Ten years on from the financial crash, banks still face accusations that they mis-sold interest rate hedging products. Customers’ options for challenging these sales and their reviews are narrowing.
Banks continue to face fallout from the sale of interest rate hedging products (IRHPs) prior to the financial crash. The FCA’s redress scheme has helped to bring closure to many but some disgruntled customers are still seeking compensation.
In our previous article we wrote that banks’ contractual protections, preventing customers from recovering losses, are standing up to judicial scrutiny. However, challenges have been made on another front, with some customers seeking to argue that banks taking part in the FCA’s IRHP Review owe their customers a duty of care in carrying out the review process, with losses resulting from negligently conducted reviews. That challenge has now also failed, with the Court of Appeal recently holding, in CGL v Royal Bank of Scotland and National Westminster, that the defendant banks’ conduct of IRHP reviews does not give rise to any duty of care owed to customers.
Three tests show that the banks do not owe a duty of care
The court customarily considers three different tests to determine whether a duty of care in respect of economic loss exists. These are:
- did the defendant assume responsibility to the claimant
- the “threefold test” in Caparo Industries plc v Dickman which asks whether: (a) the loss was a foreseeable consequence of the defendant's actions or inactions; (b) the relationship between the parties was sufficiently proximate; and (c) it would be fair, just and reasonable to impose a duty of care on the defendant towards the claimant
- whether a finding in the particular case that a duty exists would be an incremental addition to existing categories of duty.
The court’s approach in this case was to focus on the first test; had the banks assumed a responsibility to customers? The court held that the banks had not. The banks had agreed with the FCA (not the customers) to take part in the FCA review and, in doing so, were discharging their regulatory duties to the FCA. In particular, the banks’ agreement to undertake the reviews was “thrust on [them] by the FCA” and they did not assume the responsibility to undertake the reviews voluntarily. Accordingly, the Court was unwilling to find that the banks had thereby assumed a responsibility to the customers when their only agreement was with the FCA.
The regulatory context also weighed against a duty of care being imposed. The Financial Services and Markets Act 2000, in which the FCA's power to regulate banks is set out, details clearly who may bring claims as well as the roles and powers of the FCA. The court considered that to impose a duty of care would undermine both statute and the regulator’s clearly-defined role.
As cross-checks against the first test, the court also considered the outcome under the two other tests for a duty of care in respect of economic loss. The court briefly considered the threefold Caparo test. Again, in these IRHP mis-selling cases, statute and regulation has carefully identified which class of customers are to have remedies for which kind of breach. To introduce new remedies would undermine the FCA’s redress scheme. The Court held that it would not have been fair, just and reasonable to then impose a duty of care on the banks in those circumstances.
Finally, the court may find that a duty of care exists where there is a gap in protections for those who suffer loss which might be filled by a small and incremental expansion to existing remedies. The court found that, on the facts of the case, no such gap existed. The FCA review will result in customers being offered redress where appropriate meaning no further protection is required.
Assuming CGL is not appealed, there are now therefore limited avenues for customers to pursue in their search for IRHP redress.
Time is running out
We wrote last year about the potential future for IRHP mis-selling cases and noted that options were running out for disgruntled customers.
Ten years on since the financial crisis and most customers face difficulties in bringing claims. Mis-selling largely happened in 2008 or beforehand meaning many cases are now time-barred. Had the “duty of care” argument been accepted by the court, it carried with it the possibility of resetting the limitation clock and bringing many cases back within limitation periods. The Court of Appeal was wary of that outcome, considering that to impose a duty of care would allow customers to sue banks for breach of their duties "by the back door” and circumvent the limitation period for the original mis-selling.
For most, therefore, few options are left. One interesting issue which does however remain live is that of judicial review.
Is judicial review available for a customer?
We are still awaiting the appeal in Holmcroft v KPMG, which may allow dissatisfied customers to have the outcome of specific decisions made under the FCA redress scheme judicially reviewed.
At first instance Holmcroft argued unsuccessfully that the decision of KPMG, an independent reviewer in one of the mis-selling reviews under the FCA’s redress scheme, was open to challenge. Holmcroft’s primary argument was that an independent reviewer performed a public function in carrying out actions in furtherance of the FCA’s redress scheme. However, the High Court disagreed, holding that KPMG’s decision was not amenable to judicial review because it did not have "sufficient public law flavour”. KPMG’s role was part of a voluntary scheme of redress and it was not appointed or required by statute.
Whether Holmcroft’s argument will be resurrected as an option for customers will depend on the outcome of the appeal, scheduled for December 2017. The High Court did note that there were some “powerful pointers” in favour of KPMG being subject to public law duties. But, even if Holmcroft is successful on appeal, remedies for breaches of public law are limited. It is not possible to claim damages for a breach of public law where there is not also a private law cause of action, and cases such as CGL are demonstrating that such private law causes are few and far between. At best, it appears that a favourable decision for Holmcroft could simply result in Holmcroft’s bank and KPMG having to re-consider the original review decision. There is no guarantee that such reconsideration would result in any different outcome.
The finality of settlement agreements
Another recent decision also demonstrates that formal settlement of redress claims by banks should bring the customer’s mis-selling complaint to an end.
A bank’s offer of redress to a customer under the scheme may include settlement terms. A customer who accepts such an offer is then likely to be prevented from bringing further claims against the bank arising from the same circumstances or facts. This may include future claims and claims that the customer is not yet aware of. In Cameron Developments (UK) Ltd v National Westminster Bank plc, the court confirmed that “full and final settlement” means what it says and customers may not have a second bite of the compensation cherry.
In Cameron, the bank’s review had two stages. First, “basic redress” for the difference between what the customer actually paid and what they would have paid had the regulatory breach not occurred. Secondly, for the customer's additional loss incurred from the breach, such as consequential loss. The bank’s offer for basic redress stated that, if it was accepted, it would represent full and final settlement of any claims the customer may have against the bank “regardless of whether or not you are aware of them” at the date of the offer. Cameron accepted the offer but also said it wanted to claim for additional losses, and it issued proceedings against the bank when further monies were not forthcoming.
The court struck out Cameron’s claim. The settlement terms were broad – “in any way connected with the sale of the [swap]” – and covered Cameron’s additional claim. The settlement terms were also clear enough to show that the customer had agreed to give up rights they were unaware of at the date of settlement.
The court did not have to determine the bank’s alternative argument that it should be granted summary judgment. Nevertheless, the court offered its thoughts in case Cameron appealed. One point of particular importance, as in CGL, was that the bank did not have a contract with the customer. In this case that meant there could be no breach of contract.
These are complex cases, with increasingly novel arguments being put forward by claimants who are finding that traditional claim formulations are simply not available to them. Therefore, whilst we believe that claims arising out of IRHP mis-selling are, slowly, coming to an end, we anticipate that the "last gasp" of these cases will present the courts with some unique issues to consider. It seems we are still, therefore, living in interesting times and we will continue to monitor developments in this fascinating area.