History was made when the UK High Court ruled that Barclays would have to face Guardian Care Homes (GCH) in court over allegations of mis-selling derivatives and fixing Libor, which the business is now seeking around £38m worth of damages for.
The landmark case is being used as a "test case", as it is tipped to determine how courts rule against similar cases in the future. It is therefore being closely watched by public and the owners of 40,000 interest rate swap agreements (IRSA) that are currently being reviewed for cases of mis-selling.
After the High Court judge ruled that a claim brought against the bank by GCH must go to a full trial, Gary Hartland, CEO of GCH said that it was a "huge milestone with a trial now going forward to determine whether these financial products should be declared void."
He also added that "despite the fact that our claim has always had the Libor element, Barclays has to date refused to disclose information including the names of senior management involved in attempted rigging. Our claim is not just based on mis-selling but on the effect of senior management at Barclays instructing the aggressive selling of swaps while attempting to rig Libor."
Meanwhile, the case has resonated with a number of small-to-medium enterprises (SME) that are claiming to have been mis-sold IRSAs, as a large proportion of them have fallen on financial hardship when struggling to make payments on the swaps.
Jeremy Roe, founder of lobby group Bully-Banks told IBTimes UK that "it is clear from the decision of Lord Justice Flaux in the GCH case that the manipulation of Libor by Barclays and other banks is an issue that is wholly relevant to the mis-selling of IRSAs and provides yet another ground upon which SMES may challenge their IRSAs. That can no longer be disputed by the banks."
"In very simple terms, if Libor is found to have been artificially manipulated by Barclays, which is a fact already accepted by Barclays in its dealings with the FSA, every IRSA sold by Barclays is likely to be void, as is every IRSA sold by other banks implicated in the Mis-selling of IRSAs, because they are based on a conscious deception," he added.
However, judging by the strong statement Barclays delivered to the IBTimes UK, GCH has got a long and complex fight on their hands.
Also in light of every mis-selling swaps case, each product and scenario has to be evaluated individually, as the situation and terms and conditions vary each time. Adding in Libor fixing damages also complicates matters and cannot be applied to every IRSA claim.
A source close to the Barclays vs GCH case, who wants to remain anonymous due to the sensitivity over proceedings told IBTimes UK that "while the judge decided that GCH can include their amended claims as part of any future legal case, it does not mean that it will be any more likely to win such a case going forward" and that "the case doesn't have merit."
Sophisticated vs Unsophisticated
GCH's case centres around loan and finance deals between Barclays and itself during 2007 and 2008 and subsequently two multi-million pound IRSAs attached to it.
IRSAs are contracts between a bank and its customer where typically one side pays a floating, or variable, rate of interest and receives a fixed rate of interest payments in exchange.
They're used to hedge against extreme movements in market interest rates over a given period. Companies that have seen the value of these products move against them as rates fell during the recession, now owe banks crippling sums of money in interest payments each year.
The main issue where SME are claiming to be mis-sold similar products, is the level of appropriateness of the product for their business, to the fact that they had no idea what they were being sold or that they understood the number of negative scenarios or break costs they would encounter should interest rates move lower.
Another trend that many SMEs are claiming to have contributed to being mis-sold IRSAs is the fact that they had never purchased such complicated products before and therefore would not have had the access to sophisticated advisors.
And this is where GCH differs.
According to Barclays defence, "the Judge's decision means these issues will need to be determined at a full trial in due course. This business had a suite of advisors and a lot of financial experience and skill in-house."
"We understand that Graiseley (the owner of GCH) entered into their swaps with sufficient understanding to exercise their own judgment as to whether the products would meet its business objectives. They are a significant business which owes Barclays £70m. We do not believe the case has merit and will defend it," it added.
In the Defence statement issued by Barclays to the High Court, the bank highlights correspondence and conversations with Hartland, who they highlight was a financial accountant and that the group had "utilised and / or had access to an array of financial and legal professional advisers," while also listing five parties that were involved in financial making decisions.
This is where some experts believe that this is not necessarily a "test case" for SMEs, as the type of client is very different.
"Any swap mis-selling case is not straight forward and every product and client should be viewed on an individual basis. However, there is an argument, which Barclays is testing, is over whether GCH can claim for mis-selling as an unsophisticated investor. For instance, a business which has over 30 homes across the UK, cannot be deemed as completely unsophisticated," says Abhishek Sachdev, managing director at FSA-Authorised Vedanta Hedging.
"When you compare GCH to the number of businesses that are claiming mis-selling, such as Paul Adcock and all the other smaller retailers, such as fish and chip shops and the local newsagents, they would have not had the experience or immediate access to derivatives experts like myself or had any prior experience in knowing about the intricacies of a swap agreement. It is very different," he adds.
The Case for Mis-Selling
As the IBTimes UK has reported on a number of occasions, to prove there is a case of mis-selling, there are a number of challenges that businesses face, even if at-face-value a case may seem clear cut.
Following the 29 June agreement with the UK regulator Financial Services Authority (FSA), a number of banks, including Barclays, HSBC, RBS and Lloyds, have been banned from selling IRSAs to SMEs and are now in charge of reviewing every one of these products sold, to determine whether they were mis-sold. A bank appointed 'independent reviewer' will also help with the investigations but the banks are also in charge of determining redress or compensation should it find that there was mis-selling.
Each of the case studies IBTimes UK has seen vary in scope and scale and of course, in terms and conditions. The question over whether the customer was fully aware of the complexity and 'downside risk' to the hedging instrument has been widely contested by SMEs and of course the transparency over 'break costs' - the cost of exiting the agreement.
The lack of deadline to the reviews and of course 'power' banks have over the investigations has caused alarm and has led many to seek a legal course of action against the banks, instead of waiting for an outcome from the FSA agreement.
However, when it comes to company like GCH there would have to be some form of hedging in place. This is where GCH and smaller SMEs differ.
For instance, a single fish and chip shop that took out a loan to pay for a shop would not need the insurance or hedging requirements of that of a business that has hundreds of workers and chains of physical retail shops.
Experts say the main issue will be, again, the level of sophistication GCH has and of course the resources it would have had at its disposal. In the amendment pleadings document seen by IBTimes UK, GCH are claiming that the derivatives contracts are misrepresented and Libor representations were wrong.
"The major difficulty that GCH has, it that it is a fairly sophisticated customer and it would have had experience of entering these types of products previously. While I do not have exact details of the GCH case, it would be normal for a large company like them to have a series of solicitors, accountants and finance directors that would have signed off on the agreement and a customer classification, as well as a risk warning notice," says Stevie Loughrey, associate solicitor at Carter-Ruck.
"There also would have most likely been non-reliance clauses added to this, which can act against the buyer and act as a contractual stop against the claims. However, with the inclusion of Libor fixing in the claimant's amended claim, it looks as if they are saying the contracts were fraudulently misrepresented rather than negligibly misrepresented, which does change the case," he added.
Libor Fixing: Difficult to Prove Impact
As purported, the GCH case is the first to wrap Libor fixing into its claim against mis-selling derivatives. Although it had successfully settled with Lloyds for an undisclosed amount previously, the inclusion of Libor rigging takes the case into another dimension.
Barclays received a record fine of £290m with US and UK authorities earlier this year for manipulating Libor.
Since that civil penalty was made, GCH included Libor fixing into its claim, because it says that during the time it was sold these products, Barclays was rigging rates and therefore it misrepresented the benchmark rate that the swaps was hinged upon.
"Right now, the GCH claim is more philosophical than technical. For instance, when you get into the details of Libor there are a number of complicated and major challenges GCH will face when it comes to proving the 'damage' Libor rigging has had on the business," said Sachdev.
"On a basic level, let's say that the loan and swap are both matched to Libor, some can argue that then, no matter what the rate is, there will not be a damaging financial impact for the company, because if you pay less on the loan but more on the swap - it will even itself out."
Experts also point out that the process for proving the 'damage' Libor rigging has caused, will be a very long and drawn out process.
"Including Libor misrepresentations in the GCH claim has brought what is fundamentally a derivatives mis-selling case a lot of additional attention but is a point that may ultimately be difficult to show had any material impact. At the High Court, the Claimants clearly enjoyed a successful application to amend their pleadings and it seems Barclays are set to be forced to disclose Libor related material in the coming months however the Claimants have difficult hurdles to overcome," says Ali Akram, Principal - Practising Solicitor (England & Wales) - Barrister (Lincoln's Inn) for LexLaw.
"GCH has to prove that the manipulation of Libor by the Barclays rate setters actually impacted the Libor rate and what the genuine Libor rate would otherwise have been. They then have to prove that the manipulated rates adversely affected the hedging agreements that were pegged to Libor, in comparison to what it would've been. They then have to calculate their loss and the damages that flow from the manipulation of Libor," he adds.
While Barclays was the first bank to settle for a civil penalty over Libor rigging, IBTimes UK has highlighted a number of times that it is important to remember the way in which Libor is set.
Every day, Libor setters at banks submit their rate levels, which are an estimate of how much it would cost to borrow money from each other on different currencies and products, to Thomson Reuters Corp, which then calculates the data on behalf of the BBA.
The highest and the lowest submissions are stripped from the final set of data and the average rate level is calculated from the remaining submissions and published for individual currencies before midday in London.
So for instance, even if one bank set the rate higher or lower than any of the other banks, then that number would be stripped out.
For the Libor rate to be manipulated to the extent of moving rates, it would require mass collusion and contact between different institutions, not just internally at one bank.
While Barclays is still under investigation by a number of regulators around the world, so are a vast number of other banks and without this information, it is difficult for someone, right now to actually prove that Libor were moved at any one time.
Will This 'Test Case' Hurt or Hinder Future Claims?
The case management conference itself was postponed and has been scheduled for 13 November possibly in Birmingham.
Akram, who was at the High Court hearing said "as Mr Beltrami QC for Barclays spelt out, GCH will have a hard fought legal battle against Barclays. GCH will have to not only prove Libor and other misrepresentations, but also in the face of precedent that they are entitled to claim statutory breach under s150 FSMA 2000, and that there was breach of an advisory duty."
"It was also set out for Barclays that GCH had rescinded the hedging and securitisation contracts but not the loan agreement and the bank argued these were interlocking agreements. Certainly in terms of the hedging it can generally be argued by claimant lawyers that the hedging is a separate independent contract capable of rescission," he added.
The case is at a crossroads because Barclays is able to either avoid having to disclose emails, documents or any other information related to Libor and individuals involved through settling with GCH or continuing onto court.
"The only realistic way for Barclays to now avoid making any Libor related disclosure and suffering the reputational damage that may ensue is by settling the case. If Barclays do settle, this doesn't mean that every derivatives mis-selling claimant will be automatically be attaching Libor misrepresentation to their claim because the starting point is that the hedging product sold must be specifically linked to this rate. We estimate that less than ten per cent of derivatives sold to SMEs are specifically pegged to Libor," said Akram.
However, whatever the outcome of the case, experts say that SMEs should not be worried that it will necessary have a damaging impact against future claims, should GCH lose its claim against Barclays.
"My view it shouldn't be viewed as a test case," said Loughrey. "The GCH case is very different from majority of SME cases out there."