Claims against RBS and Barclays Bank for mis-selling interest rate hedging products fail

 

Background

In June 2012, the Financial Services Authority (‘FSA’) announced discovery of “serious failings” in the sale of interest rate hedging products to small and medium-sized enterprises (‘SMEs’) by a number of high-street banks.

Buying these products was often a pre-condition for SMEs trying to obtain bank loans.

The banks were told to review all their sales of these products to “non-sophisticated” customers since 1 December 2001 and to provide a remedy if the products had been mis-sold without appropriate advice on the complexity of the product.

It was only in February 2015 that the review was announced in public.

The question arising in CGL Group Ltd & Ors v The Royal Bank of Scotland Plc & National Westminster Bank Plc & Ors (Rev. 1) [2017] EWCA Civ 1073 was whether banks carrying out such reviews under the framework of financial regulatory law owed a duty of care to their customer to do the review with reasonable care and skill.

The Court of Appeal’s answer is that there is no duty of care.

The regulatory framework

Financial Services and Markets Act 2000 gives power to the FSA (now called the Financial Conduct Authority (‘FCA’)) to sanction banks that indulge in market abuse and other contraventions of the regulations made under the Act as amended.

The sanctions include a requirement to pay back the profits made from breaking the rules. If there has been widespread unlawful conduct that has harmed consumers, the FCA can require a bank to set up a ‘consumer redress scheme’ to compensate affected customers.

Related rules on Dispute Resolution and Complaint Handling require banks to investigate systemic abuse in a prompt, fair and diligent manner, and to keep customers informed, although there is no right to bring a claim in court if the bank does not follow this guidance.

The Conduct of Business rules also require that the bank must:

• Take reasonable steps to communicate to a customer in a way that is fair, clear and not misleading;
• must not try to exclude or limit any liability it has to a customer under the regulatory rules;
• take reasonable steps to ensure that if it makes any personal recommendations to a customer to buy a particular investment, the advice is suitable to the client.

What is an interest rate hedging product?

This case concerned three out of many types of product that enable borrowers to manage (or ‘hedge’) the risk of variable interest rates on their loans:

1. Swaps;
2. Collars;
3. Structured collars.

A helpful summary is provided at § 3 of the judgment:

“Swaps” enable borrowers to fix their interest rate. The bank and the borrower agree to exchange interest payments relating to a pre-arranged amount. “Collars” and “structured collars” enable borrowers to limit interest rate fluctuations to within a specified range. Under a “structured collar”, if the reference interest rate falls below the bottom of the range, the interest rate payable by the borrower may increase above the bottom of the range.

Following the global financial crisis in 2008/9, interest rates fell to historic lows. Many SMEs and individual businesspersons who had been sold collars experienced severe financial difficulty because:

1. they could not benefit from the drop in interest rates; and
2. they had to make up higher payments to the banks when the rates fell.

The claim

The businesses in this case complained that the banks had been negligent in the way they conducted the reviews and therefore failed to provide appropriate remedies. The High Court struck out the claims and the businesses appealed.

The appeal

The Court of Appeal considered the authorities on the correct legal test as to whether a duty of care should be imposed for economic losses. This is a difficult area which requires a broad assessment of the factual and legal context. Alongside the question of whether there has been an ‘assumption of responsibility’ by the Defendant, a further three-fold test was set out in Caparo Industries plc v Dickman [1990] 2 AC 605, which asks whether:

• loss to the Claimant was a reasonably foreseeable consequence of what the defendant did or failed to do;
• the relationship between the parties was one of sufficient proximity; and
• in all the circumstances it would be fair, just and reasonable to impose a duty of care.

In this case, the Banks’ review of its alleged mis-selling of products took place within the detailed architecture of financial regulatory law. This meant that there was unlikely to be an addition layer of obligations in the law of negligence co-existing with the regulatory framework (§ 83). On principle, a common law duty of care could not be derived from statutory duties (§ 84).

Where the FCA rules had created a heavily regulated environment, there were only very specific rights of action left to individuals and businesses for breaches of the FCA rules.

Parliament had limited the classes of persons who could bring actions at private law against banks for certain breaches of the FCA rules on misconduct and to impose a free-standing duty of care for the way that the Bank carried out its reviews in those circumstances would undermine Parliament’s intention. Only the FCA has the power to compel the Banks to adhere to the terms of the Review (§§ 86 to 87).

While the claimants argued that the Banks letters to them, updating them about the review amounted to an assumption of responsibility, the Court disagreed. The FCA had required the Banks to conduct the reviews and an independent reviewer was appointed to examine the transactions and control the review process. This could not amount to a voluntary decision by the Bank assuming a duty of care to the customer.

The nature of the review and the remedies available within it meant that it would not be fair, just and reasonable to impose a duty of care on the banks nor was there a gap in the legal framework that needed filling with a duty of care. Imposing a duty would also have the effect of circumventing the limitation periods for actions in negligence based on the same allegations against the banks and have profound consequences for other customer complaints systems. The fact that there was a conflict of interest between the banks and their customers was also further reason not to impose a duty. There was also no reliance by the customers on the Review process.

Conclusion

For the SMEs affected by mis-selling of these products, the range of remedies was heavily restricted where the limitation period for an action in negligence had passed and the review process did not give rise to another bite at the negligence cherry. The case is also a salient reminder that while the banking environment is subject to heavier regulation, the outcome of regulatory action may still disappoint some customers who have suffered the adverse effects.