The amount paid in compensation by the UK’s banks for mis-sold interest rate hedging products (IRHPs) almost doubled in December 2013. £81.2 million had been paid in redress by the end of November, and this rose to £158.1 million in December. This amount was divided between 1,040 successful applicants, meaning average payouts exceed £150,000. In 672 cases to date it has been determined that no redress is payable – any bank decision to this effect must be verified by an independent reviewer.
The official redress scheme ends in May 2014, so any businesses who suspect that they were mis-sold these products but have so far not submitted an application for compensation are urged to do so as soon as possible. It is thought that a further 3,700 companies are eligible to participate in the review. The banks say they expect to complete their assessments of individual cases within 12 months of receipt. £3 billion has been set aside by the UK’s banks to pay compensation, but many experts think the final bill could be as high as £10 billion.
11 high street banking groups are currently in the process of reviewing their sales of IRHPs, including all of the largest banks, after an investigation by the regulator, the Financial Conduct Authority (FCA) found evidence of significant mis-selling. IRHPs are designed to protect against rises in interest rates on business loans, however interest rates have been at a historic low for many years, meaning that the products have been of little value recently. Many businesses have been hit with significant fees and exit costs as a result, and many have said that have experienced significant financial problems or even gone bust as a result.
In an echo of the payment protection insurance mis-selling scandal, many purchasers of IRHPs allege they were pressured into buying the product, or were told that taking out the product was mandatory.
The review is focussed on smaller businesses who do not pass the ‘sophistication assessment’ – an assessment of whether they were likely to have understood the complex nature of the product. Companies who are not eligible for the review but still believe they have a case for mis-selling need to make a complaint in the usual way, i.e. complain to the firm that sold the product, and then appeal to the Financial Ombudsman Service if necessary.
The media has largely used the term ‘interest rate swaps’ as an interchangeable term with IRHPs, but a swap is in fact just one of four main types of IRHP. The four types are:
- Swaps – where the interest rate can be fixed
- Caps – where the rate is not allowed to rise above a set level
- Simple collars – where the rate stays within a pre-defined range
- Structured collars – similar to simple collars, but if the reference interest rate falls below the bottom of the specified range, the rate payable by the customer may still increase
Clive Adamson, director of supervision at the FCA, said: “Banks have picked up the pace since November. We asked that they focus their efforts on making far more rapid progress in assessing individual cases and crucially in providing redress.”