At a time when group proceedings are gaining momentum in Scotland, we are considering what types of actions might be on the horizon and which sectors might be facing an increased litigation risk. This blog is the first in an ongoing blog series and focuses on the Financial Services sector, particularly the potential risks to financial institutions as a result of claims from groups of so-called "Mortgage Prisoners".
The term "Mortgage Prisoner" is used by consumer groups to describe homeowners who took out a mortgage with a lender which became inactive as a result of the 2008 global financial crisis (either through restructuring of the lender's business or through a transfer of the lender's mortgage portfolio to another organisation). The interest rates applied by inactive lenders were allegedly higher than those applied by active lenders but, because of the stricter affordability requirements introduced by the Financial Services Authority (now the FCA) following the crisis, many individuals were not able to switch to a new lender. Collective proceedings are anticipated in England & Wales to attempt to recover for the borrowers the difference between the interest actually paid and the interest that might have been paid if the rate had been set by an active lender.
At present, the threatened litigation is directed against numerous lenders who have acquired these types of mortgage portfolios. As the issue remains in the news and more borrowers are encouraged by solicitors seeking potential claimants to come forward, it is possible that more financial institutions will be brought in before the defendant list is finalised and the action is filed at the High Court.
Could similar proceedings be on the horizon in Scotland?
We could see similar cases being raised in Scotland. The introduction of the group proceedings rules in 2020 has removed or at least lowered the economic barriers individuals would have faced if litigating alone. Would-be pursuers might have felt aggrieved but had insufficient resources (funds time and energy) to raise court proceedings. Collective redress using group proceedings will undoubtedly be attractive since class members will not face the same exposure to expense – both in terms of fees to their own solicitors and the risk of awards made against them. This is because it is likely that there will be an agreement between pursuers and the solicitors taking on these cases, that the solicitors will accept whatever expenses they recover from the defenders if they are successful, but will cover all costs if the claim is unsuccessful. The level of personal involvement required for the individuals included in the class is also very much reduced, when compared with raising their own action.
What is not clear when considering the "Mortgage Prisoner" claim in the context of the Scottish procedure, is how the Scottish Courts would deal with the potentially long list of defenders it could encompass. The rules do not prohibit group proceedings being raised against more than one defender, indeed, it would be common for more subsidiary companies within a group structure to be included. What is less clear, however, is how the Court of Session would respond when asked to grant permission for claims against multiple, unrelated defender organisations, to proceed as one action under the group proceedings regime.
In determining whether to grant permission for the action to proceed as a "group proceeding", the principal consideration for the Court is whether the group of claims raise issues of fact or law which are the same as, similar or related to, each other. However, even if this requirement is met, the Court would also have to agree that:
• there is a prima facie case;
• proceeding as a group will be more efficient than as separate claims; and
• there is a real prospect of success.
It may not be straight forward to convince the Court that grouping the claims into one action would be more efficient than allowing separate claims to proceed, where there are multiple defenders, each with distinct Ts&Cs in place with its customers.
We have not yet seen an application for group proceedings approved by the Court of Session. The Court has been grappling with this very issue in a recent application for permission to proceed against a number of vehicle manufacturers. A decision is anticipated shortly on whether the Court will permit certain claims to be grouped together (by similarity of fact and law) but then require them to be sub-divided as per defender organisation. This decision could have a potentially significant impact on the group proceedings landscape in Scotland, particularly for consumer facing/retail financial services institutions. Stringent regulation of the sector means that products and policies are likely to operate in a similar way, even though they are offered by distinct and separate providers, where issues of fact and law relevant to one consumer's claim against their provider's policy or product may have a direct bearing on those offered by other providers.
Brodies will continue to monitor developments in this area closely, with further insights to follow.
Contributor
Partner & Solicitor Advocate
