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The collective appearance

Peter Hamilton is a barrister specialising in financial services at 4 Pump Court

The Government has introduced a new Financial Services Bill in Parliament. The bill is being given a high priority and it therefore stands a reasonable chance of reaching the statute book before the general election.

The scope of the bill is wide but one aspect which has not yet attracted much attention is the proposed introduction of collective court proceedings. If the bill is enacted in its current form, it will provide the statutory framework for such proceedings.

The background to this proposal is the Government view that swift and effective redress of consumer complaints is a crucial factor in the maintenance of confidence in the financial services sector. But backlogs of complaints to the Financial Ombudsman Service about similar issues can, and do, build very quickly.

The Government wants a process which is attractive to use in situations where large groups of consumers allege that they have suffered detriment and loss at the hands of regulated firms, so that they can take legal action against those firms to recover damages.

In its White Paper, Reforming Financial Markets, the Treasury says: “The FOS is not primarily a vehicle for collective redress because it is designed to deal with complaints by deciding what is fair and reasonable in all the circumstances of each individual case.

“It cannot decide a case in the absence of a complaint, although many people may have been affected by the alleged conduct. Its decisions are not binding on an individual consumer or group of consumers…”

It continues: “The Government believes the emphasis should remain on ensuring that firms compensate the consumer voluntarily. When that is not possible and many consumers are affected in a similar way, there should be routes to collective redress that can deal with claims more efficiently, reduce the time that claimants may have to wait, and reduce the volume of individual cases dealt with by the courts or FOS…” Hence, the proposal.

The new procedure would be available where there are many claimants, all of whom have claims arising from financial services against one or more firms and where there are the same, or similar or related issues of fact or law.

In those circumstances, the court could permit all those claims to be dealt with collectively and tried together. Thus, a court will be in a position to make findings on facts and law which apply to all the individual claimants or to groups of them.

Under the new procedure, there will have to be a representative claimant who will bring the proceedings and run the case on behalf of all the possible claimants. There will be no automatic right to start collective proceedings and the representative will have to apply to court for permission to do so.

The representative need not have any direct interest in the outcome of the case. Indeed, a body such as the FSA could apply to institute collective proceedings on behalf of a group of investors or consumers.

Further, each represented, need not have a claim against all of the defendants.

It is noteworthy that a collective proceedings’ case could relate to matters that arose before the bill becomes law. Issues such as the alleged misselling of payment protection insurance or of structured investments could therefore be dealt with in collective proceedings.

When making a collective proceedings’ order, the court will direct that the proceedings are to be brought on either an opt-in or an opt-out basis.
This means that if the proceedings are to be brought on an opt-in basis, every potential claimant has to decide whether to join in the proceedings or not and a decision to opt in has to be made by a specified date.

The claimants involved in the case, and able to benefit from the result, will therefore be limited only to those who choose to join in.

On the other hand, if the proceedings are to be brought on an opt-out basis, the case will be brought on behalf of every individual who has an appropriate claim, except those who choose to opt out by the specified date.

When giving its final judgment, or when making an order in the course of the proceedings, the court will be able to direct that all represented persons, or only those so specified, will be bound by the judgment or order.

It will also be able to direct that its order or judgment will not bind represented persons. This means that a claimant who is not bound by the judgment will have to sue on an individual basis.

The Treasury will be given power to make regulations governing collective proceedings. Those regulations could provide that the FSA, the FOS and the Office of Fair Trading would be entitled to take part in any application for a collective proceedings’ order.

The regulations may permit the court to deal with the question of damages without assessing the loss in respect of each individual claim. Instead, it could have power to make a single award of damages in respect of all the claims involved, based on its assessment of the total amount of damages likely to be recoverable in respect of each claim. The damages would be paid to the representative whose job it would be to distribute the amount of the award in accordance with the court’s directions.

The court is likely to approach the question of costs in much the same way as it does at presen but there could be new rules that require specific costs to be paid out of damages.

Under this procedure, a court will be able to sort out whole categories of cases for the benefit of all consumers who might be affected and against all those providers and sellers involved in the marketing.

Very few, if any, individual claimants would need to be actively or directly involved in the proceedings. After the court has given judgment, it ought to be possible for every represented claimant to establish easily what, if anything, is due to him or her.

An important aspect is that the Treasury could, by regulation, “modify the effect of any limitation provision”. This means the Treasury would have wide powers to rewrite the Limitation Act 1980 for the purposes of collective proceedings and defendants would probably lose the protection of limitation defences.

If that were to happen, it would have wide repercussions for all financial services firms. It would also amount to discrimination against firms in the financial services sector by treating them differently before the law from all others and would raise again the question of a potential breach of the European Convention on Human Rights. That aspect of the bill should be examined by the Parliamentary Joint Committee on Human Rights.

On a more positive note, however, in a collective proceedings’ case, the court would otherwise apply the ordinary law. It would not apply the “fair and reasonable” approach of the FOS.

As this is a new concept in the UK at least, courts are likely to tread somewhat warily down this new path.

The first collective proceedings are likely, therefore, to be where there are comparatively few claimants and perhaps only a very few defendants, so that the courts can feel their way through the inevitable difficulties of organising the issues of fact and law that need to be decided.


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