From the outset it is important to note that the Claimants potential claim for breach of statutory duty pursuant to section 150 of the Financial Services and Markets Act 2000 (see below) and the Conduct of Business Rules (“COB”) was abandoned before trial. That was on the basis it was time-barred, the Claim Form having been issued more than six years after a critical meeting in May 2005.
By their appeal the Claimants sought to allege common law duties of care co-extensive with the COB.
The Claimants carried on business together in partnership buying and developing commercial property. They were described by the Judge at first instance as intelligent and experienced businessmen. Whilst they were not previously versed in swaps, the swap in question was straightforward and the Judge found they would have had no difficulty in understanding it or, if they did not, they would have asked. The Claimants had access to independent financial and legal advice from accountants and solicitors.
In May 2005 the Claimant’s had two loans from the Bank secured on properties. The terms were not material . The Court noted that in simple terms the loans were £1.5 million for a term of fifteen years on an interest only basis at 1.5% above base rate. The Base rate in May 2005 was 4.75%.
The Claimants allege that both prior to and at a meeting in May 2005 they were told by staff at the Bank that the Swap was a good idea and that they should enter into it.
As to whether the Bank did on the facts, take reasonable steps to ensure that the Claimants understood the nature of the risks involved in entering into the Swap, the judge at first instance held that it did.
The Court noted that in essence an interest rate swap is or can serve as an interest rate hedging product. The Swap executed in May 2005 was independent of the loan, although its purpose was to protect the Claimants against the risk of base rate increasing during the term of the loan.
An increase in base rate would result in the variable interest rate under the loan, base rate plus 1.5%, increasing accordingly. The Swap was based upon a notional sum, £1.5 million, which was the loan. A term was selected of ten years. The property market was then buoyant. A fixed rate was set and applied to the notional amount of 4.83%, only fractionally more than the then prevailing base rate.
The Swap provided for quarterly net payments between the Bank and the Claimant. Where the base rate exceeds 4.83%, the Bank pays the counter-party the amount of the difference between the fixed rate and base rate as applied to the notional amount, £1.5 million, over the period in question. Where the base rate is lower than 4.83%, the counterparty pays the Bank the amount of the difference calculated in the same way.
Thus if interest rates went up, whilst the Claimants would pay more under the variable rate loan, they would recoup the enhanced payment from the Bank under the Swap. Likewise if the base rate went down, the Claimants would be worse off than had they not entered into the Swap. That is because whilst they would pay less interest under the variable rate loan, they would have to disgorge that saving to the Bank under the Swap. Hence their liability to pay interest to the Bank under the loan effectively became fixed for the term of ten years.
In early 2009 the cost to the Claimants of early termination of the Swap was calculated as £138,650.
In May 2011 the Claimants issued proceedings against the Bank. Many of the Claimants allegations failed at trial in the light of the judge’s findings of fact which was largely unchallenged. The Claimants sought to pursue on appeal that compliance with the COB Rules required the Bank not only to warn that break costs could be substantial but also to explain clearly and fairly the true potential magnitude of those costs so that the Claimants could understand it.
The Bank’s conduct in either arranging the swap transaction or advising upon it was governed by the COB rules made by the Financial Services Authority.
In respect of the potential Statutory claim section 150 of the Financial Services and Markets Act 2000 provides:-
"150 Actions for damages.
(1) A contravention by an authorised person of a rule is actionable at the suit of a private person who suffers loss as a result of the contravention, subject to the defences and other incidents applying to actions for breach of statutory duty.
. . .
(3) In prescribed cases, a contravention of a rule which would be actionable at the suit of a private person is actionable at the suit of a person who is not a private person, subject to the defences and other incidents applying to actions for breach of statutory duty.
. . .
(5) "Private person" has such meaning as may be prescribed."
The Bank was an "authorised person" and conceded for the purposes of the action that the Claimants were "private persons".
The reader is referred to the Judgment for the relevant COB Rules however the following are material:-
1. COB 2.1 Clear, fair and not misleading communication
COB 2.1.1 R (1) this section applies to a firm when it communicates information to a customer in the course of, or in connection with, its designated investment business.
Clear, fair and not misleading communication
COB 2.1.3 R When a firm communicates information to a customer; the firm must take reasonable steps to communicate in a way which is clear, fair and not misleading.
COB 2.1.4 G When considering the requirements of COB 2.1.3 R, a firm should have regard to the customer’s knowledge of the designated investment business to which the information relates.
COB 2.1.5 G COB 2.1 embraces all communications with customers, for example: client agreements, periodic statements, financial reports, telephone calls and any correspondence which is not a financial promotion to which COB 3 (Financial promotion) applies.
2. COB 5.4 Customers’ understanding of risk
COB 5.4.1 R This section applies to a firm that conducts designated investment business with or for a private customer but does not apply to a firm when providing basic advice on a stakeholder product.
Requirement for risk warnings
COB 5.4.3 R a firm must not:
(1) make a personal recommendation of a transaction; or
(2) act as a discretionary investment manager, or
(3) arrange (bring about) or execute a deal in a warrant or derivative; or
(4) engage in stock lending activity;
with, to or for a private customer unless it has taken reasonable steps to ensure that the private customer understands the nature of the risks involved."
3. The Swap was preceded by the Bank sending to the Claimant what was described as a Terms Letter, which one of the Claimant’s countersigned as having been read and understood, together with an enclosures. The enclosures included a copy of the Bank’s Terms of Business which stated that the Bank would provide the customer with dealing services on an execution only basis and that it would not provide the customer with advice on the merits of a particular transaction. Schedule 1 to the Terms Letter, specifically acknowledged by one of the Claimant’s as having been read and understood, was a Risk Warning Notice in the form then prescribed by the Financial Services Authority.
Duty of Care
At first instance the judge found that no "recommendation or advice for the Swap was given at the meeting" in May 2005. He also found that the Bank did not assume "an advisory duty of care before the meeting" and that no such duty arose as a result of anything said by the Bank staff at the meeting.
The judge also assumed, uncontroversially, that the Bank owed to the Claimants a duty to take care when making statements in relation to which it knew or ought to have known that the Claimants would rely upon its skill and judgment as noted in Hedley Byrne and Co Ltd v Heller and Partners Ltd  AC 465.
The Claimants sought to argue that the COB Rules set out the content of the duty. However at first instance the judge observed that the Hedley Byrne duty did not comprise a duty to give information unless without it a relevant statement made within the context of the assumption of responsibility is misleading.
The duty imposed by COB Rule 5.4.3 was to take reasonable steps to ensure that a party to a transaction understands its nature. The judge regarded this as outside any notion of a duty not to mis-state, as he characterised the Hedley Byrne duty to be. Accordingly, the judge did not regard the content of the Bank’s common law duty in relation to the accuracy of its statements as in any relevant manner governed in the COB Rules.
At first instance the Judge found that had the Bank undertaken an advisory duty, the content of that duty would have been in part governed by the content of COB Rules 2.1.3 and 5.4.3. The Court of Appeal noted that such approach has been endorsed in a number of cases including Loosemore v Financial Concepts  Lloyds PNLR 235 at 241 where the court pointed out that the skill and care to be expected of a financial advisor would ordinarily include compliance with the rules of the relevant regulator.
In Shore v Sedgwick Financial Services Limited  EWHC 2059 (QB) Beatson J held:-
"It is common ground that [the financial advisors] owed [the Claimant] a common law duty to act with the skill and care to be expected of a reasonably competent financial advisor. In determining the extent of this duty, it is useful to start with the requirements of the relevant regulatory regime, in this case the SIB principles and the IMRO rules. This is because the skill and care to be expected of a reasonably competent financial advisor ordinarily includes compliance with the relevant regulatory rules."
Counsel for the Claimants submitted that "conventional jurisprudence” holds that breach of a statutory duty was actionable as a breach of a concurrent common law duty of care where either the purpose of the statute was to confer protection on a defined class of individuals (sounding in an entitlement to damages) or (in like circumstances) where the statutory duty has been carelessly executed. The Claimants relied upon Lord Browne-Wilkinson in X (Minors) v Bedfordshire County Council  2 AC 633 at 730.
He further submitted that where a bank undertakes a regulated activity, here arranging or executing a relevant transaction, in circumstances where failure to comply with a statutorily imposed regulation, here COB Rule 5.4.3, is likely to give rise to damage to the counterparty, depriving it of its informed choice, a duty of care arises at common law which is co-extensive or concurrent with that imposed by statute.
The Court of Appeal rejected the Claimants arguments which amounted to saying that the mere existence of the COB Rules gave rise to a co-extensive duty of care at common law. This proposition invited the question "why?" It was no answer to the question what feature of the statutory duty ( if there is a relevant statutory duty), gives rise to a co-extensive duty of care at common law to assert, that the Bank was undertaking a regulated activity in circumstances where a failure to comply with COB Rule 5.4.3 would be likely to cause loss.
The Court of Appeal noted that section 150 of the Financial Services and Markets Act 2000, provided a remedy for contravention of the rule for breach of statutory duty. However, there was no feature of the situation which justified the independent imposition of a duty of care at common law to advise as to the nature of the risks inherent in the regulated transaction.
More critically as the Bank contended neither COB Rule 2.1.3 nor COB Rule 5.4.3 in fact provides any pointer at all as to the assumption of a duty of care to advise or as to the appropriateness of imposing such a duty since both impose statutory duties which are owed by firms which are in a non-advisory or execution-only relationship with the other party as well as by firms which have undertaken an advisory role.
The Court of Appeal noted that this was most clearly demonstrated by COB Rule 5.4.3, which imposes the duty to take reasonable steps to ensure that the private customer understands the nature of the risks involved upon both a firm which makes a personal recommendation of a transaction, sub-paragraph (1), and upon a firm which arranges (brings about) or executes a transaction, sub-paragraph (3).
Causes of Action.
The Court of Appeal went on to consider the central issue as to whether a statutory duty also gave rise to a private law cause of action. It was noted that s.150 of the Financial Services and Markets Act 2000 expressly provided a private law cause of action described as an express cause of action for breach of statutory duty.
Lord Browne-Wilkinson noted in X (Minors) v Bedfordshire County Council  2 AC 633 at page 730 held:-
"Private law claims for damages can be classified into four different categories, viz: (A) actions for breach of statutory duty simpliciter (i.e. irrespective of carelessness); (B) actions based solely on the careless performance of a statutory duty in the absence of any other common law right of action; (C) actions based on a common law duty of care arising either from the imposition of the statutory duty or from the performance of it; (D) misfeasance in public office, i.e. the failure to exercise, or the exercise of, statutory powers either with the intention to injure the plaintiff or in the knowledge that the conduct is unlawful."
As to Category A claims Lord Browne-Wilkinson set out how such claims arise at page 731. In essence the following points are germane:-
1. The basic proposition is that in the ordinary case a breach of statutory duty does not, by itself, give rise to any private law cause of action.
2. A private law cause of action will arise if it can be shown, as a matter of construction of the statute, that the statutory duty was imposed for the protection of a limited class of the public and that Parliament intended to confer on members of that class a private right of action for breach of the duty.
3. There is no general rule by reference to which it can be decided whether a statute does create such a right of action but there are a number of indicators. If the statute provides no other remedy for its breach and the Parliamentary intention to protect a limited class is shown, that indicates that there may be a private right of action since otherwise there is no method of securing the protection the statute.
4. If the statute does provide some other means of enforcing the duty that will normally indicate that the statutory right was intended to be enforceable by those means and not by private right of action see for example Cutler v. Wandsworth Stadium Ltd.  A.C. 398: Lonrho Ltd. v. Shell Petroleum Co. Ltd. (No.2)  A.C. 173.
As to category C (Common Law duty of Care) the Court of Appeal noted Lord Browne-Wilkinson’s judgment in X (Minors) v Bedfordshire County Council, at page 735:-
In this category, the claim alleges either that a statutory duty gives rise to a common law duty of care owed to the plaintiff by the defendant to do or refrain from doing a particular act or (more often) that in the course of carrying out a statutory duty the defendant has brought about such a relationship between himself and the plaintiff as to give rise to a duty of care at common law.
A further variant is a claim by the plaintiff that, whether or not the authority is itself under a duty of care to the plaintiff, its servant in the course of performing the statutory function was under a common law duty of care for breach of which the authority is vicariously liable."
The Court of Appeal dismissed the Appeal. In summary it held:-
1. As to category C the common law duty of care it was held that this was of no relevance. The Bank was not carrying out a statutory duty. More importantly this analysis did not support the notion that the mere existence of a statutory duty of itself brings about the creation of a co-extensive common law duty.
2. The existence of a statutory duty may give rise to a common law duty of care in circumstances where breach of the statutory duty is not actionable in private law. The more usual case is where in performance of a statutory duty a party, usually but not always a public authority, brings about a relationship between itself and another person such as is recognised to give rise to a duty of care owed to that person. The duties are not co-extensive and the duty at common law does not arise by reason of the imposition of the statutory duty but arises out of the relationship so created.
3. The Bank did not owe to the Claimants a common law duty of care which involved taking reasonable care to ensure that they understood the nature of the risks involved in entering into the swap transaction.
4. The existence of an action for breach of statutory duty consequent upon contravention of a rule did not compel the finding of such a duty. The Claimants’ counsel’s argument that such a cause of action would afford protection to those who, not being a "private person" cannot avail themselves of a cause of action for breach of statutory duty, was an invitation to the court to drive a coach and horses through the intention of Parliament to confer a private law cause of action upon a limited class. Equally misconceived was the argument in that those who begin life as "Category A" claimants should be protected after expiry of the relevant period of limitation by a small incremental development of the circumstances recognised to give rise to a duty of care at common law.
There are a number of points to note in this decision:-
1. Section 150 of the Financial Services and Markets Act 2000 expressly provides a private law cause of action. It was described as an express cause of action for breach of statutory duty. The Claimants did of course abandon that claim on the basis of limitation.
2. The mere existence of the COB Rules did not give rise to a co-extensive duty of care at common law. Parliament had provided, by s.150 of the Financial Services and Markets Act 2000, a remedy for contravention of the rule in the shape of an action for breach of statutory duty. There was no feature of the situation which justified the independent imposition of a duty of care at common law to advise as to the nature of the risks inherent in the regulated transaction.
3. The Bank was not carrying out a statutory duty. Hence category C identified in X (Minors) v Bedfordshire County Council  2 AC 633 was not relevant.
4. The Bank did not owe to the Claimants a common law duty of care which involved taking reasonable care to ensure that they understood the nature of the risks involved in entering into the swap transaction. The existence of the action for breach of statutory duty consequent upon contravention of a rule does not compel the finding of such a duty.