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High Court Dismisses Claim relating to Mis-selling of Interest Rate Swaps

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Hitchins Sarah
Sarah Hitchins

Partner

London

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24 November 2014

In Bailey v Barclays Bank plc [2014] EWHC 2882 (QB), 27 August 2014, the High Court struck out and summarily dismissed a claim by a company in relation to the alleged mis‑selling of an interest rate swap by the bank. The decision confirms established principles that a bank does not generally tend to owe fiduciary duties to its customers and that a body corporate (such as the second claimant in this case) does not constitute a "private person" and as a result does not have rights of action under s150 Financial Services and Markets Act 2000 (FSMA).

Both claimants were customers of the bank (the second claimant was a company that was owned by the first claimant). Based on advice provided by the bank, the claimants entered into an interest rate swap agreement for a notional figure of GBP 2 million at a fixed interest rate for a fixed term of ten years (the Swap).

The claimants subsequently made a number of complaints about the suitability of the Swap and the manner in which it was sold to them by the bank. In particular, the claimants alleged that the Swap was unsuitable because it had been sold to them at a time when interest rates were falling, instead of rising (as the bank had allegedly advised), and that the notional amount for the purposes of the Swap was far in excess of the sums that they had actually borrowed from the Bank. The claimants sought:

  • a declaration under s27 FSMA that the Swap was unenforceable against the second claimant;

  • rescission of the Swap;

  • damages; and

  • equitable compensation.

Shortly before the hearing, the first claimant accepted an offer of redress from the bank. As a result, the High Court only considered the issues between the bank and the second claimant's claim. The second claimant applied to amend its particulars of claim to allege that:

  • the bank had breached various provisions of the FSA's Conduct of Business Rules (COBS) as a result of the way in which it had sold the Swap to the claimants;

  • it had a right of action against the bank in respect of its alleged breaches of COBS pursuant to s150 FSMA.

The bank's application for judgment against the second claimant required the High Court also to consider two claims in the existing particulars of claim:

  • first, a claim for relief for breach of fiduciary duty by the Bank; and

  • second, a claim for a declaration of unenforceability under s27 FSMA.

Breach of COBS rules – no prospect of success

The court concluded that the allegations made by the second claimant regarding the Bank's breaches of COBS had no realistic prospect of success. The second claimant's arguments related to its view that the Swap was a bad investment, as opposed to there being anything wrong with the way in which the Swap was implemented by the Bank.

Not a "private person"

In any event, the court held that the second claimant had no cause of action against the Bank under s150 FSMA on the basis that it was a company, not a "private person" (as required by s150). The court followed Titan Steel Wheels Ltd v Royal Bank of Scotland plc [2010] EWHC 211 (Comm) in holding that the second claimant did not constitute a private person for the purposes of s150 notwithstanding the fact that it had not suffered the losses of which it complained "in the course of carrying on business of any kind".

Compliance with COBS not incorporated into contract

The second claimant argued that, even if there was no statutory right of action, the breaches of COBS were actionable by it in contract on the basis that compliance with COBS had been expressly or impliedly incorporated into the contract between the bank and the second claimant. The court also rejected this argument on the basis that a "plain reading" of the contract in question did not support it.

As a result, the court dismissed the second claimant's application for permission to amend its particulars of claim in its entirety.

Alleged breach of fiduciary duty

The court summarily dismissed the second claimant's claim for relief for breach of fiduciary duty because a bank does not usually stand in a fiduciary relationship to its customers. There was nothing exceptional in this case that would have given rise to a fiduciary relationship.

Declaration of unenforceability

Section 27(1) FSMA provides that an agreement made by an authorised person in the course of carrying on a regulated activity in consequence of something said or done by a third party in the course of a regulated activity carried on by the third party in contravention of the general prohibition on carrying on regulated activities without permission is unenforceable against the other party. The general prohibition is set out in s19 FSMA.

In support of its claim for a declaration of unenforceability under s27 FSMA, the second claimant alleged that the bank employee who provided the claimants with advice in relation to the Swap was a "third party" carrying on a regulated activity in contravention of the general prohibition of such conduct in s19 FSMA. The court held that s27 FSMA was not engaged on the basis that the individual who provided advice to the claimants was not a "third party" but that he was the bank's employee and agent.

Comment: This decision is likely to be welcomed by financial institutions that are the subject of pending claims regarding the sale of interest rate swaps. The High Court was quite clear in this case that a body corporate cannot bring an action against a financial institution in respect of alleged breaches of FSA or FCA Rules (including COBS) under s150 FSMA.