Considering the string of scandals surrounding UK banks in recent years, the ruling that many large banks had fundamentally mis-sold complicated financial hedging instruments to unsophisticated buyers without adequately explaining their purpose or costs failed to surprise many. Reminiscent of the LIBOR conspiracy, payment protection insurance debacle, and money laundering settlement, the question of how much compensation is to be paid to whom remains an issue of dispute, as clashing parties are arguing fiercely for their own interpretation of what is due.
The root of the issue lies with complicated interest rate hedging instruments including swaps, derivatives, caps, and an arrangement known as a “structured collar.” Financial instruments in general have exploded in complexity in the past few decades, to the point where those not in the finance industry can have an extremely difficult time understanding how many of them work.
Interest Rate Swaps | IRSA
The Financial Services Authority examined 173 sales of such instruments to what they called “unsophisticated” buyers; that is, small business owners unlikely to understand the nuances and implications of the hedging products. In over 90 percent of such sales, the FSA said, the instruments were inadequately explained, sold too aggressively, or inappropriately presented as requirements to taking out a loan.
In theory, most of the instruments in question provide greater stability to the interest rate the borrower receives on a loan and guard against rising payments in the future. However, most of these instruments were sold in the past several years, which saw record lows in interest rates. Borrowers who sought to take advantage of these lower interest rates by refinancing their loans found that they were often contractually unable to without paying extensive fines, sometimes totaling tens of thousands of pounds.
As of now, four banks have been shown to have mis-sold interest rate swap agreements: Barclays, HSBC, Lloyds, and Royal Bank of Scotland. These four have all been instructed to contact customers who were potentially sold these instruments inappropriately and discuss compensation. The FSA is currently examining sales from other British banks, many of which will likely be included in any future deals.
Interest Rate Swap | IRSA Procedure
The four primary banks of the scandal reached an agreement with the FSA, who released an announcement with three statements regarding compensation: First, the banks will work with “non-sophisticated” customers who were sold structured collars any time after 1 December 2001; they will review the sales of other interest rate hedging products to non-sophisticated customers for the same time period, with the exception of structured collars and caps; and they will review any caps if customers specifically make a complaint during the time period of the review. Notably, any of these complaints regarding sales of caps will not be handled as part of the special review process, instead being shuffled through normal customer service and complaint departments at each institution.
Some feel that this agreement sets a poor precedent for the other banks likely to face similar mis-selling accusations as the investigation continues, and fails to provide adequate redress to a significant portion of affected small and medium-sized businesses, if any is ultimately provided at all.
To begin with, the agreement as announced by the FSA only applies to banks that enter into it. This includes the four largest UK banks as well as several others so far; however, any smaller banks who mis-sold such instruments and have not joined in on the agreement currently have no specific outline as to how compensation will be handled.
The agreement itself only provides a firm commitment to investigate and award compensation to the most complicated kind of hedging product under review, the structured collar. The breadth of products sold that could potentially be deemed inappropriate is much larger, but the agreement only states that such sales will be reviewed by an “independent reviewer” – a scheme that could potentially leave many affected businesses with little in the way of consideration.
Interest Rate Swaps | IRSA “non-sophisticaed customer” Vs “sophisticated”
There is some confusion as to who will qualify as a “non-sophisticated customer” under this plan. Especially in the case of medium-sized businesses, those inappropriately sold instruments might be deemed just slightly too “sophisticated” to fall under the agreement, in which case they would have to seek redress through the bank’s own complaint procedure. The FSA’s own rules give no specific definition to what constitutes a sophisticated customer; for that reason, it is feasible and even expected that most retail clients will be categorized as sophisticated customers, even if they could not reasonably be expected to understand the complex instruments being sold.
The agreement also conflicts with the FSA’s own definitions regarding IRSAs. All IRSAs are considered complex financial instruments according to the FSA, but the compensation scheme only guarantees compensation for the structured collar type of instrument. This seemingly arbitrary change in classification serves to do little but make customers less likely to receive compensation.
The amount of the compensation is left unaddressed in the agreement, leading many to think it will not extend beyond refunding of excess payments related to the instruments. This ignores arguably the greatest impact of the mis-selling: that is, the consequential losses of those excess payments, including lost profits, restricted expansions, and even insolvency caused by the excess. Some banks may even be seeking to calculate these excess payments by comparing one type of interest rate swap with another they consider to have been more appropriate, without factoring in whether any swap should ever have been sold in the first place.
Finally, the over decade-long period considered by the agreement and the extensive amount of time such procedures often take means that many potentially harmed customers could run out the time they have to bring legal action against the banks. Customers may feel placated by the FSA agreement and not pursue their own case, only to find later that they do not fall under the scope of the agreement.
The laundry list of limitations implied in the agreement make it tremendously unsatisfying for many watchdog and consumer groups. The banks are eager to avoid a situation similar to the PPI scandal, where claims management companies greatly improved the ease of making a claim for customers and consequently made it more expensive for the banks. But under the current agreement, a significant population of those hurt by the banks’ misconduct will not receive sufficient compensation, if they ever receive any at all.
Maple Financial Interest Rate | IRSA Claims Service
We have a specialist team of solicitors dedicated to dealing with the mis-selling of interest rate protection products by the banks. We are very happy to review these relatively complex arrangements and to claim compensation for our clients where appropriate. Please do not hesitate to call and we will be happy to discuss your individual concerns and requirements.
Justifed Claims for Interest Rate Swaps – Interest Rate Protection Arrangement Claims
- discrepancies between the underlying value of the loan and the interest rate swap, with customers being sold swaps which far exceed the term of their underlying borrowing, or where the notional amount of the swap is far in excess of the actual borrowing.
- substantial discrepancy between the length of the loan facility and the length of the swap product.
- customers being forced to continue with the interest rate hedges in order to maintain their current lending facility upon renewal.
- banks failing to explain to their customers the extent of the exit or breakage costs of the swaps and failing to ensure that the derivative products offered meet the needs of the customers.
- breaches by the banks of their duty of care to customers coupled with negligent misrepresentations by the banks as to the nature or effect of the products sold.
- failure by the banks to comply with their regulatory obligations under the FSA Conduct of Business.
Interest Rate SWAP News
FCA May Fine Banks Involved With Interest Rate Swap Mis-Selling
Banks who sold complex insurance products could possibly be fined by the Financial Conduct Authority. The deals were intended to protect the borrowers from rising interest rates. However, many businesses saw their payments increase drastically with the interest rates at a historic low.
FCA Interest Rate Swap Flowchart
Derivatives may be one of the most complicated financial investments on the market. The Financial Conduct Authority (FCA) has created a chart to help consumers, barristers and bureaucrats understand whether a potentially mis-sold Interest Rate swap Hedging Product (IRHP) can be reviewed.
The Financial Conduct Authority (FCA) Interest Rate Flow Chart uses a flow diagram with “Yes/No” questions to show whether a debtor qualifies for regulatory review.
Small Business Disillusioned with mis-sold Interest Rate Swaps
Many businesses have become disillusioned due to the compensation schemes set aside for the interest rate swap mis-selling derivatives. The Financial Services Authority has agreed to look into the cases of the mis-sold financial products of the big four banks (Barclays, Royal Bank of Scotland, Lloyds, and HSBC). There are several other banking institutions that have become involved in this Swap claims dilemma, also.
Interest Rate SWAP Claims UK
Maple Leaf Financial have a specialist team of solicitors dedicated to dealing with the mis-selling of interest rate swap protection products by the banks. We are happy to review these relatively complex swap arrangements and to claim compensation for our clients where appropriate.
If you believe you have incorrectly been classified as a ‘sophisticated’ customer and have, therefore, not been eligible for interest rate swap redress. Maple Leaf Financial will review your interest rate product and we will be happy to discuss your individual concerns and requirements
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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