Litigation finance growth in financial markets disputes
By Hanif Virji, Co-Founder, Therium AHV Financial Markets
This article first appeared in the June 2016 edition of Litigation Funding magazine.
Major global banks and brokers may have already paid in the region of $20 billion of fines and litigation expenses for Libor and forex rigging but the pay
outs are set to increase from a rising tide of legal claims in relation to these offences and the manipulation of indices such as ISDAFix, the global
benchmark for fixed interest rate swaps.
The growth in disputes to come is because interest rate benchmarks like Libor and ISDAFix are integral to a vast range of global financial products, from
relatively simple to more complex and highly structured products. Whilst the value of Libor related global financial contracts was revised down after the
Wheatley review, they are still worth at least $450 trillion. Potentially, millions of people and organisations across the world could be claimants in
interest rate benchmark cases, from individuals and small businesses to large corporations and highly sophisticated global investors and asset managers.
Banks and intermediaries could be the source of legal claims linked to a panoply of areas, including hire purchase agreements, mortgages and pensions,
structured credit products, corporate loans, taxation products, private banking and the full range of interest rate derivatives. There will be some very
big and multi-jurisdiction disputes. Claimant allegations will include being mis-sold products, mis-valuation, or simply being over-charged for a service.
A good example of the latter is “closet tracking” also known as “index hugging”. Asset managers have been found to charge fees on the
basis of providing active portfolio management services whereas in fact the portfolio to a large extent simply tracks a benchmark market index. The
difference in fees for the two services can be around 1 per cent per annum and it is estimated that approximately 10 per cent of the U.K.’s £6.6
trillion of assets under management could be closet trackers. Whilst difficult to estimate, it would imply an over-charging of around £6.6 billion per
annum. Finanstilsynet, the Danish regulator, estimated a third of the domestic funds in Denmark are closet trackers.
A number of current cases in London are being watched very closely. Wingate, a subsidiary of Guardian Care Homes, has brought an interest rate swap claim,
against Lloyds, alleging that a 2011 settlement over swap mis-selling should be overturned because of the bank’s libor fixing. There are many other such
cases predicated on Libor or the manipulation of other benchmarks either already in court, with some at an advanced stage, or at various stages of
preparation. The Financial Conduct Authority’s compensation scheme has led to the settlement for over 13,000 claimants with interest rate swap agreements
worth about £2 billion, so if Wingate is successful the case could become a catalyst to further similar legal claims against the banks.
Recognising the importance and complexity of such cases and the swelling case-load, the English Judiciary announced the High Court Financial List in July
last year for important and financial markets claims of more than £50 million. While London will already be a natural centre for many Libor claims,
the list will clearly add to the city’s attractiveness for financial markets litigation.
However, whilst one of the objectives of the Financial List is to reduce the time and cost of litigation through learning from test cases, financial
markets disputes will remain extremely expensive, often with costs of more than £10 million attached.
Litigation funding has a major role to play in large scale financial disputes and this is why we recently launched Therium AHV Financial markets, the first
litigation financing business dedicated to the full spectrum of complex financial markets litigation and arbitration. In just a few months we have seen a
huge demand for well-funded cases for corporate, institutional and private clients across a range of jurisdictions. These cases demand the ability to make
early decisions about the viability of providing finance, innovative funding structures, and the experience and expertise to develop models that maximise
the returns for winning claimants.
Our own recent research of litigators from the UK’s leading law firms conducted in partnership with Just Costs Solicitors highlights the growing
recognition of the contribution that litigation finance has to make to financial markets disputes and bringing access to justice. Most of the partners
(79%) we surveyed had seen new funded cases in the last year, with funding being most prominent in financial services; and three quarters of the litigators
said that funding is now core to their discussions with clients.
Many potential claimants simply do not have the funds to launch a case. For others there is too much risk to bear from the cost of a dispute, especially
when the total running cost and the disclosure demands of a case can never be determined at the outset, and the adverse costs of losing a claim to a
financial institution can be high (and the insurance to cover them). Litigation funding solves these problems. Almost a quarter of litigators (23%) we
surveyed said that the ability to meet costs was the most important function of third party litigation financing and this was closely followed by the risk
transfer benefits of funding. Meeting costs has already been crucial for large group actions to seek justice against financial institutions and this will
continue to be the case. One of the challenges in such situations is finding other claimants to join a case. Rapid book-building is critical to making a
claim viable and this is something sophisticated litigation finance providers can do.
Even for global businesses and investors that may well have large litigation budgets there is a huge benefit to be gained from turning to a
well-capitalised litigation finance provider to fund disputes. This is because litigation finance removes the cost of the dispute from the claimant’s
financial statements, thereby transforming the litigation into an asset, freeing up the cash for more strategic uses and boosting the organisation’s
It is impossible to forecast the volume of financial markets claims that will be launched in the coming months but our experience tells us that there will
be considerable activity, involving many different financial products and a wide range of claimant types. There will be a great deal of complex,
cross-continent, high value cases, and third party funding will be seen in an increasingly number of these matters.