So some 15 months after the first reporting of widespread mis-selling of Interest Rate Hedging Products (IRHPs), the BBC’s Panorama pick up on the issue. Congratulations to the BBC, but why has it taken so long?
I have picked out a number of key takeaways from the programme, here are my top 4:
1. Issues with the way the FCA Review Scheme has been designed
Only “Non-Sophisticated” Customers are eligible to have their IRHP included in the Review Scheme. This means that many businesses that fall the ‘wrong side’ of the sophistication definition will not be able to get their IRHP sale reviewed in the Scheme. These businesses will either have to complain to the bank (good luck), or litigate, which will affect the banking relationship and may incur substantial legal fees. The injustice here is that the sophistication criteria is not determined according to the level of a persons’ financial knowledge or experience – as one might expect – but some ‘arbitrary’ criteria relating to the size of their business and number of employees. So as Panorama vividly demonstrated, you get a situation where people running a pub, who (with no disrespect to them), seemed financially unsophisticated, but due to the size of their business, were deemed ‘sophisticated’. The effect of falling the ‘wrong side’ of the eligibility criteria was clearly evident.
Secondly, the Review Scheme has been designed so that the very bank that sold the IRHP is ‘judge and jury’ on whether the product was mis-sold. OK, the review process is overseen by an Independent Reviewer (big 4 accounting firm), but their involvement is actually unclear. What might be clear to many is that these Independent Reviewers are not only paid for by the bank to undertake the review but may also have other lucrative audit and consulting contracts with the bank. You would be forgiven for thinking that there are some flaws in the design of the Scheme.
One only has to think back to June this year when The Times investigation into Lloyds Banking Group found the contractors (Deloitte) employed at its largest PPI complaint handling team unit were taught how to “play the system” to the detriment of clients. Many businesses will feel uncomfortable with this design, set up and operation of the Scheme and may seek the services of a professional adviser to assist them.
2. Slow Progress of the Scheme to date, fines pending?
The FCA itself admitted that the banks have been slow to progress the review of cases. After some 8 months of the Scheme operating, 32 offers of redress accepted. There are approximately a further 30,000 cases to be reviewed. Further, the FCA admitted to Panorama that they will continue to monitor complaint handling and some banks may have to be fined. Watch this space.
3. Conduct of the Banks
Many businesses had been suffering twice the pain.
The pain of holding the IRHP (which typically resulted in increased payments) was sometimes combined with the pain of higher fees and margins payable as a result of the business being transferred into a bank’s Global Restructuring Unit. These departments, in theory, assist struggling businesses to help turn their situation around. The irony here is that many businesses, because of the IRHP, were determined to be a higher credit risk to the bank and so were forced to be moved over into Restructuring, whether they wanted to or not. So the pain is evident; higher payments under the IRHP and higher margins under the restructured loans. If the business had a simple floating rate loan (no hedging) they would not have suffered this “pain x 2” scenario.
4. The Human Cost of this mis-selling scandal
Behind these complex hedging products and the hard numbers of business often lurks ‘softer’ issues. There is a real human cost to this mis-selling scandal which affects everyday people who have had the courage in the past to start their own business and realise the dream. Unfortunately, in many instances, these dreams now lay shattered and many are picking up the pieces. The programme provided a telling glimpse of this world. It was depressing to see.
Putting emotion aside, for what is a very emotive subject, many of these businesses should now seriously think about establishing a consequential loss claim against the bank. This may not rectify the human cost, but it should go some way to alleviating the pain.
If you want to view the Panorama programme, please click on the link below: