UK: Court Of Appeal Dismisses Customers Appeals In Interest Rate Hedging Product Mis-Selling Claims

Last Updated: 11 August 2017
Article by Russell Kelsall
Most Read Contributor in UK, July 2017

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.

Background

  • 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.

Facts

CGL Group Limited v Royal Bank of Scotland plc

  • 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.

WW Property Investments Limited v National Westminster Bank plc

  • 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.

Bartels v Barclays Bank plc

  • 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.

Appeal to the Court of Appeal

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.

Court of Appeal's decision

In giving the leading judgment, Lord Justice Beatson dismissed the appeals and decided the banks did not owe a duty of care to carry out the Review with reasonable care and skill. His reasons (and both Lord Justice Lewison and Lord Justice McFarlane agreed) were:

  • 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 [2013] 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.

Comment

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 [2016] 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 [2017] 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.

Read the full judgment here

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.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
 
In association with
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement

Mondaq.com (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of www.mondaq.com

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about Mondaq.com’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.

Disclaimer

Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.

Registration

Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to unsubscribe@mondaq.com with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.

Cookies

A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.

Links

This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.

Mail-A-Friend

If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.

Security

This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to webmaster@mondaq.com.

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to EditorialAdvisor@mondaq.com.

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at enquiries@mondaq.com.

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at problems@mondaq.com and we will use commercially reasonable efforts to determine and correct the problem promptly.