Navigating the Risks: Challenges Facing Financial Institutions in 2024

Financial Institutions Face Multiple Litigation Risks in 2024

This year continues to pose significant challenges for financial institutions, with risks stemming from technological advancements and geopolitical turmoil affecting the financial markets. Understanding these risks is crucial for financial institutions to manage and prepare for potential litigation. Here are some key insights into the risks faced by financial institutions in 2024:

Case Insights from NRF’s Court Intelligence Database

Fraud remains a significant category of claims against financial institutions, with a recent increase in claims related to capital markets transactions and prospectus liability. The shift from misselling claims to litigation involving public markets and investors indicates a changing landscape in financial litigation. Increased sophistication in litigation funding and group litigation management is contributing to the growth of claims by disgruntled investors.

Economic Crime and Corporate Transparency Act

The Economic Crime and Corporate Transparency Act introduces expanded powers for Companies House, a new failure to prevent fraud offense, and reforms to corporate criminal liability. These changes aim to tackle economic crime and improve transparency in corporate entities. Financial institutions may face new litigation and investigation risks as a result of these reforms.

ESG and similar global policy-based litigation

The Triple Play strategy enables litigation against large corporates, including banks, based on global policies and regulatory standards. Parent-subsidiary liability, group litigation, and anchor defendants are key elements of this strategy. Banks may face exposure to group litigation in English courts due to alleged breaches by subsidiaries in different jurisdictions.

Cyber Risk

Cyber-attacks against financial institutions are on the rise, with data breaches and ransomware incidents posing operational and reputational risks. The shift towards digitized financial transactions and the increased use of AI systems create vulnerabilities for banks, leading to potential liability, regulatory fines, and group litigation.

Technology: AI, Crypto, and FinTech

The growth of FinTech and the adoption of AI systems by banks present distinct litigation risks, including crypto-related fraud, intermediary liability, and participation liability. Banks involved in the crypto economy may face challenges related to fraud, regulatory obligations, and duty of care. The deployment of AI systems without proper oversight increases the risk of bias and potential litigation.

Banking duties and fraud

New forms of fraud against bank customers and crypto market participants highlight gaps in regulatory and legal protection. Recent court decisions have clarified the scope of banking duties, such as the Quincecare duty, and introduced new statutory reimbursement schemes for push payment fraud. Banks should monitor regulatory developments and operational measures to mitigate fraud risks.

Margin calls and market volatility

Sudden market dislocations and geopolitical events can lead to contractual disputes and challenges for financial institutions. Market volatility, inflation, and higher interest rates may trigger margin calls and defaults, increasing the likelihood of disputes over collateral valuation and contract enforcement. Financial institutions should be prepared for potential litigation arising from market disruptions.

Long Tail Mis-Selling Risk

Changes in limitation periods and court decisions may lead to continued misselling cases against financial institutions. Recent cases have highlighted the importance of monitoring regulatory developments and historical malfeasance for long-tail litigation risks. Financial institutions should stay informed about legal developments to mitigate misselling risks.

Financial institutions must stay vigilant and proactive in managing these litigation risks to protect their interests and maintain regulatory compliance in the dynamic landscape of the financial markets in 2024.