There was a sharp intake of breath when those who work in financial services read what the FSA had said in its written submission to the Parliamentary joint committee on causation for loss arising from misselling. This is the committee which is scrutinising the bill to effect the Government’s plans to reform the regulation of financial services.
In its submission, the FSA said the Government’s proposed legislation provided a basis for the Financial Conduct Authority, when established, to deal effectively with misconduct and misselling. The FSA had in mind that the FCA would be:
“… more ready to intervene, making full use of its enhanced powers, to tackle potential and emerging risks to consumer protection and market integrity before they materialise, and in order to prevent large-scale detriment. This will include a new and intrusive approach to the way firms bring financial services products to the retail market…”
And then it said: “However, it is important for Parliament and society to recognise how these enhanced powers will operate in practice. 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. 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 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 to do so in the new legislation.
“This is a difficult issue that gives rise to real questions about how far the regulator’s powers should extend. 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.”
In other words, the FSA was saying that the public want it to be able to order a firm to pay redress even though the firm did not cause the loss. No wonder there was a sharp intake of breath.
It is difficult to believe that the British public would regard it as fair for a firm to be ordered to pay redress for a loss which it did not cause.
When presented with a set of facts and asked to reach a verdict, individual members of the British public are invariably fair-minded, something borne out by the fact that the jury system is a revered cornerstone of our administration of justice.
It is one thing to march with a placard calling for a reform of the way bankers are rewarded – that is a general call for reform of a broad grievance in an unspecific way – but it is quite another to suggest there should be a specific rule giving the FCA power to require a firm to pay money to a consumer without regard to whether or not the firm caused the loss.
To be fair to the FSA, its spokesperson is reported by Money Marketing as saying this was only a suggestion.
This suggestion, however, would have serious consequences. In the same way as the lack of a 15-year long-stop limit on Financial Ombudsman Service complaints puts FSA-regulated firms at a serious disadvantage compared with all other citizens, ignoring causation would have the same discriminatory effect on FCA-regulated firms.
Questions of causation are fundamental to the ordinary law and most people’s sense of fair play. It is good that the FSA should be constrained by the general law, at least in this area. In any event, it is not easy to see what rule could replace the ordinary law’s rules on causation.
Generally speaking, the ordinary law’s approach is to see whether the loss would not have been caused if the defendant’s wrongful act or omission had not occurred.
In other words, if the loss would not have occurred, then the wrongdoer is liable. That is known as the “but for” test.
On the other hand, if the loss would have occurred even if the wrong had not been committed, on what conceivable basis should the wrongdoer be made responsible?
The “but for” test works as long as there are not two or more possible causes that pass it.
If there is more than one possible cause, the court will have to decide whether, as the Law Lord Steyn has said: “The condition in question was a substantial factor in producing the result.”
Other judges have said that the guiding criterion is whether there was a sufficient causal connection to establish liability for the loss. But without some rules to limit the extent of the liability, there is a real danger that allocation of liability would become an unprincipled mess.
Another law lord, Lord Hoffmann, said in the case known as SAAMCO:
“Normally the law limits liability to those consequences which are attributable to that which made the act wrongful. In the case of liability in negligence for providing inaccurate information, this would mean liability for the consequences of the information being inaccurate.”
The provider of the inaccurate information would not be liable for a loss that would have occurred even if the information had been accurate.
The rule relating to fraud is wider. As Lord Denning said in a judgment in 1969: “The [fraudulent] defendant is bound to make reparation for all the actual damages directly flowing from the fraudulent inducement.”
But in the SAAMCO case, Lord Hoffmann added, “…Even if the maker of the fraudulent misrepresentation is liable for all the consequences of the plaintiff having entered into the transaction, the identification of those consequences may involve difficult questions of causation. The defendant is clearly not liable for losses which the plaintiff would have suffered even if he had not entered into the transaction or for losses attributable to causes which negative the causal effect of the misrepresentation”.
Thus, even a fraudster will not be held liable for every loss suffered by his victim. And difficult questions will arise as to which side of the line a particular loss should fall – on the claimant’s side or the defendant’s. But the point of the law on causation is to hold a balance, based essentially on common sense and fairness between the parties. It cannot be right to throw those rules out of the window in the financial services world.
Peter Hamilton is a barrister specialising in financial services at 4 Pump Court