Opt in or opt out: an FX class action decision worth millions

A UK judicial body must decide whether or not to allow a US-style class action case on alleged manipulation of foreign exchange trades to continue, in a decision that could mean the difference of millions of pounds in potential damages, if the case proceeds at all.

Barclays, Citi, JP Morgan, NatWest Markets, Royal Bank of Scotland and UBS are accused of manipulating spot FX transactions between 2007 and 2013.

If the Competition Appeal Tribunal rules the case will move forward, it must decide whether claimants would be included on an opt-in or opt-out basis. An opt-in case would require claimants who believe they were affected by the alleged manipulation to formally request their inclusion. An opt-out case automatically includes in the action any firm believed to have been affected, unless they formally request otherwise.

The decision carries huge significance. In an opt-in scenario, law firms bringing the claim may struggle to entice enough claimants to sign up to the collective action, potentially causing the case to collapse amid a dearth of funding.

With fewer claimants, an opt-in case also would be expected to carry a lower overall claim value compared with an opt-out case.

“If it has to become an opt-in [action], then you don’t know who is going to opt in, and how big the size of their claim would be,” says Lambros Kilaniotis, head of the competition practice at law firm RPC.

“You could have a reduction of anything between 30% or 40%. And 30% or 40% of a claim value is quite a significant reduction before you start to debate whether your theory of harm and the way you’ve calculated the overcharge is right,” he adds.

This could slash potential damages by hundreds of millions of pounds, based on similar cases in the US and European Union. In 2019 the European Commission fined five banks €1.07 billion ($1.27 billion) for their part in manipulation of FX markets. Claimants in the US received $2.3 billion in a similar class action suit against 15 banks in 2018

US-style class action lawsuits are a relatively new addition to UK law. Known as collective proceeding orders, or CPOs, the regime was introduced in 2015 with an opt-in or opt-out mechanism.

If it has to become an opt-in [action], then you don’t know who is going to opt in, and how big the size of their claim would be

Lambros Kilaniotis, RPC

Levels of opt-in participation in class actions in general, not just in the UK, vary depending on the type of case. In data protection cases, for example, the number of claimants can sometimes be a single-digit percentage of the overall number of parties deemed to have been affected, according to a partner at one London-based law firm. With personal injury claims, such as from medical device malfunctions, opt-in rates can be significantly higher.

“On an opt-in basis the percentage of people that sign up depends on a whole number of factors: the volume of individual losses, what’s at stake, whether those people feel personally aggrieved, because that makes a difference,” says the partner.

The cases are often financed by third parties known as funders, which take a cut of any payout if the case is successful. In collective opt-out proceedings, funders are typically paid from the undistributed aggregate award of damages.

“Funders would have made some assumptions about likely recoveries versus costs,” says Kilaniotis. “If the damages pot is no longer big enough to begin with, for example in an opt-in scenario, will the funders continue to fund the cases on the same basis? I think that’s going to be very interesting.”

Waiting for go-ahead

Before making an opt-in or opt-out determination, the Competition Appeal Tribunal must first decide whether to certify the case to allow it to go forward. Secondly, it must decide who will represent the claimants’ side of the case. Two individuals are currently competing to represent the class: Phillip Evans, a former chair of the UK’s Competition and Markets Authority, and Michael O’Higgins, a former chair of the UK Pensions Regulator.

O’Higgins is represented by Scott + Scott, the law firm which reached the $2.3 billion settlement in the US class action suit. Evans is represented by law firm Hausfeld.

Both are seeking damages based on the fines handed out by the European Commission in 2019. In two decisions, the Commission found traders from Barclays, Citigroup, JP Morgan, MUFG Bank, RBS and UBS had participated in online spot FX trading cartels in which sensitive information was shared via chatrooms and used to influence trading activities.

Both are also asking the tribunal to run the case on an opt-out basis. They argue an opt-out case could prove to be more inclusive of smaller claimants who may not be aware of the ongoing collective action and could miss out on any damages they are entitled to if the case proceeds as an opt-in.

During a hearing of the case in July, Justice Marcus Smith, chairman of the tribunal, remarked how opt-out regimes are unusual and that they were “in danger of being oppressive”.

“What you’ve got is actually a very potent stick to wield against the respondents certified to be defendants, because irrespective of the merits of the claim, what you can say is that if there is a recovery, the recovery is hugely leveraged because of the excess that will be unclaimed, which goes to charity,” said Justice Smith.

“What that then creates is an entirely non-merits based incentive to settle early,” he said.

What you’ve got is actually a very potent stick to wield against the respondents certified to be defendants

Justice Marcus Smith, tribunal chairman 

On August 24, the tribunal certified the first ever application for a CPO on an opt-out basis paving the way for future cases. The Walter Hugh Merricks CBE v Mastercard Incorporated & Others case had originally been refused by the tribunal in 2017, but after an appeal to the UK’s supreme court, the case was remitted back to the tribunal for review.

If the FX manipulation case does proceed, firms based in the UK or firms that had FX transactions priced or accepted in the EU can be included in the CPO. Firms based in the US, Canada or Australia will not be able to participate in the CPO as related class action proceedings are already underway in those jurisdictions.

The tribunal will aim to deliberate on the subject over the coming months and come to its decision in early October.

Kilaniotis expects the tribunal to allow the case to proceed. But if the tribunal refuses to certify the lawsuit, the claimants have an option to appeal.

“There is a world whereby the tribunal might come back and say, ‘I’m not convinced about this, and I’ll not certify either [Evans or O’Higgins]’,” says Kilaniotis.

“That’s an option open to them, it would be unusual, but it’s not something that I can rule out. That would be what I would call the nuclear option, and if that happens, you can very much expect there’s going to be an appeal.”

Editing by Alex Krohn