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It was sufficient for bank to explain cost of breaking swap agreement could be "substantial", rules High Court

Out-Law News | 03 Oct 2014 | 9:49 am | 2 min. read

Banks were not under a duty to "educate" a small business customer on the risks of buying a complex interest rate hedging product, the High Court has ruled.

In a recent judgment, the High Court said that the terms of the contract between NatWest and RBS and Crestsign, a small family-run commercial property investment company, were sufficient to prevent the company's director from claiming that the interest rate hedging product (IRHP) had been mis-sold. In addition, the banks were under no duty to explain a range of other products to the customer, Mr Parker, or to "educate" him on the products it did sell, the judge said.

"The banks that sold the product documented the sale as non-advised, including the usual contractual terms about reliance, representations and advice," said banking litigation expert Mike Hawthorne of Pinsent Masons, the law firm behind Out-Law.com. "The judge held that although the banks had in fact advised, and that advice would have been negligent if there had been a duty of care, the banks were not liable because there was no duty of care."

"More interestingly, the judgment also clarifies the scope of a bank's duty to provide information when selling a product: the point being that a statement that break costs could be 'substantial' was held to be sufficient. This case once again shows the effectiveness of the standard basis clauses, and the narrow limits on the scope of a bank's common law duties where a claim for breach of statutory duty cannot be brought," he said.

In 2008, Crestsign re-financed its existing borrowing by entering into a five-year loan facility for £3.45 million with the banks, backed by a 10-year swap for the full amount of the loan at a discounted rate of 0.45% for the first two years and a fixed rate of 5.65% thereafter. The banks had an option to cancel the arrangement in the last four and a half years of the term. After two years, when the costs of the swap became prohibitively expensive, Mr and Mrs Parker as directors of Crestsign brought a mis-selling claim against the banks.

The Parkers claimed that the banks owed them two "common law" duties of care when selling the product: firstly, to ensure that any advice or recommendations given to Crestsign were suitable; and secondly, to ensure that any information provided to the company was "accurate and fit for purpose". The banks denied that the sale was an "advised" one to which the first duty applied, and said that their only duty in relation to information was to ensure that this was "not misleading".

The judge said that although the banks' salesman, Mr Gillard, did in fact advise the Parkers in a way that had the potential to be negligent, the banks "went out of their way" to ensure that no duty of care would arise in the documents that they provided. These documents were "unequivocal" and "defined the relationship as one in which advice was not being given", and were "clearly drawn to Mr Parker's attention before the swap contract was concluded", he said.

Moving on to consider what the extent of the duty to provide accurate information was, the judge said that the banks' only duty was to "explain fully and accurately the nature and effect of the products in respect of which he chose to volunteer an explanation", not to explain other products that Crestsign may have wanted to purchase.

"An explanation of such other products, for the purpose of presenting a balanced picture, would be the territory of an advice-giving duty, which was excluded in the documents as I have already found," he said.

He added that any duty would not have extended as far as "a 'duty to educate', in the sense of giving a comprehensive 'tutorial' and satisfying himself that [Crestsign] understood every aspect of each product, including a detailed account of the risks associated with each which, again, would stray into the territory of advice giving". The banks "came closest to breaching the duty it owed in respect of the provision of information" in relation to the break clause, but the judge ultimately found that they "gave just enough information to avoid a breach".