By Kalvin P. Chapman
The case of Thornbridge is shortly to be heard on appeal. Permission to appeal was granted in April 2016 after the case was determined by Judge Moulder at the High Court, Manchester District Registry in 2015.
The case may be an important one. Of most significance is the issue of whether the Bank had duties to the customer offer advice, or to offer information that was not misleading.
Essentially, as the law stands today, the contractual arrangements between a bank and its customer are applied using the black letter of the law – that is, they are strictly enforced in their strictest terms. When a business enters into a hedging derivative (such as an interest rate swap – generically known as Interest Rate Hedging Products) or a foreign exchange derivative, they are almost always required by the Bank to sign or agree to an ISDA agreement of one sort or another. These agreements have clauses that says that the customer will only enter into the products having taken their own advice and will not rely on what the Bank has said.
Prior to August 2007 hedging worked quite well. Rates used to go up and down. Between 2001 and 2006 interest rates were at historic lows. From 2005 rates went up. Banks needed to make more profits. In about 2005 the Banks realised that if they pushed IRHPs and FX products onto their customers, they could make a lot of money. The Banks did the same with PPI policies to retail customers also. In order to ensure that more and more products were sold, the relationship managers and the IRHP/FX sales people were offered substantial bonus packages that were designed to reward those that sold the most products.
Businesses generally had, until late 2007, always had very close relationships with their relationship managers. The trust between them was quite often immense. It was not unusual for customers to regularly socialise with their relationship managers, with some even going on holiday with them. A number of high profile customers would be provided with holidays by the Bank.
During the 2005 to 2008 period, relationship managers would be paid huge bonuses if they referred their customers to sales people (CF21/CF30) who would sell the financial products to the customers. It was usually a process where the relationship manager and CF21/CF30 worked in tandem together. The bonuses is what made relationship managers ignore the best interests of their customers.
We have even had a client who confirmed that one Christmas Eve his relationship manager arrived with a card for the family. When our client commented on the new and expensive car, the relationship manger responded: “I got that because of selling you the interest rate structured collar”. It was amusing at the time. It was not amusing a year later when the interest rate collar was killing the client’s business.
Because trust was so implicit in the relationship the signing of yet more forms was normal and straightforward. It never occurred to the vast majority of customers to consider taking legal advice over a boiler-plate contract that was required in order to agree a new product that the relationship manager had advised. It’s not as if the relationship manager would sell something that could damage the business – banks just did not do this sort of thing.
Fast forward to 29 June 2012. Businesses had really suffered with interest rates being 0.5% and the IRHP causing damage to their business, or the FX products really causing financial problems. The FSA (as it then was) agreed to look at IRHPs. All of the solicitors involved knew the ISDA terms were significantly unfair, and had been pushed onto clients as a requirement imposed by the banks. Grant Estates v RBS, decided in Scotland, imposed these terms strictly.
The cases heard by the Courts between 2012 and 2015 all had the same narrative. It made no difference that the contractual term appeared unfair, they would be imposed strictly by the Courts. The cases, which included Thornbridge, found that the Bank did not have an advisory duty because the ISDA specifically removed it. The rule is simply that a bank customer is entitled to agree any contract it likes, but where it does enter into a contract it must be bound by it – including being bound by the ISDA terms.
It was expected that Crestsign might change things when it appealed to the Court of Appeal. The findings of fact really were damning for RBS, but the Court had been locked by the ISDA terms and found that it made no difference in a CF21/CF30 or relationship manager had misled the customer, as the ISDA terms removed any reliance on things said by the bank employees.
Thornbridge is a case where the duties of the bank employees were considered in detail. The Court found that there was no advisory relationship because (a) the bank had not been asked to provide one (b) the customer had not paid for one and (c) the bank had explicitly stated through the ISDA that there was no advisory relationship.
The Court found that there was no duty to comply with COBS where the customer was a business, because only a private individual had the right to litigate where the bank had failed to comply with COBS. This was more recently re-confirmed by Judge Waksman in Flex-E-Vouchers Ltd v Royal Bank of Scotland Plc