Securities litigation in the UK: A changing landscape?

Stewarts look at the UK financial market, with special focus on FSMA

The recently published fourth edition of the City of London Corporation’s international competitiveness study ¹ ranked London as the world’s top global financial centre. The foreword to that report states: ‘Amidst a range of macroeconomic and geopolitical challenges, this latest report shows how the UK’s financial services are key to driving growth and promoting the breadth of specialist expertise available in the City of London.’

To ensure the UK financial services market can continue to grow, it should possess:

an effective capital raising regime to attract issuers to list securities in the UK; and
an effective liability regime that upholds corporate governance standards, thereby encouraging investors to purchase listed securities in the UK.

This piece examines the interplay between these two aspects and the role securities litigation has played (and should continue to play) in promoting the UK financial services market.

Changes to the UK listing rules

The study that ranked London as the world’s leading financial centre also noted that the number of foreign companies listed in the UK is dropping. As part of an effort to reverse this trend, in December 2023, the Financial Conduct Authority (FCA) announced proposals for what it referred to as ‘the most far-reaching reforms of the UK’s listings regime in three decades’.

‘FSMA claims are time-consuming and expensive. Substantial “book-building” exercises are often required to pool the necessary investors to make a claim commercially viable.’

The aim of the FCA’s proposals appears to be to facilitate the listing process by adopting a ‘simplified listing regime with a single listing category, with streamlined eligibility and ongoing requirements, aimed at encouraging a greater range of companies to list in the UK and compete on the global stage’.

While this may be welcome news for a prospective issuer wishing to list their securities in the UK, it has provoked some negative reaction from the investor community. For example, the International Corporate Governance Network, a group of global institutional investors with $77trn of assets under management, wrote to the Chancellor of the Exchequer and the FCA stating that the proposed reforms ‘may be detrimental to corporate governance standards and shareholder protections, thereby undermining the UK’s economic growth and attractiveness as a global financial centre… and… are likely to harm the UK’s reputation as a market with robust investor protection, high corporate governance standards, a strong reporting regime and a stable policy environment’.

This emphasises the need to strike a delicate balance. On the one hand, the listing regime must be permissive enough to attract issuers. On the other hand, investors need to be satisfied that the issuers are worth investing in, and issuers must maintain high standards of corporate governance to engender such confidence from potential investors. In addition, investors are likely to be encouraged to invest in a market if a legal system exists that holds issuers to account should they fail to uphold such standards.

The role of claims under s90/90A Financial Services and Markets Act 2000 (FSMA)

Sections 90 and 90A/schedule 10A of FSMA provide the backbone of the UK’s investor protection legislation. They provide for compensation to investors who suffered loss as a result of untrue or misleading statements or omissions contained in either listing particulars or prospectuses (in the case of s90 FSMA) or in other published information (in the case of s90A FSMA).

‘The inherent and fundamental purpose of the FSMA regime is to scrutinise issuers’ conduct.’

Despite these legislative provisions being effective since 2001 (s90) and 2006 (s90A), they have not been commonly used. This is perhaps surprising given the number of public companies that have issued securities in the UK during that period and the fact that equivalent claims are so prevalent in jurisdictions such as the US and Australia.

Unlike the US, the UK legal system does not permit a US-style ‘opt-out’ class action regime, save for collective proceedings brought under s47B of the Competition Act 1998 (as amended by the Consumer Rights Act 2015). Outside of the competition sphere, the English courts have increasingly had to grapple with the advent of multi-claimant litigation in recent years. It is fair to say no consistent or uniform approach to securities claims has emerged, and cases are managed on an individual basis.

Challenges of FSMA claims

Only 13 issuers have had s90 or 90A claims issued against them in the English courts since the legislation became effective. There are several potential reasons for this.

FSMA claims are time-consuming and expensive. Substantial ‘book-building’ exercises are often required to pool the necessary investors to make a claim commercially viable. Establishing a cause of action under either s90 or 90A can be labour-intensive, particularly given the requirement under s90A for an investor claimant to prove reliance. Quantum issues are also complex and likely to require extensive expert evidence.
Given the cost of bringing and defending FSMA claims, they are usually only viable when funded by third-party litigation funders and underwritten with appropriate after-the-event (ATE) insurance. It can take months, if not years, to structure and implement the necessary funding structures to allow FSMA claims to get off the ground.
There has never been a trial of a s90 claim, and the merits of a claim under s90A/schedule 10A have only been tried once, in the Autonomy litigation² (which was an atypical s90A claim due to its so-called ‘dog leg’ structure). While this may send positive signals to litigation funders that settlements are available in FSMA claims, the flip side is that there remains uncertainty about how the English court approach various legal issues.
Certain ‘threshold’ issues that might make s90A claims more attractive to potential claimants (and funders) have not yet been brought before the English courts for determination. The main example of this is the ‘fraud on the market’ theory recognised in the US, which effectively removes the requirement for a claimant to prove direct reliance. Currently, index/passive investors (recently estimated to comprise 48% of global investors) may not have any protection from losses suffered as a result of fraudulent misstatements or omissions by directors under the current s90A/schedule 10A legislation. If the English court were to embrace a similar concept to fraud on the market, it would provide comfort to those investors and would increase the attractiveness of the UK securities market to the large global index funds.

Case management approaches in FSMA claims

Notwithstanding the above difficulties, claimants have tried to innovate how FSMA claims are case-managed to make them more cost-effective.

Most notably, the question of whether the ‘representative action’ procedure (set out in Civil Procedure Rule (CPR) 19.8) can be applied to securities claims has recently been examined by the English courts. Essentially, where more than one person has the ‘same interest’ in a claim, the representative action procedure allows the claim to be brought by one or more of the persons who have that same interest, ie, in a representative capacity on behalf of any other person who shares such an interest.

This approach emerged following Lord Leggatt’s judgment in Lloyd v Google³, where he stated that absent a detailed legislative framework for collective actions (save for competition law claims), there is no reason to decline to apply the representative action procedure or interpret it restrictively. Rather, he said, it should be treated as ‘a flexible tool of convenience in the administration of justice’. Lord Leggatt also raised the prospect of adopting a ‘bifurcated approach’ in representative actions whereby ‘issues common to the claims of a class of persons may be decided in a representative action which, if successful, can then form a basis for individual claims for redress’.

‘The decision in Wirral shows that investor claimants and issuer defendants have diametrically opposed views regarding whether representative actions provide a suitable structure for securities claims.’

Ostensibly, such an approach might seem well suited to a claim under s90A/schedule 10A FSMA, where common issues of defendant liability, such as whether information published to the market was untrue/misleading (or contained omissions) and whether persons discharging managerial responsibility had the requisite knowledge, could be resolved by way of a more streamlined representative action brought by one representative claimant (on behalf of many others). That would leave non-common issues such as reliance and quantification of loss to be resolved later in the usual way, ie, by each claimant having to prove those aspects of its claim.

This concept was put to the test in two recent s90A cases brought by Wirral Council, which commenced representative actions pursuant to CPR 19.8 against Indivior plc and Reckitt Benckiser Group plc ⁴ on behalf of classes of claimants who acquired, held or disposed of securities in both defendants during the claim period.

The defendants in both cases successfully applied to strike out these representative actions. The court was persuaded that if the representative claimant were permitted to dictate the structure of the proceedings according to the proposed representative action (in particular as to what issues should be tried at the bifurcated ‘first stage’), this would prevent the court from exercising its case management powers in the usual way, which would include a discretion to bifurcate the issues in a manner it saw fit. The court found there was no reason why the claims could not proceed as ordinary multi-party proceedings (such claims having also been issued in parallel with the representative actions).

Wirral Council submitted that its proposed approach would promote several case management benefits, including (i) facilitating access to justice, particularly for retail investors; (ii) by focusing only on common issues of defendant liability, deferring claimant-specific issues to a later trial if needed thus avoiding the need for claimants to incur the up-front cost of having to deal with those issues at the outset of the claim; and (iii) promoting scope for earlier settlement of individual claims following a declaration of liability in relation to common issues.

While those objectives might seem self-serving from a claimant’s point of view, the better argument is that the inherent and fundamental purpose of the FSMA regime is to scrutinise issuers’ conduct. Unsurprisingly, the defendants’ response to Wirral Council’s arguments was that it was unfair that the burden should be so lopsided against them. The court agreed, confirming that ‘claimants must properly plead and particularise their cases from the beginning, and it should not be as simple as subscribing to litigation without any risk or cost being incurred’.

Although Wirral Council has applied for permission to appeal, for the time being it appears that s90A claims must proceed by reference to the established approach of ordinary multi-party proceedings, despite the practical challenges and costs referred to above.

The case for reform?

The current formulation of s90A FSMA resulted from an independent review carried out by Professor Paul Davies KC regarding issuer liability to investors in respect of misstatements to the market. That review culminated in the Davies Report of June 2007.

One of the terms of reference for the Davies Report was to ‘consider the competitiveness of the UK as a good place to do business’. In the almost 20 years since, are s90 and 90A of FSMA still fit for purpose? Is the statutory framework being deployed as effectively as initially hoped? Crucially, is it playing its part to uphold the UK’s competitive advantage as a place to invest?

The fact that London is still regarded as a leading global financial centre might suggest the current system works well. However, in light of the reforms to the UK listing rules (and the concern about the negative impact this could have on corporate governance standards), is this an opportune time to revisit the efficacy of the issuer liability regime? For example, as to the reliance requirements under s90A/schedule 10A (and how they should be interpreted), while potentially appropriate for a time when active investment dominated and analysts diligently read all published information, they now have the potential to deprive investors of any protection in a future world of investment strategies driven predominantly by index trading, computer algorithms and AI.

There also remains the issue of whether there should be a more structured approach to how securities claims are brought in the UK?

The court’s decision in the Wirral case shows that investor claimants and issuer defendants have diametrically opposed views on the question of whether representative actions provide a suitable structure for securities claims. For its part, the court has expressed the importance of preserving its discretion to decide how such cases will be managed, thus maintaining the status quo. That said, the court made clear in Wirral that it was deciding how to exercise its discretion in that particular case and was not seeking to establish a general policy or precedent as to how securities claims should be brought.

It therefore remains to be seen whether the challenges with the current FSMA regime will impact investor sentiment more widely as to the desirability of investing in UK listed companies and, if so, what the wider macroeconomic consequences, if any, might be.