Mazarona Properties Limited v Financial Ombudsman Service

This case concerns the ability of the FCA to police the review process that it set up with so many banks in relation to the sale of interest rate hedging products (IRHPs). The decision suggests that the FCA (through the Financial Ombudsman) has no jurisdiction to consider what happened during the banks’ reviews. It will therefore worry the banks’ customers who might ask the question: how can we hope for a fair review if the FCA cannot police how that review is conducted?

Background

In October 2008 three associated companies (Mazarona) borrowed £6.4m from AIB. As part of that agreement, AIB was entitled to, and duly required, Mazarona to hedge against the risk of rising interest rates. Under the terms of the IRHP (a 2 year swap), AIB was a floating rate payer (3 month LIBOR on £6.4m) and Mazarona a fixed rate payer (4.66% on £6.4m). As interest rates crashed, so did any commercial benefit from the IRHP for Mazarona.

In July 2012, the FCA and AIB agreed that AIB would review the sale of its IRHPs to certain non-sophisticated customers, like Mazarona. Two basic types of redress were identified. First, the refund of all payments made under the IRHP to a customer who would not have selected any such product; this was known as the “full tear up”. Second, a refund of the difference between the payments made under the IRHP actually sold and an alternative product which the customer would have selected if there had been no regulatory breach, the so-called “alternative product”.

In April 2014, AIB concluded its initial review, found that the IRHP had been mis-sold and offered redress on the alternative product basis for £387,615.22. That offer was rejected by Mazarona on 28 April 2014 who made a counter offer on the full tear up basis of £535,370.

AIB conducted a review of the redress that it had offered under the oversight of the “skilled person”. Apparently because of new information from Marazona on 28 April 2014, AIB withdrew its offer in December 2014 because it was satisfied that Mazarona would have entered into the IRHP actually executed even if there had been no regulatory breaches.

In January 2015, Mazarona complained to the Financial Ombudsman Service (FOS) about both (i) the withdrawal of AIB’s offer and (ii) the sale of the IRHP. FOS ultimately concluded that (i) she had no jurisdiction over AIB’s review of the redress it had offered (since the review was not “a regulated activity”) and (ii) Mazarona would have entered into the IRHP even if there had been no regulatory breach.

Analysis

These two findings are difficult to reconcile. If the FOS had no jurisdiction over the review process, then how can she have also made a finding about how Mazarona would have acted? Perhaps she reached that decision without considering any aspect of the review process.

In any event, Mazarona sought judicial review of both of the FOS decisions, but only obtained permission in relation to the finding on jurisdiction. The sole issue therefore that the judge was dealing with was “whether the Ombudsman was right to conclude that she could not consider what had happened in AIB’s review in her determination.” Having worked his way through the labyrinth of relevant definitions, Mr Justice Mitting concluded the Ombudsman had been right: she did lack jurisdiction to consider what had happened in the review. It is difficult to argue with the judge’s analysis of the relevant statutory provisions, but, if correct, the practical effect is that the FCA is not entitled to oversee the very review process that it set up. Unless and until there is a statutory amendment, the decision making of the banks and the skilled persons in the review process cannot be policed by the FCA.

Mr Justice Mitting refused permission to appeal. It is not yet clear whether Mazarona will apply to the Court of Appeal for permission to take the matter further.

Gibson & Co.

June 2017

 
Thomas v Triodos

In March 2017 the High Court considered the extent of the duty of care which a bank owes to a retail customer to whom commercial borrowing facilities had been extended. The transaction in this case involved switching borrowing from a variable rate to a fixed rate for a term of 10 years. The claim against the bank was upheld by HHJ Havelock.

In order to examine the significance of the decision it is first necessary to look at what duties a bank owes to a customer.

Recent case law on the sale of financial products has drawn a clear distinction between (1) the duty a bank owes when advice is given to purchase a product and (2) the duty a bank owes when information only is provided about a product. This distinction is often misunderstood by customers.

What is the difference?

In Rubenstein v HSBC Bank plc, it was held: “The key to the giving of advice is that the information is either accompanied by a comment or value judgment on the relevance of that information to the client’s investment decision or is itself the product of a process of selection involving a value judgment so that the information will tend to influence the decision of the recipient”.

Where a bank gives advice in circumstances where it may be concluded that it assumed responsibility for that advice then there is a duty to ensure that the advice is full and accurate. Full advice is advice that covers the available options and the pros and cons of any product being recommended and enables the customer to make an informed decision.

Where a bank is subject to a regulatory regime (for example under the Financial Services and Markets Act 2000 (FSMA) and the Conduct of Business Rules (COBS rules)) then the advisory duty may go further and require compliance with that regime.

Where a bank provides information to a customer on a product then the duty of care is of a lower standard. The duty is not to mislead or misstate information (see Hedley Byrne v Heller & Partners Ltd).

Background

The claimants, Mr and Mrs Thomas, were partners in an organic farming business. In 2006, the Thomases transferred their borrowing to the defendant bank and they entered into two loan agreements: one for £300,000 and another for £1.15m for fixed terms at variable interest rates of 1.25% and 1.75% respectively. In 2008, the claimants borrowed on a further two occasions.

The Thomases became concerned about the cost of servicing their debt if the interest rates rose. They asked the bank about fixing the rate on some or all of their borrowing.

The Thomases claimed in a telephone conversation the bank had been told that they were thinking about fixing the rate on all their borrowing for ten years. The bank provided some information in writing and some information over the telephone to the claimants.

The Thomases also questioned whether the maximum likely charge for redeeming borrowing would be £10,000 to £20,000 and this was not corrected by the bank. The claimants subsequently fixed two of their loans to fixed rate loans.

The bank referred to the Business Banking Code (BBC) in its literature and in the letters to the Thomases confirming the fixes.

In 2008 the Thomases had second thoughts about their decision to fix the interest rates and started to enquire about what the cost would be if they were to re-fix. The bank told the Thomases that the penalty would be £96,205.47, which was subsequently amended by the bank to £54,691.59. The Thomases could not afford this cost.

The Thomases went on to issue proceedings against the bank. They maintained that they were not blaming the bank for the interest rates falling but they did blame the bank for not explaining the financial consequences which would flow if they tried to get out of the fixed rate before the 10 year fixed rate had expired. They said that the bank had misrepresented what the financial consequences would be.

Decision

  1. The Thomases’ claim succeeded.
  2. The relationship was not an advisory one and no advice was given.
  3. Fixed rate lending, which is the subject matter of this case, is not a regulated activity under the Financial Services and Markets Act 2000. Even if it was, the Thomases were in business as a farming partnership and therefore it is doubtful whether they would qualify as private persons under the COBS Rules so they would not have the benefit of the protection afforded by the Rules.
  4. There was no dispute that the bank owed the Thomases a duty not to mislead of misstate when providing information.
  5. The crucial point in this case is that HHJ Havelock went on to consider whether there was any and, if so, what scope for imposing a more extensive, intermediate, duty than the duty not to mislead or misstate when a bank provides information to a customer. In doing so he considered a number of conflicting first instance court decisions which tackle the issue.
  6. HHJ Havelock agreed with Judge Moulder inThornbridge Ltd v Barclays Bank that an intermediate duty could exist outside of an advisory relationship and this was not precluded by the decision in Green & Rowley v Royal Bank of Scotland. The existence of a duty of care, and the level of the duty, would depend on the particular facts of the case and whether, as a matter of policy, it is thought appropriate to impose such a duty in the circumstances.
  7. The significant feature of this case is that the bank had advertised to the claimants that it subscribed to the Business Banking Code. The BBC does not have contractual force between a bank and a customer, but it provides a benchmark as to how banks should behave. The fairness commitment in the BBC included a promise, directed to the customer, that if the bank was asked about a product, it would give the customer a balanced view of the product in plain English, with an explanation of its financial implications. There were no disclaimers, basis clauses or exclusions in the terms and conditions which applied between the Thomases and the bank which would lead to the conclusion that the bank was not willing to assume responsibility for honouring that promise.
  8. When the Thomases inquired about fixing the rate, the bank owed them a duty not to misstate. However, the duty of care which the bank owed went further - to explain the financial implications of fixing the rate. It was a duty owed only in response to the Thomases inquiries because that is what the bank had signed up to in the BBC. It was not a duty to volunteer information if not asked.
  9. The Thomases were entitled to an explanation in plain English as what fixing the rate entailed and the consequences. The essential components were: (1) that the rate could be fixed for a period (whether in months or years, and whether any minimum or maximum length of time); (2) where the available fixed rates could be found (e.g. on the internet); (3) what those rates represented (the forward cost of money); (4) the effective rate that would be payable (i.e. the current swap ask rate for the period of the fix plus the banks margin, if any); and (5) the financial consequences of terminating the fixed rate before the end of the period.


Conclusion

This is a brave decision by HHJ Havelock. Traditionally there has been a clear distinction between the duty a bank owes when (1) advice is given to purchase a product and (2) when information only is provided about a product. This decision has blurred that distinction and introduced a new “intermediate duty” to explain a product to a customer, which is higher than the duty imposed not to mislead or misstate when providing information to a customer. This decision will almost certainly be subject to further judicial scrutiny even if the decision is not subject to an appeal itself.

April 2017
Gibson & Co.

 
A witness’ worth

For most people who contemplate and then embark upon litigation, the prospect of appearing on the witness stand at trial is far from appealing. Legal scenarios that play out on television often have a revelatory moment when a character is on the witness stand either giving evidence or being cross examined. However, the reality is often far less dramatic and witnesses often have unrealistic expectations about the value of their evidence.

Credible witness?

The reliability of witness evidence has been a source of judicial comment for many years. Lord Pearce in Onassis v Vergottis [1968] 2 Lloyd’s Rep 403 stated at 431:

"Credibility involves wider problems than mere ‘demeanour’ which is mostly concerned with whether the witness appears to be telling the truth as he now believes it to be. Credibility covers the following problems. First, is the witness a truthful or untruthful person? Secondly, is he, though a truthful person telling something less than the truth on this issue, or though an untruthful person, telling the truth on this issue? Thirdly, though he is a truthful person telling the truth as he sees it, did he register the intentions of the conversation correctly and, if so has his memory correctly retained them? Also, has his recollection been subsequently altered by unconscious bias or wishful thinking or by over much discussion of it with others? [...] Therefore, contemporary documents are always of the utmost importance. And lastly, although the honest witness believes he heard or saw this or that, is it so improbable that it is on balance more likely that he was mistaken? On this point it is essential that the balance of probability is put correctly into the scales in weighing the credibility of a witness. And motive is one aspect of probability. All these problems compendiously are entailed when a Judge assesses the credibility of a witness; they are all part of one judicial process. And in the process contemporary documents and admitted or incontrovertible facts and probabilities must play their proper part."

Later, Mr Justice Bingham (as he then was) set out the accepted test for credible witnesses in The Judge as Juror: The Judicial Determination of Factual Issues published in Current Legal Problems 38:The main tests needed to determine whether a witness is lying or not are, I think, the following, although their relative importance will vary widely from case to case:

  1. the consistency of the witness's evidence with what is agreed, or clearly shown by other evidence, to have occurred;
  2. the internal consistency of the witness's evidence;
  3. consistency with what the witness has said or deposed on other occasions;
  4. the credit of the witness in relation to matters not germane to the litigation;
  5. the demeanour of the witness.


Robert Goff LJ in Armagas Ltd v Mundogas S.A. (The Ocean Frost) [1985] 1 Lloyd’s Rep 1 at 57 stated:

“It is frequently very difficult to tell whether a witness is telling the truth or not; and where there is a conflict of evidence [...] reference to the objective facts and documents, to the witnesses’ motives, and to the overall probabilities, can be of very great assistance to a Judge in ascertaining the truth.”

The recent case of GH v The Catholic Child Welfare Society (Diocese of Middlesburgh) [2016] EWHC 337 (QB) included some discussion of the authorities regarding the credibility of witnesses.

The facts:

  • The Claimant had a difficult upbringing and was from a poor family;
  • The Defendants were the Diocese of Middlesburgh (the Diocese) who were responsible for the management of St William’s School and representatives and/or members of a lay Catholic teaching order called the Institute of the Brothers of the Christian Schools (De La Salle) (the Institute);
  • The Institute had a community of brothers living at St Williams’ School; and
  • The Claimant claims that he was physically and sexually abused whilst resident at St William’s School between 1985–1986;


Comments from HHJ Gosnell

HHJ Gosnell recognised at para 24 that “the reliability of a witness’s recollection is difficult to assess independently of an assessment of their likely truthfulness.” The obvious pitfalls of relying on human memory for accurate oral evidence were explored by Mr Justice Leggatt in Gestmin SGPS S.A. v Credit Suisse (UK) Limited and others [2013] EWHC 3560 (Comm) (a case in which this firm acted):


15. An obvious difficulty which affects allegations and oral evidence based on recollection of events which occurred several years ago is the unreliability of human memory.

[...]

21. The best approach for a judge to adopt in the trial of a commercial case is, in my view, to place little if any reliance at all on witnesses’ recollections of what was said in meetings and conversations, and to base factual findings on inferences drawn from the documentary evidence and known or probable facts. This does not mean that oral testimony serves no useful purpose – though its utility is often disproportionate to its length. But its value lies largely, as I see it, in the opportunity which cross-examination affords to subject the documentary record to critical scrutiny and to gauge the personality, motivations and working practices of a witness, rather than in testimony of what the witness recalls of particular conversations and events. Above all, it is important to avoid the fallacy of supposing that, because a witness has confidence in his or her recollection and is honest, evidence based on that recollection provides any reliable guide to the truth.


HHJ Gosnell found no difficulty in applying a similar rationale to this case, especially as “it would not be difficult to find motives why either the Claimants’ or the Defendants’ witnesses might choose to lie."

Decision

Once the issue of limitation was dealt with, this case turned on the credibility of the witnesses for both the Claimant and the Defendants and how their testimony compared with the contemporaneous documentary evidence available regarding the alleged incidents.

HHJ Gosnell summarised that “the burden of proof is on the Claimant to satisfy me on balance of probability that he suffered the sexual and physical abuse which he contends occurred in this case. He has failed to discharge that burden. I found him an unreliable witness. [...] There were too many unexplained inconsistencies in his evidence and his performance in the witness box did nothing to allay my concerns.” In reaching this conclusion, HHJ Gosnell examined reports that were written by Brothers of the Institute at the time, as well as various other reports regarding the Claimant’s behaviour. HHJ Gosnell accepted that the Claimant may not have come forward with the allegations against the alleged abusers at the time for obvious reasons. However, the Claimant was not a credible witness, and so was unsuccessful.

Conclusion

It is clear that the credibility of any witness is judged by considering the weight and substance of documentary evidence ahead of the performance of the individual witness in the witness box. Documentary evidence provides objective evidence of events whereas the subjective account of some witnesses may prove to be too unreliable to bear any weight, and perhaps even fatal to their entire case.

Gibson & Co.

February 2017