Many thousands of businesses have been struggling over recent years to deal with the implications of long term fixed rate loans: ongoing interest costs significantly above current base rate, and unexpectedly high break cost charges for repaying loans early or refinancing. Businesses often feel that they were not fairly informed about the implication of long term fixes when entering into the loan and would either have not fixed their rate, would have chosen a different type of product (such as a Cap) or would have fixed for a shorter time had they received fair information.
Complaints or claims against banks about information provided about fixed rate loans are not straightforward for a number of reasons: first, fixed rate loans are not considered “investment products” by the FCA so fall outside of the regulatory regime. This meant that many businesses which were sold largely equivalent Swap or Collar products were entitled redress for mis-selling through the FCA Review of Interest Rate Hedging Products, but those sold fixed rate loans were not. Second, whilst the Financial Ombudsman Service has been prepared to uphold some complaints about fixed rate loans, many businesses are not eligible for the FOS or the compensatory limit does not adequately cover their losses. Finally, the Courts have taken a largely restrictive view of the extent of any duty on a bank to provide fair information in selling a fixed rate loan.
Two recent developments, however, provide more positive news for affected businesses. First, in the case Thomas and ano v Triodos Bank NV [2017] EWHC 314 a farming partnership has succeeded in their case in the High Court alleging breach of duty in the sale of 10 year fixed rate loans.
In addition to the fairly limited (but accepted by the banks) duty not to mis-state facts on which the customer can be expected to rely, the Court decided that there was a further duty owed by the bank to explain the financial implications of fixing the rate and the consequences of doing so.
In reaching this decision, the judge considered it important that the bank had voluntarily signed up to the Business Banking Code – a voluntary code of practice, with no contractual force, which provided a benchmark as to how banks should behave. This Code contained a promise that if the bank was asked about a product, it would give a balanced view of the product, in plain English and an explanation of its financial implications.
In the circumstances of this case, therefore, the judge decided that when Mr and Mrs Thomas enquired about fixed rate borrowing, the bank owed them a duty to explain the financial implications of doing so and that this explanation ought to have covered: the possible time periods for fixing, where details of fixed rates could be found and what those rates represented, the effective rate that would be paid if a fixed rate was agreed and, importantly, “the financial consequences of terminating the fixed rate before the end of the period”.
This latter point is of crucial importance given that it is often the size of break costs which are the most unexpected, and onerous feature of a fixed rate loan, to a business. The judge decided that whilst worked examples were not required, it was necessary for a balanced picture to have been provided to make it clear that if interest rates fell, there would be a higher break costs to pay on a longer fixed rate term remaining than a shorter term remaining.
In the factual circumstances of this claim, the explanation given to Mr and Mrs Thomas’ by their bank had been insufficient and their case was successful.
The other recent development, which will affect fixed rate loans sold in the future is that the BBA voluntary code of practice, which was of central importance in the Thomas case has recently been updated for business customers, with the new “Standards of Lending Practice” due to come into effect from 1 July 2017. This contains more detailed guidance on provision of product information, including “Firms should ensure that 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”, and “Firms should ensure that clear information is provided as to how the product on offer works: its key features and the associated costs for example, charges, interest and any breakage or early repayment fees / costs”.
Application of this more detailed guidance in the manner applied by the Court in the Thomas case will assist in pursuing claims and complaints about fixed rate loans. For existing loans, previous versions of this guidance will be relevant.
The solicitors at Claire Collinson Legal have been representing businesses with fixed rate loan claims and complaints for a number of years through a variety of methods, dependent on what is most appropriate for each complaint – utilisation of bank complaint systems, the Financial Ombudsman Service, mediation, other ADR methods and litigation. Our approach is entirely bespoke; we aim to achieve successful resolution of complaints and claims at proportionate cost.
