In a robust judgment, Mrs Justice Rose (the Judge) has dismissed claims for negligence and misrepresentation in relation to two interest rate hedging products (the HPs) sold to the claimant (LEA). The judgment contains a detailed and helpful restatement of the law in relation to advice claims and misrepresentation in this area, but it also touches on two areas of specific interest: (i) the relevance of LEA's sophistication to the Judge's consideration of the claims; and (ii) whether in the circumstances the Bank ought to have disclosed its calculation of the CLU (credit line utilisation), which would have shown (to describe it in simplified terms) the Bank's internal assessment of the maximum credit risk it faced in case of a default by LEA on the HPs.

The parties

LEA is a private aircraft chartering business. It was, according to the narrative in the judgment, run by two individuals during the relevant period in 2007/2008, one of whom, Mr Margetson-Rushmore, dealt primarily with the financial aspects of the business. Mr Margetson-Rushmore has a degree in economics and is an accountant by training. In relation to the matters set out in the judgment, LEA also drew on the assistance of Mrs Margetson-Rushmore, a qualified solicitor, who trained at Linklaters and moved on from there to work at various banks, ending with a five-year spell as head of the UK leveraged finance team at UBS AG. Mrs Margetson-Rushmore was neither an employee nor an officer of LEA, but the evidence set out in the judgment indicates that she took the lead in a number of relevant calls and meetings. The judgment records the matters she discussed during those exchanges, including requests for swap pricing models which she could assess and manipulate, yield curves (and their significance), the effect on the HPs of the Bank having a right to terminate them early, and the importance of the specific swap pricing levels set under the terms of the HPs.

There was an issue in this case as to which RBS group company was the appropriate defendant, but we do not consider it here, save to note that, in referring to "the Bank", we refer collectively to RBS and NatWest, those entities involved in the relevant exchanges with LEA.

Relevant transactions

LEA entered into two secured loan agreements with Lombard North Central plc, also part of the RBS group, in June 2007 and January 2008 respectively, for approximately £2.5 million and £10.4 million (the Loans). LEA was obliged to pay interest on both Loans at a variable rate, subject to a minimum rate of 2.5 per cent. LEA agreed to make fixed monthly payments to cover interest due on the Loans and repay a portion of the principal. The proportion of the monthly payments allocated to principal would depend on prevailing interest rates, such that, if rates were low, more of the principal would be paid off. There would be a balloon payment at the end of the term of the Loans in order to repay any principal outstanding. On that basis, if interest rates remained high during the life of the Loans, the balloon payment would be larger. There was also an "Asset Coverage Percentage", calculated by reference to the value of the aircraft on which the Loans were secured and the balance of the Loans outstanding. If the Asset Coverage Percentage fell below the specified limit, Lombard could increase LEA's repayments or require it to take various other steps.

The HPs were not required as a condition of the Loans. Various discussions between the Bank and LEA took place between July and November 2007 in relation to possible interest rate hedging, which ultimately came to nothing, with LEA saying that it would revisit hedging at a later date. The Judge considered that these discussions were relevant, however, to the HPs, which were ultimately concluded on 12 February 2008, and we refer below to those aspects of the preliminary discussions that were material to the outcome of LEA's claims. The HPs consisted of:

  • a dual rate swap with a 10-year term, the notional amount being £4 million for the first five years and £6 million thereafter. The swap could be cancelled by the Bank on 12 February 2013 and quarterly thereafter. LEA would pay interest on the notional at a rate of 4.69 per cent if the variable interest rate remained between 4 per cent and 6.25 per cent, but LEA would pay interest on the notional at a rate of 5.35 per cent if the variable rate was either below the floor or above the ceiling agreed; and
  • a value collar, for the same term and in respect of the same notional amounts. No payment would be made by either party if variable interest rates remained within a range between 3.75 per cent and 5.75 per cent. If the variable rate was lower than the floor, then LEA had to pay the Bank the difference between the variable rate and 5.49 per cent. If the variable rate was higher than the ceiling, the Bank had to pay LEA the difference between the variable rate and 5.75 per cent. The Bank was entitled to cancel the collar on 12 February 2013.

The continuing low interest rates which followed the financial crisis of 2008 had the effect that LEA repaid a significant proportion of the Loans, but meant that it incurred significant cost in servicing the HPs. LEA claimed that it was entitled to damages in the sum of £3,844,574.

The advice claim

The Judge considered the case law in this area, and referred to the general principles summarised below:

  1. it is necessary to analyse the dealings between the parties in order to establish whether the bank has not only sold products to its customer, but advised to the extent necessary to engage a duty of care to ensure that such advice is not negligent;
  2. contractual terms of business to the effect that no advice is provided can be highly significant;
  3. courts have taken a "pragmatic and commercially sensible approach" to analysing the dealings between bank and customer, and it would be wrong to dissect telephone calls and emails to extract what could be termed "advice" from a relationship not expressly characterised as advisory – what is said by a salesman should not be equated with what is said by an adviser;
  4. the questions of whether advice was given as a matter of fact and whether the bank assumed legal responsibility for such advice are conceptually separate but closely linked, and it is not possible "to draw a bright line" on all occasions; and
  5. courts are cautious about importing concepts from the regulatory sphere, including as to what constitutes advice.

It is perhaps surprising in view of the final principle articulated by the Judge that LEA invited her to draw on regulatory rules and concepts to the extent that it did. Among the arguments rejected in this context were that, because the Bank had said (in cross-examination and in one of its presentations to LEA) that it was trying to understand LEA's business objectives, it must have been acting as an investment adviser. In addition, it was said that, in using a flow chart to guide LEA through a list of possible products, the Bank was giving regulated advice within the meaning of PERG. The Judge said that the authorities did not support founding a claim in negligence on the broader, regulatory definition of advice and using it to pluck possible personal recommendations out of the interactions between the parties. She also rejected the idea that "any interaction between the bank and the client by which the bank tries to understand what the client is trying to achieve or to help the client select from a range of available products steps over the line into being advice". It is also perhaps interesting to note that LEA was arguably not on the right side of the regulatory debate in relation to these issues either. Following the Financial Advice Market Review, the FCA has been seeking to remove barriers perceived as preventing firms from offering affordable financial advice to a wider range of customers. One of the concerns raised by the industry was the risk that any form of guidance could be seen as the provision of regulated advice. The FCA has since proposed changing the definition of regulated advice such that, for most firms, it is aligned with the provision of personal recommendations.

There was a further issue between the parties as to whether LEA had adequately identified the advice that it said the Bank's salesman gave. LEA argued for a holistic approach, referring to the salesman as being "in advice mode" and urging the Judge to look at the thrust of what effect various presentations and emails were designed to have. The Judge declined to approach the matter on this more nebulous basis, holding that it must be possible for the claimant to point to some written or oral statement made by the defendant which, properly construed, amounts to advice. She considered the most likely instances of alleged advice pleaded, and found that the Bank had not pressured LEA into the HPs, or steered it towards one option rather than another.

A specific allegation made by LEA was that the Bank's salesman convinced them that interest rates might fall in the short term, but would then rise. In this context, the Judge noted that the salesman was saying "what any financially literate person could pick up from the financial press" and that he had not professed specific expertise. It was also in this context (as well as others, as set out below) that LEA's own sophistication clearly played a part in the Judge's reasoning. She noted, specifically, that:

  • the terms of the HPs might be complicated, but that they seemed no more complicated than the terms of the Loans, which Mr Margetson-Rushmore had been quite capable of negotiating;
  • the Bank's choice of scenarios in cost/benefit spreadsheets sent to LEA did not exclusively show the risks of higher interest rates and, in any event, Mrs Margetson-Rushmore could and did manipulate the spreadsheets in order to make them "live", so that she could model scenarios where base rates were different; and
  • in many of their calls with the Bank, Mr and Mrs Margetson-Rushmore indicated that they were concerned that interest rates might fall, and were willing to accept otherwise unfavourable changes to the HPs in order to achieve a lower floor.

Did the Bank owe a duty of care in relation to any advice?

The Judge held that no advice was provided, but she also considered whether the Bank would have been liable in negligence for any such advice. She held that it would not, and that the evidence fell "far short" of establishing the necessary relationship. In reaching this view, the Judge relied on:

  • the sophistication of LEA, and of Mrs Margetson-Rushmore in particular. She held that Mrs Margetson-Rushmore had deliberately emphasised to those acting for the Bank that they should view her as an equal. The Judge noted of Mrs Margetson-Rushmore that "there cannot be many small company executives who know enough to ask their bank to provide them with various forward curves for different interest or swaps rates over different periods and then discuss at length the significance of the fact that the curve is inverted". Mrs Margetson-Rushmore's sophistication is perhaps unusual in the context of cases like these, but significantly, the Judge also said: "These company directors [i.e. not Mrs Margetson-Rushmore] are experienced business people and not timid or unworldly consumers. They must take some responsibility for making sure they understand the implications of the transactions to which they are committing their business";
  • the lack of any written agreement to advise;
  • the availability of independent advice. While Mrs Margetson-Rushmore acknowledged in evidence that she had approached former banking colleagues for their views on the HPs, LEA alleged that the availability of independent advice was limited and the Judge ultimately regarded it as a neutral factor; and
  • the absence of indicia of an advisory relationship, including the fact that in none of the exchanges between the parties that were before the court did LEA ever ask the Bank's salesman what it should do.

The "mezzanine" claim

The Judge agreed with the decision of Asplin J in Property Alliance Group v. Royal Bank of Scotland (PAG) against the existence of a so-called mezzanine duty, pursuant to which a salesman, once he has provided information in relation to a product, is always under a duty to explain the product fully. She considered, however, the matters said by LEA to give rise to a breach of such duty. These included: alleged inaccuracy in explaining the circumstances in which the Bank would exercise its call option (which the Judge rejected); inaccurate explanation of the purpose of the ISDA Master Agreement (which the Judge accepted, but held not to be significant); and the Bank's alleged failure to disclose the CLU (as to which see below) or otherwise properly explain LEA's potential exposure to breakage costs. In relation to breakage costs, the Judge held that the fact of their existence was neither complicated nor surprising and in any event fully understood by Mr and Mrs Margetson-Rushmore. The Judge rejected LEA's arguments.

The misrepresentation claim and the CLU

Shortly before it traded the HPs, the Bank produced a figure of £1.6 million representing the CLU. In rough terms, this represented the Bank's internal view of its exposure were LEA to default on the HPs. It was accepted by both parties that it was not common practice at the time to disclose the CLU. Its significance in this case was said to be that, a few days earlier, the Bank had represented to LEA that it could face an additional balloon repayment on the Loans of £1.5 million as a result of exposure to high interest rates. LEA said that, once the Bank had the figure for the CLU, it should have been apparent that the possible downside of having the HPs was greater than the possible downside of not having them, and the Bank should therefore have appreciated that there was no point in proceeding with the HPs. LEA's pleading in relation to the CLU was the result of a late amendment to its case, and set very high. It alleged fraudulent misrepresentation on the part of the Bank's employee in not disclosing the CLU figure and its alleged effect.

The Judge held that, even had the CLU figure been disclosed, it would not have made any difference to LEA's decision. Mrs Margetson-Rushmore's own spreadsheets produced in advance of the trades modelled at least one scenario where comparatively low interest rates would cause LEA a substantial loss. The Judge also found that no reasonable person could have understood the Bank to represent, in referring to the risk of a higher balloon payment in case of high interest rates, that this was more than LEA might ever have to pay under the HPs if interest rates were very low.


Reading the judgment, it does not seem surprising that the claims failed, and the single most significant reason why they did is arguably the sophistication of LEA. Many of the arguments it advanced are familiar ones in swaps disputes and the Judge followed the approach which has been adopted by the courts in recent cases such as PAG. LEA argued about mismatching terms between the HPs and the Loans. It argued inadequate disclosure of possible breakage costs if it decided to terminate the HPs early. It was, however, inevitably very difficult for LEA to convince the Judge of the existence of an advisory relationship or reliance on alleged misrepresentations in circumstances where Mrs Margetson-Rushmore in particular was so plainly able to understand and deal with such issues. This judgment confirms that there are limits to the extent to which sophisticated businesses can viably put forward the same arguments in swaps disputes that might be of more relevance to less sophisticated SMEs. In addition to being struck by the sophistication of LEA, the Judge found that, while honest, LEA's witnesses' recollection was largely reconstructed from material disclosed in the proceedings and/or influenced by hindsight in view of the prevailing market conditions since the financial crisis.

The later claim in relation to the CLU similarly seems a stretch in the circumstances. It seems inherently improbable that the presentation of an estimated exposure in relation to the Loans would convey an implied representation in relation to the likely size of a differently calculated figure in relation to the HPs. For it to be so obvious a representation that failure to correct it could be characterised as deliberately dishonest seems still more unlikely.

The judgment refers to the need to take a pragmatic and commercially sensible approach to the parties' dealings, and it is plain from this judgment that not every SME will have the instinctive sympathy of the court.