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Interest rate swaps: RBS succeeds in the Court of Appeal

Fri 09 Aug 2013

The Court of Appeal has upheld the Mercantile Court’s decision in favour of Royal Bank of Scotland (“RBS”) in what was widely regarded as a test case in the rate-swap scandal.

Estate agent John Green and hotelier Paul Rowley (“the Claimants”) claimed that they had been mis-sold the interest rate swap as a form of insurance against an existing loan in 2005. They alleged that RBS had breached its duties of care by making various negligent misstatements about the swap and had given negligent advice about taking it on. The Claimants claimed that RBS had not provided them with sufficient information as to the risks and had encouraged them to enter into the swap agreement, advising them that it was “suitable” for their needs.

A fixed base rate of 4.83% was applied to the notional amount of £1.5million. Before the financial crisis in 2008, the Claimants benefitted from the swap. However, after October 2008 interest rates fell below the fixed base rate and the Claimant’s loan repayments fell but under the terms of the swap, they had to pay a corresponding sum to RBS.

Judge Waksman QC dismissed their claim in the Mercantile Court, finding that the duty of care relied upon (i) did not include a duty to give information, unless without that information the statement was misleading; and (ii) did not encompass duties under the Financial Services Authority’s Conduct of Business Rules and Guidance. The Judge further opined that although there was an indication that the protection given by the swap was not complete, this did not mean that the swap was an unsuitable product back in May 2005. The court held that:

1) No advice was given to the Claimants; only information about the swap, therefore an actionable, advisory duty had not arisen; and

2) RBS had provided sufficient information in relation to the potential risks of the Claimants backing out of the swap.

The Claimants appealed against the decision to the Court of Appeal. The Court of Appeal upheld the first instance decision that the Claimants had not been advised, merely given information.
 
The Court of Appeal’s written judgment, expected in the autumn, will be keenly awaited. 

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