The increasing spotlight on redress schemes
Earlier this month, the Financial Conduct Authority (“FCA”) and the Financial Ombudsman Service (“FOS”) published a joint Call for Input “to seek views on how to modernise the redress system, so it better serves consumers and provides greater stability for firms to invest and innovate”. This was presaged in the Chancellor’s Mansion House address the prior day, where she stated that “our approach to redress can cause uncertainty and be a drag on investment” which was reported in the press as a “call for an overhaul of the UK system for consumer redress in the financial services sector, as lenders brace for a potential multibillion-pound bill for alleged mis-selling of car finance” (FT).
Increased attention to redress schemes
A potted look through the year shows a steady increase in attention paid to redress schemes, and not just in financial services. In January, the Public Accounts Committee asked the National Audit Office to conduct a thematic review of government compensation schemes and, in February, Therese Chambers of the FCA spoke about “prioritis[ing] compensation to consumers over fines where that is the right thing to do”. In March, the FCA approved a redress scheme relating to Link Financial and, in April, Parliament debated redress schemes (on the heels of reports such as the February 2023 All-Party Parliamentary Group on Fair Business Banking’s, “Building a Framework for Compensation and Redress”). In May, a paper on reform was suggested by the Horizon Compensation Advisory Board and the National Audit Office reported back in July. Back in financial services, in August the FCA approved redress for H2O investors while in October the Court of Appeal confirmed the FCA’s wide powers with regard to individual redress schemes in the Bluecrest case.
At the more general level, MPs have been pushing for more effective ways to deliver redress in mass cases. They point to scandals around Windrush, Contaminated Blood and the Post Office (among many) and have noted three main points. First that the systems for identifying problems and investigating facts are slow -- often the relevant regulator has not spotted issues and is too late -- and generally have required court cases or Public Inquiries. Second, that schemes tend to be built up from scratch each time. Third, that most of the time the organisation or government department running the redress scheme is the very organisation that caused the problems in the first place. In line with this, the National Audit Office’s report recommended a centre of expertise be set up to provide guidance for public bodies and that consideration should be given to a new standing public body to act as a compensating authority to administer future schemes.
A principal catalyst for this activity by Parliament and the regulators in both the financial services and more general arenas appears to be a desire to cut out professional representatives, be they claims management firms or lawyers, as well as funders. The 18 April 2024 Parliamentary debate made that clear, as does the Call for Input, with both referencing the portions of compensation taken in fees. The FCA in particular appears scathing, suggesting that professional representatives, “can impede consumers’ access to free-of-charge services while not tackling large volumes of complaints promptly and effectively.”
Without perhaps stopping to ask what would have happened without the involvement of representatives in most of those cases -- a separate topic not addressed here -- there is a clear general determination to make this side of consumer protection more efficient, more structurally sound, and less prone to adversarial dispute. The rest of this piece discusses the Call for Input and redress in financial services.
FCA’s redress powers
The FCA has two main avenues to impose redress schemes, either by industry-wide schemes or by individual redress schemes.
The industry-wide power is under s404 of FSMA and has been used in relation to the Arch Cru and British Steel pension transfer scandals, targeted at financial advisers. To impose such a scheme, as well as a consultation, the FCA needs to meet certain requirements relating to loss, causation, duty and actionability. With regard to actionability, a well-commented on limitation of s404 is that it only gives rise to compensation to ‘private persons’ who have a right of action under s138D which, very generally, allows retail investors to sue for damages for breaches of certain FCA rules. This does not include breaches of Principles, or of the Consumer Duty.
The individual redress scheme powers are found in s55, under which the FCA can put in place own-initiative requirements or vary permissions in a way that allows it to impose redress or remediation schemes. The recent Bluecrest case confirmed that in these instances, the FCA is not constrained by the same criteria as is needed for s404 redress, such that there is in effect a low bar for the exercise of these powers.
There are other powers of redress contained in s382, 383 and 384 of FSMA. S382 allows the FCA to apply to Court for an order for restitution against a firm and has been used on a number of occasions, in particular where operations or firms are not authorised. S383 is similar and is relevant to market abuse cases.
S384 allows the FCA to require a provider of financial services to make redress where that person has contravened a relevant requirement (not confined just to FCA rules) and has profited (or has caused loss). S384 is an administrative power, meaning the FCA does not need to go to a Court for approval to order restitution be made and, further, while it has its own statutory criteria (including requiring an “adverse effect”), it does not have the s404 constraints.
The FCA can also institute redress schemes in relation to anti-competitive behaviour under the Competition Act.
Finally, there are voluntary redress schemes, which have seen an increase in use. A voluntary scheme was set up with banks involved in interest rate hedging products under which around £2.2 billion was paid. More recently, earlier this year, Link Financial implemented a scheme of arrangement whereby it paid restitution of up to £230 million. And in August, the H2O Group volunteered to secure the sum of €250 million to be held for redress purposes.
The Call for Input
While there is a sense of rush in the Call for Input, it is evident that the FOS was overwhelmed by claims relating to PPI and is trying to avoid similar scenarios. As stated above, the regulators make clear their annoyance with professional representatives and have stated that individual FOS claims involving professional representatives will be charged at £250 (going down to £75 if successful) whereas a consumer representing themselves can use the FOS service for free. No doubt some of the responses to the consultation will query whether this is good regulation or an attempt to dampen activity, especially if it is not accompanied by increasing efficiency.
At the same time, the FCA and FOS have stated that they have entered into a new agreement with each other, with clearer expectations on how they cooperate, including with regard to mass redress events. As for that cooperation, concerns have appeared to be about the consistency between the FCA and the FOS, where, for example, there may have been inconsistencies between FOS decisions and prior FCA guidance, leading to uncertainty for the industry. Those industry criticisms may be overplayed, as it is well-known that the FOS operates to different rules. And the industry concern, expressed in the Call for Input, that the approaches of the FCA and FOS with respect to mass redress issues stifle innovation or international competitiveness probably deserves some more public unpacking before being accepted.
It is perhaps worth remembering that in 2010 proposals for allowing collective proceedings (including opt-out class actions) in financial services, to improve consumer redress, were winding their way through Parliament before that year’s general election. Commentators have now observed that “regulatory redress schemes” are emerging as the newest “redress technology” and it has been suggested that these work well in the financial services sector because regulators have increased opportunities to access information and to intervene at an early stage. That may not have been everyone’s experience in the past, and certainly the MPs in last April’s debate were not convinced. But as the FCA shifts to “outcomes-based” regulation, and shifts its attention to restitution for consumers rather than just deterrence, we should expect continuing developments in this area.
The Call for Input requests responses by 30 January 2025 and we will report further on this once the FOS and FCA respond to the responses they receive.