Since first reported by Nigel Lubbock in 2010, complaints and allegations against the country’s major financial institutions that they mis-sold derivative (hedge) products to SME’s have gathered pace.
Recently, one particular broadsheet newspaper has given significant media coverage to the issue and a self-help action group of affected SME’s has been set up to champion the cause for its members. In addition, MP’s have debated the issue in the House of Commons and litigation continues in the UK Courts.
All of the above culminated in a two month review of the issue by the regulator, the Financial Services Authority (FSA), the results of which were issued in a report published on its website on 29 June 2012.
Outcome of the Review
In its review, the FSA found serious failings in the sale of interest rate hedging products by the major financial institutions.
In particular, the FSA found concerns regarding (a) inappropriate sales of more complex varieties of interest rate products, in particular Structured Collar products and (b) poor sales practices in the selling of other interest rate hedging products.
The FSA further found that, where sold to ‘non-sophisticated’ customers (see further below for a definition in this regard) who may lack expertise and understanding of the product, the sale of some interest rate hedging products may be inappropriate.
To attempt to resolve the above concerns, the FSA has agreed with the four largest UK retail banks (those being Barclays, HSBC, Lloyds and RBS) that they will:
(i) provide fair and reasonable redress to non-sophisticated customers who were sold Structured Collars on or after 1 December 2001;
(ii) review sales to non-sophisticated customers of other interest rate hedging products (except Caps or Structured Collars) sold on or after 1 December 2001; and
(iii) review the sale of Caps if a complaint is made by a non-sophisticated customer.
These steps are to be carried out under the scrutiny of an independent reviewer overseen by the FSA.
The following link will take you to the FSA’s full review:
In addition, on 23 July 2012, the FSA announced that 7 other UK banks (Allied Irish (UK), Bank of Ireland, Clydesdale and Yorkshire banks, Co-operative Bank, Northern Bank and Santander UK) have also agreed to the same resolution as the four major UK banks.
In its review, the FSA envisages a process whereby the banks; appoint an independent reviewer, contact customers it deems those customers fall within the scope of the agreement with the FSA (i.e. non-sophisticated customers), provide redress where appropriate and review the sales of other interest rate products (again providing redress where appropriate).
In our opinion, the review is to be welcomed. The FSA has identified that there clearly is an issue here and has at least taken some steps to remedy. We hope that the review will result in the appropriate financial recompense that all victims of mis-selling are entitled to.
However, the review, in our opinion lacks bite and leaves a significant number of loose ends.
To define “non-sophisticated customers”, the FSA has followed the criteria used in the Companies Act 2006 for classifying companies that are subject to the small companies regime. Therefore, a customer would be deemed non-sophisticated if it did not meet two of the following three criteria at the time the product was sold:
1. A turnover of more that £6.5m
2. A balance sheet total of £3.26m
3. More than 50 employees.
In addition, the FSA has allowed the bank to categorise a customer as “sophisticated” even if it does not fall within the above definition if the bank can demonstrate that at the time of sale the customer had the necessary experience and knowledge to understand the product.
However, what if the customer does not agree with the bank’s allocation to a category? For example, what if the bank categorises a customer as sophisticated (so as to fall outside of the review) but the customer feels he should be deemed non-sophisticated? The bank’s assessment will be scrutinised by the independent reviewer. However, where there remains a dispute, the FSA envisages the customer will have to complain to the bank in person and, if that does not satisfactorily resolve the issue, make a further complaint to the Financial Ombudsman Service (FOS). To be eligible to use this service you must have a turnover of less than €2m and fewer than 10 employees. All of which will take time (time a customer may not have, for reasons given below).
If you are a sophisticated customer (on the definition above), you fall outside of the review. This is even the case if the bank previously classified you as a retail or private customer for regulatory purposes.
If you have been mis-sold a financial product, you will have to pursue the bank’s internal complaints procedure and, if not resolved satisfactorily, complain to the FOS, if you are eligible to do so. If you are not eligible to do so, you will have to take formal legal action through the Courts, all of which will take time.
The redress is to be calculated on the basis of what is fair and reasonable. However, the basis of the calculation of what is fair and reasonable has not been addressed. What happens if (we would say when) what a customer considers to be fair and reasonable (a full refund plus any consequential losses) is considerably different than what a bank considers to be fair and reasonable (for example redress based on an alternative fixed rate product)?
If the parties cannot agree on the level of redress, the customer either has to refer his complaint to the FSO or, if not eligible, will have to take formal legal action.
Insolvency of Customers
What if the customer has become insolvent since the product was taken out?
If a limited company has been dissolved, there is no legal entity to which any redress can be paid. Interested parties will need to take legal advice about whether they can have the limited company restored to the Companies House Register.
Perhaps the biggest “loose end” of all is that the FSA has given no time limit within which the banks are required to fulfil their obligations under the agreement.
Whilst the banks are obliged to look at all hedge agreements sold on or after 1 December 2001, customers with a complaint will have to be mindful of limitation issues in the event that they do not reach a settlement with the banks.
It is important to bear in mind that the majority of these sales took place between 2006 and 2008. The Limitation Act 1980 provides that all contract/negligence claims must be commenced not more than 6 years from the date the action arose. In most cases, date the action arose is likely to be the inception date of the product (but there may other factors which could bring this date forward).
Those customers with complaints must be aware that, should there be any disagreement in relation to any/all of the factors referred to above, they will not be able to obtain legal assistance from the Courts once 6 years have elapsed from the date the action arose. This is so even if those loose ends referred to above have not been resolved and would leave complainants at the mercy of the banks (and the independent reviewer) if claims are not issued at Court by the relevant limitation date.
There are still significant potential problems for customers with complaints of mis-selling against banks. There is continued uncertainty and potential for disagreement in relation to a number of areas that may require court action to resolve. Crucially, the inability to successfully pursue a claim through Court after limitation expires means customers with complaints should not delay in contacting us to obtain urgent legal advice. We are able to quickly clarify clients’ positions and commence legal action to protect them should it be necessary.
At Steeles Law, we have acted, and continue to act, on behalf of a number of customers with complaints against banks and have significant experience with these disputes. We continue to act for those clients that have issued claims at Court and provide swift, assured and commercial legal advice to SME’s (and individuals). Do not hesitate to call us should you require legal assistance in this regard.