The Court of Appeal has held that banks do not owe a duty of care in tort to their customers when carrying out a swaps misselling review required by the banks’ agreement with the Financial Conduct Authority (“FCA”). The decision of the Court of Appeal upheld the decision at first instance.
The interest rate hedging products review was agreed between various banks and the FCA in June 2012 (the “Review”). This agreement required banks to carry out a review of the sale of certain interest rate hedging products under the supervision of an independent reviewer and, with the reviewer’s approval, to offer redress to customers where appropriate to do so. Some customers argued that the banks carried out the Review negligently, failed to offer proper compensation and were liable to the customers for this failure in the same sum as the underlying claim.
The cases before the Court of Appeal
In (1) CGL Group Limited; (2) Jacqueline Bartels and Adrian Bartels; (3) WW Property Investments Limited v (1) The Royal Bank of Scotland plc and National Westminster Bank plc; (2) Barclays Bank plc; and (3) National Westminster Bank plc  EWCA 1073,three linked appeals were heard together by the Court of Appeal. In each case, the claimants believed that they had a claim against the relevant bank arising out of the alleged misselling of interest rate hedging products (either a swap, a collar or a “structured-collar”), each of the claimants had participated in the Review, and each had claimed that the relevant bank owed them a duty of care to carry out the Review with reasonable skill and care.
The claimants argued that the banks owed them a duty of care to conduct the Review carefully and that they had relied on the banks to do this competently, which they had failed to do, and that it was fair, justifiable and reasonable for a duty of care to be found to exist in a relationship similar to a contract.
The banks argued that no duty of care existed and that in conducting the Review they were discharging obligations owed to the FCA. Moreover, they argued that the banks’ agreement with the FCA to conduct the Review pointed away from an assumption of responsibility to customers in relation to it. They also argued that the existence of the Review did not affect the availability or status of any other pre-existing claims of the claimants in relation to the alleged misselling and that in allowing the claimants’ appeals, the Court of Appeal would effectively allow them to circumvent the law of limitation.
In reaching its decision, Beatson LJ (with whom Lewison LJ and McFarlane LJ agreed) considered the various tests applied in previous cases to determine whether a duty of care existed. In particular, Beatson LJ noted [at para 59] Longmore LJ’s decision in Playboy Club London Ltd v Banca Nazionale del Lavoro SpA  EWCA Civ 457 stating that it has become customary to consider three tests or approaches to determine whether a duty of care arises in respect of economic loss that usually lead to the same answer and can be used as cross checks on each other; these are:
- whether the defendant assumed responsibility to the claimant (the “assumption of responsibility test”);
- the tripartite test in Caparo Industries v Dickman  2 AC 605, which is whether
- the loss was a foreseeable consequence of the defendant’s actions or inaction;
- the relationship of the parties was sufficiently proximate; and
- it would be fair, just and reasonable to impose a duty of care on the defendant towards the claimant; and
- whether the addition to existing categories of duty would be incremental rather than indefinable.
Beatson LJ concluded that the assumption of responsibility test was not the most appropriate; rather, considering all factors relied on in earlier authorities, such factors pointed away from a duty of care. In particular, Beatson LJ found that this conclusion was confirmed by applying the tripartite test in Caparo v Dickman to establish a duty of care.
The Court of Appeal’s reasoning was complex and included:
- The agreement between the banks and the FCA was reached as part of the FCA’s role in enforcing banks’ obligations under the UK’s financial services regulations. UK financial services regulation provides that, in certain circumstances, customers of financial services firms have claims against those firms for breach of the regulations, and the imposition of a common law duty of care in carrying out of regulatory obligations such as the Review would undermine the statutory regulatory framework. Beatson LJ stated [para 87]: “I consider that the overall regulatory regime is a clear pointer against the imposition of a duty of care, and suggests that to recognize a common law duty of care in the present case would circumvent the intention of Parliament.”
- The communication between the banks and their customers about the Review did not suggest that the banks were assuming responsibility to their customers for the conduct of the Review, rather the banks were doing what the FCA required them to do. In addition, the role of an independent reviewer to scrutinize the Review process mitigated against the imposition of a duty of care, and, where the independent reviewer did not owe a duty of care to customers, it was difficult to see how the banks could owe such a duty.
- If the banks failed to conduct the Review properly, the FCA could take action against them.
- Applying the tripartite test in Caparo, it was not fair, just or reasonable to impose a duty of care.
- Imposing a duty of care would circumvent the limitation period for the original misselling.
Although the decision is unlikely to bring an end to swaps misselling claims, it is likely to make it more difficult for some customers to pursue such claims against banks. It is also likely that the decision will be followed in any future review agreed by firms as an alternative to enforcement action by regulators.
In addition, the decision also serves as a useful reminder of the tripartite tests for establishing whether a duty of care exists in cases of economic loss set out in Caparo v Dickman.