IRHP: background to the review

In addition to the information on the review and redress determination process[2], and on consequential loss claims[3], frequently asked questions have been grouped by topics below. Information on the progress of the review is updated on a monthly basis[4]. Please browse through these questions to find out more information about the IRHP review scheme.

If your business is in financial difficulty, consult this page for information[5] on how this affects the review of your interest rate hedging product.

If your question is not answered here, please do not hesitate to contact us[6].

The different products

Interest rate hedging products

The purpose of an interest rate hedging product (IRHP) is to enable the customer to manage fluctuations in interest rates. These products are typically separate to a loan.

We have identified four broad categories of IRHPs sold:

1. Swaps; which enable customers to ‘fix’ their interest rate.
2. Caps; which place a limit on any interest rate rises.
3. Collars; which enable customers to limit interest rate fluctuations to within a simple range.
4. Structured collars; which enable customers to limit interest rate fluctuations to within a specified range, but involves arrangements where, if the reference interest rate falls below the bottom of the range, the interest rate payable by the customer may increase above the bottom of the range.

Interest rate swaps

An interest rate swap is a separate contract to the underlying loan agreement. It is an agreement between two parties whereby one type of interest payment is swapped for another; such as exchanging a fixed interest rate payment for a floating payment.

In practice, if the floating interest rate payment increases because base rates rise, the customer receives an amount that they can use to off-set the increase in loan repayments. Conversely, if the floating interest rate payment decreases as a result of falling base rates, the customer makes an additional payment to the bank under the terms of the swap, but benefits from lower loan repayments. The customer’s costs therefore effectively remain stable.

Caps

A cap is a separate contract to the underlying loan agreement that can have the effect of limiting increases in a customer’s loan repayments if interest rates rise.

A customer typically pays an upfront fee and/or an ongoing premium for a cap. The lower the agreed interest rate, the higher the fee.

As interest rates fluctuate, a customer’s loan repayments will fluctuate. If base rates are above the agreed interest rate, the customer receives a payment from the bank that can be set against the increased loan repayments. If interest rates are below the cap, then no payment is made. 

Simple collars

A simple collar involves a ceiling and a floor. As interest rates rise, loan repayments will increase, but increases are capped at the rate agreed as the ceiling. Similarly, as base rates fall, any reductions in loan repayments are limited to the rate agreed as the floor.

Structured collars

Structured collars are in some respects similar to simple collars. They enable customers to limit interest rate fluctuations to within a range. However, while the ceiling functions in a similar way, the floor is more complex and customers can end up paying increased interest rates if the base rate falls below the floor. They require a more difficult assessment of the benefits and risks

Agreement with banks

What was agreed with the banks in summer 2012?

We agreed with the banks that they will review all sales of IRHPs since December 2001. In particular, we agreed with the banks that for the sales to customers categorized under our rules as either "private customers" (in respect of sales made by the firms on or before 31 October 2007) or "retail clients" (in respect of sales made by the firms on or after 1 November 2007), the banks must:

1. provide appropriate redress on the basis of what is fair and reasonable in the circumstances to ‘non-sophisticated’ customers who were sold structured collars
2. review sales of other IRHPs (except caps and structured collars) for ‘non-sophisticated’ customers and where it is considered appropriate, provide redress on the basis of what is fair and reasonable in the circumstances; and
3. review the sale of caps if a complaint is made by a ‘non-sophisticated’ customer, and where it is considered appropriate, provide redress on the basis of what is fair and reasonable in the circumstances.

We asked each bank to undertake a pilot review. As a result of the pilot, we set out in more detail the approach[7] that we expect bank to apply to the full review.

Throughout the review process, each bank is being scrutinised by an independent reviewer, who is approved by us.

Which banks agreed to conduct this exercise?

On 29 June 2012, we reached agreement with Barclays, HSBC, Lloyds Banking Group and RBS banks to participate in the review exercise and to provide appropriate redress where mis-selling has occurred.

On 23 July 2012, we announced that Allied Irish Bank (UK), Bank of Ireland, Clydesdale and Yorkshire banks (part of the National Australia Group (Europe)), Co-operative Bank, Northern Bank and Santander UK had agreed to review their sales of IRHPs, and Irish Bank Resolution Corporation (IBRC), formerly Anglo Irish Bank and Irish Nationwide Building Society, also agreed to review their sales from their UK branches.

Since our announcement on 23 July 2013, Northern Bank has confirmed that it did not sell IRHPs to customers eligible under the review.

Have all the banks agreed to approach the review on the same basis?

Yes, with the exception of Irish Bank Resolution Corporation (IBRC) – see question 8 for more information.

On 31 January 2013, we confirmed that Barclays, HSBC, Lloyds and RBS had agreed to review their sales of IRHPs to small businesses based on the principles set out in our report[8], and overseen by independent reviewers.

On 14 February 2013, we confirmed that Allied Irish Bank (UK), Bank of Ireland, Clydesdale and Yorkshire banks (part of the National Australia Group (Europe)), Co-operative Bank and Santander UK had agreed to review their sales of IRHPs to small businesses based on the principles set out in our report, and overseen by independent reviewers. This means that these banks will adopt the same approach when carrying out the review as Barclays, HSBC, Lloyds and RBS.

What you can do if you're a customer of Irish bank Resolution Corporation (formerly Anglo Irish Bank and Irish Nationwide Building Society)

The Irish Government announced the liquidation of the Irish Bank Resolution Corporation (formerly Anglo Irish Bank and Irish Nationwide Building Society) (“IBRC”) on 7 February 2013.

The liquidators have legal obligations about how they can use IBRC’s available resources and have decided that they cannot carry out the review of past sales of interest rate hedging products (IRHPs) previously agreed with the FCA.

However, IBRC customers are still entitled to make a claim.

The liquidator has contacted IBRC customers and to invite them to submit any claims they might have in relation to the sale of their IRHP. The liquidator will assess all claims and determine whether redress is appropriate. If you are an IBRC customer and have not yet been contacted by the liquidator, you should contact them directly by email [email protected].

Customers who claim for losses in connection with the sale of an IRHP in the liquidation will rank as unsecured creditors. This means that whether any redress is paid to customers will ultimately depend on how much is raised through the liquidation process. Therefore, customers should be aware that even if their claim is successful, IBRC may not have enough money available to pay the redress.

Pilot exercise

What was the pilot exercise and why was it necessary?

We asked each bank to undertake a pilot review of a sample of typically more complex cases before beginning the full review. The pilot stage was vital to ensuring that each bank’s approach to reviewing their sales would deliver fair and reasonable outcomes for customers.

We have reviewed each bank’s approach to the pilot, including by looking at individual cases, to assess whether the banks and independent reviewers are correctly determining whether:

• the customer was ‘non-sophisticated’ or ‘sophisticated’;
• the sale of the IRHP complied with our regulatory requirements; and
• it is appropriate for the customer to receive any redress and, if so, what redress would be fair and reasonable.

The key findings from the pilot

We looked at 173 sales to ‘non-sophisticated’ customers from across Allied Irish Bank (UK), Barclays, Co-operative, Clydesdale and Yorkshire, HSBC, Lloyds, RBS and Santander and found that in aggregate over 90% did not comply with one or more regulatory requirements.

We also looked at a further 133 cases to check the application of the sophistication test. This has informed the changes that we have made to the test for assessing whether customers are included in the scope of the review.

The pilot confirmed our view that the independent reviewers play a vital role in this process. The pilot also identified some areas where changes or clarifications are necessary to the review approach to ensure customers will be treated fairly and reasonably.

More information on these areas can be found in our report[7].

Why we focused on the sophistication rest in the pilot sample reviewed by Bank of Ireland

We focused on the sophistication test on the pilot sample reviewed by Bank of Ireland given the bank’s original expectation that all of its small number of sales were to ‘sophisticated’ customers. However, the pilot demonstrated that some Bank of Ireland customers may be eligible to have their sales reviewed and the bank has agreed that in such cases it will review sales in line with the approach set out in our report.

What happens next

The banks began to review their sales of interest rate hedging products (IRHPs) in May 2013. We expect most customers to have been informed of their compliance assessments and, if applicable, to have received a redress offer by the end of May 2014, 12 months after the start of case reviews. Consequential loss claims may take longer to review. Track the progress of reviews of consequential loss claims[3].

Scope of the review

What to do if you bought a structured collar

If you bought a structured collar on or after the 1 December 2001, your bank will contact you to explain whether your sale is eligible for review (i.e. whether you are considered to be a ‘non-sophisticated’ customer).

When contacted by your bank you will need to respond to requests for information if you want your sale to be reviewed. Following the review, your bank will send you a letter stating the outcome of your redress determination. This will be agreed by the independent reviewer. If you decide to accept the redress proposal, you will be issued with a final redress proposal.

What to do if you bought a swap or simple collar

If you bought a swap or simple collar on or after 1 December 2001, your bank will contact you to explain whether your sale is eligible for review (i.e. whether you are considered to be a ‘non-sophisticated’ customer).

When contacted by your bank you will need to respond to requests for information if you want your sale to be reviewed. Following the review, your bank will send you a letter stating the outcome of your redress determination. This will be agreed by the independent reviewer. If you decide to accept the redress proposal, you will be issued with a final redress proposal.

What to do if you bought a cap

If you bought a cap on or after 1 December 2001 you will only be included in the scope of the review if you make a complaint and are a ‘non-sophisticated’ customer. If you think that you have been mis-sold a cap you need to contact your bank setting out the details of the sale and explaining why you think there was a mis-sale.

If you do complain, and you are a ‘non-sophisticated’ customer, the sale of your cap will be reviewed in the same way in the same way as the sale of a swap or simple collar. If you complain after the independent review has been completed, your complaint will be dealt with in accordance with the banks usual complaints handling procedures.

Sophisticated and non-sophisticated customers

What we mean by non-sophisticated customers

The purpose of the sophistication test was to identify those customers likely to be sophisticated. The threshold criteria which form part of the sophistication test are a necessary means by which the FCA has sought to establish a workable scheme to enable the banks readily to identify customers within the scope of the scheme and to enable redress, where appropriate, to be provided quickly in order to secure an appropriate degree of protection for consumers.

The sophistication criteria are therefore a proxy for financial sophistication and were chosen on the basis that small businesses and businesses entering into transactions below a certain size were less likely to have understood the risks associated with IRHPs, and were are also less likely to have had the necessary resources to obtain independent expert advice before purchasing the product and, where appropriate, to bring legal proceedings on their own behalf.

See how your business would be classified for the purposes of this review[9].

Why we made changes to the criteria

The pilot enabled us to consider the principles that should govern the review. As a result, we revised the eligibility criteria taken from the Companies Act 2006 to ensure that the review is focused on those small businesses that were unlikely to understand the risks associated with IRHPs. This might include, for example, bed and breakfast businesses which could previously have been ineligible due to their large numbers of seasonal workers. At the same time, some businesses that fell under the criteria published last June will be excluded. These include, for example, small subsidiaries of multi-national corporations, or Special Purpose Vehicles that are sophisticated enough to have understood the terms of the product or have sufficient resources to obtain advice.

Gross or net balance sheet figures

Where, at the time of the sale, the customer did not belong to a ‘group’, the relevant asset size is a gross figure of £3.26 million.

Where at the time of the sale the customer belonged to a ‘group’, the relevant asset figure is £3.26 million net of any set-offs and other adjustments made to eliminate intra-group transactions, or £3.9 million gross.

Does the '50 employees' stated mean 50 full time employees or can some be part time?

The number of employees means the average number of staff – both full-time and part-time – employed by the company in the financial year in which the product was bought. This is explained in detail in the Companies Act 2006.

I think I'm a sophisticated customer, what does this mean for me?

Sales to ‘sophisticated’ customers are not included in this review. If you believe you were mis-sold an IRHP you may complain to the bank. If you are dissatisfied with the outcome of your complaint, you may be able to take your complaint to the Financial Ombudsman Service[10].

I think I am a ‘non-sophisticated’ customer. What should I do if I think my bank has incorrectly classified me as a ‘sophisticated customer’?

If a customer believes that their ‘sophistication’ assessment has not been carried out correctly they can appeal to the bank as part of the review. In these cases, the bank’s decision will be re-examined and verified by the independent reviewer.

Independent reviewer

How independent reviewers were decided

We oversaw the appointment of the independent reviewer at each bank. During the selection process, we considered a number of factors including their skills, competence and independence.

The role of the independent reviewer

The independent reviewer will review all aspects of the proactive redress exercise and past business review. This will include the methodology and review of each individual case.

Independent reviewers will also ensure that the bank has appropriate processes for determining whether to suspend customers’ payments on a case-by-case basis.

How to know that the independent reviewer is truly independent

We conducted a robust approval process to ensure the reviewers have the necessary skills, expertise and independence to understand both the complex aspects of IRHPs and the specific needs of small businesses. When selecting the independent reviewer for our approval, the bank had to identify any potential conflicts of interest. This included any involvement by the independent reviewer in the design of the products and sales processes being reviewed, any winding up of business customers, and any auditing services to the bank.

Where we saw potential for a conflict of interest between individual customers and the first independent reviewer appointed by the bank (or a perception that there could be a conflict), we required the banks to appoint another independent reviewer to review those cases.

Review and redress determination process

How to know if you're due redress as part of the review

If you are eligible for the review and have opted in, your bank will contact you with a redress determination once they have completed the review of your case. All ‘non-compliant’ sales are considered for redress, and provide it where appropriate. Redress must be fair and reasonable in each case, and aim to put customers back in the position they would have been in had the breach of one or more regulatory requirements not occurred.

How banks calculate redress

Redress will be based on what is fair and reasonable in each individual case. Redress could include a mix of cancelling or replacing existing products with alternative products, and partial or full refunds of the costs of those products. Redress calculations will be approved by the independent reviewer.

More information on how banks determine the level of redress[2].

Is an alternative product offer 'fair and reasonable'?

The objective of the IRHP review is to put customers back in the position that they would have been in, had it not been for the mis-sale. Our principles of fair and reasonable redress give rise to three possible basic redress outcomes for customers:

1. Some customers would never have purchased a hedging product and will receive a full refund of all payments on their IRHP (also known as ‘full tear up’);
2. Some customers would still have sought or been required to enter into a product that provided protection against interest rate movements, but would have chosen an alternative product. These customers will receive redress based on the difference between the payments they would have made on the alternative product, compared with the payments they did make; and
3. Some customers may not have suffered any loss, and some customers would have chosen the same product they originally purchased. These customers do not require redress.

To ensure that alternative products are offered in the right circumstances, banks need to show that this is what the customer would have purchased and support their reasoning with evidence and customer testimony. The determination will be verified by an independent reviewer.

How to accept, or appeal, a redress determination

The IRHP review scheme has an in-built appeal mechanism. For customers to make an informed decision as to whether to accept a redress offer, banks are required to clearly explain how they have reached their determination, including what facts they have relied on. Redress offer letters set out the basis of banks’ decisions at a relatively high level. In addition, customers will be offered a face to face meeting, during which they can obtain a more detailed explanation, ask questions and, if appropriate, challenge the outcome. The banks and independent reviewers will carefully consider any points raised by customers and, if necessary, will review their decision.

Will IRHP payments be put on hold during the review?

Banks will review each product sale on a case by case basis. Where they determine that meeting on-going IRHP payments will lead to financial distress, they will, at the customer’s request, suspend the collection of payments until the end of the review.

We require independent reviewers to make sure, and to confirm to us, that banks have the right processes in place.

Timescales

How long will the review take?

Following the pilot we ran in January-March 2013, banks began reviewing customer cases of sales of interest rate hedging products (IRHPs) in May 2013.

Banks project to have completed all redress determinations by the end of May 2014, 12 months after the start of case reviews. We publish monthly updates[4] on the progress of the review, including graphs that allow customers to track banks’ progress against their projections. Consequential loss claims may take longer to review. Track the progress of reviews of consequential loss claims[10].

To ensure that reviews progress quickly, we encourage customers who receive an invitation to opt-in to the review and to respond to requests for information and testimony as quickly as possible. 

How long is the review eligible?

The banks have agreed to review all sales of IRHPs to ‘non-sophisticated’ customers made on or after 1 December 2001.

However, the agreement does not affect the application of the Limitation Act to claims which are brought through court proceedings. The IRHP review scheme is designed to ensure that eligible customers can obtain redress without recourse to legal proceedings, but if you are concerned that you may run out of time should you decide to issue court proceedings, we recommend that you seek legal advice.

Complaints and Financial Ombudsman Service

Complain to your bank

It depends on what type of product you purchased and whether you are classed as a ‘non-sophisticated’ customer.

If you are a ‘non-sophisticated’ customer that purchased any of the other IRHPs your bank will contact you, and you will need to respond accordingly. If you are a ‘non-sophisticated’ customer and you have been sold a cap then you need to complain to your bank to be included in the IRHP review.

Sales to ‘sophisticated’ customers fall outside of the scope of this review. If you are classified as a ‘sophisticated’ customer and you are not satisfied with your sale then you need to complain to your bank.

Options if you're not satisfied with the redress

If you are not satisfied with the redress offered by your bank, you may be eligible to refer your complaint to the Financial Ombudsman Service[12].

If you are not eligible for the Financial Ombudsman or are not satisfied with the outcome then you may wish to consider seeking legal advice.

Find out if you are eligible to refer your complaint to the Financial Ombudsman Service

The Financial Ombudsman Service can currently consider complaints from any business that meets the micro-enterprise definition at the time at which it complains. A micro-enterprise is an entity that has fewer than 10 employees and an annual turnover or balance sheet that does not exceed €2 million.

If you are not eligible to refer your case to the Financial Ombudsman you may be able to seek redress through the courts.

Is there a specific scheme for dealing with customer complaints?

No. We are confident that the existing eligibility for making claims through the Financial Ombudsman will allow the most vulnerable consumers to complain if they are not satisfied with the outcome of this review of their sale. Where larger businesses are unsatisfied with the outcome of the review, they may be able to take action through the courts.

Future sales

Are banks still selling these products?

Yes they are still selling these products, and are now making sure that they meet our rules when doing so. However, the banks agreed in summer 2012 to stop marketing the most complex structured collars to retail clients (as defined in our rules).