This is the second half of a two-part commentary on the legal issues involved in handling disputes over the alleged mis-selling of interest rate and similar products in the UK.

This is the second part of an article by Laurence Lieberman, a partner in the disputes and investigations team at the international law firm of Taylor Wessing, and his associate Justin Fredrickson. They examine at one of the hottest legal topics for bank customers - including high-net-worth customers. To see the first half of the article, go here.

Litigation
Although the major banks involved in the FCA review have been subjected to a fair amount of litigation, not many cases have, for one reason or the other, gone to trial. One claim that did make its way to trial, and then to the Court of Appeal, is the case of Green and Rowley v RBS. There, RBS succeeded in defending the claim against it of mis-selling. This is the most authoritative decision in the area and exemplifies the court's recent approach to swaps litigation, namely its reluctance to depart from established legal principles. Of course, the outcome of each case rests on the twists and turns of the facts and these are often not at all straightforward, so this generalisation has its limits.

Contractual estoppel
In the UK, the main court cases against banks in relation to the mis-selling of financial products have generally gone in favour of those banks – a stark contrast with Germany, where case law is more pro-consumer. The chief “pro-bank” legal principle in the UK is that the banks do not have a duty to advise in the sale of, in this case, interest rate hedging products if the sale of the products was not provided in an advisory relationship. Even if a court finds that information was provided which might amount to advice, any such claims are subject to contractual estoppel.

Contractual estoppel can occur when the customer signs the bank's terms and conditions. These might state that the bank is not in fact giving advice or a recommendation, and that the customer chose the product with information simply provided by the bank. If the customer signs, he agrees to this. He therefore cannot rely on any representations made by the bank in question and therefore, by contract, he is “estopped” from basing a legal claim on advice. Such a point was, amongst others, argued successfully by RBS recently in the case of Nextia Properties Ltd v RBS (where, interestingly, a claim based on an interest rate swap being a wager was also brought by Nextia Properties Ltd).

Such contractual estoppel provisions are sometimes underlined by a clause in the contract between the consumer and the bank which states them explicitly, or at the very least in the bank's marketing material. However, despite such a disclaimer or provision from a bank, the customer may still feel able to provide evidence that he nonetheless received advice rather than just information, and then relied upon that advice (the distinction between "advice" and mere "information" can at times be fine).

Despite the bank-friendly nature of the law in this area, it is interesting to note that one of Green's and Rowleys' possible claims was time-barred by the six-year limitation period (i.e. the rule that invalidates claims that are made six years after the action in question).   

What to do?
If readers are considering “breaking” a product that they have purchased or seeking redress from any loss they believe has resulted from that purchase they should consider the avenues which they wish to proceed down very carefully.

In addition to breakage costs, for example, they should decide whether to claim for any consequential loss, i.e. the further loss that one suffers that arises from the original loss. Here, a claimant may argue for example, that he lost profit or had to pay bank charges that only came about because of the burden of having to break the interest rate swap. The FCA review's position (which only applies, of course, to customers who are part of that review) is that if a party wants to claim for more than the breakage of the swap in question, that customer must then forgo his/her/its maximum entitlement to any interest that may have occurred according to the swap.

The FCA review's position on this, however, is irrelevant if the customer decides to proceed in the courts. A good lawyer always considers whether to put in a claim for consequential loss in a court case if such a claim has a reasonable chance of success. The results of these claims naturally come in all shapes and sizes.

This is an area in which strategic planning is vital. Customers should always bear in mind the six-year limitation period to which we have referred above. It generally applies to claims for the mis-selling of products, so they should seek legal advice urgently if that date is approaching for them.

Glossary of derivatives

Interest rate caps: Here the buyer receives payments at the end of each period in which the interest rate exceeds the agreed strike price. An example of a cap would be an agreement to receive a payment for each month the Libor rate exceeds 2.5%.

An interest rate floor: This is a derivative contract in which the buyer receives payments at the end of each period in which the interest rate is below the agreed strike price.

Collar: This is an option strategy that limits the range of possible positive or negative returns on an underlying stock (or asset or other thing) to a specific range.

Structured collar: This describes an interest rate derivative product consisting of a straightforward cap and an enhanced floor.

Contract for difference: This is a contract between two parties, typically described as "buyer" and "seller", stipulating that the seller will pay to the buyer the difference between the current value of an asset and its value at contract time (if the difference is negative, then the buyer pays instead to the seller).