Investors must have guidance

‘Non-sophisticated’ bank customers are being deterred from seeking firms’ advice on mis-selling issues

Edward Cumming

On 29 June the FSA announced that it had found “serious failings” in sales of interest rate hedging products such as interest rate swaps, caps and collars by major banks (Barclays, HSBC, Lloyds, RBS and NatWest).

More than 28,000 such products are said to have been sold to businesses ranging from fish and chip shops to art galleries.

n principle, products can meet customers’ needs, if properly calibrated, by giving greater certainty about interest rates.

They can, however, be difficult to align with future borrowing needs. They are therefore susceptible to allegations they were sold in breach of the duties owed by banks pursuant to Financial Services and Markets Act 2000 or misrepresentation in the sales process.

The FSA’s response to shortcomings including failures to match the amount and/or duration of hedging products to the amount and/or duration of customers’ borrowing, poor disclosure of fluctuating exit costs and allowing supposedly ‘non-advised’ sales to stray into advice and sales processes apparently driven by banks’ rewards and incentives was to agree with the banks a scheme whereby they would provide redress to customers sold “structured collars” and review sales of other hedging products sold to “non-sophisticated customers”. The Daily Telegraph has reported that Clydesdale Bank and Yorkshire Bank are shortly to sign up.

This allows the FSA to proclaim it has taken action, but in fact poses more questions than answers.

It is only open to “non-sophisticated” customers. Customers will be deemed “sophisticated” – and denied access to the scheme – if the bank can “demonstrate that, at the time of the sale, the customer had the necessary experience and knowledge to understand the service to be provided and the type of product or transaction envisaged, including their complexity and the risks involved.” To what extent will this subjective test provide a get-out for the banks?
The FSA’s announcement referred only to the scheme being “scrutinised by an independent reviewer”. Who will review each case? How independent will they be? What chance will customers have to review documentation and put their case?

And what of the “redress”? Will it be adequate to return customers to the position they would have been in if they had not been mis-sold the product? What about businesses that have been ruined?

Will the banks demand that businesses continue to make payments due under the product while the review takes place?
How long will the process take? The FSA’s announcement, while trying to prevent customers from falling into the clutches of claims management companies, suggests that customers did not need to use “law firms […] who will charge for using their services”. Most sales took place between 2005 and 2008. Many potential claims are accordingly approaching and passing the six-year time bar under the Limitation Act 1980. It will be unfortunate if the FSA’s scheme dissuades customers from seeking advice or issuing protective proceedings before it is too late.