More storms to come? Navigating regulatory settlement, redress and litigation

December 18, 2024

More storms to come? Navigating regulatory settlement, redress and litigation

The recent Court of Appeal decision on commissions in motor finance and the promised sectoral reforms within Chancellor Rachel Reeves' speech at Mansion House last month have once again brought the stormy mix of regulatory settlement, redress schemes and litigation within the financial services sector to the fore.

In this commentary, we examine the current landscape for retail and consumer businesses, highlighting the key legal and strategic decisions to be made when facing these headwinds.

Regulatory settlements and litigation

The intersection between regulatory settlements and redress with litigation is, of course, nothing new. Whilst the Supreme Court appeal on motor finance commissions is awaited (with the potential impact of the Court of Appeal decision from a regulatory perspective even prompting the FCA to support its expedition), industry professionals will also be aware of the current PPI group litigation relating to undisclosed PPI commissions in the face of a Financial Ombudsman Service (FOS) complaint deadline passing in August 2019, which was intended to draw a line under PPI claims.

It is therefore well understood that resolution in one sphere does not automatically bring to an end tempests in another. Just like weather patterns, trends from the US, such as a growing compensation culture, class action landscape and easier access to third-party litigation funding, are increasingly prevalent in the UK. These, combined with more than a decade of post-global financial crisis regulation and heightened regulatory focus on redress and resolution, create somewhat of a perfect storm.

Key considerations when approaching regulatory settlement

Against this background, for regulated firms, managing and minimising the financial impact of any regulatory settlement is, of course, the starting point, as well as understanding the firm's priorities and those of the regulator on whether any payment should be directed towards a fine, redress or a combination of both.

However, it is far from the only consideration. Firms must balance their ongoing regulatory relationships with broader commercial and reputational concerns. Deciding whether to accept criticism and move forward or instead seek to challenge regulatory concerns is crucial, not least because accepting a finding could, instead of allowing a line to be drawn, open up the firm to litigation instead.

Whilst a regulatory settlement might allow for a degree of narrative control when things go wrong, it generally does not contain litigation risk and indeed the basis for any regulatory finding will be critical in determining the likelihood for any future potential litigation.

Timing can also be important, as litigation and regulatory processes follow their own timelines and, as the recent motor finance commissions litigation has shown, one cannot, and does not, control the other.

Concurrent claims and regulatory processes require careful consideration in any settlement strategy to ensure that, insofar as possible, one does not derail the other.

Approaches to redress schemes

The FCA has extensive powers available to require firms to undertake redress exercises¹ although, historically at least, these powers have not been frequently invoked. In practice, they have served to operate as a powerful incentive for firms to take action voluntarily.

Whether regulator-imposed or offered voluntarily, one aspect these schemes share is the inability to bind consumers to accept redress. Indeed, a lack of finality is a key challenge for firms faced with setting up redress schemes. The extent to which consumers can be encouraged to accept redress and whether regulatory redress can limit compensation in any associated litigation must always be considered by firms.

For firms facing financial distress as a result of regulatory settlement and redress schemes, there are circumstances where a redress scheme of arrangement could be appropriate. Traditionally used in the context of both solvent and insolvent corporate restructures, court-sanctioned schemes of arrangements whereby a firm and its creditors reach a binding agreement on a refinance or restructure of a firm's debts or affairs can, and have been, used in a redress context. Acknowledging that the FCA has concerns where it sees such an approach as simply a tactic to avoid paying redress in full, in some cases the alternative of forcing a firm to wind down could create even more damaging results for consumers and, in those scenarios, redress schemes of arrangement may be the next best alternative. If approved, redress schemes of arrangement can also bring a finality to claims not seen in regulatory settlements and litigation.

Changing landscape

It remains to be seen whether the promised overhaul of regulation with an eye to increasing competitiveness will come to pass.

Whilst Chancellor Rachel Reeves' speech focused on modernising the operation of the FOS, to be effective any review would need to look beyond that to resolve uncertainty.

The FCA is keen to extol the benefits of proposing redress as a means of minimising enforcement risk or reducing fines but a current lack of formal rules around how this could be applied in practice only serves to give rise to an uncertain landscape in which firms fear proposing redress for risk that they only add to their bill.

Takeaway messages

Against this backdrop, the key considerations for firms operating in this landscape remain the same. Regulatory investigations, redress schemes and customer litigation require a multi-disciplined approach and careful management of data, people and stakeholders, both internal and external to the firm at an early stage.

Our global breadth and depth of expertise within our regulatory and litigation practices, including lived industry experience, means we are uniquely placed to assist firms in navigating these storms.

If you would like to discuss any of the issues raised in this article further, please do not hesitate to contact the Dentons team.

1. See Section 404 FSMA (industry-wide redress schemes), Sections 55L and 404 FSMA (single firm supervisory powers) and Sections 382 and 384 FSMA (restitutionary payment powers). ↩