Different recession, regulatory environment and litigation market leads to different exposures
Whilst there is a clear link between recessionary conditions and claims against financial institutions, financial services professionals and directors and officers, the lessons from the previous recessions in the early 1990s and 2008 onwards may only take us so far in predicting the outcomes this time, given the different economic base going in and the catalysts for this recession (which include the pandemic, the war in Ukraine and high inflation).
Most notably, this recession is not credit driven and, from a claims perspective, given that the financial services sector underwent significant reforms following the 2008 global financial crisis, with tougher regulatory regimes and enhanced corporate governance standards put in place, we do not expect the same volume of regulatory misconduct claims as were seen then. That having been said, some exposures arising from this recession will likely be familiar.
In times of economic crisis, we can expect more fraud to occur, with fraudsters taking advantage of the opportunity (and potential gaps in internal controls), the desperation of consumers and investors and the increased economic uncertainty to perpetrate fraud. But such conditions are also more likely to expose existing frauds, such as employee theft and Ponzi schemes.
There is also a strong correlation between historic recessionary cycles and claims against financial services professionals (wealth managers, IFAs and the like), particularly where there has been a marked reduction in share prices. Claims for failure to consider and actively mitigate risks may expose professionals to liability, for example, for breach of mandate, negligent advice, suitability assessments and mismanagement of assets.
In addition, a recessionary environment also drives D&O claims. In particular, with more insolvencies, there will be more enquiries by insolvency practitioners into the activities of the directors at the relevant times, in addition to claims by trustees against the D&Os. Civil, regulatory and disqualification proceedings may follow as a result.
Therefore, whilst we may not see exactly the same exposures this time around, there are exposures nonetheless, perhaps spurred on by the more mature litigation funding market (which enables more claims to be brought), and more litigation tools in place which could deepen the exposures.