Thomas v Triodos: revisiting the duties of care owed by banks

More than a duty not to mislead but less than a duty to advise, the mezzanine duty is an awkward amalgam but one that the courts are increasingly likely to deploy.

In Thomas v Triodos (Thomas v Triodos), a bank was held liable for mis-selling an interest rate derivative to its customers, despite it being a nonadvised transaction. The High Court, considering the spectrum of duties of care that banks owe to their customers when selling financial products, held that in certain circumstances banks owe customers a higher duty than simply not misleading or misstating information – even if the relationship is not advisory. Such a duty arose on the facts of Thomas v Triodos, in particular because the defendant bank had voluntarily subscribed to a code of conduct called the Business Banking Code (BBC) and had advertised its subscription to the claimant customers.

The claimants (Mr and Mrs Thomas) ran a successful organic farming business. In 2006, they transferred their borrowing to the defendant (Triodos Bank) due to its reputation for supporting businesses with strong green credentials.

In June 2008, the claimants decided to switch, via two tranches, a sizeable portion of their borrowing from a variable rate to ten-year fixed rates of 6.71 per cent and 7.52 per cent per annum, respectively. In the letters that the defendant provided to the claimants confirming the two fix arrangements, it had informed them that it subscribed to the BBC (this was also in its general literature).

In September 2008, base rate started falling, reaching a low of 0.5 per cent by March 2009. When the claimants sought to return to the variable rate, they were told that this would incur a substantial redemption penalty of approximately £96,000. The claimants brought a claim against the defendant for positively misrepresenting the financial consequences of prematurely leaving the fixed rate. The Court ruled in the claimants’ favour, finding that the defendant had breached its duty of care to clearly explain to them, when asked, the financial implications of entering into the fixed rate arrangements as it had been obliged to do under the BBC.

Case law has expressly recognised the existence of two types of duty owed by banks to customers when selling financial products

• When providing advice, the duty to ensure that such advice is full and accurate and, in some cases, to comply with the relevant regulatory regime.
• When providing information only, the duty to take reasonable steps not to misstate or mislead in accordance with Hedley Byrne principles (Hedley Byrne & Co Ltd v Heller & Partners Ltd [1964] AC 465).

It was held in cases such as Green & Rowley [2013] EWCA Civ 1197 and Thornbridge v Barclays [2015] EWHC 3430 (QB) that, in the absence of an advisory relationship and the provision of advice, the only duty of care that a bank owes is a Hedley Byrne duty. In determining whether advice or information has been provided, Rubenstein v HSBC [2011] EWHC 2304 (QB) held that one should look to whether the information was provided with a recommendation.

An intermediary duty – higher than that prescribed by Hedley Byrne, but not so high as the advisory duty – was first identified in Crestsign Ltd v National Westminster Bank [2014] EWHC 3043 (Ch), another mis-selling case. In that case, the relationship was non-advisory due to a disclaimer in the bank’s terms and conditions (despite the bank having provided unsuitable advice to the customer). Nevertheless, the bank owed the customer a socalled “mezzanine duty” to explain fully and accurately the nature and effect of the product once the bank’s representative had volunteered to explain it. In coming to this decision, the Court looked to the judgment of Mance J (as he then was) in Bankers’ Trust International v PT Dharmala Sakti Sejahtera [1996] CLC 518 which stated that if a bank provides an explanation or tenders advice, it must provide that explanation or tender that advice fully, accurately and properly.

However, some confusion followed Crestsign as first instance judges disagreed whether a “mezzanine duty” actually existed. In Thornbridge (which was decided after Crestsign), Moulder J confined Mance J’s statement to the facts of that case – otherwise the statement would in effect have “elevated the duty of a salesman to that of an adviser.” In Property Alliance Group Limited v The Royal Bank of Scotland [2016] EWHC 3342 (Ch), Asplin J accepted that a duty wider than the duty not to misstate could arise, although it would fall “on the advisory spectrum”. Meanwhile, the appeal in Crestsign was compromised before it was heard; interestingly, the defendant bank did not cross-appeal against the finding that there was, indeed, a “mezzanine duty”.

Thomas v Triodos was therefore an opportunity for the courts to provide clarity as to what was meant by the term “mezzanine duty”, and under what circumstances it would arise.

On the facts, the Court was satisfied that the relationship between the claimants and the defendant was not advisory, and that no advice had been given; further, the Financial Services and Markets Act 2000 did not apply as fixed rate lending per se is not a regulated activity (even if it did, it was doubtful that the claimants would have qualified as private persons in order to have a right of direct enforcement of various COBS Rules under s.138D of FSMA, as they were in business as a farming partnership). However, the Court felt that the defendant clearly owed the claimants a Hedley Byrne duty to take reasonable care not to misstate or mislead the claimants on any facts on which the claimants could be expected to rely. The question was whether the bank’s duty of care when providing the claimants with information went further than a simple duty not to misstate or mislead. Judge Havelock-Allan Q.C. said that this would “depend on the particular facts and whether, as a matter of policy, it is thought appropriate to impose such a duty in the circumstances” (para. 78).

The Court took note of the defendant having subscribed to the BBC. It contained a number of prescribed responsibilities, including the requirement to provide customers with “a balanced view of products so that they have an accurate understanding of the financial implications” in plain English. This “balanced view” was “especially important for long-term financial commitments (for example, the costs of withdrawing early from a fixed-term loan…where this is allowed)…”. There were no disclaimers, “basis” clauses or exclusions negating the defendant’s responsibility for the BBC. As such, the Court held that the defendant owed the claimants more than a duty not to mislead or misstate, and that this duty was to explain in plain English to the claimants, when asked by them, the financial implications of entering into a fixed rate arrangement. The Court stressed that this was not a duty to volunteer information if not asked, nor to provide a comprehensive tutorial.

The Court ruled that the defendant was in breach of this “mezzanine duty”. It had failed to provide the claimants with a balanced picture of the consequences of entering into the fixed rate arrangements, including the relationship manager not disabusing Mr Thomas of his suggestion that £10,000–£20,000 was the realistic redemption figure. The Court held that this was a misrepresentation which had influenced the claimants’ decision to enter into the first fixed arrangement; significantly, the Court also held that even if it was not an instance of misrepresentation, the “mezzanine duty” was breached because the relationship manager should have realised when the claimants asked about the redemption clause that they did not understand how it worked. The breach of the “mezzanine duty” persisted in the second fixed arrangement as there was no evidence the defendant’s Loan Administrator had provided the balanced picture that he was required to do under the BBC.

Although the decision in Thomas v Triodos may still be appealed – and would undoubtedly benefit from further review and clarification by a higher court – banks should consider whether a “mezzanine duty” arises whenever giving information on financial products to customers. They should review any policies or voluntary codes of conduct to determine their additional (if any) information responsibilities beyond the basic Hedley Byrne duty. Banks should also ensure that staff, including relationship managers, are aware of their responsibilities under any policies and/or codes and understand their remit, including the correct processes for volunteering explanations of products. Above all, banks should include exclusions in the form of “basis clauses” in their terms and conditions as a powerful first line of defence.