The Defendant, Clydesdale Bank (‘CB‘) offered fixed rate loans to the claimant and other small enterprises from around 1999 to 2012. These were known as fixed interest rate “tailored business loans” (‘FRTBL‘). To limit its exposure to fluctuations in the interest rate, CB agreed back-to back hedging agreements with its parent, National Australia Bank (‘NAB‘), mirroring the terms of its loans. CB was the fixed rate payer and NAB the floating rate payer. Interest rates dropped steeply in the 2008 global financial crisis, and the Claimants sought to refinance their loans. This in turn incurred early repayment break costs which became due under the loan agreement’s standard terms. The hedging agreements between CB and NAB also terminated and payments became due from CB to NAB. CB passed on these additional costs to the Claimants as well as the break costs under their agreement with them.
Farol Holdings and four other affected SMEs decided to join together to bring a claim against CB. Their claim fell into two broad categories: –
- Was CB entitled to recover break costs from the Claimants in the event of early repayment of their fixed loans?
- Had CB and NAB made false statements about the fixed rate payable by the Claimants on their loans?
The trial began in October 2023 and continued for some 12 weeks. Farol argued that CB was prohibited from claiming break costs based on its liability to NAB under the intra-group back-to-back corresponding hedge transactions. They claimed that it was an essential pre-requisite of an entitlement to claim break costs that CB had suffered an actual crystallised loss or cost as a result of action taken by it in the external market following early repayment.
The Judge found that the loan conditions entitled CB to charge break costs to clients 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. This was an established market technique for valuation. CB had suffered an actual loss – the loss of the contractual right to recover interest at the fixed rate for the remainder of the term. This was not merely a future loss. The sums demanded from CB by NAB were a reasonable substitute for that loss. The Judge therefore found for the Defendants on this part of the claim.
In the midst of difficulty lies opportunity.”
Albert Einstein
With regard to the second part of their claim, the Claimants had alleged that false representations had been made by First Defendants’ employees about the fixed rate payable by the Claimants on their FRTBLs. Each loan was made with a single fixed rate of interest which was composed of two elements: – the fixed rate, and the margin. The fixed rate, which was not disclosed to clients, included an element of income to NAB. This was known as “Added Value” (‘AV‘). Farol and their co-Claimants alleged that some fifteen employees of CB and NAB had made fraudulent, alternatively negligent, misrepresentations by contending that the fixed rate was a market rate which did not include any additional profit for CB over and above what CB already made on the margin on the FRTBLs. In fact, the fixed rate was derived from a swap rate to which a number of basis points of AV were added.
Two of the Claimants also alleged that the non-disclosure of AV made their relationship with CB “unfair” within the meaning of s 140a of the Consumer Credit Act 1974.
Having found that CB was entitled to charge the break costs it had demanded, Judge Zacaroli went on to dismiss all the claims made by Farol. Employees of CB and NAB had not been guilty of misrepresentation, whether dishonest or negligent. They had omitted to mention AV but this did not constitute misrepresentation. There was no breach of the Consumer Credit Act as a fixed rate loan could in fact bestow extra and valuable benefits to the client for which the client might expect to pay more. Their provision incurred extra costs for the bank (specialist employees had to market and sell these products and others had to manage the accrued interest rate risk) and there was nothing unfair with CB making a profit from that provision or that the AV was not disclosed: it is “unsurprising that a bank would seek to make a profit from its lending business.“
Link: Farol Holdings Ltd v Clydesdale Bank PLC & Anor [2024] EWHC 593 (Ch) (19 March 2024)
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