The FSA is seeking to force financial services firms to provide 100 per cent redress to customers who have suffered losses even if the loss was not caused by the firm’s faulty advice, according to law firm Reynolds Porter Chamberlain.
Currently, if a financial services firm breaches FSA rules when providing advice they are only liable to compensate their customer for any losses that can be directly attributed to the faulty advice. Firms can currently decline to pay compensation if they are satisfied that their breach did not cause the loss.
But RPC says the regulator is seeking the power to disregard the law of “causation” and if Parliament accepts the FSA’s request, firms will be liable to compensate customers for all losses when their actions breach the FSA rulebook.
The FSA invited Parliament to consider the law in its memo to the joint committee on the draft financial services bill, saying: “Our experience is that members of the public and Parliamentarians have been of the view that – as a matter of public policy – the breach of the FSA’s rules should in all cases entail the consumer receiving 100 per cent redress.”
The memo continues: “However, the FCA’s ability to ensure that consumers receive redress is constrained by the general law, in particular by questions of causation. If the breach of rules either did not cause the loss, or was merely a contributory factor, the FCA will not be able to require firms to pay full redress.
“If society expects as a matter of public policy that the regulator should be in a position to require greater levels of redress to be paid then the FCA needs to be given a clear mandate and powers to do so in the new legislation. This is a difficult issue that gives rise to real questions as to how far the regulator’s powers should extend and we would very much welcome the Committee debating this matter, in particular to achieve further clarity as to the FCA’s mandate in this area.”
RPC partner Simon Laird says: “Regulated firms will be very disappointed if they find themselves forced to compensate customers for losses that may be unrelated to a minor technical breach of the rules.
“Small technical breaches in documenting advice, such as failing to send the customer a suitability report, rarely impact investment decisions but could mean the firm is liable for the customer’s total losses from a financial product if the FCA is granted this power.”
The FSA says the proposal included in the memo to the committe is only a suggestion to be considered by MPs and should not be taken as firm FSA policy.