The key problems with the current redress system
It is no exaggeration to suggest that the inability of current regulatory redress system to effectively deal with mass redress events is hindering the international competitiveness of UK financial markets. In our view, there are two interlinked factors that sit at the core of the problems in this area:
- First, there has been a failure by the FCA to appropriately exercise the powers granted to it under the Financial Services and Markets Act 2000 (“FSMA”) to deal with mass redress events where necessary. Most notably, the FCA has made very little use of its powers under s.404 FSMA 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. In fact, there have only been two occasions on which the FCA has used this power.
- As a consequence of the FCA’s seeming reluctance to use its redress scheme powers, the FOS has by default become the primary forum in which mass redress events are dealt with. However, when the redress system was set up, the FOS was never intended to fulfil this role – rather it was intended to be a forum in which one-off customer complaints are dealt with efficiently and fairly. In our view, there are three key issues that, taken together, make the FOS an inappropriate forum through which mass redress events are handled: (i) FOS decisions are typically made without significant scrutiny of the facts and law; (ii) FOS decisions are very difficult to challenge; and (iii) FOS decisions on individual complaints have broader implications for firms, who must take them into account in their wider complaints handling. The effect of these factors is that the FOS is afforded a broad discretion to set the standards pursuant to which a mass redress event will be remediated and then, through a single decision made within a short period, it can bind firms to those standards. This clearly cannot be a satisfactory outcome for the FCA, which is allowing the FOS to determine how its rules should be interpreted.
Our proposed solution – amendments to the Wider Implications Framework
The primary proposal put forward in our Response is that the redress system’s ability to deal with mass redress events could be significantly improved by making some amendments to the WIF Terms of Reference.
The starting point is that we very much agree with the assertion made in the CFI that “the most effective way to mitigate the risk of a mass redress event is for firms to take prompt, proportionate and proactive action to identify and resolve harm” – this removes the need for the FCA to impose any redress scheme or, failing that, the need for the FOS to deal with the high volumes of complaints associated with a mass redress event.
In our experience, however, one of the primary barriers to firms being able to take prompt and proactive action to remedy mass consumer harm once it is identified is a concern that any remediation exercise will later be undermined by the FOS. The key, therefore, is for firms to be able obtain comfort as quickly as possible that any redress exercise they undertake will be upheld by the FOS. Firms, of course, will also want to ensure that the standards that the FOS will apply to a mass redress event have been set transparently and taking into account the views of the relevant stakeholders.
In our view, the WIF is the best mechanism through which this can be achieved. We propose that two key changes are made to the WIF Terms of Reference that would make it significantly more effective:
- Ability for external stakeholders to trigger the WIF: At present, only one or more of the WIF members are able to trigger an issue being considered under the WIF. We propose that this should be broadened to enable external stakeholders to trigger the WIF in respect of a potential mass redress event. Those external stakeholders should, we suggest, include industry bodies, individual firms and consumer groups.
- Published standards/guidance: The outcomes set out at paragraph 13 of the WIF Terms of Reference should be amended to require the WIF members to seek to agree, where appropriate, standards or guidance against which firms should handle complaints relating to a potential mass redress event (whether in business as usual complaints handling, a past business review or otherwise). Importantly, relevant stakeholders would be provided with an opportunity to make submissions on any proposed standards/guidance and any finalised standards/guidance would then need to be published – in contrast to the current position where there is often a suspicion that standard setting has taken place between the FOS and the FCA behind closed doors. The effect of the standards/guidance would then be that the FOS would uphold the complaints handling decisions of firms that properly apply them.
The upshot of these changes for firms is that they should lead to mass redress events being identified and addressed at a much earlier stage and before they have had the opportunity to balloon into issues that can become existential. For consumers, we expect that the proposals would significantly improve the prospects of obtaining fair and reasonable redress on a prompt and consistent basis, thus ultimately reducing consumers’ need to use claims management companies and to pursue claims in the courts with the backing of litigation funders.
In our Response, we also address some of the other proposed solutions put forward in the CFI (for example: granting the FOS/FCA powers to pause complaints handling while the FCA considers its next steps; taking further steps to deter claims management companies from submitting unmeritorious and poorly evidenced complaints; and, inserting a time-barring complaints longstop date into DISP). However, our view is that our proposed amendments to the WIF could be sufficient to alleviate many of the issues with the current redress system’s effectiveness in dealing with mass redress events and, consequently, we regard these other solutions as of secondary priority.
