Legal duty to conduct the FCA IRHP Review Fairly – Suremime v Barclays Bank

The High Court has decided that it is arguable that major banks owe duties of care to their SME customers to conduct the FCA Interest Rate Hedging Product (IRHP) Review in accordance with the rules agreed with the Financial Conduct Authority (previously, the Financial Services Authority). The judgment in Suremime Limited v. Barclays Bank PLC is relevant to any SME customer that is concerned that its redress outcome under the FCA IRHP Review is not fair and reasonable.

Barclays Bank IRHP Swaps Mis-selling

The Derivatives Contract sold by Barclays

On 11 June 2008, Barclays sold one of its SME customers, Suremime, a complex 10-year structured collar for an amortising notional amount of £1 million with a cap rate of 6.2% and a floor rate of 5.2%. Under the structured collar, Suremime was unable to benefit from any fall in interest rates below 5.2%. Instead, any fall in interest rates meant that Suremime had to pay Barclays at an increasingly higher interest rate (which was capped at a maximum of 6.2%).

The complex and risky nature of structured collars was subsequently recognised when the Financial Conduct Authority announced on 29 June 2012 that several major banks, including Barclays, had agreed to stop marketing structured collars to retail customers.

Barclays’ Conduct of the IRHP Review Scheme

On 17 July 2013, Barclays confirmed that Suremime was a “non-sophisticated customer” and invited Suremime to participate in the IRHP Review by way of a customer fact-find with Eversheds, a law firm that were appointed by Barclays to conduct this one-sided investigation (however, the bank’s derivative salesperson and relationship managers were never interviewed). Suremime agreed to participate in that fact-find, which took place on 16 September 2013 and was attended by Suremime, Eversheds and KPMG (who were acting as independent reviewer for Barclays).

On 11 March 2014, Barclays offered Suremime limited redress in the form of a replacement swap for a term of 9 years and 10 months at a fixed rate of 5.84%, which Barclays alleged Suremime would have terminated on 3 August 2010 at a breakage cost of £131,533. This sort of redress, a replacement swap, is cheap for banks to provide and is often offered to customers without legal representation. Suremime attempted to argue that, had Barclays complied with the regulations governing the sale of IRHPs, it would have been sold a 5-year interest rate cap at 6.5%. However, Barclays refused to amend its offer of redress.

Following the appearance of John Griffith-Jones (chairman of the FCA) and Martin Wheatley (chief executive of the FCA) before the Treasury Select Committee on 10 February 2015, the FCA’s confidential June 2012 and January 2013 agreements with several major banks (which established the IRHP Review) was published openly for the first time.

On 24 June 2015, the FCA finally published the agreements with the banks and instructions to the skilled persons, despite previously stating (for example to BBC Panorama in October 2013) that the agreements were confidential.

Litigation: Application to Amend Particulars of Claim

Suremime subsequently applied for permission to amend its particulars of claim to include three new legal claims, namely that:

  1. A contract was formed between Barclays and Suremime (as a result of Barclays’ offer to conduct the IRHP Review and Suremime’s agreement to participate in the IRHP Review), which included a term that Barclays would conduct the IRHP Review in accordance with the June 2012 and January 2013 agreements with the FCA;
  2. By agreeing to provide redress in accordance with the June 2012 and January 2013 agreements, Barclays owed a duty of care to Suremime to conduct the IRHP Review in accordance with those agreements; and
  3. By entering into the June 2012 and January 2013 agreements with the FCA, Barclays owed a duty of care to Suremime to conduct the IRHP Review properly because, if Barclays failed to do so, the FCA would not suffer a loss whereas Suremime (who was intended to benefit from the IRHP Review) would suffer a loss.

Barclays resisted this application by attempting to argue that those new claims stood “no real prospect of success” and were “fanciful and contrived”. Barclays also attempted to argue that there was no need for SMEs such as Suremime to be given the right to enforce the terms of the June 2012 and January 2013 agreements between the FCA and the banks.

Application Judgment: Suremime Limited v. Barclays Bank PLC

HHJ Havelock-Allan QC held that it was more than merely arguable that Barclays owed duties of care to Suremime to conduct the IRHP Review in accordance with the June 2012 and January 2013 agreements, and therefore granted permission for Suremime to amend its particulars of claim to that effect.

In support of his decision, HHJ Havelock-Allan QC explained, at paragraph 34 of his judgment, that:

The FCA Review was intended to provide a route to fair and reasonable compensation without customers having to sue for mis-selling. Those who stayed their hand and have not sued for the mis-sale in the hope of deriving a satisfactory result from the FCA Review process, but now allege that the specification of the FCA Review has not been faithfully applied, may be left without any remedy if they did not agree a standstill or moratorium with the bank which sold the swap and the mis-selling claim has since become statute-barred.

A full copy of the application judgment is available to download.

Impact on Swaps Mis-selling Claims

The learned judge recognised the public importance of allowing SME victims of bank mis-selling who are dissatisfied with Review offers (such as swap for swap offers, or decisions by banks that no redress is due) to consider taking legal action.

Whilst Holmcroft v KPMG offers a public law remedy, the private law cause of action set out in Suremime is likely to be more attractive as it can become part of an overall mis-selling claim, in which the bank has often already made admissions of wrongdoing in the IRHP Review scheme.

Furthermore, this particular cause of action would not be subjected to the banks’ usual contractual estoppel defence, in which they seek to rely on standard non-advisory and non-reliance clauses to prevent claimants from alleging that banks provided advice (even though they did provide advice).

In relation to the importance placed by banks on their non-advisory and non-reliance clauses, please see the judgment of Tim Kerr QC in Crestsign v National Westminster Bank PLC & the Royal Bank of Scotland PLC (which is on appeal to the Court of Appeal). A full copy of the judgment in that case is available to download.

This decision also avoids the limitation hurdles that face most swaps mis-selling claims where the derivatives product in question was sold over six years ago (although such obstacles are not necessarily insurmountable, as demonstrated in the recent case of Kays Hotel Limited v. Barclays Bank PLC).

Any similarly affected SMEs should obtain legal advice in respect of their own IRHP review outcome decisions as soon as possible.

LEXLAW have conducted and settled substantially more derivatives litigation than any other law firm in England & Wales and are the leading law firm acting against banks in derivatives mis-selling claims.