In Crestsign Ltd v National Westminster Bank Plc and The Royal Bank of Scotland Plc [2014] EWHC 3043 (Ch), the High Court held that the banks were not liable for mis-selling of an interest rate swap primarily because the documentation contained clear wording stating that it was a non-advised sale.

In 2008, Crestsign Ltd, a family-run commercial property investment company, refinanced its borrowing with the National Westminster Bank Plc and The Royal Bank of Scotland Plc (together the banks) for a period of five years, and entered into a ten year interest rate swap.

The swap included a discounted rate of 0.45 per cent for the first two years, with a fixed rate of 5.65 per cent thereafter.

The banks also had the option to cancel the swap during specified intervals within the ten year term.

Crestsign benefitted from the swap for the first two years, however after this period the cost of the swap became significantly higher.

Crestsign argued subsequently that the banks had failed to exercise reasonable skill and care when giving advice, and that the banks had failed to ensure that the information provided would enable Crestsign to make an informed decision.

The Court rejected the claim, holding that:

whether advice had been given was considered from the perspective of an objective impartial bystander;

1. on an objective basis the banks’ salesperson did appear to cross the line into advising the customer in this case but this did not constitute an agreement by the banks to give advice;
2. a finding of advice does not necessarily mean that there is an assumption of responsibility or a duty of care in tort to the recipient to give that advice carefully. There was no assumption of responsibility in this case;
3. the banks’ risk management report, terms of business and standalone derivatives terms protected them from owing any duty of care to clients, since the documents defined the relationship between the parties as “non-advisory” and the relevant disclaimers were basis clauses rather than exclusion clauses;
4. the claimant was a limited company, so could not bring an action based on breaches of the regulatory rules. The Court confirmed that a bank’s duty to comply with its regulatory obligations and duty of care at common law are not co-terminous, but regulatory obligations will inform a consideration of the duty at common law since a reasonably skilled and careful professional would comply with his regulatory obligations. Therefore, there may be an overlap between regulatory obligations and duties at common law;
5. in this case, the banks had provided Crestsign with just enough information regarding break clauses for early termination of the swap by stating that the cost of exercising such a clause could be substantial, although the banks had not provided the formula for calculation or examples of the potential scale, which the Court implied would have been preferable; and
6. in a non-advisory relationship, the banks were only under an obligation to explain the nature of products accurately without misstatement to clients, to correct obvious misunderstandings and to provide accurate information in response to questions, not to educate clients further.

A copy of the judgment is available. http://bit.ly/12igJE9