The Courts’ involvement in the
Regulation of Financial Markets
Timothy Dutton QC & James McClelland
(Fountain Court Chambers)
Part I: the PPI judicial review
& its wider regulatory significance
The Decision
• R. (on the application of British Bankers’
Association) v Financial Services Authority [2011]
EWHC 999 (Admin) (Ouseley J).
• Court rejected the BBA’s claim to quash an FSA Policy
Statement (PS 10/12) and FOS online guidance.
• The Policy Statement had introduced amendments to
the “DISP” section of the FSA Handbook which
provided for the handling of PPI complaints.
Why it matters
• Now the leading authority on how the Courts
will approach the relationship between highlevel rules and specific rules within a
regulatory system.
• Its relevance is not limited to PPI.
• Not even limited to FSMA regulation.
Structure of this Presentation
Part I: Regulatory framework
Part II: The dispute
Part III: Conclusions & wider significance
Part I: Regulatory framework
The different categories of Rules (“R”)
• “High-level Standards”
– e.g. the Principles of Business.
• “Business Standards”
– e.g. the Conduct of Business Rules.
Principles of Business (PRIN)
• Types of Rule (“R”), expressed as being:
– a “general statement of the fundamental obligations of
firms under the regulatory system” (PRIN 1.1.2G).
• Eleven in total (cf Ten Commandments).
– 1. Integrity: A firm must conduct its business with integrity.
– 6. Customers’ interests: A firm must pay due regard to the
interests of its customers and treat them fairly.
– 7. Communications with clients: A firm must pay due regard to
the information needs of its clients, and communicate
information to them in a way which is clear, fair and not
The Principles are not actionable
by private persons
• s.150 FSMA.
– (1) A contravention by an authorised person of a rule is
actionable at the suit of a private person who suffers loss as a
result of the contravention, subject to the defences and other
incidents applying to actions for breach of statutory duty.
– (2) If rules so provide, subsection (1) does not apply to
contravention of a specified provision of those rules. [….]
• PRIN 3.4.4R
A contravention of the rules in PRIN does not give rise to a right
of action by a private person under section 150 of the Act (and
each of those rules is specified under section 150(2) of the Act as
a provision giving rise to no such right of action).
Conduct of Business Rules
• For insurance “ICOBS” (previously “ICOB”).
• Granular rules specifying particular
• Detailed rather than general.
• Prescriptive rather than normative.
• For example
– Chapter 4 of ICOB “Advising and selling standards”.
– Chapter 5 of ICOB “Product disclosure”.
DISP: Complaints Handling
under the Handbook
• “DISP”: Dispute Resolution: Complaints.
• Two limbs:
(1) Firms’ obligations to handle and determine
complaints by customers (DISP Chapter 1);
(2) FOS jurisdiction to make binding determinations
where complaints not resolved by firms (DISP
Chapter 2).
Complaints handling by firms
(a) The Core Obligation
• Core obligation under DISP 1.4.1R, whereby a
firm must investigate complaints:
– “competently, diligently and impartially; assess
fairly…whether the complaint should be upheld
[and] what … redress … may be appropriate …
taking into account all relevant factors … ”.
– re. “fairly” – is this procedural or substantive? (see
Complaints handling by firms
(b) Root cause analysis
“[…] a respondent must put in place appropriate
management controls and take reasonable steps to
ensure that in handling complaints it identifies and
remedies any recurring or systemic problems, for
example, by:
• analysing the causes of individual complaints so as to
identify root causes common to types of complaint;
• considering whether such root causes may also affect
other processes or products, including those not
directly complained of; and
• correcting, where reasonable to do so, such root
Complaints handling by firms
- “reaching out” to non-consumers • Guidance indicates that firms should consider reaching out
to non-complainants:
– “A firm should have regard to Principle 6 (Customers' interests)
when it identifies problems, root causes or compliance failures
and consider whether it ought to act on its own initiative with
regard to the position of customers who may have suffered
detriment from, or been potentially disadvantaged by such
factors, but who have not complained”. (DISP 1.3.5G)
• [Deleted on 1 September 2011 but v. similar provision in
new DISP 1.3.6G.]
Part II: The Dispute
Background to the Dispute
• By mid-2008 tens of thousands of complaints being presented
to FOS.
• Those complaints were, necessarily, first considered and
rejected by firms.
• The overwhelming majority were then upheld by FOS.
• Serious concern (on both sides) that firms and the FOS were
approaching complaints differently:
– FOS was overtly assessing compliance with both the ICOB/ICOBS and
the Principles.
– Banks (it appears)were applying ICOB/ICOBS alone.
FSA Policy Statement 10/12
(August 2010)
• Amended DISP, by inserting a new Appendix 3, entitled
“Handling Payment Protection Insurance complaints”.
• The amendments may be sub-divided into five main
(1) Guidance on the assessment of complaints in order to identify
whether a “breach or failing” had occurred (DISP App 3.2).
(2) Guidance on the approach to considering evidence (DISP App 3.3).
(3) Guidance on root cause analysis (DISP App 3.4).
(4) Evidential provisions on determining the effect of a breach or failing
(DISP App 3.6).
(5) Evidential provisions on the approach to redress (DISP App 3.7).
• The most controversial were (1) and (3).
Re. (1): Guidance on the
assessment of complaints
• FSA annexed to the Policy Statement an “Open
• This purported to remind firms of the
appropriate standards by setting out a list of 15
“common failings” which occurred in the sale of
PPI policies.
• In formulating these “common failings” (which
the banks characterised as “standards”) the FSA
relied not just upon ICOB/ICOBS but also the
Re. (3): Guidance on
root cause analysis
• Amplified the guidance provided at DISP 1.3.3R.
• Provided that a firm should consider whether the
complaints disclosed a “root cause”; and if so,
– consider whether it ought to act with regard to the
position of non-complainants; and
– If so, take “appropriate and proportionate measures to
ensure that those customers were given appropriate
redress or a proper opportunity to obtain it”;
– In particular by considering whether it was fair and
reasonable to undertake proactively a redress or
remediation exercise, which might include contacting
customers who have not complained.
BBA’s Grounds of Review
• Can be distilled into three grounds:
(1) The “s.404 argument” (against FSA only);
(2) The “no obligations” argument;
(3) The “exhaustion” argument.
(1) The s.404 argument
• A challenge to the “root cause analysis” component of the PS.
• s.404 FSMA provided a statutory procedure for ordering past
business reviews and the payment of redress to noncomplainants.
• This was hedged in by protections for industry; in particular
– it required Treasury consent; and
– it was limited to requiring redress for legally actionable
failures (and therefore not breaches of Principles).
• BBA argued that by the Guidance on root cause analysis, the
PS was seeking to circumvent statutory limitations on s.404.
• Rejected - Guidance was non-mandatory.
(2) The “no obligations” argument
• Alleged an error of law because, when formulating
the “common failings”, the FSA treated the Principles
as giving rise to obligations towards customers.
• The effect of PRIN 3.4.4R and s.150(2) FSMA was to
prevent the Principles imposing any obligations as
between firms and customers.
• s.150(2) was therefore
– not just a procedural bar on court proceedings, but
– a substantive limitation upon obligations being owed to
Court rejected the “no obligations argument”
• S.150(2) did no more than provide that rules could disapply
s.150(1). (“If rules so provide, subsection (1) does not apply to contravention of
a specified provision of those rules.”)
• And s.150(1) itself merely provided consumers with a
statutory right of action. (“A contravention by an authorised person of a
rule is actionable at the suit of a private person who suffers loss as a result of the
contravention, subject to the defences and other incidents applying to actions for
breach of statutory duty.”)
• The effect of PRIN 3.4.4R was therefore simply to disapply a
statutory right of action that would otherwise arise. It had no
wider effect.
Wider significance of the rejection of the
“no obligations” argument
• Three points.
(1) Reasoning logically applies not just to Principles but
to all Handbook Rules that are non-actionable - they
remain relevant to DISP.
(2) Whenever complaints under DISP are considered,
the Principles need to be brought into account.
(3) Firms must apply the same approach when assessing
complaints internally under DISP 1.4R, as the FOS
would under its compulsory jurisdiction.
Wider significance of the rejection of the
“no obligations” argument (contd)
• Firms had argued that DISP 1.4.1R was merely procedural and
did not identify standards by which to assess complaints.
– (NB DISP 1.4.1R: “competently, diligently and impartially; assess
fairly…whether the complaint should be upheld [and] what … redress …
may be appropriate … taking into account all relevant factors … ”).
• However, Judge held that:
• “[…] when firms have to decide complaints, before they can go to the
Ombudsman, they have to apply in reality and for fair complaints
handling, the same approach as the Ombudsman would.”
• Significant because, if firms fail to do so, they will not only be
rejecting a complaint which FOS will uphold but be in breach
of their own regulatory obligations.
(3) The “exhaustion” argument
• Even if Principles could be treated as creating
obligations to customers, they could not be relied
upon to augment or contradict ICOB/ICOBS.
• This was because ICOB/ICOBS were promulgated
by the FSA “to occupy the field” and to crystallise
the Principles in insurance sales.
• The FSA could not then resort to the Principles to
amplify and extend ICOB/ICOBS.
The “exhaustion argument” in practice:
ICOB 5.3.1R vs Common Failing 15
ICOB 5.3.1R
• ICOB 5.3.1R required that in an oral sale, firms
had to provide the customer with a “Policy
Summary” containing (amongst other things)
notice of any “significant and unusual exclusions
or limitations”.
• And:
– “[…] draw the attention of the retail customer orally to
the importance of reading the policy summary, and in
particular the section of the policy summary on
significant and unusual exclusions or limitations.”
ICOB 5.3.1R vs Common Failing 15
Common Failing 15
“[…] In sales primarily conducted orally, it was not enough just to provide
important information in writing. So, we have found it to be a failing where there
was not a fair presentation of the information during the sales discussion, by, for
– giving an oral explanation; or
– specifically drawing the customer’s attention to the information on a computer
screen or in a document and giving the customer time to read and consider it.
In addition, the requirement to pay due regard to a customer’s information needs
and communicate information in a clear, fair and not misleading way required the
firm to provide balanced information when making reference to a policy’s main
characteristics (whether orally or in writing). So, we have found it to be a failing if,
where the firm described the benefits of the policy orally, it did not also provide an
adequate description of the corresponding limitations and exclusions in a way that
was clear, fair and not misleading, for example orally. Further, ICOBS requires that,
if a firm provides information orally during a sales dialogue with a customer on a
main characteristic of a policy, it must do so for all the policy’s main
ICOB 5.3.1R vs Common Failing 15
The BBA’s argument
• BBA said that the requirements of ICOB 5 were only
that significant terms appear in the Policy Summary
and there be an oral signpost;
• Common failing 15 required firms to specifically draw
customers’ attention to the significant terms (e.g.
refund terms) and give them consumer time to read
• This created inconsistency with the ICOB
Judge’s reasoning on the
“exhaustion” argument in general
• The Principles were best understood as the “ever present substrata to
which the specific rules are added”:
– The Principles always had to be complied with.
– Specific rules did not supplant them and could not contradict them.
– They were but specific applications of the Principles to the particular
requirements they cover.
– “The general notion that the specific rules can exhaust the application of the
Principles is inappropriate. It cannot be an error of law for the Principles to
augment specific rules.” (para. 162).
• The real question was not whether specific rules exhausted general ones,
but whether they excluded them
– This would require the Court to accept that a breach of the Principles might go
un-redressed, even though a specific rule has been complied with.
– The FSA had not, by ICOB/ICOBS, created a comprehensive code.
– Such a code could be circumvented unfairly, or contain provisions which were
not apt for the many and varied sales circumstances which could arise.
Judge’s specific reasoning on
Common Failing 15
• Ouseley J. accepted that it went further than the specific
• But it did not contradict them – note why he concluded
that there was no contradiction:
– “[…] it requires nothing to be done that specific rules forbid, or omitted
which they require.” [para. 174]
– “The specific rules are silent on the topic of how oral presentations
should be conducted” [para. 176]
– “There can be no contradiction of the specific rules unless they are
construed as the exhaustive expression of all obligations. There is no
justification for such a construction in the absence of clear wording
giving effect to a clear purpose or intention of such an outcome. The
overarching or underlying Principles are simply being applied where
the rules do not cover the point.” [para. 176]
Part III: Conclusions
& Wider Significance
What conclusions can be drawn from the
Judge’s reasoning on “Exhaustion”?
• There appear to be only 3 circumstances in which specific
rules will limit the application of the Principles:
(1) If the Principles are said to require something to be done
which the rules actually forbid.
(2) Conversely, if the Principles are said to require something
to be omitted which the rules require must be done.
(3) If the Principles contain an additional requirement in
circumstances in which the specific rules should be
construed as the exhaustive expression of all obligations;
but such a construction will only be justified if there is
“clear wording giving effect to a clear purpose or
intention of such an outcome”.
Direct Consequences for industry
Upstream consequences (when planning their systems and operations):
– Firms cannot treat the specific rules as reflecting the limits of their duties
to customers.
– This remains true even if they are operating in an area governed by
detailed and highly prescriptive rules.
– The open-textured provisions require a degree of flexibility and
responsiveness (rather than a “tick box” mentality).
– Given that firms engaged in selling mass consumer products target
economies of scale and consistency of customer-treatment through “tickbox” operations, this creates tensions (and costs) in implementation.
Downstream consequences (when handling complaints):
– Firms must consider the Principles and apply the same assessment of
reasonableness as the FOS.
– They cannot take refuge in asking whether or not the customer has a
cause of action.
Wider Regulatory Significance
• This is a judicial vindication of the “Principles based” approach to
regulation which the FSA had been pursuing for a number of years.
• The FSA has emphasised that it expects that principles of fairness,
to be embedded throughout a firm’s operations and within its
• In firms with tens of thousands of employees (Lloyds Banking Group
has over 100,000), this is easier said than done.
• The development within FSMA Regulation of the sorts of
expectations of professional responsibility and “client” (as opposed
to “customer”) care historically associated with the professional
disciplines (cf medicine and law).
• The tension is to what extent these requirements are scaleable.

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