The Court of Appeal has found that banks did not owe a duty of care when conducting a past business review (PBR) of previous sales of interest rate hedging products. Although the decision is in the context of the review procedure agreed between the FCA and banks, the decision is likely to apply to all PBRs, except formal 'consumer redress schemes' under s404 FSMA.
The decision reflects a recent High Court decision on which we have previously commented where the High Court found that the conduct of a review exercise was not a "specified activity" and so fell outside FOS' jurisdiction. It remains to be seen whether consumers could establish a duty of care against a firm conducting a (voluntary) PBR but firms will take some comfort.
Three linked appeals were heard by the Court of Appeal involving a number of banks and their review of interest rate hedging products. The banks reached an agreement with the FCA in June 2012 that each would review the sale of its interest rate hedging products from 1 December 2001 to "non-sophisticated customers" and provide appropriate redress where mis-selling had occurred. The terms of the agreement with the FCA remained confidential until February 2015. Under the terms of the agreement with the FCA the bank had to assess whether its sales to customers of interest rate hedging products complied with the regulatory requirements, defined as the principles, rules and guidance contained in the FCA's Handbook and taking into account sales standards. The terms of the agreement did not provide a right for an individual customer to enforce the terms.
The three claimants each claimed that the banks had mis-sold them the hedging products. One claimant alleged from the outset that the banks owed it a duty of care arising out of the review. In the other two cases it was not initially alleged that a duty of care was owed and the claimants sought to amend their pleading to allege a duty of care. (See our previous blog on the CGL v RBS case here). Permission to amend was refused on the basis that the amendments did not pass the summary judgment test. The claimants appealed that decision.
It was alleged that the banks had failed to conduct the review in accordance with the undertakings the banks had provided to the FCA, with the agreed methodology and the review had been conducted negligently. If the banks had conducted the review properly redress would have been offered. Broadly it was said that the banks had voluntarily assumed responsibility to their customers to perform the review carefully. The source of the assumption of responsibility was said to be the letter sent to each individual claimant setting out that the bank was to conduct the review if the customer opted in to that review.
The Court of Appeal concluded that no duty of care was owed:
(1) the regulatory context weighed against the imposition of a duty of care as it would be unusual for the common law to impose a common law duty on a statutory regulatory framework where the effect of the statutory regime is that a non-private customer cannot sue in relation to a complaint or a complaint handling issue or a redress determination if a bank proactively sets up a redress scheme – if there is a failure to follow the terms of the agreement reached between the FCA and the banks the answer is for the FCA to bring enforcement proceedings and not to create a separate cause of action.
(2) the correspondence sent to the claimants and the language used indicating that the banks would conduct a thorough review did not equate to an assumption of responsibility between the bank and the customer. The banks were conducting the review not voluntarily but at the instigation of the FCA and to impose a duty would be to say that the banks assumed a duty to do what they had agreed with the FCA.
(3) the fact that there was an independent reviewer under section 166 was a further indicator against imposing a duty of care. In circumstances where the independent reviewer did not owe a duty to a customer in reviewing a decision it would be odd for the bank to owe a duty when reaching its initial decision.
(4) the claims were otherwise time-barred and so to impose a duty of care would circumvent an otherwise time-barred complaint. There was no lacuna to fill; the claimants could have issued proceedings or complained to FOS at any time with respect the allegations of mis-selling. The imposition of a duty of care in respect of a complaint system could have far-reaching consequences and would not be fair, just and reasonable in the circumstances.
The fact that we now have Court of Appeal authority that no duty of care is owed to a customer with regard to complaints handling itself will be welcomed by firms. The decision also swiftly follows the High Court decision (in Mazarona) clarifying that FOS' jurisdiction did not extend to complaints handling under a review procedure and so all but draws a line under the issue. Albeit that there is now an odd distinction between a voluntary review procedure (where no duty of care is owed and no otherwise actionable provisions) and complaints handling under DISP and s404 where certain provisions are actionable against a firm by a private person.
For firms conducting a PBR a failure to follow the PBR procedure is unlikely to sound in negligence and is instead a matter for FCA enforcement. Strategically there may be advantage for firms to put in place voluntary PBRs sooner rather than later, to take themselves out of the DISP regime and into a non-actionable voluntary regime over which they have more control.