Interest Rate Hedging Products – Redress for Mis-selling
Successive reports by the Financial Services Authority (FSA) and the Financial Conduct Authority (FCA) have identified failings in the way that Interest Rate Hedging Products (IRHPs), commonly referred to as Interest Rate Swaps, were sold to businesses by the banks. Remarkably, in over 90% of the cases reviewed, the regulators found that the sales did not comply with one or more of their regulatory requirements.
These products were typically sold with loans and in many cases, the loan was conditional on their use. Designed to protect against rising interest rates for the duration of the loan, customers largely discovered that in a period of exceptionally low interest rates, they were locked in to their loans at higher interest rates with very substantial penalties enforceable for early exit from the loan.
In summary, the regulators found inappropriate sales of complex IRHPs to “non-sophisticated” customers and poor sales practices including:
· Poor disclosure of exit costs
· Failure to ascertain the customers’ understanding of risk
· Non-advised sales straying into advice
· “Over-hedging”, where the amounts and/or duration did not match the underlying loans
· Rewards and incentives being a driver of these practices
A programme of review and proportionate redress has now been agreed with many of the banks who promoted these products. As of February 2014, over 18,000 businesses have been invited to participate in the review process. To date, approximately 3,400 customers have accepted offers to “tear up” their agreements or take an alternative product, with over £480m paid in redress.
The Big 4 lenders – Barclays, HSBC, Lloyds and RBS expect to have completed the review process by the middle of 2014.
The main types of products involved are:
· Swaps, which enable customers to ‘fix’ their interest rate.
· Caps, which place a limit on any interest rate rises.
· Collars, which enable customers to limit interest rate fluctuations to within a simple range.
· Structured collars, which enable customers to limit interest rate fluctuations to within a specified range, but involves arrangements where, if the reference interest rate falls below the bottom of the range, the interest rate payable by the customer may increase above the bottom of the range.
If you have received an invitation to participate in the “review and redress” programme, we strongly recommend that you take a qualified adviser to any meeting with your bank. This will help to ensure that your interests are fully protected and that any subsequent legal action you may decide to pursue against the bank is not prejudiced.
Our forensic accountants have specialist expertise in this matter and provide end-to-end support to reach satisfactory redress with your bank. For further information, please contact us.