Firms face having to pay customers’ full losses
The FSA is seeking to arm itself with new powers that disregard a basic principle of UK law, City law firm Reynolds Porter Chamberlain (RPC) has warned.
The new powers in question are those force financial services firms to provide 100% redress to customers who have suffered financial loss even if the loss was not caused by the firm’s rule breach or faulty advice,
As the law of “causation” stands, if a financial services firm breaches the FSA rules when providing advice they are only liable to compensate their customer for any losses that can be directly attributed to the faulty advice.
The firm can currently decline to pay compensation if they are satisfied that their breach of the rules did not cause the loss. For example, they might be able to show that the customer would have proceeded to invest even though the adviser failed to document correctly the customer’s Attitude to Risk (ATR), in accordance with rules.
RPC explains that if Parliament accepts the FSA’s invitation to change the law, firms will be strictly liable to compensate customers for all financial losses when their actions breached the FSA rulebook, no matter how small the breach.
RPC’s Simon Laird said: “Regulated firms will be very disappointed if they find themselves forced to compensate customers for losses that may be unrelated to a minor technical breach of the rules.”
“Small technical breaches in documenting advice, such as failing to send the customer a suitability report, rarely impact investment decisions but could mean the firm is liable for the customer’s total losses from a financial product if the FCA is granted this power.”
“Effectively these changes to the law could encourage customers who were perfectly aware of the risks they were taking to look for a loophole through which to claim compensation. The message we hear from firms is that consumer responsibility is being thoroughly ignored in the current proposals for the FCA.”
The FSA invited Parliament to reconsider the law in its memo to the Joint Committee on the Draft Financial Services Bill.
This says: “Our experience is that members of the public and Parliamentarians have been of the view that – as a matter of public policy – the breach of the FSA’s rules should in all cases entail the consumer receiving 100% redress. However, the FCA’s ability to ensure that consumers receive redress is constrained by the general law, in particular by questions of causation. If the breach of the 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.”
Laird said: “The Financial Ombudsman already makes it harder for firms to reject compensation claims on the basis that they did not cause the customer’s loss. However, enshrining this in law so that regulated firms are denied the right to argue that their mistake had no bearing on the customer’s decision to invest or the outcome of the investment flies in the face of common sense.”
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