CGL Group Ltd v Royal Bank of Scotland Plc [2017] EWCA Civ 1073

The Court of Appeal has held that banks carrying out reviews of sales of interest rate hedging products pursuant to agreements with the Financial Conduct Authority (FCA’) did not owe a duty to individual customers to carry out those reviews with reasonable skill and care.

The appellants were required to buy interest rate hedging products as a condition of loans made to them by the respondent banks. The FCA’s view was that there had been serious failings in the selling of those products to small and medium sized businesses. As an alternative to enforcement action, the FCA required the respondent banks to carry out reviews of sales of interest rate hedging products to “nonsophisticated customers”. The banks were to review sales from December 1, 2001 and provide appropriate redress to customers where there was found to be mis-selling. The “Review Agreement” entered into by the FCA and the banks was announced in June 2012, but was not published by the Treasury Select Committee until February 2015.

The banks decided during the course of their reviews that the appellants were not entitled to any redress. The appellants put forward their claims differently, but each appellant claimed that the respondent banks had mis-sold them the interest rate hedging products and owed them a duty of care when carrying out the reviews of the sale of those products.

The appellants’ main argument was that the banks had voluntarily assumed responsibility to their customers, based on letters sent to the appellants explaining the review to be carried out, or even simply by entering into the Review Agreement with the FCA. The appellants also argued that it was fair, just and reasonable for there to be a duty because it promoted the object of the reviews, which was “to make amends for past conduct”.

The banks argued that they had not assumed responsibility by sending the letters to the customers or by opting into the reviews. They argued that the letters invited the customers to rely on the FCA and the independent reviewers, rather than the banks. The fact that the reviews were being undertaken in the context of the FCA exercising its regulatory powers, and there was an independent reviewer, indicated that there was no duty of care owed by the banks to their customers. The banks also sought to rely on a particular clause in the Review Agreement. This clause stated that persons other than the FCA and the relevant bank were to have no right to enforce any term of the Review Agreement. It was also argued by the banks that the imposition of a duty of care would undermine the law of limitation as customers would be able to bring claims outside the limitation period for the original mis-selling.

The Court considered the following three tests to determine whether the banks owed the customers a duty of care

• The assumption of responsibility test.
• The threefold test in Caparo Industries Plc v Dickman [1990] 2 AC 605 – this asks whether (a) the loss was a foreseeable consequence of the defendant’s actions or inactions; (b) the relationship of the parties was sufficiently proximate; and (c) it would be fair, just and reasonable to impose a duty of care on the defendant towards the claimant.
• Incremental additions to the existing categories of duty.

The Court said that these tests can be considered together and, regardless of the test applied, it was important to focus on the circumstances of the case and the relationship between the parties.

The leading judgment was given by Beatson LJ and sets out the following factors which indicated that no duty of care was owed by the banks:

The regulatory context

The Court’s view was that the imposition of a duty of care would “undermine a regulatory scheme which has carefully identified which class of customers are to have remedies for which kind of breach” and this would therefore go against the intention of Parliament as set out in the regulations. The Court noted the FCA’s powers as regulator and that it was the FCA’s responsibility to bring enforcement proceedings if a bank fails to comply with the terms of a review agreement.

The dealings between the parties and the context of those dealings

The appellants sought to rely on communications that “crossed the line” between them and the bank. The Court’s view was that the banks owed a contractual duty to the FCA only (which obliged the banks to allow the appellants to participate in the reviews) and the letters were drafted pursuant to the FCA’s requirements. The reviews were not voluntary, but instead “thrust on them” as an alternative to enforcement action by the FCA. This weighed against there being an assumption of responsibility by the banks. The banks had sought to rely on a clause of the Review Agreement which stated that persons other than the FCA and the relevant bank were to have no right to enforce any term of the Review Agreement. The Court thought that as this clause did not purport to exclude or limit liability for negligence, it was not itself inconsistent with an assumption of responsibility by the banks.

The role of the “skilled person” independent review

It was difficult to argue that the banks assumed responsibility when customers were informed that a skilled person (appointed under section 166 of the Financial Services and Markets Act 2000) would be examining the banks’ decisions. The banks had less control over the conduct of the reviews than the independent reviewer, who did not owe a duty to customers.

The threefold and incremental tests

The Court held it was not “fair, just or reasonable to impose a duty”, given the nature of the reviews and the limitations on remedies available under the regulatory regime. Nor was there a lacuna which justice required should incrementally be filled by a duty of care (as any gap in the remedial framework reflects the considered decision of Parliament).The Court was conscious that imposing a duty of care in respect of a complaint system could have far reaching consequences and would enable two of the appellants to circumvent the limitation period for the original mis-selling claim.

Conflict of interest

The conflict of interest (in that the banks were reviewing their own conduct) also pointed away from imposing a duty of care. The conflict of interest was why the FCA insisted upon the appointment of an independent reviewer.

Reliance

The terms of the Review Agreement were generally unknown until February 2015 at the earliest. A customer could not have been made worse off by the outcome of the review as it could still have pursued a mis-selling claim independently. Accordingly, the customers did not rely on the reviews.

The Court was reluctant to intervene where there was a statutory regulatory regime and showed consideration for the practicalities of the review process. Banks will welcome this decision as it prevents customers bringing negligence claims relating to the conduct of past business reviews. A contrary decision would have meant the conferral of additional rights on customers whenever banks agreed with the FCA to undertake past business reviews. This would have overlooked the fact that these past business reviews are by their very nature beneficial to customers and do not prevent them from enforcing their existing rights.