The English courts have been busy over recent months with cases dealing with allegations that interest rate swaps were mis-sold to small business borrowers.

In a slightly different approach in this month’s FSS, we take a look at a recent case in which a claimant tried some creative arguments that again demonstrated the difficulties of bringing this sort of claim against a bank.

In the recent decision in the Cardiff Mercantile Court (Mark Bailey and M T R Bailey Trading Limited -v- Barclays Bank plc (2014) EWHC 2882(QB)), His Honour Judge Keyser QC gave a robust judgment; squarely rejected a number of allegations against the Bank of wrong-doing; and summarily dismissed the Claimant’s claims. The decision is important because it deals with points which are commonly raised in swap mis-selling cases.

Facts

In 2007, the Bank agreed to lend £1.26m to Mr Bailey (an existing customer) to fund the purchase of a property from which one of Mr Bailey’s companies operated.   The loan was variable rate, repayable over ten years.   Mr Bailey dealt with employees of the Bank, one of whom was approved by the (then) FSA as an investment adviser, the other of whom was not.   Following a meeting with the two Bank representatives in May 2007, Mr Bailey took the Bank’s recommendation to enter into an interest rate swap agreement to mitigate the risk of interest rate rises: Mr Bailey’s relationship advisor at the Bank had predicted that interest rates would “go through the roof”. The swap was entered into for a notional sum of £2M, at a  fixed rate of 5.64% for a fixed term of ten years.

As we now well know, interest rates did not go through the roof, but fell to a record low.

In 2010, Mr Bailey decided to restructure some of his borrowings for tax purposes, which involved transferring properties from his personal portfolio to MTR Bailey Trading Limited (the “Company”).   The Bank advised Mr Bailey that the loan could not be transferred to the Company unless the swap was also novated to the Company.   The only alternative for Mr Bailey was to pay the break fees which would be payable upon the break of the swap.   Accordingly, Mr Bailey novated the loan to the Company.

Mr Bailey and the Company later brought claims against the Bank for having advised them to enter into a product which was unsuitable for them, and having done so in breach of the COBS rules.   The allegations against the bank were essentially of mis-selling.

Shortly before trial, Mr Bailey accepted the Bank’s offer of redress to him pursuant to the scheme agreed between the Bank and the FSA (now FCA) regarding the sale of interest rate hedging products.  Therefore, only the claims by the Company against the Bank went to trial.  The Bank sought summary judgment/strike-out against the Company, and the Company applied to amend its particulars of claim, seemingly in response to the Bank’s application.

Useful regulatory points arising

“Information” case, not an “advice” case

The Bank did not have an advisory role in the transaction: the Bank had classified the Company as a retail customer (affording it the highest level of protection) but the Retail Client Agreement stated the Bank would not advise the client and, by signing the agreement, the client confirmed that it had given the bank all necessary information to enable the Bank to assess the appropriateness of the product being provided.

Client’s best interests

There was no breach of COBS 2.1.1R (the best interests rule) and the Bank had not acted unfairly: it had been Mr Bailey’s own decision to transfer the swap to the Company rather than personally incur the break cost liability that the Bank had the legal right to charge.   The refusal of the Bank to waive its legal right to charge those fees could not be classed as unfair.

Suitability / appropriateness..?

The case provided a useful illustration of the difference between regulatory requirements for suitability and appropriateness: there was no personal recommendation by the Bank, so COBS 9.2.1R (the obligation to take reasonable steps to ensure that a personal recommendation is suitable for the client) did not apply. The Judge found that COBS 10.2.1 R had not been breached because the rule does not deal with the suitability of the product, but the appropriateness of it.   The Court explained that the focus in assessing appropriateness is the client’s knowledge and understanding of the product or service.   In this case, the Court found that the Company must have known the risks of entering into the swap agreement because Mr Bailey, who was the brains behind the Company, had admitted being aware of the risks and indeed wanted to avoid them.

Best execution

The claimants also tried to claim that the Bank had breached COBS 11.2 which creates a duty of best execution. The Court interpreted this rule as not being about the merits of the transaction, but about how the decision to enter into the transaction is implemented by a firm. The claimant’s argument was that the rule was breached because there were better products available at better rates of interest. Unsurprisingly, in the Judge’s view, this was not the correct interpretation of the rule.

Private person

Finally (amongst other arguments) there was a clear rejection by the Judge of attempts to widen the interpretation of a “private person” under s138D FSMA to include the Company.   The existing analysis in Titan Steel Wheels was considered and reaffirmed.

Conclusion

In his reasoned judgment, His Honour Judge Keyser QC sets out clear findings for litigants where a party claims to have been wronged by entering into swap agreements at what has turned out to be an inopportune moment.   The facts of this case allowed the Judge to come to a robust conclusion on all points, but the judgment will assist in the interpretation of COBS in light of mis-selling allegations.