Spot the Difference: Identifying Misconduct in the FCA Rules

Spot the Difference:Identifying Misconduct in the FCA Rules Christopher Edwards

Structure of the Presentation1. An introduction to the statutory regime2. Claims for Breach of Statutory Duty3. Attempts to bring the rules into play in other claims

An Introduction to the Statutory RegimePre-January 2013 FSMA 2000, ss.2 and 52(1) In discharging its general functions the Authority must, as far as is reasonably possible, act in a way – (a) which is compatible with the regulatory objectives; and (b) which the Authority considers most appropriate for the purpose of meeting those objectives. (2) The regulatory objectives are - (a) market confidence . . . . (c) the protection of consumers . . . .

An Introduction to the Statutory RegimePre-January 2013 FSMA 2000, ss.2 and 55(1) The protection of consumers objective is: securing the appropriate degree of protection for consumers. (2) In considering what degree of protection may be appropriate, the Authority must have regard to - (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 in relation to different kinds of regulated activity; (c) the need that consumers may have for advice and accurate information; and (d) the general principle that consumers should take responsibility for their decisions

An Introduction to the Statutory RegimePost January 2013 – FSMA 2000 ss.1B and 1C1B (1) In discharging its general functions the FCA must, so far as is reasonably possible, act in a way which— (a) is compatible with its strategic objective, and (b) advances one or more of its operational objectives. (2) The FCA's strategic objective is: ensuring that the relevant markets function well. (3) The FCA's operational objectives are— (a) the consumer protection objective...

An Introduction to the Statutory Regime Post January 2013 – FSMA 2000 ss.1B and 1C cont’d1C (1) The consumer protection objective is: securing an appropriate degree of protection for consumers. (2) In considering what degree of protection for consumers may be appropriate, the FCA must have regard to— (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;

An Introduction to the Statutory RegimePost January 2013 – FSMA 2000 ss.1B and 1C cont’d (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...

An Introduction to the Statutory RegimeThe Structure of the Handbook1. High Level Standards: a. Principles for Business (PRIN) b. Statements of Principle and Code of Practice for Approved Persons (APER)2. Business Standards a. Conduct of Business Sourcebook (COBS) b. ICOBS c. MCOBS d. BCOBS

An Introduction to the Statutory RegimeInterpretation of the HandbookGen 2.2.1R Every provision in the Handbook must be interpreted in light of its purposeGen 2.2.2G The purpose of the provision in the Handbook is to be gathered first and foremost from the text of the provision in question and its context among other relevant provisions. The guidance given on the purpose of a provision is intended as an explanation to assist readers of the Handbook. As such, guidance may assist the reader in assessing the purpose of the provision, but should not be taken as a complete or definitive explanation of a provision’s purpose.

An Introduction to the Statutory RegimeInterpretation of the HandbookEvidential An evidential provision is a rule, but it is not binding in its own Provisions right. It always relates to some other binding rule. When it says so, compliance with an evidential provision may be relied on as ‘tending to establish compliance’ with the rule to which it relates. And when it says so, contravention of an evidential provision may be relied on as ‘tending to establish contravention’ of the rule to which it relates.

Breach of Statutory Duty s.138D(2) FSMA 2000 A contravention by an authorised person of a rule made by the FCA is actionable at the suit of a private person who suffers loss as a result of the contravention, subject to the defences and other incidents applying to actions for breach of statutory duty. Reg 3, Financial Services and Markets Act 2000 (Rights of Action) Regulations 2001 • In these Regulations, “private person” means— (a)any individual, unless he suffers the loss in question in the course of carrying on— (i)any regulated activity; or (ii)any activity which would be a regulated activity apart from any exclusion made by article 72 of the Regulated Activities Order (overseas persons); and (b)any person who is not an individual, unless he suffers the loss in question in the course of carrying on business of any kind;

Breach of Statutory Duty Common Defences to Breach of FCA Handbook Loss not within scope of duty; Remoteness; Breach did not cause loss; Contributory Negligence

Breach of Statutory Duty Scope of Duty – Rubenstein v HSBC Bank plc [2012] EWCA Civ 1184 [114]...[I]n a case of statutory duty the question as to scope of duty is to be answered by reference to the statute itself, and in such a context the position in negligence and contract will fall in behind the statutorily discerned purpose. If, however, the position in tort or contract, absent the context of statutory duty, might lead to a separate result, as it might, there seems to me to be no profit in considering that position first in a case where breach of statutory duty has been established. To do so increases the risk of error. [115] In the present case, therefore, it seems reasonably clear that the statutory purpose of the COB regime pursuant to FSMA is to afford a measure of carefully balanced consumer protection to the "private person".

Breach of Statutory Duty Remoteness – Rubenstein v HSBC Bank plc [2012] EWCA Civ 1184 [123] Ultimately, the question of remoteness... is a matter of the reasonable contemplation of the parties. In the context of statutory protection for the consumer, it seems to me that a bank must reasonably contemplate that, if it misleads its client as to the nature of its recommended investment, and thereby puts its client into an investment which is unsuitable for him, when it could just as easily have recommended something more suitable which would have avoided the loss in question, then it may well be liable for that loss. [124] Where the obligation of a Defendant is not merely to avoid injuring his Claimant but to protect him from the very kind of misfortune which has come about, it is not helpful to make fine distinctions between foreseeable events which are unusual, most unusual, or of negligible account

Breach of Statutory Duty Causation – Zaki v Others v Credit Suisse (UK) Ltd [2013] EWCA Civ 14, COB 7.9.3 A firm, subject to the exceptions in COB 7.9.5 R, must not lend money or grant credit to a private customer (or arrange for any other person to do so) in the course of, or in connection with, its designated investmentbusiness unless: (1) the firm has made and recorded an assessment of the private customer's financial standing, based on information disclosed by the private customer; (2) the firm has taken reasonable steps to ensure that the arrangements for the loan or credit and the amount concerned are suitable, based on the information disclosed by the private customer, for the type of investment agreement proposed or which the private customer is likely to enter into; and (3) the private customer has given his prior written consent to both the maximum amount of the loan or credit and the amount or basis of any interest or fees to be levied in connection with the loan or credit.

Breach of Statutory Duty Causation – Zaki v Others v Credit Suisse (UK) Ltd [2013] EWCA Civ 14 [79] Sub-rule (1) provides the process by which the substantive obligation to take reasonable steps to ensure suitability under sub-rule (2) is facilitated: hence the latter's language - "based on the information provided by the private customer". Where there has been a breach of sub-rule (1), there is always a possibility that the bank will have defaulted on that substantive obligation. Therefore, evidence of a breach of sub-rule (1) will or may assist a Claimant to prove a breach of sub-rule (2). It may be impossible for a firm to deflect a claim of having failed to take reasonable steps under sub-rule (2) where it has failed to carry out its assessment and recording obligation properly under sub-rule (1). If, however, the lending was in fact suitable, whatever a firm has done, properly or improperly, by reference to sub-rule (1), then any failure under sub-rule (1) becomes mere water under the bridge, a matter of no ultimate consequence. I accept, nevertheless, that a proven breach of the obligation of process will in the natural course of things lead a court to consider carefully, and if need be sceptically, a firm's case that it had taken reasonable steps or that the lending was suitable, despite any lack of care in the process leading to the lending arrangements

Breach of Statutory Duty Causation – Al Sulaiman v Credit Suisse Securities (Europe) Ltd and another [2013] EWHC 400 (Comm), Cooke J [19] It is common ground that, so far as relevant, taking reasonable steps to ensure that an investment is suitable for a client involves taking reasonable steps to ensure that the client understands the risks involved in the transaction and that the rules are concerned with substance and not form. If an investment is in fact suitable for the client, then it does not ultimately matter if there have been failings in the process...The need for an explanation of the risks has therefore to be seen in the overall context of suitability, bearing in mind the client's investment objectives, risk tolerance, knowledge, experience and financial standing.

Bringing the FCA Rules into play in other claims Titan Steel Wheels Ltd v Royal Bank of Scotland plc [2010] EWHC 211 (Comm), David Steel J Corporate entities who sustain losses as a result of the purchase of financial products will usually be in business of some kind. Accordingly, cannot sue under s.150 (now s.138D) FSMA

Bringing the FCA Rules into play in other claims Bailey and another v Barclays Bank plc [2014] EWHC 2882 QB, Judge Keyser QC, 27 August 2014 – application to amend PoC [44] [T]he decision has been treated as authoritative and its reasoning has been approved in subsequent cases. The decision was followed in Camerata Property Inc v Credit Suisse Securities (Europe) Ltd [2012] EWHC 7 (Comm), where Flaux J (who, it may be noted, was dealing with applications under r 3.4 and r 24.2 and was therefore applying the same tests that I must apply) said at 98 that there were no grounds for considering it to have been wrongly decided. The decision in the Titan Steel Wheels case was also considered by Lord Hodge in the Court of Session in Grant Estates Ltd v Royal Bank of Scotland plc [2012] CSOH 133, where the issue arose for determination whether the pursuer, Grant Estates Ltd, was a "private person" for the purposes of s 150 of FSMA and reg 3 of the 2001 Regulations, both of which applied in Scotland. Lord Hodge substantially agreed with the reasoning of David Steel J and adopted a broad construction of the words "unless he suffers the loss in question in the course of carrying on business of any kind" in para 3(1)(b).

Bringing the FCA Rules into play in other claims Green and Rowley v Royal Bank of Scotland plc, [2013] EWCA Civ 1197, Tomlinson LJ [23]Mr Berkley's argument is in my view misconceived. It amounts to saying that the mere existence of the COB Rules gives rise to a co-extensive duty of care at common law. This proposition invites the question “why?” Mr Berkley accepted that not every statutory duty will generate a co-extensive duty of care at common law. It is no answer to the question what feature of the instant statutory duty, if there is a relevant statutory duty, gives rise to a co-extensive duty of care at common law to assert, as Mr Berkley did, that the Bank was undertaking a regulated activity in circumstances where a failure to comply with COB r 5.4.3 would be likely to cause loss. Parliament has provided, by s 150 of the Financial Services and Markets Act 2000, a remedy for contravention of the rule in the shape of an action for breach of statutory duty, or at any rate an action akin thereto. There is no feature of the situation which justifies the independent imposition of a duty of care at common law to advise as to the nature of the risks inherent in the regulated transaction.

Bringing the FCA Rules into play in other claims Bailey and another v Barclays Bank plc [2014] EWHC 2882 QB, Judge Keyser QC, 27 August 2014 – application to amend PoC 3 attempts: 1. Breach of COBS 2.1.1R: A firm must not, in any communication relating to designated investment business, seek to: (1) exclude or restrict; or (2) rely on any exclusion or restriction of; any duty or liability it may have to a client under the regulatory system. Regulation 6(2) permits claims under s.150 (now s.138D) where the rule that has been contravened prohibits an authorised person from seeking to make provision excluding or restricting any duty or liability Judge found that bank had not excluded liability under regulatory system

Bringing the FCA Rules into play in other claims Bailey and another v Barclays Bank plc [2014] EWHC 2882 QB, Judge Keyser QC, 27 August 2014 – application to amend PoC 2. COBS incorporated into contract. The plain reading of the Retail Client Agreement does not in my judgment support the Company's case. Clause 1.4 makes a clear contrast between the contractual terms and the Applicable Regulations. Its point is that the relationship between the parties is governed by a regulatory framework and that any provision made by the contract will nonetheless be subject to the requirements of that regulatory framework. That is perfectly intelligible and sensible and does not involve incorporation of the COBS Rules into the contract.

Bringing the FCA Rules into play in other claims Bailey and another v Barclays Bank plc [2014] EWHC 2882 QB, Judge Keyser QC, 27 August 2014 – application to amend PoC 3. COBS rules are appropriate standard of care under implied term of reasonable care and skill under s.13 SGSA 1982. This argument cannot be sustained on the facts of the case, in view of what I have already said concerning the scope of the application of the COBS Rules to the Bank's conduct vis-à-vis the Company. In short, if the Bank was not in breach of the COBS Rules, the Company cannot rely on such breach as evidence of lack of reasonable skill and care.

Bringing the FCA Rules into play in other claims Crestsign Limited v National Westminster Bank plc[2014] EWHC 3043 (Ch), July 2014, Mr Tim Kerr QC sitting as a deputy judge 126. The banks submitted that the allegations of breach of a common law duty were thinly disguised allegations of breaches of duties owed under provisions of COBS, and produced a table showing a correlation between particular duties owed under COBS and particular breaches of duty alleged in Crestsign’s particulars of claim. I did not find this point persuasive. I agree with the banks that the two sets of duties are not to be treated as co-terminous and that breach of a COBS duty is not necessarily common law negligence. 127. But it does not follow that breaches of COBS duties (not actionable as such at the suit of Crestsign) cannot also be negligent at common law. Nor is the content of the COBS duties wholly irrelevant in a common law claim brought by a person unable by statute to sue for breach of a COBS duty. The COBS duties are likely to be relevant to determining the standard of care required of a reasonably careful and skilled adviser, since a reasonably skilled and careful adviser would not fall short of the standard required to meet relevant regulatory requirements.

Bringing the FCA Rules into play in other claims Crestsign Limited v National Westminster Bank plc [2014] EWHC 3043 (Ch), July 2014, Mr Tim Kerr QC sitting as a deputy judge 145. So it is in this case. In Bankers Trust, the plaintiffs were asserting that “the duty … extends to explaining fully and properly … the operation, terms, meaning and effect of the proposed swaps and the risks and financial consequences of accepting them” (page 533C, italics in original). Mance J referred to Cornish v. Midland Bank plc and held at 533D-E: In short, a bank negotiating and contracting with another party owes in the first instance no duty to explain the nature or effect of the proposed arrangement to that other party. However, if the bank does give an explanation or tender advice, then it owes a duty to give that explanation or tender that advice fully, accurately and properly. How far that duty goes must once again depend on the precise nature of the circumstances and of the explanation or advice which is tendered.

Bringing the FCA Rules into play in other claims Crestsign Limited v National Westminster Bank plc [2014] EWHC 3043 (Ch), July 2014, Mr Tim Kerr QC sitting as a deputy judge 146. It is that statement of the law which governs the position here. It is nothing to the point that applying it may produce a common law duty on the facts whose content may overlap with applicable COBS duties. Once again, I resist the fallacious reasoning that because common law duties and COBS duties are not co-terminous, and because Crestsign is excluded from the class of persons able to sue for breach of COBS duties, the banks can owe no common law duty which happens to overlap with a COBS duty. 153. In my judgment, he [the Treasury salesman] came under a duty to explain fully and accurately the nature and effect of the products in respect of which he chose to volunteer an explanation, but I do not think he came under a duty to explain fully other products that Crestsign might have wanted to purchase but which he did not wish to sell, such as an interest rate cap product.

Christopher Edwards

Spot the Difference: Identifying Misconduct in the FCA Rules