For many individuals and businesses affected by the mis-selling of interest rate hedging products, securing compensation or redress must resemble a near impossible obstacle course.
The Financial Conduct Authority’s (FCA) Review has left many potential claimants unsatisfied and out of pocket – and in some cases, out of time to bring a claim in the courts. Limited companies have faced a further barrier, with the courts holding that they could not pursue a claim against a financial institution for breach of statutory duty because they are not “private persons”. Those who have succeeded in getting their case before the courts have found further hurdles, with the courts preferring to construe contracts literally, usually in favour of the banks, and refusing to extend or re-examine the reality of a bank’s duty of care to its customers.
But all is not lost. Recent decisions indicate that the ground is shifting slightly – not earth shattering movements, but potentially great enough to level the playing field slightly.
DUTY TO CONDUCT FCA IRHP REVIEW PROPERLY
In February 2015, the Treasury Select Committee published the agreements between nine major banks and the FCA (then the FSA) (dated June/July 2012 and January 2013) which formed the basis of the FCA IRHP Review (the FCA Agreements). The FCA had previously refused to disclose these documents. The Chair of the Select Committee noted the Committee’s continuing concern “that terms of the FCA’s redress scheme may, in some cases, have provided banks with an opportunity not to provide meaningful redress”.
At that time, Suremime Ltd was pursuing a claim against Barclays for alleged mis-selling of a structured collar swap. Barclays had investigated the transaction as part of the FCA Review and made an offer of redress which Suremime had refused as inadequate and ill founded. On reading the FCA Agreements, Suremime applied to amend its statement of claim, on the following grounds:
- that participating in the review created a contract between Suremime and Barclays under which Barclays owed Suremime a duty to conduct the review in accordance with the specification it had agreed with the FCA;
- alternatively, that Barclays owed Suremime an equivalent duty of care in tort; and
- that in entering into the FCA Agreements, Barclays agreed to confer on customers whose swap transactions were reviewed the benefits of such a review and of redress if appropriate. Therefore, Barclays owed Suremime a duty to implement the review process properly. Any failure to do so would place Barclays in breach of its Agreements in circumstances where the FCA would suffer no loss but Suremime, as intended beneficiary of the FCA Review, would.
The court ruled that the argument that the FCA Review gave rise to a contract between Suremime and Barclays faced “an insuperable hurdle of lack of consideration”. However, the tort claims did merit argument at trial, because the question of whether (and if so what) private law remedies accrue to customers who have participated in the FCA Review is a question of some public importance. On that basis, Suremime’s amendments were allowed.
Clearly this is a very small step in the right direction: the case may settle before trial, or the arguments may fail at trial. If Suremime succeed, however, claimants whose swaps claims are time barred may be able seek redress for a bank’s failure to conduct a review properly. The cause of action here would accrue from the (much later) time of the review.
Judge Havelock Allen QC had this to say, which may bode well for potential claimants: “The FCA Review was intended to provide a route to fair and reasonable compensation without customers having to sue for mis-selling. Those who stayed their hand and have not sued for the mis-sale in the hope of deriving a satisfactory result from the FCA Review process, but now allege that the specification of the FCA Review has not been faithfully applied, may be left without any remedy if they did not agree a standstill or moratorium with the bank which sold the swap and the mis-selling claim has since become statute-barred (para 35)”.
LIMITED COMPANIES AND THE PRIVATE PERSON TEST
Section 138D (formerly s150) of the Financial Services and Markets Act 2000 (FSMA) allows a “private person” to bring an action for damages against a financial institution which has contravened the regulations governing its course of business. For banks, the most recent regulations are contained in the Conduct of Business Source Rules (COBS).
Under regulation 3(1)(b) of the FSMA 2000 Rights of Action Regulations 2001, a company can be a private person provided that it does not suffer the loss complained of in the course of “carrying out business of any kind”. Until recently, the courts have accepted the banks’ wide interpretation of this regulation, effectively precluding a company from bringing an action – even where the transaction in question was a one-off trade or not part of their actual trade or business.
In MTR Bailey Trading Ltd v Barclays, Mr Bailey was sold a swap by Barclays. The swap agreement was later transferred to MTR Bailey Trading Ltd, of which Mr Bailey was director and sole shareholder. MTR applied to amend its particulars of claim, arguing that Barclays had breached the COBS in respect of the swap. Although MTR’s business was in vehicles and property rather than financial instruments, the court held that the company could not be a “private person”, and granted Barclays summary judgment against MTR. MTR applied for permission to appeal.
Lord Justice Kitchin granted permission to appeal on several grounds. In particular, he agreed that precluding companies from being “private persons” “robs the provision of its substance because most companies will be in business of some kind”. It will be interesting to see on appeal whether the court agrees with Kitchin LJ that MTR has a real prospect of success on this ground.
NON-RELIANCE CLAUSES: CAN THE BANKS RELY ON THEM?
The final, and possibly most effective hurdle potential claimants have faced so far, has been the concept of contractual estoppel. Banks’ standard terms and conditions usually contain non-reliance clauses which prevent clients (corporate or otherwise) from arguing that they have relied on any advice provided by the bank. Once signed by both parties, the courts have been reluctant to go behind the clauses or interfere with what the parties have agreed in black and white.
In Crestsign Limited v RBS, Crestsign claimed damages from RBS for negligent advice or negligent misstatement, along with a claim in misrepresentation. RBS’ defence succeeded at first instance, with the court holding that the non-reliance clause was effective – even though it found that the relevant individual at the company had in fact been advised by the bank.
Crestsign was granted permission to appeal, again on several grounds. Lewison LJ granted permission on the papers as to whether the relevant clause in RBS’s terms and conditions did actually preclude Crestsign’s action for negligent advice, or whether it was in fact an unreasonable exclusion clause, which would be void under the Unfair Contract Terms Act 1977.
More recently, Sir Colin Rimer granted Crestsign permission on two further grounds, which he characterised as having a real prospect of success. The first ground allows Crestsign to argue that that RBS’ duty to provide information required RBS to inform and explain to Crestsign the different types of product available. The second ground allows Crestsign to challenge the judge’s decision that RBS discharged the information duty it owed in respect of “break costs”.
EARTHQUAKE OR TREMORS?
Cautious optimism is the mood here. All of these cases have yet to proceed to trial; the arguments can (as ever) go either way; and many cases can be distinguished on their facts. The Supreme Court has also recently reiterated the importance of upholding the letter of the contract over “commercial common sense”.
That said, a clutch of cases such as these does suggest that there may be fault lines underlying the case law so far. Other recent cases support that view. For example, in Barnett Waddington Trustees v RBS, the court found that RBS could not recover breakage costs in respect of a swap between two internal departments of the bank – it had not suffered any loss, as it would have done in a swap with an external entity. Banks and customers should therefore review their breakage clauses carefully.
Last but not least, the court has also this year held that KPMG, the independent assessor in the FCA Review for the Holmcroft case, could potentially be considered a public body and therefore the subject of a judicial review.
Time will tell whether these developments cumulatively prove to be anything more than tremors or whether they will result in a substantial resettling of the judicial landscape.
This article was published in New Law Journal in February 2016.