A recognised body of derivatives expertise

In cases concerning the alleged mis-selling of derivatives by major banks to SMEs and individuals, the High Court has (despite routine opposition from defendant banks) permitted the parties to adduce expert evidence on issues such as the suitability and pricing of particular derivatives, the adequacy of pre-sale information about derivatives, and the standards of reasonably competent persons in the sale of derivatives in order to assist the court with resolving those proceedings at trial.

However, a recent High Court decision has given hope to defendant banks of being able to mount greater resistance to the involvement of expert evidence.

In Darby Properties Limited & another v Lloyds Bank PLC [2016] EWHC 2494 (Ch), the court refused permission to adduce expert evidence on the basis that there was no professional body that had recognised expertise in the field of derivatives and that expert evidence was not required to explain the risks or unsuitability of particular derivatives.

The judge in Darby Properties recognised the importance of establishing the relevant professional standards in a negligence case. However, the judge then concluded that derivatives experts did not belong to a regulated professional body with recognised expertise in the same way as, say, doctors or architects did, and that therefore any derivatives expert would only be able to offer a personal opinion based on what they would hypothetically have done in the circumstances of the case (which would be inadmissible) rather than offering an opinion based on what the relevant professional standards required.

Professional standards

In the field of medicine, it is clear that doctors belong to a regulated professional body, namely the General Medical Council, which sets the professional standards with which doctors are required to comply and maintains an official list of individuals. By way of comparison, the field of derivatives requires advisers to comply with the professional standards set out in the Conduct of Business Sourcebook rules (COBS) by the Financial Conduct Authority, which also maintains an official list of individuals who can advise retail customers about derivatives. It is therefore unclear on what basis derivatives advisers are considered not to be part of a regulated professional body in the relevant expertise.

The court in Darby Properties maintained that the trial judge would be able to decide whether the products sold were suitable or unsuitable, and whether the information provided about derivatives by the bank was adequate or inadequate, without the benefit of any expert evidence from derivatives advisers – despite their being considered helpful in previous High Court cases.

In one particular case, Crestsign Limited v National Westminster Bank PLC & another [2014] EWHC 3043 (Ch), the trial judge was assisted considerably by the expert evidence of the derivatives adviser Jackie Bowie, who concluded that the swap sold to Crestsign was unsuitable for several reasons (including because the swap exposed Crestsign to very high breakage costs that would dwarf the premium for a cap). The High Court has also granted permission in another derivatives mis-selling claim for Mrs Bowie to provide expert evidence about the professional standards required in marketing and selling derivatives. That claim is being brought by Wenta (a not-for-profit organisation that supports fledgling businesses) against National Westminster Bank and the Royal Bank of Scotland in relation to the alleged mis-sale of a complex financial derivative product by the taxpayer-owned banks in April 2009, and a trial is listed in this claim to take place before the High Court in October 2017.

A frequent allegation in derivatives mis-selling claims such as Crestsign and Wenta is that the bank failed (in breach of the relevant professional standard) to provide fair, clear, and not misleading information about breakage costs. Would a statement in a written presentation that ‘there may be a breakage cost or benefit should you exit the deal early which will depend on market rates at the time’ be sufficient to satisfy that standard, or does a bank need to provide a detailed table showing the potential breakage costs figure for each month of the term of the derivative to satisfy COBS 4.2.1R(1)? Or does the standard sit somewhere in between?

Providing opinion

How judges interpret that professional standard (and other such standards) will have a huge bearing on case law in this area and thereby on countless SMEs and not-for-profits throughout the country. It is unrealistic to expect a judge to be able to decide such an issue without the benefit of expert evidence from derivatives advisers as to whether a given bank has fallen below the professional standard in a particular case.

The decision in Darby Properties seems to be concerned with the possibility that experts might usurp the role of judges in defining the professional standards applicable in derivatives mis-selling claims. However, such a concern is entirely misconceived, and fails to recognise that the purpose of expert evidence in these cases is as envisaged in CPR 35.1, namely for the experts to provide their opinions on the relevant professional standards (and whether they were complied with) so that the court can then consider those expert opinions when making its own decision.

Sivakumaran Sivathillainathan is a solicitors at LEXLAW Solicitors & Barristers

@LEXLAWuk

lexlaw.co.uk