When regulation goes wrong (and what you can do about it)

22 July 2016 -

Most industries are regulated, but the regulator doesn’t always get it right. For companies on the wrong end of a regulatory decision, there is a way forward

It’s the job of a regulator to make sure that businesses in its sector are held to account when mistakes are made or things go wrong.

Promoting professionalism and better-run businesses, regulators are usually the highest authority for their sector, laying down the law and, when appropriate, handing out fines.

But what happens if the regulator gets it wrong? What redress can a business seek for damages?

Mishandling of whistle-blowers who reveal shady business practices, or failing to foresee and prevent catastrophes are just a couple examples of how regulators have let down companies they regulate.

2ndOpinionNow chief executive Chaman Salhan says there are a number of reasons why a business might look to take action against a regulator.

With submissions to the Complaints Commissioner (the body responsible for handling regulatory issues) on the rise, more and more companies are taking action when regulation goes wrong.

“In the past year, there has been a 16% increase in the number of people complaining about financial regulators, so a lot of people are actually complaining about regulatory issues,” says Salhan. “Issues that arise include: are regulatory procedures appropriate? Is the regulator a bit toothless? Are they setting benchmarks too high? Should they be more rigorous in their regulation?”

If such an issue does occur for your business, Salhan says there are two routes you can take to seek redress. The first is called misfeasance in public office.

To be able to be successful in such a claim, the failings of the regulator in its function must pass the following test: a public officer exercised public power and did so either for an ulterior purpose, specifically intending to injure the individual company, or did so with reckless indifference to the fact he had no power to do the act complained of and to the probability of injury being caused.

Such cases are hard to prove, however, with high evidential barriers to clear in order to be successful.

A high-profile example is the case of the Bank of Credit and Commerce International (BCCI), which was forced into liquidation following investigations that revealed money laundering and large-scale fraud.

After a 12-year legal battle claiming misfeasance in public office against the Bank of England for failing to properly regulate the bank, the liquidator of BCCI, Deloitte, was forced to pay £73m of the Bank of England’s legal costs after the High Court ruled that it was “no longer in the best interests of creditors for the litigation to continue”.

News reports at the time declared it the most expensive case in British legal history.

While proving misfeasance in a public office can be a challenge, there is a path that’s easier to prove.

“Because you have to prove an element of bad faith, it can be difficult to prove misfeasance in public office evidentially,” says Salhan. “It is often easier to prove negligence, and that the regulator owes a duty of care that has been breached while carrying out its regulatory function.”

The test for such negligence is in three parts:

1. A loss must be reasonably foreseeable
2. There must be a sufficient relationship of proximity between the parties
3. Is it fair, just and reasonable to impose a duty of care?

Salhan says that, for companies looking to take such action, it is a straightforward matter of looking at these questions, and then weighing up the benefits and costs of taking the regulator to court.

“There can be many regulators who are not performing their function, and you need to determine whether a loss has occurred because the function has not been performed correctly,” he says, “and then decide if you want to progress with an action alleging negligence.”

This is a sponsored feature that first appeared in the summer edition of Professional Manager. If you feel wronged by a regulator and are looking for advice, speak to Chaman Salhan and his team on 020 7936 3177 or visit 2ndopinionnow.co.uk