DISPUTE RESOLUTION MECANISMS
IN THE UK FINANCIAL SECTOR
Eilís Ferran 
PART I
THE REGULATORY FRAMEWORK
The UK embarked on a new era in financial regulation
with effect from 1 December 2001.
This is the date
when the Financial Services and Markets Act 2000 (FSMA)
came into force.
FSMA provides the framework for a
sweeping rationalisation and modernisation of the UK’s
financial
services
legislation,
covering
banks,
insurance companies, securities dealers and other types
of financial services provider.
Key features of the FSMA structure include:

A unitary statutory financial regulatory authority,
the
Financial
Services
Authority
(FSA)
which
combines the functions of prudential supervisor and
conduct
of
business
regulator
financial services industry;
1
across
most
of
the
internationally, the
model of the single integrated statutory regulator

Reader in Corporate Law and Financial Regulation, Director of the Centre for Corporate and
Commercial Law (3CL), University of Cambridge; email: evf1000@cam.ac.uk.
1
Some areas – e.g. consumer credit and general insurance brokerage businesses remain outside
the FSA’s regulatory net.
1
is
one
that
is
becoming
increasingly
common
with
countries such as Japan, Germany and Ireland having
decided to set up organisations, similar to the FSA,
that bring
together under one roof responsibility
for banking, insurance and other financial services;
the
Financial
Supervisory
Service
(FSS)
is
the
Korean single financial regulator equivalent to the
FSA;

A statement of regulatory objectives for the FSA;
these objectives are: maintaining confidence in the
financial system; promoting public understanding of
the
financial
degree
of
system;
protection
securing
for
the
consumers;
appropriate
and
reducing
financial crime;2

A risk based approach to supervision which involves
the
FSA
drawing
up
risk
profiles
for
firms
by
reference to an assessment of their risk to the FSA
in terms of their potential to cause the FSA to fail
to achieve the statutory objectives and which offers
firms the incentive of less intrusive and intensive
supervision
from
the
FSA
if
they
lower
their
individual risk assessment;3

Single ombudsman and compensation schemes;
FSMA, ss 2 – 6.
A New Regulator for the New Millennium FSA Policy Paper (London, FSA, January 2000);
Building the New Regulator – Progress Report 1 (London, FSA,.December 2000); H Davies, ‘A
Radical New Approach to Regulation’ (December 2001) and P Thorpe, ‘Preparing for the New
Regime’ (December 2001) – both speeches available via http://www.fsa.gov.uk/
development/newreg/index.html.
See also Freshfields Bruckhaus Deringer, Financial Services: Investigations and Enforcement
(London, Butterworths, 2001) paras 2.29-2.33 (hereafter ‘Freshfields’).
2
3
2

Significant
strengthening
of
the
FSA
disciplinary
and enforcement powers;

New
checks
powers
and
which
properly
are
balances
on
intended
accountable
to
the
to
the
FSA’s
ensure
state,
extensive
that
the
it
is
financial
services industry and to consumers.
Although many of the details of the new regulatory
structure have been controversial, and some remain so,
there was little serious opposition in the UK to the
general
need
regulation.
for
a
Various
new
approach
factors
to
fostered
financial
a
climate
receptive to change, including:

The pre-FSMA system of regulation involving a number
of
different
regulatory
agencies
responsible
for
different aspects of financial services activity had
failed to keep pace with a market in which sectoral
distinctions had become increasingly fuzzy through
secondary market techniques such as securitisation
and derivatives trading;4

Incidents such as the high-profile banking collapses
(BCCI and Barings) and pensions mis-selling scandals5
had
exposed
failings
in
the
old
system,
placed
particular strain on the balance that it had struck
between self regulation and state intervention, and
4
C Briault, The Rationale for a Single National Financial Services Regulator, FSA Occasional
Paper Series No 2 (1999).
5
I MacNeil, ‘The Future for Financial Regulation: The Financial Services and Markets Bill’
(1999) 62 MLR 725, 739-40; JM Black and R Nobles, ‘Personal Pensions Misselling: The Causes
and Lessons of Regulatory Failure’ (1998) 61 MLR 789.
3
raised questions about adequacy of the protection it
afforded to investors.
Whether the new British system will better serve the
interests of investors and the demands of the wider
economy than that which it has replaced is a question
for the future.
Some commentators have queried whether
the UK has got the balance right in key areas, such as
in
relation
protection
to
and
the
trade-off
facilitation
of
between
competition.
investor
The
6
potentially tricky relationship between the FSA as the
prudential supervisor of banks and the Bank of England
as the UK’s central bank and lender of last resort is
another cause for concern for some observers. 7
And,
even
have
at
this
early
stage,
practical
problems
emerged that illustrate the difficulties that lie in
translating vision into reality: a unitary approach can
eliminate duplication and gaps in regulation only so
long as structural change is matched by the practice of
better
communication
and
co-operation
between
departments within a regulatory organisation.
the
Recent
criticism of the FSA for failings in communications
between
its
prudential
regulation
and
conduct
of
business departments in the context of the financial
crisis facing Equitable Life, the world’s oldest mutual
C Mayer, ‘Regulatory Principles and the Financial Services and Markets Act 2000’ in E Ferran
and CAE Goodhart, Regulating Financial Services and Markets in the 21 st Century (Oxford, Hart
Publishing, 2001) ch 3.
7
E.g, M Taylor, “Twin Peaks’: A Regulatory Structure for the New Century”, Centre for the
Study of Financial Innovation (1995); M Taylor, “Peak Practice: How to Reform the UK’s
Regulatory System”, Centre for the Study of Financial Regulation (1996).
6
4
life assurance society, indicate that it may still have
some way to go in this respect.8
PART II
THE END OF SELF REGULATION?
Although the old British system was sometimes described
as “self regulation within a statutory framework” for
many observers it was apparent that the self regulatory
elements
of
that
structure
were
relatively
slight.
9
This insight may explain why the formal explicit ending
of self regulation achieved by FSMA did not attract
much comment during the passage of the legislation. 10
It is the reduction in the fragmentation of regulation
rather than the move away from self regulation that is
the really significant change brought about by FSMA.
But
the
assumption
that
the
new
FSMA
structure
has
entirely ousted elements of self regulation would be as
open
to
criticism
assumptions
about
on
the
grounds
of
predominantly
inaccuracy
self
as
regulatory
character of the system it has replaced.
Few would deny that self regulation has a role to
play in ensuring effective and effective regulation of
8
Report of the Financial Services Authority on the Review of the Regulation of the Equitable Life
Assurance Society House of Commons Paper (London TSO, October 2001) para 6.23 and ch 7.
See also “Regulator Faces Rising Tide of Troubles” Financial Times 20 October 2001 which
comments: “The question increasingly being asked by the financial services industry is how well
Sir Howard’s [Davies – the FSA Chairman and Chief Executive] – widely welcomed – is carried
out in practice”.
9
LCB Gower, ‘Big Bang and City Regulation’ (1988) 51 MLR 1; I MacNeil, ‘The Future for
Financial Regulation: The Financial Services and Markets Bill’ (1999) 62 MLR 725.
10
H Davies, ‘Reforming Financial Regulation: Progress and Priorities’ in E Ferran and CAE
Goodhart, Regulating Financial Services and Markets in the 21st Century (Oxford, Hart Publishing,
2001), ch 2.
5
complex, dynamic financial markets. 11
Self regulation
draws upon the knowledge and expertise of sophisticated
market participants.
industry
expertise
With the benefit of access to
self
regulation
should
often
be
better placed than state regulation to devise quick and
effective responses to new regulatory challenges.
Its
solutions are ones that market participants should more
readily accept since they have had a hand in developing
them. The more pertinent question, then, is as to the
nature
of
that
framework.
role
With
within
regard
the
to
broader
this
regulatory
question,
it
is
certainly true to say that with FSMA the UK has given a
different
answer
previously.
areas
It
where
has
the
criticised
structure.
to
and
this
question
specifically
operation
of
replaced
it
addressed
self
them
than
with
certain
regulation
a
did
was
statutory
But in striving to produce an optimal
12
combination of self and state regulation for modern
market
more
conditions,
of
an
overall
adjustment
the
of
the
UK
changes
represent
components
of
the
regulatory mix rather than a radical departure.
What do we mean by self regulation in this context?
“Self regulation” is a multi-faceted concept but the
definition
in
the
IOSCO
Model
for
Effective
Self
Regulation is useful here:13
B Black, B Metzger, T O’Brien, YM Shin, ‘Corporate Governance in Korea at the Millennium:
Enhancing International Competitiveness’ (2001) 26 Journal of Corporation Law 537, 546; ssrn
abstract id= 222491.
12
E.g., in relation to ombudsman schemes discussed at notes xxx below and accompanying text.
13
Model for Effective Self Regulation Report of the SRO Consultative Committee of IOSCO,
May 2000. Other areas where self regulation continues to play a role in the UK include: the
dissemination of financial information by the press (“City Slicker Jitters, Guardian 12 November
11
6
In
its
most
regulation
to
complete
encompasses
create,
amend,
form,
the
self
authority
implement
and
enforce rules of conduct with respect
to the entitles subject to the SRO’s
jurisdiction, and to resolve disputes
through
arbitration
or
through
arbitration or other means.
Applying
structure,
this
it
definition
is
clear
that
within
the
new
recognised
FSMA
investment
exchanges (RIEs) play a role that fulfils many of these
criteria.

Inter alia, an RIE must:14
Ensure that business conducted by means of its
facilities is conducted in an orderly manner and
so as to afford proper protection to investors;

Be willing and able to promote and maintain high
standards of integrity and fair dealing;

Be
willing
and
able
to
co-operate
with
other
regulatory authorities;

Have proper procedures for making rules, keeping
them under review and amending them;

Have
effective
arrangements
for
monitoring
and
enforcing compliance with its rules.
2001 – discussing EU proposals for state regulation of market abuse that would catch financial
journalists and referring to exemptions afforded to the Press under FSMA).
14
Financial Services and Markets Act 2000 (Recognition Requirements for Investment
Exchanges and Clearing Houses) Regulations 2001 (SI 2001/995).
7
So, RIEs are both regulated and regulators: they are
responsible
their
for
markets
markets.
admitting
and
for
regulating
Strikingly,
15
securities
it
is
to
trading
trading
with
on
regard
on
their
to
the
resolution of disputes – the subject of this paper –
that
the
role
of
RIEs
under
FSMA
is
more
proscribed than that proscribed by IOSCO.
RIEs
are
required
investigating
facilities,
to
complaints
these
have
about
requirements
narrowly
Although
arrangements
the
do
not
users
for
of
extend
obligation to offer dispute resolution services.16
its
to
an
This
is in contrast to the Korean position where the market
operators, the Korea Stock Exchange (KSE) and the Korea
Securities Dealers Assn (KSDA) are permitted to offer
dispute resolution services.
However, the UK does not
lack dispute resolution services tailored specifically
to meet the needs of the financial services industry.
Retail consumers and market professionals have a range
of options available to them.
Part III of this paper
provides an account of the main routes to resolution
and redress that are available to an aggrieved investor
in the UK.
Part IV looks at some of the factors that
may influence the choice of routes taken in particular
circumstances.
15
16
Freshfields, paras 13.213-13.219.
FSA Handbook, REC 2.15.
8
PART III
DISPUTE RESOLUTION – AN OUTLINE
An aggrieved investor has a number of options available
to him under UK financial services law.
The options
can be grouped under the following heading:

Resolution through a successful application under
applicable complaints procedures;

Redress through the ombudsman system;

Redress through arbitration or mediation;

Redress through the Financial Services Compensation
Scheme;

Redress through court action taken by the investor
against the wrongdoer; and

Redress through action taken on behalf of investors
by the FSA.
The various mechanisms are consistent with the FSA’s
consumer
protection
regulatory
objective
which
is
imposed on it by section 2 of FSMA.
Complaints Procedures
The
FSA
regards
effective
procedures
for
handling
complaints as playing a key role in delivering adequate
consumer protection.
It considers that the primary
onus should lie on firms to resolve disputes internally
wherever possible, but with provision for referral to
9
an independent person if the internal mechanisms fail
to satisfy the complainant.
given
effect
to
via
the
These expectations 17 are
regulatory
which firms are now subject.
requirements
to
Authorised firms that
conduct activities subject to the Financial Ombudsman
Service
(FOS)
with
eligible
complainants
(i.e.
individuals and small firms, charities and trusts) are
required
to
procedures.
that
firms
complaints
have
internal
complaint
handling
The FSA Handbook regulates the procedures
must
put
in
procedures,
place
in
including
relation
provision
to
for
their
fair
compensation of complainants, time limits and record
keeping.
Recognised investment exchanges are also
18
required to have complaints procedures.19
The
FSA
has
a
general
statutory
power
to
issue
guidance 20 which, in the area of complaints procedures,
it has exercised so as to provide guidance for firms on
handling complaints relating to endowment mortgages. 21
The FSA attaches considerable importance to using its
guidance powers as a flexible and informal regulatory
tool.
status.
FSA guidance does not have any formal legal
So whilst it may be unlikely that the FSA
itself would seek to take action against a person who
has acted in accordance with the FSA’s guidance, that
person cannot rely on having acted in conformity with
17
Set out in Consumer Complaints (London, FSA, 1997) FSA Consultation Paper 4, Pt III.
See also British Standard 8600, Complaints Management Systems - Guide to Design and
Implementation.
19
The Financial Services and Markets Act 2000 (Recognition Requirements for Investment
Exchanges and Clearing Houses) Regulations 2001, SI 995/2001 made under FSMA 2000, s 286,
sch 1, para 8.
20
FSMA, s 157.
18
10
FSA
guidance
complainant
as
an
refers
absolute
the
safe
complaint
harbour
to
the
if
FOS
a
or
commences a court action.
The FSA monitors the operation of firms’ internal
complaints procedures through disclosure requirements
in the form of bi-annual returns from firms containing
details of the number and nature of complaints received
during
that
period
and
the
percentage
of
these
complaints resolved within the specified time limit.
The stated purpose of the FSA rules and guidance
relating to internal complaints handling by firms is
“to
ensure
that
complaints
are
handled
fairly,
effectively and promptly, and resolved at the earliest
possible
opportunity,
minimising
the
number
of
unresolved complaints which need to be referred to the
FOS”. 22
It is a standard feature of ombudsman schemes
that the complainant should first clear the hurdle of
exhausting
becomes
otherwise
internal
involved.
legitimate
procedures
Although
before
this
complaints
the
means
may
not
ombudsman
that
be
some
pursued
because the investor is put off by the requirement to
seek redress first from the firm which has served him
badly, on balance this threshold requirement can be
regarded as a reasonable compromise between the need
for the scheme to be accessible to consumers and for it
to operate efficiently and effectively.
21
22
FSA Handbook DISP, App 2.
FSA Handbook, DISP, 1.1.12.
11
Financial Ombudsman Service (FOS)
The new landscape for its civil justice system that the
UK
has
drawn
up
in
recent
years
has
resulted
in
encouragement of alternative dispute resolution moving
into the foreground; 23 and, as part of that, ombudsman
schemes are promoted as being particularly appropriate
for straightforward claims where the amounts involved
are relatively small and/or where the complainant lacks
the resources to commence court proceedings.
According
to one commentator ombudsman schemes are increasingly
“being seen as having the capacity to function as real
alternatives
established
to
part
courts
and
of
civil
our
tribunals
justice
and
as
an
machinery”.
24
Ombudsman schemes are widely viewed as being a cheaper,
speedier and less formal dispute resolution mechanism
than the courts.25
The
retail
growing
development
financial
dispute
of
a
infrastructure.
single
has
the
efficient
here
(unsurprisingly)
construct
within
resolution
developments
a
services
awareness
importance
of
do
European
also
resulted
European
Union
cross-border
mechanisms
for
are
fairly
not
involve
supra-national
Instead
the
market
in
of
in
a
the
alternative
consumers.
But
modest
and
any
dispute
emphasis
attempt
to
resolution
is
on
co-
operative linkages between national schemes so as to
23
Access to Justice - Final Report (London, HMSO, July 1996) (Woolf Report).
R James, Private Ombudsmen and Public Law (Aldershot, Dartmouth Publishing, 1997) 3.
25
C Scott and J Black, Cranston’s Consumers and the Law (London, Butterworths, 3rd edn, 2000)
24
12
provide
consumers
of
cross-border
financial
services
with access to the alternative dispute settlement body
of other EU states via the redress body in their own
country
of
differences
complaint
residence.
between
and
the
redress
There
26
are
financial
schemes
significant
sector
operating
consumer
within
the
member states of European Union: many have a narrower
scope than the new UK structure and are limited to
banking and insurance related complaints.
The provisions for a new ombudsman regime, set out
in Part XVI and schedule 17 of FSMA provide a single
unified
dispute
procedure,
Service
(FOS).
The
FOS
the
is
Financial
operated
by
Ombudsman
a
company,
Financial Ombudsman Service Ltd (FOS Ltd), which has
been established by the FSA.
Although the scheme and
its operator are operationally independent of the FSA
and autonomy for ombudsmen is designed to be assured by
the
requirement
that
rather than the FSA,
they
27
be
appointed
by
FOS
Ltd
the FSA exerts control in a
variety of ways:

The
chairman
and
the
members
of
the
board
of
directors of FOS Ltd are appointed and liable to be
removed by the FSA; in the case of the chairman
governmental approval is also required.28
133-140.
26
Out-of-Court Complaints Bodies for Financial Services, http://europa.eu.int/comm/internal_
market/en/finances/consumer/intro.htm.
27
FSMA, sch 17, paras 4 – 5.
28
FSMA, sch 17, para 3. The terms of appointment (and in particular those governing removal
from office) must be such as to secure their independence from the FSA in the operation of the
scheme: para 3 (3).
13

The FOS annual budget must be approved by the FSA.29

It is the FSA that makes the rules governing the FOS
compulsory jurisdiction (i.e. the scheme applying to
FSA authorised firms in respect of their activities
which are FSMA-regulated and also certain of their
activities which are outside the scope of the Act).30

The FSA’s rule-making powers in this respect include
defining eligible claimants and the maximum amount
of monetary awards.
The relevant part of the FSA
Handbook provides that the FOS is available to all
private individuals and small businesses, charities
and trusts
(with a turnover (if a business), income
(if a charity) or net asset value (if a trust) of
less
than
£1
enforceable
million).
monetary
award
The
specified
that
an
maximum
ombudsman
can
make is £100,000 but he can recommend to the firm in
question
that
considers
that
it
pays
this
a
is
higher
amount
required
as
if
he
fair
compensation.31

FOS Ltd and the chief ombudsman must each make an
annual report to the FSA, and these reports must be
published. 32
The FSA intends to send copies of these
29
FSMA, para 9.
FSMA, s 226. FOS Ltd also operates a voluntary jurisdiction which is open to unauthorised
firms in respect of any of their financial services activities which were covered by membership of a
former scheme and to unauthorised mortgage lenders until these transfer to the compulsory
jurisdiction: FSMA, s227. FOS Ltd makes the rules relating to the voluntary jurisdiction, subject
to FSA approval. The FSA and FOS Ltd have agreed a harmonised set of rules applicable to both
jurisdictions.
31
FSMA, s 229 and FSA Handbook DISP 3.9.
32
FSMA, sch 17, para 7.
30
14
reports to HM Treasury and to make them available to
Parliament.33

The FSA must consent to rules made by FOS Ltd. 34
FOS
costs rules require specific FSA approval.
The
35
ombudsman can make costs awards against firms for
costs reasonably incurred by the complainant, but
not vice versa. 36
Given that ombudsman schemes are
designed to enable consumers to seek redress without
having
to
use
professional
(expensive)
advisers,
costs
legal
awards
and
against
other
firms
should not be common.37
The powerful control powers enjoyed by the FSA makes
it possible to question whether the FOS can actually
achieve
the
operational
existence
independence.
of
such
strong
Justification
links
is
that
for
the
operation of the scheme plays an important part in the
fulfilment
(or
not)
of
regulatory objective. 38
that
there
is
a
need
the
FSA
consumer
protection
Some complaints may indicate
for
the
FSA
to
invoke
its
over
FOS
about
the
disciplinary or supervisory powers.39
Since
activities
the
strongest
runs
to
the
line
FSA,
of
control
questions
independence and accountability of both organisations
are intertwined. In this context accountability is a
33
FSA CP 33, para 1.13.
FSMA, sch 19, para 14 (7).
35
FSMA, s 230.
36
FSMA, s 230.
37
FSA Handbook DISP 3.9.10 G.
38
CP 4, paras 24 and 98.
39
Ibid, paras 100-105.
34
15
multi-faceted
concept
embracing
both
processes
and
outcomes.
According to best practice guidelines, the four key
conditions that an ombudsman scheme should meet are:
independence of the ombudsman from the organisations
the
ombudsman
accessibility
has
for
accountability.
the
power
complainants;
to
fairness
investigate;
and
public
The FOS has been designed with these
criteria in mind. 40
The design has also been driven by
the FSA’s own assessment of the necessary features of
an independent complaints procedure, namely that the
arrangements should be:41
comprehensive in their coverage;
accessible to consumers;
fair and impartial as between both parties (i.e.
consumers and firms);
capable of making binding decisions;
consistent in the approach to the provision of
redress;
transparent and accountable;
flexible, simple and prompt;
efficient,
with
appropriate
minimum
performance
standards;
able
to
provide
appropriate
feedback
to
the
regulator.
40
Consumer Complaints and the New Single Ombudsman Scheme FSA CP 33, November 1999,
para 1.20.
41
CP 4, para 25.
16
In relation to the FSA, FSMA provides for political
accountability,
judicial
accountability
and
industry
and consumer accountability.
The FSA must make an annual report to the relevant
government department (HM Treasury) and the Treasury
must
then
lay
the
report
before
Parliament.
42
The
Treasury also has some specific statutory controlling
powers in relation to the FSA, including power to order
independent reviews of the economy, efficiency and the
effectiveness with which the FSA has used its resources
in discharging its functions. 43
The chairman and the
members of the FSA Board are appointed, and are liable
to be removed by, the Treasury.44
The FSA’s actions are open to judicial review and it
may be challenged under the Human Rights Act 1998 which
has implemented the European Convention on Human Rights
into
UK
law.
Further
judicial
accountability
is
provided through the establishment under FSMA of the
Financial Services and Markets Tribunal to act as an
independent
adjudicator
in
respect
of
disputed
FSA
decisions in matters of authorisation, intervention and
discipline.45
Industry
and
consumer
accountability
is
provided
through the requirement for the FSA to hold an annual
public meeting so as to allow public discussion of its
annual report to the Treasury and an opportunity for
the public to put questions about the discharge of its
42
FSMA, sch 1.
FSMA, s 12.
44
FSMA, sch 1, para 2.
43
17
functions.
This
46
is
bolstered
by
extensive
consultation requirements which are imposed on the FSA,
both with regard to general policies and practices47 and
in the exercise of specific rule-making powers.48
Both the FSA and FOS have broad (but not absolute)
statutory immunity from liability in damages for their
actions and inaction.
49
Complaints against the FSA
itself are handled through its complaints procedure 50
with the possibility of referral to the Parliamentary
ombudsman.51
Access to the FOS is free at the point of entry for
complainants.
might
deter
Although a modest fee for complainants
some
groundless
claims,
UK
experience
suggests that it would be an entry barrier that would
be likely also to put off legitimate claimants and so
undermine
the
usefulness
of
the
scheme.
52
An
45
FSMA, Pt IX.
FSMA, sch 1, paras 11-12.
47
FSMA, ss 8-11.
48
FSMA, s 65 (statements and codes relating to approved persons), s 121 (market abuse code), ss
155 and 157 (rules and standing guidance applying to authorised persons), ss 70, 125, 211 and 395
(policies and procedures relating to disciplinary and supervisory powers).
49
FSMA, sch 1, para 19 (FSA immunity); sch 17, para 10 (FOS immunity).
50
FSMA, sch 1, para 8.
51
‘Parliamentary Ombudsman to Investigate Financial Services Authority's Handling of
Equitable Life’ Parliamentary Ombudsman Press Notice 57/01, 29 October 2001. But there are
concerns that investor interest in the possibility of securing compensation from the FSA via this
route might hamper Equitable Life’s efforts to secure a compromise: ‘Hopes of Pay-out 'Threaten'
Equitable Agreement’ Financial Times, 2 November 2001. In order not to impede these efforts the
Financial Ombudsman has decided to hold back from awarding compensation against Equitable
Life itself until a vote has taken place on compromise proposals: ‘Report Offers Ray of Hope to
Policyholders’ Financial Times, 17 October 2001.
For discussion of a previous occasion on which the Parliamentary Ombudsman played a
prominent role in the aftermath of a financial scandal: R Gregory and G Drewey. ‘Barlow Clowes
and the Ombudsman’ [1991] Public Law 192, 408 (“amateurish arrangements” made by the
relevant government department for the protection of investors warranted substantial compensation
payments from the government to those investors who had lost out).
52
Complaints under the Securities and Futures Association Consumer Arbitration Scheme
virtually dried up after a £50 charge for complainants was introduced: http://
46
18
alternative solution to the problem of time-wasting,
groundless claims is provided by FSMA in that limited
awards can be made against the complainant in favour of
FOS Ltd where the complainant has acted unreasonably,
improperly
or
has
been
responsible
for
unreasonable
delay.53
The ombudsman can require parties to complaints to
provide information. 54 Firms are required by the FSA to
co-operate
with
the
ombudsman
and
failure
could result in disciplinary sanctions.
an
ombudsman
complainants
are
who
binding
may
on
alternative means of redress. 55
scheme
from
an
arbitration
binding on both parties.
do
so
Awards made by
firms
elect,
to
but
instead,
not
to
on
pursue
This distinguishes the
process
which
would
be
Other ways in which ombudsman
schemes differ from arbitration include: an ombudsman
can
base
his
judgments
on
what
is
fair,
just
and
reasonable in the circumstances, 56 whereas an arbitrator
is
normally
liabilities;
tied
to
existing
ombudsmen
legal
generally
rights
enjoy
and
greater
discretion over the procedures adopted; and, decisions
of
the
decisions
ombudsman
in
are
arbitration
usually
published
proceedings
can
whereas
be
kept
confidential.
Ombudsman awards under the compulsory jurisdiction
are enforceable through the courts in the same way as
www.complianceonline.co.uk/Info/fsacp33.htm.
53
FSMA, s 234 (4).
54
FSMA, s 231.
55
FSMA, ss 228 –9.
56
FSMA, s 228 (2).
19
money awards made by the lower courts.57
making
a
money
award,
or
as
In addition to
alternative
to
it,
an
ombudsman can issue a direction to the firm to take
such
steps
ombudsman
in
relation
considers
directions
are
just
to
the
and
enforceable
complainant
appropriate.
by
as
Such
58
injunction.
the
An
59
authorised firm that failed to comply with an award or
direction made by an ombudsman would also be liable to
FSA disciplinary proceedings.
An important idea underlying the FOS is to provide
consumers with a single point of entry for investment
business
complaints.
60
The
FOS
replaces
eight
sectorally-divided schemes that existed in relation to
banking,
insurance,
societies.
financial
services
and
building
There were significant differences between
those schemes in terms of eligibility criteria, limits
on
awards,
arrangements
time
for
limits,
the
FOS
and
so
(which
forth.
are
61
now
Funding
“virtually
final” but which will not come into force until April
2002) provide for 50 % of the budgeted expenditure to
be raised from a general levy on firms and for the
balance to be raised from case fees paid by firms.62
57
FSMA, sch 17, para 16.
FSMA, s 228 (2)(b).
59
FSMA, s 380.
60
CP 4, Pt IV. This type of “one stop shop” was presaged in a report produced for the Personal
Investment Authority (one of the predecessor bodies to the FSA) in 1993: A Unified Complaints
Procedure (Ackner). Although the FOS structure was established before implementation of
FSMA, prior to 1 December 2001 it operated the six different complaints handling schemes and it
was only then that a single unified set of rules took effect.
61
Consumer Complaints (London, FSA, 1997) FSA Consultation Paper 4, para 17; A Alcock,
‘The New Financial Services Authority and Consumer Protection’ [1998] CFILR 88.
62
Dispute Resolution: the Complaints Sourcebook Joint FSA/FOS Policy Statement on CP74 and
CP99 (London, FSA, October 2001).
58
20
As
well
as
unification
the
of
rationalisation
the
point
of
achieved
entry
through
and
the
simplification secured by the removal of the complex
“patchwork quilt” effect produced by the existence of
the eight different schemes, in putting the FOS onto a
clear statutory footing the new structure also responds
to criticism levelled at some of the old schemes about
their private sector status and what was seen as a
failure in self regulation that resulted in industry
control of the terms on which ombudsmen operated. 63
It
is sometimes argued that a statutory ombudsman scheme
runs the risk of being more legalistic than one that is
industry-run
but, although ensuring greater clarity
64
and certainty regarding processes and procedures may
involve some loss of informality, potential excessive
legalism
can
legislation,
be
countered
in
so
far
by
drafting
the
as
possible,
relevant
so
to
be
facilitative and permissive in its approach.
Although it did not assume its role as the single
statutory
December
prior
to
ombudsman
until
2001,
FOS
that
date
FSMA
cam
into
Ltd
was
practically
as
the
operator
sectorally divided schemes.
of
force
on
1
operational
the
eight
It is estimated to be the
largest ombudsman scheme in the world, with more than
400
staff,
some
10,000
member
firms
within
its
63
Review of Banking Services in the UK , Cruickshank Report (March 2000) para 4.79. For
discussion and analysis of previous criticism of the industry orientation of the banking ombudsman
scheme see James, ibid, ch 3. Also see C Scott and J Black, Cranston’s Consumers and the Law
(London, Butterworths, 3rd edn, 2000) 139. But contrast RW Hodgin, ‘Ombudsmen and Othe
Complaints Procedures in the Financial Services Sector in the United Kingdom (1992) 21 AngloAmerican Law Review 1.
64
Reforming Canada’s Financial Services Sector – A Framework for the Future Pt 4.
21
jurisdiction and a budget of around £20M.
It currently
handles around 30,000 complaints per year and expects
this number to continue to rise. 65
According to the
Chairman of FOS Ltd:66
Indeed, the unchanging background to our
activities has been a steady rise in the
number of complaints which consumers are
bringing us. The bald statistic is that
the
Financial
Ombudsman
Service
investigated and resolved 31,350 cases in
the
year
ended
31
March
2001,
compared
with 25,000 in the previous year when the
eight
schemes
were
still
separate
entities.
In the year ended 31 March 2001, it closed 28,400
cases. As at that date, 84% of the caseload was less
than six months old; 12% was between six and twelve
months old; and 4% was more than twelve months old. 67
Operating costs for the year were £20.6 million.
Unit
cost - total costs (before interest) divided by the
number of cases closed - was £753.
Arbitration and mediation
65
FOS Annual Review 1 April 2000 to 31 March 2001, http://www.financialombudsman.org.uk/first-annual-report/chair-statement.htm.
66
Ibid.
67
Ibid; http://www.financial-ombudsman.org.uk/first-annual-report/chief-review.htm.
22
Romano has described arbitration as the “dominant
mechanism
of
dispute
resolution”
business
transactions.
in
She
68
international
points
to
the
international enforceability of arbitration awards as
being
an
important
advantage
judicial decisions.
that
they
enjoy
over
She calls for other nations to
follow a policy similar to that enacted by Congress and
endorsed
by
the
US
Supreme
Court
that
explicitly
permits the use of arbitration to resolve securities
disputes.
access
However,
to
so
arbitration
dependent
on
far
in
as
the
UK
securities
legislative
or
is
concerned
dispute
judicial
is
not
endorsement.
Other perceived advantages of arbitration over court
litigation include: confidentiality; the ability to act
swiftly;
the
arbitrators
greater
as
specialist
compared
to
expertise
judges;
economy
of
of
management time; and cost savings.
In the UK civil justice reforms have been designed
so as to encourage greater use of alternative dispute
resolution rather than the courts.
having
a
practical
impact:
for
These changes are
example,
in
the
two
years since the reforms were introduced in April 1999,
new court claims in the Queens Bench Division (which
handles
general
civil
disputes)
were
down
by
37%,
69
although claims in the Chancery Division (which handles
more specialised cases) remained steady.
service
providers
saw
an
increase
in
70
the
Mediation
number
of
R Romano, ‘The Need for Competition on International Securities Regulation’ (June 2001)
(ssrn abstract id=278728).
69
‘How Litigation is Losing Out to Mediation’ Times, 26 June 2001.
68
23
cases referred to them, with a steady growth in the
percentage
courts. 71
of
the
caseload
referred
to
them
by
the
Mediation service providers acknowledge that
there is some considerable way to go before mediation
in the UK becomes as common in civil disputes generally
as it is in some other countries such as the US but the
commercial
sector
is
one
where
its
use
is
already
becoming more commonplace.72
The UK has a number of arbitration and mediation
services for the financial services industry.
Two of
the most significant are the City Disputes Panel (CDP)73
and
the
(CEDR).
74
Centre
for
Effective
Dispute
Resolution
The CDP is a private body whose sponsors
include the Bank of England, Confederation of British
Industry and Financial Services Authority.
Its web-
site declares the CDP to be “the dispute resolution
body
for
the
financial
services
industry”.
Its
caseload covers a broad spectrum of financial services
activities and since its establishment in 1994 it has
dealt with cases involving a total value in dispute
involving in excess of $4,000,000,000. 75
The CEDR is
also a private sector body supported by multinational
business,
professional
bodies
and
public-sector
organisations. It was launched in 1990 with the support
of The Confederation of British Industry to provide
70
Judicial Statistics (2000) 21.
CEDR Commercial Mediation Statistics 2000/01, http://www.cedr.co.uk/index.php?location=/
library/articles/stats0001.htm.
72
‘Shake on It, Pal’, http://lawgazette.co.uk/features/archivearticle.asp.
73
http://www.remus.com/disputespanel/links.htm.
74
http://www.cedr.co.uk.
75
McVea article forthcoming in JCLS.
71
24
mediation
services.
It
handled
467
commercial
mediations in 2002/1, 7% of which were in the financial
sector.
In
76
2001
it
was
appointed
by
the
FSA
to
develop and deliver a mediation service as part of the
FSA’s
new
enforcement
proceedings.
The
concept
of
mediation proceedings within the FSA’s disciplinary and
enforcement
regime
arose
out
of
the
public
consultations that preceded the enactment of FSMA in
which
concerns
about
the
fairness,
transparency
and
efficiency of the FSA’s powers featured prominently. 77
This appointment of the CEDR by the FSA is a indicator
of the growing significance of mediation in financial
sector disputes.
The existence of private bodies offering arbitration
services means that it would be potentially wasteful on
grounds of duplication for the FSA to maintain its own
tailor-made arbitration and mediation services.
Its
decision not to do so also reflects the lessons learnt
from past experience.
whose
One of the predecessor bodies
responsibilities
the
FSA
has
assumed,
the
Securities and Futures Association (SFA) did have a
full
arbitration
participants
but,
referred
it
to
practically
scheme
for
with
only
since
defunct
1996,
and
disputes
one
between
claim
by
2000
the
SFA
market
having
the
was
scheme
been
was
strongly
recommending bodies to refer their dispute to another
body such as the CDP.
76
CEDR Commercial Mediation Statistics 2000/01 http://www.cedr.co.uk/index.php?location=/
library/articles/stats0001.htm.
77
For an overview see Joint Committee on Financial Services and Markets, Draft Financial
25
Compensation Scheme
Effective compensation arrangements for consumers where
individual firms authorised by the FSA are no longer
able to meet their liabilities are regarded as playing
a
key
role
in
the
achievement
protection objective. 78
of
the
consumer
They are also relevant to the
objective of maintaining confidence in the financial
system in that they address the risk of the failure of
one firm triggering a wider loss of confidence in that
sector of the financial markets. 79 So, as required by
FSMA, the FSA has established the Financial Services
Compensation
Scheme
to
provide
compensation
for
consumers when a financial services firm is unable to
meet
certain
claims
against
it,
and
to
meet
the
obligations placed on all EU member states by European
law. 80
As with the FOS, the new scheme amalgamates the
various compensation schemes under the previous regimes
into a “one-stop shop”.
The institutional structure
and governance and accountability mechanisms are also
similar
to
those
of
the
FOS:
the
framework
of
the
scheme is established in rules made by the FSA but the
scheme is operated by a company, Financial Services
Compensation
Scheme
Ltd,
which
is
operationally
Services and Markets Bill First Report, pt VI.
78
Consumer Compensation (London, FSA, 1997) CP5, para 1.
79
Ibid., para 11. But for discussion of a counter view – i.e. that an existence of a compensation
scheme might mean that alternative options that might be more advantageous to investors, such as
a rescue of the collapsed firm, are not explored see AC Page and RB Ferguson, Investor Protection
(London, Weidenfeld and Nicolson, 1992) 74.
80
FSMA, s 213.
26
independent of the FSA but accountable to it. 81
The
scheme is industry-funded.
Devising a compensation scheme as a safety net for
consumers
involves
addressing
fundamental
questions
about such matters as eligibility criteria, the scope
of the scheme, limits on awards and the extent to which
consumers
should
themselves.
be
required
to
absorb
losses
From the start of the discussions about
the new scheme, it was clear that an element of “coinsurance”, i.e. consumers to bear part of financial
loss themselves, would continue.
The FSA has taken
the view that full indemnity schemes run the risk of
encouraging excessive risk-taking whereas co-insurance
schemes
provide
consumers
with
incentives
to
act
reasonably and prudently. 82 In a sense this analysis is
flawed since even without direct limits on the amounts
payable, consumers will still bear at least some of the
cost of an industry-funded compensation scheme since
the levies imposed on firms will reflect themselves in
higher prices to consumers.83
However, the significance
of the insurance premium against future compensation
claims that is implicit in payment charges may not be
readily appreciated by consumers in which case it will
be an ineffective signal to consumers that they should
take financial decisions carefully.
81
FSMA, Pt XV.
CP5, Pt II.
83
C Goodhart, P Hartmann, D Llewellyn, L Rojas-Suárez and S Weisbrod, Financial
Regulation: Why, How and Where Now? ((London, Routledge, 1998) 65-66; D Simpson, G Meeks,
P Klumpes and P Andrews, Some Cost-Benefit Issues in Financial Regulation (London, FSA,
2000) Occasional Papers Series No 12, 15-16.
82
27
The basis on which industry is required to fund
such a scheme is another matter of obvious concern.
Consumer
compensation
concerns
because
behaviour
of
schemes
raise
may
adversely
they
both
consumers,
as
moral
hazard
affect
described
the
in
the
previous paragraph, and financial firms, in that they
can pass on risks to other firms. 84
scheme
rather
than
a
number
of
Establishing one
sectorally-divided
schemes gives the issue of cross-subsidy between firms
carrying on different activities with different levels
of riskiness particular significance.85
In
broad
terms
the
FSA
has
responded
to
these
matters as follows:

only individuals and small businesses are eligible
claimants;86

the
scheme
relates
to
deposits,
investments
and
insurance;87

there
are
(100%
of
compensation
£2,000
and
90%
limits:
of
deposits
£33,000);
£31,700
investments
£48,000 (100% of £30,000 and 90% of next £20,000);
long–term insurance at least 90% of the value of the
policyholder’s
default;
guaranteed
general
fund
insurance,
at
the
date
of
compulsory,
100%
of
valid claim/unexpired premiums, non compulsory, 100%
84
D Llewellyn, The Economic Rationale for Financial Regulation. (London, FSA, 1999)
Occasional Papers Series No 1.
85
CP5, Pt II.
86
FSA Handbook, COMP, ch 4.
87
FSA Handbook, COMP, ch 5.
28
of
the
first
£2,000
of
valid
claim/unexpired
premiums and 90% of the remainder of the claim;88

The scheme is funded by industry levy but, to avoid
cross-subsidisation, there are discrete sub-schemes
broadly
covering
insurance;
these
deposits,
are
then
investments
divided
further
and
into
“contribution groups” consisting of firms engaged in
broadly similar activities.89
Judicial Proceedings by Investors
In addition to the legal claims that investors may have
arising
from
contractual
the
general
arrangements
law
with
of
tort
or
financial
their
service
providers, FSMA provides for contravention of certain
regulatory requirements to be actionable by persons who
suffer loss as a result of the contravention. 90
The
principal section under which a statutory claim arises
is generally limited to private persons, 91 though there
are certain exceptions such as one that permits persons
who
are
not
contravention
private
is
of
persons
a
rule
to
sue
relating
where
to
the
insider
88
FSA Handbook, COMP ch 10.
FSA Handbook, COMP ch 13. The establishment of sub-schemes and contribution groups
gives effect to FSMA, s 213 (5) which requires the FSA to take account of the desirability of
ensuring that the amount of the levies imposed on a particular class of authorised person reflects, so
far as practicable, the amount of the claims made, or likely to be made, in respect of that class of
person.
90
Ss 20 (3), 85 (5), 71, 150 and 202 (2).
91
As determined by HM Treasury in regulations made under FSMA, s 150 (5): The Financial
Services and Markets Act 2000 (Rights of Action) Regulations 2001 (SI2001/2256), reg 3.
Individuals are private persons so long as their loss does not result from FSMA regulated activities
or activities that would be regulated but for certain exceptions; other persons are also private
persons for this purpose unless their loss results from business of any kind.
89
29
dealing.92
The general limitation to private persons is
designed
to
prevent
tactical
investment professionals.
litigation
between
The FSA can make particular
rules non-actionable under this section and breach of
the listing rules or financial resources rules will not
give rise to an action under the section in any event.93
The overlap between the statutory claim and the claims
that the investor may have in contract or tort and the
potential difficulties in proving causation (i.e. that
the
loss
resulted
from
contravention
of
actionable
rules) makes it debatable how far investor protection
is
strengthened
claim.
by
the
existence
of
the
statutory
There are very few reported cases on the
94
statutory
predecessor
widely
effective
-
used
FSMA,
Nor does it appear from the evidence of the
particularly
a
in
mechanism.
be
not
provision
that
to
is
this
suggesting
cases
this
to
such
redress
reported
decisions as there are where the statutory claim has
been directly in point have tended to go against the
claimant.
statutory
private
Investors
claim,
persons,
for
are
who
are
example
not
unable
because
thereby
to
they
bring
are
precluded
a
not
from
pursuing their claims in contract or tort.95
92
Ibid., reg 6.
FSMA, s 150 (4).
94
I MacNeil, ‘FSA 1986: Does s 62 Provide an Effective Remedy for Breaches of Conduct of
Business Rules?’ (1994) 15 Company Lawyer172 (on the predecessor section to FSMA, s 150).
See Australia & New Zealand Banking Group Ltd v Cattan [2001 WL 825289 – breach of IMRO
rules did not cause the losses suffered by the claimant.]
95
Gorham v British Telecommunications plc [2000] 1 WLR 2129.
93
30
FSA Action to Secure Redress for Consumers
The FSA has administrative powers to order restitution
from authorised firms that have made profits or caused
losses through acting in contravention of regulatory
requirements
and
also
from
unauthorised
have been involved in market abuse. 96
obtain
a
court
order
for
persons
who
The FSA can also
restitution
against
any
person, whether or not part of the regulated community,
who has contravened such provisions or been involved in
market abuse.
97
These powers fit with the consumer
protection
and
regulatory
objectives.
considerably
maintenance
98
strengthen,
regulatory
authorities
Previously,
the
of
market
They
build
powers
under
regulator
the
was
confidence
upon,
but
by
the
enjoyed
previous
required
to
regime.
apply
to
court for remedial orders; now the FSA can impose them
on authorised persons and on persons involved in market
abuse without the backing of a court order.
There were
very few reported cases of the regulator applying to
court for such orders under the old law.99
The
Handbook
is
carefully
drafted
so
as
not
to
commit the FSA to a predetermined course of action in
particular
circumstances.
The
flexible
and
non-
prescriptive approach of the Handbook makes it hard at
this
stage
to
predict
what
will
actually
occur
in
96
FSMA, s384. The FSA also has power to obtain injunctions and remedial orders: ss 380-381.
FSMA, ss 382 – 383.
98
FSA Handbook, ENF 9.1.
99
E.g. a WESTLAW search identifies only three cases involving an application for a order under
the Financial Services Act 1986, s 61.
97
31
situations where potential routes to redress overlap,
for example where redress may be otherwise available to
consumers via the FOS. Observers of the new regulatory
structure are alert to the possibility of chaos with
the
same
complaints
judicial
factual
circumstances
to
ombudsman
the
claims
by
market
by
giving
retail
rise
to
consumers,
participants
and
a
restitutionary claim by the FSA on behalf of others
affected. 100
Only experience will tell whether the
overlap between dispute resolution routes creates real
problems but at this stage it is possible to identify
certain factors that are likely to influence the choice
of
route(s)
pursued
in
any
particular
case.
These
factors are outlined in the following section.
PART IV
OVERLAPPING ROUTES TO REDRESS: NON-EXHAUSTIVE LIST OF
FACTORS THAT MAY INFLUENCE CHOICE OF ROUTES
1. The
number
of
persons
affected/quantum
of
loss
suffered
The most pertinent overlapping redress routes here are
the FSA’s powers to obtain restitution on behalf of
investors and the FOS jurisdiction. The FSA’s power to
obtain restitution is not intended to duplicate the
functions
of
the
ombudsman
but
the
FSA
Handbook
envisages that there may be circumstances, for example
where a large number of persons have been affected or
100
[insert refer]
32
losses
are
substantial,
where
FSA
action
to
obtain
restitution may be appropriate. 101 Under the FOS Scheme
the ombudsman may decline to hear a complaint that has
been, is being, or is more suitable to be dealt with in
other proceedings.102
2. The identity of the complainants
According to the FSA Handbook, the number of instances
in which the FSA might consider using its powers to
obtain restitution for market counterparties are likely
to
be
limited.
counterparties
are
Transactions
subject
to
between
the
market
FSA’s
Inter-
professional Conduct, which is a part of its Handbook
that
seeks
to
secure
good
practice
by
setting
out,
among other things, the FSA’s understanding of market
practices
and
certainty,
conventions
reducing
facilitating
dispute
the
with
a
scope
resolution.
view
to
for
dispute
103
The
assisting
FSA
and
will
generally expect market counterparties to bring their
own civil proceedings or take other steps to recover
losses
104
However, the Handbook does not completely
rule out the possibility of FSA intervention on behalf
of market counterparties.
One situation where it might
consider doing so is where there is no claim under the
general law.
101
FSA Handbook, ENF 9.6.
FSA Handbook, DISP 3.3.1.
103
FSA Handbook, MAR 3.2.
104
FSA Handbook ENF 9.6.8.
102
33
Part
III
of
the
reasons
why
retail
article
has
already
investors
are
likely
discussed
to
favour
referrals to an ombudsman over court proceedings.
3. The nature of the dispute
Where the dispute between the parties raises difficult
points
of
law
as
opposed
to
fact,
this
may
make
judicial proceedings a more appropriate choice than a
referral to an ombudsman or recourse to arbitration
procedures.
As noted above, an ombudsman can decline
to take a case where the matter is more suitable to be
dealt with by other proceedings.
Panel
emphasises
arbitration
are
for
frequently
the
The City Disputes
particular
financially
disputes
suitability
oriented
of
fact
problems
and
not
of
“which
genuinely
disputes of law”. 105
The nature of the dispute may also
be
FSA’s
relevant
to
the
decision
whether
to
order
redress itself or to seek a court order for redress106
4. The conduct of the firm against whom the complaint
is made
It is possible that a firm which is the target of
complaints could itself influence the choice of redress
routes.
One example that has been given is of a firm
agreeing with FSA that it will pay restitution so as in
practice to eradicate the risk of complaints being made
105
106
http://www.remus.com/disputespanel/resolution3.htm.
FSA Handbook ENF 9.7.3.
34
to
the
ombudsman.
Or
107
the
firm
might
consider
starting court proceedings of some sort with a view to
persuading the ombudsman that court proceedings are a
more suitable forum for the hearing of the dispute. 108
A firm’s willingness to settle investors’ complaints
quickly and generously may help to minimise the adverse
reputational consequences of the misconduct and help to
secure
less
related
severe
FSA
disciplinary
disciplinary
sanctions
proceedings
in
than
any
would
otherwise have been imposed.
5. Costs and benefits
Amongst
the
deciding
factors
whether
it
that
is
the
FSA
will
appropriate
to
consider
use
its
in
owns
powers to seek restitution is whether the costs to the
FSA of securing redress are justified by the benefits
that
would
result
from
the
action.
109
The
FSA
is
required generally by FSMA to engage in cost benefit
analysis.
However,
some
commentators
are
sceptical
about whether meaningful cost benefit analysis can be
undertaken
difficulties
in
the
inherent
financial
in
sector
measuring
the
because
of
benefits
of
regulation.110
107
Freshfields, para 12.12.
Ibid, para 12.13,
109
FSA Handbook ENF 9.6.
110
CAE Goodhart, ‘Regulating the Regulator- An Economist’s Perspective’ in E Ferran and CAE
Goodhart, Regulating Financial Services and Markets in the 21st Century (Oxford, Hart Publishing,
2001) ch 11.
108
35