Momentum gathers on interest rate swap mis-selling – FSA to investigate
Finally it appears that the FSA have been persuaded of the need for a formal review into the issue of mis-selling of interest rate swaps to SMEs, following pressure from a Treasury select committee to investigate. A formal review has just been announced this week.
Apparently the matter had been considered by the FSA in 2010 and 2011 at which time the “small number of complaints” from small businesses had led the FSA to conclude that there were “no widespread underlying problems”. However, following media and parliamentary pressure, the regulator has finally announced a formal review to look at product design, sales processes and practices and incentives. Announcing the review, Lord Turner, chairman of the FSA indicated that “if we find widespread evidence of breaches of our rules or mis-selling, we will take action”.
Many believe that the FSA should never have allowed the banks to have access to the SME market for these complicated products, and that banks should have been blocked from pushing clients to buy swaps in compulsory packages with other products such as lending facilities in circumstances which were clearly anti-competitive.
However, because of the way that UK legislation has incorporated the Markets in Financial Instruments Directive (“MiFID”) which provides EC regulation of these products, businesses in the UK are prevented from taking action directly against banks as a result of s150 of the Financial Services and Markets Act 2000 (“FSMA”)which only entitles individuals, not businesses, to take action as a result of any breach of the FSA’s Conduct of Business Rules (“COBR”). This has left many of the worst affected unable to pursue a claim for mis-selling because they are not individuals but businesses. There are legal arguments which can be advanced to circumvent s150 – in particular EC law dictates that UK legislation implementing EC law should always be interpreted in a way that does not conflict with EC law. As there is no provision in MiFID corresponding to s150, s150 should be interpreted in a way that allows businesses to pursue claims for breaches of the COBR. These arguments are currently untested, however, although due to be run in the Court of Session next week.
In the absence of any clear path through the legal minefield presented by the FSMA, the decision in favour of review by the FSA is to be welcomed as providing a lifeline to many; it can only be hoped that the FSA will now investigate the matter with rigour.
if you would like to discuss any of the issues raised in this article, please do not hesitate to contact me.