Financial Services Compensation Scheme Ltd v Abbey National Treasury Services Plc

The court determined two preliminary issues arising from claims by FSCS as assignee of some 1,800 investors against ANTS. First, the court held that the FSA had power under Part XV of the Financial Services and Markets Act 2000, in particular section 213 and the incidental powers in section 156(2), to make compensation‑scheme rules permitting the FSCS to require assignment of investors' claims against third parties as a condition of payment. The earlier decisions on the Investors Compensation Scheme under the 1986 Act were treated as supporting this construction.

Second, the court held that compensation paid to investors by FSCS is not to be deducted from the gross loss recoverable by FSCS as assignee of the investors' claims against ANTS. The court relied on the terms of the COMP rules and the investor declaration/assignment form, which required investors to account for recoveries to FSCS and contemplated the assignment of the gross claim so that FSCS could recoup its outlay; there was no risk of double recovery to be avoided by crediting the defendant.

This is a first‑instance trial of two preliminary issues in an action by the Financial Services Compensation Scheme Limited (FSCS), as assignee of around 1,800 retail investors, against Abbey National Treasury Services Plc (ANTS). FSCS had paid compensation to investors for losses on structured capital‑at‑risk products, on the basis that their independent financial advisers were in default and unable to meet claims. As a condition of payment, investors signed declarations and assignments by which claims against their IFAs and against third parties were to vest in FSCS.

The two preliminary issues ordered for trial were:

• Whether the assignments of investors' claims against ANTS were void for want of power in the FSA to permit such assignments in the compensation scheme (ultra vires of the COMP rules); and
• Whether compensation paid by FSCS to investors must be taken into account (i.e. deducted) in calculating the loss recoverable by FSCS as assignee of investors' claims against ANTS.

The FSA was permitted to intervene on the ultra vires point and confined its submissions to that question. The judgment summarised the factual background, the terms of the COMP provisions (notably COMP 3.2.1R and COMP Chapter 7, including COMP 7.2.1R and COMP 7.2.4R), and the terms of the investor declaration and assignment (sections 3 and 4 of the form).

On the first issue the court analysed the statutory rule‑making power in Part XV of FSMA (section 213(1) and the further provisions in sections 214–217 and the incidental rule‑making power in section 156(2)). The court rejected the argument that assignment of third‑party claims was beyond the FSA's power. It held that a provision enabling assignment of third‑party claims was properly within the ambit of a compensation scheme established to compensate persons where relevant persons cannot satisfy claims. The decision in relation to the earlier ICS rules under the 1986 Act (Evans‑Lombe J) was treated as directly supportive. The court concluded that if assignment rules were not within section 213(1) they were in any event incidental or supplemental under section 156(2).

On the second issue the court proceeded from the accepted principle that an assignee takes no greater rights than the assignor and that damages are compensatory. The court, however, held that the scheme rules and the investor agreement operated to vest the gross claim in FSCS and to oblige investors to account for recoveries to FSCS, so that there was no basis for reducing the assignee's recovery by the amounts of compensation already paid. The contractual and regulatory architecture was intended to enable FSCS to recoup its outlay; restricting recovery to the investor's net loss would have produced an irrational result by leaving investors under‑compensated and defeating the scheme's recoupment purpose.

The court therefore answered the first issue in the negative (the assignments were not void for lack of FSA power) and the second issue in the negative (compensation paid by FSCS is not to be taken into account in calculating FSCS's recoverable loss against ANTS).

This is a first instance determination of preliminary issues. The court held that (1) the assignments of investors' claims against ANTS were not void for want of power: the FSA had power under section 213 of the Financial Services and Markets Act 2000, and in any event by virtue of the incidental powers in section 156(2), to make scheme rules permitting assignment of third‑party claims to FSCS; and (2) compensation paid by FSCS to investors is not to be deducted from the gross loss recoverable by FSCS as assignee of the investors' claims against ANTS, because the COMP rules and the investor assignment/acknowledgement vest the gross claim in FSCS and require investors to account for recoveries.