The Securities Litigation Review: United Kingdom - England & Wales


i Sources of law

England and Wales follow and, indeed, developed the modern common law system, in which the law is derived from a combination of legislation passed by, or under, government statutes and a system of precedent, whereby decisions of the courts are binding in future cases. In more recent times, the jurisdiction's membership of the European Union (EU) has led to an increasing number of laws passed by the European Parliament being either directly enforceable in English courts, or indirectly incorporated into the legal system through new or amended statutes. The directly enforceable Market Abuse Regulation2 (MAR), together with its implementing measures, is particularly relevant to securities litigation in the jurisdiction, as it contains the principal legal requirements governing the United Kingdom's (UK) civil market abuse regime.3

The European Union (Withdrawal) Act 2018 EUWA (as amended by the European Union (Withdrawal Agreement) Act 2020) (EUWA) provides that EU legislation that is directly applicable, such as MAR, will form part of UK law at the end of the transition period and gives powers to the government to amend this legislation so that it operates effectively after Brexit (a process sometimes referred to as 'onshoring').

The statutory instrument that will make the onshoring amendments to MAR is the Market Abuse (Amendment) (EU Exit) Regulations (SI 2019/310) (MAR EU Exit Regulations). The explanatory memorandum to the MAR EU Exit Regulations explains that this statutory instrument does not alter the policy approach of the current market abuse regime. Rather, it makes certain amendments to reflect the UK's new position outside the EU and to smooth the transition to this. Up until the end of the transition period, however, MAR continues to be directly enforceable in the UK.

The most relevant statute in the context of securities litigation is the Financial Services and Markets Act 2000 (FSMA), which governs many aspects of the provision of financial services and the operation of securities markets in the UK, including England and Wales and, together with common law claims, provides the main causes of action for investors seeking recovery of losses suffered as a result of investments in applicable securities. FSMA makes certain, largely procedural, accommodations to cater for the differences in the governmental and legal systems in England and Wales on the one hand, and Scotland and Northern Ireland on the other.4 There are, of course, other statutes relevant in more specific instances, which are described later in this chapter.

In addition to creating civil and criminal obligations, FSMA provides the legal basis for the powers and existence of the Financial Conduct Authority (FCA), which, under those powers, develops and maintains a detailed Handbook containing both binding rules and official guidance on the interpretation of those rules.5

The FCA also issues 'soft guidance' in a number of forms, which do not have official standing, but nonetheless seek to influence the behaviour of those at whom it is aimed by setting out the FCA's view on a particular issue.

ii Regulatory authorities

The FCA has primary responsibility for regulating the conduct of the UK's financial services industry and markets. It has the power to take disciplinary action against firms it has authorised to operate in that industry and individuals it has approved to perform certain licensed functions, specified by FSMA. The FCA can bring civil and, in some cases, criminal enforcement action against those whose conduct has breached its rules or statutory requirements, as well as apply to court for specific remedies, such as injunctions.6

There are other prosecution authorities with the power to investigate and prosecute criminal offences of market misconduct, the most relevant being:

  1. the Secretary of State for Business, Energy and Industrial Strategy;
  2. the Director of the Serious Fraud Office (SFO); and
  3. the Crown Prosecution Service.

It is these prosecution authorities, rather than the FCA, that have the power to bring criminal prosecutions in respect of criminal fraud or offences under the Theft Act 1968.

iii Common securities claims

Typical public securities actions include insider dealing and market abuse cases (under both the criminal and civil regimes), usually brought by the FCA, and administrative action by the FCA for breaches of the applicable regulatory regime regarding the content of publications made by listed issuers, and for breach of the disclosure requirements under MAR.

Private securities litigation is a growing area in England and Wales. The most common claims that investors in securities have threatened or brought to date are claims under the statutory liability regimes provided for by FSMA and common law claims in fraud or negligent misstatement. The statutory schemes give causes of action for:

  1. untrue or misleading statements in prospectuses or listing particulars and the omission of necessary information from such documents (Section 90 claims); and
  2. recklessly untrue or misleading statements, dishonest omissions of required information, or dishonest delay of such information in relation to an issuer's other publications (Section 90A claims).

Private enforcement

i Forms of action

Liability for statements in prospectuses or listing particulars (Section 90 FSMA)

Section 90 FSMA provides a cause of action to an investor where a prospectus or listing particulars7 relating to securities contains any untrue or misleading statement or fails to include information that is required by statute. Section 87A FSMA sets out the principal requirement that the prospectus or listing particulars include the information necessary to enable investors to make an informed assessment of the issuer8 and the rights attaching to the securities. The applicable fault standard is essentially negligence (albeit with the burden of proof reversed so that it is for the defendants to show that they were not negligent) by virtue of a defence of 'reasonable belief' that the contents of the document were complete and accurate. This fault requirement reflects the nature of the documents to which Section 90 applies as intended to encourage the purchase of securities.

The cause of action allows any person who has acquired the securities in question, and suffered a loss as a result of the defect in question, to claim for compensation under Section 90 FSMA against any person responsible for the defective document.

The list of persons responsible for a prospectus or listing particulars naturally encompasses the issuer and (in equity capital markets at least) its directors taking responsibility for the contents,9 as well as those who accept responsibility in the offering document or who authorise its contents.10 The breadth of this category means that, while it is clear that issuers and the directors of issuers are the most likely defendants to a Section 90 claim and the point is so far untested in the case law, it is, in theory, possible for a claim also to be brought against a third-party adviser to the issuer (if it can be established that the adviser has accepted responsibility for the contents of the document).

There is considerable debate as to whether the wording of Section 90 is restricted only to the original purchasers of a security, or whether an investor who acquires securities on the secondary market might also have a claim.11 However, the better view is that, as long as the misstatement or omission remains current (i.e., the passage of time, subsequent events or any updated announcements made by the issuer have not rendered the defect in the document stale), the cause of action will extend to a purchaser of securities in the secondary market.12

Although market practitioners might think it obvious, there is no express requirement in the statute that limits claims only to where there are material defects in the prospectus or listing particulars; it merely requires that the document includes 'necessary' information. However, the better view is that there must be some ability for the issuer to select the information that is considered to be material to investors for inclusion in the document, not least to avoid deluging investors with immaterial information. In addition to this practical point, it can be argued that a proper interpretation of the Prospectus Directive builds in a materiality component to what is 'necessary' information. In an interlocutory hearing in the RBS Rights Issue Litigation, Hildyard J took the view that the 'necessary information' test was a limiting concept that was intended to further the investor protection objective by confining the content of the prospectus only to that which was necessary (i.e., indispensable).13 In any event, a Section 90 cause of action is incomplete without the investor establishing causation and loss, which ought to prevent a successful claim for immaterial information defects. Going forwards, the provisions of the Prospectus Regulation (which apply from 21 July 2019) ought to have put the matter beyond doubt by expressly defining the disclosure requirement by reference to 'necessary information which is material to an investor'.

Although the issue has not been tested, on the face of Section 90 it is not necessary for the claimant to show that he or she relied on the defective prospectus or listing particulars when purchasing the securities. It is, on the drafting of the legislation, the loss suffered by the claimant that must have resulted from the defect, rather than the acquisition of the securities in question and would be consistent with the investor protection philosophy of the regime. This potentially removes one of the significant hurdles that investors face in bringing a claim on behalf of large numbers of investors, given the obvious practical difficulties for claimants in having to show that they each placed reliance on the defect in question when purchasing securities (particularly since many may not even have read the prospectus or listing particulars in full or even at all).

A defendant14 to a Section 90 claim can rely on any of the defences set out in Schedule 10 FSMA, which, broadly speaking, provide that the defendant will not be liable where it reasonably believed the contents of the document to be complete and accurate, reasonably relied upon an expert or official source to verify the accuracy of the content in question or took reasonable steps to (or did in fact) cause a correction to be made before the investor acquired the securities. The investor will also fail in its claim if it can be shown that it knew (not merely suspected) that the statement complained of was inaccurate or incomplete. Interesting questions arise as to the steps that will need to be taken to satisfy the Schedule 10 'reasonable-belief' test, the most important of the defences. For example, is it sufficient to ensure that reasonable processes have been followed (primarily by the issuer's financial and legal advisers and its auditor) in the conduct of due diligence and verification of the contents of the document? How far down the chain of command within the issuer does the investigation need to go for belief to be attributable to the issuer?15 How easy will it be, often many years after the drafting of the document in question, to explain the key judgments on materiality to the court (particularly in relation to the omission of information) unless the rationale for those decisions was well documented at the time? In relation to omissions, must the defendant establish that he or she was aware of the specific matter in question and reasonably determined that it could be omitted or is it sufficient that he or she reasonably considered the prospectus to be complete (such that there was a reasonable belief that no material omissions existed)? These, and other issues, are likely to be fertile ground to be explored in the first cases brought to trial under Section 90 in which the reasonable belief defence is deployed. It will also be relevant for directors to show the extent of their knowledge and personal executive (or non-executive) responsibilities, potentially raising the prospect of diverging interests between different directors in defending claims.

An investor is entitled in a Section 90 claim to recover its full loss on the securities in question, likely to be calculated by reference to the true value of the securities (i.e., their price had the inaccuracy or omission not been made) against the actual price paid. Critical questions arise, not yet determined by the English courts, about the appropriate method of identifying the true value, and at which point in time that value should be assessed. Moreover, in certain circumstances investors may seek to recover the total purchase price for the securities (less the credit for any value it may achieve upon disposal following discovery of the defect) if it can be shown that it would not have purchased the securities at all (a 'no transaction' case). Outside of an IPO context, difficult questions also arise where investors have sold shares prior to the identification of any defect, and whether those sales relate to shares that were purchased following the defective documents or to pre-existing shareholdings. There is also debate as to whether the right to recover loss extends to consequential losses arising from the purchase of those securities, such as the opportunity cost of what the investor might otherwise have purchased had it not purchased the securities in question. However, the better view is that such compensation would not ordinarily be available under Section 90 and an investor would have to bring a claim in the alternative in fraudulent misrepresentation (deceit) to recover damages on that basis.

Liability for other published information (Section 90A FSMA)

Section 90A FSMA has a broader application than Section 90, but is in another sense much more narrowly confined. It applies to all publications an issuer makes to the market, or whose availability is announced, through a recognised information service (other than prospectuses and listing particulars, which are subject only to Section 90). It provides a remedy to investors who have suffered loss as a result of reliance when buying, selling or holding securities on such information containing an untrue or misleading statement, or where there is an omission of, or a delay in publishing, information that is required. However, the fault standard is significantly higher than for Section 90: the issuer is only liable if a director knew that, or was reckless as to whether, the statement was untrue or misleading, or if they acted dishonestly in omitting or causing a delay to disclosure of a material fact.

As with Section 90, there is no express requirement for the defect in question to be material. However, the information will need to be material for loss to follow. In addition, the cause of action requires each investor to establish that their reliance on the defect was reasonable, which is unlikely to be satisfied in the case of immaterial defects. The need to show reliance, in contrast to Section 90, provides a serious hurdle to bringing a claim, and in actions that have been brought to date, interlocutory judgments have proceeded on the basis that claimants will have to show that they each relied on the published information in question.16 However, there remains a live issue as to whether reliance must be shown to have been placed on the defective part of the information published or if it is sufficient to show reliance on the published information as a whole. In the absence of any court guidance or established techniques for claimants to use to show reliance other than on an individual basis, it will be interesting to observe any attempts to import methods that have been adopted in other jurisdictions to overcome this challenge.17

Section 90 does not prevent claims being brought under common law, albeit that the advantages of the statutory cause of action make them less likely. By contrast, Section 90A does create a safe harbour for issuers, which prevents claims being brought other than under Section 90A (with its high fault standard). However, claims in contract, under the Misrepresentation Act 1967 and common law claims where there has been an assumption of responsibility for the allegedly defective statement, are carved out of that safe harbour.

As with Section 90 claims, there is currently no case law on the appropriate methodology for determining loss under Section 90A, but the difference between the price paid (or received) and the true value of the security in question (or price realised on its sale) is likely to be the appropriate measure, subject to difficult questions of approach to calculating quantum. While the point has yet to be tested, it is not clear what loss any investor might suffer as a result of merely holding shares (rather than transacting).

Tortious liability

The existence of a duty of care for the content of published documents will depend on all of the circumstances and the proper boundaries of the law of tort in this area are the subject of much debate and a large body of case law. In broad terms, the investor will need to show that the statement was made (or the information omitted) by someone who has 'assumed responsibility' to investors for the content of that statement, and that it is fair, just and reasonable for the court to impose a duty of care in the circumstances. The courts have found that statutory auditors did not assume responsibility to the purchasers of shares in the company they audited,18 and the directors of a company did not assume responsibility to existing shareholders in relation to governance actions (such as voting in an extraordinary general meeting (EGM)) by issuing an announcement or prospectus, or by making certain statements during investor calls relating to the transaction in question.19 However, the High Court has recently found that an arranging bank assumed responsibility to investors in publicly issued debt securities to ensure that certain transaction documentation had been properly executed.20 Directors also owe duties to existing shareholders to exercise reasonable skill and care when providing recommendations on how to act in relation to corporate actions that they propose.21 The standard that was found to apply in assessing whether reasonable skill and care was exercised was found, in the Lloyds/HBOS litigation, to be whether no reasonably competent director could have made such recommendation.

Civil liability in the tort of deceit (or fraudulent misrepresentation) can arise if the investor can establish that the false information was intended to be acted on and that, when stating it, the defendant knew it was false, or was reckless (i.e., he or she did not care) as to whether or not it was false.22 However, a false statement will not be fraudulent if the provider of the statement had an honest belief in its truth at the time it was made.23 The burden is therefore great but, if that intention is established, a presumption is raised that the investor relied upon it and the burden will shift to the defendant to show that the investor did not, as well as potentially extending limitation periods. This cause of action also gives the investor the advantage that it will be able to recover all of its consequential losses, rather than merely those that were reasonably foreseeable. However, it is likely to be a matter of evidence whether the investor can establish on the facts what its counterfactual investments would have been.

If a defendant is able to show that he or she reasonably believed an actionable misrepresentation to be true at the time the contract was made, the investor's claim will be for innocent misrepresentation. However, in most circumstances the applicable remedy for innocent misrepresentation will be rescission, not a claim in damages.

Liability under the Misrepresentation Act 1967

Negligent misrepresentation is a statutory claim under Section 2(1) of the Misrepresentation Act 1967 that is established when an investor can show that he or she entered into a contract in reliance upon a misleading statement of fact made by or attributable to the defendant. The defendant will be liable if he or she cannot show that he or she reasonably believed the statement to be true at the time the contract was made.24 Accordingly, once the statement is shown to have been false, the burden of proving that the statement was made with reasonable belief in its accuracy shifts to the defendant.

The remedies available are favourable to claimants and include both damages, assessed on the measure usually reserved for actions in deceit, and rescission of the relevant contract. However, Section 2(1) only allows for that remedy to be claimed from the contracting counterparty. In a surprising first instance decision in Taberna Europe CDO II Plc v. Selskabet AF1,25 the court found that Section 2(1) of the Misrepresentation Act could be relied upon by a secondary market purchaser for a misstatement made by the issuer to the primary purchaser on the basis that the secondary market purchase brought the issuer and purchaser into some kind of contractual relationship, notwithstanding that the misstatement was made in respect of a different contract. However, the Court of Appeal26 overturned this decision confirming that, in the event of a misrepresentation made by the issuer, the remedy under the Misrepresentation Act is only likely to be available for subscribing shareholders, rather than those who purchase on the secondary market.

Company law duties

Claims might also be brought under company law duties owed to shareholders, such as the duty to provide existing shareholders with sufficient information for them to make a reasonably informed decision about any proposals put to them at EGMs.27 The Lloyds/HBOS litigation has clarified the scope of this duty, emphasising that the duty requires the company and its directors to provide a fair, candid and reasonable description of the transaction that is being proposed based on the knowledge that the directors in fact had at the time of publication of the document.28 It is necessary for the claimants to prove both reliance and causation. For example, the claim failed in the Lloyds/HBOS litigation because shareholders could not establish that they relied on the shareholder circular issued by Lloyds (indeed most of the claimants accepted that they had not even read it) and, in any event, it would have made no difference if the information that it was determined should have been disclosed in fact had been. The acquisition of HBOS would still have completed, so the claimants could not establish causation.

However, in the Lloyds/HBOS litigation, Norris J made obiter comments that suggest that losses suffered by shareholders as a result of breaches of these company law duties may fall foul of the rules preventing claims for losses that are merely reflective of losses suffered by the company. It remains to be seen if this issue prevents future claims from being successful.

Breach of regulatory obligations

FSMA establishes a number of statutory claims available to investors who have suffered loss as a result of a breach of FSMA itself or of rules made by the FCA in addition to claims under Section 90 and Section 90A (referred to above). An investor will have a claim where the investment agreement was made with or through a person who was not authorised by the FCA, but should have been, or where the investment was a result of an unlawful financial promotion.29

Under Section 138D FSMA, a private person30 will have additional claims available where an authorised person has breached eligible31 provisions of FSMA or the FCA rules and that breach has caused the claimant loss. These claims are most commonly used by a private person where there has been a failure on the part of an authorised adviser to ensure its advice is suitable or where he or she was misled in some way as to the nature or description of the investment.

In the context of securities litigation, the English courts had previously confirmed that a claim under Section 138D FSMA was not available in respect of an alleged breach of the civil market abuse provisions in FSMA or of listing rules made pursuant to Part 6 FSMA.32 However, with the advent of MAR, which replaced the civil market abuse provisions in FSMA, the position is less clear.

Private parties have, in certain contexts, been able to rely on breach of an EU regulation in civil proceedings. Where a requirement imposed under an EU regulation such as MAR is sufficiently precise or unconditional to be relied on in the national courts, or is capable of creating rights for individuals, then in principle, breach of that requirement may provide an additional legal ground around which to base a claim.33 It would be necessary to establish a link between the interest on which the person concerned is relying and the protection afforded by the provision in the regulation, and that the person has suffered loss as a result of the breach, and it may also be necessary for that person to avail themselves first of other available rights of recourse.34

Claims against issuers for the publication of false, misleading or incomplete information to the market, such as the claim brought by Mr Geltl and others against Daimler,35 will be confined to relief under Section 90A (and Schedule 10) FSMA. However, claims by counterparties who suffer loss as a result of insider dealing or market manipulation could provide a source of litigation. Where loss is suffered by a private person, the FCA (or other prosecutors) may also obtain an order for restitution or compensation for their benefit.36 It is not inconceivable that buy-side parties in receipt of inside information from an issuer or its financial advisers as part of a market sounding, in respect of a transaction for which no cleansing announcement is made, may consider exploring injunctive relief as an option; the FCA also has power to compel issuers to make an announcement.

ii Procedure

In England and Wales, the procedural features of a private securities claim are largely governed by the Civil Procedure Rules, which form a procedural code governing all aspects of the conduct of civil court claims, with the overriding objective of dealing with cases justly and at proportionate cost.37

Claims will be commenced by the claimant filing and serving a claim form, which will be accompanied or followed by detailed particulars of the legal and factual basis for the claim. Assuming the defendant intends to defend the claim and does not dispute the English courts' jurisdiction, it will file and serve a defence, setting out in detail which parts of the claim it admits, those it denies and those it requires the claimant to prove.38 While the court has wide discretion to determine the subsequent conduct of the claim, the parties are then typically required to give extensive disclosure of documents, including, in particular, those documents that undermine their case or support another party's case, and to exchange witness statements of those individuals each party intends to call to give evidence at trial. Factual witness evidence will often be supplemented by expert evidence on issues that the court permits to assist it in the assessment of the issues in dispute. The court has substantial discretion to order the trial to be on all of the issues at once, or to order a trial of certain preliminary issues or a split trial (which may involve, for example, liability and quantum issues being determined at separate trials).

There is no true concept of a securities class action in England and Wales in the sense of a representative, opt-out action that is familiar in other jurisdictions. Where multiple claims against the same defendants raise common legal or factual issues, there are, however, three broad mechanisms by which those claims might be joined together. The first and most common is where the claimants themselves successfully apply for a group litigation order, with the effect that the court will manage their claims substantially as one. This is the procedure most similar to class actions in the securities litigation context. However, the critical point is that it is an opt-in regime, and a sufficient number of claimants will need to be persuaded to bring claims and join the group to make a claim financially viable (or to attract third-party funding). The consequent need for a 'book-build' at the commencement of proceedings tends to lead to a front-loading of costs for claimants and their funders. Secondly, the court could exercise its case-management powers to order that the claims are consolidated, or thirdly, it could order that a number of claims that it considers raise common issues are suspended and an individual case, or a small number of cases, be decided as test cases before that suspension is lifted. Whichever of these processes is followed, given the subject matter and likely scale of a piece of securities litigation, the case will usually be eligible for inclusion in the Financial List, which involves the assignment of a docketed judge from a list of judges who specialise in financial litigation.

A key feature of litigating in England and Wales (which might be thought likely to act, to some extent, to temper the growth of securities class action claims) is that, where a party is unsuccessful in bringing a claim, it will generally be required to pay the defendants' reasonable legal costs. This may extend to any third-party funders who assist in financing an unsuccessful claim. While in practice the costs awarded will not represent the full costs a party has incurred in the litigation, these sums are still usually significant and may act as a deterrent to bringing weak or speculative claims.

iii Settlements

Principally as a result of the opt-in nature of securities litigation in England & Wales, there is no general requirement for judicial oversight of an agreement to settle securities litigation. A settlement agreement will simply be a contract between the claimant and the defendant agreeing the terms upon which the litigation will be discontinued, or indefinitely suspended. That agreement will usually make provision for the apportionment of legal costs involved in the claim. However, there are obvious practical difficulties in settling a claim brought by those investors who have joined the group litigation, at least until the court orders that new claimants cannot join the group (or limitation periods have expired). There are also practical difficulties in coordinating settlement discussions with such a large and potentially diverse set of claimants, potentially with different interests and levels of motivation for the pursuit of their claims. In the event that settlements are achieved with certain parts of the class, practical issues of case management may arise from the fact that different groups of claimants may have taken primary responsibility for certain aspects of the claim, leaving any residual claimants needing to elect to narrow the claim or take on the responsibility for those additional aspects, possibly at short notice prior to trial.

One unusual feature of the jurisdiction, however, is that there is a formal regime in place39 whereby either party to the litigation can make an offer to settle, which, if the other side refuses to accept but then fails to beat at trial, can reverse the usual rule as to liability for costs.

Public enforcement

i Forms of action

The FCA has a range of powers to investigate and sanction authorised firms, approved individuals or listed issuers who it suspects have breached FSMA or the FCA's rules. It also has the power to impose administrative sanctions on any person in respect of a breach of requirements under MAR.40 For the most part, the regulator will have the power to impose sanctions directly where it concludes that a breach has occurred. In those cases, it will issue a decision notice, notifying the firm or individual of its findings and imposing what it considers to be the appropriate penalty. That decision notice will usually be published. It will then be for the recipient of the decision notice to decide whether it wishes to refer the FCA's decision to a specialist court known as the Upper Tribunal, which will hear the matter afresh, and determine the appropriate action to be taken by the decision maker (this could include an increase in penalty). The matter is then remitted back to the FCA.

In the context of securities, the key areas that the FCA tends to focus on in its civil enforcement actions include failures in a firm's governance, systems or controls, breaches of MAR requirements ensuring disclosure and transparency in relation to price-sensitive information, civil market abuse offences, failures to properly advise on investments (where there is a duty to do so) or to comply with conduct of business or financial promotion rules, and individual failings of a firm's senior managers.

The FCA also has the power to investigate and prosecute certain criminal market misconduct offences, including insider dealing,41 making a false or misleading statement intended to induce someone to invest in securities,42 creating a false or misleading impression in relation to relevant markets or securities43 or in respect of benchmarks.44 The FCA shares the power to prosecute those offences with other prosecutors including the Secretary of State for Business, Energy and Industrial Strategy, the Director of the SFO and the Crown Prosecution Service.45

Those agencies have agreed on broad principles that guide the decision as to which agency should investigate a suspected offence and, where more than one agency is investigating, how they should cooperate to avoid unnecessary duplication and ensure procedural fairness.

The FCA, unlike other prosecutors, does not have the power to prosecute criminal fraud or offences under the Theft Act 1968.

ii Procedure

Where the FCA decides to commence an enforcement investigation, its first step will be to appoint investigators, who will usually be FCA staff.46 A notice of that appointment and the reasons for it will usually be given to the individual or firm that is the subject of that investigation. There will then follow scoping discussions to determine the likely structure and timescale of the investigation.

FSMA grants the FCA a range of powers to compel the production of documents and information relevant to its investigation (including interviews).47 It will typically exercise these powers following scoping discussions with the subject of the investigation to gather the information it considers it will need to progress the investigation. However, the FCA may not compel the production of legally privileged documents.48

In criminal market misconduct investigations, the FCA may, as an alternative to compelling document production, obtain a search warrant from the court to enter and search premises (with a police officer) for the purposes of obtaining relevant documents.49

Typically, the FCA will conduct interviews after gathering relevant documents. It may use powers granted to it under FSMA to compel relevant persons to attend interviews. In the context of criminal market conduct investigations it may, however, choose to conduct voluntary interviews under caution, so that what is said in the interview will be admissible as evidence in a criminal court.50

Once it has concluded that it has sufficient grounds to make a finding against the firm or person being investigated, the FCA will, in administrative cases, issue a warning notice, setting out the contraventions it considers to have occurred and the proposed penalty. It has the power to publish that notice.51 The recipient of the warning notice will have an opportunity to make representations on its contents before the regulator finalises its decision in a decision notice.52 This will be done by the Regulatory Decisions Committee, which is an independent function within the FCA. The findings set out in the decision notice can be challenged by referring the matter to the Upper Tribunal for a fresh hearing of the facts and law,53 or seeking judicial review by the courts of some flawed aspect of the FCA's process on narrow, public law grounds.54

In market conduct proceedings, where the FCA determines that a criminal penalty is warranted, it will prosecute the offence through the criminal courts in the same manner as any other applicable prosecutor.

iii Settlements

The overwhelming majority of FCA administrative actions against authorised firms and listed issuers are settled at an early stage. Firms are typically incentivised to do so by factors such as reputational concerns, management time and distraction and the availability of a discount of up to 30 per cent on the financial penalty.55 Individuals being investigated will be facing potential loss of their livelihood by being banned from regulated positions, or a substantial fine, and may well be less incentivised by such factors (and indeed may opt to fast-track referral of the case to the Upper Tribunal).

There is no judicial oversight of the regulator's decision to settle a civil or administrative matter, although the FCA must have regard to its statutory objectives when agreeing a settlement. However, the settlement scheme does not apply to civil or criminal proceedings brought in the courts.

As in private actions, the settlement will essentially take the form of a written agreement. As part of that agreement, the individual or firm under investigation will usually agree the form of wording that will be included in a public notice, along with the details of the fine or other penalty that will be imposed. Upon reaching a settlement before a decision notice is issued, the person or firm in question will be expected to cover its own legal costs.

In criminal proceedings, a guilty plea will be a mitigating factor in the court's assessment of an appropriate sentence for a criminal conviction (often meriting up to a 30 per cent reduction in sentence) and a prosecutor retains discretion about the selection of charges that may be brought. The prosecutor may even go so far as to present a recommended sentence to the court. While a prosecutor can decide which charges to bring, it is ultimately for the court to decide what sentence is appropriate in all the circumstances. The courts have in the past expressed displeasure with a prosecutor presenting a recommended sentence as a 'done deal'.56

The Director of Public Prosecutions and the SFO now have the power to offer deferred prosecution agreements (DPAs) in relation to certain offences and when dealing with corporate defendants.57 For a DPA to come into effect, the court must determine that the DPA is in the interests of justice and its terms are fair, reasonable and proportionate. The use of DPAs in the UK is not yet widespread.58

iv Sentencing and liability

The FCA has powers to impose a broad range of disciplinary penalties and sanctions.

The sanctions most commonly used by the FCA are:

  1. fines (with no upper limit on the amount);
  2. a public censure;
  3. imposing suspensions and restrictions on firms from conducting regulated business and on regulated individuals from carrying out regulated functions; and
  4. a private warning.

The FCA has articulated a five-step penalty setting process.59 The FCA will usually consider disgorgement of any benefit received as a result of the breach and an additional financial penalty reflecting the seriousness of the breach. An adjustment (upwards or downwards) may also be made to reflect any aggravating and mitigating factors as well as to ensure that the penalty has an appropriate deterrent effect.60

Following the implementation of MAR, the FCA also has the power to prohibit an individual from holding an office or position involving responsibility for taking decisions about the management of an investment firm, and from acquiring or disposing of financial instruments, whether on his or her own account or for a third party.61

In addition to its formal disciplinary powers, the FCA also has the ability to impose other sanctions, including banning an individual, suspending an issuer's securities from trading, varying or withdrawing a firm's permission or an individual's licensed status, and requiring redress or restitution to be paid where consumers have suffered loss as a result of a breach. In addition, the FCA may now require issuers to publish information and other corrective statements.62 Under the umbrella of the legislative implementation of the Markets in Financial Instruments Directive (MiFID), the regulators now have the power to require an investment firm, credit institution or recognised investment exchange to remove a person from the management board if the regulator considers it necessary for the purpose of the exercise by it of functions under MiFID or the Markets in Financial Instruments Regulation.63

The FCA can also pass evidence to the Department for Business, Energy and Industrial Strategy with a view to enabling director disqualification orders to be sought, or director disqualification undertakings to be accepted, in respect of any individuals involved in certain breaches.

Cross-border issues

i Private

The critical cross-border question, in the absence of a clear contractual submission to jurisdiction language, is whether the English courts are the appropriate jurisdiction for the claim to be heard. The way in which the courts approach the determination of the complex question of jurisdiction is dependent on whether the common law rules or the EU regime apply to the circumstances of the claim. This question is in turn primarily driven by the domicile of the defendant, in particular whether it is domiciled in the EU or not.

EU-domiciled defendant – the recast Brussels Regulation

The general rule is that the defendant should be sued in his or her place of domicile. Accordingly, a claim against an English domiciled issuer (to which Section 90, Section 90A or one of the tortious claims described above may apply) is likely to be capable of being brought before the English courts (subject to the existence of a contradictory exclusive jurisdiction clause in the applicable documentation that is of binding effect). However, there are a number of important exceptions to this rule whereby, even if the defendant is not domiciled in England and Wales, a claim may nevertheless be brought in the English courts (and that issuers in England and Wales could face claims in the courts of other jurisdictions). The most relevant alternative jurisdiction for a tortious claim is the place where the harmful act occurred, which, pursuant to Article 7(2) of the recast Brussels Regulation, means either: (1) where the damage occurred; or (2) where the events giving rise to the damage occurred. While not free from doubt, the location of (2) is likely to be where the document in question was drafted and distributed. However, for (1), the position is subject to greater uncertainty. The decision of the European Court of Justice (ECJ) in Kolassa64 suggested that in a prospectus claim the alleged damage occurred in the place of the investor's bank account from which the investment was made. This was a controversial decision given the potential consequence that jurisdiction of prospectus claims may be both unpredictable and have no real link to the matters in dispute. Fortunately, the position has been clarified by the ECJ in Universal Music,65 which adopted a more narrow approach to the question of where the damage occurred, emphasising that, when the damage is purely financial, the connection will need to be greater than simply the jurisdiction from where the purchase monies were paid. In a securities litigation context, for example, the place where the prospectus was issued or where the securities are sold into is more likely to be the test following Universal Music.

It remains to be seen what the position will be following the UK's departure from the EU.

Non-EU domiciled defendant – common law rules

The common law rules on jurisdiction begin with whether the party can be validly served with English proceedings. Where the party is within the jurisdiction, even if only temporarily, the proceedings may be served on that party. However, the English court may grant a stay of those proceedings in the event that the defendant can show that another forum is clearly more appropriate to hear the claim (the principle of forum non conveniens).

Where the party is not in the jurisdiction, the court will need to grant permission for the claimant to serve outside the jurisdiction. To obtain permission the claimant will need to satisfy a threefold test:

  1. that the claim has a reasonable (i.e., more than fanciful) prospect of success;
  2. that there is a good arguable case that the circumstances fall within a number of statutory gateways set out in the relevant procedural rules, such as the damage being sustained within England and Wales or as a result of an act, or breach of contract, committed in England and Wales; and
  3. that England and Wales represents a clearly or distinctly appropriate forum in all of the circumstances, such that the court should exercise its discretion to permit service out of the jurisdiction.

ii Public

Jurisdictional reach of the FCA

The FCA's general conduct and supervisory jurisdiction under FSMA extends to all firms undertaking specified regulated activities in the UK. This will be the case whether they do so in accordance with regulatory permissions obtained in the UK, or in accordance with a 'passporting' arrangement under one of the EU single market directives or the Treaty of Rome,66 which enable firms regulated in other EU jurisdictions to carry out regulated activities in the UK where they meet certain criteria. The passporting arrangements will continue to apply until 31 December 2020 during the transition period, following the UK's exit from the EU on 31 January 2020.

The FCA's jurisdiction is generally confined to conduct that occurs in the UK, although certain rules have wider territorial scope (most notably the requirement to disclose issues to the regulator). The nature of international securities transactions also means that there may often be a practical difficulty in determining whether it can be said that aspects of the transaction have taken place within the UK. The FCA is also empowered to conduct investigations in support of overseas regulators.67

The FCA's market abuse jurisdiction

By contrast, the FCA must ensure that the provisions of the MAR are applied in the UK, not only in respect of all actions carried out in the UK, but also in respect of actions carried out abroad relating to financial instruments:

  1. admitted to trading on a regulated market or for which a request for admission to trading on such a market has been made;
  2. that are traded on a multilateral trading facility (MTF), admitted to trading on an MTF or for which a request for admission to trading has been made on an MTF;
  3. that are traded on an organised trading facility (OTF); and
  4. in respect of financial instruments whose price or value depends on or has an effect on the price or value of a financial instrument referred to in points (a) and (b), including, but not limited to, credit default swaps and contracts for difference.

It is expected that actions carried out within the UK would encompass actions carried out in the jurisdiction in respect of any EEA regulated market that is accessible electronically in the UK. It is not unusual for several EEA regulators to have concurrent jurisdiction in respect of the same conduct.68

Jurisdiction of criminal courts

In broad terms, as a matter of common law, the English courts' criminal jurisdiction extends only to conduct that occurs within England and Wales. However, given the increasing tendency for criminal activity to be of a cross-border nature, modern authorities have tended to interpret this doctrine in a broad manner to encompass cases where a substantial proportion of either the prescribed conduct or, where applicable, the prescribed consequences occur within England and Wales.

There are, however, a number of specific statutory exceptions that explicitly extend the territorial scope of certain offences beyond England and Wales. In the context of criminal conduct in relation to securities, the criminal insider dealing and market manipulation offences are the most obvious examples. In an extension of the more recent approach at common law described above, these offences capture both conduct that occurs within or from England and Wales and conduct that occurs abroad where the likely effect is in England and Wales.69

Year in review

i Private

The number of actual and prospective cases in which shareholders are seeking redress in the English courts, under the common law or FSMA, continues to grow steadily, and a handful of cases have led to judgments on specific points of interest in relatively untested areas of law.

Judgment in the claim against Lloyds Banking Group and five of the former directors of Lloyds TSB for losses they claim to have suffered as a result of their approval of the acquisition of HBOS and participation in the UK government's recapitalisation scheme in 2008 was handed down in November 2019.70

As the first case to reach judgment in a securities class action, it is very significant and will be influential on future class actions brought in the jurisdiction.

The claims centred on two broad criticisms of the Lloyds directors' conduct in the context of the acquisition of HBOS. First, shareholders claimed that the recommendation that they were given to vote in favour of the acquisition at the EGM convened to approve it was negligently made. Had the board acted reasonably, it was alleged, it would have recognised the risks involved in acquiring a bank that was as exposed as HBOS was to the deteriorating economy. Second, the shareholders alleged that they were not told of the true state of HBOS in the shareholder circular which informed their vote. In particular, it was alleged that the directors omitted to disclose that HBOS was in receipt of two specific forms of funding (so-called emergency liquidity assistance or ELA, and a facility from Lloyds itself) that it was using to continue to fund its balance sheet in the context of the liquidity crisis following the collapse of Lehman Brothers.

Both claims were dismissed in their entirety. In relation to the recommendation case, the court found that the decision to recommend the acquisition was a reasonable one, in the context of the work which had been performed to assess both the risks and the opportunities that the combined group would have. While events after completion of the acquisition may lead one to conclude that the transaction had been an error of judgment, that was not sufficient. The temptation to assess the decision with the benefit of hindsight had to be resisted and it could not be said that the decision to recommend the deal was one that no reasonable director could have made.

The disclosure case was also dismissed. The judge approached the question of what shareholders needed to know by focusing on matters that would impact the combined company, rather than matters that would impact only the standalone HBOS (if the acquisition was rejected). He, therefore, endorsed the directors' approach of ensuring that shareholders understood the position that they would be in if the vote was passed and if it was rejected. However, on balance he determined that the information about HBOS's sources of funding was information that shareholders ought to have been told about. It would have told them how 'far along the journey' HBOS was, even though it was clear to all what the 'destination' would have been absent the acquisition.

For the claimants to succeed, though, they needed to establish that those breaches of the information duty caused shareholders to suffer loss. On this, they failed. Needing to show that the acquisition would not have completed had the funding disclosures been made, the claimants put forward three alternatives for what would have happened in the counterfactual:

  1. The directors would have withdrawn the proposed acquisition rather than make the disclosures. The judge rejected this suggestion as inherently unlikely, given the conclusions he had reached about the reasonableness of the recommendation.
  2. The disclosures would have led to the HBOS share price falling in a 'death spiral', inevitably leading to the collapse of the deal. The judge concluded that it was not probable that there would have been any such collapse in the HBOS share price so he rejected this counterfactual.
  3. The disclosures would have caused the shareholders to reject the acquisition at the EGM. The judge noted the evidential burden that the claimants faced in establishing that the outcome of the vote would have been different (since 98 per cent of those that voted did so in favour of the deal) and concluded that the claimants had not managed to get close to discharging that burden.

In any event, the claimants would have failed to establish the quantum of loss that they had allegedly suffered. Both parties had used a particular form of expert evidence, known as an event study, to seek to establish the difference between the price of a share in the combined entity on the one hand, and the price of a hypothetical standalone Lloyds share price (which is what shareholders would have retained if their causation case had been proven and the assumption made that the deal had not completed) on the other. The parties agreed that the difference between these figures was an appropriate measure of the loss (if any) that had been suffered. However, the judge rejected the methodology that had been adopted by the claimants' expert to identify what would have happened to Lloyds' share price following any of the events that led the deal to fail. Accordingly, the claimants had failed to prove their loss, so would not have been awarded damages in any event.

It is noteworthy that the judge needed to consider the application of the principles most recently considered in the Manchester Building Society v. Grant Thornton UK LLP71 (currently awaiting on appeal to the Supreme Court) relating to whether losses suffered are within the scope of the duty breached. Lloyds argued that, in the event that the disclosure breaches had been found to have caused the acquisition to proceed (i.e., the deal would not have completed but for the breaches), any losses suffered by shareholders were outside the scope of the disclosure duties because they were caused by the impact of the economy on HBOS's loan portfolios rather than as a result of HBOS's liquidity issues. In that way, they were analogous to the 'mountaineer's knee' in Lord Hoffmann's famous example in the SAAMCo case, as losses that, while a foreseeable consequence of the activity in question (in this case, the acquisition of HBOS), were not losses that the directors were assuming responsibility for in making the disclosures. In obiter comments, the judge rejected this analysis, arguing that while the critical distinction remains between information cases (where the provider of information does not guide the whole decision-making process) and advice cases (where the adviser does), the context of the disclosures being made in a document that recommended the acquisition meant that no bright-line distinction could be drawn. This analysis, if followed in future cases, may have a significant impact on the extent of losses that could be claimed following breaches of disclosure duties.

There have also been several other cases this year that have raised issues of relevance to securities litigation.

In the Tesco litigation, the defendants sought to strike out the claim on the basis that the claimants held their shares through CREST and that this was not an 'interest in securities' as required by Section 90A. Tesco accepted that its interpretation of the statute would render the cause of action redundant for the majority of shareholders, given the prevalence of securities being held in computerised form. However, it argued nevertheless that this was a consequence of the drafting of the legislation failing to keep pace with developments of a dematerialised market. The court rejected the application, no doubt troubled by the consequences of Tesco's argument, which would be to expose a fundamental hole in the FSMA regime (and the UK's implementation of the European Transparency Directive) in promoting accurate and timely disclosure by issuers and investor protection. The court determined that it:

must proceed on the basis that the draftsman and legislature did understand the market in intermediated securities, did not intend to strip away the rights of investors who chose that mode of holding their investment, and must have been persuaded that the words they used were appropriate to preserve and enhance those rights72

In the context of a collateralised loan obligation, the courts have applied principles of contractual interpretation to determine that no incentive fee was payable to the collateral manager of the CLO when the equity noteholders exercised their right of early termination.73 The court emphasised the approach that English law takes to the interpretation of contracts, particularly the documentation of traded products that will likely exist for a long time and pass through many hands, which is to give 'particular, even paramount' importance to the words used. After considering the documentation in question, the court concluded that the parties would expect to be bound by the language used, notwithstanding the supposedly perverse incentives to exercise early redemption that the collateral manager attempted to argue that the plain meaning of the words would create.

Finally there have been two cases raising important points of principle in the context of the funding arrangements applicable to securities litigation claims, a particular feature of the development of the landscape. The first74 in the context of the Ingenious Media litigation, makes clear that security for costs orders can be made against third-party funders (at least in respect of the portion of the claimants that they 'substantially control or at any rate benefits from') and that the adverse costs liability of the funders in such claims is primary, rather than secondary (such that it does not require the defendants first to seek recovery from the claimants before turning to the funder). In addition, the judgment raises significant doubt about the suggestion that a security for costs application against the funder can be met completely by pointing to claimants' After the Event (ATE) insurance cover for adverse costs. The court concluded that there was a real, and not merely fanciful, risk that the ATE policies would not respond in full given their terms (such as avoidance for fraud or deliberate non-disclosure and other termination provisions), such that defendants would not have the same level of protection that a security for costs order would provide. Accordingly, the court held that a deduction to reflect the risks of the policies not responding fully was appropriate and security was ordered to make up the difference.

The second, a Court of Appeal decision,75 has dismissed the suggestion (first made in a case called Arkin v. Bochard Lines Limited (Nos 2 and 3)76) that a third-party funder's liability for adverse costs should be limited to the amount that the funder had provided to the unsuccessful claimant. The so-called Arkin cap is, therefore, not to be treated as a binding rule; the court instead retains a broad discretion to determine the extent of the funder's liability for defendants' costs in the event that the claims they fund are unsuccessful. This decision will have an impact, therefore, on the risk/return assessment that must be made by third-party funders when they decide which cases to fund.

ii Public

The FCA successfully brought criminal proceedings against Fabiana Abdel-Malek (a former bank compliance officer) and Walid Anis Choucair (a day trader), following a joint investigation with the National Crime Agency, on five counts of insider dealing, based on inside information the former compliance officer had received in the course of her employment. Ms Abdel-Malek and Mr Choucair were each sentenced to three years' imprisonment on the five counts. The convictions followed a previous trial in late 2018 that resulted in the jury failing to reach a verdict. The FCA, and previously the Financial Services Authority, has now secured 36 convictions in relation to insider dealing.

The FCA continues to focus on data collection and analysis as part of its ongoing efforts to enhance market integrity. In a speech at the 19th Annual Institute on Securities Regulation in Europe on 6 February 2020, Mark Steward (Executive Director of Enforcement and Market Oversight at the FCA) referred to three sources of data that, when consolidated, enable the FCA to examine what is happening in the markets in 'close to real time':

  1. MiFID II transaction reports: in 2019 the FCA received 9.8 billion MiFID II transaction reports, a 17 per cent increase on 2018;
  2. FTSE 300 order book: the FCA has begun ingesting and consolidating the FTSE 300 order book – which in 2019 generated around 150 million order reports per day – to aggregate orders in the same stock across different platforms; and
  3. Suspicious Transaction & Order Reports (STORs): 5445 were received from market actors in 2019.

This is one of the reasons why the FCA places great importance on the accuracy of transaction reports that are supplied by firms and has fined firms significant amounts when there have been errors in reporting. In March 2019 UBS AG (UBS) and Goldman Sachs International (GSI) were respectively issued Final Notices for either failing to report, making inaccurate reports or erroneously reporting transactions that had not occurred (or were not reportable) on millions of occasions between 2007 to 2017. UBS was fined £27,599,400 and GSI was fined £34,344,700. Both Final Notices referred to the failings in reporting having the potential to hinder the FCA's market surveillance and monitoring capabilities and its ability to detect and investigate suspected incidences of market abuse, insider dealing and market manipulation.

The FCA has also taken enforcement action against the management of issuers. On 12 December 2019, the FCA fined Kevin Gorman, a former managing director at Braemar Shipping Services plc (Braemar), £45,000 for failing to notify personal trades. Mr Gorman carried out three trades in his capacity as a person discharging managerial responsibility (PDMR) at Braemar. Under MAR, PDMRs and those closely associated with them are required to notify the FCA and the issuer of every transaction conducted on their own account above a certain threshold within three business days. This includes transactions in the issuer's shares, debt instruments, derivatives or other linked financial instruments. Mr Gorman was found to have sold shares worth a total of £71,235.28 on three occasions between 24 August 2016 and 18 January 2017 without informing the FCA or Braemar within the required three business days.

Outlook and conclusions

The outlook for private securities actions will continue to be shaped and developed by the progress in the cases referred to in Section V, as well as new claims that emerge, and practitioners will be keenly observing any significant developments in those cases, particularly in relation to the untested points described in Section II. Moreover, the volatility in markets as a result of covid-19 may give rise to further claims in the securities litigation space as claimants explore the adequacy and timeliness of disclosures made prior to, and during, the crisis.

Subject to the impact of covid-19, with both an appeal on the meaning of 'securities' under Section 90A and the trial in the Tesco case due to take place this year, we may get some further clarity on the scope of Section 90A and some of the issues described above. In addition, there are a number of claimant firms that have widely advertised that they are seeking to bring proceedings in relation to Quindell (Watchstone), BT, Patisserie Valerie and Petrofac for widely reported issues. One can see the influence of third-party litigation funders, such as Therium, IMF Bentham and Innsworth, and the claimant bar working together to seek potential claimants.

We expect to continue seeing growth in the activities of boutique claimant firms in seeking out potential claimants to build groups when issuers make corrections to previous announcements, or in other instances of large-scale corporate failings. The use of additional technology and experience from other jurisdictions, including through the involvement of litigation funders and whether any attempt is made to meet the reliance requirement using a 'fraud on the market' or indirect/market-based causation theory, will be carefully monitored by all those involved in issuer-based liability claims. The outcome of all of these cases (to the extent they are not settled) will largely determine whether we see a wave of substantial standalone securities claims in that area.

The FCA remains committed to strong enforcement action and the pursuit of criminal prosecutions in market abuse cases; Mr Steward recently referred to the FCA's continuing investment in tackling market abuse and successful prosecutions as reasons why, on certain metrics, the levels of abnormal price movements or volumes traded have fallen in recent years.77 However, the volume of new investigations and potentially some resourcing challenges may mean that cases remain longer in the regulatory pipeline in the shorter term. In addition, the extension of the FCA's new individual accountability regime, the Senior Managers Certification Regime, to all regulated firms in December 2019 may result in more enforcement investigations against senior managers of firms.

Both the FCA and the PRA have expressed concern about the potential for wider and systemic risks arising from poor use of trading algorithms and are focused on the need for firms to have robust governance, risk management and compliance standards and have issued guidance. We expect the FCA and PRA to take a similar stance to the governance and management of the use of machine learning in trading.78

The FCA is also focusing more attention on taking enforcement action in relation to market manipulation, which Mr Steward has described as 'equally corrosive of market integrity' as insider dealing. The inclusion of the FTSE 300 order book as a data source in its market surveillance has enhanced its ability to identify potentially manipulative trading. Its investigation work is now split 60:40 between insider dealing and manipulation, which marks a significant shift from when the FCA's wholesale investigation caseload was almost exclusively focused on insider dealing.79

Finally, greater uncertainty regarding all aspects of securities law governed by EU legislation has, of course, been created by the UK's exit from the EU. While the terms of the MAR EU Exit Regulations make clear that the intention is not to alter the policy approach of the current market abuse regime, a lot will ultimately depend on how the negotiations between the UK and the EU on their future relationship develop.


1 Harry Edwards is a partner and Jon Ford is a senior associate at Herbert Smith Freehills LLP. The authors would like to acknowledge the assistance of Ceri Morgan in producing this edition of the chapter.

2 2014/596/EU.

3 MAR has been directly applicable in the UK (and other Member States of the EU) since 3 July 2016; it replaced most of the national legislation under Part 8 FSMA, that formerly governed the civil market abuse regime, and the disclosure requirements for listed issuers made under Part 6 FSMA.

4 Most notably, the prosecution of criminal offences in Scotland remains the responsibility of the Lord Advocate and not the FCA (as is the case in England and Wales).

5 When MAR came into force in July 2016, the bulk of the FCA's guidance in the Market Conduct Sourcebook and the Disclosure Rules was deleted and replaced by European technical standards, and guidance from the European Securities and Markets Authority (ESMA). Some FCA guidance deemed compatible with MAR has been retained. If additional clarification is required, this will mainly be provided by ESMA, although the FCA retains powers to provide clarification on MAR where necessary.

6 The Prudential Regulation Authority also has power to bring administrative enforcement actions, but with the objective of promoting the safety and soundness of the firms it regulates.

7 An admission document for the purposes of listing on the London junior market, AIM, is outside the scope of Section 90 FSMA.

8 In particular, its assets and liabilities, financial position, profits and loss and prospects. See also Section 80(1) FSMA.

9 The European listing requirements and market practice for wholesale debt issuers is that the corporate vehicle, rather than the directors, takes responsibility for the content of the offering document. However, the breadth of the test for responsibility to bite (if they 'authorise the contents') means that even for such deals the directors could potentially also be liable.

10 The Financial Services and Markets Act 2000 (Official Listing of Securities) Regulations 2001/2956 Regulation 6(1) sets out the full list of persons responsible for the contents of listing particulars, and the Prospectus Rules 5.5, contained in the FCA Handbook, set out the full list in respect of a prospectus.

11 It is noteworthy that a predecessor to Section 90 liability (Section 67 of the Companies Act 1985) gave a right of action to 'those who subscribe for any shares or debentures on the faith of the prospectus', in contrast to Section 90 FSMA, which contemplates the action accruing more broadly to those who have 'acquired the securities'.

12 See J Lightman, obiter, in Possfund Custodian Trustee Ltd v. Diamond [1996] 1 WLR 1351 at 1360 discussing the equivalent provision in the statute preceding FSMA, Section 166 of the Financial Services Act 1986. He did not expressly determine the issue because the relevant statutory provision had not been brought in effect, but considered that liability owed to 'any person who has acquired the securities to which the prospectus relates' did not extend to the secondary market. See also discussion about liability for aftermarket transactions in Competition Law 1998, 19(10), 311–314 and J Payne, 'Possfund v. Diamond: a reassessment of the common law duty owed to subsequent purchasers who rely on a company prospectus', JFC 1997, 4(3), 253–254. The Possfund decision has not to date been considered or applied in the context of Section 90 FSMA.

13 RBS Rights Issue Litigation [2015] EWHC 3433 (Ch), Paragraph 53.

14 There is a potential question over whether or not the Schedule 10 defences are available to the issuer in addition to natural persons. However, the better view is that they are not restricted to natural persons.

15 See, for example, Meridian Global Funds Management Asia Ltd v. Securities Commission [1995] 2 AC 500 PC.

16 Manning and Napier Fund and Omers Administration Corporation v. Tesco [2017] EWHC 3296 (Ch); SL Claimants v. Tesco plc; MLB Claimants v. Tesco plc [2019] EWHC 3315 (Ch).

17 For example, see the discussion of 'fraud-on-the-market' theory in the US chapter of this book and the discussion of indirect, or market-based, causation in the Australian chapter, including the discussion of the judgment in TPT Patrol Pty Ltd v Myer Holdings Limited [2019] FCA 1747.

18 Caparo Industries Plc v. Dickman [1990] 2 AC 605.

19 Sharp v. Blank [2015] EWHC 3007 (Ch); Sharp v. Blank [2019] EWHC 3078 (Ch).

20 Golden Belt 1 Sukuk Company v. BNP Paribas [2017] 3182 (Comm).

21 Sharp v. Blank [2019] EWHC 3078 (Ch).

22 Derry v. Peek [1889] UKHL 1.

23 Bisset v. Wilkinson [1927] AC 177 PC 183.

24 Misrepresentation Act 1967, Section 2(1).

25 [2015] EWHC 871 (Comm).

26 Taberna Europe CDO II Plc v. Selskabet AF1 [2016] EWCA Civ 1262.

27 Kaye v. Croydon Tramways [1898] 1 Ch. 358 CA (Civ Div); Tiessen v. Henderson [1899] 1 Ch. 861 HC (Ch); CAS (Nominees) Ltd v. Nottingham Forest FC Plc [2002] BCC 145 HC (Ch); Re Smith of Smithfields Ltd [2003] EWHC 568 (Ch).

28 Sharp v. Blank [2019] EWHC 3078 (Ch).

29 FSMA, Sections 26, 27 and 30.

30 Defined in the Financial Services and Markets Act 2000 (Rights of Action) Regulations 2000, Regulation 3 and broadly any individual who is not carrying out a regulated activity, and some corporate entities that are not acting in the course of business, when suffering the loss. See Titan Steel Wheels v. RBS [2010] EWHC 211 (Comm) for the courts' restrictive approach to the meaning of 'private persons' for the purposes of standing to bring a claim under what is now Section 138D FSMA. There is ongoing speculation about changes to primary legislation to broaden the categories of claimants who fall within the scope of Section 138D FSMA.

31 Obligations placed on authorised persons by FSMA or the FCA Rules will be eligible provisions for this purpose unless there is a further provision stating that a breach does not give rise to a claim of this type.

32 Hall v. Cable & Wireless Plc [2009] EWHC 1793 (Comm).

33 See Case C-403/98 Azienda Agricola Monte Arcosu v. Regione Autonoma della Sardegna [2001] ECR I-103 in which the court considered the provisions of a regulation not to be sufficiently precise, and left Member States a residual discretion, and therefore concluded that the provisions could not be directly relied upon.

34 See the Opinion of Advocate General Geelhoed delivered on 13 December 2001 in Case C-254/00 Muñoz v. Frumar Ltd [2002] ECR I-7289, and also R (on the application of United Road Transport Union) v. Secretary of State for Transport [2013] EWCA Civ 962, in which the Court of Appeal held that the availability of civil proceedings in private law to uphold rights against a competitor did not mean that, in other contexts, and under different regulatory schemes, enforcement may not properly be limited to other means outside the private law. Significantly in that case, the complainant would not himself have suffered any recoverable financial loss, and in the event of unjustifiable inaction on the part of the relevant agency, could have sought judicial review.

35 Following the judgment of the European Court of Justice in Markus Geltl v. Daimler AG [C-19/11], the litigation brought by Mr Geltl and others against Daimler in the Stuttgart Regional Higher Court in respect of loss suffered as a result of delay in announcing inside information about the CEO's early retirement was resolved through an out-of-court settlement.

36 See, e.g., FCA Final Notice of 28 March 2017 in respect of Tesco Plc and Tesco Stores Limited (Tesco).

37 Civil Procedure Rules, Rule 1.1.

38 If a defendant fails to defend a claim within the applicable time limit following valid service, the claimant will be able to apply to court for a default judgment, allowing it to begin the enforcement process.

39 Civil Procedure Rules, Part 36.

40 The FCA also has power, on an application to the court for an injunction or restitution, to ask the court to impose a penalty in cases of market abuse under Section 129 FSMA – see FCA v. Alexander, FSA/PN/053/2011; FCA v. Da Vinci & Ors [2015] EWHC 2401 (Ch).

41 Criminal Justice Act 1993, Part V.

42 Financial Services Act 2012, Section 89.

43 Financial Services Act 2012, Section 90.

44 Financial Services Act 2012, Section 91.

45 The FCA and the Crown Office have agreed arrangements for the prosecution of offences in Scotland arising out of FCA investigations.

46 In addition, Section 166 FSMA gives the FCA the power to appoint a skilled person to produce a report, on which enforcement action is commonly based.

47 Sections 122A–122F in respect of breaches of MAR, and Sections 170–176A FSMA generally.

48 Defined as 'protected items' as described in Section 413 FSMA.

49 Section 122D (for market abuse) and Section 176 FSMA.

50 Section 174 FSMA.

51 Section 67(1)–(3) FSMA.

52 Section 67(4)–(6) FSMA.

53 Section 67(7) FSMA.

54 But see the Court of Appeal decision in R (Wilford) v. Financial Services Authority [2013] EWCA Civ 677.

55 It is now also possible to enter into a focused resolution agreement and in this way partly contest a proposed action (see Decision Procedure and Penalties manual (DEPP) 5.1.8AG to DEPP 5.1.8DG). A discount is also available in respect of partly contested cases – DEPP 6.7.3A.

56 See, for example, R v. Innospec Ltd [2010] EW Misc 7 (EWCC) (18 March 2010).

57 Crime and Courts Act 2013, Section 45 and Schedule 17. Although other prosecutors can be designated, this has not as yet occurred.

58 The SFO's first application for a DPA was granted judicial approval on 30 November 2015 in the case of SFO v. ICBC Standard Bank Plc, a case involving offences under the Bribery Act 2010, not securities litigation.

59 DEPP 5.6, DEPP 5.6A-C. The FCA is planning to consult on revising its penalty process.

60 DEPP 6.5.

61 Section 123A FSMA.

62 Sections 122G and 122F FSMA.

63 See Part 5 of the Financial Services and Markets Act 2000 (Markets in Financial Instruments) Regulations 2017, that also makes provision for the procedure to be followed and the right of referral.

64 Kolassa v. Barclays Bank Plc (Case C-375/13).

65 Universal Music International Holding BV v. Schilling (CC-12/15).

66 Otherwise known as the Treaty on the Functioning of the European Union.

67 Section 169 FSMA.

68 It is not yet clear what policy decision will be taken about jurisdiction following the UK's exit from the EU, although it seems likely that the UK will adopt an approach similar to the UK regime that predated the European legislation, which sought to capture behaviour that took place in the UK or in relation to investments traded on a trading venue situated in the UK or that was accessible electronically in the UK.

69 The UK has opted out of the Criminal Sanctions (Market Abuse) Directive 2014/57/EU, Article 10 of which requires Member States to establish jurisdiction (at least) in respect of criminal market abuse offences committed in whole or in part in their territory, or by one of their nationals where the act is an offence where it is committed.

70 Sharp v. Blank [2019] EWHC 3078 (Ch).

71 [2019] EWCA Civ 40.

72 CL Claimants v. Tesco plc [2019] EWHC 2858 (Ch).

73 Deutche Trustee Company Ltd v. Duchess VI CLO B.V. & Ors [2019] EWHC 778 (Ch).

74 Mr Nigel Rowe & Ors v. Ingenious Media Holdings plc [2020] EWHC 235 (Ch).

75 Chapelgate Master Fund Opportunity Ltd v. Money [2020] EWCA Civ 246.

76 [2005] EWCA Civ 655.

77 The FCA's annual market cleanliness metric (the MC metric) is based on the percentage of abnormal movements in price in the two days preceding a takeover announcement. The MC metric was first published in 2008 and it found that approximately 30 per cent of takeovers showed abnormal price movements in the two days prior to their announcement. In 2019, the figure was 10 per cent.

78 The Bank of England's 'Machine learning in UK financial services' paper, dated October 2019 noted that around 25 per cent of respondent banking firms had a small-scale deployment of machine learning in sales and trading, with around 5 per cent of firms citing MiFID II/MAR as a barrier to deploying machine learning. For the time being, it appears that the detection of market abuse and other financial crime is the primary use of machine learning at banks.

79 Mark Steward speech at the 19th Annual Institute on Securities Regulation in Europe on 6 February 2020.

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