Gordon Deane comments on an interesting article from the PLC website written by barrister David Simpson of 3 Verulam Buildings.  He discusses a proposal by the All Party Parliamentary Group on Business Banking to enable SMEs to claim damages from regulated financial institutions for breach of FCA rules. He argues in the light of two recent swaps mis-selling cases that this may bring welcome clarity to this area of law and thus be good news for both bankers and SME customers. 
“Small and medium enterprises (SMEs) should be able to claim damages from regulated financial institutions for breach of FCA rules according to the All Party Parliamentary Group on Business Banking. They recently called for a change to the Rights of Action Regulations (ROR) under the Financial Services and Markets Act 2000 (FSMA) to permit SMEs to bring claims for damages under s138D of FSMA for breach of FCA Rules. Currently the ROR restricts this right to “private persons” which has been construed to exclude any legal person carrying on any form of business activity (in effect, any legal person) even though many FCA Rules apply to regulated firms dealing with just such legal entities. The Parliamentary Group has a point. Two appeal cases from 2018 illustrate the point. 
Both cases involve SMEs bringing claims against banks arising out of allegedly mis-sold interest rate swaps. Both SMEs were property development companies. The main difference between the cases was that one was decided in France and the other in England. 
The French approach
The French case was Acometis v CIC Cass. Com., 20 juin 2018, 17-11473 in which the Cour de Cassation in Paris was asked to consider certain provisions of the Civil Code which implemented provisions in the Markets in Financial Instruments Directive (MiFID) relating to the provision of investment services. In a crisp 7 page judgment, the Cour concluded, “The information provided by the investment services banker must be objective, sufficient and understandable in order to enable his client to understand the nature of the investment service and the specific type of financial instrument offered, as well as the related risks, and make an informed decision” (which essentially just restates what MiFID had already made clear). 
The English approach
The English case was Property Alliance Group v RBS [2018] EWCA Civ 355.  The Court held at first instance, and the Court of Appeal agreed, that no duty to disclose the size of future break costs associated with certain swaps arose on the facts and that the bank was not in breach of any general duty by failing to provide it. In reaching that conclusion the Court of Appeal did not even mention the existence of MiFID for the simple reason that the ROR prevented the claimant from advancing a claim under them. 
Instead, the Court of Appeal effected a deep trawl of English caselaw, most of which predated MiFID itself and the most important of which (Hedley Byrne v Heller & Partners [1964] AC 465) predated the UK’s very entry into the European Union. The Court of Appeal considered issues including “mezzanine duties” and the application of the three stage test in Customs and Excise Commissioners v Barclays [2006] UKHL 28 (one stage of which itself involves three stages). One of these multiple tests involves considering whether a duty of care should be found on the basis of “public policy” – but apparently the UK’s entry into a European directive on the very topic, is not sufficient evidence of public policy in this area.  
The outcome of Property Alliance Group (as set out in a 43 page judgment handed down after an eight-day hearing involving six counsel) was essentially “it all depends on the facts”. Given that proving facts (by virtue of both the disclosure process and witness evidence at trial) is by far the most expensive element of any litigation, this decision cannot, to my mind, be viewed as a particularly favourable outcome for either banks or their customers. I cannot help feeling that the French case illustrates a more favourable outcome for both – both need to know what the law is and no one wants to spend money arguing about it. The French decision also has the virtue of reflecting the actual obligations under MiFID. 
How did we get to this point?
There are two answers to this question 
Firstly, the ROR was not amended when MiFID was implemented in the UK and thus continued to draw a distinction between private and non-private persons which MiFID itself does not draw. Under European law the principle of effectiveness means that Member States must not be arrange implementation in such a way as to make the exercise of rights practically impossible (see the judgment of the CJEU in Littlewoods Retail and Others, Case 591/10). Depriving non-private persons of a right of action appears to be a clear breach of this principle. The ROR was not amended even when MiFID itself was updated and MiFID II introduced an express requirement to “ensure that mechanisms are in place to ensure that compensation may be paid or other remedial action be taken in accordance with national law for any financial loss or damage suffered as a result of an infringement (Article 69(2)) 
Secondly, in Titan Steel Wheels v Royal Bank of Scotland [2010] EWHC 211 (Comm) David Steel J indicated that he favoured a “wide interpretation” of the phrase “carrying on business” in the ROR, even though that was not necessary in that particular case because the foreign exchange swaps of which the claimant complained had been entered into for purposes of “business-like speculation” rather than for pure hedging of risk, and indeed trading in such swaps had become “integral” to the claimant’s business. The wide construction of the ROR was adopted as orthodoxy in a number of subsequent cases, even though the finding is arguably obiter in the first place and ignores the general principle of EU law that legislation implementing European requirements should be interpreted as far as possible to achieve the result intended by those requirements. 
Where are we going?
If the amendment to the ROR sought by the All Party Parliamentary Group goes ahead, then it ought to simplify the current regulatory landscape. All general counsel working in the banking sector will tell you that what they require most is clarity and stability. As long as they know what the law is they can construct systems and processes around it. Where the law is in flux and the scope of duties are “fact sensitive” and/or subject to periodic reinterpretation (even reinvention) by the Courts, it is very difficult to predict exactly what systems are required. For this reason, the proposed amendment of the ROR ought to go some way to providing welcome clarity to both banks and their customers. Such clarity will depend, however, upon the Courts respecting the proper limits of the common law in areas subject to intense regulation (MiFID itself is supposed to be maximum harmonisation). 
What about Brexit?
Of course, this column would not be complete without some mention of the B-word. Currently, obligations arising from European law are to be “onshored”, whichever exit the UK takes from the EU. But to what extent does that allow scope for argument that those provisions were never actually properly implemented in English law and should now be reconsidered, even though the ultimate arbiter in the form of the CJEU has gone? Also, more widely, if the UK eventually benefits from an “equivalence” determination under MiFID which permits banks to provide certain cross-border services into Europe, will Courts actually need to be even more circumspect about applying common law glosses to European principles, lest they give rise to regulatory divergence that could potentially result in an equivalence determination being withdrawn (on just 30 days’ notice) – that would mean that the common law actually has less scope than now to diverge from European law. I may need to get back to you on this…”