There has been an interesting development in the courts relating to the FCA instigated Interest Rate Hedging Product Review, which may have significant consequences for any small business affected by the mis-sale of Interest Rate Hedging Products (“IRHPs”) over the last 15 years.
The administrative court has granted permission for the judicial review of a decision made by KPMG not to award consequential loss to a claimant under the IRHP review agreed between Barclays Bank and the FSA (now FCA) in 2013 (“the Review”).
The application for permission was made by a nursing home operator, Holmcroft Properties Ltd (“Holmcroft”), in relation to the conclusion of KPMG (acting as the “Independent Reviewer” of the Review pursuant to an appointment under section 166 of the Financial Services and Markets Act 2000) that the redress offered to Holmcroft in regards to IRHPs mis-sold by Barclays, was “appropriate, fair and reasonable”.
The application was resisted by KPMG, Barclays and the FCA, who claimed, among other things, that the relationship between the bank and KPMG was a matter of contract, with no wider public law duty to act fairly.
Reminding himself that at the permission stage of a judicial review application it was only the court’s role to consider whether Holmcroft’s case was properly arguable, Mr Justice Kenneth Parker allowed the application to proceed to judicial review whilst avoiding a substantive ruling on the merits of either side’s arguments.
There were several points which the judge considered had to be effectively answered by Holmcroft before such permission could be granted.
- First, there was KPMG’s contention that the Review agreement, which Barclays had entered into voluntarily with the FSA, constituted a contractual agreement. The relevant context was therefore private in nature, and did not import a public ‘flavour’ over which the administrative court should have jurisdiction. In response to this, Holmcroft submitted that instead of the FSA using its statutory powers to directly set up a consumer redress scheme (under section 404 FSMA, as has previously been seen for example in relation to consumers who had been given unsuitable advice to invest in Arch cru funds), it decided in the exercise of its statutory discretion to take another route, i.e. to enter into the Review agreement with the bank. Therefore, the FSA was securing that appropriate, fair and reasonable compensation would be payable to unsophisticated victims of mis-selling through establishment of the Review arrangements. This gave the arrangements, and in particular the function of the Independent Reviewer, which was integral and essential to those arrangements, sufficient public flavour. Although not providing his full view upon the weight of this rebuttal, the judge found that it was enough to get Holmcroft across the line in terms of a ‘reasonably arguable’ case.
- The second key point related to the scope and application of section 166 FSMA, which gives the FCA (formerly the FSA) the power to appoint a skilled person to conduct a review of a firm on its behalf, usually where the firm’s activities have given the FCA cause for concern. The defendant argued that the power derived from s.166 is used in many contexts and it is inconceivable that the exercise of this power would in all those contexts be open to judicial review. Holmcroft conceded that there were indeed only limited contexts in which the exercise of power under s166 would bring a designated skilled person within the public law realm, but that this was one of them. It invited the court to consider the specific function of the Independent Reviewer (KPMG) in the particular circumstances of the Review. This was to consider the fairness and reasonableness of the compensation awarded, which was integral to the FSA’s broader regulatory role. The defendant argued that the specific role of KPMG under the arrangements was that of a reporter, that it did not employ a quasi-judicial function, and that it could not be suggested that it was subject to the rules of procedural fairness or rationality in its decision making that would apply to a public body. While the judge noted that the court would carefully need to scrutinise what obligations, in terms of procedural fairness and substantive decision making, should be imposed on a person in KPMG’s particular position, he decided there was an arguable case and allowed the claimant to proceed with this point.
- The third main point which the judge considered required an answer was the defendant’s submission that there were (or at least had been) alternative remedies open to the claimant, which would provide relief. It was submitted by the defendant that this application was simply a means of Holmcroft remedying a mistake made in not bringing civil legal proceedings within the time limit prescribed by law. The related wider point was also made that if mis-selling had occurred there would be a contractual remedy, which could have and should have been pursued. Holmcroft countered this by submitting that the whole rationale behind the Review was to provide efficient recourse for a financially unsophisticated party, without having the cost, worry and general burden of pursuing proceedings in the courts. The judge considered that this was a reasonably arguable point. He also dismissed the argument that a complaint to the ombudsman would provide adequate recourse, recognising that there are limitations to its jurisdiction (for example, it is only open to micro-enterprises).
Holmcroft’s submissions on the quality of KPMG’s decision making were also attacked, in this instance by counsel for Barclays. They argued by reference to correspondence between Barclays and Holmcroft that even if KPMG were considered amenable to judicial review, the decision making process leading to KPMG’s conclusion in fact met the standards of public law. Again, on balance the judge considered that the evidence-based arguments submitted by Holmcroft to the contrary were at least arguable, and that Barclay’s arguments in this regard did not provide the ‘knock-out blow’ that would be required to halt the application. The judge again was extremely careful not to comment on the weight of either party’s submissions in this respect beyond the fact that there was an argument to be had.
Finally, the judge commented on the considerable general public interest attached to these proceedings. He explained that he had taken this interest into account when considering the merits of the application, which was a factor weighing in Holmcroft’s favour.
A date for the full judicial review is yet to be set down, though it is unlikely to take place before the summer is over. Many businesses dis-satisfied with the outcome they have received via the Review will be watching developments with great interest. It is, as yet, unclear what the potential consequences of a decision in Holmcroft’s favour might be for the Review as a whole. However the resources thrown at resisting the progress of this application (Barclays, KPMG and the FCA each had two barristers present) and the comments made by the judge about the wider public interest / importance of this issue, indicate that the ramifications are likely to extend far beyond Holmcroft’s own position.
A version of this article was published in the New Law Journal.