Barclays successfully defends first swap mis-selling claim involving a claim by individuals for breach of statutory duty – Ramesh Jadavji Parmar and Rama Ramesh Parmar v. Barclays Bank PLC  EWHC 1027 (Ch)
In a comprehensive judgment, Mr Hochhauser QC, sitting as a Deputy Judge of the Chancery Division (the judge), has today dismissed claims for alleged breaches of statutory duty in relation to two interest rate hedging products (IRHPs) entered into by the claimants in April 2009. This is the latest in a long line of authorities in the swap mis-selling arena which have been decided in the banks' favour. The judgment is of particular note as it is the first IRHP claim to reach a full trial involving an s.138D Financial Services and Markets Act 2000 (FSMA) claim by a private person for alleged breaches of the FCA's Conduct of Business Sourcebook Rules (COBS). The claim also raised allegations regarding an alleged failure by Barclays to disclose its internal calculation of the maximum credit risk that it faced in the event of a default by the claimants on the IRHP (referred to as CEE (credit equivalent exposure)). Similar allegations have of course been considered and dismissed by the Court of Appeal in Property Alliance Group Limited v. The Royal Bank of Scotland PLC  EWCA Civ 3551 (PAG).
The judge found entirely in Barclays' favour, save for some minor technical breaches of COBS (in relation to which no loss flowed), and held, in particular, that the sale was not advised (but that even if it was the IRHPs were suitable), that the IRHPs were appropriate and that, on the facts of the case, there was no obligation to disclose the existence of the CEE limit to the claimants.
The parties and factual background
The claimants are the owners and directors of a limited company, which imports and sells latex gloves to the medical profession. They owned the commercial premises from which their company traded and in addition to this a portfolio of residential investment properties. Mr Parmar was the primary contact and, whilst he was an experienced businessman, unlike in many of the claims to date, he had no prior experience of IRHPs.
The judgment contains a detailed explanation of the factual background leading up to the sale of the IRHPs in April 2009, which we do not repeat here, save to note that:
the claimants entered into two fixed rate swaps at a rate of 3.48 per cent, after the Bank of England base rate had already fallen to its (then) low of 0.5 per cent;
by the time the claimants entered into the swaps, they had been provided with six different presentations explaining a range of different IRHPs, including a cap, over a three-year period;
the content of those presentations was discussed and explained in telephone calls and two meetings with Mr Parmar prior to trading;
the presentations contained warnings regarding the potential for break costs to be incurred, including worked scenarios;
whilst hedging was not a condition of the claimants' lending, Mr Parmar wished to achieve a fixed rate of interest and did not wish to pay a premium. At that time, Barclays was not offering fixed rate loans to customers and, accordingly, the only way in which Mr Parmar could achieve this was through an interest rate swap; and
the presentations and contractual documentation for the IRHPs contained a number of disclaimers and representations regarding the non-advisory nature of the relationship (referred to as basis clauses).
In common with most cases in this area, the claimants' claim originally included allegations of negligence, breach of fiduciary duty, alleged tortious and contractual duties regarding the bank's conduct of the past business review into the sale of interest rate hedging products (the Review claim) and alleged breaches of various COBS rules.
The Review claim was abandoned prior to trial following the Court of Appeal's decision in CGL Group Ltd v. Royal Bank of Scotland  EWCA Civ 10732 and the remaining causes of action were abandoned on the first day of trial. The trial therefore proceeded solely in relation to the alleged breaches of statutory duty.
The claimants alleged that, but for the alleged breaches of COBS, they would have entered into two interest rate caps for a term of five years at a rate of 4.5 per cent. The claimants claimed direct losses of £338,745.54 plus interest and consequential losses of £530,270 in respect of a proposed property purchase which the claimants alleged the Bank would not fund as a result of the CEE limit.
Did the bank advise?
The judge considered the case law in this area and referred to the general principles regarding what is considered to constitute advice as opposed to simply the giving of information, summarising that the test is an objective one taking into account the evidence in the round. Applying this approach to the information provided in the presentations and the bank's conversations with Mr Parmar as a whole, the judge concluded that this was not an advised sale and, as such, COBS 9 was not engaged. In reaching this decision, the judge found that (amongst other things):
The matters relied upon by the claimants (for example, that Mr Parmar was a longstanding customer of the bank and was not shopping for hedging products) were not indicative of any advisory relationship.
References in the presentations to Barclays' various accolades and the words "Corporate Risk Advisory" beneath the name of the Barclays Capital salesperson did not mean that Barclays was providing advice (following the decision of HHJ Moulder in Thornbridge Ltd v. Barclays Bank PLC  EWHC 3430 (QB) (Thornbridge)), nor did the references to "bespoke", "our more popular solutions", "tailoring the protection" and "features and benefits".
Whilst Mr Parmar was provided with information regarding the pros and cons of different IRHPs, the presentations did not promote one product over another. No recommendation was provided to Mr Parmar as to which of those IRHPs he should enter into.
Following Thornbridge, for a recommendation to constitute advice, it must be made in respect of a particular product. Mr Parmar did not assert that any such recommendation was made and the judge found that Mr Parmar decided for himself to enter into the IRHPs having carefully considered all of the information provided to him.
The judge also relied upon the principles established in Zaki v. Credit Suisse UK Ltd  EWHC 2422 (Comm) (Zaki) and Basma Al Sulaiman v. Credit Suisse Securities (Europe) Limited and Plurimi Capital LLP  EWHC 400 (Comm) (Basma). In those cases it was held that, when considering COBS 9, the court should have regard to substance over form, i.e. if an investment was suitable for a client, it did not ultimately matter if there had been failings in the process.
Whilst it was not necessary to do so, in view of the judge's primarily findings regarding the allegations of advice, he further concluded that, even if the sale was advised, he would have found that the IRHPs were suitable for the claimants in accordance with COBS 9. In reaching this conclusion the judge relied upon (amongst other things) Mr Parmar's stated desire to obtain a fixed rate and his refusal to pay a premium.
Were the IRHPs appropriate?
Central to this element of the claim was the claimants' allegations that the bank had failed to conduct an adequate fact-finding exercise regarding the claimants' background, experience, knowledge, needs and objectives and necessary understanding of the risks prior to entering into the IRHPs.
However, it was clear from the evidence that Mr Parmar had regular dealings with Barclays Capital and that considerable information was obtained by Barclays over the course of the three years. Key to the judge's decision was a summary contained in a presentation provided in January 2009, which set out in detail the bank's understanding of the claimants' financial position and objectives. Accordingly, whilst the judge held that the fact-finding exercise was undertaken incrementally over the period of discussions, it was apparent that, by January 2009, the bank held sufficient information regarding the claimants and the bank accordingly had not acted in breach of COBS 10. The judge also bore in mind the principles in Zaki and Basra (referred to above) in this regard.
The basis clauses
The judge rejected Barclays' reliance on prior authorities (in which the banks' basis clauses have been unanimously upheld) including Thornbridge and Crestsign v National Westminster Bank and another  EWHC 3043 (Ch) and held that, had Barclays been found to have given advice, then it would not have been able to rely on its basis clauses as to do so would be in breach of COBS 2.1.2. In this regard, the judge held that it was not necessary to consider the provisions of UCTA as the matter is governed by COBS 2.1.2, which prevents a party from seeking to exclude or restrict any duty. Given that the claim involved a private person, the decision is not entirely surprising and it can of course be distinguished from the case law to date, none of which involved an s.138D claim by a private person.
Other areas of complaint
The remainder of the claimants' principal areas of complaint can be broken down into three distinct areas:
(i) Break costs
The claimants alleged that the presentations provided to the claimants failed to give a sufficient explanation of the potential magnitude of break costs. The judge concluded that the bank provided the claimants with both qualitative and quantitative illustrations of break costs and that Mr Parmar fully understood the operation and potential magnitude of the costs involved prior to trading, including their variable nature, having undertaken his own calculations in this regard.
Whilst the judge considered that the reference in two of the presentations to the calculation of break costs being analogous to those payable under a fixed rate loan was inaccurate (and therefore in breach of COBS 2.2.1, 4.2.1, 4.5.2 and 14.3.2), it was apparent that Mr Parmar understood the nature of break costs notwithstanding this. Accordingly this had no effect on the sale and did not cause the claimants any loss.
(ii) Information provided regarding a cap
The judge rejected the claimants' assertions that the presentations provided failed to prominently identify the true value of a cap in comparison to the IRHPs. Whilst the judge held that Barclays breached COBS 4.5.6 and 14.3.2 in failing to include reference to the fact that a break cost would never be incurred in respect of a cap in the written presentation, the judge found that as a matter of fact Mr Parmar was well aware that no break costs were associated with a cap from his verbal discussions with Barclays. Accordingly no loss flowed from these breaches.
(iii) Was the bank obliged to disclose the CEE limit?
In keeping with the case law to date and, in particular, the decision of the Court of Appeal in PAG, the judge concluded that, in order to comply with its obligations under COBS, the bank was not required to disclose the CEE limit associated with the IRHPs in order to enable Mr Parmar to understand potential break costs. In reaching this conclusion, the judge found that (as set out above) Mr Parmar was already fully aware of the calculation of break costs and that the bank may discharge its obligations under COBS by providing adequate break cost examples and discussing them with the client, which it did.
The judge accepted the bank's submissions that CEE was not a contingent liability as it represented the bank's near worst-case scenario in the event of a default by the claimants.
The method of calculation of the CEE varied between banks and the break costs may not even comprise part of that figure.
It was not the practice of Barclays or indeed other banks to disclose their CEE limits. As the claimants' own expert agreed, the CEE limit was entirely different from the break costs and would therefore not ever be payable by the customer.
In this instance, the CEE limit had no impact whatsoever on the claimants' ability to borrow further funds from the bank and the bank's refusal to lend funds for a proposed property purchase was based on entirely unrelated reasons.
Accordingly, whereas in this case the likelihood of the CEE having any effect on the claimants' ability to further borrow from Barclays was minimal, Barclays was not required to provide information about it.
The judge, however, did consider that there may be other factual situations where the CEE limit could have a significant impact on future borrowing, where disclosure may have been necessary to comply with the COBS rules.
This is another welcome decision for banks that continue to face (albeit in decreasing numbers) allegations of mis-selling regarding these products, following the announcement of the review in June 2012. Whilst it is apparent that the findings in this case are very fact specific, the body of case law in this area remains firmly in the banks' favour and claimants will therefore need to carefully consider the merits of bringing or indeed continuing similar actions in these circumstances.