Consequential Losses in the FCA IRHP Review

Today was another face to face fact find meet with a bank field representative and an Independent Reviewer in the FCA Interest Rate Hedging Product review. The meeting took around 3.5 hours. It was pleasant and polite. Not pushy or a ‘grilling’ as many people portray. Professional and well conducted. The former Director was able to provide his version of events and provide evidence to illustrate that the product was miss sold.

Insolvency Assist fully support the FCA IRHP review and hope it is an alternative to litigation as a means to ‘putting right wrongs’.

However, as the Lawyer in the room stated, if it is so apparent that the product was miss sold and not applicable to the customers needs, why the long drawn out process that is costing the bank vast amounts of administration fees. It is the very process, the fact find, that should have been before sale of the IRHP. It is a retrospective fact find exercise that the qualified sales person should have been made to undertake by the banks compliance department. Surely more effort should be put into ‘what the miss sale did’

The Insolvency case today was like many others we have witnessed;

  • The customer was private in his Terms Of Business pre ’07 so enjoyed COB protection
  • The customer was retail in his Terms of Business post ’07 so enjoyed COBS protection
  • The product was advised – it was not execution only
  • It was established that the bank salesperson did not ascertain the customers understanding of risk, the MTM or early break fees were not disclosed, no simple cap was ever recommended, the product was stated as a ‘condition’ of borrowing and it was proven through an independent derivatives expert report that the level of commission earned was excessive on the Swap – so breaches in many areas (just wasn’t over-hedged)

It is not these breaches I have an issue with but the process that takes so long to establish the miss sale. Why ? The miss sale decision could be detailed within minutes. If the sale was advised, ie not execution only by a professional client, then proving it complied or not with COB or COBS should be simple. Maybe I am under estimating the challenges faced by the reviewer and the bank field representatives.

So we assume a miss sale, an inappropriate product sold in a non-compliant manner that resulted in the customer being disadvantaged and then consider the CL claim – The next challenge, proving the consequences; The losses that occurred.

The fact that this product may well have caused the Insolvency.

What can be claimed as a consequential loss ?

The banks state that any CL claim will apply “general legal principals” – Tort and breach of statutory obligations. To do this we must look at the process required

  • The miss sale was a material cause of the loss – The Factual Test  or “causation”
  • The type (not amount) was “reasonably foreseeable” – The Legal Test or “remoteness”

So we have a scenario to apply – “but for” the miss sale of the IRHP, the loss would not have happened;

£ – We have premiums paid (easy to prove via bank statements or Bloomberg)

£ – We have breakage costs (easy to prove via paperwork or Bloomberg)

£ – We have liabilities associated with the IRHP that could have resulted in costs (provable by an independent derivatives expert and provable if the bank release the information from internal credit files – as we requested)

The liabilities associated with IRHP’s are the main issue of these products being unsuitable for SME’s.

The contract can of course be an asset or a liability, pending on how the market moves with or against the IRHP. Liabilities can curtail additional lending (sometimes pre-approved), curtail the ability to move bank, curtail the ability to take on a new lending company, curtail an ability to sell assets on the balance sheet as the IRHP is not part redeemable (as IRHP is constant) and ability to enter into private partnership deals (JV’s).

It is the IRHP liabilities that can render a business into a zombie like state.

It wont effect all businesses, some products don’t have any liabilities (such as a Cap) and some companies never wanted additional lending. But liabilities can be real. 

The question is, were they ever disclosed ?  

If the liabilities were not disclosed and effected the company then evidence could be obtained from the banks credit files. They do record the liabilities in their credit departments.

To sell most IRHP structured products the bank will have had to underwrite and apply immediate contingency liabilities at the time of sale, which is likely to have become sanctioned if you entered ‘specials’, this will prove the Legal Test of “reasonably foreseeable”.

So when the consequential losses are needed to be proven and evidenced as reasonable foreseeable then proof of liabilities will be essential to apply the CL “general legal principals”;

The Factual Test (“causation) = “but for”

The Legal Test (“remoteness”) = “reasonably foreseeable”

It is for the customer to show it was more likely than not that they have suffered a consequential loss which was materially caused by the miss sale

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