From the promise of pandemic recovery to recession, 2022 was a turbulent and uncertain year. Here we look back at the trends we have seen in the contentious financial services space in 2022 and explore what 2023 might have in store. This report by David Capps, a senior consultant, Paul Ryan-Brown, an associate (dispute resolution) and Andrew Sims an associate (dispute resolution), with Ashurst LLP
We start with a *Spoiler alert* – a number of the themes we saw in 2021 have carried over into 2022, with the FCA’s new Consumer Duty and ESG remaining firmly on our radar. In this article, we consider the following topics:
- Crypto winter is upon us;
- Braving the economic downturn;
- The final rules for the FCA’s consumer duty have landed;
- Ever-growing ESG responsibilities;
- All change at the FCA and SFO;
- Quincecare duty;
- Collective actions growing in number;
- “Big Bang 2.0”?
Crypto winter is upon us
With the recent snow to remind us which season we’re in, we begin with the ‘Crypto Winter’.
2022 has seen the crypto industry’s troubles deepen. Liquidity issues have triggered a number of high-profile collapses, from Terra, a ‘stablecoin’ whose value was supposed to be pegged to the dollar, to the high-profile demise of FTX. The impact of these collapses has spread to other market participants (for example, BlockFi, a crypto-currency lending platform, filed for Chapter 11 bankruptcy in the US, citing significant exposure to FTX). Investor confidence in the industry has been damaged, and this, in turn, appears to have intensified calls for more rapid legislative and regulatory intervention.
In 2022, we had already started to see increased regulatory scrutiny. On 28 July, the Law Commission published a Consultation Paper setting out its recommendations for law reform in respect of certain digital assets as objects of property rights (read more in our response to the paper here). Across the Atlantic, in June, the Chair of the US Securities and Exchange Commission (SEC) Gary Gensler said that crypto exchanges that do not cooperate with the SEC are operating “outside of the law” and may be at risk of enforcement action. Then, in September, Gensler said that the SEC will be aggressively policing crypto-tokens and intermediaries. These comments suggest that the SEC intends to be the lead regulator in the US crypto market. More recently, the SEC has published a sample letter to companies regarding recent developments in crypto-asset markets, making clear that companies have disclosure obligations, under the federal securities laws, relating to the direct or indirect impact that these events and collateral events have had or may have on their business.
In 2023, our expectation is that new law will be introduced in relation to crypto-assets accompanied by more active regulatory enforcement. In the UK, the Financial Services and Markets Bill should also become law in early 2023 (read more). The proposals in the Bill would enable the Treasury to bring crypto-assets into both the recently strengthened financial promotions regime and the regulatory activities regime for the first time. At the EU level, the EU’s Markets in Crypto-assets regulation (MICA) looks set to become law in 2024. MICA will apply to any person providing crypto-asset services or issuing crypto-assets in or into Europe (read more). It will also create an EU-wide authorisation regime, with prudential requirements and conduct rules for issuers of crypto-assets.
In terms of crypto-related litigation, we are already seeing a number of crypto-currency disputes fought out in the UK courts. We expect this activity to continue to grow in 2023 against this backdrop of increased regulatory and legislative intervention, coupled with tough market conditions.
Braving the economic downturn
Global economic conditions have worsened in 2022 and the outlook for 2023 is looking bleak, with the Bank of England predicting the longest recession since records began.
Inflation coupled with supply chain issues and interest rate rises has been further exacerbated by the war in Ukraine. We expect interest rates to remain high in 2023. This may leave businesses struggling with higher funding and operating costs, and potentially unable to repay their loans. In turn, this may lead to higher levels of loan defaults. The major UK banks have reported in their recent trading updates that they have already, collectively, set aside £1.3 billion to cover losses on loans.
When considering the economic situation in 2022, it is worth noting the impact of the ‘mini-budget’ in September. The value of government bonds dropped dramatically following the ‘mini-budget’, which significantly impacted liability-driven investment (LDI) strategies that use leverage in relation to defined benefit pensions. When UK bond yields rocketed, it triggered emergency collateral calls for pension funds to cover their LDI-related exposures.
This in turn forced pension trustees to sell their holdings to hastily raise cash to meet those collateral calls. Since then, speculation has grown that 2023 may see a surge in professional negligence claims in relation to LDI pension fund strategies. The success of such claims will depend on whether pension funds should have shifted their positions in the months before the ‘mini-budget’ – as interest rates and inflation rose, and gilt prices started to fall.
The final rules for the FCA’s consumer duty have landed
On 27 July 2022, the FCA set out final rules in relation to the new Consumer Duty, together with supporting guidance. The Consumer Duty will apply to firms that provide regulated activities to retail clients in the UK, and consists of three elements: a new “Consumer” principle; rules cutting across the various business conduct rulebooks; and four key customer “outcomes” to be achieved.
The new rules are largely unchanged from the previous proposals (read more). However, their importance should not be understated. The Consumer Duty represents the biggest change to the retail market in a generation, and will lead to material changes in the way firms must think about conducting their business with retail customers.
For new and existing products or services, the rules will come into force on 31 July 2023. Before then, firms will be expected to share implementation plans, board papers and other relevant materials with supervisors and should expect their approach to be challenged by the FCA (read more).
Given the economic downturn and cost of living crisis, it remains to be seen how easy it will be for banks to implement these rules in 2023 and beyond.
Ever-growing ESG responsibilities
In 2022, ESG has continued to dominate the headlines. We have seen heightened regulatory scrutiny brought about by new environmental and governance standards. While disclosure requirements continue to be the principal tool used by regulators seeking to align financial institutions to ESG principles, we expect the integration of these principles into firms’ investment decision-making processes to become a key focus in 2023.
In the UK, final rules on the Sustainability Disclosure Requirements (SDRs) are expected by the end of Q2 2023. These will aim to provide greater clarity and harmonisation of the rules for products which are marketed as sustainable in the UK. There will be sustainable investment labels and extensive disclosure requirements, as well as naming and marketing rules, requirements for distributors and a general anti-greenwashing rule (see further below).
The timing of the application of the proposals (excluding the anti-greenwashing rule) will be set out in a policy statement next year, and will be 30 June 2023 or later (read more). In Europe, the EU is expected to review its Sustainable Finance Strategy and the Corporate Sustainability Due Diligence Directive (read more) by the end of 2023.
Regulatory developments are also driven by investor protection considerations linked to greenwashing. The FCA is currently consulting on the above-mentioned new ‘anti-greenwashing rule’ as part of its SDRs. The proposal for this new rule reiterates the requirement for all regulated firms that sustainability-related claims must be clear, fair and not misleading, as well as consistent with the sustainability profile of the product or service, ie proportionate and not exaggerated (read more).
The new rule reinforces the FCA’s ability to challenge firms that it considers to be potentially greenwashing in respect of their products or services and to take appropriate enforcement action against them. Similar powers are already within the FCA’s arsenal but they are not expressly linked to greenwashing concerns. The new rule will come into effect immediately on publication of the FCA’s Policy Statement, which is due in H1 2023. This should provide the FCA with an additional rules-based route to enforcement where there are inconsistencies between what firms are saying and what firms are doing with respect to sustainability.
In May of this year, the High Court handed down its long-awaited judgment in the Autonomy and others -v- Michael Lynch and another civil case, which was the first case to go to trial in relation to claims brought under section 90A and schedule 10A of the Financial Services and Markets Act 2000; these are statutory provisions that allow holders of listed securities to bring claims against issuers for misstatements and omissions in their published information. The judgment will be of interest to investors looking to pursue claims where they have acquired securities in a listed company on the basis of information in documents such as interim and annual reports that turns out to be untrue or misleading or where important information that would have been relevant to the investment decision was omitted.
The judgment makes clear that liability is engaged only in respect of statements known to be untrue or misleading. For those looking to bring a section 90A/schedule 10A claim, this means establishing that the person discharging managerial responsibilities knew about the particular misstatement.
All change at the FCA and SFO
2022 also saw major announcements from both the FCA and the SFO. Mark Steward, the FCA’s head of enforcement, is stepping down in early 2023. Steward was in his role for seven years and during his tenure the FCA saw an increase in its caseload, and a lowering of its threshold for referring cases to its enforcement division for formal investigation. He will also be remembered for introducing a more data-led approach to market oversight during his tenure. The Director of the SFO, Lisa Osofsky, is expected to leave her role in summer 2023 after five years.
In both cases, it is too early to say what the impact might be, particularly given that successors are yet to be appointed.
In March 2022, the Court of Appeal handed down an important judgment (Philipp -v- Barclays Bank UK Plc  EWCA Civ 318) regarding the scope of the ‘Quincecare duty’. This duty requires banks to refrain from executing a customer’s instructions if the bank has reasonable grounds for believing that those instructions may be an attempt to misappropriate a customer’s funds. The Court found that, as a point of law, the Quincecare duty is not limited to situations where instructions have been given by an agent or authorised signatory on behalf of a customer of the bank.
This means the duty can, in principle, extend to protecting individuals against themselves. It is important to note that the decision was an appeal against a summary judgment only and will go back to the High Court for a full trial. The bank has obtained permission to appeal to the Supreme Court. However, given the prevalence of APP fraud, we may now see more victims of fraud bringing claims against financial institutions in 2023 as a result of this judgment (read more).
In a separate and more favourable decision for banks, the Privy Council held in May 2022 (in Royal Bank of Scotland International Ltd -v- JP SPC 4 & Anor (Isle of Man)  UKPC 18) that a bank’s Quincecare duty does not extend to anyone who is not a customer of the bank, such as individuals who have beneficial ownership of the monies concerned (read more).
Overall, however, this remains a rapidly evolving area of law and in 2023 we expect claimants will continue to seek to expand the amorphous boundaries of the Quincecare duty. To mitigate this risk, banks will need to ensure that they have proper policies and procedures in place to warn customers of the risks of APP fraud and that they take proper action in circumstances where they are or should be on notice that a customer may be a victim of APP fraud.
Conversely, for individuals who find themselves victims of APP fraud, the March 2022 Philipp decision opens the door for potential recourse against their bank under the Quincecare duty. In 2023 and beyond, we might even see compulsory reimbursement for APP fraud.
We have also just had the Supreme Court’s judgment in Stanford International Bank Ltd -v- HSBC Bank plc, another case concerning the scope of bank duties. The Supreme Court held that in even the hypothetical scenario of breach of a Quincecare duty, payments to the account holder’s creditors, thereby reducing its debts, could not be regarded as having caused a loss to the company’s insolvent estate.
Collective actions growing in number
2022 has seen a number of high-profile collective “class” actions involving multiple claimants who share common characteristics and are seeking a remedy against the same defendant or multiple defendants (read more).
In March, the Competition Appeal Tribunal blocked a proposed multibillion pound claim brought by thousands of asset managers, pension funds and financial institutions against major banks over alleged forex rigging. However, an appeal against that decision will be heard in April next year. Also before the Competition Appeal Tribunal, Mastercard has recently lost an appeal against a ruling in its collective action worth in excess of £10 billion. Mastercard is facing a claim brought on behalf of approximately 46 million adults, which became the first mass consumer action to be approved in the UK in 2021.
These cases are high-profile examples of a number of class action claims that were brought against financial institutions in 2022. With growing levels of litigation funding available, these types of claims are likely to increase in 2023 and beyond.
“Big Bang 2.0”?
On 9 December 2022, the Chancellor of the Exchequer, Jeremy Hunt, outlined the Government’s Financial Services package designed to drive growth and competitiveness in the UK financial services sector (the Edinburgh Reforms). The package of measures is intended to complement the Financial Services and Markets Bill 2022. The Edinburgh Reforms are divided into four categories: a competitive marketplace promoting effective use of capital; sustainable finance; technology and innovation; and consumers and business. The Government’s “vision” will no doubt involve further detail in due course.