Predictions 2024: Disputes and Investigations

Prediction

2024 will bring more substantial class actions against large corporates and their directors/senior management in relation to greenwashing and/or environmental or human rights damage caused by their operations and/or their value chains, including their business partners, customers etc. Those claims will broaden in scope to focus on nature and bio-diversity, and human rights issues, and involve alternative, non-judicial procedures too.

We will see increased criminal liability for environmental harms in multiple jurisdictions.

Why

There will be increased regulation, compliance, enforcement and litigation risk around environmental issues:

• The Corporate Sustainability Due Diligence Directive (CSDDD) will require both EU and third country companies which meet the threshold, operating within the EU, to perform human rights and environmental due diligence on their own operations and supply chain, subsidiaries and both downstream and upstream value chains (with proposed civil liability for damage caused by failure to comply).

• The European Parliament proposes an update of EU environmental crimes and sanctions rules.

• Innovative claims will bolster potential claimants, including:

(i) Claims in the UK via s.90 / 90A FSMA and securities litigation, and contractual (and insurance) disputes.

(ii) Group claims in the English Courts by those affected by environmental issues, such as those brought by communities in the Niger Delta affected by oil spills against Shell, which will determine the existence and scope of the oil company’s duties.

(iii) In France, several claims have been brought against companies alleged not to have met their duties under the corporate duty of “vigilance”; our overview of the cases to date is here.

Although climate risks will remain at the fore, in 2024 the scope will broaden to include:

• Plastics – A greenwashing complaint against Coca-Cola, Nestle and Danone in relation to their recycling claims about plastic bottles is before the European Commission, and PepsiCo is being sued in New York over its role in plastic pollution. The EU has adopted a Regulation in relation to microplastics.

• PFAS – the impact of “forever chemicals” is a major risk. Following a Rotterdam District Court ruling that the US chemical company Chemours is liable for environmental damage in the Netherlands caused by PFAS chemicals, the Netherlands’ Public Prosecution Service is considering potential criminal liability of company executives. The UK’s Drinking Water Inspectorate recently pushed for regulatory change following its 2022 tests, which showed the presence of PFAS in drinking water.

• Nature-based claims and bio-diversity – developers in England will be required to deliver 10% “Biodiversity Net Gain” from January 2024. In France, the Paris Administrative Court (jugement n° 2200534/4-1) has recognised the existence of environmental damage from pesticides, and ordered the French state to improve legal protections for biodiversity and the environment, and an NGO has made a criminal complaint against four financial institutions alleging money-laundering linked to Amazon deforestation. In Australia, a legal opinion published in November 2023 concludes that “nature-related risks” constitute risks of harm to Australian companies, and fall within directors’ duties.

• Human rights claims – We are likely to see the re-framing of some climate claims as human rights issues. The Duarte Agostinho and Others v. Portugal and 31 Other States emissions litigation, with a ruling expected in early 2024, is a human rights claim. On 27 June 2023, the UN issued a Communication to Saudi Aramco warning that the state-run oil company’s alleged contributions to the climate crisis could be in violation of international human rights law, along with a Communication to Saudi Aramco’s financiers, noting the contributions that financial institutions and asset managers can make to adverse human rights impacts through the provision of financing. In May 2024 the English Court of Appeal will hear the World Uyghur Congress’s appeal against a decision that the NCA doesn’t have to open a money laundering investigation into the importing of materials from China’s Xinjiang region into the UK. In the UK, a new Independent Anti-Slavery Commissioner will take up her role from 11 December 2023.

Greenwashing will remain a key disputes risk. The FCA’s proposed anti-greenwashing rules (PS 23/16) and guidance (GC 23/3) come into force on 31 May 2024. The UK advertising regulator’s focus on misleading green claims is likely to continue. In 2023 we saw the ASA censure several corporates over alleged greenwashing issues and for failing to prepare adverts with a sense of responsibility to society (see the ASA’s November 2023 censure of Toyota, and our earlier pieces here and here on greenwashing).

Implications

The risk of ESG civil and criminal liability, and reputational damage, will remain acute for corporates in multiple sectors, and for their investors, financiers and insurers, in 2024.

Understanding and complying with obligations is vital, to avoid regulatory enforcement and claims risk. All businesses should be conducting appropriate ESG due diligence not only internally but on all entities with whom they have a relationship through the supply or value chain. The question will be what level of due diligence is sufficient (and what information is available to conduct that due diligence).

Please see our ESG View and ESG Disputes Radar publications for regular updates. To find out how the ESG Litigation and Regulatory Investigations Tracker could help you navigate the complexities of ESG with confidence, please contact us here.

For more information please contact Rob Allen and Emily Blower.

Prediction

Following the grant of Royal Assent to the Economic Crime and Corporate Transparency Act (ECCTA), 2024 will see two important changes to corporate criminal liability in the UK.

Why

A new offence for organisations of failing to prevent fraud is expected to come into effect in 2024. “Failure to prevent” offences place greater focus on companies’ compliance programmes as a means of avoiding criminal liability: a company will be criminally liable for fraudulent acts committed for the benefit of the company or its clients by its employees, agents and contractors unless the company has reasonable procedures in place to prevent this. In this sense, the failure to prevent model criminalises companies’ compliance failures.

The Ministry of Justice is obliged to publish guidance for organisations on this new offence before it comes into force, but we expect this to be relatively generic. Fraud can occur in more varied ways than bribery or the facilitation of tax evasion – the offences already subject to a failure to prevent regime. This means that measures to manage the risk need to be more tailored to the organisation.

The guidance is likely to make clear that companies should adopt a risk-based approach and that for some companies it may be reasonable to take few, if any, steps. However, for businesses that sell goods or services to the public, a key area of risk is likely to be sales materials that may contain misleading statements. The regulated sector is likely to be better prepared for this than other businesses.

The identity principle

Failure to prevent offences are an exception to the general rules of corporate criminal liability. These provide that a company can be found criminally liable only for the actions of those individuals who represent its “directing mind and will”, typically (but not always) board members or very senior management. The difficulties of proving criminal liability by anything other than the smallest of companies under this principle are well documented.

ECCTA now amends this principle and puts it on a statutory footing. Under the new law an organisation will be liable for a “relevant offence” (a range of economic offences listed in a schedule) if:

1. a “senior manager”,

2. acting within the actual or apparent scope of their authority, and

3. commits or attempts to commit the offence after the section comes into force.

The aim is clearly to lower the threshold so that the actions of lower levels of management will suffice to make the company criminally liable.

Only weeks after this became law, a proposal was tabled in clause 14 of the Criminal Justice Bill to enlarge the scope of this “senior manager” test to all criminal offences and not just to “relevant offences”. As many offences likely to be committed by companies, such as health and safety breaches and corporate manslaughter, are already subject to separate regimes for finding liability, the impact of this change will be limited.

Implications

All organisations will need to consider where the risks of fraudulent conduct lie in their operations in order to design reasonable policies and procedures to manage this risk. The MoJ guidance is likely to provide a framework, but individual sectors who face common risks may wish to work together to produce more detailed guidance.

The change to the identity principle offers a less immediate need for action, but it may still be sensible to analyse who within the organisation will fulfil the definition of a senior manager and whose actions might therefore create criminal liability for the company.

For more detail on these changes, watch and listen to our series of podcasts here.

For more information please contact Camilla da Silva and Jon Malik.

Regulators across a number of sectors are looking at conduct outside of the workplace. We look at what to expect for financial services and legal professionals and firms in relation to ‘non-financial misconduct’ (NFM).

a). Non–financial misconduct – financial services

Prediction

The FCA will conclude enforcement cases against at least one individual and one firm for NFM breaches using their existing powers. In relation to firms, this will draw on failures to have adequate systems and controls to prevent a culture where non-financial misconduct has been allowed to occur.

Why

The FCA has made clear in the last 12 months that it is stepping up its approach to regulation in the area of NFM. This comes off the back of high profile cases involving regulated firms and individuals, the FCA’s response to and appearance at the Treasury Select Committee and its recent consultation paper on Diversity and Inclusion (CP 23/20). However, the FCA already has powers which enable it to take action against both firms and individuals for failings that typically amount to a lack of integrity (see the recent Staley final notice) and it is not a question of waiting for the current proposals to come into force before we start seeing FCA enforcement in this area.

Implications

Any case law from the FCA and/or the PRA in relation to NFM provides much needed guidance and context to the ways that firm’s approach their assessment of Fitness & Propriety and the Conduct Rules. But regulated firms should also not forget that this isn’t just about single individuals, but also about the way that they manage this risk, including in relation to their disciplinary processes, their F&P assessment, their whistleblowing policies and procedures and their approach to investigations. Key to that will be the attitude of reporting incidents to the regulators at the right time in accordance with both Principle 11 and Senior Manager Rule 4. Now would be a good time to consider a review and audit of your processes and an assessment of where you sit in comparison with your peer firms.

b). Non–financial misconduct – solicitors

Prediction

We predict that UK legal regulators will intensify their focus on NFM and workplace culture and that further investigations, claims and disciplinary sanctions will follow.

Why

The SRA has issued regular guidance updates on conduct in recent years, despite being under-resourced, and we expect this to continue.

Principle 5 requires solicitors to act with integrity, and the SRA will regulate inappropriate conduct both in and outside of the workplace. The SRA’s Principles require firms and individual solicitors treat colleagues fairly and with respect, and not to bully or harass them or discriminate unfairly against them. In recent years, the SRA has issued updated guidance on acting with integrity, on sexual misconduct, on wellbeing, and on the use of social media and other communications, including outside of the workplace. In Nwosu v Solicitors Regulation Authority Ltd a £20,000 SDT fine was not felt to be disproportionate for a senior solicitor who had made inappropriate comments to a young interviewee. Similarly, the Bar Standards Board (BSB) has issued revised guidance on conduct in non-professional life and the use of social media.

Further support and guidance specifically for in-house solicitors is also likely to follow a 2023 thematic review.

Professional ethics have also been a focus of legal regulators. Misuse of NDAs was the subject of a 2023 LSB consultation, with a policy statement or guidance expected early in 2024. Similarly, the SRA has made it clear that solicitors’ involved in the use of abusive "lawfare” may be subject to regulatory action. A House of Lords Select Committee on Communications and Digital letter to Lord Chancellor calls for the SRA to have powers to fine firms up to £250 million for abusive litigation, and for more action to tackle SLAPPs and support those facing them. The next phase of the Post Office Inquiry will likely include close scrutiny of the role of legal professionals in bringing criminal prosecutions.

Implications

There is considerable reputational and commercial risk, as well as legal and regulatory risk, in getting culture and conduct issues wrong. Firms and individuals, including those working in-house, need to be aware of the rules, and ensure that proper procedures and processes, including training, are in place.

For more information please contact Emma Sutcliffe and Michelle Allison.

Prediction

Cyber and data risk will remain a key business and systemic risk, with heightened regulatory focus and claims likely.

We will see AI disputes, regulation and enforcement action, along with continuing battles between regulators and Big Tech.

State-sponsored cyber-attacks will prompt regulatory action and further disputes in relation to the scope of war risks insurance cover and/or exclusions in a cyber scenario.

Why

Regulation of AI and emerging tech is increasing (on which, see our AI View publication). The EU’s AI Act will lay down a regulatory framework for ensuring safe use and effective governance of AI. The UK’s approach to regulating AI and other critical technologies is set out in an August 2023 White Paper, and the NCSC has produced guidelines for secure AI development which includes a requirement to include security by design. Amendments to the Product Liability Directive, which imposes strict liability on producers and suppliers where their products cause injury, death and/or damage to property, will extend the EU’s product liability regime to intangible items, including AI. There will be a presumption of defect of an AI system, and that it caused the loss complained of, if the claimant faces “excessive difficulties, due to technical or scientific complexity”. In addition, a modified defect test will take into account the AI learning after it is deployed, so that liability could be imposed if the AI was safe on deployment, but became unsafe subsequently.

The UK’s regulators are focused on maintaining financial stability, including improving cyber and operational resilience. The Bank of England - alongside HMT and the FCA - is working to improve and test the wider financial system’s resilience to cyber-attacks. Lloyd’s systemic risk scenario modelled the global economic impact of a cyber-attack on a major financial services payments system, resulting in widespread disruption to global business with estimated economic losses of US$3.5trn. Protection of data and information, with investigations and enforcement action likely. Equifax was fined £11m by the FCA in October 2023 for failing to manage and monitor the security of UK consumer data. Data privacy authorities (including the ICO) will increasingly ask questions and start investigations about AI development and the associated use of data and compliance with GDPR.

In the continuing battle between Big Tech and regulators, the ICO has sought permission to appeal the FTT’s decision in Clearview AI Inc v The Information Commissioner (see our summary vhere) that the ICO had exceeded its jurisdiction when issuing an Enforcement Notice and the Monetary Penalty Notice to Clearview AI Inc.

We also expect changes to English law to provide clarity on how the law should treat digital assets like crypto currencies and NFTs, following the Law Commission’s 2023 recommendations for reform and development of the law on digital assets.

Cyber and data security risks, including exposure to third party and outsourced risks, remain high (see our UpData publication for regular updates). The UK’s National Cyber Security Centre (NCSC)’s seventh annual review warned of enduring and significant threats to critical infrastructure. Geopolitical tensions remain high globally, with cyber a potential tool in conflicts. Insurers globally await the outcome of Merck’s appeal to the New Jersey Supreme Court as to the role of war exclusions in excluding from policy cover losses from a cyber event which had been attributed to a state-sponsored actor.

The English courts have adapted to the nature of such disputes, with the courts showing a readiness to make orders against “persons unknown”, for example, to restrain the use and disclosure of information obtained by anonymous hackers from a professional services firm. In Tulip Trading Limited (A Seychelles Company) v Bitcoin Association For BSV & Ors the court held that it was arguable that software developers who looked after the cryptocurrency Bitcoin owed fiduciary duties to Bitcoin owners.

Implications

All businesses should be taking steps to ensure that they, and anyone in their supply chain or any outsourced services, protect data and have proper processes in place to minimise cyber risk.

In addition, awareness of the regulatory and legal risks around using AI and other innovative tech products will ensure that the efficiencies and opportunities they bring can be seized more safely.

For more information please contact Minesh Tanna, Rob Allen, and David Kidman.

Prediction

Building safety regulation and disputes in 2024 will include:

• the first Building Liability Orders, alongside other applications to enforce remediation;

• regulatory scrutiny and claims in relation to construction products; and

• delay disputes arising out of the new “gateways” system for higher-risk building work

Beyond the BSA, and the new building safety regime that it ushers in, we may see wider disputes over structural defects and design and build issues in aging buildings.

Why

We expect more use of the sanctions and enforcement routes in the Building Safety Act 2022 (BSA), to compel remediation of existing 11m+ residential buildings which have been identified as having fire safety defects. This will mean more applications for Remediation Orders and Remediation Contribution Orders, the first of which we saw in 2023 (see our summary of the process and purpose of ROs and RCOs here and here). The first Building Liability Orders will be granted, passing on certain liabilities of companies and others for building-safety related claims to their associated entities. Councils also have powers under the Housing Act 2004; in October 2023 Newham Council announced that it had successfully prosecuted a building owner for failing to remove flammable cladding. In addition, the scramble to remediate affected buildings may well lead to workmanship and other issues. A contractor received a £240,000 HSE fine in October 2023 for safety breaches during the course of cladding remedial works.

New Construction Products Regulations, a new National Regulator for Construction Products (part of OPSS) and a more stringent testing regime are expected.

New obligations on building owners and managers of existing or new occupied high-rise residential buildings to, for example, maintain a “golden thread” of information and to assess building safety risks and report to the new Building Safety Regulator, will increase compliance risk, and the associated risk of enforcement action and disputes. Accountable persons of all occupied higher-risk buildings will in due course be obliged under part 4 BSA to conduct a further “building safety” risk check of their buildings, which may well itself give rise to more disputes.

We anticipate delays (and potential disputes where contracts don’t anticipate and allocate this risk) on projects, as parties seek to comply with the new “gateways” system for building control for works relating to "higher-risk” buildings.

The final report of the Grenfell Tower Inquiry will be published in 2024. A number of construction professionals have received Rule 13 warning letters and/or been subject to criticism. The contents of the final report, and any criticisms of industry participants therein, is likely to have an impact on the way existing disputes are fought.

Further, many public and private buildings in the UK were built to very different requirements than are in place today. Occupiers of education sector buildings which contain RAAC (Reinforced autoclaved aerated concrete) materials were advised on 31 August 2023 to vacate those premises until mitigation measures are in place. In November 2023, tenants of a 1958 tower block were subject to an emergency evacuation after structural defects were identified.

Implications

It remains vital for construction companies and professionals, those owning, investing in and financing property assets, and their insurers to be aware of (and to comply with) any obligations they may have under the new building safety regimes – both for new works or projects, and for buildings in occupation – created by the BSA.

For new works, contracts need to allocate responsibility for meeting the requirements of the new “gateways” regime, and make clear how to deal with the impact of potential delays caused by hard stops at prescribed points in the design and construction of new high-rise residential buildings, care homes and hospitals.

Our cladding and building safety Feature contains Insights and resources.

For more information please contact Emily Monastiriotis, Steven Kaye, and Sharlmaine Willetts.

Prediction

A little under 9 years since their introduction, the first Collective Proceedings in the Competition Appeal Tribunal (the CAT) are scheduled to reach trial in early 2024. Inevitably this will involve the CAT looking at elements of collective proceedings which are so far unknown territory.

Why

The process of certification, including analysis of blueprints, models of loss, funding, notification and distribution arrangements, has now become more established and, to some extent, certain. The CAT appears to be getting more stringent over some aspects of certification, refusing to certify claims against Meta, Apple, Visa and Mastercard in the last year, though in each case it allowed the claimants to amend their cases rather than striking them out.

The resolution of carriage claims, where more than one representative seeks to lead the action for a claimant group, is also becoming more established. The CAT ordered a separate hearing of a carriage dispute before certification of the action against Alphabet and Google, which was ultimately resolved by the representatives agreeing to merge their claims, and has been given a wide discretion by the Court of Appeal to decide these issues in UK Trucks Claim Ltd v Stellantis NV and ors.

Another area of new territory for the CAT will be approving the settlement of claims. In December 2023 the CAT reviewed and approved its first settlement, between CASV, the smallest of five defendant shipping groups, and Mark McLaren, the class representative in the vehicle shipping cartel case. We expect to see the CAT consider several more settlements throughout 2024, some of which will raise more complex issues.

More GLOs?

The approval in September 2023 of a Group Litigation Order (GLO) in relation to a medical devices claim is a reminder that CPOs are not the only collective redress procedure in town. Product liability claims are on the rise, with claimant groups in other parts of the world considering them as a way of dealing with novel issues including harm caused by social media. We expect to see more attempts to get GLOs approved in 2024, though the courts are still imposing a high bar: in November 2023 a GLO was refused for noise-induced deafness claims against the Ministry of Defence, despite the Ministry supporting it.

Action in the EU

The European Representative Actions Directive (RAD) required EU Member States to put in place by June 2023 at least one procedural mechanism for consumers to seek collective redress. Not every Member State met the deadline, but there is no doubt that this represents a major change across the EU, which has always resisted moves towards what it traditionally viewed as the excesses of the US class actions system.

The RAD permits a wide range of procedures, including opt-in and opt-out actions, so there will inevitably be a good deal of forum-shopping as potential claimants seek to identify the most suitable jurisdiction in which to bring claims. Cross-border claims can only be brought by independent not-for-profit organisations with a legitimate interest in consumer protection, but there is no shortage of qualifying entities.

We expect it to take time for the new procedures to gather momentum and the requirements to be clarified, but there is no doubt that the learning curve for European class actions is about to get steeper.

Implications

The landscape for class actions will continue to develop at pace in 2024. Claimants will continue to make the various English forms of collective actions work, such as Group Litigation Orders or Representative Actions. Claims with an increasingly fragile connection to competition issues will continue be brought in the CAT but we will start to see these being resolved and, depending upon how they are resolved, claimants may start to think twice before tying claims to competition breaches. Understanding the different collective regimes is becoming an increasingly important part of disputes practice in England and 2024 is likely to bring to the fore competing forms of action in other European countries.

For more information please contact Patrick Boylan and Eleanore Di Claudio.

Prediction

Renewed attention on how disputes are paid for is inevitable in 2024 and new legislation now looks certain. The rules will change in relation to Damages Based Agreements (DBAs): agreements under which lawyers or funders share in damages received rather than being paid for time spent or capital committed.

Why

A head of steam had built up for reform of the 2013 Damages Based Agreement Regulations (once labelled by a judge as not “the draftsman’s finest hour”), but this dissipated in the COVID crisis. The Court of Appeal’s apparent flexibility in interpreting the Regulations in Lexlaw v Zuberi (for more on which see here) arguably reduced the impetus, though it addressed only one issue with DBAs – the question of whether an alternative basis for payment could be used where the client dismissed its solicitors.

New drivers for reform

Then came the judgment of the Supreme Court in PACCAR (for more on which see here). This held that all Litigation Funding Agreements (LFAs) where the funder’s return is potentially based on the damages recovered are DBAs and subject to the Regulations. No funders had worked on this basis and so many LFAs do not comply, with the effect that they are unenforceable. All those used in collective proceedings in the Competition Appeal Tribunal are unenforceable as DBAs are prohibited.

The fallout from this decision has started and will continue throughout 2024. In Therium Litigation Funding AIC v Bugsby Property the High Court heard arguments as to whether settlement funds should be frozen pending determination of whether a LFA was unenforceable following PACCAR. The funded claimants had settled their claim but have refused to pay the funders under the LFAs. The enforceability of the LFA will ultimately be decided by arbitrators and therefore have no binding effect on other similar cases, of which we expect there to be many.

A recent case in relation to Conditional Fee Agreements looks ominous in terms of the effect of rule breaches on funding agreements – for an expanded version of this article with more on that, see here.

The government has already taken steps to address the decision in PACCAR. An amendment to the Digital Markets, Competition and Consumers Bill, currently making its way through Parliament, would prevent LFAs providing for a return based on damages from being considered DBAs, but as currently drafted only in opt-out collective proceedings in the CAT. There will be strong lobbying from funders to extend this to CFAs used in any form of proceedings.

Implications

Changes in the rules as to how litigation can be funded will have an immediate impact on the viability of certain claims. They could have a substantial impact on litigation risk for some sectors. There will be strong lobbying from various interested parties and any change in the rules is likely to be subject to public consultation. It will be sensible to stay abreast of proposals.

For more information please contact Verity Jackson-Grant and David Bridge.

Prediction

Concerns from some quarters about the role of investor-state arbitration in restricting states’ ability to legislate on human rights and climate change will gain momentum in 2024.

Why

Concerns about investor-state arbitration have been voiced for many years. Supporters argue that without an independent means of redress if investors’ assets are expropriated or devalued by policy changes, global investment will shrink. But critics allege that tribunals can make awards for sums with huge implications for developing nations behind closed doors, that investors from the Global North use these proceedings to create economic control over the Global South, and that the threat of proceedings prevents States from exercising their democratic mandate to improve human rights and environmental policies.

2023 has seen developments which only increase the pressure for change. In October the English High Court handed down an explosive judgment in the case of Nigeria v P&ID, finding that an arbitration “was a shell that got nowhere near the truth”. A sham deal procured by bribery had led to an arbitral award against Nigeria for $11bn, enforcement of which was refused by the High Court (for more on this see here).

In the same month the UN Special Rapporteur on Human Rights and the Environment presented a report on investor-state dispute settlement, that he characterised as a “daunting obstacle” to climate and environmental action. He stated that “Foreign investors use the dispute settlement process to seek exorbitant compensation from States that strengthen environmental protection, with the fossil fuel and mining industries already winning over $100 billion in awards.” The report makes the point that many times this amount could be awarded against States if they comply with their Paris Agreement commitments.

The end of the Energy Charter Treaty?

It also looks increasingly likely that 2024 may see the end of this multilateral investment treaty, which entered into force in April 1998. There is as yet no sign of the Energy Charter Conference on 20 November 2023 having resulted in agreement over attempts to modernise the treaty, which is increasingly seen as incompatible with efforts to transition away from fossil fuels and meet nations’ Paris Agreement targets.

Following a number of EU Member States unilaterally proposing to withdraw from the treaty, on 7 July 2023, the European Commission proposed that the Council decide to withdraw the entire EU from the treaty. The UK Government has stated that “there is now no clear route for modernisation to progress”, suggesting that UK withdrawal may also be imminent. After another year without progress on modernisation, this long-standing framework for energy investment disputes looks doomed. However, its protections remain in place for 20 years for investments made before a State’s withdrawal, meaning it will be relevant for a long while yet.

Implications

Balancing investors’ needs to have their investments protected from unilateral and arbitrary decisions by States against the needs of States to protect their citizens and the environment is not going to be easy. But the debate is heating up and it is increasingly clear that the status quo is ripe for reform. Watch for increased scrutiny and proposals for change in 2024.

For more information please contact Basil Woodd-Walker and Jonathan Schuman.

Prediction

We predict that in 2024 the FCA will open 2 enforcement investigations into complaints handling and fair value.

Why

We know that the FCA has the Consumer Duty as a high strategic priority - in its Business Plan for 23/24 the FCA makes it clear that it intends to make the Consumer Duty "an integral part of our regulatory approach and mindset at every stage of the regulatory lifecycle - including authorisation, policy development, supervision and enforcement priorities and processes".

We know that the FCA has budget to focus on Consumer Duty - we learnt from the FCA's 23/34 Business Plan that it has an additional £5.3m to ensure the Duty is embedded effectively.  The additional funding has allowed it to create an additional Interventions team within Enforcement which "will be ready from day one ... to enable rapid action where immediate consumer harm is detected.."

We know that the FCA has already identified areas in which they require reassurance around product value or fair processes – this scrutiny will continue with product value, quality of customer communications and fair treatment of vulnerable customers likely to form areas of focus at the FCA.

We know that the FCA plans to focus on complaint handling now - in her speech on 1 November 2023 Nisha Arora, the FCA's Director of Director of Cross Cutting Policy and Strategy stated, "The Duty will remain a top priority for the FCA. An early area of focus for us will be to look at firms' complaints data, identifying where the Financial Ombudsman Service uphold high numbers of complaints. We want to hold firms to account for dealing with complaints fairly and also ensure that they have robust mechanisms in place to learn from the root cause of the complaint."

In 2011-2016, when there was previously a spate of Enforcements relating to complaint handling, the FCA fined 7 firms £70m.

We know that the FCA has been focussing on value in insurance, asset management and retail banking for a number of years the time is ripe for an investigation to start.  In its webinar in December 2023 the FCA gave specific focus to fair value and vulnerability, reflecting the areas that it wants firms to give greater focus to.

We understand that the regulator has very recently requested copies of internal and external compliance/audit reports produced, along with actions taken in response over the past two years.  In a separate email sent to firms, the FCA requested firms' risk, complaints, and conflicts of interest registers for the previous two years.

Implications

Firms should reflect on the FCA's desire to become a more data led and assertive regulator and assess whether there are enhancements they can make in advance of the 1st annual report to the Board. 

The implementation of the Consumer Duty is one of the FCA's most high profile aims.  It is already demanding greater evidence of compliance from firms.  It is inevitable that with greater supervisory scrutiny comes a tipping point when the FCA believes that the criteria for an Enforcement referral have been met.

For more information please contact Caroline Hunter-Yeats and Jonathan Thorpe.

Prediction

We predict that the FCA will focus ever more closely on redress and that for firms with significant exposure to retail customers, redress will become a more significant financial risk than regulatory enforcement.

Why

The FCA has highlighted redress as a key focus area in (for example) speeches, press releases relating to live matters, corporate documentation and recent business plans. Taking this material together, it is clear that the FCA is prioritising the delivery of timely and fair complaint resolution and compensation to consumers and is seeking to “spot issues earlier, be innovative in how we regulate and help us intervene more assertively”.

The FCA’s newly assertive approach to redress was epitomised by the Upper Tribunal’s recent preliminary issues decision in Bluecrest in which the Upper Tribunal was asked to consider whether the FCA is entitled to require a single firm to pay redress using its OIREQ powers under s55L FSMA. The FCA argued that it could do so even where there had been no actionable breach of a regulatory requirement, a position that would have the consequence that the FCA could impose a very substantial redress scheme on a firm without engaging with the provisions of s.404 FSMA. That position was taken in circumstances in which the FCA has recently amended its decision-making procedures such that decisions of this type are made by the FCA executive alone thus removing the FCA’s Regulatory Decisions Committee as a check-and-balance.

The Upper Tribunal disagreed with the FCA and held that the OIREC power under s55L FMSA was restricted by, and must be read together with, s404F(7) FSMA such that in that case the FCA could not impose the proposed redress scheme. Whilst the FCA was unsuccessful in Bluecrest, its approach in that case has laid down a clear marker that it intends to seek redress assertively and that it is willing to test the limits of its powers to do so.

What this means for you

The FCA’s direction of travel in seeking to meet its consumer protection objective makes it likely that firms are increasingly likely to be asked to explain why redress is not appropriate at an increasingly early point in an investigation. Firms should make sure that they are clear on the circumstances in which they could be legally required to provide redress and the circumstances in which redress could only be obtained by the FCA on a voluntary basis. In those circumstances, firms will also need to consider the balance between pressure to provide redress on the one hand, and recoverability from PI insurers or other parties in the distribution chain on the other hand.

For more information please contact Thomas Makin.