Avoiding Liability Even Where There Is Negligence

The recent case of Manchester Building Society v Grant Thornton 2018 is a striking example of the inability to recover certain losses from a professional adviser, even where their advice has been negligent.

In a claim for negligence, a claimant can only claim for losses for which a defendant adviser has assumed responsibility. The Manchester Building Society ('the Society') has this month felt the full force of this principle, being awarded just £315,345 of the £48.5 million claimed from its accountants, and potentially facing a bill for a portion of the accountant's legal costs.

Background

The Society entered into 'lifetime mortgages' with borrowers, under which equity was released and no payments were due until the owner entered a care home or died. From 2006, it hedged the interest rate risk by purchasing interest rate swaps.

Under the International Financial Reporting Standards ("IFRS") the swaps had to be entered onto the balance sheet. This created 'volatility' on the balance sheet because the fair value of the swaps would fluctuate with changes in present and estimated future interest rates.

The Society's accountants, Grant Thornton, approved the use of hedge accounting as a method of limiting that volatility, by allowing an adjustment to be made to the value of the hedged asset, the mortgage. That advice, however was negligent. When the Society realised this and drew up its accounts without the use of hedge accounting in 2013, the Society's financial position took a serious downturn, resulting in substantial losses.

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