INTEREST RATE SWAPS CLAIMS, THE POST REVIEW POSITION

1.

The Products

1.1

Interest-rate swap agreements (“IRSAs”) include 1)

caps,

2)

collars,

3)

structured collars; and

4)

base rate swaps.

all of which are freestanding agreements. 1.2

The post November 2007 version of the FCA’s Conduct of Business Rules (“COBS”) applies to a “designated investment” sold by a bank to a retail customer. The term “designated investment” is defined by Article 85 of the Financial Services and Markets Act 2000 (Regulated Activities) Order 2001 (“Article 85") to be: “(a)

a contract for differences or

(b)

Any other contract the purpose or pretended purpose of which is to secure a profit or avoid a loss by reference to fluctuations in(i)

the value or price of property or any description; or

(ii)

an index or other factor designated for that purpose in the contract”

In determining the “purpose or pretended purpose” of the contract, the Court will consider the purpose of the customer and not the bank (see the decision of Leggatt J in R (on the application of London Capital Group v The Financial Ombudsman Service Ltd [2013] EWHC 2425 (Admin). 1.3

All IRSAs are considered by the FCA to be “designated investments” and accordingly regulated under COBS. The division of IRSAs into these broad types follows the analysis of the FCA. Not all products within a category have the same profile. In practice, the name given by the bank to the product may provide little insight into its type. 1

1.4

Each of these freestanding products is designed to sit alongside a standard variable rate loan facility. In theory, the bank providing the IRSA need not be the same as the bank providing the loan facility. As the IRSA is intended to provide “protection” against interest rate rises affecting a loan, its amount and term ought to be tied to the amount and term of the loan. In practice, IRSAs may be for larger amounts than the loan and for longer periods. This is usually referred to as “over hedging”.

1.5

In addition to IRSAs, there are a number of products which have the same effect as the combination of an IRSA with a variable rate loan. These are generally referred to as “embedded swaps”. The most obvious embedded swap is a fixed rate loan which is effectively the combination of a base rate swap with a variable rate loan. Some embedded swaps (particularly those provided by Clydesdale Bank PLC) are far more complicated than this and involve the combination of a structured collar with a variable rate loan. The term “hedging product” includes both IRSAs and embedded swaps. Clydesdale Bank PLC has its own separate review procedure (“the Clydesdale Review”) which largely mirrors the FCA Review.

1.6.

Whether embedded swaps are designated investments (and therefore regulated by COBS) is not yet decided. The stated view of the FCA is that fixed rate loans are not designated investments. This forms the basis for their exclusion from both the FCA Review and the Clydesdale Review. This appears to be correct because a fixed rate loan does not make use of any index. Any argument that fixed rate loans are designated investments has to be based on construing Article 85 so as to accord with EU law, the relevant directive being the Markets in Financial Instruments Directive 2004/39/EC (“MiFID”). The position of the FCA in relation to other embedded swaps is not clear. All embedded swaps other than fixed rate loans sold by Clydesdale Bank are within the Clydesdale Review. The position adopted by the Financial Ombudsman Service (“the Ombudsman”) is that fixed rate loans are not designated investments, but that COBS has to be considered when addressing the issue of whether the bank acted fairly in relation to the sale of the same.

1.6

Usually but not invariably, the bank which provides the hedging product will enter into an agreement (“the mirror agreement”) with a third party which will mirror the same. The bank providing the hedging product to its customer will receive a commission under the 2

mirror agreement. From its perspective, the commission is its profit and the hedging product leaves its balance sheet. The existence of the mirror agreement is important because termination of the hedging product will usually require the bank to terminate the mirror agreement at a cost to itself which is passed on to the customer. 1.7

The charge to be paid by the customer to terminate the hedging product (“the break cost”) is tied to projected interest rates at the date of termination. These projected interest rates are an industry standard and are usually shown on a “yield curve” diagram. The break cost is the market value of the hedging product at the date of termination and usually referred to as the “mark to market” value.

2.

Mis-selling

2.1

Mis-selling is a general term which includes a number of separate causes of action. These include: 1)

A claim for damages for misrepresentation under section 2(1) of the Misrepresentation Act 1967

2.2

2)

A claim for negligence in relation to advice given

3)

A claim for damages for breach of COBS.

The decision as to how to proceed is made complicated by the number of available avenues. These are as follows:

2.3

1)

The internal complaints procedure of the bank

2)

The FCA Review (or the Clydesdale Review)

3)

The Ombudsman

4)

Court action

The obvious claimant is the customer. However, there are other potential claimants including directors or LLP members who have executed personal guarantees. Claims by shareholders or LLP members for losses which have been suffered as a result of the collapse of a company or LLP are problematic are there are reflective loss and/or double recovery issues.

3.

Misrepresentation 3

3.1

A claim under section 2(1) of the Misrepresentation Act 1967 is the obvious remedy if the bank made a misrepresentation as to the terms of a hedging product. This is more common than might be expected as many bank representatives had little real understanding of the products which they were trying to sell and because there was often little discussion between the relationship manager and the treasury salesman.

3.2

There are two distinct types of misrepresentation claim. The first is misrepresentation as to the terms of the hedging product. The second is statements of opinion made as factors which may influence the customer into entering into a hedging product which are not made on reasonable grounds. Misrepresentation as to the terms of the hedging product

3.3

At common law, when selling a hedging product, a bank is under no obligation to explain its terms and a failure to do so does not amount to a misrepresentation. This is particularly so in relation to break costs (see Nextia Properties Ltd v RBS [2013] EWHC 3167 (QB), HHJ Behrens). However, if the bank does attempt to explain the terms of a hedging product, it has to do so fairly and completely.

3.4

Misrepresentation as to the terms of a is easier to establish for structured collars than for other products as the rebound is not something which any customer would expect. This is shown by the decision in Lakeside Inns Ltd v Yorkshire Bank PLC, 26th January 2005. Common examples of misrepresentation as to terms include: 1)

Whether a break cost is payable and how it will be calculated (insofar as there is an actual discussion about the issue)

2)

The application of margin.

3)

Whether an embedded swap is “portable”, that is to say whether the customer can move banks and keep the same.

Misrepresentation of opinion 3.5

A statement of opinion cannot ground a claim in misrepresentation unless the opinion is not held genuinely. Such an allegation was made in Grant Estates Limited v The Royal Bank of Scotland [2012] CSOH 133 and was struck out by Outer House, Court of 4

Session. The claimed misrepresentation related to the belief of the bank that interest rates would rise. 3.6

However, a statement of opinion may carry with it representations of fact. In Brown v Raphael [1958] Ch 636 the Court of Appeal held that where the person making a statement of opinion is in a far stronger position to know the facts which justify the opinion than the recipient of the statement, the statement carries with it a representation that there are reasonable grounds for the opinion. In relation to the period between October 2007 and September 2008 (being the bankruptcy of Lehman Brothers) there are strong arguments for the contention that any statement made by a bank that interest rates were likely to rise in the short to medium term was made without any proper factual basis or analysis. A number of economic indicators showing recession were present and the yield curve was negative. The economic factors included the following events 1)

On 9th August 2007 BNP Paribas Bank told investors that there was “a complete evaporation of liquidity” in the market

2)

Shortly thereafter the European Central Bank pumped Euros 95 billion into the banking market in order to improve liquidity

3)

In August 2007 the US Federal Reserve, Bank of Canada and bank of Japan began to intervene in the markets.

4)

On 17th August 2007 the US Federal Reserve gave a warning that the credit crunch could be a risk to economic growth.

5)

On 4th September 2007 LIBOR rose to its highest level since December 1998 at 6.7975 per cent

6)

On 13th and 14th September 2007 there was a run on Northern Rock during which depositors withdrew £1 billion in 24 hours. This was the largest run on a British Bank in a hundred years

3.7

Once the misrepresentation and reliance have been established, the Court will assess damages in the same way as it does in fraud.

3.8

The view which the Court as to the operation of standard exclusion clauses to defeat misrepresentation claims concerning hedging products is not clear. Standard bank clauses include acknowledgments that no “advice” has been provided by the bank or that there has been no reliance upon the same. Although these may create a contractual estoppel as 5

regards negligence claims (see Crestsign Ltd v National Westminster Bank PLC [2014] EWHC 3043 (Ch)) it is difficult to see how they can apply to misrepresentation claims, which are not based upon advice. 4.

Negligent advice

4.1

There is a fundamental distinction between the giving of advice and the provision of information. Advice is given in response to a request for a recommendation and involves a value judgment as to what would be in the best interests of the customer taking into account his needs and all available products (see Rubenstein v HSBC Bank PLC [2011] EWHC 2304 (QB) HHJ Havelock-Allan, QC). This distinction is reflected in the Perimeter Guidance in the FCA Handbook.

4.2

In Green & Rowley v The Royal Bank of Scotland [2012] EWHC 366, the customers had a formal meeting with bank representatives and discussed all of the products which could be provided by the bank. For procedural reasons, the customers were not able to bring claims in misrepresentation or for breach of COBS. They were limited to a negligent advice claim. HHJ Waksman, QC held that no advice as to the suitability of the product was actually being given. The bank was merely providing information about a range of products. The appeal ([2013] EWCA Civ 1197) was dismissed after a very short hearing and the Court of Appeal judgment is of importance for the accepted principle that if a duty of care arises, the bank has to comply with COBS to comply with such duty.

4.3

Damages are assessed under normal tort principles.

4.4

The major difficulty faced with any negligent advice claim which is now made is that the bank will almost invariably seek to strike out the same based upon Crestsign. In Crestsign, the bank contended that various standard form clauses which acknowledged that no advice had been provided to the customer in relation to the suitability of the hedging product or acknowledged that no reliance had been placed on such advice took effect in contractual estoppel so that the provisions of the Unfair Contract Terms Act 1977 did not apply. The bank’s justification for the effectiveness of such clauses was that the parties were entitled to clarify by agreement the grey area of whether a bank had strayed into providing advice. The Court accepted that these clauses took effect in 6

contractual estoppel and held more generally that contractual estoppel could apply so as to prevent the creation of a relationship of adviser more generally. Contractual estoppel is a difficult area of law as the same was effectively invented by the Court of Appeal in Peekay v Australia and New Zealamd Banking Group Ltd [2006] 2 Lloyds Rep 511 and JP Morgan Chase Bank v Springwell Navigation Corporation [2010] 2 CLC 705 in the context of commercial cases between organisations of equal bargaining power. There are powerful reasons why this principle should not apply to consumer cases and these are set out in Gerard McMeel’s article in the April edition of Counsel. 5.

Breach of COBS

5.1

COBS was amended on 1st November 2007. The new version of COBS places greater obligations on the bank. Such obligations cannot be excluded by agreement. A Court decision that COBS applies to fixed rate loans would enable this type of claim to be made by thousands of customers.

5.2

In general terms, the obligations placed on banks under COBS are as follows: 1)

An obligation to act honestly, fairly and professionally (COBS 2.1). This may be breached if the bank requires hedging unreasonably or unfairly.

2)

An obligation to provide communications which are clear, fair and not misleading (COBS 4.2). This is akin to misrepresentation and misrepresentation claims have to be re-formed under this head.

3)

An obligation to assess suitability where a “personal recommendation” is made. (COBS 9). This is akin to advice as to suitability. The difference between a “personal recommendation” and advice as to suitability is not clear.

4)

An obligation to describe the nature and risks of the product (COBS 14.3). This relates particularly to potential break costs.

These are positive duties and the bank needs to compile and keep records to show compliance. 5.3

In addition to obligations under COBS, banks are required to comply with the principles set out by the FCA in Chapter 2 of his handbook (“the Principles”). The most important of the Principles is the obligation to act honestly, fairly and professionally. The Principles apply to products not covered by COBS but cannot be enforced by Court action. They can 7

only be enforced under the Review or on a referral to the Ombudsman (see R(BBA) v FSA and FOS [2011] EWHC 999 (Admin)) 5.4

The only way to seek damages in Court for breach of COBS is under what is now section 138D of the Financial Services and Markets Act 2000 (“FSMA”). Section 138D of FSMA is available to individuals and is available to companies and LLPs unless the loss is suffered “in the course of carrying on business of any kind”. Grant Estates decided that this expression applies to any kind of business being carried on by a company or LLP and is not limited to financial business. One of the main arguments put to the Court by the claimant was that section 138D ought to be construed in accordance with MiFID.As MiFID recognised no distinction between companies and individuals, section 138D should be construed accordingly. This point was rejected. The position under English law is now clarified by Bailey v Barclays Bank PLC [2014] EWHC 288 (QB). In effect, the decision bars the right of any company or LLP to make use of section 138D of the Act. However, guarantors and other persons affected can bring such claims.

5.5

The inability of companies and LLPs to bring claims for damages for breach of COBS in Court is entirely unfair and irrational as corporate status is not linked directly to financial resources. There is also an argument that section 138D of FSMA does not carry into effect what is now MiFID correctly because it does not provide a remedy to corporate bodies when MiFID does not recognise the distinction. This is similar to the argument taken in Grant Estates. Seymours Solicitors are advertising for a group action against the Government seeking Francovich damages for the failure to implement MiFID correctly.

5.6

In principle, compensation under COBS will be assessed in the same way as damages for negligent advice.

6.

Internal bank complaints procedures

6.1

The obvious first step to be taken by any customer who wishes to make a complaint about the mis-selling of a hedging product is the internal complaints procedure of the bank. Under FCA DISP 1.4 all banks are required to investigate a complaint “competently, diligently and impartially, obtaining additional information as necessary”. This 8

provision applies even if the hedging product is not a designated investment. Only the customer can make a complaint. There is no limitation period. The bank does not merely address its common law liability. It has to address the complaint by reference to general principles of fairness taking into account COBS, the Business Banking Code and any other relevant industry standard. The FCA oversees the process in the sense that it will intervene to require the bank to deal with a complaint properly. There was an FCA review of complaint handling in April 2010 and standards did improve. 6.2

In relation to fixed rate loans, the bank will consider the issue of whether it has acted fairly by reference to COBS even though its position is that COBS does not apply.

6.3

The complaint will be dealt with by a bank employee in the compliance department. Experience shows that in many cases a very satisfactory outcome can be achieved. The case examiner looks at the matter from a compliance perspective and not a litigator’s perspective.

7.

The FCA Review Procedure of the FCA Review

7.1

On 23rd July 2012 the FSA announced that Barclays Bank PLC, HSBC Bank PLC, the Lloyds Bank Group and the Royal Bank of Scotland/National Westminster Bank PLC had agreed to take part in a review of the mis-selling of certain IRSAs to “nonsophisticated customers”. These products do not include fixed rate loans. The FCA Review was then expanded to include the majority of banks selling IRSAs in 2007 and 2008. Each bank publishes a list of products included within the FCA Review and how each product is categorised.

7.2

Only customers with caps are required to complain. Although it has been publicised that the FCA Review closed on 31st March 2015, this date only applies to customers who are required to make a complaint. The bank is required to seek out other customers and so there can be no time limit.

7.3

The Review is not a compensation scheme in the way that this would normally be 9

understood. The terms of the FCA Review have been agreed between the banks and the FCA and this is an ongoing process. The precise terms which have been agreed are not available to the public. However, the FCA issues guidance in this regard. Under the FCA Review, each bank is required to notify customers of the Review and provide “fair and reasonable compensation” for any mis-selling which has taken place. As originally formulated a “sophisticated customer” was defined as being one in respect of which two or more of the following is satisfied in respect of the period when the IRSA was sold 1)

Turnover is greater than £6.5 million

2)

Balance sheet surplus is greater than £3.26 million

3)

More than 50 employees.

The test is now more complicated and reference needs to be made to the flow chart on the FCA website. Even where the customer falls within the size restrictions of the FCA Review, it may be deemed to be a “sophisticated customer” if the bank can prove that it had sufficient knowledge of the product. This point has been taken where the customer had accountants and solicitors as directors. In the absence of agreement, the independent reviewer will determine the issue. 7.4

The FCA Review does not apply where the total nominal value of the hedging products held by the customer at the time of a sale exceeds £10 million.

7.5

The test being applied in all cases is compliance with COBS. As COBS places positive obligations on the bank and the bank is required to show compliance, the test involves elements of box ticking. If there is no evidence to show a discussion about anticipated break costs, then a breach of COBS 14.3 will be found. Misrepresentation is not covered by the FCA Review. Misrepresentation claims need to be re-formulated as breaches of COBS 4.2. Claims for negligent advice need to be formulated as breaches of COBS 9.

7.6

The “sophistication” test is unfair and arbitrary as it is based upon a company law test for the production of a particular type of annual account and not on financial resources. However, attempts to require the FCA to widen the scope of the FCA Review have not met with success. The view of the Administrative Court is that the FCA is the body with the expertise to determine the scope of the FCA Review and there is no need to interfere (see R on the application of Julian Jenkinson and Others v FCA, 13th August 2013).

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7.7.

Holmcroft Properties has recently obtained permission to apply for a judicial review in relation to the decision of the independent reviewer of its case under the FCA Review on the basis that the independent reviewer is a public body. No date has been given for the hearing. It is unclear to what extent a finding that a decision of the independent reviewer is subject to judicial review would assist a customer who is not content with findings made under the FCA Review. The terms of the FCA Review are not being challenged and the independent reviewer is merely ensuring fair play. The actual decision is made by the bank..

7.8

Redress is provided by a two stage process. The first stage determines basic redress. The second stage determines consequential losses if claimed..

7.9

The bank will calculate basic redress on one of two basis. 1)

Under the first basis (“the tear-up basis”), basic redress is the calculated on the assumption that no hedging product should have been sold. Accordingly, the hedging product is not replaced and basic redress equates to the net amount paid under the hedging product.

2)

Under the second basis (“the alternative product basis”), basic redress is the calculated on the assumption that a hedging product was needed (or the bank was reasonable in making it a condition of the loan) so that basic redress equates to the difference (if any) between the net amount paid under the hedging product and the net amount under the alternative product.

In most cases, redress is provided on the basis that the bank did not provide a proper indication of the risks associated with the hedging product in breach of COBS 14.3. Accordingly, the decisions as to which basis should apply (and what the alternative product should be) are the most crucial for the whole FCA Review process. 7.10

There are special rules which apply when a hedging product is novated to another bank. In first bank determines the basis for redress and provides redress to the point of novation. The second bank provides redress thereafter.

7.11

Basic redress carries with it interest on all payments made at 8 per cent per annum. A customer can opt to claim consequential losses instead. By doing so, the customer loses the right to claim interest. The vast majority of customers opt for 8 per cent interest. 11

Consequential losses are only likely to exceed 8 per cent in two cases 1)

Where the customer had a defined business plan and the loss of the chance to benefit from low interest rates has prevented that business plan from being put into effect. Losses are proved by forensic accountancy evidence.

2)

The sale of the hedging product has caused the customer to enter into a default regime of the bank (such as GRG at Nat West).

7.12

At the start of the FCA Review, offers of redress were not marked as being in full and final settlement of any claim. This changed in 2014. All redress offers are now stated to be in full and final settlement.

7.13

The bank will only pay the legal costs of the customer for obtaining advice as to whether an offer of settlement is acceptable. Companies in administration or liquidation are encouraged to assist in the FCA Review. However, there are issues as to the legal cost of the same. All sums paid under the FCA Review are subject to set-off.

7.14

Banks are obliged to enter to retrain from “foreclosing or adversely varying existing lending facilities” for customers in financial difficulty. “Foreclosing” is an odd word to use in this context. However, in practice banks have been careful not to take action against customers within the FCA Review which has led to a reduced level of insolvency appointments. Banks have been asked to consider suspending payments until the FCA Review has been concluded. Such a decision is taken on a case by case basis. Although most banks are prepared to enter into a “standstill agreement” suspending limitation periods until the conclusion of the Review, there is evidence that this is not invariable. Problems with the FCA Review

7.15

As the same is now winding down, it is now possible to consider the major problems with the FCA Review. These would be as follows: 1)

The inability for “sophisticated customers” to make use of the same.

2)

The exclusion of hedging products where total nominal value at the point of sale is over £10 million

3)

The exclusion of fixed rate loans

4)

The lack of consistency in redress 12

5)

Customers are often saddled with alternative products which they would not have taken out if they had been made aware of the risks

6)

The lack of any reasoned analysis of the merits of the complaint in the letter of redress. It is almost impossible to understand why the bank has made a decision that hedging was required or how it has come to its conclusion as to the most appropriate hedging product.

7)

The lack of an independent appeals procedure

8)

As regards Barclays Bank PLC, the decision that no basis redress will be paid until consequential losses have been determined.

8.

The Ombudsman

8.1

The jurisdiction of the Ombudsman is set out in Chapter 2 of the FCA Handbook. Eligible complainants include charities with an annual income of less than £1 million and “micro-enterprises”. A micro-enterprise is defined to be one with a turnover of less than Euros 2 million and less than 10 employees.

8.2

The Ombudsman can award compensation of up to £150,000. This may seem like a significant sum. However, the Ombudsman has no power to award rescission of a hedging product and has no power to allow termination without payment. For many hedging products £150,000 is far less than the breakage charge and the level of compensation available will not provide an adequate remedy.

8.3

The Ombudsman can recommend a much high award. In practice, it is possible to persuade a bank to accept such a recommendation even though it is not legally binding.

8.4

If the customer accepts the decision (and any payment made), he cannot commence a court claim in respect of the same matter to claim the remainder of his loss due to the application of the principle of merger (see Clark v In Focus Asset Management and Tax Solutions Ltd [2014] EWCA Civ 118). There are problems with this decision. It is far from clear that the Ombudsman is determining the cause of action which would be brought in Court and the role of the Ombudsman not the same as a tribunal.

8.5

For a customer which qualifies as a micro-enterprise and is seeking to recover less than 13

£150,000, the Ombudsman provides an inexpensive and speedy route to the resolution of its claim. Although the Ombudsman is required to determine a complaint on the basis of what is “fair and reasonable”, it must do so by reference to the law and appropriate regulations (including COBS). Claims are usually decided on paper and the Ombudsman will determine whether the hedging product was suitable for the customer and whether its disadvantages were properly disclosed by reference to the file maintained by the bank. Whether a particular hedging product is a suitable product for a particular customer is a very difficult issue. It is very fact specific and all of the requirements of the customer at the time need to be considered. 8.6

Limitation is an issue for complaints. Under paragraph 2.8 of DISP 2, the complaint to the bank has to be made within 6 years of the “event complained of” (which is normally the sale of the product) or “three years of the date on which the complainant became aware (or ought reasonably to have become aware) that he had a cause of complaint”. The latter mirrors section 14A of the Limitation Act 1980. The reference to the Ombudsman must be made within 6 months of the final decision of the bank on the complaint. The Ombudsman has no power to extend these periods (see R (an the application of Barkole) v Financial Ombudsman Service [2012] EWHC 3555). As the periods go to jurisdiction, they cannot be waived by the bank.

9.

The Court

9.1

Court proceedings against a bank for misrepresentation, negligent advice and (if available) breach of COBS represent full commercial litigation for which there is no short cut. Each case has to be assessed on its own merits.

9.2

Many cases involve companies in an insolvency procedure. It is for the insolvency practitioner to assess the merits of any claim before commencing one. However, if a director wishes to take an assignment of the company’s cause of action, the insolvency practitioner would have to have very goods grounds to refuse the same (see London & Westcountry Estates Ltd [2014] EWHC 753 (Ch))

9.3

To dated there have been no successful claims against banks for the mis-selling of hedging products in relation to the 2007/2008 recession and Lakeside Inns v Yorkshire 14

Bank remains the only successful case to date. Banks do appear to be picking cases to fight. Green & Rowley was a hood case for the bank to fight as the claim for breach of COBS was understood to be statute barred and it was far from clear on the facts as to whether advice (or even a product recommendation) was provided at all. There are three major issues which will need to be considered by the Court in relation to imminent claims, being limitation, expert evidence as to mis-selling and quantification of loss. Limitation 9.4

In respect of misrepresentation, negligence and breach of COBS the primary limitation period commences when the hedging product is sold. Invariably IRSAs are sold orally with any letter of confirmation being sent later (often much later). The relevant date is the date of the oral purchase (for which there will always be a transcript). There was confusion in Green & Rowley about this because at first instance it was assumed by the claimants that the limitation period commenced at the meeting leading to the sale of the swap.

9.5

The secondary period of limitation provided by section 14A of the Limitation Act 1980 only applies to claims in the tort of negligence and not to claims for breach of statutory duty such as breach of COBS (see Martin v Britannia Life [2000] Lloyds Red 412, Jonathan Parker J). Claims in negligence face the hurdle provided by Crestsign.

9.6

The attitude of the Court to negligence claims which rely upon section 14A of the Limitation Act 1980 is not clear. Most customers assume that the relevant date of knowledge commenced in November 2012 when the issue of mis-selling was first publicised widely. This seems unlikely as the normal starting date is the date when the claimant becomes aware of the problem caused by the negligence (but not necessarily the causal link) . The allegations of negligence may involve: 1)

Advice in relation to future interest rates over a particular period.

2)

The suitability of the transaction.

3)

Advice as to the level of break costs

and the limitation issues may differ. 9.7

In Kays Hotel Ltd v Barclays Bank PLC [2014] EWHC 1927 Hamblem J refused to 15

award summary judgment against a claimant who claimed that a bank had provided advice as to future interest rates over the next ten years and who sought to rely upon section 14A on the basis that the claimant could not have been expected to appreciate that such advice was wrong until well into the ten year term. This is somewhat generous and the better view is that any section 14A commencement period ought to have commenced when interest rates fell in 2009 because the customer should have appreciated at this time that matters had changed. 9.8

For suitability cases, the customer must have become aware of the problem when it appreciated or ought to have appreciated that the hedging product was more onerous than envisaged. This is probably March 2009.

9.9

For break cost cases, it may be that the secondary period of limitation only commences when the customer considered (or ought to have considered) termination of the heading product. Expert evidence as to mis-selling

9.10

Banks usually seek to exclude or limit evidence from banking or derivates experts on the basis that the issue before the Court is one of fact which can be determined from an examination of the terms and legal effect of the hedging product and the needs of the customer. Evidence of a banking or derivates expert as to the suitability of the sold hedging product for the requirements of the customer is relevant and will assist the Court because the issue of suitability requires a knowledge of other available hedging products. The expert will probably not be able to assist in relation to other breaches of COBS such as whether there was an adequate explanation of risk.

9.11

Two cases where HHJ Simon Brown, QC excluded expert banking evidence are awaiting hearing before the Court of Appeal. These are Spring Rental Ltd v Barclays Bank PLC and OM Properties Ltd v Barclays Bank PLC. These are due to be heard in late June 2015. Assessment of loss

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9.12

The FCA Review proceeds on the premise that where the customer objectively needed hedging or where the bank required hedging as a condition of the loan, loss is to be assessed on the basis that an alternative hedging product was sold. There are fundamental objections to this method of assessing loss which the FCA Review has chosen to ignore, being as follows: 1)

If COBS (and particular COBS 14.3) had been complied with, the customer may have chosen to take its business elsewhere and obtained finance without hedging.

2) 9.13

The nature of the alternative hedging product may not have discussed at all.

Applying fundamental common law principles, the starting point must be that if a hedging product was mis-sold, then loss should be calculated on the basis that no alternative hedging product replaced it. It would be for the bank to plead and prove that if it had acted in compliance with COBS a particular product would have been recommended and accepted.

9.14

Under the FCA Review, consequential losses are assessed on the basis that the customer will obtain detailed forensic evidence (which will include a large amount of factual information about the business of the customer and its plans) and the bank will challenge particular assertions. As this is a paper review, documentary evidence is required for all aspects of the claim. In principle, this is the way in which the Court should deal with the issue as well, so there will be a sequential exchange of expert evidence. It is almost impossible to plead all of the factual assumptions upon which the claimant’s expert report will be based.

SEAN KELLY St. Philips Chambers 41 Park Square Leeds LS1 2NP 29th April 2015

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