Setting up a collective redress scheme in the UK

Schemes can be set up for lots of different purposes: as a regulator-led initiative or entirely voluntarily on the part of the business or organisation. There are various reasons for this, such as to rectify reputational damage, discourage extended and expensive group litigation or to minimise regulatory sanctions or the risk of prosecution. At their core, however, their ambition is to do the right thing.

In the UK, there is an increasing trend towards collective redress schemes as an alternative to group actions brought before the courts. Reasons for this increase vary and include the increasingly prohibitive costs of an individual bringing litigation, as well as an increase in much-publicised mass claims involving a substantial amount of potential claimants. At the same time, there is a renewed emphasis upon access to justice and holding financial and other institutions to high standards.

The 2015 Consumer Rights Act allows businesses to develop redress schemes on a voluntary basis for some competition law infringements. With the increased powers by other relevant regulators, voluntary redress schemes have become a growing feature of the legal landscape.

Types of collective redress scheme

Most of the UK’s collective redress schemes to date fall into one of the following categories:

• ad hoc/voluntary schemes – for example, construction workers’ compensation scheme, voicemail interception compensation scheme
• statutory-supported schemes – for example, CPP Card and Identity Protection mis-selling scheme and AI Scheme around card protection, both pursued as schemes of arrangement
• regulator-supervised schemes – for example, consumer redress schemes under section 404 of the 2000 Financial Services and Markets Act (FSMA), Payment Protection Insurance, Interest Rate Hedging Products, financial product mis-selling schemes, the endowment policy mis-selling scheme and damages payable to customers as a result of competition law infringements
• state-organised schemes – for example, the Financial Services Compensation Scheme, Pension Protection Fund, Equitable Life Payment Scheme

Although the lines are often blurred, decisions relating to implementation and running of the scheme remain largely, although not wholly, within the business or organisation when implementing ad hoc/voluntary schemes, statutory-supported, and regulator-supervised schemes. That said, where the independence of a scheme is important – as it often is – this can easily be achieved by devolving key aspects to the law firm instructed to devise and administer the scheme.

Ad hoc/voluntary schemes

Firms that choose to set up a voluntary redress scheme retain control over decisions such as when to set up the scheme, who should be eligible, and how much compensation should be available. Businesses can also take into account reputational and public relations issues when running the scheme.

Affected individuals may choose not to join a voluntary scheme, which leaves a business open to the risk of future group litigation if there are sufficient claimants. However, drafting an appropriate settlement offer to the claimant under the redress scheme can still provide the business with some costs protection should a formal court claim be brought.

While not entirely ad hoc, the recent statutory recognition of voluntary redress schemes in relation to competition claims marks the beginning of a possible trend towards a hybrid model where voluntary solutions have some regulatory supervision. These are considered in more detail below.

Statutory-supported schemes

Schemes of arrangement are the best and most effective example of statutory provisions assisting businesses towards collective redress. Governed by section 895 of the 2006 Companies Act, schemes of arrangement can be entered into between a company and its creditors. They must be approved by a majority in number and 75% of the value of scheme creditors voting, and require approval by the High Court of England and Wales.

Scheme compensation will usually be based on a calculation method rather than a specific amount, and the method for calculating compensation will be approved by the court. The scheme will apply to the whole class of affected individuals or creditors regardless of whether individual complaints are made. Settlements may not be re-opened without permission from the High Court, and subject to any adjudication provisions provided for by the scheme.

As has been recently seen, a benefit of using schemes of arrangement to resolve mass claim scenarios is that there is a cut-off date for bringing claims, and if a claim is not brought within a specific period it is prevented from being brought. 

Regulatory supervised schemes

The UK financial regulator the Financial Conduct Authority (FCA) has powers to force businesses to make collective redress. Under FSMA section 404 the FCA can require authorised firms to establish and operate consumer redress schemes. The FCA will decide the scope of the scheme – for example, ‘retail customers’ – and timing. Although firms will in theory have a free hand to decide the amount of compensation available, the FCA is able to take disciplinary action about how participating firms operate the scheme.

Affected individuals are not obliged to accept redress under the scheme, but it establishes a simple process for those who do. Those unhappy with the settlement offered may appeal to the Financial Ombudsman Service once they have exhausted the firm’s own internal appeals process.

The power is rarely used, although the threat of section 404 powers remains a powerful incentive for voluntary schemes undertaken with the FCA's agreement. Recent changes relating to enhanced supervision by the FCA give the FCA the power to impose a requirement on a firm to undertake or cease a particular action where it is desirable to take this action to meet the FCA’s operational objectives. It is likely that this statutory change will lead to more voluntary redress schemes, rather than businesses waiting for formal imposition by the FCA.

Why should you set up a redress scheme?

Advantages to running a redress scheme include:

• reduced potential for reputational damage;
• potential for positive PR, particularly in the context of voluntary schemes, to demonstrate you are “doing the right thing”;
• reduced risk of escalating legal costs;
• a quicker and more cost-effective alternative to litigation, which has the capacity to capture more potential claimants;
• overall reduction in financial outlay for damages and costs in the majority of cases;
• potential for favourable treatment by regulators and the criminal courts – proactive remedial actions can weigh against the case for prosecution by the Crown Prosecution Service;
• reduced risk of criticism by regulators and parliament;
• the ability to offer non-monetary redress, for example an apology where appropriate;
• where set up and administered outside of the business or organisation, the ability for the scheme to be independent, notwithstanding the fact that the organisation is likely to be funding it.

There are fewer disadvantages:

• currently, ad hoc schemes have no formal route for regulator or court approval;
• potential for paying claims which ultimately would have failed or only partially succeeded if they had gone to court;
• early payment of claims compared to litigation, and front-loading of costs in the scheme design;
• not all potential claims will be settled, requiring ‘mop up’ efforts and the potential for some reputational impact in public hearings, although judges are often complimentary of defendants who have provided claimants with an alternative to litigation by way of compensation schemes;
• the appearance that liability has been accepted by the business or organisation.

Setting up a redress scheme: what to consider

Regardless of the type of redress scheme, all collective redress schemes will require similar considerations at the design stage. 

Independence

Should the scheme be devised, managed and administered entirely separately of the business or organisation? This can make the claimants feel confident that their claim will not be assessed by those they consider responsible for their loss and damage.  Depending on the sensitivity of the issues involved, claimants may feel strongly that they do not want to engage with the business or organisation in any way.

Eligibility

Who should be included in the scheme? How should the business differentiate between legitimate and illegitimate claims? What burden of proof should be applied?

Evidence

What evidence should be required to support both the eligibility of a claimant and the amount of compensation being claimed? Will expert evidence be required or should that be an optional route to perhaps open up a second tier of compensation for more complicated claims?

Compensation

Both the level and method of compensation are important: how much compensation should be paid and how should it be calculated? 

Disclosure

What information should be disclosed, to whom and when? Does disclosure create a risk of wider, nuisance applications for disclosure? How can the risks of disclosure be mitigated without affecting the payment of fair compensation?

Liability

Does the scheme amount to an admission of legal liability? Does the scheme need to be ‘without prejudice’ to protect related civil litigation and, if so, should just the offers be made on a without prejudice basis or should the scheme itself be without prejudice? Will the business or organisation be expected to issue an apology 

and if so, how can that be framed where liability is not being admitted?

Communication

How will the scheme be promoted – and to what extent will attempts be made to contact eligible participants? To what extent are negotiations with stakeholders necessary – for example, is there a statutory requirement as with schemes of arrangement? Where the scheme is being promoted, how will this affect any without prejudice correspondence?

Contributions

If multiple organisations have contributed to the scheme, how will their relative contributions be calculated and will scheme members want to preserve any rights to seek contributions from non-participants? Will an insurer be involved in this process? If an insurer is involved, will they need to be consulted and how can they be persuaded to contribute to the overall costs? 

Scheme administrator

Should a scheme administrator be appointed? If one is required, who should this be? If no scheme administrator is chosen, how will the scheme be administered?

Costs

As a mitigation exercise, which is an alternative to court litigation, how can fair procedures be ensured at the same time as controlling costs? How can offers made under the scheme have relevance if proceedings are later issued for the same scheme claim?

Data protection

Early consideration must be given to how personal data of the potential scheme claimant – which is often highly sensitive – should be correctly collected, adequately protected and used in a compliant way, and how that process should be documented. This includes ensuring that informed consent is obtained, only the necessary data is collected in the first place, that it is stored securely and then effectively destroyed as soon as it is no longer required.

Redress scheme roles

Scheme administrator

The scheme administrator will administer claims made under the scheme and be the primary point of contact for scheme claimants and any solicitor that they instruct. They will usually decide who is eligible under the scheme by reference to the eligibility criteria set out in the rules of the scheme and determine the compensation award based on the evidence provided.

Depending on the number of expected scheme claims, the administrator will often be a law firm. The size of the scheme and likely claimants may warrant a team of administrators with a clerk to manage claims and correspond with the claimants or their solicitors.

Independent scheme adjudicator

Where a scheme claimant is not considered to be eligible by the scheme administrator, they should be entitled to seek the binding review of an independent scheme adjudicator, who will review the administrator’s decision.

Experts

Where expert evidence is considered beneficial for the assessment of loss and damage, a selection of experts will need to be appointed.

Claimant law firms

Claimants will often have independent legal advice in relation to the scheme - to support them in making their claim and advising them on the implications of doing so and any offers made.  

Redress scheme documents

Redress scheme rules

The redress scheme rules will set out the purpose and framework of the scheme and other rules such as the deadline and process for a claimant to submit a claim, eligibility criteria, evidential requirements, the time in which a decision in relation to eligibility will be made, how an award will be calculated, the review/appeal process for scheme claimants deemed ineligible, how a settlement offer is made, whether fixed legal costs and other disbursements are recoverable and if so how, and the timing of final payments.

Privacy policy

This explains the extent to which the scheme administrator uses, stores and shares the information collected about the scheme claimant.

FAQs

Provides answers to frequently asked questions, such as whether the scheme claimant should seek independent legal advice, or how the compensation bands have been calculated.

Claim form

In which the scheme claimant sets out their claim and provides evidence.

Notification of eligibility

In which the scheme administrator informs the scheme claimant whether they are eligible under the scheme.

Redress offer letter

In which the scheme administrator explains the level of compensation and sets out the next steps depending on whether the offer is declined or accepted.

Redress agreement

To formally settle the claim where the scheme claimant has accepted the offer.

Typical redress scheme timeline