Six months after the High Court's surprising judgment in Suremime Limited v Barclays Bank plc [2015] EWHC 2277 (QB), the recent decision in CGL Group Limited v Royal Bank of Scotland [2016] EWHC 281 (QB) will be encouraging for financial institutions concerned about liabilities arising out of FCA past business reviews.

The Court held that the Claimant’s proposed amendment to the Particulars of Claim – namely, that the Defendant bank directly owed its customers a common law duty of care in connection with the past business review mandated by the FCA (as it now is) – was not arguable.

The express exclusion of third party rights in the bank’s agreement with the FCA was one of the most significant factors considered by the Court. This decision underlines the importance of taking great care when considering and negotiating the terms of any agreements with the FCA, as we noted in our August 2015 e-bulletin on the Suremime decision.

The Court also emphasised that to impose such a duty of care would “drive a coach and horses through a clearly defined statutory scheme”. Although not expressly stated, this must be a reference to section 138D of the Financial Services and Markets Act 2000 (“FSMA”), which provides customers who qualify as “private persons” with a private right of action against a financial institution for certain breaches of the regulatory regime. The Court in the instant case agreed with the bank that the limited circumstances in which a customer may rely upon the obligations a bank owes to a regulator as a cause of action (i.e. under section 138D FSMA) did not arise in this case. Further, the fact that a bank owes a duty to the FCA does not mean that a similar duty is automatically owed by the bank to its customer at common law (Green & Rowley v Royal Bank of Scotland plc [2013] EWCA Civ 1197). In contrast to Suremime, it was held that the proposed common law duty would therefore circumvent the existence of the statutory scheme.

1. Factual background

In July 2006, CGL Group Ltd (“CGL”) purchased a base rate collar from Royal Bank of Scotland (“RBS”). In April 2007, CGL made a further purchase from RBS, this time an amortising base rate swap.

From about February 2009, payments due from CGL in respect of these products increased markedly because of large drops in RBS’s base interest rate. In July 2009, CGL (through its director, Mr Lloyd) complained to RBS that CGL had been mis-sold the products. The parties discussed the matter by telephone in November 2009. During the course of that conversation, Mr Lloyd said: “I feel that I’ve been misled and mis-sold this policy.” Each of the products were subsequently closed out (in July 2010 in the case of the collar, and August 2010 in the case of the swap).

In the months leading up to June 2012, the FCA conducted a small scale review into the sale of interest rate hedging products. It announced the results of this review in June 2012, saying that it had agreed with a number of banks (of which RBS was one) that a redress scheme would be set up to compensate certain customers to whom such products had been mis-sold.

The agreement to establish a redress scheme represented a compromise by the FCA of any claims that it might have had against the banks involved. Under the terms of the compromise, RBS and the FCA expressly agreed that “a person who is not a party to this agreement has no right under the Contract (Rights of Third Parties) Act 1999 or otherwise to enforce any term of this agreement”.

In August 2014, RBS informed CGL that it qualified for redress in connection with the collar, but not the swap. In January 2015, CGL issued proceedings against RBS for mis-selling of interest rate hedging products on the basis of the bank’s alleged failure to provide advice and information.

2. Decision

The Court gave judgment on two applications:

  1. CGL’s application to amend its Particulars of Claim to plead that RBS owed CGL a direct common law duty of care in respect of the past business review, and breach of that duty; and
  2. RBS’s application to strike out the proceedings (or for summary judgment) on the basis that they were statute barred.

Application to amend

Of likely greater interest to financial institutions will be the Court’s findings in relation to duty of care.

CGL argued that - having agreed with the FCA to review the sale of products to CGL - RBS directly owed it a common law duty of care to:

  1. conduct the sales review in accordance with the undertakings given by RBS to the FCA and in accordance with the agreed methodology;
  2. provide CGL with appropriate fair and reasonable redress; and
  3. conduct the review with reasonable care and skill.

CGL relied upon the Commercial Court’s decision in Suremime, in which it was found arguable that such institutions owe duties of care in tort (such that customers would have private law rights of action against the institution if the terms agreed with the FCA were not followed). Alternatively, it was submitted that a duty arose in any event, which was argued on various different bases. Given CGL’s application was to amend its Particulars of Claim, it fell to the Court to decide whether the claims would pass the summary judgment test (i.e. if they had a real prospect of success).

In a short judgment - and largely approving of RBS’s submissions - the Court found that no duty of care arose in the circumstances of the case.

Making his concluding remarks, Mr Justice Bird said: “It seems to me that it is right to say that the bank cannot be treated as having taken on a duty of care when it has expressly excluded the possibility of it doing so and I am further persuaded that it is not just or reasonable to impose a duty of care in circumstances where such imposition would ride a coach and horses through a clearly defined statutory scheme.”

The decision sits somewhat at odds with Suremime. The Court was invited to find that Suremime was wrongly decided, but declined to do so outright, notwithstanding the different outcome. The Court distinguished the two cases on the basis that the Court in Suremimedid not have the full factual background (a sentiment echoed by Mr Justice Havelock-Allan QC’s own comments in Suremime). By contrast, the Court in the instant case was left with “no factual gaps”. Yet it went on to say that it would conclude that Suremime was wrong in the event that another Court were to find that the Court in Suremimedid in fact have available “all necessary matters”.

Application to strike out

The Court granted the application to strike out the claim (as originally pleaded) on the grounds of limitation. The focus of argument was on section 14A(5) of the Limitation Act 1980, which provides for time to start running for the purposes of limitation in negligence claims on “the earliest date on which the plaintiff…first had both the knowledge required for bringing an action for damages in respect of the relevant damage and a right to bring such an action”.

CGL argued that the relevant date was not until June or July 2012, following the FCA’s announcement.

The Court considered the authorities in relation to the extent of the necessary knowledge. In particular, the Court referred to the judgment of Hoffman LJ in Broadley v Guy Clapham [1994] 4 AER 439 and that of Lord Scott in Haward v Fawcetts [2006] 1 WLR. Lord Scott  summarised the requisite knowledge as “knowledge of the facts constituting the essence of the complaint of negligence”. The essence of the complaint in the instant case was a claim for mis-selling in the light of failures to provide certain advice and certain information.

It was held that Mr Lloyd (and therefore CGL) had attained the requisite knowledge by mid-November 2009. By this date CGL had more than a mere suspicion that it had been the victim of mis-selling in the light of the bank’s failure to provide advice and information. As such, the relevant date was mid-November 2009. The claim, being issued in January 2015, was therefore statute barred.

3. Comment

Although it was only in respect of an application to amend, the Commercial Court’s decision in Suremime in 2015 naturally led to concerns in the financial sector about concurrent or alternative liability in tort owed directly to customers in respect of past business reviews agreed with the FCA. The instant decision helpfully reinforces the Court’s willingness to respect express contractual terms excluding liability to third parties. Both cases are a reminder to give very careful consideration to the negotiation of any agreements with, or undertakings given to, the FCA. The decision also highlights the Court’s reluctance in this case to impinge on the clearly defined statutory scheme under section 138D FSMA.