Financial Services Bill – the compromise

Fraser Whitehead

The Government has spent years attempting to navigate the stormy waters between these two schools of thought to produce a framework that would give a route to redress for consumer actions without opening the floodgates to spurious claims.

This culminated with the 2009 Queen’s speech, which introduced the Financial Services Bill.

The bill focuses specifically on the financial ­services industry and gives power to the courts to decide on who can bring collective actions and whether they should operate on an opt-in or opt-out basis.

The legislation is also intended to strengthen the FSA’s power to set up consumer redress schemes if it appears there has been a failure to comply with its rules.

The Association of British Insurers (ABI) led the condemnation of the Financial Services Bill earlier this month by criticising its ­provision for collective ­proceedings for being “rushed through”.

ABI acting director general Maggie Craig states flatly: “Pushing the UK towards a US litigation culture would create costs for consumers and businesses that far ­outweigh the benefits.”
But Fraser Whitehead, a claimant partner at Russell Jones & Walker (RJW), ­dismisses this assumption. “This is nothing new,” he says. “Collective redress has been discussed for many years and it’s increasingly relevant.”

Whitehead has a point.

In March 2008 the Civil Justice Council (CJC) published a report recommending that the UK should establish its own collective action system rather than adopting the US model. It said there should be an opt-out as opposed to an opt-in model and more bodies should be given the power to bring representative actions.

The Ministry of Justice (MoJ) took more than a year to consider the recommendations, and when it did many felt the Government had shirked its responsibilities. The MoJ rejected the suggestion that a collective redress system should be made available to all civil ­litigations and said individual sectors should consider whether a justice gap existed and whether collective redress would close that gap.

Sources close to the ­Government suggest the Treasury already had the issue on its radar. It is responsible for the Financial Services Bill and will deliver the much -needed further detail required by lawyers.

Already defendant lawyers are on the warpath.

Beachcroft partner ­Mathew Rutter says: “There are concerns that there are insufficient safeguards.”

He lists a series of issues, including that the FSA could attempt to put itself in place of the courts. More importantly, it could spawn the growth of yet another “compensation culture” debate.

“There are concerns about who could bring an action,” Rutter explains. “You don’t have to have an interest in the claim, and that would allow claims management companies to come
forward. Then compensation culture talk raises its head.”

Whitehead rejects this and says it will be down to the courts to decide who can act as a representative body.

“The Government’s done the sensible thing by ­leaving it to the court to decide,” he says. “It’s a sensible and pragmatic approach.”

What the Treasury has failed to address, however, is how such representative actions could be funded.

One barrister comments: “It will be a wonder if these things ever see the light of day. These cases have to be funded and that means firms using their equity or bringing in external funding.

Third-party funding is expensive – they want certainty, which collective actions don’t ­easily give.”

Mayer Brown partner Angela Hayes agrees. “The funding point is fundamental,” she insists. “The ­dynamic between the US and the UK is totally ­different and in the US you’ll find companies that will invest in these cases.”

Lord Justice Jackson will publish his report on civil litigation costs in January.

It is anticipated that he will recommend alternatives to the costs shifting rule. This could pave the way for contingent commissions in some areas to help facilitate access to the courts.
Whitehead says the court could be asked to decide on which funding model might be applied at the same time as appointing the ­representative body.

“Rumours have it that contingency fees could be used,” he says.

This would send a ­shockwave through the City, forcing the insurance ­industry to mobilise a ­campaign against such a move. The fear of a US-style class action system being introduced in England and Wales is so ingrained that it would take a powerful government to push it through.

And that is the crux of the matter.

The Financial Services Bill will need to be passed within six months if it is ever going to take hold. The Treasury will pursue it ­rigorously, but whether MPs will be willing to support its passage through Parliament is another matter entirely.

Could collective redress be a feature in the future of legal services? The sceptics say efforts have been made, but predict that it will lie static at the bottom of the political agenda.

Collective redress – the political wranglings

March 2006: ‘Representative Actions in ­Consumer Protection Legislation’ consultation, launched by the Department for Business, Enterprise & Regulatory Reform (BERR), ­examines how representative actions could be implemented in consumer protection cases.

June 2007: The Civil Justice Council (CJC) ­publishes ‘Improved Access to Justice – Funding Options & Proportionate Costs’, examining the viability of introducing contingency fees as a means of funding the group actions. It favoured the introduction of “properly regulated” ­contingency fees.

February 2008: The CJC publishes ‘Reform of Collective Redress in England and Wales’. It states that there is “overwhelming evidence of the need for a further collective redress mechanism in order to supplement presently existing procedural devices available to claimants”.

March 2008: The Government publishes its response to the BERR 2006 consultation, saying that there is further work that to be undertaken due to a “lack of evidence for introducing ­representative actions”.

August 2008: The CJC publishes ‘Improving Access to Justice through Collective Actions’, setting out far-reaching proposals for group actions, including recommending the ­introduction of an opt-out system

July 2009: The Ministry of Justice announces that it will not introduce a generic right to bring class actions, but instead new procedures would be announced on a sector-by-sector basis.
November 2009: The Financial Services Bill is introduced by the Treasury, setting out a ­proposed framework to allow collective redress against financial institutions.