The back story – failings of the review process into IRHP Misselling
Some three and a half years have now passed since the FCA announced a Review into the mis-sale of interest rate hedging products, or swaps. Although approximately 40,000 small and medium sized businesses in the UK were mis-sold swaps, since June 2012 only 18,000 have lodged claims with their banks, alleging that they were missold a hedging product or swap.
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 mis-sold 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 misselling 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.
A number of legal challenges have been mounted to the Review, including a judicial review, and a claim against Barclays for breach of a duty of care to implement the Review process in accordance with the guidelines and parameters agreed with the FCA (the Suremime case – see our blog here).
Despite mounting legal claims, and the TSC sending the strongest possible message to the FCA, and despite wide-ranging criticism of the Review process, the FCA has remained apparently steadfast in its endorsement of the Review process.
Decision to drop inquiry into banking culture
As we reported last week, the FCA recently announced that it had decided that a long-promised, wide-ranging government-backed inquiry into the culture at retail and investment bank would not help achieve its "desired outcomes", saying that each lender was unique and could not be easily compared and that it would instead work directly with individual banks to promote the "delivery of cultural change".
The FCA's decision to ditch the review into culture at banks had raised concerns among members of the Treasury Select Committee who summoned Ms McDermott and other senior members of the FCA to explain, and questioned witnesses John Griffiths-Jones, Chairman, Financial Conduct Authority, and Tracey McDermott, Acting Chief Executive, Financial Conduct Authority on Wednesday in a hearing lasting almost 3 hours.
McDermott was closely quizzed by the TSC about the FCA’s decision to drop its much-vaunted inquiry. McDermott defended the decision,saying that while there was "further to go" in reforming the culture in financial services, a thematic review "was not the right way to achieve that", and maintained that ditching the broad review in favour of bank-by-bank checks did not signal a shift in the watchdog's approach to supervising banks.
"We made the decision, I made the decision, that the thematic review was not the right way to achieve that," she said.
In a report of the exchange, the Times described her appearance before the Treasury Select Committee this week as a “bruising session that laid bare a strained relationship between the FCA and Treasury”. The tone of exchanges between MPs and the FCA was tense, with the committee chairman, the Conservative MP Andrew Tyrie, criticising the FCA for demonstrating a “weakening resolve” to deal with banking problems.
Likewise, despite being grilled on whether the government had exerted pressure on the Financial Conduct Authority to drop the inquiry, the FCA Chairman, John Griffith-Jones insisted the FCA had not felt any pressure from the government to soften its approach to regulating banks.
SNP MP George Kerevan also questioned Tracey McDermott, as acting CEO, on how the FCA could claim to have improved their regulation of individual banks when they had failed to act in relation to an alleged fraud by HSBC fraud brought to light by the whistleblower Nicholas Wilson.
Call for reinstatement of the inquiry
In the wake of the FCA’s less than convincing performance before the Treasury Select Committee, on Thursday, the SNP party formally called on the FCA to reinstate the inquiry into banking culture. George Kerevan said:
“Since Ms McDermott took over from Martin Wheatley last summer the FCA has sent worrying signals that it was bending to pressure from the Treasury to return to a more light-touch regulatory regime. The cancellation of the inquiry into banking culture is just the latest evidence of the political interferences between the so-called independent regulator and a Tory government that has failed to learn the lessons of the financial crisis”.
“The defence of the FCA to justify its decision to scrap the review is not only wrong but it is also incoherent. Indeed its own website lists a total of £905,219,078 in fines levied by the Authority on financial services companies for bad conduct in 2015 alone. A further study recently conducted by KPMG also showed that between 2011 and 2014 Britain’s banks handed over 60% of their profits during the period in fines and customer remediation, for a total of £38.7 billion.
“These figures suggests that there should not be no room for complacency or hesitation when it comes to reforming the City. That is the reason why I am calling on the FCA to reinstate its inquiry into banking culture. Should the new permanent head of the FCA fail to commit to do so, I am ready to ask the Treasury Select Committee to use its parliamentary remit and to conduct the inquiry of the big banks itself.”
A backbench debate on the conduct and the effectiveness of the FCA is announced for 1st February 2016
It has now been confirmed that that there will be a Backbench Business Committee debate on the conduct of the FCA on the 1st February.This has been scheduled for 2.30pm in the Main chamber of the House of Commons and will address “The Future of the FCA”: for more detail click here.
The submission of the Conservative MP Guto Bebb, who has been a tireless champion for those who have suffered at the hands of the banks to the backbench committee can be seen in the clip below at 14.37:
Interestingly, the drive for a backbench debate has attracted cross-party support, with backing from the SNP and the Labour MP John Mann.
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