediation and other forms of alternative dispute resolution. With a focus on

complex international cases, we provide a dedicated team of experts who litigate and arbitrate disputes across different business sectors and under

a wide variety of jurisdictions in an efficient and results-oriented manner. On financial services disputes, we work closely with our market-leading

colleagues in our Banking & Finance team.

Björn is an experienced dispute resolution lawyer and advises clients

on all matters relating to commercial disputes, with a focus on Swedish

and international arbitration as well as litigation before the Swedish

district courts and the courts of appeal. He regularly assists clients

with risk analysis and risk management in connection with ongoing

disputes as well as for the prevention of future disputes.

Björn has acted as counsel for numerous Swedish and foreign clients

in both ad hoc and institutional arbitrations, for example under the

SCC’s rules for ordinary as well as expedited proceedings. He has

advised and represented clients in disputes relating to, inter alia,

construction, franchise, distribution and agency, IT, post M&A and

general commercial agreements.

As concerns financial services litigation before the Swedish general

courts, there is a limited supply of significant cases under the past 12

months. In general, as most court cases are filed by consumers, the

rights of consumers against financial institutions is a common

denominator and the cases often concern misleading prospectuses,

negligent advice and/or the mis-selling of financial products, such

as credit loans and investment products (see also question 1.1).



jurisdiction?

Negative global economic changes also cause instability on the

Swedish market. This will give rise to financial services litigation

and regulation. This was especially evident subsequent to the

financial crisis in 2008. The type of changes in regulation that

follow from EU directives and regulations will not be expanded

upon in this context.


135

Chapter 23


Homburger

Roman Baechler

Reto Ferrari-Visca

Switzerland





In Switzerland, financial institutions and services providers are most

often sued by their clients for performance of a contract or for

breach of contract. If a bank makes a payment to a third party

without valid authorisation by its customer, it will in principle

damage itself. The customer, on the other hand, retains his or her

contractual right to repayment of the assets deposited with the bank.

Bank customers therefore often claim that the bank has executed

certain transactions without a valid authorisation. In addition to

such deficiencies in legitimacy, bank customers also frequently

claim that the bank misadvised them or failed to warn them of

certain risks, thereby committing a breach of contract.


If a customer’s claim is approved, the financial institutions and

services providers are usually ordered to pay a certain amount of

money or recover other assets.




In principle, each contracting party has the right to bring an action

against the other contracting party (for untrue or misleading

statements in prospectuses or similar documents see question 3.5

below).

In cantons that have a commercial court, companies entered in the

commercial register must file claims against their bank with the

commercial court if the amount in dispute is over CHF 30,000. By

contrast, individuals have the choice as to whether they wish to

bring their action before the commercial court or the ordinary

district courts (Article 6 of the Code of Civil Procedure (CCP)). In

contrast to commercial entities, individual consumers also have the

right to bring an action at their own domicile (Article 32 of the

CCP).





this?

Third-party funding is generally permitted and available under

Swiss civil procedure law. In a recently published proposal for a

revision of the CCP, the Federal Council even suggested that the

courts should draw the attention of every plaintiff to this possibility.

Litigation insurance is likewise available and popular in

Switzerland. Typically, litigation insurance policies cover the

insured person’s attorney fees, court costs and a possible

compensation for the counterparty’s legal costs. Litigation

insurance thus lowers the hurdles for initiating a lawsuit.

Nevertheless, the well-insured Swiss are not known for their

particular litigiousness.





Actual class actions are not available in Switzerland. However,

pursuant to Article 71 of the CCP, two or more parties may jointly

bring an action or be sued jointly if their rights and duties result

from similar circumstances or legal grounds, and if each case is

subject to the same type of proceedings. In its recently published

proposal for a revision of the CCP, the Federal Council further

contemplated introducing a collective redress mechanism according

to which not-for-profit organisations would be able to bring claims

on behalf of their members if they have been authorised to do so in

a form that permits proof to be evidenced by text. Pursuant to

Article 89 of the CCP, such mechanism is currently only available

for requesting injunctive and declaratory relief concerning the

infringement of personality rights.






case?

Procedural costs are a significant barrier to financial services

Switz

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nd


litigation for customers. Pursuant to Article 98 of the CCP, the

courts may require the plaintiff to make an advance payment for the

expected court costs. In financial services disputes, the plaintiff will

normally have to make such an advance payment. The amount to be

advanced depends on the court and the amount in dispute (e.g., for

an amount in dispute of CHF 1 million, the basic tariff for the court

costs in Zurich is CHF 30,750).

In addition, at the request of the respondent in ordinary proceedings,

the plaintiff may be required to provide security for the respondent’s

potential legal costs under certain conditions, in particular, if the

plaintiff has no domicile or registered office in Switzerland or in a

country that entered into a treaty with Switzerland excluding

security for party costs (Article 99 of the CCP). Therefore, Swiss

financial institutions and services providers often request a security

for their legal costs if the plaintiff is not based in Switzerland.

In its recently published proposal for a revision of the CCP, the

Federal Council suggests that the advance payment be limited to

half of the expected court costs.

In most agreements and general terms and conditions, Swiss

financial institutions and service providers use clauses meant to

limit their duty of care. Swiss banks (i.e., licensed financial

institutions), however, can generally only exclude liability for slight

negligence. In addition, courts may even nullify an exclusion of

liability for slight negligence at their own discretion (Article 100 of

the Swiss Code of Obligations (CO)).






clock’?

Pursuant to Swiss law, contractual claims generally become time-

barred after 10 years unless otherwise provided (Article 127 of the

CO).

The statute of limitations regarding the contractual obligation to

repay of the assets deposited with the bank does not commence as

long as the banking relationship exists. It becomes time-barred 10

years after the relationship was terminated (Federal Tribunal, case

no. 133 III 37). The statute of limitations of 10 years also applies to

the customer’s claim for reimbursement of retrocessions (Federal

Tribunal, case no. 4A_508/2016).

For interest on capital, the statute of limitations is five years (Article

128(1) of the CO).

The statutory limitation periods may be interrupted by initiating debt

enforcement proceedings, filing an application for reconciliation, or

submitting a statement of claim to a court (Article 135(2) of the CO).

However, the commencement of a regulatory process does not

interrupt the statutory limitation periods.

Swiss civil courts do not observe statutory limitation periods ex officio. Therefore, the respondent must raise the defence that the

claim has become time-barred.





In Switzerland, attorney-client communication is protected by

attorney-client privilege. For the purpose of attorney-client

privilege, it is irrelevant when the communication took place or

where the records of such communication are located. However,

attorney-client privilege only applies if the communication between

a client and an attorney relates to the attorney’s typical professional

activity in the form of legal representation and legal advice. Not

covered by attorney-client privilege are activities with a commercial

focus (e.g., business advice, asset or real estate management, acting

as a board member or escrow agent).

According to the Federal Tribunal, a Swiss bank may not delegate

its obligations under Swiss anti-money laundering regulations to a

law firm and refer to attorney-client privilege. However, the Federal

Tribunal confirmed that parts of the investigation report that clearly

represent legal advice remain protected by attorney-client privilege

(Federal Tribunal, case no. 1B_85/2016). Due to the broad

language, which could be read as the abolition of attorney-client

privilege in the context of internal investigations and fact-findings

by attorneys, the decision met harsh and unanimous criticism from

Swiss attorneys and the legal doctrine.

In Switzerland, there is currently no legal privilege for in-house

counsels. However, in its recently published proposal for a revision

of the CCP, the Federal Council contemplated introducing legal

privilege for in-house counsels.

The Financial Market Supervisory Authority (FINMA) often

appoints law firms or attorneys to conduct audits at supervised

entities and persons (Article 36 of the Federal Act on the Swiss

Financial Market Supervisory Authority (FINMASA)). However,

the communication and work products of these lawyers are not

covered by attorney-client privilege because they are appointed by

FINMA and thus do not act as attorneys.




In Switzerland, financial institutions commonly use standard form

master agreements such as the ISDA Master Agreement for OTC

Derivatives Transactions, the Swiss Master Agreement for OTC

Derivatives Transactions or the Global Master Securities Lending

Agreement. These standard form master agreements are adapted in

a schedule to meet the specific needs of the contracting parties. The

individual transactions under this contractual basis are then

recorded in trading confirmations. Under Swiss law, standard form

master agreements and their schedules are treated as individually

negotiated contracts and not as general terms and conditions to

which specific rules on validity and interpretation would apply. It

should be noted, however, that only the Swiss Master Agreement for

OTC Derivatives Transactions is governed by Swiss law.





Pursuant to Article 11 of the Federal Act on Stock Exchanges and

Securities Trading (SESTA), Swiss securities dealers must observe

certain duties toward their clients (duty to provide information, duty

of due diligence and best execution, and duty of loyalty). These

duties may be specified in contractual agreements. However, terms

that abolish or contradict these duties are not valid.

Upon enactment of the Financial Services Act (FinSA) on January

1, 2020, all Swiss financial services providers will need to comply

with duties similar to those stipulated in the EU Markets in

Financial Instruments Directive (MiFID) and European Markets in

Financial Instruments Regulation (MiFIR). They include

Homburger Switzerland

Switz

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nd


provisions regarding information duties, the assessment of the

appropriateness and suitability of investment advice given to clients,

documentation and rendering of accounts as well as transparency

and care in client orders.




There are no specialist courts for financial services litigation in

Switzerland. In four cantons (Aargau, Bern, St Gallen and Zurich),

however, specialised commercial courts act as first and sole

cantonal instances for commercial and corporate disputes (Article 6

of the CCP). Commercial courts employ specialised judges

(including specialists from the financial industry) to ensure that the

know-how and the experience needed for deciding each case is

available to the court.



In Switzerland, procedural rules for financial services litigation do

not differ from other civil law litigation.





A financial services litigation is normally initiated by filing an

application for reconciliation with a cantonal justice of the peace

(Article 202 of the CCP). If no agreement is reached in the

reconciliation proceedings, the plaintiff is authorised to file an

action with the competent cantonal court of first instance (Article

209 of the CCP). The authorisation is valid for three months. If the

plaintiff files an action with the cantonal court of first instance

without a valid authorisation from the competent cantonal justice of

the peace, the cantonal court of first instance will reject the action.

In Aargau, Bern, St Gallen and Zurich, the plaintiff may directly file

an action with the commercial court without first going through

reconciliation proceedings (Article 198(f) of the CPC) if the claim is

considered a commercial litigation. If only the respondent is

registered in a commercial register, the plaintiff may choose

between the commercial court and the ordinary court (Articles 6 (2)

and 6 (3) of the CCP).






jurisdiction?

There are provisions for mediation in Swiss civil procedural law

(Articles 213 et seqq. of the CCP) but there is no requirement or

expectation that the parties engage in mediation. However, most

court proceedings are preceded by reconciliation proceedings (see

question 3.3 above).

In general, ADR clauses are not included in financial services

contracts and thus ADR is not commonly used to resolve financial

services disputes in Switzerland.

FinSA, which will be enacted on January 1, 2020, will introduce the

principle that financial services disputes between clients and

financial services providers shall be resolved in mediation

proceedings before an ombudsman (Article 74 of FinSA).

However, mediation proceedings before an ombudsman will not be

mandatory. If the parties went through mediation proceedings, the

plaintiff may unilaterally abstain from initiating reconciliation

proceedings and directly file an action with the competent cantonal

court (Article 76 of FinSA).



Pursuant to Article 752 of the CO, acquirers of shares, bonds or

other securities may bring an action against any person involved in

disseminating inaccurate, misleading or unlawful information in

issue prospectuses or similar statements. The plaintiff bears the

burden of proof for the violation of duty, the damage, causality and

negligence.

Apart from a prospectus liability suit, the plaintiff may invoke the

general remedies available under Swiss contract and tort law. A

person providing false or misleading information intentionally may

also become subject to criminal prosecution.

FinSA, which will be enacted on January 1, 2020, will introduce

various changes to the current Swiss prospectus regime. According

to the new provisions, wilful false statements or withholding

significant facts in a prospectus will be sanctioned with a fine of up

to CHF 500,000.

Mis-selling may constitute a breach of contract and a violation of

Article 11 of SESTA (see question 2.5 above). The plaintiff bears

the burden of proof for the violation of duty, the damage and

causality. Culpability is assumed, but the respondent may prove that

he or she was not at fault and thereby exclude liability.





jurisdiction?

If there is a clear discrepancy between performance and

consideration under a contract concluded as a result of one party’s

exploitation, the exploited party may declare within one year that he

or she will not honour the contract and demand restitution of any

performance already made (Article 21 of the CO). This provision

applies to both consumers and professionals. For professionals,

however, it is difficult to establish that they have been exploited.

Pursuant to Article 8 of the Unfair Competition Act (UCA), terms in

standardised agreements with consumers are unlawful if they create,

in a manner contrary to good faith, a considerable and unjustifiable

imbalance between contractual rights and obligations to the

disadvantage of the consumer. A consumer is an individual who acts

in the pursuit of his or her personal or domestic affairs. Therefore,

sophisticated and professional investors are not considered

consumers.






Most contracts with Swiss financial institutions and services


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providers are at least partially subject to Swiss agency law (Articles

394 et seqq. of the CO). Pursuant to Article 400(1) of the CO, Swiss

financial institutions and services providers must give account of

their activities for the clients and return anything received as a result

of their activities. Therefore, clients have a right to obtain

information regarding their contractual relationship with their

counterparty (e.g., client profile, contracts, account statements,

correspondence, and documentation on client contacts). The client

may make the request for information at any time. However, this

right to obtain information generally does not cover commercially

sensitive or confidential information. In the absence of a specific

agreement, the client has to bear the costs for the provision of

information. The right to obtain information becomes time-barred

10 years after the contractual relationship has ended.

Pursuant to Article 8 of the Data Protection Act (DPA), Swiss

financial institutions and services providers must provide all

available personal data of a client in their data collection upon

request by the client. Article 8 of the DPA currently applies to both

individuals and legal entities. In general, Swiss financial

institutions and services providers must comply with such requests

in writing within 30 days. The request may be denied, restricted or

delayed under certain conditions (Article 9 of the DPA). The right

to obtain information based on Article 8 of the DPA is not subject to

any statute of limitation. However, Article 8 is not applicable if the

client has already initiated civil or criminal proceedings (Article

2(2)(c) of the DPA).

FinSA, which will be enacted on January 1, 2020, will introduce an

additional right to information for clients. Pursuant to the new

provisions, clients are at any time entitled to request a copy of their

dossier and any other documents relating to them, which the

financial service provider has produced in the course of the business

relationship. Swiss financial institutions and services providers

must comply with such requests in writing within 30 days and free

of charge. The right to obtain information becomes time-barred 10

years after the contractual relationship has ended.

4 Post Trial


disputes?

Decisions in financial services disputes may be appealed in the same

way as decisions in other civil law matters.

Decisions rendered by a cantonal court of first instance (district

court) may be appealed to the cantonal court of appeal within 30

days on grounds of incorrect establishment of the facts or incorrect

application of the law if the amount in dispute is at least CHF 10,000

(Articles 308 and 310 of the CCP). Judgments below this threshold

and procedural decisions may be appealed within 30 days (or 10

days in case of summary decisions and procedural orders) for

incorrect application of the law or obviously incorrect establishment

of the facts (Articles 319 and 320 of the CCP).

Decisions rendered by a cantonal court of appeal may be further

appealed to the Federal Tribunal if the amount in dispute is a least

CHF 15,000 (disputes relating to employment and tenant law) or

CHF 30,000 (any other disputes), respectively (Article 74 of the

Federal Tribunal Act (FTA)).

Judgments rendered by a commercial court may directly and

exclusively be appealed to the Federal Tribunal (Article 75 of the

FTA). The Federal Tribunal reviews cases appealed to it for legal

and gross factual errors (Articles 95 et seqq. of the FTA).


services disputes?

There are no special rules regarding cost allocation for financial

services disputes in Switzerland.

As a rule, the losing party must bear the procedural costs (court

costs and party costs). If neither party has entirely prevailed, the

court will allocate the procedural costs in accordance with the

outcome of the case (Article 106 of the CCP). Under certain

conditions, the court may diverge from this general rule and allocate

the costs at its own discretion, in particular, if a party was caused to

litigate in good faith or if the allocation of the costs in accordance

with the outcome of the case would lead to an inequitable result

(Article 107 of the CCP).

In case of a settlement, the court usually allocates the procedural

costs according to the terms of the settlement agreement (Article

109 of the CCP).

Since each canton has its own tariff for the procedural costs (Article

97 of the CCP), the costs differ from canton to canton but

principally depend on the amount in dispute.





The typical issue in cross-border disputes or investigations

involving financial institutions is the transfer of personal data to

foreign courts, regulators, or enforcement authorities.

Several legal provisions restrict disclosure of personal data to

foreign authorities; inter alia, the prohibition of unlawful activities

on behalf of a foreign state (Article 271 of the Criminal Code (CC)),

Swiss banking secrecy (Article 47 of the Banking Act (BA)), Swiss

data protection and labour laws. Additionally, contractual secrecy

obligations or confidentiality agreements may prevent the

disclosure of data.

Article 271 of the CC prohibits and sanctions activities on behalf of

a foreign state on Swiss territory unless the responsible

administrative body has granted an authorisation. Article 271 of the

CC protects Switzerland’s territorial sovereignty and aims at

preventing foreign states or parties from circumventing

international conventions on mutual legal assistance. In general,

Swiss-based financial institutions and individuals are thus required

to obtain an authorisation by the Swiss government if they intend to

disclose personal data to foreign authorities.

Pursuant to Article 47 of the BA, it is a crime to disclose confidential

information relating to current or former clients of a Swiss bank.

Swiss banking secrecy applies to all employees, agents and

representatives of Swiss banks, including outside counsel. A breach

of Swiss banking secrecy may not only trigger criminal sanctions

but also administrative measures or proceedings and civil liability.

The DPA requires, inter alia, that personal data only be processed

lawfully, in good faith and in a proportionate manner (Article 4 of

the DPA). In addition, the DPA provides that personal data may not

be disclosed to recipients outside of Switzerland if this seriously

endangers the privacy of the data subject (Article 6 of the DPA).

Such risk is presumed as a matter of statutory law if the country of

destination is lacking adequate data protection regulation. The

Swiss Data Protection Commissioner maintains a list of countries

that are deemed to have adequate data protection.


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As mentioned under question 5.1 above, it is a criminal act to

perform activities on behalf of a foreign state on Swiss territory

without an authorisation. Taking of evidence in Switzerland is

deemed to be in the sole purview of Swiss courts. For example,

private attorneys may not conduct depositions in Switzerland and

later on use them in a foreign litigation without having been

authorised to do so pursuant to the Hague Convention on the Taking

of Evidence Abroad in Civil or Commercial Matters (HEC).

According to the HEC, judicial authorities of another contracting

state may also request the competent Swiss authority, by means of a

letter of request, to obtain evidence. However, Switzerland made a

reservation that it will not execute letters of request issued for the

purpose of obtaining pre-trial discovery of documents as known in

common law countries if (i) the requested documents are not

directly and necessarily connected to the underlying proceedings

abroad, (ii) a party or third person is asked to indicate which

documents relating to the dispute are in its possession, or (iii) other

legitimate interests are endangered.

Consequently, Switzerland only provides judicial assistance for

foreign pre-trial discovery proceedings if the requesting party

describes the evidence specifically and the evidence is reasonably

connected to assertions made in the respective litigation (Federal

Tribunal, case no. 132 III 291).

In addition, according to case law of the Federal Tribunal, a bank

client must have been given the opportunity to take part in the

proceedings of the requesting foreign court if the bank is requested

to produce documents relating to that client. If the client’s right to

be heard was not respected, Switzerland will not comply with a

letter of request because this would violate fundamental principles

of Swiss law (Federal Tribunal, case no. 142 III 116).

Swiss financial institutions may transmit non-public information to

foreign financial market supervisory authorities if the prerequisites

for granting international administrative assistance are fulfilled.

However, the foreign institution must preserve business and Swiss

banking secrecy, data protection and employee rights (Article 42c of

FINMASA).

FINMA may transmit non-public information to foreign financial

market supervisory authorities only if (i) this information is used

exclusively to implement financial market law, and (ii) the

requesting authorities are bound by official or professional secrecy

(Article 42 of FINMASA). Foreign authorities whose activities

relate exclusively to criminal prosecution and taxation do not

qualify as financial market supervisory authorities.



Extra-territorial jurisdiction is not typically asserted in Switzerland.

In Switzerland, jurisdiction is governed by Articles 9 et seqq. of the

CCP for domestic disputes, and by the Private International Law Act

(PILA) for international disputes unless an international treaty (e.g.,

Lugano Convention on Jurisdiction and the Recognition of

Judgments in Civil and Commercial Matters (LugC)) is applicable

(Article 1 of the PILA).

In general, in order to establish jurisdiction in Switzerland, either (i)

the respondent must have domicile or a registered office in

Switzerland, (ii) the parties must have agreed on a Swiss forum

based on a valid jurisdiction clause, or (iii) a Swiss forum is

applicable based on a legal provision for special matters (e.g.,

contract law or tort law).



Swiss law generally recognises unilateral jurisdiction clauses as

long as they meet the applicable requirements for jurisdiction

agreements. A unilateral jurisdiction clause is valid, inter alia, if it

is based on the parties’ consent and relates to a particular legal

relationship (Article 17 of the CCP, Article 5 of the PILA and Article

23 of the LugC).

6 Regulated Bodies



FINMA is Switzerland’s independent financial-markets regulator.

FINMA’s main task is to supervise banks, insurance companies,

exchanges, securities dealers, collective investment schemes, and

their asset managers and fund management companies.

SIX Exchange Regulation AG (SIX Regulation) is an autonomous

and independent body within the SIX Group. It is responsible for

the supervision and enforcement of the applicable stock exchange

laws and rules at the trading venues of the SIX Group (SIX Swiss

Exchange Ltd, SIX Corporate Bonds Ltd and SIX Repo Ltd). SIX

Swiss Exchange Ltd is the leading stock exchange in Switzerland.

For certain administrative infractions, the competent administrative

authorities are in charge of the prosecution (Articles 13 and 357 of

the Criminal Procedure Code (CrimPC)). The Federal Department

of Finance (FDF) is responsible for prosecuting failures to notify

qualified shareholdings or omissions to file a suspicious activity

report to the Money Laundering Reporting Office Switzerland

(MROS).

Prosecution authorities (in particular, the Office of the Attorney

General at the federal level and cantonal prosecutors at the cantonal

level) assisted by the police are responsible for criminal proceedings

whenever a criminal act might have been committed (Articles 1 and

12 et seqq. of CrimPC). In criminal proceedings, persons who have

suffered damages may bring civil claims as a private plaintiff

(Articles 119 and 122 et seqq. of CrimPC).

The Swiss Banking Ombudsman is an independent mediator for

complaints raised by clients against banks based in Switzerland.

The mediation services of the Banking Ombudsman are free of

charge for the client. Mediation services will not be provided if

proceedings before a court have already been initiated. In 2017, the

Swiss Banking Ombudsman concluded 2,027 cases. 20% of the

cases are related to banking fees.



have?

FINMA has a wide set of enforcement tools (Articles 24a and 29 et seqq. of FINMASA). It may (i) demand that information and

documentation be provided, (ii) open formal administrative

proceedings against supervised entities and persons, (iii) appoint an

independent and qualified person to conduct audits, (iv) order

measures to restore compliance with the law, (v) issue a declaratory


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ruling if the supervised entities and persons have seriously violated

supervisory provisions, (vi) prohibit individuals from acting in a

management capacity or exercising a professional activity, (vii)

carry out the disgorgement of profits, and (viii) withdraw licences

and order the liquidation of financial institutions. However, FINMA

has no authority to impose any fines or other sanctions on

supervised entities and persons.

SIX Regulation may (i) appoint experts, and (ii) interrogate the

parties involved and third parties. In case of a violation, SIX

Regulation may impose the following sanctions: (i) reprimand; (ii)

fine of up to CHF 1 million (in cases of negligence) or CHF 10

million (in cases of wrongful intent); (iii) suspension of trading; (iv)

delisting or reallocation to a different regulatory standard; (v)

exclusion from further listings; and (vi) withdrawal of recognition.

The FDF and prosecution authorities, which have a wide range of

powers in order to gather evidence, may, inter alia, (i) demand that

information and documentation be provided, (ii) interview an

accused person, witnesses and other informants, (iii) conduct

inspections, (iv) appoint experts, and (v) conduct inspections. The

sanctions to be imposed depend on the violation or crime

committed.

The Swiss Banking Ombudsman only acts as an independent

mediator and thus has no powers. However, the Swiss Banking

Ombudsman is entitled to contact the Swiss bank in question and

obtain documentation and information from the bank if the bank

client has released the bank from Swiss bank secrecy towards the

Swiss Banking Ombudsman.



As a general rule, civil courts form their opinion based on their free

assessment of the evidence taken (Article 157 of the CCP). This

rule also applies to financial services disputes. Therefore, decisions

of regulatory bodies are not binding for civil courts. However, civil

courts do not commonly differ from the facts established by the

regulatory bodies without good cause.

The recommendations of the Swiss Banking Ombudsman are not

binding. However, in the vast majority of the cases (96%), for

which the Swiss Banking Ombudsman recommended concessions

from the Swiss bank in question in 2017, the bank followed the

recommendation.


exist?

The decisions of FINMA may be appealed to the Federal

Administrative Court (Article 47(1)(c) of the Administrative

Procedure Act (APA)). The Federal Administrative Court’s decision

may be further appealed to the Federal Tribunal (Article 82 of the

FTA).

The decisions of SIX Regulation may be appealed to the Sanctions

Commission of the SIX Group. Depending on the sanction, the

Sanctions Commission’s decisions may be appealed either to an

independent appeal board or the court of arbitration.

The decisions of the FDF on administrative infractions may be

appealed to the Federal Criminal Court (Article 50(2) of

FINMASA). The Federal Criminal Court’s decisions may further

be appealed to the Federal Tribunal (Article 78 of the FTA).

Bank clients do not take part in proceedings of FINMA, SIX

Regulation and FDF and thus may not appeal decisions of these

regulatory bodies.

Since the Swiss Banking Ombudsman’s recommendations are non-

binding, there is no right of appeal.


accessible?

The decisions of FINMA are not publicly accessible. However,

since 2015, FINMA has published an annual enforcement report. In

these reports, FINMA publishes anonymised summaries of the cases

processed and decided during the past year. The report also includes

references to court rulings and statistics on FINMA’s enforcement

activity.

SIX Regulation publishes the decisions that have become legally

enforceable on its website in anonymised form.

In general, the decisions of the EFD and prosecution authorities are

not published whereas the decisions of the courts of appeal are

published.

The recommendations of the Swiss Banking Ombudsman are not

publicly accessible. However, the Swiss Banking Ombudsman has

published around 300 anonymised case reports on its website. In

addition, the Swiss Banking Ombudsman publishes an annual

report, which also includes anonymised case reports.










In its recently published proposal for a revision of the CCP, the

Federal Council suggests several changes that will lower the

barriers for customers to litigate (e.g., reduction of advance

payments for court costs, new rules regarding the liquidation of

procedural costs, reconciliation hearings before commercial courts

and class settlements).

FinSA, which will be enacted on January 1, 2020, will introduce

several changes to the Swiss regulatory framework: (i) obligation

for foreign services providers to register if they intend to provide

services in Switzerland; (ii) client categorisation rules based on the

EU concept of professional and private clients; (iii) market conduct

rules (see question 2.5 above); (iv) uniform prospectus rules; and (v)

supervision of external asset managers by an independent

supervisory organisation approved and monitored by FINMA.

Following the financial crisis, the powers of neither FINMA nor the

FDF have been increased. Since the financial crisis, however, an

increase of proceedings and sanctions against individuals can be

observed.



customer-friendly?

In general, the burden of proof with regard to a breach of contract,

the damage and causation lies with the customer as plaintiff.

Furthermore, cost barriers may prevent clients from filing an action

against financial institutions (see question 2.1 above). In this

respect, Switzerland is not very plaintiff-friendly.


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On the other hand, in particular at the district courts, judges show

sympathy and understanding for retail clients. In addition, the

requirements for the duty of care to be observed by Swiss banks

have become increasingly stricter.





drawn from them.

In a decision of January 29, 2018 (case no. 4A_54/2017), the

Federal Tribunal ruled that if a bank client cannot prove that the

bank advisor has recommended an investment, the court will assess

based on the circumstances whether or not the bank has assumed an

obligation to advise the client. In this case, the client was unable to

establish that the bank actually recommended the investment.

According to the Federal Tribunal, it was more likely that the client

wanted to invest on his or her own initiative. As a result, the Federal

Tribunal concluded that the bank had no special duty to provide

information or advice.

In a decision of April 16, 2018 (case no. 4A_586/2017), the Federal

Tribunal upheld the appeal of a private bank against a judgment of

the Zurich Commercial Court, as the bank client had not sufficiently

substantiated the asserted losses. According to the Federal Tribunal,

the client must prove the loss for each single investment. The client,

however, had improperly calculated the loss based on the difference

between the bank advisor’s statements, which did not include the

unauthorised investments, and the actual value of the securities

account.

In a decision of May 29, 2018 (case no. 4A_81/2018), the Federal

Tribunal held that when a bank fulfils its contractual obligations in

connection with the execution of payment orders, the bank client

must prove in the event of fraud that a third party has misused his or

her identity or means of communication. In this case, however, the

client was unable to establish that his or her email account had

actually been hacked.

In a decision of August 14, 2018 (case no. 6B_689/2016), the

Federal Tribunal confirmed the conviction of an external asset

manager for criminal breach of trust, as he had not informed his

clients about the receipt of retrocessions. According to the court, a

person who, in breach of contractual duties, does not inform his or

her client about retrocessions received in connection with activities

for this client, and thus causes the client to be unable to claim the

surrender of the payments, commits a criminal breach of trust.



jurisdiction?

Following the financial crisis of 2008, various regulations in the

Swiss banking sector were tightened. For example, banks today

must meet higher capital requirements than before the crisis.

Moreover, as an indirect result of the financial crisis, Switzerland

has entered into several multilateral agreements that provide a basis

for an automatic exchange of information for tax purposes between

Switzerland and other states. Meanwhile, most Swiss banks have

also settled their dispute with the US regarding undeclared assets

and have generally adopted the strategy of only accepting correctly

taxed assets. Both the cooperation with the US authorities and the

adoption of the automatic exchange of information in tax matters

have led to a wave of lawsuits concerning data transfers abroad.


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Roman Baechler

Homburger

Prime Tower

Hardstrasse 201

8005 Zurich

Switzerland

Tel: +41 43 222 10 00 Email: [email protected] URL: www.homburger.ch

Reto Ferrari-Visca

Homburger

Prime Tower

Hardstrasse 201

8005 Zurich

Switzerland

Tel: +41 43 222 10 00 Email: [email protected] URL: www.homburger.ch

As a leading Swiss corporate law firm, Homburger advises and represents enterprises and entrepreneurs in all aspects of commercial law –

transactions, proceedings and complex cases in both a domestic and a global context. Homburger offers its clients legal advice, supports them

through negotiations, represents them before public authorities and in court, and protects their interests in administrative proceedings. Homburger’s

more than 150 lawyers are registered with the Bar Association of the Canton of Zurich and/or practise as tax advisors. Thanks to the teamwork of

experienced specialists, Homburger can offer comprehensive and professional advice in all key areas of commercial law. Homburger is particularly

proud of its dispute resolution team, which is one of the largest and most effective in Switzerland.

Roman Baechler studied law at the University of Zurich, from which he

graduated in 2002. After working as an academic assistant at the

University of Zurich and as a law clerk at the District Court of Zurich,

he obtained a doctorate in law in 2007. Starting in 2008, he worked as

a law clerk with special duties and deputy judge at the District Court of

Zurich and was admitted to the bar in Switzerland one year later. In

2010, he joined Homburger as an associate, and in 2014 he graduated

with a Master of Laws (LL.M.) from Columbia Law School. In 2019,

Roman Baechler became a partner at Homburger. He specialises in

domestic and international commercial litigation.

Reto Ferrari-Visca graduated from the University of Bern in 2009. He

later worked as a law clerk at the District Court of Thun and the

government of the district of Oberaargau. He was admitted to the bar

in Switzerland in 2012 and joined Homburger as an associate in the

same year. In 2016, he obtained a postgraduate diploma in Financial

Market Law from the University of Zurich. He specialises in domestic

and international litigation and administrative proceedings, as well as

in internal investigations and regulatory/compliance matters. His

practice also focuses on privacy and data protection law and he

regularly advises clients on cross-border privacy and data protection

issues. He is fluent in German and English and understands French

and Italian.


143

Chapter 24


Debevoise & Plimpton LLP

Matthew L. Biben

Mark P. Goodman

USA





Common causes of action brought by and against financial

institutions can be organised into several broad categories.

The first category of claims is the sort of general business litigation

that all large corporations face: this includes employment and labour

disputes and suits with vendors for breach of contract.

The second category relates to litigation brought by or against

counterparties and investors, including consumers, borrowers, joint

venture partners, and shareholders, the most common forms of which

include suits for breach of fiduciary duty, shareholder derivative

claims, misrepresentation, negligence, breach of contract, statutory

claims under federal and state consumer protection laws (including

pursuant to “unfair or deceptive practices” or “UDAP” laws), fraud

and, for broker-dealers, suitability and failure to supervise claims.

Some of these lawsuits are brought as class actions. In the last 10

years, many actions were brought both by and against financial

institutions relating to alleged fraud, misrepresentation, and breach

of contract arising from mortgage securities, collateralised debt

obligations, and credit derivative products.

The third category involves civil and occasionally criminal cases

brought by government agencies, such as state attorneys general and

district attorneys acting under their respective state’s UDAP statute

and other laws, and federal agencies such as the Securities and

Exchange Commission (“SEC”), Consumer Financial Protection

Bureau (“CFPB”), Commodity Futures Trading Commission

(“CFTC”), Department of Housing and Urban Development

(“HUD”), and Department of Justice (“DOJ”), acting pursuant to

federal securities, banking, and consumer protection laws. In the

last 10 years, federal and state agencies were especially active in

bringing enforcement actions against financial institutions for

alleged wrongdoing relating to the financial crisis, particularly with

respect to the packaging, rating, marketing, and sale of mortgage

securities. In addition, regulators investigated and brought

enforcement actions relating to interest rate-fixing schemes (e.g.,

LIBOR), high-frequency trading, insider trading, share class

selection disclosures, mortgage default and foreclosure practices,

credit card collection practices, and cryptocurrencies.

Investigations and enforcement actions brought pursuant to the

Financial Institutions Reform, Recovery, and Enforcement Act

(“FIRREA”) and False Claims Act (“FCA”) have been particularly

common given the relatively long statutes of limitation applicable to

each and the breadth of financial services-related conduct they

cover, including consumer lending and securities.


The most common remedies awarded in litigation involving financial

institutions are money damages, civil money penalties (including

fines), and equitable relief to restrain future violations and remedy the

effects of past violations. Regulatory agencies commonly seek

monetary penalties, restitution to injured private parties,

disgorgement of improper gains, cease-and-desist orders, and onerous

compliance plans that impose duties on the board of directors and

sometimes must be monitored by an independent third party.




The availability of a cause of action will depend on the jurisdiction

and the nature of the alleged injury. Typically, anyone who suffers a

statutory, common law, or contractual injury will have standing to

bring suit. While the availability of a cause of action does not

typically turn on whether the customer is an individual or a

commercial entity, sophisticated entities may face a higher burden in

establishing certain elements of a cause of action or defence – e.g., the

detrimental reliance that is an element of fraud claims in many states.

Certain statutes create a right of action that can only be enforced by

government actors or agencies and not private parties. Other federal

and state laws contain, or have been interpreted to contain, a private

right of action authorising private parties to bring claims for breach

of regulatory duties. While the general rule of statutory

interpretation is that in the absence of express legislative intent,

duties imposed by statute or regulation may not form the basis for a

private right of action, courts have sometimes found that a private

right of action is “implied” in the text of the statute. For example,

courts have ruled that there is an implied private right of action to

enforce the anti-fraud provisions of the federal securities laws. The

scope of an implied right of action is construed narrowly.





this?

The doctrines of champerty and maintenance – which have

USA


historically operated to preclude third parties from encouraging or

funding lawsuits – are permitted in some states and prohibited or

abandoned in others. Where the champerty and maintenance

doctrines do not act as a bar, litigation finance has become an

increasingly important part of dispute resolution. Financing is far

more common for plaintiffs than defendants, but the defendant-side

market is developing. Many plaintiff-side lawyers also offer

alternative fee arrangements, such as contingency fees, which lower

the downside risk for plaintiffs and encourages litigation.

On the defendant side, most companies provide directors and

officers with liability insurance that covers litigation costs and

settlements that arise out of acts they perform on behalf of the

company. Such policies typically contain exclusions and

limitations, including for criminal or deliberately fraudulent

conduct.





Class action lawsuits are available in the United States and require:

that the members of the class be numerous; that there be common

questions of law or fact among the class members; that the class

representatives have claims typical of the class; and that those

representatives will fairly protect the class’ interest. The most

common class actions brought against financial services firms are

shareholder derivative actions, suits under federal and state

consumer protection laws (e.g., the Telephone Consumer Protection

Act, state UDAP statutes), and claims under federal and state

securities laws.

Immediately following the financial crisis, there was a significant

spike in the number of securities class action suits brought against

companies in the financial sector. Since 2010, new filings of such

class actions appear to have fallen back to pre-crisis levels.

In many cases, class actions are precluded by arbitration clauses in

consumer contracts. In July 2017, the CFPB promulgated a rule

aimed at limiting the ability of financial services providers to insert

such waivers into consumer contracts, but that rule was abrogated

by a federal statute passed in November 2017, so class action

waivers remain permissible for now.

The Class Action Fairness Act of 2005 expanded the ability of

financial services firms to remove class action lawsuits from state

court to federal court.






case?

Arbitration clauses in consumer contracts are one of the main

barriers to litigation for customers. The Federal Arbitration Act

(“FAA”) promotes the enforceability of arbitration clauses and

applies broadly to any “contract evidencing a transaction involving

commerce”. The FAA reflects a U.S. policy in favour of arbitration

and has been held to pre-empt state statutes limiting the

enforceability of arbitration clauses.

Other barriers to financial services litigation include liability

limitations, exclusions, or waivers incorporated into consumer

contracts. Liability waivers are generally enforced, except in cases

where the financial institution has engaged in wilful misconduct or

gross negligence.

Arbitration clauses and liability waivers will not be enforced if they

are unconscionable or if they contravene a mandatory statutory duty

or public policy. Demonstrating that a contractual provision is

unconscionable is an exceedingly high burden and requires a

showing that the clause is “fundamentally unfair or oppressive to

one of the bargaining parties”.






clock’?

Statutes of limitations differ depending on the underlying cause of

action. In New York, for example, claims for breach of contract and

fraud are subject to a six-year statute of limitations. In Delaware, a

recent law allows parties to contractually provide for a 20-year

statute of limitations for breach claims involving contracts valued at

more than $100,000.

Actions brought under the FIRREA – a broad civil anti-fraud statute

that subjects financial institutions to civil money penalties for

violating any one of a number of other federal statutes – are subject

to a 10-year statute of limitations. Claims pursued under the FCA

must be pursued either (1) six years from when the fraud was

committed, or (2) three years after the United States knew or should

have known about the material facts surrounding the fraud (but in no

event more than 10 years after the date on which the violation is

committed). Civil enforcement actions pursued by the SEC are

subject to the general five-year statute of limitations for government

actions seeking a “civil fine, penalty, or forfeiture”.

Claims for securities fraud pursued by the New York Attorney

General under the far-reaching Martin Act are subject to a three-year

statute of limitations.

When a federal or state government agency launches an

investigation, it is common practice for the company under

investigation to enter into an agreement to toll the applicable statute

of limitations. This can sometimes lead to prolonged investigations.

Refusing an agency’s request to sign a tolling agreement can be

interpreted by the regulator as an indicia of a lack of cooperation.





The attorney-client privilege can be asserted to withhold documents

or information in financial services litigation. In the context of a

regulatory examination or investigation, certain federal agencies,

including the Federal Reserve, the Office of the Comptroller of the

Currency (“OCC”), the Federal Deposit Insurance Corporation

(“FDIC”), and the CFPB, have asserted their authority to compel

banking institutions to produce information that would otherwise be

covered by the attorney-client privilege. In addition, parties cannot

invoke the attorney-client privilege to withhold documents or

information in connection with an investigation by the U.S.

Congress.

U.S. jurisdictions differ over whether the voluntary disclosure of

attorney-client privileged material to a regulatory agency waives

privilege as to third parties, known as the selective waiver doctrine.

Debevoise & Plimpton LLP USA

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A majority of U.S. jurisdictions hold that disclosure of a privileged

document to a government regulatory agency will destroy the

privilege as against third parties; the remaining jurisdictions take the

opposite view. The CFPB has specified in a rule that an institution

submitting information to the Bureau does not waive privilege with

respect to third parties.




Regulated entities in the United States typically document their

qualified financial contracts pursuant to ISDA Master Agreements

and master repurchase agreements. U.S. courts generally enforce

standard form master agreements, especially when the agreements

are between two sophisticated parties, such as financial institutions.

The ISDA Master Agreement has not been subject to much litigation

in the United States outside of the realm of bankruptcy proceedings.





Non-contractual duties that are binding on financial institutions

include duties imposed by the common law, such as fiduciary duties,

and by federal and state statutes.

Securities broker-dealers and financial advisors generally owe a

fiduciary duty to their clients. Fiduciary duties may also exist when

a financial services entity acts in an advisory capacity with a

customer. Corporations, and directors who serve on corporate

boards, have fiduciary duties to shareholders. When a corporation

enters the zone of insolvency, the directors also owe fiduciary duties

to creditors and must act in accordance with the creditors’ interests.

Delaware law allows corporate directors to contract out of part of

their duty of loyalty to the corporation, specifically with respect to

corporate opportunities.

Financial services entities are not subject to fiduciary duties when

they engage in arms-length transactions, such as traditional creditor-

debtor relationships or loan participation agreements.

Securities disclosure requirements (pursuant to the Securities Act of

1933, Securities Exchange Act of 1934, and the Investment

Advisors Act of 1940), disclosure requirements imposed by the

federal Truth in Lending Act (“TILA”) for consumer credit

products, and numerous state regulatory statutes establish duties

owed by a financial institution to its investors and customers. A

financial institution cannot contractually disclaim its statutory

liability.

The common law of most states imposes an implied duty of good

faith and fair dealing whenever there is a contractual relationship

between the parties. Because they are implied duties, courts

generally construe them very narrowly.




In the United States, civil litigation is brought either in federal court

or state court. Federal courts are courts of limited civil jurisdiction;

they will hear (1) civil cases involving issues arising under federal

law, and (2) civil cases where the amount in controversy exceeds

$75,000 and the parties are “diverse” from one other (meaning they

differ in state and/or nationality). State courts, by contrast, are

courts of general jurisdiction and do not impose subject-matter

restrictions on the civil cases they will hear.

In the federal court system, there are no specialist courts or judges

for financial services litigation. Federal administrative proceedings,

however, are overseen by administrative law judges who have

familiarity with specific regulatory topics; SEC administrative law

judges, for example, have expertise with respect to the federal

securities laws administered by the SEC. In addition, claims against

broker-dealers registered with the Financial Industry Regulatory

Authority (“FINRA”) can be brought before a FINRA arbitral panel,

composed of industry experts.

At the state level, some states, including New York, Florida, and

Illinois, have dedicated commercial courts established to hear cases

involving business transactions with financial institutions, among

other commercial entities. In New York, the Commercial Division

hears cases involving a wide range of financial services litigation,

including breach of contract or fiduciary duty, fraud, derivative

actions, commercial class actions, and statutory violations arising

out of business dealings. Claims generally must exceed a minimum

amount in controversy. Special civil procedures often apply in these

courts, such as shorter discovery timetables.



Service methods do not vary by type of proceeding, but often vary

by court. It is critical to review the rules specific to the court or

district in which the litigation is taking place.





There are no pre-trial procedures that are unique to financial services

litigation; however, as discussed in question 3.2, it is important to

recognise that pre-trial procedures vary by court. For example, New

York’s Commercial Division imposes tight discovery limitations and

timetables and applies harsher sanctions for non-compliance.

With regard to regulatory enforcement actions and rulings, a party

may be required to exhaust administrative remedies before seeking

judicial review of an agency determination.

For derivative actions brought by shareholders, many state

corporations laws require that a pre-suit demand be made to the

board of directors before an action may be filed.






jurisdiction?

The FAA promotes the enforceability of arbitration clauses and

applies broadly to any “contract evidencing a transaction involving

commerce”. The FAA reflects a U.S. policy in favour of arbitration

and has been held to pre-empt state statutes limiting the

enforceability of arbitration clauses. Arbitration of financial

services disputes is very common and many consumer contracts


USA


contain arbitration clauses. In 2015, the CFPB found that 53% of

the total credit card market included mandatory arbitration clauses

in their consumer contracts, and so did 44% of the checking account

market.

Certain self-regulatory organisations, such as FINRA, provide for

arbitration of disputes, even in the absence of a contractual

arbitration provision between the parties.



Many state jurisdictions recognise common law causes of action for

negligent misrepresentation. A plaintiff suing for negligent

misrepresentation generally must show: (1) a misrepresentation; (2)

justifiable reliance; (3) causation; and (4) pecuniary loss. In addition

to the common law cause of action, many plaintiffs can seek

statutory remedies for negligent misrepresentation under state

consumer protection statutes.





jurisdiction?

Courts generally uphold contract terms even if they are the result of

a certain level of unequal bargaining power, although contract terms

that are unconscionable or contrary to public policy will not be

upheld. Unfair terms also can run afoul of federal and state UDAP

laws, which define unfair practices broadly.

Numerous federal and state UDAP and consumer protection statutes

grant a private right of action to consumers to bring suits relating to

violations of regulatory requirements and unfair or deceptive

business practices.

The term “consumer” is defined differently depending on the

jurisdiction and the context, but, in general, state definitions tend to

be broader than federal ones. For example, the Texas Deceptive

Trade Practices Act (Texas’ UDAP statute) defines “consumer” as

any “individual, partnership, corporation, this state, or a subdivision

or agency of this state who seeks or acquires by purchase or lease,

any goods or services”. On the other hand, the CFPB’s definition of

“consumer” varies from regulation to regulation, but is usually

restricted to natural persons, and often to only those individuals who

have purchased products or services from a particular company.






Commercially sensitive and confidential information is not

presumptively protected from discovery in litigation. Most courts

will condition the disclosure of such material pursuant to a

protective order, which restricts the dissemination and use of the

material in several ways.

Many regulatory agencies that seek the production of large

quantities of financial data in connection with supervisory

examinations or investigations have put in place stringent data

security protections in recent years.

In the context of litigation, a customer can request disclosure of

personal data held by a financial services institution if the

information is relevant to the litigation or reasonably calculated to

lead to the discovery of admissible evidence. Most courts, including

all federal courts, require the redaction of certain personally

identifiable information, such as social security numbers, health

data, and bank account numbers, from all documents publicly filed

on the court’s docket.

Federal and state laws, such as the federal Freedom of Information

Act, grant members of the public, including the media, the

presumptive right to obtain documents submitted to federal and

state regulators. Under such laws, confidentiality may provide a

basis to resist disclosure, but a claim of confidentiality must be

made at the time of production to the government agency.

4 Post Trial


disputes?

There is a right to appeal decisions made by lower federal and state

courts to appeals courts. Parties also have a right to appeal a

decision by a federal or state administrative agency; typically, the

initial appeal is heard internally within the agency, and then the

party can file a petition for judicial review with the appropriate U.S.

Court of Appeals or state court.

Certain self-regulatory organisations also provide for a right of

appeal. For example, parties have the right to appeal decisions

made by FINRA hearing panels to FINRA’s National Adjudicatory

Council (“NAC”). Parties can further appeal the NAC’s

determination to the SEC and federal court.


services disputes?

Consistent with the “American Rule”, each party is responsible for

its own attorney’s fees and litigation costs in civil litigation. Fee-

shifting statutes are the exception to the rule and are generally

applicable to public interest cases rather than financial services

litigation.





Disputes over the recognition and enforcement of arbitration

provisions and arbitral awards typically arise in cross-border

litigation. In disputes between U.S. and foreign financial

institutions arising from contracts governed by U.S. law, arbitration

clauses are often upheld as valid and enforceable. With respect to

purely international disputes, outside of U.S. jurisdiction, U.S.

courts recognise and enforce international arbitral awards pursuant

to the U.S. being a signatory of the New York Convention.

With respect to the enforcement of foreign judgments in U.S. courts,

although there is no federal law governing the issue, federal courts

will apply relevant state law in determining whether to recognise

and enforce a foreign judgment. Most state laws recognise and

enforce foreign judgments and states that rely on common law to do

so base their decisions on international comity.


USA


Issues relating to extraterritorial jurisdiction and unilateral

jurisdiction clauses are also common in cross-border disputes. The

SEC is permitted to assert extraterritorial jurisdiction as long as

conduct substantially furthering the securities violation was

committed in the United States or conduct outside the United States

substantially affected the United States. Unilateral jurisdiction

clauses are usually recognised in U.S. courts and can be enforced

through a motion to transfer to the court chosen by the contractual

parties.

Cross-border disputes and investigations present complications

related to the discovery of evidence. U.S. courts allow for broad

discovery and one tool employed to collect evidence abroad is the

letter of request, known also as a letter rogatory, through which the

U.S. court can appeal to a foreign court for its assistance in

gathering evidence located in that country. Engaging in discovery

by letters rogatory can be a lengthy process, and such requests are

not always granted by foreign courts, which sometimes decide that

the discovery requests are overbroad.

In contrast to its broad approach to discovery, the United States

affords rigid protections to privileged attorney-client

communications and the right against self-incriminating testimony.

If a U.S. proceeding implicates a foreign privilege law, the U.S.

court commonly applies the “touch base” choice-of-law test to

determine which country has the strongest interest in whether the

communications should remain privileged or confidential. With

regard to the right against self-incrimination, the protection against

having to provide self-incriminating testimony generally applies in

a U.S. proceeding even if a foreign sovereign compelled the same

testimony in accordance with its law.





As addressed in question 5.1, U.S. courts cooperate with foreign

courts by means of letters of request (or letters rogatory), which seek

the assistance of foreign courts in: cross-border civil discovery;

enforcement of forum-selection clauses in parties’ contracts; and the

recognition and enforcement of foreign judgments under the policy

of international comity.

There continues to be high-level cooperation among U.S. and

foreign regulators of financial services entities to combat fraud and

ensure the safety and soundness of the financial sector. In 2012, for

example, the SEC and foreign regulatory bodies issued a joint

statement reflecting their shared commitment to cooperation on the

cross-border regulation of OTC derivatives.

In the current global economy, nationalist and protectionist

tendencies are increasing. As a result, there has been some retreat

from cooperation with regulatory bodies in the banking regulation

sector. National jurisdictions, including the United States, seem to

be increasingly focused on creating the optimal regulatory

environments for financial institutions based on the problems

occurring within their borders, rather than on global issues.



The Supreme Court has ruled in decisions such as Morrison v. National Australia Bank Ltd. and Kiobel v. Royal Dutch Petroluem Co. that statutes are presumed not to create extraterritorial

jurisdiction in the absence of express legislative intent. The

presumption against extraterritoriality exists to preserve comity

among nations and prevent unintentional disputes between domestic

and foreign laws.

Nevertheless, some federal statutes expressly have extraterritorial

effect and are enforced pursuant to the exercise of extraterritorial

jurisdiction. The Dodd-Frank Act, for example, expressly permits

the SEC to bring actions against non-U.S. firms involved in

securities fraud where conduct substantially furthering the securities

violation was committed in the United States or conduct outside the

United States substantially affected the United States.



Unilateral jurisdiction clauses, known as forum selection clauses in

the United States, are valid and enforceable in U.S. courts. If the

parties have a forum selection clause in their agreement, and one

party sues in an improper forum, the other party can move to

transfer the case by invoking the doctrine of forum non conveniens.

While both private and public factors are usually considered when

the court evaluates a motion to transfer, the U.S. Supreme Court has

ruled that courts should not unnecessarily depart from the parties’

expectations. However, in some states, unilateral clauses can be

held invalid on the grounds of mutual obligation or

unconscionability; a significant disparity in the parties’ bargaining

power is an important factor in evaluating such agreements.

6 Regulated Bodies



There are a number of federal, state, and independent regulatory

agencies and organisations that provide a forum for disputes

involving financial services firms. Federal regulatory agencies that

exercise supervisory and enforcement authority over financial

services entities, such as the OCC, Federal Reserve, FDIC, SEC,

CFPB, HUD, FTC, and CFTC, can bring enforcement actions

against financial services firms in federal district court or before

administrative law judges.

Generally, state regulatory agencies, which possess supervisory and

enforcement authority over state chartered banks and many other

financial services firms, may similarly bring an enforcement action

before an administrative panel or state court.

Certain self-regulatory organisations specific to the financial

services industry also provide forums for disputes involving

registered members. FINRA, for example, provides an arbitral

forum to resolve disputes between investors (whether or not

registered with FINRA) and registered brokerage firms and brokers.

FINRA itself may bring a complaint against a registered broker or

firm before a FINRA administrative panel composed of a FINRA

hearing officer and two industry experts.

Securities exchanges provide a forum for disputes involving listed

financial services firms. The New York Stock Exchange (“NYSE”),

for example, has authority to take disciplinary action against issuers

that violate its internal rules as well as federal securities laws on the

basis of internal referrals, investor complaints, examinations, and

referrals from the SEC. Proceedings are conducted before a hearing

panel consisting of industry members and a member of the NYSE

staff.


USA


Self-regulatory organisations, like FINRA and the NYSE, generally

only have authority to discipline registered members; they do not

have the power to bring enforcement actions against non-members.



have?

Generally, each federal, state, and self-regulatory agency has

supervisory and enforcement authority with respect to specific

products, services, or laws and regulations.

The federal prudential banking regulators – the OCC, Federal

Reserve, and FDIC – are responsible for monitoring and regulating

banks for safety and soundness and adequate capital. Each agency

possesses visitorial powers over the affairs of regulated banks and

enforcement authority with respect to violations of laws and

regulations and unsafe or unsound practices. To penalise

noncompliance, the OCC, Federal Reserve, and FDIC can impose

civil money penalties and injunctive penalties – such as

suspensions, cease-and-desist orders, and restitution for harmed

consumers.

Other federal agencies with jurisdiction over financial services

firms – such as the SEC and CFPB – also have broad supervisory

and enforcement powers, including subpoena power, the power to

conduct investigations, enforce noncompliance, and issue monetary

and injunctive sanctions.

State banking agencies have supervisory power over state chartered

banks, sharing this power with the FDIC with respect to such banks

that are not members of the Federal Reserve System. State banking

agencies may also enforce state laws, exercise subpoena power, and

issue penalties, although state agencies are pre-empted from

enforcing many state laws with respect to nationally chartered

banks. State securities regulators regulate investment advisors who

are not required to register with the SEC and enforce state securities

laws and regulations.

Self-regulatory organisations have more limited authority with

respect to their members. FINRA and the NYSE, for example, lack

subpoena power, although compliance with FINRA and NYSE

investigative demands is a requirement of continued membership.

FINRA and the NYSE can bring enforcement actions before their

own administrative panels to enforce violations of securities laws

and organisational rules and can impose sanctions. FINRA, for

example, can seek injunctive relief (including suspensions), fines

and penalties, and order restitution to harmed investors. The NYSE

has the authority to delist a financial services firm that is found to

not be in compliance with a rule or regulation.



Yes, the decision of an administrative proceeding is binding on the

parties, although typically the parties have the right to appeal the

decision.


exist?

Most regulatory decisions are appealable. Decisions of federal

administrative law judges, whether at the SEC, CFPB, HUD, CFTC,

or other agency, are initially appealable to the agency itself and then

to the appropriate U.S. Court of Appeals. Decisions of state

regulatory agencies are generally appealable to state courts. In

appeals of administrative decisions, federal and state courts generally

grant substantial deference to the administrative panel’s factual

determinations, and less deference to any legal determinations,

except in cases where the legal determination is uniquely within the

agency’s expertise.

Appeals of the decisions of self-regulatory organisations follow a

similar path – with respect to FINRA and the NYSE, the decisions

must first be appealed internally, and then to the SEC, and then the

appropriate U.S. Court of Appeals.


accessible?

Federal and state agencies typically make regulatory enforcement

decisions publicly accessible, usually on the agencies’ websites.

Many self-regulatory organisations, including FINRA and the

NYSE, also make the decisions of internal administrative

proceedings public on their websites.










In January of 2019, the Democratic Party assumed control of the

U.S. House of Representatives, leading to a split in party control of

Congress. Because of this split, it is unlikely that there will be any

major developments in federal law in the coming year.

Some state law developments are anticipated, however. California,

for instance, just enacted a new Consumer Privacy Act, which grants

consumers the right to request deletion of personal information

maintained by companies, including financial institutions, and

creates a private right of action when a consumer’s information is

subject to unauthorised access due to a company’s failure to

maintain reasonable privacy procedures. In addition, a number of

states, including New Jersey, are considering implementation of

their own fiduciary rules to replace the U.S. Department of Labor’s

fiduciary rule (requiring retirement planning advisors to act as

fiduciaries to their clients), which was recently rolled back.

There has been a considerable expansion in regulatory power since

the financial crisis. The CFPB, created in 2011 by the Dodd-Frank

Act, has already assessed billions of dollars in fines against financial

institutions, including a $1 billion fine against Wells Fargo in 2018.

Previously-existing regulatory agencies have been filing

enforcement actions at elevated rates in the years since the crisis.

The SEC has continually topped its own records for enforcement

actions and disgorgements, reaching 868 individual enforcement

actions in 2016. These numbers have not seen a particularly

significant drop-off in the last two years.



customer-friendly?

The U.S. is consumer-friendly in some ways and financial

institution-friendly in others. Consumers are empowered under


USA


numerous statutory and common law causes of action to bring

lawsuits against financial institutions to vindicate their contractual,

statutory, and common law rights. There are numerous federal and

state consumer protection statutes that apply with respect to specific

types of financial products (e.g., mortgages, credit cards, consumer

loans, student loans, securities, etc.), most of which authorise

private parties to bring suits, including class actions. In addition,

financial institutions are regulated by a large number of federal and

state regulatory agencies, which sometimes take enforcement

actions to protect consumers and seek restitution for harmed

consumers.

The U.S. is also financial institution-friendly in some respects,

including the willingness of courts to uphold contract provisions

mandating arbitration or waiving the ability to participate in a class

action. Courts in the U.S. also offer a great deal of predictability,

allowing financial services institutions to plan around potential

future liability. Stable courts, informed and experienced judges, and

a meaningful body of case law and precedent in many areas of

financial services litigation provide an excellent framework for

corporate decision-making.





drawn from them.

In PHH Corp. v. Consumer Financial Protection Bureau, the U.S.

Court of Appeals for the D.C. Circuit upheld the constitutionality of

the CFPB’s organisational structure. The case was significant

because the CFPB is unique among federal agencies in being

managed by a single director who is removable by the President

only for cause. (Most other regulatory agencies are managed by

committees.) The current CFPB director, Kathy Kraninger, will

likely serve for the next five years and is expected to usher in further

deregulatory reforms at the agency.

A controversial issue in U.S. financial services litigation is whether

an arbitration clause permits class arbitration. Two circuit courts

recently ruled that courts possess the presumptive authority to

decide if class arbitration is permitted under an ambiguous

arbitration clause. These decisions demonstrate that if a financial

services entity does not expressly delegate the permissibility of

class arbitration to the arbitrator, the decision could instead be taken

up by a court.

New York’s highest court, in Schneiderman v. Credit Suisse Securities (USA) LLC, held that claims brought by the New York

Attorney General under the Martin Act, the state’s far-reaching

securities anti-fraud law, are subject to a three-year, rather than a

six-year, statute of limitations. The Martin Act bestows tremendous

power on the New York Attorney General, since only proof of a

material misstatement, and not intent or reliance by investors, is

required to demonstrate a securities violation.



jurisdiction?

The expansion of the regulatory regime following the 2008 global

financial crisis has given considerable impetus to public and private

litigation against financial institutions. A large volume of private

litigation has followed on the heels of public enforcement efforts

and regulatory actions involving, for example, credit derivative

products that performed poorly during the global financial crisis,

leading to a number of large private settlements. The SEC, for

example, reports that its enforcement actions relating to the global

financial crisis have led to charges against 198 entities and

individuals, with penalties, disgorgement, interest and other

monetary charges totalling more than $3.76 billion.

Technological advances and the rise of FinTech have caused shifts

in enforcement focus at major U.S. federal regulators. The SEC has

indicated that its main enforcement priorities are cybersecurity,

cryptocurrency offerings, and a continued focus on the use of

technology and data analysis to generate and support investigations.


USA


Matthew L. Biben


919 Third Avenue

New York, NY 10022

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Tel: +1 212 909 6606 Email: [email protected] URL: www.debevoise.com

Mark P. Goodman


919 Third Avenue

New York, NY 10022

USA

Tel: +1 212 909 7253 Email: [email protected] URL: www.debevoise.com

Debevoise & Plimpton LLP is a premier law firm with market-leading practices, a global perspective and strong New York roots. Clients look to

Debevoise to bring a distinctively high degree of quality, intensity and creativity to resolve legal challenges effectively and cost-efficiently.

Deep partner commitment, industry experience and a strategic approach enable Debevoise to bring clear commercial judgment to every matter.

Debevoise draws on the strength of its culture and structure to deliver the best to every client through true collaboration.

Debevoise’s Litigation Department handles complex matters in courts in the United States, the United Kingdom, Hong Kong, France and elsewhere,

as well as before arbitration tribunals, agencies and administrative bodies worldwide. Areas of concentration include white-collar crime,

investigations, general commercial litigation, international dispute resolution, crisis management, intellectual property and media, cybersecurity and

data privacy, bankruptcy, insurance industry disputes, antitrust, securities litigation and product liability.

Matthew L. Biben is a Litigation Partner, Co-Leader of the firm’s

Banking Industry Group, and a member of the firm’s White Collar &

Regulatory Defense Group. His practice is focused on the expert

negotiations and litigation of complex and diverse issues, including

civil, regulatory and enforcement matters on behalf of both individuals

and organisations, with a concentration on matters related to financial

institutions and sensitive situations involving the government.

Mr. Biben has garnered extensive experience advising boards and

senior management through extensive enforcement and advisory

work. He routinely acts as counsel in internal investigations of both

domestic and international matters involving the DOJ, SEC, FRB,

OCC, CFPP, NYDFS, State Attorneys General and foreign regulators.

He is recommended by The Legal 500 US (2016) where he is

described as a “tenacious but balanced litigator”.

Mr. Biben received a B.S. from Cornell University and a J.D. from the

University of Pennsylvania Law School.

For over 10 years, Mr. Biben served as Executive Vice President and

General Counsel of JPMorgan Chase’s consumer businesses and

Executive Vice President and Deputy General Counsel of The Bank of

New York Mellon.

At Debevoise, he has advised Spanish, Canadian, French, Japanese,

Pakistani, English, Chinese, and German banks as well as all types of

U.S. banks, including universal, regional, super-regional, and local

U.S. banks.

Mark P. Goodman is the Co-Chair of the firm’s Commercial Litigation

Group, a senior member of its White Collar & Regulatory Defense

Group and spent six years as a member of the firm’s Management

Committee. He represents clients, including financial institutions, in a

broad variety of matters, with emphasis on complex civil litigation. Mr.

Goodman routinely advises corporate boards and board committees

and is a fellow of the American College of Trial Lawyers. From 1992 to

1995, Mr. Goodman served as an Assistant U.S. Attorney for the

Southern District of New York (Criminal Division). As a federal

prosecutor, he participated in and supervised numerous investigations

and prosecutions involving, among other crimes, securities fraud,

bank fraud, mail and wire fraud, and money laundering.

Mr. Goodman is a graduate of the New York University School of Law

and Sarah Lawrence College. Mr. Goodman is recommended by

Chambers USA, The Legal 500 US and IFLR Benchmark Litigation Guide.


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