09 Feb 2016
When the FCA Interest Rate Hedging Product review (“the review”) was set up in 2012 few could have predicted how the process would evolve over the next three years. The theory behind the review was quite simple. The Banks would identify those customers mis-sold an Interest Rate Hedging Product (“IRHP”) such as a Collar, Swap or Cap. The Banks would write to the customer and based on the customers response and review the sale. The review would decide whether or not the IRHP was mis-sold and pay appropriate redress if appropriate. The whole process would be overseen by an independent reviewer to ensure impartiality. In theory a nice idea…
The FCA has recently reported that the review is almost at an end and that the Banks have finished with all but a handful of complaints. So has the review delivered? The answer is somewhat mixed depending on who’s opinion you seek. Our view, based on the hundreds of business we have advised through the process, is that there are serious failings in the way in which the review has been dealt with.
The FCA and Banks are keen to stress statistics about the review. The common one being that the scheme has paid some £2.1 billion in redress to 18,100 businesses including £464 million in consequential losses. These figures seem impressive, although you do have to remember that the money the Banks has paid in redress is usually a refund of monies previously wrong paid to the Banks. You also don’t have to look too far beyond the figures to find controversies with the review.
The role of the Independent Reviewer has sparked debate. The Independent Reviewer was initially positioned by the FCA and the Banks as being a safe guard for the victims of the mis-sale and ensure that the Banks provided fair redress. Unfortunately as the review has progressed many customers have felt let down by the Independent Reviewers.
This has led to the case of Holmcroft Properties Ltd (“Holmcroft”). Holmcroft felt that the redress that they have received was not a fair reflection of the losses they suffered in particular their consequential losses. We have highlighted the issues faced in respect of consequential losses in a previous blog.
Holmcroft argues that the Independent Reviewer had not acted in the public interest by deciding to not award Holmcroft losses for the sale of their properties due to the IRHP. Holmcroft made an application for a Judicial Review of the Independent Reviewers decision based on the fact that the Independent Reviewer was acting in the public interest. Holmcroft was granted permission for this Judicial Review which commenced last Monday. The result of such a Review could reopen many cases which have already been concluded in the review.
A further issue has been the treatment of customers who have lost their Business due to the IRHP mis-sale. These victims were equally entitled to pursue the Banks for redress. The issue that such customers have faced is that to obtain redress they have to reinstate their company. Following reinstatement any redress is distributed to the company’s creditors. Of course the company’s biggest debt at the time of dissolution is likely to have been the loan that was the subject of the IRHP. Such loans became payable in full when the business failed. This has led to the unintended consequence that the Bank will award redress on one hand only to seize the same with the other hand to repay a loan that was likely to have been ongoing if the company had not failed due to the IRHP.
Whilst you would expect such victims to be subsequently redressed via a consequential loss claim, this is rarely the case and the customer does not have access to the redress monies to allow them to pursue the claim through the Courts.
The above issues, together with many other problems, has placed a lot of pressure on the FCA. The FCA has faced constant fire for the way in which the review has operated in practise. Such barrage was not helped by the fact that the FCA has determined that any investigation into the review would not commence until every single legal claim concerning IRHP’s had been settled in the Courts. The issue with such a suggestion is that the Banks strategy is to settle any strong case and only allow weak ones to proceed to a hearing. Whilst it is difficult to criticise the Banks in taking such an approach, it would be completely unfair for the FCA to base the success of its own scheme by comparing it to cases which had been tactically selected to set legal precedent. Further by the time the FCA investigates the review scheme any customers who have not already commenced legal proceedings will likely be statute barred from taking action if the FCA does not offer any further redress.
The review scheme and the news that the FCA has cancelled an investigation into “Banking Culture” led to a recent debate in the House of Commons concerning whether the FCA was fit for purpose. The FCA was declared “weak, toothless and anaemic” by MPs. The only saving grace for the FCA was that a vote into whether the House of Commons had “no confidence” was not held.
In conclusion the success of the FCA IRHP Review Scheme would depend on whose opinion you sought. It cannot be denied that some customers have received redress which they can accept. However there is a large and vocal section of businesses who do not believe that the review has delivered what it set out to do either because they have received less compensation than expected or because they have been excluded from the review altogether. Whilst one would imagine that the Banks and the FCA in particular would now like to “draw a line in the sand” in respect of the IRHP mis-selling scandal it is likely that the aftershocks of the same will be felt for many years to come.
Over the past 4 years Seneca Banking Consultants have assisted over 1,000 Interest Rate Hedging Product (IRHP) mis-selling victims and helped claim back over £50 million in redress.
If you have any questions on IRHPs, give us a call on 01204 322 805.
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