In September, the Financial Conduct Authority (FCA) published its first update on the progress made by banks undertaking a review of the sale of Interest Rate Hedging Products (IRHPs) to small and medium sized businesses. The first update was eagerly awaited as it arrived some four months after the Review Scheme started.
Summary of the FCA Update
Most customer sophistication assessments have now been conducted, with only 3,044 (10%) of assessments still ‘in progress’. Businesses will be eligible to participate in the Review Scheme if they are deemed to be Non-Sophisticated Customers (NSCs) with 16,236 (55%) of businesses so far falling into this category.
Under the Review Scheme, unless the NSC has a Category A (Structured Collar), they will need to ‘opt-in’ to get the sale of their IRHP reviewed. So far, 16,236 (55%) have opted-in; however only 997 (12%) of Category C (Cap) product holders have opted-in.
Legal options to claim redress?
Most offers of redress are looking like ‘tear-ups’; 332 (75%) of IRHPs have been cancelled with a further 51 (12%) resulting in businesses being placed in alternative hedging products. Interesting, 55 (13%) of businesses have been offered “no-redress”. These businesses will undoubtedly be disappointed as it indicates that although their IRHP has been found to have been mis-sold, it has been concluded that the business would, in any event, have taken out that IRHP or alternatively that no loss was actually suffered. It would be interesting to see how many sales of Caps fall into this category. As the Review Scheme does not have an appeals process, these businesses will need to assess their legal options if they want to claim redress.
Finally, the update reports that 32 offers of redress have been accepted, amounting to £2m, with an average compensation amount of £62,500, it is unlikely that these offers will include consequential loss.
Reading between the Lines
Although the FCA acknowledge that “progress…has been slower than expected”, it is encouraging to see that the Review Scheme is now under way and that real offers of redress are being made.
However, with over 10,000 businesses being assessed as ‘Sophisticated’, many holders of IRHPs will not be able to get their sale reviewed in the Review Scheme. This significant proportion of
businesses will effectively be forced to litigate to get any redress. Two points to note with this. Firstly, businesses will need to balance this decision against the souring of the banking relationship which will inevitably happen once litigation commences and secondly, whether they are ‘time-barred’ and therefore unable to bring a claim in the first instance.
On consequential loss, the FCA update says:
“The banks will adopt the standard approach used by the Financial Ombudsman Service when calculating interest on redress—typically customers will be offered 8% simple interest on top of redress payments. We hope this means that many customers can avoid having to put together consequential loss claims which are likely to take longer to assess.”
Why has the FCA chosen this wording?
Consequential loss should not be confused with interest. Consequential loss includes things such as: refinancing charges, bank costs, higher margins and professional fees together with ‘loss of opportunity’ where appropriate. It is not clear why the FCA have chosen this wording as it could be interpreted as misleading and may discourage some businesses to pursue consequential loss claims. Adding a consequential loss component to a claim could significantly increase the size of potential redress, although it will inevitably take longer to resolve the claim. Businesses may want to keep that in mind when their case is being reviewed as many will only have ‘one-shot’ to secure the redress that many of them desperately need.