Factual and Procedural Background
On 4 October 2011, Judge Teare dismissed a claim brought by the claimants against Company A for alleged mis-selling of financial products known as SCARPs (Structured capital-at-risk products). The claimants appealed this judgment with leave granted by Judge Waller. The appeal is scheduled for hearing before a differently constituted court.
The claim concerns ten SCARPs sold to the claimants by Company A between February 2007 and June 2008. These products were purchased with leveraged loans. The purchasers were the late Mr. X, his wife, and daughters. Mr. X died after the claim was commenced but before providing a witness statement. The claim continued on behalf of Mr. X by his wife and daughters as his personal representatives.
Mr. X was a successful and wealthy businessman with interests in various sectors including oil, insurance, and financial services. He began purchasing structured products from Company A in 2003 and had previously bought around 30 such products. Mr. X acted on behalf of himself and family, who did not actively participate in investment decisions. He entered a written advisory agreement with Company A in 2005. The relationship manager handling Mr. X was Mr. Y, an employee of Company A who received commissions on sales.
The relationship deteriorated in October 2008 following financial market turmoil triggered by the collapse of Lehman Brothers and other banks. The value of the notes declined significantly, Company A issued a margin call which Mr. X did not meet, and subsequently liquidated some products, causing losses of nearly US $70 million. The claimants sued for the shortfall.
The claim was principally based on alleged breaches of statutory duties under the Conduct of Business Rules ("COB") and Conduct of Business Sourcebook Rules ("COBS") issued by the Financial Services Authority ("FSA") under the Financial Services and Markets Act 2000. These rules impose actionable duties where breached, subject to statutory defences.
The judge summarized the case emphasizing that the core claim concerned Company A's duty under COB 5 and COBS 9 to ensure suitability of personal recommendations, and a duty under COB 7.9 regarding arranging loans linked to investments. There was factual dispute over whether a personal recommendation was made and whether Company A arranged the relevant loans.
The judge found that a personal recommendation was made but that notes 1 to 7 were suitable for Mr. X, while notes 8 to 10 were unsuitable due to market conditions and portfolio state. However, the claimants failed to prove reliance on the advice for notes 8 to 10 and consequently failed to establish loss causation from the recommendations.
The claim under COB 7.9 was dismissed because the duty applies at the time a loan or credit facility is granted, not when drawn down. The judge found no evidence that the credit facilities were unsuitable when arranged.
The appeal grounds concern only notes 1 to 7 and the application of COB 7.9, not the judge's findings on notes 8 to 10 or suitability under COB 5 and COBS 9.
Separately, on the same day as the notice of appeal was lodged, the FSA issued a final notice imposing a financial penalty on Company A for systemic failures in establishing and maintaining effective suitability systems and controls regarding SCARPs. The penalty was reduced to account for an early admission of fault.
The FSA investigation arose from a 2009 routine review, leading to a two-pronged investigation including a skilled person's report and examination of files of 30 private clients, excluding the claimants but including two clients managed by Mr. Y.
The FSA identified five main failings: inadequate systems for assessing customer risk attitudes; failure to evidence suitability of recommended SCARPs; inadequate controls on leverage recommendations; insufficient monitoring of portfolio concentration; and failure to monitor staff to ensure suitability of advice.
The FSA concluded these failings exposed customers to unacceptable risks of unsuitable SCARPs but did not assess whether individual sales were unsuitable.
The claimants applied for disclosure of documents from the FSA investigation that might undermine Company A's case or support theirs. Company A contended no obligation to disclose these, noting most files concerned unrelated clients.
The court considered whether such documents should have been disclosed during the original action and concluded this would have been a contested discretionary decision but declined to conduct a hypothetical retrospective exercise.
Legal Issues Presented
- Whether documents relating to the FSA investigation and skilled person's report should be disclosed in advance of the appeal under CPR 31.12.
- The applicability of COB 7.9 duties at the time of drawing down credit facilities for the purchase of the SCARPs.
- The relevance of systemic regulatory failings identified by the FSA to the issues of suitability and reliance in the claimants' case.
Arguments of the Parties
Appellants' Arguments
- The judge erred in his interpretation of COB 7.9, which should apply when the credit facility was drawn down, not only when granted.
- Documents from the FSA investigation, including the skilled person's report, are relevant because of the striking similarities between criticisms made by the claimants and the FSA's findings of systemic failures.
- Knowledge of these documents might have influenced the judge's findings on Mr. Y's understanding and credibility, and the adequacy of the records he maintained.
- The systemic failures regarding leverage recommendations and monitoring are pertinent to the suitability assessment and should be disclosed.
Respondent's Arguments
- There was no obligation to disclose documents related to the FSA investigation as they largely concern unrelated clients and are not relevant to the issues on appeal.
- The claimants are effectively seeking a fishing expedition to find new grounds of appeal, which is speculative and does not meet the requirements of CPR Rule 31.6.
- The FSA investigation did not focus on the specific loans or regulatory duties alleged to have been breached in the proceedings.
- The judge's factual findings on suitability and reliance would not be affected by disclosure of these documents.
Table of Precedents Cited
No precedents were cited in the provided opinion.
Court's Reasoning and Analysis
The court applied a cautious discretionary approach to the disclosure application. It emphasized that the documents sought have no direct relevance to the issues presently raised on appeal, which concern legal errors rather than factual disputes. The court noted that the FSA's findings related to systemic regulatory failings and did not address the suitability of individual sales or reliance by the claimants.
The judge's earlier findings that notes 1 to 7 were suitable and that the claimants did not rely on the advice for notes 8 to 10 were not undermined by the systemic failings identified by the FSA. The court found no logical connection between the additional material sought and the key factual conclusions.
The court also considered the burden and scope of the disclosure exercise, which would require extensive review of many documents with only speculative relevance to the appeal issues. The application was therefore refused as it amounted to a fishing expedition without satisfying the requirements of procedural rules for disclosure.
Holding and Implications
Application for disclosure refused.
The court's refusal means that Company A is not required to disclose documents related to the FSA investigation in advance of the appeal. The decision limits the scope of disclosure to documents relevant to the issues formally raised on appeal and prevents speculative fishing expeditions. No new precedent was established; the ruling primarily affects the parties by denying the claimants access to the requested materials for use in their appeal.