Neutral Citation Number: [2018] EWHC 963 (Comm)

Case No: CL-2016-000318
IN THE HIGH COURT OF JUSTICE
QUEEN'S BENCH DIVISION
COMMERCIAL COURT

Royal Courts of Justice
Rolls Building, 7 Rolls Buildings
Fetter Lane, London EC4A 1NL

Date: 02/05/2018

Before :

MR. JUSTICE TEARE
- - - - - - - - - - - - - - - - - - - - -
Between :

	Manchester Building Society	Claimant	
	- and -		
	Grant Thornton UK LLP	Defendant	

- - - - - - - - - - - - - - - - - - - - -
- - - - - - - - - - - - - - - - - - - - -

Rebecca Sabben-Clare QC and Harry Wright (instructed by Squire Patton Boggs (UK) LLP) for the Claimant
Simon Salzedo QC, Adam Rushworth and Sophie Shaw (instructed by Taylor Wessing LLP) for the Defendant

Hearing dates: 22-25, 29-31 January, 1,5-8,12,19-22 February 2018
- - - - - - - - - - - - - - - - - - - - -
Judgment Approved
Mr. Justice Teare : 
1.	This is a claim for damages by a building society caused by the admitted negligence of its accountant. The assessment of recoverable financial loss can be complex and uncertain of outcome.  In the present case the recoverable loss may be £48.5m, as submitted on behalf of the Claimant, or nil, as submitted on behalf of the Defendant, or somewhere in between. One essential enquiry is whether the loss claimed is the kind of loss in respect of which the Defendant owed a duty of care. But with regard to that enquiry the leading textbook on damages states that “hard and distinct rules ……cannot be laid down. Each particular case must be taken as it comes”; see McGregor on Damages 19th ed. para 8-132.
2.	It may assist if I give the following guide to this judgment, by paragraph numbers:
The Claimant and its business							3-10
The Accounting Framework 							11-19
The claim 										20-32
The oral evidence									33-35
The 2005 accounts and the approval of the Hedge Accounting policy		36-71
The initial swaps									72-77
Growth of the UK Lifetime Mortgage Business					78
The audit for the year ended 2006							79-80
Further swaps in relation to the UK Lifetime Mortgage Business		81-91
Swaps in relation to the Spanish Lifetime Mortgage Business			92-94
The audits										95-97
The views of the regulator								98-109
The Claimant’s sale of lifetime mortgages						110
The provision of collateral								111
The FSA’s letter dated 16 January 2013						112-114
The discovery of the error and the events thereafter				115-120
The individual heads of loss								121
(i) The cost of breaking the swaps						122-123
	“Cause in fact”			124-139
	“Cause in law”			140-149
	“Scope of duty”			150-200
	  Remoteness			201
                    Conclusion as to costs of breaking the swaps			202
                     Transaction or penalty costs						203-211
(ii) Loss of the gain that would have been earned if the swaps 
in existence in April 2006 had been closed out in 2006			212-213 
(iii) Loss of profits from the £21m UK lifetime mortgage 
book if held after December 2013 rather than sold			214-219
(iv) The costs of hedging the £21m UK book				220-222
(v) Restructuring and advisory costs					223-231
(vi) PwC hedge accounting fees						232	
(vii) The set up and perational costs of the Spanish book			233
(viii) Credit for the benefit of holding the additional UK book		234
(ix) Credit for the Spanish book						235
Contributory negligence								236-255
Conclusion										256
Statutory relief									257-267

The Claimant and its business
3.	The Claimant is the Manchester Building Society, a small mutual building society established in 1922. It has one branch with approximately 16,900 savers and 3,600 borrowers. Prior to April 2013 it was regulated by the Financial Services Authority (the FSA). Now it is regulated by the Prudential Regulation Authority (the PRA) and the Financial Conduct Authority (the FCA). Its main activity is the provision of a range of mortgage products. Typically they were fixed term, fixed interest mortgages but between 2004 and 2009 the Claimant acquired and issued lifetime mortgages which were designed to release the equity in a house to its owner on terms that the loan and interest were not repayable until the owner either entered a care home or died. These lifetime mortgages were issued to UK owners (“UK lifetime mortgages”) and also to owners of homes in Spain (“Spanish lifetime mortgages”). The Claimant entered the market of lifetime mortgages because it was less crowded and because it believed that it could get a better return on its investment. 
4.	The Claimant needed to “hedge” its interest rate risk (the risk that the variable rate of interest which it paid to acquire funds would exceed the fixed rate which it received from borrowers) and it did so by, inter alia, purchasing interest rate swaps. 
5.	Between 2002 and 2005 the Claimant had entered into six UK fixed rate swaps for periods of 3-25 years. In January and September 2006 it entered into two further interest rate swaps for periods of 1 and 3 years. The notional value of such swaps was £37.5m. These swaps hedged the fixed rate, fixed term business. 
6.	Between December 2004 and December 2005 the Claimant acquired two tranches of UK lifetime mortgages with a value of £21m. Four further tranches of such mortgages were acquired between April 2006 and October 2008 bringing the total value of UK lifetime mortgages to £68m. 
7.	The distinctive feature of lifetime mortgages is that no sum is due from the borrower until the borrower dies, moves out of the property or chooses to redeem the mortgage. Until that point, interest is compounded. The mortgages were therefore of an uncertain duration and there was no return (“zero coupon”) until that future date. 
8.	Lifetime mortgages also included a “no negative equity guarantee” such that the final payment would not exceed the value of the property upon which the mortgage was secured. Lifetime mortgages were marketed to those above the age of fifty. 
9.	Between February 2006 and February 2012 the Claimant entered into 14 interest rate swaps to hedge its UK lifetime mortgage book. They had a notional value of £74.2m. Most had a period of 50 years. Although no new UK lifetime mortgages were issued or acquired after October 2008 the later swaps were purchased because the interest which accrued on the mortgages caused the size of the mortgages to “grow”. 
10.	During 2008 the Claimant began to offer Spanish lifetime mortgages. They were structured in the same way as the UK lifetime mortgages. Between July 2008 and January 2011 the Claimant entered into 14 interest rate swaps to hedge the Spanish book of lifetime mortgages. They had a total value of €57m.      
The Accounting Framework 
11.	Before 2005 the UK Generally Accepted Accounting Principles (“UK GAAP”) did not require swaps to be included on the Claimant’s balance sheet. Thus the swaps which it had entered into between 2002 and 2004 to hedge its fixed rate fixed term mortgage portfolio were not included on its balance sheet.  
12.	As the Claimant had issued listed instruments – namely Permanent Interest Bearing Shares (“PIBS”) – it was required to prepare its accounts in accordance with the International Financial Reporting Standards (“IFRS”) for the 2005 financial year onwards. 
13.	One significant change of this transition from UK GAAP to IFRS was that under IFRS the Claimant was required to bring derivatives such as interest rate swaps onto its balance sheet. Derivatives were to be valued at fair value.  Thus any change in the fair value of the swaps, consequent upon changes in present and estimated future interest rates, fell to be recorded in the Claimant’s profit and loss account. However, the mortgages which were hedged by those swaps were to be shown at amortised cost. Thus changes in the fair value of the mortgages (as a result of changes in present and estimated future interest rates) would not be reflected on the profit and loss accounts. The consequence of this accounting mismatch, absent any mitigating measures, would be that the Claimant’s profits, and hence its capital, as recorded on the balance sheet would be “volatile”. This could, in turn, have a detrimental impact upon the Claimant’s regulatory capital position – greater volatility could necessitate an increased amount of regulatory capital.
14.	IFRS, however, provided a potential solution to the problem of increased volatility. Entities with derivatives could choose to adopt “hedge accounting”. Hedge accounting allows the volatility introduced by bringing the fair value of interest rate swaps onto the balance sheet to be offset by allowing an adjustment to be made to the value of the hedged asset, the mortgage, as shown on the balance sheet.  
15.	Hedge accounting is complex. There are very strict requirements to be fulfilled before an entity can take advantage of it. The asset being hedged and the derivative in question have to be formally designated. Various documentary requirements have to be fulfilled prior to the application of hedge accounting. It can only be applied if the hedge is expected to be “highly effective” – that is, the hedge is expected to be between 80% and 125% effective in offsetting changes in fair value attributable to the assets throughout the term of the hedging derivative. Moreover, the hedge must be determined to have actually been effective in practice. 
16.	From 2006 the Claimant used hedge accounting to enable a hedging adjustment to be made to the value of its mortgages on the balance sheet so as to eliminate or reduce the volatility risk. In 2008 the world’s financial system suffered a crisis which led to a sustained fall in interest rates and, in consequence, a change in the fair value of the Claimant’s interest rate swaps. Instead of being an asset they became a liability. That change was offset on the Claimant’s balance sheet, though not necessarily completely, by the hedge adjustment permitted by hedge accounting to the value of the mortgages as shown on the Claimant’s balance sheet.   
17.	In 2013 the Claimant learnt that it could not properly use hedge accounting. The effect of drawing up its accounts in 2013 without the use of hedge accounting was dramatic. 
18.	The Claimant’s financial position, properly reported, was wholly different from that which it had previously stated in its audited accounts. The Claimant’s profit for 2011 of £6.35m became a loss of £11.44m, and its net assets were reduced from £38.4m to £9.7m. Further, the regulatory capital position of the Claimant was very different. Instead of capital “headroom” (the amount by which its capital exceeded its regulatory capital requirement) in 2011 of £20.4m there was a deficit of £17.9m. The effect on regulatory capital was twofold. First, without hedge accounting the adverse movement in the swaps reduced the Claimant’s capital and, second, the Claimant was required to hold more capital because of the risk of volatility to which it was now exposed.  
19.	The Claimant was forced to close out the swaps. It reduced its new lending and in fact stopped lending on 5 December 2013.  Its book of UK lifetime mortgages was sold. The book of Spanish lifetime mortgages has not been sold, despite efforts to do so.  
The Claim 
20.	The Defendant is a large firm of accountants. It audited the accounts of the Claimant from 1997 until 2012.   
21.	The Claimant’s case is that in April 2006 it received negligent advice from the Defendant as to the Claimant’s Hedge Accounting Policy. It claims damages from the Defendant in respect of the substantial losses alleged to have been caused by that negligent advice when, in 2013, it learnt that hedge accounting could not be used. By that time the financial crisis of 2008 had led to the collapse of interest rates. The total damages claimed amount to some £48.5m. The biggest single head of damage is some £32.7m in respect of the cost of closing the swaps, many of which had a duration of 50 years. The sum paid represented the fair value of the swaps at the time they closed. The Claimant’s case is that the decision to close the swaps and the resulting loss were caused by the Defendant’s negligence.   
22.	The Claimant also alleges that the audits of its accounts for the years ending 2006-2011 were negligently conducted because the audit approved the use of hedge accounting. The same damages are claimed for the negligent auditing as are claimed for the negligent advice in 2006.
23.	Since the trial did not concern issues of liability the respects in which the Defendant was negligent must be taken from the pleadings. Paragraphs 62 and 63 of the Particulars of Claim alleged as follows:
“62. Grant Thornton's advice as to the effect of the Hedge Accounting Policy was wrong, and was given in breach of duty, for the following reasons. All of these points would have been apparent to any reasonably competent accountant / auditor who read the Hedge Accounting Policy, was familiar with and understood the requirements of IAS 39 paragraphs 71-94 and knew (as Grant Thornton did) that the Society proposed to apply the policy to fixed rate business, including lifetime mortgages, and long term swaps: 
a. The Hedge Accounting Policy did not require the term of each swap to conform to the term of the mortgages against which the swap was designated as a hedging instrument with sufficient similarity for the hedge to be "effective" for the purpose of IAS 39; and/or 
b. The Hedge Accounting Policy did not require the fixed interest period under the mortgages to conform to the period of the swap against which they were designated with sufficient similarity for the hedge to be effective; and/or 
c. The Hedge Accounting Policy did not require the times at which interest was payable under each swap to conform to the time at which interest was payable under the mortgages against which the swap was designated as a hedging instrument with sufficient similarity for the hedge to be effective; and/or
d. The Hedge Accounting Policy did not address what would happen if mortgages were redeemed prior to the end of the term of a swap against which they had been designated for hedging purposes, as would inevitably be the case in respect of a material number of mortgages in view of: (i) the possibility of early repayment; and (ii) the inherently uncertain term of the Society's lifetime mortgages; and/or 
e. The Hedge Accounting Policy did not contain sufficiently clear provisions in relation to how and when the Society would designate and identify each hedged risk, and at what level the hedge relationship would be designated; and/or 
f. The Hedge Accounting Policy did not contain any detailed provisions in relation to how effectiveness testing would be carried out. This was a critical matter in view of IAS 39 paragraph 88.
63. In all the circumstances, Grant Thornton were in breach of duty by giving incorrect, misleading advice to the Society in April 2006, alternatively during the course of each of the 2006-2011 audits (and in any event prior to signing an unqualified opinion in respect of those audits), and by failing to advise it, as any reasonably competent accountant / auditor in Grant Thornton's position would have done, that:
a. The Hedge Accounting Policy was inadequately detailed for them to be able to advise that compliance with it would comply with IAS 39 and enable the Society to apply the hedge accounting rules thereunder; and 
b. The Society would not be in compliance with the hedge accounting rules under IAS 39 if it applied this policy to its long term swaps and lifetime mortgages.”
24.	The Defendant’s response to this allegation is to be found in paragraph 42 of the Defence which stated as follows:
“42. As to paragraph 62:
42.1 It is denied that Grant Thornton knew that the Society intended to hedge lifetime mortgages by entering into long-term swaps at the time that it approved the Hedge Accounting Policy on 11 April 2006. In the premises, it is denied that Grant Thornton advised the Society that it was entitled to apply the hedge accounting rules under IAS 39 in relation to long-term swaps or that Grant Thornton could reasonably have been understood by the Society as providing such advice. In the premises, it is denied that the advice provided by Grant Thornton in relation to the Hedge Accounting Policy was wrong or in breach of duty for the reasons pleaded at sub-paragraphs 62(a) and (b).
42.2 Save that no admission is made to the word “critical” in sub-paragraph 62(f), it is admitted that Grant Thornton’s advice that the Hedge Accounting Policy was in compliance with IAS 39 was wrong and in breach of duty for the reasons pleaded at sub-paragraphs 62(c)-(f).
43. As to paragraph 63: 
43.1. So far as the position in April 2006 is concerned, paragraph 42.1 above is repeated. 
43.2. Subject to the aforesaid, however, it is admitted that Grant Thornton acted in breach of duty to the extent that it did not advise the Society of the matters referred to at sub-paragraphs 63(a) and (b).” 
25.	Thus the alleged negligent advice of the Defendant prior to signing an unqualified audit opinion for each of the years 2006-2011 is admitted. In particular there is no dispute that, when signing such audit opinions, the Defendant knew that the Claimant intended to hedge lifetime mortgages by entering into long-term swaps. There is however a dispute as to whether the Defendant had that knowledge in April 2006 when first advising as to the Claimant’s Hedge Accounting Policy. That dispute will be considered in the narrative section of this judgment. The Defendant accepts that it had the alleged knowledge by 8 May 2006.    
26.	With regard to the allegation of negligent auditing for the years ended 2006-2011 there is no material dispute. The allegation of negligent auditing is admitted. In particular, it is admitted that any reasonably competent auditor would have concluded that the Claimant’s financial position was materially misstated by applying hedge accounting. There does not appear to be any dispute that when conducting the audits for the years ended 2006-2011 the Defendant was aware that the Claimant had hedged lifetime mortgages by entering into long-term swaps of up to 50 years.
27.	Counsel for the Claimant in their closing submissions summarised the negligence of the Defendant as being a negligent failure to advise the Claimant in April 2006 and on the occasion of each audit thereafter that it could not apply hedge accounting.  Counsel said that that amounted to failing to advise the Claimant that its profits and losses were exposed to the full movement in fair value of the swaps that it held without offset.   
28.	The sole issue of primary fact arising from the exchange of pleadings is whether in April 2006 the Defendant was aware that the Claimant intended to hedge lifetime mortgages by entering into long-term swaps. That dispute goes to the allegation of negligent advice in April 2006. It is not relevant to the admitted negligent advice and auditing for the years ended 2006-2011. 
29.	The case of the Claimant is that the lifetime mortgage business and swaps entered into after April 2006 would not have been entered into but for the negligence of the Defendant (and that the existing swaps would have been closed). The Defendant denies that case. The Defendant says that the same mortgage business would have been effected but that it would have been hedged by another form of swaps, namely, balance guaranteed swaps and so the same losses would have been incurred. The Defendant further says that as a matter of law the claimed losses were not caused by the Defendant’s negligence. Finally, the Defendant says that the claimed losses are not within the scope of its duty of care and so, in accordance with the principles established by South Australia Asset Management Corpn. v York Montague Ltd. [1997] AC 191 (hereinafter referred to as SAAMCO) and further explained in Hughes-Holland v BPE Solicitors [2017] 2 WLR 1029, the Claimant’s recoverable loss is nil.  
30.	The dispute as to causation raises the question whether, assuming the Claimant satisfies the “but for” test and the Defendant fails in its case concerning balance guaranteed swaps, the only effective causes of the Claimant’s losses were, first, the Claimant’s commercial decisions to issue lifetime mortgages and purchase long term interest rate swaps and, second, the financial crisis which led to a collapse in interest rates and thereby to the interest rate swaps becoming liabilities. Further, putting the point in SAAMCO language, those losses were not within the scope of the Defendant’s duty; the Defendant had not assumed responsibility for them. 
31.	If, contrary to the Defendant’s primary submission, the Defendant is responsible for the Claimant’s losses the Defendant submitted that the Claimant failed to take reasonable care of its own interests by (i) its attitude to risk, and in particular, by taking out of 50 year swaps which would last for much longer than the lifetime mortgages and (ii) its own mistaken view as to the availability of hedge accounting, so that, pursuant to the Law Reform (Contributory Negligence) Act 1945, liability for the losses should be apportioned between the Claimant and the Respondent. It was submitted on behalf of the Defendant that the Claimant should bear 70-80% of its losses.  
32.	The trial took 5 weeks, with factual evidence from 5 witnesses and expert evidence from 9 witnesses in the fields of regulatory capital, accounting, derivatives, forensic accounting and retail banking. Much time and no doubt much cost was spent on expert evidence. However, by the time of closing submissions, its importance was far less than might have been suggested by the time spent upon it in the course of evidence. 
The oral evidence
33.	Apart from Mr. Harding, who became the Chairman of the Claimant in 2013 and so gave evidence of what happened (only) 5 years ago, the other witnesses gave evidence of what happened in 2006, some 12 years ago. At such a distance of time the documents must be the surer ground upon which to base findings of fact rather than the witnesses’ professed recollections.
34.	My impressions of the three witnesses for the Claimant were as follows. Mr. Harding was frank in his evidence, for example, when describing the regulator’s views of the former chief executive, Mr. Cowie, and of the Claimant’s financial position following the discovery in 2013 that hedge accounting was not appropriate. He accepted that the Claimant had in the past made “poor strategic decisions”. I saw no reason not to accept his evidence. But of course in the event of a difference between his recollection and the contemporary documents I would generally prefer the latter. Mr. Gee, the finance director, was quite cautious when giving evidence. He frequently asked for questions to be rephrased. In some cases that was understandable but not always. He was perhaps a little too careful with his answers, giving the impression that he was always mindful of the Claimant’s interests in the litigation and anxious to ensure that his answers were consistent with his witness statement.  However, I was not persuaded to accept the submission made on behalf of the Defendant that he had a selective memory, would only recollect issues which he thought would support the Claimant’s case and that his evidence had been skewed in order to place blame on the Defendant. It seemed to me that that submission under-estimated the difficulty of recalling events dating back many years. On occasion he claimed to have a recollection when it is more likely that he did not but had in his own mind reconstructed what he thought was likely to have happened. Nevertheless, when he answered a question he often appeared to do so fairly and sensibly. There can, however, be no doubt that the contemporaneous documents and the probabilities must be more reliable than his answers about events so long ago. Mr. Lynch, an operations director who served on several of the Claimant’s committees and was appointed the interim Chief Executive in 2016, was more forthcoming than Mr. Gee but had little evidence to give beyond that contained in the documents. 
35.	The Defendant called two witnesses. Mr. Nuttall was the Defendant’s audit engagement partner for the years 2003-2007. He was generally responsive to the questions put to him in cross-examination but at times was reluctant to answer questions and at others to face up to the implications of the contemporaneous documents. I formed the clear impression that the contemporaneous documents and the probabilities were a much surer guide than his oral evidence. Mr. Swales was the audit engagement partner for the years 2008-2011. He gave the impression of being very fair, freely acknowledging the mistakes he had made during the audits for which he was responsible. But again the documents and the probabilities must be preferred to his evidence when there is a conflict. 
The 2005 accounts and the approval of the Hedge Accounting Policy 
36.	Unsurprisingly, the Claimant was keen to adopt hedge accounting (Mr. Gee described the decision as “obvious”) and sought to prepare its 2005 accounts on this basis. However, as a relatively small entity the Claimant lacked expertise in this area and consequently sought the Defendant’s guidance on this subject in the course of preparing its 2005 accounts. Initially it appears, as accepted by Mr. Gee, that the Claimant intended to hedge its lifetime business by its capital and reserves. But, by the end of 2005 or early 2006 the plan was to hedge its lifetime business by interest rate swaps (as it had done in relation to its fixed rate fixed term mortgage book). 
37.	On 14 November 2005, Mr Nuttall and other members of his team met Mr Gee and Mr. Roach (the Claimant’s financial controller) for an audit planning meeting. The Defendant’s note of the meeting records that it was told of “two mortgage book acquisitions in the pipeline”. Mr. Nuttall accepted in cross-examination that he knew that the Claimant had taken on a tranche of lifetime mortgages. He further accepted that he or his team was aware from the Claimant’s Business Plan 2002-2005 that there was a period of planned growth. 
38.	Topics of discussion included the impact of IFRS on swaps and mortgages. Following that meeting, Mr. Nuttall emailed Mr Gee a set of example accounts showing the differences between IFRS and UK GAAP along with a document explaining the differences. This document commented upon the importance of hedge accounting, noting that it is a: 
“key tool in avoiding the profit volatility caused by recognising … hedging instruments at fair value”. 
39.	On 19 December 2005 Mr. Gee prepared a memorandum for the board of the Claimant which recorded that “the treatment and disclosure of each swap is currently being finalised with GT”. Although Mr. Nuttall had no recollection of discussing hedge accounting at this time it is likely, based upon Mr. Gee’s contemporaneous memorandum, that there was such discussion.  Indeed, that is in accordance with the probabilities having regard to the discussion in November 2005 and the documents sent after that meeting by the Defendant to the Claimant.  
40.	On 20 December 2005, by email, Mr Roach made two queries of Ms Taziker (the Defendant’s audit manager for 2005) relating to the accounting treatment of an existing £10 million swap against the Claimant’s fixed rate capital and a £10 million swap against fixed term mortgages. In relation to the former query Mr Roach stated that confirmation of the accounting treatment was urgent as the Claimant had a “commercial decision to make in relation to these specific SWAPS.” In cross-examination Mr. Gee accepted that the former query did not concern hedge accounting but it would appear that the latter query did. 
41.	The queries were immediately referred to the Defendant’s Client Support Services Department (CSSD), with a response received on the afternoon of 20 December 2005 from Mr. Chapman (who Mr. Nuttall said was an expert in IAS 39). This response noted that the IFRS regime was “considerably more complex” than UK GAAP and that the “hedging rules are probably the most complex area of IAS 39”. The response attached various guidance documents and summarised the requirements of IAS 39. It was suggested that Ms Taziker ask for a copy of the Claimant’s hedging documentation, ask the Claimant to identify its hedge effectiveness measures and request the Claimant to comment on how it considered the hedged items complied with IAS 39. It was also pointed out that: 
“if hedge accounting is not carried out then the fair value movement of the interest rate swap is likely to cause profit volatility. This is particularly as the most common treatment for a loan asset or liability is to be carried at amortised cost”. 
42.	Later that evening Mr. Carroll of CSSD expressed the view in an email to other members of CSSD that an “IFRS champion” ought to have been consulted and that it was surprising that CSSD had not received any queries on this subject during the year. 
43.	Mr. Nuttall was not involved with these queries as he was out of the office. Upon his return, he telephoned Mr. Gee to discuss these issues. Mr. Nuttall made an internal report of his discussion from which it appears that he had resolved the two queries. It also appears from that report that he did so without exploring with Mr. Gee the wider enquiries regarding hedge accounting suggested by Mr. Chapman.  
44.	There was a further meeting on 5 January 2006, between Mr. Nuttall, Ms. Taziker and Mr. Roach. Mr. Roach said that the hedges were fully documented but it was noted that that would be reviewed and that the Defendant would review the treatment for portfolio hedge accounting. Mr. Nuttall accepted in cross-examination that he understood portfolio hedge accounting to mean hedging a number of mortgages with one swap. The following day Mr. Nuttall sent to Mr. Roach an email attaching further generic information and guidance on IAS 39.  
45.	On 18 January 2006 Mr. Gee was informed by Mr. Nuttall that provisions for portfolio hedge accounting were more complex than those for hedging a single asset and that unless the provisions were complied with the swap would need to be accounted for “through the income account”. Mr. Gee explained in his oral evidence that at this time he and his team were focussed on getting the accounts for 2005 finalised. That is in accordance with the probabilities.  
46.	On 1 February 2006 there was a “close out” meeting (which I infer means a meeting to finalise the accounts) between the parties in relation to the 2005 accounts at the Claimant’s office. IFRS was discussed. The Defendant’s agenda noted that portfolio hedging, fair valuation of mortgages and initial hedging documentation were to be considered. The Defendant was “to look into this more to ensure correct accounting treatment. MBS sure that they are doing it correctly and in accordance with other building societies.”  
47.	“Substitution” of mortgages arises when one mortgage, which has been hedged by an interest rate swap, is redeemed and another mortgage is then hedged by the same interest rate swap. There is an issue between the parties as to whether this topic was discussed between the parties on 1 February 2006. No mention of substitution was recorded in the agenda. 
48.	Mr. Gee could not recall whether he attended this meeting and therefore could not give evidence about it, though he did infer from a “technical query” issued by Ms. Taziker, the audit manager, on 1 February 2006 that the subject was discussed.  Her query, which was sent to the Defendant’s Client Support Department (CSSD), stated as follows:
“Our client has adopted IFRS for its 2005 accounts and is looking to use fair value hedge accounting in respect of interest rate swaps against fixed rate mortgage in accordance with IAS 39.
However due to the nature of the client (ie building society) their Swaps are against a large number of individual mortgages and there are a greater value of mortgages than Swaps (as inevitably there will be some redemptions / repayments of the mortgage over the period of the loan). I think this comes under the definition of portfolio hedging and reviewed appendix A to IAS 39 to this respect. 
The client has allocated a number of mortgages to each swap to determine effectiveness but due to movements in balances, he has then added/removed individual mortgages between 2004 and 2005, thereby effectively provide a different list of mortgages at 2005 to test effectiveness. Under portfolio hedging, should they have identified a fixed number / value of mortgages (ie assets) up front against which they would test effectiveness and therefore the same list should be used in future accounting periods or do they just have to confirm that there are sufficient balances still covered by the swap?
From AG114-132, it would appear that they cannot just substitute mortgages when they are redeemed (unless due to a factor not caused by interest rates eg house sale), as this would always render the hedge effective. The client is assuming no early redemptions (as fixed rates) but clearly there will be exceptions to this. They argue that the hedges are effective as the Swaps are still covering fixed rate mortgages but although this may appear to be effective for commercial reasons, does not appear to be for reporting under IFRS. The client has also spoken to a number of other building societies adopting IFRS and they have confirmed that they are calculating in the same way (ie replacing mortgages when they are redeemed).”
49.	The covering email for this query sent by Ms Taziker to CSD stated that:
“As we are currently disagreeing the treatment with the client and they are working to a tight timetable, we would appreciate your guidance asap.”
50.	The technical query appears to refer to the practice of substitution; see the third paragraph. The fourth paragraph suggests that there had been discussion about it. The covering email suggests that there has been disagreement about it. I therefore find that the subject of substitution was raised and discussed at the meeting on 1 February 2006 (as suggested by Mr. Gee and as recalled by Mr. Nuttall). However, Mr. Nuttall also said that he recalled that “we” had told the Claimant that it was not possible to substitute mortgages upon redemption with new mortgages. Whilst a doubt may have been raised as to whether it was permissible (giving rise to the disagreement) it seems improbable that any firm advice was given on the subject by the Defendant, for Ms. Taziker’s technical query and covering email suggest that the Defendant was still to form a view on this issue.  
51.	At the end of his evidence Mr. Nuttall was asked about his recollection. He had no recollection as to whom he had told that substitution was not possible “without reference to the papers”. His only recollection as to when the discussion took place was that it was at some stage between early February and April 2006. When asked what it was he recollected he said that he recollected the lack of documentation for hedge accounting. “As regards substitution I can’t recall specific conversations myself with people from the Manchester Building Society.” He agreed that it was possible that in truth he had no recollection of the discussions but had formed a view as to what must have happened from reading the documents. It seems to me, having regard to the passage of time from 2006, that this is very likely to have been the case. I can therefore give little weight to his evidence in his statement that the Claimant had been told that substitution was not possible. 
52.	On 6 February 2006 Mr. Chapman replied to Ms. Taziker’s query in an email which was copied to Mr. Nuttall. He referred to the fact that the Defendant was “struggling” with this issue and said he was not 100% sure either way but thought that the practice of repricing of “old repaid loan” within the portfolio creates ineffectiveness. 
53.	On 8 February 2006, the Defendant informed the Claimant that it was unable to apply hedge accounting due to the lack of documentation. Mr Nuttall communicated this to Mr Gee by an email. This stated: 
“I called you this morning to continue our discussions in relation to hedge accounting. However, having left you a voicemail I thought it would be helpful to set out my thoughts on the issues prior to speaking to you. Following your request last night I also attach two documents that summarise the documentation requirements of IAS39 which are more practical than the relevant paragraphs of standard.
As you know I continue to have concerns with respect to the methods you have used in interpreting IAS39 and my research into this area is ongoing. However, we have also discussed that the key to adopting the treatment is the documentation. The requirements are onerous and failing to meet them precludes the use of the hedge accounting provisions. In my ongoing research I have noted that Nationwide only adopted the hedging provisions of IAS39 from 1 April 2005 due to the requirement to formally document their policy and strategy prior to adoption.
The formal documentation required must have been produced before transition to IFRS (which in the case of IAS39 is 1 January 2005) and must detail the hedging relationship, your risk management objectives and, therefore, the strategy for taking out the hedge. In addition it must document how and when effectiveness will be measured and how the fair value of both the swap and the mortgage assets will be determined. I understand that commercially you will have considered the risk issues during the ordinary course of business but at present it is not clear to me that you have considered and formally documented them in light of IAS39 requirements prior to the transition date. In particular it appears from our conversations with Bob Roach that the effectiveness measures were not determined until he considered them as part of the year end reporting process and our discussion over recent days in respect of the required documentation lead me to believe that whilst consideration has obviously be given to the commercial risks prior to the transition date the detailed IAS39 requirements of documentation were not considered and formally documented at the same time.
In view of these circumstances I do not believe it is appropriate for the Society to report using the hedging accounting currently adopted with respect to fixed rate mortgages. The key consideration is not the way in which you have applied the accounting requirements of IAS39 as the monetary impact of the total change in hedge fair values is probably not material but the same materiality argument cannot be applied to the disclosure of an accounting policy as IAS8 Para 8 precludes adopters from stating they have complied with a standard when in fact they have not met the full requirements but the departures are not material. Accordingly I believe the 2005 accounts should account for changes in all swaps through the income statement and the Society should if it wishes to adopt the hedging provisions at a later date note this intention in the accounts (there is no barrier to the Society adopting the hedging provisions in future from the date that the formal documentation is put in place, in addition existing swaps can be used for these purposes i.e. there is no need under IAS39 to enter into new hedging instruments).
54.	Although Mr. Nuttall said in his evidence that he was concerned in this email with the issue of substitution the email says nothing expressly about substitution. If the reference to his continuing “to have concerns with respect to the methods you have used in interpreting IAS39” is a reference to substitution he gave no advice about it because his “research into this area is ongoing”. When cross-examined he accepted that there was nothing in this email saying that substitution was not permissible. By contrast his email stated that the problem was one of documentation and that once the formal documentation is in place “there is no barrier to the [Claimant] adopting the hedging provisions in the future”. Thus, although it appears likely that the issue of substitution was raised on 1 February 2006, Mr. Nuttall, when he reported to Mr. Gee on 8 February 2006, did not say that the practice was a problem.
55.	This conclusion is consistent with at least two further documents. One would expect the existence of such a fundamental issue to have been communicated in writing to the Claimant, or at least adequately recorded in writing. It was not communicated in writing. The Defendant’s file note of 21 February 2006 produced by Mr Nuttall “to record the initial planning considerations in respect of the Society's IFRS adoption, the key issues discussed in relation to IFRS and the conclusions reached” makes no reference whatsoever to the issue of substitution. Instead it mentions only the issue of documentation in relation to IAS 39:
“Various discussions have taken place in relation to the hedging of fixed rate mortgages. The client maintained that  elsewhere in the sector societies had been allowed by their auditors to adopt IAS39 hedge accounting even though documentation was not in place in accordance with IAS39 requirements at transition. We have refused to allow MBS to adopt hedge accounting as it become evident during our work that whilst commercially the hedges in place are effective in accordance with IAS39 requirements the necessary documentation was not in place.” 
56.	Likewise, the Key Issues Memorandum for the 2005 audit recorded the agreement between the parties that hedge accounting could not be applied due to a lack of documentation:
“The Society uses interest rate SWAPs to hedge its commercial exposure to interest rate risk. However, at present the Society does not have the necessary documentation in place to comply with the requirements of IAS39, therefore, we have agreed with the Society that hedge accounting should not be adopted in the 2005 accounts. As a result of this decision an adjustment has been agreed to the draft accounts which reduces IFRS pre-tax profit for the year by £118k.”  
57.	So, pursuant to the advice of the Defendant, the Claimant did not apply hedge accounting in its 2005 accounts. The effect of this was the reduction of the Claimant’s retained profit by around £118,000, a cumulative reduction of around £361,000 of its assets and so also of its regulatory capital. The Defendant must have been aware of that. The 2005 accounts were finalised and released on 23 February 2006.  
58.	On 8 February 2006 Mr. Gee replied to Mr Nuttall requesting that the Defendant provide a “tick list” to ensure the Claimant would have the necessary paperwork in place for the 2006 accounts:
“Alastair 
Just a couple of points on the attached, with 2006 in mind:
* Can you provide the "tick list" that we had previously discussed, so that I can ensure that the paperwork that you will require to see this time next year will already be (contemporaneously) in place. 
* Can you clarify the conflict between the point in the PWC attachment and our conversation, in that we would have the policy in place for February 2006, not January 2006. As a result I would like your confirmation/clarification that we would be able to use hedge accounting (despite the policy not being documented on 1 Jan 06).”
59.	On 10 February 2006 Mr. Nuttall gave further advice about documentation and said:
“Therefore you can use and re-use an existing swap any number of times so long as you re-designate and document in accordance with your policy…...”
60.	When cross-examined Mr. Nuttall said that he had in mind that if a hedging arrangement failed the swap could be used again for a new hedging arrangement provided that it was accounted for in the income statement. However, the proviso was not mentioned in his email. When it was suggested to him that the Claimant would have understood that a swap could be used every year for a different list of mortgages he said that it would not be reasonable if the Claimant was familiar with and had read IAS 39. Given the accepted complexity of IAS 39 I consider that Mr. Nuttall’s answer was, at best, optimistic. It is more likely than not that the Claimant would have understood the advice to be an approval of substitution. 
61.	The Defendant had already received a mark up of IAS 39 from the Claimant with the understanding that the mark up would eventually form part of a hedge accounting policy. The “tick list” documentation was the next step in the process ultimately culminating in the Claimant’s Hedge Accounting Policy. Various drafts were circulated and discussed (often orally, as accepted by Mr. Nuttall in cross-examination) from February 2006 to April 2006, with the Hedge Accounting Policy being approved by Mr. Nuttall on the 11 April by email:
“Hedge Accounting
I have now reviewed your hedge accounting policy document and I am happy to confirm that I am satisfied that it meets the criteria set out in IAS 39.”
62.	It is to be noted that the Policy contemplated that a hedge would be taken for a period which would match the maturity profile of the mortgages being hedged. There was no indication that any mortgages might have uncertain fixed rate periods or that substitution would be required. 
63.	During this period, and prior to the approval of the Hedge Accounting Policy, the Claimant entered into the first two long term swaps in respect of the UK Lifetime Mortgages. A 25 year swap was taken out on 23 February 2006 and a 50 year swap was taken out on 15 March 2006.  
64.	The question of fact which must be determined is whether the Defendant was aware on 11 April 2006 that the Claimant intended to hedge its lifetime mortgages with long-term swaps. Mr. Nuttall accepted when cross-examined that at this time he knew that the Claimant offered lifetime mortgages. This appears to be in accordance with the probabilities; at the audit planning meeting in November 2005 there had been discussion of the Claimant’s business, as one would expect. 
65.	Mr. Gee gave evidence that it was “likely” that it was at this stage, between February and April 2006, that he mentioned to Mr. Nuttall and/or Ms. Taziker that the Claimant was intending to take out a long-term swap to match against UK lifetime mortgages. He said he could not recall what was said or when. When cross-examined about this he said that the taking out of the first 50 year swap was made known to the Defendant “because it featured in discussions with them at the time that the hedging policy was being finalised”. It was apparent that he had no more detailed recollection than that. Indeed it was also apparent that his “recollection” was really no more than a comment upon the probabilities. “Anything to do with hedges and hedge accounting would have been discussed with Grant Thornton.” He maintained that view notwithstanding his acceptance that the Hedge Accounting Policy as drafted was inconsistent with the Claimant’s approach to matching mortgages with swaps. “I can be certain that anything to do with hedge accounting, with hedges, with swaps and with mortgage books at that time was discussed with Grant Thornton.” 
66.	Mr. Nuttall gave evidence that he “believed” that the first time he was aware of the Claimant’s intention to hedge lifetime mortgages with long-term swaps was at a meeting on 8 May 2006. He based his belief upon the notes of the meeting. He did not claim to have a recollection of the meeting. 
67.	In resolving this issue it is necessary to have regard to the probabilities. The offices of the Claimant and the Defendant were “very nearby” to each other. Mr. Nuttall was able to drop in to spend time with his team who were conducting the 2005 audit and often met Mr. Gee and Mr. Roach. After the audit had been finalised there were oral discussions concerning the Hedge Accounting Policy. That was accepted by Mr. Nuttall. Those discussions were important to Mr. Gee because he wished to ensure that all was set for the use of hedge accounting in the 2006 audit. In that context it is more likely than not that the intention to hedge using long-term swaps was discussed. Mr. Nuttall accepted that it is necessary for the Defendant to know at the time of the audit the mortgages held by the Claimant and the swaps held by the Claimant. If that was necessary for the audit it is likely also to have been necessary when discussing and finalising the Claimant’s Hedge Accounting Policy. However, the fact that the terms of the Policy did not specifically envisage long term swaps of a longer duration than the hedged mortgages is an indication that mention had not been made of long term swaps. Mr. Gee frankly accepted that the policy as drafted, which provided that the swaps would closely match the mortgages, was not borne out by the Claimant’s practice. He could not explain why that was so. 
68.	It is also necessary to have regard to the notes of the meeting on 8 May 2006. Mr. Nuttall had a manuscript note dated 8 May 2006 which he said was of a telephone call. He had no independent recollection of the call. The note referred to the hedging of lifetime mortgages and to the “swap rate used on mortgages”. Ms. Taziker also had a note of this conversation. It is headed “IFRS Review of Hedging (updated procedures)”. The conversation involved Mr. Nuttall, Ms Taziker, Mr. Gee and Mr. Roach. Under the heading of “swaps” is the note “lifetime mortgages – swaps – 2031 and 2056”. So it is clear that there was discussion of hedging lifetime mortgages by long-term swaps. There were then further notes concerning the valuation of the mortgages. 
69.	If this had been the first occasion on which the Claimant had informed the Defendant of its intention to hedge lifetime mortgages by swaps of 50 years’ duration one would have expected that Mr. Nuttall would have raised some questions about it. One would have expected him to have queried how this fitted in with the Hedge Accounting Policy which he had approved less than a month earlier. However, there is no record of him doing so. His evidence was that he could not recall considering any issues following that “meeting” specific to lifetime mortgages. When cross-examined he said he gave the matter no thought. That suggests that he already knew that it was the intention of the Claimant to hedge its lifetime mortgages with long-term swaps. 
70.	Ms. Taziker took up the question of the valuation of the mortgages with Mr. Arthur, an actuarial analyst employed by the Defendant, on 10 May 2006. The email she sent to him included a spreadsheet which referred to swaps ending in 2031 and 2056. The documentary record is therefore consistent with Mr. Nuttall having raised no question or issue concerning long-term swaps after the phone call or meeting of 8 May 2006.  
71.	Considering (a) the probabilities and (b) the absence of thought given by Mr. Nuttall to the question of long term swaps on or after 8 May 2006 I consider it more likely than not that the Claimant’s intention to hedge lifetime mortgages by long term swaps of up 50 years duration had been disclosed to the Defendant before 8 May 2006. It is probable that the disclosure was made during the discussions concerning the Hedge Accounting Policy which ended on 11 April 2006 when the Defendant approved the policy. I accept that the terms of the policy are an indication that such disclosure had not been made but I nevertheless consider it more probable than not that the disclosure had been made before 11 April 2006. The fact is that whenever the disclosure was made neither the Claimant nor the Defendant appear to have recognised that the Hedge Accounting Policy, when referring to swaps of similar duration to the hedge mortgages, was not consistent with the Claimant’s intended practice. I therefore determine the issue of fact raised on the pleadings by finding, on the balance of probabilities, that the Defendant was aware, when it approved the Claimant’s Hedge Accounting Policy on 11 April 2006, that the Claimant intended to hedge lifetime mortgages by long-term swaps. 
The Initial Swaps in respect of the Lifetime Mortgages 
72.	On 23 February 2006, the Claimant entered into a 25-year swap with Bayern LB with a nominal value of £8.5m in respect of the UK Lifetime Mortgages. 
73.	On 15 March 2006, the Claimant entered into a further swap in respect of the UK Lifetime Mortgages, this being a 50-year swap with a nominal value of £5m. Both of these swaps were entered into before Defendant approved the Hedge Accounting Policy.  
74.	On 16 May 2006, the Risk Committee decided to replace the 25-year swap entered into on 23 February 2006 with a 50-year swap. The Claimant was “in the money” on the swap at this point. The 25-year swap was broken and £563,000 was paid by Bayern LB to the Claimant. That same day, the Claimant entered into a replacement £8.5m 50-year swap, also with Bayern LB. 
75.	This decision was made because the Claimant’s Treasury department had identified an “arbitrage opportunity”. The minutes of the Risk Committee on the 16 May 2006 detailed this:
“Mr Cowie advised of recent Treasury discussions which had identified a current window of opportunity whereby the “tear up” of an existing £8.5m 25 year Swap and its simultaneous replacement by an £8.5m 50 year Swap might place the Society in an improved position. He added that the current marked to market valuation of the 25 year Swap held and the interest rate on a new 50 year Swap allowed for an arbitrage opportunity, where, in return for the Society paying a higher fixed rate under a new Swap the proceeds of “tear up” of the existing Swap were of material commercial advantage.”
76.	Mr. Gee accepted when cross-examined that a 50-year swap was an over-hedge of the lifetime mortgages which the Claimant held. That was also apparent to the Board of the Claimant as appears from a note produced a year later by the Claimant’s Treasurer on 12 March 2007:
 “For some time the Society has been hedging long term equity release mortgages with 50 year swaps where MBS pays the swap fixed rate and receives LIBOR. It is extremely unlikely that any of the hedged mortgages will exist for a term of 50 years and perhaps a term of 20 years would be more appropriate. 20 year swap rates are however significantly higher than those of 50 years (a difference of around 0.5%).” 
77.	The Defendant was informed of the Claimant’s decision to replace the 25-year swap with a 50-year swap on 8 June 2006 when Mr Gee emailed Mr Cowie to inform him of such and asked whether the £563,000 gain made should be accounted for in the income statement or amortised over a five year period. On 14 June, Mr Nuttall responded to the effect that the Claimant was required to report the gain in its income statement. Again, as on 8 May 2006, Mr. Nuttall gave no consideration to the implications of taking out 50-year swaps to hedge lifetime mortgages.
Growth of the UK Lifetime Mortgage Business
78.	The Claimant grew its UK Lifetime Mortgage Business beyond the £21m book acquired between December 2004 and December 2005. On 27 December 2006 the Board approved the acquisition of a further £10.2m tranche of UK lifetime mortgages from New Life Mortgages (NLM) and, on 20 December 2007, the Board approved the acquisition of a further £7.51m tranche from NLM. On 23 October 2008 the Board approved the acquisition of a further £10.49m tranche of UK lifetime mortgages from NLM. 
The audit for the year ended 2006 
79.	The Directors’ Statement in the 2006 accounts noted the relationship between hedge accounting and volatility:
“Financial instruments.  At the start of 2006, the Group adopted fully a new policy in relation to hedge accounting. The Group continued to hold and acquire financial instruments in order to hedge its balance sheet position, with a view to managing the commercial impact of interest rate movements. Adoption of the hedge accounting policy permits the matching of the fair value movements relating to the hedged risk of the interest rate movement of the financial instruments and the underlying balance sheet assets. This has reduced the volatility in income statement movements especially in comparison to 2005, when the full impact of the fair value movement in financial instruments was recognised without there being a corresponding movement in the fair value of the associated assets.”
80.	The Key Issues Memorandum for 2006 illustrated how the hedging policy worked: 
“During 2006 the Society has implemented a formal hedging policy that meets the requirements of IAS 39. As a result hedge accounting has been implemented in respect of ten designated interest rate fair value hedges.
Following a review of the effectiveness of the hedges in accordance with both the Society's policy and IAS 39 two of these hedges were identified as being ineffective. As a consequence the fall in interest rate fair value on these two hedging instruments totalling £42,000 has been recognised in the income statement in full. 
The rise in the interest rate fair value of the remaining hedges was £332,000. As these hedges were effective this credit to the income statement has been offset by the decrease in the interest rate fair value of the relevant mortgage assets of £361,000 leaving an overall charge to the income statement of £29,000.”
Further Swaps in relation to the UK Lifetime Mortgages
81.	The Claimant entered into a number of swaps in respect of the UK lifetime mortgages. 
Date	Counterparty	Term	Nominal Value	
29 August 2006	Bayern LB	50 year	£5m	
28 December 2006	Bayern LB	50 year 	£5m	
26 February 2007	Bayern LB (subsequently novated to Abbey National (Santander) and not part of the claim)	50 year	£5m	
26 February 2007	Bayern LB (subsequently novated to Abbey National (Santander) and not part of the claim)	50 year	£5m	
30 July 2007	Bayern LB	50 year	£10m	
2 April 2008 	Bayern LB (subsequently novated to Abbey National (Santander))	50 year	£5m	
12 May 2008	JP Morgan	50 year	£50m	
3 June 2008	JP Morgan	50 year	£10m 	
23 February 2010	JP Morgan	9 year	£9.6m	
23 February 2010	JP Morgan	9 year	£9.6m	
15 January 2011	Royal Bank of Scotland	20 year	£5m	
28 December 2011	Santander/Abbey National	45 year	£5m	
27 February 2012	Santander/Abbey National	45 year	£5m	
27 February 2012	Santander/Abbey National	45 year	£5m	

82.	Certain of these swaps were discussed in evidence with Mr. Gee. The first of these swaps, that is, the swap entered into on the 29 August 2006, was entered into in anticipation of the acquisition of matching lifetime mortgages from NLM (with whom, as explained by Mr. Gee in cross-examination, the Claimant had a pre-emption right on any disposal by NLM). The minutes of the Treasury Committee dated 29 August 2006 recorded:
“As swap rates had reduced it may be appropriate to take a long term swap against the proposed acquisition of NLM fixed rate equity release mortgages.”
83.	Such an acquisition had not yet been approved by the Board but was approved on 28 September 2006.  It was suggested to Mr. Gee that this was a gamble on short-term movements in long-term interest rates but he did not accept that suggestion. He said there was certainty of acquisition by reason of the pre-emption right. It was submitted on behalf of the Defendant that this swap was “not entered into in order to hedge an asset that the Society had committed to purchasing”. That is strictly true but in circumstances where an acquisition was anticipated and where the Claimant had a pre-emption right the point appears to me to be unremarkable. 
84.	Mr. Gee accepted that the rationale for taking 50-year swaps instead of 20- year swaps was explained by Mr. Cowie to the Board of the Claimant on 16 January 2007 and 25 January 2007. In essence the reasoning was that using a discounted cash flow analysis it was cheaper to take a 50-year swap than a 20-year swap. This was further explained by Mr. Walker in a note to the Board dated 12 March 2007 to which reference has already been made. It was judged, assuming a discount rate of 5.25%, that the taking of a 50-year swap was likely to be beneficial to the Claimant because, looking at historical data concerning interest rates since January 1975, “LIBOR was unlikely to fall to the breakeven levels calculated by the model.” Mr. Gee agreed that this meant taking a different view from the market as to where LIBOR would be in 50 years’ time. 
85.	In 2007 two further 50-year swaps of £5m each were taken out. Mr. Roach’s note to the Risk Committee dated 9 March 2007 identified the mortgages which would be hedged by a swap of £10m. Whereas the swap would end in February 2057 the lifetime mortgages were stated as ending on 31 December 2034. 
86.	A later meeting of the Risk Committee on 17 July 2007 also discussed and agreed the purchase of a 50-year swap in anticipation of the acquisition in the fourth quarter of the year of a further portfolio of lifetime mortgages from NLM. 
87.	In relation to the 2007 swaps it was again submitted on behalf of the Defendant that (in relation to the February 2007 hedge) there were no lifetime mortgages which needed hedging and (in relation to the July 2007 hedge) that it was not required to hedge a specific acquisition of lifetime mortgages. However, the documentary record shows that the February 2007 swap was required to hedge a specific list of mortgages and that the July 2007 swap was required to hedge a possible later acquisition which it is accepted did take place on 31 December 2007 though in a lesser amount. Whilst it is clear that Mr. Cowie sought to buy swaps at what were thought to be favourable prices it is also clear that the underlying motivation for the purchases was the desire to hedge actual or anticipated mortgages. 
88.	On 27 March 2008 at a Board meeting the Claimant decided, on advice from Mr. Cowie, to relax the “counterparty limit” so that a further 50-year swap could be taken out with Bayerische in the sum of £10m. Although Mr. Gee accepted that there had been no new mortgages to hedge and that there was no urgent need to breach the counterparty limit, Mr. Cowie is recorded as saying that the opportunity was to hedge the Claimant’s balance sheet in relation to longer term sterling assets. Further, there was in fact a further purchase of UK lifetime mortgages in October 2008 in the sum of £10.48m from NLM. So swaps of £10m can be justified in 2008. 
89.	However, three swaps totalling £20m were purchased in 2008 so that there would appear to have been an “over-hedging” by about £10m. It is possible (because this had happened in 2006 and 2007) that the further purchases of swaps in 2008 were in anticipation of further purchases of lifetime mortgages but which in the event (and unlike 2006 and 2007) never took place. The minute of the Treasury Committee held on 27 May 2008 referred to the “potential to acquire lifetime mortgages via our agreement with NLM” together with “the possibility of pre-arranging £10m of hedging, thereby taking benefit from current levels on LIBOR.” This confirms the possibility of further purchases. However, the minute also records that “this introduces issues relating to the effectiveness of swaps under IFRS and that this issue should be investigated further.” That note suggests a recognition that there might in fact be over-hedging. This was noted further on 12 June 2008 when the minute of the Treasury Committee recorded that “pipeline commitments of this nature should be recorded in the gap analysis reports. It was noted that recent transactions had resulted in a significant increase in the total value of swaps outstanding.”
90.	Counsel for the Claimant submitted that the records in fact showed a list of the mortgages against which each swap was matched though I was not taken to each such document. But Counsel also referred to a graph (appendix 4 to the Closing Submissions) which indicated that the value of mortgages and swaps generally rose together. Whilst the matching was not exact, the graph did not suggest serious over-hedging (save for one period which was explained by a hedge against gilts). Counsel for the Defendant submitted that the graph showed the swaps to be usually in excess of the mortgages. That may be so from about May 2008 in the case of the UK mortgage book but the swaps and mortgages generally rose together.  
91.	There were further swaps taken out in 2010-2012. I was told that they were bought because the value of the lifetime mortgages increased as interest on the mortgages was compounded.  
The Spanish Lifetime Mortgage Business
92.	In 2007, the Claimant decided to enter into the Spanish Lifetime Mortgage market. Consideration of this commenced in about March 2007. The commercial reason for doing so was the same as that which motivated the entry into the UK Lifetime Mortgage Business – that this market was not as competitive as other markets – albeit the foreign element of the business was recognised as giving rise to complications. Like the UK Lifetime Mortgage market, the Claimant considered that swaps were required to hedge the interest rate risk. Further swaps were also needed in order to hedge the foreign exchange risk arising from the fact the Claimant was using its savers’ sterling accounts to fund lending in Euros.
93.	On 20 December 2007 the Board approved the launch of the Spanish Lifetime Mortgage book. The Claimant commenced its lending operation in March 2008. 
Swaps in respect of the Spanish lifetime mortgages
94.	In order to hedge the interest rate risk arising out of its Spanish Lifetime Mortgage Business, the Claimant entered into a series of swaps. 
Date	Counterparty	Term	Nominal Value	
2 July 2008	JP Morgan	10 year	€5m	
2 July 2008	JP Morgan	15 year 	€5m	
2 July 2008	JP Morgan	15 year	€5m	
2 July 2008	JP Morgan	20 year	€5m	
9 July 2008 	Royal Bank of Scotland 	10 year	€5m	
25 July 2008	JP Morgan	25 year	€5m	
9 September 2008	JP Morgan	5 year	€5m	
11 March 2009	JP Morgan	15 year 	€2.5m	
2 July 2009	JP Morgan	15 year	€2.5m	
2 July 2009	JP Morgan	20 year	€2.5m	
20 July 2009	JP Morgan 	30 year	€5m	
4 January 2010	JP Morgan	10 year	€2.5m	
15 January 2011	Royal Bank of Scotland	20 year	€2m	
28 May 2012	Santander/Abbey National	25 year	€5m 	

The Audits
95.	The Defendant approved the Claimant’s accounts for the 2006, 2007, 2008, 2009, 2010 and 2011 financial years, issuing an unqualified audit opinion on each occasion. As I have already noted, the Defendant has admitted that this auditing was negligent in that the accounts were misstated as a result of the misuse of hedge accounting. The Claimant’s Hedge Accounting Policy, which had originally been approved on 11 April 2006, remained the same for each year.   
96.	Mr. Swales, the audit engagement partner for the audits from 2008 to 2011, was of the view that substitution of mortgages was acceptable. In his witness statement he said:
“My understanding at the time, based on my previous experience of the application of hedge accounting, was that maturing mortgages in a hedge arrangement could be replaced with new mortgages as and when they matured, and I would not therefore have been particularly concerned by the mortgage maturity dates.”
97.	It seems clear that the Claimant proceeded on the basis that substitution was indeed acceptable. This explains why it recorded the maturity dates of the swaps as the maturity dates of the mortgages. This did not trouble Mr. Swales. Indeed he confirmed when cross-examined that it was because of his view on substitution that he thought the Claimant’s Hedge Accounting Policy was “okay”.  
The views of the Regulator
98.	The Financial Services Authority (the FSA), and later the Prudential Regulation Authority (the PRA), reviewed the Claimant’s capital adequacy through the Supervisory Review and Evaluation Process (the “SREP”). They made “advanced risk response operating framework” risk assessments (“ARROW” assessments). 
99.	The FSA carried out periodic reviews of the Claimant’s Internal Capital Adequacy Assessment Process (ICAAP) documents, sending periodic risk assessment letters and setting the FSA’s Individual Capital Guidance (ICG) for the Claimant. 
100.	The Claimant’s Financial Risk Management Policy (the “FRMP”) was produced by the Claimant’s Treasurer, considered by the Risk Committee and then approved by the Board. The purpose of the FRMP was to enable the Board to ensure that financial risks were being managed appropriately.  
101.	From 2009 to shortly before the Defendant’s negligence came to light, the Claimant and the FSA were engaged in intermittent correspondence, with some concerns being raised by the FSA as to the Claimant’s lifetime mortgage book alongside more general issues. 
102.	The FSA conducted an ARROW risk assessment and SREP of the Claimant in February 2009. By a letter dated 2 June 2009, the FSA informed the Claimant that it was considered to be “very much at the riskier end” of its peer group. Particular concern was expressed about the Claimant’s lifetime mortgage business, requiring the Claimant to adduce “robust evidence that the Board has satisfied itself of the short and long term risks to the Group and that it has adequate expertise to consider and mitigate those risks involved.” The FSA concluded by stating that it was setting a shorter regulatory period and applying a penal capital element in respect of the lifetime mortgages. 
103.	Mr. Cowie responded to that letter on 17 June 2009. He said that the aggregate balances of lifetime mortgages were expected to be between 16 and 17% of the total loan book but that it was appropriate to reduce the proportion to 15%. There was no “further appetite” to extend the portfolio.  
104.	The FSA conducted another ARROW visit in November 2009 as part of the Claimant’s Risk Mitigation Programme. On 12 February 2010, the FSA wrote to Mr. Cowie. This letter recorded that the Claimant now intended to reduce the proportion of lifetime mortgages within its books to 10%, albeit that this would take some time. The FSA remained concerned about the Claimant’s business, especially the Spanish lifetime business, and noted that swap counterparties allowed either party to break the swap after 5 years which raised “the question of how exposed the Society would be if interest rates were to rise”.   
105.	On 10 March 2010, the Claimant responded. It was noted that Bayerische Landesbank, which had been a leading provider of Swaps to the building society sector in the UK for two decades, was intending to withdraw from the UK sector and so was likely to exercise its break clause. In that event the Claimant intended to cover the hedging gap with further forward hedges but also to use its reserves and fixed interest capital as a hedge. It was further noted that other counterparties were not likely to exercise their break clauses but, on the contrary, to replace swaps previously provided by Bayerische. 
106.	A further ARROW risk assessment was carried out in the autumn of 2010. The FSA’s conclusions were communicated in a letter dated 5 November 2010. It was noted that there was as yet insufficient evidence to judge that the Claimant was “materially less of a risk”. There had been no significant rebalancing and the Claimant remained “at the riskier end of its peer group”. It was noted that lifetime mortgages were almost 20% of the portfolio. The FSA remained to be convinced that the Claimant had sufficient expertise to assess and mitigate the risks in such lending. It required a “more rigorous assessment”. It was noted that there was no external validation of the Claimant’s business and such validation by actuaries was required. 
107.	The Claimant then engaged Redmayne Consulting, a firm of actuarial consultants, to verify its models and to make recommendations (the “Redmayne Review”) (the Claimant agreeing with the FSA that it would implement the recommendations). The FSA then closed this aspect of the risk management programme. 
108.	On 16 September 2011 the FSA communicated its SREP Assessment (having carried this out in August 2011). It noted the Redmayne Review and required a work plan for implementing its recommendations. Reference was also made to a Risk Mitigation Programme which would enable the Claimant to understand the risks of its lifetime mortgage book and mitigate them effectively.  
109.	On 12 June 2012, the FSA commenced its SREP and Supervisory Assessment with an introductory visit to the Claimant’s premises. The FSA then, by letter of 18 June 2012, set out its initial impressions of the Claimant’s business. It was observed that the Claimant’s “existing balance sheet places it at the riskier and more complex end of its peer group” and the FSA indicated that it would look to senior management to demonstrate that an appropriate risk governance framework was in place. The FSA suggested that the ratio between executive and non-executive directors might be reconsidered. This letter also expressed concern at the Claimant’s future capital position and its funding. Mr. Worsnip, the Claimant’s regulatory capital expert, accepted that this letter represented a demand by the FSA for action now. He explained that the action required was in terms of a greater understanding of risk, a more appropriate risk governance framework and an increased focus on how its capital requirements would be met. 
The Claimant’s sale of lifetime mortgages
110.	The Claimant resolved to sell some lifetime mortgages in order to improve its risk profile and its capital position. It was proposed to sell some £18m of lifetime mortgages. However, to prevent the respective swaps becoming ineffective with the consequence that the Claimant might have to bear the heavy mark to market losses under the swaps the Claimant wished to substitute the sold lifetime mortgages with longer term fixed rate mortgages. The Defendant was asked about this on 31 July 2012 and replied on 20 September 2012 that that was acceptable so long as the relevant effectiveness and documentation criteria applied. That would only be known when the new mortgages were issued. In the event the issue of new mortgages proved difficult and very few were issued. Ultimately, only some £4.8m of lifetime mortgages were sold by December 2012. The greater part of that sale was possible without substitution because of capacity in the Claimant’s “gap analysis”.
The provision of collateral to the swap counterparties
111.	By the third quarter of 2012 the Claimant had provided £39.29m in cash collateral to the swap counterparties, representing the amounts by which the Claimant was “out of the money” with regard to the swaps.  
The FSA’s letter dated 16 January 2013
112.	On 16 January 2013, the FSA wrote to the Claimant setting out another risk assessment. In view of the importance attached to this letter by the Defendant I set out substantial parts of it: 
“Overall Assessment 
The business model of the Manchester Building Society is one of the least sustainable in the sector. This has been brought about by poor strategic decision-making that has resulted in a low-yielding yet higher risk asset book, a capital structure under pressure, and a high risk funding profile. Major improvements are required in the areas of risk management and governance to enable the Board to effectively implement its strategy to de-risk and strengthen the business.
The stated strategy of de-risking the balance sheet requires increased focus and enhanced control and oversight from the Board. The Society's assets are poorly positioned to deal with the challenges posed by a low interest rate environment. There has been a steep reduction in the income on assets, which is primarily linked to LIBOR/BBR, the rate of which has become materially disconnected from the cost of liabilities, which are driven by the cost of best-buy postal accounts. This has heavily reduced the Society's margin and restricted the scope for increasing the general reserve through retained profits. Repairing and improving the Society's margin will remain a key focus for a number of years, given the implications of CRD4 on the relatively high levels of subordinated-debt and PIBS the business is reliant on. The Society is also vulnerable from what we regard to be an imprudent funding profile, reliant as it is on rate-sensitive products, an increasingly large proportion of which are instantly accessible. 
The Board needs to deliver significant improvements in the firm's approach to risk management, and ensure that the chosen strategy delivers changes to the business model which increase long-term capital sustainability, and improve the stability of the Society's funding profile.
…
Risk Management and Culture 
The risk management framework is inadequate and does not enable the Board to sufficiently monitor and mitigate the level of risk to which the Society is exposed. We were very unsatisfied with the effectiveness of the Society's ICAAP, high-level risk culture and embedding and understanding of the risk appetite. The weakness in controls and cultural observations which underpin this conclusion are detailed in Appendix 3. 
We require substantial improvements to be made in the risk management framework. We have concluded however, that without external support the Society will not be able to make the advances required in the timeframe we think is necessary. Therefore, the Board should seek external assistance to help it determine appropriate expectations for the Manchester in this area. Having done this, it should re-evaluate the resources it has devoted to risk within the Society and make changes as required. We will invite the Chairman and his successor to the PRA in May 2013 to present to us the progress and improvements made. 
The weaknesses in the Society's risk management framework have been reflected in the application of a 30% scalar which is applied to the Society's Individual Capital Guidance. We will review the application of this scalar at the next capital assessment, scheduled for 2014.
Recovery and Resolution Planning 
Given our concerns around the sustainability of the Society's current business model and the risks inherent in its capital and liquidity profile, it is important that you carefully consider the contingency options available, including the option of merging with another Society. As part of this work, you will need to assess the expected accounting treatment and the extent to which it would present a barrier. Therefore, we require you to work with your auditors to develop a framework for calculating the Fair Value Adjustment that would be applicable in the event of a merger with another Society. We will also discuss the output of this exercise at the May 2013 meeting.”
…
Appendix 3 – Identified Weaknesses in the Risk Management Framework and Risk Culture 
Lifetime Mortgages - Interest Rate Risk and Foreign Exchange Market Risk 
The ICAAP does not address the non-credit risks posed by the Lifetime Book in sufficient detail. 
The Society holds a significant amount of Lifetime Mortgages and accompanying interest rate swaps on its balance sheet. Whilst this business may have seemed benign in the mid-2000's, the falls in LIBOR and Gilt rates have crystallised numerous adverse effects on the Society's balance sheet, margin and capital position. There is a risk that the existing swaps in place could be unilaterally broken by the counterparty; this has a contingent impact on the basis risk profile, and ongoing management of interest rate risk. We note that over £40m of Lifetime assets are based in Spain, and denominated in Euros. This exposes the Society to long-term changes in the Spanish, and wider Eurozone economy, which are only partially mitigated by the short-term forward contracts in place.”
113.	It is apparent from this letter that the FSA remained very concerned as to the Claimant’s risk profile and required the Claimant to improve that profile together with its risk management and its governance. Mr. Worsnip accepted that the primary reason for increasing the regulatory capital requirement by imposition of the 30% scalar was the risk of counterparties to the swaps exercising their right to break the swaps.    
114.	Mr. Cowie prepared a memorandum for the board with regard to this letter. He acknowledged that it represented a “fundamental challenge” to the board, that the Claimant had a “weak structural position” and that its “risk profile had been particularly exposed” over the last two years.  He concluded:
“The Board need to be aware that there is unlikely to be a dramatic relaxation of the ICG scalar of 30% for some time to come, certainly while the Society remains exposed to the scale of break cost risks on the long term SWAPS. The main way to reduce the impact of the scalar in the next two years remains through the staged sale of UK lifetime loans and their replacement with other long term fixed rate assets that have a lower capital consumption. Otherwise, we remain dependent on a recovery in the long term SWAP rates which will both reduce the capital requirement on remaining lifetime loans and also capital tied up in IFRS fair value adjustments. ”
The discovery of the error and the events thereafter 
115.	In March 2013, Mr. Bartlett of the Defendant suggested that in fact hedge accounting might not be applicable to the Claimant’s accounts. The Claimant sought a second opinion from PwC who advised at the end of March 2013 that hedge accounting could not properly be applied. The Claimant informed the FSA. The consequence was that the Claimant did not have sufficient regulatory capital. It was required to have regulatory capital of over £51m but its restated accounts (without hedge accounting) stated that its capital was only £36.7m. The reduction was almost entirely because, instead of a “loss from derivatives” of £855,000 in the original 2011 accounts, the loss in the revised accounts was almost £27m. 
116.	Thus emergency steps to recapitalise were required. The Claimant issued £18m of profit participating deferred shares on 7 April 2013. That action was proposed by the PRA which had assumed the role of regulator on 1 April 2013. The PRA also asked the chairman, Mr. Prior, to resign.  
117.	On 15 April 2013 Mr. Harding was appointed a non-executive director and on 17 April 2013 he was appointed chairman. He was of the view that the preservation of capital was the Claimant’s first priority. He resolved that it was necessary to break the swaps to avoid the risk that further adverse movements in future interest rates would take away even more of the Claimant’s capital.
118.	On 14 May 2013 the PRA wrote to the Claimant in these terms:
“The Society's decision to change the accounting treatment of lifetime mortgage hedges has now crystallised the primary risk for which the Scalar had been applied. Therefore, we have made the decision that the Scalar should now be removed …”
119.	On 29 May 2013 the board of the Claimant authorised Mr. Gee to close out the swaps. They were broken on 6 and 7 June 2013 at a cost of some £32.7m. 
120.	In consequence the Claimant’s mortgages were unhedged and therefore exposed to interest rate risk. The sale of the UK lifetime mortgage book would have immediate and positive effects on the Claimant’s position and a sale was considered. The perceived disadvantage to such a sale was that the Claimant would lose the profit being generated by the book. However, immediate capital preservation had to be the overriding goal and the PRA encouraged a sale. Thus in December 2013 it was sold for £68.4m. This was a small premium on its “par” value (that is, the total amount loaned plus the rolled up interest to that date). The Spanish lifetime mortgage book was not sold because the Claimant did not receive an offer at or close to “par”.  The Claimant ceased lending and employees were made redundant. The Claimant has proposed a return to lending but the PRA has stated that it does not consider that the Claimant has sufficient capital to do so. 
The individual heads of loss
121.	The Claimant has claimed certain heads of loss. They do not, I was told, cover the totality of the losses suffered by the Claimant since 2013 but only those which can properly, and in accordance with the applicable legal principles, be claimed from the Defendant. 
(i) The cost of breaking the swaps in June 2013
122.	There is no dispute as to the quantum of the actual break costs. They were £32.7m. There is however a dispute as to the quantum of the “transaction” or “penalty” costs included within the break costs. The Claimant says there were such costs in the sum of £1,449,557. The Defendant says they were much less in the sum of £193,000. Depending on how certain disputes are resolved the Defendant accepts that it may be liable in respect of these “transaction” or “penalty” costs. Before resolving the dispute as to the quantum of those costs it is sensible to deal with the major dispute concerning this head of loss, namely, whether, the break costs are recoverable. 
123.	As a matter of analysis the parties have considered the recoverability of the break costs by asking four questions: (i) Was the negligence “a cause in fact” of the loss (essentially asking whether, but for the negligence, the loss would have been incurred); (ii) Was the negligence “a cause in law” of the loss (essentially asking whether the negligence was an effective cause of the loss); (iii) Was the loss within the scope of the Defendant’s duty of care; and (iv) Was the loss too remote? These separate questions may be linked; aspects of causation have been described by Lord Sumption as filters which ultimately depend on “a developed judicial instinct about the nature or extent of the duty which the wrongdoer has broken”; see Hughes-Holland v BPE Solicitors [2017] 2 WLR 1029 at paragraph 20.  I consider that they are linked but that it is helpful, and perhaps necessary, to consider each of them separately, even though the same considerations may be relevant to one or more of the questions.  
Cause in fact; the “but for” test
124.	The Claimant’s case is that but for the Defendant’s negligence it would not have entered into further long-term interest rate swaps and would have closed out the swaps it had entered into before April 2006. The Claimant has the burden of proof on this case. 
125.	The Defendant’s case is that, had it not been negligent, the Claimant would have taken out an alternative form of hedging, namely, balance guarantee swaps (“BGS”), and would have suffered more losses than it has in fact suffered and so the claims fails. This positive case, on which it is accepted that the Defendant bears the burden of proof, has given rise to a number of issues.
126.	I shall first consider the Claimant’s case (notwithstanding that, apart from the case based upon BGS, I did not understand counsel for the Defendant to dispute it). Mr. Gee gave evidence that if the Claimant had been informed by the Defendant in April 2006 that hedge accounting was not available he was “absolutely sure” that the Claimant would not have taken out any more long term swaps. He was not sure of what would have happened to the swaps taken out in 2006 but he thought that the “logical decision” would have been to close out those swaps. 
127.	The experience of 2013 (when the Claimant decided to close down all the swaps) tends to support this evidence but it must be borne in mind that the situation in 2013 was stark and serious and not comparable to the hypothetical position in 2006. But, given that long term swaps exposed the Claimant to the risks of volatility and to consequential higher demands for regulatory capital, it appears to me more likely than not that the Claimant would not have taken out any more long term swaps. The swaps which had been taken out in 2006 were three 50-year swaps (one in March – before 11 April – and two in August and December – after 11 April). These would have been recognised as giving rise to the risks of volatility and to consequential demands for regulatory capital and so I think it more likely than not that the existing swaps would have been closed. I have noted the fact that the 2005 accounts had to be prepared without the benefit of hedge accounting (and so gave rise to a profit reduction and consequential reduction in capital of £118,000) and that that did not dissuade the Claimant from taking out a 50-year swap in March 2006. That might suggest that the same decisions would have been taken regardless of the Defendant’s advice. However, I do not consider that it does because the Claimant had been told that there was no reason why in principle hedge accounting could not be used. It was only told that its documentation was not in order and that when it was in order hedge accounting would be permissible. 
128.	I therefore turn to consider the Defendant’s case that the Claimant would have taken out alternative hedging in the form of BGS. 
Counterparties willing to issue BGS
129.	The first issue is whether there would have been counterparties willing to enter into BGS with the Claimant. 
130.	Mr. Rule, a derivatives expert, gave evidence on behalf of the Claimant to the effect that there would not have been such counterparties. He was a somewhat loquacious witness but nevertheless answered the questions put to him clearly, notwithstanding that his answers could have been expressed more shortly. His view on this topic was very firm. In his report he expressed himself to be “sure”, indeed “very sure”, that no entity would have been prepared to enter into a BGS with the Claimant. The basis of his view was that a counterparty would not have been able to offset the risk by selling an equal and opposite BGS to another counterparty. There were particular, unusual and unattractive risks associated with an equity release BGS. In his oral evidence he described BGS as rare instruments though he accepted that they had been used in the context of equity release mortgages in the period after 2013. He also said in his report that there was no evidence of a liquid market in BGS; there was no “screen” evidence of a two-way market in such products. He had searched for evidence of relevant transactions and found none. He said there was a “total lack of empirical evidence to suggest business had been transacted in this form”.
131.	Mr. Ahuja, another derivatives expert, gave evidence on behalf of the Defendant to the effect that there would have been such counterparties willing to enter into BGS with the Claimant. He also tended (though not always) to give very long answers but, like Mr. Rule, gave clear answers to the questions put to him. He relied upon the use of BGS in large scale securitisation deals regarding mortgages (of a standard type, not equity release mortgages). This surprised me because it was a very different type and scale of transaction. However, there were other matters upon which he relied for saying that there would have been an available counterparty. (i) In 2005, when working with RBS, he had executed a BGS with a lender entering the equity release market in Australia. He regarded the counterparty risk in that case as similar to that involving the Claimant. (ii) He noted that the Claimant had been provided with marketing materials by Lehman Brothers in March 2008 and by RBS in August 2010. He suggested that they indicated the appetite of Lehman Brothers and RBS to engage with the Claimant on potential hedging solutions including BGS. (iii) He relied upon his experience when working for the regulatory authorities when he “observed” derivatives solutions including BGS products, specifically for equity release business, being offered and executed between 2009 and 2013. In addition, reliance was placed by the Defendant on a review by Mr. Ahuja of the reports of several building societies which, it was said, showed that they used BGS. Reliance was also placed on a 2009 review by RBS of mortgages issued by New Life Mortgages, RBS having been asked “to quote for a swap in order to hedge the long term nature of the assets purchased.”    
132.	The experience of Mr. Ahuja at RBS and with the regulatory authorities suggests that BGS in support of equity release business are perhaps not as rare as Mr. Rule suggested. But this cannot be taken very far because little if any evidence was available as to the terms of the mortgages or of the BGS mentioned by Mr. Ahuja. Further, I did not regard the presentations by Lehman and RBS to the Claimant as cogent evidence of the availability of BGS to the Claimant. I was impressed by Mr. Rule’s evidence that those in the marketing department of a financial institution may suggest products to prospective clients which those responsible for operating the business, and in particular off-setting the risk, may find difficult to support (especially in the case of Lehman Brothers in March 2008, some six months before that institution collapsed). The reports of other building societies did not in terms mention the use of BGS (Mr. Ahuja could only say that the language used suggested “some form of BGS” and that in one case what was used was “the same as BGS”). In any event they did not relate to 2006 but to 2011-2015.  The 2009 document from RBS did not mention BGS. If any of these reports did in fact refer to BGS there was no evidence of their terms. 
133.	Whilst issues of confidentiality may have prevented evidence in the form of term sheets relating to a comparable BGS being presented to the court the fact is that the court was not presented with the term sheet of any comparable BGS issued to a building society in or about 2006 (or indeed later). The absence of any such evidence makes it very difficult for the court to accept, in the face of Mr. Rule’s evidence, that there were, on the balance of probabilities, counterparties willing to provide the Claimant with BGS for its equity release business in 2006. Having considered the evidence of the two experts and the submissions of counsel, I have concluded that, whilst it is possible that there were such counterparties, it cannot be shown to be more likely than not that there were such counterparties.   
134.	My finding on this issue makes it unnecessary to consider the further reasons put forward as to why BGS was not a realistic alternative to “plain vanilla” interest rate swaps. I shall therefore express my views on those issues more shortly.
135.	Permission from the regulator: Mr. Rule gave evidence that MBS was not authorised to enter into BGS, an exotic derivative, as opposed to plain vanilla interest rate swaps. Mr. Ahuja agreed that permission was required from the regulator but gave evidence that the regulator was more likely than not to have permitted the Claimant to use BGS based upon its assessment of the capabilities of the Claimant’s management and treasury teams. Mr. Ahuja   had in mind that the use of BGS would have mitigated rather than increased the Claimant’s exposure to uncertain cash flows from complex loans. There is evidence that in the period 2009-2013 the regulator was less than impressed by the Claimant’s management. Whilst this evidence does not relate to 2006 it gives me cause to doubt that the regulator would have approved the use of an exotic derivative such as BGS by the Claimant in 2006. Mr. Ahuja accepted that the regulator would regard BGS as an exotic instrument and that he, Mr. Ahuja, had no experience of a regulator giving such permission to a building society. Thus, whilst it is possible that consent would have been given, I am not persuaded that it is more likely than not it would have been given in 2006.
136.	The Claimant’s ability to manage BGS: Mr. Rule gave evidence that the treasury system operated by the Claimant was basic and allowed only the entry of the simplest cash-flows. It would not have allowed for the pricing and management of BGS. Mr. Ahuja gave evidence that much of the work could or would be transferred to the BGS provider, leaving the Claimant with a simpler set of considerations to be managed. I therefore gained the impression that Mr. Ahuja had a similar view of the capabilities of the Claimant’s treasury department to that of Mr. Rule. Although Mr. Ahuja did not have experience of operating a book of BGS on behalf of a building society it is to be noted that Mr. Rule, when the matter was put to him in cross-examination, thought that outsourcing would have been possible and sensible. Overall, my conclusion on this point was that it was not only possible that BGS could be managed by the Claimant so long as much of the work was transferred to the BGS provider, but also that such outsourced management was, on balance, more likely than not.     
137.	The cost of BGS and the “effectiveness” of BGS as a hedge: These are uncertain and quite complex matters, no doubt because there is no liquid market for BGS and there is no standard model for pricing BGS. Hedge effectiveness is uncertain because there is no evidence of the terms of any BGS which would actually have been available to the Claimant. In the light of my conclusion that there are two reasons why BGS were not a realistic alternative to interest rate swaps it is unnecessary to consider the detailed evidence and submissions on these further topics. Given the uncertainty surrounding both topics it is unlikely that the Defendant could show that either the cost or effectiveness of BGS was such as would indicate that the Claimant was more likely than not to have accepted BGS as an alternative form of hedging.  
138.	It was urged upon the court that the Claimant was very keen on the equity release market and would have looked favourably upon alternative hedging arrangements such as BGS. But in view of the likely lack of counterparties for this type of business and the likely unwillingness of the regulator to approve the use of an exotic hedging device by the Claimant BGS cannot be shown to have been a likely alternative to a plain vanilla interest rate swap. 
139.	I have therefore concluded that it is more likely than not that but for the negligence of the Defendant the Claimant would not have suffered the costs of breaking the swaps in 2013. However, it does not follow that the negligence of the Defendant was a cause in law of that loss because the negligence may only have provided the occasion for the loss rather than being an effective cause of it.
Cause in law; the requirement that the negligence be an effective cause of the loss
140.	It was submitted on behalf of the Claimant that the negligence of the Defendant was an effective cause of the loss because it was “sufficiently closely connected to the negligence” to be regarded as caused by it. It was said that the “key” to distinguishing between negligence which created the opportunity for loss and negligence which caused the loss was the “degree of connection between the negligence and the loss”. 
141.	It was submitted on behalf the Defendant that this question required an application of “the court’s common sense” (see Galoo v Bright Grahame Murray [1994] 1 WLR 1360 at pp.1375-6).  The court was invited to find that the losses suffered in 2013 were caused by the Claimant’s own commercial decisions to enter into such swaps and by the collapse in interest rates since the financial crisis.  
142.	In considering this question it is necessary to set out Mr. Harding’s account of the reasons for closing down the swaps in 2013. Mr. Harding explained the effect of the Claimant being exposed to volatility in a manner which was not challenged in cross-examination and appeared to me to make good sense: 
“Without hedge accounting, the Society was required to recognise the exposure to fair value interest rate risk arising from the swaps in its income statement. This had two adverse effects upon the Society going forward (over and above the loss sustained by recognising the fair value of the swaps in the income statement without a hedge offset). First, the profit and loss of the Society (and therefore the capital reserves) became exposed to the full volatility of the mark to market value of the swaps as they changed over time. It is highly dangerous for a smaller building society such as the Manchester to have its capital reserves at the mercy of fluctuations in the market that are outside its control. Secondly, exposure to these risks would mean that the PRA would require a greater level of capital to be held by the Society to protect it against these risks. The Society therefore found itself with a greater capital requirement whilst simultaneously having lost a large amount of capital (as a consequence of the removal of hedge accounting) and also having its remaining capital exposed to the vagaries of the market.”
143.	It was because of the Claimant’s balance sheet being exposed to volatility in 2013 that the Claimant decided, with the encouragement of the regulator, to close out the swaps.  Mr. Harding said:
“…..it was clear to me, on my first day in the post, that the Society needed to break the interest rate swaps which it had previously matched against its fixed rate and lifetime mortgages because of the volatility they caused, which seriously affected and imperilled the Society's capital position. I understood the PRA to share my view that this must happen.”
144.	Shortly before the swaps were sold in June 2013 the markets moved in the Claimant’s favour. Mr. Harding said:
“This sudden movement further illustrates the volatility of the position and the fact that these movements were outside the Society's control. The movement of the markets in the Society's favour was welcome in the short-term but reinforced the fact that, if the Society continued to hold the swaps, it was vulnerable to future shifts in the interest rate. The Society was required to perform a standardised interest rate stress test to predict the effect on its capital position of a 2% change in interest rate. If it had continued to hold the interest rate swaps I have no doubt that the Society would have failed the stress test and, therefore, been in the position where it had insufficient capital to continue to hold the interest rate swaps.”
145.	In his cross-examination he put the matter clearly and simply:
“My view was that we had got an open position and we should begin to close it out.”
146.	To say that the Defendant’s negligence merely provided the opportunity for the Claimant to suffer loss caused by the financial crisis of 2008 and the resulting substantial and sustained fall in interest rates and was not an effective cause of the Claimant’s loss would, in my judgment, seriously underplay the causative potency of the Defendant’s negligence. The use of hedge accounting was intended, as recognised by the Defendant in November 2005, to mitigate the effects of volatility in the fair value of the swaps. Once it was appreciated that hedge accounting was not available in 2013 the Claimant’s balance sheet was exposed to the full and unrestrained effects of volatility in the fair value of the swaps and it was those effects which led to the Claimant deciding to close down the swaps and thereby to incur a substantial loss. In my judgment the Defendant’s negligence was an effective cause of the loss suffered in 2013 when the swaps were closed down. Applying the Claimant’s submission there was a very close connection between the negligence and the loss. Applying the court’s common sense, as the Defendant submitted the court should do, it is sensible to find that the Defendant’s negligence was an effective cause of the loss suffered in 2013 in circumstances where the use of hedge accounting was intended to mitigate the effects of volatility in the fair value of the swaps and it was such volatility which led to the closure of the swaps in 2013.
147.	Counsel for the Defendant submitted in his oral closing that the accounting treatment of the swaps and mortgages was to be distinguished from the actual economic consequences of the swaps which would have occurred whatever the accounting treatment. The Claimant’s loss was caused by the Claimant’s decision to hedge its lifetime mortgages by taking interest rate swaps, not by the accounting treatment. That decision, on which the Claimant received no advice from the Defendant, led the Claimant to incur a loss on the value of the swaps when interest rates fell. That loss was measured by the mark to market value of the swaps in 2013 and had in reality been suffered by the Claimant before it decided to break the swaps. 
148.	It is of course correct that the accounting treatment of the swaps and mortgages is different from the actual economic consequences of the swaps. The latter will occur whatever shape the former takes. But the difficulty with this argument, notwithstanding the clarity with which it was advanced, appears to me to be that the accounting treatment of the swaps and mortgages had real consequences in that, if the advice that hedge accounting could be used was not correct, then the Claimant’s profits as recorded in the balance sheet would be volatile as would be the Claimant’s available capital and the amount of regulatory capital required would also reflect that volatility. That was clearly explained by Mr. Harding in his evidence and led to the swaps being closed out. Similarly, when this matter was explored with Mr. Lynch in cross-examination he said:
“the presentation of the numbers in this case mattered very much from a regulatory capital perspective.  So it was -- so it mattered   immensely about how these numbers were presented in the accounts.”
149.	So although it is obviously right to say that the accounting treatment does not cause the volatility of interest rate swaps, the accounting treatment nevertheless has a real effect in determining the extent to which that volatility affects the reported profits and hence the Claimant’s available regulatory capital. It also affects the regulator’s view of what amount of regulatory capital is required. It was the volatility of the balance sheet which led to the swaps being closed in 2013. Of course, the decision of the Claimant to purchase the swaps and the subsequent fall in interest rates were also effective causes of the Claimant’s loss in 2013 but there can be more than one effective cause of loss; and in the case of the Claimant’s loss in 2013 I consider that there were.    
Scope of the Defendant’s duty
150.	It is now well established that when assessing a defendant’s responsibility for losses the court must, having determined that the defendant’s negligence was an effective cause of the losses (as opposed to providing the occasion or opportunity for the losses to be incurred), then determine whether the losses were within the scope of the defendant’s duty. In determining the latter question it is not possible to lay down hard and fast rules. In Hughes-Holland v BPE Solicitors [2017] 2 WLR 1029 Lord Sumption, having postulated two extreme cases, one involving a valuer or conveyancer and the other an investment adviser, none of which are to be found in the present case, said at paragraph 44: 
“Between these extremes, every case is likely to depend on the range of matters for which the defendant assumed responsibility and no more exact rule can be stated.”
151.	In determining the matters for which the Defendant assumed responsibility Lord Sumption said the question to ask is whether the loss flowed from the particular feature of the defendant’s conduct which made it wrongful; see paragraph 38. The court must obviously pay close attention to the particular facts of the case before the court. Little is to be gained by considering whether the present case is to be regarded as an “advice” case or an “information” case (labels which have been used in the cases) because, as Lord Sumption said at paragraph 39 in  Hughes-Holland v BPE Solicitors:
“Turning to the distinction between advice and information, this has given rise to confusion largely because of the descriptive inadequacy of these labels. On the face of it they are neither distinct nor mutually exclusive categories. Information given by a professional man to his client is usually a specific form of advice, and most advice will involve conveying information.”
152.	Neither SAAMCO nor Hughes-Holland concerned negligence by accountants. Counsel for the Claimant made reference to four authorities concerning negligence by accountants which were decided after SAAMCO. 
153.	BCCI v Price Waterhouse [1999] BCC 351 concerned an application to strike out a claim which sought to make an accountant who had allegedly failed to uncover fraud and imprudence at BCCI liable for losses which had been incurred by reason of BCCI continuing to participate in loss-making business not affected by the fraud or imprudence. The claim was struck out. Laddie J. said at paragraph 66
“In my view there is no arguable case that the EW defendants' duty of care to Holdings, whether arising out of its appointment to audit the consolidated or unconsolidated accounts, extends as far as to cover a liability for deficits arising out of legitimate but loss-making business activities, such as investing in subsidiaries and guaranteeing loans. None of those activities was asserted as being either touched by fraud or imprudence. They are not pleaded as being a continuation of a type of business which was touched by fraud or imprudence which the EW defendants should have discovered and disclosed. They are simply losses occasioned by BCCI's continuing in trade. This conclusion can be expressed in alternative ways. The EW defendants' duty of care did not extend this far. This is not the kind of damage from which they had to take care to save Holdings harmless. Alternatively, the pleaded losses were not caused by the breaches alleged. They were caused by continued trading. The alleged negligence of the EW defendants, if proved at the trial, was just one of the factors which resulted in Holdings continuing to trade. Save in this respect it is not alleged to have played any part in generating the losses for which Holdings seeks compensation. This conclusion applies to investments in both the plaintiff subsidiaries and non-plaintiff subsidiaries. I do not understand Mr Powell to suggest that there is any difference in principle to be applied to these two groups nor any material difference in the facts.”
154.	Thus, had there been a plea that a type of business had been continued which was touched by fraud or imprudence which the defendant ought to have discovered, it is probable that the claim would not have been struck out. The facts of the case are different from the facts of the present case but it can be seen that the approach of the court is one which seeks to relate the type of damage for which recovery is sought to that in respect of which the defendant owed a duty of care to avoid. 
155.	Temseel Holdings v Beaumonts Chartered Accountants [2003] PNLR 27 was another strike out application. In that case the court refused to strike out a claim which claimed damages from an accountant in circumstances where the claimant, in reliance upon those figures, took certain trading decisions. Tomlinson J. said at paragraph 60:
“The gravamen of the complaint is that they negligently failed in that endeavour and that they certiﬁed as accurate ﬁgures that were in fact inaccurate. What is then said is that in reliance upon those ﬁgures, having been certiﬁed as accurate, the directors took certain trading decisions. That in turn will raise serious factual questions as to the extent to which the directors either did rely, or were reasonable in placing reliance. Again, I do not make any assumptions as to what the conclusion will be as a result of that investigation. But it seems to me that the question which will in fact arise for decision at the end of the day will be the question foreshadowed by Lord Hoffmann in the South Australia Asset Management case, where he pointed out that if a person is negligent in providing information he will be responsible for all foreseeable consequences of the information being wrong. One question, as it seems to me, will be the extent to which it is foreseeable, or reasonably within the contemplation of an auditor, that a consequence of the incorrectness of the information which he gives is that the company will continue to trade in the manner in which it has hitherto traded with the result that it will incur losses which might otherwise be avoided.”
156.	This approach emphasises that the accountant may be liable, following SAAMCO, for the foreseeable consequences of the information he provides being wrong where, in reliance upon the information, a company continues to trade in a certain manner with the result that it incurs losses which it might otherwise have avoided.  
157.	In Barings PLC v Coopers and Lybrand [2003] Lloyd’s Rep. 566 at paragraph   825 Evans-Lombe J. also followed the approach of allowing recovery for the foreseeable consequence of the information, which is alleged to have been negligently given, being wrong.
158.	The fourth case is Equitable Life v Ernst & Young [2004] PNLR 16. However, the appeal in that case (from a decision striking out the claim) turned on the question whether, in order to recover loss, there had to have been a request for specific advice.  That is not suggested in the present case and so I do not consider that the case really assists. 
159.	It is difficult to place much reliance on the first three cases because they concern different facts from the present case and two of them were strike out applications where the facts had not been determined. In so far as they suggest a principle it is that an accountant may be liable for the foreseeable consequences of the information or advice given by the accountant being wrong. It seems to me that that principle must be understood in the sense explained by Lord Sumption in Hughes-Holland, namely, that in determining the matters for which the Defendant assumed responsibility the question to ask is whether the loss flowed from the particular feature of the defendant’s conduct which made it wrongful; see paragraph 38 of Hughes-Holland. 
160.	That question, as explained by Lord Sumption in Hughes-Holland requires the court to consider, on the facts of each case, whether the losses sought to be recovered are losses in respect of which the defendant assumed responsibility. A helpful indication of how a first instance judge should go about answering that question is to be found in Main v Giambrone and others [2015] EWHC 1946 (QB) where Foskett J. (whose decision was upheld on appeal) said as follows:
“……the first port of call in any analysis must be the nature of the information/advice tendered by the solicitor to the client in the context in which it is tendered. When that has been identified the next step is to examine the extent to which the losses associated with entering into a transaction that otherwise would not have been entered into are fairly attributable to the negligently proffered advice/information. Thus expressed, the question is divided into two parts, but the reality is that it is one overall issue – what responsibility is being undertaken by the solicitor? Is it responsibility for the loss alleged? ”
161.	Applying this guidance there is a cogent argument in support of the Claimant’s case. The context in which the Defendant approved the Claimant’s Hedge Accounting Policy on 11 April 2006 was that the change in accountancy standards from UK GAAP to IFRS required derivatives such as interest rate swaps to be entered on the Claimant’s balance sheet. Before that change the Claimant’s balance sheet was not affected by changes in the fair value of the derivatives. After that change the balance sheet had to record such changes. In consequence, the balance sheet was exposed to volatility in interest rates which would affect the fair value of the swaps and hence profits and regulatory capital. The use of hedge accounting was designed to protect the balance sheet from such volatility and its consequences. It was in those circumstances that the Defendant approved the Claimant’s Hedge Accounting Policy. The nature of the advice given, by approving the Hedge Accounting Policy, was that the Claimant could use hedge accounting. It was given in circumstances where the Defendant knew that the Claimant wished to use it to protect itself from volatility in the fair value of interest rates swaps and the consequences that such volatility had on the balance sheet of the Claimant and hence on its profits and regulatory capital position. The losses incurred when breaking the swaps were fairly attributable to that negligent advice because, in circumstances where hedge accounting was discovered not to be not available, the balance sheet was fully exposed to volatility in the fair value of the interest rate swaps and they had to be closed out at a cost which reflected their fair value. Of course, the losses were also attributable to the sustained fall in interest rates which had occurred following the financial crisis of 2008. But having regard to the context in which the Defendant’s advice was given and its nature the losses remain fairly attributable to the Defendant’s negligence. Can it properly be concluded that the Defendant assumed responsibility for losses of the type which were sustained in 2013 when, following the realisation that hedge accounting was not available, the interest rate swaps were closed? Since the Defendant had advised, by approving the Claimant’s hedge accounting policy, that the Claimant could protect its balance sheet, and hence its regulatory capital position, from volatility in the interest rate swaps and since the losses were sustained, when that advice was found to be incorrect, because the Claimant could not allow its balance sheet, and hence its regulatory capital position, to be exposed to that volatility, those losses, which reflected the fair value of the swaps, were not only the reasonably foreseeable consequence of the Defendant’s negligence but also flowed from the particular feature of the Defendant’s conduct which made its advice wrongful. It can therefore be concluded that the losses were the type of loss in respect of which the Defendant assumed responsibility.  
162.	There is considerable evidence in support of this conclusion. Thus, shortly after the initial meeting to discuss IFRS on 14 November 2005 the Defendant informed the Claimant that hedge accounting was “a key tool in avoiding the profit volatility caused by recognising (mainly derivative) hedging instruments at fair value where there is a hedging relationship.” It is more likely than not that the Defendant was aware on 11 April 2006 of the Claimant’s intention to take out long term swaps to hedge the risk of lifetime mortgages. It is clear that that was known by 8 May 2006.  For the audits of the years 2006-2012 the Defendant was aware of the use of 50-year swaps to hedge the UK lifetime book and later, in addition, the Spanish lifetime book. Thus, when the Hedge Accounting Policy was first approved on 11 April 2006 and when it was approved annually thereafter with each audit for the years 2006-2012, the Defendant was aware that hedge accounting was required to avoid or mitigate volatility in the Claimant’s balance sheet and that if it were not properly available to the Claimant the Claimant’s reported profits and hence its regulatory capital could be harmed. Mr. Nuttall did not dispute this. He accepted that 
“…it was clear to me at all times that the application of hedge accounting could have an impact on the income statement of MBS. That was the reason why it was desirable from MBS' perspective to apply fair value hedge accounting: to minimise potential volatility on the income statement. I also appreciated at all times that the application of fair value hedge accounting would have an effect on MBS' capital reserves, since the value of MBS' balance sheet as presented in the financial statements would be affected by movements in the income statement and therefore I also knew that there was a potential impact on MBS' levels of regulatory capital, since that was based on MBS' capital reserves.”
163.	Mr. Nuttall made the further point that in 2006-7 the level of interest rates was such that there was no problem at that time. However, he must also have been aware that interest rates could fluctuate so that there could be, as he accepted, a “potential” effect on regulatory capital.   
164.	Mr. Nuttall also said in his witness statement that he was not aware that the application of hedge accounting could affect the Claimant’s decisions. It is noteworthy in this regard that the Defendant’s “Hot Review” of the 2005 audit in early 2006, noted that another building society, the Newcastle, had withdrawn from offering fixed rate mortgages due to volatility and that “under the present regulatory framework the accounting treatment may end up driving commercial decisions for the Manchester as well”. Mr. Nuttall was reluctant to accept when cross-examined that the Claimant’s commercial decisions would be driven by the accounting treatment. It was put to him that it was obvious that the accounting treatment of swaps and mortgages would affect commercial decisions. The most he would accept was that the availability of hedge accounting was “a consideration”.  I consider that the note in the “Hot Review” is the more reliable evidence of the Defendant’s understanding at the time. 
165.	Mr. Gee’s evidence on this topic, to which I have already referred, and which I consider to be consistent with the probabilities, is to the same effect. 
166.	The Directors’ Statement in the 2006 audit, to which I have already referred and must have been reviewed by the Defendant, specifically noted that the use of hedge accounting 
“has reduced the volatility in income statement movements especially in comparison to 2005, when the full impact of the fair value movement in financial instruments was recognised without there being a corresponding movement in the fair value of the associated assets.”
167.	The evidence of Mr. Harding as to the reasons why the swaps were closed in 2013, from which I have already quoted, is consistent with these contemporaneous documents and supports the conclusion that the loss which was sustained in 2013 when the swaps were closed out was the type of loss which would have been expected to flow from the Defendant’s negligence when it was appreciated that hedge accounting could not be used.  
168.	Counsel for the Defendant submitted that there were, however, several reasons why it would be wrong to conclude that the Defendant had assumed responsibility for the type of loss which was sustained in 2013. 
169.	First, he submitted that the present case was a classic illustration of the “information” type case referred to in both SAAMCO and Hughes-Holland, namely, one where a professional adviser contributes a limited part of the material on which his client will rely in deciding whether to enter into a prospective transaction but the process of identifying the other relevant considerations and the overall assessment of the commercial merits of the transaction are exclusively matters for the client. In that type of case the adviser’s responsibility does not extend to the decision itself. Thus, even if the material which the adviser supplies is critical to the decision to enter into the transaction he is only liable for the consequences of that being wrong and not for the financial consequences of the claimant entering into the transaction so far as these are greater. “Otherwise,” said Lord Sumption in Hughes-Holland at paragraph 41, “the defendant would become the underwriter of the financial fortunes of the whole transaction by virtue of having assumed a duty of care in relation to just one element of someone else’s decision.”
170.	Second, he submitted that when asking, as SAAMCO requires the court to do, whether the losses would have been sustained even if the Defendant’s advice had been correct, the answer is that they would have been incurred because the regulator was so concerned with the Claimant’s management of risk that it would have exerted pressure on the Claimant to sell the swaps in any event. On this basis none of the costs of closing out the swaps was recoverable.
171.	Third, he submitted that the mark to market valuation of the swaps, which determined the costs payable by the Claimant when it closed them out, was the market’s assessment of the value of the Claimant’s obligation to pay for the swaps in the future. Thus, if one asked in 2013 whether it was more likely than not that the Claimant would have to make the payments it did in 2013 in the future the answer would be Yes. On this basis none of the costs of closing out the swaps would be recoverable save for the “transaction” or “penalty” costs. That was the only loss in respect of which the Defendant assumed responsibility.  
An information case?
172.	I accept that it can be said, as Mr. Gee accepted, that the Defendant provided one piece of information or advice and that the Claimant’s decision to enter into the swaps was based upon not only that information or advice but also upon other (commercial) considerations as to which no advice was given by the Defendant. However, the information or advice supplied by the Defendant was supplied with the accepted purpose of avoiding or mitigating the volatility to which the balance sheet would be exposed if hedge accounting were not deployed. Thus it was advice or information which was intended to protect the Claimant from the consequences of that volatility. The Defendant did not give any advice about the wisdom or otherwise of entering the swaps but must have appreciated that unless hedge accounting could be deployed the volatility caused by changes in the fair value of the swaps the Claimant’s regulatory capital position would be susceptible to adverse change. Hedge accounting was designed to protect the Claimant from the effects of that volatility. That feature is not to be found in the classic information case referred to in SAAMCO and Hughes-Holland.  Although the defendant in a classic information case owes no duty of care to the claimant in respect of his entering the transaction (see Hughes-Holland paragraph 35) the Defendant in the present case owed a duty of care in respect of one prospective consequence of the Claimant entering into the transaction, namely, the volatility risk to which the Claimant’s balance sheet is vulnerable from changes in the fair value of interest swaps. Thus, had the information or advice provided by the Defendant been correct the Claimant’s balance sheet would not have been vulnerable to that volatility and the Claimant would not have needed to close out the swaps and thereby suffer the expense of so doing. For, had the information or advice been correct, the Claimant’s balance sheet profit and capital would not have been reduced and the required regulatory capital would not have been increased. There would have been no need to break the swaps and the costs of doing so would not have been incurred. 
173.	This approach does not make the Defendant an insurer in respect of the Claimant’s business. For the Defendant is not liable for all losses which might have resulted from entering into the swaps. For example if a counterparty to a swap became insolvent causing losses to the Claimant such losses would not be within the scope of the Defendant’s duty. Similarly, if a counterparty chose to exercise a right to terminate the swap thereby causing the Claimant to have to pay the costs of such termination such costs would not be within the scope of the Defendant’s duty. Such losses would not have been attributable to the respect in which the Defendant’s advice was wrong, namely, that hedge accounting could be applied. Such losses would still have occurred had the Defendant’s advice been correct.
174.	The above argument is, I have said, cogent. But much depends upon whether the loss incurred in 2013 when the Claimant closed out the swaps can be said to be that against which hedge accounting was intended to protect the Claimant. The above argument assumes that proposition to be correct; and it can be argued that it is because the costs represented or reflected the fair value of the swaps and hedge accounting was designed to protect the Claimant from having its profits and capital affected by that fair value. This argument was put at the very beginning of the Claimant’s closing submissions in striking and arresting terms: 
“The £32.7m swap break costs were not merely foreseeable consequences of the negligence, they were the very thing to which GT had advised MBS it was not exposed – the fair value of the swaps.”
175.	But there is also a cogent argument to the contrary.  First, hedge accounting is concerned with the manner in which swaps and mortgages are presented in the published accounts of the Claimant. It is not concerned with protecting the Claimant from losses which would flow from its purchase of interest rate swaps in circumstances where there had been a sustained fall in interest rates, for example, the cost of putting up collateral or the costs of termination of the swaps in the event that a counterparty exercised its right to terminate the swap. Second, although hedge accounting had the effect of protecting the Claimant’s published profit and capital (and in particular its regulatory capital) from changes in the fair value of the swaps, such changes were nevertheless real and exposed the Claimant to the risk of considerable loss notwithstanding the application of hedge accounting. It was because of such changes that the Claimant had to put up collateral (see paragraph 111 above) and that the regulator feared that a counterparty might exercise its right to terminate the swaps (see paragraphs 104 and 112 above) as Mr. Cowie appreciated (see paragraph 114 above). Third, that risk of loss came about by reason of the risk that interest rates might fall, as they in fact did after the financial crisis of 2008. Fourth, had the parties been asked in 2006 whether the Defendant, by advising that hedge accounting could be used, was assuming responsibility for the risk of loss to the Claimant in the event that there was a sustained fall in interest rates I do not consider that they would have replied that the Defendant was. Certainly the Defendant would not have said that it was doing so. I also think it improbable that Mr. Cowie would have said that the Defendant was doing so. He would have recognised, as Mr. Gee did in his evidence, that the decision to purchase the swaps was taken for commercial reasons on which the Defendant gave no advice. An impartial observer of the dealings between the Claimant and Defendant from November 2005 until April 2006 would not have concluded that the Defendant was assuming responsibility for the risk of loss to the Claimant in the event that there was a sustained fall in interest rates. He (or she) would have appreciated that, although the apparent availability of hedge accounting enabled the Claimant to make use of interest rate swaps, the decision whether or not to use interest rate swaps as a hedge was one for Mr. Cowie and the board to take depending upon their assessment of the commercial wisdom (or otherwise) in doing so.   
176.	The decisions in SAAMCO and Hughes-Holland require the court to form a view as to whether the Defendant assumed responsibility for the type of loss which it incurred in 2013 when it decided, in the light of the discovery that hedge accounting was not available, to close the swaps out. I have not found this an easy question to answer and my mind has wavered during my consideration of this question. 
177.	Counsel for the Claimant laid considerable emphasis upon the fact that the Claimant had continued with its business of hedging its mortgages by interest rate swaps in reliance upon the advice of the Defendant and that the losses it sustained when breaking the swaps were the reasonably foreseeable consequence of the Defendant’s negligence; in this regard support was found in the approach of Tomlinson J. in Temseel. I accept that there was such reliance and that the losses were reasonably foreseeable but the fact that the advice was critical or that the losses were foreseeable is not sufficient to show that a defendant assumed responsibility for such losses; see Hughes-Holland per Lord Sumption at paragraphs 36, 38 and 42. 
178.	But it can also be said, as I have sought to explain, that the losses flowed from the particular feature of the Defendant’s conduct which made its advice wrongful. Lord Sumption identified that as a reason for concluding that loss was within the scope of a defendant’s duty of care and that the defendant had assumed responsibility for such loss; see Hughes-Holland at paragraph 38. That is why the Claimant’s case is cogent.  
179.	Ultimately, as with so many questions with which courts must wrestle, it is necessary, having examined the evidence and the opposing arguments, to stand back and view the matter in the round. Having done so it seems to me a striking conclusion to reach that an accountant who advises a client as to the manner in which its business activities may be treated in its accounts has assumed responsibility for the financial consequences of those business activities.  I do not consider that the objective bystander, or indeed the parties themselves, viewing the matter in 2006 would have concluded that the Defendant had assumed responsibility for the Claimant “being out of the money” on the swaps in the event of a sustained fall in interest rates. Although it can be said, as I have attempted to explain, that the particular manner in which the Claimant suffered the loss on the swaps (that is, by deciding to close the swaps out when it was appreciated that the Defendant’s advice was wrong) flowed from the particular feature of the Defendant’s conduct which made it wrongful, the very same loss would have been sustained had the counterparty decided to close the swaps, as the regulator feared might well happen and as Mr. Cowie appreciated. That circumstance illustrates, it seems to me, that the loss suffered by the Claimant, looked at broadly, sensibly and in the round, was not in truth something for which the Defendant assumed responsibility or the “very thing” to which the Defendant had advised the Claimant would not be exposed. Rather, the loss flowed from market forces for which the Defendant did not assume responsibility. Just as the Defendant had not assumed responsibility for the losses which would have been incurred had a counterparty exercised its right to terminate a swap, so the Defendant had not assumed responsibility for the very same losses which were incurred when the Claimant decided to close the swaps out, notwithstanding that that decision was taken because the advice given by the Defendant had been wrong. 
180.	I have therefore concluded that the losses are not recoverable as damages.
Forced by the regulator to sell?
181.	The submission made on behalf of the Defendant was that, even if the Defendant’s advice had been correct, the regulator would have required the Claimant to dispose of its lifetime mortgages “in a phased way”. In those circumstances it is likely that the swaps would also have been broken because they would no longer have been hedging anything and so the Claimant would have been in materially the same position as it was in 2013.  
182.	The submission made on behalf of the Claimant was that the Defendant’s case that the regulator would have forced it to sell all its lifetime mortgages and then break the swaps, incurring the break costs which it in fact did in 2013, is intrinsically improbable.
183.	It is necessary to deal with this further argument for two reasons. First, my decision on the question whether the Defendant assumed responsibility for the losses incurred in 2013 when it closed out the swaps may be wrong. Second, the question whether the Defendant is liable for what has been called the “termination” or “penalty” costs of closing the swaps (in relative terms a very modest sum) depends upon this further argument.  
184.	It seems clear that in response to the regulator’s concern (as to the risks inherent in the lifetime mortgage business, as to the Claimant’s ability to manage risk and as to its exposed risk position) the Claimant had proposed to reduce its lifetime business to about 10% of its total business “over time”; see the letter from the regulator dated 12 February 2010. Mr. Gee accepted in cross-examination that this would mean selling about half of its lifetime mortgage book. In 2012 some lifetime mortgages were sold but little progress towards the aspirational level of 10% had been achieved. After the regulator had increased the scalar to 30% in January 2013 Mr. Cowie advised the board that the main way to reduce the impact of the scalar in the next two years was through a staged sale of UK lifetime loans. Thus it is likely that some lifetime business would have been sold even if the problem with hedge accounting had not been discovered.  
185.	However, a sale of all, or the greater part, of the lifetime mortgage business would necessitate the closure of all, or the greater part, of the swaps. That would cause the Claimant to suffer the very type of loss which it and the regulator wished to avoid. It is not likely that the Claimant would voluntarily suffer, or that the regulator would wish to impose, such a self-inflicted wound. 
186.	This question was the subject of expert evidence from the regulatory capital experts. 
187.	The Claimant’s expert, Mr. Worsnip, appeared to me to give his evidence in a clear, measured and careful manner, to have a profound and impressive understanding of the regulatory capital requirements and to be fair and objective. When cross-examined he accepted that in 2012 and 2013 the regulator wished to enforce more urgent action and, in the absence of any other strategy, would have required, and the Claimant would have endeavoured to implement, its plan of staged sales of its lifetime business towards the 10% level. However, he also said that “the regulator wouldn't want to force the Society into a position of insolvency by demanding that it followed a strategy, if that strategy couldn't be implemented without financial consequence.” The regulator would not have wished to cause the Claimant to fail; “...that's just causing the problem it's trying to avoid”.  
188.	The Defendant’s expert, Mr. Williams, was not able to express his answers with the same ease or economy of words with which Mr. Worsnip expressed his answers. At times he appeared not to have fully thought through his opinion.  However, when one views his answers as a whole their sense is, I think, to the same effect as those of Mr. Worsnip.  Thus he said that the regulator would have required the disposal of the lifetime mortgages but “in a phased way. This isn't something that the regulator would force on a society, it would be a very significant step, so the idea that that would become an immediate, immediate outcome in an unmanaged way is, I guess, the point I wanted to get across.” Although he later said that “if there was a significant continuation of that mortgage book -- those mortgage books, excuse me -- I think the regulator would have taken strong action to prevent the firm from carrying on that strategy”, I do not consider that he meant to say that a sale would have been enforced even if that resulted in the swaps having to be closed out and the Claimant incurring very substantial losses. “So what I'm saying is that you wouldn't have ended up with a naked situation that a regulator would have wanted to cause a society to fail.  That would not be an acceptable outcome.” 
189.	Had the advice given by the Defendant been correct I consider it is more likely than not that there would have been renewed efforts by the Claimant, with the encouragement of the regulator, to dispose of some of its lifetime mortgages. However, it is more likely than not that such efforts, even if successful, would have stopped short of being so extensive that the Claimant was forced into the position of having to close down any of the swaps and thereby to incur substantial loss. I do not consider it likely that the regulator would have used the “tools” at its disposal to enforce such closures. The regulator was seeking to prevent the Claimant from suffering loss, rather than ensuring that it did. In so far as sales of mortgages meant that part of the swaps were “unused” it is more likely than not that they would have been retained to hedge the “growth” in the remaining lifetime mortgages as interest accrued upon them. 
Future payments?
190.	Counsel for the Defendant invited the court to find that the Claimant was unable to discharge the burden of proving on the balance of probabilities that the losses sustained in 2013 would not have been paid had the Defendant’s advice been correct because, had that question been asked in 2013, the market’s answer would have been that they would have been paid. The sums paid in 2013 represented the market’s assessment of the present value of what would have to be paid by the Claimant through to the expiry of the swaps in 2056. 
191.	It is not necessary for me to deal with this argument but I shall do so in case my decision on the question whether the Defendant assumed responsibility for the type of loss sustained when the swaps were closed in 2013 is wrong. 
192.	Counsel for the Claimant said that the Defendant’s approach was wrong in principle. It was sufficient for the Claimant to show that had the Defendant’s advice been correct the Claimant would not have closed the swaps in 2013 and so would not have been obliged to pay the costs of closing the swaps. There was no warrant for the court seeking to investigate what payments were likely to have been required of the Claimant through to 2056 assuming that the Claimant had not closed the swaps in 2013. Such an investigation would depend upon the level of interest rates far into the future and an investigation of that would be speculative and unwarranted.
193.	I accept the submission of counsel for the Claimant. SAAMCO and Hughes-Holland identify the question, would the losses have been incurred had the information or advice provided by a defendant been true, as a “tool” for determining whether the defendant assumed responsibility for such losses (see Hughes-Holland at paragraph 45). I have already determined the question of responsibility in the Defendant’s favour. But I would not have reached the same decision by reference to this particular “tool”. On the facts of the present case the losses would not have been incurred had the information or advice been correct. The Claimant would not have incurred the costs of closing out the swaps because the swaps would not have been closed out.  
194.	The Defendant seeks to expand the inquiry by asking whether the same losses would have been incurred by the Claimant over the next 38 years, albeit by reference to the market’s view of that question in 2013. I do not consider that such a speculative enquiry stretching far into the future was envisaged by SAAMCO or Hughes-Holland. 
195.	SAAMCO involved lenders and the negligent valuation of property which stood as security for the loan. When the security was realised the property market had fallen thereby greatly increasing the losses suffered by the lenders when the borrowers defaulted. The lenders sought damages for the whole of their losses. The House of Lords held that they were only entitled to damages measured by the difference between the valuation and the true value of the property at the date of the valuation. The further loss caused by the fall in the property market was not recoverable because such losses were not within the scope of the valuers’ duty. The valuers were thus not liable for losses which would have been incurred if the valuers’ advice had been correct. There was no speculative inquiry into the future. 
196.	Hughes-Holland involved a businessman who made a loan of £200,000 to a builder on the mistaken assumption that the loan was intended for the development of a building (an old and disused heating tower) into office premises. In fact the loan was to be used by the borrower to pay off a debt to a bank leaving nothing, or not much, for the development. The builder had no other resources. The defendant solicitor was instructed to draw up a facility letter and a charge over the building. The letter (in the form of a template) contained statements to the effect that the loan was a contribution to the costs of development and thereby unintentionally confirmed the businessman’s mistaken assumption who then made the loan. In fact the project was never viable. The builder said the development costs were about £200,000 when in fact they were much greater. The transaction was, inevitably, a failure. The repayment date came and went without any significant development being carried out and the businessman lost virtually all his money. He exercised his power of sale over the building but the net proceeds, at the time of a depressed market, were insignificant. The Supreme Court held that no loss was caused by the solicitor’s negligence because (i) he did not assume responsibility for the businessman’s decision to lend the money and (ii) it was clear that the value of the property would not have been enhanced by the expenditure of the loan on its development; the development would have been left incomplete, the loan unpaid and the property substantially worthless when it came to be sold into a depressed market. This depended upon an examination of the facts as at the time of loss. The case did not involve the sort of speculative enquiry into the future suggested in the present case. 
197.	Thus the enquiry into the distant future suggested by the Defendant’s submission is not warranted by either SAAMCO or Hughes-Holland. The Claimant may or may not be “out of the money” for the next 30 or so years. At present (2018) the Claimant would be in a worse position than it was in 2013. But an enquiry of this nature into the distant future would inevitably be speculative and inconclusive, depending upon many and varied possible future events. That itself suggests that such an enquiry is not required when assessing liability for loss. The market may consider that it can reach a view on such a question but interest rates are subject to so many variables that no reliable prediction can be made by the court over such a long period.
198.	The enquiry required by both SAAMCO and Hughes-Holland is whether at the time the loss was incurred it would still have been incurred even if the defendant’s advice or information had been correct. In the present case it would not. If the Defendant’s advice had been correct the Claimant would not have broken the swaps in 2013 and so would not at that time have incurred the loss which in fact it did. 
199.	It is accordingly unnecessary for the court to consider the alternative case advanced by the Claimant in the event that it is, contrary to my decision, necessary for the Claimant to show, on the balance of probabilities, that the losses incurred in 2013 would not have been incurred in the future. I ought however to express my view on this alternative case in case my decision on the Claimant’s primary case is wrong. I shall do so shortly. Although Mr. Gee put forward two scenarios as to what might have happened in the future (which led to much expert comment and analysis and many pages of closing submissions) he fairly recognised that this was speculation and that what would in fact happen would depend upon 
“the attitude of the FCA and PRA toward lifetime mortgages, the capital position of the Society over time, the capital requirements imposed upon the Society over time, movements in interest rates, movements in the rate at which new lifetime and standard fixed rate mortgages could be written, house price inflation and the overall risk appetite and profile of the Society.”
200.	In this he was, in my judgment, entirely correct. Trying to predict what is likely to happen to financial markets, interest rates, the fortunes of the Claimant and the views of the regulator over the next 30 or more years is an impossible task. Possibilities may be suggested but what is more likely than not to happen is a very different matter. Thus, if it is necessary for the Claimant to establish on the balance of probabilities that the sums paid in 2013 would not have had to be paid over the next 30 or more years the Claimant is, in my judgment, unable to do so. Indeed, the Claimant (inevitably) did not address the uncertainties mentioned by Mr. Gee. Rather, the Claimant concentrated upon seeking to establish a case that its mortgage business was profitable and that it would continue to be so well into the future when new (profitable) mortgages would be issued as existing lifetime mortgages were redeemed. But even if this could be established on the balance of probabilities the Claimant would still be unable to establish on the balance of probabilities that it would not continue to have had to pay out on the swaps for the remaining life of the swaps (over 30 years), thereby incurring the losses it incurred in 2013. I have therefore not addressed the many pages of closing submissions on the question of the alleged present and future profitability of the Claimant’s business.  The Claimant submitted that the court’s task is “do its best to assess what would have happened.” I must disagree. The real question on the Claimant’s alternative case is whether the Claimant can show, on the balance of probabilities, that it would not have continued to pay out on the swaps throughout their life. The Claimant has, understandably, not attempted to show that. 
Were the losses too remote?
201.	In view of my decision that the costs of breaking the swaps were not the type of loss for which the Defendant assumed responsibility this question does not arise. If my decision on assumption of responsibility is wrong and the costs were the type of loss for which the Defendant assumed responsibility then they cannot have been too remote; they must have been losses of a type which, in the contemplation of the Defendant, were not unlikely to result from their negligence.    
Conclusion as to the costs of breaking the swaps
202.	For the reasons I have endeavoured to express the costs of breaking the swaps were not the type of losses for which the Defendant assumed responsibility. 
Transaction or penalty costs
203.	However, it is accepted by the Defendant, on the basis of my findings, that it is liable for the (relatively modest) “termination” or “penalty” costs of breaking the swaps. There is a dispute as to their quantum which the court must resolve. On this subject there was evidence from Mr. Rule and Mr. Ahuja. Both experts sought to estimate the likely break costs. 
204.	During the trial attempts were made to find out from the counterparties, RBS, Santander and JP Morgan what the transaction costs actually were. Only RBS responded, stating that it charged a “penalty” of £12,000 in relation to the Spanish lifetime swaps and £50,000 in respect of four sterling swaps. The Claimant, however, only seeks to recover in respect of two of those sterling swaps and the global figure of £50,000 does not identify the proportion of that sum that was charged in respect of the relevant swaps. The Claimant suggested that the charges were calculated on the mark to market valuation of each swap with the consequence that £36,619 was attributable to the swaps relevant to this litigation. The Defendant, by contrast, contended that the appropriate apportionment was a multiple of the notional amount of the swaps and suggested that £28,571 was the relevant sum. In the circumstances it seems to me that no injustice will be done to either party if the transaction costs are taken as being £32,600 in respect of the RBS swaps. 
205.	With regard to the JP Morgan swaps reliance was placed by the Defendant on a spreadsheet provided by JP Morgan to the Claimant at 08:33 on 7 June 2013 by email. Sheet 2 of that spreadsheet detailed what the Claimant would have had to pay at that point in time. Column V provides for a “charge bp”, this being 0.9 for the Euro swaps and 0.8 for the sterling swaps. These percentages were applied to the “DV01s” of the swaps, the DV01s being the change in value to the relevant swaps by a 1bps parallel move in the yield curve. As of 08:33, the transaction costs would have been €51,728 on the relevant Euro swaps and £59,366 on the LIBOR swaps, with the total sums payable being €12,073,360 and £9,438,095. 
206.	It appears from an email from JP Morgan that the swaps were broken sometime between 08:33 am and 09:52 am that day. The total sums to be paid were €12,115,000 for the Euro swaps and £9,450,000 for the LIBOR swaps. So although there had been some change in the sums to be paid, they were very close to those set out in the spreadsheet.
207.	The Claimant’s expert, Mr. Rule, has suggested that the JP Morgan transaction costs were £920,282 on the basis that JP Morgan was likely to have charged fees of around 6.3 basis points. This was based on his experience of closing out transactions, looking at historical transactions and assuming there was no negotiation. The latter assumption appears unlikely. He also sought to assess the mark to market value of the swaps by using data appropriate to 4.30 pm on 7 June 2013, even though they were broken some hours earlier. By contrast Mr. Ahuja based his assessment on the charges of 0.9 bp and 0.8 bp set out in the earlier email. In cross-examination Mr. Rule indicated that he did not agree with the basis for Mr. Ahuja’s calculation and that JP Morgan may well have added further costs over and above what was set out in the spreadsheet. I have considered Mr. Rule’s objections to Mr. Ahuja’s calculation and his suggestion that JP Morgan may have added additional charges. However, I am of the view that the spreadsheet sent to the Claimant under two hours before the swaps were broken provides the best evidence of the basis upon which JP Morgan in fact charged. I am not persuaded that JP Morgan would in fact have charged more than this and therefore find that the total transaction costs for the JP Morgan swaps were £92,482, which is the sum obtained from applying the stated charges.   
208.	Turning to the Santander swaps, neither party relies upon any direct evidence as to what amount of the sum paid to Santander consisted of transaction costs. I have heard evidence from both Mr. Rule and Mr. Ahuja as to the potential basis point charges Santander may have applied. Mr. Rule considered that a basis point charge of some 6 basis points may have been applied, and his calculations were based on that figure. In cross examination, Mr. Ahuja went no further than accepting that a charge calculated by reference to 1.5 basis point might have been levied. Although each bank would set its own rate, I note that the basis point charges applied by JP Morgan were 0.8 basis points on the Libor swaps and 0.9 basis points on the Euribor swaps respectively. Assuming RBS charged using a basis point model, this seemingly being the usual approach taken by banks (as accepted by Mr. Rule in his report), then RBS’s fees equated to using rates of around 2.21 and 2.24 basis points. This is higher than Mr. Ahuja’s view of the likely rate but far less than that suggested by Mr. Rule. 
209.	Although the Claimant submitted that Mr. Rule’s estimate is to be preferred on account of his experience his estimate is very high compared with the JP Morgan rates and with the RBS comparable rates. In those circumstances I was not persuaded that Mr. Rule’s estimate was likely to be right. The Defendant suggested that one approach to estimating the charges likely to have been levied by Santander is to take an average of the basis points used by JP Morgan and RBS’ apparent basis points charge. I accept that that approach is appropriate on the evidence, such as it is. Adopting this approach, the Santander transaction costs were £160,378. 
210.	The Defendant suggested an alternative method of valuation which produced a lesser figure of £60,761. However, this method, which expressed the transaction costs as a percentage of the notional value of the swap, was not in fact advocated by the experts, although it appears to have been used by the Claimant when negotiating with Bayerische LB some time before the swaps were broken in 2013.  I prefer the basis point approach which was used by JP Morgan and therefore has contemporary support.
211.	I therefore find that the transaction or penalty costs were £160,378 in the case of Santander, £92,482 in the case of JP Morgan and £32,600 in the case of RBS, making a total of £285,460.
(ii) Loss of the gain that would have been earned if the swaps in existence in April 2006 had been closed out in 2006
212.	The quantum of this claim is agreed in the sum of £850,000. It is the gain which the Claimant would have earned had the Claimant closed the existing swaps which it held in 2006. The theory underlying the claim is that had the Defendant not been negligent the Claimant would have decided to close its existing swaps and, having regard to the then level of interest rates, the counterparty would have had to pay money to the Claimant. The evidence of Mr. Gee and the expert evidence of Mr. Worsnip was to the effect that this was likely to have happened and I so find. Indeed, in circumstances where the Defendant’s case as to BGS has failed, I did not understand this to be disputed; see paragraphs 66-67 of the Defendant’s closing submissions. Instead of closing out the existing swaps the Claimant continued to hold them until closing them out in 2013 at a considerable loss. The Defendant’s negligence was therefore an effective cause of that loss. 
213.	The argument advanced by the Defendant in relation to this head of claim is, I think, that the Defendant did not assume responsibility in respect of this type of loss; see Appendix 7 p.3 of the Defendant’s closing submissions. I do not think that there was much argument addressed to this particular head of loss. That is not surprising in circumstances where the claim is, relative to the claim as a whole, a modest sum. If, as I have held, the loss suffered in 2013 by reason of having held the swaps until then and closing them out when “out of the money” is not a type of loss in respect of which the Defendant assumed responsibility then the loss suffered in 2006 by reason of not having closed out the then existing swaps when “in the money” must equally be a type of loss in respect of which the Defendant did not assume responsibility. I therefore conclude that this is not a loss which is recoverable by the Claimant.
(iii) Loss of profits from the £21m UK lifetime mortgage book if held after December 2013 rather than sold. 
214.	The Claimant sold all of its UK lifetime mortgages in 2013 when the negligence of the Defendant was discovered. They included the £21m UK lifetime mortgages which were purchased before April 2006. The Claimant’s case is that but for the negligence of the Defendant they would have continued to hold the book until its maturity and would have been better off by some £11.7m. That is said to be the value of the Claimant’s lost opportunity to do better than the value realised by the sale.  
215.	There is a dispute as to the quantum of this claim and as to what if any cost should be included in respect of hedging the book of mortgages, it now being common ground, as Mr. Worsnip accepted when cross-examined, that the book would have had to have been hedged. But the Defendant has submitted that in circumstances where the book was sold in 2013 for its market value (as the Claimant accepts it was, see paragraph 256.1 of the Claimant’s closing submissions) no loss was suffered.
216.	I am able to deal with this head of loss quite shortly. The Claimant chose to sell the book because immediate capital preservation was the priority. The Claimant was reluctant to sell because the book was considered profitable in the then current market conditions. However, the Claimant chose to sell the book and recovered its market value which it used to improve its capital position. The sale price must have reflected the then present value of the right to receive future income from the book. To award the Claimant damages in circumstances where it has already received and made use of the market value of the book would over-compensate the Claimant. 
217.	I must therefore reject this claim. It is unnecessary to deal with the redundant question of quantum but in case my decision is wrong I shall express my conclusions shortly. 
218.	The £21m book would have required to have been hedged. “Natural” hedging, that is using its existing reserves and capital was suggested but that seems an improbable solution given that it was not used in 2006. I have noted that the use of reserves in conjunction with swaps was considered by the Claimant in 2010 (see paragraph 105 above) but the use of reserves alone in 2006 still appears to me to be improbable. Mr. Worsnip suggested that 5-year fixed-rate bonds or new PIBS could have been used to hedge the holding. However, the former were not thought feasible in 2006. (Mr. Gee gave evidence in chief that by early 2006 the Claimant needed to hedge the interest rate risk on the book by acquiring interest rate swaps. Similarly, Mr. Lynch gave evidence in chief that it was not realistic to use long-term fixed rate savings as a natural hedge. He further said that it was “very clear” to him that interest rate swaps were necessary to mitigate the effects of the interest rate risk.) It seems unlikely that PIBS would have appealed to the Claimant as a form of hedging given the high coupon payable on such investments. In these circumstances it is more likely than not that the holding would not have been held until its maturity. If, however, it would have been held and if there were alternative forms of hedging it is unlikely that the cost would have been “minimal” as suggested by the Claimant. The burden of proving its loss lies upon the Claimant and in the absence of proper costing of the alternative forms of hedging I do not consider that the loss can be proved. 
219.	In any event, this head of claim is, as I understand the position, dependent upon (i) the relevant date to assess the loss being the date of the judgment in 2018 rather than 2013 when the holding was sold and (ii) the relevant discount rate being 2-3% rather than 6.5%. As to the former 2013 must, in my judgment, be the relevant date at which to assess the loss because that is when the holding was sold and thus is the date when the opportunity to earn a higher figure was lost. As to the latter the evidence strongly favours 6.5%. That is the view the Claimant’s expert, Mr. Hall, accepted in his report. When cross-examined he accepted that it was a view that a reasonable and experienced expert could put forward. Further, the Claimant itself adopted rates of between 4 and 6% and its external advisers, Redmayne, used a discount rate of 6.83%. These matters cogently suggest that the rate initially accepted by Mr. Hall was a reasonable assessment of the appropriate rate. His revised view, and the Claimant’s submissions based upon it, appeared to me to lack cogency given Mr. Hall’s initial and no doubt considered view that 6.5% was reasonable. On the basis of an assessment of the loss in 2013 and using a discount rate of 6.5% there is, as I understand the position, no loss. It is only if the loss is assessed as at 2018 that there is (ignoring the cost of hedging) a loss, varying between £11.7m (at a discount rate of 2.5%) and £4.71m (at a discount rate of 6.5%). But even if 2018 is the correct date those figures make no allowance for the cost of hedging the book until maturity which the Claimants have not assessed, beyond submitting that it would have been “negligible”.   
(iv) The costs of hedging the £21m UK lifetime book from April 2006 until 2013. 
220.	There is no dispute that between 2006 and 2013 the Claimant incurred hedging costs of £2.55m. If, as the court accepts, the existing swaps in 2006 would have been closed out but for the Defendant’s negligence these costs would not have been incurred. 
221.	The Defendant disputes liability for these costs on the grounds that they are not losses of a type for which it assumed responsibility and so are not within the scope of its duty of care.
222.	Whereas the losses incurred on the swaps were dependent upon movements in interest rates the cost of the swaps was not. The sums payable by the Claimant to the counterparty were fixed and would inevitably be incurred. To that extent there is a difference between losses on the swaps and the cost of the swaps. However, I do not consider that to be a material distinction. Just as I do not consider that the Defendant assumed responsibility for the losses on the swaps so I do not consider that the Defendant assumed responsibility for the costs of servicing the swaps. The swaps were entered into for the purpose of hedging the £21m UK lifetime book. That business was entered into for commercial reasons untouched by the advice provided by the Defendant. I accept that the advice was an effective cause of the Claimant entering the swaps and thereby having to incur the costs of servicing them and that the throwing away of those costs was a foreseeable consequence of that advice been wrong. But such factors are not sufficient to impose liability upon the Defendant for losses in respect of which the Defendant did not assume responsibility. In order to be recoverable the costs must be costs in relation to which the Defendant assumed responsibility. I do not consider that the objective bystander would consider that the Defendant, by advising as to the accounting treatment of swaps and mortgages, had assumed responsibility for the costs of servicing the swaps.  
(v) Restructuring and advisory costs
223.	There appear to be seven heads of claim which total approximately £827,000. 
224.	The first is in respect of redundancy costs in the sum of £328,521. Mr. Harding was frank and fair on these costs when cross-examined. It was suggested to him that in circumstances where the Claimant was reducing its lending in any event some redundancies were bound to have occurred. He replied that may be so. He also confirmed that that it was the Claimant’s intention that, as a result of the redundancies, there should be full year savings of in the region of £740,000. He said he did not know whether these savings were achieved but he accepted that he could not suggest that the redundancies did not turn out to be self-financing. It was therefore submitted on behalf of the Defendant that this item could not be proved to have been lost. In response it was submitted on behalf of the Claimant that the redundancy payments were by way of mitigation of loss. That is an attractive way of putting the claim but if the payments were intended to be self-financing and it cannot be suggested that they were not then on balance it appears to me that the redundancy costs were not, ultimately, a loss. If, as Mr. Harding accepted, some redundancies would have occurred in any event and where there has been no attempt to quantify those which would not have occurred then that is a further reason for saying that the loss has not been proved. 
225.	The second head of claim is said to be in respect of legal fees from Addleshaw Goddard and Eversheds in the sum of £28,605 (though it does not appear in the list of losses in Mr. Gee’s statement). On behalf of the Defendant it was submitted that fees relating to redundancies should not be allowed but that those directly attributable to hedge accounting should be allowed. On the basis of my decision with regard to redundancies that appears to be correct. It was further submitted, on the basis of evidence of Mr. Harding in cross-examination, that some £13,668 related to advice concerning Mr. Cowie’s removal. Mr. Harding said that was correct. Those costs are therefore not recoverable. On that basis the Defendant put forward a “pragmatic” figure of £7,500 as representing the legal fees directly referable to the hedge accounting issue. I accept that concession. There does not appear to be convincing evidence (or argument) from the Claimant that the legal fees in relation to the hedge accounting issue were more than that. 
226.	The third head of claim is £35,833 in respect of fees paid to Maitland Consultancy “for corporate and financial communications advice”. On the basis of Mr. Gee’s evidence in cross-examination this relates in part to “PPDS” costs and in part of the costs of changing the chairman. The latter is not recoverable and the former is said not to be recoverable. Since I do not, I think, have any explanation as to why it is recoverable I must accept the submission made on behalf of the Defendant that no sum has been proved to be a recoverable loss. 
227.	The fourth head of claim is £12,401 paid to Merrill Corporation “for data site hosting to allow third parties to investigate.” Mr. Gee accepted that this item also related to PPDS which, I am told without contradiction on behalf of the Claimant, are not claimed. In that event this is not a recoverable loss.
228.	The fifth head of claim is £72,000 paid to PwC for their investigation of the hedge accounting process. In the light of my findings the Defendant accepts that this sum is recoverable.
229.	The sixth claim is a sum of £23,000 paid to Jeff Pritchard for a report on restructuring options. There is evidence that this advice had been recommended by the FSA before the hedge accounting issue arose. However, the work appears to have been done in 2013 and 2014 in the aftermath of discovery of the hedge accounting issue. Some part of this sum is therefore recoverable. But there is also evidence from Mr. Harding that Mr. Pritchard was asked to provide advice on other risk management issues. If I allow £11,500 I do not consider that I am being unjust to either party.  
230.	The seventh head of claim is £392,110 paid to Addleshaw Goddard and Evercore from mid-2014 for capital and restructuring advice. There is some evidence (comparing the terms of the Evercore engagement letter with the Claimant’s business plan before the hedge accounting issue arose) that work of this nature would have been required in any event. Mr. Gee said that the advice was in relation to a potential merger which was also the subject of debate between the FSA and the Claimant before the hedge accounting issue arose. Mr. Harding also accepted that capital restructuring advice would have been needed in any event. It might be said that the need for capital restructuring was all the greater once the hedge accounting issue arose and that the costs incurred were greater than they would have been but for the hedge accounting issue. But since the Defendant did not assume responsibility for the losses on the swaps which losses made advice on capital restructuring urgent it does not appear to me that these costs are recoverable.   
231.	Thus the total costs proved under this head is £7,500 plus £72,000 plus £11,500, namely, £89,000. 
(vi) PwC hedge accounting fees 
232.	£66,000 was paid to PwC in respect of hedge accounting. (This appears to be a different claim from that dealt with above.) Mr. Gee accepted that if the Defendant had not been negligent in 2006 it was possible that the Claimant would have wanted a second opinion on the applicability of hedge accounting. When pressed he said that it was most likely that the Claimant would have wanted a second opinion. On the basis of that evidence I must accept that it is more likely than not that a second opinion would have been obtained in 2006 had the Defendant not been negligent. The remaining question is whether it would have cost £66,000 in 2006. That is unlikely because professional costs tend to increase with time. There was also some expert evidence that the work done by PwC was different from and more extensive than anything that would have been done in 2006. It was suggested on behalf of the Claimant that a second opinion in 2006 would have cost no more than £5,000, that being the sum which the Defendant charged in 2006 for work in connection with the introduction of IFRS. I consider that that is optimistic. It is true that that sum was charged for some work in relation to hedge accounting but at the same time the Defendant was charging in respect of its work on the annual audit. I consider that a second opinion is likely to have cost £ 20,000 in 2006. On that basis the Claimant’s damages under this head are £46,000. 
(vii) The set up and operational costs of the Spanish lifetime mortgages
233.	These costs are agreed in the sum of £835,000. The Claimant says that but for the negligence of the Defendant these costs would not have been incurred because the Claimant would not have purchased the Spanish lifetime mortgages. The Defendant says that these are not losses of a type for which it assumed responsibility and so are not within its duty of care. My decision on this head of claim must follow my decision on the principal claim. The Defendant’s advice was an effective cause of these costs being incurred in that the apparent availability of hedge accounting was one of the reasons why the Claimant decided to issue the Spanish lifetime mortgages. The costs were a reasonably foreseeable consequence of the Defendant’s negligence. However, the Defendant did not assume responsibility for the consequences of the Claimant deciding to enter the Spanish lifetime mortgage market. That decision was taken for commercial reasons in respect of which no advice was given by the Defendant. It must therefore follow that the costs are not recoverable.   
 (viii) Credit for the benefit of holding the additional UK lifetime book until December 2013
234.	The parties have agreed that by holding the additional UK lifetime book (that is, additional to the original £21m UK lifetime book) until December 2013 the Claimant earned a net profit of £3.5m. It is accepted by the Claimant that to the extent that the Claimant recovers damages in respect of the £21m UK lifetime book, credit must be given against such damages in the sum of £3.5m. However, since I have rejected that claim no credit needs to be given.  
(ix) Credit for the Spanish lifetime mortgage book 
235.	At a time when it was not agreed whether the Claimant will suffer a loss or make a gain on the Spanish lifetime mortgage book the Claimant submitted that “rough justice and the interests of finality” are best served by making no award in respect of loss and by giving no credit in respect of profit. However, I now understand it to be agreed that the Claimant will make a profit of £2.46m or £3.3m (depending upon whether the assessment of that profit has included the operating costs of £835,000). However, just as the Defendant is not responsible for losses on the books of mortgages (in respect of which it did not assume responsibility) so it cannot seek credit for gains made on the books of mortgages. 
Contributory negligence
236.	The damages recoverable by the Claimant for the Defendant’s admitted negligence therefore amount to £420,460 (in respect of items (i), (v) and (vi) above), subject to the question of contributory negligence. The question of contributory negligence will also be relevant in the event that I am wrong in my conclusion as to assumption of responsibility and the Defendant is, contrary to my decision, liable to the Claimant in respect of the costs of closing the swaps. 
237.	The Defendant’s case is that the Claimant was negligent in two respects. The first related to the commercial decision to purchase long term swaps. The second related to Mr. Gee’s negligence in considering that hedge accounting was available when it was not. 
238.	The first allegation was summarised in this way in the Defendant’s closing submissions: 
“The Claimant entered into long-term swaps for commercial reasons and in the full knowledge that those swaps would not match but would significantly exceed the maturity profiles of its lifetime mortgages creating a substantial interest rate risk mismatch. The Society decided to take this course of action on the assumption that interest rates would remain high, which proved to be false.  ”
239.	In order for a claimant to be contributorily negligent it must be shown that the claimant failed to take reasonable care of its own interests. Although there was an abundance of expert evidence in this case, I was left to assess this important matter myself. Much was made of the allegation that in deciding to purchase 50-year rather than 20-year interest rate swaps Mr. Cowie was “betting against the market”. His “bet” has proved to be wrong (so far) but it does not follow from that fact alone that he was negligent in taking a different view of interest rates from the market. I do however consider that the Claimant was negligent in deciding to buy 50-year swaps. I have reached that conclusion for two reasons. First, the duration of the swaps greatly exceeded the likely duration of the lifetime mortgages. That meant that the Claimant would have to have been able to replace or substitute redeemed mortgages with new mortgages. There is no evidence that any thought was given to the question whether this was likely to be possible decades ahead of 2006. Second, Mr. Cowie’s memorandum to the board on this subject did not suggest that the Claimant could be confident that it would be able to replace redeemed mortgages. Rather, he assumed (though with support from historical rates) that if interest rates remained at a certain level, it would in fact be cheaper to purchase 50-year swaps, rather than 20-year swaps, even if there were no substitute mortgages. It seems to me that this approach did not exhibit reasonable care for the interests of the Claimant. It involved the Claimant in making judgments about interest rates in the far distant future; an uncertain and speculative exercise. No doubt building societies have to make some judgments of that nature but to do so over a period of 50 years appears to me to be unwise. The purchase of 50-year swaps was, in my judgment, an unnecessary and imprudent risk to take. 
240.	Counsel for the Claimant did not specifically address this head of contributory negligence in their closing submissions. They referred to “an attack on the Claimant’s management of interest rate risk” and suggested that there was “nothing in this at all”. That appeared to me to refer to criticism of the Claimant’s “gap analysis” which is a different point from the criticism of the Claimant’s decision to purchase 50 year swaps. It was perhaps difficult to mount a credible defence of the Claimant’s “over-hedging” in circumstances where (i) the regulator had been critical of the Claimant’s approach to risk management, (ii) Mr. Cowie had spoken of “a damaging exposure to the long-term swaps” which was “primarily a failure in the risk management framework, in not having identified the full multifaceted scale of risk generated by holding the level of SWAP risks previously built up” and (iii) Mr. Harding had referred to “a series of poor strategic decisions made by the previous management team.”  
241.	The second allegation was expressed in this way in the Defendant’s closing submissions:
“Mr Gee, the Society’s Finance Director and a member of the Institute of Chartered Accountants, negligently devised the Society’s approach to hedge accounting and was primarily responsible on behalf of the Society for ensuring that the Society complied with IAS39.”
242.	Mr. Gee had admitted this fault in the regulatory proceedings commenced against him and stood by that admission when cross-examined in this case. 
243.	When assessing the degree of contributory negligence the fault of the Claimant has to be compared with the fault of the Defendant in terms of blameworthiness and causative potency. That is the recognised approach to the apportionment of blame on the grounds of contributory negligence.  
Blameworthiness. 
244.	The risk management fault in over-hedging by purchasing 50-year swaps was the Claimant’s fault alone. The Defendant was aware of it but the decision was that of the Claimant alone. However, this fault has little relevance to the damages which the court has held to be otherwise recoverable. The recoverable damages do not include the losses on the swaps. The risk management fault would have greater relevance had the recoverable damages included the costs of closing out or breaking the swaps, which costs were increased by the over-hedging. 
245.	In this context reference was made to the decision of the House of Lords in Platform Home Loans v Oyston Shipyards [2000] 2 AC 190 which concerned the application of the Law Reform (Contributory Negligence) Act 1945 to a case of surveyor’s negligence in the context of the SAAMCO principle. There was no detailed argument before me as to what this case decided. I have noted in particular the conclusion of Lord Hobhouse at p.211: 
“My conclusion therefore is that just as Lord Hoffmann has formulated a general principle which is easy of application in all save exceptional cases, so also will the right answer on the application of section 1(1) of the Act of 1945 be arrived at by applying the traditional percentage reduction to the lender's basic loss before making any further deduction on account of the Banque Bruxelles principle. I stress that these are rules of thumb; to adopt the language of Lord Nicholls, the principle has to be translated into practical terms. They do not aspire to mathematical precision nor is it desirable that any attempt be made in the ordinary run of cases to make them mathematically precise since the data (the evidence) will not normally, given the complexity of the situation, be sufficient to justify such precision: see the Court of Appeal in Banque Bruxelles [1995] Q.B. 375. The task of the court is to make a just and equitable assessment.”
246.	Immediately before reaching this conclusion Lord Hobhouse had identified an error by the Court of Appeal in its assessment of a just and equitable assessment: 
“The decision of the Court of Appeal in the present case in effect makes the same deduction twice over. The Banque Bruxelles principle already involves an exercise of attribution in relation to the extent of the defendants' legal responsibility for the plaintiffs' basic loss. That fact must be taken into account in deciding what further, if any, reduction in the plaintiff's recoverable damages is just and equitable.  ”
247.	In accordance with that approach I have borne in mind that the Claimant’s recoverable damages have already excluded the losses on the swaps, which losses must have been increased by the Claimant’s risk management fault in over-hedging by purchasing 50-year mortgages. It seems to me that in circumstances where those losses have already been excluded the Claimant’s risk management fault ought to be given relatively little weight when apportioning liability for the damages for which the Defendant has been held liable. To fail to bear that in mind would risk making the same deduction twice over. 
248.	The accountancy fault in using hedge accounting when it was not permitted by IAS39 was the fault of both the Claimant and the Defendant. However, in relative terms the fault of the Defendant was much the more blameworthy because the Defendant had been approached by the Claimant for specialist accounting advice. Counsel for the Defendant submitted that the directors of the Claimant have the primary responsibility for the accuracy of the Claimant’s accounts. That is of course correct when viewed from the standpoint of those who rely upon the accounts, such as shareholders. But as between the Claimant and the Defendant it makes no sense to say that the directors of the Claimant have primary responsibility when Mr. Gee sought specialist accountancy advice from a leading form of accountants. 
249.	Counsel for the Claimant submitted that there should be no reduction on account of contributory negligence. They referred to Dickson v Devitt (1916) 86 L.J.K.B. 315, where Lord Atkin said (at 317–318): 
“Business could not be carried on if, when a person has been employed to use skill and care with regard to a matter, the employer is bound to use his own care and skill to see whether the person employed had done what he was employed to do.”
250.	Care must be exercised in the application of that dictum when apportioning liability under the Law Reform (Contributory Negligence) Act 1945 because the case in which it appears pre-dated that Act when contributory negligence could operate as a complete defence. However, the dictum was applied by Simon J. (as he then was) in Newline Corporate Name Ltd v Morgan Cole [2008] PNLR 2 in which the question of contributory negligence was raised. Simon J. followed the dictum and declined to find any contributory negligence, saying “if you hire a dog you do not expect to have to bark”. (It may be noted that if the canine analogy is to be relied upon account perhaps is also to be taken of the observation by Marshall and Beltrami in their article entitled Contributory Negligence: a viable defence for auditors? [1990] LMCLQ 416 at p.421 that “just because there is a watchdog on the premises, it does not follow that the occupants can safely forget to bolt the doors and omit to switch on the burglar alarm”.).  
251.	In the present case, by contrast with the above two cases, negligence has been admitted by Mr. Gee. In particular, he ought to have spotted that the Claimant’s Hedge Accounting Policy did not appear to allow for substitution and did not reflect the Claimant’s intention to hedge using 50-year swaps which would last much longer than the initial mortgages. Whereas he was entitled to rely upon the Defendant for technical advice as to IAS39, he ought to have given careful consideration to the adequacy of the Claimant’s policy. Thus although I accept that the Defendant’s blameworthiness was, overall, much greater than that of the Claimant (because the Defendant was the specialist to whom the Claimant was looking for advice), some account must be taken of Mr. Gee’s negligence.  
Causative potency. 
252.	I shall first consider the Claimant’s negligence in deciding to purchase 50 year swaps (although, as I have already noted, there is a limit to the relevance of his factor having regard to the fact that the losses on the swaps have been excluded from the Claimant’s recoverable loss). The Claimant’s opening skeleton argument said:
“The main reason why MBS suffered substantial net losses in 2013, despite the profitability of the business, is that it had to pay sums representing its liability under the swaps to their full term (up to 50 years, whereas the UKLM book had an expected future term of between 8.5 and 11.1 years). Against that, it only received value for the existing UK mortgages then and there, with the Spanish mortgages continuing to earn money on an ongoing basis stretching into the future. The mismatch between the swaps and the mortgages meant that it was paying out on swaps without corresponding mortgage income whereas, in reality, it would never have got into that position. ”
253.	In reply counsel sought to paint a different picture based upon a table (from an expert’s report) which set out how the costs paid in 2013 for closing out the swaps were calculated. That suggested that only about 22% of the costs were attributable to the fact that 50-year rather than 25-year mortgages were purchased. Counsel for the Defendant objected to that point being taken because it appeared to be inconsistent with the Claimant’s opening skeleton argument. I bear that objection in mind but the table on which it was based was in evidence. I also bear in mind Mr. Gee’s evidence that 50-year swaps exposed the Claimant to a much higher degree of volatility. It is further to be noted that the swaps in support of the Spanish lifetime mortgages were not for 50 years (see paragraph 94 above). Doing the best I can with the evidence to which I have been referred I consider that I should regard the decision to purchase 50-year swaps as being responsible for a substantial part (that is significantly more than 22%) of the losses incurred when closing out the swaps. Having said that, the damages otherwise recoverable by the Claimant do not include (on my findings) the costs of closing or breaking the swaps. This element of causative potency is therefore of much less relevance than it would have been had the recoverable damages included the costs of closing out or breaking the swaps. 
254.	With regard to the causative potency of Mr. Gee’s accounting negligence I consider it to be substantially less than that of the Defendant. Mr. Gee’s knowledge and understanding of IAS39 may have been defective, but it was because he appreciated that deficiency that he sought specialist advice. In those circumstances the negligence of the Defendant must, as a matter of common sense, have greater causative potency. Once Mr. Gee got the go-ahead from the Defendant he went ahead with hedge accounting. However, his failure to consider carefully the Claimant’s own policy must bear some causative potency. If he had realised as he ought to have done that the Policy did not reflect the Claimant’s intention to substitute mortgages he would have pointed that out to Mr. Nuttall and Mr. Nuttall may well have considered critically the issue of substitution (as he ought to have done anyway).  
Apportionment
255.	Having regard to these reflections on relative blameworthiness and causative potency I consider that the Claimant should bear 25% of the damages and the Defendant 75% of the damages for which the Defendant is liable. If, contrary to my decision, the Defendant is liable to the Claimant in respect of the costs of breaking the swaps, some £32.7m, a different apportionment would be appropriate. In that event the Claimant and the Defendant should each bear half of the damages.   
Conclusion
256.	The Claimant is entitled to judgment for 75% of £420,460, namely, £315,345 plus interest.   
Statutory relief
257.	The Claimant has reserved the right to submit in a higher court that the Law Reform (Contributory Negligence) Act 1945 does not apply to claims in contract. In the light of that reservation the Defendant has also relied upon section 727 of the Companies Act 1985 or (in relation to the period from 1 October 2008) section 1157 of the Companies Act 2006.  That section provides as follows:
“If in any proceedings for negligence, default, breach of duty or breach of trust against an officer of a company or a person employed by a company as auditor (whether he is or is not an officer of the company) it appears to the court hearing the case that that officer or person is or may be liable in respect of the negligence, default, breach of duty or breach of trust, but that he has acted honestly and reasonably, and that having regard to all the circumstances of the case (including those connected with his appointment) he ought fairly to be excused for the negligence, default, breach of duty or breach of trust, that court may relieve him, either wholly or partly, from his liability on such terms as it thinks fit.”
258.	It was submitted on behalf of the Defendant that, notwithstanding that it acted negligently, it nevertheless acted reasonably within the meaning of the section and accordingly relief may be granted by way of a reduction in liability as is the case with contributory negligence. 
259.	The authorities on this section to which I was principally referred are Re D’Jan of London (1993) BCC 646 and Barings v Coopers Lybrand (2003) EWHC 1319 (Ch). 
260.	Re D’Jan concerned the application of the section to a director of the company who had acted negligently. Hoffmann LJ (as he then was) said at p.649:
“It may seem odd that a person found to have been guilty of negligence, which involves failing to take reasonable care, can ever satisfy a court that he acted reasonably. Nevertheless, the section clearly contemplates that he may do so and it follows that conduct may be reasonable for the purposes of sec. 727 despite amounting to lack of reasonable care at common law.”
261.	I respectfully agree that there is an oddity in considering whether a person who has failed to act with reasonable care has nevertheless acted reasonably. However, the section contemplates that such a conclusion may be reached. Thus the term “reasonably” must have been intended to allow the court to have regard to a wider range of considerations than those ordinarily involved in concluding that a person has failed to act with reasonable care. Hoffmann LJ had regard to the fact that at the time when the defendant was negligent the only persons he was likely to damage were himself and his wife who owned the company and also to the fact that his negligence was not gross but the sort of mistake which a busy man might make. 
262.	In Barings Evans-Lombe J. reviewed Re D’Jan and other authorities, including Australian cases on the comparable section in Australian statute law. He began (at paragraph 1128) by noting the paradox in the section which contemplated that a negligent auditor may be relieved of liability, in whole or in part, if he acted “honestly and reasonably.” He concluded (at paragraph 1133) that the court might determine that a person who has acted negligently has nevertheless acted reasonably if he has acted in good faith and if his negligence was “technical or minor in character” and not “pervasive and compelling”. He also concluded that the court was not restricted to consideration of the person’s fault but may take into account “wider considerations” such as Hoffmann LJ did in Re D’Jan when he took into account the “economic reality” that the defendant and his wife owned the entire company. In the absence of any other guidance I consider that I should follow this approach.  
263.	In the present case there is no dispute that the Defendant acted honestly and in good faith. The issue is whether the Defendant acted “reasonably” within the meaning of the Act. It was submitted on behalf of the Defendant that its negligence was of a technical character. It was said that the hedge accounting was a “newly introduced, very technical accounting rule.” I am unable to agree that the Defendant’s negligence was “minor” in character. Obviously it involved technical rules. But it was because the Claimant knew the rules were new and technical that expert advice on them was sought. The Defendant recognised the complexity of the new rules in late 2005 and advised internally that further investigation be made of the Claimant’s approach to them. But these enquiries were not pursued; see paragraphs 41-43 above.  Further, although the issue of substitution was raised at the meeting on 1 February 2006 and although the Defendant doubted that substitution was consistent with hedge accounting, the Defendant never clearly addressed the issue, despite appreciating the difficulty of the issue; see paragraphs 46-56 above. In the result, only the issue of documentation was addressed and the error as to substitution persisted until it was discovered in 2013. In my judgment the Defendant’s negligence was “pervasive and compelling” in that it persisted from 2006 until 2013, was known to be of importance to the Claimant and was relied upon by the Claimant for a long period of time. I find myself unable to say that the Defendant acted “reasonably” notwithstanding the wide meaning of that word in the Act. In reaching that conclusion I have taken into account, as urged by the Defendant, that the issue was “obscured” by the Claimant’s own Policy which did not match its intention to substitute the mortgages hedged by long term swaps. It is true that the issue was to an extent obscured as suggested but the issue was not invisible to the Defendant. The Defendant was aware of the intention to substitute mortgages hedged by long term swaps. Mr. Nuttall was aware (see paragraph 71 above), as was Mr. Swales (see paragraph 96 above). Yet the Hedge Accounting Policy was not questioned but was accepted.    
264.	It was also submitted on behalf of the Defendant that the matters relevant to contributory negligence can be taken account under section 727 (and its successor) if the Law Reform (Contributory Negligence) Act does not apply. I accept that that is so, provided that the Defendant has acted “reasonably” in the wide sense used in this context. In the present case I do not consider that the Claimant’s negligence (as described above in paragraphs 238 and 241) enables the court to say that the Defendant acted reasonably even in the wide sense used by the section. 
265.	Counsel for the Defendant placed reliance (in footnote 307 to their Closing Submissions) on the Australian case of AWA v Daniels [1955-1995] PNLR 727 at p.919. But that case involved a relieving section in materially different terms from those which I am asked to apply; there was no requirement that the defendant must have acted “reasonably”. 
266.	Reliance was also placed on JSI Shipping v Tefoongwonglcloong [2007] 4 SLR 460 at paragraphs 159-181. That was a Singapore case which concerned a relieving section which did require the defendant to have acted “reasonably”. The court held that where the claimant was also at fault (that is, contributorily negligent) that could be taken into account when deciding on the extent to which the defendant could fairly be relieved of liability. But that assumed a finding that the defendant had acted “reasonably”, as the Singaporean court made clear; see paragraphs 172 and 180. In that case, which concerned the failure of an accountant to detect the fraud of an employee in circumstances where the directors of the company had also been negligent in that regard, the condition that the defendant had acted reasonably was held to have been satisfied. In the present case I am unable, for the reasons I have given, to find that the Defendant acted reasonably, notwithstanding the extended sense of that word in the present context. 
267.	Thus, if it were necessary to consider the application of section 727 (and its successor), I would not have granted the Defendant relief in respect of the loss of £420,460 caused by the Defendant and for which the Defendant is responsible (subject to the effect of contributory negligence) because I would not have considered that the Defendant had acted reasonably.
268.	I am very grateful to counsel and those instructing them for their conspicuous diligence in preparing and conducting this case and for the assistance they gave me in resolving the issues in the case.