Date:

John Green and Paul Rowley v Royal Bank of Scotland plc [2012] EWHC 3661 (QB)

Summary

The Bank had not breached its duties of care owed to two lenders by either making negligent misstatements or giving them negligent advice about taking on an interest rate swap against their existing loan liabilities.

Facts

John Green and Paul Rowley (the “Claimants”) claimed that Royal Bank of Scotland plc (the “Bank”) had mis-sold to them an interest rate swap against their existing loan liabilities.

The Claimants had an existing loan liability to the Bank of £1.5 million, repayable over 15 years, on an interest-only basis at 1.5 per cent above base rate.  The Claimants met with two of the Bank’s employees and were provided with information about an interest rate swap.  The Claimants subsequently agreed to a swap: a fixed base rate of 4.83 per cent was applied to the notional amount of £1.5 million.  The way the swap operated meant that if interest rates fell below 4.83 per cent, then the Claimants’ loan repayments would decrease but they would have to pay a corresponding sum to the Bank under the swap.

The Claimants’ Claim was that the Bank was liable for negligent misstatement in relation to various details of the swap and its functionality, namely:

  • the break costs of the swap – either that the Claimants were told that these were "modest" or the Bank should have told them that they were not;
  • the swap being separate from the loans – when in fact it was linked by an 'all monies' clause and a 'cross-default' clause;
  • that the swap would fix the rate of the margin on the loans, as well as the base rate, when it did not; and
  • that the swap was portable and could be moved to a different lender along with the loans, when in reality this was unlikely.

The Claimants also brought a further Claim alleging that the Bank's staff, rather than merely providing information, had advised the Claimants to enter into the swap arrangement.  Furthermore, this advice carried with it a duty of care which was purportedly breached on the basis that the swap was not suitable for the Claimants.

Judgment

Judgment was given in favour of the Bank.  It was found that the Claimants had wrongly persuaded themselves that the Bank had misled them at the meeting because they were shocked by the level of the costs when they discovered them years after.  The duty on the Bank under the Financial Services Authority's Conduct Of Business Rules and Guidance (the “COB Rules”) is to take reasonable steps to ensure that the Claimants understood the risks and the Court found that this was outside of the duty not to misstate as established by Hedley Byrne & Co Ltd v Heller & Partners Ltd [1964].

The fact that the Bank’s staff had described the swap as separate to the loan at the meeting also did not constitute a negligent misstatement: it had been described simply to explain to the Claimants that there were two separate contracts and therefore that the swap did not end automatically if the loans ended.

Further, the Bank did not state that the swap fixed the margin as well as the base rate.  Any claim for negligent misstatement could only be by reference to what the Bank staff had said in that regard, in particular that it was said the margin could not be imagined to rise over the course of the loans.  That statement was not one based on fact existing at the time, nor was it possible to say that it was false on the grounds that the Bank had an intention in the foreseeable future of elevating its margin.  In addition, the Claimants adduced no evidence that the statement by the Bank staff was more than just opinion based on reasonable facts.

It followed that there was no negligence or no actionable misstatement.  Further, there was no misstatement as to the portability of the swap.  The Claimants had accepted that they understood that any transfer to another bank would require that bank's consent and that, subject to that consent, the swap was in principle portable.  It was not negligent of the Bank to say that the swap was portable without adverting to the need for the other bank to agree.  Accordingly, the Bank had not breached itsHedley Byrne duty of care.

Furthermore, the Bank’s staff had not recommended or advised the Claimants to take the swap at the meeting.  The fact that the relative advantages and disadvantages were discussed did not mean that the swap was recommended.  The fact that the Bank’s note of the meeting referred to the swap being "suitable" meant that the transaction met the Claimant’s requirements and not that advice had been given to take it.  Therefore, since no advice was given, an actionable, advisory duty had not arisen as a result of anything said at that meeting by the Bank’s staff.  Even if the Bank had owed the Claimants such a duty, there was clearly no breach by the Bank of Rule 5.2.5 (COB Rules) in failing to take reasonable steps to ensure that it was in possession of sufficient personal and financial information about the Claimants, nor of Rule 5.4.3 (COB Rules).

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