1. Interest Rate Hedging Products (“IRHP”) are financial products that enable the purchaser to limit their exposure to interest rate movements. They are often purchased at the same time as entering into a loan.
2. Although IRHPs are often bespoke products, commonly they can be categorised into one of four categories:
a. Swaps: a product that has the effect of fixing the interest rate of the linked loan.
b. Caps: where the effects of any interest rate rises in the linked loan are subject to a limit.
c. Collars: where the effects of any interest rate movements (up or down) are limited to a particular range.
d. Structured collars: where the range itself is variable and or the relationship with interest rate movements is more complex.
3. Since 2001, there has been a large volume of sales of IRHPs to private customers/retail clients. The FCA has become concerned that as many as 40,000 IRHPs have been missold. In 2012 eleven banks agreed to review the sale of their IRHPs to ‘unsophisticated customers’ customers since 1 December 2001.
4. In relation to each sale, the bank reviews whether or not it considered that it complied with its regulatory requirements, in particular:
a. Whether it provided the customer with appropriate, comprehensible, fair, clear and not misleading information on the features, benefits and risks associated with the IRHP in good time prior to the sale.
b. Where the IRHP was greater than the loan, explained the potential consequences of this to the client in a comprehensible and fair, clear and not misleading way.
c. Where the IRHP was purchased following advice from the bank, reasonable steps had been taken to ensure the recommendation was suitable for the customer.
5. Where a sale was ‘non-compliant’, the banks agreed to provide ‘fair and reasonable redress’ in relation to the basic loss (ie the money spent on the IRHP) and apply common law principles when assessing claims for consequential losses (eg overdraft charges, additional borrowing costs, lost profits due to money diverted paying IRHP break costs).
6. The process is overseen by independent reviewers appointed pursuant to section 166 FSMA.
7. Customers are not obliged to engage with the review and redress determination process (and even if they do, they can refuse to accept the redress offered to them). There are two main alternatives to seek redress:
a. Where the bank provided advice to a customer, a claim for negligent misstatement. Whether or not a customer received advice from the bank is a question of fact. Where customers fall into this category, they have a cause of action in tort, and are able to rely upon section 14A Limitation Act if the cause of action accrued more than six years previously but the customer acquired the relevant knowledge within the past three years (eg following the recent work by the FSA/FCA in this field).
b. A claim for breach of statutory duty pursuant to section 138D FSMA. Section 138D affords a statutory cause of action for damages to customers regardless as to whether they received information or advice. However, the statutory route is limited to claimants defined as “private person[s]”.
8. The term ‘private person’ has been defined (badly) in Financial Services and Markets Act 2000 (Rights of Action) Regulations 2001. Paragraph 3(1) makes it clear that the definition is wider than individuals contracting in their personal capacity. It also includes:
“any person who is not an individual, unless he suffers the loss in question in the course of carrying on business of any kind; …”
9. In Titan Steel Wheels Ltd v RBS  EWHC 211 (Comm) David Steel J considered when, if ever, a corporate entity is a private person for the purposes of paragraph 3(1). In that case, Titan Steel argued that its business was the manufacture of steel wheels, not financial services. It had purchased hedging products for reasons related to its manufacturing business. It argued (relying in part on Hansard transcripts) that the phrase “in the course of carrying on business of any kind” should be defined narrowly and was equivalent to the well-defined phrase “in the course of business”.
10. David Steel J rejected this argument and held that the statutory formulation was intrinsically wider in scope. As such, corporation which carries on business of any kind (regardless of whether or not this was connected in any way with financial services) could not bring a claim under FSMA.
11. The case has not been formally approved at appellate level, but has been applied elsewhere at first instance and in the Scottish Court of Session.
Attempts to formulate causes of action to fill the statutory gap
12. Following Titan, it appeared that there was a sizeable gap in recourse through the courts for customers that believed they had been missold IRHPs (or any other financial product). If a customer (i) was not private persons; and (ii) had not received advice prior to purchasing the IRHP; it had no obvious route for redress outside the FCA review process.
13. It is therefore unsurprising that there have been various subsequent attempts to fashion new causes of action by claimants falling into this gap.
Green v RBS
14. The first case of note is Green v Royal Bank of Scotland  EWCA Civ 1197. Here, the claimant argued that when banks dealt with customers and their actions were managed (at a regulatory level) by the Conduct of Business rules, an identical duty of care arose.
15. This argument, if successful, would have had two important effects. First, it would have sidestepped the exclusionary effect of the ruling in Titan Steel for most corporations. Second, both private persons and customers not defined as private person would have been able to bring a claim in tort and thus potentially gain a limitation extension to bring a claim.
16. The Court of Appeal held that:
a. Where advice was given, a duty of care was owed, and its content was informed by the handbook. It considered that this was a well-established principle per Loosemore v Financial Concepts  Lloyds PNLR 235.
b. Where information was given, there was a duty of care, but this was limited to the duty established in Hedley Byrne and co Ltd v Heller and Partners Ltd  AC 465, namely the duty to take care when making statements where the maker knows the listener would rely upon its skill and judgment. The court held that this duty could not be expanded to take account of the FSA Handbook. Parliament had set out the scope of such a remedy through s150 FSMA, and there was no proper basis to expand upon this.
17. This was an important case, as it confirmed that claimants who were eligible for a claim pursuant to s150/138D FSMA had to issue proceedings within six years of the cause of action accruing. Unless they had received advice from the bank also, they were unable to bring a claim in tort, and thus unable to rely upon s14A even if their knowledge of the alleged misselling accrued after the statutory claim was timebarred.
18. The ruling has important policy implications. The court of appeal demonstrated that they were unwilling to alter the commercial risk agreed between the parties when entering into contracts. If the court had substantially expanded the risk borne by the bank when contracting with parties (regardless as to their status or the level of advice given to them) this could have substantially affected the pricing of financial products and their availability to the market as a whole. Parliament had carved out a minor exception for the most ‘at risk’ customers, as was its prerogative, but the court saw no basis upon which it could widen this further.
(1) Mr Bailey (2) Bailey Trading Ltd v Barclays
19. A recent case has attempted numerous alternative ways of circumventing the combined effects of Titan and Green. However, following a summary judgment/strike out application, all the causes of action alleged in (1) Mr Bailey (2) Bailey Trading Ltd v Barclays  EWHC 2882 (QB) proved unsuccessful and were dismissed by HHJ Keyser QC sitting as a Judge of the High Court.
20. The first claimant was an individual. Having issued proceedings, he was then offered redress of almost all his alleged losses under the FCA scheme set out above. As such, he agreed to discontinue his claim.
21. The second claimant was a company wholly owned by Mr Bailey. Its claim had arisen because Mr Bailey assigned his loan and swap to it in 2011. As a result of the 2009 recession, the company was paying a higher than market rate of interest to Barclays but could not end the swap prematurely without paying very substantial break fees.
22. The company argued:
a. Barclays had breached the COBS rules and the company was entitled to bring a claim against Barclays for breach of these for one or all of the following reasons:
i. Pursuant to s150 FSMA;
ii. Because the COBS rules had been incorporated into the contract by the contractual clause which stated “this agreement and all transaction are subject to applicable regulations.” And/or
iii. Because the COBS rules are relevant for assessing the standard of reasonable care and skill owed by Barclays pursuant to s13 SGSA 1982.
b. Barclays’ conduct involved economic duress, unconscionable conduct and misrepresentation, and as such the company was entitled to rescission, damages and/or equitable compensation.
c. The purpose of the swap was to hedge the company’s liabilities, but the fixed interest rate was at all times much higher than the BoE base rate. The purpose of the swap had therefore been defeated and Barclays had been unjustly enriched by the receipt of payments.
d. Barclays owed a fiduciary duty to the company to act in its best interests which it breached.
e. The contract ought to be declared unenforceable pursuant to section 27 FSMA 2000.
23. The judge examined each of the propositions above in detail before dismissing the case in full. The following aspects of his judgment are of particular note:
a. The company’s case pursuant to s150 FSMA was premised upon Triton being wrongly decided. The judge considered Triton before concluding that he agreed with David Steel J’s reasoning, and regarded the principles established in that case as now being “authoritative” following its subsequent applications (paragraph 44).
b. The previous cases in which the COBS rules had been incorporated into the terms of a contract did not establish any principles of law, but were instead conclusions arrived at having analysed the construction of the contracts in question. The judge also noted that Law Commission has observed that most courts have rejected such an argument (paragraph 55).
c. The reference to s13 SGSA was not dealt with in detail (pargraphs 56-57). The judge had decided earlier that the COBS rules had not been breached (paragraph 36), and so stated simply that the argument could not be sustained on the facts.
d. The economic duress argument required a threat being made to the company. This was wholly unsustainable on the facts, as the company had merely received an assignment of the swap from Mr Bailey.
e. The claim for unjust enrichment was an attempt to recast the basic facts of the case: the swap protected the company against the risk that interest rates would rise above a certain level, but disentitled it to benefit from the risk of interest rates remaining below that level. A poor outcome for the company demonstrated only that it had proved to be a poor deal for it. The contract was in no way defeated as a consequence.
f. The misrepresentation argument also failed. It was premised upon Mr Bailey being the recipient of the misrepresentation, and therefore (to the extent he was correct) the contract was capable of being rescinded. The company argued that the swap had been assigned to it, albeit the term ‘novation’ had been used in the company’s dealings with Barclays. The judge considered that the contractual references to a novation were exactly that, and as such no misrepresentation to Mr Bailey survived into the contract entered into between the company and Barclays (paragraph 77).
g. The fiduciary duty also failed. The company did not have ‘trust and confidence’ in Barclays. It entered into the contract simply to relieve Mr Bailey of a contract he no longer wished to be bound by (paragraph 89).
h. The s27 argument was described as “plainly wrong” (paragraph 93). This provision only arises where there has been a breach of the ‘general prohibition’ (namely the carrying on of an authorised activity such as selling swaps by someone who is not authorised to do so ). Barclays is authorised to carry out authorised activities. The persons in Barclays who sold the product were Barclays’ employees and/or agents.
24. It is not yet clear whether the judgment will be appealed. It amounted to a firm restatement of orthodox principles.The authors are aware of further claims being brought in a similar vein to Bailey. There is now judicial deprecation of the numerous inventive causes of action attempted (albeit at first instance and following a strike out application).
25. For the meantime, it appears that the avenues open to persons seeking redress remain limited to:
a. Engagement with the FCA review process (if invited to do so);
b. A claim for negligent misstatement if the customer received advice prior to entering into the swap; and/or
c. A claim pursuant to s138D if the customer falls within the definition of a ‘private person’ following Titan.
26. It should be noted that the above, limited, avenues of redress are likely to have a substantial effect on banks. Banks have currently paid more than £1.2 billion to less than 8,000 customers. This number is likely to rise substantially.
This content is provided free of charge for information purposes only. It does not constitute legal advice and should not be relied on as such. No responsibility for the accuracy and/or correctness of the information and commentary set out in the article, or for any consequences of relying on it, is assumed or accepted by any member of Chambers or by Chambers as a whole.
Please note that we do not give legal advice on individual cases which may relate to this content other than by way of formal instruction of a member of Hardwicke. However if you have any other queries about this content please contact: