Claiming Against a Bank for Interest Rate Swap Mis- Selling

The Financial Services Authority has completed its review of a pilot number of cases where banks have sold small businesses interest rate swaps in which Barclays, HSBC Lloyds and RBS provided a sample of 173 sales. There are many thousands of such sales but there is no reason to believe that the findings of the FSA when the samples were reviewed will differ in any significant way from the way in which all interest rate swaps were sold by UK banks.

The FSA report that 90% of the sales they investigated were in serious breach of FSA regulations concerning the sale of financial products. The key areas of breach were that the financial products were misrepresented, poorly explained or not explained at all, commission driven, exit charges were not explained and in all the banks had seriously misrepresented the swap to the customers to whom they sold the swap.

The previous findings of the FSA have already shown

• poor disclosure of exit costs;
• failure to ascertain the customers’ understanding of risk;
• non-advised sales straying into advice;
• “over-hedging”, where the amounts or duration did not match the loans;
• rewards and incentives being a driver of these practices.

The study of the pilot cases now shows that the banks must accept that most of the customers to whom they sold these swaps were not sophisticated and that not enough attention has been paid by the banks to the consequential losses suffered by these customers; more of that later.

Fashionably, journalists call this “mis-selling” but technically at law it is known as misrepresentation. The law of England and Wales on misrepresentation has been clear since 1967 when it the Misrepresentation Act was passed. I think that the act makes clear the liability of the banks in the case of swaps that they have sold to their customers. It is worth setting out the operative provisions of this short Act of Parliament:-

(1)Where a person has entered into a contract after a misrepresentation has been made to him by another party thereto and as a result thereof he has suffered loss, then, if the person making the misrepresentation would be liable to damages in respect thereof had the misrepresentation been made fraudulently, that person shall be so liable notwithstanding that the misrepresentation was not made fraudulently, unless he proves that he had reasonable ground to believe and did believe up to the time the contract was made the facts represented were true.

 (2)Where a person has entered into a contract after a misrepresentation has been made to him otherwise than fraudulently, and he would be entitled, by reason of the misrepresentation, to rescind the contract, then, if it is claimed, in any proceedings arising out of the contract, that the contract ought to be or has been rescinded, the court or arbitrator may declare the contract subsisting and award damages in lieu of rescission, if of opinion that it would be equitable to do so, having regard to the nature of the misrepresentation and the loss that would be caused by it if the contract were upheld, as well as to the loss that rescission would cause to the other party.

(3)Damages may be awarded against a person under subsection (2) of this section whether or not he is liable to damages under subsection (1) thereof, but where he is so liable any award under the said subsection (2) shall be taken into account in assessing his liability under the said subsection (1).

 Avoidance of provision excluding liability for misrepresentation.

 If a contract contains a term which would exclude or restrict—

(a)any liability to which a party to a contract may be subject by reason of any misrepresentation made by him before the contract was made; or

 (b) any remedy available to another party to the contract by reason of such a misrepresentation, that term shall be of no effect except in so far as it satisfies the requirement of reasonableness as stated in section 11(1) of the Unfair Contract Terms Act 1977; and it is for those claiming that the term satisfies that requirement to show that it does

The key remedy that the customer of the bank will have, if misrepresentation is proved, is rescission, which will mean an unraveling of the consequences of the swap and will usually result in the bank having to repay the customer the swap charges that the bank has debited and the customer having to give credit for any swap profits that the bank has credited to its account. If the bank has charged exit fees (and these will normally be quite substantial) these must be refunded to the customer.

In some cases the effect of unraveling the swap may extend beyond the simple repayment of money by the bank; the existence of the swap may have caused the customer to enter into transactions which it would not have entered into had it not signed up for the swap. If so, the unraveling of the swap and its consequences will be complicated.

The FSA’s findings of its pilot study care at http://www.fsa.gov.uk/pubs/other/interest-rate-swaps-2013.pdf

Filed under: climate change Tagged: consequential loss from swap, law, mis-selling, misrepresentation, remedies for misrepresntation, swaps