FSA seeks compensation / causation change
The Financial Services Authority (FSA) wants to force the firms it regulates to provide 100% redress to customers who have suffered financial loss, even if the loss was not caused by faulty advice, warns Reynolds Porter Chamberlain (RPC).
The City law firm explains that as the law of “causation” stands, if a financial services firm breaches FSA rules when providing advice they are only liable to compensate their customer for losses that can be directly attributed to faulty advice.
The firm can therefore decline to pay compensation if they are satisfied that their breach of the rules did not cause the loss.
For example, they might be able to show that the customer would have proceeded to invest even though the adviser failed to document correctly the customer’s Attitude to Risk, in accordance with FSA rules.
RPC explains that if Parliament accepts the FSA’s invitation to change the law, firms will be strictly liable to compensate customers for all financial losses when their actions have breached the FSA rulebook, no matter how small the breach.
Partner at the firm, Simon Laird, comments: “Small technical breaches in documenting advice, such as failing to send the customer a suitability report, rarely impact investment decisions but could mean the firm is liable for the customer’s total losses from a financial product if the FCA (Financial Conduct Authority) is granted this power.”
“Effectively these changes to the law could encourage customers who were perfectly aware of the risks they were taking to look for a loophole through which to claim compensation.”
According to RPC, the FSA has invited Parliament to reconsider the law in a memo to the Joint Committee on the Draft Financial Services Bill, saying: “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% redress.
“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 the 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.”
Category: Financial Services Authority News, Legal News
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