In the recent decision Thornbridge Ltd v Barclays Bank PLC, the High Court considered whether Barclays had an advisory duty to the Borrower when it sold it an interest rate swap as a means of seeking to limit interest rate risk on a commercial property loan.
The Claimant Borrower was a property investment business. It sought a loan from Barclays to purchase a commercial property in Sheffield which was to be leased to a third party company. In April 2008, Barclays agreed to loan £5,652,000 to the Borrower for a 15 year term. It was a condition of the loan that the Borrower would enter into an interest rate hedge for a minimum period of 5 years or accept a fixed interest rate to be serviced from the rental income. The Borrower therefore entered into discussions with Barclays Capital which resulted in it entering into an interest rate swap for a period of 5 years to protect against interest rate rises (the Swap).
Due to the 2008 financial crisis, interest rates fell to historically low levels. That resulted in the Borrower paying more under the Swap than it had anticipated. In January 2009, the Borrower complained to Barclays about the increase in its monthly payments. The Borrower then sought to restructure the Swap but was quoted significant breakage costs, which the Borrower did not want to pay.
As a result, the Borrower issued a claim against Barclays. The primary allegation was that Barclays had failed in its duty to advise on the Swap and the suitability of the product.
The following issues fell to be determined by the Court:
- Did Barclays give advice on the Swap and, if so, was that advice adequate?
- If the relationship was advisory, was the Borrower prevented (by estoppel) from asserting such a relationship due to the terms of the Swap?
- If the bank had not given advice, what were its duties?
The Judge found that:
- On the facts, Barclays had not assumed an advisory role and had not recommended the Swap. Barclays had given predictions as to the likely interest rate movements rather than advice. In doing so, it had simply acted as a salesperson. In this regard, it was influential that Barclays had not received a fee for any advice purportedly given.
- Even if advice had been given, the Borrower was prevented from asserting that Barclays had given advice due to the particular provisions in the Swap agreement. Such provisions did not fall foul of the UCTA 1977.
- As there was no advisory relationship, there was no positive duty upon Barclays to provide information which went over and above the duty not to mislead. The Judge departed from the decision in Crestsign (read our overview of that decision here – a decision which is under appeal, due to be heard April 2016). In that case, the court had found that the bank owed a broader duty of care to explain a product "fully" when providing information about it. This, the Judge said, could not be a point of general application, as it would otherwise elevate the duty of a salesperson to that of an adviser.
- There was no contractual right requiring Barclays to comply with the (then-applicable) FSA rules and there was no right of direct action for any alleged breach of the COB rules.
The Judge concluded that the claim had been brought with the benefit of hindsight when the Swap had not operated as the parties had intended. It was not the case that the Borrower had been advised, or misled, into entering into the Swap.
This case is a further example of courts being unwilling to assist a borrower who has found himself in financial difficulty after entering into a commercial deal prior to the financial downturn.
While the Court accepted that a bank could express views as to the potential performance of a product, this was to be expected in its role as salesperson and not be taken to be the provision of advice. No doubt banks will be pleased by this decision.