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Lack of advisory duty for lenders

Print publication

02/09/2016

Walker Morris has reported previously [1] on the growing body of lender-friendly case law which has arisen out of interest rate swap agreements entered into in the run-up to the 2008 financial crisis.  Many of those cases have centered on the lack of any duty on the part of the lender to advise customers in relation to financial products being sold.  In Finch v Lloyds [2], the High Court has emphasised that lack of duty.

Background and facts

The borrowers in this case entered into an interest-rate swap agreement when taking out a loan in early 2008, but then discovered an onerous term relating to break costs when they sought to terminate the agreement early. While other swap mis-selling claims have focused (unsuccessfully) on allegations of negligent advice, the claimant borrowers in Finch v Lloyds alleged that the lender had contractual and tortious duties to provide advice as to the existence and effect of onerous terms within the products sold, but had failed to do so.

The borrowers claimed that duties on the lender to advise arose out of the close working relationship between the parties, or were implied by section 13 of the Supply of Goods and Services Act 1982 or by necessity. The borrowers also relied upon the fact that the lender had described itself in its marketing materials as a “trusted advisor” and as providing a loan that was “tailored” to the borrower’s needs.

Decision and law

The High Court dismissed the borrower’s claim in its entirety:-

  • The court held that, regardless of the relationship and interactions between the parties, there was no express contract to advise and no contract to provide a service into which the duty to advise could be implied.
  • The court found that use of the phrase “trusted advisor” was merely a marketing tactic to try to make the lender appear different from its competitors, but that it had no other significance.
  • In relation to the claim that the lender had negligently misrepresented that the loan agreement would be “tailored” to the borrower’s needs, the court held that the loan was tailored to the extent that it met the borrower’s requirements as to amount, term and inclusion of a payment holiday and that the borrowers had not informed the lender of any plan to exit early.
  • The court also noted that the term “tailored” in this context could not possibly be construed as requiring the lender to offer facilities on terms that subordinated its commercial interest to those of the borrowers.
  • Crucially, the court reiterated that there is no general duty on a lender to provide their customers with advice where they have not specifically agreed to do so. A tortious duty only arises when a lender does provide advice, then to do so with reasonable care and skill.
  • The court went even further, stating that “the circumstances would have to be exceptional before it could safely be concluded that a bank that is pitching for the business of a potential customer came under a duty to give advice in relation to the product that it was offering” [3]. That is likely to be all the more the case where, as here, to the knowledge of the lender, the borrowers were represented in the transaction by brokers and solicitors.

 WM Comment

This case will be welcomed by lenders for the emphasis it gives to the principle that there is no general duty on them to provide advice and for the additional hurdle that it represents to claimants, citing, as it does, that exceptional circumstances will be required before a court will find otherwise.

Mutuals should note from a practical point of view, however, that whilst the case does indicate that a lender will not be held to marketing statements that amount to mere advertising puff [4] there is nevertheless the possibility that some statements that are made by lenders in their marketing material could, in some circumstances, amount to contractual promises.  Even where that is not ultimately the case, it may be better in terms of customer relations, TCF and for the avoidance of future disputes, for mutuals’ marketing materials to be reviewed to ensure that they do not set up unrealistic customer expectations or misrepresentations which could come back to bite.

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[1] See our previous briefing.
[2] Finch & Anor v Lloyds TSB Bank Plc & Ors [2016] EWHC 1236 (QB)
[3] Ibid. para 54
[4] Carlill v Carbolic Smoke Ball Co [1892] EWCA Civ 1

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