As some readers may recall, in previous blog posts I have reported on the updates to the law surrounding Interest Rate Hedging Products. Prior to the economic downturn many banks across the United Kingdom offered loan facilities to its customers, on the condition that their customers entered into an Interest Rate Hedging Instrument. This type of product was sold almost as an insurance policy against the ever increasing interest rates at that time.
The way the products were sold by the Banks and the significant financial burdens the products have caused has provoked a number of legal claims.
One of the first cases to be heard by the Court was Green –v- Royal Bank of Scotland. Proceedings were issued by a Paul Rowley, a hotelier and, his business partner, John Green (“the Claimants”).
The Claimants had an existing £1.5 million loan facility in place with the Royal Bank of Scotland (“the Bank”), repayable over 15 years, on an interest only basis at 1.5 percent over the base rate.
Subsequently the Claimants entered into a Base Rate Swap (“the Swap”) with the Bank on the following the terms; a fixed base rate of 4.83 percent which was to be applied to the notional sum of £1.5 million. The way the Swap operated meant that if the interest rate fell below 4.83 percent, the Claimants’ loan repayments would decrease but they would have to pay the corresponding sum to the Bank under the Swap.
A Swap of this nature is a highly sophisticated product and one which the average man on the street would not be able to fully understand without taking advice from a financial expert. The Claimants’ case centred on the advice given by the Bank which they alleged was negligent.
However, when considering the facts of this case, the Court found in favour of the Bank. The Court held that the Bank were only under a duty to take reasonable steps to ensure that the counterparty to a transaction understood the nature of the product, in accordance with the Financial Conduct Authority’s Conduct of Business Rules.
The Court concluded that the Claimants had persuaded themselves that the Bank had misled them on the termination of the product. Just because the relative advantages and disadvantages were discussed did not mean that the swap was recommended. The product had been described by the Bank as being ‘suitable’ but the Court found that the term ‘suitable’ meant that it was suitable to Claimants’ needs, not that advice had been given for them to take out the Swap.
The case was recently heard by the Court of Appeal and its decision was issued this week, which rejected the Claimants’ appeal. The substantive Judgement will not be issued until Autumn of this year but is eagerly awaited.
Although the decision in this case is likely to cause some uncertainty, it must be noted that cases of this nature are highly fact-sensitive and must be considered on their own merits.
One of the reasons this case was dismissed by the Court of Appeal was due to the fact that the six year limitation period had elapsed. If you consider you may have been mis-sold an interest rate protection product, you must take immediate action to protect your position. It may be possible to enter into a Standstill Agreement with the bank (an agreement between the parties which effectively freezes the limitation period).
If you have been sold an interest rate protection product and require advice on whether you have an action against your bank then please contact me.
Commercial Dispute Resolution Department
0113 227 9316