FSA presses for wider powers of redress in cases of misconduct and mis-selling


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Summary: The FSA has asked Parliament to consider adopting a radically different approach to consumer redress under the new regulatory system. This could require firms to pay compensation even where a breach of regulatory duties by the firm has not caused consumers to suffer any loss.

What has happened

Parliament is debating the scope of powers that should be entrusted to the two new financial regulators that will replace the FSA in January 2013; namely the Prudential Regulation Authority (PRA) and the Financial Conduct Authority (FCA). Broad new product intervention powers are proposed to supplement the wide supervisory and disciplinary powers that the FSA is currently able to deploy.

However, in a submission to the Joint Committee examining the draft Financial Services Bill, the FSA has sought to open a debate on whether a fundamentally new approach to consumer redress should be adopted. In particular, the FSA appears now to be campaigning for the right to require firms to pay compensation even where there is no link between a breach of regulatory duties and any loss suffered by consumers.

What are the key points?

The FSA's submission states that the regulator's "ability to ensure that consumers receive redress is constrained by the general law, in particular by questions of causation.”

The submission highlights that, under the current position, if a breach of rules “either did not cause the loss, or was merely a contributory factor, the FCA will not be able to require firms to pay full redress".

As a result, the FSA is recommending that Parliament should consider giving its successor body, the FCA, the power to compel firms to pay ‘compensation’ to customers or others where a breach of the rules has occurred, even though it would have made no difference to the customer’s position if the firm had complied with its regulatory duties in full.

The FSA submits that if society expects, as a matter of public policy, that the regulator should be in a position to require greater levels of redress to be paid, then "the FCA needs to be given a clear mandate and powers to do so in the new legislation".

The regulator is therefore seeking to depart from the fundamental principle that compensation will only be awarded where a causal link can be shown between the improper conduct and the loss that has been suffered. In the absence of such a requirement it is difficult to see where the boundaries of compensation can sensibly and properly be set.

How will this affect me?

If the FSA’s proposals are accepted, firms are likely to face a significant increase in liability for losses for which they are simply not responsible.

This new approach would blur the important distinction between the imposition of financial penalties as a punishment for improper conduct, and the principle that losses caused by a breach of duty ought to be compensated by the firm that has acted improperly. Indeed, the FSA appears to be contemplating a more “rough and ready” approach to compensation in which consumers may well receive windfall payments where losses sustained (for example due to falls in equity markets) are entirely independent of any rule breaches by conduct of the firm.

What are the next steps

The FSA acknowledges that these proposals “give rise to real questions as to how far the regulator’s powers should extend” but presses the Joint Committee to address the point in order to “achieve further clarity as to the FCA’s mandate in this area”.

It is therefore important that retail firms are aware of this new area of debate opened by the FSA, and that they take proper steps to ensure that the Joint Committee is aware of the significant problems that would be created if the FSA’s proposals were to be adopted.

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