Interest rate swap misselling claims have increasingly become another key battleground area in financial services litigation against banks. However, succeeding in such claims has so far proved difficult for claimants and the recent reported cases that have gone before the Courts will have given the banks confidence in defending such claims. In a recent blog 'Claims against banks – your 10 point guide' we examined a number of issues which you should consider before bringing a claim against a bank in relation to the misselling of an interest rate hedging product or other financial product.
This blog investigates some of the potential cause of actions that you might employ in pursuing the bank in an interest rate swap misselling claim and looks at 2 recent cases in which these points were argued.
Breach of the FSA Handbook
A “private person” can bring a claim under s150 of the Financial Services and Markets Act 2000 (FSMA) alleging that a bank has breached its regulatory obligations under FSMA and has caused loss to that claimant. A bank cannot exclude its liability for breach of the FSA Handbook, or the relevant Conduct of Business Rules that were in force at the time of entering into the Swap. Therefore, this can be a useful tool in arguing that the bank is in breach of its statutory duties.
However, whilst the definition of “private person” includes an individual and a partnership it is worth noting that it excludes companies and limited liability partnerships. If you are a company or LLP you will not be able to rely on the ability to sue for breaches of statutory duty under FSMA. The Claimants in the Scottish case of Grant Estates Limited v The Royal Bank of Scotland, a property development company, argued unsuccessfully that the Swap they had been sold breached the Conduct of Business Handbook issued by the FSA and the European Markets in Financial Instruments’ Directive (2004/39/EC). The Court in that case held that a breach of the Conduct of Business Rules was not directly actionable by a non “private person” and therefore could not found a civil claim in these circumstances.
Negligent advice and negligent misstatement
In the recent case of Green v Royal Bank of Scotland Plc (commonly referred to as the Green and Rowley case) the English Courts considered the question of what would amount to a negligent misstatement by a Bank in a claim for the alleged misselling of an interest rate swap agreement. Here, the Claimant, John Green, was a hotelier who together with his business partner, Paul Rowley, had been sold a Swap in 2005 by RBS in order to hedge against movements in the interest rate on their underlying loan of around £1.5 million with RBS. After a period of initial stability, followed by a period where the base rate of interest rose sharply which benefitted Green and Rowley who were protected from such a rise, the financial crisis took hold and by early 2009 interest rates fell to an historic low which meant that Green and Rowley were forced to make substantial payments under the Swap to negate the benefit of the low rates. The Claimants then made enquiries in March 2009 about the cost of breaking the Swap earlier but were informed by RBS that in order to do so the breakage cost would be £138,650.00.
The claimants issued proceedings against RBS alleging that the swap had been missold and that RBS were in breach of its common law duty of care in providing negligent advice and making negligent statements in relation to the swap. Although the claimants did not pursue claims for beaches of statutory duty under s150 FSMA, they argued that the alleged breaches of the Conduct of Business Rules were relevant to the scope of the duties that RBS owed in terms of the negligence claims (relying on the principles of Hedley Byrne v Heller, the classic authority for when a duty of care is owed). The claims for negligent misstatement centred around the claimant’s allegations that RBS told them (1) that break costs were modest or otherwise ought to have told them that they were not, (2) that the swap was separate to the loan when in fact the loan was linked to the swap by the inclusion of “all monies” and “cross default” provisions, (3) that the swap would fix the rate of the margin on the loans as well as the base rate of interest which it did not, and (4) that the swap was portable to another lender.
In his judgment, Judge Waksman QC dismissed the claims for negligent misstatement and breach of duty to give suitable advice stating that "Because of the credit crunch, the ensuing parlous position of RBS, and the taking of the wholly unforeseeable step of increasing margin significantly, it transpired that the protection given by the swap was not complete....But none of that means that the swap was an unsuitable product back in May 2005". The Judge drew a distinction between the providing of information and the giving of advice, and held that the context in which a statement was made and understood was an all important consideration in deciding on whether it amounted to a misstatement. In this case, the Judge concluded that although the relative advantages and disadvantages between the swap and other financial products (such as for example an interest rate collar or cap) were discussed, he did not consider that this constituted a recommendation. The Judge also concluded that the Hedley Byrne test did not give rise to a duty to give information unless without it the statement made would be misleading.
Whilst the Judge was satisfied in this case that no recommendation or advice as to the suitability of the swap had been given, he did recognise that this case was highly fact sensitive, and so how a court will rule each case will depend on the factual circumstances. Also, while it is clear that the cases that have been before the courts have not been particularly helpful from a claimant point of view, implicit in this may be the fact that the banks may be seeking to settle the stronger cases before they ever get to the court.
Note: On 1st April 2013 the Financial Services Authority (FSA) was dissolved and replaced by a new financial regulatory regime. The Financial Conduct Authority (FCA) is responsible for regulation of conduct in retail and wholesale financial markets in the UK and the infrastructure that supports those markets. The Prudential Regulation Authority (the PRA) regulates all deposit-taking institutions, insurers and investment banks. The FCA is responsible for the prudential regulation of firms that do not fall under the PRA’s scope.