Financial services industry challenges ahead: Impacts of CFPB, cryptocurrency, sanctions, and litigation

At Hogan Lovells Financial Services Litigation Roundtable on 2 May 2018, our lawyers discussed some of the most prominent trends impacting financial service providers around the globe.

Here are some key takeaways from the event:

Cryptocurrency

As the cryptocurrency markets (including both “spot” and derivatives) grow, they are subject to lack of clarity as to what, for legal and regulatory purposes, a virtual currency is. Is it a “security”, over which the SEC has regulatory jurisdiction? Is it a “commodity” over which the CFTC has jurisdiction?  Both regulators are very aggressive – as is FinCEN (concerned about cryptocurrency-related money laundering) and the DOJ (concerned about fraud, manipulation and money laundering). The lack of regulatory certainty is of concern not only to those involved directly in cryptocurrencies (e.g., exchanges) but also to banks as they consider to the potential risks of facilitating transactions in virtual currencies and their derivatives -- quite apart from the volatility and the fact that cryptocurrency may be viewed as a potential competitor. The markets are also concerned about the lack of any consistent legal regime internationally.

Sanctions

The Trump Administration has extensively resorted to sanctions during its first year, including powerful sanctions imposed against certain Russian “oligarchs” and their businesses in April and making good on their threat to pull out of the Iran nuclear deal and begin re-imposing sanctions. The divergence between the US and EU approaches on Russia and Iran sanctions, and the unpredictability of the Trump Administration, has created significant complexity for financial institutions and their clients. For financial institutions, business deals that started when banks began returning to Iran in 2016 will likely be shut off due to President Trump’s recent decision to pull of the nuclear deal. It remains unclear how aggressively the US will target EU or Asian companies doing business with Iran without any US nexus.

CFPB and Consumer Finance

Uncertainty is also the major theme since Mick Mulvaney became interim director of the Consumer Financial Protection Bureau, which resulted in the bureau decreasing its actions taken from three or four a month to one action in six months. Some state attorneys general have said they will fill the void in consumer protection, but states are limited in resources and businesses don’t want to deal with 50 different regimes.

M&A and Securities Cases

M&A litigation had been increasing steadily and became an industry for the plaintiff’s class action bar. However, recent cases including Trulia, Corwin and M&F Worldwide, have made it more difficult for stockholders to bring breach of fiduciary duty claims under Delaware law. Unfortunately for companies, the plaintiff’s bar is enterprising, and there has been new trends where stockholders now pursue federal law claims, state law claims outside of Delaware, or post-closing damages cases after obtain corporate books and records.  On the securities litigation front, there has been a noticeable increase in the number of cases filed against in life sciences where securities class actions have risen dramatically because stock prices are volatile.

International Class Actions

The class action for monetary damages is an American invention, which  has spawned an aggressive plaintiffs’ bar pursuing securities, commodities, antitrust, consumer protection and other types of claims on a classwide basis.  In recent years,  class actions and class-like devices have started to go international, particularly in Europe (whose jurisdictions traditionally did not permit class-type litigation),  Major US plaintiffs’ firms are very becoming active in several European countries, through their own offices and/or by partnering with local firms. In particular, the Netherlands has become a leading jurisdiction for collective actions and settlements. That country has a statute allowing stakeholders to form a foundation that can pursue a collective action for a declaratory judgment.  If the foundation succeeds, individual claimants alleging injury by reason of defendants’ misconduct can bring follow-on actions for monetary damages. Dutch law firms, working together with US class action lawyers, have already brought collective actions (including antitrust and securities claims) against financial institutions incorporated in countries other than the Netherlands (premising jurisdiction based on also naming a Dutch “anchor defendant”). What is more, the Dutch Parliament is expected to enact legislation allowing damages to be sought in US-style “opt-out” class actions, perhaps later this year.  Meanwhile, in the UK – where major US plaintiff-side firms have invested heavily in recent years, and which has robust litigation funding market – Competition Appeals Tribunal is now authorized to certify antitrust class actions. Although none has yet been certified, observers expect plaintiffs’ lawyers to continue to bring more cases and aggressively pursue certification.

The Transition from LIBOR

Last year’s announcement by the UK Financial Conduct Authority (FCA) that it would no longer require banks to make LIBOR submissions after 2021 has sown uncertainty in the loan and capital markets—and in due course this will add to litigation risk relating to some “legacy” instruments that do not mature until after 2021.  LIBOR is used in financial instruments with an estimated notional value of $350 trillion. Market participants and trade organizations are considering ways of replacing LIBOR in new instruments and amending legacy instruments to include “fallbacks” that can backstop LIBOR once it is no longer available. On April 2, 2018 the New York Federal Reserve introduced an alternative, the Secured Overnight Financing Rate (SOFR), which is likely to require significant “tweaks” and add-ons in the coming years in order to become a viable LIBOR substitute.  Legacy instruments that do not provide for a robust and workable “fallback” in the event that LIBOR is no longer available (as it likely will not be after 2021) may well become the subject of litigation.  After all, a party cannot pay “LIBOR plus x basis points” to a counterparty if LIBOR is no longer being calculated– and if the contract does not provide for a “fallback,” enforcement of the contract may not be possible; courts will have to consider whether contractual obligations can be adjusted or reformed (over the objection of one party) on the basis of rarely used doctrines such as impracticability of performance.

For more information please see our Financial Services Litigation Practice or contact Maria Woehr.


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