The author Frank Sonnenberg once commented that “Few people will fault you for being tough, if you’re fair”. But can the same be said for terms and conditions? In particular, can you rely on disclaimers in your T&Cs to avoid owing advisory duties to business customers? Or would those terms be deemed unfair? And can a bank’s conduct convert a non-advisory relationship into an advisory one? These questions (among others) were considered by the High Court in the recent case of Fine Care Homes v National Westminster Bank . In this briefing note, Jolyon Connell and Will Hanson summarise the key issues from the judgment and explain its significance for banks and other firms dealing in financial services.
Most banks and other firms providing non-advisory financial services to business clients will have clauses in their T&Cs, making it clear that the provision of products and services does not mean that the customer is being provided with advice. That is an important distinction, as those providing advice owe more stringent legal duties towards their customers than those offering a non-advisory service. There have been repeated attempts by claimant customers over recent years to construe the provision of non-advisory services in such a way as to impose upon the provider the same (or similar) legal duties as those who do provide advice to clients: see for example our previous briefings here and here. The Fine Care case is the latest in a long line of mis-selling claims (arising from interest rate hedging products (IRHPs) in this case, but the principles are applicable more widely) in which the claimant has argued that the seller of financial services owes advisory duties despite T&Cs to the contrary.
The novel angle here is that in the Fine Care case, the claimant – Fine Care Homes Limited (Fine Care) – advanced its challenge to the non-advisory T&Cs of Natwest (RBS) on the basis that the T&Cs breached the Unfair Contract Terms Act 1977 (UCTA) .
In 2007, Fine Care bought an IRHP from RBS, in order to fund the purchase of care homes. Following the financial crisis in 2008, the IRHP moved against Fine Care which then faced significant additional interest payments and a high break cost. In 2013, Fine Care issued a mis-selling claim against the bank for £1.4 million, seeking to recover its losses and alleging that the bank negligently advised Fine Care concerning the IRHP and misstated or misrepresented its effect. In its defence, the bank sought to rely on its T&Cs which made it clear that: (i) the bank’s services were provided on an execution-only basis; and (ii) the bank was not providing any advice on the merits of the IRHP and that the borrower should obtain independent financial and legal advice. In response, Fine Care alleged: (a) that the bank’s conduct had converted a non-advisory relationship into one in which the bank assumed a duty of care to advise Fine Care; and (b) that the bank’s T&Cs were non-reliance clauses and, as such, failed to meet the test under UCTA that such clauses must be reasonable to be valid.
The Court took a dim view of Fine Care’s claims. First, the Court found that the bank had not acted in an advisory capacity. There was no formal advisory relationship, no specific instances of advice given by RBS’s representatives, and the bank’s terms (provided to Fine Care on numerous occasions) confirmed that the relationship was not an advisory one.
Secondly, while accepting that Fine Care was not a sophisticated investor, this did not give rise to advisory obligations on RBS. The Court refused to accept that the lack of understanding on the part of an unsophisticated business customer could turn a non-advisory relationship into an advisory one. Thirdly, the Court rejected Fine Care’s submission that the bank’s advisory disclaimers were non-reliance clauses which should be excluded by the requirement of reasonableness arising under UCTA. The Court held that clauses which make it clear that the services were being provided on an execution-only and non-advisory basis were not non-reliance clauses; they were instead clauses which set out the nature of the obligations of the bank. As such, they were in effect basis clauses which were not in contravention of the reasonableness test under UCTA.
Key lessons for banks and other financial services firms
- Clauses stating that a bank’s provision of services is execution-only and non-advisory are unlikely to be contrary to the requirement of reasonableness in UCTA. They are more likely to be basis clauses than non-reliance clauses. This is perhaps the judgment’s key contribution to the established line of mis-selling cases, and will reassure banks and other firms of the efficacy and robustness of such terms.
- A customer’s lack of understanding in a transaction does not of itself impose an advisory role on banks or other firms. However, each case turns on its own facts. In other cases, the nature of the parties and the conduct of the financial institution could conceivably convert a non-advisory relationship into an advisory one. The key question remains: has the bank/firm crossed the line which separates the activity of giving information about selling a product, and the activity of giving advice?
- The judgment clarifies when the provision of information might stray into giving advice. In summary:
- The ordinary position is that, while the seller must explain the product itself, a seller (in this case, a bank) owes no duty to its customer to explain the nature and effect of the transaction the customer is entering into. However, in some “exceptional cases” such a duty might arise;
- the test is an objective one: the question is whether the particular facts of a transaction objectively show that the financial institution assumes the responsibility as adviser to the customer on the suitability of a transaction. Banks and other firms must therefore take care to ensure that the reality of their conduct is consistent with the position as set out in the written T&Cs (in other words, non-advisory T&Cs will not rescue a financial institution that is, in fact, giving advice); and
- expertise in a particular area and/or being an approved person under the Financial Services and Markets Act 2000 does not confer advisory duties on a financial institution’s representative per se. But banks/firms should continue to ensure that where product experts are explaining products to clients, it is made clear to the customer in writing that no advice is being provided by that expert. As with previous cases, providing recommendations about a class of products (eg IRHPs in general) ought not to constitute advice but recommending a particular product is likely to do so.
Overall, the Court agreed with Mr Sonnenberg: your terms can be tough, so long as they are fair.
 Consumer contracts entered into on or after 1 October 2015 are governed by the Consumer Rights Act 2015, which replaced UCTA.
This publication is a general summary of the law. It should not replace legal advice tailored to your specific circumstances.
© Farrer & Co LLP, December 2020