Duty of care – Advice – Respondent bank selling interest-rate swap to appellants to protect against risk of increase in base rate of interest applicable to variable rate loan – Base rate dropping to all-time low with result that interest costs higher under swap than under original loan arrangements – Claim against respondent for breach of FSA’s Conduct of Business Rules – Court dismissing claim framed by reference to common law duty of care not statutory claim for breach of rules – Whether common law duties of care existing co-extensive with those prescribed by COB Rules – Appeal dismissed
The appellants carried on the business of buying and selling of commercial property in partnership together. Their properties were charges as security for loans from the respondent bank in the amount of £1.5m, borrowed over a term of 15 years on an interest-only basis at 1.5% above base rate. In May 2005, when the base rate was 4.75%, the respondent sold an interest-rate swap to the appellants as a form of hedge against their existing loan liabilities. The purpose of the swap was to protect the appellants against the risk of an increase in the base rate during the term of the loan; it effectively converted the variable rate of interest under the loan to a fixed rate for the 10-year term of the swap. The fixed rate was 4.83%, only fractionally more than the then prevailing base rate at the date of the transaction.
Until October 2008, the appellants did well out of the swap as the base rate rose significantly. Subsequently, however, interest rates fell to an all-time low, reaching 0.5% by March 2009, with the result that the appellants were paying more than they would have done under the original loan arrangements. By then, the appellants wished to restructure their partnership, which included revising the swap. However, under the terms of the swap, the appellants would incur break costs on early termination in circumstance where the fixed rate was lower than prevailing interest rates; the cost of early termination of the swap was calculated at £138,000.
In proceedings against the respondent, the appellants contended that it had “mis-sold” the swap to them in breach of the Financial Service Authority’s Conduct of Business (COB) Rules, in particular by inadequate disclosure of the potential break costs. They did not rely on the right of action afforded to private persons, under section 150 of the Financial Services and Markets 2000 Act, in respect of breaches of the COB Rules, owing to fears that their claim might be time-barred. Instead, they contended that duties of care existed at common law that were co-extensive with those prescribed by the COB Rules and in respect of which a more generous limitation period applied. The claim was dismissed on the grounds that no relevant duty of care was owed and that, in any event, the respondent had not breached the COB Rules in relation to the swap: see [2012] EWHC 3661 (QB). The appellants appealed.
Held: The appeal was dismissed.
Not every statutory duty generated a co-extensive duty of care at common law. The mere existence of the COB Rules did not give rise to such a duty. Parliament had, by section 150 of the 2000 Act, provided a remedy for breach of the rules in the shape of an action for breach of statutory duty. The he existence of the action for breach of statutory duty told against, rather than supported, the finding of a common law duty. There was no feature of the situation that 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. The respondent had not crossed the line that separated the activity of giving information about and selling a product from the activity of giving advice. In the absence of that feature, there was neither justification nor need for the imposition of a common law duty independent of, but co-extensive with, the remedy provided by statute: X (minors) v Bedfordshire County Council [1995] 1 AC 633 considered. The COB Rules did not themselves provide any pointer as to the assumption of a duty of care to advise or as to the appropriateness of imposing such a duty. Although such a cause of action would afford protection to those who, not being “private persons”, could not not avail themselves of a cause of action for breach of statutory duty, its imposition would drive a coach and horses through the intention of parliament to confer a private law cause of action on a limited class. Accordingly, the respondent did not owe a common law duty of care to the appellants to take reasonable care to ensure that they understood the nature of the risks involved in entering into the swap transaction.
David Berkley Qc and John Virgo (instructed by Clarke Willmott LLP) appeared for the appellants; Andrew Mitchell QC (instructed by Dentons UKMEA LLP) appeared for the respondent; Nicholas Peacock QC and Catherine Addy (instructed by the legal department of the Financial Conduct Authority) appeared for the FCA.
Sally Dobson, barrister
