Financial mis-selling claims: Fine Care v Natwest Markets Plc
Banks and other financial institutions selling financial products will inevitably owe their customers various duties. At a minimum, this usually includes a duty to ensure that the information that they provide about any financial product is accurate (arising from a duty ‘not to misstate’ and/or misrepresent facts). In some cases, however, financial institutions will also owe a more onerous duty to advise their customers on the suitability of any financial product that they are selling (and to take reasonable care in doing so) to ensure that it is fit for purpose (amounting to what is known as an ‘advisory duty’). Where an advisory duty exists, there is more scope for a customer to allege that the financial product has been mis-sold.
Whether an advisory duty exists depends on the nature and content of the parties’ dealings. For that reason it can often be unclear. In order to seek to provide certainty, financial institutions typically specify in their terms and conditions when they are not providing advice (often referred to as ‘no-advice’ clauses). Following the judgment in First Tower Trustees v CDS  1 WL 637, concerns arose that such no-advice clauses might (in common with ‘non-reliance’ clauses which were the subject of that judgment) be subject to the requirement of reasonableness under the Unfair Contract Terms Act 1977 (“UCTA”).
In Fine Care Homes Limited v Natwest Markets Plc  EWHC 3233 (Ch) (discussed below), the court re-examined the legal principles that apply when assessing whether an advisory duty will be found to exist. In a decision that will be welcome to financial institutions, it also confirmed that no-advice clauses (which merely define the nature of a party’s obligations) are not of the same nature as non-reliance clauses of the type described in First Tower (which seek to exclude liability) and are therefore not subject to any requirement of reasonableness under UCTA.
The case concerned the sale of a complex interest rate hedging product, known as a structured collar (the “Collar”) by the Royal Bank of Scotland Plc (the “Bank”) to Fine Care Homes Limited, one of its corporate customers (the “Customer”). The Collar was purchased in 2007 (just before the 2007/08 financial crisis) and was for a term of five years extendable by two years at the option of the Bank.
The purpose of the Collar, which had a notional value of £4 million (representing around 50% of intercompany debt), was to provide hedging protection to the Customer against potential rises in the UK average base rate of interest. If the average base rate went above 6.5%, the Customer was protected against a rise in interest rates. The counterpart to that protection, however, was that the Customer would be required to make a payment to the Bank if the average base rate fell below 5.5%, with that payment increasing the closer the base rate fell to zero.
Following the 2007/08 global financial crisis, the UK average base rate of interest plummeted. By 2009, it had fallen to 0.5% where it remained for the remainder of the term of the Collar. Consequently, the Customer was required to make significant net payments to the Bank.
FCA Review: Breach of Sales Standards
In 2012, a review was conducted by the FCA into the sale of interest rate hedging products by numerous banks.
The review found that, in respect of the sale of the Collar by the Bank to the Customer, a number of ‘Sales Standards’ agreed with the FCA had been (or may have been) breached, including in respect of the explanation given of the features, benefits and risks of the Collar and the alternative products available. The review nevertheless concluded that the Customer would have chosen a ‘vanilla’ collar had the relevant explanations been given. The Customer did not accept that conclusion (and also did not accept the Bank’s offer of redress in the sum of c.£384,000).
The Customer brought a claim against the Bank alleging that it had been mis-sold the Collar. It claimed that: (i) the Bank had a duty to advise it carefully in relation to the suitability of the Collar (amounting to an ‘advisory duty’) which it had failed to do; and/or (ii) that the Bank had made negligent misstatements and/or misrepresentations about the Collar.
In advancing its claim, the Customer made the following arguments:
- Advisory duty
Although the Bank’s terms of business and relevant disclaimers recorded that the Bank was not providing advice on the merits of a particular transaction (amounting, in other words, to a no-advice clause), those clauses were excluded by the requirement of reasonableness in 2.5.3 and 2.5.4 of the Conduct of Business rules and guidance (“COB”)1 (now replaced by the Conduct of Business Sourcebook, known as ‘COBS’) and under UCTA (by extension of the decision in First Tower).
Breach of FCA rules/guidance
Although the Customer was ineligible to bring a claim for breach of the FCA rules (since it was not a “private person” for the purpose of advancing a statutory claim under section 138D of FSMA), those rules and guidance were nevertheless indicative of the standard of skill and care to be expected of the Bank when assessing its duty of care owed to the Customer (whether that was an advisory duty or a duty not to misstate information relating to the Collar). In particular, the Customer alleged that a breach of the ‘APER’ code of practice2 (“APER”), which requires, among other things, that the risks of an investment are explained to a customer, indicated a breach of the Bank’s common law duty of care.
The Bank denied the claim. It argued that it had no more than a duty not to misstate facts relating to the Collar and that it had not done so.
The Court rejected the Customer’s claim. In summary, it held that:
a) The Bank did not have an advisory duty
The Bank had not assumed an advisory duty to the Customer to advise it in respect of the suitability of the Collar (and, as such, the Bank did not owe the Customer more than a duty not to misstate and/or misrepresent information relating to the Collar). In coming to that conclusion the Court had regard to previous legal authority establishing that:
- In assessing whether a bank has assumed an advisory duty to its customer, the question is whether the bank had ‘crossed the lined’ separating the activity of giving information about a product and selling it and the activity of giving advice3;
- In general, a bank will owe no duty to explain the nature and effect of the proposed transaction to its customer; it is only in some exceptional cases that such a duty might arise4.
On the facts, this was not the sort of ‘exceptional case’ where the Bank had crossed the line into assuming an advisory duty towards the Customer. The Customer had not been steered to purchase the Collar. Although the Customer had been sent a ‘discussion document’ following a meeting to discuss interest rate hedging, which drew attention to various interest rate hedging products available, none of these were singled out as being more suitable for the Customer than the others. While the Customer alleged that its controlling director was an unsophisticated investor with no experience of interest rate hedging products, the Court did not agree that the controlling director’s understanding was as limited as was suggested. Accordingly, the director’s level of understanding did not turn a relationship that was, on the face of it, a non-advisory one into one where the Bank was considered to have assumed a duty of care to advise the Customer on the suitability of the transaction.
b) Bank’s terms of business
If there was any doubt on the question of whether the Bank had assumed an advisory duty, the Bank’s terms of of business confirmed that this was not the case. Although legal authority had established that so-called ‘non-reliance’ clauses5 were subject to a requirement of reasonableness in order to be enforceable6, the relevant clauses recording the non-advisory basis on which the Bank was acting were not of that nature. Accordingly, they were not subject to any requirement of reasonableness under either the Unfair Contract Terms Act 1977 or COB 2.5.3 and 2.5.4 (and, as such, were not liable to be rendered unenforceable on that basis).
c) Breach of FCA rules / guidance
These findings (namely that the Bank had not assumed an advisory duty) meant that any breach of APER was not considered relevant. That was because APER clearly emcompassed duties going beyond a duty not to misstate information. To that end, the Court relied on legal authority establishing that the COB rules cannot create a duty of care where one does not exist on the basis of common law principles7. If, however, a bank was found to have undertaken a duty to advise on the suitability of a product then APER might be taken into account in informing the content of that duty (and whether that duty was breached). But that was not the case here.
d) No breach of advisory duty or negligent misstatement/misrepresentation
Even if the Bank had assumed an advisory duty to advise the Customer on the suitability of the Collar, the Bank had not breached that duty in the circumstances. For the same reasons, the Bank had not misstated or misrepresented information relating to the Collar.
This case underlines that financial institutions will only be found to have an advisory duty in ‘exceptional cases’ where they are considered to have ‘crossed the line’. To that end, a breach of the FCA rules or guidance cannot be relied on to indicate that this line has been crossed.
It nevertheless remains the case that the question of whether ‘the line has been crossed’ in any particular case will largely be fact-sensitive. As a result, there will continue to be cases where the nature of the duty owed to the customer is not clear-cut.
The good news for financial institutions is that no-advice clauses (which provide strong evidence of the basis on which they are acting) are not liable to be excluded under UCTA or COB 2.5.3 and 2.5.48. Accordingly, financial institutions would be well-advised to ensure that their terms of business and relevant disclaimers (which should be provided to their customers at the outset of their course of dealings) contain robust clauses clearly recording the non-advisory terms on which they are engaging with their customers.
1 COB 2.5.3 provided that: “A firm must not, in any written or oral communication in connection with designated investment business, seek to exclude or restrict, or to rely on any exclusion or restriction of, any duty or liability it may have to a customer (which for these purposes includes a retail customer) under the regulatory system” and COB 2.5.4 provided that: “A firm must not, in any written or oral communication to a private customer in connection with designated investment business, seek to exclude or restrict, or to rely on any exclusion or restriction of, any duty or liability not referred to in COB 2.5.3 R unless it is reasonable for it to do so”.
2 Being the Statements of Principle and Code of Practice for Approved Persons.
3 As per LEA v RBS  EWHC 1387 (Ch).
4 As per Property Alliance Group v RBS  1 WLR 3529.
5 Being clauses which provide that one contracting party does not enter into an agreement in reliance on a statement or representation made by the other contracting party.
6 As per First Tower Trustees v CDS  1 WLR 637.
7 As per Green & Rowley v RBS  EWCA Civ 1197. The Court in that case held that to conclude otherwise would be to confer the protection under section 138D of FSMA, available in respect of a “private person”, on a much wider class of persons: that would drive a coach and horses through the intention of Parliament to confer a private law cause of action on a limited class.
8 By parity of reasoning, the same should apply in respect of COBS 2.1.2 and 2.1.3 which has replaced COB 2.5.3 and 2.5.4.