The relevant triggers for determining whether the FCA can require an authorised person with a permission to establish and operate a scheme which corresponds to, or is similar to, a consumer redress scheme are different to those that apply for an ‘industry wide’ consumer redress scheme established under section 404 of the Act. Rather than considering the test set out in section 404(1) of the Act, the FCA has to consider the relevant legal triggers for varying a permission or varying or imposing a requirement on a firm (see sections 55H, 55J and 55L of the Act).
However, before the FCA varies a firm’s permission under section 55J(2) of the Act on its own initiative, or imposes a requirement on a firm under section 55L of the Act, the FCA must consider whether it would be ‘more appropriate’ to proceed under the Competition Act 1998. If the FCA considers that it would be more appropriate to proceed under the Competition Act 1998, the FCA must not exercise its powers under sections 55J(2) or 55L of the Act (see section 234K of the Act). In the remainder of this section, it is assumed that the FCA considers that it is able to exercise its powers under the Act rather than under the Competition Act 1998.
it is desirable to exercise the power in order to advance one or more of the FCA’s operational objectives, for example, its consumer protection objective of securing an appropriate degree of protection for consumers.
The FCA has no power to accept an application from an authorised person to vary its permission where the authorised person is a PRA-authorised person (see sections 55H and 55I of the Act). For all other firms, an authorised person with a permission can voluntarily apply to the FCA to vary its permission under section 55H of the Act. The FCA may refuse the application if it appears to the FCA that it is desirable to do so in order to advance any of its operational objectives, for example, its consumer protection objective (see section 55H(4) of the Act). The FCA also has the power to impose or vary a requirement under section 55L of the Act, in order to establish and operate a scheme which corresponds to, or is similar to, a scheme established under section 404 of the Act. However, where the authorised person is a PRA-authorised person (or is a member of a group which includes a PRA-authorised person), the FCA must consult the PRA (see section 55L(7) of the Act). As with voluntary applications to vary a permission, the FCA may refuse an application to voluntarily impose, vary or cancel a requirement if it appears to the FCA that it is desirable to do so in order to advance any of its operational objectives (see section 55L(5) of the Act).
The decision to require a firm to establish and operate a scheme pursuant to section 404F(7) affects a firm, or a small number of firms, each individually rather than the whole industry or sector of the industry. As with any supervisory or enforcement action it takes against a specific firm, the FCA is not obliged to consult before deciding to vary a firm’s permission or impose or vary a requirement.
As already explained, when determining whether to vary a firm’s permission under sections 55H or 55J or to impose a requirement under section 55L to establish and operate a scheme pursuant to section 404F(7), the FCA will need to consider whether the statutory tests referred to in CONRED 1.8.5G (for own initiative action) and CONRED 1.8.7G (where a firm applies voluntarily) have been met. This will often involve a consideration of the FCA’s operational objectives and, in particular, the consumer protection objective. The FCA will also consider the regulatory principles in section 3B of the Act and follow the normal principles of administrative law.
This exercise will be undertaken on a case-by-case basis and in the round by looking at all of the proposed terms, including any terms which have been included to make provision corresponding to section 404B (under section 404F(7)(b)). It is important to note that engaging section 404B will not automatically or always advance one or more of the FCA’s operational objectives, for example its consumer protection objective, even if the other terms of the proposed scheme do.
If section 404B is engaged then broadly the Ombudsman is normally required to decide a complaint referred to the Financial Ombudsman Service after the scheme comes into effect on the basis of what, in the opinion of the Ombudsman, the determination under the scheme should be (or should have been). This will mean that the Ombudsman will not determine the complaint by reference to what, in their view, they consider to be fair and reasonable in all the circumstances of the case. To assist the Financial Ombudsman Service in identifying relevant cases, firms may be required to draw the scheme to the attention of the Financial Ombudsman Service in any individual cases that are referred to it. However, if the firm and the consumer agree that the complaint should not be determined by reference to what, in the opinion of the Ombudsman, the determination under the consumer redress scheme should be or should have been, or if the subject matter of the complaint does not fall to be dealt with under the scheme (or part of it does not) then the Ombudsman may determine the complaint (or that aspect of the complaint) in accordance with what they consider to be fair and reasonable in the usual way.
It is likely that many section 404F(7) schemes will be set up because, in the FCA’s view, it is desirable to advance the consumer protection objective of securing an appropriate degree of protection for consumers. In determining what is desirable to advance that objective, the FCA will have regard to a wide range of factors. Many of these are likely to be interdependent considerations rather than standalone issues. These may include (but are not limited to):
how many consumers have been (or may be) affected by the act or omission to which the proposed scheme relates. It will normally only be appropriate to consider engaging section 404B where the issue affects a large number of consumers;
whether engaging section 404B would result in higher or faster redress for consumers (whether or not they have complained individually) than would otherwise be the case. In other words, the extent of any difference in redress between the proposed scheme and what consumers may receive through the Financial Ombudsman Service or the courts;
the extent to which the overall effect of the proposed scheme provides a fair and reasonable outcome for individual consumers, having regard to the desired outcome for the group of affected consumers overall; and
whether the Financial Ombudsman Service has had a material number of complaints about the act or omission, has an established approach to dealing with them and the extent to which the proposed scheme aligns with this approach.
Where the FCA is considering engaging section 404B, it will consult with the Financial Ombudsman Service at an early stage and allow time for a fully-considered, written response. The Financial Ombudsman Service is in a position to say:
whether it has already received cases about the particular firm and acts/omissions, whether any cases have been decided and (if so) what the outcomes were;
insofar as the acts/omissions are not fact-specific, whether it has previously considered similar cases and has adopted a particular approach;
the sorts of complaints it can foresee might be made in future by consumers about the firm in relation to the acts/omissions concerned;
if the Financial Ombudsman Service is likely to encounter any practical issues in implementing the proposed scheme.
The Financial Ombudsman Service cannot lawfully guarantee how it will decide cases that fall outside the scope of the scheme (e.g. pre-regulation cases or those referred to the Financial Ombudsman Service before the scheme came into effect). It may, however, be willing to describe its general approach to such cases.
Where the proposal is to engage section 404B, the FCA will apply the following governance procedure in addition to its usual processes:
all decisions to engage section 404B will be taken by the FCA’s Executive Committee or a sub-committee;
the Committee/sub-committee will need to be satisfied that there has been adequate consultation internally to ensure full consideration of consumers’ interests;
the Committee/sub-committee will consider written views from the Financial Ombudsman Service before reaching a decision; and
if section 404B is engaged, the document outlining the terms of the scheme will be published on the FCA’s website, either in the FCA Register or (with cross-reference from the FCA Register) in a register of such schemes.
If the firm has voluntarily applied to establish and operate the scheme, it is unlikely to challenge the FCA for accepting its application. If the FCA proposes to refuse a firm’s application for a section 404F(7) scheme, the FCA must give the firm a warning notice (section 55X(2)). If, after consideration by the FCA’s decision makers, the FCA decides to refuse the application, the FCA must give the firm a decision notice (section 55X(4)). The firm would be able to challenge the decision notice by referring the FCA’s decision to the Upper Tribunal (section 55Z(3)).
If the consumer redress scheme was imposed on the FCA’s own initiative, the FCA must give the firm a supervisory notice (section 55Y). The firm would be able to challenge the supervisory notice by referring the FCA’s decision to the Upper Tribunal (section 55Z(3)). The Tribunal may dismiss the reference or remit the matter to the FCA with a direction to reconsider and reach a decision in accordance with the Tribunal’s findings (section 133(6) of the Act).