Banks face a number of challenges in defending follow-on litigation claims. A brief overview of the principal risks is as follows.
The publication of regulatory notices online provides a gateway for prospective litigants. Pursuant to s138D of the Financial Services and Markets Act 2000 (FSMA), private persons who have suffered a loss as a result of the breach of Financial Conduct Authority (FCA) or Prudential Regulation Authority (PRA) rules (such as the FCA’s Conduct of Business Sourcebook (COBS)), can bring an action for damages. Despite the regulator producing its findings on the basis of relatively limited access to documentation, claimants may present the content of these notices as established facts. For example, in the recent interest rate hedging product (IRHP) mis-selling case, Hockin v The Royal Bank of Scotland  EWHC 925 (Ch), the Court permitted the claimant to amend their claim to incorporate LIBOR misrepresentation allegations supported by inferences drawn from the conclusions of regulatory authorities, following the position established in Graiseley Properties Ltd v Barclays Bank plc  EWHC 3093 (Comm).
In addition, pursuant to the Civil Procedure Rules (CPR17.4(2)), claimants can add new claims even after the expiry of the limitation period, providing the new claim arises out of the same or ‘substantially similar’ facts as the existing claim, as per Mercer Ltd v Ballinger  EWCA Civ 996. The publication of regulatory notices can trigger such amendments.
Unless the claimant has entered into a tightly worded ‘full and final’ settlement agreement, it may seek to use regulatory notices to raise new causes of action and unpick the former settlement, exposing the financial institution to further liability. In WW Property Investments Ltd v National Westminster Bank Plc  EWCA Civ 1142, another IRHP mis-selling case, the Court held that settlement agreements were binding in relation to collar products but not in relation to the overarching swap agreement. This highlights the need for clarity in drafting settlement agreements.
The unavailability of key witnesses (such as relationship managers and salespeople) can prove challenging. Often, given the passage of time, key individuals may have moved on to work at another institution or even left the industry. Former senior stakeholders may have since retired and have little incentive to engage with their former employer. Alternatively, individuals may themselves be subject to investigation which may discourage them from assisting with an investigation.
Banks will often not receive notification of follow on litigation until a considerable time after the relevant events. This can exacerbate the difficulties in promptly sourcing relevant documentation, retrieving emails and hard copy files. For historic claims, this may require time-consuming searches of back up tapes.
A bank’s customers may attempt to obtain documents outside of the formal disclosure process via a Data Subject Access Request (DSAR). This approach was challenged in Dawson-Damer v Taylor Wessing LLP  EWHC 2366 (Ch) which indicated that the English courts will be disinclined to enforce DSARs made for the purpose of advancing litigation (although this case is being appealed).
Banks may seek to rely upon privilege to protect legal advice between lawyers and their clients. The recent decision in PAG v RBS  EWHC 1557 (Ch) provides some reassurance to institutions undergoing regulatory investigations, demonstrating that it is not necessary to distinguish between legal advice and factual communications provided the latter forms part of a "continuum of communications and meetings between solicitor and client." The ruling appears to confirm that legal advice privilege can be protected within an advisory committee provided that the participating lawyers convey information and provide legal advice in respect of the regulatory investigation. However, the scope of those covered by privilege looks set to be narrowed, further to The RBS Rights Issue Litigation  EWHC 3161 (Ch). In that case, the High Court found that interviews conducted by a bank’s solicitors with its employees were not covered by legal advice privilege, as the employees were not the lawyers’ "clients." This decision may lead to a re-examination of the seminal case of Three Rivers District Council v The Governor & Company of the Bank of England Rev 1  EWCA Civ 474 and as such its appeal has been leapfrogged up to the Supreme Court, due to be heard in early 2017.
Documents primarily concerning business advice or administration will not attract legal privilege. In addition, privilege can be harder to maintain in an international investigation. While common law jurisdictions such as the UK, US and Australia recognise legal privilege, civil law jurisdictions such as the People’s Republic of China do not.
Litigation privilege may protect confidential communications between parties if the dominant purpose of such communications is in relation to adversarial proceedings either pending, reasonably contemplated or in existence. In practise, litigation privilege can prove difficult to assert and requires specialist advice to determine its precise coverage. Purely internal investigations or investigations conducted to assist with early stage regulatory investigations may not attract litigation privilege, as the dominant purpose of such work is unlikely to be in anticipation of future litigation.
Although an investigation may commence in relative privacy, as the process continues the risk increases of reputational damage from breaches in confidentiality, such as via information leaks or whistleblowers. Reputational risks will increase further once follow-on litigation commences.