23 June 2017

The use of expert witnesses in derivatives mis-selling litigation

Expert evidence is useful in derivatives mis-selling litigation but not always prized by the judges.

The debate around the use and benefits of expert witnesses in litigation has been a long-running issue for the court. Two recent High Court cases have demonstrated the complex and somewhat contradictory approach that the court has adopted towards the use of expert witnesses in derivatives mis-selling litigation. 

Refused permission 

In Darby Properties Limited & another v. Lloyds Bank PLC [2016] EWHC 2494 (Ch), the court recently refused permission for the use of derivative expert witnesses at the trial. The Court’s reasoning was based on the premise that derivatives experts do not belong to regulated professional bodies in the same way as, say, doctors or architects. As a result, the court believed that derivatives experts would only be able to offer a personal opinion based on what they would have hypothetically done in the scenario of the case rather than giving an opinion about what behaviour was required of the defendant bank by the relevant professional standards. The court therefore concluded in Darby Properties that the trial judge would be able to decide on issues such as whether the derivative products sold were suitable or not and whether the derivatives information provided by the bank to the customer was adequate or not. 

Useful

While defendant banks have attempted to take hope from the approach adopted by the Court in Darby Properties, it should be noted that derivatives expert evidence has been permitted (and found to be useful) in many other High Court cases, including in Crestsign Limited v. National Westminster Bank PLC & another [2014] EWHC 3043 (Ch).

In Crestsign, the trial judge was assisted greatly by the expert evidence from derivatives advisor Jackie Bowie, which provided the Court with valuable insight into the numerous reasons why a particular derivative product was unsuitable for the customer (which reasons included, for example, the derivative product hedging 100 per cent of the customer’s debt and exposing the customer to high breakage costs that dwarfed the cost of an interest rate cap premium). 

The Wenta case

Another derivatives mis-selling claim that will be considered by the High Court, with the benefit of derivatives expert evidence, is that of Wenta (a not-for-profit organisation that supports fledgling businesses) against NatWest and RBS, in which Wenta alleges that the taxpayer-backed banks mis-sold a complex financial derivative in April 2009. This trial in this claim is due to take place in October 2017.

The Wenta case, and other cases in relation to derivatives mis-selling, allege (inter alia) that banks failed (in breach of the relevant professional standard) to provide fair, clear and not misleading information about breakage costs. The court will need to consider what precisely constitutes “fair, clear and not misleading” information about breakage costs. Is a simple written statement from a bank that there “may” or “might” be breakage costs sufficient? Or does a bank need to provide (as some banks have done) a detailed table containing the potential breakage costs figures for each month of the derivative’s term to meet the “fair, clear and not misleading” benchmark? 

Expert evidence

The suggestion (often heard in practice) that experts might usurp the role of trial judges is baseless; judges are perfectly able to disregard any expert points with which they do not agree. However, it is precisely because of the types of questions as raised above that derivative expert evidence is useful and beneficial in assisting judges to make their own decisions about derivatives mis-selling claims at trial.

Sivakumaran Sivathillainathan is a solicitor at LEXLAW Solicitors & Barristers, Middle Temple