The Court of Appeal has held that banks do not owe a duty of care in tort to their customers when carrying out a swaps misselling review required by the banks’ agreement with the Financial Conduct Authority (“FCA”). The decision of the Court of Appeal upheld the decision at first instance.
The interest rate hedging products review was agreed between various banks and the FCA in June 2012 (the “Review”). This agreement required banks to carry out a review of the sale of certain interest rate hedging products under the supervision of an independent reviewer and, with the reviewer’s approval, to offer redress to customers where appropriate to do so. Some customers argued that the banks carried out the Review negligently, failed to offer proper compensation and were liable to the customers for this failure in the same sum as the underlying claim.
The cases before the Court of Appeal
In (1) CGL Group Limited; (2) Jacqueline Bartels and Adrian Bartels; (3) WW Property Investments Limited v (1) The Royal Bank of Scotland plc and National Westminster Bank plc; (2) Barclays Bank plc; and (3) National Westminster Bank plc  EWCA 1073, three linked appeals were heard together by the Court of Appeal. In each case, the claimants believed that they had a claim against the relevant bank arising out of the alleged misselling of interest rate hedging products (either a swap, a collar or a “structured-collar”), each of the claimants had participated in the Review, and each had claimed that the relevant bank owed them a duty of care to carry out the Review with reasonable skill and care.
The claimants argued that the banks owed them a duty of care to conduct the Review carefully and that they had relied on the banks to do this competently, which they had failed to do, and that it was fair, justifiable and reasonable for a duty of care to be found to exist in a relationship similar to a contract.
The banks argued that no duty of care existed and that in conducting the Review they were discharging obligations owed to the FCA. Moreover, they argued that the banks’ agreement with the FCA to conduct the Review pointed away from an assumption of responsibility to customers in relation to it. They also argued that the existence of the Review did not affect the availability or status of any other pre-existing claims of the claimants in relation to the alleged misselling and that in allowing the claimants’ appeals, the Court of Appeal would effectively allow them to circumvent the law of limitation.
In reaching its decision, Beatson LJ (with whom Lewison LJ and McFarlane LJ agreed) considered the various tests applied in previous cases to determine whether a duty of care existed. In particular, Beatson LJ noted [at para 59] Longmore LJ’s decision in Playboy Club London Ltd v Banca Nazionale del Lavoro SpA  EWCA Civ 457 stating that it has become customary to consider three tests or approaches to determine whether a duty of care arises in respect of economic loss that usually lead to the same answer and can be used as cross checks on each other; these are:
Beatson LJ concluded that the assumption of responsibility test was not the most appropriate; rather, considering all factors relied on in earlier authorities, such factors pointed away from a duty of care. In particular, Beatson LJ found that this conclusion was confirmed by applying the tripartite test in Caparo v Dickman to establish a duty of care.
The Court of Appeal’s reasoning was complex and included:
Although the decision is unlikely to bring an end to swaps misselling claims, it is likely to make it more difficult for some customers to pursue such claims against banks. It is also likely that the decision will be followed in any future review agreed by firms as an alternative to enforcement action by regulators.
In addition, the decision also serves as a useful reminder of the tripartite tests for establishing whether a duty of care exists in cases of economic loss set out in Caparo v Dickman.
Nikki Blair, a Professional Support Attorney in Morrison & Foerster’s London office, assisted in the preparation of this client alert.