Diversity and Inclusion - best laid plans
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Out-Law Guide | 25 Apr 2016 | 11:46 am | 6 min. read
Schemes can be set up for lots of different purposes: as a regulator-led initiative or entirely voluntarily on the part of the business in order to rectify reputational damage, discourage extended and expensive group litigation or to minimise regulatory sanctions or the risk of prosecution. At their core, however, their ambition is to do the right thing.
In the UK, there is an increasing trend towards alternative means of collective redress (i.e. alternatives to group litigation). Reasons for this vary, and include the increasingly prohibitive costs of an individual bringing litigation as well as an increase in much-publicised mass torts, from financial mis-selling scandals to breaches of privacy laws on a large scale. At the same time, there is a renewed emphasis upon access to justice and holding financial and other institutions to high standards. Recent examples of groups that have benefitted from collective redress schemes include:
With the entry into force of the 2015 Consumer Rights Act, which allows businesses to develop redress schemes on a voluntary basis for some competition law infringements, and increased powers by other relevant regulators, voluntary redress schemes look set to come into their own.
Types of collective redress schemes
Most of the UK’s collective redress schemes to date fall into one of the following categories:
Although the lines are often blurred, ad hoc/voluntary schemes, statutory-supported and regulator-supervised schemes are the most important as decisions relating to implementation remain largely, although not wholly, with the business.
Ad hoc/voluntary schemes
Firms that choose to set up a voluntary redress scheme retain control over when to set up the scheme, who should be eligible and how much compensation should be available – although PR issues may influence such decisions. However, as there will be no ‘fixed pool’ of damages as in the case of US class actions, damages will not be offered as a percentage of the pool.
Although affected individuals may choose not to join a voluntary scheme leaving firms open to the risk of future group litigation, drafting can seek to give offers made under the scheme or merely the existence of the scheme itself cost protective effect.
Whilst not entirely ad hoc, the recent statutory recognition of voluntary redress schemes in relation to competition claims marks the beginning of a possible trend towards a hybrid model where voluntary solutions have some regulatory supervision.
Schemes of arrangement are the best and most effective example of statutory apparatus assisting businesses towards collective redress. Governed by section 895 of the 2006 Companies Act, schemes of arrangement can be entered into between a company and its creditors. They must be approved by a majority in number and 75% of the value of scheme creditors voting, and requires sign-off by the High Court of England and Wales.
Scheme compensation will usually be based on a calculation method rather than a specific amount, which will be signed off by the court. The scheme will apply to the whole class of affected individuals or creditors, regardless of whether individual complaints are made, and settlements may not be re-opened without leave from the High Court, subject to any adjudication provisions provided for by the scheme.
As has been recently seen, a benefit of using schemes of arrangement to resolve mass claim scenarios is that if a claim is not brought within a specific period it is prevented from being brought. Moreover, in the UK context there is no need for the instituting company to be insolvent.
Regulatory supervised schemes
The UK financial regulator the Financial Conduct Authority (FCA) has perhaps the most-established powers to force businesses to make collective redress. Its rule-making powers under FSMA section 404 to require authorised firms to establish and operate consumer redress schemes are well known. The FCA will decide the scope of the scheme – for example, ‘retail customers’ – and timing. Whilst firms will in theory have a free hand to decide the amount of compensation available, the FCA is able to take disciplinary action about how participating firms operate the scheme.
Affected individuals are not obliged to accept redress under the scheme, but it establishes a simple process for those who do. Those unhappy with the settlement offered may appeal to the Financial Ombudsman Service (FOS) once they have exhausted the firm’s internal appeals process.
The power remains extremely rarely used, albeit the threat of section 404 powers remains a powerful incentive for voluntary schemes undertaken with the FCA's agreement. Recent changes relating to enhanced supervision by the FCA led to the implementation of section 55L of FSMA, giving the FCA the power to impose a requirement on a firm to undertake or cease a particular action where it is desirable to take this action to meet the FCA’s operational objectives. It is likely that this statutory change will lead to more voluntary redress schemes, rather than businesses waiting for formal imposition by the FCA.
Advantages and disadvantages
Collective redress schemes offer a number of advantages to companies concerned about mass claim scenarios:
There are fewer disadvantages:
Designing the scheme – preliminary issues
Regardless of the implementation method chosen, all collective redress schemes will require similar considerations at the design stage.
Who should be included in the scheme? How should the business differentiate between legitimate and illegitimate claims?
Both level and method of compensation are important: how much compensation should be paid and how should it be calculated?
Contractual or ex poste arbitration clauses are more typical in voluntary redress schemes, but some recent examples have adopted a non-binding expert determination model. Which process should the business use?
What information should be disclosed, to whom and when? Does disclosure create a risk of wider, nuisance applications for disclosure? How can the risks of disclosure be mitigated without affecting the payment of fair compensation?
Does the scheme amount to an admission of legal liability? If an arbitrator or expert is used, will that person apply the same or different burdens of proof?
How will the scheme be promoted – and to what extent will attempts be made to contact eligible participants? To what extent are negotiations with stakeholders necessary (for example, is there a statutory requirement as with Schemes of Arrangement)?
If multiple organisations have contributed to the scheme, how will their relative contributions be calculated and will scheme members want to preserve any rights to seek contributions from non-participants?
Should a scheme administrator be appointed? If one is required, who should this be? If no scheme administrator is chosen, how will the scheme be administered?
As a mitigation exercise, which is an alternative to court litigation, how can fair procedures be ensured at the same time as controlling costs? How can offers made under the scheme have relevance if proceedings are later issued for the same scheme claim?
Diversity and Inclusion - best laid plans
Fintech meet up