On 29 June 2012, the FSA announced that it had found serious failings in the sale of interest rate hedging products to some small and medium sized businesses.
The FSA confirmed that it had reached an agreement with four major banks to provide what it deems appropriate redress where mis-selling has occurred. The FSA subsequently announced that seven more banks had agreed to join its review of sales of these products.
The fallout which will inevitably follow this announcement has the potential to echo other recent mass consumer complaints such as payment protection insurance, Keydata and Arch cru. But does it have to be that way?
Interest rate swaps
The FSA’s review focused on interest rate hedging products sold since 2001, the greatest proportion having been sold between 2005 and 2008. The concerns raised include:
Inappropriate sales of more complex varieties of interest rate hedging products (such as structured collars); and
A number of poor sales practices used in selling other interest rate hedging products.
The FSA identified four broad types of products that have been sold to customers:
Swaps – which enable the customer to ‘fix’ their interest rate
Caps – which place a limit on any interest rate rises
Collars – which enable the customer to limit interest rate fluctuations to within a simple range
Structured collars – which enable a customer to limit interest rate fluctuations to within a specified range and involving 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.
Although the FSA accepted that interest rate hedging products can be appropriate when properly sold in the right circumstances, it concluded that such products may be inappropriate for ‘non-sophisticated customers’.
Sophisticated customers are those meeting at least two of the following criteria: A turnover of more than £6.5m; a balance sheet total of more than £3.26m; more than 50 employees; or the bank is able to establish that at the time of sale the customer had the necessary experience and knowledge to understand the service to be provided and complexity of the product.
A number of claimant law firms such as Legal Plus, Carter Ruck and Clear Law Solicitors have already begun to approach potential claimants with a view to starting actions. A number of firms have already bought the domain names including ‘interestrateswapclaim.com’ and ‘rate-swap-claims.co.uk’, which shows the excitement already building over prospective claims against the Banks.
The FSA has said that it is difficult to estimate how many interest rate hedging products were mis-sold, although it estimates that around 28,000 such products were sold since 2001 and each of these has the potential to lead to complaints and/or claims.
While FSA settlements and FOS decisions should limit the potential for claims, the furore generated by the FSA’s announcement and press publicity is likely to lead to ‘opportunistic’ claims, particularly by claims management companies, and those under financial pressure.
Such opportunistic claims will need to be dealt with robustly, whilst the genuine claims are resolved efficiently and sympathetically in the context of the undertakings agreed with the regulator. The furore may also encourage claims by sophisticated customers, for example, where loans expired before their hedging products, leading to break costs.
Simon Morris is a partner at CMS Cameron McKenna LLP