Even where no advice was given, a bank’s duty of care to its customer was higher than a duty not to misstate facts and extended to explaining the financial implications of certain loans. The decision suggests that, in certain circumstances outside an advisory relationship, lenders may be required to explain certain risks and features of financial products to their customers prior to sale: Philip Thomas & anr v Tridos Bank NV  EWHC 314 (QB).
Philip and Helen Thomas (the claimants) owned a farming business. In 2006, the claimants transferred their borrowings to Tridos Bank NV (Tridos). The claimants’ borrowing from Tridos was in the form of two variable rate loan agreements of GBP 300,000 and GBP 1.15 million (the Variable Loans).
In 2008, the claimants became concerned about the impact of increasing interest rates on their Variable Loans and discussed with Tridos the possibility of fixing part of their debt. These discussions took place by telephone and in writing. During these discussions, the claimants asked whether the financial penalty for fixing the Variable Loans and then redeeming them early would be in the region of GBP 10,000-GBP 20,000. Tridos did not answer, correct or refute this, even though in reality the figure was closer to GBP 94,000. Following these discussions, in June 2008, the claimants fixed a significant portion of their borrowing in two tranches for 10 years (the Fixed Loans).
In September 2008, interest rates began to fall sharply as a result of the global financial crisis. Now concerned with the level of repayments required under the Fixed Loans, the claimants asked Tridos about the penalties they would incur if they redeemed the Fixed Loans early and restructured the debt at a lower interest rate. The early redemption fee for the Fixed Loans was calculated at GBP 94,205.47 (later discounted to GBP 54,691.50). This was far greater than the GBP 10,000-GBP 20,000 the claimants thought they would be charged.
The claimants sued Tridos, alleging that it had:
- owed the claimants a duty to explain the financial consequences of redeeming the Fixed Loans before the end of their ten year term, and that it breached that duty; and
- misrepresented what the financial consequences of early redemption of the Fixed Loans would be by failing to correct or refute the claimants when they queried whether the early redemption fee would be in the region of GBP 10,000-GBP 20,000.
Deciding the case in favour of the claimants, the court held that, although the relationship between the parties was not an advisory one:
- at a minimum, Tridos owed the claimants a duty not to misstate any facts upon which they might have been expected to rely. This is the “Hedley Byrne v Heller” duty which applies when a bank provides information rather than advice; 1 and
- a higher, “intermediate”, duty could exist outside an advisory relationship in certain circumstances.2 The existence of this intermediate duty would depend on the specific facts and whether it was appropriate to impose that duty as a matter of public policy.
Business Banking Code
Tridos had explained in its product literature and certain correspondence with the claimants in relation to the Fixed Loans that it subscribed to the Business Banking Code (BBC). The BBC included a promise that Tridos would treat its business customers reasonably when providing them with a product and that this promise included: (1) giving the customer information about the product in plain English; and (2) explaining the financial implications of the product. This fairness commitment stated that “customers should be given a balanced view of products so that they have an accurate understanding of the financial implications”.
The court found that because:
- there were no disclaimers, “basis clauses” or exclusions in the terms and conditions which applied between the claimants and Tridos which would lead to the conclusion that Tridos was not willing to assume responsibility for its promises in the BBC; and
- the claimants had questioned Tridos about the potential financial impact of redeeming the Fixed Loans early,
Tridos adopted a higher duty of care to the claimants (in line with the fairness commitment in the BBC) to explain to them the financial implications of fixing the Fixed Loans. This duty came into existence because the claimants had specifically questioned Tridos about the potential financial implications of early redemption of the Fixed Loans. Tridos did not have a duty to volunteer information.
His Honour Judge Havelock Allan QC explained that, while Tridos was not required to provide the claimants with a “comprehensive tutorial” about the financial implications of early redemption of the Fixed Loans, the bank was, at a minimum, required to explain to the claimants: (1) that the rate could be fixed for a period (whether in months or years, and whether any minimum length of time); (2) whether the available fixed rates could be found (eg on the internet); (3) what those rates represented (the forward cost of money); (4) the effective rate that would be payable (ie the current swap ask rate for the period of the fix plus the bank’s margin, if any); and (5) the financial consequences of terminating the fixed rate before the end of the period.
The Court also found that Tridos’ failure to clarify the potential financial penalty for early redemption of the Fixed Loans when Mr Thomas asked whether the financial penalty would be GBP 10,000-GBP 20,000 gave rise to a misrepresentation which influenced the claimants’ decision to enter into the Fixed Loans.
This case is a useful illustration of the circumstances in which a bank or financial institution may be held to a higher duty than one which requires them not to misstate facts, even where there is no advisory relationship.
This duty may extend to a duty to explain the features and risks of a product, particularly in circumstances where the bank or financial institution has signed up to a voluntary code of practice which requires fairness commitments such as those relevant in this case.
Where banks or financial institutions have signed up to a voluntary code of practice, they should consider how that code interacts with specific product terms and conditions, such as basis clauses or exclusions.
The code of practice referred to this case as the BBC is now the Lending Code. The Lending Code will be superseded on 1 July 2017 by the Standards of Lending Practice.