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? Angela
Knight: The Financial Services and Markets Act 2000,
under which we currently operate, did not envisage circumstances in
which you could have, for
example, internet campaigns or you could download letters off websites
and say something is unfair or mis-sold, therefore creating large
numbers of complaints going to an ombudsman and somehow needing to be
handled quickly and effectively. This is an environment that has
changed
substantially. 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. In
addressing 404 within the Bill—as it is outlined at the
moment—it binds the ombudsman into a decision. You might well
ask yourself why that was necessary. I
hope that, in a somewhat inarticulate manner, I have at least given you
the answer to why it is necessary, because at the moment the ombudsman
is not bound. As the ombudsman has to look at things from a different
perspective, he can and will come in many instances to a different
conclusion. That means that the resolving of issues early is made very
difficult
indeed. |
