Following January's article entitled ‘Tools for Changing Banking Culture: FCA Are You Listening?’ (2016) 11(2) Capital Markets Law Journal 129 (in which this author criticised the FCA's ad hoc swaps mass redress system and suggested the FCA set up a standing financial services disputes tribunal modelled on the Employment Tribunals) Dr Bailey, the new CEO of the Financial Conduct Authority (FCA), accepted that its administrative ad hoc mass redress schemes have not been successful, in particular for swaps.
Dr Bailey has now accepted the principle that the FCA should empower an independent entity to resolve disputes between banks and consumers and should not seek to involve itself in their determination. He is considering his options.
This article analyses how and why the FCA over-extended itself by entering the arena of dispute resolution. It explores why the FCA’s efforts failed to satisfy market participants and undermined the confidence needed for retail markets to function efficiently—in particular by creating the impression of corporatism.
The article explains how and why common law dispute resolution systems generate market confidence. It also notes that the department of state behind the success of the common-law-based Employment Tribunals 50 years ago—now called Business, Energy and Industrial Strategy—has recently applied the same common law principles for dispute resolution in service of its competition objective by expanding the Competition Appeal Tribunal.
The article concludes by suggesting that the FCA should endow its independent dispute resolution authority with the same common law characteristics. It suggests three ways the FCA might do so.
1. Regulatory overreach—the FCA’s mass-redress error
On 1 February 2016, in the Chamber of the House of Commons, MPs debated a motion of no confidence1 in the Financial Conduct Authority (FCA). On 20 July 2016, the new Chief Executive Officer of the FCA, Dr Andrew Bailey, gave evidence2 before the Treasury Select Committee. In his evidence he observed that the a good deal of the no confidence debate centred ‘around cases that involve those adjudication processes’3—such as the swap mass redress system. He also said this:
As Dr Bailey explained to the Select Committee, the FCA’s campaign of designing and running mass redress systems was an example of mission creep; of regulatory overreach. Dr Bailey has appreciated the need for the FCA to step back from direct involvement in adjudication and for it to pursue its policy objectives in that realm by different means. This author agrees with his diagnosis of the problem.9 This article seeks to be of assistance to Dr Bailey in finding a solution.
I do not think the FCA was really established or conceived to be an adjudication body. It is a regulatory or supervisory body. Now, this is not a criticism, but it has found itself in that role, and it has found itself creating–I do not know how many, but there are quite a few–bespoke adjudication processes… .4
For interest rate hedging products, it has created a process by which the banks have a duty to do the process and there is oversight by a so-called skilled person, which is typically an accounting firm. That is enormously controversial… .5
I do not think this practice of creating–I use this term carefully, because it is a bit pejorative, but you know the point I am making–ad hoc processes has been, frankly, in my view, a success… .6
The question that follows for me is: given we have to have adjudication processes, how do we get to a point where we have better established processes with more authority and, frankly, where people can reasonably feel–I use this as a metaphor–not literally–‘I have had my day in court.’ The point is that the process has enough authority, in the best sense of the term, to it that I accept that it was a process that got me to judgment, even if I do not like the end point of it.7
… I am going to look at this question. This is not the FOS by the way; this is the non-FOS bit I am talking about now… . I do not yet know what the alternative is. If you do not mind, I need some time to think about it.8
2. From light to heavy-touch regulation—three characteristics
How was it that the FCA came to overreach itself in this way? In the view of this author, the FCA simply believed itself to be taking what appeared to it to be the next logical step in the direction of travel, which began in reaction to the free-market 1980s10 and which greatly accelerated after 2008: from light-touch to heavy-touch regulation.11 To make that contention good, one must briefly consider what one means by those terms.
First, then, let us consider how light touch regulation in this country—and in the anglo phone countries which derive their traditions from this country—actually worked. The legal point of departure is that all markets are free:12 not all markets need be regulated; freedom to contract is one of the basic freedoms we enjoy under the common law.13 However, neither consumers nor suppliers have been content for all markets to be free. Certain markets14 are considered to merit a barrier to entry before suppliers may enter. This is principally because the imbalance of knowledge and resources between supplier and purchaser15 can result in supplier abuse at the point of sale. This results in a collapse in consumer confidence and volumes, which is in neither consumers’ nor suppliers’ interests.
Initially, it was the suppliers themselves—wishing to maintain market confidence and volumes—well before the ‘big state’,16 of which the FCA is part, developed in the twentieth century—who, by self-regulation,17 erected the necessary barrier to entry. The barrier normally amounted to ensuring a supplier had completed minimum standards of training and was certified as a ‘fit and proper person’ or its equivalent. In the language of Financial Services and Markets Act (FSMA2000),18 the professions pursued the ‘consumer protection’ and ‘integrity’ objectives of their own accord.
Such guild-like self-regulation is the very definition of the ‘light touch’ regulation. But it would be a fallacy to suppose that light-touch regulation simply left the market to operate in a vacuum once the barrier to entry was surmounted. Thereafter, light-touch regulation relied upon the common law courts to determine rights and obligations between supplier and purchaser—that is, the norms of market behaviour. There was nothing light about the courts’ touch. On a proper understanding, therefore, light touch regulation cooperated with the heavy hand and the long arm of the common law.19
However, the possibility of money compensation for supplier abuse through the courts—often years after the event—is often unattractive to consumers. Imagine, for example the businessman driven into bankruptcy by a mis-sold swap. For such impecunious consumers, there was often no chance of access to justice through the courts; to them, the rule of law was a chimera.20 This vacuum of justice gave rise to political demand for something to fill it. Enter the heavy-touch conduct regulator.
What, then, does the move to heavy-touch regulation entail? In the view of this author, heavy-touch regulation has three broad characteristics.
Characteristic 1: removal of the regulatory function from suppliers
The first is the transfer of the regulatory function from the profession/guild/market ‘elders’ themselves to an entity, created by the state which is cast as being independent of the suppliers in the market. This transfer has broader21 political credibility, as in the age of universal franchise the state-created regulator is perceived to be more readily motivated by consumer interests than a regulator which is populated by suppliers. The political expectation created by this first characteristic is therefore more vigorous action on behalf of consumers.
Characteristic 2: extensive use of inquisitorial powers
The second characteristic is the grant to the state-created regulator of extensive inquisitorial powers.22 These allow the regulator to be proactive in the market; it does not sit back and let the market get on with it, instead, in the faith that the regulator is smarter than the market itself, it is empowered to poke into all corners of market activity in the hope of preventing the next crisis.23
Characteristic 3: imposition of obligations on suppliers by secondary legislation
The third characteristic is for Parliament—trusting the regulator rather than itself, the market or the courts—to delegate to the regulator the power to make law. Thus, Parliament, by primary legislation,24 grants to the regulator extensive powers to create regulation—that is, law by another name—by means of secondary legislation. This kind of law-making is, of course, limited to the market that the regulator regulates. Nevertheless, it comprises of two important kinds of obligation for the markets.
The first is an obligation of a public law nature, that is obligations on the supplier to the regulator as an emanation of the state—the old barriers to entry raised much higher than they once were and regularly re-formulated as the regulator uses its inquisitorial powers to understand market activity.25
The second kind of obligation is one for the benefit of the consumer as against the supplier. Certain types of consumers can rely on these laws or regulations to give them a private cause of action that they can enforce directly against suppliers. In the case of financial services, both species of law created by the FCA itself appear in its Handbook.26
The reader will observe that the more the state grants powers to the state-created regulator, the more the state-created regulator looks like the state itself. From what the author set out above, it is quite apparent that the regulator is exercising two functions of the state that are normally kept separate: the legislature (which makes the laws) and the executive (which enforces them). In Britain, we have never been purists27 about the separation of powers. However, we have always been aware that the more you dissolve the boundaries between the three arms of the state, the more likely you are to run into trouble.
3. The boundaries of heavy-touch regulation transgressed
The reader can see where the author is going. The next logical step in the direction of travel towards heavier touch regulation is for the regulator to usurp the third arm of the state: the judiciary. In fact, the FCA had, well before creating the swaps mass redress system, grown accustomed to exercise the judicial function of interpreting the law; its Handbook contains extensive ‘Evidentiary Provisions’ aimed at assisting it to interpret the law it created.28
There was an apparently compelling reason for the FCA to continue its direction of travel to dispute resolution itself: the common law courts are not an effective place for David to take on Goliath in commercial disputes. So something else was needed to fill that vacuum. The regulator felt the pressure to do so. It decided to fill it, ad hoc, with what can fairly be described as executive fiats to banks, ordering them to make redress where the regulator thought it was needed.
The solution of executive fiat seems attractive in a political crisis, when the overwhelming political pressure is for Something To Be Done. The political pressure comes from the consumer, and it assumes that everyone knows what needs to be done; it is just a matter of getting on and doing it. In the consumer’s view, the regulator is, of course, the person for the job. But this is just when the regulator should be on its guard; for when the regulator provides its answer to the market by executive fiat, it does so both to supplier and to consumer. If the regulator's idea of a just—or sufficiently just—outcome is something different from the consumer’s, then the political pressure quickly transfers from the banks to the regulator. That is exactly what has happened here.
However much the consumer clamours for Something To Be Done, the regulator is well advised to remember that the world of executive fiat is a different world from the common law world to which the consumer is in fact accustomed. No doubt also that, used properly, executive fiat29 will cause the consumer in due course to be grateful to its regulator. But a regulator that uses it inappropriately puts itself in harm’s way. This is because on its application, two principal weaknesses become evident—particularly to a public used to common law concepts of justice, or, as Dr Bailey metaphorically puts it, one’s day in court.
Transgression 1: a process that gives the impression of corporatism
If the reader will indulge me, I will myself resort to metaphor for the opposite reason that Dr Bailey deployed it. I do so for the following reason. A vacuum is created when an adjudicator forgets about the need for justice to be seen to be done.30 When expectations of open justice are not met in that way, the public mind finds it very easy to fill the vacuum with its worst imaginings. Conspiracy theories thrive. As I do not posit fact but illustrate imaginings, metaphor is a convenient vehicle to convey those imaginings.
Imagine, for a moment, that, in 2007, I was at the helm of a too-big-to-fail bank which, for almost two decades, had been sailing close to the wind, selling—amongst other things—swaps to small businessmen who had not understood them.31 Then, when the clouds began gather above me that year, I would have felt fear. I would have paced the deck, tapped the barometer, tested the regulatory and political atmosphere and fretted about the balance sheet that would have to keep me afloat in the coming storm.
My first command, no doubt, would have been to change tack, come alongside Her Majesty's Ship (HMS) Treasury, request permission to board, where I would have sought to persuade the politicians and the regulators that it was in no one’s interests that my vessel should end up on the seabed with all hands, her creditors unpaid.32 Indeed, I might have seen it as my duty to frighten the politicians so much by this prospect that they would board my vessel in my place, take the wheel and announce to the passengers that they had saved the ship.33
But, even then, I would have known that was not the end of it. As an old sea dog, I would have sensed that we had moved into a new season of hostile weather.34 More than the public dressing down35 by my new masters, more than their docking my wages,36 I would fear a hurricane of litigation being whipped up by claims handlers, accelerated by a front of third-party litigation funding, which would dash me onto the rocks of the Courts until my balance sheet was smashed into little pieces. What, I wonder, could I do to avert that catastrophe?
Again, I would have sought to persuade the politicians and the regulators that this outcome would be in no one’s interests. Since they now owned the ship,37 I would have their close attention. And again, I might have considered it my duty to frighten them with the prospect of this new and hostile front which had built up in the days when they liked to tell the world they made the weather.38 As an old hand, I would have known that I should never approach my new masters with a problem alone; to maximize my influence, I would need a solution for them too.
So, as I straightened my tie at the door my new masters’ cabin, I would have asked myself, what is the most I could persuade these politicians and regulators to do for me? Might I be able to persuade them to stop the cases against my bank from going to court? Might I get them to agree to prefer some kind of alternative dispute resolution system? Perhaps … but as for its terms … what would be just too much to ask? What would I dare to put on my wish list? Well, I might have said to myself: in for a penny, in for a pound.
Here goes. I would want a dispute resolution system that I myself was in charge of. I would want it to be secret. I would not want it to apply the law, because I would not want it to create any legal precedent about my behaviour. I would want to be allowed to deny claimants full compensation, in particular consequential losses. In fact, as their principal remedy, I would not want to pay them cash. Instead, I would want to substitute the profitable product I had sold them with another of my products, which was not quite so profitable but still turning a healthy margin. And so, with problem and solution at the ready, I would straighten my cap, tap lightly and wait until apprehensive voice within bid me enter.
Now, we do not know what was said in the privacy of the captain’s quarters, but we do know the mass redress system the banks got in 2013.39 They got one that exactly matches that wish list: a swaps mass redress system, which the banks themselves ran, which operated in secret, which did not apply the law, produced no legal precedent, which did not award consequential loss40 and in which the principle vehicle for compensation was the opportunity to sign up to a new financial product with the same bank. It is a very long way from a common law public’s idea of open justice.
The only aspect of the system that may not have been on a bank’s wish list was the requirement that section 166 ‘skilled persons’ ensured that they adhered to those rules and that the banks pay for them to do so. But as the rules were so generous to the banks anyway, and as those ‘skilled persons’ were the banks’ best friends—the big four accounting firms41—it looks like it would have been an easy compromise for the banks to make. The ‘skilled persons’ requirement certainly did nothing to mitigate the cynicism of the public.42 If fact, certain members of the public might be forgiven for thinking that the banks—who are clearly very skilled at handling the regulator—might have included it on their wish list as sop.
Now, there is a word for these imaginings: corporatism43—the capture of the regulator by the industry it is supposed to be regulating. Who persuaded the politicians and the regulators to adopt light touch regulation before 2008 and who profited from that regime? Who persuaded the politicians and regulators in 2008 to nationalize their losses when light touch went wrong? Who persuaded the politicians and regulators in 2013 to set up a redress system that was absurdly generous to the banks? None of these impressions need to be proven as fact for them to damage confidence in the regulator. They just need to be sufficiently plausible to lodge in the public mind.
Transgression 2: a product that does not clarify the law for the market
It is common place for legislators (or regulators) to express concern about the cost of common law justice.44 It is quite true that the common law courts and arbitrations can be prohibitively expensive. As a result, alternative dispute resolution systems are promoted by legislators and regulators45—and rightly so. In the case of the FCA, it has the Financial Ombudsman Service (FOS)—its main Alternative Dispute Resolution (ADR) arm arm, close to but independent of the FCA,46 and independent of but funded by the banks.47 It does great work helping settle cases. The FCA based its swaps mass redress system on similar ADR methodologies as those employed by the FOS.
Now, there is no doubt that ADR is a good way for a regulator to pursue its policy objectives by delivering inexpensive access to compensation for unhappy consumers. However, the ADR product is only that: a settlement for the parties. ADR does not produce what a court produces: clarification of the law for the benefit of the market as a whole. In fact, it does not even apply the law, but does what seems to it to be reasonable.48
Over-reliance on the ADR process and product, therefore, partially49 achieves one of the FCA’s operational objectives—consumer protection—at the expense of its other two operational objectives: integrity and competition.50 Only clear and predictable law can achieve all three. Over-reliance on ADR means that the disputes are settled, but the issues in the dispute are swept into a sort of legal black hole and the opportunity to clarify the law in the wider public interest is lost.51
In order to fulfil the three statutory operational objectives, the FCA should be finding a way to put its market disputes into the common law system. That system applies the law to the facts of the case with the result that legal duties are clarified and defined and the dispute disposed of. That is one of four essential characteristics of the common law system that the FCA cannot afford to do without.
4. The common law system, friend to the regulator: four characteristics
Light touch regulation may have been open to the charge of corporatism for the reason that it was akin to self-regulation, so the public is inclined to believe that in the last analysis suppliers in a market will regulate in their own interests. However, as light touch powers were limited, it probably did not matter much; only when a market crisis emerged did the impression of such corporatism create wider political concern.52 As light touch regulation left dispute resolution to the common law system, day-to-day disputes were resolved with the benefit of the public trust the common law system enjoys. As trust is the holy grail of Dr Bailey’s deliberations, this author suggests consideration of four key characteristics of the common law system on which public trust in it is based.
Characteristic 1: the common law courts are truly independent
First, its principal forum—the common law court system—is truly independent.53 This is because the courts are passive; they wait until the parties bring cases to it to decide. In this regard, it stands in contrast to a regulator, which has a duty to be active. In particular—unlike the courts—the regulator sets the regulatory framework within which the market operates—be it light or heavy touch or something in between—and investigates to ensure good conduct. These two roles are meant to prevent the crisis or mis-selling—that is, the very things which have given rise to the dispute to be adjudicated on. The regulator cannot, therefore, be independent in the true sense of the word; it is by definition a participant in the dispute.
Characteristic 2: the common law’s adversarial system generates trust
Secondly, the common law operates the adversarial system: that is each party gets its opportunity to have its say and to test thoroughly the story of the other side. It is presided over by judges who have spent their careers as self-employed practitioners at the independent Bar54 who do not drive forward the parties’ contentions, but who are, like referees, thoroughly versed in ensuring that the process by which the parties drive forward their contentions is fair and is seen to be fair. As a result, the common law court system is one of the few institutions which has broadly maintained the public trust that other institutions have lost over the last 30 years. The authority they enjoy means that—more often than not, and in contrast to the FCA’s experience of dispute resolution—sore losers complaining about the system that delivered judgment are not seen as soothsayers but fools.
Characteristic 3: the common law operates a system of open justice
There is a third characteristic of the common law system that is important to the trust that the public repose in it.55 That it is a system of ‘open justice’—which depends on reasoned argument and reasoned decisions—which develops from year to year, as one judge after the next adds to the sum of knowledge. I hope the reader is not embarrassed by my comparing it to open-source software: a product that constantly evolves, which is generated by a process to which any can add and which refines itself by peer-review. The most celebrated example of this ‘open-source’ process of law creation is the development in the twentieth century of the law of negligence–from established categories into legal principles of general application–by judges throughout the Commonwealth deciding the just outcomes to cases.56 The product of that process—the ‘duty of care’—is one of the few phrases with which almost any layperson is familiar; such is the power of ‘open-source’ legal reasoning.
By issuing public judgments on the facts and arguments of those cases, the courts work out the principles that underlie the norms of market behaviour: i.e. the law.57 Laborious as that task is, it is not wasted effort. Being an open and reasoned development of the law, the market is able to watch the cases closely, assimilate the principles and practices that the court smiles upon—the norms of market behaviour it favours—and the market adjusts its behaviour accordingly. In non-legal terms, the common law operates as a sort of ‘feedback-loop’ for market participants.
An example from the past of a regulator using the common law courts as its friend—happy to do the difficult work of resolving disputes and working out norms of market behaviour—comes from a financial crisis a quarter of a century ago: the Lloyds crisis. That crisis provided one of the set-piece dramas of the development of the law of negligence in the common law courts. The light-touch regulator of Lloyds stood back and let names58 bring private actions against the managing agents for mismanaging their risk. Within 8 years,59 the courts had worked out—by means of ‘open-source’ reasoning, drawing on the arguments of the parties in the lead cases—the principle that the agents owed names a duty of care even where there was no contractual relationship between them. In response to that clarification of the law, the market—with regulatory assistance—was able to organize itself by re-insuring the agents’ liabilities through the creation of Equitas. The feedback loop closed; the market survived. It now thrives.60
Characteristic 4: the common law system creates law on demand
A fourth characteristic of the common law system, less well remarked upon, is that the process of making law is demand-led. That is to say, when a divergence of opinion arose in the market as to the proper norms of behaviour, the market participants concerned approached the courts for the judges to decide. The law was created in direct response to demand in the market place. It was not imposed ‘top down’ by the state or regulator onto the market irrespective of demand.
Occasionally, of course, Parliament took it upon itself to pass primary legislation by way of statute, the markets continued to rely on assistance of the adversarial, common law system to understand the intention of Parliament as revealed by the statute. The case law that the courts produced clarified the legislation for the benefit of the market. In this respect too, the adversarial common law system creates a ‘feedback-loop’ for the market.
In summary, it can be said that the common law system trusts the market to establish its norms of behaviour through the agency of the courts. The market trusts the common law in return.
Now, we know that the adversarial common law courts are very good at what they do; over the centuries the courts have created a body of case law, which means that the English common law is one of the most rational and predictable in existence.61 The output of these courts, decade after decade, has made the English common law the pre-eminent choice for commercial parties transacting all over the world.62 It therefore makes overwhelming sense for an Anglo-Saxon regulator to make a friend and collaborator of the common law system. A regulator should not seek to usurp it and displace its methodologies.
5. The common law system adapted to new policy needs: a historic regulatory example
An example of a department of state befriending the common law system to help it achieve its policy objectives is provided by what is now the Department for Business, Energy and Industrial Strategy63 (BEIS) when it was charged with bringing about the employment law revolution of the 1960s.64
At that time, a policy decision was taken that workers needed more protection than the common law afforded them because industrial action was being used as a means of resolving individual employment disputes. Parliament passed primary legislation to protect workers from unfair dismissal, as it would later protect people against various forms of discrimination. The legislation simply said that workers shall have the right not to be unfairly dismissed, or discriminated against. It was as simple as that.
Neither BEIS nor the Equal Opportunities Commission themselves sought to resolve individual disputes between employer and employee. Nor did they issue executive fiats requiring employers to sit in judgment over their own unfair dismissals or sexual harassment. Does anyone for one second think society’s attitudes to workplace behaviour—in particular women and ethic minorities—would have changed as they have since then if that was how those policy objectives were pursued?
Instead, they trusted the common law system. That means they trusted employees themselves to drive forward the law on fairness and discrimination by pursuing cases that affected their lives. But it would be wrong to say they trusted the common law courts. They did not. They could see that however fair the common law courts are, there is a barrier to entry that keeps most employees from their doors; in particular the rule that the loser pays the winner’s costs. They could also see that unfair dismissal was a political issue—just like discrimination would be later—and the authority of the Tribunals and the confidence of the citizen in its rulings would require a broader base of social and workplace experience than existed on the common law bench.
They therefore took the best of the common law by taking what are now Employment Judges, teaming them with representatives of the unions and business, and created what are now Employment Tribunals where this mix of lawyers, workers and businessmen could work out how the principles, of law should be applied to the facts of the cases before them. It lowered the barrier to entry by removing almost all costs risk and introducing an inquisitorial power to compliment its basic adversarial architecture.65
When the Tribunals first sat down to their work in the 1960s, discrimination was the norm and the law still spoke of ‘master and servant’.66 In large part, through the public hearings before and the publicly-available case law created by those tribunals, just look how far our society has moved on: discrimination can now fairly be spoken of as nothing less than a secular sin; no one speaks of masters and servants. By any standard, that is a remarkable policy success for a department of state.
6. The common law system adapted to new policy needs: a modern regulatory example
At exactly the same time that the FCA issued its executive fiat to banks to compensate customers for mis-sold swaps,67 BEIS decided how it would pursue its policy of ensuring that SMEs and consumers, who ‘currently have very little practical opportunity to obtain redress’68 for anti-competitive behaviour have proper access to justice. In January 2013 BEIS’s ‘Private Actions in Competition Law: A Consultation on Options for Reform’ concluded with a ‘Final Impact Assessment’69 and the 'Government Response'.70 Those two reports would make instructive reading for Dr Bailey’s team at the FCA today.
All the more so, since on 1 April 2013 the FCA was given a third statutory objective:71 to promote competition in financial services. Much of the reasoning of the BEIS’s reports is now directly relevant to the FCA. The reports contain a compelling analysis of the problems with which the FCA is still grappling, and therefore merits summary here.
The problem those reports were addressing was that the means of redress available to SMEs and consumers complaining of anti-competitive conduct were only two: the common law courts and, in limited circumstances,72 in the Competition Appeal Tribunal (CAT). In short, both these avenues were too expensive to be useful to consumers and SMEs.73 BEIS therefore needed to look at other means of ensuring access to justice for those two groups.74
That BEIS considered this problem worthy of a solution is revealed by the way it framed its purpose in finding that solution:75
BEIS had various options to achieve those aims. To understand how to choose between them, the consultation took pains to look into the policy considerations that underlay them.
• ‘Increase growth’,76 by empowering small businesses to tackle anti-competitive behaviour that is stifling their behaviour
• ‘Promote fairness’, by enabling consumers and businesses who have suffered loss due to anti-competitive behaviour to obtain redress’
Policy 1: a regulator should limit itself to regulation and supervision
The problem BEIS was addressing was, of course, very similar in nature to the FCA’s problem of consumers and SMEs with claims against banks for mis-sold swaps. For them, the common law courts were also too expensive to permit effective redress. As we know, the FCA decided not to expand the FOS’s jurisdiction/capacity to accommodate them. Instead, the FCA chose the route of executive fiat; it pressed into service two powers available to it to create an ad hoc system: by the threat of section 404 FSMA2000 to order the banks to make redress and by section 166 FSMA2000 to require them to have skilled persons oversee them doing so.
BEIS specifically considered adopting the FCA’s two ADR processes:77 a section 404-like power to impose redress by executive fiat78 and a state-run ombudsman, like the FOS.79 But BEIS turned away from both the FCA’s ADR solutions. It seems it did so because, although it understood the benefits of ADR80 it also understood its dangers, which it listed as follows:
Perhaps BEIS had those insights81 because it had spent the last 50 years ‘sponsoring’82 the Employment Tribunals. Be that as it may, the principal driver in BEIS’s decision to adopt a common law-based dispute resolution system was a policy decision about the natural limits of the role of a regulator and the dangers along the path of executive fiat of mission creep and regulatory overreach:
a. creating additional arbitrary burdens on claimants and defendants
b. providing opportunities for lawyers to increase the costs of a case through lengthy but ineffective pre-trial processes
c. allowing the party with better access to information and legal provision (usually but not always the defendant) to exert pressure on the other party to accept a settlement that does not benefit them
d. creating a system that is so tilted towards ADR that the threat of a case ever actually reaching court is diminished, removing the pressure to settle reasonable cases
The Government considers that the primary duty of the OFT will be to enforce the competition regime and undertake studies and investigations in the competition regime. Any work therefore that the OFT will undertake on redress schemes would be in addition to this primary competition work, and should be a substantial burden on resource.
The Government is therefore concerned that if the OFT was given a power to require a business to create a redress scheme, then this would be too great a burden for the OFT. Due to the reluctance of the company, the OFT would automatically become involved in the intricate detail of a scheme. The imposition of a scheme would very likely be contested, which could involve the OFT in lengthy appeals.
Allowing redress schemes to be imposed would also run counter to the wider Government objective for ADR to be a voluntary process.
The history84 of the FCA's swaps mass dispute scheme makes BEIS's apprehension look prescient.
The Government will therefore give the OFT the discretionary power to certify a voluntary redress scheme, but not to impose one.83
Policy 2: enable SMEs and consumers to assist the regulator by private action
Policy 1 was a negative consideration: beware mission creep and overreach. However, BEIS also saw a positive reason to keep consumer and SME competition disputes within the common law dispute resolution system as a way of achieving its policy objectives without a commensurate burden on its resources. Again, its experience running the Employment Tribunals is likely to have helped it identify this reason.
BEIS recognized that its role as regulator was to deploy its resources on the big, high-impact cases,85 which regrettably left SMEs without effective redress, because the regulator cannot do everything. Nor was BEIS about to re-allocate its resources away from large cases to small ones. This led BEIS to set is policy for SMEs as follows:
BEIS’s policy was based on the insight that, ‘an effective private actions regime would help complement the public enforcement regime.’87 Indeed, it considered that an effective private enforcement regime working alongside the public enforcement regime would create far greater pressure for behavioural—or cultural—change in the markets. For example, it observed:
In this case, the primary need from government is to create a framework whereby individuals and businesses can represent their own interests, rather than rely on state enforcement in competition law … because private actions uphold the rights of individuals to seek resolution and redress and because victims of anti-competitive behaviour are particularly well-placed to confront and address this.86
BEIS had direct experience of this phenomenon in its work with the Employment Tribunals. It takes quite a lot to change workplace culture from Mad Men to one where physical contact is career-ending. What caused that change? It is conversations the manager had in the pub or reports he read in the paper about a manager just like him being cross-examined in public about his transgressive behaviour, its effect on the intern and the possibility that he will never work again. BEIS transferred the logic to anti-competitive conduct: if it could create a platform that would allow SMEs and consumers to bring claims, it could achieve a similarly powerful disincentive for anticompetitive behaviour in the markets.
An OFT report notes that survey evidence also shows that high profile OFT enforcement cases result in much greater behavioural change than lesser known cases …. The same study also gives the results of an OFT behavioural experiment that not only shows that the size of fine changed people’s behaviour, but that the greatest deterrence was from an unknown fine. The unpredictable nature of private actions and the wide range of their potential results could therefore be a very powerful disincentive for infringement.88
With policy set, therefore, the question for BEIS was then how to execute the policy: what was the right platform to permit consumers and SMEs to do the regulator’s work for them—of making behaviour or culture change happen?
7. BEIS’s preferred means of policy execution
With its 50-year experience of sponsoring the Employment Tribunals Service, BEIS could dispose of the idea of smaller competition claims being heard in the county courts in two sentences:
On the other hand, the Chancery Division of the High Court already had jurisdiction to hear competition claims, so the Final Impact Assessment focussed directly on whether to introduce a fast track for small claims in that jurisdiction90 or in the CAT91 (which is both ‘sponsored’92 by BEIS itself and run93 by the Competition Service).
… most stakeholders consulted, including almost all legal experts, have indicated that the county courts do not have sufficient competition expertise. This would mean that such cases would not be satisfactorily resolved, and would always be vulnerable to appeals to a higher court.89
The way forward could not have been revealed more clearly by responses to the consultation. Of all the consultees referred to in the Government Response, the only body that actually denied the need for a fast track was the Chancery Division of the High Court itself.94 It is perhaps not a surprise, therefore, that BEIS decided that, having settled on the policy, it would be a mistake to cede policy execution to a different department of state. Indeed, BEIS observed:
BEIS therefore decided to keep control of policy execution96 and so expanded the power of the CAT–over which it has more influence–to include a fast track for SMEs. They set themselves up to repeat their success with the Employment Tribunals.
The practical detail of court rules, processes and jurisdictions can be very important for ensuring suitable cases are brought and unnecessary costs avoided…. In most cases these matters must be decided across the justice system as a whole, but in this policy area the existence of a specialised court, the Competition Appeal Tribunal (CAT), makes matters more flexible.95
8. FCA: one policy and three means of policy execution
So which policies and which options for policy-execution stand before Dr Bailey as he thinks about this issue? This author sees one right policy and three means of executing it.
The right policy could be summarized as ‘less is more’: trying to micro-regulate or over-legislate is a mistake. BEIS satisfies itself with broad expressions of principle—be it equal treatment, fairness in dismissal or competition in markets. Likewise, the FCA should—as it largely has done—restrict itself to expressions of principle97 and then rely on the common law system to work out how those principles should be applied in practice.
The FCA needs to do what BEIS has already done twice: build the right platform, cost effective common law dispute resolution to allow market participants to bring private actions to enforce the rights the FCA has granted them. The case law that this platform will create will, in time, establish how its principles translate into market practice.
Policy Execution 1: a specialist fast track in the High court
If that is the policy, what are the platforms that the FCA could be building to achieve it? This author sees three, none of which require any, or any substantial, primary legislation.
The first is that Dr Bailey could ask the MoJ and HMCTS to create a specialist fast track list in the High Court to permit large volumes of SMEs and consumers to benefit from the expertise of high court judges. Now, admittedly, the High Court may have recently started a Financial List for large or high profile wholesale financial services disputes,98 but, like its Chancery Division in competition claims, it may be reluctant to lower the barrier to entry99 for numerous smaller claims–particularly when it considers itself to under-resourced. The FCA can only ask.100 But even if the answer is yes, the FCA would cede control of policy delivery and lose the flexibility that comes with keeping policy delivery ‘in house’.
Policy Execution 2: a new chamber in the Tribunals—or expansion of an existing one
The second option is to create a new chamber for financial services disputes which would operate under the Courts, Tribunals and Enforcement Act 2007 (CTEA2007). One benefit of this approach is that, unlike courts, a judge chairing a tribunal makes his decision equally as one of three: he is joined by market experts from either side, in this case, by a member of the financial services industry and by a representative of small business.101 This tends to give a tribunal enhanced credibility102 in the market and even with the public, such as the Employment Tribunals enjoy.103 The alternative is to expand The Upper Tribunal (Tax and Chancery Chamber); it already hears appeals from decisions of the FCA, so already possesses the market expertise that will be necessary to determine financial services disputes according to Handbook rules. A specialist chamber would also be cheaper than a High Court list.
Policy Execution 3: a specialist arbitral tribunal and appeal tribunal
Third, the FCA could create a common law arbitral system104 by agreement with the banks. Arbitral panels are also naturally a panel of three equal decision-makers who introduce industry expertise. Proceeding down the arbitral route would give both the FCA—and the banks—the benefit of keeping the rule-making ‘in house’, just as BEIS wanted to. The arbitral system’s rules should apply the law and produce a public body of authority that clarifies the law. To that end it would need an appellate tier which, under the rules, would bind those under its jurisdiction. Its awards would be persuasive in the High Court. The system could, with the agreement of the MoJ and HMCTS, connect105 to the Court of Appeal and Supreme Court.
On 9 November 2016, Andrew Bailey gave further evidence before the Treasury Select Committee. In response to the question ‘Do you draw any general conclusions about these ad hoc redress schemes and how we can move forward on that?’106 He replied:
Dr Bailey has clearly accepted the principle set out in January's CMLJ article107. Now his team must set about the work of choosing which of these forms of common law dispute resolution systems is right for retail financial markets. If Dr Bailey's team does adapt the common law to the FCA's policy needs, he can rest assured that the FCA will be doing no more than re-affirming the value of common law dispute resolution, which has guided markets through more crises than we would care to count.
I do. The problem goes back to what I said right at the beginning, which is that, when it is outside the regulatory perimeter, these are schemes that are created by the firm. [The FCA has] levers that [it] can use on them, and [it does]. However, what I have learnt from my IRHP involvement, coming late into it, is that people feel that they have not had their day in court. Now, they do not want to have a literal day in court because that is obviously very expensive. However, what I conclude from this is that it is not satisfactory from the point of view of the FCA, because the FCA has been involved in creating a lot of bespoke processes. We discussed this on the board a number of times. Were there to be a [permanent] mechanism that could substitute for these [bespoke processes] let us loosely call it a tribunal, for the sake of argument rather like the ombudsman but for more complex cases, because corporate cases often are more complex, this would be a big step forward … [The FCA is currently] creating a lot of work for [itself]. However, I am very sympathetic to the people involved, so we have to do it … if there were to be a process that could substitute for [the FCA’s bespoke processes] and to which people could go and know that they could go, I think this would be a big step forward.
On 15 December 2016, Members of Parliament (MPs) debated a motion that the FCA should set up a permanent Financial Services Tribunal modeled on the Employment Tribunals. The motion was carried.108 During that debate, Calum Kerr (MP for Berwickshire, Roxburgh and Selkirk) enquired of George Kerevan (MP for East Lothian), whose motion it was:
He should, in fact, have been calling for praise to be visited on the Capital Markets Law Journal109 which provided the robust intellectual platform on which the parallel could be established so that the idea can now be turned into reality.
Will my hon. Friend join me in praising the work of Richard Samuel, who back in May, when we first looked at this idea, drew the parallel [with Employment Tribunals] that we have been discussing?
<http://www.publications.parliament.uk/pa/cm200809/cmhansrd/cm081210/debtext/81210-0002.htm#08121022000009> accessed 29 November 2016.
The Prime Minister: The first point of recapitalisation was to save banks that would otherwise have collapsed. We not only saved the world— [Laughter.]—saved the banks and led the way— [Interruption.] We not only saved the banks— [Interruption.]
Mr. Speaker: Order.
The Prime Minister: Not only did we work with other countries to save the world’s banking— [Interruption.] Not only did we work with other countries to save the world’s banking system, but not one depositor actually lost any money in Britain… .
… in a study last week of the top 50 financial cities, the City of London came first. So I congratulate you Lord Mayor and the City of London on these remarkable achievements, an era that history will record as the beginning of a new golden age for the City of London. And I believe the lesson we learn from the success of the City has ramifications far beyond the City itself-that we are leading because we are first in putting to work exactly that set of qualities that is needed for global success… . And I believe it will be said of this age, the first decades of the 21st century, that out of the greatest restructuring of the global economy, perhaps even greater than the industrial revolution, a new world order was created.
There were 16,500 instances of the mis-sale of interest rate hedging products reviewed by the banks. Over 90% of these were found to have been mis-sale. Of the individuals who were rewarded redress, of that 16,500, 3,250 have brought consequential loss claims. The mis-sale of these products resulted in major losses to small businesses. Of the consequential loss claims which have been determined, the 3,250, 97% of consequential loss decisions are less than £10,000. Those figures, that hard data, comes from the FCA.
Also, each published determination by FOS contains the following statement: ‘I’ve considered all the available evidence and arguments to decide what’s fair and reasonable in the circumstances of this complaint.’
DISP3.6.4R In considering what is fair and reasonable in all the circumstances of the case, the Ombudsman will take into account:
(a) law and regulations;
(b) regulators’ rules, guidance and standards;
(c) codes of practice; and
(2) (where appropriate) what he considers to have been good industry practice at the relevant time.
… the common law proceeds generally by distilling from a particular case the legal principle on which it is decided, and that legal principle is then generally applied to the circumstances of other cases to which the principle is relevant as they arise before the courts. As Parke B. said, giving the advice of the judges to your Lordships’ House on Mirehouse v Rennell (1833) 1 Cl. & F. 527, 546 (cited with approval in Shaw [supra] by Lord Tucker (p.289), Viscount Simonds (p.261) and Lord Morris of Borth-y-Guest (p.291) concurring, and by Lord Hodson (pp.292-293):
‘Our common law system consists in the applying to new combinations of circumstances those rules of law which we derive from legal principles and judicial precedents; and for the sake of attaining uniformity, consistency and certainty, we must apply those rules, where they are not plainly unreasonable or inconvenient, to all cases which arise; and we are not at liberty to reject them, and to abandon all analogy to them, in those to which they have not yet been judicially applied, because we think that the rules are not as convenient and reasonable as we ourselves could have devised’.
These considerations apply equally to banking misconduct: banks’ abuse of the imbalance of information, knowledge and resources at the point of sale allow it to sell inappropriate services or extract an inappropriately high price in exchange for appropriate services. At the point of dispute that same imbalance allows it to pay an inappropriately low or no price to its customer for loss caused by its misconduct. Those costs infect the whole UK economy, reducing efficiency, productivity and output of the whole. The social costs are at their most intense in the SMEs which collapse under the cost of banks’ services, but those costs ripple out to society as a whole and depress output.
The costs of anti-competitive behaviour in terms of lower output and higher prices of goods and services, and reduced choice and innovation, are not confined to transfers between infringer and the harmed party but include costs to society as a whole arising from productive inefficiency. These wider costs are one reason why competition law deserves specific measures designed to improve access to redress and prevent social costs arising.
a. restoring positive working relationships between the parties
b. allowing the underlying problem to be resolved more swiftly
c. defending both parties from the uncertainties and additional costs of trial
d. reducing court costs to the state. (ie the judicial body, emphasis added)