Financial Services Bill


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Q193John Howell: May I move you on to consumer redress? What would you like to see done differently from what is set out in the Bill? How would like to see the consumer redress issue approached?
Matthew Fell: The proposals, as set out in the Bill, are perhaps the single biggest concern for us. It is absolutely right, it is important that consumers have proper routes to redress and that needs to be built on, but we see no evidence that what is proposed in the Bill is proportionate to the problem to be tackled. In our analysis, the proposals for collective proceedings—contrary to what the Minister told the Committee earlier this week—do bear all the hallmarks of US-style class actions. It would be the first time that we are introducing collective proceedings on an opt-out basis in the UK. From our perspective, that is a pretty dangerous precedent and we think the chance of containing it, as set out in the Bill, once the Pandora’s box is opened, is very limited.
We would also draw attention to the fact that what is proposed in the Bill runs contrary to the Government’s own response to the Civil Justice Council report earlier this year, where it says you should introduce such measures only where there is evidence of need and after consideration of alternative proposals; that adversarial civil litigation is inherently risky and costly; and that regulatory options should be considered before court-based options are introduced. For all of those reasons, we see this as a fairly dangerous path to go down.
Q194John Howell: Adrian, do you want to comment on that, particularly the impact it is likely to have on the way your members run their businesses?
Adrian Coles: I would just add that I think this is being introduced in a very accelerated manner. This is of such fundamental importance, as I think you will gather from the CBI comments, that you would expect it to be an issue that is widely consulted on in advance before it turns up in a Bill of this nature in a pre-election period and rushed through the House. You would expect wide and lengthy consultation at periods and an opportunity for all concerned to make their points. It all seems rather hurried to me. That is the first point.
Secondly, I think there must be, even now I hope, a lot of consultation about how this is going to work. Who are the affected people in the class? How are you going to identify who they are? Are people going to be included in this class action without being told? What are the characteristics of the members of a class that are going to be included in a class action? This seems hugely complex and at the moment I do not understand how it is going to work, which means it could have all sorts of unintended consequences.
Angela Knight: There are two parts to the consumer redress issue: the collective action and the consumer redress schemes later in the Bill. To take the collective action first, I share the concerns of my two colleagues. It does go against the Civil Justice Council report recommendations, which are quite good recommendations because they were looking to see how, in a UK legal context, you could start to introduce that type of process. In the Bill, however, we have not only a US style, with all the issues that flow from it, but the ability to clog up the courts as a consequence. Therefore, there needs to be some careful thinking about who could be the representative body and how these things operate.
We also see in the Bill that just about everything of substance is passed to a secondary legislative process through regulations, and to introduce something into UK law that is foreign to UK law through regulations, for which there is only the possibility of a consultative period, strikes me as something that I would ask to be very carefully thought through before going down that route. It does not seem to be the way to proceed. Among all the things that are proposed to be deferred, what is of vital importance is not only who counts as a class, but the ability to lift the statute of limitations. To put the lifting of the statute of limitations into regulations is extraordinary. There could be reasons for changing the statute of limitations, for example, if you have someone in train while the case is being considered, and under the statute of limitations, it could time out. There could be reasons for doing it, but you do not do it through regulations. If you want to do that, it has to be face-of-the-Bill stuff. There are inadequate arrangements made for even the proper consideration of the process, as well as the process proposed here, which is US-style. It is a very risky step to take; it is a much deeper exercise than just a provision in a couple of clauses that throw it over to regulations at a later date.
On consumer redress, which seeks to give the FSA a better handle on areas where problems seem to be arising in interpretation of the rules, there is a point to having that. There is also, by the way, a point in having collective redress. Please do not think that I am against that; I just highlight the issues that need to be considered first. In this area, we are talking about giving the FSA new powers under what is known as section 404. Again, there is a lacuna—even a few—in this area under the existing financial services Act. If the FSA is to have greater ability to use its 404 powers to come to conclusions where rules are unclear and where issues need to be addressed, it cannot just have, as is set out in the Bill, the ability to decide, without external consultation, what it believes the law is, or could be, under certain circumstances. We have to bring in the legal system early. Otherwise, there will only be subsequent legal cases about whether the FSA assumed the legal outcome correctly, having not taken advice in this area, and just sought to act. That is the first thing.
Secondly, it would also be real sweeping powers, which I do not think would be appropriate, for the FSA to be able to proceed down that route without there being a check and balance, where there is some form of independent assessment as to whether the way in which the FSA believes its rules should have been interpreted three, four or five years ago was correct. That is what this is all about.
The wider issue that has not been addressed in the Bill, which worries me, is the lack of stability in the retail regulatory framework in the first instance. If we were starting again, what we would need to do—something that is much more appropriate—is to provide stability in retail regulation first. That means a much better co-ordination of how the law works between the ombudsman and the FSA, and, as a very significant part of retail regulation actually sits with the Office of Fair Trading, a reassessment of how its roles and responsibilities fit as well.
What we are doing in those two areas, in effect, is looking at fixes for a system that is not working particularly well. That is always a risky thing to do. If we are doing fixes, and if that is the way that Parliament ultimately decides to go, those fixes must have legal certainty about them—they cannot be left without legal certainty. Secondly, there must be checks and balances to work through; otherwise you are disbalancing the system. You are not hearing from the wider community of interest and we will ultimately have a worse outcome through the courts being bunged up with more judicial review and unfairness cases than we have at the moment.
Q195Mr. Hoban: On Tuesday, we asked Andrew Whittaker, the general counsel at the FSA, about the whole issue of collective redress and uncertainty. He seemed to believe that the processes within the FSA would be adequate. We discussed with him the bank charges case that concluded recently—it had been through an initial court hearing, then several layers of appeal before ending up at the Supreme Court—and asked him how he was going to make sure that the process for the FSA under the redress proposal would be equally robust. His comment was that it would have a legislative process, a cost-benefit analysis, formal consultation and scope for judicial review. He went on to say that he thought that would be speedier and more efficient than the court process. Would you agree with that analysis?
Matthew Fell: The two fundamental problems are the ones that Angela alluded to. One is that there is not sufficient check and balance in the system as currently proposed. The second would be the opportunity for both parties to have input at the opportune time. It seems to me, at the moment and as the Bill is drafted, that, in terms of the input of regulated firms, they do not seem to have the opportunity to put their voice into the mix at an early stage in the process.
Angela Knight: If I refer you to the Bill itself, clause 26 on section 404 states that the provision will apply if it appears to the FSA that,
“as a result, consumers have suffered (or may suffer) loss or damage in respect of which, if they brought legal proceedings, a remedy or relief would be available in the proceedings”.
What that is saying is that the FSA—the authority—is making an assumption about what would be the outcome of a legal process. Frankly, you cannot do that. There is either a legal process and decision, or there is not a legal decision. In other words, you might say that what that clause is giving to the FSA is the ability to act as prosecution, judge, jury and so on.
There is always judicial review, but judicial review as a check and balance in a system is a backstop—it cannot be part and parcel of a normal process. The clause notes that the provision applies if it “appears” to the FSA, but if it does not appear to the industry that it has to go to judicial review, or if the FSA decides that there is not a 404 issue, the consumers will say, “We don’t think that’s right,” and if they cannot do a judicial review here, they will go up the collective redress system. All we are doing is providing a greater degree of uncertainty that we feel is of very serious concern.
We therefore propose to bring a court involvement in at a very early stage. Not all courts take years and years, and we already have examples in the UK. In insolvency, for example, a scheme is put to a court, which decides on the basis of that scheme. If there is going to be a revision of section 404, broadly in the context envisaged by the Bill, we need to have the certainty of what the legal position is, which means an early involvement of the court so that decisions are not subsequently challenged. Secondly, there also needs to be some mechanism before we even get to that court for deciding what the issues that the FSA is seeking to address are.
Adrian Coles: I will just build on one other point, slightly off the question, but one point that Angela made earlier. There is another tripartite involved in all this: the FSA, the OFT and the FOS—Financial Ombudsman Service. Already talking about modest proposals this morning, it may not be a bad idea to have a council for consumer affairs, made up of that other tripartite that I’ve just talked about, because there is significant confusion at the moment—certainly in the minds of regulated institutions, and it would not surprise me at all if in the minds of consumers—about the respective roles of those three bodies and how the rights and duties of consumers are determined within that particular tripartite. Just a little example: right at the core of the market at the moment, the FSA is responsible for the regulation of current accounts when they are in credit and the OFT is responsible for the regulation of current accounts when they are in debit—overdraft. So, you can have the regulatory authority for someone’s current account changing several times a week. There’s a little example.
Angela Knight: Which is the instability of the retail regulatory system. That is where we should be starting, not looking at fixes of what is inherently an unstable regime in the first instance.
Q196Mr. Hoban: Is that not part of the problem? I wonder to what extent the FSA needs to sharpen up its act when it covers due protection of consumers if we think that collective action is the appropriate form. You are offering a heavily—tightly—regulated area. What is it that the regulators are not doing that means the consumers need to be in a position to take collective action?
The issue with the way that the FSA and FOS interact at the moment is that the FSA can, yes, make rules and interpretation of the rules; and the FSA can of course say, “In our view, this is the way that consumers ought to be treated in a particular area.” But because the ombudsman has to decide a complaint in a broader context, taking into account every aspect—its broader than just the rules—you have an inherent ability within the system for one side to come to different conclusions from the other. That means that if you have got an issue that is significant across the sector—or indeed even significant for one firm, because some firms are very large—the FSA can come to a conclusion about how that is dealt with, although that does not necessarily mean that the ombudsman ultimately, when looking at the complaints, comes to the same conclusion. There are a number of well-recorded incidents in which that has happened.
What needs to be addressed here is the ability for the FSA, first, to come in quickly—usually it is a rule interpretation, and I will come back to the reason for that in a moment. It needs to come in quickly with a rule interpretation and to clarify that interpretation, with that interpretation then to be applied by the ombudsman. That cannot really happen now. It can be done, but the ombudsman does not necessarily have to accept that clarification. The Bill does nothing to fill that problem. It only takes up the issues in more extreme cases.
Even now, if we are going to move to a greater degree of stability, the FSA, yes, needs to operate under high-level principles within the retail space—also have rules, but also have much more guidance as to how you can evidence the two by the rules. If you employ 1,000 people, you as a firm are actually doing that guidance anyway internally—there are very detailed steps as to how that rule is evidenced. So, if the FSA or indeed the ombudsman actually says, “Ah, but our view is different”, suddenly you have a very big change indeed. That role of how you give evidence that you have abided by the rule and clarification of what the rule means is vital if we are going to get a better system that is not always defaulting either to large numbers of complaints or mass consumer action.
Q197Mr. Hoban: But does the FSA have the power to do that early clarification? Is it a lack of will or a lack of powers preventing it from doing so?
Angela Knight: As long as you have a difference between what the FSA says that a rule means and how an ombudsman has to interpret it—I do not want to put words in the ombudsman’s mouth, but if you asked him the same question, he would come up with a similar answer to me. So, as long as you have a difference between what the FSA says is an interpretation and how the ombudsman then has to use it in looking at a case, you will have a tension in the system.
 
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