Interest- Rate Hedge Products (“IRHPs”) include a variety of different products sold to customers to help protect them against interest rate risk. The down side is that such products are often complex and structured to produce adverse financial effects for the customer if the Bank of England Base Rate (“Base Rate”) goes down. And we all know that is exactly what has happened in recent years. This has given rise to a wave of IRHP mis-selling claims.
The Court of Appeal has recently handed down judgment in Green and Rowley v The Royal Bank of Scotland plc [2013] EWCA Civ 1197 which concerned such a claim. In short, the Court of Appeal rejected an argument that the FSA’s Conduct of Business Rules (“COB”) (in force in 2005) gave rise to a co-extensive duty of care in tort. A closer analysis of the case highlights some key lessons to be learned.
The Claimants carried on business together developing commercial property and had two loans from RBS secured on their properties. In simple terms the loans were structured at a variable interest rate of 1.75% over Base Rate. On 19 May 2005 a meeting took place between the Claimants and representatives from RBS. The Claimants were told that an interest rate “Swap” (whereby the Claimants were protected against interest rate rises, but equally would not benefit from a fall in interest rates) was a good idea. The Swap was executed by the parties on 25 May 2005. It was preceded by a letter from RBS which made clear that it was entered into on an ‘execution only’ basis. Following the unprecedented fall in Base Rate, the Claimants brought a claim alleging in broad terms that the Swap had been mis-sold. The Claim was issued on 25 May 2011, failed at first instance ([2012] EWHC 3661 (QB)) and was rejected on appeal ([2013] EWCA Civ 1197).
COB includes various rules, breach of which is actionable at the suit of a private person under section 150 Financial Services and Markets Act 2000 (“FSMA”). These include obligations to:
If either of these duties is breached a claimant has without more an action for breach of statutory duty subject only to issues of causation, reliance and proof of loss (as observed in para 15 of Green). By contrast, the duty of care in tort, is significantly narrower.
It is important to distinguish between ‘Information’ and ‘Advice’ claims. In terms of the latter, the first instance Judge in Green, held that had RBS owed an advisory duty than the content of that duty would have been informed, in part, by COB 2.1.3R and 5.4.3R. This accords with the principle that the skill and care to be expected of a reasonably competent financial advisor ordinarily includes compliance with the relevant regulatory rules: see Shore v Sedgwick Financial Services Limited [2007] EWHC 2059 (QB), cited at para 18 in Green.
But on the facts in Green it was held by the trial judge that RBS did not assume an advisory duty of care. Whilst the trial judge assumed that there was a common law duty to take care when making statements which RBS knew or ought reasonably to have known would be relied upon by the Claimants (aka the Hedley Byrne duty), the argument that the ‘Information’ claim was “informed by” the content of COB was rejected. The Court of Appeal endorsed this finding. This is illustrated by the following distinction drawn in Green (see para 17):
This distinction neatly highlights the benefit to be derived from bringing a statutory claim under section 150 FSMA.
In Green the Claimants abandoned their section 150 claim on the basis that it was statute barred, given that the meeting in which the alleged breaches occurred (19 May 2005) took place more than six years before the claim was brought (25 May 2011).
This concession is likely to have been wrong as the cause of action for breach of statutory duty arises when the damage consequent upon breach is suffered, given that section 150 FSMA is not actionable per se. On that basis, there ought not to have been any different approach to the limitation period which applied to the section 150 FSMA claims. Whilst the Court of Appeal did not state this in terms, leading counsel for the Claimants accepted before the Court of Appeal that the concession made below (by his junior) was “likely” to be wrong (see para 15).
Unfortunately the abandonment of the FSMA claim, coupled with the finding that RBS had provided a non-advisory service, meant that the Claimants faced a real uphill struggle.
Before the Court of Appeal the Claimants argued that there was a common law duty of care which was co-extensive or concurrent with that imposed by the statute, where the statute conferred protection on a defined class of individuals or where the statutory duty had been carelessly executed. This argument failed, in summary because (1) section 150 FSMA expressly provided a private right of action, indicating that the statute was intended to be enforced by those means alone, and (2) RBS was not carrying out a statutory duty when selling the Swap.
