Government removes class action provisions from Financial Services Act

The Financial Services Act 2010 has now received Royal Assent, after receiving expedited passage through Parliament in the "wash-up" procedure before the general election. However, the provisions relating to collective actions in the financial services sector were removed from the Financial Services Bill. Such a move has, at least for the time being, halted what would have been an important and far-reaching change to the way in which consumers can pursue claims against financial institutions. It would also have marked the first time that "opt-out" collective actions had been permitted under English law.

The provisions in the Bill relating to consumer redress schemes have, however, been retained and it is possible that consumers may be able to seek compensation via this route in some cases.

Summary of withdrawn provisions

The key features of the proposed collective action procedure included the following (see post):

• The court would authorise any collective action (by the making of a "collective proceedings order");
• The court would decide whether the claim proceeded on an opt-in or opt-out basis;
• A court-appointed representative would effectively act as the "lead claimant", who could be one of the claimants, a regulator or another body such as a consumer group;
• The procedure would be restricted in scope to "financial services claims" (i.e. claims against banks and other financial institutions in relation to their regulated activities);
• Aggregation of damages would be allowed, meaning that damages could, in appropriate cases, be assessed by reference to the overall class of claimants rather than each individual claimant.

Initially the collective actions procedures were to be available for claims by businesses as well as consumers. However, a subsequent government amendment would have restricted their scope to claims by consumers only.

The Financial Services Bill

The Bill was introduced to Parliament in November 2009 and, in addition to the collective action proposals, included a range of new measures such as expanding the FSA's powers in the areas of executive remuneration, short selling and disciplinary procedures.

On 7 April 2010, the Financial Services Secretary to the Treasury, Lord Myners, announced that the collective action provisions of the Bill (clauses 18 to 25) were to be withdrawn with a view to passing the remainder of the Bill before the dissolution of Parliament. This approach was agreed as part of the "wash-up" procedure to give express passage to outstanding bills in the last sitting week before the election, which typically sees contentious or complicated parts of legislation removed in negotiations between ministers, shadow ministers and party whips.

In the case of the collective action proposals, the Conservative Opposition had proposed a detailed series of amendments which had yet to be analysed in the Bill's committee stage. Under those amendments:

• A stricter test would be imposed for the authorisation of collective actions (requiring "common" issues of fact or law, rather than the "same, similar or related" issues);
• Representatives (i.e. lead claimants) would need to be authorised under the Civil Procedure Rules or by order of the Lord Chancellor and must not have any financial interest in the proceedings except in the capacity of claimant;
• Opt-out proceedings would only be available where opt-in proceedings would not be practicable;
• Collective actions would only be available where the FSA had refused to act or failed to act expeditiously under its power to impose consumer redress schemes;
• Hearings to authorise collective actions would be handled by a specialist group of High Court judges and the jurisdiction of the County Court would be removed; and
• Any settlements of collective actions would be subject to review by the court on fairness grounds.

Given the wide scope of these amendments, it is not surprising that this section of the Bill was dropped so that the less contentious parts of the Bill could be brought into law before the election.

The amended version of the Bill was passed and received Royal Assent on 8 April 2010.

Other developments on the horizon

In addition to the Financial Services Bill, there have been recent moves towards a new collective action procedure for consumers more generally as part of the proposed introduction of a Consumer Advocate.

The Department for Business, Innovation and Skills recently concluded its consultation on the role and powers of the Consumer Advocate. Under those proposals, a new office of Consumer Advocate would be created and the Advocate would have the power to bring a collective action on behalf of consumers who have suffered a loss as a result of a breach of consumer protection laws. The proposals envisage that collective actions would only be permitted on a "follow-on" basis, i.e. against a party which had already been found in breach of consumer protection law as a result of public enforcement action, and potential claimants would be required expressly to opt in to the collective action before damages were determined. As such, this represents a more limited procedure than that originally proposed in the Financial Services Bill.

The Government is expected to respond to the consultation later this year. No legislation has been formulated at this stage.

Comment

The removal of the collective actions proposals from the Financial Services Bill means that, for the time being, multi-party claims by consumers against financial institutions will continue to be brought under existing procedures (including test cases, group litigation orders and representative proceedings). The provisions in the Bill relating to consumer redress schemes have, however, been retained which may offer an alternative route for compensation in some cases. The consumer redress provisions will commence on a date to be appointed by the Treasury or the Secretary of State.

It remains to be seen whether there will be renewed moves towards the introduction of collective actions in the financial services sector in the next Parliament. It seems unlikely that the issue will be dropped altogether. The Government made clear that despite withdrawing the collective actions provisions on this occasion it still regards them as "important and necessary measures" and presumably would seek to reintroduce them to Parliament if re-elected (although the Minister did concede that "more work is needed" to address concerns raised about the proposals). The Liberal Democrats also expressed their support for the proposals during the earlier stages of the Bill.

The Conservative shadow minister indicated that deletion of the proposals would give the next Government the chance to consult further on them and to consider how any new collective action mechanism should sit with existing procedures. He also suggested that a more general reform of consumer claims might be pursued, rather than one focussed purely on financial services. However, given the nature of the Opposition amendments to the Bill proposed at the committee stage, it is likely that the Conservatives would favour a more restricted form of collective action than the one originally contained in the Bill.