UK - Development of a route for tackling shareholder actions has taken an unexpected route in the UK which lawyers claim could be more complicated than a US-style legal-based civil action framework and is likely to create inconsistencies among cases.

A recent consultation conducted by the Civil Justice Council - a quango to the UK's Ministry of Justice - on the future of UK collective consumer actions has produced a response from the UK government stating it will give each government department the power to decide how collective actions should be handled, rather than establish centralised legal or compensation framework.

The CJC had suggested a regime be created to facilitate generic collective actions, yet the government is delegating this decision to each department on a sector-by-sector approach "as needed".

Pension funds interested in pursuing compensation for alleged misrepresentation by listed company officials could in future be compelled to go to a compensation regime, such as the Financial Services Compensation Scheme, should they seek to take action in the UK, though no final decision has yet be unveiled as to how such cases may be tackled.

The adoption of a US-style class action law-based system appears to have been ruled out in part because criticism of the US litigious system has grown in recent years and because of fears that it may be abused.

Shareholder compensation cases tend to be fought in the US at present, as there is no overarching legal system in Europe for the pursuit of class actions. Individual countries have instead been pursuing the establishment of some form of regime allowing consumers to take civil action for alleged wrongdoing.

Portugal is currently the only country with a legal system to closest match the US, while Spain has a similar system.

Restitution for a class action against Royal Dutch Shell was most recently sought in the Netherlands through its settlement regime - a system which at no time establishes there is a legal case to answer but instead allows parties concerned to agree a settlement and for the court to decide what that sum should be. (See earlier IPE story: Shell ordered to pay €316m class action settlement)

France, and Italy have also been investigating the establishment if collective civil action regimes though they have all stalled for the time being in political stalemates.

Following the US approach has perhaps been ruled out by the UK as criticism of the regime includes concerns about the ability to award ‘triple damages' while the US system allows cases to be filed and go ahead without presenting evidence as to why - in complete contrast to the UK legal system which requires a case as to why any action should go ahead be presented before it does so.

However, Paul Lomas, a litigation partner at Freshfields, has raised concerns about the UK's direction for handling collective civil actions and believes a law-based US-style system might have been better to a certain extent, in part because there are concerns about the qualification of those who may make the judgments.

"Even though our law is very different to that in the US, this type of regime would have made it easier to start developing shareholder class action claims," said Lomas. "The UK government said its preference is for public remedies, encouraging the regulator to address more often private party compensation instead of the courts. However, there are real difficulties as to whether regulators would be geared up to deal with these responsibilities, as to skills and resources," added Lomas.

"It is also far from clear how it would work. The CJC has recommended control of these issues by the courts, however, companies may not welcome regulators awarding compensation: would they apply legal principles or general 'fairness' criteria, would the results be binding on both parties, would there be an appeal or even a judicial review; how could regulators not take decisions that reflected their policy objectives rather than a neutral evaluation of the merits?  The experiences with the FOS has shown the difficulties," added Lomas.

What may have driven the UK government's decision to pursue an ombudsman-style system in a strong interest in the work so far conducted in Denmark, according to Freshfields.

Denmark has a consumer ombudsman tasked with investigating cases which may right wrongs, publishing advisory opinions and pursuing actions which may be in the interests of pensioners and shareholders. The consumer ombudsman also has powers to bring a class action in his own name where damage has been done to the wider community, although that privilege has yet to be taken, as it is understood no action has so far been taken in his own name.

The financial services market is one of those sectors which is perhaps more likely to gain momentum should the UK adopt some sort of case framework, in part because investors have found the US regime more difficult to gain a voice in and is increasingly questioning the inclusion of non-US investors.

What the UK is likely to get instead, suggested Lomas, is inconsistent handling of cases within government departments who are perhaps uncertain of how to tackle them and what legal rules should be established.

"I think that progress across the UK system is going to get messy and slow in many areas. The government has almost washed its hands centrally and said it will be dealt with by each ministry, as and when needed. There will be inconsistency of handling among different ministries, and at different speeds, and when different regimes are put in place, there will be difficult demarcation issues - is this competition or financial services or perhaps shareholder or pension?" added Lomas.

If you have any comments you would like to add to this or any other story, contact Julie Henderson on + 44 (0)20 7261 4602 or email