Controversy over Complaints Against Financial Watchdogs
by Alex Varley-Winter, TTF’s Head of Media Relations & Investigative Reporting
The independent investigator of complaints against city watchdogs, Antony Townsend, has spoken out against regulators’ plan to impose a £10,000 ceiling on compensation if they caused financial loss. Transparency Task Force is hosting a special Symposium tomorrow to discuss the controversy, to help inform our reply to the FCA’s truncated 8-week consultation.
The FCA’s plan states that only in ‘exceptional circumstances’ will more than £10,000 may be awarded when they have caused financial loss. Those ‘exceptional circumstances’ are not defined. In his considered response, Mr Townsend says that, in his opinion, the cap on compensation is not honouring the spirit of the ‘statutory immunity’ from being sued that has long been afforded to Regulators by Parliament.
Mr Townsend published his full response on his website. In it, he writes: “Where the regulator is the sole or principal cause of a complainant’s demonstrable financial loss, in my view the presumption should be that the regulator will compensate the complainant in full. (An example of this might be gross failure to maintain a reliable register, or an indefensible failure to take any action in response to repeated and credible warnings.)
“It is hard to see why that should not be the case –other complaints schemes, of the kind operated by Ombudsmen, operate on that basis, and may make substantial payments without having to apply the kinds of approach to causation which a court would do. Where the fault is the regulator’s –as distinct from a regulated firm or individual –there appears to me to be no basis for arguing that full compensation should not be awarded, unless the sum required is of such an exceptional scale that it would have a significant impact upon the FCA’s levies (which seems unlikely).
“The draft indicates that payments for direct financial loss will be limited to £10,000 save in exceptional circumstances. While I agree that it is likely that the vast majority of such payments would be below that figure, as a matter of principle it seems to me undesirable to impose a ceiling of this kind. It does not seem to me that the statutory immunity granted by Parliament was intended to protect the regulators from major blunders of their own making.”
Andy Agathangelou, TTF’s founder says: “This issue is of great concern to TTF because we want to do all we can to help protect consumers’ interests, hence our symposium and of course we’ll also be responding to the consultation itself.”
Gina Miller, of the True and Fair Campaign, told the Times’ James Hurley that she believes the consultation ought to be paused pending the findings of reviews into the alleged mishandling of three scandals: the sale of interest rate swaps to small and medium-sized companies, the collapse of London Capital & Finance and of Connaught Income Fund Series 1.
The Bank of England, Financial Conduct Authority and Prudential Regulation Authority launched their consultation last month following Mel Stride MP’s criticism of substantial complaints-handling delays at the FCA.
The FCA is the subject of almost all the complaints, but is immune from being sued for damages in most cases.
Mark Bishop, of the Connaught Action Group, sits on TTF’s Advisory Board and will also be speaking at our event on September 2nd. He believes the three ongoing reviews of the scandals will conclude there were ‘serious regulatory failings’ and that: “A truncated consultation on plans to restrict the rights of the public, held over the summer holidays, and during a pandemic, looks a desperate, crudely executed attempt to protect itself”.
What does the consultation cover?
The Bank of England, Prudential Regulation Authority and Financial Conduct Authority consultation, aside from imposing a £10,000 cap for financial loss in most cases, also includes details of payments for ‘distress’ without financial loss. A complainant experiencing ‘a very high level of distress or inconvenience’, as a result of a ‘major failure’ in FCA processes would fall into the highest band for ‘distress’ – which is £500-£1000.
The compensation for financial loss, meanwhile, would be capped at £10,000, except in ‘exceptional circumstances’ – it is not stated in the document how ‘exceptional’ circumstances would be defined.
The regulators write: “The mere fact that one of us may have been at fault in some way does not mean that the Regulator should be considered to be the sole or primary cause of loss which was the result of the actions of a financial services firm”.
Annex 2 of the consultation discloses the full Draft Complaints Scheme Document and shows what categories of complaint the watchdogs probe.
- a. mistake;
- b. lack of care;
- c. unreasonable delay;
- d. unprofessional behaviour;
- e. bias;
- f. lack of integrity.
“Our investigations are desk-based and we do not interview witnesses or complainants.”
Who can respond to the consultation?
“This consultation may be of interest to anyone who is a potential or actual complainant under the Scheme. This includes regulated businesses and consumers of financial services.
“It may also interest consumer advocates and action groups, trade associations, and politicians, among others.”
The consultation centres on these five questions:
*”3.3The benefits of making the Scheme more accessible include:• it being less time-consuming for complainants to work out how to use the Scheme;• more complainants having realistic expectations of what the Scheme can do for them; and• we and the Complaints Commissioner needing to spend less time explaining the Scheme and dispelling misunderstandings.”
“Q2:Do you have any comments on our approach to ex-gratia compensatory payments for distress or inconvenience?
Q3:Do you have any comments on our approach to ex-gratia compensatory payments in respect of financial loss?
Q4:Do you agree with our proposals for implementing the new Scheme?
Q5:What impact do you think our proposals in this consultation paper will have on persons who share protected characteristics?”
Interested groups or individuals have a deadline of 14th September to respond to the list of questions in the Consultation document.
The fudge: How ex-gratia payments prevent ‘a lawyer’s paradise’
I’ve taken a look back through Hansard to see some of the logic that was put to law-makers in 2011-12, when they wrote the current law on the financial services compensation scheme (here).
MPs and Lords inquired from dozens of experts and stakeholders to develop the law, set out in the Financial Services Bill. Their enquiries suggest that the system of ex-gratia payments is partly set out to protect the victims of investment scams and other misconduct from being embroiled in ‘a lawyer’s paradise’, as Antony Townsend’s predecessor Sir Anthony Holland advised at the time. He told lawmakers: “if you have direct and clear liability then there are serious issues about the volume of damages that can be awarded as well as a ghastly thing called causation. What actually caused the loss? Was it the initial act of negligence or did something happen in between when the person suffered the final loss which actually prevents the body being held responsible for that loss?
“Once you go down that road it is a lawyer’s paradise. I am no longer practising, so I can say this. The lawyers love it. It is a real opportunity to pile in there and make things really complicated.
“I don’t think you can have that. You have to have something like we’ve got now, which is compensatory awards … which are ex gratia. First of all, the definition of how you calculate the damage is not in accordance with the common law calculation. Secondly, it may depend upon the interpretation placed upon it by Strasbourg under the Human Rights Act. Then it is ex gratia, because it depends upon whether the body concerned—the FSA now, but it will be the FCA—wants to pay up. “
The law that MPs and Lords then wrote, the Financial Services Act 2012, states:
Investigation of complaints against regulators
84 Arrangements for the investigation of complaints
(1)The regulators must—
(a)make arrangements (“the complaints scheme”) for the investigation of complaints arising in connection with the exercise of, or failure to exercise, any of their relevant functions (see section 85), and
(b) appoint an independent person (“the investigator”) to be responsible for the conduct of investigations in accordance with the complaints scheme.
.. (5) The terms and conditions on which the investigator is appointed must be such as, in the opinion of the regulators, are reasonably designed to secure—
(a) that the investigator will be free at all times to act independently of the regulators, and
(b) that complaints will be investigated under the complaints scheme without favouring the regulators. …”
“(5) The complaints scheme must confer on the investigator the power to recommend, if the investigator thinks it appropriate, that the regulator to which a complaint relates takes either or both of the following steps—
(a) makes a compensatory payment to the complainant, or
(b) remedies the matter complained of.”
FCA reveal £90m+ consumer losses from one pension scam alone
A TTF fellow kindly let us know that FCA executive Mark Steward was interviewed about Pension Scams on the Today programme last Wednesday. Mr Steward revealed that the FCA has just concluded probing one scam in which £90 million was wrongly transferred out of people’s pension pots. He believes, therefore, that losses reported by Action Fraud — of pension scams totalling £30m over the last three years — are likely to be an under-estimate.
Mr Steward also referred to research that scammers predominantly target men aged between 45 and 65 ‘who will know far more about the offside rule in football than they will about their own pension’.
I have transcribed the interview in full. Transparency Task Force is continuing to interview pension scam victims as we prepare to submit our evidence for MPs’ inquiry into pension scams, which we campaigned for, and which is starting very soon. Pension scam victims have revealed some absolutely shocking cases to us, resulting in unimaginable financial losses, and we find the FCA’s research very interesting:
Transcript – BBC Radio 4 Today – Wednesday 26th August, 2020
Presenter, at 07.12am: “Dom is happily standing by in the studio and you’ve been looking into Pension Scams, Dom?”
Dominic O’Connell: If you get a call, out of the blue, asking if you’d like to transfer your pension, well think very carefully about doing anything. Pension scams are on the rise, some people have lost all their savings.
Mark Steward is an executive director [full title: Director of Enforcement and Market Oversight] for the Financial Conduct Authority , and he joins us. Mr Steward good morning, you’re putting a number on this, about £30million you say has been lost to pension scams in the last three years? It sounds like quite a small number actually.
Mark Steward: Well that’s the number that’s been reported through Action Fraud. What we typically see in scams and frauds is under-reporting because people are generally really reluctant to admit to the fact that they’ve been conned by someone, they feel silly and they feel foolish. I suspect the number is actually, larger, and we’ve just finished a case, where the amount of money that was wrongly transferred out of pension pots was over £90million, so we know there is more money involved in these sorts of dodgy transfers.
Dominic O’Connell: And just to be clear, is cold-calling now completely banned by the Financial Conduct Authority? So if you receive a call out of the blue asking you whether you want to transfer your pension, you should be very suspicious?
Mark Steward: It’s banned by the government, not by the FCA and you’re right, cold calls in the UK are prohibited. But of course, that just moves the game to another kind of media, so we’re seeing effectively cold-calling tactics through email and particularly social media now as well. People are still receiving cold calls by telephone – I think everyone will have received calls from that robotic voice, and so that is still happening. And our research is telling us that consumers are still entertaining these cold-calls, despite all the warnings. So, today’s campaign is really an attempt to remind people that this is a huge red flag.
Dominic O’Connell: The research also highlights a general — ignorance is not too strong a word. — Most people are not too interested in what the state of their pension is. I think you found just over 40% of people have no idea how much money they do have in their pension.
Mark Steward: Yeah, I mean, our research tells us that the target audience for scammers is largely, men — women as well, but largely men — between 45 and 65, who will know far more about the offside rule in football than they will about their own pension. And they will be over-confident about thinking that they can spot a scam, when, in fact, we know that is just simply not true.
So the campaign today is to give people some very good, sensible, unfortunately experience-based information, about how to avoid being scammed and what the classic tactics scammers actually use. So the Scam-Smart site is a great starting-point for people to get the smarts they need to become better savers.
Press Timeline of relevant articles:
24 Aug 2020 – Financial Conduct Authority rushes to minimise compensation for its failings by James Hurley for The Times
04 Aug 2020 – Have your say: Will the WPC’s inquiry into the impact of pension freedoms be too overshadowed by Covid-19 impacts? by Professional Pensions
03 Aug 2020 – ‘“I’m 39, have lost my job and am in debt – can I unlock my £18k pension?” … DON’T do it!’‘ by Steve Webb for This is Money
01 Aug 2020 – ‘I lost £2.3m after I was conned into transferring my pension’ by Jessica Beard for the Telegraph
31 Jul 2020 ‘Common sense’ prevails as pension freedom withdrawals fall 17% — But drop is expected to be ‘a short-term blip’ by Robbie Lawther for International Adviser
31 Jul 2020 – HMRC figures show plunging pension freedom withdrawals by Hope William-Smith for Professional Adviser
28 Jul 2020 – MPs launch inquiry into pension scams by Tom Kelly for Daily Mail ; UK Pension Scams Under Scrutiny After 2015 Relaxation in Rules by Reuters & MPs launch wide-ranging pension scams probe by Justin Cash for MoneyMarketing
24 Jul 2020 – US business groups seek steps to stamp out online fraud by Leonie Barrie for Just Style
29 Jun 2020 – MPs Pushed to Launch Pension Scam Inquiry by Amy Austin for FT Adviser & Lawmakers Urged To Open Inquiry Into Pension Scams by Martin Croucher for Law 360
11 May 2020 – FCA urged to build public trust in independent reviews by Rachel Mortimer for FT Adviser
20 Mar 2020 – Connaught review delayed as Covid-19 concerns loom by Rachel Mortimer in FT Adviser
29 Dec 2019 – ‘Lambs to the slaughter – tens of thousands of savers have lost up to £10billion in rogue pensions schemes sanctioned by the government… and now the taxman is threatening VICTIMS with fines’, by Tom Kelly for the Daily Mail
15 Aug 2019 – Victims hit by Connaught’s collapse blast City watchdog for ‘whitewashing’ independent review by Lucy White for Daily Mail
20 Jun 2019 – FCA orders review of its handling of Connaught collapse by Rachel Mortimer for FT Adviser