Clause 18

Financial Services Bill – in a Public Bill Committee at 12:30 pm on 12 January 2010.

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Collective proceedings orders

Photo of Mark Hoban Mark Hoban Shadow Minister (Treasury)

I beg to move amendment 58, in schedule 9, page 192, leave out line 10 and insert

Select Committee for Children, Schools and Families of the House of Commons.’.

As this is the first clause of many dealing with collective proceedings, with your agreement, Mr. Gale, I will preface my remarks with some general comments about collective proceedings to save the need for a separate stand part debate. The amendment flows explicitly from the argument that I will make about the clause.

The genesis of this clause and subsequent clauses on collective proceedings lies in a report produced by the Civil Justice Council, a body that advises the Lord Chancellor. The report, entitled “Improving Access to Justice through Collective Actions”, was published in December 2008. It was the product of a long process of discussion and consultation within the legal community. If you are minded to read it, Mr. Gale, you will see that the report runs to about 550 pages, so it is not an inconsequential document. It sets out some of the benefits of collective proceedings. They are worth rehearsing as a backdrop to this debate.

The report states:

“Existing collective actions are effective in part, but could be improved considerably to promote better enforcement of citizens’ rights, whilst protecting defendants from nonmeritorious litigation...Effective collective actions promote competition and  market efficiency, consistent with the Government’s economic principles and objectives, benefiting individual citizens, businesses and society as a whole...Collective claims can benefit defendants in resolving disputes more economically and efficiently, with greater conclusive certainty than can arise through unitary claims...The Court is the most appropriate body to ensure that any new collective procedure is fairly balanced as between claimants and defendants, the latter of which should be properly protected from unmeritorious, vexatious or spurious claims as well as from so-called blackmail claims.”

The report’s findings conclude with the recommendation:

“There should be no presumption as to whether collective claims should be brought on an opt-in or opt-out basis.”

I will refer explicitly to that issue during debate on clause 19, which gives the basis for opt-in or opt-out proceedings, a subject of some controversy among various bodies.

The Civil Justice Council’s report set out the basis for that. However, I want to raise one issue. The Ministry of Justice, in responding to the report, said that it did not see any merit in a general application of collective proceedings but that proceedings should go ahead on a sector-by-sector basis. So why is the financial services sector an appropriate one for the introduction of what is a relatively novel procedure in UK law, notwithstanding the existence of group litigation orders?

I want to deal with three general questions. First, as I have said, why is collective action needed in the financial services sector? Secondly, is there an alternative to legal action? Thirdly, if we believe that collective proceedings are the right course of action, are there appropriate procedural safeguards to balance the interests of defendants and claimants?

Why is collective action needed? The explanatory note to clause 18, which is phenomenally brief given the nature of the clause’s subject matter, says:

“This clause provides that the court can authorise collective proceedings to be brought on behalf of a group of financial services claims that share the same, similar or related issues of fact or law.”

We can think relatively easily of issues in the financial sector that fall into that category, such as mortgage endowment mis-selling and the sale of payment protection insurance. One could also argue that Equitable Life is another example of the type of case that might warrant a collective proceedings order.

Such cases have a common thread; they are not isolated examples. The Civil Justice Council talked about the benefit of bringing these claims collectively, ensuring a more conclusive outcome than where a unitary claim is brought. So we could aggregate these cases, rather than deal with them on case by case. That would give greater consistency and it would result in a speedier response.

A timely example is the bank charges case that was recently heard in the Supreme Court. In parallel with that case, although there was a stay in hearing individual cases, a large number of people were bringing cases through county courts or small claims courts against banks, because of unfair bank charges. The reason why the test case ended up in the Supreme Court was that it was easier to deal with those issues on a collective basis rather than on a case-by-case basis, although there would have been a read-across between the Supreme Court case and resolving the historic claims if the matters had gone in the OFT’s favour.

Clearly there are cases with a common thread which one could see falling within a collective proceedings order, but I suppose that my question is not so much about whether any cases will benefit from this process, as about what it says about the strength of our regulatory system if we feel that legal action is the right step to take. For me, that is the most difficult issue to address, because we are talking about introducing collective proceedings orders in a heavily regulated sector. The FSA rulebook governs the activities of the people who will be defendants in these cases. We already have an alternative disputes resolution procedure in place—the Financial Ombudsman Service. Although the remit of the FOS is to cover individual cases, it has almost filled a vacuum in the current regulatory structure, in that it has also dealt with a series of claims in particular areas. So it was the FOS that dealt with the fallout from mortgage endowment mis-selling, for example; it has dealt with all the cases that have arisen because of that mis-selling.

It strikes me that we are looking at a relatively novel legal process, when there should be a mechanism in the regulatory structure that consumers can rely on, without having to have recourse to the law. In the evidence session, Peter Vicary-Smith said:

“It is certainly the case that the regulator is not doing its job, as we can see from the evidence on payment protection insurance and the persistent mis-selling and lack of action. It created a situation where the Financial Ombudsman Service was overwhelmed by claims, of which some 89 per cent., I think, have been upheld. It is undoubtedly the case that there are problems.”——[Official Report, Financial Services Public Bill Committee, 8 December 2009; c. 50, Q140.]

What we do not see is the reform to the FSA that allow consumers to say that a proper regulatory mechanism is in place. In debating clause 26, I think that we will talk about the consumer redress route that the Bill also introduces, but the Government need to make a much clearer argument about why this particular route has been chosen, given that a regulatory structure is in place to protect the interest of customers of financial services.

Is there not a reform in the structure of regulation or the powers of the FSA that would render the proposals unnecessary? The Ministry of Justice’s response to the Civil Justice Council report states:

“Rights of action should be introduced only where there is evidence of need and following an assessment of economic and other impacts and consideration of alternative approaches. In particular, regulatory options should be considered before introducing court based options”.

I do not think that the Government have made that case—it is not apparent from last year’s White Paper or the explanatory notes. I hope that the Minister will take the opportunity to explain why this route is preferred and why other regulatory options are not available.

The CBI said in its briefing to the Committee that it believed that

“priority should be to ensure that current regulation does its job, and then greater emphasis placed on other, more effective forms of redress such as alternative dispute resolution.”

To use the Minister’s favourite Titanic metaphor, perhaps we should focus more on prevention than on cure, and think about what we should do to avoid sailing into the iceberg in the first place, rather than on what is going to happen on deck when the ship hits the iceberg. Some consideration should be given to what the regulators are failing to do at the moment that makes the provisions necessary.

Photo of Rob Marris Rob Marris Labour, Wolverhampton South West

It was I who used the Titanic metaphor. To carry on with that, part of clause 18, without the amendments, is in a sense an attempt to stop or try to dissuade the ship from leaving port in the first place. If a financial institution knows that there could be a collective action, it may be dissuaded from engaging on a course of action that is somewhat risky.

Photo of Mark Hoban Mark Hoban Shadow Minister (Treasury)

I am sorry for wrongly attributing the metaphors; we have been awash with metaphors this morning, so we should perhaps move away from talking metaphorically about the issue.

The hon. Gentleman makes an important point. If this were an unregulated sector, his argument would be powerful, because there would clearly be a deterrent. However, there are already a number of measures in place that should provide protection for consumers—there is an FSA rulebook and rules on the conduct of business—and we should not need the clause to act as a deterrent. I am seeing it very much as a clause that facilitates an outcome when something has gone wrong, but the expectation should be that the FSA is dealing with situations as they arise. Some might argue the problem is that the FSA rules are predominantly about the conduct of business rather than the products. From what we have here, it seems that products have given rise to a problem, given that the FSA is looking at product regulation in particular. It has looked at it most recently in the context of mortgages.

The regulator should be aware that there is a problem. Such problems do not suddenly emerge out of nowhere. Payment protection insurance was a problem that built up over time, so there should have been a regulatory response as it was building up rather than a resort to law. Concerns have been expressed about the matter and the analogy drawn by several commentators is that it is equivalent to US class actions. The British Bankers Association responded by saying:

“We are very concerned that proposals on class actions risk introducing a US-style litigation culture to the UK. The US system is “opt-out” and has led to incentives for baseless claims, increased costs (ultimately born by consumers) and a situation where the only real winners are lawyers. The BBA urges that any proposals based on an “opt out” approach should be dropped and instead that the focus of the bill is on creating a more effective system of consumer redress via the FSA and subject to court approval.”

We shall talk about that structure later, but its remarks echo the concerns of the Civil Justice Council, which said that

The Court is the most appropriate body to ensure that any new collective procedure is fairly balanced as between claimants and defendants, the latter of which should be properly protected from unmeritorious, vexatious or spurious claims as well as from so called blackmail claims”.

It is not only partially an industry point; it is reflected by the considerations that underpinned the report of the Civil Justice Council.

As I said, there has been a significant debate about the measures. Consumer groups, such as Which?, Citizens Advice, Consumer Focus and Help the Aged have written a joint opinion on the provisions. They stated:

“We believe that the provisions in the Bill are an entirely proportionate response to tackle the types of mis-selling issues that have arisen in the financial services industry. By giving the court the power to decide whether a collective action would be  opt-in or opt-out as required by the circumstances of the case, they strike the balance between ensuring an opt-out process where necessary but providing judicial supervision to prevent vexatious and unmeritorious cases.

Consumer groups recognise the merits of collective action, but also some of the risks of that, which is why I want to move on to the need for safeguards. A great deal of the work of the Civil Justice Council was about some of the safeguards that are needed.

I want to conclude on the second theme. We also need to deal with the problem with the regulatory system. The regulatory system should deal with such issues and, given that the financial services sector is so heavily regulated, we should not have to depend on individuals enforcing their rights to achieve the right outcome for consumers.

Are there necessary safeguards? The safeguards are the measures set out in the Bill, in secondary legislation and under the rules of the court. The explanatory notes to the clause state:

“Regulations or rules of the court may require the court, when considering whether to authorise the bringing of collective proceedings, to consider matters set out in the regulations or rules.”

Our job in Committee is to debate such issues thoroughly. We should all be able to agree that we do not want a situation in which the only real winners are lawyers. We are not aiming for that. We must therefore make sure that there are adequate safeguards in respect of the judicial option on opt-out proceedings.

The point that we have reached in our thinking is that we must make sure that adequate safeguards are in place in the Bill if we are to go ahead. In its submission to the Committee, the Prudential wrote:

“We agree with the Government that collective proceedings should be used rarely and only for the most significant cases. However, we do not believe that the Bill, as drafted, provides sufficient checks and balances to ensure the system is not abused.”

On a similar point, much of the detail will be filled in by secondary legislation, which has yet to be published in draft, and court rulings. We expected to have more of the detail by now, as the European Justice Forum, which does not speak for the financial sector, intimated in its response. It says:

EJF is particularly concerned that the Bill would introduce opt-out class actions in the financial sector and that—contrary to government policy stated in July 2009, no framework of rules and safeguards has been produced prior to proposing such a remedy.”

The plan to produce a framework document was set out in the Ministry of Justice response to the original paper by the Civil Justice Council. What stage has that document reached?

My comments on amendments to later clauses will be about ensuring that sufficient safeguards are in place. The amendments that I have tabled are an attempt to ensure that the safeguards in the Civil Justice Council paper are reflected in the Bill not only so that we have a framework for collective proceedings but so that rights and safeguards are in place before the process comes into force.

Subsection (5) states:

“A person may be authorised under subsection (1) to bring proceedings even if the person would not otherwise be regarded as having any interest, or any sufficient interest, in the proceedings.”

That is quite a broad provision. In effect, anyone bringing a claim does not need to have bought a payment protection insurance policy or to have been mis-sold an endowment  policy. Such a person could act as a representative of claimants. In a recent case in which a group litigation order was used, the Consumers Association—now Which?—acted as a representative. It was not a financial services case; it involved a price-fixing cartel for football shirts. In that case, it was not an individual customer who bought a football shirt, but Which? that acted as a representative.

One can see why Which?, as a consumer group, would have an interest in acting on behalf of consumers, but other groups could equally act as a representative, given the breadth of subsection (5). We are well aware of the activities of claims management companies. Some clearly act in the interests of potential claimants, but one gets the sense from time to time that others are looking for a cause to fight and see a clear commercial benefit to doing so in terms of the fees that they might generate.

So there needs to be some control over who can bring such cases. Subsection (5) is broadly drafted, and amendment 58 would introduce an additional check so that the representative

“is authorised to act as a representative on an ad hoc basis under the civil Procedure rules, authorised to act as a representative and on such terms as specified by order of the Lord Chancellor, in accordance with criteria to be published by the Lord Chancellor for the purposes of this section.”

That would introduce some coherence and structure and make clear who can bring such claims and act as a representative. It would require the Lord Chancellor to consult the Lord Chief Justice or a judicial office holder nominated by the Lord Chief Justice when authorising an individual to act on an ad hoc basis or issuing criteria or guidelines for who might act as a representative.

The safeguard is set out in the Civil Justice Council’s report and is, from recollection, an extract from the draft Bill that the council prepared. The amendment is the first in a series that would introduce the safeguards set out in the report and ensure that a proper framework was in place for such actions to be brought.

Photo of Roger Gale Roger Gale Conservative, North Thanet 12:45, 12 January 2010

The Committee will notice that at the top of the selection list are the words

“Chairmen’s provisional selection and grouping of amendments”.

The Chairman does not always get it right. I think I may say without wishing to be patronising that the hon. Gentleman has taken a pragmatic and sound approach to his coverage of this debate. In so doing, he has covered collective proceeding rules, which are in clause 18, and, to a considerable extent, opt-in and opt-out, which is in clause 19. The substance of clause 20 is fairly light, so I will now group the stand part debates for clauses 18, 19 and 20 with the amendment.

If that leaves the hon. Gentleman in a difficult position, Mr. Benton or I will take cognisance of that. Mr. Benton might wish to make further remarks. We are now debating amendment 58, with which it will be convenient to debate clauses 18, 19 and 20 stand part.

Photo of Rob Marris Rob Marris Labour, Wolverhampton South West

I am surprised by the amendment, as it appears to take power away from the courts, which are independent, and give it to a politician—the Lord Chancellor—who may or may not be elected, although the current Lord Chancellor is. That would be a retrograde step. Pursuant to the other provisions in this grouping—not only clauses 19 and 20 but clauses 21, 22 and onwards—I think that the amendment is misconceived in focusing power in the hands of a politician rather than leaving it with the courts, as clause 18 would do.

Photo of Roger Gale Roger Gale Conservative, North Thanet

Before we proceed any further, the hon. Member for Wolverhampton, South-West mentioned clauses beyond clause 20. For clarity, may I explain that I drew the line at clause 20 because separate amendments have been tabled to clause 21? It would be unwise to go any further down a tricky road.

Photo of Ian Pearson Ian Pearson Economic Secretary, HM Treasury

I am considering where to begin—

Photo of Roger Gale Roger Gale Conservative, North Thanet

Try clause 18.

Ian Pearson —and, more importantly, where to end. I think that I will begin with clause 18, as you suggest, Mr. Gale, and amendment 58. Clause 18 is a new development in the law of the country, and it is entirely right that the hon. Member for Fareham should raise probing questions about the Government’s intentions. I am happy to put a number of matters on the record in the time available this morning and, I suspect, this afternoon.

We believe that there is a clear need for collective proceedings for financial services claims. The hon. Member for Fareham referred to the Civil Justice Council report on improving consumers’ access to justice. It recommended that generic collective proceedings be introduced in the UK. In our response, we said that they should be considered and, where appropriate, introduced in specific sectors where there is a case for doing so. As I have said, we believe that there is a strong case for doing so in relation to financial services.

We do not believe that there is an effective means at the moment for representing consumers as a group in mass financial services cases. There is some provision for collective litigation, but it is so limited that it is rarely used.

Photo of Roger Gale Roger Gale Conservative, North Thanet

Order. I am advised that the Programming Sub-Committee will not now meet and that this Committee will sit between 8 pm and 10 pm this evening. I can take the Chair, so Mr. Benton will be with you this afternoon and I will be with you this evening. I give an undertaking to see when I leave the room whether there is any way to generate a little heat in this igloo.

The Chairman adjourned the Committee without Question put (Standing Order No. 88).

Adjourned till this day at Four o’clock.