Between March-May 2012, evidence of mis-selling of certain interest rate hedging products (IRHP's") by a number of banks, including Barclays Bank Plc ("Barclays"), was brought to the attention of the FSA, now the FCA. IRHP's were sophisticated products the purpose of which was to protect customers from the risk in the fluctuation of interest rates. It was alleged that the banks had been selling inappropriate or unsuitable products and had adopted poor sales practices to the detriment of their customers.
As a result of information provided voluntarily to the FCA by the banks, the FCA advised that it required, at the expense of the banks, independent and objective monitoring of the bank's procedures and the settlement offers made to customers. At the same time, the FCA also issued a Requirement Notice under S166 of the Financial Markets and Services Act 2000 ("FSMA") in July 2012 requiring a report prepared by a "skilled person" "on any matter about which the Authority has required the provision of information."
Subsequently, the review and redress arrangements were agreed with the banks, including Barclays, whereby the banks would review the sale of products going back to 2001 and pay compensation, if appropriate. Whilst the process was to be undertaken by the banks, the FCA required that the review be scrutinised by an independent reviewer. Barclays therefore appointed the Defendant, KPMG as the independent reviewer and "skilled person" pursuant to S166 of FSMA to oversee the redress process as Barclays considered that KPMG had the required resources, skills and experience with the approval of the FCA.
The redress agreement between Barclays and KPMG was consigned to writing in July 2012, the terms of which were based on KPMG's standard terms and conditions for an arrangement of this nature but modified to tailor them to the particular requirements. The terms of engagement emphasised that KPMG was undertaking only to act for Barclays although some third party rights were conferred on the FCA, for example, the submission of regular reports on the progress of the redress scheme. It therefore expressly stated that KPMG owed no obligations to Barclays' customers, that Barclays could make no offers of compensation without the approval of KPMG and that such offers could only be approved if KPMG considered them fair and reasonable.
The offer of compensation was to consist of basic redress comprising the difference between the payments made on the IRHP and those which would have been made if there had been no breach of the regulatory requirements. The amount payable depended on whether the customer would have purchased an alternative product if there had been no mis-sale to which simple interest at 8% was added. The customer could seek compensation for consequential loss although the burden was on the customer to show the loss and demonstrate that but for the mis-sale, the loss would not have been incurred. However, the offer of compensation was not binding on customers who, if not satisfied with the outcome, had the option of pursuing civil proceedings or a claim before the Financial Ombudsman Service.
The Claimant, Holmcroft Properties Limited ("Holmcroft"), a property development company, submitted that it received an offer of redress from Barclays which was inadequate and did not satisfy the required criteria because it did not include compensation for loss which it is alleged was consequential upon the mis-sale. The consequential losses claimed by Holmcroft were said to flow from a decision made and implemented by Barclays in May 2011. However, KPMG concluded that Barclays had acted reasonably in adopting the approach it had.
Holmcroft therefore claimed that as Barclays had not dealt fairly with its application for consequential loss in the way it reached its decision and had refused to pay consequential losses, KPMG should not have approved a defective process. In consequence, Holmcroft asserted that KPMG in its role as independent reviewer, had acted in breach of public law principles by approving the offer of redress made to it by Barclays, making it amenable to judicial review. Both Barclays and the FCA were joined to the application as interested parties.
KPMG denied that it was amenable to judicial review as its role in the review process was not exercising a public function which would attract the principles of public law. It exercised a contractual obligation and thus there was insufficient "public flavour" to make it amenable to judicial review. This position was supported by the two interested parties, Barclays and the FCA.
The issue before the Court was therefore whether in the circumstances KPMG was amenable to judicial review and if it is, whether it acted in breach of the public law principles to which it was subject in approving the offer.
The Court found that KPMG's duties did not have sufficient public law "flavour" to make it amenable to judicial review as, although it played a pivotal role in the redress scheme, there was no direct public element to its role which was simply woven into a regulatory function. The Court considered the contractual provisions between Barclays and KPMG in order to understand the respective responsibilities and who was responsible for the offer of redress and further examined the relationship between Barclays and Holmcroft. Having done so, it found that even if KMPG were amenable to judicial review, on the facts there was no unfairness by Barclays in the review and therefore there could be no material breach by KPMG of any of the alleged public law duties.
This is an important decision for those entities seeking to perform a function under s166 of FSMA, which, whilst providing comfort to those entities, also demonstrates the need to ensure the role of a "skilled person" engaged as an independent reviewer under a contract, is carefully considered and recorded.