By Cat MacLean
In January 2013 the FCA published its findings in relation to the pilot review scheme on the misselling of interest rate hedging products (IRHPs) or swaps. As we reported in an earlier blog post, in many ways the findings of the pilot review scheme were to be welcomed: the FSA found that over 90% of the sales to ‘non-sophisticated’ customers in their pilot did not comply with one or more regulatory requirements (i.e. the COBS Rules found in the FSA Handbook). Moreover, the FCA considered that a significant proportion of these sales are likely to result in redress being due to the customer.
However, the FCA also made alterations to the sophistication test, which meant that some businesses previously excluded could now fall within the review, but that a significant number previously in the Review process were now excluded.
A customer was originally considered sophisticated if they had at least two of the following:
- a turnover of more than £6.5 m; or
- a balance sheet total of more than £3.26m; or
- more than 50 employees.
In January, the FCA revised the parameters so that if a business exceeds the balance sheet threshold and the employee number threshold, but not the turnover, it will be non-sophisticated.
However, crucially, the rules were changed to exclude those businesses with a total value of the live swaps exceeding £10 million. This caught a significant number of businesses, particularly those in the property sector, with significant property assets, and consequently swaps exceeding £10 million, but nevertheless with comparatively low employee and turnover figures.
Additionally, the new rules provided that if a business is considered to be part of a group, if the group is sophisticated under the new rules, particularly where the value of the live swaps exceeds £10 million, then the business would also be considered to be sophisticated.
Other areas of concern for customers included the exclusion of “embedded swaps”, many of which were sold by the Clydesdale as Tailored Business Loans or TBLs, and the exclusion of all customers other than those classified as private or retail customers.
Following promulgation of the pilot review findings, momentum gathered to challenge these changes, together with challenges to the exclusion of embedded swaps and intermediate and professional customers. A funding campaign was mounted to bring together enough customers with an interest in challenging the parameters of the Review, and to pool resources. In April of this year, judicial proceedings were launched.
The idea of a successful challenge to these parameters gave renewed hope to many excluded from the FCA Review process. Legal advice had been given to the claimants in the judicial review that they had a very strong case for persuading the court to give permission to review the £10 million cap; and a strong or potentially strong case for persuading the court to give permission to review the exclusion of embedded swaps, the exclusion of intermediate or professional businesses and the treatment of groups and connected groups/connected parties.
The first stage in the judicial review process was to apply to court for permission to make the case against the FCA. This application was subject to a “sifting process” whereby the details of the case were scrutinised closely.
Unfortunately, the judicial review failed the sift process on the majority of the points which were being advanced. The claimants were given a month to re-plead the issues which had passed the sift process, in order to proceed to the next stage. Even more unfortunately, at this crucial point in the process, the judicial review group ran out of funding. Without additional investment, the group was not able to proceed and we have learned very recently that the judicial review has derailed.
Where does this leave those claimants currently excluded from the Review process?
- Customers with live hedging over £10m when the hedge was entered into will be outside the Review
- Intermediate and professional customers will be outside the Review
- Customers with embedded swaps (such as TBLs) will remain outside the Review
- Businesses outside the FCA review will be left with court action as their only option unless they are small enough to apply to the Financial Ombudsman
- Those businesses who had been awaiting the outcome of the judicial review should check their documentation and time limits carefully to make sure that they take action before it is too late
The limitation of the review to customers classified under the FSA's rules as 'private' (up to 31 October 2007) can have severe implications for small businesses. To be a 'private' customer a business must have net assets of less than £5m. A business can therefore be outside of the review even if it meets the turnover and employee tests and even if it has a small hedge.For example, a business which owns high value real estate from which it runs a business could be outside the FCA Review even it has one employee, a turnover of £500k, and a swap of £100k.
The failure of the Judicial Review is obviously bad news for those who were hoping that its success would mean their inclusion in the FCA Review process. Unfortunately only options now are the Financial Ombudsman route (for those who are small enough to apply) or litigation, and anyone hoping that the Judicial Review would be the way forward should think again – and quickly – about at the very least entering into a Standstill Agreement or raising and staying proceedings to preserve their position.