Many 'non-sophisticated businesses' who have been mis-sold interest rate hedging products, ranging from swaps to caps and collars, may have already received notifications from the various banks that these sales will be reviewed for the purposes of the FCA review. The majority of the interest rate hedging products were sold between 2005 - 2009. Once these businesses receive the notifications they are then asked whether they wish to take part in the review and, if so, will be asked to provide information concerning the sale of the product. It is very unlikely that the business will be included within the review automatically. The business will have to reply to the letter of notification from the bank and confirm that it wishes to take part within the review.
The situation does not change where the business is in administration or liquidation. The insolvency practitioner appointed will still have to respond to the letter of notification and confirm that it wishes the insolvent business to be included within the review. Insolvency practitioners must be aware that relevant time limits for responding to the notification letter and also for the purposes of limitation (which are explained further below) apply from the original dates of the letters and the sale of the products and NOT the date of the appointment of the insolvency practitioner.
As part of the FCA review, the banks will consider whether the business was mis-sold the hedging product. The bank will then look at awarding compensation for the losses suffered by the business. This compensation is calculated on 2 basis. Direct loss compensation and consequential loss compensation.
Direct losses are aimed at compensating the business for losses that they have suffered as a direct result of the sale of the hedging product. For example, if an alternative product is offered as redress by the bank, the business will be credited back the interest it has paid on a mis-sold product, with additional interest on these sums at the rate of 8%.
When offers of compensation for direct losses are made, the bank will often advise the business that any claims for "consequential loss" must be submitted within 28 days. The banks often do not explain what is meant by consequential loss, which quite often can be the largest part of a businesses' claim, especially for insolvency practitioners who must look at the reasons why the business failed.
Consequential loss covers losses which have been incurred as a consequence of the sale of the hedging product. These losses can range from overdraft fees and increased bank charges to claims for loss of profits and also compensation for having to sell assets on a forced sale basis to continue to fund the hedging product. In a worse case scenario, the business could be forced into liquidation or administration, and the insolvency practitioner appointed would need to look at the reasons why the business failed and seek appropriate redress from the bank.
Whilst the banks are notifying businesses that they may have a potential claim for direct and consequential loss, the banks are not telling businesses (and any insolvency practitioner appointed) that:
- The six-year limitation rule applies to direct and consequential loss claims. This means that court proceedings MUST be issued within 6 years of the date of the completion of the sale of the hedging product to the business. This time does not run from the date of the appointment of the insolvency practitioner. If the bank rejects the claim for either direct or consequential loss, then unless businesses or the insolvency practitioners have either entered into a "standstill agreement" with the bank, or issued proceedings in the court within the time limit, then that business and the insolvency practitioner will be time-barred and will not be entitled to bring any claim against the bank.
- Consequential loss claims can often be more substantial than the direct loss claims and many insolvency practitioners may be missing out on recovering sums which they are legally entitled to as a result of the sale of the hedging product.
Bearing in mind that the majority of the hedging products were mis-sold in 2007 and 2008, many businesses and insolvency practitioners are already out of time for challenging the banks with regards to direct and consequential loss claims. Those businesses which insolvency practitioners find are still within the six-year time limit need to act quickly and seek appropriate legal advice to protect their position and ensure that they recover the correct levels of compensation.
Many insolvency practitioners may feel that they do not have sufficient information to bring a claim for redress against the banks. However, it is often sufficient from a review of the files and documentation that the insolvency practitioners are able to bring a claim for redress. The former directors of the insolvent business also owe a duty to assist the insolvency practitioner with bringing a claim for redress. Finally, it must be remembered that insolvency practitioners themselves are under a duty to investigate and pursue, where appropriate, claims for redress.
The interest rate hedging team at Stephensons Solicitors LLP have acted for insolvency practitioners in bringing claims for redress against various banks and have a 100% success record with these claims. The banks have been very accommodating with their offers of redress to insolvency practitioners and the offer of compensation have been readily accepted by clients.