In spring 2016, we examined the range of interest rate hedging product ("IRHP") misselling claims that were working their way through the courts following on from the redress scheme agreed between the banks and the Financial Conduct Authority ("FCA"). In this update, we revisit this IHRP litigation following a recent decision by the Court of Appeal around whether a duty of care is owed by those operating such a redress scheme. Had the claimants been successful in their arguments, it would have allowed them to re-open their claims against financial institutions, despite the fact that the underlying allegations of negligence were statute barred.
In 2012, nine banks agreed to review their sales of IRHPs made to non-sophisticated customers since 2001. Once affected customers had been identified, their participation in the redress scheme depended on the type of product purchased. Those who had purchased structured collars were automatically included within the redress scheme, whereas those who had purchased cap products had to have proactively complained to their banks to be included. Purchasers of all other types of IRHPs would be invited to optin if assessed as non-sophisticated.
By the end of 2015, the redress scheme appeared to have been a success on paper with 92% of offers having been accepted, but this was only half the story. Some customers were aggrieved as they were left with little choice but to participate in the redress scheme as their legal claims would have been time-barred or they were not eligible to go to FOS given their size and others complained that the compensation was inadequate, or they were offered alternative hedging products instead, or otherwise excluded from the process on technicalities. A number of claims against the banks then followed by those dissatisfied by the redress received with claimants deploying various arguments, including that the banks owed them a duty of care in conducting the redress scheme.
Claimants in such actions had something of a bumpy ride, with some finding a way through and others meeting a dead end. There were also some potentially conflicting decisions with the High Court in Suremime Limited v Barclays Bank plc (2015) granting permission to amend the Particulars of Claim to plead that the defendant bank directly owed its customers a common law duty of care in connection with the conduct of the redress scheme. However, the Court in CGL Group Limited v Royal Bank of Scotland (2016) held that a similar proposed amendment was not arguable.
Court of Appeal judgment
Three linked appeals came before the Court of Appeal in June 20171 , one of which was the CGL Group appeal. The principal issue to be decided was whether reviews, conducted pursuant to an agreement between the banks and the FCA as part of a settlement to avoid enforcement proceedings by the FCA, which considered that there had been "serious failings" in the way the banks sold these products to small and medium sized businesses, gave rise to a duty of care by the banks to those businesses to carry out those reviews with reasonable care and skill.
Lord Justice Beatson gave the leading judgment, dismissing the appeals.
While Beatson LJ acknowledged that the difficulties of determining when a duty of care arises are well known, there are three general tests to be considered in the round: (1) whether the defendant assumed responsibility to the claimant; (2) the threefold test in Caparo Industries plc v Dickman (1990) (reasonable foreseeability, proximate relationship and fair, just and reasonable to impose a duty); and (3) whether the addition to existing categories of duty would be incremental rather than indefinable.
The appellants' primary case was that the banks owed them a duty of care because they had "voluntarily" assumed responsibility to them in carrying out the redress scheme by virtue of writing to the customer inviting them to opt-in. Beatson LJ thought the appellants had focussed too heavily on the assumption of responsibility test and that it was not the most appropriate one in this case.
Beatson LJ considered that the regulatory context clearly weighed against the imposition of a duty of care in these cases, stating that it would be "unusual for the common law to impose a common law duty on a statutory regulatory framework". He noted that parliament had already decided that some breaches of the banks' regulatory duties are not to be actionable at all by customers, and others are only to be actionable by private persons. Here, the appellants did not have rights of action under s138D of the Financial Services and Markets Act 2000 ("FSMA") to seek damages for losses arising from breach of rules. Consequently the recognition of a common law duty of care to the appellants would be "to drive a coach and horses through the intention of Parliament" and would "undermine a regulatory scheme which has carefully identified which class of customers are to have remedies for which kind of breach".
It was clear that Beatson LJ placed much weight on what parliament intended, namely that the FCA was to have broad powers, including the ability to require restitution under s384 or a scheme under s404 FSMA, and that no individual customer could enforce these powers or sue for breach as it would be for the FCA to bring enforcement proceedings. Although the banks and FCA had come to a contractual arrangement to carry out the review, he considered that the review was "in practical terms thrust on them by the FCA rather than truly voluntary" and this pointed against recognising a duty of care.
The fact that the review and redress process was also scrutinised by an independent reviewer (a `skilled person' appointed under s166 FSMA) also appears to have been a factor relevant to the determination of whether a duty arose. Beatson LJ considered that the banks could not have "assumed responsibility" when they expressly informed customers that an independent reviewer would be examining the decisions. Though the point did not arise, he also commented that the independent reviewer could not have owed a duty of care to the customers either.
Beatson LJ also appeared to be concerned about the broader implications had the appeals been allowed. He noted that the complaint concerned not the provision of banking services, but the way in which complaints about banking services were handled. He considered it was possible to imagine a number of similar customer complaint schemes such that the imposition of a duty of care in respect of a complaint system could have " far-reaching consequences".
Interestingly, Beatson LJ also referenced (or rather downplayed) the Suremime v Barclays decision, noting that the judge had permitted the amendment to the Particulars of Claim whilst expressly stating that he could not be confident that all the relevant facts had been deployed which would be relevant to determining whether a duty of care arose. It appears that the parties in Suremime may have settled before a substantive hearing of the facts took place.
The decision will have come as a welcome relief to financial institutions that had been engaged in such IRHP reviews. However, it does raise the question as to whether banks will be keen to agree to schemes outside of s404 in order to avoid owing a duty of care or otherwise being caught by actionable provisions of FSMA.
It also continues in the same direction as the April 2017 decision in Mazarona Properties Ltd v Financial Ombudsman Service (2017), where the High Court rejected an application for judicial review of a decision taken by a FOS ombudsman when faced with a complaint about a redress offer made (and later withdrawn) following the alleged misselling of IHRPs by a bank. The FOS decided that it could not hear the complaint as the bank's review process fell outside the scope of its compulsory jurisdiction. The High Court agreed, finding that the FOS is only permitted to consider a complaint under the compulsory jurisdiction if it relates to an act or omission by a firm in carrying out regulated activities, and a complaint about the handling of a complaint is not a complaint about the provision or failure to provide a financial service, though a s404 scheme would have come within FOS's jurisdiction pursuant to s404B FSMA.
We shall have to wait and see whether the Court of Appeal's decision in CGL is appealed, or if any other claimants try their luck with ever-more creative arguments as to why a duty does exist. Any claimant whose original claims are time-barred and therefore hoping to have another bite of the cherry by reworking their original allegations as breaches of duty will most likely have had any hopes dashed by this decision.