CUSTOMER COMPENSATION NEEDS CLARITY
The FSA recently acknowledged serious failings in the sale of interest rate hedging products by four of the UK’s biggest banks: Barclays, HSBC, RBS and Lloyds.
A redress scheme has been agreed for those customers the banks believe have been mis-sold interest rate hedging products. However, there is still widespread uncertainty and cynicism amongst customers regarding who will receive redress and what what the scale of that will be. Will litigation be the only way for some mis-sold customers to seek the compensation they believe they are entitled to? The following seeks to provide answers to some commonly asked questions.
1. WHAT ARE INTEREST RATE HEDGING PRODUCTS?
Interest rate hedging products were sold by banks to customers as protection from interest rate rises on loan repayments. If interest rates rose, the bank would absorb the subsequent increase to the loan repayments. The products were mainly sold between 2005 and 2008 to SMEs.
There are various interest rate hedging products, including swaps, caps and collars, all of which are legitimate but complex and risky in nature, meaning they are only suitable for ‘sophisticated’ customers.
2. HOW WERE INTEREST RATE HEDGING PRODUCTS ‘MIS-SOLD’?
The FSA review identified the inappropriate sale of interest rate hedging products to ‘non-sophisticated customers’. This meant that products were sold, often ‘over the counter’ via a simple telephone transaction, to ‘non-sophisticated’ customers who failed to understand that:
Although protected from interest rate rises, they were also agreeing to make payments to the bank if interest rates fell
The products tied customers in for many years, e.g. a 25yr term
A ‘break cost’ would apply if the customer cancelled the contract. In a low interest rate environment the break cost is higher
In its simplest form, the customer was unaware they were placing a bet.
Win: Interest rates rise; customer loan repayments remain constant
Lose: Interest rates fall; customer owes unexpected sums of money on a continuing basis. This contract can only be broken by making a significant payment to the bank
For customers purchasing interest rate hedging products, this was a bet they lost. Interest rates dipped to an all-time low and remained consistently low thereafter.
3. WHAT IS THE REDRESS SCHEME FOR CUSTOMERS WHO HAVE BEEN MIS-SOLD INTEREST RATE HEDGING PRODUCT?
The redress scheme has narrow parameters in which customers will qualify for an offer of compensation to be made. Barclays, HSBC, RBS and Lloyds have agreed to:
Provide redress to non-sophisticated customers sold structured collars;
Review sales of other products (except caps or structured collars) for non-sophisticated customers; and
Review sale of caps to a non-sophisticated customer if a complaint is made during the review
4. WHAT HAPPENS NOW?
Banks are in the process of contacting customers who purchased:
Structured collars – to propose redress;
Interest rate hedging products (except caps or collars) – to explain whether they are considered non-sophisticated. If they are, the bank will offer a review of the sale.
If a customer purchased an interest rate cap product, they would need to actively complain to the bank to be considered for redress.
5. WHAT IF A CUSTOMER EITHER DOESN’T QUALIFY FOR REDRESS, OR IS NOT HAPPY WITH THE REDRESS OFFERED?
The Financial Ombudsman Service (FSO) can help if a customer:
Is unhappy with how their case has been reviewed;
Is unhappy with the level of redress proposed; or
Believes they have incorrectly been classified as a ‘sophisticated’ customer and have, therefore, not been eligible for redress, despite complaining to the bank.
However, if a customer has over 10 employees or believes they have suffered a loss of more than £150,000, they will not be eligible to use the FOS. If this applies, or if a customer is still unhappy having been to the FOS, they will need to consider whether to take action through the courts.
WHAT IS A ‘SOPHISTICATED CUSTOMER’ AS DEFINED BY THE FSA?
A ‘sophisticated’ customer is defined by the FSA as meeting at least two of these criteria:
Turnover over £6.5m
Balance sheet total over £3.26m
More than 50 employees
– or –
If the firm can demonstrate that the customer had the necessary knowledge and experience to understand the service and type of product, including the complexity and risks.
If a customer finds themselves pursuing litigation in order to access adequate compensation, TheJudge can help to minimise the cost risk and cash flow implications of doing so. Various funding and insurance products are available – contact one of our brokers today if you would like to discuss this further.