Expert view: Welcome to class actions, US-style

By Emily Lew, December 17, 2009

Many of the column inches generated by the introduction of the Financial Services Bill to Parliament last month were dedicated to the elements of the bill relating to bankers’ bonuses. But there is another aspect of the bill which has not received the attention it deserves.

This is the proposal to introduce a form of class action in the UK in the financial services arena.

The concept of a class action is most familiar in the context of the US legal model, in which a group of claimants club together to sue a particular defendant. What is so controversial about this form of litigation is that claimants in the group do not need to be named or identified, meaning that some of them may be completely unaware that a claim has been brought on their behalf.

So somebody in the US could launch a securities class action, for instance, on behalf of all those who bought shares in a particular company during a particular time period and, if successful, the court could award damages to everyone in the class.

To be excluded from the proceedings, potential claimants would actively have to “opt out”. Together with jury trials, large damages awards and the lack of a “loser pays” costs rule, the existence of these opt-out actions makes the US a dangerous place for potential defendants.

This type of litigation does not currently exist in the UK. There is the ability to bring some types of collective action, for example representative actions or group litigation orders, but generally the claimants have to “opt in” to be part of the proceedings.

But in recent years, there have been calls for reform of UK litigation procedures to make class actions possible. Supporters of reform say that potential claimants are prevented from bringing lawsuits, due largely to the opt-in rule and the loser pays costs system.

Until now, such calls for reform have been largely fruitless. The business lobby has strenuously campaigned against the introduction of any proposal that resembles the US class action system.

But the Financial Services Bill envisages the introduction of opt-out style litigation for “financial services claims”, such as claims brought against banks, mortgage brokers and other financial institutions.

If the bill is made law, there could be dramatic changes to the litigation landscape in the UK.

Emily Lew is a litigation associate at Herbert Smith LLP

Last updated: 10:39am, December 17 2009