In a judgment handed down on 24 July 2017, the Court of Appeal dismissed the appeals of three customers against three different banks on whether they were owed a duty of care when conducting an interest rate hedging product mis-selling review ordered by the FCA.
In June 2012, the FSA (as it was then) announced the outcome of a review of IRHP sales stating it had found shortcomings in over 90% of sales. To avoid enforcement action by the FSA, most banks entered into agreements with the FSA and gave written undertakings.
The banks agreed to (amongst other things) appoint a ‘skilled person’ under Section 166 of the Financial Services and Markets Act 2000 (FSMA). The skilled person, accountancy firm KPMG LLP, was required to review IRHP sales within its scope, approve all communications from the banks and report weekly to the FSA and, from 1 April 2013, the newly formed Financial Conduct Authority (FCA) on progress (collectively the Review).
In these three linked appeals, the Court of Appeal considered whether the Review conducted under the agreement between the banks and their statutory regulator gave rise to any duty of care by the banks to those businesses to carry out those reviews with reasonable skill and care.
CGL Group Limited (CGL) bought a collar (in July 2006) and a swap (in April 2007) from the Royal Bank of Scotland plc (RBS) and National Westminster Bank plc (NatWest).
In 2013, RBS told CGL it fell within the Review and it qualified for redress for the collar but not for the swap.
In January 2015, CGL issued proceedings against RBS claiming both products had been mis-sold. RBS applied to strike out the claim and for summary judgment saying the claims were out of time. CGL then applied to amend its particulars of claim to include a claim for (amongst other things) a breach of a duty of care by RBS to conduct the Review in accordance with the undertakings given to the FSA.
RBS argued all these allegations were statute-barred under the Limitation Act 1980 because they were over six years old. RBS submitted CGL had been fully aware of the facts by November 2009 (before the publication of the Review). CGL conceded the limitation period had expired, but instead relied on the ‘date of knowledge’ provisions in section 14A of the Limitation Act 1980 and argued it did not acquire the relevant knowledge until June 2012 (when the media published reports of the Review).
On 12 January 2016, His Honour Judge Bird refused CGL's application for permission to amend its particulars but granted RBS's application to strike out CGL’s claim because it was statute-barred.
Between 2004 and 2010, WW Property Investments Limited (WW) borrowed money from NatWest. By the terms, those loans were hedged and the parties entered into 4 IRHPs (the first three were collars and the fourth was a swap).
In 2014, following the Review, both sides entered into a compromise agreement for the sale of the collars. WW received compensation of £424,152.06. The settlement agreement said it was in full and final settlement subject to WW being able to claim consequential losses.
WW sought compensation for consequential loss arguing the collars and swap were wagering contracts at common law and were therefore invalid because NatWest had greater knowledge than WW of the prospects for the hedge. WW also claimed it was an implied term NatWest had not, and would not, manipulate any LIBOR index.
On 1 March 2016, His Honour Judge Roger Kaye QC struck out WW's claims for the collars because the compromise agreement has settled those claims and decided the swap claim had no reasonable prospect of success. He also refused WW's application to amend the particulars to introduce a claim for breach of duty of care.
The Bartels were the directors and shareholders in a company called Gwenllian Court Hotel Ltd (the Company), which owned a hotel acquired in 2006 with a mortgage from Barclays Bank plc (Barclays). Barclays sold the Company a swap for a notional amount of £700,000, amortising over a term of seven years at a fixed rate of 5.5%. The Company went into administration on 9 March 2010. The Bartels said this was because of the sale of the IRHP.
The Bartels complained to the FCA and Barclays in June or July 2012. The Company's swap fell within the Review. In August 2014, Barclays made an offer of redress to the Company but this was set off against sums owed to Barclays (leaving a payment of £0).
On 23 June 2015, the Bartels brought proceedings in their name (rather than the insolvent Company's name) against Barclays for misrepresentation, negligence and breach of statutory duty. They also alleged breach of a duty of care owed to them and the Company under the Review. On 27 October 2015, the Bartels applied to amend the particulars to add the Company as an extra claimant. In response, Barclays made an application for summary judgment.
It was common ground the limitation period of all the claims had expired. Barclays argued the existing and proposed claims had no real prospect of success so the existing claim should be struck out and the proposed claim should not be added because the amendments were pointless.
On 19 May 2016, His Honour Judge Waksman QC struck out all of the Bartels’ claims against Barclays. He decided there was no real prospect of a successful waiver argument and, as a result, the Bartels were refused permission to join the Company to make misrepresentation and breach of statutory duty claims. Although the failure of the waiver point also affected the intended claim in negligence by the Company, His Honour Judge Waksman QC also decided this would not have stopped it from being a viable claim and then being joined if (a) there was a viable extension of limitation under Section 14A of the Limitation Act 1980 at the date of issue and (b) the Company could satisfy the requirements of CPR 19.5.
On 13 January 2017, Lord Justice Christopher Clarke gave the customers permission to appeal on one issue: whether the relevant bank owed the claimant a duty of care in carrying out the Review. The customers argued there was a duty of care to carry out the Review with reasonable care and skill and the relevant banks had failed to comply with this duty. The relevant banks argued there was no such duty.
The "difficulties of determining when a duty of care arises in respect of economic loss are well known" but it had become "customary to consider three tests or approaches which usually lead to the same answer and can be used to cross-check each other".
When considering whether a responsibility has been assumed, this is an objective test.
However, in this case, the assumption of responsibility test was not the approach.
The regulatory context clearly weighed against imposing a duty of care. The "overall regulatory regime is a clear pointer against the imposition of a duty of care, and suggests that to recognise a common law duty of care in the present case would circumvent the intention of Parliament."
Parliament had carefully "decided that some breaches of the banks' regulatory duties were not actionable at all by customers, and others are only actionable by a private person".
The Court of Appeal's decision in Green & Rowley v Royal Bank of Scotland plc  EWCA Civ 1197 (and permission to appeal was refused by the UK Supreme Court) clearly rejected the argument a cause of action at common law should be recognised for individuals who did not have a statutory claim under FSMA. Recognising a duty of care to the customers in these claims would (to use Lord Justice Tomlinson's words in Green) "drive a coach and horses through the intention of Parliament".
The letters sent to customers about the Review followed the relevant banks agreeing to undertake the Reviews which was "in practical terms thrust on them by the FCA rather than truly voluntary, and this is a pointer against the recognition of a duty of care". It was also difficult to say the banks assumed a responsibility when they "expressly indicated that an independent skilled person would be examining the decisions". Because KMPG LLP owed no duty to the customers, it would be "surprising if the bank owed a duty".
The "nature of the Review and the limitations on the remedies available to customers who are not private persons under the regulatory system or (see below whose claims are time-barred are, in my judgment, facts that mean that it is not "fair, just and reasonable" to impose a duty of care on the banks".
The Review could not impose duties which where the original claim was time-barred. Simply because the relevant banks agreed to the Review should not mean time-barred claims are now within time.
The relevant banks' customers had remedies even if no duty of care is imposed, there cannot be a "lacuna" and therefore no need for a duty of care to fill such a lacuna. The limits of the regulatory system do not create a lacuna: they reflect the careful decisions of Parliament.
The customers' complaints were not about the provision of banking services but how the banks dealt with complaints about their services. If a duty of care was imposed, it would have far-reaching consequences which would not be "fair, just and reasonable" to impose in the circumstances.
Permission to appeal has been refused by the Court of Appeal although the customers are able to apply to the UK Supreme Court within 28 days.
The Court of Appeal's decision is both well-reasoned and commercially sensible. Given Lord Justice Beaton's former career as a professor of law, it is unsurprising the judgment carefully analyses all of the relevant legislative provisions and combines the decision with practical common sense. The fact a bank enters into a scheme or review with its regulator surely cannot give customers rights which they would otherwise not have. Customers within the scope of such a scheme have a choice: to agree to the scheme or take other action. And a scheme can have many practical benefits for customers including avoiding needing to incur the cost of litigation and (like the Review allowed) meaning time-barred claims are within the review.
It is also welcome the Court of Appeal re-affirmed its earlier decision in Green. Both this decision, and the Court's earlier decision in Green, provide welcome (and binding) clarifications of the law. Given the UK Supreme Court refused permission to appeal in Green, it seems likely a similar conclusion will be reached if the customers in this litigation seek permission to appeal from the UK Supreme Court.
The Court of Appeal's decision is also consistent with the High Court's decision in R (Holmcroft Properties Limited) v KPMG LLP  EWHC 323 (Admin), where the Court decided a skilled person's decision in the context of such a review could not be challenged by an application for judicial review, and the High Court's decision in R (Mazarona Properties Limited) v Financial Ombudsman Service  EWHC 1135 (Admin), where the bank's review of the redress offered for the alleged mis-selling of a swap did not fall within the Ombudsman's compulsory jurisdiction because dispute resolution was not a regulated activity.