On 6 October 2017, the Court of Appeal ruled that an investor with an interest in promissory notes cannot sue the issuing bank for allegedly making misleading statements about those promissory notes. There was no contractual relationship; only the bearer of the promissory notes could sue the issuer for breach of contract.
On 14 September 2017, alleged “serious concerns” lead the Financial Conduct Authority (“FCA”) to reveal its final decision to exercise its jurisdiction under Part 4, Section 131 of the Enterprise Act 2002 (“the Act”). The FCA subsequently referred investment consultancy and fiduciary management services to the Competition Markets Authority (“CMA”) for a Market Investigation Reference (“MIR”) – the first time that the FCA has made such a reference.
Christopher Woolard, the FCA’s Executive Director of Strategy and Competition commented:
“It is a significant step for us to make this recommendation. We have serious concerns about this market and believe that the CMA is best placed to undertake this work”
As mentioned in our blog posted on 20 September 2016, MasterCard was facing one of the UK’s first class-action lawsuits, following the introduction of collective proceedings under the Consumer Rights Act 2015. This allows for collective proceedings to be brought in the Competition Appeal Tribunal (“CAT”) on an opt-out basis, by representatives of consumers or businesses.
The action facing MasterCard was in respect to a previous finding by the EU Commission that MasterCard’s Multilateral Interchange Fees (“MIF”) were kept unfairly high. In September 2014, the European Court of Justice confirmed that MasterCard’s MIF restricted competition under the Treaty on the Functioning of the European Union (“TFEU”). The collective proceedings were being led by Walter Merricks CBE, on behalf of a proposed class of 46 million consumers and in respect of MIF to 2008.
The CAT was asked to consider whether to grant a “collective proceedings order”, allowing the class action to go ahead. The CAT declined to grant such an order – however, it is important to note that the CAT’s decision was due to the damages model sought by the class of consumers and was not based upon an adversity to allow collective proceedings. Continue Reading
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”)) 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).
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.
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.
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.
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.
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  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.
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.
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.
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.
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.