Commercial Court rejects EURIBOR implied representations

The Commercial Court has dismissed claims that a bank made implied representations as to EURIBOR rate-setting in the context of selling an interest rate swap: Marme Inversiones 2007 SL v NatWest Markets plc & Ors [2019] EWHC 366 (Comm).

This is the second civil court trial judgment considering IBOR manipulation, the first being Property Alliance Group Ltd v Royal Bank of Scotland [2018] 1 WLR 3529 in which the claim relating to LIBOR manipulation was also dismissed (see our banking litigation e-bulletin). Together, these decisions are a reminder of the difficulties of proving allegations that IBOR-setting banks made implied representations when selling IBOR-linked products. The combined effect of these judgments suggests:

  • The requirement to identify specific conduct which led to the implied representation being made is important (and should not be underestimated). In the context of these transactions, a bank simply entering into an IBOR-linked swap is unlikely to justify the implication of any representation wider than the limited representation formulated by the Court of Appeal in PAG (see below).
  • Implied representations must be certain and obvious: if there is “elasticity of possible meaning“, this will indicate the absence of an implication.
  • The broader and more complex the alleged representations, the more active and specific the conduct must be to give rise to the implication.
  • Proving reliance on any representations which are implied will be fact-specific and onerous.
  • Falsity must be specifically proven: it is not sufficient to draw inferences on the basis of conduct relating to other benchmarks (such as an IBOR in a different currency) or indeed findings of the regulator.

In PAG, the Court of Appeal held that the bank made the narrow implied representation (at the time of entering into the swaps) that it was not itself seeking to manipulate GBP LIBOR and did not intend to do so in the future (however the claimants could not prove that the representation was false). In this case, the court’s view was that a similar narrow representation in relation to EURIBOR could theoretically have been implied, but this implied representation was not alleged, and was not shown to be false in any event.


The proceedings arose out of interest rate swaps set by reference to EURIBOR, entered into between Marme Inversiones 2007 SL (“Marme“) and the defendant banks (the “Banks“). The Banks sought various declarations that they had lawfully terminated the swaps and that Marme owed them €710 million plus interest.

Marme sought rescission of the swaps ab initio and/or damages of up to €996 million on the basis that one of the Banks (RBS plc, “RBS“) negligently/fraudulently made representations regarding the integrity of the process of setting EURIBOR (on its own account and as agent for the other Banks) and that Marme relied upon those representations when entering into the swaps. Marme did not contend that the representations were made expressly, but that they should be implied from the circumstances and RBS’s conduct.


The court found in favour of the Banks. It granted the declarations sought and held that the alleged representations did not fall to be implied.

The court distilled the following principles from existing authorities considering implied representations:

  1. It is possible for a representation to be made expressly or impliedly through words or conduct. For a representation to be implied, silence or mere assumption is not usually enough as there is no general duty of disclosure. It is necessary to view the words or conduct objectively to determine whether an implied representation has been made. The natural assumptions of the reasonable representee will be helpful in assessing whether an implied representation has been made through the conduct of the representor.
  2. Whether or not a representation is implied is ultimately a question of fact to be determined in the circumstances of the particular case: see also Deutsche Bank AG v Unitech Global Ltd [2013] EWCA Civ 1372.
  3. More may be required, in terms of words or conduct, to prove an implied representation which is wide in meaning or complex.
  4. It is less likely that a representation that is vague, uncertain or ambiguous would be objectively understood to have been made from words or conduct.

With these principles in mind, the court considered the representations alleged in the instant proceedings, identifying a number of (legal and factual) difficulties with the case alleged by Marme. The key points which are likely to be of broader interest are summarised below.

  • Marme alleged that in the light of PAG, at least some of the alleged representations in this case should be treated as having been “plainly” made by RBS. The court found that in truth PAG provided no support at all for Marme’s case. In PAG, the claimants similarly sought rescission of swap agreements and/or damages on the basis of (among other things) alleged implied fraudulent representations. The Court of Appeal in PAG found that the representations as pleaded could not be implied, but decided that a different implied representation would be justified:

In the present case there were lengthy discussions between PAG and RBS before the swaps were concluded as set out by the judge in the earlier part of her judgment. … RBS was undoubtedly proposing the swap transactions with their reference to LIBOR as transactions which PAG could and should consider as fulfilment of the obligations contained in the loan contracts. In these circumstances we are satisfied that RBS did make some representations to the effect that RBS itself was not manipulating and did not intend to manipulate LIBOR. Such a comparatively elementary representation would probably be inferred from a mere proposal of the swap transaction but we need not go as far as that on the facts of this case in the light of the lengthy previous discussions.

  • Marme submitted that, in the same way as PAG, the representations in this case should be inferred from a mere proposal of the swaps. However, the court observed that the representations in this case were not the same as the (narrow) implied representations reformulated by the Court of Appeal in PAG.
  • The court held that the implied representations were not supported by any other authority, in particular Deutsche Bank v Unitech offered no support. The court emphasised that although the Court of Appeal in Deutsche Bank v Unitech granted permission to amend to include pleas of implied representations about LIBOR, it would be wrong to regard what was decided as having too great a significance (given the appeal related to an interlocutory application to amend statements of claim and merely found that the points advanced were arguable).
  • Importantly, the court was concerned that if Marme’s case on implication was to succeed, it would inevitably involve a ‘watering down’ of the requirement that specific conduct be identified from which any alleged representation is said to arise. It said Marme could identify no conduct other than RBS entering into (and allegedly proposing) the swaps to justify the implication of any representation wider than the limited representation formulated by the Court of Appeal PAG. In the court’s view, this was an “intractable difficulty” for Marme.
  • The court also considered the decision in Geest v Fyffes [1991] 1 All ER (Comm) 672. The court in that case had set out a “helpful test” for evaluating the representor’s conduct in cases of implied representations, which is: to consider whether a reasonable representee would naturally assume that the true state of facts did not exist and that, if it did, he would necessarily have been informed of it. The Court of Appeal in PAG agreed this test was helpful, but it warned that this should not water down the requirement that there must be clear words or clear conduct of the representor from which the relevant representation can be implied. Here, the court said that invocation of the “helpful test” in Geest was not enough by itself – Marme could not merely rely on an internal assumption on its part that RBS failed to correct.
  • The court was concerned about the distinct lack of certainty (and associated lack of obviousness) as to what was entailed in the alleged representations. It said there was the same “elasticity of possible meaning” which had operated against the implication in Raiffeisen Zentralbank Osterreich AG v RBS [2010] EWHC 1392 (Comm).
  • The court accepted that passive conduct may sometimes be sufficient for the implication of a representation. However, it said the broader and more complex the alleged representations, the more active and specific the conduct must be to give rise to the implication.
  • In the court’s view, RBS’s conduct in going along with the swaps was sufficient for the implication of a much narrower representation: namely that RBS was not itself manipulating, and did not intend to manipulate or attempt to manipulate, EURIBOR. However, that implied representation was not put forward by Marme in the action. The court said that this was probably because Marme recognised that it would be “in no position to establish falsity“.

The court therefore rejected the implication of the representations alleged by Marme, the action failed and the court held that the banks were entitled to the declaratory relief sought. In case it was wrong in these conclusions, the court went on to consider questions of falsity and reliance, but this was on an obiter basis given its primary conclusions.

Donny Surtani
Donny Surtani
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John Corrie
John Corrie
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Ceri Morgan
Ceri Morgan
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WW Property Investments Limited v National Westminster Bank Plc: Court of Appeal refuses permission for addition of claims regarding LIBOR manipulation

The case concerned an application by the claimant for permission to appeal a decision of the High Court to strike out the entirety of the claim concerning the claimant’s interest rate hedging products (IRHPs”) and its refusal to grant permission to add a new claim. Although not a substantive appeal as such, the case nevertheless illustrates some useful headline points in mis-selling claims.

The Court of Appeal held that the claimant had no real prospect of success in its claims: (1) based on alleged implied contractual terms and misrepresentations regarding the manipulation of LIBOR benchmarks (due to deficiencies in how those claims had been pleaded in this particular case); and (2) that the relevant IRHPs constituted wagering contracts and were invalid at common law. It did, however, grant leave to appeal a third limb of the claim (concerning conduct of the FCA Review).

Importantly, the Court of Appeal found that the claimant had through its conduct affirmed its interest rate swap, which would preclude any claim for rescission. The Court appeared to set a low standard for affirmation, finding that the claimant had affirmed the swap contract by: (1) making payments under the swap until its termination; (2) participating in the industry wide review of sales of IRHPs; and (3) claiming repayment of net swap payments and consequential losses in the proceedings.

Although the Court of Appeal’s decision is technically not binding precedent (as the judgment relates to permission to appeal), this point may have wider significance for LIBOR manipulation claims if other courts decide to follow the Court’s reasoning.


The claimant entered into four IRHPs with NatWest, hedging loans made by that bank: three enhanced interest rate collars in 2004, 2005 and 2007, and an interest rate swap in 2010. In June 2012, the FCA announced that it had agreed with a number of banks (including NatWest) that a redress scheme would be set up to review and compensate certain customers to whom IRHPs had been mis-sold (the “FCA Review“). In this case, the FCA Review provided redress in respect of the three enhanced collars, but found that the swap had not been mis-sold.

The claimant advanced three main claims:

  1. LIBOR Claims: It was an implied term of the swap that NatWest had not previously, and would not in future, seek to manipulate any LIBOR index. Alternatively, there was an implied misrepresentation that NatWest would not manipulate any LIBOR index. This claim was not included in the initial pleading and the claimant had sought permission at first instance for its claim to be amended to include this claim.
  2. Wager Claim: The IRHPs constituted wagering contracts, as contracts for differences are in essence bets on the movement of the underlying rate/asset. It was claimed that such contracts are invalid under common law if the parties have unequal knowledge of the prospects of succeeding in the wager. The claimant argued that the parties had unequal knowledge as only NatWest knew that the IRHPs each had a mark-to-market value in favour of NatWest on the date of sale.
  3. Review Claim: NatWest had breached a duty of care owed to the claimant to carry out the Review diligently and to take proper account of all the evidence. The Review should have offered redress for the swap and offered additional consequential losses in relation to the three enhanced collars.

At first instance, HH Judge Roger Kaye QC in the Leeds District Registry struck out the entirety of the claim as having no real prospect of success and refused permission for the addition of the LIBOR Claims. The claimant sought permission to appeal.


The Court of Appeal refused leave to appeal the strike out of the Wager Claim and refusal to allow the amendment to include the LIBOR Claims. However, it granted permission to appeal the judge’s decision to strike out the Review Claim.


The Court of Appeal found that the LIBOR Claims had no real prospect of success and accordingly refused permission to appeal. Whilst the Court found (following Deutsche Bank AG v Unitech Ltd and Graiseley Properties Ltd v Barclays Bank plc [2013] EWCA Civ 1372) that the existence of both the alleged implied term and implied representation was arguable, it was highly critical of how the claims had been pleaded in this case and found that several essential elements of the causes of action had not been pleaded. For example, in respect of the implied term claim, the claimant failed to allege that NatWest manipulated the relevant LIBOR rates at any relevant time. In respect of the implied misrepresentation claim, the claimant failed to claim that it had relied on the alleged misrepresentation.

Notably, both the High Court and the Court of Appeal found it “plain” that the claimant would not have been able to claim rescission (for breach of the alleged implied misrepresentation) as it had affirmed the swap contract by: (1) making payments under the swap until its termination; (2) participating in the Review and pursuing the Review Claim in the proceedings; and (3) claiming for repayment of all net swap payments and consequential losses in the proceedings.

Wager Claim

The Court of Appeal firmly rejected the Wager Claim, finding:

  1. The alleged common law rule that wagering contracts are invalid if the parties have unequal knowledge (if it had ever existed), would have been abolished by the Gambling Act 2005. In any event, the regime established by the Financial Services Act 1986 and the Financial Services and Markets Act 2000 would have excluded the rule from applying to the IRHPs or any financial instrument which they regulated.
  2. Even had the alleged rule applied, the IRHPs would not have constituted wagering contracts as they had a genuine commercial purpose. The IRHPs protected the claimant from changes in interest rates.
  3. Even had the alleged rule applied, the parties would not have had unequal knowledge, as neither side knew the future course of interest rates during the term of the IRHPs. The fact that the mark-to-market value was in favour of NatWest on the date of sale merely represented the expectations of the market, but ultimately neither party knew what would happen.

The Court also rejected an argument by the claimant, linked to point 3 above, that it is unlawful for a bank to enter into a swap contract with a customer that has a mark-to-market value in the bank’s favour on the date of sale, unless it discloses that fact to the customer. The Court firmly found that there was no realistic basis for claiming an implied term or representation that the mark-to-market is zero at the date of sale.

Review Claim

The Court of Appeal noted that it had recently granted permission to appeal a similar decision of the High Court in CGL Group Ltd v Royal Bank of Scotland [2016] EWHC 281 (QB). Accordingly, it accepted that the Review Claim was arguable and granted permission to appeal. The Court recommended that consideration should be given to listing the two appeals together (CGL is due to be heard in June 2017).


As the Court noted, it is unusual for the Court of Appeal to issue such a lengthy and detailed judgment in respect of an application for permission to appeal. This was primarily due to the judgment going into considerable depth to explain why the Wager Claim was fundamentally flawed. The Court suggested that it wanted to ensure similar claims were not advanced in future.

Perhaps the most significant part of the judgment is the Courts’ dismissal of the LIBOR Claim and its comments around affirmation. Much of the Court’s reasoning is limited to the particular facts of the case and, in particular, the claimant’s failure to plead its case properly. However, it is notable that the Court found that the claimant affirmed the swap contract (and therefore could not rescind) due to participating in the Review and also initiating proceedings to recover the net swap payments. The findings on affirmation were dealt with briefly in the judgment and the Court’s reasoning was not set out in detail. In addition, the judgment is technically not binding precedent, as it relates to the narrow question of permission to appeal. Nevertheless, if this approach is followed in other LIBOR manipulation cases (and in particular, in the upcoming judgment in Property Alliance Group v Royal Bank of Scotland plc, expected by January 2017), then claimants may struggle to establish rescission for implied misrepresentations regarding LIBOR manipulation. This could deal a severe blow to such claims, as it is likely that the amount of damages in any LIBOR manipulation claim (as distinct from rescission) would be minimal, given that the effect of alleged manipulation on any one product is likely to be negligible.

John Corrie
John Corrie
+44 20 7466 2763
Dan Eziefula
Dan Eziefula
+44 20 7466 2182

Supreme Court refuses permission to appeal in two mis-selling claims

The Supreme Court has refused permission to appeal from two recent Court of Appeal judgments involving high-profile mis-selling claims against banks.  The result of the Supreme Court decisions is to put an end to one of the claims but to allow the other to proceed to trial in the High Court.

LIBOR claims – Unitech v Deutsche Bank

We have previously reported on the progress of two pending cases in the High Court (Graiseley Properties v Barclays Bank and Deutsche Bank v Unitech Global) that have been widely viewed as test cases on the potential for private claims by customers who entered into LIBOR referenced products with LIBOR panel banks. The claims were brought in the wake of various regulatory investigations into and findings of misconduct with respect to the setting of LIBOR by certain of the panel banks.  A key issue has been whether the Claimants should be allowed to pursue allegations that, when entering into the LIBOR referenced product, the banks made implied representations to them relating to the integrity of LIBOR.

Following two first instance decisions on that question, the Court of Appeal in November 2013 held that the allegations of implied representations relating to the integrity of LIBOR were sufficiently arguable as to have a real prospect of success, and therefore the allegations should be allowed to proceed to trial (read our report ‘Court of Appeal allows LIBOR claims to proceed’).

The Graiseley proceedings have since settled (on confidential terms) and will therefore now not proceed to trial.

However, Deutsche Bank in the Unitech proceedings sought permission from the Supreme Court to appeal the Court of Appeal’s ruling.  That permission has now been refused by Lords Neuberger, Clarke and Sumption.  The published reasons for the refusal are limited to:  “..the applications do not raise an arguable point of law.  It is not normally appropriate for the Supreme Court to entertain appeals on an issue which the Court of Appeal has simply held to be arguable and this is not an exception” …

Accordingly, Unitech’s LIBOR allegations will now proceed to trial in the High Court and will be closely watched.  No hearing date has yet been allocated.

It is important to note that the Supreme Court’s decision appears to have been based primarily on deference to the Court of Appeal’s judgment and (particularly without any detailed reasons for the decision) should not be viewed as an endorsement of the merits of the claims.  Similarly, as we previously noted, the Court of Appeal’s finding that the claims were sufficiently arguable to be allowed to proceed to trial only required it to apply a relatively low threshold.  Whilst Unitech will be allowed to plead and argue the LIBOR allegations, it is likely to face significant hurdles at trial (as detailed in our earlier briefing following the first instance decisions ‘Private LIBOR claims – an uphill battle for claimants’).

Interest rate swaps – Green & Rowley v RBS

The Green & Rowley v RBS proceedings in the High Court were the first interest rate swap mis-selling case to come before the English courts since June 2012 when the (then) FSA announced its review into the sales of interest rate hedging products.

The trial judge fully rejected the various claims brought by the Claimants against RBS.  These claims included a common law claim for negligent misstatement (described as a duty “not to misstate”) in respect of the information provided to the Claimants in relation to the swap.

The Claimants’ appeal to the Court of Appeal focused on a narrow but important point of law regarding this negligent misstatement claim.  The Claimants asserted that, although the trial judge had held the transaction to have been non-advised and this finding was not appealed, RBS’ common law duty not to misstate still incorporated all its duties under the relevant Conduct of Business (COB) Rules.  The Court of Appeal roundly rejected that suggestion.  Although it agreed that  the COB rules would have informed the relevant common law duty had the transaction been conducted on an advisory basis, that was not the case for an execution-only transaction (as was the case here).  In particular, the common law duty not to misstate did not require a bank to take reasonable care to ensure that a customer understood the risks involved in entering a transaction (read our report  ‘Appeal related to alleged misselling of interest rate swaps dismissed‘).

The Supreme Court has now refused the Claimants permission to appeal.

The reasons for that decision have not been published, beyond the conclusion that there was ‘no arguable point of law’ requiring the Court’s attention.  However, the Supreme Court’s apparent refusal to re-open the line of argument run in the Court of Appeal is to be welcomed for banks,  as it further closes down an attempt effectively to broaden the category of individuals which can bring claims for breach of the COB (or replacement COBS) Rules, beyond those who qualify as ‘private persons’ for the purposes of the statutory cause of action in s.150 (now s.138D) FSMA 2000.  The Court of Appeal  was very clear that to import all of the relevant COB duties into the common law duty of care would be to “drive a coach and horses through the intention of Parliament to confer a private law cause of action upon a limited class”.

The development will also be welcomed by banks in that it will leave undisturbed the sensible approach adopted by the trial judge (detailed in our earlier briefing) regarding both the non-existence of an advisory relationship and the adequacy of RBS’ disclosure regarding the swap’s break costs.

Damien Byrne-Hill
Damien Byrne-Hill
+44 20 7466 2114
Rupert Lewis
Rupert Lewis
+44 20 7466 2517
Jan O'Neill
Jan O'Neill
Professional Support Lawyer
+44 20 7466 2202

Court of Appeal allows LIBOR claims to proceed

The Court of Appeal has allowed parties to two claims against LIBOR panel banks to amend their pleadings to include allegations that the banks made implied representations relating to the accuracy of LIBOR. In doing so, the Court held that the amendments were sufficiently arguable so as to have a real prospect of success.

This is a relatively low threshold and, whilst the parties will be allowed to plead the LIBOR allegations, they are likely to face some significant hurdles at trial (as set out in our earlier briefing following the first instance decisions, here). However, if the Court of Appeal decision stands the test of a potential appeal to the Supreme Court, banks can expect to have to argue such issues concerning whether implied misrepresentations were made, and (if so) what was their scope, at trial rather than dismiss them summarily.

Graiseley Properties Limited v Barclays Bank PLC and Deutsche Bank AG v Unitech Global Limited [2013] EWCA Civ 1372 (read the judgment here).

First instance decisions

Graiseley Properties Ltd (“Graiseley“) brought a mis-selling claim against Barclays Bank plc in respect of an interest rate swap and a loan which originally included an allegation of innocent misrepresentation against Barclays in relation to LIBOR manipulation. However, following the regulatory findings against Barclays in respect of Barclays (including the information contained in the FSA Final Notice), Graiseley applied to amend its particulars to include a plea of fraudulent misrepresentation.

Unitech Global Ltd and Unitech Ltd (together, “Unitech“) had applied to amend their defence and counterclaim in respect of a claim brought by Deutsche Bank for payment under a credit facility and an interest rate swap so as to include similar allegations to those made by Graiseley relating to LIBOR manipulation.

The Commercial Court granted Graiseley’s application to amend its pleading to include the implied representations relating to LIBOR.However, by contrast, Cooke J did not allow Unitech to make their proposed amendments.2

Court of Appeal decision

The Court of Appeal heard both appeals together and unanimously decided to allow both parties to make the proposed amendments to their pleadings.3

In allowing Graiseley and Unitech to amend their pleadings, Longmore LJ (who gave the leading judgment) stressed that whilst the proposed pleas of implied representations in both cases are arguable, any case of implied representation is fact specific and therefore it would be “dangerous” to dismiss such an allegation summarily “in a factual vacuum.” Even where Longmore LJ felt that, in respect of the alleged representations concerning the conduct of other banks, Barclays’ and Deutsche Bank’s arguments would have “considerable force” at trial, he nevertheless felt that it was not appropriate for the Court of Appeal to refuse permission to amend the pleadings at this stage. He said that he did not “consider it the function of this court at this stage of the proceedings to be too selective about the precise representations which the parties wish to advance” and that it was for the trial judge, who would have a fuller picture of the case, to decide on the merit of the allegations.

It is still open to both Barclays and Deutsche Bank to seek to appeal the Court of Appeal’s decision to the Supreme Court, so the legal position in relation to whether such pleadings will be allowed to proceed may yet take another turn.

Difficulties in bringing LIBOR claims

Our earlier briefing in May 2013 (click here) sets out the various difficulties that parties are likely to face in bringing claims against banks in connection with the accuracy of LIBOR. Disclaimers in the contractual documentations (particularly ‘no representation’ and non-reliance clauses) may be difficult to overcome in cases where fraud is not pleaded. However, even in a claim for fraudulent misrepresentation, the extent of the awareness or responsibility of senior management in respect of the LIBOR manipulation is likely to be a key factor in establishing the requisite knowledge and intention on behalf of the bank in making representations on routine commercial transactions referencing LIBOR. This is because the individual salesman or relationship manager who sold the interest rate hedging or other financial product referencing LIBOR is not likely to have known about any manipulation of LIBOR by the bank at the time. Parties pleading representations relating to LIBOR manipulation are therefore likely to seek to rely on any regulatory findings regarding senior management’s awareness of wrongdoing, if there is any.

It is worth noting that, in their appeal of the Commercial Court’s decision in Graiseley, Barclays decided not to pursue two of the objections to the granting of permission to amend that were raised at first instance. The first of these objections related to whether it can be said that it must have been obvious to the people alleged to have had the relevant knowledge that the representations were being made on transactions referencing LIBOR and were false. Flaux J said at first instance that this objection was “wholly without merit” because it was at least arguable that senior management at Barclays had the requisite degree and extent of knowledge, particularly in light of regulatory findings. This may well be one of the key issues at trial. The other objection related to whether the individuals who were alleged to have made the implied representations were authorised by Barclays. Flaux J held that it was sufficiently arguable that such authority did exist for the proposed pleading amendments to be allowed to proceed.

Where claimants bring contractual claims alleging that terms relating to manipulation of LIBOR were implied into a contract, these are also likely to face difficulties in establishing causation and loss (as set out in more detail at paragraph 4 of our earlier briefing, here).

1Graiseley Properties Ltd & Ors v Barclays Bank plc [2012] EWHC 3093 (Comm)

2Deutsche Bank AG & Ors v Unitech Global Ltd [2013] EWHC 471 (Comm)

3Graiseley Properties & Ors v Barclays Bank plc; Deutsche Bank AG & Ors v Unitech Global Ltd & Ors; and Deutsche Bank AG v Unitech Ltd [2013] EWCA Civ 1372

Damien Byrne-Hill
Damien Byrne-Hill
+44 20 7466 2114
Simon Clarke
Simon Clarke
+44 20 7466 2508
Ajay Malhotra
Ajay Malhotra
+44 20 7466 7605

Private LIBOR claims – an uphill battle for claimants

The ongoing regulatory investigations into the manipulation of LIBOR have prompted much speculation about the possibility of claimants bringing private law actions against banks based on the regulators’ findings. In the first cases to come before the UK courts, the Court of Appeal has recently granted permission to appeal two High Court decisions as to whether LIBOR-based claims could be introduced into existing actions alleging mis-selling of interest rate hedging products.

In light of those decisions, this briefing considers the prospects of such LIBOR claims in the mis-selling context and identifies substantial obstacles claimants will face in seeking to ‘piggyback’ off the regulatory actions.

A copy of our Banking Litigation Briefing is available here.

Interest rate hedging product claims – the current landscape

1.  The FSA review

In 2012, the Financial Services Authority (FSA) announced the findings of its review into interest rate hedging products (IRHPs) sold to small and medium sized firms and in June and July 2012, the FSA agreed with eleven banks that they would conduct a proactive redress exercise and past business review in relation to their sales of IRHPs on or after 1 December 2001.

Specifically, the FSA has agreed with the banks that, for sales to customers categorised under the FSA’s rules as either ‘private customers’ (in respect of sales before 31 October 2007) or ‘retail clients’ (in respect of sales from 1 November 2007), the banks will:

  • Provide appropriate redress to non-sophisticated customers sold structured collars;
  • Review sales of other IRHPs (except caps and structured collars) to non-sophisticated customers and provide redress where appropriate; and
  • Review the sale of caps to non-sophisticated customers in cases where a complaint is made by the customer and provide redress where appropriate.

In each case, a customer will be regarded as ‘non-sophisticated’ if it does not meet the FSA’s ‘sophistication test’ and any redress provided is to be by reference to what is fair and reasonable in all the circumstances. The exercise for each bank will be scrutinised by an independent reviewer and overseen by the FSA.

Each bank was asked to undertake a pilot review of a small sample of more complex cases before beginning the full review.  On 31 January 2013, the FSA published a report on its findings from its review of the pilot exercise conducted by Barclays, HSBC, Lloyds and RBS and confirmed that those banks would commence their full reviews in accordance with the approach set out in that report. The FSA has said that it expects those banks to aim to complete their full reviews within 6 months, although the FSA accepts that for banks with larger review populations this may take up to 12 months.

On 14 February 2013, the FSA also confirmed that the remaining banks (apart from the Irish Bank Resolution Corporation, which went into special liquidation on 7 February 2013)  had also agreed to proceed with their full reviews in line with the same approach set out in the  FSA’s 31 January 2013 report.

2.  FOS decisions

Although the FSA initially considered the establishment of a scheme effectively extending the FOS’s jurisdiction to deal with IRHP complaints, it has recently been confirmed that this will not be put in place.  However, customers meeting the existing FOS eligibility criteria will remain able to refer their complaint to the FOS if they are not satisfied with the redress offered within the review process.

It appears that a number of customers have already complained to the FOS. Indeed, during 2012 two provisional FOS decisions involving the sale of IRHPs were issued –  W Family v Bank E and Business H v Bank S.  The relevant parties in each case were requested to submit further representations before the FOS finalises its determinations. We set out further detail below.

The W Family v Bank E

In July 2007, the W Family took out a variable rate 14 year loan in order to expand their business. At the same time, the family took out a multi-callable swap for a period of 15 years, with an initial two year discounted rate. After two years, a higher fixed rate was payable for the remaining period of the swap. The interest rate payments under the swap were tied to LIBOR, as opposed to Bank E’s base rate, on which the loan was based (i.e. there was an element of mismatch).

The Ombudsman found that:

  • although the documentation was “unclear and contradictory about whether or not advice was given“, the actions of  the bank did in all the circumstances amount to professional investment advice in respect of the swap;
  • the bank recommended a swap that was not suitable to the W Family. The Ombudsman described the swap as being “a one-sided deal”, which allowed the bank to terminate the swap after two years if rates rose at any time, thereby leaving the customer unhedged against rising rates (although he did not directly consider the impact of including the call feature on the discounted rate offered on the transaction). The swap also did not amortise, even though it was expected that the W Family would start making capital repayments against the loan after the first two years, and the swap also lasted a year longer than the loan itself;
  • the bank also failed to explain the potentially onerous cancellation costs associated with the swap.

Business H v Bank S

Business H took out a variable interest rate loan and also bought a “base rate collar” in connection with the loan. (The bank later said that the hedging was a condition of the loan and the lending would not have been granted unless a hedging transaction arrangement had been agreed). The collar was set to cover a sum of £356,000, had a 20 year term and was set to amortise.

The Ombudsman found that:

  • the bank’s actions in connection with the swap amounted to investment advice;
  • the notion of a collar was not inherently unsuitable for Business H in its circumstances, given its desire to minimise the premium for this arrangement. However, a floor of 20 years with the possibility of significant cancellation charges was not suitable overall for the needs of Business H, which was a small operation; and
  • the bank also failed to highlight adequately or to explain the potential cancellation charges.

It is interesting to note that in both cases the Ombudsman did not make any formal findings on redress. Instead, he invited both parties to discuss how best an award could be agreed and, to facilitate those discussions,  set out the principles he would take into account if he were to make a formal award.

3.  Court decisions

Grant Estates Limited v Royal Bank of Scotland2

This is a Scottish case and the first reported judgment on the subject of IRHP mis-selling. In 2007, Grant Estates and RBS entered into a 5 year loan agreement for £775,000 and a swap transaction for the same notional amount. Grant Estates alleged that RBS mis-sold the swap agreement and that, instead of protecting Grant Estates from a rise in interest rates, the swap fixed rates too high and became such a burden on the company that it defaulted on the loan agreement with RBS and fell into administration. The Court rejected the claim on the following grounds:

  • Grant Estates was not a “private person” for the purposes of s.150 of the Financial Services and Markets Act 2000 (“FSMA”) and therefore had no direct remedy under that provision;
  • there was no implied collateral agreement for the bank to advise Grant Estates and consequently no breach of such a contract. This finding was based heavily on the Court’s conclusion that there was a written contract setting out what RBS was to undertake and expressly warning Grant Estates that it should obtain its own independent, legal and tax advice; and
  • the acts of the bank employees were consistent with a contractual regime in which the customer had agreed that it would not treat any views that the bank expressed in bringing about the derivative transaction as advice on which it was entitled to rely.

Green & Rowley v RBS3

In this first reported English IRHP case, the customers alleged that in May 2005, RBS mis-sold to them an interest rate swap as a form of hedge against their existing loan liabilities to the bank. They alleged that:

  • the bank had made various negligent misstatements regarding the operation of the swap, including understating the costs if they chose to break the swap early and inaccurately indicating that the swap transaction fixed not only the base rate but also the margin; and
  • the bank owed them advisory duties in respect of the swap because it had positively recommended the transactions and that those duties had been breached because the swaps were not suitable for them (principally because they allegedly required a transaction that fixed not only the base rate but also the margin).

Originally there were also claims for breach of statutory duty under s.150 of FSMA but it was accepted that those claims were time-barred.  Nevertheless, the customers alleged that at least some of the relevant FSA Conduct of Business Rules (the ‘COB Rules’) informed the scope of the bank’s common law duties for the purposes of both the negligent misstatement and the negligent advice claims.

The claims failed in their entirety, with the Court finding that there was no negligent misstatement and that no advisory duty had arisen (and that, in any event, there had been no breach of any such advisory duty).

This case was highly fact-sensitive and the Court’s findings turned largely on what was said at a meeting between the claimants and employees of the bank at which information regarding the swap and other similar products was provided. However, as in Grant Estates(above), the contractual documents contained helpful provisions clearly confirming that no advice was being given and the judge cited Grant Estates in finding that such provisions can be invoked to negate or delineate the ambit of any duty of care.

The judge also noted, with respect to the relevance of the COB Rules, that the scope of the duty in a common law action for negligent misstatement (as distinct from an advisory duty) is narrower than and does not necessarily encompass the COB Rules to the extent that the COB Rules include (i) duties to take reasonable steps to communicate clearly or fairly (COB 2.1.3) and (ii) duties to take reasonable steps to ensure that a counterparty understands the nature of its risks (COB 5.4.3).

Whilst future decisions could of course take a different approach depending on the specific facts (including particularly the content of a bank’s written terms), these first two IRHP judgments have been welcomed by the financial services industry.

4.  Potential for ‘top up’ of FOS decisions through court action

The manner in which IRHP claims are pursued may also potentially be influenced by a recent  High Court decision holding that a party who had accepted a favourable FOS decision and been paid the statutory maximum award (then £100,000, now £150,000) by the firm could nevertheless subsequently bring a damages claim for the balance of the full loss they had allegedly suffered, over and above the FOS award: Clark & anor v In Focus Asset Management & Tax Solutions Ltd [2012] EWHC 3669.

The decision departs from previous authority on this issue and, unsurprisingly, permission to appeal has been sought.  If the High Court’s decision is upheld, this may have the effect of encouraging potential litigants to seek to fund subsequent court action through a FOS award.  Complainants may also seek to adduce the FOS judgment in support of their court case, particularly given that it is quite common for the FOS to recommend a higher award than its statutory limit (albeit that the test for liability applied by the courts is of course materially different from the test adopted by the FOS).

Read our full briefing on the decision.

5.  LIBOR allegations in IRHP claims

A claim currently pending in the High Court has also raised the possibility of the IRHP claims landscape being overlaid with claims in respect of LIBOR (London interbank offered rate).

The claimants in that action have brought a claim in relation to loans made to them with an associated interest rate swap and interest rate collar agreement, payments under which were set by reference to 3 month Sterling LIBOR.  In a judgment delivered on 29 October 2012, the Court permitted the claimants to amend their pleadings to add claims based on alleged implied representations by the defendant bank (and/or implied contractual terms) as to the integrity of the LIBOR rates. The allegations in this respect rely heavily on regulatory findings against the relevant bank in respect of LIBOR:  Graiseley Properties Limited & ors  v Barclays Bank Plc [2012] EWHC 3093

It is important to note that the Court did not make any considered determination of the LIBOR allegations and was only required to consider whether the points raised reached the threshold of being sufficiently arguable to proceed to trial and be tested. However, this is now an important test case and the trial (listed in October 2013) will be watched closely both by claimants considering bringing similar claims and defendant banks.


1 Grant Estates Ltd v The Royal Bank of Scotland Plc [2012] CSOH 133.
2 John Green and Paul Rowley v The Royal Bank of Scotland [2012] EWHC 3661.

Damien Byrne-Hill
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