The conduct of bankers remains in the spotlight as yet another scandal hits the British banking industry this time over the mis-selling of interest rate hedging products.
On 29 June 2012, the FSA published a report and found “serious failings” in the manner in which banks have sold interest rate hedging products to small and medium size businesses. This has resulted in an agreement between Barclays Bank Plc, HSBC Bank Plc, Lloyds Banking Group and The Royal Bank of Scotland Plc and National Westminster Bank Plc to provide “fair and reasonable redress” to “unsophisticated customers” where mis-selling has occurred.
What is interest rate hedging?
Interest rate hedging is a complicated area. The hedging products sold by banks are designed to reduce the risk of exposure to high interest rates by effectively enabling the customer to fix their interest rate (“swaps”), place a limit on interest rate rises (“caps”), limit interest rate fluctuations to within a simple range (“collars”), or limit interest rate fluctuations to within a specified range with the risk that, should the stipulated interest rate fall below the bottom of that range, the interest rate may increase to above the bottom of the range (“structured collars”).
The FSA has found that “unsophisticated customers” have been wrongly advised by a number of banks against the potential risks associated with the hedging products and specifically the potential exit costs and what happens when the base rate falls dramatically. Customers who thought that they were protecting themselves from interest rate increases have, in some cases, found themselves paying interest rates substantially over base rate.
Sophisticated –v- Unsophisticated Bank Customers
The FSA described “unsophisticated customers” as customers lacking the expertise and understanding of interest rate hedging products. Such customers have suffered terrible losses as a result of their reliance on the banks’ assurances.
Sophisticated customers sold interest rate hedging products are not within the scope of the FSA’s review. They may however still complain through the usual avenues. The FSA has defined the “sophisticated customer” as a customer who meets at least two of the following (i) a turnover of more than £6.5 million; or (ii) a balance sheet total of more than £3.26 million; or (iii) more than 50 employees.
What next?
Unsophisticated customers affected by structured collars and other interest rate hedging products (except caps or structured collars) can, if they have not made a complaint already, expect to be contacted by their bank in due course.
The banks are required, after review of the circumstances of the case, to propose a fair and reasonable redress to the customer which will be reviewed and agreed by an independent reviewer. Customers who are not happy with their review may complain to the Financial Ombudsman Service if they meet certain eligibility criteria.
The FSA has invited the Scheme Operator at the Financial Ombudsman Service to consider if a specific scheme can be arranged for dealing with the outcome of the FSA’s review. Until then, those affected should follow the usual complaints procedure i.e. make their complaint to their bank first in order to give them a chance to review the complaint. Banks have 8 weeks to do this and if the customer is not happy with their bank’s response then the Financial Ombudsman can investigate.
It remains to be seen exactly what “fair and reasonable redress” will be. For those customers who are unable to achieve fair and reasonable redress through the banks’ own review scheme or who do not meet the Financial Ombudsman Service criteria or who have suffered a loss of over £150,000 or who are otherwise deemed to be sophisticated clients it seems litigation may represent the only real form of obtaining redress. To this extent the acknowledgment by a number of banks that they have participated in the mis-selling of interest rate hedging products will surely weigh against them and it is anticipated that many court cases will end up being concluded by negotiated settlement.
If you have been affected by interest rate mis-selling and wish to discuss your available options please contact our Commercial Disputes Team on 0113 222 3242.