The FSA recently announced that it has reached agreement with Barclays, HSBC, Lloyds and RBS in relation to the mis-selling of interest rate hedging products. It is envisaged that the agreement will prevent a repeat of the delay and expense that arose in the payment protection insurance scandal.
Concerns have been raised by commentators that calculating the compensation due to customers is likely to be difficult because some products may need to be cancelled. Moreover the FSA has not yet set down a deadline for redress to be agreed. The exercise will be scrutinised by an independent reviewer with the FSA overseeing the process.
It would seem that the FSA will divide claims into two categories: those who were sold relatively simple products, who are expected to have the opportunity for their cases to be reviewed; and those who were sold more complex products or were unlikely to have understood the downside risk they were taking on.
We believe that if this approach will be adopted, it is vital to ensure that the assessment process listens carefully to the customer to ascertain whether the customer truly understood the downside risk. So far, none of our clients really understood the downside risk associated with a hedge or swap, not least because the banks were keen to minimise any downside risk.
For those deemed not to have understood the downside risk, whose case may be reviewed by an independent assessor and who may be compensated appropriately “if there is evidence of mis-selling”, the challenge must be is to ensure: (i) that the independent assessor does not suffer from the malaise which seems to affect the Financial Services Ombudsman, where claims can languish for months if not years, and who rarely uphold claims made against banks; and (ii) that sufficiently detailed and relevant evidence is given to the independent assessor to establish clearly the evidence of mis-selling.”
The FSA has said that compensation and redress available to customers will vary. Not all customers will be owed redress, but for those that are, the appropriate redress for each customer will be determined on the basis of what is fair and reasonable. Further, businesses who are not satisfied with the outcome of the review process will still be able to complain to the Financial Services Ombudsman.
Unfortunately customers who are not satisfied with the outcome of their review and have a claim of more than £150,000 may be left with no alternative but to use the courts to obtain redress. Most of our clients’ claims are in excess of £150,000. It would be highly regrettable if the vast majority of affected customers are left in a “take it or leave it position” whereby if they fail to accept the reviewer’s outcome then they will be left to pursue an expensive and time-consuming action through the courts.
The FSA agreement does not have affect the legal position. Any businesses pursuing their bank in the courts would need to overcome the various legal hurdles, such as proving that their bank owed them a duty of care.
Currently businesses do not have a right of action against banks for breaching FSA Regulations. It seems that unless Parliament decides to change the current law, banks will avoid paying a significant amount of the massive losses businesses have suffered due to their actions.
We hope that all businesses that have been mis-sold interest rate hedging products will be adequately compensated for their losses.