A Wider Information Duty?

Thu, 21 Sep 2017

Thomas v Triodos Bank NV [2017] EWHC 324 (QB):  

This practice note explains the decision in Thomas v Triodos and a potential new route to relief in a mis-selling claim against banks and other providers of financial products to business customers, including SMEs.  

One of the foremost difficulties experienced by SMEs suing their bank in the swaps mis-selling litigation was that they had to establish that the bank had given advice in relation to the product sold.  If no advice on the merits of the product had been given, and the bank had not come under the intermediate common law duty of care in Bankers Trust International v PT Dharmala Sakti Sejahtera and in the earlier decision in Cornish v Midland Bank, the customer could advance only a misinformation claim under the bank’s Hedley Byrne duty to take reasonable steps not to mislead.

Green and Rowley v RBS decided[1] that the duty not to misstate was much narrower than the advisory duty, and would only be breached if the lack of clarity or unfairness in the statement made by the bank rendered it a “half truth”.  That was a formidable hurdle to overcome.

While accepting the principles in these authorities, in Thomas v Triodos Bank Judge Havelock-Allan QC championed a new and radical approach to the legal effect of a misstatement made by the bank prior to entering into a transaction with its customer.

Mr and Mrs Thomas were a married couple and partners in an award winning organic farming business.  In the summer of 2008 they decided that they wanted to switch a sizable proportion of their borrowing with Triodos Bank from a variable interest rate to a fixed rate.  In June 2008 they switched the greater part of their borrowing to loans (“the Loans”) with terms of 10 years at 6.71% and 7.52%.  Following the dramatic fall in interest rates to 0.5% in March 2009, they found themselves tied into a very much higher interest rate than they would have paid on variable terms.  The terms for the Loans included two clauses (2.10 and 2.11) referring to an early redemption charge (“the Redemption Charge”) if the Loans or any part of them were repaid before the expiry of the fixed term.  

Prior to the fixing of the rate on the first tranche of the Loans Mr Thomas and Mr Price of the bank had a telephone conversation.  That conversation had been preceded by an email exchange on the previous day between Mrs Thomas and Mr Price.  Mrs Thomas had asked for potential scenarios for fixing the rate for maturities between 2 and 5 years as an example.  The forward rates quoted by Mr Price were lower the longer the period to maturity.

The Judge found that in response to what Mr Thomas had said:-

Mr Price had probably said something which conveyed to Mr Thomas that it was sensible to think of fixing for 10 years rather than 5 years or 2 because the 10 year rate was lower; and

Mr Price had failed to disabuse Mr Thomas when he had asked whether the maximum likely redemption penalty would be in the range of £10,000 - £20,000

(together “the Response”).

In his judgment the Response did not cross the line between providing information on the one hand and advice on the other, but it amounted to the provision of misleading information and to misrepresentation because it only told half the story.  That was because:-

The critical factors to balance against the rate advantage was that the longer the period of the fix, the greater was the likelihood that Mr and Mrs Thomas would want to repay capital before maturity; and that the longer the unexpired term at point of repayment, the greater any redemption charge would be even if the rates only modestly moved against them.

Mr Price had not given the full picture by explaining the potential downside to fixing for a longer period.

In consequence the Judge held that:-

The Response was a misrepresentation which influenced the first fix of rates, but not the second fix because another member of the bank’s staff, Mr Roylance, gave a sufficient warning before the second fix that the £10,000 - £20,000 figure was wrong;

So far, so conventional.

Apart from the actionable misrepresentation in relation to the first fix, Mr and Mrs Thomas also succeeded against the bank for breach of an “information duty”.  This is the novelty emerging from the decision. The Judge held that where the bank had advertised in its promotional material that it subscribed to the Business Banking Code[2], it had assumed responsibility to the customer for adhering to the principles set out in that code. 

The court considered that as there were no “basis clauses” in the bank’s documentation (seeking to disavow responsibility for advice/representations), and since the bank had voluntarily subscribed to the customer commitments in the code (i.e. it had not been compelled by a regulatory regime or otherwise to adopt the commitments), the court could and should readily infer that the bank had assumed responsibility to the customer for adhering to the principles set out in the code. 

 That in turn gave rise to a duty to the customer that was more than the duty not to mislead or misstate in Green and Rowley:-

The Fairness Commitment in the code 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.

That meant that when the customer enquired about fixing the rate of the Loans, the bank owed a duty of care to explain the financial implications of fixing the rate.

The duty was owed only in response to the customer’s inquiries because that was what the bank had signed up to, and the bank was not required to volunteer information if not asked nor to provide a “comprehensive tutorial” (adopting the comments of the judge in Crestsign).

What was required from the bank was an explanation in plain English of what fixing the rate entailed and the consequences and the essential components of that explanation were:-

(1)            The rate could be fixed for a period

(2)            Where 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 (i.e. the rate that would be payable)

(5)            The financial consequences of terminating the fixed rate before the end of the period

In relation to (5) the bank was obliged to provide an accurate description of how clauses 2.10 and 2.11 of the Loans would operate in the event of an early repayment.

While a worked example had not been necessary, it should have been made clear to Mr and Mrs Thomas that if there was an early repayment, then the longer the period left to run, the higher the redemption penalty would be if there was a difference in rates which meant a redemption penalty became chargeable.

In the result the Judge found the bank liable for breach of its information duty (and in this cause of action Mr and Mrs Thomas were also entitled to rely on the second fix) because they suffered losses when they ended up fixing their rates for far too long because the bank failed adequately to explain the financial implications of fixing, and how the redemption charge would work.  He awarded them various losses claimed under the separate heads of loss and reserved all aspects of quantum not decided for further submissions.

This decision is most welcome because it permits a customer to hold the bank to its promises in a voluntary code and, in appropriate factual circumstances, to recover loss suffered as a result of the bank’s breaches of the commitment in the code.

This is a true innovation. The conventional approach to voluntary codes hitherto has been that they lack contractual force as between the bank and the customer, and that they do not give rise to rights enforceable by the customer.

It remains to be seen whether the decision will be followed in the general context of product mis-selling claims. To recap, the wider information duty is based on the bank’s assumption of responsibility to act as promised in the voluntary code which in turn gives rise to a duty of care to act in accordance with those standards - even where the bank has given no “advice” to the customer.

It is notable that Beatson LJ in the conjoined CGL appeal[3], decided 4 months after the judgment in Thomas v Triodos, arguably rowed back from assumption of responsibility as a foundation for a duty of care on the part of the bank, having referred to the “chequered history” of the concept. In that appeal the court ruled that the banks did not owe a duty of care to their customers in relation to their conduct of the FCA Review into mis-sold interest rate hedging, whether by an assumption of responsibility or by way of the tripartite test in Caparo or a White and Jones beneficiary duty.

It may be possible to distinguish CGL because the factors highlighted as indicating against an assumption of responsibility in the CGL appeal (the regulatory context; the exclusion clause in relation to third party rights in the framework agreement; the fact that the banks’ participation in the Review was not voluntary, but had been “thrust on” them by the FCA; and the role of the s.166 Skilled person) were entirely absent in Thomas v Triodos where it was, moreover, emphasised that the bank’s commitment to the code was truly voluntary.

In the right factual circumstances the principle in Thomas v Triodos may provide non-advised business customers complaining about a mis-sold product with a new cause of action for breach of the bank’s information duty.    The relevant voluntary information commitments are now set out in the Standards of Lending Practice for Business Customers (adopted on 1 July 2017); and the following are likely to be of particular relevance:-

Product Information

·      All financial promotions are clear, fair and not misleading (echoing COBS 4.2.1R) 

·      Customers are provided with clear and understandable information which enables them to decide whether the product they are considering applying for meets their needs and is appropriate for the type of business they are engaged in

·      Clear information is provided as to how the product on offer works: its key features and associated costs for example charges, interest and any breakage or early repayment fees/costs.

Product Sale

·      Before providing any form of credit, granting a limit or increasing the customer’s borrowing, the firm [bank] will assess, from the information available at the time, whether the customer will be able to repay it in a sustainable manner without incurring financial difficulty

·      At the point of sale firms [banks] will provide clear information to the customer regarding the key features of a product and any breakage or early repayment fees/costs associated with it.           

Susanne Muth
Commerical and Chancery Group
21 September 2017