2014 could be the year for increased shareholder action if yesterday's announcement by RBS is anything to go by, says Nick Rowles-Davies of Vannin Capital.
The announcement by RBS that it had set aside a further £3bn for legal claims and litigation costs was described in some quarters as a surprise statement. In the wider context of the situation, it is actually no shock at all that banks are continuing to take hits on fighting battles in court and settling claims against them. Experts in the legal world have already earmarked 2014 as having the potential to bring a number of key cases in the wider world of litigation, particularly at London’s High Court. In some quarters, it has been argued that banks are over the worst of it when it comes to legal threats against them. It has been said there is light at the end of the litigation tunnel for its CEOs and GCs. My argument is that this is hugely optimistic.
Rise in claims
Figures showed last year, there was a rise in the number of claims against financial services companies. Of 201 High Court cases in 2013, 112 were against banks and other such organisations. This was a rise from 65 the previous 12 months. Indeed, the UK’s top banks, including RBS and Barclays, accounted for 47 per cent of litigation against all FTSE100 constituents.
The data – from Thomson Reuters Lawtel - showed what is termed to be a “second spike” of this type of case, stemming from the economic downturn and working within the six year cut off limit for cases to be brought.
There has been some analysis which says this signals the end of the worst for the banks and other organisations in the sector. But I would argue this view seems incredibly optimistic, based on what is in the pipeline and from information around the legal world. Banks have been having bad years since Northern Rock in 2008.
Last year saw further problems with the RBS v Highland case, where an RBS employee was found to have misled the Court, resulting in probably the first decision before the English Courts where a UK bank had a judgment overturned as it had been obtained by the bank’s fraud.
This year will see further shareholder claims, more interest rate swap claims, the continuing issue on PPI (there are reports that a record 320,000 mis-selling cases will be resolved this year), Libor and CDO cases. A case involving an investigation into a bank branch outside of London will also bring further embarrassment from the disclosure.
The well-publicised RBS and potential Lloyds TSB shareholder cases claim there was a disregard for their own self-preservation over the rights of investors. Together the claims allege (we must remember these have not been heard as yet) cynical and unpleasant greed, which confirms the public long held views of certain banks and bankers.
Three shareholder groups suing RBS
Regarding RBS, the year is not yet a month old and there is already news that the two shareholder groups who are suing the bank are now being joined by a third. It is reported 8,500 small shareholders are joining two other actions in taking on RBS with claims adding up to £4billion over alleged misleading details contained in the 2008 share sale.
Then came the announcement – which was unscheduled and took place after the markets closed – that RBS is set to make an £8bn loss for the 2013 financial year after declaring it will book £3.1bn of provisions for litigation and mis-selling costs. Shares in the state-owned bank immediately plunged, and further questions were raised by experts and analysts alike. RBS are not alone in announcing these types of big litigation figures in recent months, with the same happening in the US as well.
Tougher powers for regulators?
The big question that is often asked is whether regulators should have tougher powers and if so, would this decrease litigation. The Financial Conduct Authority has been criticised over interest rate swaps, among other things. There has been an almost constant call for the FCA to be more like America’s SEC, with tougher powers beyond the limitations it currently has. But in terms of the present situation, the damage is done.
The separation of investment and high street banking will have an effect but there is little now that can stop the litigation that is in the pipeline, and it needs to be a cleansing and cathartic process for the banks.Sadly, I predict in most cases, they will fight tooth and nail and not do the right thing. For too long, banks have been able to adopt a scorched earth policy on litigation. They can fill the court room with expensive teams of lawyers, often massively outgunning the opposition. But changes in how cases can be funded, including Third Party Funding (litigation funding), have worked to redress the balance on this.
The introduction of Jackson has also put a strong onus on costs and time. How much effect that will have on banks remains to be seen, and it is clear to me they can still use the process stemming from Jackson in a tactical way to put off smaller rivals by lodging big numbers. In many of these cases, those wronged have been small business holders or families who have seen savings turn to dust.
That is the key to much of this, as it resonates in the public conscience. The success or otherwise of some of these more high profile case will have a strong bearing on how much similar litigation comes on stream in the future.Each case is different, as we know, but the fact they involve the wider public and not just large-scale institutions will of course bring further publicity and raised awareness.
The public in the UK are usually keen to see that the underdog wins the day.If possible the banks’ reputations will be tarnished further. It means surely that they have to distance themselves from the past and show - as well as say - that they have cleaned up their acts.
Nick Rowles-Davies is a consultant at litigation funding at Vannin Capital.