The Court of Appeal has decided that banks do not owe a duty of care to customers in relation to their conduct of the review agreed between the banks and the Financial Conduct Authority (FCA) in relation to past sales of interest rate hedging products (the IRHP Review). This decision upholds the decisions at first instance in each of the three conjoined cases that the Court of Appeal considered. The outcome is unsurprising, and will have implications beyond the specific context of the IRHP Review. Permission to appeal has been refused by the Court of Appeal, although the appellants are able to apply to the Supreme Court within the next 28 days.
The IRHP Review
The IRHP Review was agreed by various banks and the FCA in June 2012, and its existence was made public by the FCA at the end of that month. The structure of the IRHP review was that each bank involved entered into an agreement with the FCA, following without prejudice settlement discussions in relation to past sales of interest rate hedging products. The agreement was accompanied by an undertaking. The terms of the agreement and undertaking were not made public until February 2015.
Each bank undertook to the FCA to conduct the IRHP Review in accordance with agreed terms. The banks and the FCA agreed that the IRHP Review would apply to all sales made to eligible customers (essentially those private- and retail-classified customers who were deemed non-sophisticated) since 1 December 2001. The bank in each case would assess its past sales to each such customer, set against regulatory requirements, and would make an offer of redress to customers where appropriate. The entire exercise, together with all determinations of redress, would be overseen by an independent reviewer that the FCA required each bank to appoint as a skilled person.
All customers were to be contacted by letter (the Letter) in order to explain the IRHP Review, the role of the FCA and the role of the independent reviewer. Most customers would need to opt in to the IRHP Review, although some would automatically be included.
The cases before the Court of Appeal
Without setting out in detail the facts of each case before the Court of Appeal, there were various common features. In each case, the claimants believed that they had a claim against the relevant bank arising out of alleged misselling of an interest rate hedging product (either a swap, collar, or so-called structured collar). Also in the case of CGL Group Limited and Mr and Mrs Bartels, the bank had a limitation defence to certain of the claims made.
The claimants also participated in the IRHP Review carried out by the relevant bank, but had been dissatisfied with the outcome.
Each of the claimants had claimed that the relevant bank owed them a duty of care arising out of the IRHP Review. The availability of such claims has been the subject of some speculation, particularly since HHJ Havelock-Allan QC allowed an amendment of this kind to proceed. That speculation should now be at an end.
The claimants' arguments
The claimants argued that the banks owed them a duty of care to conduct the IRHP Review carefully. They argued that the banks had assumed responsibility voluntarily, chiefly by means of the Letter1. The claimants said that they had relied on the banks to undertake the IRHP Review competently, that they had failed to do this, and that it was fair, just and reasonable for a duty of care to be found to exist in a relationship that was akin to contract.
The banks' position
The banks argued that no duty of care arose from the Letters, or the claimants opting into the IRHP Review. In conducting the IRHP Review, the banks were discharging obligations to the FCA, and the fact of the existence of the agreement with the FCA pointed away from an assumption of responsibility to customers in relation to it. The IRHP Review did not affect the availability or status of any pre-existing claims of the claimants in relation to the alleged misselling and, in allowing the claimants' appeals, the Court of Appeal would allow them effectively to circumvent the law of limitation.
The Court of Appeal's decision
Part of the judgment of Lord Justice Beatson (with which McFarlane and Lewison LJJ agreed) considers the different tests applied by previous cases in determining whether a duty of care exists in relation to economic loss: the voluntary assumption of responsibility; the tripartite test in Caparo v. Dickman (foreseeability, proximity and "fair, just and reasonable"); and the so-called incremental approach. Having considered these tests, Beatson LJ concluded that the assumption of responsibility test was not the most appropriate, but that, considering all factors relied on in earlier authorities, such factors pointed away from the existence of a duty of care. He found that this conclusion was confirmed by applying the other tests, in particular the one in Caparo.
The reasons for this conclusion were:
- the regulatory context clearly weighed against the imposition of a duty of care, the Court of Appeal noting that it would be unusual for a common law duty to be imposed on a statutory one, particularly where the common law duty was more extensive. Applied specifically to the present case, the Court of Appeal found that the context of the IRHP Review was a highly regulated environment, in which the FCA had been given a wide range of powers, and Parliament had carefully prescribed the circumstances in which particular individuals might take action;
- it was artificial to characterise the IRHP Review as a purely voluntary exercise, separate from the regulatory regime, in circumstances where it was only undertaken as an alternative to enforcement proceedings;
- customers who are not "private persons" as defined (which companies are generally not) cannot sue in relation to a complaint-handling issue, as a result of the way in which FSMA and the FCA's rules are framed;
- the Letters (on which the claimants relied to a significant extent) were required to be sent in the form they were by the FCA;
- the role of the independent reviewer militated against the imposition of a duty of care and, in circumstances where the independent reviewer could not owe a duty of care, it was hard to see how the banks could;
- applying the Caparo test, it was not fair, just and reasonable to impose a duty of care;
- allowing the appeals would have the effect of allowing the claimants to litigate their time-barred causes of action "by the back door"; and
- the Court of Appeal did not accept that the claimants had relied on the Letters or the IRHP Review, in that it was unclear what they would have done differently – their participation in the IRHP Review did not preclude them from pursuing their original claims.
The Court of Appeal's decision is not surprising. It would be strange indeed if so carefully designed a process as the IRHP Review, containing as it did a substantial dose of regulatory intervention, should be held to create a duty of care. Such a decision would effectively mean that the independent scrutiny offered by the reviewer would itself become the subject of scrutiny by the court, and that cannot have been the intention behind the IRHP Review's design. There seems no reason why the court's conclusions in this case should not also apply in any future review agreed by firms as an alternative to enforcement action.