Financial Services and Markets Dispute Resolution Quarterly Update: Winter 2019

Welcome to our final quarterly update of 2019, in which we review some of the key developments affecting financial services and markets in the areas of disputes, investigations and financial crime.

Judicial highlights include: the Court of Appeal’s assessment of what happens to legal advice privilege attaching to communications between a company and its lawyers when that company has been dissolved; and both the Court of Appeal and the Supreme Court’s rejection of attempts by financial institutions to exclude the Quincecare duty of care.

Meanwhile, the FCA has imposed a substantial fine against broker Tullett Prebon for multiple compliance monitoring and conduct failures as well as a failure to be open and co-operative with the regulator.

Finally, the UK Financial Intelligence Unit has published its Suspicious Activity Reports Annual Report, which provides an interesting overview of the performance of the UKFIU and NCA in terms of the number of SARs processed and the results arising from them.

Quick links


Litigation developments

Legal advice privilege survives dissolution of a client company

How to interpret “mandatory provision of law” in a facility agreement

Appeal courts dismiss banks' attempts to exclude Quincecare duty

Court of Appeal allows representative action to continue against Google

Regulatory developments

FCA imposes substantial fine against broker Tullett Prebon for numerous compliance monitoring and conduct failures as well as a failure to be open and co-operative with the regulator

Financial crime

The UK Financial Intelligence Unit (UKFIU) publishes its Suspicious Activity Reports (SARs) Annual Report and strikes a positive tone

Litigation Developments

Legal advice privilege survives dissolution of a client company

In Addlesee v Dentons Europe LLP [2019] EWCA Civ 1600, the Court of Appeal considered a question which, in the words of Lewison LJ, “is easy to pose, but not so easy to answer…what happens to legal advice privilege attaching to communications between a company and its lawyers, once that company has been dissolved…”. The Court of Appeal concluded that, once created, legal advice privilege continues to exist unless and until it is waived and so survives the dissolution of the client company.

The issue arose in the context of a claim by a large group of investors (the Investors), who had invested in a scheme marketed by a Cypriot company (the Company). The Investors subsequently alleged that the scheme had been fraudulent and brought a claim against the Company’s solicitors (the Solicitors), alleging negligence and deceit.

Although the Company had been dissolved, the Solicitors still had possession of documents created during the course of their retainer with the Company, which they said were privileged. The Investors sought disclosure of those documents, arguing that they were no longer privileged. The Investors claimed that, as the Company was no longer in existence, there was no legal person who was capable of asserting legal advice privilege. It followed, according to the Investors, that the right to assert privilege had ceased to exist.

The Court of Appeal rejected this argument. Lewison LJ emphasised the importance of the public policy behind legal advice privilege; namely that parties must be able to consult lawyers in confidence, safe in the knowledge that there are no circumstances in which the contents of those communications will be revealed without their consent. Any inroads into this principle would undermine the policy behind the rule.

Quoting the maxim used in various previous cases, Lewison LJ said the rule was: “once privileged, always privileged”. The circumstances in which the documents were created meant that they were privileged. What mattered was not whether there was anyone capable of asserting privilege but whether anyone had waived privilege. In this case, there had been no such waiver and the documents remained privileged.

It is worth noting that the Court of Appeal expressly limited its decision to legal advice privilege and, therefore, it is not clear whether the same approach would be taken to documents protected by litigation privilege.

How to interpret “mandatory provision of law” in a facility agreement

The High Court has interpreted the expression “in order to comply with any mandatory provision of law” in the context of a non-payment event of default contained in a facility agreement. Under the agreement, the borrower would not be in default if non-payment was because it was complying with such a provision.

In Lamesa Investments Ltd v Cynergy Bank Ltd [2019] EWHC 1877 (Comm) the ultimate beneficial owner of the lender became a blocked person under US sanctions law. The US sanctions regime has extraterritorial effect, in that secondary sanctions (including a prohibition on maintaining a correspondent account in the US) can be imposed on non-US persons facilitating a transaction with a blocked entity. The borrower was a UK bank and whilst the loan which had been made to it had no US nexus, it required a US correspondent account to carry out a significant part of its business. However, the borrower refused to make payments to the lender because of the ruinous effect on its business that US sanctions would have if they were imposed.

The lender argued that it was not compulsory under the US sanctions regime for non-US persons to withhold payment; non-payment by the borrower was merely to avoid possible sanctions. Accordingly, “mandatory provision of law” should be interpreted, in this context, as meaning a law applying to UK parties, acting in the UK and making sterling payments. The Court disagreed; it considered that “mandatory provision of law” meant a law that the parties could not vary or disapply contractually. Reliance was placed, in part, on the meaning of “mandatory provision of law” in the Rome I Regulation (on the law applicable to contractual obligations).

It is established that English law will not excuse failures in contractual performance by reference to a foreign law unless that law is the law of the contract or the place of performance. However, as in this case, and in many other situations we see, contractual parties can manage the risk of a foreign law's extraterritorial effect by express contractual provision.

Appeal courts dismiss banks' attempts to exclude Quincecare duty

Both the Court of Appeal and the Supreme Court have rejected separate attempts by financial institutions to exclude the Quincecare duty of care. Put simply, the duty is as follows:

“[A] banker must refrain from executing an order if and for so long as the banker is "put on inquiry" in the sense that he has reasonable grounds (although not necessarily proof) for believing that the order is an attempt to misappropriate the funds of the [customer].” (Per Steyn J in Barclays Bank plc v Quincecare Ltd [1992] 4 All ER 363).

In The Federal Republic of Nigeria v JP Morgan Chase Bank, N.A. [2019] EWCA Civ 1641, the Court of Appeal dismissed the Bank's appeal against the decision at first instance in which its application for reverse summary judgment against the Federal Republic of Nigeria (FRN) had been dismissed (see our May 2019 Quarterly Bulletin). 

The Bank had agreed to act as depository in respect of settlement monies put up by FRN in relation to a long-running dispute about an off-shore Nigerian oilfield. The deposit account was opened pursuant to a Depository Agreement between the Bank and the FRN in May 2011. Between August 2011 and August 2013, on instructions by authorised signatories of the FRN, the Bank made three transfers totalling US$875m from the deposit account to accounts in various names at Malabu Bank and Keystone Bank. It was alleged that the money was then used to pay off corrupt former and contemporary Nigerian government officials and/or their proxies, rather than being paid to parties properly entitled to the settlement monies.

The Court of Appeal rejected the Bank's argument that the Quincecare duty could not apply to a depositary account, and considered that none of the provisions in the Depository Agreement, including exclusions and indemnity clauses, was “[anywhere] clear enough” to exclude the duty. Therefore, the question of whether the Bank had breached the duty and caused loss to the FRN would have to proceed to trial.

In Singularis Holdings Ltd (In Official Liquidation) v Daiwa Capital Markets Europe Ltd [2019] UKSC 50, the Supreme Court unanimously dismissed Daiwa's appeal against judgments at first instance and in the Court of Appeal that it had breached the Quincecare duty when complying with written instructions received from the sole signatory (AS) to Singularis’ account to pay away $204m to third parties. In breach of his fiduciary duty to Singularis, AS had submitted false documents in relation to the payments, which constituted misappropriation of Singularis’ funds by AS.

Daiwa argued that since AS was the guiding mind and will of Singularis, his fraud should be attributed to the company such that the liquidator's Quincecare related claim against Daiwa should fail for illegality or lack of causation.

In the leading judgment, Lady Hale found that:

  • the breach of fiduciary duty by AS did not prevent Singularis from recovering money misappropriated from its account. To deny the claim would be unfair and disproportionate in the context of any wrongdoing by Singularis, although the Court had correctly exercised its power to make a deduction for contributory negligence of 25%;
  • on causation, the fraudulent instructions given by AS to Daiwa had given rise to the duty of care which Daiwa had breached, and it was that which had caused the loss to Singularis; and
  • AS' fraud should not be attributed to Singularis for the purposes of the Quincecare claim since it would “denude the duty of any value in cases where it is most needed”. If Daiwa's argument were to be accepted in a case such as this, there would in reality be no Quincecare duty of care or its breach would cease to have consequences; this would be a retrograde step.

Court of Appeal allows representative action to continue against Google

In Lloyd v Google LLC [2019] EWCA Civ 1599, the Court of Appeal considered CPR 19.6, the rule which allows proceedings to be brought on behalf of a class of people who have the “same interest” in the claim. In this jurisdiction, this is the closest equivalent (outside the context of competition claims) to a US-style “opt-out” class action in that, unlike a Group Litigation Order, it does not require claimants to be joined to the proceedings, or even to be identified (as long as they are identifiable). This may be of interest to banks who are frequently on the receiving end of claims by groups of claimants.

In this case, Richard Lloyd, who is described in the judgment as a “champion of consumer protection”, is bringing a claim on behalf of more than four million Apple iPhone users. Mr Lloyd alleges that Google tracked the online behaviour of iPhone users between 2011 and 2012 in breach of the Data Protection Act 1998 (the DPA 1998).

The first question that the Court of Appeal had to consider was whether members of the represented class (i.e. the iPhone users) had suffered damage within the meaning of section 13 of the DPA 1998. This, in turn, involved the Court deciding whether the claimants could recover “uniform per capita damages” for infringement of their rights under DPA 1998, without proving pecuniary loss or distress. Sir Geoffrey Vos, who gave the only reasoned judgment, held that such damages were recoverable. This was because the iPhone users had been deprived of something of value, namely their ability to control their personal data, and EU law requires Member States to provide a remedy for this.

Next, the Court had to consider whether the iPhone users all had the “same interest” in the claim, as required by CPR 19.6. Sir Geoffrey Vos considered that this requirement was satisfied because the represented class were all victims of the same alleged wrong and had all suffered the same loss (loss of control of their personal data). Furthermore, it was impossible to conceive that Google could raise a defence to one represented claimant that did not apply to the others.

The case is of interest because it has historically been difficult for representatives to bring damages claims using the procedure set out in CPR 19.6. At trial, counsel for Mr Lloyd accepted that the claim was “an unusual and innovative use of the representative procedure”.

It remains to be seen whether this case will lead to more representative actions being allowed to proceed in the future. The claim is unusual in that a uniform sum of damages is sought on behalf of each member of the represented class, a factor which contributed to the conclusion that the claimants had the “same interest”, which may be difficult to establish in other cases.

Nonetheless, the representative procedure is an attractive one for parties, solicitors and funders looking to bring claims on behalf of large classes of claimants against defendants with deep pockets, and the decision in this case may encourage them to try to emulate Mr Lloyd’s success.

Regulatory Developments

FCA imposes substantial fine against broker Tullett Prebon for numerous compliance monitoring and conduct failures as well as a failure to be open and co-operative with the regulator

The FCA has published a Final Notice in respect of the inter-dealer broker, Tullett Prebon (Europe) Limited (Tullett Prebon), now part of TP ICAP, which it fined £15.4m (after early settlement discount of 30%) for breaches of Principle 2 (conduct business with due skill, care and diligence), Principle 3 (take reasonable care to organise and control affairs responsibly and effectively with adequate risk management systems) and Principle 11 (deal with regulators in an open and cooperative way). This is a significant financial penalty which demonstrates how an initial penalty can be substantially increased by a firm’s poor conduct during the FCA’s subsequent investigation.

The Final Notice relates to the Rates Division of Tullett Prebon and in particular their "name passing" broking business. The FCA found that, between 2008 and 2010, the Rates Division had ineffective monitoring and compliance systems in place, a lack of control around client entertainment expenditure and also a failure to escalate improper broker conduct relating to wash trades (and similar) which generate brokerage without serving a real commercial purpose. The FCA also found that there was an almost complete lack of monitoring taking place by either compliance or the relevant senior management despite there being an electronic system which could have been used for such purposes. Mark Steward, Executive Director of Enforcement and Market Oversight at the FCA said:

“While these trades did not mislead the market, nor amount to market abuse, the wash trades were entirely improper, undermining the proper function of the market. Senior management and compliance were cocooned from seeing the misconduct, and systems and controls failed to probe broker conduct, even when warning signs were visible.”

The FCA also found breaches of Principle 11, in relation to their subsequent investigation (which related to LIBOR) into the Rates Division. In August 2011, the FCA served an information requirement on Tullett Prebon which asked for, amongst other things, the audio recordings for a certain broker between January 2007 and October 2010. Without conducting any internal investigation into whether the tapes actually existed, Tullett Prebon informed the FCA that it wouldn’t be able to provide these because it had a policy of destroying tapes after 12 months. However, despite this policy, the tapes had not been destroyed and there were in fact significant numbers of relevant tapes available. In 2013, when Tullett Prebon became aware that they definitely did have the recordings that the FCA had previously requested, they were found to have misled the regulator as to how they had been discovered. There was then also a significant delay of nine months between the supposed "discovery" and provision of the tapes to the FCA.

This Final Notice places significant emphasis on Tullett Prebon’s failures in compliance monitoring and the importance of "first line of defence" oversight as well as the fundamental importance of full co-operation with the FCA in relation to any subsequent investigation into the underlying conduct.

Financial Crime

The UK Financial Intelligence Unit (UKFIU) publishes its Suspicious Activity Reports (SARs) Annual Report and strikes a positive tone

The Report was published in November 2019 and summarises the performance of the UKFIU and the National Crime Agency (NCA) in terms of the number of SARs processed and the results arising from them. There are a few facts contained in the Report that are particularly noteworthy:

  • The number of SARs being submitted continues to increase. Between April 2018 and March 2019 478,437 SARs were submitted. This is an increase of 3.13% on the previous year. This is noteworthy, especially because concerns have been raised in the past about whether the UKFIU can handle the volume of SARs being submitted. This is reflected somewhat in the figures, which show that the average turnaround time for responses to SAR submitters for all requests is now 5.12 days, as against 4.32 last year.
  • Defence Against Money Laundering SARs (DAML SARs) have hugely increased in number. In 2018/2019, 34,543 DAML SARs were submitted. This is a significant increase of 52.72% compared to last year. DAML SARs also seem to have a high likelihood of being approved. Of the 34,543 submitted only 1,332 were refused – a rate of just 3.9%. However, it appears that if consent is initially refused that is likely to be the final position on the matter; of the 1,332 DAML SARs refused initially, only 17 were subsequently granted during the moratorium period that follows the initial notice period.
  • Only a minority of DAML SARs are considered by law enforcement. The Report shows that UKFIU made a decision on 69.81% of DAML SARs without referring them to law enforcement for a recommendation. The Report emphasises this as a positive aspect of the system as it enables law enforcement to focus on the highest priority cases, but it may be a surprise to some that so few reports are the subject of consultation with enforcement authorities.
  • The DAML SARs are producing significant law enforcement results. The most significant story arising out of these facts is that in 2018/2019, £131,667,477 was denied to criminals as a result of DAML SARs and related action by the authorities. This is an increase of 153.66% on the previous year. Interestingly, the reason given for this in the Report is the introduction of Account Freezing Orders (AFOs) under the Criminal Finances Act 2017 and the extension to the moratorium period associated with AFOs. It is very interesting to see the immediate effect of these new powers being quantified in this way and this is perhaps an indication of the strategic approach the UK authorities will take in the coming years.
  • SARs from legal professionals remain few in number but are increasing. Lawyers have in the past been criticised for not submitting as many SARs as might be expected. According to the 2019 Annual Report, independent legal professionals submitted 0.58% of the total number of SARs in the past year. While this is a small number (the head of the UKFIU notes in the Report that “the number of reports from lawyers and accountants remains low”) it does represent an increase of 4.29% on the previous year.

In general, the UKFIU appears to be satisfied with how the SARs system operates. It has taken on additional staff (growing from 80 to 118) and is investing in new IT systems to process the SARs it receives. Having recently been the focus of a Law Commission report as well, it appears that the SAR system is here to stay and may increasingly be relied on by the UK authorities.

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