23 June 2011 -
Over a third of law firms have experienced an increase in financial services disputes since the onset of the financial crisis in August 2007, according to KPMG global research. It also found a similar increase (31 per cent) in the proportion of law firms working on more than ten such cases and that in the three-year period post credit crunch, the proportion of firms engaged in more than 50 financial services disputes rose from 28 percent to 44 percent.
KPMG questioned over 70 significant law firms in 16 countries on their views on the litigation landscape within the financial services industry pre and post the 2007 global financial crisis. The research also found that disputes with a value of more than £10 million (or currency equivalent) had risen by six percent to 35 percent based on the views of two thirds of respondents.
Kathryn Britten, UK Chairman, KPMG Forensic comments: “While the increase in disputes in the financial services sector in the UK and globally has been on a steady increase, there is no doubt that the predicted high volume growth has yet to materialise. “However, as our research has shown, claimants are choosing their battles carefully – fighting where the values at stake are highest – particularly when this may mitigate against reputational risk.”
Types of financial services disputes on the increase
Since the middle of 2007 the proportion of financial services disputes that relate to mis-selling and contentious valuations has increased by 50 per cent. While proportionally fraud cases have increased by 35 per cent.
Prior to the financial crisis, the majority of financial services disputes concerned breaches of contract, however, the proportion of these disputes has fallen since 2007, from 47 per cent to 36 per cent, and the disputes landscape has become increasingly challenging.
Anecdotally, respondents reported an increase in regulatory disputes, following the tightening up of the financial services industry since the global financial crisis.
Hedge fund and complex financial instrument disputes up
Globally the proportion of financial services disputes relating to hedge funds increased from 4 per cent to 7 per cent. As has been widely reported, hedge funds were significantly affected by the collapse of the bond market in late 2007 and their managers are now the subject of increasing attack as parties seek to recover their losses relating to the unravelling of complex asset backed financial instruments.
In the UK the research also found that the proportion of disputes involving hedge funds and complex financial instruments had increased from 21 per cent to 39 per cent in the three years since August 2007.
Where disputes are settled
Since late 2007, the proportion of financial services disputes decided by arbitration in the first instance has increased by 4 per cent globally and 7 per cent in the UK, according to the research; this shift has been particularly noticeable in international and cross-border financial services disputes in Asia, Australia and the UK.
The move away from litigation reflects the increasingly international nature of the disputes and suggests that the desire to keep disputes as private as possible is a key factor for the parties involved. Increasing use of mediation as a mechanism for settlement also reflects a demand for privacy as well as the need to minimise costs.
Regional differences
The research highlights that the biggest increase in disputes has been in those economies where the financial crisis has had the least impact and where recovery has been the fastest. Whereas those economies hit hardest by recession and taking longer to recover have experienced only a steady increase in the numbers of disputes, which looks set to continue.
It also found an increase in class actions and that these were increasingly prevalent in litigation in North America and Australasia. But in Australasia, we have seen a shift in class actions away from the large scale litigation to more retail-focused customer actions on issues such as excessive bank fees.
Class actions are a means of providing better access to litigation for smaller investors, including individuals and pension fund holders. Recent moves within Europe have meant that US-style class actions are becoming more accessible to litigants there.
Future view of the disputes landscape
Looking ahead as the world’s economies continue to recover from recession, it seems inevitable that the volume of financial services disputes will continue to increase, particularly around:
- Complex financial instruments;
- Claims bought by financial regulators;
- Actions to recover losses resulting from fraud and / or misconduct;
- Disputes involving smaller entities and individuals.
For lawyers, the pressure is now on them to save money, despite the rising costs of disputes, and this has undoubtedly led them to be more innovative in the way they structure their fees and respond to the tighter budgets of their clients.
Kathryn Britten concludes: “As the world’s economies continue to recover, and with greater focus on regulation, the increase in financial services disputes seem set to continue to for quite some time. “With so much to consider in terms of both potential losses and risk to reputation, the stakes are higher than ever and parties will increasingly opt for more private and cost effective methods of resolution, such as arbitration or mediation. The values associated with these disputes are increasingly material to all of the parties involved as they seek to regain financial stability.”