The Financial Services Act 2010 was passed in the so-called wash-up of Parliamentary business after the announcement of the date of the general election earlier this year. That act introduced a statutory framework for “consumer redress schemes”.
In essence, a consumer redress scheme established under the act is one imposed by the FSA on a number of regulated firms in respect of widespread or regular failures.
A simple example would be the widespread misselling of a particular type of product. Indeed, if statutory consumer redress schemes had been available this time last year, the FSA may well have established one in respect of payment protection insurance.
A consumer redress scheme will consist of a set of rules under which each firm involved will have to:
- investigate whether it has failed to comply with requirements applicable to the activities in question; and then
- decide whether any failure revealed by the investigation has caused (or may cause) loss or damage to any consumers; and next
- decide what the redress should be made in respect of the loss or damage; and finally
- make the redress to the consumers.
In other words, a consumer redress scheme would require every firm involved in the relevant type of business to carry out a review of past business in a statutory framework.
The rules would be made by the FSA, after it had carried out its normal consultation. The rules would be prescriptive. They would define the period to be covered by the scheme, so that all transactions falling within the period would have to be examined. The review itself would have to be completed within a specified time.
The FSA would set out in detail how each case should be analysed and evidence assessed. It would give examples of the failures it required the firm to investigate, the kinds of redress to be offered, and the way in which the amount of redress was to be calculated.
There are a number of comments to be made about these schemes. The first is that consumers would only be able to get redress under a scheme if the failures by the firm concerned would entitle the consumer to a remedy in legal proceedings. In other words, the scheme would be based on applying the ordinary law, so redress would only be available if the consumer had a legal right of action.
Thus, the examples which could be set out in the rules, as described above, would have to be based on the law. They would have to be examples of things done, or omitted to be done, on the basis of which a court or tribunal would decide that a claimant had a legal remedy.
On the other hand, the redress which can be provided for under the scheme need not be limited to remedies which can be awarded by a court.
Thus, for example, the rules could require a firm to offer a top-up, or other improved benefit, or to alter the terms of a contract. But the FSA must limit the forms of redress to what it considers just in relation to the kind of case in question.
Second, as one would expect in a scheme based on the ordinary law, the law of limitations would apply, including the long stop. But time would stop running for the purposes of limitation, once a scheme was established. So if a consumer’s claim was not statute-barred when the scheme was established, he or she would still be entitled to appropriate redress even if the relevant limitation period had expired before the firm got round to reviewing that case.
That is fair and it prevents firms from benefiting from their own delays when implementing a scheme. A similar rule applies to court proceedings – the limitation clock stops when the proceedings are issued.
The rules could make provision for the scheme to be operated by one or more so-called “competent persons”. In other words, an independent third party might be instructed to carry out the case-by-case reviews. If a large number of cases have to be examined, it is likely that firms would have to buy in extra resources and the rules could provide that the FSA would have to approve the providers of that extra resource.
The scheme rules can be challenged by anyone with a sufficient and legitimate interest in them. The challenge would be made to the Financial Services Tribunal, and would generally be by way of judicial review.
It follows that, in deciding the matter, the tribunal would consider factors such as whether the FSA has acted irrationally or unreasonably, or has taken into account irrelevant factors or failed to take into account relevant factors. If the application was successful, the tribunal would require the FSA to think again.
There are two areas, however, where the tribunal would be able to go further.
At the heart of a scheme will be the rules setting out when, and in what circumstances, a case is to be treated as one in which a consumer has a claim entitling him or her to redress.
As explained above, those aspects of the scheme must be based on the ordinary law and the tribunal will be able to decide whether the FSA has got the law right.
The act deals with the way in which the Financial Ombudsman Service must handle cases that fall within a scheme.
If a consumer makes a complaint to the FOS at a time when a scheme is in operation and the complaint relates to a matter to which the scheme applies, the FOS must decide the case by applying the rules of the scheme.
That means that the FOS must apply the law as embodied in the scheme.
The ombudsman must not decide the case in accordance with its own standard formula; that is “by reference to what is, in the opinion of the ombudsman, fair and reasonable in all the circumstances…” The same applies if the complaint is made after the scheme is closed – the FOS must apply the rules of the scheme. Further, the FOS cannot award more than the current maximum of £100,000.
In its guidance relating to its approach to consumer redress schemes, the FSA has said that the FOS proposes to refer complaints back to the firm if the scheme is still in operation. Also, the FOS proposes to dismiss, without considering the merits, any complaint made after the firm has dealt with it under the scheme if, for example, the complainant is seeking a form of redress not available under the scheme.
Further, the FOS will consider whether to put on hold any complaints which will be dealt with under a scheme which is in the course of being established.
It goes without saying that the FSA will be able to use its usual disciplinary powers to ensure that schemes are operated properly and within acceptable lime limits.
Generally, however, we should welcome the fact that all such schemes will operate by applying the ordinary law, and not the palm tree justice meted out by the FOS or in accordance with the FSA’s own ideas of fairness. That will be particularly important when the FSA becomes the Consumer Protection and Markets Authority.
Peter Hamilton is a barrister specialising in financial services at 4 Pump Court