FCA Regulatory and Criminal Investigations

The Financial Conduct Authority (FCA) regulates the financial services industry in the UK and has far reaching powers to investigate, often in parallel, both regulatory breaches of the FCA’s Principles for Businesses and Approved Persons and complex financial crime including market abuse and insider dealing.  These investigations often involve cross border investigations with other regulators such as the Commodity Futures Trading Commission (CFTC) in the USA.

The FCA has become more proactive in the exercise of its enforcement and investigation powers and this has led to a number of high profile cases including those involving the manipulation of the London Interbank Offered Rate (LIBOR) and the largest insider dealing case being prosecuted. Individuals facing a FCA investigation could ultimately face a number of penalties including, a substantial fine, prohibition from working in the financial services industry and prison.

At Bivonas our regulatory and criminal litigation lawyers are regularly instructed to act for individuals who are facing FCA investigations and are well equipped to deal with the regulatory, disciplinary and criminal investigations and proceedings that may ensue. Bivonas has a wealth of expertise in this area, having represented individuals in cases involving LIBOR manipulation, market abuse and insider dealing.

Costs in litigation in England and Wales

London has become one of the preferred dispute resolution centres in the World. Litigation in England and Wales however potentially carries a huge cost burden. Firstly, our Civil Procedure Rules (“CPR”) can impose severe cost orders on litigants for failing to follow procedure or for conducting themselves in manner which is contrary to CPR’s overriding objective, namely to deal with cases justly, embodying the principle of equality, economy, proportionality and expedition. Secondly we have an adversarial costs system which is founded on the “indemnity principle” which means the losing party pays the other side’s costs. In practice this will be approximately two thirds of the winning party’s actual expenditure on solicitors, barristers, experts and court fees. Such costs if not agreed are determined by the court under the process of detailed assessment known as “taxation” which takes place at the conclusion of proceedings. Accordingly litigants must carefully consider the funding options and the adversarial cost consequences associated.  The following is a basic guide for those considering ligating in England and Wales.

Paying Lawyers

The traditional method of charging legal costs in litigation by solicitors is by hours expended at an hourly rate. Barristers/counsel also charge by the hour but expect to agree fixed “brief” fees for hearings and daily “refresher” fees for additional days in court.

Solicitors are also allowed to enter into conditional fee agreements (“CFA”). This normally entails a lower hourly rate than normally charged but with an agreed “success fee”. Subject to the agreed goal being achieved, e.g. recovery of money or assets, the hourly rate can be enhanced by as much as 100% and is recoverable from the losing party.

Although solicitors are often reluctant to commit to a fixed or capped fee, there is no reason why this cannot be agreed. If a solicitor is an experienced litigator, he/she should be able assess the costs and commit to a fee.

There has also been a recent growth in two areas:-

  • After the event insurance

 

After the event insurance, known as “ATE”, is where a litigant purchases insurance that provides coverage against having to pay the opponent’s legal costs. This is normally subject to obtaining a favourable opinion of good prospects of success and payment of a sizeable premium, however some insurers will also insure the premium, which means the insured party never actually has to pay the premium unless the case is won. At present, ATE premium is recoverable from the losing party but the law is expected to change in April 2013 (see Jackson Reforms below).

  • Third party funding

 


A third party funder will fund the claimant’s own legal costs of the claim but will require the claimant to agree that the third party funder will receive a percentage of the damages recovered, usually between 30 and 50%. Third party funders presently are not government regulated but there is a self imposed code of conduct which is widely accepted by the industry. Funders can be insurance companies, hedge funds, investment banks or private capital. Usually the funder has a risk committee which will include lawyers, retired judges etc. An individual can also fund litigation. Funding and ATE brokers have emerged in recent times, all purporting to have access to the funding and ATE market and provide what they regard as a holistic approach to litigation funding.

Those involved in third party funding need to be mindful of certain dangers:

Champerty and Maintenance

Champerty and maintenance are doctrines that aim to preclude frivolous litigation. A modern definition of maintenance is the support of litigation by a stranger without just cause. Champerty is an aggravated form of maintenance. The distinguishing feature of champerty is the support of litigation by a stranger in return for a share of the proceeds.

The seminal case of Arkin v Borchard Lines Ltd and others [2005] EWCA Civ 655 introduced a principle known as the Arkin cap. This case effectively opened the litigation funding market and third party funding will not breach the rule against maintenance in itself. Funding by third parties in return for a share of the proceeds will not amount to champerty either.

In Arkin, the funded claimant lost and the defendants applied for an order making the funders liable for their costs. The Court of Appeal held that the funder was liable for costs up to the amount of its own contribution, but to impose liability over this limit would represent too great a risk for third party funders. The judgment and the principle it established were designed to balance the principle of access to justice against the need for fairness to successful defendants who should be able to recover their costs.

Following this decision, while third party funders still risk exposure to adverse costs, the Arkin cap limits their exposure to the amount of their investment. Funders will not be found liable to pay all of the costs of litigation unless the funding agreement is champertous.

The question of whether a funding arrangement falls foul of the rule against maintenance and champerty will depend on the circumstances. Modern authorities give some guidance as to the factors that the court will take into account when assessing the validity of any agreement. These include, inter alia, the extent to which the funder controls the litigation, the extent to which the funded party is provided with information and is able to make informed decisions about the litigation, the amount of profit that the funder stands to make relative to the total damages and whether there is a risk of distorting evidence.

There are consequences for third party funding if the doctrine of champerty is breached. The agreement will be regarded as void and unenforceable and the funder will be unable to enforce the agreement against the funded party. Since the successful funded party would be under no enforceable liability to its funder, as a result of the indemnity principle explained above, it would be unable to recover costs from its opponent.

In practice, the issue of potential liability for adverse costs is often irrelevant because many funders will insist that sufficient ATE insurance is purchased to cover the adverse costs risk. In these circumstances, the defendants do not need to target the funder to recover their costs.

The litigation funding agreement is key to whether the funding arrangement is champertous. If the agreement gives the funder too much power to intervene, to withdraw unreasonably or to extract an unconscionable return from the case, then it may breach the ethical constraints imposed by the law and public policy. The litigation funding agreement should be carefully drafted to limit the extent a funder has influence on the case or on the legal representatives, and to limit the funder’s access to certain information. This access is often further limited by the desire not to waive legal privilege over confidential information.

Conflicts of Interest

One of the concerns regarding funded litigation is the risk of conflict of interest. The Code of Conduct in the Solicitors Regulation Authority Handbook 2011 specifies that a solicitor can never act where there is a conflict (or a significant risk of a conflict) between the solicitor and his/her client. A solicitor must act in the best interests of the client. His/her ability to do so must not be impaired by, for example, any financial interest or commercial relationship.

Confidentiality and Privilege

The SRA Code of Conduct deals with confidentiality and disclosure. It provides that the protection of confidential material is a fundamental feature of a solicitor’s relationship with clients. A solicitor must keep the affairs of clients confidential unless disclosure is required or permitted by law or the client consents.

This can lead to a dilemma because the prospective funder will want to see as many documents as possible in order to assess the strength of the claim.  The legal team must give careful consideration to which documents need to be disclosed. This is particularly important in the case of documents that would normally benefit from legal professional privilege since handing over such documents to the prospective funder could be regarded as waiving privilege. The best solution is to ask the potential funder to sign a confidentiality agreement which includes an undertaking that all documents provided are being disclosed on the basis of a limited waiver of privilege and they are to be held in complete confidence. However, if a third party funder provides funding, it is likely that common interest privilege will apply.

Funders will require a strong opinion of the prospects of success, usually 60% or 70% upwards and will consider not only the prospects of success of the claim, but also possible counterclaims and whether there are any other parties with an interest in any recovery. They will also look carefully at the creditworthiness of the opponent. A funder is unlikely to be interested in a case that is wholly dependant on the performance of witnesses of fact.

Funders generally prefer to fund only part of a lawyer’s fees, with the balance being funded by the client or the law firm itself (through a CFA).

Security for Costs

An order for security for costs offers protection to a party (usually a defendant) from the risks of their opponent not being able to pay the party’s litigation costs if ordered to do so. The order will usually require the opponent to pay money into court or provide a bond against which the winning party can subsequently enforce an order for costs. One of the grounds for applying for security for costs pursuant to CPR r 25.13(2) is that the claimant is:

(i) resident out of the jurisdiction; but

(ii) not resident in a Brussels Contracting State, a State bound by the Lugano Convention or a Regulation State, as defined in section 1(3) of the Civil Jurisdiction and Judgments Act 1982.

In practical terms, a foreign litigant should expect the defendant to apply for security for costs. A third party funder may consider funding the security for costs.

The Jackson Reforms expected to be implemented from April 2013

Significant civil procedure reforms are expected to be implemented on 1 April 2013. These reforms arise out of recommendations by Lord Justice Jackson known as the “Jackson Review”. The review was set up in late 2008 by the then Master of the Rolls, Lord Clarke of Stone-cum-Ebony, because the senior judiciary were – and are – concerned about the escalating costs of civil justice.

The Legal Aid, Sentencing and Punishment of Offenders Act 2012 (“LASPO”)

These will make sweeping changes to litigation funding. The main changes for commercial litigation are expected to be as following:-

• ATE insurance premiums will not be recoverable from defendants.

• Conditional fee agreements will not permit recovery by solicitors of a success fee of       more than 25% of base costs.

• The introduction of Damages Based Agreements.

Part 2 of LASPO includes provisions to remove the recoverability of ATE insurance premiums and of CFA success fees in most cases. LASPO is expected to come into force in April 2013. Removing recoverability of success fees and ATE insurance premiums is likely to level the playing field between third party funding and CFAs or ATE insurance. This is because the funded party will always be the paying party, rather than the unsuccessful opponent.

Damage Based Agreements

By far the most important aspect of the Jackson reforms, if implemented, is the introduction of Damages Based Agreements (“DBAs”), which essentially is a contingency fee agreement, similar to that widely utilised in the USA.

Contingency fees, (not to be confused with CFA), are currently lawful only before a claim is filed in court and are prohibited in England and Wales once the claim is filed and litigation  commences.

In commercial litigation this is likely to mean that with effect from April 2013 a solicitor will be able to enter into a DBA agreement with his/her client based on the damages recovered. The ceiling on the proportion of damages the solicitor will be able to share is 50% (including barristers fees but excluding expenses such as an expert). This is likely to have a dramatic effect on the culture of litigation conducted in England and Wales.

In reality, DBAs will probably be used in conjunction with third party funding, as much as in direct competition with it. However, solicitors will have three important advantages over third party funders:-

• No capital adequacy requirements. There are no plans for the capital adequacy of solicitors to be regulated when they fund cases through DBAs. Unless that changes, solicitors may have an advantage over funders when pricing their funding terms.

• Solicitors’ relationship with the client. Funders receive the majority of their applications from the instructed solicitors. If solicitors become their competition to a significant degree, funders will need to find a way of marketing themselves directly to the litigants.

• No exposure to adverse costs. Following the Civil Justice Council’s report on DBAs, it seems unlikely that a firm of solicitors will have the same exposure to adverse costs when they invest in a case through a DBA that a third party funder has.

The DBA must specify the following:-

  • the claim or proceedings or parts of them to which the agreement relates;

 

  • the circumstances in which the representatives payment, expenses and costs are payable and

 

  • the reason for setting the amount of the payment at the level agreed.

 

Agreement cannot require a payment net of costs to exceed 50% of the sums ultimately recovered including counsels fees.

Barristers and Solicitors

England and Wales has traditionally been a split profession. Barristers (also referred to as counsel) have rights of audience in the higher courts and are specialist advocates and advisers. Solicitors can obtain higher rights if they choose.

In some cases barristers accept direct access from the public. They can be instructed directly by foreign lawyers and some other professions. However, in all substantial cases it will be desirable and necessary to instruct a barrister through a firm of solicitors.

The solicitor’s role

Taking instructions from the client

Identifying relevant issues of English law

If it is necessary to instruct a specialist barrister, identifying the appropriate barrister/counsel

Properly instructing counsel

Issuing claims

Considering and defence

Taking instructions on defence

Advising on next steps and any interlocutory applications

Dealing with disclosure and inspection of documents

Taking instructions for witness statements/interviewing witnesses

Identifying and instructing experts

Preparing bundles/documentation for trial

Dealing with any settlement negotiations

Counsel’s/ Barrister’s role

Settling pleadings (the detailed claim or defence)

Advising on the law

Advocacy at trial and interlocutory stages

Barristers are NOT set up to:-

Take instructions from clients

Deal with disclosure of documents

Deal with witnesses

Conduct/ manage investigations

Deal with settlement negotiations

It is also important to understand that each barrister is an independent sole trader who does not have the necessary support or infrastructure to conduct substantial litigation without a solicitor.

One of the most important factors for a client in relation to litigation is often the cost. Barristers do not advise in relation to costs, third party funding and after the event insurance.

The split profession has successfully operated for over three centuries and only recent economic influences have challenged the system.  If a case is properly managed by an experienced team, the roles of the solicitor and barrister are clearly established and defined to avoid duplication of costs.

Antony Brown

Bivonas LLP

February 2013

Claim No: HC11CO2409 IN THE HIGH COURT OF JUSTICE (CHANCERY DIVISION). IN THE MATTER OF THE FINANCIAL SERVICES AND MARKETS ACT 2000

Claim No: HC11CO2409 IN THE HIGH COURT OF JUSTICE (CHANCERY DIVISION). IN THE MATTER OF THE FINANCIAL SERVICES AND MARKETS ACT 2000. BETWEEN: THE FINANCIAL SERVICES AUTHORITY (a company limited by guarantee) (Claimant) -and- (1) DA VINCI INVEST LIMITED (2) DA VINCI INVEST PTE LIMITED (3) MINEWORLD LIMITED (4) SZABOLCS BANYA (5) GYORGY SZABOLCS BRAD (6) TAMAS PORNYE (Defendants)

 

Acting for a Seychelles company and three individuals being pursued in the High Court of Justice, Chancery Division for civil penalties following alleged market abuse by manipulating trading, known as “layering”, in relation to Contracts for Difference. The case involves high frequency computer-based algorithm trading strategies. Tracey McDermott, the FSA’s acting director of enforcement and finance has stated in relation to the case “the FSA will take swift and decisive action to protect the integrity of UK markets, wherever those seeking to abuse them are based. These companies engaged in repeated cross-platform market manipulation, which the FSA will not tolerate.” The trial of the action is listed for June 2013.

 

Read more on the Financial Times website or this document.