Carney and Parmar – further comfort for banks facing mis-selling claims, and a word of warning about witness evidence

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Carney and Parmar – further comfort for banks facing mis-selling claims, and a word of warning about witness evidence

Published 29 June 2018

The two recent High Court decisions in Carney & others v NM Rothschild & Sons and Parmar and another v Barclays Bank plc will be welcomed by banks who continue to face mis-selling claims. These two cases raised new and specific issues that had not previously been considered by the Court, but the decisions themselves highlight the more general legal and evidential difficulties Claimants alleging mis-selling are likely to face.

Carney v NM Rothschild

The Facts

The Claimants, Mr and Mrs Carney and Mr and Mrs Fox, were all residents in Spain, who had entered into Loan Agreements with NM Rothschild & Sons ("Rothschild") in 2005 and 2006. The purpose of the loans was to allow the Claimants to make investments which were designed to reduce their exposure to the Spanish equivalent of inheritance tax (the local rate of which was very high). The loans provided by Rothschild were secured by the investments and the Claimants' properties in Spain. The investment itself was promoted by an Independent Financial Adviser based in Marbella.

The Loan Agreements were all in the same form and contained various familiar clauses to the effect that Rothschild had made no recommendations as to the suitability of the investments and had acted as provider of finance only, and that the Claimants had been advised to seek independent legal and tax advice.

The investment underperformed, in part due to the global financial crisis in 2007 and 2008, and in part, according to the Court, due to Rothschild's conservative management of it.

The Claimants issued proceedings in 2016, alleging that Rothschild had acted as their adviser in relation to the suitability of the investment and its efficacy as a way of avoiding Spanish inheritance tax. They alleged that a representative of the bank, Mr Dewsnip had made various misrepresentations about the investment at (i) a cocktail party attended by Mr and Mrs Carney and (ii) a lunch hosted by Mr and Mrs Fox. Essentially, the Claimants alleged that Rothschild had advised that this was a very good and safe investment, that it would take the value of their properties outside of their estates for the purpose of inheritance tax and they could have confidence in their investment and their ability to ultimately repay the loans. In fact, according to the Claimants, the investment as a whole was very risky and did not generate sufficient funds to repay the interest and fees, and the tax position was not as they had been led to believe.

The Claimants brought their claims pursuant to s140A and 140B of the Consumer Credit Act 1974, alleging that in light of the above an unfair relationship had arisen out of the Loan Agreements. They requested the removal of their indebtedness to Rothschild and the discharge of the security under the Loan Agreements.

The Decision

The fact that the Claimants' claim was one of an unfair relationship was important for two reasons. First, this was the first time, so far as the Court was aware, that the efficacy of "basis clauses" (i.e. clauses which purport to agree the basis and scope of the relationship between the parties) had been considered in the context of an unfair relationship claim. Second, in an unfair relationship claim, it is for the Defendant to prove that the relationship was not unfair, rather than, as is more usual, the Claimants bearing the burden of proof.

The Court conducted a detailed and forensic analysis of the relevant terms of the Loan Agreements and each separate allegation of unfairness. Having done so, the Judge concluded that Rothschild had "clearly satisfied the burden of showing that there was no unfair relationship" and so the claims must fail. In coming to this conclusion, the Judge confirmed that the bank did not give any material advice and did not assume an advisory role. It was important, in his view, that the Claimants had an IFA, whose role was specifically to advise on the various elements of the investment. It was also important that the various terms in the Loan Agreements purported to agree the scope of the relationship between the parties and as such were "basis" rather than "exclusion" clauses. However, in an unfair relationship claim this is not the end of the story. Both basis and exclusion clauses could, in theory, fall within the Consumer Credit Act's provisions and lead to an unfair relationship, but, importantly, the Judge explained that the impact of a basis clause is much less than an exclusion clause which would also be subject to the requirement of reasonableness under the Unfair Contract Terms Act 1977. The Judge concluded that, in any event, even if the particular clauses in question in this case had been exclusion clauses, he would have found them to be reasonable.

The Judge also held that, on the facts, the bank had not made any actionable representations, or, to the extent that it had, they were not false. In any event the basis clauses would have prevented the Claimants relying on any representations.

Parmar v Barclays

The Facts

In the second case, Mr Parmar, a longstanding customer of Barclays, and his wife, entered into two ten year interest rate swaps (the "Swaps") on 29 April 2009. Prior to that, they had been provided with a number of facilities with the bank, none of which had required them to enter into interest rate hedging products ("IRHPs"), and all of which had been drawn down.

In 2006, Mr Parmar asked for a further fixed rate loan. He was told by his relationship manager at Barclays that such loans were no longer being offered, and that the only way of achieving a fixed rate of interest on a loan would be to enter into an IRHP. There followed 34 months of discussions between Mr Parmar and representatives of Barclays and Barclays Capital in relation to the terms on which an IRHP would be offered, before the Swaps were eventually entered into in 2009. During this time the Claimants were given 6 different presentations explaining a variety of IRHPs, and Mr Parmar discussed the presentations in telephone calls and meetings with various representatives of the bank. As in the case of Carney, the presentation and the subsequent contractual documentation included disclaimers and representations regarding the non-advisory nature of the relationship between Barclays and the Parmars.

In March 2015, the Parmars issued proceedings against Barclays. Although the claims were initially much broader, by end of the trial, they were proceeding solely on the basis of breach of various statutory duties set out in the FCA's Conduct of Business Sourcebook (the "COBS Rules"). Again, this was the first time that this specific type of claim had reached the Courts.

The Decision

The Judge in Parmar took a similar overall approach to the one in Carney, setting out a forensic analysis of each contact between Mr Parmar and Barclays and then assessing whether any of those contacts amounted to a breach of the COBS Rules. His findings were almost entirely in favour of Barclays. He did find that there had been some minor breaches, but they had not led to any loss and so did not assist the Claimants.

As in Carney, the Judge found that the bank had not had an advisory relationship with the Claimants. He was not persuaded that the longstanding relationship between Mr Parmar and Barclays was indicative of any advisory responsibility, and the fact that Mr Parmar was given information about the pros and cons of different products also did not indicate that he had been advised.

In addition to alleging an advisory relationship, the Claimants had suggested that the Swaps were inappropriate, and that the bank had breached Chapter 10 of the COBS Rules by failing to conduct an adequate fact-finding exercise to ascertain the appropriateness of the product. The Court disagreed. Although the fact finding exercise was carried out piecemeal over a number of years, by January 2009 it was clear that the bank held sufficient information to enable them to make a decision as to the appropriateness of the Swaps.

Comment

Both of these cases involved specific, and fairly narrow, causes of action that had not previously been before the Courts in the context of mis-selling claims. Nevertheless the allegations made by the Claimants themselves covered familiar ground, and the Courts' position in both was also familiar. It seems that claimants will continue to struggle to successfully bring claims of this nature against banks and financial institutions no matter what specific cause of action they choose to pursue.

In both cases, the Judges highlighted the fact that it has been a significant amount of time since the events in question. Although the Claimants were all said to have been clearly trying to assist the Court, and there was no sense that they were dishonest, both Judges noted that their memories of key conversations and meetings had (i) deteriorated over time, and (ii) been coloured by both their preparation for the trial and the fact that they had "come to view the Bank generally…as the sole source of all their difficulties". The Judge in Carney pointed out that "the fact that the Claimants have been litigating this case for two years now and have been making complaints of one kind or another for a number of years previously and indeed not long after problems arose, does not necessarily assist them. That is because over time, views and impressions, even if inaccurate, can solidify into what appear to be clear and reliable accounts of what took place, even to the witnesses themselves." There were no contemporaneous notes of presentations, conversations or meetings to either back up or rebut what the Claimants said they remembered. The banks' witness evidence was not without its own difficulties – key people had left since the events being considered, and others were of limited assistance, having only been involved in specific and narrow issues.

Given all of the above, in both cases the judges placed considerably more weight on the documentary evidence than the statements and oral evidence provided by the parties. This highlights the crucial importance to banks and financial institutions of, most importantly, making sure their contractual documentation is as watertight as possible, but also of taking and retaining contemporaneous notes of contact with customers – as often and in as much detail as possible.

Authors

Laura Berry

Laura Berry

London - Walbrook

+44 (0) 20 7894 6343

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