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Legal scrutiny of the FCA Review Process as news breaks of "secret deal" struck between the banks and the regulator

Posted on Feb 18, 2015 by Cat Maclean  | Tags: FCA Review Process, Interest Rate Swaps, Mis-selling, Judicial Review, bully banks, lobby group,  | 0 Comments

By Cat MacLean, Partner, Financial Services & Banking Disputes

Legal scrutiny of the FCA Review process as news break of “secret deal” struck between the banks and the FCA

A campaign group is set to launch a judicial review of the process for compensating small businesses which were mis-sold complex interest rate hedging products by British banks. The products were meant to protect firms against rising interest rates, and were originally designed for much larger and more sophisticated organisations, but in the years leading up to the financial crisis, much smaller SMEs were targeted by the banks in the sales process of these products. Many took out hedging products without any clear understanding of what they had signed up to, and when rates fell the companies had to pay extra charges, typically running to tens of thousands of pounds. Worse than this, those who tried to exit the agreement were told that they faced breakage charges typically of 30-40% of the underlying borrowing, often extending to hundreds of thousands of pounds.

The FCA agreed terms in 2012 to compensate thousands of customers mis-sold the products with nine banks including Royal Bank of Scotland (RBS.L), Lloyds Banking Group (LLOY.L), Barclays (BARC.L) and HSBC (HSBA.L). However, over a third of businesses were excluded from the scheme, either because they were considered “financially sophisticated” or on other grounds. The banks had set aside 4.4 billion pounds to compensate customers but have so far paid out just 1.8 billion. To date, the FCA have defended the scheme, saying that over 14,000 customers had received offers of cash compensation, and describing the redress scheme as “a quick, efficient and fair way of ensuring the right redress is paid”.

However, the terms of agreement between the FCA and the nine banks involved in the IRHP Review has been made public by Andrew Tyrie, Chairman of the Treasury Select Commission, in anticipation of their upcoming report. He said:

“The committee remains very concerned that terms of the FCA’s redress scheme may, in some cases, have provided banks with an opportunity not to provide meaningful redress. Many firms feel that this process has unfairly favoured the banks.The committee expects to comment further on the scheme in its forthcoming report on SME lending. There are widespread concerns that the banks have been permitted to evade compensating the true costs of the financial mis-selling scandal.”

What is apparent from the belated disclosure of the document is that the Review’s regulatory framework for conducting the Review centres almost entirely on the Conduct of Business Rules / Conduct of Business Sourcebook Rules (COB(S)). This is in direct contradiction to what customers have been told throughout the Review process. News also broke last week that the regulator had in fact reached a secret deal with the biggest banks to water down thecheme to compensate customers mis-sold complex interest rate derivatives. Harry Wilson of The Times reported having seen significant differences between the final rules for compensation schemes for victims of interest rate swap mis-selling and those put forward less than two weeks before.

In the first draft of the rules, the Financial Services Authority — the predecessor of the Financial Conduct Authority, the City regulator — proposed handing a key role to an independent reviewer to oversee the process. However, the final scheme saw the independent reviewer merely acting as an auditor of the process and playing little part in the decision making process.

Wilson reported that documents seen by The Times show significant differences between the final rules for compensation schemes for victims of interest rate swap mis-selling and those put forward less than two weeks before.

Guto Bebb, the chairman of a parliamentary group supporting victims of swap mis-selling, said that the changes highlighted in the letters were “invariably in favour of the bank . . . It’s astonishing that the FCA continue to place so much confidence in the independent reviewers in view of a structure that allows banks to pick and choose what is presented for consideration.”

The Bully Banks group, a lobby group representing thousands of small businesses, which has 2,000 members, has now announced that it intends to take action following publication of the agreement between banks and the financial regulator over how the scheme should operate, details previously been kept out of the public domain. Bully Banks has instructed solicitors to commence a judicial review of the process led by the Financial Conduct Authority and will apparently file a legal claim within days.

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