The Financial Conduct Authority (FCA) has suggested that it may yet use its regulatory enforcement powers against firms who have mis-sold interest rate hedging products (IRHPs). So in addition to the significant sums paid in compensation, the UK’s banks could yet need to pay large fines over their conduct when selling this product.

Nausicaa Delfas, head of the supervision department at the FCA, told the Treasury Select Committee of the House of Commons in early July 2014 that such action may follow once the FCA’s customer compensation scheme regarding these products has ended. The UK’s banks were asked to complete the redress process by May 2014, but many institutions have missed this ‘deadline’.

The review is focussed on smaller businesses that do not pass the ‘sophistication assessment’ – an assessment of whether they were likely to have understood the complex nature of the product.

The latest FCA figures, published on May 31 2014, show that of 29,490 claimants, some 18,964 have been classed as ‘non-sophisticated’ and 10,475 as ‘sophisticated’, while a further 51 are still awaiting their assessment.

Of the completed investigations, 13,060 sales have been classed as non-compliant and only 1,134 as compliant. Any decision by a bank to reject a claim must be verified by an independent reviewer.

Of the 18,964 claimants accepted as non-sophisticated, around 2,000 have since opted out of the review and their cases will not now be considered, which still leaves almost 3,000 investigations outstanding.

12,690 offers of compensation have been made, of which 6,726 have so far been accepted, resulting in total compensation of around £1.1 billion. However, not all customers have received monetary compensation, and almost 50% have instead been offered a different type of IRHP, deemed to be more suitable than the one originally sold.

11 high street banking groups were required by the FCA to review their sales of IRHPs, including all of the largest banks. 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 they 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.

Companies who are not eligible for the review as a result of being classed as sophisticated, but who still believe they have a case for mis-selling, need to make a complaint in the usual way. This means they must complain to the firm that sold the product, and then appeal to the Financial Ombudsman Service if necessary. In June 2014, the Independent newspaper suggested that once compensation to ‘sophisticated’ customers – whose losses may be much higher on average – had been taken into account, that Lloyds Banking Group alone could be faced with paying out as much as £5 billion to affected customers.

Even for customers classed as ‘non-sophisticated’
, the battle may not be over. Over 2,000 mis-selling victims have signed up to the Bully Banks project, and this group is threatening legal action after claiming that the compensation payouts are inadequate.