Interest Rate Swap Mis-selling: Did You Know? – A Guide to the Concept of Mis-Selling

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Posted in:Banking and Finance|September 11, 2013 | Join the mailing list

The Financial Services Authority (Now the Financial Conduct Authority) announced in June 2012 that a review would be undertaken into the sale of Interest Rate Hedging Products ("IRHP") by the Banks. 
11 Banks are taking part.  Here are some facts about the review and the sale.

1. Mis-Selling
This phrase is used a lot.  It has been used by the FSA and the FCA, it is even used by the Banks.  Quite a number of solicitors also use it.  Berg even has it on our website. 

Did You Know that there is no such thing as mis-selling?  It is a colloquialism.  Any claim against a Bank must be
made out in terms of breach of contract, misrepresentation, negligence, breach of regulations (for partnerships or individuals, but not companies), and sometimes fraud.

2. Mis-Selling: The FCA Review
The FSA and now the FCA has suggested that the review is looking for mis-selling.  They have never directly said this, but that has been the suggestion. 

Did You Know that the only thing the FCA and the Banks are looking for in the review is a breach of the regulations
that governed the banks at the time of sale?  For the vast majority of cases, this is simply a failure to advise on break costs in an open way.  There are many other regulations that can be brought up by a customer, and if you show those breaches of regulations
you are more likely (than if you did not) to get full redress rather than a rejection or an "alternative product".  This is why solicitors, Bully Banks, Experts and MPs all advise customers to seek legal advice.

3. Mis-Selling: The Courts
A number of customers are required to issue proceedings in Court, either because they are no longer part of the FCA review or because they have reached the six year limit within which to bring a claim. 

Did You Know that a Court is not concerned with regulatory breaches directly unless you are an individual or a partnership
(s. 150 Financial Services and Markets Act 2000) or any claim of "mis-selling"?  A Court will only look at whether there has been actionable (ie. it has a right of claim) negligence, misrepresentation, breaches of contract or, occasionally but rarely, fraud. 
There is no legal concept of mis-selling in any area of English Law.  Ensuring that you have followed the right process with which to bring a claim from the start is essential, because if you are not offered full and proper redress under the FCA Review scheme
(or are excluded from it) you must start the litigation process over again, and that can take 4 to 9 months.

4. Mis-Selling: The Review
As part of the FCA led review into the historic sales of IRHPs the Banks will assess whether there has been a regulatory breach.  The FSA in its pilot study has shown that in approximately 93% of cases there has been a regulatory breach. 

Did You Know that a regulatory breach does not necessarily mean that you will be offered any redress? 

Did You Know that the FCA is allowing the Banks to not offer a financial package of redress but, in some cases, offer
an alternative IRHP?  For instance, if you entered into a structured collar it is possible for the Bank to offer you, for example, an interest rate swap instead?  They will offer you the difference in the costs of the two (if any), but it is less likely that
you will be offered any consequential losses as a result. 

5. Mis-Selling: The Alternative IRHP
Did You Know that the FSA has allowed alternative IRHPs that have a break cost of 7.5% (or less) of the notional sum?  That sounded quite attractive when announced. 

Did You Know that the FCA has in fact allowed the Bank to calculate the 7.5% based upon the prevailing interest rate
at the time you entered into the IRHP.  That means that the 7.5% rule in fact now means up to 30% or 40% of the notional sum!

6. Mis-Selling: The Litigation Route
Some businesses have been rejected from the FCA review, either for their sophistication in terms of knowledge and experience, or because of the size of their company or group of companies, and some have been rejected because of the size of the IRHP (the £10million
rule). 

Did You Know that there is a set of rules that you must abide by if bringing a claim against a Bank (the Civil Procedure
Rules and the Civil Procedure Rules Pre-Action Protocols)? 

Did You Know that if you fail to abide by those rules a Court could order you to pay the Bank’s costs, or part of their
costs, even if you win?  The same applies if you fail to identify to the Bank all of your heads of claim (ie. the reasons behind the claim such as misrepresentation etc) in your letter of claim? 

Did You Know that a letter of complaint does not comply? 

Did You Know that you must allow the Bank a period of three months, from receipt of your letter of claim, within which
to investigate your claims?  Their response is likely going to be long and complex, so you will be required to respond to this, which will then allow them further time.  If you instruct a solicitor in regards to the FCA review, you should be asking that solicitor
to ensure that they are also following the litigation route at the same time as the FCA review.

The FCA has said that the FCA review is customer centric, and customers do not need solicitors.  We disagree, as does Bully Banks.  Knowing what regulations applied to the sale of your IRHP may mean the difference between being offered redress and not being
offered anything, or being offered an alternative IRHP.  You must ensure you chose a solicitor with a lot of experience in this area.  And, most importantly, you must ensure you instruct a solicitor.  If you instruct a company that is not a firm of solicitors
you will have to start the whole litigation process from the start if you are not offered proper redress.  A company that is not a law firm cannot proceed down the pre-action protocol process for you, they are not entitled to do this.

If you should wish to discuss your particular interest rate hedging product case with a member of Berg’s Banking & Financial Regulation team,
please contact 0161 833 9211

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