Lloyds breaches FCA mis-selling guidanceby
Lloyds Banking Group has breached Financial Conduct Authority (FCA) guidance on the offer of compensation for interest rate swaps mis-selling.
The bank was forced to withdraw its offer of redress to a business when the FCA found it tried to substitute the original hedging product for an alternative.
This breached FCA guidelines as it exceeded the maximum break cost of 7.5% of the businesses’ borrowings, nearing 39%.
It also switched the benchmark interest rate, in its own favour, to base rates from Libor.
The first redresses under the FCA pilot scheme have been made, with some banks increasing their compensation provisions for affected businesses.
The scheme is also the subject of an application for judicial review by law firm Manches.
First payments made under FCA scheme
The scheme is finally operational, but the redress has taken a long time to come around for small businesses still suffering the effects of mis-sold swaps, Hall said.
Interest rate swaps mis-selling scandal
• Swaps are hedging products which allow customers to 'fix' their interest rate
• Greatest volumes were sold between 2005-2008, before the rate fell to current low
• During this time, banks reduced the minimum loan value against which they were willing to offer hedging procuts
• FCA found evidence of poor sales practices around these products by banks
• FCA mystery buyer report found 90% of 173 products in pilot review scheme were mis-sold
• Estimated 40,000 small and medium-sized businesses sold over the last decade
He added that the initial formula looks encouraging for holders of structured collar products, who can expect to be refunded for all repayments made under the product, with statutory interest.
These product holders can also expect no termination costs upon cancellation, and it will also be possible to claim for consequential or indirect losses.
“It’s positive that offers are being made,” said Hall. “But the speed is not so encouraging.”
FCA review scheme legally challenged
Manches has applied for a judicial review of the FCA’s review scheme.
According to Hall, it is challenging the differences between sophisticated and non-sophisticated customers.
Currently, sophisticated customers are any business with a ‘live’ swap of more than £10m, and so cannot use the FCA scheme, as it is considered to have been aware of the risks.
The firm has dispatched a letter before action to the FCA’s chief executive Martin Wheatley and is challenging the scheme’s exclusion of medium-sized businesses or some businesses considered to be sophisticated.
In addition, the law firm would like to see those with fixed rate bank loans, who Hall says are similar products to interest rate swaps, included in the scheme.
The FCA estimates that 40,000 swaps were sold to small-to-medium-sized businesses over the last 10 years, but Hall said that if non-sophisticated and fixed interest bank loan customers were included in the scheme, that number could increase the amount due in compensation by three or four fold.
If successful, it could lead to banks increasing their compensation provisions.
Banks increasing compensation provisions
Yorkshire Bank and RBS have both increased their redress provisions by £39m and £50m respectively.
The total industry provisions for swaps mis-selling now stands at around £2.5bn.
Hall says he expects more banks to do the same over the next two months, as the real costs, for example administrative costs in RBS’ case, become apparent.
Hall also highlighted to important, recent cases in the interest rate-swap mis-selling saga.
Green & Rowley (G&R) appeal and intervention by the FCA
The FCA applied to intervene in G&R vs RBS. This appeal is important to a large number of potential swap claimants, whose statutory duty claims are time-barred, but who have a potential claim in negligence.
G&R’s appeal raises two issues, the first being whether the statutory duty of compliance under the Conduct of Business Rules (COB) gives rise to the same duty to the bank’s clients in negligence.
If this is successful, the Court of Appeal will consider what was required of the bank to comply with COB, i.e. a risk warning the bank should have issued detailing the break costs of a swap product.
The appeal hearing will take place between 29 and 31 July.
Guardian Care Homes v Barclays
This case is important to establish a “landmark precedent” for swaps and Libor rigging, but doesn’t look likely to happen until 2015.
Last summer, Guardian Care Homes (GCH) sued Barclays for up to £70m for being mis-sold a swap that was linked to Libor.
This made the product sale void because of the bank’s fraudulent misrepresentation of Libor.
Last month, Barclays won the right to appeal the High Court decision which allowed GCH to include the Libor rigging element in its case against the bank.
The start of the trial is delayed until April 2014, to allow time for appeal.
Further reading on interest rate swaps mis-selling: