Mis-selling of Interest Rate Hedging Products - Success for the Bank
Since last reported by Ian and Marija Markovic, trainee solicitor at Steeles Law, the UK Courts have given Judgment in the first reported case on the mis-selling of interest rate swaps.
On Friday 21 December 2012, in the case of Green & Rowley v Royal Bank of Scotland 2012, the Manchester Mercantile Court (High Court of Justice) dismissed a claim brought by Mr John Green and Mr Paul Rowley against RBS.
Green and Rowley have appealed against that decision to the Court of Appeal, and the Financial Conduct Authority (one of two regulatory authority successors to the FSA) has written to the Court asking for permission to participate in the Appeal.
Background to the Case
Mr Green and Mr Rowley were business partners in property investment. In May 2005, their partnership had liabilities to Royal Bank of Scotland of £1.5m, repayable over 15 years at 1.5% above base rate. Their bank manager, Mrs Gill, suggested that they may wish to enter into an interest rate protection product. After a meeting with an RBS specialist in this area, Mrs Holdsworth, they entered into the “swap” (click here for our previous article explaining this term). The base rate at that time was 4.75% and the fixed rate was set at 4.83%.
This arrangement worked well for Green & Rowley initially; in June 2006 the base rate increased significantly and carried on at a higher rate than the swapped rate until October 2008. This meant that, during this period, Green & Rowley received payments from RBS under the swap. However, following the financial crisis in late 2008, the base rate drastically decreased and, in March 2009, settled at the current record low base rate 0.5% and stayed there. This left Green & Rowley paying increased amounts under the swap and unable to take advantage of the record-low rate.
His Honour Judge Waksman QC made it clear upon delivering Judgment that this case was highly fact sensitive. The evidence concentrated on what was said at the meeting with the specialist and before the swap was entered into. Green & Rowley claimed that RBS breached its common law duty of care in making negligent mis-statements and in giving negligent advice with regard to the swap.
The Judge accepted that, in line with Rubenstein v HSBC Bank PLC 2011, if a product had been recommended this may amount to advice. Mrs Gill recommended Green & Rowley to consider an interest rate protection product and arranged a meeting with the specialist, Mrs Holdsworth. At the meeting with Mrs Holdsworth, the advantages and disadvantages of various products were discussed. But the Judge stated in this case that this does not amount to a recommendation (and therefore advice) and that Green & Rowley were free to make their own decision.
Mrs Holdsworth retained a note taken of the particular meeting, including manuscript diagrams and figures used for illustrative purposes and more importantly a typed note from the manuscript note she took at the meeting setting out what was said. By contrast, Green & Rowley had no notes of the meeting or what was said at the time, therefore relaying information purely from memory of some seven years before. The Judge stated that he generally preferred the evidence given by the Bank to that of Green & Rowley.
Even though the word ‘suitable’ was used to describe the chosen swap product in a note taken by Mrs Holdsworth at the meeting, the Judge found that this was only confirmation that the product was suitable for Green & Rowley’s expressed requirements, not advice that it was suitable pursuant to the Conduct of Business Rules.
Therefore, as no advice had been given, the claim for negligent advice failed.
In relation to break costs, RBS provided documentation which stated that, if the swap was broken, there would be a cost or benefit depending on the market conditions. That was the extent of a reference to break costs by RBS. Green and Rowley claimed that the information provided by RBS did not go far enough and that RBS owed a duty of care to explain the potential extent of the break costs in much more detail.
However, the Judge found that the information provided was sufficient and, what mattered in common law, was whether the statements in themselves were accurate, not whether more could have been said. Therefore the Judge concluded that the information provided by the Bank was not misleading, so the claim for negligent mis-statement also failed.
In January 2013, shortly after Judgment was given, the Financial Services Authority (as it then was) released a report on the outcome of its pilot scheme.
Included in that report was a section titled ‘Assessing Compliance with Regulatory Requirements’. This gave examples of what, in the FSA’s opinion, sales of the interest rate hedging products by banks should include for those sales to be conducted within the regulatory requirements.
The report also stated that “for the disclosure of break costs to comply with our regulatory requirements, the bank should be able to demonstrate that in good time before the sale, the bank provided the customer with an appropriate, comprehensible and fair, clear and not misleading disclosure of any potential break costs.”
Green & Rowley have since dis-instructed the solicitors acting on their behalf for the case at first instance and have appointed new solicitors to act in relation to an appeal.
Following an application, Lord Justice Lewison has granted Green & Rowley permission to appeal His Honour Judge Waksman QC’s Judgment on grounds of public interest. It is expected that an appeal will take place in October 2013 (coincidentally the same month that Graiseley Investments Limited & Ors v Barclays Bank plc, another interest rate hedging product case, is expected to be heard).
Very recently, the Financial Conduct Authority (which has superseded the FSA) wrote to the Court and both parties to the case seeking permission to make a submission to the court to offer clarity on its regulatory requirements.
Although the case was a success for RBS at first instance, permission to appeal has been granted and the matter has not yet reached a final conclusion. Even if the decision at first instance is upheld at the Court of Appeal, this case should not necessarily deter a person or company from pursuing a claim against a bank.
This case was fact specific (His Honour Judge Waksman QC said as much) and every case has different facts. The outcome in this case was determined by what was said between the parties and how the evidence was given.
This case highlights the importance of accurate evidence. Before bringing a claim, it is imperative that all relevant information is obtained. The evidence given by the claimants must also be consistent and not conflicting. The court is likely to look on contemporaneous documents taken from that period of time more favourably. To maximise an opportunity of success it is crucial that the evidence is properly prepared from the outset and the case is dealt with by a legal team that have the requisite expertise.
The Judge found both claimants to be intelligent and experienced businessmen, and described the swap they entered into as ‘straightforward’. Many potential claimants will not have the same knowledge and experience and many products entered into will be of far greater complexity.
At Steeles Law we have acted and continue to act for a number of clients involved in disputes with banks including the mis-selling of complex financial products. We have already secured significant settlements on behalf of clients.
If you or your business has entered into a hedging agreement, whether that agreement remains in place or not, we would like to hear from you. For a no obligation discussion about interest rate hedging products call Ian Robotham today.