Interest rate derivatives are a form of financial engineering that was devised by professionals for use by professionals; in this case the professionals are banks and bank traders.

Throughout history there have been financial innovations to cover various needs in the financial system. So coinage, banknotes, Gold standards, were all devised to cover commercial and financial needs.

Foreign exchange and the readily available ability to buy and sell currencies are a case in point. They really took off as countries relaxed Exchange Controls in the aftermath of the Second World War and the period, certainly in Europe, of great austerity and rebuilding.

The first real derivative could easily be considered the development of the Eurodollar market in London and Europe in the mid to late sixties. This was caused by the tidal wave of US dollars created by the Marshall Plan.

Banks (led by merchant banks in the City of London) realised that many of the US$ were not necessarily ready for repatriation or immediate use and could therefore be lent for short periods to other banks who had short term use for them. It was soon realised that any currency where the country had a major imbalance of payments, could be used in the same fashion. It is true to say that these Euro markets helped develop international trade in the post-war years.

These markets grew very rapidly in the late 60’s and early 70’s and led to the first problems of banks trading beyond the size of their balance sheets. In order to overcome the balance sheet problems, a Swiss company, Tradition, developed the first Interest Rate Derivative, called an FRA: A very simple instrument that was considered an ‘Off Balance sheet item’ and allowed the banks to continue trading without the restrictions of being within balance sheet limitations. (One can see immediately the dangers being created here for the future unsupervised overtrading that has occurred in recent years by ‘rogue traders’. Barings and the recent UBS rogue trader come to mind)

Other financial instruments were soon devised to cover various perceived requirements.

Interest Rate Swaps, Foreign Exchange Options, both vanilla and exotic. Financial futures (these were devised from long standing commodity futures markets such as the copper futures market) that started with open outcry markets. Repos, and ultimately some very complex instruments that were devised in the American investment houses. The junk bond market led by Drexel and Michael Milken, in the late 80’s and so on, until we came to the Subprime Mortgage debacle that led to the banking crisis and the fall of Lehman Brothers, Northern Rock, HBOS and various other banks. Many banks and hedge funds employed mathematicians to devise new and more complex derivatives to enhance their profit streams. Many of these instruments were too complex to verify and therefore, in my opinion, were very dangerous.

I reiterate my statement that these Interest Rate derivatives were created by professionals for professionals.

Should they have been used for ordinary banking purposes? That is not for me to decide but I would make it very clear that as a banker of some longstanding, I believe that there has been in place a tried and tested system for lending money to customers without the need for these added products.

The banks have lent to customers on a secured and unsecured basis for many decades. Whilst it is understandable to want to protect oneself from interest rate rises, it is probably true to say that economic history would indicate that unless there is high inflation causing violent upward movement of interest rates, this protection is not strictly necessary.

The period from about 2000, was vaunted by the previous Government as a period of growth, low inflation and low interest rates, and the present Government of historically low rates, so therefore were these instruments necessary?

Personally I do not think so, but you could argue a case for Interest rate Derivatives to protect on the upside with a ‘cap’ but I am not sure you could argue so successfully for a ‘collar’,

Jeff Slade

Jeff Slade is a director of JBE (Associates) Ltd, an established foreign exchange consultancy.

Between them they have over 80 years of experience of trading in the international foreign exchange markets for major banks and brokers .

Jeff Slade first traded in 1969 and worked in London both as dealer and broker, becoming Global Head of Central Banks and Middle East Region for a major European bank, culminating in becoming Vice President in charge of merging that bank with another major bank.

Brian Hogg started in 1967 and traded in various major banks throughout the world. Brian retired as UK Treasurer of a  foremost engineering company overseeing the Foreign Exchange and Cash Management of over 50 UK companies. Brian is an acknowledged expert in trading markets and banking practice, particularly in derivatives.

Please contact us for guidance on making a claim.

In its review of the mis-selling of interest rate hedging products, the FSA reported on a number of cases of bad practice among British banks, including mis-selling.

As a result of the FSA’s investigation, the banks are required to appoint independent reviewers. These reviewers must be approved by the FSA and demonstrate sufficient knowledge of interest rate hedging products and the needs of the small and medium sized businesses (SMEs) they were predominantly sold to.

The FSA, which regulates the UK financial services industry, is committed to ensuring that the banks deliver the right outcomes for their customers.

Banks are urged to focus on giving redress as swiftly as possible and to write to all customers who have been sold interest rate hedging products.

The banks included in the FSA’s review include:-

• Barclays
• Lloyds
• HSBC
• RBS
• Allied Irish Bank (UK)
• Bank of Ireland
• Clydesdale Bank
• Yorkshire Bank
• Co-operative Bank
• Northern Bank
• Santander UK

The interest rate hedging products were designed to protect against the risk of interest rate movements. They include:-

• Interest rate swaps (which “fix” the interest rate)
• Interest rate caps (which cap interest rate rises)
• Interest rate collars (which cap interest rates by limiting fluctuations within a simple range)
• Interest rate structured collars (which cap interest rate rises by limiting fluctuations within a more complex range)

The FSA has agreed with Barclays, HSBC, Lloyds and RBS that they will not continue to market structured collars to customers.

The banks anticipate a substantial number of claims and it has been reported that Barclays has made provision for £450 million to cover its exposure.

In November 2012 the FSA wrote to customers that had been sold an interest rate hedging product warning that the banks may take up to a year to review cases.

Clearly an independent review that offers redress at no cost or risk to the victims of mis-selling has its attractions. However, it is still not clear exactly how the review process will work and what level of redress will be provided. It will also not apply to all customers who have been mis-sold products.

Legal action therefore remains the preferred option for many individuals and businesses who have lost out. Mis-selling claims can include recovery of payments made to service interest rate hedging products, including onerous breakage costs, along with any other losses incurred and the claimant’s own legal costs. The courts themselves have acknowledged that some cases need to be litigated.

Potential claimants must also remember that claims can become statute barred if court action if not pursued, so sitting back and failing to act could prejudice your position.

To find out where you stand and whether a formal legal claim would be in your best interest give our FREE legal helpline a call on 0808 139 1593 or email us at [email protected]

Negligent over-valuations.

A decision handed down from the High Court, has re-confirmed the Courts’ position on negligent over-valuations.  It gave detailed consideration on the attempted defence of contributory negligence by the mortgagee – a defence which was soundly trounced – but importantly, made comment on what our professional negligence solicitors at Slee Blackwell are repeatedly seeing as “convenient” valuations, rather than true ones.

Mr & Mrs Sherman had bought a new development in Putney.  The judgment made it clear that the property was of a very modern design, its principal features including a steel frame and floor-to-ceiling plate glass windows.  It was located in an area of Putney which was predominantly of Victorian, Edwardian and inter-war buildings so finding properties of a similar design in the area was not easy for valuation purposes.

In 2007, Mr & Mrs Sherman wished to raise a further loan on the property for the sum of £350,000 and Blemain Finance Ltd was approached to provide a second mortgage.  The interesting aspect of the loan application is that it was accompanied by two valuations by Haywards Surveyors & Valuations.  The first had been carried out at a much earlier date; the second was simply a re-type of the original, confirming a valuation for the property of £3.33m.

Blemain were not happy with the report largely as Haywards were not on their panel of approved surveyors so instructed E.Surv who were provided with a copy of Haywards’ report and then carried out their own survey, valuing the property at £3.4m.

Blemain then considered the Sherman’s ability to fund the mortgage.  The Sherman’s accountant provided a certificate suggesting that their net monthly income was in excess of £46k.  An Experian report showed that there was some £240k owing on loans and credit cards and over £686k owing on three other mortgages.  Although it was clear that the Shermans were living their lives purely on their credit cards, they had an excellent servicing record and in all, Experian gave them a good credit rating.

There was a further issue.  Blemain’s policy was that their Loan to Value ratio (LTV) was 73%.  The value of the first charge on the property and Blemain’s would total 73% of the £3.4m valuation of the property.  However, the full credit committee of the lender gave consideration to the matter.  They concluded that even at 73%, there was still a comfortable equity cushion and, of course, the Shermans were high earners.

Having given full consideration to the matter, Blemain made a loan of £250k (not the full £350k requested).  Unfortunately, the Shermans defaulted on their mortgages so the first mortgagee took possession and sold the property for £2m.  There was not enough money in the pot to pay off the Blemain mortgage.  They decided to sue the valuer for professional negligence.

There are some interesting characteristics in this case.  Much of the judgment revolves around the original valuation and the fact that, as the property was fairly unique, it was very difficult to find a suitable comparator.  After much deliberation, Coulson J found that the true value of the property was in fact £2.8m and that the margin of error – despite the experts saying that the concept was “legally driven” – was 10%.

However, it is the deliberations of the defence that makes this case interesting as E.Surv alleged there was contributory negligence by Blemain.

The LTV ratio was heavily criticised by the Defendants but Coulson J made it clear that a 73% LTV ratio – given there were other prime moneylenders in the market that would have a LTV of 75% – was not negligent, particularly given the equity cushion.

There was also criticism of Blemain for not making further investigation following receipt of the Equifax report which demonstrated a level of indebtedness that was simply too high.  Although an accountant’s certificate had been obtained,  E.Surv went so far as to suggest that Blemain should have conducted further investigations on that front as they considered it “clear” that the certificate only dealt with the net profits of the Shermans’ business and so did not take into account personal tax liabilities.  Coulson J said that that sort of investigation went too far and there was no need for Blemain to go behind such a certificate and certainly did not agree that the issues raised by the Defence about the certificate were “clear”.

However, one of the things that I found most interesting in this judgment is at paragraphs 32 and 89.  I am currently engaged in a large number of mortgage overvaluation claims. In these I often find that valuers are told the price that the property is being sold for and their valuations then seem to tally.  This is the wrong way round. The point was made by Coulson J when he stated:

“I note… that [the valuer] was given the £3.4m figure at the outset.  Again, like both the surveyors in the Webb [Resolutions Ltd v E.Surv Ltd 2012 EWHC 3653 (TCC)] case, [the valuer] was endeavouring to reach a valuation that married up with the figure that he had been given by the prospective buyer.  For the reasons set out in the judgment in Webb, I regard that as bad practice.”

In light of this, it will interesting to see if subsequent Courts pick this up when dealing with negligent over-valuations and take a sterner view of surveyors’ conduct when carrying out valuations.

How we can help with negligent over-valuations

Contact us now to chat about egligent over-valuations, and valuers, or surveyors negligence claims.

As we enter 2013, interest rate swap specialist solicitor Emma Slade finds cause for hope in the latest judgement to be delivered by the courts.

The judgment in the long awaited case of Green & Bowley –v- Royal Bank of Scotland [2012] EWHC 3661 was finally handed down by HHJ Waksman QC on Friday 21st December 2012.

At first glance the judgment appears to ring the death knell for future Interest Rate Swap mis-selling claims against banks as His Honour found in favour of the bank. However, on a careful examination of the 27 page, 125 paragraph judgment, it may not be as bad as people think.

Mr Rowley is a hotelier and occasional property developer and in 2001, he joined forces with Mr Green to develop a few properties. Over the years, they took out various borrowings with RBS until their total liability by mid-2005 was £1.5m. On 19th May 2005, they had a meeting with two members of staff at RBS to discuss their level of borrowing. The possibility of converting the borrowings to a simple Swap was discussed along with other alternative products like Caps and Interest Rate Collars.

In a simple Interest Rate Swap, the Swap itself is a different loan instrument to the original – although it runs alongside it. The value of the Swap can be any figure and for any period of time. Although the variable rate Loan that Green & Rawley had taken out was for £1.5m over 15 years, the Swap instrument was for £1.5m over ten years. Once this is established, a fixed rate is set up: in this instance, 4.83%. The way the Swap worked in their case is that whilst the rate on the Loan varied, if the rate was over and above 4.83%, the bank would pay the difference back to Green & Rowley; so whilst the loan repayments increased, Green & Rowley would get that back. At the same time though, if the rate fell below 4.83%, whilst the Loan rate would fall, Green & Rowley paid the difference to the bank. It is, to all intents and purposes, “the same as converting the variable rate loan to a fixed rate loan with all the potential advantages and disadvantages that has.”

After the meeting, Green & Rowley signed up to the Swap deal within a matter of days and agreed at the hearing that at first, it was to their advantage. However, when the base rate fell to a historic low, they found that the product became more expensive. On trying to get out of it, they discovered that the breakage costs were in excess of £130,000.

In May 2011, six years after the original meeting, Green & Rowley issued proceedings and on 21st December 2012, the Court came to the conclusion that RBS had not mis-sold the IRS to them. Although Green & Rowley put forward two arguments namely that they had been provided with poor information by the bank and secondly, that the information given amounted to Advice and thus tantamount to a mis-statement, HHJ Waksman QC soundly dismissed all aspects of the claim.

So is this the end of IRS mis-selling claims?

Put simply, no.

Why?

1. The main reason this interest rate swap claim failed is that it was a very fact-specific claim; the Judge in fact described it himself as “highly fact specific”. A great deal revolved around the original meeting on 19th May 2005. What was repeatedly highlighted by His Honour was that many customers do not keep any notes of their meetings whereas the banks do tend to keep manuscript documents. All Green & Rowley could put forward were their witness statements which the Court said “ha[d] been hampered by the lengthy lapse of time”. The bank on the other hand produced diagrams and a typed note of the meeting made at the time. In those circumstances, HHJ Waksman QC said that the contemporaneous evidence was to be preferred.

2. Secondly, this particular Swap was fairly straightforward and easy to understand, whereas many others tend to be more complicated. In addition, many complicated Swaps are sold to what the FSA call “unsophisticated customers”. In this instance, Green & Rowley were described as “intelligent and experienced businessmen”, that they were not pressurised, “nor do I believe that either of them was confused… they would have had no difficulty in understanding it.”

3. Part of the claim was also time-barred which meant the Claimant’s legal team was not able to rely on s150 FSMA which would have been the strongest part of their claim. Instead, they had to rely on Common Law arguments to make their point which did not fit neatly into the scenario.

4. Many of the IRS claims revolve around the fact that the bank has provided the Client with “Advice” about the product rather than a mere recommendation. There is a very fine line between these two concepts but in this instance, the compelling evidence of the two RBS employees coupled with the vague nature of Green & Rowley’s recollection, meant that the Court concluded ‘Advice’ had not been given, ergo there was no breach of duty of care. Interestingly, HHJ Waksman QC did make clear that if Advice had been given, then the outcome could have been different.

5. Finally, one other issue raised by the Defendant’s legal team in potential defence: they pointed to various exclusion clauses in their documentation which they argued gave them a defence to any claim for poor Advice. His Honour was not prepared to be drawn into this argument on the grounds that the Advice argument had already failed. As such, we still await judicial decision on this point.

All in all therefore, whilst the case was a resounding success for the result is not as prejudicial to interest rate swap mis-selling victims as initially thought. There is still room for a claim to be made.

If you would like to find out more about the interest rate swap mis-selling scandal and claiming redress call Emma Slade on 0333 888 0403 or email her at [email protected]

Interest Rate Swap Scandal Timeline

20th January 2013

The Sunday Telegraph reports that one of the Big Four banks is poised to double its provision for the mis-selling of Interest Rate Swaps with another of the Big Four set to treble it.  One “Senior Banking source” has suggested that the Big Four will need to at least double their overall compensation provision to £1.5bn.

21st December 2012

RBS have been successful in its first High Court law suit brought against them for the IRS scandal. The two businessmen who had commenced proceedings against RBS in May 2011 for alleged mis-selling had their claim dismissed. The Court made it clear though that the outcome was “fact specific” and may not have an impact on other cases. It will not affect the FSA review of interest rate hedging products.

10th December 2012

Two businessmen in a property partnership concluded their claim against RBS on Friday following allegations that they were sold an interest rate swap attached to a business loan without having the full consequences explained to them. Details of the claim have not been released to the public but it is believed that judgment will be handed down before Christmas

7th December 2012

Which? reported today that following investigations, it banks are still selling IRS agreements as almost two-thirds of banking staff have unnecessary pressure placed upon them to reach their financial targets

28th November 2012

The Daily Telegraph has today reported of a complaint by a North-East businessman into the conduct of Clydesdale Bank and Yorkshire Bank who have called in a £3.8m loan with breakage costs of £1.2m despite allegations that they mis-sold him the product.

25th November 2012

The co-founder of a Michelin starred restaurant in London, Hakkasan, has started a revolt against RBS for what he claims is a mis-sold interest rate swap agreement, an arrangement he claims he did not want

21st November 2012

Guto Bebb, the chair of the all-party Parliamentary group investigating the interest rate swap scandal, has accused HMRC of being “less than sympathetic” with companies who are involved. He stated in correspondence to HMRC that “it is very concerning to see that HM Revenue & Customs appears intent on pushing businesses that might well be eligible for redress into administration.”

14th November 2012

Barclays and RBS have agreed to suspend swap payments for some SMEs who are in “financial distress” until the FSA-led review has been completed

12th November 2012

The all-party Parliamentary group tasked with investigating the IRS scandal has demanded a meeting with the FSA on 13th December 2012 at 12pm to re-assess the FSA’s role in the review of the scheme.

12th November 2012

Writing in The Times, John Cridland, head of the CBI, states that banks should be protected from law suits in relation to the selling of products linked with LIBOR. Guto Bebb, the chair of the all-party Parliamentary group investigating the scandal, describes this as “bizarre”

5th November 2012

At a hearing before a Parliamentary Committee on Banking Standards, the CEO’s of Barclays, HSBC and Santander sought to justify the continued selling of IRS products to SME’s, claiming there was a need for SMEs to have access to them.

1st November 2012

Clydesdale Bank and Yorkshire Bank have reportedly set aside just under £50m for compensation for mis-selling interest rate swap schemes. It is unclear whether they consider that this will be sufficient, their CEO stating that “it is still early days”

29th October 2012

Barclays attempts to adjourn the claim brought against it by Guardian Care Homes have failed today at a hearing in the High Court. Barclays Bank attempted to argue that the case should be adjourned until after the FSA-led review but the Court denied them this. Importantly, the Court has ordered that the case must go to trial and that Barclays will have to release, by way of disclosure, some sensitive material about who has been involved in the LIBOR fixing scandal. The trial is scheduled to take place next October. This is an important interest rate swap claim as it is the first real test case in this area. It is believed that there are in excess of 40,000 IRS arrangements and so there will be many people watching the outcome of this claim with interest.

26th October 2012

It has been reported that Santander has set aside £232m for compensation in IRSA claims

25th October 2012

The Financial Ombudsman Service has overturned two previous decisions in IRS complaints. The two unnamed banks have been ordered to pay compensation to two unnamed complainants, one such compensatory package is likely to be in excess of £500,000

23rd October 2012

Guto Bebo, MP, has set up a cross-party Parliamentary group to consider the mis-selling of interest rate swap products. Calling itself the All-Party Mis-Selling Group (APMG), it will be investigating the actions of the banks and reviewing ways to compensate affected SMEs

7th October 2012

The CEO of Barclays Bank has stated that a team of 300 staff has been set up to investigate the mis-selling interest rate swap claims

1st October 2012

The FSA has revised its original estimate of 28,000 businesses affected by the IRS mis-selling claims to 40,000 which an estimated compensation level of £10bn

19th September 2012

The Daily Telegraph today reports on the disturbing results of a survey carried out by the Economic Intelligence Unit which suggests that 84% of bankers are more focused on immediate performance targets rather than the society at large

18th September 2012

It is understood that, sometime last week, Sara Pearson, businesswoman, settled her Interest Rate swap mis-selling claim against Barclays Bank. She claimed that Barclays approached her with the opportunity of investing in the scheme and that she relied upon them for advice. It is likely that the parties will have entered into a confidentiality agreement so we do not know the details but in her Particulars of Claim, Ms Pearson claimed the she expected to recover in excess of £228k.

16th September 2012

Guto Bebb, MP, has written to the FSA expressing his concern at the delay in the compensation procedure, saying he does not feel that the body has done sufficient to date to assist affected SMEs

14th September 2012

Although not linked to the IRS Scandal, a landmark decision has been made in the High Court in the case of Rubenstein –v- HSBC. Hiding behind its terms and conditions of business, HSBC claimed that it had not advised Mr Rubenstein about the financial products that he invested his money in. The Court disagreed. This will be useful ammunition in the interest rate swap claims as it is an argument the banks are repeatedly raising

4th September 2012

Although appointed only five days ago, the new CEO of Barclays, Anthony Jenkins, has already received correspondence from a group of 8 MPs, expressing their concern at the mis-selling scandal and Barclays failure to deal with it to date

21st August 2012

A potential blow to claimants in the IRS scandal came today from the Scottish Courts when a claim brought by Grant Estates Ltd against RBS was dismissed. The heartening point though is that the Court dismissed the claim as GEL was not considered a “private person” under the Financial Services and Markets Act. Rather the Judge urged the company to consider making a claim to the FOS.

13th August 2012

In what is likely to be the first test case in the IRS scandal, Barclays has filed its defence in a claim brought against it by Guardian Care Homes who plead a loss of £38m. In defence, Barclays denies that it gave advice, that GCH is no worse off by this investment and it was “sophisticated” enough to understand what it was investing in

6th August 2012

Following the announcements on 29th June, the Big Four banks have now revealed how much they have set aside for interest rate swap compensation claims. Barclays is the biggest hit with £450m. HSBC has put aside £157m and NatWest and RBS have set aside £157m.

28th July 2012

RBS’s Irish-based subsidiary has just agreed to pay out €30m to Dublin-based businessman, David Agar, as well as paying his legal costs which is understood to be in the region of €1m, in response to his claim for mis-selling an IRS scheme

24th July 2012

Under the redress scheme agreed on 29th June with the FSA, Barclays and the Lloyds group will soon be writing to affected investors in their IRS scheme. Allied Irish, Northern, Yorkshire, Santander, Clydesdale, Co-Operative Banks and Bank of Ireland have all voluntarily joined the FSA-led redress scheme

19th July 2012

It is understood that Barclays have invited Guardian Care Homes to adjourn the trial of their claim pending the outcome of the FSA-led review. GCH have refused.

18th July 2012

Clydesdale Bank and Yorkshire Bank are now being investigated by the FSA

6th July 2012

The Federation for Small Businesses in Cumbria and Lancashire have led a call for the immediate end to repayments on IRS schemes for SMEs

30th June 2012

Yesterday’s announcement has done little to assuage the worries of affected SMEs. Whilst they are happy that the Big Four accept in principle that the products were mis-sold and compensation needs to be paid, the general reaction is that allowing the banks to set up their own judge and jury on whether a claim has been mis-sold is a mistake. There appears to be no criteria set for determining whether something has been mis-sold or what the definition of suitable redress. Importantly, there is no timescale.

29th June 2012

The FSA has provided an update on the IRS mis-selling which may provide a useful foundation for the way forward: only time will tell. The gist of its update is that there has indeed been mis-selling with some very bad sales practices by banks which the FSA calls “serious failings”. This includes failure to provide information on breakage costs. The Big Four – HSBC, Barclays, Lloyds and RBS – have agreed that they will provide re-dress where mis-selling has occurred. They have agreed that they will provide re-dress to all non-sophisticated customers who purchased structured collars on or after 1st December 2001 and will review all other similar sales (except caps and structured collars). Importantly, they have agreed to cease marketing structured collars to ‘retail clients’. At the moment, it is estimated there will be approximately 28,000 customers affected by the hedging.

The agreement does appear somewhat lax in specifics and the devil will certainly be in the detail. The immediate criticism is that there does not appear to be a timetable here. We shall just have to monitor matters.

27th June 2012

The latest in the LIBOR rate fixing by Barclays has resulted in them being fined $450m (£290m) by the FSA. The LIBOR fixing has had a huge impact as many loans and deals were based on this rate. In fact, any mis-selling of hedge funds based on the LIBOR rate will have a second prong to the attack.

This is the largest fine issued by the FSA

21st June 2012

The Law Society Gazette has obtained copies of the Particulars of Claim and Amended Defence in the case of Sara Pearson –v- Barclays Bank which is due to be heard in October 2012. Ms Pearson alleges that she has suffered losses in excess of £228,000. She alleges that Barclays approached her ‘unsolicited’ and led her to believe that the product was ‘low risk’, would ‘protect her business’ and was ‘suitable’ for her. Barclays deny that they provided any advice to Ms Pearson, that she was given opportunities to consider the options and that she was a ‘sophisticated’ investor. This will be one to watch.

21st June 2012

A House of Commons debate has taken place, headed by Guto Bebb, MP, about the mis-selling scandal. The sub-heading in today’s Daily Telegraph article is “Britain’s biggest banks have been accused by MPs of orchestrating the systematic mis-sale of complex interest-rate swaps to thousands of businesses across the country.”

20th June 2012

After months of speculation, the FSA have finally agreed to launch an investigation into the interest-rate swaps mis-selling scandal. Its investigation will concentrate on the Big Four as it is believed that they are responsible for approximately 95% of the sale of these products.

18th June 2012

A debate is scheduled to take place in the House of Commons on the mis-selling of the IRS

16th June 2012

Leading Labour ministers are reported to have written to the CEOs of the Big Four, urging them to cease foreclosures on businesses that have been affected by IRS mis-selling.

15th June 2012

An astounding statement has been made by Barclays’, Bob Diamond. Only a week ago, the official line from Barclays was that the mis-selling accusations were “completely without merit”, yet now, Bob Diamond is openly admitting that “I can guarantee you in some cases we have made mistakes.” He went on to say that if they have made a mistake, they will “own up to it … and fix it.”

9th June 2012

Hotelier, Manit Limratana, is bringing court proceedings against HSBC for losses in excess of £100,000 following their purchase of a derivative in his name without his permission, he claims. The swap was subsequently broken but it cost Mr Limratana £118,460 in breakage fees for which he now claims.

31st May 2012

The case of Grant Estates Ltd –v- RBS continues. GEL’s claim centres around the main issue of whether RBS can hide behind its terms and conditions of business where it states it will not advise when, as Iain Mitchell QC, Counsel for GEL, claims that in reality, they were providing advice on the ground. GEL lost approximately £135,000 in breakage costs which resulted in the company going into administration which it now seeks to challenge. We await the verdict.

30th May 2012

Grant Estates Ltd has brought proceedings against RBS in the Scottish Court of Sessions where they claim they were mis-sold derivative product which was entirely unsuitable. Alistair Clark QC, Counsel for RBS, claimed that the bank were merely “salesmen” and did not owe any duty of care for the information given. The case continues.

28th May 2012

It would appear that Unitech Ltd, an Indian property developer, has filed a counterclaim in proceedings brought against it by Deutsche Bank AG. Deutsche Bank AG accuses Unitech Ltd of failing to making payments of $11m under a swap contract in what was a $150m deal. Unitech are counterclaiming that the swap was not suitable and was not explained properly. They claim damages which will expunge Deutsche Bank AG’s claim if successful.

16th May 2012

The Daily Telegraph has reported that Labour has launched an investigation into the alleged mis-selling scandal of interest rate swaps. It is hoped that they can bring about an alteration to the Financial Services Bill which will allow affected SME’s to bring a class action against lenders.

5th May 2012

The Daily Telegraph is today reporting that the FSA is considering a major investigation into the banks’ involvement in the IRS selling schemes. .

3rd May 2012

Business Secretary, Vince Cable, has announced that he will be keeping “a very close eye” on what could prove to be the biggest mis-selling scandal since PPI. He confirmed that he is working with the FSA and the Treasury.

29th April 2012

The Daily Telegraph is advising that Guardian Care Homes Ltd which runs a chain of some 30 care homes, has recently obtained a review report by JC Rathbone Associates on the losses arising from derivatives GCH purchased. JC Rathbone Associates conclude that there was a “reckless disregard” by Barclays as to the suitability of the option for GCH. The report will form the basis of GCH’s compensation claim against Barclays which was issued in the High Court four days ago.

16th April 2012

Barclays has announced that is has made a serious error in its sales pitch for hedging products by some SMEs by showing a presentation which was more suitable to “investment professionals”.

15th April 2012

The Daily Telegraph reports that the interest-rate swap scandal could hinder the restructuring of the banks which may then have a snowball effect on the economy.

25th March 2012

Just weeks before the trial, Barclays Bank has paid unstated compensation to Wand Property in a surprise climb down by the bank. They had consistently stated that they had not been negligent in selling the hedging product sold to Wand. The trial was due to start on 16th April but this settlement means that we will be deprived of judicial clarification on the banks’ liabilities.

22nd March 2012

In a surprise decision, the German courts today ordered Deutsche Bank AG to pay compensation to Ille Papier Services €541,074 (£472,000) plus interest for the mis-selling of a derivative. It is understood that Deutsche Bank AG faces another 25 similar cases so it will be interesting to see if they try to settle them in light of this decision.

11th March 2012

The Telegraph publishes a front-page article entitled British banks hit by new mis-selling scandal which starts the investigation into the possible mis-selling of the products.

Some say it could be as big as the PPI scandal. We doubt that as many people will be affected, but the amount of money involved could exceed the figures in the PPI cases. The true extent of the problem is unlikely to become known until a definitive court decision has been delivered, though there are already signs of people coming forward in numbers to challenge the banks on interest rate swap products.

In 2010 things weren’t looking too rosy for consumers when the Court made an unhelpful decision in the case of Titan Steel Wheels Ltd –v- The Royal Bank of Scotland plc [2010] EWHC 211 (Comm). In that case, Titan brought proceedings against RBS for losses arising out of the alleged mis-selling of two derivative products in June and September 2007. There were a number of issues that had to be considered by the court including whether the Bank’s terms and conditions of business were unfair (as they claimed that the Bank was not giving “advice” in relation to interest rate swap products) and whether Titan was a “private person” as defined by the Financial Services and Markets Act 2000 (Rights of Action) Regulations 2001.

In a 27-page judgment, the Court came to the conclusion that Titan was a large pan-European company with regular sales being made within the Eurozone and that they had entered into these derivatives to make a profit. Further, the company had “sophisticated” financial staff who were not “ingénue(s) in the field of financial products”. The Court also declared that RBS had not acted in the role of an adviser and its terms and conditions were not unfair.

It was the latter part of the judgement that caused most of the problems for borrowers as on the face of it, most will wish to allege that they acted on the Bank’s advice. This point was tested again in the recent case of Grant Estates Ltd (in liquidations) –v- The Royal Bank of Scotland plc [2012] COSH 133. This is a Scottish case so will not have direct relevance in England & Wales, but its outcome will have an impact. One of the main arguments by Grant Estates was that if RBS was to hide behind the warranties of its terms and conditions of business, it follows that the contract must have been one for advice. Unfortunately, in a judgment handed down on 21st August 2012, the claim was dismissed on the basis that Grant Estates had knowingly entered into the contract with the warranties and were therefore subject to them. It is understood though that Grant Estates are appealing the decision.

Despite these initial setbacks, it’s not all doom and gloom for consumers wishing to bring an interest rate swap claim. There have been a number of successful cases brought against the banks for mis-selling IRS scheme. Indeed, one went to trial in Leeds Mercantile Court last year and in between the conclusion of the trial and the time for handing down the judgment, the parties settled. Frustratingly, we do not know the terms of the settlement as the parties are bound by a confidentiality agreement. However, the fact that settlement was reached is encouraging and a further indication that the banks appear to accept that interest rate swap cases do present them with a serious problem.

Further impetus has come from the Financial Ombudsman Service (‘FOS’).

On 25th October 2012, the FOS reversed two of its rulings on hedging products. Previously, the FOS was known to make rulings in favour of the banks. In fact, in mid-2012, a statement was made which showed that approximately 90% of the FOS’s rulings went in favour of the banks, despite the fact that both the FOS and the banks agreed that there had been mis-selling. The FOS’s reversal of these two rulings has therefore been welcomed by solicitors dealing with interest rate swap litigation.

There are also indications that the courts’ approach is changing. At a pre-trial hearing on 29th October 2012 in the case of Guardian Care Homes –v- Barclays Bank plc, an attempt was made by Barclays to get the case adjourned pending the outcome of its own FSA review process. The Court slapped down the application and the subsequent objections raised by Barclays. It stated categorically that the claim would go to trial and during the process, Barclays is to disclose potentially embarrassing information about what had been going on. This matter is set for trial sometime in the latter part of 2013, but given what the Court has ordered and the fact that the FOS is starting to support smaller consumers in their quest for redress, we think it could well settle.

Whilst interest rate swap claims may have got off to a slow start, it looks like the tide is finally turning in favour of the consumer.

If you have suffered loss as a result of a mis-sold interest rate swap or similar product then give our FREE interest rate swap legal helpline a call on 0333 888 0403 and speak to a specialist solicitor, or email [email protected]

Negligence solicitor, Emma Slade attempts to demystify the Hedge.

I am often asked, what exactly is a hedge?

If you are thinking in terms of that leafy thing at the end of your garden, then you probably need to be on a gardening website. However, if you have been a victim of the Interest Rate Swap (‘IRS’) scandal, then read on.

Interest rate swap products involve a financial concept known as a hedge. IRS schemes were originally conceived and created by professionals for professionals; it was not the sort of product that should have been sold to members of the general public. To make matters worse, institutions selling Interest Rate swap hedges, frequently failed to explain the concept properly to the consumer, leaving them with a false impression of how the product works.

I will explain how a hedge operates by giving an example.

Mr Li owns a couple of rice fields in the Hubei Province of Central China. Each November when he harvests the rice, he could easily take it into the local market and sell it on his stall, 1 kilo at a time. However, he cannot guarantee he will sell it all so instead, sells it to a rice trader, Mr Wang, at a price which is lower than he would get if he sold it on his market stall but at least he knows he has a guaranteed income. This goes on for a number of years.

The following January and before the rice planting season begins, Mr Li’s mother-in-law threatens to move in with him and he needs money to build an annex. Mr Li goes to Mr Wang and offers to sell Mr Wang his rice harvest for that year (which will be harvested in November) in advance. There is no guarantee that Mr Li will produce the same amount of rice that he has done in the years past. At the same time, Mr Wang – when he offers a price – does not know whether he is paying too much as there may be a glut in the market in November or whether he has got a bargain as there may be a huge pest problem affecting production. It is a gamble. Again, Mr Li does not receive as much as he would have done if he had actually waited until November but he does have the certainty of the money in his pocket.

This is a very basic “future”. In the money markets, they can get a lot more complicated and operate over longer periods of time. Let us say, for example, that Mr Wang decides that his arrangement with Mr Li is a good one and decides that maybe he wants to buy Mr Li’s rice harvest for the next twenty years. However, this will tie up Mr Wang’s money for the next twenty years and it may be that he will need it. So rather than purchasing the actual rice harvest for the next twenty years, he purchases the option to buy it: Mr Li has to promise that for the next twenty years, he will sell his rice to Mr Wang. This is a hedge.

Mr Wang now has a tradeable product – the option to purchase. It is purely speculative and the only reason it exists is because Mr Wang has been buying rice from Mr Li for a long period of time and believes Mr Li will continue to produce. Mr Wang can now enter the money markets and sell that option to purchase. As time progresses and there are changes and fluctuations in the rice market, the value of this derivative will also change and fluctuate. It will also increase in value as the derivative gets closer to the end of the 20 year option period.

Interest Rate Swap

So how does it work with an Interest Rate Swap?

Let me give you another example.

Baker Enterprises Ltd needs to raise funds to expand its factory. It comes under the category of an SME. Usually, they would simply be seeking a mortgage with their bank but the bank persuades them to enter into an Interest Rate swap.

Rather than offering the factory to the bank as security, the bank suggests that Baker Enterprises Ltd buys into a hedge and it is that hedge which will act as the security for the loan. The bank provides a loan to Baker Enterprises to purchase the hedge which is then placed on the open market and traded, thus providing sufficient funds for the original loan that Baker Enterprises needed.

At the same time though, the bank explains that both the loan and the hedge need to be paid for. Baker Enterprises will need to be making the loan repayments and will also have to pay interest. However, the bank persuades Baker Enterprises Ltd that they will enter into a “collar” interest rate swap: they will cap the interest rate on the funding of the hedge and they will link that interest rate to the LIBOR rate (London Inter Bank Offered Rate). They say to Baker Enterprises that if the LIBOR rate goes over, say, 5%, Baker Enterprises will only have to pay 5% interest plus of course the repayments on the loan and the lending margin on the loan. If the LIBOR rate is less than 5%, then the interest rate payable by Baker Enterprises Ltd will fall at the same time.

However, whilst there is a cap on how high the interest rate will go, because it is a Collar IRS, the bank also set a floor of, say, 4%. If the LIBOR rate falls below 4%, Baker Enterprises Ltd still needs to pay 4% interest.

The directors of Baker Enterprises Ltd are not sophisticated money-men. All they really understand is that the company will get the money it needs secured on an investment but importantly, the loan is repaid with a capped interest rate.

Unbelievably, after being in this arrangement for a couple of years, the LIBOR rate drops to an all time low of, say, 1%. Baker Enterprises are still paying 4% on their IRS scheme and it is obvious that the scheme is no longer financially viable. They decide to redeem the loan (or break it) but this is when the second shock arrives: the breakage costs.

Because the hedge has been bought for 20 years, if the bank sells it now, it is going to make a huge loss. It cannot afford to keep the hedge on its books and will need to sell it but rather than the bank making the loss, it passes the loss back to the consumer in the guise of “breakage costs”. Baker Enterprises had only taken out a loan of £700,000 but would have to pay breakage costs of £300,000.

And that is where the “scandal” has arisen. In this instance, Baker Enterprises is an unsophisticated SME, as are many of the people who have fallen victim to it. Virtually ever consumer says that they simply did not understand the product that had been sold to them or what would happen if the base rates fell to the all time low that they are currently at. Even more importantly, it would appear that the break costs were not properly explained. Break costs were mentioned, but the bank failed to give examples to the consumers of the level of the potential break costs.

There is also a possibility of a second scandal here. I have specifically given the above example based on the LIBOR rate – it could just as easily be the Bank of England base rate – but as readers of the news will know, Barclays Bank has been the subject of substantial fines for fixing the LIBOR rate which is supposed to fluctuate according to market conditions. Indeed, the Guardian Care Homes Ltd case is covering both of these issues – mis-selling interest rate swap products and the fixing of the LIBOR rate which they claim caused additional losses. The trial on this matter is scheduled to take place in October 2013 and it could have serious financial repercussions.

In the meantime, if you are a victim of the interest rate swap scandal and need FREE initial advice about making a legal claim then contact me at [email protected] or call me on 0333 888 0403.

Interest rate swap solicitor, Emma Slade, launches Slee Blackwell’s dedicated free interest rate swap legal helpline to assist victims of mis-sold interest rate swap products

The banks have been hit hard in 2012 following a series of financial scandals and mishaps: LIBOR rate fixing, tax avoidance schemes and PPI mis-selling to name but a few. But the latest scandal and one which seems to be bubbling away under the surface, is Interest Rate Swaps or IRS. The mis-selling of these hedge-based derivatives has been brought to the public’s attention by a series of articles in The Daily Telegraph and has led to the FSA entering into a deal with the four big High Street banks – Lloyds TSB, Barclays, HSBC and RBS – that they will set up independent reviewing schemes to look at this latest problem. Ten other banks including Clydesdale, Allied Irish Bank (UK), Santander (UK), have also agreed to review their sales.

In response to the enquiries we have received from worried consumers, Slee Blackwell Solicitors have set up a dedicated FREE legal helpline to deal with interest rate swap mis-selling queries. The helpline is being run by professional negligence solicitor, Emma Slade, who has developed a keen interest in IRS litigation

For anyone who is not entirely familiar with interest rate swaps and the legal issues involved, Emma has prepared a useful guide:

A BRIEF GUIDE TO INTEREST RATE SWAPS

Interest Rate Swaps are sophisticated but highly complicated financial instruments. They were intended to protect a customer from fluctuations in interest rates and, whilst they have been around since the early part of this century, they were being heavily promoted by the banks between 2005 and 2008.

The hedging products are usually based on another underlying product which the bank will hold for a specified period of time with the agreement to sell it back into the market in the future at a specified price. Based on the perceived value of that hedge, the bank is able to raise funds to provide a loan to the customer. What is not apparent to most people is that the hedging instrument of the underlying asset is entirely separate from the loan itself; the bank will charge a rate to the customer under the hedging instrument as well as a lending rate under the loan itself.

There are many different types of Interest Rate swap products available but probably the easiest one to describe is a “collar”. In essence, the bank will set a maximum interest rate (the “cap”) and a minimum interest rate (the “floor”). Whilst the Bank of England interest rate or LIBOR rate fluctuates between the cap and the floor, the customer will be charged the actual rate plus the lending margin of the loan itself. If the interest rate goes above the cap, the customer will pay the cap plus the lending margin; if it falls below the floor, the customer will pay the floor rate plus the lending margin.

To put it into figures, let us say that the cap is set at 5% and the floor is 4%. Whilst the LIBOR rate, for example, is 4.25%, the customer will pay 4.25% plus the lending margin; if LIBOR becomes 6.5%, the customer will pay 5% (the cap) plus the lending margin; if LIBOR falls to 3%, the customer will pay 4% (the floor) plus the lending margin.

Between 2005 and 2008, interest rates were fluctuating and the banks were promoting IRS schemes to customers (especially SMEs), giving the impression that an IRS was akin to a fixed rate mortgage. Special emphasis was placed on what would occur if interest rates rose but rarely was there any real explanation of what would happen should interest rates fall. As we know, since 2009, we have had an all-time low base rate of 0.5%. Many SMEs who entered into an IRS are therefore facing crippling interest rate charges on their loans and hedging instruments.

To make matters worse, because of the nature of the hedging instrument where the bank is tied in for a specified period of time, should a customer wish to terminate the arrangement, they face significant “break costs” which can run into many hundreds of thousands of pounds.

The FSA have been investigating the selling of these products and have come to the conclusion that a lot of them have been mis-sold. From the viewpoint of interest rate swap solicitors like us, it is obvious that the banks were not complying with FSA Rules which require them to provide full and clear information. In virtually every case, we have heard that the customer simply did not understand what was being sold to them. In particular they did not know what would happen if the interest rate levels fell. They were simply not properly advised.

Similarly – and this is the biggest issue – customers were not informed of the potential break costs. Many of the banks have argued that it is impossible for them to calculate what the break costs of a broken hedging product would be but given the sophistication of computer software available to the banks, they should have been able to give examples to client’s should they wish to break the product at various intervals in the agreement.

Ultimately though, it is clear that Interest rate swaps were simply not suitable for the majority of purchasers. Most of the customers were SME’s or what the FSA would call “unsophisticated investors”. Given that these products were initially created for the professional investor and money trader, it is difficult to see how the banks can justify selling these products to the unwary public.

As outlined above, the Big Four banks have been required to set up investigations into the mis-selling of these products with another ten banks voluntarily offering to consider the matter. The FSA itself has agreed to become involved but will only look at an interest rate swap case where the break cost is less than £100,000, the business has less than ten staff and less than £2m in assets. Given that the majority of cases are looking at break costs in excess of £100,000, they are not going to be reviewing the majority of claims. Instead, it falls to the customer to try and negotiate a deal with the bank direct or to approach specialist interest rate swap solicitors to pursue a interest rate swap claim.

If you have been mis-sold an interest rate swap product then call our FREE interest rate swap legal helpline on 0333 888 0403

Professional negligence solicitor Emma Slade ponders the foreseeability of the economic downturn and its legal implications

A recent decision from the Court of Appeal could have serious implications for those who put themselves in a position of advisor prior to the double dip recession that has engulfed the UK economy.

Until the decision in Rubenstein –v- HSBC, it had long been accepted that a Claimant would not be reimbursed for their losses arising out of a recession or a falling market. However, the Rubenstein decision appears to have turned this on its head, with far reaching implications for people making a professional negligence claim.

To review the law as it appeared before the Rubenstein case, we need to consider South Australia Asset Management Corporation –v- York Montague Ltd 1997 AC 191, better known as the SAAMCO case. In fact, SAAMCO was three separate cases involving different parties but, as they all raised similar issues, they were heard together.

In each case, a valuation had been made of premises and on the strength of that valuation, the claimant (a lender) had made a loan. The valuations though were negligent over-valuations. This became apparent when the borrower defaulted and the lender had to recover the property, subsequently selling it at a loss. In each case though, the loss was made greater because of the fall in the property market in the last recession.

In effect, there were two losses: the difference between the over-valuation and the correct valuation and then the further loss arising from the fall in the value of the property. The lenders wished to recover both losses.

Ultimately, the Court of Appeal concluded that whilst the lenders could recover the first loss, they could not recover the second loss as that simply had not been foreseeable at the time the valuation had been undertaken. The court felt that whilst a surveyor could expect a small fluctuation in the market, the recession itself had not been foreseeable.

There was also another distinction made: whether the valuation was considered to be “information” to allow another person to decide upon a course of action; or whether it was “advice” encouraging another person as to what course of action they should take. In SAAMCO, the Court of Appeal considered that a valuation was merely information for the lender to make a decision about what to do; it was not advice about the nature of the property market.

The outcome of Rubenstein –v- HSBC has therefore come as quite a surprise.

In this case, Mr & Mrs Rubenstein had sold their property and wished to invest the proceeds of sale (£1.25m) in a risk free investment. Mr Rubenstein contacted an IFA at HSBC to discuss his options and was provided with a brochure for the AIG Premier Access Bond. In August 2005, Mr Rubenstein emailed the IFA saying:

We can’t afford to accept any risk in the investment of the principal sum. Can you confirm what – if any – risk is associated with this product

The reply came back:

We view this investment …as the same as cash deposited in one of our accounts…[T]he risk of default…is similar to the risk of default of Northern Rock.

A singularly prophetic response given the demise of Northern Rock two years later!

Mr Rubenstein invested his money in the AIG fund where it remained for three years until the crash of Lehman Brothers, swiftly followed by problems at AIG. Like others, Mr Rubenstein tried to extract his money from the ailing company but lost approximately £180,000 from his investment. He brought a claim for compensation for professional negligence.

At first instance, the trial judge concluded HSBC had indeed given negligent advice, that the fund had been totally inappropriate for Mr Rubenstein and that Mr Rubenstein had relied on that advice. However, applying the SAAMCO principles, the Court found that the loss was entirely unforeseen and too remote. The Judge concluded that the loss had not been caused by the bank’s negligence but by the “extraordinary and unprecedented financial turmoil which surrounded the collapse of Lehman Brothers”.

On Appeal, HSBC conceded that, in accordance with SAAMCO, they had provided Mr Rubenstein with “advice” upon which he relied. They also tried three lines of argument to try and show that the loss was not foreseeable.

Firstly, they claimed that the collapse of Lehman Brothers had caused unexpected and unprecedented financial turmoil which could not have been foreseen. The Courts response was that Mr Rubenstein hadn’t invested in Lehman Brothers! Rather, the loss resulted from HSBC advising Mr Rubenstein to invest in a fund that was subject to a market risk, something which he did not want.

Secondly, HSBC pointed out that at the time of the investment, the AIG fund would have been regarded as being risk-free. The Court considered this as irrelevant as the bank had a duty to protect Mr Rubenstein from market risk.

Finally, HSBC argued that the investment had only intended to be for a short period of time but instead, the fund was held open for an additional two years which would have been outside the remit of their original instructions and thus could not have been foreseen. The Court felt that this was a powerful argument but ultimately concluded that the time the monies were to be held in the fund had not been defined in terms of months but rather that it was to be there until Mr Rubenstein purchased a new property.

Mr Rubenstein’s professional negligence claim was successful and HSBC were ordered to pay £113,000 in compensation plus legal costs.

The outcome of this case is quite extraordinary, particularly in light of the cases that arose out of the previous recession. It is not clear whether this will set a new precedent for all professional negligence cases for losses that arise out of a recession or credit crunch, or whether this case is to be distinguished on its own particular facts. If it is to be distinguished, there are good grounds for doing so: in this particular instance HSBC accepted they were giving Mr Rubenstein “advice” rather than merely information. Importantly, Mr Rubenstein had made it unequivocally clear that he did not wish to experience any risk, yet HSBC had misrepresented the nature of the investment to him. On that basis, it would appear that the SAAMCO defence might still be available in a pro neg case if the advice was not part of the express terms of the instructions provided by the client.

Anyone seeking to bring a claim for compensation for professional negligence against a bank, IFA, financial adviser or any other professional person is welcome to use our FREE Professional negligence legal helpline. Call 0333 888 0403.

We deal with professional negligence claims on a no win, no fee basis and offer an out of office hours advice service by email in the evening and at weekends.

Litigation lawyers will know what a Hearsay Notice is, when one needs to be served and why. However, a recent decision by the Court of Appeal seems to have made it easier for hearsay evidence to be relied upon in court proceedings and this may result in a flood of professional negligence claims against unwary solicitors.

Hearsay is information gathered by one person from another – the first person having no first hand experience of the information. For example, you buy a packet of sweets from a shop for 52p and tell A what you have done. A then relays that information to B. When A passes that information to B it will be considered hearsay evidence as A has no personal knowledge of the fact that you bought the sweets for 52p.

Hearsay evidence can be used in court trials but in order to do so, the party who wishes to rely on it must comply with s2(1) of the Civil Evidence Act 1995, serving a notice on the other side stating an intention to adduce hearsay evidence “for the purpose of enabling [the other party] to deal with matters arising from its being hearsay.” Failure to serve such a notice means that the hearsay evidence cannot be used.

However, the Court of Appeal in Charnock –v- Rowan (2012) EWCA Civ 2 appears to have allowed an alternative method to be used.

The facts of the case are interesting. A car struck a stationary bus which carried 14 passengers. The damage to the bus was slight – it cost less than £500 to repair – but each of the 14 passengers made a personal injury claim, although only 10 accident claims proceeded to trial. The Defendants were highly sceptical. The bus had been stationary and the car had only been travelling at 15 mph. They seemed to be suggesting that 10 PI claimants were colluding in insurance fraud. As the trial judge said to the Defendant’s trial Counsel, Paul Higgins, “Either I have got ten liars or frankly, I have got none.” “That,” replied Mr Higgins, “is our position”.

The main argument put forward by the Defendants was to be found in their medical evidence; a series of medical reports prepared by a Mr Shah. Although his reports did not make any suggestions of disbelief in the claimant’s version of events, he did record some of the claimant’s stories as relayed to him and, in some cases, pointed to some discrepancies in the narrative. Technically, this is hearsay evidence and if the Defendants wished to rely on those aspects of Mr Shah’s report, they should have served a hearsay notice. However, they failed to do so.

What they relied upon was the fact that the Claimants had agreed that the report should be in the trial bundle without making any objection to Mr Shah’s comments. CPR PD 32 r 27.2 states that “all documents contained in bundles which have been agreed for use at a hearing shall be admissible at that hearing as evidence of their contents….” The Defendants argued therefore that by reason of this, no hearsay notice was required as the agreement of the bundle was the requisite notice.

The original trial judge, HHJ Gore QC, was not happy with this approach. What the Defendants were alleging was tantamount to insurance fraud and he felt that such claims must be based on “proper and admissible evidence…managed and presented in accordance with the substantive and procedural laws and rules of this jurisdiction.” If a formal hearsay notice had been served, the Claimants would have called Mr Shah to be cross examined but, following the Defendants argument, the Claimants lost this opportunity. His Honour felt that this drove a coach and horses through natural justice and long established statutory duty.

The judge found in favour of the personal injury Claimants saying that whilst there may be inconsistencies in their stories, none were sufficient to cause him alarm and quite frankly, he found it “implausible that so many people went to the trouble and inconvenience of going to hospitals or doctors or clinics, sometimes more than once, if… there was nothing wrong with them.” Interestingly, despite having spent a large proportion of his judgment dealing with the issue of the hearsay evidence, ultimately, it did not affect his finding for the Claimants – he relied purely on the facts as presented to him.

The Defendants appealed the decision, the basis of the appeal being whether or not they could rely on Mr Shah’s hearsay evidence. Ultimately, the Appeal was dismissed as the Court of Appeal felt that the Defendant’s case was “somewhat thin” but what the judgment did do was appear to endorse the Defendant’s argument that, despite it appearing to be a “trial by ambush”, documents that are included in an agreed bundle which contain hearsay evidence will be allowed without the necessity of serving a hearsay notice.

As I have said above, this judgment drives a coach and horses through the long established scheme of dealing with hearsay. To my view, the modern day scheme of litigation is for parties to try and work together without trying to trip each other up; no more “Perry Mason” style litigation of appearing at the last minute of the trial with the crucial piece of evidence or cross-examination. The hearsay notice was valuable in this respect as it could alert the opposing party to issues that they may not have considered as being live and to try to deal with is sensibly without it being “an invitation to almost limitless and costly wrangling both before and at trial” which the Court of Appeal thought their decision in this case was likely to avoid.

Whilst it may have avoided “costly wrangling” in the current case, if a solicitor misses the hearsay evidence in an agreed bundle and ultimately loses a claim as a result, this will only invite another claim, this time for professional negligence.