Green and Rowley v The Royal Bank of Scotland plc

The Court of Appeal dismissed the appellants' challenge to the trial judge's refusal to recognise a common law duty of care co-extensive with the Conduct of Business (COB) rules. The court held that section 150 of the Financial Services and Markets Act 2000 provides an express private cause of action for breach of COB rules and that the mere existence of those regulatory duties does not, without more, give rise to an independent common law duty to ensure a client understood the nature and magnitude of risks (including break costs) where no advisory relationship had been assumed. The court accepted the Hedley Byrne principle that a duty may arise where an assumption of responsibility is shown, but held that the Hedley Byrne duty does not extend to impose the wider obligations contained in COB 2.1.3 and COB 5.4.3 absent an advisory relationship. The trial judge's factual findings that the bank did not give advice and did not assume an advisory duty were not challenged and were decisive.

The appeal concerned the sale in May 2005 of a straightforward interest rate swap by The Royal Bank of Scotland plc to Messrs Green and Rowley, who alleged the swap had been mis-sold. The swap was intended to hedge the pair's variable-rate loan by effectively fixing interest for a ten year period. The appellants complained specifically about alleged inadequate disclosure of potential early termination ("break") costs.

The bank had provided a Terms Letter, a prescribed Risk Warning Notice and documentation stating it would provide execution-only dealing services and would not advise on the merits of a transaction. At trial His Honour Judge Waksman QC found that no recommendation or advice had been given, that the bank did not assume an advisory duty and that the bank had not assumed a duty to advise prior to the meeting; those factual findings were not appealed.

The principal legal issue on appeal was whether the existence of the COB rules (notably COB 2.1.3 R and COB 5.4.3 R) and the statutory remedy under section 150 of the Financial Services and Markets Act 2000 entitled the appellants to a concurrent common law duty of care that would require the bank to take reasonable steps to ensure the customers understood the magnitude of potential break costs. Counsel for the appellants relied on authorities such as Hedley Byrne for negligent misstatement and on the proposition that statutory duties may inform common law duties.

The Court of Appeal rejected that argument. It held (i) section 150 already provides an express private cause of action for contravention of the rules, (ii) the Hedley Byrne negligent misstatement duty is concerned with avoiding misleading statements where there is an assumption of responsibility and does not extend to the broader obligation to ensure understanding prescribed by COB 5.4.3 in the absence of an advisory relationship, and (iii) the mere imposition of a statutory duty does not, without more, generate a co-extensive common law duty to advise. The court also noted a procedural concession below that limited the appellants' reliance on the statutory claim as time-barred and observed that the factual findings that no advice was given materially undermined any claim for an expanded common law duty. The Financial Conduct Authority intervened but the court declined to express a view on whether the bank in fact contravened the COB rules, that issue having been unnecessary to decide the appeal.

Relief sought: damages and/or declaratory relief for alleged mis-selling and failure to warn adequately about break costs; Issues framed by the court: (i) whether a common law duty of care co-extensive with COB rules exists, (ii) scope of Hedley Byrne negligent misstatement duty in the regulatory context, (iii) interaction between statutory remedy under s.150 FSMA and common law duties, and (iv) whether the facts showed an advisory relationship. Reasoning: statutory remedy under s.150 and the absence of an advisory relationship meant no co-extensive common law duty arose; Hedley Byrne duty does not import obligations to ensure comprehension of risk beyond avoiding misleading statements.

The appeal was dismissed. The court held that (1) section 150 of the Financial Services and Markets Act 2000 provides an express private cause of action in respect of contraventions of the Conduct of Business Rules and that fact does not justify creating a concurrent, co-extensive common law duty of care; (2) the Hedley Byrne negligent misstatement duty is limited to preventing misleading statements where responsibility is assumed and does not impose the broader obligation in COB 5.4.3 to ensure a customer understands the risks unless an advisory relationship exists; and (3) the bank had not undertaken an advisory duty on the facts and the judge's unchallenged findings on that point were dispositive.

Appeal from the High Court of Justice, Manchester District Registry (His Honour Judge Waksman QC) [2012] EWHC 3661 (QB).