Private Law claims under section 138D of the Financial Services and Markets Act 2000

October 1, 2015

 

Disputes concerning investments, insurance, mortgages or banking, potentially engage the Financial Services and Markets Act 2000 and a possible liability for, or claim to, damages in private law.

 

Investments, insurance, mortgages and banking are nowadays heavily regulated under the Financial Services and Markets Act 2000 (“FSMA”) and the vast number of statutory instruments made under it. In some circumstances, this regulatory framework permits private law claims for damages.

 

The Regulators

 

There are two regulators established under the FSMA: the Financial Conduct Authority (“FCA”) and the Prudential Regulation Authority (“PRA”). A short pithy description of the difference between them might be that the FCA regulates low-level things which tend to affect the public (consumer protection, promoting competition, ensuring the UK financial system is not used for financial crime); whereas the PRA - which is part of the Bank of England - deals with the higher level matters affecting the stability of the UK financial system as a whole. Both the FCA and the PRA have extensive rule making powers (and use them).

 

Section 138D of FSMA

 

Section 138D of FSMA sets out the basis on which “private persons” may claim for breach of rules made by the two regulators. “Private person” is a term of art; it basically means any individual (except for an individual subject to regulation by one or other regulator), but can also extend to corporate bodies which suffer loss outside the course of their business.

 

Not all breaches of rules give rise to a claim by a “private person”. In the case of rules made by the PRA, breach of the rule does not give rise to a claim unless the rule says so. In the case of rules made by the FCA, things are the other way round. A breach of a rule made by the FCA is actionable, unless the same or another rule specifies that it is not actionable.

 

Where does one find these rules and what sort of rules are likely to affect “private persons”?

 

The FCA and PRA Handbooks

 

The rules are to be found in two “Handbooks”, the FCA Handbook and the PRA Handbook. “Handbook” is a misnomer - the Handbooks are in reality two complex websites, littered with (i) mysterious acronyms; and (ii) innocuous sounding words and phrases which in fact have a specific definition which might limit or expand the natural meaning (“private persons” is a good example, unless you check the definition, there is nothing to suggest that it might, in some circumstances, apply to a company). The FCA Handbook is to be found at www.handbook.fca.org.uk/handbook; the PRA Handbook is at www.prarulebook.co.uk.

 

Both Handbooks have gone through a number of different incarnations over the years, because the Regulators themselves have been changed. Fortunately, the websites have a cunning calendar feature by which you can see what the rules were on any given date.

 

Investments, Insurance, Mortgages and Banking

 

In general terms, the rules most likely to have practical consequences for private persons are the rules set out in the “Business Standards” section of the FCA Handbook and in particular the four “Sourcebooks”:

(1) Conduct of Business Sourcebook (“COBS”) which regulates activities connected with investments and life insurance policies;

(2) Insurance Conduct of Business Sourcebook (“ICOBS”), which is concerned with insurance (other than life assurance);

(3) Mortgages and Home Finance Conduct of Business Sourcebook (“MCOB”);

(4) Banking Conduct of Business Sourcebook (“BCOBS”).

 

The Distinction between Rules and Guidance

 

Not everything in the Sourcebooks is a rule - some of it is just guidance. It is necessary carefully to check the headings in the Sourcebooks - the rules are marked with a capital R and guidance with a G. For example COBS Rule 9.2.2R specifies the level of information that firms regulated to carry on investment business must obtain from their client.  COBS 9.2.7G gives guidance only as to what a firm can still do, if it does not have sufficient information about a client. Therefore, a breach of the rule covering obtaining information from potential investors (COBS 9.2.2R) gives rise to a claim in damages, but a breach of the guidance as to what a firm can do without such information does not.

 

Similarly ICOBS 8.1.1R (which is the source of the duty to handle an insurance claim promptly and fairly and not unreasonably reject it) is a rule and damages are available for a breach. On the other hand ICOBS 8.3.3G (dealing with conflicts of interest of insurance intermediaries) is simply guidance. It follows that handling an insurance claim unfairly (in breach of (ICOBS8.1.1R) is potentially a breach of a rule giving rise to a claim in damages. A conflict of interest by an insurance intermediary is a breach of guidance only, which does not give rise an actionable claim.

 

Summary

 

This brief article can give no more than an introduction to a complex subject. Nevertheless, the basic principles involved are reasonably straightforward. Any dispute concerning investments, insurance, mortgages or banking, potentially engages FSMA. A search of the relevant Sourcebook will give an indication whether a Rule might have been infringed. If so, there is a risk of liability or the possibility of a claim.

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