In the recent Holmcroft appeal, the Court of Appeal held that the Divisional Court had been correct in deciding that KPMG, acting as Independent Reviewer in a misselling redress scheme approved by what was then the Financial Services Authority (“FSA”), was not amenable to judicial review. As such, the question whether KPMG had acted unlawfully in that role fell away. The bank that had instituted the redress scheme and the Financial Conduct Authority (the “FCA” – which superseded the FSA in April 2013), made submissions as interested parties in support of KPMG’s position that it was not amenable to judicial review.

Background

The case related to a bank customer redress scheme following the interest rate hedging products (“IRHP”) misselling investigation conducted by the FSA. The bank (Barclays) entered into a voluntary agreement with the FSA to set up the redress scheme, which included a requirement for a skilled person (known as the “Independent Reviewer”) to be appointed by the bank to review and give a view on each offer of compensation to a customer (the “AFR assessment”) as to whether it was appropriate, fair and reasonable. The FSA had powers under section 166 of the Financial Services and Markets Act 2000 to approve the Independent Reviewer to fulfil this role and to require the Independent Reviewer to report on the operation of the scheme to the FSA. KPMG was appointed by the bank as the Independent Reviewer.

In 2014, KPMG approved the redress offers made to a customer, Holmcroft Properties Limited (“Holmcroft”), in respect of missold IRHPs. In December 2014, Holmcroft sought judicial review of KPMG’s confirmation that the redress offer was appropriate, fair and reasonable. By the time of KPMG’s confirmation, Holmcroft’s potential civil claims against the bank in respect of the misselling had become time-barred.

Divisional Court decision on amenability

Judicial review proceedings may most obviously be brought against decisions of public bodies exercising public functions. However, over the years, some public functions have been outsourced by public bodies to private entities. Other decisions which seem to have a public nature, such as the decisions of the Advertising Standards Authority, have always been made by what are, in fact, private entities. For these reasons, the law in this area has developed to allow judicial review of decisions and actions by private bodies when exercising those public functions – it is the nature of the function or decision that determines whether the entity exercising the function or making the decision is amenable to judicial review in that context, and not just the source of the power to make the decision. As noted by Dyson LJ in R (Beer) v Hampshire Farmers' Market Ltd [2004] 1 WLR 233, “the law has now been developed to the point where, unless the source of power clearly provides the answer, the question whether the decision of a body is amenable to judicial review requires a careful consideration of the nature of the power and function that has been exercised to see whether the decision has a sufficient public element, flavour or character to bring it within the purview of public law.”

A key question in this case was whether KPMG was exercising a public function when acting as the Independent Reviewer.

The Divisional Court dismissed the proceedings on two grounds. First, KPMG’s decision was not amenable to judicial review. Second, the AFR assessment was not unlawful due to, amongst other arguments, the bank’s non-disclosure of internal records.

Five specific reasons were given in the lower court for concluding that KPMG’s role as Independent Reviewer was not sufficiently public in nature to make the challenged decision amenable to judicial review:

  1. The bank’s redress scheme was voluntary. The FSA could not, in exercising its regulatory powers, have imposed KPMG as Independent Reviewer on the bank.
  2. The FSA did not appoint KPMG. The FSA only approved KPMG’s appointment by the bank, as possessing the appropriate skills for an Independent Reviewer.
  3. The legal authorities, in particular Ex p Aegon Life and YL v Birmingham City Council, show that the fact that a private body performs a public law function does not mean that they will necessarily attract public law principles and become amenable to judicial review.
  4. The FSA had no regulatory obligation to carry out the role as Independent Reviewer if one could not be found (i.e. it was not a public role that had to be performed in any event), reinforcing the point that the bank’s redress scheme was voluntary.
  5. KPMG’s appointment did not mean that the FSA was precluded from taking an active role in the redress scheme in particular cases. For example, it would need to be involved in the event that a claimant alleged that the bank and KPMG were treating them unfairly.

Judgment

The Court of Appeal held that KPMG, in its role as Independent Reviewer, was assisting the bank to meet the requirements imposed on it by the FSA to offer appropriate, fair and reasonable redress to customers. It was factually important that the redress was to be negotiated on private law principles and, once confirmed by KPMG and offered to the customer, the customer was free to accept or reject it and pursue an alternative legal remedy. The Court held that the FSA’s requirements “merely overlaid, or sat alongside, a private dispute. They did not change the character of that dispute, which was fundamentally a private law matter.” For that reason, KPMG’s decision was not amenable to judicial review.

While the Divisional Court’s decision was upheld, Arden LJ opined that the lower court, in arriving at its decision, had focused too narrowly on the source of KPMG’s power and the manner of its appointment, and should have taken a wider view of all of the circumstances concerning the (i) regulatory and (ii) factual context to ascertain the function that KPMG performed and whether it had a sufficient public flavour. In this case, the regulatory context meant that the FSA had deemed a scheme of redress necessary and had secured the commitment of the banks to the scheme. The FSA had also incorporated a mechanism into the process whereby the bank-appointed “skilled person" would report back to the FSA following assessment. The FSA had no intention or requirement to participate in the negotiations. As to the factual context, the scheme was designed for the pursuit of the private rights of unsophisticated investors in financial products and therefore, combined with the Independent Reviewer's role in the regulatory context, did not have sufficient public character and lacked any policy element.

As the Court of Appeal held that KPMG was not amenable to judicial review, the second ground fell away and was only considered briefly.

Comment

This decision will come as welcome news to firms currently or previously appointed as “skilled persons” and potentially also to firms undertaking analogous roles in a regulatory context.

Although the decision was favourable to KPMG, it is a reminder that (applying Datafin), it is the function performed by a body and not the powers the body holds that is amenable to judicial review. In this case, the function KPMG was performing was held not to be sufficiently public in nature, but it does not preclude KPMG, or similar firms being deemed to be performing a public law function in different circumstances.

This judgment also highlights that judicial review cannot be used as a mechanism to circumvent the expiry of limitation in respect of alternative civil claims. Judicial review is necessarily a remedy of last resort. The fact that Holmcroft had failed to launch a claim in time, even on a precautionary basis, was criticised by the Court.

To read the judgment in full please click here.