he High Court of Justice has recently issued its decision in the case of Crestsign Limited v (1) National Westminster Bank plc and (2) the Royal Bank of Scotland Plc. The action was one for damages. It was alleged by Crestsign that they had been mis-sold an interests rate swap by their bankers at NatWest and RBS. This swap had cost the company a lot of money. Furthermore breakage costs had prevented the company from refinancing.
The judgement is a frustrating one for customers who believe they have been mis-sold Interest Rate Hedging Products (IRHPs). It amounts to a pyrrhic victory for the Bank – yes, the IRHP was miss-sold, but the Bank was allowed to rely upon its myriad of disclaimers and risk warnings in order to sidestep liability for its negligent advice.
A Familiar Story
The background to this case is a story which will be familiar to many Bank customers who were sold IRHPs. Crestsign was a family business operated by a Mr and Mrs Parker. It was an investment company for property. It financed its property acquisitions via interest only loans and it banked with Northern Rock. By late 2007 the company was looking to move banks (there had recently been a run on Northern Rock). The Parkers began to speak to other lenders, seeking a £3.3m facility to refinance their facility with Northern Rock, with a term of 10 years.
By February 2008 the Parkers were in discussions with Natwest (by that time a subsidiary of RBS – hence the inclusion of RBS in the case) and their proposals were making their way through the Bank’s various committees. The Bank recommended a five year loan term and suggested that an interest rate management product be taken out. This later became a condition of the loan finance.
The Sales Pitch
What followed was a meeting between Crestsign, the company’s relationship manager Mr Flack and an RBS Treasury Specialist, Mr Gillard. This took place in May 2008. The respective parties recollection of this meeting differ considerably to say the least.
Mr Flack and Mr Gillard contend that at this meeting they simply provided Crestsign with a number options regarding the different types of IRHPs which could be taken out. At the outset they clearly explained that no recommendations were being given and no views were being expressed regarding interest rates by the Bank and that all of this information was clear and understood by the Parkers. Risks were adequately explained.
The judge largely did not believe the Banks account of the meeting, describing the RBS Treasury specialist as a “salesman to the bones”. Whilst four “options” were provided to the Parkers during the course of the meeting, the judge was certain that a recommendation was being made. Furthermore the judge was certain that the Parkers left the meeting failing to understand two key elements of the swap they had selected. Firstly it was a transaction separate to the underlying loan and that the terms of the swap did not match the terms of the loan.
Following this meeting, and on the basis of what the Parkers considered to be a recommendation from their bankers, Crestsign entered in to a 10 year swap for the full amount of the loan at a discounted rate of 0.45% for the first two years, and with a fixed rate of 5.65% thereafter. Crestsign benefitted from the swap for two years. The swap was then “out of the money” i.e. Crestsign was having to make payments to the Bank under the swap and significant losses were incurred. Crestsign was also prevented from refinancing due to the breakage costs which would have been incurred in cancelling the swap.
The Bank's Terms, Conditions and Waivers
As part of the IRHA sales process the Bank provided Crestsign with a various sets of terms and conditions, risk warnings and terms of business. These would play a key role in the case. Theseterms will be familiar to a many RBS and Natwest Customers:
- The RBS Risk Management Paper which set out the four IRHP options
- The RBS Terms of Business for Retail Clients
- The RBS Standalone Derivatives Terms
The various waivers and clauses are too numerous and lengthy to reproduce here. In summary they stated that the no advice was being provided, the customer would satisfy themselves as to the suitability of the product and that furthermore the customer would place no reliance on the Bank for any advice or recommendations of any sort. In regards to information provided by the Bank, the Bank disclaimed all liability for its use.
Crestsign argued that the bank was in breach of two duties of care and that Crestsign was entitled to damages under the Misrepresentation Act 1967 (“the 1967 Act”).
- The first was a common law duty to use reasonable skill and care when giving advice and/or making recommendations to Crestsign to ensure that such advice and/or recommendations were suitable for the company.
- The second was a common law duty to take reasonable care when providing information to Crestsign and to ensure that such information was both accurate and fit for the purpose for which it was provided, namely to enable Crestsign to make a decision on an informed basis.
- The terms of the Bank’s various waivers and terms of business which purported to exclude liability for negligent advice were ineffective. The terms or documents were exclusion clauses, purporting to exclude liability for negligence, and therefore by section 2(2) of the Unfair Contract Terms Act 1977 (“the 1977 Act”) could not protect the Banks unless they satisfied the requirement of reasonableness, which they did not.
The Banks’ Position
The Bank’s position can be summarised as follows:
- The Bank denied in the existence of the first duty.
- In relation to the second duty, the Bank argued that its threshold was higher. For the Bank to breach this duty the information had to be misleading.
- Furthermore the Bank asserted that there was no breach of any common law duty as no “advised sale” had taken place. The proposition that this was an advised sale was precluded by the Bank’s terms of business and other documents, as well as on the facts.
- These terms and documents did not amount exclusion clauses so that the 1977 Act did not apply; or alternatively if it did, that the requirement of reasonableness was satisfied.
- The Result being that Crestsign was prevented from asserting that this was an advised sale; and that there was no entitlement to damages either at common law or under the 1967 Act.
Duty to use reasonable skill and care when providing advice
Before the Court could consider whether a duty to use reasonable skill and care when providing advice and/or existed and had been breached, the Court first had to be satisfied that a recommendation had in fact been made in the first place. The judge agreed with Crestsign that a recommendation had been given. Crestsign had relied on the advice of a purported treasury expert when making their decision to take out the product. The strength of the Banks recommendation was as such that advice had been given and a recommendation made.
The question was therefore whether a duty of Skill and care arose. The Bank sought to rely upon its documentation referred to above which asserted that no advisory relationship existed and that as a result Crestsign could not rely upon it for advice. It was ultimately successful in its argument. It successfully argued that the clauses which it relied upon were “basis clauses” i.e. clauses which set out the basis on which the Bank and Crestsign carried out business, as opposed to exclusions of liability which could be attacked as being unreasonable under the 1977 Act.
This somewhat contradictory position was described by the Court as being as if the Bank had said to Crestsign:
“although I recommend one of these products as suitable, the banks do not take responsibility for my recommendation; you cannot rely on it and you must make up your own mind”
Interestingly the judge stated that if such a duty had existed, the Bank would have breached it, its advice being negligent.
Duty to use reasonable skill and care when providing information
Given the effect of RBS’s contractual waivers of liability there was not really any requirement for this duty to be examined in any real detail. However the judge did go on to express his view on the matter. The judge accepted that the Bank did not have a duty to provide information, but had nevertheless volunteered information on the products it was offering. This changed things. The Bank therefore had a duty in respect to the information it provided insofar as the information should be accurate and proper.
In examining whether the Bank had breached this duty, the Court held that it had not. The information provided had not been misleading. Interestingly the Court held that is was acceptable to describe break costs and being “substantial”. There was no need to elaborate further as to what this meant, unless queried by Crestsign. This would appear to be a position contrary to the FCA’s guidance on this matter inother cases.
The conclusion of the decision can really be best summed up in the judge’s own words:
“In sum, then, the banks did not provide misleading information. They did provide negligent advice but they successfully excluded any duty not to do so. They did not show themselves worthy of the trust Mr Parker placed in them, but unfortunately for Crestsign, the common law provides it with no remedy because the banks successfully disclaimed responsibility for the advice they gave on the suitability of the swap, which was negligent but not actionable.
…While the result may seem harsh to some, it is not the role of the common law and this court to act as a regulator. It follows that although I have considerable sympathy for Mr and Mrs Parker, I must dismiss Crestsign’s claim.”
This is clearly a frustrating decision for customers who believe they have been mis-sold IRSAs. It would suggest that even if negligence advice was given,in situations where the bank was not worthy of the trust of its own customers, banks can effectively escape liability on the basis of theirterms and conditions.
It is worth bearing in mind however that this case, like all others, turned on its own facts. Different banks will have followed different sales process, provided different advice and operated under different terms, conditions and risk warnings. That said it is likely that an appeal will be forthcoming. This will no doubt be something to be explored in future blog posts.
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