19 Feb 2016
Around 3 and a half years have now passed since the FCA identified serious failings in the way in which high street banks sold interest rate hedging products, or swaps generally, to small and medium-sized enterprises. Swaps, which are extremely complex products, were sold to businesses locking them into paying fixed or structured interest payments on borrowings to protect against interest rate hikes, which never happened. The mis-sold swaps resulted in businesses paying out huge interest bills to their banks at a time when the Bank of England slashed its rates in 2007 and 2008; these businesses of course were the intended beneficiaries of rate cuts in a recession-stricken economy. The pressure of the swap payments meant that many otherwise sound and trading businesses became insolvent but for those that managed to weather the cost of their swaps, they held hope in a fair, effective and transparent FCA Review process. With the redress scheme approaching completion, over 3 years on, gaping cracks remain which cast doubt on whether or not the FCA Review process has delivered.
A primary concern is that the entry criteria to the FCA Review is arbitrary. Only smaller businesses categorised as “non-sophisticated” were eligible. Larger businesses affected by swaps were, and still are, excluded. The test is a purely technical and quantitative one: if a business turned over more than £6.5m (or fit other criteria) when it was sold a swap, entry to the FCA Review process is not possible. Larger businesses took out larger loans and therefore larger swaps, meaning larger losses, but they were disqualified. These businesses, providing their swap claims are not statute-barred and they have the stomach, funds and possibly several years of management time for a David and Goliath litigation, could take the banks to Court. So, unlike their “non-sophisticated” counterparts, the burden of proof that a swap was mis-sold is on the affected business. Some businesses excluded from the FCA Review scheme are our dairy farmers, restaurateurs and car dealers. There is no mandate from the FCA to help “sophisticated” businesses and the banks are comfortable in that respect and turn a blind eye.
Turning to “non-sophisticated” businesses, to date, the FCA reports that around 13,500 businesses have accepted a redress offer and £2.1bn in redress has been paid out including around £464m to deal with consequential losses, namely, connected losses to the business other than the actual swap payments. However, categorising a “swap for a swap” offer as an accepted redress offer has allowed the FCA to suggest that 92% of businesses under the Review scheme have been compensated. It is not difficult to see why businesses have felt that “swap for a swap” offers are far from satisfactory: simply put, the bank¾overseen by the bank’s Independent Reviewer¾has replaced a product which it considers mis-sold with another hedging product. Baffling. How better off the business becomes as a result of their “swap for a swap” offer should not be the question in a fair and effective redress scheme. Full tear ups and historic compensation should be at first base where mis-selling has occurred.
Further, the door is tightly shut on consequential losses. Where a redress offer has been made, the banks allow businesses to put forward a separate claim for consequential losses. The swap payments, for example, forced businesses to sell properties at a considerable undervalue and make redundancy pay outs for their staff. The mere fact that consequential losses form a key feature of the FCA Review suggests that the FCA and the banks understood that businesses were effectively shrinking, not growing, as a result of the mis-sold swaps. However, these claims are consistently rejected. Forensic accountants who are able to reconstruct balance sheets and prove consequential losses only in very exceptional circumstances produce pay outs for businesses. The only way to try to wedge open the door is litigation or, only until recently, judicial review.
The role of the banks’ Independent Reviewers, who, according to the FCA, “will review all aspects of the proactive redress exercise and past business review” has recently come under judicial review. The High Court in London granted Mishcon de Reya permission to seek a judicial review of the compensation process affecting a nursing home, Holmcroft Properties Ltd, which was run by Barclays Bank and reviewed by KPMG, the bank’s Independent Reviewer. The Judge agreed with Holmcroft that KPMG could be considered a public body and therefore subject to judicial review, a hearing which assesses if the decision was irrational, outside of its powers, or unfair. Holmcroft was awarded £500,000 for direct losses but its claim for consequential losses, the loss of various properties, was refused, a decision validated by KPMG. A decision found in favour of Holmcroft could significantly open the floodgates for other businesses unhappy with their redress determinations.
Less obvious swaps which are well-known were also excluded from the FCA Review. An estimated 70,000 of these products were sold using similar sales tactics as the traditional swaps. These loans, embedded with swaps, were linked to market rates and came with the same risks and losses as the normal swaps, in particular, break costs which led businesses to paying enormous fees. The main perpetrator was Clydesdale and Yorkshire Bank that coined these products Fixed Rate Tailored Business Loans. Other banks also sold these products, for instance, Treasury Loans by Lloyds Bank, and Sterling Fixed Rate Loans by RBS. Building societies such as Nationwide also had a part to play. Given the mounting evidence, David Thorburn, Clydesdale and Yorkshire Bank’s former CEO, accounted to the Parliamentary Treasury Select Committee in summer 2014, where he set out a clear procedure and practice, non-observance of which would constitute a mis-sell of Fixed Rate Tailored Business Loans.
Finally, prospects for insolvent businesses and those affected by the misconduct of RBS’ Global Restructuring Group (GRG) remain zero. The banks gladly offset any redress offer on a mis-sold swap against residual debt, even though the insolvency in question resulted from the swap. The heavy swap payments accelerated businesses into GRG and businesses were compounded by penalising charges and pinned down by historic covenant breaches, personal guarantees were enforced and, ultimately, businesses were stripped of all assets. Often, at the end of the conveyor-belt was an insolvent empty shell company with ex-directors severely out of pocket. This situation sits at the apex of a consequential loss claim, claims which reasonably can run into many millions, and ones which the banks outright refuse.
Over 3 years later, the landscape remains unsavoury for businesses affected by swaps, whether categorised as “sophisticated” or “non-sophisticated”, whether they had small or large claims for consequential losses, whether in the context of a Fixed Rate Loan or if they faced RBS’ GRG, or if they can afford the David and Goliath face-off in Court. Whilst thousands of businesses and stakeholders await the outcome of Holmcroft’s judicial review action, it would not be unreasonable to conclude that, under the FCA Review process to date, the banks have spent millions to save billions.
Seneca Banking has advised over 1,000 businesses in relation to these complex claims, our success rates are significantly high and our team is recognised as the UK market leaders for advice regarding swap claims.
Swap mis-selling continues to affect both Banks and businesses on a day to day basis, we suspect this scandal is far from over and businesses affected must come forward and speak to us.
We have been hugely successful in challenging (and in turn overturning) initial bank determinations under the Review and is crucial for any business that has been through the process to check their outcome with experts like Seneca to ensure they have got the correct result. We recently had a Midlands based Property developer approach us, he had been offered just over £100,000 by the Bank, after engaging us we were able to increase this offer to over £1million. We cannot stress how important it is for any business that has been affected by a swap, cap, collar or a Tailored Business Loan (TBL) to get in touch.
To speak to one of our experts, give us a call on 01204 322 805.
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