Section 14 of the Financial Services Act amends section 404 of the Financial Services and Markets Act (FSMA), under which any consumer redress scheme had to be authorised by the Treasury on application from the FSA. Under the new law, the FSA can act on its own authority.
The power arises when the regulator decides there may have been a "widespread or regular failure" by relevant financial services firms to comply with its rules and consumers may have suffered detriment as a result.
Although the Financial Services Act was passed in April, the provision on consumer redress schemes could not come into force until a commencement order was made by the Treasury. That order was made this week, bringing section 14 into effect on 12th October.
Sally Dewar, the FSA’s managing director of risk, described the new law as an important tool for the FSA.
"The power would obviously be used proportionately," she said. "It is not a substitute for working with industry where there is the potential to bring an issue to a fair and speedy conclusion."
"The FSA will, however, seek to use this power where necessary to ensure consumers are fairly treated," said Dewar.
Because the section creates a rule-making power, the FSA will have to undertake a cost-benefit analysis and carry out a formal consultation exercise each time it wants to establish a consumer redress scheme.
The rules it then draws up will specify what constitutes a failure to comply with the rules, the steps firms should take to investigate whether there has been a failure and what kinds of redress should be made.
A guidance note published in July this year sets out in more detail how the regulator will use its powers and the scope and operation of any consumer redress scheme it might order.
As an additional safeguard against the power being used improperly, the FSA's rules can be challenged by application to the Upper Tribunal, the successor to the Financial Services and Markets Tribunal.
The commencement order also brought into force a number of other parts of the Financial Services Act, including a section that gives the FSA power to publish its decision notices as well as final notices.
At present, there can be a considerable delay before a final notice if the person pursues an appeal to the Tribunal. The new rule allows FSA enforcement actions to be given greater publicity at an earlier stage.