In a ruling of crucial importance to the financial services and banking industries, two businessmen who accused their bank of mis-selling them a financial product which left them seriously out of pocket have had their compensation hopes dashed by the Court of Appeal.
The case was considered of such significance that the Financial Conduct Authority was permitted to put forward arguments as an intervener although it was not a party to the proceedings. The Court’s critical finding was that financial professionals do not owe a free-standing duty of care at common law to give advice to private clients as to the nature of risks inherent in regulated transactions.
The businessmen had borrowed £1.5 million from the bank to fund various commercial property developments and had also entered into an interest rate swap arrangement in order to hedge themselves against interest rate fluctuations. They ‘did well’ out of the swap for a period of more than two years and were ‘in the money’ as interest rates rose steadily.
However, neither they nor the bank had foreseen the market convulsions that followed the collapse of Lehman Brothers. As the base rate plummeted to a record low of 0.5%, the businessmen discovered the product’s downside and they were shocked when the bank informed them that it would cost them almost £140,000 to buy themselves out of the swap.
The businessmen argued that they had been mis-sold the product and sought substantial damages on the basis that the bank had failed in its duty to warn them of the risks associated with the product and of the potential cost of extricating themselves. However, their complaints were dismissed by the High Court.
In dismissing the businessmen’s appeal, the Court noted that the swap was a ‘very straightforward’ product and that, as experienced and intelligent men, neither of the businessmen would have had difficulty understanding how it worked. They had had access to their own independent financial and legal advice and the product had in fact achieved what it was supposed to do in that it had fixed the real rate of interest that they were required to pay.
The Court noted that the businessmen had abandoned arguments that the bank had breached the statutory duty it owed them under the Financial Services and Markets Act 2000. That potential cause of action had not been pursued on the footing that it was time-barred. The businessmen had instead relied upon allegations that the bank had breached the duties it owed them at common law.
However, the Court found that their arguments were misconceived in that they amounted to a submission that the mere existence of statutory duties under the Act gave rise to co-extensive duties at common law. The bank had confined itself to explaining the basic features of the product and explaining how it worked and had not purported to give advice on the risks involved. In the circumstances, there was no justification, or need, for the imposition of a common law duty independent of, but co-extensive with, the remedy provided by statute.