Government proposes class actions for financial services

The Government has introduced a Financial Services Bill to Parliament, which includes provision for collective actions in the financial services sector. If the Bill is passed,  these measures have the potential to transform the way in which parties can pursue complaints against banks and other financial institutions and will introduce the first ever “opt-out” collective action procedure in England and Wales. 

Summary and implications

• The announcement of a proposed collective actions regime in the financial services sector is the first major step towards implementing collective actions in England and Wales, after a series of UK and EU government reports suggesting further reform in this area.
• It is surprising that the form of collective actions proposed in the Bill is broader than that originally proposed by the Treasury in its White Paper on Reforming Financial Markets published in July 2009. The White Paper suggested only a procedure led by the Financial Services Authority (“FSA”), to be used in exceptional cases, whereas the Bill allows collective actions to be pursued more widely.
• While the proposals in the Bill apply only to claims in the financial services sphere, they may be adopted as the model for other sectors if their implementation in this field is judged to be a success.
• The proposed reforms do not reflect all of the features of US-style class actions. However, they will still represent a significant departure from the way in which multi-party litigation has been conducted in the past. The move to introduce opt-out class actions is particularly significant. This not only will involve  procedural  changes, but also affects matters such as limitation periods and quantification of damages.
• At present, media and public attention has largely been directed to other aspects of the Financial Services Bill. However, in the aftermath of the Supreme Court’s decision in the bank charges litigation on 25 November 2009 (The Office of Fair Trading v Abbey National plc [2009] UKSC 6) the focus may turn increasingly towards methods for consumer redress against financial institutions, including the proposed collective actions regime in the Bill.
• If the Bill is passed, any financial institution faced with a potential claim involving multiple claimants will require specialist advice as to the implications of the new laws.

Background

The reform of group litigation in England and Wales has been under debate for some time. In particular, those representing claimants have maintained that current procedures are inadequate to provide effective access to justice in cases where multiple claimants suffer loss arising out of the same or similar facts. The debate culminated in a detailed report by the Civil Justice  Council (“CJC”), “Improving Access to Justice through Collective Actions”, in December 2008. This recommended the introduction of a generic collective action, which would apply to all areas  of civil law and would enable the court to allow collective actions to be brought on either an “opt-in” or “opt-out” basis. The CJC also recommended that “aggregated damages” should be introduced  for opt-out claims, to allow the court to assess the damage to the class as a whole without requiring proof of loss by each individual claimant.

There have also been moves in recent years from the Office of Fair Trading (“OFT”) and the European Commission towards the introduction of a new collective redress procedure for competition and consumer claims. The OFT made recommendations to government in November 2007 including a proposal for representative actions to be brought on behalf of both consumers and businesses on an opt-out basis. In 2008 the Commission published a White Paper on Damages Actions for Breach of EC Antitrust Rules and a Green Paper on Consumer Collective Redress, setting out options for collective redress in competition and consumer cases respectively, which included provision for opt-out actions. A draft directive for collective actions in competition claims is being finalised and further developments may emerge from the Commission during 2010.

In the meantime,  the UK Government  announced its response to the CJC Report in July 2009 which rejected the need for a generic collective action and proposed instead that reform of collective actions should, where needed, take place on a sector-by-sector basis (see post).

Also in July 2009, the Treasury released its White Paper on Reforming Financial Markets. The White Paper suggested a need for a more efficient collective redress mechanism for consumers, sitting alongside other measures to strengthen the position of consumers in dealing with financial institutions. It suggested collective actions may be needed in exceptional cases, although in a limited form, where the FSA would effectively sanction any collective action and nominate a representative claimant.

The Financial Services Bill is effectively the first step down the government’s chosen path of sector-by-sector reform. It has cited an increasing number of consumer complaints in the financial services sector and pointed out that a large proportion of these complaints share common characteristics, making them appropriate for collective actions.

Key features of the Bill

The Financial Services Bill was introduced to Parliament on 19 November 2009, after being announced in the Queen’s Speech the previous day. It includes a range of new regulatory measures and proposes not only a new regime for collective actions but also a significant enlargement of the jurisdiction of the FSA in the areas of executive remuneration, short selling and disciplinary procedures.

Sections 18 to 25 of the Bill set out the new collective action procedure. The key features of the procedure are:

Authorisation procedure. There is no automatic right to bring a collective action. Rather, the court must authorise the use of the procedure in each case by making a “collective proceedings order”. As part of the authorisation procedures, the court will need to appoint a representative to “lead” the claimants. The court would also need to be satisfied that the claims in the action give rise to the same, similar or related issues of fact or law, and that the collective action falls within the definition of a “financial services claim”.

There is no requirement in the Bill that the court must be satisfied that a collective action is the best means of resolving the claim, or that other measures for redress should have been attempted as a first step, although this could be addressed later via regulations or in the rules of court.

Representative to act on behalf of claimants. A representative will be appointed to act on behalf of claimants in a collective action. The representative may be one of the claimants or another party (such as a consumer lobby group or a regulator, such as the FSA or the OFT) and need not otherwise have any interest in the proceedings.

Opt-in or opt-out. The court will decide in each case whether the proceedings should be conducted on an opt-in or opt-out basis. Opt-in proceedings will only give relief to those claimants who notify the representative of their claim by a deadline set down by the court. By contrast, in opt-out proceedings, relief can be awarded to the entire class of claimants, except those who opt out before the court’s deadline. However, even in opt-out proceedings, any potential claimants domiciled outside the United Kingdom can only participate by opting in.

“Financial services claims”. The collective action procedure in the Bill can only be used for “financial services claims”. These are defined as claims brought against:

• authorised persons (including investment firms and credit institutions) and appointed representatives as defined under the Financial Services and Markets Act 2000;
• payment service providers under regulation 2(1) of the Payment Services Regulations 2009; or
• those operating in the consumer credit, consumer hire, credit brokerage, debt adjusting, debt counselling, debt collection, debt administration, credit information or credit reference  industries as defined by the Consumer Credit Act 1974.

Timing. It is proposed that the procedure will be available for causes of action which arose before the commencement of the new law, if passed.

Damages. The Bill does  not set down any firm rules about calculation of damages, but gives the Treasury a wide- ranging power to make regulations about damages in collective actions. This specifically includes the power:

• to allow the court to award aggregated damages (ie to make an award of damages based on the loss suffered by the class overall, but without undertaking an assessment of the damages recoverable by each individual claimant in the proceedings);
• to set out how the representative should distribute any damages to claimants; and
• to decide how any undistributed damages should be applied (including for “charitable or other purposes”, which would include distribution by a cy-près  scheme to a suitable body advancing the claimants’ objectives).

Costs shifting. The Bill itself  does  not purport to change the existing costs rules which apply in England and Wales. However, there is provision for rules of court to be introduced  dealing with costs in collective actions. The payment of a proportion of the claimants’ costs out of the pot of damages is specifically suggested. Otherwise it is unlikely that the rules of court would significantly alter the basic costs shifting principle. Although the prospect of abolishing the cost shifting principle for collective actions has been raised separately as part of Lord Justice Jackson’s Review of Civil Litigation Costs (see post), the government’s response to the CJC report gave strong support for retaining the cost shifting rule to help deter unmeritorious claims.

Security for costs. The question of whether security for costs should be available against a representative claimant is not addressed in the draft Bill, although this too could be dealt with by rules of court. It is likely that the court’s power to award security for costs will be preserved at least in some form, as this is widely seen as another useful tool to deter unmeritorious claims.

Further regulations. A wide range of other matters are left to be addressed by regulations or rules of court including:

• modification of the effect of limitation periods for collective actions;
• what steps representatives must take to bring the claim to the attention of potential claimants;
• the criteria for making a collective proceedings order;
• how counterclaims can be brought;
• how settlements of collective actions can be effected (including any requirement for approval by the court).

Role of the FSA. It would be possible under the proposed regime for the FSA to act as the representative claimant, in appropriate cases. There is also provision for regulations to be made which would give the FSA (or the OFT or the Financial Ombudsman) the right to be heard before the Court on any application for a collective proceedings order. However, there is no general requirement for the FSA to be involved in or notified of any collective action initiated under the proposed regime.

Next steps

It remains to be seen whether the Bill will be passed by Parliament and, if so, whether the collective action proposals will be amended in any significant way before enactment. There has been speculation in some quarters that there will be insufficient parliamentary time before the next general election to enact all of the measures announced in the Queen’s Speech. However, it is likely that the Financial Services Bill will be given a particularly high legislative priority and there is therefore a real possibility of the Bill becoming law in the coming months. How soon thereafter the new collective action procedure will be implemented remains an open question.

Comment

The proposals in the Bill for collective actions will represent a new chapter in financial services litigation in England and Wales if they become law. While collective actions  under this regime will differ significantly from US-style class  actions, the potential for opt-out proceedings in particular will be a major cultural change from the way in which multi- party claims have been pursued in the past. For example, a significant body of new law and procedure is likely to evolve as a result of:

• the need for the court to determine which types of cases are suitable for collective actions (especially how the court interprets the requirement for claims to arise from the “same, similar or related” issues of fact or law);
• the practicalities of litigation involving an “opt-out” body of claimants who are not identified and joined to the proceedings in the traditional way; and
• the assessment of damages on an aggregate basis, which could give rise to difficult questions as to how concepts such as causation, remoteness and contributory negligence can be applied in collective actions.

The Government’s Impact Assessment for the Bill suggests that the FSA may wish to be involved in securing collective redress on the part of consumers under these reforms, although there is likely to be interest in pursuing collective actions from consumer groups and private claimants as well.

The Impact Assessment also notes that the majority of complaints to the Financial Ombudsman Service are concentrated in a small number of products, headed by mortgage endowments and personal pension plans, making collective actions in these areas particularly likely. Any disputes along the lines of the recent litigation over bank overdraft charges led by the OFT (see Office of Fair Trading v Abbey National plc & ors [2009] UKSC 6) may also be pursued as a collective action in future.

The proposed reforms reflect a dramatic departure from the measures suggested in the Treasury’s White Paper on Reforming Financial Markets. The White Paper contemplated collective actions, but only where sanctioned by the FSA, where the FSA observed a breach  of its rules and where use of the FSA’s other powers or the Financial Ombudsman Service would be insufficient. Indeed it went so far as to suggest collective actions would be appropriate only in “exceptional cases”. None of these limitations on the use of collective actions has found its way into the Bill.

The White Paper also suggested that the FSA would be responsible for nominating the representative claimant who would bring any collective action, whereas the Bill simply provides for the representative to be appointed by the court on an application for a collective proceedings order.

It is unclear why the FSA’s regulatory oversight over collective actions as proposed in the Treasury White Paper has been abandoned in favour of an approach far closer to the model proposed by the CJC, in which a collective action is effectively a private right of action to be pursued by individual litigants.

Has the FSA expressed opposition to its proposed involvement in the scheme envisaged in the Treasury White Paper, preferring instead to exercise its regulatory powers, for example, to direct past business reviews as a means of procuring redress for consumers? In any event, it is to be hoped that the reasons for these notable departures from the Treasury White Paper become clearer on further readings of the Bill.

If the reforms in the Bill are introduced  successfully, it is likely that they will form a model for the introduction of collective actions in other fields beyond financial services; these might include employment, environmental and mass tort claims. They may also influence how the UK implements any forthcoming EC Directive on collective actions in the area of competition claims.

We will continue to monitor the Bill’s progress and provide further updates on any significant developments.