- Voluntary initiatives to compensate will make financial products more expensive
- FSA rewrite of rule book made "under the guise" of MiFID
- Firms may become uninsurable
Companies could be required to voluntarily compensate all of their customers under the new rules being brought in under the guise of the EU's Markets in Financial Instruments Directive (MiFID), warns City law firm Reynolds Porter Chamberlain LLP (RPC) at their Financial Services seminar held today (May 17).
RPC says that MiFID, which comes into force on November 1, is being used as an excuse to rewrite the Code of Business Rules (NEWCOB) and the Dispute Resolution Rules that cover all financial services business - even though many, such as IFAs and insurance brokers, are not covered by MiFID.
Jonathan Davies, Partner, of RPC says: "The new Dispute Resolution rules could see many companies being required to offer compensation on a proactive basis once they become aware of a recurring problem. At the moment they can wait until a customer complains. This institutionalises the Pensions Review."
"This will be a costly exercise that will inevitably hit the pockets of customers by pushing up the price of financial products. Not only will companies need to review their procedures once a recurring problem arises, there is also the expensive possibility of providing voluntary compensation to all its customers."
"The new rules are unlikely to be welcomed by professional indemnity insurers, and regulated firms may once again find it very difficult to obtain insurance."
"It is hard to think of another sector in which businesses are required to give clients compensation for problems the clients did not know existed."
The FSA have incorporated the Treating Customers Fairly (TCF) agenda into the new rules, so not responding to a recurring problem could be regarded as breaching the TCF principles. The new rules state:
"A firm should have regard to principle 6 (Treating Customers Fairly) when it identifies problems, root causes or compliance failures and consider whether it ought to act on its own initiative with regard to customers who have not complained."
The FSAs recent targeting of companies mis-selling Payment Protection Insurance (PPI) shows their intention to apply the TCF principles aggressively.
Says Jonathan Davies: "Should a similar mis-selling scandal arise again, the FSA will be expecting firms to take the initiative in compensating their customers."