Kenneth Millar and Another v Financial Services Ombudsman and Another

• Jurisdiction: Ireland
• Judge: Mr. Justice Gerard Hogan
• Judgment Date: 30 September 2014
• Neutral Citation: [2014] IEHC 434
• Court: High Court
• Date: 30 September 2014

Millar v Financial Services Ombudsman & Anor

IN THE MATTER OF AN APPEAL PURSUANT TO PART VII (B) OF THE CENTRAL BANK ACT 1942, AND CHAPTER VI AND SECTION 57CL THEREOF (AS AMENDED AND INSERTED BY THE CENTRAL BANK AND FINANCIAL SERVICE AUTHORITY OF IRELAND ACT 2004)

BETWEEN

KENNETH MILLAR AND DONNA MILLAR

APPELLANTS

AND

FINANCIAL SERVICES OMBUDSMAN

RESPONDENT

AND

DANSKE BANK

NOTICE PARTY

[2014] IEHC 434

[No. 422 MCA/2013]

THE HIGH COURT

Statutory appeal - Financial services - Mortgages - Loan arrangements - Increase in variable interest rate - Complaint against notice party, Danske Bank - Rejection of complaint by Ombudsman - Challenge to this decision - s.57CL of the Central Bank Act 1942 - The Governing Council of the European Central Bank - No ECB funding - Role of the Ombudsman - Construction of clause 3 - Key words of clause 3 “…in response to market conditions”-Application of ordinary principles of contract law governing the construction of contractual documents - Investor Compensation Scheme Ltd v. West Bromwich Building Society [1998] 1 W.L.R. 866; principles applied - Ulster Bank v. Financial Services Ombudsman [2006] IEHC 323; test applied

Facts This was a statutory appeal brought by the appellants, Mr Kenneth Millar and Ms Donna Millar, pursuant to s.57CL of the Central Bank Act 1942. They sought to challenge a decision made by the Financial Services Ombudsman on the 10 ^th December 2013 rejecting their complaint against the notice party, Danske Bank.

In 2005, the Millars entered into seven separate loan agreements relating to various residential properties. One was their family home whilst the others were buy-to-let investment properties. The complaint related to the manner in which Danske Bank purported to increase the variable interest rate payable on said mortgages. The appellants argued Danske Bank had wrongly increased interest rates at a time when interest rates had fallen dramatically. The rate gap between the ECB (The Governing Council of the European Central Bank) rate and the variable rate had widened from 1.5% to just over 4%. The appellants complained of this but Danske defended its decision to raise its variable interest rate on the basis that, as it did not receive any ECB funding, these rate cuts were irrelevant.

Held The judge had to determine the definition of the variable interest rate as contained in the applicable terms and conditions governing the loan arrangements. The judge considered what the true role of the Ombudsman was. He queried “should the court defer to the Ombudsman on the question of contract law or should the Ombudsman”s decision be scrutinised as if it were, in effect, a decision of a lower court dealing with a contract issue”? The judge said it could not be correct that this court should defer to the Ombudsman on matters of pure contract law, not least given that the Ombudsman”s decision would create a res judicata on that very contractual point which would bar the re-litigation of the issue before the ordinary courts. The judge went on to say that the present issues involved the straightforward application of ordinary principles of contract law governing the construction of contractual documents. Therefore, he concluded it would be inappropriate for the court to defer to the Ombudsman on these issues.

The judge ruled the Ombudsman erred in concluding that the words in question (“…in response to market conditions…”) were clear when they were not. He further erred in not having regard to the wider matrix of fact which, objectively, might reveal the meaning of these words as they appear in the relevant contractual documents. The judge decided, adopting the test articulated by Finnegan P. in Ulster Bank v. Financial Services Ombudsman [2006] IEHC 323 that the decision reached by the Ombudsman “was vitiated by a serious and significant error or a series of such errors”.

-Therefore the Ombudsman”s decision could not be allowed to stand. The judge made an order pursuant to s. 57 CM (2) (b) of the 1942 Act setting aside the decision of the Ombudsman of 10th December 2013. He made a further order pursuant to s. 57 CM (2) (c) remitting the matter to the Ombudsman for a fresh determination of the complaint in a manner not inconsistent with this judgment.

CENTRAL BANK ACT 1942 S57(CL)

CENTRAL BANK & FINANCIAL SERVICES AUTHORITY OF IRELAND ACT 2004 S16

CENTRAL BANK ACT 1942 S57(BB)

CENTRAL BANK ACT 1942 S57(BK)(4)

CENTRAL BANK ACT 1942 S57(CI)(2)

O'HARA v ACC BANK PLC (NO.1) UNREP CHARLETON 7.10.2011 2011/41/11897 2011 IEHC 367

KOCZAN v FINANCIAL SERVICES OMBUDSMAN UNREP HOGAN 2010/26/6385 2010 IEHC 407

SHANNON REGIONAL FISHERIES BOARD v BORD PLEANALA 1994 3 IR 449

ANALOG DEVICES BV v ZURICH INSURANCE CO UNREP 2005 1 IR 274 2005 IESC 12

ICDL & ORS v EUROPEAN COMPUTER DRIVING LICENCE FOUNDATION LTD 2012 3 IR 327 2012 IESC 55

INVESTOR COMPENSATION SCHEME LTD v WEST BROMWICH BUILDING SOCIETY 1998 1 WLR 866

AIB PLC v GALVIN DEVELOPMENTS (KILLARNEY) LTD UNREP FINLAY GEOGHEGAN 29.7.2011 2011/3/612 2011 IEHC 314

TENNANTS BUILDING PRODUCTS LTD v O'CONNELL UNREP HOGAN 17.4.2013 2013/50/14109 2013 IEHC 197

IRISH BANK RESOLUTION CORP LTD (IN SPECIAL LIQUIDATION) v MCCAUGHEY UNREP KELLY 29.1.2014 2014 IEHC 230

ULSTER BANK INVESTMENT FUNDS LTD v FINANCIAL SERVICES OMBUDSMAN UNREP FINNEGAN 1.11.2006 2006/56/11976 2006 IEHC 323

CENTRAL BANK ACT 1942 S57(CM)(2)(B)

CENTRAL BANK ACT 1942 S57(CM)(2)(C)

1 JUDGMENT of Mr. Justice Gerard Hogan delivered on 30th September, 2014

2 1. This is a statutory appeal brought by the appellants, Mr. Kenneth Millar and Ms. Donna Millar, pursuant to the provisions of s. 57CL of the Central Bank Act 1942 (as inserted by s. 16 of the Central Bank and Financial Services Authority of Ireland Act 2004)("the 1942 Act"). In this appeal Mr. and Ms. Millar challenge a decision made by the Financial Services Ombudsman ("the Ombudsman") on 10th December, 2013 to reject their complaint against the notice party, Danske Bank (formerly known as National Irish Bank)("Danske"). The appellants have seven mortgage accounts with Danske and the complaint relates to the manner in which Danske purported to increase the variable interest rate which is payable on those mortgages. The issue in essence relates to the definition of variable interest rate contained in the applicable terms and conditions governing the loan arrangements these parties.

3 2. In 2005 the Millars entered into seven separate mortgage loan agreements with Danske in respect of a number of residential properties. One of these properties concerned the Millars' own family home and the others were in respect of buy-to-let investment properties. It is not in dispute but that the interest rate applying to loan was a standard variable rate. It is further accepted that these loans are currently being serviced and are not in arrears.

4 3. It is also important to state at the outset that it has never been contended that these mortgages were "tracker" mortgages, i.e., where the interest rate tracked the interest rate set by the Governing Council of the European Central Bank ("the ECB"). The appellants' case is rather that, having regard to the terms of the mortgage deeds (and other extrinsic evidence), Danske acted wrongly in increasing interest rates at a time when interest rates generally have fallen to historically low levels.

5 4. Interest rates have fallen since the onset of the global financial crisis in 2008, save for a short period in 2011 when interest rates were (briefly) raised twice by the ECB. This decline in interest rates has been especially marked within the Eurozone since the latter months of 2011 as the future of the currency seemed in doubt and a series of rate cuts was then commenced by the ECB. While that threat seems to have passed - for now, at any rate - the ECB has subsequently been faced with the new problem of acute disinflationary pressures within the Eurozone area. The difficulties which the ECB has encountered in recent years in meeting its own inflation target of 2% has resulted in a situation where interest rates have now been set at unprecedentedly low rates. Given this deflationary environment it seems likely that monetary policy within the Eurozone will continue to remain accommodative and, so far as can be presently judged, that interest rates will remain at these very low levels for the immediate future. Such is the broad economic backdrop to the present appeal.

6 5. The gist of the Millars' complaint is, however, that Danske have allowed its variable interest rate to increase at a time when interest rates within the Eurozone have fallen so dramatically. In their affidavit grounding these proceedings the Millars have demonstrated that in the period prior to October 2011 there was a very high - and, indeed, almost perfect - coefficient of-correlation between the interest rates applicable to their loans and ECB rates. In November 2011, however, Danske increased its variable rate by almost 1% and since then that rate has remained at just over 4%. In the meantime, following a succession of interest rate cuts, the ECB rate has plunged to almost zero. It is sufficient for present purposes to say that the rate gap between the ECB rate and the variable rate has widened from 1.5% to a figure of just over 4%. The Millars point out that there is now a "significantly imperfect negative" correlation between the ECB rate and the interest rate applicable to their loans. This analysis has not been contradicted by either the Ombudsman or by Danske.

7 6. The appellants complained about this increase in the variable rate, but Danske defended its decision to raise its variable interest rate on the basis that, as it did not receive any ECB funding, these rate cuts were irrelevant to it. Following further correspondence between...