Interest rate hedging products: mis-selling - Update on Green v Royal Bank of Scotland

The Court of Appeal recently published its judgment in Green v Royal Bank of Scotland Plc [2012] EWHC 3661 QB, the first decided case concerning the alleged mis-selling of Interest Rate Hedging Products ("IRHPs").

We summarise the Court of Appeal's decision below (a detailed bulletin analysing the judgment is attached here).

Background

The claimants brought proceedings against the Royal Bank of Scotland ("RBS") in 2011 alleging mis-selling of an IRHP.  At first instance, the High Court dismissed the claim on the basis that RBS had not provided advice to the claimants and had provided enough information regarding the break costs involved. The claimants appealed that decision earlier this year.

Court of Appeal

On appeal, the claimants alleged that compliance with the relevant COB Rules gave rise to a common law duty on RBS' behalf to explain clearly the potential magnitude of any break costs in a way that they could understand it.

The Court of Appeal dismissed the claimants appeal on the basis that there was a difference between 'providing information' and 'providing advice'.  Only the latter could give rise to a duty which would be informed by the COB Rules.  The Court premised its decision on two factors:

1. The existence of a statutory duty does not necessarily bring about the creation of a common law duty of care to advise.  This is particularly the case when a statutory remedy is available for any breaches of that statutory duty; and
2. RBS did not on the facts, undertake to advise upon the transaction and it did not give any advice.

Conclusions

This was a "highly fact sensitive case" based upon evidence specific to this case; however, there are a number of points of principle to be drawn from the Court of Appeal's judgment:

• Clear evidence will be required to ground a finding that a product provider crossed the line which separates the "activity of giving information" from the "activity of giving advice".
• Absent evidence establishing a duty to advise, a claimant will not be able use the COB Rules to create a common law duty of care.
• The existence of a statutory duty might give rise to a common law duty of care, but only in circumstances where the breach of the statutory duty was not actionable under the statutory regime.
• Where (as in the case of RBS) the contractual documents make clear to customers that the service is provided on an execution-only basis this will be taken as being inconsistent with an advisory role. 

Comment

The Court of Appeal's decision highlights that in claims based on mis-selling of IRHPs, a pivotal issue which will often determine the outcome will be the distinction between the role of banks, as the providers of the product or of an 'execution only' service on the one hand; and the role of advisor to the customer on the other. The contractual terms which govern the legal nature of the relationship between the bank and the customer are a key determining factor in this issue, so the standard terms and the system used for the sale process are key points for professional indemnity insurers both from the underwriting and claims perspectives.

We are continuing to monitor developments in IRHP mis-selling generally, so if you have any questions please contact us.