The Central Bank (Supervision and Enforcement) Act 2013
Major changes are being made to the law affecting financial institutions' liability to their customers.
• Where there are systemic issues – such as general overcharging or mis-selling of investment products – the Central Bank of Ireland ("CBI") will be able to direct the financial institution to provide monetary redress to all affected customers – in effect, enabling a kind of "class action" remedy.
• The recourse of customers has been simplified to provide for a clear statutory right of action rather than an action for negligence or breach of contract.
The recently enacted Central Bank (Supervision and Enforcement) Act 2013 (the "2013 Act") bolsters the powers of the Central Bank of Ireland ("CBI") to regulate, supervise and take action against regulated financial entities (including banks, insurance companies, financial intermediaries, investment firms and credit unions). With the exception of section 72 it came into force on 1 August 2013. Part 6 of the 2013 Act contains some radical provisions which will expose banks and other financial institutions to new forms of civil liability for breach of duty and regulatory obligations. These provisions, which were not contained in the Bill as initiated, have the following effect:
• The CBI can direct a financial institution to provide redress for "widespread or regular" defaults such as over-charging, mis-selling investment products, other civil wrongs and breach of certain regulatory enactments;
• Any customer of a financial institution has a statutory cause of action where it has suffered loss as a result of a breach of regulatory duty by the financial institution, e.g. it has sold an unsuitable product to the customer, or has otherwise failed to meet regulatory standards in the provision of its services.
CBI Direction to Provide Redress
The CBI can exercise this power in respect of an array of breaches of regulatory duty if they have been "widespread or regular." The CBI can publicise the fact that it is investigating a financial institution's conduct and the making of a direction. A financial institution's compliance with a direction does not constitute an admission of liability.
The monetary redress directed can include actual and anticipated loss on the part of the financial institution's customers. The CBI can direct the financial institution to pay the CBI's costs of giving the direction. It can also direct the financial institution to pay interest on monetary redress.
A CBI decision to direct the provision of redress is capable of being appealed to the Irish Financial Services Appeal Tribunal ("IFSAT"). IFSAT enjoys an interventionist standard of review - it can, amongst other things, substitute the CBI's decision with another decision if IFSAT considers that the other decision is "correct and preferable".
These new provisions for directing redress fills a gap in Irish litigation procedure whereby it is not possible for a group of plaintiffs who have suffered loss arising from the same wrong to mount a "class action" (as that phrase is understood in US jurisdictions). It seems possible, however, that in particular cases the amount of compensation directed to be given by the CBI may not meet claimants' expectations. For example, there is no jurisdiction for the CBI to direct the payment of exemplary damages. In exceptional cases, therefore, it may well be that aggrieved customers will pursue civil claims in such circumstances. Any such claim would clearly have to account for monetary redress provided by the financial institution pursuant to the CBI's direction. However the Financial Services Ombudsman ("FSO") has no jurisdiction in respect of matters which are being investigated by CBI or have been the subject of a direction.
Statutory Right of Action
A new statutory right of action is available to any "customer" to sue for damages arising from breach of an array of statutory duties by a financial institution. The right of action is not confined to consumers; nor is it confined to small and medium-side enterprises ("SMEs"). It is available to any actual or potential customer of a financial institution. Accordingly, professional customers, and large-scale businesses will have a right of action under this provision. However the definition of "customer" in the 2013 Act is such that it seems clear that market counterparties will not have a right of action under this provision. The extension of the statutory cause of action beyond consumers and SMEs represents a radical and worrying development for financial institutions. Legislation introduced in the UK after "Big Bang" (Section 62 of the Financial Services Act 1986) which afforded an analogous right of action for all customers of regulated entities was later amended so as to confine the statutory right of action to "private investors" i.e. essentially, consumers.
Some of the regulatory duties which could form the basis of the new cause of action are framed in very wide terms. For example, regulation 16 of the EC (Licensing and Supervision of Credit Institutions) Regulations 1992 requires a credit institution to manage its business in accordance with "sound administrative and accounting principles" and to have internal control and reporting procedures to ensure this. In particular cases there may be difficulties in establishing that breach of a particular duty actually caused the customer's loss.
Normal principles of statutory interpretation would mean that customers cannot sue in respect of breaches occurring before the provision came into force.
A likely consequence of the new provision is that where an aggrieved customer brings proceedings against a financial institution, a claim based on the statutory cause of action will be the preferred course of action. A plaintiff can therefore avoid the usual requirements in a professional negligence claim to have an expert report before serving a statement of claim. Furthermore, in particular cases a breach of regulatory duty may very well be easier to prove than breach of a duty of care. In terms of procedure, it seems likely also that plaintiffs will seek trial of preliminary issues by reference to the statutory cause of action. This is because if a plaintiff succeeds in respect of the statutory cause of action (which may be perceived to be a more straightforward objective than, e.g., a claim in negligence) a successful claim in this regard will dispose of the entire action.
These provisions represent a sea-change in terms of Irish regulatory law. To date, the High Court has held that the content of the Consumer Protection Code does not constitute terms which can be implied into a bank-customer contract. However, the High Court has held, in the context of repossession actions that as a matter of process the bank must demonstrate that it has complied with the relevant code of conduct on mortgage arrears. This latter issue has been referred to the Supreme Court by way of a case-stated (in essence, a request for a judicial ruling on a point of law).
The introduction of a statutory cause of action is likely to generate a considerable amount of litigation. Aggrieved customers may well bypass the FSO's mediation-adjudication role and head straight for the courts.
The new provisions further emphasise the need for robust compliance functions. In addition, the creation of a statutory cause of action means that CBI regulations made under the extensive new powers provided for in Part 8 of the 2013 Act will need to be drafted with considerable specificity given that a breach of those provisions will give rise to a direct cause of action on the part of a financial institution's customers. Although the CBI is not obliged to consult in advance on the content of those rules, it is hoped that it will so that they can be framed with appropriate industry input.