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Landmark interest rate swaps ruling for Tozers’ client
Tozers LLP report on the latest news for those mis-sold interest rate hedging products
Thousands of businesses angry at the outcome of the Financial Conduct Authority (FCA) Review of their complaint that their bank mis-sold them an interest rate swap may have a fresh chance to sue for damages.
Many victims of the swaps mis-selling scandal felt their redress offers were derisory or were offered nothing at all. However a ground-breaking court ruling in favour of a parks sector client of Tozers has now opened the door to challenges against the outcome of the Review on the ground that the bank failed to conduct the Review in accordance with the terms agreed with the FCA.
The case relates to a holiday park operator who is suing Barclays, alleging that the bank mis-sold them an interest rate swap product in 2008. Interest rate swaps are one form of the complex derivative products (often referred to as interest rate hedging products or IRHPs) which were sold as a means of protecting businesses against a rise in interest rates. The FCA found that the banks failed to explain to their customers the
- costs involved if interest rates fell and
- extremely high break costs.
When interest rates fell to unexpectedly low levels, many of these customers were left with huge interest payments and penalties which in some cases has actually caused the businesses to fail.
The review process set up by the FCA included a set of standards which the banks were required to follow when conducting their review of the sale of a product. These are contained in a confidential contract between the bank and the FCA which was only published very recently as a result of pressure from the Treasury Select Committee. This contract contains a clause excluding the right of the bank’s customers to enforce the agreed review standards against their banks. Barclays argued that this clause blocked any claim by the park that its claim had been unfairly reviewed. The park argued that, despite the contract wording, the banks owed a separate duty of care to the customers participating in the review which required them to conduct the review properly and to abide by the agreed standards.
Judge Havelock-Allan QC, sitting in the High Court in Bristol, agreed with the park. He accepted that their argument had a real prospect of success and should be allowed to go forward to trial. Barclays’ argument is that the only duty of care it owes in regard to the Review is owed to the FCA as regulator and that it has no such obligation to the victims of the mis-selling.
The Judge said the case was one of public importance because thousands of businesses shared this park operator’s anger at the outcome of the FCA review. Until this ruling, many companies had feared that they had no prospect of seeking redress through the courts after taking part in the review because any potential legal claim is by now time barred.
However this decision could permit businesses unhappy with the bank’s review decision to bring a legal claim against the bank based not on original sale but on the bank’s conduct of the review itself. Because the reviews will have taken place only recently and these claims are very far from time barred, this could result in another chance at compensation for claimants who are out of time to sue for the original sale.
Experience tells us that it is not safe to assume that the bank’s decision complied with the FCA’s standards just because it was signed off by the ‘Independent Reviewer’ or ‘Skilled Person’ nominated in the review. The banks, perhaps at the time relying on an assumption that customers would never have access to the standards or the contract clause which was supposed to block any challenges, have offered some surprising decisions (often entitled a ‘Redress Determination’ by the bank). These apparent failures to comply with the Review standards include
- holding incorrectly that the business was “sophisticated” and therefore excluded from the Review altogether
- deciding that no redress was owed when in fact the sale did not meet the standards to be applied in the Review
- making either surprisingly low offers or no offer at all
- offering merely to move the customer into another product which is again unsuitable or which the customer does not want.
Many businesses which were sold the most toxic of these products will have already learned the final outcome of the bank’s review of their sale and may have given up hope of ever receiving compensation. However these redress determinations were mostly made by banks before the review standards were made public and before this recent landmark decision. The latest developments may now give swaps victims renewed hope and a second chance to obtain compensation.
If you are concerned about the outcome of a bank’s review of your client’s decision then forward this to them or call 01392 207020 and ask to speak to Jill Headford.