Critics of the compensation paid out by banks in the interest rate swap scandal are starting to question moves made by the Financial Conduct Authority (FCA). Critics charge that the FCA has rigged the game by allowing high street banks to be the final arbiter on which companies receive compensation in the mis-selling scandal and how much redress will be paid.

2014 Interest Rate Swap Update

Here are the facts as they stand now:

1. To date, the UK’s big banks have paid out £482 million in mis-selling interest rate swap compensation, according to the FCA.

2. As of 13 March 2014, 3,430 mis-selling victims received compensation payments since the FCA started the redress scheme back in August.

3. The February payouts totaled £175 million to more than 1,000 individuals and businesses. January’s total was £147 million.

4. Rejected claims total 962.

5. Nearly 20,000 companies have agreed to let the banks review the claims.

 

Broken down by banks, here are the total numbers of redress offers:

1. HSBC made 2,181 offers.

2. Barclays offered 1,405 redress payments.

3. Lloyds Banking Group made 953 offers.

4. Other banks made 233 settlement offers.

 

It’s likely that critics are starting to blast the FCA because of pressure by businesses who were sold Interest Rate Hedging Products (IRHP)since 2001. The background to this matter is complex and convoluted.

IRHPs were designed to lessen risks on loans taken out by businesses. These financial instruments were designed to soften the impact on businesses against rising interest rates. They are meant to act as stabilizers to prevent a business from being swamped and sunk in choppy financial waters.

These financial schemes, however, did not perform the way that banks claimed they would. Thousands of businesses were hit with higher interest rates that forced them to make exorbitant interest rate payments to the issuing banks.

The Financial Services Authority (FSA) moved into the swaps breach and found that banks had peddled these financial instruments as a guaranteed no-cost hedge. The FSA also claimed that banks didn’t tell businesses about high exit fees that were required to buy out of the hedge contract.

Last year, stories popped up that told of business owners who were hammered with increased monthly interest payments that totaled tens of thousands of pounds. Other were socked with exorbitant buyout fees.

For example, Bluesight in Filey got smashed with a 60 percent devaluation on its business. Then the bank crushed Bluesight with a fee that totaled more than £1 million. The owner had no choice but to seek relief in receivership.

In another widely publicized incident, a London Chinese restaurant owner discovered that the Royal Bank of Scotland had raided his bank account and removed £200,000. The owner claimed that he never knew that the bank had sold him an interest rate swap. SEE Small Business Interest Rate Swap Article

It’s estimated that more than 40,000 small businesses may have unwittingly purchased swaps. The FSA has relied on a sophistication test in its regulations in order to force banks to pay compensation for mis-selling interest rate swaps. The FSA has categorized these businesses as “non-sophisticated” customers. What that means is that the business owners did not have the wit, knowledge or financial acuity to understand the complexity of financial swap instruments. Due to this lack of financial acumen, businesses should not have been sold interest rate swaps. SEE FCA Sophisticated Customer Test

The FSA set about to measure how many businesses may have been mis-sold interest rate swaps. This part of the story reveals the nut of the matter and why critics are attacking the FCA. It should be noted that the FSA was abolished under the Financial Service Act 2012, and its regulatory duties were assumed by the FCA and the Prudential Regulation Authority on 1 April 2013.

Last year, the defunct FSA ordered banks to set up pilot review boards in order to determine how many businesses were mis-sold interest rate swap schemes. The fact that the offending parties, the banks, were given authority to determine cause, effect, culpability and payments raised cries of the fox guarding the chicken house.

Banks were expected to thumb through each swap sale and determine where they may have committed acts of financial villainy and then assign appropriate payments for compensation. The FSA set terms that included looking at each swap contract individually in order to make a determination that the FSA regulations were impeccably followed. The FSA released a statement that it expected each client to be handled “fairly and reasonably according to their own circumstances.” The key in determining whether or not a customer was unfairly clobbered revolved around the FSA test of sophistication.

After the dust from all the squabbling and protestations had settled, the FSA determined that 90 percent of interest rate swap sales had involved some measure of mischief by the banks. That determination was a signal by the FSA to the banks to begin paying redress. It should be noted that the FSA tinkered with its definition of sophistication during the review process. Financial analysts estimated that the mis-selling scheme could cost banks £10 billion.

While the kabuki dance between the FSA and the banks played out, businesses were bleeding out millions of pounds all over the English economy. Credible reports surfaced of businesses selling off property in order to meet commercial mortgage obligations, pay employees and maintain business loans. Business owners have accused the banks of foot dragging and sitting on claim disbursements for months. This has forced businesses to take out additional loans to stay afloat.

The Guardian, in a satirical look at the interest rate swaps, said that the banks had hired litigation lawyers to look at the swap contracts. It also accused the FCA of failing to provide credible oversight. This has allowed the banks to make determinations on who is sophisticated. This sophistication determination allows the bank to decide which businesses qualify for compensation. Critics have slammed the FCA for failing to provide credible oversight.

Independent case reviews at banks are apparently overseen by large law firms that engage in litigious cross-examination of swap customers. The idea, the Guardian said, is to get businesses to admit that they really did want to buy a swap. Once an admission is secured, the bank can deny a claim.

According to the Guardian, retired bankers have been hired by the banks to act as independent assessors, paying these assessors £1,000 per day. They are required to become Ltd companies in order to limit the banks’ liabilities if errors are made. These assessors can be fired if they fail to please the bank. The day-rate pay of £1,000 acts as incentive to come to conclusions that favor the bank.

Claims by customers are being delayed until the limitation date passes, closing the legal window for customers to make claims, the Guardian said. Companies have six years to file a claim. Overall, the Guardian accused the FCA of naivety and squishy compliance to what the banks want.

It’s expected that the fur will fly in the coming months when consequential loss claims are tossed into the ring. Consequential loss involves compensating businesses for subsequent losses caused by the interest rate mis-selling. It might include matters like profit loss and the liquidation of a business. SEE Interest Rate Swap Consequential Loss

Reuters explained in an article that consequential loss demands that banks compensate not only the direct cost of the mis-selling but also all losses a business may have suffered as a result of the swap contracts. This has the banks shaking in their boots, according to an advisor at All Square, a company that acts as a consultant to companies pursuing claims.

The banks that have offered companies eight percent annual interest compensation in lieu of paying consequential claims. The FCA has supported this proposal.

Still, this matter will probably not go away quietly. Businesses and their allies are accusing the banks of rigging the game and attempting to run out the clock. Observers of this squabble expect the fight to increase in intensity as the year plays out.


Interest Rate Swap : News

Interest Rate Swaps: Redress, the Banks and Businesses

There were four big banks involved in the investigations surrounding mis selling of interest rate swap products to unsophisticated business customers. The banking institutions that were reviewed by Britain’s regulators included Barclays, HSBC, Lloyds and RBS.

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Nationwide drawn into Interest Rate Swap Mis-selling Allegations

Nationwide Building Society has become the first building society to be enveloped by the current scandal concerning the mis-selling of interest rate hedging products.

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Banks face property developers hidden claims upto £10bn

Thousands of property developers could be entitled to better lending terms and compensation over mis sold interest rate swap products between £5bn and £10bn. An estimated 1 in 5 commercial property developers could be eligible under FCA redress for mis selling of interest rate swap products.

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Interest Rate Swap misselling has cost Banks £159m reports FCA

With payouts for Britons who were mis-sold interest rate swap products reaching £158.6m in December, Barclays, Lloyd’s, HSBC, and Royal Bank of Scotland have increased their compensation approvals

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Tim Capper reports on Financial Mis-Selling for Maple Leaf Financial. Our aim is to ensure you get honest advice and proper guidance to ensure a suitable recommendation can be made to pursue a financial claim

 

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Tim Capper

Bringing you financial news and information in plain english for Maple Leaf Financial. My aim is to help readers understand these often complex financial instruments.