Making amends

Redress schemes have always been an important feature of the disputes landscape for FCA regulated firms. But what factors might drive their increasing significance in the coming years?

There is an increased appetite from the FCA to impose redress schemes and it has wide-ranging powers to do so:

• 384 FSMA restitutionary powers;
• 404 FSMA powers to impose consumer-wide redress schemes; and
• Supervisory powers to impose redress schemes through own-initiative variations of permission or impositions of requirements.

As well as these powers, the FCA can exert pressure on firms to agree to redress schemes as a way of averting or mitigating the consequences of enforcement action.

We anticipate a renewed drive from the FCA to ensure that redress is made available for consumers where widespread harm has occurred.

The FCA has historically shown that it has been willing to use these powers, most recently imposing a £49m redress scheme on financial advisors who provided unsuitable advice to members of the British Steel pension scheme. Our view, however, is that we will see an up-tick in the number of redress schemes imposed on firms by the FCA in the coming years. In particular, the FCA’s recent business plans have made clear that protecting consumers is a key priority with the introduction of a new Consumer Duty being key to this (this comes into force on 31 July 2023). This duty aims to set higher and clearer standards of consumer protection across the financial services sector. We anticipate, therefore, a renewed drive from the FCA to ensure that redress is made available for consumers where widespread harm has occurred.

The (ongoing) rise of mass claims litigation in the English Courts

The UK has not historically been a forum in which we have seen high levels of litigation of mass claims. However, in recent years we have seen a number of trends developing which are likely to have a significant impact on financial institutions. For example:

• Claims being brought under the Competition Appeal Tribunal’s (“CAT”) opt-out class action procedure;
• A rise in data breach claims, following cyber incidents; and
• A rise in shareholder claims and, in particular, claims under s.90 and s.90A FSMA.

These mass claims are driven by a buoyant litigation funding market in the UK, which is estimated to have doubled in size over the last three years and is now worth over $1bn. Although such mass claims have been criticised because in many cases large proportions of the sums recovered by the claimants are absorbed by funders and claimant law firms, these claims are nevertheless high stakes litigation that can be extremely expensive for firms to defend. Notably advocates also consider them to be an important tool to access to justice, albeit this must be set against the percentage return to those who have suffered the loss.

Given the context, there is clear potential for the establishment of redress schemes to be a win-win alternative to mass litigation for both potential defendant firms and for potential claimants in appropriate circumstances, particularly where industry wide or institutional systemic issues are uncovered. For firms, such schemes provide a cost-efficient way of dispensing with mass claims (or parts of them), particularly where the merits of defending those claims at court might not be good. By proactively offering compensation to potential claimants, the funders, claims management companies and claimant law firms acting on contingency fee arrangements may find that the economic viability of bringing claims on behalf of the depleted group of claimants that either do not fall within the scheme, or elect not to participate in it, is destroyed. For the potential claimants, redress schemes present a straightforward way of obtaining compensation without the need for legal representation and litigation funding, which will, in many cases, increase the overall levels of recovery that they ultimately receive.

Such schemes provide a cost-efficient way of dispensing with mass claims

There is already a procedure in place, unique in English law, for the CAT to approve the settlement of collective opt-out proceedings. That procedure has yet to be used, however with the recent spate of collective actions that have been certified by the CAT it looks likely that this procedure will be tested within the next year or two.  It should provide a platform to take the lessons of recent redress schemes and implement them for the benefit of both claimants and defendants.

Conclusion

As mass litigation in the UK rises, there is likely to be an increase in the establishment of redress schemes. Rather than emerging from defendants, they will increasingly be used by regulators such as the FCA, and through negotiation with claimants as a settlement tool. In the future, we may see wider legislative moves in the UK towards enabling court-supervised redress schemes.