Interest rate hedging products (IRHPs) were common prerecession when businesses were keen to protect themselves against the threat of interest rate rises. However, following years of historic low rates, and with the benefit of hindsight, businesses which purchased IRHPs are now arguing that the products were mis-sold. Mis-selling claims turn on their own facts, but the banks' contractual protections are standing up to scrutiny. In this briefing, we consider the recent contrasting mis-selling decisions in Crestsign v RBS [2014] and Thornbridge Ltd v Barclays Bank Plc [2015], and identify the main obstacles for claimants alleging mis-selling, with a look forward to upcoming cases in 2016 which may test the protections banks rely upon.
Crestsign and Thornbridge
Both Crestsign and Thornbridge were required to enter into an IRHP as a condition of obtaining commercial mortgages. They subsequently claimed that the bank provider had given them negligent advice regarding the IRHPs. Both claims were unsuccessful and, although Crestsign was granted permission to appeal, that case has now settled. The judgements helped clarify some issues but the different approaches taken by the respective Courts mean that there remain areas of uncertainty that banks will want to be aware of.
Claimants may find it difficult to show that banks are acting as advisors when selling an IRHP
This will depend on the facts of the case and the context as a whole.
Thornbridge’s claim was defeated because advice was not given: the bank’s personnel were salespeople (despite working in ‘Corporate Risk Advisory’); had not received a fee for any alleged advice; and the claimant understood the IRHPs offered.
Thornbridge cited with approval JP Morgan v Springwell, that salespeople can give recommendations in their daily interactions with customers which do not amount to advice or an advisory relationship.
In contrast, in Crestsign the Court concluded that advice had been given because, in providing information only on limited products, the bank had effectively recommended those products. However, this decision turned on the evidence available and it will be difficult for a claimant to show a salesperson’s recommendation amounted to advice.
IRHP contracts are likely to exclude any argument that the borrower relied on pre-contract representations
Whilst no advice was given in Thornbridge, the judge considered whether the terms of the IRHP contract, in particular the ‘non-reliance’ clause, prevented the claimant from arguing it relied on the alleged advice or that the banks owed a duty of care.
In both Crestsign and Thornbridge it was found that the parties had agreed that they entered the relationship on the basis that no pre-contract representations had been given. As such, the claimants were prevented from relying on any pre-contract statements that had in fact been made.
Crestsign was granted permission to appeal the reliance point, but has since settled its dispute with RBS. Until such time as this issue is re-visited, therefore, it is likely to prove difficult for a claimant to argue against a contractual non-reliance clause.
If the non-reliance clause is a ‘basis clause’ it will not be subject to the UCTA reasonableness test
It is important to know whether a non-reliance clause is a ‘basis clause’ or an ‘exclusion’ clause; the latter could be held ineffective under the Unfair Contract Terms Act 1977 if a court holds that the exclusion clause unreasonably excludes liability for negligence (the UCTA reasonableness test).
In Thornbridge, the relevant test was held to be whether the non-reliance clause defined the basis upon which the parties were transacting (ie a basis clause) or attempted to exclude a party’s liability (ie an exclusion clause). This approach differed from that in Crestsign, which considered instead whether the clause attempted to ‘re-write history’.
Interestingly, the judge in Crestsign thought the basis clause to be unreasonable, in part, because the IRHP market was complex and poorly understood by inexperienced customers such as Crestsign. In contrast, Thornbridge found a different basis clause to be reasonable, in part, because Thornbridge said in meetings with the bank that they understood the implications of the IRHP. As such, if the non-reliance clause had been found to be an exclusion clause in either case, only in Crestsign would the court have held the clause ineffective under the UCTA reasonableness test. Banks must give thought to how to prove non-reliance clauses are reasonable in the context of the parties’ relationship, in case the claimant argues the clause is subject to the UCTA reasonableness test.
A bank’s duty of care to provide information will be limited in scope
Crestsign held that a bank’s salesperson is under a duty to explain fully and accurately the nature and effect of the products he chose to explain (although not regarding other products he did not want to sell). However, Moulder J declined to follow this approach in Thornbridge as it would have elevated the duty of a salesman to that of an adviser.
Both Thornbridge and Crestsign agree that a bank has a duty to ensure information it gives is accurate and not misleading. In particular, it may be contentious whether a bank had satisfied its duties to provide accurate and not misleading information about IRHP break costs, a ground which Crestsign had sought to appeal.
Also, it appears to remain from Crestsign that the bank’s duty includes answering any reasonable question and correcting obvious misunderstandings. For all of the above, it will be crucial for the bank to fully evidence what information it provided to the customer.
Cases to look out for in 2016
There are numerous mis-selling cases ongoing, some of which raise issues about LIBOR manipulation, including Property Alliance Group v RBS, as well as the Thornbridge appeal. In addition, the following are of note.
Limitation periods
Most of the mis-selling allegations relate to IRHP sold in 2008, in respect of which limitation is likely to have passed. However, businesses which applied for redress through the FCA’s IRHP compensation review will be interested in the outcome of Suremime v Barclays, where the dispute turns on whether the bank owed a duty of care to the customer when carrying out its obligations under the FCA review and were negligent in applying the agreed review rules. In such cases, the limitation period for a claim in respect of a review may not have started until the customer received the review decision.
Is judicial review available to a Claimant?
In R (Holmcroft Properties) v Barclays Bank Plc and KPMG, Holmcroft sought judicial review of KPMG’s role as an independent reviewer in Barclay’s offer under the FCA review scheme. Although Holmcroft was unsuccessful at first instance, it is seeking permission to appeal to the Court of Appeal and, if successful, this claim may open further avenues to disgruntled customers.
Could a customer claim a bank breached regulations of how they conduct business?
Section 150 of the Financial Services and Markets Act 2000 (FSMA) allows a ‘private person’ to bring an action for damages against a financial institution which has contravened the regulations governing its course of business (eg COBs). Current judicial interpretation precludes businesses from claiming under s.150 FSMA, but the issue is under appeal in MTR Bailey Trading v Barclays. If successful this could permit a claim that Barclays breached COBs.