10 Oct 2013
Court of Appeal decision on financial mis-selling claims
Green & Rowley v The Royal Bank of Scotland Plc
Finance litigation alert
In the second of our series of four short webcasts looking at key themes in finance litigation (click to view), we considered the Court's approach to financial mis-selling claims during the course of which we reviewed the High Court decision in Green & Rowley v The Royal Bank of Scotland Plc  EWHC 3661 (QB).
The Court of Appeal has now considered Messrs Green & Rowley's appeal in a short judgment released on 9 October 2013.
By way of reminder, Green & Rowley had taken out variable rate loans with The Royal Bank of Scotland Plc ("the bank") to finance various property development projects. In 2005, they also entered into an interest rate swap with the bank. At that time, the conduct of the bank in arranging a swap transaction or advising upon it was governed by the FSA Conduct of Business Rules ("the COB Rules").
The purpose of the swap was to protect Green & Rowley against the risk of the base rate increasing and it did so by effectively converting the variable rate of interest under the loans to a fixed rate for 10 years. The swap achieved its purpose of insulating Green & Rowley from the various changes to the base rate in the period 2005 to 2009.
However, when Green & Rowley sought to terminate the swap mid-way through its term (in 2009) when interest rates were very low (and thus when the bank was "in the money"), they were told that the break costs would exceed £130,000.
In 2011, Green & Rowley brought a mis-selling claim against the bank. They alleged that the bank had breached its common law duties of care not to provide negligent advice and not to make negligent mis-statements. These allegations focussed on a meeting in 2005 when the bank had provided information on the swap to Green & Rowley.
Green & Rowley did not bring a claim against the bank for breach of statutory duty under section 150 (now section 138D) of the Financial Services and Markets Act 2000 ("FSMA") (despite being private persons) as they conceded that such a claim was time barred.
Under section 150 of FSMA, a breach of certain regulatory rules (including a breach of the COB Rules) is actionable at the suit of a private person who has suffered loss as a result of the breach. The key COB Rules in this case were those requiring a bank to take reasonable steps to ensure that it communicates in a way which is clear, fair and not misleading and that the customer understands the nature of the risks involved. Had the claim not been time barred, it would have been open to Green & Rowley to sue the bank for breach of statutory duty without having to show that the bank owed them duties of care at common law or that the bank had acted negligently.
Green & Rowley's common law claims failed in the High Court. The Court held inter alia that, as a matter of fact, the alleged statements had not been made and that as the bank had not, in the court's view, made a recommendation, no advisory duty of care had arisen. Green & Rowley did not appeal these findings.
Green & Rowley sought to persuade the Court of Appeal that the bank owed them duties of care at common law that were co-extensive or concurrent with the duties imposed on the bank by the COB Rules such that Green & Rowley could bring a claim in common law for breach of the COB Rules. Green & Rowley alleged that compliance with the COB Rules required the bank not only to warn that break costs could be substantial but also to explain clearly and fairly the true potential magnitude of those costs so that they as the potential counterparty could understand it.
The Court of Appeal dismissed Green & Rowley's appeal, rejecting the contention that the bank owed common law duties of care mirroring the content of the COB Rules. The Court said that, by section 150 of FSMA, Parliament had provided a specific remedy for contravention of the COB Rules in the shape of an action for breach of statutory duty. It went on to say that there was no feature of the Green & Rowley case which justified the independent imposition by the Court of duties of care at common law. The Court was not willing to "drive a coach and horses through the intention of Parliament to confer a private law cause of action upon a limited class".
The Court pointed out that this does not affect the long established principle that once a bank has undertaken a common law advisory duty, the content of that duty (or the required standard of care) is informed by the rules of the relevant regulator.
This is ground that the High Court and the Scottish Court of Session have been over a number of times previously and in respect of which they have consistently concluded that Parliament has drawn a line where it has, and the Court should not redraw that line in a different place. To this extent, the decision of the Court of Appeal on the narrow issue of whether co-extensive or concurrent duties to the COB Rules exist at common law should come as no surprise.
However, the Court of Appeal did not decide (because it concluded that it did not need to do so) the arguably more controversial question of whether compliance with the COB Rules required the bank not only to explain the nature of the potential break costs but also their potential magnitude.