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Redressing the balance: Banks owe no contractual duty to customers in respect of regulator-mandated review

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Back in 2012 the FSA (now FCA) launched an investigation into mis-selling of interest rate hedging products. A number of banks agreed with the FCA to conduct a pro-active redress exercise. This required the banks to review their sales to non-sophisticated customers and provide redress where appropriate.

Some customers – unsatisfied with the redress on offer – pursued private actions against banks for mis-selling.

Last year, in CGL Group v RBS, the Court of Appeal held that the banks owed no tortious duty of care to customers in relation to their conduct of these reviews.

This summer, in Elite v Barclays, the Court of Appeal considered whether the customer might still have a claim for breach of contract. While the bank did have a contractual duty to conduct its review, that duty was owed to the FCA alone. Importantly the bank's agreement with the FCA contained an exclusion of any third party rights. Customers therefore could not claim for breach of that agreement.

A contract had been formed between the customer and the bank by the offer and acceptance of a basic redress payment (excluding any consequential losses – as the customer had rejected the Bank's initial offer in this regard). This agreement recorded that the bank would be assessing the customer's consequential losses pursuant to the FCA-mandated review. However, the bank was already obliged to conduct that review in any event under the FCA agreement. The customer’s contract was simply one of settlement. It did not contain any express intention on the part of the bank to assume a duty to the customer regarding the internal review. In any event there was no consideration for any contractual undertaking regarding the review that the bank was already obliged to conduct.

Even if there had been a contractual agreement regarding the review, the customer’s attempts to imply a contractual duty to use reasonable skill and care either by necessity or under the Supply of Goods and Services Act 1982 would have failed anyway. Using reasoning analogous to CGL Group v RBS the court held that a contractual obligation would not make sense and would cut across the regulatory regime.

This decision gives Court of Appeal endorsement to a raft of similar first instance decisions in Suremine Limited v Barclays Bank, Marshall v Barclays Bank and Marsden v Barclays Bank. It provides helpful comfort for banks when agreeing remedial action with the FCA that they ought not to be exposing themselves to private actions from customers in respect of their review, provided third party rights are excluded.