Time is running out for firms to respond to FCA consultation on the extension of the Senior Managers and Certification Regime

By now, most FCA regulated firms will be aware that the FCA intends to extend the Senior Managers and Certification Regime (“SM&CR”) so that it applies to all FCA regulated firms from an as yet unspecified date in 2018 (most likely mid to late 2018).

The FCA consultation period (in respect of Consultation Paper CP17/25 – “Individual Accountability: Extending the Senior Managers & Certification Regime to all FCA firms” (“Consultation”), found here: https://www.fca.org.uk/publication/consultation/cp17-25.pdf) is only open until 3 November 2017 for firms to respond to the FCA’s proposals.   The Consultation not only applies to UK based FCA regulated firms, but also, branches of non-UK firms which have FCA permission to carry out regulated activities in the UK.  Insurers are covered by a separate consultation (Consultation Paper 17/26).

Background

The proposed extension of the SM&CR has come about as a result of the Financial Crisis and is intended to act as an “accountability system” – that is, a regime which is more focused on individual (as opposed to corporate) accountability.   The SM&CR replaces the Approved Persons Regime.

SM&CR was introduced by the FCA in larger firms (e.g. banks and building societies) from spring 2016. However, SM&CR will be extended to all financial services firms in 2018. Indeed, it is estimated that, following implementation, the new regime will apply to circa 60,000 firms in the UK.

What is proposed?

The intention is that a “core” regime will apply to every firm (regardless of size), unless that firm is a “Limited Scope Firm” (please see further detail below).

The core regime consists of three elements: (i) Senior Managers Regime, (ii) Certification Regime and (iii) Conduct Rules. Unsurprisingly, the Senior Managers Regime focuses on the most senior individuals at a firm (see out at 2.27 of the Consultation) – anyone holding a “Senior Management Function” will need to be FCA approved before starting the role and the role will need to be governed by a Statement of Responsibilities (setting out what that individual is responsible/accountable for).

In addition, every Senior Manager will have a “duty of responsibility” – this means that they will have an area that they are personally responsible for and if something goes awry in that area, the FCA will consider whether that individual took “reasonable steps” to prevent the issue in question from occurring.   The FCA will propose and outline new responsibilities which should be given to Senior Managers, known as “Prescribed Responsibilities”.

The Certification Regime element will apply to individuals who are in roles which may have a large impact on the financial markets, the firm they work for, or on the customers of that firm.   These will be labelled “significant harm functions”. The FCA will require that firms certify (once a year) that individuals in these roles are suitable for the role. However, individuals in these positions will not need to be approved by the FCA before taking the post.

The Conduct Rules apply to arguably all individuals working in a financial services firm. The Conduct Rules will not be surprising and will comprise of elements such as integrity and treating customers fairly.

Furthermore:

  • More stringent rules will apply to the largest firms (such as those with Assets under Management of £50 billion or more – the full criteria is set out at 2.38 of the Consultation), which the FCA estimates only comprises of less than 1% of the firms which it regulates.   This will be known as the “enhanced” regime under the SM&CR.
  • Under the “enhanced” regime, firms will need to apply all of the elements of the core regime and also (i) Additional Senior Management Functions (ii) Additional Prescribed Responsibilities (iii) a Senior Manager will overall responsibility for every area/business activity/management function of the firm (iv) Responsibilities Maps and (v) Handover Procedures (see 2.39 of the Consultation for further detail); and
  • A “limited scope” regime will apply to firms which are currently subject to a limited application of the Approved Persons Regime.   Examples given are limited permission consumer credit firms, sole traders and authorised professional firms whose only regulated activities are in non-mainstream regulated activities.  Recent estimates suggest that about 33,000 regulated firms will fall within the limited scope regime and those firms will need to appoint a named senior manager to have accountability and will be subject to fewer requirements than core firms.

The FCA has indicated that the new regime is being designed to be proportionate and flexible, whilst ensuring that consistent principles are implemented across financial services firms.

What next?

 Given that:

  • SM&CR will impose new regulatory burdens on firms and senior individuals which may cost time and money in responding to new regulations;
  • SM&CR may lead to changes in a firm’s business models and a re-shaping of firms’ compliance activities; and
  • Breaches of SM&CR could result in individuals being disciplined by the FCA (the most severe end of the penalties spectrum including criminal liability) which in turn could affect the firm’s reputation and individuals’ livelihoods,

it is very important that firms and the individuals in their senior management functions that might be effected by extended SM&CR now take the time to carefully consider and respond to the FCA’s Consultation as they feel able. Time is running out and the reach of extended SM&CR will be far and wide.

 

 

Upper Tribunal upholds Charles Palmer ban and fine

Background

Charles Palmer (“Mr Palmer”) was the CEO and majority shareholder of Standard Financial Group Limited and a director/de facto CEO of the adviser network which comprised of Financial Limited and Investments Limited (“Firms”).   At its its hight  (in 2011) the network boasted 397 appointed representatives (“ARs“) and 516 registered individuals (“RIs“), whom between them advised circa 40,000 customers over a 22 month period (2010 to 2012). Mr Palmer held the CF1 (Director) controlled function at each of the Firms.   He was responsible for “developing and maintaining the Firm’s business model”, for implementation of the model in practice and he had oversight of the conduct of the Firms. By way of further context, the Firms were acquired (along with their parent company – Standard Financial Group Limited) by Tavistock Investments Plc in February 2015.

FCA decision

On 25 September 2015 the FCA announced  that it was fining Mr Palmer £86,691 on Mr Palmer and prohibiting him from performing significant influence functions at an authorised firm.

The FCA considered that, Mr Palmer had a responsibility to exercise due skill, care and diligence in ensuring that he (and other board members) understood the extent to which the Firm’s business model gave rise to material risks to underlying customers and that appropriate controls/mitigating measures were in place in respect of those risks. A key risk was, of course, that underlying customers could receive unsuitable advice from the adviser network. In the FCA’s view, the business model ultimately formed by Mr Palmer gave the ARs and RIs a high level of freedom, thereby increasing risk to underlying customers and also increasing the risk that the Firms would not be aware of (and as such could not take steps to prevent) the provision of unsuitable advice or sale of unsuitable investments by the ARs/RIs, in particualr with regard to high risk products like UCIS.

The FCA decided that, during the relevant period (February 2010 – December 2012) “the Firms failed to implement an effective risk management framework and control framework to ensure that: (i) the materials risks to underlying customers arising from the Firms’ business model were identified and understood by the Board; (ii) appropriate controls and mitigating measures were put in place in relation to these risks; (iii) the effectiveness of controls and mitigating measures was being objectively assessed; and (iv) sufficient, relevant and reliable information was provided to the Board in relation to the controls and mitigating measures” – a link to the full Decision Notice can be found here: https://www.fca.org.uk/publication/decision-notices/charles-anthony-llewellen-palmer.pdf

The FCA also issued Final Notices to the Firms in July 2014, the Firms’ Compliance Director in March 2015, and their Risk Director, in December 2015.

The Upper Tribunal’s decision

Mr Palmer appealed to the Tribunal contending that: (i) the Firms’ compliance director should have been responsible for failures in compliance systems and controls; (ii) the Firms’ risk management director should have been responsible for the management of customer risk; (iii) the Firms’ board of directors should have been responsible for the monitoring and performance of the above executives, rather than him personally; and (iv) the FCA had “cherry-picked” certain incidents in an attempt to claim he had set an inappropriate tone and culture at the Firms.

Earlier this week it was announced that the  Tribunal had unanimously upheld the FCA’s decision and dismissed Mr Palmer’s reference.

The Tribunal agreed with the FCA that Mr Palmer had breached Principle 6 of the Statement of Principles and Code of Practice for Approved Persons.

Overall, the Tribunal agreed with the FCA that Mr Palmer had failed “to act with due skill, care and diligence in performing his functions as a director of the Firms”. The finding was largely based on the premise that the Firms’ business model gave rise to enhanced risks, which should have required robust systems, control and monitoring to be in place. The Tribunal disagreed with Mr Palmer’s submissions and stated that the onus should have been on him to continually and proactively challenge those responsible for putting systems and controls in place in order to be satisfied that the procedures were operating as they should. Instead, “this was a fundamental point Mr Palmer never grasped”, which in turn, went to the issue of Mr Palmer’s competence.

The Tribunal therefore decided that Mr Palmer’s failings were sufficient to justify the FCA’s financial penalty.

The severity of the fine imposed on Mr Palmer was, in part, due to aggravating factors. In particular, Mr Palmer had been the subject of previous enforcement action in February 2010 when he was fined £49,000 by the FSA for breaches of Statements of Principle 5 and 7 of the FSA’s Statements of Principle and Code of Practice for Approved Persons between 6 April 2006 and 19 August 2008 in performing the significant influence functions of CF1 (Director) and CF8 (Apportionment and Oversight) at the Firms.

As Mr Palmer clearly demonstrated a lack of competence and capability, the Tribunal upheld  the FCA’s decision to prohibit him from performing any significant influence function with respect to regulated activities. The Tribunal found that Mr Palmer showed limited insight into the seriousness of his misconduct and that there was a clear risk that his actions might be repeated in the future.

FCA executive director of enforcement and market oversight Mark Steward commented said “Mr Palmer’s conduct fell well below the standards the FCA would expect of a senior manager of an authorised firm. His conduct was made worse by the fact that he did not learn lessons from, and address the failings highlighted to him in 2010.”

We await hearing as to whether Mr Palmer now seeks permission to appeal the Upper Tribunal’s decision to the Court of Appeal.

 

 

 

 

The new PPI complaint deadline: the beginning of the end or the end of the beginning?

As discussed in a previous blog (3 May 2017), consumers seeking compensation in relation to any new payment protection insurance (“PPI“) complaint will now have until 29 August 2019 to complain to the Financial Ombudsman Service about any alleged mis-selling by lenders.

The Financial Conduct Authority (“FCA“) has announced the final deadline in an attempt to draw a line under claims of PPI misselling, claims that have plagued lenders over the last decade. PPI has turned out  to be one of the most expensive issues ever to have hit the UK’s financial sector. Based on FCA figures, since January 2011, a total of £27 billion has been paid out to customers.

Inevitably, lenders will welcome the new deadline which should survive any legal challenges by claims management companies.  But before the corner is turned, lenders might need to galvanise themselves for a potential spike in new PPI complaints and claims from customers (directly and through those claims management companies) over the next two years. This month the FCA will launch its two-year consumer communications campaign with Andrew Bailey, Chief Executive of the FCA saying that “putting in place a deadline and campaign will mean people who were potentially mis-sold PPI will be prompted to take action rather than put it off“.  Mr Bailey may very well be right and certainly the CMCs have not wasted any time in upping their adversting ante.

To cope with any increase in claims, lenders may also need to ensure they have set aside enough funds to deal with any  surge of claims over the next two years. Having already set aside £40 billion to cover claims to date, some lenders may do well to re-evaluate their existing PPI reserve pots.

This is very much the end is in sight. But not quite yet.

 

Court of Appeal finds that banks had no duty to conduct an FCA ordered review with reasonable skill and care

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.

 

 

Financial Guidance and Claims Bill – tougher regulation for Claims Management Companies

Claims’ Management Companies (“CMCs”) offer legal claims and complaint management services to members of the public. Historically, CMCs work to bring large numbers of complaints against financial services companies and recent areas of focus have been PPI and interest rate hedging mis-selling complaints. Whilst some CMCs are reputable, others try to rally business through unsolicited calls/texts and charge high fees, often backed by a policy of “after the event” insurance, for handling complaints that would otherwise be free for counsumers to progress via the Financial Ombudsman Service (“FOS“) .

An independent review into the regulation of CMCs was undertaken and the Government accepted the recommendations outlined as a result of that review.   Importantly, responsibility for regulating CMCs will be transferred to the Financial Conduct Authority (“FCA”). There has been recent progress in this area, as the Financial Guidance and Claims Bill (“FG&C Bill”) was announced in the Queen’s Speech on 21 June 2017. The FG&C Bill is currently at the Committee Stage in the House of Lords. One of the aims of the FG&C Bill is to transfer regulatory responsibility for CMCs to the FCA.

The relevant clauses in the FG&C Bill will:

  • make amendments (by way of secondary legislation) to the Financial Services and Markets Act 2000 (“FSMA”) to enable the FCA to regulate the activity of CMCs as a “regulated activity” under FSMA;
  • give the FCA the power to impose a cap on the fees that CMCs can charge for their services;
  • Include a power for the Ministry of Justice (as current regulator of CMCs) to put into place a transfer scheme for (i) the assets/liabilities of the Claims Management Regulation Unit and (ii) staff, to the FCA; and
  • In addition, provide for the transfer of responsibility for dealing with consumer complaints about CMCs from the Legal Ombudsman to the FOS.

The changes that are due to be implemented under the FG&C Bill are likely to greatly improve the position of consumers, who should no longer be targeted by unsolicited campaigns (because CMCs will be subject to the FCA’s rules on marketing) or be charged steep fees to pursue a financial services complaint due to the proposed fee cap.   For financial institutions, the wave of speculative claims might also decrease. Broadly speaking, regulation of CMCs by the FCA will see a shift away from CMCs focussing on their own profit, towards fulfilling their intended purpose as firms who help consumers to resolve meritorious complaints in a cost effective manner.

However, it is worth noting that the FCA is seemingly not likely to rush the implementation of the new regime and it will take time for the secondary legislation that will supplement FSMA (as referred to in the first bullet point above) to be finalised. Until such time as both of these steps are concluded, CMCs may continue to operate in their present form. This is unfortunate, in light of the recent FCA announcement that the final deadline for making a new PPI complaint will be 29 August 2019, which we discussed in further detail in a blog post in May.   This may well mean that consumers experience significant numbers of approaches from CMCs regarding possible historic PPI policies and claims, as CMCs rush to bring all possible claims ahead of Augsut 2019 deadline.

Regulator takes action to address risky lending practices

On 4 July 2017, the Prudential Regulation Authority (“PRA”) released a statement on consumer credit (“Statement”), following a review of consumer credit lending (“PRA Review”). The review included the examination of PRA regulated firms’ underwriting practices for credit cards, unsecured personal loans and motor finance.   As readers will be aware, there has been a good deal of press coverage regarding concerns over increased consumer lending and the rising average level of household debt.   The fear is that “risky” lending is on the rise,taht  consumers won’t be able to manage their debts if interest rates increase and commission based products could be leading to an increase in the (mis) selling of unsuitable products.

The PRA website confirms that the PRA Review was carried out following “a continued period of material growth in consumer credit, a lowering of pricing and extensions of interest-free offers” and the Statement records the issues which are seen to arise for the PRA regulated firms which provide the consumer credit referred to in the paragraph immediately above.   As set out in the introduction to the Statement, those firms will shortly be contacted by the PRA, with a request that they respond to the Statement and the information provided by them will assist the PRA in determining firm specific supervisory action and will be shared with the Financial Conduct Authority.

What the PRA Review found

In brief, the PRA Review found:

  •  There was evidence of weakness in some aspects of underwriting;
  • The resilience of consumer credit portfolios is reducing due to the combination of continued growth, lower pricing and some increased lending into higher risk segments;
  • Assessment and pricing for risk has been influenced by historically low arrears rates;
  • Firms are not necessarily considering the impact of consumer indebtedness and consumer’s future ability to repay debt when assessing lending risk;
  • There is a large degree of variation between firms in respect of risk management practices and controls in respect of consumer credit products;
  • In respect of credit cards, many firms are attracting new consumers by offering 0% promotional offers. This includes applying the uncertain Effective Rate Accounting standards to those offers. In addition, if the model assumption used by the firm when calculating the offer turns out to be optimistic (because of unpredicted changes in consumer behaviour), that firm could be facing a loss if the offer made was only likely to be marginally profitable;
  • In respect of unsecured personal loans, the rapid reduction in interest rates for consumer lending means that the firms will be left with less income to absorb potential future losses;
  • In respect of motor finance, the fast expansion of Personal Contract Purchase (“PCP”) deals exposes lenders to the risk of the vehicle’s residual value – in PCP deals, lenders offer a guaranteed future value for the vehicle, which is usually in the range of 85% to 95% of the expected future value of that vehicle. This exposes the lender if there is a significant downturn in the used car market.

Issues for PRA Regulated firms

 The PRA Review made it clear that firms are “the first line of defence against the risk of losses on these exposures”.   In light of this, the PRA will be requesting evidence from all firms with “material exposure” to consumer credit as to how they will ensure the following:

  •  That a firm’s credit scoring process adequately captures medium term risk (including consideration as to whether credit scoring models should build in an approach to “new generation” borrowers, who do not have experience of a high interest rate environment);
  • That “stress-testing” approaches do not under estimate potential downturn risk – current arrears multiplier models may be unsuitable and it might be wise to predict the absolute level of arrears in stress when taking a view as to risk;
  • That loss leader segments are to be explicitly reported and monitored;
  • That, at the cut off point for new business, consideration is given as to whether a “prudent add-on” should be applied, meaning that default rates could be higher than provided for by an assumption, before new business becomes loss making;
  • That a consumer’s total level of all debt is be taken into account during the underwriting process;
  • That firms’ risk appetite, MI and governance frameworks are sufficient to oversee consumer credit portfolios;
  • In respect of credit cards and in particular 0% offers, that they can justify the assumptions used when forecasting new business and in particular, how the potential volatility of customer behaviour referred to above will be managed;
  • They can provide evidence of underwriting assessments and pricing of unsecured personal loans which take into account the total amount of debt a consumer has; and
  • In respect of motor finance, the guaranteed future value of a vehicle (as referred to above) is set in a “prudent” manner.

These issues have been summarised from the Statement, the full copy of which can be found here: http://www.bankofengland.co.uk/pra/Documents/publications/reports/prastatement0717.pdf

 What the future holds

In addition to the PRA seeking the evidence outlined above from PRA Regulated firms, The Bank of England will also be bringing forward its assessment of “stressed losses on consumer credit lending in the Bank’s 2017 Annual Cyclical Scenario stress test for the major firms”. In addition, the PRA will work with firms who have high exposure to consumer credit but were not captured by the Annual Cyclical Scenario stress test to review firm’s resilience to the 2017 stress scenario and to provide appropriate feedback to firms.

The risk here is that, if firms do not address the issues highlighted in the PRA Review and the Statement, they are potentially engaging in risking lending practices.   This could leave them open to claims from consumers in negligence and/or for breach of contract, should consumers encounter difficulties with their borrowing and allege that they should not have been sold the consumer credit products they have entered into. In addition, consumers may be left with risky products which they cannot afford to repay in the future. And there is the possibility of regulatory investigaiton and disciplinary actions

Firms should therefore look to comply with PRA requests for evidence and should ensure that they have considered how to comply with the issues outlined in the Statement, as summarised under the heading “Issues for PRA Regulated firms” above.

 

SFO appears safe for now after proposed merger with the National Crime Agency omitted from Queen’s Speech

The UK Government appears for the time being at least to have scrapped plans to merge the Serious Fraud Office (“SFO”) with the National Crime Agency (“NCA”). The controversial proposal to abolish the SFO did not feature in the Queen’s Speech, suggesting that it has been put on the back burner following the failure of Prime Minister Theresa May to gain an overall majority following the recent General Election.

The proposal to combine the SFO with the NCA was previously met with disapproving comment from many who suggested that it would damage the UK’s reputation in fighting fraud and corruption. The apparent decision to drop the proposal also comes just after the announcement that the SFO has charged Barclays Bank and four of its former executives with conspiracy to commit fraud and the provision of unlawful financial assistance.

The apparent change in the Government’s plan and the latest charges against Barclays may prove a lifeline for the SFO, particularly now that its powers continue to gain some traction. However, this is not the first time the Government has tried to abolish the SFO and, whilst the charges against Barclays go in its favour, it may still have to work hard to keep its place as a prosecuting authority. A senior official has said that the Government continues to “review options”. Nevertheless, the recent hefty settlements with Rolls-Royce and with Tesco highlight the progress the SFO is now making and it could be that the options being reviewed shift from abolition to funding.

Retailers Consortium v MasterCard – an update on ongoing MIF litigation

Background

Our previous blog piece (20 September 2016) described how, in 2007, the EU found that MasterCard’s Multilateral Interchange Fees (“MIFs“) were unfairly high. This decision was applicable to cross-border transactions using MasterCard and Maestro cards in the European Economic Area (“EEA“). The finding was that Mastercard’s MIF breached Article 101 of the Treaty on the Functioning of the European Union (“TFEU“) because they restricted competition between retailers’ banks and inflated the cost of card acceptance by retailers.

On 14 July 2016, Sainsbury’s was awarded £68.5 million plus interest by the Competition Appeal Tribunal in a decision which stated that Mastercard had restricted competition by setting fees on card transactions in the UK.

2017 decision by Mr Justice Popplewell

Interestingly, it was reported back in March that MasterCard had won a High Court legal battle brought by a group of twelve retailers which included Asda, New Look and Morrisons, in respect of MIFs. The retailers were relying on the European Commission decision from 2007 (outlined above) which was upheld in 2014.

The retailers’ case against MasterCard was based upon MIFs in three relevant territories: (i) transactions in the UK (UK cardholders at UK retailers) (ii) transactions in Ireland (Irish cardholders at Irish retailers) and (iii) cross border transactions (in the UK and Ireland by EEA cardholders). The retailers argued that, over the last ten years, they had spent approximately £437 million on MIFs. The Court was being asked to consider whether the MIFs set by MasterCard for debit and credit transactions in the relevant period, in respect of the three relevant territories outlined above, were anti-competitive in breach of UK, Irish and EU competition law.

In line with the European Commission ruling, Mr Justice Popplewell sitting in the High Court did consider that MIFs, in isolation, were anti-competitive. However, Mr Justice Popplewell went on look at the wider position – specifically, to consider the commercial impact on MasterCard if they set their MIF at zero. In this scenario, would MasterCard have survived in the face of competition from the Visa regime? Mr Justice Popplewell thought it likely that if MasterCard had a zero MIF and Visa’s MIFs were set at their actual levels, card issuing banks would have taken their business to Visa (and clearly, a Visa monopoly would be no better for consumers and no less anti-competitive).

In light of the above, Mr Justice Popplewell considered the MasterCard’s MIFS were necessary for the functioning of its payment system, describing them as “objectively necessary as an ancillary restraint“. Paragraph 44 of Mr Justice Popplewell’s judgment discusses the ancillary restraint doctrine, which can essentially operate to take a practice outside of the Article 101 TFEU prohibition in a situation which is predominantly “pro-competitive” but “has as one of its constituent parts what would be a restraint on the autonomy of the parties if considered in isolation“.

In addition, Mr Justice Popplewell did not consider there was any restriction of competition because, had MasterCard had a zero MIF, it would not have survived in the market. It was not appropriate to think that in the scenario of MasterCard operating a zero MIF, Visa would only have been able to operate at lower rates also.

The Future?

The decision of Mr Justice Popplewell is certainly likely to impact upon the ongoing class action brought by Walter Merricks CBE on behalf of some 46 million consumers, as discussed in further detail in our last blog piece. It seems far less likely that the consumer class action will be successful in the UK in light of the latest decision in the MasterCard litigation.

 However, MasterCard’s request to appeal the judgment in the Sainsbury’s case was refused on 22 November 2016, therefore despite Mr Justice Popplewell’s recent ruling; the decision in the matter of MasterCard and Sainsburys (which cost MasterCard some £68.5 million) is unlikely to be reversed.

 

SFO win a reminder of the limits of privilege in internal investigations

In May the Serious Fraud Office persuaded a High Court judge to order Eurasian Natural Resources Corporation to hand over internal investigation documents it had claimed were privileged. The decision brings back into focus the vexed question of which documents produced in corporate internal investigations can be withheld in subsequent regulatory investigations and prosecutions. Continue Reading

Long awaited certainty on cut-off for PPI claims

In a previous blog post, we discussed how the Financial Conduct Authority (“FCA“) was backing a call by the banks for the introduction of a two year cut-off for PPI claims.

Deadline

The FCA has now announced that the final deadline for making a new PPI complaint will be 29 August 2019.   Andrew Bailey (Chief Executive of the FCA) commented that “putting in place a deadline and campaign will mean people who were potentially mis-sold PPI will be prompted to take action rather than put it off. We believe that two years is a reasonable time for consumers to decide whether they wish to make a complaint“. Continue Reading

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