By Cat Maclean Partner and Solicitor Advocate, Head of Dispute Resolution at MBM Commercial LLP
|Some 3 and a half years have now passed since the FCA announced a Review into the missale of interest rate hedging products, or swaps. Although approximately 40,000 small and medium sized businesses in the UK were missold swaps, since June 2012 only 18,000 have lodged claims with their banks, alleging that they were missold a hedging product or swap.
Any Redress offered by the banks under the Review should be fair and reasonable and should put the customer back in the position they would have been in had they not been mis-sold the IRHP.
The FCA ordered banks to identify eligible customers who were sold structured collars, swaps, or simple collars and invited them into the review, and report that all such claims have now been determined and offers of basic redress made where appropriate. Of the 18,000 customers identified, 16,000 chose to join the review, and 2,000 have chosen not to participate. At 89%, customer engagement has been high.
that the banks have sent 18,100 redress determinations to customers, “14,600 of which include a cash redress offer”. Apparently in 3,500 cases, the banks have concluded that the IRHP sale complied with rules or that the customer suffered no loss.
The FCA maintain that, to date, around 13,200 customers have accepted a redress offer and £2 billion is being paid out, including more than £450 million to cover consequential losses. They say that “This means that, so far, around 90% of offers have been accepted”.
However, a significant number of claimants have received offers described as “Basic Redress” which simply offer to replace the missold swap for another swap. Even where the Review finds the product has been mis-sold, the Redress offered can be substantially less than the customer would be entitled to through the courts – or even nil, because Redress under the Review does not necessarily rip up the derivatives contract.
|Categorising a “swap for a swap” offer as Redress has enabled the FCA to produce the oft quoted statistic that 90% of claimants under the Review scheme have been compensated.
Politicians on the Treasury Select Committee recently criticised the compensation scheme for delays and exclusions that have left hundreds of businesses dissatisfied.
“Firms feel that they have been doubly let down: first by mis-selling and now by the redress process. They may have a point. The Committee remains seriously concerned about the scheme’s effectiveness and lack of transparency,” said Andrew Tyrie, who chaired the committee.
In February of this year, the FCA came under significant fire from members of the Treasury Select Committee who accused the financial regulator of siding with the banks instead of the customers. Committee member Mark Garnier criticised the compensation process for only taking evidence from the banks, pointing to one case where just one paragraph of 70 pages of evidence from a customer was included in the adjudication documents. “What this clearly shows is that you came up with an idea, the banks put pressure on you, and you succumbed to pressure,” he said.
In March of this year, the TSC published its Eleventh report, entitled “Conduct and Competition in SME Lending”http://www.publications.parliament.uk/pa/cm201415/cmselect/cmtreasy/204/20402.htm
which contained widespread criticism of the FCA Review process. The report comments that:
“The FCA has consistently maintained that the redress process has worked as intended. But there have been complaints that the process of the IRHP review falls short of delivering fair and reasonable redress. It has been difficult for this Committee to determine, however, whether these complaints are examples of isolated exceptions to an adequate process, or are signs of a wider, systemic problem with the review.
This in itself is indicative of a flaw in the process which the FCA should address. In particular, the FCA should collect the information necessary to establish whether there are systemic failures in the review. The FCA should publish its findings, a summary of the complaints it has examined, and take any action it decides is appropriate to ensure that all customers receive fair and reasonable redress.”
The particular issues which attracted criticism from the TSC in their report included conflicts of interest, particularly in respect of relations between the bank and its independent reviewer, lack of complainant access to the independent reviewer, lack of complainant access to case information, and lack of any appeals process.
Despite the TSC sending the strongest possible message to the FCA, the FCA remains apparently steadfast in its endorsement of the Review process. According to Karina McTeague, head of retail banking at the FCA, 90% of claimants in the Review process have been “paid out”. Commenting at a lecture given to Edinburgh University this week, she said: “I do believe that we have succeeded in what we set out to do. I would say the Review process has been speedy, and effective, and the vast majority have got their money back”.
Despite the FCA party line on the Review, an announcement on Friday 27th November, http://www.fca.org.uk/news/fca-seeks-views-on-its-approach-to-small-businesses that the FCA is considering raising the redress limit available to small business complainants from the Financial Ombudsman Service (FOS) above its current limit of £150,000, is interesting. The move is part of a wider paper from the regulator on whether the level of protection provided to small and medium sized enterprises (SMEs) in its rules and guidance is broadly right, and comes in the wake of the widespread mis-selling of interest rate swap products to small businesses by banks.
It might be suggested that one reason for increasing the current financial limit on FOS compensation is because of its increasing use as the best alternative to an appeal from an unsatisfactory Review decision.
Christopher Woolard, director of strategy and competition at the FCA, said: “Small businesses are a vital part of the UK economy. We need to consider whether we’re doing our part in delivering an effective, proportionate regulatory framework that gives them the confidence required to use the financial services they need to grow.
“We want people to tell us whether our rules are appropriate: do they strike the right balance between protecting small businesses and encouraging firms to offer services to SMEs, to compete and to innovate?”
The assertion that FCA actively want to be told whether their rules are appropriate is remarkable, for want of a better word: it certainly does not chime with the FCA response to the TSC’s “Conduct and Competition in Commercial Lending” report. Despite a lengthy response paper running to many pages, the bottom line is set out by the FCA in just a few lines: “We consider it would…be sensible to make any decision about the nature or extent of any review, including its oversight arrangements, after legal proceedings have concluded, as the outcome of these may impact its scope”. This neatly avoids the point that the reason legal proceedings have been instituted by companies such as Holmcroft and Suremime http://mbmcommercial.co.uk/blogs/banking-disputes-blog/signs-of-a-storm-to-come-%E2%80%93-cracks-in-the-fca-review-programme-continue-to-spread/ is precisely because the review process has failed them. According to Karina McTeague of the FCA, the FCA’s aim in implementing the Review process was to get remediation and payment to small businesses as quickly as possible. However, it is undoubtedly the case that by instituting a flawed process, and by allowing that process to proceed unchecked, with no appeal or overview process, the FCA have failed many small businesses.
In closing, let’s look at a few positives however: judicial review of an independent reviewer’s decision is still proceeding through the courts in the Holmcroft case: the courts have held that there is a plainly arguable case that the banks owe a duty of care to customers to carry out the Review process fairly and according to the guidelines agreed with the FCA (Suremime); and the announcement by the FCA that it is considering increasing the compensation threshold at FOS above £150,000 can only be good news for those customers who have missed out in the Review process.