Case: Green v Royal Bank of Scotland Plc  EWCA Civ 1197 (CA (Civ Div))
The Court of Appeal’s recent judgment in an interest rate mis-selling case brought by property developers John Green and Paul Rowley (G&R) against The Royal Bank of Scotland (RBS)1 provides useful guidance for insolvency practitioners and other potential claimants on bringing mis-selling claims.
Whilst the Court of Appeal declined to find that RBS had mis-sold a swap to G&R, the narrow grounds of appeal and the fact-specific findings mean the ruling is not an insurmountable obstacle to claimants looking for redress in relation to interest rate hedging products (IRHPs). However, the fact that some claims were time-barred put G&R on the back foot and underlines the importance of claimants (including Insolvency Practitioners (IPs) stepping into the shoes of insolvent businesses) moving swiftly to minimise the risk of limitation periods expiring.
Messrs Green and Rowley: the background facts
G&R were partners in a property development and lettings business and had a loan facility with RBS of £1.5 million, repayable on an interest-only basis at 1.5 per cent above base over a 15 year term. In May 2005, G&R tried to protect themselves against anticipated interest rate rises by entering into an interest rate swap (the Swap) with RBS which fixed an interest rate of 4.83 per cent (just higher than the base rate at the time of 4.75 per cent) against a so-called notional amount of £1.5 million. As is often the case with IRHPs, this notional amount matched G&R’s pre-existing loan liability to RBS of £1.5 million, but the loan and the Swap were separate documents.
Under the Swap, where the base rate exceeded 4.83 per cent, RBS would be liable to pay the difference (net) to G&R on a quarterly basis. Between 2006 and 2008, G&R were "in the money" under the deal, as interest rates rose and payments G&R received from RBS under the Swap compensated them for the higher interest rates payable under the variable loan facility. However, as interest rates nosedived to 0.5 per cent in March 2009 as a result of the global economic crisis, the position was reversed and RBS became the net payee under the Swap. In early 2009, G&R tried to restructure their partnership and revise the Swap and were alarmed to discover that a break charge of £138,650 would be payable if they tried to terminate the Swap early.
Mis-selling claims: the essential ingredients
There are broadly three main hooks on which to hang a mis-selling claim. First, breach of the statutory duties contained in the Financial Services Authority’s (the FSA, now the Financial Conduct Authority, the FCA) Conduct of Business Sourcebook (the COBS rules). The COBS rules contain detailed guidance governing the sale of financial products and are directly actionable by "private persons", which includes individuals and other organisations such as charities but, under the current case law, does not include companies. Secondly, you can plead negligent advice, based on breach of the common law duty to take reasonable care and skill when advising. Finally, you can plead negligent mis-statement (breach of the duty to take care not to mis-state).
G&R issued their claim on May 25, 2011, on the six year anniversary of the date on which the Swap had been signed. G&R’s central allegations were that RBS had made negligent mis-statements about the features of the Swap (the Information Claim) and that RBS had negligently advised them to enter a Swap which was clearly unsuitable for their requirements (the Advice Claim). However, G&R dropped a claim for direct breach of the COBS rules as they thought the relevant limitation period had expired, a concession which may have cost them dearly. *Insolv. Int. 15
First instance findings
At first instance, the Advice Claim foundered on Waksman J.’s finding on the facts of the case that RBS’ representative had not advised or recommended that G&R enter the Swap. The fact that the relative advantages and disadvantages of the Swap were discussed did not mean that the Swap had been recommended and RBS’ salesperson had kept good notes of the meeting in which the Swap was sold, which assisted her in proving this point. However, Waksman J. concluded that if an advisory relationship had arisen between the parties then the COBS duty for RBS to take reasonable steps to ensure that G&R understood the nature of the risks involved would flesh out the scope of RBS’ advisory duty to G&R, even if a claim for direct breach of the COBS rules was time-barred.
This decision built on existing case law which holds that where an advisory duty can be established, the scope of the duty will be informed by the detail of the COBS rules. Whether or not an advisory duty arises will turn on what the bank said in their sales pitch and what information was given to the customer. In other words, any advisory duty is likely to encompass COBS requirements such as taking reasonable steps to ensure that the customer understands the nature of the risks involved in purchasing a product.
The Information Claim also failed at first instance on the basis that the evidence did not suggest that the explanations given to G&R by RBS’ representative were either misleading, unclear or unfair. Again, this turned on what RBS’ representative (who Waksman J. found to be a very reliable witness) had said to G&R and the information booklet she had given them. Waksman J.’s conclusion that G&R were very intelligent and experienced businessmen, who would have had no difficulty in understanding the straightforward Swap, played a part in the failure of their Information Claim.
Waksman J. also found that the common law duty not to mis-state was narrow in scope and did not encompass the COBS duties.
Court of Appeal ruling: the second blow
The ground of appeal was a narrow one but was criticised as "misconceived" by Lord Justice Tomlinson, who gave the leading judgment for a unanimous Court of Appeal. G&R argued that there was existing authority which indicated that a common law duty of care mirroring the statutory COBS duties arose automatically where the purpose of the statute was to confer protection on a defined class of individuals or where the statutory duty had been carelessly executed.
But as Tomlinson L.J. asked simply in his judgment - "why"? Private persons were already entitled to bring an action for direct breach of statutory duty so a concurrent common law duty was not necessary to enable them to enforce their rights. Although G&R argued that it would assist those entities (eg. companies) which are not deemed private persons, Tomlinson L.J. thought this would "drive a horse and coaches through the intention of Parliament to confer a private law cause of action upon a limited class".
The judgment underscores the importance of bringing claims swiftly to minimise the risk of limitation periods expiring. G&R’s counsel accepted on appeal that their original view that time had run out for their breach of COBs claim was "likely" to be wrong because any breach of duty would continue until the Swap was executed (e.g. May 25, 2005). Their decision not to change their view on this point on appeal knocked out a potentially valuable claim.
Tactically, had the appeal succeeded then it would have been open to G&R to side-step the time-bar on the breach of statutory duty claim by claiming a breach of a matching common law duty of care (which was still within time). However, the Court of Appeal’s finding on the facts put paid to that.
Alternative routes of redress
Aside from the Court route, the FCA’s sponsored review of IRHPs remains ongoing, with nine banks (including the big four) in the process of reviewing the sale of 30,000 IRHPs to individuals and businesses which meet the FCA’s test for being a "non-sophisticated investor". The banks are expecting to inform eligible participants of their results (including offers of compensation) by the end of the year, with compensation calculated on the basis of what is fair and reasonable. This usually means refunding the difference between the rate paid under the IRHP and the floating rate which would have otherwise applied. Consequential losses can also be claimed, although the FCA has warned that redress may be slower for such claims.
Given that participation in the FCA-sponsored review does not stop the clock running for limitation purposes in relation to Court claims, participants in the review (including IPs) should take advice on negotiating a standstill agreement with the bank in order to freeze limitation periods whilst the review is underway.
Restructuring experts and participants in the review who are in financial distress should also take advantage of the banks’ commitment to fast-track such cases. The banks have also agreed not to take repossession action or to adversely vary lending facilities until a decision on redress has been taken, unless they have the participant’s consent or there are "exceptional circumstances". In some cases, banks are also agreeing to suspend interest repayments under IRHPs whilst the review takes place, which may provide some welcome breathing space.
Finally, individuals and micro-enterprises (businesses with an annual turnover of less than two million euros and fewer than ten employees) may also seek redress from the Financial Ombudsman Service (the FOS), which has the power to award compensation of up to £150,000 if it finds an IRHP was mis-sold, including reviewing a decision made under the FCA review.
The moral of the story?
Given that the Court of Appeal’s findings in this case were fact-specific, claimants (including IPs) may still be able to bring actions in the Courts for breach of statutory duty (breach of the COBS rules) or for negligent advice or negligent mis-statement. Potential claimants should be warned that recent case law means companies will struggle to bring a claim for breach of statutory duty.
The case also demonstrates the importance of retaining and locating contemporaneous documentary evidence of the sale of IRHPs. The lack of documentary evidence on G&R’s part meant they had to rely on their recollections from seven years earlier, which weakened their evidence.
The case also serves as a reminder of moving quickly to minimise the chances of actions being time-barred – many swaps were sold between 2005 and 2008 so time is of the essence in bringing claims. Finally, where the bank is the major secured creditor of an insolvent business then the commercial reality may be that any redress ultimately ends up back in the bank’s pockets. This should not however be a reason to dismiss IRHP claims out of hand, as *Insolv. Int. 16 redress could have a material bearing on a struggling company’s survival and, where that is not possible, could maximise the size of the pot for the benefit of the creditors.
This article was published in Insolvency Intelligence in January 2014.