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Caution for interest rate swap claimants

Print publication

11/01/2016

In April 2014 the Supreme Court refused permission for the claimants to appeal the high profile decision that Royal Bank of Scotland Plc did not make any misstatements, and as such was not held liable, to Mr Rowley and Mr Green in connection with the interest rate swap which formed the basis of their mis-selling claim [1]. The Supreme Court’s refusal was welcomed by banks because it left undisturbed the previous approach of the lower courts, regarding both the non-existence of an advisory relationship and the adequacy of the bank’s disclosure regarding the swap’s break costs.

In another important case, Thornbridge v Barclays [2], the High Court has dealt another blow which means that those considering interest rate mis-selling claims should proceed only with real caution.

Claimant’s allegations

In this case the borrower claimant entered into a swap agreement to hedge its interest rate exposure on a £several million commercial real estate loan. When the market crashed following the 2008 financial crisis and interest rates fell to historically low levels, the swap (in particular the level of break costs) became much more expensive than the borrower had anticipated. In an attempt to recoup losses, the borrower brought a claim against the lender, alleging that the bank had acted in breach of contract and/or in breach of duty by failing to provide adequate information and advice, including by failing to provide examples of the break costs that would apply when interest rates were very low and by failing to set out comparative advantages and disadvantages with other hedging products.

Court’s decision and key issues

In a clear and helpful decision which will be of interest and importance to anyone bringing or defending an interest rate swap mis-selling claim, the court found as follows.

  • The bank had not assumed an advisory role. It was clear that the bank was selling a swap product and that any predictions and views given by the bank had not gone beyond the daily interactions of a sales force and its customers. The fact that the bank had not received any fee was also relevant to the finding that there was no advisory relationship.
  • The terms of the swap itself precluded the claimant from asserting that the bank had given any advice. The claimant had signed up to a non-reliance representation within the swap contract. The court held that such a clause was not an exclusion of liability clause which would be enforceable by the bank only if it was reasonable pursuant to the Unfair Contract Terms Act 1977 (UCTA) [3]. Rather, the representation was a clause which explained the basis of the parties’ relationship and agreement, and it therefore created an estoppel which prevented the claimant from asserting that the bank had given any advice.
  • The scope of the bank’s duty in relation to its provision of information about the swap was limited to providing information that was accurate and not misleading. There was no wider duty to ensure that it provided full information. The bank could not be criticised for not providing break cost illustrations for interest rates as low as those caused by the global financial crisis.
  • The lack of advisory role also meant that the bank could not be criticised for not providing information about the comparative advantages and disadvantages of the swap as against different hedging products.
  • More generally, although the claimant was a retail customer, he was carrying on business and so he could not claim under the Financial Services and Markets Act 2000 (FSMA) for alleged breaches of the (then) Financial Services Authority’s (FSA) conduct rules. In addition, the reference in the bank’s general terms of business to transactions being subject to FSA rules did not incorporate those rules into the claimant’s swap contract with the bank.

WM Comment

The High Court clearly and comprehensively dismissed each of the claimant’s attempts to recoup its interest rate swap losses from the bank in Thornbridge. Our advice to lenders in the current climate would be to strongly resist any swap mis-selling claims. Whilst every case will turn on its own facts, the courts seem to be doing all they can to keep the floodgates closed. Lenders currently facing such claims may even wish to consider making a summary judgment or strike out application, in light of recent decisions.

As a brief aside, in another interest rate swap mis-selling claim heard even more recently [4], the High Court has made a procedural decision which may further assist defendant lenders. The court refused a claimant’s application for specific disclosure of documents which did not pertain directly to matters in dispute, but which the claimant argued might establish collateral facts relating to other complaints of swap mis-selling by the lender, and which might therefore be admissible as similar fact evidence. Taking into account a variety of factors, including the need to protect against a ‘fishing expedition’, the need to prevent satellite issues derailing the trial, proportionality and oppression to the lender, the court stated that even if the requested documents would be relevant and admissible, the court had the discretion to refuse to admit them.

Please do not hesitate to contact Richard Sandford, Sandip Singh or any member of Walker Morris’ Banking Litigation team for further advice or assistance.

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[1] See Walker Morris’ earlier briefings on the case.
[2] Thornbridge Ltd v Barclays Bank Plc [2015] EWHC 3430 (QB)
[3] In any event, the court also considered that if the clause in question had been an exclusion clause, it would nevertheless be reasonable under UCTA, and would therefore be enforceable to exclude liability on the part of the bank.
[4] Claverton Holdings Ltd v Barclays Bank plc [2015] EWHC 3603 (Comm)

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