Appeal relating to alleged mis-selling of interest rate swaps dismissed: Green and Rowley v RBS

Green & Rowley v Royal Bank of Scotland plc [2013] EWCA Civ 1197

The Court of Appeal has handed down its decision in the first interest rate swap mis-selling case to come before the English courts since June 2012 when the FSA (now the FCA) announced a review into the sales of interest rate hedging products.

In a ruling that will be welcomed by financial institutions, the Court of Appeal has rejected the proposition that, in non-advised transactions, a bank's common law duty not to mis-state is informed by the relevant COB rules.  The decision effectively rejected an attempt to widen the category of individuals who can bring a claim for breach of the COB/COBS rules.

Factual background

Green & Rowley¹ 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 RBS. On 19 May 2005, Green & Rowley met with two RBS employees and during this meeting information was provided about the swap and other interest rate protection products.  On 25 May 2005, the parties entered into the swap.  At that time, Green & Rowley had a pre-existing loan liability to RBS of £1.5 million repayable in 15 years on an interest only basis at 1.5% above base rate.  The swap was for £1.5 million and for a term of 10 years.  The base rate remained comparitively flat until about June 2006 when it started to rise significantly.  Between October 2008 and March 2009, the base rate dropped steadily from 5% down to 0.5% and accordingly Green & Rowley became net payers under the swap in significant amounts.

First instance decision

At first instance, Green & Rowley had alleged a broad range of deficiencies in RBS' conduct and had alleged that RBS:

(i) was liable for negligent mis-statement in respect of information provided to them (the "Information Claim"); and

(ii) gave negligent advice about the swap (the "Advice Claim").

Originally there were claims for breach of statutory duty but it was conceded that they were time-barred.  Nevertheless, the customers argued that the bank's common law duty of care not to mis-state included the contents of COB rules 2.1.3 (communications to be fair, clear and not misleading) and 5.4.3 (risk warnings) and that these had been breached.  In particular, they alleged that they had not been properly informed by RBS of the potential break costs associated with the trade both prior to and at the meeting on 19 May 2005.

In December 2012, the High Court in Green & Rowley v The Royal Bank of Scotland plc [2012] EWHC 3661 found for RBS.  The key findings of HHJ Waksman QC, sitting as a Deputy Judge in the High Court, were as follows:

The Information Claim

• The duty to take care not to mis-state is narrower than the advisory duty where one would expect that relevant professional standards (in particular COB rules 2.1.3 and 5.4.3) would form part of the assessment as to whether it has been broken.
• Had COB rules 2.1.3 and/or 5.4.3 been relevant to the duty not to mis-state, the Judge held that he would still have found no breach.  This was based on, in part, his findings as follows:
  • The fact that there could be a break cost was stated and illustrations were offered in a brochure found to have been given to the customers.  The Judge held that the explanation was not misleading, unclear or unfair;
  • The risk in respect of break costs was an 'ancillary matter' - the 'essential risk' (which the customers understood) was the risk they could end up worse off if interest rates fell.   As to break costs, '..it was right to say something … but what was said was sufficient';
  • It was open to the customers to have asked for detail of the costs at or after the key meeting but they did not do so;
  • The fact that a subsequent brochure in 2009 made a reference to a potential 'substantial' break cost did not mean that what was said in 2005 was inadequate.    '..(T)he drop in interest rates which followed 2008 and has remained was extremely unusual' ; and
  • As at 2005, the risk of a drop in interest rates to the extent that occurred (and the consequent increase in break costs to the levels seen)  was 'very much a theoretical risk and not one which needed to be positively stated', especially bearing in mind the customers' intentions to keep the loans for at least 10 years.
• The Judge also observed that it was not clear that causation would have been established (although stopped short of a finding to that effect):

' ..had Green & Rowley been informed simply that the break costs/benefits could be substantial back in May                      2005 it is a matter of complete speculation as to what they would have done - I certainly could not be satisfied                 that they would not have proceeded'.

The Advice Claim

• It was held that RBS had conducted a non-advised sale and therefore did not owe an advisory duty of care to the customers.

Green & Rowley subsequently appealed, and the appeal was heard by the Court of Appeal on 29 July 2013.  The FCA was granted permission to intervene to make submissions in the appeal.

Court of Appeal decision

The arguments made by Green & Rowley on appeal can be summarised as follows:

• Issue 1 – a duty of care at common law not to mis-state is co-extensive with a bank's duty to comply with the relevant COB rules, even in a non-advised situation; and
• Issue 2 – if relevant, the High Court's factual findings as to the adequacy of the warnings around break costs were incorrect.

Green & Rowley did not appeal the High Court's factual findings that no recommendation or advice was given at the meeting of 19 May 2005 or that RBS did not assume an advisory duty of care.

The Court of Appeal dismissed the appeal. Lord Justice Tomlinson considered that arguments relating to Issue 1 were misconceived and that they amounted to saying that the mere existence of the COB rules gives rise to a co-extensive duty of care at common law.  This begged the question "why"?  He noted that Parliament has provided a remedy for private persons for a breach of statutory duty under section 150 (now s.138D) of the Financial Services and Markets Act 2000 ("FSMA 2000") and that there was nothing which justified "the independent imposition of a duty of care at common law to advise as to the nature of the risks inherent in the regulated transaction".

Having rejected Issue 1, the Court of Appeal held that it did not need to consider Issue 2 and declined to make any obiter comments regarding the scope of the bank's duties in relation to the disclosure of break costs. The FCA had been given leave to intervene in the appeal in order to make submissions in this regard but the parties, including the FCA, agreed that it would be inappropriate for the Court to express any views on this point and therefore no such submissions were made.

Those who qualify as 'private persons' will, as before, be able to bring claims for breach of the COB/COBS rules under s.138D FSMA 2000 (formerly s.150) so long as they are not time-barred.  In this regard it is worth noting that the customers' breach of statutory duty claim was dropped before the first instance hearing on the basis that it was time-barred.  Counsel for the appellants admitted at the Court of Appeal hearing that this concession "was "likely" to be wrong² because any breach of duty associated with the arrangement and execution of the transaction would continue until the execution of the transaction itself".  The Court of Appeal was not asked to express a view as to when the limitation period began to run.

Commentary

Whilst this case is highly fact specific³, the Court of Appeal's decision is welcome news for banks as it closes down an attempt effectively to circumvent the proper scope of the statutory cause of action contained in s.150/138D FSMA 2000 and broaden the category of individuals which can bring claims for breach of the COB/COBS rules.  The Court was very clear that to import a common law duty of care which involved taking reasonable care to ensure that Green & Rowley understood the nature of the risks involved in entering into the swap transaction 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 Court of Appeal's decision is also likely to be welcomed by banks for the fact that it leaves undisturbed the approach adopted by the High Court regarding: (i) the existence of a non-advisory relationship; and (ii) the adequacy of the disclosure regarding break costs.  As noted above, in relation to (ii), at first instance the Judge held that "Had (the) COB rules…been relevant to the duty not to mis-state (contrary to my conclusion) I would still have found no breach" (emphasis added).

The decision also does not alter the High Court's finding that the COB rules will only inform the relevant common law duties to the extent that a transaction is conducted on an advisory basis as opposed to an execution only basis.  At first instance, the Judge commented that in respect of an advisory duty "one would expect that relevant professional standards (in particular COB Rules 2.1.3 and 5.4.3) would form part of the assessment as to whether it [i.e. the advisory duty] has been broken."  The Court of Appeal noted that this approach has been endorsed on at least four occasions by first instance judges.  For example, it was held in Loosemore v Financial Concepts [2001] Lloyds PNLR 235 that the skill and care to be expected of a financial advisor would ordinarily include compliance with the rules of the relevant regulator.

_{1. Mr Rowley was a hotelier and property developer and Mr Green was a residential lettings agent at the relevant times.}

_{2.  The Claim Form was issued on 25 May 2011, more than six years after the meeting on 19 May 2005 but exactly six years after the execution of the swap.}

_{3.  At first instance, the High Court found that Green & Rowley were "intelligent and experienced businessmen".  RBS were also able to rely on their contractual documentation which contained helpful provisions confirming that no advice was being given.}