No duty of care owed under mis-selling redress scheme
27 September 2017
Banks which had agreed with the UK Financial Conduct Authority (FCA) to carrying out reviews of how interest rate hedging products (IRHPs) had been sold to certain of their small and medium-sized business customers (SMEs), do not owe a duty of care in tort to those customers in carrying out the reviews. The decision will make it much more difficult to bring tortious claims against regulated entities regarding their conduct of regulatory compensation schemes. The court held that no such duty of care should arise where there is already a comprehensive regulatory scheme in place which defines when breaches of regulatory duties are actionable and by whom: (1) CGL Group Ltd (2) Jacqueline Bartels & Adrian Bartels (3) WW Property Investments Ltd v (1) Royal Bank of Scotland Plc & National Westminster Bank Plc (2) Barclays Bank Plc (3) National Westminster Bank Plc  EWCA Civ 1073.
The appellants had entered into the IRHPs with the respondent banks to hedge variable interest rate risk arising from commercial loans. As a result, the appellants were either unable to benefit from the dramatic fall in interest rates in 2008/2009 or faced significant increases in financing costs under the trades.
Following the FCA finding “serious failings” in the sale of IRHPs to SMEs by a number of banks, in June 2012, the respondent banks (along with seven other banks) agreed with the FCA to carry out a review of sales of IRHPs to “non-sophisticated” customers (the Review) and to provide redress to customers where mis-selling was found to have occurred. The Review was conducted under a review agreement between each bank and the FCA, in which the bank undertook to carry out the Review in accordance with specific terms. Of particular importance in this case was the requirement for the banks’ Review to be scrutinised by a skilled person (appointed under s166 of FSMA) who would have the final say in any redress determinations and monitor other aspects of the Review process.
The appeals in these separate claims were linked on the basis that they all raised the question of whether the banks owed the appellants a duty of care in carrying out the Review.
Three tests for duty of care
Acknowledging the difficulties in determining when a duty of care arises regarding economic loss, the court applied three tests which are often used interchangeably, and as cross-checks on each other:
- (1) whether the defendant assumed responsibility to the claimant;
- (2) the threefold test in Caparo Industries plc v Dickman1 which asks whether (a) loss was a foreseeable consequence of the defendant’s actions or inactions, (b) the relationship of the parties was sufficiently proximate, and (c) it would be fair, just and reasonable to impose a duty of care on the defendant towards the claimant; and
- (3) whether the addition of this duty of care to the existing categories of duty would be incremental.
The appellants’ primary case was that the banks had voluntarily assumed responsibility to their customers to perform the Review carefully; accordingly, they owed their customers a duty of care in doing so.
No duty of care
The court held that cumulatively the following factors militated against a duty of care arising in this case.
- Regulatory context: The context of the Review clearly weighed against the imposition of a duty of care. To recognise a common law duty of care would undermine a regulatory scheme which has carefully identified which class of customers are to have remedies for which kind of breach (classes which the appellants did not form part of). It was Parliament’s intention that only the FCA can require the banks to comply with the schemes; no individual customer could enforce these schemes or sue for breach of their terms.
- Dealings between the parties: The communications received by the appellants from the banks regarding the Review (which formed the core of the appellants’ case on “assumption of duty”) did not suggest a voluntary assumption of responsibility towards the customer. The banks had been obliged to allow the appellants to participate in the Review and its communications were drafted as required by the FCA. The reason why the banks had agreed to conduct the Review was also an important factor: in practical terms, the banks had agreed to do so at the instigation of the FCA following its findings, rather than on a truly voluntary basis.
- Role of the independent reviewer: In their communications to their customers, the banks had emphasised that its Review (and the decisions made as part of it) would be scrutinised by an independent reviewer. It was difficult to argue that the banks had assumed responsibility to the customers, and owed them a duty of care, when it had less control over the conduct of the Review than an independent reviewer which itself could not owe a duty of care to customers.
- Not “fair, just and reasonable”: Imposing a duty of care would enable two of the appellants to circumvent the limitation period for their original mis-selling claims (which they accepted were time barred). Given that the alleged breaches of duty were in substance no more than a restatement of these original claims, and the overall nature of the Review, the court considered that it was not “fair, just and reasonable” to impose a duty of care.
- No “lacuna”: The court did not consider there to be a “lacuna” in the law which required rectification by a common law duty of care. The appellants’ attempts to identify a lacuna amounted to no more than identifying the limits of the regulatory regime enacted by Parliament. The court also considered that it would be wrong to regard the position if the Review was conducted badly but the FCA decided not to bring enforcement proceedings as a lacuna.
- Conflict of interest: The existence of a conflict of interest (the Review required the banks to assess whether they had acted in breach of their regulatory duties and whether to provide redress) pointed away from imposing a duty of care.
In November 2016, the FCA published a final progress update on the Review stating that, following the completion of their sales review, the nine participating banks had sent redress determination letters to 18,200 businesses and paid GBP 2.2 billion in redress to customers. Banks participating in the Review have faced a number of claims in the High Court in connection with their sales of IRHPs, including Property Alliance Group v Royal Bank of Scotland plc and Suremime Ltd v Barclays Bank plc.2
While this decision will be of immediate interest to the banks participating in the Review, it is significant for all regulated institutions. The substance of the appellants’ underlying claims was not about the provision of banking services, but about how the banks dealt with their complaints about banking services. It is possible to imagine a large number of similar customer complaints or redress schemes (including consumer redress schemes carried out under s404 FSMA or restitution schemes under s384). Against this background, the imposition of a duty of care concerning a complaints system could have had far-reaching consequences for all FCA regulated institutions, and potentially institutions regulated by other authorities with powers to institute complaints schemes. In its decision, the Court of Appeal underlined the fact that Parliament has decided where breaches of regulatory duties are actionable (some breaches are not to be actionable at all, and others are only to be actionable by private persons), thus bringing certainty for FCA-regulated institutions as to who may bring claims against them in connection with their regulatory duties and in what circumstances.
Finally, in the Court of Appeal’s judgment, Lord Justice Beatson set out a comprehensive analysis of the general approach of the courts when determining whether a duty of care exists in cases of economic loss. Given that the establishment of a duty of care is an essential element of all such claims in tort, this case will be of interest to both potential claimants and defendants in such cases.
1 Caparo Industries plc v Dickman  2 AC 605.
2 In the latter case, HHJ Havelock-Allen QC had granted the applicant permission to amend its pleadings to introduce a claim that the Bank owed it a duty of care in relation to the Review on the basis that these claims in tort were arguable.
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