Following in the footsteps of its £3.15 million mea culpa, the FCA released MS14/3.2, its retirement income market study, and TR14/20, reviewing annuity sales practices.

Both reports suggest that the FCA has indeed learned a lesson from the debacle which followed its botched media briefing on the scope of its annuity sales review. Not the weighty thoughts of Sir Simon Davis (226 pages) but a much simpler lesson: time limits matter. Ignoring them can cost £3 billion of shareholder value, your bonus or even your job.

It was the suggestion in The Telegraph that the FCA wanted annuity providers to review decades worth of past annuity sales which originally caused such alarm on the stock market. Contrast this with the muted response to the publication of the final report which, rather blandly, “ask[s] the majority of firms to do further work to determine if [the FCA’s] findings in relation to enhanced annuities are indicative of a more widespread problem and/or have led to poor consumer outcomes” in “the period since the FSA’s previous thematic work on Open Market Options in 2008”. It could be coincidence but the choice of the Open Market Options review is potentially significant as it took place approximately six years ago; suggesting that the FCA has come to accept that the law of limitation should apply to reviews of past business.

In fact, while there have been stories in the press in the past months about some firms interpreting their historic liabilities very broadly, with Coutts reportedly writing to some customers back to 1957, firms may already be able to time bar liabilities under current UK law.

Historic liabilities and time limits

There are two ways in which firms may find themselves reviewing historic liabilities: firstly, because a firm determines that circumstances require it to conduct a voluntary past business review (PBR); or, secondly, because the FCA establishes a statutory consumer redress scheme.

There are no rules preventing firms from relying on limitation defences when considering a PBR (as Amy Parr commented in June). Under DISP 1.3.6G firms conducting PBRs must consider whether they should provide customers with redress and give those who have not yet complained an opportunity to seek redress. This is likely (at least in the first instance) to take the form of a customer contact exercise. This customer contact exercise arguably ought to include customers who may be time-barred from complaining because all customers who may have suffered detriment must be given the “opportunity” to seek redress. Customers with time-barred complaints may, for example, be informed that the firm believes their complaint is time barred and that this is the firm’s final decision for the purposes of the DISP rules. They must also be made aware of their right to have this final decision reviewed by FOS.

The situation is similar for firms subject to consumer redress schemes. Despite the fact that firms are compelled by the FCA to participate in such schemes under section 404 FSMA, the schemes still allow for limitation defences. Section 404 FSMA provides that the establishment of a consumer redress scheme stops time for limitation purposes but time bar arguments remain open if those liabilities became time barred prior to the scheme’s implementation. Nonetheless, FSA/FCA guidance on customer contact letters is that firms should to contact all customers even if they do not believe that they would be eligible for redress.

The long road to long-stops

There have been calls from other retail sectors with long-tail liabilities for the FCA to take further action to curtail firms’ liabilities. Most notably APFA has waged a lengthy campaign for the FCA to recognise a long-stop date for liabilities arising from breaches of FSMA or the FCA Handbook.

APFA reportedly met with the FCA earlier in the year to put its case. The FCA then threw a curve-ball at the campaign, as explained by my colleague Tom Hunter, suggesting that the EU ADR Directive prevented the FCA from introducing a long-stop into UK law. APFA responded by threatening to take the FCA to court over the matter.

It seems that these firmer tactics have borne fruit with the FCA agreeing in its consultation paper CP14/30 Improving Complaints Handling that the EU ADR Directive did not, after all, prevent it from introducing a long-stop and that it would consider the issue in a forthcoming review.

Prior to the FCA’s announcement on annuities, I would have been pessimistic about the outcome of this long-stop review. However, the serious impact of long-tail liabilities have been brought home to the FCA and it seems that, thankfully, the FCA may be reconsidering its position on time limits. In the meantime firms can, and should, use the existing law to limit their historic liabilities.