The Financial Services Bill contains far-reaching and novel proposals for US-style class actions among its provisions. While many concerns have been raised about this part of the bill, the proposals remain unchanged. Importantly, the bill remains silent on some of the key aspects of such actions, and given the breadth of the proposals a wide range of financial services professionals and their insurers are potentially exposed. What follows are some key areas of concern.
The bill contains a number of proposals intended to reform the sector in the wake of the recent crisis and to improve the lot of consumers. The impact of the bill’s proposals regarding collective proceedings on financial services professionals such as financial advisers and the networks to which they belong, insurance brokers and accountants as well as in respect of their corporate finance business, merits closer scrutiny.
The bill has now cleared the House of Commons and had its second reading in the House of Lords on 8 February; the Lords committee stage is scheduled for 24 February. If passed in its current form the bill would introduce, and thereby expose, financial services professionals to opt-out class actions.
Controversial features of these proposals include:
- the ability to bring claims on an opt-out basis (unprecedented under English law) and in respect of services provided long before the bill comes into force;
- the fact that proceedings can be brought by a ’representative’ with no other interest in the proceedings, which is seen as a charter for claims farmers;
- wide powers for HM Treasury to alter or entirely remove limitation periods; and
- the fact that, although widely described as providing a redress mechanism for consumers, the bill is not in fact limited in that way.
The principle of enabling the swift and efficient resolution of legitimate consumer complaints is laudable, yet questions remain as to the proposals’ fitness for purpose. Would they reduce both the time that claimants must wait for redress and the number of claims currently handled by the courts or the Financial Ombudsman Service (FOS)? The answers lie not in the bill, but rather in the hands of HM Treasury and the Ministry of Justice, which have been left to specify the mechanism’s detailed workings through secondary legislation. If institutions respond by increasing the cost of consumer products and services, the proposals may backfire.
Also of concern is the breadth of these proposals. Collective proceedings would be available not only to consumers, but also, for example to shareholders and institutional clients of financial institutions – although it is far from clear why the latter groups might need such rights. The potential targets of such proceedings are equally broad, including any FSA-authorised person in respect of services provided in connection with a regulated activity. Claims might therefore be directed not only at banks, investment managers and insurers, but also at financial advisers and insurance brokers. Insurers writing professional indemnity cover for such professionals and ’errors and omissions’ and ’directors and officers’ cover for financial institutions more generally will therefore wish to monitor these proposals closely.
Important details regarding the operation of any class action mechanism, including the checks and balances required to prevent abuse, remain absent from the bill and dependent upon secondary legislation.
As such they are unlikely to attract any meaningful parliamentary debate. They include those specifying:
- the interplay, and potential overlap, between the collective proceedings mechanism, the new FSA-driven consumer redress schemes proposed in the bill, and the existing redress mechanisms, such as the FOS;
- the criteria to be satisfied before Courts may sanction opt-out collective proceedings;
- the circumstances in which HM Treasury may suspend unilaterally limitation periods; and
- the availability of novel aggregated and cy près damages.
Despite receiving detailed evidence addressing the most serious shortcomings of these proposals, the Commons Committee declined to amend the relevant sections
of the bill, which passed to the Lords unamended.
With opposition parties expressing broad support in respect of the bill, it seems likely that it will become law in some form this side of the general election. As the bill is debated in the Lords, financial institutions, financial services professionals and the insurers that stand behind both groups may therefore wish to lend their voices to the growing chorus for the nuts and bolts of these proposals to be disclosed, reviewed and debated in full before being set out in primary legislation.
Dan Preddy is a partner and Martin Langley is an associate in the banking and financial services dispute resolution practice at Beachcroft