In December 2012, HHJ Waksman QC (the Judge), sitting in the Manchester Mercantile Court, dismissed a claim brought by Mr Green and Mr Rowley (G&R) who alleged that RBS (the Bank) had mis-sold them a 10-year base rate swap (the Swap).1 This was the first complaint regarding the sale of interest rate management products to be decided by the English High Courts, although many more are presently in progress.
G&R appealed against this decision. The appeal raised two issues.
- Ground one: whether the Respondent's statutory duties under COB 2.1 and COB 5.4.3 of the Conduct of Business Rules (the COB Rules), being the regulatory rules in force at the time, relating to communicating in a clear, fair and not misleading fashion and taking reasonable steps to ensure a customer understands the risks of a transaction, give rise to what the Appellants described in their skeleton as a concurrent duty of care owed by a bank to its customers (the Concurrent Duty).
- Ground two: if there is a Concurrent Duty, what the "Information Threshold" (the quality and extent of the explanation of risk (specifically in relation to break costs)) is which a bank should satisfy, so as to comply with its duties under the COB Rules or the Concurrent Duty.
The Financial Conduct Authority (FCA) intervened in the appeal to make submissions on the second ground. On 29 July 2013, the Court of Appeal (Richards LJ, Hallett LJ and Tomlinson LJ) dismissed the appeal. A full judgment will be delivered in due course. During argument, the court emphatically rejected G&R's submissions on ground one and refused to create a new common law duty based on the COB Rules. G&R's failure on this first ground meant that the court decided (with the agreement of all the parties) not to hear the second ground of appeal. The FCA therefore took no active part in the appeal and did not make any oral submissions to the Court of Appeal on break costs. The Judge's first instance findings that the Bank said enough about break costs and sufficiently disclosed the essential risk of the Swap (that if interest rates fell, G&R would do worse overall) remain undisturbed by the appeal.
On 25 May 2005, G&R entered into the Swap with the Bank. The meeting at which the Bank explained the Swap took place on 19 May 2005. Exactly six years after the Swap was entered into, on 25 May 2011, G&R issued proceedings against the Bank. At the trial Counsel for G&R conceded that their claim for breach of statutory duty, based on alleged breaches by the Bank of COB Rules 2.1.3 and 5.4.3, was time-barred. As such, G&R found themselves in the same position as companies that have been classified as private customers2 to which the COB Rules apply but that are disqualified from bringing claims because of the definition of a "private person" within the Financial Services and Markets Act 2000 (Rights of Action) Regulations 2001 (the 2001 Regulations).
Accordingly, G&R had to fall back on a claim that the Bank had breached its common law duty of care and submitted that the COB Rules should be incorporated as part of the common law duty. The Judge rejected this argument and said that COB 2.1.3 (to the extent it required anything beyond the Hedley Byrne duty) and COB 5.4.3 formed no part of the common law of negligent misstatement.
Counsel for G&R tried to persuade the court that Rule 5.4.3 of the COB Rules imposed a positive duty on the Bank at common law to take reasonable steps to ensure a private customer understands the nature of the risks involved, both when making a personal recommendation (i.e. giving advice) and when selling a swap on a non-advisory basis, as in this case.
G&R's Counsel argued that the court should find the existence of a Concurrent Duty on policy grounds to remedy a lacuna in the law, namely that a limited company (who may be a "private customer" for the purposes of the COB Rules and is therefore owed a duty under them) will not be able to pursue an action under Section 150 (now Section 138D) of the Financial Services and Markets Act 2000 (FSMA) because such claims are generally restricted to individuals.
Tomlinson LJ pointed out that, in this case, G&R had a remedy under Section 150 of FSMA, for six years, and had allowed it to lapse. Therefore, to permit a claim arising out of the Concurrent Duty, would serve to frustrate Parliament's intention to limit such a remedy to six years from the date of the relevant transaction.
Counsel for G&R sought to rely on various cases to support the existence of a Concurrent Duty. The court did not regard these cases as demonstrating the existence of such a duty. The court distinguished those authorities which dealt with an advisory relationship as well as the case of X (Minors)3, given that this concerned the duties of a public authority, whereas the Bank was operating as a commercial enterprise.
G&R's Counsel's submission that the court should find there was a Concurrent Duty echoed arguments raised in other recent cases involving currency and interest rate swaps, namely Titan Steel Wheels4 and Grant Estates5. In both cases, companies unsuccessfully argued they should be allowed to bring claims for breach of Section 150. In Titan, Mr Justice Steel in the Commercial Court robustly rejected the argument that the currency swap entered into by Titan was not done in the course of "business of any kind" (being the test in the 2001 Regulations for entities other than private persons to bring claims). In Grant Estates, the company argued that the exclusion of small companies from the right to bring a claim under Section 150 was in breach of MiFID and therefore Titan had been wrongly decided. Again, this was firmly rejected by Lord Hodge in the Court of Session in Scotland.
The G&R appeal confirms that the courts continue to prevent claimants who are not individuals bringing claims under Section 150. This appeal has also not altered the Judge's clear findings that the disclosure given in this case of potential break costs to G&R was sufficient to comply with both COB Rules.