- The proportion of mis-selling and contentious valuation disputes have both increased by nearly 50 percent worldwide since the credit crunch
- The proportion of fraud disputes in the UK increase by nearly a fifth
- Move away from settlement in UK courts towards arbitration
UK law firms have seen an increase in financial services disputes post August 2007, up 33 percent, according to global KPMG research, however, the expected large-scale growth of disputes has yet to happen both here and across the world. This may reflect the slower than expected economic recovery in the UK and many other parts of the world.
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.
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
The UK is broadly in line with global trends for the types of disputes which appear to be on the increase, including the proportion of financial services disputes that relate to mis-selling and contentious valuations which have both increased by at least 50 percent.
While proportionally fraud cases have increased by 35 percent, globally, while in the UK, fraud went up from 15 percent to 19 percent, an increase of more than 25 percent.
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 percent to 36 percent, as 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
In the UK, the proportion of disputes relating to hedge funds increased from 9 percent to 15 percent, post August 2007, while globally that figure saw an increase from 4 percent to 7 percent. Combining the proportion of disputes involving hedge funds and complex financial instruments in the UK saw an increase from 21 percent to 39 percent in the three years since August 2007.
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.
Value and number of disputes
Globally, comparing the three year periods either side of the credit crunch, the research 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.
There was also found a similar increase (31 percent) in the proportion of law firms working on more than ten such cases per year. 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 when compared to the previous three years.
Where disputes are settled
In the UK, the research found a more pronounced swing away from the Courts towards Arbitration as a means of settling disputes, with a 7 percent increase, compared to 4 percent globally. This shift has also been particularly noticeable in international and cross-border financial services disputes in Asia and Australia.
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.
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 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.
In the UK, the Ministry of Justice is encouraging the use of alternative dispute resolution, which appears to be gaining popularity within financial services disputes as parties seek to preserve privacy and minimise costs.
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.”
For further information please contact:
Judith Dow, KPMG Corporate Communications
Tel: 0207 694 8584
Mobile: 07786 197 718
KPMG Press Office: 0207 694 8773
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