Financial Services Compensation Scheme Ltd v Abbey National Treasury Services Plc

The statutory power to establish a compensation scheme included power to require, as a condition of compensation, assignment of claims against third parties for the same loss. Such a provision was integral or, alternatively, incidental and supplemental to the scheme’s purpose. The assignment was therefore intra vires.

Compensation paid by the scheme was not deducted from the assignee’s gross claim where the compensation agreement required investors to account to the scheme for recoveries. Because that arrangement prevented double recovery, the claim was not limited to the investor’s net loss.

Financial Services Compensation Scheme Ltd sued as assignee of claims belonging to approximately 1,800 investors compensated under the statutory scheme. The claims concerned structured capital-at-risk products promoted through independent financial advisers. The defendant, Abbey National Treasury Services Plc, was alleged to have collaborated in their development and promotion.

The court tried two preliminary issues: whether the scheme had power to require assignment of claims against third parties, and whether compensation paid to investors reduced the loss recoverable from the defendant. The Financial Services Authority intervened on the vires issue.

1. Assignments. The provisions of COMP 3.2.1R and COMP 7.2.1R permitting assignment of claims against third parties were valid. Section 213(1) of the Financial Services and Markets Act 2000 conferred a broad power to establish a compensation scheme, and section 213(7) prevented sections 214 to 217 from limiting that power.
2. Alternatively, the provisions were authorised by section 156(2). The applicable two-part test was whether the provision was objectively incidental or supplemental to the purpose of the rules and whether the FSA reasonably considered it appropriate. Assignment of claims for the same loss enabled the scheme to recoup compensation and was integral, rather than peripheral, to its operation.
3. The statutory history and the decision in Investors Compensation Scheme Ltd v West Bromwich Building Society supported that construction. Sections 214 and 215 did not impliedly exclude assignments against third parties. The assignments were therefore not void or ineffective.
4. Deduction of compensation. An assignee could recover no more than the claimant’s substantive entitlement, but deduction was unnecessary where the payment arrangement prevented double recovery. The investors’ agreements required them to pay recoveries from the defendant or other third parties to FSCS. The scheme rules also required surplus recoveries to be paid to investors.
5. The arrangement was analogous to Berriello v Felixstowe Dock & Railway Co and subrogated insurance cases. FSCS was entitled to pursue the gross loss, without credit for compensation already paid. The first preliminary issue was answered in the negative and the second was answered by holding that compensation was not to be taken into account.