This article was contributed by 3 Hare Court Chambers barrister Richard Samuel
If I were a bank that had been happily mis-selling swaps, then, when I sensed that the Financial Conduct Authority (FCA) was beginning to feel sufficient political pressure from consumers to make it easier to sue me, I would have asked myself what kind a dispute resolution system I would want the FCA to set up.
It would look like this. I would want a dispute resolution system that I myself was in charge of. I would want it to be secret. I would not want it to apply the law, because I would not want it to create any legal precedent about my behaviour. I would want to be allowed to deny claimants full compensation, in particular consequential losses. In fact, as their principal remedy, I would not want to pay them cash. Instead, I would want to substitute the profitable product I had sold them with another of my products which was not quite so profitable but still turning a healthy margin.
Believe it or not, that’s just what the FCA gave the banks in January 2013. The caveat was that ‘skilled persons’ had to oversee the redress scheme the FCA required the banks to administer – but as they were their old friends the big four accountants, that was an easy compromise to make. It is this scheme that was judicially reviewed this year in the case of Holmcroft, now under appeal. But the new head of the FCA, Dr Andrew Bailey, did not need to wait for the Lord Justices’ decision; on 20 July this year he said this to the Treasury Select Committee:
“I do not think the FCA was really established or conceived to be an adjudication body. It is a regulatory or supervisory body. Now, this is not a criticism, but it has found itself in that role, and it has found itself creating – I do not know how many, but there are quite a few – bespoke adjudication processes…
“For interest rate hedging products, it has created a process by which the banks have a duty to do the process and there is oversight by a so-called skilled person, which is typically an accounting firm. That is enormously controversial.”
He’s not wrong; the scheme was as toxic for the reputation of the regulator as it was for the banks, because it reeks of corporatism: the capture of the regulator by the industry it is supposed to regulate. But, in fact, like most conspiracies, on closer examination it looks more like cock-up – and for the best of motives; the FCA was trying to fill a vacuum of justice between the two existing dispute resolution platforms: the Financial Ombudsman Service and the courts. Access to the former is restricted, it does not apply the law and anyway it under-compensates. Access to the latter is theoretically open to all, it applies the law and it fully compensates – but the price of entry is much too high for it to have an impact on banking culture and market behaviour on the scale the FCA wanted.
Dr Bailey told the TSC that he did not yet know how he would fill that vacuum in the future, but he did say he wanted his dispute resolution platform to have more authority, and to give parties a sense of their ‘day in court’. At the time of the Holmcroft judicial review, I suggested the FCA could do worse than look at the example of the Employment Tribunals, which in their 50 years of operation have changed employment culture and labour market behaviour out of all recognition. Now, MPs are ahead of Dr Bailey: today they debate a motion that the FCA should create just that: a low-cost, expert Financial Services Tribunal for resolution of retail banking disputes in accordance with the law. Dr Bailey, are you listening?