Advisors Beware!

Manchester Building Society v Grant Thornton UK LLP [2021] UKSC 20

1.      The UK Supreme Court has significantly clarified and also widened the scope of the duty of care owed by advisors giving advice in a professional capacity. While the judgment was concerned with advice given by one of the larger accounting firms worldwide, Grant Thornton (GT), it has potential implications for advice given by other professionals such as advisors, brokers, assessors and other third parties.

2.      Manchester Building Society (MBS) sold fixed-rate lifetime mortgages. Funding for these mortgages came from borrowing, which exposed MBS to the risk of increased borrowing costs. MBS wanted to enter into further interest-rate swaps and sought advice from GT on whether they could avail themselves of an off-setting accounting method (‘hedge accounting’), which meant the volatile value of the swaps would not be recorded on their balance sheet. GT ‘incorrectly and negligently’ said that they could and MBS entered into the swaps.

3.      GT realised its mistake in 2013, at which point interest rates had fallen following the global financial crises, and MBS ultimately had to close their positions at a cost of over GBP32m., which they claimed against GT.

4.      The High Court followed the SAAMCO principle, in which the provider of an excessive valuation was held liable only for the reduced security afforded the lender, and not for losses from movement in the property market. It held the losses from closing out the swap contract were outside the scope of duty the parties could have reasonably considered GT was undertaking.

5.      The Court of Appeal agreed the outcome, but focused on the distinction between information and advice cases. This was a case where GT was merely giving information, and their liability was limited to that. The loss suffered from closing out the swap positions early was not within the scope of duty of care assumed by giving that information.  

6.      However, the Supreme Court disagreed and unanimously allowed the appeal. It held the question to ask, in relation to all professional advice given, is what is the purpose of the advice and what is the risk the advice is suppose to safeguard against.

7.      In this case the purpose of the advice was whether MBS could pursue this business model of mortgages and swaps considering the assets at their disposal, and the forced early closure of the swaps was precisely a “fruition of that risk” which the advice was suppose to guard against. 

8.      Advisors Beware! This may have implications for our industry. For instance, brokers offering valuations should consider the purpose and what risk the valuation is meant to guard against: a request from an owner merely asking for a ship’s value will give rise to different liability than a request from a lender considering a mortgage and its security. Similarly, professional advice on one of the many decision an owner has to make, be it tax-efficient registration, to pollution and propulsion systems, may also render an advisor liable if (i) the purpose of the advice is to assess the risk associated with that decision, (ii)  such a risk materialises, being one which the incorrect and negligent advice was suppose to guard against.