Bank backs another winner in interest rate swaps saga – but is it luck or judgement?

11 September 2014

Despite their costly on-going review work and redress exercises, banks that sold interest rate swaps are still facing parallel court claims.

So far they seem to have picked winners by settling stronger claims with better prospects of success.  Mark Bailey & MTR v Barclays Bank, a recent decision handed down in Cardiff's District Registry, was another example of an apparently easy win for a defendant bank.

The court upheld and applied the principles of Titan Steel.  It should offer further comfort to banks that they appear to be protected from regulatory claims made by would-be corporate claimants with whom they have entered into interest-rate swap contracts.

By way of a quick reminder, in the Titan Steel case, a steel manufacturing company had entered into a series of interest-rates swaps with RBS. Titan Steel ultimately 'lost out' on the contracts as unfavourable exchange rates meant that they were liable for more than they would have been had they not entered the contracts in the first place. Titan Steel brought a claim against RBS claiming that:

  • The interest rate swap transactions were so unusual and complex that the person dealing with them at Titan Steel had no authority to enter into them and bind the company in that way;
  • RBS had advised that same employee that the product was suitable for Titan Steel, taking into account all of their circumstances and thus, owed Titan Steel a duty of care;
  • RBS had a duty to treat Titan Steel fairly and had failed to do so;
  • Titan Steel was, for these purposes, a 'private person' for the purposes of a claim for damages under (what was then) s.150 of FSMA 2000

A full trial of those preliminary issues followed. The Judge held that:

  • Titan Steel could not rely upon s.150 which applies only to a "private person".  A corporate can be a "private person" only if it did not suffer the loss in the course of carrying out "business of any kind". Titan Steel said that "business of any kind" should be interpreted narrowly. They said that their main business was the manufacturing of wheels and that the purchasing of derivative products, such as interest rate swaps was incidental to that main business; the purchasing, they said, was not "business" in and of itself. The Judge rejected this. He said that the swaps were entered into as part of their main business and thus they were not "private persons".
  • RBS owed no duty of care to advise Titan Steel. The Judge favoured RBS' evidence that they had advised Titan Steel to take independent legal advice but they failed to do so.

Turning now to the recent Bailey decision, the claimants were an individual, Mark Bailey and his company, MTR Bailey Trading Ltd. Both Mr Bailey and the company had entered into various arrangements with Barclays including an interest rate swap agreement for a notional figure of £2 million at a fixed rate for a fixed 10 year term. Mr Bailey later brought a claim against Barclays alleging that the swap was entirely unsuitable as it tied both him and his company into a fixed rate at a time when rates were falling, instead of rising as Barclays had advised them they would.

The effect of this is that the individual and the company would both be tied to much higher rates than they would have had they not entered into the swap contract.

As it transpired, shortly before the hearing Mr Bailey accepted an offer of redress following Barclays' review of swap sales to non-sophisticated customers.  Accordingly, the claim proceeded solely in respect of the company's claim.

The company, as in Titan Steel, contended it was a 'private person' within (what is now) s.138D of FSMA. It argued that Titan Steel had been wrongly decided on the 'private person' point. Judge Keyser QC rejected that argument. He also said that, quite apart from this point, there was no prospect of the company showing that Barclays had breached the rules on this occasion.

The company also sought a declaration that the swap contract was not enforceable by virtue of s.27 FSMA.  This provision renders unenforceable agreements entered into by authorised persons in consequence of the actions of an unauthorised third party.  The company argued that Barclays (an authorised person) entered into the swap agreement as a consequence of a personal recommendation made by Barclays' employee (who was not an authorised person).  Perhaps unsurprisingly the court concluded that this argument was plainly wrong – Barclays' employee was its agent not a third party.

Therefore, although each case will be looked at on its own facts, this latest case is further evidence that the Courts, in England and Wales, will not make it easy for a corporate claimant to obtain redress under the regulatory system.

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