Thomas Roe KC (instructed by Hausfeld & Co LLP) for the Claimant
MR JUSTICE FORDHAM:
The target decision, challenged in these judicial review proceedings as being incompatible with public law standards, was announced by the Defendant (“the Authority”) on 14 December 2021. It was published, alongside a report dated 26 November 2021 (“the Report”) by an Independent Reviewer John Swift KC on a Lessons Learned Review, as part of the Authority’s response to the Report (“the Response”). The Independent Review was into the supervisory intervention on interest rate hedging products (IRHPs) by the Authority’s predecessor (the FSA) and then the Authority itself. The Chronology at Appendix 1 of the Report sets out some of the key events between February 2010 and September 2019. The Report and Response are published in the public domain and accessible to anyone who wishes to access greater contextual detail.
One of the questions within the Terms of Reference for the Independent Review was (§5(2)) whether the eligibility criteria under the “redress scheme” (§3) constituting the supervisory intervention (§1) on IRHPs (“the Scheme”) were “appropriate”.
The Independent Reviewer’s “main conclusion” (Report p.316) in answering that question – applying a standard of “what was objectively reasonable, appropriate and proportionate in all the circumstances” (p.295) – was that the FSA had been “wrong” to confine eligibility to “a subset of Private Customers/Retail Clients which it designated as ‘non-sophisticated'”, which “avoided, without adequate objective justification” the FSA’s “wider responsibilities to secure redress for all Private Customers/Retail Clients who had been mis-sold IRHPs and to whom banks owed the same regulatory obligations as they owed to ‘non-sophisticated’ customers” falling within the Scheme’s eligibility criteria. The Report had spoken (p.372) of a need for “an objective justification” which was founded on “strong evidence”.
Among the key conclusions within the Response, alongside an acknowledgement of “clear shortfalls in processes, governance and record-keeping”, was the Authority’s statement of its belief that the decision to treat sophisticated and non-sophisticated customers differently in the case of IRHPs was justified (Response §3.21). The Authority accepted “objective justification” (§3.20), and “evidence-based” (§3.30). A September 2021 Board Paper recorded (at Annex 2) that the Authority did not agree with the “high … evidential hurdle”. The stated belief was key in the explanation of the Authority’s reasons (Response §§4.3-4.4) for the target decision not to take any action using the Authority’s powers, to require any further redress to be paid to IRHP customers (§4.2). A first key articulated reason in the Response (§4.3) emphasised the Authority’s disagreement that the limitation on scope had been wrong, considering instead that it had been a reasonable approach to a regulatory aim of swift and certain redress for the most vulnerable which thereby provided “appropriate protection to all the various customers involved”. A second articulated reason why action was not considered appropriate or proportionate (§4.4) emphasised that the Scheme had been a voluntary agreement whose terms had set out “the entirety of the steps” required of the banks. Mr Coleman KC today describes that as being a contract which further action would have breached.
As to the background and context, the first complaints to the FSA relating to IRHP mis-selling had started in February 2010. By March 2012 there were newspaper articles on the subject and the FSA was in information-gathering mode. On 24 April 2012 more than 40 members of Parliament acted to become constituted as the Claimant (“the APP Group”), whose name at that time was “the All-Party Parliamentary Group on Interest Rate Swap Mis-selling” (Report p.96). All-Party Parliamentary Groups are a familiar feature of the Parliamentary and public landscape. As the evidence explains, they are a forum bringing together members of both Houses of Parliament and from all political parties “around a subject area”. Mr Roe KC submits, and I accept, that they engage public interest issues, with a remit transcending the defending and promoting of the interests of constituents. They are governed by Officers from the House of Commons and House of Lords.
Here, as explained in the evidence, the APP Group – established in April 2012 – is supported by a non-profit secretariat and reliant on external funding through monies donated, none of which can go to any officer or parliamentarian. The APP Group’s work is described in the public domain. A snapshot of its annual net income as at 2022 was £15,952.60. There are now some 117 members of the APP Group from the House of Commons and House of Lords. The APP Group broadened its focus and changed its name to “fair business banking” in 2015. In May 2019 the Supreme Court (Lady Hale, Lord Reed and Lord Hodge) gave the APP Group permission to intervene in a case about the reflective loss rule in the law of damages: see Marex Financial Ltd v Sevilleja (All Party Parliamentary Group on Fair Business Banking intervening)  UKSC 31  AC 39 (at p.43C-D). Lord Sales explained (at §114) that: “In view of the significance of the case, this court granted permission to the All Party Parliamentary Group on Fair Business Banking … to intervene by oral and written submissions”. The five Counsel team who appeared for the APP Group, to assist the Supreme Court, summarised the purpose of the intervention (p.47B) as being “to draw to the Court’s attention particular practical problems which arise in an insolvency in the case of small private companies, and which make it inappropriate for the courts to impose, as a matter of policy, a no reflective loss rule as wide as that held in the Court of Appeal’s judgment or without real room for exceptions”. The evidence before me of Ms Buchanan – the APP Group’s executive director of Policy and Strategy – refers to another intervention in another case, but the description I have given from Marex is quite sufficient for present purposes.
Ms Buchanan’s evidence, filed in these proceedings on behalf of the APP Group, describes its originating “purpose” as being “to bring to the attention of Parliament, the FCA …, the press and the public the plight of businesses that had been mis-sold IRHPs”. She explains that the APP Group’s work was “instrumental” in “triggering” the information gathering into the mis-selling of IRHPs which led to the Scheme then being established. The Report itself (p.298) describes “the public and political pressure” to intervene from March 2012, the subsequent Parliamentary debates (p.85), and the ongoing political pressure by reference in particular to the formation of the APP Group and the case it was making (p.96). The evidence of Ms Buchanan also explains that the APP Group had raised concerns about the design of the Scheme including in particular the eligibility criteria and ‘sophistication’ test. That is a reference to a narrowing, from an original inclusive scope (Report p.24), by reference to aspects such as size, turnover and number of employees (Report p.131). There are various descriptions given, at various times. They include ‘deemed understanding’ (p.323) of transaction and risk to describe those becoming ineligible. They also include ‘reasonably considered most at risk’ to describe those becoming eligible (Response §3.28). The Report makes reference (p.21) to the actions of Parliamentarians in the run up to the commitment given in 2015 to a review with independent input. The Report describes the role which the APP Group had in assisting the Independent Reviewer and giving evidence (Report pp.118, 145, 267, 281, 294, 312).
In broad terms, the basic picture is that the Scheme had led, by the end of 2016, to the payment of some £2.2 billion redress relating to 20,206 mis-sales of IRHP to those falling within the scope, with scheme costs at a level of £920m. The eligibility criteria which excluded customers on grounds of ‘sophistication’ are said to have constituted some 34% of the overall cases, and some 10,604 IRHP sales (elsewhere described as 10,577). The Authority’s “guess” is that the level of redress for the excluded cases could range from some £350m to £3.2bn.
The concerns about the nature of the regulatory intervention had led to the public confirmation in June 2015 of the Authority’s intention to perform a lessons learned exercise including independent oversight. Four years later in June 2019, the Authority appointed Mr Swift KC (QC as he then was) as the Independent Reviewer, supported by a specialist team (Report Appendix 10). The Terms of Reference (§4) recorded that the Review was “not intended to be a route by which the redress scheme or individual cases can be reopened”. Mr Swift KC was chosen to be appointed, to conduct the Lessons Learned Review, because of his standing and specialist expertise including years in independent practice with past regulatory experience in the public sector.