Options for those seeking to bring a mis-selling claim against a bank (Parmar and another v Barclays Bank Plc)

The outcome of claims regarding interest rate hedging products (IRHPs) is generally mixed, with companies having been dealt a number of blows, particularly in respect of consequential losses, and the court having ruled in the bank’s favour. But this doesn’t mean all cases are doomed to fail, as Polly Blenkin, senior associate at Mishcon de Reya LLP, explains following the first ruling of its kind for private individuals (as opposed to companies) bringing a case to trial.

Parmar and another v Barclays Bank Plc [2018] EWHC 1027 (Ch)

What are the practical implications of this case?

Though it sounds pretty grim for claimants, when you read the judgment it is clear that, other than the fact that this is the first of such cases to get to judgment, the decision in Parmar should not deter others who have a claim under the Conduct of Business Sourcebook Rules (commonly referred to as the COBS Rules).

On the facts of the case, the judge found Barclays’ conduct to be acceptable—an alternative cap had been offered (a type of IRHP where the total cost of protection is known from the start and won’t trigger a break cost), the bank had presented the customer with illustrations of break costs—notably with specific quantified examples—and the customer made an independent and carefully considered decision. Plainly, these facts will not be present in all cases, particularly against different banks who took different approaches, but even between different relationship managers and those selling the IRHPs, there will be variations in how an IRHP was sold to a customer and how that customer participated in the process. Furthermore, the judge’s comments regarding the effect of an IRHP on creditworthiness will depend on the specific facts and circumstances in a case. The Parmar decision should therefore not undermine other COBS cases which are stronger on the facts and can be easily distinguished.

For customers who entered into the IRHPs as companies, the future is looking rather bleak. However, it is a very different outlook for individuals, or individuals who ran their small business through a partnership. Claims of this nature are still viable (provided there are no limitation issues) and difficult for the banks to defend.

What’s the general background to this case?

Following initial rumblings in 2010 about the sale of IRHPs to small businesses by Barclays, complaints continued, culminating in the Financial Conduct Authority (FCA) carrying out a proper discovery exercise into IRHPs in 2012. This uncovered evidence of inappropriate or unsuitable products, poor practices and poor customer outcomes in respect of the sale of IRHPs—so the FCA review into the mis-selling of IRHPs was born. The FCA agreed with a number of banks (Barclays, HSBC, Lloyds, NatWest and RBS) that they would carry out a sales review and provide appropriate redress where mis-selling had occurred.

Lo and behold, the banks have been the subject of much criticism for their handling of the review process. Having sent a redress determination letter to 18,200 businesses, 90% of sales were non-compliant and £2.2bn was paid in basic redress, and £462m compensatory interest (at 8%)—but only £45m has been paid in respect of specific consequential losses.

Consequential loss offers have left many customers dissatisfied and faced with the choice to either give up or, for the few who had the means, litigate. There have been a number of attempts before the courts to run cases criticising the banks for their conduct in the review process. Though there have been smatterings of helpful comments from the courts, none have hit the fatal blow.

The principal difficulty in claims for the mis-selling of IRHPs is to establish that the bank owed relevant duties to the customer, eg breach of statutory duty, breach of implied duties, negligent advice, negligent provision of information, misrepresentation and/or breach of implied duties in relation to the FCA review. The strongest cause of action for the mis-selling of an IRHP is for breach of the relevant FCA rules, principally the COBS Rules, since these impose substantial duties upon banks.

The common problem that customers face is that under the Financial Services and Markets Act 2000(Rights of Action) Regulations 2001, SI 2001/2256, a claim for breach of statutory duty may only be made by a ‘private person’. This means companies are usually left with the other causes of action—negligent advice, misrepresentation etc, which are much more difficult to establish. Even if they do, as in Crestsign v National Westminster Bank and another [2014] EWHC 3043 (Ch), [2014] All ER (D) 183 (Sep), the banks have successfully relied on exclusion clauses.

What led to this case?

Mr Ramesh Jadavji Parmar and his wife, Mrs Rama Ramesh Parmar, run a small business in Perivale which, among other things, imports and sells latex gloves to the medical profession. At the relevant time, they owned the commercial premises where their business operated and had also built up a portfolio of residential properties. The Parmar case concerns claims brought by the Parmars against Barclays for the mis-selling of two ten-year interest rate swaps in April 2009.

The Parmars claimed direct losses of around £340,000 and consequential losses of around £530,000 (both with interest and together, in excess of £870,000). This is the first COBS case that has been ruled on.

What did the court decide?

Save for some technical breaches of COBS, the court found in favour of Barclays. Specifically, the judge found the sale of the IRHPs had not been advised (but even if it was, they were suitable for the customer), the IRHPs were appropriate, and the bank was not required to have disclosed what Barclays termed the ‘credit equivalent exposure’ (a credit line put in place in order to quantify the bank’s exposure to a customer arising from the existence of an IRHP).

Interviewed by Nicola Laver.

The views expressed by our Legal Analysis interviewees are not necessarily those of the proprietor.

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