An English Court of Appeal case heard recently confirmed that the English courts will be unwilling to infer a common law duty into non-advisory contracts between banks and private individuals, by virtue of the Conduct of Business (“COB”) rules issued by the Financial Conduct Authority. This mirrors and reinforces the approach taken by the Hong Kong courts to date, which have refused to imply a common law duty of care on the basis of regulatory requirements contained in the SFC Code of Conduct.

Facts

In the recent Court of Appeal case of Green & Rowley v Royal Bank of Scotland plc [2013] EWCA Civ 1197, the claimants alleged that RBS had mis-sold them an interest rate swap as a form of hedge against their existing loan liabilities to RBS. The claimants had an existing loan liability of £1.5 million. repayable in 15 years on an interest only basis at 1.5% above base rate. The swap was for £1.5 million and for a term of 10 years. The base rate dropped steadily from 5% down to 0.5% between October 2008 and March 2009, meaning that the claimants became net payers under the swap.

The claimants alleged that RBS was liable for negligent misstatement in relation to the information they had provided, in particular for not properly informing them of the potential break costs associated with the trade, and for providing negligent advice regarding the swap. The claimants argued that RBS’ common law duty of care not to mis-state included the contents of COB rule 2.1.3 (that communications are to be fair, clear and not misleading) and 5.4.3 (risk warnings). The High Court dismissed both claims.

At first instance, the Court held that the common law duty of care not to mis-state was narrower than the common law advisory duty, where one would expect the relevant professional standards to form part of the assessment as to breach. Even if the COB rules had been relevant to the duty, the judge held that he nevertheless would not have found a breach as RBS had provided sufficient information in relation to the potential break costs in a brochure. As RBS had conducted a non-advised sale, the Court held that RBS did not owe the client an advisory duty of care.

Decision

Green & Rowley appealed this decision on the grounds that a duty of care at common law not to mis-state was co-extensive with a bank’s duty to comply with the relevant COB rules, even in a non-advisory context. The Court of Appeal dismissed the appeal, holding that the COB rules will only inform the relevant common law duties to the extent that a transaction is conducted on an advisory basis, as opposed to an execution basis. Given the existence of a statutory cause of action for ‘private persons’ to bring claims for breach of the COB rules under s.138D Financial Services and Markets Act (“FSMA”) 2000, the Court found there was nothing which justified “the independent imposition of a duty of care at common law to advise as to the nature of risks inherent in the regulated transaction“. In this case, the claimant’s action under s.138D was time-barred.

Comment

This decision is welcome news for financial institutions in England as it effectively closes down an attempt to circumvent the proper scope of the statutory cause of action in s.138D FSMA and broaden the category of individuals who can bring claims for breach of the COB rules.

The Hong Kong courts have similarly rejected attempts by private individuals to infer actionable duties on the bank arising from equivalent regulation, the Code of Conduct for Persons Licensed by or Registered with the Securities and Futures Commission (the “Code”). However, while the English courts refused on the basis that this would be contrary to Parliament’s intention to create a cause of action for a limited class of claimants under s.138D FSMA 2000, no such statutory remedy exists in Hong Kong.

Instead, the Courts have refused to infer such duties on the grounds that the Code was not incorporated into the relevant contracts and to infer such a duty was to go against the express wording of the contracts in question. In the recent cases of Kwok Wai Hing Selina v HSBC Private Bank (Suisse) SA [2012] HKEC 903 (in which Herbert Smith Freehills acted for the bank in its successful defence) and DBS Bank (Hong Kong Limited) v San-Hot Industrial Company Limited and Hao Ting [2013] HKEC 352,  the court dealt with this very issue. In both cases, the customers had sought to rely on the Code to impose actionable duties on the bank based on an alleged assumption of responsibility towards the customer. These duties included a duty to advise the customer, to ensure that the recommended investments were suitable for the customer’s risk tolerance and to ensure that the customer fully understood the nature of the risks involved.

However, in both cases the Court refused to imply a duty as, on a proper construction, the Code had not been incorporated into the contract in either case. The Court refused to imply this duty when that was contrary to the express terms of the contract in each case, which stated that the relationship was execution-only, that the bank was not required to provide any advice, and that the bank assumed no responsibility for the accuracy of the information provided. The Court thus confirmed that the Code did not in itself give rise to contractual or statutory liabilities. The Court in DBS Bank, in particular, confirmed that the Code was admissible only in the context of proceedings under the Securities and Futures Ordinance (Cap. 571) and not in civil actions generally. Therefore, in recent decisions handed down in both the English and the Hong Kong Courts, the clear trend emerging is that a common law duty to advise the client and warn them of the risks provided, will not be implied by virtue of the local financial regulations, where a bank is providing services on a non-advisory basis. A court will likely examine the express wording of the contract to determine whether the contract is non-advisory. If a contract is intended to be “execution-only”, banks should therefore ensure that the relevant disclaimer language is provided to the customer and countersigned by them. RMs should draw such language to the customer’s attention and ensure that no pre-contractual promises are made to provide financial or investment advice, otherwise an advisory duty of care may arise.