The wrong side of the hedge
As described in this article by Katherine at The Times in April ’13 the worse scenario for redress for a miss sold Interest Rate Hedging Products (IRHP) victim is if they have lost their business as a result of the very product advised to them by the bank now under review.
The battle to seek justice is a tough one with the process being controlled by the Insolvency Practitioner (IP) and not the Directors or Shareholders, who were present at the time of sale and the only people who can actually contribute to this review process. IP Agents are often bank approved or recommended and in some cases bank appointed.
Once in Administration the company’s options to seek redress are the same as any other company; through the Courts, FOS or the FCA, but the process is controlled by the Insolvency Practitioner (IP)
Conflict of Interest ? R3 say not. If the claim is considered and executed correctly then I agree. However, if the IP is remiss and does not prepare the claim in a manner expected or allows options to close while under their control, say in the aspect of being timed barred for litigation while on their watch, then it could be a matter of dusting down the PI cover !
Since this article in April ’13 much has changed
The FCA IRHP review
In May ’13 it was agreed by the FCA that the involvement of previous Directors and/or Shareholders would enhance the review scheme for insolvent companies and allow the principal of ‘customer engagement’ to bring about clarity in the sale process. The review majors on sales process and its ability to have complied with COB or COBS, pending the time of sale.
The review of sales is from December 2001 to date with the majority of sales being made in ’07 and ’08. This has a dramatic effect on the time bar dates for Litigation which believed to be 6 years from date of sale. So sales made before October 2007 could well now be timed barred from any Litigation.
During the FCA review fact find process the IP Agent and previous Directors and/or Shareholders are allowed to detail the sales process and highlight any breaches, providing evidence where they can. The main miss sale breaches that FCA review can uncover are;
1. Over Hedged sales – both in time and/or amount in relation to the loan
2. Non-Advice straying into Advice
3. Poor disclosure of exit costs
4. Rewards and Incentives being a driver of the sale
5. Failure to ascertain the customers understanding of risks
These are usually evidenced by pre-sale documents used by the banks salesperson and correspondence, usually emails sent between the customer and the bank managers regarding the necessity to have an IRHP. Some loans conditioned the need for an IRHP in the loan offer. Many different aspects of breaches can and will be evidenced.
The one issues that seems to have been overlooked is the fact that contracts may have liabilities that were never disclosed
These liabilities can take form in three basic forms;
1. MTM – Mark To Market, the market value of the IRHP. The day after the sale the MTM will be an amount of liability equivalent to the commission earned on the sale. As such it is best explained as a second hand value
2. Contingent Liability – the bank will have ascertained a value of the contracts contingent liability and ensured the business could ‘take the liability’ by means of wealth in the businesses balance sheet assets
3. Sanctioned Liability – this is a liability that the bank apply when the contingent liability becomes real.
Bank of England base rate flattened in early ’09 to half of one percent – 0.5%. At this stage the IRHP’s liabilities would have shot through the roof on the majority of structured IRHP products (but not a simple Cap).
This raised so many questions that need to be answered; Did the banks ever tell the customer ? Were the banks liable to tell the customer ? Should annual audit requests, PN16’s, issued by the bank have detailed these liabilities, allowing the businesses accountant to decide if the businesses financial statements should detail the liabilities ? If they registered at Companies House then the businesses creditors would have not had a fair insight into the businesses risk exposure ?
This all becomes more complex when the company enters Administration as the MTM (break fee) is added to the banks Indebtedness and further distances ‘other’ creditors
The FCA IRHP review scheme then provides an option to claim redress IF the miss sale is proven in a written and/or oral fact find process undertaken with the banks selected reviewer
Full Redress, if offered, takes two forms;
1. Basic redress plus 8% simple interest on premiums
2. Basic redress plus a detailed CL claim using “general legal principals”
Did the miss sale of the IRHP cause the Insolvency ?
If the answer is Yes then option 2 is the only option to allow the FCA Principal of Redress to be implemented;
Fair and reasonable redress means putting the customer back in the position they would have been in had the regulatory failings not occurred, including any consequential loss.
Advice from the banks when assessing consequential losses (CL) is to use “general legal principals” relevant to claims in tort and for breach of statutory obligations. This means that a customer must be able to show that it was more likely than not that this miss sale of the IRHP was a material cause of the loss (the Factual Test or “causation”), i.e. “but for” the miss sale of the IRHP, the loss would not have happened and that the type (not amount) of loss was a “reasonably foreseeable” outcome of the miss sale at the time the customer entered into the IRHP (the Legal Test or “remoteness”) – the contingent liability could be key
Did your IRHP liabilities curtail your borrowing, ability to find an alternative lender or ‘partner’ ?
Were these liabilities ever disclosed to your business ?
So losses can be both cash flow and liability derived
To date we have yet to see any CL claims approved but the work really starts when the invitation to submit a CL is made. Will the Insolvency Practitioners do right by their creditors, who under the above logical, could be deemed to be due redress as well ?