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Landmark court ruling could pave way for ‘more litigious’ FSA

by: Jenna Towler
  • 28/02/2013
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Landmark court ruling could pave way for ‘more litigious’ FSA
A Supreme Court victory for the Financial Services Authority (FSA) could result in the regulator becoming more litigious, according to law firm Taylor Wessing.

The case – involving the FSA, Sinaloa Gold and Barclays – could result in problems for banks and other financial institutions as the ruling means seeking financial injunctions is now less risky for the regulator, according to the law firm.

Shane Gleghorn, head of commercial disputes and a partner at Taylor Wessing explained: “As a result of the decision the FSA will not always be required to give an undertaking that it will compensate for damages incurred by innocent third parties, such as banks, as a result of it obtaining a freezing injunction against a financial institution’s client.

“This will make it less risky for the regulator to seek injunctions freezing assets – which could herald a more litigious FSA.”

He added: “This important judgement will give the City regulator more confidence to pursue those suspected of wrongdoing because the FSA will be cushioned from potential legal claims by third parties for damages suffered as a consequence of complying with the freezing injunction.

“The judgement enables the FSA to enforce the law uninhibited by a fear of open-ended claims for damages. It removes a concern that there is a potential blank cheque payable to innocent third parties who have suffered damage as a consequence of complying with the freezing injunction.”

Taylor Wessing said ordinarily, where one private party seeks a freezing injunction against another, it is required to give an undertaking to compensate any innocent third parties, such as banks obliged to freeze relevant accounts.

The undertaking covers not only expenses incurred by the third party in implementing the order, but also, more importantly any further damages the third party might suffer as a result.

An innocent bank might, for example, be faced with the cost of defending proceedings brought against it by the account holder, the law firm added.

The FSA generally concedes that when taking positive action to shut down what is alleged to be unlawful activity, it is liable for any expenses incurred, but asserts that, unlike a private party, it should not be required to compensate for damages incurred. The Supreme Court today upheld this view.

As a starting point, there is no general rule that the FSA should be required to give an undertaking to compensate defendants or third parties for any damages suffered as a consequence of complying with the freezing injunction.

The onus will now, therefore, be on banks and other asset holders who fear being adversely affected by an injunction to explain the loss feared and to apply for any injunction to be made conditional on an undertaking for damages.

Given the basis of the ruling, this may be difficult to establish.

Taylor Wessing added: “The upshot is that it removes a significant concern for the FSA and a potential barrier to taking action that could herald a more litigious FSA.”

 

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