Fair and reasonable redress for individuals and businesses who suffered losses from Swap mis-selling. The level of redress will vary with each case and will be determined by a committee who will review both documentation and customer statements. All compensation offers are also being evaluated by an independent reviewing committee to ensure fairness.
Financial Conduct Authority determines redress for IRHP swaps
What is an IRHP Swap?
An interest rate hedging product (IRHP) allows customers to manage their fluctuations in interest rates. These products are usually sold separately from a loan. IRHP swaps enable customers to fix or determine their interest rates. An interest rate swap is a separate contract than a loan agreement. More specifically, it’s an agreement between two parties that one type of interest payment will be exchanged for another. For example, a fixed interest rate payment could be swapped for a floating payment. In practice, if a floating rate payment increases because base rates rise, the customer receives an amount they can then use to off-set the increase in loan repayments. On the other hand, if the floating interest rate payment decreased as a result of falling base rates, the customer would make an additional payment to the bank under the terms of the swap, but they would benefit from lower loan repayments. The customer’s borrowing costs therefore remains relatively stable.
The purpose of the redress or compensation is to allow customers to receive compensation for the costs of the mis-selling. The fair and reasonable determiner by the FCA believes basic redress customers will fall into one of the three following outcomes:
- Customers who never purchased a hedging product would have their IRHP torn up and receive a full redress for payments made on their IRHP.
- Customers who chose the same product they originally purchased and did not suffer losses will receive no compensation.
- Customers who entered into a product that provided protection against interest rates movements but chose an alternative product would receive compensation based on the difference between payments made on the alternative product and the payments that should have been made if no mis-selling had occurred.
Banks are responsible for explaining to their customers how they determined their redress amount and on what premises. Letters will be sent that lay out a basis for a bank’s redress decision. Customers will also have the option to hold a face to face meeting with an appropriate representative in order to gain a more detailed explanation for their compensation, to have the opportunity to ask questions and to challenge an outcome if they deem necessary. Banks and independent reviewers will consider any claims raised by customers during this meeting. Banks are not required to show customers how they reached their calculations for redress offers. However, independent reviewers are verifying all of their calculations.
Taxes on Redress
Tax treatment of redress will typically be determined on a case to case basis and on a customer’s financial tax position. Banks will not advise their customers on this process. Those interested in tax details will need to contact the HM Revenue and Customs department.
What Consequential Loss Means?
Consequential loss refers to a customer being deprived of money and other financial losses as a result of IRHP swaps. To reflect these lost opportunity costs, banks have agreed to add an automatic eight percent annual interest rate on top of basic redress payments. The FCA considers this a fair alternative to putting together consequential loss claims for most customers since going on an individual basis would take too much time. However, if a customer believes their loss of opportunity is greater than an 8 percent simple interest, they are invited to present their claims after a basic redress offer has been presented. There is no need for customers to go to a claims management company immediately. Consequential loss presented after basic redress offers will be assessed by current established legal principles. Claims must meet the requirements listed below in order to be considered for consequential loss compensation.
- The mis-sale caused a loss that would not have occurred had the bank not breached regulation.
- The loss must be a reasonable outcome that could have been foreseen by the bank had they not breached regulation.
- All claims must be supported by evidence.
Examples of Consequential Loss
By no means an exhaustive list, below is a breakdown of typical reasons some customers might file and be entitled to additional compensation regarding swaps.
Customers who incurred bank charges and penalties that may have been avoided had banks not violated regulation with swaps may be entitled to compensation for these fees.
Legal and Professional Fees
Fees incurred for consequences of swap mis-sales such as a customer paying for professional advice on how to deal with IRHP payment may be entitled to compensation for these costs. It’s worth noting that legal fees incurred while trying to recover compensation will not likely be recoverable.
Loss of Profits
Customers who could have used money made to IRHP payments to increase their profits may be entitled to compensation. The lost opportunity must be more than the eight percent a year they would automatically receive, and they must provide appropriate documentation.
It’s difficult to prove mental distress in order to meet legal tests for compensation, unless the customer could provide appropriate evidence.
Wasted Time Management
Losses relating to wasted time management may be entitled to compensation. The customer would have to show a diversion in time management that led to quantifiable losses for a business as a result of an IRHP mis-selling to be eligible.
A customer would have to demonstrate a loss that was reasonably foreseeable by the bank had they not breached regulation with the IRHP mis-selling.
Losses for Associates
Losses for individuals associated with customers who were sold an IRHP such as shareholders may be considered for compensation. These third parties must prove personal losses that was directly related to the IRHP mis-selling.
How to File a Claim for Consequential Loss?
Customers who feel they are entitled to consequential loss payments that are not represented by the eight percent simple interest redress may file a claim after they have received their initial redress offer. These claims must be submitted four to six weeks after receiving an initial redress offer. Banks are offering customer support including guidance to help customers get their claims filed on time and will also consider time extension requests on a case to case basis. Most claims will be assessed within four to eight weeks after being received by independent reviewers. Rejected claims will be provided with feedback that may include providing necessary evidence to support a particular claim. All claims of consequential loss will be evaluated by established legal principles.
Businesses in Financial Distress
Businesses in financial distress affected by the IRHP mis-selling may be eligible to have their payments suspended. Additionally, a business in administration will not be affected in terms of eligibility. Banks have agreed that companies affected by this breach in regulation who have dissolved will be treated consistently with other customers.
Reviews have reportedly been conducted with haste, and many customers have received redress for the breach in regulation in the mis-sale of IRHP swaps. It’s crucial for customers to be prepared and fully understand their losses. It may even be necessary to hire a financial expert to determine a customer’s loss as a result of the mis-sale.
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