The recent case of Thomas & Anor v. Triodos Bank NV  EWHC 314 suggests that in certain circumstances banks that have subscribed to voluntary codes of conduct (and advertised that fact to their customers) might be fixed with a higher duty of care to their customers than they would otherwise owe.
Background – advising, informing or something in between?
When a bank provides its customer with advice about a product, it clearly owes a higher duty than if it were merely providing the customer with information. The dividing line is a matter of objective assessment, but the High Court has described it in these terms:
"The key to the giving of advice is that the information is either accompanied by a comment or value judgment on the relevance of that information to the client's investment decision or is itself the product of a process of selection involving a value judgment so that the information will tend to influence the decision of the recipient"1
The duty is to ensure that advice is full and accurate. Full advice covers the available options and the pros and cons of any product or products being recommended and enables the customer to make an informed decision.
However, when a bank gives information about a product and does not advise or recommend it, the duty is lower. Judge Waksman QC concluded in Green & Rowley2 that the only duty of care owed then is the Hedley Byrne v. Heller duty to take reasonable care not to misstate any facts upon which the customer might be expected to rely. The Court of Appeal expressly approved his analysis.
Whether a bank is advising a customer about a product, or merely informing the customer, if the bank is acting within the scope of a regulatory regime, such as the COBS Rules, it will also need to ensure it complies with its statutory obligations.
Since Green & Rowley there has been a difference of view among judges at first instance as to whether a more extensive duty should apply when a bank sells its customer a swap.
The dispute at the heart of Thomas & Anor v. Triodos Bank NV stemmed from the claimants switching their borrowing from a variable rate to a fixed rate for a term of 10 years. Mr and Mrs Thomas argued that Triodos failed to explain the financial consequences if they tried to get out of the fixed rate before the 10-year term expired. They also argued that Triodos positively misrepresented what the financial consequences would be.
The judge concluded that Triodos's relationship with the claimants was not advisory. However, in determining the extent of the bank's duties, he thought it significant that Triodos had advertised to the claimants that it subscribed to the Business Banking Code (BBC). The BBC has no contractual force between a subscriber and its customers, but is a voluntary code setting standards of good practice. As the judge noted "it simply provides a benchmark as to how banks should behave".
The edition of the BBC in force when the claimants fixed their interest rate contained a "fairness commitment". Subscribers promised that if a customer asked about a product, they would give a balanced view of the product in plain English, with an explanation of its financial implications. Therefore, when Mr and Mrs Thomas enquired about fixing the rate on their loans, the bank owed them more than a Hedley Byrne v. Heller duty not to mislead or misstate. Instead, the bank had a duty to follow the best practice in the BBC (including explaining the financial implications of fixing the interest rate), which it had breached.
The judge explained that what was required was not extensive, but rather an explanation in plain English of what fixing the rate entailed and the consequences. He saw the essential components as being:
- that the rate could be fixed for a period (whether in months or years, and whether any minimum or maximum length of time);
- where the available fixed rates could be found (e.g. on the internet);
- what those rates represented (the forward cost of money);
- the effective rate that would be payable (i.e. the current swap ask rate for the period of the fix plus the bank's margin, if any); and
- the financial consequences of terminating the fixed rate before the end of the period.
The judge also thought that, as to the last point, the bank was obliged to explain how the clauses in the loan agreement entitled "Early repayment" and "Early repayment of loans with fixed interest" would operate in the event of an early repayment.
While this is a first instance decision, it is likely to cause some concern for banks lending to small businesses.
Most high street banks subscribe to a voluntary code of practice for their dealings with small business customers. This used to be called the Business Banking Code. More recently it has been the Lending Code, and from 1 July 2017 it will be the Standards of Lending for business customers. All iterations of the code contain similar commitments around giving customers clear information about products.
By signing up to the codes (and advertising this fact), it now seems that a bank could increase its risk of incurring tortious liability to its business customers for failing to give sufficient information about the workings and risks of its products