When the long awaited Royal Bank of Scotland (RBS) Global Restructuring Group (GRG) proposed compensation scheme was announced on 8th November 2016, it was soon met with a barrage of predictable criticism.
But why the outpouring of such disbelief, disappointment and condemnation? Of course it was never going to work. Have we not learnt from the IRHP redress episode that the FCA is just not fit to design, implement and police a proper financial services dispute resolution mechanism for businesses? After all, they are regulators, not adjudicators.
So let’s take a closer look, compare and analyse some of the main features of the IRHP redress scheme and the proposed RBS GRG compensation scheme. That way, we should be able to identify if the FCA have made any progress over the past three years in designing ad-hoc business banking redress programmes.
|FCA IRHP redress scheme (‘IRHP’)||Proposed RBS GRG compensation scheme(‘GRG’)|
|Announced||January 2013||December 2016|
|Banks Affected||9 UK High Street Banks||RBS Group (RBS, NatWest, Ulster Bank)|
|Number of Customers potentially affected||c. 18,000||c. 12,000|
|Scheme Eligibility||According to: Number of employees, turnover, net assets, consolidated size of hedging.Product must have sold between 2001 and 2012.Must be a standalone product (versus embedded product)||Business must have been in the GRG unit between 2008-2013|
|Automatic Refund||Category ‘A’ products entitled to automatic review and redress||Complex fees automatically refunded|
|Independent Reviewer/Third Party||Typically a big 4 accounting firm (KPMG, Deloitte, E&Y)||Sir William Blackburne (Retired high court judge)|
|Appeals Process||In-built appeals mechanism||Potentially available through the Independent Third Party|
|Consequential Loss Claim||Typically separate to the basic redress award with a separate submission of a consequential loss claim||Potentially available through the scheme’s complaints process, although no Third Party Review or Appeal process|
|Scheme Transparency||Monthly progress reports||Unknown|
Both the IRHP and GRG schemes include eligibility criteria, although the GRG scheme does not have a strict business size limiting criteria applied. This will appeal to those businesses that are larger, or have many connected entities, as they will still be eligible for the scheme. Despite this, there will be an ‘implicit’ business size criteria as it was typically larger corporate accounts that were passed into GRG. The smaller accounts tended to be passed to another ‘turnaround’ unit in RBS called Specialised Relationship Management (SRM). These businesses will not be eligible for the GRG scheme, although many of the patterns of misconduct and unfair treatment may well have seeped down from GRG into SRM. The risk here is that the really small, very financially unsophisticated businesses will be excluded from a redress programme. However, if these businesses feel that they have been treated unfairly by SRM, they should at least have the Financial Ombudsman to take their complaint to.
The other point to note is that despite being eligible, many businesses passed into GRG won’t be able to claim because they have been dissolved. These businesses will therefore be dependent on a private conversation between RBS and the insolvency practitioner in order to benefit from the GRG scheme. Good luck with that one.
Arguably, the GRG scheme will work better than the IRHP scheme as GRG customers will benefit from automatic redress of complex fees. Under the IRHP scheme, if the business was sold a Category A (Structured Collar) product, they were entitled to ‘automatic review and redress’. However, the ‘get out’ for the bank was that they could still substitute the mis-sold Category A product for a Category B or C product, such as a swap or a cap – thereby reducing the amount of compensation payable. A straight refund of complex fees should be much simpler and fairer for the business. However, the real debate here is whether the GRG scheme definition of ‘complex fees’ is wide enough as it excludes many of the higher costs associated with being in GRG such as margin increases, arrangement fees etc.
Independent Reviewer / Independent Third Party
This feature may well be the biggest improvement for the proposed GRG scheme. There appears to be a rejection of the conflict-ridden relationship between the banks and the big 4 accounting firms, to that of more independent judicial oversight. This should mean that the Independent Third Party will be less susceptible to getting brow-beaten by the bank where there is genuine disagreement in decision outcome of complaints (see : RBS prompts time or-an-independent-review-of-the-independent-reviewer.html).
It’s too early to know what difference there will be – let’s see what happens.
The IRHP scheme had an in-built appeals mechanism for businesses that were unhappy with the outcome of their review. Unfortunately, many did not know that they could appeal the outcome as this was not advertised or explained clearly by the banks during the IRHP review process (from my experience). The problem with the IRHP in-built appeals mechanism was that an appeal could only be considered if the customer provided new information to the bank that had not been considered in the initial review. But that procedure assumes that there is only one interpretation of the information allowed – i.e. the bank’s own interpretation. We found that it was often a matter of an alternative interpretation of the same information, rather than the provision of new information, that was the nub of the matter. This was particularly so when interpreting the compliant counterfactual position, or what the business would have done had they been compliantly sold the product. That is very much a grey area open to multiple interpretations dependent on the case reviewers’ experience and own subjective or heuristic bias (e.g. being paid by the bank to review the case). However, it is encouraging to see that an ex-member of the judiciary will be responsible for overseeing the appeals mechanism, which should indicate more of an adversarial approach in assessing the complaint, such as full disclosure of information. Having information symmetry with the bank is crucial to put both parties of a dispute on an equal footing.
This is the key one for me. When we look back in 3 years’ time to assess whether the GRG scheme was successful in delivering fair redress to customers, it will largely depend on whether meaningful consequential loss payments were made or not.
The sentiment from the IRHP scheme was that the banks got away with paying consequential losses. A quick look at the most recent update by the FCA on consequential losses paid for IRHPs shows the following:
- Number of Consequential Loss claims completed assessments: 3,742
- Amount of Consequential Loss claims paid (over and above 8% compensatory interest): £46 million
Therefore, the average Consequential Loss payment amounted to a mere £12,293 per claim.
The fact that RBS have only provisioned £300 million to pay compensation, which includes the automatic fee refunds, would suggest that customers should be prepared for another rough ride on consequential losses. Furthermore, in the GRG scheme the process for considering claims for consequential loss is not overseen by the Independent Third Party and there is no right of appeal to the Independent Third Party for consequential losses – at least the IRHP scheme had some third party oversight.
In the IRHP scheme, the FCA published regular monthly updates on how the scheme was progressing. However, one key piece of detail missing from these updates was information relating to the appeals process, such as: number of appeals lodged, number of appeals upheld/rejected, average difference between offers made pre and post appeal. Or put another way, basic information that any business owner would want to know so that they can make a more informed decision to accept or appeal an offer made by the bank. It would be good to see this level of transparency in the GRG scheme, although its usefulness will be severely limited if there is no appeals process for consequential losses.
Having compared the two schemes, it does look like the FCA have implemented some lessons from their IRHP scheme experience. Simpler eligibility criteria, automatic refund of fees and a move away from the cosy relationship between bank and independent reviewer are all steps in the right direction. Yet real concerns remain around the lack of independent oversight and appeal process for consequential loss claims.
Time for a ‘super FOS’?
It’s really time to stop all the predictable moaning. The conversation needs to move on to discussing the longer term solution.
It is becoming increasingly apparent that there is a need to move away from the reliance on the FCA to fire-fight systematic mis-selling and misconduct scandals through the implementation of ad-hoc redress schemes. This is despite the name change of the regulator from ‘Services’ to ‘Conduct’ in 2013. It seems that when they decide to deliver a redress programme, it is half-cocked; and when they should deliver other redress programmes, they don’t (think paralysis on embedded swaps).
We need a proper financial services dispute resolution platform that is fit for the 21st Century. A ‘super-FOS’, equipped with technically competent, well trained and knowledgeable staff that can deal with these kinds of complex banking disputes in a timely manner is emerging as a strong contender (see APPG Fair Business Banking debate http://www.parliament.uk/business/committees/committees-a-z/commons-select/backbench-business-committee/news-parliament-2015/mps-to-debate-motion-on-the-creation-of-a-commercial-financial-dispute-resolution-platform/).
There is a huge vacuum that needs filling here. Parliament and the FCA just need to get on with it.