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Judgment Title: Irish Life and Permanent Plc -v- Financial Services Ombudsman & Ors Neutral Citation: 2012 IEHC 367 High Court Record Number: 2011 264 MCA Date of Delivery: 03/08/2012 Court: High Court Composition of Court: Judgment by: Hogan J. Status of Judgment: Approved |
Neutral Citation Number 2012 [IEHC] 367 THE HIGH COURT [2011 No. 264 MCA] IN THE MATTER OF THE CENTRAL BANK ACT 1942 (AS AMENDED) AND, IN THE MATTER OF PART VIIB THEREOF, AND IN THE MATTER OF AN APPEAL PURSUANT TO SECTION 57CL THEREOF BETWEEN IRISH LIFE AND PERMANENT PLC (trading as PERMANENT TSB) APPELLANT AND
FINANCIAL SERVICES OMBUDSMAN RESPONDENT AND
CHRISTY THOMAS AND JOSEPH THOMAS NOTICE PARTIES (TOGETHER WITH THREE OTHER RELATED STATUTORY APPEALS INVOLVING PAT AND MARY FOLEY, DEREK HEALY AND JOANNA HEALY AND DAMIEN LAVERY AND LINDA LAVERY-WHELAN RESPECTIVELY AS NOTICE PARTIES) JUDGMENT of Mr. Justice Hogan delivered on the 3rd August, 2012 1. What are the duties of a Bank towards a customer who seeks advice in relation to a mortgage product? This is one of the fundamental issues which are presented by a series of four appeals brought to this Court by the appellant, Irish Life and Permanent plc ("ILP") against decisions of the Financial Services Ombudsman. Before considering these broader questions, it is necessary to set out the background to the various appeals, each of which present a slightly different factual background, but all of which raise broadly similar legal issues. 2. Before proceeding any further, I should record at the outset that I am customer of the appellant Bank, a fact which I disclosed to the parties at the outset of the hearing once this appeal was assigned to me. Neither party objected to my hearing these appeals and, on that basis and in the light, therefore, of that express and mutual waiver of any objection, I agreed to hear and determine it. 3. 1 propose to outline the background facts of each of the appeals before then to examine the legal issues which arise. All of the appeals arise from events which took place mainly in 2009 and 2010 where many customers of the ILP first switched out of fixed-interest tracker mortgages (i.e., a mortgage interest rate tracking or following the European Central Bank refinancing rate) to variable interest rates, but then subsequently found that when the original fixed period had expired, they could not elect to switch back to tracker mortgages. This is a common feature of these appeals, as the customers in question maintained in their complaints that they were either poorly advised by ILP or that by maintaining a studied silence, ILP tacitly encouraged them to break the tracker rate contract. 4. It should be said that these tracker rates were originally offered in a completely different financial era, prior to the onset of the financial turmoil and banking crisis which beset the country in late 2008 and the subsequent emergence of the Eurozone debt crisis. The latter has meant that tracker mortgages interest rates are at record lows (and thus very advantageous for customers), while the Bank's costs of funds has risen. Virtually all tracker mortgages are currently loss-making and the product has since been withdrawn from the market. 5. A further consideration is that a computer failure in early 2009 meant that many ILP customers were- from the Bank's perspective- wrongly allowed to switch from fixed to variable interest rates without financial penalty. This also is a key factual background to three of the four appeals. By this stage the ECB had lowered interest rates in response to the financial crisis and many mortgage holders were examining ways of exiting fixed rates agreements in order to avail of the lower interest rates being charged to variable interest rate customers. It appears that many consumer websites were highlighting the fact that ILP were permitting customers to switch without penalty and the number of customers seeking to avail of this option rose sharply during this period of January and February 2009 until the Bank could satisfactorily address this problem. While ILP honoured the no penalty quotations, the uncontradicted evidence before me was that this computer error was extremely costly for ILP - with a net loss of over €33m.-and that ILP suspended switching in February 2009 when the problem was discovered until it could be rectified. 6. While the facts of the individual appeals vary as to their details, there are two key issues which required to be examined. First, what was the reason why ILP charged no redemption or break fee when permitting certain customers to switch from fixed to variable rates in the early part of 2009? This is a key feature in the Foley and Lavery Whelan appeals and, to a lesser extent, the Healy appeal. It does not feature at all in the Thomas appeal. Second, was ILP under a duty to inform the customers of the consequences of the break, namely, that they could not revert to the tracker mortgage at the conclusion of the original fixed rate term once that rate had been broken by opting for the variable rate? 7. I propose now to consider in detail the facts of each individual case before returning to consider some of the legal issues which arise. The Healy Appeal
The lock-in period for this product is a fixed term rate. However, this can be broken subject to the payment of redemption fees as described in the section "Early Repayment below".
Damien Lavery and Linda Lavery-Whelan
17. The Ombudsman found against ILP on the following grounds:-
Pat and Mary Foley
mortgage account...with immediate effect without penalty. I wish to opt for a loan to value variable rate currently at 5.4% and reducing in January to 4.5%." 22. Special Condition J provides that:-
'The Bank permitted you to break out of the fixed rate agreement and we committed to there being no fixed rate exit fee.' 24. The Ombudsman went on to say:-
The Thomas appeal 27. The essence of the Thomases complaint to the Financial Services Ombudsman ("the Ombudsman") was that in February, 2009 they contacted ILP seeking advice in relation to their mortgage payments. It is common case that the Thomases were allowed to switch to a variable rate in return for a redemption fee of some €1,045. However, the Ombudsman found that ILP had not given appropriate advice to the Thomases when they availed of the option to switch. Specifically, the Ombudsman found that the Thomases were unaware of the fact that the loan would not now revert to a tracker rate of interest as a result of this acceptance of the variable rate offer. In this respect, the Ombudsman found as follows:-
The Bank has rejected the complainants' argument that when they selected the variable rate they were advised that they could avail of the tracker rate in September, 20I0, when their fixed rate was originally due to expire. The Bank has claimed that it would not have provided such advice, this was simply not the case. However, I am satisfied that the Bank did not advise the complainants of the loss of the right to revert to a tracker rate when the application of February, 2009 was approved. The Bank considers that the contents of special condition 7 as adequate warning in this regard. It is imperative to note that the provisions of special condition 7 do not advise the complainants of the fact that the right to a tracker may be lost if the fixed term is broken. Therefore, when the decision was made the complainants should have been provided with the information that would explain the actual effect of this decision. No other information is provided. The agreement lacks clarity and does not provide any express information of the complainants from which they could conclude with any certainty that the tracker rate might be at risk."
The Foley and Lavery-Whelan appeals 33. Applying, therefore, the test adumbrated in cases such as Hummingbird, Henry Denny and Canty, one is driven to conclude that the findings of the Deputy Ombudsman in the Foley case regarding the conduct of ILP in not charging a break fee are clearly not supported by the evidence. The uncontradicted evidence before the Court was that the Bank had experienced a computer systems failure in late 2008 and early 2009 so that customers were not being charged a break fee. As the number of customer requests for a switch grew during the course of January 2009 and into February 2009, ILP realised that something was seriously awry. On 6th February 2009, ILP suspended requests for a switch pending a review. By 25th February a new methodology was being implemented manually and by 4th March the new methodology had been implemented on to the computer system. ILP decided that it should honour all quotations given during this period which involved no penalty switching, even though this decision proved to be extremely costly for the Bank. 34. In these circumstances there was no basis for the Deputy Ombudsman's finding that ILP's behaviour had been disingenuous. Quite the reverse: the Foleys' request for a no-penalty switch had been accommodated in early January 2009, but the actual systems error had only been discovered by ILP in February 2009. Counsel for the respondent, Mr. McDermott, argued that ILP had put forward new evidence on this appeal not hitherto available to the Deputy Ombudsman on this issue, but it seems to me that the essence of the Bank's response had already been conveyed in the Bank's letter of 9th May 2011 when it stated:- "It is not Bank policy to offer a break from a fixed rate term without the imposition of a penalty. We discovered a problem with our mortgage system in mid-February 2009 when it was not calculating an exit fee on loans breaking out of a fixed rate early. At this time the Bank suspended requests from customers until the problem was rectified. This was rectified in early March 2009." 35. It is true that the evidence supplied to this Court by ILP on this vital issue was certainly more fulsome than that supplied to the Deputy Ombudsman. I also feel certain that had this material been available it would have been of considerable assistance to him. Nevertheless and contrary, therefore, to what was stated by the Deputy Ombudsman, ILP had, in fact, provided an adequate explanation as to why the Foleys had not been charged for the switch, even though this was contrary to the Bank's own policy and even if one must concede that a more comprehensive reply has been supplied on affidavit to this Court. In these circumstances, there was no evidential basis at all for the finding that the decision not to charge a fee was the result of a "positive decision being made by it rather than as a result of a systems failure." 36. In the light of this conclusion, it follows that other derivative findings equally cannot stand. The Deputy Ombudsman thus expressly found that ILP "in waiving the usual penalty, offered an inducement [to the Healys] to break the existing contract." That finding is obviously premised on the earlier conclusion that ILP had been disingenuous and that by a clever tactical manoeuvre had waived its break fee in order to induce the Healys to abandon the valuable tracker mortgage. 37. Given that these findings are unsustainable in law and are central to the decision, it follows equally that I must therefore set aside this finding and remit the matter to the respondent. This does not necessarily mean that the respondent cannot uphold the Healys' complaint- a subject on which I express no view. It merely means that the respondent cannot do so on the basis which was done in this case by finding that ILP's conduct was disingenuous or that it had cunningly induced the Healys to make the switch by deliberately refraining to charge a break fee. 38. Turning next to the Lavery- Whelan appeal, it will be seen that this turns on two key elements:- i. First, that the applicable clause in the mortgage (Condition H) did not clearly specify that the tracker mortgage entitlement would not thereafter be available if fixed rate agreement was broken by the customer during that period. ii. Second, that ILP did not apply the break fee and that it had provided "no explanation for this decision." It followed that ILP had "acted deliberately and consciously to encourage [Mr. Lavery and Ms. Lavery-Whelan] to switch from the fixed rate" and that it had "offered an inducement" to them to do so. 39. In my view of my conclusions in relation to the Healy appeal, it is equally clear that these findings here in relation to ILP's conduct cannot stand, as they are equally a central feature of the entire conclusion. As we have just seen, ILP did offer such an explanation for the failure to charge the break fee and there is simply no evidence to support the finding that ILP had deliberately and consciously acted to encourage Mr. Lavery and Ms. Lavery-Whelan to switch out of the tracker rate. 40. In these circumstances, it is unnecessary for me to consider any of the other arguments advanced on behalf of ILP, including arguments in relation to a breach of fair procedures and the adequacy of the reasons given by the Ombudsman. Just as with the Healy appeal, I propose to remit the matter to the Ombudsman for further consideration in the light of this judgment. None of this means that Mr. Lavery and Ms. Lavery Whelan's complaint necessarily cannot succeed. Again, I express no views on the merits of that complaint, save to say that Ombudsman would not be entitled to find against the Bank on the basis that it had offered no explanation for the failure to charge the break fee or that it had deliberately sought to induce the couple to switch by failing to charge a break fee. The Thomas appeal 1. That the contents of the applicable special condition (special condition 7) was not sufficiently clear so as to advise Mr. and Ms. Thomas "of the fact that the right to a tracker rate may be lost if the fixed term is broken" and that the agreement lacked clarity as a result. ii. That when the Mr. and Ms. Thomas contacted ILP "for advice regarding interest rates", the Bank "should have specifically discussed the loss of the tracker rate" with them and there is no evidence that it did so. The construction of the special condition 43. This, undoubtedly, is a sophisticated and clever argument which, for example, had it been advanced in an undergraduate law examination would have attracted high praise from the examiners as an original demonstration of legal craft and skill. But this type of argument should really have no place in the construction of financial documents involving retail customers, even if- as the Bank contends, but the Healys deny- the customers are to be regarded as experienced investors and even if (as here) they had access to independent legal advice. Given the huge implications for the customer, if a key clause of this kind is to bear this sophisticated construction, it behoves the Bank to spell this out in plain language for the benefit of all customers, and not simply those who have either an amateur or professional interest in the niceties of the law relating to the construction of contracts who might otherwise be able to glean this vital piece of information unaided. Or, at all events, the Ombudsman is entitled so to think. Whether the Bank should have advised its customers in relation to the possible adverse consequences of the switch 45. While the categories of fiduciaries are never closed, there is, I think, a reluctance to extend their boundaries beyond the traditional categories because to do so would effectively impose super-added duties of utmost good faith and complete disclosure to persons who never contracted to do so and thus potentially frustrate the ordinary workings of the commercial world. While all who enter into contracts are obliged to discharge them honestly and in good faith, it cannot be supposed, for example, that a retailer is under a positive obligation to disclose to a customer that he or she is aware that exactly the same goods can be purchased for a lower price from a nearby outlet. That would, however, be the position in law if, for example, a retailer were held to be a fiduciary. 46. Accordingly, save in the special case of where the mortgagee enters into possession of mortgaged property it is clear that the mortgagor/mortgagee relationship is not a fiduciary one: see, e.g., Irish Life and Permanent pic v. Financial Services Ombudsman [2011] IEHC 439,per Michael White J. Nor can it be said that there is there a general duty on a Bank to insist that customers take independent advice in relation to Bank dealings: see Bank of Ireland v. Smyth [1996] I I.L.R.M. 241, 249 and Breslin, Banking Law (2nd. Ed.)(at 125). 47. While all of this is true, at the same time some measure of realism must also temper this analysis. The banking system is, by its nature, a highly regulated one which, is- or, at least, ought to be- based on trust: see, e.g., Director of Corporate Enforcement v. D 'Arcy [2006] 2 IR 163, 177, per Kelly J. The laissez-faire rules which might apply in the case of the borrowing and lending on the international capital markets cannot be applied in exactly the same way in the case of the domestic mortgage market, given that these are matters which gravely affect the long term welfare of most members of the general public. The very fact that the Office of the Financial Services Ombudsman was established by the Oireachtas is itself living testimony ofthis. 48. All of this means that the engagement by a Bank with its customers in relation to the domestic mortgage market must be viewed in this light. Just as with the construction of contractual documents, it would be unrealistic to suppose that retail customers should be aware of the finer points of the law in relation to fiduciaries. Nevertheless, it is important to recall that in all four appeals, the customers dealt with representatives of ILP's "Mortgage Advice Department" and these representatives were frequently described by the Bank as "mortgage advisors" or "advisors": see, e.g., the letter from ILP to the Ombudsman on 161h May 2011 in relation to the Healy appeal. The voluminous documentation accompanying these appeals are replete with references (by both customer and Bank alike) to mortgage advisors. 49. While counsel for the Bank, Mr. Murray SC, emphasised that ILP saw its role as simply giving information and not advice, this is not quite the picture which emerges from the documentation, or, again, at least, the Ombudsman- who, after all, is possessed of special skill and competence in this area - was entitled so to think. Nor does any of this necessarily involve a radical change in the law. 50. It is true that the oft-cited decision of Mocatta J. in Schoiler v. National Westminster Bank [1971] 2 Q.B. 719 is regarded as authority for the proposition that a Bank is under no duty to give advice to its clients. But even that case needs to be viewed in its proper context. That was a case where a Guernsey-based Bank transferred Malaysian dollar denominated dividends to the United Kingdom for encashment without reference to the plaintiff or her advisers because they did not have the requisite foreign exchange facilities to change Malaysian dollars. The plaintiff, a Danish non-resident, found that these proceeds then suffered United Kingdom tax by reason of that transfer, even though this would not have occurred had the funds not been so transferred. 51. It is important to stress that this was an action for negligence and breach of contract, which, despite the judge's evident sympathy for the plaintiff, ultimately failed. Critically, however, the plaintiff did not contend that the Bank owed her any duty with regard to tax advice. Accordingly, it was in that context that Mocatta J. held that the suggestion that the bank owed the plaintiff any such duty would be placing an "impossible burden upon a Bank and would therefore be unreasonable to imply such a duty from the facts here": see [1971] 2 Q.B. 719,727. It is, however, one thing to say that a bank is not under a duty to give tax advice in relation to the rather specialist matters of the taxation of foreign dividends. It is quite another to say that a bank did not hold itself out as having given advice in relation to matters peculiarly within its own knowledge and expertise, such as the consequences of switching between its own various mortgage products. 52. Indeed, one does not have to go much further than Hedley Byrne & Partners v. Heller & Co. [1964] AC 465 to see how a bank can assume a liability for advice gratuitously given. Of course, the mere fact that a bank might evaluate, for example, the commerciality of a particular project in order to assess the credit risk does not in itself place the Bank under any duty of care to the customer. There are, however, a series of English cases where it has been stated that banks who take it upon themselves to advise customers can be placed under a duty of care as a result: see, e.g., Wood v. Martins Bank [1959] 1 Q.B. 55; Verity v. Lloyds' Bank, The Independent Law Report, 4th September 1995 and Frost v. James Finlay Bank Ltd. [2001] EWHC Ch 404. 53. The decision in Verity is of some interest because there the defendant bank had produced a leaflet advising customers to ask their bank manager for advice which was "frank, professional and yours for the asking." The defendant was held liable based on this advice given in relation to a buy to let investment which failed. In the present cases ILP - with its reference to mortgage advisors and a mortgage advice centre - appears to have created something of a similar aura and expectation on behalf of customers. In these circumstances, I consider that the Ombudsman was entitled to hold that Mr. and Ms. Thomas had contacted ILP for advice as well as for information in relation to their mortgage products and that the Bank's response should be judged against that background. The Ombudsman was, moreover, entitled to find that the Bank had not given the appropriate information as to the implications of a switch. 54. For good measure I would also add that the Ombudsman was entitled to invoke Chapter 2.12 ofthe Consumer Protection Code (2006) which provides that:
56. It follows, therefore, that the Ombudsman was entitled to think that the present case came within s. 57CI(2)(g), so that the conduct here was "otherwise improper" in the sense used in that sub-section. In other words, the Ombudsman was entitled to conclude that a retail Bank should properly alert its customers- if only in the most general of terms - of the potentially serious adverse consequences of a particular decision, especially where it seems clear where those customers were seeking advice and guidance from the Bank's mortgage advice centre and that these are standards which modem retail Banks might reasonably be expected to uphold. 57. It would, I think, have been advantageous and desirable for the Ombudsman to have spelled out precisely why the conduct was considered to be so otherwise improper in this statutory sense for all the reasons set out by Finnegan J. in J.& E. Davy v. Financial Services Ombudsman [2010] IESC 30, [2010] 3 I.R.324, 370. But just as in J & E Davy, I consider that the reasons given by the Ombudsman are perfectly clear and obvious in the context of the elaborate reasoning contained in the decision and ILP cannot be said to have been prejudiced by this omission 58. For all of these reasons, I would dismiss the appeal in the Thomas case. The Healy Case 60. The Ombudsman observed that:
62. The Ombudsman, however, also went to say that:-
64. While this matter has given me some anxiety, in the end I have concluded that these observations are not central to the conclusions in the same way as they were in both the Foley and Lavery-Whelan appeals. In this regard, therefore, I propose to adopt the approach taken by Hanna J. in Caledonian Life v. Financial Services Ombudsman [2010] IEHC 384. I will, therefore, uphold the finding, albeit for somewhat different and more confined reasons than those actually given by the Ombudsman. In this regard I propose, therefore, to direct that the Ombudsman's finding be amended by removing the passage in question. Conclusions
B. I propose to make an identical order in the Lavery and Lavery-Whelan appeal. C. In the Thomas appeal I propose to make an order pursuant to s.57CL(2)(a) affirming the finding of the Financial Services Ombudsman. D. In the Healy appeal I propose to make an order pursuant to s. 57CL(2)(a) affirming the finding of the Financial Services Ombudsman, but I will also direct that certain passages (the nature of which I will discuss with counsel) stand edited and removed from the decision of 9th August, 2011. |