Litigation Risk: Proactive Steps for Wealth Managers

Wealth managers are coming under increased threat of litigation as investors look to recoup losses suffered in the market turmoil precipitated by COVID-19 earlier this year. For example, in the US, insurers are facing several lawsuits lodged by pension schemes who allege their funds were invested contrary to the advertised strategy, while in the UK, early legal action has begun against at least one fund director with similar claims around “inappropriate” investments being chosen for the fund.  

Prior to the pandemic, escalating regulatory scrutiny around suitability and pricing, combined with rapidly growing investment in litigation funding, had already created fertile ground for claims against wealth managers. This risk had been particularly heightened as pension freedoms expose more retail investors to unsuitable products and risks. Now, following the recent disruption, there will be pension funds, and thousands of individual investors, who have lost out. Bringing claims against advisers, or fund managers themselves, may be seen as a way to recoup some of the losses suffered, particularly as the availability of top lawyers on contingent fee funding models continues to increase. 

 Where investment and wealth managers are facing exposure to litigation risk, there are proactive steps to take. For example:

·         Risk can be mitigated be reviewing and improving procedures for pro-active monitoring of individual fund managers to ensure they are acting within their remit, and making investment decisions appropriate to each client and in accordance with the investment mandate. 

·         Where a potential claim does arise, early collection and preservation of relevant data (such as email, contracts and transaction date) is crucial. Doing so enables proper assessment of the level of exposure, and minimises future costs of defending a claim.

·         Initial assessment of the likely quantum of any pay-out should be conducted as early as possible, even prior to any formal claim. This is particularly critical in the context of deciding whether to settle early, or proceed into formal dispute resolution mechanisms.

As the threat of potential litigation rises, now is the right time to review your existing approach to ensure your business is on the front foot before a case arises.