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19 July 2017

What does your bank owe you?

In an interesting (and helpful) development for Claimants, the courts have found that there may be circumstances in which a bank owes an ‘intermediate’ or ‘mezzanine’ duty to customers when providing information about its products.

Facts of the case

The Claimants in this case were Mr and Mrs Thomas, a husband and wife team, who were also partners in an award-winning organic farming business which they built from scratch, Linscombe Farm. In 2006 they transferred their borrowing from Natwest to the Defendant, Triodos Bank, because the bank had a reputation for supporting businesses with strong green credentials.

In the summer of 2008, the Thomases decided they wanted to switch a sizeable proportion of their borrowing from a variable rate to a fixed rate. Like others who fixed the rate of their borrowing before September 2008, Mr and Mrs Thomas found themselves tied to a far higher rate of interest than the current market rate.

The Thomases switched the greater part of their borrowing to a fixed rate in June 2008, and did so in two tranches, at 6.71% and 7.52% per annum respectively. In each case the fix was for a 10 year term.

Clause 2.10 of the bank’s terms and conditions referred to an ‘early repayment fee’ in the event of early redemption, and clause 2.11 provided that an additional ‘extra repayment premium’ was payable if a fixed rate loan was repaid early. It was for this reason, and prior to agreeing to switch to fixed rates, Mr Thomas queried whether the maximum likely redemption penalty would be in the region of £10,000 to £20,000. Mr Thomas’ understanding of the amount of the redemption penalty was not corrected by the bank.

A few years later, and as a result of the global financial crisis, the Thomases began to have second thoughts about their decision to fix the interest rates and started to enquire about what the cost would be if they were to re-fix the loan. In response, the bank told the Thomases that the penalty would be £96,205.47; this was subsequently amended to £54,691.59. It became clear at the trial that the bank had very little experience of a customer wanting to break a fixed rate on borrowing and that only a few senior personnel really understood how the clause referring to such costs was supposed to work. Although the early termination penalty decreased, it was still significantly more than the Thomases had expected, and it was more than the Thomases could afford.

The question then arose as to what the Thomases could do in this unfortunate situation. That became a matter for the court to decide, and here follows the court’s reasoning and decision.

Judgment

In cases like this, it is important to distinguish between circumstances in which a bank provides advice to a customer, and when they are simply providing information. HHJ Havelock-Allen looked at the Rubenstein v HSBC Bank plc case when considering this point. It was held in Rubenstein that: ‘The key to the giving of advice is that the information is either accompanied by a comment or value judgment on the relevance of the information to the client’s investment decision or is itself the product of a process of selection involving a value judgment so that the information will tend to influence the decision of the recipient’.

In practical terms, what this means is:

  • where a bank provides advice, there is a duty to ensure that the advice is full and accurate. ‘Full advice’ should cover the options available to a customer and the pros and cons of any product being recommended, such to enable a customer to make an informed decision; and
  • when a bank provides information about a product to a customer, the duty of care owed is to a lower standard. That duty is to not mislead or misstate information (Hedley Byrne v Heller & Partners Ltd).

There was no doubt in this case that the bank at least owed the Thomases a duty of the Hedley Byrne variety to take reasonable care not to misstate any facts on which the Thomases could be expected to rely. The question was whether the bank owed any further duty than that.

An important facet to this case is the fact that the bank advertised to customers in its literature and in letters, that they subscribed to the Business Banking Code (BBC) (it is worth noting that the BBC does not have contractual force between banker and customer: it simply provides a benchmark as to how banks should behave). The BBC contained a ‘Fairness Commitment’ which was essentially a promise to the customer that:

‘if the bank was asked about a product, it would give the customer a balanced view of the product in plain English, with an explanation of the financial implications’.

The Court found that there were no basis, or exclusion clauses which would lead to the conclusion that the bank would not honour this promise. Therefore the bank owed a duty greater than the Hedley Byrne duty to simply not misstate or mislead.

When the Thomases asked about the cost of exiting the fixed rate loan early, the bank owed them a duty to explain the financial implications of fixing the rate. However, it is important to note HHJ Havelock-Allen’s points [at para 81] that such a duty was:

“owed only in response to the claimants” inquiries because that is what the bank had signed up to in the [Business Banking Code]. It was not a duty to volunteer information if not asked.’

In simple terms, this is a responsive, not a proactive duty.

HHJ Havelock-Allen held that the essential components to what ought to have been the bank’s explanation were as follows:

  • that the rate could be fixed for a period (whether in months or years, and whether any minimum or maximum length of time);
  • where the available fixed rates could be found (eg on the internet);
  • what those rates represented (the forward cost of money);
  • the effective rate that would be payable (ie the current swap ask rate for the period of the fix plus the bank’s margin, if any); and
  • the financial consequences of terminating the fixed rate before the end of the period.

HHJ Havelock-Allen went on to say that a worked example was not necessary, but the ingredients of the calculation under each clause should have been made clear in terms which gave a balanced picture and brought home to the Thomases that even if the fixing rate was lower for a longer period ahead, the longer period left to run if there was early repayment, the higher the redemption penalty would be if there was a difference in rates which meant that a redemption penalty was chargeable.

Conclusion

This is a bold and interesting decision by HHJ Havelock-Allen. Although this case has not changed the fact that there is a clear difference in the duty owed by banks when providing advice or information to customers, it has gone some way in opening up the possibility, in certain circumstances (like here where the Bank subscribed to the BBC) of introducing a new ‘intermediate duty’ to explain a product to a customer. For now, this is a helpful judgment for claimants, but will undoubtedly be the subject of further judicial scrutiny.

If you would like further information please contact Sinead Lester.

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