The FCA interest rate hedging product (IRHP) review scheme
In 2012, the-then Financial Services Authority began a review of the way some banks had sold Interest Rate Hedging Products to small or medium-sized businesses. These products were designed to insure businesses against changes in interest rates, but regulators became concerned about the hidden costs – running from the thousands to the millions of pounds – that business owners, who may not have understood the complex nature of the financial products they were buying, were left with. The review found that over 90% of sales of Interest Rate Hedging Products did not comply with one or more regulatory requirements.
As a result of the FSA’s intervention, banks began reviewing Interest Rate Hedging Product sales made to some customers in a pilot scheme at the end of 2012. Following the pilot, a full-scale review of sales began under the-now Financial Conduct Authority in May 2013. The review process first identifies whether or not customers are ‘sophisticated’ or ‘unsophisticated’ buyers, and, if the latter is true, ‘fair and reasonable redress’ is offered.
There are likely to be a number of cases in which Insolvency Practitioners are involved as office holders for corporate or non-corporate bodies that have a potential claim for redress under the review process.
Jon Welsby, director of Insolvency Assist Community Interest Company, offers his opinion on the latest developments in the IRHP review scheme as the first cases go through the process.
Insolvent companies are now entering the FCA Interest Rate Hedging Product (IRHP) review scheme, but what does this mean and how does it work? Access to the review scheme is open to all companies; in administration, liquidation and dissolved. A specialist community interest company, Insolvency Assist CIC, has taken its first insolvent company – Bluesight Ltd in Administration – through the process.
The FCA has stated that customer participation is essential to allow a better understanding of the sales process and its compliance with regulatory requirements. At a meeting held in May 2013 with numerous government departments in attendance, including The Insolvency Service, the FCA made two recommendations:
•The former company directors, advisers or shareholders present at time of the IRHP sale can participate to provide evidence, written and/or verbal, with their practitioner.
•The bank will provide information from its files for the practitioner to share with the former directors, advisers or shareholders to allow a fair and reasonable review.
Entry to the scheme is not always automatic and the practitioner may have to complain or facilitate a complaint from former directors or shareholders to have the review process initiated. The bank will then assess the customer on their status to qualify; ‘non-sophisticated’, a requirement to enter the review scheme (guidance of which is available on the FCA web site).
The review’s purpose is to establish any recollections of meetings or conversations and hand over any documents that may assist the independent reviewer in establishing the compliant nature of the IRHP sales process. In pilot findings the FCA has found a number of issues with poor sales practices including:
•Poor disclosure of the exit costs;
•Failure to ascertain the customer’s understanding of risk;
•Non-advised sales straying into advice;
•’Over hedging’, both in term and amount;
•Rewards and incentives being the main driver of these practices.
The sales process can only be evidenced by the people involved at the time of sale. The FCA makes a point of detailing how important ‘customer engagement’ is for the review to meeting its objective for a fair and reasonable review scheme.
The independent review will use the written and/or oral submissions of evidence to assess the compliance of the sale and then make a decision in respect to any regulatory breaches, taking into account the FCA Principals and Conduct of Business Sourcebook (COBS).
Redress, if due, can take three forms; full, alternative product or no redress.
The principal of redress is the aim to put customers back in the position they would have been in had the breaches of regulatory requirements not occurred.
Bluesight Ltd in Administration in Leeds.
One of the first meetings in the FCA process was attended by the practitioner, an independent reviewer and the bank field representative, who chaired the meeting, the two directors present at the time of sale and their advisers. As with all fact find meetings and submissions it was recorded and undertaken with prejudice.
The meeting was open and friendly. At no time was the questioning by the bank field representative aggressive or difficult. The meeting was conducted in a manner allowing the company to put across its version of events and submit evidence to allow the IRHP sale to be explained in full. All verbal matters of fact were backed up with written evidence. The company had commissioned an expert report through Insolvency Assist CIC guidance that allowed facts and pricing analysis of the IRHP contract. This proved invaluable in allowing evidence of prevailing market rates and level of remuneration earned at the time of sale. It also allowed IP agent comfort if receiving an overview of the products’ suitability from a third party.
To obtain this third party report it is important that the information is presented from both sides; bank and ‘customer’, with meetings between the expert and ‘customer’ to establish suitable evidence and facts. Business customers may believe they have been mis-sold to but it is very important to prove this is the case. After six hours of evidence-giving the meeting concluded. The bank field representative confirmed that the independent reviewer would now assess the case and feed back their outcome within a reasonable timescale.
The second stage, if proceedings continue, will be redress.
What has R3 been doing?
R3 has been working closely with the FCA, government departments, the Insolvency Service, firms, and representatives of consumer groups to put together guidance for IPs involved in the review process. These will be issued shortly as a technical update. The update will cover steps an IP can take to establish whether a claim for redress is an option in an insolvency case, the destination for financial redress, the types of products being reviewed, and how the review process works in the case of dissolved companies.