Forex (fx) derivatives misselling claims

We advise companies making claims against banks over toxic foreign exchange (forex or fx) transactions and derivatives. 

We have recently (since mid-2014) seen an increasing number of companies which have been suffering from serious losses caused by these very complex and one-sided trades. With sterling at a five year high against the US dollar, many companies are now in a position of having to accept far more foreign currency than they require at rates which are far worse than market rates. As a result, many companies find themselves seriously out of the money and now realise that they were unaware of the risks involved when they entered into these forex contracts.

Companies which require foreign exchange for their businesses have often sought to hedge against currency risk by entering into forward contracts so that they have fixed currency costs over the coming months or years. But banks have been persuading companies to enter into extremely complicated forex trades which are entirely unsuitable for ordinary businesses. Instead of helping them to mitigate against currency risk, these contracts are speculative products which have the potential of leaving  companies with enormous liabilities. 

Characteristics of these trades often include:

  • trades may be “knocked out” if a predetermined “in the money” target, which accumulates over the monthly trades, is exceeded.  These are known as TARFs (Target Redemption Forwards) or TARNs (Target Accrual Redemption Notes);
  • downside risks are potentially unlimited if exchange rates move the wrong way;
  • little upside – trades may be “knocked out” or terminated if the exchange rate reaches a certain level.  If the trades are knocked out, companies may have to purchase currency at or below spot rates;
  • companies may be locked in to contracts lasting considerable periods (18 months or 2 years) with individual trades expiring each month and with high break costs to terminate; and
  • ratio forwards – where, if the exchange rate reaches certain trigger points, companies may find themselves having to buy, for example, double the currency they require.

The combination of these factors is highly unpredictable and means that it is extremely difficult for a business to foresee what its potential liability may be.

Possible causes of action

Bank customers caught up in such contracts may have the following possible legal claims against their bank:

(a) Negligent advice  

The bank may owe the customer a duty of care at common law to advise and/or to provide complete and accurate information to the customer in respect of the contracts.  This duty may include:  

  • a duty not to recommend derivative contracts which were unsuitable and/or inappropriate;
  • a duty to explain the nature and effect of the contracts;
  • a duty to ensure that the information was complete and accurate;
  • a duty to inform as to the risks involved, in particular in relation to potential losses; and
  • a duty to inform as to the effects and risks of restructuring the contracts.  

The bank’s terms and conditions relating to the contracts include disclaimer clauses to the effect that it is not providing advice to the customer. It would be usual for the bank to seek to rely on those disclaimers and argue that they should be regarded as “basis” clauses, i.e. clauses which set out the basis on which the parties are deemed to have entered the contract. The bank would say that the effect of a basis clause is that it prevents the customer from arguing that the bank was advising them, no matter what the bank may have said to the customer.  

There is legal authority, however, that basis clauses may not be effective if the bank knew that the basis was untrue. For example, if the bank was well aware that the customer was not taking its own advice or carrying out risk management, then the bank would know the non-advisory clause did not reflect the reality of the situation.  

The customer could also argue that the disclaimer clauses are not basis clauses but are exclusion clauses. If they are regarded as exclusion clauses, then it is arguable that they were not reasonable under the Unfair Contract Terms Act 1977. It is further arguable that the clauses were unreasonable because the customer was in no position to calculate the potential risks and costs whereas the bank had sophisticated systems available to do this.   

If it can be proved that the bank was in breach of its duty of care, recovery of all the losses suffered by the customer could be sought on the basis that, if the bank had complied with its duties, the customer would not have entered into such transactions.

(b) Best execution  

The bank may have been in breach of its contract with the customer in that it failed to comply with its best execution policy.

Banks are under a statutory requirement to provide its Retail Clients with ”best execution”, i.e. to sell such clients products at the market rate. If the customer is not a Retail Client as defined by the FCA, it will not be entitled to this statutory protection and it will have to see whether the bank’s terms and conditions included a contractual “best execution policy”. If so, it might be possible to claim that the bank had not complied with its contractual policy if the bank had made excessive profits from the transactions.

A successful claim could result in the customer being able to recover the difference between the price at which the products were sold and the appropriate market price they should have been sold at.  

(c) Forex manipulation  

The FCA’s findings that several banks were guilty of manipulating the forex market may allow a further claim by the customer.  

The claim would be that the bank was liable for misrepresentation in that the customer entered into the transactions relying on an implied representation by the bank concerned that the forex rates were properly and honestly calculated and, had the customer known that the rates were being manipulated by the bank, the customer would not have entered into the contracts in the first place. On that basis, the customer should be put back in the position it would have been in had it not entered into the transactions with the bank, so all the contracts with the bank should be cancelled and any losses suffered by the customer as a result should be refunded. An alternative claim would be that the customer should be able to recover losses it suffered as a result of the manipulation. 

Our specialist banking and financial disputes lawyers can advise on claims for misselling Forex (fx) derivatives. Please contact a member of the team for more information or to discuss your claim.

Additional information