The end of redress scheme outcome challenges?

The recent case of R. (on the application of Holmcroft Properties Ltd) v KPMG LLP 2018 WL 04636705 has confirmed that Judicial Review is not the appropriate avenue for a bank customer unhappy with an accountancy firm acting as a 'skilled person' in approving an offer of compensation by his bank under a redress scheme relating to mis-sold financial products.

Background

In 2012, following the discovery of serious and widespread failings by a number of UK banks regarding the sale of IRHPs, the FSA (now FCA) agreed with those banks, the creation of redress schemes in which the banks would review their engagement with customers and provide any necessary redress to customers. In order to ensure that the banks' conclusions were appropriate, fair and reasonable, their decisions were to be overseen by an independent reviewer who was approved by the FSA and appointed as a 'skilled person' pursuant to S166 of the Financial Services and Markets Act 2000. The independent reviewer was to report to the FSA as to whether the banks were carrying out their reviews as agreed, which involved reviewing and making an 'AFR assessment' on each of the compensation offers made by the banks. Barclays Bank Plc (Barclays) chose to appoint KPMG as its independent reviewer.

Holmcroft Properties Limited (Holmcroft) was a customer of Barclays. As part of its review, Barclays agreed that it had mis-sold IRHPs to Holmcroft and offered to pay compensation. The compensation offered, however, only covered the basic redress of a refund of the swap payments, and did not include any compensation for the consequential losses claimed by Holmcroft. In its AFR assessment, KPMG approved this decision.

Holmcroft sought to challenge the decision through a Judicial Review of KPMG's approval of Barclays's decision. Judicial Review enables people to challenge the exercise of power by a public body or office. Holmcroft argued that KPMG had failed to discharge its public law duties of fairness (acting as independent reviewer appointed at the behest of the FSA).

Judicial Review at first instance

At the Judicial Review hearing, the fundamental question of whether a private body, such as KPMG, can be capable of having its decisions judicially reviewed was considered. The claim failed, as the court concluded that KPMG's duties in the review "did not have sufficient public law flavour to render it amenable to judicial review". Holmcroft appealed.

Appeal

The Appeal was dismissed. KPMG, in its role as the skilled person, was not amenable to Judicial Review. The Appeal Court made the following conclusions:

1. The criterion for amenability for Judicial Review is very broad – it requires "careful consideration of the nature of the power and function that has been exercised to see whether the decision has a sufficient public element, flavour or character to bring it within the purview of public law"';
2. Public law principles can still apply to a situation where the decision arises out of a contractual arrangement (i.e. between Barclays and KPMG);
3. One must look beyond the source of a body's power and the manner in which the body has been appointed. A body whose power derives from contract and whose functions are partly public and partly private can still be amenable to Judicial Review; and
4. The position of the body who has been appointed should be analysed as part of a wider regulatory context by standing back and examining its function within the wider context of, in this case, the review and what the FSA was aiming to achieve.

In this case

1. KPMG had no statutory power to make its assessments. Its power came from its contractual arrangement with Barclays;
2. KPMG carried out a role that the FSA could not have done itself (due to resources);
3. KPMG did not replace the FSA's role. The FSA was not obliged (by statute) to carry out an independent review of the banks' decisions;
4. The redress scheme and Barclays' appointment of KPMG were both voluntary;
5. Just because KPMG's job assisted the FSA with its own objectives didn't make it sufficiently amenable for Judicial Review;
6. Looking at KPMG's role overall, it conducted a high-level review on behalf of, and provided a detailed report to, the FSA relating to the commitment that the FSA had obtained from the banks to provide affected customers with appropriate compensation. It was too narrow a view to say that making the individual AFR assessments was outside the scheme of statutory regulation; and
7. Finally, the nature of the redress scheme was, in essence, for the pursuit of private rights. The FSA didn't intend for there to be any public law challenges to the AFR assessments and it didn't intend to replace the role of the courts, which would be the correct route for redress if customers were not happy with their compensation offers.

"The reality is that Holmcroft's bringing of a complaint against KPMG was ancillary to pursuing a private law claim. The requirements of the FSA merely overlaid ... a private dispute. They did not change the character of that dispute, which was fundamentally a private law matter."

Conclusion

Although each application for Judicial Review turns on the particular facts of the case, this decision will make if far more difficult for bank customers to apply for Judicial Review if they feel that they have been treated unfairly or are unhappy with the outcome of a FCA approved redress scheme.

Moreover, the cases of Elite Property Holdings Ltd and another v Barclays Bank Plc [2018] EWCA Civ 1688 (17 July 2018) (Flaux LJ), Suremime Limited v Barclays Bank plc [2015] EWHC 2277 (QB) and CGL Group Limited v Royal Bank of Scotland [2016] EWHC 281 (QB) have further limited the options for customers pursuing an alternative route to challenging financial institutions regarding their liabilities arising out of FCA past business reviews.

It leaves customers effectively with a choice of either accepting compensation offered under a redress scheme or rejecting the offer and pursuing a civil remedy through the courts.

This publication is intended for general guidance and represents our understanding of the relevant law and practice as at October 2018. Specific advice should be sought for specific cases. For more information see our terms & conditions