The High Court has dismissed the latest interest rate hedging product (IRHP) mis-selling claim to reach trial in Fine Care Homes Limited v National Westminster Bank plc & Anor  EWHC 3233 (Ch).
The judgment will be welcomed by financial institutions for its general approach to claims alleging that a bank negligently advised its customer as to the suitability of a particular financial product (whether an IRHP or otherwise). While there are some aspects of the decision which hinge on the unsophisticated nature of this particular claimant, the touchstone of when it can be said that a bank owes a common law duty to advise, the content of that duty and what a claimant must prove to demonstrate that the advisory duty (if owed) has been breached, will be of relevance to similar claims faced by banks in relation to other products or services.
The aspect of the judgment likely to be of greatest and widest importance to the financial services sector, is the court’s analysis of how the doctrine of contractual estoppel should be applied in these types of mis-selling cases.
The question in this case was whether the bank was entitled to rely on its contractual terms as giving rise to a contractual estoppel, so that no duty of care to advise the customer as to the suitability of the IRHP arose. In good news for banks, the court determined that clauses stating that the bank was providing general dealing services on an execution-only basis and was not providing advice on the merits of a particular transaction (precisely the sort of clauses which are typically relied upon to trigger a contractual estoppel), were not subject to the requirement of reasonableness in the Unfair Contract Terms Act 1977 (UCTA) when relied upon in the context of a breach of advisory duty claim.
This may appear an unsurprising outcome, given the Court of Appeal’s decision Springwell Navigation Corpn v JP Morgan Chase Bank  EWCA Civ 1221. However, certain obiter comments by Leggatt LJ in First Tower Trustees v CDS  1 WLR 637 could be read as conflicting with Springwell in relation to the effect of so-called no-advice clauses and the application of UCTA in relation to them.
In the present case, the court emphasised the clear distinction made in First Tower between, on the one hand, a clause that defines the party’s primary rights and obligations (such as a no-advice clause), and on the other, a clause stating that there has been no reliance on a representation (a “non-reliance” clause). It said that the Court of Appeal’s decision in First Tower was limited to the effect of non-reliance clauses given the nature of the clause at issue in that case. First Tower confirmed that where the effect of a non-reliance clause is to exclude liability for misrepresentation which would otherwise exist in the absence of the clause, section 3 of the Misrepresentation Act 1967 will be engaged and the clause will be subject to the UCTA reasonableness test. In contrast, the clauses at issue here were not non-reliance clauses, but rather clauses that set out the nature of the obligations of the bank, and therefore were not subject to section 2 of UCTA.
Contractual estoppel has regularly been relied upon by banks defending mis-selling claims to frame the obligations which they owe to customers, particularly in circumstances where claimants have sought to argue that, notwithstanding the clear terms of the contracts upon which the transactions were entered into, the banks took on advisory duties in the sale of financial products which turned out to perform poorly. The decision in Fine Care Homes will therefore be welcomed by financial institutions, particularly against the backdrop of the First Tower decision. While in many circumstances, no-advice clauses would be likely to meet the requirements of reasonableness under UCTA in any event (as was the outcome in the present case), removing a hurdle that must be cleared in order to rely on such clauses is clearly preferable from the bank’s perspective, adding certainty to the relationship.
In 2006, the claimant (Fine Care Homes Limited) took out a loan with the Royal Bank of Scotland (the Bank) to finance the acquisition of a site in Harlow on which it intended to build a care home (the land loan). The claimant also intended to borrow further funds from the Bank to finance the development of the site (the development loan), although ultimately the parties were unable to reach agreement on the terms of the development loan.
In 2007, the claimant took out an IRHP with the Bank, as a condition of the anticipated development loan. The IRHP was a structured collar with a term of five years, extendable by two years at the option of the Bank (which was duly exercised).
In 2012, the IRHP was assessed by the Bank’s past business review (PBR) compensation scheme (which had been agreed with the then-Financial Services Authority (FSA)) to have been mis-sold. In 2014, the claimant was offered a redress payment by the Bank’s PBR.
The claimant did not to accept the offer under the PBR and pursued the following civil claims against the Bank at trial:
- Negligent advice claim: A claim that the Bank negligently advised the claimant as to the suitability of the IRHP, in particular by failing to tell the claimant that the IRHP would impede its capacity to borrow, or that novation of the IRHP might not be straightforward / might require security.
- Negligent mis-statement / misrepresentation claim: A claim that the information provided by the Bank regarding the IRHP contained negligent mis-statements or misrepresentations in the same two respects as the negligent advice claim.
- Contractual duty claim: A claim that the Bank was subject to an implied contractual duty under section 13 of the Supply of Goods and Services Act 1982 to exercise reasonable skill and care when giving advice and making recommendations, which was breached in the same two respects as the negligent advice claim.
The court held that all of the claims against the Bank failed, each of which is considered further below.
1. Negligent advice claim
The court’s analysis of the negligent advice claim was divided into three broad questions: (i) did the Bank owe a duty of care to advise the claimant as to the suitability of the IRHP; (ii) could the Bank rely upon a contractual estoppel to the effect that the relationship did not give rise to an advisory duty; (iii) if there was an advisory duty in this case, was it breached by the Bank in the two specific respects alleged by the claimant?
(i) Did the Bank owe a duty of care?
It was common ground that the sale of the IRHP was ostensibly made on a non-advisory rather than advisory basis, but the claimant alleged that the facts nevertheless gave rise to an advisory relationship in which a personal recommendation was expressly or implicitly made. In this regard, the claimant relied on the salesperson at the Bank being held out as being an “expert” (as an approved person under FSMA); that he advised the claimant to buy the particular IRHP and that the Bank therefore assumed a duty of care which required it to ensure that the IRHP was indeed suitable.
As to whether the Bank owed an advisory duty on the facts of this particular case, the court referred in particular to two substantive trial decisions considering a claim for breach of an advisory duty in the context of selling an IRHP: Property Alliance Group v RBS  1 WLR 3529 and LEA v RBS  EWHC 1387 (Ch). The court highlighted the following key points from these cases:
- A bank negotiating and contracting with another party owes in the first instance no duty to explain the nature or effect of the proposed arrangement to the other party.
- As a point of general principle, an assumption of responsibility by a defendant may give rise to duty of care, although this will depend on the particular facts (applying Hedley Byrne v Heller  AC 465).
- In the context of a bank selling financial products, in “some exceptional cases” the circumstances of the case might mean that the bank owed a duty to provide its customer with an explanation of the nature and effect of a particular transaction.
- There are a number of principles emerging from the cases as to the way in which the court should approach this fact-sensitive question. In particular, the court must analyse the dealings between the bank and the customer in a “pragmatic and commercially sensible way” to determine whether the bank has crossed the line which separates the activity of giving information about and selling a product, and the activity of giving advice.
- However, there is no “continuous spectrum of duty, stretching from not misleading, at one end, to full advice, at the other end”. Rather, the question should be the responsibility assumed in the particular factual context, as regards the particular transaction in dispute.
- Assessing whether the facts give rise to a duty of care is an objective test.
On the facts, the court did not consider that this was to the sort of “exceptional case” where the bank assumed an advisory duty towards its customer. The court highlighted the following factual points in particular, which are likely to be of broader relevance to mis-selling disputes of this nature:
- The court noted that it is quite obviously not the case that in every case in which an IRHP is sold by an approved person (as it will inevitably be) a duty of care arises to ensure the suitability of the product.
- The claimant was unable to point to anything at all in the exchanges between the Bank and the claimant which contained advice to buy the IRHP. The court rejected the claimant’s argument that the Bank’s presentation of the benefits of IRHP products in general could amount to advice to buy any specific product. Referring to the decision in Parmar v Barclays Bank  EWHC 1027 (Ch), the court confirmed that if a recommendation is to give rise to an advised sale, it must be made in respect of a particular product and not IRHPs in general. Although Parmar was decided in the context of a statutory claim under s.138D FSMA, the court found that the principle applied equally to a mis-selling claim of this type (see our blog post on the Parmar decision).
Accordingly, the court found that the Bank did not owe an advisory duty in relation to the sale of the IRHP.
In reaching this conclusion, the court rejected any suggestion that the rules and guidance set out in the FSA/FCA Handbook could create a tortious duty of care where one did not exist on the basis of the common law principles (applying Green & Rowley v RBS  EWCA Civ 1197). The relevant context in Green & Rowley was whether the (then-applicable) Conduct of Business rules and guidance (COB) could create a concurrent tortious duty of care, but the court in this case extended the same reasoning to the Statements of Principle and Code of Practice for Approved Persons (APER). The court stated that APER code could not carry any greater weight in relation to the content of the common law duties of care than the COB rules.
(ii) Could the Bank rely upon a contractual estoppel?
The court found that the Bank was entitled to rely on its contractual terms as confirming that the relationship between the Bank and the claimant did not give rise to a duty of care to advise the claimant as to the suitability of the IRHP, and that the claimant was estopped from arguing to the contrary by those contractual terms.
The terms of business included the following material clauses:
“3.2 We will provide you with general dealing services on an execution-only basis in relation to…contracts for differences…
3.3 We will not provide you with advice on the merits of a particular transaction or the composition of any account…You should obtain your own independent financial, legal and tax advice. Opinions, research or analysis expressed or published by us or our affiliates are for your information only and do not amount to advice, an assurance or a guarantee. The content is based on information that we believe to be reliable but we do not represent that it is accurate or complete…”
The court rejected the claimant’s argument that these clauses were subject to the requirement of reasonableness under UCTA.
In reaching this conclusion, the court referred to the decision in First Tower Trustees v CDS  1 WLR 637, which considered the effect of a “non-reliance” clause (a clause providing that the parties did not enter into the agreement in reliance on a statement or representation made by the other contracting party). First Tower confirmed that, where the effect of a non-reliance clause is to exclude liability for misrepresentation which would otherwise exist in the absence of the clause, section 3 of the Misrepresentation Act will be engaged and the clause will be subject to the UCTA reasonableness test.
However, the court in Fine Care Homes found that clauses 3.2 and 3.3 in the present case were different from non-reliance clauses, being clauses that set out the nature of the obligations of the Bank. The court highlighted that the judgments of both Lewison LJ and Leggatt LJ in First Tower, clearly distinguished between a clause that defines the party’s primary rights and obligations, and a clause stating that there has been no reliance on a representation. In respect of the former, First Tower provided the following articulation of the position:
“Thus terms which simply define the basis upon which services will be rendered and confirm the basis upon which parties are transacting business are not subject to section 2 of [the 1977 Act]. Otherwise, every contract which contains contractual terms defining the extent of each party’s obligations would have to satisfy the requirement of reasonableness.”
In First Tower, Lewison LJ had gone on to refer to Thornbridge v Barclays Bank  EWHC 3430 (a swaps case) which considered a clause stating that the buyer was not relying on any communication “as investment advice or as a recommendation to enter into” the transaction. In First Tower, Lewison LJ explained that this clause defined the party’s primary rights and obligations, and was not a clause stating that there had been no reliance on a representation.
Applying this reasoning to the present case, the court found that clauses 3.2 and 3.3 (stating that the Bank was providing general dealing services on an execution-only basis and was not providing advice on the merits of a particular transaction), were primary obligation clauses that were not subject to the requirement of reasonableness in UCTA (or, by parity of reasoning, COB 5.2.3 and 5.2.4).
Had UCTA applied, the court said that it would in any event have found the clauses reasonable, noting that some of the claimant’s objections effectively asserted that it could never be reasonable for a bank selling an IRHP to a private customer to specify that it was doing so on a non-advisory basis – which the court did not accept.
(iii) If an advisory duty was owed, was it breached by the Bank?
Although it was not necessary for the court to consider the specific breaches of duty alleged by the claimant (given its findings above), the court proceeded to do so for the sake of completeness.
The court applied Green & Rowley, confirming that the content of the advisory duty (if owed) “might” be informed by the COB that applied at the time of the sale (here COB 2.1.3R and COB 5.4.3R) and the APER code. However, the claimant did not in fact identify any specific respect in which the FCA framework had a material impact on the claimant’s case.
By the time of the trial, the claimant’s case was narrowed to two quite specific allegations concerning what it should have been told by the Bank in relation to two key issues: (1) that the Bank negligently failed to explain to the claimant that the Bank’s internal credit limit utilisation (CLU) figure for the IRHP, would affect the claimant’s ability to refinance existing borrowings / borrow further sums (from the Bank or another lender); and (2) that the Bank should have warned the claimant that novation of the IRHP might require external security to be provided.
The arguments on these allegations were fact-specific, and ultimately the court found that there was no evidence to support them.
2. Negligent mis-statement / misrepresentation claim and contractual claim
The claims on these alternative grounds also failed, given the court’s finding that what the Bank told the claimants was correct, in respect of the two complaints identified.
Consistent with the position found in Green & Rowley, the court noted that the content of the Bank’s common law duty in relation to the accuracy of its statements was not informed by the content of the COB rules or APER code (in contrast with the advisory duty, where the content of the duty might be informed by the FCA framework).
Accordingly, the claim was dismissed.