New Redress Powers for the FCA

by | Nov 28, 2024 | For Clients

I recently received an email from my friend Mark Dennison from The Compliance Department. Some of you may know Mark or use his compliance services and may have already read his article. What drew me to the email was the use of the word “scary” in the title, which immediately piqued my interest.

Mark has kindly allowed me to share the gist of his article for those of you who haven’t seen it.

So, what’s it all about?

In mid-October, a significant ruling from the Court of Appeal (COA) emerged that could impact financial firms across the UK. Mark has stressed that while there’s no immediate action to take, it’s worth taking the time to understand the key points and potential implications.

In short, the COA has overturned a previous decision by the Upper Tribunal (UT) in the case of The Financial Conduct Authority v Bluecrest Capital Management (UK) LLP. The COA ruled that the FCA (Financial Conduct Authority) doesn’t need to prove legal liability before requiring a firm to compensate clients under a single-firm redress scheme.

This decision could have wide-reaching effects, especially following the introduction of the Consumer Duty, which requires firms to prevent and address foreseeable harm to consumers.

Here’s a straightforward breakdown of the key terms and what this means:

What Is a Single-Firm Redress Scheme?

A single-firm redress scheme allows the FCA to require a company to compensate all affected clients for a widespread issue, as outlined under Section 404 of the Financial Services and Markets Act (FSMA).

What Is Legal Liability?

Legal liability typically requires four elements to be proven:

  1. Breach of duty
  2. Actionability (the claim must be actionable under the law)
  3. Causation (a direct link between the breach and the harm caused)
  4. Loss (clients must have suffered actual losses).

If any of these elements are missing, legal liability isn’t established, meaning compensation isn’t typically due.

What Happened in This Case?

  • The UT originally sided with Bluecrest, stating that the FCA couldn’t demand redress unless legal liability was proven.
  • The COA disagreed, ruling that the FCA can require compensation under a redress scheme, even without meeting the four conditions for legal liability.
  • The COA pointed out that other routes for redress, like complaints handled by the Financial Ombudsman Service (FOS) or restitution orders under Section 384 of FSMA, don’t always require the same strict conditions.

What Does This Mean for Firms?

This ruling strengthens the FCA’s powers. The FCA can now use its judgement, within the limits of rationality and public law, to act in the name of consumer protection—even if legal liability isn’t established.

For firms, this could mean greater scrutiny and the possibility of redress obligations based on the FCA’s interpretation of harm, not just on clear breaches of legal duty. While some may hope for a further appeal to challenge this decision, it raises questions about how firms will navigate this expanded scope of FCA authority.

Mark has mentioned that he is planning to provide an update next month. If anyone would like to discuss this further or get in touch with Mark, I’m happy to pass on his details.