What Is A Public Function? Judges Tackle Issue in Bank Mis-Selling Case

Many private companies provide support to public authorities in the exercise of their powers and duties, but does that mean that they are themselves performing a public function, thus making them susceptible to judicial review? The Court of Appeal tackled that burning issue in the context of a bank mis-selling dispute.

The case concerned a property company that had purchased interest rate hedging products (IRHPs) from a bank in connection with borrowings of £2.4 million. After the company suffered severe financial difficulties, the bank appointed receivers. The company said that its difficulties had been worsened by the IRHPs, which it had been mis-sold, and the bank agreed to pay it over £400,000 in compensation. The company, however, argued that that took no account of further consequential losses arising from the mis-selling and that it should have received about £5.6 million.

In the wake of the IRHP mis-selling scandal, the bank had agreed customer redress arrangements with the Financial Services Authority (FSA), which has since become the Financial Conduct Authority. Pursuant to that agreement, the bank had appointed a large accountancy firm to act as an independent ‘skilled person’. The firm’s role was to review compensation offers made by the bank to its customers in order to ensure that they were appropriate, fair and reasonable.

After the firm approved the bank’s offer to the company, the company launched a judicial review challenge to the decision. However, its claim fell at the first hurdle after judges of the Divisional Court ruled that the firm was not performing a public law function and that its assessment of the offer was thus not amenable to judicial review. The redress scheme was essentially voluntary and the firm’s role as independent reviewer was performed under a private contract with the bank.

In ruling on the company’s appeal against that ruling, the Court found that the judges had focused too narrowly on the private source of the firm’s power of review and that it should have taken a wider view of the regulatory position and factual context. The firm’s role, performed under the Financial Services and Markets Act 2000, was in part to assist the FSA and was woven into the regulatory fabric.

In dismissing the appeal, however, the Court noted that the redress scheme was created essentially for the pursuit of bank customers’ private law rights in respect of mis-selling. The role of the courts in enforcing civil claims had not been ousted by the scheme, and customers who were dissatisfied with compensation offers were at liberty to reject them and pursue civil litigation instead.

The FSA did not, by the scheme, confer a guarantee that every mis-selling victim would receive appropriate, fair and reasonable offers of compensation and the underlying dispute was fundamentally a private law matter. In the circumstances, the firm had not been performing any public law function that was susceptible to judicial review.