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FINANCIAL SERVICES AND MARKETS ACT 2000:

DECEMBER 2000

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OVERVIEW OF RIGHTS OF ACTION

Background

1.1     The FSMA gives the Government the power to make regulations  prescribing the cases in which persons (private as well as non private) may bring an action for loss suffered as a result of a breach of FSA requirements, rules and certain provisions under FSMA.  The regulations prescribe:

(a)          the cases in which breach of a permission under Part IV or resulting from any other provision of FSMA is actionable by any person (section 20(3));

(b)          the definition of a “private person” who may bring an action for breach of a duty to take reasonable care in relation to the activities of a person who is subject to a prohibition order or the performance of a controlled function (section 71(3)) and the cases in which such a breach is actionable by a person who is not a private person (section 71(2));

(c)          the definition of a “private person”  who may bring an action for breach of a rule (other than a rule relating to financial resources) (section 150(5)) and the cases in which such a breach is actionable by a person who is not a private person (section 150(3)); and

(d)          the cases in which breach of a requirement imposed by the FSA exercising its power of intervention in respect of an incoming EEA firm or Treaty firm is actionable by any person (section 202(2)).

1.2     The Act makes a distinction between breach of FSA requirements and rules or certain provisions under FSMA: breach of a FSA requirement under section 20(3) or section 202(2) is (subject to regulation by the Government) potentially actionable by any person whereas breach of section 71(2) or a FSA rule under section 150(3) is actionable only by a private person save in specified circumstances.

Existing position

1.3     The Financial Services Act 1986 (the FS Act) contains a similar regime for rights of action as that in FSMA.  The FS Act provides that any person may bring an action for loss suffered as a result of a breach of rules (other than financial resources rules (section 62)).  A person may only bring an action if he is a private investor save in specified circumstances (section 62A).

1.4     The Financial Services Act 1986 (Restriction of Right of Action) Regulations 1991 (the Existing Regulations) define a private investor as an investor whose cause of action arises as a result of anything he has done or suffered in the case of:                       

(a)          an individual, otherwise than in the course of carrying on investment business; and

(b)          any other person, otherwise than in the course of carrying on any other business.Government, local authorities and international organisations are excluded from the definition of private investor. 

1.5     The Existing Regulations also specify the circumstances in which an action may be brought by a person other than a private investor i.e. where:

(a)          there is not a breach of the rules specified in section 62(1) or (2) of the FS Act;

(b)          there is breach of a rule prohibiting the exclusion or restriction of any duty or liability;

(c)          there is breach of a rule prohibiting insider dealing;

(d)          the action is brought by a person in a fiduciary or representative capacity and(i) the person to whom the representative owes a duty or for whom he is acting is a private investor; and (ii)    any recovery will be exclusively for the benefit of that person and the action could not otherwise be brought.

1.6     There is a different definition of private investor and a different specification of the circumstances in which breach of a rule is actionable by a person other than a private investor in the Financial Services Act 1986 (Restriction of Right of Action) (Friendly Society) Regulations 1991 (theFriendly Society Regulations) which are made under paragraph 22A of Schedule 11 to the FS Act.

1.7     The Friendly Society Regulations define a private investor as an individual who is neither an authorised nor an exempted person.  They also prescribe the circumstances in which other persons have a right of action i.e. where:

(a)          an individual who is an authorised or exempt person suffers loss otherwise than in the course of investment business;

(b)          there is a breach of any prohibition or requirement imposed under Chapter VI of Part I of the FS Act (restriction on business and dealing with assets);

(c)          there is a breach of a requirement to furnish information; or

(d)          there is a breach of a rule prohibiting the exclusion or restriction of any duty or liability. 

1.8     The FS Act makes no distinction between rules and requirements, but does distinguish between those cases where breach of a rule is actionable by a private investor and those where it is actionable by any other person.

1.9     There is no analogous regime in the Insurance Companies Act 1982 (the ICA) or the Banking Act 1987 (the BA) giving a person a right of action for breach of requirements or rules.  Proposals      

1.10    The regime set out in the FS Act is similar to the regime proposed under FSMA.  But the FS Act model cannot be simply carried across as the cases where breach of a rule is actionable under the FS Act do not correspond with those where breach of a requirement, rule or provision under FSMA is actionable under FSMA.  The Government proposes to follow the existing FS Act regime subject to the changes outlined below.

1.11    The Government proposes to extend rights of action to persons who suffer loss as a result of the breach of FSA rules by an authorised person.   There will therefore be a right of action against a bank or insurer for breach of any rule (other than a listing rule or a financial resources rule) applicable to them as it makes little sense to have different rights of action depending on the business undertaken.  This will represent a change for banks and insurers.

1.12    The Government proposes to preserve the distinction between those cases where breach of a rule is actionable by a private person and those cases where it is actionable by any other person: to make breach of a rule actionable by any person would considerably extend the rights of non-private persons beyond what they are at present. 

1.13    As breach of a FSA requirement will give rise to rights of action on the part of a non private person in circumstances where a right of action is not available under the Existing Regulations, the Government has considered whether the ability of a non private person to bring an action for breach of a requirement should be subject to certain conditions e.g. the non private person (i) having no other remedy, (ii) having no prior knowledge of the breach and (iii) acting in good faith.  This qualification could apply to breach of a requirement as well as breach of a rule.  The Government invites comment on whether the rights of non private persons to bring an action for breach of a FSA requirement or rule should be limited in this way.

1.14    The Government proposes to define private person and to specify the circumstances in which breach of a rule is actionable by any other person along the lines set out in the Existing Regulations.  The definition of private investor and the specification of the circumstances specified in the Friendly Society Regulations are not appropriate for all firms.  Nor does it seem appropriate to create a special carve-out for friendly societies along the lines set out in the Friendly Society Regulations.

1.15          Although the existing definition of private investor in the Existing Regulations is not aligned with the current definition of private customer in the SRO rule books, the Government has considered whether there may be some merit in seeking to align the definitions under the new regime.  Since the definition of private person needs to be wider than the definition of private customer so that third parties who are not customers have a right of action for breach of rules, the Government believes the definition of a private person need not (and probably should not) mirror that of a private customer.

1.16    The Government wishes to ensure that the different consequences arising from breach of a requirement, rule or other provision under FSMA do not produce perverse results.  For example, it would be perverse to have a situation where, say, a right of action applied under section 20(3) of FSMA where there was a breach of a financial resources requirement imposed under section 43 of FSMA but there was no right of action by any person (private or non private) as a result of breach of a financial resources rule by virtue of section 150(4).  Since breach of a financial resources requirement is not actionable under the FS Act, the Government proposes that breach of a financial resources/capital ratio/ premium income limit requirement should not be actionable by any person (private on non private) under FSMA.

1.17    Client money is also problematic.  Breach of the client money rules will give rise to a right of action by a private person under section 150(1) of FSMA but not by a non private person except to the extent specified in regulations.  But breach of a client money requirement imposed as part of a permission will be actionable by any person under section 20(3).  To avoid this potentially perverse result, the Government believes that non private persons should be able to bring an action for breach of a client money rule under section 150(3) of FSMA. 

1.18    The Government also proposes to provide that auditors and actuaries appointed by the FSA under section 340(4)(c) of FSMA should have a right to bring an action for breach of FSA rules against a firm to recover their fees.  In many cases auditors and actuaries will probably only accept an appointment if they have a direct right of action against the FSA.  But since the FSA has no means of recovering its costs from a firm through penalties, comment is invited on whether auditors and actuaries are likely to bring an action against a firm for recovery of their fees if they are given this right in the Proposed Regulations. 

Proposed Regulations     

1.19    The Proposed Regulations prescribe the cases in which breach of a FSA requirement under section 20(3) and 202(2) is actionable by any person and the cases in which breach of a FSA rule or certain provisions under FSMA is actionable by a person who is not a private person.  

1.20    In respect of the cases to be prescribed under section 20(3) of FSMA for breach of permission, the Government proposes that a right of action is available to any person who suffers loss as a result of breach of a requirement (except a financial resources requirement).  Breach of a financial resources requirement will not be actionable by any person for the reasons given in paragraph 1.16.

1.21    In respect of the cases to be prescribed under section 71(2) and (3) of FSMA for breach of a prohibition order or performance of a controlled functions, the Government proposes that:

(a)          private person is defined along the lines of private investor in the Existing Regulations; and

(b)    a right of action is available to any other persons acting in a fiduciary or representative capacity who bring an action on behalf of a private person.None of the other circumstances specified in the Existing Regulations or the Friendly Society Regulations are relevant to a breach of this kind.

1.22    In respect of the cases to be prescribed under section 150(3) and (5) of FSMA for breach of any other rule (other than a listing rule or financial resources rule), the Government proposes that:

(a)          private person is defined along the lines of private investor in the Existing Regulations; and

(b)          a right of action is available to any other person:

(i) whose circumstances fall within the circumstances specified in the Existing Regulations (referred to in paragraph 1.5 above); or

(ii) where there is a breach of a client money rule (for the reason given in 1.17 above); or

(iii) where the person is an auditor or actuary appointed by the FSA under section 340(4)(c) of FSMA (for the reason given in 1.18 above).

1.23    In respect of the cases to be prescribed under section 202(2) for breach of a requirement imposed by the FSA exercising its power of intervention in respect of an incoming EEA firm or Treaty firm, the Government proposes that a right of action is available to any person who suffers loss as a result of a requirement (except a financial resources requirement).  While the FSA is unlikely to impose a financial resources requirement on a Schedule 3 EEA firm where financial resources will be a prudential matter for the home state regulator, the FSA may impose a financial resources requirement on a Schedule 4 Treaty firm.

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