Interest Rate Swap Mis-selling

Consequential Losses 


Whether a claim is pursued via the courts or the FCA scheme, consequential losses will be assessed by referring to the established legal principles of tort and breach of statutory duty.  Customers should be aware of some of the legal tests, which in broad terms are:

  • The mis-sale must have caused the loss (i.e. the loss would not have happened had it not been for the bank’s regulatory breaches).
  • The loss must not be too “remote”.  That is, the loss must have been a reasonably foreseeable outcome of the bank’s regulatory breaches (i.e. the bank could have reasonably foreseen that its regulatory breaches could result in those losses).
  • Only claims that are supported by evidence will be considered.  For example, documents that were created at the time the loss was suffered are likely to be very relevant.

The legal principles

Pursuant to the classic case of Hadley v Baxendale, Claimant’s have two key “heads” of loss in any claim which applies to claims arising from mis-selling of a hedging product.

1.         The first are losses that arise “naturally” or “according to the usual course of things” from the breach. The courts often refer to this first limb as “direct” loss. In these cases, these losses will be the payments made pursuant to the hedging product on a monthly or quarterly basis and any set up costs.

2.         Second are such additional losses as the parties would, at the time when they made the contract, have reasonably expected to be the probable result of such a breach. The courts generally refer to this second limb as “consequential” or “indirect” loss.

How a party’s loss is categorised and presented is very important.

The most common problem that being mis-sold a hedging product causes is the disastrous effect it has on cash flow. This often results in financial difficulties.  The key issue is, the extent to which the company’s financial difficulties resulted from the additional payments which the company had to make under the swap (recoverable) and the extent to which they resulted from, for example, difficult trading conditions (not recoverable).  Proving effect on cashflow is key and needs to be done in detail.  There should be a spreadsheet showing the actual monthly cashflow and the cashflow had the Swap not been entered into.  The effect on cashflow can be calculated very simply, if the Company has management accounts, or it can be worked out from the Company’s bank statements.  The comparison is between what was actually paid under the swap (swap plus margin) and what would have been paid had the borrowing in respect of the notional amount been at the variable rate plus margin. 

Examples of recoverable losses;

After the exercise above is carried out, the practical implications of the effect on cash flow need to be clearly set out to give the Claimant the best chance of recovering them. Examples include;

  • selling a property at an undervalue;
  • refinance costs;
  • loss of revenue;
  • professional fees incurred.

If you would like to discuss your consequential losses, please get in touch on 0161 928 3848 and ask to speak to one the swaps mis-selling team.