The FCA has, over the past 12 months, highlighted their concerns over the sale of complex Interest Rate Hedging products to tens of thousands of small to medium sized businesses who were "non sophisticated customers". The FCA directed a number of banks to provide "fair and reasonable redress" to these "non sophisticated" customers. The "non sophisticated" customers who were sold these products ranged from care home operators, hoteliers, chemists, vets, hauliers, small property developers and pub owners.These customers were advised by the banks to "hedge" the possibility of interest rates increasing when also taking out a loan with the bank. In fact, the banks made it a condition of the loan to require a hedging product.As a result, many customers were faced with crippling monthly repayments when the interest rates fell and also unreasonably high exits fees should the customer wish to terminate the hedging product.
In June 2012, the FCA followed issued a finding that "serious failings" had occurred in the sale of swaps and other interest rate derivatives to small business which amounted to mis-selling. The FCA came to an agreement with the four major banks , namely RBS, Barclays, Lloyds and HSBC that these banks would review their past sales of these products and offer appropriate redress.
Despite the apparent agreement reached between the banks and the FCA, the FCA says the offering of compensation packages to those businesses affected by the mis-selling has been "slower than expected". Whilst the process has improved, figures released in October 2013 show that the banks were still missing their targets. The FCA initially hoped to resolve 1000 cases during the month, but only 800 have been resolved. The FCA states that this delay has caused "customer frustration".
The FCA has now written to the four major banks to agree ways to speed up the process. The FCA has also agreed with the four major banks to split compensation payments. Initial compensation will be paid on the losses directly associated with the mis-selling of the hedging product. For example, the interest charges or the exit costs. More complicated consequential losses, for example if the customers has other losses as a result of the mis-selling, will be dealt with later. The 4 major banks have also agreed to pay interest on compensation associated directly with the mis-selling at the rate of 8%.
Customers should therefore welcome the intervention of the FCA and hope that the banks now meet the targets for providing redress. Customers must also remember, however, that if they are unhappy with the compensation offered, or indeed if no compensation is offered, they only have 6 years from the date the hedging product was entered into to bring a claim in the courts. If the bank are reviewing any customers' claim this does not extend the period of 6 years to bring a claim.
By Leanne Millhouse, commercial litigation solicitor