 House of Commons |
Session 2009 - 10 Publications on the internet Financial Services Bill |
The Committee consisted of the following Members:Chris Stanton, Eliot Wilson,
Committee Clerks † attended
the Committee Public Bill CommitteeThursday 14 January 2010(Morning)[Mr. Joe Benton in the Chair]Financial Services BillWritten evidence to be reported to the HouseFS
13 Herbert Smith
LLP FS
14 Herbert Smith LLP (additional
memorandum) FS
15 Association of British
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16
JWG FS
17 European Justice
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18 City of London Law Society Litigation
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19 City of London Law Society Regulatory Law
Committee
Clause 26Consumer
redress
schemes 9
am Mr.
Mark Hoban (Fareham) (Con): I beg to move amendment 70, in
clause 26, page 29, line 13, leave
out ‘to make rules’ and insert
‘for a scheme to
be
made’.
The
Chairman: With this it will be convenient to discuss the
following: amendment 71, in clause 26, page 29,
line 20, leave out ‘make rules’ and insert
‘propose a
scheme’. Amendment
72, in
clause 26, page 29, line 38, leave
out ‘rules are’ and insert ‘scheme order
is’. Amendment
73, in
clause 26, page 29, line 41, leave
out ‘making rules’ and insert ‘proposing a
scheme’. Amendment
74, in
clause 26, page 29, line 43, at
end insert— ‘(11) If the
Authority proposes a scheme under this section, it shall apply to the
court for a consumer redress scheme
order. (12) “Consumer
redress scheme order” means an order imposing a consumer redress
scheme on relevant firms. (13)
Any application by the Authority under this section
shall— (a) attach a
draft order setting out the rules of the proposed consumer redress
scheme in full; and (b) be
notified to relevant firms and be published as required by the Civil
Procedure Rules or as otherwise directed by the
court. (14) Upon an application
under subsection (11), the court may make a consumer redress scheme
order if it is satisfied
that— (a) the making of
such an order represents the most appropriate means for the fair and
efficient resolution of the liability of relevant firms to pay redress
to consumers; (b) the consumer
redress scheme is just and equitable;
and (c) the consumer redress
scheme order complies with section
404A. (15) At any time after
the making of a consumer redress scheme order, any relevant firm, the
Authority, the ombudsman scheme or any other party permitted by Court
rules to do so, may apply to the court
for— (a) any amendment
to be made to the consumer redress scheme order,
or
(b) clarification or directions regarding the
operation of the consumer redress
scheme; and upon any such
application the court may make any order it considers appropriate
(including making any amendment to the consumer redress scheme
order).’. Amendment
75, in
clause 26, page 30, line 2, leave
out ‘Rules under section 404’ and insert
‘a consumer
redress scheme
order’. Amendment
76, in
clause 26, page 30, line 41, leave
out ‘rules’ and insert ‘consumer redress scheme
order’. Amendment
77, in
clause 26, page 30, line 45, leave
out ‘rules’ and insert ‘consumer redress scheme
order’. Amendment
81, in
clause 26, page 31, line 22, at
end insert— ‘404AA
Rules of court about consumer redress
schemes (1) Rules of court may
make provision about consumer redress
schemes. (2) Such rules shall
be designed with the objectives of ensuring, inter alia,
that— (a) applications
concerning consumer redress schemes are heard and determined
expeditiously; and (b) notice
of such applications is published so as to bring the application to the
attention of those who may be affected by the consumer redress
scheme. (3) The rules may in
particular— (a) make
provision about applications for or in connection with consumer redress
scheme orders; (b) make
provision about the notice to be given to relevant firms regarding such
applications; (c) make
provision about the publication of such applications, so as to bring
the application to the attention of those persons who may be affected
by a consumer redress scheme
order; (d) set out the criteria
to be applied by the court when deciding whether to make a consumer
redress order (or the terms of such an order including the rules of the
consumer redress scheme); (e)
make provision for any other matter relating or incidental to the
proper management and conduct of the consumer redress
scheme; (f) make provision for
the court to consider whether other means may be more appropriate for
the fair and efficient resolution of the liability of relevant firms to
pay redress to consumers, and to give directions as it considers
necessary.’.
Mr.
Hoban: I welcome you to the Chair, Mr. Benton,
for the Committee’s penultimate sitting. I wish to make some
preliminary remarks about the clause and what it seeks to achieve,
which I believe is important. I shall then discuss the amendments. I
suspect that it may also be a stand part debate, as I have some
detailed questions about other parts of the clause.
When the
Financial Services and Markets Act 2000 was introduced, a clear
structure was put in place to give adequate protection to consumers.
The Financial Services Agency is responsible for regulating the conduct
of firms; the Financial Ombudsman Service deals with individual
complaints; and the Financial Services Compensation Scheme provides
protection in the event of insolvency.
Section 404
of that Act provided a mechanism by which groups of complaints could be
resolved. It recognised the fact that although the ombudsman service
dealt with individual complaints, a mechanism was needed to deal with
instances of widespread mis-selling. We heard examples of that in
earlier sittings.
Section 404
provided for a review of past business. It contained important
provisions that allowed the Treasury to decide whether there had been a
widespread failure on the part of authorised persons. The Treasury
could authorise a scheme to determine the nature and extent of that
failure, establish the liability of authorised persons to make
concession payments and determine the amounts payable by way of
compensation. Significant provisions were in place to facilitate
collective redress.
The White
Paper described the provisions as
“powers to
impose redress schemes on a firm-by-firm basis where a large number of
consumers are
affected.” The
problem is that section 404 has never been used. Indeed, Which? said in
its
submission: “At
present the FSA is only able to order past business review if it
attains an order in Parliament. The process is burdensome, and it is
apparent that the industry does not consider the threat of activation
to be realistic. Despite numerous episodes of mis-selling by the
financial services industry, the powers have never been used. Allowing
the FSA to take direct action will create a more credible
deterrent.” We
know that the powers in section 404 have never been used, but has the
FSA ever asked the Government to exercise those powers?
As section
404 has not been used, there is a vacuum. What happens if consumers
make a series of claims about a firm or type of product? The reality is
that the vacuum has been filled by the Financial Ombudsman Service,
which, effectively, has administered compensation for mis-selling if
there has been a significant number of claims. It has been going beyond
its remit of dealing only with single claims. That is not satisfactory
from the ombudsman’s perspective, nor from the perspective of
the industry or consumers.
We need an
effective mechanism to allow redress for a large number of claimants.
That is the reason for the provisions in clause 26, which replace those
in section 404. The proposed new section 404 seeks to
modernise the procedure and, importantly, to ensure that it
works.
The White
Paper, “Reforming financial markets”,
states: “The
Government proposes to update FSMA with new powers to make redress
powers more effective and capable of use in a wider set of
circumstances. One option for achieving this is to give the FSA the
power to establish a review of past business failure, without requiring
the involvement of the Treasury or Parliament as FSMA currently
requires.” That
is the thrust of the new section 404.
The new
powers will be far-reaching and easier to deploy, albeit at the expense
of Treasury and parliamentary approval and scrutiny. As to where the
provisions fit within the architecture, consumer redress schemes should
follow where regulation and practitioner schemes fail. I should hope
that they would come before collective proceedings, which were the
subject of a clause that we debated on Tuesday. We would expect that if
a regulator noticed a situation in which there was systemic failure
affecting a product or customer, the powers under clause 26
would be used, which would pre-empt the need for consumers to have
resort to the
courts. It
is right that consumers should have adequate redress where there has
been widespread mis-selling. If the current regime is not being used,
it is important to try to improve on it. Andrew Whittaker, the
FSA’s general
counsel, made some relevant points in giving evidence to the Committee,
when he contrasted the old and new
powers: “They
involve quite a complex process of an assessment by the FSA, a report
to the Treasury, and then a parliamentary process. This is a more
direct process involving standard rule-making by the FSA. We think that
it will be speedier and more flexible than the process that is
currently in the
legislation.”——[Official Report,
Financial Services Public Bill Committee, 8 December 2009; c. 35,
Q85.] The
old system built in fairly robust safeguards, in that the Treasury and
Parliament had to approve the scheme. That set a very high hurdle for
the FSA and, I suspect, contributed to the fact that the powers were
not used. If we are to give the FSA the new powers, which do not
involve Treasury or parliamentary approval, the question is what
safeguards are build into the process. We need to bear in mind that the
cost of redress, not just in relation to compensation, but in relation
to the work that will be needed to review past business and come up
with and administer a scheme, could run into hundreds of millions of
pounds and affect the viability of a firm. Those are not insignificant
sums, and I think that firms and consumers expect a proper process to
be in place to protect their
interests. What
are the safeguards? First, any scheme would have to undergo the
FSA’s usual rule-making process. That is a requirement in new
section 404(3). Secondly, the scheme takes on some characteristics of
an enforcement process, under section 404A(8)—the rules can
include provision for warning and decision notices and an appeal to the
tribunal—if the rules under section 404A(1)(k) are made. Those
are the rules that give power to the FSA, rather than the relevant
firm, to investigate the
matter. There
are some safeguards in the process, but the final sanction is, as
Andrew Whittaker told us in Committee,
“a judicial
review by any affected party on the basis that we had misdirected
ourselves about what a court would be likely to decide. That will be
quite a high hurdle for us to get over, and we will need to do our best
to do so.”——[Official Report, Financial
Services Public Bill Committee, 8 December 2009; c. 35,
Q86.] There
is, as the final safeguard, recourse to judicial review, and given the
amounts that could potentially be involved, it is clear that firms may
choose to resort to that
process. The
British Bankers Association has suggested as an
alternative: “Given
that the circumstances in which these new provisions might apply will
never be clear cut, it seems only logical that an independent party
should review all sides of the issue, however this has not been built
into the legislation. The FSA will be given largely autonomous powers
to draft rules, supervise compliance, consider enforcement action and
take potentially retrospective action with no mechanism to challenge
its decision, outside judicial
review.” Thus
under the rules set out in clause 26 the FSA is in the position of a
court. It goes beyond simply acting as a court: it investigates, judges
and sentences authorised firms, without an independent check.
Let us be
under no illusion about the complexity of the cases. Where there is no
legal certainty, the FSA will need to use its own processes to ensure
that it is as robust in reviewing a case as a court system would be.
One need think only of the case about bank charges
that went through the courts recently. Effectively, it was resolved in
the Supreme Court, and the FSA would have to internalise that process
in its operations.
My amendments
would remove some of the uncertainty and minimise the risk of judicial
review by ensuring that there is court approval for a redress scheme.
That would act as a safeguard. In the amendments that I tabled on the
previous group of clauses on collective proceedings, my objective was
to make sure that there were proper safeguards to ensure that orders
were used appropriately, and the same thinking is behind these
amendments. I want to ensure that there is a proper process and that
there is an independent check on the FSA’s actions. The
objective is to ensure that people have confidence in the process that
the FSA would go through.
What are the
benefits of court approval for a redress scheme? A requirement for
court-based approval would ensure that decisions were taken by legal
experts with complete impartiality and no risk of conflict of interest;
that interactions with the Human Rights Act 1998 were fully taken into
account when such decisions were made, thus providing an equitable
justice mechanism; that we had full and impartial consideration of a
firm’s arguments, based on their legal merits, rather than the
narrow test applied on judicial review, which might not allow
sufficient scope for challenge; that there was a full and impartial
legal assessment of the arguments and the evidence presented by all
parties to the proceedings; and that the court could give direction
where required, subject to the scheme coming into force.
The
amendments would permit consumer redress schemes to be put in place
swiftly, but with an important procedural safeguard: the requirement
for the scheme to be approved by the court. That would provide for
greater certainty and independent oversight of the scheme. Indeed, when
we quizzed Mr. Whittaker on the application of the consumer
redress proposals, he
said: “a
process of this kind could be useful after a court
decision.”——[Official Report, Financial
Services Public Bill Committee, 9 December 2009; c. 35,
Q87.] He was
referring particularly to the bank charges case.
Amendments 70
to 73 would replace references to rules with references to scheme
orders. Those orders are covered in more detail in amendment 74, which
defines an order as being primarily the rules under which a consumer
will be compensated. There is also a requirement to notify relevant
firms and an opportunity to make an application to the court to amend
the order. The basis on which the court should approve a scheme is that
it would be the most appropriate form of redress, would be fair and
would comply with new section 404A.
Amendment 81
provides for new rules for the court to use on receipt of an
application for a consumer redress scheme, mirroring the provision in
previous clauses that provided that court rules would be put in place
to enable the collective proceedings order to work. The amendment also
outlines the criteria that the court should use to approve the scheme.
In addition, to ensure that matters are resolved quickly, proposed new
section 404AA(2)(a) includes the criterion that cases should be heard
and determined expeditiously.
The amendments
should improve the new provisions and give us the best of both worlds.
We need to ensure that new section 404 is made more relevant and up to
date so that the power can be used by the FSA and represents a credible
deterrent and a credible process for compensating consumers, while
ensuring that proper safeguards are in place. That is the thrust of the
amendments.
9.15
am I
want to refer to a number of questions that have been raised about new
section 404, but which are not covered in my amendments. At
the moment, new section 404(1)(a) applies
if “it
appears to the Authority that there may have been a widespread or
regular failure by relevant firms to comply with requirements
applicable to the carrying on by them of any
activity”. What
is missing is a reference to the authority having evidence, and a
reference to the relevant firms not having complied with the
requirements of the authority’s rules. We are worried that the
FSA will be able to instigate a consumer address scheme without
evidence of a widespread regulatory failure by
firms.
9.15
am As
the Bill is drafted, the power will significantly reduce the burden of
proof required to establish a review of past business. It would enable
the FSA to oppose past business reviews on firms and implement
compensation schemes for whole classes of customers, even if it had
little or no evidence of consumers having suffered significant
detriment. That would be costly to providers and offer no benefit to
consumers. If the clause was more tightly drafted to required
evidential standards to demonstrate that the firm has not complied with
the requirements of the authority’s rules, it would make it
clear in what circumstances the powers would be used and demonstrate
that there was clearly a reason for such
action. I
come now to new section 404(1)(b) and the words “or may
suffer”, which mean that the new section could be invoked purely
in the belief that consumers may suffer loss or damage. Such a belief
is speculative. Neither the fact nor the quantum of such a loss or
damage could be established until it had actually occurred. What is the
purpose of including “or may suffer” in the provision
because it seems to be going beyond the situation of those who have
actually suffered
loss? New
section 404(7)
states: “If
the firm determines that the failure has caused (or may cause) loss or
damage to consumers, it must then”.
That would require a
firm to speculate whether—and if so, to what extent—any
action on its part might have caused loss or damage to consumers or may
cause loss or damage at some point in the future. Neither the fact nor
the quantum of such a loss or damage could be established unless and
until it had actually occurred. Should we not be in a position when the
power is applied only to the extent to which there is evidence of loss
or damage having been suffered by consumers as a direct consequence of
the actions of the firm and within the firm’s control? We need
to be clear about what the Government are trying to achieve with such
loose wording under the proposed subsection.
New section
404A(1)(b) states that rules may make
provision “setting
out, in relation to any specified description of case, examples of
things done, or omitted to be done, that are to be regarded as
constituting a failure to comply with a
requirement”. It
has been suggested that the use of “examples” provides
too much latitude and uncertainty in the scope of the scheme, which
could extend beyond the examples actually cited. It might be
appropriate to tighten the wording and perhaps, rather than paragraph
(b), have something along the lines of “setting out, in relation
to any specified description of case, things done, or omitted to be
done, which constitute a failure to comply with a requirement of the
Authority’s rules.” That would tighten up the
scheme’s rules so that we know exactly what the firm has
done. My
next point concerns the role of the ombudsman, about which I have a
later amendment. In new section 404B(4), there appears to be
a double jeopardy. A complainant can not only be covered by the
consumer redress process but can also make a complaint to the
ombudsman. If consumers are covered by the redress scheme, they should
be able to apply only to that scheme and not also be covered by the
ombudsman
service. The
Bill says that a consumer who is subject to the consumer redress scheme
can make a complaint to the ombudsman. My later amendment deals with
the parameters around which a complaint can be made. However, if a
consumer is unhappy with the redress scheme, given that it has been
proposed by the FSA, should not the complaint about the application of
the scheme be made to the FSA rather than to the ombudsman, since the
scheme is being made under FSA rules? The argument might be that the
complaint ordinarily goes to the ombudsman when a consumer is unhappy
with what a firm has done. That is the normal process. Where a firm is
applying a scheme established by the FSA, it is odd that the complaint
goes to the ombudsman and not to the FSA as the originator of the
scheme’s rules. In such a case it would be appropriate for the
complaint to be made to the FSA rather than to the
ombudsman. Finally,
there is a definition of the meaning of “consumers” on
page 32 of the Bill. One can understand that someone who has entered
into a transaction should be covered by the redress scheme, but what
happens when people have merely “contemplated” a
transaction? How should they be covered by the redress scheme? For
instance, I might think about buying payment protection insurance. It
has been offered to me, but I did not take it up because I thought it
was a complete waste of money. However, the fact that I contemplated
taking it up might mean that I had a complaint under the redress
scheme, so I am not clear why those who might merely think about buying
a product should be covered by the redress scheme. It should be focused
on those who have actually bought a product. Can the
Minister clarify the inclusion of “may have
contemplated” in new section
404D(1)?
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