The Law Spot highlights some legal points of interest / cases / legislation which have arisen during the month in the UK. It is not intended to be comprehensive in any way, merely a summary of a selection of the legal issues which have affected the financial services industry during the period.
Amongst other items, this month’s issue contains an update on some issues arising on the regulatory front as well as providing a very good example of the Unfair Contract Terms Act 1977 in practice – although not as you would hope by standing up for the rights of those adversely impacted by an unfair contract term, but instead finding that a disclaimer of liability was valid.
FCA Mission Statement
The Financial Conduct Authority (FCA) launched its mission statement in April 2017 detailing its aim of regulating “in a way that adds the most benefit to those who use financial services”. The Mission explains the FCA priorities, and in particular, explains its decision to prioritise vulnerable customers, recognising that they need a higher level of protection than some other users of financial services, and describing the framework the FCA uses to make decisions. The Mission also outlines the reasoning behind the FCA’s work and how it intends to enforce its role. It is divided into nine sections:
- Introduction to our Mission
- Public value
- How we make regulatory decisions
- Interpreting our objectives
- Assessing and measuring our impact
- Considering user needs
- What consumers can expect
- What firms can expect
- Next steps
FCA (2017) Our mission [online]. Available at: https://www.fca.org.uk/publications/corporate-documents/our-mission. [Accessed: 18 April 2017]
The PRA Publishes the 2017 Stress Test Scenario
The PRA published the 2017 stress test scenario on the 27 April 2017; scenarios are published every six months. The scenario is intended to help firms calibrate the severity of their own capital planning stress scenarios under Pillar 2.
In addition, PRA states that the scenarios are designed to encourage:
- “engagement of senior management: firms' awareness of the reputational considerations associated with undertaking stress testing exercises using recommended scenarios should result in senior management being better engaged in the stress testing process;
- ·overcoming 'disaster myopia': during prolonged periods of economic stability, firms tend to underestimate the probability of adverse outcomes and the potential crystallisation of 'tail risks’. One way of addressing this is for supervisors to portray scenarios that represent a 'tail event' allowing firms to set their own stresses accordingly; and
- benchmarking of results and approaches: asking firms to run scenarios that are broadly comparable in terms of severity will allow supervisors to more easily compare and benchmark individual results and firms' approaches to stress testing”.
The stress test applies to firms not participating in the 2017 concurrent stress test.
PRA (2017) Supervisory activities – stress test scenario [online]. Available at: http://www.bankofengland.co.uk/pra/Pages/supervision/activities/stresstestscenario.aspx. [Accessed: 3 May 2017]
Persistent Credit Card Debt
The FCA launched its consultation on “persistent” credit card debt and earlier intervention remedies in April 2017. Persistent debt is defined by the FCA (2017) as:
“an account where:
• over a period of 18 months,
• payments of interest, fees and charges exceed repayment of principal; and
• the outstanding account balance is continually above £200."
The consultation seeks to gather views on the identification of relevant customers and the instigation of early intervention remedies in order to tackle persistent credit debt. These measures would impose set timeframes within which points firms would be obliged to intervene to attempt to address the problems created by this type of debt.
Brodies (2017) FCA launches consultation on “persistent” credit card debt [online]. Available at: http://www.brodies.com/blog/fca-launches-consultation-on-persistent-credit-card-debt/#page=1. [Accessed: 3 May 2017]
Bank's Duty of Care
In a case which will be of interest to those studying law, the case of Singularis Holdings Limited (in Official Liquidation) v Daiwa Capital Markets Europe Limited  EWHC 257 (Ch) found the bank (Daiwa) was guilty of breaching its duty of care to its customer. The court held that the bank was on notice (i.e. aware) that its corporate customer was at risk of being defrauded by its director but failed to stop payments made for the purpose of misappropriating funds of the company.
The case confirms the lead case of Barclays Bank Plc v Quincecare Limited and Another  4 All ER 363.
Collier Bristow (20170 Duty of care owed by bank to customer to prevent fraudulent transactions [online]. Available at: http://www.collyerbristow.com/item/1983-duty-of-care-owed-by-bank-to-customer-to-prevent-fraudulent-transactions. [Accessed: 4 May 2017]
The case of The National Crime Agency v. N and Royal Bank of Scotland Plc cleared up some of the confusion which existed around the ability of customers to challenge banks when bank accounts are temporarily frozen in response to potential money laundering suspicions.
In this case, the Bank suspected that the credit balance in certain accounts of its customer ('N') constituted criminal property. Accordingly, it froze the accounts and made a suspicious activity report to the National Crime Agency (NCA) seeking consent to return the funds to N.
N issued proceedings for an interim mandatory injunction requiring the Bank to operate N's accounts and for declaratory relief. To skip to the end of the story (this is a Court of Appeal decision so there was also an over-ruled decision), the court held that unless there is very clear evidence that the bank has acted in bad faith, customers are unable to seek an order from the court to compel the bank to take any action when it has frozen an account and is waiting for a response to a consent request from the NCA.
This is a welcome decision for banks and provides much needed clarity.
Dentons (2017) Money Laundering: Further clarity provided by the Court of Appeal on the operation of the consent regime [online]. Available at: http://www.dentons.com/en/insights/alerts/2017/april/10/money-laundering-further-clarity-provided-by-the-court-of-appeal. [Accessed: 4 May 2017]
...the Unfair Contract Terms Act 1977 (UCTA) in practice. The UCTA considers unfair contracts between traders and other traders, and consumer to consumer contracts. The Act states it will consider the bargaining power of the parties, and the extent to which potentially unfair clauses were brought to the contracting parties’ attention. These rules were clearly demonstrated in Goodlife Foods Limited v Hall Fire Protection Limited which centred around the loss suffered when an industrial frying machine caught fire at Goodlife's premises leading to property damage and business interruption losses of over £6 million. Goodlife claimed that the cause of the fire was the failure of the fire suppression system which Hall Fire had designed, supplied, installed and commissioned for Goodlife ten years previously.
Goodlife issued a claim in negligence against Hall Fire who sought to rely on its standard Terms & Conditions which contained a wide exclusion clause, purporting to exclude all liability for any claim in negligence.
The court found in favour of Hall Fire, stating that the disclaimer of lability was reasonable, given the equal bargaining power of the parties and the fact that the clause was drawn to Goodlife’s attention.
Source: Roberts, J (2017) Further Guidance on the Requirement of Reasonableness under UCTA [online]. Available at:
http://www.shoosmiths.co.uk/client-resources/legal-updates/guidance-on-requirement-reasonableness-under-ucta-12730.aspx. [Accessed: 3 May 2017]
Caroline Murray is a Senior Lecturer in the full-time banking and finance degree programmes at The London Institute of Banking & Finance.