High Court rejects mis-selling claims against bank

In Fine Care Homes Ltd v National Westminster Bank Plc & Anor [2020] EWHC 3233 (Ch) the English High Court dismissed Fine Care’s claims for mis-selling by the bank of a derivative. The judgment will be particularly relevant to banks and financial institutions facing mis-selling claims as it provides helpful guidance on the relationship between regulatory and common law duties.

Fine Care bought a structured collar, which went out of the money after the financial crash. The bank sold Fine Care a structured collar to hedge its repayment obligations under a loan. The global financial crash in 2008 caused interest rates to plummet which left the collar out of the money for Fine Care (by a net rate of 6 per cent.). Fine Care brought a claim against the bank in 2013, which was stayed for a brief time to allow the Financial Services Authority (now the Financial Conduct Authority) to conduct a review into the sale of structured collars by banks. Following this review, the bank offered Fine Care a refund of £384,258.50, on the basis that Fine Care would have chosen a “vanilla” collar over the structured collar. Fine Care rejected the bank’s offer, arguing that it would not have chosen any product with the bank and proceeded with its claim in the High Court (seeking its full losses of £1.4 million). 

Fine Care brought claims in negligence, misstatement, misrepresentation and breach of statutory duty. Fine Care claimed that the bank negligently advised it in relation to the collar, and/or negligently (or in breach of its statutory duties) misstated or misrepresented the effect of the collar. In her judgment, Bacon J expressed the “improbability” of Fine Care’s principal witness and controlling director, Mr Hassan Somani, having such “precise recall” of material conversations with the bank employees from well over a decade ago and, given Mr Somani’s account of events was “confused and inconsistent”, did not consider him to be a reliable witness. This was particularly damaging to Fine Care, given the contemporaneous documentary evidence available to the Court from the bank already presented Fine Care with a considerable uphill battle in making out its claims.

The Judge held that the content of a legal duty might be informed by regulatory rules, but not if those rules are not actually engaged. Fine Care placed great reliance, in relation to all aspects of its claim, on the regulatory framework applicable to the selling of investments, and in particular, the rules and guidance set out in the FCA Handbook (“FCA Rules”). Fine Care was unable to bring a claim for breach of the FCA Rules under s.138D of the Financial Services and Markets Act 2000 because it was not a “private person”. Nevertheless, Fine Care submitted that the FCA Rules provided a framework by reference to which the alleged negligent advice and misstatements/misrepresentations should be analysed. Bacon J referred to LEA v RBS [2018] EWHC 74 (Ch), in which Rose J noted the authorities are alive to the need to keep the common law causes of action separate from an action for beach of statutory duty by failure to comply with the FCA Rules. Rose J had referred to the judgment of the Court of Appeal in Green & Rowley v RBS [2013] EWCA Civ 1197, where the Court endorsed the view that the duty imposed by the FCA Rules to take reasonable steps to ensure the counterparty to a transaction understands its nature (i.e. a duty to give information/advise) was well outside any notion of a duty not to misstate (i.e. the duty in Hedley Byrne to take reasonable steps when making statements). 

Looking objectively at the transaction as a whole, the bank had not “crossed the line” and assumed an advisory duty. Bacon J noted (as accepted by the Court of Appeal in Property Alliance Group v RBS [2018] 1 WLR 3529) that, in the ordinary case, a bank will owe no duty to explain the nature and effect of the proposed transaction to its customer, but in “some exceptional cases” such a duty might arise. In Fine Care’s case, it was “common ground” that the sale of the collar was made on a non-advisory basis and that the factual circumstances (including the existence of an execution-only basis clause) were not exceptional and did not lead to the conclusion that the bank was assuming an advisory duty of care. Bacon J went on to find that, even if she had found a duty of care to have arisen, she would have rejected Fine Care’s claims that the bank breached its duty.

The bank did not make any negligent misstatement or misrepresentation. The bank readily accepted that it had a Hedley Byrne duty not to negligently state facts to Fine Care but, based on the factual analysis undertaken with respect to the advisory duty claim, the Court found that Fine Care’s claims of misstatement or misrepresentation were not made out.

Jonathan Rea, Associate in London

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