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Unravelled: Financial Services Class Actions

6 September 2016

Written by Partners Jenny Campbell and Peter Haig

Our class actions team recently published our Class Action Risk 2016 report. The objective of the report is to look behind the headlines and hype that often surrounds class actions to provide a more holistic and objective assessment of class action risk for our clients. This is particularly important in an environment in which the press surrounding class actions has often heralded a developing crisis for Australian business.

The basis for our analysis is filings data dating back to 2005. We use this data to look at trends emerging over the last decade through a series of five year on five year comparisons, and also as the basis for identifying emerging trends. We consider that this timeframe and structure provides the most meaningful basis to assess changes in the class actions landscape and current class action risk. It allows us to distinguish between trends of likely ongoing significance and 'spikes', which may themselves not provide much indication of what is to come.

The key points to emerge from our research include the following:

  • Class action risk has increased significantly over the course of the past decade – more claims are being filed and more law firms and third party funders are promoting claims.
  • That trend does, however, need to be seen in its broader context. A closer analysis of the data reveals that the number of companies facing class actions has fallen. This is because the raw filings data is affected by the increasing number of companies facing more than one claim in relation to the same conduct. In some cases this is because multiple law firms have commenced class actions – for example the class actions against Volkswagen. In others it is because the same firm has brought multiple actions on behalf of different customers – for example, eight class actions have been commenced against Standard & Poor's in respect of its rating of eight different CDOs (although the same methodology was used to rate each product).
  • The key driver for the increased filings is the number of ‘new’ law firms who have commenced class actions. This 'new entrant' risk is currently a bigger contributor to class action risk than third party litigation funding.
  • There has been a spike in shareholder class actions against listed companies in the past eighteen months, but longer term trends suggest that banks and financial services companies are the most frequent targets.
  • There has been a renaissance of product liability claims (largely in the pharmaceutical and automotive industry) and natural disaster (mainly bushfire) filings continue to increase.
  • The vast majority of class actions are settled, but almost one-third are dismissed or otherwise discontinued with no money changing hands. This suggests that so-called 'blackmail settlements’ (companies paying to settle unmeritorious claims) are not as common as some suggest.

Of particular interest to readers of Unravelled will be the longer term trends showing that claims in the financial services sector are the most common type of class action. The most frequent claims made against participants in this sector include claims relating to the mis-selling of financial products, the rating of financial products, lending practices and compliance with trustee obligations.

While this trend is of obvious concern, it is important to consider it in context. For example, filings in this sector have been affected by the bank fees cluster (of eleven class actions) and the eight class actions against Standard & Poor’s referred to above – these cases have had a very significant and disproportionate impact on the overall trend. It remains to be seen whether filings in this sector are sustained in the years to come, particularly as the limitation periods in respect of GFC-related losses expire. Indeed, as can be seen from Figure 1, financial services class action filings have fallen (as a percentage of overall filings) in the past eighteen months.

Figure 1

Just as importantly in putting the raw data into context is the fact that, while financial services class actions can be very significant and high-profile, this is the sector most likely to face smaller class actions - in terms of the number of group members, amounts claimed and public interest.

Also relevant in this context is the role that 'new entrants' are playing in contributing to class action risk. As mentioned above, our data suggests that the biggest contributor to current class action risk is new law firms looking to establish class action practices. Of particular note in this respect is that roughly 26 per cent of the class actions filed since 2013 have been commenced by 15 firms who have filed either one or two claims in that period. This is undoubtedly resulting in claims at the more speculative end of the spectrum and is therefore an obvious contributor to risk. Moreover, in our experience, the relative inexperience of these firms in running class actions can create significant practical and reputational issues for the defendants they sue. To a large extent, these issues arise from the fact that class action law and practice is now heavily embedded in hundreds of interlocutory judgments and orders to the point where even the most careful reading of the legislation will give rise to misconceptions as to accepted and required practice. Defending claims run by firms who are not familiar with that practice requires particular insight and vigilance.

Looking ahead, the biggest potential agent for change is the possibility that the courts will permit third party funders to be remunerated on a 'common fund' basis – an issue currently before the Full Federal Court (sitting as a court of first instance) in the shareholder class action against QBE. This would see funders receive a commission from the total amount recovered in a class action and not just from the group members who have signed funding agreements. If permitted, this would avoid the need for funders to book build before agreeing to fund a class action and significantly increase the amount required to settle class actions. As a result, the acceptance of the 'common fund' approach would significantly alter the class action landscape. For whose benefit is perhaps a question for another day.

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