Hundreds of business are still seeking compensation for mis-sold interest rate swaps and thousands of “sophisticated” customers have been excluded from the compensation scheme, Financial Conduct Authority (FCA) chief executive Martin Wheatley has told MPs.
Nine banks including Lloyds, RBS and HSBC agreed in 2013 to compensate companies sold products supposed to protect them from changing interest rates on their debts but that were inappropriate.
About 17,000 firms have gone through the compensation scheme and 14,000 of these have received a total of £1.8 billon in redress. Mr Wheatley told the Treasury Select Committee yesterday that a few hundred affected companies were still negotiating with the FCA over compensation.
Mr Wheatley said firms whose swap was worth more than £10 million were deemed to be “sophisticated” customers and ineligible for compensation, a threshold that had excluded about a third of firmssold the products.
Source: The Telegraph
I agree with Mr. Tyrie, chairman of the Treasury Select Committee, that the FCA review process has not worked, though not necessarily for the same reasons as Mr. Tyrie.
Mr. Tyrie specifically mentioned borrowers with a swap of over £10m being excluded as being “sophisticated”. There is a certain logic to this and if anyone was contemplating taking out a complex financial instrument from their bank they ought to have sought independent advice (or have the necessary in-house expertise) regardless of how much they trusted their bank in the good old days.
The process has been flawed as the timetables were insufficiently strict, meaning compensation was delayed to many of the SMEs who needed the redress most.
Another flaw was the somewhat arbitrary process by which certain types of products were included and others excluded. For example, non-sophisticated borrowers who took out a fixed rate swap were invited to opt in to the review, when many of them would have been happy taking out a fixed rate loan in the first place. Mis-selling would have occurred if, for example, break fees were inadequately explained, but the provision of a fixed rate swap was not necessarily mis-selling in itself. So some businesses have received redress to which, in my opinion, they were not necessarily entitled. Conversely, non-sophisticated borrowers who were sold a cap had to complain to their bank to be included in the process, yet a cap is a more complex product that a fix.
The lack of an appeal process is a major flaw of the FCA review. I’ve witnessed many cases where the bank has rejected claims for compensation either on spurious grounds or without even providing proper explanation. The banks point to the fact that an independent reviewer oversees the process, but as each bank appoints (and pays for) the reviewer it is unclear quite how independent they are. Many SMEs who were genuinely mis-sold a swap have been denied rightful redress. The FCA themselves are not involved in the process unless the process has not been followed properly leaving legal action as the only remaining option for many SMEs denied redress. Yet how many SMEs can afford to pay lawyers to sue a major bank?
Although the FCA has a thankless task it is time that they admitted the review process has not worked properly and implement new procedures so those genuinely mis-sold a derivative are able to obtain redress.
Written by Daniel Shear
