As some readers may recall, in a previous blog I reported on how last year the Financial Services Authority (FSA) had ordered Barclays, HSBC, Lloyds and the Royal Bank of Scotland to conduct a review of sales of Interest Rate Hedging Products to small/medium sized businesses. The FSA required those banks to carry out a pilot study which involved selecting a number of affected customers from each bank to assess the banks’ approach in the sale of those products to their customers.
The FSA has now released its report setting out its findings from the pilot study. The report concluded that there was significant mis-selling of Interest Rate Hedging Products by the banks. The FSA looked at 173 cases of sales to “non-sophisticated” customers and found that 90% did not comply with one or more of the regulatory requirements. The FSA has confirmed that a significant proportion of these sales are likely to result in financial redress for the bank’s customers.
More high street banks have agreed to review sales of Interest Rate Hedging Products. These include Allied Irish Bank (UK), Bank of Ireland, Clydesdale Bank, Yorkshire Bank, Co-operative Bank, Northern Bank and Santander UK. Each of those banks will now be reviewing sales of those products in line with the approach adopted by the FSA in its report.
The FSA has changed the “sophistication test” used to determine which business are eligible for reviews, to ensure that the review is focused on small business that were unlikely to have understood the risks associated with the products which were sold to them. The amended test could mean that customers who would previously have been considered to be “sophisticated” and therefore not eligible for review may now be included.
The FSA has issued guidelines to ensure that there is consistency across the banks when determining what is fair and reasonable redress for individual cases, with the aim of putting customers back in the position they would have been in had the breach of regulatory requirements not occurred. Potential redress would include cancelling the arrangements and refunding all payments or transferring the customer to a more suitable product. If a customer would have bought a different kind of product from the one recommended, they might be offered partial compensation depending on the losses they have suffered. However no compensation would be given if the customer would still have bought the same product anyway or the customer had suffered no loss.
The FSA has also asked the banks to look at customers who have suffered “consequential” losses. These are additional losses over and above the “normal” losses that may have been caused by the breach of the regulatory requirements during the sale of the hedging products, such as overdraft charges and additional borrowing costs. For customers to be eligible for this type of compensation, the loss must have been caused by the regulatory breach and have been reasonably foreseeable at the time of that breach.
The banks are aiming to complete their substantive reviews within six months although it may take up to twelve months for those banks who have a substantial number of sales to review.
Whilst these reviews are being undertaken by the banks, customers should not sit back waiting for the outcome of those reviews as time is not on their side. Generally, customers will have six years from the date of the sale of the product within which to pursue legal action against the bank otherwise their claim will be statute-barred and they will lose their right to pursue a claim through the Courts. Therefore, customers who purchased the Interest Rate Hedging Products in 2007 will be approaching that deadline (some may already be too late). Customers who believe they may have a claim against the bank should act immediately and seek legal advice notwithstanding that they may have been informed by their bank that they are part of the review.
If you believe you have been mis-sold a product from your bank then please contact me to discuss your options.