Some recent cases have demonstrated the Financial Conduct Authority’s (FCA) willingness to exercise its powers of restitution and with some differing outcomes. Can firms look for coverage under their insurance programmes for such restitution orders?
Restitution in English law is a remedy that seeks to restore, to an innocent party, gains that someone else has obtained from them.
More specifically, the FCA has power to apply to the civil courts for a restitution order under s382 of the Financial Services and Markets Act 2000 (FSMA) requiring a person to make payment to the FCA to make good losses caused to others or disgorge unjust profits made in contravention of FSMA. Restitution orders can be made against a firm or an unauthorised person. Decisions about whether to apply for a restitution order are made by the FCA’s Executive Directors of Enforcement. However, due to limited resources, consideration as to whether applying for a restitution order is the best use of these resources will be considered, particularly where there are alternative means of redress.
The FCA’s formal restitution powers are exercised on rare occasions. There are numerous criteria that the FCA must consider in determining whether to apply for restitution and include, although are not limited to: quantifiable profits; identifiable losses; the number of persons affected; FCA costs; is redress available elsewhere (for example by reference to the Financial Ombudsman Scheme); and what other powers are available to the FCA.[1]
The Financial Conduct Authority v Avacade Limited and others resulted in the FCA succeeding in obtaining restitution orders against five defendants pursuant to section 382 of FSMA.[2] This case highlighted the highly topical area of bad advice in relation to pension transfers, and indeed the focus of the regulator on protecting consumers. It was held that the schemes, run by Avacade without appropriate authorisation, which involved inducing individuals to transfer their pensions into high-risk self-invested personal pensions, contravened various sections of FSMA and FSA. The five defendants were ordered by the High Court to pay a total of GBP10.7 million to the affected individuals. The restitution orders against 3 of the firm’s Company Directors were made on the basis that they were knowingly concerned in the breaches of Avacade and/or Alexandra Associates.
Two of those Directors appealed the High Court decision making the restitution orders. The appeal was dismissed, and the restitution orders upheld on the basis that the two Directors were knowingly concerned in the breaches of Avacade.
In contrast to the outcome in Avacade, is the case of The Financial Conduct Authority v Karen Ferreira.[3] Karen Ferreira was successful in her appeal against the decision of the High Court ordering her to pay GBP2.7 million in restitution to consumers who had suffered a loss at the hands of her company, Our Price Records Limited. The FCA’s case was Ferreira, had been “knowingly concerned” in the breach of the financial promotions’ rules by the company when seeking investment from high net worth and sophisticated investors, and therefore caught by section 382 FSMA. The Court of Appeal disagreed with the FCA’s argument and held that Ferreira did not have the requisite knowledge that the company’s investment communications had not been approved. The narrowed interpretation of “knowingly concerned” and the finding that Ferreira had no personal liability is likely to have been a welcome outcome for directors.
In the FCA’s 2023/24 Business Plan it states that it “will continue to be less risk averse and take more robust action, sending a strong message of the action we take when we identify harm”.[4] This continued focus on being less risk averse and taking swifter enforcement action has been ascribed (at least partly) to the criticism the FCA has faced over its handling of the British Steel Pension Scheme (BSPS). The FCA was found on investigation by the House of Commons Committee of Public Accounts, to be “behind the curve” in responding to unsuitable pension transfer advice[5] and criticised for not knowing “what was happening in the [defined benefit] pension transfer market or the BSPS case and fail[ing] to identify the scale of the issue.”.[6]WTW continue to monitor the emergence of Restitution Orders, and indeed of pensions mis-selling allegations more generally.
In the meantime, the extent of insurance coverage available very much depends on the circumstances.
Insurers do not intend to provide cover for payment of sums which are not compensatory in nature and as such, while the definition of “Loss” under Professional Indemnity policies may expressly refer to restitution and/or Restitution Orders under FSMA, care should be taken to identify potential applicable exclusions. Consideration should also be given as to whether there are any allegations (particularly if a firm does not have the resources to meet any payments due), made against directors. In that event, notifications should also be made to any management liability policy.
Talk to a WTW broker or Claims Advocate on how we can assist in reviewing the scope of coverage available to you.
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