In the context of interest rate hedging product (“IHRP”) mis-selling litigation, the High Court has rejected an application for permission to amend particulars of claim to include a claim for a declaration that the defendant bank failed properly to conduct its past business review of IRHPs (the “Review”): Teresa Day & Anor (t/a Appledore Clinical Services) v Barclays Bank plc [2018] EWHC 394 (QB).

This judgment is consistent with the related decision in CGL Group Limited & Ors v The Royal Bank of Scotland plc & Ors [2017] EWCA Civ 1073, in which the Court of Appeal held that it was not arguable that the defendant banks owed a duty of care in tort directly to their customers in connection with conduct of the FCA Review (read our banking litigation e-bulletin). The instant application was viewed by the bank as an attempt by the claimants to introduce “through the back door” a claim based on the bank’s alleged failures to conduct the FCA Review properly, now that such a claim could not be made through the “front door”, following the CGL decision.

The High Court held that the declaration sought would inappropriately and disproportionately extend the scope of the proceedings, because it would have required the court (and the parties) to address issues outside of the substantive claims. In this context, it was particularly relevant that the claimants accepted that they were unable to bring a claim against the bank for breach of duty to conduct the FCA Review properly, as a result of the decision in CGL. The court viewed the application as an attempt by the claimants to act as “informal enforcers” of the FCA regulatory regime when this was a matter for the FCA itself. It held that it was not a legitimate use of the court’s powers to make findings in an attempt to force the FCA to act; the more appropriate route would be for the claimants to seek judicial review if the FCA refused to take enforcement action against the bank.

The combined effect of the decision in this case and CGL is that private claims by customers based on conduct of the FCA Review by defendant banks are very unlikely to succeed, whether they are pleaded by way of an alleged tortious duty or by seeking a declaration of wrongdoing.

Background

In October 2007, the claimants purchased an interest rate collar from Barclays Bank plc (the “Bank”). In June 2012, the Bank agreed with the now-FCA to carry out the Review of its sales of IRHPs since 1 December 2001 to customers who did not meet the ‘Sophisticated Customer Criteria’, and to offer redress as appropriate. In January 2013, following a pilot exercise, the Bank agreed amendments to the specifications of the FCA Review. The two agreements between the Bank and the FCA are referred to in this e-bulletin as the “FCA Agreement”.

As part of the FCA Review, the Bank reviewed the IRHP sold to the claimants, and in early 2014 offered basic redress to the claimants together with compensation for consequential losses (provided that they could be proved). However, the claimants did not submit a claim for consequential loss and instead commenced proceedings in the High Court in October 2014.

The claimants alleged misrepresentation relating to the sale of the IHRP and/or that the Bank breached various Conduct of Business Rules giving rise to a claim for breach of statutory duty under s.138D of the Financial Services and Markets Act 2000 (“FSMA”). The claimants subsequently applied for permission to amend their particulars of claim on a number of bases. The instant judgment considered their application to introduce a claim for declaratory relief.

Decision

The court refused to grant permission to amend the particulars of claim to include the claim for declaratory relief, for the reasons explained below.

(1) Scope of the declaration

In oral submissions, the claimants confirmed that the declaration sought might cover “…any breach of any regulatory requirement on the part of the [Bank] including any element which constituted a breach of the [FCA Agreement]”. As to breach of the FCA Agreement, the complaint articulated by the claimants was that the Bank had not conducted the FCA Review properly, in particular by not allowing the claimants enough time to submit their consequential loss claim.

The claimants accepted that they had no direct claim against the Bank for failure to conduct the FCA Review properly following the decision in CGL. The court noted that part of the reasoning given by the Court of Appeal in CGL for rejecting the notion of the existence of any such duty of care owed by banks to customers, was because the appropriate enforcement mechanism in respect of the FCA Review was the FCA. The claimants asserted that the declaration was nonetheless appropriate because the FCA was “strapped for cash” and would not take enforcement action in individual cases unless findings have already been made for the FCA by a judge. However, the court noted that the trial judge would not have to deal with what happened in the FCA Review because there was no claim against the Bank for breach of the FCA Agreement (nor could there be because of the decision in CGL). Accordingly, the declaration sought would involve the court and the parties having to address issues other than those arising under the existing substantive claims. The court stated that this was a wholly unsatisfactory basis on which to proceed.

In the court’s view, the application amounted to an attempt by the claimants to act as “informal enforcers” of the FCA regulatory regime, when this was a matter for the FCA itself. The Bank’s conduct of the FCA Review was subject to the supervision and approval of the independent reviewer, in the form of the Skilled Person. This important role was described in CGL and was found to militate against the imposition of a duty of care in that case. The court held that it also militated against using a declaration as a device to force the FCA into action. The court characterised it as “absurd and inappropriate” to consider regulatory questions that extended beyond the issues in the underlying claim in the hope that the FCA may later provide compensation to unsuccessful litigants.

The court also found that the scope of the claim for a declaration remained unclear and had every prospect of adding significantly to the length of trial. Finally, even if the claim for declaratory relief was allowed, it was not accepted by the court that the claimants had any real prospect of success in establishing any breach of the FCA Agreement by the Bank. The time allowed by the Bank for submitting a consequential loss claim (four months) was not considered an impossibly short period of time, particularly considering the fact that the claimants had been involved in the FCA Review since early 2013 and were assisted by counsel for most of that time. The claimants had not sought any further extension of time. Further, the court noted that even after four years of litigation the consequential losses had still not been articulated.

(2) Discretionary power to grant declaratory relief

The court considered a number of cases on the discretionary power of the court to grant declaratory relief (presumably on the basis that the test for permission to amend under CPR 17 requires the amending party to demonstrate that the claim has a real prospect of success, although this was not expressly stated in the judgment). The court highlighted the following relevant principles from the case law in particular:

  • Cause of action: The court accepted that there is no need for an underlying cause of action in order to grant a declaration (following Guaranty Trust Co of New York v Hannay & Co [1915] 2 KB 536).

  • General principles: The court also considered the principles articulated in Financial Services Authority v Rourke [2001] EWHC 704 (Ch) that in granting a declaration the court should take into account: justice to both claimant and defendant; whether the declaration would serve a useful purpose; and whether there are any other special reasons for or against a declaration. The court considered that the claim for a declaration would extend the scope of the trial and be unjust to the Bank. Whereas refusing to allow the amendment would not be unjust to the claimants, due to the speculative nature of the claim. Further, the lack of clarity and difficulty in determining the scope of the declaration was a special reason against granting it.

  • Non-parties: The court noted that the claimants were not a party to the FCA Agreement between the Bank and the FCA, but this did not itself preclude the granting of a declaration provided that the non-party was directly affected by the issue: Rolls Royce Plc v United the Union [2009] EWCA Civ 387. However, it would still be exceptional for a non-party to obtain declaratory relief where the contracting parties themselves were not in dispute as to their rights/obligations: The Federal Mogul Asbestos Personal Injury Trust v Federal-Mogul Limited & Ors [2014] LR 671. In the current case, there was no dispute between the Bank and the FCA in relation to the FCA Agreement, and in any event, there was no legal right on the question of the time extension. The court held that this case clearly fell into the category where it would still be exceptional to allow a non-party to a contract to seek declaratory relief.

  • Judicial review as an alternative to declaratory relief: The court also highlighted that the claimants could seek judicial review of the FCA’s refusal/failure to take enforcement action against the Bank. The court noted that while there have been other cases in which the obligations of a public body were considered by the court when judicial review was also available, they were highly fact-sensitive. On the present application, the court doubted the claimants’ legitimate interests in seeking a declaration and determined that it was not a legitimate use of the court’s powers to make findings in an attempt to force the FCA to act. The court commented that this would cut across the regulatory regime which had been established for the FCA generally and the FCA Review in particular.