In March 2017 the High Court considered the extent of the duty of care which a bank owes to a retail customer to whom commercial borrowing facilities had been extended. The transaction in this case involved switching borrowing from a variable rate to a fixed rate for a term of 10 years. The claim against the bank was upheld by HHJ Havelock.
In order to examine the significance of the decision it is first necessary to look at what duties a bank owes to a customer.
Recent case law on the sale of financial products has drawn a clear distinction between (1) the duty a bank owes when advice is given to purchase a product and (2) the duty a bank owes when information only is provided about a product. This distinction is often misunderstood by customers.
What is the difference?
In Rubenstein v HSBC Bank plc, it was held: “The key to the giving of advice is that the information is either accompanied by a comment or value judgment on the relevance of that information to the client’s investment decision or is itself the product of a process of selection involving a value judgment so that the information will tend to influence the decision of the recipient”.
Where a bank gives advice in circumstances where it may be concluded that it assumed responsibility for that advice then there is a duty to ensure that the advice is full and accurate. Full advice is advice that covers the available options and the pros and cons of any product being recommended and enables the customer to make an informed decision.
Where a bank is subject to a regulatory regime (for example under the Financial Services and Markets Act 2000 (FSMA) and the Conduct of Business Rules (COBS rules)) then the advisory duty may go further and require compliance with that regime.
Where a bank provides information to a customer on a product then the duty of care is of a lower standard. The duty is not to mislead or misstate information (see Hedley Byrne v Heller & Partners Ltd).
Background
The claimants, Mr and Mrs Thomas, were partners in an organic farming business. In 2006, the Thomases transferred their borrowing to the defendant bank and they entered into two loan agreements: one for £300,000 and another for £1.15m for fixed terms at variable interest rates of 1.25% and 1.75% respectively. In 2008, the claimants borrowed on a further two occasions.
The Thomases became concerned about the cost of servicing their debt if the interest rates rose. They asked the bank about fixing the rate on some or all of their borrowing.
The Thomases claimed in a telephone conversation the bank had been told that they were thinking about fixing the rate on all their borrowing for ten years. The bank provided some information in writing and some information over the telephone to the claimants.
The Thomases also questioned whether the maximum likely charge for redeeming borrowing would be £10,000 to £20,000 and this was not corrected by the bank. The claimants subsequently fixed two of their loans to fixed rate loans.
The bank referred to the Business Banking Code (BBC) in its literature and in the letters to the Thomases confirming the fixes.
In 2008 the Thomases had second thoughts about their decision to fix the interest rates and started to enquire about what the cost would be if they were to re-fix. The bank told the Thomases that the penalty would be £96,205.47, which was subsequently amended by the bank to £54,691.59. The Thomases could not afford this cost.
The Thomases went on to issue proceedings against the bank. They maintained that they were not blaming the bank for the interest rates falling but they did blame the bank for not explaining the financial consequences which would flow if they tried to get out of the fixed rate before the 10 year fixed rate had expired. They said that the bank had misrepresented what the financial consequences would be.
Decision
- The Thomases’ claim succeeded.
- The relationship was not an advisory one and no advice was given.
- Fixed rate lending, which is the subject matter of this case, is not a regulated activity under the Financial Services and Markets Act 2000. Even if it was, the Thomases were in business as a farming partnership and therefore it is doubtful whether they would qualify as private persons under the COBS Rules so they would not have the benefit of the protection afforded by the Rules.
- There was no dispute that the bank owed the Thomases a duty not to mislead of misstate when providing information.
- The crucial point in this case is that HHJ Havelock went on to consider whether there was any and, if so, what scope for imposing a more extensive, intermediate, duty than the duty not to mislead or misstate when a bank provides information to a customer. In doing so he considered a number of conflicting first instance court decisions which tackle the issue.
- HHJ Havelock agreed with Judge Moulder inThornbridge Ltd v Barclays Bank that an intermediate duty could exist outside of an advisory relationship and this was not precluded by the decision in Green & Rowley v Royal Bank of Scotland. The existence of a duty of care, and the level of the duty, would depend on the particular facts of the case and whether, as a matter of policy, it is thought appropriate to impose such a duty in the circumstances.
- The significant feature of this case is that the bank had advertised to the claimants that it subscribed to the Business Banking Code. The BBC does not have contractual force between a bank and a customer, but it provides a benchmark as to how banks should behave. The fairness commitment in the BBC included a promise, directed to the customer, that if the bank was asked about a product, it would give the customer a balanced view of the product in plain English, with an explanation of its financial implications. There were no disclaimers, basis clauses or exclusions in the terms and conditions which applied between the Thomases and the bank which would lead to the conclusion that the bank was not willing to assume responsibility for honouring that promise.
- When the Thomases inquired about fixing the rate, the bank owed them a duty not to misstate. However, the duty of care which the bank owed went further – to explain the financial implications of fixing the rate. It was a duty owed only in response to the Thomases inquiries because that is what the bank had signed up to in the BBC. It was not a duty to volunteer information if not asked.
- The Thomases were entitled to an explanation in plain English as what fixing the rate entailed and the consequences. The essential components were: (1) that the rate could be fixed for a period (whether in months or years, and whether any minimum or maximum length of time); (2) where the available fixed rates could be found (e.g. on the internet); (3) what those rates represented (the forward cost of money); (4) the effective rate that would be payable (i.e. the current swap ask rate for the period of the fix plus the banks margin, if any); and (5) the financial consequences of terminating the fixed rate before the end of the period.
Conclusion
This is a brave decision by HHJ Havelock. Traditionally there has been a clear distinction between the duty a bank owes when (1) advice is given to purchase a product and (2) when information only is provided about a product. This decision has blurred that distinction and introduced a new “intermediate duty” to explain a product to a customer, which is higher than the duty imposed not to mislead or misstate when providing information to a customer. This decision will almost certainly be subject to further judicial scrutiny even if the decision is not subject to an appeal itself.
April 2017
Gibson & Co.