(1) Mark Thomas Raymond Bailey; and (2) MTR Bailey Trading Limited v. Barclays Bank plc  EWHC 2882 (QB)
In a recent hearing in the Cardiff Mercantile Court, His Honour Judge Keyser QC (the Judge) considered various arguments advanced in relation to an interest rate swap.
Many of the points argued will be familiar to those who take an interest in swaps litigation, and the Judge's conclusions on the key points are summarised in this note. Those points include: the proper interpretation of COBS 9 and COBS 10 and the distinction between suitability and appropriateness; the entitlement of companies to bring claims for breach of COBS rules; and the effect which the regulatory regime may have on contractual obligations. Some of the claims advanced appear to be at the margins of the arguable in relation to this type of case. They were unsurprisingly rejected by the Judge and are not considered here.
The transactions in dispute
The facts of this case are unusual in some respects. The first claimant, Mr Bailey, borrowed some £1.26 million from Barclays in 2007, with a variable rate of interest, for the purchase of business premises occupied by the second claimant, a company wholly owned by Mr Bailey (the Company).
The judgment records (and the Bank does not appear to have disputed for the purposes of its application for summary judgment) that Mr Bailey's relationship manager at the Bank (who was not approved to give investment advice) told him that interest rates would go "through the roof" and suggested that he consider some form of interest rate hedging product. A presentation describing three hedging products was provided to Mr Bailey by another of the Bank's employees (who did have approval to provide investment advice). Mr Bailey then had a meeting with both these individuals during which the same advice and recommendations were repeated, and it was recommended that Mr Bailey enter specifically into an interest rate swap.
He did so on 4 May 2007. Economically, the Swap did not perform well for Mr Bailey and his evidence stated that he had made a series of complaints about it from 2009 onwards.
Crucially, in 2011 Mr Bailey wanted to transfer some properties from his own portfolio to the second claimant (the Company), for tax planning purposes. The Bank's position was that, unless the Swap was also transferred, Mr Bailey would have to pay substantial break costs to terminate it. The Swap was therefore novated from Mr Bailey to the Company in March 2011.
The Bank classified the Company as a retail client. The Bank's terms of business (the Terms) stated that it would not provide advice in relation to any transaction between it and the Company. This point was also explicitly made in the covering letter accompanying the Terms. The Swap confirmation contained the usual representations and warranties, including that no advice from the Bank was relied upon.
Mr Bailey's own complaints were considered as part of the review process agreed between banks and the (then) FSA. Redress was offered by the Bank and accepted by Mr Bailey, and his claim in the litigation was therefore to be discontinued.
The Company, however, pursued its claim for damages, rescission and a declaration of unenforceability. In order to do so, it sought to add a number of additional claims to those it had already advanced. The Bank, by contrast, sought strike-out or alternatively summary judgment on the Company's claims.
Could the Company claim for breaches of COBS?
A. On the facts?
The Company alleged that the Bank had breached a number of duties owed under the COBS rules, including those below.
COBS 9.2.1R (failing to take reasonable steps to ensure that a personal recommendation is suitable) and COBS 10.2.1R (in a sale where there is no personal recommendation, failing to ask the client for information regarding his knowledge or experience in the relevant investment field, so as to enable the firm to assess whether the product is appropriate).
The Judge held that there was no personal recommendation to the Company for the purposes of COBS 9. This is not a surprising conclusion given the contents of the contractual documents relied upon by the Bank.
More interesting is the Judge's treatment of COBS 10 and his summary of the difference between it and COBS 9. The Company alleged that it could never be appropriate for it to enter into the Swap on such disadvantageous terms, and that there was therefore a breach of COBS 10. In making its case in that way (and in company with many claimants in swaps cases), the Company effectively treated COBS 9 and 10 as interchangeable and focused in relation to both rules on the merits of the product in order to establish whether there was a breach of the rule.
The Bank argued successfully that this was not the correct approach. It is clear from the Judge's reasoning that COBS 9 relates to the suitability of the product in question, whereas COBS 10 relates to the knowledge and understanding of the client. It raises what might be described as a threshold question of whether the client has sufficient knowledge and understanding to make it appropriate to sell the relevant product, not whether the product is either appropriate or suitable for the client's needs. This distinction is helpfully drawn and doubtless will be relied on in other cases.
COBS 11.2.1R and best execution - the judgment ventured briefly into the grey area of best execution, the full implications of which are yet to be defined in the swaps context. A client's right to best execution is set out in COBS 11 and is also frequently contained in banks' terms of business, which are designed to cover situations where the bank trades as the client's agent as well as with the client as principal. In the latter case, it is difficult to see how the duty of best execution should apply. However, FCA's recent thematic review on best execution makes it clear that the duty of best execution is not excluded merely because the bank trades as principal.
In this case, the Judge did not take the opportunity to resolve these uncertainties, but the Company failed nonetheless to establish a breach of the duty of best execution. It focused its attack on the merits of the Swap rather than the mechanics by which it was executed, and the Judge held that allegations of this sort could have no realistic prospects of success. It remains to be seen whether other claimants are able to advance more successful arguments on this point.
B. As a matter of principle
(i) under FSMA?
Companies complaining of swaps misselling commonly argue that they can claim damages for breach of the COBS rules under s150 of FSMA (now s138D), notwithstanding that such rights are reserved to private persons, which generally means individuals. The Company's attempt in this case to overturn the judgment in Titan Steel Wheels v. RBS (giving a wide interpretation to the exclusion of companies acting in the course of their business from the definition of "private persons") was unsuccessful.
More interestingly, this may be among the first judgments to consider another line of attack on the limited availability of s150 claims. The statutory framework provides that those who are not private persons can claim under s150 in prescribed circumstances. Such circumstances include cases where the rule alleged to have been breached is one which prevents regulated firms from excluding or restricting any liability to clients.
The argument now made by some claimants is that by stating in their terms of business that they do not provide advice in relation to investments, banks are effectively limiting or excluding their duties under the regulatory system. This is said to be a breach of COBS 2.1.2R (which prohibits firms from excluding liability under the regulatory system) sufficient to allow companies to bring claims under s150 which would normally be reserved for private persons. Such claims are alleged to extend to damages for breach not only of COBS 2.1.2R but also of other rules, including those referred to above.
The counter to this argument is that, even if a bank were held to have breached COBS 2.1.2R, thus giving a corporate client a right to claim under s150, it is by no means clear that such a client would have a right to damages for breach of any rule other than COBS 2.1.2R itself, thereby effectively compensating it only for the exclusion of liability. It is not clear from the statute that any wider right to damages for breaches of other COBS rules is triggered and it is hard to see why it should be.
This issue is not completely resolved in the judgment. The Judge noted that the Claimant's case on breach of COBS 2.1.2R was obscure. However, he found that the terms themselves did not purport to exclude liability under the regulatory system, and he was not persuaded that there was any reasonably arguable allegation of breach of the COBS rules at all, rendering the issue irrelevant.
(ii) as part of its contract with the Bank?
The Judge rejected the suggestion that the COBS rules were incorporated by reference into the Terms, and that breaches of them therefore gave rise to a liability to pay damages for breach of contract.
The Company also argued that there was an implied term (pursuant to the Supply of Goods and Services Act 1982) that the Bank must exercise reasonable skill and care in providing services under the Terms. This contractual obligation was to be measured (the Company said) by reference to the Bank's regulatory obligations. There is some parallel in cases where a bank agrees to assume a duty to advise a client: in such cases, the scope of the bank's common law duty can be affected by its regulatory obligations in relation to the provision of investment advice.
The Judge rejected this argument on the basis that he had found there to be no breach of the COBS rules on the facts. He therefore did not examine further whether this was an avenue for claimants wishing to bring the provisions of COBS within the terms of the contract between bank and client.
Did the role of the relationship manager in the sale mean that the Swap was unenforceable?
The claimants alleged that because the Bank's relationship manager had made positive recommendations in relation to the Swap, despite not being approved to do so, the provisions of s27 of FSMA were engaged. This section says (in essence) that an agreement entered into by an authorised person in consequence of something done by an unauthorised person is unenforceable as against the other party and makes provision for repayment of sums received pursuant to such an agreement. Such allegations are common in swaps cases, where the customer's contact has usually been with two individuals from the relevant bank: one with specialist knowledge and approval to sell investment products, and the other with a general relationship management role, who typically deals with the bank's lending to the customer.
A key point in this judgment for swaps cases generally is that the s27 regime does not apply to these types of cases. Even where a relationship manager strays into the territory of giving investment advice or information on products, he is still an employee of the (authorised) bank, and the bank has not entered into the agreement in consequence of anything done by an unauthorised person.
There is a separate provision (s59 of FSMA) which provides that authorised persons must take reasonable care to ensure that no person performs a controlled function unless acting in accordance with an approval from the relevant regulator. Contravention of that provision can give rise to a claim for damages under s71 of FSMA (again the claimant must be a private person). It does not, however, make the transaction unenforceable.
This judgment contains some points of real relevance to other swaps cases, and indeed more generally.
- Claimants who attempt to rely on COBS 9 and 10 interchangeably will be unsuccessful. COBS 10 is directed at the knowledge and understanding of the client, not the merits of the product.
- This case continues the line of authorities to the effect that companies will have difficulty in claiming damages under s150/s138D of FSMA, although it did not fully resolve the arguments concerning the effect of exclusions of liability.
- It also does not consider the principle behind the argument that banks have a contractual duty to their clients to comply with COBS rules because those rules represent the appropriate standard of reasonable skill and care contractually required of banks by the SoGSA. Nevertheless, it continues a line of authority to the effect that bringing such a claim will be difficult.
- The regime under s27 whereby agreements entered into by authorised persons in consequence of the actions of an unauthorised person are unenforceable does not apply in this context.