UK: Banks Did Not Owe Duty Of Care To 'Mis-Sold' Swap Customers In Relation To Statutory Redress Scheme

Last Updated: 27 July 2017
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Banks did not owe a common law duty to their customers to ensure that compensation for allegedly mis-sold interest rate hedging products (IRHPs) was properly calculated under a redress scheme agreed with the banks' regulator, the Court of Appeal has ruled.

The judgment, in three conjoined appeals, "draws a line" under any common law 'duty of care' claims linked to the High Court's decision in the Suremime v Barclays case in 2015, according to financial litigation expert  Mike Hawthorne of Pinsent Masons, the law firm behind

"The decision of the judge in the Suremime case, to allow the claimant in that case to amend its claim to say that the way it had been treated in Barclays' redress scheme was in breach of a duty of care which Barclays owed to its customers in the conduct of the redress process, set a hare running," he said. "Banks will welcome the line which the Court of Appeal has now drawn under such arguments."

"It would be a waste of time and costs for everyone involved if every decision in a redress scheme could be re-litigated in the courts. The whole idea of regulator-led customer redress is to provide a simpler, cheaper, faster option for customers, so that they are not forced into litigation. It is not supposed to be the warm-up act for litigation if customers don't get exactly what they want," he said.

"More generally, the judgment is also now the most up to date statement we have from the Court of Appeal on the various common law tests which must be applied to determine whether a duty of care has arisen in any given circumstances," he said.

IRHPs provide borrowers with protection against changes in interest rates by locking in net cash outflow to a fixed interest rate. The product is designed so that the swap provider, which is usually the bank that provided the underlying loan, covers the cost of increased payments if the interest rate rises, while customers have to pay the bank if rates fall. Simple products merely fix an upper limit to the interest rate on a loan, while more complex 'structured collars' introduce a degree of interest rate speculation to the transaction. In all cases, customers risk having to make higher payments than anticipated if the market does not perform as expected.

In June 2012 the financial regulator, now the Financial Conduct Authority (FCA), agreed a redress scheme with a number of high street banks in response to "serious failings" it had found in the way that IRHP products were sold to individuals and small businesses. Each of the banks agreed to review any sales of IRHPs to "non-sophisticated" customers on or after 1 December 2001, and to provide appropriate redress where mis-selling had occurred. Sales of 'Category A' products, including structured collars, were automatically reviewed, while customers who may have been mis-sold other IRHPs were sent a letter inviting them to opt into the review.

In each of the three cases before the Court of Appeal, the customer claimed the bank had voluntarily assumed a common law duty of care towards them when it wrote to them informing them that they had been assessed as 'non-sophisticated' customers and entitled to have the sale reviewed. They also argued that it was "fair, just and reasonable" for there to be such a duty, because the object of the review was to ensure that non-sophisticated victims of mis-selling were put into the position that they would have been in had no mis-selling occurred.

After reviewing the history of the principles as to when a common law duty of care will arise, the Court of Appeal disagreed. Giving the unanimous judgment of the court, Lord Justice Beatson said that the customers had "overstated the importance of the 'assumption of responsibility' test" by "effectively elevating it to the sole test to be applied". Other factors, including the regulatory context, "clearly [weigh] against imposition of a duty of care in these cases", the judge said.

"It would be unusual for the common law to impose a common law duty on a statutory framework," Lord Justice Beatson said in his judgment.

"The present context is a highly regulated environment in which parliament has carefully prescribed the circumstances in which particular individuals may be able to institute proceedings and take other action within a framework in which the FCA has been given a wide range of powers," he said.

Referring to the Green and Rowley decision of 2013, in which the Court of Appeal rejected an IRHP mis-selling claim by two businessmen based on an alleged common law duty co-extensive with the relevant regulatory rules, the judge said it would similarly "drive a coach and horses through the intention of parliament" to recognise a common law claim in these cases.

"[Doing so] would undermine a regulatory scheme which has carefully identified which class of customers are to have remedies for which kind of breach," he said.

"I reject the argument that imposing a duty of care in respect of [the regulatory review] in the circumstances of these cases does not have this effect because the review was a voluntary agreement which is entirely separate from the [regulatory] scheme," he said. "The FCA entered into the review agreement with the banks in its role as regulator and as an alternative to enforcement proceedings. In these circumstances, it is artificial to suggest that the review was entirely separate from the regulatory scheme."

"More broadly, I consider that 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 ... It was the deliberate intention of parliament that only the FCA was to have the power to require the banks to comply with these schemes, and that no individual customer could enforce them or sue for breach. Accordingly, the effect of the regime is that a non-private customer cannot sue in relation to a complaint or a complaint handling issue. Nor can a non-private customer complain about a redress determination if a bank proactively sets up a redress scheme," he said.

Should a bank fail to comply with the terms of the review agreement with the FCA, it was "the responsibility of the FCA to bring enforcement proceedings", he said.

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