GBRW Expert Witness Limited is an affiliate of GBRW Limited, a consulting company based in the City of London which provides advice on banking, insurance, financial sector and enterprise development issues. This year the company celebrates its twentieth anniversary of expert work in banking, investment management, insurance, stockbroking, derivatives and related litigation.
Three of GBRW Expert Witness’s directors - Paul Rex, David Croft and Tim Dowlen - are active as experts and their pool of experienced associates is probably the widest in the UK for financial sector cases.
In the past eight years, their experts have worked on over 400 cases involving civil and criminal court proceedings, arbitrations and mediations in jurisdictions which include England and Wales, Scotland, Australia, Bahamas, Cayman Islands, Dubai, Hong Kong, Ireland, Jersey, New Zealand, Singapore and Sweden.
Martin Edwards, GBRW Expert Witness’s Director, Asia, is based in Singapore and is responsible for relationships with law firms in the region, especially those in Hong Kong and Singapore.
Finding The Right Expert
Law firms looking for expert witnesses or advisers in financial sector litigation face a number of challenges:
• How to identify the right expert in a specialised discipline
• How to develop a short list of suitable candidates on a discreet basis
• How to avoid individual experts “shoe-horning” themselves into roles for which they are not properly equipped
• How to assess individuals’ strengths and weaknesses and prior track records
GBRW Expert Witness’s experience - as experts themselves and from working with their associates over an extended period - normally enables them to propose one or more candidates whom they consider the best equipped to address specific issues on which expert evidence is required. On occasions, they may suggest using more than one expert where the requirements of the case cannot be covered by a single individual.
The group’s consulting activities also enable them to identify potential “new” experts, particularly when recent industry experience is important. These will not appear in the usual expert directories and websites and may require time and professional support to help develop them in the expert role.
Where individuals have had little or no prior experience, they can be assisted where necessary on research and presentation issues and carry out a detailed critical review of their first draft and final reports. If required, experts can also be helped to prepare for cross-examination.
When an expert is selected, GBRW Expert Witness signs an engagement letter with the instructing law firm and a matching engagement with the expert concerned. The law firm issues a letter of instruction directly to the expert and communicates directly with him or her from that point. Billing is on an hourly basis, with supporting time records. No charges are for the expert search or for initial discussions – billable time only starts to run once an engagement has been agreed.
The Management Team
Paul Rex oversees GBRW Expert Witness’s activities. He has dealt personally with a range of areas which include lending and approval procedures, trade finance, specialised lending and practices in the syndicated loan market. He has given oral evidence in several cases, most recently in a London Arbitration (2015), IRD v Westpac New Zealand (2009, High Court of New Zealand) and KBC & Bank of Tokyo Mitsubishi UFJ v Ferrero & Others (2009, High Court).
David Croft has given evidence in a number of high value cases involving structured finance, complex investment products, capital markets and bank treasury/risk issues. He has given oral evidence most recently in Alliance Bank JSC v Metropol (Cyprus) Limited (2013, London Court of International Arbitration) and Zeid v Crédit Suisse (2011, High Court).
Tim Dowlen is a former Senior Examiner in Liability Insurance for the Chartered Insurance Institute and an experienced insurance broking expert who also practices as an insurance broker. He has been instructed in more than 100 cases (including six court appearances) and oversees the development of GBRW EW’s insurance work.
Jeremy Denton-Clark and Martin Edwards are highly experienced international bankers. While neither currently practises as an expert, they are very familiar with the issues involved in selecting and instructing expert witnesses and advisers.
GBRW Expert Witness has been engaged by more than 70% of the Legal Week Top 50 UK firms as well as overseas practices and HM Revenue and Customs Solicitor’s Office in a number of tax related cases.
Their clients include leading solicitors UK and worldwide including Cyprus, New Zealand, USA, Singapore and Hong Kong:
GBRW Expert Witness has produced Briefing Papers to assist lawyers, on a number of areas which are frequently subjects of litigation. A number of these areas are discussed in the following sections.
“It's only when the tide goes out that you learn who's been swimming without a bathing suit.” – Warren Buffett
Investment losses are often followed by lawsuits and requests for expert advice on investment performance have formed one of GBRW Expert Witness’s most active areas of work since the global financial crisis in 2008/2009.
Each case will have its own characteristics, but in the company’s experience the following elements feature regularly:
• A mismatch to the investor’s requirements. In a falling market, many complaints will be based on the assertion that the investor’s risk appetite was either misunderstood, incorrectly recorded or ignored.
• The characteristics of the investment. The investment adviser or manager may have mis-classified or misunderstood the nature of the investment, which may in turn imply failures in its product approval process and/or its underlying due diligence or analysis.
• Unprofessional behaviour, typically exhibited in practices such as mis-selling to inexperienced investors or misrepresentation of the nature of the investment product.
• Fraud. In its most blatant form, this may involve theft of assets or Ponzi schemes such as Madoff’s. Less extreme forms may involve churning, self-dealing and front running.
In many cases, these practices may be symptomatic of inadequate governance and control processes in the investment manager or adviser. There may be a
number of headings under which claims for compensation can be pursued.
It is important to bear in mind that poor performance is not automatically a basis for a claim. The starting points for expert advice will usually include the following areas:
• Were the investments appropriate? Under this heading, the expert will examine the investor’s risk appetite and stated investment objectives, the nature of the investments which are the subject of the litigation and the percentage of the total portfolio which they constituted.
• Were proper procedures followed? Many jurisdictions have detailed requirements for fact-finding and record-keeping procedures when advisers are dealing with clients. Investment advisers and managers will also have internal policies and procedures which they may have to disclose in litigation. Failures in either of these areas may not necessarily establish the basis for a successful claim, but they will often be relevant to the claim and may generate pressure for a settlement.
• Timing. Certain classes of investment (split caps, for example) become increasingly risky as the original concept is developed. The point at which advice was given can often be crucial and access to industry data and comment at different points in time may be necessary to substantiate claims.
• Quantum of loss. Even when it can be established that a particular investment was mismanaged, “what if” analyses for a number of scenarios are required to establish the loss for which the investor can actually claim. This loss will be set by reference to the position he or she would have been in if the investment had not taken place.
GBRW Expert Witness decided in 2009 to enter the insurance expert field by acquiring the business of Associated Insurance Experts, a group experts in many insurance disciplines who had been pooling their knowledge and contacts for nearly 20 years. The majority of its cases concern broker negligence (roughly one third of instructions) or underwriting decisions and practice (another third).
Many solicitors looking for an expert may only be involved in insurance cases from time to time. Given the particular characteristics of the insurance market, an early approach to an expert is highly advisable and can often be very persuasive in the progress of a case. If an expert is approached too late in a case (when the parties have already taken positions), assumptions about insurance contracts by the legal team may prove to be ill founded or incorrect. Insurance jargon and the wording of contracts occupy a particular world; a basic error in interpreting the effect of an insurance policy can badly weaken the client’s position in a disputed claim.
The world of insurance is based on payment of claims. Most litigation is therefore between two parties to an insurance contract; however, litigation occurs not only between policyholder and insurer, but also between a policyholder as a client and an insurance broker as their agent (policyholders may also claim against both their broker and their insurer). Insurers also sue reinsurers and vice versa, with reinsurance brokers often party to such disputes.
Private consumers’ claims are often rejected (“avoided”) by their insurer on the grounds of non-disclosure. Changes in consumer insurance law now put the onus on the insurer to prove the relevance of alleged non-disclosure. This is a recent development, so contracts entered into before 2013 are still subject to dispute on the grounds of non-disclosure.
Market sectors range from motor to marine insurance, from liability to livestock insurance and from property insurance to placing agencies (“binding authorities”). Private insurance policy disputes feature, as do professional indemnity problems and esoteric areas such as contingency insurances – prize indemnity, defective title and restrictive covenant. Experts have dealt with life assurances, investments, mortgages and pension provision as well as health and medical insurances and loss adjusting and forensic claims experts can assist with quantum issues.
GBRW Expert Witness’s experts have been actively involved in the Law Commission reform of insurance contract law leading up to the 2013 Act mentioned above, the first Statute for private insurance customers. The Law Commission introduced a version of a business insurance Bill to Parliament in July 2014, which is now under discussion and review.
Interest Rate Swap Disputes
There has been extensive coverage of the mis-selling of Interest Rate Swaps – some containing embedded and sometimes complex options – to Small and Medium-sized Enterprises (SMEs) in the UK.
On 29 June 2012, the then Financial Services Authority (now FCA) announced that it had reached agreement with four major banks – Barclays, Lloyds, HSBC and RBS – so that the banks would provide appropriate redress where mis-selling of interest rate derivatives had occurred. Independent reviewers were appointed and approved by the then FSA to ensure that the correct level of compensation – if any – would be paid by the banks. On 23 July 2012 a further seven banks
agreed to do the same thing.
The independent reviewer process is obviously an attractive route for clients of the banks who feel that they were mis-sold interest rate hedging products, because it provides a low or no cost method of settling the dispute, and avoids expensive mediation or court costs. Furthermore, the banks are obliged to approach every client who was sold these products if there is a case for mis-selling.
However, not all interest rate hedging products are automatically included in the scheme; structured collars were specifically mentioned and the banks agreed that no further sales of these products would be made to retail customers. Structured collars were sold under a number of different brand names, but essentially they gave the client a maximum and minimum rate payable on the product, but also raised the rate (although never above the maximum) if interest rates fell below certain levels. With the massive fall in interest rates seen after the financial crisis, the vast majority of these minimum rates kicked in, and clients found themselves paying higher rates – even while market interest rates continued to fall.
Not all suspect products were structured collars; many interest rate swaps were also “structured” in different ways. They could be cancellable (by the bank), extendable (by the bank) or increased or decreased in amount (by the bank); all of these features involved the client – often unknowingly – selling one or a series of options to the bank. Selling options is a potentially risky activity for a small business and banks were frequently at fault in not making it transparent that the client was taking on these risks when it bought such products.
Not all clients will be eligible for this scheme:
• Firstly, “sophisticated” customers will be excluded; the FCA’s position is that this is intended only to exclude clients who should have been very familiar with the complexity of these products. It is clear that some banks have excluded claims on the basis of the FCA parameters, even if it appears that the client was non-sophisticated. The only immediate way forward in these situations is to institute legal proceedings, but time limitations may already exclude some cases, and with others the time left will be very limited.
• Secondly, if the bank believes that the client fully understood the product when it was sold, then such clients will also be excluded. These situations will often be worth appealing – probably with expert support.
It is important to bear in mind that any redress offer from the bank is binding on the bank, but not on the client. This suggests that in many cases the first offer will not necessarily be the final offer and a period of negotiation may well ensue. If the final offer is not acceptable to the client, the client will still have available legal or non-legal methods of recourse.
But how does a small business assess what is a fair offer, and how can it tell whether the independent assessor has taken into account all the facts that might have established mis-selling? It is difficult to create a template that will answer either question definitively – specific circumstances will always have to be taken into account.
Essentially – and in very simple terms – there are three possible outcomes:
• The bank may decide that the hedge should be voided and all costs associated with it repaid; this is clearly the “best” solution, so it will probably come as no surprise if this is not what is offered.
• The second is the replacement of a structured collar (for example) with a more straightforward vanilla collar. It is also assumed that a client would not have bought a hedge if it might be expected that under “reasonably pessimistic” assumptions about interest rates the break cost would be more than 7.5% of the nominal value of the hedge. This generally means that the tenor of the new hedge is between 5 and 7 years, but so far it has been impossible to ascertain the
exact methodology underpinning the calculation.
• The final outcome is that the bank decides that the original hedge should stand. This is most likely for 5 years or under and more straightforward hedging products like vanilla swaps.
Clearly nobody will appeal if the bank chooses to refund everything under the first option, although consequential losses may still be an issue (see below). In the case of both the second and third options, it may be worth appealing – the downside is after all limited, since the original offer is binding on the bank. Expert advice may be required at this stage, as some cases have been successfully appealed on the basis of quite technical arguments about the replacement hedge being offered.
Consequential losses based on loss of profits or business are possible although the FCA does warn that this may delay the process. Any claims under this heading will clearly require strong supporting evidence, especially where it is argued that a bank’s actions led to the borrower experiencing solvency problems or breach financial covenants.
In summary, therefore, it is worth giving careful thought before accepting any redress offer that does not involve the voiding of the hedge product.
Commercial Property Lending
The property crash of the early 1990s led to a wave of litigation between banks, borrowers, valuers and other professional advisers. Despite the severity of the 2008 financial crisis, commercial property lending litigation has been at much lower levels, in part because low levels of interest rates have enabled lenders and borrowers to defer some of the problems facing them.
A number of elements in current problem lending are remarkably familiar to lenders who lived through previous property downturns.
• over-optimistic, and in some cases fraudulent, valuations;
• excessive loan to value ratios;
• poor control over disbursements for development lending; and
• defective legal work on Reports on Title and loan security documentation.
In addition, many banks sold (or mis-sold) interest rate protection products in the form of interest swaps, collars and other derivatives as discussed in the previous section. These have exacerbated problems for many borrowers.
One major difference is that the present unprecedentedly low levels of interest rates have enabled banks to sit on their non-performing property lending at minimal cost. However, there is little prospect that property prices will increase far or fast enough to return defaulting property loans to performing status and we therefore expect to continue to see high levels of litigation in this sector as problems are crystallised
GBRW Expert Witness’s website at www.gbrwexpertwitness.com provides further information on their activities, including the Briefing Papers referred to above and their newsletter, Expertise.
The company welcomes enquiries from law firms and other parties looking for experts in cases involving banking, investment or insurance disputes.