Court dismisses interest rate swap misselling case
Green & Rowley v RBS1, the first reported case of its kind to come before the English court, saw Mr Green and Mr Rowley – property developers operating in a partnership (the "Claimants") – bring proceedings against the Royal Bank of Scotland (the "Bank"), alleging that they had been mis-sold an interest rate hedging product.
In 2005 the Claimants had loans with the Bank totalling around £1.5m. The term of these interest-only loans was 15 years (the "Loan"). Interest was charged at 1.5% above the Bank's base rate (the "Margin"). The Bank encouraged the Claimants to consider a product which would hedge against the risk posed by any fluctuation in interest rates.
After a meeting on 19 May 2005 (the "Meeting") with two representatives from the Bank (Mrs Gill and Mrs Holdsworth), the Claimants entered into a swap with the Bank for a shorter period of 10 years (the "Swap"). Quarterly payments were made under the Swap either by the Bank or by the Claimants, so that it matched the interest earned on a notional £1.5m at a fixed rate of 4.83%. If the base rate interest earned would exceed the amount earned at the Swap rate, the Bank would make a net payment to the Claimants representing the difference. If the reverse, the net payment would be made by the Claimants.
As explained by the judge this had the same effect, when taken together with the Loan, as:
… converting the variable rate loan to a fixed rate loan with all the potential advantages and disadvantages that has, depending on the state of the market.
For much of the duration of the Swap, the Claimants were 'in the money'. Interest rates were higher than 4.83%, and whilst their payments under the Loan increased, they recouped an equivalent amount in payments from the Bank under the Swap. By early 2009, however, rates had hit an all-time low of 0.5%, leaving the Claimants making significant net payments to the Bank under the Swap.
In March 2009, the Claimants sought to restructure their partnership. On enquiring about the costs of breaking the Swap early they were told that the cost would be up to £138,650. The Claimants eventually issued proceedings against the Bank on 25 May 2011.
The judge commented that this was a "highly fact sensitive case", which largely turned on the events of the Meeting. Benefitting from a contemporaneous note and a clear understanding of how she structured her meetings, the judge found Mrs Holdsworth – an Area Manager for the Bank specialising in interest rate hedging products – to be "an impressive witness". The same could not be said for the Claimants, whose evidence, the judge found, had likely suffered due to the passage of time, being "not always consistent", and "[not] always plausible". Where the evidence conflicted, the judge generally preferred the evidence of the Bank to that of the Claimants.
The Claimants sought redress for negligent misstatement and/or on the basis that they had been advised to enter into the Swap despite it being unsuitable for them.
The alleged misstatements by the Bank were, broadly, that:
- the break costs of the Swap would not be expensive, when in fact they were;
- the Swap was separate to the Loan, when it was in fact linked, for example, by a cross-default clause;
- the Swap would fix the Margin rate on the Loan, when it only had the effect of hedging against changes in the base rate; and
- that the Swap was portable, when in fact to move the Swap would require the consent of the Bank and/or it was unlikely another bank would take on the liability.
With regard to the claims for negligent misstatement, the Claimants argued that the duty required by the test in Hedley Byrne2 ought to reflect the standards required by the FSA COB Rules and Guidance in force at the time. Although there was authority for this in an advisory context, the judge rejected this in the context of a claim for negligent misstatement, finding that the "duty to take care not to mis-state is much narrower".
The judge rejected each of the misstatement claims. Although he had found the COB Rules did not form a part of the Hedley Byrne duty, the judge indicated that he would not, in any event, have found such duty to be breached if he was wrong on that point.
As to the advice claim, the judge was not satisfied that any recommendation or advice as to suitability was given before, or at, the Meeting, with the consequence that the alleged duty did not arise. Documents which evidenced the transaction were found to emphasise the "non-advisory nature of what took place at the Meeting".
Even if a duty to advise had been found, the judge would have held that the duty was not breached, even if it incorporated the requirements of the COB Rules. Instead, the judge held that "… as for the objective of base rate fixing, the Swap was entirely suitable".
Although it looks set to go to appeal3, this case highlights some of the factors likely to be at issue in a case of this kind. Particular attention should be paid to:
- The importance of contemporaneous documentary evidence. Misselling cases are likely to relate to events which took place many years ago, and contemporaneous evidence will often be persuasive, as well as assisting witnesses in their recall of events.
- The need to demonstrate causation if claimants are to succeed. This may be difficult to make out and consequently make litigation less appealing to some claimants. Some parties with smaller claims will in the alternative (or parallel) to litigation make a complaint to the Financial Ombudsman Service – where demonstrating causation is less likely to be an issue.
- The interaction between FSA rules and litigation. In this case the judge was unwilling to effectively incorporate FSA rules into Hedley Byrne. Other claimants might be able to rely on section 150 of FSMA 2000 to seek statutory redress for loss suffered due to breach of FSA rules, unavailable to the Claimants here due to being time-barred.
In any event, we can expect to see more cases in this area – the story is not over yet.
This blog was co-authored by Nigel Brook.
 Green & Rowley v RBS  EWHC 3661 (QB).
 Hedley Byrne v Heller  AC 465.