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Financial Services Sector Expert Insight

Medico Legal

by Paul Grainger, Complyport Limited The Financial Services Sector is one of the most important areasof the economy of the United Kingdom (UK). It is not surprisingtherefore that the financial services sector gives rise to a significantnumber of disputes and litigation cases.

The financial services sector contributes 7.51% of UKeconomic activity (as measured by Gross DomesticProduct - GDP). It contributes £66 billion (11%) ofUK taxation, contributes £58.5 billion to UK exports,employs 1.1 million people directly and a further 1.1million in ancillary service jobs. Nearly every one ofthe 27.2 million UK households will use and be a customer for at least one financial service. In many cases,each household may use multiple financial servicesper person and many households will contain morethan one person who is a customer. At the time ofwriting, there are 27.4 million people in work in the UK.

Most householders will have a bank account,possibly a mortgage, car purchase loan or other hirepurchase loan, have credit card, debit card, storecard, Oyster card or other form of payment card, usepayment applications on their mobile phone. Asa householder they will normally have householdcontents insurance, may need motor insurance, mayhave insured their mobile phone and may buy travelinsurance for their holidays. Many may have otherforms of insurance too. They may have savings products (eg, Individual Savings Accounts – ISAs), be amember of a pension scheme and have life assuranceor investment products. It is not surprising that theFinancial Conduct Authority (FCA) reported in 2017that there were 3.76 million complaints made by customers about financial services firms. That accountsfor roughly 13.8% of households or 13.7% of the UKwork force who have raised a complaint against a financial services firm in the 2017 year.

Of course many of these 3.76 million complaints areresolved between the financial services firm and theircustomers through the mandatory complaints handling process and procedures introduced by the regulators. Many of these that are not resolved throughthe complaints handling process may be resolved byreference to the Financial Ombudsman Service(FOS). However, a relatively small number of the totalmay remain unresolved and there may be substantial sums at stake. It is these cases that may result inlitigation.

In this article I will draw upon my experience as anexpert in financial services and financial servicesregulation and discuss the role of the financial services expert witness in different types of case.

Complaints handling process

The Financial Services Act 1986 came into force inApril 1988 and introduced mandatory complaintshandling rules for complaints against regulatedfinancial services firms. This meant that financial services firms had to deal with complaints in accordancewith rules and guidance set out by their regulator.

As regulation developed and regulators merged, thecomplaints handling rules can now be found win theDISP (Dispute Resolution) section of the FinancialConduct Authority (FCA) Handbook.

The complaints handling rules set out minimumstandards that must be adhered to by financial services firms in recognising and responding to complaints raised by their customers. This includesminimum disclosures of information including notifying the customer of their rights regarding the ability (if they are an eligible complainant) to refer to FOSany complaint that is not resolved to the customer’ssatisfaction.

It is estimated that of the 3.76 million complaintsmade against financial services firms in 2017, circa 3.4million were resolved between the financial servicesfirm and the customer. This suggests that around90% of complaints logged by financial services firmsare fairly rapidly dealt with by financial services firmsto the satisfaction of the customer (or that the customer accepts there is no merit to their complaint andsettles or withdraws it). It also suggests that around10% of complaints are not satisfactorily resolved andgo on to become complaint cases investigated by andadjudicated on by FOS.

It is also interesting to note that approximately 41%of all complaints related to Payment Protection Insurance (PPI). The FCA has imposed a deadline of29 August 2019 for PPI complaints to be received.This deadline should result in a very significant dropin the number of complaints cases reported to theFCA and in those referred to FOS. However, if thereis a very significant reduction in complaints (circa40%) due to the end of PPI complaints and claims,based on current estimates that will still leave around 2.2 million complaint cases each year againstfinancial services firms.

FINANCIAL OMBUDSMAN SERVICE (FOS)

Many disputes relating to financial services may bedealt with by the Complaints Teams within financialservices firms. Generally, such complaints will be fromprivate clients and will often involve relatively smallsums of money. Many complaints will be resolved amicably with consumer accepting the findings of thecomplaints team and any compensation offered. Inother cases, the consumer may not be happy with thefindings and/ or the amount of compensation thatmay have been offered. In such cases where the complainant does not agree with the findings or responsefrom the financial services firm, he or she often hasthe right to refer the dispute to FOS.

FOS is a body originally set up under the FinancialServices Act 1986 to act as an independent form ofdispute resolution with the express intent of providing a relatively simple and speed means of providingconsumers with an independent route to resolvefinancial services complaints and disputes. It is freefor the consumer. Its decisions are binding upon thefinancial services firm and referring a case to FOSnormally avoids costly and time consuming litigation.

FOS handled 1,456,396 enquiries in the 2017-2018.Of these enquiries, 339,967 became new complaints.The complaints accepted by FOS for investigationand resolution involved 4,014 firms, of which 1,956firms had only 1 complaint, 1,304 firms had between2 and 10 complaints but 193 firms had over 100complaints.

In the year 2017-2018, FOS resolved 400,658 cases(including cases from the previous year). Of this number, 32,780 were by way of an Ombudsman’s FinalDecision which is binding on the financial servicesfirm.

An extract of the data provided by FOS in its AnnualReview is provided at Table 1 and Table 2 and Table3 below.

It is worth noting that not all enquiries received byFOS are complaints. It is also worth noting that not allpotential complaints about which enquiries may bemade can be investigated by FOS. FOS is able to investigate complaints relating to individual consumerswith regard to a range of mainstream financial servicesin the UK. However there are some types of claimantand some types of services which FOS does not havethe authority to investigate and adjudicate on.

It is interesting to note that there are some firms whoappear to be serial offenders and have multiple (andin some cases hundreds) of complaints against them.This implies either multiple failings in the way theydeal with customers or that there was a significantissue that that had an impact on many customers.

Perhaps there is no surprise that PPI and bankingcomplaints account for 86% of all complaints. It mayalso be expected that given the large numbers of thepopulation who buy insurance out of necessity(whether home, motor or travel insurance), that it willgenerate a significant number of complaints (11%).However, it may be surprising for some to find thatonly 4% of all complaints related to investment andpensions.

What the evidence from FOS demonstrates is thatwhilst there are a large number of complaints thatarise from the financial services sector, the vastmajority of these are resolved either direct with thefirm concerned or by FOS. The implication is therefore that only the relatively small number ofcomplainants where cases that are not resolved byFOS to their satisfaction or that are not eligible to beaccepted by FOS are likely to consider litigation.

Clearly where such cases are resolved by FOS, thereis no need for a consumer to consider litigation andthus no need to instruct an expert. However, whathappens then to the other cases?

Litigation cases

There are broadly two classes of consumer complaintsthat are most likely to result in litigation. They are

1. those cases where the customer is dissatisfied withthe FOS decision regarding the outcome of his/hercomplaint; or

2. those cases where the compensation claimed isabove the threshold for the maximum compensationthat can be awarded by FOS.

Due to the cost of litigation, it is normally the lattertypes of case that are most likely to result in litigation.(However, it may be that where a customer has verystrong feelings about a case, they may pursue a civilclaim based on a point of principle. This may also bethe case where a claimant has financial support froma third party.)

It should be noted that when FOS investigates an unresolved complaint and finds in favour of the customer, FOS can instruct the firm to pay compensationfor financial loss and/or for non-financial reasons (eg,distress). This can be expressed as a monetaryamount or as a formula, but is limited in either caseto a maximum award of £150,000 plus any costs andthe addition of simple interest on both the award andthe costs.

It is also worth noting that FOS can only deal witheligible complainants which broadly means individual retail consumers and micro enterprises. Similarly,FOS only has jurisdiction over retail financial servicesfirms that carry out services in or from the UK.

In addition to the two types described above, thereare also financial services disputes that are perhapsbest described as “Business to Business” disputes.Such cases can include smaller and medium sizedenterprises that, as they are not micro enterprises,currently fall outside of the definition of an eligiblecomplainant and so who in the event of an unresolved complaint, cannot seek redress via FOS. It canalso include disputes arising from non-retail financialtransactions, eg, capital markets transactions or regulatory due diligence on merger or acquisition.

Expert witness

Complainants are normally inclined to considerlitigation where the complaint is unresolved or wherean offer of compensation has been made by the financial services firm or a counterparty to a transaction, but the offer is not considered to be acceptable.It is at this stage that a complainant is likely to seeklegal advice and contemplate litigation.

The Civil Procedure Rules set out the correct processto be followed where litigation is contemplated (including consideration of alternative dispute resolution methods). I do not propose to go into the CivilProcedure Rules in this article.

It is normally at the initial consultation between acomplainant and their legal adviser that the use of anexpert may be considered first. Matters relating tofinancial advice, financial transactions and financialservices regulation are quite technical and often complex. In considering and ascertaining the merits ofany litigation under consideration, it may be that anexpert is consulted at an early stage to help clarify theissues and to provide a preliminary opinion as to themerits of the complainant’s case.

If an expert is not instructed at this early stage, it maybe that key issues are identified which will have asignificant bearing upon the case it may well be thatan expert is instructed with quite specific instructionsin terms of the questions or matters to be consideredand upon which an expert opinion is required.

Of course it is also the case that if an expert is instructed by a complainant’s legal adviser, then the defendant’s legal adviser may also instruct an expert(and vice versa). In some cases, the parties may seekclearance to instruct a Single Joint Expert (or may beinstructed to do so by the Court).

Nature of case

Where an expert is instructed (whether by one partyor as a Single Joint Expert) the expert and the legaladviser(s) will agree terms of instruction and payment. However the most important part of the instruction is the precise nature and scope of theopinion that is required from the expert. This in turnwill be determined by the nature of the issue or issuesinvolved in the complaint or dispute.

The term “financial services” covers the followingmarket segments:

• Banks;

• Banking advice and transactions;

• Mortgage lending and mortgage advice;

• Consumer credit lending and advice;

• Savings and investments advice and transactions;

• Stock broking; • Investment portfolio management;

• Life assurance advice and transactions;

• Pension plan and pension schemes advice and transactions;

• Insurance advice and transactions;

• Insurance broking;

• Independent Financial Adviser (IFA) firms;

• Financial Planning firms;

• Investment companies;

• Investment fund management companies;

• Life assurance companies;

• Insurance companies.

The type of financial services product or service willdetermine the subject matter expertise required bythe expert. It is self-evident that the expert shouldhave relevant expertise (technical knowledge andexperience) of the product or service concerned.

The matters generally involved in the majority offinancial services complaints or disputes can then be sub-divided into the following categories:

a) Whether any advice or transaction was suitable forthe customer;

b) Whether the execution of and completion of atransaction was appropriate;

c) Whether the correct or appropriate regulatoryprocesses and procedures were followed;

d) Whether the actions or behaviours of the financialservices firm were negligent or in some other waydeficient;

e) Whether loss has occurred;

f) Calculation of the quantum of any loss;

g) Whether any loss arose from deficient behaviourby the financial services firm that is defending theclaim.

The expert will be expected to form an opinion basedupon the evidence provided as to whether theoutcome of the advice or service was appropriate andcompliant with the requirements of the relevantregulator or regulators.

The range of financial services and the matters orconsiderations involved in the two lists above, are provided to illustrate the potential complexity involved.The lists are not exhaustive.

Instruction

The instruction given to the expert by the instructing legal adviser is critical in shaping and framing theopinion that the expert will provide. It is becomingmore common for the instructing legal adviser to provide a draft instruction but to ask the expert to indicate any other information or questions that may berelevant to the aspects of the case upon which the expert’s opinion is required. This is often very helpful tothe expert and the instructing legal adviser in ensuring that the final instruction provided to the expert isprecise and focused on the issues for which expertopinion is required, but not so focused or precise asto inadvertently exclude issues or matters that maybe pertinent to the opinion required.

I would observe that in my experience the betterframed the instruction, the easier and more costeffective it is for the expert to produce the requiredopinion.

The evidence bundle provided can also have asignificant influence upon the ease cost effectivenesswith which the opinion can be provided. In somecases, the evidence bundle may contain too much information. In these cases, there is information that isnot relevant to the matters and precise questionsupon which the expert must prepare an opinion. Asa result, time is wasted reading information that atbest may not be relevant or pertinent and at worst,may serve to confuse matters. In other cases, it may bethat too little is provided meaning that the expertmay need to ask supplementary questions or requestadditional information

There are of course scenarios where the nature of theopinion required may evolve. If and when supplementary questions are posed to the expert, this mayrequire additional evidence to be provided.

In my experience, instructions can be broadlygrouped into two categories - focused or broad brush.In focused instructions, the instructing legal advisergenerally has a very specific range of questions onwhich they would like the expert to offer provide anopinion. They often consist of quite specific and insome cases limited scope questions enabling theexpert to offer equally focused opinion in response.

The broad brush instruction is more wide ranging inits scope. It will often seek opinion from the expertto identify regulatory or compliance failings in theprocesses and procedures that the financial servicesfirm has undertaken in advising a customer or carrying out a financial transaction. This is useful wherethe client is believed to have suffered loss as the regulatory and compliance failings will often be the causeor partial cause of the loss.

Loss and causation

A key part of any complaint or litigation relating tofinancial services is that the complainant (the claimantin litigation) will have suffered one or more of financial loss, expense/cost and/or distress or upset. Theamount (quantum) of any loss, expense or cost canbe calculated using well established methods. In myexperience, it is more difficult to assess what (if any)payment should be made to compensate a customerfor distress.

In assessing the quantum of loss, account may need tobe taken not just of losses already incurred, but also offuture losses or future costs and expenses. It may bethe case that future losses, expenses and costs can becalculated and commuted to provide a present value.It may also be the case that interest may be due onthe quantum of past losses, expenses and costs.

Whether an expert will be instructed to provide anopinion on loss assessment and calculate the quantum will depend significantly on the complexity of themathematics involved and the competence of the expert. In some cases, one expert may be instructed toprovide an opinion on matters relating to the adviceprocess and/or execution of a transaction, whilst another expert is instructed to calculate quantum.

Having established whether a loss has occurred andif so the quantum of loss, it is then important toestablish what is known as causation, ie, the cause ofthe loss. In intermediation cases where a financialservice is transacted following some form or advice,an expert will normally be instructed to assesswhether the advice and/or transaction process andprocedures followed were compliant with regulatoryrequirements and/or company standards.

Where the advice or transaction processes orprocedures were not complaint with regulatory requirements (and/or company’s own additional standards where applicable) then it is highly likely that an expert will conclude that the non-compliance is theroot cause or a contributory cause of the loss.

Another scenario may also occur. It may be the casethat an intermediary or adviser such as a financialadviser, an insurance intermediary, a mortgage broker or a stock broker or similar has followed companyprocedures to the letter. However, if those companyprocedures were not compliant with regulatory standards then that is still likely to be a cause of loss.

Types of cases

Most financial services expert witness cases can beclassified as either “Business to Business” (B2B) casesor as retail client cases. As discussed above, currentlyonly micro businesses qualify as eligible complainantsand can escalate unresolved complaints to FOS.

B2B cases typically mean that the complainant/claimant is not an eligible complainant and this hasno recourse to FOS in the event their complaint is notdealt with satisfactorily by the financial services firm.If the sums at stake are sufficiently large, the businessconcerned may wish to seek a remedy by litigation.

Complaints by most individual customers and mostmicro businesses generally fall into two types. Theytend to arise from issues relating to One-Off Intermediation; or Service Fulfilment.

One-off intermediation typically involves the provision of some form of advice or information basedupon which the customer enters into a transaction.The transaction could be with the same firm that provided the advice or information or it could be with acompletely separate firm.

In many cases intermediation would involve thecustomer dealing face to face with another humanbeing. Examples of this would in the past have beenfinancial advice, insurance broking and mortgage orloan advice.

However, increasingly technology has been and isbeing used in the intermediation process. Whilst faceto face advice and contact may be preferred for morecomplex financial transactions, increasingly customers are seeking information and advice from saya call centre and may then carry out a transaction viathe same call centre. Much of the home and motorinsurance market now operates in this way.

Increasingly, internet (web) based information, adviceand transaction services are being delivered in markets such as consumer credit, motor insurance, homeinsurance, term life assurance and savings products.Not only have direct sales websites arisen (eg, DirectLine insurance), but price comparison websites havebecome increasingly important. Not only do they provide comparisons of product features, they also allowthe customer to obtain a personalised price comparison and the ability to click through and transact theproduct required. Indeed, it is useful to reflect thatthe Russian meerkats that appear to have become soubiquitous on television, are actually promoting avery successful financial services comparison site( site(Comparethemarket.com) for insurance and savingsamongst other products.

It is relatively easier for a firm to control a websitebased service than one delivered by humans. Assuming the correct process, procedures, information anddisclosures are hard wired into the website and theyare compliant, it is much easier to ensure a consistently compliant transaction will result.

The other main type of case involves service deliveryor fulfilment. This can include the servicing andclaims issues arising especially in relation to bankingand insurance business. To a lesser degree it also applies to loans administration, mortgage administration and savings products.

Service delivery issues can also arise from serviceagreements relating to private client portfolio management, financial planning or high end insurancebroking, where a client may have specific service delivery requirements for which they pay a fee.

Where a dispute or complaint relates to service provision, it is normally because the customer believesthe financial services product has not worked or behaved as expected or because it is believed that someother key aspect of service delivery has not been fulfilled.

Business to business issues

I have commented above on aspects that relate mostlyto cases arising from retail advice and transactions.However, some of the cases in which I have providedexpert reports involved issues where the claimant wasunable to seek any remedy other than by litigation.Where the claimant is a smaller or medium sized enterprise or a large firm, they cannot seek to resolve acomplaint or dispute by reference to FOS. Similarly,certain types of financial service or transaction falloutside of the remit of FOS.

I have been involved in one case where one financialservices firm acquired another financial services firm,based upon warranties and undertakings that therewere no identified regulatory or compliance problems identified by the firm being acquired at the timeof sale. Subsequently, quite some time after the salehad completed, regulatory and compliance problemswere identified relating to advice and transactionsprovided to clients of the firm that had been acquired.

I was instructed as a single joint expert to review theclient files concerned and determine the extent of anynon-compliance or regulatory breach. I was then instructed to assess whether the breach was capable ofbeing rectified and if so estimate the time and cost required to remedy any breach and avoid or limit lossto the client. This was a commercial dispute betweentwo financial services firms relating to the value paidby one firm to buy another. However, expertise wasrequired to assess compliance with regulations andrules relating to financial advice and transactions.

Other cases in recent years have arisen from businessbanking activity and capital markets. These cases i nvolved complex financial products (swaps, options,futures and similar derivatives products) being soldby banks to corporate customers for whom they werenot appropriate. In these cases too an understandingof the products concerned and of the regulations andrules applicable was required in order to provide andexpert opinion on the appropriateness of such transactions to instructing legal advisers.

Competence, negligence and rogue behaviour

The root cause of many financial services disputes isactually human behaviour. I do not have the time orspace in this article to explore this in any depth. However, there are some high level observations I wouldlike to make.

It is often said that in financial services things gowrong because of one or more of three reasons:

1.Incompetence;

2.Rogue behaviour;

3.Negligence.

Competence can be defined as having the relevantknowledge, skills, experience and application required to carry out a role or job to the required standard. By implication incompetence is the failure toattain one or more of the four requirements or characteristics of competence. This may arise because aperson was recruited into a role for which they werenot sufficiently qualified and/or experienced, becausethey had insufficient skills, were over-promoted orwere insufficiently trained.

Rogue behaviour in the delivery of a financial servicemay be characterised as acting in a way that iscontrary to the behaviour that is prescribed or that isexpected in the circumstances.Rogue behaviour mayarise out of intent, incompetence or lack of care.Rogue behaviour may be as a result of criminalintent.

Negligence can arise because of a lack of appropriatecare and attention, leading to error or omission. Thiswill often be due to failure to follow correct process,procedure or standards in carrying out a tasks. Negligence can be caused by incompetence but it can alsobe caused by rogue behaviour.

Corporate behaviour is sometimes blamed whenthings go wrong in the financial services sector. However, regulators and other commentators have consistently made the point that corporate behaviourarises from the morals, ethics, principles, policies,processes, procedures, controls and culture set by thesenior management and middle management withinthe firm. If the tone from the top is poor, it is no surprise that poor products and service may arise resulting in complaints and disputes with customers.

The future

Given my comments above, it will come as no surprisethat I do not expect there to be any significant declinein the demand for expert reports relating to financialservices litigation. Even when PPI claims end inAugust 2019 the expected drop in complaints (41%) will still leave an expected 2.2 million financialservices complaints each year, of which a significantminority are likely to result in litigation.

However, with the intended extension of the SeniorManagement and Certification Regime (SMCR) byFCA to the whole of the financial services sector in2019, it is likely that if senior managers are found tohave been negligent or non-compliant by regulators,then customers (especially those unable to seek recourse to FOS) may be encouraged to take their caseto litigation. After all, if the firm’s senior managementhave been found to have been non-compliant, it islikely to support any complaint against the firm.

Paul Grainger

BA (Hons), FCISI, FIFP, CFP, APFS

Chief Executive Officer

Paul is the Chief Executive Officer of ComplyportLtd, a major regulatory and compliance consultancyfirm advising in the financial services sector. He joinedComplyport Ltd in April 2014.

He has:

• 35 years’ experience of dealing with financialplanning, investment, pensions, social security andlong term care issues;

• 35 years’ experience as a financial services practitioner;

• 32 years’ experience of financial regulation andcompliance;

• 30 years’ experience as a regulatory and compliance consultant;

• 26 years’ experience span as a compliance officer& money laundering reporting officer;

• 30 years’ experience as a director/partner and ofsenior management and risk control in financial services.

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