12 April 2021

Ben Walton and Caroline Harbord write for FT Adviser on pensions mis-selling claims

Head of Commercial Dispute Resolution, Ben Walton, and Senior Associate, Caroline Harbord's article entitled ‘Pensions could be the next big area for mis-selling claims' was recently published in FT Adviser.

In their article, they highlight how players in the pensions industry have, until recently, avoided being pursued for mis-selling, compared with the banks which have faced over a decade of litigation related to the mis-selling of financial products. However, Ben and Caroline predict that this may now become a “litigation boom area”.

The full article was first published in FT Adviser and can be found here.

Group claims relating to the mis-selling of financial products have been the thorn in the side of most banks for more than a decade, particularly since the financial crash of 2008.

However, notwithstanding that the pension industry also engages in the mass sale of financial products, its players have, until recently, avoided being pursued for mis-selling on quite the same scale.

The pensions industry has generally been regarded as a more elusive target for financial mis-selling claims, predominantly because of the more nuanced way in which the pension investment journey is structured.

While banks historically tended to keep each part of the investment journey in-house (that is, a bank employee would advise customers to buy a financial product sold by said bank, thus unintentionally making the bank an easy target when problems arose), by contrast the pension investment journey is more complex, making it harder to pin liability on attractive defendants.

The pension investment journey

For example, a standard pension investment journey might involve:

  • An independent financial adviser
  • A pension trustee
  • A financial institution offering an investment product (such as a wrapper bond)
  • investment fund selling investments to be held within the wrapper bond.

Often these four market participants would be based in different jurisdictions with different local regulatory regimes (varying in robustness).

These market participants are to a degree co-dependent on each other for referrals, and it is common for thousands of investors to follow a substantially identical investment journey through the same four entities (such individuals being known as 'batch investors').

There is also an argument that the co-dependent nature of the industry disincentivises its participants from holding each other to account when mistakes are made, unless specifically compelled to do so by extraneous pressure.

The effect of all this is that it is not easy for everyday pension investors to seek redress for pension losses through civil proceedings. To do so, they would be faced with the unenviable task of: untangling the complex investment journey; identifying the duties and responsibilities of each player in accordance with the relevant applicable law and local regulations; and establishing wrongdoing on the part of potential defendants with the means to satisfy judgment.

Undertaking the analytical exercise behind these steps alone is a complex and laborious endeavour requiring specialist legal expertise, not to mention the financial and emotional commitment of civil proceedings (possibly across jurisdictions), and the associated adverse costs risk (that is, the risk that the claimant would have to pay most of the defendant’s cost in the event the claim fails).

Little wonder then that many pension investors with significant losses (sometimes comprising the entirety of their pension pot) have written off the prospect of even attempting to seek redress through civil proceedings.

Why is pension litigation tipped as a boom area?

What is increasingly clear, however, is that the traditional context is changing, and that group claims for mis-sold pension investments are predicted to be a litigation boom area.

The key drivers behind this change are undoubtedly:

  • The increased availability of third-party litigation funding, which marries perfectly with large scale group pension litigation
  • The increasingly sophisticated approach of lawyers pursuing these claims.

The basic litigation funding model involves a third-party funder paying the ongoing costs associated with bringing proceedings, including an ATE (after the event) insurance premium to insure against the adverse costs risk.

If the claim is unsuccessful, the funder loses its investment (that is, all costs it has incurred on the claim).

However, if the claim is successful (that is, there is a settlement or judgment in the claimant's favour), the funder is repaid its costs, plus a premium, from the claim recoveries before they are distributed to claimants.

While this model serves to reduce claimant recoveries (due to the deduction of the litigation funder’s premium), it provides claimants with the means to pursue defendants where they would otherwise be unable to do so.

Litigation funding and pension claims: the perfect match

As alluded to above, the uniformity of the pension investment journey, once properly understood, means that group pensions claims have the classic hallmarks required to make litigation funding viable.

The pension investment journey outlined above involves thousands of individuals (the batch investors) purchasing the same pension investment, on the same terms, and from the same entity.

If there is a fault in this standardised process, the individuals go on to suffer the same loss and have the same claim against the same defendant. Pension trustees and financial institutions make attractive defendants (in any claim, but particularly in funded claims where the funder needs comfort as to its return) due to their deep pockets and insurance policies.

Claimant groups in pension claims have huge growth potential (particularly with the help of social media platforms), which means they can have the capacity to absorb the cost of the litigation funder’s premium without significantly impacting individual claimant recoveries.

Additionally, historic pension claims (that is, claims that arose more than six years ago, which would usually be time barred) may be included in current group actions if the claims involve allegations of fraud, concealment or latent damage.

What this means for the pension market participants

While this is obviously good news for claimants, it presents both a threat and an opportunity to the traditional market players.

For example, a pension trustee may find itself on the receiving end of a funded group claim (for example, a claim that they breached their duties, acted negligently, or in serious cases, were complicit in fraud).

Alternatively, a trustee may find itself as a claimant in a funded group action. For example, it may consider itself duty bound to participate (directly or by delegation) as a claimant in a funded claim against a third-party investment provider to recover pension losses for beneficiaries.

Indeed, a trustee may even find itself in both roles simultaneously, such that it is being pursued as a defendant (or anticipates being so pursued), while at the same time participating as a claimant in a corresponding group claim against a third party to mitigate any potential liability in the proceedings it is defending (or anticipates defending).

In either case, the time is now for trustees and other participants to audit their investment journey for historic and current issues.

Given the size of the industry and historic sums invested, what at first might appear to be a small chink could in fact lead to an exposure of hundreds of millions, and in some cases billions.

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