By James Davey, Professor of Insurance & Commercial Law, University of Bristol Law School
Assume that we can agree what the greater good entails. And that we can design an optimal set of rules or principles that meets this objective. Who should enforce these rules, and how? This is an issue that caught the attention of leading scholars in the second half of the twentieth century. Papers by Becker, Stigler and Posner are emblematic of an initial burst of activity in the 1960s. This has since developed into a distinct branch of regulatory theory. Over time, this broadened beyond the architecture of public law and has become an embedded element within private law. This co-option of private law, and in particular the law of contract, as a form of governance has been decried by some but is now well established as a regulatory technique (Collins, 1999).
In recent years, this has become a core concern for those interested in the relationship between European Union law and (national) private law, with the emergence of ‘European Supervision private law’. This maps the use of private law to enforce public law norms, whether by way of damages for breach or restraints on market action as in Parker v NFU Mutual. The financial services sector is often cited as a key application of this technique (Micklitz, 2014). The wider use of private law mechanisms to regulate the operation of markets at a macro level, rather than individual relationships, is a related area of academic interest, but outside the scope of this note.
The orthodox view (as in O Cherednychenko, 2015) is that optimal systems of enforcement normally involve some overlapping private and public law processes. Moreover, that enforcement requires a combination of judicial determination of the legitimacy of market conduct, alternative dispute resolution and administrative action. The regulatory model assumes bargaining within the shadow of these systems, and not simply the formal resolution of disputes by these processes. In the UK financial services sector, these roles are filled by the courts, the Financial Ombudsman Service and the key regulator: the Financial Conduct Authority.
We might expect these bodies to undertake relatively traditional roles in enforcing the public good. However, evidence from financial services law and the growth of ‘supervisory private law’ shows a notable role fluidity in this regard. Private law institutions and mechanisms do more than compensate, public law does more than regulate. Sometimes these hybrid systems are complementary, and sometimes provide competing routes to regulation in pursuit of the greater good.
Beyond Traditional Enforcement Roles
If we look at the roles undertaken by the courts, regulator and alternative dispute forum in the financial services space, there is clear evidence of hybridity of task, model and remedy. Some of this emerges from its origins as a harmonised area whilst the UK was a member of the EU, but that ignores the effects of UK practice on the design of EU financial services law. The creation of the single market in insurance, for example, was as much achieved according to a UK vision of governance as done to the UK model. Hybridity is a feature of UK financial services law, and not merely an acquired characteristic following harmonisation.
One element of the greater good in consumer and SME markets is likely to concern redress at scale. This may reflect relatively minor losses at a population level but may also relate to substantial losses across sectors. The traditional role of litigation assumes single claimants and multiplicity of actions. These might be merged by way of a class action (Micklitz, 2015). But the financial services sector has seen the use of an innovative procedure: the ‘Test Case’ procedure in FCA v Arch Insurance. This allowed the regulator to act as a ‘synthetic claimant’ in respect of tens of thousands of insurance claims generated by the COVID-19 outbreak. The regulator agreed (with a representative group of insurers) a set of hypothetical scenarios designed to test the limits of commonly used business interruption insurance policies. The process assumed that each side bore their own legal costs and acted within the normal boundaries of an adversarial claim. The litigation moved with alacrity: from first claims management conference to Supreme Court judgment in around nine months. Similar jurisdictions have achieved much less progress in the same time frame- Schwarcz, 2021 describes the fragmented and costly process in the United States. This has elements of the class action- determination of a key legal issue at scale- but without the need for a financial incentive for investors to speculate on the outcome of the litigation, with the associated costs to the claimants. The FCA recovered (via an additional levy on the market) around £7million in legal costs. This provided the numerous claimants with an authoritative legal basis on which to settle claims on common wordings in the shadow of a Supreme Court judgment. Standard form litigation has since followed on contentious areas of assessing recoveries, such as per event limitation clauses.
As noted above, the regulator may have a role as a synthetic claimant, representing a sector of protected market actors. But the FCA has also undertaken a compensatory role, using powers to order redress following market failures rather than utilising judicial powers to do so. It also has powers to undertake administrative action to punish or prevent conduct deemed undesirable. Some of this uses overtly public law mechanisms, but not all. The unfair terms legislation has (since 1994) enabled action by bodies such as the FCA to act as litigants before the courts, and to reach legally binding agreements with individual service providers and on a sectoral level. Much of this administrative action is done in the shadow of the private law rules on unfair terms, but the administrative determination of outcome is regulatory in shape and not judicial. It is part of a regulatory conversation, with agreed changes to behaviour. It also appears to be much less concerned with the precise regulatory ambit of the powers than a court would be. A simple point of contrast here would be the technical consideration of the regulation of price related terms in the Abbey National litigation (where the Office for Fair Trading exercised similar powers as litigant before the Supreme Court on the legitimacy of overdraft charges) and the much less technical enforcement of those same rules by the FCA as administrative agency in its ‘unfair contract terms’ library.
The Ombusdman has also had effects far beyond its role as a low-cost resolver of disputes. Its practices on the proportional response to pre-contractual non-disclosure and misrepresentation were codified in the recent statutory reforms of consumer and commercial insurance law. Earlier iterations of the Ombudsman had set high expectations on the control on unfair terms in insurance, whatever the formal legal position. This contribution to the development of legal norms would normally be a judicial role, but consumer and SME financial services claims might often be resolved through the informal processes of FOS rather than via the courts, and the gradual expansion of its jurisdiction will only exacerbate this. As in other areas (discussed in respect of international sales markets in Bridge, 2021), the use of ADR to resolve disputes may starve the common law (and the courts more generally) of the oxygen of testing cases that it needs to shape the law.
The Public Good and the Role of the Public: Administrative Action and Breach of Statutory Duty in the ‘Consumer Duty’ Era
The Financial Conduct Authority has long viewed its regulatory function as informed by economics, and by behavioural economics in particular. The new ‘Consumer Duty’ reflects a vision of conduct regulation designed to prevent the misuse of behaviourally informed practices by financial services providers. A classic example of this was the use of ‘price walking’ whereby the price of financial services products was increased on renewal, independently of any change to the cost of providing the product. This reflected an assumed behavioural vulnerability: reduced price sensitivity for customers renewing contracts compared to those changing providers. In some cases, vulnerable customers were being charged rates far beyond any expected market rates. The trigger for this review came not from within the FCA itself but following a ‘super-complaint’ from a cluster of NGOs, including Citizens Advice. Generally speaking, FCA rules at that time did not regulate price, that being assumed to be determined by competitive markets (Davey, 2022).
The initial FCA proposal was for a ‘duty of care’ towards consumers, which has obvious legal overtones. If given effect on this basis, it would have been one of the greatest expansions of (quasi-) tortious liability in recent years. Conversely, a pure ‘duty of care’ model risked reinforcing rather than challenging widespread market practices, as discussed in Baker v Quantum Clothing.
The overarching ‘consumer duty’ was therefore created as a regulatory standard (an FCA ‘Principle’) rather than a rule enforceable by private action. Selected individual rules giving shape to the general principle are enforceable, by way of an action for breach of statutory duty, by private persons.
The detailed rules giving effect to the ‘Consumer Duty’ have come into force. Some go far beyond mitigating traditional market failure. This reflects explicit requirements on regulated market actors to consider cognitive biases of customers. For example, home and motor insurance retail markets are now subject to price controls, requiring new and existing customers to be priced on an equivalent basis. This is a classic example of regulating for a past issue, rather than a future problem. The future proofing is meant to arise through the high-level principle of the consumer duty. This has echoes of the 2000s, whereby the requirement of ‘treating customers fairly’ was meant to change the underlying culture. It failed to do so (Georgosouli, 2014). Whilst the regulatory principle existed, the precise duties (which were enforceable by private parties) lacked bite.
Regulating controls for behavioural harms will require a more nuanced approach. Consumers are likely to be unaware that they are being harmed, at least in the short term. The initiators of regulatory action will need to be able to evidence systemic positions. This may well be the regulator and/or the NGOs of the original ‘super complaint’. Compensation models are likely then to either ‘piggyback’ regulatory intervention or be orchestrated by regulators.
There is a wider lesson to be taken from this example, that the mechanisms for identifying and quantifying harms need to be as carefully designed as the substantive rules themselves. Enforcing in the public good in the ‘consumer duty’ era will require expertise and resource in the third sector, and in the regulatory space. In an era in which there is a tendency towards more law, rather than better law, this is an issue which should not be overlooked.
Reference List
- M Bridge, ‘The CISG and Commodity Sales: A Relationship to be Revisited?’ [2021] Sing J L S 271, 284.
- O Cherednychenko, ‘Editorial: Public and Private Enforcement of European Private Law: Perspectives and Challenges’ (2015) 4 European Review of Private Law 481, 487.
- H Collins, Regulating Contracts (OUP, 1999), Ch 11.
- J Davey, ‘Insurance and Price Regulation in the Digital Era’ in TT Arvind & J Steele (eds) Contract Law and the Legislature: Autonomy, Expectations, and the Making of Legal Doctrine (Hart, 2022).
- A Georgosouli, ‘Payment Protection Insurance (PPI) Misselling: Some Lessons from the UK’ (2014-2015) 21 Connecticut Insurance Law Journal 261.
- H Micklitz, ‘The Public and the Private – European Regulatory Private Law and Financial Services’ (2014) 10 European Review of Contract Law 473.
- H Micklitz ‘The Transformation of Enforcement in European Private Law: Preliminary Considerations’ (2015) 4 European Review of Private Law 491, 509.
- D Schwarcz, ‘Redesigning Widespread Insurance Coverage Disputes: A Case Study of the British and American Approaches to Pandemic Business Interruption Coverage’ (2021-22) 71 De Paul L Rev 427.