There has been a mixture of good and bad news recently for Brokers from the Financial Services Authority (FSA). On the one hand is the welcome news that the FSA it is to restart its funding review of the Financial Services Compensation Scheme (FSCS). On the other is the alarming news that the FSA is seeking to impose absolute liability on brokers and IFA’s to provide compensation to customers for losses that were not caused by the firm’s faulty advice.
This latest wheeze by the FSA goes against the natural laws of justice, and will impose a huge financial burden on the industry as Professional Indemnity Premiums will have to rise to meet the increased levels of awards for non fault compensation.
The proposal by the FSA seems to have slipped in without the implications being picked up by the industry. The FSA’s alarming request formed part of their response to the joint committee on the draft financial services bill. In their memo the FSA stated:
“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 per cent redress.”
PI Expert agrees that any breach of the rules that results in a clear loss for a consumer should result in compensation to the customer, but we take issue with the suggestion that this should result in compensation being paid where there is no link between the customer’s loss and the advice provided.
The FSA’s went on to say:
“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.”
“If society expects as a matter of public policy that the regulator should be in a position to require greater levels of redress to be paid then the FCA needs to be given a clear mandate and powers to do so in the new legislation. This is a difficult issue that gives rise to real questions as to how far the regulator’s powers should extend and we would very much welcome the Committee debating this matter, in particular to achieve further clarity as to the FCA’s mandate in this area.”
This statement should be sending shivers of fear down the spine of the industry. If adopted, this change will alter the current legal position whereby a firm is only liable to compensate customers in respect of losses which stem directly from the advice that they have provided.
If the FSA gets its way the law will instead provide the FSA with the dispensation to totally disregard the principles of causation. Firms could find that a small technical breach in for example providing documentation such as failing to provide a demands and needs statement could result in a firm being required to compensate a customer for a loss that has arisen for a totally different reason that is unrelated to the advice provided by the firm.
The FSA has said that the proposal to the committee is a suggestion for consideration and is not a firm FSA policy, however there is a real danger that this proposal could get through by default if the industry lets it slip through without protest or comment.
PI Expert cannot see how the FSA proposal can have any benefit to the industry or indeed customers. Of course the FSA would be a net beneficiary of such a draconian change as it would significantly reduce the time and level of expertise needed to investigate complaints. If a customer only needs to provide a minor breach of rules to achieve full compensation a less through investigation will required which could be undertaken by less well qualified staff. This would give the FSA, who are under huge pressure at present due to the large number of payment protection claims, a huge saving in terms of time and staffing costs.
If the FSA’s real motive is to reduce their admin costs then this could end up being a method of getting brokers to foot the bill of the banking sectors miss selling of PPI and Creditor Insurance by the backdoor. However the long term affects of such a major alteration to the laws of natural justice would be far reaching.
The net result of a change of this magnitude can only be that Insurance Intermediaries will end up paying a huge cost in compensation payouts and this will have the knock on effect of increasing PII premiums, potentially to the type of levels that have been seen in the surveyors and solicitors markets where in many cases firms have had to fold due to the unaffordable cost of obtaining PII cover.
If passed into law, the proposed change will open the door to greedy lawyers and claims farmers who will be rubbing their hands with glee at the prospect of such easy pickings. PI Expert questions how the FSA can believe that it is in the public interest to legislate for a firm to take responsibility for any loss that does not arise from their own actions.
There is no justification for this proposal. It negates the principle of indemnity that underpins the insurance industry and imposes an unfair burden on advisors across the entire financial sector. We must not let this slip into law by inertia.
PI Expert – Independent, Authoritative, Incisive Professional Indemnity Advice for the Financial Industry For help and advice call us on 01825 745410.