Appeal decision blocks common route for interest swap mis-selling claims, says expert

The two property developers, John Green and Paul Rowley, would only have been entitled to pursue a claim against the bank for breaches of the Conduct of Business (COB) Rules, set by the Financial Conduct Authority (FCA); rather than under any non-statutory 'common law' route, according to a recently-published Court of Appeal judgment. However, in order to have done so, they would have had to have begun their claim within six years, it said.

Banking litigation expert Michael Hawthorne of Pinsent Masons, the law firm behind Out-Law.com, said that the decision was an "exceptionally important" one for banks currently defending mis-selling claims brought by business customers. This was because it "put an end to one of the core ways in which some of these claims have been formulated to date", he said.

"The Court said at the hearing on 29 July that the appeal had failed, so the big points in the decision are not news – it's the details which are newsworthy," he said. "The key issue in this appeal was whether, on a non-advisory sale, RBS owed its customers a common law duty of care which was co-extensive with the relevant COB rules, bearing in mind that in this case the customers' potential statutory claim [under s150 of the Financial Services and Markets Act (FSMA)] was time-barred."

"The argument failed because the statutory scheme which includes the COB rules was intended to be self-contained. The remedy which Parliament intended for a rule breach was a claim under s150. If a s150 claim is not available for whatever reason, then it would drive a coach and horses through the intention of the legislation for the courts to find there to be an identical remedy outside the statutory arrangements."

Claims brought against banks in relation to IRHP sales by companies have generally been brought on the grounds that this 'co-extensive' duty did exist, as the statutory route is only open to individuals rather than companies, he said. However, a considerable number of claims arguing a common law duty of care have also been made by individuals, given the time limits that apply to statutory claims, he said.

"This is a very important point to have clarified," he said. "The decision knocks out the claim that there is a common law duty which is 'co-extensive' with the statutory scheme - at least in relation to non-advisory sales. More than ever before, the battleground will be over whether sales were advisory or not," he said.

IRHPs provide borrowers with protection against changes in interest rates by locking in net cash outflow to a fixed interest rate. The product is designed so that the swap provider, which is usually the bank that provided the underlying loan, covers the cost of increased payments if the interest rate rises while customers have to pay the bank if rates fall. Simple products merely fix an upper limit to the interest rate on a loan, while more complex 'structured collars' introduce a degree of interest rate speculation to the transaction. In all cases, customers risk having to make higher payments than anticipated if the market does not perform as expected.

A number of high street banks are currently reviewing their sales of IRHPs to individuals and small businesses with a view to compensating those who were mis-sold the products, after a review by then regulator the Financial Services Authority found "serious failings" in the way that the products were sold. Common issues were banks not properly ascertaining whether customers understood the risks associated with the product they were buying, and not notifying customers that large exit fees could apply if they wanted to cancel the arrangements.

The High Court had previously ruled against Green and Rowley in their claim that RBS had mis-sold them an IRHP in May 2005. They claimed to have been told by staff at the bank that the product "was a good idea and that they should enter into it" to protect them against interest rate fluctuations in relation to a £1.5m property loan. Instead they "faired correspondingly badly" when interest rates fell to an all-time low in 2008, and were "shocked" to learn of potential costs when they enquired in 2009 about ending the arrangement early.

On the facts of the case, the bank "did not cross the line which separates, on the one hand, the activity of giving information about and selling a product and, on the other hand, the activity of giving advice", Lord Justice Tomlinson said. As it had not done so, there was "neither justification nor need for the imposition of a common law duty independent of but co-extensive with the remedy provided by statute".

Banking litigation expert Michael Hawthorne said that the decision did not affect the High Court's earlier ruling that the bank was under a common law duty "not to mis-state facts in circumstances where it was aware that the customers would rely on those facts".

"A bank still has a common law duty to take reasonable steps not to mislead, even thought the other parts of the 'clear, fair and not misleading communications' rules were found to be outside the scope of RBS' common law duties," he said.