Regulation and Court proceedings – two sides of the same coin, or different coins entirely?
October 2015 | SPECIAL REPORT: INTERNATIONAL DISPUTE RESOLUTION
Financier Worldwide Magazine
A number of interim decisions in the English Courts concerning disputes about interest rate hedging and LIBOR manipulation have recently thrown a spotlight on the interplay between regulatory investigations and enforcement and court proceedings on the same subject matter. These cases highlight new and potentially unforeseen risks for firms and ‘skilled persons’, including potential liability to customers and investors affected by the relevant misconduct, and orders requiring wide ranging disclosure of highly sensitive information. The principles involved could have serious ramifications for other similar issues where investigations and enforcement proceedings lead to claims on the same subject matter – for example, Forex manipulation and the ongoing investigation into the activities of RBS’s Global Restructuring Group.
Business customers and investors often find it difficult to pursue claims against banks, even where they can demonstrate failure to comply with the standards expected by the FCA, because they are not ‘private persons’ and so cannot bring a claim for breach of statutory duty under s138D of FSMA, are too large to qualify for the Financial Ombudsman Service and have entered into contracts which contain extensive disclaimers and exclusions of liability by the bank. In the cases about interest rate hedging products, which have so far reached judgment (all RBS cases), the decisions have been in favour of the bank. In one case (Crestsign vs. RBS), it was held that RBS had, in fact, given advice, and that the standard of the advice would have been negligent had Crestsign been owed a duty of care. Nonetheless the court held that the contract terms in place meant that RBS did not owe a duty of care and was not liable to the customer for damages. The Court of Appeal is due to consider a number of the issues in this case about the law in respect of such terms, known as ‘basis clauses’, in April 2016.
Disclosure is usually contentious and important in such cases, because the bank’s records contain evidence about the motives of the individuals involved, and the extent of knowledge of the bank’s senior management – both very important issues for a claimant seeking to establish liability in the face of extensive disclaimers and also matters likely to have been a focus of the regulators.
The banks and skilled persons involved argue that the customer or investor has no direct rights in the context of regulatory processes, and that it is for the regulator to protect the customer or investor’s interests (the regulator being overseen by the administrative courts in by way of judicial review). Also they argue that the ‘skilled person’ is not performing a public function which brings it within the ambit of judicial review.
Customers and investors argue for a direct route to enable them to take action or obtain compensation if the banks and ‘independent reviewers’ appointed under s.166 of FSMA have fallen below the required standard because it is they who suffer from such failures.
Many documents relating to dealings with regulators are highly relevant in civil litigation about the same subject matter and fall within the test for disclosure. However, they also raise complex issues of privilege and conflict with laws of other jurisdictions.
R (on the Application of Holmcroft Properties) vs. KPMG
Holmcroft Properties was sold an interest rate hedging product (IRHP) by Barclays. Its case was included in the IRHP review process agreed between the banks and the FCA (the ‘IRHP Review’). The FCA required the banks to appoint a suitably qualified independent third party pursuant to s.166 of FSMA to act as an ‘independent reviewer’ to check that the bank was providing fair and reasonable redress to customers in the review process and Barclays appointed KPMG to fulfil that role.
Holmcroft received redress in the IRHP Review and then made a claim for consequential losses in the review process. The claim failed. Holmcroft was concerned that KMPG had little involvement or engagement with Holmcroft and did not appear to have properly fulfilled the role required by the FCA in the review process.
Holmcroft submitted an application for judicial review asking the Court to find that KPMG was engaged to carry out a public function and that it had failed to comply with the standards applicable to public bodies in fulfilling such public functions.
Barclays argued that the court should refuse permission because KPMG was not performing a public function and that Holmcroft should not be allowed to attempt to use judicial review as a device to to cure its oversight in failing to issue a breach of contract in time.
The Court decided that Holmcroft’s case is reasonably arguable and that the issues are of significant public interest and so gave permission for a full hearing which will decide whether KPMG was engaged in a public function and, if so, whether it met the required standards (and what those standards are).
Suremime Limited vs. Barclays Bank Plc
Suremime issued proceedings claiming that an IRHP sold to it in 2008 had been mis-sold. It was awarded some redress in the IRHP Review but considered the award inadequate. Following publication by the Treasury Select Committee of documents setting out in detail the terms of the IRHP Review and what the FCA required the banks to do, Suremime applied for permission to amend its case to include allegations that Barclays owed it a duty of care when carrying out the review to exercise reasonable care and skill and failed to do so with the result that it awarded Suremime inadequate redress, and so should pay damages for negligence.
Barclays argued that it did not owe a duty of care directly to the customer in carrying out the IRHP Review and so could not be liable to Suremime because its duty was only to the FCA. Barclays suggested that it was not necessary to allow the claim for negligence to proceed because, if Holmcroft were right, judicial review was the appropriate route and asked the court not to allow these claims to proceed because they had “no real prospect of success”.
The court did not agree and held that it was “more than merely arguable” that the bank owed a duty of care to Suremime in carrying out the review and so there was sufficient merit and importance in the argument for the claims should proceed.
The Suremime case will be followed closely by customers who are unhappy with the outcome of an IRHP review, and could result in a second wave of claims about IRHPs from small businesses, particularly by customers whose claims about the original mis-selling are out of time, and those who face difficult hurdles regarding disclaimers and exclusions in the bank’s standard terms.
Property Alliance Group Ltd vs. Royal Bank of Scotland
In this interest rate hedging case involving allegations about LIBOR manipulation and the activities of RBS’s Global Restructuring Group the parties have been engaged in recent months in hard fought disputes about disclosure of material relating to regulatory activities.
The Property Alliance Group (PAG) had entered into swaps using GBP LIBOR (Sterling LIBOR) as a reference rate and part of PAG’s claim is that RBS impliedly represented that it was not manipulating LIBOR at the time the company entered into the swaps.
This assertion is based on findings by a number of regulators including the FSA that RBS had manipulated Japanese Yen LIBOR and Swiss Franc LIBOR. In its defence, RBS positively asserted the fact that there had been no finding by the regulators that RBS had manipulated Sterling LIBOR. PAG argued that RBS was therefore required to disclose the documents about the background to, and reasons for, the lack of such a finding in, for example, the FCA’s enforcement notice including its correspondence with the FSA. RBS claimed that the documents related to settlement negotiations and were therefore protected from inspection by ‘without prejudice’ privilege.
The judge decided that RBS could not both rely on the documents and refuse to produce them for inspection and RBS was ordered to produce them. RBS then applied to amend its defence to remove the assertion about GBP LIBOR on the basis that they would then no longer be disclosable. The outcome of that application to ‘put the genie back in the bottle’ is awaited at the time of writing.
RBS objected also to the disclosure of documents relating to its executive steering group, whose remit included matters to do with the relevant regulatory investigations on the basis that they were subject to legal advice privilege. The court held that given the broad scope of the content the only reliable way to discern whether they were privileged or not was for a different judge to review the documents and decide which, if any, were privileged.
The court was also required to deal with issues about disclosure of dealings with other regulators because RBS argued that to do so was unlawful in other jurisdictions. The court was not willing to accept that but ordered that an application would have to be made to the court before this material was referred to in open court and put into the public domain. This order to produce the documents to the claimant was made despite restrictions on disclosure of the relevant material ordered by a court in the US and a letter from the Japanese regulator asking the English court not to order disclosure.
Given the number of investigations and conduct reviews in recent years, and the vast extent of the highly sensitive material currently in the hands of financial institutions about their dealings with regulators, they will no doubt be following developments in these cases very closely to assess the extent of their exposure and inform their policies for future investigations.
Janine Alexander is a partner at Collyer Bristow LLP. She can be contacted on +44 (0)20 7470 4406 or by email: email@example.com.
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