Beware the middle ground: Lenders’ intermediate duty to explainPrint publication
Richard Sandford explains a recent case which might mark the beginnings of a trend towards increased accountability for lenders when dealing with customer queries.
Crestsign + Thomas v Tridos = intermediate duty to explain
Historically, authority concerning the applicable duty of care on the sale of financial products has differed according to whether advice was being given to a customer about whether to purchase a product (in which case the duty owed by the lender was greater: to ensure that the advice given was full and accurate); or whether the lender was merely providing information (in which case the duty was lesser: not to misstate facts) . Retail lenders and their advisors will no doubt be familiar with the case of Crestsign Ltd v National Westminster Bank plc , however, in which the High Court held that lenders may owe an intermediate (or ‘mezzanine’) duty, to explain fully and accurately the nature and effect of products about which it chooses to offer an explanation. The Crestsign duty represents something of a middle ground – it is less onerous than the duty owed by a lender in an advisory case, but it is more onerous than a mere duty not to misstate.
In the recent case of Thomas v Tridon Bank NV  the High Court held that this intermediate duty to explain applied, and it found that the bank in question was in breach.
The claimant customers operated a farming business and had a number of loans from the defendant bank on variable interest rates. In 2008 the customers enquired about fixing the rate on their borrowings. The lender’s representative remarked to one of the customers that he thought the customer was sensible to think of fixing the rate for ten years, because the ten year rate was lower. When the customers later struggled to service their loans, the relationship between the parties broke down. The customers brought proceedings on the basis that the lender had failed to fully explain the financial consequences that would flow from a ten year fix and that the lender had failed to disabuse them of their inaccurate impression of the likely level of repayment penalty (which they had made known to the lender’s representative).
Court decision and key takeaways
The High Court agreed with the customers. Analysing the authorities and finding that the relationship between the customer and the bank was not an advisory one and that no advice was given, the court decided that case law to date did not preclude the imposition of an intermediate duty of care outside the context of an advisory relationship.
As such, when the customer enquired about fixing interest rates in this case, the lender owed a duty to provide a plain English explanation of what fixing the rates would entail. That included explaining:
- that the rate could be fixed for a period, whether in months or years and whether for any minimum or maximum time;
- where the available rates could be found;
- a calculation of the forward cost of the money;
- the effective rate that would be repayable; and
- the financial consequences of early repayment. Whilst a worked example may not have been necessary, the ingredients of the relevant calculation should have been provided; and
- the court also considered that the lender should have made clear to the customer that, whilst fixing for a longer period meant achieving a lower rate, it also meant that the longer there was left to run after early repayment, the higher the redemption penalty would be.
The court commented that the existence of a duty of care, and the level of that duty, will depend on the particular facts of the case and whether it is appropriate to impose such a duty in the circumstances.
Highly relevant to the question of whether it is appropriate to impose the intermediate duty are:
- Whether or not the lender has issued any effective disclaimer;
- Whether the COBS Rules under the Financial Services and Markets Act 2000 and/or the FSA Principles of Business, including the Treating Customers Fairly Rules (TCF) apply; and
- Whether or not the lender subscribes to, and assumes responsibility for, the Business Banking Code or any other similar promises.
Whether or not a duty of care applies in a non-advice case is now a very subtle question. Pending any future clarification from the higher courts, it does seem that Crestsign and Thomas v Tridos are signalling an increasingly customer-focused approach. Mutuals will be well advised to review their marketing and contractual documentation so as to include effective disclaimers where possible and to ensure that they are not making promises that they are not fully willing and able to keep. Mutuals should also ensure that their staff are properly trained as to the possible liabilities, so as to limit the risk of ‘off the cuff’ remarks made in response to customer queries giving rise to claims later down the line.
 see Rubenstein v HSBC Bank plc EWHC 3204 (QB); Green v Rowley  EWHC 3661 (QB); and Hedley Byrne & Co Ltd v Heller & Partners Ltd  AC 465
 EWHC 3043 (Ch)
  EWHC 314 (QB)