Holmcroft Properties Ltd, R (On the Application Of) v KPMG LLP, Court of Appeal - Civil Division, September 28, 2018, [2018] EWCA Civ 2093

Resolution Date:September 28, 2018
Issuing Organization:Civil Division
Actores:Holmcroft Properties Ltd, R (On the Application Of) v KPMG LLP

Neutral Citation Number: [2018] EWCA Civ 2093

Case No: C1/2016/1159





ELIAS LJ & MITTING J [2016] EWHC 323 Admin

Royal Courts of Justice

Strand, London, WC2A 2LL

Date: 28/09/2018

Before :





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Between :

Approved Judgment

Richard Gordon QC and Malcolm Birdling (instructed by Mackrell Turner Garrett) for Holmcroft

Javan Herberg QC and Mr Hanif Mussa (instructed by Herbert Smith Freehills LLP) for the Respondent

Richard Coleman QC and Ms Kerenza Davis (instructed by Baker McKenzie) for the First Interested Party

Dinah Rose QC and Ben Jaffey QC (instructed by Linklaters LLP) for the Second Interested Party

Hearing dates : 22-23 May 2018

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Lady Justice Arden : 1. independent reviewer in customer redress scheme: amenability to Judicial Review and fairness

1. These proceedings arise out of customer redress arrangements set up by the Financial Services Authority (``the FSA'') (now the Financial Conduct Authority (``FCA'')) with Barclays Bank plc (``Barclays''). In common with other banks, Barclays had missold interest rate hedging products (``IRHPs'') to customers for whom they were not appropriate. The FSA was until 1 April 2013 the regulator with statutory powers of the UK financial services industry.

2. As part of these redress arrangements, Barclays voluntarily agreed with the FSA that it would provide fair compensation to customers affected by the misselling. In addition, it also agreed with the FSA to appoint a ``skilled person'' to whom section 166 of the Financial Services and Markets Act 2000 (``FSMA'') as then in force (which is set out in the Appendix to this judgment) would apply. Barclays chose to appoint the respondent firm of accountants (``KPMG'') for this purpose. The FSA exercised its own statutory powers under section 166 to approve the appointment and to require the ``skilled person'' to make a report to it on the operation of the redress arrangements. Barclays also undertook to engage and obtain an opinion (an ``AFR assessment'') from the skilled person as Independent Reviewer in each case in which an offer of redress was made as to whether the compensation was appropriate, fair and reasonable.

3. The appellant (``Holmcroft'') was a customer of Barclays to which IRHPs were missold. Barclays offered Holmcroft compensation under the redress arrangements but the offer did not include compensation for certain consequential loss to which Holmcroft considers it is entitled. KPMG as Independent Reviewer made an AFR assessment approving the offer. Holmcroft then sought judicial review of KPMG's decision to approve Barclays' offer on the basis that it had failed to discharge its public law duties of fairness.

4. By order dated 6 March 2016 the Divisional Court (Elias LJ and Mitting J) dismissed the proceedings, first on the ground that the decision of a skilled person with respect to an AFR assessment was not amenable to judicial review, and, secondly on the ground that in any event the AFR assessment in this case was not, as Holmcroft alleged, unlawful. Holmcroft contended before the Divisional Court that in breach of its public law duties KPMG had failed to ensure that Holmcroft was provided with the bank records on which Barclays relied in making its decision declining to make the offer sought in relation to consequential loss. Holmcroft argued that the result of KPMG's actions was that it was unable to make effective representations to Barclays. On this appeal, Holmcroft contends that the Divisional Court was wrong on both grounds, but the second ground arises only if Holmcroft is correct on the first ground.

2. IRHP Compensation arrangements and holmcroft's claim

5. In March 2005, Holmcroft and its subsidiary, Holmwood Nursing Home Limited (``HNHL''), borrowed some £2m and £400,000 respectively from Barclays to acquire property. In April 2005, Holmcroft purchased an IRHP from Barclays. Both loans were restructured on 21 March 2007 as a 20-year repayment loan of £2.4m. On 10 April 2008, Holmcroft purchased a second IRHP. Barclays also provided Holmcroft with current account facilities.

6. Holmcroft subsequently suffered serious financial difficulty. In May 2011, Barclays appointed receivers of Holmcroft's properties. Holmcroft contended that the IRHPs had exacerbated its financial position, and caused it consequential loss. Barclays' own perception of the affairs of Holmcroft and HNHL was different, and drew on its internal records, known as Zeus records, which are relevant to the second ground.

7. In 2012, the FSA identified serious failings in the selling of IRHPs. The FSA reached voluntary settlements with several banks, including Barclays. As part of its settlement, Barclays undertook with the FSA that it would carry out an assessment of whether it was appropriate to provide redress to customers wrongly sold IRHPs, and if so, to determine what redress would be appropriate, fair and reasonable in the circumstances. Each offer of compensation would be reviewed by a skilled person appointed by Barclays and approved by the FSA pursuant to the exercise of its powers under section 166 FSMA. As part of its role, the skilled person had to confirm whether the redress offered to customers was appropriate, fair and reasonable.

8. Following review, on 28 March 2014 Barclays made redress offers of £243,821.43 and £197,003.37 to Holmcroft in respect of its IRHPs, plus an offer of 8% simple interest by way of compensation for consequential losses. By a response dated 22 July 2014, Holmcroft claimed further consequential losses of approximately £5.2m. Barclays rejected Holmcroft's claim on 5 September 2014. KPMG as the Independent Reviewer confirmed the appropriateness of the offer of redress in their possession. Following a failure to submit further evidence in accordance with a deadline imposed by Barclays, Barclays treated Holmcroft's case as closed. The limitation periods for Holmcroft to bring civil claims against Barclays regarding the misselling of the IRHPs expired in April 2011 and April 2014 respectively.

9. On 5 December 2014, Holmcroft issued an application for permission for a judicial review against KPMG.

3. Judgment of the divisional court

10. The Divisional Court accepted that the role of the Independent Reviewer was ``woven into the fabric'' of the FSA's regulatory function. The Independent Reviewer could veto an offer of compensation. It assisted the FSA in performing its regulatory function. However, on weighing up the relevant factors both ways the Divisional Court concluded that the role of the Independent Reviewer did not have sufficient ``public law flavour'' to make KPMG amenable to judicial review.

11. The Divisional Court gave five specific reasons, which I will summarise before setting out the relevant passage from the judgment. First, Barclays' implementation of the redress scheme was essentially voluntary. The Divisional Court considered that the FSA could not have imposed the role of the Independent Reviewer on Barclays. Moreover, Barclays decided what offer to make to affected customers.

12. Second, the arrangement between Barclays and KPMG was contractual and the customer was not a party to it. The mere fact that the FSA required the engagement of a skilled person was not sufficient to make KPMG amenable to judicial review.

13. Third, likewise, the fact that KPMG's role promoted the objectives of the regulator was not sufficient to make KPMG amenable to judicial review.

14. Fourth, the FSA had no statutory obligation, and probably not the resources, to carry out the role of the Independent Reviewer itself.

15. Fifth, the FSA could have taken other regulatory steps to sanction Barclays' misselling, and it might be amenable to judicial review if it did so, but that did not affect KPMG's position.

16. The following extract from the judgment of the Divisional Court contains the relevant passage:

38 We have not found this question to be easy to resolve but ultimately we consider that KPMG's duties do not have sufficient public law flavour to render it amenable to judicial review. We reach this conclusion for a number of interrelated reasons, although there are certainly pointers in favour of amenability.

39 We accept that KPMG was clearly ``woven into'' the regulatory function, to use the expression of Rose LJ in Ex p Aegon Life [1994] CLC 88 . Its function in approving the terms of any offers was critical in achieving the twin aims of objectivity and acceptability. As a matter of substance it could veto any offer which it did not approve and effectively compel Barclays to tailor its offer accordingly. Whether that was the contractual effect of the arrangements or not is of little moment; it was certainly the commercial reality. In our view there is some artificiality in treating KPMG as merely assisting Barclays in its compliance obligations, as occasionally happens in the ordinary course of affairs. This was more than a mere private arrangement and the bank would never have conferred the veto power upon KPMG unless required to do so by the FCA as part of its regulatory functions. Moreover, Barclays did not have a free hand in the appointment; it had to be approved by the regulator. The voluntary arrangement was coupled with the reporting requirements which were imposed by statute. KPMG was undertaking its duties both for Barclays and for the FCA so as to assist the latter in the effective performance of its regulatory functions.

40 Moreover, there was a clear public connection between its function and the regulatory...

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