The Financial Services Bill has had its Second Reading debate in the House of Commons and is now in committee. It includes measures enabling US-style class actions to be brought by consumers. How far this will alter the balance of power between consumers and financial services firms remains to be seen. Jonathan Mayner reports.
Topic: Financial services
Who: Financial Services Authority
When: November 2009
Where: United Kingdom
Law stated as at: 17 December 2009
On 19 November 2009 the Financial Services Bill was introduced to Parliament. The Bill proposes a number of new measures which are designed to bolster protection of consumers in the financial services sector. The most commented-upon of these measures will facilitate forms of collective redress, which may or may not represent a move toward US-style class actions. Less controversially, the Bill also aims to enhance the Financial Services Authority's (the "FSA") ability to order financial services firms to set up consumer redress schemes.
What is collective redress?
Collective redress or more colloquially "class actions" are phrases commonly used to describe legal proceedings in which claimants whose claims exhibit the same, similar or related points of fact or law bring a joint claim in a single set of proceedings. Under current UK law, any collective claims are conducted on an opt-in basis which means that individual claimants, usually having already issued separate claims, are identified and may be grouped together if they so wish. By contrast collective redress procedures in the US (referred to as class actions) are conducted on an opt-out basis, in which persons with similar claims are included in the united proceedings unless they expressly opt out of it.
Collective claims under the Bill
Under the measures proposed by the new Bill, a court would have the power to authorise a third party representative or representative body to bring a collective action on behalf of consumers against FSA-regulated firms, consumer credit businesses and payment service providers. The court would also have discretion to determine whether the collective action is to be conducted on an opt-in or opt-out basis. While opt-in collective actions are already a feature of UK law, the new measures would facilitate the process, requiring only that potential claimants notify the representative bringing the claim within a specified timeframe.
Similarly, where a claim was to be brought on an opt-out basis, a claimant who did not wish to be included in the collective claim would have to notify the representative of their wish to be excluded from the claim. It is envisaged however that potential claimants domiciled outside the UK would not be covered by any opt-out scheme and that they would have to separately opt-in. Another proposed feature of opt-out proceedings is that certain issues in such actions may be determined on an opt-in basis, allowing for greater flexibility and a degree of control for individual claimants.
At present the Bill allows for the court to make awards of damages without having undertaken an assessment of the amount recoverable in each individual claim. This clearly runs the risk of over or underpayment for any given claimant involved and it is not clear precisely how such an award will be calculated.
The Explanatory Notes to the Bill make it clear that a court, when hearing and application from the FSA, Office of Fair Trading or Financial Ombudsman Service (the "FOS") for leave to bring collective proceedings, must consider the most appropriate means for such bodies to deal with the matters concerned. It may be more appropriate for example that the FSA impose a fine or order that a firm set up a collective redress scheme to handle consumers' complaints. It is likely however that these regulatory bodies would be in favour of the higher profile and impact of leading a collective action on behalf of consumers.
Consumer redress schemes
The FSA currently has the power, although it rarely exercised, to order financial service firms to set up consumer redress schemes where many consumers have similar or related complaints in respect of an FSA authorised firm. The Bill aims to strengthen this power and encourage the FSA to make such an order where it considers that there has been a widespread or regular failure to comply with the FSA's rules and that consumers may have suffered loss as a result.
New FSA rules would specify what constituted non-compliance, what mitigating or aggravating factors to consider, what type of redress would be most appropriate and timescales. However the firm in question must review its own practices and make determinations as to whether they were compliant and whether consumers had suffered loss. Should consumers feel that the scheme has not adequately dealt with their complaint, they could refer the matter to the FOS which can rule on what the correct outcome should have been. The FOS would only be able to order monetary awards up to the maximum available under the scheme, but could make recommendations that firms pay a larger amount.
Why this matters:
On paper at least, the introduction of collective actions such as these signifies a considerable redistribution of power in relations between consumers and financial services firms. That said, much of the effectiveness of these proposals depends on additional sets of rules not contained in the Bill.
Firstly, the Treasury would have a general power to make regulations about collective actions and would, among other things, determine the scope of such actions and when and against whom they may be brought. The second set of rules which would be required are detailed procedural rules to be established by the court. These regulations and rules will need to be carefully drafted so as to strike an appropriate balance between providing appropriate and effective consumer redress and deterring unmeritorious claims.
Concerns about collective redress measures abound in the financial services sector. Fears that making it easier to bring collective actions will open the floodgates to a US-style litigious compensation culture have some merit, but could be assuaged by careful and considered drafting of the Treasury's regulations and the court's procedural rules. The worry is that as the Bill seems set to be rushed through before the election which is likely to take place in May 2010, these measures may be set in motion sooner rather than later. Considering that there is still much in the Bill that would benefit from robust debate, and that it was not debated at its First Reading, the financial services sector's concerns may well be justified.
Proposals to bolster out-of-court mechanisms for collective redress, such as consumer redress schemes may go some way towards providing a viable non-litigious alternative to collective actions. Consideration must also be given however to how effectively such schemes compensate consumers and whether the FSA and FOS need to be given greater powers in relation to compensation-awarding to make these schemes a real alternative to collective actions in the courts rather than a soft option.
With the date for the Second Reading of the Bill not yet decided, much hangs in the balance.