Plans to improve consumer redress against financial firms being 'rushed through', says ABI

The new law would also strengthen the power of the Financial Services Authority (FSA) to order firms to set up consumer redress schemes if it appears there has been a widespread failure to comply with the rules about how firms carry out their activities.

But if the measures are to become law, the Bill will need to be passed before the next general election, which effectively means within the next six months.

Maggie Craig, acting Director General of the Association of British Insurers criticised the hurried nature of the legislation. “The changes to the FSA’s powers on consumer redress are of profound importance, and we are alarmed this is being rushed through without proper consultation with industry," she said.

"This is too important not to get right.  We are also worried over moves to court-based collective redress. Pushing the UK toward a US litigation culture would create costs for consumers and businesses that far outweigh the benefits." 

Class actions

In July, the Government announced it would not be introducing a generic right to bring class actions in English courts for all types of civil claim. Any new procedures would be considered on a sector-by-sector basis and only introduced if there was clear evidence of need. 

But its White Paper, Reforming financial markets, published on 8th July, identified financial services as one sector where a more effective system for collective redress was required.

Under the Bill, a court would be able to authorise a representative or representative body (such as a consumer group) to bring a class action on behalf of consumers whose financial services claims raised the same, similar or related issues of fact or law. 

Potential defendants would include all firms authorised by the FSA to carry out regulated activities, appointed representatives of FSA-authorised firms, payment service providers and firms engaged in consumer credit activities. 

The court would also decide whether the proceedings should be brought on an 'opt-in' or an 'opt-out' basis.

Current procedures for collective actions in English courts are based on an opt-in model, which means that individual claimants must be identified before their claims can be grouped together. Generally, this means they must have already issued their own proceedings. The new procedure would make this process easier, by merely requiring potential claimants to notify the representative of their claims within a specified time.

Where proceedings are brought on an opt-out basis, all persons with a similar claim are automatically included in the action unless they take steps to opt out from it. Class actions in the US are based on an opt-out system.

Under the proposed procedure, if the court ordered a collective action to be brought on an opt-out basis, a potential claimant who did not wish to be included would have to notify the representative within a time limit set by the court. Any potential claimant living outside the UK, however, would not be covered by an opt-out scheme and would have to notify the representative to have their claim included.

The Government envisages compensation being awarded either as a lump sum, based on the court's estimate of the likely recoverable damages for each claim, or in accordance with a formula. The court would also be able to direct how the money is to be held and distributed and whether any part of it is to be used to meet specified costs.

Consumer redress

The Bill also aims to strengthen the FSA's current (but underused) power to order individual firms to set up consumer redress schemes by enabling the regulator to impose such schemes on an individual or an industry-wide basis as appropriate.

Under section 26, where the FSA concludes there may have been a "widespread or regular failure" by firms to comply with the rules and it appears that consumers have suffered (or may suffer) loss or damage as a result, the FSA would be able to make rules requiring each relevant firm, or all firms of a specified description, to set up a consumer redress scheme.

The firm would have to review whether it was in breach of the requirements, whether this failure has caused, or may cause, loss to consumers and decide what the redress should be. The FSA's rules would specify what acts or omissions constituted a failure to comply, the factors to be taken into account, what kind of redress would be suitable and any time limits or cut-off date.

A consumer covered by the scheme but dissatisfied with the way a firm has dealt with his complaint would be able to take the matter to the Financial Ombudsman Service (FOS), which would decide what the outcome should have been. Any monetary award made by the FOS would be limited to the maximum payable under the scheme, but the Ombudsman would be able to recommend that the firm pay a larger amount.

The Bill had its first reading in the House of Commons, without debate, on 19th November. No date has yet been confirmed for the second reading.