FSA may force advisers to fully compensate unhappy clients

The FSA wants advisers to provide 100% compensation to clients who have suffered losses, even if it was not the firm’s fault, according to a City law firm.

Reynolds Porter Chamberlain (RPC) said the decision, outlined in an FSA note to Parliament, "reverses the basic principle of UK law".

Currently, a firm can decline to pay compensation if they are satisfied a client's losses were beyond their control - known as the law of "causation".

Simon Laird, a partner at RPC, said advisers would be "very disappointed" if they were forced to fully compensate customers for losses that may be unrelated to a minor technical breach of the rules - and that the decision "flies in the face of common sense".

"Effectively these changes to the law could encourage customers who were perfectly aware of the risks they were taking to look for a loophole through which to claim compensation," he said.

The FSA invited Parliament to reconsider the law in its memo to the Joint Committee on the Draft Financial Services Bill, saying: "Our experience is that members of the public and Parliamentarians have been of the view that - as a matter of public policy - the breach of the FSA's rules should in all cases entail the consumer receiving 100% redress."

"If society expects as a matter of public policy that the regulator should be in a position to require greater levels of redress to be paid then the FCA needs to be given a clear mandate and powers to do so in the new legislation.

"This is a difficult issue that gives rise to real questions as to how far the regulator's powers should extend and we would very much welcome the Committee debating this matter, in particular to achieve further clarity as to the FCA's mandate in this area."

Laird added that if Parliament were to accept the FSA's invitation to change the law, firms will be strictly liable to compensate customers for all financial losses when their actions breached the FSA rulebook, no matter how small the breach.

"The Financial Ombudsman already makes it harder for firms to reject compensation claims on the basis that they did not cause the customer's loss," he said.

However, an FSA spokesman called RPC's comments "deeply misleading".

"Our memo is clear that this is an issue the FSA would like the committee to consider," he said.