1. Absent an appeal to the Supreme Court, the industry-wide concerns which arose from the first-instance judgment concerning non-solicitors acting in litigation and signing court documents have been resolved. Unauthorised persons such as paralegals are permitted to undertake a broad range of work in litigation under appropriate supervision by a solicitor (or other authorised person).

2. The wave of costs challenges and County Court decisions on entitlement to conduct litigation which arose following the first instance decision is likely to recede.

3. The conduct of litigation must be supervised by a solicitor (or other authorised person). The degree of supervision required is context specific. The Court of Appeal left the detail to the regulators, but specifically endorsed the practice, in appropriate matters such as simple debt recovery, whereby an authorised person conducts regular meetings with unauthorised fee-earners and samples their work.

The Law Society issued an updated practice note on compliance with the newly-clarified requirements on Monday. The LSB and SRA each released statements of intent to ensure that practitioners receive updated guidance following the Court of Appeal's decision.

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Ahead of the proposed transfer of AML supervision to the FCA, OPBAS has warned that some legal and accountancy regulators "may still be taking an overly member-centric approach" and failing to undertake “sufficiently dissuasive disciplinary measures” over non-compliance with anti-money laundering rules. The oversight body reported that "We still see some [regulators] are overly relying on ‘assisted compliance’ to correct failures through a disproportionate focus on working with firms." Those statements might provide a taste of how the FCA will approach professional services AML regulation in its new role.

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The Office for Legal Complaints has published the Legal Ombudsman's 2026–27 business plan and budget, predicting a whopping 17,675 complaints over the next year – almost double the level it received only two years ago, and exceeding the LeO's "worst-case projections". "That is a staggering increase – so significant that it outstrips the jump in LeO’s own operational output. It is beyond what LeO’s current operating model can deal with." (The LeO was already feeling the pinch, following the LSB's slashing of a budget increase requested in November, warning that new complaints might take over a year to resolve).

The LeO pins the blame for the increased demand primarily on "service issues and ongoing failures in tier 1 complaints handling", and it seems likely firms will come under increasing pressure to resolve complaints internally. The Ombudsman is in this regard seeking input on a Model Complaints Resolution Procedure which it hopes will help "improve the consistency and quality of complaint handling across the legal sector."

The LeO has however acknowledged the role played by generative AI in driving the increase, and is preparing to fight fire with fire, proposing to develop an "AI writing engine" to assist in writing final decisions. We wonder if this could develop into an early trial of AI powered judicial decision-making.

The LeO is also considering "adopting a tiered, ‘polluter pays’ case fee structure" to reduce demand. A stakeholder consultation is promised for summer 2026. One way or another, consumer-facing firms in particular are likely to find themselves absorbing the cost and time demand of an AI-enabled increase in complaints volume and complexity for the foreseeable future.

The LeO has in the meantime published its latest round of "public interest decisions" – example decisions, naming the law firms in question, which will remain available on its site for 12 months.

The Bar Standards Board reported coming under similar pressure in its 2026-27 business plan, "as the volume and  complexity of reports about barristers have  increased. The use of AI is now a contributing factor in driving reports."

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Meanwhile the SDT published its latest Key Performance Measurements Report, disclosing a meaningful reduction in the number of new proceedings issued by the SRA over the last year. Referrals by private individuals, perhaps reflecting the same trends as those identified by the LeO, more than doubled to 40, although it appears that the overwhelming majority of these fell at the first hurdle.

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Elsewhere, the judgment in Kamal v Tax Policy Associates represented the first exercise of a statutory power under ECCTA 2023 to dismiss a claim which met the statutory definition of a strategic lawsuit against public participation (SLAPP).

The FCA was ordered to reapply for a search warrant, having made ‘significant errors in law’ as part of a fraud probe into a barrister, including applying under the wrong statutory provision and failing to properly tailor the application to the legal framework used.  However, the High Court said that the FCA had not acted in bad faith and did not order the return of devices seized.

The Legal Services Consumer Panel (LSCP) has questioned whether the Legal Services Board (LSB) is sufficiently resourced and structured to oversee regulation of the sector, and "that the current regulatory framework within which the LSB operates is fragmented, outdated, and structurally incapable of delivering its statutory objectives". The LSCP considers that structural reforms are required to ensure that the regulatory system can meet statutory objectives.

The ACCA has provided feedback on the SRA's consultation on client money in legal services. Whilst the ACCA welcomes the SRA's proposals to tackle non-compliance with requirements relating to accountant's reports, it suggests that responsibility for submitting law firms’ accountant’s reports should remain with the client money-holding law firm, and should not be switched to the accountants.

The SRA issued an update on its Post Office Horizon investigations, indicating that over 20 investigations were in progress, but no action was likely to be taken before publication of the Public Inquiry's final report into the scandal.

The Court of Appeal has reserved judgment in proceedings concerning whether conduct must be "serious, culpable and reprehensible" in order to amount to a breach of the Standards and Regulations. The first instance judgment is here. 

A new regulatory joint taskforce will tackle poor handling of motor finance claims by some claims management companies and law firms, after the FCA, SRA, ICO and Advertising Standards Authority agreed to join up their efforts.

The Bar Standards Board (BSB) has rejected a complaint made against a barrister by the Good Law Project (GLP) on behalf of a trans woman over multiple social media posts. The regulator said the barrister "has the right to manifest her gender critical beliefs”.

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Noteworthy recent SRA and SDT decisions include:

• A decision dismissing an appeal from an SRA decision to sanction non-compliance with the banking facility rule in SRA Accounts Rule 3.3, including an interesting discussion of the application of the SRA's guidance on financial penalties to licensed bodies (which, unlike 'traditional' law firms, face unlimited (in practical terms) fines for non-compliance), and the ongoing disparity between the approaches of the SRA and SDT to setting fines. Submissions were heard before the SRA's recent decision to sanction a City firm for a breach of Rule 3.3, in which the SRA departed from its own guidance (as discussed in a previous edition).

• A decision to suspend a solicitor following breaches of the SRA Overseas Rules relating (amongst other things) to complaints made to various security and intelligence organisations concerning his own client. The Respondent successfully resisted a costs order on the grounds of impecuniosity.

• A judgment on an Agreed Outcome, in which the respondent solicitor accepted a suspension, having admitted misconduct in connection with attempts to persuade a former client to withdraw complaints to the SRA and Legal Ombudsman.

• A number of allegations of dishonesty were admitted or found proven, leading to striking-off orders for the solicitors in question (and one suspension, on the basis that a one-off act of dishonesty in exceptional circumstances justified a lesser sanction).

• An Agreed Outcome imposing aggregate fines of £3,000 in relation to the improper retention of funds in client account. The Respondent also agreed to a £35,000 contribution to the SRA's costs.

• A former partner of a large international firm was suspended for two years, having admitted telling a client to destroy evidence within scope of a search order.

• The latest in a series of unsuccessful prosecutions related to the Daily Mail undercover investigations into immigration firms.

• Referrals to the SDT for two solicitors concerning apparently unrelated social media posts which are alleged to have invoked antisemitic tropes. The allegations are subject to a Hearing before the Solicitors Disciplinary Tribunal and are as yet unproven.

• The High Court dismissed an appeal from an order of the SDT suspending a solicitor for acting without integrity by issuing proceedings and applications found to be totally without merit and conducting litigation in a manner that drew judicial criticism.

Virgin Media was a landmark case that cast doubt upon the validity of historic alterations to pension scheme rules (some as far back as 1997). The Court held that a lack of written actuarial confirmation (as required by section 37 of the Pension Schemes Act 1993 for amendments impacting member benefits in contracted-out schemes) would render an amendment void, regardless of whether such actuarial confirmation would have been granted had it been sought at the time. Broadly, actuarial confirmation requires the scheme actuary to confirm that an alteration does not prevent the pension scheme from continuing to meet the "reference scheme test".

In February the Financial Reporting Council (FRC) published guidance for scheme actuaries responsible for giving retrospective confirmation in accordance with the Bill. The FRC made it clear that actuaries could take a proportionate approach and rely on "indirect evidence" that actuarial confirmation would have been given at the time, in recognition of the fact the Bill does not require the actuary to be certain (it needs to be "reasonable to conclude" that the alteration would not have prevented the scheme from continuing to satisfy the statutory standard). 

TPR's guidance

TPR confirms that the guidance is for trustees, scheme managers and responsible authorities (collectively referred to as governing bodies in the guidance) of occupational pension schemes that:

• were contracted-out on the salary-related basis at any point between 6 April 1997 and 5 April 2016, and
• have not been fully wound up or transferred to the Pension Protection Fund (PPF) or the Financial Assistance Scheme (FAS) at the date the Bill receives Royal Assent.

The second bullet point reflects the fact that the Bill confirms that alterations in wound up schemes will be treated as having met the requirements of the regulations from their original effective date and so are to be treated as valid. TPR makes it clear that schemes that have not been fully wound up will need to obtain actuarial confirmation (which indicates TPR does not condone leaving the issues unresolved where the scheme is in the process of winding up in order to benefit from the carve-out in the Bill).

TPR confirms that governing bodies should:

• Establish whether the scheme is affected by the judgments in the Virgin Media case and, if so, decide whether it will use the potential remediation available under the Bill.
• Understand the Virgin Media judgment and the remediation available under the Bill;
• Seek advice and information from the scheme's legal adviser and actuary;
• If using the remediation under the Bill, provide formal written instructions to the scheme actuary to undertake the work.

TPR confirms the scope of work should specify:

• the alterations requiring consideration; and
• "where multiple alterations occurred at the same time, eg in a single deed of amendment, whether your actuary can consider the overall effect of all these alterations together, or consider each alteration individually, or a combination of both approaches. A new trust deed and rules may have contained substantive amendments even if it is called a consolidating deed and these will need to be identified".

• Agree a practical and realistic timescale with the actuary, and discuss timings with the sponsoring employer;
• Ensure that document retention policies will not cause the destruction of relevant records until matters are resolved;
• At the outset, consult the actuary to determine whether they have sufficient information. Consistent with the FRC's guidance advocating a proportionate approach, TPR confirms "we do not expect you to carry out exhaustive searches before your actuary undertakes the remediation work". If further information is required, TPR encourages governing bodies to liaise with former administrators, actuaries, legal advisers, employers, and trustees. 

As a starting point it encourages governing bodies to "consider the circumstances impartially " and determine whether alterations required a s.37 confirmation (noting alterations before 6 April 1997 or after 5 April 2016 will be out of scope) and, thereafter, whether any of those alterations are missing a s.37 confirmation. If so, TPR propose that trustees weigh up the cost/benefit of devoting resource to searching for evidence instead of assuming there was no certification and moving directly to remediation.

TPR notes there will be situations where the actuary cannot provide the retrospective confirmation for all the affected alterations; in such circumstances governing bodies should consider the reasons and decide what to do next. TPR does not address what these circumstances may be, but if an actuary is unable to provide actuarial confirmation it is likely trustees will need input from the scheme's legal adviser as to how it should proceed, including consideration as to whether actuarial confirmation can be provided if further information is provided. TPR also notes that schemes will need to consider the extent to which validity issues impact the funding position of the scheme; this will be more relevant if it becomes apparent the scheme cannot obtain retrospective actuarial confirmation via the Bill.

TPR also provides practical tips by encouraging governing bodies to take the following measures when carrying out this exercise:

• Make decisions in line with decision-making procedures in the scheme's governing documentation;
• Maintain a clear audit trail for decisions, actions, and results;
• Store actuarial confirmations alongside the alterations, with whoever holds the scheme's formal documentation, and provide copies to the sponsoring employer who should be kept informed of decisions;
• Prepare "a reactive response on this issue to manage member queries in a clear and consistent way", and update it following completion of the remedial exercise.
• Assess quality of scheme data in light of the exercise, and improve it as necessary.

Trustees will be pleased to note that TPR confirms that it does not expect governing bodies to report remedial actions or failures to obtain s.37 confirmations in the past.  TPR notes that "any historic breach is very unlikely to be materially significant to us now in carrying out any of our functions".

Commentary

TPR has issued practical guidance that is similar to that issued by the FRC to actuaries, in that it makes it clear that trustees should take a proportionate and cost-effective approach to resolving s.37 issues. This is reflected in its recognition that trustees may decide to assume there is no actuarial confirmation and move directly to remediation instead of carrying out exhaustive searches for evidence. TPR notes that trustees can instruct actuaries before the Bill receives Royal Assent (which is expected to happen in April).

That said, TPR clearly expects schemes to address these issues rather than simply ignoring them and assuming compliance. Schemes in the process of winding up are expected to bottom out any Virgin Media issues, albeit in practice this may not make a practical difference if buy-out providers are unwilling to assume the risk of leaving s.37 issues unresolved (particularly as there should now be a route to validating alterations that would have been given actuarial confirmation had such been sought at the relevant time).

It is also interesting to note that TPR calls on trustees to assess Virgin Media issues "impartially", and in this respect it is noteworthy that TPR suggests that it does not expect to be informed of s.37 issues and that it is "very unlikely" to take any action in respect of the same.

These changes form part of a broader effort to modernise the UK's financial redress framework and rebalance the respective roles of the FOS and the Financial Conduct Authority (FCA).

The reforms

The key reforms can be summarised as follows:

1. A new longstop date, preventing complaints being made more than 10 years after the relevant event (subject to limited exceptions). This adds a layer of certainty for firms when considering their exposure to historic complaints.
2. A formal referral mechanism to the FCA. Where there is uncertainty regarding the interpretation of regulatory requirements, the FOS will be able to refer questions to the FCA before determining a complaint. The intention is that this should ensure consistency between regulatory standards and ombudsman decisions.
3. A change in the "fair and reasonable test" in order to ground FOS decisions more firmly in FCA rules and guidance rather than leaning on a test that can lead to varied outcomes. This addresses the concern that the FOS can effectively create new standards through its' "fair and reasonable" jurisdiction, leading to uncertainty for firms.
4. Greater FCA involvement in systemic issues. The FCA will take a more active role in identifying and addressing widespread or systemic failings, to include industry-wide redress schemes. The FOS will return to its originally intended function of resolving individual disputes quickly and informally, rather than acting as a quasi-regulator.
5. Operational reforms aimed at improving speed and efficiency. The FOS is expected to streamline its processes, reduce backlogs and resolve complaints more quickly. This includes by filtering out weaker claims at an earlier stage.

What does this mean for firms and advisors?

Taken together, these reforms show a shift towards a more structured and predictable redress framework, and a move away from the quasi-regulator role the FOS has, in some instances, been seen to be taking.

For financial advisers, these reforms are likely to sharpen the focus on the evidencing any advice given is in accordance with the applicable Handbook Rules. .

The introduction of a 10-year longstop is likely to be welcomed by advisors, and could have an early impact, particularly for those potentially exposed to historic claims. It should provide a clearer backstop for historic complaints and greater certainty when assessing risk.

The alignment between FOS decisions and the FCA rules is also significant. Firms/advisers may be better placed to defend complaints where they can demonstrate compliance with the regulatory framework in force at the time. This may, in turn, lead to a more robust approach to complaint handling and a reduced inclination to settle marginal claims.

The new referral mechanism to the FCA also has the potential to reduce inconsistent or unpredictable outcomes. However, it could also introduce a further layer of complexity and delay in cases where regulatory interpretation is contested.

Broadly, the reforms reinforce a better division of roles, which should be welcomed. The FCA will retain its role as the rule-setter and overseer of systemic issues, and the FOS will revert to its role as a dispute resolution body focused on individual complaints. This should improve coherence, although it may limit the scope for consumer-favourable interpretations in individual cases.

Conclusion

The proposed reforms represent a significant recalibration of the UK's financial redress system. Whilst the emphasis on speed and efficiency should be welcomed, the more important development is the move towards a more predictable and rules-based framework, with clearer alignment between the FOS and the FCA.

For firms/advisers, this will be a broadly positive shift. However, it remains to be seen how the FOS applies these changes in practice.

The MPS market has grown considerably in recent years, with 43% of advice firms outsourcing to an MPS provider in 2025. The growth in the use of MPS is largely being driven by the increased regulatory challenges faced by advisors, in particular the Consumer Duty, which has increased ongoing monitoring and reporting requirements. One of the benefits of using an MPS is that advice firms can leverage specialist investment expertise without adding to their internal expenses, which can deliver greater efficiency, as well as better value for money and outcomes for clients. However, this is only possible if advisory firms select MPS firms that satisfy the specific needs of their clients.

The purpose of the multi-firm review is to look at how MPS providers:

• Implement the Consumer Duty, in particular emphasising fair value, appropriate products, and good consumer outcomes, to ensure they are central to MPS design.
• Monitor whether MPS produce the intended results for investors.
• Assess the fees charged by MPS, to ensure that charges are justified and communicated clearly to clients.

In their Regulatory Priority report, the FCA acknowledged there has been significant consolidation and rapid firm growth in parts of the consumer investment sector, including MPS providers. If controls do not keep pace with growth, risks can emerge. Firms therefore need robust systems and controls to manage those risks, whilst keeping the interests of consumers central to their plans.  The FCA says that it will progress its review of MPS firms this year and assess whether the Consumer Duty rules and requirements remain appropriate. The FCA is also expecting firms to act promptly to address emerging risks, including signs of inadequate financial resources, and to assess new technologies and products to ensure good consumer outcomes and strengthen financial resilience through stress testing and contingency planning.

Key Takeaways

In anticipation of the FCA's review, financial advisors may want to review their due diligence on MPS providers to ensure their investment strategy and charges align with the Consumer Duty. Communications with clients should also be reviewed to ensure that it has been clearly explained to clients why an MPS provider meets the objectives and risk appetite of the client.  Finally, financial advisors should also ensure they have adequate record keeping demonstrating their compliance with the Consumer Duty.

Once the FCA has completed their review, we can likely expect new FCA guidance on MPS governance, as well examples of good and bad practice.

To read the FCA's Regulatory Priority report, please click here.

With the Court of Appeal's judgment reserved, where have things been left for now?

• The conservative view on the first instance decision is that whilst paralegals may assist in the conduct of litigation, there are many activities which must be carried out by a qualified person in order to avoid the risk of criminal liability and costs challenges.

• The SRA has issued guidance on how to comply with the rules, and promised to "treat sympathetically self-reported incidences of genuine error based on mistaken interpretation of the law, prior to us publishing this page on 20 October 2025."

• CILEx has the power, granted by the LSB in November, to authorise chartered legal executives to carry on the conduct of litigation (without being required to seek authorisation for rights of audience at the same time).

• There are reports of extensive challenges in the County Courts, principally where costs recovery is sought on matters with heavy paralegal involvement.

In the meantime, a serial fare-dodger charged and convicted for travelling on over 100 journeys without a ticket attempted to overturn the conviction on the basis that a "lay prosecutor" had made the applications for summonses. The magistrate's court held that Mazur was irrelevant as the Criminal Procedure Rules has allowed for a non-qualified person to apply to issue a summons and further that Parliament never intended that a breach of the application procedures would "invalidate the proceedings".

…

Another case with seismic potential is the ongoing challenge led by Carter-Ruck to the SRA's power to require firms to produce client privileged documents in aid of its investigations. The regulator routinely exercises its statutory information gathering powers to compel firms to produce documents from matter files, but to date the question of how those powers apply to privileged information remains unsettled. The SRA has indicated that it is "seeking to have the proceedings expedited to avoid undue delay in resolving a point of law of public importance".

…

The SRA has responded to the government consultation on the proposed transfer of its AML supervisory role to the FCA. SRA Chief Executive Sarah Rapson told the Board that "I have discussed directly with the FCA leadership how we will work closely with the FCA to ensure a smooth, proportionate and effective transition when the new arrangements are implemented… We will continue to act as the competent authority under the Money Laundering Regulations until the transition to FCA supervision is complete."

In the meantime, we are not aware of the SRA taking any further steps to implement its unlimited fining powers for AML breaches under ECCTA 2023 following the government consultation. It may be that those proposals have been put on ice following the proposed transfer to the FCA.

…

Just as the SRA seeks to put the collapse of Axiom Ince behind it, another potential scandal has emerged in the form of PM Law, a group of consumer-facing firms which closed abruptly on 2 February. The SRA intervened two days later. Like Axiom Ince, PM Law had grown rapidly by acquiring other existing firms. The precise circumstances of the closure remain murky for now, although the SRA has announced that 'We are investigating a potential fraud, including the misappropriation of client money." The SRA is reported to have returned £9m to clients of the stricken firm, out of a mix of retained client money and the compensation fund.

The parallels with Axiom Ince will be deeply uncomfortable for the regulator, particularly should it transpire that opportunities were missed to identify the group's issues. The LSB has already asked the SRA to explain what it knew about the firm before its collapse.

On that front, Axiom Ince's primary layer insurers are reported to have issued proceedings against the SRA regarding its conduct in the run-up to the collapse. The SRA has in turn issued its own proceedings against Axiom Ince's insurers, asserting a subrogated claim on behalf of clients who made claims on the SRA Compensation Fund.

Looking forward, the SRA intends to take steps to improve how it uses information about firms to anticipate problems before they arise. The new measures announced by the regulator include "a new ‘law firm profiler’ giving our teams a single page view of key data for each of the 9,000 firms we regulate".

…

From one high profile law firm collapse to another, the LSB this week issued a formal public censure against the SRA concerning the regulator’s failure to protect consumers affected by the collapse of Sheffield-based law firm SSB Group Limited. The SRA has apologised, acknowledged the harm caused to SSB’s former clients and committed to a programme of reforms, including cultural change, improved risk assessment, strengthened evidence-gathering, and enhanced financial oversight of firms.

…

The SRA has issued a warning notice on the marketing of "no win, no fee" arrangements in the context of high-volume consumer claims. The notice has been released in the context of mounting scrutiny by the regulator of the high-volume consumer claims sector. The critical lens through which the regulator is honing in on the sector is demonstrated by the 83 open investigations into 72 consumer claims firms as of 31 December 2025. After the collapse of SSB law, the SRA have been concerned not only with the application of no win, no fee arrangements and the extent to which the risks are understood by clients but also inadequate uptake of appropriate ATE insurance to protect clients from the risk of adverse costs.

…

The SRA has been ordered to pay defence costs incurred in connection with its failed prosecution of a Carter-Ruck partner, which are estimated to exceed £1m. The SRA's Chief Executive has in the meantime indicated that it intends to appeal the SDT's summary dismissal of its case, "on the ground that the tribunal erred by reaching conclusions on issues of fact to justify the dismissal and such facts should have been tested in cross-examination at trial".

In the same report to the board, the SRA's Chief Executive indicated that the regulator is "reviewing" the scathing appeal judgment in its prosecution of Ashley Hurst.

In the meantime, the Anti-SLAPP Coalition (of over 120 editors, lawyers, academics, journalists and civil society representatives) has published an open letter to Kier Starmer calling for anti-SLAPP provisions to be included in the next King's speech, anticipated in May 2026. The coalition say that in the last 5 years SLAPPs have been used by "wealthy and powerful claimants" who have "misused the British justice system and the costs associated with participating in pre-trial and court proceedings to stifle protected speech and public participation". The letter calls for a "society-wide remedy". 

…

A City firm was cleared by an employment judge of claims brought by an applicant who, having unsuccessfully applied three times for a training contract at the firm, alleged discrimination and victimisation. Whilst the Employment Tribunal found that the firm had rational and plausible explanations for the adverse application decisions, the tribunal in postscript said that the firm "would do well to learn some important lessons from [the claims]" in view of evidence around the handling of the claimants applications. In particular, the tribunal referred to the tone of email correspondence from one of its team involved in the recruitment process as "at very best remarkably gauche and inept and we can well understand why the Claimant was offended to find herself apparently being encouraged to abandon her application…the messages did not amount to acts of harassment…an organisation genuinely passionate about inclusion and diversity would not normally be expected to countenance messages of that sort being sent in its name".

…

We have seen AML compliance and workplace misconduct as two of the highest risk areas for regulatory enforcement action for some time now, and that has been borne out over the last few weeks during which we have seen:

• A £68,000 fine for a firm which allowed almost $23 million to pass through its client account as part of agreed escrow services and general advice to a client in Russia in respect of a asset purchase for which the firm was not involved in. The SRA said that there was "no need for [the firm] to receive or make payments relating to that underlying transaction" and that its services amount to the providing a banking facility.

• A City firm was fined £18,000 for failing to prevent its staff from allowing its client account to be used as a banking facility. Unusually, the SRA appears not to have referred to its guidance on financial penalties in setting the level of the fine. "Although the firm was determined to be of greater means, it was not considered proportionate to impose a financial penalty at a higher rate. This was because the firm’s conduct was not deliberate or reckless in respect of its regulatory obligations."  

• The SRA imposed total fines of £75,836 on 7 further firms for breaches identified by its AML Proactive Supervision team.

• The SDT suspended a retired solicitor from practice for one year, having found that he failed to act with integrity in connection with sexually motivated comments at a firm Christmas party.

• Two further solicitors referred to the SDT for allegedly sexualised or sexually motivated conduct.

Other noteworthy recent decisions include:

• Striking-off orders in respect of solicitors who variously misled a lender as to the completion date for a property transaction; provided misleading information to a Family Court as to his location during a hearing; created a misleading attendance note concerning his attendance at a hearing; and provided a misleading CV to a recruitment agency.

• A striking off order, for a partner at a London law firm who made more than 80 unauthorised transfers across 3 years from the client account totalling almost £1.2 million. Most of the payments were transferred to other clients and third parties and the firm's business account but around £77,000 from six client matters were used to settle his personal tax bill.

• A rebuke for a solicitor who allowed the sum of £71,000 held on trust by the firm to remain in client account for a period of 16 years following the death of the trustees. Since being contacted by the SRA, the solicitor took steps to be appointed as trustee and liaise with the beneficiaries to distribute the funds.

…

A judgment of the Upper Tribunal identified two separate cases where solicitors had cited fake authorities. Both were referred to the SRA. Judge Fiona Lindsley also identified that one of the solicitors appeared to have uploaded client confidential information to a public AI tool, risking a breach of confidence. She noted that the problem had become so widespread that the claim form for judicial review has had to be amended to require lawyers to sign a statement of truth saying that cited authorities actually exist.

…

In a case involving an application for specific disclosure, the High Court considered the obligations of a firm to return a matter file to its client on request. The court referred to the well-known guidance issued by the Law Society in its Practice Note dated 26 July 2022, identifying that various documents (including internal communications, draft documents and working papers) would belong to the firm rather than its client.

Meanwhile, in proceedings under the Solicitors Act 1974, Costs Judge Nagalingam found a breach where a firm failed to disclose WhatsApp messages from the client file. The court held that any communications for which the client has been charged form part of the file and must be captured, saved and disclosed, including WhatsApp messages.

…

A network of female general counsel, The Eagle Club, has criticised the Law Society's whistle-blowing guidance for in-house lawyers for entrenching "longstanding bias against reporting" and urging the Law Society to withdraw the guidance. The guidance advises in-house lawyers contemplating whistleblowing to disclose "specific information with factual content" rather than "suspicions or unfounded allegations". The club say there remains a lack of adequate guidance from the SRA and that the Law Society's guidance fails to address the fundamental issue that in-house lawyers "cannot report wrongdoing without significant legal, professional and personal risk" leaving misconduct in corporations unaddressed.]]>{65A0212B-66DC-4F5B-A31E-53A8913BB653}https://www.rpclegal.com/thinking/professional-and-financial-risks/lukins-v-quality-part-x-ltd/Mon, 09 Mar 2026 15:23:00 ZProfessional and financial risksRachael Healey, Sally LordThe underlying claim concerned loss and damage caused by a 2018 fire at commercial premises in Wembley.  It was not disputed that under s.2 of the Limitation Act 1980, limitation expired on 6 April 2024 – 6 years from the date of the fire.

On 25 March 2024, the claimants’ solicitors posted multiple copies of the claim form to the King’s Bench Division by way of a special delivery letter with instructions to deduct the court fee from their PBA account. The letter was received and signed for on 26 March 2024.

However, since 1 July 2019, Practice Direction 51O had made CE‑File mandatory for legally represented parties starting claims in the Central Office of the King's Bench Division, the Court staff promptly returned the claim forms on 28 March, explaining that paper filing would not be accepted. For what the judgment records as 'reasons unknown', the solicitors did not receive that letter until 9 April and the claim was then issued via CE‑File on 9 April 2024.

The defendants sought summary judgment on the basis that the claims were out of time for limitation purposes.  The claimants resisted the applications on the basis that the claims were brought when the court received the claim form, or in the alternative, the Court should exercise its power to remedy any error of procedure pursuant to CPR r.3.10.  The Court granted summary judgment against the claimants.

The “all that could reasonably be expected” standard

The Court considered the leading authorities on when an action is “brought” for limitation purposes. Under CPR r.7.2(a) proceedings are started when a court issues a claim form, but CPR PD7A 6.1 modifies CPR r.7.2 in certain circumstances such that proceedings are brought when the claim form as issued was received in the court office. Then CPR r.7.12 provides that a practice direction may permit or require a claimant to start a claim by requesting the issue of a claim form electronically.  CPR PD51O provided for an electronic working pilot scheme to operate in the Central Office of the King's Bench Division in proceedings started after 1 January 2019 and CPR PD51O broadly provided that where a party is legally represented Electronic Working must be used by that party to start and/or continue any relevant claims or applications.

The general principle is that, for an action to be brought, a claimant must show they have done “at least all that could reasonably be expected of him in order to ensure that proceedings are issued within time” and "what is reasonable will depend on factors such as the requirements set by the rules and practice directions, whether the claimant is legally represented, and the content and timing of any communication he has had with the court with regards to issuing the claim" (paragraph 62).

In applying this to the facts, the Court emphasised that PD51O’s mandatory e‑filing requirement had been in place “for over five years. The Claimants’ solicitors should have been familiar with it. Plainly they were not.” In those circumstances, the claimants had not done all that could reasonably be expected (or all that was in their power) to start proceedings in time.

Paper filing did not “save” limitation

The claimants argued that they had “brought” the claim in time when the paper forms were received on 26 March 2024 and they relied on PD7A 6.1 (backdating to receipt of the claim form) arguing that the court staff should have issued the claim or scanned it themselves.

The court rejected these arguments and confirmed that PD7A 6.1 operates against the backdrop of the current procedural regime. PD51O requires represented parties to start claims via CE‑File and therefore, sending a paper claim form is simply not taking the “necessary step required to enable the proceedings to be started”. The analogy with litigants in person also fails because a litigant in person posting a claim form is carrying out what the rules allow, and so it is open to them to rely on PD7A 6.1; a represented party doing the same is ignoring a mandatory requirement and acting unreasonably.

No CPR 3.10 safety net for pre‑issue errors

The claimants also argued CPR r.3.10 and PD51O 5.3 as a way to “remedy” their failure and treat the claim as brought in time. The court held that CPR r.3.10 “can provide no remedy unless there are proceedings extant at the time of the procedural error. There were no proceedings in existence at the time that the Claimants failed to comply, so it cannot apply” (Para 68)); and that it cannot abrogate the limitation period contained in primary legislation.

This judgment provides a good example of the importance of complying with the CPR and court procedures and always ensuring that claims are issued well before the limitation deadlines Ignorance cannot be excused and errors are left at the feet of the solicitors, not the court.

The hope is that initiatives such as the introduction of targeted support and reforms to product information will give consumers the confidence to invest. It's therefore understandable that one of the FCA's key consumer investment priorities for the next year is building a stronger investment culture, which they note firms can do by communicating clearly and honestly, and fully explaining risks and rewards (and, of course, explaining fees and charges). 

Further priorities include strengthening trust (to be done by ensuring strong governance, robust risk systems and paying redress where due) and securing good consumer outcomes (via monitoring, fair pricing and timely support). The FCA also mentions strengthening financial crime controls.  

The FCA goes on to discuss what they've been doing in the market in 2025, with highlights including the introduction of targeted support (which will take effect from April this year). The FCA notes that "a large number of firms [are] using our pre-application support service." This doesn’t quite tally with a recent article from the FT Advisor which states that only 19 firms were using this as of early January, although it Is of course possible that there's been an uptick since then. 

The FCA also notes its work in combatting fraud and taking action on unlawful financial promotions. 

Some other areas of focus for 2026 include increasing operational and financial resilience across the sector, the review of the SMCR and the eagerly anticipated publication of a final policy statement on the new cryptoasset regime.  

In closing, the FCA notes that its intention is that there will be less attention on firms doing the right thing and stronger action where harm is greatest. Again, a laudable aim. 

In summary, whilst the stated priorities may boost consumer confidence, it's hard to see how this will encourage firms to actively seek to close the advice gap, particularly for consumers looking to invest smaller amounts; the FCA's hope seems to be that targeted support will be offered free at the point of use (having previously noted that respondents to their consultation on targeted support had agreed that uptake would be limited if this wasn’t the case). The key question is whether firms are actually likely to offer this service when they could ultimately be at risk of claims for little (if any) reward. It therefore remains to be seen whether the priorities and actions set out for 2026 will support growth (as intended).

For anyone who would like to discuss the Proposals, please feel free to get in touch with Whitney Simpson, Faheem Pervez or Ben Simmonds.

Mrs K was ultimately only awarded £1,000 in respect of distress and inconvenience because she was unable to demonstrate a financial loss flowing from the erroneous estimates. Part of the reason for this was because NHS BSA took steps to attempt to correct previous errors. This decision serves as a reminder to administrators not only to (a) ensure that data and automated systems are accurate and produce reliable information, but also to (b) take steps to remedy an error as quickly as possible, in order to limit exposure.

Background

Mrs K was a member of the NHS Pension Scheme. Between 2018 and 2020, Mrs K sought various estimates of her pension benefits, with a view to taking early retirement.  Her employer provided estimates via its access to NHS BSA's automated system. The estimates provided between 2018 and May 2020 were correct. 

In October 2020, Mrs K obtained a further estimate from her employer, but the estimate showed benefits which were nearly twice as high as the previous estimate (only 5 months earlier), both in respect of annual income and lump sum.  Mrs K queried the accuracy of the estimate with her employer, given the stark difference, and was provided with a second erroneous estimate in November 2020, with an assurance that the estimate was correct. That said, the estimates contained disclaimers that they were not intended to be relied upon for making retirement decisions.

As before, these two estimates were provided by Mrs K's employer, which they produced via access to NHS BSA's automated system. The queries that Mrs K raised regarding the accuracy of the estimates were not passed to NHS BSA for their comment.

Mrs K gave notice of her retirement, with a retirement date set for 5 March 2021. NHS BSA received her application for retirement benefits in January 2021 and sent her a quotation (which, importantly, carried a different status to an estimate). The quotation contained the correct figures, but Mrs K claimed that she did not receive the quotation. 

Mrs K retired on 5 March 2021 and on 11 March 2021, NHS BSA wrote to Mrs K to advise her again of her correct benefit entitlement levels. On 16 March 2021, Mrs K received her first benefit payment and telephoned NHS BSA to query why her benefits were lower than what had been stated in the October and November 2020 estimates.

Following an investigation, in June 2021, NHS BSA wrote to Mrs K to advise her of the previous error, confirm the correct benefits entitlement, and offer Mrs K the option to cancel her retirement and return to work.  Mrs K declined to take up this offer and instead notified NHS BSA that she had suffered financial hardship due to the mistake and raised an official complaint via their Internal Dispute Resolution Procedure (IDRP).

In her complaint, Mrs K stated that she had made the decision to retire early in reliance on the incorrect October and November 2020 estimates. She had elected to pay off pre-existing debts due to the benefits she thought she would receive and now found herself in financial hardship as a result.

NSA BSA did not uphold Mrs K's complaint at stage 1. While it recognised the error in the estimates, it attributed this to a system error. It acknowledged that Mrs K had queried the erroneous October 2020 estimate but explained that the query had never been raised with NHS BSA, as it should have been.  NHS BSA further maintained that it had provided Mrs K with accurate information concerning her benefits in the January 2021 quotation, prior to her retirement.

Mrs K disagreed with the outcome and requested that the complaint be moved to stage 2 of the IDRP. Again, the complaint was not upheld, and NHS BSA reached the same conclusion, finding that, given the prior consistency of the estimates Mrs K received prior to October 2020, she should have known it was 'unsafe' to rely upon the figures in the October and November 2020 estimates in making her retirement decision.  In both IDRP decisions, it was maintained that in any event, Mrs K could only be paid what she was entitled to under the Scheme Rules, and this was the lower amount.

TPO Decision

Mrs K then referred her complaint to TPO where it was partly upheld. TPO found that NHS BSA was responsible for all of the incorrect estimates provided to Mrs K, even though these were not provided directly by NHS BSA but through their automated system. Mrs K's employer provided the estimates via access to NHS BSA's automated systems and as an authorised user of NHS BSA's systems, the employer acted as a representative of NHS BSA. As such, they were found liable for maladministration and TPO awarded Mrs K £1,000 for distress and inconvenience on that basis.

However, TPO found that where disclaimers were included in the estimates, it was not reasonable for Mrs K to rely upon these in making her decision to retire. Furthermore, Mrs K suffered no financial loss in relying upon the incorrect estimates, as the debts she paid off with the initial sums received were pre-existing, and NHS BSA had made her aware of the error (and provided the correct quotation) prior to the payments being made. Further, where NHS BSA made Mrs K aware of the error 6 days after her retirement, she could have returned to her former role, thereby mitigating her financial circumstances, but chose not to do so.

Takeaways

This decision serves as a reminder to pensions administrators of the importance of ensuring that automated systems function properly, that the data used in these processes is accurate, and that authorised users of their systems follow best practices in communicating potential issues to administrators.  While this complaint did not result in a large liability for NHS BSA, there is potential in the future for similar errors to result in significant risks to administrators.

Data accuracy and the efficiency of automated systems is already on TPO's radar with the rollout of Pensions Dashboards which has the potential to produce similar complaints to Mrs K's if administrators do not ensure that strong controls and checks are in place.

The decision also emphasises that, when errors do occur, it is vital for administrators to communicate this to members as quickly as possible to limit their potential liability by giving members a reasonable opportunity to make any required changes. 

To read the full TPO decision, click here.

The decision in Virgin Media Ltd was a landmark case that cast doubt upon the validity of historic alterations to pension scheme rules (some as far back as 1997).  Employers and trustees of pension schemes will be pleased to note that the FRC has called on actuaries to adopt a proportionate approach when deciding whether an alteration would have prevented the pension scheme from continuing to meet the reference scheme test.

Background

The Virgin Media fallout

In September 2025, the government introduced draft legislation (via the Pension Schemes Bill) to deal with industry-wide concerns following the Court of Appeal decision in Virgin Media. The Court held that a lack of written actuarial confirmation (as required by section 37 of the Pension Schemes Act 1993 for amendments impacting member benefits in contracted-out schemes) would render an amendment void, regardless of whether such actuarial confirmation would have been granted had it been sought at the time.

The draft legislation deals with this potential unfairness arising from a strict reading of section 37 (whereby alterations are void – as opposed to voidable – in the absence of written actuarial confirmation) following Virgin Media. This is a relief for schemes that have grappled with the uncertainty about the validity of historic alterations, particularly amendments that had sought to reduce benefits and therefore had the potential to trigger higher liabilities if alterations were void because of Virgin Media (simply because the actuarial confirmation cannot be located or was not obtained, despite the fact the scheme actuary would have considered the alteration at the time).

The draft legislation

As it stands, section 101 of the draft Pension Schemes Bill broadly states that "potentially remediable alterations"[1] are to be treated for all purposes as having met the requirements of section 37 and having always been a valid alteration subject to satisfying the conditions in subsection (3).

Those conditions are:

1. that the trustees or managers of the scheme have made a request in writing to the scheme actuary for the actuary to consider whether or not, on the assumption that it was validly made, the alteration would have prevented the scheme from continuing to satisfy the statutory standard, and

2. that the scheme actuary has confirmed to the trustees or managers in writing that in the actuary’s opinion it is reasonable to conclude that, on the assumption that it was validly made, the alteration would not have prevented the scheme from continuing to satisfy the statutory standard. (Our emphasis)

The FRC's guidance

The FRC's guidance is designed to assist actuaries tasked with providing a retrospective confirmation under section 101(3). In particular, it provides guidance for actuaries required to form an opinion as to whether it is "reasonable to conclude" an alteration would not have prevented the pension scheme from continuing to meet the reference scheme test

The test – certainty not required

Pension schemes will be relieved that the FRC expects actuaries to take a proportionate and broadbrush approach in deciding whether it is "reasonable to conclude" that an alteration could have been given at the relevant time. This is a sensible approach, given that many alterations will be historic (particularly as many section 37 issues are likely to arise due to a lack of written evidence, not helped by the time that has lapsed since the alteration was made).

The FRC confirms the following in respect of this test:

"The test does not require the scheme actuary to have certainty about whether the rule alteration would not have prevented the pension scheme from continuing to meet the reference scheme test. Instead, the test requires the scheme actuary to reach a reasoned and justifiable conclusion taking into account all the relevant facts and circumstances identified after taking a proportionate approach to the gathering of data".

The requirement for a proportionate approach

The FRC emphasises the importance of actuaries taking a proportionate approach in deciding whether further information is required to form a view:

"The scheme actuary is expected to exercise judgement over what information is sufficient for the purpose of forming an opinion. In doing so, the scheme actuary is encouraged to use information which is readily available, that is information which can be obtained without incurring a disproportionate amount of time and effort."

The FRC acknowledges that there will be situations where no further information is required for the actuary to give retrospective actuarial confirmation based on an understanding of the rule alteration alone. The guidance sets out several examples, such  as alterations that (1) did not decrease benefits; (2) impacted benefits that are irrelevant to the reference scheme test (such as lump sum benefits on death in service); (3) impacted benefits that are subject to a reference scheme underpin; or (4) changes in indexation or revaluation reflecting changes in legislation. The guidance also notes that there will be situations "where a simple assessment is sufficient to reach a conclusion".

Reliance on "indirect evidence"

Where further information is required, actuaries are encouraged to rely on "indirect evidence" on the basis they do not need to be certain that actuarial confirmation would have been given.

Examples of indirect evidence given in the guidance include subsequent actuarial confirmations and "legal advice, trustees’ meeting minutes, member communications or other documents relating to the rule alteration". Generally, the FRC appear to be recommending that actuaries look for documentation that would suggest the alterations were considered and endorsed by the scheme actuary at the relevant time.

Commentary

The FRC is encouraging a proportionate and pragmatic approach. In this respect it is consistent with the government's decision to introduce draft legislation to address the fallout arising from Virgin Media, by allowing schemes to obtain actuarial confirmation retrospectively for alterations in recognition of the uncertainty caused by the judgment.

The guidance is welcome news for pension schemes – particularly sponsoring employers – as the actuaries' ability to take a pragmatic approach and rely on "indirect evidence" where further information is required (as opposed to having to go through member data to determine the position with a greater level of certainty for each alteration impacted by Virgin Media) should allow schemes to mitigate the cost of resolving the fallout.

Schemes that were proactive in looking to address the fallout may find themselves in an unfortunate position given that the draft legislation excludes section 37 issues that are the subject of proceedings issued on or before 5 June 2025. Schemes that waited for government intervention following the Court of Appeal decision in July 2024 may now look to instruct actuaries to start work on reviewing alterations that have been impacted by Virgin Media on the assumption the relevant draft legislation is unlikely to materially change as it passes through the House of Lords.

That said, some schemes may hold out for the long-awaited High Court judgment in Verity Trustees v Wood [2024] EWCA Civ 843 (heard last February) which is expected to provide further guidance on the scope of amendments requiring a section 37 actuarial confirmation, such that certain alterations may not, in fact, be impacted by Virgin Media and therefore will not require legal resolution (in particular closure of a scheme to future accrual). Notably the High Court was asked to confirm what qualifies as written actuarial confirmation, whether a triennial valuation by the actuary would suffice, and whether a presumption of regularity can be inferred. Interestingly, the latter may be the kind of "indirect evidence" that an actuary can consider in reaching a view under the legislation. 

[1] "Potentially remediable alterations" are defined in s.100(7). Broadly, the subsection requires the alteration to have been treated as valid by trustees with no positive action taken on the basis the alteration was void because of s.37. An alteration may also be excluded from the scope of remediation if any question relating to the validity of the alteration (due to s.37) has been determined by the court or is subject to proceedings issued on or before 5 June 2025 (when the Government confirmed its intention to introduce draft legislation).

This updated Guidance includes revised scoping tables, which detail the disclosure requirements for companies, qualifying partnerships and limited liability partnerships under the Companies Act 2006 in respect of the strategic report, the director's report, and the energy and carbon report. The FRC is pushing companies towards more structured, transparent and forward‑looking reporting, particularly around governance, sustainability and payment practices.

The Guidance is intended to assist UK entities generate  high‑quality strategic reports focused on the needs of shareholders and other primary users, and telling a cohesive story of the business focused on performance, position, risks and future prospects.

The FRC has updated the Guidance to reflect:

• The revised UK Corporate Governance Code 2024
• Legislative changes to directors’ report disclosures
• Developments in sustainability‑related and wider corporate reporting practice
• Improvements to structure and accessibility

The scoping tables effectively act as a compliance checklist for what “good” looks like in statutory reporting, including with respect to payment practices.

The impact

The FRC expects strategic reports to enable users to understand where the business stands today, and its future prospects, risks and opportunities. This emphasis on a forward‑looking, cohesive narrative increases potential exposure in several ways.
Statements about strategy, resilience, business model, and future performance will be scrutinised if performance later disappoints as claimants and regulators may argue that risks were downplayed, assumptions were unreasonable, or disclosures were selective or overly optimistic. As sustainability‑related reporting becomes more embedded, allegations of greenwashing, inconsistency across different reports and publications remains a potential risk exposure. Essentially, there are now clearer standards against which directors’ conduct will be judged if things go wrong.

The Guidance and scoping tables are likely to be used, implicitly or explicitly, as a benchmark in regulatory scrutiny by the FRC and Financial Conduct Authority, in investor actions and in derivative claims alleging breach of duty. Where a company’s reporting falls short, claimants may argue that directors (1) failed to provide material information, (2) misapplied or ignored established reporting expectations, or (3) did not exercise reasonable care, skill and diligence in overseeing reporting.

The updated scoping tables explicitly reflect reporting of payment practices in the directors’ report which could lead to:

1. Creditors and supply chain disputes. Transparent disclosure of payment practices can crystallise issues around late payment, aggressive working capital management and pressure on key suppliers which may, in some cases, feed into allegations of wrongful trading or failure to act in the interests of creditors.

2. Reputational and stakeholder pressure. Poor payment practices may attract scrutiny from stakeholders (including regulators and media), increasing the risk of regulatory or parliamentary attention and pressure on the board’s oversight of financial and operational resilience.

3. Distress and insolvency‑adjacent risk. Payment data may be used as a leading indicator of financial stress. Where distress follows, directors’ earlier statements on liquidity, going concern and risk management may be retrospectively challenged.

By aligning with the UK Corporate Governance Code 2024, the Guidance emphasises that governance and reporting should be integrated with strategy and risk management, and raises expectations that boards have robust processes behind the narrative disclosures. It increases the risk of claims against directors as failures in governance or risk management may be easier to link to defective reporting. The standard of what “a reasonably diligent director” ought to have known or ensured about the contents of the strategic report may be perceived as higher.

The FRC is raising the bar on how companies tell their story. D&Os insurers may want to revisit their underwriting and risk dialogue accordingly, treating the updated Guidance and scoping tables as both a warning for potential exposures and a diagnostic tool for governance quality.

Background: The Underlying Personal Injury Claim

Mr Hussain, a solicitor with over 23 years’ untarnished practice, represented himself in a personal injury claim following a road traffic accident in June 2019. When preparing his claim, Mr Hussain failed to disclose a pre-existing injury that he had sustained to his left shoulder after a fall in December 2018, to his medical expert, Dr Tanvir, and omitted it from his witness statement and the expert’s report. Both documents alleged that the injuries were wholly attributable to the road traffic accident.

According to the SDT, during the trial of the personal injury claim in April 2021, HHJ Sephton QC found Mr Hussain’s evidence “conflicting and incoherent”, noting significant discrepancies between his account to Dr Tanvir and his evidence in court. The SDT quoted the judge having concluded that Mr Hussain “knew jolly well” his account was false and found him to be “fundamentally dishonest” under the test in Ivey v Genting Casinos [2017] UKSC 67. The claim was dismissed, and Mr Hussain and his daughter (also a claimant) were ordered to pay costs.

SDT Proceedings: Allegations and Findings

Following the adverse judgment, Mr Hussain self-reported to the SRA, triggering disciplinary proceedings. In the Rule 12 Statement, the SRA alleged that, between July 2020 and April 2021, Mr Hussain failed to disclose relevant medical history in his personal injury claim, breaching Principles 1 (upholding the rule of law), 2 (public trust), 4 (honesty), and 5 (integrity) of the SRA Principles, as well as paragraph 1.4 of the Code of Conduct for Solicitors.

The SDT’s analysis focused on two key occasions: (1) when Mr Hussain received Dr Tanvir’s addendum report in August 2020, which still omitted reference to the prior injury, and (2) when he signed his witness statement in October 2020, again failing to mention the earlier fall and asserting that all injuries were attributable to the accident.

The Tribunal found that Mr Hussain had breached his ongoing duty of disclosure, particularly as an experienced solicitor with some prior personal injury expertise. His failure to ensure the accuracy of the expert report and witness statement constituted serious misconduct. However, the Tribunal distinguished between a mere failure to disclose and deliberate dishonesty.

Why the SDT Did Not Find Dishonesty

Despite the civil court’s finding of “fundamental dishonesty”, the SDT confirmed it was not bound to reach the same conclusion. Applying the two-stage test in Ivey, the Tribunal first considered Mr Hussain’s actual state of knowledge. It was clear that he knew of the prior injury and its relevance. The second stage required the Tribunal to assess whether his conduct was dishonest by the standards of ordinary decent people.

Several mitigating factors were referenced during the SDT proceedings including:

• Mr Hussain had disclosed his full medical records to the defendant’s solicitors.
• He had attempted to rectify the expert report by contacting the medical agency twice, although the corrections were not made.
• Dr Tanvir later accepted responsibility for the oversight and apologised.
• There was no evidence of exaggeration of symptoms or fabrication of documents.
• Mr Hussain self-reported the adverse judgment to the SRA and cooperated fully.
• He provided substantial character evidence attesting to his integrity.

On balance, the SDT concluded that, while Mr Hussain’s conduct was misleading and fell below the standards expected of a solicitor, it did not meet the high threshold for dishonesty. The Tribunal also declined to make a finding of recklessness, noting that this was not clearly pleaded.

Sanction and Costs

The SDT imposed a four-month suspension, suspended for two years, and ordered Mr Hussain to pay £15,000 towards costs. The Tribunal emphasised that misleading the court is inherently serious, but that the absence of dishonesty, the isolated nature of the episode, and Mr Hussain’s exemplary career warranted a proportionate response.

Implications for future dishonesty cases

This decision underscores several key points for practitioners:

• Civil findings of dishonesty are not determinative in disciplinary proceedings. The SDT will conduct its own assessment, applying the Ivey test and considering all relevant evidence and mitigation.
• The threshold for professional dishonesty remains high. Mere failures to disclose, even if serious, may not amount to dishonesty absent clear evidence of intent to mislead for personal gain.
• Solicitors must be scrupulous in ensuring accuracy in expert reports and witness statements. The duty of disclosure is ongoing and extends beyond the mere provision of records.
• Mitigation matters. Self-reporting and cooperation are key. When this is combined with an unblemished record can significantly influence the outcome.

This case highlights the importance of rigorous disclosure and transparency in litigation, as well as the nuanced approach taken by the SDT in assessing dishonesty. Practitioners should be aware that while misleading the court is always serious, only the clearest cases will result in findings of professional dishonesty and the most severe sanctions.

We were not fans of the Tribunal's decision and welcome the judgment on appeal. It is worth emphasising how critical the Court was of both the SRA's prosecution and the Tribunal's reasoning – particularly at paragraphs 117 to 122 of the judgment. You don't often see judgments on appeal like this.

The reversal is the latest in a series of blows for the SRA's SLAPPs programme. On 20 January, it was the SDT's turn to criticise the Regulator, in its published reasons for dismissing the regulator's prosecution of a Carter-Ruck partner. The Tribunal concluded that "Even taken at its highest, the SRA’s case did not disclose conduct capable of meeting the threshold required to proceed… Accordingly, it would not have been in the interests of justice or proportionality for the matter to proceed further.". The SRA is reported to be facing a £1m costs claim in relation to the failed prosecution.

This decision also turned on questions of fundamental legal principle. A solicitor does not act improperly merely by representing a client whose case was weak or controversial, provided they do not knowingly assist in an abuse of process. An advocate owed no duty to the opponent and should not be penalised for advancing a case in accordance with instructions. A solicitor was not required to investigate or verify the truth of factual instructions before advancing them, even where doubts existed. "The dividing line was knowledge. A solicitor must not knowingly advance false instructions or assist in an abuse of process, but absent such knowledge, the solicitor was entitled and often obliged to continue to act."

The appeal from the Mazur judgment on the extent to which non-solicitors can assist in the conduct of litigation under supervision has been listed for a hearing to start on 24 February.

The Government's proposal to transfer AML regulation of the profession from the SRA to the FCA (reported in previous issues) has come under renewed scrutiny. The Law Society and the SDT filed consultation responses highlighting significant concerns about the potential for inconsistent decisions, double jeopardy, and client confidentiality. The Tribunal highlighted a clear example of the practical difficulties with the proposals, being what to do where an investigation involves alleged AML breaches coupled with allegations of professional misconduct. The Law Society concluded that the proposals pose "major operational and strategic risks to the profession while offering no proven benefits".

Lord Chancellor David Lammy welcomed the New Year by unveiling unpopular plans to remit up to 75% of the interest earned on pooled client accounts to the Treasury for "[investment] in strengthening the justice system". The Ministry of Justice has opened a consultation on the 'Interest on Lawyers' Client Account Scheme' for a brief 5 weeks, ending on the 9 February 2025. Law Society president, Mark Evans, issued a scathing response to the slap-dash proposals: "The MoJ has decided to take money from the interest earned on law firms’ client accounts to boost its own budget. Yet, as its own consultation reveals, it has no clear idea how this proposal will work in practice and no understanding of the serious consequences this will have on high street firms and access to justice throughout England and Wales. Firms will close, fees will rise and clients will be impacted if the MoJ goes ahead with the proposal.'

Research by the Centre for Socio-Legal Studies (University of Oxford) into potential new funding streams for the not-for-profit legal sector notes that while there are almost 80 comparable schemes globally for managing interest on lawyers’ client accounts, they typically allocate interest to legal aid programmes rather than a ministry’s general budget.

The Law Society responded to the Department for Science, Innovation & Technology's (DSIT) call for evidence on the AI growth Lab, asking for guidance rather than the imposition of new regulatory obligations concerning the technology.

Following binding directions issued by the Legal Services Board (LSB) in May 2025, the SRA has now published an implementation plan for complying with the LSB directions. The directions, arising out of the LSB's review of the SRA's handling of supervision of Axiom Ince, require the SRA to address the failures identified during the review. The SRA's implementation plan targets six priority areas: (1) governance (2) risk management (3) authorisation (4) client money protection (5) the oversight of firm sales, mergers and acquisitions and (6) pre-intervention processes. The SRA points to its Consumer Protection Review at the start of 2024 as a large piece of work that will contribute to its implementation plan.

As for Axiom Ince itself, the firm's Professional Indemnity Insurers have issued a professional negligence claim against the regulator for its failure to prevent the large-scale misappropriation of funds.

The LSB launched a consultation on its draft business plan and budget for 2026/27, and announced the appointment of a new Chief Executive.

Since our last update, the SRA has issued (by our count) 14 fines for AML breaches totalling £185,238.

Other recent SRA decisions include:

• A rebuke for a solicitor who had pleaded guilty to assault occasioning ABH.
• A fine for a solicitor who failed to provide the SRA with copies of qualified accountant's reports to the SRA over a period of seven years, and allowed a £33,000 deficit to remain on client account for nearly two years.
• A referral to the SDT for a solicitor alleged to have made misleading statements while acting on a personal injury matter.
• A referral to the SDT for a solicitor alleged to have attempted to take unfair advantage of an individual's position as a litigant in person by requesting their contact details and subsequently obtaining them from a private investigator.

The SDT published reasoned judgments in cases including:

• A striking-off order, on an agreed outcome, for a solicitor who sent a misleading email to a third party, telling a colleague: "tell him client says we will withdraw our application to court as soon as we receive the signed docs from him (he doesn't know we haven't issued .... we just led him to believe we did)." (The colleague said no and reported the solicitor internally).
• Striking-off orders in two unrelated cases in which solicitors were found to have issued certified copies of documents without having seen the originals.
• A period of suspension for a solicitor who was found to have dishonestly amended an internal handover note to cover the fact that they had failed to carry out a task prompted in the note in respect of a wills and probate matter. The solicitor failed to conduct a Capital Gains Tax Mitigation. When the omission gave rise to a CGT liability to the client's estate, the solicitor failed to set out the circumstances around the liability by editing the note.
• A section 43 order in respect of a paralegal who sent dishonest emails in a conveyancing transaction whereby the sale was completed before the grant of probate had been received. Following completion, the buyer's solicitor chased the transfer form to which the paralegal falsely claimed that the transfer form and signed contract had been lost in the post and that there had been IT issues. The deed was then only provided to the buyer solicitors once the grant of probate was made. The Tribunal dismissed allegations from the paralegal that the supervising solicitor had given instructions in respect of the dishonest emails.

The SRA suffered two defeats before the Tribunal in unrelated SLAPPs cases. On 8 December 2025, a partner at Hamlins LLP was cleared of allegations that he misled another solicitor as to the strength of his client's case. Four days later, the SDT summarily dismisseda SLAPP allegation against a partner at Carter-Ruck, holding that the SRA's case was "based on hindsight rather than evidence of professional misconduct".

In separate proceedings, Carter-Ruck has launched a High Court challenge to the SRA's ability to compel firms to disclose privileged material. This could be a big deal: the law in this area is filled with uncertainty and if the decision goes against the SRA it may profoundly affect how it conducts investigations. We will be watching this one closely.

A Government consultation on the FCA's proposed takeover of AML supervision of the legal sector will remain open until 24 December 2025. The proposals have overtaken the SRA's plan to start imposing unlimited fines in exercise of a power granted by the Economic Crime and Corporate Transparency Act 2023. Pending transfer of the enforcement role to the FCA, larger firms suspected of AML breaches are likely to be referred to the Tribunal.

For the time being, the SRA remains the frontline AML regulator for the legal profession, and has kept up a brisk rate of sanctions (of smaller firms) for AML breaches: 7 fines totalling £65,857 in the two weeks leading up to this edition.  

The Chartered Institute of Legal Executives has been granted permission to appeal the Mazur decision which brought into question the lawfulness of business models many firms operate on and which introduced uncertainty around the role of CILEx (and other non-authorised legal staff) in the conduct of litigation. CILEx's position on appeal is likely to focus on the argument that non-authorised staff have been conducting litigation (under the supervision of their authorised firm or a qualified solicitor) as a matter of custom for "decades, if not centuries".

The Law Society has been given permission to be joined as a respondent and will also make submissions.

In the meantime, and as no appeal decision can be expected for at least a year, CILEx reports that 600 executives have lodged applications for litigation rights in order to regularise their ability to conduct litigation. These applications follow the LSB's approval for CILEx to grant stand-alone litigation rights which had previously been coupled with advocacy rights.

The SRA has also published updated guidance on the effect of the decision, which can be accessed here. Whilst the SRA promises to treat historic mistakes 'sympathetically', it warns that "if you are conducting a reserved activity without authorisation and have not addressed the implications of the judgment and our guidance, you can expect us to use all appropriate investigative and enforcement powers to identify and address this misconduct."

The SRA published the results of a thematic review into the COLP and COFA role, in which it identified concerns including that the compliance officer roles are often undervalued within firms. The regulator indicated that in the longer term, it will undertake a more fundamental review of the effectiveness of the compliance officer regime.

The SRA is also consulting on new proposals regarding client money, including requiring firms to submit all accountants' reports to the regulator and make annual declarations of compliance. The consultation will remain open until 20 February 2026.

In another AI-horror story, wasted costs were ordered against a firm which cited fictitious authorities generated by AI software in an application to amend a claim. The court followed the earlier decision in Ayinde v London Borough of Haringey, which provided that a referral to the regulator will ordinarily follow the citing of fictitious authorities. However, the judge stopped short of a referral to the SRA, on the basis that the "the failure in this case was in substance a failure of management at the firm more than the failure of [the] individual solicitor".

Two former directors and senior managers of SSB Group were made subject to disqualification orders under s.99 Legal Services Act 2007. The SRA is currently subject to enforcement action by the Legal Services Board following an independent review which identified numerous failings by the regulator before the collapse of the ill-fated high-volume claims specialist.

Other recent SRA decisions include:

• section 43 orders arising out of a drink-driving conviction and a litigation consultant accepting a cash payment from a client which he failed to deposit in the client account nor return on request;
• a rebuke for failing to properly supervise staff members given to an immigration solicitor who submitted duplicate asylum statements in two separate cases and instructed a trainee to prepare and submit a judicial review application for a client's asylum matter which was deemed by the Upper Tribunal to be "poorly prepared and lacked any merits".
• A rebuke for a solicitor who instructed a trainee to backdate a deed, under the genuine but mistaken belief that it was proper and acceptable to do so.

The SDT published reasoned judgments in cases including:

• The dismissal of all allegations against the former managing partner of an international firm. The SRA had alleged that the partner breached Principles 2 (public trust and confidence) and 5 (integrity) of the SRA principles in connection with allegedly sexually-motivated conduct.
• A suspended period of suspension (with conditions) for a solicitor who was found to have acted with "manifest incompetence" in connection with conveyancing transactions and his management and ownership of a firm.
• A fine for a solicitor who failed to spot money laundering red flags whilst acting in a unsecured loan transactions. The red flags included the solicitors for one of the borrowers changing mid-transaction without explanation and, being asked to send the loan money to companies and individuals who were not the borrower rather than a solicitor's client account as stipulated in the facility agreement. The SDT commented that these transactions "bore hallmarks of fraud and/or money laundering".
• A decision on an Agreed Outcome to strike off a solicitor for financing his mortgage with criminal proceeds from his brother's drug dealing. The decision followed the solicitor's conviction for conspiracy to commit fraud by false representations after he had obtained a residential mortgage from Santander to purchase a property for which he represented he would be the sole owner. In reality, the property was partially funded by his brother who was living at the property and contributing to the mortgage payments.
• A decisionto remove conditions from a former US firm associate's practising certificate after a one-year suspension for possession of cocaine. The SDT in removing the conditions commented it was "impressed by [his] genuine remorse" and that the solicitor had "fully acknowledged his past conduct and taken the time to reflect upon it."

For more insights from the RPC team into solicitors' regulation, plus in-depth analysis of developments in lawyers' liability, please sign up to our big sister Lawyers Covered.

We would love to hear your questions, comments and suggestions for future topics. Obviously we can't comment on ongoing cases, and the views expressed in RPC Pulse are not to be relied upon as legal advice.

Under section 994 of the Act, a member of a company may petition for relief where the affairs of the company have allegedly been conducted in a manner that is unfairly prejudicial to the interests of some or all of its shareholders (being an "unfair prejudice petition").

In this case, the High Court considered the preliminary issue of whether two respondents should be removed from an unfair prejudice petition. In doing so, the Court had regard to its discretionary powers under CPR r.19.2(3) to remove parties if it is "not desirable for that person to be a party to the proceedings", which is known as "the desirability test".

Background

Adam Farnsworth (the Petitioner) and Kevin Chave (the First Respondent) are joint equal shareholders in Essex and East London Van Services Limited (the Company).

The First Respondent's son, Aaron Chave (the Second Respondent), joined the Company in 2014 as a fitter and resigned in 2023 as a senior fitter. Upon his resignation, the Second Respondent was given a 25% shareholding in a dormant company, Kent Van Solutions Limited (the third respondent, KVSL) by the First Respondent and was made a director. Subsequently, KVSL commenced trading as a competitor to the Company.

The Petitioner alleged that the actions undertaken by both the First Respondent and Second Respondent to revive KVSL amounted to a conspiracy to cause harm to the Company.

The events resulted in both the Petitioner and First Respondent bringing unfair prejudice petitions which sought orders for the Petitioner to buy out the First Respondent's shareholding in the Company. However, they disagreed on when the valuation of the shares should take place, and what the valuation should be. These issues turned on whether the Court considered there to be unfair prejudicial behaviour by either parties or both.

Before the matter progressed to trial, the Court considered as a preliminary issue whether the Second Respondent and KVSL should be removed as respondents to the Petitioner's unfair prejudice petition, given they wanted to be released, whilst the Petitioner wished for them to remain.

Application of the 'desirability' test

The exercise of the Court's discretion under CPR r.19.2(3) to remove parties turned on the assessment of the desirability of the respondents being parties to the proceedings "in light of the overriding objective of enabling the court to deal with cases justly and at proportionate cost".

In order to assess the "desirability" of the Second Respondent and KVSL being parties, the Court considered the warning in Re Little Olympian Each-Ways Ltd, which provided that it is abusive to require a respondent to remain a party if "the likelihood of relief against a party were so remote as to be perfectly hopeless". The Court extrapolated from the warning in Re Little Olympian that it would be equally "wrong to draw someone into litigation when no substantive remedy is sought against them".

Against this backdrop, the Court turned to the first requirement of an unfair prejudice petition – "that the petitioner both plead and prove that the respondent was concerned either directly or indirectly in conducting the affairs of the company in an unfairly prejudicial manner."

The Court observed that the focus of the pleaded unfairly prejudicial conduct was attributable solely to the First Respondent. The Second Respondent was "merely" a fitter, who did not have a managerial or directorial role, and KVSL was a separate company. As such, neither of these respondents were involved in the "conduct" of the Company's affairs.

Rather, the Petitioner's allegations against the Second Respondent personally were that he had breached restrictive covenants in his employment contract. However, this was purely a contractual matter and so there was no unfair prejudice to the Petitioner in his capacity as a member.

As such, the Court pointed out that "no meaningful relief" was being sought against either the Second or KVSL.  Instead, the petition was seeking authorisation under section 996(2)(c) of the Act to bring civil proceedings in the Company’s name.

Putting aside the issue that authorisation is not a relief in an unfair prejudice petition, the Court considered whether such a petition was "sufficiently substantial to justify" the inclusion of the two respondents as parties to "a lengthy and expensive petition for matters in which no remedy is sought against them."

The Court ruled that it was not for two reasons.

Firstly, the authorisation was likely to be "otiose" given that both the underlying petition and counter-petition sought orders requiring the Petitioner to purchase the First Respondent's half of the Company's shareholding. Regardless of the outcome, the Petitioner would gain control of the Company and could cause the Company to commence Part 7 proceedings against the Second Respondent and KVSL without authorisation from the Court.

Secondly, the unfair prejudice petition was an attempt to circumvent the need for Part 7 proceedings. By including the Second Respondent and KVSL as parties, the unfair prejudice petition would have resulted in binding findings of fact on the conspiracy allegations, which would have made Part 7 proceedings either unnecessary or a formality. The practical effect of granting the pleaded relief of authorisation would be to determine the subsequent Part 7 proceedings in advance. This would amount to an abuse of the unfair prejudice jurisdiction.

The Court further expanded on the second point, stating that it would be disproportionate to require the respondents to "participate and fund what amounts to a trial of corporate claims against them, but dressed up as a petition about unfair prejudice to a shareholder."

As a result, the Court held that the Second Respondent and KVSL should be removed from the proceedings given no direct or meaningful relief was being sought against them. Rather, their inclusion amounted to an attempted pre-determination on the conspiracy allegations which would then either "obviate the need for Part 7 proceedings or make them uncontroversial", which was tantamount to an abuse of process. 

Practical Implications

This decision serves as a reminder that, while section 994 petitions may afford petitioners a wide range of potential parties against whom relief could be sought, the Court will exercise its discretion and restrict the scope of applicable respondents. The relief sought against respondents must be meaningful and sufficient.

This case highlights that parties should be mindful that the Court will apply a strict interpretation of the requirement both to plead and prove that any respondents were conducting company affairs in an unfairly prejudicial manner. Parties that are relevant to the facts but are acting in a capacity that sits outside of the conduct of the company's affairs should be treated as witnesses and, if necessary, third-party disclosure under CPR r.31.17 should be sought.

Jonathan Friend (the "Defendant") was the founder and former director of Friend MTS Limited ("Friend MTS") as well as being a non-executive director and substantial shareholder of Friend Media Technology Systems Limited ("FMTS"), a Jersey-registered parent company (together the "Claimants").

In 2022, a private equity firm made a significant investment into the Claimants, which resulted in the Defendant entering into a Service Agreement and an Investment Agreement with the private equity firm. Divisions soon emerged between the Defendant and the private equity firm's management appointees to the Claimants, and the Defendant was removed as a director of Friend MTS on 22 November 2024.

Allegations

The Claimants alleged that, following his removal, the Defendant engaged in multiple discussions with the Claimants' customers, potential customers, potential partners and competitors, and divulged confidential information, with the aim of competing with the Claimants. The Defendant had also established a company, Friend TP Ltd ("Friend TP"), for this purpose. In doing so, the Claimants alleged the Defendant was in breach of restrictive covenants both under the Service Agreement and Investment Agreement, and in breach of his fiduciary duties as director of Friend MTS (until 22 November 2024) and FMTS (throughout).

By the time the claim reached the court, most of the Claimants' claims had been abandoned, including allegations of breach of confidence and the demand for an account of profits. The only two heads of loss that the Claimants continued to maintain were that the Defendant's alleged actions resulted in a lost opportunity to win back a previous customer in a deal worth £1.8 million, and an alleged missed chance to acquire a rival business valued at £5.42 million.

The Defendant denied the allegations, asserting that he had acted pursuant to his duties under the Service Agreement (prior to its termination) and thereafter his continuing fiduciary duties as a non-executive director of FMTS. The Defendant alleged that the allegations were an attempt on the part of the Claimants to put pressure on him in relation to separate proceedings between them in the Employment Tribunal (regarding various alleged detriments during the Defendant's employment) and in Jersey (relating to unfair prejudice proceedings).

Decision

The judge dismissed the claims in their entirety. It was noted by the judge that the Defendant and his family continued to own a significant shareholding in the Claimants and therefore had an interest in promoting their success. The judge also determined that the suggestion that the Defendant could compete with the Claimants, as a sole trader, was not credible, based on the evidence.

In respect of the lost opportunity to win back a past customer, the judge concluded that, based on the contemporaneous documents, the Defendant had neither contacted nor attempted to contact the previous customer in relation to the provision of services, and that it was clear that there was not in fact any extant commercial opportunity which was in the power of the Defendant to either grant or withhold.

Regarding the allegation that the Claimants had missed the chance to acquire a rival business, the judge determined that the evidence that the Defendant had failed to inform the Claimants of the commercial opportunity was "inadequate." The judge was also "unimpressed" by the evidence provided by the Claimants for the alleged £5.42 million loss suffered, stating that "it is difficult to escape the conclusion that the Claimants' intention was to include a very large (although unjustifiable) 'loss' in the claim against [the Defendant], in the context of their wider dispute."

With regard to Friend TP, it was determined that the company had been incorporated by the Defendant months earlier and remained dormant. The judge acknowledged that while the dormant nature of the business may not be determinative of an absence of conflict, a director may nevertheless take certain preparatory steps to compete consistently with their duties to the company of which they are a director. The case is therefore fact sensitive. In this instance, the judge determined that incorporating Friend TP did not constitute competitive activity and therefore did not breach any of the restrictive covenants.

Overall, the judge criticised the lack of supporting evidence for many of the allegations made by the Claimants, as well as the inconsistent nature of how the claim was presented. In this case the judge assessed the Claimants' losses as being "entirely without foundation". The judge also highlighted that the Claimants could have cleared much of their suspicion of the Defendant if they had made further enquiries of what had been discussed at the time.

Commentary

The judgment illustrates that companies who suspect that a director may not be acting within their duties should adequately investigate the matter to fully ascertain the facts before bringing a claim for breach of duty. The judgment also highlights that companies are expected to adequately evidence their claimed losses, which can potentially be challenging in circumstances where it is alleged that a company has lost an opportunity.

To read the full judgment, please click here.

Guidance on Individual Conduct

The guidance sets clear standards for individual conduct, both within and outside the workplace. This includes the obligation on all staff to treat colleagues with dignity and respect, and not to engage in bullying, harassment or discrimination. Senior managers are expected to take a proactive role in challenging inappropriate behaviour and required to help develop an inclusive culture. 

When interacting with clients and third parties, professionals must ensure that personal views do not impact the treatment of others in an unfair manner. Reasonable adjustments are also required to be made when dealing with clients with disabilities, to ensure that services are still accessible and inclusive for such clients.

The guidance also notes that individuals' conduct outside of the office (including online) can affect public trust in the profession and that offensive or discriminatory behaviour outside the office may be subject to regulatory scrutiny.

Inclusive Workplace Culture

Law firms are required to take active steps to create and maintain inclusive workplaces, including having appropriate policies and training structures in place and encouraging open discussion of EDI issues. Firms should also have clear complaints procedures in place for EDI concerns. 

Recruitment, promotion and reward practices should also be considered by firms to ensure fairness and to remove potential barriers to progression.

The SRA encourages firms to collect and consider diversity data, and also supports the setting of aspirational targets, particularly for improving representation at senior levels. Larger firms could be expected to go further by publishing gender pay gap data and similar reporting in relation to ethnicity, disability or social background.

While not all suggested actions are required by all firms, those which are larger are expected to adopt appropriate and meaningful measures to comply with their EDI obligations.

Practical Steps 

The guidance includes a range of recommended actions that firms should take to support EDI, depending on their size and structure. These include:

• Developing and continually reviewing an EDI policy;
• Ensuring inclusive and fair recruitment, promotion and performance management processes;
• Providing staff training on EDI topics such as unconscious bias and inclusive communication;
• Collecting and analysing diversity data at the firm to identify potential areas for improvement;
• Creating opportunities for open dialogue, such as staff networks or forums; and
• Making reasonable adjustments to support both clients and employees with disabilities.

SRA Enforcement Action

The SRA confirmed it will prioritise cases involving serious breaches of its principles, particularly those that undermine public trust or involve unfair discrimination, harassment or sexual misconduct. Firms that fail to meet diversity data reporting obligations may be subject to financial penalties too so firms should not be ignoring the additional guidance.

The opening section of the Consultation covers the background and what brought us here, including the judicial review of a FOS decision (upholding a complaint) by Clydesdale and the Supreme Court decision in Johnson v FirstRand Bank (discussed here). On the latter, the FCA references one of the conjoined claims (Johnson) which was upheld due to a high, undisclosed commission and the failure to inform the borrower of a commercial tie between the lender and finance broker (who was also the seller of the vehicle). Much of the scope and form of the Scheme seems to have been informed by this, despite the majority of transactions to be reviewed not sharing the same characteristics as Johnson (as discussed below).

The proposed scope of the Scheme is very broad, covering all motor finance agreements taken out between 6 April 2007 and 1 November 2024. Predictably, one of the key areas of focus is DCAs. Under such arrangements a finance broker could vary the rate of interest payable on a loan, with a commensurate increase or decrease in their commission. One could argue that the timeframe is too broad, not least because this significantly predates when primary limitation will have expired and a period of some three years after DCAs were banned. We discuss limitation further below, but the FCA justifies the latter on the basis that it was not until the Court of Appeal decision in Johnson v FirstRand Bank that they knew firms had moved to more transparent pricing models. The FCA also proposes that lenders will deliver the Scheme rather than brokers, on the basis that this will be simpler and allow for more timely redress.

So, in what circumstances is redress likely to be payable? Whilst the FCA states that not all consumers who took out motor finance will be owed compensation, they still estimate that 14.2 million agreements (44% of those taken out since 2007) will be considered unfair. A relationship will be considered unfair if there is inadequate disclosure of one or more of the following:

• A DCA.
• A high commission arrangement (being one with commission equal to or greater than 35% of the total cost of credit and 10% of the loan).
• Tied arrangements that gave the lender exclusivity or a first right of refusal.

The relationship will be deemed fair if none of the factors above are present.

The starting point will be that there is a rebuttable presumption of an unfair relationship if one of the above arrangements were present and there was not adequate disclosure. Cases will also be excluded if a matter has been referred to FOS, if redress has been accepted, if no commission was payable or if a case has been decided by the Court.

Predictably, the FCA sets a fairly high bar on what would constitute adequate disclosure - disclosure of such an arrangement will be adequate if clear and prominent information was provided, and not (for example) hidden in small print. For DCAs, this will also require disclosure of how commission was linked to the interest rate charged (effectively, the FCA wants there to have been full disclosure of the existence and nature of commission). The FCA also proposes that lenders should presume disclosure was inadequate unless it can be proven to the contrary. This is particularly significant for cases where documents are no longer retained, as it will be nigh on impossible to argue that the relationship was not unfair as there will simply be no evidence of disclosure available.  

Assuming an unfair relationship exists, redress is generally to be calculated "at the average of an estimation of loss based on the method we decide and the commission paid." Obviously, this means that customers may not be compensated based on the actual loss suffered – the approach instead averages out an APR adjustment remedy and a commission repayment remedy (as applied in Johnson). The FCA's research has found that DCAs in general generated commission between 20% and 40% higher than a flat fee model. Such customers will effectively be repaid based on the proposed hybrid model. The FCA notes that a 'loss based' APR adjustment remedy for DCA cases would result in a 17% difference in APR – this has been rejected as an approach to redress as it is considered it could risk under compensating consumers.

For cases involving a contractual tie between lender and broker and high commission (as discussed above), customers will receive repayment of commission plus interest (but the FCA opines that such cases will be rare). The FCA found that on average, for every £1 of commission paid under such arrangements, the cost of credit rose by £0.60.

Overall, the average redress payment is anticipated to be £700 and 85% of consumers are expected to take part in the Scheme. As mentioned above, the total redress payable is estimated at £8.2 billion. The cost to firms implementing the Scheme is estimated to be £2.8 billion. Despite these costs, the FCA assumes there will continue to be good product availability, although they cannot rule out "some modest impacts…on pricing" which seems fairly optimistic. On redress, the FCA has opted against a 'de-minimis' threshold, which would have excluded cases where the cost of review would exceed the redress amount. However, lenders do have the option of settling cases without completing all the stages of the process, thus allowing them to avoid the full costs of investigating a file (in such circumstances lenders also have the option of simply repaying commission rather than completing the hybrid calculation).

As regular readers will know, the FCA's interest in this area was prompted by the widespread use of DCAs. The FCA has looked at 3,333 DCA files and found that the borrower was informed that commission would be paid in 0 cases, with 60% of customers being told that commission 'may' be payable and there being insufficient evidence on file in respect of the remaining 40%. Similarly, only 4% of consumers with non-DCA arrangements were told of the amount of commission to be paid. On tied relationships, across 570 files reviewed, a 'right of first refusal' was identified in 29% of cases, of which only 10% were disclosed to the consumer. Based on their research, the FCA estimates that an unfairness indicator will be present in 37% of DCA cases and that 9.5% of cases will show an inadequate disclosure of high commission and 10.5% showing inadequate disclosure of a tied arrangement.

One positive to note is that the Scheme will proceed on an opt-in basis, with lenders required to invite consumers to decide whether or not they want their case assessed.

Discussion

The scope of the FCA's review might be largely as anticipated following Johnson, at least in terms of the type of arrangement. It was always unlikely that any redress scheme would exclude DCAs and the Johnson decision perhaps made it inevitable that this would encompass the types of arrangement deemed unfair under the Consumer Credit Act 1974. However, there are some questions to be asked around what the FCA is envisaging.

First and perhaps most importantly, the timeframe for the review is broad; at present primary limitation will have expired in respect of all arrangements taken out before October 2019 (and this date will continue to move forward until the Scheme rules are published). However, the FCA envisages going back to 2007 (being roughly the date when the relevant sections of the CCA came into force and FOS began to take responsibility for handling consumer credit complaints). The FCA addresses limitation by stating that, under s.32(1)(b) of the Limitation Act 1980, the six-year timeframe will not start to run if a fact relevant to the claim has been deliberately concealed from the claimant, with time only starting to run from when the claimant could with reasonable diligence have discovered that fact.

The FCA's view is that a failure to disclose adequate features of the commission arrangement will amount to deliberate concealment that the consumer "could not with reasonable diligence have discovered." However, following Canada Square Operations Ltd v Potter, there must be an intention to actually conceal the fact in question for s.32 to operate. It's questionable to what extent any failure to disclose a DCA (for example) would be deliberate rather than simply not something that brokers would do as a matter of routine, based on their interpretation of the FCA's Guidance at the time. We also question to what extent s.32 could apply if a customer was told that commission 'may' be payable, given that this clearly would put a customer of reasonable diligence on a path by which they could have discovered the specifics of the commission had they been inclined to do so (although of course the FCA disagrees with this analysis).

The FCA also brushes over the issues caused by the lack of records retained for agreements going back to 2007, seeming to conclude that, as there were issues with disclosure in later cases, it will presumably be the same with earlier cases. Lenders may also face considerable difficulty in contacting consumers where records of the transaction have not been retained, as they may well not have any contact details.

We also question to what extent DCA arrangements should be treated as being 'unfair' en-masse. Based on Johnson, motor finance brokers are unlikely to owe a disinterested duty (or a fiduciary duty), and it seems reasonably likely that at least a proportion of DCA customers would have received an interest rate that was commensurate with what was available on a flat fee basis. In such circumstances, it's hard to see how any unfairness arises.

Similarly, there is a rebuttable presumption under the Scheme that an unfair relationship will have caused damage. Using DCAs as an example, this presumption could be rebutted if the lender can demonstrate that the broker applied the lowest rate within the permitted range (which is unlikely to have been the case, given that this presumably would have meant no commission was payable). However, it seems unfair to require redress to be paid if the rate actually applied was reasonable, especially in the absence of any assessment of what other rates were actually available, and on the basis that the consumer was minded to purchase the vehicle.

The FCA justifies its approach based on the Court's wide powers of remedy under the CCA, noting that in Johnson the Court did not have to consider causation and measurable financial loss. That may be correct, but the Johnson case did not concern a DCA, and the bulk of the transactions to be reviewed under the Scheme will involve a DCA. It has not been established that such arrangements are unfair per se for the purposes of the CCA, nor will brokers have been under a fiduciary or disinterested duty, so it seems questionable to what extent any redress should comprise a commission element.

This follows on to some concerns about causation – presumably the majority of customers were primarily motivated to purchase the vehicle, and a proportion would almost certainly have done so regardless of the nature of the disclosure of commission. The FCA sidesteps this by stating that the Supreme Court did not need to consider causation in Jonhson (and 'causation' is mentioned twice throughout the Consultation), but this again ignores the fact that the majority of files subject to the review will not be on all fours with Johnson.

Overall, a redress scheme has been anticipated for some time, and it was always the case that there would be some knotty questions around limitation, causation and loss in particular. The Consultation arguably doesn’t adequately address these issues. We also question the approach taken on limitation and the presumptions of unfairness. It's positive that the overall redress bill has decreased so significantly, and it's encouraging to see the inclusion of an opt-in. However, we anticipate there may be some push back.

The Consultation has two deadlines – 4 November for views on proposals to extend the complaint handling rules, and 18 November for the redress scheme proposals.  We will keep an eye on this, so be on the lookout for further blogs as and when the FCA's policy statement alongside the final rules are published, which are expected early 2026.

This isn't however a moment to wait and see, the FCA has been keen to communicate to both motor finance lenders and brokers that there is work to do now while they await the outcome of its Consultation, and has set out these actions in a Dear CEO letter published on 7 October.

Recent high-volume consumer claims failings

One of the starkest examples of the risks in this sector was the collapse of SSB Law, a Sheffield-based bulk claims firm that went into administration after pursuing thousands of cavity wall claims and defaulting on the litigation funding obligations that underpinned its model. Clients who had been assured their claims were being handled on a no-win, no-fee basis were instead left unexpectedly liable for adverse legal costs associated with their discontinued claims, where the ATE insurance cover SSB Law had put in place was insufficient. The potential exposure to what later amounted to up to £40,000 in adverse legal fees per client had not been adequately explained to SSB's clients.

The SRA highlighted the SBB Law case as emblematic of the dangers posed when firms fail to manage litigation funding responsibly or provide clear information to clients. These concerns were reflected in the SRA’s 2024/2025 Business Plan, which identified bulk consumer claims as a priority area for supervision, noting the sector’s exposure to systemic weaknesses such as poor client communication, inadequate due diligence on funders, and aggressive use of high-cost borrowing. These events drove the impetus behind the thematic review, with the SRA commenting:

"As we confirmed in our 2024/25 Business Plan, we have identified concerns about themes emerging from cases involving volume consumer claims. As of 30 June 2025, we have 89 ongoing investigations that relate to 73 firms providing volume consumer claims services."

Other recent investigations and firm failures have reinforced the regulator’s view that, without stronger compliance, bulk claims work can too easily drift from providing access to justice into causing significant consumer harm.

The SRA's thematic review and its findings

The review surveyed 129 firms active in the high-volume consumer claims sector, collecting information on the volume and type of claims they handle and on the referral and litigation funding arrangements in place. The SRA visited 25 firms onsite and reviewed their awareness of and adherence to regulatory obligations designed to protect consumers from the risks associated with the sector. Of the 25 firms visited, 9 are now subject to open investigations adding to the 95 existing investigations relating to 76 bulk claims firms.

The SRA’s review found widespread concerns, including firms failing to act in clients’ best interests with litigation funding and referral arrangements, providing insufficient information on costs and funding options, poor compliance when arranging ATE insurance, weak oversight of referrers, inadequate client onboarding, and limited advice on claim merits and prospects.

A point of particular importance, in view of the high-profile collapse of SSB Law, is the obligation on firms to monitor their financial stability when taking on litigation funding. The review flagged the tendency for some firms to take on high levels of litigation funding in relation to their annual turnover. Over-gearing can jeopardise a firm's financial viability, especially where the actual progression or number of cases taken on differs from the financial models relied upon in funding-related decision-making processes. There is also the risk that securing funding can compromise a firm's regulatory obligations, such as acting in clients' best interests, where the commercial need to meet funding obligations can conflict with client interests. Of the 25 firms visited, only 16 reported an awareness of the obligation to monitor their financial viability, and only 15 reported an awareness of the need to report serious financial difficulty. 

Growth of bulk-claims firms and the litigation funding market go hand-in-hand

The SRA recognised that the level of borrowing in bulk claims is "closely linked" to the growth of the litigation funding market. Greater accessibility to funding facilitates a wider net to farm and take on claims. By way of example, on entering administration, SSB Law was holding 43,000 cavity wall claims and owed £200 million to six litigation funders. The firm now faces up to 1,400 professional negligence claims. 

The balance of maintaining access to justice whilst ensuring that funding is responsible and does not put consumers at risk has also been a concern of the Civil Justice Council (CJC), which reviewed the litigation funding market and published a final report in June. Where funding is provided to consumers, the CJC recommended enhancing regulatory obligations including: introducing a 'consumer duty' for litigation funders providing funding to consumers; requiring that funded parties receive independent advice on proposed fee arrangements; and requiring that ATE insurance policies contain robust anti-avoidance endorsements. 

The concerns highlighted by the SRA in its review extend into other regulatory jurisdictions and are shared by the government. In June 2025, the SRA Chair met with the Ministry of Justice and other stakeholders in roundtable discussions to identify measures that could be taken to protect consumers against harmful practices. Further, in July 2025, the SRA and FCA issued a joint statement warning bulk-claims firms and CMCs about maintaining compliance when onboarding or marketing claims in the recent motor finance litigation. Whilst the Supreme Court judgment in the motor finance litigation ruled out the vast majority of claims, the SRA and FCA's joint concerns around the marketing, funding and running of bulk claims remain relevant. The regulatory activity by various bodies is also representative of the risks that cut across multiple sections of the high-volume claims market.

What's next?

As a result of the SRA's review, bulk-claims firms will now be required to formally declare that they understand their regulatory obligations. The regulator also continues to progress 89 investigations into bulk-claims firms. Further, the SRA has released its 2025/2026 budget, attributing the 19% increase from the previous year to the "space-occupying issue" ¹ that is the high-volume claims sector. The SRA's new budget will collect an additional £16.6 million from regulated firms and solicitors to cover a sustained growth in complaints (a 41% increase in the number of complaints reported to the SRA in the last three years) and bolster the compensation fund which has been strained by large-scale collapses. The legal sector, and its insurers, can expect bulk-claims firms to remain under the spotlight and subject to robust regulatory enforcement.

The Virgin Media decision confirmed a High Court decision that historic amendments to contracted-out benefits made without written actuarial confirmation would be deemed void. This resulted in a great deal of market uncertainty as many schemes hold incomplete historic records which led to confusion as to whether actuarial confirmations had been obtained for relevant amendments. This raised concerns that long-standing benefit structures might not be legally effective – in turn this could impact benefits depending on the nature of the void amendment.

Following industry pressure, on 5 June 2025, the Government confirmed that amendments to the Bill would be tabled to allow affected schemes to retrospectively obtain written actuarial confirmation that historic benefit changes met the necessary standards at the time.

How this will work in practice

Under the proposed amendments to the Bill, for ongoing schemes where the is a "potentially remediable alteration", trustees can make a request to the current scheme actuary in writing for the actuary to consider whether or not, on the assumption that the amendment was validly made, the amendment met the statutory test (i.e. whether a s.37 confirmation could have been provided at the time the amended was made).  An actuary can then confirm that if, in their reasonable opinion, the amendment met the statutory test.  If an actuary receives such a request, they may take any professional approach that is open to the actuary in the circumstances of the case and may act on the basis of the information available to them as long as the actuary considers it sufficient for the purpose of forming an opinion on the subject matter of the request.  These steps can be taken now and so before the section comes into force.

Schemes that have already been wound up or have entered the Pension Protection Fund/Financial Assistance Scheme, are to have amendments treated as valid automatically. 

A "potentially remediable alteration" is one where (1) the amendment could not be made unless the relevant legislative requirements had been met – i.e. s.37 applies, (2) the amendment was treated by the trustees and managers of the scheme as if it was a valid alteration, (3) no positive action has been taken by the trustees or managers of the scheme on the basis that they consider the alteration to be void for non-compliance with s.37 and (4) it is not excluded from scope.

In relation to (3), 'positive action' means either (a) notifying members of the scheme in writing to the effect that the trustees or managers consider the alteration to be void or (b) taking any other step in relation to the administration of the scheme in consequence of the trustees or managers considering the alteration to be void which has the effect of altering payments to members.

In relation to (4), a "potentially remediable alteration" is excluded if the question of the validity of the amendment has been (a) determined by a court before the section came into force, (b) was an issue on or before 5 June 2025 in legal proceedings involving the trustees or managers of the scheme but has been settled before the section comes into force and (c) was in issue on or before 5 June 2025 in legal proceedings and remains in issue when the section comes into force.

What next?

The amendments to the Bill are a welcome development for schemes affected by the Virgin Media judgment. Whilst it will not resolve every case, the Bill should give trustees (and professional advisers) a way forward in circumstances that fall within the Bill to address any s.37 issues.

The OMR so far

The majority of improvements made under the OMR so far have been small and aimed at removing barriers on day-to-day workloads. However, some improvements have been more permanent and substantive, most notably:

• Revised complaint approach: This requires complainants to exhaust their pension scheme's internal dispute resolution process before referring their complaint to POS. The rationale behind this is to allow trustees the opportunity to address complaints at scheme level before matters are referred to POS in a bid to promote efficiency and reduce POS' caseload.
• Expedited determination approach: This was introduced in September 2024 and allows caseworkers to issue quick initial decisions on cases with clear outcomes, if they are provided with all the necessary information and/or documents upfront (missing out the adjudication process). If unchallenged, the initial decision will become binding. POS considers that this improvement could reduce wait times by up to 18 months and streamline the complaints process and its annual report notes that 104 cases between September 2024 and March 2025 were closed adopting this approach.
• The use of lead cases: Where POS identifies a single case that represents a broader issue affecting multiple members, it can prioritise this case and use it as a 'precedent' that informs and expedites the resolution of similar complaints (this was used in the Rowanmoor SSAS cases).

POS has applauded the success of the OMR and credited it for maintaining the status quo despite the record number of referrals received in the last year.

Priorities for the second year

Following the success of the first year of the OMR, POS is now looking to identify whether further improvements can be made in the 2025/26 year. With the volume of POS referrals reaching record highs, it is vital that POS identifies areas to build upon and further improve efficiency without compromising customer expectations.

POS' target for 2025/26 is to increase complaint closure rates by a further 4% year on year, whilst building on the success of the previous year and the positive implementations already made. To support this goal, POS has identified the following areas of focus:

• Improving awareness and early dispute resolution: By making further efforts to increase awareness of need to first exhaust the internal dispute resolution mechanisms before approaching POS. POS intends to provide tools and information to schemes and individual applicants to support early dispute resolution.
• Enhancing pensions expertise early on: By implementing increased levels of specialised pensions knowledge at the early stages of complaint handling. This strategy seeks to identify and address issues promptly, ensuring that cases requiring intervention are prioritised effectively and that time is being spent on the cases that require POS' attention.
• Expanding the expedited determinations approach: By broadening its application across all stages of the complaint process.
• Streamlining the jurisdiction and response process: By simplifying the procedures for determining jurisdiction and obtaining formal responses from respondents. This is expected to improve the overall complaint resolution timeline and reduce waiting times for complainants.

What's next

Whilst it has been an unprecedented year for POS, the changes introduced via the OMR has allowed the service to maintain the status quo. However, if referral levels continue to grow at the same rate, the service may need to step up its game. POS is likely to look to automation and AI to assist, but that will take time and carry its own risks – and so for now, POS continues to look at ways to cut wait times.  We wait to see whether POS looks to FOS for inspiration and the introduction of case fees, for example, to encourage early resolution before reaching POS.

The three-year strategy

The strategy sets out TPO's three-year roadmap to tackle rising demand. To do this, it sets out two key goals: 

1. Improve the quality and efficiency of service. 
2. Lead the way in driving improvements across the industry, particularly in relation to pensions administration and complaint handling. 

The first of these goals is designed to build upon the momentum created by the implementation of TPO's Operating Model Review (OMR), which introduced new methods of processing cases such as lead-case handling, quicker informal resolutions, and a more flexible approach to how determinations are made. TPO intends to implement additional methods of improving efficiency such as the use of AI for administrative matters (as opposed to decision making tasks which will remain human led).

The second goal is aimed at reducing the number of complaints TPO receives in the first place through collaboration with schemes, providers and regulators to prevent the escalation of complaints. This includes the publication of clearer guidance, the improvement of schemes' internal dispute resolution processes and raising public awareness of customer rights. TPO aims to be more than a service provider but a leader in the sector. It plans to publish sector insights, share lessons learned from the cases it receives and develop relationships with stakeholders across the pensions sector from regulators to policy makers.

These goals are clearly designed not just to improve how TPO operates, but also to reshape how the wider pensions industry operates. TPO suggests that achievement of these goals will result in the following outcomes: 

• Improved pension scheme administration;
• Greater recognition of TPO as a key part of the pensions supervisory sector;
• Improved complaint handling across the industry; and
• Increased public awareness about pension complaints.

The Corporate Plan

The 2025/26 Corporate Plan sets out the groundwork for TPO's broader three-year strategy. Their key priorities for 2025/26 include:

• Sustaining recent gains in case handling, targeting a 4% year-on-year increase in closures;
• Managing demand through better public information, sector engagement, and signposting;
• Improving access for users by making the complaints process clearer and more inclusive;
• Developing staff capability, with a focus on training, decision-making consistency, and wellbeing; and
• Modernising systems and governance, including exploring longer-term funding models.

The Plan acknowledges that efficiency in itself will not be enough. Even if case closures rise each year, the unprecedented level of growing demand means that TPO will need the assistance of the wider industry to resolve issues at an earlier stage to reduce the number of referred complaints.

TPO also notes the potential for complaints with – (1) the Pensions Schemes Bill and its new initiatives including default decumulation options, (2) the Pensions Dashboard with the expectation that data issues are discovered before the 2026 go-live date and once the dashboard is live consumers identifying issues with their pensions, (3) the consolidation of smaller schemes and (4) complaints continuing around scams, pension transfers and auto-enrolment.

What comes next?

As consumer awareness of pensions rights heighten, TPO's role becomes increasingly critical. The Corporate Plan and Strategy indicate that, rather than taking a reactive stance, TPO is considering the long-term. 

The success of TPO's strategy will ultimately hinge on how well the sector engages with the TPO to collaboratively meet the rising challenge of surging complaint levels. Ultimately, TPO isn't just changing how it works, it is trying to change the wider sector in which it works and hopes that this will result in fewer disputes, better outcomes, and an overall more confident sector. Time will tell whether TPO can meet these lofty goals.

The latest discussion paper builds on the first phase of engagement from earlier this year and invites stakeholders to continue engaging to help shape how the FRC and Recognised Supervisory Bodies (RSBs) regulates the market in the future. Written submissions are sought by 30 September 2025, with a series of targeted roundtable sessions throughout September.

Key Features of the FASS Proposals

Central to the proposals is a shift from inspection-heavy oversight, towards assessing the effectiveness of a firm's SoQMs. Whilst audit firms are already required to maintain such systems under ISQM (UK) 1, the FRC now intends to make these the core aspect of oversight.

The FRC plans to make use of graded audit file inspections, scaled to reflect each firm's market position and the nature of its audit portfolio. This is said by the FRC to allow supervisory attention to be directed where it is most needed, without imposing unnecessary burdens on firms with lower risk profiles.  The assessment of a firm's risk profile will look at a firm's audit business risk and its operational and financial resilience. Graded inspections will then be supplemented with three other types of file inspections:

• corroboratory inspections – to obtain confidence on the effectiveness of the firm's internal quality monitoring programme;
• follow up inspections – where there are specific areas or entities with specific quality findings;
• thematic inspections – where there appears to be an issue with a particular element of audits.

This multi-level review process is intended to produce a more continuous understanding of audit quality, as opposed to a one-off file review.

The discussion paper also proposes the removal of the current "tiering" structure, which has long categorised firms publicly according to their size and role in the market. Whilst the FRC intended this to assist with resource allocation, it has often been seen externally as a form of league table, which the FRC acknowledges has impacted the market. 

For the 12 largest Public Interest Entity (PIE) audit firms, a transitional period is proposed in which the regulator proposes to scale back direct inspections of ISQM (UK) 1 and during which the regulator will reduce the overall number of graded file inspections for these firms. Currently such a transitional period is not proposed for smaller firms, though the FRC are considering the impact of a transitional period for smaller firms based on where they are in the regulatory cycle – the FRC intends to share details with such firms in Autumn 2025.

Alongside these changes, the FRC intends to revise its audit market reporting model to deliver more relevant, accessible information to investors, audit committees, businesses, and the public. This is part of a broader ambition to enhance transparency and accountability across the profession.

Implications for Firms and Professionals

For large PIE audit firms, the proposals see a row back from the current inspection regimes. However, any reduction in direct oversight will be contingent on demonstrating that internal SoQMs are both robust and effective in practice. These firms will need to ensure that their governance, documentation, and internal review processes can stand up to scrutiny in a more system-focused supervisory model.

For smaller and mid-tier practices, the removal of the tiering structure may help reduce perceptions of hierarchy within the profession, but the expectations around quality management will remain high. While graded inspections should offer a more proportionate regulatory approach, the emphasis on SoQMs means that even modestly sized firms will need to invest in maintaining strong internal systems.

RSBs, meanwhile, will be required to align their own supervisory models with the FRC's revised framework.

Considerations

As the FRC moves towards a more risk-based and principles-driven regulatory approach, firms that can demonstrate a culture of quality, supported by well designed and documented systems will likely be best placed to benefit from the more flexible, proportionate approach envisaged by the FRC. Conversely, weaknesses in governance or internal controls may be more exposed in a model that focuses on how a firm manages audit quality in practice, rather than on the outcome of individual inspections alone.

The shift also means a greater focus on management – with a focus on SoQMs – with the FRC noting that this does not mean it will be doing less work – just the correct work to respond to risk. 

RPC covered the Court of Appeal ("COA") decision in our previous blog. In brief, the COA decided that, in each of the three conjoined appeals, the dealer (as finance broker) owed a disinterested duty to provide information or advice on an impartial basis. If such a duty exists, a borrower will be able to establish liability against the lender as a primary wrongdoer if any commission paid is secret. More concerningly, the COA held that, in each case, the dealer owed a fiduciary duty (being a duty of the utmost good faith) to the borrower. In such circumstances, a borrower will be entitled to a full return of any commission paid from the lender if fully informed consent was not obtained (which would necessitate disclosure of the exact level of commission paid), provided the lender was aware of the 'wrongful act' (being the failure to disclose the commission). This decision potentially opened the floodgates for thousands of borrowers to bring claims directly against lenders for sums paid in commission on motor finance purchases, as well as having the potential to impact wider financial services sectors.

The key issue before the Supreme Court was whether the status of the dealer as seller of the vehicle was sufficient to negate the existence of a fiduciary duty. The Court also considered whether the common law does (or should) continue to recognise a distinct tort of bribery and, if so, what relationship would engage this, specifically, whether a disinterested duty was sufficient for these purposes. On one of the appeals (Johnson), the Court also considered whether the relationship between the consumer and lender was unfair under s.140A of the Consumer Credit Act 1974 ("the CCA").

The Supreme Court Judgment

The decision turned on whether the relationship between the lender, broker dealer and consumer gave rise to a 'no conflict' duty owed by the broker to the consumer such as to make the receipt of an undisclosed commission from the lender a bribe at common law, or, in the case of such a receipt by a fiduciary, a breach of that duty giving rise to equitable remedies. The Court took a sensible and pragmatic approach when looking at the relationship between the parties, firstly determining that each participant in the transaction was engaged at arm's length for their own separate commercial objectives. Secondly, it was also decided that the arranging of finance was not being provided as a separate service in its own right (as was the case in the Hurstanger and Wood cases). Rather, the service was ancillary to the sale of the car.

Thirdly, it was determined that at no point in any of the transactions did the dealer give any undertaking or assurance that it was putting aside its own commercial interests in the transaction. Fourthly, the dealers were held not to have undertaken an agency relationship at law in arranging finance, with the Court noting that the dealer had no authority to bind customers to a legal relationship with the lender. The Court also noted that dependency or vulnerability were not, of themselves, indicia of a fiduciary relationship. Crucially, the Court decided that the elements of the relationship between the parties as listed were incompatible with the recognition of any obligation of undivided or selfless loyalty by the dealer to the customer. Expanding on this, the Court stated that the position of the dealer as credit intermediary in the finance transaction was not analogous with that of, for example, a company director, trustee, partner or agent – the dealer's ability to pursue its own commercial objectives were hostile to the existence of such a duty.

The Court rejected the suggestion that the transaction comprised two separate elements, being the negotiated disposal of the vehicle and the subsequent sourcing of the finance package required. The Claimants had argued that the dealer and customer shared the same interests on the second stage of the transaction, and that there was no continuing arm's length commercial negotiation at this stage. The Court rejected this, noting that where the customer needed finance to purchase the vehicle, the dealer's separate interest would persist until completion of the transaction.

The Court also noted that three of the transactions involved the dealer stating to the customer that they would seek the 'most suitable financial package' but did not accept that this of itself gave rise to a fiduciary duty (although it could possibly give rise to claims in contract or misrepresentation). In all three of these cases, the dealer did disclose that it might receive a commission, which pointed away from the existence of a fiduciary duty. On this, the court pointed out that a relationship of trust and confidence was a widespread feature of many commercial relationships which were far removed from any sort of fiduciary duty.

As a consequence, the Supreme Court decided that the Court of Appeal was wrong in law to determine that a fiduciary duty arose as a consequence of their subjective findings of trust, confidence and vulnerability as indicative of a fiduciary relationship.

In looking at the question of a 'disinterested' duty, the Court determined that the tort of bribery was not engaged by anything other than the receipt of a benefit by a person who is subject to a fiduciary duty to which the beneficiary of that duty has not given fully informed consent. For these reasons, all four of the claims based in equity and bribery were deemed to fail and the appeals allowed. As a consequence, the Court did not consider the adequacy of the disclosures around the commission received or the availability of a remedy in restitution against the briber and the availability of rescission at law or in equity.

The CCA claim

Mr Johnson also pursued a claim that the relationship was unfair under s.140A of the CCA.

It was conceded at the first trial of Mr Johnson’s claim that, because there was a personal loan element of the credit agreement and there were antecedent negotiations in respect of this under section 56(1)(c) of the CCA and, as a result, negotiations with Mr Johnson were deemed by section 56(2) to be conducted by the dealer in the capacity of agent of the lender as well as in its actual capacity. Under s.140A, a relationship can be deemed unfair based on any of the terms of the agreement, the way in which the creditor exercised or enforced its rights under the agreement and / or any other thing done by or on behalf of the creditor, based on all relevant matters.

The burden of proving an unfair relationship falls on the creditor, and if this is established, the Court may award various remedies including the repayment of any sum paid by the debtor or a reduction in the sum payable under the agreement. Mr Johnson's pleaded case made a number of allegations of unfairness, including that the lender failed to ensure that the dealer (as agent) complied with the Consumer Credit Sourcebook ("CONC"), that key features of the finance were not explained (meaning he could not make a fully informed decision), that elements of the transaction that could affect the dealer's impartiality (as broker) were not prominently indicated under CONC 3.7.4G and that the additional interest payable was not justified by any additional work required under CONC 4.5.2G.

These arguments had been dismissed by DDJ Sandercock at first instance, who noted that Mr Johnson mistakenly asserted that the commission paid to the dealer was based on the interest rate applied to the loan, when it was actually based on the capital value of the sum borrowed, and the instalments would have been the same regardless of the level of commission. The Court at first instance also noted that Mr Johnson was not entitled to claim against the lender based on an alleged bad bargain having been struck for the purchase of the car.

The COA determined that DDJ Sandercock unduly relied on the mistake as to the nature of the commission arrangement (which was not, as noted, a discretionary commission arrangement). The COA noted (with reference to Plevin) that a finding of whether or not the dealer disclosed the commission would have a material impact on whether or not the relationship between borrower and lender was unfair. The COA did determine that the relationship was unfair, noting the 'very high' commission paid to the broker. However, the Supreme Court determined that the COA erred in taking into account the inflated price paid for the car when considering whether or not the relationship was unfair (noting that the fact the level of commission correlated with the increase in the purchase price over and above the Glass's Guide value of the vehicle was a coincidence).

The Court referred to the FCA's submissions, which noted that relevant factors in considering unfairness would include the size of commission relative to the charge for credit, the nature of the commission, the characteristics of the consumer and extent and manner of the disclosure of commission.

Mr Johnson's evidence at trial was that the commission was not disclosed to him orally and that he was further not aware of it because he did not read the lender's terms and conditions (which stated that commission may be payable to the broker, and that the amount was available from the broker on request). The Court agreed with the FCA that the mere fact commission had not been disclosed was not sufficient of itself to make the relationship unfair.

Nevertheless, the high level of undisclosed commission was a powerful indication that the relationship was unfair, and would have been a major consideration for Mr Johnson. Despite the cost of the commission not being directly added to the cost of the credit, it was accepted that this would have formed part of FirstRand's overheads and would have been recovered indirectly from borrowers. The commercial relationship between the dealer and lender was also held to be a relevant factor, as this was a tied relationship with finance applicants having to be submitted to the lender in the first instance, ahead of any other lender being approached. The Court agreed with the COA, that the dealer made no attempt to be impartial between different lenders, despite the Suitability Document noting that it was offering products from a select panel of lenders.

In conclusion, despite Mr Johnson's disregard of the precontractual documents and terms and conditions being held to be relevant, the Court did not remit the s.140A question back to a district judge, and ordered that FirstRand repay the £1,650.95 paid in commission, along with interest "at an appropriate commercial rate" from the date of the agreement.

Conclusion

The decision of the Supreme Court will be welcome news for the motor finance industry and wider sectors. The Court's approach to assessing the relationships between the parties to the transactions under appeal is eminently sensible and reflects the commercial reality of such transactions. Imposing a duty of utmost good faith on a motor finance broker in circumstances where this is intrinsically linked to the purchase of a vehicle (presumably at a profit) always seemed to stretch credulity.

Lenders and brokers are not home 'scot-free' though; based on this verdict, there will be circumstances where a relationship could be deemed unfair and a borrower could be entitled to a return of commission (plus interest at an appropriate commercial rate). Questions about the degree to which any commission arrangements were disclosed (and the level of commission itself) will be highly relevant, and whether or not a relationship will be deemed unfair will be fact specific in each case.

Beyond this, the FCA has also announced that it will be issuing a consultation in October on a compensation scheme for motor finance customers. However, the Supreme Court decision will be taken into consideration and estimates of redress (while only indicative) have drastically reduced, to between £9 and £18 billion. The FOS will also have been paying close attention to the decision and, despite not having to apply the law, this may factor into how they decide complaints on similar facts (as well as informing the pending appeal of Barclay's judicial review of FOS in the Clydesdale Case).

However, for now, the industry can enjoy the decision, safe in the knowledge that the scope of any mis-selling scandal has been significantly reduced albeit not removed entirely.

The underlying claim related to a joint venture which the parties had entered into, to invest in, purchase and develop land in London.

The key issue considered in this case related to the application of the limitation defence under the Act, as the claim form was issued more than six years post-completion. The Claimant relied on s.32 of the Act, specifically that the Defendant's actions were fraudulent (s.32(1)(a)) and that there had been deliberate concealment (s.32(1)(b)).

The Court considered previous case law authorities relating to fraud and deliberate concealment, noting that the statement of claim test applies to the fraud limb. This test requires a Claimant to know enough to plead a claim, and is now applicable to deliberate concealment, such that limitation begins to run in a case of this nature when the Claimant recognises that it has a worthwhile claim. The Court has previously emphasised that this test must be applied with common sense.

The Court considered the requirement of reasonable diligence, referencing Neuberger LJ in Law Society v Sephton & Co [2004] EWCA Civ 1627, which set out that there must be an assumption that the claimant desires to discover whether or not there has been a fraud, otherwise the definition of 'could' in this context does not carry the weight it should in circumstances where the claimant should be investigating the position. This point has been debated as to what should constitute the trigger for reasonable diligence. The Court considered that this must be judged in line with the relevant circumstances. Allison v Horner [2014] EWCA Civ 117 set out that it is not what the claimant should have known but rather what they could have known.

Here, the Judge was not convinced by the Defendant's argument that the Claimant was a director of the company and therefore had a duty to comply with their director's duties. In this instance, misrepresentations had been made to the Claimant directly, rather than the company. However, the Claimant had accepted, in cross examination, that he was an educated man with a degree in business which was relevant in the context of s.32.

The Court clarified that s.32 expects enquiries to be made in circumstances where reasonable diligence requires further investigation of matters. If that would have led to discovery of fraud or concealment, limitation isn't postponed beyond this point.

The Court considered whether an educated person in the position of the Claimant, entering a joint venture with someone he did not know well, could have discovered fraud or concealment if exercising reasonable diligence. The burden of proof was on the Claimant.

The Judge found that the Claimant was understating his business acumen, his ability to obtain relevant documentation and his understanding of the property. The Judge concluded that the Claimant could have discovered the alleged fraudulent or negligently misrepresented facts with a level of reasonable diligence.

Therefore, the Claimant was not able to overcome the limitation defence to the claim.

This case will be of relevance for claims against directors where the actions giving rise to a claim are alleged to have been concealed from the claimant(s) whether this be the company or its shareholders. The Court's assessment of what amounts to "reasonable diligence" on behalf of the Claimant to identify the alleged concealment and/or fraud is likely to remain an area of dispute.

To read the full judgment please click here.

In a related press release, the FCA has stated that the current redress system works well for individual cases that are referred to the FOS. However the FCA has identified that specific or novel issues which involve a high volume of complaints can overwhelm the system and cause significant delays. The aim of the proposed changes is to help firms identify and resolve issues before complaints escalate and to support the Government's goal of increased economic growth, by providing greater predictability, so businesses have confidence to invest and innovate.

The consultation is the outcome of the FCA's and FOS' Call for Input that they jointly launched in November 2024. Individually, the FCA set out in their 2025-2030 Strategy that they intended to review the redress regime as part of their focus on the competitiveness of UK financial services. The FOS also detailed their intention to modernise the redress scheme in their Plan and Budget Consultation 2025-26.

The proposed changes include improving how the FCA and FOS work together in order to ensure regulations are interpreted consistently. This will be done through a new referral process to improve transparency about regulatory alignment, and the introduction of a lead complaint process to look at novel and significant complaint issues as they emerge. The FCA has also updated their Memorandum of Understanding with the FOS to assist in improving how they work together.

Moreover, clearer guidance will be issued on how firms can report issues to the FCA, as well as good practice examples to help identify and resolve complaints. Guidelines will be introduced to help the industry assess and resolve situations that could spike complaints. Changes will also be made to how the FOS processes complaints to ensure they are well-evidenced and ready before an investigation begins.

These proposed changes are intended to complement the Government's proposals, which  include:

• Adapting FOS' 'fair and reasonable' test, such that the FOS will be required to find that a firm’s conduct is fair and reasonable where it has complied with relevant FCA rules, in accordance with the FCA’s intent for those rules.
• The FOS will be obliged to refer issues with potentially wider implications, or mass redress events, to the FCA and the regulator will be obliged to consider those issues. Parties to a complaint will also be able to request that the FOS refer such an issue to the FCA and it will be for them to decide how those issues should be addressed.
• The adoption of a framework which formalises the roles of the FOS and the FCA in providing regulatory certainty. Where there is ambiguity in how the FCA’s rules apply, the FOS will be required to seek a view from the FCA. Where appropriate, a party to a complaint will be able to request that the FOS seeks the FCA’s view on interpretation of rules.
• A more flexible mass redress event framework will be introduced. The FCA will be able to investigate and respond to mass redress events more easily, ensuring that, when needed, mass redress events can be considered and dealt with quickly and effectively.
• An absolute time limit of 10 years will be introduced for bringing cases to the FOS, subject to certain exceptions, such as longer-term products.

The FCA and FOS are asking for comments on the consultation by 8 October 2025.

Key takeaways

The goal of modernising the financial redress system has clearly been an aim of both the FCA and the FOS for some time and comes as little surprise. It is worth noting the time of the consultation. The Supreme Court's judgment on motor finance is expected to be delivered in July 2025. The FOS received 18,658 new complaints concerning car loans in the fourth quarter of 2024, which is a 33% increase from the previous quarter and three times the number from the same period in 2023. Should the Supreme Court uphold the Court of Appeal's decision, then a significant increase in the number of complaints concerning car loans is expected which threatens to jam the system and significantly delay complaints being processed.

To read the consultation, please click here.

This decision has the potential to cost the finance industry tens of billions. If they hold that car dealers do owe fiduciary duties to customers when arranging finance, this could lead to an industry-wide redress scheme on a scale nearing the PPI scandal, predicted to cause an impact in the industry upwards of £30bn. Whilst this will be the landmark case, there is another case that could set the standard for whether we are about to see a wave of successful complaints to FOS.

Running parallel to the Supreme Court case is Barclays' appeal of a judicial review decision concerning FOS upholding a complaint concerning the same type of finance agreements (being discretionary commission models). An analyst from RBC Capital Markets has estimated that the potential cost to Barclays could reach up to £250 million if the appeal is rejected and this could open the floodgates to a wave of successful complaints. Lenders are watching this case closely, many of whom offered similar commission-based finance arrangements. However, the case has hit a bump in the road as the Court of Appeal made clear that the Supreme Court case will lead the way.

Barclays' Appeal on Hold

The Barclays matter involves a complaint made to the FOS by a customer who purchased a second-hand car through Arnold Clark. The customer alleged that they were not informed that their loan agreement with Clydesdale Financial Services (a subsidiary of Barclays), included a commission payment of £1,300 to Arnold Clark.

The FOS upheld the complaint in 2024, finding that the commission was not clearly disclosed. FOS noted the arrangement was unfair under consumer credit rules and went on to state that these types of "behind the scenes" financial arrangements presented a conflict of interest. Barclays made an application for judicial review, with the key arguments being that FOS had erred in law in determining that Arnold Clark was required to disclose the nature of the commission arrangements and that the decision on quantum was irrational. These arguments were rejected by the High Court in December last year.

Barclays have since appealed the High Court's decision. This was expected to go before the Court of Appeal this week, however, the Court of Appeal have adjourned this matter until September, pending the outcome of the parallel Supreme Court case. Lord Justice Stephen Males stated it was "necessary to know what the Supreme Court is doing to decide" given that case was to act as a test which will inform the multibillion-pound consumer redress scheme.

Lord Justice Males further justified the adjournment, stating that whatever the Supreme Court decides is "almost inevitably going to be highly relevant because it sets the landscape for consideration of the ombudsman's decision and the various rules, guidance and principles which are in play", before going on to state that if the Supreme Court does uphold the decision in FirstRand Bank and hold that there is a fiduciary relationship between the credit broker and consumer, then Barclays' appeal would be in trouble.

What Comes Next?

Back in 2024 we predicted that there would be an industry wide 'opt-out' redress scheme under s.404 FSMA due to the volume of complaints made regarding discretionary commission arrangements. It seems that, if the Supreme Court uphold the decision, this will become a reality. The FCA is intervening in both the judicial review and Supreme Court motor finance cases and is considering implementing a redress program.

The FCA previously confirmed that they will confirm whether they are proposing to introduce a redress scheme within six weeks of the Supreme Court judgment. Whilst they have yet to decide how this will work the FCA has indicated that it may look at an 'opt-out' model for the redress scheme, similar to what we saw for the s.404 review of British Steel Pension transfers. However, time will tell.

The Supreme Court ruling will be a landmark decision with a potential impact cost of billions. The Barclays case will then likely be the watershed moment for the potential wave of claims that will follow before the FOS. With the potential for a redress scheme mirroring the level of the PPI scandal hanging in the balance, and the significant impact this will all have on finance industry, we wait to see the direction the Supreme Court takes.

I would like to extend a particular thank you to my colleagues Jake Cotterill, who did most of the work on this edition's update, and Charlotte Thompson, who contributed this edition's Insight column.

The Last Two Weeks

The SDT has published two reasoned judgments on cases involving sexual harassment in the workplace.

In AR, a former partner was suspended for 24 months for admitted breaches in the form of extremely lewd comments towards a more junior colleague at a work drinks event. The judgment is particularly interesting because the Respondent was anonymised following medical evidence as to the impact on his health were his identity to be revealed. The issue gave rise to debate amongst the Panel, who reached a split decision. The balance between the impact of publicity on respondents, on the one hand, and the interests of the public in transparency on the other, are delicate and this won't be the last time the Tribunal needs to make difficult judgments on the issue.

In Brady, a solicitor was suspended for 12 months following two episodes of unwanted sexual conduct towards two different colleagues (further allegations were made but not proved on the balance of probabilities). The Tribunal considered, amongst other things, its jurisdiction over actions outside the immediate workplace, applying Beckwith. In an interesting contrast with that case, the Tribunal found that the SRA had proved breaches of Principles 2 and 5 but not any breaches of the underlying Code (in which regard the fact that the allegations concerned non-consensual touching appears to have been a key distinction). The judgment also illustrates, amongst other things, how sensitive and voluminous the evidence can be in cases of this nature and provides an interesting contrast with AR on the subject of publicity.

Both solicitors faced significant adverse costs awards: £32,655 for AR and £95,000 for Brady. In circumstances where cost awards in SDT proceedings are excluded by many insurance policies it is worth bearing in mind the risk of an adverse costs award before the Tribunal.

Other reasoned SDT judgments published since our last edition include:

A fine for a solicitor who amended a Lasting Power of Attorney and the date of a cheque without client instructions. The SRA's allegation of dishonesty was not proved: the Respondent's actions were "improper and unwise" but not dishonest, given the state of her knowledge and belief at the time. 

• An unsuccessful application for review of a Section 43 order, which sets out and applies the approach to be taken by the Tribunal when reviewing a decision of the SRA under that section.

• Fines for a firm and solicitor for admitted breaches of the banking facility rule and failures to return client money promptly on a number of matters. The conduct was determined as meeting the lowest level of seriousness required to justify a fine, leading to fines of £5,000 for each Respondent.

• A fine for a solicitor who failed to cooperate with investigations by the Legal Ombudsman and the SRA over a period of three years, and who failed to discharge an undertaking within a reasonable time. The Tribunal accepted that given the impact of a serious health event, allegations of lack of integrity were not proven and a fine at Level 1 of the indicative fine band was therefore appropriate.

• A decision to strike off a solicitor for admitted dishonesty.

The SRA published its now-customary slew of fines for non-compliance with AML rules: following our last edition, I count 14 fines in a total of £248,000 for breaches discovered by the AML Proactive Supervision Team. The largest fine was £63,869 imposed on a Bexleyheath ABS, a fine which represented 1.6% of turnover (following a 30% reduction for mitigating factors).

In the meantime, the government has pledged to introduce "clearer and more proportionate" AML regulations to ease the pressure on professional services firms. 

Other SRA decisions include:

• A significant number of interventions: 11 since 10 June. 

• A section 99 order disqualifying a non-solicitor from holding roles in the profession after he "indecently exposed himself on camera revealing his genitals to external counsel and colleagues" during an online training session.

• A section 43 order for a solicitor who dishonestly traced client and witness signatures on a Land Registry form.

• A rebuke for a firm following technical failures to comply with licence conditions in breach of the Russian sanctions regulations "owing to inadvertent human error".

• A rebuke for a solicitor that failed to ensure there was a proper system in place for his firm to be managed and for client files to be properly supervised. The solicitor failed to discharge his duties as COLP and COFA effectively and did not comply with the subsequent investigation.

A new statistic identified through the use of a freedom of information request indicates that the SRA is awaiting more than £1,000,000 in unpaid fines for internal sanctions as of April of this year. This figure rises from £800,000 in November of 2024. However, it is unclear whether these increasing figures are caused by a larger number of firms failing to pay, or an increase in the financial value of fines laid out by the SRA.

The Law Society pulled few punches in its response to the SRA's consultation on its Business Plan and Budget for 2025/26. The response walked through the highlights of a difficult year for the Regulator, particularly with regard to the collapses of Axiom Ince and the SSB Group, and the LSB's criticism of failings around the SQE, before encouraging the SRA "to ensure it focuses on its core compliance role if it is to regain public confidence and the trust of the profession it regulates."

The Employment Tribunal dismissed allegations of direct disability discrimination and victimisation relating to the reporting an employee to the SRA on the basis that the alleged acts are covered by judicial proceedings immunity. The detailed judgment sets out a very helpful explanation of the absolute privilege which applies to reports to regulatory bodies. The protection is extremely strong, extending in principle to even malicious complaints to the regulator, given the public policy importance of reporting concerns to regulators.

The Court of Appeal's judgment in Federal Republic of Nigeria v P&ID and Seamus Andrew was published earlier this month and makes for fascinating reading. The court at first instance heavily criticised Seamus Andrew, a solicitor and barrister who acted for the defendant, finding that he had acted improperly by receiving and utilising confidential documents that had been leaked from the opposing side. Despite not being party to the proceedings, Mr Andrew sought to appeal in his own right, on the basis that it breached his Article 6 and 8 rights. The Court of Appeal considered those issues, as well as the duties of a solicitor who receives the other side's documents. Read the judgment here.

Another judgment worth reading is Cotham School v Bristol City Council, particularly the discussion from paragraph 96 around the application of data privacy rules to personal data in the litigation context. The judge highlighted that "far too many of the documents in the bundle had been redacted, usually to remove names and other personal details of individuals. As a general proposition, this should not happen." "I remind all parties (and indeed all readers of this judgment) that the data protection legislation contains wide exemptions for the use of personal data in legal proceedings.

Insight
Our previous update touched on changes being consulted upon by both the SRA and BSB on complaints handling requirements, and today we're exploring this further. Both consultations accord with updated requirements by the Legal Services Board (an independent body which approves legal regulators) on consumer complaints, in May 2024. 

The SRA and BSB's proposals aim to make complaints procedures more prominent and accessible, and both regulators are considering a more thorough approach to collecting, reviewing and publishing data on complaints.

However, the most controversial element of the regulators' proposals is the suggestion of changes to when solicitors (and barristers) tell clients about the ability to make a complaint. Currently solicitors inform their clients at the time of engagement of their right to complain. However, because some clients do not always recall being told about the complaints procedure at the start of their matter, the SRA and BSB are considering expanding the requirement for providing information on how to complain at the conclusion of the legal matter as well. 

This proposal has (unsurprisingly) been to many solicitors' chargrin. A common theme of the criticism is the fear that it will do nothing but increase the already heavy administrative burden on solicitors, and add to compliance duties. Additionally, there are concerns that it will simply generate complaints – clients, no matter how well the case has been run, may be encouraged to find fault in solicitors where previously they would not have done so, thereby driving up the number of meritless complaints solicitors need to consider. 

Aside from the fact these proposals may not be liked, whether they are required is another matter.  As the SRA itself highlights, satisfaction levels in solicitors are at their highest, at 87% in 2024. Firms have also indicated to the SRA that the number of complaints received and resolved has increased over the past 10 years – according to the consultation "in 2024, firms told us that 82 per cent of complaints were resolved at first-tier to the satisfaction of the client – which is the highest reported since 2012 when we started collecting this data." Indeed the worst statistics quoted by the SRA centre on complaints handling, as opposed to publicising the ability to make complaints. In recent years there has also been a surge in complaints received by the Legal Ombudsman about lawyers (leading to the need to increase its budget). Maybe more reminders to clients about the complaints procedure would lessen their need to contact the LeO, but may achieve the opposite.

Conversely, last week the profession's consumer watchdog the Legal Services Consumer Panel expressed "deep concern" over legal services providers' "persistent failure… to effectively address complaints from consumers." It has found that only 51% of consumers knew how to make a complaint, and only 48% of those people said they would first complain to the law firm first as required. 21% were "silent suffers" who would not take action even if they were unhappy.

We await the consultation's results, and the SRA's forthcoming thematic review on complaints procedures, with interest. It certainly appears that there are problems with some law firms' complaints processes. However what is not clear is whether the SRA's proposals will be the solution to these issues, or whether they make things worse. 

For more insights from the RPC team into solicitors' regulation, plus in-depth analysis of developments in lawyers' liability, please sign up to our big sister Lawyers Covered.

This month's edition discusses a Supreme Court decision on limitation in construction negligence claims, a Court of Appeal decision on valuer negligence, a barrister's appeal from a Bar Tribunals and Adjudication Service decision and more.

Q&A
We would love to hear your questions, comments and suggestions for future topics. Obviously we can't comment on ongoing cases, and the views expressed in RPC Pulse are not to be relied upon as legal advice.

As those who follow the vehicle finance market will be aware, the historical use of discretionary commission arrangements, whereby the broker's commission is linked to the interest charged on a loan, has been causing considerable furore. In April 2025 the UK Supreme Court heard the appeal in Johnson v FirstRand Bank Limited, on whether it was lawful for motor finance brokers to receive a commission from the lender without obtaining the customer's informed consent. The Supreme Court's judgment is expected to be delivered in July 2025.

As early as January 2024, we predicted that there might be an industry wide redress scheme under s.404 of FSMA, concerning discretionary commission arrangements and it seems this prediction is coming ever closer to being accurate.

In March 2025, the FCA published a statement confirming that it's likely they will consult on an industry wide redress scheme if, taking account of the Supreme Court's upcoming decision, they conclude that customers have 'lost out' due to widespread failings. The FCA has now published its considerations on a potential redress scheme.

The FCA's Proposals

Although the FCA notes that it cannot predict the outcome of the Supreme Court's judgment, it has been speaking with consumer groups, firms and industry trade bodies on their views if a redress scheme was to be introduced.

The FCA has set out legal tests that must be met for a redress scheme to be introduced. This would involve widespread or regular failure by firms to comply with requirements, that results in consumers suffering loss or damage in respect of which a court would grant a remedy – this being the test required by s.404 of FSMA. The FCA would also have to consider it desirable for a redress scheme to be established over other routes that consumers could use to obtain redress. For context, the Financial Ombudsman Service received 18,658 new complaints concerning car loans in the fourth quarter of 2024, which is a 33% increase from the previous quarter and three times the number from the same period in 2023.

The principles that will guide a redress scheme would be comprehensiveness, fairness, certainty, simplicity and cost effectiveness, timeliness, transparency and market integrity. The FCA has acknowledged that there may be tensions between some of these principles and that they will strike the right balance, with the consultation playing an important role in getting the balance right.

The FCA has a number of options under consideration on how the redress scheme may be designed:

• Opt-in redress scheme – customers would have to confirm to their firm, within a certain time period, that they wish to be included in the scheme. The FCA has noted that this approach could be challenging, with many consumers potentially being unsure of which firms they have agreements with.
• Opt-out redress scheme – customers would be automatically included in the scheme unless they opt out. The FCA believes that this option would be simpler for customers and may reduce speculative claims. However, it is acknowledged that it could be more expensive for firms and take longer to implement.

In terms of calculating redress, the FCA notes that a wide range of options have been suggested, including those based on FOS decisions. The FCA has confirmed that they have not come to a conclusion on how redress should be calculated and this could well be a key point of discussion.

They also noted that any redress calculations must be fair to consumers who have lost out, while also ensuring the integrity of the motor finance market. The FCA is mindful that large numbers of firms may go out of business or withdraw from the market if the redress scheme does not properly balance these factors. If this were to happen the FCA believes that it would reduce competition in the motor finance market and could potentially make it more expensive for consumers to obtain motor finance in the future. To illustrate the risks in terms of calculating redress, the regulator also highlighted that if firms do go out of business, customers may not receive any redress as the Financial Services Compensation Scheme does not cover motor finance.

Next Steps

The FCA has confirmed that they will confirm within 6 weeks of the Supreme Court judgment, whether they are proposing to introduce a redress scheme. If the FCA does decide to introduce a redress scheme it will issue a consultation on how the scheme would work in practice, the proposed timings for its introduction, and a cost benefit analysis. Following the consultation, the FCA will confirm whether they are going ahead with the redress scheme and will set out when they expect firms to implement the rules, which is currently expected to be in 2026.

The Virgin Media decisions in the High Court, and Court of Appeal have been well reported due to the significant impact and uncertainty created for pension schemes, sponsoring employers and pension scheme advisors.

The facts of the National Transcommunications Limited Pension Plan (the Scheme) were that the NTL Pension was a contracted out Defined Benefit (DB) pension that was established from January 1991.  A "contracted out" scheme was a scheme in which the contracting employer contracted out of the State Earning Related Pension Scheme.  In exchange, it agreed to provide a range of minimum benefits to its members.  Contracting out was abolished from 6 April 2016 when a single state pension was introduced.

The Scheme included a provision for the payment of guaranteed minimum pensions to members which could be contracted out on the salary related basis.  Qualifying members that left the Scheme before their normal retirement age would be entitled to a deferred pension at their normal retirement age.  This deferred pension would be subject to revaluations on a yearly basis.  

In 1999, the Scheme's Trustees implemented a replacement deed which amended the revaluation provisions with effect from 1997 which would reduce the rate deferred pensions would be revalued.

Section 37 of the Pensions Schemes Act 1993 (as amended by the Pensions Act 1995) allowed contracted out schemes to amend its governing rules only if certain conditions were satisfied.  Regulation 42 of the Contracting-out Regulations 1996 included a provision that prohibited any alterations to rights to the payment of pensions and accrued rights to pensions (Section 9 rights) unless an actuary had confirmed in writing that the scheme would continue to satisfy the statutory standards set out in section 12A of the Pensions Act 1993 (Actuary Confirmation).

The issue for the Scheme, was that the Actuarial Confirmation could not be located. 

The Court of Appeal and the High Court concluded that Section 9 rights included both past and future service, and ruled that the absence of an Actuarial Confirmation meant that any amendments to the rules relating to section 9 rights was void.

Impact

The decisions underlined that the failure to evidence compliance with the specific wording of rules and regulations can have fundamental consequences.  Notwithstanding that the intentions of the parties had ostensibly been clear; a failure of evidence was sufficient to void amendments.  

Considering the length of time that has elapsed since the date of past amendments, numerous schemes could potentially be in the same position; despite taking the correct steps at the time of the amendments, they were left unable to evidence the Actuarial Confirmation.  The ramifications of void amendments can be costly for schemes, given this was likely to result in members having received incorrect benefits.

Based on the Virgin Media decisions, it was unlikely that schemes would be able to cure the technical breach by providing additional evidence from individuals involved with the decision-making process at the time, including by obtaining subsequent evidence from the actuary confirming the that they would have provided an actuarial confirmation at the time.

DWP's intervention

Earlier this year, the Minister for Pensions, Torsten Bell, confirmed in a written answer to Parliament that the government was considering available options arising from the Virgin Media decisions.

The government confirmed on 5 June 2025 that legislation will be introduced to allow affected schemes to have the ability to retrospectively obtain written actuarial confirmation that historic benefit changes met the necessary standards at the time.

The news will be welcome for schemes which may have Section 37 issues.  Additionally, the news will be welcome to professional advisors that may have been dragged into considering the impact of not having an actuarial confirmation as needed at the time of an amendment.  We wait to see the details and the proposals may not cure all issues (for example if an actuarial confirmation would not have been given or could not have been given that the time). But for now some good news.

The publication of the updated Code follows extensive stakeholder consultation on the effectiveness of the existing Code. According to the FRC, the aim of the new Code is to support long-term sustainable value creation while significantly reducing the reporting burden for signatories, of whom there are currently nearly 300 who represent around £50 trillion in assets under management. Overall, the move by the FRC is part of its wider strategy to support the government's goal of driving economic growth. 

The Code operates alongside the Financial Conduct Authority's oversight of financial markets, the Department for Work and Pensions' pension scheme regulations and the Pensions Regulator's protection of member interests. 

The new Code includes an updated definition of stewardship as “responsible allocation, management and oversight of capital to create long-term sustainable value for clients and beneficiaries”.

The FRC has included fewer principles in the Code as well as shorter "how to report" prompts instead of detailed reporting expectations. According to the FRC, early evidence suggests that signatories may be able to reduce reporting volumes by 20-30% while maintaining quality. The new Code also includes dedicated Principles for different types of signatories including asset owners and asset managers. For the first time, specific Principles have been included for proxy advisors, investment consultants, and engagement service providers.

The new Code also creates a more flexible reporting structure, by enabling Policy and Context Disclosures and Activities and Outcomes Reports to be submitted either separately or as a combined document. The Policy and Context Disclosure will only need to be submitted once every four years, while the Activities and Outcomes Reports must be submitted every year.

After the Code's introduction on 1 January 2026, a transition year will follow, during which no existing signatories will be removed from the signatory list following their 2026 application. The aim of this is to give signatories time to familiarise themselves with the Code's new format.

Richard Moriarty, the CEO of the FRC, stated that: "The Code is not prescriptive and does not direct how any signatory should choose to invest. It takes a principles-based approach which is focussed on delivering a clear outcome of value creation for clients and beneficiaries."

The FRC has also introduced draft guidance to assist with reporting to the Code. The guidance is optional, rather than prescriptive. The FRC notes that many current signatories of the Code will be able to prepare their reports without referring to it.  The guidance provides useful tips and examples to support effective implementation, particularly for those managing non-equity asset classes. The FRC is welcoming any comments on it before 31 August 2025.

Takeaways

The Chartered Governance Institute UK & Ireland had previously raised concerns that the definition of 'stewardship' focussed too much on one element of stewardship, that of the fiduciary stewardship of client monies, but lacked focus on the other element – the stewardship responsibilities to wider society as the owner of a company. The new definition of 'stewardship' now aligns the duties of investors with those of the directors of a company under the Companies Act. 

The updated Code further identifies that signatories when applying the Principles need to pay particular attention to their directors' duties as set out under section 172 of the Companies Act 2006 that refer to directors' duties to promote the success of the company.

Business leaders may welcome the FRC's recent comments that stewardship reports should not have to "feel like a box-ticking exercise." Only time will tell as to whether the FRC's promise to take an axe to the Code will promote long-term economic growth. 

To read the new Code, please click here.

FOS can currently direct redress payors to pay varying levels of interest on top of the compensation awarded. Interest can be awarded in three ways:

1. Interest as part of a money award – effectively, this type of interest comprises interest that was overpaid by the complainant (on a loan for example).
2. Pre-determination interest – being interest awarded on the money that the complainant was deprived of (for example, on an investment that was unsuitable and lost money).
3. Post-determination interest – this is interest applied to the sum awarded in the event that this is paid late.

Points 2 and 3 are to be considered in the current consultation and point 1 will remain unchanged.

The consultation comes after a joint Call for Input from FOS and the Financial Conduct Authority which requested feedback as to how the current dispute resolution system can and should be modernised. Read our previous blog here.

Feedback received by FOS to date suggests that interest awards should better reflect the current market. To date FOS had considered the 8% interest rate to be fair, but it has been suggested by others that this is too high. FOS has suggested that interest at a rate of 1% above the average Bank of England base rate (the base rate) may be a better option going forward given that throughout the previous fluctuations to the base rate, FOS' interest rate has stood at 8%. Other options include retaining the 8% rate or fixing the applicable rate at a lower percentage. 

FOS are asking which of the possible options suggested would be most suitable, what a possible alternative rate should be and how this should be implemented, as well as what situations it may be appropriate not to apply interest.

This comes as part of FOS, the FCA and the Treasury's ongoing attempt to reform the current dispute resolution system and to ensure it aligns with their aims for the future.

Feedback is being collected by FOS and the consultation will close on 2 July 2025.

To read the full consultation paper please click here.

I was very sad to learn of the death this week of Tim Dutton KC, a lovely person and excellent lawyer who led the field in this area for many years. Read a touching obituary here.

The Legal Services Board has taken enforcement action against the SRA in connection with its handling of the collapse of Axiom Ince. The LSB's directions provide for the SRA to play a much more active role in monitoring transactions and financial stability in the legal sector. Read on below for more details.

The SRA and BSB are both consulting on proposed changes to their requirements for the handling of client complaints. The proposals are directed towards making complaints procedures more prominent and accessible for clients, including requiring firms to tell clients about their complaints procedure at the end of a matter. Both regulators are also considering a more rigorous approach to collecting, analysing and publishing complaints data. The proposals come against a backdrop of a significant increase in the number of complaints to the Legal Ombudsman – feel free to speculate whether the proposals are likely to increase or decrease the LeO's workload. The consultations come to a close on 25 July (SRA) and 6 August (BSB).

The Civil Justice Council published its final report on its review of litigation funding. The CJC recommends reversal of the PACCAR decision by legislation, to take litigation funding agreements outside the scope of the rules governing DBAs. Other recommendations include establishment of a formal regulatory scheme for litigation funding, and measures to increase access for justice in small claims and manage risk associated with portfolio funding.

At the time of going to print, the SRA has published decisions to fine 12 more firms a total of £212,000 for AML breaches since our last edition on 19 May. The largest fine was £77,784, imposed on a licensed body. One firm received a £25,000 fine – the maximum which can be imposed on traditional firms until changes to the SRA's approach to financial penalties come into effect.

In the meantime, the Property Lawyers Alliance launched a campaign to reduce the burden of AML compliance on conveyancers, describing the regulatory regime as "oppressive" and solicitors as "fearful" of a "punitive fining regime".

Other SRA decisions include:

• A rebuke for a solicitor who acted without client instructions and accepted funds into client account in breach of the banking facility rule.
• A rebuke for a solicitor who communicated settlement offers under which the other side was to agree not to make a complaint to the SRA.
• A s.43 order in relation to a non-solicitor who signed lasting powers of attorney for a client who lacked capacity.

The SDT published reasoned judgments in cases involving:

• A solicitor who was found to have been dishonest in deleting emails from her firm's case management system following a client complaint. The Tribunal elected not to strike her off, imposing a 12 month suspension on the basis that the dishonesty represented a "moment of madness" while she was "moving into a zone of ill-health".
• A solicitor who was struck off having been found to have dishonestly submitted timesheets while working for three firms simultaneously.
• A six-month suspension, to be followed by a 3-year restriction on holding certain roles, for the COLP and COFA of a firm who admitted lack of integrity and acting under a conflict of interest.
• A £14,000 fine for a law firm partner who wrongly released £2.6m of deposits to his property developer client. The case was resolved by Agreed Outcome, with the SRA agreeing to a fine calculated under the SDT's approach to financial penalties (rather than its own more draconian approach).

The Law Society responded to the LSB's consultation on upholding professional ethics. " While the LSB’s intention to reinforce public confidence in legal services is understandable, there is a failure to acknowledge the robustness of the current regulatory system... The LSB risks drawing disproportionate conclusions that in turn have the potential to lead to overregulation", said Law Society president Richard Atkinson.

There are also reports of Q1 2025 having been one of the busiest periods for the Insolvency Courts with more than 3,700 scheduled hearings. This was approximately a 25% increase compared to the same quarter in 2024.

It is likely the increase in firms finding themselves in such situations is due to rising operating costs over the last few years, such as higher energy prices and the hike in National Insurance Contributions and minimum wage. It is also possible that the increase will continue amid the current global tariffs war.

When taking a closer look at the data available from Q1 2025, there are several trends which emerge, and ones which directors and officers (D&O) insurers could view as indications of potential claims to come.

HMRC 

In Q1 2025, 2,093 winding up petitions were filed at the Insolvency and Company Court. Of these, over half were issued by HMRC. It appears that the inability of some companies to pay tax bills has been the final nail in the coffin for some firms in financial distress. It is notable that there has been a jump from the 630 winding up petitions filed by HMRC in Q3 2024, compared to the 1,069 petitions filed in Q1 2025. 

One way in which company directors may have engaged in wrongful trading (thus leaving themselves open to claims) is by spending VAT collected, or PAYE or National Insurance contributions deducted from pay, and not then having the monies available to pay HMRC when the tax is due. As shown by the data available, HMRC may take steps to file a winding up petition against firms that have not paid their liabilities. If this has occurred, and an insolvency practitioner (IP) has been appointed, the former D&Os may find themselves on the receiving end of questions and requests for documents from the IPs.  

We will have to see whether the high number of winding up petitions issued by HMRC results in an increased number of claims against the former directors.

Construction

Companies in the construction sector saw the most winding up petitions filed against them in Q1 2025. Of the 583 claims, 230 were brought by HMRC, continuing the theme of companies being unable to pay tax bills as being the last straw.

As previously identified by our construction team, firm insolvencies in the construction industry remain high and have included some high profile insolvencies like ISG which is having big knock-on effects for those further down the supply chain.

We expect that D&O insurers providing cover for directors in the construction industry will be mindful of the risks facing this sector. 

Consumer products

Following closely behind construction, the consumer products sector also saw a significant number of winding up petitions in Q1 2025. 

The consumer products sector has also faced problems due to the global supply chain issues, as well as having to weather the impact the cost-of-living crisis has had on the spending power of consumers. These factors have likely contributed to the number of winding up petitions filed against companies in the consumer products sector, where such firms have been unable to pay creditors. Again, we expect that D&O insurers may see an increase in claims relating to directors of companies in this area due to the volume of winding up petitions the sector is seeing.

It remains to be seen what impact the current global tariffs war will also have on companies in the consumer products sector. D&Os of companies facing financial difficulties need to be mindful that creditors' interests arise when directors know, or should know, that the company is insolvent or bordering on insolvency, or that insolvent liquidation or administration is probable.

Comment

There are several challenges facing the construction and consumer products sectors at present, leading to an increased number of insolvencies. This in turn could result in a higher number of claims and/or regulatory action being taken against the former directors of these companies. 

It remains to be seen whether an increase in insolvency claims activity will have an impact upon the D&O market conditions and whether we may see insurers increase premiums and limit their risks accordingly. 

1. According to Solomonic data pulled on February 9, 2025.

£3,984,440 – the fine levied on the dishonest owner of an ABS which was left with a £10m shortfall on client account following improper withdrawals. Action was also taken against an employee and the firm's HOFA. "'This is the largest fine we have ever issued" said Paul Philip in a press release. "Meanwhile, we continue to review how best to protect client funds, with further steps to be announced later this year."

Elsewhere, the SRA published its business plan for the year, a war-cry on AML compliance, and an interim position statement on financial penalties: read on below for further details.

A solicitor and barrister have been referred to their regulators for citing fake cases in an application for relief from sanctions. Mr Justice Ritchie said: "I consider that providing a fake description of five fake cases, including a Court of Appeal case, qualifies quite clearly as professional misconduct."

In a separate case, a solicitor appealing the SDT's decision to strike him off referred to 25 fake authorities in his submissions. The appeal was struck out as an abuse of process.

The SRA authorised "the first law firm providing legal services through artificial intelligence". The firm offers the use of an AI-powered litigation assistant to help clients recover unpaid debts. The regulator said that "Under our rules, named regulated solicitors will still ultimately be accountable for the firm delivering high professional standards. This means they will also be responsible for all the system outputs and for anything that goes wrong."

Meanwhile, the FT asked whether the case for junior lawyers is being undermined by AI. In good news for lawyers, it concluded that AI will increase demand for legal services, and regulating the technology will need lawyers too. "Budding legal bigwigs still have a case."

The Legal Services Board has stepped up enforcement activity against the Bar Standards Board, after identifying serious shortcomings in its performance back in March. The SRA has avoided further action for now, despite also finding itself on the naughty step for shortcomings relating to its authorisation, supervision and enforcement processes.

The SDT published its reasoned decision in the case of a solicitor who tangled with tax law blogger Dan Neidle on behalf of Nadhim Zahawi MP. The Tribunal found that breaches had taken place and imposed a £50,000 fine. The decision involves consideration of fine-textured issues concerning confidentiality, without-prejudice privilege and conduct in litigation, and is well worth a read for dispute resolution lawyers.

HMRC issued stop notices against a well-known former solicitor requiring him to stop promoting tax avoidance schemes.

The Post Office project published a report on the impacts of the Post Office Scandal. The authors report on the crushing impact of the scandal on sub-postmasters and their loved ones, and offers thoughts on how the official response could have been made better.

The Law Society launched an ethical practice framework for in-house solicitors. "The framework offers free tools, resources and templates to help the in-house community navigate ethical challenges in the workplace". The framework is intended to complement SRA guidance for in-house solicitors, launched in November last year.

There were the now-customary decisions on AML compliance: three more fines since our last edition, plus the SDT's reasoned decision involving a Southend firm which accepted a £120,000 fine for a variety of breaches.

As if that wasn't enough, a further slew of decisions was published by the SRA, the SDT and the Admin Court. We've only got space for a lightning summary:

The SDT published reasoned decisions in cases involving dishonesty in connection with suspicious financial transactions and a failure to disclose personal bankruptcy. The Tribunal also suspended a solicitor for undertaking work from an unregulated entity, and struck off a convicted rapist. A solicitor unsuccessfully appealed a striking-off order arising out of antisemitic tweets.

SRA decisions included: section 43 orders arising out of an ABH conviction and a dishonest attempt to recover costs on a pro-bono matter; referrals to the SDT for solicitors accused of dishonesty, including one whose firm acted for women bringing claims arising out of vaginal mesh implant surgery; and a firm rebuked for failing to return files and client money in a timely manner.

Insight

The Economic Crime and Corporate Transparency Act 2023 gives the SRA power to impose unlimited fines for breaches of rules designed to prevent or detect financial crime.

In July 2024, the regulator consulted on a new approach to financial penalties. It proposed to introduce minimum fines, increase penalties for the most serious breaches and, of course, start wielding its ECCTA powers. However, its proposals ran into significant opposition, forcing a change of approach.  

The regulator has now published an interim position statement on its financial penalties framework. In brief, it proposes to push through limited amendments to its existing guidance now, allowing it to start handing out unlimited fines, and come back to its broader proposals at a later date.

The plan is to consult with "key stakeholders" about "some limited technical changes to our fining guidance relating to ECCTA" this summer. "We will then seek approval of the changes from the Legal Services Board."

The SRA's existing guidance contemplates the imposition of fines of up to 5% of annual domestic turnover. The proposed amendments will allow the SRA to levy fines at that level for breaches taking place after 4 March 2024, when the legislation came into force.

These measures will be harder to challenge than the more ambitious proposals mooted last year. The SRA's fining guidance has been in place for two years already, and its unlimited fining powers are granted by primary legislation. So firms could be exposed to multi-million pound fines within the year.

The interim statement also:

• Confirms that the SRA will revisit its broader financial penalties framework in a further consultation later in the year.
• Abandons proposals to calculate fines for international firms with a small footprint in the UK by reference to global turnover.
• Formally confirms that drink driving convictions will not result in an SRA fine going forward.

Significantly, the SRA has indicated that during its further consultation"we and the Solicitors Disciplinary Tribunal (SDT) will explore potential opportunities for the alignment of our respective approaches financial penalties." A rapprochement between the two bodies would resolve an absurd inconsistency in the current framework.

Meanwhile, it seems as though the recent flurry of enforcement activity relating to AML breaches is set to continue. At the SRA media briefing last week, chief executive Paul Philip said: ‘We are concerned we are still finding fairly basic deficiencies in AML arrangements within firms. Fines have been continually going up. [Non-compliance] is probably not deliberate as firms may not have the capacity or may not have paid attention.

‘The fact is that not having a risk assessment in place does increase the risk of money laundering. We will continue to ratchet up the consequences if people don’t comply.’

Elsewhere, the SRA is planning a data-gathering exercise on AML, sanctions and suspicious activity reports, to run for six weeks from the end of June.

The SRA also published its draft business plan and budget for the following year. Highlights include:

• A proposed 32% increase in the regulator's investigation and enforcement budget.
• Reported year-on-year increases in the number of reports of solicitor misconduct (up 20%), new investigations (up a staggering 40%) and concluded investigations (a comparatively modest 18%). "It is not yet clear what is driving these increases, and we are looking into this".
• A new work programme on professional ethics, drawing on the Post Office Horizon scandal, SLAPPs and the experiences of the in-house sector. "At the core this work will be looking at what we can do to make sure ethics are front and centre of mind for all practising solicitors."

Q&A

We would love to hear your questions, comments and suggestions for future topics. Obviously we can't comment on ongoing cases, and the views expressed in RPC Pulse are not to be relied upon as legal advice.

The LSB published its business plan for 2025-26. Highlights include:

• A focus on professional ethics and the rule of law. "Subject to the outcome of the consultation on our proposals, we will ensure that regulators make progress on implementing our policy expectations with the objective that their regulated communities uphold high standards of professional ethical conduct, reflective of the trust placed in legal professionals and the role they play in society".
• A plan to develop, consult on and implement new policy on equality, diversity and inclusion.
• Proposals to improve access to justice and close gaps in consumer protection.
• Improving disciplinary processes among the regulators. "We propose these encompass transparency, proportionality, timeliness and consistency."

The SRA has published updated guidance on complying with the UK sanctions regime.

The latest revision of the LSAG Guidance on anti-money laundering measures for the legal profession has now been approved by HM Treasury and takes effect from 23 April 2025.

A High Court judge has decided not to start contempt proceedings against a firm which circulated an embargoed draft judgment ahead of hand-down. The "serious error" arose out of a mix-up in the firm's media management department. "So far as the court is concerned, this judgment is enough. The enquiry has been undertaken. Sufficient clarity has been achieved. Lessons will have been learned."

SSB Law has been accused of employing “unethical tactics” to retain clients who wanted to drop their cases. The LSB expects to conclude its independent review into the SRA's actions in the lead-up to SSB's collapse during the next 12 months.

The SRA fined a solicitor £13,500 for breaching the banking facility rule by making payments to a third party after conclusion of a retainer. Another solicitor was rebuked for sending an email directly to a represented opponent containing unsubstantiated allegations. The SRA also fined six more firms for breaches of AML rules. Two firms were fined at or around the £25,000 maximum, with the others receiving penalties between £1,000 and £18,802 by reference to the severity of the breaches and their respective turnover.

The High Court fined a barrister who admitted misleading a lay client £25,000, overturning a decision of the Bar Tribunals and Adjudication Service to suspend him. Applying guidance with its roots in the cases involving solicitors, the court held that the dishonesty was momentary and that exceptional circumstances justifying a lesser sanction than disbarment were therefore present. Meanwhile, the SDT struck off a solicitor who misled three clients as to the progress of their personal injury claims.

The FT asked whether corporate whistleblowers should be paid. The SRA offers little incentive for solicitors and firms to comply with their reporting obligations, including where doing so may lead to an investigation into the whistleblower: "Although we cannot guarantee that we will not take any action against you, bringing the information to us is likely to help your position considerably."

Gregory Treverton-Jones KC, who acted for a solicitor targeted in the Daily Mail 'sting' on immigration firms, who was exonerated by the SDT after the SRA intervened in his firm, has called for an overhaul of the intervention regime, describing the case as "shaming this part of our legal system to its core."

Insight

A Court of Appeal decision last year highlighted an issue with the "adequate consideration" defence under section 329 Proceeds of Crime Act 2002.

The issue is this. Let's say Bob, a criminal, instructs lawyers on a transaction, paying for their services at a market rate. The money which Bob pays to his lawyers is criminal property. In receiving payment, the firm acquires criminal property, leaving it vulnerable to a criminal charge under section 329 of POCA.

Fortunately for the firm, because it provided services under its retainer with Bob, it has a defence under section 329(c): "a person does not commit such an offence if he acquired or used or had possession of the property for adequate consideration".

Less happily for the firm, last year the Court of Appeal held in World Uyghur Congress v NCA that the provision of “adequate consideration” by someone who can rely on section 329(2)(c) does not preclude the property from being “criminal property” in the hands of someone else with the requisite knowledge or suspicion.

As a result of the judgment, whilst monies can still be received in reliance on the adequate consideration exemption, there is a risk that transferring those funds onwards (e.g. using the funds to pay disbursements) could amount to the commission of a substantive money laundering offence.

The Law Society's view is that the decision does not impose additional reporting obligations on solicitors. "Solicitors representing clients or advising on their legal rights and obligations (which requires a reasonable sum to be paid for these services) are not engaged in money laundering, other than where a solicitor is participating in money laundering, or knows, or is in fact, providing advice for the purpose of money laundering."

The LSAG does not, however, seem to be as confident. The latest iteration of its anti-money laundering guidance for the legal sector has not been updated to reflect the World Uygher Congress decision, with the Law Society simply indicating that "Discussions are ongoing with LSAG".

Where does this leave firms in practice? We think solicitors should be cautious whenever there is a risk of receiving monies which may be known or suspected to be the proceeds of crime. The "adequate consideration" defence will rarely provide a complete answer: partly due to the issues summarised above, and partly because the defence does not apply to sections 327 (concealing) or 328 (arrangements) of POCA.

The Law Society is due to host an online event on these issues on 12 June – sign up here.

Q&A

We would welcome any questions or suggestions from readers for future Insight topics. Obviously we can't comment on ongoing cases, and the views expressed in RPC Pulse are not to be relied upon as legal advice.

The Law Society published a blog on steps law firms can take to prepare for the ‘failure to prevent fraud’ offence introduced by the Economic Crime and Corporate Transparency Act 2023, which comes into force this September. Recommendations include appropriate risk assessment, risk-based policies, controls and procedures, and delivering training on the new offence.

Breaches of AML rules continue to be fertile ground for the SRA, which fined eight firms up to 3.2% of turnover (reduced for mitigating factors) over the last fortnight. The largest fine was £36,622, imposed on an ABS. Two more (traditional) firms were referred to the Tribunal for AML breaches, possibly because the SRA wants to impose fines in excess of £25,000. The nature of the breaches is familiar: failures to carry out appropriate firm-wide risk assessments and/or client matter risk assessments, failures to have appropriate policies, controls and procedures in place, and failures to establish source of funds or carry out ongoing monitoring. The recent cases follow a rash of similar decisions over the last 12 months, and a high-profile £300,000 agreed outcome before the Tribunal earlier this year. None of the decisions involved evidence of actual money-laundering taking place.

Meanwhile, a solicitor has been referred to the SDT for alleged inappropriate and unwanted touching and comments towards colleagues, and three solicitors received rebukes for failing to return client funds promptly.

The SDT suspended a former US firm associate for 12 months, having found that he inappropriately touched two female colleagues. He was also ordered to pay £95,000 towards the SRA's costs. A reasoned decision will be published in the coming weeks, and will include analysis of the bounds of the SRA's jurisdiction over conduct outside the workplace.

The SDT published its reasoned decision in the case of a solicitor who failed to engage with a number of complaints to the Legal Ombudsman, and the SRA's subsequent investigation. Whilst the Respondent did not attend the hearing, the SDT detected difficulties in her personal life and noted that she had not practised for 6 years. Criticising the SRA's decision to pursue the case, the SDT commented upon "a disproportionality between what the Respondent had done and the weight of the allegations", and " questioned whether matters could have been resolved by another method i.e. retained in-house by the SRA". The SDT imposed a reprimand.

TheLegal Ombudsman is seeking an 11.4% increase in its budgetnext year. It expects to receive over 10,000 complaints over each of the next two years, following "a step-change in annual output". The Chief Ombudsman commented: "over several years, standards of neither service nor complaints handling have improved in legal services. In some areas, they have worsened."

The Information Commissioner's Office has fined a criminal firm £60,000 after hackers stole client details and leaked them to the dark web. The ICO said: "by focusing its efforts on bringing its systems back online and neglecting to undertake an assessment of the risks posed to data subjects, the firm did not notify the Commissioner until 43 days after the Cyber Incident", rather than the required 72 hours. We understand the firm intends to appeal.

Insight

When imposing fines in-house, the SRA's starting point is a percentage of income (for solicitors) or revenue (for firms). Ranging up to 5% of turnover or 97% of income in the most serious cases, the SRA's approach can result in eye-watering sums, although we are yet to see the full effect due to a £25,000 cap on the SRA's fining powers. (The position is different for ABSs, where the SRA has much greater leeway).

To date, the revenue-based approach hasn't affected larger firms much: given the way its existing guidance works, the SRA effectively lacks the power to fine firms with a turnover above about £21m per year. However, that will all change when the SRA starts to wield unlimited fining powers for breaches relating to financial crime under the Economic Crime and Corporate Transparency Act. Following a consultation last year, the SRA is expected to announce an update on its use of these powers this summer.

Once the new powers come into force, firms and solicitors could see fines imposed at a previously unthinkable level (the consultation paper included a worked example which resulted in a £3,750,000 fine).

For the time being, when the SRA considers a greater fine is appropriate, it refers the matter to the Tribunal. The difficulty, though, is that the Tribunal's approach to fines is far less draconian than that of the SRA.

The Tribunal recently published updated sanctions guidance, making minor tweaks to its existing approach (a modest increase to the fining bands). In an implied rejection of the SRA's approach, the updated guidance does not provide for penalties which scale with income. Although the Tribunal takes the means of respondents into account, the penalties it imposes are generally materially lower than those which the SRA's guidance would produce.

High earners and larger firms are therefore left in a difficult position when seeking to assess their exposure to a financial penalty, or to reach agreement with the Regulator. The Tribunal has been critical of the SRA's proposals and appears unlikely to bring its approach into line with the SRA's approach any time soon. For its part, the SRA continues to pursue unlimited fining powers for all categories of breach, where it enjoys the support of the LSB. The dust has yet to settle, but for the time being the regime seems to be stuck in a rather unsatisfactory muddle.

Foresight

The SRA is expected to publish its response to its consultation on financial penalties later this year. This will give rise to the availability of unlimited fines for breaches related to financial crime which took place on or after 4 March 2024. The SRA's proposals have been controversial and the response may be challenged in the courts.

The Civil Justice Council's consultation on their review of litigation funding following the Supreme Court's decision in PACCAR came to a close on 3 March 2025. A full report is expected by summer 2025, and may contain proposals for changes in the law. In the meantime, the Court of Appeal is due to consider litigation funding agreements (LFAs) based on a multiple of the sum invested early this summer.

The SRA's consultation on client money in legal services closed on 21 February 2025. The consultation included proposals with regard to the holding of client money by law firms and possible moves towards regulatory supervision of M&A activity in the legal sector. The SRA's response is awaited.

Q&A

We would love to hear your questions, comments and suggestions for future topics. Obviously we can't comment on ongoing cases, and the views expressed in RPC Pulse are not to be relied upon as legal advice.

To summarise, the Profit Rule requires fiduciaries to account for a profit that they make out of their position as a fiduciary, unless they have fully informed consent from the principal to keep the profit. In this case, the appellants sought for the Profit Rule to be changed so that the test of causation was applied on the "but for" basis, by asking whether a fiduciary would have made the same profits if they had avoided any breach of fiduciary duty.

Facts

Following the death of Georgian businessman, Arkadi Patarkatsishvili (Badri), his family instructed an asset recovery company in the British Virgin Islands and an LLP (together the Respondents) to recover Badri's assets.

The appellants (the Appellants) were former company directors of the Respondents and were held to be fiduciaries (and note that fiduciaries can include trustees, partners and some professional advisers).

The Respondents alleged that the Appellants resigned from their fiduciary positions with the intention of taking advantage of this business opportunity, which they had been working on for the Respondents, for their own personal gains. In doing so, the Respondents alleged that the Appellants had breached their fiduciary duties and had unlawfully profited from the lucrative contract.

High Court and Court of Appeal

The High Court ruled in favour of the Respondents, finding that the Appellants had breached their fiduciary duties. The Judge found that the Appellants had made accountable net profits of $179 million, but allowed a 25% equitable allowance in recognition of their skill and effort in generating the profits, awarding $134 million plus interest. The Appellants appealed.

The Court of Appeal upheld the ruling. Throughout, the Appellants had reserved their right to seek to depart from fiduciary principles before the Supreme Court, namely that a court must always answer the question of whether a fiduciary is liable to account for profits by reference to a “but-for” test of causation. In other words, by asking whether the Appellants would have made the same profits even if they had avoided any breach of fiduciary duty.

The Appellants' grounds for proposing such a change were as follows:

1. The present basis for the remedy of the Profit Rule works as an injustice to honest fiduciaries.
2. The court's disinclination to construct counterfactuals is outdated when considering modern procedural and forensic tools that are available to the courts.
3. Equitable allowance is not fit for purpose to be a cure for any injustice, while a "but-for" condition would not contain these defects.
4. Other equitable remedies (such as equitable compensation) have been recently developed by the insertion of common law principles of causation, and so this modernisation should be extended to the remedy of account of profits.
5. In this respect, English law is lagging behind the law of other common law jurisdictions.
6. Academic criticism of the remedy of an account of profits ought to be given more weight than it has previously been given.

Supreme Court

The Supreme Court unanimously dismissed the appeal. Lord Briggs gave the leading judgment. Lord Briggs stated that "the rigour of the profit rule, together with the conflict rule to which it is closely related, continues to underpin adherence by fiduciaries to their undertaking of single-minded loyalty to their principals and beneficiaries." Addressing each of the six grounds in turn, Lord Briggs:

1. Determined that the Appellants had made an error in treating the Profit Rule merely as a remedy. It is also an order for the specific enforcement of a basic duty of trustees and fiduciaries, to treat any profit arising out of their fiduciary role as belonging to their beneficiaries.
2. Rejected that anything significant has changed in terms of the court's forensic ability to construct counterfactuals.
3. Stated that courts have a broad discretion to apply equitable allowances and noted that the Appellants did not challenge the High Court's use of a 25% equitable allowance in this case.
4. Noted that equitable compensation is about compensation for loss, but loss is irrelevant to an account of profits.
5. Explained that relevant case law in other common law jurisdictions did not require the creation of a counterfactual to reach their conclusions, and that they are insufficient to command a “catch up” change in English law.
6. Concluded that the Profit Rule in its current form has not given rise to anything approaching an academic consensus that change or reform is needed.

In conclusion, Lord Briggs ruled that the grounds for appeal did not carry significant weight and did not add up to anything significant in the aggregate to justify a departure from precedent. Lord Briggs added that the principle is intentionally strict. He therefore concluded that the law regarding a fiduciary's duty to account for profits, or the means by which equity identifies profits that are subject to that duty, should neither be reformed nor changed.

Lord Leggatt, Lord Burrows and Lady Rose all concurred with the leading judgment but gave differing reasons for reaching that conclusion. In his judgment, Lord Burrows noted that "human nature being what it is" has not changed and therefore the justification for the current Profit Rule should remain in place. Lady Rose also explained that fiduciary duties were codified as recently as the Companies Act 2006.

Commentary

Fiduciaries, whether directors or trustees, should note this decision as a clear reminder that the Profit Rule will be applied to anyone who deviates from their "single-minded loyalty" owed to their principals.

The appellants in this case had sought to argue that the Profit Rule (which had been explored in some eighteenth century case law decisions) needed updating to account for the modern world of commerce where the fiduciary and the principal are both sophisticated operators, having access to the same information, who may also rely on less formality, and far less on trust, than in the traditional relationships. However, interestingly the Court noted that the introduction of the Companies Act in 2006 (which codified directors' fiduciary duties) showed that the UK Government considered that the Profit Rule was still relevant in more modern times.

To read the full judgment, please click here.

In 2014, the Complainant sought to invest in the German Property Group (GPG) following correspondence with an unregulated introducer which was promoting investments in GPG. 

To facilitate the investment, the Complainant applied to Rowanmoor to set up a SSAS (indicating in the application form an intention to invest in GPG). The Complainant was appointed as a member trustee alongside Rowanmoor Trustee Limited (RTL) as 'independent trustee', making them joint trustees. The Complainant was the sole member of the SSAS.

Rowanmoor explained to the Complainant that it could not offer advice on the suitability of the proposed GPG investment, nor could it provide guidance on the legal process involved. To that end, the Complainant was asked to sign a disclaimer, excluding Rowanmoor of all liability connected to the investment (albeit TPO found it was unclear if this disclaimer applied to Rowanmoor as trustee and/or Rowanmoor as administrator). The Complainant signed the disclaimer, confirming that he understood the risks associated with the GPG investment. The Complainant chose not to obtain legal or regulated advice before making the investment despite being recommended to do so by Rowanmoor.

In January 2015, the Complainant instructed Rowanmoor to invest £84,700 into GPG following input from an unregulated party. 

In October 2020, the FCA, Financial Ombudsman Service and the FSCS announced that GPG had entered preliminary insolvency proceedings in Germany. The properties owned by GPG were valued at approximately €150m, meaning that investors (including the Complainant) were likely to lose most of their investment.

The Complaint and TPO’s Decision

The Complainant referred his complaint to TPO regarding the suitability of investments chosen and held by the SSAS, particularly with regard to RTL's involvement as independent trustee. The Complainant requested that Rowanmoor place him in the financial position he would have been in had the investment not been made.

TPO's findings

TPO’s investigation focused on the duties and responsibilities that both Rowanmoor and RTL held in relation to investment due diligence. Its findings were based on a similar case (PO-25984) involving Rowanmoor’s role as trustee of a different SSAS and involving a different investment.
In its determination, TPO concluded that Rowanmoor, in its capacity as the scheme administrator, had fulfilled its administrative duties. However, the complaint against RTL as the independent trustee was upheld on the basis that it should be held to the standard of a professional trustee and ultimately failed to meet its legislative obligations and breached its duty of care to the Complainant by allowing the GPG investment without adequately assessing its suitability.

The Role of RTL as Professional Trustee

TPO’s reasoning highlights the differences between the roles of professional and member trustees. While the Complainant, as a co-trustee, had the authority to approve the investment, RTL, as a professional trustee, was uniquely positioned to assess the suitability of the investment. As a professional trustee, RTL had a heightened responsibility to ensure that the investment was suitable for the SSAS member and aligned with the best financial interests of the member.

The investment in GPG was deemed high-risk, given that it was an unregulated overseas property investment and involved loan notes promising high returns, regardless of market conditions. TPO stated that no reasonable trustee would have approved such an investment, especially without conducting proper due diligence. The failure of RTL to properly assess the GPG investment resulted in a breach of its duty of care owed to the Complainant. TPO emphasised that RTL had fundamentally failed to understand and meet its duties, despite continuing to charge fees for its services.

Apportioning Liability

While the Complainant was involved in approving the investment as co-trustee, TPO found that RTL, as the professional trustee, held the lion's share when it came to responsibility for the investment decision. Given that RTL had a duty to ensure the investment was suitable and had failed to do so, liability was apportioned 80% to RTL and 20% to the Complainant.

TPO’s approach reflects the understanding that RTL, as the professional trustee, had the expertise and duty to prevent unsuitable investments, while the Complainant, as a less experienced co-trustee, should not be deemed equally responsible for the failure to assess the investment properly.

Conclusion

This decision serves as a stark reminder of the fiduciary duties trustees owe to pension scheme members. Professional trustees, such as RTL, are held to a higher standard of care and are expected to conduct thorough due diligence, particularly when it comes to high-risk investments. 

TPO's determination underscores the importance of understanding trustee obligations and highlights the potential consequences when these duties are neglected. For pension schemes and their trustees, the decision provides a clear example of how liability will be assessed in cases involving unsuitable investments and the apportionment of responsibility between professional and member trustees.

A lender exercised its right to appoint LPA receivers over a property in Herne Bay, Kent (the Property) following a default on a financing arrangement. Mark Getliffe and Diane Hill were appointed as joint LPA receivers over the Property.  The Property was subsequently sold for c. £722,000 less than its valuation of £5m, with the purchaser also paying the LPA receivers' fees.  

A claim was brought against the accountancy firm for whom the LPA receivers were employed.  The claim asserted that there were two other offers at the £5m purchase price that were not properly considered and the Property was sold "without exposing it to the market" and sold to a connected person at a price just sufficient to redeem the lending arrangements.  The claimant, being a litigant in person, had a right to bring the claim as assignee of the borrower's cause of action.  Notably the assignment agreement, "claims" were defined as those against Mark Getliffe and Diane Hill.

Procedural History

A strike out application was successfully made by the accountancy firm, with the Master finding that – (1) the assignment assigned causes of action against the LPA receivers personally and not the accountancy firm, (2) the claim was brought against the wrong party, (3) the LPA receivers acted in their personal capacity having been appointed as "principals", (4) no authority was offered for the proposition that an employer of an LPA receiver was vicariously liable for the receivers' breaches and (5) an application to join the LPA Receivers would have failed as the claim was statute barred against the LPA receivers when the claim was issued (with a standstill having been entered with the accountancy firm and so the claim against the firm was in time).

Permission to appeal was granted but only on the issue of vicarious liability – the issue of estoppel (as the fact the claimant had pursued the accountancy firm and not the LPA receivers personally was not pointed out initially) – was not an issue on appeal.

The Decision 

The High Court considered the nature of a receiver's appointment: that a lender has authority to choose anyone they deem suitable to be an LPA receiver and there is no legal requirement for any specific qualifications, experience, or that the individual is a licensed insolvency practitioner, and that the Insolvency Act does not permit corporate bodies to be appointed as receivers – only individuals.  Further, on appointment the receiver is deemed to be the agent of the borrower and that relationship is not a "true" agency but simply a means by which the borrower is made responsible for the receiver's actions.

On the issue of vicarious liability the Court set out a two-stage test – first whether the relationship between the defendant and the person who committed the tort was one of employment or akin to employment and second, whether the wrongful conduct was so closely connected with acts that the wrongdoing party was authorised to do that it can be fairly and properly regarded as having been done by the tortfeasor while acting in the course of their employment or quasi-employment.  However, the Court also pointed out situations where the contractual employer is not vicariously liable – for example – complete transfers of control or independent contractors where the relationship cannot be brought within the "akin to employment" category.  In short, the capacity in which the wrongdoing party is acting and the nature of the activities they are carrying out which give rise to a tort/claim can alter the incidence of vicarious liability by their contracted employer.  

The Court then went on to reject the appeal:

• Vicarious liability - the LPA receivers' role was not one carried out in their capacity as employees nor in so far as claims were brought could it be said that those claims related to activities carried out in the course of employment.  The appointment is a personal one, the legislative framework means that LPA receivers are appointed personally so there is a direct relationship and accountability to the borrower.  As the appointment is a personal one, it does not depend upon maintaining employment with a particular employer.  The law treats the receivers as independent agents, and so once appointed the LPA receiver is acting in the course of their appointment and not in the course of their employment.

• The assignment – the assignment only assigned claims against the individual LPA receivers and not the accountancy firm.

The Implications

Although there was notably no specific case that had previously decided the point that an accountancy firm is not vicariously liable for the acts of its employed LPA receiver, it was widely understood that insolvency practitioners hold personal appointments and so should be pursued in the event of a claim in their personal names.  This case confirms that principle. 

There are notably a number of other personal appointments that exist in the professional services world including that of the scheme actuary for a defined benefit/final salary pension scheme.  For scheme actuaries sometimes the appointment documentation provides that a claim needs to be in the name of the actuarial firm rather than the individual so any public proceedings do not personally name the actuary – with the actuarial firm expressly taking on the liability of the scheme actuary.  The same is difficult to apply in insolvency cases given the nature of appointments under the Insolvency Act and so who is the right party and what the contractual documentation behind the appointment says, should be carefully considered and borne in mind. 

The primary issue in Tooling was whether an energy supplier, Engie, was liable to Tooling as an accessory to breach of fiduciary duty by Tooling's utilities broker, Utilitywise plc (UW).  Tooling is engaged in the business of manufacturing tools, consuming a huge amount of energy.  They engaged UW to assist in obtaining energy supplier contracts for their business.  Tooling did not directly pay UW for their brokerage services.  Rather, UW received commission from Engie.  The commission was built into the unit price of the energy, and the commission levels were set by UW, with an entitlement for UW to be paid up to 80% of the total commissions they expected to be paid over the life of the contract up front, thereby incentivising UW to sign Tooling up to longer service contracts. 

Tooling knew that UW was receiving a commission from Engie, but it did not know the amount, the details of how it was set, the fact that the commission was built into the unit price for the energy, or that UW might have an incentive to sign Tooling up to longer contracts to maximise up front commission. 

UW was not involved in the litigation at all, having ceased trading before it began.  Instead, Tooling pursued Engie, asserting that Engie had wrongfully procured UW's breach of fiduciary duty owed to Tooling, and was liable to pay Tooling damages as a result.

Tooling's case was dismissed at the High Court level, and they appealed to the Court of Appeal on seven grounds.  They were granted permission to appeal in September 2024, and the Court of Appeal handed down its judgment in Johnson in October 2024.

The facts in Tooling had significant similarity to the facts in Johnson, where the claimant signed a form which informed him that a commission might be paid, but no further details were provided on the commission.  Given the factual similarity and the finding of accessory liability of the lenders in Johnson, Tooling sought permission to appeal on an eighth ground of appeal. Tooling argued the High Court judge was wrong to find that Engie had not acted dishonestly, alleging that the Johnson judgment bound the Court of Appeal to find that Engie did, in fact, act dishonestly and so was liable as an accessory.

Consideration of Johnson

The Court of Appeal affirmed, despite Tooling's arguments to the contrary, that dishonesty was an essential ingredient in accessory liability, and Tooling's efforts to argue otherwise were found to be unconvincing.

The alternative to this was the eighth ground, wherein Tooling alleged that the result in Johnson bound the Court of Appeal to find that Engie had, in fact, acted dishonestly and so was liable as an accessory. Tooling argued that Johnson concluded that the only elements required to prove dishonesty was that the lender (or in this case, Engie); (1) knew it was paying the broker a commission and (2) further knew that there was a fiduciary relationship between the broker and the claimant.  On Tooling's case, Johnson would not require that Engie also knew the payment of the commission "constituted a breach of duty because of the lack of informed consent by Tooling" (paragraph 114 of Tooling).

Engie argued that permission to appeal on these grounds should not be granted in any event because dishonesty had not been raised in the original proceedings and, in any event, Tooling's argument had no realistic prospects of success.

The Court of Appeal agreed with Engie, finding that Tooling's reading of Johnson was incorrect and took the conclusion in Johnson out of context.  The Court made it clear that the lender in Johnson was liable on an accessory basis because the Court determined the lender to be dishonest.  The Court explained that this was clear from the relevant fact the Court highlighted in Johnson, such as the fact that the lender in that case had a right of first refusal when it came to disclosure of the commission, such that the broker/dealer had to approach the lender before any others, and that "FirstRand [the lender] was actively encouraging the broker not to make full disclosure and therefore that it neither wanted nor expected full disclosure to be made. In particular, the Dealer Terms do not require disclosure of the tie between FirstRand and the dealer and this renders FirstRand complicit in the concealment of that highly material fact."  (paragraph 126 of Tooling).   In short, the finding of dishonesty was not based solely on the lender's knowledge of the fiduciary relationship and the commission, crucially, it was also based on the lender's requirements and general course of dealing with the dealer/broker.

The Court of Appeal conceded that, read in isolation, certain parts of the Johnson judgment would suggest that it was not necessary for the lender to know that the claimant had not given informed consent for accessory liability to attach.  However, the Court clarified that in their view, Johnson must be read together with the context that "the court made findings (at §129 and §134) that FirstRand [the lender] had acted dishonestly, in particular by actively encouraging the broker not to make full disclosure" The earlier finding of dishonesty meant that the Court did not need to find that the lender had actual knowledge that there had been no informed consent (paragraphs 133-135 of Tooling).

The Court of Appeal then went on to note that, because dishonesty had not been alleged by Tooling before the lower court, no evidence had been given on dishonesty, and so none could now be adduced.  What little evidence which had been adduced in the prior proceedings which could arguably go to dishonesty was either insufficient or inapplicable, and so permission to appeal on those grounds was denied.

What could this mean for Johnson post the Supreme Court?

At a minimum, it appears that Tooling gives additional needed clarity for the reasoning in Johnson, at least insofar as 'half secret' commissions are concerned.  As the Court of Appeal itself conceded in relation to its own judgment in Johnson, it was possible to read Johnson as requiring only that the lender have knowledge of the fiduciary relationship and that a commission was paid for accessory liability to attach.  However, Tooling makes it clear that this was not the intent, and the Court maintains that the outcome in Johnson was consistent with the principles concerning the need to establish dishonesty in accessory liability cases as already enshrined in case law.  In short, Tooling confirms that the reason for the outcome in Johnson when it came to the half secret commission case was that the factual circumstances were such that it was clear that the lender acted dishonestly, evidenced by the requirements it put on the broker in terms of right of first refusal and discouraging full disclosure.

Even if the Supreme Court upholds the Court of Appeal's decision in Johnson, the Tooling judgment may afford an opportunity to narrow the impact of Johnson for 'half secret' commission cases, without undoing the overall result.  This provides some comfort to motor finance lenders, particularly where their own broker contracts do not contain similar requirements as those in Johnson – it is also a welcome clarification from the Court of Appeal given that the Tooling case is clear evidence of the impact of Johnson on commission arrangements beyond motor vehicle finance.

The other useful commentary from the Court of Appeal in Tooling was in relation to limitation.  The issue of limitation arose because the first utilities contract was entered into on 8 February 2016 and the claim form was not issued until 1 April 2022 – so more than 6 years from when the contract was entered into.  The Court of Appeal found that the claim was within the primary limitation period as the cause of action did not accrue at the time the contract was entered into but when the commission was paid.  However, the Court of Appeal then went on to consider deliberate concealment under s.32 of the Limitation Act 1980 and found that s.32 was not engaged.  This was because of the finding of the lower court that, had Tooling asked UW for further details of the commission, UW would have told them – so even assuming deliberate concealment – Tooling could have, with reasonable diligence, discovered that which had been concealed at the time of entering the first contract with Engie.  This could again be a useful argument where finance arrangements involving commissions were entered into more than 6 years ago (and could form a notable restriction for any consumer redress exercise that may follow the Supreme Court decisions dependent on the outcome).

It will be interesting to see how and to what extent the Supreme Court considers Tooling in the Johnson case, and we will have to wait and see if Tooling provides a small reprieve for lenders in 'half secret' cases.  The Johnson hearing is set to take place from tomorrow until 3 April 2025.

The key areas of focus in the Strategy, Plan & Budget most relevant to the accounting profession are as follows:

The future of enforcement action

The paper notes the FRC's E2E review – which is looking at an "end-to-end" review of its investigation processes, examining all steps from outset to publication of outcomes.  The paper notes that this includes "… considering whether we can develop a broader and more graduated set of options for routes to resolution that can be used for investigations, depending on the circumstances".  There is a reference to audit firms taking "greater ownership and accountability of their continued improvement journey" albeit the FRC notes that enforcement will remain "an important part of our regulatory toolkit".  The FRC consulted on its review of investigations in its draft plan in December and is to consult further in the autumn.

The paper also notes that the FRC is to undertake a comprehensive review of how the Audit Supervision regulatory model should evolve to challenges and emerging issues in the UK audit market.  The FRC says it plans to implement the new model in 2026/27. 

SMEs – assisting smaller firms to conduct audits

The FRC has shared a desire to ensure that the audit market works effectively.  Part of the FRC's approach is ensuring that audit quality across the whole of the Public Interest Entity ("PIE") market is of a "consistent quality", following a push to outsource more PIE work to smaller firms outside of the Big Four.   However, the papers notes that from the most recent assessments "the quality gap between the largest firms and others had widened, not narrowed".

The FRC intends to ensure that the performance standards expected for smaller firms carrying out PIE audits are appropriate and proportionate by undertaking a market study and developing guidance to encourage auditors to apply the ISAs in a proportionate way.  The paper also notes an intention to invest more in the Scalebox initiative to help smaller firms develop their capabilities.

Risk Management - relevant risks identified by the FRC and mitigation proposals 

The FRC notes key developments on the horizon including – a focus on economic growth, AI, sustainability reporting standards, growing interest of private capital in the UK audit market and the resilience of the audit profession (including pipelines for the workforce).  The paper refers to the Sandbox which has focused on audit and assurance and that this will expand to all areas within the FRC's remit.  The FRC has set out new principal risks (as they relate to the industry) and the planned activities in the period 2025-2026 to overcome these risks:

• A lack of proactivity, responsiveness or consideration of stakeholder impacts such as evolving political expectations. The FRC notes that any delays can cause a loss of trust in corporate governance, reporting and audit quality. 

In response, the FRC says it wants to embed their growth duty in all their work and engage well with those interested in and/or affected by their work. This includes streamlining the Stewardship Code and supporting draft legislation – reducing unnecessary burdens and clarifying monitoring processes – this will be an important development for directors and officers.  Directors & Officers will be expected to embed recent updates to the UK Corporate Governance Code, in particular in relation to internal controls and Provision 29 (which comes into effect in January 2026).  This requires boards to declare the effectiveness of their internal controls and risk management systems.

• A failure to influence and implement domestic and international accounting standards – leading to costs to participants in the ecosystem and risks undermining the quality of information supporting decision-making in financial markets. 

In response, the FRC will deliver a UK standards response to the finalisation of international standards on sustainability engagements. 

• A lack of an effective supervisory model, creating a failure to drive audit quality improvements, build firms capability and market resilience – leading to a lack of audit confidence in the market.

In response, the FRC mentions a desire to implement changes to the supervision of smaller audit firms to create more proportionate inspections and to use the Scalebox initiative to work with smaller audit firms to help share best practice and develop their capability. 

The Audit Reform Bill

The three-year strategy emphasises a desire to be 'best in class' as a regulatory authority and refers to the government's commitment to Audit Reform in the July 2024 King's Speech. The report notes that the proposed legislation will place the FRC's "regulation responsibilities on a firmer footing" and notes that by the end of the 2025-28 strategy the legislative reform and transition to ARGA "should hopefully be reality".  Interestingly the FRC also says that "… we do not agree that the modernisation of the FRC's current regulatory toolkit through statutory powers would necessarily lead to a major change in the tone and approach to our regulation".

Actuaries

Outside of audit, the FRC is also responsible for the regulation of the actuarial profession alongside the Institute and Faculty of Actuaries.  The paper refers to forthcoming legislation that the FRC anticipates "will place our actuarial regulation responsibilities on a firmer footing… to define a risk-based and proportionate framework for the regulation of public interest actuarial work" and to setting "well-balanced, proportionate and targeted requirements" in relation to actuarial advice on the use of final salary scheme surpluses.

What Next?

The overall tone of the Strategy, Plan and Budget is one of growth, with the FRC's Chief Executive expressing support for "responsible risk-taking"– there is a theme from the FRC that it will look at the audit of SMEs to see if processes can be streamlined to reduce the burden on SMEs.  But what happens next for the FRC really depends on the Audit Reform and Corporate Governance Bill, and what that means in practice for the future of the FRC and its regulatory approach.

2024 saw a number of developments, including published FOS final decisions and a Court of Appeal decision in Johnson v FirstRand Bank Limited upholding complaints and claims against lenders for disclosure failings by finance brokers. One of the FOS final decisions has been subject to an unsuccessful judicial review application (which is currently being appealed) and the Johnson v FirstRand Bank case is proceeding to the Supreme Court. 

Against this backdrop (and with the estimated redress across the board now reaching £40 billion) it seemed increasingly inevitable that our prediction for an industry wide redress scheme may come true, and it has now moved one step closer. On 11 March 2025, the Financial Conduct Authority (FCA) published a statement confirming that it's likely they will consult on an industry wide redress scheme if, taking account of the Supreme Court's decision, they conclude that customers have 'lost out' due to widespread failings. 

The Supreme Court is set to hear the appeal against the Court of Appeal's judgment between 1 and 3 April 2025. The FCA had previously planned to make an announcement in May but has now confirmed that they will confirm whether it will propose a redress scheme and the details for the same within 6 weeks of the Supreme Court decision. This means that the announcement will be dependent on when the Supreme Court publishes its judgment. 

The FCA's publication clearly suggests that, if the Supreme Court does uphold the Court of Appeal's decision, then there will be a redress scheme. Importantly, the FCA indicates that it may be looking at an 'opt-out' model for the redress scheme (an approach we saw taken for the s.404 review of British Steel Pension transfers). The publication states that a redress scheme would be "simpler for consumers than bringing a complaint…", indicating that the FCA may not be considering an opt-in exercise, given that an 'opt-in' is usually categorised as a complaint. 

The FCA believes that this approach will be "more orderly and efficient for firms than a complaint led approach", which further implies that they are envisaging a scheme that does not proceed using the normal 'opt-in' process. 

This could create an issue for the FCA, as coverage arguments could ensue if firms are asked to pay redress in the absence of an 'opt-in,' as there will have been no claim made for the purposes of a claims-made insurance policy in these circumstances. Furthermore, it needs to be kept in mind that, for redress to be payable under a s.404 scheme, consumers must have suffered a loss in respect of which they would be entitled to a remedy if they brought legal proceedings. In practice, this means the usual legal principles of duty, breach, causation and loss must be satisfied before redress is payable.   

We will be keeping a close eye on this and will report further on any new developments, and in particular, the publication of a consultation paper. However, firms must be prepared for the operational challenges and potential financial impact that may arise if the redress scheme moves forward.

As recently as 2022, the financial penalty which the SRA could impose on a 'traditional' law firm (as opposed to an Alternative Business Structure ('ABS'), to which a different regime applies) was limited to £2,000. Any greater sanction would require a referral to the SDT. That limit increased to £25,000 in July 2022. (See our previous article on this topic here). But now, less than 3 years later, the SRA has the power (granted by Economic Crime and Corporate Transparency Act 2023 ('ECCTA')) to impose unlimited fines for rule breaches related to economic crime.

The SRA revamped its approach to financial penalties in 2023. Now, the majority of financial penalties are calculated by reference to annual domestic turnover for firms or annual gross income for individuals. The percentages in question can be hefty (over 25% of turnover or 149% of income in the most serious cases), but the £25,000 cap has until now placed a limit on the resulting fines. Removal of that cap will clear the way for the SRA to impose fines at a level which is as yet unheard of for the profession.

The new powers kick in for breaches related to financial crime which took place on or after 4 March 2024. The SRA's fining powers for regulatory breaches unrelated to financial crime remain capped at £25,000 for the time being, although the SRA is pushing for this limit to be removed as well.

To put the new proposals in context, a worked example in the SRA's consultation paper results in a fine of £2,340,000 being imposed on a firm. For comparison, the largest fine ever imposed on a firm by the SDT to date was £500,000. Fines for the largest firms (and even some individuals) could in principle reach even higher.

The SRA's proposals have received stiff opposition from, amongst others, the Law Society and the CLLS, and may well be subject to judicial review. However, wherever things may settle in terms of the details of the approach, the SRA's new powers come from primary legislation and are likely be used in some form or other during the coming months.

Recent decisions

In light of the above, we have been reviewing and considering recent SRA decisions. The SRA's decisions in recent AML compliance cases effectively illustrate its evolving approach in what should be an area of real concern and focus for law firms.

AML is a particularly significant area at the moment, because:

1. Firstly, it is now a major focus area for the SRA (reflected in the sheer number of decisions last year – over 50 firms fined for AML breaches). It is specifically identified as a key priority in the SRA's corporate strategy, and the SRA has set up the AML Proactive Supervision team to inspect and assess AML compliance.
2. Secondly, as above, the SRA acquired the power to levy unlimited fines on firms and individuals in respect of breaches related to financial crime (including breaches relating to AML compliance) under ECCTA. The SRA hasn't used those new powers yet, pending the outcome of a consultation on its new approach to financial penalties. The consultation closed in September and the outcome is expected early this year.

There are common themes across all of the cases we have considered:

1. They all involved failures to carry out the risk assessments (firmwide, client and matter risk assessments) required by AML legislation, and/or failures to adopt suitable policies, controls and procedures to address the risk of money laundering.
2. There was no evidence of any harm being caused to clients or third parties.
3. The firm did not benefit financially from the breaches.
4. The firm cooperated with the SRA and acted promptly to remedy the breaches.

The SRA's financial penalty scale

In order to appreciate the impact of the changes to the SRA's fining powers, it is important to set out and explore the SRA's approach to imposing financial penalties; this is published here. An important point to note at the outset is that the SRA's current approach is to impose fines which represent a percentage of turnover (for firms) or income (for individuals).

Against that background, financial penalties are set following a strict formula:

1. Initially, the SRA determines the seriousness of the breach. It does this as follows:
   
   a. Firstly, the nature of the conduct is assessed as "less serious" or "more serious". In broad terms, "less serious" offences are unintentional one-offs, whereas "more serious" offences are deliberate or reckless, or form part of a pattern.
   
   b. Secondly, the impact of the conduct is assessed as low, medium or high. The SRA will not only look at the harm which was in fact caused by the breach, but also the harm which the breach had the potential to cause.
   
   
2. At each stage, the conduct is given a score: 
   
   a. The "nature" score is either 1 (less serious) or 3 (more serious); and 
   
   b. The "impact" score is either 2 (low), 4 (medium) or 6 (high).
   
   
3. Those scores are then added together to produce a "penalty bracket", which is a range of possible fines expressed as a percentage of annual domestic turnover (for firms) and a percentage of annual gross income (for individuals)
   
   

   Total score	Bracket	% age of turnover (firms)	% age of income (individuals)
   3	A	0.2 – 0.3%	2-3%
   5	B	0.4 – 1.2%	5-11%
   7	C	1.6 – 3.2%	16-49%
   9	D	3.6 – 5%	65-97+%

   
   
   
4. The decision maker will then decide where within the "penalty bracket" the penalty should be set, before being adjusted to take into account things like mitigation, affordability and the removal of any benefit arising out of the conduct. This is referred to as the "basic penalty".
   
   
5. Having set the "basic penalty", the SRA will then:
   
   a. Apply a percentage reduction of up to a maximum of 40% to take account of any mitigating factors; and
   
   b. Adjust the final penalty so as to eliminate financial gain or other benefit obtained as a direct or indirect consequence of the misconduct.

The SRA's approach to aggravating and mitigating factors

Under the SRA's current approach, its decision makers consider separate mitigating factors at two different stages of the fining process. Firstly, they take into account mitigating factors when determining the appropriate indicative fine. Secondly, after the indicative fine level has been set, they assess whether it is appropriate to reduce (discount) the penalty to take account of further specific mitigating factors. These factors are:

• Making an early admission
• Remedying any harm caused
• Cooperating with our investigation

The decision maker can discount a basic penalty by a sum of up to 40 per cent, but the SRA advises that it will take into account the need to make sure that the penalty remains appropriate and proportionate to uphold public confidence. This is a simplified version of the SRA's old approach, which it considers introduces more clarity and transparency.

The SRA is proposing it moves away from a standalone discounting process. Instead, its decision makers will consider all aggravating and mitigating factors at one stage, when setting the indicative fine level. The SRA intends to amend its guidance to set out the types of factors which it will consider as aggravating or mitigating factors.

The SRA proposes to make it clear in its guidance that it may consider the following aggravating factors when setting the indicative fine:

• Demonstrating a lack of insight or remorse regarding the misconduct.
• Harm or potential harm to vulnerable clients.
• Disregarding our published guidance or warning notices.
• Hindering our investigation.
• Failure to cooperate with our investigation.
• Failure to remedy harm.
• Previous regulatory findings.

And that it may consider the following mitigating factors:

• Taking steps to prevent further misconduct
• Making an early admission

The SRA have reflected on the specific factors that decision makers currently consider as part of our discounting process:

• Respondents who make an early admission of misconduct to the SRA can save costs and stress to witnesses and others involved in the process as well as saving the SRA considerable time and resources. (Mitigating factor).
• The SRA expects all those who have breached its rules to remedy any harm caused by that breach. The SRA will therefore not consider doing so to be a mitigating factor. It will consider a failure to do so to be an aggravating factor.
• Cooperation with SRA investigations is a regulatory obligation. The SRA does not consider meeting this obligation to be a mitigating factor. A failure to cooperate with an SRA investigation would be an aggravating factor. Similarly, deliberately hindering our investigation would be a more serious aggravating factor and may be misconduct in its own right.

Turning back to recent decisions

Going back to the recent decisions discussed above, the basic penalties set by the SRA ranged between 0.8% and 3.6% of annual domestic turnover for the firms in question. The firms were relatively small, so this didn't result in fines at a high. However, they are still a lot higher than the type of fine that we consider we would have seen in comparable circumstances even a couple of years ago.

It's worth highlighting that in most of the cases we have considered, the firm has cooperated fully with the SRA, remedied any breaches promptly, and there was no evidence of any harm being caused to anyone (which we consider means that it was not established that any money-laundering took place). The breaches were all at the level of not having the appropriate paperwork/policies in place. But despite that, the SRA assessed most of the cases as falling within penalty bracket B or C, justifying quite a serious sanction. These heavy sanction in those circumstances are of course surprising, but that is the effect of the SRA's current approach to financial penalties.

General observations

As a basic observation, the level of the fines imposed (on small regional firms) represents the type of step change in the level of SRA fines to be expected in light of the significant changes summarised above.

However, we aren't seeing any really big fines being imposed on larger firms – yet. We suspect that this is because the SRA is not yet using its ECCTA powers to impose fines above £25,000 on (non-ABS) firms, pending the outcome of its recent consultation.

The majority of the firms agreed to imposition of the fine in question, by entering into a regulatory settlement agreement with the SRA. Given how much firepower the SRA now has, it is perhaps understandable they are able to leverage a settlement in a majority of cases.

Issues for the (very near) future

The first and most significant point to make is that soon – perhaps very soon – the SRA will announce the outcome of its consultation on its new financial sanctions guidance, which will include details of how it will use its new powers under the ECCTA.

In addition to reflecting the SRA's new powers, the proposed updated sanctions regime under consultation extends the penalty brackets listed above by adding two new penalty bands – E and F – for the most serious cases. If adopted, the new bands will give the SRA power to levy fines of between 6 – 25% of annual turnover (or an uncapped amount of over 25% of turnover, in the very highest band) on firms, and between 113% - 145% of annual gross income (and again, an uncapped amount in the most serious cases) on individuals.

The consultation has been controversial, and the outcome may well be subject to legal challenge. However, it seems inevitable that at some point the SRA will impose a fine measured in the millions for a breach of AML legislation.

Separately from the new fines regime, the SRA has signalled in its most recent AML Annual Report that it is continuing to ramp up its efforts to ensure AML compliance, and is actively recruiting into its AML function:

"In addition, we are considering how best to respond to our new regulatory objective of promoting the prevention and detection of economic crime under the Economic Crime and Corporate Transparency Act 2023 (ECCTA). Alongside our work relating to AML and sanctions, we will be recruiting to expand our proactive capability. This will make sure we have the right levels of oversight and coordination of the reactive and proactive ways of working that support our fraud prevention work."

So we consider that the trend of more, and bigger, sanctions for AML compliance is only going to accelerate.

Conclusion

Faced with an increasingly active and muscular regulator, there has never been a better time for law firms to review their AML and sanctions compliance functions. We would also encourage firms to review their insurance arrangements and consider whether they have adequate cover in place for regulatory matters.

Update

March 2025 will see the Institute of Chartered Accounts in England and Wales (ICAEW) introduce updates to its Code of Ethics to reflect recent changes from the International Ethics Standards Board for Accountants (IESBA). The IESBA sets international ethics standards with their aim being to instil public trust and to facilitate proper functioning of economies and markets.

The ICAEW is a member of the International Federation of Accountants and therefore must implement changes made to the IESBA's Code of Conduct (the Code). The 2025 changes are anticipated to be significant given the ethics focused work that has taken place by IESBA since 2020 when the Code was first introduced. 

In summary the new Code of Ethics raises standards for accountant professionals which arguably brings increased risks.

The significant changes are in relation to:

• The role and mindset of professional accountants
• The use of technology
• New provisions relating to the independence of accountants and firms in group audits
• Professional behaviour

Role and mindset

One significant update to the Code of Ethics focuses on the role and mindset of accountants, stressing the importance of acting in the public interest, maintaining an inquiring mindset and recognising bias. In light of the prevalent rising threat of insolvencies, directors and officers (D&O) must be careful about trading, or being seen to trade, when a company is insolvent i.e. wrongful trading.  With 83 of FTSE100 companies having an ICAEW chartered accountant on their board, the changes have a particular impact on those directors who may well be subject to additional scrutiny given their qualifications.

It is important for all D&Os to remain mindful of the duties owed to creditors and consider whether a company is able to continue as a going concern. The increased regulations on ICAEW members may mean that in house accountants are mindful of how aggressively a company is run. We could therefore see increased scepticism from ICAEW members sat on director boards, but the wider board is also likely to see the impact of this change given it will also apply via the audit.

The use of technology

Another major change to the Code of Ethics addresses the impact of technology, specifically the potential risks from innovative technologies and the requirement for competence, due care and confidentiality alongside the use of technology. AI cannot replicate the professional scepticism that auditors in particular are required to adopt.

These changes highlight the risks posed by new tools and provide clearer guidance on independence, confidentiality, and professional competence when handling technology-related services. Those in the profession will need to strike a balance between staying ahead of the curve and at the same time not becoming too reliant on technology. The accountancy sector has been one of the largest adopters of Artificial Intelligence (AI) and those in the industry need to ensure that they exercise professional judgement when making commercial decisions and do not over rely on these technologies. ICAEW members on the board of directors could find themselves exposed if they become too reliant on technology where they could be said to fall short of their fiduciary duties to when promoting the success of a company.

Independence in audits

The updates to the Code of Ethics will also strengthen independence requirements for group audits with new rules on communication between group and component auditors and clearer processes required for addressing independence breaches. Definition of "Audit Team" and "Engagement Team" will also be revised to bring greater clarity.

The starting point for auditors is a requirement to exercise professional scepticism in line with required ethical considerations and objectiveness, auditors must apply and demonstrate sceptical mindsets when undertaking their work¹. ACCA are of the view that an audit performed without professional scepticism would not be high quality and it is important that those in the industry engage professional judgement as a key component of quality auditing. 

The Financial Reporting Council released a publication in 2024² which noted that the audit market had become increasingly consolidated, with an acknowledged decrease in the number of registered audit firms. Costs in this area have also gone up by 27% suggesting a lack of competition and there is a desire to try and break this up. Smaller audit firms will need to remain mindful of ensuring that the work they undertake is within their capabilities, so as not to open themselves up to potential claims (especially given that auditors are often in the frame when companies enter insolvency).

Professional behaviour

The current wording of the Code of Ethics requires accountants to act with courtesy and consideration. There is a debate as to whether this wording sufficiently captures the behaviours that the ICAEW intends it to. Whilst the scope already covered an overarching provision that members should not act in a way which discredits the profession, the anticipated Code of Ethics' new wording will now incorporate specifics for society's expected standards of professional accountants. Sophie Wales, Director of Regulatory Policy at the ICAEW, has commented that the wording is more contemporary.

The Code of Ethics wording around behaviour highlights that accountants' professional lives are not just within the workplace, but emphasises that the profession is being represented outside of the working world. Social media has been tricky to navigate and the ICAEW has seen complaints in this area. In a podcast³ discussing the new Code of Ethics, Sophie Wales has emphasised that those identifying themselves as chartered accountants online or at events will be held to the same standards as those who identify under this title in person. It is acknowledged that this could be taken to be intrusive, however. The ICAEW is seeking to strike a balance between free speech and accountants' private lives whilst also maintaining the high standards expected of those in the profession.

It is hoped that the clearer and more specific wording will help those who wish to report conduct if it seems to fall below standards expected. The ICAEW will continue to review whether behaviours are serious enough to require sanctions, with the conduct department reviewing complaints via diligent investigations. It is hoped that the new Code of Ethics will facilitate this department.

In light of more onerous requirements, firms and individuals will need to ensure that they have appropriate cover for regulatory investigation costs. We may well see an uptick in regulatory investigations, as has been seen with regulatory bodies like the Solicitors Regulation Authority. With a focus on workplace culture, employment liability policies may also be triggered in circumstances of bullying claims where there are allegations that the Code of Ethics has been breached.

Other amendments

Other amendments include guidance to support objectivity in engagement quality reviews as well as guidance on the alignment with the International Standard on Assurance Engagements (UK) 3000 (a mandatory standard for assurance engagements). Guidance will also be provided in respect of self-review threats in non-assurance services (those which fall outside of audit engagement).

What next?

In bringing about these changes the ICAEW has reviewed codes of conduct across various sectors. FCA and SRA regulated entities have felt the full force of regulatory intervention in recent years, as well as other regulatory bodies continuing to broaden their oversight. The new Code of Ethics seems to now be catching up to this approach. Given the increased standards expected, we may well see more regulatory complaints submitted to the ICAEW which could result in fines and regulatory costs for members.

To help members prepare for the changes to the Code of Ethics, the ICAEW will be providing resources, including a series of articles setting out major changes, a webinar for members in April 2025 and updated Continuing Professional Development materials. Further changes are also anticipated to the Code following the implementation of further updates to the IESBA code.

All companies and professional firms that have D&Os, Partners or employees that are ICAEW chartered accountants should be mindful of the updated Code of Ethics and consider their insurance arrangements in order to ensure that sufficient cover is in place.

This article was originally published in Law360.

However, the head of the FCA has warned that such growth will come with risks that the government must be alive to. Speaking on the issue on 22 January, the head of the FCA warned that more could go wrong as a result of these demands to slash regulations and has asked that the government clearly outline what they feel is an acceptable level of harm to consumers. Whilst the proposals offered by the FCA may allow for the freedom for growth that the government is seeking, the FCA have made clear that these proposals come with a real risk of consumer harm.

The Proposals

On 16 January 2025 the FCA wrote to the prime minister, setting out their recommendations to support the government's mission on growth. These proposals include:

• Streamlining the FCA Handbook following input from the industry on rules that could be simplified or removed.
• Removing the need for a Consumer Duty Board Champion, now that the Duty is in effect.
• Reducing conduct requirements for wholesale insurers.
• Simplifying responsible lending advice rules for mortgages, supporting home ownership and opening a discussion on the balance between access to lending and levels of defaults.
• Consulting on removing maturing interest-only mortgages and other outdated guidance.
• Embracing a 'digital first' approach to support the government's AI plan. Avoiding creating additional regulations for AI by relying on existing frameworks.
• Reforming online tools designed to explain pensions, improve transfer times and finalise next steps for the pension dashboards.
• Removing the £100 contactless limit both for physical cards and digital wallets.
• Create new digital service standards, allowing firms to accept digital identity authentication and verification.

These are a small number of the lengthy proposals outlined by the FCA, all of which can be found here.

Concerns/Commentary

The FCA's 16 January letter makes clear that the FCA believes these proposals would assist in bolstering the growth aim of the government. It also makes clear that growth is a cornerstone of the FCA's own strategy. However, the FCA is clearly concerned about the potential additional risk it perceives arises from these proposals.

Consumer Duty Board Champions

The Consumer Duty Champion position was created by the FCA to ensure that the Duty is regularly raised and discussed at board level. There is concern that the decision to remove this role is coming too soon, noting that the role has only existed for 18 months. The FCA's own review into the progress of the Consumer Duty had noted that progress was being made amongst firms, but there was still work to be done across the board. It is questionable whether removing this position will serve as an aid to bolster growth, or whether it will see firms slide back into old patterns of working and whether the Consumer Duty will take a back seat in the minds of professionals. The FCA have made clear over the last year that the consumer must be at the forefront of the professional's service. Removing the champion role now may undermine this message.

No further AI regulation

Whilst not putting further regulation in place to hamper AI will undoubtedly allow for innovation in the sector, this could lead to increased risk to consumers. The Financial Ombudsman Service's (FOS) previously published complaints data revealed that complaints regarding fraud had reached record quarterly highs, with authorised push payment (APP) scams being one of the most common. Unregulated AI has only amplified the risk of these types of frauds becoming more common. Fraudsters are already able to spoof phone numbers, but AI technologies allow these schemes to become more complex. AI voice-cloning allows them to replicate the voice of a trusted person, AI chatbots can mimic conversations with banks, and deepfakes can manipulate images to mislead consumers. The FCA has yet to take substantive action to regulate these technologies, and if the FCA's proposal to not put any further regulation in place is followed through with, the risks to consumers from these AI-supported frauds may increase.

Relaxed lending rules

The proposal that has sparked perhaps the biggest fear is the proposal to relax the lending rules, which some fear may see a return to the 'light touch' approach that led to the 2008 banking crisis.

The head of the FCA warned that the proposals for easing controls on mortgage lending could increase defaults and repossessions of homes, stating "On mortgages, [what] if there are more defaults if we relax [rules]?... one or two things are going to go wrong here and not everybody is going to play completely by the rule book, and is there acceptance of that?".

There may be merit to relaxing the lending rules to enable more people to get on to the property ladder, which is particularly difficult in the current climate. Many in the country are simply unable to afford the high costs associated with a first-time purchase and relaxing the rules could assist with this. However, it has to be asked whether this will ultimately exacerbate the situation. Relaxing the lending rules may help buyers, but without looking to the issue of the current lack of supply, it may only worsen the situation of general unaffordability.

Conclusion

The FCA's proposals to support this growth are not without merit, in particular, streamlining the Handbook seems like a logical next step given the apparent move towards outcomes-based regulation. However, the FCA is clearly concerned that prioritising growth could lead to additional consumer harm and the query to the government about what level of harm is acceptable clearly highlights the potential difference of approach here. Any measures to support growth must be weighed against the associated risks that will follow these changes, whilst being conscious of the fact that very little in life is risk free.

Whilst it is a difficult task to create a clear metric on 'acceptable levels of risk' that a regulatory body such as the FCA could use, it is something that should be openly discussed between the regulator and the government so that a clear framework can be agreed upon. Regardless, the FCA will face a challenge in attempting to balance the demand for growth with their regulatory responsibilities.

Previous Engagement

The FCA previously issued a Dear CEO letter in January 2023 and in the intervening period has engaged with firms on liquidity risk management, financial crime, culture and non-financial misconduct (NFM). In its recent letter the FCA summarises that progress has been uneven across the market with some firms falling behind. The FCA intends to publish an observation paper showing examples of good and poor practice.

Key Risks

The key risks identified by the FCA and driving attention in the latest letter are:

• Prudential risk management. A subset of firms were found to have unsuitable liquidity risk management and stress testing systems, but the FCA has noted that clearing brokers are generally becoming stronger prudentially.
• Financial crime. There is concern that firms are underestimating the money laundering risks which they are exposed to. The FCA notes some improvements in risk assessment processes and oversight frameworks but also notes a failure by some firms to develop adequate methodologies for risk rating clients.
• Remuneration and broker misconduct. Inappropriate remuneration policies place more emphasis on revenue generation and not enough on remuneration being used as a tool to address poor behaviour.

Looking Forward

The FCA has set out their strategy for the next two years – this is based around four key focus areas. The key areas highlighted are broker conduct, culture, business oversight and financial resilience. These have been chosen with the aim of ensuring that firms with a "healthy and compliant culture" are not at a disadvantage compared to firms with an unhealthy culture.

The FCA recognise the weight of bargaining power held by brokers over their employers, as they are not only the main revenue earners for a business but are also the main points of contact with clients. This raises concerns about a likelihood of firms ignoring instances of misconduct such as insider trading, market abuse, overcharging clients, abusing gifts and non-financial misconduct. For this reason, the FCA will be conducting work to assess how firms manage their brokers. If "material weaknesses" in frameworks managing broker conduct are identified, the FCA may place restrictions on firms or take enforcement action on firms or individuals.

The FCA's approach is that good culture and good conduct go hand-in-hand. The FCA have found that diverse boards provide a more effective challenge to management, leading to better decision making and success. Considering this, the FCA launched the NFM survey in 2024 to get insight into how firms identify, report and handle NFM. The FCA plans to use the results from the survey to increase proactive engagement with portfolio firms, with an increased focus on outlier firms.

The FCA has set out its intentions to test firms' risk and control oversight frameworks through their proactive work on broker conduct. Remuneration tools will be under the spotlight due to their role in handling brokers' non-compliance. Where firms fail to comply with the Remuneration Code, the FCA will use their regulatory tools, such as imposing additional capital requirements to reflect the increased risk stemming from inappropriate remuneration practices.

The FCA has emphasised the importance of wholesale brokers maintaining adequate levels of capital and liquidity in order to reduce the risk of causing market disruption should they fail. The FCA plans to test wholesale brokers' contingency funding plans and frameworks to ensure that they are adequate for potential liquidity challenges caused by stress events. Firms should continuously review their levels of liquidity to ensure that they constantly comply with the Investment Firm Prudential Regime. Where the FCA identify material weaknesses, they may impose additional capital and liquidity requirements. 

The facts

The facts will be relatively familiar. A fraudster masqueraded as a genuine property owner and borrower. He obtained a mortgage offer from the lender (Social Money Ltd (SoMo) for the sum of £701,500 (net of fees) to be used to redeem an existing first charge and to provide a significant sum of money for the borrower by way of a short term bridging loan. Attwells were instructed by the borrower and JMW solicitors acted for SoMo. A number of identity checks were required and carried out not only by Attwells but also by an independent firm of solicitors. Face to face checks were carried out.

Attwells provide a number of undertakings (which we do not set out in full) specifically confirming:

In consideration of the provision of the loan facilities by the Lender to the Borrower for the Borrower's business purposes ("the Transaction"), we undertake to you as follows:…

…to use the loan advance solely for the Transaction…

…within 5 working days of completion to effect at the Land Registry against the title numbers …the registration of the Charge as a first legal charge…

The term 'Borrower's business purposes' was not defined.

In short, the borrower turned out to be a fraudster, £60,757 was used to redeem the existing mortgage secured against the property but the balance of c. £640k was sent to the fraudster.

SoMo then issued proceedings against Attwells and sought summary judgment on the basis the claim for breach of contractual undertaking and for breach of trust was indefensible.

The outcome of the hearing

The Judge refused the application for summary judgment on the basis that there were significant questions over the interpretation of the undertaking – Attwells argued that since the undertaking did not specify that the Borrower was 'the owner of the properties' and that it was not specified that the money could only be used for the business purpose of the owner of the properties. There was therefore a triable issue over the interpretation of the contractual undertaking. Attwells suggested that they were entitled to send the monies to the borrower who was in receipt of a mortgage offer from SoMo and for whom they were acting. There were further arguments over whether the application to register had to be made in 5 days or whether registration had to occur in 5 days – the undertaking was clearly ambiguous.

It was accepted that the monies were held on trust but the Judge indicated that the terms of the Trust were not wider than the terms of the undertaking and as such, again, there was an issue suitable for trial.

Commentary

1. The parties all accepted that there was no right to seek summary judgment on the undertakings under the Court's inherent jurisdiction, given the Supreme Court's decision in Harcus Sinclair v Your Lawyers Ltd ;
2. When an undertaking is requested, the party requesting it should be absolutely clear as to what they are trying to achieve and ensure clarity in the terms of that undertaking, to give a party the very best chance of a summary enforcement of the undertaking at an SJ hearing;
3. The summary judgment procedure is not going to be successful where there are substantive construction issues and where the defending party can demonstrate a real rather than fanciful chance of success;
4. It is established law that holding money in client account will mean that money is held on trust but the terms of that trust are unlikely to exceed the obligation set out in the undertaking.

If/when this case makes it to the full trial, it will be very interesting to see how the law on undertakings develops further.

For further information on the issues raised in this article please contact Jo Makin or Will Sefton.

As time goes on, fewer retirees are having the security of a defined benefit scheme, and more complicated advice is required in respect of what investments to hold, the member's needs and their level of required income. The publication of the RIAAT follows on from the Consumer Duty which introduced higher standards of care on financial services firms, emphasising fair treatment and the need to evidence good outcomes for clients. Indeed, a whole page of the RIAAT spreadsheet is dedicated to the Consumer Duty requirements.

Both the RIAAT and Consumer Duty place a particular focus on vulnerable clients. The FCA has also published advice on how to support consumers with characteristics of vulnerability when providing pension transfer advice. This increased focus on vulnerable clients threatens to present additional challenges to firms, particularly in light of the current economic landscape in the UK. Inflation, which has remained higher than forecast in recent months, fell slightly to 2.5% in December 2024. However this is still above the Bank of England's target of 2%. Meanwhile the Office for National Statistics confirmed on 16 January 2025 that the UK economy grew by only 0.1% in November 2024, following two months of contraction. Moreover, the increase in the Government's borrowing costs in recent weeks raises concerns about potential emergency cuts to public services, in addition to existing cuts such as the means testing of the winter fuel payments. These pressures risk increasing the number of consumers that the FCA deems to be vulnerable.

Facing serious financial difficulty, a larger number of consumers may be more susceptible to opting for unsustainable drawdowns, significantly increasing the risk of the consumer running out of money. Providing advice to an increasing number of vulnerable clients in accordance with the requirements of both the RIAAT and Consumer Duty will be a major challenge to many firms. While not compulsory under the RIAAT, the FCA has previously noted that cashflow modelling "can be a key step in providing suitable advice. It is used to project the income flows that different assets could generate and compare these with the client’s estimated retirement needs." The heightened risk of members running out of money may encourage more firms to adopt cashflow modelling as a way of ensuring that the consumer receives an appropriate level of income and evidencing that their advice is suitable.

More consumers may also become susceptible to scams or fraudulent activity. The FCA is clearly aware of this possibility and has previously urged pension schemes and trustees to report to them any concerns or suspicions about pension transfer requests. Furthermore, growing economic hardship may also motivate more consumers to bring claims against firms if they believe they have potentially provided them with advice that adversely impact the value of their pension. The increase of the compensation cap by Financial Ombudsman Service to £430,000 may also add to this.

The new requirements may pose a significant challenge to smaller firms who may struggle to allocate the necessary resources to implement the requirements fully. Overall, 2025 looks to be a more challenging year for firms providing retirement income advice. With an ever-increasing number of consumers requiring more complicated advice and potentially larger numbers of vulnerable consumers, firms will have to ensure their processes for providing advice and disclosure meet the FCA's requirements. 

In the first of the two cases, Lendlease Construction (Europe) Limited v Aecom Limited (2023) the High Court looked at the formalities for a deed.  The proceedings involved a complicated construction/building dispute, but whether or not the contract between the claimant and defendant (the Consultancy Agreement) was a deed or not was vital to the applicable limitation period.  If the Consultancy Agreement was a deed then the contractual breaches relied on by the claimant, Lendlease, were in time as a breach of a deed attracts a longer 12 year limitation period.  If the Consultancy Agreement was a contract (so not a deed), then Aecom's position was that the claim was out of time.

The Consultancy Agreement had been drafted with an attestation clause in the format necessary for the execution of a deed.  It provided for execution in one of two ways – first by affixing the party's common seal in the presence of two directors or a director and the company secretary, or second expressed as being executed by the company as a deed and signed by two directors or by a director and the company secretary.  In this respect the execution block reflected the relevant statutory provisions prescribing the formalities for the execution of a deed (as the Consultancy Agreement was entered in October 2004 the relevant provisions were under s.36A and s.36AA of the Companies Act 1985 and s.1 of the Law of Property (Miscellaneous Provisions) Act 1989).  

There were two issues contended by Aecom who argued that the Consultancy Agreement was a contract and not a deed.  First, the individuals signing on behalf of Aecom signed in the section for witnesses purporting to be those witnessing the affixing of the company seal.  As a result, Aecon argued that the Consultancy Agreement was not expressed as being executed by Aecom as a deed.  Second, the two individuals that signed – Mssrs Cooper and Palmer – were not statutory directors of Aecom – albeit it was found by the High Court that they had authority to enter into the Consultancy Agreement on behalf of Aecom.

As to the first issue, the High Court found "… I have no hesitation in concluding that when Mr Cooper and Mr Palmer signed the Consultancy Agreement they were purporting to execute it as a deed…The reality is that Messrs Cooper and Palmer signed in the wrong place…"  Here the High Court relied on two factors – first, there was no intention that the Consultancy Agreement should be executed by affixing the company seal – so the signatures were in the wrong place.  Second, the alternative interpretation was that Mssrs Cooper and Palmer purported to witness something which had not happened.

On the second issue, the High Court acknowledged that the rules governing the execution of deeds are laid down in statute and it was the intention of Parliament that if a document was to take effect as a deed, specified conditions had to be satisfied.  The High Court then went on to find that the Consultancy Agreement was executed as a deed and that; "… the central factor is the artificiality of Aecom's position.  It accepts that Messrs Cooper and Palmer had authority to act as they did… it is not open to Aecom to accept that it was bound by the actions of Mssrs Cooper and Palmer and then to adopt an unrealistic stance as to the nature of those actions or as to their effect…".

So despite the fact the signatures were in the wrong place and the two individuals signing for AECOM were not statutory directors, that did not stop, on the facts, the Consultancy Agreement being found by the High Court to have been executed as a deed attracting a 12 year limitation period.

A missing signature?

 In the more recent case of Ballard v Buzzard (2024) the High Court was faced with the question about the validity of two amendments to a final salary pension scheme where the amendment power required a document to be signed by all five trustees but despite the fact all five trustees did sign, one purported to sign on behalf of the employer and not as a trustee, leading to doubt as to whether the amendment power had been followed.  If the amendment power had not been followed, the amendment was ineffective.  The scheme's amendment power was quite long-winded, but it was accepted by both sides that the amendment power envisaged three stages as part of any change to the rules.  First, the procedure was started by the provision by the employer to the trustees of a written authorisation to undertake the proposed alteration or addition, second the trustees needed to decide whether to implement the proposal as they did not have to automatically accept the employer's proposal and finally once the trustees had decided they should adopt any alteration or addition, they were required "forthwith" to declare any such alteration or addition to the rules in writing under their hands.

Following findings of fact in relation to the first amendment as there were two versions of the document forming the basis of the first amendment, the High Court was faced with the question of whether both amendments were valid as there was no signed version of either amendment signed by all trustees. Instead, one trustee signed against the signature block "for and on behalf of the principal employer" and the parties agreed there was no reason to believe that this trustee signed a second time as trustee – so whilst four of the trustees had or were found to have signed in a manner that demonstrated they were signing in their respective capacities as trustee, the only signature given by one of the trustees was in a different capacity.  One of the factual issues was that the proforma document for amendments did not have sufficient signature blocks – there were not five blocks for the trustees – and so the High Court found that this meant that on each occasion one trustee found a form in front of him, designed by the advisers understood to be experts in pension administration, and he ensured that the document was signed in the manner required by the signature blocks on that document.  In light of that the High Court found "… I have no doubt that in doing so it was his intention to demonstrate the approval [to the amendments] by both the [employer] and the trustees…".

Before the High Court, it was advanced that there were two reasons why the signature block – for the employer – should be ignored.  First, on a true construction of the amendment power the amendments were effective and second, even if the signature was ineffective as a signature as a trustee and the steps taken by the trustees to amend fell short of the formalities under power of amendment, it only did so in the most insignificant of ways and in such circumstances the court should apply the equitable maxim of "equity regards as done that which ought to have been done" to cure the defect.  However, the High Court did not need to deal with these issues as a way around the problem came to light during the hearing – namely that the court could apply its powers of rectification to the signature block.  In light of this the High Court ordered rectification of the signature block, so that it referred to execution in the capacities as both the employer and the trustee.

A potential cheaper answer in a professional indemnity claim?

The two cases show the court arguably taking a more lenient approach to formalities, particularly in the first case when it came to execution of a deed.  It also shows the court's willingness to get around issues with documents where it can.  Considering whether it is possible to get around execution/formality issues is important where in the absence of having following the formalities or where there are execution issues, the amendment does not take effect.  The issue most commonly arises in the trust area and particularly for pension scheme amendments.  Rather than treating the attempted amendment as invalid and calculating what the position would be on the basis the amendment was invalid, which can be particularly expensive in pension cases where the result is often higher benefits, it is worth considering if there is a way to resolve the issue first.  This is particularly relevant in professional indemnity claims involving documents where there are execution/formality issues as funding an application to resolve the problem may well be the cheaper option compared to having to address the damages arising from the fact a document simply does not have the effect it was understood to have had.

• Shifting liability: Moving away from solely focusing on whether firms followed specific rules towards examining the actual harm caused to consumers.
• Accountability for outcomes: Firms can be held liable for consumer harm even if they did not intentionally cause it.
• Preventing harm before it happens: Encouraging firms to proactively identify and mitigate risks that could lead to consumer harm.
• Stricter liability: Firms may be held responsible for consumer harm, even without demonstrating deliberate wrongdoing.
• Focus on consumer outcomes: The primary focus is on the impact upon consumers, not just technical compliance with the rules.
• Enforcement action: The FCA will use its full range of enforcement powers, including fines, public censure and even the withdrawal of authorisation to deter and punish firms that harm consumers.

The FCA's update on 14 January 2025 provides further guidance for firms on meeting their redress responsibilities under the "polluter pays" framework. The FCA outlined six main examples of "polluting" behaviours, including:

• Basic Phoenixing: A firm shutting down and a new firm taking its place, leaving behind unresolved liabilities.
• Lifeboating: Key personnel leaving a firm before liabilities are addressed, leaving consumers without recourse.
• Fronting: A firm appearing to be independent but being controlled by another entity.
• Sale at an undervalue: A firm sells its assets below market value and that sale impacts its ability to cover its actual or potential liabilities.
• Restructuring: Changing the corporate structure of the group to isolate liabilities and protect assets.
• Proceeds of sale not applied to redress: A firm has funds available to it from the sale of an asset or assets, and has potential or actual redress liabilities, but those funds are not used to address those liabilities.

The update aims to ensure that firms prioritise good customer outcomes to ensure the integrity of the market is not undermined by those that engage in "polluting" behaviour. In accordance with the Consumer Duty, firms must act in good faith, avoid causing foreseeable harm and enable and support retail customers to pursue their financial objectives.

The FCA has said that firms should take "reasonable and verifiable" steps to ensure that there is provision for any potential or actual redress liability. Firms should assess the risk of advice given by conducting "robust file review and ongoing reviews of past advice". Firms should not distribute assets when there are potential or actual redress liabilities unless there is already provision made for the same. We do not yet have clear guidance from the FCA on what it believes is an appropriate level of asset retention.

Firms can expect increased scrutiny from the FCA regarding their risk management practices and consumer redress processes. Implementing robust compliance programs and addressing potential consumer harm can be a timely and costly exercise. However, "polluting" behaviour can significantly damage a firm's reputation, impacting customer trust and business relationships. It is therefore important that firms are aware of "polluter pays" framework and the update and ensure compliance with the same. This may prove to be a challenging exercise and firms may need to seek expert advice on how to comply with the rules.

The lifetime allowance (LTA), abolished from the 2024/25 tax year, previously set a limit on the amount individuals could save in registered pensions without triggering additional tax charges. Fixed protection, introduced in 2012, allowed savers to preserve the higher LTA of £1.8 million under certain conditions.

Mr R, a deferred member of the JPMC UK Retirement Plan, had a protected LTA of £1.8m. At age 55, in December 2019, he crystallised two pension arrangements, using 7.78% of his allowance. His remaining benefits included:

1. A self-invested personal pension (SIPP) with Interactive Investor (II);
2. Additional voluntary contributions (AVCs) held within the JPMC UK Retirement Plan;
3. Uncrystallised benefits in the JP Morgan UK Pension Plan.

In early 2020, Mr R planned to transfer his AVCs to his SIPP and crystallise the account before the 2019/20 tax year ended. His goal was to withdraw £30,000 in taxable income to take advantage of his lower-rate tax band whilst also maximising his tax-free lump sum.

In February 2020, Mr R submitted the necessary forms to transfer his AVCs into his SIPP. Whilst the transfer value of £411,896 was received by March 2020, the JPMC UK Retirement Plan did not confirm whether the benefits were crystallised — a detail that II required to proceed with Mr R’s drawdown request. This lack of confirmation caused delays, despite Mr R’s repeated efforts to escalate the matter.

The crystallisation status was only confirmed on 5 April 2020, after the tax year had ended. Mr R argued that this delay caused him financial harm, specifically:

1. £27,259 in LTA tax charges, incurred during a later crystallisation event in 2022.
2. £6,000 in additional income tax, resulting from his inability to withdraw funds within his lower-rate tax band in 2019/20.

Mr R attributed these losses to the delay in crystallising his SIPP and sought compensation from both the trustee of the JPMC UK Retirement Plan (which was transferring the AVCs) and II (the plan which received the AVCs).

The Ombudsman’s Findings

The Ombudsman found that II's handling of the crystallisation process amounted to maladministration. Whilst crystallisation details had not been included in the transfer documents, the Ombudsman determined that II should have escalated the issue more effectively and provided clearer guidance to Mr R about the potential implications of the missing information.

However, the Ombudsman limited II's liability, concluding that its duty of care did not extend to all of Mr R's claimed financial losses. The decision drew on the Supreme Court’s decision in Khan v Meadows [2021] UKSC 21, which confirmed that liability is restricted to losses directly connected to the provider’s scope of duty. Whilst II was accountable for delays in crystallising the SIPP, it could not reasonably be held liable for Mr R’s later decision to crystallise another pension arrangement in 2022, which ultimately led to the LTA allowance charge.  The purpose of the transfer of the AVCs at the time of II's maladministration was to minimise income tax, not to minimise tax on a future crystallisation event.

Notably, the Ombudsman highlighted that the delay had a mitigating effect. The value of Mr R's SIPP had increased during the interim, resulting in a higher tax-free lump sum. This, in the Ombudsman's view, offset some of Mr R's claimed losses.

In recognition of the inconvenience caused to Mr R, II had offered him £2,000 and the trustee of the JMC UK Retirement Plan had offered £500. The Ombudsman considered these offers sufficient and did not award further compensation.

Key Takeaway 

Whilst the Ombudsman found that II’s handling of the crystallisation process fell short of expected standards, the ruling reaffirms that liability is not open-ended. Providers are not liable for every financial consequence of a delay, particularly when those consequences are influenced by the member's own subsequent decisions. 

Khan v Meadows remains an important reference point, reinforcing that liability should be limited to losses directly linked to a provider's scope of duty.  Although delays are never ideal, it is not necessarily the case that they automatically result in liability for all subsequent consequences.

For providers, the case highlights the need to manage time-sensitive processes like transfers and benefit crystallisation events with care and to proactively communicate with members about potential impacts of delays or missing information.

To read the decision, please click here.

Background

Aabar Holdings SARL v Glencore PLC & ors [2024] EWHC 3046 (Comm)concerned alleged misconduct by various subsidiaries of Glencore PLC (Glencore), with a number of the claims against Glencore being brought under sections 90 and 90A of the Financial Services and Markets Act 2000 (FSMA), which broadly sets out the statutory regime for shareholders to bring claims against companies in relation to misleading published information. Aabar Holdings (Aabar) was not a shareholder in Glencore, but was instead the sole shareholder in another company, Commodities S.a.r.l (Commodities), which was the ultimate beneficial owner of shares in Glencore. Commodities was dissolved in 2021 and Aabar claimed that as a result, all the assets of Commodities transferred to Aabar – including the Glencore shares.

During the course of the claim, a dispute arose as to whether (and if so in what circumstances) Glencore would be entitled to assert privilege against the claimants in these proceedings. In deciding this dispute, the issues to be considered by Picken J were:

1. Does the Shareholder Rule exist in English Law?
2. If so, does the Shareholder Rule apply to each of (i) legal advice privilege; (ii) litigation privilege; and (iii) without prejudice privilege?
3. Does the Shareholder Rule extend to Aabar?
4. Does the Shareholder Rule extend to privileged documents belonging to subsidiary companies within Glencore's corporate group?

Issue 1 – the existence of the Shareholder Rule

The key aspect of this case relates to this first question – does the Shareholder Rule exist in English Law. This rule has been applied for over a century, and dates back to the 19th century case of Gourand v Edison Gower Bell Telephone Co of Europe Ltd where the principle was first applied.  Ultimately however, Justice Picken departed from the century-old precedent and held that the Shareholder Rule does not exist as a matter of English Law.

In looking at the question of whether the Shareholder Rule exists in English law, Picken J considered the argument that it exists either (1) on a proprietary interest basis, or (2) on a joint interest privilege basis.

Turning first to whether it exists on a proprietary interest basis, at paragraph 33 of the judgement, Picken J stated that "the Shareholder Rule is not (or can no longer be) founded on the principle that a shareholder has a proprietary interest in the company's assets and, therefore, in advice taken by the company and paid for out of the company's funds". In rejecting this founding principle on the idea that a shareholder holds no interest in company assets, this left the question to be answered as to whether the Shareholder Rule exists not on a proprietary interest basis, but on the basis that a joint interest privilege arises between a shareholder and company.

In considering whether it exists on a joint interest basis, Picken J reviewed the existing case law discussing the issue, however, ultimately he concluded that the rule's existence cannot be justified on this basis either. At paragraph 93 of the judgment he states "there is no binding authority which decides that the Shareholder Rule can be justified on the basis of joint interest privilege. What there is, in truth, amounts to little more than passing (and anyway obiter) comments in cases where the Shareholder Rule was not in issue…".

Picken J then went further than this, at paragraph 94, discussing his uncertainty as to whether the joint interest privilege principle is a concept with its own independent existence – instead, his view was that the term 'joint interest privilege' is merely an umbrella term that describes a variety of different situations where one party can assert privilege over another based on case by case circumstances.

Picken J did go on to discuss the alternative, in the event his analysis on joint interest was wrong. In his view, in the alternative, he considered there to be no justification as a matter of principle, to conclude that it applies to the relationship between companies and shareholders – based on, amongst other things, the fact that nothing in the shareholder/company relationship justifies depriving companies of the privilege they are otherwise entitled to, noting that typically shareholders have no right to company assets beyond what is established in contract.

Given that the Shareholder Rule could not be said to have either a proprietary interest basis nor a joint interest basis, the court therefore concluded that the rule is now unjustifiable and should no longer be applied. As such, for the purpose of issue 1, the court concluded that the Shareholder Rule does not exist in English law.

Further points of interest

Despite concluding that the Shareholder Rule does not exist, Picken J went on to consider the further issues, namely assuming the rule does exist, (1) whether the rule applies to legal advice, litigation privilege and without prejudice privilege, (2) whether the rule extends to unregistered shareholders who do not directly hold shares, and (3) whether the rule extends to privileged documents belonging to subsidiary companies.

On this first issue, Picken J considered that the rule would, if it existed, apply to legal advice and litigation privilege but not without prejudice privilege. He noted that without prejudice privilege typically involves a third party, in addition to the company and shareholders. Even if the interests of a shareholder could be said to be aligned with those of the company, it does not follow that there is also interest between the shareholder and the third party. As such, without this third party dynamic, it is difficult to see how it could apply to without prejudice privilege. Glencore did not dispute that the rule would apply to legal advice and litigation privilege, so these were not given further consideration.

On the second issue, Picken J ultimately considered that, in principle, the rule could extend to unregistered shareholders which never held shares directly. Justice Picken rejected the suggestion that the rule could not cover persons who were not on the register of members. In his view, the fact a shareholder may not directly hold legal title to shares does not preclude the operation of the rule. His underlying reasoning being that the rule does not exist as a matter of company law, but rather through joint interest where the company/shareholder hold a sufficient joint interest – joint interest allowing for beneficial ownership rather than legal title.

On the final issue, Picken J concluded that the rule would extend to privileged documents belonging to subsidiaries. Discussing again that, if the rule exists, it must be on the joint interest basis, Picken J considered that if there is a chain of holding companies and each shares the requisite joint interest in a communication, meaning that no company can assert privilege against another, then the ultimate subsidiary company should not be able to assert privilege against any of them. This then applies to the shareholders, with the shareholder in the subsidiary having an interest in the success of both the subsidiary and the parent company. Where a particular communication is relevant to the chain of holding companies, it is also relevant up the chain of subsidiaries. In principle therefore, there is no reason why the rule could not extend to subsidiary companies.

Summary

This High Court decision represents a significant departure from a principle established more than a century ago. The claim itself was brought in respect of FSMA, so the extent to which it may be applied in other areas of litigation remains to be seen, though in principle there is no reason that Picken J's views could not extend beyond FSMA matters. What remains to be seen, however, is whether Picken J's rationale will be applied in subsequent cases. Whilst this is not the first time the court has questioned the ongoing existence of the Shareholder Rule, the fact remains that this is a significant change from the established position, and previous courts have considered that this is a matter which should be left to higher courts to ultimately decide. If the decision stands, then it will have a substantial effect on the ability of claimant shareholders (at the very least in a claim under FSMA) to obtain disclosure of company documents they may have previously been able to obtain easily. We anticipate that this issue will remain a topic of litigation and only time will tell whether this will be the turning point for the Shareholder Rule.

KRF Services (UK) Ltd is a company that provides management services to the family of a person who is designated under the Sanctions Regulations.

KRF adopted unmodified Model Articles and used to have more than one director. However, following the imposition of the Sanctions Regulations, KRF found itself in a situation where the Board only constituted one director. The Board passed a resolution to make an administration application.

The questions before the Court were whether (1) the resolution passed by the Board amounts to a valid decision and (2) whether it should exercise its discretion to make an administration order in light of the Sanctions Regulations.

The sole directorship scenario

There has been a long-running tension between Model Articles 7 (2) and 11 (2).

Model Articles 7 (2) states: If (a) the company only has one director, and (b) no provision of the articles requires it to have more than one director, the general rule does not apply, and the director may take decisions without regard to any of the provisions of the articles relating to directors’ decision-making.

Whereas Model Articles 11 (2) states:  the quorum for directors’ meetings may be fixed from time to time by a decision of the directors, but it must never be less than two, and unless otherwise fixed it is two.

It is self-evidentially problematic in the scenario where a company has adopted the unmodified Model Articles but only has one director: Model Articles 11(2) requires a minimum of two directors to form a quorum whilst Model Articles 7(2) allows a sole director to make binding decisions.

On this issue, the previous case law has seemingly expressed differing approaches. In Fore Fitness Holdings Ltd [2022] EWHC 191 (Ch), where the Articles were a mix of the Model Articles and bespoke articles, the Court found that the sole director may not be able to make a valid decision given the quorum for board meetings was two directors. The deputy judge suggested that if a company were to intend to give power to a sole director to act alone, the company should have deleted Model Articles 11(2).

In Re Active Wear Limited [2022] EWHC 2340 (Ch), the Court distinguished the findings in Fore Fitness Holdings Ltd [2022] EWHC 191 (Ch). The company in question had not adopted any amendments to the Model Articles and had only one director. The Court found that where a company has only one director, as permitted by section 154(1) of the Companies Act 2006, and no provision of the articles requires it to have more than one director, the unambiguous effect of Article 7(2) was that it prevails over the requirement for a quorum of at least two in Article 11(2). In other words, in the case of unmodified Model Articles, the sole director has the power to pass the resolutions alone; otherwise it would have rendered Model Articles 7(2) redundant.

However, there is still a wrinkle in Re Active Wear Limited as the Judge noted that this principle only applies where there had only ever been a single director in the company's life.

The High Court decision in Re KRF Services (UK) Ltd

The Court found that the sole director in this case did have the power to pass the resolution and it was appropriate to make an administration order despite the company being designated or controlled by a sanctioned person.

The Court considered that where a company adopts the Model Articles without amendments, Model Articles 7(2) trumps the 11(2) as the Model Articles need to be internally consistent. The number of directors the company once had is neither crucial nor relevant.

The Court made its findings with consideration to Fore Fitness and Active Wear:

• Fore Fitness is distinguished as it applies to the cases where the Company indeed modified the requirement of a minimum number of directors; which was not the case in KRF Services (UK) Limited.
• The fact that KRF Services (UK) Limited had more than one director in the past is irrelevant; the Judge's view in Active Wear is simply obiter.

The Sanctions Regulations

Turning to the second issue, the Court considered that the appointment of administrators in isolation does not breach regulations 11 to 15 and 19 of the Sanctions Regulations.

The Judge held that by making the appointment itself the Court does is not making " funds " or " economic resources " available " to " a designated person (or connected person) or " for the benefit of " a designated person.

Key take-aways

The Judgement in KRF has now provided more clarity in relation to the decision-making power where there is a sole director:

1. The Model Articles do not, in itself, stipulate the requirement of the minimum number of directors.
2. However, if a company's articles specify a requirement of a minimum number of directors, the sole director would have to appoint other directors before making any valid decisions on behalf of the company;
3. If the Model Articles have been adopted without any amendments (and/or any amendments made are not related to the requirement of the minimum number of directors), the sole director may then have the power to make valid and binding decisions regardless of the number of directors historically.

This case may be of particular interest for D&O Insurers of smaller, SME companies that may find their Policyholder only has one director. This recent case suggests that the sole director's decision can be binding on the company even if the company had more than one director in the past. However, this case also reinforces the adage that "prevention is better than cure" as D&Os will want to ensure that they follow the decision-making procedures as set out in their constitution to limit the chances of future disputes.

In the context of the Sanction Regulations, this case confirms that a company can in principle make an administration application to Court even if the company itself is designated or owned or controlled by a sanctioned person.

To read the judgment, please click here.

Martyn Santer is a solicitor and Director of Santers Solicitors Limited which had a sizeable conveyancing practice. In September 2022, after almost 40 years of practice, Mr Santer decided to retire from practice and agreed to sell Santers Solicitors Limited to Mr Asad Sahi for the sum of £90,000, who, he understood was a registered foreign lawyer. In November 2022, after basic background checks, Mr Sahi began undertaking consultancy work for Santers Solicitors Limited to assist Mr Santer's conveyancing practice.  

However, Asad Sahi was an alias used by Yawar Ali Shah, a disbarred barrister who was convicted in July 2013 on two counts of conspiracy to defraud after misappropriating almost £3 million for four mortgage frauds and for which he served three years in prison. Mr Sahi had been involved in three law firms in which the SRA had intervened.

The Intervention

The SRA, who had previously struck off two solicitors in 2023 for fraudulently assisting Yawar Ali Shah, was quick to serve the Claimant firm, Mr Santer and Mr Shah with an intervention notice for suspected dishonesty – this came after the SRA received a report from an individual in February 2024 that Mr Sahi had allegedly misappropriated £60,000 whilst working for the Claimant company, and that Mr Sahi had a conviction of conspiracy to commit fraud. 

Schedule 1 of the Solicitors Act 1974 (the 1974 Act) sets out the circumstances in which the Law Society can and should intervene. The relevant provisions of the 1974 Act are contained at Schedule 1, Part 1, paragraphs 1(1)(a), (aa) and 6(1).  These entitle the Law Society (in practice, the SRA) to seize client money if the SRA has reason to suspect dishonesty on the part of:

• "a solicitor, or an employee of a solicitor, in connection with that solicitor's practice; or
• "on the part of a solicitor in connection with 
  • The business of any person of whom a solicitor is or was an employee, or any body of which a solicitor is or was a manager, or
  • Any business which is or was carried on by a solicitor as a sole trader…"

The SRA's investigation concluded that Mr Shah had falsified documents and made false mortgage applications whilst working at the Claimant practice. 

The SRA's conclusion that there was reason to suspect dishonesty on behalf of Mr Santer was based in part on Mr Santer having employed Mr Shah and another individual of concern, a Robert Jones. Mr Jones aka Robert Offord aka Robert John had restrictions on this practising certificate and Mr Santer allegedly failed to seek permission from the SRA before employing him. There was some suggestion that Mr Jones was engaged in fraudulent practices with Mr Shah. 

The Decision

The court had two questions to consider: first, were there grounds to suspect dishonesty on the part of Mr Santer when the intervention notice was served (if not, the SRA's intervention notice was invalid); and second, in light of all of the information available to the court, does the risk to Mr Santer and the firm outweigh the risk to the public. The court agreed with the SRA that there was enough evidence to justify a suspicion of dishonesty (albeit this transpired to be misplaced) and, as such, the initial intervention notice was not invalid. 

In relation to this second question, the court must carry out a balancing exercise between the need to protect the public from dishonest solicitors and the consequences faced by a solicitor if the intervention is allowed to continue (Dooley v The Law Society (No 1)). 

HHJ Jarman KC, sitting at the High Court, found no evidence to suspect that Mr Santer had acted dishonestly, or that he suspected that Asad Sahi aka Mr Shah was undertaking dishonest activities. The court accepted that Mr Santer carried out appropriate identity checks and was deceived by Mr Shah, as other solicitors had been previously. Mr Santer had no regulatory issues before the investigations and had an unblemished record. Further, the court accepted Mr Santer's evidence that neither he, nor his company, were involved in any of the fraudulent activities undertaken or facilitated by Mr Shah.
As a result of the intervention, Mr Santer and his practice had suffered significant reputational damage and had lost clients, some of whom were third generation clients. HHJ Jarman KC considered that the damage caused to Mr Santer was disproportionate to the small risk to the public by withdrawing the intervention, and that as Mr Shah was no longer at the practice, the risk to the public in withdrawing the notice was relatively small risk to the public. 

Comment

This judgment is a rarity. A solicitor has very rarely succeeded in overturning an intervention in their practice. However, this judgment perhaps demonstrates that the courts are alive to the fact that there is a fine line between the need to protect the public from harm, and the need to protect solicitors from the loss of their livelihoods. 

Interventions are perhaps the most draconian power available to the SRA and can have devastating effects on the reputation of the practice and its principals. This decision serves as a welcome reminder to the regulator to wield its power proportionately. 

It also highlights the risks involved in mergers and acquisitions of law firms: see our article explaining the SRA's recent warning notice on mergers, acquisitions and sales of law firms. In this case, Mr Santer had decided to sell his firm due to ill health; however, rather than a smooth transition into retirement, he has found himself the recipient of an intervention notice and became embroiled in litigation to end the intervention. The judgment records that the SRA warned in 2023 that established practices were being targeted to be purchased by fraudsters as a vehicle for fraud. Due diligence is key and the case also serves as a reminder to carry out adequate due diligence and background checks on lateral hires. 

The SRA have indicated that they intend to seek permission to appeal, so this may not be the final word.

General Insurance Perimeter

This issue was first raised by the FCA in July 2019.  The FCA notes that the Regulated Activities Order 2001 ("RAO") does not provide a complete definition of insurance, and there has sometimes been uncertainty as to how certain contracts should be classified.

The FCA has identified two areas of concern where they believe relevant products should be regarded as insurance:

• In contracts where the provider claims to have absolute discretion not to pay out, but where the FCA considers the discretion to have no real content or to be an unfair term.  The FCA believes these contracts should be categorised as insurance.
• Where the firm claims their warranties are mainly service contracts providing repair services, with a minor indemnity element that pays benefits if the product is lost or damaged.  The FCA believes that these contracts artificially describe the repair services and are really contracts of insurance.

In addition to these two areas of concern, the FCA noted that since Brexit and the end of the temporary permission regime there have been instances of UK based persons providing services on behalf of a non-UK authorised overseas insurer.  There is a risk that the overseas insurer could be effecting or carrying out insurance contracts in the UK, requiring it to be UK authorised.  Whilst acknowledging that it is for a UK court to decide what may amount to insurance business in the UK, the FCA are reviewing whether guidance is needed to set out their approach in this area.

The FCA has also seen instances of general insurance policies being used by commercial entities to provide the benefit of the insurance cover for liabilities their clients may suffer.  However, these unregulated firms are the sole policyholder who then sell to their clients an interest in the policy in order to share in proceeds of any claim. The FCA is concerned that consumers may lose access to regulatory protections under these arrangements. The contractual position is also ambiguous, with uncertainty about whether consumers actually obtain rights under the insurance policy – if they do, the unregulated firms could be carrying on regulated activities without the necessary permission.  The FCA is considering consulting on guidance setting out its approach in this area.

Debt Advice Landscape

This issue was first raised by the FCA in September 2020.

Unregulated lead generators are a major point of entry to the individual voluntary arrangements and Protected Trust Deed market.  They pass leads to FCA-authorised debt packager firms and to Insolvency Practitioners regulated by Recognised Professional Bodies, overseen by the Insolvency Service. The FCA noted that Insolvency Practitioners benefit from an exclusion in the RAO which typically enables them to provide debt advice without being FCA regulated.

Consumers seeking debt advice require help which meets their needs and enables their financial recovery and that referral fees paid by debt solution providers in exchange for customer leads can lead to poor consumer outcomes.  The FCA explained that debt packagers had a conflict of interest between having regard to the best interests of consumers and giving debt advice which maximises revenue for the firm from referral fees. This is why debt packagers have been banned from receiving referral fees since June 2023.

The FCA has introduced new guidance to clarify when lead generators may need to be authorised and continues to work closely with the Insolvency Service and the Government to address the risk of harm to consumers in this market.

In addition to the existing issues addressed in the report, the FCA has introduced two new issues they have identified: investment trust cost disclosure and exclusions to regulated activities.

Investment Trust Cost Disclosure

The FCA has stated that they are committed to replacing EU-inherited consumer cost disclosure regulation with a new framework tailored to UK markets and firms.  To this effect, the FCA's regulatory forbearance ended on 22 November 2024.  On the same day the Packaged Retail and Insurance-based Investment Products (Retail Disclosure) (Amendment) Regulations 2024 (SI 2024/1204) came into force.

Closed-ended UK-listed investment funds are excluded from disclosure requirements in the UK PRIIPS Regulation and MiFID Org Regulation. But the FCA reminds firms that they remain within the wider regulatory perimeter and are subject to the consumer duty and COBS 4 requirements to communicate in a manner that is fair, clear and not misleading.

The FCA will launch a consultation on the proposed Consumer Composite Investments framework before the end of 2024 with a view to publishing the final rules in the first half of 2025.

Exclusions to Regulated Activities

The FCAs notes that there are various exclusions contained within legislation for regulated activities which would otherwise fall within their scope. The regulator specifically refers to an exclusion in article 66 of the RAO which applies to trustees who are acting in the course of discharging their general obligations as trustee.  The FCA has identified a number of instances where consumers have lost money when their trusts have been invested in opaque, high-risk investments which then subsequently failed through a trust structure.

The FCA asks for wider consideration about the circumstances when exclusions could be disapplied to enable them to have greater oversight, including for unregulated trustees.

Comment

Whilst the general insurer perimeter has been an identified issue for more than five years, commercial entities should be mindful of their use of group insurance policies, particularly if there are instances of general insurance policies being used to provide the benefit of the insurance cover for liabilities their clients may suffer.

The FCA has identified trusts as an area of concern, with both of the new issues identified relating to trusts and trustee activities.

Furthermore, the regulator appears to be focusing its attention on existing exclusions and where such exclusions can be producing adverse results. It's possible that the FCA may move to disapply particular exclusions in the coming years.

That being said, the majority of issues identified in the current perimeter report have been areas of focus of the FCA for a number of years which suggests that the issues they are focused on in respect of what they should and shouldn't be regulating remain largely the same.

To read the FCA's perimeter report, please click here.

The Appellant ("Mr White") was the owner of Lloyds British Testing Limited (the "Company"). He was the only member of an occupational pension scheme which was established by the Company twenty years prior ("the Scheme"). The Company went into administration in 2016 and then into insolvent liquidation in 2017. The Respondent ("Manolete"), which is a litigation funder, took an assignment from the liquidators of claims for breach of fiduciary duty owed by Mr White to the Company. 

Manolete alleged that Mr White had breached his fiduciary duties to the Company by causing it to make a series of substantial payments in the period of 20 months before it went into administration. The payments included payments towards a number of luxury cars, a helicopter, foreign holidays for Mr White, payments towards his home, and rent on his son's flat. Manolete obtained a judgment against Mr White for circa £1 million (inclusive of interest and costs).

After the judgment remained unsatisfied, HHJ Hodge KC (the "Judge") made the order which has since been appealed. The Judge ordered Mr White to give notice to the Scheme trustees, exercising rights to draw down his entire pension fund and direct payment into a UK bank account into his own name which would then be paid to Manolete.

Mr White appealed this decision and contended that when viewed against the background of the application by Manolete, the effect of the Judge's Order was that he would not receive his pension from the Scheme, but that it would be used by Manolete to discharge the Judgment Debt, and that this was prohibited by section 91(2) of the Pensions Act 1995 (the "Act"). He contended that in making the Order, the Judge adopted an artificial approach that was contrary to the clear meaning and statutory purpose of sections 91(1) and (2) of the Act that entitlements and rights to future benefits under occupational pension schemes should be immune from the claims of creditors.

The Court of Appeal subsequently reviewed the purpose of the legislation and considered why the Act was introduced. The Court noted that at the time the Act was introduced there was an understanding that entitlements or rights to future benefits under occupational pension schemes should be immune from attachment by judgment creditors, and should not form part of the estate which would vest in a trustee in bankruptcy for the benefit of the general body of creditors of the scheme member. The Judge held that "There is no indication in any of the legislative materials that Parliament intended to alter or diminish the general immunity from attack by creditors which was given to entitlements and rights to future pensions under occupational pension schemes by the remaining provisions of section 91."

The Court of Appeal concluded that the Order Manolete had previously sought would have contravened section 91(2) of the Act. Therefore, the appeal was allowed, meaning that Mr White was not required to draw down money from his occupational pension fund. 

This judgment has confirmed that occupational pension funds are protected from being drawn down to satisfy judgments. This decision may be welcomed by those D&Os who have the benefit of a final salary pension given it is ringfenced from enforcement actions.  This decision is set against a backdrop of high levels of corporate insolvencies and an active litigation funder market seeking assignment of potential claims against former D&Os of insolvent companies.

On 2 January 2020, Solstice (SW) Limited (the Company) entered liquidation, with Mark Bowen (the Liquidator) being appointed as liquidator. 

The Liquidator made an application under section 236 of the Insolvency Act 1986 (the Act) for the production of various documents including bank statements. Whilst investigating the Company's affairs the Liquidator identified an overdrawn employees' loan account, unjustified withdrawals of funds and diversions of funds received from the Company's counter-parties to the personal accounts of two former directors of the Company.

The Liquidator's solicitors wrote a Letter Before Action to the Company's former directors (the Respondents) but received no substantive response. The Liquidator subsequently informed the Respondents that he would sell the claims he had identified. They were duly assigned to Asertis Limited (Asertis).

On 25 January 2023, Asertis sought remedies against the Respondents under the assigned causes of action. At a hearing on 2 September 2024, the Respondents objected to Asertis' use of the bank statements obtained by the Liquidator under section 236, arguing that they had not given consent for their use in the proceedings. However, the Liquidator provided that there was a public interest in his duty to realise assets for the benefit of creditors, and this was furthered by providing the bank statements to Asertis, given that the crux of the claim was the diversion of money through non-Company bank accounts, which could only be evidenced by the bank statements. However, the Judge directed Asertis not to rely on the bank statements until making an application to court to determine its entitlement to do so. The application was subsequently made.

Legal Analysis

The relevant sections of the Act are: (i) Section 235, which provides that the Respondents had a duty to co-operate and give information to the officeholder relating to the Company's affairs, and (ii) Section 236, which provides the court the power to require the Respondents to produce records in their possession or control relating to the Company.

In assessing these sections, Judge Briggs set out three propositions from case law:

• once an officeholder obtains documents using the compulsion powers, the officeholder is subject to an implied duty of confidentiality;
• regarding the extent of the duty of confidentiality, the Liquidator cannot be under any duty of confidence which will prevent the performance of their statutory duties;
• the question of whether permission should be permitted if the duty of confidence is relaxed and the documents or information are to be used for the purposes for which the power was conferred.

Discussion

In considering whether to grant the application for documents, the Judge then considered the policy discussions which led to Section 246ZD being incorporated into the Act, which provides officeholders the right to choose whether to assign causes of action.

The Liquidator's power to bring proceedings to collect in the assets was most recently updated in the Small Business, Enterprise and Employment Act 2015. In an impact assessment produced by the insolvency service dated 14 June 2014 it stated:

'[civil claims] can only be brought by the Liquidator in respect of fraudulent trading and wrongful trading and by the administrator or the Liquidator ("the officeholder") in respect of the other causes of action…we wish to give the officeholder the maximum opportunity and flexibility to take forward any potential claims and to get best value for creditors.'

When the Small Business, Enterprise and Employment Act 2015 came before the Public Bill Committee on 4 November 2014, Jo Swinson, the government minister, stated:

'The [insolvency practitioners] will still be bound by statutory limitations on disclosing information and the assignee will not have access to the statutory powers that exist for the insolvency practitioner. That is a particularly privileged position conferred on [insolvency practitioners], so that they can fulfil their statutory duties. It would not be right or appropriate to transfer those powers or, indeed, any information received under those powers. In making any assignment, the insolvency practitioner will need to consider carefully whether there are any legal restrictions – such as those in the Data Protection Act – on the information they can pass on.'

Section 246ZD, which provides officeholders the right to assign certain causes of action, was later incorporated into the Act. Judge Briggs explained that the purpose of this was to 'provide office-holders of insolvent estates a third option to realise an asset in the insolvency…the office-holder is provided with the freedom to choose whether to pursue a cause of action, sell the cause of action or not to pursue the cause of action.'

Judge Briggs accepted that when selling a cause of action, it is a 'commercial reality' that a purchaser would require a liquidator to provide the documents necessary to substantiate the claim and that this claim was particularly reliant on the documents obtained under section 236. The Judge summarised that the 'assignee does not step into the shoes of the assignor for all purposes and once the information or documents are cloaked in confidentiality they remain confidential unless there is a release from the person who benefits from the protection.'

Decision

Judge Briggs granted the application, ordering that the material obtained should be made available to Asertis to enable the free flow of information necessary for the purpose of satisfying the burden of proof at trial. 

Judge Briggs confirmed that the judgment was consistent with the intention of Parliament to provide an officeholder with the ability to sell causes of action that would benefit an insolvent estate. An officeholder would be hampered in obtaining the best price if he could not disclose information material to the assessment of the cause of action.

However, Judge Briggs balanced these rights by ordering that the bank statements should be redacted to hide personal information and disclose only the fact of the deposits into the account.

On the issue of permission, Judge Briggs noted that it was "for the office-holder to decide whether to seek permission to provide confidential information to a prospective assignee or assignee" and that the assignee must then decide whether the court's permission is required to use any confidential information. Judge Briggs ruled that whether permission is required is dependent on the specific facts of each case but that 'permission will be the usual course.' 

In this case, Judge Briggs ruled that it was right that permission was sought.

Comment

There are a growing number of claims being brought against former directors of insolvent companies with many of these claims being assigned from liquidators to litigation funders. The decision more clearly sets out the procedural requirements for how liquidators can use documents obtained under Section 236 of the Act. 

In particular, the judgment confirms that claims can be effectively assigned while still respecting confidentiality obligations. However, the court makes it clear that an assignee still does not inherit all the rights of the assignor and that in most cases court permission will be required before company documents are disclosed.

The Report highlights a significant 21% increase in complaints compared to the previous year. This surge can be attributed to various factors, including the challenging economic climate, the Financial Conduct Authority's (FCA) review of motor finance commissions and the impact of the Consumer Duty (the Duty) implemented by the FCA in July 2023 for open products. 

The increase in complaints at a glance:

• Total number of complaints – a 21% increase in complaints from 165,149 in 2022/23 to 199,025 in 2023/24 (8% more than the FOS expected). 
• Total number of complaints resolved – a 9% decrease from 209,471 in 2022/23 to 192,077 in 2023/24 (80% of cases were resolved within 6 months).
• Irresponsible and unaffordable lending - a 74% increase in complaints from 19,080 in 2022/23 to 33,321 in 2023/24. In part, this may be a reflection of the challenging economic climate and the financial pressure on consumers.
• Fraud and scams –a 28% increase in complaints from 21,673 in 2022/23 to 27,675 in 2023/24. This reflects the continued evolution and increasing sophistication of the tactics used by scammers.
• Motor finance commission - a 10% increase in complaints from 11,446 in 2022/23 to 12,604 in 2023/24. The FOS continued to receive complaints after the FCA announced its review in January 2024 and they expect to see an increase when the FCA review has concluded (that review is likely to be delayed now that permission has been granted for the lead claims to be appealed).

Focus on Consumer Duty

The Consumer Duty was implemented for open products in July 2023 and closed products in July 2024. The ombudsmen and investigators are applying the Duty to their assessment of complaints, with collaboration across teams to ensure they approach issues consistently.

The FOS has emphasised the importance of firms demonstrating fair treatment of customers, particularly in light of the Duty. The ombudsman has observed an increase in cases related to product suitability, customer understanding, and firms' responses to complaints. It is crucial for finance professionals to ensure that their products and services align with the principles of the Duty and that they have robust processes in place to address customer concerns promptly and fairly.

What next for the FOS

The FOS are operating in an environment with a number of policy challenges and they also have to deal with new products entering the market. To give some examples, the FCA's review into motor finance has prompted a significant increase in complaints, with a further increase expected when that review has concluded. The Payment Services Regulator has published their new rules on reimbursement where a fraud or scam has occurred. The Government has signalled the regulation of 'Buy Now, Pay Later' products and the FOS continues to work with stakeholders on the consistent implementation of the Duty. This all adds up to make a challenging environment for FOS.

In addition, the Chancellor announced a move to modernise the FOS in her Mansion House speech on 14 November 2024. As a result, the FOS and FCA jointly issued a Call for Input on how the framework can be modernised, the problems that mass redress events cause firms and how the FCA/FOS could work together to ensure their views on regulatory requirements are consistent. To read more on the move to modernise the FOS please click here.

Key takeaways

The increase in the number of complaints highlighted in the Report demonstrates the importance of clear communication, fair claims handling and adhering to regulatory changes. Key considerations for finance professionals and their professional indemnity insurers include:

• Consumer Duty Compliance - ensuring that products and services meet the requirements of the Duty, particularly in terms of product governance, price and value, and customer understanding.
• Effective complaint handling - implementing robust complaint handling procedures that prioritise fairness, transparency, and timely resolution.
• Staff Training - providing adequate training to staff on the Duty, complaint handling, and regulatory requirements.
• Data management - maintaining accurate and up-to-date records to support claims decisions and regulatory reporting.
• Review of policies and procedures - conducting regular reviews of policies and procedures to ensure they are aligned with regulatory expectations and industry best practices.

By proactively addressing these areas, finance professionals and their professional insurers can mitigate the risk of the increasing number of complaints made to the FOS.

To read more, please click here.

As such, the FCA has published a webpage outlining what it is planning on focussing on in the rest of December and the first quarter of 2025. It looks like those working at the FCA still have a number of things to tick off their to do list before signing off for Christmas this year, as the various initiatives on the webpage show the timeframes the regulator is working to.

There are four areas the FCA is focussing on:

Improving standards and implementation of the Consumer Duty

The FCA wants to understand how firms are embedding the Consumer Duty and needs data in order to do so. The regulator is due to publish reports this month and in Q1 2025 outlining the findings from three related projects:

1. Analysis of the root cause of complaints and review of board reports
2. Review of vulnerable customers' treatment
3. Review of supporting consumers' informed decision making and outcomes

The FCA said the above projects will allow the regulator to share good practices and highlight areas which need improvement.

Enhancing understanding of the price and value outcome

This priority builds on work the FCA undertook in Q3 2024 regarding fair value assessments (which we discussed earlier this year), with the FCA planning to report further in the first half of 2025 on work it is doing regarding the treatment of interest on balances held in investment or SIPP platforms, pure protection insurance, unit-linked pensions or savings, and premium finance.

Sector specific priorities

The FCA has widespread plans regarding various sectors it oversees in terms of the implementation of the Consumer Duty.

• Retail banking – the first half of 2025 will see the regulator carry out work on bereavement and power of attorney in retail banking, in conjunction with work being carried out relating to vulnerable customers.
• Consumer finance – the FCA will publish findings next year on consumer understanding of credit agreements from using firms' digital tools.
• Payments and digital assets – next year the FCA will assess how well firms are able to ensure customers understand the price of foreign exchange in remittance services.
• Consumer investments – December should see consultations on draft rules for new UK retail disclosure rules (following the repeal of EU regulations), and a proposal regarding targeted support from firms to pension savers being published. The latter consultation is part of wider work being done to use the Consumer Duty to close the advice gap. The FCA also wants to improve firms' ability to identify vulnerable clients.
• General and life insurance – the FCA hopes to better understand how insurers' claims handling arrangements drive good customer outcomes, with findings to be published in the next financial year.
• Sustainable finance – also expected next financial year are the FCA's plans to extend the Sustainability Disclosure Requirements to portfolio management.

Realising the benefits of the Consumer Duty

The FCA is working through responses to its "call for input" regarding the requirements on retail firms and how the Consumer Duty can be used to simplify the same. It plans on setting out next steps in the first half of 2025.

Comment

It is clear that the Consumer Duty is a significant change, with a lot more work to be done by the regulator and firms to ensure it is fully implemented. The priorities of the FCA outlined in the webpage show it is concerned with using the Consumer Duty to protect vulnerable customers, and ensuring that firms are providing good value for money and ensuring consumers understand advice or products provided.

These priorities being published comes at a time when the FCA is under increased scrutiny following the All-Party Parliamentary Group on Investment Fraud and Fairer Financial Services' scathing report on the regulator, labelling it "opaque, unaccountable and incompetent". 

It will be interesting to see the outcome of the work the FCA is focussing on, and the impact it has on the implementation of the Consumer Duty in the industry.

This proposal has been the source of much contention since its publication, with fears that such a plan would have a negative impact on business within the UK, and disincentivise competition, subsequently hindering industry growth. This view stemmed largely, from the fact that the plan to 'name and shame' those companies being investigated might have a significant and long-lasting impact on their reputation, which when noting that most FCA investigations result in no action being taken, was viewed as a disproportionate potential harm.

Following much public discourse, the FCA has now released phase two of the consultation paper, which outlines a number of significant changes to the original proposal. The new proposal appears to have softened somewhat – though the decision as to whether to make a particular announcement will still require consideration of whether doing so is in the 'public interest', with the FCA setting out a current list of factors which will be weighed when deciding whether to make such an announcement.

"Significant Changes" to the proposal

The original consultation proposal set out a public interest test which would be applied when deciding whether to make an announcement. Phase two of the consultation paper makes clear that the public interest framework will remain central to the decision as to whether to release details of an investigation. However, the FCA has proposed four "significant changes" from the initial proposal, which include some additional considerations for the public interest framework. These changes include:

1. Proposing that the impact of an announcement on the relevant firm will form part of the FCA's public interest test and be central to their consideration of whether to announce an investigation and name a firm.
2. Proposing that firms be given 10 business days' notice of an intended FCA announcement, to make representations to the FCA. Then a further 2 business days' notice of publication of any announcement if the FCA decide to proceed despite the representations.
3. Proposing that the public interest test take into account the potential for an announcement to seriously disrupt public confidence in the financial system or the market.
4. Making clear that the FCA will not make any proactive announcements of investigations that are currently ongoing. So, the proposal to announce investigations will only affect those firms who are investigated after the plan is put into place – though the FCA confirmed that they may reactively confirm ongoing investigations where this is in the public interest.

The fear of most firms when the proposal was first announced was the potential reputational damage such an announcement could have on their business. In an apparent effort to mitigate this concern, the new proposal makes clear that such potential reputational damage to a relevant firm (which will be made clear through representations) and damage to the financial system as a whole, will form part of the central considerations within the public interest test. The question remains, how this potential reputational risk will be weighed in practice.

When might the FCA make an announcement?

In response to previous feedback seeking clarity on how exactly the FCA intend to weigh the public interest test, the new consultation paper sets the factors which the FCA would take into consideration. The full list can be found within the consultation paper, though factors in favour of making an announcement include:

• The information about the matter under investigation is already in the public domain.
• Publishing is likely to be in the interests of potentially affected customers, consumers or investors and/or customers, consumers or investors more generally.
• Publishing is likely to prevent direct or indirect consumer harm, for example in cases of suspected fraud.
• Publishing would be in the interest of creditors (where a firm under investigation is insolvent or in administration)
• Publishing would provide an educational benefit for firms and market users to understand the types of conduct the FCA is investigating and could drive better compliance with FCA rules and regulations.
• Publishing is likely to have an operational benefit by encouraging potential witness or whistleblowers to come forward.

The factors against making such an announcement will include whether:

• Publishing could cause serious market or sector impact, financial instability, wider systemic disruption or impact, or seriously disrupt public confidence in the financial system or the market.
• Publishing would be likely to have a severe impact on the firm or on third parties, in particular, the firm's current or former directors and/or employees. For this factor, firm size would be particularly relevant, with the impact on smaller firms potentially being grater.
• Publishing is likely to have an adverse impact on the interests of customers, consumers or investors.
• Publishing could hamper an FCA investigation or an investigation by another regulatory body or law enforcement agency.

Whilst the FCA has identified more factors in favour of making an announcement than against, these factors reveal a change which will likely be a breath of fresh air for affected firms. In particular, the previously proposed framework made no room for the interests of those firms under investigation, whereas the current proposal makes clear that the impact on not only the particular firm, but also their employees, directors and the financial market as a whole will all be taken into account. The FCA's acknowledgment of smaller firms having the potential for a greater negative impact from a publication is also to be welcomed.

Summary

It appears that, in response to the backlash received following the initial consultation, the FCA has somewhat softened their initial proposal. It remains the case however, that almost 65% of enforcement action taken by the FCA results in no action being taken, so the continued fear of significant reputational damage being caused through an ultimately unwarranted announcement remains significant. 

Ultimately, it remains to be seen how the FCA would implement this policy in practice, and whether significant reputational damage to a firm will, in itself, outweigh protecting the interests of the consumer in any given case. Whilst the objective of increasing transparency and accountability, along with the need to protect consumers are all laudable objectives, this still needs to be properly balanced with the need to promote healthy competition. 

For those who wish to respond to the FCA's newest proposals, responses must be provided by 17 February 2025 using the FCA's online response form.

The FCA is wanting more people to be able to make more informed decisions about their finances, with only 8% of adults reported to have taken financial advice over the previous year. The FCA is concerned that this advice gap is reducing people's confidence to invest and save. On 8 December 2023, the FCA and the Government jointly published a Policy Paper on the Advice Guidance Boundary Review that set out their initial proposals on how to close this advice gap. The Policy Paper contained three proposals:

• Targeted Support – a new form of support allowing authorised firms to provide suggestions that are appropriate to consumers with the same high-level characteristics.
• Simplified Advice - a new form of advice that makes it easier for firms to provide affordable personal recommendations to consumers with more straightforward needs and smaller sums to invest.
• Further clarifying the boundary - providing greater certainty for authorised firms on scenarios where they can provide support that does not constitute regulated advice.

The FCA sought feedback from stakeholders on these proposals.

Feedback

The FCA summarised the feedback that it has received for each of the three proposals:

• Targeted support was the option most respondents believed would help customers at scale, so long as consumers have confidence in it and understand what protections it provides. 
• Many saw a role for simplified advice but recognised that it may not meet the demands of the mass market. There were some suggestions that simplified advice would be needed in conjunction with targeted support.
• Interest was shown for the FCA to further clarify the boundary between regulated financial advice and unregulated guidance, however it was recognised that it was unlikely to resolve the support gap and its own.

FCA Approach

Due to the significant increase in defined contribution pensions being accessed in 2023/24, the FCA's first consultation in December 2024 is to focus solely on pensions support. Further proposals for targeted support for retail investments will be released in the first half of 2025, with the FCA is currently conducting consumer research.

The FCA will continue to work with the Information Commissioner's Office and The Pensions Regulator on the Privacy and Electronic Communications Regulations (PECR) 2003 including how these interact with proposals being considered as part of this review, including targeted support. To this end, on 15 November 2024 the FCA issued a joint statement with the ICO and The Pensions Regulator giving firms greater clarity about communications they can make under the Consumer Duty that are compatible with PECR.

The FCA is continuing to engage with firms, industry working groups and trade bodies to understand how they can better support their customers and to collaborate to test options. Over 85% of investment adviser firms employ 1 to 5 advisers and in 2025 the FCA will engage with them directly through a series of roundtables across the country. They will use this, and other engagement, to determine the willingness and capacity of these firms to offer a simplified advice service. The feedback to these consultations will be used to finalise the FCA's proposals.

Comment

There had previously been reports that the FCA would focus solely on targeted advice. However, the FCA still appears to be exploring whether a low-cost simplified advice service should also be introduced. The FCA explained that they will 'keep an open mind to test whether targeted support and simplified advice will achieve the aims of this work.' 

Some IFAs have previously expressed concerns that a low-cost simplified advice service may result in high costs and time investment in lower-asset clients. The FCA has invited firms to use the regulator’s own prototype of a simplified advice or targeted support service where such concerns can be tested. The regulator has stated that the purpose of this is to 'collaborate with [firms] to test options.' Firms that wish to take part can contact the FCA at AGBR.external.engagement@fca.org.uk.

To read the FCA's feedback statement, please click here.

This area of focus for the FCA is based on consistent feedback received from CEOs around the industry. In short, the FCA aims to be more predictable, pragmatic and proportionate in the way that it operates. One change requested by the industry is to streamline data requests. In her speech, Emily Shepperd defended the regulator's record by setting out improvements over the last four years, including that 98.5% of cases are now being assessed within the committed service deadline and most service metrics being rated green.

In terms of the next five years, the regulator is looking to simplify their retail conduct rules and guidance, especially where there are areas of complexity, duplication or over-prescription. The FCA also wants to utilise technology in order to automate elements that are rote and focus staff time on the judgements to be made. It was also confirmed that the FCA would continue to expand its presence across the UK.

Financial crime

In their current strategy, the FCA set themselves the target of slowing the growth of fraud. They have seen some positive results but are thinking about how they can go further. The FCA will seek to re-enforce partnership working and also look internationally to achieve a further step change on the prevalence of financial crime. To achieve this, they will seek partnerships to share data and use data analytics to find connections that help to identify and prosecute financial criminals. The FCA has already run a proof of concept that synthesized data analysis to assist in identifying criminal activity.

However, Emily Shepperd acknowledged concerns about the cost of financial crime controls and questioned whether this is an area where the regulator could help. She suggested the idea of digital passports as a solution but confirmed that they are open to ideas on how to tackle financial crime more efficiently and proportionately.

Consumer Resilience

The FCA wants to ensure consumers have access to, and the confidence to use, appropriate products and services and to build trust in the services that consumers rely on. At present the Consumer Duty places the onus on firms to ensure that consumers are empowered to understand products on offer and to help them make informed decisions on what is appropriate. The FCA now seeks to refine the line between advice and guidance, making the distinction clearer to help consumers understand their choices. The FCA specifically mentions pensions and investments in this regard, where they are currently working towards introducing targeted support. The regulator's view is that the best way of building trust in financial services is through greater consumer understanding.

Growth and Innovation

The financial services sector produced £278bn in economic output for the UK in 2023 which makes up 12% of the economy and £110bn in tax revenue. UK asset managers are responsible for £11trn - making the UK the world’s second largest investment manager market. The FCA argues that growth in the financial services sector is stronger and more sustainable when there is consumer confidence, the market has integrity and is supported by healthy competition between firms. Moreover, the regulator seeks to make the financial services sector a magnet for international investment.

The FCA is seeking to facilitate growth in the economy. The first way of achieving this is to ensure good value for the cost of regulation. The regulator believes that developing domestic and international partnerships will be key in achieving this. The second way is for the regulator to support innovation, facilitating a more productive and competitive sector. The FCA seeks to build upon the work they have already done with Early and High Growth Oversight, the Regulatory Sandbox and Innovation Pathways by continuing to evolve the innovation services they offer. Like almost every sector, the FCA is also looking at greater use of AI. Their AI Lab aims to help firms overcome challenges in building and implementing AI solutions, while supporting safe and responsible development. The third way is by facilitating investment in the real economy, including resolving the advice guidance boundary. The speech sets out the regulator's previous reforms in this area including changes to the FCA's listing rules and introducing greater freedom in how asset managers pay for investment research. Going forwards, the FCA plans to improve retail access to fixed income markets and to support the green finance transition.

Comment

Whilst not giving any precise details of their plans for 2025-2030, the FCA clearly seeks to leverage new partnerships - both international and domestic - and improved technology such as AI and increased automation to achieve their strategy.  Moreover, the regulator seeks to push ahead and introduce some existing proposals such as the targeted advice service.

The theme of growth and innovation is no doubt influenced by the new Labour government's policy of increasing economic growth, coming soon after Chancellor Rachael Reeve's Mansion House speech where she stated that reform is required of the UK regulatory model in order to unlock innovation, drive more investment and deliver sustainable economic growth.

The speech was published on the same day that a report by the All-Party Parliamentary Group on Investment Fraud and Fairer Financial Services found the FCA to be 'opaque, unaccountable and incompetent.' Whilst the FCA 'strongly reject' the characterisation set out in the report, the regulator faces a challenge of developing a strategy over the next five years that will improve confidence from industry, consumers and Parliament while helping to fulfil the goals of the new government.

In essence, this means that firms deducting fees from damages awarded to their clients will not be protected from the limitation periods under section 70 where they fail to secure agreement to a payment of a specific amount; it is not enough to rely on retainer provisions providing for the client's consent to general deductions for fees.

Key Takeaways

• A client's prior consent to general deductions in payment of fees and delivery of a compliant bill of costs to communicate the final fees owed is not sufficient to amount to a 'payment' under the Act.

   

• Solicitors must seek their client's agreement to the specific amount in a bill of costs before deducting fees from funds held on account in order for the deduction to amount to a 'payment'.

   

• Failure to do so will mean no 'payment' has occurred (for the purposes of section 70) and solicitors will not benefit from the limitation protections against challenges to their bills.

Relevant Background

The Respondent (a solicitor firm) acted on a Conditional Fee Arrangement (CFA) for the Appellant in relation to a personal injury claim in which the Appellant accepted a settlement offer for £275,000 in damages plus reasonable costs.

The Respondent provided the Appellant with an interim statute bill for £73,700, of which £38,000 was recovered from the Defendant to the personal injury claim. The Respondent retained approximately £58,000 to cover any potential shortfall in costs and eventually deducted around £35,000 in respect of its own costs, paying the rest to the Appellant.

The Appellant did not understand the basis of the payment of the Respondent's fees, and more than 21 months after the final payment was received from the Respondent, initiated proceedings seeking assessment of the final bill.

Section 70 Solicitors Act 1974

Section 70 sets out the powers of the court to assess a solicitor's bill of costs. The court's powers of assessment were designed as a mechanism to protect clients from solicitors charging excessive fees for their work.

Section 70 also provides significant limitation protections to solicitors. The limitation periods are differentiated by whether or not a payment of the solicitor's bills has already been made, or whether a bill has merely been issued and is then subject to challenge. The rationale follows that a client who has already paid their solicitor's fees, and only then subsequently challenges those fees, is taken to have agreed to the amount and so any challenge is subject to a stricter regime.

The time when a 'payment' (within the meaning of section 70) is made is therefore significant to determining when a client will be time barred from challenging a bill of costs.

The statutory regime under section 70 can be summarised as follows:

Where no payment has been made -

• Clients have an unconditional right to have the bill assessed for one month after the delivery of the bill.

   

• After that one month period and up to 12 months from the delivery of the bill, clients may apply to the courts for an assessment of the bill to be ordered,

   

• After 3 months from the delivery of the bill, the court may only order an assessment of the bill if there are "special circumstances".

However, where there has already been payment of the bill –

• Clients still have the unconditional right to have the bill assessed in the first month after the delivery of the bill.

   

• After the one month period and up to 12 months from the payment of the bill, the court may order an assessment only if there are "special circumstances".

   

• After the 12 months have expired from the payment of the bill, no assessment can be made.

Claim

The Appellant argued that the deduction of the fees payable under the statutory bill issued by the solicitors did not amount to a 'payment' within the meaning of section 70 on the basis that a 'payment' requires an agreement as to the amount to be paid.

The Appellant's position was that payment is a reactive process to a demand for payment made in the bill. According to the Appellant, the client therefore needs to be informed of the sums owed and agree to the specific amount; any prior consent by the client to general deductions for fees is insufficient to satisfy the requirements of a 'payment'.

The Respondent argued that the requirements for a 'payment' under section 70 are satisfied when (i) a retainer is agreed with the client that permits the deduction of fees from funds held on account and (ii) the amount to be deducted is communicated (rather than agreed) by the delivery of the statutory bill of costs. In the Respondent's case, the payment was made simultaneously with the delivery of the bill.

Procedural Background

In April 2021, the Appellant applied for an order for assessment of the bill of costs provided by their solicitors, 21 months after the bill had been issued.

The costs judge held that 'payment' had been effected when fees were deducted from the damages owed to the Appellant, and therefore they were time barred from seeking an assessment.

The Appellant appealed the High Court who allowed the appeal and held that there had been no agreement to the deduction of the fees, and therefore the deduction did not amount to a 'payment' that would commence the timer on the limitation period under section 70 (4). The High Court decision was discussed in our previous article here.

The solicitors appealed to the Court of Appeal who decided that no formal agreement is necessary for a deduction to amount to a 'payment', which was defined as a transfer of money (or equivalent) in satisfaction of a bill with the knowledge and consent of the client. The Court of Appeal considered that, provided a compliant bill has been issued, a client who has already validly authorised the solicitor to deduct his fees does not need to provide additional consent after the delivery of a bill in order for a 'payment' to occur. On this definition of a 'payment', solicitors would be able to rely on retainer provisions to take payment of their bills without seeking further agreement to the amount in the bill itself.

The decision of the Supreme Court

In this closely watched decision, the Supreme Court overturned the decision by the Court of Appeal, which had been led by the Master of the Rolls. In reinstating the High Court decision, it was held that a 'payment' for the purposes of section 70 requires the client's agreement to an exact amount to be charged. There will be no 'payment' simply on the communication of the exact amount (by delivery of a bill) with the solicitor relying on the client's prior consent to general deductions to collect the fees.

The Supreme Court's decision included the following considerations of the purpose of the statutory regime:

• In this case the purported payment was made by a deduction rather than a transfer of funds. A transfer of funds to satisfy a bill indicates the client's acceptance and agreement to the amount in the bill. In equivalent terms, a deduction would therefore require agreement to the specified amount in the bill, and there can be no payment by a mere communication of that amount.

   

• The purpose of the statutory mechanism in section 70 is to protect clients from unreasonable fees. Therefore, they must have an opportunity to consider the detail of the bill. If, as proposed by the Respondent, 'payment' was to take place on communication of the charges and in reliance on prior consent to general deductions, this would diminish the client's protections.

Commentary

The decision has significant implications for the legal profession where it is common for clients to be billed through retainer provisions that provide for payment to be deducted directly from damages.

Firms should be alive to the need to secure agreement to the bill, before deducting their fees from client funds held on account, to ensure that this collection amounts to a payment which will afford them the limitation protections in the Act.

Failure to do so will mean that no 'payment' has occurred (within the meaning of section 70) thereby leaving longer windows open for clients to challenge their bills. In order to maintain the benefit of the limitation protections in section 70, firms should review their billing practices and retainer provisions to ensure that consent is sought after the delivery of the bill and that the client has sufficient time to consider its detail. 

This initiative follows an increase in crypto ownership among UK consumers. 12% of adults now own crypto, up 2% from previous findings, and 93% of adults are aware of crypto, also up 2%. The value of the average crypto holding has also increased by nearly £250, from £1,595 to £1,842. 

Crypto is not currently regulated, although 1/3 of people believe that they could raise a complaint with the FCA if something went wrong. The FCA are therefore seeking to introduce clear regulation which protects consumers and supports the competitive crypto sector at the same time.

Crypto is a volatile asset, and this has prevented some wealth management firms from integrating it into their client portfolios. Whilst many remain cautious, the introduction of regulation could encourage this to change.

The regulator's announcement follows the conviction of Raymond Bedi and Patrick Mayanga, who carried out a £1.5 million investment fraud involving fake crypto investments. This, combined with the increase in consumer ownership of crypto, highlights the importance of regulation in this sphere. Perhaps even more so following the introduction of the Consumer Duty. 

To view the FCA's roadmap, please click here. 

It may therefore be encouraging that plans are afoot to modernise FOS. The Chancellor's announcement at the Mansion House speech recognised that the rules governing the way in which FOS handles complaints have not necessarily kept up with changes to the complaint landscape, and FOS and the FCA have now jointly issued a Call for Input on modernising FOS. 

This notes that the current redress framework works well for individual complaints but that 'challenges can occur' when FOS has to deal with mass redress events. FOS and the FCA are asking for input on how the framework can be modernised, the problems that mass redress events cause firms (and what changes could be made to allow these to be better managed) and how the FCA/FOS could work together to ensure their views on regulatory requirements are consistent. 

The chancellor pre-empted the Call for Input in her Mansion House speech and included discussion of this around other topics centred on the need to drive growth and competitiveness.

Quite what a mass redress event constitutes is not yet clear. However, we're fairly confident that this will cover market wide mis-selling issues and concerns with specific products. The possibility of FOS reform may be welcomed by those who have had to deal with such issues – FOS was initially set up as a quick and informal resolution service to deal with low value complaints and it probably wasn’t envisaged that it would have to deal with the type of market-wide issues that it has frequently addressed in the past decade or more. Any concerns about FOS not being adequately set up to deal with mass redress events has likely been amplified by the volume of pending vehicle finance complaints (with a further 15,000 being made to FOS in the three months to April this year) and  the contribution to complaint volumes by claims management companies, with FOS looking to bring forward a charging regime which would see professional representatives charged for bringing claims (as discussed here and here).

This is very much a first step towards the modernisation of FOS and the redress process. The industry will be hoping that this will lead to a more balanced view of liability when a mis-selling issue arises instead of a 'one size fits all' approach. They may also be hoping that any changes could include requirements that FOS fully considers things such as causation and legal principles relevant to whether or not a duty has been breached. However, given that FOS can now award up to £420,000, it's vital that any changes ensure that the service is best equipped to provide appropriate consumer protection, balanced against fairness to respondents, with the appropriate degree of oversight. 

The paper noted that 20% of cases referred in the past 2 years came from CMCs and that that only 25% of these resulted in a different outcome for the complainant than that which they had already been offered by the respondent firm. 

FOS' proposals are intended to allocate an element of the costs of resolving cases to professional representatives who derive a benefit from using FOS. The plan is to allow CMCs (and other professional representatives) three 'free' cases per year before charging a £250 fee, reducing to £75 if the complaint is found in favour of the complainant. If the £250 fee has been paid, this will also result in a reduction of £175 to the fee paid by the respondent.

Feedback on the proposals is expected by the end of the second quarter of 2024/25. The proposals have however found support from the new City Minister, Tulip Siddiq, who highlighted concerns that CMCs were submitting 'significant numbers of poorly evidenced or template responses to FOS with no financial disincentive for doing so.'

Priorities for the FCA

During 2025 the FCA will engage with LMPs on their culture and controls (looking at non-financial misconduct) and also focusing on the following priority areas:

• Consumer Duty – LMPs should embed the Consumer Duty.  The letter notes that priorities for LMPs include monitoring the firm's products and services to ensure they are appropriately designed for target markets and evidencing that a firm's products/services offer fair value.  

The letter also highlights responsible lending and closed products and services.  On responsible lending, the letter notes that firms should conduct accurate and appropriate affordability assessments where applicable.  It also notes the importance of not only ensuring that consumers understand a product at the outset and that the product meets their needs, but also that LMPs monitor changes in circumstances such as financial stress appropriately. 

On closed products and services, where the Consumer Duty has applied since 31 July 2024, the letter notes the importance of filling in out of date and incomplete client records including characteristics and needs, sales records or historic performance of a product and when this is not possible to take additional steps to mitigate the risk of harm. 

• Financial resilience (for non-dual regulated firms) – LMPs should ensure adequate financial resources are in place to ensure the financial safety of the firm. 

• Operational resilience – LMPs should have adequate systems in place to mitigate operational risks including incorrect notifications or demands for payments being issued to customers. The letter highlights that LMPs should have clear policies in relation to due diligence carried out at the outset of a relationship with an intermediary and that this due diligence should be reviewed on an ongoing basis.

• Financial crime and fraud – LMPs should remain aware of criminal misuse and although the risk is less than that for retail banks, LMPs should stay abreast of the tactics of bad actors.

• Sustainable finance – LMPs should ensure sustainability related claims are accurate and non-misleading.

Next steps

Going forward the letter emphasises the FCA's focus on the Consumer Duty and the FCA's intention to engage with LMPs to embed the duty with a focus on data and MI, culture and controls and understanding and treatment of the needs of customers in vulnerable circumstances (notably using the phrase "customers in vulnerable circumstances" rather than "vulnerable customers").  Further, the FCA "… will continue to actively monitor the market to identify poor consumer outcomes for borrowers in closed books and will act where necessary…".

Looking forward to 2025, lifetime mortgages are one of the significant areas of concern for the FCA, forming one of many portfolios subject to recent supervisory correspondence by the regulator. The letter further highlights the regulatory challenges faced by firms in 2025, balancing a need for tailored consumer-focused products and services whilst also ensuring adherence to evolving guidelines including the Consumer Duty and its application to closed products and services.

The FCA published its market study on 16 October 2024 as part of its ongoing work on motor and home insurance. The Consumer Duty is at the front and centre of this, with the FCA noting that it had stated as early as 2023 that firms needed to consider premium finance as part of their fair value assessments. The FCA is also aiming to understand how competition works in the market and see whether regulatory intervention is required.  

On the same date the Government announced a new taskforce to ensure the motor insurance market is treating  customers fairly.  The taskforce comprises the FCA, the Competition and Markets Authority and ministers from several departments. The goal is to identify factors behind rising premiums and to look for solutions that might keep costs under control. Additionally, the taskforce will look to assess the equality of motor insurance offerings from different demographics, geographies, and communities.

The motor insurance market has been under the spotlight in recent years due to its significance in modern life – both the taskforce announcement and the market study highlight the essential nature of such insurance. The scrutiny is likely to continue to grow, as the Consumer Duty means that firms have no option but to review their offerings periodically to make sure they are delivering a fair deal for drivers, and the FCA will take action to remedy things if it does not believe fair value is being offered. Hopefully the FCA will take a balanced view and consider fair value in light of the increasing economic pressure on providers of such insurance as well as the financial circumstances of consumers. However, given that the FCA notes that some providers are charging APR of 20 – 30% on premium finance in circumstances where other providers offer this for free, it seems to be a safe bet that the FCA will be looking to drive change in this sector and will use all the tools at its disposal in order to do so.

FCA invites all stakeholders to share their views on the Study by 5pm on Monday 18 November 2024.  

The appeal to the COA raised two issues:

1. The statutory powers of the FCA to order redress – specifically the scope of the power at 4A of FSMA and to what extent these are constrained by the requirements of s.404 of FSMA.
2. The jurisdiction of the upper Tribunal when an FCA decision / notice is referred to it.

In very brief terms, in the underlying matter the FCA alleged that Bluecrest Capital Management (UK) LLP (Bluecrest) had failed to manage a conflict of interest. Bluecrest operated two investment funds: the External Fund, which was open to investors, and the Internal Fund, which was only available to employees and directors of Bluecrest. During the period under investigation, some portfolio managers were transferred between the two funds. The US Securities and Exchange Commission ("SEC") announced in 2020 that the parent company (Bluecrest Capital Management Limited) had agreed to settle charges concerning disclosure, misstatements and omissions in relation to the transfer of managers between the Funds. The SEC issued a plan for US based investors to be compensated for management fees paid in connection with the affected investments.

The FCA issued a first supervisory notice (FSN) under s.55L of FSMA that required Bluecrest to pay redress to non US investors. This was based solely on alleged breaches of Principle 8, which relates to managing conflicts of interest. Bluecrest was required to compensate these investors as a condition to their retaining permissions to carry out regulated activities.

A financial penalty of £40,806,700 was also imposed for breaches of Principle 8 (which requires a firm to manage conflicts of interest fairly) via a second decision (DN). Both the FSN and DN effectively concerned Bluecrest having favoured the Internal over the External Fund, allegations denied by Bluecrest.

The UT decision concerned three applications. For the purposes of this blog, the first and second applications are key and summarised briefly below.

Firstly:

• Bluecrest sought to strike out elements of the FCA's statement of case on the basis that s.55L of FSMA only allowed the FCA to implement a single firm redress scheme where it had the power to do so on an industry wide basis under s.404 of FSMA. In order to do this, 4 conditions needed to be met – breach of duty, actionability, causation and loss (the components of a legal lability). Bluecrest argued that the FSN and the FCA's statement of case did not show any real prospect of meeting these conditions. The UT accepted that 55L required fulfilment of the 4 conditions. It also held that the FCA's statement of case was capable of fulfilling the conditions of breach, causation and loss. However, they also held that this did not fulfil the actionability requirement (noting that a breach of the Principles is not actionable) and therefore the FCA did not have the power to impose the redress requirement

• The FCA's appeal contended that s.55L is not circumscribed by s.404F(7) and is not subject to the 4 conditions and, even if it were there is no actionability condition.

Secondly:

• The FCA had sought to amend its statement of case. The UT broke the amendments down into 4 categories, of which 2 were rejected and subsequently appealed. These concerned alleged breaches of PRIN 7 and Rule 4.2.1 of COBS. These amendments were refused by UT on the basis they did not fall within the matter referred. In particular, if the alleged breaches of COBS 4.2.1 were allowed into the amended statement of case, this would have meant that there was an alleged breach of a COBS rule (rather than just breaches of the Principles), which is directly actionable.  

The first application

To give some context, s.55L of FSMA provides that the FCA may impose a requirement on an authorised person if it appears to the FCA that it is desirable to do so in order to advance one or more of its operational objectives – these being the consumer protection, integrity and competition objectives. S.55N in turn identifies requirements which may be imposed by 55L – these include that the FCA may require an authorised person to take or refrain from taking specified action.  S. 55N(5) provides as follows:

"A requirement may refer to the past conduct of the person concerned (for example, by requiring the person concerned to review or take remedial action in respect of past conduct)."

It was under this power that the FCA sought to impose the single firm redress scheme on Bluecrest by way of a change to their permissions. In considering the matter, the UT identified 4 mechanisms under FSMA and supporting legislation which could be used to compensate clients where breaches of regulatory rules had been established:

1. A civil claim under what is now s.138D(1) (2) of Financial Services Act 2012 (originally under s.150(1) of FSMA).
2. Restitution orders from the court or FCA under 382 – 384 FSMA
3. The imposition of a redress scheme under 404 of FSMA
4. VIA the FOS

The UT held that all of these required the establishment of loss, causation and duty conditions and that both s.404 and s.150 (now 138D) required the actionability condition to be fulfilled. The UT drew attention to the restrictions on the FCA's power to use 404, noting that this could only be used to implement a redress scheme where the conditions at 404(1) were met – these being a widespread, regular failure by firms to comply with regulatory requirements and that consumers had suffered or may suffer loss or damage which if they brought legal proceedings a remedy or relief would be available, and that it is desirable to impose such a scheme.  The imposition of a s.404 redress scheme therefore required 'actionability' and the FSN was based solely on a breach of the Principles and was therefore not actionable.

Again, the FCA's view was that they were able to impose a redress scheme under their s.4A FSMA powers without the constraints of s.404(1). The UT had said that the FCA's interpretation would lead to a surprising result, as it could require 'redress' to be paid (which would have been in the region of $700 million dollars in the Bluecrest case) without the 4 elements of a legal liability, or that regulatory requirements had been breached at all, or even that the redress related to regulated activities. The UT felt that the s.55L power must therefore be restrained to avoid absurd results. They held it was therefore constrained by 404(f) 7 and 404A – again, the 4 conditions needed to be established. The UT noted that it was unlikely that Parliament wanted to also grant a restriction-less power to impose redress without any statutory hurdles when the 4 mechanisms for redress required such hurdles to be cleared. It would also be striking if no hurdles had to be cleared for a single firm redress scheme when clear conditions were set out for an industry wide scheme.

The UT concluded that on proper construction, s.404F(7) is the provision enabling the FCA to impose a single firm redress requirement under 55L(3) which corresponds to or is similar to a consumer redress scheme. This section ensures that the statutory criteria are aligned. The UT held that there was no freestanding power under s.55L(2)(C) and (3) for the FCA to impose a redress requirement simply because they are satisfied that the consumer protection objective is met.  The requirements the FCA may impose when ordering such a redress scheme are only those that may be imposed by way of rules made under s.404 – provided at 404A. In brief, it was concluded that loss, causation, duty and actionability must be established.

In brief terms, the FCA's counter argument was that 55L was constrained by the provisions of subsection 2, which included the requirement that the exercise of the power must appear desirable to advance one of the FCA's operational objectives, along with the public law requirement of rationality. They also stressed that 55N(5) sets out that a firm may be required to take remedial action (which Bluecrest had argued was conceptually different from 'redress'). Their view was therefore that a single firm redress scheme under 55L did not need to satisfy the 4 conditions before redress was payable.

The appeal

In its judgment the COA reached the 'clear conclusion' that the FCA was correct in its interpretation; the power at 55L could impose requirements as a variation of an existing permission provided there was a rational decision to exercise the power which the FCA considered was necessary to advance the objective of consumer protection. The COA stated that, if it was the intention to impose restraint on this power, it was expected that it would be expressly found at Part 4A.

The COA also found that there was nothing in Part 4A which limited the imposition of permission requirements to those for which FCA/FOS had powers to impose compensation through other areas of FSMA. The COA found that there was a 'false premise' underlying the UT decision – being that the power to impose conditions on permissions are linked to and constrained by powers to impose compensation or redress. The COA stated that there was nothing in the wording which so limited the powers, that sanctions form a different function from permission requirements and that sanctions must relate to a regulated activity, whereas permission requirements did not (for example, these could be linked to the general integrity of the authorised person). On this last point, the Court noted that the FCA could rationally impose an 'own initiative' requirement that a judgment debt be satisfied as a condition of continuing permission, regardless of whether the debt related to a regulated activity. They also made the point that two of the routes for redress (FOS and a s.384 restitution order) did not require the 4 conditions to be met (and anyone who has dealt with FOS will agree that causation doesn’t seem to be a necessary requirement for upholding complaints).

In rejecting the argument that s.55L was constrained by s.404F(7), the Court noted that this provision merely governed what may happen if the FCA exercised its power under s.55L. This provision states that, if the FCA varies a permission or authorisation so as to establish a scheme similar to a consumer redress scheme, "the provision that may be included in the permission or authorisation as varied includes provision imposing requirements on the person corresponding to those that could be included in rules made under section 404; and provision corresponding to section 404B." The COA noted that this provision did not state that the s.404A powers defined the scope of a single firm redress scheme, nor did the language impose threshold conditions for this.

The Court noted the difference between the purposes of s.55 and s.404 in general, whilst also noting that the power to require 'remedial action in respect of past conduct' at 55N(5) was broad enough to encompass a single firm redress scheme, rejecting Bluecrest's argument that this was only intended to cover a review of past conduct.

The Court also rejected the argument that the 4 conditions should apply equally to a single firm redress scheme as to a market wide one; they again noted that s.55 concerns regulation of permissions whilst s.404 is solely concerned with redress (brushing over the fact that the practical outcome of the FCA's use of 55L was solely to impose a redress scheme). They also noted the industry wide nature of s.404, which imposed investigatory obligations on firms regardless of whether it was believed that each and every firm was in contravention.

On the different outcomes point, the Court noted that "…where none of the Four Conditions are fulfilled, it will rarely be the case that the FCA would be able to justify the imposition of a redress requirement as rational." Bluecrest argued that the FCA's position gave it unfettered power with no real public law constraints, given the breadth of discretion afforded by a subjective judgment of what the FCA considered appropriate consumer protection. However, the Court held that it was commonplace for complex market activity to be subject to generally expressed rules and high-level objectives and that regulated firms had recourse to the UT.

Amendment

In looking at the UT's decision to reject the amendments to include allegations re PRIN 7 and COBS, the COA noted that the UT had accepted that the new reliance on Principle 7 and COBS relied to a large extent on the same 'body of disclosure' and the same regulated activity as the breaches of Principle 8. However, they held that the new allegations must not only be based on the same factual background but must also be of the same nature.

The COA held that the word 'matter' (in the context of the contents of the FSN and DN) had a wide meaning – secondly, it was the 'matter' itself that was referred to the UT rather than the decision itself (noting that s.133(4) of FSMA permits the UT to consider any evidence relating to the subject matter of the reference- it's power to consider matters were not constrained by the decision reached by the FCA). In looking at what constituted the matter the COA found that Bluecrest's case was too narrow and the FCA's too wide. It was held that the 'matter' must bear some relationship to the decision – there must be a sufficient relationship between the matter referred and the decision which triggers the right to refer. Sufficiency will be satisfied if there is a real and significant connection with the subject matter of the process. It need not be something that the FCA has specifically relied on during the process.  Provided it had a real and substantial connection with the subject matter of the process.  

The COA notes that the proposed amendments 3 & 4 were essentially relabelling the conduct already identified as having allegedly breached different rules and therefore fell within the matter referred. The UT had therefore made an error in respect of this approach and held that these amendments should be allowed.

Conclusion

Regulated firms will no doubt feel equal and opposite emotions on reading this judgment to those felt when reading the UT's decision. The FCA noted that rationality and public law constraints serve to fetter its power to impose single firm redress schemes but whether or not to impose such a scheme is largely down to the FCA's will and perception – the level of protection and oversight afforded by the need to meet the 4 requirements before redress is payable is valuable to the industry as it acts as a check and balance on the proposals of the regulator.  

One would hope that the FCA would adhere to the provisions of s.404F(7) when ordering redress under Part 4A, and there will indeed be a degree of unfairness if redress schemes are imposed which pay no regard to causation or limitation, for example. It does seem strange that a redress scheme can be imposed under s.55 (the primary purpose of which concerns restriction or variation of permissions) without any legal liability requirements when the specific section of FSMA that deals with redress schemes expressly includes a need for these.  That said there were some consoling comments made by the COA that it will be a "rare case" where none of the Four Conditions are satisfied and the FCA's decision to impose a redress scheme by the backdoor under Part 4A by way of a change in permissions is not susceptible to challenge. An area ripe for challenge going forward.  I have some sympathy with Bluecrest's argument here, being that remedial action and redress are conceptually different.

It also does indeed seem strange to conclude that the legislature's intention was to embed the need for a legal liability when imposing an industry wide scheme but to give the FCA largely unfettered discretion when imposing what are basically the same requirements on a single firm. That public law restraints will protect firms here doesn’t really ring true – a challenge can be expensive and time consuming and is far more likely to arise when an industry-wide scheme is looming as a consequence. It is single firms (and particularly smaller firms) who require the clear, set protections offered by the 4 conditions as a consequence.

We await news of any appeal, but in the meantime firms will no doubt be concerned about how the FCA looks to approach redress exercise given the sharp about-turn here. 

Genesis Capital (UK) Ltd (Genesis) was a company in the South Africa-based investment banking Genesis Capital Group. Liquidators were appointed after Genesis was wound up by the court on 31 July 2019. The liquidators assigned claims against Genesis' sole director, Lewis Barry Bloch (Mr Bloch) in December 2022 to Asertis Ltd (Asertis), a litigation funder. The claims related to alleged breaches of directorial duties by Mr Bloch in permitting a payment from Genesis' bank account of nearly £3m to another party. Proceedings were issued by Asertis against Mr Bloch in June 2023.

At a hearing in June 2024, the court heard an application for security for costs made by Mr Bloch. The application was made as Mr Bloch considered there was reason to believe Asertis would not be able to pay an adverse costs order if one was made against the funder if it is unsuccessful in the litigation. This is due to the accounts of Asertis showing that the company began trading in 2020 and has yet to make a profit.

Asertis defended the application, rejecting Mr Bloch's interpretation of its accounts and submitting that it has the benefit of a revolving credit facility with US Bank Trustees Limited and an After-The-Event (ATE) insurance policy with an anti-avoidance endorsement (AAE).

Decision

Judge Millen granted the application, ordering that Asertis has to make a payment into court for costs. It was found that Mr Bloch's reason to believe Asertis would be unable to pay his costs if required could be upheld for the following reasons:

• Asertis has been trading at a loss since it began operating in 2020, the company's assets are largely the value of claims it is pursuing (which are not certain) and the accounts suggest a deteriorating financial position;
• No terms of the £200m revolving credit facility available to Asertis were entered into evidence, and therefore it was unclear whether such a facility could be used to pay an adverse costs order;
• The ATE policy had a limit of £250,000, which is lower than Mr Bloch's budgeted costs, and the policy and AAE contain numerous termination clauses which, if invoked, would mean none of Mr Bloch's costs would be payable.

Much of the judgment focuses on considering the ATE policy, with Judge Millen beginning his consideration of the ATE policy by addressing case law raised in submissions by counsel. It was noted that in Michael Phillips Architects v Riklin [2010] EWHC 834 (TCC), Akenhead J summed up the case law by stating:

“[…]What one can take from these cases, and as a matter of commercial common sense, is as follows:

(a) There is no reason in principle why an ATE insurance policy which covers the claimant’s liability to pay the defendant’s costs, subject to its terms, could not provide some or some element of security for the defendant’s costs. It can provide sufficient protection.

(b) It will be a rare case where the ATE insurance policy can provide as good security as a payment into court or a bank bond or guarantee. That will be, amongst other reasons, because insurance policies are voidable by the insurers and subject to cancellation for many reasons, none of which are within the control or responsibility of the defendant, and because the promise to pay under the policy will be to the claimant

(c) It is necessary where reliance is placed by a claimant on an ATE insurance policy to resist or limit a security for costs application for it to be demonstrated that it actually does provide some security. Put another way, there must not be terms pursuant to which or circumstances in which the insurers can readily but legitimately and contractually avoid liability to pay out for the defendant’s costs.

(d) There is no reason in principle why the amount fixed by a security for costs order could not be somewhat reduced to take into account any realistic probability that the ATE insurance would cover the costs of the defendant.”

Having considered the case law, and the various clauses in the AAE which would enable insurers to void the policy, Judge Millen held:

"In my judgment the ATE Policy cannot be regarded as providing sufficient protection to Mr Bloch, even on the basis that the AAE applies. There is a real risk that the policy will not meet an adverse costs order in full. It offers no protection in respect of the costs incurred in the nine months before the policy was taken out, …and is limited to £250,000, which at the very least raises a risk that it would be inadequate to meet Mr Bloch’s costs in any event, given the level of costs disclosed by both the original and revised costs budgets filed by him."

He also confirmed that Mr Bloch had not suggested that "the claim does not have a real, as opposed to fanciful, prospect of success".

Judge Millen ordered Asertis to pay into court an initial payment of £101,317.31, being 60% of Mr Bloch's incurred costs. He further ordered that following the Costs and Case Management Conference (CCMC) listed for November 2024, Asertis pays into court 60% of Mr Bloch's costs incurred between his cost budget dated 14 June 2024 and the date of the CCMC, as well as 70% of the court approved estimated costs.

Comment

The number of corporate insolvencies remain high, as shown in the latest Insolvency Service report, and we are seeing a growing number of claims being brought against the former directors of insolvent companies – many of which have been assigned from liquidators to litigation funders.  If such companies have limited cash available to them, the terms of any credit facility and ATE insurance are subject to be scrutinised when considering whether the funder has the funds to meet any adverse costs order. The Court's decision is a reminder that there is a relatively low hurdle required to show that an ATE policy will not respond to an adverse costs order amounting to an "unjustifiable element of doubt about the extent of the cover."

D&O insurers who are covering the costs of claims brought by litigation funders may want to carefully consider the financial viability of the relevant funder, as well as any credit facilities and ATE insurance, and consider whether a security for costs application should be made.

In the wake of high-profile insolvencies, including the collapses of Carillion and BHS, which highlighted significant auditing failures, the government is committed to restoring investor and public trust in the corporate governance and financial practices of large businesses. A troubling study by the Audit Reform Lab, a think tank, revealed that 75% of audit reports failed to indicate that companies, which subsequently failed within the following year, were at risk of bankruptcy by providing a 'material uncertainty related to going concern' finding. The government recognises that trust in financial information - provided by directors - giving an accurate picture of the health of the company is vital for attracting long-term investment and promoting growth.

The proposed changes aim to transform the regulatory landscape, including as to scrutiny and accountability of company directors.

Background: How did we get here?

In December 2018, an independent review of the Financial Reporting Council (FRC) was completed. The review assessed the FRC's ability to effectively regulate audit quality and financial reporting. Led by Sir John Kingman, the review found that the FRC faced several constraints on its effectiveness, largely due to its lack of a clear statutory base, which limited powers and the clarity of its duties. The FRC had evolved from a private institution into a regulator through the 2014 Audit Directive, subsequent delegated powers, and voluntary agreements. This evolution resulted in a regulator with "responsibility without power." Additionally, the FRC continues to be partly funded by a voluntary levy which has blunted incentives to champion reform and often resulted in an "excessively consensual approach" to its regulatory functions. The review report recommended establishing a new regulator, the Audit, Reporting and Governance Authority (ARGA), which would be given statutory powers and structured in a way to overcome the FRC's historic shortcomings.

The recommendations from the independent review fed into the previous government's White Paper on "Restoring Trust in Audit and Corporate Governance: Proposals on Reforms" (White Paper) in May 2022. These proposals have now been incorporated into the outline of the Bill, for which a draft is pending.

The Audit Reform and Corporate Governance Bill

According to the outline, the Bill continues the work and the proposed legislative changes set out in the White Paper of the previous government. The draft legislation would involve replacing the FRC with a new regulator, namely ARGA who would differ from the FRC as follows:

• Wider Remit: The definition of Public Interest Entities (PIEs) will be extended to include the largest private companies thus subjecting them to the same reporting standards as large, listed companies; with a view to ensuring audits of these companies give early warning signs of financial issues.

   

• Streamlined Regulations: Unnecessary rules would be disapplied to smaller PIEs to ensure that reporting requirements are not disproportionately onerous on smaller businesses.

   

• Greater investigatory and enforcement powers: Currently, directors can only be held accountable for making incorrect financial statements if they are members of an accountancy body. This limits the efficacy of the existing enforcement regime. The Bill would give ARGA statutory powers to investigate concerns over the accuracy of financial reporting and sanction directors for neglect or breaches of their duties.

Recent related developments: FRC updates the UK Corporate Governance Code

In the backdrop to the Bill, the FRC published a revised UK Corporate Governance Code in January 2024 (2024 Code), which will apply to companies listed in the commercial companies category or the closed-ended investment funds category for financial years commencing on or after 1 January 2025. The existing 2018 version of the Code will continue to apply to such companies in the meantime. Previously only premium-listed companies were bound by the Code which was (and remains) voluntary for private companies; however, the Code does act as a guide to good board practices even where it is not formally adopted. 

The purpose of the Code is to "set high standards of corporate governance, reporting and audit by holding to account those responsible for delivering them". This development provides some colour to the context of the Bill which may potentially go further than the FRC in introducing US-style regulation.

In response to the White Paper, between May to September 2023, the FRC had conducted a consultation regarding proposed amendments to the Code aimed at addressing concerns highlighted in the White Paper. Of the 18 proposals set out in the consultation, explored in our previous article here, only a handful were ultimately retained in the 2024 Code.

The main substantive change to the 2024 Code involves reporting on internal controls. Prior to the changes, the Code required the Board to implement and monitor a management and internal control framework. Boards will now be required to include in their annual reports:

• A description of how the board has monitored and reviewed the effectiveness of the framework;
  
  
• A declaration of the effectiveness of the material controls as at the balance sheet date; and,
  
  
• A description of any material controls which have not operated effectively as at the balance sheet date, the action taken, or proposed, to improve them and any action taken to address previously reported issues.

This change deviates from the original proposal, which would have mandated Boards to report all identified material weaknesses (instead of only ineffective controls) and to provide an explanation for the basis of the Board declaration (rather than simply describing the review process of the systems). Additionally, Boards have retained a higher level of flexibility and control in their reporting on internal controls as they have the discretion to determine which controls are classified as 'material controls' for inclusion in the Board declaration. In particular, the 2024 Code retains the 'comply or explain' regime, which allows Boards to choose not to comply with provisions provided they explain why their alternative approach was more appropriate in upholding high standards of governance. This approach offers flexibility and reflects the fact that one approach does not fit all, in view of the diverse types of companies adhering to the Code. Boards are therefore at liberty to chose bespoke governance arrangements reflecting the company's particular circumstances or attributes.

The ICAEW and other stakeholders welcomed the watered-down changes which were ultimately implemented in the 2024 Code. Stakeholders had been concerned that the FRC may introduce requirements styled like those in the Sarbanes-Oxley Act 2002 (SOX) in the US. During the consultation, in feeding back on the above changes, stakeholders sought assurances that the proposed changes would not replicate the US's SOX regime which requires:

• That boards of US companies maintain and report annually on the operational effectiveness of the company's internal controls over financial reporting;

   

• And, that CEOs and CFOs attest personally to the effectiveness of internal controls and thereby imputing personal liability on directors for knowingly or wilfully misrepresenting the efficacy of the controls.

The FRC has listened to stakeholders and refrained from intrusive requirements akin to SOX. As above, it remains to be seen how the Bill will take shape in this respect once it has been fleshed out beyond the limited outline currently available.

What may the Bill mean for management liability?

Whilst the precise text of the Bill is awaited, the background to it has involved consistent calls for a new regulator with broader enforcement powers, including the ability to investigate and sanctions directors for neglect or breaches of duty.

In the spirit of the momentum behind these proposed legislative changes so far, King Charles III stated that it is:

"...important that all directors in the UK’s most significant companies face consequences if they neglect their duties in respect of financial reporting, so the bill will allow for this.”

Directors owe duties to the company to act in a way which promotes the success of the company, and in doing so must have regard for the desirability of the company maintaining a reputation for high standards of business conduct. Further, they have a duty to exercise reasonable care, skill and diligence in carrying out their duties whilst in office. The Bill intends to enhance the accountability of Directors for incorrect financial reporting.

It seems unlikely, on present information, that the Bill will implement duties on Directors which are as intrusive and stringent as SOX, but we will have to wait and see how the draft Bill develops. A UK adaptation of the SOX regime had been previously anticipated under the previous government, although this never materialised, as reflected in the ultimate 2024 Code. The question remains as to the direction and the detail the new government take with drafting the Bill. The SOX provisions in the US are highly litigated and place personal liability on directors for the efficacy of internal controls. Whether or not the reforms take a SOX-style or other approach, it seems from the outline of the Bill that obligations on directors may increase vis-à-vis the provision of accurate financial information. If that happens, directors (and, indeed, D&O insurers) will need to be alive to any increased risk of claims and ensure that internal controls meet any such higher standards.

The FCA has announced a consultation on a new regulatory regime for retail investors. This comes as a result of the government's "repeal and replace" plan following Brexit and may also include a review of sections of the Mifid II and Priips regulations. The FCA's executive director for markets, Sarah Pritchard, has said that there is a "unique opportunity to design flexible and proportionate regulation which is tailored to the UK market. Regulation that supports retail investors to buy products that suit their needs." It is hoped that new rules will be finalised in the first six months of 2025.

Pritchard announced that the FCA wants to hear from financial advisers regarding the new regime, which will largely relate to adjusting the approach to risk appetite. She said: "The concern regularly expressed is that we have become focused on the chance of loss at the expense of possible return."

Impact of new regime on Consumer Duty

The introduction of the Consumer Duty last year shifted the FCA's approach, from 'rules based' regulation to becoming more outcomes-focused. The proposed retail investors regime will also be outcomes-focused, allowing firms to be innovative and flexible in advising clients. In particular this will allow sole traders or small firms to tailor their approach to their own clients, with the FCA acknowledging that it is these types of advisers who often feel the effects of regulation the most.

Advice-guidance boundary review

Pritchard also added that firms with innovative ideas do not need to wait for the FCA to complete the advice-guidance boundary review.

In December 2023 the regulator published a policy paper in conjunction with the Treasury setting out initial thoughts on how to address the line between firms providing advice and providing guidance. The FCA considers that the purpose of such a review will only be reached in a "vibrant and sustainable" advice market. Pritchard noted that the FCA's aim is for retail investors to have "access to the help and guidance that they need, at a cost they can afford, when they need it – so that they can make informed decisions" from a varied and extensive market.

Pritchard noted that there are three key challenges with reforming the advice-guidance boundary:

• Finding suitable protections for consumers;
• Balancing an outcomes-focused approach with areas where prescriptive regulation is needed; and
• Striking the right balance between certainty and room for innovation.

It appears that the advice-guidance boundary review will be ongoing alongside the consultation on the new regulatory regime for retail investors, with the advice-guidance boundary perhaps becoming clearer once the new regime is in place.

Crackdown on tax avoidance

The Labour Party Conference saw the Chancellor, Rachel Reeves, deliver a speech outlining the Government's priorities for the upcoming budget. She noted that there will be a crackdown on tax avoidance and closure of tax loopholes, as the "government will not sit back and indulge the minority to avoid paying the taxes that they owe". HMRC is already recruiting 5,000 new compliance officers to work on this crackdown.

Other government priorities

Reeves also pointed to other changes which will be outlined in the Autumn 2024 budget which will impact those working in financial services. She noted that there will be reforms to the pensions system, although there is no detail as yet as to what reforms can be expected.

The Government has also pledged to introduce VAT on private school fees and heavily invest in public services.

What this means for financial professionals

The regulatory landscape is shifting and professionals need to ensure they are keeping up to date with changes as and when they take effect. For those firms who service retail investors, responding to the consultation for the new regime may be wise, to ensure concerns and desires are understood by the FCA.

The suggestion from the FCA that advisers should be able to approach their advice with flexibility and innovation, with a focus on the outcome for consumers, will need to be carefully balanced with ensuring any tax advice is in line with the upcoming crackdown on avoidance schemes. Professionals may well face claims from clients if HMRC come knocking.

What is the background to this issue?

In recent years, mergers have become a popular growth strategy within the legal market. In 2022 alone, the number of mergers surged by nearly 23% compared to 2021. This trend includes several high-profile mergers, some of which have raised concerns following financial difficulties, such as those experienced by Axiom Ince and Metamorph Group, which led to SRA interventions. The Solicitors Regulation Authority (SRA) has expressed increasing concern that, in some cases, client interests are being sidelined in favour of firms' commercial ambitions. As a result, the regulator has issued the warning notice to firms involved in mergers, urging them to keep client care central to their decision-making processes.

SRA Chief Executive Paul Phillip commented:

"We have seen some firms making multiple acquisitions in a relatively short period of time, which can create challenges in terms of business integration, organisational culture, and maintaining standards of service to an increased client base."

While the SRA acknowledges that mergers are a legitimate means of growth, offering significant commercial benefits—such as expanding practice areas, acquiring top talent, and achieving economies of scale—the regulator is reminding firms of their duty to prioritise client interests. The warning notice stems from concerns that recent merger-related collapses could undermine public trust in the legal profession and the delivery of legal services. In particular, the SRA are concerned that client interests are not always paramount during transactions, with commercial interests or expediency sometimes appearing to take precedence, which is unacceptable.

Mergers, financial failures, and client protection

The SRA’s June 2024 warning notice coincided with the SRA's  Consumer Protection Review which subsequently concluded in July 2024. The review examined the regulator's approach to protecting consumers of regulated legal services and alluded to concerns about the strain on the Compensation Fund following an increase in interventions, especially of so-called "accumulator" firms. The SRA noted that the number of interventions in 2024 has already more than doubled compared to the previous year, putting additional pressure on the Compensation Fund where many of these interventions arise out of circumstances also generating significant claims.

What behaviour is the SRA concerned about?

The warning notice gives examples of conduct which might breach regulatory arrangements, including:

• Treating client files as commodities that can be bought or sold without reference to the client's own wishes – and/or failing to give clients enough time to decide whether to give informed consent to the transfer of their matter, money and documents.
• Overlooking important matter deadlines during the file transfer.
• Sale of will banks without testator's consent, including to unregulated entities.
• Failing to ensure that the client account is not in deficit before acquiring it.

It is fairly obvious how each of these examples might be detrimental to client interests; however, the SRA is also concerned about more "high level" or indirect impacts, such as:

• Failing to carry out due diligence on the firm being acquired.
• Both the buyer and seller firms failing to consider whether the acquiring firm has the competence, systems, staffing or capacity to carry out the work being acquired.
• Failing to notify the SRA promptly of any indicators of serious financial difficulty.

The first two examples here demonstrate the continuing widening of the regulator's reach, with the SRA's tendrils now firmly embedded into key commercial decisions made the firm. The SRA make clear that a number of provisions of both the Code of Conduct for Solicitors, RELs and RFLs and the Code of Conduct for Firms are engaged in a merger or acquisition situation.

The issue of this warning notice also fits with the SRA's recent trend of committing to written guidance legal analysis that solicitors were previously trusted to work out for themselves, such as the trust implications of a shortage on client account, which was the subject of another SRA warning notice also released in June 2024 (Money missing from client account). This also fits with the increase in litigants in person in recent years – sharing information in this way arguably primarily aids clients in understanding precisely what to expect from their solicitor.

What does the SRA expect?

The SRA expect that protection of client interests is at the forefront of decision-making when selling, merging or acquiring another law firm.

The warning notice sets out the following requirements, all of which are unarguably best practice, but some of which may be difficult to comply with in the commercial realities of a complex transaction such as a law firm merger:

1. Keeping clients informed and avoiding imposing unreasonably short timescales on clients (as this indicates that you have not managed the situation effectively and, as such, have not complied with regulatory requirements), who should be able to make an unfettered and informed decision about who to instruct.
2. Acting in clients' best interests even when selling your firm.
3. Making all reasonable efforts to contact testators before transferring storage of their will – and evidence such steps.
4. Ensuring that a file storage and destruction policy is in place to ensure that files are kept for an appropriate period and destroyed in a confidential way.
5. Carrying out a systematic review of any acquired client balances.

The warning notice highlights the complexities involved in balancing commercial interests against regulatory requirements. Law firm mergers are by no means the only area in which difficult ethical calls need to be made – some other obvious examples are the tension between chargeable hours targets and employee wellbeing / workplace culture, and hourly rate billing vs fixed fee pricing. Metaphors about the "regulatory obstacle course" have never been more apt.

What about solicitor managers?

When a law firm enters administration or liquidation, solicitor managers are commonly appointed to ensure that client interests, privilege and confidentiality are protected and regulatory obligations met. The SRA speculates that this is not always done due to cost considerations or because the insolvency practitioner may not be aware of the need for one.

It is clear from the warning notice that the SRA expects a solicitor manager to be appointed "in most circumstances" where the firm enters administration or liquidation. This is an "explain or comply" obligation, with the warning notice making clear that firms who do not appoint a solicitor manager will need "clear justification" for deciding not to do so.

Looking ahead: ongoing regulatory review

The SRA's warning notice will be updated once the findings of the Consumer Protection Review are consolidated and incorporated into an ongoing review of growth strategies within the legal sector. This indicates the regulator's intent to continue scrutinising the balance between law firms' commercial ambitions and their obligations to clients in the context of growth strategies seemingly overtaking consideration of client's interests.

In November 2022, TPR shared a draft version of its compliance and enforcement policy for public consultation. The regulator received 48 responses from a diverse range of stakeholders, with the majority expressing support for the key principles and risk areas outlined in the draft. However, some concerns were raised about issues such as third-party cooperation and differing interpretations of the policy's intent. TPR has taken this feedback into account to refine its approach and clarify its guidance.

The main message from TPR is that trustees and scheme managers of trust-based pension schemes must take immediate steps to comply with their duties related to the pensions dashboard.  Key points to note include:

1. Pension schemes must ensure they are prepared to connect to the dashboards as required. Non-compliance could involve failing to meet connection deadlines or not adhering to the guidance provided by TPR and the Money and Pensions Service (MaPS).
2. As connection dates approach, TPR has noted that whilst many schemes are preparing effectively, some have not adequately measured or improved their data quality. TPR plans to engage with numerous schemes in autumn 2024 to assess how they are managing critical elements.
3. Schemes are expected to maintain clear and comprehensive audit trails to demonstrate compliance. This involves documenting monitoring processes, adhering to MaPS' reporting standards and detailing actions taken to address any data-related issues.

In its blog, TPR emphasises the need for trustees and scheme managers of trust-based pension schemes to prepare thoroughly for the pensions dashboard. To achieve this, they must fully understand their duties by reviewing TPR's guidance on compliance and enforcement. Effective planning for a staged and orderly connection process in line with the DWP guidance. Furthermore, trustees should manage resources effectively, which includes establishing robust controls and contractual agreements with service providers.

Trustees must ensure that their data is accurate and reliable.  TPR recommends several best practices to achieve this objective, including identifying, evaluating and documenting any risks whilst implementing appropriate controls to address these concerns. Continuous review and enhancement of existing controls are also necessary to maintain high data quality. It is important to keep clear records of decisions made and advice received, as well as to monitor progress reports from the regulator. Lastly, any breaches must be reported to TPR promptly, along with taking steps to mitigate any issues.

The introduction of the pensions dashboard is likely to bring both benefits and risks.  TPR's enforcement policy highlights the risks in terms of schemes failing to adhere to deadlines and obligations placed on them by the pensions dashboard.  This is a risk for trustees (and with that their PTL insurers) and for pension providers (and with that FI insurers with the FCA providing its own enforcement policy for FCA regulated pension schemes).  Further, in the run up to the launch of the pensions dashboard the blog highlights TPR's concerns over scheme data quality which is likely to be an issue for trustees of trust-based arrangements in particular.  It will be interesting to see if TPR uses its powers to require schemes to clean up their data. 

The FCA's findings highlight:

• Firms should take a holistic approach to the price and value outcome and the Consumer Duty overall – poor practices are identified as including interest rate tiering in bank accounts with lower interest rates as balances grew and complex / opaque charging structures with the FCA specifically citing double dipping (i.e. charging for holding cash whilst retaining interest on cash) in the SIPP and investment platform sectors;
• Approaches to assessing fair value should look critically at customer outcomes and not look to justify existing approaches to pricing or benefits of a product or service – poor practices identified include grouping products together despite material differences in their structure, the use of broad target market definitions (for example in GAP insurance the target market was defined as anyone who buys a car - this was seen as too generic), failing to consider fees and charges against how the product or service is used or how it is distributed, failing to substantiate purported benefits of services provided (for example "peace of mind" for GAP insurance without evidence to back up the claim).  The issues here broadly relate to (1) failing to account separately for products with distinct features, fee structures or which yield different benefits and (2) defining the target market at too high a level of generality.
• Assessing customer groups where there are differential outcomes – if a group of retail customers receives different outcomes from the same products compared to another group of retail customers, the firm should be able to explain why this is the case and assess whether each group is getting fair value.  Poor practice in this area included firms struggling to provide data and evidence where there are different customer outcomes and inadequate assessment of vulnerable customer groups including that firms did not have adequate processes in place to proactively identify vulnerable customers and instead relied on customers to self-report vulnerabilities.
• Costs of manufacture and distribution impacting the value assessment – cost and margin analyses can be used when assessing fair value – however, poor practice cited includes providing insufficient explanation of the impact of cost on fair value, for example saying that the retention of interest on cash is made to run a platform but providing no evidence for that conclusion.

The publication also provides that – (1) the FCA is reviewing fair value assessments from 10 investment platforms/SIPP operators earning interest on cash balances, (2) for GAP insurance the FCA took action against a number of firms imposing requirements to suspend the sale of GAP insurance and has recently lifted a number of requirements and (3) the FCA continues to monitor banks in terms of passing on increases in interest rates to savers.

Notably at the outset of the update the FCA highlights the pressures on small firms when it comes to implementing the Consumer Duty and that the FCA does not "expect a small firm to apply the same resources or processes to assessing fair value as a large firm.".  Instead, the FCA says that it expects firms to "take a reasonable and proportionate approach in light of their resources, size of client base, and the complexity of the factors being considered in the fair value assessment".  For each of the areas highlighted by the FCA there is a specific note for small firms and what is expected of them.

The FCA continues to publish updates on the implementation and its oversight of the Consumer Duty.  It has already been a busy 14 months when it comes to the Consumer Duty and given the rate of FCA publications on the subject can be expected to just get busier.  It is perhaps a warning for the industry when the FCA says "we will act where we see firms not making improvements in response to feedback, or if firms' products and services are clear poor value outliers when compared to the price and value of similar products and services" – the price and value outcome is of course just one of the four outcomes underpinning the Consumer Duty – and so the scope for FCA activity is wide as we continue to see the FCA flex its muscles in this area.

Just Recruit was a recruitment agency based in St Albans and went into administration on 29 January 2021 due to its inability to pay debts of £1.2m. However, Mr Freed made several payments totalling £918,590 to two companies in the months preceding Just Recruit's collapse. The two companies to receive the payments were Key People Ltd and Achieva Group Ltd, both are also St Albans based recruitment firms.

Key People has now been purchased by Achieva Group and was an unsecured creditor when Just Recruit entered administration. A total of £240,000 was paid by Just Recruit to Key People between 9 October 2020 and 14 December 2020 as part of a "long-standing arrangement" whereby administrative and financial support were provided by Key People to Just Recruit. According to the companies, Key People billed Just Recruit £100,000 on a quarterly basis for its support.

A total of £678,590 was paid to Achieva Group between 17 December 2020 and 24 December 2020 from Just Recruit. Achieva Group later bought the assets and business of Just Recruit for £50,000 in a pre-pack administration deal.

A claim was brought by the administrators of Just Recruit against Mr Freed for breaching the Insolvency Act 1986 by prioritising the interests of Key People and Achieva Group over those of other creditors. Manolete Partners agreed to an assignment of the legal claims from the administrators in 2021.

Decision

Judge Mark Mullen found that Mr Freed did breach his duties as a company director by making the payments. He said that "the only conclusion that can be formed from the evidence that I have seen is that the payments were, at best, made without proper consideration of the interests of creditors and, at worst, a cynical scheme to abstract funds from Just Recruit Group and leave the debts of unconnected creditors in the company." There is a legal presumption that the payments made to Key People and Achieva Group unfairly favoured them over other creditors. Judge Mullen added "were that presumption not engaged, I would nonetheless be satisfied that the payments were influenced by a desire to prefer by reason of the fact that entities connected to Freed received payments while unconnected creditors did not…the conclusion that there was an intention to prefer is inescapable."

The Judge referred to the Supreme Court's decision of Sequana BTI v Sequana [2022] noting that that it is not open to the shareholders of a company to ratify a breach of the duty to consider the interests of creditors at a time when the company is already insolvent or bordering on insolvency.

The Court also rejected the defendant director's argument that his liability should be limited to the shortfall in the administration of the company. The director sought to rely upon the "circularity defence" which is sometimes deployed to argue that to avoid monies going around in a circle the Court can cap the relief obtained by the Claimant to the costs and expenses of the insolvency practitioner. However, in this case, the Court was not persuaded that there was "true circularity" as the claim had been assigned to a litigation funder. The Judge held that, "where the office-holder has assigned a cause of action such a restriction will cause prejudice to creditors while allowing the Defendants to retain a greater proportion of the proceeds of the wrongdoing. It also would prejudice the claimant, as an innocent third party purchaser of the claim, and has the potential more generally to discourage potential purchasers of claims from doing so."

As a consequence, Mr Freed was ordered to pay the entirety of the compensation awarded, being £918,590 (the total paid out to Key People and Achieva Group prior to Just Recruit's collapse). Key People and Achieva Group were ordered to share the liability of the amounts they both received from Just Recruit.

Comment

The Court's rejection of the "circularity defence" on the basis that the cause of action had been assigned to a litigation funder means that where a funder is involved directors of insolvent companies are less likely to be able to limit the redress amount payable. In this case the Judge was mindful that, "to place a limitation on recovery in the form proposed by the Defendants would discourage the pursuit of claims…"

The successful outcome for Manolete Partners was handed down days before the release of their financial results for the year to 31 March 2024. The funder announced pre-tax profits of £2.5m and an 18% increase in new case investments – a company record. These results follow a loss of £3.1m in 2022, a consequence of Covid legislation protecting businesses from insolvency. The Insolvency Service's most recent report reveals that company insolvencies remain high, with there being 16% more insolvencies in July this year compared to in July 2023 and it appears that litigation funders are capitalising on this development.

This decision is another reminder to D&O insurers that there are litigation funders willing to fund claims against D&Os deemed to have breached their fiduciary duties. Especially in light of the recent economic climate and the increase in insolvencies, there is potential for such funders to further target directors who may have breached their duties prior to the company's collapse.

To read the judgment, please click here.

Principals are responsible for overseeing their ARs.  At the end of 2022 the FCA introduced new rules where, in broad terms, the FCA increased the obligations on principals when it comes to overseeing their ARs.

The FCA has "tested" 270 firms (said to be c. 10% of the principal population) on how the new rules are bedding in.  The FCA conducted a telephone questionnaire with 250 firms participating and where principals were asked about – their AR oversight, how they ensure their ARs don’t act outside of their appointments, onboarding and termination processes, how principals monitor changes and growth at ARs and whether principals delegate tasks or functions to their ARs.  Alongside the telephone questionnaire, the FCA randomly selected 23 principal firms for an in-depth assessment where it reviewed information and documentation of those firms.

The FCA's findings

The FCA says that it found principals had "made some effort" to comply with the new rules but "not all principals" could show they had undertaken an adequate annual review or self-assessment covering all points as set out in the FCA Handbook SUP rules.  In particular, SUP 12.6A sets out the detail of the annual review including basic checks such as checking the AR is solvent, its fitness and proprietary and ability to carry out the regulated activities for which the principal is responsible and checking the adequacy of controls over and resources for monitoring and enforcing compliance.  Reviews are also triggered where an AR changes its business model, the scope of its agency is expanded, there are changes to senior management or "a significant in the number of complaints" about the AR.  There is also a requirement on the principal to conduct a self-assessments looking at its compliance in broad terms to check it remains robust and again the detail of that is set out in SUP 12.6A. 

The FCA reports that 1 in 5 firms had not conducted required checks (whether the self-assessment or annual reviews) and that the quality and completion of both the self-assessment and annual review requires improvement.  In particular, out of the firms conducting reviews "approximately half of these were of good quality" (52% of self-assessments and 43% of annual reviews were considered of good quality as part of the in-depth review) and those principals involved in in-depth assessment "had not properly documented their self-assessment or annual reviews, or took a tick box approach to completing them".

The FCA sets out examples of good practice and areas of improvement.  When it comes to the self-assessment the FCA note examples of good practice as using a broad range of management information and adopting a RAG (red-amber-green) rating system.  Areas for improvement include a high level tick box approach and not documenting and addressing a clear action plan for any material deficiencies or concerns with compliance identified in the self-assessment.  For annual reviews, good practice is noted as embedding consumer duty compliance into the review and assessing AR activity to prepare a full analysis of their activity and business to feed into the annual review.  Areas for improvement are noted as relying on limited information about the AR and lack of evidence gathering.

The review also looked at how principals monitor whether an AR is acting within the scope the principal permitted – i.e. within the AR agreement.  From the telephone questionnaire 66% of firms said they used data and management information to monitor ARs activities, over 50% regularly reviewed the AR agreement as well as making regular firm facing visits or holding meetings, less than 33% checked consumer facing materials such as leaflets and websites.  Good practice in this area is noted as including mystery shopping exercises and reviewing all new financial promotions for compliance.  Areas for improvement are noted as failing to check consumer facing materials and not undertaking file reviews or observing interactions between ARs and consumers.

The review also looks at the onboarding of ARs (important for firms taking on Tenet's ARs in particular) and the termination of AR relationships.

What next?

The FCA review is a follow-up to the new rules.  Overall the picture is a little mixed and principals will want to ensure that they reflect on the FCA's good practices and make sure they are adopted to mitigate against rogue ARs and also to ensure they are meeting their regulatory supervisory obligations.  An area to keep under review for those in the FCA regulated advice and broker sectors.

The FCA's annual report for 2023/24 shows that a total of 83 skilled person reviews were commissioned in the 2023/24 year. To put this in context, 45 such reviews were commissioned in 2022/23 and only 37 in 2022/23 (net of those that were commissioned and then cancelled).

It's perhaps no surprise that this increase matches up with the advent of the Consumer Duty – the FCA's data confirms that this was one of the issues that was examined via s.166, albeit they don’t set out how many of the 83 reviews commissioned concerned this. However, 20 reviews concerned retail banking, 15 concerned retail lending and 19 concerned retail investments, so a total of 54 were in the retail finance space. Deductive reasoning indicates that a proportion of these will indeed have been concerned with the Consumer Duty and that this could have been the reason for the increase.

I mentioned earlier that firms are generally keen to avoid the costs of such a review. To put this in context, the aggregate cost incurred by firms for s.166 work in the year was £38.3 million. This averages out to £460,000 per review (although this comparison is somewhat flawed as it includes sums incurred on s.166s that were live from previous years).

A combination of the FCA's data led approach and the self-reporting requirements of the Consumer Duty probably mean that this trend will continue. FCA regulated firms (and their insurers) are well advised to ensure that the scope of any such review is properly focussed on the issues and that any subsequent past business review is limited to addressing foreseeable harm and that redress is only paid if a legal liability is established.

On 11 June 2024, the High Court dealt with liability and causation in respect of wrongful trading and trading misfeasance claims brought by the Liquidators of British Homes Stores (BHS) Group against the company's former directors. The Court considered "trading misfeasance" as a cause of action, which is a term that the Court has coined to refer to a director's failure to consider the interests of creditors when a company is insolvent or bordering on insolvency, which they nonetheless continue to trade. Quantum was also dealt with in the June judgment, bar in relation to the trading misfeasance claims, which was reserved to the August judgment. This was on the basis that given this is a developing area of law, the Court did not want to impose liability on the directors until they had the chance to make further submissions, before they looked to consider compensation for breach of what the Court has described "the modified Sequana duty" (see below).

The Supreme Court decision in Sequana

The leading case dealing with the scope of duty owed to creditors for directors of companies in financial distress is BDI 2014 LLC v Sequana SA and others [2022] UKS C25 (Sequana). The Sequana case established the duty to consider creditors' interests arises when directors know, or should know, that the company is insolvent or bordering on insolvency or that insolvent liquidation or administration is probable. We discuss the case in more detail in our blog. 

We have also previously discussed the potential increase in claims against directors and officers (D&Os) resulting from this decision, and the decisions that have followed it in our blog - How a Supreme Court ruling could cause surge in claims against directors.

In Wright v Chappell the High Court ultimately held that directors of the former BHS group of companies were jointly and severally liable for £110,230,000 in respect of their breaches relating to the trading misfeasance claims. As such, the quantum decision serves as a timely reminder of a director's duty to carefully consider any transactions, and the potential liability that will arise from a failure to do so, which we explain in more detail below.

Background – Wright v Chappell

In April 2016, four companies in the BHS group went into administration, requiring the instruction of joint liquidators.

Shortly after their instruction, the joint liquidators determined that, from the date of their appointment, the directors either knew or ought to have known that there was no reasonable prospect of avoiding insolvent liquidation. The joint liquidators subsequently brought claims against the four directors involved. One director settled their claim with the joint liquidators.

One claim was made for wrongful trading under section 214 of the Insolvency Act 1986 (the 1986 Act), where the Court ultimately determined that the directors were each liable on a joint and several basis for a 15% share of the net deficiency between the date on which the Court determined the directors knew or ought to have known there were no reasonable prospects of avoiding insolvent liquidation and the date on which BHS eventually filed for administration.

The second claim, being the claim for which the recent judgment on quantum has been handed down, was a claim under Section 212 of the 1986 Act, or what is now being termed as "trading misfeasance". The Court found that the directors did not have regard to their fiduciary duties and as was established in the Sequana case, the duty to have regard to the interests of creditors.

The August quantum decision

The Court's August judgment dealing with the quantum for the trading misfeasance claim set out a framework for calculating redress resulting from this relatively new cause of action.

Interestingly, the Court determined that Section 212 was engaged on any date on which the directors had a duty to consider if a transaction was in the interests of creditors, but ultimately failed to discharge that duty. This led the Court to determine that the date from which the increase in net deficiency would be calculated would be June 2015, which was c.3 months earlier than the relevant date in the wrongful trading claim.

In assessing causation, the Court applied a "but for" test: but for the directors' decision to continue to operate the company, would the creditors of the company have been better off than they ultimately were at the point of administration?

This approach was applied to the directors on a joint and several basis, exposing the directors to a much greater liability than the wrongful trading findings in the first claim.

In assessing the scope of the loss, the Court dismissed the defendants' arguments that the measure for compensation should be limited to the specific single malfeasant transaction or venture. Instead, the Court applied a much wider scope, finding that the starting point for calculating the increase in net deficiency was when the directors entered into a transaction which allowed the companies to continue trading contrary to the interests of creditors. In essence, the directors were joint and severally liable for the difference between the company's assets and liabilities at the point they entered into the additional loans and the point at which the company was put into administration.

Interestingly, the Court did not apply the principle of remoteness, but did find that it was still necessary to prove that any breaches of duty were the effective cause of the losses suffered. The Court also considered the scope of the directors' duty, finding that losses unrelated to the breach of duty would not be recovered. This meant that the impact on the company pension fund, caused by market fluctuations, was deemed outside the scope of the duties breached by the directors and so these losses were not recoverable.

Key take-aways

It has been nearly two years since the Sequana decision and in that time the Courts have sought to further clarify the application of the principles set out in that decision, such as in the case of Hunt v Singh, which we discussed in a blog  post last year. The recent BHS case has therefore added further clarity to a newly developing area of law.

While Wright v Chappell represents an extreme version of events, it emphasises the need for directors to carefully consider any transactions they propose to make, and to be able to demonstrate a well-reasoned basis for those transactions.

D&Os should continue to keep a close eye on the developing caselaw surrounding the management of companies in the insolvency area.

To read the Wright v Chappell judgments, please click here and here.

The study will look at a number of key areas, including:

• Value for money:  Are consumers receiving protection products that are commensurate with the commissions paid to advisors?
• Consumer outcomes:  Are the recommended protection products meeting the specific needs and circumstances of individual consumers?
• Adviser incentives:  Are advisors being incentivised to recommend products with higher premiums to maximise their commission earnings, potentially leading to below par outcomes for consumers?

The connection to the Consumer Duty

The market study aligns closely with the new Consumer Duty, which came into force in July 2023.  The Consumer Duty sets out higher standards of consumer protection and requires firms to act fairly, honestly, and transparently.  Key aspects of the Consumer Duty that are relevant to this probe include:

• Fair treatment:  Firms must ensure that consumers are treated fairly and that their best interests are considered.
• Transparency:  Firms must provide consumers with clear and accessible information about the products and services they offer.
• Good outcomes:  Firms must take steps to deliver positive outcomes for consumers.

By investigating the commission structure associated with protection products, the FCA is seeking to ensure that these products comply with the principles of the Consumer Duty and that consumers are not being exploited.

The study could have wide ranging implications for business that either provide or sell this type of cover.  Key potential implications include:

• Rule changes:  If the FCA finds evidence of harmful practices, it could introduce new rules to curb excessive commissions or mandate transparency in commission structures.
• Reputational damage:  Businesses implicated in unethical commission practices could face reputational damage.
• Increased costs:  Compliance with new regulations could lead to increased operational costs for businesses.

The FCA also hopes that there will be positive implications of customers, including:

• Improved outcomes:  The FCA's hope is that this could lead to a more transparent and fair commission structure, resulting in consumers receiving protection products that better align with their needs.
• Reduced costs:  If excessive commissions are curbed, the FCA hopes that consumers may benefit from lower premiums.
• Increased trust:  The FCA's view is that a crackdown on unethical practices could restore consumer confidence in the financial services industry.

The FCA's press release is keen to stress that they are looking to explore how this market is working, and they note the peace of mind that such cover can provide consumers.  However, the FCA has been keen to highlight circumstances where it believes fair value is not being offered since the advent of the Consumer Duty and we fully expect them to take action here if they do decide that these products are not meeting consumers needs (and at a fair value).

Key priorities for 2024/25 as set out in the report include:

1. Making process changes to reduce waiting times.
2. Reducing the number of older, complex cases from its historical caseload.
3. Improving signposting and pre-application journey, offering more self-service information to ensue the right complaints reach TPO.
4. Securing long-term funding of the Pensions Dishonesty Unit.
5. Expanding TPO’s specialist knowledge in pensions.
6. Reviewing the current systems to ensure TPO clearly understand what's needed to deliver further efficiencies and meet the expected increase in demand.

This year is set to be transformative for TPO. They’re launching a “root and branch” review of their operating model to identify improvements and better manage existing resources. TPO is eager to pilot new approaches, gather feedback from stakeholders and refine their processes going forward.  Although the root and branch review is underway, there are some insights in the plan including more robust triage over complaints, looking for earlier opportunities in the customer journey to make decisions through short form determinations (said to be akin to a court summary judgment) and working more proactively to identify upcoming issues and utilising lead cases more effectively to inform complaints handling. 

The Corporate Plan also outlines performance against key performance indicators (KPIs) for 2023/24. Noteworthy stats include TPO successfully resolved 99% of general inquiries within four weeks, exceeding their 90% target. However, they fell short of averaging 680 complaint closures per month, achieving only 553.  Further, the target wait time for assessment was 12 months against the target of 5 months, for early resolution was 11 months compared to the target of 5 months and for adjudication 15 months against a target of 12 months.

Whilst TPO acknowledges that some KPI's weren’t met, they're advocating for a sustainable funding model in collaboration with the DWP to address the challenges of increasing volumes and complexities in their caseload.

TPO continues to expect increases in complaints because of the pension freedoms, auto-enrolment and the pension dashboard increasing the options and awareness of individuals of their pension provision.  The publication of the Corporate Plan for 2024/25 is a significant moment for TPO as it seeks to tackle the growing demand for its services. It is crucial for stakeholders — especially pension trustees, administrators and their insurers — to stay informed about how these developments could impact the complaints process and service delivery in the pensions sector.  

On 26 July 2024, the SRA Claims Management Fees Rules (the Rules) aimed at restricting "excessive fee-charging when firms make compensation claims for mis-sold financial products" came into effect. These new rules will apply to solicitors, firms and their employees that undertake what the SRA describes as claims management activities for financial services products.

In introducing the Rules, the SRA noted its obligations in accordance with the Financial Guidance and Claims Act 2018 (the Act). Section 33 of the Act requires the SRA to make rules to protect against excessive charges in relation to claims management activities that relate to financial products or services.

The Rules operate akin to the rules implemented by the FCA which restrict the amount of fees recoverable by CMCs from consumers when pursuing financial mis-selling claims on consumers' behalf – i.e. they operate on the basis of a sliding scale based upon the amount of redress obtained by a consumer.

Under the Rules, the amount law firms will be able to recover from consumers in relation to financial mis-selling claims is as follows:

Are there any exceptions?

There are several exemptions where the Rules will not apply – section 2.6 of the Rules states that they will not apply:

(a)To any charges for reserved legal activities;

(b)To charges imposed in circumstances where the relevant services were provided, or the agreement to provide them was entered into and instructions to pursue the claim were given, before these rules came into force;

(c)If no award for monetary redress is made in the client's favour in relation to the claim;

(d)If the claim does not fall within the scope of (1) the complaints resolution rules set out in the FCA Handbook (DISP: dispute resolution), (2) any statutory ombudsman scheme such as the Financial Ombudsman Service, the Pensions Ombudsman, or the Financial Services Compensation Scheme;

(e)To any charges for activities carried on in relation to actual or potential court proceedings in various circumstances, including where there are issues in relation to limitation, where there is no option to / or a consumer is unable to pursue the claim through a statutory ombudsman scheme and where there are potential complicated or novel issues; and

(f)To a claim made to one of the statutory ombudsman schemes where the SRA is satisfied that there are exceptional circumstances

The potential impact of the Rules

It is clear the SRA has sought to align itself with the FCA and exception (d) in particular is indicative of that approach.

The Rules address the practices of a limited number of law firms which predominantly deal with financial mis-selling claims. Since the FCA's introduction of the fee restrictions on CMCs, some law firms have undertaken significant marketing campaigns to increase awareness of their services. As above, many of these firms have then gone on to charge excessive fees to consumers.

With the implementation of restrictions on the amount firms are able to recover, we may see fewer of these firms operating within this area. Furthermore, firms may be dissuaded from taking on more complicated claims, but which may not amount to a claim involving a "novel, complex or important point of law". This may of course lead to questions over whether the Rules inhibit consumers' access to justice.

With that said, there will likely remain a significant number of firms which represent consumers in relation to financial mis-selling claims and who are able to stomach the newly imposed restrictions on recoverable fees for these types of claims.

A.  Targeted support

The targeted support proposal was broadly based on firms (1) using limited information about a customer and their circumstances to provide support to consumers where the action would be appropriate to a person in similar circumstances – a "people like you" proposal, or (2) an offer of targeted support without explicit charges (which could instead be wrapped up in transparent upfront fees).

B.  Simplified advice

Simplified advice would differ from targeted support to the extent that a consumer obtaining simplified advice would be advised by way of a personalised recommendation – i.e. we recommend this to "you". The idea being that simplified advice focusses on one specific need and so does not involve an analysis of a customer's circumstances that are not directly relevant to that need.

Whilst the FCA is yet to announce its plans, reports suggest that the FCA will drop the simplified advice proposal, but that it will press ahead with the targeted support proposal.

If this is the approach taken by the FCA, then it will need to ensure that firms' concerns are addressed. One of the main concerns for firms is whether they will still be held responsible for a customer's investment decisions if they give targeted support in the same way as they would be had the firm provided holistic advice. Furthermore, firms will also need to consider how such a model could be introduced, including how 'targeted support' could be implemented and operated to ensure that it works for firms from a commercial perspective.

Keep an eye out for our blog which will be released following the FCA's announcement. In the meantime, for a reminder of the issues in play, please visit RPC's FT Adviser article where we consider the different issues around navigating the advice-guidance boundary.

The FCA initially encouraged former BSPS members to raise complaints with their advisor following which they could refer to the Financial Ombudsman Service (FOS) or Financial Services Compensation Scheme (FSCS) should the advisor be insolvent. 

Despite the publicity a relatively small number of members raised complaints and, following a consultation, the FCA announced a redress scheme under section 404 of the Financial Services and Markets Act 2000 towards the end of 2022. 

Under this scheme, advisors were required (by a deadline set by the FCA) to write to their BSPS clients and inform them they would be reviewing the suitability of the advice given. If the member disagreed with the advisor's conclusion, they could contact the FCA who had the power to arrange for the FOS to independently review the advice. 

The FCA anticipated that redress would come to approximately £49m, with advisors paying £33.6m of this and the remaining £15.4m coming from the FSCS. However, the calculation for determining redress is closely tied to the value of gilts, which fell drastically following Liz Truss' mini-budget and the announcement of various tax cuts at the end of 2022. As such, redress payments have been significantly lower in the years since 2022.

In a report published in July 2024, the FCA has reported that approximately £100m in redress has now been offered to at least 1,870 former BSPS members. However, only £8.7m of this was offered under the redress scheme. The FCA has further revealed that the percentage of cases where advice was found to be unsuitable under the redress scheme, but where no redress was ultimately payable, is 70.1%, which the FCA attributes to "changing economic conditions". 

This comes as a result of the cost of funding guaranteed retirement income through an annuity having fallen significantly in the past two years, meaning a smaller pot is needed now to buy the same level of income that a much larger pot would have provided in, say, 2019. In some instances, the amount needed to put that member in the position they would have been had they not transferred out of the DB pension, is lower, and in some cases is zero, as the transferred funds are currently able to purchase a higher level of benefits than were available from BSPS.

To put this in context, prior to the introduction of the redress scheme, claims to the FOS, FSCS and arising out of FCA intervention came to around 3,000 and led to redress of approximately £97.4m being payable to 1,510 former members. Following the introduction of the redress scheme just under 3,000 cases have been considered with approximately £8.7m in pay outs to 360 members (with a number of the balance of the 3,000 cases presumably showing no loss). These numbers reveal that the redress scheme has seen significantly less redress paid than anticipated. In the final rules for the redress scheme, the FCA themselves stated (under the heading 'measuring success' no less) that one of the proposed outcomes of the scheme was that £49 million would be paid in redress. The figure actually paid out represents less than 20% of this which could prompt people to ask if the cost and expense of the redress scheme was necessary.

Still, the FCA remains optimistic, advising that they are still accepting complaints from BSPS members who have not yet made one.

Under the current finding guidance, fines are determined based on the nature and impact of the misconduct, categorized into bands A to D, with A capturing the least serious misconduct and the subsequent bands capturing progressively more serious misconduct. The guidance also considers mitigating and aggravating factors separately after identifying an indicative fine. The SRA may reduce an indicative fine by up to 40% for mitigating factors. If the indicative fine exceeds £25,000, the case must be referred to the SDT, which has unlimited fining powers.

The SRA is now contemplating updates to the fining guidance to strengthen the deterrent effect of fines. They have raised concerns that the current guidance lacks clarity and fails to adequately differentiate between conduct that is "intentional, grossly negligent or reckless, continued after it was known to be improper, or formed a pattern of conduct" and conduct without these characteristics. The proposed updates aim to enhance the deterrent impact of fines and increase their punitive nature for serious misconduct.

In summary, the proposals include the following changes: 

• Introduction of two new penalty bands, E and F. Previously, fines for misconduct under Band D could reach up to 5% of annual domestic turnover. Now, fines for misconduct under Band F could invite an indicative fine ranging from 11% to >25% of annual domestic turnover. The open ended indicative fine in Band F reflects the SRA's new unlimited fining powers and the discretion of decision makers to issue fines as they see fit in the circumstances.
• Updating the scoring framework that assigns a score based on the nature and impact of misconduct. The cumulative score determines the appropriate penalty band. The SRA proposes updating the framework to include scores for misconduct causing "severe" or "very severe" loss or impact. These higher scores would place such misconduct into the new penalty bands E or F, resulting in significantly more punitive fines.
• Implementing minimum fines for each penalty band, with a minimum fine of £5,000 for the least serious misconduct in Band A.
• Enhancing clarity on when the SRA may base fines on metrics other than annual domestic turnover. Currently, fines can be based on global turnover in "exceptional circumstances." The SRA proposes introducing illustrative examples to clarify when this may occur.

Although the SRA's unlimited fining powers are limited to economic crimes, the proposed changes to the fining framework would affect the assessment of all types of misconduct, including non-economic misconduct. The SRA consultation papers reads: 

"Many of the cases in Band E and F are likely to be for serious misconduct involving economic crime, although other serious misconduct might also fall into these bands."

According to the consultation paper, such 'other' serious misconduct may include that which jeopardises the public trust in the legal profession, such as misconduct relating to SLAPPs.  Indicative fines identified by the SRA in the higher bands, E and F, could result in recommended fines of over 25% of global revenue. While the SRA will not have the authority to issue these fines in relation to 'other' serious misconduct, they will be able to refer such cases to the SDT. The consultation paper paints a picture of a radically re-imagined enforcement landscape which will no doubt alarm firms across the board.

The second function is the digital report and taxonomies team. Although the FRC has required digital reporting for over 10 years, in respect of tax-related information, the new function is designed to shift the focus onto standardized digital reporting. These reports can then be electronically analysed in a more efficient and effective way.  One of the key challenges faced by regulators is that they often hold vast amounts of data but have limited resources to interrogate and analyse that data, and this measure will no doubt assist the FRC in meeting this challenge.

The FRC stresses that there is good regulation in place already, which helps the markets to function well. The restructured functions are designed to be tools for the FRC to be a smarter regulator, and to help growth and competitiveness in the UK, which Labour made clear in the King's speech this week, is an absolute priority. 

The FRC is also working in collaboration with other regulators in the industry to promote clear and consistent reporting and regulation. The focus is very much on smarter regulation, and not more regulation. 

This most recent reform of the FRC appears to be a stepping-stone to creating the long-anticipated new regulator, the Audit Reporting and Governance Authority (ARGA).  While the genesis of this new body came under the last Conservative government, in response to public scandals following the collapse of companies such as Carillion, Thomas Cook and BHS, Labour confirmed, in the run up to the recent election, that they intended to take forward its implementation.  The prominence of audit reform in the King's speech further confirms that we are likely to see this new regulatory sooner rather than later. 

The new regulator is proposed to have enhanced regulatory and enforcement powers, with, for example, more companies being brought within the definition of 'Public Interest Entity', and therefore subject to enhanced scrutiny.  In addition, ARGA will have a remit to increase competition within the audit industry, and to challenge to the dominance of the 'Big Four', for example with managed shared audits, where smaller firms will undertake part of the auditing work alongside an existing auditor.  Ultimately, this is intended to promote corporate transparency and competition within the industry, leading to a renewed public confidence. 

There is no current timeframe for establishing ARGA, albeit it appears to be a governmental priority, and we will need to wait and see when it is given the necessary parliamentary time.  However, with the FRC introducing the two new functions, in addition to numerous other reforms over the last few years, it is clear that changes are already well underway.  For an industry that many have considered overdue for reform for some time, this will be a welcome sign.

Jacob Hopkins McKenzie Ltd (JHM) was an appointed representative (AR) of Kession Capital Limited (KCL), under the Financial Services and Markets Act 2000 (FSMA).  KCL became the target of a number of claims concerning losses incurred on certain collective investment scheme (CIS) investments which JHM promoted.  

Under s39 of FSMA, an authorised person can effectively lend their FCA authorisation to other firms. Despite being unauthorised themselves, these firms will then be able to use the principals' authorisations in order to undertake regulated activities.  The scope of what activities the AR is able to perform on behalf of the principal will be set out in an Authorised Representative Agreement (ARA).   In this case, the Claimants sought to hold KCL liable for the losses they incurred as a result of the CIS investments which JHM promoted.  The Claimants sought summary judgment against KCL, arguing that it was so clear that KCL was responsible for JHM's activities that summary judgment was warranted on that specific issue.  The lower court agreed.

The two primary issues to be heard by the Court of Appeal were (1) whether promoting the CIS investments fell under the 'Relevant Business' section of the ARA and (2) whether a prohibition in the ARA on promoting CIS to retail investors was a restriction on 'what' could be done or 'how' it could be done.  Under FSMA s39, liability of principals for the activities of ARs hinges upon what they have agreed to be responsible for in writing.   As such, the Court of Appeal considered the content of the ARA closely, and further considered how the ARA terms fit in with the language and overall aims of the relevant legislation.

As to the first issue, KCL submitted that the distinction the lower court drew between 'promoting/marketing' and 'operating' a CIS was too fine of a distinction and that the ARA, properly read, stated that JHM was to have nothing at all do to with CIS.

The Court of Appeal was unconvinced, noting that the distinction between promoting/marketing and operating is recognised within the legislation, and so it is only right to draw the same distinction in interpreting the ARA.  As such, the fact that the ARA expressly excluded operating a CIS did not mean that KCL did not accept responsibility for JHM promoting CIS.

The Relevant Business JHM was to carry out under the ARA was to "offer advisory and arranging services to third-party investors with regard to residential property investment." The CIS JHM had promoted was indeed a residential property investment, and so the Court of Appeal agreed that the ARA envisioned JHM carrying out precisely the activities it actually carried out. 

The Court of Appeal further agreed with the lower court that the attempt to exclude CIS by a clause in the ARA stating "there is no pooling of capital and no CIS" was a reflection of the parties' (mistaken) understanding of what constituted a CIS, not the legal reality of it, akin to parties' deeming an agreement to be a license, despite it legally being a lease.

As to the relevance of KCL's own FCA permissions, it is interesting that at the lower court, KCL argued that they themselves were not regulated to promote CISs.  However, at the Court of Appeal, they accepted that they were, in fact, regulated to promote CISs, by virtue of the inclusion of the word 'unit' in the list of authorised investment types. Therefore, this further strengthened the Court of Appeal's conclusion that promoting CISs did form part of the Relevant Business under the ARA and so was business KCL could be responsible under s.39 of FSMA dependant on the terms of the ARA.

As to the second issue, KCL submitted that the prohibition on advising retail clients contained within the ARA caused JHM's activities to fall outside the Relevant Business of the ARA, and KCL had therefore not agreed to accept responsibility for those activities for the purposes of s39 of FSMA.  This issue arose because it transpired that, although JHM classified all of its customers as sophisticated or professional, many of these classifications were incorrect, and the customer ought to have been classed as retail and so JHM should not have advised them.   

The Court of Appeal considered a similar issue in Anderson v Sense finding that there are boundaries as to the limitations principals can place within ARAs in order to avoid liability for certain activities.  More specifically, a principal may restrict what activities the AR carries out (by reference to the authorised activities), but it cannot restrict how those activities are carried out, at least for the purposes of s39 responsibility.  'How' limitations will still be effective as between the AR and the principal for the purposes of a claim by the principal against the AR for a breach of any appointed representative agreement, but they will not be effective as between the consumer and the principal. 

When determining whether the restriction on JHM to only deal with retail customers was a 'what' or a 'how' restriction, the Court of Appeal considered whether the activity of advising could be broken into parts – ie advising retail customers as a separate activity to advising professional or sophisticated customers.

Following a review of the relevant authorities, the Court of Appeal drew particular attention to four principles:

"78. First, the appointed representative’s exemption and the principal’s responsibility are co-extensive.

79. Second, the permission given to the appointed representative, and the corresponding acceptance of responsibility by the principal, may be limited to the carrying on of only part of the generic business for which the principal is authorised.

80. Third, it was in this context that [the Court of Appeal in Sense] drew a distinction between ‘what’ and ‘how’. The point of the distinction was to enable the principal’s acceptance of responsibility to be limited to certain kinds of business (the ‘what’, i.e. ‘what activity may be carried on’), while preventing the principal from drafting its way out of responsibility by limiting its permission by reference to the way in which the permitted business was to be carried on (the ‘how’, i.e. ‘how a permitted activity is carried on’). For example, a grant of permission which is conditional on the business being carried on properly will be ineffective to limit the principal’s responsibility to investors. If I may say so, the distinction between ‘what’ and ‘how’ sheds valuable light on section 39, although it is always necessary to ensure that such a striking phrase does not come to replace the statutory language. The statutory
language refers to ‘part of that business’, i.e. part of the business of a prescribed description which the principal is authorised to conduct.

81. Fourth, it is significant that Lord Justice David Richards referred to ‘the underlying regulatory and protective purposes of the legislation’."

In applying these principles, the Court of Appeal concluded first that the issue of what type of business an AR carries out is very different from the question of for whom that business is carried out.  Second, the court concluded that determining whether a client is retail, professional, or otherwise, requires an assessment which is very similar to the type of assessment required in advising on suitability.

"It is common ground that an assessment of suitability is concerned with how the business is conducted, so that if an appointed representative recommends an unsuitable investment, the principal is responsible. That responsibility cannot be avoided by a contract term purporting to limit the permission given to the appointed representative to recommending investments which are suitable for the investor."

Similarly, the court concluded that a principal ought not to be able to avoid liability for the incorrect classification of a customer as professional or sophisticated.  For a principal to impose a prohibition on dealing with retail clients necessarily entrusts to the AR the task of determining which clients are retail and which are not, just as it entrusts the task of assessing suitability.  Viewed this way, "it makes no legal or commercial sense to say that the principal entrusts that decision to the representative when the representative gets it right, but not when it gets it wrong."

Third, the court concluded that to allow a principal to limit their responsibility only to an AR advising non-retail clients would be against the consumer protection aims of FSMA s39.  It would result in professional clients dealing with ARs having greater protections that misclassified retail clients: a perverse result indeed.

The court did note that KCL's own FCA permissions did not permit it to deal with retail clients, and that this might seem contradictory to the conclusion that KCL was responsible for JHM advising retail clients, despite a prohibition on it in the ARA.  However, KCL finds itself in the same position as JHM, in that if it were to misclassify a retail client as a professional client, it would have to take responsibility for the consequences of doing so, just as it would have to take responsibility for providing unsuitable advice. 

As with the original judgment in this case, the conclusion here does not drastically alter the landscape of principal liability for AR activities.  However, it does provide some useful nuance and explanation for the tests employed in differentiating 'what' and 'how' restrictions and serves as a stark reminder to principals to ensure AR agreements are carefully drafted and that they fully understand what they are taking responsibility for.

At the end of 2023 the FCA requested the most recent board and / or committee reports from 20 large insurance firms (including those operating across general insurance and life insurance) to review how those firms are monitoring, assessing, and testing consumer outcomes and the actions being taken after identifying poor outcomes. The publication of the findings comes 11 months after the implementation of the Consumer Duty for open products.

At its simplest, the Consumer Duty aims to ensure good outcomes for consumers and this review demonstrates the FCA's commitment to monitoring the implementation of the Duty.

Some firms were able to demonstrate good practice, with the FCA noting that some had been able to show a clear causal chain from the setting of clearly defined customer outcomes, monitoring of those outcomes, identification of poor outcomes and appropriate action then being taken. In very broad terms, the FCA's expectations include that firms should identify relevant sources of data for assessing outcomes and then subject that data to an appropriate level of scrutiny.

However, the FCA also noted that some approaches to monitoring were not coherent or in the early stages of development, which is perhaps surprising given that we're now 11 months beyond the Duty's implementation for open products. They were also critical of firms who focussed on processes being complied with rather than the outcomes actually being delivered. In some cases, there was noted to be an absence of clear evidence that monitoring of outcomes had led to proactive action to improve outcomes. This underlines the fact that the FCA will not just want firms to identify poor outcomes, it will expect them to take prompt and decisive action to rectify any issues with these. 

The FCA also found an inconsistent approach to the monitoring of outcomes for distinct groups of customers, the most obvious category being those with characteristics of vulnerability. The FCA now expects firms to identify whether vulnerable customers are receiving worse outcomes than non-vulnerable customers.  If so, they will of course be expected to rectify this. Followers of the Consumer Duty will know that vulnerable customers have been a key area of concern for the FCA since implementation and the attention given to these customers here shows that this is unlikely to change.

Price and value were additional areas of concern, and the FCA noted that firms should ensure they keep a monitoring record of commission, operational costs and charges regarding the products they offer, with a particular mention of insurance and insurance intermediaries being required to do this.

Some firms were praised for their efforts in redesigning their customer communications, albeit this did not appear to apply across the board. Firms will need to focus on a variety of customer understanding metrics and be prepared to develop new approaches to monitor these.

The FCA has requested information regarding any actions taken following firms' identification of poor consumer outcomes.  It will be crucial for firms to be able to identify and set out what improvements a customer has received following a finding of a poor outcome. Firms will want to pay particular attention to the monitoring systems that they currently have in place and implement any required changes as soon as possible.

FCA Expectations

The review does recognise that the outcomes in question will vary from firm to firm depending on their strategy, the nature of the products and services as well as their target markets but that those with clearly defined and specific outcomes were better able to monitor them. 

The FCA expects all within the insurance sector (and those in retail financial services firms) to consider the published findings, which can be accessed here.

The FOS has made some changes to the criteria for claims to be considered "proactively settled."  Under the new guidelines, the following criteria must be met:

• Timeliness: The business must submit their settlement offer within 14 calendar days of receiving notification that the complaint has moved to investigation. (A single timescale is said to help to make it clearer to understand and simpler to administer). 
• New Offer: The offer must be different from any previous offers made to the customer, including those in the final response letter.
• Explanation: The offer must provide an explanation of the offer together with relevant supporting information.
• Full Resolution: The customer must accept the offer, and it must fully resolve the complaint without the need for further investigation by the FOS.

If the offer does not meet the Scheme criteria the FOS will tell the business why, and that they will investigate the complaint in the normal way. When the offer is communicated to the customer, the FOS will offer them guidance to help them decide whether to accept it. 

New Category of 'Proactively Settled' Complaints

At the time the FOS introduced the trial Scheme, it introduced a new category of  'proactively settled' complaints. Previously, these settlements might have been recorded as 'change in outcome'. This new category of proactively settled complaints is set to continue under the permanent Scheme and it will apply if the early settlement complies with the updated criteria listed above. The adoption of this new category forms an incentive for firms to pro-actively settle complaints given how the data is reflected in FCA annual returns.

Benefits of the Scheme

• Faster Resolutions: Customers can get their complaints addressed quicker without waiting for a full investigation.
• Improved Business-Customer Relations: Businesses can demonstrate a commitment to customer satisfaction by proactively resolving issues.
• Reduced Workload for FOS: By resolving complaints earlier, the FOS can focus on more complex cases.

What This Means for Businesses

Businesses should take advantage of the Scheme by reviewing their position on complaints once notified of an investigation. By making fair and reasonable offers, within 14 calendar days of receiving notification from the FOS that the complaint has moved to the investigation phase, businesses can potentially resolve issues faster, improve customer satisfaction and avoid a potential negative ruling from the FOS (please see above details regarding the new FOS category of proactively settled complaints).

The ever-increasing FOS redress cap (now up to £430,000 for complaints referred to the FOS on or after 1 April 2024 about acts or omissions on or before 1 April 2019 and up to £195,000 for complaints referred to the FOS on or after 1 April 2024 about acts or omissions on or before 1 April 2019) might increase the appetite amongst businesses for early settlement.

In addition, the ongoing FOS consultation for case management companies and professional representatives to be charged a fee each time a complaint is made might encourage businesses to settle customer complaints quickly, to avoid reimbursing any fees paid (subject to the outcome of the consultation).

What This Means for Consumers

Consumers can benefit from a potentially faster resolution to their complaints. They should, however, be mindful that any settlement offers they receive should fully address their concerns before accepting the offer.

Possible Future Developments

The FOS will likely continue to analyse data and feedback to refine the effectiveness of the Scheme.  What is clear is that the FOS is committed to the timely resolution of financial disputes. This update to the Scheme is a positive step towards achieving that goal.

Professor Willcocks (the complainant) entered into a Managed Discretionary Advisory Agreement with Linear Investments Ltd (Linear) (the respondent) under which Linear provided discretionary investment management services.  Professor Willcocks completed an account opening form (AOF) and client application, depositing £100,000 in which trades were made in Contracts for Difference (CFDs).  Linear only worked with 'professional clients' and Professor Willcocks had been categorised by Linear as an "elective professional client" (having identified himself as falling within hat definition). 

At the time of his application to Linear, Professor Willcocks had been employed at the London School of Economics for 12 years specialising in robotic automation (and so his expertise was not in finance).  He had an investment portfolio of c. £800,000 with approximate annual income of £220,000 derived from savings and investments and an approximate net worth of £2.2m with no debts.  

The AOF recorded that Professor Willcocks worked in education and had the same employer for 12 years, it also recorded his investment portfolio at £800,000.  The AOF had various boxes to indicate investment experience, Professor Willcocks selected equities, CFDs and alternative investments/funds.  He selected "no" to options, futures and FX.  Having selected equities and CFDs, Professor Willcocks then had to identify the length of activity (indicating 2 years plus) and number of transactions (said to be 40-80) and for investment funds he had to confirm if he had experience in fixed income, bonds and funds (to which he selected all three).  He also selected that his experience included both execution only and advisory.  

Following his investment, Professor Willcocks complained to Linear albeit he did not directly challenge his categorisation as an "elective professional client", instead the focus was on what he described as a "misleading" contractual term that sought to exclude a right to complain to the Ombudsman.  He also complaint that Linear had used misleading terms and conditions relating to account fees, used misleading performance information relating to investment strategies and mismanaged his account including a failure to manage risk appropriately.  Professor Willcocks also explained that he had no experience in trading CFDs (despite the AOF he completed suggesting the opposite).

Relevant FOS rules – 'professional client'

In order to complain to FOS a complainant must be an "eligible complainant".  An "eligible complainant" does not include a "professional client" (amongst other carve outs).  For an FCA regulated firm to treat a client as a "professional client" at the time (2018) it was necessary to comply with COBS 3.5.3R which required:

1. The firm to undertake an adequate assessment of the expertise, experience and knowledge of the client that gives reasonable assurance in the light of the nature of the transactions or services envisaged that the client is capable of making their own investment decisions and understanding the risks involved (the 'qualitative test');
2. In the course of the assessment, at least two of the following must be satisfied: (a) the client has carried out transactions in significant size, on the relevant market at an average frequency of 10 per quarter over the previous four quarters, (b) the size of the client's financial instruments portfolio, defined as including cash deposits and financial instruments, exceeds EUR 500,000, and/or (c) the client works or has worked in the financial sector for at least one year in a professional position which requires knowledge of the transactions or services envisaged (the 'quantitative test')
3. The following procedure is followed (a) the client must state in writing to the firm that it wishes to be treated as a professional client either generally or in respect of a particular service or transaction or type of transaction or product, (b) the firm must give the client a clear written warning of the protections and investor compensation rights the client may lose in providing such a confirmation and (c) the client must state in writing, in a separate document from the contract, that they are aware of the consequences of losing such protections.

However, even if a customer is a "professional client" that can only relate to an activity where they are a professional client – i.e. just because a professional client meets the criteria in one instance does not mean they meet the definition in all instances (DISP 2.7.9AR).

FOS decision

The FOS investigator upheld the complaint which was then referred to the Ombudsman who produced two provisional decisions (the first applying contributory negligence at 25% and the second rejecting any contributory negligence argument).

In relation to whether Professor Willcocks was a "professional client" the Ombudsman found he was not and in doing so referred to the following:

• The AOF amounted to not much more than self-certification and the tick box answers alone did not amount to an adequate assessment of a client's experience, knowledge and expertise or provide enough evidence to give Linear reasonable assurance that Professor Willcocks was capable of making his own investment decisions and understanding the risks involved.
• The AOF itself required the potential client to attach appropriate evidence to support categorisation but no evidence was provided.
• The AOF put Linear on notice of certain "red flags" – (1) the form asked for a brief explanation of knowledge and experience and none was provided, (2) the planned transactions were in CFD but the information provided by Professor Willcocks was that he had invested for more than 15 years in blue chip stocks (indicating that he did not have evidence or knowledge of investing in CFDs) and (3) conflicting information had been provided in the broker application form where Professor Willcocks had ticked to confirm he had worked in the financial sector for at least a year but this was contradicted by his employment history.
• Linear could provide no evidence that it had verified details of Professor Willcocks' experience (including previous investments in CFDs).

The Ombudsman concluded that had Linear sought further evidence from Professor Willcocks to support the tick box answers (which the Ombudsman said it should have done), Professor Willcocks would not have been able to provide that information and so would not have satisfied the qualitative test.

Having found that Professor Willcocks was not a professional client (and so able to complain to FOS as an eligible complainant), the Ombudsman found that Professor Willcocks was misled into investing in the investment strategy as a result of it being described as medium risk when it was high risk and it was unlikely the investment would have been made had it been known it was high risk.  There was also a failure to provide the required information in relation to costs and charges as well as likely returns and other misleading information. 

Having applied a discount of 25% for contributory negligence in the first decision, the Ombudsman changed his mind in the second provisional decision instead finding that he had given too much weight to Professor Willocks' incorrect information in the AOF.  In reaching a decision not to apply any contributory negligence discount, the Ombudsman found that the onus was on Linear to properly assess Professor Willcocks' knowledge and experience and Linear had failed to do so, including the size of previous trades to satisfy the quantitative test and so Professor Willcocks should not have been classified as an elective professional client in the first place. 

The Ombudsman awarded redress based on a comparison of the return on Professor Willcocks' investment against what the return would have been adopting the FTSE UK Private Investors Income Total Return Index.

The judicial review

Linear challenged the Ombudsman decision by way of judicial review arguing that:

• The Ombudsman had failed to acknowledge the central importance of the contract Professor Willcocks had signed and that Linear was entitled to rely on Professor Willcocks' assertion that he was an elective professional client. Professor Willcocks was a wealthy, sophisticated and highly intelligent investor.  He could not go back on the contents of his AOF and associated documentation on which Linear was entitled to rely.
• The Ombudsman was irrational in deciding that Professor Willcocks could be both a professional client for the purposes of investment business and simultaneously a consumer in respect of his portfolio.
• The Ombudsman could not lawfully interfere with Linear's client classification based on the information provided by its client and having reached a properly conducted assessment it was entitled to reach. Further, Professor Willcocks did not challenge his elective professional client status in his detailed complaint.
• It was irrational for the Ombudsman to adopt the FTSE UK Private Investors Income Total Return Index – it was too mainstream and conservative.  Professor Willcocks had identified a hedge fund comparison himself in his complaint being a high risk alternative investment and a more apt comparison.  Further the Ombudsman's refusal to request disclosure as to where Professor Willcocks subsequently invested £100,000 when he left Linear meant that the Ombudsman deprived themselves of crucial information to adequately identify a rational benchmark.
• The decision not to adopt a discount for contributory negligence was irrational. 

The High Court rejected the arguments made by Linear on the basis that:

• The Ombudsman's finding that Professor Willcocks was not a 'professional client' was reached for "perfectly cogent reasons" as set out in the decision and in particular when relying on the finding that Linear had not undertaken an adequate assessment of the expertise, knowledge and experience of the client to meet the qualitative test.  Further, it is possible for a person to be a consumer for some purposes and not others.
• Linear's submissions on the primacy of the contract "bore little relation to the wording of COBS" when it came to the test Linear had to satisfy to treat a client as a "professional client", that is because the test required Linear to undertake an assessment of the expertise, experience and knowledge of the client and the test was not whether Linear's assessment was irrational faced with the documentation it was provided with.
• The Ombudsman explained the reasons for adopting the FTSE UK Private Investors Income Total Return Index and it was "self evidently not irrational and expressly took account of the circumstances of the case.  Similarly the Ombudsman's decision not to seek further disclosure from Professor Willcocks was not irrational".  Notably the High Court went as far as to say "… What relevance to the calculation of fair compensation would it have had if he [Professor Willcocks] had placed his money from Linear under the mattress in March 2019?", effectively concluding that what Professor Willcocks would have done with the monies had he not invested it via Linear was not relevant to the assessment of loss.
• The High Court rejected the arguments on contributory negligence finding that (1) the Ombudsman carefully explained their reasons, (2) the reasoning was sound – mistakes in the AOF were not causative of the losses and (3) the Ombudsman is not required to cite or apply common law principles in any event.

What next?

A broad takeaway from the decision is the failed challenge to FOS' adoption of the FTSE UK Private Investors Income Total Return Index which is often a cited by respondent firms as particularly unfair given the "high" returns it produces against the returns often sought by the complainants in the underlying investment which forms the basis of the complaint or otherwise might be considered as an appropriate investment for a complainant (if they had placed the monies elsewhere).  A further broad takeaway are the findings in relation to contributory negligence.  Both grounds for challenge required Linear to establish that the Ombudsman had acted irrationally in reaching the decision that it did (a high bar).

As to the judgment on the approach to classifying customers as 'professional clients', given the onus under COBS that the regulated firm effectively checks that a client meets the criteria, the take-away would appear to be that it's not enough to rely on what a customer merely says by reference to a tick-box exercise, more is needed.  In particular (1) evidence to back up what the client says and (2) checks to ensure that what they say "fits together" against other documents providing an insight into their investment experience.  Checks for inconsistencies is a trend at FOS where, with the benefit of hindsight and time, FOS often centre on inconsistencies to justify an assertion that red flags at the time were missed.  This means that more time (and cost) is likely to have to go into processes for firms (whether onboarding or otherwise) to try and provide some level of protection that statements made by customers are reliable.

Although this is another example of a judicial review of a FOS decision failing, it is also an indication that the courts appear more willing to grant permission for judicial review with cases going to a full hearing.  We expect more challenges to FOS with the increase in FOS limits given there is simply more money at stake for regulated firms and so we are likely to see further decisions testing FOS' jurisdiction going forward.