BANKING & FINANCE LITIGATION UPDATE
Issue 56
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DOMESTIC BANKING 7. Barclays' shareholders have accused regulators of destabilizing the bank by forcing the resignation of chief executive Bob Diamond and weakening BARCLAYS the management team. Investors were responding 1. Barclays is planning a reform of its bonus scheme. to claims made by the FSA and the Bank of One of the proposals being considered is that England at the Treasury select committee that the awards should be withheld until staff retire or sudden removal of Mr Diamond was in the best leave the bank. Other proposals include bonuses interest of shareholders. being deferred for five years or clawed back if targets are not achieved. Daily Telegraph, 19 July 2012
Daily Telegraph, 6 August 2012 8. Barclays has lost exclusive insurance advertising rights as a condition of its new Premier League 2. Barclays is being urged by shareholders to use deal - despite having paid more than 45 per cent Bob Diamond's departure as an opportunity to more this time round to secure its position as title change the bank's strategy and cut the size and sponsor. cost of its investment banking operation, putting an end to so-called "casino banking". Daily Telegraph, 18 July 2012
Sunday Times, 5 August 2012 9. The Treasury Select Committee has revealed that the board of Barclays was told in February this 3. As part of an investigation into possible rigging of year that the relationship between the bank's the Euribor rate, Italian police have seized senior management and the FSA had "broken documents from the Milan offices of Barclays. down". The FSA had also apparently raised Prosecutors in the city of Trani have opened a concerns about Mr Diamond's appointment as criminal investigation following complaints from chief executive in September 2010 and had sought two consumer groups, Adusbef and assurances that there would be "a change of Federconsumatori. culture at Barclays".
Daily Telegraph, 31 July 2012 Daily Telegraph, 5 July 2012
4. Barclays has set aside £450 million to compensate small and medium-sized businesses mis-sold HSBC controversial interest rate swaps. Barclays is one 10. HSBC's former chief executive, Michael of four banks to have agreed a settlement with the Geoghegan, and head of its Mexican business, regulator in June. Sandy Flockhart, could have millions of pounds in bonuses clawed back as a result of the US money- Daily Telegraph, 30 July 2012 laundering scandal that has so far cost the bank $700m (£444m). 5. Barclays is being investigated by the FSA over whether the bank adequately disclosed fees paid Daily Telegraph, 31 July 2012 to Qatar Investment Authority when it purchased a stake in the bank in 2008. 11. David Bagley has resigned as chief compliance officer at HSBC during a hearing in the US Senate Financial Times, 30 July 2012 concerning the bank's failure to comply with anti-money laundering procedures. Mr Bagley 6. Anthony Salz, vice-chairman of Rothschild, has will remain with the bank. been appointed by Barclays to investigate whether the way in which the bank set its bonuses Financial Times, 18 July 2012 encouraged some staff to behave dishonestly. Salz will also look at conflicts of interest, training, disciplinary processes, whistleblowing systems LLOYDS BANKING GROUP and leadership behaviour as part of a review of the 12. Lloyds Banking Group's former head of security bank's culture. for online banking has pleaded guilty to the theft The Times, 25 July 2012 of £2.5 million. Jessica Harper is facing a custodial sentence for falsifying invoices over a
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four year period and laundering the proceeds. She 19. Stephen Hester, chief executive of RBS, has will be sentenced at a later date. warned that the bank will take another hit to its reputation, as well as a huge fine, as a result of its Independent, 8 August 2012 involvement in the Libor scandal. The exact size of the fine to be faced by RBS is not yet known 13. Lloyds Banking Group has been forced to cut the but Hester told an interview with the Guardian price of its Project Lundy auction after failing to that the investigation by the FSA was "in attract enough interest in the portfolio of loans. process". The proposed price of 70p in the £1 has been cut to 50p. Guardian, 30 July 2012
Daily Telegraph, 23 July 2012 20. Sami Wasif, the London restaurant entrepreneur who is the co-founder of Michelin-starred Chinese 14. Lloyds Banking Group is expecting to announce restaurant Hakkasan, has claimed that an interest that it will accelerate the ring-fencing of its retail rate swap mis-sold to him by RBS has cost him banking business from its investment arm ahead almost £200,000 in extra payments. Mr Wasif of the Independent Commission on Banking's says he was sold the 10-year swap in 2004 2019 deadline. without his permission, when it was attached to a £1.2 million loan he took out, and that he only Sunday Telegraph, 22 July 2012 discovered its existence in February after he noticed discrepancies in his bank account. THE ROYAL BANK OF SCOTLAND Sunday Telegraph, 29 July 2012 15. The Royal Bank of Scotland (RBS) customers will not be offered any price discounts or free 21. Mervyn King, Governor of the Bank of England, deferred shares when the bank's insurance division has called on the FSA to launch a full floats later this year. The Direct Line group investigation into RBS's recent computer which owns Churchill, Green Flag and Privilege is problems within its retail arm, which left many valued between £3 billion and £4 billion. customers without access to their accounts.
Times, 6 August 2012 Daily Telegraph, 27 June 2012
16. Brazil's Itau Unibanco is putting together a bid for 22. An inexperienced technician in RBS's computer RBS's business in the US. Speculation is centre in Hyderabad, India, could have been mounting that the state-owned bank will put responsible for the bank's recent computer Rhode Island-based retail bank, Citizens, up for problems. Information was accidentally deleted sale for an estimated £10 billion. Bank of during a software upgrade. America Merrill Lynch and JP Morgan Chase are also said to be interested in the business. Daily Telegraph, 27 June 2012
Sunday Times, 5 August 2012 STANDARD CHARTERED 17. First quarter figures show that RBS has repaid the 23. Standard Chartered is considering a counterclaim emergency loans obtained from the Treasury and against the New York regulator after the bank was the Bank of England in 2008 but business accused of funding $250bn in breach of Iranian secretary Vince Cable is asking why the funds sanctions. used to repay the loans were not used to lend more money to small businesses. Mr Cable is pushing Financial Times, 9 August 2012 for a full nationalisation of RBS. Sunday Times, 5 August 2012 DOMESTIC GENERAL 18. Cabinet ministers are in discussions about whether 24. The cost to UK banks of mis-selling payment to buy the 12 per cent of RBS which it does not protection insurance is fast approaching £10 own, thus fully nationalising the bank. The billion and rising, putting it on course to become Chancellor is thought to be opposed to the idea. the most costly consumer financial scandal in British history. Financial Times, 2 August 2012
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Independent on Sunday, 5 August 2012 on companies' shares. Over £1 million was made by the insider trading ring. 25. New FSA rules mean banks providing insurance as part of "packaged" accounts will need to check Times, 23 July 2012 customers are eligible to claim on the policies.
Financial Times, 31 July 2012 EUROPEAN GENERAL 26. Preparations are being made for the first British 30. BaFin, the German markets regulator, has group legal action against those banks who rigged extended an investigation into the alleged rigging interest rates. The legal action will demand that of Euribor, the main interbank lending rate for the contracts worth millions of pounds should be Eurozone. Eight of the country's banks - DZ Bank, ripped up and that all money paid under tainted LBBW, Deutsche Bank, Commerzbank, NordLB, deals be given back to clients. It will be argued BayernLB, Landesbank Berlin and Heleba - are that the banks who colluded to drive down rates to believed to have been ordered to submit details of the detriment of customers were in breach of how they calculate and monitor the interest rate. competition law. Claims on behalf of other financial institutions and their clients are also The Times, 30 July 2012 being considered, with money having been lost as 31. Following the Libor scandal, the European a result of trust being placed in the rigged rates Commission will make amendments to the Market and payments calculated on the basis of those Abuse Directive that will make the rigging of rates. interest rates a criminal offence. The Commission is expected to announce that anyone found to have The Times, 30 July 2012 falsified interest rates will face imprisonment. 27. Lord Turner, chairman of the FSA, has admitted to the Treasury Select Committee that on three Independent on Sunday, 22 July 2012 occasions in 2007 and 2008 the regulator 32. HSBC, Deutsche Bank, Credit Agricole and overlooked the possible manipulation of the Libor Societe Generale are being investigated by rate because messages were relayed to 'junior regulators concerning manipulation of the Euribor staff'. An internal investigation at the FSA has rate following evidence of links between traders at been ordered. all four banks and Philippe Moryoussef, former euroswaps trader at Barclays. Daily Telegraph, 17 July 2012
28. RBS and Lloyds Banking Group are at risk of Financial Times, 19 July 2012 significant fines as part of the investigation into 33. The chair of the European Banking Authority, attempted rigging of the inter-bank lending Andrea Enria, has indicated that the nine per cent market. At least a dozen financial institutions core tier one capital ratio which banks were across the world have been caught up in a global required to reach by June 2012 will become inquiry into Libor manipulation. HSBC is also permanent. believed to be under investigation, as are Citigroup, JP Morgan, Deutsche Bank, UBS and Financial Times, 17 July 2012 the inter-dealer broker ICAP founded by the Tory donor Michael Spencer. 34. Compliance with EU regulatory demands will cost the banking industry €33.3bn over the next three Daily Telegraph, 28 June 2012 years according to a study by think-tank JWG. Costs could increase to €50bn once Basel III and Solvency II kick in. EUROPEAN BANKING Financial Times, 26 June 2012 UBS 29. Five men have been found guilty of insider dealing after confidential documents were obtained from the high-security printing facilities of JP Morgan Cazenove and UBS and the information used to place profitable spread bets
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INTERNATIONAL BANKING MORGAN STANLEY 40. Morgan Stanley, which controls Morgan Stanley BANK OF AMERICA MERRILL LYNCH Smith Barney (owned jointly by the bank and Citigroup) has eliminated four managerial posts 35. Bank of China is to end its bid to establish a and made a ten per cent cut in the venture's 120 private banking operation in Europe, and will sell branch complexes as part of ongoing cost-cutting the Geneva arm of its business to Julius Baer, a measures. private bank. Daily Telegraph, 8 August 2012 Financial Times, 25 July 2012
CITIGROUP INTERNATIONAL GENERAL 36. Chief executive of Citigroup, Vikram Pandit, has 41. The US government is pushing for a global review laid out cultural changes which he believes banks of Libor saying that the UK cannot reform it on its must adopt in the aftermath of the Libor scandal own. US Treasury secretary Tim Geithner and has promised that the bank will seek expressed a lack of confidence in the reviews regulatory permission for a capital return to being conducted by the UK Treasury and the shareholders by the end of the year. British Bankers' Association.
Sunday Telegraph, 15 July 2012 Independent, 19 July 2012 42. The Federal Reserve Bank of New York has GOLDMAN SACHS claimed that it proposed reforms to the way the Libor rate is calculated four years after being 37. Dutch pension group Pensioenfonds Vervoer is alerted to potential problems by Barclays. taking legal action against Goldman Sachs Asset According to the Fed it alerted British regulators Management in London alleging the bank invested but no action was taken. its funds in inappropriate assets which led to substantial losses in 2008. The Times, 11 July 2012 Daily Telegraph, 6 July 2012 PRESS RELEASES JPMORGAN CHASE 43. Sergeant Review of Simple Financial Products: 38. Speculation that JP Morgan Chase is preparing for Interim report the retirement of chief executive Jamie Dimon, Views are sought on a report by a steering group has been fuelled by a management reshuffle. chaired by Carol Sergeant on a rationale for simple According to analysts, Daniel Pinto, the most financial products. The report analyses the target senior London-based executive, has been left as market, proposes a set of products to be taken one of the favourites to succeed Dimon as a result forward for development, and suggests a structure of the changes, with the other favourite being for the governance of the "simple products" Mike Cavanagh. The two were named as co-heads standard. Comments by 12 October 2012. of commercial and investment banking. HM Treasury, 3 August 2012 Sunday Times, 29 July 2012 Further information can be found on the Treasury 39. JPMorgan has been subpoenaed twice in the past three months by the US Federal Energy website: Regulatory Commission over whether it http://www.hm-treasury.gov.uk/d/ manipulated power markets in California and the sergeant_review_simple_financial_products_interi Midwest. There is also wrangling between the m_report.pdf bank and the regulator over the disclosure of material which the bank claims is privileged. 44. CP12/18: Data collection on remuneration practices Financial Times, 3 July 2012 This FSA consultation seeks views on remuneration data reporting requirements for
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prudential sourcebook for banks, building societies LIBOR. This work should consider amongst other and investment (BIPRU) firms and third country things: BIPRU firms. It looks at two data items in particular: the Remuneration Benchmarking ■ whether participation in the setting of LIBOR Information Report and the High Earners Report. should be brought into the regulatory perimeter Comments by 30 September 2012. under the Financial Services and Markets Act 2000 as a regulated activity; Financial Services Authority, 1 August 2012 ■ how LIBOR is constructed, including the http://www.fsa.gov.uk/static/pubs/cp/cp12-18.pdf feasibility of using of actual trade data to set the benchmark; 45. Financial sector resolution: broadening the regime ■ the appropriate governance structure for LIBOR; This HM Treasury consultation seeks views on proposals which aim to ensure that if parts of the ■ the potential for alternative rate-setting financial system other than banks run into processes; difficulty, they can fail in a way that does not threaten financial stability, without requiring ■ the financial stability consequences of a move taxpayer support. The consultation focuses on to a new regime and how a transition could be investment firms and financial holding companies, appropriately managed. central counterparties, other financial market infrastructures and insurers. Comments by HM Treasury, 30 July 2012 September 24, 2012. Further information can be found on the Treasury HM Treasury, 1 August 2012 website:
http://www.hm-treasury.gov.uk/d/ http://www.hm-treasury.gov.uk/press_68_12.htm condoc_financial_sector_resolution_broadening_r egime.pdf 48. FSA publishes new rules on packaged accounts
46. Funding for Lending Scheme opens for The FSA has published new rules requiring banks business and building societies to check whether customers are eligible to claim on insurance cover before HM Treasury has announced that the Funding for selling them a packaged bank account. Packaged Lending Scheme (FLS) draw down window is accounts are current accounts bundled up with a now open for the next 18 months and will allow range of insurance policies and other features such banks and building societies to borrow in the FLS as overdraft facilities or music downloads. In a at cheaper rates, for periods of up to four years. market where one in five people now have these The Scheme offers incentives for banks and products, the FSA wants to increase the level of building societies to increase lending to UK consumer protection. From 31 March 2013 banks households and businesses and aims to deliver and building societies must: credit easing to the whole economy. ■ check whether the customer is eligible to claim HM Treasury, 1 August 2012 under each policy and share that information with them; http://www.hm-treasury.gov.uk/press_69_12.htm ■ if the sales adviser is recommending policies in 47. The Wheatley Review the package they must establish whether each policy is suitable for the customer and alert The Chancellor of the Exchequer has them if some are not; and, commissioned Martin Wheatley, managing director of the FSA and Chief Executive-designate ■ provide customers with an annual eligibility of the Financial Conduct Authority, to undertake a statement setting out the requirements to claim review of the framework for the setting of LIBOR. each of the benefits under each insurance The Wheatley review will formulate policy policy in the package which should prompt recommendations with a view to reforming the customers to check whether their current framework for setting and governing
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circumstances have changed and whether the management of a bank. Comments by policies continue to meet their needs. 30 September 2012.
Financial Services Authority, 27 July 2012 HM Treasury, 5 July 2012
Further information can be found on the FSA Further information can be found on the Treasury website: website:
http://www.fsa.gov.uk/library/communication/ http://www.hm-treasury.gov.uk/ pr/2012/079.shtml consult_sanctions_directors_banks.htm
49. Report on risks and vulnerabilities of the 52. Commission proposes legislation to improve European banking system consumer protection in financial services
The European Banking Authority (EBA) has The European Commission has presented a published its annual report on the risks and legislative package that raises standards and vulnerabilities of the European banking sector. removes loopholes for the benefit of consumers. The report describes the main developments and Specifically, the package proposes new, consumer trends that affected the EU banking sector in 2011- -friendly standards for information about 12 and provides the Authority's outlook on the investments, raises standards for advice and main micro-prudential risks and vulnerabilities tightens certain rules on investment funds to looking ahead. ensure their safety.
European Banking Authority, 12 July 2012 European Commission, 4 July 2012
Further information can be found on the EBA Further information can be found on the Europa website: website:
http://www.eba.europa.eu/cebs/media/ http://europa.eu/rapid/pressReleasesAction.do? Publications/Other%20Publications/Risk% reference=IP/12/736&format=HTML&aged=0&la 20report/EBA-Risk-Assessment-report-2012.pdf nguage=EN&guiLanguage=en
50. The Tobin Tax: recent developments - 53. LIBOR, Public Inquiries and FSA Disciplinary Commons Library Standard Note Powers - Commons Library Standard Note
This House of Commons Library Note discusses This House of Commons Library Standard Note the international developments in relation to the summarises some of the key points relating to the Tobin Tax, proposed by the American economist, Barclays Bank LIBOR rate fixing scandal. It looks James Tobin, who argued that a tax on currency at issues surrounding public inquiries and at the trades could dissuade harmful speculation by role and limitations of the Financial Services financial markets. Authority's disciplinary powers.
House of Commons Library, 15 July 2012 House of Commons Library, 4 July 2012
Further information is available on the parliament Further information can be found on the website: Parliament website:
http://www.parliament.uk/briefing-papers/ http://www.parliament.uk/briefing-papers/ SN06184.pdf SN06376.pdf
51. Sanctions for the directors of failed banks 54. LIBOR: Update
This HM Treasury consultation seeks views on a The SFO, which has been working with the FSA, proposal to introduce a "rebuttable presumption" states that now the investigation into the issue of that the director of a failed bank was not suitable regulatory misbehaviour in relation to the LIBOR to be approved by the regulator to hold a position has concluded, it is considering whether it is both as a senior executive in a bank. The consultation appropriate and possible to bring criminal also covers the possibility of introducing criminal prosecutions. It hopes to conclude its assessment sanctions for serious misconduct in the of evidence within a month.
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Serious Fraud Office Further information can be found on the FSA website: Further information can be found on the SFO website: http://www.fsa.gov.uk/library/communication/ pr/2012/072.shtml http://www.sfo.gov.uk/press-room/latest-press- releases/press-releases-2012/libor--update--.aspx 57. The FCA - our vision for enforcement
55. Statement by the Chancellor of the Exchequer, Speaking at the FSA's enforcement conference, Rt Hon George Osborne MP, on LIBOR chief executive Martin Wheatley outlined priorities which the Financial Conduct Authority, HM Treasury has published a statement made by which replaces the FSA in 2012, will undertake. George Osborne, Chancellor of the Exchequer, to These include introducing a new supervisory the House of Commons on the London Interbank approach, a new culture and ensuring that good Offered Rate (LIBOR) and related reforms consumer outcomes are built into business models. concerning the banking sector. In his statement, Mr Osborne announced three government Financial Services Authority, 3 July 2012 initiatives arising from this issue: Further information can be found on the FSA ■ amendments to the Financial Services Bill website: 2012-13 in autumn 2012 to ensure that fines paid by the financial services industry to http://www.fsa.gov.uk/library/communication/ regulators go to the Exchequer; speeches/2012/0702-mw.shtml
■ a review by Martin Wheatley, chief executive- 58. Composition of capital disclosure designate of the Financial Conduct Authority requirements: rules text (FCA), on what reforms are required to the current framework for setting and governing This Basel Committee on Banking Supervision LIBOR. Mr Wheatley will produce a report on publication sets out the disclosure requirements on these issues later in summer 2012; the composition of banks' capital to raise the quality and consistency of capital in the banking ■ the establishment of a joint committee, chaired sector. by Andrew Tyrie, to conduct an inquiry into professional standards in the banking industry. Basel Committee on Banking Supervision and The joint committee will produce a report by Bank for International Settlements, 26 June 2012 the end of 2012 and the government intends to reflect its recommendations in the Banking Further information can be found on the BIS Reform Bill. website:
HM Treasury, 3 July 2012 http://www.bis.org/publ/bcbs221.pdf
Further information can be found on the Treasury website: CASE LAW 59. Wife's undue influence claim against bank fails http://www.hm-treasury.gov.uk/ chx_statement_020712.htm Barry Davies ("H") was a renowned dealer in Oriental antiques. He originally traded as a sole 56. FSA to adjust bank liquidity guidance in light proprietor but in 1994 he incorporated his business of improved Bank of England facilities ("Company"). He owned all of the shares and was the sole active director, though his wife, Christine The FSA has announced that, in the current Davies ("W") was a director too. When the conditions and in the light of the improved level of Company was incorporated the business's liquidity insurance to be provided by the Bank of borrowing with Barclays was re-arranged with W's England, it will adjust its guidance to certain agreement. banks on appropriate levels of liquid asset buffers. Between March and May 2001 H wanted to Financial Services Authority, 3 July 2012 further re-organise his business affairs and had been introduced to AIB Group (UK) Plc ("AIB")
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as prospective bankers to both the Company and personal loan and on its subsequent renewals, the family. Prior to the further restructuring of the grasp the gist of the arrangements (that there was Company's borrowings with AIB certain property company borrowing and some other borrowing for assets were transferred from the Company to W which she was signing) even if she did not wrestle who, in addition to being a director, also had a with the detail or work through the consequences. sizable personal property portfolio. She must then have lost that grasp until confronted with reality on her husband's death. It would As part of the restructuring, AIB agreed to grant a otherwise be difficult to reconcile her evident and personal loan of £1.35m to H and W jointly. It also genuine upset upon realising the full extent of the offered separate and concurrent lending to the family indebtedness to AIB with her admitted Company to be secured by a personal guarantee understanding that she had signed a guarantee and from H and W for up to £1.45m. It was a condition that a guarantee cannot relate to your own debt, that H and W must obtain independent legal her acceptance on multiple separate occasions of a advice. W chose a Mr John Downing of Davenport non-company loan offer in a different amount and Lyons as her independent solicitor. the fact that the existence of two facilities was openly discussed in her presence without her AIB formally instructed Mr Downing to advise W protesting. in relation to the security she was providing for the Company's borrowing. Mr Downing contacted H's However, the judge stressed that the important solicitor seeking written confirmation of the question was not what her intention was in relation circumstances surrounding the matter upon which to the personal loan but rather how that intention he was advising W. He received some information was brought about. Was her acceptance of the which enabled him to see that what he was personal loan brought about by a basic but real advising on was but part of a much wider scheme grasp of the situation or by complete ignorance of but it did not enable him to see what the intended the true situation brought about by some financial arrangements were in detail. Mr wrongdoing by H? Downing was sent further documents and information by the Company on 15 June 2001 at The judge noted that there were severe limitations H's request with the express object of ensuring that in seeking to draw conclusions from an assessment Mr Downing had everything he could conceivably of the personalities involved given that H had died want before tendering advice to W. before W mounted her challenge and she had had six years of intense reflection which inevitably In June 2001 W signed acceptance of the facility coloured her recollection. There was also a paucity letter relating to the personal loan of £1.35m. She of evidence. He had to give greatest weight to the also signed the joint and several guarantee of the contemporary documents and the realistic Company's borrowing for up to £1.45m. inferences he could properly draw from them.
H died and W sought to have the personal loan of In broad terms, the replacement of one set of £1.35m set aside on the basis that it had been banking arrangements with another was the very procured by undue influence. She claimed that she sort of transaction that might be accounted for by feared abusive treatment if she disagreed with H. the ordinary motives of ordinary parties to a She also claimed that AIB had not taken proper marriage. The family's assets were "on the line" steps to satisfy itself that W's agreement had been throughout. Also the context in which the AIB properly obtained and that AIB had not brought facilities were being taken did not really suggest home to her in a meaningful way the practical that H was conning W into taking on liabilities to implications of the risks involved. She claimed benefit H's Company. A key part of the that her understanding had been that her liability transactions was the transferring of property into was to be limited to £1.45m not £2.8m. W's name which the Company had paid for. This suggested that H was trying to confer a benefit on The burden was on W to prove undue influence. W not take advantage of her. She had to establish that some legal or equitable wrong committed by H caused her to enter into the H had a genuine desire to see that W had proper personal loan. and full advice and had personally tried to ensure that the independent solicitor instructed to advise Considering the evidence as a whole, the judge W had the fullest and clearest understanding of the was not convinced that H had exercised undue transactions and the securities to be offered in influence. He found that the inherent probabilities relation to each of the two facilities so that he suggested that W did, at the time of accepting the
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could give whatever advice he thought fit to W. H they had taken out in connection with a loan also never sought to conceal the fact that there agreement. They claimed that CC had failed to: were two separate facilities. H could not be criticized for leaving it to W's solicitor to provide ■ advise that the PPI was optional and to take explanations rather than providing them himself. other steps to communicate information about the PPI policy to them in a way that was clear, The important point was not whether W's solicitor fair and not misleading ("Optionality Issue"); competently and successfully did his job (though the judge was of the view that he had) but rather ■ take reasonable steps to ensure that the PPI whether by procuring W's consent in this way H was suitable for their demands and needs committed some legal or equitable wrong. The ("Suitability Issue"). judge took the view that a husband who by full disclosure of the entire transaction and all of the It was common ground that any person relevant documents puts his wife's solicitor in the undertaking insurance mediation activities at the position to tender full and informed advice to her material time was required to comply with the cannot be fairly criticized as lacking candour, or rules of the Financial Services Authority's properly accused of suppression of material Insurance: Conduct of Business Sourcebook information. ("ICOB"). A breach of ICOB gives a private person a right to claim damages under s.150 of the For all these reasons the judge was not persuaded Financial Services & Markets Act 2000 ("FSMA that on the balance of probabilities H had unduly 2000"). influenced W. The Optionality Issue He did however go on to express his conclusions about other points which had been argued. Had he ICOB 2.2.3R provides that, "When a firm found that there had been undue influence he communicates information to a customer, it must would have held that AIB had been on take reasonable steps to communicate in a way constructive notice of that influence. AIB would that is clear, fair and not misleading". have been "put on inquiry" because it was aware that the loan was being made for the purposes of The Goodmans both filed lengthy witness the Company as distinct from H and W's joint statements but the court also had the benefit of purposes. He would then have found that having accurate and contemporaneous transcripts of been put on inquiry, AIB had not discharged its telephone calls made between CC and the obligations because its internal monitors had taken Goodmans and the contemporaneous the view that the package as a whole was documentation. The contemporaneous evidence sufficiently complex to require that general advice cast grave doubts on the reliability of the as to the facilities should be given but in fact AIB Goodmans as witnesses. The judge indicated that had only instructed Mr Downing to advise as to where the witness statements were at odds with the the securities. contemporaneous evidence the court would inevitably prefer the contemporaneous evidence. However, such findings would not have assisted W in the end. The judge would have gone on to CC was able to point to a number of instances find that she was estopped from denying personal where it was demonstrably communicated to the liability under the personal loan because of her Goodmans either orally or in writing that PPI was acceptance of renewed, and especially extended, optional. facilities (themselves untainted by any undue Mr Goodman's claim that he did not concentrate influence). during the telephone call and "did not consider the Christine Davies v AIB Group (UK) Plc, Chancery forms in any great detail and signed the form Division, 27 July 2012 where indicated…" was dismissed by the judge as a "lamentable explanation". Mr Goodman should 60. Judge dismisses PPI claim preferring have heeded the clear warning given in letters contemporaneous evidence to customers' from CC which urged in simple and clear terms, testimony "Please read the documents carefully to ensure that you are happy with the offer." Mr and Mrs Goodman claimed damages from Central Capital Limited ("CC") in relation to a An allegation that CC failed to advise that the PPI payment protection insurance ("PPI") policy which premium would be added to the loan and interest
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charged on it was equally unsustainable in light of was such that it would not even cover the monthly the unchallengeable contemporaneous evidence. repayment on the loan.
The Suitability Issue In their witness statements, the Goodmans asserted that they would not have taken out PPI ICOB 4.3 provides that where an insurance had they known it was optional because of the intermediary such as CC makes a personal cost and because Mr Goodman was in secure recommendation to a customer to take out PPI, it employment. However, when the matter came to is bound to take reasonable steps to ensure that its trial they abandoned that tack and tried to argue recommendation is suitable. In particular when that if it had been offered to them they would have assessing whether a PPI policy is suitable to meet taken out PPI for both of them for 25 years. a customer's demands and needs the insurance intermediary must take into account: whether the The judge regarded these changes in tack as level of cover is sufficient for the risk which the "breathtaking volte faces" and "classic examples customer wishes to insure; the cost of the contract of witnesses giving evidence on oath to suit their (where this is relevant to the customer's demands case". He did not regard either of the Goodmans and needs); and the relevance of any exclusions, as truthful in their witness statements or in their excesses, limitations or conditions in the contract. evidence on oath in court. He concluded that the truth was to be found in the contemporaneous The Goodmans had argued that CC had failed to documents and agreements which the Goodmans advise that other PPI products were available at a knowingly and knowledgeably signed up to after significantly lower price. However this allegation being carefully and informatively handled by CC's had to be dropped in the middle of the trial as it intermediaries. was unsustainable in fact and in law in light of Harrison v Black Horse [2010] EWHC 3152 (QB) The Goodmans had had previous experience of (Mercantile Court) as endorsed by the Court of PPI and they obtained the only PPI on offer that Appeal in Harrison v Black Horse Limited [2011] was suitable for their needs in January 2007. The EWCA Civ 1128. length of the term of the PPI was amply discussed with them and they understood how it worked The Goodmans alleged that CC had failed to with rebates at the end of the period of cover and advise them that the term of the PPI policy was the option of taking out another period of only 5 years but this was plainly wrong in light of coverage at the end should their personal the contemporaneous evidence. circumstances change. It was only Mr Goodman's income which needed protection. The Goodmans also alleged that CC failed to take reasonable steps to ensure that the PPI was Mr and Mrs Goodman's claims were dismissed, suitable for their demands and needs. In particular judgment was entered for CC and the Goodmans they argued that wider PPI coverage was needed were ordered to pay CC's costs on an indemnity so as to protect against the loss of Mrs Goodman's basis. modest earnings not just coverage for Mr Goodman's earnings and a term longer than (1) Stuart Goodman (2) Margaret Goodman v five years was needed to cover the length of their Central Capital Ltd, Queen's Bench Division, 25 year loan. Birmingham Mercantile Court, 25 July 2012
Given that Mrs Goodman was ultimately made 61. Valuer failed to exercise reasonable skill and redundant at the end of 2008 and given the general care but resulting valuation would have been economic climate in 2009 then, with the benefit of the same even if he had hindsight, it was accepted that greater protection should have been taken out. However, the Platform Funding Limited ("PFL") sued a firm of recommendation CC made in 2007 that they chartered surveyors, Anderson & Associates should take out PPI cover for Mr Goodman only ("AA"), over a mortgage valuation which AA had (as primary wage earner) and life cover for both of provided over a flat ("Flat") in a new development them in respect of the proposed loan was made on at Thamesmead in London. AA valued the Flat in the basis that they were proposing to borrow a August 2006 with a current open market value of very substantial sum of money secured on their £275,000. In reliance on that valuation PFL home and that Mrs Goodman's monthly income advanced £250,960.78 to its borrower. The borrower never actually occupied the Flat and soon defaulted on the loan. PFL repossessed the
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flat and sold it at a considerable loss in January Mr Barrie was not a party to the proceedings. It 2008. seems that he fled to Sierra Leone in late 2006 to evade being charged with and sued for fraud. PFL was advised that AA's valuation was negligent. It claimed that had AA provided a non- The judge noted that AA's valuation of the Flat negligent valuation it would not have advanced should have been carried out in accordance with any money to the borrower. It based its claim on the RICS Red Book Requirements, which the difference between the value of the Flat as included a provision from June 2006 that a advised and what it considered the non-negligent valuation should identify any incentives being value. offered in a new development.
The block in which the Flat was situated was Having considered all the evidence (including called Hill House. It comprised of 84 one and two- expert evidence) the judge concluded that AA had bedroom flats. The block was built by Persimmon carried out its valuation of the Flat without Homes (South East) Limited ("Persimmon") and reasonable skill and care as it had: the entire block was acquired by a Mr Alim Barrie. The relevant events occurred in 2005 and ■ failed to consider whether the sale price was 2006 when the property market was still buoyant, adversely affected by incentives; house prices were still rising and mortgages were relatively easy to obtain. ■ not sought any new-build comparables in adjacent blocks; As became clear much later, Mr Barrie had in fact embarked on a dishonest scheme whereby he ■ not made other enquiries such as seeking out acquired all the 84 flats at prices which were comparables from estate agents. significantly below the market price and then sold them to purchasers at significantly above the However, on the balance of probabilities, even if market price. He got purchasers to apply for sub- the valuer had exercised the requisite skill and prime mortgages supported by valuations which care the resulting valuation would have been the were based on unreliable comparables same. Had he taken the relevant steps they would manufactured by him. not have provided him with any further evidence that his valuation was too high. It was Mr Barrie who found purchasers for the flats. The marketing and conveyancing of the flats In reality PFL's entire loss was caused by: were carried out on his instructions. However, as ■ the dishonest ways that Mr Barrie marketed Persimmon had a site presence, it would have and sold the flats; seemed to an outsider that the flats were being marketed by Persimmon, particularly as it was a ■ the collusive way in which the firm of uniformed Persimmon employee who arranged solicitors instructed to act for PFL and its access to the flats for inspecting valuers and borrower conducted the conveyancing. In provided them with comparables of the price at reality this firm was acting solely as Mr which other flats in the block had sold for. In fact Barrie's agent and in collusion with him. The Mr Barrie had carefully arranged that any visiting conveyancing was undertaken in breach of valuer would get the impression that the PFL's instructions, the Law Society's Green marketing of the flats to the public was being Card warning, the Blue Card and money undertaken by Persimmon's sales staff. Valuers laundering procedures and the Council of were given the erroneous impression that Mortgage Lending's rules; Persimmon was marketing the flats on the open market to willing buyers with no incentives and ■ the apparent involvement of Persimmon in the that the selling prices that had been achieved on marketing of the flats whereby it appeared to comparable properties were genuine and not be the vendor and actively marketing the flats subject to adjustment by way of cash backs or when it was not and its failure, in agreement refunds. In fact, the comparables which the with Mr Barrie, to provide any information to Persimmon employee passed on to the valuers had valuers save for the comparables selected and specifically been provided by Mr Barrie and only provided by Mr Barrie. ever included figures for other flats in the same block which were sale prices which had been set PFL's claim against AA was dismissed. by Mr Barrie.
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Platform Funding Limited v Anderson & the fraudulent evasion of VAT, in other words that Associates Limited, Queen's Bench Division, even though it did not in fact know that this was 10 July 2012 the case, it should have known and would have done so if it had made sufficient inquiries. 62. Lender's claim against accountants dismissed on basis that no duty of care was owed and the On 18 March 2009 Dragon was ordered to be claim was time barred wound up and it was dissolved on 30 March with no distribution to creditors. This case considered two issues. First whether the defendant KPMG LLP ("KPMG") owed a duty of In the event, although Dragon had made some care to the claimant, Arrowhead Capital Finance repayments to M and M had made some Limited ("Arrowhead"), which was not its client repayments to Arrowhead, M defaulted on its loan but an investment fund which lent money to a when Arrowhead required it to repay in February special purpose vehicle ("M") which in turn lent 2007. money to KPMG's client. Second, whether the case was out of time on the basis that the damage, Arrowhead issued its claim against KPMG in which is an essential ingredient of a cause of August 2011. It claimed that a duty of care should action in tort, occurred more than six years before be imposed on KPMG both on the basis that there the claim form was issued. had been an assumption of responsibility and on the basis that the threefold test of foreseeability, KPMG had been engaged by Dragon Futures Ltd proximity and "fairness, justice and ("Dragon") to advise on establishing rigorous due reasonableness" was satisfied. diligence operating procedures which would ensure that it would be able to recover VAT from Duty of care issue HM Customs and Excise ("HMCE") on the purchase and sale of mobile phones. The judge held that KPMG owed Arrowhead no duty of care. In January 2004 Dragon negotiated a loan facility with Arrowhead. As part of the negotiations First, KPMG had not assumed any responsibility Dragon provided Arrowhead with documents to Arrowhead. Until the conference call in March which referred to the management of the risk of 2004 (which came too late to have been causative being involved in a carousel fraud by means of in Arrowhead's decision to make the loans) there (among other things) "KPMG Advice" and also had been no direct communication between referred to KPMG as a "Resource" in being able KPMG and Arrowhead. Undoubtedly KPMG to confirm to HMCE that proper diligence had assumed responsibility to Dragon for the proper been exercised as to the counterparties with which performance of its services. It did so on the terms Dragon would deal. The documents also referred set out in its engagement letter and its terms and to the fact that KPMG had conducted an conditions. These included specific limitations on independent due diligence exercise. the extent of responsibility which KPMG was prepared to assume, including a cap on its HMCE began investigating Dragon's transactions. financial liability. Whilst Arrowhead would not Dragon arranged a conference call with have known the precise terms on which KPMG Arrowhead which was attended by KPMG in had been engaged by Dragon, any reasonable March 2004. businessman would have expected that there would be a written engagement of KPMG which By November 2004 HMCE had formally rejected would be likely to contain such terms. all of Dragon's VAT claims for input tax on the basis that there was a "missing trader" in the In such circumstances it was inconceivable that supply chain and that the purchases and sales, any reasonable businessman would have judged objectively, were devoid of economic considered that KPMG was voluntarily assuming substance, not forming part of any economic an unlimited responsibility towards potential activity. Dragon had by then ceased trading. investors in Dragon, particularly an investor such as Arrowhead which was investing at several Dragon appealed to the VAT & Duties Tribunal removes. but ultimately the appeal was dismissed by consent as Dragon accepted that, objectively, it As to the threefold test, the judge was prepared to had the means of knowledge that by its purchases assume that Arrowhead was able to satisfy the it was participating in transactions connected with requirements of foreseeability and proximity but
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did not think it would be fair, just and reasonable was more than six years before the to impose a duty of care on KPMG. Such a duty of commencement of the action. The claim was care could result in unlimited liability (or at any therefore time barred. rate, liability up to the full amount of the loans to be advanced by Arrowhead, together with a high On the basis that KPMG owed Arrowhead no duty rate of interest on such loans) when it would have of care and, even if it did, Arrowhead's claim was been obvious to all concerned that KPMG's time barred, KPMG was entitled to summary relationship with Dragon would be governed by judgment dismissing Arrowhead's claim. terms likely to contain limitations on the extent of KPMG's liability, that the business in which Arrowhead Capital Finance Limited (in Dragon proposed to engage was high risk and that Liquidation) v KPMG LLP, Commercial Court, KPMG would not have been prepared to accept 2 July 2012 such a responsibility to Arrowhead if it had been 63. Nominal damages only in breach of contract/ asked to do so. negligence claim as it was not inevitable that Limitation issue lender would have refused to lend if properly advised S. 2 of the Limitation Act 1980 stipulates that tortious claims must be brought within six years This case concerned a mortgage fraud. The lender, from the date on which the cause of action Godiva Mortgages Ltd ("G"), claimed damages for accrued. A cause of action in negligence "accrues" fraudulent misrepresentation against its borrower, when the claimant suffers damage. It was Mrs Khan ("K") and damages for breach of therefore crucial to establish when Arrowhead contract and/or negligence against its solicitors, could be said to have suffered damage. Keepers Legal LLP ("KL").
Having referred to the authorities the judge To all intents and purposes it seemed that K was concluded that first there must be actual going to purchase a house in London from her measurable damage, although this does not brother-in-law, Mr Chaudhry ("C") for £495,000. necessarily mean that the damage is capable of In her mortgage application to G, K indicated that final quantification. The mere possibility of a deposit of £173,250 was to be provided as a damage is not enough. Second, the mere fact that "Gift from Parent/Relatives". G had agreed to a lender enters into a transaction by making a loan make a mortgage advance of the balance i.e. which it would not otherwise have made may, but £321,750. does not necessarily, amount to damage. Third, KL were instructed to act on behalf of G and K. whether the making of the loan does constitute They thought that they had effected simultaneous damage depends upon a comparison between the exchange and completion of the purchase by K amount of the loan and the value of the rights from C on 10 September 2009. The price given in which the lender acquires. Fourth, those rights the contract was £495,000. The seller's solicitors will generally consist, as they did in this case, of told KL that £173,250 had already been paid by (a) the borrower's (M's) covenant to repay and (b) way of direct deposit to the seller. At completion the true value of the security (in this case Dragon's KL retained £16,376 of the mortgage monies VAT repayment claims). All of these issues are advanced by G to cover KL's costs and issues of fact which depend upon the evidence. disbursements and paid £305,374 to the seller's In the instant case it was clear that M's ability to solicitors having been told that the seller would repay the loans made by Arrowhead in full was accept this reduced amount to complete. entirely dependent on the security of Dragon's It later transpired that the transaction was VAT repayment claims. Looking at the matter fraudulent. Neither K nor G obtained any title to objectively, Dragon's VAT repayment claims the property. The named seller, C, had in fact died were always going to fail. They had all been more than a year previously and the contract and rejected by November 2004. From then on, transfer purportedly signed by him were forgeries. although Dragon had a right of appeal, as a matter The solicitors ostensibly acting for C ceased of objective fact its appeal had no real prospect of practising and the money paid to them success. The judge therefore concluded that even if Arrowhead had not already sustained actual disappeared. damage at the date of making the loans, it had K sought to argue that she was an innocent victim done so at the latest by November 2004, which of the fraud.
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After hearing all the evidence, the judge concluded have lent in these circumstances. G might well that it was overwhelmingly likely that K was have been prepared to proceed in circumstances dishonestly involved throughout. The mortgage where there was apparently a family sale with a application contained a number of representations substantial apparent security margin and an about the transaction, her financial position and apparent confirmation from the seller's solicitors her personal details which were incorrect and she that the deposit had been paid. either knew that or had authorised others to give the information on her behalf regardless of Whilst G had established a breach of contract and whether it was true. A scheme had been devised to breach of duty in negligence it had not made out obtain the mortgage advance without losing any the case that it had suffered any loss thereby. The interest in the property by conducting an apparent negligence claim therefore failed on causation, sale in the name of the deceased C. K was aware while the breach of contract claim succeeded only of and actively participated in that scheme. to the extent that G would be entitled to nominal damages. K was therefore liable for the fraudulent misrepresentations that there was intended to be a Godiva Mortgages Ltd v (1) Sophie Khan (2) genuine sale of the property at £495,000 and that a Keepers Legal LLP, Chancery Division, deposit of £173,250 had been paid to C. G relied Birmingham District Registry, 27 June 2012 on these misrepresentations and K was therefore liable for G's losses flowing from the advance. ARTICLES The claim against KL was based on negligence 64. Shifting the burden of proof and breach of contract rather than fraud. G claimed that KL had failed to inform it about Looks at the effect of the Supreme Court's matters which would have alerted it to the judgment in Royal Bank of Scotland Plc v Etridge potential fraud and caused it to refuse to lend. (No.2), which imposed two requirements where an individual sought to shift the evidential burden of KL initially filed a defence but after ceasing to proof in a case where a person guarantees their practise took no active part in the proceedings. KL interest in a property to secure the debts of another was not represented and did not appear at the trial. person and asks whether Etridge clarified the law. Even though KL adduced no evidence at trial, the onus was still on G to establish the necessary "From manifest disadvantage to transactions that elements of its case. call for explanation: have the difficulties been eliminated ten years after Royal Bank of Scotland In essence, G's case was that KL failed to: Plc v Etridge (No.2)?", Journal of International ■ inform it about the direct deposit; Banking Law & Regulation, Vol 27 N0 8, pp 293-205 ■ notice/enquire about/advise G that receipts provided by K to allegedly substantiate 65. Financial services disputes: class actions payment of the deposit left a deficiency of Looks at ways of recovering compensation in £5,000; disputes about financial services in the UK and ■ notify G that the price of the property was whether there is a place for class actions in such effectively reduced by £16,373 at completion disputes: discusses the FSA's proposed consumer in relation to the costs and disbursements redress scheme and the use of GLOs. shown on the completion statement as "paid by "Dispute resolution of financial services cases in the seller". England: any place for class actions?", G argued that had KL acted as it should have done Butterworths Journal of International Banking & it would not have made the advance. Financial Law, Vol 27 No 7, pp 395-398
The judge accepted that these matters should have been reported to G. However, there was nothing in G's evidence which said in terms that had these matters been reported G would have refused to allow the matter to complete. Nor could it be assumed that it was inevitable that G would not
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