FREE CHAPTER from ‘A Practical Guide to Financial Services Claims’ by Chris Hegarty


Before 2001

Financial services regulation had an epoch defining moment in 2000 when the Financial Services and Markets Act 2000 (“FSMA”) was passed. This swept away the previous regime of self-regulation of the industry by the various Self Regulatory Organisations (“SROs”), replacing it with regulation by the Financial Services Authority.

I do not propose to dwell on the previous regime because as at 2017 almost all of those cases arising under the SRO regime have passed and such a discussion is of purely historic interest; save only where the application of section 32 Limitation Act 1980 enables such a claim to be brought.

The dawn of a new day

On 1 December 2001 the Financial Services and Markets Act 2000 and its legion of supporting instruments came into force.

A new, singular Handbook was designated as the rulebook for all financial services businesses and was broken down into various parts and sections all of which clearly specified to whom and in what circumstances they applied.

This was, in the UK, the first major example of outcomes focused regulation where the regulatory objectives would be set, a specific business however could comply in any fashion it wished, although the business itself bore the risk of failures in effective compliance. To this end a set of overarching Principles were set down at the start of the Handbook.

Atop the ordinary contractual and tortious causes of action a specific statutory cause of action was created for breach of the rules set out in the Handbook (where permitted) in section 150 of FSMA, specifically intended to grant to individuals1 the ability to sue for breaches of the Handbook and therefore provide a simpler and more direct remedy than an action in negligence.

The most important rulebooks when considering claims by a customer against a financial services business are the various Conduct of Business rulebooks. These set out the rules applicable to a business when undertaking business either generally (COB) or in relation to insurance (ICOB) or mortgages (MCOB). These rules were developed as a successor to the rules of the various SROs with the advantage of additional oversight and the opportunity to correct any perceived shortcomings or failings and so were intended to provide a clear set of standards to which financial services providers could expect to be held.

COB introduced concepts, particularly suitability, which form the cornerstone for the majority of financial services claims. This idea of suitability, and a framework for the issues to be factored into the assessment of suitability, was a major shift in the delivery of financial services and opened up a much more structured approach to the delivery of effective financial advice, sale of financial products and the proper consideration of whether such advice and sale was performed effectively and in a fashion which ensured that the consumer was properly protected, informed and advised.

Europe strikes back

Whilst the developments in the UK with FSMA continued, the Europe-wide regulation and oversight of cross-border financial services did not stand still. In numerous areas EU regulations imposed requirements and standards to establish a solid basis for a common market in financial services.

From a consumer perspective the single most significant instrument to emanate from Europe was the Markets in Financial Instruments Directive2 (“MiFID”). As a Directive this necessitated new rules replacing certain significant parts of the FSA Handbook – particularly those relating to conduct of business. Therefore, with effect from 1 November 2007, the Conduct of Business Sourcebook (“COBS”) replaced COB.

Fortunately for practical purposes the changes involved are not enormous, MiFID and therefore COBS, set out rules for the conduct of business which were significantly influenced by COB. The concept of suitability was therefore retained albeit rephrased and the additional concept of appropriateness introduced.

Appropriateness, in this specific context, is set out in COBS 10 to increase the standard of care applying to less mainstream products where suitability does not otherwise apply.

Return of The Bank of England

Following the financial crises of the late 2000s a major reorganisation of financial services was undertaken, resulting in the Financial Services Act 2012 (the “2012 Act”). The single greatest change was the separation of responsibility of regulation of large financial institutions from the FSA – which was renamed the Financial Conduct Authority (“FCA”) in the process – to the Bank of England (although under its title of the Prudential Regulation Authority, “PRA”, for these purposes).

One slight but noteworthy change at this time for the purposes of claims against financial professionals was the relocation of the Section 150 FSMA cause of action to section 138D FSMA.

And next?

On the horizon we have MiFID II3, which is expected to bring into scope newer and more novel investments and provide enhanced protections. With commencement dates over the coming years, it remains to be seen how litigation involving financial products will evolve in response to the actions of financial services firms in providing their services.




1See the Rights of Action Regulations

2Directive 2004/39/EC

3Directive 2014/65/EU