Causation - the multi-billion pound question

21 February 2012. Published by Simon Laird, Global Head of Insurance

The FSA's £1.5m fine imposed on Santander UK plc yesterday raises again the question of whether causation should be required for firms in the financial services industry to be liable to their clients.

Santander were fined £1.5m for erroneous statements in their product literature about the circumstances in which FSCS cover would be available to customers purchasing structured products.  The Key Features document said Santander was covered by the FSCS, but in fact FSCS cover would not be available for claims relating to inadequate investment performance or where Santander was unable to meet the guarantee its subsidiary had given as part of its structured product. It was recognised that no investor detriment had actually arisen, and the risk of investor detriment was very low and would only have arisen if the investment failed to provide the minimum return and the relevant Santander subsidiary failed to honour the guarantee and Santander became insolvent.

To succeed with legal claims in the Courts the investors would have to prove that Santander's erroneous statements had caused them loss. The investors would have to prove that but for Santander's erroneous statements, they would not have invested in the structured product. I strongly suspect that most investors made their investment decision based on the likelihood of the investment return being achieved, rather than being strongly if at all influenced by the availability of FSCS protection against the insolvency of one of Europe's biggest banks.

Nonetheless, the FSA's final notice records that Santander "voluntarily" conducted a customer contact exercise giving all investors the option of surrendering the structured product at no penalty. There was very low take-up of this option, but one does not have to be particularly cynical to suspect that if the investments had moved adversely, numerous clients would have taken advantage of the technical false statement to back out of the investment. Effectively in mis-describing the availability of FSCS, Santander became guarantor of the investments.

We have commented previously on the FSA's suggestion of possibly abolishing the law of causation.  Given that in this case, the amount invested was £2.7bn, the amount at issue on this seemingly obscure point of law is obvious and enormous. It is perhaps not surprising that this is one of the relatively few FSA published final decisions that was contested to the RDC and not settled.

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