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Interest rate swap agreements (IRSA) - FAQs

Interest rate swap agreements FAQs. If you have an interest rate swap deal, please contact us on 01616 966 229. Our team of experienced commercial solicitors will review the paperwork and advise if you have a case.

How many companies have potentially been mis-sold IRSAs?

The Financial Services Authority (FSA) has estimated that 40,000 small and medium sized business have been sold IRSAs, but that not all companies will have been victims of mis-selling. Each case will need to be reviewed on its own facts.

Compensation proposals are presently only available to non-sophisticated customers. What is a non-sophisticated customer?

The FSA consider that a smaller business is unlikely to possess the specific expertise to understand all of the risks associated with these products. The FSA have classified these businesses as ‘non-sophisticated’ customers.

A customer would be classified as a ‘sophisticated’ customer if at least two of the following were met, in the financial year during which the sale was made:

  • A turnover of more than £6.5 million.
  • A balance sheet total of more than £3.26 million (gross).
  • More than 50 employees (on average, including PT and FT staff, in the year the product was bought).

This reflects the criteria used in the Companies Act 2006 for classifying companies that are subject to the small companies regime, and which have lighter reporting requirements, and are therefore less likely to have staff or advisers with appropriate knowledge and skills.

In addition the FSA have agreed with the banks that they can classify a customer as a ‘sophisticated’ customer if they can demonstrate that at the time of the sale the customer had the necessary experience and knowledge to understand the service to be provided and the type of product or transaction envisaged, including its complexity and the risks involved.

A ‘non-sophisticated customer’ is one that is not a ‘sophisticated’ customer.

How much are the banks liable to pay?

11 banks have signed up to the FSA Independent Review Scheme, to look at potential compensation payments to customers who were mis-sold IRSA’s. Those banks are Barclays, HSBC, Lloyds TSB Group, RBS, Allied Irish Bank (UK), Bank of Ireland, Clydesdale Bank, Yorkshire Bank, Co-Operative Bank, Northern Bank and Santander UK.

As of January 2013, it is understood that Barclays, HSBC, Lloyds TSB and RBS have set aside £740 million to pay compensation for their mis-selling.

How long do I have to bring a claim?

The Limitation Act 1894 applies to any claim against a bank for mis-selling IRSAs. This means you have 6 years from the date the policy was sold to bring a claim.

However the banks have agreed to look at any policy sold after 1 December 2001 when considering claims for compensation under the Independent Review Scheme which is being overseen by the FSA.

What are the basis of a complaint of mis-selling IRSAs?

The customer did not understand what was being sold to him or her.

The customer was not aware of the magnitude of the break cost. (If an IRSA is broken before the end of its term then a substantial break cost may be payable. This could be as much as 20% of the notional amount. So, an IRSA covering interest on a loan of £500,000 may well have a break cost in the order of £100,000).

The customer was not aware of the implications of the bank’s ability to terminate the IRSA. There is often a clause that allows the bank to end the IRSA if the IRSA becomes unfavourable to the bank. These IRSAs are designed to greatly favour the bank. A typical scenario may be an IRSA for 10 years with the right for the bank to end it at the end of the fifth year and then at quarterly intervals after that. In effect, the customer is selling options to the bank. The attraction to the bank is that if the IRSA begins to work against it (e.g. when interest rates are rising) it can simply terminate the IRSA without having to pay any compensation to the customer. So, the bank has it both ways - putting it simply, if interest rates fall the customer pays; if the rates go up the bank can end the IRSA.

The bank did not comply with the FSA Conduct of Business Rules.

A duty of care was owed by the bank to the customer and was breached.

The bank “encouraged” customers to enter into IRSAs by linking them to the grant or renewal of loan facilities and this raises issues as to whether the purported agreement of the customer to enter into the IRSA was indeed a true “agreement” or whether the apparent agreement was obtained under duress or undue influence.

How do I make a complaint?

There are two ways to try and obtain compensation. There is making a claim in court, in which we recommend you obtain independent legal advice before doing so.

Alternatively you can complain to the bank which sold you the IRSA and request for them to review the sale as you believe you were mis-sold. If they undertake a review they may request information from you in relation to the sale. It is important you cooperate with this. If they determine you were mis-sold the IRSA they may make an offer of redress (compensation). The Independent Reviewer will have to approve the offer. You can then decide to accept or refuse the offer. The offer will be based as what is ‘fair and reasonable’ in each individual case.

If you are not satisfied with the outcome of the review you can make a complaint to the Financial Ombudsman. However not all companies and individuals are eligible to make a complaint to the Ombudsman and the maximum compensation payable is £150,000.00

If you are a business and have a turnover of less than €2 million (around £1.6 million) and less than 10 employees then you are eligible to complain to the Financial Ombudsman Service. Different rules apply to individuals, charities and trusts.

If you are ineligible to take your case to the Financial Ombudsman Service you may have the option of seeking redress through the courts.