UK: High Court Dismisses Application For Judicial Review Of KPMG's Role In Redress Scheme

Last Updated: 25 April 2016
Article by Jane Howard

The High Court has dismissed an application for judicial review of the role KPMG played in a scheme to provide redress to customers who had been mis-sold financial products. In R (on the application of Holmcroft Properties Ltd) v KPMG LLP the court accepted that KPMG had been assisting the financial services regulator in its performance of its regulatory functions, however KPMG's duties did not have sufficient public law flavour to be subject to judicial review.

Background

The claimant had been sold an interest rate hedging product (IRHP) by a bank. The IRHP was subsequently found to have been widely mis-sold.

In agreement with the Financial Services Authority (FSA) (the FSA at that time, now the Financial Conduct Authority (FCA)), the bank set up a scheme to provide redress to customers who had wrongly been sold the IRHP. KPMG was appointed by the bank to review offers of compensation that would be made to customers under the scheme.

The terms of KPMG's retainer included an express provision that KPMG acted only for the bank and owed no duties to the bank's customers. The bank also agreed not to make any offer of compensation to a customer without first securing KPMG's agreement that the offer was appropriate, fair and reasonable.

The FSA served a 'requirement notice' on the bank under the Financial Services and Markets Act 2000 (FSMA). The notice identified KPMG as the 'independent reviewer' - who could be called to provide reports on the redress scheme to the FSA.

The claimant was made an offer of compensation under the IRHP redress scheme, which had been approved by KPMG. The claimant asserted that the offer made by the bank was inadequate as it did not include compensation for consequential losses. The claimant argued the bank had not acted fairly - it had failed to provide the information used to reach the conclusion that no consequential loss had been suffered. Furthermore, the defendant had acted in breach of its public law duties in approving the bank's 'unfair' stance.

The claimant applied for judicial review of KPMG's approval of the bank's offer of compensation.

KPMG argued that it was not amenable to judicial review as it was not exercising a public function which attracted the principles of public law. In any event the bank was entitled to find that no consequential loss had been suffered and that the process adopted to reach that decision was fair. KPMG did not accept liability for approving the bank's decision and the procedures leading up to it.

The decision

The administrative court held that KPMG's duties did not have sufficient public law flavour to render it amenable to judicial review.

The court recognised there were factors in favour of amenity:

  • KPMG was clearly woven into the regulatory function - it could veto any offer it did not approve and could effectively compel the bank to tailor its offer;
  • The bank conferred the veto power on KPMG because it was required to do so by the FSA;
  • KPMG's reporting requirements were imposed by statute;
  • KPMG was undertaking its duties both for the bank and for the FSA - so as to assist the FSA in the effective performance of its regulatory function.

However, the public element was not sufficiently strong for the following reasons:

  • The FSA had chosen to adopt an essentially voluntary scheme of redress - although it could use more draconian statutory powers if the need arose;
  • KPMG's powers were conferred by contract and it had no relationship with the customers at all. Furthermore KPMG were not appointed by the FSA - the FSA just approved their appointment by the bank;
  • The fact that private arrangements are used to secure public law objectives does not bring those arrangements into the public domain sufficiently to attract public law principles;
  • The FSA had no regulatory obligation to carry out the role undertaken by KPMG - in the absence of a willing skilled advisor;
  • The FSA was not disqualified by the arrangements from talking a more active role in particular cases.

There was, therefore, no direct public law element in KPMG's role. KPMG's approval of the claimant's offer from the bank was not open to judicial review.

The court also stated that even if KPMG were under a public law duty (as alleged by the claimant), on the facts of the case there was no unfairness by the bank in the procedure adopted and there could, therefore, be no material breach by KPMG of any public law duty to secure fair process.

Comment

The claimant has applied to the Court of Appeal for permission to appeal this decision. We will update you once the permission application has been dealt with - in the meantime the decision in this case is welcome news for banks and the 'skilled advisors' who review the decisions they make as part of a redress scheme.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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