Recent decisions from the Administrative and Mercantile Courts have stirred things up in the swaps mis-selling arena, potentially opening up two new fronts of litigation.
In the past customers have sued for damages for negligent misrepresentation, breach of contract and/or negligent advice or negligent provision of information in relation to the original sale of the swap. Individuals have also sued for breach of statutory duty under section 138D of the Financial Services and Markets Act 2000 (FSMA) (such claims can only be brought by “private” persons and not small and medium sized businesses, although that is an issue due to be considered by the Court of Appeal in 2016).
Claims are rarely straightforward and are often met with the defence of contractual estoppel. This effectively prevents parties who have agreed in their contractual documentation that they are transacting on a particular basis (for example on the basis that no advice is being given or that no representations have been made) from arguing otherwise, even when the agreed stated position is at odds with reality. This defence often proves insurmountable.
Given the cost and difficulties in pursuing conventional claims, disgruntled customers have sought cheaper and easier ways to resolve their disputes.
In 2012, having identified failings in the way that 9 major banks had sold interest rate hedging products to SME's, the FSA (now the FCA) introduced an alternative redress scheme - the FCA Review. Under this scheme, the banks and the FCA entered into agreements which stipulated that the banks should carry out past business reviews of their sales to unsophisticated customers going back as far as 2001 and, where appropriate, make offers of redress. The scheme was designed to deliver fair and reasonable redress to customers quickly and cheaply.
The take up rate was high - 89% of identified customers chose to participate in the scheme. To date around 12,600 customers have accepted a redress offer and some £2 billion is currently being paid out to them.
Not all customers are satisfied though. 10% of redress offers have not been accepted and in some quarters there has been criticism of the review. What can these customers do if they consider that the amount of redress they have been offered is inadequate?
Public law rights?
Earlier this year, in R. on the application of Holmcroft Properties Ltd  EWHC 1888 (Admin), the Administrative Court gave a customer permission to bring judicial review proceedings of an independent reviewer's assessment of a redress agreement on the basis that it was arguable that the arrangements put in place by the FCA Review had a sufficient public law dimension to make the Skilled Person amenable to judicial review.
The matter will not come on for a full hearing until January 2016 so we must wait until then to see whether the court, having reviewed the arguments in greater depth, is convinced that the conduct of the independent reviewer should indeed be open to a public law challenge. However, given that the redress agreements between the FCA and the banks were entered into voluntarily and the banks’ obligations under them are essentially contractual, surely they should not be amenable to judicial review? Customers already have alternative private law remedies to sue for mis-selling so why should they need public law remedies too?
Private law rights?
In the meantime, in a separate case a judge in the Mercantile Court has given a customer permission to advance a case that it has private law rights of action to sue a participating bank for failing to carry out the FCA Review properly.
In Suremime Ltd v Barclays Bank plc  EWHC 2277 (QB), Suremime had participated in the FCA review but was dissatisfied with its offer of redress. It had already issued a swaps mis-selling claim against Barclays in relation to the original sale. As well as claiming damages for negligent misrepresentation, breach of contract and/or negligent advice or negligent provision of information, Suremime also claimed that it was entitled, by virtue of section 1 of the Contracts (Rights of Third Parties) Act 1999, to enforce the agreements made between the FSA and Barclays under which the FCA Review was instituted because it was a third party upon whom the agreements purported to confer a benefit. Ultimately, however, Suremime had to abandon this particular limb of its claim when it transpired that the agreements between the FSA and Barclays expressly excluded any such third party rights.
Instead Suremime applied to amend its claim to include 3 new claims for Barclays’ alleged breach of contract and/or negligence in conducting the redress scheme.
These new claims were advanced on the following lines:
- breach of contract – a contract had come into being between Suremime and Barclays as a result of the bank offering to review the sale of the swap and Suremime agreeing to participate in the review and incurring expense in engaging in a fact-finding exercise with the bank’s solicitors. Barclays owed Suremime a contractual duty to conduct the review in accordance with the specification it had agreed with the FSA for conduct of the FCA Review;
- breach of a duty of care in tort – by agreeing to provide redress in accordance with the specification for the conduct of the FCA Review, Barclays owed Suremime a duty of care in tort; and
- breach of a White v Jones type duty – Suremime argued that its position was akin to that of the “disappointed beneficiaries” in White v Jones. There the court imposed a duty of care on a firm of solicitors who negligently failed to draw up a will before their client testator died, with the result that two intended beneficiaries lost their inheritance. The court imposed a duty on the solicitors in order to plug a legal gap which would otherwise mean that no one could advance a claim. The testator could not sue as he had suffered no loss and the beneficiaries had no obvious basis of claim. Suremime argued that there was a similar lacuna in its case. The bank owed Suremime a duty to implement the review process properly because any failure to do so would place the bank in breach of its agreement with the FCA but the FCA would suffer no loss. Suremime, as intended beneficiary of the FCA Review, would suffer loss.
In deciding whether to let these new claims proceed the judge had to decide whether they had a “real prospect of success” or whether there was some other compelling reason why they should be considered at a trial.
The judge dismissed the contract claim as unsustainable due to lack of consideration. The bank was going to include the claimant’s swap in the review process regardless of whether Suremime engaged in the fact-finding exercise. Suremime was therefore denied permission to introduce that claim.
Suremime was however given permission to amend its claim to include the new tort claims. This was because the judge thought them “more than merely arguable”. He was reluctant to “throttle such claims at birth” when he could not be confident that all the relevant facts were known and had been deployed at this early juncture.
He did not think that the fact that the claimant might be able to assert public law remedies of theHolmcroft Properties type, or the fact that it could sue for the original mis-selling, should necessarily be a bar to a private law duty of care being owed. The White v Jones principles might have potential application in Suremime’s case as whilst the FCA might be able to enforce compliance with the FCA Review through the Independent Reviewer, the FCA would still suffer no loss if the bank fell short in implementing the specification of the review.
The judge was mindful that many other cases would share the same factual matrix in which the new and alternative bases of claim arose. It was right to take into account the wider landscape rather than just the facts of this case. Although Suremime was not time-barred from bringing a claim, many other customers had stayed their hand and not sued for mis-selling in the hope of getting a satisfactory result from the FCA Review process. Unless those customers had agreed a standstill their mis-selling claims might now be time-barred and they might be left without any remedy. These were compelling reasons as to why the tort claims merited full argument at trial.
Neither the decision in the Holmcroft Properties case nor the decision in the Suremime case is finally determinative of the issues. The thresholds which the claimants had to meet in order to secure permission to proceed were relatively low as all they needed to establish was that their points were sufficiently arguable. It is therefore quite possible that once the arguments have been properly ventilated the courts will find the customers’ arguments untenable.
If the cases succeed, however, they could offer many customers easier options than have been available in the past. In particular, the Suremime line of attack may prove attractive to customers as a means of circumventing the usual contractual estoppel defences and avoiding having to prove mis-selling altogether.
Many customers who have participated in the FCA Review are barred from bringing claims in relation to the original mis-selling because the limitation period for bringing such claims has passed. The review extended to products sold as long ago as 2001. If such customers are dissatisfied with their offers of redress they could potentially be given a second bite of the cherry by being able to bring claims related to the conduct of the review (which obviously happened much later) rather than the original mis-selling. In White v Jones the court was concerned to ensure that the disappointed beneficiaries were given a remedy where one would not otherwise exist. In Suremime, the judge has opened the door to a variation on a claim which did once exist but has since been lost by virtue of the Limitation Act, a piece of legislation which exists for sound policy reasons.
In addition, in bringing those claims, customers will have to prove that the review was not carried out by the bank concerned to the requisite standard of care which is something different to proving that the hedging product was mis-sold in the first place. That has the potential to increase costs for all concerned if there is little overlap between a traditional mis-selling claim and a Suremime claim.
One thing seems sure - considerable litigation in this area is set to continue.