Claims should be judged on their specific circumstances
Wednesday, September 5, 2012
On 29 June, the FSA published its agreement with the banks on compensation to be paid for mis-sold swap products. Many have assumed that all interest rate swap products marketed by banks will lead to compensation, but this is not necessarily so. Both under the FSA scheme and in front of the courts, there are a number of hurdles to be crossed before securing redress. Much will turn on how the swap was sold and in what circumstances. It may come down to the wording of presentations and who said what to whom. It will, however, be worth bank customers burdened with a swap product seeking advice to establish whether they are entitled to be compensated for mis-selling and breach of the FSA requirements for banks when selling this sort of product.
The nature of the product has become clearer. Banks were (and still do) often making it a condition of loans on variable rates that there should be an interest rate swap product also purchased which would protect against rises in interest rates. This product is not technically part of the loan, but supports the loan that is being made. It places a cap or collar on the interest rate to be paid on the loan. This is fine as interest rates rise, but has a very serious consequence if interest rates fall, as they have done.
The swap (otherwise referred to as a hedge) is an investment. It has potentially significant value to the bank as a derivative product. The FSA has commented that the selling process was influenced by personal bonuses to be paid on achieving a sale. As an investment, the swap often has little connection to the term of the loan itself. The period covered by the swap is very often much longer than the term of the loan. The term of the loan might be 10 years and the swap might have a life of 30 years.
As loans or refinancing were negotiated, customers would be referred to experts within the bank. Often relationship managers would deny any knowledge or understanding of the detail of the swap. As an investment product, it had to be sold by specialist investment advisors.
As interest rates fell, penalties were applied and when customers wanted to exit the product they found that they had to pay the value of the product to the bank. This could be a very substantial payment. In many cases, the payments are such that the business cannot sustain them. In that event the bank would step in under its debenture to appoint an administrator and in due course to place the company in liquidation.
Although the FSA concluded that some products were mis-sold and will be compensated for, the Financial Ombudsman and the courts have often concluded to the contrary. A court in Scotland recently refused a claim brought against RBS on the grounds that the customer ought to have understood what they were buying and had opportunity to consider the downside to the product. But this failed claim is matched by a very substantial settlement payment made by RBS to a customer last month.
Claims need to be considered on the basis of individual circumstances and events. It is vital to gather all the facts and documents before launching any claim, be it through the FSA or in the form of litigation.
– David Greene, senior partner, Edwin Coe