Banks face onslaught of fraud cases as investors shun mis-selling claims

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Dec 13, 2017
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Mis-selling claims have become more difficult to win than those of fraud

Chris Radburn/PA

British banks face a wave of fraud claims that could tie them up in years of litigation, City of London lawyers have said.

Fraud allegations are rising because of increased regulatory oversight of banks and financial institutions brought in after the 2008 crash. 

Claims of fraud also have longer limitation periods, generally better legal remedies and circumvent so-called basis clauses, which banks have used to defeat mis-selling claims. 

Analysts looked at more than 200 cases involving banks and financial institutions issued in the High Court in London between January 2016 and July this year, and found that mis-selling cases now account for less than half, down from two-thirds, but cases involving fraud have more than quadrupled. 

Norton Rose Fulbright, the City law firm that carried out the research, said the number of High Court fraud claims was running just after those involving mis-selling and derivatives. 

“The shift towards cases related to allegations of fraud is notable,” Michael Godden, a partner at the firm, said.

The lawyers point out that the flood of mis-selling cases after the 2007 financial crisis is finally running dry. The decline is likely to be the result of existing cases settling or being decided, with no new actions taking their place. 

Specialist banking litigators point out that the High Court has generally upheld basis clauses and exclusions or limitations in banks’ terms and conditions, making it difficult for investors to succeed with mis-selling claims. 

The English courts have always been a favoured jurisdiction for litigating fraud and asset tracing cases

A basis clause is an agreement between two parties setting out the terms on which they deal with each other. They frequently involve one party accepting that it is a sophisticated investor that does not rely on the other party for advice. 

The clauses have been used successfully as defences in mis-selling cases, and often cannot be overturned as unreasonable using the Unfair Contract Terms Act 1977.

As a result, lawyers say that claimants are increasingly alleging fraud, which could lead to a transaction being rescinded and might put them in a better position than damages for breach of contract. 

Alleging fraud can also increase pressure on defendant banks to settle to reduce potential damage to their reputations.

Godden added that “the English courts have always been a favoured jurisdiction for litigating fraud and asset tracing cases because English law has a well-developed menu of orders and remedies to help uncover and remedy genuine examples of fraud”.

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