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Long arm of the law

The Government may be accused of being ineffectual and lacking in substance but, as IFAs know only too well, some of its initiatives can have far-reaching implications.

The new Competition Act could allow smaller IFAs to sue big firms which get better commission from providers, while the Human Rights Act is set to change the Financial Ombudsman proceedings completely by giving both IFAs and complainants the right to a full public hearing.

The Competition Act 1998 makes explicit for the first time the right to sue for breach of competition law. Potentially, this could allow smaller IFAs to sue nationals and networks which use their size and market position to get better rates of commission from providers. However, a consensus is emerging that the legislation will not apply to IFAs.

Towry Law marketing director Mike Bowman says: “This legislation is designed to catch firms that abuse their dominant market position, so the fragmented nature of the IFA sector makes it unlikely that it will affect us.

“Providers understand the relative profitability of different systems of IFA distribution. Nationals are the most profitable system. If we can prove that dealing with a national gives the providers a profit advantage, then preferential commission rates will be fully justified under the legislation.”

Towry Law should be familiar with these arguments. In March, Money Marketing revealed that the national IFA had written to life offices demanding commission terms up to 10 per cent higher than the national IFA rate because of its distribution muscle. The strongly worded letter said Towry&#39s greater distribution, increased cost savings and gro-wth “should be reflected in our commission remuneration”.

But life offices disagreed and viewed the move as trying to hold them to ransom.

A company will only be considered to have a dominant position under the legislation if it has a market share of at least 40 per cent.

Davenport Lyons Solicitors competition law specialist David Marchese says: “If you are not in a dominant position, then you can be as unfair as you like and, if an agreement can be objectively justified as an effect of the market, that is, &#39They offer us better service, so we pay them more commission&#39, then it is legal.”

This means a small IFA suing a bigger firm for breach of competition law will first have to convince the courts that the bigger firm has a dominant market position. Then it will have to prove that the bigger firm is abusing that position by getting more commission from providers through coercion and not simply through a mutually beneficial agreement.

Historically, the procedures of the various financial ombudsman services have been informal, with the emphasis on a quick, sensible and low-cost resolution to problems. Cases rarely reach the hearing stage. However, hearings are strictly controlled by the ombudsman.

This approach will end once the Human Rights Act becomes law on October 2, enshrining the right of both parties in the ombudsman process to a full public hearing.

When the hearings are held for the satisfaction of the two parties rather than to inf-orm the ombudsman&#39s judgment, they will become adversarial.

The new Financial Ombudsman Service, which will soon replace the eight different financial ombudsmen, fears that if it is unable to check this trend, the process could be transformed into a lengthy and expensive approximation of a court case.

FOS communications officer Iris Baker says: “Informality is the backbone of the ombudsman service. In the past, people have not had to worry about standing up and making a case for themselves. People see it in terms of the consumer being able to demand a hearing but now the firms can demand one as well.”

In fact, firms will probably be more likely to demand a hearing than complainants, as they are more likely to have good presentational skills at their disposal. Because parties have the right to representation, the involvement of lawyers will increase.

The FOS fears that the ability of some firms to afford top-flight representation in the new hearings could make the proceedings unequal and intimidating for the complainant, something which the whole ombudsman process is currently set up to avoid.

Towry Law&#39s Bowman says: “The ombudsman service is already slow, complicated and involved. The Human Rights Act will add an extra layer of complication, pushing up costs.”

As to whether Towry Law would employ lawyers to represent it in the new hearings, Bowman says: “As a well-funded major player, we are better placed to ensure we are well represented when we need to be.”

Bowman does not think ombudsman cases will become a problem for national IFAs but fears that smaller firms may have difficulty dealing with escalating costs.

Solicitor Jonathan Davies, a partner in City law firm Reynolds Porter Chamberlain, says: “There is no doubt the ombudsman is a court and will be seriously affected by the Act.”

Clearly, the Act could tip the scales in IFAs&#39 favour. It could also lead to a massive escalation of costs for both parties and clog up the ombudsman service to the detriment of both IFAs and consumers.

But this could be just the first of many repercussions that the Act will have on financial services regulation. Legal opinion is that although the legislation that set up the FSA was amended several times in order to prevent possible infringement of human rights, parts of it could still prove illegal under the new Act.

Clifford Chance litigation partner Michael Smyth says: “No one outside the FSA would claim that the Financial Services and Markets Act is Human Rights Act-proof.”


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