With bank reporting season getting into full swing, the scale of the interest rate swaps mis-selling problem is becoming clearer, according to a claims specialist.
Since AccountingWEB last reported on the issue in November, there have been a number of legal and other updates in the area, including the FSA’s pilot findings on interest rate hedging products and negotiations between MP Guto Bebb and the banks that sold the arrangements to small businesses.
Daniel Hall of Treasury product claims specialist All Square Treasury said the industry was “finally waking up”.
“Banks are now making material provisions, with Barclays increasing theirs to £850m and RBS expected to increase theirs to £1bn, bringing industry provisions to around £2bn,” he said.
“These figures could have been much higher had changes to the FSA review scheme not been reduced.”
The FSA mystery buyer report found more than 90% of products were mis-sold out of 173 reviewed.
However, Hall said not all is at is seems, as the FSA has adjusted the definition of non-sophisticated customers who can take advantage of its scheme.
The pilot findings introduced some key revisions to the ‘sophisticated customer’ test. Any business with a ‘live’ swap of more than £10m is deemed to be a ‘sophisticated customer’ and so cannot use the FSA scheme.
“This doesn’t make sense,” he said. “A product has either been mis-sold or it hasn’t. An artificial cut-off point will leave many legitimate claimants out in the cold, not because of the level of their financial knowledge, but because of the size of the swap that their bank sold them.”
“This change of definition looks set to be challenged by a Judicial Review against the FSA for allegedly “acting unreasonably and changing criteria for businesses to be within the review”. Expect many more twists and turns to come.”
Slow pace of FSA review scheme
Nine months have passed since the FSA identified “serious failings” and the review scheme is still not operational, according to Hall.
In the meantime, businesses continue to struggle with swaps. In addition to this, the Bank of England debating negative interest rates will mean payments under swap contacts will increase further, he said.
“Those businesses that will become subject to the statute of limitations during the review process will need to rely on a favourable outcome, otherwise they will lose their right to issue proceedings should they subsequently want to litigate.”
Use of Claims Management Companies
The FSA insists there is no need to use claims management companies as the claims process is straightforward.
“It’s easy to understand why they are saying this, as nobody wants to see a repeat of the PPI-style feeding frenzy that has occurred,” said Hall.
Business were largely mis-sold swaps because they didn’t understand the product they were buying, said Hall, therefore it’s unclear how they’ll be able to understand alternative products the review scheme may put them into.
“It’s also unclear how they can meaningfully negotiate any proposed settlement without fully appreciating exactly what’s on the table.”
Role of independent reviewers
The FSA scheme ensures that each bank appoints an independent reviewer to assess each case. The independent reviewer will determine whether:
- a mis-sale has taken place
- the amount of redress payable in the event of a mis-sale
“On paper, businesses should take comfort from the independent review process, but again everything is not as it seems. Whether the banks and Big Four accountancy firms can ever truly remain independent is something many remain unconvinced by. Will an independent reviewer, paid for by the bank, really have the stomach to fight every inch of the way for the small business?”
Other recent developments surrounding interest rate swaps include:
- Green & Rowley v RBS [Dec 12] – first piece of case law to receive a court judgement on swaps mis-selling. The judge decided in favour of RBS. Green & Rowley were considered to be ‘intelligent and experienced’ businessmen (i.e. sophisticated customers) and would have understood the products. It was ruled that the bank did not give advice, but only provided information
- Green & Rowley appeal [Jan13] - This case is going to the Court of Appeal, instructed by Clarke Wilmott Solicitors
- Increase in bank provisions [Feb 13] - When Barclays announced its results, the bank made additional provisions for swaps mis-selling of £400m to a total of £850m. RBS announced it will be ‘meaningfully’ increasing its provision from an initial figure of £50m. Other banks will most likely be increasing their provisions over the coming weeks as they release results. Total industry provisions for swaps mis-selling now stands at over £1.5bn
- Moratorium on payments of swaps [Feb 13] - The banking industry has come under pressure from the Greg Clark, financial secretary to the Treasury, who called for a moratorium for all payments on swaps. So far the banking industry has rejected this and only allows for suspension of payments on a case-by-case basis where a business is genuinely facing financial difficulties.
For further reading, see All Square Treasury's guide for accountants on interest rate swaps.