Major changes are being made to the law affecting financial institutions' liability to their customers.
- Where there are systemic issues – such as general overcharging or mis-selling of investment products – the Central Bank of Ireland ("CBI") will be able to direct the financial institution to provide monetary redress to all affected customers – in effect, enabling a kind of "class action" remedy.
- The recourse of customers has been simplified to provide for a clear statutory right of action rather than an action for negligence or breach of contract.
The recently enacted Central Bank (Supervision and Enforcement) Act 2013 (the "2013 Act") bolsters the powers of the Central Bank of Ireland ("CBI") to regulate, supervise and take action against regulated financial entities (including banks, insurance companies, financial intermediaries, investment firms and credit unions). With the exception of section 72 it came into force on 1 August 2013. Part 6 of the 2013 Act contains some radical provisions which will expose banks and other financial institutions to new forms of civil liability for breach of duty and regulatory obligations. These provisions, which were not contained in the Bill as initiated, have the following effect:
- The CBI can direct a financial institution to provide redress for "widespread or regular" defaults such as over-charging, mis-selling investment products, other civil wrongs and breach of certain regulatory enactments;
- Any customer of a financial institution has a statutory cause of action where it has suffered loss as a result of a breach of regulatory duty by the financial institution, e.g. it has sold an unsuitable product to the customer, or has otherwise failed to meet regulatory standards in the provision of its services.
CBI Direction to Provide Redress
The CBI can exercise this power in respect of an array of
breaches of regulatory duty if they have been "widespread or
regular." The CBI can publicise the fact that it is
investigating a financial institution's conduct and the making
of a direction. A financial institution's compliance with a
direction does not constitute an admission of liability.
The monetary redress directed can include actual and anticipated
loss on the part of the financial institution's customers. The
CBI can direct the financial institution to pay the CBI's costs
of giving the direction. It can also direct the financial
institution to pay interest on monetary redress.
A CBI decision to direct the provision of redress is capable of
being appealed to the Irish Financial Services Appeal Tribunal
("IFSAT"). IFSAT enjoys an
interventionist standard of review - it can, amongst other things,
substitute the CBI's decision with another decision if IFSAT
considers that the other decision is "correct and
preferable".
These new provisions for directing redress fills a gap in Irish
litigation procedure whereby it is not possible for a group of
plaintiffs who have suffered loss arising from the same wrong to
mount a "class action" (as that phrase is understood in
US jurisdictions). It seems possible, however, that in particular
cases the amount of compensation directed to be given by the CBI
may not meet claimants' expectations. For example, there is no
jurisdiction for the CBI to direct the payment of exemplary
damages. In exceptional cases, therefore, it may well be that
aggrieved customers will pursue civil claims in such circumstances.
Any such claim would clearly have to account for monetary redress
provided by the financial institution pursuant to the CBI's
direction. However the Financial Services Ombudsman
("FSO") has no jurisdiction in respect
of matters which are being investigated by CBI or have been the
subject of a direction.
Statutory Right of Action
A new statutory right of action is available to any
"customer" to sue for damages arising from breach of an
array of statutory duties by a financial institution. The right of
action is not confined to consumers; nor is it confined to small
and medium-side enterprises ("SMEs"). It
is available to any actual or potential customer of a financial
institution. Accordingly, professional customers, and
large-scale businesses will have a right of action under this
provision. However the definition of "customer" in
the 2013 Act is such that it seems clear that market counterparties
will not have a right of action under this provision. The
extension of the statutory cause of action beyond consumers and
SMEs represents a radical and worrying development for financial
institutions. Legislation introduced in the UK after
"Big Bang" (Section 62 of the Financial Services Act
1986) which afforded an analogous right of action for all customers
of regulated entities was later amended so as to confine the
statutory right of action to "private investors" i.e.
essentially, consumers.
Some of the regulatory duties which could form the basis of the new
cause of action are framed in very wide terms. For example,
regulation 16 of the EC (Licensing and Supervision of Credit
Institutions) Regulations 1992 requires a credit institution to
manage its business in accordance with "sound administrative
and accounting principles" and to have internal control and
reporting procedures to ensure this. In particular cases there may
be difficulties in establishing that breach of a particular duty
actually caused the customer's loss.
Normal principles of statutory interpretation would mean that
customers cannot sue in respect of breaches occurring before the
provision came into force.
A likely consequence of the new provision is that where an
aggrieved customer brings proceedings against a financial
institution, a claim based on the statutory cause of action will be
the preferred course of action. A plaintiff can therefore avoid the
usual requirements in a professional negligence claim to have an
expert report before serving a statement of claim.
Furthermore, in particular cases a breach of regulatory duty may
very well be easier to prove than breach of a duty of care.
In terms of procedure, it seems likely also that plaintiffs will
seek trial of preliminary issues by reference to the statutory
cause of action. This is because if a plaintiff
succeeds in respect of the statutory cause of action (which may be
perceived to be a more straightforward objective than, e.g., a
claim in negligence) a successful claim in this regard will dispose
of the entire action.
Conclusions
These provisions represent a sea-change in terms of Irish
regulatory law. To date, the High Court has held that the
content of the Consumer Protection Code does not constitute terms
which can be implied into a bank-customer contract. However,
the High Court has held, in the context of repossession actions
that as a matter of process the bank must demonstrate that it has
complied with the relevant code of conduct on mortgage
arrears. This latter issue has been referred to the Supreme
Court by way of a case-stated (in essence, a request for a judicial
ruling on a point of law).
The introduction of a statutory cause of action is likely to
generate a considerable amount of litigation. Aggrieved customers
may well bypass the FSO's mediation-adjudication role and head
straight for the courts.
The new provisions further emphasise the need for robust compliance
functions. In addition, the creation of a statutory cause of
action means that CBI regulations made under the extensive new
powers provided for in Part 8 of the 2013 Act will need to be
drafted with considerable specificity given that a breach of those
provisions will give rise to a direct cause of action on the part
of a financial institution's customers. Although the CBI is not
obliged to consult in advance on the content of those rules, it is
hoped that it will so that they can be framed with appropriate
industry input.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
