Green and Another v Royal Bank of Scotland Plc

Approved Judgment

Hearing date : 29 July 2013

On 25 May 2005 the Respondent bank, The Royal Bank of Scotland plc, hereinafter "the Bank", sold to the Appellants, John Green and Paul Rowley, an interest rate swap, hereinafter "the Swap", as a form of hedge against their existing loan liabilities to the Bank. Messrs Green and Rowley allege that the swap was, to use the current expression, "mis-sold" to them by the Bank. The judge below, His Honour Judge Waksman QC, sitting in the Mercantile Court at Manchester, disagreed. Hence this appeal.

At the relevant time the conduct of the Bank in either arranging a swap transaction or advising upon it was governed by the then current Conduct of Business, hereinafter "COB", Rules promulgated by the Financial Services Authority pursuant to its rule-making powers conferred by the Financial Services and Markets Act 2000.

Section 150 of the Financial Services and Markets Act 2000 provides, so far as material, as follows:-

" 150 Actions for damages.

(1) A contravention by an authorised person of a rule is actionable at the suit of a private person who suffers loss as a result of the contravention, subject to the defences and other incidents applying to actions for breach of statutory duty.

…

(3) In prescribed cases, a contravention of a rule which would be actionable at the suit of a private person is actionable at the suit of a person who is not a private person, subject to the defences and other incidents applying to actions for breach of statutory duty.

…

(5) "Private person" has such meaning as may be prescribed."

The Bank was for these purposes an "authorised person" and the Bank conceded for the purposes of this action that Messrs Green and Rowley were "private persons".

The COB Rules said to be relevant are:-

" COB 2.1 Clear, fair and not misleading communication

Application

COB 2.1.1 R (1) This section applies to a firm when it communicates information to a customer in the course of, or in connection with, its designated investment business.

(2) This section does not apply to a firm when it communicates a financial promotion in circumstances in which COB 3 (Financial promotion) applies to the firm.

Purpose

COB 2.1.2G The purpose of this section is to restate, in slightly amended form, and as a separate rule, the part of Principle 7 (Communications with clients) that relates to communication of information. This enables a customer, who is a private person, to bring an action for damages under section 150 of the Act to recover loss resulting from a firm communicating information, in the course of designated investment business, in a way that is not clear or fair, or is misleading.

Clear, fair and not misleading communication

COB 2.1.3 R When a firm communicates information to a customer, the firm must take reasonable steps to communicate in a way which is clear, fair and not misleading.

COB 2.1.4 G When considering the requirements of COB 2.1.3 R, a firm should have regard to the customer's knowledge of the designated investment business to which the information relates.

COB 2.1.5 G COB 2.1 embraces all communications with customers, for example: client agreements, periodic statements, financial reports, telephone calls and any correspondence which is not a financial promotion to which COB 3 (Financial promotion) applies.Firms should note the requirements of COB 3.8.4 R relating to non-real timefinancial promotions and COB 3.8.22 R relating to real timefinancial promotions.

…

COB 5.4 Customers' understanding of risk

Application

COB 5.4.1 R This section applies to a firm that conducts designated investment business with or for a private customer but does not apply to a firmwhen providing basic advice on a stakeholder product.

Purpose

COB 5.4.2 G Principle 7 (Communications with clients) requires a firm to pay due regard to the information needs of its clients and communicate information to them in a way that is clear, fair and not misleading.Principle 9 (Customers: relationships of trust) requires a firm to take reasonable care to ensure the suitability of its advice and discretionary decisions. The purpose of this section is to ensure that a firm takes reasonable steps to ensure that a private customer understands the nature of the risks inherent in certain transactions.

Requirement for risk warnings

COB 5.4.3 R A firm must not:

(1) make a personal recommendation of a transaction; or

(2) act as a discretionary investment manager, or

(3) arrange (bring about) or execute a deal in a warrant or derivative; or

(4) engage in stock lending activity;

with, to or for a private customer unless it has taken reasonable steps to ensure that the private customer understands the nature of the risks involved."

The designation "R" indicates that the relevant provision is a rule — those provisions preceded by the designation "G" are guidance as to the purpose and application of the rule.

For the purposes of these provisions the Bank was a firm engaged in designated investment business and Messrs Green and Rowley were private customers.

Mr Green was at the material time an estate agent and residential lettings agent in Lytham St Annes. Mr Rowley was at the material time a hotelier and property developer in the same town. They carried on business together in partnership buying and developing commercial property. The judge described them as intelligent and experienced businessmen. He also observed that whilst they were not previously versed in swaps, this particular swap was very straightforward and they would have had no difficulty in understanding it or, if they did not, they would have asked, by which he meant I think that they would have asked the Bank in the circumstances hereinafter described. They also had access to their own independent financial and legal advice from accountants and solicitors.

As at May 2005 Messrs Green and Rowley had two loans from the Bank secured on their properties. The precise details of the loans do not matter. Although it is an over-simplification, it can for present purposes be assumed that the loan was of £1.5 million for a term of fifteen years on an interest only basis at 1.5% above base rate. Base rate as at 25 May 2005 was 4.75%.

Messrs Green and Rowley allege that both prior to and at a meeting on 19 May 2005 they were told by a Mrs Kay Gill and a Mrs Karen Holdsworth of the Bank that the Swap was a good idea and that they should enter into it. Mrs Gill was a Senior Commercial Manager looking after a specific portfolio of business customers, including Messrs Green and Rowley. Mrs Holdsworth was an Area Manager specialising in the arrangement of interest rate management products of which the Swap was one.

The Swap was executed on 25 May 2005. It was preceded by the Bank sending to Messrs Green and Rowley what the judge described as the Terms Letter, which Mr Rowley countersigned as having been read and understood, together with its enclosures. The enclosures included a copy of the Bank's Terms of Business which stated at paragraph 3.2 that the Bank would provide the customer with dealing services on an execution only basis. At paragraph 3.3 thereof the Bank stated that it would not provide the customer with advice on the merits of a particular transaction. Schedule 1 to the Terms Letter, specifically acknowledged by Mr Rowley as having been read and understood, was a Risk Warning Notice in the form then prescribed by the Financial Services Authority. It is unnecessary for the purposes of this judgment to discuss the question whether the provision of a notice in this form amounts to compliance with COB Rule 5.4.3. It is equally unnecessary to discuss whether, on the assumption that provision of the Risk Warning Notice is not or not necessarily sufficient compliance therewith, the Bank did on the facts of this case take reasonable steps to ensure that Messrs Green and Rowley understood the nature of the risks involved in entering into the Swap. The judge held that it did, although that conclusion was equally unnecessary to his decision, as I shall describe.

An interest rate swap is or can serve as an interest rate hedging product. The Swap executed on 25 May 2005 was independent of the loan, although its purpose was to protect Messrs Green and Rowley against the risk of base rate increasing during the term of the loan. An increase in base rate would result in the variable interest rate under the loan, base rate plus 1.5%, increasing accordingly. Both parties would have assumed in 2005 that the margin above base rate would remain constant during the term of the loan. Indeed, the margin was initially fixed, although later agreed variations to the terms of the loan opened up the prospect of an increase in margin being imposed on review or roll-over. But on the assumption that the margin remained fixed at 1.5%, the Swap effectively converted the variable rate of interest under the loan to a fixed...