Government resists bringing US-style class actions to English courts

Such rights should be considered and, if appropriate, introduced, on a sector-by-sector basis. Where they are adopted, the principle that the loser pays the costs of the action should be retained to deter some of the abuses seen in US class actions. 

The comments form part of the Government's response to a report by the Civil Justice Council (CJC) published last July, which recommended that collective or class actions should be possible in respect of any civil claim affecting multiple claimants. The court would decide in each case whether a class action was appropriate and whether it should be on an 'opt-in' or 'opt-out' basis.

Under an opt-out system, anyone in the class who does not wish to be included in the action would have to take active steps to opt out from it. Class actions in the US are based on an opt-out system.

English procedures for collective actions are based on an opt-in model, where individual claimants must be identified (and generally to have issued their own proceedings) before their claims can be collated.

The options currently available include test cases (such as the recent bank charges litigation), representative actions and group litigation orders. But the CJC found these existing procedures to be only partially effective and that many potential claimants were being deterred from bringing court actions altogether.

Clear evidence of need

In its formal response published on 20th July, the Government accepts that there may be circumstances where low value/high volume cases could be brought more effectively on a collective basis, but it does not support the introduction of a generic class action system.

"We believe that a sector based approach to the introduction of collective action rights is likely to produce a better outcome overall and to be more achievable" the paper states. Such rights should be introduced only where there is "clear evidence of need". 

"The policymakers for the relevant sector should be satisfied that access to justice can be achieved more cost-effectively and proportionately by collective court based litigation, rather than through individual claims or by other options, such as enhanced regulatory powers.

"Where regulatory bodies exist and are in a position to act on behalf of consumers or other groups they could for example be given power to order compensation to be paid to consumers in addition to or instead of a financial penalty." 

The Government, however, agrees with the CJC that, where a class action mechanism is introduced, there should be effective alternative dispute resolution procedures in place to encourage settlement as well as strong case management by the court.

Whether a particular scheme is opt-in, opt-out or adopts a modified system would need to be decided on a sector basis, although the Government sees "considerable weight" in concerns that have been raised about the sort of full opt-out model operated in the US.

It also favours retaining the court's full discretion to order the losing party to pay the costs of the action – the "loser pays" principle – in order to deter blackmail litigation, where class actions of little real merit are brought to force a settlement. 

Financial services

One area where the Government supports the introduction of more effective collective redress system is the financial services sector.

In its White Paper 'Reforming financial markets', published on 8th July, it said that the emphasis should remain on ensuring firms compensate customers voluntarily.

"When that is not possible and many consumers are affected in a similar way, there should be routes to collective redress that can deal with claims more efficiently, reduce the time that claimants may have to wait, and reduce the volume of individual cases dealt with by the courts or FOS [Financial Ombudsman Service]," it said.

The FSA can already impose redress schemes on individual firms where large numbers of consumers are affected, but this power is generally underused. The White Paper proposes granting the regulator new powers to order compensation on an industry-wide or firm-by-firm basis as appropriate.

It also suggests granting the FSA the right to establish a review of past business failure without requiring the involvement of the Treasury or Parliament, as currently required under the Financial Services and Markets Act.

Firms would be required to ascertain their liability to individuals, calculate the loss and pay compensation within the parameters of the compensation scheme, which could apply on an opt-out or an opt-in basis according to the circumstances.

Another possibility would be to expand the scope of such schemes beyond breaches of FSA rules to cover wider areas where the FSA has regulatory responsibility, including breaches of the general law.

As for court-based class actions, the Government believes there is a case for a new collective redress mechanism in the financial services sector. But rather than create an expensive new tribunal or alternative dispute resolution system to deal with such actions, it proposes giving the FSA the power to appoint a body or person to take a representative action through the court.

Next steps

Where a sector wishes to introduce a collective action mechanism, the relevant Government department will need to draft primary legislation following a consultation exercise and an assessment of the economic and other impacts. 

Later this year, the Government will draw up a policy framework setting out the issues which need to be considered. It will also work with the CJC to develop proposals for any new procedural rules that will be required.