Bailey & MTR Bailey Trading Ltd v Barclays Bank Ltd.

Posted on 14/11/2014 · Posted in Financial Litigation, Interest Rate Swap, Investment

Mr Bailey borrowed some £1.26m from Barclays in 2007, with a variable rate of interest, for the purchase of business property occupied by the second claimant, a company wholly owned by Mr Bailey (the ‘Company‘). Mr Bailey stated that his relationship manager at the Bank (who was not approved to give investment advice) had told him that interest rates were going to go “through the roof” and suggested some form of hedging product. After meeting with another employee (who was authorised to provide advice) it was recommended that Mr Bailey enter an interest rate swap. This he did in May 2007.

The swap never performed well and Mr Bailey made complaints about it from 2009 onwards. In 2011, wanting to transfer some properties from his own portfolio to that of the Company, Mr Bailey was required to transfer the Swap to the Company as well in order to avoid substantial break costs on termination. The Bank classified the Company as a retail client, and the Bank’s terms of Business stated that it would not provide advice in relation to any transaction between it and the Company. This was reiterated explicitly in a covering letter accompanying the Terms. The Swap confirmation further stated that no advice from the Bank was relied upon.

Derivatives are financial weapons of mass destruction.”
Warren Buffett

The claims were brought by both claimants alleging that the swap was entirely unsuitable as it tied both Mr Bailey and his company to a fixed rate for a 10 year term when interest rates were falling (rather than rising as Barclays, it was alleged, had predicted). They were paying far more than they would have done had the swap contract never been entered. Mr Bailey’s own grievances were dealt with as part of the review process between the banks and the (then regulator) FSA, he was awarded redress and his claim in this case was discontinued. The Company, however, continued its claim for rescission of contract, unenforceability of contract and damages.

The Company contended that it was a “private person” thereby getting legal protection under the regulations (Conduct of Business Sourcenbook (‘COBS‘) rules under the Financial Services and Markets Act 2000 (‘FSMA2000‘)). The Judge rejected this argument and further held that the contract was enforceable. Even though the contract had been entered into on the recommendation of an “unauthorised person“, in this case that person was still an agent of the Bank and not a third party.

This latest case, upholding the judgement in Titan Steel v RBS, is evidence that the Courts will not make it easy for corporate claimants to obtain redress under the regulatory system.

Link: Bailey & Anor v Barclays Bank Plc [2014] EWHC 2882 (QB) (27 August 2014)

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