Will the FSA's recent findings mean a litigation bonanza?

The FSA's announcement that 90 per cent of interest rate hedging products sold to 'non-sophisticated' customers were non-compliant was a staggering statistic. The FSA's sample was small but the huge percentage suggests that, like all the best icebergs, the full review (due to be completed by Barclays, HSBC, RBS and Lloyds in around 12-months time) is likely to reveal a host of dreadful practices lurking below the waterline. The fact that Barclays has already set aside £850m for swap mis-selling suggests real concern. Several analysts estimate the cost to the banking industry will exceed £2bn.

This scandal will probably not result in a plethora of simple easy-to-process claims of the PPI variety. The independent reviewers (paid for by the banks) will supposedly assess each sale to a 'non-sophisticated' customer and decide what constitutes fair and reasonable redress. In many cases the claims will not be swiftly disposed of. Aggrieved customers who disagree with the reviewers' findings may well revert to the Financial Services Ombudsman. Others may choose to sue.

Ticking clock

One obvious area is the question of what constitutes a 'non-sophisticated' customer. Size is not in itself a measure of sophistication. Is a property developer who may be an experienced business person necessarily regarded as someone who understood what a swap was? Many banks will push hard to show that at the time of the sale the customer had the necessary experience and knowledge to understand the product in question including its complexity and the risks involved. Expect some interesting battles on this front.

The standard limitation period for contractual or tortious claims is of course six years from the date on which the cause of action accrued. The FSA refer to 40,000 sales being reviewed dating back to 2001. If this timescale is used for the full review, any contracts entered into pre-2007 are already time-barred from contract claims, which raises interesting questions as to how limitation points are treated. Limitation in respect of tortious claims gives scope for arguments about when loss was suffered. For instance, for a simple swap, is loss suffered: upon receiving negligent advice and entering into the swap agreement; at the start date of the agreement; or when the market began to change and the swap became less valuable? One added complication is that most swaps have both a trade date (when terms were agreed) and an effective date (when obligations begin).

In Shore v Sedgwick Financial Services Ltd [2008] EWCA Civ 863 the Court of Appeal held that a claimant who was negligently advised suffered financial loss at the point they switched pension funds because the new scheme was immediately less financially advantageous and the possibility of actual financial harm therefore constituted a loss. Similarly, in a swap claim, loss is only quantifiable after the agreement is entered into. As such, some claims could be time-barred if the court decides that a customer suffered financial loss when they invested in the swap and not when the markets first moved against them. For a time-barred customer, a latent damage claim could provide a route around 'standard' limitation. Section 14A of the Limitation Act 1980 provides that the limitation period will run for three years (with a 15-year longstop) from the date when the claimant knows or ought to have known; (1) the material facts about the loss suffered; (2) the identity of the defendant; and (3) the cause of action. In Haward and others v Fawcetts (a firm) [2006] UKHL 9, the House of Lords considered the actual knowledge requirement of latent damage and held that for the three-year time period to start the claimant:

a. must have knowledge of the factual essence of what is subsequently alleged as negligence in the claim;

b. must have knowledge of the act or omission giving rise to the negligence but not the existence of negligence itself;

c. should not need to know the precise details of the claim; and

d. should have enough knowledge to know that they should start investigating whether they have ?a claim.

Litigation bonanza

The FSA's widely reported initial review into mis-selling of swaps and similar hedging products took place in 2012 and, following Haward, it is arguably from this point a customer should have been aware of the latent damage they suffered. This might well give claimants until 2015 to bring claims but the area is a grey one.

So is a litigation bonanza in the offing? Ignoring the low value cases that will doubtless be quietly processed, there are bound to be some much bigger claims in which issues of sophistication, limitation, reliance and construction will all feature. Such litigation will not be for the faint-hearted. If a bank decides to fight and is not concerned about reputational risk, it will not settle easily, especially if it perceives that a dangerous anti-bank precedent could ?be set.

It will be fascinating to see what cases emerge over the next few years.