Claiming Redress In Cases Of Mis-Selling Of Interest Rate Hedging Products
Introduction and Scope
This article has been written in order to describe the potential pitfalls posed to organisations that take part, without being legally represented, in a FSA/FCA Review dealing with the sale of derivatives which are designed to hedge their potential looses that may occur due to adverse interest rate changes.
What is actually taking place is that the FSA/FCA Review, (the FSA is now renamed the FCA) that is carried out is not in fact being performed by the regulator but by the banks or their representatives who may turn out to be mis-selling party.
A recently performed pilot study, carried out as a precursor to the Interest Rate Swap Mis-selling Review that followed, led the FSA/FCA to find that there were "serious failings" in the way in which IRHPs were sold to businesses and that in some cases this amounted to mis-selling. It is estimated that this was the case in up to 90% of all cases and it was established that in such cases the customer in question should be entitled to receive redress at an appropriate level.
An Arrangement Is Arrived At Between The Banks and the FSA/FCA Regarding The Process Of Conducting Reviews Of Interest Rate Swap Mis-Selling Cases
The FSA/FCA has now confirmed that it has finally come to an arrangement with the banks concerned whereby those banks have agreed to carry out a review their previous transactions involving IRHPs and that, where appropriate, they should provide appropriate redress to customers who could be described as non-sophisticated.
However, to define a customer as non sophisticated however could be the subject of considerable disagreement and an additional test process is now being applied by the banks so that they can assess the degree of sophistication of the purchaser of the IRHP and thereby make a decision as to whether, for the purposes of the review, they could accurately and fairly be described as non-sophisticated.
The review process agreed between the FSA/FCA and the banks regarding the sale of interest rate hedging products (IRHPs) is now in force. The scope of the review is to provide a framework in which the selling organisation can assess what reasonable redress they should offer, if indeed they offer anything at all, when such a case of mis-selling is found.
The way the FSA/FCA review process is currently carried out is fraught with potential dangers for businesses who have previously made such a purchase and who are not properly represented by specialists in this field. This is especially important during any telephone or face to face meetings that may take place.
The Process of the FSA/FCA Review
Once you have been invited to participate in an FSA/FCA review, the bank will almost certainly require you to take part in a fact-finding discussion. This discussion might be carried out face to face during one or more sessions or alternatively over a number of telephone conference calls which will almost certainly be recorded. The review procedure is almost always conducted by trained specialist litigation lawyers who are acting for the bank and not the FSA/FCA. There is, of course, provision for you to be represented at those review meetings should you decide that you want to be. It is highly advisable that you are represented at these meetings.
The principle issue here is that your own recollection of events, events which may in fact have taken place several years ago, can often be an important and decisive factor when the bank makes a decision as to the level of recompense to offer to you. In an adversarial situation such as this it is difficult to avoid making an unguarded or ill-considered remark that could then be detremental to your case when a decision is made as to the level of compensation or redress to offer to you. Such remarks may also prejudice your position in any future legal proceedings that may take place.
Seeking Redress In Cases Of Mis-selling
As there is no automatic process for making redress as a result of a breach of regulatory rules made by the bank following an FSA/FCA review, the onus is placed upon customers who were mis-sold Interest Rate Hedging (IRHP) products to make a claim for themselves.
The process and procedures for submitting such claims are known in detail only by the banks and the FSA/FCA. It is known that the banks are have, in many cases, retained teams of specialist lawyers and forensic accountants to defend their actions. Interest Rate Hedging Products (IRHPs) are complicated financial instruments that require expert advice before purchase and which were often sold without the correct and comprehensive customer advice process taking place prior to the sale being made.
Making a claim in such cases is a complex matter and it requires an understanding of all the applicable regulatory, statutory and legal principles, all of which must be asserted when claiming for redress.
It will be useful to ensure that you have suitably qualified accountants and other specialists on your team so that you can maximise any finding that decides that a bank is liable to make redress and in properly quantifying the level of such redress. This will usually take into account the profits achieved by the bank as a result of making the sale of the IRHP to your organisation.
The Need for Legal Representation
Taking into account the pitfalls enumerated above, many of which pose a significant threat to those who may justifiably have a claim for the mis-selling of an IRHP product to them, it is essential that small businesses seek proper specialist support when participating in an Interest Rate Swap Mis-selling Review, irrespective of whether that review is carried out in person or by means of one or more telephone calls.
This is a specialist and complicated area of the law but qualified expert advice and guidance is available is available from a number of specialist law firms who have experience in matters concerning possible instances of IRHP mis-selling.