Recent events suggest that the financial system in general, and the banking system in particular, still have serious issues to resolve before we, the general public, can be confident that all the outstanding misselling issues have been resolved; that the biggest banks have dealt adequately with their misselling liabilities and that they are properly capitalised and ethically run, complying with their duty to their customers and to the regulator to treat their customers fairly.
Let us start with the alleged missale of interest rate hedges and the more exotic variants, such as interest rate caps and collars. These products are intended to protect the customer against interest rate risk. In principle, therefore, they can meet customers’ needs as they provide greater certainty over future loan repayments. However, these products can also be very complex and, therefore, susceptible to misselling.
The FSA has carried out a review, as a result of which it has said that it “has found serious failings in the sale of interest rate hedging products to small and medium sized businesses. We have evidence which raises concerns about the sales we have reviewed in certain banks. These concerns include (i) inappropriate sales of more complex varieties of interest rate hedging products (such as structured collars) and (ii) a number of poor sales practices used in selling other interest rate hedging products. We also found that sales rewards and incentive schemes could have exacerbated the risk of poor sales practice. Practices varied across banks but we found sufficient evidence of poor practices to justify action by the FSA.
“Interest rate hedging products can be an appropriate product when properly sold in the right circumstances. However, when sold to customers who are likely to lack expertise and understanding of the product… some interest rate hedging products may be inappropriate.”
In order to provide a swift solution for customers, the FSA has reached agreement with Barclays, HSBC, Lloyds and RBS and NatWest to provide appropriate redress where misselling has occurred. Seven other banks have also voluntarily joined in the review.
On top of the missale of hedging derivatives, the scandal that some banks have taken part in the rigging of the Libor rates has now been exposed. It follows as the night does the day that the Libor rigging issue is likely to be relevant to the misselling of interest rate hedging products in which the underlying interest rate is referable to one of the many different Libor rates.
There is a case making its way through the High Court in which some borrowers from Barclays have made the connection between the misselling of such products and the rigging of Libor. The borrowers are companies in the Guardian Care Homes group of companies, and they have recently got permission from the court to amend the way in which they were intending to put their cases, to also allege fraud against Barclays at the trial when (and if) it takes place.
Their allegation is that Barclays required, as part of the overall financing, that the borrowers enter into hedging contracts of a somewhat exotic variety, namely a swap and a collar.
The effect was that, although fixing the borrowers’ interest liability, it had the commercial effect of exposing them to movements in the Libor floating rate. The borrowers’ rate of interest was effectively fixed at around 5 per cent, but the lower that Libor floated below that fixed rate, the more the borrowers would be liable to pay.
Those products are alleged to have been inappropriate for the borrowers on any basis. In other words, they were missold. But if the Libor rate was rigged so that it was lower than it would otherwise have been, that exposed the borrowers to greater costs under those contracts. The rigging amounted to fraud because by implication Barclays would have been representing the underlying Libor rate as genuine and honestly calculated but the reality was different.
If fraud is proved, then all the borrowers’ losses directly caused by the fraud are recoverable. The fallout from a successful case of this sort against the bank is likely to be immense and far reaching.
The rating agencies have also come under fire.
In Australia, recently a judge has found Standard and Poor’s guilty of issuing a rating which he found to be “misleading and deceptive and involved the publication of information or statements false in material particulars and otherwise involved negligent misrepresentations to the class of potential investors in Australia [which included the claimants], because by the AAA rating there was conveyed a representation that in S&P’s opinion the capacity of the [rated financial instrument] to meet all financial obligations was extremely strong and a representation that S&P had reached this opinion based on reasonable grounds and as the result of an exercise of reasonable care when neither was true and S&P also knew not to be true at the time made”.
ABN Amro was also involved in the Australian case. The judge said of that bank that it was “knowingly concerned in S&P’s contraventions of the various statutory provisions proscribing such misleading and deceptive conduct, and also itself engaged in conduct that was misleading and deceptive and published information or statements false in material particulars…”.
On the assumption that there are likely to be other similar actions against the rating agencies and banks, that will also have wide repercussions.
Then there is the Card Protection Plan case. On15 November 2012, the FSA announced that it had fined CPP £10.5m for misselling insurance products.
In its press release, the FSA said: “CPP has also agreed to pay redress and estimates that around £14.5m will need to be paid to affected customers, but this could change depending on how many customers respond to CPP’s contact exercise. CPP has estimated that the total costs of the FSA’s investigation will be £33.4m which includes the fine, redress and the costs associated with the investigation… The FSA found widespread misselling of CPP’s two main UK products between January 2005 and March 2011. CPP failed to treat its customers fairly and did not provide clear information to its customers:
CPP sold its Card Protection product by emphasising that customers would benefit from up to £100,000-worth of insurance cover – when this was not needed because customers were already covered by their banks; and
CPP overstated the risks and consequences of identity theft during sales of its Identity Protection product.
“CPP sold Card Protection and Identity Protection through its own sales channels, or through a partner, such as a high-street bank, which introduced its customers to CPP. Card Protection cost about £35 a year while Identity Protection cost about £84 a year. In total, CPP sold 4.4 million policies and generated £354.5 million in gross profit.”
This is a serious indictment of CPP and it is not surprising that the fine was the joint highest retail fine imposed by the FSA. Again, the banks appear to be involved, and so again this will affect the banks.
The cases described above, in addition to the PPI and other cases, leave one wondering where and when this will all end.