Banking giant faces landmark mis-selling case
Key defences relied on by banks in interest rate swap (IRS) mis-selling claims are set to be tested in court this October when the claim of business-owner Sara Pearson against Barclays comes to trial.
The Gazette has obtained copies of Pearson’s claim and the bank’s amended defence, as lodged at the High Court. On the claim form, Pearson says she ‘expects to recover circa £228,354’. IRSs are complex derivatives products designed to protect business owners against a rise in interest rates. As interest rates have fallen, many business owners have questioned the products’ appropriateness.
Key points disputed by the parties include the definition of ‘advice’, the strength and relevance of banks’ regulatory obligations and the appropriateness of banks’ promotional materials.
Pearson, advised by litigation firm Carter-Ruck, contends that Barclays approached her ‘unsolicited’ to recommend the purchase of an IRS. She believed that information presented by the bank was advice (which Barclays denies), and that the bank had not met standards of customer care demanded by the Financial Services Authority.
The bank, the claim says, failed in its contractual and common law duties to Pearson, by ‘expressly or impliedly’ representing the product as ‘low risk’, able to ‘protect her business’, and ‘suitable’.
In its defence, Barclays is adamant that it did not give advice. It cites specific opportunities Pearson was given to seek clarification on the IRS product proposed. In arguing that the bank believed she was a sophisticated customer capable of understanding the product, Barclays’ defence points to the role of the financial controller of Pearson’s PR business.
Research by litigation funder Norton Accord estimated there to be 4,000 potential mis-selling claims against major UK banks amounting to £1bn. Expert witnesses have since told the Gazette they believe the figure to be much higher. One claim, currently being prepared, is for £250m.
A spokesperson for Barclays told the Gazette: ‘We cannot comment on a matter which is currently in litigation save to confirm that we deny the allegations made in the claim.’
Comments
IRSA's and s.150 FSMA 2000
S.150 FSMA 2000 is being used by banks against limited companies trying to rely on FSA COB rules in IRSA actions.
However, in my view s.150 is incompatible with the EU Directive leading to the COB rules; unless a firm's finances exceed two of the following levels listed in the Directive as denoting a professional client capable of understanding complex IRSA's without explanation or advice:
- Balance sheet total EUR 20,000,000
- Net turnover EUR 40,000,000
- Own funds EUR 2,000,000
If finances are under the above levels, it is arguable that a firm should be regarded as a 'retail client' entitled to the protections in the FSA COB rules.
Titan Steel Wheels Ltd v The Royal Bank of Scotland PLC [2010]
Titan Judgment: http://www.bailii.org/ew/cases/EWHC/Comm/2010/211.html
Mr Justice Steel's judgment in the above Queen's Bench case considered this issue in detail (whether Titan was a "private person" as defined by the Financial Services and Markets Act 2000 (Rights of Action) Regulations 2001) and is the present authority on the definition of a 'private person' under s150 Financial Services and Markets Act 2000.
The claimant, Titan, was a large concern and had a great deal of derivatives experience having entered into 43 OTC derivatives between 200 to 2007 with values of between €100m and €200m. Titan had claimed it was a private person by virtue of Reg. 3(1)(b) (any person who is not an individual, unless he suffers the loss in question in the course of carrying on business of any kind).
Unfortunately for UK SMEs, Titan is the case shaping the current law in this area even though it was an entirely different claimant to the small businesses and individual non-businesses (particularly shocking) who were sold swaps, caps, collars and other structured products.
We, along with a small number of other firms, are challenging the definition of 'private person' at present under the vehicle of incorporated small family business claimants. The next claim is presently due to be heard in October.
Our company is snowed under
Our company is snowed under with orders for our SWAPS Case Management software so plainly this is considered quite a lucrative market.
Are "Complex Defensive" Derivatives Suitable for Small Business?
In these cases a bank customer is sold an interest rate 'protection' product which contains contingent liabilities that are not adequately explained. One has to ask the question why either a fixed rate loan or a simple interest rate cap derivative product was not sold to clients?
This is particularly the case when the increasing complexity of a product will usually have resulted in increasing undisclosed profits to the bank. For example an interest rate cap is a fairly simple derivative with a fixed sale cost and low profit however can be manipulated by adding a knock in floor so that there is now usually increased profit to the Banks and no sale cost to the client (an easy sale) but potentially massive contingent liabilities which must be, but usually aren't, explained.
A cap with a knock in floor, a product placed by banks such as HSBC with UK SMEs, is known in trader speak as "complex defensive" - is this type of derivative ever likely to be suitable for the typical small retail business or would they have been better off with a simple cap?
The matter was earlier today debated by back bench motion at the House of Commons and it was mentioned that bank customers are afraid of taking on their banks for fear of them taking aggressive action. We can confirm this is very much the case and that we have seen Banks call in loans, appoint LPA Receivers, place property portfolios in auction, and seek winding up orders. Each of these actions can be challenged and pre-empted.
It was also indicated in Parliament that the FSA will report their findings at the end of June 2012.