Climate-related disclosures: the new frontier?

Herbert Smith Freehills LLP have published an article in Butterworths Journal of International Banking and Financial Law on the Financial Conduct Authority (FCA)’s proposals for regulating climate-related disclosures and the litigation risks which may arise for issuers from such proposals.

Climate change has been part of the political and regulatory discourse for years. However, it is an issue which is gaining increasing prominence on the global stage. Over a thousand companies now support the Task Force on Climate-related Financial Disclosures (TCFD)’s recommendations, while shareholder activism in the climate arena is stretching beyond Greenpeace’s proposed resolutions at energy companies’ AGMs. Against this backdrop, both the EU and the UK have advocated for adapting their financial systems to address climate risks. Whilst the European Central Bank and Bank of England are addressing the risks from climate change in their financial systems, attention has also turned to how companies themselves can be affected by climate change, both in terms of risk assessment and management, and in terms of investor and market-facing disclosures. The current legal framework regarding issuer disclosure already provides some requirements for issuers to disclose climate-related risks in certain circumstances. However, the existing disclosure requirements fall short when it comes to consistent and meaningful disclosures. There are therefore systemic and policy drivers to increase transparency, reporting and potential regulation in this space.

The FCA has noted that voluntary adoption of the TCFD’s recommendations has been increasing. However, based on the feedback that the FCA received in response to a 2018 Discussion Paper, the FCA considers that there is evidence to support the case for it to intervene to accelerate such progress.

In our article, we examine the existing disclosure requirements for issuers, the FCA’s new proposals for regulating climate-related disclosures, the FCA’s reasons behind the proposals, how issuers will be impacted by the proposed regulatory change, the litigation risks which may arise for issuers and how issuers can mitigate against such litigation risks.

This article can be found here: Climate-related disclosures: the new frontier? This article first appeared in the October 2020 edition of JIBFL.

Simon Clarke
Simon Clarke
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Nihar Lovell
Nihar Lovell
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Sousan Gorji
Sousan Gorji
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Judgment handed down in FCA’s COVID-19 business interruption insurance test case

The High Court has today handed down judgment in the COVID-19 Business Interruption insurance test case of The Financial Conduct Authority v Arch and Others. Herbert Smith Freehills represented the FCA (who was advancing the claim for policyholders) in the case, which considered 21 lead sample wordings from eight insurers. Following expedited proceedings, the judgment brings highly-anticipated guidance on the proper operation of cover under certain non-damage business interruption insurance extensions.

While different conclusions were reached in respect of each wording, the court found in favour of the FCA on the majority of the key issues, in particular in respect of coverage triggers under most disease and ‘hybrid’ clauses, certain denial of access/public authority clauses, as well as causation and ‘trends’ clauses. The judgment should therefore bring welcome news for a significant number of the thousands of policyholders impacted by COVID-related business interruption losses.

For more information see this post on our Insurance Notes blog.

Privilege in the context of regulatory investigations: latest guidance from the High Court

Another recent High Court decision has considered the question of privilege in a regulatory context: A v B & Anor [2020] EWHC 1491 (Ch).

As with other recent decisions of this kind, the issue arose in the context of an auditor required to produce documents to its regulator, the Financial Reporting Council (“FRC”). The decision is likely to be of broader interest to financial services institutions, because it may indicate the approach the court is willing to take more generally in cases involving a regulator using its powers of document compulsion, such as the FCA.

In the present case, the FRC sought disclosure from the auditor of documents belonging to the auditor’s client, and over which the client claimed privilege. However, there was a dispute between the auditor and its client as to whether the documents were – in fact – privileged. Importantly, the court held that the auditor must form its own view on whether documents are privileged and can therefore be withheld on that ground, regardless of whether the privilege is that of the auditor or its underlying client. It considered that the duty to disclose was on the auditor and disclosure could only be refused on the grounds that a document was actually privileged. Mere assertion of privilege by the client was insufficient.

In the context of the FCA’s powers to compel a regulated person to disclose documents, the question would be whether the client’s documents are “protected items” under s.413 of the Financial Services and Markets Act 2000. Following the decision in Sports Direct International plc v The Financial Reporting Council [2020] EWCA Civ 177 (see our post here), there could be no argument that disclosure of the documents (if indeed subject to privilege) would not amount to infringement of the client’s privilege, or that the client’s privilege has been lost by providing those documents (on a limited waiver basis) to the regulated person.

However, the same question may arise as to which party is required to determine whether privilege attaches to the documents in question. Subject to any appeal, the decision suggests that the regulated person cannot refuse to produce documents on the grounds that a claim to privilege has been asserted or could be asserted by a client (or other third party to whom duties of confidentiality are owed); the regulated person must take its own view on the privilege claim.

For a more detailed analysis of the decision, please read our litigation blog post.

The transition from LIBOR: FCA conduct risk warning and next steps

Over the past couple of weeks, the FCA has released two important communications in the context of the discontinuation of LIBOR, which is expected to cease after end-2021.

On 19 November 2019, the FCA published a paper setting out a series of questions and answers for firms about conduct risk during LIBOR transition. Then on 21 November 2019, a speech was made by Edwin Schooling Latter, Director of Markets and Wholesale Policy at the FCA, setting out the next steps in transition from LIBOR from the FCA’s perspective. We consider below what these communications tell the market about the current approach being adopted by the FCA to LIBOR transition, together with the key takeaways in relation to regulatory risks and next steps.

Conduct risks Q&A publication

For context, the background to the conduct risks Q&A communication from the FCA is:

  • The Dear CEO letters published by the FCA in September 2018, which asked for details of the preparations and actions being taken by major banks and insurers in the UK to manage transition from LIBOR to alternative interest rate benchmarks (SONIA in the UK).
  • A joint statement published by the FCA and PRA setting out their key observations from the responses of those firms to the Dear CEO letters, in particular identifying a number of critical elements which were present in “stronger responses”.

We considered the thematic feedback and guidance provided by the joint statement in a previous banking litigation blog post. One of the key themes of the joint statement was the real divergence across the market in terms of preparedness for LIBOR discontinuation.

While the joint statement previously identified and emphasised good practice for LIBOR transition, the FCA appears to have changed tactics and approach to engage market participants in its latest missive. The conduct risks Q&A communication is framed as the publication of initial answers to some of the most commonly raised conduct questions, but it is clearly designed to highlight the regulatory risks of failing to prepare properly for LIBOR transition, and is likely aimed primarily at those at the weaker end of the spectrum in terms of the responses to the Dear CEO letters (although of course applicable to all).

The conduct risk Q&As offer only general guidance to firms, but we highlight below some of the key takeaways emphasised by the FCA.

Governance and accountability

  1. DO identify the Senior Manager responsible for overseeing transition away from LIBOR (for firms subject to the Senior Managers and Certification regime) and detail those responsibilities in the relevant Senior Manager’s Statements of Responsibilities.
  2. DO consider whether any LIBOR-related risks are best addressed within existing conduct risk frameworks or need a separate, dedicated program.
  3. DO keep appropriate records of management meetings or committees that demonstrate the firm has acted with due skill, care and diligence in their overall approach to LIBOR transition and when making decisions impacting customers.
  4. DO consider and address potential impact and risk in an appropriately coordinated way across a firm: how it will impact overall business strategy and front-office client engagement, rather than being a narrow legal and compliance risk.

Replacing LIBOR with alternative rates in existing contracts/products

  1. DON’T use LIBOR discontinuation to move customers with continuing contracts to replacement rates that are expected to be higher than what LIBOR would have been, or otherwise introduce inferior terms.
  2. DO communicate effectively with customers as to how fall-back provisions are expected to operate (e.g. whether clauses operate at, or before cessation, and on what basis) where fall-back provisions are inserted in existing contracts to replace LIBOR with a new reference rate.
  3. DO consider whether any contract term relied on by the firm to amend a LIBOR-related product is fair under the Consumer Rights Act 2015 in respect of consumer contracts.

Offering new products with risk free rates (“RFRs”) or alternative rates

  1. DO offer new products that reference RFRs and other alternative rates that meet customers’ needs, rather than LIBOR-linked products.
  2. If offering LIBOR-linked products which mature after end-2021, DO take care in describing to the customer the risks associated with LIBOR ending and how it will affect them; and be aware that there is a risk that some customers may not fully understand the implications.

Communicating with customers about LIBOR and alternative rates/products

  1. DO ensure that existing customers with legacy contracts are appropriately informed about what will happen in the event of LIBOR ending and its effect on the customer (the Q&A publication includes a number of points of more detailed guidance to ensure customers are appropriately informed, e.g. ensuring relevant client-facing staff have adequate knowledge and competence to understand the implications of LIBOR ending and can respond to client queries appropriate, which may require additional training).
  2. DON’T delay conversations with customers to the point the client is left with insufficient time to understand their options and make informed decisions.

Next steps in LIBOR discontinuation

The speech delivered by Edwin Schooling Latter on 21 November 2019 is the latest in a line of speeches on LIBOR discontinuation from senior directors at the FCA. We highlight below the most important points of interest in this speech, from the perspective of banks and other financial institutions.

Possibility of a legislative fix

While it is fair to say that there has been no softening in the FCA’s message that LIBOR will cease at end-2021, there has been some degree of variance between the various speeches on what assistance (if any) the market can expect in particular in relation to some form of legislative fix.

In a speech by Andrew Bailey, Chief Executive of the FCA, on 15 July 2019, the FCA hinted at the possibility – for “tough” legacy contracts – of legislators redefining LIBOR as RFRs plus fixed spreads. Mr Bailey was clear that this option should not be relied upon to be deliverable, but suggested that there would be a consultation on the possibility of legislation in the second half of 2019. In what will no doubt be a disappointment to many market participants, there was no update or further elaboration of this suggestion in the latest speech by Mr Schooling Latter. While such an option in the UK was not explored, the FCA noted that a legislative fix is being considered in the United States in relation to bond conversations – building in a so-called pre-cessation trigger.

Pre-cessation trigger in the derivatives market

The FCA’s wider discussion of the inclusion of a pre-cessation trigger is noteworthy, in particular its comments and concerns in relation to contractual fall-backs in the global derivatives market (because of the systemic importance of LIBOR in the swaps market). By way of brief background, the International Swaps and Derivatives Association (“ISDA”) has consulted derivatives market participants on a number of aspects of the proposed fall-back provisions in ISDA documentation, including whether or not to include a pre-cessation trigger (see the consultation and the results).

The ISDA pre-cessation trigger consultation was engaged because of concerns from the FCA and the Financial Stability Board Official Sector Steering Group (“OSSG”) that the “end-game” for LIBOR may include a period in which it is still published (post end-2021, when panel banks are no longer compelled to submit rates), but no longer passes the key regulatory test in the European Benchmarks Regulation of being capable of measuring the underlying market or economic reality, i.e. it is not “representative”. In such circumstances, the FCA could make a public statement that LIBOR is no longer representative (likewise, other regulators could make a statement that the relevant covered IBOR is no longer representative). The purpose of the ISDA consultation was to determine whether and how to include a pre-cessation trigger regarding “representativeness”, so that the relevant fall-backs would be triggered following such an announcement. The majority of respondents supported the inclusion of a pre-cessation trigger, but there was some variation of views on how best to implement that trigger, with support for an optional approach (i.e. where market participants could choose whether or not to include the pre-cessation trigger, with the result that some amended legacy derivatives contracts would include such a trigger and some would not).

It is very clear from the recent speech that the FCA is in favour of the pre-cessation trigger in ISDA documentation being integral and not optional, saying that reservations expressed by respondents to the consultation about making the trigger optional were “compelling”. Considering the other side of this debate, the FCA addressed (in some detail) the principal concerns from respondents who expressed reservations about including both triggers as standard (i.e. removing optionality and making the pre-cessation trigger integral). The FCA’s view is in line with that of the OSSG, which wrote to ISDA to encourage them to consult on making the pre-cessation trigger an integral, and not optional, part of the standard language.

Given the view of the regulators, it seems likely that the next word from ISDA on contractual fall-backs will be to consult market participants to make a final decision on whether the pre-cessation trigger should be integral or optional.

Loan market

The FCA remains concerned by the volumes of new LIBOR-linked loans being written which mature after end-2021. While the FCA accepts the challenges inherent in transition for the loan market, it emphasised the following key messages for market participants:

  • The target to stop new lending using LIBOR is Q3 2020 (as set by the sterling RFR Working Group).
  • The loan market should not delay transition of new business away from LIBOR until the production of forward-looking term rates based on SONIA; the market is capable of shifting to overnight rates compounded in arrears (in the same way as the bond and securitisation markets).
  • The FCA accepted that there may be some parts of the loan market where forward-looking term rates are needed (e.g. to calculate fair replacement rates for legacy LIBOR contracts that cannot be amended to work on overnight rates compounded in arrears). Forward-looking SONIA term rates will therefore be the central issue in a forthcoming sterling RFR Working Group publication on term rate use cases.

Rupert Lewis
Rupert Lewis
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Harry Edwards
Harry Edwards
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Nick May
Nick May
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Ceri Morgan
Ceri Morgan
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Jon Ford
Jon Ford
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The Financial Services Duty of Care Bill

On 29 October Lord Sharkey introduced a Private Members’ Bill into the House of Lords, which proposed amending the Financial Services and Markets Act 2000 (“FSMA”) to empower the FCA to introduce a duty of care owed by authorised persons to consumers in carrying out regulated activities under FSMA (the “Bill”).

The Bill proposed that a duty of care be defined as an obligation to exercise reasonable care and skill when providing a product or a service.  Whether or not this statutory duty would provide a private cause of action for customers to pursue claims against financial institutions would depend on how the duty was introduced by the FCA (if the proposed amendments to FSMA were made). This is because the FCA determines which rules, if breached, are actionable by a “private person” under section 138D FSMA.  For example, there is currently no right of action for breach of the FCA’s Principles for Business, whereas breach of certain rules in the Conduct of Business Sourcebook may be actionable under section 138D FSMA. Accordingly, the effect of the proposed Bill on any future civil liability risks for financial institutions would be dependent on the position adopted by the FCA. In this regard, it is noteworthy that most respondents to the FCA’s previous Discussion Paper (18/5) did not support a new statutory duty of care (see blog post for further details).

Our Financial Services and Regulatory colleagues have considered and commented on the proposed Bill in their recent FSR blog post.

Rupert Lewis
Rupert Lewis
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John Corrie
John Corrie
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Ceri Morgan
Ceri Morgan
Professional Support Lawyer
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LIBOR discontinuation – FCA thematic feedback on responses to Dear CEO letter

The FCA and PRA yesterday published a joint statement setting out their key observations from the responses of major banks and insurers in the UK to the Dear CEO letters published in September 2018, which asked for details of the preparations and actions being taken by those firms to manage transition from LIBOR to alternative interest rate benchmarks (SONIA in the UK).

The statement confirms that the FCA and PRA have reviewed responses from those firms and provided feedback directly. In addition, given the market-wide nature of the issue, they have decided to publish a number of market-wide observations which they have made in the course of reviewing the responses to the Dear CEO letters. The FCA and PRA identify a number of critical elements which were present in “stronger responses” to the Dear CEO letters, which are summarised below and provide some helpful guidance for other firms affected by LIBOR discontinuation.

As repeatedly emphasised by the FCA and PRA, given the widespread use of and reliance on LIBOR, there are significant risks associated with transitioning from LIBOR to alternative risk free rates. We considered in some detail the potential litigation risks in our article published in the Journal of International Banking Law and Regulation: LIBOR is being overtaken: Will it be a car crash? (2019) 34 J.I.B.L.R..

The stated purpose of the Dear CEO letter was to seek assurance that firms’ senior managers and relevant governance committee(s) understand the risks and are taking appropriate action now. It is clear from the joint statement that there is real divergence across the market in terms of preparedness for LIBOR discontinuation. This latest communication is a further call to action from the FCA and PRA to ensure firms are properly prepared for the transition.

Good practice identified by the FCA and PRA for LIBOR transition

  1. Identifying reliance on and use of LIBOR beyond a firm’s balance sheet exposure and assessing (for example) whether LIBOR is present in the pricing, valuation, risk management and booking infrastructure firms use.
  2. Quantification of LIBOR exposures using a range of quantitative and qualitative tools and metrics, keeping the metrics up to date.
  3. Nominating a senior executive covered by the Senior Manager Regime as the responsible executive for transition, with clarity on the senior manager’s role in transition work.
  4. Developing a project plan for transition with sufficient granularity of detail, including key milestones and deadlines to ensure delivery by end-2021.
  5. Carrying out a detailed prudential risk assessment (subject to appropriate review and challenge), taking a broad view and considering all risks that could be relevant to a firm’s operations. Aligning identified risks with appropriate mitigating actions.
  6. Identifying a range of conduct risks, including management of potential asymmetries of information and the potential for conflicts of interest, when forming and reviewing transition plans. Again, aligning identified risks with appropriate mitigating actions.
  7. Planning and managing risks on the basis of LIBOR discontinuation at the end of 2021, rather than assuming that it will continue in some form thereafter.
  8. Demonstrating a good understanding of and involvement in with relevant industry initiatives.
  9. Proactively transacting using new risk free rates or taking steps to incorporate robust fallback language.

In a speech given on the same date this feedback was published, Dave Ramsden (Deputy Governor for Markets and Banking at the Bank of England) made clear that regulatory scrutiny in relation to LIBOR transition will continue:

More generally, I only see the level of supervisory engagement on this topic intensifying to make sure firms are ready for end 2021. The response to the Dear CEO letter provides a basis for this engagement to continue.”

Firms (whether recipient of the original Dear CEO letter or not) should therefore reflect carefully on the published feedback. No doubt it will also be of interest to firms considering benchmark transition issues in other jurisdictions, notably in Hong Kong and Australia where the regulators have similarly asked firms to confirm their preparedness.

Jenny Stainsby
Jenny Stainsby
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Harry Edwards
Harry Edwards
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Ceri Morgan
Ceri Morgan
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Alexandra Payne
Alexandra Payne
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Do we need a new duty of care in financial services?

On 17 July 2018, the FCA published a paper on its Approach to Consumers (the Approach), accompanied by a discussion paper DP18/5 (the DP) on the possible introduction of a new duty of care and other alternative approaches (a New Duty).
The Approach sets the FCA’s vision for well-functioning markets that work for consumers, and builds on the November 2017 consultation on its Future Approach to Consumers. The aim is to provide greater transparency on when and how the FCA will act to protect consumers, its policy positions on key issues, and its strategy for ensuring that it advances its consumer protection objective with the greatest impact.
The key question raised by the November 2017 consultation, one of immediate interest to firms and other stakeholders, was whether there was a need to introduce a New Duty.
Some stakeholders suggested that the current regulatory framework was insufficient, was not applied effectively to prevent harm to consumers and did not provide appropriate levels of protection. Some thought the introduction of a New Duty could foster long term cultural change within firms and avoid conflicts of interest. Others by contrast felt that existing FCA rules and common and statute law, complemented by the Senior Managers & Certification Regime collectively represent in practice the same requirements on firms as a duty of care.
The FCA’s objective is therefore to open broader discussion on the merits of a New Duty and understand what outcomes a New Duty may achieve to enhance behaviours in the financial services sector.
To that end, the FCA seeks views on:
  • whether there is a gap in the existing legal and regulatory framework, or the way the FCA regulates, that could be addressed by introducing a New Duty;
  • whether change is desirable and if so, the form it should take;
  • what a New Duty for financial services firms might do to enhance positive behaviour and conduct from firms in the financial services market, and incentivise good consumer outcomes;
  • how the New Duty might increase the FCA’s effectiveness in preventing and tackling harm and achieving good outcomes for consumers;
  • whether breaches of a New Duty or of the FCA’s Principles for Businesses should give rise to a private right of action for damages in court; and
  • whether a New Duty would be more effective in preventing harm (by, for example, enhancing good conduct and culture within firms) and therefore lead to less reliance on redress.
The DP deliberately leaves open for discussion the nature of any duty, i.e. whether it would be more akin to a ‘duty of care’ or to a fiduciary duty, the former being more of a positive obligation than the latter which is, largely, a prohibition (e.g. a firm must not put its own interests above those of the client).

Assessment of the current legal and regulatory framework

The DP reviews the current legal and regulatory framework and notes that it could be said that the current Principles for Businesses (Principles), amplified by detailed rules, address many of the issues cited for introducing the New Duty.

The FCA identifies the following as the most relevant Principles:

  • Principle 2 – a firm must conduct its business with due skill, care and diligence
  • Principle 6 – a firm must pay due regard to the interests of its customers and treat them fairly
  • Principle 7 – a firm must pay due regard to the information needs of its clients, and communicate information to them in a way which is clear, fair and not misleading
  • Principle 8 – a firm must manage conflicts of interest fairly, both between itself and its customers and between a customer and another client, and
  • Principle 9 – a firm must take reasonable care to ensure the suitability of its advice and discretionary decisions for any customer who is entitled to rely upon its judgment.

The FCA also points to the client’s ‘best interests’ rule, whilst highlighting that there is no equivalent rule applicable to accepting of deposits and carrying out contracts of insurance, and obligations on firms to take reasonable care in undertaking certain activities.

These are supplemented by the Consumer Rights Act 2015 (the CRA), which implies a term requiring those providing services to consumers to act with reasonable care and skill, and the FCA’s power to enforce breaches of certain consumer protection laws (including the CRA).

The FCA has also concurrent competition powers to investigate and intervene in respect of markets where competition may not be working well, and to enforce against breaches of the competition law prohibitions.

Finally, the FCA is extending its Senior Managers and Certification Regime (SM&CR) to all FSMA authorised firms: this will impose on most employees of financial services firms five conduct rules, including in particular the requirement to act with due care, skill and diligence, and to pay due regard to the interests of customers and treat them fairly. The FCA believes these additional obligations on individuals could help address some of the key cultural and governance concerns which underlie calls for a New Duty.

Proposals for the New Duty

As well as seeking views on the merits, practicalities and consequences of introducing a New Duty, the FCA will consider a range of possible alternatives to address stakeholders’ concerns:

  1. making a rule introducing a New Duty, through the use of FSMA rule-making powers. This approach would require clarification through the issue of guidance and consideration as to how it would sit within the regime, and in particular its relationship to the Principles.
  2. by the introduction of a statutory duty (through a change in primary legislation in Parliament) and supplemented by FCA rules and guidance. A statutory duty would have greater status than the Principles, going further than the requirements of s1C(2)(e) FSMA¹.
  3. the extension of the client’s best interest rule. This would only apply to regulated activities and may require some amendment to some of the Principles.
  4. enhancements to the Principles through the introduction of detailed new rules or guidance, for example through the guidance expected to be published next year on the identification and treatment of vulnerable customers.

Consumer outcomes and redress

While being clear that the best consumer outcome is to prevent harm from occurring in the first place, the FCA addresses the mechanisms available to a consumer when seeking redress when things go wrong.

It is in that regard, the FCA raises what will no doubt be a controversial question as to whether a breach of a New Duty or of the Principles should give rise to private right of damages. The latter reopening a debate had in the context of a 1998 consultation that originally introduced the Principles.

Any extension of private rights of action in respect of breach of the Principles would need to be considered in conjunction with the FCA’s recent discussion of a proposed extension of Principle 5 to unregulated activities, which the FCA may revisit in the future. Such an extension of Principle 5, together with the recognition of a range of industry codes relating to unregulated activities, would assume a wholly different complexion if private rights of action were also added to the mix.

Reflection

The call for duty of care in financial services regulation is not a new one and, as well as having been a priority for the Financial Services Consumer Panel for some time, was considered by the Parliamentary Commission on Banking Standards as well as the Law Commission.

It is not clear from the DP that there is in fact an obvious gap in the existing legal and regulatory framework to be filled – that itself being an open question in the DP. That is, rationally, the fundamental starting point – proceeding to discuss the nature or form of a New Duty, including the potential for the Principles to be actionable, is premature before the underlying problem or gap is properly identified. Clearly there continue to be conduct issues in the market that need to be addressed but rushing to introduce new rules or guidance is not necessarily the best answer.

 

¹ In meeting its objective of securing appropriate degree of protection for consumers the FCA is currently required by s1C(2)(e) FSMA to have regard to “the general principle that those providing regulated financial services should be expected to provide consumers with a level of care that is appropriate having regard to the degree of risk involved in relation to the investment or other transaction and the capabilities of the consumers in question”

Jenny Stainsby
Jenny Stainsby
Partner
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Karen Anderson
Karen Anderson
Partner
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Jon Ford
Jon Ford
Senior Associate
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Court of Appeal holds no real prospect of success for claim alleging contractual obligations owed by a bank to its customers in the conduct of FCA review

The Court of Appeal has refused the claimants permission to appeal in the most recent interest rate hedging product (“IRHP“) mis-selling claim to come before the appellate courts: Elite Property Holdings & Anor v Barclays Bank plc [2018] EWCA Civ 1688.

The Court of Appeal considered the High Court’s decision to refuse the claimants permission to make two key (but contentious) amendments to the particulars of claim. Agreeing with the High Court, it held that neither claim had a reasonable prospect of success and refused to grant the claimants permission to appeal. The proposed amendments concerned the following claims:

  1. A claim that the bank owed a contractual obligation to its customers in relation to the conduct of the bank’s past business review into the sale of IRHPs agreed with the FCA (then FSA). The Court of Appeal noted that the bank was obliged to carry out the review pursuant to its obligation to the FCA, and the agreement between the bank and the FCA expressly excluded any rights of third parties under the Contract Rights of Third Parties Act 1999 (“CRTPA“). Further, there was no consideration provided by the customers in relation to any alleged contract.
  2. A claim brought in circumstances where one IRHP was restructured into another IRHP (and a settlement agreement was entered into in relation to the first IRHP). The proposed amended particulars of claim alleged that losses under the first product were “repackaged and continued” or “carried over and continued” under the second. The Court of Appeal found that there was no causative link between the mis-selling of the second IRHP and the losses pleaded.

The decision is a welcome one for institutions, confirming that claimants will face significant legal obstacles if they seek to bring claims of the type outlined above. In particular, the decision is consistent with the prior decisions of the Court of Appeal in CGL Group Limited & Ors v The Royal Bank of Scotland plc[2017] EWCA Civ 1073 and of the High Court in Marsden v Barclays Bank plc[2016] EWHC 1601 (QB) (which considered and rejected the notion of tortious duties owed by financial institutions to customers in carrying out their FCA reviews).

The result of this decision is that the instant proceedings will be brought to an end; save for a final appeal in relation to the High Court’s separate refusal permit an amendment of the particulars of claim to include conspiracy allegations. Permission to appeal in that regard has been allowed by the Court of Appeal, but the appeal itself has not yet been listed.

Background

For a detailed background to this decision, read our banking litigation e-bulletin on the High Court decision.

In summary, Barclays Bank plc (the “Bank“) provided loan facilities to the two appellant companies and the appellants entered into three structured collars with the Bank. Subsequently, the appellants raised concerns about the structured collars. This led to a settlement agreement concerning the structured collars being concluded by all parties in 2010 (the “2010 Agreement“) and the structured collars were terminated, with the break costs being financed by further loans from the Bank. The refinanced loans were hedged by the appellants entering into three interest rate swaps.

In June 2012, in common with several other banks, the Bank agreed with the FCA to undertake a past business review in relation to its sales of IRHPs to small and medium-sized enterprises (the “FCA review“). That undertaking expressly excluded third parties’ ability to rely on the terms of the undertaking.

The outcome of the FCA review was that the two appellant companies were offered redress by the Bank. Following negotiations in September 2014, in November 2014, the appellants agreed to receive basic redress payments in full and final settlement of all claims connected to the IRHPs, but excluding any claims for consequential loss (the “2014 Agreement“).

Following a review of the evidence submitted by the appellants, the Bank rejected their claims for consequential loss. The appellants then issued proceedings to recover the consequential losses in November 2015. The Bank applied to strike out the majority of the appellants’ claims, which the appellants sought to meet by a cross application to amend the particulars of claim.

High Court Decision

For a detailed explanation of the High Court decision, please read our banking litigation e-bulletin. By way of summary, the key parts of that judgment insofar as relevant to the appeal:

  • Advisory claims – structured collars: The High Court struck out all mis-selling claims in relation to the structured collars, which it held were barred by the 2010 Agreement. The appellants did not seek to appeal this finding.
  • Advisory claims – swaps: The High Court also struck out the mis-selling claims in respect of the swaps, on the basis that the loss pleaded was said to be attributable to or caused by breaches of duty owed in respect of the structured collars alone. It refused leave to amend the particulars of claim to include a pleading that the losses incurred under the structured collars were “repackaged” by virtue of the appellants’ entry into the swaps and accordingly continued after the swaps were sold. The appellants described these as “legacy losses“, and argued that they were attributable to the Bank’s alleged breach of duty when selling the swaps.
  • Claims in relation to the FCA review: The High Court struck out the claim that the Bank owed and breached a tortious duty of care to the appellants in carrying out the FCA review, resulting in losses to the appellants. This was on the basis that any such claim was compromised by both the 2010 Agreement (in relation to the structured collars) and the 2014 Agreement (in relation to the structured collars and swaps).

The High Court refused permission to amend the particulars of claim, to include a contractual claim mirroring the tortious claims in relation to the FCA review above – on the basis that the Bank assumed such contractual obligations when the appellants accepted basic redress under the 2014 Agreement.

Grounds of Appeal

The appellants appealed the High Court’s decision on two grounds:

  • Advisory claims – swaps: The appellants appealed the finding that there was no reasonable prospect of success in relation to the swaps claim, asserting that the High Court had wrongly concluded that the appellants’ pleaded case in relation to the “legacy losses” arising from the swaps did not link breach of duty and loss.
  • Claims in relation to the FCA review: The appellants appealed the High Court’s refusal to permit them to amend the particulars of claim to plead that the acceptance of basic redress under the 2014 Agreement gave rise to a contractual relationship in relation to the Bank’s conduct of the FCA review.

The appellants had also initially sought to appeal the finding that there was no reasonable prospect of arguing that the Bank owed the appellants a tortious duty of care in relation to the conduct of the FCA review akin to the contractual duty. However, before the permission hearing, following CGL Group Ltd v Royal Bank of Scotland Plc[2017] EWCA Civ 1073, the appellants abandoned that ground of appeal.

Court of Appeal Decision

The Court of Appeal refused permission to appeal on both grounds.

(1) Advisory claims – swaps

The Court of Appeal assessed the original particulars of claim and was satisfied that the High Court was correct when it concluded that the losses claimed were only pleaded as having been caused by the appellants’ entry into the structured collars rather than the subsequent swaps.

The Court considered that the proposed amendments did not improve the appellants’ position. The proposed new paragraph in the particulars of claim suggested that the losses caused by the structured collars were “repackaged and continued” or “carried over…and continued” following the appellants’ entry into the swaps. The Court of Appeal was satisfied that while the losses may have occurred after the appellants’ entry into the swaps, “the cause of the relevant loss was the entering of the mis-sold structured collars“.

Accordingly, the Court of Appeal refused permission to appeal on this ground, finding that the High Court was right to refuse permission to amend the particulars of claim in relation to the swaps mis-selling claim. Given that the High Court struck out the swaps mis-selling claim as it was originally pleaded, the result is that these claims cannot now be pursued by the appellants.

(2) Claims in relation to the FCA review

The Court of Appeal held that the appellants’ claim that the Bank came under a contractual obligation to them in relation to the conduct of the FCA review (when they accepted basic redress under the 2014 Agreement) was unsustainable. Having heard argument from the Bank in Suremime Limited v Barclays Bank [2015] EWHC 2277 (QB), as well as Marshall v Barclays Bank [2015] EWHC 2000 (QB) and Marsden, the Court of Appeal concluded that there was “…plainly no such contract in June 2014 for all the reasons given by judges who decided the earlier cases” which the Court of Appeal described as having been “correctly decided on this issue“.

In support of this finding, the Court of Appeal relied on the following key factors in particular:

  • The Bank was obliged to carry out the review pursuant to its obligation to the FCA under the FCA undertaking that it had previously given.
  • The agreement between the Bank and the FCA expressly excluded any rights of third parties.
  • There was no consideration provided by the appellants in relation to any alleged contract at that time (as had been noted in Suremime).
  • The position had not changed in September or November 2014 (i.e. when the appellants entered into the 2014 Agreement); the suggestion that the Bank came under an additional contractual obligation to the appellants, mid-way through the FCA review, was nonsensical.
  • The only relevant contract was the 2014 Agreement, which was, in substance, a compromise agreement in relation to which the Bank had not assumed any additional obligations (such as obligations to carry out the FCA review with reasonable skill and care) in relation to the conduct of the FCA review.

Moreover, the Court of Appeal expressly endorsed the reasoning of Beatson LJ in CGL. This focused on the nature of the FCA review and the limitations of the remedies available to non-private persons under the relevant regulatory regime whose claims are time barred. Although CGL considered the imposition of a tortious duty of care, the Court of Appeal in the instant case commented that Beatson LJ’s reasoning was “…inconsistent with there being any basis for a claim in contract either, absent some clear expression of intention by the bank to assume a contractual obligation“. The fact that the imposition of a contractual obligation would cut across the regulatory regime seemed to the Court of Appeal to “strongly militate against there being a contract of the kind alleged by the appellants“; the only contract the Bank had entered into in relation to the FCA review was with the FCA.

Accordingly, the Court of Appeal refused permission to appeal on this ground also. The effect is that the appellants will not be able to pursue any claims relating to the Bank’s conduct of the FCA review, given that the High Court struck out the claim based on the existence of a tortious duty and refused permission to amend the particulars of claim to plead the existence of a contractual obligation.

Conclusion

This is another welcome decision for financial institutions given the clarity that the Court of Appeal has now given on two occasions in relation to claims relating to alleged contractual obligations or duties of care owed by financial institutions in relation to their conduct of FCA past business reviews.

John Corrie
John Corrie
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Ceri Morgan
Ceri Morgan
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Nic Patmore
Nic Patmore
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High Court rejects application to include conspiracy allegations in IRHP misselling claim and gives guidance on meaning of “exceptional circumstances” in past business review undertakings given to the FCA

The latest in the line of recent judgments concerning interest rate hedging product (“IRHP“) misselling allegations concerns an application by the claimants to introduce economic tort claims for wrongful interference, conspiracy to injure and/or conspiracy to use unlawful means: Elite Property Holdings Ltd & Anor v Barclays Bank plc [2017] EWHC 2030 (QB). The High Court comprehensively rejected the claimants’ application. It follows an earlier decision in the same proceedings, in which the Court struck out the majority of the claimants’ claims relating to the sale of their IRHPs and ordered the claimants to particularise properly their claims for conspiracy (see our e-bulletin on that decision here). The combined effect of these judgments is likely to bring an end to the proceedings in question, subject to the claimants’ pending applications for permission to appeal both decisions.

In the instant case, the Court rejected the claimants’ application for permission to amend the particulars of claim on the basis that the claims sought to be introduced had no real prospect of success. Underpinning the proposed amendments was an allegation that the defendant bank (the “Bank“) had unlawfully foreclosed the claimants’ loan facility in breach of an undertaking given by the Bank to the FCA. The undertaking was given in the context of the Bank’s past business review (“PBR“) relating to the sale of IRHPs, and provided that the Bank was not entitled to foreclose or adversely vary customers’ facilities unless there were “exceptional circumstances“. The Court found that there could be “no serious argument” that the circumstances were not “exceptional“.

The Court also noted that, had it been necessary to determine the point, it would have found the claims were compromised by a settlement agreement entered into between the parties in 2014. This approach to settlement agreements in IRHP misselling cases is in line with other recent authorities (see e-bulletin here).

While the new Elite decision turned on its particular facts, it does serve as a warning as to the dangers of insufficient pleadings in cases involving allegations of conspiracy or similar, and adds to the growing body of case law providing certainty for banks in IRHP misselling cases. In particular, the Court provided some guidance by way of a postscript as to the way in which claims in conspiracy ought to be pleaded, which is of general application. The Court’s discussion of the meaning of “exceptional circumstances” in the PBR undertaking is also likely to be of wider interest to banking institutions, particularly those who have given similar undertakings as part of their PBRs.

Background

The Bank provided loan facilities to the two claimant companies (“Elite” and “Decolace“, respectively), which were secured over properties including three elderly care homes owned by Elite. In connection with those facilities, between 2006 and 2008, the claimants entered into three structured collars with the Bank. The claimants subsequently alleged that those collars had been mis-sold; the Bank then agreed to restructure their loans. As part of that restructuring, the parties agreed to enter into a settlement agreement in relation to the collars.

In 2012, in common with several other banks, the Bank agreed with the FSA (now the FCA) to undertake its PBR in relation to its sales of IRHPs to small and medium-sized enterprises, which included the provision of appropriate redress. As part of that agreement with the FCA, the Bank agreed that it would not foreclose on or adversely vary existing lending facilities (except with prior consent) until a final determination had been reached in relation to the redress owed to the customer, “except in exceptional circumstances“.

The Bank also agreed with the FCA to appoint KPMG to the role of the “skilled person” to the PBR, to act as an independent reviewer and oversee the PBR. Part of this role involved KPMG overseeing the Bank’s approach to its undertaking to the FCA by confirming whether “exceptional circumstances” existed.

During 2012 and 2013 various events took place, causing the Bank to allege that Elite had breached its loan facility agreements, triggering its right to foreclose under the “exceptional circumstances” carve-out of the undertaking. These events (listed at paragraphs 20-28 of the judgment) included the following:

  • Elite twice defaulted on its cashflow to debt requirements under its loan facilities (for which the Bank sent reservation of rights letters).
  • HMRC made a demand on a company associated with Elite, which operated the care home business and provided security for the underlying loan, Health and Homes Limited (“H&H“), for corporation tax of approximately £700,000. HMRC subsequently issued a winding up petition against H&H as payment was not made.
  • Without the Bank’s consent (which was required), H&H and Elite agreed to transfer the care home business to another company in the same group.
  • H&H submitted a proposal for a company voluntary arrangement, stating that it was unable to pay its debts as they fell due. This was rejected by HMRC and H&H was placed into creditors’ voluntary liquidation.
  • The Bank became aware that both claimants had been struck off the BVI Companies Register (although it was later confirmed that they had each been restored).

The Bank sought confirmation from KPMG that these constituted “exceptional circumstances” under the undertaking to the FCA. It indicated that it wished to appoint BDO as administrators and LPA receivers over both claimants. KPMG granted the Bank’s request.

In September 2013, the Bank made a formal demand on the claimants. The demand against Decolace was withdrawn following confirmation that it had been restored to the BVI register (as the striking-off had been the central basis for that demand). Subsequently, the Bank commenced enforcement action by appointing administrators over H&H, which was followed by the appointment of LPA receivers over the assets.

At this time, Elite and Decolace were also taking part in the Bank’s PBR. This led to the Bank making offers of “basic redress” to the claimants (which excluded consequential losses). The claimants separately submitted claims for consequential losses, which the Bank ultimately rejected. The claimants then issued proceedings to recover those alleged losses.

The claimants’ particulars of claim alleged: (a) mis-selling of the relevant swaps; (b) breach of duty on the Bank’s part in conducting the PBR; and (unusually for these claims) (c) conspiracy. In a judgment dated 16 December 2016, the Court struck out the claimants’ claims relating to parts (a) and (b), and ordered the claimants to particularise fully and properly their conspiracy claims. It is that order which gave rise to the claimants’ application to amend the particulars.

Application to amend particulars of claim

The claimants sought to add claims relating to wrongful interference by unlawful means, conspiracy to injure and/or conspiracy to use unlawful means. In particular, they sought to allege that:

  • The Bank combined with BDO to engineer “a position whereby the Bank could foreclose on or adversely vary the Claimants’ existing facilities“.
  • The Bank’s foreclosure and adverse variance to the facilities (carried out by BDO as LPA receivers) amounted to unlawful means and an unlawful interference in the claimants’ business.
  • In the alternative, that the Bank’s combination with BDO amounted to a conspiracy to injure the claimants.

The proposed amendments set out lengthy factual particulars relating to the allegations made, which appear at paragraph 45 of the judgment. The “unlawful means” alleged for both the tort of wrongful interference and conspiracy to use unlawful means, was that the Bank was in breach of its undertaking to the FCA not to enforce, because the circumstances were not “exceptional“.

Decision

To determine whether to allow the claimants’ proposed amendments, the Court applied the test of whether the proposed claims had a real prospect of success. To meet this test, claims must carry “some degree of conviction“, albeit that the Court ought not to “embark on a mini trial to see whether there is a real prospect“. The Court rejected each of the amendments sought, reasoning as follows:

Wrongful interference by unlawful means

  • In relation to the tort of wrongful interference by unlawful means, the Court found that there could be “no serious argument” that the circumstances were not “exceptional“. The Court found that it was conclusive that KPMG as the skilled person had approved the Bank’s designation of the circumstances as “exceptional circumstances“, noting that it was not open to a customer to “second-guess” what constituted “exceptional circumstances“. Because there was no unlawfulness to begin with, this would dispose of both the wrongful interference by unlawful means claim, and conspiracy to use unlawful means claim.
  • The Court also held that the claim should fail on the basis of the reasoning in OBG v Allan [2007] UKHL 21:”Unlawful means therefore consists of acts intended to cause loss to the claimant by interfering with the freedom of a third party in a way which is unlawful as against that third party and which is intended to cause loss to the claimant. It does not… include acts which may be unlawful against a third party but which do not affect his freedom to deal with the claimant.” (emphasis added). The Court found that the unlawful acts (if any) against the FCA (the third party) in the present case, did not interfere with the FCA’s (the third party’s) freedom to deal with the claimants. The Court concluded: “This is all far removed from paradigm cases of wrongful interference where, for example, a trade competitor of the victim of the tort acts unlawfully as against the third party so as to stop the third party from dealing in some way with the victim in order to diminish the victim’s business, and so on.”

Conspiracy to injure

  • In relation to the tort of conspiracy to injure, the Court noted that there must be a “predominant intention on the part of the conspirators to injure the claimant“. The Court concluded that there was no such intention in the present case and, in the absence of a motive, found that the conspiracy to injure plea was “hopeless” and “should never have been made“.

Conspiracy to use unlawful means

  • Given that the only unlawfulness relied upon was breach of the undertaking (and the Court ruled that there was no real prospect of establishing such a breach), this plea also failed.

While not required to determine the point, the Court went on to consider whether the claims sought to be introduced by the claimants were barred by virtue of a settlement agreement entered into in 2014. The Court found that each of the wrongful interference and conspiracy to use unlawful means claims were caught by that settlement agreement, and that there was a “strong case” to say that the conspiracy to injure claim also fell within the scope of the settlement agreement.

By way of a postscript, the Court made the following general observations in relation to the pleading of cases in conspiracy or similar. Specifically:

  • While noting that claims in conspiracy or similar are “notoriously difficult to plead“, the Court found that the particulars ought to have been pleaded in a more “structured way“, with a separate section for each plea giving “proper particulars of each constituent element of the tort“.
  • The Court noted that it was “vital“, particularly in cases involving conspiracy to injure, to plead both the nature of the injury which it is said was intended, and the motive for that alleged injury. The Court observed that, unless both elements are pleaded, there is a risk that a court will be “puzzled by the plea as it was here“.

Conclusion

While this case turned on its own facts, it provides both helpful general guidance on the appropriate approach to pleading claims based in conspiracy, and more specific guidance on the meaning of “exceptional circumstances” in undertakings given to the FCA not to foreclose on customers in the context of IRHP mis-selling. The case also reminds claimants of the appropriateness of making allegations of conspiracy.

John Corrie
John Corrie
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Hannah Bain
Hannah Bain
Associate
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Ceri Morgan
Ceri Morgan
Professional Support Lawyer
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Court of Appeal confirms no tortious duty of care owed to customers in connection with the FCA past business review

Over the past two years, the courts have grappled with the novel claimant argument that financial institutions owe duties of care in tort directly to their customers in connection with their conduct of the past business review of interest rate hedging product sales announced by the FCA (then FSA) in 2012 (the “Review“). There have been a number of contradictory High Court decisions – see our previous e-bulletins here and here.

However, in good news for financial institutions, the Court of Appeal has now clarified – in three conjoined appeals – that such claimants have little prospect of bringing such claims against the banks conducting that Review: CGL Group Limited & Ors v Royal Bank of Scotland plc & Ors [2017] EWCA Civ 1073.

The Court of Appeal found it was not even arguable that the defendant banks in the three linked cases owed tortious duties to the claimants to conduct the Review with reasonable skill and care. This was primarily because such a duty would undermine the statutory and regulatory regime, which grants customers rights to bring claims against financial institutions only in certain defined circumstances. Such claims should now be amenable to summary judgment.

In addition, the separate High Court decision in Cameron Developments (UK) Limited v National Westminster Bank plc & Ors [2017] EWHC 1884 (QB) suggests that customers who accept “basic redress” under the Review will be treated as having settled all claims relating to the way in which the bank conducted the Review, where the settlement wording is sufficiently broad. This provides another reason why such customers should be prevented from bringing claims in connection with the Review.

The combined effect of these two cases should spell an end for any similar claims regarding the Review.

CGL Group: background

In Suremime Limited v Barclays Bank plc [2015] EWHC 2277 (QB), the High Court found that it was arguable (for the purposes of a summary judgment application) that the defendant bank owed a tortious duty to the claimant to conduct the Review with reasonable skill and care. However, in the subsequent first instance decision in CGL Group Limited v Royal Bank of Scotland [2016] EWHC 281 (QB), the High Court expressly declined to follow Suremime and instead found such duties were unarguable. CGL Group appealed this decision, and the appeal was heard together with the appeals of two other cases in which claims based on such tortious duties had been struck out.

The principal issue before the Court of Appeal was whether it was arguable that the defendant banks owed the alleged tortious duty of care in connection with the Review.

CGL Group: Court of Appeal judgment

In a detailed judgment, the Court of Appeal found that the alleged tortious duty of care was not arguable. The Court’s decision was based on the following factors in particular:

  • The alleged tortious duty would undermine the regulatory and statutory regime, which provides for recourse only in certain circumstances (under section 138D Financial Services and Markets Act 2000 or through the Financial Ombudsman Service). In particular, the Court held that the framework for consumer redress schemes provides a clear pointer against the imposition of a duty of care, as it was the deliberate intention of Parliament that only the FCA was to have the power to require the banks to comply with a consumer redress scheme and that no individual could enforce such schemes or sue for breach. The alleged tortious duty would undermine Parliament’s intention to confer a private law cause of action only on a limited class in defined circumstances. The Court did not consider that it was relevant that the Review was undertaken pursuant to contractual agreements between the FCA and the banks (and was not established under any of the FCA’s official stautory powers, such as its consumer redress scheme powers, such as its consumer redress scheme provisions). The Court found that the Review was nevertheless clearly part of the regulatory scheme, as the FCA and the banks agreed the Review as an alternative to enforcement proceedings. If a bank failed to comply with the terms of the Review agreement, the Court considered that it would be the responsibility of the FCA to bring enforcement proceedings.
  • The Court rejected the claimants’ submissions that the correspondence in which the banks invited customers to participate in the Review evidenced a voluntary assumption of responsibility by the banks. In particular, the banks were obliged to carry out the Review under their agreements with the FCA, so it could not be said that the banks were acting “voluntarily“.
  • In addition, the appointment of an independent reviewer as a “skilled person” who would be examining the decisions of the Review made it “difficult to argue” that the banks had assumed responsibility to customers. As the independent reviewer could not have owed a duty of care to customers, the Court said it would be “surprising” if the bank owed a duty.
  • Imposing the alleged tortious duty would, in effect, allow customers to circumvent the limitation period for the original mis-selling of the product, as the limitation period would re-start at the date of the Review. It would thus allow time-barred claims via a back door.
  • The existence of a conflict of interest is another factor weighing against the imposition of the duty. The conflict of interest between the banks and their customers arises because the banks were being asked to assess whether they had acted in breach of their regulatory duties and to pay out redress if so.
  • The customers could not demonstrate reliance on the banks conducting the Review with reasonable skill and care, as it remained open to them to pursue a claim in mis-selling.

The Court considered the above factors under the umbrella of the three classic tests used to determine the existence of a tortious duty of care in respect of economic loss. As has become customary, the Court considered the tests together in the round and used them as cross-checks on each other (see Playboy Club London Ltd v Banca Nazionale del Lavoro SpA [2016] EWCA Civ. 457 (e-bulletin here)). These tests are: (1) “assumption of responsibility“; (2) the three-fold test in Caparo Industries plc v Dickman [1990] 2 AC 605 (forseeability, proximity and whether it is “fair, just and reasonable” to impose a duty); and (3) the incremental test (whether the addition to existing categories of duty would be incremental rather than indefinable).

Cameron Developments: background

The claimant entered into an interest rate swap with the defendant bank in March 2010 (the “Swap“). The sale of the Swap was considered as part of the bank’s Review. In September 2014, the bank’s Review offered the claimant “basic redress“, which offered to cancel the Swap (at no cost) and replace it with an interest rate cap and also to refund the difference between the net payments made under the Swap and the payments that the claimant would have made if it had entered into the cap at the outset.

The claimant accepted the basic redress in October 2014. The acceptance form included a full and final settlement of claims connected with the swap, save that claims for “consequential losses” were carved out and not settled (the “Settlement“).

In April 2015, the Review rejected the claimant’s consequential loss claims. The claimant subsequently issued a claim for these losses, alleging:

1. Mis-selling claims in respect of the original sale in March 2010 (the “Mis-selling Claims“).

2. Breach of a tortious duty of care to conduct the Review with reasonable skill and care (the “Tort Claims“).

3. Breach of an alleged separate contract, entered into at the time of the Settlement, to assess the consequential loss claims within the Review (the “Contract Claims“).

The bank sought summary judgment over the Tort Claims and the Contract Claims on the basis that they had been settled by the terms of the Settlement. The bank accepted that the claimant was entitled to bring the Mis-selling Claims in order to claim consequential losses allegedly incurred as a result of entering the Swap.

Cameron Developments: judgment

The Court found that the Settlement settled both the Tort Claims and Contract Claims and, accordingly, granted summary judgment. Some key factors in the decision were:

  • The wording in the Settlement covered claims “arising under or in any way connected with the sale” of the Swap. This was sufficiently broad to cover claims in relation to the Review, which the Court found are “connected with” the sale of the Swap, in the ordinary sense of the words.
  • Whilst the parties had not considered the possibility of the Tort Claims or Contract Claims at the time of entering the Settlement (and the claimant did not know at that time it was giving up those claims), the settlement wording was sufficiently broad to capture future, unknown claims (covering “past, present or future claims … regardless of whether or not you are aware of them at the date of this letter“).
  • The parties agreed that the carve-out for “consequential losses” in the Settlement would not apply to the Tort Claims or Contract Claims, following the decision on this point in Elite Property Holdings Limited & Anr v Barclays Bank plc [2016] EWHC 3294 (QB) (see our e-bulletin here). The carve-out applied only to claims that the mis-selling caused consequential loss, and did not apply to claims that the alleged breaches of duty by the Review caused consequential loss.

Conclusion

These two judgments will be welcomed by financial institutions. The uncertainty caused by the conflicting first instance decisions in Suremime and CGL Group has now been resolved, and any existing claims against banks alleging duties of care in connection with the Review are now at risk of summary judgment. Claimants who had brought Review claims may still be able to pursue mis-selling claims (if they are not time-barred), although this will of course require them to prove breach of duty at the time of the original sale.

Significantly, the Court of Appeal’s reasoning is likely to apply to other past business reviews and redress exercises conducted by financial institutions with regulatory oversight by the FCA. In that context (and whilst any review would need to be considered by reference to its individual circumstances), financial institutions are likely to be assisted by the finding that the overall regulatory regime for consumer redress schemes provides a clear pointer against the imposition of a duty of care (even where the Review in this case was not undertaken pursuant to any official statutory power). The appointment of an independent reviewer to oversee a review further weighs against the imposition of a duty of care. This suggests that claimants may find it difficult to establish such tortious duties in connection with other consumer redress exercises overseen by the FCA.

John Corrie
John Corrie
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Ben Goodman
Ben Goodman
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Dan Eziefula
Dan Eziefula
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Ceri Morgan
Ceri Morgan
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