In what circumstances might skilled persons appointed under FSMA be subject to judicial review? The Court of Appeal recently explored the vulnerability of skilled persons to judicial review and dismissed an application for judicial review against KPMG, acting as a skilled person on behalf of Barclays Bank, as it found the framework in which KPMG operated was not sufficient to bring it into the public law arena.
Misselling of interest rate hedging products
This case arises out of an investigation by the Financial Services Authority (the FSA) (now replaced by the Financial Conduct Authority) into the misselling of interest rate hedging products (IRHPs) by various high street banks. Barclays Bank, along with others, acknowledged that it had missold IRHPs to customers and voluntarily agreed to compensate these customers. As part of this process, it agreed with the FSA that it would appoint a "skilled person" under s166 FSMA, who would oversee Barclays' redress process and report back to the FSA on a regular basis. In addition, the skilled person would review the compensation offers made to customers in order to provide an opinion on whether the offer was appropriate, fair and reasonable. KPMG was appointed by Barclays and approved by the FSA.
Holmcroft was a customer of Barclays that was missold IRHPs. Barclays offered Holmcroft compensation for some of its claimed losses, but not all. KPMG approved the offer and Holmcroft sought judicial review of KPMG's decision on the basis that it failed to discharge its public law duty of fairness.
First instance decision in favour of KPMG
At first instance, the Divisional Court found that KPMG was not amenable to judicial review, principally because: (i) Barclays' redress scheme was voluntary, meaning that the FSA could not have imposed it on Barclays; (ii) the relationship between KPMG and Barclays was contractual and the customer was not a party to the contract; (iii) the FSA had no statutory obligation to carry out the role KPMG conducted for Barclays; and (iv) overall there was not a sufficiently "public law flavour" to KPMG's role to allow for judicial review to be available.
Endorsement by the Court of Appeal
The Court of Appeal approved the Divisional Court's findings, but noted that it had focussed too narrowly on the source of KPMG's power. It should have taken a wider view of the regulatory position and factual context in which KPMG fulfilled its function.
The Court of Appeal found that, fundamentally, Holmcroft's claim was a private law matter. Holmcroft was essentially pursuing private law rights by public law means. Compensation was to be negotiated subject to private law principles, including limitation, causation and heads of damage and the appropriate forum for enforcing payment, if agreement had been reached between Holmcroft and Barclays, was the courts. The FSA had not imposed a system for this process and had no role in the negotiation of compensation between Barclays and its customers. Therefore, KPMG was not performing a public law role amenable to judicial review.
The Court acknowledged that in reaching this finding, it was exposing a gap in the protection provided to customers as there would be no means of redress in public law if the compensation offered by banks was insufficient but approved by the skilled person. Customers would still retain the right to seek redress through the courts in the usual way and could take steps to protect their position while negotiations with the bank continued in order to avoid running out of time to bring a claim, such as entering into a standstill agreement with the bank or issuing a claim on a precautionary basis – although in the case of many IRHP claims, that may not be possible.
The role of a skilled person
The Court of Appeal provided firms that act as a skilled person with some comfort that they are unlikely to be exposed to judicial review by third parties in the future. However, it is notable here that a deciding factor was that the FSA had no role in the negotiation of compensation between Barclays and its customers. No doubt the FCA, which intervened in the proceedings to support KPMG, will be pleased with the result given the increasing reliance it has placed on skilled person reviews in recent years. However, it remains to be seen whether the same decision would be reached where a skilled person acts at the direction of, or in conjunction with, the FCA when arranging a compensation scheme.