Courts have confirmed that your bank is under no duty to advise on hedging. Borrower beware!
Hedging interest rates under floating rate loan facilities are commonplace in real estate finance transactions. Whilst they tend to run alongside the initial transaction the commercial arrangements are often discussed and put in place directly between the borrower and bank without involving lawyers or other advisers.
In circumstances where the borrower is not obtaining external hedging advice, what are the bank's duties to the borrower when discussing the hedging products?
In Thornbridge Ltd v Barclays Bank PLC  EWHC 3430 (QB), the High Court considered whether a bank had an advisory duty when it sold an interest rate swap to its borrower.
The case involved a standard real estate finance transaction with a requirement to hedge as a condition precedent to funding. The bank gave the borrower information on the hedge options. The borrower subsequently entered into an interest rate swap to protect against interest rate rises.
Unfortunately the hedge took place just before the 2007/2008 financial crisis. The interest rates did not increase but instead dropped to historic lows. The borrower had to pay a higher interest rate under the hedge and could not break the swap due to the high break costs.
The borrower brought a claim against the bank on the basis that it had failed in its duty to advise on the swap and the suitability of the product. The main claims the borrower made were that the bank:
- failed to provide adequate information regarding break costs, including a failure to give examples of the break costs applying when interest rates were low
- failed to set out the relative advantages and disadvantages of other hedging products.
The Court held that the bank's role was that of a salesperson and not an adviser. In finding that the bank had not assumed an advisory duty, the Court found that:
- whilst the representative may have made a statement about the likely movement of interest rates, this was no more than an opinion
- even if it had amounted to advice or an endorsement of a product this had not gone beyond the relationship of a salesperson and their customer
- the bank was under no obligation to provide comprehensive information addressing all market eventualities
- there must be a distinction between investment advice (where a fee is taken) and advice given as part of a sales process. In this case the bank had taken no fee.
The judge was further of the view that the case had been bought with the benefit of hindsight and although the swap was no longer appropriate it was not mis-sold at the time.
It should also be noted that the Court found that even if there had been an advisory duty established, the bank's boilerplate contractual language would have given rise to a "contractual estoppel" preventing a claim for breach of an advisory duty.
How does this principle translate where hedging is a condition of the loan? Although a borrower could use a third party to hedge, it almost always hedges with the lender. The salesperson on these occasions has no need to "sell" the product. It is hard to reconcile these scenarios with the presumption that they are always selling and not advising.
This decision may come as no surprise for those with knowledge of mis-selling litigation and again shows the Courts' reluctance to assist borrowers who entered into (during better times) transactions that later turned out to be bad bargains. Although of course it will be welcomed by the banks, especially as there has been considerable media and political attention on the mis-selling of financial products.