HFW Insurance & Reinsurance Bulletin - January 2010

The Financial Services Bill By Graham Denny

On 19 November 2009 the Government introduced the Financial Services Bill (the "Bill") to Parliament, to provide greater rights and information for consumers and stronger financial regulation to make banks more robust in the future. It follows the "Reforming Financial Markets" White Paper of July 2009, which considered the causes of the financial crisis, action to be taken to restore financial stability and possible regulatory reforms.

The Bill will not become law unless and until it undergoes the necessary Parliamentary process, but of particular note in the Bill are the extensions of the disciplinary, enforcement and information gathering powers of the FSA and the implementation of a new collective redress system for financial services claims. These are potentially significant issues for the financial services industry and insurers.

Disciplinary, enforcement and information gathering

The extensions to the FSA's disciplinary and enforcement powers for those who have breached the rules include penalties for those who perform controlled functions without having the required FSA approval, but lack of knowledge that the function was a controlled one could be a defence.

The FSA will have extensive powers to obtain and require information or documents it considers relevant to the stability of one or more aspects of the UK financial system. This power extends to managers of investment funds and persons connected to them, as well as service providers who provide services to an authorised person. A service provider is likely to include professional advisers. The Bill does provide for safeguards in relation to the exercise of these powers by the FSA.

Collective redress

The potential impact of the collective redress proposals in the Bill cannot be overstated and follows a considerable amount of debate over the last few years concerning the existing collective redress mechanisms in England and Wales, the primary fear being a move towards the US class action system. The Bill proposes significant changes in this area for "financial services claims", which are defined broadly in the Bill.

Amongst the proposals are: that claims need not be brought by those individuals in whom the cause of action rests but can be brought by representatives who have no interest in the proceedings; the courts are to decide as to whether collective actions can be brought on an opt-in or opt-out basis; and, the courts are permitted to make an award of damages without undertaking an assessment of the amount recoverable in each individual claim. The collective redress proposals will require a new set of procedural rules to be created by the court or at the very least an update to the current rules.

Comment

The threat of the introduction of a US class action system was hitherto considered unlikely primarily because the current system in England and Wales does not provide for class actions on an opt-out basis and there is also a different attitude in the US to litigation funding and costs. The Bill proposes changes potentially paving the way for collective redress actions for...