The FCA’s redress scheme powers

A renewed vigour to secure redress?

28/11/2023

The FCA has, for many years, had an extensive range of powers available to it to require firms to undertake redress exercises. These powers have historically not been used by the FCA that frequently. Our expectation, however, is that this is about to change.

In this article, we explore the nature and scope of the FCA’s powers in this area and we then consider the recent regulatory and litigation trends which suggest that firms will likely experience more frequent use of such powers in the coming years.

The FCA’s redress scheme powers

Consumer Redress Schemes – section 404 FSMA

Section 404 FSMA is a rule-making power that enables the FCA to impose industry-wide consumer redress schemes on multiple firms that have failed to comply with FCA requirements and caused loss or damage to customers. The FCA is required to consult on the proposed rules before they come into force. This power has only been used on two occasions, but has been exercised very recently to provide compensation for those given unsuitable advice to transfer out of the British Steel Pension Scheme (BSPS).

Importantly, a redress scheme established pursuant to section 404 FSMA can only compensate customers for loss or damage where they also have a private right of action under section 138D FSMA. This is a significant limitation and, for example, prevents the FCA imposing section 404 consumer redress schemes in circumstances where only breaches of the FCA’s Principles have been found. Notably, the FCA’s new Consumer Duty sits within the Principles section of the FCA Handbook, and, hence, the FCA’s section 404 powers cannot be used in relation to breaches of the Duty.

Supervisory Powers – sections 55J, 55L and 404F(7) FSMA

The FCA can impose redress schemes on single firms by way of its supervisory powers to impose own initiative requirements (section 55L FSMA) or own initiative variations of permission (section 55J FSMA). Significantly, however, in Bluecrest Capital Management (UK) LLP v The Financial Conduct Authority [2023] UKUT 00140 (TCC) the Upper Tribunal recently found that the section 55L power and (by implication) the section 55J power are not free-standing powers to impose redress schemes on firms and must be read together with, and are restricted by, the terms of section 404F(7) FSMA (although the decision is currently subject to appeal).  Consequently, as things stand, the same limitations apply to the FCA’s use of these powers as apply to their powers under section 404 FSMA – i.e. there must be a breach of an FCA requirement that has caused loss to persons affected by it and such breach must be privately actionable.

Restitutionary Powers – sections 382 and 384 FSMA

The FCA has powers to require firms to make restitutionary payments to persons who have suffered loss as a result of firms’ breaches of FCA requirements (unlike the powers discussed above, there is no necessity for such persons to have a private right of action). The FCA can either seek to exercise these powers itself or by application to the High Court. The FCA has not frequently used these powers, but they do provide it with a powerful tool to secure the payment of redress.

Voluntary Schemes

It is open to the FCA to agree voluntary redress schemes with firms, as a way of avoiding enforcement action or mitigating the consequences of it. We have been consulted on such schemes for numerous regulated entities who have found systemic issues at the heart of their businesses. Although not a formal power under FSMA, the significance of this approach was most clearly demonstrated in 2012 when the FCA reached agreement with nine banks to set up the interest rate hedging product mis-selling compensation scheme, which resulted in the payment of around £2.2 billion in redress to small businesses.

Proactive redress

Finally, it should not be forgotten that the FCA can take measures to require firms to take proactive steps to deliver redress to customers, even before it considers pursuing any of the above routes. The FCA’s guidance at DISP1.3.6G has, for many years, stated that firms identifying “recurring or systemic problems” should consider whether customers, even if they have not complained, need to be proactively offered appropriate redress. Moreover, the new Consumer Duty goes further and contains a rule, at PRIN2A.2.5R, requiring firms who identify foreseeable harm to retail customers (even if no complaint has been made) to proactively “take appropriate action to rectify the situation, including providing redress where appropriate.

Why do we expect to see a future increase in FCA redress schemes?

In our view, there are two key factors that are likely to increase the vigour and frequency with which the FCA uses its redress scheme powers in the coming years: the FCA’s strong focus on consumer protection; and the rising levels of mass litigation in the UK.

The FCA’s focus on consumer protection

The protection of consumers is now one of the key objectives of the FCA.

Even prior to the coming into force of the Consumer Duty on 31 July 2023, there had been clear indications from the FCA that it is willing to test the limits of its redress scheme powers in order to secure compensation for consumers.  The recent Bluecrest case (referred to above) is a stark example of this. In that matter, the FCA took the aggressive stance that it had the power, under s.55L FSMA, to impose a US$700 million redress scheme simply because it considered this “desirable” to further its consumer protection objective and without regard to whether there had been any actual breach of an FCA requirement. The FCA was, of course, unsuccessful in the first instance, but the arguments advanced and its decision to now appeal this judgment demonstrate the FCA’s appetite to secure redress for consumers. The same could perhaps also be said of the FCA’s establishment of the BSPS scheme, which represents the first time in almost 10 years that the FCA has used its section 404 redress scheme powers.

Going forward, this trend can be expected to continue now that the Consumer Duty has come into force. The FCA has made clear in the consultation papers and policy statements leading up to the imposition of the Duty that it will be looking to secure redress for consumers who have suffered harm through firms’ breaches of it. Whilst, the FCA’s section 404 and 404F(7) FSMA redress scheme powers will not be available in respect of breaches of the Duty, it has made clear that its restitutionary powers still remain available. The FCA has also said that it is sees firms’ obligations to proactively offer redress to harmed retail customers where appropriate as “a crucial element of firms delivering good outcomes for their customers”. The FCA will, therefore, no doubt use these latter obligations to pressure firms into establishing redress schemes relating to breaches of the Duty and firms who fail to comply with these obligations risk enforcement action.

The rising levels of mass litigation in the UK

Whilst the UK has not historically been a jurisdiction in which there have been significant volumes of mass litigation, there has (as our Class Actions insight series explores) been an growing trend for such litigation in recent years. Financial institutions are increasingly affected by this.

Our expectation is that, from the FCA’s perspective, it will not be satisfactory to let claimant law firms and litigation funders drive the recovery of redress from financial institutions, not least because in many cases large proportions of the sums recovered by the claimants are absorbed by funders and claimant law firms. We, therefore, expect that this rise in mass litigation will further invigorate the FCA to impose redress schemes on firms (or to pressure firms into establishing them), in order to provide claimants with a straightforward way of obtaining compensation without the need for legal representation and litigation funding.

Indeed, when faced with mass claims, the prospect of dealing with those claims (or part of them) within a redress scheme may also, in some instances, have appeal to impacted firms too. Such schemes provide a cost-efficient way of dispensing with claims, particularly where the merits of defending those claims at court might not be good. In addition, by proactively offering compensation to potential claimants, such schemes also have the potential to destroy the economic viability of bringing legal proceedings for the funders and claimant law firms.

Conclusions

Although the FCA’s redress scheme powers are far from novel and there have been several substantial redress schemes established over the past decade, we anticipate a more enthusiastic use of these powers in the coming years  and that redress schemes will become an even more common feature of the disputes landscape for financial services firms (especially where issues involving regulated firms are exposed by difficult economic conditions for consumers). That, of course, brings additional risk for firms but, as described above, potentially some opportunities too.

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Rhys Corbett

Partner, London