THE AREA of financial services is rapidly becoming a litigation hotspot, spurred on by the increased level of regulatory intervention post HIH, a Lawyers Weekly source has revealed.
There is a confluence of factors at work that are seeing the financial services industry face increased litigation, according to Blake Dawson Waldron partner Michael Vrisakis. A key accelerant has been the increased level of regulatory supervision and intervention, particularly post HIH.
“We are definitely seeing more propensity for class actions to be launched in the area of financial services, as well as the propensity for certain key legislative duties and other general law duties imposed on product issuers to be probed and explored through court actions by regulators and consumers alike,” he said.
On the regulatory front, before HIH, regulatory intervention was principally focused on the ‘bad end of town’ and wilful breaches, Vrisakis said, while the current focus has expanded significantly to breaches resulting from short comings in process, procedures and governance.
This has been manifested in a large spate of enforceable undertakings and court actions in recent times. On the consumer front, one of the largest class actions in the financial services segment in terms of the number of plaintiffs was brought this month.
Traditionally the area has not seen large litigation activity in comparison to the magnitude of business conducted, Vrisakis said, noting that this could be ascribed to the relative youth of the law in this area with respect to certain segments, such as superannuation.
A key aspect of this is APRA and ASIC’s greater use of amorphous legal duties, such as directors duties under the Corporations Act and equivalent duties under superannuation legislation, as a catch all and pervasive means of regulatory intervention, according to Vrisakis.
Another important factor is simply the sheer volume and complexity of new legislation, such as FSR and super licensing, which has a common element of conferring greater powers on the regulators, greater rights on consumers and greater obligations on product issuers to disclose such rights to those consumers. It also has meant that the difficulty factor and the compliance ‘pass mark’ for financial institutions have definitely increased substantially, Vrisakis said.
He said this is resulting in greater consumerawareness of such rights and so greater impetus for consumers to make complaints and take legal action.
“This confluence of factors is likely to mean that the volume of such financial services litigation will increase very significantly, particularly with the advent of further consumer empowering legislation such as the choice of fund regime which takes effect from 1 July this year,” said Vrisakis.
There have been important developments in the legal area, which have coincided with these factors, Vrisakis said. For example, there has been a discernable and increasing trend in relevant case law decisions for rights of beneficiaries and other investors to be judicially enhanced.
Most recently, the NSW Court of Appeal in Hannover Life v Sayseng (23 June 2005) saw an insurer held to owe a duty of good faith directly to a beneficiary of a superannuation fund and not just a duty to the trustee of the fund, which was the more conventional articulation of the position.
As well, a deceleration in some areas of legal practice due to other legislative developments, has led to a number of plaintiff legal firms developing or expanding their expertise in the area of financial services litigation, he said.