SMEs that are not satisfied with the outcome of the FCA Review or do not qualify for the Review may be tempted to raise a court action in order to recover the losses caused by their Bank. In order to avoid throwing good money after bad, the following issues should be considered before raising a court action:
1. Funding the Litigation
Taking on the banks is very much a David v Goliath battle. The litigation process is expensive and the banks with their deeper pockets can drag it out so that more often than not little David has to throw in the towel. In addition the banks will not hesitate to appeal any lower court decision that might threaten to open the floodgates for other customers to pursue claims.
Before embarking on court action, customers should acknowledge that even if they are initially successful, they may need to fund their way through several appeals and the case could ultimately reach the UK Supreme Court. Unfortunately by the time the final decision is reached, many years may have passed and the legal fees incurred may be eye-watering unless the customers’ solicitors and advocates/barristers are carrying out the work on a contingent basis. It should also be borne in mind that in Scotland the successful party will generally speaking recover approximately 60% of their legal expenses. The remaining 40% of their legal expenses is irrecoverable.
However it should be remembered that customers who have a strong claim (compelling documentary evidence or oral witness evidence that is likely to be reliable, credible and persuasive) will be more likely to be made a settlement offer by the banks. It cannot be forgotten that if a case runs to an evidential hearing then the bank is faced with some irrecoverable legal expenses (even if it is successful), potential adverse publicity, inconvenience to bank personnel called as witnesses, and the uncertainty of litigation with the risk that a legal precedent is set in favour of borrowers.
2. Entitlement to Claim
A customer’s ability to raise proceedings will depend on their legal nature. Under the FCA Review Scheme everyone that is eligible for review can rely on the COBS Rules but unfortunately the litigation route is quite different. Currently only individuals (and possibly partnerships) can rely on the Financial Services and Markets Act 2000 (“FSMA”) and the COBS Rules.
Limited companies are unable to pursue a statutory claim under FSMA and will need to make do with a claim under the common law for breaches such as negligent misrepresentation, promise and negligent advice. As a result, limited companies are unable to rely on the same arguments in Court as they would if they fell within the FCA Review Scheme.
3. Duty of Care
A further obstacle for bringing a claim is establishing that the bank owed a duty of care to give advice to the SME with reasonable care and skill. The customer will have the evidential burden of proving that the bank assumed responsibility for giving advice and was not simply passing on information to the customer. Even if it can be proved that advice was given to the customer then an additional hurdle is proving that the customer relied upon that advice.
In the majority of cases, the banks’ contracts specifically state that no advice is being given and that the customer has independently made up their mind out the product in question. Most customers feel that the bank provided them with advice but unfortunately the banks’ hidden in the small print there are clauses stating the relationship is ‘non-advisory’. These disclaimers present a formidable hurdle that customers will need to overcome in order to succeed in their claim against the banks.
4. Breach of Duty of Care
If a customer establishes a duty of care then in most cases it will not be too hard to show that the Bank breached its duty by making reference to the duties set out in the FCA Handbook which arguably set out the standards a banker should meet in the sale of an interest rate swap agreement.
However the decision made by the banker must be a decision which no reasonable and competent adviser could have made so expert evidence will invariably be required from reputable bankers as to the standard of care required and whether the bank failed to meet that standard.
If the customer has established a breach of the bank’s duty of care then there is still a further challenging hurdle to be overcome; causation. The customer has to show that the loss it suffered was caused by the lender’s negligence and for no other reason.
In recent times the causation test applied by the courts has been to decide whether the bank’s failure was the main dominant factor which caused the loss. If the SME would still have proceeded with the swap even if the bank had complied with all the FCA duties then the causal link is broken as the bank’s breaches of duty did not cause the loss so no compensation is recoverable.
It may prove difficult for a customer (particularly a sophisticated customer with financial experience or expertise) to show that the bank’s failures were the main cause of the loss as the documentary evidence may suggest the customer was able to evaluate the swap risks for themselves.
If you are contemplating court proceedings against your bank then we hope this blog post has been helpful and informative. If you require assistance with the FCA Review Scheme, a Financial Ombudsman Complaint or litigation then please do not hesitate to contact a solicitor in our Financial Disputes Team on 0131 226 8200.