Do banks have to explain the terms of interest rate swaps to laymen when they are entered?

A bank which fails to comply with statutes whilst undertaking a regulated activity can be sued for breach of statutory duty. However, what happens if the time limit for such a claim has expired?

24 October 2013

Where a bank fails to comply with regulation imposed by a statute whilst undertaking a regulated activity it can be sued for breach of statutory duty. However, if the time limit for such a claim has expired does it also amount to a breach of common law to allow a claim to be brought? No. The Court of Appeal decision in Green and Rowley v The Royal Bank of Scotland [2013] EWCA Civ 1197 has now confirmed that there is no such concurrent or co-extensive duty of care at common law.

Messrs Green and Rowley were, respectively, a real estate and residential lettings agent and a hotelier and property developer. They were consequently not financial services experts (and their bank was aware of this). They entered into an interest rate swap (IRS), which specified that a payment would be required if the IRS was terminated early. Green and Rowley subsequently altered their funding arrangements with the Bank and terminated the IRS and the bank imposed a termination charge of £138,650.00. 

Green and Rowley argued that the FSA's Conduct of Business (COB) Rules required the Bank to explain clearly and fairly the true potential magnitude of those costs, and to warn that they could be substantial before the IRS has been entered. They lost and appealed, arguing that breach of a statutory duty should also be actionable as a breach of a concurrent common law duty of care where either the purpose of the statute is to confer protection on a defined class of individuals or where the statutory duty has been carelessly executed. It was accepted at the appeal that failure to comply with COB Rules 2.1 and 5.4 gave rise to a claim for breach of statutory duty (through s150 (now 138D) FSMA). However Green and Rowley were out of time to bring that claim.

The appeal was unsuccessful.

The mere existence of a statutory duty does not, of itself, create a common law duty: where no advice is given on the merits of a particular product, there is neither justification nor need for the imposition of a common law duty independent of but co-extensive with remedies provided by statute.

Breach of a statutory duty may give rise to a private law cause of action if the construction of that statute imposes a duty to protect a limited class of people and there was intent to confer a right of action for breach of that duty. The existence of a common law duty, on the other hand, depends on the relationship between the parties being one which gives rise to such a duty.

Leave to intervene was granted to the Financial Conduct Authority on the issue of whether the Bank did not, in any event, contravene COB Rule 2.1.3 or 5.4.3. The appeal had, however, already been dismissed and no determination was needed or made on this point.

Key contact

Paul Haggett

Paul Haggett Partner

  • General Counsel
  • COLP/MLRO
  • DPO

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