Dispute Resolution
From bet-the-farm- disputes- to courts of opinion
Chancellor Rachel Reeves delivered her first Mansion House speech in November. She started by reiterating that "economic growth" is the "national mission". The Chancellor reviewed some of the plans which she had set out in her first Budget that seek to tackle some of the longstanding issues in the supply-side of our economy before moving on to speak about her plans for financial services, "the crown jewel" of the UK economy. A key theme of the speech is the focus on removing barriers to growth and investment, highlighting that the UK’s status as a global financial centre cannot be taken for granted. With that in mind, the Chancellor announced a number of important reforms, some of which are a continuation of existing initiatives being taken to the next stage, while others are new. The implications and benefits of these reforms will crystallise over time but this is a helpful recognition of the role financial services can play in growth and that calibrating regulation appropriately is key to making the sector more dynamic and competitive. The announcements in the speech included:
For further information, please see our blog here.
With the 'new' enforcement leads now settled in at the FCA, the drive towards an enforcement approach which is more targeted has become apparent. Enforcement data (relating to both financial services firms and listed entities) that was published as part of the Annual Report package in September presents a significant uptick in case closures, with 60 enforcement case closures in 2023/24 versus 38 in 2022/23. This is alongside a marked reduction in the number of new cases opened; the FCA opened only 25 cases in 2023/24 in contrast to the 60 cases in 2022/23.
A substantial rump of cases remains, with 503 individuals and firms under investigation as at the FCA's financial year end in March 2024. While this is down from 591 open investigations at the end of March 2023, the FCA's push to speed up its enforcement activities is likely to take some time to materialise.
However, the FCA's controversial transparency proposals – otherwise known as the 'name and shame' proposals – remain a cause for concern across regulated firms and listed entities. The proposals, originally published for consultation in February, would see the regulator publicly announce the opening and progress of regulatory investigations, including disclosing the names of the investigated entities (but not individuals). The proposal was heavily criticised by politicians, industry and policy influencers calling on the regulator to think again. In particular, commentators noted:
Under pressure, the FCA released marginally revised proposals in November 2024. The regulator now says that it will factor consideration of the potential impacts of disclosure on both the firm concerned and on public confidence in the financial system or the market as part of its new 'public interest' test. Further, the FCA now intends to give firms 10 business days' notice of its intent to disclose to facilitate representations, with a further two days' notice if the FCA ultimately determines to proceed – this is vastly improved on one day's notice as proposed in February. And, while the regulator remains unbowed on the issue of traditional cost versus benefit analysis, it has provided some thoughts on impact in the new consultation. Fundamentally, however, the criticisms which met the FCA's first attempt remain. Additional time to make representations does not, in the end, mean the FCA will not publish a statement which causes damage to a firm, its staff, its customers, and/or by association the rest of the sector or part of thereof – it is very difficult, if not impossible to 'put the genie back in the bottle'. Further, firms which have witnessed the FCA's novel adaptation of its tools over time will find scant comfort in any reassurances as to intention which may be offered by those currently in post at the FCA.
Responses to the second consultation are requested by 17 February 2024. Herbert Smith Freehills responded to the FCA's first consultation on the proposals, and also engaged widely with clients and other stakeholders. We will engage with the regulator during the second consultation exercise, and continue to encourage better, evidence-based policymaking.
For more enforcement data insights, please see our blog here. For more on the FCA's proposals on "name and shame", see a summary of our response here.
The FCA's Consumer Duty has been in place for new products since July 2023. In July 2024, it also became applicable to "back book" products (ie, those sold before the Duty's 2023 application date). With the Duty now reasonably established and fully applicable, the regulator is assessing how firms have responded, with recent supervisory work across cash savings, "GAP" insurance, and the treatment of interest on cash balances held by investment platforms. The FCA will continue to look at particular products and services, applying the Consumer Duty lens as it scrutinises outcomes for consumers.
Another challenge for the regulator will be how it supervises (and, where necessary, intervenes with firms on) the "price and value outcome" under the Consumer Duty while maintaining the position that it is not a price regulator. The FCA will need to do this without undermining its credibility with consumers and consumer advocates.
The FCA is also considering how the Duty can successfully interact with, and help to appropriately further, the secondary international competitiveness and growth objective which was introduced with FSMA 2023. The government's forthcoming Strategy (see above) may help to guide the FCA in this respect.
The FCA has also commenced what is likely to be a lengthy exercise to review its existing rulebook to identify and remove content which is no longer required and address content which does not appropriately align with the Consumer Duty.
On 7 October, the UK's new statutory Authorised Push Payment (APP) fraud reimbursement scheme went live but not before a significant last-minute change was made, which reduced the scheme's maximum compensation cap from £415,000 to £85,000. This new cap will cover over 99% of claims by volume. Under the new scheme, the defrauded customer's provider makes the reimbursement, and then claims 50% of the amount refunded from the receiving provider used by the fraudster. The Payment Systems Regulator (PSR), which is regulator responsible for the new scheme, has commented that this shared responsibility model will incentivise payment providers to improve fraud prevention measures.
The PSR's Managing Director has called the new scheme's protections "world-leading". The greater potential benefit lies in its ability to drive sophisticated and innovative anti-fraud developments, creating a world-leading payments environment in the UK that can be applied more broadly across other financial markets and commerce infrastructures.
An independent review, confirmed by the Chancellor in her Mansion House speech, will be conducted within the next 12 months.
For more about the scheme, see the series of articles here.
The Court of Appeal has handed down a single judgment in relation to three appeals considering lender liability in the context of non-disclosed and partially-disclosed commissions paid by lenders to credit brokers: Johnson v FirstRand Bank Ltd (London Branch) (t/a MotoNovo Finance) [2024] EWCA Civ 1282. Application to appeal has been made to the Supreme Court, but pending the outcome of that decision, the Court of Appeal's decision will be binding.
From the regulatory perspective, prior to the judgement, it was generally accepted based on comment from the FCA that a redress scheme would be instituted. Speaking to market analysts in late July 2024, FCA CEO Nikhil Rathi observed that, "based on the work we have done to date is that we think that it is more likely than when we started the exercise that we may need to make a structured intervention to ensure appropriate redress to consumers". Such an intervention could be in the form of a structured redress scheme under s.404 of FSMA 2000 which would be subject to formal rule-making processes (eg, consultation, cost v benefit analysis); the most recent example of such a scheme is that put in place for British Steel Pension Scheme members. The Supreme Court's ruling will influence the scope of such an exercise – it may also set the stage for intervention in other areas.
There is also, of course, the option for supervisory or enforcement action at an individual firm level if the FCA determines this is warranted; enforcement action would be publicly disclosed.
The FCA has said that it is monitoring the progress of this decision, liaising with affected parties, the industry and the government, as the outcome feeds into its review of motor finance DCAs (announced in January 2024). The FCA is using its powers under s.166 of the Financial Services and Markets Act 2000 (FSMA) to gather information from firms. It has also introduced arrangements for the handling of motor finance complaints by regulated firms and by the Financial Ombudsman Service (FOS) to accommodate the review. This included a pause for the 8-week deadline for a final response relating to such complaints, which was subsequently extended on 30 July 2024. The FCA plans to set out its findings of its review in May 2025.
As noted, a redress scheme is certainly more likely now than it appeared at the commencement of the s.166 exercise.
The contents of this publication are for reference purposes only and may not be current as at the date of accessing this publication. They do not constitute legal advice and should not be relied upon as such. Specific legal advice about your specific circumstances should always be sought separately before taking any action based on this publication.
© Herbert Smith Freehills 2024
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