Locations
In October 2016 we reported on a case that apparently heralded a new approach by the courts to the traditional duty of care imposed on financial advisers when advising their clients (the "Bolam test"), placing more responsibility on a properly informed investor to accept the consequences of the investment risks they have voluntarily assumed (O'Hare v Coutts & Co [2016] EWHC 2224 (QB)).
However, in a judgment handed down in March this year the Queen's Bench Division held that where retail customers of a bank had switched their borrowing from a variable rate to a fixed rate over a 10 year term, the bank was liable for misrepresentation in respect of redemption penalties and in breaching its duty to inform how early repayment clauses would operate under the loan agreements (Thomas and another v Triodos Bank NV [2017] EWHC 314 (QB)). So what does this say about the nature of a bank's duty to inform or advise its customers?
The facts
The claimants, Mr and Mrs Thomas were partners in an organic farming business. After transferring their banking to the defendant in 2006 they restructured their borrowing in 2008, maintaining two variable rate loans. Concerned about their ability to service their debt should interest rates rise, they contacted their relationship manager at the bank about fixing their rate. The bank provided some written information and had various telephone discussions with the claimants. The bank's standard terms and conditions, which applied to the claimants' borrowings included certain early repayment fees and charges (redemption penalties). When enquiring as to the amount they might be asked to pay in redemption penalties a figure of £10,000 - 20,000 put forward by the claimants was not corrected by the bank's relationship manager (in fact it was impossible to determine the quantum in advance). The claimants subsequently decided to fix their loans for 10 years. Literature accompanying the bank's confirmation referred to the Business Banking Code (the "Code") (Note that the Code has since been replaced by the Lending Code and, since July this year, the Standards of Lending Practice).
The fallout from the global financial crisis saw rates fall and, finding it difficult to service the higher fixed rates, the claimants enquired as to the cost of repaying the loans early. The redemption penalties calculated by the bank were far in excess of those the claimants had been led to expect at the point they fixed. The bank/customer relationship inevitably broke down and the claimants brought proceedings alleging:
• A failure to explain the true consequences of exiting the fixed rate loans before the end of the term.
• A positive misrepresentation of those consequences by failing to correct or refute the claimants' anticipated amount of the redemption penalties.
The decision in Thomas and another v Triodos Bank NV
The High Court held that the bank had breached a duty owed to the claimants which had arisen because the bank had voluntarily signed up to the principles in the Code. However, the bank's duty to provide information was "responsive" and not a proactive duty to volunteer information where it was not asked to. As a minimum, the bank owed the claimants a duty not to misstate any facts that they might have been expected to rely on. The bank did not owe a higher standard of duty as would arise under an advisory relationship.
A more extensive "intermediate" duty could exist outside an advisory relationship in certain circumstances (applying Crestsign Limited v National Westminster Bank plc ([2014] EWHC 3043 (Ch)). But this would depend on the facts and whether it was appropriate for the court to impose such a duty as a matter of public policy.
The bank was also liable in misrepresentation because the bank had failed to disabuse the claimants as to the estimated redemption penalties which resulted in their decision to fix the rates.
Conclusion
It is particularly interesting to note that the court used the voluntary (non-contractual) adoption of the Code's guidelines to infer that the bank had a duty of care to comply with them. The Code's commitments on fairness included a promise to its customer that, if the bank had been asked about a product, the bank would give a balanced view of the product in plain English, with an explanation of the financial implications.
The interjection of the Code in this instance means that is not entirely clear how the duty sits between the typical Hedley Byrne & Co Ltd v Heller & Partners Ltd ([1964] AC 465) duty not to misstate or mislead and the enhanced duties imposed by an advisory relationship. According to the court, the Code wording meant the bank must go beyond the duty not to mislead or misstate. In the present case the court distinguished it from O'Hare on the basis that:
• The bank's duty was not advisory. Rather it was to respond to the claimants' specific inquiries by providing a clear explanation of the financial implications of fixing the rate and how the standard terms and conditions worked, not a "comprehensive tutorial" (the "information duty"). That duty had not been discharged.
• The banking expert witnesses agreed that if the customer were to ask questions in relation to the calculation of any redemption penalties then the relationship manager would be expected to explain the principles and factors behind the calculation of such penalties and that the Code provides guidance as to the content of the information.
In clarifying how far a bank should go in providing information in response to questions from its customer about a product in a non-advised transaction, the court felt the "Montgomery test" of materiality was appropriate. That is, would a reasonable person, in the position of the customer, be likely to attach significance to that piece of information? (Montgomery v Lanarkshire Health Board [2015] AC 1430).
In deriving a duty from the bank's voluntary adoption of the Code this case can be distinguished from other financial misselling cases including , Green v Royal Bank of Scotland plc [2012] EWHC 3661 (QB) and Thornbridge v Barclays ([2015] EWHC 3430 (QB)), which are somewhat at odds. To the extent that the Code implies a greater standard of care than a bank may wish to owe to its customers, it may need to carve out its adherence to the voluntary principles by contractually excluding liability for breaches of the Code.