Stronger evidence needed in interest rate swap mis-selling cases

Last year, we posted a blog on the outcome of the FSA inquiry into the interest rate swap market and its damning conclusion that a number of financial institutions had been guilty of serious failings in the way they had sold such products to small businesses.

We’ve now had what appears to be the first reported court decision on bank liability for mis-selling interest rate swap products, in a case brought by Paul Rowley, a Lancashire hotelier, and his business partner John Green against Royal Bank of Scotland.

They had a pre-existing loan liability of £1.5m and were sold a swap in 2005 after a meeting with one of the bank’s commercial managers, and an area manager who specialised in interest-rate management products.

The pair did well out of the swap until the financial crisis in October 2008, after which they fared very badly due to the dramatic fall in interest rates.

Matters came to a head in 2009 when they asked about the costs of terminating the swap early and were advised that it could cost up to £138,650.

They issued proceeding against RBS in 2011, but had their claim dismissed.

On the facts the judge preferred the evidence of the bank. He found that the statements made by the bank at the meeting in 2005 were not misleading and that no advice or recommendation had been given as to the particular product that had allegedly been mis-sold.

Crucially, the bank’s key witness had retained a contemporaneous note of what was discussed at the meeting, whereas the claimants did not, and so did not have enough evidence to prove their case.

The judge went out of his way to make clear that the test is whether what was said or done at the time the swap was taken out amounted to a negligent mis-statement at law, or a breach of the bank’s duty to give suitable advice. What mattered at common law was whether the statements in themselves were accurate, not whether more could have been said.

Hindsight did not assist in that regard and even an admission from one of the bank’s employees that the product had been mis-sold was not sufficient on this occasion for the claimants to succeed.

This judgment is clearly a welcome decision for the banks, but does it signal the end of the line for such litigation?

In my opinion it does not, but highlights that for future claims to succeed there will need to be strong evidence of mis-statements from financial institutions, or advice not in the customer’s best interests, in particular the importance of meeting notes and interviewing relevant witnesses.

It also shows the threshold for establishing liability in law is much higher than the criteria that the FSA has provided for determining that a product has been mis-sold.

No one should be unduly deterred from bringing a case if they feel they have been mis-sold interest swap products, but should seek legal advice at an early stage, and remember that good quality evidence should not be underestimated.

If you wish to know more about this, or have any further questions, please contact Colin Fenny at Harrison Drury on Colin.Fenny@harrison-drury.com.