Financial Services update

Financial Ombudsman service news

In May 2011, the FSA announced that it would be making various changes to the Financial Ombudsman Service. The key dates and changes are as follows:

1 September 2011

 Where a firm receives a complaint and they either reject it or they accept the complaint and offer remedial action they must respond to any complaint by enclosing a copy of the FOS’s standard leaflet and inform the complainant that if they are dissatisfied with the response, they may refer the complaint to the FOS, and must do so within 6 months.

 Determinations by the FOS against a firm should be used by that firm as part of training and development. In particular, individuals to whom the complaint relates should be informed of the determination and it should be used to further their training and development. 

Firms should also identify the senior person at the firm responsible for handling the complaints and compliance in general.

1 January 2012 

The Ombudsman can award up to £150,000 from 1 January 2012. However, any complaint referred to the FOS before 1 January 2012, will remain at £100,000.

Treasury publishes white paper on financial regulation reform

On 6 September 2011, HM Treasury published a consolidated version of the Financial Services and Markets Act 2000. The purpose of this consolidated version is to show how the changes introduced by the Financial Services Bill will be incorporated.

In June 2011, the Government published a White Paper to reform the financial services sector, in order to prevent a repeat of the 2008 lending and debt crises, the repercussions of which are echoing across European central banks this month.

The paper largely reproduces and fleshes out earlier government announcements to date but, in a move welcomed by industry, the Government has chosen to revise and update the Financial Services and Markets Act 2000 (FSMA) rather than a repeal and implementation of a new act.  The policy proposals outlined in the White Paper can be summarised as follows.

Financial Policy Committee FPC

The FPC will be committee of the Court of the Bank of England. The FPC will meet on at least a quarterly basis and will comprise of the Governor of the Bank of England, 3 deputy governors of the Bank, 2 Bank executive directors, the Chief Executive of the Financial Conduct Authority, 4 external members and a non-voting Treasury representative.

The FPC will be responsible for overseeing stability and identifying risks in the financial services industry. Where risks have been identified, it will offer advice to governmental bodies which have authority over the area identified, such as the Treasury, the new regulators and the Financial Reporting Council. The FPC will also have the power to make directions to Prudential Regulation Authority and the Financial Conduct Authority.

The Government harbours great hope that the FPC will be able to provide a guiding hand and foresight to prevent the next financial crises. There are some promising signs that it may be successful, in that the FPC committee is made up of representatives from all the relevant authorities, and this may help to create a more structured and collegiate approach to financial regulation within government. Further, the remit of the FPC is to identify and dampen future risks, which although inherently difficult to do, does do more than merely react and put out the fires which have already ravaged the industry.

Prudential Regulation Authority  PRA

The PRA will be part of the Bank of England, and will be responsible for the regulation and supervision of deposit taking firms. The PRA will generally take a ‘big picture’ approach to its supervisory responsibilities. The exact firms and the level of supervision which the PRA will take have not yet been specified. However, the White Paper allows for the PRA to bring intensive supervision where it considers that the firm poses a particular systemic risk to the sector.

Financial Conduct Authority FCA

The government proposes that the FCA will focus on the protection of consumers and, in particular, fostering a climate of competition and transparency for financial promotions.

The FSA has since published some guidance on the new powers which will be wielded by the FCA, these include the power to direct firms to withdraw or amend misleading financial promotions with immediate effect, to publish a warning notice in relation to disciplinary notices, and to strengthen the FCA’s powers in relation to tackling misleading information. 

Related links:

Financial Services Bill

White Paper

FSA Consults on Mortgage Fraud Prevention

The FSA has sought to take a tough stand against mortgage fraud, and is aiming to bring in systems and guidance in order to provide the industry with greater protection.

The FSA launched a consultation on financial crime labelled CP11 / 12 in June 2011.  The FSA plans to publish a policy statement and final version of CP 11/12 Guide towards the end of 2011.

To access the consultation, follow the link below:

http://www.fsa.gov.uk/pages/Library/Policy/CP/2011/11_12.shtml

Controversial Alternative Investment Fund Management Directive entered into force on 21 July 2011

The Alternative Investment Fund Management Directive 2011/61/EU (“AIFM”) was created by the European Union in response to the financial crisis, and the Madoff scandal of 2008. The purpose of the directive is to create a European wide regulatory framework for EU established alternative investment funds managers, in order to promote transparency in the funds, accountability of fund managers and protect investors.

The AIFM directive will apply to all venture capital funds, commodity funds, property investment funds, and investment funds – including hedge funds. It will require a minimum capital requirement of €125,000 on all alternative investment funds. It also aims to reduce the secrecy currently employed by funds by introducing procedures for independent valuation of the funds assets, and requiring that the relevant managers are authorised and subject to regulation by the relevant regulatory authority in the member state in which they are domiciled. In addition, they have controversially require that the managers, disclose to investors the type assets they will acquire, the strategy, approach to risk and the amount of leverage in the fund. This requirement, it is feared, will reveal market sensitive information, and may inhibit the competitive advantage which the funds require to maintain a healthy investment return.

Some will argue that these measures are largely overdue, given that the funds have the potential to wield such financial clout, and are responsible for the investment of many institutional investors. However, others have criticised the “one-size-fits-all” approach, and have made a case for layering the levels of supervision, depending on the size of the fund. Perhaps, and not for the first time, those in the finance industry have threatened to move their funds elsewhere in response to increased regulation, and have pointed to a lack of discussion with other markets, noticeably the US, which now has looser regulation than the EU. It is interesting to note, that prior to the 2008 crash, there were calls on the US to loosen its regulations as it was losing business to the EU. The greater regulation in the US at the time, failed to prevent either the crash or the Madoff scandal, and there is a fear that regulation will always be ineffectual and colloquial in playing catch-up in what is a fast moving and global industry.

For further details, please click here. 

FSA wins Payment Protection Insurance battle, but have they opened the floodgates?

In August 2010, the FSA sought to introduce Policy Statement 10/12, which would require all Payment Protection Insurance (PPI) policies to be subject to the FSA’s dispute resolution procedure detailed in the Complaints Sourcebook (DISP), in the event of a complaint.

The statement 10/12 sought to impose the rules retrospectively on all PPI sales and not just future sales from the point of the statement. The British Bankers Association, on this basis, brought an application for judicial review, but the Court found in favour of the FSA on 4 April 2011. The FSA has since hailed the decision as an event which will “trigger a dramatic improvement in the way customers are treated when making complaints”. Whether this prediction is true or not remains to be seen, but what does this mean for banks which have already sold PPI to consumers, will there now be an influx of claims against the banks?

Should the banks be worried?

It is unlikely that this decision will see the floodgates open against the banks. This can be seen for several reasons. Firstly, whilst the Banks have made a large provision for complaints brought by consumers on the basis of PPI mis-selling, it does not mean that all consumers have been mis-sold to nor does it mean that every complaint made will result in a pay-out. It simply means that the banks have made a provision for a ‘worst case’ scenario.

Secondly, most claims brought for mis-selling PPI are brought in County Courts on a “no-win” “no-fee”, or Conditional Fee Arrangements. This entitles the Claimant, in the event of winning the claim, to seek an order by the Court against the Defendant to pay up to a 100% uplift on the base costs ordinarily charged by the solicitor. If the Claimant loses, they will not pay their own solicitors fees, but they may also be ordered to pay the loser’s fees.  However, following the Jackson report on costs, substantial changes are being made to Conditional Fee Arrangements, and a Claimant will no longer be entitled to receive the uplift from the Defendant in the event of victory. The Bill for reform is currently progressing through parliament and is expected to implemented some time in 2012. This may, therefore, significantly affect the appetite of Claimants for bringing claims in the Court against the banks, since the cost of the claim will need to be born by the Claimant up until trial, and they are less likely to recover their full costs, even in the event of victory.

Banks and other financial firms should be aware the consumers still have the option of pursuing a complaint with the Financial Ombudsman Service, a quicker route, where the threshold for proving the claim is lower than applied by a Court.  This coming year, may well, therefore, see a rise in the number of FOS complaints to offset the number of civil litigation proceedings.

Thirdly, in the claims which have gone through the Court against banks and firms so far, the majority have gone against the consumer. This could be because, as opposed to commercial institutions, a consumer is unlikely to have kept detailed records of transaction, other than those produced by the bank, and so may struggle to provide the requisite evidence to prove the claim. Where documents were available, they generally seem to back the bank’s claim and contradict the consumer’s often hazy recollection. 

Springwell Navigation Corp. -v- JP Morgan Chase Bank (formerly Chase Manhattan Bank) and others [2010] EWCA Civ 1221 -  Appeal Decision

The background

Springwell (the “Appellant”) was an investment vehicle for a shipping consortia owned by the Polemis family. The Polemis family had a long standing relationship with Chase Manhattan Bank (the “Respondent”) and had invested heavily in the debt market. The Appellant invested in derivative link notes issued by the Respondent (“GKO LNs” but whose underlying security was Russian Federation issued bonds. In 1998 the Russian Federation fell into financial crisis and the Appellant’s portfolio was left with negligible value.

The Appellant at the first instance brought a claim on the basis the Respondent had misrepresented the risks associated with the portfolio of Russian debt, and were therefore liable under section 2 of the Misrepresentations Act 1967 and associated case law, and on the basis of breach of various contractual duties. All causes of action, but for a negligible costs claim were dismissed by Justice Gloucester.

The Appellants subsequently appealed the decision. The Appellants claimed that they had been told that the GKO LNs were “conservative” and “liquid”. They contended that these representations induced them into entering into the contract, and they were not told that the notes were, as they saw, high risk investments.

The decision

The Court of Appeal dismissed the appeal and found in favour of the Respondents.  In particular they found that no misrepresentation had made.  The Court found that the Respondents employee had used the phrase with reference to the fact that there had been few if any defaults by countries on sovereign debt. In reference to the “liquid” comment, the Court understood that the phrase had been used because the notes were relatively short term and so the risk of sovereign default was relatively low. In addition, the Court found, upholding the first instance decision, that the Appellant was a sophisticated investor who had extensive experience of investing in the emerging economy debt markets. It could, therefore, not be said they had relied on skill and judgment of the Respondent when deciding to invest in the GKO LNs.

On the contractual documents the Court also found in favour of the Respondent, on the basis that the contract stated that the Appellant would not rely on any warranty or representation other than that included in the contract. Therefore, they were estopped from relying on the representations which they claimed to have relied. The Court considered whether the clauses were reasonable and fair for the purposes of the Unfair Contract Terms Act 1972 and concluded that they were. In particular they made reference to the fact that the Appellant was a sophisticated investor in the emerging economy debt markets, and so were aware of the risks involved.

What does this mean in practice?

• The Court will generally provide less protection to sophisticated investors. However, when providing the advice make sure that the investor understands the risks involved, and that this understanding is evidenced in writing. 
• Protect yourself from any representations or warranties which are not included in the contract, by included a non-reliance clause. Tailor this clause to meet the needs of specific client investors in order to make sure that the clause does not fall foul of UCTA.