Four years ago the Financial Conduct Authority (FCA) ordered a review of the sale of more than 30,000 interest rate hedging products by a number of high street banks, after pilot investigations showed that IRHPs had been mis-sold to many business banking customers, including property businesses.
The FCA assured businesses that they would get fair and reasonable redress but, four years on, while the review found breaches of FCA rules in relation to more than 90% of the IRHPs sold and payments of more than £2.1bn have been refunded, many businesses have still been given little or no redress.
Even in cases where the bank has refunded payments, claims for consequential loss for more than an 8% return on those funds are very often refused or only a small fraction of the sum claimed is awarded.
Many affected businesses have serious concerns about the review’s capacity to consider the evidence fairly and provide them with an adequate redress, particularly regarding consequential losses.
Fundamentally flawed
Fundamentally, given the behaviour of the banks as uncovered in numerous recent scandals, the review was flawed at inception because the same bank responsible for the alleged mis-selling was responsible for reviewing the sale of the products based on secret (at the time) terms agreed with the FCA.
To this end, the bank is effectively judge, jury and executioner in assessing what, if any, redress should be paid, with its conclusion then merely being checked by an “independent reviewer” (a “skilled person” appointed and paid for by the bank under section of the 166 of the Financial Services and Markets Act 2000) based on the information the bank chose to share with them.
More specifically, the following important issues have emerged during the review process.
1. There is no route of appeal if the decision is wrong, unless the customer is a very small business within the eligibility criteria for the Financial Ombudsman Scheme. Most of the businesses in the review are not. Even if they are eligible for the FOS, the maximum award is £150,000. Most claims are worth much more than that.
2. The customer has no right to obtain disclosure of the bank’s internal documents, which form a key part of the material reviewed by the bank and the independent reviewer. The banks refuse to disclose even the key documents they rely on to dispute claims. Typically, in relation to consequential loss, the bank claims it has a record which evidences that the IRHP was not the reason a particular property purchase or transaction did not go ahead. The bank refuses to disclose this record, which of course the customer has never seen or approved. The customer, therefore, has no opportunity to provide any comment or context around the bank’s records which the independent reviewer can only assess in light of the bank’s spin on them. This is a clear breach of natural justice and it is extremely surprising and disappointing that the FCA endorses this stance.
3. The banks make unrealistic requests for evidence way beyond what is required based on the usual legal principles. The bank typically alleges there is insufficient evidence about what would have happened if the customer had not had the IRHP, even where the customer can point to examples of specific properties it would have bought (and contemporaneous evidence of enquiries about them) or projects abandoned for lack of cash flow. Claims are rejected purely because there is no contemporaneous document recording that the customer has decided not to buy a particular property or to carry out a development project because of the IRHP. The customer’s testimony as to the reasons for the decision is ignored. This is a completely inappropriate and incorrect approach to consequential loss claims because, by their nature, they require proving a hypothetical scenario which can only be done by witness evidence from the decision maker about the decisions they would have made at the time had circumstances been as they should have been. No contemporaneous documents can exist to prove this because the hypothetical events didn’t actually happen (which is the whole point). This witness evidence should be considered in conjunction with any documents available to decide whether it is “more likely than not” that things would have panned out as the customer claims. The level of contemporaneous documentary evidence the banks require is completely unrealistic and way beyond what would be required in court.
4. There is no ability for the customer to engage with the bank reviewer or independent reviewer. Crucially, customers have no ability to discuss points directly with those making the decision. Customers cannot trust that their points are being properly communicated to those actually making the decisions, and there is no communication to enable a two-way discussion.
5. There is a lack of consistency in the treatment of cases. Initially customers were often provided with internal documents from the bank’s files, and telephone call recordings and transcripts where available. Then such requests began to be routinely refused, with the FCA’s support, leaving one group of customers at a disadvantage compared to the others. In some cases, the banks have paid legal costs, in others they have not, and various different tests are used. In some cases the bank awards an arbitrary sum towards costs. This clearly cannot be treating all the relevant customers fairly.
6. Any mis-selling outside of the specific trends identified by the FCA when it did its pilot investigations is ignored. For example, customers often complain that the bank sold a long-term swap against short-term borrowing on the basis that the bank would lend to them for the long term but that the structure had to be based on a short-term loan initially. Then the bank refused to extend the loan causing the customer to incur hefty break costs. The bank then refuses to consider this complaint within the review process because it alleges it is a complaint about the lending and not about the swap.
The litany of problems clearly merits a full scale re-examination of the operation of the review process to ensure that fair redress is ultimately provided to the businesses involved. There is a precedent. The FCA required Lloyds to “re-review” more than a million PPI claims when it found that complaints had been unfairly rejected. This is all the more important as it appears likely that other similar reviews may be undertaken in the future, with one possibility being in response to the FCA’s forthcoming report into the activities of RBS’s Global Restructuring Group if that finds evidence of any misconduct.
What can affected customers do?
If customers have to take the bank to court to challenge the sale of the swap, they face the potential hurdle that, unlike the review, the court will take into account disclaimers in the banks’ documents absolving them from liability. Further, proving breaches of the FCA rules will not be enough to obtain compensation unless the borrower is an individual and not a company.
Many property companies that put faith in the review process have run out of time to sue about the original mis-selling as the usual time limit is six years. Some customers are alleging negligence and/or breach of contract by the bank in conducting the review and several such cases are progressing through the courts, with some conflicting decisions and appeals pending.
Property businesses who feel they have been short changed in the FCA’s review process should not give up entirely – the FCA investigated interest rate swaps initially in 2010 and decided not to take action at that time, having found insufficient evidence to do so. Persistence by businesses affected in making complaints to the FCA resulted in a reconsideration in 2012 and the current review process. There are a number of potential routes to challenge the current position, and the legal issues about IRHPs show no sign of dying away in the near future. Businesses should be persistent and continue to complain to the FCA if they consider they are being unfairly treated.
Janine Alexander is a partner in Collyer Bristow’s banking and financial disputes team
