Spot the Difference:

Identifying Misconduct in the FCA Rules

Christopher Edwards
Structure of the Presentation

1. An introduction to the statutory

regime
2.Claims for Breach of Statutory Duty
3. Attempts to bring the rules into play in
other claims
An Introduction to the
Statutory Regime
Pre-January 2013 FSMA 2000, ss.2 and 5
2(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 Regime
Pre-January 2013 FSMA 2000, ss.2 and 5
5(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 Regime
Post January 2013 – FSMA 2000 ss.1B and 1C
1B (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’d

1C (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 Regime
Post 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 Regime
The Structure of the Handbook

1. 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 Regime
Interpretation of the Handbook

Gen 2.2.1R Every provision in the Handbook must be interpreted in light of its
purpose

Gen 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 Regime

Interpretation of the Handbook

Evidential 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

(1) 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

1. Loss not within scope of duty;

2. Remoteness;
3. Breach did not cause loss;
4. 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