Court of Appeal rejects Titan Class X claim: speedread Q & A

(This article was first published on Lexis®PSL Banking & Finance. Click for a free trial of Lexis®PSL)

What was the appeal about?

Credit Suisse Asset Management (“CSAM”) was the originator of Titan 2006-1, a commercial mortgage backed securitization (“CMBS”). The Titan 2006-1 SPV (“Titan”) issued eight tranches of bonds (A to H) for a total of EUR 723 million. It used the proceeds to acquire commercial real estate loans from CSAM.

Like many CMBS structures of that vintage, the Titan CMBS featured “Class X notes”. These were a small (EUR 50,000) tranche of bonds that ranked ahead of the other tranches in certain respects and bore a special variable rate of interest. Their purpose was to ensure that if Titan was due to receive more in interest from the loans than it owed to the tranche A to H bondholders, that “excess spread” would be paid to the Class X noteholder (which was CSAM). In other words, the Class X notes allowed CSAM to extract any surplus interest from the loans it had securitized, rather than leave it trapped in Titan.

Because the excess spread was generated across hundreds of millions of euros of loans and bonds but paid as interest on only EUR 50,000 of Class X notes, the Class X interest rate could be thousands of percent and tens of millions of euros.

The loans Titan had acquired suffered significant defaults. Titan became unable to pay the interest due on the bonds it had issued. However, interest was still due on the Class X note, because the transaction documents defined the Class X interest rate by reference to sums due to Titan on the loans, rather than sums actually received.

Disputes arose between CSAM and some class A to H noteholders about various aspects of how the Class X interest rate should be calculated, and when the Class X notes should be redeemed. These issues were decided by Mr Justice Etherton in the High Court earlier in 2016. When the case reached the Court of Appeal, only one issue remained: whether, when calculating the Class X interest rate, the fact that default interest was due on some of Titan’s loans should be taken into account. Continue Reading

FCA and PRA announce changes to enforcement and disciplinary process

On 1 February 2017, the Financial Conduct Authority and the Prudential Regulation Authority released a policy statement that the regulators say is aimed at strengthening the transparency and effectiveness of their enforcement and decision-making processes. This policy statement follows on from an earlier Treasury review in these areas. Continue Reading

FCA chief calls for dispute resolution mechanism for small firms

The Yorkshire Post has reported that Andrew Bailey, CEO of the Financial Conduct Authority, is working with Parliament to develop an adequate and independent complaint resolution for SMEs who believe that they have been badly advised or “mis-sold” a product by a financial institution.

Mr Bailey notes that the Financial Ombudsman Service (“FOS”) exists predominantly to resolve complaints about financial services’ businesses by individuals (the FOS can consider certain complaints by “micro enterprises”, which means small businesses employing less than ten people and with a turnover or annual balance sheet of Euro 2 million or less). Therefore, he said that he was keen to see the establishment of an effective dispute resolution mechanism for SMEs, recognising the sometime prohibitive costs of bringing Court proceedings. Mr Bailey added that the idea was backed by a number of MPs and the Government has said that it would look into it.

The devil will really be in the detail here and the FCA’s idea seems to be very much in its infancy. For example, it is not clear whether the proposed dispute reclusion mechanism would be created via an expansion of the FOS’ existing jurisdiction or an entirely new scheme sitting inside or outside the auspices of the Court system or mediator providers.

The messages therefore for banks and other financial institutions at the moment is to watch this space but be aware of the FCA’s thinking about the future of complaint resolution and the way in which the wind may be blowing.

Supreme Court to decide if London Whale notices identified Achilles Macris

In a previous blog we described how the FCA is facing a number of challenges from individuals arguing that they are identifiable from regulatory notices addressed to their employers. Individuals are granted third party rights under section 393 of the Financial Services and Markets Act 2000 (“FSMA“), which essentially provides that, if an FCA notice identifies someone other than the person to whom the notice has been given and is prejudicial to that person, a copy of the notice must be given to that person. Section 394 then allows the individual to make representations and request relevant documents before the  notice is published. In several live cases the FCA is accused of failing to respect those safeguards.

In mid-October the UK Supreme Court heard the FCA’s appeal from the Court of Appeal judgment in FCA v Macris [2015]. In that case the FCA had issued warning, decision and final notices informing JP Morgan that it was to be fined (to the tune of £138 million) due to failings in respect of a credit derivatives trading portfolio that lost the bank over $6 billion: the so-called “London Whale” trades. Continue Reading

One too many: summary judgment for bank in pub swaps case

Mr Marsden was in the business of buying, restoring and selling pubs and hotels, financed by loans from Barclays. In July 2006 he entered into an interest rate swap with the bank to hedge floating rate loans of £1.6 million advanced to buy two pubs in Suffolk and Derby (£750,000 and £850,000 respectively). The swap was terminated by Mr Marsden in July 2007 and he received a cancellation payment of £30,000 as interest rates had risen above the fixed rate.

In May 2007 he sold the Suffolk property and repaid the £750,000 loan. The Bank lent him a further £1.4 million (in addition to the remaining loan of £850,000) to buy another pub in Shropshire.  Further swaps were entered into as a hedge against the interest rate risk under the outstanding loans at a fixed rate of 5.63%.

After a fall in interest rates in 2008, like many similar borrowers Mr Marsden began having to make payments to the bank under the swaps. By 2009 he was in financial difficulty. In August 2009, he complained to the Financial Ombudsman Service that the bank had mis-sold him the swaps.  The FOS did not notify the bank of the complaint until May 2010.   Payments to the bank stopped for a period in 2010. In July 2010 the parties met to discuss a restructuring of the indebtedness. The bank said it would not agree a restructuring whilst the FOS complaint remained unresolved.  In September 2010, Mr Marsden withdrew the complaint.

Following further negotiations the bank offered a new loan in January 2011 to consolidate the liabilities. It was a condition of the offer that the swaps were broken. Mr Marsden accepted the offer in February 2011, and in March a settlement agreement was signed. In it he acknowledged that the settlement was “in full and final settlement of all complaints, claims and causes of action which arise directly or indirectly, or may arise, out of or are in any way connected with the Swaps“.

Despite the restructuring, the business continued to struggle and in May 2012 Mr Marsden was declared bankrupt.

In June 2012 the FCA announced that the bank (along with four other banks) had agreed to review past sales of interest rate hedging products to certain categories of customers. The bank subsequently offered Mr Marsden redress totalling £608,601.14 including interest. The offer provided that Mr Marsden could make a claim within 40 days for consequential losses, should he wish to do so.

Called to the bar

Mr Marsden sued alleging breach of statutory duty, negligence, breach of contract and misrepresentation in the sale of the swaps. The bank argued that these causes of action had been compromised by the 2011 settlement agreement.

Mr Marsden also brought claims for (i) restitution, on the grounds that the swaps were contrary to public policy and/or failed to comply with “statutory preconditions”; (ii) deceit; and (iii) breach of contract in conducting the review. The bank argued that, as well as being compromised by the settlement agreement, these claims were hopeless. The bank applied for summary judgment. The claimant argued as follows:

  • That the bank gave no consideration for the settlement agreement. But the judge concluded that the new loan agreement and the cancellation of the swaps were “part and parcel of the same overall transaction as the Settlement Agreement” and as such there was adequate consideration for the release of future claims against the bank.
  • That the bank’s refusal to restructure the lending until he withdrew his FOS complaint and signed the settlement agreement amounted to duress. The judge re-iterated the ingredients of duress: “…pressure, (a) whose practical effect is that there is compulsion on, or a lack of practical choice for, the victim, (b) which is illegitimate, and (c) which is a significant cause inducing the Claimant to enter into the contract”. It was held that the settlement agreementwas part of a commercial negotiation of the terms on which the Bank would provide a large new loan to a defaulting debtor“. There was no obligation on the bank to lend further to Mr Marsden while there was a complaint outstanding. As such, the settlement agreement was signed due to commercial considerations and not duress.


  • The scope of the settlement agreement was not wide enough to cover (or was incapable of covering) alleged misconduct, breach of regulatory duties, fraud, “sharp practice” (whereby the bank was aware of claims not known to the claimant), and breach of contract in respect of the swaps review. The court cited case law on the construction of settlement agreements, including Lord Bingham’s statement in Bank of Credit and Commerce SA (In Liquidation) v Ali (No.1):A party may, at any rate in a compromise agreement supported by valuable consideration, agree to release claims or rights of which he is unaware and of which he could not be aware, even claims which could not on the facts known to the parties have been imagined, if appropriate language is used to make plain that this is his intention“. It was held that the settlement agreement release clause was wide enough to cover all possible future claims, whether known or not. It was highlighted that even the widest wording would not normally exclude future fraud claims. As Mr Marsden had already made a misrepresentation claim, the settlement agreement was viewed as wide enough to cover deceit claims. In any case, the judge found no “sharp practice” by the bank.


The bank was awarded summary judgment against on the basis that the settlement agreement had compromised any possible claims in relation to the swaps. The claims had no realistic prospect of success. The judgment is reported as Marsden v Barclays Bank Plc [2016] EWHC 1601 (QB).

One for the road

This decision reasserts in the swaps mis-selling context that borrowers will be held to their agreements, including settlement agreements. It will remain very difficult indeed for a borrower that has signed up to a commercial settlement to unwind that agreement later by making creative allegations like economic duress, lack of consideration or that it can avoid the release it gave by alleging sharp practice. Banks can take comfort in the enforceability of settlements they agree (although remembering the limits on settling unknown or future fraud claims). They can also take heart that it is still possible to get fundamentally weak claims dismissed on a summary basis without the costs of a full trial.

MasterCard faces one of the UK’s first class-action lawsuits

Class Actions in the UK

Class actions have long been a feature of the US legal landscape. But until October 2015 there was no genuine “class action” procedure in the UK. Then the Consumer Rights Act 2015 (“CRA“) introduced collective proceedings that can be brought in the Competition Appeal Tribunal (“CAT“) by representatives of consumers or businesses.

While previously the UK had “opt-in” group litigation orders, these were really just a means of organising litigation where large numbers of claimants were actively pursuing similar claims. The CRA permitted “opt-out” collective actions for the first time.  In “opt-out” cases anyone resident in the UK who is within the defined class is automatically included in the action unless they opt out. There is no need for the representatives to identify all of the members or specify their losses. If the claim succeeds, aggregate damages will be awarded to the group of claimants (as opposed to an individualised assessment for each claimant).

Initially, the Government’s intention was to exclude funders, law firms and special purpose vehicles from acting as representatives for either consumers or businesses in collective proceedings. But no such provision was incorporated into the legislation or the CAT rules.

The new CRA regime will apply retrospectively. Collective proceedings are to be expected in respect of competition law infringements which have historically been identified by the UK and/or EU competition authorities.

The consumer class action against MasterCard

MasterCard now finds itself faced with a legal challenge brought by a representative under the CRA on behalf of consumers, on an “opt-out” basis.

 Multilateral Interchange Fees (“MIFs“) 

The action relates to a previous finding by the EU Commission that MasterCard’s MIFs were kept unfairly high. Interchange fees are paid by a retailer’s card acceptance provider to a consumer’s card issuer (such as MasterCard) every time a card transaction takes place.  The retailer’s bank pays the retailer the cost of the goods/services, less a service charge that is largely determined by the level of MIF.  Retailers then pass on the cost of accepting card payments to their customers, by way of increased retail prices.  Interchange fees can be bilaterally agreed between the issuing bank and the retailers bank, or, the default fee established multilaterally by MasterCard (the MIF) will apply.  The MIF should be limited to no more than 0.3% on credit cards and 0.2% on debit cards.

European Commission decision

In 2007, the European Commission issued a decision against MasterCard which was applicable to cross-border transactions using MasterCard and Maestro credit and debit cards in the European Economic Area. It found 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. The Article 101(3) exemptions were not satisfied.   MasterCard failed in an appeal and in September 2014 the European Court of Justice confirmed that MasterCard’s MIF restricted competition.

Current collective proceedings

The representative of the consumer proceedings is Walter Merricks CBE, who was previously the Chief Financial Services Ombudsman and is a non-practising solicitor. Mr Merricks has instructed a law firm to file the claim.  This includes a plan for managing the claim – it is said that “the proposed class of 46 million consumers will be communicated with through a claims website, newspapers, magazines and social media”. It is reported that the claim has been quantified at £14 billion worth of charges borne by consumers.  The claim relates to MasterCard’s MIF to 2008, as following the European Commission judgment referred to above, MasterCard undertook to reduce its cross-border MIF to the recommended level. A litigation funder will provide funding of up to £40 million to Mr Merricks and his legal advisers.

The Sainsbury’s Supermarkets Ltd v MasterCard decision

The recent judgment in Sainsbury’s Supermarkets Ltd v MasterCard Incorporated and others is likely to have an impact on this consumer action.  In 2012, Sainsbury’s filed a claim against MasterCard UK seeking damages for loss suffered by Sainsbury’s due to MasterCard’s infringement of competition law, through its setting of the UK MIF.   On 14 July 2016, the CAT awarded Sainsbury’s £68.5 million plus interest, ruling that MasterCard had restricted competition by setting fees on card transactions in the UK.

MasterCard tried to use the “passing-on” defence, asking the CAT reduce the damages award because Sainsbury’s passed the costs to its customers. The CAT ruled that “no identifiable increase in retail price has been established, still less one that is causally connected to the UK MIF. Nor can MasterCard identify any purchaser or class of purchasers of Sainsbury’s to whom the overcharge has been passed who would be in a position to claim damages“.  The CAT confirmed that MasterCard would have had to prove that there was a further class of claimant (the consumers) who could bring an action because the overcharge was passed on. The CAT’s ruling on this point will potentially cut the other way now MasterCard is facing a class action by the consumers like those who could not be shown to have suffered a loss in the Sainsbury’s case.

Best in class?

The introduction of “opt-out” class actions along the lines of the US model is controversial, with many fearing it will see the rise of a US-style litigious culture driven by entrepreneurial funders and law firms seeking out opportunities to certify large classes and generate returns as much for themselves as the class they purport to represent. On the other hand, the competition law context might be one in which individual consumers lack the incentives and resources to take on large organisations without a class-action regime, meaning wide-reaching anti-competitive behaviour would never be redressed. Now that the CRA has one of its first high-profile cases, there will be a chance to see what the pros and cons of the new procedure will be in practice.

Financial Ombudsman makes adviser pay for failing to stop £250,000 fraud on client

The Financial Ombudsman Service has sent a clear message to financial advisers that they must be vigilant to the risk of fraud when processing transactions on behalf of their clients. In its 23 August newsletter the FOS highlighted a recent case in which an adviser was ordered to pay fraud losses that the Ombudsman considered could have been avoided had the advisor heeded clear “alarm bells” that a transaction might be fraudulent.

The Fraud

In the case before the FOS, a financial adviser’s client lost £250,000 in bond savings. Scammers hacked her email account and instructed her adviser to transfer funds to an account said to be a solicitor’s bank account in Hong Kong. The adviser instructed the client’s investment provider to make the transfer. But the investment provider could not trace the solicitors firm, and so declined to make the transfer.

The adviser emailed the client to explain that the money could not be transferred. The fraudsters replied providing details of a UK bank account in the client’s name. Although the account was in the client’s name, it was not her account. The investment provider highlighted to the adviser that the account details were different to their records. The adviser confirmed they were correct and the transfer went ahead.

The investment provider later sent a letter to the client confirming the withdrawal, which alerted her to the fraud.

The Remedy

The client reported the fraud to the police and luckily was able to recover £170,000. She asked her adviser to reimburse the shortfall. The adviser offered to pay only 25% of the £80,000 residual loss. The client brought her case to the FOS.

During the FOS investigation it came to light that the client had been a customer of the adviser for more than ten years and always attended face-to-face meetings when she wanted to discuss her investments. The client therefore expected the adviser to have at least phoned her before acting on email instructions to transfer a significant sum. In its defence, the adviser confirmed that the client had recently been emailing about a mortgage, so the email regarding the transfer did not seem odd. As the client had previously worked in Asia, it seemed reasonable for her to use a bank account in Hong Kong.

The FOS noted that “as a finance professional, the adviser would have been aware of the risk of fraud and scams”. It decided that the nature and content of the communications with the fraudsters should have put the adviser on notice of the risk of fraud. It commented that, “having received an email asking for such a large sum of money to be transferred overseas, the adviser could have realised something was not right. If that wasn’t enough, we thought alarm bells should certainly have started ringing when the investment provider said they couldn’t trace the firm of solicitors. We found it hard to see why, at that point, the adviser hadn’t phoned [the client]”. The FOS concluded that the adviser should have prevented the fraud, and ordered it to make good the shortfall in the client’s investments.

With an estimated £755 million lost to financial fraud in 2015, including £121 million lost to fraudulent bank transfer scams, this ruling suggests advisers will be called upon to be the first line of defence for their clients. They need to make sure they are up to date with potential fraud risks and remain vigilant, or risk bearing the cost.

End in sight for PPI claims? FCA updates on cut-off deadline

In our blog post “Shift towards a PPI cut-off deadline reported” (24 June), we explained that internal documents had revealed that the FCA was backing a call by banks for the introduction of a two year cut-off for new PPI claims.

The official FCA announcement was made on 2 August 2016. It confirmed that the FCA considers that its package of proposals regarding PPI complaints (as set out in the FCA’s November 2015 consultation) should be taken forward. The proposals included setting a deadline for bringing new PPI complaints, and a communications campaign to bring the proposed cut-off deadline to consumers’ attention.  It has been suggested that the consumer communication campaign could cost up to £42 million, which is likely to be shouldered by the banks.

Before making a final decision on the package of proposals, the FCA is “consulting on changes to the proposed rules and guidance concerning the handling of PPI complaints in light of Plevin” (the Supreme Court decision in Plevin v Paragon Personal Finance Ltd [2014] UKSC 61).

The proposed changes to the rules and guidance concerning the handling of PPI complaints were flagged by the FCA following responses received to its November 2015 consultation. They relate to three key aspects of the current rules and guidance:

  • to include profit share in the FCA’s approach to assessing fairness and redress;
  • to allow rebates received by a consumer when cancelling their PPI policy to be partly reflected in any redress due (reducing the redress); and
  • clarifying how firms should assess redress where commission or profit share rates varied during the life of the PPI policy.

Consultation on these proposed changes will close on 11 October 2016. If after that the FCA makes the final decision to proceed with the package of proposals, it has said it anticipates that:

  1. guidance concerning the PPI deadline, who is to meet the cost of the consumer communications campaign fee, and how changes to the handling of PPI complaints post-Plevin, will be published before the end of December 2016;
  2. any changes to the rules and guidance post-Plevin would come into force by the end of March 2017; and
  3. the rule setting the PPI cut-off deadline would come into force by the end of June 2017, with the consumer communication campaign starting at the same time, meaning a cut-off deadline in June 2019.

This delay could force Banks to set aside yet further funds to cover claims made during this longer than anticipated period. At least it now looks like final clarity on the matter can be expected before the end of 2016.

The future of market rigging investigations?

Forex hit the headlines once again in late July, after the arrest of HSBC global head of forex cash trading (Mark Johnson) at JFK airport in New York.   The US Department of Justice alleges that Mr Johnson (and Stuart Scott, who was HSBC’s head of forex cash trading for Europe, the Middle East and Africa until 2014) used a technique called “ramping” when arranging for Cairn Energy to purchase $3.5 billion in sterling. This means that the bank is said to have purchased the sterling for HSBC’s owns accounts, caused the price of sterling to jump, and resold it to Cairn at higher prices.

Accusations of misconduct in FX trading are sadly nothing new. But here the Cairn trade had already been scrutinised and given the all clear. In 2013 HSBC had engaged a law firm to conduct an investigation into its currency trading, including this trade. Such internal investigations are common in the financial services sector, and the regulator often relies heavily upon their findings to supplement its own work (although the regulator will generally “test” the evidence and conclusions). In this instance no breaches of the bank’s internal code of conduct were found.

The incident raises again the question whether the reliance on internal investigations into market manipulation scandals can continue, or, whether there will be pressure on regulators to insist upon independent external investigations in the future.

Forex rigging – a recap

The issues with FX manipulation arose in part because the FX market is unregulated, and as such there are no specific rules governing it. The absence of a physical FX marketplace also lends itself to the potential for rigging. Trading takes place on electronic systems, operated by large banks – and approximately 40% of the world’s dealing goes through London.  Currency prices fluctuate based on supply and demand, and in response to economic news.

To help with valuing multi-currency assets and liabilities, daily spot FX benchmarks (known as “fixes”) are determined. Until recently, the main fixes were calculated by Reuters based upon currency trades which took place between 30 seconds before and 30 seconds after 4pm GMT.  Because the fix was based such a short period, traders were able to collaborate and place aggressive orders during the one minute window to distort the fix.   Traders also shared confidential information regarding their clients’ activities to enable fixes to be manipulated. In 2014, the FCA fined five banks a collective of £1.1 billion for their roles in G10 spot FX manipulation.  Since then the fix window has been lengthened to five minutes, making it harder to manipulate.

Changes to the conduct of investigations?

Once it began to emerge that market rigging may have taken place, the banks involved all conducted their own internal investigations. The findings of those internal investigations were passed to the FCA and other authorities.

In 2014, the FCA announced a remediation programme, which required firms to “review their systems and controls and policies and procedures in relation to their spot FX business to ensure that they are of sufficiently high standard to effectively manage the risks faced by the business”.   Senior managers were asked to confirm that such action had been taken, with the focus being on clear accountability for the specific issues which the FCA had highlighted as requiring change.  Despite the advantages of a remediation programme, this still put the emphasis on firms to ensure their own compliance and accountability, with limited external checks.

In 2015 Jamie Symington – Director in Enforcement (Wholesale, Unauthorised Business and Intelligence) at the FCA – highlighted the perceived benefits of allowing firms to conduct their own investigations: an understanding of their own business enabling them quickly to investigate, establish the facts and remediate.  But Mr Symington noted that, in circumstances where the FCA may be considering taking enforcement action, it must consider whether an internal investigation will help or hinder the FCA’s investigation.  The FCA is alive to the fact that firms will have their own interests in mind when an investigation is being conducted.

If incidents like Mr Johnson’s arrest, some three years after an internal investigation found no fault, continue to arise, there is clearly a risk that regulators will think again about the way in which investigations in the financial services sector are conducted. That may ultimately entail fully independent, external investigations, either by skilled persons appointed under section 166 of FSMA or by some other bespoke procedure. Such a move would undoubtedly make investigations more costly and cumbersome to run, and as such more of a burden for the firms under investigation. The Johnson case certainly highlights once more the need for firms asking regulators to rely on internal investigations to ensure they are conducted by genuinely independent external professionals in a robust manner that will withstand scrutiny. Otherwise firms face the risk that scrutiny may be brought to bear in the US courts.

Financial Disputes Roundtable: “Get me my money back!” Tracing the Proceeds of Fraud and Cybercrime

For the next in our breakfast roundtable series, Laurence Winston and I will be joined by intelligence and investigations specialists James Stothard and Damian Ozenbrook of Blue Square Global to look at tracing and recovering stolen assets. Following on from our well-received recent roundtable session on how to react to a cyber-theft or fraud, we are looking forward to another lively Chatham House Rules discussion of a range of issues including:

  • Effective use of investigators and other asset tracing techniques
  • The investigator’s perspective
  • Looking behind complex trust structures and tracing ultimate owners
  • Following the money across jurisdictions
  • Enforcement tactics in the UK, EU and beyond

The roundtable will be taking place on 20 September 2016, with registration and breakfast from 8:15 and the discussion getting underway from 8:45. If you would like to join us please register here: places are limited.