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Banks are delaying interest rate hedging claims

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Vince Cable has criticised lenders for stalling on compensation payouts to thousands of businesses mis-sold risky interest rate swap products. It emerged in June that only a handful of businesses have received compensation almost a year after banks were ordered to review their past sales. Insiders admitted that the number of firms that have received their money is ‘very, very small’.

As you may be aware, the Limitation Act 1980 says that you have six years from the date of purchase (ie entering into) of the hedging product to bring a claim in court. This means that court proceedings have to be issued within this 6 year period. If not, a claim cannot be brought.

However, banks are not warning of this limitation date when asking businesses if they wish to be included within the Financial Conduct Authority review. Businesses therefore assume that there is no risk or downside to being part of the FCA review, assuming (wrongly) that there is always the court process available should they be unhappy with the FCA review.

It is contended by the media and representatives of businesses that one major reason why the banks are not reviewing the cases as quickly as they could is that they know that after the six year time gap, they can no longer be sued. This means that if the business is unhappy with the outcome of the review, and it has been more than 6 years since the entering into of the hedging product, the business cannot take court proceedings against the bank. The business will therefore lose any right to compensation/redress that it may have had.

It is also a possibility that banks may be delaying due to the large amounts of compensation which they will have to pay out. If there are a lot of businesses who have in fact been mis-sold products, then the banks will have to pay substantial sums by way of compensation. This has the knock-on effect of potential financial problems for the banks involved, with the banks also being unable to continue to charge the interest rates and breakage costs associated with the hedging products. Some analysts estimate the costs to banks of dealing with hedging claims to be in the region of £10billion.

On the side of the banks, however, the banks argue that they are not purposely delaying the claims. The banks say that before they can take any action, they have to gain approval from the FCA. So, if the FCA is taking their time on deciding whether they should grant approval, then the business and banks are loosing time to pursue their case. The banks argue that they want to sort out the claims, so that their customers are satisfied, but they have hit a brick wall, as the FCA hasn’t given them approval to start proceedings.  

Whatever the reasons for the delays, businesses must therefore act immediately to ensure that they stay within the 6 years to bring a claim. One way to ensure this is to ask the bank to enter into a "Standstill Agreement" whereby the bank accepts that the 6 year period "stands still" from the date of the Standstill Agreement.

Alternatively, should the bank not agree to enter into a Standstill Agreement, the business has the option of issuing court proceedings to protect its position.

Either way, given the importance of the 6 year rule, businesses are encouraged to act quickly and take immediate legal advice.

By Leanne Millhouse, commercial litigation solicitor