Fixed Rate Loan Fraudulent Misrepresentation Claims Fail at Trial

On 19 March 2024, Mr Justice Zacaroli handed down judgment in Farol & ors v Clydesdale Bank PLC and National Australia Bank Limited [2024] EWHC 593 (Ch). The 185-page judgment comprehensively dismisses all claims against both banks, in actions brought by four customers in relation to fixed rate loans they had entered into with Clydesdale Bank (Clydesdale). Amongst the claims dismissed were allegations of deceit against 15 current and former employees of the banks, including four senior executives.

DLA Piper, instructing Bankim Thanki KC, Ian Wilson KC and Richard Hanke, acted for the first defendant, Clydesdale. DLA Piper is also acting for Clydesdale in claims by over 900 other claimants seeking materially similar relief. Those other claims are currently stayed.

The Claims

The claims, which were promoted by claims management company, RGL Management Limited, and pursued with the aid of litigation funding, fell into two broad categories:

• Was Clydesdale entitled to recover break costs from the claimants in the event of early repayment of their fixed rate loans?
• Had Clydesdale and National Australia Bank Limited (NAB) made false statements about the fixed rate payable by the claimants on their loans?

The claimants alleged that the banks had made fraudulent misrepresentations in respect of both types of claim. The judge found that there was no evidence to support those allegations.

Break Costs Claims

The claimants’ principal claim in relation to break costs was that Clydesdale was not entitled to charge break costs to customers on the basis of its liability to NAB under intra-group back-to-back corresponding hedge transactions which they claimed were not legally binding. Even if they were binding, the claimants asserted that payments under those corresponding hedge transactions did not fall within the kinds of loss Clydesdale was able to recover as break costs under the terms of their loans.

The judge found that the loan terms entitled Clydesdale to charge break costs to customers based on the Net Present Value (NPV) of the difference between the fixed rate of interest due for the remaining term of the loan and interest at prevailing floating rates for the same period. The sum due from Clydesdale to NAB upon termination of each corresponding hedge transaction was a reasonable proxy for that loss. Accordingly, the claimants would have been liable to Clydesdale for break costs even if there had not been a corresponding hedge transaction in place with NAB, although in the event the judge did find those transactions to be legally binding.

It followed that, since Clydesdale was entitled to charge break costs as it did, there was no misrepresentation to the claimants when it asserted that entitlement. It also followed that there was no dishonesty by the four senior executives (two each from Clydesdale and NAB) who were alleged to have known that break costs were not recoverable, but dishonestly failed to stop the practice of doing so.

Fixed Rate Claims

The claimants claimed that Clydesdale and NAB misrepresented the nature of the fixed rate payable under their loans, leading them to believe that the fixed rate was a market rate set independently of Clydesdale and NAB and/or did not contain any element of profit or income for the banks (beyond the negotiated lending margin). In fact, the fixed rate was derived from a swap rate to which a number of basis points of Added Value (AV) were added. Two of the claimants brought a further claim on the same facts under the unfair relationship provisions of the Consumer Credit Act 1974.

The court also determined these claims in the banks’ favour. In their dealings with customers, Clydesdale and NAB employees did not (by omitting any mention of AV) represent, dishonestly or otherwise, that the only income Clydesdale generated on the loans was via the lending margin. Eleven current or former employees of Clydesdale and NAB were accused of deceit by effectively telling half-truths about Clydesdale’s income; in none of those cases was the allegation made out.

The court also found for Clydesdale and NAB on the unfair relationship claims. A fixed rate loan is a different product to a variable rate loan, providing additional and valuable benefits to the customer, for which it would expect to be charged more. The provision of that product involved specialist employees who marketed and sold the products, and others with responsibility for managing the accrued interest rate risk. There was nothing unfair about Clydesdale making a profit from that service. The fact that the AV was not disclosed did not render the relationship unfair.

Comment

The judgment, handed down after a 12-week trial between October and December 2023, is a comprehensive success for Clydesdale and NAB, dismissing all claims the banks faced as well as the serious and wholly unwarranted allegations of deceit made against current and former employees.

Whilst claims in misrepresentation are highly fact-specific, fixed rate lenders will welcome the fundamental conclusions which underpinned the judge’s dismissal of the claims. Other lenders’ entitlement to charge break costs to customers will turn on the wording of their relevant terms and conditions and the basis on which the losses arise which they seek to claim as break costs. They will however welcome the court’s upholding of Clydesdale’s right to charge break costs on a NPV basis and the finding that the relevant fixed rate loans did not contain “embedded swaps”. These are two points that have commonly been taken against lenders in recent years in challenges to their entitlement to charge fixed rate loan break costs.

Lenders will also welcome the finding that Clydesdale was entitled to charge a margin, in the form of AV, both to cover the additional costs of providing fixed – compared to floating – rate lending and to earn an element of profit. In respect of the latter, the judge found it “unsurprising that a bank would seek to make a profit from its lending business” concluding that it was not an indication of an unfair relationship that the additional income in the fixed rate itself included an element of profit.