The FSA has now floated the idea of enshrining in statute what we have long known to be its (and FOS’) objection to the law of causation. The proposal would, in effect, create strict liability by making firms liable to compensate clients even if they did not cause the loss. If implemented, such a proposal would create a further divide between the regulated and unregulated sectors and (inevitably) generate another understandable grievance for financial services firms.
In its recently published evidence to the Joint Committee on the Draft Financial Services Bill the FSA said, regarding future regulatory powers to deal effectively with misconduct and mis-selling: “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 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“.
I have often noted the FOS’ propensity to disregard what it sees as technical causation defences where firms argue that any beach of rules or duty of care did not cause the losses suffered. This already creates uncertainty through the different approaches of the courts and FOS. The FSA’s proposal would see this distinction enshrined in statute.
Last month, I commented on a significant court case relating to mis-selling of the AIG Enhanced Fund. In that case, although the adviser was found to have been in breach of his common law duty of care and old COB rules, the Judge decided that “what happened to the [Enhanced Fund] on 15 September 2008 and the days following was wholly outside the contemplation of the bank or any competent financial adviser in September 2005. I find that the loss was not caused by any negligence on the part of [the adviser] … I also find that the loss was not reasonably foreseeable by HSBC and is too remote in law to be recoverable as damages for breach of contract or in tort“. The Judge concluded that the same reasoning applied to a claim for damages for breach of statutory duty under s. 150 of FSMA and therefore awarded only nominal damages.
The causation principles applied by the High Court will not bind FOS and so the decision offers only limited comfort to firms facing similar mis-selling complaints. We must wait to see what (if any) impact the case has on FOS’ treatment of such complaints. This is precisely the sort of case where the FSA’s proposal (if implemented) would render the firm liable despite, as a matter of current law, not having caused the loss.
If the FSA wishes to be able to impose liability on firms (whether via FOS decisions or when creating consumer redress schemes) without reference to causation principles it will have to persuade the Government to amend FSMA to disapply common law principles of causation from the regulated financial services sector.
The de facto position within FOS could be made de jure by simple amendment to the language of s. 228 FSMA which sets out the FOS’ jurisdiction to decide matters on the basis of what, in the opinion of the individual Ombudsman, is fair and reasonable in all the circumstances. The new Financial Services Bill would simply have to add words such as: “regardless of the law of causation“.
To prevent firms from avoiding liability to consumers under a redress scheme (or equivalent past business review) the right to damages under s. 150 FSMA would have to be amended, at least, to remove the words “as a result of the contravention, subject to the defences …“. More likely, express provisions would be required to rule out causation defences.
As matters stand, firms can decline to pay compensation as part of a scheme or past business review if satisfied that any breach did not cause the losses. For example: if the investor would have proceeded to invest regardless of the failure by the adviser to identify the correct ATR; or, if the policyholder would have proceeded to take the product even if they had been made fully aware of particular features or risk warnings.
Why, in justice should firms have to pay for losses they have not caused? If a firm commits a technical breach (like HSBC’s failure to send a suitability report in the AIG case cited above) but the advice given would have been the same and accepted in any event, would such a firm really be held liable to compensate its client? Imposing such strict liability effectively makes firms guarantors of the products they sell.
If the FSA is given a clear mandate and powers in the new legislation to require greater levels of redress notwithstanding causation defences it will make real the fears first expressed when the predecessor to s.150 was created in s.62 of the Financial Services Act 1986. Then the industry was reassured that legal defences would still be available as the loss had to ‘result’ from the breach. It would mark a radical change in the exposures of regulated financial services firms if those protections were lost. I wonder whether the professional indemnity insurance market would be willing to insure firms subject to such liabilities. The implications (legal and commercial) would require considerable debate.
As Parliament is sovereign and can therefore bend the law to its will, there is nothing that we (as financial services lawyers) or regulated firms can do but continue to make the common sense arguments on which established jurisprudence is based. Given the perception of a retrospective requirement of suitability, firms already feel as though they become guarantors of consumer investments and I believe any proposal to do away with the law of causation would create justifiable outcry.