Interest rate hedging products (IRHP)

Find out about: 

• The FSA and FCA’s supervisory intervention in banks’ sales of interest rate hedging products to small and medium size businesses from 2001, and the redress secured for many mis-sold customers.
• The recent independent review of the supervisory intervention by John Swift QC, which sets out a number of recommendations for the FCA to act on going forward.

Here, we explain the background to the mis-selling and redress scheme.

Background to the sales review

In 2012, our predecessor the FSA identified failings in the way some banks had sold stand-alone collar, swap, and cap derivatives to small and medium sized enterprises (SMEs). These products were often offered on the basis that they would protect the SMEs’ loans with the banks from interest rate changes – therefore known as ‘interest rate hedging products‘ (IRHPs).

The banks involved agreed to review the IRHP sales they had made since 2001 to those SMEs that were ‘private customers/retail clients’ under the regulator’s rules, if the sale was also assessed as having been made to a non- sophisticated customer. The FSA and banks agreed formal terms for the scheme, including how to distinguish non-sophisticated customers from sophisticated customers.

The redress scheme was designed to deliver fair redress with certainty and as quickly as possible to those mis-sold customers who were in the most vulnerable circumstances in the difficult circumstances at the time, during the global financial crisis.  

Review of sales

The FSA required each case reviewed by a bank to be independently overseen and verified by a skilled person (eg accountancy or law firm) appointed under s.166 of the Financial Services and Markets Act 2000. Read the agreements with the banks, along with our instructions to appoint the independent reviewers.

For the sales assessed as non-sophisticated against the criteria agreed under the scheme: 

• Structured collars were assumed to be unsuitable and taken straight into assessment for redress.
• Simple collars or swaps were (unless the customer opted out) taken for assessment of whether the sale was made unfairly and, if so, what the redress should be.
• Caps were only taken for assessment of whether the sale was made unfairly if the customer had previously complained or complained in response to the banks’ invitation by the deadline given of 31 March 2015.

The banks and skilled persons reviewed the sales against detailed sales standards and criteria set out by the FSA. Likewise, the FSA set out how to calculate redress for mis-sales fairly and consistently, which could include cash and/or an alternative hedging product, depending on the circumstances.

Outcomes  

The full scheme started in May 2013, after a pilot exercise. Through the life of the scheme the banks reported to us their progress on the cases and outcomes, which we monitored.

After more than 3 years of extensive work, by late 2016 banks had reviewed nearly 31,000 IRHP sales, of which:

• Around 35% had been assessed as ‘sophisticated’ sales against the agreed criteria and excluded from further review.
• Around 65% had been assessed as ‘non-sophisticated’ and taken forward for further review (unless opted out by the customer, as around one tenth were).

Of the sales that weren’t opted out (over 18,000), around 80% led to redress offers of money and/or an alternative hedging product. Customers accepted around 95% of those offers by 30 September 2016, to the value of around £2.2 billion. A small number of the remaining offers were accepted later. This aggregate position chart sets out more detail on the near final results of the scheme as at September 2016. We have not revised it since but note that some of the remaining redress offers were accepted after that date, and some other figures may also in the end have been slightly different to those in the chart.

In addition to the £2.2 billion, as at September 2016, an aggregate sum of around £46 million had been paid to some customers for specific additional losses caused by their mis-sold IRHP. Some further offers for additional losses were made and accepted in subsequent years. See more on consequential loss claims.

The 9 banks that participated in the IRHP redress scheme and reviewed their sales of IRHPs are: 

• Allied Irish Bank (UK)     
• Bank of Ireland     
• Barclays 
• Clydesdale & Yorkshire Banks     
• Co-operative Bank     
• HSBC 
• Lloyds Banking Group     
• Royal Bank of Scotland     
• Santander UK 

The banks also paid the costs of having to terminate customers’ IRHPs early (ie the costs of IRHP payments that customers would have made in the future), and the considerable costs of employing more than 3,000 staff to carry out the review exercise, and of engaging professional services companies as skilled persons to look at every case.

Other options for customers

Customers who did not complain in time, or who were assessed as sophisticated and not eligible for the scheme, had the following options (subject to time limits for making a complaint or bringing a claim):

1. Complain about the sale of their IRHPs through the banks’ usual complaints-handling processes.
2. Refer their complaint to the Financial Ombudsman Service; at the time, in general, customers who were private individuals could bring complaints to the Ombudsman Service, as could businesses that were 'micro enterprises' (an EU term covering smaller businesses) as long as they had an annual turnover of less than €2 million (approximately £1.59 million) and fewer than 10 employees.
3. Pursue their case through the courts.