Lender not Obliged to Advise Borrower about Onerous Term

July 1, 2016

Finch and another v Lloyds TSB Bank Plc and others [2016] EWHC 1236 (QB)

 

In general, a bank is not under a legal obligation to provide advice but it has been established by a number of cases that if a bank does provide advice then it must do so using reasonable care and skill.

 

To successfully argue a misselling claim in tort, it is not simply enough to assert that poor advice has been provided; it must be established that the financial institution owes a duty of care for advice which gives rise to an economic loss. If the facts of a case do not fall within an established category of duty of care, then the test used to establish whether a duty of care exists is that set out by the House of Lords in Customs and Excise v Barclays Bank plc [2006] UKHL 28:

1.Whether the defendant has assumed responsibility to the claimant.
2.The threefold test, that is whether:
(a)the claimant’s loss was reasonably foreseeable;
(b)there was sufficient proximity between the parties; and
(c)it is fair, just and reasonable to impose a duty of care.

3.That the duty should be incremental to an established category of duty.

In Finch and another v Lloyds TSB Bank Plc and others the dispute arose in connection with a loan made available for a term of ten years at a fixed rate of interest. Under the loan agreement, if the borrower repaid the loan early it was obliged to pay any resulting break costs incurred by the lender. These could include potentially significant costs incurred by the lender in breaking a swap entered into by it to hedge against the risk posed by lending monies at a fixed rate that it had borrowed in the interbank market at a variable rate. The central points to the claimants’ argument were that:
1.The lender owed the borrower a duty to advise it, either in contract or in tort, in respect of any onerous terms in the loan agreement but it failed to do so as it did not explain the scope of the break costs provision. The claimants contended that a duty to advise arose because of the close relationship between the borrower and the lender; that the lender was not simply a source of finance but was, as it subsequently described itself, a “trusted advisor” to the borrower and its investors.
2.The lender negligently misrepresented to the borrower that the loan agreement had been “tailored” to its needs but it had not been because the costs of early exit made it unsuitable, particularly because it was alleged that the lender was aware that the borrower would want to repay early given the ages of some of the investors in the borrower (who had also provided guarantees).

It should be noted that the borrower was advised on the finance arrangements by a finance broker and solicitors.

It was found, on the facts, that the lender had no contractual duty to advise the borrower about the terms of the loan agreement.

The Judge commented that the proposition that the lender was effectively under a duty to give disinterested advice voluntarily in relation to the product it was offering, even though that advice was or might be contrary to its commercial best interests went beyond the type of tortious duty considered in existing cases. The circumstances in which such a duty could arise “would have to be exceptional and markedly different from the conventional relationship of banker and customer”, particularly when, as was the case here, the borrower was represented by a broker and solicitors. Applying existing authorities, a bank is not under a general duty to give advice and no exceptional circumstances existed in this case. The use of the phrase “trusted advisor” to describe the lender was simply a phrase used by it and its employees for marketing purposes to differentiate it from its competitors.

On the misrepresentation issue, the lender had not been informed of the borrower’s intention to repay early. In any event, the expression “tailored” could only mean that the loan offered would be the best the lender was prepared to offer, taking into account the borrower’s requirements. However, “tailored” could not be construed as requiring the lender to offer facilities on terms that subordinated its commercial interests to those of the borrower.

For lenders this will be a welcome addition to the body of case law in their favour in relation to misselling of financial products. It will be difficult for a borrower to establish that a lender had a duty to advise it about the terms of the loan documentation, even where the lender has emphasised its willingness to work with the borrower to find the best solution for its borrowing needs.

Should you require any advice in relation to the impact of the above please do not hesitate to contact a member of the Banking Team at Cleaver Fulton Rankin.

Please note; the content of this article is for information purposes only and further advice should be sought from a professional legal advisor before any action is taken.