Background

The Court of Appeal has this week handed down judgment in three linked appeals (CGL Group and Others v Royal Bank of Scotland Plc and Others). These concerned interest rate hedging products (“Hedging Products“) that certain smaller businesses (including the Appellants) allege they were required to buy as a condition of loans made to them by three banks (in this case, RBS, Barclays and National Westminster – “Banks“) which were “missold” to them by the Banks.

The appeals were concerned with reviews conducted by the Banks into how the Hedging Products had been sold (“Reviews“). The Reviews were undertaken in line with an agreement reached between the Banks and the Financial Conduct Authority (“FCA“). The FCA had found that there had been “serious failings” in the way in which certain institutions had sold  hedging products to small and medium sized businesses.  The FCA  therefore required certain financial institutions,  including the Banks,  to undertake the Reviews as an alternative to FCA enforcement proceedings and to provide redress where the Reviews showed that miselling had occurred. An independent reviewer was apppointed by the FCA to scrutinise the Reviews which were ultimately overseen by the FCA.

The Banks wrote to the Appellants advising them of the Review process,  explaining the role of the FCA and the independent reviewer. Ultimately however, the Banks determined that the Appellants were not entitled to any redress.

The question before the Court of Appeal was whether the Banks owed a duty of care to the Appellanst to carry out the Reviews with reasonable skill and care.

Judgment

The Court of Appeal held that the Banks were not under a duty to conduct the Reviews with reasonable skill and care.

In determining whether a duty of care arises in respect of economic loss the Court’s routinely defer to three tests: (1) whether the defendant had assumed voluntary responsibility to the claimant; (2) the threefold test in Caparo Industries Plc v Dickman [1990] 2 A.C. 605; and (3) whether the addition to existing categories of duty would be incremental.

In applying those tests, and rejecting the existence of a duty of care, the Court concluded that:

• The regulatory context clearly weighed against imposing a duty of care. Financial services is a highly regulated environment in which Parliament had set out circumstances in which particualr individuals could institute proceedings and take other action within a framework where the FCA had wide powers. The recogniton of a freestandinng duty of care would undermine the regulatory regime which had identifed which class of customers were to have remedies agsint whom for which types of regulatory breach.

• The Reviews were not voluntary. The Banks were required to undertake them by the FCA. The imposition of a duty of care would circumvent Parliament’s intention that only the FCA was to have power to comply with certain schemes and no individual could enforce them or sue for breach. If the Reviews were not properly conducted, it was within the power of the FCA to bring enforcement proceedings.

• The Banks’ letters to the Appellants explaing the Review could not be used as a basis for finding a duty of care. The Appellants argued that the letters were offers by the Banks to assume responsibility for thoroughly reviewing the relevant evidence and determining whether the Appellants were entitled to redress. However, the Court of Appeal held that the Banks were obliged to allow the Appellants to participate in the Reviews in accordance with a contractual duty owed by the Banks to the FCA. Additionally, the Letters were drafted in the form required by the FCA. Given this context, the Letters did not amount to a voluntary assumption of responsibility by the Banks to the Appellants.

• The central role of an independent reviewer went against the argument that the Banks owed a duty of care. It was difficult to see how the Banks could owe such a duty when they had less control over the Reviews than the independent reviewer.

• It was not fair, just or reasonable to impose a duty of care. Two of the Appellants’ allegations simply restated their original claims, which the Court below were time-barred under the Limitation Act 1980. The Court of Appeal recgnised that imposing a duty of care and allowing customers to sue banks for breach of regulatory duties by the “back door” would circumvent the limitation period for the original mis-selling and restart the limitation “clock” from the date of the Review.

Conclusion

The judgment is welcome news for banks and other financial institutions concered about potential exposures created by FCA ordered/ supervised reviews.

The Court of Appeal has (subject to any appeal to the Supreme Court) closed off a potential free standing cause of action for those disappointed by such reviews. The Court recognised this when it noted that “the imposition of a duty of care in respect of a complaint system could…have far-reaching consequences and… would not be fair, just and reasonable to do so in the circumstances of these cases”.

The Court has also locked the procedural back door that might otherweise have allowed time barred cases to proceed and avoid the statutory time limits for brining claims prescribed by the Limitation Act.

And in any future regulator ordered reviews financial instituions would do well to look to exclude rights of third parites in any agreement concluded with the regulator so as to minimise risks.