SAAMCO principles applied to accountants’ negligence claim

Manchester Building Society v Grant Thornton [02.05.18]

The High Court confirmed that external factors for which professionals had no responsibility would be taken into consideration when assessing damages.

The facts

The claimant, MB-S, was a small mutual building society. As MB-S typically offered fixed rate loans, it needed to “hedge” its interest rate risk, namely that the variable rate it paid to acquire funds would exceed the fixed rate it received from its borrowers. This was facilitated by purchasing interest rate swaps.


  • Between 2005 and 2006, MB-S had entered into interest rate swaps with a notional value of £37.5 million.
  • Between 2004 and 2009, MB-S became involved with lifetime mortgages, which are popularly known as equity release schemes. These were issued in the UK and Spain.
  • Between February 2006 and February 2012, MB-S entered into 14 rate swaps to hedge its UK lifetime mortgage book with a notional value of £74.2 million.
  • Between July 2008 and January 2011, MB-S entered into 14 swaps to hedge its Spanish lifetime mortgage book with a total notional value of £57 million.

UK accounting standards did not require interest rate swaps to be included on MB-S’s balance sheet. However, as a result of the change in its business, MB-S was required to prepare accounts in accordance with International Accounting Standards. These required derivatives, such as interest rate swaps, to be included on the balance sheet and the mortgages themselves had to be shown as an amortised cost. The net result of this meant that MB-S’s profit, and hence its capital on the balance sheet, would be volatile, which in turn would have a knock on effect on MB-S’s regulatory capital position.

Accountants’ advices

Enter Grant Thornton, MB-S’s auditors, who mistakenly advised MB-S that they could adopt “hedge accounting” which allows the volatility introduced by including the value of the interest rate swaps on the balance sheet, to be offset by allowing an adjustment to be made to the value of the hedged asset i.e. the lifetime mortgages. From 2006, MB-S used hedge accounting to eliminate or reduce the volatility risk.

In 2008, the global financial crisis occurred, leading to a sustained fall in interest rates and a consequential change in the value of the interest rate swaps. Instead of being an asset, they became a liability. Initially, this was offset by a hedge adjustment to the value of the mortgages.

Subsequently, in 2013, Grant Thornton suggested to MB-S that in fact hedge accounting might not be applicable to their accounts. MB-S sought a second opinion from PwC who confirmed hedge accounting could not properly be applied. The result on MB-S’s accounting position was devastating. Its £6.35 million profit for 2011 became a loss of £11.4 million, and its net assets reduced from £38.4 million to £9.7 million. Worst still, it had a regulatory capital deficit of £17.9 million, which meant it was required to hold more capital because of the risk of volatility to which it was now exposed. MB-S was forced to close down its swaps, cease lending and sell its UK book of lifetime mortgages.

MB-S sought damages from Grant Thornton, for negligent advice and auditing, of £48.5 million, some £32.7 million being in respect of breaking the swaps. Grant Thornton admitted that between 2006 and 2011, it had negligently advised that MB-S’s hedging accounting policy complied with International Accounting Standards, and had negligently conducted the audits of the accounts for those years.

The decision

In light of the admission of liability, legal argument was restricted to issues of causation and the scope of Grant Thornton’s duty of care.


Grant Thornton lost on causation, the Judge finding it was more likely than not that, but for Grant Thornton’s negligent advice, MB-S would not have entered into swaps after April 2006. Likewise, their negligence was found to be an effective cause of the loss incurred on breaking the swaps, although MB-S’s decision to purchase the swaps and the fall in interest rates were also found to be effective causes.


On breach, however, the Judge found that the £32.7 million loss incurred as a result of MB-S having to break the swaps did not fall within the scope of Grant Thornton’s duty of care. The reasons for this were four-fold:

  1. Hedge accounting was concerned with the manner in which swaps and mortgages were presented in MB-S’s published accounts. It was not concerned with protecting MB-S from a sustained fall in interest rates.
  2. Although hedge accounting protected MB-S’s published profit and capital from changes in the fair value of the swaps, those changes were real and exposed MB-S to considerable losses notwithstanding the application of hedge accounting.
  3. That risk of loss came about because of the risk that interest rates might fall.
  4. It was not reasonable to conclude that Grant Thornton, by advising on the use of hedge accounting, had assumed responsibility for the risk of the loss to MB-S in the event there was a sustained fall in interest rates. Although the apparent availability of hedge accounting enabled MB-S to make use of interest rate swaps, the decision to use them was one for MB-S. The losses incurred by MB-S flowed from market forces for which Grant Thornton had not accepted responsibility.

Grant Thornton were found liable in respect of the termination costs of breaking the swaps, advisory and restructuring costs and hedge accounting fees incurred by MB-S.

However, the Judge found contributory negligence on the part of MB-S in buying 50 year swaps, which was “an unnecessary and imprudent risk”. Similarly, the Judge found MB-S had been negligent in wrongly concluding that hedge accounting was available. However, he found that Grant Thornton were far more culpable for the accountancy fault as they had been approached to provide specialist accounting advice. Accordingly, the damages for which Grant Thornton were found liable were reduced by 25% to reflect MB-S’s contributory negligence.


This decision is clearly of interest to insurers, brokers and insured alike serving as a timely reminder of the principle in SAAMCO that professionals are not necessarily liable for all of the losses arising from incorrect advice. Here, it was found that the majority of the loss sustained by MB-S was as a result of market forces for which Grant Thornton had no responsibility.

There is also a useful discussion of the principles applied in assessing contributory negligence and the need to avoid double discounting where damages have already been limited by reference to the SAAMCO principle.

Further, the Judge found that Grant Thornton, acting as auditors, had not acted “reasonably” within the scope of the Companies Act 1985. However, this is a statutory provision that should be borne in mind when defending claims against company officers and auditors as it potentially provides a complete defence.

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