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Categories:Regulation

Class clash on the bill

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Laurence Lieberman, partner, and Tom Oliver, associate, in the commercial disputes group at Taylor Wessing assess the implications of the Financial Services Bill and pick out the threat of class actions as needing particular scrutiny in Parliament

Parliament: Introduction of class actions in Financial Services Bill needs close attention

Parliament: Introduction of class actions in Financial Services Bill needs close attention

The Financial Services Bill, has grabbed the headlines for its provisions relating to the banking crisis, including the proposed establishment of a Council for Financial Stability comprising the FSA, Bank of England and the Chancellor, and the proposed power enabling the FSA to tear up bankers’ bonuses.

However, an important aspect of the bill which has not received as much attention in the media, nor a significant proportion of debate time during its passage through Parliament so far, is the introduction of class actions (or collective redress) for claims against financial services firms.

The current position
Collective redress provisions do already exist under English law and there are currently two ways in which group litigation can be brought by individuals.

First, representative actions allow a lead claimant to bring a case on behalf of a class of individuals. This requires all the claimants to have the same interest in the claim (broadly, the requirement for a common interest, grievance and remedy).

Second, since 2000 the courts have been able to grant group litigation orders. These are a way of dealing with a multitude of individual claims which have a common legal or factual basis.

They have not proved popular. According to HM Courts Service, in 2009, only two group litigation orders were made. Furthermore, claimants must expressly put themselves forward or opt in to the GLO, which often results in a reduction in the size of the class.

Collective redress provisions in the Financial Services Bill
The proposals for collective redress in the Financial Services Bill radically alter the current position for group litigation in the financial services arena.

It is proposed that where consumers (defined widely enough to be any person or company who has used the services of a firm carrying on regulated activities) bring financial services claims (which are defined to encompass a wide variety of claims against a wide variety of financial services entities), the courts have the discretion to determine whether the proceedings should be on an opt-out or opt-in basis.

If opt-out is followed (the common US model), unless an individual decides to expressly exclude themselves from the group they will be assumed to be part of it.

The opt-out provisions exclude non-UK domiciled individuals unless they expressly notify the group representative that their claim should be included.

Given the substantial number of UK non-domiciled customers receiving financial advice or sales from a UK regulated firm, ensuring such potential claimants are made aware of the group action will be important.

Historically, it is the advisers and sellers of financial products and services that have more often been the target of claims but the provisions are drawn widely enough to include both product providers, as well as the retail distribution chains and other advisers and sellers.

Lack of clarity
For proposals of such significance, the bill is short on the specifics of how the new provisions will work. The details have been left for secondary legislation or court rules which will not of course come under the same Parliamentary scrutiny as the bill. In particular, the position on the following matters remain unclear.

Opt-out
The practicalities of the proposed system have not been fully articulated. In particular, it is unclear how claimants are to be identified when they do not expressly join the proceedings.

Scope of the claim
For the court to agree that group litigation is appropriate requires “the same, similar or related issue of fact or law”.
What this means in practice is not clear and it could be that cases are heard together where there are different facts or even different legal causes of action.

This has the potential to become difficult to manage, particularly when the courts attempt to make the causal link between the breach of contract or duty of care and the loss suffered.

Damages
The bill does not provide any clear rules on how damages are to be assessed or distributed within a group.

Instead, the Treasury would be handed wide-ranging powers to pass regulations, which would allow the court to assess the loss of the group, rather than individuals. The distribution of the damages awarded to individuals may be done according to a formula.

The regulations will also specify how undistributed damages ought to be distributed (for example, to a charity). The larger the group, the more likely it would be that any damages would be on a rough and ready basis.

This may put some claimants off joining the group litigation on the basis that they would be more likely to secure greater damages if they brought a private claim.

Limitation periods
There are potentially very wide powers to amend the applicable limitation period. This could cause significant uncertainty for financial services firms as they may find themselves open to litigation after the expiry of the six-year limitation period for bringing these types of claims. Again, any such rules are to be made by way of Treasury regulations.

Concluding thoughts
If the bill is passed in its current form, it will significantly change the current approach to class actions, at least in the financial services context. It may well also serve as a model for the introduction of similar legislation in other commercial spheres.

The potential for large-scale group financial litigation is clear, continuing the strong current political tide to empower and protect the consumer as seen in recent FSA pronouncements. In January, Lord Justice Jackson published his long awaited review of how litigation is funded. If his proposal to introduce contingency fees is implemented, there would be an even greater incentive for claimants (and their lawyers) to pursue class actions.

Concerns remain that with so much attention focused on the bankers’ bonuses and the other provisions, unless the bill’s current drafting is scrutinised in the remaining Parliamentary debates, this important area of the bill may be passed without undergoing sufficient Parliamentary scrutiny.

If this happens, the financial services industry will need to carefully monitor the implementing regulations - or prepare for an increase in US-style class actions.

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