Causation, causation, causation...
Lord Turner's key note speech at the Mansion House on 20 October confirms the FSA wants Parliament to reconsider the 'trade-off'...
…between the 'natural assumption' that 100% redress would follow a breach of rules and the 'general principles of law' that mean 100% redress is not available unless, without question, the breach caused the whole loss.
Concerned that we may have over-stated the FSA's interest in preventing firms from relying on causation defences, we clarified that the FSA had not said it 'wanted' to change the law but was merely raising the issue for debate during the passage of the draft Financial Services Bill. Well, the FSA has not relented but has raised the issue again, in similar terms, as one of only four key issues that its Chairman invited Parliament to consider in respect of any future mis-selling.
Lord Turner's four trade-offs for Parliament to consider in respect of mis-selling were:
- between more intense supervision and higher regulatory cost
- between seeking to identify and prevent problems early on, versus relying on the FOS to compensate consumers after the event
- those involved in any set of rules relating to customer redress, between the natural assumption that a breach and customer detriment should mean 100% redress and the general principles of law that "if the breach of rules did not without question cause the whole loss, then 100 per cent redress is not available"
- between regulation and customer choice
I note that Lord Turner is not proposing reconsideration of the long stop time bar issue.
I cannot believe that Parliament would be persuaded to change the law on causation within the financial services sector. The implications are literally incredible. Take the latest example: Credit Suisse UK was fined on Tuesday £5.95m for various systems and controls breaches relating to the selling of over £1bn worth of SCARPs. The FSA highlighted the following:
- inadequate systems and controls in relation to assessing customers’ ATR;
- failing to take reasonable care properly to evidence the suitability of SCARPs for customers; and
- failing to monitor staff effectively to ensure that they took reasonable care when giving advice.
According to the Final Notice, the skilled person found that for 17 of the 24 SCARP transactions they tested, there was insufficient evidence of consideration of the customer’s overall portfolio. This is indicative of rule breaches in over 70% of cases. An internal report also identified that management suitability reviews were sub-standard in 44% of cases.
During the Relevant Period, approximately 623 of Credit Suisse's customers invested in excess of £1.099 billion in 1,701 SCARPs. Credit Suisse has reportedly "agreed to undertake a review in relation to its sale of SCARPs to customers who purchased these products during the Relevant Period to ensure that Customers do not lose out as a result of the failings identified in this Notice. If a Customer has been advised to purchase an unsuitable product, redress will be paid to the Customer to ensure that they have not suffered financially as a result" [my emphasis].
Without reliance on causation defences when conducting its past business review, Credit Suisse would face a compensation bill that would have dwarfed the fine imposed and the cost of redress assessed by reference to losses 'as a result of the failings'.