By Liana Park, Solicitor, Dispute Resolution
Many businesses interested in the area of mis-sold interest rate hedging products (“IRHP”) will be well aware of this case and the recent appeal. In July the English High Court of Appeal dismissed the borrowers' case, ruling that a six-year limit on claims for mis-selling under breaches of regulatory guidelines for selling financial products had elapsed.
This outcome was disappointing for many who were hoping for a legal breakthrough in interest rate swap cases due to the intervention by the Financial Conduct Authority (FCA) into the appeal. That said, commentators have acknowledged the case turned on its specific facts and is of limited wider application. Moreover, the FCA’s submissions drafted by Nicholas Peacock QC explaining the regulatory framework of rules and their interpretation are particularly useful for anyone considering pursuing a claim under s150 of the Financial Services and Markets Act (“FSMA”).
The FCA submissions consider what was required from the bank in relation to the disclosure of break costs for the purposes of complying with the regulatory Conduct of Business Rules (“COB Rules”). In setting out their submissions the FCA made the following notable observations:
The FCA was concerned by the Judge’s analysis when he found that RBS was not in breach of the COB Rules. In particular the rules relating to explanations of risk and providing information in a fair, clear and not misleading way.
Under the COB Rules banks must ensure that “reasonable steps” are taken so that private customers understand the risks of IRHPs.
What constitutes “reasonable steps” will be relative to an individual customer’s information needs.
Break costs are not an ancillary issue, but are an inherent risk of IRHPs. The break costs could be very substantial and should be disclosed in a clear/fair/not misleading way.
Banks knew or should have known about the risk of break costs being substantial.
In some cases only illustrative examples would suffice, depending on the customers information needs.
Further, these illustrative calculations could have been prepared and provided by the banks.
The FCA submissions also provides a good explanation of how banks calculate the value of an IRHP on their books, and consequently how they would calculate the cost to them of losing that IRHP if it was terminated (i.e. the break cost).
It is clear from the FCA's submissions that the regulatory requirements go far beyond the common law duty when it comes to making negligent misrepresentations. The submissions emphasised the need for banks to determine the information needs of individual customers. In numerous cases we are dealing with, it is clear that the banks have made no attempt to assess the information needs of individual customers. As noted above, these submissions will be helpful for claimants looking to make a claim under s150 FSMA and also those taking part in the FCA Review of IRHPs.
The full FCA submissions can be found on Vedanta Hedging’s website here.
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 Services and Banking Disputes Team on 0131 226 8200.