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You are here: BAILII >> Databases >> England and Wales High Court (Administrative Court) Decisions >> The All-Party Parliamentary Group On Fair Banking, R (On the Application Of) v The Financial Conduct Authority [2025] EWHC 525 (Admin) (07 March 2025) URL: http://www.bailii.org/ew/cases/EWHC/Admin/2025/525.html Cite as: [2025] EWHC 525 (Admin) |
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KING'S BENCH DIVISION
ADMINISTRATIVE COURT
Strand, London, WC2A 2LL |
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B e f o r e :
____________________
| THE KING on the application of THE ALL-PARTY PARLIAMENTARY GROUP ON FAIR BANKING |
Claimant |
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- and |
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| THE FINANCIAL CONDUCT AUTHORITY |
Defendant |
____________________
Mr Richard Coleman KC and Mr Christopher Knight (instructed by Dentons UK and Middle East LLP) for the Defendant
Hearing dates: 10 and 11 December 2024
____________________
Crown Copyright ©
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SECTION NUMBER |
SUBJECT |
PARAGRAPH NUMBER |
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I |
The nature of the application | |
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II |
Legislative framework (i) The Consumer Protection Objective (ii) Regulation of Interest Rate Hedging Products ("IRHPs") by the FCA (iii) Regulatory classification of customers (iv) FCA's regulatory powers in relation to IRHPs mis-selling |
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III |
Background (a) The discovery of mis-selling (b) The voluntary redress scheme (c) The differentiation between Private Customers/Retail Clients (d) The Sophistication Test
(e) Changes to the Sophistication Test |
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IV |
The Review | |
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V |
The Defendant's account of the IRHP Scheme |
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VI |
The performance of the IRHP Redress Scheme in accordance with the agreements | |
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VII |
The FCA's decision in light of the Review not to seek to compel the Redress Banks to provide redress to the Sophisticated Customers ("the Decision") |
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VIII |
Reasons for disagreeing with the Review as regards the IRHP Scheme | |
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IX |
Response to recommendations | |
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X |
Introduction to Ground 1 (a) The First Issue: the scope of the challenge (b) The second of the agreed list of issues: must the Defendant's disagreement with the Review be cogent? (i) Is a reasonable merits-based disagreement an answer to a challenge about irrationality? (ii) The test for irrationality (iii) Conclusions in respect of the second issue (c) The third of the agreed list of issues: was the Defendant entitled to take into account potential argument of the Redress Banks of a contractual right not to be required to make further redress and/or a legitimate expectation of not being required to do so or not to depart from the Scheme and/or the effect of the passage of time?
(d) The fourth of the agreed list of issues: did the Decision of the Defendant to take no further steps to seek to secure redress for customers comply with common law standards of reasonableness?
(i) The Claimant's position
(ii) Adequacy of contemporaneous records
(iii) Reasons for caution in appraising the Defendant's case
(iv) Differential treatment of customers
(v) The December 2021 Response in respect of differentiation of customers
(vi) Basis for reasonable disagreement
(vii) Accepting differential treatment in June 2012 and thereafter
(viii) The discretion of FSA/FCA
(ix) Further considerations
(x) Conclusion on Ground 1
(xi) Reasons for deciding to take no further action |
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X |
Ground 2 | |
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XI |
Relief | |
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XII |
Concluding words |
MR JUSTICE FREEDMAN:
I The nature of the application
II Legislative framework
(i) The Consumer Protection Objective
"(a) the differing degrees of risk involved in different kinds of investment or other transaction;
(b) the differing degrees of experience and expertise that different consumers may have;
(c) the needs that consumers may have for the timely provision of information and advice that is accurate and fit for purpose;
(d) the general principle that consumers should take responsibility for their decisions;
(e) the general principle that those providing regulated financial services should be expected to provide consumers with a level of care that is appropriate having regard to the degree of risk involved in relation to the investment or other transaction and the capabilities of the consumers in question;
(f) the differing expectations that consumers may have in relation to different kinds of investment or other transaction;
(h) any information which the scheme operator of the ombudsman scheme has provided to the FCA pursuant to section 232A."
(ii) Regulation of Interest Rate Hedging Products ("IRHPs") by the FCA
"6. Customers' interests
A firm must pay due regard to the interests of its customers and treat them fairly.
7. Communications with clients
A firm must pay due regard to the information needs of its clients, and communicate information to them in a way which is clear, fair and not misleading.
8. Conflicts of interest
A firm must manage conflicts of interest fairly, both between itself and its customers and between a customer and another client.
9. Customers: relationships of trust
A firm must take reasonable care to ensure the suitability of its advice and discretionary decisions for any customer who is entitled to rely upon its judgment."
(iii) Regulatory classification of customers
(iv) FCA's regulatory powers in relation to IRHPs mis-selling
(i) section 404 consumer redress schemes: the FCA may by rules require relevant firms including persons authorised by the FCA to establish a consumer redress scheme. This is where it appears to the FCA that there may have been a widespread or regular failure by those firms to comply with requirements applicable to the carrying on by them of any activity as a result of which consumers have suffered loss or damage. The onus is on the firm to review sales, identify any breaches and provide appropriate redress in accordance with the rules made by the FCA for the consumer redress Scheme. There were limitations in that the scheme was not actionable by many of the potential victims of the IRHPs during the relevant period. A scheme could not be imposed where the limitation periods for the schemes had expired and, in any event, it was time consuming to exercise such statutory powers.
(ii) section 382 (restitution orders): the FCA may apply to the court for a restitution order if it is satisfied that a person had contravened a relevant requirement occasioning loss to one or more persons. This requires the FCA to establish the breaches and quantify the loss. The power is subject to the six-year limitation period for actions for sums recoverable by statute (s.9 of the Limitation Act 1980).
(iii) section 384 (power of the FCA to require restitution): in the case of authorised firms, the FCA may itself make an order in essentially the same circumstances as apply to section 382 but without a formal limitation period. However, the lapse of time and delay since the grounds for exercising the relevant power first arose may be relevant to whether in the particular circumstances the FCA may lawfully exercise it and if so whether it should do so.
(iv) section 55L, since 1 April 2013 (and before that, a similar power of the FSA existed): the FCA may impose a requirement on an authorised person if it is desirable to exercise the power in order to advance one or more of the FCA's operational objectives. That could include a requirement on a particular firm to take remedial action in respect of past conduct or to establish and operate a redress scheme similar to a section 404 scheme. Here too there is no limitation period, but the discretionary matters set out in (iii) relating to lapse of time and delay would apply.
(i) whilst the regulatory scheme imposes the same duties to all customers in the same regulatory class, what has to be done to discharge the duties would depend on the particular circumstances of the sale and the customer (including the customer's relevant knowledge and experience).
(ii) breaches of the COB and COBS rules are actionable by individual consumers, but not by any other person acting in the course of their business. Most of the potential victims of mis-selling of IRHPs during the relevant period were companies or other types of business acting in the course of business who had no right of action to enforce these rules.
(iii) whilst the sale standards applied equally to all Private Customers/Retail Clients, the FCA had a discretion to determine its regulatory priorities including the particular areas of consumer harm that it wished to target. At all material times, in considering what degree of protection may be appropriate, the FCA was entitled to have regard to "the differing degrees of experience and expertise that different consumers may have" and "the general principle that consumers should take responsibility for their decisions".
III Background
(a) The discovery of mis-selling
(b) The voluntary redress scheme
(c) The differentiation between Private Customers/Retail Clients
(d) The Sophistication Test
"'Sophisticated Customer Criteria' means:
In the financial year during which the sale was concluded, a Customer who met at least two of the following:
(i) a turnover of more that £6.5 million;
(ii) a balance sheet total of more than £3.26 million; or
(iii) more than 50 employees;" (the 'Companies Act Test')
or
(iv) The Firm (that is, the Bank) is able to demonstrate that, at the time of the sale, the Customer had the necessary experience and knowledge to understand the service to be provided and the type of product or transaction envisaged, including their complexity and the risks involved." (the 'Additional Test')."
(i) agreeing to provide redress to those customers with the most complex type of IRHPs, namely structured 'collars' where there would not be an analysis of whether the bank actually contravened any of the FCA's regulatory requirements (Category A products);
(ii) for category B products (all products other than Category A and Category C products), the Redress Banks agreed to review each sale (made since 1 December 2001 irrespective of limitation) in detail unless the customer opted out of the review and to provide redress for breaches of the relevant regulatory requirements. This was even though the Redress Banks may have had no legal liability for such breaches in relation to many small business customers e.g. where they are not private persons for the purposes of section 138D FSMA;
(iii) the Redress Banks also agreed to review Category C products (caps) on the same basis if the customer opted in to the scheme, following communication from the relevant bank;
(iv) in most circumstances, the Redress Banks agreed not to foreclose on or adversely vary existing lending facilities without prior notice or obtaining prior consent.
(e) Changes to the Sophistication Test
" We confirmed again that whilst we had moved substantially on sophistication to ensure that the right customers were involved in this exercise, we felt strongly that we should maintain our position on redress. Looking at this in the round, this presented a balanced approach which ensured fair and reasonable outcomes for the small and unsophisticated customers who had been mis-sold and was fair to banks."
IV The Review
"The Review explained that all Private Customers / Retail Clients who fell within the remit of the FCA had the same rights and were owed the same obligations by the Banks, and the FCA had the same corresponding duty to protect those rights. While the FCA may have been able to treat some customers more advantageously than others, the Review concluded that the FCA's decision to restrict the scope of the whole Scheme to 'non sophisticated' customers was made 'after only the briefest consideration' and without adequate consultation (Review: page 32, paras. 42-43). It found no evidence of any impact analysis being conducted nor evidence as to how the Sophistication Test was appropriate." (Review page 322 para. 17)
"4. all Private Customers/Retail Clients were entitled to equal regulatory protection. There was no proper basis for differential treatment of different customers within that category.
5. As other regulatory authorities, the FCA may use its judgement and discretion where appropriate. It is not necessarily inappropriate for the FSA/FCA to treat persons within the same client class/category differently. These categories do not operate as a straitjacket allowing no discretion on the part of the regulator, under which intervention for one must mean precisely the same kind of intervention for all. However, persons falling within the same category all have rights, which the regulator has a corresponding duty to protect. The FSA/FCA should not discriminate between them without an adequate and well evidenced objective justification for different treatment.
6. Where the FCA considers that there is an objective justification for limiting the scope of redress only to certain persons within a defined category, there should be proper consultation with stakeholders before any such action is taken. In that context, the FCA should explain its intended approach and the reasons for it (for instance that that sub-group alone has suffered detriment and/or that the wider scope would be disproportionate) and allow affected persons and other stakeholders a proper opportunity to make representations in respect to the proposed restriction of scope. None of this was done in relation to the exclusion of 'sophisticated' customers from the scope of the Scheme.
10. it does not follow, however, that the FSA or the FCA was justified in further differentiating, by reference to the consumer protection objective or at all, as between consumers within the same category without adequate objective justification and without prior proper consultation with stakeholders. I have also seen no contemporaneous evidence to suggest that the FSA analysed or justified the concessions it made from time to time by reference to the consumer protection objective."
(a) There was no clear evidence as to why the Companies Act Test had been identified as appropriate and there was no adequate explanation for why the customer's size meant it should not qualify for redress. There was no clear evidence of any impact analysis having been undertaken, no examination of whether the tests to be applied were the right ones, and the "blunt tool" appeared to have been adopted at the suggestion of one of the banks (Review page 322 para. 17].
(b) The Additional Test was not appropriate, namely for banks to assess whether a customer had sufficient knowledge and experience to understand the IRHP contract. It did not align with the FSA's regulatory remit, because some regulations could be breached in relation to an IRHP sale even if the customer was capable of understanding the contract [Review page 322 para. 18].
(c) The changes to the Sophistication Test following the Pilot Scheme "were all agreed 'behind closed doors'(Review page 326 para. 28), without consultation or explanation" and "(The FCA) sought to ensure that only the 'right' subset of Private Customers/Retail Clients would be eligible for the Scheme without ever clearly articulating what that subset should be. Aided by this lack of specificity, the banks succeeded in getting the FSA to make several substantial concessions on the scope of the Sophisticated Customer Criteria. The position eventually arrived at a mix of criteria of considerable complexity, as set out in the Supplemental Agreement reflected the banks' very considerable success in further limiting their financial exposure to redress for Private Customers and Retail Clients" (Review page 327 para. 29).
(d) The Companies Act Group Test "meant that, in effect, the FSA assumed knowledge and experience of IRHPs as a result of the group structure, even if none existed at the level of the subsidiary that had purchased the relevant IRHP" (Review page 328 para. 31).
(e) The £10 million notional test threshold "appears to have been an essentially arbitrary figure again with minimal underpinning analysis or impact assessment, albeit still significantly higher than the threshold suggested by the banks.'"([Review page 329 para. 32).
(f) The final version of the Sophistication Test was an "untested, unsampled mix of criteria so complex they had to be set out in a diagram resembling an intricate ancestry chart" (Review page 332 para. 42).
"It was never clear, nor obvious, why customers who fell on the wrong side of the quantitative criteria (whether as set out in the Initial Agreement or as amended subsequently) should be excluded from the Scheme in the first place. The FSA appears to have proceeded on an impressionistic view that certain kinds of Private Customers/Retail Clients were deserving of regulatory protection, whereas others were not, without ever expressly articulating or testing that approach. On that basis, it adopted and varied the eligibility criteria (often at the instigation of the banks), with only a vague understanding of the real-world impact these changes would have on businesses that had been mis-sold IRHPs" (Review p.332 para. 41).
"...clear that the FSA should never have agreed to limit eligibility for the Scheme, without adequate justification and consultation. Concluding the Initial Agreement on this basis (i.e. limiting eligibility within the category without such justification/consultation) was a serious regulatory error. This was exacerbated by the speed with which the relevant decisions were taken, the absence of any proportionality assessment weighing likely benefits and detriments, the lack of any meaningful involvement by the Board, and the failure to pause for proper consultation, formal or informal, with stakeholders." (Review p.324 para. 21).
V The Defendant's account of the Scheme
(i) There was real urgency: as noted in the Swift Report at Chapter 3 para. 28, the FSA was conscious of the need to provide prompt assistance to small businesses in distress. There were consumers who were going bankrupt because of payments required to be paid under the IRHPs. This gave rise to acute and mounting financial difficulties for customers directly affected and due also to challenging economic circumstances during the global financial crisis. There was no time for many businesses to await a more forensic process which would be required in any exercise of statutory powers. A longer process would enable the FSA to interview employees at firms affected and to have inspected and analysed numerous sales files.
(ii) Whilst by 25 April 2012 there was prima facie evidence of inappropriate or unsuitable products, there was no evidence of how widespread the breaches were. The ESRC (the Executive Supervision and Risk Committee) found that at that time that the picture was not yet sufficiently clear and therefore proposed to undertake further work in order to make more detail preliminary findings and options for regulatory intervention.
(iii) There was consideration of the advantages and disadvantages of a voluntary industry wide scheme and the use of the FSA's statutory powers. In June 2012, the FSA sought to ensure that customers who had suffered or been exposed to financial detriment as a result of being mis-sold IRHPs should be swiftly and appropriately compensated. In the circumstances, the FSA found voluntary agreements to be the preferable approach, as it considered them likely to lead to fair and faster redress than consumers might otherwise receive, to be legally enforceable and robust, and not to place unsustainable burdens on its resources given its other priorities and commitments: see Chapter 7 of the Swift Report paras. 20 21 on pages 304-305.
(iv) As was recognised in the Swift Report at Chapter 8 para. 25, the FSA was aware of the various options available to it before it committed itself to the agreement and reasonably evaluated the relative advantages and disadvantages of these options. Mr Swift stated:
"in my view, it was reasonable for the FSA to aim for a voluntary agreement with the first tier banks, rather than using any of its statutory powers. I am not convinced that delaying entering into the initial agreement in order to carry out further investigations pursuant to the FSA's powers under section 166 FSMA would have led to a preferable outcome. In principle, a voluntary agreement was a reasonable means by which to address concerns about the sale of IRHPs and, for the reasons explained above, was arguably preferable to the alternatives."
(v) Mr Swift (Chapter 1 para. 30, and Chapter 7 para. 23 on page 305) found that the voluntary agreements were an appropriate way to address the FSA's concerns about the sale of IRHPs to those eligible under the Scheme. By locking the banks into a review by reference to an agreed and rigorous set of sales standards, the voluntary redress scheme was a "bird in the hand" which meant that eligible customers gained an advantage compared to the use of statutory powers with less certain and slower outcomes. The outcome of the exercise of statutory powers is never guaranteed and there is always the risk of losing if challenged or having the parameters of any redress scheme narrowed. The negotiation of a voluntary agreement also allowed the FSA greater scope in ensuring redress on the basis of the Principles for Businesses as well as the COB/COBS rules, which may otherwise have entailed lengthy and uncertain legal disputes. The use of a voluntary agreement allowed the FSA to obtain redress in relation to sales going back as far as 2001, avoiding limitation issues.
(vi) The Scheme delivered fair outcomes for those within its scope. The outcomes were likely to be preferable to that which would have been obtained through alternative options: see Swift Report (Chapter 7 page 364 paras. 29(a) and 30(a)).
(i) Mr Steward, who was the FCA's head of enforcement and market oversight, led a team which considered the appropriateness of the Scheme having regard to the criticisms of Mr Swift. He reported to the Board Sub-Committee which closely monitored the Review (which included the FCA chair and two non-executive directors), the Project Board (which was an internal working group considering issues of strategy in relation to the Review, consisting of 5 or 6 representatives chaired by Mr Steward) and the Risk and Compliance Oversight division (which liaised on the day-to-day conduct of the Review). Subject matter experts and persons who worked for the FSA in 2012/2013 were asked to consider extracts from the first draft report relevant to their areas of knowledge and expertise and to comment on areas for representations.
(ii) Representations were submitted on 30 March 2021 and a further set on 2 July 2021, and a further set on 11 August 2021. During the drafting process, there was input and direction from the Project Board and the Board Sub-Committee. Mr Steward set out in detail how the first representations came about (paras. 106-111). Likewise, he set out the same about the second representations (paras. 120-121). The Defendant stated that it was reasonable for the FSA to aim for a voluntary agreement, rather than using statutory powers, and in doing so creating a "bird in the hand" advantage. There was no means of knowing what would have happened if the FSA had refused to restrict eligibility to non-sophisticated customers. In response to Mr Swift's professional position that there should have been prior consultation, the FCA noted that consultation would not be appropriate in all cases, in particular not where there was a need to act speedily.
(iii) In a witness statement of Mr Geale, the director responsible for the supervision of retail banking, he set out how he led the FCA's work relating to whether in the light of the Review, action should be taken against the Redress Banks for customers outside the Scheme. There were two broad lines of inquiry, namely (a) the potential legal power available and possible consequences, requiring the use of statutory powers, and (b) an understanding of how excluded customers had been treated by the Redress Banks. The large amount of work done especially between June 2021 and September 2021 is set out in detail at paras. 22 - 49 of Mr Geale's statement.
(iv) There is further evidence from Mr Lloyd, the senior independent director on the Board and a non-executive member since April 2013 and from Mr Watts, a technical specialist who was involved in the further redress question and in putting together of the board paper for the meeting of 30 September 2021 ("the Board Paper"). This decision is at the heart of the judicial review.
(i) the factors which it had before the introduction of the Sophistication Test. This included especially that the negotiations with the banks and the concessions were in order to achieve swift redress for those most in need;
(ii) the distinction between those who were more likely as against those who were less likely to have been able to understand the risk of the IRHP was insisted upon by at least some of the banks. In these circumstances, the Defendant evaluated that it was better to make such a distinction than to walk away from a voluntary scheme completely.
(iii) the Defendant had a reasonably held belief that some customers were less sophisticated than others in terms of knowledge and experience of financial products, resources and access to professional advice;
(iv) the belief that whilst the test was imprecise or even blunt, there was some correlation between size and vulnerability, and that the smaller the entity, the more vulnerable and the less able to obtain advice about financial products it might be;
(v) the Defendant had concerns about the impact of such a test on customers who might be vulnerable despite their size, but had to do a balancing act between standing up for the principle of not making any distinction within the group of Private Customers/Retail Clients on the one hand and protecting the most vulnerable or a large part of them by making a quantitative distinction;
(vi) the Defendant took comfort from such a quantitative distinction being made in other contexts e.g. the Companies Acts, Ombudsman schemes, legislative protections for consumers. There was nothing wrong in principle about choosing to prioritise certain customers over others within the same class provided that it was rational to do so.
(vii) the Defendant believed that rights requiring proof through a statutory process would be more limited in that for many customers (a) there was only limited proof of actual mis-selling such that any attempt to exercise statutory powers would take time and resources, and (b) there would not be actionable claims or the scope of the claims would be substantially less than under the voluntary schemes (as regards the time periods of the sales or the customers included or the failings to be addressed);
(viii) there were undertakings provided by the Redress Banks to handle complaints fairly and in accordance with their handling procedures. Claims could be brought by excluded customers if they had actionable claims although two claims already brought had been successfully defended in court.
VI The performance of the Scheme in accordance with the agreements
VII The FCA's decision in light of the Review not to seek to compel the Redress Banks to provide redress to the Sophisticated Customers
(i) some of the causes of action were statute barred e.g. applications under ss. 382 and 404 FSMA;
(ii) the FCA disagreed with the Review's adverse findings about the scope of the Redress Scheme;
(iii) the Redress Banks had a strong argument that they could reasonably regard the matter of redress for Sophisticated Customers as closed;
(iv) the difficulty and complexity of any redress action;
(v) the burden on FCA resources; and
(vi) insofar as there were reasons for seeking redress, those arguments were outweighed by those in favour of not seeking redress.
VIII Reasons for disagreeing with the Review as regards the IRHP Scheme
(i) an early scheme would provide redress which could not be achieved through use of statutory mechanisms;
(ii) the FSA's position was weak at the time including having limited proof of mis-selling;
(iii) taking into account differing degrees of risk in different investments and differing degrees of experience and expertise of different consumers in relation to different kinds of regulated activity;
(iv) a range of conclusions was thus reasonably open to FSA when assessing what was an appropriate degree of protection for different customers in relation to IRHPs, including to conclude, as it did, that some customers within the very broad Retail Client category required
a different level of protection from others;
(v) the Scheme may have been a blunt tool, but it provided a workable scheme to enable the Redress Banks to identify customers who should be in scope and to provide redress quickly;
(vi) there is no evidence that any of the Redress Banks would have agreed to a voluntary redress scheme if the FSA has insisted on it covering Sophisticated Customers too, nor is there evidence that a better outcome could have been provided without a scheme;
(vii) using statutory powers would have involved more time, resource and evidence against a backdrop of "a significant prejudicial effect on customers, many of whom were facing financial hardship", as Silber J stated in refusing permission to apply for judicial review in R (Jenkinson & ors) v Financial Conduct Authority in August 2013 (CO/5140/2013).
IX Response to recommendations
X Introduction to Ground 1
(i) to reject the findings of the Review (Mr Swift) concerning the Sophistication Test (paras.24 and following); and
(ii) to decide to do nothing further (paras. 28 and following).
"First Issue: Is it open to the Claimant to contend that the FSA acted unlawfully in 2012/2013 in agreeing to the Sophistication Test in support of its case that the decision under challenge (being the Decision taken by the FCA in 2021) was irrational?
Second Issue: In so far as the Decision rested on the Defendant's disagreement with the Review's statement that that it had been "wrong [of the Defendant] to confine [the Scheme] to a subset of Private Customers/Retail Clients designated as 'non-sophisticated'", is the Claimant right to submit that such disagreement needed, in the circumstances, to be supported by cogent reasons if it was to be lawful? If so, was it?
Third Issue: Was the Defendant entitled to take into account in making the Decision the considerations listed above at paragraph 15?"
(Paragraph 15 was that the Banks may have had a strong argument that they could reasonably regard the matter of redress for IRHP mis-selling as closed on the grounds that (1) the Banks had a contractual right not to be required by the FCA to make further redress as regards the relevant mis-selling owing to the terms of the Scheme; and/or (2) by reason of the Agreements, their performance and the FCA's subsequent conduct and communications and the passage of time since the underlying events and the Scheme, the Banks have a legitimate expectation of not being required to do so; or alternatively that the FCA should not depart without good reason from its long-standing policy that the IRHP Redress Scheme was an appropriate response to the mis-selling of IRHPs; and/or (3) the passage of time meant that limitation periods for bringing claims and complaints against the Banks had long expired and evidence relating to the sales would have deteriorated over time.)
"Fourth Issue: did the Decision of the Defendant to take no further steps to seek to secure redress for customers comply with common law standards of reasonableness?"
(a) The First Issue: the scope of the challenge
(b) The second of the agreed list of issues: must the Defendant's disagreement with the Review be cogent?
"It is common ground that the FSA was not bound to treat all members of a group equally in the event that rationally there could be a distinction between different members. It was agreed that differentiating within a consumer category should be reasoned, evidence based and objectively justified. However, the Swift Recommendation went further than that and stated that:
"The FCA should aim to ensure that persons within the same category are treated consistently: where rules exist for the protection of all within a defined class, regulatory intervention should not be restricted to benefit only a subset of that class unless there is an objective justification founded on strong evidence and tested through consultation."
(i) Is a reasonable merits-based disagreement an answer to a challenge about irrationality?
"These points arise in a particular context of having set up an Independent Review to report on the lessons to be learnt, with the value of the identified independence and expertise. The Independent Reviewer's decision is not said by the Authority to have been unreasonable or unlawful. One question is whether to 'depart' from it on the basis of a merits-disagreement is a course which satisfies contextually-applicable standards of common law reasonableness."
"29. If the SoS does seek advice from the Board, the Board provides just that: advice . The SoS is entitled to reject it if he (reasonably) concludes that the advice is not "wholly persuasive". The SoS is entitled to reject even a reasonable recommendation on the basis of his own (reasonable though different) assessment. The words used in the SoS's policy, at 5.8.3 of the GPPPF, underscore the fact that it is the SoS's view that matters: it is for the SoS to be "wholly persua[ded]" (or not). There is no presumption that the Board's views are correct, let alone the only possible (reasonable) views. As it was put in R (on the application of Overton v. The Secretary of State for Justice [2023] EWHC 3071 (Admin) (Overton) at [28], there may be issues arising as to which " there will very rarely if ever be a single unquestionably correct answer ". It is necessary to avoid being distracted by having regard to the rationality of the Board's recommendation (rather than the SoS's decision).
30. Thus, the SoS does not need to identify a deficiency in the Board's reasoning in order lawfully to reject the Board's recommendation. It is the decision of the SoS that is under scrutiny, not that of the Board."
"43. Nothing in either of these judgments (cases of Wilmot [2012] EWHC 3139 (Admin) or Gilbert [2015] EWCA Civ 802) suggests that there is a requirement to show "very good" or "good" reason for departure from the Board's finding or recommendation in the sense advocated for by the prisoners.
44. Thus, to repeat, in assessing the lawfulness of the SoS's decision, the exercise is not to identify whether the SoS has relied on a "good" (or "very good") reason for departing from the Board's finding or assessment. Rather, the question is simply whether or not the SoS's decision was rational."
(i) the scrutiny is not on whether the Reviewer (in the instant case) was correct or whether the recommendation of the Reviewer was rational, but on whether the view of the Defendant to depart from the recommendation was rational;
(ii) In Sneddon, the Court of Appeal reached that conclusion, departing from the reasoning of Fordham J which had been to the effect that the Secretary of State could not depart from a rational decision of the Parole Board: the rationality was about the decision of the Secretary of State, not that of the Board;
(iii) In Sneddon, despite the statutory context within which the Parole Board made its recommendation, the decision under review was that of the Secretary of State. A fortiori in the instant case where there was no statutory context, but an ad hoc appointment of an independent person to review without any agreement to be bound by the decision.
(ii) The test for irrationality
"[the applicant] does not have to demonstrate, as respondents sometimes suggest is the case, a decision so bizarre that its author must be regarded as temporarily unhinged. What the not very apposite term 'irrationality' generally means in this branch of the law is a decision which does not add up - in which, in other words, there is an error of reasoning which robs the decision of logic."
"39. One potential form of irrationality may arise where a public body accords differential treatment to persons who are in a materially similar position, without good reason. As Sedley J explained in R v Ministry of Agriculture Fisheries & Food, ex parte Hamble (Off Shore) Fisheries Ltd [1995] 2 All ER 714 at 722, "a discretionary public law power must not be exercised arbitrarily or with partiality as between individuals or classes potentially affected by it". The same point was made by Lord Donaldson MR in R (Cheung) v Hertfordshire County Council, (The Times, 4 April 1998) who referred to "a cardinal principle of public administration that all persons in a similar position should be treated similarly".
"First, it is commonplace in regulation of complex market activity to have rules and powers which are expressed in general terms and by reference to high level objectives, and to leave the discretion as to how they are to be fulfilled to the expertise of an experienced regulatory body of experts. That is especially necessary in the field of financial markets activity covered by the FCA's regulatory remit, which will potentially involve a myriad of different factual circumstances in a complex market with constantly evolving and novel products and services, something which is positively to be welcomed on a macro-economic level. The FCA is obliged by s. 1B(1)(a) to act compatibly with its strategic objective of ensuring that the relevant markets work well, and by s. 1B(4) to discharge its functions in a way which promotes competition on the interests of consumers. By s.1E(2)(e) the FCA must in pursuing its competition objective have regard to how far competition is encouraging innovation. The narrower and more prescriptive the terms in which its powers and rules are expressed, the less likely they are to provide an effective tool for regulating financial market activity to achieve these objectives. It is therefore neither surprising nor objectionable that the FCA, as the specialist and expert regulatory body, should be afforded by Parliament a wide measure of subjective discretion in seeking to achieve the defined statutory objectives."
(iii) Conclusions in respect of the second issue
(i) the issue is not whether the Review was rational, but whether the decision to reject the findings of the Review concerning the Sophistication Test and/or to decide to do nothing further to follow the recommendation of the Review was rational;
(ii) there is no presumption against the Defendant that it would adopt the findings and recommendation of the Review and/or there was no onus on the Defendant to show that it had a very good reason or a good or cogent reason not to do so;
(iii) the ability to impugn the decision of the Defendant not to adopt the findings and recommendation of the Review is not limited to highly exceptional circumstances;
(iv) despite the colourful use of language about rationality, judicial intervention is not confined to a decision so bizarre that its author must be regarded as temporarily unhinged: it suffices if there is an error in reasoning which renders the decision lacking in logic;
(v) there are cases where the decision which is the subject of disagreement is the result of a body which has so many advantages over the regulatory authority or the Secretary of State as to make it difficult to justify the disagreement as rational or reasonable;
(vi) there is scope for a reasonable merits-based disagreement even in circumstances where there is a commissioned Review and a refusal to implement it, unless there is a binding agreement to adopt it;
(vii) the decision of the regulatory authority is not unfettered. It must exercise an objective judgement on the relevant material available to it, it must act in good faith and not for an ulterior motive and by reference to all the relevant circumstances of the case. It is in this context that the Court, knowing about the independence of the Reviewer relative to the Defendant, will scrutinise carefully whether disagreement is reasonable or in good faith;
(viii) a discretionary public law power must not be exercised arbitrarily or with partiality as between individuals or classes potentially affected by it, unless there is good reason to do so.
(c) The third of the agreed list of issues: was the Defendant entitled to take into account potential argument of the Redress Banks of a contractual right not to be required to make further redress and/or a legitimate expectation of not being required to do so or not to depart from the Scheme and/or the effect of the passage of time?
(d) The fourth of the agreed list of issues: did the Decision of the Defendant to take no further steps to seek to secure redress for customers comply with common law standards of reasonableness?
(i) The Claimant's position
(i) The number of private client customers who found themselves deemed to be Sophisticated Customers was very large, comprising about 34% of the customers comprising many thousands of customers and products with allegations of having been affected by mis-selling. That was a large cohort, and far too large to be dismissed as an unfortunate effect of a necessarily imprecise form of categorisation. Even taking into account the fact that customers within the Scheme received sums of £2.2 billion, there were so many excluded customers that, it is said, it was unreasonable to agree the Sophistication Test with so severe a consequence.
(ii) There was no consultation as to the effect of the Agreement. There was no statistical or other research to justify the position objectively. There was no detailed impact assessment, analysis or testing of the distinction between Private Customer/Retail Clients according to the Sophistication Test. Adopting a conclusion of Mr Swift at para.1 of his conclusions: "... to the extent that the FSA's objective was to secure address only for customers who knew, or should have known, about the risks (of) IRHPs, it failed to find a mechanism appropriate to that objective: it relied on a complex mix of quantitative criteria, never properly tested for their suitability for that task, as well as an alternative qualitative test." (Recommendation 2: Scope of the Scheme para. 1 page 316).
(iii) As regards the categorisation or definition of Sophisticated Customers, it did not follow from the size of a customer that they would have an understanding of a complicated financial product or even the opportunity to take advice in the context of their busy working lives. The fact that in other contexts, the Companies Act test of a small company was used did not justify deeming any customers as Sophisticated Customers. The exemption from publication of full accounts or Ombudsman schemes did not prove that a potential victim of mis-selling was able to look after themselves as regards remedy.
(iv) There was a stark contrast between being within and outside the Scheme. Those within were relieved of limitation barriers and had the advantage of undertakings provided by the Redress Banks. Those without would have to fend for themselves and with the disadvantages of having to prove very complicated cases against banks well versed in the products.
(v) The position was aggravated by the fact that where a customer qualified as a non-Sophisticated Customer, the Redress Banks could seek to exclude such a person on the basis that, in reality, such a person was a Sophisticated Customer. There was no converse ability of a person deemed to be a Sophisticated Customer to be able to submit that despite quantitative qualification, in reality, they were not a Sophisticated Customer.
(vi) The concession happened so quickly during the night of 26/27 June 2012 that it was submitted that there was no attempt to stand up to the banks and to ensure that customers were treated broadly equally. It is alleged that the Defendant simply keeled over to the banks. For example, they did not take offers off the table for so long as the banks insisted on the outcome which caused such detriment to such a large percentage of the customers who had been victims of mis-selling.
(vii) It followed that the FSA in 2012/2013 had failed in its duties in agreeing to treat the excluded customers differently from those within the Scheme and the FCA and likewise had acted irrationally and/or contrary to common law unreasonableness in rejecting the findings of the Review in this regard and deciding to take no action thereafter.
(ii) Adequacy of contemporaneous records
(iii) Reasons for caution in appraising the Defendant's case
(i) if an independent reviewer had been appointed at great expense in order to learn lessons, the wider circumstances indicated at least a readiness to accept the findings;
(ii) the findings were clearly the product of considerable work and reflection from the Reviewer who was both independent and a distinguished expert in the field and indeed chosen because of his distinction;
(iii) the suspicion is that where the findings comprised criticism of the FSA, the natural self-defensive reaction would be to reject the same or to explain their own position in such a way as to escape the consequences of the criticism e.g. by relying on reasonable disagreement. In that regard, the suspicion would still remain even despite the replacement of the FSA by the FCA and even though the personnel changed to a great extent from 2012/2013 to 2021;
(iv) the scope for unconscious bias in their own favour was considerable in contrast to the independence of the Reviewer.
(iv) Differential treatment of customers
(v) The December 2021 Response in respect of differentiation of customers
(i) a voluntary redress scheme would provide redress to customers in the most vulnerable circumstances more quickly and with greater certainty than a statutory approach;
(ii) if the FSA had sought to use its statutory powers to try to provide redress, this would have taken more time to achieve a result against a background of rapidly growing harm to many of the SMEs and could have led to redress being substantially less than under the voluntary scheme;
(iii) the Agreement necessarily involved some trade-offs and some of the delineation of the scope of the Scheme was in part a result of negotiations including a pilot review;
(iv) there is no evidence that the banks would have agreed to a voluntary redress scheme if the FSA had insisted that it cover the past sales to all Private Customers/Retail Clients;
(v) the FSA was obliged by FSMA to assess what it considered to be an appropriate degree of protection taking into account several factors including the differing degrees of experience and expertise that different consumers may have had;
(vi) There was a range of conclusions reasonably open to the FSA at the time and it was considered reasonable for the FSA to judge as it did that:
(a) some of the customers were more sophisticated and would have likely understood the key features of the IRHPs and all would have been able to access relevant expertise and skills to help them understand and appreciate those aspects;
(b) the redress scheme for IRHPs should prioritise and if appropriate be limited to less sophisticated customers so as to secure more timely redress for them in the context of acute financial difficulties;
(c) the Agreement provided certainty and swift redress for customers reasonably considered to be most at risk even though the dividing lines between those who should and should not have been included in the Scheme were difficult to draw and complex.
(vi) Basis for reasonable disagreement
(i) It was rational and a basis for reasonably held disagreement for the FCA to consider in 2021 that the reasons of FSA in 2012/2013 for regarding a voluntary agreement as being preferable to using statutory powers were still reasonably held. It was believed then, and it was proven right, that it achieved a favourable outcome for the many customers affected by the mis-selling who had acute financial difficulties. Such was the urgency that they could not wait for a medium to long term solution.
(ii) It was rational and a basis for reasonably held disagreement to take the view that the FSA had a stark choice in view of the fact that the banks or at least some of them were not prepared to make a deal of one size fits all. The banks had decided that there had to be a distinction along the lines of the Sophistication Test. The differentiation in order to get a voluntary agreement was considered in 2021 to be a rational response, and nothing that had happened including the Review undermined the belief of the Defendant that this was a reasonable course of action.
(iii) The FSA could have decided to bring the negotiations to an end. However, it believed that many of the cases at that stage would be difficult to prove and would have an uncertain outcome. I was also concerned that leaving the table would back-fire, as it would be forced back to the table with a worse position. Considering the position in 2021, the Defendant was entitled to have a reasonable merits-based disagreement about the view that the FSA should have left the table.
(iv) It was rational and a basis for reasonably held disagreement to prioritise certain customers over others within the same class if it was reasonably perceived that this was the only way to obtain the voluntary agreement on the table. The distinction was between those who were more likely as against those who were less likely to have been able to understand, or to have had the opportunity to be advised about, the risk of the IRHPs. In 2021, the Defendant was entitled to have a reasonable merits-based disagreement that such prioritisation was justified as a proxy for sophistication even if there was not adequate time to do any meaningful stress testing or detailed research.
(v) Whilst laying itself open to a charge of having acted arbitrarily, the FCA was entitled rationally to consider in its Decision of 2021 that the FSA had acted in 2012/2013 urgently to protect the less sophisticated customers. Whilst the quantitative tests were imprecise and blunt tools, not least because deserving customers might be deemed to be sophisticated, there was not the time to do a more detailed impact assessment, analysis or testing of the distinction. It applied quantitative criteria which were well-established in the financial services regulatory scheme as a proxy for sophistication (that is a consumer's ability to understand the risks of a financial product, including by taking advice). Mr Steward's evidence at paras. 84-90 is that a variety of pieces of financial services legislation, both domestic and EU, use company size criteria as a proxy for sophistication and the need for protection, including the Financial Ombudsman Scheme.
(vi) There was a paucity of hard evidence to prove the difficulties of customers in 2012/2013. This was evident in cases brought which failed for want of such evidence. It would be an enormous exercise to obtain such evidence customer by customer or even on behalf of representative customers. This would be very costly and without knowledge of the benefits that would ensue from such research. The Defendant was entitled rationally to consider in 2021 that such an open ended investigation in circumstances where it was speculative at best what it would lead to was not a justified use of time and expense.
(vii) Even if any meaningful stress testing could have been done, there would still be a balancing exercise of whether the Defendant should enter into an agreement excluding customers or agree a test by reference to sophistication of customers. The insistence by at least some banks on a Sophistication Test meant that such a dilemma would still have to be confronted. The Defendant was entitled, even on limited information relative to that envisaged by Mr Swift, to form the view that the 'bird in the hand' of an agreement was better than the statutory route. The Defendant was entitled to take that view, based on its regulatory experience, that even without testing the distinctions by way of impact assessments, they were pursuing the objective of achieving the best outcomes which they believed to be available for consumers.
(viii) Against the background of urgent steps being required, it was not irrational in 2021 to consider that it adopted an imperfect solution rather than seeking a more complete solution years later by which time it would be too late for many concerned.
(ix) When looking back at matters in 2021, the Defendant was entitled to reflect on the fact that the settlement achieved in the end a recovery of £2.2 billion which was believed to be a large recovery as to justify retrospectively the importance attached to taking this voluntary settlement on the basis of its being a 'bird in the hand'. The compensation was in respect of about 20,000 sales. As above noted, the Redress Banks incurred costs of c. £920 million operating the Scheme.
(vii) Accepting differential treatment in June 2012 and thereafter
(i) the FCA has placed more weight on the importance of obtaining a voluntary agreement to address the concerns about mis-selling, the importance of obtaining more certain and faster outcomes than would have been available by the use of statutory powers. There were also the advantages of obtaining the benefits of various undertakings and avoiding potential limitation issues;
(ii) the FCA's assessment of the appropriateness of the Scheme gives more weight to the weakness of the negotiating position of the FSA with the Redress Banks, and in particular the uncertainty of what could have been achieved through the exercise of the FSA/FCA's statutory powers. That was particularly because of the pessimism as to the prospects of enforcement action and the difficulties in obtaining evidence of mis-selling; and
(iii) there was a reasonable disagreement in negotiation tactics about whether to have taken the voluntary agreement off the table if the Redress Banks were not prepared to agree to admit all Private Customers/Retail Clients within the Scheme. The FCA considered that that would put at risk the benefits secured for the more vulnerable category it was seeking to prioritise described as the "bird in the hand."
(viii) The discretion of FSA/FCA
(ix) Further considerations
(x) Conclusion on Ground 1
(xi) Reasons for deciding to take no further action
(i) by 2021, it was the very long time after the events in question, which would make it especially difficult to prove any wrongdoing case by case on the part of the Redress Banks: this rests on the self-evident proposition that the more historic the allegations, the more difficult they would be to establish. The difficulties caused due to the passage of time from such mis-selling as there was to the time of the Review have been discussed in the section above about the third issue;
(ii) as stated in the Board Paper at para. 4.36, a challenge of Sophisticated Customers to try to recall a sales experience of one or two decades earlier and to consider the counterfactual choices which the customer might have made absent the mis-sale would have been challenging enough during the Scheme, but eight years on in 2021 would have been even harder;
(iii) the real difficulty so many years after the event of obtaining evidence to prove the matters case by case without the advantage of the undertakings obtained in the Scheme;
(iv) large amounts of money would have been required to prepare for and take action which would have an uncertain outcome not just due to litigation risks, but due to the difficulties of appraising any prospects of success until a vast amount of preparatory work had been undertaken;
(v) the need to dedicate resources to more immediate and less historic victims of mis-selling; and
(vi) the reasonable belief that it impeded chances of voluntary settlements in the future with banks in the event of such an action on the basis that even without a bar such as contractual discharge or legitimate expectation, banks may wonder what point making payments without finality.
X Ground 2
(i) the FCA was aware that the excluded customers were dissatisfied with the scope of the Scheme including customers who had suffered material financial loss and considered that the FCA should act in their cases;
(ii) the circumstances listed at para.36 of the skeleton argument of the Claimant containing criticisms about the nature and effect of the differentiation and the reasons why the FSA/FCA failed in its object to protect consumers appropriately all appear in the Review and did not require consultation to ascertain these criticisms;
(iii) the Board Paper noted all of this and it was a large part of the premise for the Review in any event, which recorded evidence of dissatisfaction of excluded customers, identifying loss suffered by excluded customers and evidence of recoveries of redress by excluded customers;
(iv) In June 2021 the FCA considered whether it should consult on the issue of taking further steps on redress, but formed the view that it was not necessary since it was already well aware of the nature of the issue and that doing so could provoke market speculation and uncertainty.
XI Relief
XII Concluding words