The likelihood is that this trend for redress schemes in the financial services sector will continue to gain momentum in the coming months and years. There are three key reasons for this.
First, as recently as February 27, Therese Chambers, the FCA’s joint executive director of enforcement and market oversight, affirmed in a speech that the watchdog “will prioritise compensation to consumers over fines where that is the right thing to do”. The Woodford scheme of arrangement was cited as a specific example of the regulator taking this approach.
Second, the coming into force of the FCA’s consumer duty is likely to be a driver for further redress schemes.
The regulator has made clear in the consultation papers and policy statements leading up to the imposition of the consumer duty that it will be looking to secure redress for consumers who have suffered harm through companies’ breaches of the duty.
While the FCA’s industry-wide redress scheme powers are not currently available in respect of breaches of the duty, it has made clear that some of its powers to impose schemes on individual companies do remain available.
Proactive schemes
The watchdog has also said that it is sees companies’ obligations under the consumer duty to proactively offer redress to harmed retail customers where appropriate as “a crucial element of firms delivering good outcomes for their customers”.
The expectation, therefore, is that companies could well come under pressure to set up proactive schemes, or else face the risk of enforcement action for breach of the duty.
Third, the growing trend for mass litigation in the English Courts, to which financial institutions are increasingly susceptible, is also likely to increase the appetite for redress schemes.
From the FCA’s perspective, it will not be satisfactory to let claimant law firms, claims management companies and litigation funders to drive the recovery of redress from financial institutions – not least because these entities typically absorb large proportions of the sums recovered.
Indeed, when faced with mass claims, redress schemes can have appeal for impacted companies too.
Even if they do not bind the whole class of potential claimants in the way that the Woodford scheme does, they can at the very least provide a cost-efficient way of dispensing with claims, particularly where the merits of defending those claims might not be good and there is a desire to destroy the economic viability of the funders’ and claimant law firms’ models.
