It’s been some time since my last update on this blog. Apologies for this absence, but as you can imagine there has been an enormous amount of activity in the Swaps claims space over the past 6 months. To help our readers, I thought it would be useful to provide a summary update of the key developments in Interest Rate Hedging Product (IRHP) mis-selling claims during this time. Here are my top 5 developments.
1. Progress of the FCA Review
According to the FCA,* the Review Scheme is nearing completion in terms of the number of cases that have been reviewed and redress offer letters have been sent out to customers. Banks have now distributed over 16,000 redress determination letters to customers, out of a total “non-sophisticated” review population of 19,060 (83%).
In terms of how long the Review Scheme will be open, we are hearing from at least one bank that this will be March 2015. The FCA should communicate when it intends to close the Review Scheme down, so I would encourage any business that is yet to submit a claim, or opt-in to have the sale of their product reviewed, to do so now.
2. A Significant Amount of “Adverse Decisions”
I define an “adverse decision” as one of two outcomes for customers in the review process:
- I. Not mis-sold
- II. Mis-sold with ‘low redress’, where redress is either:
- The mis-sold Swap being replaced by an alternative Swap
- The mis-sold Collar/Structured Collar being replaced by an alternative Collar
- The mis-sold hedging product stands as the bank believes the customer would have taken this product in any event.
According to the FCA*, there are a total of 2,500 cases falling into the category of either “Not mis-sold” or “Mis-sold but hedging product stands”, or 15.6% of all cases. In fact, just less than 50% of redress outcomes communicated have resulted in a Full tear up.
Of the 16,000 redress determination letters sent to customers, around 8,000 have accepted redress, with £1.2BN in redress having been paid out. That’s some way short of the c.£4.0BN that has been provisioned across the banking industry to cover IRHP mis-selling, even when taking into account items such as break costs (which the bank absorbs) and administration costs of operating the Scheme.
3. The In-Built FCA Appeals Mechanism
For those businesses that are unhappy with their redress determination, don’t feel that you need to blindly accept this outcome from your bank. There is a clearly defined appeals process in which you can appeal the banks decision and redress outcome.
According to the FCA:
The IRHP review scheme has an in-built appeal mechanism. For customers to make an informed decision as to whether to accept a redress offer, banks are required to clearly explain how they have reached their determination, including what facts they have relied on. Redress offer letters set out the basis of banks’ decisions at a relatively high level. In addition, customers will be offered a face to face meeting, during which they can obtain a more detailed explanation, ask questions and, if appropriate, challenge the outcome. The banks and independent reviewers will carefully consider any points raised by customers and, if necessary, will review their decision.
All Square are acting for a growing number of businesses that want to appeal the decision. They either don’t understand the terms of the redress offer letter or feel so aggrieved with the unjust outcome that they want to proactively do something about it. We are building a track record of successfully getting outcomes changed from “Not Mis-sold” to “Mis-sold Full Tear Up”. Recently, we got a decision changed from £0 to +£360k, so it’s definitely worthwhile challenging the decision. Remember the first outcome letter is an “initial” or “provisional” outcome, so rather than being the end of the process it could represent the start of the negotiation process with your bank. When it comes to appeals, we find working with a specialist advisor can reap rewards as the arguments to overturn an appeal can quickly get very technical.
4. Consequential Loss
For me, this one has always been the big un-known. This part of the claim process has the potential to really push the amount of provisions higher than the current £4.0BN as many consequential losses can involve large sums stretching back multiple years. It’s also more of a grey area than the basic redress part of the claim as the claim rests largely on causation issues rather than was X or Y Sales Standard breached (although some banks are very apt at making these grey areas as well).
According to the FCA*, in June 2014, 2,400 customers had submitted a consequential loss claim (13% of total businesses in the Scheme). Of these, 600 assessments had been completed resulting in £1m in consequential loss payments over and above 8% simple interest per year). On average a consequential loss payment of £1,700 per customer.
We are aware of many potential consequential loss claims being rejected by banks, so it’s worthwhile engaging a specialist such as a Forensic Accountant in order to assess, analyse, build, submit and negotiate a consequential loss claim.
5. Development of Case Law
Crestsign Limited v NatWest/Royal Bank of Scotland
The Court held that NatWest/RBS (the Bank) could rely upon its exclusion clause in order to avoid being held liable for the mis-selling an Interest Rate Hedging Product (IRHP). This is despite the Court finding that the Relationship Manager “did not go into detail [about the IRHP], not being an expert in hedging products himself; that Mr Parker [of Crestsign Limited] did not properly understand what the reference to hedging or interest rate management meant; that Mr Parker understood the Relationship Manager to be referring to a requirement that the loan be at a fixed rate, which he did not want; and that Mr Parker was concerned about this but not sufficiently to stop the discussions or seek any further explanation at the stage”.
The Court also found that at the meeting with the Interest Rate Management (IRM) specialist “…Mr Parker understood next to nothing, and [the Relationship Manager] not a great deal more” . The Judge did not accept the specialist’s evidence that Mr Parker understood how these [IRM] products worked. Further District Judge Kerr QC found that the specialists’ evidence “was not always frank and was at times evasive” and that he “calculated where the banks’ advantage lay when deciding what kind of evidence to give”.
Although the Court rejected the evidence of the IRM specialist that “at the end of the meeting, Mr Parker “showed a good understanding of all the concepts which I had discussed”” and held that the specialist was “not concerned to ensure that Crestsign understood the products sufficiently to enable it to judge whether they were objectively suitable, or which was the most suitable…His priority was not to benefit Crestsign”, the Court held in the Banks favour on the basis of the documentation provided to Crestsign by the Bank (being the Risk Management Paper and two sets of terms of business). The Court held that the Bank “did provide negligent advice but they successfully excluded any duty not to do so”.
In conclusion, as long as any bank disclaims responsibility for the advice they are giving on the suitability of a product they can be negligent but not liable.